SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 2)
[2012] FCA 1116
•15 October 2012
FEDERAL COURT OF AUSTRALIA
SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 2) [2012] FCA 1116
Citation: SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 2) [2012] FCA 1116 Parties: SPAR LICENSING PTY LTD ACN 002 965 193 and SPAR AUSTRALIA LIMITED ACN 102 281 167 v MIS QLD PTY LTD ACN 132 323 418, CHRISTOPHER MARTIN SICHTER, SHARON LEE WARD and ANTHONY PAUL APLIN; MIS QLD PTY LTD ACN 132 323 418, CHRISTOPHER MARTIN SICHTER, SHARON LEE WARD and ANTHONY PAUL APLIN; SPAR LICENSING PTY LTD ACN 002 965 193 and SPAR AUSTRALIA LIMITED ACN 102 281 167 File number: NSD 1501 of 2011 Judge: GRIFFITHS J Date of judgment: 15 October 2012 Catchwords: CONTRACT – termination of franchise agreement – no express right of termination – whether implied right of termination – whether breach of franchise agreement
COMPETITION – s 45(2) Competition and Consumer Act 2010 (Cth) – whether provision an exclusionary provision – whether provision has substantial purpose and/or effect or likely effect of substantially lessening competition in a market – definition of relevant market –competitors in that market
TRADE PRACTICES – s 51AD Trade Practices Act 1974 (Cth) – Trade Practices (Industry Codes-Franchising) Regulations 1998 – whether breach of clauses 6B and 10 of Franchising Code of Conduct – whether current disclosure document provided to prospective franchisee – whether relief granted under ss 82 or 87
TRADE PRACTICES – s 18 Australian Consumer Law – representations prior to execution of franchise agreement – representations that franchise agreement could be terminated on payment of termination and related fees – whether representations made – whether representations misleading and/or deceptive – whether representations relied upon – whether loss or damage suffered – whether causal link between representation and loss suffered – whether relief granted under ss 82 or 87 Competition and Consumer Act 2010 (Cth)
Legislation: Competition and Consumer Act 2010 (Cth) ss 4D, 4E, 45, 82, 87
Australian Consumer Law s 18
Evidence Act 1995 (Cth) ss 64, 79
Trade Practices Act 1974 (Cth) ss 51AD, 51AE, 52
Trade Practices (Industry Codes-Franchising) Regulations 1998
Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 (Cth)Cases cited: Allstate Life Insurance Co v Australia New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112
Australian Competition and Consumer Commission v Cement Australia Pty Ltd (No 3) [2010] FCA 1131
Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297
Australian Competition and Consumer Commission v Metcash Trading Limited (2011) 282 ALR 464
Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd (2010) 268 ALR 321
Australian Gas Light Company v Australian Competition and Consumer Commission (2003) 137 FCR 317
Australian Securities and Investments Commission v Rich (2005) 216 ALR 320
Davids Holdings Pty Limited v Attorney-General (Cth) (1994) 49 FCR 211
De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) [2012] FCAFC 28
De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) (2011) 200 FCR 253
Como Investments Pty Limited (in liq)v Yenald Nominees Pty Limited (1997) ATPR 41-550
Connex Group Australia Pty Ltd v Butt [2004] NSWSC 379
Eastern Express Pty Limited v General Newspapers Pty Limited (1991) 30 FCR 385
Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167
Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1
Gould v Vaggelas (1985) 157 CLR 215
Henville v Walker (2001) 206 CLR 459
Houssein v Under Secretary, Department of Industrial Relations and Technology (NSW) (1982) 148 CLR 88
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653
I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109
Investmentsource Corporation Pty Limited v Knox Street Apartments Pty Limited [2007] NSWSC 1128
Janssen-Gilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526
Land Enviro Corp Pty Limited v HTT Huntley Heritage Pty Limited [2012] NSWSC 177
Lithgow City Council v Jackson (2011) 244 CLR 352
March v E & MH Stramare Pty Ltd (1991) 171 CLR 506
Marks v GIO Australia Holdings Limited (1998) 196 CLR 494
Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90
Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 62 FLR 437
Rafferty v Madgwicks (2012) 203 FCR 1
Ringrow Pty Ltd v BP Australia Ltd (2003) 130 FCR 569
Re Queensland Independent Wholesalers Ltd (1995) 132 ALR 225
Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169
Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53
Rural Press Ltd v Australian Competition and Consumer Commission (2002) 118 FCR 236
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Sanguine Technology Pty Ltd v Abacus Calculators (WA) Pty Ltd [2010] FCA 279
Singapore Airlines Limited v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158
Seven Network Ltd v News Ltd (2009) 182 FCR 160
SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 1) [2011] FCA 1054
Wardley Australia Limited v Western Australia (1992) 175 CLR 514
Williams and Hodgson Transport Pty Ltd v Castlemaine Tooheys Ltd (1985) 64 ALR 521Date of hearing: 1, 2, 3, 4, 9, 10 May 2012 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 277 Counsel for the Applicants: Mr I S Wylie with Mr Kirby Solicitor for the Applicants: Clamenz Evan Ellis Lawyers Counsel for the Respondents: Mr R A Perry SC Solicitor for the Respondents: Lynch Morgan Lawyers
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1501 of 2011
BETWEEN: SPAR LICENSING PTY LTD ACN 002 965 193
First ApplicantSPAR AUSTRALIA LIMITED ACN 102 281 167
Second ApplicantMIS QLD PTY LTD ACN 132 323 418
First Cross-ClaimantCHRISTOPHER MARTIN SICHTER
Second Cross-ClaimantSHARON LEE WARD
Third Cross-ClaimantANTHONY PAUL APLIN
Fourth Cross-ClaimantAND: MIS QLD PTY LTD ACN 132 323 418
First RespondentCHRISTOPHER MARTIN SICHTER
Second RespondentSHARON LEE WARD
Third RespondentANTHONY PAUL APLIN
Fourth RespondentSPAR LICENSING PTY LTD ACN 002 965 193
First Cross-RespondentSPAR AUSTRALIA LIMITED ACN 102 281 167
Second Cross-Respondent
JUDGE:
GRIFFITHS J
DATE OF ORDER:
15 OCTOBER 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties are to confer and prepare draft declarations and other orders giving effect to these reasons and in accordance with paragraph 275 below.
2.The parties will be notified of the date the matter will be relisted for the making of orders giving effect to these reasons and directions.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1501 of 2011
BETWEEN: SPAR LICENSING PTY LTD ACN 002 965 193
First ApplicantSPAR AUSTRALIA LIMITED ACN 102 281 167
Second ApplicantMIS QLD PTY LTD ACN 132 323 418
First Cross-ClaimantCHRISTOPHER MARTIN SICHTER
Second Cross-ClaimantSHARON LEE WARD
Third Cross-ClaimantANTHONY PAUL APLIN
Fourth Cross-ClaimantAND: MIS QLD PTY LTD ACN 132 323 418
First RespondentCHRISTOPHER MARTIN SICHTER
Second RespondentSHARON LEE WARD
Third RespondentANTHONY PAUL APLIN
Fourth RespondentSPAR LICENSING PTY LTD ACN 002 965 193
First Cross-RespondentSPAR AUSTRALIA LIMITED ACN 102 281 167
Second Cross-Respondent
JUDGE:
GRIFFITHS J
DATE:
15 OCTOBER 2012
PLACE:
SYDNEY
TABLE OF CONTENTS
INTRODUCTION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [1] BROAD OUTLINE OF PARTIES’ CLAIM........ ........ ........ ........ ........ ........ ........ ........ ..... [10] THE APPLICANTS’ CLAIMS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [16] Applicants’ Contract Claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [17] Special Offer Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [20] Franchise Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [21] Consideration of applicants’ contract claim........ ........ ........ ........ ........ ........ ........ ........ ..... [22] Applicants’ Competition Law Claims........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [27] (a) Exclusionary provision........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [28] (b) Substantial lessening of competition........ ........ ........ ........ ........ ........ ........ ........ ...... [47] Market definition........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [55] SPAR’s limited evidence on its competition law case........ ........ ........ ........ ... [68] SPAR’s purpose case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [70] SPAR’s likely effect case........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [75] RESPONDENTS’ CROSS-CLAIM........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [88] BREACH OF THE FRANCHISING CODE........ ........ ........ ........ ........ ........ ........ ........ ..... [90] (a) Summary of relevant legislative requirements concerning disclosure........ ........ .... [92] (i) The Franchising Regulations........ ........ ........ ........ ........ ........ ........ ........ ........ [96] (ii) The Franchising Code........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [98] (b) Factual findings concerning the Disclosure Document........ ........ ........ ........ ........ . [115] (c) Summary of parties’ respective arguments........ ........ ........ ........ ........ ........ ........ .... [123] (d) Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [140] (e) Relief........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [153] (i) Declaration of contravention........ ........ ........ ........ ........ ........ ........ ........ ........ [156] (ii) Damages........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [157] (iii) Setting aside or varying the Franchise Agreement and/or Special Offer Agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [158] MISLEADING AND DECEPTIVE CONDUCT........ ........ ........ ........ ........ ........ ........ ...... [166] (a) Were the representations in fact made?........ ........ ........ ........ ........ ........ ........ ........ . [174] (b) Were the representations misleading and/or deceptive?........ ........ ........ ........ ........ [203] (c) Were the representations relied upon by the cross-claimants?........ ........ ........ ....... [209] (d) Did MIS suffer any loss or damage and, if so, is there a causal link between that
loss and the representations?........ ........ ........ ........ ........ ........ ........ ........ ........ ........[227] (i) MIS’s loss or damage........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [230] (ii) Causal link between the representations and MIS’s loss or damage........ ........ [266] (e) Relief........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [271] CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [275] REASONS FOR JUDGMENT
INTRODUCTION
These proceedings concern a dispute about the wholesale supply of dry groceries and related services to a supermarket situated on Macleay Island in Moreton Bay, Queensland. The applicants are two companies in the SPAR group of companies. The first applicant (“SPAR Licensing”) is a wholly-owned subsidiary of the second applicant (“SPAR Australia”). I shall refer to them collectively as “SPAR”. SPAR Licensing supplies dry groceries and related services to a range of independent retail grocery outlets, primarily in Queensland and northern New South Wales, but also in some other parts of Australia. SPAR Licensing prefers to supply such products and services pursuant to franchise agreements with independent retail grocery outlets. It also supplies those products and services to some such outlets even where there is no franchising arrangement in place. In supplying such products and services on a wholesale basis, SPAR Licensing competes with Metcash Trading Limited (“Metcash”) and its subsidiaries, which include IGA Distribution Pty Ltd (“IGA”).
Macleay Island is a relatively small island situated in Moreton Bay, north of Brisbane. It has a population of approximately 2,500 people, many of whom are retirees or persons in the lower socio-economic demographic. As such, they are generally price sensitive in their grocery shopping. It is a popular holiday destination and its population increases during holiday periods up to around 5,000 people. Ferry services run to and from Macleay Island to Redland Bay on the mainland. The ferry trip takes approximately 20 minutes and costs about $15.00 for a return fare. It costs about $100.00 to transport a vehicle from the mainland to Macleay Island and vice versa. There is also a ferry/barge service to and from Russell Island, which is situated south of Macleay Island in Moreton Bay. The journey to Russell Island from Macleay Island takes approximately 5 to 10 minutes.
There are two supermarkets on Macleay Island. The first is the store which is owned and operated by the first respondent, MIS QLD Pty Ltd (“MIS”). The second, third and fourth respondents are all directors and shareholders of MIS. MIS’s store on Macleay Island is currently a SPAR branded store after the owners entered into a Special Offer Agreement with SPAR Licensing in December 2010 and a related Franchise Agreement on 1 February 2011. Prior to those agreements being executed, since August or September 2008 MIS acquired dry groceries from SPAR, but not under any franchise arrangement. The MIS store is approximately 450 square metres in size.
The second supermarket on Macleay Island operates under the banner “FoodWorks”. It is approximately 250 square metres in size. The FoodWorks Group comprises many independent retailers in Queensland. The Group represents an amalgamation of approximately 15 different independent banners which previously operated in Queensland. Independent supermarket retailers can become shareholders of the Group. The FoodWorks Group has what was described as a “long term” supply agreement with Metcash. The Group obtains its wholesale supply of dry groceries from Metcash but sells the products under its own banner, not that of IGA. As will emerge below, there was scant evidence in the proceedings as to the terms and conditions under which FoodWorks obtains wholesale dry groceries from Metcash.
There are a number of other supermarkets in the region surrounding Macleay Island. There is a “Supa IGA” supermarket of approximately 1200 square metres on Russell Island. At Redland Bay, there are another two IGA bannered stores, both in the same ownership. One is approximately 500 square metres and the other is 350-400 square metres. Woolworths, Coles and Aldi each operate supermarkets located at or near Victoria Point, which is situated on the mainland to the west of Macleay Island. There is no ferry service direct to Victoria Point from Macleay Island. Macleay Island residents who wish to visit Victoria Point do so either by bus or car after catching the ferry to Redland Bay. Residents of Macleay Island sometimes travel to Victoria Point to obtain medical attention and other professional services.
Neither Coles nor Woolworths operates a supermarket on Macleay Island. But Macleay Island residents are able to obtain groceries by using Woolworths’ online service, known as Woolworths Online. The nature of that service will be elaborated upon below noting, however, that the evidence on that subject was quite limited.
There is fierce rivalry between Metcash and SPAR to supply dry groceries and related services to independent supermarkets in Queensland. As will emerge further below, both businesses devote considerable time and resources seeking to persuade independent retailers to enter into franchising or licensing arrangements under which they obtain their wholesale supplies and related services exclusively from one rather than the other supplier.
The proceedings arise against the background of MIS having entered into a Franchise Agreement with SPAR Licensing on 1 February 2011, then seeking to exit that arrangement in August 2011 after entering into what was described as an “Alliance Agreement” with SPAR’s rival, Metcash/IGA. In September 2011, the SPAR parties obtained an interlocutory injunction restraining MIS from exiting the Franchise Agreement and also restraining it from purchasing goods for the conduct of its retail supermarket from any person other than SPAR (see SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 1) [2011] FCA 1054).
It is convenient to now outline in broad terms the parties’ respective legal claims.
BROAD OUTLINE OF PARTIES’ CLAIMS
By way of a further amended statement of claim filed on 10 February 2012 the SPAR parties contend that they are entitled to obtain final relief against the respondents in respect of causes of action in contract and competition law. They seek specific performance of the Special Offer Agreement and the Franchise Agreement. Additional relief is sought in respect of SPAR’s competition law claims. Those latter claims are said to be made under s 45 of the Competition and Consumer Act 2010 (Cth) (“the CC Act”).
There are two limbs to the applicants’ competition law claims. The first limb concerns an allegation that MIS and Metcash entered into an exclusionary provision in contravention of s 45(2)(a)(i) of the CC Act. The provision which the SPAR parties claim to be an exclusionary provision is identified and described in [35] of their further amended statement of claim (“the Provision”), which is in the following terms:
On a date presently unknown to the applicants but in or about August 2011 and by 16 August 2011, MIS made an arrangement, or arrived at an understanding, with Metcash which contained a provision that:
(a)MIS would terminate the Special Offer Agreement and the Franchise Agreement and instead acquire dry groceries and related marketing and retail support services from Metcash, in consideration of
(b)Metcash assisting MIS financially and otherwise to terminate those agreements, and guaranteeing that if MIS did so Metcash would refrain from acquiring, redeveloping and/or expanding the Foodworks (sic) Supermarket and supplying additional dry groceries and related services to it (the Provision) (original emphasis).
The second limb of the SPAR parties’ competition law claims is to the effect that, even if the Provision is not an exclusionary provision, it has the substantial purpose and/or the effect or likely effect of substantially lessening competition in various wholesale, retail and/or combined markets in contravention of s 45(2)(a)(ii) of the CC Act.
The respondents defend those claims and also bring a cross-claim, with the following two limbs. First, they claim that they are entitled to certain relief because SPAR Licensing has contravened certain provisions of the Franchising Code of Conduct (“the Franchising Code”), resulting in a contravention of s 51AD of the Trade Practices Act 1974 (Cth) (“TP Act”). In particular, they claim that SPAR Licensing failed to provide MIS with current and required financial information prior to execution of the Franchise Agreement, contrary to clauses 6B and 10 of the Franchising Code.
The second limb of the cross-claim alleges that SPAR Licensing contravened s 18 of the Australian Consumer Law by making certain representations to the MIS directors which induced them to enter into the Special Offer Agreement and the Franchise Agreement. Those representations are said to be misleading and deceptive because the representations were to the effect that, if MIS became a SPAR franchisee and then later wanted to convert to IGA and terminate the Franchise Agreement, MIS could do so on condition that it pay SPAR Licensing the termination and related fees set out in the Franchise Agreement. The cross-claimants allege that they relied upon those representations in executing both the agreements. They contend that the representations were misleading and deceptive because the SPAR parties are now seeking to restrain MIS from terminating those agreements, contrary to the terms of the representations.
The cross-claimants seek various relief, including declaratory orders, damages and orders that the Franchise Agreement and/or Special Offer Agreement be set aside or varied.
THE APPLICANTS’ CLAIMS
I shall now deal with the applicants’ claims in both contract and competition law.
Applicants’ Contract Claim
The applicants’ claim in contract may be summarised as follows:
(a)in mid-December 2010, the respondents entered into the Special Offer Agreement with SPAR Licensing for the supply of dry groceries and related marketing and retail support services;
(b)on 1 February 2011, SPAR Licensing and MIS entered into the Franchise Agreement, with MIS as franchisee and Mr Sichter, Ms Ward and Mr Aplin as guarantors;
(c)the Franchise Agreement is for a term of 5 years commencing on 1 February 2011. It requires MIS to operate its supermarket on Macleay Island as a SPAR bannered store and to purchase SPAR’s range of dry groceries exclusively from it;
(d)neither the Special Offer Agreement or the Franchise Agreement expressly confers any rights of termination on the respondents;
(e)on 19 August 2011, the respondents purported to terminate both the Special Offer Agreement and the Franchise Agreement by a letter of resignation, thereby repudiating the agreements; and
(a)the applicants elected to affirm the agreements and to commence these proceedings.
In broad terms, the respondents resist the applicants’ claims in contract on several grounds. First, they contend that a term should be implied in the Franchise Agreement to the effect that MIS has a right to terminate the agreement. Secondly, they say that they had the right to terminate the agreements under the common law. Thirdly, they seek to have the Franchise Agreement and the Special Offer Agreement either declared void or varied under one or other of the two limbs of their cross-claim. Thus, they contend that:
(a)the deficiencies in the Disclosure Document provided to them around 21 July 2010 gave rise to a contravention of s 51AD of the TP Act and were of such significance and character that the Court in its discretion should set aside or vary both those agreements; and/or
(b)similar relief should also be granted on the basis that the respondents were induced to enter into those agreements by the applicants’ misleading and deceptive conduct, contrary to s 18 of the Australian Consumer Law.
It is convenient to now summarise the key terms of those agreements.
Special Offer Agreement
The Special Offer Agreement was executed on 14 December 2010. It is expressed to be conditional on the directors of MIS signing and finalising a formal franchise agreement before 14 January 2011. The Special Offer Agreement provides the respondents with special benefits in terms of service fees, rebates, subsidies, incentives and other pricing support in developing the Macleay Island store as a SPAR bannered store. Some of the incentives were only available for the first twelve months of the business relationship, while others were spread over the full five year term of the proposed franchise agreement.
Franchise Agreement
As noted above, the Franchise Agreement was ultimately executed on 1 February 2011 (no material significance attaches to the fact that this occurred several weeks after the date specified in the Special Offer Agreement). The key relevant terms of the Franchise Agreement can be summarised as follows:
(a)the agreement is for a term of 5 years (clause 3.2);
(b)the parties to the Franchise Agreement are SPAR Licensing as franchisor and MIS as franchisee, with the guarantors being Mr Sichter, Mr Aplin and Ms Ward;
(c)express provision is made in clause 19 for the franchisor to terminate the agreement but no express provision is made for early termination by the respondents; and
(d)clause 20.6 deals with the subject of amounts payable on termination. Because of its significance to the proceedings, it is convenient to set out that clause in its entirety:
20.6 Amounts Payable on Termination
If this Agreement is terminated after the cooling off period and within 5 years of this date following a breach by the Franchisee, the Franchisee must within 7 days of termination pay to the Franchisor:
(a)the amount of the Termination Fee specified in Item 10 of the Schedule;
(b)the amount of any payment by the Franchisor, or reimbursement of payments made by the Franchisor to the Franchisee, for the costs of the maintenance of the Premises in compliance with clause 10.3 hereof, the estimate of which (to the extent that it is known) as made on this date is set out in Item 12 of the Schedule;
(c)the amount of the cost to the Franchisor, of the provision of retail business managers or other consultants of the Franchisor to assist the Franchisor in restocking, layout and management of the Premises, the estimate of which (to the extent that it is known) on this date is set out in Item 13 of the Schedule;
(d)any amounts as incurred or paid by way of direct payments, subsidies, costs, prizes, prize moneys, benefits or otherwise by the Franchisor for advertising promotions, programs or campaigns of the Business, the estimate of which (to the extent that it is known) on this date is set out in Item 14 of the Schedule; and
(e) the amount of the cost of the Franchisor for the supply of:
(i)computer hardware and software as supplied by the Franchisor to the new franchisee;
(ii)the provision of consultants or employees of the Franchisor for the installation of the computer hardware and software;
(iii)the training of the Franchisee as to the conduct of the Business;
(iv)uniforms for use by the Franchisee and its staff referred to in clause 9.8; and
(v)any signage supplied by the Franchisor and not paid for by the Franchisee;
the estimate of which (to the extent it is known) on this date is set out in Item 15 of the Schedule.
Consideration of applicants’ contract claim
Mr Wylie (who appeared with Mr Kirby for the applicants) described SPAR’s contract claim as “straightforward”. SPAR’s claim simply relies on the express terms of the Franchise Agreement. He submitted that, in the absence of any express right of termination by MIS, an implied right of termination should not be found to exist because such a right was not necessary to give business efficacy to the Franchise Agreement and would also be inconsistent with the express terms of the Franchise Agreement.
Although the respondents resisted the applicants’ contract claim on various grounds (see [18] above), Mr Perry SC (who appeared for the respondents) primarily focused on his clients’ cross-claim. Acceptance of either limb of that cross-claim has the potential to have the Special Offer Agreement and the Franchise Agreement either set aside or varied in a way which would stymie the applicants’ contract claim.
Subject to an important qualification which I will come to shortly, I accept that, prima facie, the respondents’ conduct in purporting to terminate the Franchise Agreement and convert to IGA constituted a breach of the Franchise Agreement. I accept SPAR’s submission that the Franchise Agreement did not confer any right of termination on the respondents. I also accept the submission that no implied right of termination should be read into the Franchise Agreement. In my view, such a right is not necessary to give business efficacy to the Franchise Agreement. There is nothing unusual about the notion of a franchisee being bound to honour a franchise agreement for a term of five years. Furthermore, it is difficult to reconcile implying such a right in circumstances where express provision is made in clause 20.6 of the Franchise Agreement for the franchisor alone to terminate the agreement in prescribed circumstances. Finally, as to the alleged common law right to terminate the agreements, I see no basis for any such right in the circumstances here and also note that, in any event, the point was not developed at all by Mr Perry SC in argument.
But that is not the end of the matter. Whether or not the applicants ultimately succeed in their contract claim depends upon the Court rejecting the respondents’ cross-claim. That is because acceptance of either limb of that cross-claim might result in the Special Offer Agreement and the Franchise Agreement being either set aside or varied by the granting of relief under s 87 of the TP Act or CC Act (which are in identical terms). In those circumstances, it is appropriate to defer further consideration of the matter until the cross-claim is considered and determined.
I shall now proceed to deal with the applicants’ competition law claims.
Applicants’ Competition Law Claims
As noted above, the applicants’ competition law case has two alterative limbs, both of which rely on s 45 of the CC Act. It is convenient to deal with those limbs in turn. Before doing so, it might be noted that the applicants’ causes of action are said to arise under the CC Act, whereas the cross-claimants rely on the TP Act for their causes of action. The difference lies in the timing of the relevant events underpinning the parties’ respective claims.
(a) Exclusionary provision
The first limb turns on the applicants establishing that there is an arrangement or understanding between MIS and Metcash which includes an exclusionary provision within the meaning of s 4D of the CC Act (and see ss 45(1)(a) and (2)(a)(i) of that Act). As noted above, the applicants contend that the exclusionary provision (as pleaded in [35] of the further amended statement of claim and reproduced at [11] above) is to the effect that, if MIS converted from SPAR to Metcash, Metcash would assist MIS financially to terminate its agreements with SPAR and guarantee that Metcash would refrain from acquiring, redeveloping and/or expanding the FoodWorks supermarket on Macleay Island and supplying additional dry groceries and related services to it.
The first limb of the applicants’ competition law claims raises the following central question: assuming that the Provision as pleaded in [35] of the further amended statement of claim otherwise constitutes an exclusionary provision within the meaning of s 4D of the CC Act, are MIS and Metcash/IGA competitors in a pleaded market? If they are not, the definition of an exclusionary provision in s 4D cannot be satisfied and the first limb of the competition claims must necessarily fail.
The only relevant market relied upon by the applicants for the purposes of the first limb is said to be the Macleay Island Retail Market (as pleaded in [32] of the further amended statement of claim, which was partly admitted by the respondents in [32] of the further amended defence). Mr Wylie candidly accepted (more than once) that the evidence in support of SPAR’s contention that MIS and Metcash are competitors in that market was “limited”. Mr Wylie further acknowledged that it was “a difficult case” for him to make out. He also accepted that there was no evidence before the Court which contradicted the proposition that Metcash/IGA are wholesalers, not retailers, and did not themselves operate any supermarket in Queensland at a retail level.
In support of this aspect of SPAR’s case, Mr Wylie drew attention in his closing address to IGA’s interest in acquiring and developing retail sites, including evidence concerning the alleged possibility of IGA redeveloping the FoodWorks supermarket on Macleay Island. Mr Wylie relied on statements made by Mr Brian West on this topic in correspondence with Mr Aplin (Mr West was IGA’s business development manager in Queensland). He also relied upon Mr Costanzo’s evidence regarding IGA’s interest and activities in acquiring and developing retail sites generally.
For the following reasons, I find that the applicants have failed to establish that MIS and Metcash/IGA are competitors in the Macleay Island Retail Market.
First, while it may be accepted that Metcash/IGA are sometimes involved in acquiring and developing retail supermarket sites, SPAR could point to no evidence which demonstrates that Metcash/IGA actually operate any supermarket at a retail level. I am satisfied that the evidence establishes that, in cases where Metcash/IGA are involved in developing or establishing a retail supermarket site, they do not operate the site themselves as retailers. Rather, it appears that their practice is to take a head lease and then enter into a sub-lease or other similar arrangement with an independent retail operator, who then operates the supermarket. In circumstances where Metcash/IGA acquire or redevelop a site, they are understandably in a strong position to require a retail supermarket operator to acquire groceries and related services from them on an exclusive basis and on condition that they use the IGA banner.
Secondly, in my view, the statements made by Mr West in his correspondence with Mr Aplin do not establish that IGA intended to operate a retail supermarket on Macleay Island in the sense of becoming a supplier in that market (as opposed to being a wholesale supplier to that market). It is evident that the MIS directors were concerned that if MIS converted to IGA, IGA might supply another IGA bannered supermarket or grocery store on Macleay Island in competition with MIS’s IGA bannered supermarket. To assuage those concerns, Mr West sent Mr Aplin a letter dated 10 August 2011 and then a further letter dated 19 August 2011, the effect of which was to guarantee that IGA would not open another supermarket under the IGA banner on Macleay Island (or assist, fund or facilitate others to develop or open a grocery store there) for a period of 7 years without MIS’s consent, on condition that MIS enter into what was described as an “Alliance Agreement” with IGA. There is nothing in that letter, or in any other evidence, which suggests that IGA had any interest itself in actually operating another supermarket or grocery store on Macleay Island.
Thirdly, Mr Wylie submitted that significance should attach to the fact that, at Mr Sichter’s request, Mr West extended the terms of IGA’s restraint beyond not merely opening an IGA bannered supermarket on Macleay Island, but so as also to include IGA not opening “a grocery store” there. Mr Wylie emphasised that the reference in Mr West’s letter dated 19 August 2011 to “a grocery store” was not limited to one with an IGA banner. I do not consider that any relevant significance should attach to Mr West’s acceptance of this suggested extension in the terms of the restraint. Mr West was not called as a witness in the proceedings but Mr Sichter gave evidence, which I accept, that his concern was to restrain IGA from setting up a rival store on Macleay Island with an IGA banner on it. He explained that he asked Mr West to extend the terms of the restraint so as to include “a grocery store” because he did not want IGA circumventing the restraint by calling a rival IGA store on Macleay Island something other than “a supermarket”. Mr Aplin had similar concerns (see further below).
Fourthly, Mr Wylie also relied on Mr Ruberto’s evidence of a conversation he had with Ms Ward on the morning of 19 August 2011 when she told him that MIS was going to switch to IGA (noting that 19 August 2011 is also the date of MIS’s “resignation letter”). Mr Ruberto said that Ms Ward told him that MIS had no choice but to switch from SPAR because:
IGA told them that if they did not go over to IGA, they would redevelop the FoodWorks site at Macleay Island and that would be the end of them.
In my view, Ms Ward’s reference to IGA redeveloping the FoodWorks site does not give rise to an inference to the effect that IGA itself intended to operate a retail supermarket on that site. The reference to “redeveloping” the site says nothing about who ultimately would operate any supermarket built on that site. I think it highly improbable that Metcash/IGA would have any interest in themselves operating a retail supermarket on Macleay Island as that would place them in competition with other nearby retail supermarkets to which they provide wholesale supplies.
Fifthly, Mr Wylie drew attention to an email sent by Mr West to Mr Aplin on 18 August 2011 which relevantly stated:
Hi Anthony I am coming under pressure to give the other site an answer on their proposal. Steve told me that you have signed the credit application but had not resigned. Can you please let me know as soon as you do so so I can kill off the other site.
Mr Wylie submitted that this email indicated that IGA had an interest in redeveloping the FoodWorks site. But even if that submission is accepted, it does not establish that IGA itself intended to operate the supermarket at a retail level. As already noted, Mr West did not give evidence in the proceedings. Both Mr Aplin and Mr Sichter were cross-examined by Mr Wylie as to their understanding of Mr West’s email. Both said that they were unaware of any interest on IGA’s part in IGA itself redeveloping the FoodWorks’ site. Mr Aplin’s understanding was that the current owner of the site had approached IGA and asked if they knew of any independent retailers who might be interested in operating a supermarket on the site if it was redeveloped. Mr Aplin was led to believe that the owner of the IGA bannered store at Redland Bay might have been interested in taking up the opportunity to become an IGA bannered supermarket operator on Macleay Island. Mr Aplin was unsurprisingly concerned that any such outcome would prejudice his interest in converting the MIS store to an IGA bannered supermarket in a few years time. Mr Sichter’s understanding was that the current owner of the site on which the FoodWorks supermarket was situated was interested in redeveloping it. He also said that he was unaware of any intention on the part of IGA to redevelop that site. I accept the evidence of Mr Aplin and Mr Sichter on these matters.
Sixthly, I also find that Mr Costanzo’s evidence concerning IGA’s activities in acquiring or redeveloping retail sites does not suggest that IGA had any plans to operate any supermarket on a retail basis, whether on Macleay Island or elsewhere. He gave extensive evidence regarding the rivalry between IGA and SPAR, particularly during the period between 2006 and 2010 when he worked for Metcash and before he became SPAR’s Queensland state manager. He described various tactics used by Metcash/IGA to persuade independent retailers to convert to the IGA banner. He said that this was sometimes done by spreading rumours to the effect that IGA was interested in acquiring a head lease in near proximity to an existing store aligned with a different wholesaler and then establishing an IGA bannered store operated by an independent retailer. Mr Costanzo never suggested that IGA itself would or was likely to operate such a store. There was simply no evidence establishing that Metcash/IGA had either a history or any intention of participating at a retail level in the operations of any supermarket in the manner suggested by SPAR.
Seventhly, in my view, SPAR’s contention that Metcash/IGA were suppliers in the Macleay Island Retail Market may be predicated on an erroneous understanding of the concept of a “market” for the purpose of the CC Act. As the High Court observed in NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at [68], the term “market” in that Act is not “precise or formally exact”, and there can be “overlapping markets with blurred limits and disagreements between bona fide and reasonable experts about their definition”.
Section 4E of that Act does not purport to provide an exhaustive definition of the term “market”. Rather, it merely states that a market includes goods and services substitutable for, or otherwise competitive with, the goods or services under consideration.
The guidance provided in the caselaw as to meaning of “market” in this context, includes the following observations of French J (as he then was) in Singapore Airlines Limited v Taprobane Tours WA Pty Ltd (1991) 33 FCR 158 at 174:
In competition law it has a descriptive and a purposive role. It involves fact-finding together with evaluative and purposive selection. In any given application it describes a range of economic activities defined by reference to particular economic functions (eg manufacturing, wholesale or retail sales), the class or classes of products, be they goods or services, which are the subject of those activities and the geographic area within which those activities occur. In its statutory setting the market designation imposes, on the activities which it encompasses, limits set by the law for the protection of competition. It involves a choice of the relevant range of activity by reference to economic and commercial realities and the policy of the statute. To the extent that it must serve statutory policy, the identification will be evaluative and purposive as well as descriptive.
In Australian Gas Light Company v Australian Competition and Consumer Commission (2003) 137 FCR 317 (“AGL”) at [378], French J made the following further relevant observations:
The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both.
The Macleay Island Retail Market, as pleaded and defined by the SPAR parties, is a market for the retail supply of dry grocery products and related services on Macleay Island. SPAR’s contention that the suppliers in that market include both MIS and Metcash cannot be accepted on the evidence presented in these proceedings. MIS is undoubtedly a retail supplier, whereas Metcash/IGA are wholesaler suppliers.
Accordingly, for these reasons, I find that SPAR has failed to establish that MIS and Metcash/IGA are competitors in the Macleay Island Retail Market. The evidence overwhelmingly demonstrates that MIS is a supplier in that retail market, whereas Metcash/IGA are suppliers in one or other wholesale markets. Of course, as wholesalers, Metcash/IGA have a keen interest in ensuring that IGA bannered stores operate successfully in retail markets because such success is beneficial to their wholesale business. But such an interest falls well short of establishing that Metcash/IGA are themselves actual or potential suppliers in the Macleay Island Retail Market as contended by the SPAR parties. Thus the first limb of the applicants’ competition law claims is rejected.
(b) Substantial lessening of competition
The second limb of the applicants’ competition law claims is directed to s 45(2)(a)(ii) of the CC Act, which is in the following terms:
(2) A corporation shall not:
(a) make a contract or arrangement, or arrive at an understanding, if:
(i) …; or
(ii) a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition.
In broad terms, SPAR argues that, even if the Provision pleaded in [35] of the further amended statement of claim is not an “exclusionary provision”, it is a provision which has the purpose or likely effect of substantially lessening competition in one or more pleaded markets. Thus SPAR raises both a purpose and a likely effect case under this limb. The substantial lessening of competition is said to relate to SPAR being removed as a wholesale supplier of dry groceries and related services on Macleay Island and in the Moreton Bay region. That is said to be both a substantial purpose and likely effect of the Provision. In addition, SPAR argues that the Provision has the purpose or likely effect of substantially lessening competition by removing Metcash/IGA as a potential competitor in the Macleay Island Retail Market as pleaded by it.
SPAR’s s 45(2)(a)(ii) case does not depend on SPAR establishing that MIS and Metcash are competitors. Rather, it substantially (but not exclusively) focuses on the purpose or likely effect of the Provision on competition between SPAR and Metcash.
SPAR pleads no less than seven alternative markets for this aspect of its case. Those markets are defined and further described in the further amended statement of claim as:
(a)the Macleay Island Wholesale Market;
(b)the Moreton Bay Wholesale Market;
(c)the Queensland Wholesale Market;
(d)the Macleay Island Retail Market;
(e)the Moreton Bay Retail Market;
(f)the Macleay Island Independent Market (representing the combined wholesale and retail supply of dry grocery products and related services on Macleay Island); and
(g)the Moreton Bay Independent Market (representing the combined wholesale and retail supply of dry grocery products and related services in the Moreton Bay region).
The respondents admit in part the existence of the Macleay Island Retail Market as defined by the applicants, but deny the existence of all the other markets pleaded by the applicants. In particular, the respondents admit that MIS, Woolworths Online and the operator of the FoodWorks supermarket on Macleay Island are all suppliers in the retail market for the supply of dry grocery products and related services on Macleay Island, but deny that SPAR Australia, SPAR Licensing or Metcash are suppliers within that retail market. Mr Aplin also gave evidence, which I accept, that the IGA bannered supermarket on nearby Russell Island competes with MIS and is a supplier in the Macleay Island Retail Market. He said that in 2010 Macleay Island residents who travelled by ferry/barge to Russell Island and shopped at the IGA store there received a full refund of their travel costs if they purchased groceries over a particular amount. Mr Aplin indicated that he took into account the pricing of the Russell Island store in setting MIS’s prices. In my view, there is insufficient detailed and relevant evidence to extend the suppliers in that retail market so as to include Coles, Woolworths and Aldi by reference to their supermarkets in or near Victoria Point. I take the same view in respect of the IGA supermarkets at Redland Bay.
SPAR relies on limited documentary and lay evidence in seeking to establish its various pleaded markets. No relevant expert evidence was adduced by any party.
This limb of SPAR’s competition law claims raises the following issues for determination:
(a)apart from the Macleay Island Retail Market (the existence of which is admitted in part by the respondents), has SPAR established any of its other pleaded markets;
(b)has SPAR established that the Provision has the purpose of substantially lessening competition in any market established by it; and
(c)alternatively, has SPAR established that the Provision has the likely effect of substantially lessening competition in any such market?
Before addressing those issues, it is convenient to say a little more about the following two matters:
(a)relevant principles relating to market definition and their application to the evidence here; and
(b)limitations in the evidence relied upon by SPAR in support of its competition law claims and how SPAR presented this aspect of its case.
Market definition
As Yates J observed in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297 at [245], the seminal expression of “the market” for the purposes of Australian competition law is to be found in the following observations of the Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169 at 190:
We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (If there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution-substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives.
It is the possibilities of such substitution which set the limits upon a firm’s ability to “give less and charge more”. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to “give less and charge more” would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, i.e. a relatively high cross-elasticity of demand or cross-elasticity of supply?
Markets can be defined in terms of product, function and geography (see AGL at [378] and the helpful analysis by Emmett J in Australian Competition and Consumer Commission v Metcash Trading Limited (2011) 282 ALR 464 at [127]-[129], [150]-[152] and [174]-[208], which analysis was not disturbed on appeal – see (2011) 198 FCR 297).As to the product dimension, each of SPAR’s pleaded markets identifies the relevant items as “dry grocery products and related services”. The dry grocery products are particularised as groceries such as breakfast cereal, canned food, biscuits, flour, tea, coffee, soft drinks, nappies, cleaning products, personal hygiene products, packaged not daily fresh delicatessen and dairy items, and frozen goods. Such products are said to be distinct from and not substitutable with perishable products, including fresh fruit and vegetables, and daily fresh dairy, meat, delicatessen or bakery items. In the case of the pleaded wholesale markets, the “related services” are identified as “related marketing and retail support services” and then further particularised as “a range of related branding, promotional pricing and advertising, retail systems and training services”. In the case of SPAR’s pleaded retail markets, the “related services” are described as “branding, promotional pricing and advertising services”.
SPAR supplies approximately 12,000 to 13,000 dry grocery products, while Metcash/IGA supplies approximately 17,000 such products. Mr Carson (who was SPAR’s chief executive officer from 2004 until 31 January 2011) gave evidence that SPAR’s supply of dry grocery products constitutes about 50 per cent of the products that a supermarket ordinarily sells. Other products which are supplied on a wholesale basis to supermarkets include such items as fresh fruit and vegetables, meat, delicatessen items and other perishable goods, none of which is included in SPAR’s pleaded markets. The pleaded markets are all confined to dry grocery products and related services. Mr Costanzo also gave evidence that IGA supplies a similar, but broader range of dry grocery products and similar related services. His evidence was that both SPAR and IGA supply a range of generic products. He said that SPAR provides approximately 450 generic lines (under the “Fabulous” brand) while Metcash provides approximately 1,000 generic lines (under the “Black & Gold” brand). It is not clear from the evidence whether all those generic lines are dry grocery products or also include goods which are not included in SPAR’s pleaded markets.
Insofar as the “related marketing and retail support services” are concerned, the evidence, such as it is, indicates that those services include marketing support, merchandising support and store operational support. Mr Costanzo gave evidence that SPAR had an IT department, which assists SPAR stores by, for example, maintaining retail and cost price files.
Turning now to the functional dimension of SPAR’s pleaded markets, they include a number of alternative retail markets, wholesale markets as well as combined markets. It is now well established that the appropriateness of any particular functional level depends upon the particular facts of a given case. After reviewing the relevant authorities in Metcash Trading, Yates J (with whom Finn J agreed) concluded at [266]:
These authorities show that, as a matter of principle, there is no reason why, for competition law purposes, a market cannot be defined by reference to multiple functional levels. They illustrate that it might be appropriate to do so where downstream activities function to constrain upstream behaviour. Whether that is so depends on the facts presented for consideration and the evaluation of those facts by the relevant decision-maker (emphasis added).
The importance of the particular evidence which is adduced in support of a contention that a market should be defined by reference to multiple functional levels, e.g. both wholesale and retail levels, is vividly illustrated by the different conclusions arrived at regarding the supermarket industry in cases such as Davids Holdings Pty Limited v Attorney-General (Cth) (1994) 49 FCR 211 and the Metcash Trading litigation. There seemed to be an assumption in part of SPAR’s competition law case that, because of the markets found to exist in the Metcash Trading litigation, the same markets should be found here. Any such assumption must be rejected. SPAR carries the onus of establishing the existence of its pleaded markets by reference to the evidence adduced in these proceedings.
Turning now to consider the geographic dimension of market definition, it is to be noted that SPAR’s alternative pleaded markets operate at three different geographic levels, namely a narrow geographic market limited to Macleay Island, a broader regional market relating to Moreton Bay and, finally, a very broad market which is expressed in terms of the state of Queensland as a whole.
Putting to one side for the moment SPAR’s pleaded Macleay Island Retail Market (which was partly admitted by the respondents), I consider that SPAR adduced insufficient evidence to support many of its other pleaded markets. As noted above, some evidence was adduced concerning the wholesale activities of both SPAR and Metcash at a state level. It is evident that SPAR’s wholesaling operations are conducted from its warehouse located at Acacia Ridge, at least insofar as its dry grocery products are concerned. SPAR operates “cross-docking” facilities in Sydney and Canberra, whereby major loads are broken down onto smaller trucks. SPAR has a separate warehouse outside Brisbane from which its frozen and dairy products are distributed. That warehouse has some relevance to the proceedings insofar as it relates to frozen goods (which fall within SPAR’s definition of “dry groceries”), but it has no relevance insofar as its operations relate to perishable groceries, such as dairy products. It is significant to note, however, that these two warehouses are located in Queensland and, although they are used to supply wholesale dry groceries to supermarkets in both Queensland and elsewhere, they provide some support for the existence of a Queensland Wholesale Market. The limited evidence also suggests that Metcash/IGA’s wholesaling operations are conducted on a state by state basis, but that Metcash has a broader national presence.
The evidence concerning market share was limited to Mr Costanzo’s estimate that Metcash/IGA supplied approximately 95 per cent of the wholesale market of dry groceries in Queensland, and SPAR supplied approximately 5 per cent. Mr Costanzo said that those were “rough round figures”. Mr Carson gave evidence that, in 2010, SPAR supplied approximately 150 SPAR branded stores and another 150 unbranded stores. He estimated that approximately 70 per cent of the stores supplied by SPAR were in Queensland.
Mr Wylie placed particular emphasis on the relative significance of the MIS store to SPAR’s wholesale business. The MIS store is the only SPAR store in the Moreton Bay region. He said that the store was SPAR’s third biggest wholesale customer in the south-eastern part of Queensland. A spreadsheet produced by SPAR (which was used to brief their expert, Mr Haley), revealed that, as at March 2012, the MIS Macleay Island supermarket represented 1.3 per cent of SPAR’s total wholesale sales (including Queensland and beyond). The spreadsheet apparently recorded information concerning SPAR’s total wholesale revenue for the first three months of 2012. The figures included new customers such as the Supabarn chain of supermarkets in NSW and the ACT who, according to Mr Carson, started to acquire wholesale groceries from SPAR after January 2011 when he left SPAR. The figures were not confined to Queensland alone, nor were they confined to SPAR’s dry grocery products. If some allowance is made for those matters, it would appear that the MIS Macleay Island supermarket represented no more than one per cent of SPAR’s wholesale supply of dry groceries in Queensland.
With some hesitation, I am prepared to accept that the evidence pointed to by SPAR is sufficient to support the existence of a State-wide wholesale market for the supply of dry groceries and related services in which SPAR and Metcash/IGA are suppliers and independent grocery stores are acquirers.
But, for the following reasons, I find that SPAR has not adduced sufficient evidence to establish any of its other pleaded wholesale or combined markets. In particular:
(a)I consider that SPAR has not established the existence of the Macleay Island Retail Market as pleaded by it. In particular, having regard to Mr Aplin’s evidence, the suppliers in that retail market are MIS, the operator of the FoodWorks supermarket, the IGA at Russell Island and Woolworths Online. For convenience, however, I shall continue to refer to this market as the Macleay Island Retail Market;
(b)SPAR’s evidence is inadequate to establish the existence of the Moreton Bay Retail Market. In particular, I reject SPAR’s contention that the suppliers in such a market include SPAR Australia, SPAR Licensing and Metcash. For reasons given above, I consider that those businesses are not suppliers in any retail market, but rather are wholesalers;
(c)I consider that SPAR has failed to establish the existence of either the Macleay Island Wholesale Market or Moreton Bay Wholesale Market as defined in the further amended statement of claim. In my view, the evidence strongly suggests and I find that the wholesale businesses of both SPAR and Metcash are operated on a state by state basis. It may well be that there are “sub-markets” within that state-based wholesale market, but I respectfully agree with Emmett J’s observations at first instance in Metcash Trading at [178] and [179] to the effect that the concept of a sub-market has no explicit statutory role and that, while it may have some attraction as “a tool of analysis”, it cannot displace the statutory significance of identifying a market; and
(d)as noted above, there is insufficient evidence in these proceedings to warrant any finding in SPAR’s favour as to the existence of either the Macleay Island Independent Market or the Moreton Bay Independent Market. Any such combined retail and wholesale markets would have to take into account participants additional to those identified by SPAR. In particular, such an analysis would have to take into account the activities of the vertically independent supermarket chains, such as Coles, Woolworths and Aldi. There is a conspicuous lack of detailed evidence relating to those activities.
I shall now say something more about the limitations in SPAR’s market evidence.
SPAR’s limited evidence on its competition law case
At the commencement of Mr Wylie’s oral closing address, the Court made plain that it was having difficulty understanding how SPAR put and made good its competition law case. Mr Wylie responded by acknowledging several times that SPAR’s evidence was limited. The Court emphasised that SPAR needed to address it on how it said that the evidence supported its competition law claims. As matters transpired, the Court was not taken in any detail to the evidence, even with its limitations. Although SPAR did not abandon any of its pleaded markets, Mr Wylie’s closing address largely focused on SPAR’s pleaded Macleay Island Wholesale Market and Macleay Island Retail Market.
The evidentiary gaps in SPAR’s competition law case was particularly stark in respect of SPAR’s pleaded combined wholesale and retail markets, which focus on Macleay Island specifically and the Moreton Bay region more generally. The concept of a combined wholesale and retail market in either of those geographic areas necessarily raised for consideration the nature and extent of the activities of the major vertically integrated supermarket chains in those areas, such as Woolworths, Coles and Aldi. But there was scant evidence about their operations or market shares. It was common ground that none of Woolworths, Coles or Aldi operates a supermarket on Macleay Island but, as noted above, SPAR ultimately accepted that residents of Macleay Island could buy dry groceries (and presumably other products) using the Woolworths Online service. Apart from Mr Aplin’s very basic description of that service (see [77] below), which indicated that it was a competitive retail service to that offered by MIS, there was no detailed evidence providing the foundation for any meaningful assessment of the significance of that service in the context of SPAR’s pleaded retail and combined markets relating specifically to Macleay Island. In those circumstances, while it was ultimately accepted by the SPAR parties that Woolworths Online was a supplier in the Macleay Island Retail Market, in the absence of more detailed evidence about that service, the Court was unable to conduct a meaningful assessment of SPAR’s claims to the effect that the Provision had a purpose or likely effect of substantially lessening competition in the Macleay Island Retail Market (or, indeed, the Moreton Bay Retail Market). Mr Wylie correctly accepted that the SPAR parties carried the onus of establishing these matters.
SPAR’s purpose case
There was no material contest between the parties as to the relevant legal principles applying to the “purpose” aspect of s 45(2)(a)(ii). Those principles are conveniently set out in the joint judgment of Dowsett and Lander JJ in Seven Network Ltd v News Ltd (2009) 182 FCR 160 at [850]-[901] and may be summarised as follows:
·the purpose of a provision is to be ascertained by reference to the subjective purpose of those who sought and caused the inclusion of the provision in the contract, arrangement or understanding ([851]);
·purpose is not the same as motive, nor is it the same as knowledge ([852]-[853]);
·it is not necessary that the proscribed purpose be the only purpose, but it is necessary that the proscribed purpose be a substantial purpose ([854]);
·the notion of “substantial” is used in the sense of considerable or large or real and not imaginary ([855] and [858]);
·the purpose of a particular provision is to be ascertained by determining the end sought to be achieved by the parties including, in particular, whether a substantial purpose was to substantially lessen competition ([861]);
·merely because a provision is included for a proscribed purpose does not necessarily mean that it will have the likely effect of substantially lessening competition ([867]); and
·it is enough that one party in a multi-party contract had the purpose, in including a provision of substantially lessening competition in a relevant market, provided that such a purpose was a substantial purpose for such inclusion ([871]).
Mr Wylie summarised SPAR’s case under s 45(2)(a)(ii) that the Provision had the purpose of substantially lessening competition as follows:
… the applicant’s (sic) case is that here there was a real chance of Metcash competing in the Macleay Island retail market if the understanding had not been arrived (sic) and the provision made, and a substantial purpose and the likely effect of the provision was to limit the retail supply of Metcash dry groceries to Macleay Island.
Mr Wylie then made clear that there was a second element to this part of SPAR’s case when he made the following submission:
… the second element of the provision is that it terminated SPAR (sic) wholesale supply to Macleay Island, and for the reasons I’ve indicated before, substantially lessened competition between SPAR and Metcash in the Macleay Island and broader – and any broader wholesale (sic) that your Honour found.
In my view, SPAR has failed to discharge its onus of establishing that the Provision was included for either of the alleged proscribed purposes. As to the claim that the purpose was to limit the retail supply of Metcash dry groceries to Macleay Island, it is difficult to see how the Provision had that purpose. When the Provision was agreed between MIS and Metcash/IGA, dry groceries were being supplied to the FoodWorks supermarket on the Island via the long term supply agreement with the FoodWorks Group. No evidence was adduced to suggest that that arrangement would change as a result of the Provision. The Provision was made in the context of MIS agreeing to become an IGA bannered store. Consequently, if that arrangement is implemented, Metcash/IGA would directly or indirectly provide dry groceries to both the stores on Macleay Island, one of which would be an IGA bannered store and the other a FoodWorks branded store. In those circumstances, it is difficult to see any basis in SPAR’s contention that a substantial purpose of the Provision was to limit the retail supply of Metcash dry groceries on Macleay Island.
As to the second purpose advanced by the SPAR parties, even if it be accepted for the sake of argument that a substantial purpose of the Provision was to terminate SPAR’s wholesale supply to Macleay Island, SPAR has failed to establish that any such purpose involved a substantially lessening of competition in any of its pleaded wholesale or combined markets. For reasons separately expressed, I do not accept that SPAR has established the existence of any wholesale market for the supply of dry groceries and related services other than on a State-wide basis. In my opinion, the removal of SPAR as a wholesale supplier on Macleay Island in circumstances where that supply constitutes no more than one per cent of SPAR’s total sales of dry groceries on a wholesale basis in Queensland falls well short of satisfying the requirement that any proscribed purpose in the Provision substantially lessens competition in the Queensland Wholesale Market.
SPAR’s likely effect case
Again, there was no real contest between the parties as to the relevant principles governing this aspect of SPAR’s s 45 case (noting that, in argument, SPAR did not develop its “effect case”, and concentrated on its “likely effect case”). The relevant legal principles may be summarised as follows:
·the term “likely” means “a real chance” (see Seven Network at [748]-[751]);
·the phrase “substantially lessening competition” is evaluative and, even though the term is imprecise and ambiguous, it is probably better to avoid substituting other adverbs for the term “substantially”. It certainly means something more than trivial, minimal or nominal and probably has a meaning closer to that denoted by the word “considerably” (see Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 62 FLR 437 at 444 per Lockhart J and Rural Press Ltd v Australian Competition and Consumer Commission (2002) 118 FCR 236 at [124]-[125]);
·the central concept of “a substantial lessening in competition” necessarily requires careful consideration to the relevant market in which that competition occurs; and
·as Wilcox J observed in Eastern Express Pty Limited v General Newspapers Pty Limited (1991) 30 FCR 385 at 420-421;
… every commercial contract lessens competition to some degree. Each party is taken out of the market to the extent of its commitment. The parties, being bound to each other, are unable to buy from, or sell to, others the goods or services the subject of the contract. To that extent, they are inhibited in their ability to compete with others for purchases or sales. But those restrictions are fundamental to contract law; law which the Trade Practices Act was designed to supplement, not to supplant. No doubt this is why the word “substantially” appears in pars (a)(ii) and (b)(ii). If those paragraphs had referred merely to contracts etc which lessen competition, they would have achieved too much. The introduction of “substantially”, a word of degree, enables the court to make a judgment about the degree of anti-competitive effect of a particular contract, having regard to its scope and purpose;
For present purposes, it may be accepted that, in assessing whether a provision in a contract or other arrangement has a substantial purpose, or likely effect, of substantially lessening competition, it may be relevant to consider whether the provision operates so as to “nip in the bud” actual or potential competition in the relevant market (see Rural Press at [129]).
As best I understand Mr Wylie’s submissions, the essential elements of SPAR’s likely effect case are as follows. First, Mr Wylie emphasised that there was, to some extent, an agreed retail market on Macleay Island for the supply of dry groceries and related services and that it was common ground that both MIS and the FoodWorks store were suppliers in that market. Mr Wylie also ultimately accepted that Woolworths Online is a supplier in that market. That concession was presumably based upon Mr Aplin’s evidence, which described the broad features of that service. Residents on Macleay Island are able to order groceries and refrigerated items online from Woolworths. The groceries are delivered by truck and ferry to the Island’s residents three times a week. A delivery fee is payable, but Mr Aplin said that the fee fluctuated according to the basket spend, with all delivery fees being waived if a customer bought more than $200.00 worth of groceries or if the customer was willing to wait for an end of week delivery. Mr Aplin said that he modified MIS’s pricing by reference to Woolworths Online’s prices, while also noting that Woolworths had a bigger volume supply discount potential because of its size. No evidence was placed before the Court indicating Woolworths Online’s retail market share on Macleay Island, but Mr Aplin identified that service as one which competed with MIS’s retail operations.
Secondly, Mr Wylie accepted that the terms and conditions on which dry groceries were supplied to the FoodWorks store on Macleay Island were not in evidence. He acknowledged the difficulties which that presented for his case. He pointed to Mr Costanzo’s limited evidence on that topic, which was to the effect that the FoodWorks Group, rather than individual FoodWorks stores, had “a long term supply agreement with IGA”.
Thirdly, Mr Wylie submitted that, an assessment of whether the removal of SPAR’s wholesale supplies from Macleay Island was likely to have the effect of substantially lessening competition, had to be judged not only quantitatively, but also qualitatively. As noted above in [64], he contended that the MIS store was of particular significance to SPAR because it was its third best wholesale customer in the south-eastern region of Queensland, an area which was dominated by IGA stores. There is no other SPAR branded store in the Moreton Bay region. He submitted that if SPAR’s wholesale supply on Macleay Island ceased, there would be no constraints on Metcash/IGA’s conduct or pricing in the wholesale markets as pleaded. In support of that submission, he relied on the decisions of the Full Court of this Court and of the High Court in Rural Press Ltd v Australian Competition and Consumer Commission (2002) 118 FCR 213 and (2003) 216 CLR 53 respectively.
Fourthly, on the issue of substantial lessening of competition in the Macleay Island Retail Market, Mr Wylie submitted that the likely effect of the Provision was to limit the retail supply of Metcash dry groceries to Macleay Island, while acknowledging again that SPAR’s evidence on this particular matter was limited.
Fifthly, Mr Wylie submitted that, if the Court did not accept the separate existence of the retail markets and wholesale markets as pleaded, SPAR’s alternative claims were that there was:
(a)a combined market for the wholesale supply of dry grocery products and related services to independent supermarkets on Macleay Island or, alternatively, in the region; and/or
(b)a combined market for the retail supply of dry grocery products and related services by independent supermarkets on Macleay Island or, alternatively, in the region.
In support of these propositions, he relied on the Full Court’s decision in Metcash Trading and the decision of the Trade Practices Tribunal in Re Queensland Independent Wholesalers Ltd (1995) 132 ALR 225.
Having regard to my findings above concerning the relevant markets established by the evidence, I need only consider the Macleay Island Retail Market (as redefined above in [66(a)]) and the Queensland Wholesale Market.
The first point to make about the Macleay Island Retail Market is that, even if it is accepted that the Provision has the effect of removing SPAR as a wholesale supplier on Macleay Island, with the consequence that SPAR supplied dry groceries are no longer available to consumers on Macleay Island, that does not mean that the evidence demonstrates that there is a likelihood (in the sense of a real chance) of competition in the Macleay Island Retail Market being substantially lessened. Consumers would still be able to choose between buying their dry groceries from the MIS supermarket operating under the IGA banner, the FoodWorks supermarket acquiring dry groceries indirectly from IGA (but trading under the FoodWorks banner), Woolworths Online, as well as the Supa IGA on Russell Island. In the absence of any evidence indicating the respective market shares of those retail sources serving Macleay Island, I find that there is insufficient evidence to support a finding in SPAR’s favour that the Provision is likely to have the effect of substantially lessening competition in that particular market.
Secondly, even if Woolworths Online is put to one side, I do not think that there is room for any assumption that competition at a retail level is likely to be substantially lessened simply because, with SPAR removed as a wholesale supplier, Metcash/IGA will provide dry groceries on a wholesale basis on Macleay Island to MIS and to the FoodWorks store (via the long term supply agreement with the FoodWorks Group), as well as to the Supa IGA on Russell Island. Mr Aplin’s evidence was to the effect that there were significant pricing advantages in being an IGA bannered store in terms of promotional pricing opportunities and better case deals, which differentiate an IGA bannered store from the FoodWorks store on Macleay Island. That was one of the reasons he gave for including the Russell Island IGA bannered store among his competitors. He said that that store was able to offer attractive pricing for Macleay Island’s price sensitive residents, when compared with his store and the FoodWorks store on Macleay Island. Mr Aplin explained that it was his understanding that promotional programming was undertaken by the FoodWorks Group itself notwithstanding that it acquired dry groceries from Metcash/IGA, whereas Metcash/IGA took responsibility for promotional programming for their IGA bannered stores and were able to offer more attractive promotional pricing for those stores.
Thirdly, I do not think that the difficulties presented by SPAR’s limited evidence are overcome by resort to the concept of the Provision operating to “nip actual or potential competition in the bud”. Rural Press was concerned with quite different facts which involved a market previously and subsequently dominated by a single player. That is not the case here, when account is taken of the competition provided by Woolworths Online, as well as the differences between the supply of IGA dry groceries to the FoodWorks Group as opposed to IGA bannered stores, as described by Mr Aplin.
As to SPAR’s likely effect case as it relates to the Queensland Wholesale Market, having regard to the finding above that SPAR’s supply of wholesale dry groceries to the MIS store represents no more than one per cent of its total wholesale revenue for Queensland, I reject this aspect of the second limb of the applicants’ competition law claims that the Provision has the likely effect of substantially lessening competition in that market.
For these reasons, therefore, SPAR’s competition law claims must fail.
RESPONDENTS’ CROSS-CLAIM
There are two limbs to the cross-claim:
(a)an allegation that SPAR Licensing contravened the Franchising Code of Conduct and, thereby, contravened s 51AD of the TP Act; and
(b)an allegation of misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law on the part of SPAR Licensing, which it is claimed was material to the respondents’ decision to enter into the Special Offer Agreement and the Franchising Agreement.
I shall deal with each of those cross-claims in turn.
BREACH OF THE FRANCHISING CODE
The first limb of the cross-claim concerns the allegation that SPAR Licensing contravened s 51AD of the TP Act. The contravention was said to arise because, contrary to clauses 6B and 10 of the Franchising Code, the document provided by SPAR Licensing to MIS on or about 21 July 2010 was not a disclosure document within the meaning of the relevant provisions of the Franchising Code. That was because it is alleged that the document did not contain certain required financial details and information concerning SPAR Licensing, the proposed franchisor.
It is convenient to deal with this limb of the cross-claim under the following headings:
(a)summary of relevant legislative requirements concerning disclosure;
(b)factual findings concerning the Disclosure Document;
(c)summary of the parties’ respective arguments;
(d)consideration; and
(e)relief.
(a) Summary of relevant legislative requirements concerning disclosure
The first question is whether this aspect of the cross-claim attracts the relevant provisions of the TP Act or those in the CC Act. As noted above, the cross-claimants plead the matter as a breach of s 51AD of the TP Act but, in their defence to the cross-claim, the cross-respondents plead that s 51AD of the CC Act is the correct provision and not s 51AD of the TP Act. This issue was not further developed by Mr Wylie in his argument but, as Mr Perry SC pointed out, the cross-respondents’ pleading seems to be predicated on the fact that the Franchise Agreement was entered into on 1 February 2011, i.e. after the commencement of the CC Act on 1 January 2011. Mr Perry SC submitted that the cross-respondents’ position was erroneous having regard to the transitional provisions in Schedule 7 of the Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 (Cth). Item 6 of Schedule 7 of that Act has the effect that the TP Act as in force immediately before the commencement of the Item (i.e. 1 January 2011) continues to apply after that date in respect of acts or omissions that occurred before the commencement date. Mr Perry SC further submitted that the act or omission which was the subject of the alleged contravention was not the execution of the Franchising Agreement in February 2011 but, rather, the cross-respondents’ conduct in providing the allegedly non-compliant Disclosure Document on or about 21 July 2010.
Mr Costanzo was clearly familiar with the contents of that letter. He forwarded a copy of it to Mr Love on 13 September 2010, confirming in the attached email that the letter had been sent to 28 SPAR stores. Mr Costanzo explained to Mr Love (who was his superior) that the letter was part of an entire program adopted by IGA to persuade SPAR stores on the “hit-list” to convert to IGA. The letter was admitted into evidence without objection.
In support of its claim for damages, MIS also relied on a report dated 26 April 2012 by Mr Stuart Benjamin, a chartered accountant and director of Lytras & Benjamin. Mr Benjamin gave evidence as an expert quantifying MIS’s loss as a result of it being unable to convert to the IGA banner from 1 September 2011. His loss calculations were divided into two periods. The first period was between 1 September 2011 and 30 April 2012 (being the estimated date of the trial). The second period was between 1 May 2012 and 1 February 2016 (being the balance of the term of MIS’s franchise agreement with IGA). In estimating MIS’s losses during each of those periods, Mr Benjamin used three different figures, each reflecting an assumption made by him that, if MIS had converted to IGA, it would have enjoyed an increase in sales revenue of 10 per cent, 15 per cent or 30 per cent. Those assumptions were based in part upon paragraph 5(a) of Mr Aplin’s witness statement dated 25 April 2012, which as noted above was based on what Mr Aplin had been told by Mr Costanzo (the SPAR parties challenged those parts of Mr Benjamin’s report which relied on Mr Costanzo’s representations to Mr Aplin, but the objection was overruled as described above). Using a figure of a 10 per cent increase in sales revenue, Mr Benjamin estimated that MIS’s total net loss for the period from 1 September 2011 to 30 April 2012 was $21,172.00. Using that same figure of 10 per cent, he estimated that MIS’s total net loss for the period 1 May 2012 to 31 January 2016 was $73,204.00. Thus Mr Benjamin’s opinion was that MIS’s total net loss for both periods was $94,376.00.
Mr Benjamin said that the basis of his use of the 10 per cent to 30 per cent range was both:
(a)paragraph 5(a) of Mr Aplin’s witness statement dated 25 April 2012; and
(b)the statement in IGA’s letter dated 24 August 2010, to the effect that stores which had converted to the IGA brand over the past few years had all enjoyed a sales increase of over 15 per cent, with many stores more than doubling that increase.
Mr Benjamin adopted a four stage methodology in forming his opinions. First, he set out the background facts to the proceedings. As Mr Perry SC submitted, those facts were largely uncontested except for the benefits which MIS said it expected to enjoy from switching to the IGA brand (including increased sales revenue as a result of higher brand awareness, generic product range and more competitive promotional pricing). Secondly, Mr Benjamin set out the assumptions he had made in forming his opinions, which included adopting that part of Mr Aplin’s statement concerning an expectation that converting to the IGA banner would produce an increase in gross sales in the range of 10 to 30 per cent. Thirdly, Mr Benjamin calculated MIS’s damages by carrying out a number of steps as described by him in paragraphs 5.1 to 5.18 of his report dated 26 April 2012. Finally, Mr Benjamin set out his detailed calculations leading up to his conclusions concerning MIS’s loss and damages.
For the purposes of the cross-claim, the SPAR parties relied on a report in reply dated 7 May 2012 by Mr Peter Haley from Vincents Chartered Accountants. Mr Haley primarily responded to Mr Benjamin’s report dated 26 April 2012, but he also commented to a lesser extent on Mr Aplin’s witness statement. Mr Haley questioned the assumptions made by both Mr Aplin and Mr Benjamin that MIS would enjoy a one-off increase in sales if MIS switched to IGA. Mr Haley said that that assumption should not be made unless there was material identifying which particular stores had experienced such sales growth on converting to IGA. He also said that it was necessary to consider whether the Macleay Island MIS store in particular could have experienced such an increase and whether other factors contributed to the increases achieved by other stores converting to IGA.
Mr Haley said that, in his opinion, there was range of possible factors that might operate to increase the sales of any particular store on converting to another banner, including such matters as:
(a)whether the product offering would change and become more attractive;
(b)whether the increased sales would be driven by an increase in sales across the product range or be confined to low margin items;
(c)whether the increased sales would be driven by an increase in prices;
(d)whether the store would become more attractive to customers as a result of lower prices;
(e)whether the store has the demographic and geographical attachment to support such an increase in sales, bearing in mind that the Macleay Island store’s catchment was limited to island residents and could not realistically draw on customers outside its immediate catchment area;
(f)whether the customer catchment area is expecting any increase in population;
(g)the history of the particular store, including Mr Haley’s view that in the calendar year 2011 the Macleay Island store achieved increase in sales of 14.3 per cent over its sales in 2010 while acquiring its dry groceries from SPAR;
(h)whether the other stores which enjoyed an increase in gross sales upon converting to IGA also undertook a refurbishment or expansion at the time of their conversion, in circumstances where the Macleay Island store recently undertook a refurbishment which may have contributed to its 14.3 per cent increase in sales in 2011; and
(i)whether the other relevant stores contributing to the 10-30 per cent range undertook a “marketing blitz” upon conversion.
Mr Haley’s evidence was that, based on his experience of valuing supermarkets, sales uplifts do not result from simply a change of banner or name.
A Joint Statement of Experts dated 9 May 2012 was also tendered in evidence. It recorded the outcome of a conclave between Mr Benjamin and Mr Haley and identified their points of disagreement. The most material point of disagreement related to Mr Benjamin’s assumption that there would be an increase in sales revenue in the range 10 to 30 per cent if MIS converted to IGA. Mr Haley reiterated his criticism of that assumption as set out in paragraph 2.7 of his report in reply dated 7 May 2012. He also added that he doubted that there was any capacity for MIS to increase its sales if it switched to IGA having regard to Macleay Island’s socio-economic demographics and his belief that “the vast majority of the immediate population are currently customers thereby suggesting there is little potential to increase sales by attracting more of the local population”.
In the Joint Statement of Experts, Mr Benjamin accepted that the likelihood of an expected increase in sales revenue was not a matter within his expertise. He described it as “an operational and/or marketing matter”. In other words, Mr Benjamin implicitly reiterated that he relied on Mr Aplin’s evidence and IGA’s letter dated 24 August 2010 in adopting and applying that range of figures.
Mr Aplin did not participate in the experts’ conclave and, as noted above, the SPAR parties did not challenge his qualifications to express opinions on the quantification of MIS’s loss. He was, however, cross-examined by Mr Wylie as to his adoption of Mr Costanzo’s range. Mr Aplin rejected the proposition that he personally did not believe that there would be an uplift of sales in that range. He also rejected the proposition that he did not have any basis for a projected increase in sales of 10 to 30 per cent if MIS moved to IGA other than what Mr Costanzo told him. Mr Aplin’s response to that proposition was as follows:
Well, I think there’s – there’s other factors at play, like brand awareness and price perception of consumers in our market. That would, in my view, be other factors that would indicate that I – I could expect an increase to justify the values that were given to me by John Costanzo. Price perception of the supermarket on Russell Island with our residents is quite – quite keen. People think that that store is very competitively priced. So aligning myself with – with the same banner would go a long way in giving people the same perception of price. Therefore, you know, I believe that we would anticipate that – that form of increase.
I accept that evidence. As noted above, I found Mr Aplin to be an honest and reliable witness. In attaching particular weight to Mr Aplin’s evidence on these matters, I also take into account his extensive knowledge of, and involvement in, the retail supermarket industry in Queensland. Not only was he deeply involved in the operations of the MIS store on Macleay Island for the last few years, but he also had experience in the late 1990s through to 2002 in managing IGA stores in Rockhampton, Bundaberg, Loganholme and Thornlands. In the period 2002 to 2009 he was not directly involved in the operation of any IGA stores because he was then working as a systems consultant for Scanning Systems Australia (a business owned by Metcash which provided software and related services to independent grocery stores), but he gave evidence that, during that period, he had contact day-to-day contact with IGA retailers and provided advice on their retail systems and the technology aspects of their business. Under cross-examination he said that he had “a very good knowledge of how IGA operated at store level”. He also said that he had worked as an employee at SPAR supermarkets.
In his witness statement dated 25 April 2012, Mr Aplin also described what he saw as the benefits of MIS converting to IGA. Paragraphs 19 and 20 of Mr Aplin’s statement were as follows:
One of the benefits that MIS would obtain if converted to an IGA supermarket is the benefit of IGA group buying discounts. Various supplies to IGA known as charge-back suppliers offer more favourable trading conditions than the comparable SPAR suppliers. If MIS was an IGA store it could purchase directly from these charge-back suppliers at these more favourable trading conditions. I did not factor this benefit into the ‘Purchase Price Comparison’ spreadsheet referred to above.
Another benefit that MIS could obtain if it was an IGA supermarket is the benefit of IGA special promotional buying which because of the volume of purchases that IGA makes, results in lower supply costs to franchisees than are available from SPAR. An example is Bulla ice-cream which has been available from IGA for $2.99 to IGA franchisees but has never been available from SPAR to MIS for less than $3.99 per unit. I did not factor this benefit into the ‘Purchase Price Comparison’ spreadsheet referred to above.
I admitted that evidence over SPAR’s objections. The basis for those objections was conclusion and opinion. In rejecting the objections I draw attention to the fact that, apart from it being general industry knowledge, evidence had been led in the proceedings that the larger wholesalers or integrated supermarket chains are able to take advantage of their greater scale and volume in order to provide higher rebates to their customers.
I accept Mr Aplin’s evidence on these matters, which provides some further support for his acceptance of Mr Costanzo’s advice that there would be a one-off increase in sales revenue if MIS switched to IGA and his adoption of the figure at the bottom of that range.
As noted above, Mr Wylie submitted that the cross-claimants had failed to establish any actual loss or damage in respect of this limb of their cross-claim concerning Mr Gale’s representations. He said that that alone was sufficient to refuse relief under either or both ss 82 or 87 of the CC Act. He further contended that, even if some loss or damage was found, the Court should exercise its discretion under s 87 and not order any relief against his clients in circumstances where MIS “obtained a financially beneficial arrangement from SPAR on the basis of entry into a five year agreement, and continued to trade successfully throughout the period following, and up-following (sic) the representations and to date”.
Mr Wylie submitted that there was no evidence underpinning the assumptions adopted by both Mr Aplin and Mr Benjamin that there would be an increase of gross sales in the range of 10 to 30 per cent if MIS converted to IGA. Mr Wylie also submitted that I should give no weight to Mr Benjamin’s evidence because he failed to make any allowance for the fact that MIS had increased its sales revenue during both 2010 and 2011 while sourcing supplies from SPAR and that his calculations had been made on the basis of a zero base.
For the following reasons, I reject those submissions. First, as noted above, I overruled SPAR’s objections to that part of Mr Aplin’s witness statement which made reference to him taking into account Mr Costanzo’s advice to him that MIS could expect an increase in gross sales in the range of 10 to 30 per cent. Mr Aplin was content to adopt and apply the bottom figure in that range in estimating MIS’s loss. He concluded that MIS had suffered a net loss of $12,715.39 for the period 1 September 2011 to 1 December 2011. I accept Mr Aplin’s evidence. I also accept Mr Benjamin’s evidence that MIS suffered a financial loss by not being able to switch to IGA from 1 September 2011 up until 30 April 2012. As noted above in [246] Mr Benjamin quantified that net loss for the longer period as $21,172.00.
Secondly, I consider that IGA’s letter dated 24 August 2010 provided additional support for Mr Costanzo’s advice to Mr Aplin that there would be a one-off increase in gross sales of at least 10 per cent if MIS switched to IGA. That letter was tendered by SPAR. As noted above, that letter (which was sent to 28 SPAR stores whom IGA was targeting), contained a representation from IGA’s general manager to the effect that all stores which had converted to IGA over the past few years had enjoyed a sales increase of over 15 per cent, with many such stores more than doubling that increase.
Thirdly, I do not accept Mr Wylie’s submissions that no weight should attach to Mr Benjamin’s evidence, taking into account Mr Haley’s criticisms of it. Mr Haley’s evidence did not establish that there would be no increase in gross sales in the range of 10 to 30 per cent if MIS switched to IGA. Rather, the burden of Mr Haley’s evidence was to the effect that more detailed information was required in order to determine whether the range identified by both Mr Costanzo and also in IGA’s letter dated 24 August 2010 was applicable to the Macleay Island store. Among the matters he said should be considered was whether MIS could achieve another large one-off increase in sales in circumstances where it had achieved an increase in sales in both 2010 and 2011 when it was acquiring dry groceries from SPAR. Mr Haley added that Mr Benjamin had also not made any discount for risk that the expected one-off increase in sales would not occur. But while he said that the effect of allowing for such risk “could be substantial”, he nevertheless opined that “the risk attaching to the achievement of a 30 per cent increase is certainly greater than the risk attaching to the achievement of a 10 per cent increase in sales”.
In my view, while there is some force in some of Mr Haley’s criticisms, I do not consider that those criticisms warrant rejection of the entire range of the projected one-off increase in sales on conversion to IGA. They do cast doubt, however, on the reliability of the top figures in that range. But I do not regard those criticisms as undermining reliance on the figure which is at the bottom of Mr Costanzo’s range. That is particularly the case where that figure is supported by IGA’s letter dated 24 August 2010, as well as by Mr Aplin’s evidence under cross-examination as to why he personally believed that there would be an uplift of at least 10 per cent if MIS switched to IGA.
For all these reasons, therefore, I find that MIS has established on the balance of probabilities that it did suffer an actual financial loss consequential upon its inability to operate as an IGA franchisee from 1 September 2011. As to the quantum of that loss, I accept Mr Aplin’s evidence that the net loss was $12,715.39 for the period 1 September 2011 to 1 December 2011. I also accept Mr Benjamin’s evidence that MIS’s net loss for the period 1 September 2011 to 30 April 2012 was $21,172.00 (based on a one-off 10 per cent increase in sales). For reasons which I set out below, it is unnecessary to make any finding as to MIS’s loss outside those periods.
(ii) Causal link between the representations and MIS’s loss or damage
As noted above, SPAR also contended that the cross-claim was deficient because there was no pleading or evidence relating to reliance and what MIS would have done if the representations made by Mr Gale had not been made. Mr Wylie submitted that the cross-claim was conducted on the basis that, if MIS’s directors had known that Mr Gale’s representations were misleading or deceptive, they would not have signed the Franchise Agreement. Mr Wylie contended, however, that there were three realistic possibilities, namely:
(a)the Franchise Agreement would not have been signed (he accepted that that was a realistic possibility for present purposes);
(b)MIS would have signed a relationship deed or alliance agreement with IGA (or its parent company, Metcash); or
(c)since the three MIS directors held different views, no decision would have been made to sign up with IGA and MIS would have continued to be supplied by SPAR without any franchise agreement.
For the following reasons, I reject those submissions. First, as to the pleading point, I consider that the cross-claimants adequately pleaded reliance in:
(a)paragraph 15 of the statement of cross-claim, by reference to their acting in reliance upon the truth of the representations described in [14] and being induced thereby to enter into the Special Offer Agreement, the Franchise Agreement and providing guarantees in respect of the Franchise Agreement; and
(b)paragraph 18(d), which expressly pleads that MIS had lost the opportunity to join the IGA franchised supermarket business and suffered consequential loss.
Secondly, I reject SPAR’s submission that there was no evidence concerning what MIS would have done if Mr Gale’s representations had not been made. Both Mr Aplin and Mr Sichter made clear that unless Mr Aplin was satisfied that MIS could extricate itself from the Franchise Agreement when he bought out the other two shareholders, he would not have agreed with his co-directors to sign the Franchise Agreement. And in the passage set out above in [215] from Mr Aplin’s evidence under cross-examination, Mr Aplin said that, if the representations had not been made, he would definitely not have signed the Franchise Agreement. Thus a “stalemate” would have been created because he “would have pushed through without any form of agreement or any form of incentives until I purchased the shares of my business partners”.
Mr Sichter gave unambiguous evidence that, without Mr Aplin’s concurrence, MIS would never have entered into the Franchise Agreement. Although Mr Sichter did not give direct evidence as to what he would have done if Mr Gale’s representations had not been made, it can be inferred that he would have adopted a similar position to that of Mr Aplin, namely to continue to obtain supplies from SPAR but not under any franchise arrangement. That is because Mr Sichter expected that Mr Aplin would buy out the other shareholders in a few years time and wanted to be in a position at that time to become an IGA franchisee. I accept that Mr Sichter was loyal to SPAR and did not have any concerns about the proposed SPAR franchise agreement, but I do not believe that he would have persuaded Mr Aplin to sign the proposed SPAR franchise agreement if Mr Gale had not made the representations. Mr Aplin was adamant that he would not have done so. Furthermore, I consider that Mr Sichter would have gone along with Mr Aplin and simply continued to obtain dry groceries from SPAR outside a franchise arrangement until such time as Mr Aplin acquired all the shares in MIS.
I do not consider that any significance attaches to the fact that Ms Ward did not give evidence. I adopt and repeat the reasons set out in [226] above.
(e) Relief
In the light of my findings above upholding the second limb of the cross-claim, the issue arises as to what relief should be given. Mr Perry SC clarified in closing address that the relief sought in respect of the cross-claim was:
(a)a declaratory order to the effect that the cross-respondents engaged in misleading and deceptive conduct and thereby contravened s 18 of the Australian Consumer Law;
(b)a declaratory order pursuant to s 87 of the CC Act declaring the Franchise Agreement and Special Offer Agreement to be void;
(c)if an order was made in accordance with paragraph (b) immediately above, the cross-claimants’ claim for damages was limited to the period 1 September 2011 until the date of judgment and that the quantum of that loss is as assessed by Mr Benjamin; and
(d)in the alternative to (b), if the Franchise Agreement and Special Offer Agreement were not set aside, the terms of the Franchise Agreement should be varied so as to reflect Mr Gale’s representations, namely that MIS could terminate the Franchise Agreement on payment of the specified termination and related fees.
As noted above, Mr Wylie submitted that, even if the Court was satisfied that MIS had suffered actual loss or damage, it ought not in the exercise of its discretion make any order pursuant to s 87 of the CC Act. The basis for that submission was said to be the circumstances that MIS had obtained what was described as “a financially beneficial arrangement from SPAR” based upon it entering into the Franchise Agreement and that MIS continued to trade successfully from the date of the Franchise Agreement. Mr Wylie also accepted that, if the Court found in favour of the cross-claimants in respect of the second limb of their cross-claim, it was appropriate to make a declaratory order to the effect sought by the cross-claimants.
For completeness I should also record that in view of the findings I have made concerning the cross-claim, the applicants’ contract claim cannot succeed. That is because the cross-claimants have succeeded in having the terms of the Franchise Agreement varied ab initio so as to reflect Mr Gale’s representations concerning the right of MIS to terminate the Franchise Agreement upon payment of the relevant termination and related fees. Accordingly, no breach of contract occurred when MIS’s conduct was consistent with the terms of the varied contract.
In my view, the cross-claimants are entitled to receive some, but not all, the relief they seek in respect of the second limb of their cross-claim. In particular, I consider that this is an appropriate case in which to grant the following relief:
(a)a declaratory order as sought by the cross-claimants concerning the cross-respondents’ contravention of s 18 of the Australian Consumer Law;
(b)an order under s 87 of the CC Act varying the Franchise Agreement and related Special Offer Agreement ab initio so as to reflect Mr Gale’s representations;
(c)an order that SPAR Licensing pay damages in respect of MIS’s loss for the period 1 September 2011 to the date of judgment, plus interest; and
(d)an assessment will also need to be made of the quantum of the termination and related fees payable to SPAR upon MIS terminating those agreements.
CONCLUSION
I consider that the appropriate course is to require the parties to confer and seek to agree terms of orders reflecting my reasons above. The orders should deal with at least the following matters:
(a)discharging the interlocutory injunction;
(b)dismissing the applicants’ amended originating application filed 10 February 2012;
(c)the quantum of damages, together with interest, payable to the cross-claimants;
(d)the terms of the declaratory orders concerning the contraventions of s 51AD of the TP Act and s 18 of the Australian Consumer Law and the consequential variations to the terms of the Franchise Agreement and Special Offer Agreement;
(e)the quantum of the termination and related fees which MIS is liable to pay upon exiting the Franchise Agreement and Special Offer Agreement; and
(f)costs (my tentative view is that the applicants should bear the respondents’ costs of both the amended originating application and the cross-claim).
In the event that the parties cannot agree on the formulation of the orders, each should prepare its own draft of the proposed orders and the matter will be re-listed for further argument. Accordingly, if agreement is not achieved on the terms of the proposed orders within 7 days hereof, I direct:
(a)the respondents to file and serve its draft orders, together with a brief outline of their written submissions within 14 days hereof;
(b)the applicants to file and serve their draft orders, together with a brief outline of their written submissions within 21 days hereof; and
(c)any written submissions in reply by the respondents should be filed and served within 28 days hereof.
In due course, the parties will be notified of the date for the re-listing of the matter.
I certify that the preceding two hundred and seventy-seven (277) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths. Associate:
Dated: 15 October 2012
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