Susu Pty Ltd v M Marinos Pty Ltd &Anor (No 8) - [2011] SASC 65

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
SUSU PTY LTD v M MARINOS PTY LTD &ANOR (No 8)
[2011] SASC 65
Reasons of Judge Lunn a Master of the Supreme Court
18 April 2011
EQUITY
Compensation for loss from having given an undertaking not to sell assets pending hearing of injunction to prevent their sale - injunction refused - held no contract between the parties for their sale - undertaking prevented acceptance of offer from another person to purchase them in November 2006 for $35,200 - after undertaking discharged sold for $15,000 - held onus on respondent to claim for compensation to show claimant should reasonably have mitigated its loss by selling them for a higher price - that onus not discharged - compensation assessed at $20,200 - held no power to award exemplary damages.

SUSU PTY LTD v M MARINOS PTY LTD &ANOR (No 8)
[2011] SASC 65
JUDGE LUNN:
Reasons on inquiry as to damages
Background

Part of the background is set out in the following passage from my reasons (No 7) published on 29 November 2010:
1The plaintiff, Susu Pty Ltd (“Susu”), was the franchisee of the Trinity Gardens Cheesecake Shop from the first defendant M Marinos Pty Ltd (“Marinos”).[1] Susu instituted this action seeking declarations about the terms of the franchise agreement and damages for its breach from Marinos. Its pleaded causes of action did not directly involve the plant and equipment of Susu used in the business.
2Marinos counterclaimed against Susu, inter alia, for an order that it sell to it the plant and equipment used by it in the business in accordance with an option in clause 19.9 of the franchise agreement.[2] Susu disputed its obligation to sell this plant and equipment to Marinos. Susu had removed the plant and equipment from the shop premises and had secreted it at a location not known to Marinos.
3By an application of 19 July 2006, FDN22, Marinos applied, inter alia, for an injunction restraining Susu from disposing of the plant and equipment. It asserted that its option to purchase it under clause 19.9 of the agreement would be defeated if Susu otherwise disposed of it.
4On 12 September 2006, I noted an undertaking of Susu not to dispose of, or deal with, the plant and equipment until 26 September 2006. I also noted the usual undertaking as to damages of Marinos, by its counsel, in respect of the subject matter of Susu’s undertaking. Those undertakings were continued on 26 September, 11 October and 8 November 2006. On 21 November 2006 the application of Marinos for the injunction was argued and was refused.
5On 12 May 2010 Susu discontinued the action. On 23 September 2010 Marinos discontinued its counterclaim.
6By an application taken out on 14 October 2010, FDN82, Susu applied to enforce the undertaking as to damages given by Marinos in relation to the undertakings of Susu not to sell the plant and equipment.[3] Susu alleges that it suffered considerable loss through it being delayed in selling the plant and equipment by reason of its undertakings given to the Court not to do so. Marinos disputes this.
[1]    Michael Marinos is a second defendant to the action but this is irrelevant to the present application.
[2]    The directors of Susu were also made additional defendants to the counterclaim but that has no relevance in the present application.
[3]    FDN82 is addressed to Marinos and also to Michael Marinos as the second defendant, but the undertaking was only recorded as being given by Marinos as the first defendant and not by the second defendant.
In my reasons (No 7) I refused an application by Marinos for security for its costs for FDN82.
Exercise of the option
Paragraph 19.9 of the sub-franchise agreement between the parties provided:
19.9 First Right to Purchase
If the Franchise is terminated for any reason, or ends, the Master Franchisee may by written notice to the Franchisee at any time after delivery of a notice of default, or within 2 weeks after the effective date of termination or end of the agreement purchase all, or part of, the Franchisee’s physical assets used in the Franchise Operation, to take over some or all equipment leases and to take over the lease of the Premises. There will be no compensation for goodwill or leasehold improvements. The purchase price for these assets will be the fair market value being the value based on an arms length off-site sale to a willing but not anxious purchaser as separate items and not in the context of a going concern and if there is a dispute as to that value then it will be determined with clause 16.7
Paragraph 16.7 of that agreement provided:
16.7 Arbitration
If a dispute as to the fair market value of the Franchised Operation arises, the value must be determined by an independent value appointed by the President of the Australian Institute of Chartered Accountants and his decision will be final. Costs must be borne equally.
Marinos alleges that by a letter of 17 March 2006 from its solicitors it duly exercised its rights under paragraph 19.9. The relevant parts of that letter stated:
We further advise that our client will purchase all or part of the physical assets, property, plant and equipment used in the Franchised Operation at a fair market value pursuant to Clause 19.9 of the Agreement and hereby provides you with notice of its intention to do so and, accordingly, you are required not to damage, destroy or remove them from your premises.
After you have vacated the premises, our client will provide you in writing with what it believes to be a fair price and, if there is no agreement as to price between you and our client, then pursuant to Clause 16.7 of the Agreement an independent valuer will be requested to determine their value.
In law, paragraph 19.9 gave Marinos an option to purchase all or part of the physical assets of Susu which were used in the franchise business.[4] A valid exercise of the option required strict compliance with the terms of the option.[5] A valid exercise of the option creates a conditional contract.[6] Also, the exercise of an option must be absolute and unqualified.[7] Insofar as clause 19.9 gave Marinos the right to purchase all, or part of, the assets, the proper interpretation of that clause is that it had to specify upon the exercise of the option whether it was taking all, or only some, and if so which, part of the assets. It did not give it the legal right, as it claimed to have, to nominate after the exercise of the option that it would only purchase some of the assets for the fair market value of those particular assets. I do not accept that the option was subject to an implied term that Marinos could inspect the assets after its exercise before having to nominate which items it was purchasing. It had the right under the Franchise Agreement to so inspect before it exercised the option. As Marinos purported to exercise the option for both or all or some unspecified parts of the assets, it was not a legally effective exercise of the option. Accordingly, Susu was never legally obligated to sell the assets or any part of them to Marinos.[8]
[4]    These assets, which Susu used in the franchise business, are referred to as “the assets”.
[5]    Maclachan-Trupe v Peters [1983] VR 53.
[6]    Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57 per Gibbs J.
[7]    Quadling v Robinson (1976) 137 CLR 192 at 200-1.
[8]    I need not deal with Susu’s alternative argument that Marinos purported to exercise the option outside the time limit permitted by paragraph 19.9.
Chronology of relevant events
Marinos always maintained that it had validly exercised the option, but Susu did not concede this. A “fair market value” as stipulated by paragraph 19.9 was never agreed and no arbitrator was ever appointed under paragraph 16.7.
Upon vacating the Trinity Gardens premises in May 2006 Susu removed all of the assets from it and had them stored in adjoining premises, although their whereabouts were not then known to Marinos. Negotiations took place between the parties through their solicitors, which on behalf of Susu comprised offers to sell the asset to Marinos at nominated prices, and which on behalf of Marinos consisted of offers to agree the fair market value of the assets for the purposes of paragraph 19.9.[9] It is not necessary to go into these negotiations. I do not consider that any conduct of the parties prior to the undertaking being given on 12 September 2006 can be relevant to the matters which I have to decide.
[9] The parties were always at cross purposes in their negotiations about the assets. Marinos was seeking to agree the price for the purchase which it claimed it had effected under paragraph 9.9 by its letter of 17 March 2006. Susu was seeking to effect a new sale of the assets unrelated to any rights of Marinos under paragraph 19.9.
As at 12 September 2006 Marinos was seeking an injunction on its counterclaim about the assets to prevent Susu from selling them and Susu was maintaining that it did have the right to sell them as it saw fit.
Marinos retained a firm of professional valuers, Mason Gray Strange (“Mason”), to value the assets. On 28 September its solicitors wrote to Susu’s solicitors requesting that Mason be permitted to inspect the assets. On 4 October the solicitors for Susu wrote to the solicitors for Marinos proposing a settlement of the whole of the claim and the counterclaim, which included a condition that if the offer was accepted, Susu would sell the assets to Marinos for fair market value and in that event would allow Mason to inspect them. By a second letter of that date Susu’s solicitors indicated that they would allow inspection by Mason upon Marinos complying with certain directions of the Court which had been given in respect of other aspects of the proceedings. After some further negotiations it was arranged that Mason would inspect the assets on 17 October. This occurred and Mason issued a written valuation for the assets ex situ for $29,860 inclusive of GST.
In the meantime, on 9 October 2006 Susu had obtained its own valuation from Evans Clarke International, another professional valuer, (“Evans”) for $36,800 exclusive of GST. It is unclear from affidavits relied upon on FDN82 when this valuation was disclosed by Susu to Marinos.
Susu received a written offer dated 20 October 2006 from W E H Friedrich Nominees Pty Ltd (“Friedrich”), the landlord of the premises, to purchase the assets for $30,000 plus GST, but this offer was only open for acceptance until 10 November 2006. It provided that settlement on the sale would take place by 24 November 2006.
By a letter dated 24 October 2006 Mr Mark Wheatley (“Wheatley”) offered to purchase the assets from Susu for $32,000 plus GST. This offer was only open for acceptance for 21 days from 24 October. The undertaking given by Susu to the Court prevented it from accepting the offers from Friedrichs and Wheatley.**
On 26 October Susu’s solicitors wrote to the solicitors for Marinos requesting a copy of the Mason valuation. On 27 October 2006 the solicitors for Marinos replied in the following terms:
We confirm that a copy of the valuation by Andrew Maros of Mason Gray Strange has been provided to our office.
We are instructed by our client that he is happy to provide your client with a copy of the valuation on the condition that they contribute to half of the costs of the invoice, that being $550.00. We enclose a copy of the invoice for the valuation.
Our client has inspected the inventory provided by Mason Gray Strange and informed us that he does not intend to purchase the following plant and equipment:
·Sharp Cash Register, ERA570, multi tote, S/No: 68000971;
·Pair of gas rings with 1 LPG bottle and hoses;
·Bench top scales, 2kg
·Aluminium step ladder, 4ft, (not sighted);
·2 x Galvanised steel steps (not sighted);
·PC Desktop Dell Intel Celeron, 128Mb, 6Gb, HDD, monitor, keyboard and Lexmark 235; and
·Entrance strip;
Further, purchase of the remaining plant and equipment will be subject to an inspection by our client.
No copy of the valuation of Mason was then supplied to Susu. Susu’s solicitors replied on 27 October indicating they were only prepared to pay the proper costs of photostating the valuation and asserting that it was an expert report which had to be disclosed under Rule 38.
On 30 October the solicitors for Marinos wrote to the solicitors for Susu claiming that it was entitled to recover the costs of the valuation from Susu under the terms of the franchise agreement,[10] and stated:
On 17 March 2006, our client gave notice to your client that he intends to purchase all or part of the physical assets, property, plant and equipment used in the Franchised Operations. As per the above clause, it is in our client’s discretion as to whether he purchased all or part of the Franchisee’s physical assets. It is our client’s view that he intends to purchase only those physical assets which are able to be reused in the Franchise business.
We enclosed a copy of the valuation and seek your client’s agreement as to its contents. We note that if there is a dispute as to the valuation, clause 16.7 of the Agreement will come into operation.
A copy of the Mason valuation was sent with that letter.
[10] It is not necessary to go into whether that contention was correct or not.
On 31 October the solicitors for Susu wrote to the solicitors for Marinos again disputing that Marinos had any right to the assets or their delivery up which it was seeking from this Court. It stated that Susu wished to accept the offer of $32,000 plus GST from Wheatley, but was prepared to sell the assets to Marinos for $35,200 inclusive of GST if payment was made before 7 November. Marinos did not reply to that letter.
On 14 November the solicitors for Susu again wrote to the solicitors for Marinos pointing out that the offer from Wheatley would lapse that day, but Susu could not accept it because of the undertaking which had been given. Susu requested Marinos immediately withdraw its application for an injunction so that it could then accept the offer from Wheatley. Later that day the solicitors for Marinos replied, referring to a letter of 7 November 2006 which is not in evidence.
On 17 November the solicitors for Susu wrote to the solicitors for Marinos offering to sell the assets for the value ascribed to them by Mason provided payment was made within seven days and Marinos paid 90 per cent of Susu’s party and party costs of the application in respect of the assets. There was no reply to that offer.
On 21 November 2006 the application by Marinos to prevent Susu from selling the assets was refused and Susu was thereby impliedly released from its undertaking not to sell them.
On 16 February 2007 Susu sold the assets to Mark Wheatley for $15,000 inclusive of GST. It now claims its damages are $20,200, being the difference between the amount for which it could have sold the assets to Wheatley under his offer of 24 October 2006 and the amount for which they were ultimately sold.
In dealing with FDN82 I have confined myself largely to the contents of the affidavits which were put forward by the parties as evidence on it. There is a large amount of other affidavit evidence on the Court file relating to many earlier applications, of which I am generally aware, but to which I have not made specific reference for the purpose of these reasons.
The relevant events for FDN82 need to be seen against a background which was not established in detail by the affidavits before me on FDN82. Most of what I am about to say was implicit in the questions put in cross-examination to Ms Du Bois, a director of Susu, and her answers. After Marinos regained possession of the premises from Susu in May 2006 it negotiated with Friedrich to obtain a further lease of the premises, presumably in order to be able to establish another cheesecake franchise in the premises. However, those negotiations broke down and Marinos did not obtain any new lease of the premises from Friedrich. In about October-November 2006 Friedrich was negotiating with Wheatley, who operated a number of other bakeries, for him to establish a bakery in the premises. At a date of which I am not aware but which was apparently in about November 2006, Wheatley became a tenant of the premises. By no later than February 2007 a bakery business was established in the premises by Wheatley and apparently without resort to the assets which Susu later sold to him.
Alleged offer to purchase by Marinos
Marinos’ counsel submitted that the letter of 27 October 2006, quoted above, constituted an offer by Marinos to purchase the assets for $28,085 with some exclusions amounting only to a few hundred dollars. I do not accept this. Without a copy of the Mason valuation, which Marinos was intentionally withholding, Susu could not ascertain the price which was being offered in the letter, if it otherwise constituted an offer. Thus, it was too uncertain in its terms as to price to be an offer capable of acceptance.
Any price which was being offered by Marinos was disclosed by the valuation which accompanied the letter of 30 October 2006. However, the portion of that letter quoted above shows that Marinos was not making an offer to purchase the assets with some exceptions, but was pursuing the alleged contract under paragraph 19.9 and the letter of 17 March 2006. If Susu had accepted the proposal as contained in the letters of 27 and 30 October, it would have been an admission by it that Marinos in March 2006 had validly exercised the option for the assets. This would have had serious potential implications for what order might be made on the costs of the counterclaim. Insofar as those two letters and the valuation might otherwise have constituted an offer, Susu cannot be criticised in this application for not having accepted it. In any event, its amount was still lower than the offer from Wheatley.
Equitable considerations
As this Court is now exercising an equitable discretion, it is entitled to take the conduct of the parties into account on whether it would be unconscionable to award Susu equitable compensation for its loss.[11] I do not consider that Susu was guilty of any conduct which would disentitle it to equitable relief. It was under no legal obligation to sell the assets to Marinos and so was not required to allow Marinos to inspect or value them. There were some omissions by both parties in answering correspondence and there were various delays by both parties, but none of it by Susu significantly affected any rights of Marinos.
[11] Rail Corporation of NSW v Leduva Pty Ltd, Einstein J, Supreme Court of NSW, 5 June 2007, [2007] NSW SC 571.
Counsel for Marinos complained of the paucity of the evidence put forward by Susu about its relevant dealings with Friedrich and Wheatley. That evidence certainly was minimal but, as I find below, in the absence of any evidence to the contrary, it is sufficient to prove Susu’s loss resulting from its undertaking. No authority was cited that any such paucity of evidence should disentitle a claimant to relief in Equity.
The evidence
I accept the affidavit evidence of Susu. Its director, Ms Du Bois, was cross-examined on her affidavits. I find her to be a witness of truth. Nothing put forward in her cross-examination caused me not to accept her affidavits or her other evidence.
Counsel for Marinos criticised the case put forward by Susu because it had not adduced affidavits from Mr Friedrich and Mr Wheatley. It was under no obligation to do so. Neither of those persons were shown to be so much in the camp of Susu[12] that it would be expected that they would give evidence on its behalf.[13] It was equally open to Marinos to have adduced evidence from these persons. If they would not cooperate, it could have sought their examination under Rule 87R 83.13.
[12] Ms Du Bois denied that Mr Friedrich was her boyfriend. I accept her denial. No other evidence on the topic was adduced.
[13] The Rule in Jones v Dunkel. See generally Cross on Evidence [1215].

I find that Susu received an offer from Wheatley for the assets for $35,200 inclusive of GST, which lapsed on 14 November. Susu’s undertaking precluded this offer from being accepted, but if it had not been for the undertaking, Susu would have accepted it. I accept the evidence of Ms Du Bois that shortly after 21 November Mr Wheatley informed her that he was not prepared to renew his offer in its previous terms. Although there is no direct evidence on the point, the likelihood seems to be that by this time Wheatley had entered into his lease with Friedrich and had made other arrangements for equipping his new shop. Likewise, I find that shortly after 21 November Ms Du Bois was advised by Friedrich that it was not prepared to extend its offer which had lapsed on 10 November.
I find that on 15 February 2007 Susu sold the assets to Wheatley for $15,000 inclusive of GST. I accept the evidence of Ms Du Bois on the point. The original tax invoice for the sale would be expected to have gone to Wheatley as the purchaser. It is not surprising that Susu did not have a full copy of it in its records. The absence of any documentary evidence that the $15,000 was received and banked by Susu does not cause me to reject the evidence of Ms Du Bois that it occurred. I reject the submission of Marinos that Wheatley’s offer of 24 October 2006 and his purchase of the assets on 15 February 2007 were shams.
Damage suffered by the plaintiff
As stated above, I find that but for the undertaking it gave to the Court, Susu would have accepted the offer of Wheatley of 24 October 2006 and have sold the assets to it in November 2006 for $35,200 inclusive of GST. I find that Susu sold the assets on 15 February 2007 for $15,000. Therefore, as a result of the undertaking, it has suffered a loss of $20,200.
Mitigation of damage
Marinos submitted that Susu should not be awarded compensation of $20,200 because it had failed to act reasonably in mitigating its loss. It was not disputed that Susu had not advertised the assets or sought out any other purchaser for them after 21 November 2006, other than Friedrich and Wheatley. Ms Du Bois said that she had been advised by each of Evans and Mason that the chance of the best price was by selling the assets where they were in storage and if they went to auction or they were advertised in the paper, she could expect markedly less. She did not say when she received that advice, but I infer it was probably before the undertaking expired. It is not evidence of the objective truth of what she was told, but only of her state of mind and her motivation for what she did. She conceded that the assets had not deteriorated before they were ultimately sold. She gave no evidence that in February 2007 she had sought to obtain a better price than $15,000 for the assets.
Marinos submitted that the assets had been valued ex situ in October 2006 by Evans and Mason at $36,800 and $30,000 exclusive of GST respectively. Its counsel submitted that no cogent reason had been put forward why the best reasonably obtainable market price for the assets had more than halved in about four months.
For reasons which it is not my task to enquire into, neither party saw fit to adduce expert valuation evidence about the proper market value of the assets in early 2007.[14] It may be that the market for such goods in South Australia had dramatically changed since September and October 2006. I do not know.
[14] Susu was not unreasonable in delaying their sale until mid-February 2007.
At common law, the onus is on the defendant to a claim for damages to show that the claimant has acted unreasonably in not taking steps to mitigate the loss and thus reduce the damages.[15] It may be that any reasonable steps to mitigate the loss would only have reduced the loss, but not have eliminated it. Again, the onus is on the defendant to show the extent of any such reduction. Marinos has not discharged the onus of proof upon it on the balance of probabilities to show that Susu did not take any reasonable steps available to it to mitigate its loss. Therefore, Susu is to recover its loss of $20,200.
[15] McGregor on Damages 17^th Ed., [7-019].
Exemplary damages
Susu has claimed exemplary damages. I am not aware of any authority about the availability of exemplary damages as part of equitable compensation for loss arising out of an undertaking in lieu of an injunction. In the analogous situation of equitable compensation for breach of fiduciary duty, there is no entitlement to exemplary damages where the duty arose in the context of a contractual relationship.[16] Here, the dealings between the parties were all in the context of a contractual relationship. Accordingly, I hold that here there is no entitlement in Equity to exemplary damages or their equivalent.
[16] Harris v Digital Pulse Pty Ltd (2003) 56 NSW LR 298.
Interest
No reference was made during submissions to any interest to be awarded to Susu on the equitable compensation. I will hear counsel on the point. I will delay making any order on FDN82 until I have heard those submissions.
FDN82 is adjourned for further submissions to Tuesday 3 May 2011 at 9.15am.