Mr Rental Australia Pty Ltd v Ird Services Pty Ltd

[2016] NSWSC 700

Supreme Court

New South Wales

Medium Neutral Citation:	Mr Rental Australia Pty Ltd v IRD Services Pty Ltd [2016] NSWSC 700
Hearing dates:	14-18, 21, 23 March 2016
Decision date:	02 June 2016
Jurisdiction:	Equity
Before:	Meagher JA
Decision:	(1) Direct that the parties attempt to agree on short minutes of order giving effect to these reasons, those orders to be delivered to my Associate by 5pm on 8 June 2016. If no agreement can be reached, the parties are to lodge with my Associate before 5pm on 15 June 2016, the orders for which they contend, and written submissions (not exceeding three pages) in support of them. Any issue as to the final form of orders will then be determined on the papers.
Catchwords:	CONTRACT – franchise agreement – where option to purchase business assets of franchisee if agreement “terminated for any reason” – whether option only available where termination occurs pursuant to express entitlement – whether option void for uncertainty – whether franchisor entitled to specific performance of purchase agreements arising from exercise of option   CONTRACT – franchise agreement – where franchisees purported to terminate agreements – whether franchisor engaged in repudiatory conduct entitling franchisees to terminate – whether breaches of essential terms by franchisor – whether franchisor engaged in unconscionable conduct
Legislation Cited:	Australian Securities and Investments Commission Act 2001 (Cth), s 93AA Competition and Consumer Act 2010 (Cth), Sch 2, Australian Consumer Law, ss 21, 237 National Consumer Credit Protection Act 2009 (Cth), ss 5(1), 6, 29, 35
Cases Cited:	Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Byrne v Australian Airlines Ltd [1995] HCA 24; 185 CLR 410 Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312 Co-operative Insurance Society Ltd v Argyle Stores (Holdings) Ltd [1998] AC 1 Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184; (2013) 29 BCL 329 Downer EDI Ltd v Gillies [2012] NSWCA 333; 92 ACSR 373 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 Federal Commissioner of Taxation v Murry [1998] HCA 42; 193 CLR 605 Kennedy v Vercoe [1960] HCA 64; 105 CLR 521 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; 233 CLR 115 Lloyd v Lloyd (1837) 2 My & Cr 192; 40 ER 613 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 89 NSWLR 633 Mehmet v Benson [1965] HCA 18; 113 CLR 295 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 89 ALJR 990 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; 195 CLR 1 Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; 149 CLR 537 Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd [1935] HCA 56; 53 CLR 618 Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 Tonto Home Loans Australian Pty Ltd v Tavares [2011] NSWCA 389; 15 BPR 29,699 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522
Texts Cited:	J D Heydon, M J Leeming & P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed 2015, LexisNexis Butterworths)
Category:	Principal judgment
Parties:	Mr Rental Australia Pty Ltd (Plaintiff) IRD Services Pty Ltd (First Defendant) J&D Business Solutions Pty Ltd (Second Defendant) Alwitem Pty Ltd (Third Defendant) Glenn David Travers and Sandra Travers (Fourth Defendant) Andsmit Pty Ltd (Fifth Defendant) Ian Dobbie (Seventh Defendant) Jeffrey Wood (Eighth Defendant) Debra Siozos (Ninth Defendant) Ross Grimm (Tenth Defendant) Joy Grimm (Eleventh Defendant) Peter Raymond Thomas (Twelfth Defendant) Sharon Leanne Thomas (Thirteenth Defendant)
Representation:	Counsel: JAC Potts with CE Bannan (Plaintiff/Cross Defendant) RHM Attiwill QC with DB Bongiorno (Defendants/Cross Claimants)   Solicitors: Corrs Chambers Westgarth Lawyers (Plaintiff/Cross Defendant) HWL Ebsworth Lawyers (Defendants/Cross Claimants)
File Number(s):	2015/00242810

Judgment

Overview

1. Before September 2015 the first to fifth defendants (together, the franchisees) operated franchise businesses under the “Mr Rental” name. Those businesses, as that name suggests, involved the rental of home appliances and goods, such as white goods, televisions, mobile phones, furniture and exercise equipment, to consumers. In late July or early August 2015, those defendants purported to terminate their franchise agreements (the franchise agreements) because of repudiatory conduct on the part of the plaintiff franchisor, Mr Rental Australia Pty Ltd (MRA). Their right to do so was disputed. In response MRA purported to terminate the agreements on the basis that the wrongful terminations by the franchisees constituted repudiatory conduct. It also relied on an express term entitling it to do so where a franchisee “voluntarily abandons” the franchise business or relationship.

2. The franchise agreements conferred an option on MRA to purchase the assets of a franchisee’s business in the event that the agreement expired or was “terminated for any reason”. MRA has sought to exercise that option. It is contended that MRA’s right to do so did not arise where the franchisees terminated the agreements. The franchisees also contend that the option is unenforceable for uncertainty, and because an implied condition precedent to its exercise was not satisfied.

3. It is now common ground that the agreements have been terminated. Each of the franchisees has continued to service its old customers and to conduct a rental business from the same premises as their previous Mr Rental business, albeit under a new name and with new branding. That has been permitted under a regime agreed between the parties pending the determination of these proceedings, which were commenced on 19 August 2015.

4. MRA seeks orders for specific performance of the asset purchase agreements, and an order for delivery up of the franchisees’ customer records and rental agreements. The franchisees oppose that relief. They also seek an order pursuant to s 237 of the Australian Consumer Law (which applies by operation of s 131 and forms Sch 2 of the Competition and Consumer Act 2010 (Cth)) restraining MRA from enforcing that option. That order is sought on the basis that MRA engaged in unconscionable conduct contrary to s 21 of that Law. Neither party claims damages for breach of contract by the other.

5. Before returning to these issues, I propose first to record my findings as to the general and non-controversial circumstances in which the disputes arise.

The parties and the franchise agreements

6. The parties to each franchise agreement were MRA, the franchisee (which in the case of each of the relevant defendants, other than the fourth defendant, was a corporation) and the guarantors and indemnifiers of the franchisee’s obligations under that agreement. Those guarantors are separately named as 7th to 13th defendants. However they are no longer interested parties. MRA has abandoned its claims to damages in respect of the alleged repudiation of the franchise agreements. By doing so it has also abandoned its claims against the guarantors to be indemnified in respect of those losses. (MRA has also settled with and discontinued its proceedings against the sixth, fourteenth and fifteenth defendants.)

7. Each of the agreements was in the same terms, except for details specific to the parties and the territory in which they were to operate. I set out the more significant provisions of the agreements below when addressing the issues to which they relate. I also include as an attachment to these reasons a somewhat lengthy extract of the provisions directly relating to the matters in issue.

8. The first defendant (IRD Services) operated franchises in the Gosford and Wyong territories. Ian Dobbie is the principal director of IRD Services. The second defendant (J&D Business Solutions) conducted franchise businesses in the Nowra and Wollongong territories. The directors of J&D Business Solutions include Debra Siozos. The third defendant (Alwitem) conducted the Coffs Harbour franchise. The directors of that company include Ross Grimm. The fourth defendant is a partnership between Glenn and Sandra Travers (Travers Partnership). That partnership operated the Moonah franchise in Tasmania. Finally, the fifth defendant (Andsmit) operated the Dandenong franchise. Peter Thomas is a director of Andsmit. With the exception of Sandra Travers, each of these persons gave evidence.

9. The dates of commencement of each of the franchise agreements, and the end date of that agreement absent its termination, are set out below. The number of asterisks (*) indicates whether the franchise agreement was the first between the parties or a renewal, and in the latter case, whether it was the second or third such agreement between them.

Franchisee	Franchise Area	Period of Franchise
IRD Services	Gosford	12 March 2015 – 2 March 2020 **
IRD Services	Wyong	2 May 2011 – 2 May 2016 *
J&D Business Solutions	Wollongong	29 January 2015 – 3 September 2019 ***
J&D Business Solutions	Nowra	29 January 2015 – 3 September 2019 **
Alwitem	Coffs Harbour	22 December 2014 – 22 December 2019 **
Travers Partnership	Moonah	17 December 2014 – 17 December 2019 **
Andsmit	Dandenong	29 January 2015 – 3 September 2019 ***

Circumstances leading to the termination of the franchise agreements

The franchise system as it operated before July 2010

10. Prior to 1 July 2010, MRA’s franchisees offered ‘fixed term’, ‘short term’ and ‘corporate’ rental agreements. Under the terms of those agreements the owner of the goods or equipment, and the party letting them on hire was the franchisee. Accordingly, the rental payments were received by the franchisee.

11. A substantial proportion of the non-corporate customers of the franchises were from lower socio-economic groups, receiving Centrelink benefits and using Centrepay, a voluntary bill paying service which enabled persons receiving those benefits to make rental payments direct to the relevant franchisee. Other customers paid by direct debit, credit card or cash. Mr Travers’ evidence was that in excess of 75% of the payments received by the Moonah franchise were received via Centrepay.

The introduction of Commonwealth credit legislation

12. The National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) received Royal Assent on 15 December 2009 and commenced on 1 April 2010. Relevantly, from 1 July 2011 it prohibited persons who do not hold a credit licence, and who are not acting on behalf of a licensed principal as its employee, director or credit representative, from engaging in “credit activities” (s 29). Those activities as defined include the provision of a consumer lease, being a contract for the hire of goods by a natural person under which that person does not have a right or obligation to purchase the goods (s 6; Sch 1, National Credit Code, s 169). From 1 July 2010, the Act permitted persons to apply to the Australian Securities and Investments Commission (ASIC) for the issue of credit licences authorising the licensee, or its representatives, to engage in such activities (s 36).

13. The characteristics of a consumer lease to which these provisions apply include that the goods were hired “wholly or predominantly for personal, domestic or household purposes”. However such leases “for a fixed period of 4 months or less or for an indefinite period” are excluded from those to which the Act otherwise applies: s 5(1); Sch 1, National Credit Code, ss 170, 171(1).

14. Taking account of these provisions, MRA determined that from 1 July 2010 its franchisees would offer three types of rental agreement. They were an ‘indicative period’ rental agreement, which was for an indefinite period but required the customer to nominate the duration of the anticipated rental; a short term rental agreement for a period of up to 16 weeks; and a corporate rental agreement offered to small businesses.

15. In October 2010, ASIC raised concerns with MRA as to whether its indicative period rental agreement was in fact for an “indefinite period” within the terms of the exception in s 171(1) of the National Credit Code. That question was debated between ASIC, MRA and its lawyers. Eventually it was resolved by MRA giving an undertaking in accordance with s 93AA of the Australian Securities and Investments Commission Act 2001 (Cth). The form of that undertaking (as accepted in January 2013) recorded ASIC’s view as being that the indicative period rental agreement (which contained a provision allowing the franchisee to charge an additional fee if the customer terminated the agreement before the end of the indicated period) was in substance a consumer lease for a fixed term greater than 4 months and therefore one to which the Code applied. It also recorded that MRA “and/or the Mr Rental franchisees intend to apply for Australian credit licences”. The undertakings given included ensuring that MRA’s franchisees would not enter into any further agreements which provided for the payment of that additional fee and would not charge that fee under any existing agreement.

16. From January 2013, all MRA franchisees offered a revised “indefinite period” rental agreement which did not contain a provision requiring the customer to nominate the anticipated duration of the rental. Those agreements, along with the short term and corporate rental agreements, continued to be offered by the franchisees until their franchise agreements were terminated.

17. In late 2012, MRA engaged an external consultant, Taltingan Pty Ltd, to consider and advise on the relative advantages and disadvantages of centralised and decentralised credit licensing models. The latter involved each franchisee becoming licensed, whereas the former involved a single credit licence and a network of authorised credit representatives. A report from that consultant in January 2013 indicated that at least one competitor of MRA, Rent the Roo, had adopted a centralised model.

18. In March 2013, MRA engaged another external consultant, Beeson Consulting, to undertake financial analyses of those operating models. Beeson made a presentation to MRA’s senior executives and shareholders in early June 2013.

The development of a centralised licence model

19. At a meeting on 17 July 2013, MRA’s board resolved “to move the Mr Rental business model to a centralised operations model”. That model, as eventually implemented, became known within MRA and its franchise network as the ‘New World’ system. The existing model, which it was intended to replace, was referred to as the ‘Old World’ system.

20. The principal difference between the systems is that in the New World, Mr Rental Group Pty Ltd (MRG), a subsidiary of MRA and the holder of an Australian credit licence, enters into the rental agreement with the customer. The franchisees then act as credit representatives and undertake activities on its behalf. Their principal activity is entering into rental agreements on behalf of MRG. They receive service fees for doing so. The goods for rent are, at the election of the franchisee, either acquired and owned by it or acquired and owned by MRG. In the former case, the goods are bailed to MRG on terms which authorise it to rent the goods. In each case, the customers make payments direct to MRG, mainly using Centrepay or direct debit.

21. A broader range of rental agreements may be offered by New World franchisees because they are able to offer ‘regulated’ agreements. The different types of agreement are referred to by the parties as ‘products’. The most popular product offered in the New World, which cannot be offered by the franchisees who operate under the Old World system, is a fixed term rental agreement (for a period of more than four months) known as ‘Mr Fixed’. Three other products offered in the New World are similar (in one case essentially identical) to products offered in the Old World. They are ‘Mr Short’, ‘Mr Flex’ and Mr Corp’ which correspond with the ‘short term’, ‘indefinite period’ and ‘corporate’ rental agreements.

22. Information Technology (IT) platforms were developed for use with the New World system. The main Old World IT system was known by the acronym CAIRO (Customer Acquisition and Rental Operation). The functionally similar platform made available to New World franchisees was described as MAX (Mr Rental AX).

23. The chief executive officer of MRA, Mr Nixon-Smith, presented the New World system to a national conference of franchisees in late February and early March 2014. In May and June 2014, MRA’s existing franchisees were invited to enter into New World franchise agreements and, at the same time, to consent to the termination of their existing agreements. The first to fifth defendants, among others, did not accept that proposal. Instead, over time each thereafter exercised a right to renew its or their existing franchise agreement. The one exception is in relation to the Wyong franchise agreement which did not require renewal until May 2016.

The change to the Centrepay scheme

24. In late June 2015, Centrepay announced a change to its policy in relation to the making of direct payments for rental products such as those offered by Mr Rental and its franchisees. Prior to that change, Centrepay could be used irrespective of whether the relevant rental agreement was regulated under the NCCP Act. From 1 July 2015, only new customers with regulated agreements could use the Centrepay facility. Centrepay also announced that from 30 June 2016 it would no longer make payments with respect to unregulated agreements entered into before 1 July 2015. The Department of Human Services (DHS) later agreed in the case of MRA franchisees to extend that date to 1 September 2015.

The disputes between the parties

25. Before November 2014 HWL Ebsworth (HWLE) was retained to act in the interests of a franchisee group of which the first to fifth defendants were members. Corrs Chambers Westgarth (Corrs) acted for MRA. The correspondence leading to the termination of the franchise agreements was preceded by two notices of dispute served on behalf of that group. The first was dated 19 November 2014 and the second, 7 May 2015. The subject matter of the first included losses of income said to have resulted from the move from ‘fixed term’ to ‘indicative period’, and then to ‘indefinite period’ rental agreements, as directed by MRA. The second concerned the introduction of the New World system which was said to involve breaches of MRA’s obligations with respect to the website, software, marketing and the development and integrity of the franchise network, principally because features of the New World system had not been made available to Old World franchisees and had been developed with funds contributed by them. By the time of the second dispute notice, the franchisee group for which HWLE acted numbered about 16 out of 70 or so MRA franchisees in Australia.

26. On 17 July 2015, HWLE wrote to Corrs requesting that MRA allow the franchisee group to obtain credit licences under the NCCP Act and offer rental agreements to their customers on the same or similar terms to the ‘Mr Fixed’ product. Reference was made to the new Centrepay policy which would prevent the franchisee group “from accepting Centrepay payments from any new customers from 1 September 2015 and from their current customers from 1 July 2016”.

27. That letter continued:

… approximately 77% of the payments our clients receive from customers are received through Centrepay. Further, receiving payments from Centrepay is the most efficient way for our clients to conduct their businesses as approximately 10% of payments received from customers through the direct debit system are dishonoured and result in significant bank charges and additional administrative costs being incurred by our clients.

To enable our clients to continue to operate their businesses profitably and efficiently they must continue to have access to customers that are able to make payments via Centrepay. To this end they must obtain individual credit licences and offer a form of rental agreement to customers that is regulated by the NCCP. This can be achieved by offering the Mr Fixed rental agreements to customers.

28. That request was rejected by Corrs’ letter dated 28 July 2015. Three days later, on 31 July 2015, the first to fifth defendants sought to terminate their franchise agreements with MRA (other than with respect to the Wyong territory). Each did so on the basis of alleged repudiatory conduct on the part of MRA. That conduct was identified as “the matters” in the two notices of dispute and in HWLE’s letter of 17 July 2015. In accordance with an earlier agreement between the parties, these terminations, if effective, were treated as ending the agreements at midnight on 14 August 2015 (14 days after the notice of termination).

29. As I have already noted, the validity of those terminations was disputed. On 17 August 2015, MRA purported to terminate each franchise agreement (except that for Wyong) with immediate effect. IRD Services sought to terminate the Wyong franchise agreement on 28 August 2015. There was then a similar exchange of correspondence to that which had occurred earlier in relation to the other franchises. On 2 September 2015, MRA purported to terminate that agreement with immediate effect.

The commencement of proceedings

30. The first to fifth defendants maintain that they terminated the franchise agreements with effect from 14 August 2015. MRA maintains that it terminated them on 17 August 2015. As explained above, the equivalent dates for the termination of the Wyong franchise are 28 August and 2 September 2015. On 17 August 2015 (and on 3 September 2015 in respect of Wyong) MRA exercised the option under cl 22.6 to purchase all of the Business Assets of each franchisee. The validity and enforceability of that option is challenged.

31. Under the agreed interlocutory regime the franchisees continue to conduct business, including by entering into new rental agreements and acquiring new rental assets. If the Court upholds the validity of the purchase options and their exercise, the parties have agreed that those new agreements and assets are to be treated as Rental Agreements and Business Assets for the purposes of cl 22.6. The franchisees also agreed that they would “co-operate and do all things necessary to allow the valuations contemplated by clause 22.7” to proceed as quickly as possible.

The issues in the proceedings

32. MRA seeks orders for the specific performance of purchase agreements arising from its exercise of the option in cl 22.6. It also seeks an order for delivery up of customer lists, customer data-bases and copies of rental agreements.

33. The following issues are raised by those claims:

(1)   Does the right to purchase under cl 22.6 arise in circumstances where the franchise agreement has been terminated by the franchisee under the general law and not by reason of any express entitlement to do so under cl 21.

(2)   Was MRA guilty of repudiatory conduct or breaches of essential terms entitling the franchisees to terminate the franchise agreements.

(3)   Was the option to purchase –

(a)   void for uncertainty; or

(b)   not able to be exercised because of the non-satisfaction of an implied condition precedent that MRA maintain a customer transfer policy.

(4)   Having regard to the provisions of cll 22.7 and 22.8, is MRA able to elect to pay the written down value of the Business Assets in satisfaction of its obligation to pay the Purchase Price.

(5)   Is MRA entitled to specific performance of each purchase agreement.

(6)   Is MRA entitled to an order for delivery up of customer lists and rental agreements.

34. There is no issue as to MRA having validly terminated the franchise agreements, in the event that the franchisees are held not to have been entitled to do so. Nor is there any issue, in that event, as to MRA having done so in the exercise of its rights under cl 21.2(c), as well as under the general law.

35. By their cross-claim, the first to fifth defendants seek declarations that they were entitled to and did lawfully terminate the franchise agreements. They also seek a declaration that MRA engaged in unconscionable conduct contrary to s 21 of the Australian Consumer Law and an order restraining MRA from enforcing each option to purchase. The first of these claims is dealt with by Issue (2) above. The second raises the following additional issue:

(7) Are the franchisees entitled to an order restraining the enforcement of the purchase options by reason that MRA engaged in unconscionable conduct contrary to s 21 of the Australian Consumer Law.

36. Neither party makes any claim to damages for breach of the franchise agreements or loss of the benefit of those agreements by reason of repudiatory conduct. Nor do the franchisees claim damages by reason of unconscionable conduct on the part of MRA.

37. I propose to address these issues in the order in which they are raised except for Issue (2) which I will address before dealing with Issue (7). In relation to Issue (2), the position of IRD Services and the Wyong franchise has to be considered separately because it is to be taken to have elected to affirm its franchise agreement at the end of July 2015. Subsequently on 28 August, it sought to terminate the agreement with immediate effect for repudiatory conduct on the part of MRA said to have occurred in the intervening period.

The validity and enforceability of the options to purchase

The relevant provisions

38. The immediately relevant provisions of the franchise agreements are cll 22.6, 22.7 and 22.8, which provide:

22.6   Option to Purchase

In the event that this Agreement expires or is terminated for any reason the Franchisee grants to the Franchisor the right (not the obligation) by notice in writing to the Franchisee within 30 days of the termination or expiration of this Agreement for the Franchisor or its nominee to:

(a)   purchase such of the Business Assets as may be selected by the Franchisor;

(b)   if required by the Franchisor have the Franchisee assign or transfer to the Franchisor (or its nominee) or surrender (as the case may require) all the Franchisee's right, title and interest in the Premises Agreement and the Franchisee hereby irrevocably appoints the Franchisor severally as its true and lawful attorney for it and in its name to execute all such documents and do all such things as are necessary to effect such an assignment, transfer or surrender and quietly yield and deliver up possession of the Premises to the Franchisor; and

(c)   if required by the Franchisor have the Franchisee assign the Franchisee's right, title and interest in all or some of the Rental Agreements to the Franchisor (or its nominee) and the Franchisee hereby irrevocably appoints the Franchisor severally as its true and lawful attorney for it and in its name to execute all such documents and do all such things as are necessary to effect such an assignment.

22.7   Purchase Price

The Purchase Price to be paid by the Franchisor (or its nominee) to the Franchisee upon the exercise of the option contained in clause 22.6 shall be the price nominated by the Franchisor in the notice exercising the option contained in clause 22.6 unless within 7 days of receipt of such notice the Franchisee notifies the Franchisor that it requires the price to be the lesser of:

(i)   the written down value of the Business Assets selected by the Franchisor as recorded in the Franchisee's books of account; or

(ii)   the fair market value of the Business Assets selected by the Franchisor as determined by the Valuer. In conducting the valuation the Valuer acts as an expert and not as an arbitrator and must not include any component for leasehold improvements. The Valuer's decision is final and binding on the parties and the Valuer's costs must be shared equally between the Franchisee and the Franchisor; or

(iii)   The Valuer, in determining the fair market value, must take into consideration, in any goodwill calculation, the value of the goodwill, based on the current customer transfer policy in operation at that time.

22.8   Payment of Purchase Price

The Purchase Price determined in accordance with clause 22.7 is payable by the Franchisor to the Franchisee as to 10% upon the Purchase Price being determined and the balance within 30 days of the Purchase Price being determined.

The exercise of the option

39. On 17 August 2015 Corrs gave HWLE notice that MRA exercised its option under cl 22.6 in relation to each of the agreements, other than that for Wyong. A notice in the same terms was given for Wyong on 2 September 2015. Each of those notices stated that, pursuant to cl 22.6:

… our client hereby exercises its option to:

(a)   purchase each of the Business Assets;

(b)   require the Franchisee assign to the Franchisor all of the Franchisee’s right, title and interest to the Premises Agreement; and

(c)   require the Franchisee assign to the Franchisor each Rental Agreement.

40. The Business Assets are defined in cl 1.1 to mean:

… fittings, fixtures, plant and equipment, goods rented by the Franchisee to a Customer under a Rental Agreement, vehicles and other assets owned and used by the Franchisee in the conduct of the Business.

41. In accordance with cl 22.7, MRA nominated a specific amount, exclusive of GST, as the Purchase Price in relation to each of the franchises. Those amounts varied from $55,249, in the case of Dandenong, to $197,395 for Coffs Harbour.

42. As also permitted by cl 22.7, on 24 August 2015, HWLE notified Corrs that the franchisees required the purchase price to be “the lesser of a value determined in accordance with clause 22.7(i) and (ii)”. A similar nomination and notice were given following the termination of the Wyong franchise.

Issue 1: Does the right to purchase arise if the franchise agreement is terminated by the franchisee for MRA’s repudiatory conduct?

43. The franchisees contend that “terminated for any reason” in cl 22.6 refers to any reason for termination expressly permitted by the agreement and not otherwise. It follows that the option to purchase only arises upon the exercise of a right to terminate under the agreement. Accordingly, in the case of termination by a franchisee, the expression includes a termination under cl 21.3. The franchisees argue that it would be contrary to commercial sense for MRA to have the benefit of the option in circumstances where its repudiatory conduct could result in the termination of the agreement. That is claimed to be so particularly where on termination, MRA may be entitled to a transfer of the Premises Agreement for “no allocated consideration”, a transfer of the future income receivable under the Rental Agreements, again for “no allocated consideration”, and a transfer of the assets for no more than their written down value. Finally, it is submitted that adopting this construction does not produce an unreasonable outcome from MRA’s perspective because it would retain the benefit of the option in all of the circumstances in which it is entitled to terminate. That is only so, however, if MRA’s rights of termination are expressly and exhaustively dealt with by cll 21.1 and 21.2, to the exclusion of any remaining remedies for breach otherwise arising by operation of law. The franchisees say that is the effect of these provisions.

44. MRA submits that the franchise agreement is “terminated” in any circumstance where it is brought to an end other than by reason of its term having expired. Those circumstances include termination under the general law as well as termination pursuant to an express entitlement. The words “for any reason” are broad and emphasise that the option arises on the event of termination, irrespective of the circumstances in which that occurs. MRA contends, as a fall back argument, that if cl 22.6 is to be construed as only applying to a termination pursuant to an express entitlement, that occurred when it terminated in reliance on cl 21.2(c). However, that argument is only available if the franchisees were not entitled to terminate for repudiation.

45. Several provisions of the franchise agreements address what is to happen in the event of the expiration or “termination” of the agreement. They include cll 16.8, 22.1, 22.2, 22.3, 22.4, 22.5, 23.1(b) and 24.6(a). In the case of each, the context and subject matter indicate that the provision is intended to govern an aspect of the relationship between the franchisor and the franchisee after the end of the agreement, irrespective of the circumstances which have resulted in its termination. For example, cl 16.8 provides in that event that the franchisee has no entitlement to any amount standing to the credit of the National Marketing Fund. There is no sensible reason why that provision should apply in some circumstances and not others. That observation also holds for cl 22.1, which provides for the payment by the franchisee of monies owing to the franchisor and to the franchisee’s trade or other creditors.

46. In the same way, cl 22.6 addresses the position with respect to the purchase of the assets of the franchise business, the assignment of its lease and the assignment of the benefit of the existing Rental Agreements. I accept MRA’s submission that the words “for any reason” emphasise that the option arises irrespective of the circumstances which have resulted in the termination.

47. Similar language (“on termination … for any reason”) is used in cl 5.4(b)(iii), which requires that any lease entered into between the franchisee and a third party lessor with respect to the premises from which the business is conducted, contain a provision which confers on MRA the right, but not the obligation, to replace the franchisee as lessee. Such a provision in a lease, on the ordinary and natural meaning of those words, would be engaged in the event of any termination. The right given by cl 22.6(b) is directed to producing the same outcome by assignment or transfer and arises on the happening of the same event.

48. The franchisees’ argument that it would be contrary to commercial sense for MRA to have the benefit of the option in circumstances where its conduct has resulted in the termination overlooks that in such circumstances the franchisee would have an action for damages for the loss of the benefit of the franchise agreement. An assessment of those damages would take account of the extent to which any amount received following the exercise of the option did not adequately compensate the franchisee for the value of the Business Assets acquired, as well as for the loss of the benefit of the agreement for the balance of its term: Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; 166 CLR 245 at 260-261 (Mason CJ).

49. The franchisees’ argument that the transfer of the lease and of future income under the Rental Agreements would be for “no allocated” consideration is correct in the sense that no specific consideration is allocated to the assignment of those rights. However, each is an aspect of the right granted by cl 22.6, and upon the exercise of that right, the Purchase Price calculated in accordance with cl 22.7 is payable. Accordingly, and as the opening words of cl 22.7 suggest, that price is paid in respect of the bundle of rights acquired “upon the exercise of the option”. If the circumstances giving rise to that exercise result from repudiatory conduct on the part of MRA, the damages to which the franchisee would be entitled would take account of any difference between the value of those rights and the other assets transferred, and the consideration received on the exercise of the option.

50. Finally, in my view, cl 21 does not exclude the rights at common law which MRA would otherwise have to terminate for breach. That conclusion also makes it most unlikely that the parties intended that MRA would only have the benefit of the option in circumstances where it had terminated pursuant to an express right to do so.

51. The relevant principle is that “clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law”: see Concut Pty Ltd v Worrell [2000] HCA 64; 75 ALJR 312 at [23] (Gleeson CJ, Gaudron and Gummow JJ) and the cases cited by Allsop P in Downer EDI Ltd v Gillies [2012] NSWCA 333; 92 ACSR 373 at [142]. Here there are no such clear words. Clause 21 in terms describes circumstances in which the franchisor “is entitled” to terminate by notice or immediately. The circumstances described do not include all conduct on the part of the franchisee that would evince an unwillingness or inability to render substantial performance so as to constitute repudiatory contract: cf Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; 233 CLR 115 at [44]. The continued existence of a right to terminate for repudiatory conduct is not inconsistent with MRA’s entitlements arising under cl 21. The presumption that MRA did not intend to abandon that remedy is not rebutted.

52. I conclude that cl 22.6 applied, even where, as they contend, the franchisees terminated each agreement. It follows that Issue (1) is answered in the affirmative. It also follows that Issue (2) does not arise. However, I will consider that issue later in these reasons, in part because its subject matter is also relevant to Issue (7).

Issue 3(a): Is the option to purchase void for uncertainty?

53. The objective theory of contract requires that the meaning of the provisions of the franchise agreements be determined by what a reasonable person in the position of the parties would have understood them to mean: Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at [22]. In a case such as the present one, the meaning to be preferred is that which produces a sensible and commercial outcome, consistently with how a reasonable business person would have understood the language: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 89 ALJR 990 at [52], [109]; Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 89 NSWLR 633 at [69]-[86].

54. Addressing cl 22.7, the introductory words convey that the price to be paid on the exercise of the option is that nominated by MRA in its notice exercising the option unless the franchisee exercises its further right to notify MRA that it requires the price to be the lesser of what follows. Notwithstanding that each of the three sub-clauses is expressed in the alternative, it is apparent that only sub-clauses (i) and (ii) describe a means of arriving at the price to be paid for the Business Assets in respect of which the option has been exercised. Sub-clause (iii) is concerned with the determination of ‘fair market value’ by the Valuer, who is to be an “independent licensed valuer”. It does not qualify the primary obligation of the Valuer which is to determine in accordance with sub-clause (ii) the fair market value of those assets which are selected. That is confirmed by the specification in sub-clause (iii) of something which the Valuer must take into account in “determining” the value referred to in sub-clause (ii). That being the position, there is no uncertainty which results from the expression of the three sub-clauses as alternatives. The price is to be the lesser of the two values determined in accordance with sub-clauses (i) and (ii).

55. The franchisees submit that uncertainty is introduced by the terms of sub-clause (iii) and the requirement it imposes on the Valuer when undertaking the exercise in sub-clause (ii). It is argued that sub-clause (iii) embodies two “unreal valuation concepts” that cannot be applied. The first is the suggestion that “goodwill” attaches to business assets, whereas the ‘correct’ position is said to be that goodwill does not inhere in identifiable assets of a business. The second is that sub-clause (iii) suggests that a “goodwill calculation” might be undertaken as part of a determination of the fair market value of assets, whereas the ‘correct’ position is said to be that goodwill may be measured, and in that sense valued, only where there has been the acquisition of a business for a price which exceeds the fair market value of the identifiable net assets acquired. In that circumstance the value of goodwill can be said to constitute the difference.

53. Putting the matter slightly differently, the franchisees point out that sub-clause (ii) requires that the Valuer determine the fair market value of particular assets. That valuation would not require any determination of the value of goodwill. However, sub-clause (iii) requires the Valuer to take a particular value of goodwill into account “in any goodwill calculation”. That is only consistent with such a valuation or calculation being required by sub-clause (ii). This is said to render uncertain the subject matter of the valuation described in sub-clause (ii), and how it is to be undertaken.

54. Separately, it is contended by the franchisees that sub-clause (iii) introduces further uncertainty in referring to the “current customer transfer policy”. That uncertainty is claimed to arise for three reasons. The first is that the content of that policy is entirely within the power of MRA so that MRA alone is in a position to determine how any goodwill is to be calculated and, to that extent, it is said, to determine the amount of consideration payable on the exercise of the option. The second is that the evidence does not indicate whether there was such a policy current at the time, and if so what it was. The third is that assuming the current policy is that asserted by MRA, it does not contain any provision which assists in the calculation or determination of the “value of the goodwill”.

55. In response MRA submits that the provisions of sub-clause (iii) are not uncertain so as to render cl 22.7 void and unenforceable. That is because the governing provision is sub-clause (ii) which describes the subject matter of the valuation and how it is to be undertaken. Sub-clause (iii) does no more than require the Valuer to take something “into consideration”. To the extent that sub-clause (iii) is incapable of being given any definite meaning, it should be severed and cl 22.7 read and applied without reference to it. That approach is said to accord with cl 31.8, which provides;

31.8   Severability

This Agreement must, so far as possible, be interpreted and construed so as not to be invalid, illegal or unenforceable in any respect, but if a provision, on its true interpretation or construction is held to be illegal, invalid or unenforceable:

(a)   that provision must so far as possible, be read down to the extent that it may be necessary to ensure that it is not illegal, invalid or unenforceable and as may be reasonable in all the circumstances so as to give it a valid operation; or

(b)   if the provision or [part] of it cannot effectively be read down, that provision or part of it will be deemed to be void and severable and the remaining provisions of this Agreement will not in any way be affected or impaired and will continue notwithstanding that illegality, invalidity or unenforceability.

59. It is convenient at this point to address the factual issues arising from the reference in sub-clause (iii) to the “current customer transfer policy”. The relevance of that reference is two-fold. First, the fact that there was such a policy and what it concerned forms part of the surrounding circumstances or context known to the parties, in which the meaning of their language must be considered. Secondly, it is relied on by the franchisees as causing uncertainty in the operation of the sub-clause for the reasons summarised above.

60. The “customer transfer policy”, as its name suggests, addressed the amount which might be paid by franchisee A to franchisee B in the circumstance that a customer with a current rental agreement moved out of franchisee B’s territory and into franchisee A’s territory. The amount payable was in respect of the transfer to franchisee A of the goods or equipment rented by that customer from franchisee B. It was not concerned with what should be paid in the event that the right to carry on the whole or part of franchisee B’s business was for sale. Clauses 19.3 and 19.6 of the franchise agreements contemplate that eventuality.

61. On 19 August 2015, HWLE on behalf of each of the relevant franchisees requested a copy of the ‘current customer transfer policy’ referred to in sub-clause (iii). On 21 August 2015, Corrs provided to HWLE what was described as the “current version” of the customer transfer policy “effective 6 July 2013”. There is an issue as to whether that was in fact the current version of the policy as at August 2015. For the reasons which follow, I consider that it was at that time the current version of the policy in relation to the Old World system.

62. The policy contains ‘guidelines’ as to the procedure to be followed in the circumstances outlined above. In the event of a transfer of a Rental Agreement and goods, the policy contemplates the payment of an amount described as the Replacement Value of the goods, to be calculated in accordance with a Replacement Value Schedule. No such document is attached to the policy and the evidence does not establish that there was such a schedule in August 2015. The policy does not refer to goodwill or how its value might be determined. That is not surprising in view of the fact that the policy is not concerned with the transfer of all or part of a business.

63. Mr Nixon-Smith’s evidence was that this version of the customer transfer policy was released in July 2013, as part of the Old World Operations Manual. In cross-examination, however, he accepted that the version of that policy attached to an email of 7 January 2015 was the most recent that he was able to recall as at December 2015. The document attached to that email appears to be a draft. In the header to the email it is described as a “draft-update” and in the text it is said not to be in the operations manual. In re-examination Mr Nixon-Smith was taken to that document and to the 6 July 2013 version. He described the former as a draft and the latter as the “latest version of the policy”. That evidence accords with the terms of the documents and I accept it.

64. Returning then to sub-clause (iii), it requires a Valuer, for the purpose of a valuation under sub-clause (ii), to consider a particular value of goodwill “in any goodwill calculation”. It does not direct that there be a goodwill “calculation” or “valuation”. What it requires is that the “value of the goodwill, based on the current customer transfer policy” be taken into account.

65. It may be accepted, as the franchisees contend, that for legal and accounting purposes goodwill is to be understood as inseparable from the conduct of a business and distinct from the assets of that business, except where the sale of the assets carries with it the right to conduct the business: Federal Commissioner of Taxation v Murry [1998] HCA 42; 193 CLR 605 at [4], [31]. The Business Assets which are to be the subject of the valuation in sub-clause (ii) do not include the franchise business, any right to conduct that business or any asset which carries with it that right; and the purchase with which cl 22.6 is concerned necessarily occurs in circumstances where the existing franchise agreement, carrying with it the right to conduct the franchise business, has expired or been terminated.

66. The franchisees seize on the language of sub-clause (iii) and its references to “any goodwill calculation” and the “value of the goodwill” as indicating that the determination of the fair market value of the Business Assets must in some way take account of and value the goodwill of some business. They accept the position stated above that the option is not concerned with the sale of the right to conduct the franchise business. However they submit, somewhat faintly, that at the point in time the franchise is terminated, the franchisee is able to commence a new business taking advantage of its existing customer relationships, contracts and premises, and that when it does, goodwill inheres in the conduct of that business. The fatal difficulty for this argument is that the right to carry on such a business is not the subject of the purchase option and, if MRA exercises that option, it does not get the benefit of any such goodwill because it is not proposing to carry on that business.

67. There are three related principles or rules of contractual interpretation which are relevant when considering the meaning to be attributed to the references to goodwill in sub-clause (iii). The first is that the language used should be given its ordinary and natural meaning unless, upon a proper application of such rules, a contrary intention is to be found within the text: Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd [1935] HCA 56; 53 CLR 618 at 636. The second is that the text may make clear that the parties have adopted their own special meaning when using a particular word or words. In such a case, as Lord Cottenham LC observed in Lloyd v Lloyd (1837) 2 My & Cr 192 at 202; 40 ER 613 at 617:

if the provisions and the expressions be contradictory, and if there be grounds, appearing upon the face of the instrument, affording proof of the real intention of the parties, then that real intention will prevail against the obvious and ordinary meaning of the words.

The third is that a provision such as cl 22.7 should be construed if possible so as to render the various parts of it “harmonious one with another” and with other provisions of the agreement: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; 129 CLR 99 at 109; Wilkie v Gordian Runoff Ltd [2005] HCA 17; 221 CLR 522 at [16].

68. Ultimately the franchisees’ uncertainty argument depends on the parties having used the expressions “goodwill calculation” and “the value of the goodwill” in sub-clause (iii) in the technical sense in which such expressions are understood in a legal or accounting context. There are two grounds appearing on the face of cl 22.7 which show that the parties should not be taken to have used those expressions in that technical sense. The first appears in sub-clause (iii) and has been mentioned above. The ‘customer transfer policy’ is not concerned with the valuation of a business or with the valuation of goodwill, as it was understood in Murry. It is concerned with the valuation of an asset which is the subject of a customer contract. Sub-clause (ii) may also call for the valuation of the same asset because the Business Assets include goods rented under a Rental Agreement. This suggests that the reference to “goodwill” in sub-clause (iii) is to the amount, if any, by which the in use value of the rental goods exceeds their written down or depreciated value in the franchisee’s books of account. Any such amount, whilst not according with a correct legal or accounting understanding of goodwill, reflects a difference between the value of an asset in use and subject to a rental agreement, and its value as recorded in the books of account. The second ground is that sub-clause (ii) is not concerned with the valuation of a business, or an asset which carries with it the right to conduct a business. It follows that the valuation exercise to be undertaken in accordance with sub-clause (ii) is not concerned with any valuation of goodwill in that sense.

69. In my view sub-clause (iii) is to be construed as referring to “goodwill” understood in the sense described above and not in the legal or accounting sense explained in Murry. The references to the customer transfer policy would have been understood by a reasonable business person in the position of these parties as being or including a means of valuing rental goods ‘in use’. That person also would have understood that the same subject matter may form part of the Business Assets to be valued in accordance with sub-clause (ii); and that the subject matter of that valuation did not include a business or the right to carry on a business. It follows, as would have been apparent, that unless the references to “goodwill” in sub-clause (iii) are given that meaning, which is wholly consistent with their use in that provision, that sub-clause could have no sensible operation with respect to the customer transfer policy and its possible application to the valuation to be undertaken under sub-clause (ii). For that reason I reject the arguments that cl 22.7 is void because of uncertainty introduced by sub-clause (iii).

70. The franchisees’ remaining arguments also should be dismissed. The fact that the customer transfer policy is formulated by MRA does not enable it to determine all or part of the consideration payable on the exercise of the option. The Valuer is not obliged to apply that policy. If in the expert opinion of the Valuer, the policy does not make sense or does not assist in an assessment of the fair market value of the Business Assets, the Valuer, having considered it, would be justified in not giving effect to it. The same reasoning applies where, as appears to be the case here, the current policy does not include the formula or methodology adopted for calculating the transfer value.

71. For these reasons, Issue 3(a) is answered in the negative.

Issue 3(b): Is the exercise of the option subject to an implied condition precedent that MRA maintain a customer transfer policy?

72. The franchisees contend that it is an implied condition precedent to the exercise of the option in cl 22.6 that MRA maintain a ‘customer transfer policy’. As pleaded that term requires that MRA maintain a document “to be drafted and amended from time to time, answering the description of the ‘current customer transfer policy’” and that the document “provide some means by which ‘goodwill’ is to be ‘valued’”. An immediate difficulty with the formulation of this term concerns the sense in which “goodwill” is used. Although the proposed implied term does not expressly say so, the sense in which that word is used must be that which the franchisees contend the word has when used elsewhere in sub-clause (iii), namely as describing the goodwill of a business, which is inseparable from that business.

73. It is accepted that the term contended for must satisfy the five sometimes overlapping conditions specified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 and reiterated in Byrne v Australian AirlinesLtd [1995] HCA 24; 185 CLR 410 at 441, 442. The term contended for does not satisfy those criteria and for that reason is rejected.

74. First, it is inconsistent with the express provisions of sub-clause (iii) as I have construed it. Secondly, it is not necessary to give “business efficacy” to the franchise agreements that such a term be implied. As I have explained above, the efficacy of sub-clause (iii) is not dependant on the existence of a current customer transfer policy. If there is no such policy, the Valuer will have acted in accordance with sub-clause (iii) by satisfying him- or herself that there is no such policy. In doing so the requirement to take it “into consideration” will have been satisfied. Issue 3(b) is also answered in the negative.

Issue (4): Is MRA able to tender the written down value of the Business Assets in satisfaction of its obligation to pay the Purchase Price?

75. MRA seeks a declaration that on the proper construction of cl 22.7, and in discharge of its obligation to pay the Purchase Price under cl 22.8, it may tender as the Purchase Price the written down value of the relevant assets in circumstances where the franchisees have elected to require the price to be the lesser of the values determined under sub-clauses (i) and (ii). MRA submits that where the franchisees have made that election, determining the Purchase Price by reference to the lesser of those two values only operates to its benefit, by reducing the price that otherwise would be payable. That being the position, it is said that MRA can waive its right to insist upon a valuation in accordance with sub-clause (ii) and meet its obligations under cl 22.8 by paying the written down value of the relevant assets. In the course of argument, reference was made to cases such as Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; 149 CLR 537 (at 543, 560), which acknowledge the right of a party to waive a condition precedent to the operation of a contract, or one of its terms, where that condition precedent is for the sole benefit of that party.

76. In response the franchisees submit that it is not possible for MRA to waive the determination of one or other of the values in sub-clauses (i) and (ii), because of the provisions of cl 22.8. I accept that submission.

77. Clause 22.8 addresses the time for payment of the Purchase Price and provides that 10% of that price is to be paid upon its being “determined in accordance with clause 22.7”, with the balance to be paid within 30 days of that determination. Thus the time for payment of the first instalment and of the balance depends upon the determination in fact of the two values in cl 22.7. It is only when both have been determined that the “lesser” of the two is known. That is the event which fixes the time for performance of the obligations to pay in cl 22.8. Those provisions are for the benefit of both parties and cannot be waived by one. Issue (4) is answered in the negative.

Issue (5): Is MRA entitled to specific performance of each option to purchase?

78. The franchisees submit that the Court should not make an order for specific performance of the options to purchase for three reasons. First, it is said that MRA is not ready and willing to perform the purchase agreements. It is said that the valuation process commenced in September 2015 has stalled for reasons which indicate that MRA is not willing to proceed with it. Reference is also made to MRA’s conduct in maintaining that it is entitled to elect whether to tender the written down value of the Business Assets as the Purchase Price as also indicating that it is not willing to perform in accordance with the terms of cll 22.7 and 22.8.

79. Secondly, it is submitted that the making of an order for specific performance is likely to result in “repeated applications for rulings on compliance” while the franchisees carry on the rental businesses until the purchase is concluded: Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30; 195 CLR 1 at [79]. It is also argued that the Court would be required to supervise the retainer and instruction of the independent Valuer; the completion of the franchisees’ books of account to show the written down value of their Business Assets; the payment of the Purchase Price; the transfer of the Business Assets; and the assignment of the Premises Agreements and Rental Agreements.

80. Finally, it is said that the proposed orders for specific performance contemplate the transfer of the franchisees’ interests in the Rental Agreements and Business Assets but leave their position unclear with respect to the performance of ongoing obligations to their landlords and customers and their continuing liabilities under the agreements to be assigned. It is not contended that specific performance should be refused because damages would be an adequate remedy. Such a contention was originally made, but is not pressed.

81. In response, MRA says that it remains ready and willing to proceed with the valuations and perform in accordance with cll 22.7 and 22.8. It relies on the evidence of Mr Nixon-Smith in that regard and submits that I should not otherwise infer from the circumstances surrounding the progress of the valuation that there is any lack of readiness or willingness to perform on its part. MRA also says that the specific performance sought would not require repeated applications for rulings on compliance or continual supervision of an activity, such as the running of a business, for an indefinite period: cf Co-operative Insurance Society Ltd v Argyle Stores (Holdings) Ltd [1998] AC 1 at 12-13.

82. Finally, MRA points out that contracts for the sale of a business or for the disposition of an interest in land are properly the subject of orders for specific performance. In the case of the former, it refers in particular to Kennedy v Vercoe [1960] HCA 64; 105 CLR 521 at 528-9 and in the case of the latter, to Heydon, Leeming & Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed 2015, LexisNexis Butterworths) at [20-035].

Whether MRA is ready and willing to proceed with the valuation of Business Assets and performance of purchase agreements

83. This first submission makes it necessary to consider and make findings as to the circumstances that have caused the valuation of the Business Assets to stall.

84. On 16 September 2015, the Valuer, Mr Griffiths of Grays Asset Services (Grays), was appointed by MRA. By email dated 6 October 2015, Grays made inquiries of MRA concerning the proposed valuation. That email raised some issues as to the basis upon which the rental assets might be valued. Inquiries were made by Grays to enable the submission of “an accurate quote”. That email was followed up on 21 October and 9 November 2015. On 11 November 2015, there was a telephone conversation between an employee of Grays and Mr Delaney of Corrs. The former’s note of that conversation records Mr Delaney as being careful not to provide legal or other advice as to how Grays might go about their valuation. Mr Delaney also asked for an estimate of their costs. It is relevant to note that on 27 November 2015, the final hearing of the proceedings was fixed to commence on 14 March 2016.

85. Grays directed further questions to Corrs concerning the scope of the proposed valuation work in an email on 11 December 2015. A request was made at that time for a copy of the “current customer transfer policy” and the Replacement Value Schedule referred to in that policy.

86. On 28 February 2016, Grays reiterated their “concerns” as expressed in the original email of 6 October 2015. Those concerns related to two matters. The first was that although there is no requirement at law that a plant and equipment valuer be “licensed”, the definition of Valuer in the franchise agreement describes an “independent licensed valuer”. The second was that a valuation of plant and equipment would not ordinarily include goodwill, although it was said that such a valuation could be undertaken on the basis of “existing use” which assumes that the assets are to be used within an ongoing business following their sale. The February email concluded by inquiring whether the franchisees were willing to accept “our limitations”, presumably a reference to the absence of any licence.

87. There was a further telephone conversation between Grays and Corrs on 29 February 2016. A Grays file note of that conversation suggests that Mr Delaney continued to decline to provide advice as to whether the valuation would require any assessment of goodwill. The concern as to the absence of any licence was also repeated and reference was made to the possibility of retaining a valuer qualified to value a business as well as property and equipment. The note concludes “[n]o actual course of action agreed”.

88. Finally, on 2 March 2016 Corrs wrote to HWLE advising that the valuations had not commenced, asserting that their client was ready and willing to proceed with the valuations should that prove necessary, and recording that in their view it was open to MRA to elect to pay the written down value so as to obviate the need for some or all of the valuations of the Business Assets to be performed. That has remained MRA’s position since the commencement of the hearing.

89. Until 22 February 2016, when the franchisees filed a Further Amended Commercial List Response, it was not contended that relief by way of specific performance should be refused on the ground that MRA was not ready and willing to perform its obligations under cll 22.7 and 22.8. The raising of that defence led to the filing of further evidence from Mr Nixon-Smith to the effect that MRA is ready and willing to proceed with the valuations. In cross-examination he reasserted that to be the position and his evidence was not further challenged.

90. In Mehmet v Benson [1965] HCA 18; 113 CLR 295, Barwick CJ observed (at 307) that the question whether a party is ready and willing to perform a contract “is one of substance not to be resolved in any technical or narrow sense”. In that case, which concerned the performance of a contract for the sale of land, the principal matter to be performed on behalf of the purchaser was payment of the purchase price. In the present case, the matter for performance also is the payment of the purchase price. However, in order for that to occur, the Purchase Price must be determined. The latter is something which requires co-operation of the parties, as the agreed interlocutory regime confirms. MRA has retained a valuer, albeit one who is not licensed. The valuation process stalled because of questions raised by the valuer as to the basis upon which it should proceed and its qualifications. At that point it was most unlikely that the parties would be able to agree on the approach that the valuer should take to the valuation of the Business Assets. That is understandable in view of the franchisees’ argument that the provisions of the agreement in that respect are uncertain.

91. MRA maintains that it is willing and able to proceed with the valuation and to complete the purchase agreements. Its conduct in prosecuting these proceedings is only consistent with that being the position. The circumstances in which the valuation process stalled were understandable due to the issues between the parties. In the circumstances I am satisfied that MRA is willing and able to proceed to completion of the purchase agreements, and that the stalling of the valuation process does not indicate otherwise.

Whether specific performance should be declined because continual supervision by the Court is necessary

92. MRA should have an order for specific performance of each of the purchase agreements resulting from its exercise of the options. Contrary to the franchisees’ submission, the making of that order does not involve the possibility of “repeated applications for rulings on compliance” with orders requiring a party to “carry on an activity, such as running a business”: cf Patrick Stevedores at [79], citing Argyle Stores at 13.

93. The following matters are required to enable the determination of the Purchase Price in accordance with cl 22.7.

94. The franchisees must produce completed and up-to-date books of account containing the current written down values of the Business Assets (including those referred to in [31] above). The parties must co-operate to enable a duly appointed valuer to determine the fair market value of those Business Assets. The appointment by MRA of a valuer licensed and qualified to value a business as well as property and equipment, may remove one ground of possible future dispute as to the binding nature of any valuation ultimately provided.

95. The franchisees must in the meantime do what is necessary to be in a position to assign or transfer any interest in the Premises Agreement to MRA. Upon determination of the Purchase Price, MRA must pay 10% of that price to each franchisee and no later than 30 days after the determination of that Purchase Price, the parties must complete the agreement by payment of the balance. In exchange for that payment, the franchisees should provide documents assigning or transferring the Rental Agreements (again including those referred to in [31] above), the Business Assets and their interest in any Premises Agreement. Those documents should include any relevant document of title, or transfer, where applicable in registrable form.

96. As a condition of the grant of orders for specific performance, and so as to address the franchisees’ third argument (see [80] above), the franchisees are entitled to written undertakings from MRA to perform their obligations under the Rental Agreements and Premises Agreements from the date of completion and to indemnify them against any liability to any customer or lessor arising from a breach of those agreements thereafter.

97. For these reasons, Issue (5) is answered in the affirmative. MRA has proffered draft orders for specific performance of each of the relevant agreements. Those proposed orders require amendment to delete the orders sought in relation to the tender of the written down values and to include orders which address the condition referred to above.

Issue (6): Is MRA entitled to an order for delivery up of customer lists and rental agreements?

98. Clause 22.3 relevantly provides:

22.3   Return materials

The Franchisee must, within seven days of the effective date of termination or expiration of this Agreement, deliver, transfer and return to the Franchisor all Intellectual Property (including customer databases and copy rental agreements) and uniforms in the possession of the Franchisee which have been purchased from the Franchisor, together with all copies of any Manual and all forms, Stationery, business cards, signage, advertising material and other printed matter within the possession, power, custody or control of the Franchisee which bear the Name, the Marks or name of the Franchisor.

99. MRA seeks an order that the franchisees deliver up customer lists, customer data-bases and copies of any rental agreements.

100. The franchisees only oppose the making of that order if the purchase option in cl 22.6 is held to be invalid or otherwise unenforceable. In that event, each would be entitled to continue to perform the rental agreements and deal with the customers party to those agreements.

101. In circumstances where I have held the option to be valid, enforceable and liable to be specifically performed (and reject the claim as to unconscionable conduct), the franchisees do not oppose the making of appropriate orders for delivery up of this material. Those orders should take effect at the time MRA takes over the performance of those agreements and dealings with those customers. Issue (6) is answered in the affirmative.

The franchisees’ cross-claim

Overview

102. The principal obligations which it is alleged MRA has breached are those in cll 14.1(a) and (b), and 14.3 which provide:

14.   Franchisor’s Obligations

14.1   Principal Obligations

The Franchisor agrees with the Franchisee that it will:

(a)   make the Franchise System available to the Franchisee;

(b)   actively develop and promote the Franchise System; and

...

14.3   Integrity of Intellectual Property

The Franchisor shall take reasonable steps to maintain the integrity of the Franchise System and to protect the Intellectual Property against any action or infringement by any person.

103. The definitions providing content to those obligations include:

Business means the business to be conducted in accordance with this Agreement with respect to the rental of the Products and the provision of the Services to Customers;

Franchise System means the business system to enable the conduct of the Business and includes:

(a)   the Intellectual Property;

…

(c)   the goodwill and business reputation which the Franchisor has established in the Franchisor as a company, the products the Name and the Marks;

…

(e)   the Franchisor's training methods procedures, accounting practices and systems;

(f)   all innovations and changes in the Franchise System as the Franchisor may develop and prescribe from time to time; and

(g)   the Manual.

Products means each and all of those products as specified in the Manual which may be approved by the Franchisor for the rental by the Franchisee to Customers, and such other products as approved by the Franchisor in writing from time to time;

Rental Agreement means each Rental Agreement entered into by the Franchisee and a Customer under which the Franchisee rents the Products to a Customer, in the form prescribed by the Franchisor from time to time;

Website means the internet website of the Franchisor or used by the Franchisor in the Franchise System, including any other internet website that the Franchisor may develop in the future in relation to the Franchise System.

104. All but one of the current agreements between MRA and the franchisees was entered into between December 2014 and March 2015, and therefore after the New World system was introduced. The exception is the agreement for the Wyong territory which commenced in May 2011.

105. The franchisees do not allege that the introduction by MRA of the New World system was itself a breach of any of the clauses relied upon. That is consistent with the terms of cl 4.6(a) which contains an acknowledgement by the franchisees that MRA may grant rights to other persons to operate other businesses in the nature of the Business outside the territory.

106. The breaches alleged concern:

• development of IT services and technology for New World franchises with fees paid by Old World franchisees.

• not making New World IT services and technology available to Old World franchisees.

• not making available to Old World franchisees differently branded products and logos developed for the New World system.

• using funds contributed by Old World franchisees to the National Marketing Fund and the Co-operative Marketing Fund for the development and marketing of New World products and logos.

• adopting a ‘split’ Mr Rental Website.

• refusing to allow the franchisees to obtain Australian credit licences and offer rental agreements otherwise on the same terms as those offered in the New World.

107. The conduct relating to each of those matters is said to have involved breaches of cll 14.1(a), 14.1(b) or 14.3. Some of the conduct is also alleged to have breached specific provisions. Those provisions are cll 5.11 (IT Services and Technology); 8.1 (Website); and 16.1 and 16.2 (Marketing Funds). They will be set out, where relevant, in the reasons that follow.

108. Two further and general allegations are made; namely, that MRA breached an implied term of the agreements that it deal with each franchisee “in good faith and reasonably and not capriciously or for some extraneous purpose” and that MRA engaged in unconscionable conduct. In each case the conduct alleged is acting in the manner summarised above and for the purpose of devaluing the Old World system, discriminating against the franchisees, deterring them from using that system and seeking to compel or motivate them to move to the New World system.

109. By their Further Amended Cross-Claim, the franchisees allege that these breaches “evinced an intention [on MRA’s part] not to be bound” by the franchise agreements. In their written submissions the franchisees also contend that cll 14.1(a), 14.1(b) and 14.3 are “essential” terms, the breach of which entitled them to terminate. In addition the unconscionable conduct is relied upon as supporting an order pursuant to s 237 of the Australian Consumer Law restraining the exercise of the purchase options in cl 22.6. These questions are the subject of the remaining Issues (2) and (7).

110. The repudiatory conduct relied on in relation to the termination of the Wyong franchise is different for the reason outlined in [37] above. Mr Dobbie agreed that notwithstanding the reasons which he believed justified the termination of the Gosford franchise at the end of July 2015, he chose to keep operating the Wyong franchise. That conduct, and (as appears below) his insistence on performance by MRA, constituted an election on his part to affirm the Wyong franchise agreement. Accordingly, in relation to IRD Services’ later termination of that agreement, it is necessary to consider and make findings about MRA’s conduct in August 2015. It is alleged that during this period MRA breached that agreement by denying IRD Services access to CAIRO and to some email accounts, and by its diverting telephone calls.

Issue 2: Was there conduct on the part of MRA entitling the franchisees to terminate?

111. Conduct is repudiatory if it is such as to “convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it”: Koompahtoo v Sanpine at [44]. The franchisees rely on the breaches of contract alleged as constituting such repudiatory conduct. They also rely on the breaches of cll 14.1(a), 14.1(b) and 14.3 as entitling them to terminate. They contend that these are “essential” terms, any breach of which gave rise to an entitlement to bring the agreement to an end. If those are not essential terms, the franchisees argue that the breaches of them were nevertheless sufficiently serious to justify termination.

112. The relevant principles are those stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641-642 (references omitted):

The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained.

113. None of cll 14.1(a), 14.1(b) and 14.3 is expressed to be essential so that any breach would justify termination. Each could give rise to a range of breaches, some serious, but many trivial and of no moment. That being so, it is not to be presumed that the parties required strict performance of those promises. Rather, the nature and subject matter of the obligations in cll 14.1(a), 14.1(b) and 14.3 is such that the parties should be taken to have contracted on the basis that there should be substantial performance of those provisions, so that only a serious breach would justify termination.

114. Below I propose to deal with each of the alleged breaches, and where a breach has been established, the seriousness of that breach and whether the underlying conduct evinces an unwillingness to render substantial performance of the franchise agreements. Finally, I will separately consider whether the conduct found, taken as a whole, manifested an unwillingness to perform those agreements substantially and in accordance with their requirements

Alleged breach: IT services and computer software created with fees paid by the franchisees

115. MRA has developed, and makes available for use exclusively in the New World system, the following IT platforms – MAX, LAM PrintPortal, Relative E-Learning Network Training (RENT) and certain sections of StorePortal. Allegations are made with respect to the development of this technology and the exclusive provision of it to New World franchisees. It is said that the technology was developed using monies paid by the franchisees under cl 5.11(c) and that those developments were not for the benefit of the franchisees and the Old World system as required by cl 5.11(d). It is not contended that any breaches of cl 5.11(d) were sufficiently serious to constitute repudiatory conduct.

116. By cll 5.6 and 5.11 a franchisee agreed that it would obtain the computer software package specified by MRA to be used in the Business and any other software which MRA decided was necessary for the operation of the Business. Schedule 1 to each franchise agreement provided that the franchisee should pay a weekly licence fee referred to as the MIS Weekly licence fee (MIS fee). MIS is an acronym for Management Information Systems and includes a range of IT items including CAIRO, SharePoint, StorePortal, MRA’s call centre and data storage. That fee was payable in accordance with cl 5.11(a)(i) in return for use of MRA’s computer hardware and software in the operation of the Business.

138. The findings I make on the basis of the evidence concerning the NMF are as follows. First, the failure of MRA from July 2014 to keep a separate account in respect of the Old World NMF contributions constituted a breach of each of the franchise agreements. Secondly, assuming a separate fund had been kept, there were payments made from that notional fund from July 2014 which were not applied exclusively for the development and promotion of the Old World system. Thirdly, over time, and as the number of New World franchisees and their contributions to the joint account increased, it is less likely that payments were made that were not, or could not have been, met out of contributions made by New World franchisees. The evidence does not permit a finding as to the amount which was expended in breach of cl 16.3(a). However there is no doubt that breaches of that kind occurred.

139. Those breaches are not, however, sufficiently serious to constitute repudiatory conduct on the part of MRA. Mr Nixon-Smith’s evidence was that MRA continued to provide significant promotional and marketing support to the Old World franchisees in the 2015 calendar year by undertaking four marketing campaigns involving television, radio, Facebook and website advertisements; developing art work, campaign and other marketing materials; arranging for television sponsorship and advertising; and producing and distributing catalogues. That evidence was not challenged and I accept it. The evidence does not show that the annual revenue received by the franchisees for the financial year ended 30 June 2015 was affected by any insufficiency or reduction in the level of promotional or marketing activity. A comparison of the rental revenue of the Coffs Harbour and Moonah franchises for the years ended 30 June 2014 and 30 June 2015 shows that in the case of the former, its revenue increased from $854,583 to $899,295 across those two years. In the case of Moonah, its rental revenue remained fairly constant at $1,277,467 in the first year, and $1,267,658 in the second. MRA’s conduct to which I have referred in [144] above was not such as to convey that it was unwilling to continue to perform its obligations under the franchise agreements, and in particular with respect to undertaking promotional and marketing activity.

140. The position is similar in relation to the CMF account for the same period (1 July 2014 to 30 June 2015). The payments out of that account included expenditure with respect to the Today Show sponsorship for July, August, September, October, November and December 2014. The expenditure in relation to the period from July to October 2014 was for the promotion of Mr Rental and the Old World system, including in the relevant territories. The position in relation to November and December 2014 is less clear because that expenditure focused on the New World branding and logo, although it was likely also to promote the Mr Rental name in the Old World territories (see [143] above). Payments from this account also included expenditure on New World catalogue campaigns undertaken in August and October 2014. The amount involved was approximately $13,000.

141. To summarise, in relation to the CMF the evidence suggests that there may have been breaches of cl 16.3(b) before and after December 2014. However the amounts involved were not significant. The breaches were not serious and did not convey that MRA was not prepared to meet its ongoing obligations. To the extent there were breaches, they did not constitute repudiatory conduct.

142. The franchisees do not contend that any breaches of cll 16.3(a) and 16.3(b) also constituted breaches of cll 14.1(b) or 14.3. They do however allege that MRA’s not having made the New World products and branding available to them constituted a breach of these provisions. I have dealt with that allegation above.

Alleged breach: Adopting a ‘split’ Website

149. Mr Nixon-Smith’s evidence, which was not challenged, was that until January 2015 the MRA website homepage ( contained only Old World branding and pricing. At that time, MRA decided that the homepage should contain New World branding and pricing. The reason for this change was that significantly more Mr Rental franchisees were operating under the New World system than under the Old World system. Henceforth the Mr Rental homepage displayed New World products and prices below which appeared the words “this pricing option is only available at participating stores” together with a button and instruction to “enter your location (postcode) to see your pricing options”. If the postcode entered corresponded to an Old World territory, the next screen indicated that the particular pricing option shown on the first page was not available and requested the user to click “OK” to access the pricing option available in his or her area. By clicking “OK”, the user then gained access to a page which displayed only Old World products and pricing.

150. The franchisees contend that by adopting what is described as a ‘split’ website, MRA has failed to make the Franchise System available to them in breach of cl 14.1(a) and to grant them a non-exclusive licence to use that website in breach of cl 8.1. Exactly what that licence would have permitted the franchisees to do was not explored in argument. It is also alleged that by adopting this form of website MRA has failed to actively develop and promote the Franchise System in breach of cl 14.1(b) and failed to take reasonable steps to maintain its integrity in breach of cl 14.3.

151. The definition of Franchise System includes Intellectual Property that as defined includes the Website, which in turn is defined as the “internet website of the Franchisor or used by the Franchisor in the Franchise System”. By cl 8.1, the “Franchisor grants the Franchisee a non-exclusive licence to use the Intellectual Property in the Business during the Term”.

152. Mr Nixon-Smith’s evidence was that MRA considered the possibility of setting up the Website so that the user is first required to input his or her postcode before being given access to any homepage displaying products and price information. Such a facility is referred to as a “website entry popup”. His evidence, which I accept, was that MRA’s digital media advisor, Liquid Interactive, considered that there were risks associated with using an entry popup because they tend to be disliked by users, which then has an adverse effect on ‘traffic behaviour’. That adverse effect is that users leave the Website rather than continue through it. MRA’s decision to act on that advice and set up the ‘split’ Website was consistent with its “absolute right” acknowledged in cl 10.27(c):

… to control the content of the Website and the right to alter the appearance, content and functionality of the Website at any time although [MRA] will endeavour to give the Franchisee reasonable prior warning …

153. As I understand the franchisees’ argument, MRA’s breach is said to arise from its having dedicated certain parts of the Website to the Old World system, and other parts to the New World system. The Website as defined is Mr Rental’s website or the website used by Mr Rental in relation to the Old World system. The ‘split’ website described above answers each of those descriptions. That Website has been made available to the franchisees in the sense that they, and any internet user, may gain access to it as part of the system enabling the conduct of their rental business in accordance with the Old World system. That being the position, I do not consider there is any breach of cl 14.1(a). Nor has there been a breach of cl 8.1 or the licence granted by that clause.

154. There are also said to have been breaches of cll 14.1(b) and 14.3 because the Website homepage shows New World prices and products “in preference” to those offered by Old World franchises. Its doing so does not in my view involve any failure to actively “develop” or “promote” the Old World system or to maintain the integrity of that system. The Website continues to promote the franchisee’s business by marketing the Mr Rental name and by making known the products and prices offered by franchisees in particular territories as part of a Mr Rental franchise. The latter requires that the customer’s location is determined and the Website provides a mechanism for this.

155. Mr Travers gave evidence that between January and August 2015, the Moonah franchise received inquiries or complaints from customers about the price differentials between New World and Old World products. In late January 2015, he communicated one particular customer’s confusion to MRA. Its response dated 21 January 2015 included the following:

You will have noted that the website specifies directly under the minimum price “This pricing option is only available at participating stores” and “Enter your location to see your pricing options”. We consider this is informative, clear and sufficiently prominent, and accommodates the position for your customers in Tasmania. When you click through and provide a Tasmanian suburb or postcode the IPR pricing appears. This is the correct pricing and not misleading to your customers. Therefore, we are interested to hear from you what particular aspect of the website appears unclear to your or your customers, so that we can continue to monitor and consider any concerns.

156. Even if it were the case that this conduct was a breach of one of MRA’s obligations, it could not justify termination. It did not deprive the franchisees of substantially the whole benefit of their franchise agreements. The Old System pricing and products remain accessible on the Website for customers living in or making an inquiry of the relevant territories.

Alleged breach: Refusal to allow franchisees to obtain credit licences and offer rental agreements otherwise on the same terms as those offered in the New World

157. By its letter dated 17 July 2015, HWLE requested that MRA allow its clients to obtain credit licences in their own names and offer rental agreements on the same or similar terms as the Mr Fixed rental agreement. MRA did not agree to either of those requests. Corrs’ letter dated 28 July 2015 advised that MRA did not support the franchisees obtaining individual credit licences because a centralised licence model was fundamental to its franchise business offering regulated products.

158. The franchisees allege that in refusing that request, MRA failed to actively develop and promote the Franchise System in breach of cl 14.1(b) and failed to take reasonable steps to maintain the integrity of that system in breach of cl 14.3.

159. Corrs’ letter recorded what were said to be MRA’s reasons for concluding that the centralised licence model was in the best interests of the overall franchise business:

●   an applicant for an ACL [Australian credit licence] is required to, among other requirements, demonstrate a minimum level of education/training and relevant experience. There was, and is, no guarantee that ASIC would grant an ACL to every franchisee;

●   once an ACL is obtained, the licensee has to maintain the ACL by demonstrating that it is compliant with various ongoing regulatory obligations. It is likely each ACL would include a condition requiring each franchisee to appoint a compliance consultant to conduct regular audits (as has been required of Mr Rental);

●   Mr Rental concluded that, to ensure consistency of approach to regulatory obligations, to significantly reduce the risk of non-compliance, to reduce reputational risk to all franchisees (which could arise from the conduct of a single non-compliant franchisee) and to benefit from economies of scale, a centralised ACL model would be most effective for the business.

160. Mr Travers gave the franchisees’ final approval for the sending of the letter on 17 July 2015 requesting that they be permitted to pursue separate licences. He was cross-examined as to what he thought MRA’s response was likely to be. His evidence, which I accept, was that he understood MRA’s “very strong preference” was for a centralised model with a single licence and that it had good commercial reasons to prefer that model. He was also directed to Corrs’ response and the reasons set out above. Although he did not agree with those reasons, he did not doubt that MRA sincerely believed it was in the best interests of the Mr Rental business that it adopt a centralised model.

161. The franchisees argue that MRA was aware of the effect that the changes to Centrepay’s policy would have on the Old World franchises (see [11] and [24] above). That difficulty had to be addressed in the context of the original franchise system. It could be addressed by permitting them to be licensed and to offer the Mr Fixed product. They submit that MRA’s refusal to allow that to happen constituted a failure to actively develop and promote the Old World system and to take reasonable steps to maintain its integrity.

162. MRA’s obligation under cl 14.1(b) to “actively develop” the original franchise system did not in my view require that it adopt a decentralised licence model for its Old World franchisees. That is so for the same reasons that informed MRA’s preference for adopting a centralised model. The franchisees’ proposal carried with it the real risk that not all of them would obtain licences and be able to offer ‘regulated’ products. That would not result in a system available to all of those franchisees, and would not constitute the development or promotion of the existing system. The obligation to maintain the “integrity” of the Old World system is concerned with maintaining and protecting rights and assets used in connection with it and does not require MRA to make fundamental changes to the structure of the Franchise System. The franchisees’ allegation of breaches of cl 14.1(b) and 14.3 is not made out.

Alleged breach: failure to act in good faith and reasonably and not for some extraneous purpose

163. The franchisees allege that it was an implied term of the franchise agreements that MRA deal with them “in good faith and reasonably and not capriciously or for some extraneous purpose”. By the Further Amended Cross-Claim, the franchisees allege that MRA’s conduct in refusing to allow them to obtain credit licences and to offer New World products, and its refusal to allow access to the MAX computer platform, the New World logos and the unregulated New World customer contracts, was conduct engaged in to “devalue” the original franchise system, “discriminate” against those franchisees, “deter” them from using that system and to “compel” them to move to the New World system.

164. The matters relied upon in the pleading as supporting the allegation that those purposes or ends influenced or motivated MRA’s conduct include that it had requested that the franchisees enter into new agreements and that after this request was declined, there was “no reasonable justification” for not allowing them to have access to the products, logos, branding, computer platform and software used in the New World system.

165. The franchisees’ written submissions go beyond that pleaded case. They include that the implied obligation of good faith was breached by reason of the same conduct, not because it was undertaken for those pleaded purposes, but because it was “unjustified” and involved a “disregard for the franchisees’ legitimate commercial interest[s]”. It is contended, without elaboration, that to the extent MRA’s conduct “has denied the franchisees the normal incidents of the benefits of their franchise, MRA has not acted in good faith”.

166. I propose to deal with this unpleaded case, but shortly. For the reasons I have already given, I do not consider that the conduct referred to involved breaches of any express term of the franchise agreements, other than those with respect to the use of Marketing Funds. Accepting, without deciding, that there was an obligation of good faith and that it extended to the performance of the terms of the agreement said to have been breached, there was not in my view any breach of such an obligation of good faith to the extent it would require compliance with honest standards of conduct, or standards that are reasonable having regard to the interests of the respective parties: see Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184; (2013) 29 BCL 329 at [144]-[145]. The evidence of Mr Travers, referred to above, recognises that MRA has dealt in good faith with the franchisees in relation to the introduction of the centralised licence model.

167. I turn now to the allegation that MRA’s conduct was directed to ‘persuading’ or ‘compelling’ them to abandon their Old World franchises and transfer to the New World. Four matters are relied upon in support of the allegation that MRA’s conduct was so directed.

168. First, it is said that MRA had strong financial incentives to convert all of its franchises to the New World system, including a potential profit redistribution in its favour and a “restructure” that might eventually result in the franchise operations returning “to company ownership”. This submission requires reference to the circumstances in which MRA decided to pursue the centralised licence model. I make the following findings as to those circumstances.

169. At the meeting in June 2013 (see [18] above), Mr Beeson presented a draft analysis of the options available for the restructure of the MRA franchise. Those present included Mr Nixon-Smith, MRA’s Chief Financial Officer, Mr Jamieson, and its principal shareholders. The analysis included a proposed centralised business model under which MRA was licence holder and the existing franchisees were its agents, conducting day-to-day operational activities with the customer on a “fee for service” basis. The model and its assumptions showed the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the Australian and New Zealand franchise business of MRA (assuming the New Zealand business would not change). On those figures, there was an increase in the overall profitability of the business and significant re-distribution of that profit in favour of MRA.

170. Mr Nixon-Smith described Mr Beeson’s initial model as being like a “company owned system” or “centralised non-franchise system”. The point Mr Nixon-Smith was making, perhaps not as clearly as he might have, was that the assumptions made as to the returns to the franchisees under that model remunerated them as if they were employees of the franchisor, and did not take account of the nature of a franchise business system. His evidence, which I accept, was that at this June meeting the assumptions underlying the draft analysis were questioned and made the subject of further consideration.

171. Mr Beeson’s record of the matters discussed at the meeting included that MRA’s management was to “review and refine the various assumptions made in the models, particularly relating to franchisees’ activities”. It also noted:

1.   Whilst the proposed centralised case held financial benefits, it was acknowledged that the transition for current franchisees would be onerous. The high performing franchisees would require a form of compensation for moving to a different model, or to finance their exit from the business.

2.   The “fee for service” rates outlined in the model should be reviewed as these may not fully compensate the franchisees for the full range of services they are being asked to perform under their agency role.

172. Consistently with that being the position, Mr Nixon-Smith agreed in cross-examination that if the results of reviewing the assumptions showed the proposal to be “adverse to the financial viability either of the franchisees or the franchisor”, MRA would not have proceeded with the centralised model. I accept that evidence as reflecting Mr Nixon-Smith’s thinking at that time. He explained what happened next:

… we had a great discussion with Mr Beeson about what our intent was, and we then moved very quickly into … an activity-based model, which then would reflect really what the revenue streams of the business were. We did not, I did not accept the modelling Mr Beeson had done.

173. At the director’s meeting on 17 July 2013, at which MRA resolved to adopt the centralised model, Mr Nixon-Smith’s June 2013 report was considered. That report included the following under the heading “Business Overview”:

●   Licence – modelling completed and presented by Andrew Beeson. Model and associated issues indicate the business move to a centralised model. Further work has been undertaken by Dibbs; Bailment agreements for the equipment are recommended. Dibbs scoping out costs for licence legal excluding Franchising (Corrs to do this work). Potential change management issues for the franchised network in Australia will be expensive and time consuming.

174. Mr Nixon-Smith denied that this report was false in recording that Mr Beeson’s modelling indicated that MRA should move to a centralised system. As he explained, Mr Beeson’s modelling indicated a move to a centralised franchise system, notwithstanding that it did not include the activity-based model ultimately adopted.

175. That these discussions proceeded through June and July 2013 as Mr Nixon-Smith described, is confirmed by Mr Beeson’s note of 31 July 2013, which included the following summary of the approach by then adopted:

-   Constructing a view of the profitability of a franchisee, under the revised business model of the Franchisor owning the revenue streams.

-   Under this scenario the franchisee will carry out activities on behalf of the franchisor, and be expected to be remunerated up to 80% of the revenue which the franchisee would previously have received from the customer base.

-   The franchisee will therefore alter its operating costs, and the aim is that the franchisee will earn a sufficient return under this model,

This model is then to be able to be applied to all franchisees to produce a “before and after” scenario which can then be reviewed by each franchisee.

176. Finally, with respect to this first matter, it was not put to Mr Nixon-Smith in cross-examination that he was influenced in his conduct and decision-making in relation to the move to a centralised licence model, by any earlier predicted profit redistribution in favour of MRA or the prospect of eventually converting the franchise network to “company ownership”. The evidence does not indicate that either of those factors influenced his or MRA’s conduct during this period or motivated the decision to proceed as it did in relation to the introduction of the centralised licence model.

177. The second matter said to support the allegation as to MRA’s “extraneous purpose” is that MRA “never properly considered having the franchisees as licence holders”. That proposition is contrary to the evidence and not made out. Mr Nixon-Smith explained why he believed in mid-2013 that a centralised model was in the best interests of MRA and its franchisees. His evidence in that respect was not challenged and shows that he did consider the position of the franchisees under a system in which each sought to become licensed. That evidence included:

a. I considered that the requirements of s 37 of the NCCP Act … were stringent and there was a material risk that:

i.   not all franchisees would be successful in obtaining an ACL if left to their own devices; and / or that

ii.   not all franchisees would properly maintain currency of their ACL or comply with their ACL if left to their own devices;

b. I considered that it would likely be expensive for franchisees to fulfil the obligations on a licensee under s 47 [of the] NCCP Act;

c.   I considered the potential consequences of non-compliance with an ACL, such as civil and criminal penalties and the suspension or cancellation of licences, to be very serious for the MRA franchisee business because such consequences had the potential to reflect poorly on all MRA franchisees and the Mr Rental brand. I considered that a centralised model would provide superior levels of regulatory compliance because MRA could offer uniform compliance training and assistance across the franchise network and better monitor franchisee compliance with regulatory requirements;

d.   I was concerned, given the experience that MRA had with ASIC …, that ASIC would be closely monitoring future compliance with the terms of any ACL or ACLs;

e.   I considered that it would be administratively burdensome and expensive for MRA to conduct a franchise business where each franchisee had a different ACL, potentially with different conditions attached and little visibility and control over matters of the franchisee's compliance with the ACL.

178. The franchisees rely on the fact that Mr Beeson was not asked to undertake any modelling of a decentralised licence system. The effect of Mr Nixon-Smith’s evidence was that it was not necessary for MRA to have done so because PriceWaterhouseCoopers had undertaken an analysis in 2011 of the profitability of the existing franchise system, which was “very similar” to a “multi-licence scenario”. That matter was not taken any further by the cross-examiner. Mr Nixon-Smith said, and I accept his evidence, that MRA formed the view that under the “activity-based model” franchisees would achieve the same or higher profitability than under the existing model. Subsequently, Mr Beeson made presentations to a small group of franchisees (known as the ‘V-Team’) and to the MRA Board. In August 2013, a presentation to the V-Team included comparisons of the “indicative financials” of “typical” and “large” franchisees in the “Current World” and in the New World. Similar comparisons were included in presentations made by Mr Beeson to the MRA Board on 28 October 2013 and 6 November 2013.

179. The third matter relied upon by the franchisees is that MRA’s business plan was to convert all franchisees to the New World system by moving “resistors individually” and dealing with them on a “one on one basis”. Mr Nixon-Smith agreed that from MRA’s perspective the clearly preferable outcome was to achieve a 100% conversion of franchisees to the New World system. However he did not think that would be achievable in the short term and did not accept that there was any “overarching strategy” to convert the remaining franchisees by engaging in particular conduct. It was not squarely put to Mr Nixon-Smith that the differential treatment of the franchisees in the Old World was intentionally undertaken with a view to deterring them from continuing to use that system and motivating them to move to the New World system. It does not follow, and I do not infer, from MRA’s desire to convert all franchisees to the New World that it was prepared to and did act as alleged. To some extent, adopting such a “overarching strategy” would not have been consistent with dealing with the franchisees on a “one on one” basis, the alleged conduct being directed to all of them. More significantly, as Mr Travers accepted, MRA believed it had good commercial reasons for moving to the centralised licence model.

180. The fourth matter is said to be “the disparity in treatment between the New World and original system franchisees”. The only example given in the franchisees’ written submissions is that when dealing with Centrepay’s change of policy, MRA requested that the DHS allow payments for the unregulated Mr Flex product to be made under the revised policy, but did not make a similar request in relation to the “indefinite period” rental agreement offered by the franchisees. Whilst Mr Nixon-Smith maintained that there were “vigorous” discussions between the DHS and MRA, he could not point to any contemporaneous material indicating that such a request had been made. I consider the likelihood to be that one was not made.

181. However, that fact does not justify an inference that MRA’s conduct was motivated in that or any other respect as alleged. The argument made by MRA in support of the concession sought from the DHS emphasised that Mr Flex was offered by the holder of a credit licence and that the same procedures were followed in selling that product as were required in relation to the selling of regulated products. A similar argument could not have been made in relation to the franchisees who were not then licensed and did not uniformly follow such procedures. The so-called “disparity in treatment” was not different treatment of franchisees or products that were in the same or substantially the same circumstances.

182. The allegation that MRA did not act in good faith because it acted for the extraneous purposes alleged is not made out. The conduct of MRA was not undertaken to deter the franchisees from continuing in the Old World system or to motivate them to move to the New World. The fact that the franchisees may have been so deterred or motivated, particularly in the circumstance that the Centrepay policy was changed, does not establish otherwise.

Alleged breach in relation to Wyong franchise

183. It remains to consider the position of IRD Services and the Wyong franchise. The additional conduct occurring after 14 August 2015 (the effective date of termination of the other agreements) which is relied on as justifying the termination of the Wyong agreement, concerns disruptions to its access to CAIRO and email accounts, and the diversion of customer telephone calls. On 21 August 2015, HWLE wrote to Corrs alleging those breaches by MRA of the Wyong franchise agreement and requesting that they be remedied. In doing so, IRD Services acted in accordance with its earlier election to affirm that agreement.

184. Subsequently, by its letter of 28 August 2015, HWLE purported to terminate that franchise agreement for repudiatory conduct. The question whether it was entitled to do so depends on whether MRA’s conduct on and after 14 August, considered in the context of what had proceeded it, was repudiatory. I make the following findings in relation to that conduct.

185. First, and by way of background, IRD Services commenced operating the Gosford franchise in March 2010 and the Wyong franchise in May 2011. At that time the franchises were operated from separate stores, one in each of those territories. In May 2014, MRA agreed to the closing of the Wyong store and the operation of both franchises from a store in Watt Street, Gosford. There previously had been separate landline telephone connections to the Gosford and Wyong stores. After May 2014, one landline telephone was used for both businesses, namely, that to the Gosford store. Accordingly, as at early August 2015, the same telephone number was used for the Gosford and Wyong franchises and when a caller telephoned MRA’s 1800 number and entered a postcode which corresponded with the Wyong territory, the call was automatically diverted to the Gosford store telephone number. Secondly, and in addition, the data for the Gosford and Wyong franchises was maintained on a single data-base within CAIRO.

186. On 31 July 2015, IRD Services sought to terminate the Gosford franchise agreement with effect from the close of business on 14 August 2015. On 17 August 2015, MRA gave notice terminating that agreement with immediate effect. At the same time it commenced to set up a separate CAIRO data-base for the Wyong franchise so that the franchisee could have access to that data without having access to the Gosford data-base. On the evening of 17 August 2015, Mr Dobbie’s access to his email account for the Gosford store and to the CAIRO data-base was blocked. Throughout that and the following day, MRA’s IT manager, Ms Walker, experienced difficulties in creating the separate data-base for Wyong. Because of that delay Mr Dobbie’s access to his email account and to the combined data-base was reinstated in the afternoon of 18 August. However that access did not extend to his staff.

187. Mr Dobbie raised that ‘problem’ with MRA very late on 17 August and again on 20 August 2015. In the morning of 20 August, he was advised that MRA had created a separate Wyong data-base within CAIRO and that for the Wyong staff to obtain access to CAIRO and to the email account, it was necessary for him to nominate the particular staff who required access. No nomination was received before 25 August 2015, when Mr Dobbie sent a further email regarding his staff’s lack of access. Ms Walker responded by email on the following day again pointing out that those staff had to be nominated. There was no response to that email before 28 August 2015 when IRD Services purported to terminate the Wyong franchise agreement.

188. There were also difficulties with the diversion of telephone calls for the Wyong territory which were transferred through the MRA 1800 number. That service was supplied by an entity named Fonebox. On 17 August 2015, MRA instructed Fonebox that when a call was received, and the caller entered a postcode located in the Wyong territory, the call was to be diverted to a particular number which in fact was the Wyong number that had not been used since mid-2014 and was no longer connected (although it would seem that number remained on the Website). The person who gave that instruction did not appreciate that number was not connected. Late on the evening of 17 August, Mr Dobbie sent an email to MRA’s operations manager, Mr O’Driscoll, advising that the “Wyong phone number on the website is not a connected number”. That email requested that the Website number be changed to the number which was connected to the Gosford store.

189. In the morning of 20 August, Mr Dobbie sent a further email to Mr O’Driscoll noting that telephone calls:

in the Wyong [territory] are being diverted to an alternative site/answering service. This is [having] an impact on our ability to service customers. As it has now been 2 days, we expect that this will be resolved as an urgent issue. We have forwarded this information on to our lawyers and we will be using these communications as a basis for any action we are involved in moving forward.

190. Mr O’Driscoll responded 30 minutes later saying:

The 1800 number is technically difficult. We need a Wyong number to divert the calls to as this is the Mr Rental franchise business. Until such time as we have a dedicated Wyong Mr Rental number to divert calls to, we are unable to change the current arrangement.

Mr Dobbie did not supply a number for use in connection with the Wyong franchise.

191. Fonebox records of calls made to MRA’s 1800 number by callers identifying themselves as having a postcode in the Wyong franchise territory show that 24 such calls were made in the period between 17 August and 28 August 2015. Of those 24 calls, seven telephone numbers made at least two calls, so that there were 13 callers in total. A text message with contact details for 11 of those 13 callers was sent to mobile telephone numbers associated with Mr Dobbie and the Gosford store manager.

192. Mr Dobbie was cross-examined about the difficulties experienced in relation to his access to CAIRO and the diversion of calls concerning the Wyong territory. He agreed that his access to CAIRO had been restored, and that he was told that he would have to nominate the names of staff to facilitate their access. He also agreed that he did not subsequently nominate any staff. He described the “main issue” as being the difficulty with the diversion of telephone calls. He maintained that he understood Mr O’Driscoll’s email of 20 August as insisting that he provide a Wyong area telephone number for the Wyong territory (meaning a landline in that geographical area), notwithstanding that he had no physical store in that territory. He accepted that he did not, in response to that request, offer MRA a Gosford area number or attempt to speak to Mr O’Driscoll or Mr Nixon-Smith to explain that it would be difficult for him to provide a Wyong area number because he had no store in that area. He also accepted that he could have made such an inquiry.

193. My assessment of Mr Dobbie’s conduct throughout this period is that if there was a significant problem in relation to the provision of a telephone number for the Wyong franchise and he had wanted to resolve that problem, he would have telephoned Mr O’Driscoll or someone else at MRA. He did not do so. MRA’s conduct with respect to the continuing provision of access to CAIRO, the email accounts and the diversion of telephone calls did not involve any serious breaches of the Wyong franchise agreement and did not convey an unwillingness on the part of MRA to continue to perform its obligations under that agreement. On the contrary, the position conveyed in the correspondence throughout this period was that MRA was seeking to address and resolve each of the problems as they arose.

Conclusion as to the franchisees’ entitlement to terminate

194. There were no serious breaches of the franchise agreements and there was no repudiatory conduct entitling the franchisees (including IRD Services in relation to Wyong) to terminate the franchise agreements as they purported to do. I answer Issue 2 in the negative.

Issue 7: Was there unconscionable conduct

195. The franchisees also allege that the conduct relied on as constituting a breach of MRA’s obligation to act in good faith and reasonably was, by reason of the intentions and motives described in [163] above, “unconscionable” contrary to s 21 of the Australian Consumer Law. The franchisees rely on that conduct as entitling them to an order preventing MRA from exercising its purchase option under each agreement. That order is sought pursuant to s 237 of the Australian Consumer Law.

196. The concept of statutory unconscionability, as explained by Allsop P in Tonto Home Loans Australian Pty Ltd v Tavares [2011] NSWCA 389; 15 BPR 29,699 at [291], includes conduct having the following features or characteristics:

a high level of moral obloquy on the part of the person said to have acted unconscionably … [T]he conduct must be irreconcilable with what is right or reasonable … The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct.

197. My finding that MRA did not engage in the relevant conduct with the intention and motives alleged means that the franchisees’ claim that there was unconscionable conduct must also be rejected. Issue 7 is answered in the negative.

Conclusions

198. MRA is entitled to orders for specific performance and delivery up. It is not entitled to the declaration it seeks as to the tender of the written down value of the Business Assets in satisfaction of the obligation under cl 22.8 to pay the Purchase Price. The franchisees’ Cross-Summons should be dismissed and having regard to the outcome of the proceedings, and subject to any orders already made, they should pay MRA’s costs of its claim and of the Cross-Summons.

199. I propose to direct that the parties confer and attempt to agree on orders which give effect to my conclusions and lodge those proposed orders with my Associate by 5pm on 8 June 2016. If they are unable to agree, the parties should lodge the orders which it or they contend for and written submissions in support of those orders (not to exceed three pages) with my Associate by 5pm on 15 June 2016. I will then determine any issue as to the form of orders on the papers.

200. Accordingly, I make the following direction:

1. Direct that the parties attempt to agree on short minutes of order giving effect to these reasons, those orders to be delivered to my Associate by 5pm on 8 June 2016. If no agreement can be reached, the parties are to lodge with my Associate before 5pm on 15 June 2016, the orders for which they contend, and written submissions (not exceeding three pages) in support of them. Any issue as to the final form of orders will then be determined on the papers.

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Schedule (126 KB, pdf)

Decision last updated: 02 June 2016