National Security Training Academy (GC) Pty Ltd v National Security Training Academy Pty Ltd

[2013] QSC 245

SUPREME COURT OF QUEENSLAND

CITATION:

National Security Training Academy (GC) Pty Ltd v National Security Training Academy Pty Ltd [2013] QSC 245

PARTIES:

NATIONAL SECURITY TRAINING ACADEMY (GC) PTY LTD
ACN 135 916 031
(applicant)
v
NATIONAL SECURITY TRAINING ACADEMY PTY LTD
ACN 101 333 680

(respondent)

FILE NO/S:

BS 4630 of 2013

DIVISION:

Trial Division

PROCEEDING:

Originating Application

ORIGINATING COURT:

Supreme Court of Queensland

DELIVERED ON:

16 September 2013

DELIVERED AT:

Brisbane

HEARING DATE:

8 July 2013

JUDGE:

Philip McMurdo J

ORDER:

It is declared that the contract between the applicant and the respondent, constituted by the written franchise agreement dated 13 May 2010, has not been duly terminated.

CATCHWORDS:

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – OTHER MATTERS – where applicant franchisee and respondent franchisor entered into franchise agreement – where franchisee required to provide BAS and franchise payment to franchisor every quarter – where franchisee lodged BAS and made payment late – where franchisor served breach notice on franchisee – where franchisor subsequently emailed franchisee to demand payment – where email did not specify that franchisor would terminate the franchise agreement if payment was not made – whether the franchisee breached the franchise agreement by lodging and providing BAS late – whether implied term of the franchise agreement that BAS had to be lodged on time – whether franchisee breached the franchise agreement by failing to make the franchise payment on time – whether the franchisor provided a valid notice of breach

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS – where franchisor required to give a breach notice to the franchisee before terminating the franchise agreement – where Franchising Code requires a breach notice to specify that the franchisor will terminate the franchise agreement unless the breach is remedied – where Franchising Code did not form part of the franchise agreement – whether the breach notice given by the franchisor under the franchise agreement had to specify that the franchise agreement would be terminated if the breach was not remedied – whether the franchise agreement should be interpreted consistently with the Franchising Code where the franchise agreement is capable of more than one meaning  

Competition and Consumer Act 2010 (Cth), s 51AD

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; [1977] HCA 40, applied

COUNSEL:

C Jennings for the applicant

G Sheahan for the respondent

SOLICITORS:

Jason Nott Solicitors for the applicant

McInnes Wilson Lawyers for the respondent

1. In 2010, the parties entered into a written contract, by which the respondent granted to the applicant a franchise to conduct a business at the Gold Coast.  The term of the franchise was five years with a further five years unless the franchisee elected not to extend the term. 

1. The respondent says that pursuant to an express term of the contract, it has terminated the contract for the applicant’s breach. The applicant disputes that upon several grounds. It says that it was not in breach of the contract (at least at any relevant time) or that the respondent did not give a notice to remedy any breach as the contract required before it could be terminated. Further, the applicant argues that the respondent’s purported termination contravened the Franchising Code of Conduct, so that the respondent contravened s 51AD of the Competition and Consumer Act 2010 (Cth). If the purported termination of the contract was otherwise valid, the applicant would seek relief, including relief under s 87 of that Act, to make the termination ineffective.

1. The case was commenced by an Originating Application, because the applicant sought urgent interlocutory relief to prevent the respondent from taking steps which were consequential upon its purported termination.  The application for an interlocutory injunction was resolved by the respondent undertaking that until the final hearing of the proceeding, it would not appoint another franchisee to this area without providing the applicant with prior notice and that it would do certain other things which would have the effect of permitting the applicant to continue to conduct the franchised business for the time being.  The case then came on for a final hearing in the Civil List.

1. At the commencement of this hearing, a question arose about the extent of the relief which was sought by the applicant.  That relief included an award of damages for breach of contract.  A claim for damages was made in the Originating Application.  But there had been no pleadings or disclosure.  The respondent complained that it was unprepared to meet a claim for damages within this hearing.  A related question was the potential for relief under s 87 for any contravention of the Franchising Code, because that also raised an issue about the likelihood of loss to the applicant. 

1. With the concurrence of the parties, I ordered that certain questions be tried in advance of the balance of the proceeding.  Those questions are as follows:

1.          Whether the applicant was in breach of contract as the respondent contends.

2.          Whether the respondent’s termination or purported termination of the contract was valid according to the contract.

3. Whether the respondent’s termination of contract involved a contravention of s 51AD of the Competition and Consumer Act 2010 (Cth); and

4.          If it did involve such a contravention whether that of itself had the consequence of invalidating the respondent’s purported termination of the contract absent any order of the court.

1. The franchise agreement required the applicant to pay to the respondent a fee, calculated as a percentage of the applicant’s gross turnover according to its Business Activity Statements.  To that end, cl 10 and cl 10.1 provided as follows:

“10.       Accounting systems

The franchisee will maintain appropriate accounting systems, as approved by the franchisor, the following are required:

1.MYOB Premier Software, (including subscribing to version updates)

2.Or alternate software which is approved by the franchisor.

3.An independent bookkeeper to submit BAS/GST returns, and franchise returns.

4.BAS/GST returns are to be submitted quarterly to the franchisor.

5.All accounting software, bank accounts, credit card, eftpos and other systems used by the franchisee are to be separate from any other business, and unique to the franchise.

10.1Franchise returns

The franchisee is required to report to the franchisor in accordance with the quarterly cycle required for BAS/GST returns.

Within 7 days of the compilation of the BAS/GST return the franchisee is to forward a copy of the franchisee’s BAS/GST return, together with a cheque for 7.5% of gross turnover, (not including clients designated in section 3.4) or receipt for electronic payment of the franchisee fee.  Upon receipt of payment franchisor will issue a tax invoice and receipt to franchisee, and email to franchisee on the same day.

GST is not included in the 7.5% franchise fee, and is to be added to the payment.”

1. The respondent’s case is that the applicant failed to forward a copy of its BAS for the October-December 2012 quarter together with a cheque for payment of the franchise fee. 

1. Clause 1.4 of the franchise agreement provided for its early termination upon the basis of a breach by the applicant.  The relevant part of cl 1.4 was as follows:

“…  If the Franchisee breaches or violates any provision of this Agreement or of the Franchisor’s Manual, (Described in Paragraph 5), and fails to remedy the breach, or violation within a reasonable period* following written notice by Franchisor, Franchisor may terminate this Agreement at once and without any further notice to Franchisee.

*Reasonable period is the earlier of either 30 days, or such period of time as required by the franchisors registering body, as provided in writing.”

1. Section 51AD of the Competition and Consumer Act 2010 (Cth) provides that a corporation must not, in trade or commerce, contravene an applicable industry code. The Franchising Code is an applicable industry code because it has been prescribed as a mandatory industry code under s 51AE of the Act. The franchise agreement makes no specific reference to it and it does not provide that the code is to form part of this contract. But the code has force under s 51AD and other provisions of the Act which provide for the remedies for its contravention.[1]

   [1]In particular, s 80, s 82 and s 87.

1. Clause 21 of the Franchising Code is as follows:

“21        Termination - breach by franchisee

(1)       This clause applies if:

(a)a franchisee breaches a franchise agreement, and

(b)the franchisor proposes to terminate the franchise agreement; and

(c)clause 23 does not apply.

(2)The franchisor must:

(a)give to the franchisee reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach; and

(b)tell the franchisee what the franchisor requires to be done to remedy the breach; and

(c)allow the franchisee a reasonable time to remedy the breach.

(3)For paragraph (2)(c), the franchisor does not have to allow more than 30 days.

(4)If the breach is remedied in accordance with paragraphs (2)(b) and (c), the franchisor cannot terminate the franchise agreement because of that breach. 

…”

1. The applicant’s BAS for the quarter ended 31 December 2012 was required to be lodged with Australian Taxation Office by 28 February 2013.  The applicant was late with this BAS, lodging it with the ATO on 19 March 2013. 

1. On 22 March, the respondent served on the applicant a letter from its solicitors which was headed “Breach Notice” and which was as follows:

“We act for National Security Training Academy Pty Ltd (NSTA).

We are instructed that National Security Training Academy (GC) Pty Ltd (Gold Coast) has failed to comply with its obligations under clauses 10 and 10.1 of the current franchise agreement you have with our client.  That is, Gold Coast has failed to provide copies of its BAS/GST returns and financial returns for the period 31 October 2012 to 31 December 2012.

Further, our client has recently contacted Gold Coast to remind and further request the returns.

Consistent with clause 1.4 of the franchise agreement, our client gives notice of the breach of the terms of your agreement with our client.

Please be aware that failure to remedy this breach within 30 days of the date of this letter will give our client a right of termination of the Gold Coast franchise without further notice to you and other possible remedies and rights.

…”

1. On 25 March, the applicant emailed to the respondent a copy of the BAS and a document described as “franchisee return”, for the October-December 2012 quarter.  On the following day, the applicant’s Mr Geaney delivered to the respondent’s office in Brisbane copies of the same documents.  The franchisee return showed a calculation of the income upon which the franchisee fee was to be calculated, and a calculation of that fee which, inclusive of GST, was $7,700.  But no cheque for that amount or any other amount accompanied the documents. 

1. Another of the documents then delivered was an invoice from the applicant addressed to the respondent, for a total of $7,500.  The invoice was apparently for the applicant’s service of training some 10 individuals, at $750 each. 

1. On 28 March 2013, an employee of the respondent emailed Mr Geaney as follows:

“…Thanks for submitting your Franchise Fees paperwork.  Regarding your emails with Sharyn and you wanting to have the $7700 fees offset against your invoice GC000570.  Adam we cannot do that and I know you would be aware of this.  We have not received any funding for NSW and do not have approval for funding as yet, so payment cannot be made on this invoice.  Also no offsets are allowed for Franchise Fees, they must be paid up front each quarter.  Can you please pay the amount as soon as possible. …”

1. There was no argument that for some reason, the applicant did not have to make a payment to the respondent at the same time as delivering these documents.  Even allowing for the amount of its invoice, there was still a net sum of $200 to be paid.  Ultimately, the franchise fee of $7,700 was paid by the applicant in the week preceding this hearing. 

1. On 9 May, the respondent’s solicitors wrote to the applicant, purporting to terminate the franchise agreement for the applicant’s failure to remedy the breach specified in its notice of 22 March.

1. On 15 May, lawyers acting for the applicant replied, contending that the notice of 22 March did not comply with the Franchising Code in that it failed to “tell the franchisee what the franchisor requires to be done to remedy the breach”.  It further contended that the breach described in that notice of 22 March had been remedied by the delivery of the BAS and other documents on 26 March. 

1. The first question for determination is whether the applicant was in breach of the franchise agreement at any relevant time.  The position as at the date of the breach notice must then be considered.  At that point, the applicant had lodged its BAS for the most recent quarter with the ATO.  Clause 10.1 of the franchise agreement required the applicant to forward a copy of the BAS to the respondent within seven days of the compilation of the BAS.  The applicant argues that the BAS was compiled on the day on which it was lodged with the ATO, or at least that it is not demonstrated that it was compiled prior to that date.  For present purposes, it must be accepted that this was the date of its compilation, because it is not shown to have been compiled earlier.  Seven days from 19 March had not passed when the breach notice was given.  The applicant submits that therefore at the time of the breach notice, it was not in breach of contract and the notice had no effect. 

1. According to the relevant tax laws, this BAS had to be lodged with the ATO by 28 February 2013.  There is a question then about whether the applicant’s failure to lodge the BAS by that date constituted a breach of the franchise agreement.  Clause 10 required “BAS/GST returns … to be submitted quarterly to the franchisor”.  The franchise agreement did not specifically require the franchisee to lodge a BAS with the ATO.  Nor did the franchise agreement specifically provide that the applicant was to compile a BAS within a certain time.  However, the payment of the franchisee fee was to coincide with the provision of a copy of the BAS return to the respondent.  Absent some contractual obligation upon the applicant to lodge a BAS in a timely way, the respondent could be deprived of the benefit of the contract, because it would have no right to the payment of the franchise fee unless and until the BAS was compiled.  In my view, this compels the implication of a term to the effect that the applicant was to lodge its BAS quarterly as required by the law.  Such a term satisfies the requirements for the implication of terms in fact, according to BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[2]  In particular, the implication of such a term is necessary to give business efficacy to this contract, because without that term, the franchisee could deprive the franchisor of the benefit of the contract by delaying in the compilation of the BAS. 

   [2](1977) 180 CLR 266 at 282-3

1. Therefore, the applicant was in breach of the contract on and from 1 March 2013.  But that breach was remedied when the BAS was lodged with the ATO on 19 March. 

1. By the language of cl 10.1, the time limit for sending a copy of the BAS to the franchisor was seven days from its compilation.  It is that language which requires the implication of a term which I have discussed.  The language of cl 10.1 cannot be interpreted so as to require a copy of the BAS to be forwarded to the franchisor no later than seven days from the last date which is allowed by law for its lodgement with the ATO.  Clause 10.1 is engaged by the actual compilation of the BAS.  Therefore, the breach of contract by the applicant, prior to 19 March, was the failure to lodge a BAS with the ATO.  Once that breach was remedied, the applicant had seven days in which to forward a copy to the respondent.  It follows that the applicant was not in breach of the contract as at the date of the breach notice, 22 March. 

1. Clause 1.4 provides that the contract could not be terminated for a breach by the applicant unless a notice to remedy that breach was given.  Necessarily, such a breach must be one which precedes a notice under cl 1.4 and which has not been remedied when the notice is given.  Therefore, the notice of 22 March cannot suffice for the purposes of cl 1.4. 

1. On 26 March, the applicant again breached the contract, by failing to provide a cheque for the franchise fee with the copy of the BAS, as was required by cl 10.1.  The respondent submits that the required cheque was in an amount of $7,700.  On any view, at least $200 should have been paid yet the applicant made no payment. 

1. That failure to pay was a breach which, subject to compliance with cl 1.4 and to the operation of the Franchising Code, entitled the respondent to terminate the franchise agreement. 

1. By the email of 28 March, the respondent insisted upon this payment.  It plainly identified the applicant’s breach.  And the payment was not made within 30 days of this email. 

1. It was not necessary for the purposes of cl 1.4 that a notice be in the form of that which was given on 22 March.  In particular, it was not necessary for the notice to state that it was given under cl 1.4.  But in my view it was necessary that the notice should not only identify the breach, but also be a notification of an intention of the franchisor to terminate if the franchisee failed to remedy the breach within a reasonable time.  The terms of cl 21 of the Franchising Code are relevant here.  Although the code was not incorporated as part of the contract, the concurrent legal obligations under the code are relevant in the interpretation of this contract.  If a provision of the contract is capable of more than one meaning, then the preferable meaning is that which is more consistent with the operation of the code.  On one view of cl 1.4, the notice which is required is a notice of the fact of the breach.  On another view, it is a notice of the breach and of the franchisor’s intention to terminate, absent a remedy of the breach within a reasonable time.  That latter interpretation, but not the former, would be consistent with the requirements of cl 21 of the code.  Therefore, the email of 28 March was not a notice under cl 1.4 of the franchise agreement, because it did not inform the applicant that the respondent would terminate the contract if the fee was not paid within a reasonable time.  For the same reason, it was not a notice for the purposes of cl 21 of the code.

1. On 9 May 2013, the respondent purported to terminate the franchise agreement.  It did so on the basis of a failure to remedy the breach described in the notice of 22 March.  As I have held, that notice was ineffective because the applicant was not then in breach.  There was no notice duly given under cl 1.4 which preceded this purported termination.  Therefore, the right to terminate under cl 1.4 did not exist and this purported termination was ineffective. 

1. There was no subsequent notice given under cl 1.4.  The applicant’s default in making this payment of $7,700 has now been remedied. 

1. I turn then to the specific questions for determination.  The first is whether the applicant was in breach of contract as the respondent contended.  The alleged breach, according to the respondent’s written argument,[3] was in the fact that as at 22 March 2013, the applicant had not sent a copy of its BAS together with a cheque to the franchise fee.  I have held that the applicant was not in breach as at 22 March.

   [3]Paragraphs 37 and 38.

1. The second question is whether the respondent’s purported termination of the contract was valid according to the contract.  I have held that it was invalid, because of the absence of a notice duly given under cl 1.4. 

1. The third question is whether the respondent’s termination of the contract involved a contravention of s 51AD. That question is premised upon the purported termination of the contract being valid according to the contract. Because it was invalid, the purported termination was of no effect. Similarly, the fourth question was premised upon the purported termination being valid according to the contract.

1. What remains to be considered is the appropriate relief.  The respondent argues that declaratory relief, being discretionary, should be refused because of the applicant’s conduct in breaching the contract.  That conduct is a relevant consideration.  But it is necessary for a declaration to be made in order to give effect to the resolution of the questions within this judgment.

1. It will be declared that the contract between the applicant and the respondent, constituted by the written franchise agreement dated 13 May 2010, has not been duly terminated.  I will hear the parties as to other orders including costs.