Otrava Pty Ltd v Mail Boxes Etc (Australia) Pty Ltd; Mail Boxes Etc (Australia) Pty Ltd v Otrava Pty Ltd

[2004] NSWSC 1066

CITATION:	Otrava Pty Ltd & Ors v Mail Boxes Etc (Australia) Pty Ltd; Mail Boxes Etc (Australia) Pty Ltd v Otrava Pty Ltd & Ors [2004] NSWSC 1066
HEARING DATE(S):	10.02.04; 11.02.04; 12.02.04; 23.06.04; 24.06.04; 25.06.04; 20.07.04; 21.07.04
JUDGMENT DATE:	10 December 2004
JUDGMENT OF:	Nicholas J
DECISION:	para 138
CATCHWORDS:	Franchise agreement - whether inducement to enter agreement by false and misleading representations - whether breaches of s 52 Trade Practices Act 1974 (Cth) - construction of agreement - Frustration - whether agreement terminated by frustration - whether agreement repudiated by franchisee or validly terminated for breach by franchisor - Damages - loss of opportunity for royalty and marketing fee - costs
LEGISLATION CITED:	Trade Practices Act 1974 (Cth) s 52 Frustrated Contracts Act 1978 (NSW) s 12
CASES CITED:	Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158 FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd (1992) 108 ALR 479 Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 46-048 State of NSW v Moss [2000] NSWCA 133 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
PARTIES :	3514/02 Otrava Pty Ltd - First Plaintiff Assad Atef Karem - Second Plaintiff Inas Karem - Third Plaintiff Feras Atef Karem - Fourth Plaintiff Mail Boxes Etc (Australia) Pty Ltd - First Defendant Mark Jones - Second Defendant Gordon Streight - Third Defendant 3249/02 Mail Boxes Etc (Australia) Pty Ltd - Plaintiff Otrava Pty Ltd - First Defendant Assad Atef Karem - Second Defendant Inas Karem - Third Defendant Feras Atef Karem - Fourth Defendant
FILE NUMBER(S):	SC 3514/02; 3249/02
COUNSEL:	P R Glissan - Otrava Pty Ltd, Assad Atef Karem, Inas Karem, Feras Atef Karem R Brender - Mail Boxes Etc (Australia) Pty Ltd, Mark Jones, Gordon Streight
SOLICITORS:	Napier Keen - Otrava Pty Ltd, Assad Atef Karem, Inas Karem, Feras Atef Karem Abadee Dresdner & Freeman - Mail Boxes Etc (Australia) Pty Ltd, Mark Jones, Gordon Streight

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

10 December 2004

3514/02 Otrava Pty Ltd & Ors v Mail Boxes Etc (Australia) Pty Ltd
3249/02 Mail Boxes Etc (Australia) Pty Ltd v Otrava Pty Ltd & Ors

JUDGMENT

1 His Honour: These proceedings arise from disputes concerning a franchise agreement made on 10 October 2001 (the agreement) between Mail Boxes Etc (Australia) Pty Ltd (MBE), the franchisor, and Otrava Pty Ltd (Otrava), the franchisee, and Assad Atef Karem (AAK), Inas Karem (IK) and Feras Atef Karem (FAK) as guarantors of Otrava under the agreement.

2 By their further, further amended statement of claim filed 20 July 2004 in No. 3514/02 Otrava and the guarantors as Plaintiffs claim relief against MBE and Mark Jones (Mr Jones) the Second Defendant and Gordon Streight (Mr Streight) the Third Defendant.

3 It is claimed that the Plaintiffs were induced to enter the agreement by false and misleading representations made by Mr Jones and Mr Streight in contravention of s 52 Trade Practices Act 1974 (Cth) (the Act) so that they are entitled to a declaration that the agreement is void ab initio, and to an order that money paid under it be refunded, and to damages. Alternatively, it was claimed that the agreement had been terminated by frustration so that the Plaintiffs were entitled to the refund of monies paid under it pursuant to s 12 Frustrated Contracts Act 1978 (NSW). Further alternative claims were made for a declaration that Otrava lawfully terminated the agreement by reason of breaches by MBE of some of its provisions, and for damages.

4 By its statement of claim filed 19 December 2002 (in No. 3249/02), MBE as Plaintiff claims against Otrava and the guarantors a declaration that it validly terminated the agreement, and damages resulting from the repudiation of it by Otrava. The issues raised under these claims overlapped those in No. 3514/02 and thus it was appropriate that both sets of proceedings be heard and determined at the same time.

5 An additional question for determination was the appropriate order for costs of the interlocutory proceedings in No. 3249/02 which resulted in the undertakings given to the court by Otrava, the guarantors and other defendants, and the orders which were made, by consent, by His Honour Mr Justice Austin on 26 August 2002. The terms of the undertakings and orders are recorded in the document entitled “Minutes of Orders made 26 August 2002”.

Introduction

6 MBE carries on business as the franchisor of “MBE Business Service centres”. It holds the master franchise for Australia for a business concept known as “Mail Boxes Etc” and conducts a business of awarding and supervising franchises of the MBE business. A franchisee provides to its customers what are described as back-office services for businesses such as printing, binding, photocopying and e-mail receiving. Mr Jones is a director of MBE and is its general manager for Australia and New Zealand, and Mr Streight is its central area manager for Sydney.

7 Otrava carries on business as the manager of a number of pharmacies. Assad Atef Karem and Feras Atef Karem are brothers, registered pharmacists, and directors and shareholders in Otrava. Inas Karem is the wife of Assad Atef Karem, and a registered pharmacist. They have been involved in the pharmacy industry for about ten years and the business has an annual turnover of about $4,000,000.00.

Background

8 The following narrative is of events which provide some background for the better understanding of the competing claims. Most of these matters were not in dispute and in any event there was ample evidence for the finding that each took place.

9 In May 2001 AAK was introduced to Mr Jones whilst involved in negotiations for the lease by Otrava of space for a pharmacy at Henry Deane Plaza, 2 Lee Street, Sydney. This led to a discussion about MBE’s business and Otrava’s interest in becoming a franchisee to operate from the same building.

10 On an occasion in June 2001 AAK had a meeting with Mr Jones during which matters concerning the operation of a franchise and what was involved in setting up the business were discussed. The details of their conversation are set out in para 47, during which Mr Jones made the representation pleaded in para 10(d) of the further, further amended statement of claim that MBE does everything necessary to enable the business centre to open and trade.

11 At the meeting AAK was given an MBE franchise application form to complete.

12 On 27 June 2001, following a meeting between them, Mr Jones sent AAK a business profile and other information concerning the franchise business. On 29 June 2001 Mr Jones sent AAK a first draft of a lease proposal for discussion purposes. The document referred, inter alia, to a mezzanine, air conditioning, carpet and other items as part of the lessor’s contribution to be made under a separate agreement, and to handover upon completion of lessor’s works which were to commence upon the execution of the lease.

13 On 8 July 2001 AAK completed the franchise application the purpose of which was to provide information for the determination of the suitability of the applicant to be a franchisee. The application was returned with the required deposit of $1,500.00.

14 In early August 2001 MBE approved Otrava as a franchisee, and AAK was provided with a franchise agreement instruction sheet for completion. The document was signed by AAK on 2 September 2001 and sent to Robert James, solicitors for MBE, with Otrava’s cheques totalling $1,925.00 in payment of the documentation fee towards costs and expenses in drafting the franchise agreement.

15 On 31 August 2001 the franchise agreement was sent by MBE’s solicitors to the Karems for execution by Otrava and the guarantors.

16 On 4 September 2001 there was a meeting between AAK and Mr Jones. Mr Jones’ e-mail of that date records that he informed AAK of the situation about the lease for the premises, and that discussion about a timetable for development should be deferred until after the agreement had been signed.

17 On 5 October 2001 there was a meeting between AAK and Mr Streight during which the involvement of MBE in the fit out of the premises to enable Otrava to commence business as a franchisee, and other matters, were discussed. The details of their conversation are set out in para 49 during which Mr Streight made the representations pleaded in para 11 of the further, further amended statement of claim, namely:

“(a) It is my responsibility as your Area Manager to do everything necessary to enable your business centre to open and trade;
(b) MBE has the experience in doing everything necessary quickly to enable a business centre to open and trade;
(c) MBE knows how to do everything necessary to enable a business centre to open and trade”.

18 On 10 October 2001 the agreement was executed by Otrava and each of the Karems as guarantors, and subsequently delivered to Mr Streight on about 12 October 2001. During the weeks before it was signed AAK obtained legal advice about it and reassessed whether he wanted to proceed with the franchise. By item 6 of the schedule to the agreement a franchise fee of $29,950.00 was payable on or before the date on which the agreement was signed. AAK unsuccessfully attempted to vary the time for payment to the commencement of trading. He was informed that the proposed variation was unacceptable. He then drew a cheque to pay the fee but it was not presented for payment. A replacement cheque was presented for payment on 11 December 2001.

19 By item 12 of the schedule a start up fee of $22,000.00 was payable as to $11,000.00 within fourteen days of the date of signing, and as to the balance within fourteen days of an offer to lease being submitted for the premises. The payments were made on 11 December 2001 and 18 February 2002 respectively.

20 By its letter dated 22 October 2001 to MBE, Exponential Property Services Pty Ltd (Exponential) as agent for the lessor, Toga Pty Ltd (Toga) invited Otrava to make an offer to lease shop No. 2 (the shop) at Henry Deane Plaza. It included particulars of terms of the proposed lease. Against the item “Lessee Works” it said that the lessee must pay for fitting out the shop and must ensure approval for the fit out design prior to commencement of fit out.

Against the item “Lessor’s Works” were a number of matters to be installed by the lessor such as lighting, air-conditioning, and a mezzanine level. It was noted that it was agreed that the lessee shall perform the lessor’s works but had the right to obtain and pay on alternate quotes. The handover date was stated to be two weeks from date of completion of the lessor’s works but no later than 15 February 2002, and the fit out period was stated to be four weeks from date of handover to the lessee.

With the letter were sent a number of documents including one entitled “Lessor and Lessee Disclosure Statement”.

21 On 3 December 2001 AAK, on behalf of Otrava, signed the offer to lease and the disclosure statement.

22 On 7 January 2002 Mr Dennis Limbert commenced employment with Otrava as a consultant and to manage the new shop.

23 On 1 February 2002 the lease agreement between Toga and Otrava for the shop was executed. The term was for five years commencing 15 March 2002 and terminating on 14 March 2007. The handover date was 15 February 2002 and the fitting out period was four weeks from the date of handover. Clear distinction was made between the nature and extent of fit out works to be undertaken by Otrava and works to be carried out by Toga.

Clause 3.1 provided for completion of the owner’s (Toga’s) works which were to be carried out by Otrava at the owner’s expense during the fit out period. The works were listed in schedule 3 and included the installation of a mezzanine floor. Clause 4 provided for the carrying out by Otrava of the fit out subject to Toga’s approval. The general nature of this work was set out in some detail in schedule 2.

24 During December 2001 MBE instructed Mr Harvey Webster, architect, to prepare preliminary plans for the fit out of the shop including a plan for the mezzanine level. Final outline plans as discussed with Mr Jones and Mr Streight were submitted to Toga for consideration on 5 February 2002. Following approval by Toga, Mr Webster prepared a full set of final plans which were delivered by Mr Streight to Exponential on 5 March 2002 for Toga’s further consideration.

25 On 5 February 2002 a copy of the draft plans were provided to AAK and Mr Limbert at a meeting with Mr Streight. Discussed at the meeting was an operations plan proposed by Mr Limbert which indicated an opening date for 11 March 2002 which Mr Streight considered to be achievable.

26 During meetings in March 2002 with Mr Streight and Mr Jones, AAK expressed his concern at the delay in the progress of approvals of the plans. He requested and obtained MBE’s consent to retain a private certifier to speed up the process of approval by the Sydney City Council of the development application and construction certificate, and to submit a quotation for the construction of the mezzanine. AAK also expressed interest in opening additional MBE centres and visited sites in Liverpool Street, and George Street, Sydney for this purpose. He and Mr Limbert actively took steps to lease premises for a second shop which led to negotiations during April 2002 for the lease of premises in the Metcentre, No. 273 George Street, Sydney.

27 By letter dated 25 March 2002 to the agent, Toga requested changes to the plans in respect of the structural drawings and the location of the door to the mezzanine. By his fax to Mr Jones of 27 March 2002 Mr Limbert sought a meeting to discuss the mezzanine structure and the revision of the drawings complained of. On 8 April 2002 an amended set of final plans and engineering drawings was sent to Toga with a request for approval of the fit out.

28 The notice of determination by Sydney City Council approving the alterations to the shop was given on 17 April, and the construction certificate was issued on 30 April 2002.

29 On about 18 April, DMS Shopfittings Pty Ltd, a builder arranged by AAK, submitted to Toga its quote for the work as did Baybridge Building Pty Ltd on 24 April 2002. However, on about 30 April 2002 Mr Jones was informed by Toga that the quotations were too expensive and it intended to use its own contractors. Thereafter it retained RNK Engineering Pty Ltd to do the work.

30 As at 30 April 2002 it remained AAK’s intention to proceed with the agreement and with the shop at No. 2 Lee Street.

31 During April 2002 AAK became increasingly dissatisfied with MBE concerning the availability of premises for other MBE centres. This dissatisfaction was expressed in Mr Limbert’s e-mail to Mr Streight of 1 May 2002, entitled “Promises not kept”.

32 In summary, the e-mail expressed anger and disillusionment with MBE for its lack of assistance in securing for Otrava further MBE territories in Sydney. Complaint was made that a proposed map of territory boundaries had not been provided. Further complaint was made that a meeting to finalise discussions on MBE territories available in the Sydney CBD had been abruptly cancelled. Relevantly, the e-mail included the following:

“Gordon, why do you keep making these promises and not keeping them?
I thought that as our Area Director we would have a close business relationship and that you would assist us to grow our business, which would obviously be beneficial to us, and to you with the 2 ½% royalties that you receive from us!! Have Assad and I made a mistake in believing this? At the moment we believe that we have.
We are now holding an offer to lease the premises at 273 George street (sic), which expires next Monday. If we have not signed the offer by then, we lose the premises. As we have been able to negotiate the lease down to $722 a square metre, I would hate to lose this opportunity.
Assad and I are holding 2 applications for new MBE franchises that we have intended to lodge with you. we (sic) cannot do so until you provide us with the information that we need concerning the CBD territory boundaries, so that we can make an informed decision.
We also need an undertaking from you that the set-up process for 273 George Street can be completed on deadline as the handover date for the site is 1st June, and rent is paid from 4 weeks after that. (we (sic) are more than willing and able to help expedite this process with you).
While I do not hold you personally responsible for the 8 weeks (up till now) worth of delays in the set-up of MBE Sydney Central, this must not be allowed to happen again.
On the face of it, it seems like we are being prevented from taking up extra territories in the city. If this is so, please let us know now so we can make other arrangements.
If this is not the case, I would appreciate your assurances that these delays and broken promises will not continue, and we can therefore repair any relationship that we have left and remotivate ourselves to pursue with MBE”.

33 Mr Streight responded by e-mail of 2 May 2002 in which he sought a meeting with Mr Limbert the next day. There was no evidence that the meeting took place.

34 On 6 May 2002 AAK, for Otrava, signed a tenant’s disclosure statement in respect of the letting of a shop at the Metcentre, 273 George Street, Sydney.

35 In their letter of 7 May 2002 Otrava’s solicitors, Napier Keen, informed Robert James as follows:

“We note our client has entered into a Franchise Agreement with your client, such agreement dated 11 January, 2002. The commencement of the Agreement pursuant to item 11 is a date being either
i. 30 days after the Franchisee completes the Training Program; or
ii. 4 months from the date of this Agreement; or
iii. The day the Franchised Business commences trading,
whichever is earlier.
The premises have not been fitted out in accordance with the fit-out arrangements that are being undertaken by your client and, as such, sub-paragraph ii in item 11 is the relevant date as to the date of the agreement; that date, therefore, will be 11 May, 2002.
We hereby put you on notice that if the premises are not ready for occupation by 11 May, 2002 our clients propose to terminate the agreement. If necessary, we propose to refer the dispute to Dispute Resolution in accordance with the terms of the Agreement, however, our client’s attitude will always remain as hereby expressed”.

36 In its letter to Exponential of 8 May 2002 Otrava advised its intention to terminate the agreement with MBE. It contained the following:

“I am writing to advise you and your client, TOGA of the extreme frustrations this company is having with both the MBE Corporate Office and the MBE Area Management.
Otrava Pty Ltd has advised the solicitors for the MBE Corporate Office that we intend to terminate Otrava’s franchise agreement with MBE as of 11th May, 2002.
Otrava Pty Ltd fully intends to honour it’s (sic) obligations to TOGA under its lease of shop 2 Henry Deane Plaza, 2 Lee Street, Sydney and commence trading with a Business Service Centre once the shop fit has been fully completed.
Our legal advice has been that our agreement with MBE is due to begin on the 11th of May 2002, and because MBE has not met its obligations by having the Business Centre ready for trading on that date, that our agreement with MBE is not binding. We had reasonable expectations that MBE was a professional organization that was capable of developing the Business Centre site in the 8 months since the agreement was signed, but this has not proven to be the case. We advise that as of 12th May 2002, neither MBE Corporate Office or it’s (sic) employees represent Otrava. We have retained DMS Shopfitters to complete the remainder of the shopfit (sic) (excluding Toga’s contribution as per the lease). The shopfit (sic) will be completed to the plans as approved by Toga and the Sydney City Council.

I have attached to this letter extra information detailing our frustrations in dealing with MBE Corporate Office which have led to our decision, information on our business strategy (including our other CBD sites under development) as well as the details of the team behind Otrava.
We acknowledge that the fitout (sic) delays are the fault of MBE Corporate and not Toga or Otrava Pty Ltd, and we have had no alternative but to take the action we have detailed in this letter.
We look forward to working with Toga to expedite the shopfit (sic) and would appreciate an acknowledgement of this fact in writing from Toga as soon as possible”.

37 Consistent with the terms of the letter was AAK’s evidence that at this time he intended that Otrava would commence trading as a business service centre from the shop upon completion of the fit out by someone other than MBE. He said that he did not want MBE to do the fit out because he thought it would take too long.

38 By their letter of 9 May 2002 Robert James replied to Napier Keen’s letter of 7 May 2002. Relevantly, it included the following:

“We refer to your correspondence of 7 May 2002 where you state that your client intends to terminate the Agreement if the premises are not ready for occupation by 11 May 2002. As discussed between our respective clients, the premises will not be ready for trading on that date. Whilst our client will effect the fit-out in connection with terms such cabinets, joinery, computer installation, etc, pre-fit-out works such as construction of the mezzanine level were not to be carried out by MBE. Delays in effecting the fit-out have occurred beyond our client’s control. It is for this reason that no specific timeframe is included in the Franchise Agreement in connection with completion of the fit-out.
…
Our client understands that your client is becoming frustrated with the process to fit-out the premises. Our client is equally frustrated and concerned. However, there are certain matters that are beyond the control of our respective clients. In this instance, the landlord is a large organisation and obtaining information from them and their consent can be a bureaucratic exercise.
We respectfully suggest that rather than your client unilaterally repudiate the Franchise Agreement, that an urgent meeting between the parties be convened to sort through the fit-out issue and any other issue your client wishes to raise”.

39 By their letter to Robert James of 9 May 2002 Napier Keen stated the following:

“Further to our correspondence dated 7th May last our clients advise that they have spoken to your clients (sic) principal and that he all but conceded that the premises will not be ready for occupation by the 11th May. That being the case we confirm our clients (sic) instruction that there is no alternate means to remedy the situation other than by a termination of the agreement”.

The letter also made demand for refund of monies paid by Otrava in the sum of $83,950.00 failing which action for recovery would be taken.

40 By letter of 10 May 2002 Napier Keen replied to the letter of 9 May 2002 from Robert James. It included the following:

“We do not accept that there are factors which are completely outside your client’s control in having these premises ready for occupation.
Our client is not interested in a meeting to reconsider fit-out issues. Our instructions are quite adamant that it proposes to terminate the Agreement and requires a refund of the moneys it has paid as set forth in our letter to you of the (sic) 9 May”.

41 By letter of 10 May 2002 Robert James responded to Napier Keen letters of 9 and 10 May 2002 as follows:

“We confirm your response that your client has no interest in meeting to reconsider the fit-out issues and wishes to repudiate the Agreement entered into.
In that situation, our client will have no option but to accept your client’s repudiation of the Agreement. Accordingly, our client is not required to refund monies paid in respect of the Franchise Fee, Start-Up Fee or any other fees paid. Our client has incurred considerable loss having ordered and paid for plant and equipment and other costs associated with the fit-out. Proceedings will be issued to recover those costs together with damages for loss of royalty”.

42 On about 13 May 2002 it was found that the drawings for the mezzanine were incorrect. Toga required Otrava to revise them and obtain certification. The problem concerned the mezzanine height level and compliance with the building code. On 17 May 2002 Toga advised Exponential that it was prepared to continue the building works on condition that Otrava, as tenant, was responsible for compliance with requirements as to floor to ceiling height. Mr John Cavassini, a civil and structural engineer, was requested by Mr George Nickolic of DMS Shop Fittings Pty Ltd (who had been retained earlier by AAK to advise in relation to the fit out) to redesign floor joists for the mezzanine level. This he did, and forwarded his advice and design plans to Mr Nickolic on 27 and 30 May 2002. These were sent to Exponential for Toga’s approval to enable construction to proceed.

43 In its fax dated 7 June 2002 to Otrava, Exponential confirmed Otrava’s advice that it would not sign off on the amended plans submitted by it for the shop fit out to be constructed by Toga’s contractor. It also referred to Toga’s claims for costs arising out of delays, for extra construction costs, and for lost rental.

44 By letter dated 12 June 2002 to Exponential Otrava stated its refusal to accept responsibility for the mezzanine level and asserted that the delays were caused by MBE resulting in frustration of Otrava’s efforts to proceed with the business.

45 From about July 2002 Otrava was in negotiation with Toga for surrender of the lease. In about August 2003 it was agreed that the lease be surrendered upon payment of rent until 30 June 2003.

The representations

46 The Plaintiffs rely upon conduct constituted by the aggregation of the representations said to have been made to AAK by Mr Jones in early June 2001 and by Mr Streight on 5 October 2001 which were misleading and deceptive, and were relied upon by AAK in deciding to enter the agreement.

47 The circumstances and terms of the conversation involving Mr Jones are set out in AAK’s affidavit sworn 17 June 2002 para 7 as follows:

“In early June 2001 I met with Mark Jones again and discussed a number of issues concerning the franchise. These issues included the various income sources for the franchise, the marketing approach and levies and what was involved in setting up the business. The month for commencing business as a Franchisee of MBE was important to me and Otrava. Conversation concerning this topic took place in words to the following effect:
AAK ““If we go down the path of proceeding with the franchise when would we be up and trading?”
Mr Jones “We will have all the paperwork out of the way by August and the site will be ready in December. Because of Christmas and the workforce taking annual leave, I think the best time to start would be January 2002. This is a quieter month and the onsite training would be a lot easier.”
AAK “What do we have to do to get the store up and running?”
Mr Jones: “Nothing at all. MBE puts all the pieces together and creates the business centre to the point where it is ready for trade and the keys are handed over. The $22,000.00 set up fee goes towards training, design and our involvement in the set up of the store.””

48 The Defendants accept AAK’s version and that it conveyed the pleaded representation that:

“MBE does everything necessary to enable the business centre to open and trade”.

49 The circumstances and terms of the conversation involving Mr Streight are set out in the same affidavit (para 12) as follows:

“In about late August 2001 I met with Gordon Streight over coffee at a Café in King Street, Newtown next to his MBE Shop there, and our conversation included words to the following effect:
Mr Streight “”It is my responsibility as your Area Manager to bring all the ingredients together to make an MBE Centre. We have the experience in putting things together quickly as we have selected suppliers who we know and trust to put together the different parts of the Centre, for example we use a particular cabinet maker for all the bench work, as he has all the specifications and the corporate colour scheme already noted. We use POSSE to provide us with the point of sale software, we use a particular mail box supplier, and so on. We know how to pull it all together, and in the fit out time we will get you and your staff trained, so that when we hand over the site you can commence trading. There is a pre-marketing plan I will work on with you, as well as a checklist of various things to make the opening run smoothly. We want people coming into the Centre from the first week of opening”.
AAK “That’s very good as it allows us to concentrate on the training.””

50 The Defendants accept AAK’s version and that it conveyed the pleaded representations that:

“(a) It is my responsibility as your area manager to do everything necessary to enable your business centre to open and trade.
(b) MBE has the experience in doing everything necessary quickly to enable a business centre to open and trade.
(c) MBE knows how to do everything necessary to enable a business centre to open and trade”.

It was also accepted that the conversation took place on 5 October 2001.

51 It was the Plaintiffs’ case that the words “ … everything necessary to enable the/your/a business centre to open and trade” would be reasonably understood to mean everything necessary to produce a suitable design for the fit out of the premises at 2 Lee Street, Sydney, engaging and directing a builder to construct or re-model the premises and generally developing the premises, physically to enable Otrava to open and trade by the commencement date defined by the franchise agreement. Thus, for example, the representation made by Mr Jones would be reasonably understood to mean that MBE would carry out the construction and installation of the mezzanine. It is alleged that, so understood, the representations were false because Toga, not MBE, was responsible for, and obliged to do, whatever was necessary for the mezzanine including its construction and MBE lacked the experience and knowledge to do so.

52 For the Defendants it was submitted that the representations would not be understood in the sense alleged. It was put that, reasonably understood, the representations referred to what was required for fitting out the business centre and making it ready to operate, which did not include construction work on the premises including that for the mezzanine. It was put that in the context in which each was made the representation was incapable of being misleading or deceptive, and was merely puffery. The conversations concerned MBE’s expertise in fitting out stores and preparing businesses for operation, and nothing about its involvement in construction work prior to fit out.

53 The effect of the submission as to the sense in which each representation should be understood is to recast it. Thus, for example, the Plaintiffs’ case proceeded on the basis that Mr Jones made a representation in the following terms:

“MBE does everything necessary to enable the business centre to open and trade including everything necessary to produce a suitable design for the fit out of its premises at 2 Lee Street, Sydney, engaging and directing a builder to construct or remodel the premises and generally developing the premises, physically to enable Otrava to open and trade by the commencement date defined by the franchise agreement”.

54 Accordingly, the primary question is whether the representations so formulated are reasonably capable of being conveyed by the words complained of, having regard to the circumstances in which they were uttered. The question is to be decided objectively. The court must make up its own mind as to whether the words spoken by Mr Jones and Mr Streight in the relevant conversations in fact conveyed the representations claimed.

55 The relevant test is as stated in Amalgamated Television Services Pty Ltd v Marsden (1998) 43 NSWLR 158 at p 166 per Hunt, CJ at CL:

“What must be emphasised is that it is the test of reasonableness which guides any court in its function of determining whether the matter complained of is capable of conveying any of the imputations pleaded by the plaintiff. In determining what is reasonable in any case, a distinction must be drawn between what the ordinary reasonable reader, listener or viewer (drawing on his or her own knowledge and experience of human affairs) could understand from what the defendant has said in the matter complained of and the conclusion which the reader, listener or viewer could reach by taking into account his or her own belief which has been excited by what was said. It is the former approach, not the latter which must be taken”.

See also FAI General Insurance Co Ltd v RAIA Insurance Brokers Ltd (1992) 108 ALR 479 at pp 494-496.

56 In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at p 199 Gibbs, CJ said:

“The conduct of a defendant must be viewed as a whole. It would be wrong to select some words or act, which alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading. It is obvious that where the conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave meaning to the particular words”.

57 The Plaintiff did not give any evidence as to the representations, or that he understood them in the sense referred to. Although such evidence is admissible, its absence is not critical to the question of meaning although it may be relevant to the question of reliance.

58 With regard to the conversation in early June 2001 the affidavit version of AAK is set out in para 47. In my opinion the words attributable to Mr Jones considered in context are not reasonably capable of conveying to a listener the pleaded representation recast to express the sense in which it was claimed it should be understood. Put another way, I find that a reasonable listener to the words spoken by Mr Jones would not have understood the pleaded representation in the sense claimed. This is because it is clear that the topic of conversation was the preparation of the business centre for opening and trading. In response to AAK’s questions Mr Jones, in general terms, explained MBE’s role in relation to this preparation. The statement “MBE puts all the pieces together and creates the centre to the point where it is ready for trade and the keys are handed over” would be reasonably understood to mean that MBE’s role for which the $22,000.00 set-up fee was paid was involvement in training, design and in the set up of the store. It is not reasonably open to conclude from these words that Mr Jones was representing that this involvement extended to the construction, remodelling and/or general development of the premises. The last mentioned, of course, are substantially different activities from those relevant to training, design, set up and fit out which would take place upon completion of any construction work. I do not accept that it could be reasonably understood that the $22,000.00 set up fee would also include building construction costs. From the words of the conversation it is apparent that the subject of construction did not arise and no reasonable listener could have taken Mr Jones to have been referring to it. I find that the representation as pleaded and made by Mr Jones was incapable of being understood in the sense alleged and, accordingly, this claim must be rejected.

59 For substantially the same reasons I have come to the same conclusion with respect to the representations made by Mr Streight. It is unnecessary to recite his words. In short, he explains his and MBE’s involvement in selecting appropriate suppliers for the installation of the various fittings required for the conduct of a business centre. He refers to staff training and pre-marketing for a smooth opening to trading. What was said, it may be assumed, was on the basis that the premises were ready for the fit-out stage. Nothing was said on the subject of building activity or construction work to be undertaken by him, MBE, or anyone else and no reasonable listener would have taken Mr Streight to have been referring to such activity. I find that the representations as pleaded and made by Mr Streight were incapable of being understood in the sense alleged, and accordingly these claims must be rejected.

60 Nevertheless it is appropriate that I consider whether the conduct of Mr Jones and Mr Streight in making the representations if understood in the sense alleged, was misleading or deceptive or likely to mislead or deceive, and whether AAK was thereby induced to make the agreement.

61 I am therefore required to consider the likelihood of a person in the position of AAK being affected by the conduct. Under s 52 the onus is on the plaintiff to show that the conduct is likely to mislead or deceive. Conduct which merely causes some uncertainty in the mind of the relevant person does not breach s 52 (Parkdale Custom Build Furniture Pty Ltd, pp 199, 209-211).

62 Furthermore, to obtain relief under the Act the Plaintiffs are obliged to prove that when AAK signed the agreement the infringing conduct operated as an inducement to do so.

63 Relevant to these considerations is the information about the proposed agreement provided to AAK, not only in meeting with Mr Jones and Mr Streight, but in documents he received and acted upon between early June and the execution of the agreement on 10 October 2001. The evidence included the following.

64 On 29 June 2001 the final draft of lease proposal was provided. It referred to the mezzanine as part of the lessor’s contribution under separate agreement, to commence upon lease execution after which fit out would take place. The distinction between mezzanine construction and fit out was made plain, and that Toga, not MBE, was responsible for it.

65 The franchise application contained a questionnaire, which AAK completed on 8 July 2001 and returned to MBE with the payment of a deposit of $1,500.00. Question 12 asked “Do you understand that you must make your own enquiries and get your own advice when considering this business opportunity?” He answered: “Yes”.

66 The franchise agreement instruction sheet given to AAK on 1 August 2001 was completed by him with information about Otrava as proposed franchisee relevant to the drafting of the agreement. He returned this to Robert James solicitors with a cheque for $1,750.00 on 2 September 2001.

67 On 31 August 2001 the agreement was sent to AAK. His evidence under cross-examination as to advice received and consideration given to its details is recorded (T pp 30-37) and need only be summarised. I find that he obtained independent legal and financial advice as to the terms of the agreement, made his own enquiries about it, and (as he said himself e.g. T p 81) it was ultimately his decision to go ahead, aware of the risks involved. The agreement included a statement that, before signing, the franchisee and the guarantors had received, read and had been given a reasonable opportunity to understand the relevant documents, and a statement that they had committed and received solicitor’s advice, and a similar statement as to advice from their accountant/taxation advisor as to the investment requirements and financial risks of entering the agreement. These were signed by AAK for Otrava and as a guarantor, and by the other Plaintiffs as guarantors. Also included and signed by them was a representation certificate which contained an acknowledgement to the effect that no representations made by MBE, its officers or agents had been relied upon which caused them to enter the agreement. Clause 35 of the agreement required completion of these documents. Clause 36.1 stated acknowledgment of the matters contained in them. This evidence is relevant to the question whether the Plaintiffs’ submissions that the conduct in fact was misleading or an inducement should be accepted (e.g. Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 46-048 at 53,146.

68 Particular reference should be made to provisions of the agreement concerning the extent of MBE’s responsibility for the development of the premises for trading. By cl 4.5.2 the franchisee appointed MBE its agent “ … to construct or re-model the Premises according to MBE’s Standards, including engaging and directing the builder”.

Under cl 4.5.3 the development costs were covered by the “Construction/Fit-Out Fee”. This fee also included costs of purchase and delivery by MBE of mail boxes and equipment required to commence operations (cl 5.1). It was defined to be “ … the costs of construction and fitting-out the premises in accordance with MBE’s standards”. MBE’s standards were defined to mean “ … the standards and specifications established by MBE as set out in this Agreement, the Operating Manual or otherwise notified to the Franchisee”. Schedule item 13 specified the components of the fee, sub-para (iii) of which required “ … the balance of the construction cost of the fit-out, Mail Boxes and Equipment required to commence operation of the Franchise Business … within 7 days of presentation of the final invoice”.

69 In my opinion the proper interpretation of these provisions inevitably leads to the conclusion that MBE’s obligation under cl 4.5.2 to construct or re-model the premises according to its standards for which the construction/fit out fee was payable, was limited to construction associated with the fit out stage and did not include construction associated with the structure of the premises at which the business was to be conducted. There can be no doubt, and I find, that AAK understood this to be so. Clause 4.4 required the franchisee to comply with the terms of the lease, and he was aware that the mezzanine was Toga’s responsibility to be the subject of separate agreement with him. In evidence, which I accept, he said that he understood that in order to get the shop going Toga had to complete the mezzanine after which MBE was to complete construction and fit out (T pp 44, 45).

70 On this evidence it is my opinion that, had AAK understood the representations in the sense claimed, it is implausible for the Plaintiffs to contend that any impression he gained as to MBE’s responsibility for the construction of the mezzanine would have survived his reading of the agreement and the other documents, and the advice he received prior to signing. This is because the evidence shows that by the time he came to sign the agreement he was well aware that MBE was not bound to do what it allegedly represented it would do, yet he nevertheless proceeded with it.

71 Also relevant are the attributes and position of AAK at material times. AAK impressed me, and I find him to be, a person of substantial commercial experience and acumen. He is a businessman well able to make a judgement as to where his best financial interests lie and is unlikely to make a commitment unless he satisfies himself that it is commercially advantageous to do. Having regard to his answers in the questionnaire in the franchise application this finding would come as no surprise. An example is question 4 which asked: “What do you feel has been your greatest accomplishment in your life?” to which he answered: “Building myself a multi-million dollar foundation from nothing, which has now made me financially independent and able to grow exponentially”.

Other examples are his attempt to postpone the date for payment of the franchise fee (schedule item 6), and to change the minimum gross sales figure from $15,000.00 to $25,000.00 per month. (Schedule item 17 and his evidence at T pp 78-81).

72 AAK also impressed me as a forthright person who would not have hesitated to protest in blunt terms to MBE and Messrs Jones and Streight if he truly thought he had been misled into a transaction adverse to his commercial interests. From the time he signed the lease with Toga until termination of the agreement in May 2001 there was always opportunity to protest that the delays were attributable to MBE’s failure to construct the mezzanine in breach of representations to him on which he relied if he believed that was the case.

73 However, there is no evidence that any such protest or complaint was made of such conduct. For example, nothing to this effect is in the e-mail of 1 May 2002 (paras 31 and 32 above), an occasion when if there was any truth in the claim it would be reasonable to expect it would have been therein referred to.

74 Significantly, in his affidavit of 17 June 2002 in which the conversations complained of are found, AAK omits to say that he understood the representations in the sense claimed, and upon such understanding relied in entering the agreement. No oral evidence to that effect was adduced at the trial. Had it, in truth, been the case that AAK had that understanding, and was thereby deceived into entering the agreement, there can be no doubt that as a person with the attributes I have described, he would have given evidence as to his understanding, reliance and inducement.

Conclusion

75 In the absence of evidence on the issue the Plaintiffs have altogether failed to prove that the representations were in fact understood by AAK in the sense claimed. Furthermore, if in fact the representations had been understood by AAK in the sense claimed, the evidence enables me to find that they lacked any potency to mislead or deceive, or to operate as an inducement to AAK to enter the agreement. In my opinion the whole of the evidence demonstrates that the claims that the Defendants’ conduct was in breach of s 52 of the Act have no foundation whatever, and must be rejected.

Frustration

76 The Plaintiff submits that the agreement was ended by frustration because of events which prevented performance of certain obligations within the stipulated time so as to render it radically different from what was originally undertaken under it. It was put that the event of frustration was the state of affairs which existed at 9 May 2002.

77 The situation at this time was that the mezzanine had not been completed. As construction was being undertaken by Toga it was said to be not within MBE’s control, and MBE was unable to indicate when it would be completed. It was AAK’s view that completion would not be for about six weeks. For the Plaintiffs this submission was put (T p 315):

”In those circumstances, it is simply open to Otrava to argue that the contract is frustrated if the day before or two days before the commencement date, the franchisor is saying that the construction is beyond its control and there is no commencement date that can be offered and that the premises will not be ready for trading on the commencement and isn’t saying anything more than that”.

At T p 318 it was submitted that:

“Even if the commencement date is 11 May I submit there is still a frustration if they say at that date they are unable to provide the premises; don’t give any time and say it is beyond their control. That is a frustration because it frustrates the purpose of the agreement. The franchisee cannot start trading and doesn’t know when it can. It is something altogether radically different from what was contemplated”.

78 It was also submitted that under the agreement it was MBE’s responsibility to construct the mezzanine, and that the requirements that MBE provide mail boxes and equipment by the commencement date (cl 5.1) and for Otrava to commence business on that date (cl 10.2) were essential conditions of the agreement.

79 Reliance was also placed on the explanation for delay stated in Robert James’ letter of 9 May 2002 (para 38) particularly statements to the effect that delays to the fit out had occurred beyond MBE’s control and that MBE shared Otrava’s frustration and concern.

80 For the Defendant it was submitted, in effect, that delay beyond 11 May 2002 did not operate to frustrate the agreement in that postponement of obligations as to delivery and commencement of business brought about no change to the substance of what was to be performed by the parties. It was put that strict compliance with the time requirements for the delivery and commencement of business was not essential to the agreement.

81 It was also put that the evidence demonstrated that by March 2002 the parties accepted that the construction of the mezzanine would be delayed, and from that time agreed that the shop would not be ready for trading until such time as construction and fit out were completed.

82 The Defendant further submitted that the complete answer to the frustration claim is in the agreement itself, namely cl 38 which relevantly provides:

“38.1 If by reason of Force Majeure, a party is unable to perform all or any of its obligations under this Agreement (not being an obligation to pay money and/or take out and maintain insurance) that party:
…
38.1.2 will be relieved of that obligation to the extent and for the period that they are (sic) so unable to perform;
…
38.3 If the Force Majeure continues for more than 90 days, the party entitled to call upon the performance of such obligation, may terminate this Agreement by giving 30 days notice to the other party”.

“Force Majeure” was defined to mean “anything which is not reasonably within the control of the party affected (e.g. natural disaster, strike, transportation delays, delays caused by government)”.

83 It was put that the clause is wide enough to meet the situation of delay complained of by the Plaintiffs, and indicates that the parties at the time of the agreement contemplated and provided for such a situation.

84 It was common ground that, as appears from schedule item 1, the date of the agreement was 11 January 2002 and the commencement date under schedule item 11(ii) was four months from the date of the agreement, namely 11 May 2002.

85 In Veremu Pty Ltd & Ors v Ezishop.net Ltd (in liq.) & Ors [NSWCA] 317 at para 3, Gyles JA summarised the relevant principles thus:

“It was common ground that frustration occurs when the law recognises that a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it a thing radically different from that which was undertaken by the contract: Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696 at 729 per Lord Radcliffe; adopted in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. In Davis Contractors Ltd v Fareham Urban District Council at 720-1 Lord Reid said that the task of the court is to determine on the true construction of the terms of the contract, read in the light of its nature and the relevant surrounding circumstances, whether the contract is wide enough to apply to the new situation. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 357 Mason J referred to frustration when the parties entered into the contract on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist and that common assumption proves to be mistaken, and at 360 his Honour stated the critical issue as whether the situation which had come about was fundamentally different from that contemplated by the contract on its true construction in the light of the surrounding circumstances. The question should be determined by regard to all these statements”.

86 Further, in Davis Contractors (pp 728-729) Lord Radcliffe said:

“So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.
…
The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for”.

87 Thus the critical issue is whether the situation resulting from the unlikelihood of the premises being ready for trading on 11 May 2002 is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances (Codelfa Construction Pty Ltd at p 360).

88 In exercising the judgment the court is required to make as to whether, having regard to all the circumstances, the delay in construction of the mezzanine which prevented compliance by MBE with cl 5.1 and by Otrava with cl 10.2 on or before 11 May 2002 has brought about the frustration of the agreement, it is necessary to turn to it. As Lord Reid and Lord Radcliffe have pointed out, frustration depends upon the true construction of the agreement read in light of the relevant circumstances existing when the contract was made, and the events which have since occurred.

89 In my opinion, on its proper construction, cl 38 is wide enough to apply to the situation of delay complained of. A force majeure is defined as anything not reasonably within the control of the party affected. The examples included illustrate the contractual intention that the qualification of the relevant event is limited only to that which is not reasonably within the control of the party affected. It seems to be common ground that delay in mezzanine construction with consequential postponement of commencement of trading was something not reasonably within the control of the parties. Accordingly, it was open to Otrava to invoke cl 38 so as to be relieved of its obligation to commence business until completion of construction and fit out. It chose not to do so. In such circumstances the doctrine of frustration does not apply.

90 Furthermore, in my opinion, upon the proper construction of the agreement as a whole it cannot be said that performance of the obligation to deliver under cl 5.1, or to commence business under cl 10.2, on or before the commencement date was essential to performance of the agreement. I reject the Plaintiffs’ submission that these were “time of the essence” conditions non-compliance with which would bring the agreement to an end or entitle an innocent party to rescind.

91 I find on the evidence that, by their conduct from March until Napier Keen’s letter of 7 May 2002 the parties proceeded on the basis that the fit out, including delivery of mail boxes and equipment, would not happen until after construction of the mezzanine by Toga’s builder. So proceeding, of course, was to act with regard to the terms of the lease and of the agreement. I also find that it was foreseeable by the parties that in these circumstances there was always a risk of delay in construction which would postpone the commencement date. Support for this finding includes AAK’s evidence (T pp 44, 45) that as at early May 2002 he accepted that the time for MBE to deliver the mail boxes and to fit out did not arise until after the mezzanine had been installed. It may thus be inferred that it was accepted, at least by then, that the shop would not be ready for trading by the time specified and that the commencement date should necessarily be postponed until actual completion of the fit out. That this was the reality was acknowledged by counsel for Otrava when he stated (T p 311) that he could not submit the agreement was frustrated earlier than May 2002 and that there was a waiver or acquiescence for a period of time when the premises were not ready by February.

92 Nothing in the evidence suggests that delay in the work and postponement of trading pending completion was extraordinary, or rendered performance of the agreement impossible, or in any relevant way altered the situation of the parties, radically or otherwise or, in Lord Radcliffe’s words, “changed the face of things”. As His Lordship observed, it is not hardship or inconvenience or material loss itself which calls the principles of frustration into play.

93 Although delay might prevent use of the shop for the purpose of the agreement until completion of construction work and fit out with resultant inconvenience and loss of trading it is not enough to attract the doctrine of frustration. Accordingly, when all the circumstances are considered, the fact that the mezzanine and fit out would not take place until some weeks after 11 May 2002 did not bring about the frustration of the agreement.

94 Furthermore, I find that the agreement was brought to an end not by the alleged frustrating event but by Napier Keen giving the letters of 7, 9, and 10 May 2002 which led to its termination. These letters, and Otrava’s letter to Exponential of 8 May 2002 (para 36) support the conclusion that the underlying explanation for proceeding with the claim is to be found in AAK’s personal frustration and impatience at the delay rather than as a result of consideration of the relevant legal principles. The case on frustration must be rejected.

Third count

95 Otrava claims a declaration that it lawfully terminated the agreement pursuant to cl 4.2 thereof. Put another way, it claims that by the letters from Napier Keen of 7, 9 and 10 May 2002 Otrava did not repudiate the agreement.

96 Otrava’s claim is to meet MBE’s contention as evidenced in the letters from Robert James of 10 and 27 May 2002 that the effect of the letters of 7, 9 and 10 May 2002 was to repudiate the agreement, acceptance of which repudiation entitled MBE to terminate it. In other words, Otrava contends that Robert James wrongly took Napier Keen’s letters to be repudiatory of the agreement.

97 In support of its claim Otrava submits that because the shop could not be, or was not, fitted out before the commencement date it follows that suitable premises had not been found on or before that date within the meaning of cl 4.2. It was put that under this clause either party was entitled to terminate the agreement by giving notice to the other, in which case the agreement would be at an end.

98 Relevantly, cl 4.2 provides:

“4.2 Premises
If Premises have not been secured before this Agreement is signed, MBE and the Franchisee must use their best endeavours to find suitable Premises from which the Franchisee may conduct the Franchised Business on or before the Commencement Date. If MBE and the Franchisee are unable to find suitable Premises on or before the Commencement Date, then either party may terminate this Agreement by giving notice to the other, in which case:

4.2.1. this Agreement will be at an end; and

4.2.2. subject to the Franchisee complying with its obligations under Section 26 which MBE reasonably requires, MBE will refund to the Franchisee all money paid to MBE on account of the Franchise Fee, less an amount equal to $6,000.00 plus an amount to cover MBE’s reasonable legal costs in relation to the termination of this Agreement under this Clause”.

99 The submission was that the letter of 7 May 2002, and also the letters of 9 and 10 May 2002, should be construed as such a notice.

100 In my opinion the claim is without substance and must be rejected for reasons which may be briefly stated.

101 Firstly, as a matter of construction of cl 4.2 in context with the remainder of the clause, it is clear that it was not intended that it was necessary that the premises be fitted out for the conduct of the business in order to meet the description “suitable”. It is plain from cl 4.5 that once suitable premises had been found development by way of construction, remodelling, and fit out would then take place.

102 The evidence in this case proves beyond argument, and I find, that the premises, being the shop which was leased by Otrava from Toga on 4 February 2002, were suitable premises within the meaning of cl 4.2, and hence there was no entitlement to terminate. Indeed, Otrava’s submissions to the contrary are in the teeth of its letter to Toga of 8 May 2002 in which its proposal is predicated on acceptance that the shop was suitable for the purpose.

103 Secondly, it is inconceivable that any of the letters of 7, 9, 10 May 2002 from Napier Keen could be rationally understood, either separately or together, as a notice of termination under and for the purposes of cl 4.2. The letters state in blunt and unequivocal terms Otrava’s intention to terminate the agreement because the shop would not be ready for occupation by 11 May 2002. Having regard to the circumstances in which they were written Robert James’ conclusion that the letters stated Otrava’s intention to abandon and be no longer bound by the agreement was entirely reasonable and, in my opinion, correct and I so find. MBE was entitled to accept Otrava’s repudiation and thereupon terminate the agreement. This it did by Robert James’ letter to Otrava of 10 May 2002. Furthermore, in the circumstances MBE was entitled to regard these letters as evidence of Otrava’s abandonment of the business or relationship which entitled it to terminate the agreement under cl 25.3.3 by the letter of 10 May 2002.

Fourth count

104 Otrava claims a declaration that it terminated the agreement by reason of breaches by MBE of cl 4.5.2 and cl 5.1 thereof. It alleges that in breach of cl 4.5.2 MBE failed to fit out the shop, and in breach of cl 5.1 it failed to deliver mail boxes and equipment required for the commencement of trading. It claims by Napier Keen’s letters of 7, 9 and 10 May 2002 it lawfully terminated the agreement and is entitled to damages.

105 Clause 4.5.2 provides:

“MBE to Develop Premises
The Franchisee appoints MBE as its agent to construct or re-model the Premises according to MBE’s Standards including engaging and directing the builder”.

Clause 5.1 requires MBE to deliver mail boxes and equipment required to commence operation of the business on or before the commencement date.

106 The circumstances concerning the fit out and non-delivery have already been referred to at length in these reasons. I have earlier expressed my view as to the proper construction of cl 4.5.2 (paras 68, 69) which is that MBE’s obligation was limited to construction associated with the fit out stage and did not include construction associated with the structure of the premises at which the business was to be conducted. So understood, the evidence did not prove that MBE was in breach of this provision and I so find. What the evidence does show is that the occasion for fit out had not arrived and time was not of the essence. The same may be said in respect of the obligation to deliver under cl 5.1: the shop was not ready to receive the mail boxes and equipment and time was not of the essence. The evidence supports MBE’s submission that it intended to carry out the fit out when it was timely to do so but the agreement was terminated before it could.

107 In the circumstances the grounds relied upon for this claim are entirely unsupported by the evidence. In my opinion the claim is without substance and must be rejected.

Fifth count

108 Otrava claims a declaration that it terminated the agreement pursuant to cl 4.2. As I understand Otrava’s submission, it was that, because the business could not be conducted from the shop as at the commencement date, the premises were not suitable within the meaning of cl 4.2 and thus Otrava was entitled to terminate the agreement. I reject this claim for the same reasons given for rejection of the third count.

Conclusion

109 I have found that by Napier Keen’s letters of 7, 9 and 10 May 2002 Otrava repudiated the agreement which was terminated upon MBE’s acceptance by Robert James’ letter of 10 May 2002.

110 I have held that Otrava has failed to establish any of the grounds in support of its various claims for relief. Accordingly, I propose to dismiss the further, further amended statement of claim filed 20 July 2004.

MBE’s claims (No. 3249/02)

111 It having been found that the agreement was terminated following its repudiation by Otrava, MBE claims in these proceedings:

(i) the sum of $1,100.00 for a fee for training;

(ii) the sum of $28,618.33 being the balance of monies payable as the construction/fit out fee under cl 6.1.3, cl 6.10 and schedule item 13 of the agreement; and

(iii) damages for past and future loss of opportunity to earn a royalty and the marketing fee.

112 Several terms of the agreement are relevant to these claims. Clause 26.1.9 provides that on termination of the agreement Otrava is to pay all money owing to MBE. Clause 26.3 provides that on termination Otrava will not be entitled to any rebate or refund of any money paid by it to MBE in respect of various fees including the construction/fit out fee (cl 26.3.1), or to any compensation for any loss suffered resulting from termination of the agreement. Clause 26.4 provides that termination will not relieve Otrava or the guarantors of their respective obligations to pay any money due under the agreement.

113 By cl 20.1 the guarantors guarantee to MBE payment of all money payable by Otrava, and indemnify MBE in respect of any failure by Otrava to make any payment or perform any of its obligations under the agreement. The guarantee and indemnity continues until satisfaction of all the guarantors’ obligations under the agreement.

114 As for the training fee, MBE claims $1,100.00 (including GST of $100.00) as a fee payable for training undertaken by Mr Dennis Limbert in April 2002 as envisaged in schedule item 12. The evidence establishes, and I find, that Mr Limbert undertook the training, that MBE’s tax invoice dated 27 March 2002 for $1,100.00 for this fee remains unpaid, and that Otrava is liable to MBE for this amount. Accordingly this claim is upheld.

115 As for the construction/fit out fee, schedule item 13 required payment of two instalments each of $30,000.00 within specified times. The first instalment of $33,000.00 (including GST of $3,000.00), although payable on 18 December 2001, was paid by Otrava on 15 March 2002. The second instalment of $33,000.00 (including GST of $3,000.00) was payable on 1 January 2002. On 15 March 2002 Otrava paid the sum of $4,381.67 leaving unpaid the sum claimed, namely $28,618.33.

116 For the Plaintiff it was submitted that no award would be made because it had not been shown that MBE had in fact suffered loss or damage in the amount claimed as a result of Otrava’s failure to pay the balance of this fee. The short answer is that it was a debt due and payable under the agreement (cl 6.1; cl 26.4), and I hold that Otrava is liable to pay it.

117 As for loss of opportunity, MBE claims recovery of damages for past and future loss of the opportunity to earn the royalty and marketing fee had Otrava commenced trading from the shop and had continued to trade for the ten year term of the agreement.

118 Under cl 6.3 the franchisee is obliged to pay the marketing fee and the royalty as set out in the schedule. Schedule item 14 sets the marketing fee at an amount equal to 2% of gross sales for each month calculated and payable monthly by 4pm on the tenth day of the following month by Otrava to MBE. Schedule item 15 sets the royalty at an amount equal to 6% of gross sales for each month calculated and payable in terms similar to those applicable to the marketing fee. In schedule item 17 the amount for the minimum gross sales is $25,000.00 per month averaged over any quarter. (As earlier noted, the minimum gross sales figure was $15,000.00 but this was changed to $25,000.00 by AAK). The item also provides for a pro rata adjustment to be made on the first and/or last month where the business does not commence on the first day or end on the last day of a month. The minimum gross sales figure is to be adjusted on each anniversary of the commencement date in accordance with movements in the consumer price index. By cl 21.1 Otrava was required to achieve minimum gross sales from the business during the term, which obligation was to become operative six months after the business opened for trade.

119 Otrava submitted that it was not liable for damages for the lost marketing fee on the basis that under cl 17 MBE had agreed to deposit the fee in a marketing fund from which was to be paid the costs of promotion of MBE’s business generally, with consequential benefit to Otrava. It is unnecessary to recite cl 17 except to note that by cl 17.6 Otrava acknowledged that marketing fees are paid as part of the ongoing consideration for the franchise and that there is no trust created in respect of the payment by Otrava of those fees, and that under cl 17.2 MBE’s use of the fund was to be at its sole discretion for the benefit of its business. In my opinion the effect of cl 17 makes plain that the loss of the opportunity to be paid the marketing fees under the agreement is a loss properly recoverable from Otrava.

120 It also submitted that the claims should be rejected on the ground that MBE had a duty to mitigate its loss and failed to do so. In my opinion the evidence does not establish that there was any reasonable prospect of a substitute franchisee being found which was ready and able to conduct the franchised business from the shop within a reasonable time after May 2002. Furthermore, I accept Mr Streight’s evidence that the loss of Otrava resulted in an absolute loss of the royalties and marketing fee, which would have been received from that franchise because even if a new franchisee was obtained there was another available area for it.

121 Assessment of this component of the claim involves the exercise of a wide discretion. The court is not constrained by narrow limitations and is required to do the best it can despite any lack of specific evidence. Assistance is to be had from the analysis of the cases by Heydon, JA (as he then was) in State of NSW v Moss [2000] NSWCA 133 at paras 67-87 from which His Honour concluded that (para 87):

“87. … The task of the trier of fact is to form a discretionary judgment by reference to not wholly determinate criteria within fairly wide parameters. Though the trier of fact in arriving at the discretionary judgment must achieve satisfaction that a fair award is being made, since what is involved is not the finding of historical facts on a balance of probabilities, but the assessment of the value of a chance, it is appropriate to take into account a range of possible outcomes even though the likelihood of any particular outcome being achieved may be no more than a real possibility … ”.

122 In this case the assessment of an award requires the determination of the likely amount of minimum gross sales which would have been achieved as well as the likely period during which Otrava would have conducted the business under the agreement. It requires allowance for vicissitudes or contingencies and to reflect the chance that factors unconnected with the termination of the agreement might have precluded Otrava conducting the business and achieving minimum gross sales of $25,000.00 per month for the whole term.

123 Relevant to these issues is the evidence as to what was likely to happen had Otrava performed the agreement. It shows that it was AAK’s intention that Otrava would trade as a franchisee in accordance with the terms of the agreement. As earlier observed, he is an experienced and successful businessman. He made a considered judgement that minimum gross sales in the amount of $25,000.00 per month was achievable and altered the draft agreement accordingly. There is ample support for the finding that it was well within Otrava’s capacity to make a commercial success of the franchise business, and that it is probable that it would have continued with it for the term, or at least for as long as it was commercially advantageous to do so.

124 Also relevant is the evidence of Mr Jones and Mr Streight, which I accept, to the effect that the shop, near Central railway station, was in a good location in a busy area close to Sydney’s central business district. I also accept their evidence that the average monthly gross sales achieved by MBE franchisees in Australia in recent years is about $21,300.00.

125 In my opinion the fair amount to allow for minimum gross sales per month is $21,000.00. It is slightly in excess of the mid point between the figure included in the draft ($15,000.00) which, it might be assumed, was fixed by MBE based on its overall experience as to what could be reasonably achieved in the location and the agreed figure ($25,000.00) as proposed by AAK, but without the backing of relevant experience. It is also a figure consistent with what was said to be the average. According to Mr Streight’s evidence and confidential exhibit 2, a deduction of 10% should be made to take account of gross business receipts from sales, e.g., of Australia Post products, in respect of which royalty is not payable. Thus the figure in this case upon which the calculation of the lesser of the combined royalty and marketing fee at 8% should be based is $18,900.00. (This was referred to in evidence as the “subject to royalty” figure).

126 It is common ground that account should be taken of the cost to MBE of administration of the franchise in the sum of about $50.00 per week, say $200.00 per month.

127 It is common ground that the discount rate of 3% is appropriate for present value of future loss. I take the discount rate of 15% to be appropriate for allowance for contingencies or vicissitudes (State of NSW, para 31).

128 On the evidence I find it probable that the shop would have been ready for the commencement of business in about September 2002. In assessing the amount for loss of opportunity to the royalty and the marketing fee from that time until the present (December 2004) I take into account the likelihood of the lapse of several months before minimum gross sales would be to the order of $21,000.00 per month. Taking into account all relevant considerations I find that MBE is entitled to damages for the past loss of opportunity to be paid a royalty and marketing fee in the amount of $26,000.00.

129 With respect to the loss of opportunity to be paid a royalty and marketing fee from January 2005 until expiry of the term of the agreement I find that MBE is entitled to damages in the amount of $97,000.00.

Costs of the interlocutory proceedings (No. 3249/02)

130 Following the collapse of settlement discussions between the parties, by letter to Napier Keen of 17 June 2002 Robert James demanded by 5pm the next day delivery up of intellectual property relating to the franchise, and payment of money owing to MBE under the agreement, and undertakings not to exploit MBE’s intellectual property and to comply with the covenants in cl 19.2 of the agreement failing which immediate application would be made for injunctive relief. There was no response within the time specified.

131 On 21 June 2002 MBE filed the summons in these proceedings claiming relief as foreshadowed. Thereafter there was correspondence between the solicitors for the parties and Otrava agreed to deliver up certain intellectual property of MBE.

132 By letter to Napier Keen dated 27 June 2002 MBE’s solicitors advised, inter alia, of the intention to press for interlocutory and final relief claimed in paras 5 and 9 of the summons to restrain Otrava and the other Defendants from involvement in any way in a business in competition with MBE, and sought appropriate undertakings to enable consent orders to be made. By letter dated 28 June 2002 Napier Keen advised of the Defendants’ refusal to give the undertakings.

133 It is unnecessary to recite all of the ensuing correspondence which is in Exhibit 6 and which preceded the filing of MBE’s notice of motion on 13 August 2002. The undertakings were not provided. Consequently by letter dated 23 August 2002 MBE’s solicitors advised of the intention to proceed on 26 August for the foreshadowed interlocutory orders.

134 On 26 August 2002 MBE’s notice of motion came before the court and, after negotiations, orders were made by consent by Mr Justice Austin in terms of the minutes of that day. In summary, Otrava and other Defendants undertook not to be involved in any way in Leveraged Business Service Centres Pty Ltd or in any business conducted by that company at the Metcentre until final determination of the proceedings between the parties or until 10 May 2004, whichever first occurred. Costs were reserved.

135 MBE seeks an order for costs of the interlocutory proceedings against the First to Fourth Defendants. The proceedings were discontinued against the Fifth and Sixth Defendants and no costs order is sought against them.

136 In my opinion the proper exercise of discretion to recognise the justice of the case is to make the order for costs which MBE seeks. The whole of the evidence demonstrates that MBE was entitled to make the demands and seek the relief claimed in the summons. The correspondence shows that reasonable opportunity was afforded the Defendants to comply with those demands and thereby avoid the proceedings which led to the orders made on 26 August 2002.

137 Alternatively, had costs not been reserved and the issue argued before the court on 26 August 2002 it would have been open for His Honour to have ordered that costs be costs in the cause, an order which is not uncommon in similar cases. The consequence of such an order would be that in accordance with the usual practice costs would follow the event at the end of the final proceedings. Had I been asked to determine the question at that time it is probable that, in the circumstances, I would have made such an order.

Conclusion

138 For the above reasons I propose the following:

(1) In No. 3514/02 the further, further amended statement of claim be dismissed with costs.

(2) In No. 3249/02:

(i) a declaration that MBE has, by letter dated 27 May 2002 validly terminated the franchise agreement between it and the First, Second, Third and Fourth Defendants dated 11 January 2002;
(ii) that MBE is entitled to recover from the Defendants:
(a) $1,100.00 for the training fee;
(b) $28,613.00 for the balance of the construction/fit out fee;
(c) $26,000.00 for past loss of opportunity to be paid a royalty and marketing fee;
(d) $97,000.00 for the loss of opportunity to be paid a royalty and marketing fee from January 2005 until expiry of the term of the agreement;
(iii) that the Defendants pay MBE’s costs of the proceedings which include the costs of the interlocutory proceedings.

139 In the circumstances it is appropriate that the parties be given the opportunity to consider whether there is any distinction to be made between Otrava and the guarantors, and questions as to interest and costs before the matter is finalised. I would expect the parties to reach agreement on these matters in light of these reasons, in which case short minutes should be prepared. If agreement cannot be reached the matter may be re-listed by arrangement with my Associate before 5pm 15 December 2004.

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Last Modified: 12/17/2004