Ranoa Pty Ltd v BP Oil Distribution Ltd

[1989] FCA 787

Re: RANOA PTY LIMITED
And: B.P. OIL DISTRIBUTION LIMITED and B.P. AUSTRALIA LIMITED
No. G625 of 1989
FED No. 787
Petroleum Retail Marketing Franchise Act 1980 - Leases

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart(1), Wilcox(1) and Gummow(1) JJ.

CATCHWORDS

Petroleum Retail Marketing Franchise Act 1980 - whether some provision of the Act resulted in the acquisition of property (viz. some species of goodwill) so as to require the respondent-franchisor to pay to the appellant-franchisee compensation pursuant to s.23 - ss. 3, 7, 8, 13, 16, 17B of the Act.

Leases - observations on the general law rule that the benefit of goodwill built up by reason of a tenant carrying on a business from the leased premises enures to the benefit of the landlord at the expiration of the term - observations on the meaning of "goodwill".

Petroleum Retail Marketing Franchise Act 1980

Petroleum Retail Marketing Franchise Amendment Act 1984

Judiciary Act 1903

Lands Acquisition Act 1906

Lands Asquisition Act 1955

Landlord and Tenant Act 1927 (U.K.)

Real Property Act 1900 (N.S.W.)

Blue Metal Industries Ltd v Dilley (1970) AC 827

Llewellyn v Rutherford (1875) LR 10CP 456

The Commonwealth v Reeve (1949) 78 CLR 410

Charrington and Co Ltd v Simpson (1935) AC 325

Whiteman Smith Motor Co. Ltd v Chaplin (1934) 2KB 35

Trade Practices Commission v Tooth & Co. Ltd (1979) 142 CLR 397

Albany V Commonwealth of Australia (1976) 12 ALR 201

HEARING

SYDNEY

#DATE 20:12:1989

Counsel and Solicitors for Mr R.W.R. Parker Q.C. and
the Appellant: M.O. Tubbs, Esq., instructed

by Messrs. Stojanovic & David

Counsel and Solicitors for Mr R.A. Conti Q.C. and
the Respondent: L.G. Foster, Esq., instructed

by Messrs. Clayton Utz.

ORDER

The question reserved for separate decision be answered as follows:

Question: "Upon the basis of the following assumptions, namely, that for the purpose only of the determination of this separate question, on 18 September 1989

(a) the Respondents acquired property namely some species of goodwill from the Appellant and,

(b) such property was acquired otherwise than on just terms, did the operation of some provision of the Petroleum Retail Marketing Franchise Act 1980 result in the acquisition of this property so as to require the Respondents to pay to the Appellant compensation pursuant to s.23 of the said Act?" Answer: No.

The appeal be dismissed.

The appellant pay the costs of the respondents.

NOTE: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.

JUDGE1

This appeal, which is brought, by leave, from the decision of a Judge of this Court (Sheppard J.), concerns the construction of s.23 of the Petroleum Retail Marketing Franchise Act 1980 ("the Act"). The Act was amended in various respects by the Petroleum Retail Marketing Amendment Act 1984 ("the 1984 Act"), the substantive provisions of which came into operation on 1 January 1985. However s.23 has remained in its original form. It provides as follows:-

"23(1) Where, but for this section, the operation of a provision of this Act would result in the acquisition of property from a person by another person otherwise than on just terms, there is payable to the person by that other person such reasonable amount of compensation as is agreed upon between those persons or, failing agreement, as is determined by a court.

(2) In sub-section (1), 'acquisition of property' and 'just terms' have the same respective meanings as in paragraph 51(xxxi) of the Constitution."

1. Jurisdiction with respect to all matters arising under the Act is conferred by s.26 upon this Court and certain other specified courts.

2. Sheppard J. answered in the negative a question which Burchett J. had ordered be decided separately from and before all other questions in the proceedings. The question (as slightly amended by further order of Sheppard J.) was as follows:-
   

"Upon the true construction of s.23 of the Petroleum Retail Marketing Franchise Act 1980 in its setting in the Act, is the franchisee, upon the expiration of the period of nine years, provided for in ss.13 and 17B entitled to such reasonable amount of compensation as is determined by a Court upon the basis that the franchisor acquired property from the franchisee otherwise than on just terms by reason of the operation of this Act?"

1. When senior Counsel for the appellant opened the appeal it became apparent that on his case questions involving the interpretation of s.51(xxxi) of the Constitution might sufficiently be drawn into the proceedings, so as to make it the duty of the Full Court not to proceed unless and until it had been satisfied that the appropriate notices had been given under s.78B of the Judiciary Act 1903. With an eye to avoiding the need for an adjournment for a time sufficient to enable compliance with s.78B, the parties reformulated the question for determination on the appeal so as to avoid raising at this stage in the proceedings, any issue involving the interpretation of the Constitution.

2. The separate question was then reformulated as follows, pursuant to an order made by us with the consent of the parties:-
   

"Upon the basis of the following assumptions, namely, that for the purpose only of the determination of this separate question, on 18 September 1989

(a) the Respondents acquired property namely some species of goodwill from the Appellant and,

(b) such property was acquired otherwise than on just terms, did the operation of some provision of the Petroleum Retail Marketing Franchise Act 1980 result in the acquisition of this property so as to require the Respondents to pay to the Appellant compensation pursuant to s.23 of the said Act?"

1. We turn now to the relevant facts, which were not disputed. By lease dated 30 June 1980 the first respondent (then known as Amoco Australia Limited) as registered proprietor of land under the provisions of the Real Property Act 1900 (N.S.W), granted to the appellant a lease in respect of service station premises situated at 1234 Prince's Highway, Engadine, ("the Premises"). By a dealer trading agreement also dated 30 June 1980 the first respondent granted to the appellant a franchise to sell from the Premises certain petroleum products (including motor fuel) and agreed to supply the appellant with such products for retail sale. The term of the lease and the agreement was a period of three years commencing 1 July 1980 and expiring 30 June 1983. The Act came into operation on 19 September 1980. The lease and the agreement comprised a "franchise agreement" to which that statute applied. We will return later in these reasons to the relevant statutory provisions. The lease and agreement were duly renewed by a further lease and dealer trading agreement dated 2 June 1983 for a further term of 3 years commencing 1 July 1983 and expiring 30 June 1986.

2. By an agreement dated 28 December 1984 it was agreed between the respondents and the appellant that the first respondent assign to the second respondent, and the second respondent assume the burden of, the then current dealer trading agreement dated 2 June 1983. The parties acknowledged and agreed that that agreement should remain on foot for the purposes of the then current lease dated 2 June 1983.

3. By a further instrument dated 3 July 1986, between the respondents and the appellant the first respondent granted to the appellant a lease of the Premises for a further term of three years commencing 1 July 1986 and expiring 30 June 1989, and the second respondent agreed to supply certain petroleum products (including motor fuel) to the appellant for retail sale on the Premises. By a further (and final) agreement styled "Service Station Lease" made between the respondents and the appellant, the first respondent leased the Premises to the appellant for a term of 2 months and 18 days commencing 1 July 1989 and expiring 18 September 1989. By the same instrument the second respondent agreed to supply to the appellant certain petroleum products (including motor fuel) for retail sale on the Premises.

4. The definitions in sub-s.3(1) of the Act produce the result that the provisions of the leases under, or by virtue of which, the first respondent granted to the appellant a right to possess the Premises in connection with the retail sale of motor fuel by the appellant at those premises, together with provisions in the dealer trading agreements by which the first respondent (and, after 1984, the second respondent in lieu of the first respondent) agreed to supply the appellant with motor fuel for retail sale by the appellant at the Premises, comprised a "franchise agreement". The definition of "franchisor" in sub-s.3(1) rendered each respondent a "franchisor"; cf. Blue Metal Industries Ltd v Dilley (1970) AC 827 at 853.

5. In the events that have happened, the appellant had the status of a "franchisee" within the meaning of the Act for a period of 9 years from 19 September 1980 to 18 September 1989. On 30 March 1988 the second respondent wrote to the Appellant advising that "B.P. intends to take back control of B.P. Engadine at the end of your current lease", so that "B.P. is unable to offer renewal at that time." There is no dispute between the parties that sub-s.17B(4) of the Act operated upon the facts of this case, so that the appellant as franchisee was not entitled to a further renewal of the franchise agreement and it was open to the respondents to refuse such a renewal.

6. The question as framed on the appeal requires the assumption that on 18 September 1989 the respondents acquired property, namely some species of goodwill from the appellant, and that such property was acquired otherwise than on just terms. The precise issue that is posed on those assumptions is whether the operation of some provision of the Act resulted in the acquisition of this property so as to require the respondents to pay to the appellant compensation pursuant to s.23.

7. In order to answer that question it is necessary first to refer to certain provisions of the Act. Sub- sections 17B(4),(5) and (6) evince, as Sheppard J. said, an intention to confer the protection of the legislation on franchisees for a period of 9 years commencing on or after 19 September 1980. The appellant gained the protection of the legislation forthwith upon its commencement on 19 September 1980; hence the significance in the present case of the expiry of the franchise agreement on 18 September 1989.

8. Section 13 of the Act contains provisions dealing with the duration of franchise agreements. A corporation shall not enter, as franchisor, into a franchise agreement the term of which does not comply with the requirements of s.13: sub-s.13(1). In ordinary circumstances, a franchise agreement, whether entered into for the first time or by way of renewal, is to be for a period of not less than three years. Sub-section 13(4) provides as follows:-
   

"13(4) Subject to sub-sections (5) and (6), where -

(a) a corporation enters, as franchisor, into a franchise agreement by way of renewal; and

(b) the term of the original agreement amounts, or the terms of the original agreement and of any previous renewal amount in the aggregate, to a period of more than 6 years and less than 9 years, the term of the agreement so entered into shall be a period that is not less than the difference between the period referred to in paragraph (b) and 9 years."

1. It is unnecessary to refer to sub-s.13(6), but sub-s.13(5) provides that, in ascertaining the length of the term of an agreement for the purposes of para.13(4)(b), so much of the term of the agreement as has occurred at a time when the statute did not apply to the agreement shall be disregarded.

2. Section 16 provides that a franchise agreement may not be terminated by the franchisor except on one or more of the grounds specified in sub-s.16(2). Section 17, subject to its provisions and to those of s.17A and s.17B, obliges a franchisor to renew a franchise agreement except on one or more of a number of specified grounds. Sub-section 3(4) relevantly provides that, where at the expiration of a franchise agreement the franchisee and the franchisor enter into a new franchise agreement concerning the same subject matter, the new agreement should be taken to be a renewal of the earlier agreement notwithstanding that the provisions of the new agreement may differ from those of the earlier agreement. Further, sub-s.3(4A) provides that a reference to renewal should be read as including a reference to further renewal.

3. Upon the expiry on 18 September 1989 of the franchise agreement the respondents, as franchisors, were at liberty, but were not obliged, to renew the franchise agreement. This was because the term of any renewal together with the past term would have amounted in the aggregate to 9 years or more. The position is spelled out in sub-s.17B(4). This provides:-
   

"17B(4) Where -

(a) a franchise agreement (in this sub- section referred to as 'the original agreement') has been entered into otherwise than by way of renewal;

(b) the provisions of section 17 of this act as in force before 1 January 1985, or of sections 17 and 17a of this act as in force on and after that date, or both, have applied in relation to a renewal, or 2 or more consecutive renewals, of the original agreement; and

(c) the term or terms of the agreement as so renewed, together with the term of the original agreement, amount in the aggregate to 9 years or more, sections 17 and 17a of this Act as in force on and after that date do not apply in relation to the renewal of the agreement when the term of the agreement next expires, but, if the franchisor voluntarily renews the agreement, those sections and this section (subject to section 6) apply again as if the agreement as so voluntarily renewed were entered into otherwise than by way of renewal."

1. Section 6 does not bear upon the problem in the present case. However, the significance for the legislation of the 9 year period of protection is further emphasised by sub-s.17b(5) which provides that ss.17 and 17a, dealing with renewal and procedures for renewal, do not apply in relation to a franchise agreement whose term is 9 years or more.

2. The Act does not operate merely upon agreements which have contractual force under the general law. This is made clear by the definition of "agreement" in sub-s.3(1), as embracing any agreement, arrangement or understanding whether or not having legal or equitable force and whether or not based on legal or equitable rights. Nevertheless, as the arrangements between the appellant and the respondents demonstrate, there will be many instances where that which is treated by the legislation as a "franchise agreement" is a combination of a lease of premises and an agreement for the acquisition of motor fuel for retail sale at those premises.

3. Where the legislation fixes upon an arrangement or understanding which is not based on legal or equitable rights and does not have legal or equitable force, the legal rights and obligations of the parties to the franchise agreement will be those created by the legislation itself and any arrangement or understanding between the parties must yield to the statute. Thus sub-s.7(1) provides that the Act applies "notwithstanding any agreement to the contrary". On the other hand, an arrangement or understanding between the parties is unaffected to the extent to which it is capable of operating consistently with the legislation: sub-s.7(2).

4. Where the relations between the franchisor and the franchisee have as their source an agreement creating legal or equitable rights, the giving of effect to the Act will qualify the rights and obligations of the parties under the general law. Obvious examples are provided by the provisions in the Act dealing with termination and renewal of a franchise agreement. To the extent that a provision purports to exclude, limit or modify the operation of a provision of the legislation it is void. A provision is void also to the extent to which it purports to exclude, limit or modify any right or remedy based on or arising out of a provision of the legislation. These consequences are spelled out in sub-s.7(1) of the Act. But again, the legislation is not to be taken to affect the operation of an agreement to the extent to which the agreement is capable of operating consistently with the Act: sub-s.7(2) so provides. Further, s.8 states:-
   

"8 This Act is not intended to affect the operation of a law of a State or Territory to the extent that that law is capable of operating concurrently with this Act."

1. If under the law in force in the State of New South Wales the position was that, upon the expiry of the franchise agreement on 18 September 1989, the goodwill built up in respect of the business conducted at the Premises by the appellant enured to the benefit, not of the respondents, but of the appellant, then it would, in our view, be clear enough that the Act was not intended to affect the operation of the general law in this respect. This would be because the general law was capable of operating concurrently with the legislation, within the meaning of s.8.

2. However, as is not disputed, the general law is to the contrary effect. Under the general law the benefit of goodwill built up by reason of a tenant carrying on a business from the leased premises enures to the benefit of the landlord at the expiration of the term. Lord Coleridge CJ in Llewellyn v Rutherford (1875) LR 10 CP 456 at 467, speaking with reference to a public-house, described the position as follows:-
   

"Here is a public-house in which a thriving business has been carried on, having attached to it that which has been variously described as goodwill, - a thing which has an appreciable value and is every day bought and sold. That goodwill the tenant is about to forego. In the absence of a stipulation to the contrary, it would be an increased value of the premises, which on the tenant's going away would enure to the benefit of the landlord: he might let them for an increased rent or he might obtain a premium. In the absence of a stipulation, the tenant could derive no advantage from such increased value. The end of the term having arrived, all he could take away would be the stock-in-trade and the tenant's fixtures. The goodwill is lost to him."

See also the judgment of Brett J., supra at 469.

1. As is illustrated by the facts in Llewellyn v Rutherford, specific provision to the contrary might be made by covenant in the lease. Statute may also have an impact. The Commonwealth v Reeve (1949) 78 CLR 410, dealing with resumption pursuant to the Lands Acquisition Act 1906, provides one example. Another was provided by the Landlord and Tenant Act 1927 (U.K). since repealed: see Halsbury's "Laws of England", 4th Ed., Vol. 27, p 436. The 1927 statute conferred upon a tenant an entitlement on the termination of the tenancy and on quitting the holding to compensation from the landlord where the tenant could show that, by reason of the carrying on by him or his predecessors in title at the premises of a trade or business for a period of not less than 5 years, what was termed "goodwill" had become attached to the premises by reason of which the premises could be let at a higher rent than they would have realised had no such goodwill attached thereto: see Charrington and Co. Ltd v Simpson (1935) AC 325; Halsbury's "Laws of England", 2nd Ed. Vol. 20, pp 294-297.

2. The failure of the British Parliament to define "goodwill" in this legislation presented the courts with some difficulties in describing that particular species of client connection to the premises with which the legislation was concerned. In Whiteman Smith Motor Co. Ltd v Chaplin (1934) 2KB 35 at 42, Scrutton LJ, in what might now be seen as Orwellian imagery, divided customers resorting to business premises between those whose habits were reminiscent of the cat, the rat and the dog. Maugham LJ. (at 50) added the rabbit to indicate those customers who attended simply from propinquity to the premises, whilst the dog's attachment would be a personal one to the particular person carrying on the business, the cat's attachment would be to the premises rather than to the particular person operating the business, and the rat represented those who followed neither the place nor the person and thus might be expected to drift away elsewhere. It may have been with these sophistications in mind that the parties framed the question before us merely in terms of acquisition of "some species of goodwill".

3. Upon the expiry of the term of a franchise agreement in circumstances such as those in the present case, where the franchisor is not bound to renew the agreement and does not voluntarily do so, does the legislation bring about a result as regards the goodwill which differs from that under the general law? In the present case, by dint of sub-s.17B(4) the legislation does not oblige the respondents to renew the franchise agreement for a further term. Does this mean that within the meaning of sub-s.23(1) the operation of a provision of the legislation would result in the acquisition of property from the appellant by the respondents?

4. Under the general law, in the absence of any special covenant and any other applicable statute, upon the tenancy of the appellant coming to an end, the benefit of any goodwill of the character described above would enure to the benefit of the first respondent as lessor. The Act operated upon this relationship by limiting the means by which it could be brought prematurely to an end and, in effect, by entrenching the right to possession of the appellant for a period of 9 years from 19 September 1980. To the extent to which the legislation in this way cut in upon what would otherwise be the rights of the franchisor in relation to the Premises, this might have involved an acquisition from the franchisor of property within the meaning of s.51(xxxi) of the Constitution; cf. Trade Practices Commission v Tooth & Co. Ltd (1979) 142 CLR 397. No doubt it was to meet that possibility that s.23 was enacted, obviating any objection on constitutional grounds by providing for "just terms": cf. s.31 of the Lands Acquisition Act 1955 which was considered by Jacobs J. in Albany v Commonwealth of Australia (1976) 12 ALR 201 at 233. But intrusion upon the rights of the franchisor is not something with which these proceedings are concerned. They concern the alleged deprivation of the franchisee.

5. In a sense, because in the present case the legislation has entrenched the tenure of the appellant only for a 9 year term, the acquisition of goodwill of which the appellant complains has come about for the reason that sub-s.17B(4) does not stipulate a maximum period in excess of 9 years. But this does not mean that, within the meaning of sub-s.23(1), the acquisition by the first respondent of the goodwill in question is the "result" of the operation of sub-s.17B(4). Sub-section 23(1) is couched in terms of "result". The acquisition results from the operation of the general law as it affects the relationship between the parties in question, freed as it now is from the constraints and qualifications imposed by the Act. The acquisition of goodwill upon the end of the term on 18 September 1989 was not the result of the operation of any provision of the Act so much as a consequence of what the Parliament did not provide, namely an entrenched tenure for a period greater than 9 years.

6. Where a franchisor elects to grant a new lease the franchisee has the benefit of continued exploitation of the goodwill of the site; perhaps for another 9 years. But where a franchisor elects not to grant a new lease, the franchisee is turned from the site without compensation for any goodwill which it may have developed during its period of occupancy. A franchisee, such as the appellant, may regard this result as harsh, the harshness being exacerbated if it should be the case - we do not know whether it is so - that franchisors are more likely to decide themselves to operate sites to which substantial goodwill attaches. But if this result is harsh, it is a product of the circumstance that the Act does not require the franchisor who elects not to renew to pay any compensation to the franchisee. Any such harshness cannot be met by extending s.23 to cover not only an acquisition which results from the operation of the Act but also an acquisition which results from what the Act does not provide.

7. In our view, the question propounded for our determination should be answered in the negative. The appeal should be dismissed with costs.