Pilton Holdings Pty Ltd (ACN 107 903 104) v Essential Beauty Franchising WA Pty Ltd (ACN 108 421 192) (No 2) - [2015] SASC 172

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
PILTON HOLDINGS PTY LTD (ACN 107 903 104) & ANOR v ESSENTIAL BEAUTY FRANCHISING WA PTY LTD (ACN 108 421 192) (No 2)
[2015] SASC 172
Judgment of The Honourable Justice Sulan
30 October 2015
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA - STAY OF PROCEEDINGS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
This is an application in respect of a judgment of the Supreme Court, upheld on appeal by the Full Court. Judgment was entered in favour of the respondents, in the amount of $272,494.68. An application for special leave to appeal to the High Court has been made by the applicants in this proceeding. A stay of enforcement and operation of judgment is sought by the applicants.
If a stay application is refused, Forrest will likely be declared bankrupt, and Pilton will be wound up. Therefore, ultimately Pilton and Forrest will likely be denied an opportunity to have their High Court application decided. This constitutes exceptional circumstances.
No prejudice will result to the respondents other than delay and inability to execute judgment. The respondents will suffer no material prejudice if the stay is granted.
The balance of convenience lies in favour of the applicants.
Held (allowing the application):
1. A stay of proceedings is granted.
2. The stay is subject to an undertaking from Pilton and Forrest that they will not deal directly or indirectly with any assets of Pilton or Forrest pending determination of the special leave application.
Jennings Constructions ltd v Burgundy Royale Investments Pty Ltd (1986) 161 CLR 681; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148; Pilton Holdings Pty Ltd v Essential Beauty Franchising (WA) Pty Ltd [2015] SASCFC 88, considered.

PILTON HOLDINGS PTY LTD (ACN 107 903 104) & ANOR v ESSENTIAL BEAUTY FRANCHISING WA PTY LTD (ACN 108 421 192) (No 2)
[2015] SASC 172
Civil: Application
SULAN J.
Introduction

This action involves inter alia the interpretation of a franchise agreement. After a trial before a Judge of this Court, it was determined that Essential Beauty Franchising WA Pty Ltd (“EBF”) the first respondent, the franchisor, was entitled to terminate a Master Franchise Agreement (“the Agreement”) to which it and the first appellant (“Pilton”) were the parties.
It was held that EBF was entitled to judgment in the amount of $272,494.68 (inclusive of interest) as against Pilton and Pilton’s director, Angus Alexander Forrest (“Forrest”). Forrest was the guarantor of Pilton’s obligations under the Master Franchise Agreement.
The trial Judge concluded that, had he found that EBF wrongly terminated the Agreement, its action would have amounted to a wrongful repudiation. In this event, the first appellant’s counterclaim for damages was to be assessed in excess of $2 million.
Pilton and Forrest sought a stay of the judgment pending appeal to the Full Court. Nicholson J granted the stay. I adopt his concise summary of the litigation:[1]
On 30 June 2014 following a lengthy trial, a Judge of this Court delivered judgment in favour of the respondents and dismissed the first appellant’s counterclaim. The judge held, inter alia, that the first respondent (as Master Franchisor) was entitled to terminate the Master Franchise Agreement to which it and the first appellant (as Master Franchisee) were parties. It was also held that the first respondent was entitled to judgment in the amount of $272,494.68 (inclusive of interest) as against both the first appellant and the second appellant (as guarantor of the first appellant’s obligations under the Master Franchise Agreement). However, the Judge went on to find that had he found the first respondent to have wrongfully terminated the Master Franchise Agreement, its actions would have amounted to a wrongful repudiation and, in this event, the first appellant’s counterclaim for damages was to be assessed at something in excess of $2M.
[1] Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [1].
Pilton and Forrest appealed. On 30 June 2015, the Full Court dismissed the appeal. Kourakis CJ, with whom Vanstone and Lovell JJ agreed, concluded that EBF was entitled to terminate the Agreement. He held that Pilton had failed to comply with directions given to it by EBF in respect of training, benchmarking and advertising.
Pilton and Forrest have applied to the High Court for special leave to appeal against the judgment of the Full Court. They are now unrepresented. Forrest has been granted leave to represent Pilton. The Notice of Appeal to the High Court contends that the Full Court erred in concluding that EBF was entitled to terminate the contract for breach of Clause 22. Clause 22 of the Agreement provides that if the Master Franchisee breaches a term of the Agreement and the franchisor proposes to terminate the Agreement and the franchisor gives reasonable notice advising of the breach and of it its intention to terminate the Agreement and the Master Franchisee fails to remedy the breach, then the franchisor is entitled to terminate.
The underlying dispute which led to the direction being given related to Pilton’s refusal to comply with a direction which, in effect, required Pilton to circulate a list of approved products and suppliers to all of Pilton’s franchisees, which list was prepared by EBF, and which met standards set by EBF.
There was a further direction that Pilton direct Forrest to attend training at EBF’s premises in Adelaide by a given date and given time. Pilton refused to comply with that direction. Kourakis CJ concluded that that direction was unreasonable. He concluded that Pilton could have chosen an appropriate agent of its choice to attend the training sessions, rather than Forrest having to do so. However, Kourakis CJ determined that it was reasonable to direct Forrest to attend training in respect of benchmarking and marketing.
A further direction was given which required Pilton to produce to EBF copies of all advertising placed by Pilton over the past 12 months.
The trial Judge found that the failure to comply with the directions to produce copies of advertising placed with potential franchisees did not constitute a sufficiently serious breach as to entitle EBF to terminate. However, the Judge found that the failure to remedy the breach within 30 days after service of the breach notice entitled EBF to terminate in accordance with Clause 22 of the Agreement.
The Full Court concluded:[2]
The Judge found that clause 22 rendered a failure to remedy a breach of another clause after reasonable notice has been given in compliance with clause 22.1 a breach of an essential term. That construction of clause 22 was not contested on appeal. It follows that Essential Beauty WA was entitled to terminate for Pilton’s breach of clause 22 by failing to remedy its non-compliance with the training benchmarking and advertising directions.
[2] Pilton Holdings Pty Ltd v Essential Beauty Franchising (WA) Pty Ltd [2015] SASCFC 88 at [96].
The Notice of Appeal contends that the Full Court was in error in concluding that EBF was entitled to terminate Pilton pursuant to Clause 22 on the basis that Pilton’s breaches, if any, were trivial and, in issuing a breach notice pursuant to Clause 22 for what it contends amounted to trivial breaches, the result was that non-essential terms are treated as essential terms of the Agreement. It is contended that the interpretation of Clause 22 is of wide‑reaching importance because terms the same as, or similar to, Clause 22 exist in most, if not all franchise agreements. If franchisors can transform non‑essential terms into essential terms, it will have far-reaching effects upon franchisees’ businesses generally.
Counsel for EBF contends that the appeal is not reasonably arguable and Pilton and Forrest have little chance of obtaining special leave to appeal. Therefore, the application for a stay should be refused.
The factors to which the Court should have regard in determining whether to grant a stay of proceedings in respect of an application for special leave to the High Court were considered in Jennings Constructions Ltd v Burgundy Royale Investments Pty Ltd.[3] Brennan J observed that a stay to preserve the subject matter of litigation pending an application for special leave to appeal is an extraordinary jurisdiction and exceptional circumstances must be shown before its exercise is warranted. He said:[4]
In exercising the extraordinary jurisdiction to stay, the following factors are material to the exercise of this Court’s discretion. In each case when the Court is satisfied a stay is required to preserve the subject matter of the litigation, it is relevant to consider: first, whether there is a substantial prospect that special leave to appeal will be granted; secondly, whether the applicant has failed to take whatever steps are necessary to seek a stay from the court in which the matter is pending; thirdly, whether the grant of a stay will cause loss to the respondent; and fourthly, where the balance of convenience lies.
[3] (1986) 161 CLR 681.
[4] (1986) 161 CLR 681 at 685.
Since judgment was entered in the Full Court, EBF has issued a bankruptcy notice against Forrest and a winding up notice against Pilton.
A further hearing of the creditors’ petition is set for 2 November 2015. The winding up petition has been adjourned to be further considered on 24 November 2015.
The application for leave to appeal to the High Court and the supporting written argument have been lodged at the High Court Registry. That application will be heard in private on the papers. The High Court Registry has advised that it is most likely to be determined in February/March 2016.
If the stay application is refused, then it is likely that Forrest will be declared bankrupt and Pilton will be ordered to be wound up before determination of the application by the High Court. In those circumstances, the liquidator of Pilton and the trustee-in-bankruptcy of Forrest will be required to consent to the matter continuing. It is accepted by EBF that that consent is unlikely to be obtained. The application would then lapse.
Counsel for EBF conceded that if the stay were granted, then no prejudice will result, other than a delay and the inability to execute the judgment. Counsel accepted that, if special leave is refused, Pilton and Forrest will be unable to meet the judgment debt and it is almost inevitable that liquidation and bankruptcy will follow.
The only concern expressed by counsel was that if there are assets which may be available, Pilton or Forrest could, during the delay period, take steps to make it more difficult, perhaps impossible, for EBF to successfully execute its judgment against assets that may presently be available for that purpose. As was conceded by counsel, that is a minimal risk in this case.
The applicants must establish exceptional circumstances before a stay will be granted. If I refuse the application, then the application for special leave will almost inevitably be rendered nugatory. Pilton and Forrest will, therefore, be deprived of an opportunity to have the High Court decide their application. There is no dispute that Pilton and Forrest have prosecuted the application in a timely manner.
I accept EBF’s submission that the prospects of success of the application for special leave are not high. However, there is no immediate prejudice to EFB if a stay were granted. The exceptional circumstance is that, if the applicants are declared insolvent, the applicants will be deprived of obtaining a decision from the High Court of their application for special leave. If special leave were obtained and their appeal was successful, the applicants would be entitled to substantial damages.
The balance of convenience lies in favour of the applicants.
In the circumstances, I grant a stay of the proceedings. The stay is to be granted subject to an undertaking from Pilton and Forrest that they will not deal directly or indirectly with any of the assets of Pilton or Forrest pending the determination of the application for special leave.
Subject to that undertaking being given, I order that the enforcement and operation of the judgment entered on 30 June 2014 in favour of EFB against Pilton and Forrest be stayed pending the outcome of the application for special leave to appeal to the High Court, filed on 27 July 2015.