Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) - [2024] NSWSC 1305

Supreme Court

New South Wales

Medium Neutral Citation: Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) [2024] NSWSC 1305
Hearing dates: 29 July – 9 August 2024, 9 – 11 September 2024
Date of orders: 17 October 2024
Decision date: 17 October 2024
Jurisdiction: Common Law
Before: Elkaim AJ
Decision:
1. Judgment for the plaintiff against the defendant in the sum of $20 million.
2. The defendant is to pay the plaintiff’s costs of the proceedings.
3. The parties have leave to make further submissions in respect of the costs order and interest.

Catchwords:
CONTRACTS — construction — interpretation — whether the use of the words ‘and/or’ in cl 4.7 meant that the defendant was bound to consider the best interests of the plaintiff — consideration of the commercial purpose of the clause, agreement and the commercial value an option to renew clause has for either party — application of test in H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4 — held the terms of cl 4.7 and the agreement as a whole required the defendant to consider the best interests of the plaintiff
CONTRACTS — construction — interpretation — where under an alternative interpretation whereby cl 4.7 did not require the defendants to consider the best interests of the plaintiff — whether upon the defendant’s construction of cl 4.7 they breached the contract — where defendant held a board meeting to consider the exercise of renewal and commissioned a report detailing the plaintiff’s breaches to provide justification for the defendant’s decision to refuse the renewal of the agreement — whether the report and board meeting was part of a genuine decision making process — held upon the defendant’s construction of cl 4.7 the defendants actions were not in breach of the term
CONSUMER LAW — unconscionable conduct — in connection with goods or services — discussion of principles of unconscionability involving some degree of moral obloquy — whether the defendant’s conduct in allowing the plaintiff to believe that renewal of the agreement was possible constituted sharp practice — held that the defendant by not acting in good faith with the plaintiff engaged in unconscionable conduct
CONSUMER LAW — industry codes — Franchising Code of Conduct — where matters raised in the code fall within the substantive claim
EVIDENCE — expert evidence — where defendant’s expert was retained to criticise the analysis of plaintiff’s expert — where in oral evidence the defendant’s expert’s adopted a similar value and final damages amount to the plaintiff’s expert — use of defendants valuation accepted
CONTRACTS — remedies — damages — after breach — damages awarded for breach of contract using defendant’s expert’s valuation
CONSUMER LAW — unconscionable conduct — assessment of damages — damages awarded

Legislation Cited:
Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, Chs 2, 3, ss 21, 22, 236
Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth), Sch 1 - Franchising Code of Conduct, Pt 5A, cll 6, 23, 27, 28,

Cases Cited:
Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7
H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4
Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8
Hungry Jacks Pty Ltd v Burger King Corporation [1999] NSWSC 1029
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; [1938] HCA 66
Master Homes Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21; (1976) 136 CLR 444
Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; (2015) 321 ALR 584
Productivity Partners Pty Ltd (trading as Captain Cook College) & Anor v Australian Competition and Consumer Commission & Ors [2024] HCA 27
Sellars v Adelaide Petroleum NL (1994) 179 CLR 1386
Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23

Category: Principal judgment
Parties: Lindfield NSW Pty Ltd (Plaintiff)
Netdeen Pty Ltd trading as GJ Gardner Homes (Defendant)
Representation:
Counsel:
Mr T Castle SC (Plaintiff)
Ms D Levi (Plaintiff)
Mr A Schatz (Plaintiff)
Mr S Couper KC (Defendant)
Mr J Gooley (Defendant)
Solicitors:
Addisons (Plaintiff)
Thomson Geer Lawyers (Defendant)

File Number(s): 2023/237902
Publication restriction: No

JUDGMENT

Introduction

At the commencement of the hearing the plaintiff indicated that the trial would be run within the scope of the pleadings. Throughout the trial the defendant took the point that a particular matter being led was outside the pleadings and also objected to certain evidence on the same basis. The plaintiff made no concession that its case had strayed outside of the pleadings, although some of the submissions encasing certain evidence within the pleadings required a somewhat indirect approach.
My view is that the plaintiff did adhere to the pleadings, perhaps sometimes on their very edge, but overall to an extent that the defendant was well able to meet the case being put and never suffered any prejudice by reason of not being able to meet any assertion made by the plaintiff.
To this end, during the defendants’ final submissions, I put this question to his Majesty’s counsel, at Tcpt, 10 August 2024, p 736 (5):

“HIS HONOUR: Is that your way of saying that everything that's outside the pleadings you've been able to meet?
Mr Couper KC answered:
COUPER: Not quite, your Honour, and we'll give your Honour some examples of where things have been raised‑‑
HIS HONOUR: You can come back to it, if‑‑
COUPER: Yes. We're conscious of what your Honour says and we will deal, in more detail, with how we approach those matters.”

Other than repeating the general complaint about the pleadings the defendant did not come back to give me examples or deal with the matter in more detail. Between my assessment that the pleadings were not ignored and the defendant not returning to the question posed above, I am satisfied that the plaintiff’s case was put without any prejudice to the defendant’s capacity to identify the allegations against it and to meet them.

Background

In 1983 Mr Greg Gardner commenced a homebuilding business called GJG Homes. In 1995 the defendant company was incorporated (G.J. Gardener Homes Pty Ltd) in order to facilitate the franchising of Mr Gardner’s building enterprise.
The business structure had three tiers: at the top was the Master Franchisor. There was then a Master Franchise Agreement (MFA) with a Master Franchisee. The Master Franchisee then had franchise agreements with Sub-franchisees.
In short, the Sub-franchisees were (generally) small building firms that built residential homes under the banner of G.J. Gardener Homes. The Master Franchisee, who was not a builder, provided support to the Sub-franchisees.
An earlier Master Franchisee for the combined NSW and ACT areas was not successful. Mr Matthew Hope, through his company Lindfield NSW Pty Ltd (the plaintiff), became the Master Franchisee for the combined NSW and ACT areas on 18 November 2005. To become a Master Franchisee he needed to invest $500,000. The MFA between the plaintiff (Lindfield) and the defendant (Netdeen) had a term of 10 years.
Mr Hope, who had lived in New South Wales, moved to Queensland in October 2009. In February or March 2014 Mr Hope asked the defendant to prepare a new MFA, which was prepared and executed on 1 July 2014. The parties to the MFA were the plaintiff and the defendant. The new MFA had a term of 10 years, and also an option to renew for a further 10 years.
The option to renew is the primary issue in the proceedings. This is because on 3 July 2023 the plaintiff endeavoured to exercise the option to renew. On 24 July 2023, the defendant issued a Refusal Notice declining the application for renewal. The refusal was made pursuant to cl 4.7 of the MFA.
It is also relevant to note here that after the plaintiff had requested renewal on 3 July 2023, the defendant, on 5 July 2023, provided the plaintiff with a copy of its “current” MFA. It did so because, pursuant to cll 4.2 and 4.6, any renewal would be subject to the current MFA. It is part of the plaintiff’s case that the current MFA was deliberately so disadvantageous to the plaintiff that it formed part of the defendant’s predetermined decision to exclude the plaintiff from the G.J. Gardener Homes franchise. The use of the current MFA to achieve a similar purpose was said to have been utilised by the defendant in dealings with a Master Franchisee in Victoria.
The result of the refusal to renew the MFA is that the plaintiff is no longer the Master Franchisee and therefore no longer able to derive an income from the Sub-franchisees (the builders).
The ten-year term of the MFA expired on 1 July 2024. On 27 May 2024, the defendant served a notice of termination of the MFA on the plaintiff and took an assignment of the franchise agreements between the plaintiff and the Sub-franchisees, thus ending the plaintiff’s role in the G.J. Gardener Homes enterprise. Effectively, the three-tier model was abandoned and replaced with two-tiers with the Master Franchisor at the top having a direct relationship, through the assigned Sub-franchise agreements, with the Sub-franchisees. This was referred to as a direct model and the process of achieving the model, as ‘de-mastering’.
The assignments mentioned above were contemplated by the MFA and had the effect of excluding the plaintiff from its income source. The income structure, referred to as royalties under the three-tier model worked in this way:

The Sub-franchisees paid the Master Franchisee 4% of the contract price of building contracts which the Sub-franchisee had made with customers.

The 4% was then divided as follows: the Master Franchisee paid 1% to the Master Franchisor.

The Master Franchisee put 1% into a marketing fund run by the Master Franchisee.

The Master Franchisee retained the remaining 2%.

As a general statement, the plaintiff as a Master Franchisee, worked hard and did well. There is no dispute that the plaintiff had an annual profit of about $4 million.
The plaintiff alleges that it has been ‘pushed out’ of the G.J. Gardener Homes enterprise leaving it with no income and no realisable asset. The loss said to emerge from this circumstance has been assessed by the plaintiff, through an expert, at $25.6 million. In this litigation the plaintiff claims this amount as damages. There is also an alternative claim for damages of $3,942,330.

The plaintiff’s case

The plaintiff put its case in a number of ways:

The terms of the MFA, properly construed, were breached by the defendant.

Even if the terms of the MFA are construed as advocated by the defendant, the defendant has still acted in breach of those terms.

The defendant’s conduct, whatever the result of the argument about the terms of the MFA, was in breach of the Franchising Code (Code).

Whatever conclusions may be reached about the MFA and the Code, the defendant has in any event acted unconscionably in contravention of the Australian Consumer Law (ACL).

I think the four topics described in the preceding paragraph will provide a convenient structure for my reasons. However, I also note that by the end of the case the plaintiff advanced three “meta” issues:

Did the defendant bring an open mind to the decision to refuse renewal of the MFA?

Did the defendant exercise cl 4.7 for an improper purpose, namely to take away the plaintiff’s successful business for nothing, that is at no cost to the defendant?

Was there unconscionable conduct on the part of the defendant? The plaintiff submitted this was achieved in the same way, namely by taking the plaintiff’s business away from it in return for no compensation. The defendant’s conduct was described by the plaintiff as “sharp practice”.

It is notable that the above three concluding issues omit any reference to the Franchising Code.
In addition, I will deal with damages and arguments on termination. The latter arises from Mr Hope’s involvement in a business venture called Wattle Court Homes.

The terms of the MFA, properly construed, have been breached by the defendant.

This topic has two elements: construction of the relevant clauses and whether, on the plaintiff’s construction, there has been a breach of the MFA.
This is a convenient point to insert the relevant clauses of the MFA.

“PART 4 TERM
4.1 (Term of Master Franchise) This agreement is for a Term as specified in Item 3 of the Schedule provided however that the Agreement shall terminate on the date on which all Franchise Agreements granted pursuant to this agreement have expired or have been terminated, unless it is earlier terminated under Part 14 whichever is the earliest in time to occur.
4.2 (Renewal Term of Master Franchise) Provided that the Master Franchisee shall have duly complied with all its obligations under this and any related agreements and shall have taken all actions reasonably necessary to ensure that the Master Franchise conforms to the then current image of a G J Gardner Homes Master Franchise, the Master Franchisee shall, subject to Parts 4.6 and 4.7, have an option to renew the Master Franchise for the additional term set out in Item 4 of the Schedule upon the terms and conditions of the Franchisor's then current standard Master Franchise Agreement.
4.3 (Mode of Exercise) The option granted by Part 4.2 shall be exercised by the Master Franchisee giving written notice to the Franchisor of such exercise no more than twelve calendar months and not less than six calendar months prior to the expiration of the Term, time being of the essence.
4.4 (Renewal Fee) The Franchisor shall charge a fee for the renewal of the Master Franchise upon the exercise of the option granted by Part 4.2 as specified in Item 19 of the Schedule.
4.5 (Legal and Other Costs on Renewal) The Master Franchisee must pay or where appropriate reimburse the Franchisor for:
(a) the Franchisor's legal costs (on a solicitor and own client basis) and other costs associated with the negotiation, preparation and execution of the new Master Franchise Agreement; and
(b) any stamp duty or other taxes, duties, levies or charges payable in relation to the new Master Franchise Agreement.

4.6 (Effect of then Current Standard Terms on Option)
(a) The Master Franchisee acknowledges that, at the time of exercise of the option granted by Part 4.2, the Franchisor's then current standard Master Franchise Agreement and related agreements may contain provisions materially different from those of this and related agreements. Upon the due exercise of the option for renewal, the Franchisor shall forthwith forward to the Master Franchisee and the Guarantor copies of the Franchisor's then current Master Franchise Agreement and any other related agreements then used by the Franchisor in granting G J Gardner Homes master franchises together with the then current form of Franchise Agreement and any other related agreements then used by the Franchisor in granting GJ Gardner Homes franchises.
(b) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are not materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4, other than Part 4.1 shall be excluded).
(c) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, the Master Franchisee and the Guarantor (if any) may, within twenty-one (21) days of receiving such copies by written notice to the Franchisor, accept or reject such terms and conditions (other than those relating an option for renewal) and in default of such notice the Master Franchisee and the Guarantor as the case may be shall be deemed to have accepted the same.
(d) If either the Master Franchisee or the Guarantor rejects such terms and conditions under paragraph 4.6(c) then, unless the Parties within a further twenty-one (21) days after giving notice of rejection reach agreement as to the terms of renewal of the Master Franchise, the exercise of the option shall be deemed to be withdrawn and of no further effect.
(e) If both the Master Franchisee and the Guarantor accept such terms and conditions under paragraph 4.6(c) or the Parties agree to other terms and conditions under paragraph 4.6(d), then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4 or equivalent option for renewal shall be excluded) or in the form agreed as the case may be.

4.7 (Franchisor's Rights) Notwithstanding that the Master Franchisee may be otherwise entitled to exercise the option for renewal, the Franchisor may, by written notice to the Master Franchisee within 21 days after receiving notice under Part 4.3, refuse to renew the Master Franchise upon grounds, honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-Franchisees. Without limitation as to other matters that may reasonably taken into account in determining whether such grounds are reasonable, regard may be had to the Master Franchisee's -
(a) percentage of market share to date;
(b) ability to service Franchisee to date;
(c) demonstrated skill and performance to date;
(d) ability to achieve the targets set out in the Development Schedule;
(e) demonstrated support or lack thereof for the Franchisor, its Directors and officers, the Franchisor's business as a whole and the Franchise Network.

4.8 Holding Over
If the Master Franchisee continues to operate the Business at the expiration of the Term or Renewal Term with the consent or acquiescence of the Franchisor, that continued operation will be strictly on a month to month basis and in accordance with the terms of this Agreement. Either party shall be entitled to give thirty (30) days written notice to the other of their intention to terminate the continued operation of the Business.”

Clause 14 is also important. It dictates certain matters arising upon the termination or expiration of the MFA. The most relevant subclauses are:

“14.6
(b): if requested by the Franchisor, the Master Franchisee shall immediately transfer to the Franchisor the Master Franchisee’s rights under those Franchise Agreements nominated by the Franchisor and upon effective assignment, the Franchisor shall assume the obligations of the Master Franchisee under those agreements arising after the date of assignment.
…
(g): the Master Franchisee will not be entitled to any payment, repayment or compensation for any goodwill attaching to the Business.
…
14.10 (Option to purchase)
Upon expiration, surrender or termination of this Agreement, the Franchisor may by written notice to the Master Franchisee, elect to purchase free from encumbrances any or all of the assets of the Business including without limitation, equipment, signs, fixtures, fittings, improvements and supplies. The purchase price will be determined by a qualified valuer selected by both parties or failing agreement, by the President of the Institute of Chartered Accountants in Queensland ...”

A point I will make here, although it may not be of much significance, is that contrary to the submissions of the defendant that there was no goodwill attached to the franchise, cl 14.6 (g) does recognise the existence of goodwill although attaches no value to it.

The construction argument centred on cl 4.7. The plaintiff submitted that the clause required the defendant to take into account the best interests of the plaintiff. Initially the plaintiff said that the words “and/or” did not involve an alternative. At the end of the hearing however, the plaintiff had slightly amended its position by conceding the ‘alternative’ possibility but nevertheless saying that the exercise of the power under cl 4.7 necessarily included a limitation which made it necessary to consider the best interests of the plaintiff. This limitation arose from the words “that may be reasonably taken into account”. These words gave effect to the overall purpose of the MFA which catered for the interests of both the plaintiff and the defendant, as well as the Sub-franchisees.
The defendant submitted that the terms of cl 4.7 did not oblige it to consider the best interests of the plaintiff.
The general approach to be taken in construing a commercial contract was set out in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 from [46]-[50]:

“46. The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
47. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
48. Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
49. However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
50. Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.” (references omitted)

Both parties also relied upon the decision of Edelman J in H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4. At [93] his Honour identified three categories of interpretation:

“There are ephemeral borders, to which lawyers sometimes cling, between three categories of interpretation of words in legal instruments: (i) interpretation of the meaning of express words in a clause; (ii) drawing inferences that recognise implications within a clause; and (iii) drawing inferences that recognise the implication of a new ‘term’. All three are ‘an exercise in interpretation’. All three are concerned with ‘what the [instrument] actually means’. And all three involve drawing inferences and recognising matters that are implied in the sense that they are not confined to the semantics of literally expressed meaning. For instance, like the latter two categories, even the first category will often involve drawing inferences from context by recognising explicatures from the express text. In all three categories, context and purpose supply additional information for the meaning that combines with the literal text. By this means, the ‘implication is included in [the meaning of] what is expressed.’" (references omitted)

And then from [96]-[99], his Honour continued:

“96. By contrast, the task of interpretation is sometimes expressed as a more rigid test, requiring much greater restraint, where the meaning of a clause requires an inference that is said to involve the addition or removal of words in the instrument. So, for drawing inferences that recognise an unexpressed implication within a clause, in Fitzgerald v Masters, Dixon CJ and Fullagar J said that ‘[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency’. And an even stricter approach to drawing inferences that recognise an entire implied term in a contract appears from the famous passage in Codelfa, where Mason J (with whom Stephen and Wilson JJ agreed) said that ‘courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term’ and that there are five ‘conditions necessary to ground the implication of a term’. The proposed implied term: (1) must be reasonable and equitable; (2) must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) must be so obvious that ‘it goes without saying’; (4) must be capable of clear expression; and (5) must not contradict any express term of the contract.
97. The ephemeral nature of the borders between the three categories of interpretation makes it difficult to justify any sharp distinctions between them. It has thus, albeit controversially, been suggested that the categories be entirely collapsed. The best approach is to recognise that implications fall on a continuum that depends upon the extent of the contribution that the general or particular circumstances of context or purpose must make to the required inference beyond the language of the provision. In contracts that are entirely in writing, like other entirely written instruments such as legislation, the larger the contribution from surrounding circumstances beyond the text that is required to recognise the implication the greater must be the relevance of those circumstances and the greater the ‘force as to carry conviction to the mind’ that is needed before the implication can be recognised as one that would have been intended by a reasonable person in the position of the parties.
98. At one end of the continuum, an implication beyond the literal meaning of express words might be slight and in contractual interpretation the inference of that implied meaning can be readily drawn if that was the meaning that would have been intended by a reasonable person in the position of the parties. It does not matter if the inference is described as inserting new words. As Lord Eldon LC said in Wight v Dicksons, ‘[i]t had been said that it was too strong to insert a word; but the answer was, that the other words in the [contract] could not have their proper effect without it’.
99. At the other end of the continuum, a contractual implication beyond the literal meaning of the express words might be large, requiring a high level of satisfaction by the court that the implication would have been intended by a reasonable person in the position of the parties. Hence, if the implication is properly characterised as a new, and separate, term of the contract, the present state of the law is that a court will require satisfaction of all five of the factors endorsed in Codelfa before the implication is recognised.”

The defendant submitted the decision of Beach J in the Federal Court in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 was particularly applicable. It was pointed out that the plaintiffs in that case had put their case in a similar way to the plaintiff here. The non-renewal clause in AHG was cl 8. Beach J stated at [65]-[75]:

“65. The determination of the NRNs claim principally turns on the proper construction of clause 8 of the dealer agreements, including the ascertainment of the proper purpose of that clause.
66. The applicants allege that the object of the dealer agreements was to encourage and facilitate the investment in, establishment, operation of and/or maintenance by the dealer of an MB dealership at the premises identified in the dealer agreement, and the taking of financial risks by the dealer in relation thereto.
67. The applicants plead that the commercial bargain that MBAuP struck with each dealer was that each dealer would invest time, money, effort and entrepreneurial skill, and take financial risks, to build their MB dealerships, from which they would enjoy ongoing profits and which they could sell to reap the benefits of the goodwill they had generated.
68. The applicants submit that determining a proper purpose is a matter to be assessed in conformity with the object of the contract, which they also refer to as the nature of the bargain. That object or bargain contemplates a particular form of relationship between MBAuP and the dealer, on the faith of which the dealer has invested in its dealership to make future profits and enhance the goodwill of its dealership.
69. On that case, it is alleged that because a dealer made investments in their dealership, the dealer was entitled to continue to operate that dealership under the dealer model permanently, provided the dealer met their targets and made mutually agreed improvements. Indeed, the applicants say that is the case regardless of the quantum and timing of the investments made by a dealer.
70. On the basis of that asserted permanence of the commercial bargain, the applicants assert that MBAuP could never exercise the power of non-renewal as a precursor to a change of business model, regardless of how much notice it gave to dealers and no matter what the financial terms of that new business model were.
71. Now the applicants characterise the power by reference to what it does not empower MBAuP to do. So, it is said that the power of non-renewal granted to MBAuP is not at large and that the power of non-renewal is limited by the bargain reached between MBAuP and the dealer, and cannot be used in a manner which is antithetical to that bargain or to destroy it.
72. The applicants contend that the non-renewal power in clause 8 did not extend to permitting MBAuP to use that power to continue the existing relationship between MBAuP and each of the dealers on the basis of an agency relationship, which was contrary to clause 1.2 of the dealer agreements.
73. The applicants’ case as to the purpose of the non-renewal power is that its purpose was to allow MBAuP to bring its relationship (cf the dealer agreement) with a given dealer to an end, in two circumstances.
74. The first circumstance was where that dealer had failed to meet its targets or make mutually agreed improvements.
75. The second circumstance was said to be some other purpose ‘consistent with the object of the dealer agreement’ and relevant ‘business circumstances’. Now the facts described as the business circumstances that inform the exercise of the non-renewal power appear to be that the dealers operated as retailers and MBAuP as a wholesaler, each applicant had invested time, money, effort, entrepreneurial skill and took financial risks to acquire, establish, build and/or maintain the businesses comprising their MB dealerships, each applicant established relationships with customers such that they created a valuable asset of and/or goodwill in the business at their MB dealership, MBAuP encouraged the dealers to make those investments and take those risks, and MBAuP represented that the dealers could build a successful long-term relationship with MBAuP and/or the Mercedes-Benz brand provided that they achieved their targets and made any mutually agreed improvements. So, the business circumstances describe aspects of the dealer model under which MBAuP and the applicants had previously operated.”

The plaintiff pointed out that AHG was under appeal and submitted:

The case was clearly distinguishable.

“I'll come to that a little bit later, but it was a different contract, different rights and the primary judge bravely opted not to follow the High Court, calling what one of the judges there, Justice Gordon, had set out as being intellectual fairy floss.” (Tcpt, 29 July 2024, p 4 (18); [3506] of the judgment in AHG).

“It was an automatic renewing agreement, ‘Unless written notice ... shall revive automatically’, et cetera, ‘Unless and until ... shall be given’, that's what it said. His Honour [at 2781] said, ‘As with clause ... could be issued’. That's completely different to this case because they have, in this case, honest and reasonable grounds. Then in terms of purpose and good faith, what his Honour said, really, following on from that lack of express constraint [at 3149], the highlighted words, ‘The proper inquiry ... its true purpose’. Again, very different where you have the conditions in cl 4.7.” (Tcpt, 29 July 2024, p 54(17).

I think AHG is distinguishable and that the primary distinguishing feature can be seen from [69] and [70] of the judgment (quoted above). As I observed to counsel:

“The plaintiff here doesn't say that you could never exercise 4.7, it just says that you didn't exercise it according to its terms.”

In AHG a number of purveyors of Mercedes-Benz motorcars brought proceedings against Mercedes-Benz Australia to prevent the introduction of a new style of relationship, effectively by forcing the dealers into an agency relationship, as opposed to the dealer agreements that they previously enjoyed. The dealers complained that the switch involved “the appropriation of the dealers’ goodwill and customer relationships for no or inadequate compensation” at [19].
The dealer agreements were not for a fixed term, but they did include a non-renewal power which was at the centre of the dispute. The dealers argued that as long as they did not breach the dealer agreements and they met their targets, then Mercedes-Benz could not activate the non-renewal clause.
In addition, the dealers asserted that “MBAuP’s conduct in issuing the NRNs was motivated by a purpose which was antithetical to the dealer relationships and dealer agreements, being to take the customer relationships and the profits to be earned from the unexpired lifetime value of their customers, without paying anything to the dealers for that taking” at [20].
Beech J, at [65], said that:

“The determination of the NRNs claim principally turns on the proper construction of clause 8 of the dealer agreements, including the ascertainment of the proper purpose of that clause.”

His Honour continued, at [79]:

“But in my view the purpose of clause 8 was to enable MBAuP to bring the term of a dealer agreement to an end. It was the only means by which MBAuP could bring a dealer agreement to an end, absent agreement of the parties or breach by the dealer. And it symmetrically matched a dealer’s right to terminate the dealer agreement without cause on 60 days’ notice. The only substantive constraint on its exercise was that it be exercised in good faith, which was, inter alia, an obligation imposed by clause 6 of the Franchising Code. Further, the applicants’ concept of a broader bargain superimposed on the contractual framework must be rejected.”

It can immediately be seen that unlike cl 4.7, which imposed certain obligations on the exercise of the non-renewal power following an application for renewal, the relevant issue in AHG was the exercise of the non-renewal clause where there had not been any request to renew a fixed term and where the implementation of the clause was derived from the unilateral actions of Mercedes-Benz.
I do not suggest that AHG is irrelevant to the current case, but only that caution must be taken in applying its conclusions to the present, and different, facts.
The plaintiff submitted that the interpretation of cl 4.7 must take into account the purpose of the clause and in particular that the inclusion of the best interests of the Master Franchisee was a meaning “that would have been intended by a reasonable person in the position of the parties.”
A number of matters were put as indicating both the purpose of the agreement and what might have been intended by a reasonable person. When the MFA was being negotiated in 2014, at the genesis of the agreement, it initially did not include a renewal option. Mr Hope wrote to Mr Wallis, by email, on 3 April 2014, stating:

“I can’t understand why a renewal term would not be included. This doesn’t give you any extra security and only serves to piss off the people making money for you. If you ever wanted to terminate me it would be based on performance and there are enough clauses in the agreement to do this. Having no renewal term just gives me no motivation to stay with the business. The other point is that it completely devalues the master franchise as the length of the agreement and renewal are the only things that have any value!
…
I am trying to take on a large amount of debt to buy out Mickey which will take 10 years to pay off. Having no renewal means I will pay it off and will be without a business at all. I am making a big commitment to you, Greg and the brand and would hope that this would be reflected in the agreement, but at the moment it is not.”

Mr Wallis responded the following day. He said that the agreement that had been sent to Mr Hope had been, in essence, a standard draft. He continued:

“Especially given your situation with buying out a partner at time of renewal, then a further renewal is something we certain talk about.”

The just quoted exchange indicates the value recognised by both parties in a term of renewal. This is not surprising. As a general concept, an option to renew, for example in a lease, is a valuable commodity in the hands of the person who might exercise the option. If the exercise of the option required no more than a simple refusal, it would be an option without content, purpose, or value.
I also think it necessary to return to the origins of the MFA and in particular the philosophy guiding the making of agreements with Master Franchisees.
This is exemplified in the information booklet which states:

“Asset to sell
A common complaint amongst business people is that they work their entire life but have nothing to sell when they retire. We have set about changing this. By investing in a G.J. Gardner Homes Master Franchise you are investing in your future and helping to build a business that can later be sold.
G.J. Gardner Homes’ goal for Master Franchisees is to allow Master Franchisees to build a valuable and saleable asset that will continue to grow in value.”

Mr Wallis agreed that the philosophy dictated the attitude of the defendant until 2019:

“Q. So far as this information booklet was concerned, it set out the Netdeen position and philosophy about master franchising at the time; correct?
A. Mm‑hmm.
Q. You have to‑‑
A. Sorry. Yes. Yes, sorry.
Q. That philosophy, so far as you're concerned, about master franchising continued until at least 2019 in Australia?
A. Mm‑hmm. Yes.”

The effect of the non-renewal was to utterly deprive the plaintiff of the asset that had grown in value. There was nothing to sell. The defendant says that the MFA allowed it to take the action that it did. In particular, its actions were completely consistent with its rights under the MFA, which were exercised in accordance with the clauses of the agreement, in particular cl 4.7.

Put another way, the defendant’s construction of cl 4.7 allowed the defendant to override the best interests of the plaintiff in favour of the best interests of itself and the Sub-franchisees.
On this construction a major incentive in a person becoming a Master Franchisee is ignored.
The plaintiff also relied on that part of cl 4.7 which directly referred to the performance of the Master Franchisee, in particular as to market share, servicing Sub-franchisees, skill and performance, achieving targets and “support or lack thereof” for the overall franchise. If these were matters that might be considered then, it followed, by use of the words “without limitation as to other matters that may reasonably be taken into account” that the best interests of the Master Franchisee should also be considered.
Returning to Lundbeck, I think my view on interpretation falls mostly within the second category identified by Edelman J (at [93]), although as his Honour says, the border between the categories is “ephemeral” or short lived. If the term that I think should be implied, namely that cl 4.7 necessitates the consideration of the best interests of the Master Franchisee, then I think the Codelfa test is also passed.
Applying the test as set out in [96] of Lundbeck, I am satisfied that:

Against the background of the attractions to entering an MFA put forward by the defendant, the implied term is reasonable and equitable. To omit consideration of the best interests of the Master Franchisee, whose efforts have been an integral part of the success of the MFA, would be inequitable.

I do not think the contract would be effective without the implied term. This is because the prospect of renewal is such an integral part of the attraction of entering the MFA in the first place.

Again, I think that the attraction, perhaps inducement, of having a renewal clause which contemplates consideration of the best interests of the Master Franchisee is a term about which it might be said it “goes without saying”. In other words, it might be seen as a natural product of a renewal term that the Master Franchisee will not be ignored.

I think an implied term that says the interests of the Master Franchisee must be considered, is a simple term and therefore one “capable of clear expression”.

The implication of the term I have posed does not contradict any express term of the MFA. It might be said that it would be inconsistent with other terms allowing for the termination of the contract, but these only arise upon misconduct or poor performance by the Master Franchisee.

In relation to the fifth factor I have discussed in the previous paragraph, my view is endorsed by the following:

This part of the email, quoted above, sent by Mr Hope to Mr Wallis on 3 April 2014:

“If you ever wanted to terminate me it would be based on performance and there are enough clauses in the agreement to do this.”

There is an entire clause devoted to termination (cl 14) which could be utilised to effectively expel the Master Franchisee from the MFA in applicable circumstances. The implied term that I have posed has, as an assumption, that the plaintiff had not acted in a way that would justify termination under cl 14. On this assumption there is no contradiction with cl 14. In this regard, Mr Wallis in his oral evidence from Tcpt, 1 August 2024, p 207 made little of asserted breaches by the plaintiff.

I have included cl 14.10 above, because it implies, in fact its terms are express, the possibility of an asset held by the Master Franchisor notwithstanding that, under the defendant’s interpretation of cl 4.7, the interests and assets of the Master Franchisee are irrelevant.

I was also referred to the principles of interpretation as set out in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, at [35]:

“The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties … intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’ (references omitted).”

Applying the interpretation as just described, I am satisfied that a reasonable businessperson would understand cl 4.7 to contemplate that a renewal clause would have, as a factor to be considered, the interests of the person seeking the renewal. To conclude otherwise would be, as I have already said, to completely extinguish the value of an option to renew. The lure that had induced the Master Franchisee into the agreement would reduce to little more than mere marketing and the existence of the option would be meaningless.
Having reached this conclusion, the next step is to see whether the best interests of the Master Franchisee had been taken into account. There was no real issue that they had not. The defendant’s case was that there was no need to do so, and it had not been done. It follows that I am satisfied that the defendant breached its obligations under cl 4.7 and therefore breached the MFA. This entitles the plaintiff to damages for breach of contract.
Theoretically I could proceed directly to damages. However, against the possibility that I am wrong in the interpretation of cl 4.7, I will proceed as if I had preferred the defendant’s interpretation.

Even if the terms of the MFA are construed as advocated by the defendant, the defendant has still acted in breach of those terms.

Under the defendant’s interpretation, the defendant was entitled to refuse renewal under cl 4.7 if it had “honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-franchisees.” The defendant said that it had reached the conclusion contemplated by the clause that it was not in the best interests of the Franchisor and Sub-franchisees to renew the MFA.
The plaintiff submitted that the important question was not whether the defendant had reached a conclusion as envisaged by the clause, but rather whether it had reached a conclusion at all. By this I mean that the plaintiff submitted that there had not been a decision made on the merits, even under the defendant’s interpretation of cl 4.7, to renew or not renew; rather the decision had been made well before the renewal application was made. This imports two notions: that a report prepared for consideration by the defendant’s board (the COO report) was not a report prepared for genuine consideration, and secondly that the meeting on 20 July 2023 did not involve the making of a decision but was no more than a ‘rubber-stamping’ of a previously made decision.
The plaintiff put the question about a decision in this way: did the directors bring an open mind to the meeting about the renewal? The plaintiff submitted that the defendant’s reliance on cl 4.7 was an effective subterfuge to an already made, but concealed, decision to ‘de-master’ (or switch to a direct model).
In my view there is a subtlety to the question posed by the plaintiff which needs to be considered. This was the possibility that a decision had been made before the meeting but, at the meeting, a separate decision was made as to whether to stand by the earlier decision. If this had happened then the existence of the earlier decision, as an indicator of a breach of the defendant’s obligations under cl 4.7, would be of much less significance.
In order to answer the question about the true nature of the decision to refuse renewal made at the board meeting on 23 July 2023, I think it necessary to go back in time to events that had already occurred.
Between 2009 and 2015 the number of Sub-franchisees grew from 19 to 26. The combined turnover of the Sub-franchisees, over this period, grew from $89,095,966 to $171,082,099.
In March 2015, the plaintiff was entirely purchased by a company called Colour Capital Pty Ltd. This company was then owned by the Hope Family Trust. The defendant’s approval for the purchase was required by the MFA. The defendant gave approval.
In 2017 Colour Capital sold 33.3% of its shares to Teaminvest Private Group Limited (‘TIP’) for $5 million. The defendant consented to this transaction.
The result of the above transaction was that the plaintiff “is wholly owned by Colour Capital and Colour Capital is owned by TIP as to 33.3% and the Hope Family Trust as to the balance.”
On 24 May 2019, TIP was listed on the Australian Securities Exchange. In 2020 TIP had discussions with Mr Hope about increasing its shareholding in Colour Capital, initially to 49% and then, after two years, to 66.66%.
Again, because of the requirements of the MFA, Mr Hope sought approval from the defendant for the graduated sale to TIP. The defendant indicated that it did not wish TIP to have a majority interest in Colour Capital. At about the same time Mr Hope asked the defendant if it would purchase Colour Capital for $18 million, this being the valuation that TIP had placed on the plaintiff’s business. The defendant declined the offer.
Also in May 2019, Mr Christopher Thornton was employed by the defendant as its Chief Operating Officer for Australia and New Zealand. Mr Thornton had a marketing background and had not worked in the building industry previously. He did have experience in the franchise industry.
In July 2019 Mr Thornton met with the Master Franchisees at a meeting in New Zealand. At that time, his employer’s goal was “for every Franchisee to be profitable and the largest and most respected builder in their area (Vision) and the goal was to become the #1 home builder in Australia by 2023 (what became the ‘1@23’ goal) (Goal).” (Exhibit A p 175 [23]).
In December 2019 Mr Thornton commissioned reports from two franchise experts, Mr David Campbell, and Mr Jason Gehrke. Both reports had been received by the defendant by May 2020. The two experts also provided supplementary reports. Mr Gehrke summarised his opinion in his report dated July 2023:

“The G.J. Gardner Homes executive team were asked to provide information for extra insight into the performance of the franchisor and the franchise network more broadly, and to compare where possible with performance under the previous master franchise arrangements for Victoria/Tasmania and Queensland/Northern Territory, versus the new arrangements in which franchisees in these states are directly managed and supported by the national franchisor.
Based on the information provided, there is sufficient evidence of improvement across a number of metrics for which quantitative or anecdotal data is available, or for which there is work in progress, for me to believe that the individual franchisees are now better-off overall by having a direct relationship with the franchisor, rather than a master franchisee. Equally, based on the information provided, I have seen nothing to convince me that franchisees are in any way worse-off as a result of this direct relationship.
I remain of the opinion that master franchising in the Australian domestic market is no longer of benefit to the G.J. Gardner Homes brand or individual franchisees, and is a barrier to high levels of network performance. I encourage ongoing monitoring of the performance metrics considered in this further supplementary report as a way of gaining valuable insights into further opportunities for brand and network improvement in future.”

Mr Campbell reached similar conclusions in his second report, also dated July 2023.

“From industry analysis and my extensive experience, the Master Franchise model in this brand is now not fit for purpose and will (if not already) begin to have declining benefits through fragmentation of purpose as the Master Franchisees move into maturity/succession planning.
The financial modelling provided in my First Report and reproduce earlier in this report clearly established the logic and rationale to consider an alternate franchise support structure.
The recommendation to move to a straight-line franchise structure is the only viable alternative if the franchise concept is to be retained.
The restructure has clearly demonstrable benefits for the Franchisor and current/future Sub-franchisees.
While the Master Franchisees have a prima facie position of loss of recurring revenues, they are subject to a renewal process with no guarantee of a perpetual arrangement. The current structure has reached the end of its useful purpose.
Two Master Franchisees have already agreed to relinquish their master agreements. A hybrid system is simply not an option in the best interests of the brand, Franchisor and Sub-franchisees, particularly given the current market challenges and the unknown willingness for the shareholders in NSW/ACT and WA to provide any further reinvestment in support of their franchisees in direct contrast to the clearly stated Franchisor's intentions.
It is imperative that now this transition has commenced it needs to be fully completed in order to allow the full benefits to commence flowing to the brand, franchisor, sub franchisees and the clients of G.J. Gardner Homes.”

Mr Wallis, Mr Trent Gardner, and Mr Thornton met in May 2020 to discuss the initial reports. Mr Thornton was asked to prepare a report making recommendations for the G.J. Gardner Homes business.
Following the meeting in May 2020 the defendant’s intention was to go to a “direct model” operation. Mr Thornton, under cross-examination, seemed reluctant to refer to this model as “de-mastering” notwithstanding that this phrase was frequently used by him in his reports to the board. Mr Thornton’s use of the heading “alleged de-mastering strategy” in his affidavit in Exhibit A, page 209, is somewhat disingenuous.
Notwithstanding the intention to move to the direct model, Mr Thornton was adamant that this did not mean that MFA’s would be abandoned and in fact this was not done. Mr Thornton referred to the Victoria/Tasmania position as an example. The example demonstrated the very opposite because within a month of a new MFA being agreed with the Victorian Master Franchisee, that Franchisee agreed to a Deed of Relinquishment bringing the new MFA to an end. Mr Thornton referred to the closeness in time of the deed to the signing of the new MFA as a coincidence. I do not accept that description. The fallacy in Mr Thornton’s coincidence was demonstrated by the new MFA and the Deed of Relinquishment being signed on the same day. I think it is quite clear that the new MFA was executed in order to facilitate the entering into of the deed.
I mentioned above that the plaintiff asserted that the current MFA was deliberately disadvantageous to a Master Franchisee. This was to assist the defendant in effectively engineering the exclusion of an existing Master Franchisee and thereby implementing a direct model.
The unattractiveness of the new MFA was well illustrated in the evidence of Mr Trent Gardner where he conceded that the obligation on the Master Franchisee, under the new MFA, would be to pay $600,000 to the Franchisor for the provision of a business development manager, but this manager would receive an annual salary of $100,000 from the Master Franchisor. In other words, the Master Franchisee would pay $600,000 for the services of a person whose actual services were valued at $100,000. Clearly an agreement of this type would be untenable, unworkable, and unprofitable.
Mr Trent Gardner denied the payment of $600,000 was to “shift the profit” from the Master Franchisee to the Master Franchisor. Somewhat unconvincingly he said the purpose was to “change the commercials”:

“It was an effort to change the commercials of - if we were accepting the responsibility for business development, that the commercials around business development would be transferred to Netdeen.”

I also observe that shifting the profit is a more obvious example of changing the “commercials”.
The ramifications of the board’s decision to go to the direct model was at the core of a good deal of the cross-examination of Mr Thornton, particularly, but also of the other defendant witnesses. The suggestion, which was continuously emphasised, was that the decision having been made, that decision dictated the relationship with the Master Franchisees even if the Master Franchisees were not made aware of the decision. In other words, renewal of MFAs, other than as in Victoria, would not occur no matter what other factors existed. Thus, it did not matter that the plaintiff was doing very well because the profits he was making were better off in the hands of the defendant. This point is graphically illustrated in the PowerPoint presentation which was shown to Mr Hope on 17 November 2020 and can be found at p 967 of Exhibit A.
Mr Thornton agreed that the direct model strategy involved “getting rid” of MFAs. He agreed that the strategy involved the backing of the plaintiff into a corner where the only person who could take over the Sub-franchisees was the defendant. Mr Hope could not increase third-party involvement in Colour Capital nor effectively take any other action, other than terminate the MFA.
Mr Thornton denied that this strategy was “lacking in integrity”. He also denied that cl 4.7 was an integral part of the strategy, to the effect that if all else failed, the defendant would simply not renew the MFA.
On 17 November 2020 Mr Hope met with Mr Trent Gardner and Mr Thornton. According to Mr Hope, Mr Thornton told him that:

“(a)   the GJ Gardner franchise network would now be better off as a direct    model    without master franchisees, as it was now in the defendant’s    financial interests;
(b)   the defendant would not allow TIP to purchase more than 49% of the    shares in Colour Capital; and
(c)   the defendant would not allow the sale of shares by my family trust in    Colour Capital to a third party at any stage in the future.”

Mr Thornton does not dispute the assertions made about him as quoted in the preceding paragraph. He does however say that he met with all of the Master Franchisees, in November 2020, to discuss “the vision for GJG.”
In his report to the board on 14 January 2021, referring to the November 2020 meeting, Mr Thornton said that the Master Franchisees were told of “the significant problems with the Master Franchise model” and that:

“Further, we also signalled that we would not be agreeing to the transfer of any ownership in existing Masters either between existing parties (except where there had already been explicit consent given) or with any 3^rd parties. We reiterated that we expected Specified Persons to be actively driving the business (i.e. not retiring).”

Mr Thornton then stated, in his report, that:

“Most Masters appreciated us exposing this information to them.”

As conceded by Mr Thornton, Mr Hope was far from appreciative, as shown in his email to Mr Thornton and Mr Trent Gardner on 18 November 2020. Here are some excerpts:

“I feel compelled to respond to yesterdays meeting and the information that was shared. I have come away with little understanding of what you feel was the point of your presentation. The pretext of the meeting was that you would be sharing ‘the vision of G.J Gardner Homes’, however at no point was anything close to a ‘vision’ presented. The only thing presented was a report prepared by an unnamed third party who obviously had no context on the operation of the franchise system for the last 15 years.

…
Now that the business is successful you now want to whinge about the fact that we are profitable and that those profits could be lining your own pockets. I find this incredibly insulting and disrespectful when I now pay well over $2,000,000 of fees per year, and besides the development of the software, have seen little assistance from the corporate office in return.
Now that I have also built equity into the business, you also want to limit my ability to on-sell the business to a third party because you don’t have an appetite for continuing with master franchises. These actions are in such bad faith that it seems you would be in breach of your legal obligations under the franchising code and possibly trade practices law.”

What Mr Hope was actually saying was a precursor to his position in this litigation. He was warning Mr Thornton that the defendant was making an attempt to take away his business in order to have the profits that the plaintiff was achieving.
On 4 March 2021 the plaintiff was offered $7.83 million “in exchange for the early termination” of the MFA. The offer was rejected. Mr Thornton said that the valuation had been prepared by a Mr Peter Haley who calculated the value of the NSW/ACT Master Franchise at $8.23 million but deducted $909,475, being the negative value of the Western Australian Master Franchise. $500,000 was added “as a gesture of good faith, considering Mr Hope’s involvement with GJG for around 20 years.”
Mr Haley’s valuation was based on the value of the remaining term of the MFA. Therefore, the possibility of a renewal was not a factor in the valuation. Mr Thornton denied that not mentioning cl 4.7 was “not in the right spirit.”
Mr Thornton’s approach was that he had concluded that Mr Hope wished to terminate the MFA and the defendant “wanted to help.”
Following rejection of the offer of $7.83 million, Mr Hope contacted Mr Trent Gardner and told him that the valuation was deficient because it did not take into account the possibility of renewal and did not value the likely growth to the end of the term. Mr Gardner apparently agreed with the second point. Mr Thornton said that during the COVID-19 epidemic building projects increased dramatically because people were reassessing their housing needs and there were financial incentives from government.
In June 2021, a further offer was made to Mr Hope of a termination sum of $14 million. The offer was accepted but did not come to fruition because the parties disagreed on some terms, in particular a term of release from future claims against the plaintiff.
My reading of the correspondence about the disagreement I think illustrates a possibly over-anxious approach on the part of Mr Hope, although both parties clearly reached a stage where they simply would not move from their respective positions. This was indeed unfortunate because the $14 million agreement, if it had come to fruition, would have avoided this litigation.
Following the failure of the $14 million agreement, the plaintiff’s case is that the plaintiff returned to its commitment to the MFA and did very well (for itself and the defendant) and always considered it had the right to renew for a further 10 years. The plaintiff asserts that the defendant did not disabuse it of this possibility but, surreptitiously, never intended to even consider renewal, the defendant having committed itself to progress to the direct model.
In his report to the board on 20 October 2021 Mr Thornton observed that:

“Matt has subsequently decided to take a constructive approach to the relationship and has removed outstanding breaches including payments, policy compliance and collaboration on marketing.”

Despite these positive comments Mr Thornton wrote that “Matt could invest and focus resources in the remainder of the term to shore up his case for renewal on this point.” Mr Thornton ended his comments on New South Wales and Western Australia by stating:

“In Q4 an honest conversation is needed (not least to be fair to Matt) on the above position.”

Mr Thornton denied that the honest conversation referred to Mr Hope being informed that he had no chance of obtaining a renewal. The honest conversation is said to have occurred on 22 February 2022. There is, unusually for the system that seems to have prevailed in the defendant’s offices, a file note of this meeting. Based on the file note, which is at Exhibit A p 1177, the meeting began well but descended into a heated exchange:

“Very cordial opening exchanges ranging from the schools our kids are at to COVID to growing teams.
Eventually I said that I wanted to talk about how we both could make the best of the next two and a bit years (i.e. the remainder of the NSW MFA). First up I wanted to check what Matt’s understanding was, given our previous discussions and negotiations, of the future at the end of the current MFA.
It was clear that Matt was not on the same page as me on this, him believing he would have another agreement and me seeing significant challenges, so I suggested that I lay out the reasons:”

The reasons that Mr Thornton provided included the views of the two independent franchising experts (Mr Gehrke and Mr Campbell), a commitment to the direct model (with qualifications), reference to a new MFA which had been negotiated in Victoria and Tasmania and the defendant’s objection to further investment from TIP.
The reference to the new MFA is, as I have discussed above, something of a smokescreen because the new MFA, at least the one utilised in Victoria and Tasmania was in reality a part of the de-mastering strategy that occurred in those states.
The file note of 22 February 2022 continued:

“Matt believes that he is entitled to another agreement and/or a payout for building up the business over a number of years.
Matt stated that he was entitled to a 10 year renewal under the terms of his current MFA. I responded that my opinion was that we had the right not to offer another agreement.”

I think it evident from the file note that Mr Thornton had the view that there was an un-fettered right held by the defendant to terminate the agreement. This is essentially the allegation of the plaintiff concerning the manner in which the defendant ultimately refused renewal.
Mr Thornton denied that he had told Mr Hope, at the February meeting, that there would be no renewal of the MFA. Again, the suggestion was that the defendant, while allowing the plaintiff to continue doing well, and making a profit, had decided that there would not be a renewal no matter what factors might be considered. Further, in other words, a pre-meditated position had been made and concealed.
The file note I have just mentioned came under intense scrutiny. This is because it transpired that it had been changed by Mr Thornton on 27 February 2024, only two days before his affidavit of 29 February 2024 was sworn. The file note is referred to in his affidavit at par 87 where it is stated:

“Annexed and marked ‘AB’ is a copy of my notes from the meeting.”

There is no suggestion from Mr Thornton that the annexure is not a copy of the original file note. The original note is Exhibit K. The differences are small but their import is large. For example, the file note annexed to Mr Thornton’s affidavit states:

“First up I wanted to check what Matt’s understanding was, given our previous discussions and negotiations, of the future at the end of the current MFA.
…
We had subsequently shared with the Masters our intention to move towards the direct model over time.”

The original file note stated:

“First up I wanted to check that Matt was of the understanding, given our previous discussions and negotiations, that there would be no new MFA offered.
…
The Board had subsequently made the decision to move to the direct model over time.”

The differences in the file notes indicate a distinction between a decision to be made and a decision having already been made about the plaintiff’s MFA. I think the alteration to the file note is both a condemnation of Mr Thornton’s credit and a significant point in favour of the plaintiff’s case.
Following the meeting on 22 February 2022 Mr Hope wrote to Mr Thornton asking him to “provide written notice at your earliest convenience regarding the information that you shared at yesterday’s meeting regarding corporate offices decision to not offer a renewal for our Master Franchise Agreement, which is due to be renewed on 1 July 2024.”
Mr Thornton replied, on the same day, that he was “putting together a letter with our position.” He foreshadowed that the letter would need the board’s approval so thought it would be received by Mr Hope in the following week. In fact, no letter was received in the following week and the letter which did eventuate did not arrive until 24 June 2022 and it had not been drafted by Mr Thornton. In fact, it was signed by Mr Trent Gardner but drafted by the defendant’s solicitor.
On 25 February 2022 Mr Wallis came to the house of a friend (“Techy”) where Mr Hope was present at a poker game. Mr Wallis and Mr Hope did not get on well at the game, presumably because of the conversation that had occurred between Mr Hope and Mr Thornton on 22 February 2022.
Under cross-examination Mr Wallis would not concede that Mr Hope was upset because he had been told by Mr Thornton some three days earlier that his MFA would not be renewed. Mr Wallis said that Mr Thornton did not have the authority to make that statement. On 7 March 2022 Mr Wallis sent an email to Mr Hope apologising for “turning up to poker under the circumstances.” The balance of the email concerns the negotiations about the $14 million agreement and ends with some remonstrations about name-calling apparently engaged in by Mr Hope.
The letter of 24 June 2022 (Exhibit A p 1282) states that “it is too early for Netdeen Pty Ltd to determine whether a renewal of the NSW/ACT Master Franchise, in accordance with Item 4 of the Schedule, is in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-franchisees.” This wording, by referring to “other G J Gardner Homes Master Franchisees” (emphasis added) suggests that the best interests of the plaintiff are not a relevant consideration.
The letter also reminds Mr Hope that the right to renew is conditional, and reference is made to cll 4.2 and 4.7.
The plaintiff submitted that the letter was another example of a subterfuge in that, by June 2022, the defendant had already decided to not renew the MFA. This conclusion is consistent with the unaltered file note Mr Thornton had prepared on 22 February 2022.
The letter of 24 June 2022 ends in this way:

“We reiterate that we continue to require strict compliance with the Master Franchise Agreements.”

As I have already pointed out, alleged acts of non-compliance with the MFA, such as wearing uniforms, do not seem to have been of much consequence to the defendant’s directors. Although raised in the COO report prepared for consideration of the renewal of the MFA, Mr Wallis regarded them as “not the kind of breaches which would result in a non-renewal” (Exhibit A p 153).
In December 2022, Colour Capital, the plaintiff, GJWA Investments Pty Ltd and Matica Pty Ltd commenced proceedings in the Federal Court against the defendant. I was told the latter two companies were irrelevant to the current proceedings and should be ignored. I accept that advice. The proceedings were discontinued on 1 March 2023 on terms that included the applicants paying the defendant’s (Netdeen’s) costs.
As stated above, the plaintiff gave notice of the exercise of its option on 3 July 2023. On 20 July 2023, the defendant’s board met to consider the option. Mr Wallis, Mr Trent Gardner, and Mr Greg Gardner (as board members) were present together with Mr Thornton, Mr Conrad Gardner, Mr Patrick Haley, and Mr Chris Pace.
The sole purpose of the board meeting was to consider the exercise of the option. At the meeting, Mr Thornton presented the report (the COO Report) which he had been asked to prepare. The report had been circulated to the board members on 14 July 2023.
The COO report, like the meeting itself, was asserted to be an effective cover designed to give an appearance of justification for the refusal to renew the MFA. I think there is some substance in the assertion.
Under cross-examination Mr Thornton initially said that the COO report was his “own independent work”. However, before the report was distributed, Mr Thornton sent a draft to the defendant’s solicitors. The solicitors suggested some amendments which Mr Thornton took on board and incorporated in the final report. At least two of the comments and amendments are noteworthy.
Firstly, the draft included this paragraph:

“This lack of relative performance has been ‘masked’ by the micro economic increase on house (and construction) prices over the last few years. This has also allowed the Master Franchisee to gain extraordinary profits and rest on its status quo, reaping rewards without fulfilling its obligations in the Master Franchise Agreement and meeting KPIs.”

The solicitors, perhaps with guile or simple cynicism, made this comment about the just quoted paragraph:

“Chris, do you know any reputable source which would verify this statement?
Chris, it would be really useful as I have mentioned on many occasions to have a neat table which sets out how much profit Lindifiefl (sic) has made since G.J. Gardner Homes has records. The number is very high and a Judge will be frankly astonished and influenced by how many $ this Master Franchisee has pulled out of the NSW/ACT Master Franchise”

The draft paragraph did not change in the final report, but a graph was annexed showing some marketing data. It is obvious that the defendant, by seeking the input of its solicitors, was acting with the risk of litigation in mind.
The supposition that a judge would be astonished might have been seen by the solicitors as a message to a judge that the plaintiff had done very well and should not be complaining. On the other hand, such figures would equally explain the defendant’s endeavours to terminate the MFA and take the plaintiff’s profits for itself.
Secondly, words of praise inserted by Mr Thornton in the draft were removed and replaced with a different paragraph. Under the heading of Renewal, Mr Thornton made some positive comments about Mr Hope. He said, “It certainly seemed that Matt was genuine in his intent to achieve a successful transition in 2021.” (Exhibit A p 1915)
The solicitors deleted the compliment and inserted a new paragraph calling into question “whether Mr Hope’s continued presence would be to the benefit or detriment of the Franchise Owners.” This comment was made about the amendment:

“We have re-drafted this section. The previous drafting included a string focus on ‘transitioning’ powers and responsibilities to the Franchisor. This sends the wrong message: That a renewal is essentially a transition to a Direct Model and the MFA is meaningless.”

As I have already observed the proposed MFA was essentially a device to persuade, if not force, the Master Franchisee to terminate the MFA. The solicitors’ comment is both informative of the defendant’s attitude, as well as, again, somewhat cynical.
The defendant submitted that the COO report was a genuine and fair assessment of the relevant circumstances to be presented to the board. I note that there was no challenge to the correctness of any fact stated in the report. This was partly a product of an evidentiary ruling I made at Tcpt, 30 July 2024, p 101(15):

“HIS HONOUR: What I got in mind, Mr Couper, is to allow these paragraphs in, but with the caveat that they are not permitted to be relied upon in support of an allegation that the facts set out in the COO report are incorrect. You live with that?
COUPER: We’d be content with that ruling.
HIS HONOUR: Mr Castle?
CASTLE: Yes, your Honour.”

The defendant submitted that the COO report was a “comprehensive and detailed analysis of relevant factors”.
The defendant pointed out a number of parts of the COO report which it said highlighted the factors that the board meeting would need to consider. Remembering that I am now assuming the correctness of the defendant’s construction of cl 4.7, some examples are:

Mr Hope was not acting in the interests of the Sub-franchisees. He had an “unattractive temper” and was susceptible to “moments of rage” when dealing with Sub-franchisees.

Mr Hope “has demonstrated an increasing lack of loyalty and good faith towards the Franchisor.”

Market share in New South Wales and the ACT had declined over a period of three years to March 2023 from 2.64% to 2.41%.

The plaintiff had not made investments (from its profits) to promote “network growth personnel and marketing, more skills training, more systems support, better support for staff recruitment, initiatives for reducing barriers to growth at a franchise office level, and a locally based staff.” (Exhibit A p 2081)

Resources were effectively being diverted to other interests of the Colour Capital group.

There was a detailed analysis of the factors that had been outlined, commencing at par 5.5 of the report. These factors were said to be directly relevant as cl 4.7 considerations.

In par 5.6 of the report there is said to be a comparison of the “Master Model vs Direct Model.” References are made to expert reports, like that of Mr Campbell and to “Weaknesses of Master Franchising and the G.J. experience.”

A portion of the report is devoted to TIP and its involvement as a shareholder in Colour Capital. This is said to be “problematic”. At par 5.36 it is stated: “Colour Capital (as the sole shareholder of the Master Franchisee, with TeamInvest having a 33.33% share in Colour Capital) has an inherent conflict of interest; on one hand, being the interest of Lindfield fulfilling its obligations under the Master Franchise Agreement and supporting the Sub-franchisees and, on the other hand, to Colour Capital’s shareholders who (rightfully) expect maximum return on their dividends.”

The report referred to, and annexed, the expert reports of Mr Gehrke, Mr Campbell, and Mr Haley. These were independent reports which provided a sound foundation for the direct model.

I have only listed some of the considerations and analysis contained in the COO report, to illustrate the defendant’s submission that the report was comprehensive and covered all of the factors that might be taken into account in deciding upon the best interests of the Franchisor and the Sub-franchisees.
The report ends with a conclusion and recommendation. The last three paragraphs are:

“6.7 Given the conclusions in paragraphs 6.2 to 6.6 of this paper, I believe that it is in the best interests of the Franchisor and the Sub-franchisees that the Master Franchise Agreement not be renewed. In particular, I believe that the Sub-franchisees will benefit from the increased access to support, training and national uniformity which NextEraEnergy would provide, if it was appointed to act as the Franchisor for NSW/ACT Sub-franchisees in a Direct Model. This benefit would far outweigh the support which the Master Franchisee has indicated (by comment and conduct) that it is willing or able (taking into account the Teamlnvest issue) to provide.
6.8 Given Mr Hope's disparagement of the G.J. Gardner Homes brand and non-compliance with the national marketing strategy (Annexure N), it is also likely that other Master Franchisees (in particular, South Australia) could benefit from a non-renewal of the Master Franchise Agreement. This would reduce the risk of those other Master Franchisee's operations suffering reputational harm and increase the benefit of a national marketing strategy.
6.9 Given all of the available data, my opinion and experience, it is recommended that the Master Franchise Agreement not be renewed.”

Mr Potter addressed the apparent anomaly in this way:

“I did agonise over that a bit when I wrote the report, and I sort of justify that on the basis that the cumulative growth in the Potter high is still 4% roughly higher than the cumulative growth in the low scenario.”

Mr Potter explained his methodology was necessitated by his use of the discounted cash flow model. He said:

“Q. As I understand your evidence, you regard that approach as appropriate because over time you assume that housing starts are about the same. Is that what you're saying?
A. That's ‑ that's ‑ that's correct, and I could add, I did some ‑ within the ‑ accepting that I'm using a discounted cash flow methodology, so there is a discount rate that I'm applying for risk. The ‑ I looked at what does these assumptions mean for market share, so typically within the framework of a discounted cash flow model if the ‑ if the outcome of the assumed rate of growth each year, or forecast, means the market share increases compared to what it was recently, an increase in market share would normally attract a bit more risk as a discount rate, cause it's a riskier assumption. In this case, the outcome of the assumption we've been talking about through to 2034 is a stable market share. It's not increasing. It stays at the same level, so that, in the construct of a discounted cash flow model, that is not ‑ it's not an assumption that creates a need to increase the discount rate, or moderate the ‑ the future cash flow assumption, in the context of the discount rate being applied.”

I repeat that Mr Ross said the discounted flow methodology was appropriate.
Assuming for the moment that Mr Potter’s opinion has flaws, there is nevertheless a proper and reliable basis to fill the deficiencies.
It emerged during the cross-examination of Mr Ross, the defendant’s expert, that Mr Ross did not have a markedly different view of the value of the business. Mr Ross accepted that the discounted cash flow model used by Mr Potter was an appropriate, if complicated, method of valuing the business. Mr Ross also accepted that the exercise performed at Table 6 of Mr Potter’s reply report (included above) was a legitimate expression of Mr Ross’s suggested discount rates, although he did not agree with the cash flow assessment of $49.5 million.
But much more importantly, Mr Ross suggested that there was a simpler and alternative method of valuing the business. This is the ‘multiples’ approach which Mr Ross refers to at par 7.7.8 of his report:

“In my opinion, this derived discount rate is still too low, in that it does not yet take into account any risk unrelated to the specific variables it relies upon. Based on my experience as a valuer, in my opinion a sensible discount rate for a business like that of Lindfield’s would be in the range of 20% to 25% (which relates, in broad terms, to a cash flow multiple of between 4.0 and 5.0 times, ignoring growth). On that basis, the requisite specific risk premium would be in the range of 3.8% to 8.8%.” (Emphasis added)

Mr Ross was asked about the multiples approach and eventually gave these answers to some questions I asked:

“Q. So if ‑ we're just assuming.
A. Yes, so assuming that ‑ assuming that it is ‑ that the reported profit for the most recent year prior the valuation is 4 million, then one could arrive at a value for the business by multiplying that 4 million by a multiple.
Q. Where do we get the multiple from?
A. Well, the multiple is either derived from your experience as a valuer, and that is usually referrable to transactions that have actually occurred in the market for businesses of this size, or less preferably, trying to do a reverse calculation, starting with a discount rate, to produce a multiple.
Q. If you do multiply the 4 million by the multiple you've arrived at, would you need to apply any further discount after that?
A. No. That would be the value of the business.
Q. Right, so what's the multiple for this one?
A. Well, in my view, on a no growth basis, it would be four to five, you know. Then in order to come up with an appropriate multiple, then one would have to make an assumption about growth in profits. Now, Mr Potter's model suggests very high growth in profits. Almost - more than two and a half times profit over the period. I don't think that's reasonable. Yeah.
Q. Just in the way you were looking at it.
A. Yeah.
Q. We've got the $4 million.
A. On the assumption that it is four, yes.
Q. Yes, the assumption. Got the multiple of four.
A. Or five. Yes. Yes.
Q. Or five.
A. Yep.
Q. Let's call it five.
A. Yep.
Q. We multiply four by five.
A. Yep. That's 20, yes.
Q. 20.
A. Yes. Exactly. So—
Q. The valuation of the business is $20 million.
A. Yes. So very similarly—"

Mr Ross then went on to say that a multiple of '5' was at the bottom of the range and could be higher. Combining Mr Ross's evidence with the admitted cash flow of $4 million per year, the result is that Mr Ross's valuation of at least $20 million, is a reflection of the value of the business over the ten years to July 2034. As I have said, this is not very different from Mr Potter’s valuation especially when factoring in that the multiple is assessed on a no growth basis and the business had displayed significant growth. Arguably, inserting a higher multiple to reflect historical growth, would result in a figure higher than Mr Potter’s valuation.
The $20 million, based on the multiples calculation, is also not very different to the $19.6 million achieved by applying Mr Ross’s suggested discount rate of 20% to Mr Potter’s revised cash flows (see the table inserted above).
Objection was taken by the defendant to any valuation based upon Mr Ross’s evidence because the damages claim had not been pleaded according to the method used by Mr Ross. I reject this criticism. Mr Ross was the defendant’s expert. He was made available for cross-examination and in the course of his evidence indicated, albeit through a different system of calculation, that the value of the lost 10 years was $20 million or more.
Mr Ross’s instructions from the defendant were confined to criticising Mr Potter’s report. Mr Potter observed:

“Whilst Mr Ross has criticised the data and assumptions leading to the forecast cashflows I have calculated, he has not offered an alternative approach.”

But, as seen above, Mr Ross referred to the multiples approach in his report which was tendered by the defendant. Then, once in the witness box, he was available to be cross-examined, or asked clarifying questions by me, and if it emerged that he had a particular view then I do not see why that view cannot be utilised in the plaintiff’s favour. It is not uncommon for evidence given by an opposing witness to be adopted by the ‘other’ side.
The defendant cautioned me against taking a ‘doing the best I can’ approach. I was first referred to this passage from Master Homes Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88, from [420]-[421]:

“420. Where expert evidence is concerned, the Court’s role is to evaluate it critically. Where the evidence is cogent, it should not be ignored. In this regard, it is not part of the Court’s role to bring a third set of opinions into the arena, nor to piece together its own valuation. However, where there is conflicting expert evidence, it may be necessary to accept part of each expert’s evidence and reject other parts. In some circumstances, it may be necessary for the Court to make adjustments to the conclusion reached by an expert when that expert’s opinion is shown to be flawed in one or more respects or based on an incorrect assumption. Moreover if, after careful examination, the Court forms the view that a piece of expert evidence is not cogent, then it may be disregarded.
421. Bearing these matters in mind, it is clear that judges should not take on the role of an expert. If an evaluation of the whole of the evidence demonstrates that the experts’ opinions are not well founded, then the judge is left in the position of having to do the best that he or she can if satisfied that the plaintiff has sustained loss.” (References omitted)

Then I was taken to the decision of the majority in the High Court in Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 where Gibbs J and Aicken J at pp 37 and 38 said that damages must be proved with a degree of certainty. However, it is also clear from the judgment of Aicken J that in the case under consideration “there was simply no evidence of the value of the resource”.
This is far from the position here where even the defendant’s expert, Mr Ross, concedes a valuation for the term of the renewal. Adopting a figure of $20 million is not doing the best I can. It is relying on the evidence of two experts from opposing sides whose opinions are ultimately not widely different.
$20 million is the lower figure in Mr Ross’s multiples approach. Adopting the $20 million figure, as opposed to, for example, Mr Potter’s low figure of $23.7 million does perhaps have an element of rounding off or settling somewhere within the difference. In Hungry Jacks Pty Ltd v Burger King Corporation [1999] NSWSC 1029, Rolfe J, at [607], referring to the decision of the High Court in Sellars v Adelaide Petroleum NL (1994) 179 CLR 1386, said:

“Their Honours said that the ‘all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation’, and that the approach conformed to the ‘long-standing practice of taking into account contingencies in the assessment of damages’.”

If Mr Potter has applied enough of a discount, as suggested by Mr Ross, then the reduction of the Potter Low to $20 million is appropriate.
In my view the attitude taken by the defendant was consistent with its overall approach of obstructing the plaintiff’s case at every opportunity notwithstanding that some matters, such as the acknowledgement of damages, really should not have been the subject of such vigorous dispute, and not to the extent of the unmitigated criticism of the plaintiff’s expert, without any concession being made as to an alternative damages amount. It was only through the professionalism of Mr Ross as an expert witness that the lack of a real damages issue emerged.
It was submitted by the defendant that cl 14.6(g) precluded the awarding of damages. The plaintiff submitted that the clause could only be referable to the alternative damages claim. I do not think it is relevant at all. The clause relates to any “payment, repayment or compensation for any goodwill …”. As I have already said, this is not a claim for goodwill. It is a claim for damages arising from breach of contract or unconscionability. I do not think cl 14.6(g) has any part to play.
The measure of damages is to put the plaintiff in the position it would have been but for the breach. The measure was expressed in this way by Mason CJ and Wilson J in Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8 at 143:

“… the plaintiff is entitled to full compensation for the loss which he sustains in consequence of the defendant's wrong, subject to the rules as to remoteness of damage and to the plaintiff's duty to mitigate his loss.”

The damages here are a calculation of the amount that would have been earned over the 10 years of renewal. They cannot be said to be remote. No suggestion was made of a failure to mitigate.
I acknowledge of course that the claim for the future losses may be described as a loss of opportunity giving rise to the necessity for significant discounting. This discounting however is an integral part of the damages assessments made by the two experts. Mr Ross actually refers to a “sensible discount rate” in his use of the multiples calculation.
Both experts have not only discounted the future earnings for an accelerated receipt but also because of the various vicissitudes that they have mentioned. I am therefore satisfied that the $20 million I will award takes full account of the fact that the plaintiff’s claim is for a loss of chance.

The alternative damages claim

Because I have found for the plaintiff on the primary damages claim, I will deal with the alternative damages claim briefly.
According to Mr Castle: “The sale is when you, effectively, take a deposit, and the slab is when the builder goes on site.” In opening written submissions, the plaintiff described the alternative claim in this way:

“Linfield’s alternative calculation of the damages is for that part of the royalties payable after 1 July 2024, arising from sales entered into pre-termination, because royalties are only paid once the building work commences (known as the ‘slab’ date). Mr Hope has estimated there are about 1000 sales in this category at any given time.”

Mr Castle, in oral submissions, said the approach was:

“to take a subset of all of the slabs which will be laid over the next ten years and to identify which slabs are actually the result of existing sales ... . In other words, we’ve done the work as master franchisee, sale has occurred, the slab comes later and your Honour, that’s an alternative calculation.”

The plaintiff’s claim is for $3,942,330. The defendant’s submission was, if the claim was allowed at all, it should be for $2,330,232. The reasons leading to the difference between the two figures is the application of a different conversion rate. The plaintiff applied 80%, the defendant applied 65%.
The conversion rate is the amount of sales that are converted into signed contracts. The plaintiff’s 80% came from Mr Hope, based on his estimation of the conversion rate. Mr Trent Gardner, in his affidavit of 5 August 2024, said that he analysed “information in the software regarding historical conversion rates from sales to slab rates in the NSW/ACT territory.” His analysis produced a result of 64.3%. In addition, Mr Trent Gardner analysed the conversion rate between 1 January 2012 and 31 December 2022. This analysis produced a rate of 67.2%. Accordingly, he effectively averaged the results of his analyses to reach 65%. The plaintiff conceded the possibility of “unforeseen contingencies” which would justify reducing the 80% to 75%. This would bring the damages down to $3.75 million.
The plaintiff’s 80% is based on Mr Hope’s estimate. The defendant’s 65% is based on a comprehensive analysis performed by Mr Trent Gardner. I think this fact favours the defendant’s submission. Had I awarded damages on the alternative basis they would have been in the sum of $2,330,232.

Wattle Court Homes Pty Ltd

Wattle Court Homes Pty Ltd (‘Wattle Court’) was set up by Mr Hope in November 2023. The company carries on the business of a franchisor of home building franchisees.
As at July of this year no franchise agreements had been concluded with any homebuilders. The business was also not on the Franchise Disclosure Register (as required by Pt 5A of the Franchising Code of Conduct).
Wattle Court has a website which, in paper form, came into evidence as Exhibit 1.
The cross-examination of Mr Hope on Wattle Court was the subject of objection. It was said to be not relevant because it referred to matters that had occurred after 27 May 2024 (when the MFA was terminated). The defendant said that “it goes to credit”. I allowed the questions to continue, but only on this basis.
The position in relation to events before 27 May 2024 is relevant because it relates to the defendant’s assertion that Mr Hope’s (and in turn the plaintiff’s) conduct from December 2023 amounted to a repudiation of the MFA. Breach of cl 8.39 was said to be at the core of the repudiating conduct.
The purpose of the questioning on credit was to suggest that Mr Hope, while purporting to be acting in the interests of the defendant, was actually ‘white anting’ the defendant’s business by trying to compete with the defendant including poaching franchisees of the defendant. There is a draft franchise agreement with one such company, owned by a Mr Luecki. This company has actually commenced trading in North Sydney under the banner of Wattle Court Homes Sydney North.
Mr Hope said he was starting Wattle Court and trying to attract franchisees “should we not get a renewal”. Presentations had been made to a number of GJ Gardner franchisees but, said Mr Hope:

“We were presenting the concept of Wattle Court Homes and what it was going to be. Whether that was a good idea for them or not was up to them.”

This passage of the cross-examination was submitted to be important:

“Q. Is it the case that you had discussions with G.J. Gardner subfranchisees in New South Wales in 2023 about the idea that you would or might establish Wattle Court Homes as a franchisor for building homes?
A. That was our plan B that we presented to the franchisees.
Q. Did you present to the subfranchisees the idea that you had a proposal to set up Wattle Court Homes to become a franchisor for the building of homes in New South Wales?
A. If we weren't able to obtain a renewal, then yes.
Q. Did you first present that idea to representative subfranchisees in December or November 2023?
A. I first spoke about the concept of it to franchisees in December 2023, yes.
Q. Which franchisees were they?
A. That would've been Horst and Mel, Shaun and Nathan Vickery ‑ sorry, Shaun Vickery and Nathan Fay, Peter Leotta from Tweed Heads. Peter and Karen Leotta from Tweed Heights, Chris Mosha in Wagga. I believe they were the only people I spoke to in December.
Q. After December 2023, did you speak to other representatives of other New South Wales sub‑franchisees of GJ Gardner about your idea of potentially commencing business as Wattle Court Homes the franchisor?
A. One that had expressed in what I was doing post‑GJ Gardner Homes if it came to that, yes.
Q. It wasn't just one, was it?
A. One franchisee?
Q. Yes.
A. No.
Q. How many sub‑franchisees in New South Wales up to 27 May 2024 did you have discussions with about the idea that you were contemplating setting up Wattle Court Homes?
A. I believe in total I'd spoke to 12.”

The defendant submitted:

“To suggest that this is somehow not a breach by the plaintiff, because there was some independent decision involved by the franchisee, ignores what the case is actually about on this topic, which is the breach, by Lindfield, of the obligations in cl 8.39. ‘I say to you I'll give you a deed of termination, so you can get off with the hook with GJ Gardner, on the basis that you want to come with me, and I want you to come with me’. To try to characterise that as being some form of independent decision by Sydney North, uninfluenced by Mr Hope of Lindfield, is to defy reality, with respect, your Honour.”

Following this submission, I asked Mr Couper if the defendant was seeking a restraining order against the plaintiff. He replied that there was no counterclaim. Mr Couper seemed to then appreciate the limits of his submissions about Wattle Court by stating:

“That's why I'm trying to do this very quickly, and not waste time with it, because Lindfield doesn't seem to be saying they want to go out and do anything ‑ Wattle Court Homes has been set up to do something. I just wanted to very briefly tell your Honour what the issues are and move on to something perhaps more substantial.”

I think it important to bring the Wattle Court issue, at least after 27 May 2024, back to its only point of relevance, namely the credit of Mr Hope. I said above that I generally accepted Mr Hope’s evidence with the possible exception of his evidence concerning Wattle Court. I appreciate that Mr Hope would have been anxious to keep trading in a business he knew well, in particular when it was obvious that his future did not lie with the defendant. Notwithstanding the reasonableness of looking for a new venture, I did think that Mr Hope was perhaps being a little underhand in his approaches to the defendant’s Sub-franchisees.

In overall terms however, I still prefer, where there is a conflict, the evidence of Mr Hope over that of Mr Wallis and Mr Thornton. I formed such a poor impression of these two witnesses that my reservations concerning Mr Hope have no practical effect.
I will deal with the position before 27 May 2024 under the following heading of Termination.

Termination

Despite what I have just said about the Wattle Court issue, the defendant submitted that Mr Hope’s conduct in respect of Wattle Court amounted to a repudiation of the MFA between December 2023 and 27 May 2024. Mr Couper submitted:

“The repudiation was by the conduct in the period from December 2023 to 27 May 2024, and the notice of termination based on repudiation was given on 27 May 2024.”

Mr Couper continued:

“First it is said that Mr Hope was entitled to do what he did, and we make the submissions that that ignores cl 8.39. Second, it is said that none of this matters ‑ paraphrasing ‑ because it was all conditional upon him not getting the renewal, but our point remains. To set out to undermine the G.J. Gardner Homes system in New South Wales, even if it's just, well, I might end up not needing to undermine it, and I'll walk away from it, doesn't mean that this hasn't been a repudiation of the agreement.”

Clause 8.39 states:

“(Diligence, Good Faith and Loyalty) The Master Franchisee and the Specified Person must at all times:-
(a) faithfully, honestly and diligently perform their obligations under this Agreement;
(b) operate the Master Franchise strictly in accordance with all of the standards, practices and obligations set forth in the Manual;
(c) continuously exert their best endeavours to promote the Master Franchise and operate the Master Franchise so as to maximize the revenue and profits of the Master Franchise;
(d) operate the Master Franchise so as to reflect favourably on the Franchisor and all G J Gardner Homes Franchisees;
(e) act with loyalty and good faith towards the Franchisor, Master Franchisee and the G J Gardner Homes Franchise Network;
(f) not perform any act which is designed to, or is likely to, assist any competitor of the Master Franchise or any competitor of any other G J Gardner Homes Franchisee.”

The difficulty facing the defendant, as I have already said, is that the Wattle Court evidence, at least after 27 May 2024, was restricted to Mr Hope’s credit. My reservations concerning Mr Hope’s credit do perhaps allow for a finding that, pursuant to cl 8.39 he had not acted with “Diligence, Good Faith and Loyalty.”
The more important difficulty is my finding that, well before 27 May 2024, the defendant was in breach of the MFA giving rise to the plaintiff’s entitlement to damages. Again, I repeat that there is no cross-claim by the defendant seeking any declarations of dishonesty or restraint of trade.
Accordingly, assuming my findings on breach of contract and unconscionability are correct, the termination and repudiation issue does not arise. I should add that if repudiation is a valid issue, I would conclude that the repudiation was by the defendant and accepted by the plaintiff.
On 27 May 2024, the defendant issued a Notice of Termination to Mr Hope. There were two notices, one in respect of the plaintiff and the other concerning the Western Australian franchise agreement. The latter is not relevant.
In the Notice of Termination the defendant says that:

“Mr Hope’s conduct constitutes a repudiation of the Master Franchise Agreement. Netdeen hereby gives notice that it accepts Lindfield’s repudiation and terminates the Master Franchise Agreement, bringing the Master Franchise Agreement to an immediate end”.

The letter then goes on to set out alleged breaches by the plaintiff of the MFA and then says that the incorporation of Wattle Court Homes Pty Ltd amounted to repudiating conduct.
The plaintiff’s lawyers (Addisons) responded on the same day. The letter points out that at the same time as the notice was issued the defendant blocked the plaintiff from accessing the G.J. Gardner computer system. This system included emails and business records.
The letter also points out that the Franchising Code had been breached in that seven days’ notice of termination had not been given (pursuant to cl 29 of the Code). The letter then says that the defendant’s conduct “in wrongfully terminating the MFA today is itself a repudiation of the MFA, and all related agreements.” This repudiation is accepted by the plaintiff.
To repeat, I do not see the question of who repudiated the agreement as relevant to the resolution of the litigation. Resolution flows from my findings of breach of contract, well before 27 May 2024, and the defendant’s unconscionable conduct. These findings are the basis for my award of damages.
The receipt of damages for breach of contract does not depend on the termination of the contract as stated by Barwick CJ in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444; [1976] HCA 21 at 451:

“However, the promisee's right to damages for any breach which has occurred up to the date of the termination of the contract, including the anticipatory breach or repudiation of it, remains.”

In Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; [1938] HCA 66, Latham CJ said at 300:

“It is admitted by the plaintiff that if the defendant’s construction of the clause is adopted the contract has been broken by the plaintiff. Therefore, as a matter of course, the defendant is entitled to nominal damages. This right does not in any way depend on whether the defendant was entitled for any reason to determine the contract. Thus, according to the construction of the clause which I regard as correct, there is no doubt whatever as to the defendant’s right of action for damages for breach of contract in respect of the first two seasons.”

Conclusions

I have found that there was a breach of the MFA by the defendant and that, separately, there was unconscionable conduct on the part of the defendant.
The measure of damages for breach of contract is to put the plaintiff in the position it would have been but for the breach.
This position is one in which the plaintiff would have been able to operate the business for a further ten years or have had a realisable asset, albeit of a diminishing value as the ten years progressed, noting of course that the plaintiff would have been making a profit in the elapsed years.
I have already decided that, based on the two experts, the value of the lost business should be $20 million. By adopting this sum, I have taken into account the discounting that is required. I do not think it necessary to apply any further discounting.
In relation to unconscionability, s 236 of the ACL provides for the recovery of “loss or damage” for contraventions of the provisions of Ch 2 or 3 of the ACL (which includes s 21). The loss or damage here is the loss of the value of the option to renew which I think must equate to the value of the business lost, namely $20 million.
It follows that the plaintiff is entitled to a verdict for $20 million with costs. Because the $20 million is almost entirely for a future loss, I do not see a basis for any entitlement to interest. However, I will give the parties leave to make any submissions on interest and variation of the costs order.
I make the following orders:

Judgment for the plaintiff against the defendant in the sum of $20 million.

The defendant is to pay the plaintiff’s costs of the proceedings.

The parties have leave to make further submissions in respect of the costs order and interest.

**********

Decision last updated: 17 October 2024

Medium Neutral Citation:	Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) [2024] NSWSC 1305
Hearing dates:	29 July – 9 August 2024, 9 – 11 September 2024
Date of orders:	17 October 2024
Decision date:	17 October 2024
Jurisdiction:	Common Law
Before:	Elkaim AJ
Decision:	1. Judgment for the plaintiff against the defendant in the sum of $20 million. 2. The defendant is to pay the plaintiff’s costs of the proceedings. 3. The parties have leave to make further submissions in respect of the costs order and interest.
Catchwords:	CONTRACTS — construction — interpretation — whether the use of the words ‘and/or’ in cl 4.7 meant that the defendant was bound to consider the best interests of the plaintiff — consideration of the commercial purpose of the clause, agreement and the commercial value an option to renew clause has for either party — application of test in H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4 — held the terms of cl 4.7 and the agreement as a whole required the defendant to consider the best interests of the plaintiff CONTRACTS — construction — interpretation — where under an alternative interpretation whereby cl 4.7 did not require the defendants to consider the best interests of the plaintiff — whether upon the defendant’s construction of cl 4.7 they breached the contract — where defendant held a board meeting to consider the exercise of renewal and commissioned a report detailing the plaintiff’s breaches to provide justification for the defendant’s decision to refuse the renewal of the agreement — whether the report and board meeting was part of a genuine decision making process — held upon the defendant’s construction of cl 4.7 the defendants actions were not in breach of the term CONSUMER LAW — unconscionable conduct — in connection with goods or services — discussion of principles of unconscionability involving some degree of moral obloquy — whether the defendant’s conduct in allowing the plaintiff to believe that renewal of the agreement was possible constituted sharp practice — held that the defendant by not acting in good faith with the plaintiff engaged in unconscionable conduct CONSUMER LAW — industry codes — Franchising Code of Conduct — where matters raised in the code fall within the substantive claim EVIDENCE — expert evidence — where defendant’s expert was retained to criticise the analysis of plaintiff’s expert — where in oral evidence the defendant’s expert’s adopted a similar value and final damages amount to the plaintiff’s expert — use of defendants valuation accepted CONTRACTS — remedies — damages — after breach — damages awarded for breach of contract using defendant’s expert’s valuation CONSUMER LAW — unconscionable conduct — assessment of damages — damages awarded
Legislation Cited:	Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, Chs 2, 3, ss 21, 22, 236 Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth), Sch 1 - Franchising Code of Conduct, Pt 5A, cll 6, 23, 27, 28,
Cases Cited:	Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187 AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4 Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8 Hungry Jacks Pty Ltd v Burger King Corporation [1999] NSWSC 1029 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; [1938] HCA 66 Master Homes Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Ogle v Comboyuro Investments Pty Ltd [1976] HCA 21; (1976) 136 CLR 444 Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; (2015) 321 ALR 584 Productivity Partners Pty Ltd (trading as Captain Cook College) & Anor v Australian Competition and Consumer Commission & Ors [2024] HCA 27 Sellars v Adelaide Petroleum NL (1994) 179 CLR 1386 Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23
Category:	Principal judgment
Parties:	Lindfield NSW Pty Ltd (Plaintiff) Netdeen Pty Ltd trading as GJ Gardner Homes (Defendant)
Representation:	Counsel: Mr T Castle SC (Plaintiff) Ms D Levi (Plaintiff) Mr A Schatz (Plaintiff) Mr S Couper KC (Defendant) Mr J Gooley (Defendant) Solicitors: Addisons (Plaintiff) Thomson Geer Lawyers (Defendant)
File Number(s):	2023/237902
Publication restriction:	No