Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2021 02622

BETWEEN:

LANHAI PTY LTD (ACN 605 035 603) & ORS	Plaintiffs
and
7-ELEVEN STORES PTY LTD (ACN 005 299 427)	Defendant

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JUDGE:	Riordan J
WHERE HELD:	Melbourne
DATE OF HEARING:	31 January 2022 1–3, 7-8, 10, 22 February 2022
DATE OF JUDGMENT:	22 March 2022
CASE MAY BE CITED AS:	Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd
MEDIUM NEUTRAL CITATION:	[2022] VSC 132

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MISLEADING AND DECEPTIVE CONDUCT – Whether franchisor mislead prospective franchisee about the term of the franchise agreement.
UNCONSCIONABLE CONDUCT – Whether franchisor’s decision not to exercise a lease option relating to franchised premises constituted unconscionable conduct in contravention of the Australian Consumer Law.
GOOD FAITH OBLIGATION – Whether franchisor’s decision not to exercise a lease option relating to franchised premises was in breach of its obligation to act in good faith towards the franchisee, in accordance with the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth).
REMEDIES – Whether the Court should grant an injunction restraining termination of the franchise agreement – Whether damages an adequate remedy.
DAMAGES – Franchisee claimed loss of opportunity to acquire alternative business – Whether Court could have regard to opportunities to acquire various businesses – Adequacy of evidence – Principles to be applied in assessing value of the lost opportunity considered.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Ms G Crafti with Mr C Banasik	Levitt Robinson Solicitors
For the Defendant	Mr P H Solomon QC with Mr M D Tehan	Norton Rose Fulbright

Contents

Introduction

The plaintiffs
The defendant

Background

Litigation history

Issues for determination

Question 1 - Did the defendant engage in misleading conduct, in contravention of s 18 of the ACL?

Plaintiffs’ submissions
Defendant’s submissions
Conclusion

Questions 2 and 3 – Were the plaintiffs induced to enter into the Franchise Agreement in reliance on the misleading conduct and, if yes, to what relief are the plaintiffs entitled by reason of the misleading conduct?

Inducement
Conclusion

Assessment of Damages
Plaintiffs’ submissions
Defendant’s submissions
Conclusion

Injunction
Plaintiffs’ submissions
Defendant’s submissions
Principles
Conclusion

Question 4(a) - Did the defendant breach its obligation to act in good faith?

Plaintiffs’ submissions
The defendant’s submissions
Principles
Conclusion

Question 4(b) - Did the defendant engage in unconscionable conduct?

Plaintiffs’ submissions
The defendant’s submissions
Principles
Conclusion

Question 5 - If yes to question 4(a) or (b), what relief are the plaintiffs entitled to by reason of such breaches?

Orders

Appendix 1 – The Handwritten Note

Appendix 2 – Page 1 of The June Document

Appendix 3 – Page 3 of the August Document

HIS HONOUR:

Introduction

By originating motion filed 26 July 2021 and amended statement of claim filed 26 October 2021, the plaintiffs claim injunctive, damages and other relief from the defendant on the basis of the following allegations:
(a)misleading and deceptive conduct, in contravention of s 18 of the Australian Consumer Law;[1]
(b)breaches of the defendant’s obligation to act in good faith towards the plaintiffs, in accordance with the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (‘the Franchising Code’); and
(c)unconscionable conduct in contravention of s 21 of the ACL.
[1]Competition and Consumer Act 2010 (Cth) sch 2 (‘the ACL’).
In essence, the plaintiffs allege that:
(a)the first plaintiff (‘Lanhai’) was induced to enter into a franchise agreement dated 4 June 2015 (‘the Franchise Agreement‘) by the defendant’s misleading and deceptive conduct, in contravention of s 18 of the ACL; and
(b)the defendant’s conduct in terminating the Franchise Agreement in April 2021 was:
(i)a breach its obligation to act in good faith under cl 6(1) of the Franchising Code; and
(ii)unconscionable in contravention of s 21 of the ACL.

The plaintiffs

On 30 March 2015, Lanhai was incorporated for the purpose of acquiring the franchise of the 7-Eleven Heathmont store located at 103-107 Campbell Street, Heathmont, Victoria 3135 (‘the Heathmont Store’), pursuant to the Franchise Agreement.
The second plaintiff (‘Ms Li’)[2] was born in Xinyang, Henan Province, China in 1971. After completing a Bachelor of Engineering specialising in Detection Technology and Instruments in the Physics Department of Zhengzhou University in Henan Province, she worked as an engineer at China Telecom until 2003.
[2]On occasions, Ms Li is referred to by her English first name ‘Ines’ in quotations.
The third plaintiff (‘Mr Wang’)[3] was born in Beijing, China in 1971. In 1988, he completed a Diploma in Clinical Medicine at Henan Medical University and trained and worked as an anaesthetist until 2003.
[3]On occasion, Mr Wang is referred to by his English first name ‘Joe’ in quotations.
Ms Li and Mr Wang married in 1999 and immigrated to Australia from China in March 2003.
In summary, their work history since immigrating to Australia is as follows:
(a)Between 2003 and 2004, Ms Li worked as a cashier, and Mr Wang worked as a stockist and cleaner, in various fruit and vegetable grocery stores.
(b)Between 2004 and 2007, they purchased and operated a Bizzi Beez home cleaning franchise.
(c)Between 2008 and 2013, they purchased and operated a dry cleaning business.
(d)Between March and May 2014, Ms Li and Mr Wang returned to China for the first time since immigrating to Australia.

The defendant

The defendant is the franchisor in Australia of a system for the identification, fixturisation, layout, merchandising and operation of extended-hour retail stores, identified principally by the trade name and service mark ‘7-ELEVEN’ under licence from 7-Eleven Inc (a Texas Corporation).

Background

On or about 22 May 2014, Ms Li sent an email to the defendant, inquiring about franchise opportunities in Australia.
By email of 23 May 2014 to Ms Li, Mr O’Hara, the defendant’s Franchise Development Manager for Victoria, replied and attached an enquiry letter which instructed Ms Li and Mr Wang to complete an online Information Request Form. The email also attached an Information Brochure entitled ‘The 7-Eleven Franchise System’.
The Information Brochure included the following:
(a)On the first substantive page under the heading ‘Meeting today’s needs’, it stated:
A 7-Eleven franchise is your opportunity of making dreams come true. It offers the chance to operate your own business, to be your own boss, and build something you can be proud of.
(b)Under the heading ‘Store Agreement’, it stated:
The typical term of the 7-Eleven Store Agreement is 10 years, unless limited by an earlier expiry of the property lease. All rights and obligations of 7-Eleven and the franchisee are set out in the Store Agreement.
On 23 May 2014, Ms Li completed the Information Request Form.
By email of 29 May 2014 to Ms Li, Mr O’Hara invited her to attend an interview at the 7-Eleven head office ‘to discuss our franchise model and current store opportunities available’.
On 11 June 2014, there was a meeting between Mr O’Hara and Ms Li and Mr Wang (‘the 11 June Meeting’). Although Mr Wang was in attendance, his ability to understand English was limited, such that he was unlikely to have understood what was said at the meeting unless it was translated for him by Ms Li.
Much of what relevantly occurred at the 11 June Meeting was not in dispute, including:
(a)Mr O’Hara recorded notes on a single piece of paper which he used to explain the 7-Eleven model with Ms Li and Mr Wang (‘the Handwritten Note’). A copy of the Handwritten Note is Appendix 1 to these reasons.
(b)Mr O’Hara explained the basis for the division of gross profit in a hypothetical store in which:
(i)the retail sales were $200,000;
(ii)the cost of goods sold was $100,000; and
(iii)the gross profit was therefore $100,000,
in which case the gross profit would be divided 57% to the defendant and 43% to the franchisee.
(c)On the Handwritten Note, Mr O’Hara drew a table (a scanned photocopy of which is inserted below) that depicted an example of a lease of a franchise store in respect of which:
(i)the primary term was six years from 2014 to 2020;
(ii)there were two, three-year options labelled ‘opt 1’ and ‘opt 2’;
(iii)there were three subsequent five-year terms; and
(iv)the primary term plus the options totalled 12 years and the term of the franchise agreement was 10 years.
(d)By reference to the table, Mr O’Hara explained to Ms Li and Mr Wang that, in the example:
(i)the primary term is six years;
(ii)the total of the primary term and the two option periods is 12 years; and
(iii)the 12-year period is sufficient to cover the 10-year franchise agreement.
(e)The reference to three additional five-year terms was part of the explanation that, if all the options were exercised and the defendant wished to continue at the site, it would approach the landlord for an additional lease. For example, three additional five-year terms.
The point of controversy, to which I will return, was whether Mr O’Hara explained to Ms Li and Mr Wang that:
(a)the 10-year term of the franchise agreement, in the example set out in the Handwritten Note, was subject to the defendant:
(i)exercising the option under the lease after the expiration of the six-year primary term; and
(ii)exercising the option again after the expiration of the first three-year option; and
(b)the defendant was under no obligation to do either,
(‘the Reduced Term Explanation’).
Towards the conclusion of the meeting, Mr O’Hara gave Ms Li and Mr Wang a copy of a four-page document entitled ‘Franchise Opportunities: VIC – As at: June 2014’ (‘the June Document’, a copy of the first page of this four-page document is Appendix 2 to these reasons). The document detailed 18 different 7-Eleven franchise stores in a table.
Relevantly, the June Document recorded the following in relation to a 7-Eleven store located at 200-202 Waverley Road, Mount Waverley, VIC 3149 (‘the Mt Waverley Store’):
(a)the ‘Franchise Agreement Term’ to be ‘As per Lease’; and
(b)the ‘Lease Term’ to be ‘16/2/17 + 1x5 Yr Opt’.
Immediately after the words ‘Lease Term’ in the second column of the table on each page, there was an asterisk. Below the table, the following note was written in small font beside an asterisk:
* Options are not guaranteed and lease extensions will be decided on a case by case basis at the sole discretion of 7-Eleven. Note: Franchise Agreements continue until; the earlier of: 1) the date on which the primary (current) term of the Lease expires, or 2) the expiration of any further term of the Lease (but only if the option to extend is exercised by 7-Eleven during the term of the agreement) or 3) 10 years after the effective date. * Franchisee Fees are subject to change
(‘the Explanatory Note’).
By email of 18 June 2014 at 9:52 pm to Mr O’Hara, Ms Li stated that, after meeting a store owner, she had a strong interest in acquiring a 7-Eleven franchise and, based on her past experience operating businesses, was confident in her ability to do so. She concluded the email by saying:
I am interesting [sic] with the store 1089E Mt Waverley, but just worried about its lease, only 7 years left. How long has this store been in the market? When should I discuss the price with the owner?
By email of 18 June 2014 at 10:21 pm to Ms Li, Mr O’Hara replied:
I am glad that you had a chance to meet and talk too [sic] Teresa, she is a very good example of what can happen if you work hard, follow the 7-Eleven system and really look after your Store and customers.
Store 1089 has been on the market for about 3 months, you can start talking to the Franchisee now if you are sure that it is the right Store for you.
It is probably too early for 7-Eleven to start talking to the landlord about the lease but I will ask for you anyway. This may take some time before I can get an answer.
By email of 23 June 2014 to Mr O’Hara, Ms Li stated that she had contacted the owner of the Mt Waverley Store and asked whether she should sign the contract with him or see Mr O’Hara first. By email of the same day, Mr O’Hara replied to Ms Li:
As per our first meeting you cannot sign a contract or leave a deposit until you have been given approval by 7-Eleven.
The vendor and yourself can only verbally agree on the goodwill amount then come back to me to commence the approval process. The approval process determines not only your suitability to become a 7-Eleven Franchisee but gives us a clear indication of the volume (turnover) of Store that you may be suitable for. The Store will stay on the market until a candidate has been approved by 7-Eleven as suitable to purchase the Store, then a contract is signed and a deposit left.
By email of 25 June 2014 to Mr O’Hara, Ms Li said that she had reached an agreement with the franchisee of the Mt Waverley Store and asked: ‘What will be the next step?’
By email of 11 August 2014 to Mr O’Hara, Ms Li attached various documents, including a business plan. In the business plan, Ms Li identified the following factors as influencing her decision to select the Mt Waverley Store:
1.Location. 1089F store is in a very good location, corner of two busy roads, in a residential area and no big shopping centre around 2km.
2.Increasing apartments, flats in neighbourhood, increasing density of population nearby, younger population, increasing consumption capacity.
3. I am very confident that I could run well this store.
On 21 August 2014, Ms Li and Mr Wang met with Mr O’Hara and Ms Sue Owen of the defendant. Ms Owen informed them that their application for the Mt Waverley Store had been rejected. Ms Li made the following relevant extract in her diary:
The decision is already made. You are not suitable to buy this store. Then he gave us a new list of stores for sale. He highlighted the stores that he wants to sell to us. He said that he hoped we would not say goodbye to 7-Eleven. We can start with a small store, then 2 or 3 years later, change to a bigger store.
At the meeting, Ms Li and Mr Wang were given a copy of another document entitled ‘Franchise Opportunities: VIC’ and dated ‘As at: August 2014’ (‘the August Document’), on which the 11 recommended stores were highlighted (a copy of the third page of this four page document is Appendix 3 to these reasons). Of the 11 stores, only three were noted as having a ‘Franchise Agreement Term’ of ’10 Years’. The rest were noted: ‘As per Lease’. Relevantly, the ‘Lease Term’ for the Heathmont Store was shown as ‘4/7/21 + 1x5 Yr Opt’. As with the June Document, there was an asterisk after the words ‘Lease Term’ with the same Explanatory Note in small font set out below the table, as set out in paragraph 19 above.
By email of 2 September 2014 to Mr O’Hara, Ms Li stated that she had agreed on a price with the franchisee of the Heathmont Store. By email of the same day, Mr O’Hara replied:
That is really good news, do you want to meet with me tomorrow around 12.00pm? I will get all the financials ready for you so that you can do your plan.
By email of 4 September 2014 to Mr O’Hara, Ms Li attached a business plan for the Heathmont Store. With respect to the factors influencing her decision to select the Heathmont Store, Ms Li stated:
1.        Heathmont store is a suitable store for me to operate.
2.        The store is an old and potential store.
3. The store located near the train station which brings more valuable customers to the store.
4.        The store has long term lease.
On 15 September 2014, Ms Li was to start training. However, by email of 11 September 2014, she informed Mr O’Hara that she was pregnant, with her baby due at the end of February.
Ms Li decided to delay the commitment to purchase the Heathmont Store until after the birth of her baby and wrote in her diary on or about 29 September 2014:
Last week, Peter called twice again. He wants us to give the deposit to the Heathmont store owner, Bill, so that he would not sell the store to anybody else. But considering that I will give birth to my baby in February, just in case there is an emergency and I can’t do the training and can’t take over the store, I would lose the deposit. So I told Peter, I can give the deposit at the end of February, but not now.
Approximately one month after the birth of Ms Li’s child on 16 February 2015, Mr O’Hara contacted Ms Li and made arrangements for her to meet the defendant’s Regional Manager for the purpose of resuming negotiations with respect to the purchase of the franchise of the Heathmont Store.
By Heads of Agreement for Sale of Business dated 24 March 2015 between the vendors of the Heathmont franchise and Ms Li, the vendors agreed to sell the business for a total goodwill of $633,500, subject to the approval by the defendant of the purchaser.
On 30 March 2015, Lanhai was registered.
On or about 30 April 2015, Mr O’Hara gave Ms Li and Mr Wang various documents, including a 95 page disclosure document. On pages 81 to 82 of the document, there was a table setting out the relevant conditions of the Franchise Agreement which included, with respect to the term of the agreement, the following:

Article Relevant Condition

(a)    Term of the franchise agreement 1 (a), 24, 25,29 & Exhibit A

(b)    Variation 2(j)

(c)    Renewal, extension or extension of the scope 24

(d)    Conditions the Franchisee must meet to renew, extend or extend the scope of the franchise agreement 24 (Extension or renewal can occur only by mutual agreement. There is no entitlement requiring that the Store Agreement be extended or renewed.)

On or about 12 May 2015, Ms Li and Mr Wang attended the offices of a solicitor, Ms Cecilia Yek, for the purpose of receiving legal advice with respect to the proposed franchise agreement and disclosure statement prepared by the defendant and the execution of a solicitor’s certificate.
By Certificate of Independent Legal Advice dated 12 May 2015, Ms Yek certified as follows:
1.before the Franchisee and the Client(s) executed the Agreement I reviewed the entire content thereof and outlined and explained to the Client(s) the terms and conditions thereof and in particular the nature and effect of the Agreement and the legal consequences of any breach or default thereunder.
2. neither I nor any firm of which I am a member or employee is retained by 7-ELEVEN in relation to this matter.
3.prior to the completion of this Certificate I asked the Client(s) the following question to which I received an affirmative response:-
‘Do you understand the nature and effect of the Agreement and the possible consequences to the Franchisee and to you of a failure to fulfill the obligations under the Agreement?’
I accept the evidence of Ms Li and Mr Wang that Ms Yek did not advise them that the term of the Franchise Agreement was not 10 years but rather, relevantly, was until the expiration of the primary term of the lease unless the defendant exercised the option to renew the lease. Ms Yek was unable to recall giving any advice on the term of the Franchise Agreement.
On 4 June 2015, Lanhai and the defendant entered into the Franchise Agreement with respect to the Heathmont Store. The terms of the Franchise Agreement consisted of 52 pages plus exhibits and addenda of 70 pages. The Franchise Agreement contained the following relevant clauses:
(a)Under the heading ‘Licence’, art 2(f) provided:
The FRANCHISEE acknowledges that SEA has no obligation to renew or exercise any option to extend the Lease (article 2(f));
(b)Under the heading ‘Term and expiration’, art 24 provided:
(a)The term of this Agreement shall commence on the Effective Date and continue until termination of this Agreement as provided in Article 25, or until expiration of this Agreement on the earlier of:
(i)the expiration of the primary term, or cancellation or termination of the Lease; or
(ii)the expiration of the extended term of the Lease (if an option to extend the primary term of the Lease has been exercised by SEA on the Effective Date or is exercised by SEA during the term of this Agreement); or
(iii) 10 years after the Effective Date; or
(iv) SEA’s exercise of its Option to Purchase in accordance with Article 27 of this Agreement.
(b)The term of this Agreement may be extended or renewed only by mutual agreement in writing between the FRANCHISEE and SEA.

On 7 December 2015, the defendant, Lanhai and Ms Li entered into a variation of the Franchise Agreement (‘the Variation Agreement’), which had the effect of, among other things:
(a)transferring control of payroll to the defendant;
(b)increasing Lanhai’s share of gross profit contra to the defendant; and
(c)increasing Lanhai’s ‘minimum income guarantee’ (‘MIG’) (in respect of gross profit), which was off-set against 7-Eleven’s share of gross profit, from $120,000 to $340,000 per year.
Mr Braeden Lord, the defendant’s General Manager of Retail Operations gave evidence that the primary purpose of the MIG was to ensure that there was sufficient minimum income to cover the cost of running an optimal roster.
The MIG increase was applied retrospectively, taking effect from 1 July 2015. At some point during the 2015-16 financial year, the Heathmont Store became a ‘MGI Store’, which was the defendant’s term for a store which satisfied the contractual preconditions for a reduction in the amount of gross income payable to the defendant (known as the ‘7-Eleven Charge’) because the franchisee’s gross income was less than the MIG. The MIG increased from $347,200, commencing 1 July 2016 to $418,035, commencing 1 September 2021.
By document titled ‘Property Committee Charter’ dated 6 August 2018, new processes and mechanisms were adopted for the 7-Eleven Property Committee (‘the Property Committee’) which was responsible for ‘reviewing, assessing, endorsing and where available approving proposed additions and changes to the 7-Eleven store portfolio’. The Property Committee has a regular, recurring meeting (known as a ‘PCM’) scheduled every month for 2 hours with a standard form agenda which included the items ‘lease options’ and ‘store closures’.
By email of 25 January 2021 to Mr Nick Maddox, the defendant’s Acting State Manager for Victoria (copied to Ms Megan Ross, the defendant’s Assistant Development Manager), under the subject ‘Victorian Store Potential Closures’, Benjamin Chapple, the defendant’s Development Manager, attached a profit and loss table relating to certain 7-Eleven stores including the Heathmont Store. In the body of the email, Mr Chapple stated:
Nice to meet you earlier. To summarise:
RETAIN – 1177 Flinders Lane
TBC -
1149 Keysborough
1045 Heathmont (on figures pasted below it seems a closure)
1131 St Kilda.
Below I have cut and pasted the P&L for each to save you opening spreadsheets. Please review with Tony and confirm operations opinion as to close or renew (in each case 5 year options). Thanks.
The ‘figures pasted below’ showed the ‘net profit’ for each financial year derived by the defendant from the Heathmont Store as follows:
(a)2015 - $93,685;
(b)2016 – ($32,530);
(c)2017 – ($32,761);
(d)2018 – ($118,560);
(e)2019 – ($106,840); and
(f)2020 (being from June 2020 to date) – ($244,274).
By email of 9 February 2021 to Mr Chapple (copied to Ms Ross), Mr Maddox replied, relevantly stating:
Heathmont – Divest, loss maker, no ability to develop site for fuel offer – concern around network gap?
By email of 16 February 2021 to Mr Maddox and Mr Chapple, Ms Ross stated:
Thank you for confirming the below.
Regarding Heathmont, as we have 5 years left on the franchisee agreement (expiry is 22 June 2025), I’m assuming we will need to agree a payout fee. Can you provide me with an estimate of this fee to be included in the financial model?

Franchisee Name Yong Li

Purchase price

GW [goodwill] $633.500 FF [franchise fee] $100,224

I also wanted to flag that lease expires on the 4^th of July 2021 which doesn’t give us 6 months from PCM approval (31 March) to closure.
Regarding our contractual obligations to the franchisee to provide 6 months notice of closure, can an alternative agreement be made with the franchisee or should I proceed with trying to get an extension on the current term to give us the required 6 months?

By email of 17 February 2021 at 8:12 pm to Mr O’Hara under the subject heading ‘Victorian Store Potential Closures’, Mr Maddox said:
Can you please confirm the FF and GW below and when it was paid? It seems an extraordinary amount for a MGI store…. Have we given them any other correspondence that you are aware of relating to our views on them paying this much?
By email of 17 February 2021 at 8:24 pm to Mr Maddox, Mr O’Hara replied:
GW $633,500 FF $100,224, changeover was 23/06/2015. I have attached the A&E. I do not believe that there was any comms regarding the investment amount.
By email of 2 March 2021 to Mr O’Hara, Mr Maddox asked whether there was a way of working out what the balance of the loan would be.
By email of 3 March 2021 to Mr Maddox, Mr O’Hara said that he could not contact the bank, but it appeared that ‘the bulk of the funds came from a redraw on the home loan with Westpac’.
By email of 12 March 2021 to Ms Ross, Mr Maddox said:
Are you able to please provide an update on the paper for the potential closure of non-exercising of the lease option at Heathmont? It would be good to understand the financial impact of trading through for 5 years vs paying out the FSE and closing?
I suspect we may be better off trading through?
By email of 15 March 2021 to Mr Maddox, Ms Ross attached a document titled ‘Heathmont (Closure)’ and said:
As it stands, the financial model shows that with the franchisee payout fee, it is still a better financial outcome to close the store.
Noting that I calculated the franchisee payout fee by prorating the FF and GW for the balance of the 10 year period (4 years from lease expiry)
Please let me know if you are happy to proceed with the closure of the store, or would like to make some amendments.
By email of 19 March 2021 to Mr Michael Hobday of the defendant and Mr Lord, Ms Ross attached a series of documents which she called the ‘renewals for discussion on Monday’. The attached Lease Renewal Approval for the Heathmont Store made the following recommendation:
Although #1045 is a loss maker, the recommendation is to renew the lease for the following reasons:
1.There are 5 years left on the franchisee agreement, meaning that the franchisee payout fee if we close on 04/07/2021 would be ~$293,489.
2.Although the model projects a loss over the term of the renewed lease, the losses are $188,774 less than if we close at expiry.
3.If we close the store, the area would be considered a GAP in the network.
The basis for this recommendation was set out in the document as follows:
Operational Performance
The operational performance of the franchisee at this location is considered average based on feedback from the operational performance chapter members, as well as a review of key reports such as the Store Matrix. The Store Matrix has classified the store as ‘potential’ for FY19 & FY20.
Overall, the areas of opportunity relate to customer service, NPS, upsell, GVGC and staff selection.
Franchisee Compensation
Compensation is being considered in the attached paper on the basis that the Franchisee entered the network in 2015 around the time of the 7-Eleven payroll scandal.
Compensation in line with pro-rata of the investment is being considered as reasonable for the comparison of the outcomes of the 2 key scenarios for this location. The franchisee has not been engaged in this matter at this stage.
Scenarios
The two key scenarios are as follows:
1. Exercise 5 year option and trade through to end of lease
2.Relinquish at lease option and provide compensation to the franchisee on a pro-rata basis of the initial investment
As you can see form the below table, a growth in merchandise sales in line with the Long Term Plan (LTP) of 3.5%, provides a clear financial benefit to 7-Eleven between the two scenarios. The comparative financial positions is a key factor for recommendation.
3.5% Merchandise sales escalation

Performance

Corporate

Franchise

Corporate Store

Closure at Lease Expiry

Store Contribution

($376,772)

$250,446

($222,876)

($565,546)

Discounted Cash Flow

($33,392)

$126,340

$44,308

($175,385)

Optionality
Securing a further 5-year term provides the business with an opportunity to leverage a new way of working and improve store performance. The 5 year option also provides an opportunity to seek to acquire the site and operate corporately in the event store performance deteriorates and cannot be improved under Franchise operation. Any consideration for acquiring the site would be negotiated on a pro-rata original investment basis; and therefore would not materially impact the two scenarios above.
Finally, the relinquishment of this location would create a network gap, that at this stage we are currently not positioned to fill. Securing of the lease at this location for a further 5 years provides the business with the time required to secure an appropriate nearby location.
Recommendation
In summary, exercising the option for a further 5 years provides the business with optionality to improve the performance of the location and/or secure an alternate location without materially impacting the financial outcomes for 7-Eleven. The recommendation is therefore to exercise the option for a further 5 years.

By email of 22 March 2021 to Ms Ross and others, Mr Hobday included his notes from ‘our sign off meeting earlier’, which included, with respect to the Heathmont Store:
1046 Heathmont – not approved, to go to PCM. Need to understand how the recovery will be achieved? Need to look more into the detail of the financial assumptions. How will it get to 39% GP and $40k
By email of 25 March 2021 to Mr Lord, Mr Hobday and others, Ms Ross attached the Property Committee agenda for the PCM to be held on 31 March 2021, which recommended the review and approval of the closure of the Heathmont Store.
On 31 March 2021, at the PCM, the Property Committee resolved to close the Heathmont Store. The Store Closure Approval document with respect to the Heathmont Store included the following:
(a)In the section titled ‘Recommendation’:
This store is a significant loss maker and has been for a number of years. Although the WDV and franchisee payout fee make it a slightly better financial outcome to renew the lease and trade for another five years, operations has advised that this would simply defer a problem and that the more cost effective outcome is to close the store. The recommendation is therefore not to renew the lease for another 5 years and close at expiry.
(b)In the section titled ‘Operations Comments and Recommendation’:
The store is a loss maker and the opportunity to grow weekly sales is considered limited. The site should therefore be divested.
(c)In the section titled ‘Commentary’:
No reasonable reasonable [sic] rental level will bring this store into profitability.
(d)In the section titled ‘Lessor Negotiations’:
The lessee [sic] was willing to reduce the rent [from $129,374] to $120,000.
By telephone call on 1 April 2021, Ms Li was informed by Ms Kirsten Stone, the defendant’s Retail Business Manager, that the defendant would be closing the Heathmont Store.
On 8 April 2021, there was a meeting between Ms Li, Ms Stone and Mr Maddox in the back office of the Heathmont Store. Mr Maddox said that:
(a)the reason for the store closure was that the store was not profitable for the defendant;
(b)the plaintiffs could continue to operate the store until the last day of the lease on 4 July 2021; and
(c)the reason for the short notice was that Mr Maddox ‘had only just found out’.
By email of 20 April 2021 at 11:16 am to Mr Lord, Mr Maddox said:
Please see attached document for your review and approval for ex-gratia payment to be made to FSE’s @ 1045G Heathmont following our decision to not take up the next 5 year option.
If you could please review and approve if appropriate so we can engage next steps with legal and formally oﬀer to the FSE’s?
The document attached to the email recommends an ex-gratia payment of $313,098.96. Under the heading ‘Rationale’, the document includes recognition that the franchisee did not receive their full six-month notice period, and stated as follows:
•Majority compensation amount is calculated for remaining tenure of 1,466 days at a value of $200.91 per day total $294,534.33.
o Based on the initial Goodwill and Franchise Fee paid of $633,500 and $100,224 respectively – total investment $733,724.
o Pro-rata of total investment is considered appropriate compensation in this circumstance to due to the commencement date of the Franchise being 23^rd June 2015.
• Minority compensation is calculated to recognise that the Franchisee did not receive their full 6-month notice period from 7-Eleven in relation to the future of their Franchise a the 1045G Heathmont store to the value of $18,564.62.
o Based on forgone net income of $366.70 per day less the Goodwill and Franchise Fee amount of $200.91 per day to a subtotal of $165.80 per day, for a period of 182 days (6 months) from the notification date to the franchisee. The amount of $165.80 is then extrapolated over the balance of 112 days to recognise the likely shortfall in total income earnings and provide them with appropriate time to make other alternative business or employment arrangements.
By email of 20 April 2021 at 1:22 pm to Mr Maddox, Mr Lord approved the ex-gratia payment.
By email of 26 April 2021 to the plaintiffs’ Heathmont Store email address, Mr Mark Nance, the defendant’s former Victorian State Manager, attached a letter dated 20 April 2021 noting the store closure date was 17 June 2021 and stating:
Expiry of Store Agreement - 7-Eleven Store 1045G at 103-107 Campbell Street, Heathmont 3135 (Store)
We refer to the franchise agreement between Lanhai Pty Ltd and 7-Eleven Stores Pty Ltd (7-Eleven) in respect of the Store, dated 4 June 2015, as varied by the Variation of Franchise Agreement dated 7 December 2015 (Store Agreement).
Under the Store Agreement, 7-Eleven granted you the right to operate the business from the Store, in accordance with the terms of the Store Agreement.
Pursuant to Article 24(a) of the Store Agreement the term of the Store Agreement continues until the earlier of 10 years from the Effective Date, or (among other things) the expiration of the Store premises lease (Lease).
As you are aware, the Lease for the Store premises (Premises) is due to expire on 4 July 2021 (Expiry Date). As confirmed at our meeting on 8 April 2021, 7-Eleven will not be taking up any further options under the Lease. Accordingly, the Store Agreement will expire on the Expiry Date. In order to enable 7-Eleven to satisfy its obligations under the Lease, the Store will be closed with effect from 17 June 2021 (Closure Date).
The purpose of this letter is to formally notify you that on the Closure Date the Store Agreement will come to an end as will your entitlement to operate a 7-Eleven business under the Store Agreement and to occupy the Premises.
For the avoidance of doubt, the licence granted to you under the Store Agreement to occupy the Premises will also cease on the Closure Date and you will be required to cease trading from and vacate the Store on the Closure Date.
The arrangements contemplated by Article 26 of the Store Agreement will apply in respect of Inventory and the finalisation of your Open Account.
Finally, we will soon provide to you a draft Deed of Termination and Release (Deed), documenting the above arrangements, for your consideration. The Deed will also include an ex-gratia payment in the amount of $313,098.96.
Please contact me if you have any questions at this stage.
By emailed letter of 27 April 2021, Ms Li replied in a three-page letter setting out the difficulties caused by the defendant’s decision.
On 28 April 2021, there was a meeting between Ms Li and Mr Nance at the defendant’s head office, with Mr Maddox on a video link from Perth. Mr Nance handed Ms Li a letter dated 23 April 2021 and a Deed of Termination of Franchise and Release (‘the Deed’). The letter stated that the Deed released the defendant from any liability in respect of a class action pending in the Federal Court of Australia against the defendant. Mr Nance said that the Heathmont Store was being closed because it was not profitable for the defendant and the ex-gratia payment had been calculated on a pro rata basis. Mr Nance recommended that Ms Li seek legal advice before signing the Deed, but if the plaintiffs did not sign the Deed they would not get anything.
After the meeting, Mr Wang collapsed and was taken by ambulance to hospital. He was discharged in the evening.
On 30 April 2021, Ms Melissa Bryan of the defendant refused Ms Li’s request to provide somebody to cover Mr Wang’s shifts in the afternoon following his collapse and time in hospital. Accordingly, Mr Wang worked in the Heathmont Store and collapsed again at about 5:00 pm. Mr Wang was taken to hospital where he was diagnosed as having had a heart attack.
On or about 2 May 2021, Ms Stone arranged for assistance to be provided to cover Mr Wang’s shifts at the store.
On 3 May 2021, Ms Stone telephoned Ms Li and asked whether she wanted to close the Heathmont Store earlier than the defendant had proposed. Ms Li refused the offer.
On about the evening of 4 May 2021, Mr Wang was discharged from hospital. Ms Li told Mr Wang that he should not work for at least two weeks.
By email of 4 May 2021 at 4:40 pm to Mr Nance (copied to Mr Maddox and Ms Stone), Ms Li stated:
I am facing a number of issues on my part in regards to closing the store. Firstly I would really appreciate if someone could provide a response to my previous emails as of right now I haven’t received a response. In addition I have requested an electronic copy of the deed which I have also not received this is significantly hindering my ability to seek legal advice which you have strongly recommended. Right now I feel incredibly pressed for time the confirmation slip stated I have 14 days to consider the deed which is simply not enough time on top of this the confirmation letter is addressed at the 23th of April yet I only received it on the meeting with Mark Nance which happened on 28th of April in the head office. Which I was told More importantly the second director who is my husband is currently in hospital so we have not had time to officially consider the terms of the deed. Currently I don’t understand why 7‐Eleven are so dismissive of us a franchisees and the constraints being placed on us make it almost impossible to seek legal advice and make a full informed decision.
By email of 4 May 2021 at 8:18 pm to Ms Li, Mr Maddox stated:
We will endeavour to provide you with those electronic copies you have requested over the next 24hrs.
We appreciate that your circumstances have changed significantly over the past week with Joe being in hospital. We are happy to provide you with further time for you to seek the appropriate legal advice. If we are able to provide you with the electronic copies in the next 24hrs, please advise how much time you require?
Based on our understanding that you have expressed an interest to Kirsten Stone that you would consider exiting the store earlier than the proposed date of 17th June 2021, we are currently in the process of revising the documentation with an increased ex‐gratis payment and a closure date of 27th May 2021. If this is not accurate or your [sic] would need more time to consider and seek advice, please advise and we will hold off any amendments to the previously provided letter and documentation?
By email of 5 May 2021 to Mr Maddox (copied to Mr Nance and Ms Stone), Ms Li replied:
We appreciate your prompt response. However you have misunderstood our intentions. Kristen suggested to us an earlier closure we did not interest as well would like to continue trading until the end of our lease as per our contract which you have confirmed in the meeting of 8th April is the 4th of July. We intend to continue trading until the 4th of July because it makes the most financial sense as you can imagine we have already lost 4 years of trading time we hope not to loose [sic] anymore. In addition the land lord has communicated with us that currently there are no tenants interested in taking upon a new lease.
Currently our first priority is Joe’s health, his condition is very sudden and unexpected and we have no medical explanation for the cause of his injuries. Joe would like to meet with a member of the senior leadership team preferably the CEO once he has fully recovered to address the the [sic] conditions of the store closure.

By email of 12 May 2021 to Ms Li, Mr Maddox attached updated documentation and confirmed the meeting for 13 May 2021.
On 13 May 2021, there was a meeting on Microsoft Teams involving Ms Li, Mr Wang and their son and Mr Nance and Mr Maddox. Ms Li asked for compensation of $450,000 and said that they would pay the difference to buy another store. Mr Maddox refused and said that the other purpose of the meeting was to let them know that the defendant would not sell another store to them because they were not suitable for 7-Eleven. Ms Li said she wanted the last day to be 30 June 2021 and Mr Maddox replied that the ex-gratia payment would be reduced.
By email of 17 May 2021 to Ms Li, Mr Maddox forwarded the documentation amending the final closure date to 30 June 2021.

Litigation history

By originating motion filed 26 July 2021 and summons filed 27 July 2021, Lanhai (the only plaintiff at that time) applied for an injunction restraining the defendant, until further or other order, from:
(a)terminating the Franchise Agreement; or
(b)revoking the licence granted by the defendant to Lanhai under the Franchise Agreement to occupy the Heathmont Store.
On 27 July 2021, Connock J adjourned the further hearing of Lanhai’s summons to 30 July 2021 on the defendant giving the following undertaking:
By its counsel, until the hearing of the plaintiff’s application for interlocutory relief, or further order, the defendant undertakes, unless the defendant ceases to be the lessee of the premises at 103-107 Campbell St, Heathmont, Victoria 3135 (Premises) and/or the landlord of the Premises hereafter requires the defendant to satisfy all make good obligations under the lease by 4 August 2021:
(i)not to prevent, obstruct or hinder the continued operation of the business conducted by the Plaintiff pursuant to the Franchise Agreement between the plaintiff and the defendant dated 4 June 2015; and
(ii)to continue to grant a licence to the Plaintiff to occupy the Premises.
On 30 July 2021, Connock J made directions for the filing of pleadings and listed the hearing of Lanhai’s summons on 1 September 2021. The defendant confirmed that its undertaking (referred to in the preceding paragraph) remained operative and further undertook, until the hearing and determination of Lanhai’s application for interlocutory relief, or further order, not to give notice of its intention to determine the lease dated 20 September 2011 between the defendant and Loder Agricultural Enterprises Pty Ltd (‘the Lease’).
On 13 August 2021, I ordered by consent that Lanhai has leave to join Ms Li and Mr Wang as plaintiffs to the proceeding and to file and serve an amended originating motion, a statement of claim and a further amended summons.
On 16 September 2021, I published my reasons in respect of the plaintiffs’ application;[4] and, on 17 September 2021, I granted an interlocutory injunction and ordered:
Until further or other order, the defendant (7-Eleven):
a.is required to treat the Franchise Agreement between 7-Eleven and Lanhai dated 4 June 2015 as continuing and to perform its obligations under the Franchise Agreement, including but not limited to the grant of the licence by 7-Eleven to Lanhai to occupy the Premises at 103-107 Campbell St, Heathmont Victoria 3135;
b.is restrained from determining the Lease of the Premises; and
c.is required to comply with its material obligations under the Lease (including the payment of rent and outgoings as and when they fall due).
[4]Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd [2021] VSC 587.

Issues for determination

The issues arising in this proceeding require determination of the following five questions.
(a)Question 1 – Did the defendant engage in misleading conduct, in contravention of s 18 of the ACL, by representing to the plaintiffs that the term to which they were contractually entitled under the Franchise Agreement was 10 years, rather than the earlier of:
(i)approximately six years, being the expiration of the primary term of the Lease on 4 July 2021; or
(ii)10 years, if the defendant chose to exercise an option to renew the Lease arising during the 10-year term?
(b)Question 2 – If yes to question 1, were the plaintiffs induced to enter into the Franchise Agreement in reliance on the misleading conduct?
(c)Question 3 – If yes to question 2, to what relief are the plaintiffs entitled by reason of the misleading conduct?
(d)Question 4 – Did the defendant:
(i)breach its obligation to act in good faith towards the plaintiffs, in accordance with the Franchising Code; and/or
(ii)engage in unconscionable conduct, in contravention of s 21 of the ACL,
by making the decision to not exercise the option to renew the Lease (‘the Decision’), and refusing to reverse the Decision.
(e)Question 5 – If yes to question 4(a) or 4(b), to what relief are the plaintiffs entitled by reason of such breaches?

Question 1 - Did the defendant engage in misleading conduct, in contravention of s 18 of the ACL?

Plaintiffs’ submissions

The plaintiffs submitted that the Court should find that the defendant engaged in misleading and deceptive conduct, for the following reasons:
(a)The Court should accept the evidence of Ms Li and Mr Wang, that Mr O’Hara made the following statements at the 11 June Meeting:
(i)The standard franchise term is 10 years.
(ii)By reference to the Handwritten Note drawn during the meeting:
(1)the total of the primary term and options in the hypothetical example was 12 years which would cover a 10-year franchise agreement; and
(2)after the end of the primary term and each available option, the defendant had an opportunity to negotiate with the landlord for a new lease.
(iii)With respect to the June Document:
(1)the opportunities stated as having a franchise term of ’10 years’ were those for which the total lease term, including options, exceeded 10 years; and
(2)the opportunities stated as having a franchise term of ‘As per Lease’ were those for which the total lease term, including options, was less than 10 years.
(b)The Court should reject Mr O’Hara’s evidence that he would have given the Reduced Term Explanation at the 11 June Meeting, for the following reasons:
(i)Mr O’Hara had no recollection of the meetings with Ms Li and Mr Wang and he admitted his work practices had changed over time and had not been documented.
(ii)Mr O’Hara admitted it was not part of his standard practice to say that the decision of whether to exercise the option would be by reference to the profitability of the franchise to the defendant.
(iii)Mr O’Hara backtracked on his evidence that it was part of his standard practice to tell prospective franchisees that the defendant sometimes negotiates new lease periods in the lead-up to the expiry of the primary term.
(iv)If Mr O’Hara did give some limited explanation as to what an option was, it could only be concluded that such an explanation was inadequate and induced a misunderstanding in the minds of Ms Li and Mr Wang.
(v)The unlikelihood of Mr O’Hara giving the Reduced Term Explanation was consistent with him failing to correct Ms Li’s statement in her email of 18 June 2014 that the balance of the lease with respect to the Mt Waverley Store was seven years (which included a five-year option).
(c)Mr O’Hara produced the following misleading documents:
(i)At the 11 June Meeting, he drew the Handwritten Note, on which he wrote ‘12’, representing the total lease term including options, directly above ’10 Agreement’, suggesting a relationship between them and that the total lease term covered the franchise term; and
(ii)The June Document and the August Document (collectively, ‘the Franchise Opportunities Documents’), which referred to the lease term of the Heathmont Store (among others), as being ’10 years’ when in fact, the term of the Franchise Agreement was only until the end of the primary term unless the defendant exercised the options. Further, the documents distinguished the stores in which the primary term and options totalled less than 10 years as being ‘As per lease’.
The plaintiffs further submitted that the Court should accept the evidence of Ms Li and Mr Wang that they were misled into the mistaken belief that they would have a contractual entitlement to a 10-year term under the Franchise Agreement. The fact of the mistaken belief is consistent with the fact that, in the business plan for the Heathmont Store prepared by Ms Li and sent to Mr O’Hara on 4 September 2014, Ms Li referred to one of the factors for selecting the Heathmont Store as being that it had a ‘long term lease’.

Defendant’s submissions

The defendant contended that, whilst the Court may accept the plaintiffs’ evidence that they did not understand the concept of an option in the Lease and perhaps each of them genuinely held the belief that the Lease was 11 years long, the defendant was not the cause of that lack of understanding in any legal or practical sense.
The defendant also contended that the two representations that the plaintiffs allege were made by the defendant, being:
(a)that the term of the Franchise Agreement would not expire before the end of 10 years because of the primary term of the Lease; and
(b)that the defendant would exercise the option to extend the Lease,
must rationally be treated as alternatives, and because no evidence was led by the plaintiffs as to the representation in sub-paragraph (a), the Court should proceed on the basis that the plaintiffs’ ‘real case’ is only the representation in sub-paragraph (b).
The defendant submitted that the Court should not be satisfied that it engaged in the misleading conduct as alleged for the following reasons:
(a)The Court should accept Mr O’Hara’s evidence that he was likely to have adopted his standard practice, as set out in his witness statement, which was to give the Reduced Term Explanation to any prospective franchisee. Specifically, Mr O’Hara’s evidence was that his usual practice was to explain the following:
(i)the term of a standard franchise agreement is 10 years or the term of the lease (including any options to extend the lease), whichever is shorter;
(ii)a lease typically has a principal term and then one or more options to renew the lease;
(iii)7-Eleven might exercise an option, or not, or the lease might not contain an option. I explain what happens in each of these situations. I also focus on the expiry of the initial term, and say that should we get to the end of this term, and there is no option to extend or we decide not to exercise an option, the franchise agreement would end;
(iv)it was not guaranteed that 7-Eleven would exercise the option, and that it depended on the performance of the business; and
(v)if a lease was expiring after its last option had been exercised, and 7-Eleven wished to enter into a new lease, 7-Eleven’s practice was to try to negotiate with the landlord for a new lease prior to the expiration of the last option term.[5]
(b)The Handwritten Note was consistent with the proposition that Mr O’Hara had adopted his standard practice and had discussed options with Ms Li and Mr Wang.
(c)In response to a question from the Court, Mr O’Hara gave the following answer:
HIS HONOUR: Would you have said to them that if 7-Eleven doesn't exercise the option, then you won't get a 10 year term. You'll have to give up, at the end of that primary term of the lease?---
WITNESS: Yes, Your Honour. And in the diagram, the – the period that's circled the primary term with – with the six under it, under it, is me indicating that the term of the agreement would be six years, not 10.
[5]Witness statement of Peter O’Hara dated 16 December 2021, underlining added in the defendant’s closing submissions filed 9 February 2022.
The defendant further submitted as follows:
(a)If Mr O’Hara followed his standard practice at the 11 June Meeting, he did not mislead the plaintiffs. The plaintiffs have not discharged their onus of establishing which part of Mr O’Hara’s standard practice was not followed.
(b)Although Ms Li did not understand that, if the options were not exercised the Franchise Agreement would come to an end, the Court should find that Mr O’Hara did explain it. The fact that Ms Li did not understand and did not seek clarification of the proposition should not result in liability for the defendant.
(c)The Franchise Opportunities Documents were not misleading because they refer twice to the existence of options. First, in the ‘Lease Term’ row, there is a reference to the Heathmont Store lease containing ‘1x5 Yr Opt’. Second, at the bottom of each page, there is the Explanatory Note. The fact that the plaintiffs may not have understood what an option was does not render the Franchise Opportunities Documents misleading or deceptive.

Conclusion

In the circumstances, I consider that the defendant’s conduct was misleading in that it had ‘a sufficient tendency to lead a person exposed to the conduct into error (that is, to form an erroneous assumption or conclusion about some fact or matter)’.[6] The erroneous assumption was that the contractual entitlement under the Franchise Agreement was to a term of 10 years, rather than the earlier of:
(a)approximately six years, being the expiration of the primary term of the Lease on 4 July 2021; or
(b)10 years, if the defendant chose to exercise an option to renew the Lease arising during the 10-year term.
[6]Australian Securities and Investments Commission (ASIC) v Dover Financial Advisers Pty Ltd (2019) 140 ACSR 561, 586 [98] (O’Bryan J) (citations omitted) (‘ASIC v Dover’).
My reasons for this conclusion are as follows.
(a)The August Document incorrectly stated that the ‘Franchise Agreement Term’ for the Heathmont Store was 10 years. In fact, under art 24(a) of the Franchise Agreement, the plaintiffs’ contractual entitlement was to a term expiring at the end of a primary term on 4 July 2021, a period of six years and one month from the date of the Franchise Agreement.
(b)This erroneous assumption that the franchise term for the Heathmont Store would not be affected by the Lease was reinforced by the fact that, in the Franchise Opportunity Documents, the ‘Franchise Agreement Term’ for some stores was described as ‘As per lease’ rather than ’10 years’. The ‘As per lease’ description was used for those stores where the total of the primary lease term and all option periods was less than 10 years. In my opinion, the differentiation between ‘As per lease’ and ’10 years’ would lead a reasonable reader to presume that, where the ‘Franchise Agreement Term’ was expressed in the Franchise Opportunities Documents to be 10 years, it was not subject to earlier termination by reason of the expiration of the primary lease term.
It is necessary to consider the effect of the Explanatory Note in assessing whether the August Document as a whole had a sufficient tendency to lead a person exposed to form an erroneous assumption.
In Downey v Carlson Hotels Asia Pacific Pty Ltd, Keane JA discussed the circumstances in which a disclaimer could erase the effect of a misleading representation in a document.[7] His Honour observed:
It has been recognised, however, that disclaimers can be effective ‘if the clause actually has the effect of erasing whatever is misleading in the conduct’; in other words, if the effect of the disclaimer is to make clear something that, if allowed to remain vague or ambiguous, could have led a person into error. … It is apparent that if a disclaimer is to function in this way it must be worded unambiguously, feature prominently and it must be communicated to the reader that the disclaimer is relevant to the information it is seeking to qualify. As Jacobson and Bennett JJ noted in National Exchange:
Where the disparity between the primary statement and the true position is great it is necessary for the maker of the statement to draw the attention of the reader to the true position in the clearest possible way.[8]
[7][2005] QCA 199 (Williams and Keane JJA, Atkinson J).
[8]Ibid [83] (Keane JA, with whom Williams JA and Atkinson J agreed) (citations omitted), quoting National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369, 381 [55].
In my opinion, the Explanatory Note did not erase the effect of the misleading representation as to the term of the Franchise Agreement, for the following reasons:
(a)On its face, each of the Franchise Opportunities Documents recognises the fact that the prospective franchisee will be investing many hundreds of thousands of dollars to acquire the franchise businesses for sale. The disparity between the 10-year term and the lesser term is very significant. For example, in the case of the Heathmont Store, the term was less than seven years at the time the August Document was provided, and six years and one month at the time of entry into the Franchise Agreement.
(b)The Explanatory Note is not featured prominently on the document. It is in small print and is worded in a confusing manner. It would be difficult for a lay person to understand, even one whose first language was English, much less Ms Li and Mr Wang.
(c)The asterisk referencing the Explanatory Note was placed after the words ‘Lease Term’ and not ‘Franchise Agreement Term’, which did nothing to communicate the effect the ‘Lease Term’ and options had on the ‘Franchise Agreement Term’.
(d)I accept the unchallenged evidence of Ms Li and Mr Wang that the Explanatory Note was not brought to their attention at all. In fact, Mr O’Hara did not contend that it was part of his standard practice to bring the Explanatory Note to the attention of prospective franchisees.
Although I have found the August Document on its face was misleading, it is necessary to consider the document in the context of the evidence as a whole and the surrounding circumstances. As was explained by McHugh J in Butcher v Lachlan Elder Realty Pty Ltd:
The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself. It invites error to look at isolated parts of the [defendant’s] conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole. The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document.[9]
[9](2004) 218 CLR 592, 625 [109] (citations omitted) (underlining added).
I reject the defendant’s contention that, even if the August Document was misleading, the misleading effect was erased by the statements of Mr O’Hara at 11 June Meeting.
The conversation on 11 June 2014 occurred over seven and a half years ago. Accordingly, I approach the evidence of Ms Li and Mr Wang as to their memory of the conversation with caution. Similarly, I consider some caution is required in determining what Mr O’Hara’s standard practice was at that time and whether, as part of that practice, he would have clearly given the Reduced Term Explanation.

On the balance of probabilities, I am satisfied that Mr O’Hara did not give the Reduced Term Explanation to Ms Li and Mr Wang, for the following reasons:
(a)I accept the plaintiffs’ evidence that they do not recall Mr O’Hara saying anything about the defendant having an ability bring the 10-year franchise term to an earlier termination by not exercising the option. In fact, I accept that Mr O’Hara did not adequately explain to Ms Li and Mr Wang at the meeting what the options were and how they affected the term of the Lease.
(b)The fact that Ms Li did not understand that the entitlement to a franchise term was limited to the primary term was demonstrated by her email to Mr O’Hara on 18 June 2014 with respect to the Mr Waverley Store set out at paragraph 20 above. Further, the finding that Mr O’Hara did not give the Reduced Term Explanation is supported by the fact by that in his reply to that email he does not disabuse Ms Li of her false assumption that the option period would be part of the contractual entitlement to a franchise term. His explanation that he did not do so because he assumed that the defendant would exercise the option for the Mt Waverley Store is not consistent with a ‘standard practice’ of explaining the limiting effect of a primary term to prospective franchisees.
(c)In my opinion, even the explanation set out in Mr O’Hara’s witness statement at paragraph 86(a) above is not unambiguous. A prospective franchisee told of the standard franchise term of 10 years and being provided with the Franchise Opportunities Documents could reasonably consider that any statement about the defendant not being obliged to exercise options to renew leases applied to the period after the expiration of a 10-year franchise term.
Whatever explanation was given by Mr O’Hara, it was not sufficient to erase the effect of the subsequent representations in the Franchise Opportunities Documents. It was not contested that the plaintiffs entered into the Franchise Agreement believing that they had acquired a contractual entitlement to a 10-year franchise term. This was quite properly not contested by counsel for the defendant in view of the evidence of Ms Li and Mr Wang, which was supported by:
(a)the email of 18 June 2014 with respect to the Mt Waverley Store franchise term, as set out at paragraph 20 above; and
(b)the statement in the business plan dated 3 September 2014 that one of the reasons for selecting the Heathmont Store was that it had a long term lease, as set out at paragraph 28 above.
In conclusion, for the reasons set out above, I find that the defendant did engage in misleading conduct within the meaning of s 18 of the ACL by falsely representing to Ms Li and Mr Wang that they had a contractual entitlement to a 10-year franchise term.

Questions 2 and 3 – Were the plaintiffs induced to enter into the Franchise Agreement in reliance on the misleading conduct and, if yes, to what relief are the plaintiffs entitled by reason of the misleading conduct?

The plaintiffs claim an injunction; or alternatively damages pursuant to s 236 of the ACL.

Inducement

The plaintiffs claim damages pursuant to s 236 of the ACL, which provides:
(1) If:
(a)a person (the claimant) suffers loss or damage because of the conduct of another person; and
(b) the conduct contravened a provision of Chapter 2 or 3;
the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.
The plaintiffs allege that, but for the defendant’s misleading conduct in contravention of s 18 of the ACL, the plaintiffs:
(a)would not have entered into the Franchise Agreement; and instead,
(b)Ms Li and Mr Wang would have applied to buy an Australia Post licenced post office or, if that was not possible, one of the following businesses as a series of cascading alternatives:
(i)a TattsLotto outlet;
(ii)an independent bottle shop;
(iii)a tobacconist; or
(iv)a dry cleaning business.
To establish this claim, the plaintiffs must prove on the balance of probabilities, that:
(a)the defendant engaged in the alleged misleading and deceptive conduct; and
(b)but for the misleading and deceptive conduct, the plaintiffs:
(i)would not have entered into the Franchise Agreement; and
(ii)‘would have taken action to obtain the lost benefit’,[10] by pursuing other commercial opportunities of some value,[11] which is ‘not in the realms of the merely theoretical or negligible’.[12]
[10]La Trobe Capital & Mortgage Corporation Ltd v Hay Property Consultants Pty Ltd (2011) 190 FCR 299, 318 [89] (Finkelstein J) (‘La Trobe Capital’).
[11]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355 (Mason CJ, Dawson, Toohey and Gaudron JJ); La Trobe Capital (2011) 190 FCR 299, 323 [112] (Jacobson and Besanko JJ).
[12]Mal Owen Consulting Pty Ltd v Ashcroft (2018) 97 NSWLR 1163, 1185 [101] (Barrett AJA).
Once these matters of causation have been established on the balance of probabilities, the assessment of the value of the lost opportunity is ‘by reference to the degree of probabilities and possibilities of factual hypotheses [and] may require a process of estimation extending even to a degree of guesswork and may lie at any point within a broad range’.[13]
[13]Ibid (citations omitted). See also La Trobe Capital (2011) 190 FCR 299, 318-19 [89]-[90] (Finkelstein J); 323 [112]-[113] (Jacobson and Besanko JJ).
With respect to the adequacy of evidence that must be adduced to support this assessment of damage, Brooking J observed in JLW (Vic) Pty Ltd v Tsiloglou:
It is often said that the amount of the damage must be proved with certainty, but this only means as much ‘certainty’ as is reasonable in the circumstances. Where precise evidence is obtainable, the court naturally expects to have it; where it is not, the court must do the best it can. The nature of the damage may be such that the assessment of damages will really be a matter of guesswork, as in the well-known case of Chaplin v Hicks [1911] 2 K.B. 786, where the plaintiff had lost a chance of winning an engagement as an actress as a prize.[14]
[14][1994] 1 VR 237, 241 (Brooking J, with whom, Tadgell and JD Phillips JJ agreed) (citations omitted).
The degree of precision with which damages are to be proved is proportionate to the proof reasonably available.[15] The relationship between the degree of precision required and the availability of evidence was explained by Hayne J in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd as follows:
It may be that, in at least some cases, it is necessary or desirable to distinguish between a case where a plaintiff cannot adduce precise evidence of what has been lost and a case where, although apparently able to do so, the plaintiff has not adduced such evidence. In the former kind of case it may be that estimation, if not guesswork, may be necessary in assessing the damages to be allowed. References to mere difficulty in estimating damages not relieving a court from the responsibility of estimating them as best it can may find their most apt application in cases of the former rather than the latter kind.[16]
[15]Nilon v Bezzina [1988] 2 Qd R 420, 424 (McPherson J), quoted with approval in State of New South Wales v Moss (2000) 54 NSWLR 536, 554 [72] (Heydon JA with whom Mason P and Handley JA agreed) (‘Moss’).
[16](2003) 77 ALJR 768, 774 [38] (Hayne J with whom Gleeson CJ, McHugh, and Kirby JJ agreed) (citations omitted) (emphasis in original).
Questions as to the adequacy of evidence required to establish loss is likely to commonly arise in cases where the wrongdoer has prevented the victim from pursuing an opportunity because the wrong ‘has thrust the victim into a difficult task of proving a past hypothetical’.[17] The Court may adopt a robust approach ‘relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic”’.[18]
[17]Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333, [246] (Giles JA) (citations omitted), quoted with approval in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337, [155] (Giles JA, with whom Macfarlan and Young JJA agreed).
[18]Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, 59 (Handley JA, with whom Mason P and Beazley JA agreed), citing LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 3) (1990) 24 NSWLR 499, 508 (Hodgson J in Eq); Blong Ume Nominees Pty Ltd v Semweb Nominees Pty Ltd (2019) 135 SASR 385, 408-9 [99]-[101] (Kourakis CJ, Stanley and Lovell JJ); Pitcher Partners Consulting Pty Ltd v Neville’s Bus Service Pty Ltd (2019) 271 FCR 392, 417 [109]; 419-20 [124] (Allsop CJ, Yates and O’Bryan JJ), and discussed in Berry v CCL Secure Pty Ltd (2020) 381 ALR 427, 441-2 [34] (Bell, Keane and Nettle JJ); 455 [74] (Gageler and Edelman JJ). See also Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, 415-6 [74] (Gleeson CJ, McHugh, Gummow, Kirby, Hayne, Callinan and Heydon JJ).

Conclusion

I am satisfied on the balance of probabilities that, but for the defendant’s misleading and deceptive conduct, the plaintiffs would not have entered into the Franchise Agreement, for the following reasons:
(a)The evidence of Ms Li and Mr Wang was to that effect and neither were challenged on that issue.
(b)The fact that Ms Li considered the length of the Franchise Agreement term to be a critical factor is supported by the following contemporaneous communications with the defendant:
(i)Ms Li’s email of 18 June 2014 stating that she was worried that the Mt Waverley Store lease, had ‘only 7 years left’.
(ii)Ms Li’s statement in her business plan for the Heathmont Store dated 3 September 2014 that a factor influencing her decision to select the Heathmont Store was that it had a long term lease.[19]
(c)The contractual term of the Franchise Agreement was critical to permit the plaintiffs to recover their substantial capital investment of approximately $796,366. The difference between a contractual entitlement to a franchise term of six years and one month, and a contractual entitlement to a term of 10 years is self-evident.
[19]See paragraph 28 above.
Further, I am satisfied that, but for the defendant’s misleading conduct, the plaintiffs would have pursued opportunities to buy other businesses of the type alleged, for the following reasons:
(a)The unchallenged evidence of Ms Li was:
Instead, I would have worked towards my second option, to buy a post office. A friend of a friend of mine, whose name I do not remember, had bought a post office business. I would have made contact with this person to ask about the amount needed to invest and how many years it would take to get my investment back, whether it is a good business, and whether it is hard to operate. I would have spoken to the people in the post office system who sell post office businesses. Just like when we were interested in buying a 7-Eleven, we would have done research and visited post offices and spoken to people in the business or people who had experience previously running a post office business to understand the business opportunity.
Zhe and I would have applied to buy a post office business for between $800,000 to $1,100,000 in the east of Melbourne, no more than 40 minutes’ drive from our home in Wantirna.
I would have talked to business brokers selling post offices to learn what the post office system was like, and how to become a post office licensee. In this process, I would have discovered what I now know which is that post office licensees do not have a limited term, as the post office licence is for as long as you want, until you sell the business.
I would have bought the post office business by about September or October 2014, and would have finished all the training before my second child was born (in February 2015). Then I would have arranged for someone else to run the post office between January and March 2015, while giving birth to my second child. Then I would have returned to work at the post office business.
If we could not buy a post office business, we then might have bought a Tatts Lotto outlet. If neither of those options would have worked, we would have bought an independent bottle shop or a tobacconist. If we could not find the right business, we would have bought a dry cleaning business but bigger than the one we had originally had, which had big enough profits to allow us to have staff for most of the hours, and Zhe would work in the store. I would not have worked in this dry cleaning business until after our second child had reached one year of age (February 2016), due to the chemicals used in a dry cleaning store.
If we had had to look for another business for a long time, I would have tried to find work for a salary until we bought another business. For example, I would have done clothing alterations, so that I could earn about $500 to $700 per week, although I would not have worked in January and February 2015 while I was pregnant and just after my baby was born.
(b)The unchallenged evidence of Mr Wang was:
Had we not proceeded with the Heathmont Store, we would have considered purchasing an Australia Post, bottle shop, tobacconist, Tattslotto, or other retail business similar to this.
My understanding, from friends who run these kinds of stores, is that they have a back office, where we could keep and look after our newborn, while managing the store. If we could not purchase that kind of a business, we would have purchased a dry-cleaning business, though we were still concerned that the chemical use could be harmful to our newborn so we would not have purchased it before our newborn reached one year of age. As a last option, we would have purchased a cleaning business like Bizzi Beez, but this was a last option because I did not want to continue performing manual labour. But I knew I could buy a cleaning business for about $10,000 and earn enough to cover living expenses. I would not have searched for an ordinary job as I was certain I could buy a cleaning business if I had no other option.
I would have been prepared to pay up to $1,000,000 to purchase a business and would have been prepared to take out a business loan if necessary to make up the difference between the money we already had available (including by home loan) and that budget of $1,000,000.
(c)Ms Li and Mr Wang were both well-educated and had an established history of operating their own businesses since 2004, as set out in paragraphs 4, 5 and 7 above.
(d)The evidence of Mr Goldstein, the principal of Business Reports and Values, who deposed that he has had over 30 years’ experience in business valuation and business broking, was that an Australia Post licensed post office, a TattsLotto agency, and a bottle shop would each be a suitable business for acquisition by persons with the qualifications of Ms Li and Mr Wang.
Further, I am satisfied that the plaintiffs have established that the commercial opportunity to acquire businesses of the type alleged was of some value. I accept the evidence of Mr Goldstein as to the expected net profit return from each of these businesses on a basis of an investment of $795,000 and $1,100,000.
In this case, the plaintiffs lost the opportunity to pursue the acquisition of various businesses. In a similar manner to the assessment of damages for loss of earning capacity, the assessment of damage in this case does not depend on calculating the income from one particular business opportunity which is no longer possible, but in calculating the damage arising from the loss of the opportunity to carry on one of various businesses. It is an exercise in estimation of possibilities, not proof of probabilities.[20] The lost opportunity in this case was the opportunity to pursue the series of cascading opportunities referred to in paragraph 101 above.
[20]Moss (2000) 54 NSWLR 536, 553-554 [71] (Heydon JA with whom Mason P and Handley JA agreed on this ground 4)). See also at 554-555 [72] with respect to the proper approach to quantification when damages are difficult to assess in various claims, including for loss of earning capacity in injured plaintiffs, pecuniary loss caused by negligent advice and damages for breach of contract.
The fact that it is not necessary for a plaintiff to limit its claim to one particular opportunity is established by the decision of the Full Federal Court in La Trobe Capital;[21] and the Western Australian Supreme Court in Orchard Holdings Pty Ltd v Paxhill Pty Ltd.[22]
[21]La Trobe Capital (2011) 190 FCR 299 (Finkelstein, Jacobson and Besanko JJ).
[22][2012] WASC 271 (‘Orchard Holdings’).
In La Trobe Capital, the Full Federal Court considered a claim by a finance institution for the loss of an opportunity to lend out funds, which had in fact been advanced on a non-performing loan made on the basis of a negligent valuation. The Court accepted the evidence that the funds would have been lent to another commercial property developer, and that it was not necessary for the financier to prove that any particular loan applications had not proceeded by reason of the unavailability of the money that was applied on the non-performing loan.[23]
[23]La Trobe Capital (2011) 190 FCR 299, 307-8 [37], 318-19 [89]-[90], 320-1 [96] (Finkelstein J); 323 [112]-[113] Jacobson and Besanko JJ).
In Orchard Holdings, Allanson J considered a claim for loss of opportunity in the following circumstances:
(a)The plaintiff (‘Orchard Holdings’) commenced development of a residential apartment building in Western Australia.
(b)In obtaining a loan for the project from Westpac Banking Corporation, the bank advised that Orchard Holdings would need to satisfy a ‘pre-sales condition’ to finance the project, by selling 20 apartments off the plan by a certain date.
(c)The defendants misled and deceived Orchard Holdings by fabricating pre-sale contracts with respect to, relevantly, 13 apartments.
(d)Orchard Holdings claimed compensation for reduced sale prices (being the difference between the fictitious sale price and the price actually achieved) and other expenses arising from the lost opportunity to sell the 13 apartments by the pre-condition date, as well as holding costs for the 13 apartments and for apartments that were not the subject of fictitious contracts.[24]
[24]Orchard Holdings [2012] WASC 271.
Allanson J allowed the claim (after deducting appropriate discounts to account for risks) on the basis it was not necessary for Orchard Holdings to prove that any particular purchasers would have entered into contracts; and considered that the loss should be ‘assessed by a more broad brush technique’.[25]
[25]Ibid [383].
Presumably, to prove that particular persons would have bought each of the 13 apartments in the relevant historical period would have been impossible. Allanson J stated:
I cannot, on the evidence, determine with any precision how likely it is that the plaintiffs would have sold an equivalent number of apartments at the same, or about the same, prices as they believed they had. The assessment of the degree of probability that an event would have occurred, and the consequent adjustment of the award of damages to reflect that, involve matters not capable of precise proof.[26]
[26]Ibid [381] (citations omitted).
Accordingly, Allanson J’s approach may be seen as the Court assessing damages as best it can, given that Orchard Holdings could not realistically have adduced evidence of particular buyers at the relevant time.
Similarly, in my opinion, it would not be just in this case to limit the plaintiffs’ damages to the loss of the opportunity to purchase their preferred alternative choice, being an Australia Post licensed post office. Damages assessed on the basis of that one opportunity alone would not do justice to the plaintiffs. As the plaintiffs’ evidence establishes, if the plaintiffs had not succeeded in acquiring their first option, there were a series of other businesses they would have pursued.

In Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a deed of company arrangement) (No 3), Colvin J, after an extensive review of the authorities, summarised the current state of the unwritten law as to the meaning of good faith for the purposes of cl 6(1) of the Franchising Code as follows:
(1)the term ‘good faith’ imports a normative standard to be observed by the parties in dealings as to matters to which the standard is applied;
(2)the normative standard embraces an obligation to act honestly and with fidelity to the bargain concluded between the parties;
(3)the normative standard also embraces an obligation to act co-operatively in matters related to performance;
(4)the standard does not require a party to subordinate its legitimate interests to those of the counterparty, but is does require due regard to the legitimate interests that both parties have in the performance of the contract they have made;
(5)conduct which is dishonest, capricious, arbitrary or motivated by a purpose which is antithetical to the evident object of any provision of the [agreement] that governs the conduct being scrutinised or conduct which is otherwise motivated by bad faith will not meet the standard;
(6)where the scrutinised conduct, viewed in the particular context, is objectively unreasonable then the unreasonableness may form part of the basis for a conclusion that there has been a lack of good faith, but objective unreasonableness is insufficient of itself to amount to a lack of good faith; and
(7)the quality of the scrutinised conduct is to be evaluated having regard to the circumstances of the particular parties, particularly their sophistication, commercial power and the relative significance for each party of the subject matter of the conduct.[33]
[33](2019) 368 ALR 441, 565-6 [476] (‘ACCC v Geowash’).
His Honour made the following additional comments with respect to the standard imposed by the obligation:
I note that sometimes the standard is described as incorporating an obligation to act fairly or engage in fair dealing. However when such terms are used they must be understood as being subject to the ability of a party to pursue its own legitimate interests. Further, as I have noted, in s 6(1) of the Code the good faith obligation extends to dealings between the parties before entering into an agreement. The common law use of good faith in such a context appears not to embrace a notion of fair dealing as is indicated by the decision in [Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd (2010) 41 WAR 318]. …
Clause 6(1) of the Code imposes a standard that is applicable to the manner in which franchisor and franchisee must act toward each other in any action or dealing that is governed by the terms of the franchise agreement or the Code. This follows from the language of cl 6(1) expressing a standard that must be observed by franchisor and franchisee in the way they act towards each other ‘in respect of any matter arising under or in relation to’ the agreement and the Code. It is not a provision directed towards ensuring that the terms of all franchise agreements meet an objective standard of fairness or reasonableness. Rather, the Code has provisions that are designed to ensure that franchisees have all the information to make an informed decision as to whether to enter into a franchise agreement and, if so, on what terms: as to the disclosure obligations.
So, application of cl 6(1) in any particular case requires the identification of the matter arising under or in relation to the agreement or the Code in respect of which there has been a failure to act in good faith by one party towards the other. It does not enable a general claim to be made that there has been a failure to act in good faith. So, it is to be expected that where a complaint is made as to the conduct of a franchisor ‘the focus of an obligation of good faith should ordinarily be on a franchisor’s use of powers and opportunities available by reason of the franchise relationship’.[34]
[34]Ibid 566-7 [747]-[750] (citations omitted). An appeal from this decision was dismissed in Ali v Australian Competition and Consumer Commission (2021) 394 ALR 227 (Allsop CJ, Besanko and Perram JJ). In that case, the Court quoted the above statements of principle: at 276-7 [194]-[195]; and noted that the appellant did not raise any grounds of appeal or make any submissions that addressed Colvin J’s findings in relation to the breach of good faith including the above statements: at 305 [300].
While recognising the primacy of the words of cl 6(1), I would summarise Colvin J’s approach to the determination of whether a party has acted without good faith, in breach of its obligation under the Franchising Code, as being an evaluative process that has regard to parties’ respective circumstances, as well as:
(a)whether the party has acted honestly, co-operatively, not arbitrarily and with due regard to the interests of the parties with respect to the agreement and its performance;
(b)whether the party has been motivated by considerations collateral to the agreement; and
(c)whether the party was acting in its legitimate commercial interests.
Although questions of reasonableness and fair dealing may be relevant in determining whether a party has acted without good faith, they are not sufficient of themselves to support such a claim and are subject to the party’s ability to pursue its own legitimate interests.

Conclusion

In my opinion, the defendant did not act in bad faith in contravention of cl 6 of the Franchising Code. By causing the Franchise Agreement to come to an end after approximately six years by deciding not to renew the Lease, the defendant was pursuing its legitimate interests. I make this finding for the following reasons:
(a)The uncontroversial evidence was that, in making the decision to not renew the Lease and allow the Franchise Agreement to expire on its terms, the defendant’s principal consideration was the fact that the Heathmont Store had not been profitable for the defendant for a number of years. An interest in avoiding loss-making investments will usually be legitimate.
(b)The decision-making process was not arbitrary. Although the evidence shows the defendant has a ‘default position’ to close loss-making stores when their leases expire, the defendant followed its usual processes before reaching a decision with respect to the Heathmont Store. In fact, those processes included consideration of a recommendation to exercise the option on the Heathmont Store for a further five years; but the Property Committee resolved not to do so after taking into account various considerations including:
(i)that the opportunity to grow the store was limited; and
(ii)that there was no reasonable rental level that would bring the store into profitability.
(c)Although there was evidence which supported the proposition that the unprofitability of the Heathmont Store was a consequence of the Variation Agreement and the introduction of the MIG, I accept the evidence of Mr Lord that ‘the primary purpose [of the MIG] is to ensure that there is sufficient minimum income into a store that ensures that there are … income to cover the cost of running … an optimal roster for the stores’. It was not alleged or suggested that the decision to introduce the MIG was made in bad faith or for any collateral purpose. The fact that the decision may have been prompted by litigation or other pressures to ensure employees of 7-Eleven franchisees were paid appropriately only supports a finding that the decision was made in good faith.
I also do not consider that the specific matters relied upon are sufficient to support an allegation that the Decision was made in bad faith. In particular:
(a)The fact that the defendant received consideration for a 10-year franchise term which terminated after six years and one month, may entitle the plaintiffs to a remedy, but does not support an allegation that the Decision was made in bad faith.
(b)The fact that the defendant was aware that the Decision would have the effect that the term of the Franchise Agreement would expire does not constitute a collateral purpose. There is no standing obligation for a franchisor to extend the term of a franchise agreement.
(c)Accepting the plaintiffs’ submission that no steps were taken by the defendant to improve the Heathmont Store’s performance does not lead to an inference that the Decision was reached in bad faith. The plaintiffs did not allege that the absence of such steps was a breach of the Franchise Agreement.
(d)The fact that they did not consult with Ms Li and Mr Wang prior to making the Decision does not indicate that it was made in bad faith.
(e)The fact that Ms Li and Mr Wang were at a relative commercial disadvantage to the defendant does not prevent the defendant from allowing the Franchise Agreement to expire in furtherance of its legitimate commercial interests.
(f)The fact that the defendant failed to comply with its obligation to provide six months’ notice may entitle the plaintiffs to an appropriate remedy. However, in my opinion, it does not indicate that the Decision was made in bad faith, particularly in circumstances where the defendant proposed to compensate the plaintiffs for the reduced notice period.
In the circumstances, I do not consider that the plaintiffs have established that, by making the Decision, the defendant acted otherwise than in good faith in contravention of cl 6(1) of the Franchising Code.

Question 4(b) - Did the defendant engage in unconscionable conduct?

Plaintiffs’ submissions

The plaintiffs submitted that the defendant’s reliance on its strict legal rights to end the Franchise Agreement by failing to renew the Lease was unconscionable in the following circumstances:
(a)The defendant did not disclose the existence of the mechanism in art 24(a)(i) of the Franchise Agreement and the way in which it used that mechanism to terminate franchise agreements prior to the end of the 10-year term. This informational asymmetry placed the defendant in a dominating bargaining position relevant to the directors and allowed them to include a hidden termination right, missed even by the plaintiffs’ solicitor, in the Franchise Agreement.
(b)The financial impact of the Decision was the loss of Ms Li and Mr Wang’s entire investment in the Heathmont Store.
(c)The Decision was not reasonably necessary for the protection of the defendant’s legitimate interests.
(d)The defendant deliberately contravened the Franchising Code by not giving six months’ written notice.
(e)The Decision was not an act in good faith.
(f)The Decision was motivated by the Heathmont Store being a ‘serial loss maker’, which was the result of:
(i)income support resulting from the widespread underpayment of employees across the 7-Eleven network;
(ii)capital expenditure of $216,449 for renovations in the last two financial years; and
(iii)the inappropriate inclusion and allocation of personnel, advertising and insurance expenses to the Heathmont Store.

The defendant’s submissions

The defendant responded to the plaintiffs’ submissions as follows:
(a)For the reasons submitted with respect to the misleading and deceptive conduct case, the defendant did not fail to disclose the ‘mechanism’ that the Franchise Agreement might end before 10 years.
(b)The decision to close the Heathmont Store did have a negative financial impact on the plaintiffs. However, that does not render it unconscionable for the defendant to close the store because if it did, the defendant would essentially be restrained from ever closing a store where the franchisee had invested a large sum of money. Further, the defendant made offers to pay hundreds of thousands of dollars to the plaintiffs even though it had not been the recipient of the goodwill paid by the plaintiffs.
(c)The Decision was reasonably necessary for the protection of the defendant’s legitimate financial interests because the Heathmont Store was unprofitable for the defendant.
(d)The defendant’s failure to give the six months’ notice as prescribed by the Franchising Code does not meet the high bar of unconscionable conduct, particularly in circumstances where:
(i)the defendant’s offer to the plaintiffs was calculated by reference to the shortfall in the notice period; and
(ii)as a result of the injunctive relief, the plaintiffs have had more than six months since the giving of notice.
(e)The making of the Decision was not a breach of the duty of good faith for the reasons previously submitted.
(f)The evidence established that the Heathmont Store was a loss maker.

Principles

In determining whether conduct is unconscionable under s 21 of the ACL, the Court will undertake an evaluative process having regard to the factors referred to in s 22 and all of the circumstances.[35] Of course, this process would not be properly undertaken by simply focussing on whether each of the separate factors enumerated in the section existed.[36]
[35]Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1, 59 [153] (Nettle and Gordon JJ) (‘ASIC v Kobelt’).
[36]Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3) (2020) 275 FCR 57, 117 [364] (Beach J) (‘ASIC v AGM Markets’).
Section 22 identifies a non-exhaustive list of factors to which the Court may have regard. The factors to be considered under s 22 may be broadly divided into the following categories:[37]
(a)the vulnerability of the service recipient relative to the supplier;[38]
(b)any bad faith or unfair dealing of the supplier to the service recipient in the transaction;[39] and
(c)the standard of conduct of the supplier measured against its own conduct in similar transactions and industry codes.[40]
[37]As to categories of the ‘conceptions’ identified in the cognate s 12CC(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’), see ASIC v AGM Markets (2020) 275 FCR 57, 119 [371] (Beach J).
[38]ACL s 22(1)(a), (c), (d), (j).
[39]Ibid s 22(1)(b), (d), (e), (j), (k), (l).
[40]Ibid s 22(1)(f), (g), (h).
In the leading authority of ASIC v Kobelt, the Judges of the High Court made reference to the principles which may be considered in determining whether conduct should be found to be unconscionable under s 12CB of the ASIC Act. It has been recognised that these principles are equally applicable to statutory unconscionability under the cognate provisions in ss 21 and 22 of the ACL.[41]
[41]Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd (2021) 388 ALR 577 (Allsop CJ, Besanko and McKerracher JJ).
(a)Kiefel CJ and Bell J stated that the values informing the standard of conscience were:
(i)certainty in commercial transactions;
(ii)honesty;
(iii)the absence of trickery or sharp practice;
(iv)fairness when dealing with customers;
(v)the faithful performance of bargains and promises freely made; and
(vi)the protection of the vulnerable.[42]
(b)Gageler J described such unconscionable conduct as ‘conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’.[43] He explained the role of the Court as follows:
The correct perspective is that s 12CB operates to prescribe a normative standard of conduct which the section itself marks out and makes applicable in connection with the supply or possible supply of financial services. The function of a court exercising jurisdiction in a matter arising under the section is to recognise and administer that normative standard of conduct. The court needs to administer that standard in the totality of the circumstances taking account of each of the considerations identified in s 12CC if and to the extent that those considerations are applicable in the circumstances.[44]
(c)Keane J said that the term ‘unconscionable’ imports the higher level of moral obloquy associated with the victimisation on the vulnerable.[45]
[42]ASIC v Kobelt (2019) 267 CLR 1, 17 [14], noting these were identified by Allsop CJ in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199, 274 [296].
[43]ASIC v Kobelt (2019) 267 CLR 1, 40 [92].
[44]Ibid 38 [87].
[45]Ibid 48 [118].
In Jams 2 Pty Ltd v Stubbings, the Court of Appeal summarised the statements of Gageler, Nettle, Gordon and Edelman JJ in Kobelt with respect to the standard for statutory unconscionable conduct, as follows:
The applicable standard is a normative one involving the evaluation of whether the conduct in question is ‘so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’; in the sense that a court should only take the serious step of denouncing conduct as unconscionable when it is satisfied that the conduct is ‘offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society’. The evaluation exercise is informed by the non-exhaustive list of factors in s 12CC.[46]
[46][2020] VSCA 200, [90] (Beach, Kyrou and Hargrave JJA) (citations omitted) (‘Jams’). It is noted that an appeal of this judgment was allowed by the High Court, but not in respect of the relevant passage extracted here: [2022] HCA 6 (Kiefel CJ, Keane, Gordon, Steward and Gleeson JJ).
In Jams, the Court of Appeal held that, following ASIC v Kobelt, it is not appropriate to use the ‘arcane’ expression ‘moral obloquy’.[47] As Beach J observed in ASIC v AGM Markets:
[T]he statutory language should not simply be restated by substituting words or a phrase that Parliament did not choose. At most, the statutory concept of unconscionable may accommodate a flavour of moral obloquy in the sense that it means more than ‘unjust’, ‘unfair’ or ‘unreasonable’, but it is to divert the relevant normative inquiry to specifically seek to identify its existence or to clothe the relevant conduct with such a conclusory label.[48]
[47]Jams [2020] VSCA 200, [91].
[48]ASIC v AGM Markets (2020) 275 FCR 57, 119 [370] (citations omitted) (emphasis in original).
Further, in Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd, after considering the judgments in ASIC v Kobelt, the Full Federal Court held that vulnerability was not an essential feature of a contravention of s 21.[49] Their Honours explained:
Whilst some form of exploitation of or predation upon some vulnerability or disadvantage of people will often be a feature of conduct which satisfies the characterisation of unconscionable conduct under s 21, such is not a necessary feature of the conception or a necessary essence in the embodied meaning of the statutory phrase.[50]
[49](2021) 388 ALR 577 (Allsop CJ, Besanko and McKerracher JJ).
[50]Ibid 578 [4].
The Full Court also doubted the value of quibbling over words to express the notion of unconscionability and identified the task as:
[A]n evaluation of the impugned conduct to assess whether it is to be characterised as a sufficient departure from the norms of acceptable commercial behaviour as to be against conscience or to offend conscience and so be characterised as unconscionable.[51]
[51]Ibid 598-9 [92].

Conclusion

In ACCC v Geowash, Colvin J observed that for conduct to be unconscionable, it must involve a considerable departure from the norms and behaviours that are accepted by society; and referred to the inter-relationship with unconscionability and lack of good faith as follows:
In the early decision in [Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234], Priestley JA referred to the ideas of unconscionability, unfairness and lack of good faith having a great deal in common (at 268). Those terms each express a normative standard of behaviour that is imposed by the law in particular contexts. However, there are important differences. … [U]nconscionability involves a considerable departure from accepted business norms of behaviour such that the conduct is plainly or obviously conduct of a kind that is outside the bounds of those norms. Good faith requires both honesty as well as a genuine commitment to the purposes of the agreement.[52]
[52]ACCC v Geowash (2019) 368 ALR 441, 566 [748].

I consider that the plaintiffs failed to establish that the Decision constituted unconscionable conduct principally for the reasons outlined in paragraphs 152 to 153 above in respect of my rejection of the claim of a breach of the obligation of good faith under cl 6 of the Franchising Code. In particular, for the reasons stated, the Decision was made in pursuit of the defendant’s legitimate interests and in accordance with the terms of the Franchise Agreement. In those circumstances, the defendant’s conduct fell well short of being so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience.

Question 5 - If yes to question 4(a) or (b), what relief are the plaintiffs entitled to by reason of such breaches?

As I have found that the defendant did not breach its obligation to act in good faith towards the plaintiffs, in accordance with the Franchising Code, or engage in unconscionable conduct, in contravention of s 21 of the ACL, this question does not arise.
Orders
Subject to any submissions with respect to the matter referred to in paragraph 168(a) below, I propose to order that the defendant pay damages pursuant to s 236 of the ACL in the sum of $595,246.40.
I will hear the parties on the following further matters:
(a)the question of whether the sum of $50,000, as the current value of the Heathmont Store, should be deducted for the assessed value of the loss of opportunity relating to the hypothetical alternative business, as this was not canvassed in final submissions; and
(b)appropriate further orders with respect to costs, the discharge of the interlocutory injunction and in respect of which plaintiff judgment should be entered.
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Appendix 1 – The Handwritten Note

Appendix 2 – Page 1 of The June Document

Appendix 3 – Page 3 of the August Document

Article	Relevant Condition
(a) Term of the franchise agreement	1 (a), 24, 25,29 & Exhibit A
(b) Variation	2(j)
(c) Renewal, extension or extension of the scope	24
(d) Conditions the Franchisee must meet to renew, extend or extend the scope of the franchise agreement	24 (Extension or renewal can occur only by mutual agreement. There is no entitlement requiring that the Store Agreement be extended or renewed.)

Franchisee Name	Yong Li
Purchase price	GW [goodwill] $633.500 FF [franchise fee] $100,224

Performance	Corporate	Franchise	Corporate Store	Closure at Lease Expiry
Store Contribution	($376,772)	$250,446	($222,876)	($565,546)
Discounted Cash Flow	($33,392)	$126,340	$44,308	($175,385)

[2022] VSC 132

22 March 2022