Subway Systems Australia P/L v Thorpe

[2000] QSC 99

SUPREME COURT OF QUEENSLAND

CITATION:

Subway Systems Australia P/L v Thorpe [2000] QSC 099

PARTIES:

SUBWAY SYSTEMS AUSTRALIA PTY LTD
(ACN 009 277 034)
(applicant)
v
MICHAEL JOHN THORPE
(respondent)

FILE NO:

794 of 2000

DIVISION:

Trial

DELIVERED ON:

28 April 2000

DELIVERED AT:

Brisbane

HEARING DATE:

26 April 2000

JUDGE:

Muir J

ORDER:

1.   That the application be dismissed

2.   That the respondent’s costs of and incidental to the application, to be assessed, be its costs in the cause

CATCHWORDS:

PRACTICE – APPLICATION – STRIKING OUT –application to strike out paragraphs of amended defence and counterclaim – whether pleadings fail to disclose a reasonable cause of claim or defence – must be clear case to justify summary intervention.
FRANCHISE AGREEMENTS – meaning of – whether agreements confer the right to carry on the business of offering, supplying or distributing goods or services.

Dey v Victorian Railways Commissioners (1949) 78 CLR 62
General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 124
Uniform Civil Procedure Rules, r 171
Franchising Code of Conduct, clause 20

COUNSEL:

M D Hinson SC for the applicant

SOLICITORS:

Mullins & Mullins for the applicant
Morgan Conley for the respondent

1. The applicant seeks an order pursuant to r 171 of the Uniform Civil Procedure Rules striking out those paragraphs of the respondent’s amended defence and counterclaim which rely for their efficacy on allegations that Development Agency Agreements entered into between the applicant and the respondent are “franchise agreements”. In the statement of claim in the action the applicant, in reliance on the terms of a “Resignation Agreement” entered into on 9 June 1999, seeks to restrain the respondent from, inter alia, using the name “Subway”, disparaging the applicant and holding himself out as being a development agent for the applicant.

1. The respondent pleaded that –

(a)        The Resignation Agreement was entered into under duress;

(b)        The Resignation Agreement was ineffectual to terminate the Development Agency Agreement as the respondent’s interests thereunder had been assigned by a deed dated 7 May 1999.

(c) The applicant had consented to the assignment by operation of the provisions of the Franchising Code of Conduct prescribed under the Trade Practices (Industry Codes – Franchising) Regulations 1998.

1. Clause 20 of the Franchising Code of Conduct relevantly provides –

(1)A request for a franchisor’s consent to transfer of a franchise must be made in  writing.

(2)A franchisor must not unreasonably withhold consent to the transfer.

(3)For subclause (2), circumstances in which it is reasonable for franchisor to withhold consent include:

…

(4)The franchisor is taken to have given consent to the transfer if the franchisor does not, within 42 days after the request was made, give to the franchisee written notice:

(i)        that consent is withheld; and

(ii)setting out why consent is withheld.”

1. The term “franchise agreement” is comprehensibly defined in the Code in the following terms –

“(1) A ‘franchise agreement’ is an agreement:

(a)that takes the form, in whole or part, of any of the following:

(i)       a written agreement;

(ii)       an oral agreement;

(iii)      an implied agreement; and

(b)in which a person (“the franchisor” grants to another person (“the franchisee”) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c)under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii)specified by the franchisor or an associate or the franchisor; or

(d)under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i)          an initial capital investment fee; or

(ii)         a payment for goods or services; or

(iii)a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

(iv)        a training fee or training school fee;

but excluding:

(v)payment for goods or services at or below their wholesale price; or

(vi)repayment by the franchisee of a loan from the franchisor; or

(vii)payment for the wholesale price of goods taken on consignment; or

(viii)payment of market value for purchase or lease of real property, fixtures, equipment or supplies needs to start business or to continue business under the franchise agreement.

(2)   For subclause (1), each of the following is taken to be a franchise agreement:

(a)    transfer, renewal or extension of a franchise agreement;

(b)    a motor vehicle dealership agreement.

…”

1. “Franchise” itself is defined as including –

“(a)       the rights and obligations under a franchise agreement’

(b)       a master franchise’

(c)       a subfranchise’

(d)      an interest in a franchise.”

1. The respondent by its solicitor Mr Conley, argued that even if the applicant could establish that the Development Agent Agreements did fall within the definition of “franchise agreement”, the applicant would be left with the difficulty that cl 20 of the Code refers to a transfer “of a franchise” and not to the assignment of rights under a “franchise agreement”. He submitted that a “franchise” was a different and broader concept to a “franchise agreement”.

1. Mr Hinson SC submitted that, on its proper construction, the definition of “franchise” encompassed only those relationships which met the criteria in cl (1)(b), (c), and (d) of the definition of “franchise agreement”. I was not attracted to this submission initially, but it gains considerable strength from the following –

(a)        Clause 5 makes the Code applicable to franchise agreements, not to franchises;

(b)        Clauses 10, 11, 13, 20(3)(f), (h), 21 and 22 are all drafted on the premise that a franchise is a concept which arises out of a franchise agreement.

In my view, a “franchise” for the purposes of the Code must either arise under a “franchise agreement” or be a master franchise, a sub-franchise or an interest in a franchise.

1. I will now consider whether there is a triable issue that the Development Agency Agreements are “franchise agreements”. In the agreement dated 3 March 1998 for the Northern Territory, the applicant is defined as “the Company” and the respondent is defined as “the Development Agent”. Recitals D, E and G respectively provide –

D.The Development Agent desires to work as an independent contractor to develop and service the Company’s Sandwich Shops in the following Territory (the ‘Territory’):  In Australia, The Northern Territory.

E.‘Franchise Agreement’ is an agreement licensing the operation of a Sandwich Shop, in the form as determined by the Company from time to time, which will be entered into between the Company and each Franchisee (as defined below).

…

G.‘Franchisee’ is an individual who will enter into a Franchise Agreement with the Company.”

1. The applicant contends that subclause (b) of the definition of “franchise agreement” does not apply to the Development agency Agreements as –

(a)        the relationship between the applicant and the respondent is that of a franchisor and franchisor’s representative;

(b)        the agreements do not grant the respondent a right to carry on business of offering, supplying or distributing goods or services. Rather, the agreements are agreements for the provision of services to the applicant or to the applicant’s franchisees on behalf of the applicant.

1. There is much force in the applicant’s submission. The scheme of each agreement is to appoint the respondent the Development Agent for the relevant Territory. It has an obligation to set up Subway sandwich shops within the Territory and to secure franchise agreements for those shops. In performing its obligations under the 3 March 1998 agreement, cl 2.08 provides that the development agent is- 

“… governed by and shall conduct business in accordance with the Company’s policies as set forth in the Development Agent Manual, the Operations Manual, and the newsletters Weekly Update and Subway to Subway, which policies may be amended by the Company or Licensor from time to time as a result of experience, changes in the law or changes in the marketplace.”

1. Copies of such documents were not placed before me. It was contended on behalf of the respondent that he did not have copies and had not had discovery and was thus not in a position to mount an argument based on the contents of the documents.

1. It seems to me that the better view of the Development Agency Agreements is that contended for by the applicants. The agreements (with the exception of cl 1.02 of the March 3, 1998 agreement in its unamended form) do not confer on the respondent the right to carry on the business of offering, supplying or distributing goods under the Subway name or otherwise. The best argument for the respondent appears to be that, insofar as each agreement requires the applicant to set up Subway Shops and to procure the entering into of franchise agreements with franchisees, the applicant is granting to the respondent “the right to carry on the business of … supplying services in Australia”. There is no doubt that there is a “system or marketing plan” within the meaning of subclause (b) of the definition. If there is a “business” within the meaning of subclause (b), then the other requirements of subclause (c) are plainly met. Subclause (d) provides a difficulty for the respondent but  there are payments required to be made in a great many circumstances under a number of clauses in the agreement. Although I doubt that any of these fall within the type of payment contemplated by subclause (d), I am not prepared to conclude that the respondent’s case in that regard is unarguable.

1. The applicant must demonstrate that the pleadings disclose no reasonable cause of action or defence. I am mindful of the authorities which establish that the power to strike out pleadings for allegedly failing to disclose a cause of action is to be sparingly exercised. It has been said that a case must be very clear to justify the summary intervention of the Court to prevent a party submitting its case for determination.[1]

   [1]Dey v Victorian Railways Commissioners (1949) 78 CLR 62.

1. In my view, although the respondent’s case, relevantly, is weak it surmounts the tests propounded by Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW).[2] I am concerned also that -

   [2](1964) 112 CLR 125.

(a)        all the material relevant to a determination of the respondent’s claims may not be before me;

(b)        there are ambiguities in the agreements which may be susceptible to clarification by extrinsic evidence. I have in mind, in particular clause 1.02 of the 3 March 1998 agreement.

1. Clause 1.02 provides, inter alia –

“Michael Thorpe has already met the requirements of paragraph 1.02 in his Development Agency Agreement for Queensland.”

1. Clause 1.02 provides for an obligation to open and operate a Subway outlet. I can find nothing in the Queensland Agreement which imposes any obligation of that nature.

1. Accordingly, I dismiss the application.

1. I order that the respondent’s costs of and incidental to the application to be assessed be its costs in the cause.