Thorne & Anor v Literacy Circle Pty Ltd & Ors

[2009] FMCA 507

FEDERAL MAGISTRATES COURT OF AUSTRALIA

THORNE & ANOR v LITERACY CIRCLE PTY LTD & ORS [2009] FMCA 507

CONTRACTS – Formation – intention to create legal relations – whether contract or mere offer – abandonment – applicable principles – repudiation.

TRADE PRACTICES – Unconscionable conduct – according to the unwritten law of Australia – limited to equitable doctrines – mere unfairness arising out of breach of contract does not amount to unconscionable conduct – accessorial liability.

TRADE PRACTICES – Unconscionable conduct in business transactions – factors to be considered – a mere breach of contract does not amount to unconscionable conduct – accessorial liability.

TRADE PRACTICES – Franchising Code of Conduct – breach of Code.

DAMAGES – Breach of contract – purpose of award – reliance damages.

Trade Practices Act 1974, ss.51AA, 51AC, 51AD, 51AE, 75B
Australian Securities and Investments Commission Act 2001, s.12CC
Trade Practices (Industry Codes – Franchising) Regulations 1998 cls.6, 10, 11, 21, 22
Federal Magistrates Act 1999, s.76
Uniform Civil Procedure Rules 2005 (NSW), sch.5

Masters v Cameron (1954) 91 CLR 353
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631
Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
Ryder v Frohlich [2004] NSWCA 472
Australian Competition & Consumer Commission v Samton Holdings Pty Ltd & Ors (2002) 117 FCR 301
Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd& Ors (2003) 214 CLR 51
Body Bronze International Pty Ltd v Soleil Tanning Oxford Pty Ltd [2007] FCA 371
Hurley v McDonalds Australia (2000) ATPR 41-471
Australian Competition & Consumer Commission v Simply-No Knead (Franchise) Pty Limited (2000) 104 FCR 253
Australian Securities and Investments Commission v National Exchange Pty Limited (2005) 148 FCR 132
Australian Competition & Consumer Commission v Oceana Commercial Pty Limited & Ors [2004] FCAFC 174
Attorney-General (NSW) v World Best Holdings Limited [2005] NSWCA 261
Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286
Macdonald v Australian Wool Innovation Ltd [2005] FCA 105
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

G Pearson, “The ambit of unconscionable conduct in relation to financial services” (2005) 23 C&SLJ 105
R Bigwood, “Curbing Unconscionability: Berbatis in the High Court of Australia” (2004) 28(1) MULR 203
P Strickland, “Rethinking unconscionable conduct under the Trade Practices Act” (2009) 37 ABLR 19

First Applicant: MATTHEW JAMES STANNETT THORNE

Second Applicant: HOLLIE MAREE THORNE

First Respondent: LITERACY CIRCLE PTY LIMITED (ACN 117 201 493)

Second Respondent: WILLIAM OWEN EDWARDS

Third Respondent: JACQUELINE EDWARDS

File Number: SYG 2001 of 2007

Judgment of: Cameron FM

Hearing dates: 23 – 27 June 2008

Date of Last Submission: 7 August 2008

Delivered at: Sydney, Melbourne (videolink)

Delivered on: 29 May 2009

REPRESENTATION

Counsel for the Applicants: Mr C. Johnson

Solicitors for the Applicants: Armstrong Lawyers Pty Ltd

Counsel for the Respondents: Mr H. Stowe

Solicitors for the Respondents: Mr R.H. Storey

ORDERS

1. There be verdict and judgment for the applicants against the first respondent in the sum of $91,731.82.

2. The application be dismissed as against the second and third respondents.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2001 of 2007

MATTHEW JAMES STANNETT THORNE

First Applicant

HOLLIE MAREE THORNE

Second Applicant

And

LITERACY CIRCLE PTY LIMITED (ACN 117 201 493)

First Respondent

WILLIAM OWEN EDWARDS

Second Respondent

JACQUELINE EDWARDS

Third Respondent

REASONS FOR JUDGMENT

Introduction........................................................................................................... [1]

Background............................................................................................................ [4]
The allegations....................................................................................................... [6]
Relief sought....................................................................................................... [12]
The evidence........................................................................................................ [13]

Applicants’ evidence....................................................................................... [13]

Matthew Thorne.......................................................................................... [13]
Hollie Thorne............................................................................................. [48]
Bronwen Moir............................................................................................ [77]

Respondents’ evidence................................................................................... [92]

William Edwards........................................................................................ [92]
Jacqueline Edwards.................................................................................. [132]
Peter Moir................................................................................................ [171]

Consideration.................................................................................................... [191]

Was there a contract on foot prior to 12 July 2006?................................ [191]
Was the contract abandoned on or about 12 July 2006?........................... [203]
Repudiation of the contract on 14 August 2006........................................ [228]
Estoppel........................................................................................................ [247]
Trade Practices Act...................................................................................... [248]

Allegations................................................................................................ [248]
Unconscionable conduct – Section 51AA............................................. [253]
Unconscionable conduct – Section 51AC............................................. [256]

Breach of Franchising Code of Conduct.................................................... [294]

Damages............................................................................................................ [305]
Conclusion........................................................................................................ [324]

Introduction

1. The first respondent, Literacy Circle Pty Limited (“Literacy Circle”), is a childhood literacy education business operating in New South Wales through various franchises.

2. In 2006 the applicants, Matthew Thorne (“Matthew”) and Hollie Thorne (“Hollie”), who are husband and wife, sought to establish a Literacy Circle franchise business in Melbourne.  Their relationship with Literacy Circle turned out to be difficult.

3. On 14 August 2006, Literacy Circle terminated the franchise relationship with the applicants and it is from that step that these proceedings flow.

Background

1. Literacy Circle was incorporated on 18 November 2005 and its initial directors and shareholders were:

   a)Beverley Edwards, wife of William Edwards (“Bill”), the second respondent;

   b)Jacqueline Edwards (“Jaki”), the third respondent, daughter of Beverley and Bill Edwards and Literacy Circle’s chief executive officer;

   c)Peter Moir (“Peter”), Hollie’s father and Literacy Circle’s chairman and public affairs director;

   d)Bronwen Moir (“Bronwen”), Hollie’s mother and Literacy Circle’s educational programs director; and

   e)Andrew Hewson (“Andrew”), marketing director. 

2. Bill Edwards, Literacy Circle’s chief financial officer, was neither a director nor shareholder of the company but was, Matthew and Hollie submit, effectively in control of Literacy Circle. 

The allegations

1. Matthew and Hollie allege that in February 2006 they agreed with Literacy Circle to become its franchisees in Melbourne, to operate a business to be known as “Literacy Circle (Inner East)” (“Inner East”).  No written franchise agreement was ultimately executed.  Notwithstanding this, Matthew and Hollie allege that they set up their business in Camberwell, rented premises, fitted them out, undertook training conducted by Literacy Circle, advertised the business and started teaching on 1 July 2006.

2. Matthew and Hollie allege that on 14 August 2006 by email from Peter in his capacity as Literacy Circle’s chairman, Literacy Circle purported to withdraw the offer of a franchise to the applicants and to terminate the franchise with immediate effect.

3. Matthew and Hollie allege, notwithstanding the absence of an executed written agreement, that there was a contract between the parties which Literacy Circle repudiated, which repudiation they accepted. In any event, they allege, Literacy Circle is estopped from claiming any entitlement to withdraw its offer of a franchise or to terminate it except on terms providing for reasonable notice and compensation to them. They further allege that, in the circumstances, Literacy Circle’s conduct was unconscionable and in breach of ss.51AA and 51AC of the Trade Practices Act 1974 (“TPA”), that contrary to s.51AD of the TPA Literacy Circle contravened the Franchising Code of Conduct, and that pursuant to s.75B of the TPA, Bill and Jaki had accessorial liability for Literacy Circle’s conduct in breach of the TPA.

4. In their further amended defence the respondents deny that an agreement was made in February 2006 but, if one is found to have been made, they allege that Matthew and Hollie repudiated it by Hollie, in a conversation she had with Peter on or about 12 July 2006, manifesting an intention no longer to be bound by such a contract, which repudiation was accepted by Peter on behalf of Literacy Circle.  However, in their written submissions, the respondents confined this aspect of the defence to a submission that “[w]hatever contract was in place before 12 July 2006, that contract was terminated by mutual abandonment on 12 July 2006” because the circumstances surrounding the 12 July 2006 conversation between Hollie and Peter were said to support an inference that this had occurred. 

5. The respondents also allege in the further amended defence that if any contract was on foot on 14 August 2006, Matthew and Hollie repudiated it:

   a)by failing or refusing to confirm that they were intending to proceed with the franchise;

   b)by failing or refusing to execute a draft franchise agreement within a reasonable time;

   c)by evincing an intention not to execute a draft franchise agreement in their own names; and,

   d)on or about 14 August 2006, before Literacy Circle sent its email of that date, by evincing an intention no longer to trade as franchisees of Literacy Circle.

6. The respondents allege that by its email of 14 August 2006, Literacy Circle accepted the repudiation represented by the conduct set out in [10] above.

Relief sought

1. Matthew and Hollie seek damages for costs and expenses incurred by them together with other, consequential losses arising out of the breach of contract alleged. They also seek damages for the alleged breaches of the TPA and the Franchising Code of Conduct.

The evidence

Applicants’ evidence

Matthew Thorne

Background

1. On 2 February 2006, a meeting took place between Matthew, Hollie, Bill and Peter, during which Matthew and Hollie were assessed for suitability as Literacy Circle franchisees and shown a forecast of earnings and expenses for a Melbourne franchise.  The financial terms were explained; Matthew and Hollie were told that they would not be required to pay an initial franchise fee to Literacy Circle, a concession which was to be offered with the first five franchises, but that they would be required to pay Literacy Circle a fee of 12.5% of their sales.  Bill explained the other terms on which Matthew and Hollie might be offered a franchise including the exclusivity of their territory, that their premises would need to be approved by Literacy Circle, that advertising and use of Literacy Circle’s intellectual property had to be approved by Literacy Circle, that initial training would need to be completed to Literacy Circle’s satisfaction and that the term of the franchise was to be 10 years. 

2. Bill alleges that at the conclusion of this meeting he said, amongst other things, that the franchise documents would have to be signed before an agreement would be in place.  Matthew denies that such a conversation occurred and says that the first occasion he had a conversation with Bill concerning signing the franchise agreement was on or about 15 February 2006 when Matthew did agree to sign the agreement when it was ready.  He says that prior to the cancellation of their franchise, there was never any discussion between him and Bill or any director of Literacy Circle, to the effect that Hollie and he did not have a franchise until an agreement was signed.

3. Matthew also denied that, at a meeting with an ANZ Bank small business specialist, Bill said that Bill, Hollie and Matthew acknowledged that the franchise would not be formalised until the documentation was signed by all parties.

4. At the conclusion of the 2 February 2006 meeting, Bill informed Hollie and Matthew that he would discuss their interest in a franchise with the board.  On 6 February 2006 Bill sent Matthew an email containing a revised estimate of start-up costs of $35,000 and a forecast of sales and profits to 24 December 2006.  On 7 February 2006, Matthew telephoned Bill to confirm that he and Hollie wished to proceed to acquire the franchise on the terms offered. 

5. Following the board meeting on 15 February 2006, Peter informed Matthew that the proposal to offer them a franchise had been approved.  Either on that day or shortly afterwards, Bill informed Matthew that the franchising documents were with Literacy Circle’s solicitor and that they would be provided when they were available.  Matthew deposed that Bill also said to him that as the franchise had been approved, he and Hollie were to agree on a territory, find suitable premises and inform him of the entity that was to be the franchisee. 

6. Matthew deposed that he agreed to sign the franchise agreement when it was ready but there was never any discussion with Bill or any other Literacy Circle director to the effect that he and Hollie did not have a Literacy Circle franchise until an agreement was signed.  Bill had said to him that the terms of the franchise agreement would be those which had been discussed and agreed.

7. On 24 February 2006 Bill wrote by email to Matthew and Hollie to record that the franchise territory being considered was to include Whitehorse, Knox and Maroondah.  Matthew deposed in his affidavit sworn 23 April 2008 that the territory was later varied to Boroondara, Monash and Whitehorse.

8. In late February 2006, Matthew and Hollie found potential premises and subsequently Jaki sent a letter to Maroondah City Council seeking planning approval.  Ultimately, those were not the premises which Inner East rented. 

9. Bill alleges that during a visit he made to Melbourne on 22 – 23 February 2006 he said:

   … I reiterate that our position is that the offer is to Hollie, and whilst we raise no objection to Matthew being included, it is Hollie who we will be dealing with in the operation of the centre. 

   Matthew denies that Bill made such a statement.

10. From mid-February 2006, Literacy Circle referred to Matthew and Hollie as the “Melbourne franchise”, “regional franchisee” or similar.  Literacy Circle-specific email addresses were created for both Matthew and Hollie.  In April 2006, in newsletters available in hard copy and on its website, Literacy Circle referred to “Literacy Circle (Inner East)”, as its franchisee.

11. In early May 2006 Matthew attended induction in Sydney where he received training in learning programs, financial reporting and a program called E-lecta. 

12. On or before 19 May 2006, Literacy Circle authorised Matthew and Hollie to register and operate under the business name “Literacy Circle (Inner East)” and Matthew registered the business name on 24 May 2006.  After the approval of the business name, Jaki created and provided Inner East with a Literacy Circle email address.

13. Matthew deposed that on 23 April 2006 Bill inspected and approved premises on Toorak Road at Camberwell and, on or before 8 May 2006, Andrew approved the furniture for use in Inner East’s premises.  In reliance on this Matthew and Hollie purchased the furniture.  On 23 May 2006, Bill wrote a letter to the Camberwell premises’ letting agent stating that Matthew and Hollie’s application for a franchise was approved by the board, that they had attended training, were authorised to commence business and that the premises had been inspected and approved for use as a Literacy Circle franchise.  Subsequently, Matthew and Hollie executed a 5 year lease of the Camberwell premises to commence on 23 May 2006.  On 30 May 2006 they borrowed to fund Inner East.

14. In mid-May 2006, Matthew and Hollie followed Literacy Circle’s process to arrange printing and stationery supplies and on 6 June 2006, Matthew provided Inner East’s details to Jaki for use in an advertisement in Melbourne’s Child magazine and to update Literacy Circle’s website. 

15. On 24 June 2006 Matthew and Hollie engaged a receptionist and on 1 July 2006 they commenced operating Inner East.  Literacy Circle started to refer students for enrolment in courses and during July 2006 Inner East assessed and/or enrolled approximately 10 students.

16. On 14 August 2006 Matthew received an email from Peter informing him that Literacy Circle was “withdrawing its offer” of a franchise.  Matthew deposed that he was shocked by this, saying that this was the first time since February 2006 that their franchise had been referred to as an “offer”.

17. Following the termination, Matthew had several telephone conversations with Peter seeking to resolve outstanding issues between Hollie and him and Literacy Circle.  Peter told Matthew that Bill had received legal advice on behalf of the board that Literacy Circle had a legal right to withdraw its offer if Matthew and Hollie had not executed the franchise agreement.

12 July 2006

1. Matthew said that Hollie had the majority of dealings with Literacy Circle as she was the manager of Inner East in the teaching area.  He described her as a forthright person who, rather than let a problem linger, sets about addressing it.

2. Difficulties arose in Hollie’s dealings with Jaki.  Matthew and Hollie considered that proper respect for their autonomy was lacking.  They also thought that some Literacy Circle directives were prejudicial to their business and that there was a lack of prompt and reasonable response to concerns that they raised.  Matthew said that there was a significant number of conflicts which took place between Inner East and Literacy Circle during the course of their relationship.

3. Matthew deposed that there was conflict between Hollie and Jaki during June and July 2006, although as early as March 2006 Matthew and Hollie had felt uncomfortable about the approach Jaki took in her dealings with Inner East.  Hollie found her interaction with Jaki to be distressing.  Matthew remembered Hollie saying on or about 12 July 2006 “I just can’t go on with Literacy Circle franchise because I’m too emotionally distressed” and he conceded that at that point she expressed to him a clear intention to leave Literacy Circle.  However, notwithstanding what Jaki says in paragraph 2 of her affidavit sworn 20 June 2008, he did not share that intention.  Matthew said that although Hollie had said in her email to Jaki of 17 July 2007 that she had no teaching materials, having deleted them because, at that time, “we had decided to leave Literacy Circle and did not want to view the materials”, this was not an intention which he shared.  Matthew said that when Hollie said to him on 12 July 2006 that she could not go on with Literacy Circle because she was too emotionally distressed, he disagreed with her intention to leave and said that she should speak to Peter about it and take his advice. 

1. Later that day Hollie discussed with Peter whether she should continue with Literacy Circle.  Matthew believed that Peter had said to Hollie that if she had doubts, morally she should delete the teaching materials which Inner East had received from Literacy Circle.  After her conversation with Peter, Hollie told Matthew that she still intended to leave Literacy Circle and that she had told Peter this.  By the time of this conversation with Matthew, and without reference to him, Hollie had already deleted the teaching materials.  Matthew had no specific recollection of discussing the timing and fact of the deletion of the teaching materials in that conversation but became aware of it some time between 12 July 2006 and Hollie’s later request for the materials to be resent by Literacy Circle.

Execution of written franchise agreement

1. On 2 February 2006, Matthew had a second conversation with Bill when the franchise agreements were mentioned. Matthew’s recollection was that it was agreed that when the written agreements were ready they would have to be signed.  However, Mathew denied acknowledging that the franchise documents would have to be executed before the franchise agreement was in place.  He also disagreed with the proposition that in a conversation with Bill on 15 February 2006 Bill had said that execution of the franchise documentation had to be effected before there was any formal or legal relationship in place.

2. Matthew deposed that he received from Bill on 14 and 16 June 2006 respectively, first the franchise documents and the draft disclosure statement and then a draft schedule to the agreement.  Bill asked Matthew to complete and return the schedule, which he did by email on 23 June 2006.  Matthew deposed that Bill said that upon his receipt of the completed schedule the franchise documents could be prepared for execution by the parties.

3. Matthew deposed that on 4 July 2006 he received an email from Bill requesting that he provide contact details of a solicitor so that they could “get the franchise agreements underway”.  Matthew provided the details of his solicitor.

4. Then the disruptive events of 12 July 2006 occurred.  Not long after, however, Matthew and Hollie decided that it was appropriate to try to rebuild bridges with Literacy Circle to see if, again, the franchise arrangement could work. 

5. Matthew disputed the proposition that he and Hollie thought that if things got better they would continue and if things did not get better they would leave.  He said he wanted to work through the issues.  In his view, there was a relationship between the parties which they could not just walk away from.  Moreover, Matthew said he did not understand that if he did not sign the documents he was free to walk away.  He said that he knew that if the documents were not signed there was no written legal document in existence but he still believed that the parties had a relationship which would have to be discussed or brought to an end. 

6. Matthew referred to a conversation between him, Jaki and Hollie which was one of a number of conversations following the events of 12 July 2006.  In that particular conversation, Jaki raised the question of executing the documentation within 14 days, making it clear that this was to be done.  Matthew and Hollie neither agreed nor disagreed, Hollie asking for more time before they signed the agreement.  Matthew said that the parties had been involved for six months and all of a sudden Literacy Circle was pushing for quick signatures in circumstances where it had not yet been demonstrated that Hollie’s concerns would be addressed.

7. Jaki says that in her conversation with Hollie on 17 July 2006, instead of agreeing to sign the franchise documents within 14 days, Hollie said:

   ‘No, we want a more positive experience; we want to rekindle the faith; is it really going to get better; or will it get back on minimum terms; most issues have been resolved and we will talk about it.’ Hollie and Matthew said they wanted to wait for six months and then decide if they wanted to sign the Franchise Agreement.

   In his affidavit in reply sworn 11 June 2008 Matthew denied that he or Hollie said this on 17 July 2006 or at any other time but, rather, had a conversation, prior to Jaki’s re-emailing the materials on 17 July 2006 at 8.58am, in which they said that they agreed to sign the franchise agreements within 14 days of receipt.

8. Under cover of a letter dated 21 July 2006, Literacy Circle’s solicitor sent franchise documents to Matthew and Hollie’s solicitor who apparently received them on 25 July 2006.  As Matthew and Hollie’s solicitor did not have their contact details, the solicitor obtained these a few days later from Literacy Circle’s solicitor.  On Saturday 5 August 2006 Jaki inquired by email whether Matthew and Hollie had received the franchise documents and Matthew responded that he would contact his solicitor the following Monday.  On 7 August 2006 Bill sent an email consenting to Matthew and Hollie’s request of 5 August 2006 to use a company as the franchisee and flagging that this change had the potential to increase Matthew and Hollie’s legal costs associated with the preparation of the franchise documents.

9. On 7 and 8 August 2006 Matthew telephoned his solicitor wanting to speak to her about the franchise documents.  His calls were not returned.

10. On 9 August 2006 Peter informed Hollie that he would be going to Literacy Circle’s board regarding their franchise and would suggest that it be terminated.  Matthew then left a message with his solicitor to defer reading the franchise documents pending further advice from Literacy Circle. 

11. Matthew deposed that he did not understand that any urgency attached to the finalisation of the franchise documents and at no stage prior to 14 August 2006 did he say to any director of Literacy Circle, or to Bill, that he did not intend to proceed with the franchise.

Managers’ meeting on 9 August 2006

1. Matthew said that at a managers’ meeting there had been serious conflict between Jaki and Hollie in relation to business cards and that this had upset Hollie.  His recollection was that although Hollie had said something like “they’re at it again”, this situation was different from the one in July 2006 when termination of the relationship was in prospect.  He denied the proposition that around this time he had discussions about breaking away from Literacy Circle and establishing an independent business. 

2. After the managers’ meeting, Hollie spoke to Peter and discussed what had happened.  Peter said that given the flare-up at that meeting, he would go to the board and suggest that the relationship be reconsidered and thought be given to whether it would be prudent to bring it to an end.  Hollie’s response to this was that they would wait and see the result of the discussions at board level.  Matthew and Hollie did not discuss breaking away from Literacy Circle and were waiting to see what Peter came back with.

Termination

1. When Matthew received Peter’s email of 14 August 2006 purporting to end the relationship he was shocked and he and Hollie then started to question what they would do.  It was not until they had received the 14 August 2006 email that Matthew communicated to Peter or anyone else an intention to explore the establishment of an independent business.  Although they did not protest to Literacy Circle about the 14 August 2006 email, Matthew and Hollie did not want to break away from Literacy Circle.  Matthew denied the proposition that there had effectively been an agreement between Hollie and Peter for a consensual separation of the businesses. 

Hollie Thorne

Background

1. Hollie deposed that the meeting on 2 February 2006 occurred in the manner described by Matthew in his affidavit sworn 23 April 2008 (see [13] above).

2. On 15 February 2006 Peter, on behalf of the Literacy Circle board, informed her that her franchise had been approved.  Thereafter, she and Matthew commenced establishing their franchise in the manner described by Matthew in his affidavit.

3. On 1 July 2006 Inner East opened for business and by 15 July 2006 it had approximately 10 students assessed and/or enrolled.  By mid-July 2006 Matthew and Hollie had invested most of their money in establishing Inner East.

4. Hollie deposed to having experienced significant conflict with Jaki between March and July 2006 relating primarily to directives given by Jaki to Inner East which Hollie detailed in her affidavit and which she felt were detrimental to the success of Inner East. 

5. Hollie deposed that, while each issue was eventually resolved, they caused her and Matthew significant emotional drain and that this caused their relationship, as well as Hollie’s relationship with her parents, to deteriorate.  Hollie said that as the relationship with Literacy Circle deteriorated she found it harder to speak to Matthew and the further apart they became in their views, the less they spoke.  Hollie became increasingly frustrated and distressed but Matthew found it difficult to accept that things were as bad as she said they were.  Hollie felt that she was the only one finding Literacy Circle difficult to deal with and she felt that nobody else really understood.  The conflict caused her significant personal distress.

12 July 2006

1. Hollie says that the conflict with Jaki “came to a head” when, on or shortly before 12 July 2006, Hollie told Peter that she was uncertain about whether she could proceed with the franchise as she was distressed by the ongoing conflict with Jaki and, to a lesser extent, Bill. 

2. Hollie denied that in the course of her conversation with Peter on 12 July 2006 she told him that it was her intention to leave Literacy Circle.  At that time she did not wish to continue to deal with Jaki on a day to day basis because of the distress this caused her but, by the same token, she did not wish to lose her business.  She said that at this time she proposed to discuss the situation with Matthew and could not say that she had reached a categorical decision.  She considered the possibility of leaving Literacy Circle and she told Matthew that that was a course of action she was considering, although around the time of her conversation with Peter she had not actually formed an intention to leave Literacy Circle.

3. Hollie conceded that, at some points during her considerations, she had harboured an intention to leave Literacy Circle in order to avoid the difficulties she had encountered.  She said she was very ambivalent, having strong feelings both ways and swinging between feeling that she could not go on and feeling that she should try to continue.  On this basis, she conceded that although she never acted on it, it was conceivable that at some point she had formed the intention to leave Literacy Circle.  She also conceded that it was possible that during her conversation with Peter on 12 July 2006 she discussed this feeling, as well as her desire to “stick it out”.

4. Hollie said that during their conversation on 12 July 2006 Peter said to her that if she was having doubts about wanting to run a Literacy Circle franchise she needed to delete the teaching materials.  This was on the basis that it would not be right for her to look at them if she was having doubts and worries.  Hollie described this statement as a direction that if she was having doubts she should delete the teaching materials.  Because she was having doubts, she did so. 

5. Hollie understood that without the Literacy Circle materials, Inner East could not continue to operate as a Literacy Circle franchise and offer the range of services that were proposed within that franchise.

6. Hollie said that she never felt that the relationship ended, notwithstanding that she would have required the deleted Literacy Circle materials in order to operate the franchise.  She was not expecting that the resolution of her problems would take too long and she assumed that once the issues were resolved it would not be a problem to get the materials back.  She denied the suggestion that the reason she deleted the materials was that she intended to leave Literacy Circle and would never need them again.

7. Hollie said that deletion of the materials was not really a business issue but more about what was the correct thing to do.  She felt that Peter was right when he said that if she had doubts she should not look at the material, although she could not remember whether she had said to her father that she would delete them in accordance with his suggestion.  Later, in the context of her belief that the business relationship had never stopped and also believing she was no longer having doubts, Hollie was happy to receive the course material again.

8. Hollie deposed that on or about 12 July 2006, and apparently after her conversation with Peter, she and Matthew spoke to Jaki.  They said that they were not happy and did not feel that they had been getting the right support.  Jaki acknowledged that there had been a lot of conflict and apologized.  They “spoke about getting things back on track” and Jaki invited Hollie to list her concerns in an email.  During the course of the conversation Hollie told Jaki that she had deleted the course materials from her computer because Peter had directed her to do so. 

9. Hollie said that it was on 12 July 2006 in their first conversation following the deletion of the materials that Jaki said words to the effect of “if you wish to proceed with Literacy Circle you will need to sign the franchise agreement documentation within 14 days”.  Hollie neither agreed nor disagreed with the requirement but, instead, made a counter-proposal by asking for some more time.  According to Hollie, Jaki responded by saying that she would think about it.  Hollie said that she did not immediately agree to the 14 day requirement because she wanted to attempt to get Literacy Circle to reconsider the way that they were dealing with Inner East and she was hoping this response would encourage better behaviour.  Hollie said that during that 12 July 2006 conversation neither she nor Matthew rejected the franchise agreement or at any stage said that they were not bound by it.  Rather, they acknowledged to Jaki that they were bound by the terms of the draft franchise agreement.

10. On 14 July 2006 Hollie sent an email to Jaki outlining her concerns and on 15 July 2006 Jaki acknowledged receipt of the email stating, amongst other things, that she “believed that we can move forward together as a positive and productive team”.  Hollie replied the same day saying that she was “comfortable receiving the lesson materials again”.

11. Hollie deposed that on 17 July 2006 Jaki emailed her asking which course materials to send.  Hollie responded by email saying:

    At the moment, we have no teaching materials at all because I deleted them.  At that time, we had decided to leave Literacy Circle and did not want to view the materials.  …

    Hollie deposes that the latter statement is inaccurate because, although she had formed this intention on 12 July 2006, Matthew did not agree and counselled her to speak to her father, who then directed her to delete the course materials. 

12. On 17 July 2006 Jaki sent an email to Hollie saying that she would start emailing the course material. 

13. On 21 July 2006 Jaki sent an email to Matthew and Hollie saying that she was “thrilled … to have both you as part of the Literacy Circle family”. 

Execution of written franchise agreement

1. Hollie said that she and Matthew had a conversation with Jaki on or about 17 July 2006 when Jaki said that they were required to sign the franchise agreement within two weeks of receiving it.  Hollie deposed that both she and Matthew agreed to this.  She also said that she had another conversation with Jaki that day to which Matthew was not a party. 

2. Hollie denied believing that if she did not execute the documents she was free to walk away from Literacy Circle, saying that she assumed that she and Matthew were bound and, in any event, she never considered the possibility of never executing the documents.

3. Hollie asserts that from 21 July to 14 August 2006 she and Matthew conducted Inner East in accordance with the terms of the franchise agreement, as evidenced by various emails passing between Inner East and Literacy Circle. 

Managers’ meeting on 9 August 2006

1. On 9 August 2006 Hollie participated via Skype in a franchise managers’ meeting.  She deposed that, during that meeting, there was conflict between Jaki and her regarding the printing of the franchisee business cards, arranged by Literacy Circle, which failed to include the words “independently owned and operated”.  Jaki suggested that the franchisees apply a sticker or stamp on the business cards to rectify the problem.  Hollie says that when she objected to the cost of reprinting them or to Matthew and her having to spend time applying stickers or stamps, Jaki became angry and stated that it was required by the franchise agreement.

2. Referring to the disagreement at the managers’ meeting, Hollie said that she was very distressed that the relationship had gone backwards so quickly.  She was not thinking beyond that response or in terms of a breakdown of the relationship but instead about how to deal with the problems concerning the printing of the stationery.

3. Hollie deposed that about an hour after the conclusion of the meeting she received a call from her parents who said that Jaki was very upset.  Hollie said she was shocked to be telephoned by her parents about the managers’ meeting and also shocked that Jaki had gone to her parents rather than to her.  Peter informed her that the business relationship between her and Matthew and Literacy Circle was not working and that it might be necessary for Literacy Circle to “cut you loose”.  Peter made the observation that the relationship was not going to work out and that he would talk to the board.  Hollie said that without making a substantive response she terminated the phone call.  She said that she was in shock.

4. Hollie denied that in the course of their conversation Peter raised the possibility of mutual abandonment of the franchise relationship.  She thought he was only going to the board to discuss possibilities.

Termination

1. Hollie said that on 14 August 2006 she received a phone call from Peter who said that he was going to send her an email.  Peter said that the board had decided to end the business relationship and to withdraw their offer of a franchise.  Hollie’s evidence was that she did not know that their relationship was based only on an offer.  Hollie assumed that Literacy Circle had received legal advice and that there would be no point in pursuing them regarding the termination although she said she did think it was odd that their relationship was suddenly called an offer when up until then it had always been referred to as a franchise.  She concluded that there was no point in protesting.

2. Later on 14 August 2006 Hollie received an email from her father stating, in part:

   This email will serve to confirm my earlier advice to you that the Board of Directors of Literacy Circle Pty Ltd has reluctantly taken the decision to withdraw the offer of a franchise to you.  We have taken the decision because of what we believe to be irreconcilable difference[s] in our respective approaches to the relationship between Literacy Circle Pty Ltd and its franchisees.  The withdrawal of this offer is effective immediately. 

3. On 18 August 2006 Matthew and Hollie established Thorne Academy Pty Ltd, having decided that they would try to open and run their own business.  However, by September 2006 it had become apparent to them that they did not have sufficient funds to continue and so they ceased operating.

4. As to the proposition that the termination permitted Matthew and Hollie to establish the Thorne Academy, Hollie said that they did not decide to commence Thorne Academy until the termination of the Literacy Circle franchise and all they were doing was making the best of a bad situation. 

Bronwen Moir

Background

1. In her affidavit sworn 12 June 2008 Bronwen deposed that she became a director and shareholder of Literacy Circle on 18 November 2005 when it was incorporated, having already been contracted by Bill and Jaki to produce lessons and programs to be used by Literacy Circle.  At all material times, although not a director, Bill was involved in the management of Literacy Circle as chief financial officer.  He attended board meetings, gave financial reports and voted in his wife’s name.

2. Bronwen deposed that Peter’s only responsibility in his capacity as chairman was to chair the monthly board meetings.  The role of negotiator between Literacy Circle and Matthew and Hollie was assigned to him by Bill.

3. Although Literacy Circle had a board of directors:

   a)Bronwen’s work in her role as Educational Programs Director was checked, edited and passed by Jaki;

   b)Bill overruled Bronwen on the hiring of a particular story writer;

   c)while working on a distance education program, Bill told Bronwen and Peter that he intended to employ a particular person to assist in building the business.  Although the directors said to Bill that this was premature, Bill said to Bronwen that it was his money and he would decide how to spend it; and

   d)Bill and Jaki told Bronwen in February 2006 that they would no longer pay Matthew and Hollie for any short stories they wrote for Literacy Circle after they became franchisees because they were “part of the Literacy Circle family”.

4. Bill said to Bronwen that Literacy Circle needed at least five franchisees operating to attract other prospective franchisees.  He also said that it was necessary to offer franchises, including the one offered to Matthew and Hollie, notwithstanding that the documentation had not yet been completed.  Indeed, Matthew and Hollie commenced trading prior to the franchise documents being completed, as did Jaki and Andrew, the other franchisees.

5. Bronwen deposed that in July 2006 she became aware that there were difficulties between Hollie and Jaki.  At this time Hollie said to her that she was unsure whether she could continue as a Literacy Circle franchisee.  Bronwen says that she reassured Hollie that it would get better and Hollie said she would do her best.

12 July 2006

1. Because of the way the Moirs’ home office was set up and the volume at which Peter set his telephone, Bronwen was able to hear Peter’s conversation with Hollie on 12 July 2006.  In her evidence Bronwen largely corroborated Peter’s account of that conversation.  Bronwen confirmed that Hollie had said she was unsure what to do and that Peter had said that if she had any doubts she should delete the Literacy Circle material.  In that conversation, Hollie did not express an intention to leave Literacy Circle but, rather, said that she was unsure what she was going to do.  Peter told her that integrity demanded that if that was how she felt then, until she clarified her position, she should delete the material.  Bronwen said Peter said:

   If you are feeling that this is – that you’re upset and you’ve got any doubts, then you should delete the material.  You shouldn’t have the material until you’re sure.

2. Bronwen said that during a conversation she herself had with Hollie in July 2006, Hollie said she was not sure whether she could continue as a Literacy Circle franchisee, but did not say “I intend to leave”.  The conversation was more in the nature of Hollie asking for advice about what she could do concerning her difficulties with Jaki.  She did not say to Bronwen that she harboured an intention to leave Literacy Circle.

Termination

1. On 14 August 2006 Bronwen overheard Bill and Jaki agreeing with Peter’s suggestion to end the business relationship with Matthew and Hollie and to terminate the Inner East franchise.  During that conversation Bill said to Peter “you send them an email to end the franchise”. 

2. Bronwen said that although she heard Peter say to Jaki on 14 August 2006 that “I think we should cut them loose”, that statement was probably first made a week earlier and before the 9 August 2006 managers’ meeting.  It occurred as part of a discussion at Literacy Circle’s Chatswood office between Peter, Bill and Jaki when Peter said that the difficulties with Inner East were causing a lot of angst and diverting Literacy Circle from the building of the business.  Bronwen said that even before 9 August 2006, things were bubbling along and were not particularly calm, including at Literacy Circle.  There were difficulties in the way that Hollie and Jaki perceived their conversations and things were building up, with Hollie complaining about Jaki and Jaki complaining about Hollie.  Bronwen described it as things beginning to unravel because Jaki and Hollie did not see eye-to-eye on a lot of things.

3. In that early August 2006 meeting at Chatswood, either Bill or Peter said that if the problems could not be solved then Literacy Circle would have to consider “cutting” Inner East “loose”.  Bill told the board members that it would not be a problem if Literacy Circle decided to cut Inner East loose because his legal advice was that as the documents had not been signed there was no contract in place.

4. Bronwen said that she had grave doubts as to whether all that existed between Literacy Circle and Inner East was a mere offer of a franchise but Bill had reassured them that it was only an offer and could be revoked without any problems.  Bill told them that there was no contract because Matthew and Hollie had not signed the contract documents.

5. Bronwen disputed the propositions that Bill and Jaki were not involved in the decision to terminate the relationship with Inner East or that there was never an occasion that they raised such a proposal.  Moreover, Bronwen said it was “absolutely not” the case that it was Peter’s idea to “cut” Matthew and Hollie “loose” rather than Bill or Jaki’s.  In the period prior to determination of the parties’ relationship, the “phone calls and emails came in thick and fast” and Bill was very angry about the whole situation.  Bill’s actions and communications betrayed anger on his part such as one telephone call to Peter in which he was impolite about Matthew, screamed out “fix it” and slammed down the phone.

6. Bronwen rejected “absolutely” the proposition that she supported the decision to terminate the relationship with Inner East partly because there was some arrangement between Hollie and Peter that there be a separation between the two businesses.  She said that between early August and the morning of 14 August 2006 there had been no consultation with Hollie or Matthew as to their wishes in the matter.  Bronwen also denied that there was a conversation between Peter and Jaki on 14 August 2006 when Peter told Jaki that Matthew and Hollie did not want to be part of Literacy Circle and did not want to be controlled as franchisees.  Bronwen disputed the proposition that Jaki left it to Peter to decide what to do about Inner East, saying that the ultimate decision was directed by Bill and Jaki.  She speculated that Peter had been asked to be the intermediary with Matthew and Hollie because he might have been able to come to some amicable arrangement for separation but nevertheless “at all times [the] company was directed by Bill and Jaki”.

7. Bronwen deposed that Peter had no executive authority in his position as chairman and that the final decision to terminate the franchise did not rest with him.  She deposed that Peter never did anything regarding the dealings with Matthew and Hollie and the termination of their franchise without first consulting Bill and Jaki. 

8. The termination of Matthew and Hollie’s franchise was briefly discussed at a board meeting on 16 August 2006.  Bronwen says that Bill, Jaki and Peter’s actions were endorsed by the board and no vote was taken.  Bronwen deposed that the board endorsed the termination email Peter sent to Hollie on 14 August 2006 because Bill said he had sought legal advice and was told that if the franchise documents had not been executed, there was no binding agreement.

Respondents’ evidence

William Edwards

Background

1. In his affidavit sworn 21 May 2008 Bill deposed to having had a conversation with Peter on 20 January 2006 to the following effect:

   Peter:As you are aware, Hollie has been taking a great interest in the development of Literacy Circle and now wants to take the next step and find out more about the possibility of becoming a franchisee.

   William:… Owning a franchise is a big step and we would offer every assistance to Hollie in making a decision to enter into a franchise and the running of such a franchise.  Because Hollie is your daughter and appears keen to proceed, we are willing to start working towards it now, even though the Franchise documents are not ready.  However, please explain to Hollie that any offer to her must be signed-off with the Franchise documents for it to become binding and to ensure the rights of all parties are protected.

2. Bill deposed that, following this conversation, he attended a lengthy meeting with Hollie, Matthew and Peter on 2 February 2006 at which they discussed:

   a)the financial expectations and costs associated with a Literacy Circle franchise;

   b)the location of the intended franchise in Melbourne;

   c)the proposed area of the franchise, to be calculated from local government areas involving a total population of 400,000 people; and

   d)that there would be no franchise fee but royalties would be payable at 12.5% of gross fees.

3. Bill deposed that at the conclusion of the meeting he said the following words:

   Matthew, we will be happy to offer Hollie and you the opportunity to become a Literacy Circle franchisee on the recommendation of Peter, your father-in-law.  You will understand that this is only the start of the process, as firstly, you have to be satisfied that you and Hollie want to be a franchisee and undertake the responsibilities as such, secondly, we have to be satisfied that you can operate the franchise, and thirdly, we would have to all sign a franchise agreement to complete and formalise the transaction.

4. Bill said that at this first meeting with Matthew and Hollie he was very conscious of the need to discuss the franchise agreement.  Bill deposed that:

   Hollie and Matthew both agreed in particular to the signing of the franchise documents.  Matthew and Hollie then said words to the following effect:-

   We are both looking for full-time work and that it would be best if we started now.

   I replied:-

   William:Normally we would not proceed unless the Franchise Agreements were in place, but because of the family link with Peter, being Chairman, and Bronwen, a Director, I would recommend to the other directors, that we start working towards it now.

   Both Hollie and Matthew said to me, words to the effect:-

   Thank you, Bill, we do appreciate that the legal documents would have to be executed before the franchise agreement is in place.

5. Bill deposed that on or about 14 February 2006 Matthew informed him that he had located a potential site for the franchise in Ringwood and forwarded him photographs of it.  Later, at dinner, Bill said to Matthew and Hollie words to the following effect:

   … the premises, subject to council approval, are suitable and if you decided to become a franchisee, they would be acceptable to Literacy Circle.

6. About the same time, Bill and Matthew attended a meeting at the ANZ Bank with the bank’s Small Business Specialist, Luke Thomas, where the following conversation took place:

   Thomas:What is the situation in relation to the franchise documentation?

   William:The franchise documentation is being prepared and I have discussed all the details with Hollie and Matthew, and we all acknowledge that the franchise will not be formalized until this document is signed by all parties.

   Matthew:I agree that is the situation.

   Thomas:Well, a signed franchise document will be a condition of the loan.

7. On 15 February 2006 Literacy Circle’s board of directors resolved to offer Matthew and Hollie a franchise.  In his affidavit in reply sworn 20 June 2008 Bill said that following that meeting he said to Matthew something to the effect of

   The proposed franchise is approved, but subject to the execution of the franchise documentation when it is finalised.  Execution of the franchise documentation has to be effected before there is any formal legal relationship.

8. In an email to the Literacy Circle directors on 24 February 2006, Bill reported on progress concerning “New franchises” including his dealings with Matthew and Hollie.  He also reported that Literacy Circle’s solicitor had promised to have the franchise documents finalised within two weeks.

9. Bill deposed that by 22 March 2006 Literacy Circle was proposing to proceed with their offer of franchises to five prospective franchisees, including Matthew and Hollie.  His email to directors of 22 March 2006 reported on “Northside”, “Central Coast” and “Ringwood Melbourne” and on the interest which two other parties had shown in taking up franchises.  In that email he said:

   Our current offer, for the first 5 Regions is with a NIL franchise fee.  As we will have 3 franchise (NS, CC & R) plus outstanding offers to Di Michael and Zorin, I suggest that we count these as the 5.

   He went on to discuss franchise fees for subsequent franchises saying:

   My reasoning for this is that we are well advanced from our initial position last December 2005, and with 3 franchises operating by the end of the second term will look more substantial. 

10. In his email to Bronwen of 30 April 2006 Bill objected to paying an invoice which sought payment for some work Hollie had done.  Amongst other things, Bill said:

    At the start of the writing of stories Hollie and Matthew were independent supplies [sic] to LC and we treated them as such.

    However, you have both heard me before and so has Hollie, that I believe that the members of the LC family should be prepared to contribute what they are good at to LC at no cost.  This is so in the case of us all, Bron, Pete, Jaki, Bev, Andrew, Tam and me.

    Whilst the situation is different with a Franchisee, we are not charging Hollie and Matthew a Franchise Fee and are prepared to provide every assistance we can or they request, all with [the] objective of making the franchise successful.  There are costs involved in all of this, for instance my trips to Melbourne cost approx $275 each, which LC pays, plus 64000 of my frequent flyer points.

    LC will continue to incur costs in assisting Hollie and Matthew, and I believe should be able to expect a contribution from them where appropriate. 

11. On 19 April 2006 he received an email from Hollie advising that she had located new potential premises, the premises in Ringwood having proved unsuitable because of zoning issues.  Bill travelled to Melbourne on 23 April 2006 to inspect these premises in Camberwell and he concluded that they met Literacy Circle’s basic requirements.  He discussed with Matthew and Hollie how partitions could divide the premises into classrooms as well as the Literacy Circle requirement that there be windows to ensure that parents could observe their children at all times.

12. By email dated 16 May 2006 Hollie advised him that she and Matthew proposed to use the name “Literacy Circle (Inner East)”.  She also advised that the landlord of the Camberwell premises had requested that a business reference be provided by a Literacy Circle representative.  On 23 May 2006 Matthew repeated Hollie’s request for a business reference and later that day Bill wrote to the managing agent of the premises at Camberwell, saying;

    I have been asked by Matthew and Hollie Thorne to confirm that they have been granted a Literacy Circle Franchise.

    Over the past months we have been assessing an application from Matthew and Hollie to establish a franchise to be known as “Literacy Circle Inner East”.

    I am pleased to advise that there [sic] application was approved by the Board of Literacy Circle Pty Ltd on the 19^th April 2006.

    Matthew and Hollie have attended the initial training programs and are now authorised to commence business.  They have satisfied the Literacy Circle Board they have the required skills and capital resources to conduct the franchise. 

13. Bill deposes that between 7 and 9 June 2006 he and Matthew had discussions about advertising for Inner East.

12 July 2006

1. On 11 July 2006 Bill had a conversation with Matthew and Hollie during which he acknowledged that Literacy Circle had not delivered the standard of support which they had requested.  He stressed the need to move forward.  Matthew agreed with this but Hollie wanted to discuss all the past issues in detail.  Afterwards, Bill telephoned Peter to advise him that the discussion with Matthew was a success but that the one with Hollie was “a disaster”.

2. On 19 July 2006 the board met.  The minutes record that Jaki had spoken at length to Matthew and Hollie on 12 July 2006 regarding their concerns and that Hollie had emailed Inner East’s concerns on 14 July 2006.

Execution of written franchise agreement

1. Bill says that he received an email from Jaki dated 14 June 2006 stating that Matthew and Hollie “were wondering” when they could view the franchise documents.  Bill subsequently emailed a copy of the draft franchise agreement to Matthew and, the next day, a copy of the disclosure document and reference schedule.  The reference schedule was completed and returned by Matthew on 23 June 2006.

2. Bill deposed that by 4 July 2006 he had heard nothing from Matthew or Hollie concerning the franchise documentation.  He emailed Matthew requesting that he provide contact details for his solicitor.  Matthew replied by email the same day.

3. In the minutes of the board meeting on 19 July 2006 the following is recorded as to the franchise agreements:

   Franchise Agreements will be delivered to Franchisee solicitors by the end of this week early next week.  Jaki requested a confirmation from Inner East that their intention is to sign the document after 14 days of receipt from their Solicitor.  Inner East requested more time to decide on whether or not they would intend to proceed.  Inner East requested that they need to ‘develop the faith’ again in the business before deciding to proceed.  Inner East was given the opportunity to submit to Jaki to table at the Board meeting a suggested time frame to sign the Franchise Agreement and reasons why Inner East needed more time.  No time frame or reasons were submitted to Jaki prior to the Board meeting.  Jaki stated that until their intentions are made clear, no program materials or support is able to be provided to Inner East.  It would be unfortunate to invest our time, product information and knowledge to a company that did not intend to proceed with becoming a Franchisee.

4. On 21 July 2006 Literacy Circle’s solicitor sent to Matthew and Hollie’s then-solicitor, Gilberthorpes, copies of the disclosure document and franchise agreement.  Gilberthorpes subsequently wrote to Literacy Circle’s solicitor on 26 July 2006 stating that they did not have Matthew and Hollie’s contact details and requesting that they be sent.  Those details were faxed to Gilberthorpes the same day.

5. Bill said that although the contractual documentation had been requested as early as December 2005, it was still being amended in August 2006.  On 7 August 2006 he asked his solicitor to make two short amendments to the franchise agreement and on 8 August 2006 those amendments were sent to Gilberthorpes.

6. Bill deposed that by 10 August 2006 he had become concerned at Matthew and Hollie’s attitude and their continued failure to do anything about the franchise documentation

   copies of which had been supplied to them as long ago as 14 and 15 June 2006, and to their nominated Solicitors by letter dated 21 July 2006.

Discussion and negotiations following 9 August 2006 meeting

1. Prior to 14 August 2006, Bill was concerned that Matthew and Hollie did not intend to go ahead.  He did not ring them about this; Peter was having most of the discussions with Matthew and Hollie.  Bill understood that in the week and a half prior to 14 August 2006, Peter was trying to work out an amicable way to “cut” Inner East “loose” and for the parties to go their separate ways. 

1. In the week preceding 14 August 2006, Bill said to Peter that the franchise documents had not been signed, that he could not see that they would be signed and that, in his opinion, there was no contract.

2. Bill said that he had several phone conversations with Peter during this time and re-affirmed previous statements of his that while he understood and supported Peter’s position as Hollie’s father, it was conflicting with his role as chairman.  Nevertheless, Bill also told Peter that he would support whatever decision Peter made as to Matthew and Hollie’s future relationship with Literacy Circle.  Bill said to Peter that “we have to seek resolutions for this problem and the decision is yours, Peter”.

3. In his affidavit in reply sworn 20 June 2008 Bill deposed that in early August 2006 there been a number of conversations between him and Peter to the following effect:

   Peter:Things are not going well with Hollie and Matthew.  I think that they want to go their own way.  It may be time to cut them loose.

   Bill:Well, Peter, agreement of some kind has to be made, either they sign the documents and we proceed, or they go their own way.  We can’t continue with a situation where they are not committed, but we are locked in. 

   Peter:I fully understand, but this is a situation that I wish neither I nor Literacy Circle are [sic] in.  I can see that they want more control and freedom to do what they want, not want Literacy Circle wants.

   Bill:Peter, as I have previously stated I understand the family pressure on you.  As you know I have lost a son, and I would not want any other parent to go through what we have.  So , so you have to manage firstly your family position and I will accept whatever decision you make.  We are letting you make the decision about what you think is appropriate

   Peter:Thanks Bill I will talk to them again

   Bill:I know it’s tough, but I have spoken to Jaki and Andy and we will all support whatever decision you make.

   Peter: Thanks.

   Bill:Hopefully you can work out how we can agree to go our own ways.

4. Bill said that he was prepared to go either way.  Either Matthew and Hollie would sign the documents and become franchisees or they would decide to leave and do their own thing.  Bill expressed this view to Peter.

5. Bill also said that in the period prior to 14 August 2006 he regarded Matthew and Hollie with suspicion, as did Jaki.  In the week prior to 14 August 2006 Jaki expressed her suspicion that Matthew and Hollie might try to set up a business on their own.  Bill says that he shared Jaki’s belief that it was Matthew and Hollie’s intention to obtain as much information from Literacy Circle as they could and then set up their own business.

6. Bill had lost trust in Matthew and Hollie because he could see no movement by them towards executing the documents.  In Bill’s view, Matthew and Hollie made no effort to sign the documents and were, in fact, putting obstacles in the way of signing.  Also, there had been the dispute in the managers’ meeting on 9 August 2006 which he thought was just an excuse to pick a fight.  Bill concluded that Matthew and Hollie were looking to break up the relationship and his interpretation of events was that Matthew and Hollie were going to go their own way and were not going to be Literacy Circle franchisees. 

7. Bill emailed Andrew on 11 August 2006 stating that, in view of the uncertainty surrounding Inner East, he had decided to put the advertisement for Inner East in Melbourne’s Child on hold.

Termination

1. Bill denied various of Bronwen’s allegations concerning the extent to which he exercised control over both Literacy Circle and Peter’s dealings with Matthew and Hollie.  Bill also disputed Bronwen’s evidence that he had said in the early August meeting at the Chatswood offices that his view that there would not be a problem if Literacy Circle brought the relationship with Inner East to a close, because there was no contract as the documents had not been signed, was a view based on legal advice.  However, he said that the remainder of Bronwen’s evidence concerning his statement was correct.

2. Literacy Circle thought it best that it be Peter who made whatever decision had to be made, although Bill thought the decision would be one for an amicable spilt.  Bill deposed that he was content to leave the decision in Peter’s hands because the issue potentially raised some delicate family issues and he wanted Peter to be allowed to manage things in a way which protected that relationship. 

3. Bill said that he would have preferred that Peter, in his discussions with Matthew and Hollie, preferred the interests of his family over those of Literacy Circle.  Bill says that he clearly stated to Peter that his concerns were for Peter and his family above dollars to Literacy Circle.  Bill did not want to put Peter in a position where he risked alienating his daughter over a business dispute.  Thus Peter was given absolute discretion about how to deal with the problem.  Bill made statements allowing Peter to make a decision in favour of his family if he wished.

4. Bill says he received a copy of Peter’s email to Matthew and Hollie terminating the business arrangement on 14 August 2006.  In his affidavit in reply sworn 20 June 2008 Bill referred to the conversations he had with Peter in early August 2006 and said that at no point in those dealings:

   (a)Did Peter indicate that he was intending to unilaterally revoke the offer or terminate whatever arrangement was on foot, without any agreement between the parties first being reached;

   (b)Did I instruct or suggest (expressly or by implication) that Peter unilaterally revoke the offer or terminate whatever arrangement was on foot, without any agreement between the parties first being reached;

   (c)Did I give any directions to Peter as to how he should deal with the issue.

5. Bill went on to depose that he assumed that when Peter had referred to “cutting them loose” he was referring to some arrangement by which there would be an amicable and consensual parting of the ways.   Bill said that he left the matter to Peter because he was talking of an amicable separation of the two companies and trying to work out an amicable way to “cut them loose”.  He thought that the decision that Peter would make would be for an amicable split.  Indeed, at one point of his evidence Bill said that Matthew and Hollie did amicably go their own way.

6. Bill deposed that he did not even turn his mind to the possibility that Peter would seek to revoke the offer unilaterally or to terminate whatever arrangement was in place.  It was Peter who thought up the notion of withdrawing the offer of the franchise.  Bill said that he had no idea that Peter was going to terminate the offer in his email of 14 August 2006 as the concept of terminating the offer of franchise had not been discussed between them.

7. Bill said he was quite astounded to find out that Peter had sent the email of 14 August 2006 and was concerned because he was unsure about whether there was a proper legal basis to revoke the offer.  He thought it was unwise to take that course.  After it was done, Peter indicated a number of times that the parties amicably went their own way. 

8. After the email of 14 August 2006 was sent, Bill and Peter had a conversation to the following effect:

   William:That must have been a very difficult decision for you to make.  It is not the decision that I thought you would have made, because it puts you in potential conflict with Hollie.  But we gave you full rights to make the decision, and we accept it.

   Peter:They are now going their own way.  They are operating their own tuition company.  This frees them from Literacy Circle, and allows them to trade themselves.

9. Peter’s actions were subsequently ratified at a board meeting on 16 August 2006, the minutes of which record:

   It became evident one [and] a half weeks ago after speaking to Bill, Jaki, Hollie and Matthew that Literacy Circle Pty Ltd and Literacy Circle [Inner East] had irreconcilable difference[s] and would never have a ‘meeting of the minds’.  Inner East did not fit into our Franchise Model, with different expectations over the amount of control a Franchisee could exert. 

10. Bill thought that Peter’s decision was likely to be legally valid because:

    a)whatever arrangement might have been in place for the first part of the year, there was a fresh start when Hollie had apparently abandoned the franchise as demonstrated by her emails of 15 and 17 July 2006.  He saw these at the time and he inferred from them that Hollie had elected to abandon the franchise but then reconsidered;

    b)Matthew and Hollie had been required to sign the franchise documents within 14 days of receipt and although they had agreed to, had not done so; and

    c)in light of Matthew and Hollie’s conduct he doubted whether they would ever execute the documents. 

    Given what Bill interpreted to be Matthew and Hollie’s lack of commitment to executing the documents, evidenced by their failure to progress this step from the time they first received the documents, he had serious doubts whether they intended ever to execute them.

11. After he sent his email on 14 August 2006, Peter indicated to Bill that Matthew and Hollie were happy going their own way and that from that point would trade as Thorne Academy.

Jacqueline Edwards

Background

1. Jaki deposed in her affidavit sworn 21 May 2008 that in March 2006, on the assumption that Matthew and Hollie would become franchisees, she had created Literacy Circle email addresses for them.  On 19 May 2006 she emailed the board, Hollie and Tam Lambert, the manager of the Central Coast franchise, advising that all franchises had also been given unique Literacy Circle email addresses. 

2. During April/May 2006, with the assistance of Tam Lambert, Jaki prepared a Policy and Procedure Manual for the Literacy Circle franchises.  The draft was emailed to Hollie as her input was sought.  However, she did not complete the tasks she was assigned and these were completed by Peter.  Jaki deposed that although Matthew and Hollie had indicated earlier that the manual was essential for the business, they did not make an effort to ensure that they were contributing to the documentation:

   They wanted to be involved and listened to, however, when given the opportunity, consistently failed to do so.

3. At the first Literacy Circle managers’ meeting on 14 June 2006, Hollie agreed to draft the agendas, to circulate the agenda one week prior to meetings and to prepare minutes.  Jaki deposes that although Hollie completed and circulated the minutes on 14 June 2006 she did not prepare the next agenda or take minutes. 

4. Jaki said that she became distressed in her dealings with Hollie and by finding how difficult she was to work with.  It became clear to her that Matthew and Hollie intended not to join Literacy Circle if their demands and requirements were not met.

12 July 2006

1. Jaki said that it was around 12 July 2006 when she first came to the view that Matthew and Hollie intended to obtain information from Literacy Circle in relation to teaching, intellectual property, operations and marketing so they could set up a business independent of Literacy Circle.  Jaki’s concerns regarding the possibility that Inner East would not operate as a Literacy Circle franchise arose that day after she had spoken to Peter, who told her that Inner East did not intend to be a franchisee, and subsequently to Matthew and Hollie, who said “our facility to work is unsure”. 

2. In her affidavit in reply sworn 20 June 2008 Jaki deposes that on or about 12 July 2006 she had a conversation with Peter in which words to the following effect were said:

   Peter:Hollie and Matthew have decided not to continue to be part of Literacy Circle.  This situation is very distressing for me and Bronwen because we really wanted our daughter to be part of this business and it is not working out.

   Jaki:I see it is important that we resolve this issue for you and Bronwen.  I will speak to Hollie and Matthew. 

   Jaki deposes that at no stage was she informed that Peter had directed Hollie and Matthew to delete any programs.  Peter was not authorised or directed by the board to make such decisions.  She also deposed that in that conversation Peter made no reference to Hollie and Matthew deleting the Literacy Circle programs.

3. After Jaki spoke to Peter she rang Matthew and Hollie who aggressively explained to her all the issues they had and their feeling that they could not proceed with Literacy Circle.  They were aggressive and hostile.  Jaki deposes that she was concerned that they did not understand the basic relationship between a franchisor and franchisee and when she tried to clarify this, Jaki deposes that they said they did not want to be bound by the terms of the draft franchise agreement and wanted to “do their own thing”, for example with marketing and signage.  Jaki says that their last statement to her was:

   … our facility to work is unsure.

4. Her evidence also was that during their conversation on 12 July 2006 Hollie said to Jaki that “we don’t intend to proceed”.

5. Before going into the problematical issues, the three of them discussed a conflict resolution process.  Jaki said that she was not aggressive or hostile in that conversation as her goal was to try to find a resolution with Matthew and Hollie to see if they would come back as franchisees.  She went on to say that

   [t]hey had already left Literacy Circle by deleting all the documents, and now we were looking at what terms would they – what were the issues and could these issues be resolved if they wanted to come back as a Literacy Circle franchise. 

6. Jaki’s subsequent evidence also was that although she knew on 15 July 2006 that the material had been deleted, she could not say whether she knew this before that day.  Although she conceded that it was an important issue that the materials had been deleted, she could not recall whether, upon reading Hollie’s email of 11.45am on 15 July 2006, she was shocked to learn that Inner East had deleted the course materials.  Jaki deposed that where she says in her email of 15 July 2006 to Matthew and Hollie “I … believe we can move forward together as a positive and productive team and look forward to our meeting” she was referring to the parties’ agreement to pursue conflict resolution. 

7. Jaki told Hollie to set out her grievances in an email.  At the end of 12 July 2006 Jaki had a higher level of confidence in Matthew and Hollie because they were willing to be involved in conflict resolution but it had not changed her opinion of them.  Nor was her opinion altered by Hollie’s email of 1:51pm on 14 July 2006 listing the couple’s concerns. 

8. On 17 July 2006, after she had spoken to all of the directors, Jaki spoke to Matthew and Hollie about what the directors had decided.  Matthew and Hollie were happy with most of the proposed solutions to the conflicts but one thing they did not agree to was the 14 day period to sign the franchise documents.  They wanted time for a more positive experience with Literacy Circle, at which point Jaki explained to them very clearly that Literacy Circle would not commit its time, money or energy to a company when it did not know what the long term prospects were. 

9. At the board meeting on 19 July 2006 the board agreed to the solutions to the problems raised by Inner East which Matthew and Hollie had discussed with Jaki on 17 July 2006.  Jaki further deposed that at the board meeting on 19 July 2006 Hollie’s email of 17 July 2006 referring to the deletion of materials was discussed, although the minutes do not record this.

10. On 21 July 2006 Jaki wrote to Matthew and Hollie saying:

    It was good to talk this morning Hollie, and I am thrilled (as I know the other Directors are) to have both of you as part of the Literacy Circle family.

    It has been a rocky start and everyone has learnt a lot and as a company Literacy Circle has grown immensely for the better.

    On behalf of the Literacy Circle Directors, I would like to wish you both all the best on your journey as Literacy Circle (Inner East) and like to offer our support to help you[r] business grow and prosper. 

Execution of written franchise agreement

1. Jaki disputed Hollie’s assertion that in their conversation on 17 July 2006 Hollie agreed to sign the documents within 14 days of receipt.  Jaki deposed that the timing of the execution of the franchise documentation was discussed by her, Matthew and Hollie on 17 July 2006:

   Jaki:I have spoken to each Director at length regarding your concerns and solutions from each Director.  The Directors all had similar solutions to your concerns and I will explain them to you.

   If you wish to proceed with Literacy Circle, you will need to sign the franchise documentation within 14 days.  In paragraph 87 you refer to signing the franchise too within 14 days of receipt by your solicitor.  A Franchise arrangement between a Franchisee and Franchisor is a mutually beneficial arrangement.  There are limitations on what a Franchisee can do in terms of images, logos, marketing, programs and training.  However there is also support and guidance provided from the Franchisor in marketing, operations and programs.

   Hollie/Matthew:   

   We will see how it works for a while.  We will get back to you on a time frame and tell you if we are happy if how [our] concerns are addressed.  We have a personal stake in this.  We will not sign the documentation in 14 days.  We want a more positive experience with Literacy Circle before we sign.  We want to rekindle the faith in Literacy Circle.  Is it really going to be better.  Most issues we raised seem to have been well resolved and we will talk about it later. 

2. On 19 July 2006 and before the board meeting that day, there was another discussion about executing the franchise documents.  Jaki says that neither Matthew nor Hollie provided an undertaking to execute the documentation within 14 days and, instead of giving the undertaking, Hollie said:

   Matthew and I have not had time to talk about all the matters we discussed including the Franchise Agreement.  Although we cannot give you any timeframe for signing the Franchise Agreement, we are happy to operate as we were before.  We are happy for you to talk for both sides to the meeting.

3. Referring to the minutes of the board meeting on 19 July 2006, in which she is recorded as having stated that until Matthew and Hollie’s intentions were made clear no program material or support was able to be provided to Inner East, Jaki specifically recalled having the view at that time that unless and until Matthew and Hollie provided a commitment to execute the documents within 14 days she would not provide them with fresh materials.

4. Jaki said that as at 17 July 2006, notwithstanding her email of that date, her intention was that no materials were going to be sent to Matthew and Hollie until they had agreed to sign the franchise agreement within 14 days of receipt.  Although Hollie sent an email on 15 July 2006 saying she was comfortable with the then current situation and asking Jaki to send the materials, Jaki said that it was not until 21 July 2006 that she re-sent the deleted materials and this would not have happened if Matthew and Hollie had not committed to the 14 day period.  The contents of her email of 21 July 2006 and her subsequent provision to Hollie of more course materials led Jaki to infer that it was likely that there had been a discussion around 21 July 2006 in which Matthew and Hollie agreed to execute the franchise documentation within 14 days of receipt.

5. In Jaki’s view, Matthew and Hollie had left Literacy Circle on 12 July 2006 and a condition of returning was that they sign the franchise agreement within the stipulated timeframe.  Jaki said that as of 21 July 2006, the relationship was subject to a new contract which was specifically linked to a commitment to sign the documentation.  This requirement was not contained in any email although the parties had telephone conversations.  Jaki did not recall ever having put the new arrangement in writing. 

1. In her evidence at the trial, Jaki said that Peter’s email of 14 August 2006 came as a surprise to her and that before he sent the email she had no knowledge that he intended to discontinue Matthew and Hollie’s franchise.  She explained this by saying that, before his email, Peter and she had had discussions about the parties “mutually not wanting to proceed”.  She said that it was a surprise that Peter said in the email that Literacy Circle had reluctantly taken the decision to withdraw the franchise offer because, in Jaki’s view, the decision to part was mutual. 

2. However, Peter said that after the 9 August 2006 meeting, he had many discussions with Bill and Jaki about what to do with Matthew and Hollie.  He said that Bill, Jaki and he came to the conclusion that they needed to “revoke the offer”.  Peter said that the three key people making the decisions about Matthew and Hollie were Bill, Jaki and him and that Bill and Jaki gave him explicit instructions to send the email.  Peter speculated that he “got the job of writing the letter” because it had basically been his suggestion to end the franchise.  Peter said that before sending the email to Hollie, he put it to Jaki in a telephone conversation and she agreed with it.

3. Peter rejected the proposition that Bill and Jaki said that they would support him in whatever decision he made in relation to Matthew and Hollie, saying that it was never his decision alone, it was one which rested with the board.  Indeed, his evidence was further to the effect that he would not have taken a unilateral decision in relation to that relationship, an attitude which is consistent with the dominant position of Bill and Jaki in the company.  Although Peter was the chairman of the company, he and Bronwen were, in practical reality, no more than Bill’s employees.  They depended upon him for their income and for their accommodation, which was owned by a company Bill controlled.  Moreover, Jaki was Bill’s daughter with managerial responsibility for the operation of the company.  Although Peter was chairman, executive responsibility was ultimately reposed in Jaki, putting her in a position superior to both Peter and Bronwen in respect of their day to day work for the company. 

4. When deciding which version of these events to accept, I find compelling Bronwen and Bill’s evidence that at that meeting in Chatswood prior to 9 August 2006, Literacy Circle board members had discussed “cutting” Matthew and Hollie “loose”.  Clearly, this option had been considered by the company’s important decision-makers before Peter sent his email.  This fact is reflected in para.4 of the minutes of the 16 August 2006 board meeting where it was recorded that:

   It became evident one and a half weeks ago after speaking to Bill, Jaki, Hollie and Matthew that Literacy Circle Pty Ltd and Literacy Circle (Inner East) had irreconcilable difference[s] and would never have a ‘meeting of the minds’….

   Peter’s email of 14 August 2006 was consistent with the action the board members discussed as early as the early-August meeting in Chatswood. 

5. I have also found earlier in these reasons that Peter had little in the way of conversations with Matthew and Hollie, who really did not want to speak to him after 9 August 2006.

6. Consequently, I reject Bill and Jaki’s evidence that Peter was negotiating an agreed separation, that they were unaware that he was going to send the email of 14 August 2006 and that they played no part in the decision to terminate the relationship which was evidenced by that email.  I conclude that this evidence was untrue and designed to distance them from the decision to terminate the franchise arrangement which, I find, was a decision made by them jointly with Peter.  I accept Peter when he says that he would not have made a decision of this significance, to terminate one of the only three franchise arrangements which Literacy Circle had in place, without ensuring that Bill and Jaki agreed.

7. My rejection of Bill and Jaki’s evidence on this subject is also supported by their conduct once the email had been sent.  After Peter sent his email to Hollie, Jaki emailed him saying:

   Dear Peter,

   Thank you.  I know this has not been an easy process for Bronwen and yourself.  Again, you have my full support.

   Bill deposes in his affidavit sworn 20 June 2008 that after he found out that Peter had sent that email he said to him:

   That must have been a very difficult decision for you to make.  It is not the decision I thought you would have made, because it puts you in potential conflict with Hollie.  But we gave you full rights to make the decision, and we accept it.

8. It is hard to see how a decision which Bill and Jaki believed essentially to be a consensual parting of Inner East from Literacy Circle was a difficult one for Peter to make or involved a process which was not easy for Peter or Bronwen.  After all, Bill and Jaki’s evidence was that Matthew and Hollie were intending to go it alone as the Thorne Academy, Peter was not tasked with talking them into it. If the separation was consensual, then it was not truly Peter’s decision but was an agreement with Matthew and Hollie to which no real difficulty would have attached.  On the other hand, if Peter had been asked to deliver to Matthew and Hollie Literacy Circle’s message that their business relationship was terminated, it is not hard to see why Peter would have found it a difficult and unpleasant responsibility.

9. Further, as referred to above at [127] Bill deposed in his affidavit of 20 June 2008 that he was

   … [q]uite astounded to find out that [Peter] had sent the email of 14 August 2006, revoking the offer of franchise.  I was concerned, because I was simply unsure about whether there was a proper legal basis to revoke the offer, and I thought it was a bit unwise to take that course.  Although I had said to Peter that I was totally happy to leave the decision up to him, my preferred strategy would have been to seek to reach some mutual agreement with Hollie and Matthew to end whatever relationship was on foot.

10. Little more than an hour after Peter’s email to Hollie was circulated to the Literacy Circle directors and to Bill, Bill sent Peter an email which was quite inconsistent with his claimed astoundment.  In that matter-of-fact email Bill said:

    Peter,

    Following on from your e-mail today, the following items will also need to be addressed.

    a.Registered Business name “Literacy Circle Inner East” Reg No Vic B1924902Z.  (To be transferred to LC)

    b.1300 307 457 to be immediately transferred to LC.  This phone number must not be used by or answered in the name of “Thorne Academy” or any other name they choose to trade under.

    c.Official letter from our Solicitor, setting out that ownership and usage rights to LC Intellectual Property and copyright has ceased. 

    Bill raised no question about the propriety and legality of Peter’s action which is unsurprising given his earlier expressed views concerning the significance of there being no signed contract.  However, this silence does not sit well with Bill’s evidence in his 20 June 2008 affidavit that, upon receiving a copy of Peter’s email, he was concerned because he was unsure whether there was a proper legal basis to revoke the offer. When cross-examined on the apparent inconsistency between his claimed astonishment and the business-like tone of this email, Bill said that he had accepted Peter’s decision as a fait accompli and that the email in question only represented a note of the next things which had to be done.  However, far from being surprised by the course which Peter took, I find that Bill anticipated it and was ready and prepared to take the next step once Peter had “cut” Matthew and Hollie “loose”.

11. Having concluded that Literacy Circle’s repudiation was the product of a group decision of the three most relevant board members, rather than being the impetuous solo act of the chairman, it is necessary to consider whether it was unconscionable.  In this connection, Bill and Jaki’s conduct between 9 and 14 August 2006 in working with Peter to bring about the termination of the relationship with Matthew and Hollie which was, on his own admission, Peter’s idea, should be distinguished from their subsequent unattractive attempts to distance themselves from this outcome and to place total responsibility on Peter’s shoulders. 

12. Turning first to Literacy Circle’s understanding of its rights, it is not a matter of particular importance whether or not Bill had obtained advice that, in the absence of a written contract, Matthew and Hollie were no more than offerees whose Literacy Circle offer could be revoked at will.  What I do conclude is that Bill did hold the view, expressed to the Literacy Circle board and accepted by them, that there was no contract without a written document and that all Matthew and Hollie had was an offer from Literacy Circle which could be withdrawn.  As a result, I conclude that Literacy Circle’s decision manifested in Peter’s email of 14 August 2006 was based on a genuine, if incorrect, view of Literacy Circle’s rights.  In such circumstances, I do not conclude that it showed a lack of good faith.

13. I have already recorded that I do not find credible Bill and Jaki’s evidence they were unaware that Peter was going to send the email of 14 August 2006 and that they played no part in the decision to terminate the relationship which was evidenced by that email.  Even so, at worst their conduct did not, in the relevant period, amount to any more than a delegation to Peter of the unpleasant task of bringing about the termination of the problematical relationship with Matthew and Hollie which they believed Literacy Circle was entitled to obtain. 

14. Although it was a repudiation of the contract with Matthew and Hollie, Literacy Circle’s conduct did not exhibit the sort of unreasonable, unfair, harsh or oppressive conduct seen in the No-Knead case or the misconduct seen in Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286. Nor was it similar to the carefully formulated and systematic approach of the respondent in ASIC v National Exchange which I accept was designed to induce the franchisor to terminate the franchise relationship.  Here, the termination was a step taken at the end of a period of difficulty and attempts at long-term conflict resolution.  I accept that Literacy Circle had genuinely attempted to accommodate the idiosyncrasies of their Melbourne franchisees but ultimately failed.

15. I find that although Bill, Jaki and Peter had concluded that Inner East’s conduct was inimical to a successful business relationship, none of them was motivated by emotions more negative than exasperation, even occasional great exasperation, and resignation that the problems would not be resolved.  The fact that Bill and Jaki have subsequently sought to distance themselves from the decision-making process may be related to the allegations against them of accessorial liability.  Whether or not that is so, the way they conducted their defence is not relevant to what I find Literacy Circle’s conduct actually to have been.  That conduct did not, in my view, display the sort of moral obloquy necessary to ground a finding of unconscionable conduct.  I conclude that nothing really happened between Peter’s conversation with Hollie on 9 August 2006 and his further conversation and email on 14 August 2006 other than that Literacy Circle decided to repudiate the contract.  A mere breach of contract does not amount to unconscionable conduct.  As Weinberg J said in Macdonald v Australian Wool Innovation Ltd [2005] FCA 105:

    Any promise that is deliberately broken could easily be characterised as “unconscionable”. That is not the sense in which the term is used in s.51AC. (at [280]).

16. Having regard to all the circumstances, including those referred to in s.51AC(3), I am not satisfied that the breach of contract found in this case, or the events which preceded it, support a finding of unconscionable conduct on the part of Literacy Circle.

17. In further reference to s.51AC(3), Literacy Circle’s various breaches of the Franchising Code are discussed below at [294] – [304]. In my view, none of those breaches is so significant or unconscientious as to justify a finding of unconscionable conduct.

18. There being no finding that Literacy Circle engaged in conduct which was unconscionable, no question of accessorial liability on the part of Bill or Jaki arises. 

Breach of Franchising Code of Conduct

1. The Franchising Code has been prescribed pursuant to s.51AE of the TPA as a mandatory industry code and is found in the schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998. Section 51AD of the TPA provides that a corporation must not, in trade or commerce, contravene such a code. Matthew and Hollie allege that Literacy Circle failed to comply with cls.6, 10, 11, 21 and 22 of the Franchising Code. As a threshold issue, I find that the parties’ conduct, identified and considered earlier in these reasons, demonstrates that their relationship was one in trade or commerce. I further find that their conduct relating to the contract, including its formation, was conduct undertaken in trade or commerce.

2. Clause 6(1) of the Franchising Code provides:

   6   Franchisor must maintain a disclosure document

   (1) A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document) for the franchise in accordance with this Division.

   I have already found that the contract was made in February 2006 when Bill conveyed to Matthew and Hollie the board’s offer of a franchise and they subsequently accepted it.  Clause 4 of the Franchising Code provides that a franchise agreement can be oral.  Bill sent the disclosure document by email on 15 June 2006.  As the disclosure document was provided to Matthew and Hollie after, rather than before, the franchise agreement was entered into I find that Literacy Circle breached cl.6(1) of the Franchising Code.

3. Clause 10 of the Franchising Code requires a franchisor to give a prospective franchisee a copy of the Franchising Code, a disclosure document and a copy of the proposed franchise agreement at least 14 days before the franchisee enters into the agreement.  There is no evidence to suggest that, in accordance with cl.10, Literacy Circle ever sent to Matthew or Hollie a copy of the code or that, as required by cl.11 of the Franchising Code, Matthew or Hollie sent Literacy Circle a written statement that they had received, read and had a reasonable opportunity to understand the disclosure document and the code of conduct.  Consequently, I find that Literacy Circle also breached cls.10 and 11 of the Franchising Code.

4. Clause 21 of the Franchising Code relevantly provides:

   21     Termination — breach by franchisee

   (1)     This clause applies if:

   (a)     a franchisee breaches a franchise agreement; and

   (b) the franchisor proposes to terminate the franchise agreement; and

   (c)      clause 23 does not apply.

   (2)     The franchisor must:

   (a) give to the franchisee reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach; and

   (b) tell the franchisee what the franchisor requires to be done to remedy the breach; and

   (c) allow the franchisee a reasonable time to remedy the breach. …

5. With reference to cl.21(1)(c), cl.23 of the Franchising Code provides:

   Termination -- special circumstances

   A franchisor does not have to comply with clause 21 or 22 if the franchisee:

   (a)no longer holds a licence that the franchisee must hold to carry on the franchised business; or

   (b)becomes bankrupt, insolvent under administration or an externally‑administered body corporate; or

   (c)voluntarily abandons the franchised business or the franchise relationship; or

   (d)     is convicted of a serious offence; or

   (e)operates the franchised business in a way that endangers public health or safety; or

   (f)is fraudulent in connection with operation of the franchised business; or

   (g)     agrees to termination of the franchise agreement. 

6. Although Literacy Circle alleged that in July 2006 Matthew and Hollie abandoned their contract with it, that allegation has not been made out.  It was not suggested that any other of the circumstances described in cl.23 of the Franchising Code were present.  Consequently, I find that cl.23 does not apply in this case.

7. Returning to consideration of cl.21, one of the reasons given by Literacy Circle for its decision to terminate the relationship with Inner East was that Matthew and Hollie had failed to execute the franchise agreement within the 14 days it stipulated.  It has already been found that Matthew and Hollie were obliged by a term of the February 2006 agreement to sign a written version of the contract, although that was not an essential term which, if breached, justified termination by Literacy Circle.  Clause 21 applies to circumstances where in reliance on a franchisee’s breach of agreement, the franchisor proposes to terminate the agreement.  That was not this case. Here, Matthew and Hollie’s failure to execute the franchise agreement was relied on by Literacy Circle as a reason to withdraw what it characterised as an offer.  It was not said to be a contractual breach justifying termination.  In those circumstances, cl.21 does not apply in this case.

8. Clause 22 of the Franchising Code relevantly provides:

   22     Termination — no breach by franchisee

   (1)     This clause applies if:

   (a)     a franchisor terminates a franchise agreement:

   (i)      in accordance with the agreement; and

   (ii)     before it expires; and

   (iii)    without the consent of the franchisee; and

   (b)     the franchisee has not breached the agreement; and

   (c)      clause 23 does not apply.

   (2) …

   (3) Before terminating the franchise agreement, the franchisor must give reasonable written notice of the proposed termination, and reasons for it, to the franchisee.  …

9. With reference to cl.22(1)(c), as already found, none of the circumstances described in cl.23 have been shown to have been present. 

10. Clause 22 of the Franchising Code will only apply if a franchisor terminates a franchise agreement in accordance with that agreement.  That is not what occurred in this case.  Here, the contract was repudiated by Literacy Circle.  It did not purport to act pursuant to a term of the agreement but, rather, it acted on its stated belief that there was no contract on foot and that it was entitled to withdraw an offer which it had made to Matthew and Hollie.  Given these facts, no breach of cl.22 of the Franchising Code occurred.

11. Although breaches of clauses 6, 10 and 11 of the Franchising Code have been identified, Matthew and Hollie did not seek damages specifically related to any such breaches, addressing their claim for damages for breach of the provisions of Pt.IVB of the TPA to the consequences of the repudiation. Consequently, it is not necessary to consider any accessorial liability of Bill or Jaki for the breaches of the Franchising Code which have been found.

Damages

1. Matthew and Hollie claimed damages of $83,074.19 made up of out-of-pocket expenses totalling $31,940.57, lease costs for the period after July 2006 of $24,493.51, income lost by Hollie which she would have earned had she not taken up work on the franchise quantified at $15,000 and financing charges of $12,040.11 with a deduction conceded for the sale of items of equipment worth $400.  These figures are found in an amended attachment to the statement of claim which was filed on the second day of the hearing.  Matthew deposed that these costs and expenses were incurred in reliance on the agreement that he and Hollie had with Literacy Circle. 

2. The respondents submitted that were liability to be found, any damages claimed by Matthew and Hollie ought to be reduced substantially to reflect what the respondents described as the very significant chance that Matthew and Hollie would have suffered an identical loss whether or not the franchise had been terminated on 14 August 2006.  The respondents supported this submission by reference to the fact that although the business continued to operate after 14 August 2006, albeit as the Thorne Academy, it failed shortly afterwards.  They submitted that there was a significant likelihood that Inner East would have failed in identical circumstances and that a 75% discount should be applied to any damages award to reflect what they submitted was the 75% chance of this happening.

1. The purpose of an award of damages for breach is to put the innocent party in the same position, so far as money can do it, as if the contract had been performed: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. Such rights can include awards of damages for expenses reasonably incurred in the course of performing contractual obligations, subject to the contract being sufficiently remunerative that those expenses would have been recouped if the contract had not been breached.

2. In a case such as the present where a breach makes it impossible to know what returns a contract would have produced, the question arises as to how the Court is to determine whether, or to what extent, an applicant’s expenses would have been recouped had the breach not occurred.  It was accepted by the majority of justices in Amann Aviation that in such circumstances there is a presumption that an applicant would have recovered his or her expenses, although that presumption can be rebutted.  The nature of the onus borne by a respondent in such circumstances may be either an onus of proof or only an evidentiary onus and it may also be that an applicant’s damages will be reduced to take account of possible contingencies in the operation of the contract, such as early termination in accordance with particular provisions of the contract.

3. In this case, the respondents did not attempt to prove that the return which the contract would have produced, had it not been breached, would not have recouped Matthew and Hollie’s costs and expenses.  Rather, and without demonstrating what Inner East’s returns were likely to be, they submitted that Matthew and Hollie had only a 25% chance of such recoupment because there was a 75% chance that Inner East was going to fail as the Thorne Academy failed.

4. The evidence does not satisfy me that Inner East would have ceased operating as the Thorne Academy did.  The circumstances of the two operations were different in important respects.  Inner East benefited from the Literacy Circle group’s advertising, its client referrals and by being part of an organisation larger than itself.  It would have continued to do so.  The Thorne Academy did not have those advantages.  Inner East had the use of Literacy Circle’s intellectual property but the Thorne Academy did not, although it did have access to some other teaching programs.  That is to say, while it may have had a slow start, Inner East had the guarantee of Literacy Circle’s support and reason to believe it had a future.  The Thorne Academy had no such support and thus its prospects would always have been dimmer than Inner East’s.  I conclude that the decision not to proceed with the Thorne Academy was taken in circumstances very different to those which Inner East enjoyed before 14 August 2006 and which Inner East would have continued to enjoy had the contract not been repudiated.

5. The evidence did not suggest that prior to 14 August 2006 Matthew and Hollie had any doubts about the future of Inner East and I conclude that the termination of the relationship with Literacy Circle was the step which led their business to fail.  I do not conclude that the decision to close the Thorne Academy demonstrates that a similar decision would have been taken in relation to Inner East, particularly in light of Bill’s representations in February 2006.

6. In such circumstances, not only have the respondents failed to discharge such onus of proof as may have been theirs but they have also failed to demonstrate that the prospects of Inner East’s failure were real.

7. That being so, I find that those costs and expenses which Matthew and Hollie can prove were reasonably incurred in the course of performing their contractual obligations would have been recouped from Inner East’s returns.  I consequently find that an award of damages should be made to compensate Matthew and Hollie for costs and expenses of that sort which Literacy Circle’s breach caused to be wasted. 

8. The out-of-pocket expenses claimed by Matthew and Hollie at $31,940.57  are itemized in the amended attachment to the statement of claim and are largely but not completely substantiated by copies of receipts which became Exhibit A49.  Mathew was not cross-examined on these and I find that those expenses which were proved were reasonably incurred by Matthew and Hollie during the course of them performing their contractual obligations.  The items claimed but not substantiated by receipts were:

   ·5^th June – Computer software - $229.00

   ·8^th July – Office decoration - $25.40

   ·10^th July – Office decoration - $59.35

   ·15^th July – Office internet - $49.95

   ·July end – Bank account fee - $10.00

   ·15^th Aug – Office internet - $49.95

   ·25^th Aug – Office phone bill - $517.23

   ·28^th Aug – Office 1300 phone number - $35.28

   ·Aug end – Bank account fee - $6.45

   ·25^th Sep – Business phone - $104.44

   ·Feb end – Merchant facility/breaking contract fee - $500.00

   The receipts also show that the following corrections are necessary to the following claimed items:

   ·June end – Office Renovation DIY; $675.10 should be $639.40

   ·June end – petrol for month; $525.76 should be $522.56

   ·July end – petrol for month; $147.01 should be $97.01

   The amount to be awarded for these out-of-pocket expenses will therefore be $1,675.95 less than the amount claimed, reducing the damages to be awarded for this aspect of the claim to $30,264.62.

9. Matthew gave evidence that the premises were re-let and, by implication, that he and Hollie were not responsible for rent after a particular point.  Based on the rent invoiced to Matthew and Hollie evidenced in Exhibit A50, this occurred in or about December 2007.  I accept that in the period after 1 August 2006, Matthew and Hollie paid their landlord $24,493.51.  It should also be noted that several lease payments were referred to in the itemization annexed to the statement of claim but were not pressed as they were also included in this aspect of the claim.  Matthew and Hollie should receive damages of $24,493.51 in respect of these lease expenses.

10. Matthew deposed to having borrowed almost $60,000 in respect of the business and the third page of Exhibit A50 indicates that the total interest charge referable to that borrowing was $10,948.50 with associated fees of $1,091.61.  I accept that those expenses were reasonably incurred and the award will reflect this.

11. By way of an off-set for the expenses claimed, Matthew said that he had been able to sell a bookshelf, a table and a whiteboard for about $400 and this deduction will be taken into account. 

12. As to the claim of $15,000 for Hollie’s loss of earnings, the opportunity cost of engaging in the partnership business, represented by the income which Hollie could have earned in alternative employment but which she forwent, is a cost which can be claimed as damages.  The amount Hollie claims she lost because of her work in the partnership equates to an annual salary of $30,000.  In her evidence, Hollie said that prior to 2006 she had been employed at a salary of between $30,000 and $35,000 per annum and had resigned from that position with an expectation of obtaining a replacement job paying at least $30,000 and possibly $40,000.  Hollie’s PAYG Payment summaries demonstrate that the two jobs which she held immediately prior to her full-time involvement with Inner East paid her at a rate no greater than $26,250 per annum.  However, in October 2006 Hollie took up a new job where she was paid $40,000 per annum plus superannuation. 

13. Hollie was cross-examined on the periods when she worked.  She was employed by Tip Top Blinds (Vic) Pty Ltd between 9 November 2005 and 27 January 2006.  Hollie conceded that in 2006 she was studying full time.  She also agreed that the summer holidays of her Bachelor of Arts and Journalism course at Monash University spanned the period of her full-time employment with Tip Top Blinds.  Her next job was a part-time position through Stokes Wiggins Recruitment from 8 February 2006 until 3 March 2006 a date which, experience shows, roughly coincides with the commencement of the standard university teaching year. 

14. Hollie started to work on the franchise business at about the end of March 2006.  From that point until October 2006, after the closure of the Thorne Academy, her only work was in the partnership business.  An acceptance of Hollie’s claim to have lost $15,000 in earnings during the period when she was engaged in the partnership business assumes that that commitment wholly prevented her from working elsewhere.  I consider such a proposition to be unlikely.  It has not been shown in respect of the period prior to Inner East starting to trade in July 2006 that Hollie was required to devote herself to the franchise on a full-time basis.  Indeed, the evidence does not satisfy me that she was, or that she did, and I conclude that she is more likely to have been devoting time to her university commitments.  Indeed, in this connection, I accept Jaki’s evidence that in the managers’ meeting on 9 August 2006 Hollie protested about the work she was asked to do saying that she had university commitments. 

15. But whether or not Hollie was, in fact, so engaged with university activities is not the real point.  It merely tends to support the conclusion I have already reached that her duties at Inner East before it started to trade in July 2006 were not such as to prevent her from seeking remunerative employment elsewhere, if only on a part-time basis.  In this regard, Hollie’s evidence is thin.  It must be assumed that, in addition to tasks arising out of her communication with Literacy Circle in Sydney, Hollie assisted in the establishment of the business by, for instance, supervising and assisting in the fit out of Inner East’s premises.  However, there were no students before July 2006 and I do not conclude that the job of setting up the business during April to June 2006 would have required Hollie’s full-time attention.   Once the business commenced trading, however, I accept that Hollie was required to be available for work at all times during normal business hours. This, I accept, would have prevented her from taking other employment. 

16. Having reached these conclusions, I find the claim of $15,000 for lost earnings to be excessive.  I accept that Hollie would have been able to gain employment in a job paying $30,000 per annum, but I am not of the view that she was wholly prevented from doing so by her commitments to Inner East.  Doing the best I can on the evidence before me, I conclude that Hollie devoted only one-quarter of her time to Literacy Circle in the period prior to 1 July 2006.  Thereafter, I find she was effectively engaged full-time in the business until, as the Thorne Academy, it ceased trading and she obtained employment elsewhere.  Therefore, I conclude that the earnings Hollie lost as a result of her engagement in the partnership business amount to $9,375.

17. Matthew said that the total income for the business was between $2,000 and $2,500, much of which was earned while he and Hollie were operating the Literacy Circle franchise.  In this connection, it should be recalled that Inner East commenced operating in early July 2006 and ceased at the time of Peter’s email on 14 August 2006 and that the Thorne Academy subsequently operated for a short period thereafter.  The damages to be awarded will be reduced to reflect those earnings which, taking the mid-point between the two figures identified by Matthew, I find amounted to $2,250.

Conclusion

1. It flows from my findings that there will be a verdict for the applicants against the first respondent and verdicts for the second and third respondents against the applicants.

2. There will be judgment for the applicants against the first respondent in the sum of $73,523.24. To this will be added $18,208.58 for interest pursuant to s.76 of the Federal Magistrates Act 1999 and calculated in accordance with the rates set out in sch.5 to the Uniform Civil Procedure Rules 2005 (NSW).  In arriving at that figure, interest on Hollie’s September 2006 loss of earnings has been calculated from 1 October 2006, reduced by $750 to reflect a pro-rata figure for the fees earned by the business.  Further, to calculate the interest on the lease payments made after the breach, I have taken a mid-point between 1 August 2006 and the last payment on 29 April 2008 as the date from which interest should be calculated, namely 15 June 2007.

I certify that the preceding three-hundred and twenty-five (325) paragraphs are a true copy of the reasons for judgment of Cameron FM

Associate:

Date: 29 May 2009