Montedeen Pty Ltd v Bamco Villa Pty Ltd
[1999] VSCA 59
•18 May 1999
SUPREME COURT OF VICTORIA
COURT OF APPEAL Not Restricted
No. 2175 of 1996
| MONTEDEEN PTY LTD |
| Appellant |
| v |
| BAMCO VILLA PTY LTD |
| Respondent |
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JUDGES: | BROOKING, CHARLES and CHERNOV, J.A. | |
WHERE HELD: | MELBOURNE | |
DATES OF HEARING: | 1-2 December 1998, 9-11 and 15 March 1999 | |
DATE OF JUDGMENT: | 18 May 1999 | |
MEDIA NEUTRAL CITATION: | [1999] VSCA 59 | |
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Contract - Franchise agreement - Construction - Exclusive licence - Restrictions on franchisor - Improper diversion of business by franchisor - Breach of implied term - Sham - Purported sale of business.
Courts and judges - Court raising possibility of new issue - Preconceived views - Reasonable apprehension of bias.
Practice and procedure - Pleading - Amendment on appeal - Raising new point not taken below - Reformulation of legal principle on evidence at trial - Pure question of law - Interest of justice.
Evidence - Re-opening case - New evidence - Rule in Ladd v. Marshall - Availability of evidence for trial - Witness in camp of other party.
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APPEARANCES: | Counsel | Solicitors |
For the Appellant | Mr. P.J. O'Callaghan, Q.C. | Jerrard & Stuk |
| For the Respondent | Mr. D.M.B. Derham, Q.C. and Ms M. Rozner | Lander & Rogers |
BROOKING, J.A.:
CHARLES, J.A.:
CHERNOV, J.A.:
Montedeen Pty. Ltd. (which we shall throughout call "Montedeen") describes itself as the owner of the Delta Car Rentals System and associated trademarks, the system and trademarks being used in the business of renting cars and trucks in Victoria and in some other States. By a series of franchise agreements it has licensed a number of franchisees to use the system and the trademarks. Montedeen also carries on business at a number of locations on its own behalf. It describes as branches all the locations at which either it or one of its franchisees carries on business. It has in addition what it describes as agencies, where it has what it calls agents who will hire out cars and trucks. At the time of the trial of the action out of which these appeals arise there were about 20 branches in Australia, some of them being conducted by Montedeen and the remainder by its franchisees. Mario Salvo is the managing director and controller of Montedeen and the litigation has been conducted on the basis that the company is his creature.
Bamco Villa Pty. Ltd. (which we shall throughout call "Bamco Villa") is controlled by two brothers, Tony and Horace Vernuccio. It is one of Montedeen's franchisees. How this came about is in a general way recorded in the reasons for judgment of the trial judge and we need not provide a corresponding summary.
Salvo and the Vernuccio brothers have been on bad terms for years. The bad feeling between them and the disputes giving rise to this litigation have fed the one upon the other, with the result that vast sums of money, by the standards of ordinary people, have been expended in legal costs in litigation conducted à outrance. The cost of the litigation to date must dwarf the damages that have thus far been awarded. It is Wagnerian in its length and complexity and the vehemence with which it has been conducted. The case came before one of the judges in the Commercial List on no less than 16 occasions before the trial began. This is no criticism of that judge, who has plainly at all times done his best to discourage the parties from conducting the litigation in the way they have chosen. To say that both sides have carried the litigation to unreasonable lengths is not, however, to say that it does not arise out of real and substantial grievances based upon wrongful acts, or that there has been no underhand behaviour such as might reasonably excite indignation in the other party.
Bamco Villa filed a writ naming Montedeen and Salvo as defendants on 22 March 1996. The correctness of five substantial sets of reasons for decision is called in question by Montedeen's appeal and by the cross-appeal of Bamco Villa. The trial began on 1 May 1997 and occupied the first half of that month. It was confined to the question of liability. On 6 June 1997 the judge published reasons, 53 pages long, in which he determined that Salvo was not liable to the plaintiff and that some of the plaintiff's claims against Montedeen should succeed while others should fail. On that day the further hearing was adjourned. Salvo is not a party either to the appeal or to the cross-appeal.
Shortly after the reasons for decision were given on 6 June, Bamco Villa applied to the judge to re-open its case. After hearing evidence and argument on 23 and 24 June, the judge, on 3 July 1997, dismissed this application.
Between 22 and 29 September 1997 what has been described as the first damages hearing took place. On 20 October 1997 his Honour published reasons for decision on the question of damages, not giving judgment or arriving at any final figure but leaving it to the parties to make calculations in the light of his determinations.
On 18 November and 18 December 1997 what has been called the second damages hearing took place. The judge gave his reasons for decision after that hearing on 18 February 1998. On 27 February 1998 his Honour gave judgment for Bamco Villa against Montedeen for $168,959 together with $31,125 interest and dismissed the proceeding as against Salvo. The hearing was adjourned to 6 March 1998 for further consideration of the plaintiff's application for injunctions. After an intervening adjournment, on 16 March 1998 his Honour granted injunctions against Montedeen and ordered it to pay the plaintiff's costs of the proceeding. The question of costs was much in dispute.
In the result there are five substantial sets of reasons for decision, covering in all 127 pages. By the resulting appeal and cross-appeal either one party or the other, or both of them, call in question a number of the determinations made by the judge in relation to liability, the refusal on 3 July 1997 to allow the plaintiff to re-open its case on liability, determinations made by the judge in relation to damages and his decision given on 16 March 1998 concerning the grant of injunctions and what order for costs should be made. The reasons for decision given on that day relate to costs but not to the matter of the injunctions.
We have 19 volumes of appeal books, copies of authorities and summaries and submissions. Two interlocutory applications have been made in relation to the appeals, one last May and one last November. The appeals have had an unfortunate history. They were to be heard last September, but the failure of Montedeen to provide the necessary material in time, coupled with an inaccurate estimate of the duration of the hearing, led to an adjournment. The hearing of the appeals began last December but again the estimates of duration proved to be unsatisfactory and the appeals were part heard and adjourned to this month. The hearing of the appeal has been spread over six days.
The Franchise Agreement
Without any lengthy reference to events preceding the franchise agreement out of which this litigation arises, it may be said that in 1989 a company named Burwell Nominees Pty. Ltd., controlled by Horace Vernuccio and acting as trustee of his family trust, had begun operating the Oakleigh Delta branch as franchisee and that in November 1990 that company had begun operating the Richmond Delta branch as franchisee. Throughout 1991 there were disputes between Salvo and Horace Vernuccio about the territory of the Richmond branch and the rights which the franchisee was to enjoy in relation to that territory. In the first few months of 1992 Salvo and the Vernuccio brothers agreed that the brothers should, through a corporate vehicle, become the franchisees in respect of the Richmond branch and on 22 June 1992 Bamco Villa was incorporated. On 1 July 1992 it began trading as the Richmond franchisee. Initially it carried on business only at premises at 26 Swan Street, Richmond, but later it opened a second branch within the territory, situated at 343 Burke Road, Camberwell. Although Bamco Villa began trading as franchisee on 1 July 1992, it was not until 11 June 1993 that a written franchise agreement, made between Montedeen and Bamco Villa, was executed. That agreement gives as the date of the commencement of the franchise 1 December 1992. The franchise is to continue until 30 June 2010 unless in the meantime terminated pursuant to cl.23. The franchise is granted by cl.1.1:
"In consideration of the sum specified in Item 4 of the First Schedule hereof paid by the Franchisee to the Franchisor and subject to the terms and conditions hereof, the Franchisor hereby grants to the Franchisee and the Franchisee accepts the franchise and exclusive right (hereinafter called 'the Franchise') to use those parts of the System which are specified in Item 5 of the First Schedule in the operation by the Franchisee of the business specified in Item 6 of the First Schedule hereof (hereinafter called 'the Business') at the location or locations within the Territory previously approved by the Franchisor in accordance with Clause 14 hereof."
By cl.1.3 the franchisee acknowledges that it is aware that the franchisor has granted or will grant rights in respect of the franchise and the right to use the system to other persons in respect of locations outside the territory.
Item 1 of the First Schedule fixes a franchise fee of $1 and item 6 defines "the business" as the rental of cars and trucks including mini-buses and four-wheel-drive vehicles. Item 5 of the Schedule specifies the following parts of the system:
"1.The right to use the name 'Delta Car Rentals (Richmond)' and 'Delta Truck Rentals (Richmond)' and 'Delta Car & Truck Rentals (Richmond)' and 'Dam Cheap Car Rentals' and any other trade marks, servicemarks and logos either:
(a)required by the Franchisor to be used in the Business or
(b)necessary for the use of the said names by the Franchisee
2.Those matters and things described in Sub-clause (iii) of Recital A of this Deed."
Recital A is as follows:
"'Delta Car Rentals System' is a system for the conduct of a motor vehicle rental business consisting of, inter alia:-
(i)the right to use and/or grant the right to others to use the names 'Delta Car Rentals', 'Delta Truck Rentals', 'Delta Car & Truck Rentals' or any similar names together with certain trade marks and logos and such other names, trade marks or logos as may be hereinafter used or adopted for use on or in connection with the Delta Car Rentals System ('The Marks');
(ii)valuable experience and know-how in the design, layout, operation and management of motor vehicle rental outlets;
(iii)distinctive signage, colour schemes, operation manuals, point of sale material, packaging, business techniques and procedures."
Clause 4.3 deals with use of "the Marks":
"The Franchisee's right to use the Marks shall be limited to the Franchisee's right to use the Marks in the Territory in connection with, and only with, the Business and then only in accordance with the conditions and procedures which are prescribed from time to time by the Franchisor pursuant to this Agreement."
Clause 8.1 restrains the franchisee from competing, during the term of the agreement, with the Delta Car Rentals System. Clause 24.6 restrains the franchisee for 12 months after the date of termination of the franchise from competing with that system.
Clause 9 deals with advertising and may be said to place it in a general way under the control of the franchisor and to require payment by the franchisee of a levy.
Clause 14 is concerned with premises and by cl.14.1:
"The Franchisee shall establish and maintain physical facilities in the Territory within premises of which the Franchisor has previously approved (hereinafter called 'the Premises'). Such approval may be granted or refused as the Franchisor so elects."
The clause dealing with operating standards, cl.18, includes this provision:
"The Franchisee shall comply with the standards set by the Franchisor for the operation of the Business including without limitation:-
...
18.1.5participation in any Central Reservation System which the Franchisor may establish during the term hereof including without limitation complying with all of the terms and conditions applicable thereto, accepting and servicing all reservations received through such Central reservation System and paying the Franchisor for each and every reservation placed under such Central Reservation System."
Clause 22.1 requires the franchisor to permit the franchisee to conduct the business under the business name and to use the marks in advertising the business and in telephone and corporate listings.
Clause 22.4 is an important provision. By it:
"The Franchisor shall use its best endeavours to conduct the Delta Car Rentals System in a proper and efficient manner and shall promote the mutual business interest of the Franchisor and the Franchisee and shall encourage the use of the Delta Car Rentals System throughout Australia."
Clauses 24.4 and 31 are designed to ensure that the franchisor shall have at its disposal upon the termination of the franchise the franchisee's telephone numbers and directory listings.
Clause 25.1 is of importance:
"The Franchisor reserves the unconditional right from time to time to change the Delta Car Rentals System or any part thereof including without limitation any Marks, names, forms, bulletins, procedures and Standard Rental Agreements. The Delta Car Rentals System as so changed or amended from time to time shall for the purposes hereof be deemed to be the Delta Car Rentals System referred to in this Agreement."
Clause 26.1 deals with the legal relationship between franchisor and franchisee.
Clause 39 is to be noted:
"That for the purpose of this particular Franchise Agreement only the words 'Delta Car Rentals System' shall also be deemed to include the right to use the name 'Dam Cheap Car Rentals' or any similar name together with certain trade marks and logos and such other names, trade marks or logos as may be hereinafter used or adopted for use on or in connection with the name 'Dam Cheap Rentals'.
A note annexed to the Schedule defines "the territory" for the purposes of the franchise by means of hatching. The hatched area comprises a large part of the inner and eastern suburbs of Melbourne. Its boundaries are the Eastern Freeway, Hoddle Street, Victoria Parade, Spring Street, Flinders Street, St. Kilda Road, Dandenong Road, Burke Road, High Street, Warrigal Road, Union Road, Whitehorse Road and Burke Road. Thus it extends, for example, from Collingwood in the north-west to Burwood in the south-east and from Windsor in the south-west to East Kew in the north-east.
Before the judge and before us, the parties were not in agreement about what constituted the franchise agreement. Montedeen said it was wholly contained in the agreement in writing dated 11 June 1993. Bamco Villa said it was partly in writing, partly oral and partly implied. The parties were also in dispute concerning the proper construction of provisions of the agreement in writing of 11 June 1993. There was moreover an alternative claim by Bamco Villa for rectification of the agreement in writing.
We can at the outset dispose of two of these matters very shortly. The judge rejected the contention of Bamco Villa that the franchise agreement was partly oral. As to this we say no more than that, having regard to his Honour's findings of fact which bear on this question (findings which were open to him), we see no reason to differ from his Honour's conclusion that the franchise agreement was not partly oral. The second question is whether the judge erred in rejecting the claim for rectification. Once again we will content ourselves with saying that, in the light of his Honour's findings of fact which bear on this question (findings open to him), we see no reason to differ from the conclusion that the remedy of rectification was not available.
Rights under Franchise Agreement
Clause 1.1 of the written franchise agreement - which is to be read in conjunction with cl.1.3 - grants to the franchisee the "exclusive right" to use the parts of the system specified at the location or locations within the territory approved by the franchisor. The description of the right as "exclusive" not only prevents the franchisor from licensing another franchisee in respect of the area of activity but also prevents it from itself exploiting the rights in question in respect of that area. We have chosen the vague phrase "area of activity" to leave open the breadth of the restriction. A licence granting "the exclusive right" to use intellectual property will ordinarily be construed as preventing the licensor not only from granting other licences but also from using the property itself: Guyot v. Thomson (1894) 3 Ch. 388 at 397 per Lindley, L.J.; Ex parte British Nylon Spinners Ltd. (1963) 109 C.L.R. 336; Young v. Odeon Music House (1976) 10 A.L.R. 153 at 161-2; Cornish, Intellectual Property, 3rd ed., para.7-23; Cornish, World Intellectual Property Guidebook, para.7-023; Lahore, Patents, Trade Marks and Related Rights, paras.22,075 and 22,080; McKeough & Stewart, Intellectual Property in Australia, 2nd ed., para.22.18. There is every reason for construing cl.1.1 of the present agreement in the usual way. Montedeen concedes that the effect of the franchise agreement is that it may not licence another franchisee in respect of a location within Bamco Villa's territory. It also accepts that the effect of the agreement is that it may not itself establish a branch within that territory. In our opinion this is the effect of the agreement on the proper construction of cl.1.1. We have no doubt that the restriction prohibits the establishment within the territory of what would ordinarily be described as a branch. We also consider that it prohibits the advertising of a telephone number in a way which links that number to the territory by showing it to be a number in respect of a suburb within the territory. This point will be found to be of importance when we come to deal with Bamco Villa's claims in relation to what might be called the Touma affair. We shall return to this question of the effect of cl.1.1 after briefly summarising the claims made in the litigation.
The Bamco Villa claims
Bamco Villa made a considerable number of claims against Montedeen. There was no counterclaim. Perhaps the principal matters of which Bamco Villa complained were the opening and operation by Montedeen of its branch in St. Kilda Road, the allocation of "cells" for the purposes of the 131390 telephone number and the loss to the plaintiff of the Dam Cheap franchise. Bamco Villa complained that the introduction of the centralised telephone system, with its 131390 number, coupled with the allocation of "cells" made by Montedeen for that purpose, and the operation of the St. Kilda Road branch of Montedeen constituted infringements of the express or implied rights of Bamco Villa under the franchise agreement. It relied not only on express and, as it contended, implied terms of the agreement but also on allegations of misleading and deceptive conduct under the Trade Practices Act 1974 and the Fair Trading Act 1985 and on allegations of conspiracy to injure. Other claims were made, for example, it was said that Bamco Villa had been overcharged by Montedeen by reason of the erroneous treatment of certain payments as part of Bamco Villa's gross revenue. Bamco Villa failed on this last question below and has not pursued its appeal in this regard. Another of Bamco Villa's allegations was that in breach of express or implied terms of the franchise agreement Montedeen or persons associated with it had established car rental businesses including a Dam Cheap car rental business and a Crown Rent A Car business in Bamco Villa's territory in competition with the plaintiff. Other claims were made by Bamco Villa which need not be mentioned. Rectification, declarations, injunctions and damages were sought. The case raised a large number of questions of fact and law.
We have said that in our opinion cl.1.1 of the franchise agreement confers an exclusive right upon Bamco Villa which would be infringed if Montedeen established a branch, or authorised another franchisee to establish a branch, in Bamco Villa's territory, or if Montedeen advertised, or authorised another franchisee to advertise, a telephone number in a way which linked that number to the territory by showing it to be a number in respect of a suburb within the territory. We now enlarge upon our reasons for these conclusions.
The effect of cl.1.1
A great deal of the argument, both before us and below, has concerned whether terms are to be implied into the agreement in accordance with the rules laid down in B.P. Refinery (Westernport) Pty. Ltd. v. Shire of Hastings (1977) 180 C.L.R. 266. But before embarking upon that inquiry one should first ascertain what the terms of the agreement are on its proper construction independently of those rules, and herein lies, we think, the answer to a number of the questions which have been considered in this case. The judge concluded that it was an implied term of the agreement - in the B.P. Refinery sense - that "at least the franchisor would not itself use the Delta system in the plaintiff's territory in competition with the plaintiff". His Honour evidently considered that this was not the consequence of cl.1.1 of the agreement, properly construed. That clause does not in terms contain any negative stipulations so far as the franchisor is concerned. Indeed, all the obligations that are in terms cast upon the franchisor are positive in form: see cl.22. (We have no doubt that cl.22 will, however, prevent certain activities on the part of the franchisor.) Of course the avowedly exclusive nature of the right conferred on the franchisee by cl.1.1 means that the franchisor is under a correlative obligation not to infringe that right, whether by directly trenching upon it or by authorising another franchisee to do so.
How should one define what we have earlier described as the area of activity - the area in respect of which the franchisor is not at liberty either itself to use the intellectual property or to license another to use it? Let us look again at the provisions of the franchise agreement, including some that we have not yet mentioned. By recital B, the right to be granted is described as "the right to adopt and use the Delta Car Rentals System in the territory specified ...". Clause 1.3 in effect reserves to the franchisor the ability to grant the right to use the system to other persons "in respect of locations outside the Territory". By cl.4.3, the franchisee's right to use "the Marks" is limited to use "in the Territory". The franchise granted includes, according to cl.5.1, the right to use a business name containing "words indicating the Territory". The advertising levy is by cl.9.2 to be determined by having regard to the extent to which the advertising or similar matter is applicable to the franchisee's business "and/or the Territory in which the Business is conducted". Although cl.1.1 itself is expressed as conferring the exclusive right to use the system at the approved location or locations within the territory, as we have said earlier, we entertain no doubt, having regard to the provisions of the agreement as a whole, that it prohibits the franchisor from itself establishing, or licensing another franchisee to establish, a branch within Bamco Villa's territory. We take the same view of the establishment of a telephone number ostensibly linked to a location within the territory, whether by means of a full address or only a suburb. Such prohibitions, however, do not arise from any implied term of the agreement as has been found to be the case by his Honour. Rather, they are the consequence of the operation of cl.1.1 of the agreement, properly construed.
The introduction of the centralised telephone system
Much of the business of Delta franchisees came to them through telephone enquiries. At first each branch (including those operated by Montedeen itself) had its own telephone numbers shown in Delta's Yellow Pages telephone directory advertisements. Montedeen allowed each franchisee to advertise three telephone numbers in the advertisement, each of these being shown as the telephone number for a given suburb. What was permitted where a franchisee had two branches in its territory is not clear, but where it had a single branch it was permitted to advertise the telephone number of that branch opposite the name of the suburb and two other telephone numbers, one for each of two other suburbs within its territory. Calls to those two other numbers were automatically diverted to the franchisee's branch.
By early 1992 Delta was also using a centralised system, in the sense that a single telephone number (359 2222) was in addition advertised. This was manned by an operator, who received enquiries and referred the callers to a particular branch by telling them which telephone number to dial.
During the first half of 1992 Salvo decided that Delta should avail itself of what Telstra called the Custom Net 13 System and which we shall call the 13 system. This was a centralised system which was electronically operated. Under it a would-be customer of Delta dialled one telephone number and Telstra's computer diverted the call to a pre-programmed telephone number, being that of a particular Delta branch. Telstra divides its customers into geographic areas called "cells" and at the time when Montedeen introduced the 13 system Telstra's computer technology required it to divert all customers' calls originating in a cell to the same branch. Telstra took instructions from Montedeen on which branch was to receive the calls from a particular cell. The difficulty was that the boundaries of the territories of the Delta branches did not match the boundaries of the Telstra cells. In many cases Telstra's cells overlapped two or more territories, and so Montedeen had to choose which of two or more branches would receive all the calls from a particular cell.
It was not alleged by Bamco Villa in the statement of claim, nor was it suggested on its behalf either at the trial or on appeal, that the powers of Montedeen under the agreement of 11 June 1993 did not extend to the establishment of a centralised telephone system whereby telephone calls from prospective customers would be automatically distributed among branches. In this regard Mr O'Callaghan, who appeared in this Court with Mr. Peters on behalf of Montedeen, referred to the general provision made by cl.25.1 and the particular provision made by cl.18.1.5. It is perhaps worth noting that in his evidence Tony Vernuccio accepted that it was competent to the franchisor to establish such a system. We therefore need not consider the scope of cl.25.1 or cl.18.1.5. The complaint of Bamco Villa is and has always been, not that a centralised telephone system was established by the franchisor, but that one was established which gave to Montedeen the benefit of all telephone enquiries originating in certain parts of its territory.
Before dealing with the claims made by the parties in the course of the hearing of the appeal and cross-appeal, it is convenient to deal with two preliminary matters raised by them at an early stage of the hearing, namely, the contention made on behalf of Montedeen that the court should disqualify itself from further hearing the matter on the ground that it had shown an appearance of bias and an application by Bamco Villa to amend its pleadings.
The bias application
These appeals came on first for hearing on Tuesday 1 December 1998, at which time the Court had set aside three days for the hearing. By the end of the first day, while Mr. O'Callaghan was still opening the appeal, it had become apparent that the hearing of the appeals would not be concluded in the allotted time, and the Court accordingly indicated at the outset of the second day that it would adjourn the hearing of the appeals at an appropriate time to a date in February or March 1999. During the first day, an argument was put by Mr. O'Callaghan that the judge had erred in finding that a term was to be implied in the agreement between Bamco Villa and Montedeen. In the examination of the relationship between the parties which followed the making of this submission, a question was raised during argument as to whether Montedeen in all the circumstances that had been established owed Bamco Villa a fiduciary duty in the exercise of its powers as franchisor under the agreement. Mr. O'Callaghan submitted that no such fiduciary duty was imposed upon Montedeen in all the circumstances.
At the outset of the second day of the hearing, two members of the Court raised with Mr. O'Callaghan the question whether the Court would in any event, when considering the issue of the supposed implied term and the alleged breach of that term, be required to consider whether Montedeen had acted as franchisor in breach of fiduciary duty. Portion of the comments made from the Bench are set out in an affidavit sworn on 9 February 1999 by Bamco Villa's solicitor, Michael John Champion of Lander & Rogers. The passages quoted are incomplete, in that the passage attributed to Charles, J.A. in paragraph 4 was introduced by the phrase "It may be arguable that" and the passages attributed to both Brooking and Charles, JJ.A. were accompanied on several occasions by statements by both members of the Bench to the effect that those views were expressed before hearing Mr O'Callaghan's argument on the subject and were not in any sense final expressions of view.
During the discussion that followed, Mr O'Callaghan submitted that he could not proceed with his argument until Bamco Villa decided whether it wished to pursue the issue of the breach of fiduciary duty, since that course would necessitate an amendment of the grounds of appeal and possibly also of the pleadings. The hearing of the appeals was then adjourned to a date in March 1999, convenient to both parties, since neither party sought to have the appeals listed for hearing in February. Counsel for Bamco Villa, Mr. Derham (who appeared in this Court with Ms Rozner), said that Bamco Villa would consider whether it wished to pursue the argument of breach of fiduciary duty, and if it considered it needed an amendment to its pleadings or grounds of appeal, would have issued a summons giving appropriate notice to Montedeen well in advance of the hearing date. In due course such a summons was issued to be heard at the beginning of the adjourned hearing in March.
These events led to an application by Montedeen that the Court should disqualify itself from further hearing the appeal on the ground that it had shown the appearance of bias. After hearing argument on this question the Court rejected the application, saying that reasons would be given later. The following are our reasons for dismissing that application.
Mr. O'Callaghan's submission was that if the Court as presently constituted continued with the hearing of the appeals and the application for amendment, the potential existed for the Court to allow the amendment and find that Montedeen had acted in bad faith and order accordingly. Those circumstances in his submission gave rise to a reasonable apprehension of bias. He said that it was not submitted that there was actual bias, but that the reasonable observer, aware of the unusual way in which the subject matters arose, could reasonably and not fancifully entertain and hold a suspicion of bias. The submission continued that the objective observer would see that it was the action of the Court which had resulted in the appeal's being sought to be run on a case drastically different from the one which had been argued and fought during the trial itself. He relied particularly on the fact that it had been suggested by members of the Court that findings made by the learned trial judge were close to findings of bad faith.
It is, of course, well-established that the airing by a judge of views indicating the general drift of his thinking in response to argument, but expressed to be tentative and exploratory, manifests no partiality or bias; see Re Keely, J.; ex parte Ansett Transport Industries (Operations) Pty. Ltd. (1990) 64 A.L.J.R. 495. Furthermore it is not uncommonly necessary for a court to put forward during argument matters which the court considers may be relevant and which should therefore be raised, as Dawson, J. said in Re Keely at 499. In Re Lusink, ex parte Shaw (1980) 55 A.L.J.R. 12, Gibbs, A.C.J. referred at 14 to R. v. Watson; ex parte Armstrong (1976) 136 C.L.R. 248 and said -
"In that case it was pointed out, at 264, that it is not uncommon, and sometimes necessary, for a judge, during argument, to formulate propositions for the purpose of enabling their correctness to be tested, and that 'as a general rule anything that a judge says in the course of argument will be merely tentative and exploratory'. However, in some cases the words or conduct of the judge may be such as to lead the parties reasonably to think that the judge has pre-judged an important question in the case, and then prohibition may issue. Of course, the court which is asked to grant prohibition will not lightly conclude that the judge may reasonably be suspected of bias in this sense; it must be 'firmly established' that such a suspicion may reasonably be engendered in the minds of the parties or the public ..."
Furthermore, judges may in exchanges express their views with vigour, without necessitating their disqualification; see Galea v. Galea (1990) 19 N.S.W.L.R. 263, at 278; Fitzgerald v. Director of Public Prosecutions (1991) 24 N.S.W.L.R. 45, at 49; Australian National Industries v. Spedley Securities (1992) 26 N.S.W.L.R. 411, per Kirby, J. at 418.
In the present case, the Court was enquiring of counsel at the start of the second day's hearing, whether it might be necessary to pursue in later argument the question of breach of fiduciary duty, which had been discussed during argument the previous day, the question being raised at a time when all parties were aware that the hearing of the appeal would shortly be adjourned for a period of some months. No members of the Court expressed a concluded view on any matter. The parties were permitted a full opportunity to make submissions on the question and the Court in any event in March 1999 ruled that the respondent should not be permitted to pursue the question of breach of fiduciary duty. No basis has, in our view, been established for the submission that the Court pre-judged any issue or otherwise demonstrated the appearance of bias. It is for these reasons that the application that the Court disqualify itself was rejected. The costs of this application should be treated as part of the general costs of the appeal, and borne by the unsuccessful party.
Application to amend statement of claim to claim breach of fiduciary duty
The respondent by its summons sought to amend its pleadings to make the following claim -
"At all relevant times the first defendant owed the plaintiff a fiduciary duty not to:
(a)allow its interests in the Crown, Astoria and Real Cheap businesses to conflict with the interests of the plaintiff in the Delta business without the consent of the plaintiff;
(b)exercise its powers as franchisor in relation to the approval of the location of Delta branches outside the Territory (clause 1.3), the establishment and operation of a central reservations system (clause 18.1.5), the publication and advertising of telephone number listings, advertising (clauses 17.1.2, 9.1 and 9.2), and the use of marks or names (clause 4.10):
(i)with the intention of furthering its own business interests at the expense of the plaintiff's business interests; or
(ii)so as to gain a profit or advantage for itself in circumstances where its interests conflicted with those of the plaintiff."
The respondent further sought to claim that in breach of the supposed fiduciary duty the first defendant diverted calls to the Delta "131390" number made from within the plaintiff's territory to the first defendant's own St Kilda branch, opened its St Kilda branch on the boundary of the plaintiff's territory with the intention of diverting business away from the plaintiff, withheld from the plaintiff the right to use the name Dam Cheap, and established and operated and continued to operate and manage the Crown, Astoria, and Real Cheap businesses in competition with the plaintiff.
In support of the application for leave to amend, Mr. Derham submitted that on the facts found by the judge, Montedeen owed a limited fiduciary duty to Bamco Villa, the relationship giving rise to this duty being limited to those aspects of Bamco Villa's business affairs over which Montedeen as franchisor undertook the exercise of power and control. He submitted that Montedeen owed fiduciary duties to Bamco Villa not to exercise its powers as franchisor under the franchise agreement with the intention of furthering its own business interests at the expense of Bamco Villa, or so as to gain a profit or advantage for itself in circumstances where its interests conflicted with those of Bamco Villa.
Mr. Derham submitted that leave should be granted to Bamco Villa to amend its pleadings on a number of bases. He submitted that the point now sought to be raised was a question of law arising on facts all of which had been admitted or proved at trial and no new evidence would be required to be adduced by either party. The submission continued that the point was merely a reformulation of legal principle in its application to the facts; the breaches of the fiduciary duty sought to be alleged by Bamco Villa being in respect of the same matters as had previously been alleged by Bamco Villa to have been breaches of the terms of the franchise agreement, all of which had already been raised in the pleadings and relied upon at trial. Mr. Derham submitted that the facts necessary to prove a breach of fiduciary duty had all been established by the findings of the judge and further relied on the fact that the remedies sought by Bamco Villa against Montedeen had included injunctions, declarations and damages for breaches of the franchise agreement. The acts complained of as giving rise to the breach of fiduciary duty were the same as those which had previously been relied upon in respect of the various remedies sought at the hearing before the trial judge against Montedeen. He submitted that in all these the circumstances no prejudice would be caused to Montedeen by granting the amendment sought, and noted that the Court had indicated that it might need to consider the point as being already raised on the facts and by the judge's findings below.
Mr. O'Callaghan's submissions in response commenced with reliance on the well-known passage in Suttor v. Gundowda Pty. Ltd. (1950) 81 C.L.R. 418 at 438, where Latham, C.J., Williams and Fullagar, JJ. said -
"The circumstances in which an appellate court will entertain a point not raised in the court below are well established. Where a point is not taken in the court below, and evidence could have been given there which by any possibility could have prevented the point from succeeding it cannot be taken afterwards ..." (Emphasis supplied.)
Mr. O'Callaghan submitted that to the extent that the findings of the trial judge were said to constitute a finding approaching that of bad faith, which he did not accept was the fact, any such finding was not open to the judge in the first place. The case had, he submitted, been conducted on pleadings which contained no allegation of bad faith, and Montedeen had been given no opportunity to deal with any such allegation. Insofar as either fraud or breach of fiduciary duty was now being alleged, he submitted that any such allegation should have been made clearly and specifically and with detailed particulars. Mr. O'Callaghan argued that the case had come on appeal from the Commercial List and relied on Geelong Building Society (In Liq) v. Encel [1996] 1 V.R. 594 for the proposition that in general a point may not be raised on appeal that has not previously been raised below unless there are exceptional circumstances; and that in considering whether such circumstances exist the Court must consider the expectations of both parties to receive justice; whether the amendment involves merely a reformulation of a legal principle applicable to evidence not in dispute or whether, as he submitted was the case here, if the amendment had been allowed below the course of evidence might not have differed; and whether the need to amend was caused by the fault of the party now seeking the amendment. He submitted that the amendment had not been sought below for reasons which had nothing to do with Montedeen, but which must amount merely to oversight on the part of Bamco Villa and that Bamco Villa had given no explanation for its failure to raise allegations of breach of fiduciary duty at the trial on liability.
On Wednesday 10 March we rejected the respondent's application for leave to amend, saying that we would give our reasons later. Our reasons are as follows.
The respondent did not include a claim for breach of fiduciary duty in its pleadings, or even, for that matter, in the grounds of appeal. Furthermore the question of fiduciary duty had been mentioned before the trial judge, emphasis being laid by Montedeen's counsel, Mr. Judd, on the fact that no claim was made by Bamco Villa for breach of any fiduciary duty by Montedeen.
In Geelong Building Society v. Encel, Tadgell, J. said at 608-609 that -
"It is reasonable to suppose that, had the respondent been faced with the point which is now sought to be made against him, he could well have taken a different attitude to the appellant's claim from that which he did. Thus, to allow the amendment now sought would be to put the respondent at risk of incurring a very large extra liability without having an appropriate opportunity to consider avoiding it by way of compromise or other means. That is a disadvantage for which an order for costs of the appeal in the respondent's favour could not compensate him."
In Banque Commerciale S.A., En Liquidation v. Akhil Holdings Ltd. (1990) 169 C.L.R. 279, at 284, Mason, C.J. and Gaudron, J. referred to -
"The rule that, unless all facts have been determined beyond controversy or the question is one of construction of law and it is expedient and in the interests of justice to entertain the point, a party may not take a point for the first time on appeal."
Their Honours said that some aspects of this rule -
"appear to derive from public policy considerations directed to ensuring the finality of litigation. On the other hand some aspects of the rule may have their genesis in estoppel by election in the conduct of litigation, although, if so, the relevant consideration is not that the other party is put in a worse position but that he or she may have been so placed. See, for example, [Water Board v. Moustakas (1988) 62 A.L.J.R. 209] where the refusal to allow the appellant to raise a new case was rested on 'the possibility that the [other party] may, if it had been raised below, have wished to call evidence in response to it'. So far as the rule may derive from public policy, the relevant consideration is that the case sought to be made on appeal is a new or different case from that which emerged at the trial."
In our view it would have been unfair to Montedeen to permit Bamco Villa to amend its pleadings during the hearing of the appeal to raise the question of breach of fiduciary duty. We think there is much to be said for Mr. Derham's argument that all the facts necessary to establish a breach of fiduciary duty were before the Court and, having regard to the width of the cross-examination during the trial, that it is unlikely that the pleading of a claim for breach of fiduciary duty would have altered or widened the ambit of the evidence. But Mr. O'Callaghan submitted that because there was no allegation of bad faith as now sought to be pleaded in issue during the trial, Mario Salvo was not examined in chief in relation to his motives and intentions in respect of the exercise of the powers now alleged to have been exercised in bad faith. He submitted that to import into the relationship between franchisor and franchisee fiduciary obligations would have very significant consequences and make that relationship a drastically different one from that merely governed by the terms of the agreement. The existence of a fiduciary relationship, once established, would have called for the production of evidence quite different from that given at the trial. So also, if any fiduciary duty had been established, it would have been open to Montedeen to show that the actions of which complaint was made as being in breach of that duty had been taken with the informed consent of the respondents. Much more evidence might, he submitted, have been called to show the knowledge of Tony Vernuccio of the activities of Montedeen in establishing and locating the St Kilda branch of its business. In addition, so the argument ran, Montedeen might have sought evidence from other franchisees, corroborating its evidence that the powers of Montedeen had been exercised fairly, in the interest of all franchisees and the whole Delta business.
As McHugh, J.A. said in Holcombe v. Coulton (1998) 17 N.S.W.L.R. 71, at 78 -
"To allow a party to raise in an appellate court a matter which was not litigated in the trial court not only undermines the respective functions of the trial and appellate courts and the policy of law but perhaps more importantly it deprives the appellate court of the benefit of the views of the trial court."
In all the circumstances the proper course was clearly to reject with costs the respondent's application to amend the pleadings to raise the question of breach of fiduciary duty.
We now turn to consider the matters argued by the parties on the appeal and cross-appeal.
Cell allocation
When Salvo determined that the 13 system should be adopted Delta was, in about the middle of 1992, given by Telstra the number 133582. It advertised that number as its "hotline" in the 1993 Yellow Pages. But the number was never in fact used, since Telstra found itself unable to connect Delta to that number. As a result, Montedeen was never required to make the necessary allocation of cells for the purposes of 133582. A new number - 131390 - was later allotted to Delta and Delta was connected to it, so that it had become necessary for Montedeen to make an allocation of cells. The number was used in the 1994 Yellow Pages. The allocation of cells made by Montedeen bulks large amongst the grievances which gave rise to this litigation. The judge described it as "the sting in the plaintiff's complaint, if not the underlying cause of the litigation". Montedeen had opened its own branch in St. Kilda, as his Honour found, in late 1992, about nine months or so before the use of the 131390 telephone number began. Montedeen's St. Kilda branch was only about 200 metres from the boundary of the Bamco Villa territory. Two of Telstra's cells - St. Kilda/Windsor and Malvern - were predominantly situated in Bamco Villa's territory. The judge found that about two-thirds of the former and 80% of the latter fall within that territory. The allocation of cells was made by Salvo himself, who was the mainspring of Montedeen and took all important decisions on its behalf. He allocated the two cells just mentioned to Montedeen's own branch, St. Kilda. In what he claimed was part of a balancing operation - we are not here dealing with all relevant allocations - he allocated to Bamco Villa the North Balwyn cell, which was wholly outside its territory, and the East Kew cell, of which something approaching two-thirds was outside its territory.
A good deal of evidence was devoted to the question how many customers those four cells might be expected to yield. This evidence dealt with such matters as the number of subscribers in different areas, population density and how likely those who lived, either temporarily or permanently, within a given area, were to become customers of a car hire business. It is plain that Salvo himself regarded the St. Kilda/Windsor cell and the Malvern cell as of great importance to the successful operation of his company's new St. Kilda branch. He admitted in cross-examination, with obvious reluctance, that if he was presently required to consider whether he should establish that new branch without being able to "get the business out of the St. Kilda Road and Windsor cell and the Malvern cell" he would probably not establish the branch. The admission is not surprising in view of the fact that it had been suggested to Horace Vernuccio in cross-examination that if the St. Kilda/Windsor and Malvern cells had been allocated to Bamco Villa the effect would have been "to put the St. Kilda branch out of business".
Salvo's evidence was that he had regarded himself as bound to act in a fair and reasonable way in allocating cells and that this had at all times been his aim in making the allocation. He said that he had tried to act, and had acted, "in the best interests of Delta as a whole". He said that he had regarded himself as required to, and had in fact endeavoured, to have regard to the interests of franchisees and franchisor. He swore that he had considered it to be in the interests of the franchisor and all the franchisees that there should be allocated to each branch the adjoining Telstra cells so as to create a telephone catchment area around each branch. He said that in his view the St. Kilda/Windsor and Malvern cells were in the natural catchment area of Montedeen's St. Kilda branch. He said that he had explained to all the franchisees, including Tony Vernuccio as representing Bamco Villa, that he was allocating cells to the branch in whose natural catchment area they were. He denied that he had told Tony Vernuccio that a cell would be allocated to a franchisee if that cell or the greater part of it fell within the territory of that franchisee.
Tony Vernuccio's evidence was that Salvo had not told him of the cell allocations that he had in fact made and had not told him that his aim in making allocations was to arrive at a fair and equitable distribution based on the natural catchment areas of branches. Vernuccio swore that Salvo had told him that each cell would be allocated to the territory in which it, or the greater part of it, was situated. In the cross-examination of Horace Vernuccio hearsay evidence was elicited - deliberately elicited - so as to make it admissible against Montedeen. Horace Vernuccio was asked in cross-examination what his brother had told him of his discussions with Salvo and so evidence was elicited that Tony had told Horace that he had been informed by Salvo that if a cell was partly in one territory and partly in another it would be allocated to the territory in which the greater part of it was situated.
The judge made three findings which directly concerned Salvo's - and so Montedeen's - motivation in introducing the 13 system and allocating cells. The first of these findings was that Montedeen allocated the St. Kilda Road/Windsor and Malvern cells to its own St. Kilda branch "for the simple reason of commercial expedience in the interests of that branch". This finding followed a reference to Salvo's admission that if he was starting afresh without business from those two cells he would probably not open the St. Kilda branch and a finding that there was a greater concentration of commercial activity in the areas of those two cells than in the East Kew and North Balwyn areas that had been allocated to Bamco Villa. The finding about commercial expediency in the interests of the St. Kilda branch is unequivocal. It is a finding of what motivated Salvo in allocating the two cells. The judge went on to find, towards the end of his reasons, that Salvo and Montedeen had been motivated by the same consideration in refusing to change the allocation of cells after it had been made, saying that they had refused to change the system "because of personal commercial advantage".
Between the two findings about motivation we have mentioned there is a third:
"It should be understood that the '13' system has advantages and I accept it was introduced by the first defendant bona fide in the interests of the Delta business. I also accept that because the system did not then have the ability to divide the cell by streets Salvo made some allocations between franchisees including the first defendant, Collingwood being a particular example, on a basis which he regarded as fair and reasonable to affected franchisees and the first defendant in all the circumstances."
The finding that Salvo decided to introduce the 13 system because of a bona fide belief that it was in the interests of the Delta business is not inconsistent, or in the least difficult to square, with the findings made about the motivation of the defendants in making, and refusing to change, the allocation of the two southern cells. The finding that Salvo made some allocations of cells on a basis which he regarded as fair and reasonable does not clash with the finding made about the two southern cells and indeed the reference to "some allocations" reflects the judge's view that other allocations were not made on a basis which Salvo regarded as fair and reasonable to affected franchisees and Montedeen in all the circumstances.
In addition to submitting that the adverse findings of the motivation behind the allocation of the two southern cells were not clear, Mr O'Callaghan submitted that they were not supported by the evidence. But in our view those findings are impregnable. The case is one in which the credibility of witnesses was highly important and there is no reason for supposing that the judge has misused the advantage which he gained by seeing and hearing the witnesses. There was a considerable conflict of evidence between Salvo and Tony Vernuccio. It is clear that the judge did not accept Salvo as a reliable witness on some important questions, notably on the question whether he had told Tony Vernuccio at an early stage that Montedeen might itself open a branch in St. Kilda. The judge did not in express terms resolve the conflict of evidence between those two witnesses on what had been said - or not said - by Salvo about the allocation of cells. It may well be that his Honour preferred the evidence of Vernuccio and found that Salvo had told him that each cell would be allocated to the franchisee in whose territory it, or the greater part of it, was situated and that Salvo had said nothing to him about making allocations of cells in a fair and reasonable way, in the interests of all concerned, and with a view to providing each branch with a natural telephone catchment area. If the judge preferred Vernuccio's evidence on these points, he would almost certainly have rejected Salvo's evidence of the considerations that had motivated him. The judge was also to have regard to considerations which bore on the probabilities, and the passage in his reasons which immediately precedes the first finding on the question of motivation shows that he did so. On the question of motivation it was material to consider Salvo's view - as put to Horace Vernuccio in cross-examination - that if the two southern cells were allocated to Bamco Villa the St. Kilda branch of Montedeen would be put out of business. It was also material to consider the considerable quantity of evidence bearing on the number of prospective customers in the two southern cells compared with areas lying to the north.
Breach cl.22.4
While its claim in this regard was at the trial overshadowed by its allegation of breach of implied terms, Bamco Villa did also assert breach of one of the express terms of the agreement dated 11 June 1993, namely, cl.22.4, which required Montedeen to use its best endeavours to conduct the Delta system in a proper and efficient manner and also required it to promote the mutual business interest of the franchisor and franchisee and to encourage the use of the system throughout Australia. It would make no difference to the outcome of this appeal, but it is clear that the words "use its best endeavours to" do not govern all three branches of the covenant but only the third. The question then becomes whether, on the findings of the judge, there has been a breach by Montedeen of its obligation (a) to use its best endeavours to conduct the Delta system in a proper and efficient manner and (b) to promote the mutual business interest of Bamco Villa and itself. We think it clear that these obligations have on the judge's findings been broken.
Before dealing further with this question, it is necessary to summarise briefly the contentions of Montedeen made during the hearing of the appeal in so far as they relate to the issue of cell allocations. In its notice of appeal, it challenged his Honour's findings that:
(a)it was an implied term of the franchise agreement that Montedeen would not compete with Bamco Villa for Delta business in the latter's territory;
(b)the allocation by Montedeen of the two cells in question constituted competition by Montedeen in the Bamco Villa territory (in breach of the implied term).
We have already said that the implied term found by his Honour did not arise. The prohibition on Montedeen from exploiting in the territory in question the rights in respect of which it granted exclusivity to Bamco Villa, springs from the exclusive nature of the right conferred on the franchisee by cl.1.1 and not from any implied term of the agreement.
We are also of the view that Montedeen's allocation of the two cells to its St. Kilda branch did not constitute competitive behaviour by it in the Bamco Villa territory. Properly characterised, the allocation of the two cells was an exercise by Montedeen of a power, which the parties accept it had, to modify, improve, develop and promote the Delta System. Even if that power was not exercised properly, it does not follow that such a step constituted a competitive act on its part. In any event, even if the allocation in question could be classified as competitive behaviour on the part of Montedeen, it did not take place in the franchisee's territory.
Although his Honour did not deal with the possible breach of cl.22.4, at the hearing of the appeal, Mr. Derham submitted that the allocation in question amounted to an intentional promotion by Montedeen of its own interests to the detriment of Bamco Villa and was in breach of Montedeen's obligation under cl.22.4 to conduct the allocation of cells properly and for the mutual benefit of Montedeen and its franchisees. Mr. Derham also contended that Montedeen's allocation to Bamco Villa of cells that related to other territories did not eliminate that breach. The cells so allocated to Bamco Villa in substitution for the St. Kilda Road/Windsor and Malvern cells did not generate anything like the business that was forthcoming from the cells that were allocated away from it.
Mr. O'Callaghan did not seek to argue that it was not open to Bamco Villa to contend on this appeal that cl.22.4 was breached by reason of Montedeen's allocation of the two cells in question. But he did submit that the allocation did not contravene the clause. According to him, the true purpose of this provision, particularly its first limb, was to impose on Montedeen an obligation not to act negligently when it was conducting an aspect of the Delta System for the benefit of its stake-holders, such as by promoting and developing the Delta brand. He said that if in doing so, it was to act negligently to the detriment of Bamco Villa, that would constitute a breach of cl.22.4 but that this did not occur in the context of the cell allocation undertaken by Montedeen. For reasons given later, we do not consider that such a construction of the provision reflects the full ambit of the operation of its first limb.
It was further submitted on behalf of Montedeen that the reference in cl.22.4 to the promotion of "mutual business interest" was a reference to the promotion of an interest in which the franchisor and franchisee had a shared or joint interest, such as the promotion of the Delta brand name interstate with the view to attracting business in which its franchisees would have the opportunity to participate. It was contended that the allocation of cells was not an exercise to which the parties had such a mutual interest. We also reject this submission.
Clause 22.4 speaks first of Montedeen's being required to conduct the "Delta Car Rentals System" properly and efficiently. So far as is relevant, the term "Delta Car Rentals System" is defined in Recital A as a system for the conduct of car rental business which consists, inter alia, of:
-the right to use the business and trade names, marks and logos associated with Delta
-the experience and know-how (of Montedeen) relating to the operation and management of motor vehicle rental outlets
-distinctive signage, various principal materials used to promote the System and business techniques and procedures.
Turning to the first limb of cl.22.4, in our view, "conduct" of the "Delta Car Rentals System" (Delta System) encompasses activities by Montedeen which modify, improve, promote or develop the Delta System as is contemplated by cll.9, 19, 22 and 25, such as advertising, establishing a central reservation system and other like acts. It was accepted by the parties that the development of the Delta System also includes the introduction of a central telephone system such as the 13 System (which, in 1993, necessarily involved the allocation of Telstra cells amongst franchisees, including cells which covered more than one territory of a franchisee). Consequently, for the purposes of cl.22.4, the activity involved in such cell allocation fell within the term "conduct of the [Delta System]". It follows that the clause imposed on Montedeen an obligation to conduct that activity, namely, the allocation of cells, in a "proper and efficient manner".
For present purposes, the question whether the allocation was efficient does not arise for determination. The real question is whether, in all the circumstances, the allocation was "proper" within the meaning of cl.22.4. The Oxford English Dictionary (second edition) provides a variety of meanings for the term "proper". One such definition is: "strictly belonging or applicable; that is in conformity with the rule; strict, accurate, exact, correct; literal not metaphorical". Another is: "to which the name accurately belongs; strictly so called, in the strict use of the word; genuine, true, real; regular, normal". Still another is: "such as a thing of the kind should be; excellent, admirable, commendable, capital, fine, goodly, of high quality .. of good character or standing; honest, respectable, worthy". In the present context, probably the most relevant part of the definition is "genuine, true, real" which suggests that in order to conduct the Delta System in a "proper" manner, Montedeen would be required to conduct the system, not with the intention of benefiting itself, but with due regard to the interests of its franchisees. Whatever may be said as to the exhaustive definition of the term "proper" in cl.22.4, in the context of the allocation of cells for the purposes of the 13 System, it can be said that an allocation by Montedeen with the intention of promoting its interests at the expense of its franchisees, would not amount to a "proper" allocation of cells.
There was evidence before his Honour as to what Salvo considered to be a proper basis for the allocation of cells, namely, each cell which extended over more than one territory of a franchisee, would be allocated on a territory basis, so that the franchisee whose territory formed the substantial part of it, would generally be allocated that cell. According to Tony Vernuccio, that is what Salvo first told him when they discussed the introduction of the 13 System and the allocation amongst franchisees of cells which covered more than one territory. On that basis, of course, the two cells in question should have been allocated to Bamco Villa since the great bulk of each of the two cells fell within its territory. Salvo has denied saying this to Vernuccio. Mr. O'Callaghan argued that it was inherently unlikely that Salvo would have told Vernuccio that he would allocate the cells on a territory basis, because that would involve Salvo's being prepared to "neutralise" (as Mr. O'Callaghan put it) the St. Kilda branch. It can be accepted that Salvo realised that if he allocated the two relevant cells to the Richmond branch, that would effectively shut down his St. Kilda operation and that was the last thing in the world that he wanted to happen (or would be prepared to let happen). But it does not follow that he did not tell Tony Vernuccio that the cells would be allocated on a territory basis. He may have said one thing to him, intending to do (and doing) another. We have noted previously that his Honour may well have preferred the evidence of Vernuccio on this issue and if he did, he would have rejected Salvo's evidence of the considerations that have motivated him. For reasons already stated, it is likely that his Honour did prefer Vernuccio's evidence on this point. Such a conclusion is consistent with his Honour's observation in his first damages judgment that he found Vernuccio to be an essentially honest witness.
Thus, Salvo's action in allocating the two cells in question to his branch was contrary to his own assessment of what would have been a proper basis for such an allocation.
In any event, it has been mentioned previously that his Honour found that the cell allocation in question was made by Salvo "for the simple reason of commercial expedience in the interests of [Montedeen's St. Kilda] branch". Such a finding makes it difficult to say that the allocation was a "proper" allocation within the meaning of cl.22.4, particularly if it had a materially detrimental effect on the business of Bamco Villa. In view of that, it is not surprising that Montedeen attacked this finding of his Honour, principally on the basis that it was against the evidence or the weight of the evidence. Its case on appeal was that his Honour overlooked the fact that before the question of allocation came up for consideration, Montedeen had opened its St. Kilda branch in late 1992 and by the time the cells were allocated, it had established its own catchment area which broadly corresponded with the territory covered by the two cells. Montedeen relied in this regard on the evidence of Tony Vernuccio that it seemed inevitable that if potential customers (within the two cells) were given the choice of placing a call either to the plaintiff's Richmond branch or the St. Kilda branch, most, if not all, would telephone the latter. Hence, it was argued, that by that point in time the greater part of telephone-generated business from areas covered by the two cells went to the St. Kilda branch. It follows, so it was claimed, that the allocation of cells by Salvo did no more than give recognition to the reality of the commercial situation and, more importantly, did not deprive Bamco Villa of any business that it would otherwise have had. The intention of Montedeen was always to allocate the cells so as to reflect the catchment area of each of the branches.
It was also contended that his Honour's finding as to Montedeen’s reason for the making of the cell allocation was inconsistent with his acceptance that the 13 System was introduced by Montedeen bona fide in the interests of the Delta System. It was also claimed that the finding in question is also inconsistent with his Honour's acceptance of the fact that some allocations were made on the basis that Salvo believed was fair and reasonable, having regard to the effect on franchisees and Montedeen, given all the circumstances. Moreover, it was contended that the allocation, even if wrongful, had no detrimental impact on Bamco Villa.
We have already given reasons for our conclusion that his Honour's finding which is challenged by Montedeen is impregnable. Moreover, his Honour's judgment makes it clear that he was well aware that by the time the 13 System was being introduced, Montedeen's St. Kilda branch had established its catchment area which included the area covered by the two cells in question. His Honour plainly recognised this as being a consequence of Montedeen's opening of the St. Kilda branch. Consequently, there is no basis for the contention that his Honour overlooked the fact that at the time of the allocation of the two cells in question, the catchment area of the St. Kilda branch included the Bamco Villa territory which broadly corresponded to the area of the two cells.
The contention put on behalf of Montedeen that this allocation of cells did no more than preserve the commercial reality which existed at the time, even if accurate, does no more than support his Honour's conclusion that the allocation was made for the reason he attributed to the franchisor. The decision was clearly driven by the desire to retain for the St. Kilda branch at least as much custom from the areas in question as it had at the time of the allocation. The alternative of giving the two cells in question to the Richmond branch, would have had a disastrous effect on Montedeen's St. Kilda operations. The fact that Salvo could not have countenanced this result led to the allocation of those cells to the St. Kilda branch. In the circumstances, therefore, the allocation was obviously made for the reason given by his Honour.
Furthermore, Montedeen's contention that such allocation did not have a detrimental effect on Bamco Villa, flies in the face of his Honour's finding to the contrary. In an effort to overcome that finding, Mr. O'Callaghan pointed to Tony Vernuccio's evidence as to customer preference from the areas in question for the St. Kilda branch. The substance of this submission, however, was considered by his Honour in his damages judgment and was rejected. At the hearing which dealt with the assessment of damages, it was put on behalf of Montedeen that even if the allocation amounted to a breach, it caused no loss to Bamco Villa because of Vernuccio's evidence that nearly all customers from the relevant areas preferred to do business with the St. Kilda branch. But on the evidence that was led on this issue, his Honour found that Bamco Villa did lose business which it otherwise would have derived as a result of the allocation of the cells to the St. Kilda branch. In our view, his Honour was entitled to make such a finding, having regard to the evidence before him. It must be borne in mind that until the cell allocation in question, Bamco Villa had the opportunity to gain some custom from the relevant areas. It was not suggested on behalf of Montedeen that after the St. Kilda branch was established all custom from the two cells went to that branch. His Honour was satisfied on the evidence before him that Bamco Villa did enjoy some patronage from those areas before the cell allocation. Once the allocation was made, however, the franchisee lost that custom and the opportunity to retain it and perhaps build on it. In those circumstances, it is not surprising that his Honour concluded that Bamco Villa lost business by reason of the allocation of the two cells in question to the St. Kilda branch. Moreover, that the allocation in question caused Bamco Villa a material detriment, was implicitly recognised by Montedeen, which purported to compensate it for such loss by allocating to it other cells such as East Kew and North Balwyn. But as his Honour found, these cells generated relatively little telephone business when compared with the St. Kilda Road/Windsor and Malvern cells.
For completeness, it should be noted that, for reasons already given, we are of the view that his Honour's finding as to the reason why Montedeen allocated the cells in question in the way it did is not inconsistent with his accepting that the 13 System was introduced by Montedeen bona fide in the interests of the Delta System.
As his Honour recognised, Montedeen fell foul of the franchise agreement not because it introduced the 13 System, but because in the course of so doing it made the relevant cell allocation so as to promote its interest at the expense of that of its franchisee. It can also be accepted, as his Honour did, that some allocations were made on the basis which Salvo believed was fair and reasonable, having regard to the effect on franchisees and Montedeen, given all the circumstances. But in relation to the two relevant cells, the allocation was made essentially on the basis of self-interest.
In those circumstances, although the introduction of the 13 System may have been "proper" conduct of the Delta System by Montedeen within the meaning of cl.22.4, the allocation by it of the two cells in question contravened that requirement of the clause.
In view of this conclusion it is strictly unnecessary to consider whether Montedeen's allocation of those cells also constituted a breach of the second limb of cl.22.4, that Montedeen promote the mutual business interest of itself and the franchisee. It seems to us, however, that it is tolerably clear that by pursuing its self-interest when allocating those cells, Montedeen failed to promote the parties' mutual business interest. The clause places a positive obligation on Montedeen so to act. Montedeen was, we think, required to promote the parties' mutual business interest when conducting the Delta System, which, relevantly, included the allocation of the cells in the course of its implementation of the 13 System. Whatever may be said about the difficulty in determining the full extent of the obligation that is imposed by this part of cl.22.4, it seems to us that Montedeen's pursuit of its self-interest when allocating the two relevant cells at the expense of the franchisee cannot properly be described as the promotion of the mutual business interest of itself and Bamco Villa.
For these reasons, his Honour's ultimate decision that the allocation by Montedeen of the two relevant cells to its St. Kilda branch constituted a breach of the franchise agreement must stand.
Opening of St. Kilda branch
We have already mentioned that one of the matters agitated before his Honour was Bamco Villa's claim that the opening by Montedeen of its St. Kilda branch in late 1992 at a location approximately 200 metres from the Bamco Villa territory constituted a breach of the franchise agreement. Essentially, its case was that it was given the exclusive right by cl.1.1 to use the Delta System in its territory so that Montedeen was thereby precluded from competing with it for Delta business in that area. It was contended that, by setting up and operating the St. Kilda branch in the way it did, Montedeen competed with Bamco Villa in its territory. His Honour rejected this claim and Bamco Villa has cross-appealed against that decision.
The circumstances and context in which the St. Kilda branch was opened by Montedeen have already been mentioned. It will be recalled that the franchise agreement was not executed until 11 June 1993, but that Bamco Villa had operated the Richmond branch since June 1992 essentially pursuant to the heads of agreement which are dated 3 March 1992. It can be assumed for present purposes that both the heads of agreement and the franchise agreement gave Bamco Villa exclusivity as to the use of the Delta System in terms which are to be found in cl.1.1 of the franchise agreement and that the definition of the territory in respect of which that exclusive licence was granted, was relevantly the same for both agreements.
During 1992, Montedeen advertised Delta outlets in the Yellow Pages. It did so by reference to suburbs in respect of which it provided corresponding telephone numbers. Thus the advertisement referred to Richmond and provided in relation to it the telephone number of the Bamco Villa outlet. There were other suburbs and telephone numbers listed in the advertisement which reflected branches operated by other franchisees and by Montedeen. But the advertisement also represented (falsely) that a Delta business was being conducted in St. Kilda (at an unspecified location) and a telephone number was provided in respect of it - 427 0244. If that number was called, it was serviced by Montedeen staff. But a would-be customer looking at the 1992 Yellow Pages would have been misled into believing that a Delta branch was located in St. Kilda. In the circumstances, it may be assumed that in 1992 at least some potential customers of the Richmond branch who were located in the Bamco Villa territory near its boundary with St. Kilda, seeing in the Yellow Pages that a Delta business was located in St. Kilda, telephoned that outlet and not Richmond, simply because of its apparent proximity. Be that as it may, it seems that no complaints were made by Bamco Villa to Montedeen about this bogus advertisement.
According to his Honour's findings, Montedeen opened its St. Kilda branch in late 1992 and, as has been said earlier, located it approximately 200 metres from the boundary of the Bamco Villa territory. His Honour found that prior to this occurring Salvo told Tony Vernuccio about the possibility of Montedeen's opening branches in its area and not, as Salvo would have it, that Montedeen might open a branch in St. Kilda. Shortly after the opening of the St. Kilda branch, Bamco Villa complained to Montedeen about that action and continued to complain about it, but to no avail. Ultimately, this matter became one of the issues in the proceeding before his Honour.
It seems clear on his Honour's findings (and this was not challenged by Montedeen on appeal) that Montedeen established the branch in order to attract (necessarily at the expense of Bamco Villa at least as to part) custom from those who were located in its territory in an area which broadly corresponds with the St. Kilda Road/Windsor and Malvern Telstra cells. In terms of proximity, that area is closer to the St. Kilda branch than the Richmond outlet, so it is not surprising that potential customers located there found it more convenient to telephone and deal with what they thought was the St. Kilda branch rather than the more distant Richmond outlet. It also seems clear that, as events turned out, the St. Kilda branch did attract a substantial amount of business from that area.
One of the bases on which Bamco Villa sought to support its claim before his Honour that, in opening the St. Kilda branch in the way it did, Montedeen breached the exclusivity provisions of the franchise agreement, was that the agreement gave it the exclusive rights to all business, including telephone-generated business, emanating from its territory and, therefore, by accepting telephone business from the area referred to and not accounting for it to Bamco Villa, Montedeen was in breach of the agreement. His Honour, correctly in our view, rejected this argument and this has not been challenged on appeal. Mr. Derham accepted that cl.1.1 does not give Bamco Villa such a right. He also accepted that Montedeen was free to compete with Bamco Villa for Delta business, providing it did not do so within the Bamco Villa territory. That this is common ground is not surprising, having regard to the absence of a provision in the franchise agreement prohibiting Montedeen from competing against its franchisee. Moreover, on its plain reading, cl.1.1 gives Bamco Villa no more than exclusivity in the use and exploitation of the Delta System within the territory (meaning, as was accepted by Montedeen during the hearing of the appeal, that Montedeen was thereby precluded from conducting a Delta business in the territory in competition with Bamco Villa). Furthermore, cl.1.3 clearly contemplates that other franchisees would be established outside the Bamco Villa area and it must follow that at least some, if not all, of them would be competitors of Bamco Villa.
Mr. Derham's principal argument in relation to this aspect of the cross-appeal was that by setting up and operating the St. Kilda branch as it did, Montedeen competed with Bamco Villa business within its territory. He submitted that the determination of whether Montedeen so competed, depended on how the activity alleged to be competitive was being conducted. He contended that by deliberately placing itself in close proximity to the Bamco Villa territory and advertising that location, it effectively reached into the Bamco Villa territory and took business out of it and, thus, competed with Bamco Villa in its territory. A similar argument was put to his Honour. He rejected it and, in our view, he was correct in doing so.
Bamco Villa led evidence on the application from three persons, Marian Atwill, Vincent Condello and Gary John Salt. The judge regarded the evidence of Atwill and Condello as not entitling Bamco Villa to re-open its case, since their evidence went to conversations which occurred subsequent to the trial and therefore, if accepted, widened the issues to enable Bamco Villa to make a fresh claim for a later breach of the agreement. This aspect of his Honour's ruling was not challenged during the appeal. It was the evidence of Salt which was said to be critical to Bamco Villa's application.
In support of the application, Michael John Champion, Bamco Villa's solicitor, swore an affidavit in which he dealt with the issue why Bamco Villa had not called Salt to give evidence at the trial. Champion said that Salt was an employee of Montedeen and accordingly he considered he could not approach Salt to discuss his evidence. However, after Salt left the employ of Montedeen (on 23 May 1997) he had with difficulty located Salt and spoken to him. In his evidence, Salt said he was contacted about one week before he gave evidence (which took place on 23 or 24 June 1997).
The judge said in his reasons for rejecting the application that at the heart of Salt's evidence was the issue whether the statement in Salt's personnel chart (which Montedeen had failed to produce in making discovery) that Joseph Touma was the New South Wales state manager of Delta was correct. Salt asserted that Touma was the state manager. He referred to an occasion when on a visit to Sydney in February 1997 Touma and Steve Brooks produced documents which they said confirmed that Brooks (not Touma) was the state manager in New South Wales and that Touma was merely a consultant. Salt said he had prepared the personnel chart showing Touma as the New South Wales state manager and, despite Salvo and Wunsch knowing its contents, no query had been raised with him concerning Touma's position. Then in May 1997, Wunsch queried with Salt who he (Salt) thought was the New South Wales state manager. When Salt said Touma, Wunsch said it was Brooks, and ultimately Wunsch asked Salt to back-date a revision of the chart showing Brooks as manager from some time in March or February. Salt did so, but said to Wunsch that this was not the structure at that time; however Wunsch asked him to make the change and print the document. Later, said Salt, Wunsch asked him to type a letter saying the original chart was mistaken in relation to Touma. Salt's evidence was that this was in connection with the pending trial, and that he was troubled by what he had been asked to do, as he felt he was being asked to say something untruthful.
In this Court, it was submitted that the evidence presented on the application to re-open Bamco Villa's case, but particularly the evidence of Salt, would have been sufficient to "tip the scales" if the evidence was at that stage insufficient to establish that the sale transaction was a sham. The evidence, it was submitted, was probative of an attempt by Montedeen to deceive both Bamco Villa and the trial judge as to the true position with the Touma businesses. Furthermore, if Salt's evidence was accepted, it related to events said to be occurring at the very time of the trial of the issue of liability in May 1997, whilst Salt remained an employee of Montedeen, and supported the case made by Bamco Villa that Salvo and Wunsch were attempting to conceal the fact that the agreement in question was a sham.
The judge concluded that the fresh evidence did not require the case to be re-opened, saying that he was not satisfied that with reasonable diligence the evidence of Salt could not have been discovered and adduced at the trial. His Honour said that the identity of Salt was known and that it had been known prior to the end of the trial that he had left the employ of Montedeen on terms that might have left him unfavourably disposed towards Montedeen. His Honour said Salt had lived at his present address for 18 months to two years and was listed in the telephone book. His Honour held there was enough in the evidence of Salvo to indicate that Salt had left the employ of the first defendant in unhappy circumstances and might therefore have been inclined to speak to Bamco Villa's solicitor on the very issue about which he had now been called to give evidence. The judge then went on to conclude that even if the evidence showed that Touma was state manager of Delta in New South Wales, that did not necessarily mean that the sale was a sham, but related more to issues of credit bearing on this issue. His Honour held that it could not be said that the evidence most probably would have produced the result contended for or was so highly likely to do so as to make it unreasonable to suppose it would not.
In our view, if his Honour had not already been satisfied that the evidence in the trial led to the conclusion that the agreement of 8 August 1996 was a sham, he was in error in not granting Bamco Villa's application and permitting it to re-open its case. As we have already observed, Salt remained an employee of Montedeen until 23 May 1997, some ten days after the hearing of the trial on liability concluded. Even if there were circumstances which suggested that Salt was likely to be unhappy in Montedeen's employ, Salt was in our view none the less to be regarded as in Montedeen's "camp", so as to make it unrealistic for the other party to call him; O'Donnell v. Reichard [1975] V.R. 916, at 920; Payne v. Parker [1976] 1 N.S.W.L.R. 191 at 201. In the words used by Glass, J.A. in Payne v. Parker, Salt was a witness whom it would have been natural for Montedeen to call, a witness who would be expected to be available to Montedeen rather than Bamco Villa. It was stated by Mr. Derham during argument, and not contested by Mr. O'Callaghan, that Salt's identity was in fact not known to Bamco Villa until he was referred to during Salvo's evidence. Furthermore, the probative value of Salt's evidence was substantial and in our view, if accepted, would have given strong support to the conclusion that the sale of the Astoria, Crown and Real Cheap businesses to Sable Smooth (later called Crown Rent-a-Car Pty. Ltd.) was a disguise or a false front for the continued carrying on of businesses under those names by Montedeen. As we have already said, however, the view we take is that on the evidence already before the Court, Bamco Villa had established its case that the sale was a sham, and that Montedeen had breached the franchise agreement by thus engaging in impermissible competition in Bamco Villa territory.
Calculation of cell areas
By its Notice of Cross-appeal Bamco Villa has also challenged his Honour's decision to accept expert evidence given on behalf of Montedeen as to the percentage of the St. Kilda Road/Windsor cell that fell within the franchisee's territory. It was contended on behalf of Bamco Villa that his Honour should have accepted the evidence of its witness on this issue and then applied such percentage to the calculation of its loss and damage.
During the first damages trial, Bamco Villa claimed by way of damages, compensation for business lost to it as a consequence of the wrongful diversion from it of all calls from the St Kilda Road/Windsor and Malvern cells (and, without objection from Montedeen, for loss of calls from Glen Iris and Caulfield cells). In that context, it sought to establish, inter alia, the percentage of the cells lost to it (netted off by cells allocated to it by Montedeen from other franchisees). To that end, Bamco Villa led evidence to show what was the percentage area of each overlapping cell that fell within its territory. That involved measuring the area of such cells and such parts of them as were within the Bamco Villa territory. The required measurements and calculations were made on behalf of Bamco Villa by an architect, Monita Ma and on behalf of Montedeen, by a licensed surveyor, Kenneth John Roberts. Both gave evidence and his Honour found them to be honest witnesses who performed the work that was requested of them, but he also found that they used different methods in making the relevant calculations. The cell in respect of which the two witnesses differed most was the St. Kilda Road/Windsor cell and that is the cell with which this aspect of the cross-appeal is concerned. Ma claimed that 91 per cent of it fell within the Bamco Villa territory, whereas Roberts' figure was 64 per cent. As to the other cells that were measured by them, it is only necessary to say that there was agreement between them as to some and disagreement, in varying degrees, as to others.
His Honour carefully considered the evidence on this issue and, in respect of some cells as to which there was disagreement, accepted the calculations of Ma and in relation to others, those of Roberts. Thus, for example, he accepted Roberts's measurements in respect of the St. Kilda Road/Windsor and East Kew cells, but rejected his evidence in relation to the Collingwood cell. As to the Malvern cell, his Honour accepted a figure that was part-way between those put forward by the two experts. We are here only concerned with the question whether his Honour erred in his acceptance of Roberts's evidence in relation to the St. Kilda Road/Windsor cell (and in his rejection of Ma's measurements in relation to it). In its notice of cross-appeal, Bamco Villa attacked his Honour's decision to reject Ma's calculations in respect of a number of cells, but at the hearing of the cross-appeal, Mr. Derham challenged his Honour's rejection of Ma's calculations only in so far as they related to the St. Kilda Road/Windsor cell.
His Honour found that on instructions Ma excluded from the area of the St. Kilda Road/Windsor cell, the parkland to the west of Queens Road (and that she made a similar exclusion in respect of the East Kew cell). The exclusion was made on the basis that it was unlikely that there would be an intensity of phone calls from the parklands. Roberts, on the other hand, included the parklands in the area which he measured. His Honour was critical of Ma's approach for two reasons. First, such exclusion of parkland was not carried out uniformly by her in the sense that there was no corresponding adjustment for parkland which was located in the Bamco Villa territory within a particular cell. The second reason was that Bamco Villa had failed to establish by evidence its assumption that it was unlikely that there would be an intensity of phone calls coming from the Albert Park parkland. His Honour preferred the relevant calculation of Roberts.
There were two principal grounds on which Mr. Derham sought to challenge his Honour's rejection of Ma's evidence and his acceptance of Roberts's calculations in respect of the St. Kilda Road/Windsor cell. He first submitted that there was no inconsistency in the way Ma treated parklands in the course of measuring the areas of the relevant cells. Mr. Derham argued that the bulk of the area outside the relevant Bamco Villa territory was parkland, whereas the parklands in other cells, which were not excluded from the areas measured by Ma, were small and did not warrant an adjustment.
Mr. Derham also contended that his Honour should not have accepted Roberts's calculations because they were inaccurate having regard to the overlay that was used by him. It was put that Roberts had used an enlarged overlay which contained errors which resulted in his calculations being inaccurate and that his Honour did not pay any or any sufficient regard to such matters. One of Mr. Derham's complaints was that his Honour recognised the imperfection of the enlarged overlay as used by Roberts when his Honour considered the position of the Collingwood cell (in respect of which he rejected Roberts's calculations owing to this error) but when it came to analysing his measurements pertaining to the St. Kilda Road/Windsor cell, his Honour made no like observation in respect of the imperfection in the overlay that was relevant to that cell.
The evidence established that for the purposes of her calculations, Ma used a Melway map of Melbourne to a scale of 1:75,000 and corresponding overlays which showed the boundaries of the Telstra cells and the Bamco Villa territory. Roberts, on the other hand, made his measurements by reference to the Department of Crown Land and Survey Map (Map) for Melbourne which was on a scale of 1:25,000. He caused the Telstra overlay in respect of that Map to be professionally prepared and enlarged so as to show the boundaries of the Telstra cells and the Bamco Villa territory. Using a planimeter, which is an instrument used by licensed surveyors to measure areas of irregularly shaped parcels of land, he calculated that in respect of the St. Kilda Road/Windsor cell, 64 per cent of it was within the plaintiff's territory. He made like calculations in relation to other cells which were partly in the Bamco Villa territory, such as Malvern, Collingwood and others.
Under cross-examination, Roberts agreed that the enlarged overlay was produced for him by someone else who took as a starting point the overlay applicable to the map of Melbourne which has a scale of 1:75,000 and which showed, inter alia, the boundaries of the Telstra cells. The boundaries of the Bamco Villa territory were marked on that overlay and it was then enlarged so as to be applicable to Roberts' Map of Melbourne. It seems that in the course of its preparation, the enlarged overlay was cut down the middle and then glued together, but in that process corresponding boundary lines did not match up in a number of places, including some boundaries of the St. Kilda Road/Windsor cells. Roberts accepted in cross-examination that this mismatch of boundaries probably affected his calculation of the areas of the corresponding Telstra cells and that, therefore, his measurements were, to a certain degree, inaccurate.
It is clear from his Honour's judgment, however, that he took into account a range of matters in coming to his decision to reject Ma's calculations in respect of, inter alia, the St. Kilda Road/Windsor cell and to accept the measurements of Roberts. In particular, his Honour had regard to the imperfection in the enlarged overlay that was used by Roberts when he calculated the relevant areas of the St. Kilda Road/Windsor cell. He said, for instance, in the context of considering Ma's exclusion of parkland:
"In the case of East Kew and St. Kilda Road/Windsor I find that the reason for the difference is the exclusion by Ma of parkland. I think it is correct that unless this is done uniformly it should not be done at all. Further, there is no evidence as to the number of telephones in such areas or any detailed analysis of the location or intensity of location of telephones in the plaintiff's territory or outside the plaintiff's territory or the cells. I accept Roberts' calculation as correct."
Later, his Honour said this in the context of discussing their measurements pertaining to the Collingwood cell:
"In the end I am left to make a finding as to which estimate is correct. I do not accept that the higher measurement of Ma is explained by the method she used including the scale she used. As concerns Roberts, however, I am satisfied that a relevant factor in his measurement was the imperfection in the map he used; in other words that what he used conduced to error. This imperfection became evident during Roberts' cross-examination. Both in the matter of this cell and all the others I have regard to all the evidence in expressing my conclusions. On balance I find Ma's measurement [in relation to the Collingwood cell] is correct." (Emphasis added)
It seems clear enough that his Honour had present to his mind when considering Roberts's evidence about the Collingwood and other cells, including the St. Kilda Road/Windsor cell, the imperfections in the enlarged overlay that was used by him. It should be borne in mind that Roberts did not concede in cross-examination that the imperfection in the overlay produced any quantifiable error or even a material inaccuracy in his measurements of the area of the St. Kilda Road/Windsor cell. He merely agreed that because of the error in the overlay, his measurements were likely to be inaccurate "to a certain degree". In relation to Ma, it is obvious from what has been said earlier, that his Honour took into account not only the fact that there was inconsistency as to her treatment of parkland, but also that the basis for excluding it had not been established. It has not been demonstrated on appeal, however, that this approach was not open to his Honour.
In the circumstances, therefore, there is no justification for interfering with his Honour's decision to reject Ma's calculations and to accept Roberts's estimate as to what percentage of the area of the St. Kilda Road/Windsor cell fell within Bamco Villa's territory.
Allocation of Glen Iris and Caulfield Cells
In grounds 11-14 of its Notice of Cross-appeal, Bamco Villa claims that his Honour erred in not holding that the diversion by Montedeen of the Glen Iris, Caulfield and St. Kilda Road 3004 cells away from the plaintiff constituted breaches of the franchise agreement. At the hearing of the appeal, Mr. Derham confined his challenge to the first two cells, part of each of which was located in the Bamco Villa territory. Implicit in the submission made on behalf of Bamco Villa on this issue was the claim that his Honour overlooked determining whether such allocation amounted to breach of the franchise agreement. It was submitted, that, therefore, this matter should be remitted to his Honour for determination.
Bamco Villa's pleadings and particulars are probably wide enough to encompass the claim that Montedeen's diversion of the Glen Iris and Caulfield cells constituted a breach of the franchise agreement. The evidence before his Honour established that the Glen Iris cell was diverted to another franchisee (Dalston Pty. Ltd. ) and the calls from the Caulfield cell were taken by Montedeen.
In his judgment consequent upon the first damages trial, his Honour stated on a number of occasions, consistently with his liability findings, that a relevant breach of the franchise agreement by Montedeen was constituted by its wrongful allocation to its St Kilda Branch of the St Kilda Road/Windsor and Malvern cells. His Honour said: "It is only the treatment of those cells that I held to be a breach and which is now in question". His Honour did not make a like finding in respect of the Glen Iris and Caulfield cells, but it does not follow that he overlooked them.
At that trial, Bamco Villa sought, by way of damages, compensation for business lost to it by reason of the wrongful allocation of the St Kilda Road/Windsor and Malvern cells and, as his Honour noted, it presented calculations in respect of each such diversion. His Honour also observed that in that context Bamco Villa sought to assess the income it would have earned but for that breach, although taking into account the business it gained from allocations to it of other cells and adjusted for loss of the Glen Iris and Caulfield cells. Thus, in its calculations, Bamco Villa effectively claimed for loss of calls from that part of the Glen Iris cell that was in its territory (38%). A similar calculation was proffered in respect of the Caulfield cell (only 8% of which was in the plaintiff's territory).
In discussing Bamco Villa's formulation of its claim for damages, his Honour specifically recognised that his findings of breach were limited to the diversion by Montedeen of calls from the plaintiff's territory to itself. In the case of the Glen Iris cell, however, Montedeen allocated the cell to another franchisee and not to itself. His Honour noted that "despite this [namely, notwithstanding that this diversion was not a breach] counsel for Montedeen did not object to the inclusion of Glen Iris in the plaintiff's damages calculations". Hence, because there was no opposition from Montedeen, Bamco Villa proceeded to calculate its loss of business having regard to the diversion of the Glen Iris cell (and the Caulfield cell).
In the circumstances, therefore, it is not surprising that Mr. Derham conceded that on appeal, Bamco Villa sought to have the issue of breach relating the Glen Iris and Caulfield cells remitted to his Honour for determination, not so as to pursue a damages claim, but to seek injunctive relief referable to those areas.
In our view, it is plain from his Honour's judgment, that he did not regard the diversion by Montedeen of the Glen Iris and Caulfield cells as constituting a breach of the franchise agreement. Moreover, the basis of his Honour's finding that the diversion of all calls from the St Kilda Road/Windsor and Malvern cells to its St Kilda branch amounted to a relevant breach was that it was carried out for the commercial advantage of Montedeen. There was no finding of such a motive on the part of Montedeen in respect of the Glen Iris and Caulfield cell allocations, nor was there a finding that such cell allocation gained a commercial advantage to Montedeen.
In the circumstances, therefore, it was not a matter of his Honour's overlooking the issue in relation to the latter two cells. His Honour found that such diversions were not of the same character as the diversion of the larger two cells and, therefore, did not amount to a breach of the franchise agreement.
Consequently, there is no basis for remitting to his Honour the issue whether the diversion by Montedeen of cells from the plaintiff's territory found in the Glen Iris and Caulfield cells constituted a breach by it of the franchise agreement.
Injunctions, Damages, Costs
In its Notice of Cross-appeal Bamco Villa also claimed that his Honour should have granted an injunction to restrain Montedeen during the life of the franchise agreement from conducting in the territory the same business as that which Bamco Villa is authorised to conduct in the territory under the franchise agreement or a competing business and from using the Delta System in the territory in competition with it. Montedeen, on the other hand, contended that the injunction that was granted by his Honour should be dissolved. Towards the conclusion of the hearing of the appeal and before these issues were argued, the parties announced that they were content not to pursue them, if at all, until after our decision on the other appeal grounds was made known. The view taken by them was that whatever injunctive relief may be appropriate will depend on the way in which the relevant issues are resolved by our judgment. Consequently, we say no more about these claims.
In its Notice of Cross-appeal, Bamco Villa claimed that his Honour should have awarded it further damages. Such a claim was, however, based on Bamco Villa's establishing on its appeal that Montedeen breached the franchise agreement by establishing its St. Kilda Road branch and that the sale by Montedeen of the Touma business was a sham. Bamco Villa failed in the first matter, but succeeded on the second. Consequently, the question what damages were suffered by Bamco Villa by reason of the sham sale must be remitted to his Honour for assessment.
On 27 February 1998, almost nine months after the commencement of the trial, the parties came before his Honour on the question which of them was to bear the costs of the proceeding. Bamco Villa, which essentially succeeded at trial, sought an order that Montedeen not only pay its costs of the proceeding, but do so on a solicitor-client basis on the ground that it had behaved unreasonably and, in effect, in a high-handed manner. Montedeen, on the other hand, contended that since Bamco Villa lost on a number of issues, including the issue relating to the sham sale, it should pay some portion of Montedeen's costs.
On 16 March 1998, his Honour gave judgment on these issues. His Honour decided that it would be just and proper that Bamco Villa should receive its costs from Montedeen without reduction on any account and that Montedeen should not receive any of its costs. He ordered on that day that Montedeen pay Bamco Villa's costs of the proceeding including reserved costs. His Honour declined to order that these costs be paid on a solicitor-client basis and Bamco Villa has sought leave to appeal from that decision. This matter was raised on the last day of the hearing of the appeal although no summons had been issued seeking leave to appeal from his Honour's costs order. Since Bamco Villa offered to file such a summons and since no objection was taken on behalf of Montedeen to the matter proceeding on that basis, the court heard the parties on this issue.
Before we deal with this issue, it is necessary to mention a number of other matters. First, his Honour's costs order of 16 March 1998 did not affect the costs order made against Bamco Villa on 3 July 1997 in relation to its unsuccessful application to re-open its "sham" case and adduce further evidence in relation to it. Next, we have already said that in light of our decision on the sham and related issues, it will not be necessary for Bamco Villa to avail itself of the leave to re-open its case which should have been given and adduce further evidence as to ownership by Montedeen of the Touma business. We will make the order granting leave notwithstanding that it will not be availed of.
In all the circumstances, therefore, it is appropriate that his Honour's order of 3 July 1997 that Bamco Villa pay the costs of Montedeen of and incidental to its application to lead further evidence be set aside and that Montedeen be ordered to pay Bamco Villa's costs in relation to that application.
Returning to the costs question which is the subject matter of the application for leave to appeal, his Honour plainly dealt with that issue on the basis that Bamco Villa had failed in its claim that the sale of the Touma business was a sham. Since we have decided this point against Montedeen, it is appropriate that his Honour reconsider Bamco Villa's application that Montedeen pay its costs on a solicitor-client basis in light of our judgment. In order to enable that to be done, we propose that his Honour's costs order of 16 March 1998 be set aside and that the issue be remitted to his Honour for re-consideration in light of our decision in this case.
Proposed orders
To summarise, our conclusions on the various issues that were argued on the appeal are as follows-
(a)Although his Honour erred in implying into the agreement the term which he did, Montedeen's allocation of the two relevant cells to its St. Kilda branch was none the less in breach of cl.22.4 of the franchise agreement.
(b)The sale of the businesses to a company supposedly controlled by Touma was a sham.
(c)Even if the sale of the businesses was not a sham, Montedeen managed and operated them in the Bamco Villa territory for the true owner, in breach of the franchise agreement.
(d)His Honour erred in not giving Bamco Villa leave to re-open its case on the "sham" issue and adduce further evidence as to the true ownership of the businesses.
Some issues raised by Bamco Villa in its cross-appeal were, we think, rightly abandoned by it. In relation to two relatively minor issues, which took up little time during the hearing of the appeal and did not involve significant amounts of money, Bamco Villa failed. Those issues related, first to the rejection by his Honour of Ma's evidence in relation to the St. Kilda Road/Windsor cell and secondly to his Honour's finding as to the allocation of the Glen Iris and Caulfield cells. A more significant issue on which Montedeen succeeded concerned the St. Kilda branch. Overall, however, and as a matter of substance, it is fair to say that Bamco Villa succeeded in its cross-appeal.
In light of our decision in respect of the issues on which Bamco Villa succeeded and subject to anything that counsel may say, it would be appropriate, we think, to make orders to the following effect:
(1)On the appeal -
(a)Appeal dismissed with costs, save for the application for leave to amend the statement of claim which shall be paid by the respondent.
(b)Order that the appellant forthwith cause to be discharged at its own expense the second mortgage given to it by the respondent pursuant to the order of the Court of Appeal made on 15 May 1998 or, if the mortgage is unregistered, forthwith deliver it up to the solicitors for the respondent.
(2)On the cross-appeal -
(a)Appeal allowed with costs.
(b)Set aside paragraph 2 of his Honour's judgment of 27 February 1998.
(c)Remit the matter to his Honour so that he may determine and award the damages (including damages in the nature of interest) which Montedeen must pay Bamco Villa.
(d)Set aside his Honour's order of 3 July 1997 and in lieu thereof order that Bamco Villa's application for leave to re-open its case be granted with costs.
(e)Set aside paragraph 4 of his Honour's order of 16 March 1998 and remit the matter to his Honour so that he may determine whether the costs of the proceeding (including reserved costs) to be paid by Montedeen to Bamco Villa should be on a solicitor-client basis and may order accordingly.
(f)Liberty to either party to apply to the Court of Appeal for an order in respect of injunctions.
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