Kiraig Pty Ltd as trustee for Jovette Trust v Rent the Roo Pty Ltd
[2017] FCCA 1493
•30 June 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| KIRAIG PTY LTD AS TRUSTEE FOR JOVETTE TRUST & ANOR v RENT THE ROO PTY LTD & ANOR | [2017] FCCA 1493 |
| Catchwords: EQUITY – Allegation of breach of confidence. CONTRACT – Option to renew contract – whether void for uncertainty. |
| Legislation: Competition and Consumer (Industry Codes – Franchising) Regulation 2014, cl.6 of sch.1 Competition and Consumer Act 2010, ss.51ACB, 75B, 82 Australian Consumer Law, ss.2, 20, 21, 22, 236, 237 Personal Property Securities Act 2009 National Consumer Credit Protection Act 2009 |
| Masters v Cameron (1954) 91 CLR 353 Hurley v McDonald’s Australia Ltd (2000) ATPR 41-741 Coco v AN Clark (Engineers) Ltd [1969] RPC 41 Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 |
| First Applicant: | KIRAIG PTY LTD ACN 113 874 267 AS TRUSTEE FOR JOVETTE TRUST |
| Second Applicant: | JOY ELAINE GILMORE |
| First Respondent: | RENT THE ROO PTY LTD ACN 001 408 448 |
| Second Respondent: | PHILLIP HAGUE |
| File Number: | SYG 1398 of 2016 |
| Judgment of: | Judge Cameron |
| Hearing date: | 28 November – 2 December 2016, 7 December 2016, 7 April 2017, 10 May 2017 |
| Date of Last Submission: | 10 May 2017 |
| Delivered at: | Sydney |
| Delivered on: | 30 June 2017 |
REPRESENTATION
| Counsel for the Applicants: | Mr J.V. Gooley and Ms N.Dewan |
| Solicitors for the Applicants: | MCW Lawyers |
| Counsel for the Respondents: | Mr R. Parsons |
| Solicitors for the Respondents: | Kells |
ORDERS
The application be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1398 of 2016
| KIRAIG PTY LTD ACN 113 874 267 AS TRUSTEE FOR JOVETTE TRUST |
First Applicant
| JOY ELAINE GILMORE |
Second Applicant
And
| RENT THE ROO PTY LTD ACN 001 408 448 |
First Respondent
| PHILLIP HAGUE |
Second Respondent
REASONS FOR JUDGMENT
INTRODUCTION................................................................................................. [1]
APPLICANTS’ POINTS OF CLAIM................................................................... [4]
Franchise Agreements..................................................................................... [5]
Proposed renewal of the Franchise Agreements........................................... [6]
Proposed sale of the franchises and right of first refusal............................ [7]
Termination of Franchise Agreements........................................................ [11]
Breaches of the Franchise Agreements....................................................... [12]
Good faith and unconscionable conduct...................................................... [13]
Breach of confidence.................................................................................... [17]
Orders sought................................................................................................. [18]
DEFENCE........................................................................................................... [19]
LEGISLATION
Franchise Agreements................................................................................... [21]
Competition and Consumer LegislationObligation to act in good faith................................................................. [22]
Unconscionable conduct.......................................................................... [24]
Accessorial liability.................................................................................. [25]Damages and compensation.......................................................................... [27]
APPLICANTS’ EVIDENCE
Joy Gilmore
Franchise Agreements.............................................................................. [29]
Renewal...................................................................................................... [34]
Offer by Friends Investments................................................................... [40]
Overseas holiday....................................................................................... [42]
Right of first refusal................................................................................. [43]
Termination of the Franchise Agreements.............................................. [48]Stephen Gilmore............................................................................................ [52]
Relationship with Mr Hague.................................................................... [54]
Proposed transfer and sale....................................................................... [58]
Right of first refusal................................................................................. [59]
Termination of Franchise Agreements.................................................... [60]
Breach of confidence............................................................................... [63]Sunit Khosla................................................................................................... [65]
Manprit Sidhu................................................................................................. [71]
Paul Kean........................................................................................................ [72]
Other witnesses.............................................................................................. [74]
RESPONDENTS’ EVIDENCE
Philip Hague
Relationship with Mr Gilmore................................................................. [75]
Renewal...................................................................................................... [79]
Proposed sale............................................................................................ [84]
Termination of Franchise Agreements.................................................... [86]
Access to Kiraig’s emails......................................................................... [90]
Friends Investments.................................................................................. [91]Alan Carroll.................................................................................................... [92]
Roger McKenna............................................................................................. [97]
Mario Quintiliani........................................................................................... [99]
CONSIDERATION
Findings on factual background.................................................................. [105]
Receipt of 8 September 2015 letter.......................................................... [107]
Mr Gilmore and Mr Hague......................................................................... [115]
Breach of the Franchise Agreements’ renewal leases.............................. [118]Effect of the Renewal Clauses.............................................................. [120]
Breach by provision of Proposed Agreements with new terms?........ [126]
Finding..................................................................................................... [128]Breach of transfer of franchise provisions of the Franchise
Agreements.................................................................................................. [129]Was there a valid exercise of the right of first refusal?...................... [130]
Rent the Roo’s intentions....................................................................... [140]
Finding..................................................................................................... [147]Good faith and unconscionable conduct.................................................... [148]
Good faith................................................................................................ [151]
Unconscionable conduct........................................................................ [166]
Breach of confidence............................................................................. [174]
CONCLUSION................................................................................................. [184]
INTRODUCTION
The first respondent (“Rent the Roo”) is engaged in the business of renting household products to consumers. It operates as a franchisor in over sixty exclusive franchise territories across Australia. The second respondent (“Mr Hague”) is Rent the Roo’s chief executive officer.
On 19 April 2005 the first applicant (“Kiraig”) entered into a franchise agreement with Rent the Roo for the exclusive territory known as “Area 20” and on 7 September 2005 it entered into a further franchise agreement with Rent the Roo for the exclusive territory known as “Area 10” (together, “Franchise Agreements”). The second applicant (“Mrs Gilmore”) was guarantor of Kiraig’s performance of the Franchise Agreements.
Around the time the Franchise Agreements expired and potentially came up for renewal, Kiraig entered into an arrangement for another franchisee to purchase its franchise territories. Rent the Roo sought to exercise a right of first refusal in respect of that proposed sale but it and Kiraig could not agree on terms and that transaction did not proceed. Shortly after, the second of the Franchise Agreements expired and Rent the Roo thereupon refused to entertain Kiraig’s attempts to renew either of the agreements. Kiraig was consequently unable to sell its franchises to the other franchisee. After the expiry of the Franchise Agreements, officers of Rent the Roo also accessed certain of Kiraig’s documents which were saved on Rent the Roo’s email system.
APPLICANTS’ POINTS OF CLAIM
In summary, the applicants’ amended points of claim filed on 2 December 2016 alleged as follows.
Franchise Agreements
The applicants alleged that the Franchise Agreements contained the following terms:
a)Kiraig would have the exclusive right to operate and use Rent the Roo’s franchise system within the Area 10 and Area 20 territories;
b)the initial franchise fee payable by Kiraig for Area 20 was $100,000 plus GST and $50,000 for Area 10;
c)the franchises could be assigned, subdivided, sub-franchised or otherwise transferred by the applicants with prior written approval from Rent the Roo, with such approval not to be unreasonably withheld. Approval could be conditional upon the payment of a new franchise fee by the transferee;
d)if Kiraig received an expression of interest to purchase the franchises, Kiraig would submit an exact copy of the expression of interest to Rent the Roo which would thereafter have a period of two weeks to exercise its first right of refusal to purchase the franchises on the terms and conditions contained in the expression of interest. If Rent the Roo did not exercise its right of first refusal, Kiraig could complete the sale and/or transfer of the franchises subject to Rent the Roo’s approval;
e)the initial term of each agreement was ten years, with an option to renew for a further ten years;
f)the exercise of the option for renewal was to be effective if, amongst other things, Kiraig gave written notice of its intention to renew the agreements not sooner than six months and not later than three months before the end of the initial term; and
g)upon the exercise of the option for renewal, Kiraig and Rent the Roo would enter into Rent the Roo’s master franchise agreement current at the time which would not contain terms substantially different from those in the Franchise Agreements.
Proposed renewal of the Franchise Agreements
On 19 October 2014 Kiraig exercised its right of renewal for Area 20 and on 30 March 2015 it exercised its right of renewal for Area 10. On 19 June 2015 Rent the Roo sent draft franchise agreements for both areas to the applicants for execution (“Proposed Agreements”). The applicants alleged that the Proposed Agreements incorporated terms which were substantially different from those in the Franchise Agreements.
Proposed sale of the franchises and right of first refusal
On 29 July 2015 Kiraig received an offer to purchase the two franchises from an existing franchisee of Rent the Roo, Friends Investments Pty Limited (“Friends Investments”), on the terms that:
a)Friends Investments would pay $250,779 for the two territories;
b)Friends Investments would acquire a Mercedes Sprinter van used in Kiraig’s business by either taking over or paying out the existing lease; and
c)completion would occur no later than 26 August 2015.
On 31 July 2015 the offer from Friends Investments was sent to Rent the Roo and on 7 August 2015 Rent the Roo sought to exercise its right of first refusal. The applicants alleged that the purported exercise was invalid because:
a)it was subject to further negotiations and execution of a contract for sale, the terms of which had not yet been settled;
b)the Mercedes Sprinter van was excluded from the sale; and
c)Rent the Roo made no commitment to purchase the franchises.
The applicants alleged that in the course of negotiations, the respondents informed them that if Kiraig did not sell the franchises to Rent the Roo on the terms proposed and subsequently sought to continue with the sale to Friends Investments, Rent the Roo would require Friends Investments to pay a new franchise fee in respect of each territory.
The applicants alleged that negotiations with Rent the Roo on the proposed terms of sale were ultimately unsuccessful and were formally ended on 2 September 2015. They alleged that Friends Investments continued to remain interested in acquiring the franchises for the two territories provided that a new franchise fee was not imposed.
Termination of Franchise Agreements
The applicants alleged that on 8 September 2015 Rent the Roo terminated Kiraig’s franchise rights for the two territories and, thereafter, Rent the Roo, under the direction of Mr Hague:
a)removed Kiraig from receiving enquiries from new and existing customers made through Rent the Roo’s national telephone number;
b)diverted enquiries from new and existing customers intended for Kiraig to other Rent the Roo franchisees and to Rent the Roo itself;
c)began trading in the two territories in competition with Kiraig, including directly soliciting business from Kiraig’s customers; and
d)on 11 September 2015 wrongfully accessed and copied from Kiraig’s email account a management report containing a list of all of Kiraig’s customers, together with particulars of each consumer lease of such customers.
Breaches of the Franchise Agreements
The applicants alleged that by incorporating into the Proposed Agreements terms which were substantially different from those in the Franchise Agreements, the respondents breached their obligations under cls.1B(b) of the latter agreements. They also alleged that the respondents breached the Franchise Agreements by unreasonably withholding approval of the transfer to Friends Investments, contrary to cls.10B(a) of the agreements, and by wrongfully terminating the Franchise Agreements.
Good faith and unconscionable conduct
The applicants alleged that by virtue of cl.6 of sch.1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (“Franchising Code”), each party to a franchise agreement had an obligation, both express and implied, to act towards another party with good faith in respect of any matters arising under or in relation to the franchise agreement.
Consequently, in dealing with the approval for transfer and subsequent termination of the Franchise Agreements, it was alleged that Rent the Roo had an obligation towards the applicants and/or Friends Investments to act in good faith, to act honestly and not arbitrarily and to co-operate to achieve the purpose of the Franchise Agreements. The applicants alleged that Rent the Roo breached its “obligations of good faith” because:
a)it purported to terminate the Franchise Agreements when it was not entitled to because there had not been a breach of the agreements;
b)its purported termination was not reasonably necessary for the protection of its legitimate interests; and
c)in purporting to terminate the Franchise Agreements, it was not motivated by a desire to protect its legitimate interests but by malice and/or revenge against Kiraig for not transferring the franchises upon invalid exercise of the right of first refusal.
The applicants alleged that by failing to act in good faith, Rent the Roo contravened s.51ACB of the Competition and Consumer Act 2010 (“CC Act”). They alleged that Mr Hague was, directly or indirectly, knowingly concerned in that contravention.
Further or in the alternative, the applicants alleged that Rent the Roo’s conduct was unreasonable, oppressive and amounted to unconscionable conduct under ss.20 and 21 of the Australian Consumer Law (“ACL”). They alleged that Mr Hague was also knowingly concerned in that conduct.
Breach of confidence
It was alleged that the information which was accessed and copied by Rent the Roo on 11 September 2015 was confidential information acquired by the respondents without the applicants’ knowledge. The applicants alleged that it was acquired in circumstances which gave rise to an obligation to keep the information confidential and not use it to the detriment of the applicants. They alleged that the respondents made unauthorised use of the information in breach of the obligation of confidence.
Orders sought
The applicants sought damages in the sum of $269,153 and equitable compensation or an account of profits.
DEFENCE
The respondents denied having breached the Franchise Agreements, having not acted in good faith, having acted unconscionably and having breached an obligation of confidence. They put the applicants to proof of, or contested, their characterization of the renewal provisions of the Franchise Agreements and of Rent the Roo’s purported right of first refusal and its exercise.
Rent the Roo also filed a cross-claim but it was not pressed.
LEGISLATION
Franchise Agreements
The relevant terms of the Franchise Agreements were:
1B. RENEWAL
Subject to sub clauses (a) & (b) below, the Franchisor will renew the Franchise for one (1) further period … the duration of which shall be the period set out in Schedule I (“the Renewal Term”), if and only if:
(a)the Master franchisee has been throughout the Term in full compliance with this Agreement and or has rectified to the complete satisfaction of the franchisor any breaches within the specified timeframes of this or any other agreements between the Franchisor and the Master franchisee at the time of giving the notice referred to in paragraph (d) or at the date of expiration of the Term;
(b)the Master franchisee and the Guarantor then enters into the Franchisor’s then current Master Franchise Agreement (which will not however contain terms substantially different from those herein contained) …
…
(d)Prior to entry into the new master franchise agreement, the Master franchisee shall pay to the Franchisor its full cost of renewing the Franchise, including GST if applicable and including but not limited to legal fees incurred in the preparation of all necessary documents and stamp duty if applicable on all such documents; and
(e)The master franchisee gives written notice to the Franchisor of the Master franchisee’s intention to renew the Franchise and said notice shall be given between (3) months and (6) months before the end of the first Term.
…
10. TRANSFER
…
10B. BY MASTER FRANCHISEE
(a)The Franchise is personal to the Master franchisee and may not be in whole or in part voluntarily, involuntarily, directly or indirectly assigned, subdivided, sub-franchised or otherwise transferred by the Master franchisee without the prior written approval of the Franchisor provided that approval to assign the Franchise in whole shall not be unreasonably withheld. If such approval to assign is granted, it may be conditional upon the following:
(i)The Master franchisee paying to the Franchisor all unpaid accounts plus the costs associated with approving such transfer plus a transfer fee where the total of those transfer costs shall not exceed $5000 plus GST;
(ii)The transferee executing the Franchisor’s then current master Franchise Agreement and if so deemed by the franchisor in its ultimate discretion the transferee paying a new franchise initial franchise fee for a new franchise agreement with a fresh term consistent with the then initial terms of the franchise agreement being granted at that time which will not contain financial terms substantially different from those contained herein), and such other documents then customarily used by the Franchisor for its master franchisees;
…
(c)Such franchisor consent of the transfer will be made in writing within 30 days after the master franchisee’s request is made or a written response will be issued by the franchisor within 30 days if consent withheld setting out the reasons.
…
10D. FRANCHISOR’S RIGHT OF FIRST REFUSAL
Notwithstanding the provisions of clause 10B, if the Master franchisee shall at any time determine to sell the Franchise or an interest in the Franchise and the Master franchisee shall obtain a written bona fide expression of interest to purchase the business, including the Master Franchise rights together with his interest in all real or personal property, leasehold improvements if applicable and other assets used by the Master franchisee in the Business from a responsible and fully disclosed bonafide purchaser and shall submit an exact copy of such expression of interest to the Franchisor, who shall, for a period of two (2) weeks from the date of delivery of such offer, have the right, but not the obligation, exercisable by written notice to the Master franchisee, to purchase the Franchise and the assets of the Business, for the price (less any amount payable by the Master franchisee to the Franchisor) and on the terms and conditions contained in such expression of interest, provided that the Franchisor may substitute cash for any form of payment proposed in such expression of interest. The Franchisor may deduct from the purchase price any unpaid debts of the Master franchisee to the Franchisor and may pay out of the purchase price any of the Master franchisee’s unpaid trade creditors.
If the Franchisor does not exercise its right of first refusal, the Master franchisee may complete the sale of the Business to such purchaser subject to the provisions of Clause 10B hereof, for a consideration which does not vary from the consideration set out in the offer of the right of first refusal. …
Competition and Consumer Legislation
Obligation to act in good faith
Section 51ACB of the CC Act provides that a corporation must not, in trade or commerce, contravene an applicable industry code.
The Franchising Code is found in sch.1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014. It relevantly provides:
6 Obligation to act in good faith
Obligation to act in good faith
(1)Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to:
(a) the agreement; and
(b) this code.
This is the obligation to act in good faith.
Civil penalty: 300 penalty units.
(2)The obligation to act in good faith also applies to a person who proposes to become a party to a franchise agreement in respect of:
(a)any dealing or dispute relating to the proposed agreement; and
(b)the negotiation of the proposed agreement; and
(c)this code.
Matters to which a court may have regard
(3)Without limiting the matters to which a court may have regard for the purpose of determining whether a party to a franchise agreement has contravened subclause (1), the court may have regard to:
(a)whether the party acted honestly and not arbitrarily; and
(b)whether the party cooperated to achieve the purposes of the agreement.
…
Unconscionable conduct
The ACL is found in sch.2 to the CC Act. Sections 20, 21 and 22 of the ACL relevantly provide:
20Unconscionable conduct within the meaning of the unwritten law
(1)A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.
(2)This section does not apply to conduct that is prohibited by section 21.
21Unconscionable conduct in connection with goods or services
(1)A person must not, in trade or commerce, in connection with:
(a)the supply or possible supply of goods or services to a person (other than a listed public company); or
(b)the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
…
(3)For the purpose of determining whether a person has contravened subsection (1):
(a)the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b)the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4) It is the intention of the Parliament that:
(a)this section is not limited by the unwritten law relating to unconscionable conduct; and
(b)this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c)in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
22Matters the court may have regard to for the purposes of section 21
(1)Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened section 21 in connection with the supply or possible supply of goods or services to a person (the customer), the court may have regard to:
(a)the relative strengths of the bargaining positions of the supplier and the customer; and
(b)whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and
(c)whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services; and
(d)whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and
(e)the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; and
(f)the extent to which the supplier’s conduct towards the customer was consistent with the supplier’s conduct in similar transactions between the supplier and other like customers; and
(g)the requirements of any applicable industry code; and
(h)the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code; and
(i)the extent to which the supplier unreasonably failed to disclose to the customer:
(i) any intended conduct of the supplier that might affect the interests of the customer; and
(ii) any risks to the customer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer); and
(j)if there is a contract between the supplier and the customer for the supply of the goods or services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and
(ii) the terms and conditions of the contract; and
(iii) the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and
(iv) any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and
(k)without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
(l)the extent to which the supplier and the customer acted in good faith.
Accessorial liability
Section 75B of the CC Act provides that a person is involved as an accessory in a contravention of pt.IVB of the Act, which includes s.51ACB, if the person:
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.
Section 2 of the ACL is relevantly identical to s.75B of the CC Act but is concerned with persons involved in contraventions of the ACL.
Damages and compensation
Section 82 of the CC Act provides that a person who suffers loss or damage as a result of a contravention of pt.IVB of the Act, which as previously indicated includes s.51ACB, may recover the amount of the loss or damage arising out of the contravention from the person who committed the contravention or from a person involved in the contravention.
Similarly, s.236(1) of the ACL provides that a person who suffers loss or damage as a result of a contravention of chp.2 of the ACL, in which ss.20, 21 and 22 are found, may recover the amount of the loss or damage arising out of the contravention from a person involved in the contravention. Section 237 of the ACL provides that the Court may make compensation orders in favour of a person who has suffered loss or damage as a result of a contravention of chp.2 of the ACL.
APPLICANTS’ EVIDENCE
Joy Gilmore
Franchise Agreements
Mrs Gilmore is the sole director of Kiraig, which is the trustee of a discretionary trust called “The Jovette Trust”.
On 19 April 2005 Kiraig and Rent the Roo entered into a franchise agreement for Area 20 which, Mrs Gilmore deposed, generally covered the districts of Hornsby, Blacktown, Parramatta and Silverwater in the Sydney metropolitan area. Mrs Gilmore was a guarantor of the franchise agreement.
Mrs Gilmore deposed that the Area 20 franchise agreement was for a term of ten years and included an “option” for renewal for a further ten years. It also required the payment of a franchise fee of $100,000 and ongoing “management services fees” or royalties of 10% of the franchise’s gross revenue.
On 7 September 2005 Kiraig and Rent the Roo entered into a franchise agreement for the Area 10 territory, which covered the territory from Mount Druitt in western Sydney to Bathurst in the central west of New South Wales. Mrs Gilmore deposed that she also signed that franchise agreement as guarantor of Kiraig’s obligations. She deposed that the agreement was in terms almost identical to those of the Area 20 franchise agreement.
Mrs Gilmore deposed that following the making of the Area 10 franchise agreement, Kiraig conducted the two franchises as one business. She deposed that she operated the franchises with her husband.
Renewal
On 19 October 2014 Mrs Gilmore wrote to Rent the Roo exercising the option for renewal of the Area 20 franchise agreement. On 30 March 2015 she sent a further letter to Rent the Roo exercising the option for renewal of the Area 10 franchise agreement.
Mrs Gilmore deposed that on 23 April 2015 she received a letter from Rent the Roo’s solicitors enclosing, relevantly, a draft franchise agreement. An amended version of the draft franchise agreement was provided on 19 June 2015 (i.e the Proposed Agreements). Mrs Gilmore deposed that, in her view, the Proposed Agreements included terms which provided Rent the Roo with rights it did not previously have under the Franchise Agreements in that it:
a)imposed an end of term competition restraint on “related parties” which would have included her husband;
b)created a security interest in favour of Rent the Roo under the Personal Property Securities Act 2009;
c)required Kiraig to use Rent the Roo’s centralised bookkeeping facility and database which would have resulted in Rent the Roo having possession and control of all of Kiraig’s financial data and customer database; and
d)authorised Kiraig’s customers, suppliers, bankers and trade creditors to provide confidential information to Rent the Roo and authorised Rent the Roo to make confidential business enquiries of those parties in relation to Kiraig’s franchise.
Mrs Gilmore deposed that the amended version of the Area 20 draft franchise agreement was provided more than seven months after she had exercised the option for renewal of the franchise and more than two months after its term had expired (on 18 April 2015). She deposed that in the period after the Area 20 franchise agreement expired, Rent the Roo continued to operate the franchise relationship in exactly the same manner as it had before 18 April 2015: it continued to forward sales leads for Area 20 to Kiraig and continued to invoice Kiraig on a monthly basis for royalties. Further, the franchises for both territories continued to operate without alteration as they had done for the previous ten years.
Mrs Gilmore deposed that, other than the letters she received from Rent the Roo’s solicitors on 23 April 2015 and 19 June 2015 enclosing, respectively, an initial draft franchise agreement and then the Proposed Agreements, neither Mr Hague nor any person on behalf of Rent the Roo said or did anything to indicate to her that there was any urgent need to sign any renewal documents.
However, in cross-examination Mrs Gilmore accepted that she had received two further letters from Rent the Roo, dated 8 and 23 July 2015 respectively, which expressed a need for urgency in relation to the renewal of the Franchise Agreements. Even so, Mrs Gilmore did not perceive these letters as communicating a need for urgency because of, variously:
a)the length of time which had elapsed since she first exercised the option for renewal of the Area 20 franchise agreement;
b)the fact that the franchise business was being conducted in exactly the same manner as it had been for the previous ten years; and
c)the fact that the letters dealt only with Area 20.
She deposed that Rent the Roo did not press for the renewal of the Franchise Agreements at any stage subsequent to the 28 July 2015 letter. Mrs Gilmore said that she did not act in relation to the 23 April 2015 letter because, at the time, she had not been well and was moving house. As for the July 2015 letters, she said that she did not act because, by that stage, she and her husband were talking about selling the franchises. She had also been advised that it was not necessary to take up the offer made in Rent the Roo’s letter of 19 June 2015 if she was going to sell the franchises.
Offer by Friends Investments
Mrs Gilmore deposed that in July 2015 she and her husband received from Sunit Khosla and Manpreet Sidhu, the directors of Friends Investments, an offer to purchase the franchises. On behalf of Kiraig, on 29 July 2015 she executed an agreement for the sale of the franchises for the sum of $250,779, with settlement to occur “within 28 days” (i.e 26 August 2015). An amendment to the agreement was executed later that day to include in the sale the delivery van which Kiraig used in its businesses. The amendment required Friends Investments to either take up or pay out the existing lease.
Mrs Gilmore also referred to an email which Kiraig’s solicitor, Mr Kean, sent to Rent the Roo’s solicitor, Mr Quintiliani, on 28 July 2015. Relevantly, that email contended that the Proposed Agreements contained terms which were materially different from the Franchise Agreements’ terms while also conceding that the franchise system had to evolve. It asked Rent the Roo to “bear with” Kiraig “for a few more days while we resolve how best to accommodate the interest [sic] of both parties”. Mrs Gilmore said that that email had been sent on instructions.
Overseas holiday
Mrs Gilmore deposed that she and her husband went on a European holiday, which included a cruise on the Baltic Sea, from 18 August 2015 to 1 October 2015. She deposed that she had arranged for Mr Khosla and Mr Sidhu of Friends Investments to assist her husband and her in running their franchises while they were on holiday. She deposed that this “caretaker arrangement” was made on short notice and was not part of the agreement for the sale of the businesses.
Right of first refusal
On 31 July 2015 Kiraig advised Rent the Roo of the proposed sale to Friends Investments and invited Rent the Roo to consider whether to exercise its right of first refusal. By letter dated 7 August 2015 Rent the Roo’s solicitors advised that it intended to exercise its right of first refusal.
By letter dated 13 August 2015 Kiraig’s solicitors sent a draft contract for sale to Rent the Roo’s solicitors. Those solicitors responded on 18 August 2015 seeking amendment of the settlement date from 26 August 2015 to 1 September 2015, requiring corrections to the draft to remove a reference to Mr Gilmore (on the basis that he was neither a director nor guarantor of Kiraig) and reference to the van (on the basis that it had not been included in the “executed bona fide notice” executed by Friends Investments) and seeking certain information, including an electronic copy of Kiraig’s then-current lease agreements. Kiraig’s solicitors responded on 19 August 2015 rejecting the deletion of the van and refusing the request for copies of lease agreements but agreeing to the other requirement and requests. Mrs Gilmore deposed that negotiations followed that correspondence.
Mrs Gilmore said that in late August 2015 Mr Kean told her that Mr Quintiliani had advised that if Kiraig proceeded with the sale to Friends Investments rather than to Rent the Roo, Rent the Roo might impose a new franchise fee of $150,000 for each territory.
On 2 September 2015 Mrs Gilmore instructed her solicitors to terminate negotiations with Rent the Roo. She said that this was because of the conversation between Mr Kean and Mr Quintiliani concerning the possibility of a franchise fee attaching to the territories they were selling. She and her husband thought that Friends Investments would not be willing to go ahead. Mrs Gilmore said that she had had little faith in Rent the Roo completing the sale because the exchange date kept changing. She and her husband felt that Rent the Roo had been costing them fees and putting things off so they cancelled the sale and withdrew Mr Kean’s instructions. She said that they intended to speak to Friends Investments when they returned from their holiday.
Mrs Gilmore deposed that on 4 or 5 September 2015 Mr Khosla telephoned her and informed her of a conversation he had had with Mr Hague at the Rent the Roo conference. She deposed that as a result, she sent an SMS message to Mr Hague asking to speak to him by telephone.
Termination of the Franchise Agreements
Mrs Gilmore subsequently received by email a letter from Rent the Roo’s solicitors dated 8 September 2015 advising that Kiraig’s rights to operate the franchises would end at the close of business that day. The letter also stated that Kiraig had, up until that point, been permitted to conduct the Area 20 franchise on a “holding over” basis. Mrs Gilmore deposed that she was completely shocked by that letter on the basis that she had had no notice or warning of Mr Hague’s intention to treat both franchises as having an end-date of 8 September 2015. In cross-examination Mrs Gilmore said that she and her husband got the email late in the afternoon on 10 September 2015, about 5pm. She said that they had been “out during the day” and when they “came back into Wi-Fi” they opened their emails and discovered the letter from Rent the Roo’s solicitors.
Mrs Gilmore deposed that she and her husband spoke to Mr Hague on 10 September 2015 but at that point had not yet seen the 8 September 2015 letter from Rent the Roo’s solicitors terminating the franchise agreements, deposing that she did not have access to the Rent the Roo email account while she was on holidays. Mrs Gilmore deposed that words to the following effect were said:
Mr Hague:The sale document with Friends Investments does not comply with the requirements of the first right of refusal clause in that it does not set out the full details of the sale price. It does not specify the portion of the total amount that was for goodwill and the amount that was for rental agreements.
… I am not going to have Sunit purchase the two territories without paying a full standard franchise fee.
Mr Gilmore: Why?
Mr Hague:Because I can.
Mr Gilmore: Randall (North) and Judy (Moore) [former franchisees] are not paying a new franchise fee on the sale of Brisbane. Why are you treating us differently?
Mr Hague:Because I can.
Mrs Gilmore deposed that no mention was made during that conversation of franchise rights ending or expiring.
Mrs Gilmore said that that conversation occurred at 5-6am on 10 September 2015, local European time, and that the 8 September 2015 email arrived at 5pm that day, local European time. She conceded that she and her husband had received the email of 8 September 2015 before the conversation with Mr Hague, as she had replied to it on 9 September 2015. However, she did not agree that they had also received (or seen) the 8 September 2015 letter ostensibly attached to that email, although she said that if there had been no attachment she would have made an enquiry.
Mrs Gilmore deposed that Kiraig had, since 8 September 2015, continued to service customers and to receive rental payments but had not entered into any new consumer leases.
Stephen Gilmore
Mr Gilmore is Mrs Gilmore’s husband and an employee of Kiraig. He deposed that he has worked with his wife and has been involved in the day-to-day operations of the Area 20 and Area 10 franchises, together known as “Sydney Greater West”, to various degrees since their commencement.
Mr Gilmore deposed that during the first few months of the Area 20 franchise, he developed systems, procedures and forms for use in the franchise and shared this information with Mr Hague. Subsequently, in June 2006, he joined Rent the Roo as a subcontracted manager and continued in that role until 19 March 2010. Mr Gilmore deposed that during this period he developed a comprehensive operations manual, trained franchisees at Kiraig’s office as well as in the field and ran the annual conference, amongst other things.
Relationship with Mr Hague
Mr Gilmore deposed that as a contracted manager he became well acquainted with Rent the Roo’s business systems and all of its franchisees and developed a close working relationship with Mr Hague. He deposed that his personal relationship with Mr Hague began to deteriorate in 2009 over various issues concerning the conduct of the franchise network.
Mr Gilmore deposed that one such issue arose out of the enactment of the National Consumer Credit Protection Act 2009 (“NCCP Act”) in 2010 and its requirement that businesses offering consumer leases hold Australian Credit Licences. He deposed that it had been Rent the Roo’s preference for its franchisees to satisfy the licensing requirements by being appointed as Rent the Roo’s authorised representatives, relying on its Australian Credit Licence. Mr Gilmore deposed that at the time he undertook some research and took legal advice which convinced him to secure an independent Australian Credit Licence for Kiraig. He deposed that other franchisees also used his research and advice to obtain their own Australian Credit Licence, contrary to the respondents’ wishes. Subsequently, Rent the Roo repeatedly made requests that Kiraig and the other independent Australian Credit Licence franchisees agree to use a centralised database for the recording and management of consumer leases known as “Roo Books”. Mr Gilmore deposed that he and his wife had resisted using the Roo Books because they had preferred to manage their own NCCP Act compliance and to not share their customers’ confidential records.
Mr Gilmore deposed that on 19 March 2010, as a result of the deterioration in his relationship with Mr Hague, he resigned from his role with Rent the Roo. He deposed that he told Mr Hague that he was resigning because he could not trust him. Mr Gilmore deposed that after his resignation he continued to attend Rent the Roo events with his wife but was not allowed to participate, with the exception of the 2011 national conference which he attended as his wife’s proxy. He deposed that he continued to work for Kiraig and maintained close relationships with many of the franchisees.
Mr Gilmore deposed that sometime in June 2012 he invited Mr Hague to his home in an attempt to improve their strained personal relationship. He deposed that he did not feel that the meeting improved things and he had hardly spoken to Mr Hague since.
Proposed transfer and sale
Mr Gilmore deposed that Friends Investments retained the rental income it received from contracts it wrote while it was running Kiraig’s business. He deposed that the sale price he and his wife negotiated with Friends Investments had taken into account the fact that Kiraig would retain the rental income it received from contracts it had written. He deposed that the agreement executed on 29 July 2015 set out their entire agreement on the sale and that there had been no other arrangements for the transfer of the franchise areas.
Right of first refusal
Mr Gilmore gave oral evidence concerning the emails which preceded Mr Kean’s email of 2 September 2015 calling off the sale to Rent the Roo. He said exchange had originally been intended to occur on 28 August 2015 but was changed to 1 September 2015, which was not his preferred date. He said that he had instructed Mr Kean to have the contract amended by including provision for a 10% deposit but he had not known that the contract had been provided to Rent the Roo’s solicitor in escrow and that an embargo had been placed on exchange. He did not recall having instructed Mr Kean to not exchange.
Termination of Franchise Agreements
Mr Gilmore deposed that when he and his wife spoke to Mr Hague on 10 September 2015, he had not been aware of the 8 September 2015 letter or that Mr Hague had taken the view that Kiraig’s franchise rights had ended. Mr Gilmore’s evidence of the conversation was similar to his wife’s evidence. He deposed that during the conversation there was no discussion of the termination of Kiraig’s franchise rights or the possibility of Rent the Roo granting the areas to Friends Investments as new franchises on the basis that Kiraig’s rights had ended. Mr Gilmore deposed that the only matters discussed concerned the negotiations for the sale to Rent the Roo and, failing that, the terms on which Rent the Roo would consent to a transfer of the franchises to Friends Investments. He deposed that Rent the Roo’s general manager, Roger McKenna, was also present during the discussion. He deposed that Mr McKenna’s only contribution to the conversation was towards the end when he said “There is a solution to this impasse. We are very close.”
Mr Gilmore’s recollection of the conversation was supported by notes which he deposed had been prepared at the time. Those notes, which were annexed to his affidavit of 23 November 2015, recorded a conversation with Mr Khosla at 9:30am Sydney time on 10 September 2015, before the conversation with Mr Hague on 10 September 2015:
spoke [sic] to Sunit asking him whether he had had the opportunity to have a conversation with Phil at the National Conference that was held from 5th to 7th September about the sale of SGWRTR
Sunit said that he tried to but Phil did not want to talk about it and Sunit felt that Phil was wanting Joy to come on bended knee to him/apologise to him.
We agreed that we would phone Phil to see if we could move the matter forward and sent Phil an sms and an email asking him to advise a suitable time that we could call him.
The second part of the notes recorded a conversation with Messrs Hague, McKenna and Alan Carroll (Rent the Roo’s operations manager) at “around 4pm Sydney Time” and “around 5am” Baltic time on 10 September 2015. That note made no reference to Mr Quintiliani’s email of 8 September 2015 but recorded Mrs Gilmore’s complaint that she “did not understand what was happening [or] …what you are doing to me. I am so upset and in tears …”. Mr Gilmore recorded himself as having asked what could be done “to resolve the situation that had arisen”, referring to the collapse of the sale to Rent the Roo. He also recorded his complaints about the negotiations over the details of the sale under the right of first refusal and disagreement over whether the offer made by Friends Investments actually satisfied “the requirements of the 1st right of refusal clause”.
Breach of confidence
Mr Gilmore deposed that Rent the Roo has a national telephone number which it promotes in all its advertisements, delivery vans, stationery and publications. Rent the Roo’s telephone system automatically diverts calls made to the national number to the franchisee in the area from which the call originates or, if there is no franchisee in the area, to Rent the Roo for allocation to an appropriate franchisee. Rent the Roo also receives enquiries through its website and those enquires are redirected in the same manner as the telephone enquiries. Mr Gilmore deposed that in his experience very few Rent the Roo customers contacted it or its franchisees other than by the national telephone number or the website.
Mr Gilmore deposed that:
a)on 11 September 2015 at 4:48pm an email was sent from Kiraig’s primary business email account ([email protected]) to Messrs Hague, McKenna and Carroll;
b)on 15 September 2015 Kiraig’s email account was accessed from a computer in Tasmania; and
c)on 18 and 22 September 2015, after the Rent the Roo website generated and sent to the Kiraig email address two applications from two potential customers, Rent the Roo accessed Kiraig’s email and forwarded the first email to another franchisee and the second email to Mr Carroll.
Sunit Khosla
Mr Khosla is one of the directors of Friends Investments, which has been Rent the Roo’s Central Coast franchisee since December 2006. Friends Investments also owns franchises in the Inner West and Dubbo.
Mr Khosla deposed that on 29 July 2015 Friends Investments made an offer to purchase Kiraig’s Areas 20 and 10 franchises on the following terms:
a)a sale price of $250,779;
b)Friends Investments would acquire the Mercedes Sprinter van used in the businesses by either taking over or paying out the existing lease; and
c)settlement would occur “within 28 days”.
The agreement in relation to the van was an amendment to the agreement as first struck. The agreement and the amendment both occurred on 29 July 2015.
Mr Khosla deposed that around this time he informed Mr Hague of the proposed sale. A few days later, Mr Hague indicated that Rent the Roo would be exercising its right of first refusal to purchase Kiraig’s territories. Mr Khosla deposed that Friends Investments nevertheless continued to be interested in purchasing the businesses.
Mr Khosla deposed that from about 18 August 2015 to 1 October 2015 Friends Investments provided assistance to Kiraig in managing its business while Mr and Mrs Gilmore were out of the country on holiday. He deposed that these arrangements were made after Friends Investments had agreed to purchase the businesses and after he became aware that Rent the Roo had exercised its right of first refusal. He deposed that the arrangement did not form part of nor was it connected in any way with the agreement for the sale of the franchises.
Mr Khosla deposed that Rent the Roo’s annual conference took place on 4-6 September 2015. At some point during that conference, Mr Hague informed Mr Khosla that the sale of Kiraig’s territories would not be proceeding and that Rent the Roo intended to terminate its franchise agreements with Kiraig. Mr Khosla deposed that later that day, he informed Mr Gilmore of his conversation with Mr Hague. They then had the following exchange:
Mr Gilmore: There was an issue with the van so we terminated the negotiations with him. He now says that if the sale to you goes ahead he will require a new franchise fee for each of the 2 territories.
Mr Khosla: We are still interested in purchasing the territories but not if we have to pay new franchise fees.
Mr Khosla deposed that by the time Mr and Mrs Gilmore returned from their holidays on 1 October 2015, he was aware that Kiraig’s franchise rights had ended and that it was no longer receiving customer enquiries from head office. He deposed that he formed the view that Kiraig was no longer in a position to proceed with the sale of the businesses to Friends Investments and so did not press for the completion of the purchase.
Manprit Sidhu
As already noted, Mr Sidhu is the second director of Friends Investments. He deposed that on 29 July 2015 he and Mr Khosla met with Mr and Mrs Gilmore when Mrs Gilmore offered to sell Kiraig’s franchises to them for $250,779. He deposed that he and Mr Khosla agreed that the price was fair and that they subsequently signed a sale agreement.
Paul Kean
Mr Kean is the applicants’ solicitor. He deposed that he was engaged by the applicants in June 2015 to advise on a draft franchise agreement for Areas 20 and 10. In the course of giving that advice, he received instructions from the applicants concerning the sale of the franchised businesses to Friends Investments.
Mr Kean deposed that on 26 August 2015 he had a telephone conversation with Rent the Roo’s solicitor, Mr Quintiliani, which included the following exchange:
Mr Quintiliani: You realise if your client sells to Friends Investments, my client will charge a new franchise fee for each territory.
Mr Kean: Why would he do that?
Mr Quintiliani: Because he thinks he can.
Other witnesses
Evidence was also given by two former Rent the Roo franchisees who said that when they sold their franchises, the new franchisees had not been required to pay a new franchise fee.
RESPONDENTS’ EVIDENCE
Philip Hague
Relationship with Mr Gilmore
Mr Hague deposed that when he offered Mr Gilmore a job as a subcontracted manager in June 2006, most, if not all, of the documentation necessary to conduct Rent the Roo’s franchise business was already in existence. He deposed that Mr Gilmore’s input had been limited to assisting in improving those documents and in making amendments to them.
Mr Hague deposed that he and Mr Gilmore had only had a work relationship. He deposed that Mr Gilmore’s office had been located in his own home and that he had visited him there from time to time for the sole purpose of discussing Rent the Roo business. Mr Hague deposed that while there were matters on which they disagreed, in his view their working relationship had not deteriorated and they had been able to continue to discharge their respective duties. He denied that Mr Gilmore had told him that he could not trust him.
Mr Hague deposed that after Mr Gilmore’s resignation, Mrs Gilmore indicated that she wanted him to continue to attend Rent the Roo meetings. In response, Mr Hague said that Mr Gilmore could only attend meetings if he was formally involved in the business, for instance as a temporary guarantor of Kiraig.
Mr Hague deposed that when he attended Mr Gilmore’s home office in June 2012 it was at the latter’s invitation and he had not been aware of the reason for the meeting. He deposed that during the course of the meeting Mr Gilmore stood up and spoke in a raised voice. Mr Hague deposed that he felt threatened by Mr Gilmore’s words and demeanour and left the premises. He deposed that they had scarcely spoken since.
Renewal
Mr Hague accepted that the Proposed Agreements contained terms which had not been in the Franchise Agreements. He deposed that they were drafted in that manner in order to capture the principles of the Franchising Code which had been introduced on 1 January 2015 and to reflect Rent the Roo’s recent requirement that all its franchisees hold independent Australian Credit Licences. Mr Hague deposed that the new terms were meant to reflect an evolution in Rent the Roo’s business and were also intended to be standard terms in all new and renewing franchise agreements. Amongst others, the new terms included:
a)an obligation on Kiraig to conduct its business using the Roo Books software and any other software advised by Rent the Roo. Mr Hague deposed that this term was inserted to reflect the modernisation of Rent the Roo’s record keeping system which enabled it to monitor its franchisees’ compliance with regulatory requirements; and
b)authorisation for Rent the Roo to make any enquiries with Kiraig’s customers, suppliers, bank or trade creditors concerning its business. This was inserted to ensure that Rent the Roo had a contractual right to make enquiries because as a franchisor it carried ultimate responsibility for any compliance failures by its franchisees.
Mr Hague deposed that he later realised that the draft agreement sent on 23 April 2015 had not taken into consideration the fact that Areas 20 and 10 operated as separate franchise areas. He deposed that when he realised the mistake in late June 2015, he instructed his solicitors to prepare and issue separate renewal documents for each of those areas. The revised agreements reflecting the distinction between the two areas were sent to Kiraig under cover of two letters dated 19 June 2015.
Mr Hague denied that Rent the Roo had failed to express a sense of urgency that Kiraig sign the renewal documents. In that regard, he referred to a letter sent by Rent the Roo’s solicitors to Mrs Gilmore on 8 July 2015. The letter referred to the Proposed Agreements which had been sent on 19 June 2015 and to the conditions which needed to be satisfied before the new agreement could commence. It concluded:
We look forward to receiving the [signed agreements and other documents] by no later than close of business Wednesday, 22 July 2015.
On 23 July 2015 Rent the Roo’s solicitors sent a further letter to Mrs Gilmore, noting that they had not received any responses to their letters of 19 June and 8 July 2015. The letter went on to say:
Please urgently advise whether you intend to continue with the renewal of the Franchise Agreement.
We look forward to receiving your urgent response by no later than close of business Friday, 24 July 2015.
On 28 July 2015 the applicants’ solicitors wrote to Rent the Roo’s solicitors contending that the Proposed Agreements contained terms which were materially different from the terms of the Franchise Agreements.
Mr Hague deposed that subsequent to the 28 July 2015 email, Kiraig did not raise any other issues in relation to the terms of the Proposed Agreements. He deposed to having believed at that time that Kiraig intended to proceed with the renewal of the franchises and had expected it to execute the Proposed Agreements by 6 September 2015. He deposed that he took that date to be the end-date of the 2005 Franchise Agreements. He said that it had been his understanding that the Area 20 franchise agreement had, in some way or form, been extended to the expiration of the Area 10 franchise agreement on 6 September 2015.
Proposed sale
Mr Hague deposed that after 31 July 2015 he directed his attention to Kiraig’s expressed wish to sell the Area 20 and Area 10 franchises. During the course of negotiations on the sale, Rent the Roo indicated that it was unwilling to include the delivery van in the sale. He also deposed that it had never been his intention to impose a new franchise fee as a condition of sale to any transferee. Mr Hague deposed that he had not at any time during the negotiations instructed his solicitors to tell the applicants that Rent the Roo would impose a new franchise fee on any transferee and had not personally communicated such a view to Mr and Mrs Gilmore.
On 2 September 2015 Mrs Gilmore terminated the sale negotiations and her solicitor’s retainer. Mr Hague deposed that he had always intended to proceed with the purchase and had already made arrangements to secure financing for it. He said that he applied for finance a day or two after Rent the Roo advised the applicants (by letter dated 7 August 2015) that it intended to exercise its right of first refusal and he signed the relevant agreement on 1 September 2015. Mr Hague said that although that agreement provided that the funds would be advanced on 7 September 2015, they were actually available earlier than that. He deposed that he was therefore surprised when Kiraig withdrew from the sale and terminated its solicitor’s retainer.
Termination of Franchise Agreements
Mr Hague deposed that because of Kiraig’s termination of the sale negotiations, the difficulty in communicating with Mr and Mrs Gilmore at the time and their failure to act on the renewal of the franchises, he considered Kiraig’s rights to the Area 20 and Area 10 franchises to have ceased by 8 September 2015. However, he denied having told Mr Khosla at the conference in early September that Kiraig’s Franchisee Agreements were going to be terminated. On 10 September 2015 he, together with Mr McKenna and Mr Carroll, had a telephone conversation with Mr and Mrs Gilmore. He deposed that the conversation was to the following effect:
Mr Gilmore: What is happening with our franchise?
Mr Hague:We have been waiting for the information necessary to allow us to value the business and you’ve now withdrawn from the sale and your lawyer’s no longer instructed. How do you value the business?
Mr Gilmore: I value it at about $100,000 for the contracts and $150,000 for the area.
Mr Hague:That doesn’t seem to accord with the formula that appears to have been applied and contained in the initial offer we received.
Mr McKenna: I don’t know why we’re even speaking about this. You guys have not renewed your franchise, it’s now expired and you don’t have a franchise to sell.
Mr Gilmore: Well I want to sell the franchise.
Mr Hague:The areas are no longer under any franchise because they have expired. This would be just like a new franchise. Any new incoming franchisee will need to pay the franchisor a franchise fee like any other new franchisee.
Mr Gilmore: Judy and Randall [former franchisees] didn’t pay a franchise fee. Why are you treating me differently?
Mr Hague:You are not being treated differently. The franchise agreement says that I can impose a new franchise fee on any new franchisee.
Mr Gilmore: Are you doing this because of me?
Mr Hague:Of course not.
Later that day Mrs Gilmore sent an email to Mr Hague and his solicitors stating that she wished to renew the Franchise Agreements and had deposited money into the respondents’ solicitors’ account for Rent the Roo’s legal fees arising out of the renewal. Mr Hague deposed that during their conversation earlier that day Mr and Mrs Gilmore had not indicated that they would be renewing the franchises and he had not agreed to allow them to do so after the expiration of the 2005 agreements. He deposed that he instructed his solicitors to respond to Mrs Gilmore. In the response his solicitors advised Mrs Gilmore that Kiraig’s rights to exercise an option to renew the agreements had expired on 8 September 2015 and that it could no longer seek to enliven those rights. Mr Hague deposed that he also instructed his solicitors to return the money Mrs Gilmore had deposited.
Mr Hague deposed that by that time he had become extremely dissatisfied with Mr and Mrs Gilmore’s conduct. He deposed that his dissatisfaction arose from:
a)Mr Gilmore’s behaviour as general manager of Rent the Roo;
b)Mr Gilmore’s resistance to carrying out directions from him;
c)threats to sue which Mr Gilmore had made to him;
d)Mr and Mrs Gilmore’s belief that Rent the Roo would use the Roo Books to take Kiraig’s customers and their resistance to using the books or allowing Rent the Roo to audit their franchise files;
e)the applicants’ actions in giving a notice of intention to renew but then failing to provide Rent the Roo with the documents necessary for it to comply with the Franchising Code and failing to “execute” their legal rights, leaving Rent the Roo in a position of uncertainty;
f)the applicants’ creation of uncertainty by sending a notice of sale of their franchise rights and then failing to provide Rent the Roo with information which would have allowed it to assess the value of the franchise;
g)Mr and Mrs Gilmore leaving for an overseas holiday in the midst of negotiations without advising Rent the Roo of their arrangement with Friends Investments, which diluted the business in Area 20 and Area 10 and detrimentally affected the goodwill in those areas;
h)Mr and Mrs Gilmore’s withdrawal from the sale and termination of their solicitor’s instructions which left Rent the Roo without a means of finalising the transaction; and
i)Mr and Mrs Gilmore’s refusal to provide, in connection with the sale, information about the full range of then-current contracts.
On 21 September 2015 Rent the Roo’s solicitors wrote to Kiraig’s solicitors reiterating that its rights under the Franchise Agreements had ended and inviting Kiraig to set out its claims in writing. On 25 September 2015 Kiraig’s solicitors responded setting out its claims. Mr Hague deposed that he instructed his solicitors not to respond to that letter as he considered that by then the renewal matter was closed.
Access to Kiraig’s emails
Mr Hague deposed that Kiraig’s primary business email address was a sub-domain of the domain name “renttheroo.com”. He deposed that Rent the Roo had registered that domain name, Kiraig’s email address and other email addresses in 2005. He deposed that Rent the Roo owned the email addresses within the franchise group but allowed the franchisees to use them for the purposes of the franchise business. He deposed that the email address had always been accessible to Rent the Roo as the holder of the domain name.
Friends Investments
Mr Hague deposed that Mr and Mrs Gilmore had not advised Rent the Roo of their arrangement that Friends Investments run Kiraig’s franchise areas while they were away on holiday from August to October 2015. He deposed that if they had sought approval of the arrangement, Rent the Roo would not have given it.
Alan Carroll
Mr Carroll is Rent the Roo’s group general manager and in that role is responsible for the day to day running of the business and the management of operations and franchisees.
Mr Carroll deposed that on 1 February 2012 he had a meeting with Mr and Mrs Gilmore. He deposed that during the meeting Mr Gilmore indicated that he wanted to continue attending Rent the Roo meetings. In response, Mr Carroll said that Mr Gilmore would only be allowed to attend meetings if he became a director or guarantor of Kiraig. Mr Carroll deposed that Mr Gilmore said that he did not want to be officially involved with Kiraig, saying “I just don’t trust Philip Hague.”
Mr Carroll’s evidence concerning the 10 September 2015 conversation was essentially identical to Mr Hague’s evidence.
Mr Carroll admitted that on 11 September 2015 he accessed Kiraig’s business email address to ensure that there were no unanswered emails or customer enquiries which might have gone unanswered after the termination of Kiraig’s franchises. Whilst doing so, he found the customer profile report and forwarded it to Mr Hague and Mr McKenna although, because the sale to Rent the Roo had not proceeded, it was only a matter of curiosity. He said he had not discussed the email with anyone other than Mr Hague and Mr McKenna.
Mr Carroll deposed that the email address was owned by Rent the Roo and as group general manager he was entitled to access it.
Roger McKenna
Mr McKenna is employed by Rent the Roo as its brand alignment manager. In that role he is responsible for ensuring that all the Rent the Roo franchisees comply with its policies and procedures and with the National Credit Code. Mr McKenna deposed that as part of his duties he visits Rent the Roo franchisees and reviews a sample of their consumer leases and their practices and procedures. He deposed that from 2011 he made a number of attempts to attend Kiraig’s premises to carry out such reviews but was always met with active resistance. Mr McKenna deposed that he had only ever conducted one audit of Kiraig’s consumer leases. That audit occurred on 7 April 2015 after Rent the Roo advised that it would not consider Kiraig’s notice to renew without an audit.
Mr McKenna’s evidence concerning the 10 September 2015 conversation was essentially identical to Mr Hague and Mr Carroll’s evidence.
Mario Quintiliani
Mr Quintiliani is the respondents’ solicitor. Mr Quintiliani said that he first became involved in the preparation for the renewal of Kiraig’s franchises in February or March 2015. He was aware by that time that Rent the Roo would be instructing him to redraft its franchise agreements and that some were coming up for renewal. Mr Quintiliani described the new version of the relevant franchise agreement as a “[d]ifferent agreement entirely” which was designed to be used by other franchisees as well as Kiraig. He said that his instructions had been to use the new wording to standardise Rent the Roo’s franchise agreements. This was the wording which appeared in the Proposed Agreements.
Mr Quintiliani agreed that he had seen Mr Kean’s email of 28 July 2015 adverting to the presence of new terms in the Proposed Agreements. He said that he had been instructed not to respond and to wait to see what detailed response or comments might be forthcoming form Kiraig on that issue.
In August 2015 he exchanged a number of emails with Mr Kean, the applicants’ solicitor, concerning the proposed sale of the franchises to Rent the Roo.
Mr Quintiliani deposed that he had a conversation with Mr Kean on 26 August 2015 which included the following exchange:
Mr Quintiliani: My clients don’t see the van as being a major issue either way in the transaction but they want to see the commercial leases.
Mr Kean:My clients may have a different view on the van and may want to go ahead and sell to Friends Investment.
Mr Quintiliani: My clients may wish to charge a franchise fee.
Mr Kean:Why would they do that?
Mr Quintiliani: They think they can on the reading of the franchise agreement.
Mr Kean:They may think that there is a contractual right.
Mr Quintiliani deposed that the conversation had been in general terms and included speculation on the actions the parties would take if certain events unfolded. Mr Quintiliani deposed that his comment concerning franchise fees had been made without instructions. In cross-examination Mr Quintiliani said that the conversation had focussed on the van but that towards the end it became more casual and bantering, as Mr Quintiliani and Mr Kean had known each other for a long time. The comment concerning franchise fees had been part of that latter part of the conversation.
In emails attached to Mr Quintiliani’s affidavit, the following chronology is revealed:
a)17 August 2015: email Mr Kean to Mr Quintiliani enclosing draft contract, including the van, completion date of 26 August 2015;
b)26 August 2015 at 9:32am: email Mr Quintiliani to Mr Kean advising Rent the Roo did not need to see Kiraig’s consumer leases but sought a schedule outlining the number of contracts, their expiry dates and their values after exchange;
c)26 August 2015 at 10:01am: email Mr Kean to Mr Quintiliani seeking agreement on completion on 1 September 2015 subject to resolution of outstanding issues;
d)27 August 2015 1:11pm: email Mr Kean to Mr Quintiliani advising that Kiraig no longer sought inclusion of the van and foreshadowing an amended contract wording;
e)27 August 2015 6:38pm: email Mr Kean to Mr Quintiliani enclosing signed contract excluding the van, completion date of 1 September 2015. Covering letter stated that the contract, signed by Kiraig’s attorney, was to be held in escrow and was not to bind Kiraig until advice to that effect was provided;
f)28 August 2015 6:30am: email Mr Kean to Mr Quintiliani advising that if contract was amended to provide for a 10% deposit, exchange could be effected; and
g)28 August 2015 8:10am: email Mr Kean to Mr Quintiliani advising that a new issue might have arisen and that Mr Quintiliani was no longer authorised to exchange. Mr Kean stated that he would telephone shortly.
CONSIDERATION
Findings on factual background
Generally the witnesses agreed on the significant factual matters relevant to deciding this case or gave evidence which was sufficiently similar that, together with documents which were adduced into evidence, the following matters can be found without difficulty:
a)on 19 April 2005 Kiraig entered into a ten year exclusive franchise agreement with Rent the Roo for the Area 20 territory and on 7 September 2005 it entered into a ten year exclusive franchise agreement for the Area 10 territory;
b)each agreement contained a provision which was characterized as an option for renewal for a further ten year period;
c)on 19 October 2014 Kiraig indicated to Rent the Roo, purportedly in accordance with the Area 20 franchise agreement, that it wished to renew that agreement for a further ten years. On 30 March 2015 Kiraig did the same in relation to the Area 10 franchise agreement;
d)the Area 20 agreement expired on 19 April 2015;
e)on 23 April 2015 Rent the Roo sent Kiraig a draft franchise agreement providing in one document for the renewal of the Area 20 and the Area 10 franchises;
f)on 19 June 2015 Rent the Roo sent the Proposed Agreements to the applicants for individual renewals of the two Franchise Agreements;
g)the Proposed Agreements contained terms which were different from those in the Franchise Agreements;
h)on 8 July 2015 the respondents’ solicitors wrote to Kiraig asking that signed documents relating to the renewal of the franchises be returned to them by 22 July 2015;
i)on 23 July 2015 the respondents’ solicitors wrote to Kiraig in a letter stamped “URGENT” asking that signed renewal documentation be supplied by close of business the following day;
j)on 28 July 2015 Mr Kean on behalf of Kiraig wrote by email to Mr Quintiliani on behalf of Rent the Roo concerning the renewal, noting that the Proposed Agreements contained new terms and asking that Rent the Roo “bear with my client for a few more days while we resolve how best to accommodate the interest [sic] of both parties”. Kiraig made no further communication on the subject of renewal until 10 September 2015;
k)on 29 July 2015 Friends Investments made an offer to Kiraig to purchase its two franchises, with completion on 26 August 2015. Initially, the offer did not include Kiraig’s van but the offer was varied later on 29 July 2015 to provide for Friends Investments to purchase it as part of the transaction;
l)on 31 July 2015 the Friends Investments’ offer was sent to Rent the Roo under cover of an emailed letter. The variation of that offer, also signed on 29 July 2015, which provided for the purchase of the van, was not sent with that communication although reference was made to it in the covering letter;
m)on 7 August 2015 Rent the Roo sought to exercise its right of first refusal and related discussions ensued;
n)on 13 August 2015 Mr Kean wrote by email to Mr Quintiliani advising that the proposed agreement for sale from Kiraig to Rent the Roo would provide for completion to occur on 26 August 2015;
o)on 17 August 2015 Mr Kean emailed to Mr Quintiliani a draft contract for sale of business providing for a completion date of 26 August 2015 and the transfer of the van to Rent the Roo together with an assignment to Rent the Roo of its related loan agreement;
p)on 18 August 2015 Rent the Roo’s solicitors wrote to Kiraig’s solicitors, relevantly asking that the completion date be changed to 1 September 2015, rejecting the inclusion of the van on the basis that it had not been included in the offer made by Friends Investments, rejecting Mr Gilmore’s inclusion as a covenantor because he was neither a director nor guarantor of Kiraig and asking for an electronic copy of then-current consumer lease arrangements;
q)on 18 August 2015 Mr and Mrs Gilmore departed for a holiday in Europe which was due to conclude on 1 October 2015. During the period most relevant to this matter they were aboard a ship in the Baltic Sea;
r)on 19 August 2015 Kiraig’s solicitors responded to Rent the Roo’s solicitors relevantly saying that Friends Investments’ offer had been amended before it was notified to Rent the Roo and so the amended offer constituted the basis on which Rent the Roo could seek to exercise its right of first refusal and if the request for documents was a due diligence request it was refused. Kiraig’s solicitors also said:
Further, if your client suggests that my letter of 31 July was an offer to sell the business to your client on the terms set out in the attachment, but excluding the additional term relating to the van and that offer was accepted when your client exercised its first right of refusal, that construction of events is untenable. An agreement for sale has not yet been formed.
s)on 26 August 2016 Mr Quintiliani wrote by email to Mr Kean recording that Rent the Roo no longer pressed its request for the consumer leases at that point, but asked for a schedule of them after exchange;
t)on 27 August 2015 Mr Kean wrote by email to Mr Quintiliani advising that Kiraig agreed to sell the business to Rent the Roo “without the van” and that a revised contract would be submitted with a view to exchange by email later that day;
u)later on 27 August 2015 Mr Kean wrote by email to Mr Quintiliani advising that the contract was to be sent shortly and enquiring whether he could sign and return the document the same day;
v)at 6:38pm on 27 August 2015 Mr Kean relevantly emailed to Mr Quintiliani a letter enclosing an amended contract for sale of business signed on behalf of Kiraig and Mr and Mrs Gilmore as covenantors. The letter advised that Kiraig did not intend to be bound until further notice and that the contract was to be held in escrow;
w)at 6:30am on 28 August 2015 Mr Kean wrote by email to Mr Quintiliani advising that the amended contract was to be amended further by inserting a requirement for a 10% deposit following which Mr Quintiliani could exchange;
x)at 8:10am on 28 August 2015 Mr Kean wrote by email to Mr Quintiliani saying:
A new issue may have arisen. You are now not authorised to exchange. I am on a plane and will call when land. It’s not a big issue. Will call.
y)on 1 September 2015 Rent the Roo’s solicitors wrote to Kiraig’s solicitors advising that their client would not be able to complete on 1 September 2015, agreeing to the amendment to include a 10% deposit and asking for particular information about Kiraig’s consumer leases so it could know the value of the business. It said:
We are instructed that the Franchisor will not be able to complete on 1 September 2015 but wish to first receive from the Franchisee the following:
1. details of the number of current consumer leases;
2. the expiry dates for those leases;
3. the value of the gross future rent of the individual leases; and
4. postcode distribution of the leases.
The Franchisee would no doubt appreciate that without this information the Franchisor is unable to determine the true underlying value of the business it is purchasing.
z)on 1 September 2015 Mr Hague executed an agreement for the financing of Rent the Roo’s purchase of Kiraig’s franchises;
aa)on 2 September 2015 Mr Kean wrote by email to Mr Quintiliani advising him that Kiraig would not be proceeding with the sale to Rent the Roo and that future communications were to be directed to Mrs Gilmore;
bb)on 6 September 2015 the Area 10 agreement expired;
cc)on 8 September 2015 Rent the Roo’s solicitors sent an email to Mrs Gilmore which attached a letter advising that the franchises had expired and that Kiraig was to write no more Rent the Roo business. The covering email said:
Dear Mrs Gilmore
Please find attached our letter of todays [sic] date.
Yours Faithfully …
dd)on 9 September 2015 Mr and Mrs Gilmore wrote by email to Mr Quintiliani saying:
Thank you, We have left s [sic] message with your client Phil Hague.
ee)at about 5am Baltic time on 10 September 2015, Mr and Mrs Gilmore had a telephone conversation with Messrs Hague, Carroll and McKenna;
ff)on 10 September 2015 Mr and Mrs Gilmore wrote by email to Mr Quintiliani, expressed to be subsequent to the conversation they had had with Mr Hague, seeking to renew each of the Franchise Agreements;
gg)on 11 September 2015 Mr Quintiliani wrote by email to Mrs Gilmore advising that the opportunity to exercise the options to renew had expired with the Franchise Agreements;
hh)on 11 September 2015 Mr Carroll accessed Kiraig’s documents and information stored in Rent the Roo’s network and provided a copy of a customer profile report to Mr Hague and Mr McKenna; and
ii)on 25 September 2015 Kiraig’s solicitors wrote to Rent the Roo’s solicitors raising, amongst other things, provisions of the Proposed Agreements which they asserted were substantially different from the provisions of the Franchise Agreements.
Subject to the comments which follow, I accept that the witnesses gave truthful evidence.
Receipt of 8 September 2015 letter
As already noted, there was considerable agreement on the facts relevant to the case but there were, nevertheless, points of difference. The most important of these was whether Mr and Mrs Gilmore had seen Mr Quintiliani’s email of 8 September 2015 before they had their conversation with Mr Hague on 10 September 2015.
Mr Quintiliani’s 8 September 2015 letter advising the expiry of the Franchise Agreements was sent under cover of an email. Exhibit R4 was an email chain concerning the expiry of the Franchise Agreements. The chain:
a)started with that email from Mr Quintiliani, which was time stamped “01:59” on 8 September 2015. It was followed by:
b)Mrs Gilmore’s email in reply, time stamped “08:00” on 9 September 2015, saying that a message had been left with Mr Hague. It was followed by:
c)a further email from Mrs Gilmore to Mr Quintiliani time stamped “10:35pm” on 10 September 2015, which referred to her having had the opportunity to speak to Mr Hague and tell him that Kiraig would renew its franchises. The email chain concluded with:
d)Mr Quintiliani’s email in response time stamped “3:40pm” on 11 September 2015 confirming Rent the Roo’s position as expressed in the letter of 8 September 2015 - that the Franchise Agreements had expired and that Kiraig was not in a position to rely on rights which had come to an end.
I am not persuaded that Rent the Roo’s reliance on the right of first refusal provisions of the Franchise Agreements was a device or anything other than genuine.
First, the argument that Rent the Roo used its right of first refusal as a device to prevent Kiraig from selling the business to Friends Investments lacks serious evidentiary support and requires Rent the Roo’s behaviour to be seen through the distrusting eyes of Mr Gilmore. I accept Mr Hague’s evidence that he had arranged funding so he could finance the purchase, which is behaviour quite at odds with Kiraig’s contention.
Secondly, if a complying offer was made, Rent the Roo was entitled to buy Kiraig’s business and no criticism could attach to it for the simple exercise of such a right.
Thirdly, the transaction failed because Kiraig withdrew from it in circumstances which, objectively, do not suggest that Rent the Roo did not want to complete it. I appreciate that Kiraig wanted to sell the business promptly but the decision to walk away abruptly without exploring why Rent the Roo sought a settlement date later than had been agreed, particularly when other matters had been negotiated successfully, suggests that it was Kiraig which was reluctant to contract with Rent the Roo, not the reverse. On a related point, contrary to the applicants’ submission that Rent the Roo’s letter of 1 September 2015 was “repudiatory in the context of [it] having to match the terms of the Expression of Interest”, I do not interpret Rent the Roo’s request for information in that letter to have erected a condition precedent to the sale or to have objectively manifested a repudiatory intention. Specifically, the letter did not say, or in my view imply, that Rent the Roo was unwilling to proceed with the transaction on the basis of the Friends Investments offer.
Fourthly, the fact that the parties might now disagree as to whether Rent the Roo had effectively exercised the right of first refusal or whether it had simply made an offer to purchase says nothing material about Rent the Roo’s motivation at the time. In that regard, it is to be observed that Kiraig did not suggest to Rent the Roo during their negotiations that its proposal was not an effective exercise of the right of first refusal or that Kiraig was entitled to reject Rent the Roo’s proposal and deal with Friends Investments instead. There is therefore a dearth of contemporary evidence to suggest that Rent the Roo believed anything other than that it was properly exercising the right of first refusal. Nor did the cross-examination of its witnesses persuade me that it held such a view.
Finally, the evidence does not support a finding that Rent the Roo intended to impose a further franchise fee on Friends Investments were they to have purchased Kiraig’s franchises. Mr Quintiliani said that he had raised the idea in a bantering way in conversation with Mr Kean and had done so without instructions. Whatever impression that comment may have made on the Gilmores and Mr Kean, I find that it was not something which Rent the Roo had intended to impose. When it was in fact raised, in the conversation of 10 September 2015, I conclude it was no more than an implicit reassertion of Rent the Roo’s position expressed in the 8 September 2015 letter that the Franchise Agreements had expired. In such circumstances, if anybody took over Areas 20 and 10 they would do so as new franchisees and would, in the normal course, be expected to pay a new franchise fee.
Finding
In the circumstances, I am not persuaded that Rent the Roo’s conduct amounted to a breach of cls.10B of the Franchise Agreements.
Good faith and unconscionable conduct
In their amended points of claim, the applicants expressed their allegation that Rent the Roo had failed to act in good faith, contrary to s.51ACB of the CC Act and cl.6 of the Franchising Code, in the following terms:
In the premises set out in paragraphs 8, 9, 10, 13, 14, 15, 16, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30 and 31 above [which relevantly dealt with the Renewal Clauses, the wording of the Proposed Agreements, the Friends Investments offer, Rent the Roo’s actions in reliance on the right of first refusal clause and Rent the Roo’s 8 September 2015 statement that the Franchise Agreements had expired] and for the reasons set out below, the first respondent was in breach of its obligations of good faith:
(a)The first respondent purported to terminate the Agreements when the first respondent was not entitled to terminate the same because there had not been a breach of the Agreements.
(b)The first respondent’s purported termination was not reasonably necessary for the protection of its legitimate interests.
(c)In purporting to terminate the Agreements, the first respondent was not motivated by a desire to protect its legitimate interest but by malice and/or revenge against the applicant for not transferring the franchises for area 10 and 20 upon invalid exercise of the right of first refusal.
The amended points of claim relied on the same alleged conduct to allege that Rent the Roo had engaged in unreasonable, oppressive and unconscionable conduct and, implicitly, that this contravened ss.20 and 21 of the ACL.
It was further alleged that Mr Hague was an accessory to the conduct in question and liable accordingly under the CC Act and the ACL.
Good faith
The allegations of a want of good faith made in the amended points of claim were advanced somewhat differently in the applicants’ written submissions where it was said:
The Applicants … contend that RTR acted in breach of the duty of good faith and acted arbitrarily, in that:
(G)upon receiving notices of renewals from Kiraig, RTR providing franchise agreements which contained “terms substantially different” to the initial agreements;
(H)Upon being notified of such terms being substantially different, RTR failing to amend the new terms to reflect the initial franchise agreement;
(I)by failing to properly exercise RTR’s first right of refusal, and thereafter, using commercial leverage to unreasonably withhold the sale of the business to a third party;
(J)by terminating Kiraig’s franchise rights, without any prior notice, and by:
I.removing Kiraig from receiving any enquiring from new or existing customers;
II.diverting enquiring from new or existing customers to other franchisees;
III.began trading in the territories, and/or allowing a third party to conduct itself within the two territories;
IV.wrongfully accessing an email account operated by Kiraig and copying Kiraig’s confidential management report containing a list of all of its customers.
The applicants also pointed out that the consequences for the parties were that Rent the Roo acquired the franchise territories without payment and Kiraig lost the benefit of a sale to Friends Investments.
The Franchising Code provides that when considering whether a party has acted in breach of the obligation to act in good faith, the Court may have regard to whether the party acted honestly and not arbitrarily and whether the party co-operated to achieve the purposes of the agreement. To that may be added considerations derived from the authorities.
In Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 it was held by the NSW Court of Appeal that there is no distinction of substance between an implied term that a party to a contract must act reasonably and an implied term that a party must act in good faith, in the exercise of its contractual powers and obligations.
In Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 the NSW Court of Appeal concluded that a contractual obligation of good faith embraces no fewer than three related notions:
a)an obligation on the parties to co-operate in achieving the contractual objects;
b)compliance with honest standards of conduct; and
c)compliance with standards of conduct that are reasonable having regard to the interests of the parties.
The court also held that although the duty requires a party to have due regard to the legitimate interests of both parties, it does not require a party to act in the interests of the other party or to subordinate its own legitimate interest to the interests of the other party.
In Jobern Pty Ltd v BreakFree Resorts (Victoria) Pty Ltd (2008) Aust Contract R 90-269, Gordon J said:
Specific conduct has also been identified by various courts as constituting ‘bad faith’ or a lack of ‘good faith’ including:
(1)acting arbitrarily, capriciously, unreasonably or recklessly;
(2)acting in a manner that is oppressive or unfair in its result by, for example, seeking to prevent the performance of the contract or to withhold its benefits;
(3)failing to have reasonable regards to the other party’s interests;
(4)failing to act ‘reasonably’ in general. I consider this requirement in further detail below.
A requirement to act ‘reasonably’ when acting in good faith was first articulated in Australia by Priestly JA in Renard Constructions where his Honour observed that reasonableness had “much in common with the notions of good faith”: at 263. Following this decision, courts have favoured ‘reasonableness’ as one of the requirements of good faith. Finkelstein J in Garry Rogers Motors stated that “provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied”: at [37]. However, several Australian academics have rejected the proposition that good faith includes a requirement of reasonable conduct. (at [146] and [147]) (references omitted)
Kiraig’s allegations of a want of good faith must fail, principally because its other allegations, dealt with earlier in these reasons, have failed.
First, the Renewal Clauses were void and so not enforceable. Consequently, Rent the Roo was free to propose whatever terms it considered appropriate for new franchise periods. In that connection it has not been demonstrated that the terms of the Proposed Agreements were unreasonable, oppressive or unfair, as distinct from disagreeable to Kiraig or the Gilmores for their own idiosyncratic reasons. Nor has it been demonstrated that Rent the Roo was unwilling to agree to amendments to the Proposed Agreements.
Secondly, in those circumstances a failure to amend the Proposed Agreements unilaterally upon receipt of Mr Kean’s email of 28 July 2015, particularly when Mr Kean asked Mr Quintiliani to give Kiraig some time to consider how to reach an accommodation and did not raise the issue again for nearly six weeks, was not behaviour which lacked good faith.
Thirdly, I have found that Rent the Roo’s understanding of the operation of the right of first refusal in the context of this matter is to be preferred over Kiraig’s. That is to say, I find that Rent the Roo did not fail to exercise that right “properly”.
Fourthly, I do not accept that Rent the Roo did not intend to purchase Kiraig’s franchises. I find that it did intend to purchase them and that Kiraig’s perception that it had an ulterior motive for engaging the right of first refusal was incorrect.
Fifthly, Rent the Roo did not terminate the Franchise Agreements. They expired through the effluxion of time and no renewal had been negotiated before they did, an omission which must attributed to Kiraig’s lack of interest in pursuing the issue until it was too late. It is therefore not necessary to address Kiraig’s perceptions of Rent the Roo’s state of mind at the time.
Sixthly, the redirection of business away from Kiraig upon the expiry of the Franchise Agreements was natural in the circumstances and quite unexceptionable.
Seventhly, for reasons which will shortly be given, in the circumstances I see no impropriety, unreasonableness or lack of good faith in Rent the Roo accessing certain information which Kiraig contends was confidential to it.
As I have concluded that Rent the Roo did not breach cl.6 of the Franchising Code and s.51ACB of the CC Act, the related allegation of liability as an accessory made against Mr Hague has not been made out.
Unconscionable conduct
The applicants alleged that Rent the Roo breached ss.20 and 21 of the ACL. That is not possible as s.20 can only apply if s.21 does not. It is therefore convenient to consider the s.21 allegation separately and first.
What conduct is properly to be considered unconscionable for the purposes of s.21 eludes precise definition. However, in Australian Competition and Consumer Commission v Lux Distributors Pty Ltd (2013) ATPR 42-447, the Full Court of the Federal Court said:
The task of the Court is the evaluation of the facts by reference to a normative standard of conscience. That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they can be seen to be honesty and fairness in the dealing with consumers. … the operative provisions of the ACL reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. These considerations are central to the evaluation of the facts by reference to the operative norm of required conscionable conduct. (at [23])
In Hurley v McDonald’s Australia Ltd (2000) ATPR 41-741 it was held by the Full Court of the Federal Court that:
For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated. Whatever “unconscionable” means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable. The various synonyms used in relation to the term “unconscionable” import a pejorative moral judgment. (at [22]) (emphasis included) (references omitted)
For the reasons given in the context of the allegation that Rent the Roo did not act in good faith, I also find that the conduct in question was not unconscionable as that word is understood in the context of s.21 of the ACL.
Section 20 of the ACL proscribes conduct in trade or commerce which is unconscionable as that word is understood by the common law. In Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 it was held that in the common law, unconscionable conduct:
… was “the knowing exploitation by one party of the special disadvantage of another” … special disadvantage … meant “a disabling circumstance seriously affecting the ability of the innocent party to make a judgment in [that party’s] own best interests.” (at 62 [5] per Gleeson CJ)
No special disadvantage afflicting Kiraig or Mr or Mrs Gilmore which would engage s.20 was demonstrated. Nor for the reasons already given do I find that the relevant conduct involved an element of exploitation. As the Chief Justice observed in the Berbatis case:
In the present case, there was neither a special disadvantage on the part of the lessees, nor unconscientious conduct on the part of the lessors. All the people involved in the transaction were business people, concerned to advance or protect their own financial interests. (at 64-65 [15])
Consequently, I find that Rent the Roo did not breach s.20 of the ACL.
As I have concluded that Rent the Roo did not breach ss.20 or 21 of the ACL, the related allegation of liability as an accessory made against Mr Hague has also not been made out.
Breach of confidence
The applicants alleged that the information contained in the management report which Mr Carroll accessed in and copied from Kiraig’s email account on the Rent the Roo system, namely a list of Kiraig’s customers and the particulars of each of their consumer leases, was confidential and that the respondents were obliged to keep it confidential. It was alleged that the respondents used the information in breach of that obligation.
In cross-examination Mr Carroll accepted that the information in question had been Kiraig’s confidential information.
Although in their defence the respondents denied the confidentiality of the information, partly on the basis that it was stored in an email account which was owned by Rent the Roo and was not acquired without “the expectation” of the applicants, those points were not raised in addresses. The respondents’ written submissions on this issue were laconic:
Breach of Confidence
This claim must fail on the basis that:-
(i)RTR has taken no unfair advantage nor made unconscientious use of the subject information. RTR’s management viewed it and did nothing more with it.
(ii)No loss has been occasioned to the Applicants by the subject events. The Applicants have continued to make exclusive use of the subject information.
(iii)No remedy is necessary or appropriate.
The respondents’ failure to address on the question of the confidentiality of the information might have been an implicit concession of the point. If so, it was not so clear that the issue can be passed over without comment.
In Coco v AN Clark (Engineers) Ltd [1969] RPC 41, Megarry J said:
In my judgment, three elements are normally required if, apart from contract, a case of breach of confidence is to succeed. First, the information itself, in the words of Lord Greene, M.R. in the Saltman case on page 215, must “have the necessary quality of confidence about it.” Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it. I must briefly examine each of these requirements in turn. (at 47)
In Commonwealth v John Fairfax & Sons Ltd (1980) 147 CLR 39 Mason J said:
… the plaintiff must show, not only that the information is confidential in quality and that it was imparted so as to import an obligation of confidence, but also that there will be “an unauthorised use of that information to the detriment of the party communicating it” (Coco v. AN Clark (Engineers) Ltd.) (at 51)
In Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 it was said:
It is unnecessary, for the purposes of the present appeal, to attempt to define the precise scope of the equitable jurisdiction to grant relief against an actual or threatened abuse of confidential information not involving any tort or any breach of some express or implied contractual provision, some wider fiduciary duty or some copyright or trade mark right. A general equitable jurisdiction to grant such relief has long been asserted and should, in my view, now be accepted: see The Commonwealth v. John Fairfax & Sons Ltd. Like most heads of exclusive equitable jurisdiction, its rational basis does not lie in proprietary right. It lies in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained. Relief under the jurisdiction is not available, however, unless it appears that the information in question has “the necessary quality of confidence about it” (per Lord Greene M.R., Saltman) and that it is significant, not necessarily in the sense of commercially valuable (see Argyll v. Argyll) but in the sense that the preservation of its confidentiality or secrecy is of substantial concern to the plaintiff. (at 437-438 (per Deane J, Gibbs CJ, Mason, Wilson and Dawson JJ agreeing) (footnotes omitted)
The test is one of conscience and whether it was unconscionable of Rent the Roo to have accessed the information. I do not believe that it was, notwithstanding the similarities the facts of this case have with those in Imerman v Tchenguiz [2011] 1 All ER 555, to which I was taken by the applicants. In the latter case the plaintiff’s confidential information was stored on a server operated by his brothers-in-law at their business. The plaintiff’s business affairs were quite distinct from those of his brothers-in-law and he used their facilities as a matter of convenience only. The circumstances were such that the brothers-in-law were bound by a duty of confidentiality in relation to the information. In this case, a franchisee stored certain information concerning the operation of the franchisee on the franchisor’s computer system. Although the franchisee was operating its own business, it was not independent of the franchisor, which would have had a legitimate interest in supervising the franchisor. If Kiraig was prepared to use the email address [email protected], which was provided by Rent the Roo, it should have had no expectation that what passed through that address would have been confidential vis à vis Rent the Roo. The fact that Mr Carroll appears to have perceived Kiraig’s situation differently does not alter this fact.
However, if that conclusion is incorrect, there is nevertheless no merit in the point.
The applicants sought monetary compensation for the alleged breach of confidence in the form of equitable damages or an account of profits. In final addresses the applicants submitted that they were not required to make an election in relation to which relief they sought until aware of the outcome of this part of the case and argued that once these reasons were published they could seek further orders, such as discovery, which would permit them to make an informed decision on that question. However, putting aside issues concerning the late point at which that contention was advanced, the submission presupposed that Rent the Roo had dealt with the information in a manner which justified Kiraig receiving some monetary compensation. That was not demonstrated. Specifically, it was not demonstrated that Rent the Roo used the information other than as reading material or that it was disseminated beyond Messrs Hague, Carroll and McKenna. Consequently, there is no basis to order that some form of monetary compensation be paid to Kiraig.
CONCLUSION
The applicants’ case has not been made out.
Consequently, the application will be dismissed.
I certify that the preceding one hundred and eighty-five (185) paragraphs are a true copy of the reasons for judgment of Judge Cameron
Date: 30 June 2017
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