Master Education Services Pty Limited v Ketchell

[2008] HCATrans 89

[2008] HCATrans 089

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S384 of 2007

B e t w e e n -

MASTER EDUCATION SERVICES PTY LIMITED

Applicant

and

JEAN FLORENCE KETCHELL

Respondent

Application for special leave to appeal

GUMMOW J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 8 FEBRUARY 2008, AT 2.54 PM

Copyright in the High Court of Australia

MR V.V. BEDROSSIAN:   May it please the Court, I appear for the applicant.  (instructed by Meehans Solicitor Corporation)

MR S.J. BURCHETT:   I appear for the respondent with my learned friend, MR R.E. STEELE.  (instructed by McPhee Kelshaw Solicitors)

GUMMOW J:   Yes, Mr Bedrossian.

MR BEDROSSIAN:   Thank you, your Honours. 

GUMMOW J:   We see that the application book has in it an affidavit from Mr Giles who is a member of a body called the Franchise Council of Australia saying what an important case this is.  How much money is involved?

MR BEDROSSIAN:   In this particular case, at first instance the judgment was of the order of $25,000 to $30,000.  Of course, since that time the matters of principle have emerged.

GUMMOW J:   Yes.  I do not know if you have people here who give you instructions, but this is what I want you to think about.  If you were successful in obtaining a grant of special leave, a condition might be imposed as to the carriage of costs in any event by your side who I imagine is the Board of the Franchise Council.  You may need to take a moment to get instructions on that before you proceed.

MR BEDROSSIAN:   Your Honour wishes me to do so now?

GUMMOW J:   If you want to.

MR BEDROSSIAN:   Yes, if your Honour please.  Your Honours, the best I can put it at this point is that because I am not instructed by solicitors who obtain instructions from the Franchise Council, that is no doubt a possibility and if otherwise special leave were granted and a condition were imposed to that effect, of course my client would make every endeavour to satisfy that condition, but I am unable to provide ‑ ‑ ‑

GUMMOW J:   The condition would be an undertaking to the Court by your client.

MR BEDROSSIAN:   Indeed.

GUMMOW J:   It will be for your client to make sure of the strength of the arrangements it might have with the Franchise Council.  Do you follow me?

MR BEDROSSIAN:   Yes, I follow what your Honour is saying and I do not dispute that there are more than just my client who may be interested in the outcome of the proceedings.

GUMMOW J:   Yes, very well.

MR BEDROSSIAN:   If your Honours please.

GUMMOW J:   You say Justice Windeyer got this situation correctly identified as to the interrelation between the common law and the remedies of the Trade Practices Act?

MR BEDROSSIAN:   Yes, in a broad sense, but clearly not descending to the level of analysis that would be available to this Court when one has reference to, for example, explanatory material and second reading speech that I have included in the applicant’s bundle.  So there would be a greater analysis but, yes, I submit that that was the correct analysis.

GUMMOW J:   Is there any reference in the Court of Appeal to our decision in SST?

MR BEDROSSIAN:   There is, your Honours.  The Court of Appeal purports to make reference to it and adopts portions of it, for example, at application book 44, paragraph 28 of the judgment.  SST Consulting Services is cited as involving an approval of what was said as being the general rule or the ordinary rule.  In my respectful submission ‑ ‑ ‑

GUMMOW J:   I mean SST is directed to the Trade Practices Act as well as these general propositions.  Is there any further reference to SST?

MR BEDROSSIAN:   As I recall, there is.  At application book 49 at paragraph 48 of the judgment there is an extract.  Beyond that the Court of Appeal do not really deal with SST Consulting other than to reject the submission that was made on behalf of my client that, although not applicable in a strict sense, some of the statements of the majority in SST Consulting were indicative of the same sort of approach that should be adopted regarding Part IVB, section 51AD of the Act.

GUMMOW J:   If you are correct, how would this sort of dispute play out within the framework of the Trade Practices Act.....system?  Your client sues for recovery of money from the franchisee.  The franchisee complains that your client contravened the Trade Practices Act.  What happens then?

MR BEDROSSIAN:   There would be a cross-claim seeking relief whether by way of damages or relief from the enforceability of a contract and that cross-claim would need to establish a separate course of action under, for

example, section 51AC or AD of the Act.  In those circumstances, the onus would then fall upon the franchisee to establish that loss was caused directly or relevantly by conduct that constituted a breach of the Code itself.

GUMMOW J:   Where would that leave your claim for $25,000?

MR BEDROSSIAN:   The franchisee did bring a cross-claim in these proceedings under section 51AC and asserted, amongst other things, that the conduct giving rise to a claim for damages was a breach of the Code itself.  That cross-claim was determined and, if I can take your Honours to application book 4, your Honours will see at about application book line 17 there is a finding by the Local Court Magistrate:

I find on balance that no damage is shown to be suffered as a result of non compliance with clause 11.

GUMMOW J:   Yes, I see.

MR BEDROSSIAN:   Now, what has occurred there is there has been an express finding that nothing flowed from whatever breaches there were and that brought an end to the cross-claim and it has not been disturbed since.  In those circumstances, the upshot of the entirety of these proceedings is that, as my client submits, the technical breaches that were found and are not disputed to have not caused relevant damage and hence given rise to an entitlement to relief, nevertheless have resulted in my client not being able to recover the outstanding fees in question.

GUMMOW J:   Thank you.  I think we will hear from Mr Burchett.

MR BEDROSSIAN:   If your Honours please.

GUMMOW J:   I think we are seized of the thrust of what you are saying.

MR BURCHETT:   Your Honours, the result that my friend suggested happily for his client would not be the result, in my respectful submission, if one were to follow through with the argument that he seeks to make out, in that, yes, indeed, there was a cross-claim which was dismissed but, unhappily, it was dismissed by an error that was found to be an error indeed by, as he then was, Master Malpass in taking into account a capital gain on the sale of the little cottage outside Mudgee which my client purchased in order to operate this business from. 

His Honour, as he now is, in that decision held that our defence warranted returning it to the Local Court magistrate but did not list the decision on the cross-claim because he held that, disregarding the capital gain, it was a break even position, as he put it but, of course, he was relying on the existence of the defence at that time implicitly accepting it as a good defence and indeed expressly accepting that Justice Windeyer’s decision did not answer it.

If one then adds the loss that is caused by, of course, the order for payment of the franchise fees, then plainly the $1,000 loss that his Honour regarded as insignificant at that time becomes a significant loss.  It is unfortunate that his Honour Associate Justice Malpass, when the matter came back before him again on the appeal from the upholding of our defence, took a completely different view about the defence and the decision in The Cheesecake Shop Case.  As a result, we find ourselves in the position where our cross-claim has been dismissed on the basis of just having a proper defence which would prevent us having a loss because we would not have to pay the franchise fees and yet, because of the mix up in the court below about the effect of The Cheesecake Shop Case, we do not have our cross-claim any more as a subject of these proceedings. 

If we had our cross-claim on and if my friend was correct that what we had to do was to rely on section 82 and 87 as we had in the cross-claim, then his claim for the franchise fees would plainly give rise to a loss in accordance with the Federal Court decisions that deal with how one views an 82 or 87 claim in relation to a breach of the Code.

CRENNAN J:   Contravention was basically admitted, was it not?

MR BURCHETT:   Yes, eventually.  In the course of the appeals the disputes dropped off and we are now in the indisputable position that what the applicant seeks special leave to appeal about is whether or not a court should take notice of a clear prohibition on a party receiving money which it is asked to order that it receive.  It is not a case of having to look at implications or policies of a statute or anything like that.  It is simply a question of, first and foremost, whether or not a court should obey the law ‑ ‑ ‑

GUMMOW J:   What law?

MR BURCHETT:   The law as stated in the legislative instrument constituted by the Code through the regulation and section 51AD which says that the corporation must not contravene that Code.

GUMMOW J:   That is the whole question that is thrown open by SST.  That is the question.  I do not think one can say the answer is clear cut.

MR BURCHETT:   With respect, we get to SST when we look at really the wider point ‑ ‑ ‑

GUMMOW J:   I do not think one can say the answer is clear cut.  You may ultimately be right.

MR BURCHETT:   In my respectful submission, it is clear cut, because what your Honour is looking at is the wider aspect of the matter; that is, whether or not the prohibition on entry into the contract means that the contract is unenforceable.  I say that there is, I think, on the last count 14 judges of this Court who have all consistently supported that general rule but, be that as it may, the point is when one looks at 11(1)(c) one has a clear, indisputable statement by delegated legislation, which is not disputed as being valid and within power, as to the consequences of the franchisor’s breach of the Code and it states clearly that it is not entitled.  It must not receive the money which it asks the court to order it receive. 

A court cannot ignore that, in my respectful submission.  The court is bound just as much as the franchisor.  It cannot become complicit in the franchisor’s breach of the Code and thereby breach of the Act which ‑ ‑ ‑

GUMMOW J:   Wait a minute, Mr Burchett.  When you say “the court must not”, are you applying the common law in this or are you applying some implication from the statute which it does not specify or some other combination, or what?

MR BURCHETT:   No, I am applying simply the common law, as I think Justice Kirby said on one occasion in the case, that the only question of public policy when you are looking at a clear statement in the legislation that the contracts are not enforceable is that the court obeys the law.

GUMMOW J:   It is more sophisticated than that, if I may say so, Mr Burchett.

MR BURCHETT:   That is when we go to the next step, the entry into the contract prohibition, but even then there is no question it is worthy of the consideration of this Court because the general rule, as it is called, has been uniformly accepted by this Court in every decision that has considered it and in relation specifically to the Trade Practices Act and breaches of sections within the Trade Practices Act.  Starting with Milreis shortly after the passing of the Trade Practices Act going right up to SST and Baxter most recently, we have consistent acceptance of that rule that if there is a clear prohibition on entry into the contract, then it is unenforceable unless there be something else in the statute which states a contrary position.

There is not a single thing that is pointed to by the applicant which goes to the contrary.  Indeed, in attempting to find something by reference to explanatory memoranda and the type we see that in fact it supports the position that the Code and the section mean exactly what they say; that the contract entered into in defiance of the Code is to have the consequence that no non-refundable moneys are to be received.  Perhaps if I can take you to SST.

GUMMOW J:   For what purpose?

MR BURCHETT:   To demonstrate how it is entirely consistent with the general rule that my friend seeks to contest.  At tab 9 of the applicant’s bundle and at paragraph 34 the majority referred to the “central proposition” of section 4L, which my friend seeks to rely upon as being indicative that the general rule does not apply in the Trade Practices Act and in fact it is quite the opposite.  The existence of 4L, as stated in this passage in SST, indicates that it is assumed that the general rule will apply, the ordinary rule as it is referred to here, unless there are the circumstances that are set out in 4L.

GUMMOW J:   The purpose of the Franchise Code is to regulate conduct, is it not? 

MR BURCHETT:   It is.

GUMMOW J:   By and large, the Trade Practices Act is all about conduct.

MR BURCHETT:   Yes.

GUMMOW J:   It is not about making or not making contracts.

MR BURCHETT:   There a number of provisions that deal with contracts, of course.

GUMMOW J:   Of course the conduct may be ....... by the formation of a contract.

MR BURCHETT:   Yes, and indeed there are provisions, such as section 45, dealt with in Carlton & United and these provisions all deal with various other provisions beside it in that case.

GUMMOW J:   The attention by the scheme of the Trade Practices Act in general to conduct is a matter to which we had regard in SST, did we not, in adjusting the negative consequences, if you like, of the statute to the common law principles of illegality of contracts?

MR BURCHETT:   Yes.  The basis upon which the decision was made was that the norms of conduct that are sought to be established are norms that are current at the time that ‑ ‑ ‑

GUMMOW J:   Yes, I understand that.  I suppose what I am putting to you is that it may be that the treatment of SST therefore in the Court of Appeal was not as ample as it might have been.

MR BURCHETT:   I think, with respect, all the Court of Appeal was looking at was, well, has there been any change to the general approach to a statute which is shown clearly to prohibit entry into a contract of what the consequences are.  They had a look at all the normal cases, such as Yango and Nelson and so forth, and saw that they were all dealing with the different situation of where you could not find a clear statement as to what the prohibition was.  They moved on then to, say, has that been endorsed by this Court recently, and SST clearly does endorse it.  It endorses it by showing, as indeed I think the Chief Justice put in Carlton & United before this Court, that section 4L, by making an exception to the rule, shows quite clearly the legislative intention that the rule is to otherwise apply and, indeed, otherwise we have the situation that is cited time and time again in the cases from Milreis, Justice Brennan’s decision there, that otherwise provisions such as this Code intended to regulate the conduct between parties in commerce from day-to-day cannot be relied upon because they would not be creating legal rights and obligations to regulate that conduct as it occurs, but one would have to wait and see what the outcome of an application to the court under section 82 or 87 was.  That would be an intolerable situation.  Retrospective codes of conduct are hardly what was intended.

GUMMOW J:   Jurisdiction under section 87 these days is more broadly invested than it was at the time of the Carlton & United litigation, is it not?

MR BURCHETT:   That is true.

GUMMOW J:   As this very case illustrates.  The Local Court was dealing with this.

MR BURCHETT:   I am sorry.  I did not catch that.

GUMMOW J:   The Local Court was exercising federal jurisdiction on this cross-claim.

MR BURCHETT:   It was, yes.  In my respectful submission ‑ ‑ ‑

GUMMOW J:   So the practical problems of bifurcation that seemed to exist 20 years ago have been alleviated by the Federal Parliament broadening the scope of the investment of federal jurisdiction.

MR BURCHETT:   But that, in my respectful submission, does not reflect on the present affectation of legal rights and obligations intended to be made by sections such as 51AD and 45.  Indeed, part of the problem that was identified in the explanatory material that my friend relies upon was the problem of the unreliability of franchisees having to make application to court to seek relief.  The Code of Conduct was intended to apply and regulate the conduct from day to day of franchises, between franchisor and franchisee, and to give and confer and impose rights and obligations then and there, not to make the parties go to the expense that was sought to be avoided of bringing proceedings in order to see where they stood. 

More importantly in this case, as your Honour Justice Gummow raised right from the start, this is a case about $25,000 to $30,000 which to my client is a lot of money but, nonetheless, is completely overshadowed by the costs that have been incurred in these proceedings to date.  We do not know what the capacity is of the applicant to meet our costs even though we are currently the beneficiary of cost orders and even though it is ‑ ‑ ‑

GUMMOW J:   If special leave were granted it would be conditioned upon the solicitor for the applicant undertaking to the Court that its client would do this.  The solicitor who gave that undertaking without being absolutely sure that it was properly backed would be in deep trouble.

MR BURCHETT:   That certainly gives me some comfort, your Honour.  The point that I still make is that this is an inappropriate matter in which to consider the points that are raised because we have the two aspects of the Code that were relied upon by the Court of Appeal and it is only in relation to one that on one view of the matter it would be quite unnecessary to decide that my friend relies on; that is, his challenge is to the findings in relation to clause 11(1)(a), the prohibition on entry and the consequences of that for illegality of the agreement in whole, but strictly speaking the Court of Appeal did not need to go that far and this Court would not need to go that far because there is 11(1)(c) quite plainly stating the consequences of the conduct; that they must not receive the money that they ask the Court to make them receive. 

That stands outside any argument that in fact seems to have been made in the application.  I frankly do not know what the challenge is to that.  It does not appear to be enunciated in any clear way at all in the application.  I simply seek to say that the court erred.

GUMMOW J:   Thank you, Mr Burchett.  Anything in reply?

MR BEDROSSIAN:   Only to address two issues.  Firstly, if your Honours want to hear me about my learned friend’s submission about the finding of loss or damage caused by conduct originally by the Local Court and then on appeal, I can answer that issue if your Honours wish to hear about that.  In substance, the reality is that there was a decision not to grant leave to appeal

with respect to that issue and the relevant portion of Master Malpass’ decision appears at application book 13, paragraphs 27 to 31.  I also wish to address, your Honour, the issue of an undertaking on behalf of my client. 

My client is a private litigant and, in my respectful submission, ought to be subject to the same conditions or lack of conditions as would occur in other cases of like nature.  The reality is that it was the franchisee who obtained leave to appeal to the Court of Appeal and that leave was granted despite the fact of the quantum of the amount in issue at that stage.  In my respectful submission, it would be an unfair burden to impose that condition on my client now having an arguable position at least with respect to the Court of Appeal’s judgment.  Those are my submissions.

GUMMOW J:   We will take a short adjournment.

AT 3.32 PM SHORT ADJOURNMENT

UPON RESUMING AT 3.32 PM:

GUMMOW J:   There will be a grant of special leave to appeal in this matter limited to grounds 2, 3 and 7 of the draft which appears at pages 56 and 57.  In limiting the grant in that way we are not meant to exclude from argument the propositions laid out in paragraphs 4, 5 and 6, but we think they are truly argumentative rather than having necessary quality of a ground of appeal.  So the notice of appeal founds a grant of leave limited to grounds 2, 3 and 7. 

The operation of that order is suspended and will not take effect until the applicant by its solicitor has furnished to this Court in a written form satisfactory to the District Registrar an undertaking in any event to pay the costs of the respondent of an incidental to the appeal to this Court and not to seek to disturb any costs orders in favour of the respondent made in the New South Wales Court of Appeal.  Now, is that clear?

MR BEDROSSIAN:   Yes, it is, your Honour.

GUMMOW J:   Very well.

MR BURCHETT:   One query in relation to it as to whether that covers the costs orders made in the Local Court.

GUMMOW J:   I said not to disturb the costs orders made in the Court of Appeal.

MR BURCHETT:   Yes.  I was just inquiring as to whether your Honour intended to cover the disturbance of those orders made in the Local Court as well.

GUMMOW J:   What did the Court of Appeal do about that?

MR BURCHETT:   They set aside the orders made by Associate Justice Malpass which had set aside the orders made in the Local Court, so reinstated the ‑ ‑ ‑

GUMMOW J:   But you were successful as far as costs were going in the Court of Appeal, were you not?

MR BURCHETT:   Yes, so they did not make a costs order in relation to the Local Court.

GUMMOW J:   We deal with the Court of Appeal, Mr Burchett.  You were successful in the Court of Appeal as to costs, right?

MR BURCHETT:   Yes, but that order reinstates the order made in the Local Court.

GUMMOW J:   Do you seek any disturbance on any occasion now of the costs orders made in the Court of Appeal?

MR BURCHETT:   No.

GUMMOW J:   Exactly.  They will not be disturbed, so quit grumbling, as they say.

MR BURCHETT:   I understand.  Thank you, your Honour.

GUMMOW J:   I will just read it again. 

1.Special leave is granted but limited to grounds 2, 3 and 7 in the draft notice of appeal.

2.The operation of order 1 is suspended and will not take effect until the applicant by its solicitor has furnished to this Court on or before 3 March 2008 in a written form satisfactory to the District Registrar an undertaking in any event to pay the costs of the respondent of and incidental to the appeal to this Court and not to seek to disturb any costs orders in favour of the respondent made in the New South Wales Court of Appeal.

MR BEDROSSIAN:   If the Court pleases.

MR BURCHETT:   May it please the Court.

AT 3.35 PM THE MATTER WAS CONCLUDED