Pilton Holdings Pty Ltd v Essential Beauty Franchising (WA) Pty Ltd - [2015] SASCFC 88

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
PILTON HOLDINGS PTY LTD & ORS v ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD
[2015] SASCFC 88
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Vanstone and The Honourable Justice Lovell)
30 June 2015
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
The respondent, franchisor of the Essential Beauty business in Western Australia, sought at trial a declaration that it had validly terminated a master franchise agreement with the appellant.
The appellant was granted a master franchise agreement for Western Australia with the respondent in 2004. In 2010 the appellant purported to direct the Essential Beauty franchisees in Western Australia as to approved products and suppliers. The respondent disputed that the appellant had the power to so direct the franchisees under the master franchise agreement and issued directions for the appellant to withdraw all lists of approved products and suppliers. The appellant refused to comply with the notices and the respondent terminated the master franchise agreement.
The respondent brought proceedings to a single judge of this court for a declaration that the contract was validly terminated, and other associated remedies. At trial the judge found that the contract was validly terminated, the respondent had the role of approving products and suppliers, and that the respondent validly terminated the agreement when the appellant failed to comply with proper directions.
The respondent issued a direction to the second appellant requiring him to personally attend certain instructional classes in Adelaide. The trial judge determined that such a direction was unreasonable.
The appellant appeals the decision to this court.
Held (Per Kourakis CJ, Vanstone and Lovell JJ agreeing)
1. On the proper construction of cl 9.1.2 the respondent had the role of accrediting approved products and suppliers.
2. The respondent was entitled to issue the direction notices in relation to the list of approved products or suppliers circulated by the first appellant.
3. The respondent validly terminated the agreement for the first appellant’s non-compliance with directions there given.
4. The direction of the respondent to compel the second appellant to attend certain training sessions was not reasonable. The second appellant was not regularly engaged in the kind of activity to which the direction related. The direction could not reasonably preclude the second appellant from nominating another individual to attend in his place.
5. Appeal dismissed.
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, considered.

WORDS AND PHRASES CONSIDERED/DEFINED
"Contract terms", "interpretation", "franchise", "franchise master agreement", "franchisee", "franchisor", "contractual interpretation", "termination", "reasonable direction"

PILTON HOLDINGS PTY LTD & ORS v ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD
[2015] SASCFC 88
Full Court: Kourakis CJ, Vanstone and Lovell JJ
KOURAKIS CJ.
Background

This is an appeal against the findings of a Judge of this Court that the respondent, Essential Beauty Franchising (WA) Pty Ltd (Essential Beauty WA), a franchisor, was entitled to terminate its master franchise agreement with the appellant, Pilton Holdings Pty Ltd (Pilton) on the grounds of Pilton’s breaches of that agreement. In 1990, Mr and Mrs Maiello using the corporate vehicle Essential Beauty (SA) Pty Ltd opened a beauty salon in Adelaide trading as Essential Beauty. In 2000, Mr Maiello decided to establish a franchise system for Essential Beauty salons in South Australia and to that end, in January 2001, he incorporated Essential Beauty Franchising Pty Ltd (Essential Beauty Franchising) to be the franchisor. Mr Maiello was its sole director.
In early 2002, Essential Beauty Franchising acquired premises at Regency Road, Prospect to use as a warehouse and office. Essential Beauty Franchising distributed products acquired from manufacturers or importers branded “Essential Beauty”. It also distributed products under the brand of some manufacturers. Over time the number of external suppliers to franchisees declined and the proportion of products supplied by Essential Beauty Franchising increased. Essential Beauty Franchising supplied products through another entity referred to as Essential Distributors.
In March 2004, Mr Maiello incorporated Essential Beauty WA for the purpose of holding the Essential Beauty master franchise in Western Australia. Mr Maiello was its sole director.
In February 2004, Mr and Mrs Forrest incorporated Pilton. They were its directors and shareholders. In March 2004, Essential Beauty WA granted the master franchise for Western Australia (the master franchise agreement) to Pilton.
In June 2004, Pilton granted a franchise to Mr and Mrs Furler to operate an Essential Beauty store at Hay Street, Perth. That store opened in October 2004. Between 2005 and 2010 a further nine Essential Beauty stores were opened in Western Australia. As at February 2014, there were 59 Essential Beauty stores in Australia: 18 in South Australia, 17 in Western Australia, 17 in Victoria, 5 in Queensland and 2 in New South Wales.
In late 2010, a dispute developed between Essential Beauty WA and Pilton over whether Pilton had exclusive authority to direct Western Australian franchisees as to the beauty products which they should use in their stores. Pilton directed the Western Australian franchisees that only it, and certain third party suppliers specified by it, were approved suppliers of beauty products for the stores. Essential Beauty WA sent a notice, purportedly pursuant to the master franchise agreement, directing Pilton to withdraw its notices. It also directed Pilton to take certain other steps with respect to training, benchmarking and advertising to discharge its obligations under the agreement. Pilton failed to comply with those directions. On 17 December 2010 Essential Beauty WA served on Pilton a notice to withdraw its current lists of approved products. On 28 January 2011 Essential Beauty WA served on Pilton a notice of breach pursuant to the master franchise agreement. On 15 March 2011 Essential Beauty notified Pilton of its termination of the agreement.
The primary issues argued at trial and on appeal were:
a.whether Pilton was in breach of the agreement purporting to deny the Western Australian franchisees the right to purchase products from Essential Beauty WA or its distributors;
b.whether the directions given by Essential Beauty WA were reasonable;
c.whether Pilton’s failure to comply with the directions justify Essential Beauty WA’s termination of the Agreement.
For the reasons which follow I would uphold the Judge’s finding that Pilton was not exclusively empowered under the terms of the agreement to specify the suppliers of beauty products to the Western Australian franchisees. I would find that the directions notices given by Essential Beauty WA which in effect demanded that Pilton cease to so direct the Western Australian franchisees as to the purchase of products was a reasonable exercise of its contractual powers under the master franchise agreement. I would uphold the Judge’s finding that Essential Beauty WA was entitled to terminate the agreement by reason of Pilton’s failure to withdraw its direction.
I would also uphold the Judge’s finding that directions given by Essential Beauty WA in its notice with respect to all other matters, save the direction that Mr Forrest attend for make-up training, were reasonable. I find that the failure of Pilton to comply with the reasonable directions given by Essential Beauty WA justified termination of the Agreement. I would, therefore, dismiss Pilton’s appeal.
The Master Franchise Agreement
The parties to the master franchise agreement were Essential Beauty WA, Pilton and Mr Forrest. Mr Forrest was a party only for the purpose of guaranteeing Pilton’s obligations as master franchisee.
By clause 4 of the Agreement, Essential Beauty WA granted to Pilton a master franchise in Western Australia. Clause 4.1 provided:
4.1 GRANT
In consideration of the Master Franchisee’s undertakings, the Company grants to the Master Franchisee the right in the Area to:
establish and operate a Master Franchise operation;
enter into Franchise Agreements;
act as a licensee of the Mark “Essential Beauty”;
personally conduct the System within the Area through the establishment of Premises for Franchisees
on the following terms and conditions:
4.1.1termination or expiration of this Agreement shall constitute a termination or expiration of the Master Franchise;
4.1.2the Master Franchisee will only enter into Franchise Agreements with Franchisees who are responsible and of good character, financially substantial and competent to operate a Franchise and have completed a training program to the satisfaction of the Master Franchisee and the Company;
4.1.3the Master Franchisee will only enter into Franchise Agreements on the terms of the then current Franchise Agreement as notified by the Company from time to time unless the Company has approved in writing any amendment of the Franchise Agreement in respect of any particular Franchisee;
4.1.4the Master Franchisee shall diligently search for and screen potential franchisees within the Area in such manner as is reasonably specified by the Company …
Pursuant to clauses 6 and 7, the term of the Agreement was five years from 15 March 2004 together with three rights of renewal of five years each.
The System was defined in the recitals. Recitals A, C and E provided:
AThe Company has knowledge and skills concerning the business of beauty services and associated products (“The System”). The Company has a licence from Tony Maiello to commercialise a franchise system developed by the licensor under the Franchise Code.
C     Distinguishing characteristics of The System include:
·       the business name “Essential Beauty”;
·       certain trademarks and logos for which registration is sought, or has been obtained, in the Commonwealth of Australia;
·       developed marketing concepts and sales techniques;
·       an Operations Manual;
·       beauty service techniques;
·       techniques for beauty salon operation;
·       exclusive beauty and other products;
·       distinctive colour schemes;
·       distinctive beauty salon development and fit-out;
·       distinctive uniforms bearing the “Essential Beauty” logo;
…
EThe System requires that licensees and sub-licensees adhere to standards and policies developed by the Company which provide for the successful and uniform operation of businesses utilising The System.
Clause 1 contained the following relevant definitions:
“Beauty Services” means the provisions of beauty services including make-up and eye services, facials, waxing, massage, body piercing and Henna tattooing (false), electrolysis, nail enhancement, collagen treatments and Slimtone body shaping.
…
“Franchise Agreement” means a form of agreement approved of by the Company and entered into by the Master Franchisee with a Franchisee.
…
“Operations Manual” means the procedural advice manual developed by the Company and lent to the Master Franchisees or its Franchisees by the Company. Amendments, variations, deletions or additions made to the Operations Manual by the Company during the Term or any Renewal Term of this Agreement are also included.
…
“Product” means beauty products and consumables and other like aids used in the carrying out of Beauty Services or sold by the Franchisees.
In addition to payment of a master franchise fee of $250,000 Pilton also agreed by clause 10.1 of the Agreement, to pay to Essential Beauty WA 50 percent of the initial and ongoing fees payable by franchisees.
Clause 9 of the Agreement was entitled “Product”. It is the clause at the centre of the dispute between the parties. Clause 9.1 provided as follows:
9.1 USE AND PURCHASE OF PRODUCT
9.1.1 During the Term or any Renewal Term the Master Franchisee shall use all reasonable endeavours to ensure that Franchisees will only use Product approved of by the Company.
9.1.2 The Master Franchisee shall use all reasonable endeavours to ensure that Franchisees purchase all Product from it or the Company or from suppliers who demonstrate an ability to meet the Company’s reasonable quality standards and specifications for such Product. The Master Franchisee will carry sufficient stock of the Product, as specified by the Company, to enable it to adequately supply the Franchisees.
9.1.3 The Master Franchisee will use all reasonable endeavours to ensure that the right of the Franchisees to utilise or offer for sale or otherwise deal with the Product is strictly limited in accordance with the terms of Franchise Agreements and any directives contained in the Operations Manual.
Clause 9.3 of the Agreement provided:
9.3 DIRECTIONS
The Master Franchisee will promptly adhere to and implement any reasonable directions of the Company as to
9.3.1 the Product to be used in The System;
9.3.2 any maximum (but not minimum) price Franchisees may charge Clients for product.
Clause 12.5 of the Agreement imposed obligations on the master franchisor to undertake training. Essential Beauty WA relied in part on a breach of this clause to terminate the Agreement. It provided:
The Master Franchisee agrees with the Company as follows:
12.5 MASTER FRANCHISE TRAINING
to participate in such initial and ongoing training as the Company may reasonably require:
12.5.1 Payment
the Master Franchisee shall pay all its own costs for attending ongoing training;
12.5.2 Training Location
training shall take place in Adelaide;
12.5.3 Persons Required to Train
the Master Franchisee (if a natural person) or such other person as the Company shall direct shall attend training;
Clause 12.9 of the Agreement provided:
The Master Franchisee agrees with the Company as follows:
12.9 FOLLOW DIRECTIONS
to follow and use all reasonable endeavours to cause Franchisees to follow the directions of the Company as to:
12.9.1 the manner of display and use of any Approved Name, Marks or the Image;
12.9.2 the manner of effecting satisfactory Customer relations by Franchisees;
12.9.3 the provision of Beauty Services and use of Product by Franchisees;
12.9.4 any other matter provided for in this Agreement or the Operations Manual.
The Agreement included an express good faith clause:
The Master Franchisee agrees with the Company as follows:
12.18 GOOD FAITH
to act in good faith at all times to the Company and forthwith provide such assistance and co-operation as may be practical upon request by the Company.
Clause 22 of the Agreement governed termination:
22.     DEFAULT AND TERMINATION
22.1   DEFAULT-BY MASTER FRANCHISEE
If
22.1.1     the Master Franchisee breaches a term of the Agreement, and
22.1.2the Company, in consequence of the breach, proposes to terminate the Agreement: and
22.1.3the provisions of sub-clause 22.6 do not apply,[1]
[1]    Clause 22.5 (erroneously described as Clause 22.6 in sub-clause 22.1.3) has no application in this case.
then the Company shall:
22.1.4give to the Master Franchisee such reasonable notice in the circumstances (but not exceeding thirty (30) days) advising of the breach and of its intent to terminate the Agreement; and
22.1.5advise the Master Franchisee of what is required to remedy the breach; and
22.1.6allow the Master Franchisee the period set out in the notice to remedy the breach.
...
22.2   NO TERMIMATION IF COMPLIANCE
If the Master Franchisee remedies the breach in the manner required by the Company under sub-clause 22.1.5 and within the time specified in the notice, then the Company may not terminate the Agreement.
22.3   TERMINATION
If the Master Franchisee fails to remedy any breach set out in the relevant notice and within the time permitted for the same then the Company shall be at liberty to forthwith terminate the Agreement immediately upon communicating its intent to do so to the Master Franchisee.
22.4   DISPUTE RESOLUTION
In the event that a dispute between the Master Franchisee and the Company arises out of a termination under the preceding sub-clauses then the Dispute Resolution procedures under clause 26 shall apply.
Clause 30 provided:
ENTIRE AGREEMENT
This Agreement, the Franchise Agreements and the provisions of the Operations Manual contain the entire understanding and agreement of the parties concerning the matters contained in this Agreement.
The WA Franchises
The first four agreements granting franchises to Western Australian stores were tripartite agreements between Essential Beauty WA, Pilton and the franchises. The Judge referred to those agreements as “the old form franchise agreements”.
Under the old form franchise agreement, Essential Beauty WA and Pilton jointly granted to the franchisee a right to operate an Essential Beauty salon. Clause 9.3 of the old form franchise agreements provided as follows:
The Franchisee shall at all times purchase all goods, materials, Products and packaging for the Products from the Franchisor or such suppliers nominated in writing by the Franchisor who have been authorised by the Franchisor to supply the Franchisee. It shall be the responsibility of the Franchisee to ensure that sufficient stocks are maintained at all times and training given to enable the proper and efficient running of the Franchise.
Clause 13.6 of the old form franchise agreements provided:
The Franchisee agrees with the Franchisor and Master Franchisee as follows:
…
13.6 not to produce sell or supply any Product or service other than those products referred to in this agreement unless expressly authorised in writing by the Franchisor.
From September 2008 another standard franchise agreement was used by Pilton in Western Australia. The Judge referred to that standard agreement as “the new form franchise agreement”. The new form franchise agreement was drafted by Mr Maiello’s solicitors in Adelaide. The new form franchise agreement was not a tripartite agreement. Although not parties to the new form franchise agreement, both Essential Beauty Franchising and Essential Beauty WA were mentioned in the agreement – as “EB” and “EB Western Australia” respectively. Pilton was called “Essential Beauty” in the agreement.
The new form franchise agreement included the following terms:
2.5The Franchisee acknowledges that EB may issue directions to the Franchisee from time to time which the Franchisee will comply with as if they were issued by Essential Beauty as master franchisee.
5.The Franchise shall, at all times until after the Dissolution Date, use its best endeavours at the full cost of the Franchisee:
…
5.2.2 Prior to the Dissolution Date only use Products and equipment approved by Essential Beauty
…
6.2.the Franchisee shall not at any time until after the Dissolution Date, directly or indirectly except with the prior written consent of Essential Beauty:
6.2.1 sell or attempt to sell any goods or services other than the required Business Activities to Clients to the extent permitted by law;
…
[Business Activities was defined by clause 81 to mean:
the sale of goods and services approved by EB to Clients at the Franchised Premises and at other locations as approved by EB within the Territory and other activities as specified in the Manuals.]
…
27.1The Franchisee agrees to purchase all Products from Approved Suppliers, including the Franchisor, as they have demonstrated to EB an ability to meet EB’s standards and reliability for Products used in the System or sold by Franchisees.
[Clause 81 defined Product to mean:
Stock and materials which are sold or used in the Franchised Business as designated by EB from time to time]
[Clause 81 defined Approved Supplier to mean:
each of the supplies (including without limitation EB, Essential Beauty and subsidiary or associate of EB or Essential Beauty) approved by Essential Beauty to supply goods and/or services to the Franchisee from time to time]
27.2Essential Beauty shall, to ensure compatibility and quality standards, either sell to the Franchisee Specified Equipment, Products, and additional goods and equipment required from time to time in the Franchised Business or shall designate Approved Suppliers from whom the Franchisee will make those purchases.
27.3Essential Beauty will assist in the selection of Approved Suppliers following the directions of EB and may revoke approval of an approved supplier from time to time.

Clause 81 of the new form franchise agreement was a definition clause but contained within the definition of Approved Supplier the following substantive provision:
Essential Beauty will not unreasonably withhold its approval to a supplier nominated by the Franchisee whether the Franchisee wishes to purchase products or equipment from another supplier if that supplier is able in the opinion of Essential Beauty to satisfy the goods and services specifications, quality, availability and support are to the standards that Essential Beauty requires from time to time.
Disputation over supply of product
On 5 July 2010 Mr Maiello attached to an email which he sent to Mr Forrest an authorised product list. It listed 21 products under six headings. Eleven products were manufactured for Mr Maiello and bore the label “Essential Beauty” or “Essential Distribution”. Each of the other ten products bore the manufacturer’s own brand name. Mr Maiello invited comments on the product list from Mr Forrest. Mr Maiello also attached to his email a list of approved suppliers on which he invited comments.
Mr Forrest did not comment on the authorised product list, but he sent to Mr Maiello a different version of an approved supplier list which was only to apply in Western Australia. It showed 22 different categories of product or service and an approved supplier for each category. It showed Pilton as the approved supplier in all categories except three, for which it showed third party suppliers. Neither Essential Beauty WA nor Essential Beauty Franchising were approved.
On 7 July 2010 at 10.03 am, Mr Maiello responded to the email. He asked Mr Forrest to add his suppliers to Mr Maiello’s approved supplier list or to add Mr Maiello’s suppliers to Mr Forrest’s list.
Later on 7 July 2010, Mr Maiello sent a third email to Mr Forrest. He attached to the email Mr Forrest’s list of approved suppliers with provision for additional columns for South Australia, Victoria and Queensland.
On the same day Mr Forrest responded by email to Mr Maiello attaching the original version of an approval procedures document which had been sent to him by Mr Maiello on 5 July with a note on the front page saying “State-based approval procedures may also apply”.
Following a complaint by a Western Australian franchisee about difficulties in obtaining products for her store, Mr Forrest entered into email communications with Mr Maiello on how the franchisee’s complaint should be dealt with. On 24 July and 2 August 2010, Mr Maiello and Mr Forrest exchanged emails. There was a consensus that Mr Forrest would increase his stock holding levels to ensure that Western Australian franchises would be supplied the products they needed, and that, if Reforest did not have product in stock, he would order it from Essential Distribution in Adelaide, which would dispatch the product directly to the store but invoice Pilton.
On 7 October 2010, Mr Maiello sent an email to Mr Forrest raising the problem of franchisees in Western Australia and Victoria not obtaining timely products from Pilton or Salons R Us (the Victorian Master Franchisee) respectively. Mr Maiello proposed suggested a solution in an attached flow chart which showed Pilton and Salons R Us respectively supplying franchisees in Western Australia and Victoria but allowing Essential Distribution in South Australia to supply those franchisees directly if the master franchisees could not do so. He sought Mr Forrest’s response.
On 19 October 2010, Mr Maiello sent an email to Mr Forrest and the principal of Salons R Us. He proposed that franchisees Australia-wide be allowed a discretion to buy from Salons R Us, Pilton or Essential Distribution after first calling on their State master franchisee to supply the product. Mr Forrest responded on 21 October 2010. He claimed that he was the sole distributor in Western Australia and asserted that there were not excessive complaints of supply failures in that State. In a subsequent email exchanges, the parties moved towards entrenched positions and acrimony.
After visiting the stores of the Western Australian franchisees, on 19 October 2010, Mr Forrest sent notices of breach to all but one of them on 1 November 2010. Each notice listed products seen by Mr Forrest on his visit to the franchisee’s salon which Mr Forrest claimed were either non-approved products or products obtained from non-approved suppliers.
On 3 November 2010, Mr Maiello sent an email to Mr Forrest referring to four breach notices which Pilton had sent to one of the Western Australian franchisees, N. Mr Maiello claimed that the notices misinformed the franchisee as to which products were approved and which were not.
Later that day Mr Maiello telephoned Mr Forrest. There was a short conversation, which ended with Mr Forrest hanging up the phone.
On 4 November 2010, Mr Maiello sent an email to Mr Forrest demanding that he withdraw the breach notices issued to the Western Australian franchisees.
On 8 November 2010, Mr Maiello sent an email to Mr Forrest attaching a list which Pilton had issued of approved products and suppliers dated 30 September 2010. Of the 24 listed categories of products Pilton was the only approved supplier in 17 categories and naming a third party as the only approved supplier in the remaining seven categories. Mr Maiello informed Mr Forrest that he had been contacted by numerous franchisees querying Pilton’s list and that he intended to tell them that the list was not correct.
On the same day, Pilton’s solicitors sent an email to Essential Beauty WA’s solicitors. They contended that the definition of “approved suppliers” in the franchise agreements with the franchisees clearly stated that the suppliers were to be approved by Pilton. Pilton’s solicitors also contended that Essential Beauty WA had approved Pilton as a supplier.
Further on the same day, Mr Maiello sent an email to all franchisees. It referred to the unapproved list circulated by Pilton and, attached the product list and the approved supplier list authorised by Essential Beauty Franchising. The list was essentially the same as the list which had been sent to Mr Forrest on 5 July.
On 25 November 2010, Pilton’s solicitors wrote to each of the Western Australian franchisees. They attached the approved product and supplier list issued by Pilton (the Pilton list). They required that any stock and materials not acquired from suppliers approved by Pilton be removed within seven days, and that any outstanding orders from non-approved suppliers, including Essential Beauty, be cancelled. Pilton also demanded that invoices for stock procured from non-approved suppliers within the last 30 days be provided to it.
The Pilton list was divided into four columns. The first three columns identified products by reference to category code, category name and product description. The fourth column specified an approved supplier. Pilton was the only approved supplier for all but six products. A third party was nominated as the sole supplier for those six products. The distribution arm of Essential Beauty WA, Essential Distribution, was not nominated.
On 1 December 2010, Essential Beauty WA’s solicitors wrote to Pilton’s solicitors. They referred to the four breach notices served on N and contended that they were erroneous in certain respects. They demanded the immediate withdrawal of all breach notices issued by Pilton.
Following a store visit made by Mr Forrest on 3 December 2010 Pilton issued a further breach notice to N on 9 December 2010 in respect of the Joondalup store. It referred to essentially the same products as the 1 November 2010 breach notice. For ease of reference, I refer to the 1 November and 9 December 2010 breach notices collectively as the “Pilton breach notices”.
On 10 December 2010, Essential Beauty WA’s solicitors wrote to Pilton’s solicitors. They complained about Mr Forrest’s unannounced visits to the stores of the franchisees and demanded that prior written notice be given of any future inspections and that those inspections be conducted outside normal business hours.
On 15 December 2010, Essential Beauty WA’s solicitors wrote to Pilton attaching a directions notice (the first EB-WA notice). Relevantly and in summary the first EB-WA notice directed that Pilton:
1.withdraw the Pilton breach notices and the demands in the letters from Pilton’s solicitors issued on 25 November 2010;
2.not, without the prior written agreement of Essential Beauty WA, issue to franchisees other breach notices, termination notices or demands in relation to products or services stocked or supplied by Western Australian franchisees;
3.cause Mr Forrest to attend two days training with Essential Beauty in Adelaide on four topics in mid to late January 2011 on a date and at a time to be arranged by 22 December; and
4.produce to Essential Beauty WA copies of all advertising placed by Pilton for new franchisees over the past 12 months.
On 17 December 2010, Essential Beauty WA’s solicitors sent to Pilton another directions notice (the second EB-WA notice). The first and second notices will be referred to collectively as the EB-WA notices. Relevantly, the second EB-WA notice directed that Pilton:
1.withdraw all current lists of approved products and suppliers including the one enclosed with its solicitors’ letters dated 25 November 2010; and
2.circulate an enclosed approved products and suppliers list to all Western Australian franchisees.
The approved product and supplier list enclosed with the 17 December notice (the EB-WA list) was a two page document with each page divided into five columns. The first three columns identified approved products by a category code, category name and product description. The fourth column identified a brand name and the fifth a supplier. The listed supplier for each product was most often Essential Distribution or Pilton. There was no product on the list which could be supplied by one and not the other. For many of the products supplied by them no brand name was listed. On occasions a third party supplier of a product was nominated.
On 17 December 2010, Pilton’s solicitors sent a letter to Essential Beauty WA enclosing a notice of dispute. It related to the first EB-WA notice and to Essential Distribution supplying products directly to franchisees.
On 4 January 2011, there was a telephone conference between Mr Maiello and Mr Forrest to discuss their dispute but nothing was resolved.
On 12 January 2011, Essential Beauty WA’s solicitors sent to Pilton a notice of dispute in relation to the directions issued in the EB-WA notices.
EB-WA’s breach notice
On 28 January 2011, Essential Beauty WA’s solicitors served on Pilton a breach notice (the EB-WA breach notice). The breaches alleged were a failure to comply with the EB-WA notices.
Termination and subsequent events
On 15 March 2011, Essential Beauty WA’s solicitors sent to Pilton’s solicitors a notice of termination of the Agreement (the termination notice).
On 23 March 2011, Pilton’s solicitors wrote to Essential Beauty WA’s solicitors alleging that the purported termination was unlawful and stating that Pilton intended to commence proceedings seeking relief including an injunction preventing reliance upon the termination notice.
The product directions
The full terms of the first EB-WA notice with respect to approved products was as follows:
1.The WA Master Franchisee is directed:
1.1. to withdraw within three (3) business days of the date of this notice all Notices of Breach issued to WA franchisees by the WA Master Franchisee or on its behalf in the months of November 2010 and December 2010 relating in whole or in part to the stocking or supply of purportedly non-approved products by WA Franchisees; and
1.2 to not, without the prior written agreement of the Franchisor, issue to any WA franchisees any other Notices of Breach or any Notices of Termination in any way concerning or relating to products or services stocked or supplied by WA franchisees.
(This direction is given pursuant to clauses 9.3 and/or 12.9.3 of the MFA and/or clauses 12.9.4 and 12.18 of the MFA).
2.The WA Master Franchisee is directed to withdraw all of the demands in the letters issued to WA franchisees by the WA Master Franchisee’s legal representatives dated 25 November 2010 and not to issue or cause to be issued to WA franchisees, without the prior written agreement of the Franchisor, any further letters of demands in relation to products or services stocked or supplied by WA franchisees. (This direction is given pursuant to clause 9.3 of the MFA and/or clauses 12.9.4 and 12.18 of the MFA).
The full terms of the clauses of the second EB-WA notice with respect to approved products was as follows:
1.The WA Master Franchisee is directed to withdraw all current lists of approved products and suppliers circulated to WA franchisees by it or on its behalf, including but not limited to the WA Master List that was enclosed with the WA Master Franchisee’s legal representative’s letter dated 25 November 2010, by written notices to be given by the WA Master Franchisee to all of the WA franchisees within four (4) business days of the date of this notice. The WA Master Franchisee is directed to not circulate any further list to any Essential Beauty franchisees without written consent from the Franchisor (subject to direction 2 in this notice).
(This direction is given pursuant to clauses 9.3 and/or 12.9.3 of the MFA and/or clauses 12.9.4 and 12.18 of the MFA).
2.The WA Master Franchisee is directed to circulate the attached list of approved products and suppliers [List] to all of the WA franchisees within four (4) business days of the date of this notice. The List is from the date it is circulated to the WA franchisees, as per this direction, to comprise a list of the approved products and suppliers for the purposes of each of the Franchise Agreements between the WA Master Franchisee and the WA franchisees.
(This direction is given pursuant to clauses 9.3 and/or 12.9.3 of the MFA and/or clauses 12.9.4 and 12.8 of the MFA).
Construction of clause 9
The validity of the above mentioned notices depends on the proper construction of clause 9 of the agreement. The first observation I make about clause 9 is that it does not on its terms expressly confer a power, let alone an exclusive power, on either Pilton or Essential Beauty WA to direct Western Australian franchisees as to the supplier from whom they must source products used in their stores. A contractual power could only be found in agreements to which the franchisees are parties. Under the old form franchise agreement the franchisee was required to purchase from Essential Beauty WA or such other suppliers as were nominated in writing by Essential Beauty WA. As parties both Pilton and Essential Beauty WA were entitled to enforce that contractual obligation. Real difficulties would arise in the construction of the old form agreements if Pilton and Essential Beauty WA attempted to enforce inconsistent directions. But that is not an issue in these proceedings. Under the new form franchise agreement the Western Australian franchisees were contractually bound to Pilton to follow any directions given by Essential Beauty WA but Essential Beauty WA was not a party and could therefore not directly enforce that term.
As between Essential Beauty WA and Pilton the question is whether any directions given by either of them to a franchisee pursuant to an agreement to which they are parties breach any term of the master franchise agreement.
Clause 9.1 of the Agreement is a reasonable endeavours clause. Pilton is required to use all reasonable endeavours to ensure that franchisees will only use products approved of by Essential Beauty WA. Clause 9.1.2 bound Pilton to use its reasonable endeavours to ensure that the Western Australian franchisees purchase all products from Essential Beauty WA or from suppliers who demonstrated an ability to meet Essential Beauty WA’s reasonable quality standards and specifications for such products. The critical question insofar as the EB-WA direction notice is concerned is whether Pilton breached clause 9.1.2 by failing to use all reasonable endeavours in accordance with that sub-clause. Pilton’s contention is that it complied with that sub-clause by using its reasonable endeavours to ensure that franchisees purchased products from it and other suppliers who were approved even though it purported to deny franchisees the option of purchasing from Essential Distribution.
Pilton’s construction of clause 9.1.2 should be rejected. The use of the disjunctive term “or” does not give Pilton alternative options for discharging the obligation on it imposed by that sub-clause. Clause 9.1.2 requires Pilton to ensure that Western Australian franchisees purchase product from either one of the three sources it prescribes and no other. The terms of the master franchise agreement show that the income generated for both Pilton and Essential Beauty WA could be significantly affected depending on which of the three prescribed sources of product Western Australian franchisees selected. By excluding Essential Beauty WA and Essential Distribution as a possible supplier of products Pilton did not use its reasonable endeavours to ensure that Western Australian franchisees “purchase all product from it or the company or from suppliers who demonstrate an ability to meet the company’s reasonable quality standards and specifications for such product”. On the contrary it took steps to discourage franchisees from purchasing products from one of those sources, Essential Beauty WA.
The effect of the construction I would give of sub-clause 9.1.2, and in particular the use of the disjunctive term “or”, implies an obligation on Pilton not to deny franchisees the option of purchasing product that met the quality specifications from Essential Beauty WA. The implication of that term is obvious, reasonable and justified. It operates equally on both parties. For example, Essential Beauty WA could not set quality standards and specifications in such a way as to exclude suppliers favoured by Pilton even though the quality of the product supplied by them was the equal of other products approved by it.
The proper approach to contractual construction was recently considered by the High Court in Electricity Generation Corporation v Woodside Energy Ltd.[2] French CJ, Hayne, Crennan and Kiefel JJ re-affirmed that an objective approach is to be taken. In particular the meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean. In ascertaining that meaning it is permissible to have regard to the surrounding circumstances known to the parties to the contract and to the commercial purpose or objects to the secured by it. Pilton and Essential Beauty WA must have contemplated that each of them would offer product to the Western Australian franchisees and that such supply would generate a significant income stream from which they hoped to profit.
[2] [2014] HCA 7.
Both Pilton and Essential Beauty WA must also have contemplated that their profitability depended on the success of their franchisees. Their mutual understanding supports a construction of clause 9.1 of the franchise agreement which denies each of them to unilaterally deny the other the anticipated income stream from supplying product.
Even though I have reached the same conclusion as the Judge I have approached it in a slightly different way. I would not rely on Essential Beauty WA’s undoubted power to specify products and standards as supporting a construction which would also give it the exclusive, or at least overriding, power to nominate the suppliers. In my view Essential Beauty WA is not empowered by clause 9.1 to prohibit Pilton from using a supplier, or recommending a supplier to the Western Australian franchisees, if that supplier’s product met the standards set by Essential Beauty WA. To put that proposition in terms which apply to clause 9.1, Pilton would discharge its reasonable endeavours obligation if it included a supplier of a product which met those standards as an approved supplier in its communications with the Western Australian franchisee.

Nor would I place as much weight as the Judge on the form of clause 9.1.2 which posits Pilton as the promisor. Pilton is the promisor for no other reason than that clause 9.1.2 is a reasonable endeavours clause.
The Judge’s approach may well have been influenced by the position taken by the parties. At trial each party claimed an exclusive right to nominate suppliers. On the construction I would give clause 9.1 Essential Beauty WA’s power was to set reasonable quality standards. Whether a supplier’s product met those standards was to be determined objectively. If Essential Beauty WA and Pilton were in disagreement over that fact its ultimate resolution depended, not on the unilateral decision of one or the other, but on a judicial determination of that fact. The limitation on Essential Beauty WA’s power to set standards to what is reasonable necessarily require a judicial determination in the event of a dispute and so the parties must have intended that any ancillary dispute over which suppliers met those reasonable standards would also be judicially determined.
Nor would I place much weight on the fact that Essential Beauty had more experience in the beauty salon business than Mr Forrest or Pilton. Pilton could always engage experienced persons. What is more important is that the system was devised by Mr Maiello and the Essential Beauty group of companies. It is in the nature of a franchise agreement that consistency is important. It is for that reason that Essential Beauty WA must be expected by the objective observer to retain for itself exclusive power to nominate suppliers. However for the reasons I have given the terms of the master franchise agreement only conferred on Essential Beauty WA a power to set standards for products.
It follows from the above that on the ultimate question of the extent of Pilton’s reasonable endeavours obligation my reasoning also differs slightly from the Judge’s. I proceed not from the basis that Essential Beauty WA had exclusive authority under the contract to nominate suppliers. I proceed instead on a construction of the reasonable endeavours clause; which gives a different textual significance to the use of the disjunctive “or”, and which places contextual importance on the need for uniformity and the joint interest in shared profitability from the supply of products which is inherent in the master franchise agreement. It would, as the Judge observed, be absurd in that context for Pilton to be able to preclude franchisees purchasing a particular product of the franchisor because it is not an accredited third party supplier.
Pilton’s reliance on clause 9.1.2 is unfounded. The amount of stock that Pilton was contractually required to carry would depend on the number and identity of the approved suppliers from time to time. Pilton could not contractually be required to keep large quantities of stock of a product which is readily available from a number of other suppliers.
Ultimately I agree with the construction given by the Judge that:[3]
… on the proper construction of clause 9.1.2, Pilton’s obligation is to ensure that franchisees are entitled to purchase product from any one of Pilton, Essential Beauty WA or accredited third party suppliers and Pilton cannot dictate to the franchisees that they are entitled to purchase only from a subset of those categories.
[3] [2014] SASC 84 at [231].
It follows that Essential Beauty WA was entitled to give the first direction in the first BB-WA notice and the directions in the second BB-WA notice pursuant to clause 9.3.1 in order to ensure compliance by Pilton with its obligation pursuant to clause 9.1.1 or the master franchise agreement.
In the face of Pilton’s non-compliance with those directions and its failure to perform its obligation pursuant to clause 9.1.1 Essential Beauty WA was entitled to give Pilton the EB-WA breach notice and in the face of Pilton’s continued failure to comply to give the termination notice.
The training direction
It is necessary to set out in more detail the terms of the training direction given on 15 December 2010.
The training direction was expressed in the following terms:
6The WA master franchisee is directed to cause its director Angus Forrest to attend training with the franchisor at the franchisor’s Adelaide training premises situated at 142 Rundle Mall, Adelaide in mid to late January 2011, on a date and at a time to be arranged with the franchisor by no later than 22 December 2010, to participate in ongoing training, included but not limited to the following:
6.1     Training in relation to permanent makeup products and techniques;
6.2     Training in relation to issues recently updated in the master franchisee operations manual;
6.3     Training in relation to budgeting and the implementation of benchmarking practices into WA stores; and
6.4     Training in relation to marketing schedule planning for 2011.
7The WA master franchisee is directed that the ongoing training and direction 6 is to be undertaken on the following terms and conditions:
7.1     The WA master franchisee is required to cause Angus Forrest to be available for two full days from 9 am to 5.30 pm each day to undertake the ongoing training;
7.2     The WA master franchisee is responsible for the payment for its and Angus Forrest’s costs in attending the ongoing training.
On 19 February 2011 Mr Forrest sent Mr Maiello an email declining to attend the permanent make-up training because he had not himself applied any permanent makeup in the last five years and did not have the technical experience to train franchisees in it. Mr Forrest wrote:
Also, can you please clarify, you appear to have suggested that I come to South Australia personally for training in this technique so that I can personally conduct training in WA. If this is the case I will have to decline your offer since I have not performed any permanent makeup in the last five years and am technically not in position to be training WA salons in this treatment in which they are considerably more experienced than I.
Mr Maiello responded:
This was in a directives letter I sent to you – not a suggestion, a directive. This was because of the importance of this technique to the EB system. The directives letter should be addressed in its entirety as there were other directives in it permanent makeup being one of them… it has been noted that you have declined.
The Judge found that the emails did not establish that the training contemplated by Essential Beauty WA was for the purpose of training Mr Forrest to personally apply permanent make-up. The Judge also found that the emails did not demonstrate that the requirement that Mr Forrest attend for training was unreasonable.
It is doubtful that the email exchange can affect the construction of the direction or reveal its purpose but as far as it goes I accept that the email exchange does not show that Essential Beauty WA’s purpose was to train Mr Forrest to apply permanent makeup himself. However I would find that a direction that the principal of a master franchisor of a business of this nature personally attend a training course on the techniques used to apply permanent make-up is on its face unreasonable even if it was not contemplated that he would personally apply the products. A direction from a master franchisor which does not allow the principal of a master franchisee the option of sending an employee or consultant who is responsible for training franchisees is manifestly unreasonable.
Mr Maiello gave the following evidence about the purpose of the training:
Q.I see, all right, so that is structure as at today and then you have annotated where it was different in the past as far as the companies are concerned, is that right.
A.Correct.
Q.Then you have also included the key people, which this is, again, as of today.
A.Correct.
Q.Again, you have annotated previously Pat or Trish Esposito worked for Essential Distribution until 2005.
A.Correct.
EXHIBIT #P33 DOCUMENT ENTITLED 'ESSENTIAL BEAUTY STRUCTURE' TENDERED BY MR O'SULLIVAN. ADMITTED.
XN
Q.Just before lunch, I have taken you to the first directions notice.
A.Mm-hmm.
Q.Can I take you back to that, it's vol.3, p.977.
A.I am on that page.
Q.You see that there is an item 6 and item 7 were the direction for Mr Forrest to attend training.
A.I can see that.
Q.Now, 6.1, 'Training in relation to permanent make-up products and techniques', Mr Forrest was directed to attend training in relation to that.
A.Mm-hmm.
Q.Well, he doesn't do that sort of work.
A.Yes.
Q.So why does he need training.
A.As with all of our services that we offer, a male in this environment is juxtaposed, so we can never directly offer the service itself, though Mr Forrest in the early days did actually offer the service of permanent make-up. This particular technique, which I was offering training in, I originally sent somebody from South Australia to Singapore to learn the technique, all-up cost of around $20,000, because my wife was not in a position to travel to learn the technique. Once we received training in the technique and effectively a manual in Chinese, we had to translate the manual using some of our staff members. We translated the manual, we implemented the technique and we were having great success. It was at this point that around June/July or August 2010, I asked the masters to attend training in a friendly email sent to them. I followed that up with another friendly email in around August to say 'Come down for this training', and both of them went unresponded to by Mr Forrest. So we made it as part of a directions notice, and the training was not something that he had to do directly, nor was the expectation, but going back to my point about being juxtaposed, it was about him learning the basics of the technique, the application of the technique and therefore, he would be to give that information to one of his key staff members in Western Australia, whoever that is, and they could implement the technique - how much space do you need? Is it training in small groups? Is it in large groups? What documents are available? What resources are available? What protocols are associated with this technique, etc., and I need to say this, that it was interesting to note that on the work server, we later found emails between the WA master franchisee and the Queensland master franchisee, where they were actually investigating this technique and buying supplies, and Angus actually asked where he gets practice kits from. So I had already done all the hard work and yet we have intercepted these emails sometime later. So it was just interesting to note that. So there was no reason from our perspective why Angus couldn't attend this training. He wasn't expected to do the permanent make-up training technique itself.
Later in cross-examination Mr Maiello testified:
HIS HONOUR
Q.Do you still have vol.3.
A.No, your Honour.
WITNESS SHOWN VOL.3
XXN
Q.Going to vol.3, please look at p.821.
A.I'm on that page.
Q.You'll recognise that this part of an exchange about training.
A.Yes.
Q.You notice that Angus is asking you on 8 November to set up the new franchise training for the Whitford salon.
A.Yes.
Q.Then go please to p.1059 and this is an example of an email to you and then the response back in red.
A.Yes.
Q.At the bottom, about .9 on p.1059, you are being asked about the training DVD.
A.Yes.
Q.And you explained to Angus that it wasn't produced.
A.Yeah, months ago as it says there, sir.
Q.As it says, yes. Then go over the page, you'd agree with me that what Angus is doing the third line down is explaining why he is not intending to go to training for permanent make-up wouldn't you.
A.I vehemently disagree.
Q.Even though he says 'I will have to decline your offer since I have not performed any permanent make-up in the last five years and am technically not in a position to be training WA salons in this treatment'.
A.Mr Ross-Smith, just to be clear, because it may not be apparent, no technique that Angus and I ever offered, involves kinesthetic training directly. We're just simply not in a position to offer bikini waxing, permanent make-up or anything. The purpose of the permanent make-up training was for him to cover over, see the technique in action, see the support materials, see what was on FCOM which supported all that, look at the registration forms. So it wasn't kinesthetic training that he was required to do, it was because I know that Angus hadn't done permanent make-up around 2008 or earlier, but I was curious to know that he was picking up practice pens and Skins in other emails, but that wasn't apparent at the time.
Q.Do you say to his Honour that even with what Angus has said to you in that email about training, it was appropriate for you to terminate the master franchise agreement on the training issue.
A.Yes. Let me explain, Mr Ross-Smith; I received an email yesterday on land tax and some of the changes associated with that with certain rents. Now, I passed that onto my in-house counsel, Steve Polychannon, and asked him to follow that up. Now, Steve from time to time would give me advice on the topic and if he didn't attend a training seminar which was offered by Pace Lawyers, he would not be in a position to give that level of advice to me. When it comes to training in the Essential Beauty system, Angus, in his capacity as a master franchisee, is required to give advice to franchisees. If he doesn't know the product or the system or the techniques, he's not well-positioned for that and might I say with this one here, I did send off a friendly email around July, asking him to attend, which went unresponded to, or a negative response. I sent a subsequent one in August which he also declined to come, so I made it as part of a directive notice. Let me also state that this particular technique cost me over $20,000 to implement and it's still in our system today. So, to answer your question, training is absolutely critical, not only in the EB system but across all disciplines and we call that professional development within our system. So, as I have said earlier, a lot of the directives that were put to Mr Forrest could've been dealt with in an afternoon, but they weren't, and I'll leave my answer at that.
Mr Maiello’s testimony exposes the fundamental misconception at the heart of the training direction. The master franchisee was not Mr Forrest but Pilton. There was no reason why Pilton could not act through an appropriate agent of its choice to obtain knowledge of, and train its employees on, make-up techniques. I would find that clause 6.1 of the first EB-WA notice was unreasonable.
I turn next to the benchmarking and marketing training direction given by clauses 6.3 and 6.4 of the first EB-WA notice. Mr Forrest testified that even though he undertook some benchmarking and marketing training over the telephone in January, he did not attend for face to face training in Adelaide over two full days from 9.00am to 5.30pm. The requirement to attend for training in Adelaide was a requirement of the master franchise agreement itself, and was repeated in clause 7 of the first EB-WA notice. Mr Forrest gave as the reason for not attending in Adelaide that the master franchisee operations manual, which was the subject of the direction in clause 6.2, had not yet been prepared. However Mr Maiello gave evidence, which the Judge accepted, that a “Yearly Checklist Handbook” had been issued to master franchisees at the time the direction was given. That finding of the Judge is not disputed on appeal.
There is an important distinction between make-up training and the business management of the franchise. As to the latter, it was reasonable to direct Mr Forrest as the sole principal of Pilton to attend for that training. It follows that on the evidence the Judge correctly found that Mr Forrest had failed to comply with the training direction by not attending in Adelaide in relation to the updated master franchisee operations manual and in relation to budgeting and the implementation of benchmarking. The Judge correctly found that those requirements had not been shown to be unreasonable. As the Judge observed the fact that alternative training methods might have been available does not make the direction unreasonable.[4]
[4] [2014] SASC 84 at [300]-[307].
The Judge found in Pilton’s favour that the failure to comply with the direction that Mr Forrest attend in Adelaide did not comprise a sufficiently serious breach of clause 12.9.4 of the Agreement as to entitle Essential Beauty WA to terminate. However the Judge found that clause 22 governs the right of Essential Beauty WA to terminate for breach. I return to that clause further below.
Advertising
The full text of the clause of the first EB-WA notice with respect to advertising was as follows:
14.The WA Master Franchisee is directed to produce to the Franchisor copies of all advertising placed by the WA Master Franchisee under clause 4.1.4.1 of the MFA over the past 12 months. (This direction is given pursuant to clauses 12.9.4 and 4.1.4 and /or 12.18 of the MFA).
Pilton did not advance at trial an argument that the advertising direction was unreasonable. The Judge found that the obligation on Pilton to advertise for new franchisees imposed by clause 4.1.4.1 was an important obligation. In that context the Judge found that Essential Beauty WA reasonably required production of details of the advertising placed by Pilton in order to ascertain whether Pilton had complied with that obligation. The Judge was satisfied that the direction was reasonable.
Mr Forrest testified that he did not comply with the direction to provide copies of the advertisements he had placed because he had not kept hard copies himself. Mr Forrest gave no reason for not approaching the advertisers for copies. In his cross-examination he gave the following evidence:
Q.You agree with that.
A.Yes.
Q.Item 14 on p.980, you didn't comply with that.
A.I was unable to comply with that one.
Q.Why.
A.I hadn't kept any copies of advertising.
Q.Were you not able to go to the organisations with whom the advertisements were placed and get copies.
A.No. I just hadn't kept any. I wasn't ... didn't have it and I didn't apply to any of these organisations.
Q.Now this was sent to you on 15 December 2010, p.975.
A.Hmm-mm. Sorry, what was on ...
Q.That's right isn't it. Did you receive it on 15December.
A.Yes, yes, yes.
Q.Well, the next day if you go to p.981.
A.Hmm-mm.
Q.You send an email to Nilar who's one of your franchisees.
A.Yeah.
Q.Notwithstanding the directions notice of 15 December you repeat in the second paragraph that 'Essential Distribution in South Australia and/or the franchisor are not approved suppliers in WA.'
A.Yes.
Q.So you were never going to comply with the directions notice were you in relation to the topic of approved suppliers.
A.No, I felt it was contrary to our agreement, so they weren't reasonable as a result.
The requirement to provide copies of the notice was not limited to copies of notices in Mr Forrest’s or Pilton’s present possession. The power to direct provision of the notices was not limited to copies of advertisements in his possession. The fact that notices were no longer in Pilton’s possession may or may not depending on the circumstances excuse a failure. However in this case there was no apparent reason why copies of the advertisements could not have been obtained from the advertising agency.

In the course of closing submissions counsel for Essential Beauty WA was asked by the Judge to put his case on the breach in failing to produce the advertising details notice. There was the following exchange:
His Honour: And then the advertising, I’m not quite sure of your case on that. I think Mr Forrest gave evidence that he didn’t have any copies of advertising?
Counsel:Yes he did give that evidence. It seems to me that is one of those – realistically, one of those trivial items.
Later in the course of his submissions on whether certain terms of the contract were essential or intermediate terms counsel referred to the failure to provide the copies of the advertising and said:
So, what we say is that we have to then go back and see what are essential or no-essential terms. If it is a non-essential term, is a sufficiently serious breach? And I know I am digressing slightly, and I took your Honour to that clause 4.1.4 about advertising, one might consider that the failure to provide copies of adverts – I think I described them as ‘trivial’ earlier during the case, is probably just that, trivial. So it’s a non-essential term, but that’s a provision of clause 4.1.4 in terms of ‘you will place advertisements’ therefore a direction can be given ‘show me the advertisements’. But if in fact – the same topic, but no advertisements were placed at all such as to breach clause 4.1.4 in seeking franchisees, one might say ‘well, that’s an essential term’. So, that’s why it’s important to qualify precisely what it is that the direction relates to and whether or not termination was justified on that basis.
It appears therefore that, in context, counsel’s concession that the breach was trivial related to the issue of the sufficiency of the breach to constitute a serious breach of an intermediate term.
The Judge correctly found that Pilton had failed to comply with the advertising direction. Consistently with the concession of counsel for Essential Beauty WA the Judge found that the failure to comply with the direction to produce copies of advertising placed for potential franchisees did not constitute a sufficiently serious breach of clause 12.9.4 of the agreement so as to entitle Essential Beauty WA to terminate. However, the Judge found that the failure to remedy that breach within 30 days after service of the breach notice entitled Essential Beauty WA to terminate in accordance with clause 22 of the Agreement. It is to the power to terminate pursuant to that term which I next turn.
Power to terminate
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.
Conclusion
I would dismiss the appeal
VANSTONE J: I agree with the orders proposed by the Chief Justice and with the reasons he has written.
LOVELL J: I would dismiss the Appeal. I agree with the reasons of the Chief Justice.