Madison Pacific Property Management & Ors v Australian Securities Commission
[1999] FCA 62
•8 FEBRUARY 1999
FEDERAL COURT OF AUSTRALIA
Madison Pacific Property Management Pty Ltd v Australian Securities & Investments Commission [1999] FCA 62
CORPORATIONS LAW – offer to public of franchise rights in residential tenancy property management business – whether the offers of franchises infringed s 1064(1) Corporations Law – definition of “prescribed interest” within s 9 Corporations Law – application or non-application of the “franchise” exemption in reg 1.02 Corporations Law – consideration of whether an offer to manage is inconsistent with the franchisor/franchisee relationship.
WORDS AND PHRASES – “prescribed interest”, “franchise”
Managed Investments Act 1998 (Cth)
Acts Interpretation Act 1901 (Cth), s 15AA
Corporations Law, ss 8A, 109(H), 1064
Property Stock and Business Agents Act 1941 (NSW)Securities Industry Act 1980 (Cth), s 43
Corporation Regulations, regs 1.02, 7.1.02
Australian Softwood Forests Pty Ltd v Attorney General (NSW) (1981) 148 CLR 121, discussed
Commissioner for Corporate Affairs v Casnot Pty Ltd (1981) CLC 40-704, cited
Khania Nominees v Hamilton (1986) 4 ACLC 390, cited
R v Commons (1986) 4 ACLC 551, cited
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, followed
Butterworth v Lezemo Pty Ltd (1983) 8 ACLR 737, referred to
Streeter v Pacific-Seven Pty Ltd (1985) 9 ACLR 790, referred toAlloyweld Pty Ltd v Federal Commissioner of Taxation (1984) 69 FLR 274, referred to
Oakey Abattoir v Federal Commissioner of Taxation (1984) 54 ALR 595, referred to
Australian Securities Commission v United Tree Farmers (1997) 24 ASCR 94, referred to
Waldron v M G Securities Australasia Ltd (1975) VR 508, referred toScott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265, referred to
Snook v London & West Riding Investments Ltd [1967] 2 QB 786, referred to
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449, referred toRe British Basic Slag Agreements [1963] 2 All ER 807 (CA), applied
FRENCH, DRUMMOND AND CARR JJ
8 FEBRUARY 1999
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAG 87 OF 1998
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
MADISON PACIFIC PROPERTY MANAGEMENT PTY LTD
(ACN 081 776 810)
First AppellantMADISON PACIFIC AUSTRALIA PTY LTD (ACN 981 776 874) AS TRUSTEE OF THE MADISON PACIFIC AUSTRALIA TRUST
Second AppellantMADISON PACIFIC MANAGEMENT PTY LTD (ACN 081 776 758) AS TRUSTEE OF THE MADISON PACIFIC MANAGEMENT TRUST
Third AppellantMADISON PACIFIC MARKETING PTY LTD (ACN 081 776 794) AS TRUSTEE OF THE MADISON PACIFIC MARKETING TRUST
Fourth AppellantMADISON PACIFIC FINANCE PTY LTD (ACN 081 776 847) AS TRUSTEE OF THE MADISON PACIFIC FINANCE TRUST
Fifth AppellantAND:
AUSTRALIAN SECURITIES COMMISSION
RespondentJUDGE:
FRENCH, DRUMMOND AND CARR JJ
DATE OF ORDER:
8 FEBRUARY 1999
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1. The appeal is allowed.
2. The orders made by Lee J on 25 June 1998 be set aside.
3. In lieu thereof the application be dismissed.
4.The respondent to pay the appellants’ costs of the proceedings before Lee J and of this appeal.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAG 87 OF 1998
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
MADISON PACIFIC PROPERTY MANAGEMENT PTY LTD
(ACN 081 776 810)
First AppellantMADISON PACIFIC AUSTRALIA PTY LTD (ACN 981 776 874) AS TRUSTEE OF THE MADISON PACIFIC AUSTRALIA TRUST
Second AppellantMADISON PACIFIC MANAGEMENT PTY LTD (ACN 081 776 758) AS TRUSTEE OF THE MADISON PACIFIC MANAGEMENT TRUST
Third AppellantMADISON PACIFIC MARKETING PTY LTD (ACN 081 776 794) AS TRUSTEE OF THE MADISON PACIFIC MARKETING TRUST
Fourth AppellantMADISON PACIFIC FINANCE PTY LTD (ACN 081 776 847) AS TRUSTEE OF THE MADISON PACIFIC FINANCE TRUST
Fifth AppellantAND:
AUSTRALIAN SECURITIES COMMISSION
Respondent
JUDGE:
FRENCH, DRUMMOND AND CARR JJ
DATE:
8 FEBRUARY 1999
PLACE:
PERTH
REASONS FOR JUDGMENT
FRENCH J:
Introduction
This case concerns the offering to the public of franchise rights in a residential tenancy property management business, conducted by Madison Pacific Australia Pty Ltd in New South Wales. The offers involved a promise to allocate to each prospective “franchisee” three hundred randomly selected properties in the Sydney metropolitan area to constitute the “franchise territory”. The properties so selected would be unlikely to be geographically contiguous. The offers were associated with invitations to each prospective franchisee to have the whole of the management of the franchised territory assumed by Madison Pacific Property Management Pty Ltd with marketing services provided by Madison Pacific Marketing Pty Ltd and loan finance by Madison Pacific Finance Pty Ltd.
On 25 January 1998, on the application of the Australian Securities Commission, Lee J made orders declaring that the offers of franchises constituted offers of prescribed interests within the meaning of s 9 of the Corporations Law and that the making of the offers constituted conduct on the part of the Madison Pacific companies contrary to ss 1018, 1064 and 1065 of the Corporations Law. His Honour granted an injunction restraining the companies from offering interests in the Madison Pacific franchise in conjunction with any offer or invitation to enter into management agreements in relation to that interest. The injunction did not apply to applications made to the Madison Pacific companies which had been accepted as at 25 June.
His Honour ordered that any person who had purchased or subscribed for any interest in the scheme was entitled to avoid the agreements made pursuant to the acceptance of that offer. He also made an order that the companies give notice to each investor setting out the terms of the order and statements of the investor’s rights to avoid the scheme agreements and associated advices.
The Madison Pacific companies have appealed against his Honour’s judgment.
Grounds of Appeal
The grounds of the appeal are as follows:
“1.The learned Trial Judge erred in law in finding that the investment opportunity offered by the Appellants in conjunction with the invitation to prospective franchisees to appoint Madison Pacific Management Pty Ltd as Manager of the franchisees business did not constitute a franchise as defined in Regulation 1.02 of the Corporations Regulations.
2.The learned Trial Judge erred in law in finding that the offer by Madison Pacific Management Pty Ltd to act as Manager of a franchisee’s business constituted the offer of a participation interest within the meaning of that expression in the Corporations Law.
3.The Learned Trial Judge should have held that the investment opportunity offered by the Appellants whether taken as a whole or individually constituted a franchise within the meaning of that term in Regulation 1.02 of the Corporations Regulations.”
Salient Features of the Scheme
It is convenient, before turning to the issues raised on the appeal, to review some of the salient features of the scheme documentation. That documentation comprises:
1. Information Memorandum
2. Franchise Agreements consisting of:
(i) Franchise Agreement
(ii) Management Agreement
(iii) Marketing Agreement
(iv) Loan Agreement
(v) Loan Repayment Guarantee
(vi) Franchise Endorsement Page
3. Short Term Loan Agreement
The Information Memorandum commences with a notice advising prospective franchisees to seek their own professional advice on the proposal and related agreements. By way of disclaimer it points out that the document is not a prospectus and says that Madison Pacific has taken legal advice that the issue of the franchises is “…specifically exempt from the prospective provisions of the Corporations Law”. It also asserts that Madison Pacific has legal advice that a business investor does not require a licence in accordance with the Property Stock and Business Agents Act 1941 (NSW) to operate a Madison Pacific franchise. It says by way of admonition to prospective investors:
“…a business investor should not enter into an agreement to acquire a Madison Pacific Franchise if the business investor is seeking a totally passive investment. Even in circumstances where a Franchisee opts to appoint a manager, he should do so in the knowledge that a Madison Pacific Franchise is likely to require an equivalent amount of work and attention, to that required of the owner of any other small business enterprise, run under management.”
By way of historical overview, the memorandum refers to the limits and inadequacies of the traditional property management services provided by local real estate agents. This is contrasted with the Madison Pacific philosophy of promoting and training residential property supervisors to a level equivalent to that of investment and fund managers in other financial fields. By utilising what is called the Madison Pacific system focussing on low cost, high quality services, Madison Pacific claims in the Information Memorandum to be able to attract high volume quality business and in turn high quality staff and the financial resources to provide “…an unequalled quality of property management services”.
The Memorandum sets out what is described as an opportunity for applicants to acquire franchises utilising the Madison Pacific system and the Madison Pacific image and the option of having the business run under professional management by an approved manager. The term of the franchises is for a period of twenty years. The Memorandum states that:
“A franchise incorporates a “territory” initially consisting of more than 300 addresses within the Sydney metropolitan area, spread over many suburbs to achieve a balance of opportunity for individual franchises. Thus no one franchise territory will comprise a concentration of addresses in a particular building, suburb or area, but rather a broad spread of addresses across the Sydney metropolitan area.”
These addresses are computer generated to ensure similar treatment of all franchises. The territory may increase in size over time with the addition of new addresses to the database. The rights conferred by the franchise are summarised in the Information Memorandum thus:
“The franchise will entitle the Franchisee to operate a business providing services to property owners. Income is derived by Franchisees providing Madison Pacific property management services to owners of properties within the franchised territory.”
The Memorandum then described “First Year Services and Fees”. These comprise a franchise establishment fee, an annual franchise fee, a training fee and a software fee. The franchise establishment fee entitles the franchisee to acquire the rights to utilise the Madison Pacific image, the Madison Pacific system and the Madison Pacific Operations Manual. There is an annual payment to enable the franchisee to continue to utilise Madison Pacific know-how. For a fee on-going sales training and property services training are offered. In addition a Property Services Software Program is offered by which franchisees would be enabled to monitor the performance of the manager, if one is appointed.
Under the heading “Other Services” there is reference to “Franchise Management Services (optional)” in the following terms:
“Each Madison Pacific Franchisee has the opportunity to operate their Madison Pacific business personally and will have access to an Operations Manual, together with optional sales training for themselves and/or their employees, all provided by the Franchisor.
Alternatively, a Franchisee may choose to employ the services of Madison Pacific Management, an approved manager under the Franchise Agreement, who will assist the Franchisee in running their Madison Pacific business.
Further, a Franchisee may elect to nominate an alternative manager, who would need to become an approved manager, under the terms of the Franchise Agreement.
If appointed, Madison Pacific Management will, on behalf of the Franchisee, manage and direct the day to day operation of the Madison Pacific business and will endeavour to promote, advance and improve the business. Regular financial and operational reports will be provided to Franchisees by Madison Pacific Management to enable them to adequately monitor their Madison Pacific business.”
Also under the heading “Other Services” are the optional offers of direct response advertising programs, direct mail programs, telemarketing and other marketing services, a newsletter, prepayment of the first year’s interest on loan finance from Madison Pacific Finance, and optional funding comprising a Limited Recourse Loan, an introduction to third party lending institutions “familiar with the acquisition of a Madison Pacific franchise” and a Loan Repayment Guarantee. For each of the marketing services referred to there is an optional fee payable by the franchisee. There is an Initial Fees Summary set out in the Information Memorandum which includes the Franchise Establishment Fee, the Optional Training and Software Program fees, the Optional Marketing, Advertising, Direct Mail, Telemarketing and Annual Management Fees, Newsletter subscription and Loan Repayments Guarantee. This shows a total investment of $32,500. In addition the ongoing fees payable from the “Gross Profits Only” of the franchise business are specified, being:
1. Annual Franchise Fee being 2.0% of Gross Profit
2. Annual Management Fee of 43.0% of Gross Profit
Loan facilities are offered by way of:
1.An advance of $15,000 from an independent financial institution (Principal Lender) with interest of approximately 12.5% p.a. over six years; and
2.Franchisees who avail themselves of the benefits of the management services and marketing services there will be access to a Limited Resource Loan from Madison Pacific Finance of $7,500 for each franchise acquired with interest at 9.75%.
The Limited Recourse Loan is said to be “totally self funding with repayments being made from the Franchisee’s Gross Profit only”. It is anticipated that loan repayments in respect of the loans would be made solely from the income generated from an individual Madison Pacific franchise. Up to 55% of a franchisee’s Gross Profit (other than the first year) would be utilised to repay the loans. A summary of projected cash flows is set out, a diagrammatic representation of the corporate structure of the Madison Pacific group and a list of “risk considerations”. Also incorporated in the Information Memorandum is an opinion from solicitors relating to the tax deductibility of costs associated with investment in the scheme. Detailed projected cash flows are also attached showing conservative assumptions about the average number of properties services per franchise, rising from 6.5 in year one to 13.9 in year twenty. There is an independent from Deloitte Corporate Finance on cashflow projections for individual franchise owners.
The Franchise Agreement itself is made between the prospective franchisee and Madison Pacific Property Management Pty Ltd and Madison Pacific Australia Pty Ltd. By cl. 2.1 Madison Pacific Australia grants to the franchisee:
“…an exclusive franchise to conduct one Madison Pacific Outlet providing the Madison Pacific Services to the Specified Properties during the Term using the Madison Pacific System and the Madison Pacific Image subject to this Agreement.”
Terms used in cl 2.1 are defined in cl 1. The Madison Pacific Services comprise:
“(a)property repairs and maintenance services, which include the co-ordination of all works and services and control of costs associated with the general upkeep, cleaning, repairs and replacement of items as required;
(b)the compilation and maintenance of the Madison Pacific Brand and Model Identification Register;
(c)recommendations on property presentation to maximise rental potential and market value;
(d) regular property inspections;
(e)preparation of monthly statements and the provision of administrative services; and
(f)monitor, administer, supervise and authorise the disbursement of property outgoings (sic).”
The term “Madison Pacific Outlet”:
“…means a business conducted under franchise from the Franchisor providing some or all of the Madison Pacific Services.”
The “Specified Properties” are defined thus:
““Specified Properties” means the addresses of properties located within the State allocated to the Franchisee by the Franchisor upon the execution of this Agreement (and being not less than three hundred (300) sites) and any other property addresses located within the State which may be allocated to the Franchisee by the Franchisor after the date of this Agreement.”
The “Madison Pacific Image” is a reference to the relevant Trade Marks, the name “Madison Pacific” and the associated marks, names, emblems, designs, logos and the like.
Madison Pacific retains an absolute discretion to vary the Specified Properties in circumstances which are set out in cl. 2.4. It can allocate additional property addresses from new or unallocated addresses. It can remove a rent producing property from the Specified Properties and allocate it to another franchisee where that franchisee is or becomes the owner of the property or acquires it. If the dwelling or dwellings in a specified property are replaced by a greater number of dwellings, the franchisor may remove the addresses of the additional dwellings from the specified properties and reallocate them.
Sub-Franchising is prohibited but the franchisee is authorised to “…appoint a manager to conduct the Franchise Business on its behalf, provided that the Franchisee has obtained the written consent of Madison Pacific in relation thereto”. The franchisor’s obligations in relation to the provision of training, software program and an operations manual are set out in cl 4. The duties of the franchisee are set out in cl 6 and include an obligation to:
“(a)conduct the Franchised Business efficiently and commercially and so as to preserve and enhance the Franchised Business, the Madison Pacific Image and the Madison Pacific System.”
Clause 9 provides that the franchisee shall not carry on the franchised business other than from premises approved in writing by Madison Pacific which approval shall not be unreasonably withheld. As to the management of the business cl 10 provides:
“The Franchisee shall not engage, appoint or allow any person (except the Franchisee) to manage the Franchised Business unless and until Madison Pacific has (in its absolute discretion and on such terms and conditions as it may require) approved in writing the manager and the terms of the manager’s engagement or appointment.”
There is an assignment clause which permits the franchisee to “…sell the Franchised Business and assign all its rights under this Agreement”. This is subject to approval of the assignee by Madison Pacific.
Under the Optional Management Agreement the franchisee engages Madison Pacific Management Pty Ltd “to be the sole and exclusive manager of the Franchised Business…” (cl 2.1). A first year monthly fee of $495 is specified and thereafter an annual fee of 43% of Gross Profit payable monthly in arrears.
The manager’s duties are specified in cl 5. The primary duty is set out in cl 5.1:
“The Manager shall during the Term manage, direct and control the Franchised Business on behalf of the Franchisee.”
Clause 5.3 under the heading “Management Standards” provides that in the discharge of its duties under the agreement the manager shall (inter alia):
“(a)act with reasonable skill in managing the Franchised Business with a view to promoting, advancing and improving the Franchised Business;
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(c)devote such time and attention to the management of the Franchised Business as may be reasonably necessary in the opinion of the Franchisor;
(d)be entitled to manage any other business for any other person;
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(f)subject to the Franchise Agreement, act on its own initiative and exercise such powers as may be available to it as the manager of the Franchised Business;
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(i)comply with all reasonable instructions and directions as may be given to the Manager by the Franchisee concerning the general conduct and management of the Franchised Business.”
The duties of the franchisee are set out in cl 6:
“6.1The Franchisee hereby grants to the Manager access to and the right and power to exercise on behalf of the Franchisee in the conduct and management of the Franchised Business all the rights, powers, duties, discretions and benefits conferred on the Franchisee by the Franchise Agreement for the purpose of or in connection with the conduct of the Franchised Business by the Franchisee and without limiting the generality of this clause specifically authorises the Manager to execute on the Franchisee’s behalf all documents reasonably required in the conduct and management of the Franchised Business.
6.2The Franchisee shall not require the Manager to do anything that is not permitted, nor prohibit or restrict the Manager doing anything that is required to be done, under the Franchise Agreement.”
The manager is responsible under cl 8 for all payments, costs, charges and expenses incurred in the conduct and management of the business and:
“…shall ensure so far as possible that the Franchisee is not personally liable for such payments, costs, charges and expenses and shall indemnify the Franchisee against all such payments, costs, charges and expenses.”
There is provision for termination of the agreement for breach by the manager or, where the manager ceases to be approved by Madison Pacific to manage the Franchised Business. (cl 11) The manager is an independent contractor of the franchisee but clause 12 qualifies that statement as follows:
“12. RELATIONSHIP
The Manager is engaged by the Franchisee as an independent contractor. Nothing in this Agreement shall be taken as constituting the Manager or any other servant, agent or contractor of the Manager an employee or servant or (except to the extent required by this Agreement) an agent of the Franchisee.”The Marketing Agreement is made between the franchisee and Madison Pacific Marketing Pty Ltd. By the Marketing Agreement the franchisee engages Madison Pacific Marketing to be its sole and exclusive marketing consultant. During the continuance of the agreement no other person is to be engaged to market the franchise business without the prior written consent of Madison Pacific (cl 2). There is provision for the payment of marketing fees and a statement of the marketing duties of Madison Pacific Marketing. The marketing services provided include an ongoing direct response media advertising program, a direct mail program, a telemarketing program, training packages for telemarketers, coordination of promotional and direct mail materials, provision and placement of media programs, detailed prospect lists and the conduct of ongoing market research and effectiveness monitoring. Under the heading “Marketing Standards” in cl 5.2 there is a requirement that Madison Pacific Marketing comply with all reasonable instructions and directions as may be given to it by the franchisee “… concerning the general conduct and marketing of the Franchised Business”.
Clause 6 relating to the duties of the franchisee is in terms almost identical to those of the equivalent clause in the Management Agreement and other equivalents relate to termination (cl 9), the existence of an independent contractor relationship and the negativing of an agency relationship (cl 10).
The fourth agreement in the package is a Loan Agreement with Madison Pacific Finance whereby Madison Pacific Finance advances money to the franchisee. By cl 2.2:
“2.2The Franchisee acknowledges to the Lender that it irrevocably elects to pay in advance the Initial Franchise Establishment Fee, the Annual Franchise Fee, the Ongoing Sales Training Fee, Special Property Services Training Workshop Fee and the Software Program Fee payable under clause 5 of the Franchise Agreement, and the first year’s Management Fee and Newsletter Subscription Fee payable under clause 4 of the Management Agreement (if applicable) and the Marketing Fee payable under clause 4 of the Marketing Agreement.”
By cl 2.3 the franchisee irrevocably authorises and directs Madison Pacific Finance to pay the proceeds of the advance to Madison Pacific who will apply it in accordance with cl 7 of the Franchise Agreement.
In addition to the Loan Agreement there is a Loan Repayment Guarantee Agreement under which the lender, Madison Pacific finance, provides a guarantee in consideration of the franchisee executing the Franchise Agreement, the Management Agreement, the Marketing Agreement and the Loan Agreement and paying $300 to the lender. The lender guarantees the timely repayment of each Principal Lender Loan Repayment. In any period during the initial period when gross revenue is insufficient to permit the payment in full of the Principal Lenders Loan Repayment in accordance with cl 7.3 of the Management Agreement the lender shall pay to the principal lender on behalf of the franchisee a sum equal to the shortfall (cl 2(a)). In subsequent years Madison Pacific Finance offers to extend the guarantee on like terms on an annual basis (cl 2.2(b).
Statutory Framework
Regulation of offerings of interests other than shares and debentures dates back to amendments to the Uniform Companies Act 1961 in New South Wales in 1971. These were further amended when four of the six States adopted uniform amendments to their Companies Acts in 1975 and 1976. Subsequent development of the statute law is helpfully summarised in Ford, Principles of Corporations Law at 22.540:
“The 1975-76 amendments established the basic elements of the definition of “interests”, which came to be known as “prescribed interests” when the Companies Code was adopted by the States and Territories under the co-operative companies and securities scheme, which commenced (for prescribed interests) on 1 July 1982. The basic definitional and regulatory elements of the co-operative scheme were adopted by the Corporations Law, though over time there were extensive developments and modifications in matters of detail through regulations and modifications by the Commission. The system which had evolved from 1971 was replaced by a new conceptual and regulatory system under the Managed Investments Act 1998 (Cth), which commenced on 1 July 1998.”
It was the Companies Act 1961 (NSW) and in particular ss 81 and 76 of that Act which was considered by the High Court in Australian Softwood Forests Pty Ltd v Attorney General (NSW) (1981) 148 CLR 121. Section 81 prohibited the authorised issue or offer of interests to the public for subscription or purchase and invitations to the public to subscribe for or to purchase any interests. The definition of “interests” in s 76 of the Act was almost identical in the relevant parts to the definition of “participation interests” in the Corporations Law.
In 1987 a regulation (Statutory Rule 1987 No 172) was made pursuant to the Companies Act 1981 to exempt from the definition of “prescribed interests” the offer of rights to participate as franchisees in franchises. In an Explanatory Statement issued by the Attorney-General, reference was made to cases in which franchises were held to be prescribed interests on the basis that the franchisee had an interest in profits from the franchisor’s scheme or there was a common enterprise under which the franchisee could expect profits from the efforts of the franchisor. The cases referred to were Commissioner for Corporate Affairs v Casnot Pty Ltd (1981) CLC 40-704, Khania Nominees v Hamilton (1986) 4 ACLC 390 and R v Commons (1986) 4 ACLC 551.
These decisions had the result that a franchisor could be required to be a company within s 164 of the Act, to enter into an approved trust deed and to appoint an approved trustee as well as to hold a dealer’s licence under s 43 of the Securities Industry Act 1980 (Cth). The Explanatory Statement said:
“None of these consequences is intended. New regulation 14A of the accompanying Regulations will therefore exempt from the definition of “prescribed interest” any right to participate or any interest, as franchisee, in a franchise.”
The relevant regulation is now reg 7.1.02 of the Corporations Regulations and is to be read with the definition regulation 1.20.
Provisions of the Corporations Law, dealing with prescribed interests, which have now been supplanted by the Managed Investments Act 1998 (Cth) are in issue in this case. It is to be noted that there are transitional provisions under the latter Act whereby interests created before 1 July 1998 will attract the old “prescribed interests” system subject to the need to comply with the new system by 30 June 2000.
Chapter 7 of the Corporations Law deals generally with “securities” defined in s 92 to include “prescribed interests made available by [a] body”. Part 7.12 is concerned with offering securities for subscription or purchase. Division 5 deals with prescribed interests and covers ss 1063 to 1076 inclusive. The core provision regulating the sale of prescribed interests is s 1064(1):
“1064(1) A person, other than a public corporation, must not make available, offer for subscription or purchase, or issue an invitation to subscribe for or buy, any prescribed interest.”
The term “prescribed interest” is defined in s 9:
““prescribed interest” means:
(a)a participation interest;
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but does not include:
(c)a right or interest, or a right or interest included in a class or kind of rights or interests, declared by the regulations to be an exempt right or interest, or a class or kind of exempt rights or interests, for the purposes of Chapter 7;….”
The relevant parts of the definition of “participation interest” as defined in s 9 are:
““participation interest” means any right to participate, or any interest:
(a)in any profits, assets or realisation of any financial or business undertaking or scheme whether in Australia or elsewhere;
(b)in any common enterprise, whether in Australia or elsewhere, in relation to which the holder of the right or interest is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or a third party; or
(c)in any investment contract;
whether or not the right or interest is enforceable, whether the right or interest is actual, prospective or contingent, whether or not the right or interest is evidenced by a formal document and whether or not the right or interest relates to a physical asset, …”
Franchise rights or interests are exempted from the operation of Chapter 7 by reg 7.1.02:
“For the purposes of the definition of “prescribed interest” in section 9 of the Corporations Law, any right to participate, or any interest, as franchisee in a franchise is an exempt right or interest for the purposes of Chapter 7 of that Law.”
The term “franchise” is defined in reg 1.02:
““franchise” means an agreement or arrangement, whether express or implied, oral or written, between 2 or more persons by which:
(a)a party to the agreement or arrangement (in this definition called “the franchisor”) authorises or permits another party (in this definition called “the franchisee”), or a person associated with the franchisee, to exercise the right to engage in the business of offering, selling or distributing goods or services in Australia or in an external Territory, under a marketing plan or system controlled by the franchisor or a person associated with the franchisor; and
(b)the business carried on by the franchisee or the person associated with the franchisee, as the case may be, is capable of being identified by the public as being substantially associated with a mark identifying, commonly connected with or controlled by the franchisor or a person associated with the franchisor; and
(c)the franchisor exerts, or has authority to exert, a significant degree of control over the business; and
(d)it may reasonably be expected that, in carrying on the business, the franchisee or a person associated with the franchisee is, or will be, substantially dependent on goods or services supplied by the franchisor or a person associated with the franchisor;”
Reference should also be made to s 109H of the Corporations Law which provides:
“In the interpretation of a provision of this Law, a construction that would promote the purpose or object underlying the Law (whether that purpose or object is expressly stated in the law or not) is to be preferred to a construction that would not promote that purpose or object.”
This and associated provisions of the Corporations Law reflect provisions enacted by the Companies and Securities (Interpretation and Miscellaneous) Provisions Code to enable extrinsic materials to be referred to and purposive constructions to be adopted.
The Decision under Appeal
The case for the Commission before the learned trial judge was that the offer documents, taken together, involved a proposal that amounted to a prescribed interest and did not attract the exemption applicable to a right to participate or interest as franchisee in a franchise for which reg 7.1.02 provides.
His Honour posed the question he had to answer thus:
“To determine whether the characterisation of a prescribed interest applied by the Commission to the offer documents is appropriate it is necessary to determine what form of transaction constitutes a franchise as defined in reg 1.02 to ascertain whether the exemption for a right to participate, or interest, as a franchisee in a franchise extends to the combination of transactions attacked by the Commission.”
He then turned to reg 1.02 and the four elements of the definition of “franchise” which it set out. As to the first two elements defined in pars (a) and (b) he observed that the Commission was content to accept that they were present. No argument had been submitted on the third element in par (c). His Honour’s judgment focussed on the fourth element set out in par (d) of the definition. As to this the Commission said at the hearing of the appeal that it had not conceded that all the requirements of pars (a) and (b) were satisfied and in particular did not concede the condition they import that the franchise involves the carrying on of a business by the franchisee. The concession that was made in relation to (a) was that there was a marketing plan or system controlled by the Madison Pacific group. As to par (b) it was the existence of the requisite mark that was conceded and no more. There was no substantial issue on par (c) at the hearing. The Commission’s case was and remained however that the definition of “franchise” requires the carrying on of a business by the franchisee either by itself or by an agent. In the event that characterisation of the case was not contested before this Court.
His Honour rejected the submission from Madison Pacific Management that its services under a Management Agreement would fall within par (d) as services supplied by a person associated with Madison Pacific Australia on which, under the proposed franchise scheme, a franchisee would substantially depend to carry on the business.
He held that, on its face, the appointment of Madison Pacific Management, which operated as an independent contractor responsible for all the costs of the managed business and indemnifying the franchisees, was “external to a franchise agreement and not an element capable of defining a franchise”. His Honour went on:
“The goods or services to be supplied by a franchisor on which a franchisee may reasonably expect to be substantially dependent are those which go to the essence of the business developed by the franchisor and essential for a franchisee to obtain in carrying on the franchised business if the business is to be conducted successfully in the style of the franchisor’s business. Providing for the conduct of a franchised business for the term of the franchise to be carried out by a manager associated with the franchisor tends to negate the concept of franchise embodied in the definition of that term in reg 1.02. Sole and exclusive management by a person associated with the franchisor is not a service upon which a franchisee may reasonable expect to be substantially dependent in carrying on a franchised business.”
His Honour then turned to the question whether the offer by Madison Pacific Management in conjunction with the offer of a franchise was the offer of a prescribed interest and found that it was. He considered the conduct of members of the Madison Pacific group (who were then respondents before him) as a group in publishing the offer documents and the separate conduct of Madison Pacific Management in making the offer to manage the businesses as raising the same issue. He found in effect that Madison Pacific Management’s offer constituted an offer to establish the “franchised business” for absentee investors and that such business would not exist unless and until Madison Pacific Management created it. The holder of a right or interest obtained under the Agreement who appointed Madison Pacific Management was led to expect profit from its efforts and indeed for an investor, his Honour held, it represented the only way in which a profit could be obtained. The requisite common enterprise was to be found in the close connection of the operation of the franchised business with the business of Madison Pacific Management and the expectation that its efforts would provide the gain to be received by either business.
The Contentions
The Madison Pacific companies submitted that the Franchise Agreement, so designated in the scheme documentation, met each of the requirements of reg 1.02. In particular, it was said in relation to reg 1.02(d) that the franchisee carrying on the business expects to be substantially dependent on goods and services provided by the franchisor. In this case the goods and services provided included the Operations Manual under cl 4.4, the optional training and software under cls 4.1 and 4.2 and the allocation of territory under cl 2.
The reasons of the learned trial judge were challenged on the basis that his Honour in effect modified the fourth element in par (d) by holding that the offer to manage negated the characterisation of the arrangement as a franchise. The appointment of a manager was optional and the franchisee could appoint any person to act as manager with the franchisor’s written approval. Moreover it was said the services of Madison Pacific Management could fall within the fourth requirement of the definition of “franchise” as services supplied by a person associated with the franchisor upon which a franchisee would substantially depend to carry on the franchise. This would not require substantial dependence on all the goods and services provided.
If the franchise was a franchise within the meaning of reg 1.02 the fact that there was an offer by Madison Pacific Management to manage the business could not alter that characterisation.
The Commission’s submission did not depend upon any argument that acceptance of the management offer was the only viable way to accept the “franchise” offer generally. Although in practice that would be the probable outcome in most cases, it was enough from the Commission’s point of view that the offer of the package, including management, was made.
There were, it was said, at least two offers of participating interests. The first was the package as a whole. The second was the offer of the Management Agreement alone. The offer of management was the offer of a right to participate in or interest in the profit of Madison Pacific Management’s business undertaking. That offer taken by itself was an offer of a common enterprise.
Whether the Scheme Offers a Prescribed Interest
The general question to be posed pursuant to s 1064(1) is whether the conduct of the Madison Pacific group and, alternatively, the conduct of Madison Pacific Management constituted the making of offers for subscription or purchase of any prescribed interest.
There is no dispute that the Madison Pacific group was issuing or offering to the public the right to participate in its “franchise” scheme or extending invitations to the public to do so. The concepts of “issue”, “offer” or “invitation” are wide and plainly wide enough to embrace the present case – Australian Softwood Forests Pty Ltd at 134-135.
The narrower question then arises whether the subject of the issue offer or invitation was a prescribed interest. This can be approached by asking first whether a relevant exemption under par (c) of the definition of “prescribed interest” applied. If the answer is in the affirmative there is no need to consider further whether the scheme would otherwise constitute a prescribed interest. If the exemption is not applicable the remaining issue is whether the scheme involves the offer of that category of “prescribed interest” designated as “participation interest”. That would require the application of the various elements of the definition of “participation interest” to the facts of this case. The primary issue in this case is the application or non-application of the franchise exemption.
If the subject of the issue, offer or invitation is “a right or interest…included in a class or kind of rights or interests, declared by regulations to be….a class or kind of exempt rights or interests for the purposes of Chapter 7” then it is not a prescribed interest for the purposes of s 1064. Regulation 7.1.02 exempts as a class “any right to participate, or any interest as franchisee in a franchise”. The question whether the offer involved “a right to participate” or “any interest” was not agitated on appeal. Those words however are to be read in combination with the definition of franchise. So the question is whether what was offered was a right to participate or an interest in “an agreement or arrangement … by which” the various elements set out in pars (a) to (d) inclusive of reg 1.02 were satisfied.
Turning directly to par (d) the question is whether what was offered was a right to participate or an interest as franchisee in an agreement or arrangement by which:
“it may reasonably be expected that in carrying on the business, the franchisee or a person associated with the franchisee is, or will be, substantially dependent on goods or services supplied by the franchisor or a person associated with the franchisor.”
The “business” referred to in par (d) is identified in par (a) as “the business of offering, selling or distributing goods or services in Australia or in an external Territory, under a marketing plan or system controlled by the franchisor or a person associated with the franchisor”.
His Honour observed in this case that “the franchise must relate to the establishment of a business which uses the franchisor’s system of marketing goods or services…”. He also said that for investors resident in Western Australia, and by extension investors resident outside New South Wales, Madison Pacific Management would establish the franchised business and it would not exist until Madison Pacific Management was able to create it. In my view that reflects the reality of the arrangements for out-of-State investors. Indeed I would go further and say it reflects the reality of the arrangements for all investors. In real terms the scheme, in its day to day operation, will be difficult to distinguish from a business conducted by the Madison Pacific group in which members of the public have been invited to invest. That observation however, does not conclude the case. There is no contention by the Commission in this case that the various agreements which make up the scheme documentation are shams. Indeed that suggestion was disclaimed. So the question whether the rights and interests offered relate to a franchise must be considered by reference to the documentation which makes up the offer rather than by speculation, however informed, about how it will be made to work in practice.
In Australian Softwood Forests it was said by Mason J at 130:
“There are real difficulties in the suggestion that the court can read down the very comprehensive definition of “interest” by reference to the supposedly unintended consequences of a literal reading on everyday commercial transactions. The definition is so general and all-embracing that it is impossible to say that it necessarily excludes particular transactions which appear to be covered by the general words. The hazards of adopting such a course are not dispelled by the absence of a supporting context. It would be different if we could glean from the legislative provisions an overall purpose which being limited in scope, justified a reading down of the definition. Unfortunately in this case the search for a legislative purpose takes us back to the very words of the definition for the intended scope of the operative provisions depends so heavily on the comprehensive language of that definition.”
That proposition applying to the general language of ss 81 and 76 of the Companies Act 1961 (NSW) can be applied also to the general language of the exemptions under consideration in this case. The reference in the Explanatory Statement to the unintended consequences that franchises were caught by the prescribed interests provisions prior to the exemption does not thereby offer a basis for construction of the statutory elements of “franchise” beyond what the words of the exemption allow. There is no limiting purpose beyond the words of the Act itself to read down the scope of the exemption to cover a category narrower than the ordinary meaning of its words would suggest.
His Honour decided the issue of the franchise exemption by focussing on par (d). What was required was consideration of the words of par (d) and their relationship in particular to the Management Agreement offered by Madison Pacific Management. As the Commission submitted, that consideration need not proceed on the basis that resort to the Management Agreement was the only viable option for investors. It is sufficient that it is offered and the package, including that offer, examined in deciding whether it amounted to a “prescribed interest”. To say that the Management Agreement is optional does not answer the proposition that the package including the Management Agreement defines what is offered. It contemplates that there will be a range of investors, even if theoretically not all, to whom what is offered and what is issued will be a right to participate in an agreement or arrangement including the management agreement.
His Honour characterised the Management Agreement as “.. external to a franchise agreement and not an element capable of defining a franchise”. In so saying no doubt he was addressing the requirement that each of pars (a) to (d) of the definition of franchise refers to the content or operation of the relevant “agreement or arrangement”. So the franchise agreement or arrangement must be something “by which” it may reasonably be expected that the franchisee will be substantially dependent on goods or services supplied by the franchisor or a person associated with the franchisor.
But to characterise the Management Agreement as “external to a franchise agreement and not an element capable of defining a franchise” does not conclude the question whether par (d) is satisfied. The inclusion in the offer of some component which does not fall within the definition of a franchise does not necessarily have the result that what is offered is not a franchise. His Honour went further and said that the management proposal tended to “negate the definition of franchise embodied in the definition of that term in reg 1.02”. This must be linked with his further observation of his Honour that:
“Sole and exclusive management by a person associated with a franchisor is not a service upon which a franchisee may reasonably expect to be substantially dependent in carrying on a franchised business.”
One way of approaching the question is to ask whether the Madison Pacific Management proposal is inconsistent with the franchisor/franchisee relationship contemplated by par (d). If it is inconsistent and not merely superadded then it cannot stand with par (d) and a proposal incorporating the management proposal is not a franchise. If it is consistent with the requirements of par (d) then notwithstanding its practical operation, the arrangement may attract the exemption.
The language of par (d) contemplates a business for which the franchisee has legal responsibility albeit it will use goods and services supplied by the franchisor or its associate. It contemplates a degree of supervision and control by the franchisee reflected in the words which speak of the franchisee “carrying on the business”. The reference to the franchisee being “substantially dependent” is not consistent with the franchisee operating as a mere cypher of the franchisor and effectively under the total control of the franchisor or a person associated with it.
The duties of the manager under the Optional Management Agreement are to “manage, direct and control the Franchised Business on behalf of the Franchisee” (cl 5.1). It is “subject to the Franchise Agreement” to “act on its own initiative and exercise such powers as may be available to it as the manager of the Franchised Business” (cl 5.3(f)). Importantly, it is to “comply with all reasonable instructions and directions as may be given to the manager by the Franchisee concerning the general conduct and management of the Franchised Business” (cl 5.3(i)). On the other hand the scope of the responsibility given by the franchisee to the manager under cl 6.1 is wide and involves a delegation of the franchisee’s “rights, powers, duties, discretions and benefits conferred…by the Franchise Agreement…” By cl 6.2 the franchisee is not to require the manager to do anything that is not permitted nor to prohibit or restrict the manager doing anything that is required to be done under the Franchise Agreement. Of this it can be said, however, that the clause simply ensures that the manager cannot be prevented by the franchisee from doing anything that the franchisee is obliged to do under the Franchise Agreement. It does not displace the discretion to give general directions under cl 5.3(i). The indemnity clause of the agreement under which the manager will indemnify the franchisee against all payments, costs, charges and expenses does not of itself relieve the franchisee of personal liability for the debts of the business. It may be said however that the obligation on the manager to “ensure so far as possible that the Franchisee is not personally liable for such payments, costs, charges and expenses” suggests an obligation on the part of the manager to contract on its own behalf and not as agent for the franchisee, whether as undisclosed principal or otherwise. Indeed the agreement provides that the manager is an independent contractor engaged by the franchisee albeit it leaves open the possibility that the manager will be the franchisee’s agent to the extent required by the Management Agreement and at common law in any event an agency relationship may be imputed.
In my opinion on an analysis of the legal rights and duties created by the Optional Management Agreement it is not inconsistent with the scheme documentation otherwise satisfying the requirements of par (d). The ultimate responsibility for carrying on the business, albeit the business may in effect be created by the manager, is that of the franchisee. The ultimate legal liability, save to the extent that it can be avoided by the manager contracting in its own right, remains with the franchisee. The franchisee has a power to give directions to the manager concerning the general conduct of the business. The manager plainly has legally enforceable obligations to the franchisee and the agreement may be terminated for breach or not renewed upon the expiry of its term.
Treating the Management Agreement as “external” to the Franchise Agreement, the franchise does meet the requirements of par (d) by reference to the various goods and services provided including the Madison Pacific Operations Manual, the utilisation of Madison Pacific know how, sales training and property services, the Property Services Software Program which would allow franchisees to monitor the performance of the manager, direct response advertising programs, direct mail programs, telemarketing programs and associated training packages, co-ordination of promotional and direct mail materials, provision and placement of media programs, provision of prospect lists and the conduct of ongoing market research and effectiveness monitoring. All of these services are provided for in the Marketing Agreement.
In any event I am satisfied that on an analysis of the legal rights and duties of the manager and those of the franchisee under the Management Agreement to which I have already referred, the services provided by the manager were within the scope of the kinds of services contemplated in par (d) supplied by the franchisor or a person associated with the franchisor.
I agree also with Carr J, and for the reasons that he has expressed, that the Management Agreement cannot be singled out and identified as a participation interest.
Conclusion
In my opinion therefore his Honour erred in holding that the proposed agreement or arrangement was not a franchise for failure to satisfy the requirement in par (d) of the definition. The appeal should therefore be allowed.
I certify that the preceding seventy-four numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.
Associate:
Dated: 8 February 1999
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WG 87 OF 1998
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
MADISON PACIFIC PROPERTY MANAGEMENT PTY LTD
(ACN 081 776 810)
First AppellantMADISON PACIFIC AUSTRALIA PTY LTD
(ACN 981 776 874) AS TRUSTEE OF THE MADISON PACIFIC AUSTRALIA TRUST
Second AppellantMADISON PACIFIC MANAGEMENT PTY LTD
(ACN 081 776 758) AS TRUSTEE OF THE MADISON PACIFIC MANAGEMENT TRUST
Third AppellantMADISON PACIFIC MARKETING PTY LTD
(ACN 081 776 794) AS TRUSTEE OF THE MADISON PACIFIC MARKETING TRUST
Fourth AppellantMADISON PACIFIC FINANCE PTY LTD
(ACN 081 776 847) AS TRUSTEE OF THE MADISON PACIFIC FINANCE TRUST
Fifth AppellantAND:
AUSTRALIAN SECURITIES COMMISSION
Respondent
JUDGE:
FRENCH, DRUMMOND AND CARR JJ
DATE:
8 FEBRUARY 1999
PLACE:
PERTH
REASONS FOR JUDGMENT
DRUMMOND J:
I have had the advantage of reading Carr J’s reasons in draft. I regret that I am unable to agree with the view that his Honour takes. However, I gratefully adopt his statement of relevant facts and statutory provisions and his summary of the parties’ contentions.
The respondent’s contention is that the appellants, in soliciting purchasers for their various services, infringed s 1064(1) the Corporations Law by making an offer for purchase of a prescribed interest. This appeal is concerned with whether the appellants have a good answer to this charge in so far as they say that what they offered for purchase was the right to participate as franchisee in a “franchise” and thus the offer of something exempt from the reach of s 1064.
Section 1064(1) prohibits a person, subject to a qualification not presently relevant, from offering for purchase any “prescribed interest”. The definition of “prescribed interest” in s 9 expressly excludes any right or interest declared by the regulations to be an exempt right or interest for the purposes of Ch 7. Regulation 7.1.02 the Corporations Regulations declares that, for “the purposes of the definition of ‘prescribed interest’ in section 9 of the Corporations Law, any right to participate, or any interest, as franchisee in a franchise is an exempt right or interest for the purposes of Chapter 7 of that Law”.
In order to determine whether what the appellants offered was such an exempt right or interest, it is first necessary to identify the subject matter of their offer.
The learned primary judge correctly, in my opinion, treated the appellants’ offer as a package consisting of a number of elements. This offer was presented by the appellants to offerees in a single fifty two page document under a cover entitled “Franchise Agreements”. This document is described at p 32 of the Information Memorandum, which the appellants also distributed to offerees, as “a document entitled Franchisee Agreements which embodies the various Agreements associated with the Madison Pacific Franchise and includes: Franchise Agreement, Management Agreement, Marketing Agreement, Loan Agreement, Loan Repayments Guarantee”. The table of contents at p 1 of the “Franchise Agreements” document lists these five elements and a sixth document, called a “Franchise Endorsement Page”. This Page, at page numbered 51, takes the form of an agreement which will arise upon the execution of the “Endorsement Page” between the person described in it as the “franchisee” and each of the following: Madison Pacific Australia, to entry into the Franchise Agreement; Madison Pacific Management, to entry into the Management Agreement; Madison Pacific Marketing, to entry into the Marketing Agreement and Madison Pacific Finance, to entry into both the Loan Agreement and the Loan Repayments Guarantee. The Endorsement Page also states that the Loan Agreement is only available if the Management and Marketing Agreements are executed, while the Loan Repayment Guarantee is only available if all three of these Agreements are executed.
In order to obtain a proper understanding of what was offered, it is necessary to have regard to the appellants’ Information Memorandum and its “Your Key Questions Answered” document, that was also distributed by the appellants with the “Franchise Agreements” document.
The Franchise Agreement in terms confers on the franchisee the exclusive right to provide “the Madison Pacific Services to the Specified Properties during the Term using the Madison Pacific System and the Madison Pacific Image”, ie, to supply for twenty years a range of administrative and other services in particular formats to certain owners of properties in New South Wales and to use the Madison Pacific trademark and other intellectual property in identifying those services as Madison Pacific services: see cl 2.1 and definitions of the various terms in cl 1.1 of the Franchise Agreement. While the definition of “Specified Properties” in the Franchise Agreement indicates that the franchisee is to obtain, by force of cl 2.1, the right to provide the Madison Pacific services to a minimum of 300 specific property addresses located within New South Wales, the Information Memorandum makes it clear that only property owners within the Sydney Metropolitan Area are to be included in this “territory” of 300 addresses (p 5) and that franchisees are to seek management agreements only with owners of these addresses that are residential rental properties: see p 3 and the annexures to the Memorandum incorporated in it as p 17 and pp 30 and 31. The cash flow projections in the Memorandum, at pp 10 and 27, envisage that in order to generate an average annual income of $8,150 per annum over the twenty year life of the Franchise Agreement, each franchisee will need to have the management rights to only a small number of rental properties - up to a maximum of about a dozen - recruited from the 300 properties initially allocated to the franchisee. There is, however, no restriction on the number of properties a franchisee can have under management.
The Information Memorandum describes the Manager’s role under the Management Agreement as follows:
If appointed, [Madison Pacific Management] will, on behalf of the Franchisee, manage and direct the day to day operations of the Madison Pacific business and will endeavour to promote, advance and improve the business. Regular financial and operational reports will be provided to Franchisees by Madison Pacific Management to enable them to adequately monitor their Madison Pacific business.
An analysis of the fees charged by the Manager in the first year, relative to the second and later years, highlights the additional works and services that will be performed by the Manager in the first year. The servicing, introduction and development of rapport with new tenants and landlords, together with the establishment of new records and close physical analysis of the franchise territory itself is significantly greater in the first year.
I now turn to the question of whether the fourth criterion in Regulation 1.02(1) was satisfied. With great respect to the primary judge, I think that it was satisfied. Taking the “arrangement” offered, I think that it is quite clear that it was an arrangement “by which” it might reasonably be expected that, in carrying on the business, the franchisee would [the actual wording is “is, or will be”] be substantially dependent on services supplied by the franchisor or a person associated with the franchisor. Given the economies of scale sought to be achieved by the Manager conducting simultaneously the various businesses of the franchisees, it would, in my opinion, reasonably be expected that the franchisee would engage the Manager for that purpose. The whole arrangement was one in which that might reasonably be expected to occur, i.e. that the Manager as agent of the franchisee would carry on its (the franchisee’s) business. [Although clause 12 of the Management Agreement disclaims the constitution of the Manager as an agent of the franchisee, that disclaimer is qualified by the words “(except to the extent required by this Agreement)”. In my view, the obligation accepted by the Manager, by clause 5.1 of that agreement, to “… manage, direct and control the Franchised Business on behalf of the Franchisee” had the result that the Manager became the franchisee’s agent for those purposes at least.] In those circumstances, it is not necessary to consider the further issues of whether the additional goods or services supplied by the franchisor would fall within sub-paragraph (d), or whether the Manager became a person associated with the franchisee.
I would reject the respondent’s contention that the Management Agreement can be singled out and identified as a “participation interest”. I do so because of the width of the exemption worked by Regulation 7.1.02. I repeat the words “… any right to participate, or any interest, as franchisee in a franchise …”. Each franchisee, as such, has the option of engaging the Manager under the Management Agreement. The offer of the managerial services can be seen as a very important part of the franchise. Indeed, I have held, that, by itself, it satisfies the fourth criterion of the definition as an “arrangement” by which it may reasonably be expected to constitute services upon which the franchisee will be substantially dependent. In my view, it would fly in the face of the obvious Parliamentary intent, to which I have referred above, to remove such an important part of what is offered to the franchisees from the exemption conferred by Regulation 7.1.02. The arrangement should be viewed as a whole. If it is an arrangement by which the various criteria are satisfied, then it is a franchise, as the whole “arrangement” falls outside the definition of “prescribed interest”. In those circumstances, it is not necessary for me to consider the appellants’ other arguments for excluding the offer of a Management Agreement from the definition of “prescribed interest”.
Conclusion
For the foregoing reasons, I would allow the appeal and set aside the orders made at first instance.
I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr Associate:
Dated: 8 February 1999
Counsel for the Appellant: Mr M L Bennett Solicitor for the Appellant: Bennett & Co Counsel for the Respondent: Mr J A Chaney Solicitor for the Respondent: Michael Gething Date of Hearing: 16 November 1998 Date of Judgment: 8 February 1999
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