Sunice v Wendy's Supa Sundaes - [1998] QSC 223

IN THE SUPREME COURT
OF QUEENSLAND
No. 8209 of 1998
Brisbane
Before White J
[Sunice v Wendy’s Supa Sundaes & Anor]
BETWEEN:

SUNICE PTY LTD (ACN 002 841 036) as Trustee of the SUNICE INVESTMENT TRUST
Plaintiff
AND:

WENDY’S SUPA SUNDAES (QLD) PTY LTD
(ACN 053 854 041)
First Defendant

AND:

WENDY’S SUPA SUNDAES PTY LTD
(ACN 007 897 994)
Second Defendant

AND:

HOLKSHAM PTY LTD (ACN 010 147 887)

Third Defendant

CATCHWORDS: Order 19 r.1 - whether trustee of fund - whether accounting parties - Order 19 r.3 - disputed issues of fact.

Counsel: Mr S Couper SC with him Mr I Erskine for applicant/plaintiff
Mr J Sheahan SC with him Mr P Flannagan for
respondents/first and second defendants.

Solicitors:Carl Blumen for the applicant
Flower & Hart for the respondents

Hearing Date: 15 October, 1998
REASONS FOR JUDGMENT - WHITE J

Judgment delivered 23 October 1998

The plaintiff is a franchisee who carries on a retail ice cream business under the name “Wendy’s Supa Sundaes” in 3 franchise premises in shopping centres in Brisbane. The second defendant is the national franchisor. The third defendant was the master franchisee for Queensland and assigned its interest in July 1997 to the first defendant which is the current master franchisee.
The plaintiff issued a writ on 4 September 1998 seeking, inter alia, injunctive relief restraining the first and second defendants from exercising rights of entry to shop premises pursuant to certain franchise agreements, damages and orders pursuant to the Trade Practices Act, damages for contractual breach and an account.
On 16 September the plaintiff issued a summons seeking an account pursuant to O.19 r.1 of the Rules of “all monies paid by the plaintiff in respect of Advertising Contribution to the First and Second Defendants pursuant to” 3 franchise agreements.
The defendants submit that such an order ought not be made summarily because the parties are not in an accounting relationship or, at the least, it is a question which must first be tried and that there are other contested issues which need to be resolved prior to the taking of an account.
The Terms of the Franchise Agreements
There is a franchise agreement relating to each of the 3 retail shops operated by the plaintiff dated respectively 8 November 1993, 24 March 1995 and 4 October 1996 (an agreement of 5 October 1992 was renewed on this date in respect of one of the shops). So far as is relevant to this inquiry the terms of the agreements are similar and during the hearing the agreement dated 8 November 1993 was used as the reference agreement.
The second defendant (“the national franchisor”) developed an image and technique for the marketing, preparation and sale of specialised ice cream and confection through dedicated ice cream parlours. The first defendant (originally the third defendant) (“the master franchisee”) entered into a Master Franchise Agreement with the National Franchisor which entitled the master franchisee to own, operate and franchise others in Queensland. The national franchisor consented to the master franchisee granting a franchise to the plaintiff upon the terms and conditions set out in the agreements. The agreements are detailed and lengthy. Clause 5 of the November 1993 agreement concerns payments to be made by the plaintiff under that franchise agreement. By cl. 5.1 the plaintiff was required to pay to the master franchisee an initial non refundable franchise fee and by cl. 5.2 throughout the term a franchise service fee. Clause 5.3 concerns the advertising contribution which is the subject of the application for an account. It provides:
“5.3.1The Franchisee shall pay to the Master Franchisee a contribution in respect of all advertising and marketing conducted by the National Franchisor or its agents during the Term in accordance with the calculation ...
5.3.2The Master Franchisee shall pay the Advertising Contribution to the National Franchisor which shall use the Advertising Contribution for the development of advertising and promotional material and for advertising at the sole discretion of the National Franchisor.
5.3.3The National Franchisor shall establish a separate bank account (“the Advertising Fund”) and shall operate such account, as a pooled trust account for all Wendys franchisees, to pay the costs of developing and publishing advertising and promotional material in such manner as the National Franchisor, in its sole discretion, deems appropriate for the benefit of all Wendy’s franchisees. Upon winding up of the Advertising Fund each such franchisee is to have a proportionate interest in the Advertising Fund (after payment of moneys expended pursuant to this clause) equal to the proportion to which its Advertising Contribution for the preceding month is a proportion of the aggregate Advertising Contribution from all Wendys franchisees for that month.
5.3.4The National Franchisor shall apply the Advertising Contribution exclusively for the development and publication of Wendys advertising and promotions, including such advertising agency fees and reasonable costs as the National Franchisor may incur in connection with the administration of the Advertising Fund.
5.3.5The National Franchisor may at its sole discretion from to time advance moneys to the Advertising Fund which moneys shall be refundable to the National Franchisor out of the Advertising Fund at the sole discretion of the National Franchisor and repayment of such moneys shall be a proper payment of advertising expenses pursuant to this clause. The Franchisee acknowledges and agrees that the total contributions to the Advertising Fund need not be spent in the year in which such contributions are received, and that a reasonable reserve may be accumulated in the Advertising Fund, and further acknowledges that upon the termination of this Agreement the Franchisee shall not be entitled to claim any part of the moneys standing in the Advertising Fund.
5.3.6The Franchisee acknowledges and agrees that the National Franchisor is entitled to administer the Advertising Fund as it deems appropriate and is not obliged to expend a proportionate part of the contributions in any area or on behalf of any particular franchisee. The National Franchisor hereby agrees that no moneys in the Advertising Fund shall be invested in or lent to the National Franchisor or any company related thereto or invested in any prescribed interest provided that nothing herein shall prohibit payment of costs and expenses or repayment of loans properly made pursuant to this clause.
5.3.7The National Franchisor shall be entitled to delegate its responsibilities contained in this clause to one or more persons of its choosing. The National Franchisor agrees to keep a proper set of books of account in relation to moneys paid to it for Advertising Fund contributions and to accurately maintain them at all times.
5.3.8...
5.3.9...”
Background Facts
Since the first franchise agreement was entered into by the plaintiff in about October 1992 it has contributed about $200,000 to the advertising fund. The plaintiff is dissatisfied with new promotion proposals and a change in direction for the franchise shops which would be embodied in new franchising agreements. Mr J Keam, a director of the plaintiff has produced financial statements for the advertising fund provided by the master franchisor for various periods commenting in 1996 through to 31 March 1998 which are line amounts for, inter alia, market research, market management fee - administration, management fee - salaries, National Advisory Council costs, research and development, transparency - test market, travel and accommodation - local (para 36 affidavit of Keam filed 4 September 1998). No detailed accounts or formal audits have been provided.
In about 1990 the national franchisor and master franchisee established a National Advisory Council comprising representation of the defendants and a franchisee representative from each State including Queensland. It met twice yearly. The expectation was that each franchisee representative would report back to the State franchisees. Minutes of the meetings of the National Advisory Council from 1991 to 1997 show that the advertising fund was a regular item for discussion, with delegates seeking a breakup of how the funds were spent.
Relationship between the Parties
The plaintiff contends that the provisions of cl.5 of the franchise agreement create an express trust of the advertising fund for which the national franchisor is the trustee and the plaintiff the beneficiary. This is submitted to be supported by expressions such as “pooled trust account”, “administer the Advertising Fund” and “agrees to keep a proper set of books of account”. As a consequence the plaintiff, as beneficiary is entitled as of right to an account, Spellson v George (1987) 11 NSW LR 300 per Powell J at p. 316.
The proposition in Spellson is not in dispute. Mr Sheahan SC for the defendants maintains that as a matter of construction the franchise agreements do not create a trust in respect of the advertising fund and that the relationship is wholly governed by the terms of the agreement. Mr S Couper SC for the plaintiff contends that it is a purpose trust of the kind considered in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, that is, money paid over for a particular purpose which, if the purpose fails, will be held for the benefit of the provider of the money. Mr Sheahan contends that a proper analysis of the agreements shows that the parties could not have intended to create a trust in respect of this fund and that if they did, it would be an invalid non-charitable purpose trust, that is, a trust for advertising Wendy’s Supa Sundaes, Leahy v Attorney-General (NSW) [1959] AC 457. If it is a trust for the benefit of the franchisees who contribute to the fund, as the plaintiff seems to contend, Mr Sheahan submits that no provision for vesting has been made and it may infringe the rule against perpetuities, Bacon v Pianta (1966) 114 CLR 634.
The arrangement between the parties does not suggest a trustee/cestui-que trust relationship notwithstanding the use of some trust-indicative expressions. The plaintiff, by virtue of the terms of the agreement, has no interest in the unspent accumulation of the fund except in certain narrowly confined circumstances, cl. 5.3.3. Nor do the parties appear to have contemplated a Quistclose resulting trust type of arrangement.
The plaintiff contends for an express trust or, alternatively, some other fiduciary relationship between the parties which gives rise to an obligation to account. The defendants on the other hand submit that the relationship between them is defined and governed entirely by the detailed provisions of the franchise agreement and that equitable relationships have no part to play. That there is a contractual relationship is not inimical to a fiduciary relationship, but if such a relationship is to exist it must accommodate itself to the terms of the contract, Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Mason J at p. 97. The national franchisor may use the advertising contribution at its sole discretion limited only by the purpose for which it is paid, cl. 5.3.2, 5.3.3 and 5.3.4.
Clause 7 sets out the general obligations of the national franchisor and the master franchisee to the franchisee covering matters such as training, setting up an operation, management advice, convening of meetings, and indemnity with respect to trademarks and other litigation concerning the master franchisee. On the other hand the franchisee’s obligations in cl. 6 are detailed and lengthy (24 pages) and include an obligation to keep records with specificity. The franchisee is obliged to render a weekly report of receipts and expenses to the master franchisee, annual certified financial statements, and to submit to an audit without notice by the master franchisee, and inspection of its books and records at any time.
The national franchisor is required by cl. 5.3.7 to “keep a proper set of books of account in relation to monies paid to it for Advertising Fund contributions and to accurately maintain them at all times”.
The national franchisee is expressly not obliged to operate the advertising fund evenhandedly between the franchisees or in any geographical area, cl. 5.3.6 and the expenditure is plainly for the benefit of the franchisee, the master franchisee and the national franchisor.
The agreement is described as constituting the entire agreement and understanding between the parties and excludes any implied terms save for statutory imposition, cl. 12.11 and cl.12.19.
I would conclude in a prima facie way without finally deciding the matter, that the contractual relationship between the parties is so precise in its regulation of what each party may do that there is no scope for the creation of a fiduciary duty such as to give rise to the right to an account.
I think it unnecessary to deal with Mr Sheahan’s other point, that on a proper construction of the agreement, it is the master franchisee who is entitled to enforce any trust with respect to the advertising fund and not the plaintiff franchisee.
Even if it were clear beyond argument that the parties were in a relationship so as to entitle the plaintiff to an account there are issues which, in my view, ought to be decided by trial before that might be ordered. There is a dispute on the affidavits as to the categories of expenditure which are encompassed by cl. 5, Keam, paras 28 and 36, and Wall, affidavit of 9 October 1998, paras 11 and 12. The clause itself variously describes the use to which the advertising fund may be put. In cl. 5.3.1: “in respect of all advertising and marketing conducted by the National Franchisor”; cl. 5.3.2: “for the development of advertising and promotional material and for advertising”; and cl. 5.3.4: “exclusively for the development and publication of Wendys advertising and promotions, including such advertising agency fees and reasonable costs as the National Franchisor may incur in connection with the administration of the Advertising Fund”. Unless the person conducting the account knows with certainty what line items which are the subject of challenge fall within cl. 5 and what do not, that person will be unable to carry out the task, Rockhampton Permanent Building Society v Petersen [1986] 1 Qd R 128 per Connolly J at p. 130.
The other contested issue is whether the plaintiff is estopped by its conduct from asserting that the national franchisor was not entitled to expend money from the advertising fund in the manner complained of by the plaintiff. The defendants maintain that even though the plaintiff was not a delegate to the National Advisory Council its representative attended the meetings at which the advertising fund was discussed and objection to the method of expenditure was not voiced. The franchisee’s representatives were precluded from distributing details of marketing strategy to the other franchisees in their State whom they represented for reasons of commercial confidentiality, according to the minutes, but were free to discuss those matters with them. The minutes demonstrate that the advertising fund was a topic always under review by the franchisees and a level of discontent at the lack of detail is evident.
Mr R Stone, general manager, marketing, for the second defendant deposes to a representative of the plaintiff attending a training night in Brisbane on 28 May 1996 at which income and expenditure statements in respect of the advertising contribution was presented by way of overhead projection and that no objections were received. Mr M Wall, general manager, retail, of the second defendant deposes that had a challenge been made to the propriety of particular categories of expense, the defendants may have responded by, for example, outsourcing the work to an advertising agency, or cutting back on programs, or agreeing to carry out particular programs only by way of a special levy on the franchisees.
That is sufficient to indicate that the summary procedure envisaged by O.19 r.1 is inappropriate in this case. It will be for the trial judge to determine after the findings of fact have been made and issues of construction determined, if the taking of an account is necessary in respect of the advertising fund.
Finally, cl. 13 of the most recent franchise agreement of 4 October 1996 provides for a dispute resolution procedure. Mr Sheahan does not submit that its presence precludes the plaintiff commencing and prosecuting the action on the bases discussed in cases such as Hooper Bailie Associated Ltd v Natcon Group Pty Ltd (1992) 28 NSW LR 194 and Elizabeth Bay Developments Pty Ltd v Boral Building Services Pty Ltd (1995) 36 NSW LR 709. However, the parties may well benefit from a program of mediation. Since the matter relates to continuing businesses there ought to be as little delay as possible before reaching resolution. I would be prepared to give directions for mediation and/or the speedy resolution of the action.
The order is, dismiss the summons. I will hear submissions as to cost.