Video Ezy International Pty Ltd v Sedema Pty Ltd - [2014] NSWSC 143

Supreme Court

New South Wales

Medium Neutral Citation: Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143
Hearing dates: 26/09/2013
Decision date: 27 February 2014
Jurisdiction: Common Law
Before: Harrison AsJ
Decision:
The Court orders that:
(1) The appeal is dismissed.
(2) The decision of his Honour Magistrate Favretto dated 14 February 2013 is affirmed.
(3) The amended summons filed 26 September 2013 is dismissed.
(4) The plaintiffs are to pay the defendants' costs as agreed or assessed.

Catchwords: APPEAL FROM LOCAL COURT - whether Magistrate erred in finding a franchise agreement had come to an end - whether the franchisor breached the restrictive covenant not to compete with the franchisee in the exclusive territory - whether competing "within" the territory of the franchise is the physical territory or includes products purchased over the internet - whether the franchisor had an obligation to act in good faith to the franchisee - whether the conduct of the franchisor was unconscionable within the meaning of the Trade Practices Act 1975 (Cth) and the Competition and Consumer Act 2010 (Cth) - whether related entities of the franchisor were liable as accessories to the unconscionable conduct of the franchisor; EVIDENCE - admissibility of evidence on the ground that the evidence was opinion - evidence properly admitted
Legislation Cited: Australian Consumer Law, ss 20, 21, 22
Competition and Consumer Act 2010 (Cth), Sch 2, ss 2, 20, 21, 22
Evidence Act 1995 (NSW), ss 78, 80
Local Court Act 2007 (NSW), ss 39, 40, 41
Trade Practices Act 1974 (Cth), ss 51AA, 51AB, 51AC, 51AD, 75B, 82, 87
Cases Cited: Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333
Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 104 FCR 253
Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; (2005) 148 FCR 132
Bullabidgee Pty Ltd v McCleary [2011] NSWCA 259
Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558
Canon Australia Pty Ltd v Patton [2007] NSWCA 246
CG Berbatis Holdings Pty Ltd v Australian Competition and Consumer Commission [2001] FCA 757; (2001) 185 ALR 555
Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1
Connex Group Australia Pty Ltd v Butt [2004] NSWSC 379
Hurley v McDonald's Australia Ltd [1999] FCA 1728, (2000) ATPR 41-741
Swain v Waverley Municipal Council [2005] HCA 4; (2005) 220 CLR 517
Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165
Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389; (2011) 15 BPR 29,699
Wigan v Edwards (1973) 1 ALR 497
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
Category: Principal judgment
Parties: Video Ezy International Pty Ltd ACN 003 532 269 (First Plaintiff)
Video Ezy Australasia Pty Ltd ACN 073 076 294 (Second Plaintiff)
BB Australia Pty Ltd ACN 058 986 673 (Third Plaintiff)
EzyDVD Pty Ltd ACN 123 658 702 (Fourth Plaintiff)
Sedema Pty Ltd ACN 002 734 643 (First Defendant)
Scott Newman (Second Defendant)
Samantha Newman (Third Defendant)
Lorraine Margaret Charnas (Fourth Defendant)
Representation: Counsel:
P Durack SC/P Herzfeld (Plaintiffs)
T Alexis SC/D Mackay (Defendants)
Solicitors:
Macpherson and Kelley Lawyers (Plaintiffs)
Cara Marasco and Company (Defendants)

File Number(s): 2013/78400
Publication restriction: Nil
Decision under appeal

Date of Decision:

2013-02-14 00:00:00

Before:

Favretto LCM

File Number(s):

2011/245474

Judgment

HER HONOUR: The plaintiffs seek to appeal the whole of the decision made by his Honour Magistrate Favretto in the Downing Centre Local Court on 14 February 2013. By amended summons filed 26 September 2013, the plaintiffs seek firstly that the appeal be allowed; secondly, judgment of the Court below be set aside; thirdly, in lieu of the orders of the Court below (a) judgment in favour of the plaintiffs for $71,351.55 plus interest, (b) dismissal of the cross claim, (c) an order that the defendants pay the plaintiffs' costs on a solicitor/client basis, (d) the cross claimants pay the cross defendants costs of the cross claim on a solicitor/client basis; fourthly, as an alternative to order 3 of the summons, the matter be remitted to the Local Court; fifthly, the defendants pay the plaintiffs' costs of the appeal on a solicitor/client basis.

The appeal

Section 39 of the Local Court Act2007 (NSW) provides that a party who is dissatisfied with a judgment or order of the Local Court may appeal to the Supreme Court, but only on a question of law.

Section 40(1) of the Local Court Act provides that a party who is dissatisfied with a judgment or order of the Local Court may appeal to the Supreme Court on a ground that involves a question of mixed law and fact, but only by leave of the Supreme Court.

Section 41(1) of the Local Court Act provides that this Court may determine an appeal either (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal.

In Swain v Waverley Municipal Council [2005] HCA 4; (2005) 220 CLR 517, Gleeson CJ at [2] reiterated that in the common law system of civil justice, the trial process determines the issues between the parties. The system does not regard the trial as merely the first round in a contest destined to work its way through the judicial hierarchy until the litigants have exhausted either their resources or their possibilities of further appeal.

Background

In these proceedings in this Court, the plaintiffs are Video Ezy International Pty Ltd ("Video Ezy International"), Video Ezy Australasia Pty Ltd ("Video Ezy Australia"), BB Australia Pty Ltd ("Blockbuster") and EzyDVD Pty Ltd ("EzyDVD") who were also the plaintiffs in the Local Court proceedings. The defendants are Sedema Pty Ltd, ("Sedema") Scott Newman, Samantha Newman and Lorraine Margaret Charnas. Mr Newman and Mrs Newman are husband and wife. Mrs Charnas is the mother of Mrs Newman. For convenience, I will collectively refer to the plaintiffs as Video Ezy and refer to Sedema, Mr Newman, Mrs Newman and Mrs Charnas as Sedema except where otherwise stated.

Through a corporate structure Video Ezy International, Blockbuster and EzyDVD are subsidiaries of Video Ezy Australia. Video Ezy Australia is controlled by the holding company, Strassa Pty Ltd. Mr Paul Uniacke is the sole director and shareholder of Strassa Pty Ltd and he has control of the group of companies.

Video Ezy International as a franchisor licenses the use of the business name, system and certain trademarks in the operation of Video Ezy outlets under the business name in defined territories in Australia. Blockbuster is responsible for the TiVo movie service, a set top box service that allows access to on-demand videos via a television screen. EzyDVD is responsible for the online retail business of the website "ezydvd.com.au" that allows customers to order DVDs online.

On 1 April 2003, Sedema purchased the Video Ezy business in Hazelbrook for $225,000 from Video Ezy International with the condition that Video Ezy International will grant Sedema a 10 year exclusive franchise in Hazelbrook (the "Hazelbrook agreement"). The goodwill component of the purchase price was expressed to be $146,701.

On 25 September 2003, Sedema also purchased a 10 year exclusive franchise for $18,700 from Video Ezy International for the Video Ezy business in Katoomba (the "Katoomba agreement"). The goodwill component was expressed to be $15,000. Mrs Charnas guaranteed Sedema's performance for both the Hazelbrook and Katoomba agreements.

On 20 June 2010, Sedema closed the Katoomba business on the basis, upon what it said, was an agreement entered into with Video Ezy International on 20 June 2008. Video Ezy International disputes the existence of such an agreement. At the time of the trial of the proceedings in the Local Court, Sedema continued to operate the Hazelbrook business.

The Local Court proceedings

On 29 July 2011, Video Ezy filed a statement of claim against Sedema in the Local Court claiming unpaid franchise and advertising fees pursuant to the franchise agreements from the defendants. The defendants admitted liability for the fees allegedly owing under the Hazelbrook agreement, but denied liability for fees under the Katoomba agreement on the basis that Sedema had been released from its obligations under the Katoomba agreement.

On 17 May 2012 Sedema filed a further amended statement of cross-claim against Video Ezy International, Video Ezy Australia, Blockbuster and EzyDVD contending that:

(1) Video Ezy Australia breached the exclusivity clause of the Hazelbrook agreement by reason of its interest in Blockbuster and EzyDVD when Blockbuster and EzyDVD engaged in online purchase and subscriptions of movies and DVDs in the Katoomba and Hazelbrook region;

(2) It was an implied term of the franchise agreements that Video Ezy International would act in good faith towards Sedema;

(3) The conduct of Video Ezy International and Video Ezy Australia was unconscionable under ss 51AA and 51AC of the Trade Practices Act 1974 (Cth) and s 21 of Sch 2 of the Competition and Consumer Act 2010 (Cth);

(4) Blockbuster and EzyDVD were accessorily liable under s 75B of the Trade Practices Act and s 2 of Sch 2 of the Competition and Consumer Act.

The Magistrate decided that Sedema was released from the Katoomba Agreement and that Video Ezy Australia had breached the exclusivity clause in the Hazelbrook agreement; Video Ezy International had breached the good faith obligation implied in the franchise agreements; Blockbuster and EzyDVD were involved in unconscionable conduct and; awarded damages to Sedema.

The Magistrate entered judgment firstly, in favour of the plaintiffs against the defendants for the sum of $12,656.58; secondly, in favour of the cross claimants against the first and second cross defendant in the sum of $56,248.39; thirdly, in favour of the cross claimants against the third cross defendant in the sum of $257; and finally, for the cross claimants against the fourth cross defendant in the sum of $55,991.39. All the judgment sums were inclusive of interest.

Grounds of appeal

The plaintiffs appeal from the whole of the decision of his Honour Magistrate Favretto on the grounds that his Honour erred in concluding that:

(1)The Katoomba agreement came to an end on 20 June 2008 through oral acceptance by Sedema of an offer made by Video Ezy International by letter dated 15 May 2008;

(2)Video Ezy Australia breached clause 9.1 of the Hazelbrook Agreement;

(3)There was an obligation to act in good faith implied in the franchise agreements;

(4)Video Ezy International breached the obligation to act in good faith implied in the franchise agreements;

(5)The conduct of Video Ezy Australia and Video Ezy International constituted unconscionable conduct within the meaning of s 51AC of the Trade Practices Act and s 21 of Sch 2 of the Competition and Consumer Act;

(6)Blockbuster and EzyDVD were liable as accessories for the unconscionable conduct of Video Ezy International and Video Ezy Australia;

(7) Sedema was entitled to damages in the amount of $46,043.39 for loss suffered by the unconscionable conduct of Video Ezy Australia and Video Ezy International; and

(8) The Magistrate erred by admitting into evidence the second sentence of paragraph 43 of the affidavit of Lorraine Margaret Charnas sworn on 24 August 2012 on the basis that the sentence was inadmissible on the grounds of relevance and opinion.

Leave to appeal

Video seeks that leave to appeal be granted to the extent necessary (Ground 1A).

Sedema said that the appeal falls into two categories. The first category involves matters of appeal as of right on the question of law and the second category involves matters that require leave because they involve a question of mixed law and fact. The parties dispute which grounds of appeal raise questions of mixed fact and law. Both parties agree that Ground 1 involves the proper construction of a contract which is a question of law giving Video Ezy an appeal as of right. Video Ezy's position is that only Ground 5 is a question of mixed fact and law and the balance of the grounds of appeal raise questions of law only. Sedema's position is that Grounds 2 to 6 involve mixed questions of fact and law that require leave. Sedema opposes leave being granted.

It is difficult to discern whether some of the grounds raise questions of law alone or mixed questions of fact and law: see article by The Hon MJ Beazley AO, "The distinction between question of fact and law: a question without answer?" The Judicial Review (2013) 11 TJR particularly at 336 to 338. I do not think that the grounds of appeal relate to facts alone. Had I been able to decide that the grounds of appeal did not raise a question of law but rather a question of mixed law and fact, I would have refused to grant leave to appeal. My reasons are the quantum amount of damages awarded, is the relatively modest amount of $56,248.39. This is set off against the judgment sum of $12,656.58 in favour of Video Ezy International, the amount in dispute is $43,591.81 and this amount is not in proportion to the costs already incurred by both parties in both the Local Court, where the hearing lasted four days, and in this Court. .

It appears that both parties made written submissions in the Local Court (see for example T 242.8). Those submissions are not before this Court. Oral submissions made in the Local Court5 are contained in the transcript and I have read them. In this Court Video Ezy relied on written submissions and submissions in reply. Sedema relied on written submissions.

Ground 1: Release of the Katoomba agreement

The terms of the written Katoomba franchise agreement between the parties are not in dispute. The agreement was for a period of 10 years commencing on 1 August 2003. The agreement would have concluded on 1 August 2013 if there was no release. The Magistrate made a finding that the release occurred on 20 June 2008 which meant that the franchise agreement came to an end on 20 June 2010 [over three years earlier] and Sedema was not liable to pay the franchise and advertising fees.

Video Ezy submitted that the Magistrate erred in concluding that the Katoomba agreement came to an end on 20 June 2008 through oral acceptance by Sedema of an offer made by Video Ezy International by letter dated 15 May 2008. Video Ezy identified what it said are further errors of law. They are first, that the Magistrate took into account the subjective understanding of the 15 May 2008 letter on the part of Mrs Charnas; second the conversation on 20 June 2008 between Mrs Charnas and Ms Catherine Pritchard should not have been taken into account in interpreting the offer contained in the letter of 15 May 2008; and finally, that because there was a lack of consideration there was no agreement to release Sedema from the original agreement.

It is convenient that I record how the Magistrate's judgment is structured. The Magistrate has divided his judgment into the issues raised by the parties by using headings. Under these headings his Honour discusses the facts, the law and then his decision on particular issues. At the outset the Magistrate addressed the correct test for the proper construction of a contract. His Honour quoted the well known passage from Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40] where the High Court stated:

"It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." [Citations omitted.]

The following section of the judgment is headed, "Is Sedema liable under the Katoomba Franchise?" Sedema had asserted that it was not liable for any franchise or advertising fees because it was released from its obligations by an agreement entered into with Video Ezy on 20 June 2008 (the release agreement).

The Magistrate commenced his analysis of the evidence on this topic by recounting that by early April 2008 Sedema was experiencing a range or commercial difficulties in Katoomba relating to oversupply of stock, serious cash flow problems, poor returns policy and the slow process in relation to the potential sale of Hazelbrook. Sedema had contemplated taking legal action against Video Ezy International evidenced by an e-mail from Mrs Charnas to Ms Pritchard, the business partner of Video Ezy which included the following: "On the other hand, if we are required to pay penalty Franchise fees or are otherwise disadvantaged, we reserve the right to battle on in Katoomba and request assistance in lowering the Rental level and Franchise fees, or alternatively, seek legal advice."

There are two significant communications between the parties, namely, the letter dated 15 May 2008 and a telephone conversation that occurred on 20 June 2008. I shall briefly refer to them.

The letter dated 15 May 2008 from William Howes, the corporate legal counsel for the Ezy Video group, is addressed to Sedema. It states:

"Having entered into the Katoomba Agreement, you are bound by the terms and conditions of the Katoomba Agreement for the full ten year term.

While we understand that you wish to hand back the territory, there is no mechanism permitting this course of action under your agreement with us.

However, as we are understanding of the present situation and we are prepared to release you from the Katoomba Agreement on payment of 2 years franchise fees."

Mrs Charnas' evidence (J [30]) is that on 20 June 2008, she had a conversation with Ms Pritchard on behalf of Video Ezy International, to the following effect:

"[Ms Charnas:] 'I have spoken to the leasing agent and the landlord has agreed to reduce the term of the lease to a 2 year period. As a result we propose to take up the offer from Video Ezy in their letter of 15 May 2008. We will pay franchise fees for Katoomba for the next 2 years and then we will close the Katoomba store in June 2010.'

Ms Pritchard: 'OK. That sounds good'."

Counsel for Sedema submitted that the Magistrate properly constructed the subsequent agreement objectively for the following reasons:

(1) The Magistrate set out the applicable test in his judgment.

(2) The Magistrate expressed the finding in paragraph [32] of the judgment on the basis of what was "reasonable" and what was a "reasonable and objective assessment of the ... letter."

(3) The Magistrate's approach was not affected by a subjective assessment of the letter as his Honour considered the arguments of the plaintiffs in paragraph 29 of his judgment and noted what the letter of 15 May 2008 did not say and then addresses the question of whether there was consensus ad idem between the parties regarding the 15 May 2008 offer.

In [26] the Magistrate referred to Mrs Charnas' subjective understanding of the contents of the letter dated 15 May 2008 but this was done in the section where he was making findings about the evidence given and in order to test the veracity of Mrs Charnas' evidence. His Honour found that Mrs Charnas acted consistently with her understanding of the contents of the letter dated 15 May 2008. The Magistrate referred to both Mrs Charnas' and Ms Pritchard's account of the telephone conversation of 20 June 2008. Ms Pritchard had no recollection of the telephone conversation, nor of the contents of the letter dated 15 May 2008. His Honour analysed the evidence of both Mrs Charnas and Ms Pritchard. Under the next heading "Determination - Sedema was released from the Katoomba agreement" his Honour accepted Mrs Charnas' version of the telephone conversation of 20 June 2008 and gave reasons as to why he did so.

His Honour then went on to say:

"[32] Having accepted Mrs Charnas's evidence the court must still determine whether there was consensus ad idem between the parties regarding the 15 May 2008 offer. The 15 May 2008 letter does not say that the 2 years of franchise fees were to be paid 'up front' as one would have expected nor that the offer could only be accepted in writing. Further, in the 15 May 2008 letter Mr Howes had also responded "While we understand that you wish to hand back the territory, there is no mechanism permitting this court of action under your agreement with us." (Court's emphasis). Viewed in that context it is reasonable to accept that Mr Howes was saying there is no provision for the immediate handing back of Katoomba with the inference it must continue. Immediately following that paragraph is the release offer about payment of 2 years franchise fees. Having been told there was no mechanism for handing back Katoomba, it is then reasonable in that context to regard the offer of continuing Katoomba for another 2 years as continuing to pay the franchise fees. Mrs Charnas in the conversation of 20 June 2008 reiterated the 15 May 2008 offer as she understood it and there is no evidence from Ms Pritchard to contradict her words. A reasonable and objective assessment and understanding of the 15 May 2008 letter and the 20 June 2008 conversation is that the offer was to continue the franchise for a period of 2 years upon the payment of the franchise fees."

In the conversation of 20 June 2008, Mrs Charnas was informing Ms Pritchard that the landlord had agreed to reduce the lease to a two year period and so accepted the offer set out in the letter of 15 May 2008. Ms Pritchard acknowledged the acceptance by saying "Ok. That sounds good." In my view, the Magistrate undertook the task of objectively construing the terms of the agreement. In doing so, the Magistrate did not take into account the subjective intentions of Mrs Charnas.

Video Ezy contended that at [32] the Magistrate took into account the terms of the 20 June 2008 conversation in construing the 15 May 2008 letter and said that as with a contract, the meaning of an offer cannot change depending on the subsequent conduct of the party to whom it is made. While Mrs Charnas mentioned speaking to the leasing agent and the landlord agreeing to the reduction in the term of the lease, at the beginning of the telephone conversation she relevantly says, "We will pay franchise fees for Katoomba for the next 2 years". That is, she is accepting the offer that Video Ezy was "Prepared to release ... [Sedema] from the Katoomba Agreement on payment of 2 years franchise fees." The meaning of the offer did not change.

Video Ezy contended that the 15 May 2008 letter should have been to be construed as an offer to release Sedema upon payment of two years franchise fees upfront as that is the natural and ordinary meaning of the words "on payment of 2 years franchise fees". [Emphasis added]. According to Video Ezy, such an offer was not accepted in the 20 June 2008 conversation and no such upfront payment was made. Sedema contended that the letter was to be construed as an offer simply to reduce the outstanding term of the franchise to two years, which offer was accepted and Video Ezy's construction of construction of the contract were to be accepted, it would require a reader to amend the offer to include the word "upfront". Sedema also argued that the proper objective construction of the 15 May 2008 letter is that there was an offer to continue the franchise and that construction was open on the language of the letter.

Nowhere in the letter of 15 May 2008, nor in the telephone conversation was the word "upfront" mentioned. As the Magistrate stated, "The 15 May 2008 letter does not say that the 2 years of franchise fees were to be paid 'upfront' as one would have expected." In my view, his Honour's determination was correct.

So far as the lack of consideration is concerned, Video Ezy submitted that the putative agreement of the kind found by the Magistrate would be invalid, as it was not supported by consideration passing from Sedema to Video Ezy International. On that putative agreement, Sedema would do nothing more than it was already obliged to do under the franchise agreement, namely pay the franchise fees over the two year period; indeed it would do less than it was already required to do, as it would pay franchise fees for a shorter period than otherwise required.

According to Video Ezy, this was a classic instance of past consideration and that such past consideration is insufficient to support a contract to terminate the franchise agreement.

Sedema referred to Wigan v Edwards (1973) 1 ALR 497 at 512 where Mason J stated:

"An important qualification to the general principle is that a promise to do precisely what the promisor is already bound to do is a sufficient consideration, when it is given by way of a bona fide compromise of a disputed claim, the promisor having asserted that he is not bound to perform the obligation under the pre-existing contract or that he has a cause of action under that contract."

Mrs Charnas had previously informed Video Ezy that if Sedema was required to pay penalty franchise fees or was otherwise disadvantaged, she would consider obtaining legal advice. By accepting the release Video Ezy would ensure that the franchise agreement would continue to operate and it would receive payment for another two years rather than Sedema seeking legal advice. This constitutes consideration.

The Magistrate did not err in law in construing the release of the Katoomba agreement. This ground of appeal fails.

Ground 2: Clause 9.1 of the Hazelbrook sale agreement

Sedema asserted that this ground of appeal is one of mixed fact and law for which leave is required. Whether the interpretation of a word or phrase in a contract is a question of law or one of mixed fact and law is not clear. Clause 9.1 is in relation to the Hazelbrook territory only. The Magistrate did not make an award of damages for breach of the restrictive covenant and this finding does not form the basis of the Magistrate's award of damages. However, it is necessary to determine this ground of appeal because it impacts upon whether or not Video Ezy engaged in unconscionable conduct. In the exercise of my discretion, I would grant leave if the interpretation of this issue involves a question of mixed fact and law.

The Magistrate concluded that Video Ezy Australia had contravened clause 9.1 of the Hazelbrook agreement through its subsidiary EzyDVD, by EzyDVD's sale of DVDs into the Hazelbrook territory.

Video Ezy identified the critical question that had to be determined by the Magistrate was whether the business of EzyDVD was a "business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise". Video Ezy accepted that the words "within the territory of the franchise" qualify both of the preceding kinds of business, ie one "involving the rental and/or sale of video products" and "any other business of a similar nature" that the business of EzyDVD is one involving the rental and/or sale of video products. It is not disputed that Blockbuster accepted TiVo subscriptions from at least six persons in the franchise territory covered by the Katoomba agreement and rented movies at $35 each to four of those persons and that EzyDVD sold DVDs to persons residing within the franchise territory covered by both the Katoomba and Hazelbrook agreements.

The point of difference is that Video Ezy asserted that the business of EzyDVD is not one "involving the rental and/or sale of video products ... within the territory of the franchise" Video Ezy said that is so for five reasons. They are:

(1) As a matter of ordinary language, the italicised words expressly localise the conduct referred to (the rental and/or sale of video products) "within" the territory of the franchise. The clause does not refer to the rental and/or sale of video products "into" the territory of the franchise. The word "within" connotes the containment of the business inside the territory. That is not apt to describe a business which involves sending video products into the territory from outside.

(2) This approach to clause 9.1 is consistent with the need to construe the clause in its context and in the light of the factual matrix at the time when the agreement was made. The evidence suggested growth in internet based purchasing of DVDs from 2005 to 2010, particularly in the later years. Conversely, at the time of signing the Hazelbrook sale agreement, the prospect of such a business posing a serious threat to the Hazelbrook store was apparently unlikely (J [54]).

(3) The context of the Hazelbrook sale agreement as a whole is consistent with a localised focus of clause 9.1. For example, the "Business" sold was the business "as conducted by the Vendor at Shop 6, 195 Great Western Highway, Hazelbrook, NSW 2779" (clause 1.3). The form of franchise agreement included in the Hazelbrook sale agreement conferred a franchise which was exclusive only "to the extent that the Franchisee shall at all times have the exclusive right to operate Video Ezy franchise outlines within the territory" (clause 1(2)). Further, the "the Franchisee agrees that it will not make any use nor will it permit or authorise any use directly or indirectly of the system or the marks outside the territory" (clause 1(4)). [Video Ezy's emphasis added].

(4) The other restraints in the form of franchise agreement in the schedule to the Hazelbrook sale agreement are consistent with a localised focus. Each would not on their terms extend to a business such as EzyDVD. Thus the covenant not to compete in clause 7(9) precludes an interest in "any business of the nature of the licensed business" and the restraint precludes an interest "in any other movie hire outlet located or operated for the term of this Agreement".

(5) The Magistrate was in error to say that "the distinction suggested between the operation of a "bricks and mortar" business and on-line trading is illusory" (J [54]). The words in clause 9.1 are to be interpreted in accordance with its natural and ordinary meaning.

Video Ezy submitted that clause 9.1 did not apply to the business operated by EzyDVD, as the clause refers to the sale or rental of video products "within the territory" and not the sale or rental of video products "into" the territory. Video Ezy said that it requires that the business be "within the territory of the franchisee". A business may undertake transactions in a place without it being correct to say that the business is "within" that place.

Sedema submitted that clause 9.1's primary object was to protect the goodwill that was acquired by the purchase price. According to counsel for Sedema, on a proper reading and understanding of clause 9.1, it could not mean that the expression "within the territory" meant that a business must operate within the territory to have breached the restraint covenant.

On the same day as the Hazelbrook sale agreement, Video Ezy International and Sedema entered into the Hazelbrook franchise agreement. On this topic the Magistrate referred to the relevant terms of both the Hazelbrook sale and franchise agreements. I shall not reproduce all of those clauses here. Both parties referred to two other documents, namely the 2003 and the 2010 disclosure documents.

In the Local Court Video Ezy International, Video Ezy Australia, Blockbuster and EzyDVD argued that all that Video Ezy Australia sold and Video Ezy International licensed was the operation of a "bricks and mortar" outlet for the sale or hire of Video Ezy products and not on-line products. The answer, they assert, lies in clause 2.3 of the 2003 disclosure document which provided in part "The business operated under the Video Ezy franchise, and in accordance with the Video Ezy franchise system is the establishment and operation of a video movie hire outlet or outlets utilising the Video Ezy registered trade and service marks...". Further points of difference between the "Video Ezy franchise system and the TiVo and ezydvd.com.au businesses are the different trademarks (clause 7.1, 2003 disclosure document) used in the Video Ezy franchise system with no suggestion that TiVo or ezydvd.com.au used those trademarks together with the site (clause 11) and location (clause 13) of the franchised business.

Video Ezy International, Video Ezy Australia, Blockbuster and EzyDVD also asserted that the 2010 disclosure document was no more than an announcement of a new business opportunity which was extended to franchisees and that the restrictive covenant, exclusivity provisions and 2003 disclosure document should be read as what was current at that time consistent with the objective theory in the interpretation of contracts: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40].

The restrictive covenant in clause 9.1 of the Hazelbrook sale agreement with Video Ezy reads:

"In consideration of the Purchaser entering into this Agreement and in order reasonably to protect the goodwill, the Vendor undertakes that, except with the prior written consent of the Purchaser that they shall not exercise, carry on or be in any manner whatsoever, either directly or indirectly concerned or interested, either by himself or in partnership with or as manager, servant or agent for any other person, company or corporation in the trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise for 'Video Ezy Hazelbrook' for the term of the Franchise Agreement (other than as Franchisor of the Video Ezy franchise system)." [the restrictive covenant clause].

The Magistrate's reasoning is found at [52] to [54]. Those paragraphs read:

"[52] A reasonable construction of the restrictive covenant, the franchise agreements and 2003 Disclosure Document in their totality is that what was being sold and licensed and was primarily the sale and or hire of video products, including '...products intended for display on a television screen or other visual monitor...'. It is instructive that the restrictive covenant, which sought to protect the valuable goodwill, was in the terms '...in the trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory ...'. The means by which the video products were actually provided was controlled by the franchisor no doubt to protect the integrity of the Video Ezy franchise system, including the physical layout of the actual stores and the use of the system and the marks.

[53] Moreover, the franchisee was in turn also prohibited from operating '...a competing business that is substantially the same as the franchised business outside the territory of the franchise other than Video Ezy franchised or corporate owned outlets;' (Clause 8.2(d)) and the 2003 Disclosure Document went even further to say that the franchisee covenanted not to be involved '...in any business of the nature of the licensed business, otherwise than as approved by the franchisor...'. The import of those restrictions is that it was intended that there be mutual obligations not to operate a substantially similar business. If Sedema had commenced to operate an on-line business then VEA and VEI could also have rightly complained.

[54] The distinction suggested between the operation of a 'bricks and mortar' business and on-line trading is illusory. While in 2003 the impact of the technological advances of TiVo and ezydvd.com.au may have not yet been fully appreciated on the Video Ezy franchise system nevertheless the contractual documentation reasonably affords an interpretation that the restrictive covenants and the exclusivity provisions were intended to protect either party from either conducting a competing business in the hire and sale or hire of video products. It would have been no different had VEI, VEA, Blockbuster or EzyDVD commenced operating a business of the sale or hire of video products by mail order, at a market stall or out of the back of a truck in the territories. It would be an affront to the reasonable person on the 'Bondi bus' to suggest that it was the common understanding of the parties that VEI and VEA could sell or hire video products by mail order, at a market stall or out the back of a truck in the territories. So to would it be to suggest that the TiVo movie service and ezydvd.com.au on-line businesses were any different."

The phrase "within the territory" is to be given its natural and ordinary meaning. That phrase should not be read narrowly. Clause 9.1 does not contain the words "into the territory" as postulated by Video Ezy. The construction of the restrictive covenant that the defendants ask this Court to adopt is, in my view, artificial.

In my view the Magistrate construed the restrictive clause correctly when his Honour interpreted the meaning of clause 9.1 by applying the test of what a reasonable person would have understood it to mean.

At [54] his Honour does construe the meaning of clause 9.1 by reference to the post contractual 2010 disclosure documents. In my view the Magistrate did not err in law. This ground of appeal fails.

Grounds 3 and 4: Implied obligation of good faith

Video Ezy submitted that the Magistrate erred in concluding that firstly, there was an obligation to act in good faith in the franchise agreements; and secondly, Video Ezy International was in breach of that obligation.

In the Local Court Video Ezy did not concede the necessity to imply that it had an obligation to act in good faith and that care must be exercised in identifying both the content and operation of an implied term upon which the parties have expressly agreed.

In the Local Court Sedema framed its argument in relation to Video Ezy's implied obligation to act in good faith and its breach of the implied obligation in the following way. Since early 2009 both Blockbuster and EzyDVD have actively competed against Sedema in the territory. They derogated from the goodwill purchased by Sedema under the sale agreement and the goodwill associated with each of the franchise businesses' license under the franchise agreements. Competition between a franchisor via its related entities and the franchisee within the territories was in breach of the obligation of good faith because Video Ezy International, the franchisor company, had failed to remain loyal to the promise of the grant. Sedema lost a significant volume of sales and while this was going on, it continued to pay, and Video Ezy International continued to receive, the franchise fees and advertising contributions on a monthly basis notwithstanding that the franchisor in the relation companies was flouting the exclusivity of the territories that Sedema had paid for (T 223-4).

In short, Sedema claimed that apart from the express terms of the franchise agreements, there was an implied obligation required on the part of Video Ezy International to remain loyal to, comply with honest standards of conduct and act reasonably in relation to the promise of exclusivity in the territories by not competing against Sedema for rental or retail business (J 60).

The franchise agreements contained provisions concerning the extent to which each of Video Ezy International and Sedema might compete against each other. I shall briefly refer to them. By the grant of an exclusive licence in clause 1(2), Video Ezy International was precluded from granting franchises to competitors. Clause 2(1)(a) reads that Sedema was to establish or maintain at its sole expense within the territory one or more Video Ezy outlets for the licensed business offering video movies for hire rent or sale.

Clause 7(6)(a) provides that Sedema agreed:

"(a) That the licensed business shall operate primarily as a Video Movie Library offering:

(i) Videos for hire or sale;

(ii) Video blank tapes, head cleaners and accessories for sale or hire;

(iii) Video and Computer Games for sale or hire;

(iv) For the purposes of this Clause 'videos' includes all products intended for display on a television screen or other visual monitor including by way of illustration, all video software products, including pre-recorded and blank video cassette tapes, video and computer game cartridges."

No other competition restraint was included in the franchise agreements except clause 9.1 of the Hazelbrook sale agreement which has already been discussed.

A disclosure document was also provided by Video Ezy International to Sedema prior to Sedema's purchase of the Katoomba and Hazelbrook franchises. I shall briefly refer to some of those terms. Clause 2.3 provided that the business operated under the Video Ezy franchise and in accordance with the Video Ezy franchise system is the establishment and operation of the video movie hire outlet or outlets utilising the Video Ezy registered trade and services marks.

Video Ezy International confirmed that it was not involved in any other businesses which competed with the Video Ezy franchise system (clause 3.2(a)(ii) and that the franchise was for an exclusive territory (clause 8.1).

Clause 8.2 provided that for the franchised territory:

"(a) in respect of the exclusive franchise territory, no other franchise may operate a business that is substantially the same as the franchised business. In addition the franchisee is not permitted to advertise outside of the franchise territory without the consent of the franchisor.

(b) the franchisor or an associate of the franchisor may not operate a competing business that is substantially the same as the franchised business;

(c) the franchisor or an associate of the franchisor may not establish other competing franchises that are substantially the same as the franchised business;

(d) the franchisee may not operate a competing business that is substantially the same as the franchised business outside the territory of the franchise other than Video Ezy franchised or corporate owned outlets; and

(e) the franchisor is not able to change the territory of the franchise without the consent of the franchisee."

In this Court, Video Ezy submitted that while an implied term of good faith as expounded in Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558, may be used in relation to matters such as termination in the franchise agreements, the implied term of good faith should not be used to expand the scope of an exclusivity licence. Video Ezy also submitted that the Magistrate's reasons did not focus on the good faith benefit set out in Hungry Jack's (at [171]) which embraces an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); compliance with honest standards of conduct; and compliance with standards of contract which are reasonable having regard to the interests of the parties. Video Ezy asserted that the detailed regime of restraints leaves no room for an implied obligation of good faith, which, in substance, extends the area within which Video Ezy were not permitted to compete with Sedema. Such a term would be contrary to the express terms of the agreements and so far as it requires the parties to co-operate in achieving the contractual objects, it is confined by those contractual objects.

Further, Video Ezy said that where the express terms prohibit the parties from undertaking certain kinds of competing business, an implied obligation to act in good faith cannot legitimately prohibit the parties from undertaking other kinds of competing business. That may be expressed by the conclusion that such an implied obligation is excluded by these express terms. Alternatively, it may be expressed by the conclusion that the benefit, which the implied obligation protects, does not extend to freedom from competition from business of kinds other than those expressly mentioned.

Thus, Video Ezy says that as a matter of principle, there may be a breach of an implied obligation to act in good faith when there is no breach of an express term. However, given the express protections in the franchise agreements, the conclusion that the conduct of EzyDVD and Blockbuster did not cause Video Ezy International to breach an express term of those agreements is fatal to a contention that that conduct caused Video Ezy International to breach an implied obligation to act in good faith.

In this Court, Sedema submitted that there were no express provisions of the franchise agreements that were inconsistent with the implied obligation of good faith and that the Magistrate was obliged to follow Hungry Jack's at [163] - [164] and [169]. Thus, apart from the express terms of the franchise agreements themselves, the implied obligation of good faith required Video Ezy International to remain loyal to the promise of exclusivity in the territories and not to compete against Sedema for rental or retail business.

In Hungry Jack's the Court of Appeal explained:

"[163] This necessarily brief survey of the case law post Alcatel Australia indicates that obligations of good faith and reasonableness will be more readily implied in standard form contracts, particularly if such contracts contain a general power of termination. Clearly, however, the cases where these terms are to be implied are not limited to standard form agreements. Alcatel Australia itself, which involved a 50 year lease agreement of commercial premises, provides an example of a one off contract where such terms were implied.

[164] There also appears to be increasing acceptance (Saxby Bridge Mortgages aside) that if terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law. We consider that to be correct. The argument by Mr Archibald, senior counsel for Burger King Corporation, proceeded on that basis. He submitted, however, that the pre-conditions for the implication of a term at law had not been satisfied in this case, and that the implication was unnecessary as the contract comprehensively dealt with the rights of the parties. This raises the question of when a term will be implied at law.

...

[169] We have already touched upon this ... However, it is worth noting that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley JA said in Renard Constructions (at 263):

'The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith'.

...

[171] Rolfe J observed that in Alcatel Australia, Sheller JA (at 369) appeared to equate the notions of 'reasonableness' and 'good faith'. Whilst Sheller JA did not say that in terms, his review of the case law and academic and extra-judicial writings on the topic, clearly support the proposition. In addition to his references to Renard Constructions, Sheller JA (at 367) referred to the statement of Sir Anthony Mason in his 1993 Cambridge Lecture, that it was probable that the concept of good faith 'embraced no less than three related notions':

'(1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);

(2) compliance with honest standards of conduct; and

(3) compliance with standards of contract which are reasonable having regard to the interests of the parties'."

Later in Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333, Hammerschlag J stated:

"[399] So far as the pleaded obligation of good faith, fair dealing and reasonableness is concerned it may be accepted that such a term is to be implied.

[400] Such a term has been implied into a franchise agreement: Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558; Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310. In Far Horizons Pty Ltd v McDonald's Australia Ltd Byrne J said at [120]:

'As I indicated to counsel in argument, I do not see myself at liberty to depart from the considerable body of authority in this country which has followed the decision of the New South Wales Court of Appeal in Renard Constructions (ME) Pty Ltd v Minister for Public Works. I proceed therefore on the basis that there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreement in good faith and reasonably, and not capriciously or for some extraneous purpose'."

After discussing the applicable law and outlining the positions of both parties under the earlier heading "Was there an implied obligation to act in good faith?" the Magistrate stated:

"[63] Leaving aside whether there was an implied obligation under the Trego principle VEI has not disputed the Burger King implied obligation

[64] The court accepts Sedema's claim that after the commencement of the franchises VEI recognised the exclusivity provisions of the 'Addendum to the Franchise Agreement: ecommerce-On-Line Rental' and the 2010 Disclosure Document ... Thereafter, VEI did not prevent Blockbuster and ezydvd.com.au by operating substantially similar businesses in Hazelbrook and Katoomba (to 20 June 2010) in breach of that implied obligation."

In my view the law on this topic is clear. There is to be implied in the franchise agreements a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreements in good faith and reasonably, and not capriciously or for some extraneous purpose. Video Ezy International had an obligation to act in good faith in relation to Sedema, in relation to its contractual obligations to remain loyal to, comply with honest standards of conduct, and act reasonably in relation to the promise of exclusivity in the territories by not competing against Sedema for rental or retail business.

In so far as Video Ezy's argument that the conclusion that the conduct of EzyDVD and Blockbuster did not cause Video Ezy International to breach an express term of those agreements is fatal to a contention that that conduct caused Video Ezy International to breach an implied obligation to act in good faith is concerned, I do not agree. The controlling mind of TiVo, Blockbuster, EzyDVD and Video Ezy International is the same, Mr Uniacke. He is a director of all of these entities. In evidence Mr Uniacke conceded that the TiVo, Blockbuster and EzyDVD businesses competed in the franchised territories and he had access to customer's names and addresses in those territories and he could have stopped those transactions (T 127.7-128.31).

Video Ezy also complained that the Magistrate focussed on post-contractual documents namely the "Addendum to the Franchise Agreement: ecommerce-On Line Rental [sic]" sent to all franchisees by Video Ezy International on 30 September 2003 and the 2010 disclosure document issued by Video Ezy International on 19 July 2010 and that these post-contractual documents were not relevant to identifying the scope of any implied good faith obligation. (The "Addendum to the Franchise Agreement: ecommerce-On Line Rental" is actually titled "Addendum to the Franchise Agreement: ecommerce-On Line Retail").

Sedema disagreed with this proposition and submitted that the Magistrate did not use the post-contractual documents such as the Addendum to the Franchise Agreement: ecommerce-On Line Rental issued by Video Ezy International on 30 September 2003 and the 2010 disclosure document issued by Video Ezy International on 19 July 2010 to identify the scope of the implied good faith obligation but rather the Magistrate used these documents to identify the plaintiffs' breach.

In [53] the Magistrate addressed whether or not an implied obligation to act in good faith arose. In [54] his Honour turned his mind to whether or not Video Ezy International breached its implied obligation to act in good faith in relation to the franchise agreements. His Honour specifically stated that after the commencement of the franchises Video Ezy International recognised the exclusivity provisions. Video Ezy International had purported to alter the exclusivity provision by introducing new wording to clause 8.2(b) of the updated disclosure document. In [54] the Magistrate addressed the issue of breach of the implied obligation to act in good faith. His Honour concluded that Video Ezy International did breach its implied obligation to act in good faith because it did not prevent Blockbuster and EzyDVD by operating substantially similar businesses in Hazelbrook and Katoomba (to 20 June 2010). In [64] the Magistrate concluded with the words "in breach of that implied obligation". The Magistrate did not use the post-contractual documents such as the Addendum to the Franchise Agreement: ecommerce-On Line Rental issued by Video Ezy International on 30 September 2003 and the 2010 disclosure document issued by Video Ezy International on 19 July 2010 to identify the scope of the implied good faith obligation. This ground of appeal fails.

Grounds 5 and 6: Unconscionable conduct

I shall briefly refer to some relevant principles of unconscionability.

The predecessor provisions of the relevant Australian Consumer Law (as set out in Sch 2 of the Competition and Consumer Act) provisions may be found in ss 51AA - 51AC of the Trade Practices Act and it is accepted that the authorities concerning the interpretation of the Trade Practices Act "unconscionability" regime are applicable to the current statutory regimes.

Section 51AA of the Trade Practices Act and s 20 of the Australian Consumer Law provides, so far as concerns trade and commerce, a corporation must not engage in "... conduct that is unconscionable within the meaning of unwritten law ..." or that a person must not engage in "... conduct that is unconscionable, within the meaning of the unwritten law ..." respectively.

Section 51AC of the Trades Practices Act in relation to business transactions and s 21 of the Australian Consumer Law in connection with goods and services similarly provide that "a corporation/person must not ... engage in conduct that is, in all the circumstances, unconscionable" and "a person must not ... engage in conduct that is in all the circumstances, unconscionable". Section 51AC(3) of the Trade Practices Act and s 22(1) of the Australian Consumer Law contains a non-exhaustive list of matters to be taken into account in determining whether there has been unconscionable conduct. Importantly, one of these factors is the extent to which the supplier and the business consumer/acquirer acted in good faith (s 51AC(3)(k) and s 22(2)(l)).

In Bullabidgee Pty Ltd v McCleary [2011] NSWCA 259, Allsop P stated that the Trade Practices Act is:

"[69] ... 'fundamentally remedial and protective legislation' giving effect to 'matters of high public policy'; and is thus to be construed so as to give the fullest relief which the fair meaning of the legislation will allow: Marks v GIO Australia Holdings Ltd [1998] HCA 69; 196 CLR 494 at 528-529 [99]-[103]. These descriptors of the legislation are apt because the legislative purpose is to promote, in the broad sphere of Australian economic activity (trade and commerce), informed commercial activity, not based on misinformation, but rather on accurate information. That purpose goes beyond honest dealing in good faith."

Sundberg J in Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 104 FCR 253 at [31] held that the term "unconscionable" under the statutory provisions is not limited to the cases of equitable or unwritten law on unconscionability. The list of factors is non-exhaustive. At [37] it was held that the Court is "aided but not controlled by the factors listed."

Nevertheless, the provision sets a high bar to be met by a plaintiff. In No-Knead (at [30]) Sundberg J referred to Hurley v McDonald's Australia Ltd [1999] FCA 1728; (2000) ATPR 41-741 where the Full Court stated at [22]:

"For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated - Cameron v Qantas Airways Ltd [1995] FCA 1304, (1994) 55 FCR 147 at 179. Whatever 'unconscionable' means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term 'unconscionable' import a pejorative moral judgment - Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 at 283-4 and 298." [Original emphasis.]

Similarly, in Canon Australia Pty Ltd v Patton [2007] NSWCA 246, Campbell JA stated:

"[41] In Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557, Spigelman CJ (at [119], 583) said, concerning a different statutory provision,

'Over recent decades legislatures have authorised courts to rearrange the legal rights of persons on the basis of vague general standards which are clearly capable of misuse unless their application is carefully confined. Unconscionability is such a standard.'

[42] He continued (at [121], 583):

'Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what is 'fair' or 'just', it could transform commercial relationships...'

[43] Those remarks can equally, in my view, be applied to the notion of 'unconscionable conduct' in section 51AC."

Further, ordinarily, it may be necessary to demonstrate some special disadvantage: CG Berbatis Holdings Pty Ltd v Australian Competition and Consumer Commission [2001] FCA 757; (2001) 185 ALR 555 at [70].

In the Local Court Sedema's claim in relation to unconscionable conduct was as follows:

(a) Sedema purchased an exclusive licence to operate Video Ezy franchise outlets in Hazelbrook and Katoomba for 10 years.

(b) Sedema paid a substantial sum of money to acquire those exclusive rights.

(c) The pre-contractual disclosure document informed Sedema that the franchisor may not operate a competing business that is substantially the same as the franchised business, before the exclusive rights were purchased; the exclusive rights were protected by the restrictive covenant in clause 9.1 of the sale agreement in the Hazelbrook territory and the sales into that territory were clearly in breach of that covenant.

(d) Since early 2009, Blockbuster and EzyDVD had actively competed against Sedema in the territories and have thereby derogated from the goodwill purchased by Sedema under the sale agreement and the goodwill associated with each of the franchised businesses licensed under the franchise agreements. Competition between the franchisor (via its related entities) and the franchisee in the territories was in breach of the obligation of good faith, because Video Ezy International has failed to remain loyal to the promise of the grant.

(e) Sedema lost a significant volume of sales in the territories; and

(f) Sedema continued to pay and Video Ezy International continued to receive, the franchise fees and advertising contributions on a monthly basis, notwithstanding that its related entities flouted the exclusivity of the territories that Sedema paid and continued to pay for.

On appeal, Video Ezy submitted that the Magistrate erred by finding that Video Ezy Australia and Video Ezy International engaged in unconscionable conduct regarding the contravention of clause 9.1 of the Hazelbrook agreement and the implied obligation of good faith.

Video Ezy submitted that there was no evidence on the part of Video Ezy of an accumulation of incidents which "discloses an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee that amounts to unconscionable conduct" as summarised by Sundberg J at [51] in No-Knead. Video Ezy also submitted that given there was no finding by the Magistrate of any motive, intent, bad faith or intent to injure with some purpose to drive the franchisees out of the franchises, the Magistrate misapplied the No-Knead decision. Video Ezy's position was that the Magistrate's conclusion that Blockbuster and EzyDVD were involved in the contraventions by Video Ezy International and Video Ezy Australia was justified only by the observation that they had the same directors and were controlled by Mr Uniacke and that these matters were insufficient to justify the submission. Even if each of the plaintiffs engaged in the conduct found by the Magistrate, they submitted that it was an error to conclude that it constituted unconscionable conduct as it requires a high level of "moral obloquy": Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389; (2011) 15 BPR 29,699 at [291].

Sedema pointed out that "moral obloquy", as cited in Tonto Home Loans at [291], is not a standalone test that unconscionable conduct, which includes a high level of the moral obloquy, is but one example. Other examples include conduct that is irreconcilable with what is right or reasonable, as referred to in Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132. According to Sedema, Video Ezy's conduct was at least of this character and in the circumstances, the Magistrate correctly relied on the No-Knead decision to find that the franchisor's conduct "was inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith."

The Magistrate referred to No-Knead as it involved the relationship between a franchisor and franchisees and was instructive.

Discussion of No-Knead

In No-Knead, the Australian Competition and Consumer Commission sought declarations that Simply No-Knead (Franchising Pty Ltd) had engaged in conduct in contravention of s 51AC of the Trades Practices Act; that No-Knead had engaged in conduct in contravention of s 51AD of the Trade Practices Act; and that the second respondent Mr Bates was, within ss 82 and 87 of the Trade Practices Act, a person involved in No-Knead's contravention.

No-Knead was the owner of a business trading under the name "Simply No-Knead". From about 1989 until 1999 No-Knead franchised the No-Knead business to franchisees. It entered into franchise agreements. Ken Bates was a director and managing director of No-Knead who entered into a number of franchises with franchisees.

The Commission identified six categories of conduct on the part of No-Knead, which, it alleged, contravened s 51AC(1). The conduct consisted of firstly refusing to deliver franchised products to the McKinnon, Heidelberg, Canterbury and Ferntree Gully franchises; secondly, deleting the telephone numbers of the McKinnon, Heidelberg and Canterbury franchises from Telstra's 013 Telephone Directory Assistance Service without the consent or the knowledge of the franchisees; thirdly, unreasonably refusing requests from the franchisees to negotiate matters in dispute with No-Knead and to discuss matters of concern to the franchisees; fourthly, producing and distributing advertising and promotional material which omitted the names of the franchisees and their franchised businesses; fifthly, selling and offering to sell its products in the territories of the franchisees and in areas proximate to their territories; and finally, refusing to provide current disclosure documents to the McKinnon, Heidelberg and Canterbury franchisees in response to written requests. It was also alleged that this last complaint was a contravention of s 51AD.

Sundberg J, after making findings that No-Knead engaged in such conduct, concluded:

"[51] Having had regard to the applicable subs (3) matters, and all the other circumstances of the case, I have concluded that the accumulation of incidents ... discloses an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee that amounts to unconscionable conduct by SNK for the purposes of s 51AC(1). Further, that conduct, in particular competing with the franchisees, refusing to supply products for (at least on two occasions) contrived reasons, omitting the franchisees' names from the brochures, and the hostile and pugnacious manner in which Bates dealt with them, shows that soon after the franchisees' letter of 21 July 1998 (if not before) SNK devised a plan intended to cause the franchisees to terminate or not renew their franchise agreements. SNK's conduct achieved its aim. Between August and November all the franchisees either terminated their agreements or did not renew them. There is no doubt that SNK's conduct was a cause of their respective decisions in this regard. Some support for the conclusion that SNK's conduct was calculated to achieve the end result comes from its own mouth."

Returning to this appeal, in relation to unconscionability, the Magistrate stated:

"[71] The court has found that Blockbuster and EzyDVD were operating substantially similar business and VEA and VEI took no action in preventing those sales transactions when they could have: (T 127.7-128.31). That conduct by VEA and VEI was irreconcilable with Sedema's rights and benefits under the respective agreements and demonstrated a complete and utter lack of good faith under s 51AC TP Act and s 21 CC Act.

[72] As VEA, VEI, Blockbuster and EzyDVD had the same Directors and were all ultimately controlled by Mr Uniacke (as he conceded) then Blockbuster and EzyDVD were imbued with the knowledge of the contraventions and are liable as accessories under s 75B TP Act and s 2 Schedule 2 CC Act. That knowledge was reposed in Mr Uniacke who had access to the names and addresses of the TiVo and ezydvd.com.au customers in the territories and he could have stopped the contravening conduct by the rental or sales into the territories. The court accepts that Blockbuster and EzyDVD were knowingly concerned in and parties to the contravening unconscionable conduct."

While Sundberg J's conclusion that the accumulation of incidents discussed discloses an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee that amounts to unconscionable conduct by No-Knead for the purposes of s 51AC(1), it is not necessary (as counsel for Video Ezy asserted) that these factors must necessariliy be present to found a decision. Nor is it necessary that the Magistrate find motive, intent, bad faith and intent to injure with some purpose to drive the franchisees out of the franchises. It is trite to say, but each case turns on its own facts. What has to be demonstrated to find unconscionability is a high level of moral obloquy. The Magistrate accepted that Sedema's complaints were well founded and made a determination that Video Ezy's conduct "was inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith." This is sufficient. There is no error of law.

Sedema's case was that Blockbuster and EzyDVD had accessorial liability for Video Ezy Australia and/or Video Ezy International, by aiding, abetting or procuring the contraventions under s 75B of the Trade Practices Act or s 2 of Sch 2 of the Competition and Consumer Act.

In regard to accessorial liability, counsel for Video Ezy submitted that there is a requirement of actual knowledge of the essential elements of contravention before liability can be found and that there were no findings by the Magistrate as to Mr Uniacke's knowledge of the essential elements of the contravention.

Counsel for Sedema submitted that as Video Ezy Australia, Video Ezy International, Blockbuster and EzyDVD had the same directing mind and were all ultimately controlled by Mr Uniacke, both Blockbuster and EzyDVD had the requisite knowledge of the elements of the contravention. It was not necessary to establish that Mr Uniacke was aware that the conduct contravened the statute.

The leading case on accessorial liability is Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661. In Yorke the High Court held that s 52 of the Trade Practices Act imports the requirements of the criminal law. The person sought to be made liable must be shown to have had knowledge of the essential matters, which go to make up the contravention. In Yorke the alleged accessory, an employee of Lucas, was held not to be liable because although he was aware of the representations made, as they were made by him, he had no knowledge of their falsity. Therefore, he could not be said to have intentionally participated in the contravention: Yorke at 668. "Knowledge" means actual and not constructive knowledge: see Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 5.

So far as accessorial liability in relation to the claim of unconscionability is concerned, in No-Knead Sundberg J stated:

"[53] It is obvious from the events I have recounted that Bates was involved in SNK's contraventions of ss 51AC and 51AD. He was the person by whom SNK committed its contraventions. He was therefore directly knowingly concerned in them for the purposes of s 75B(1)(c)."

It is convenient that I refer to some of Mr Uniacke's evidence here. He agreed that from the time that the TiVo movie service went live on 29 April 2009, he knew that a person in the Katoomba or Hazelbrook territory had a choice of watching a movie that was available on that service. He also knew that if they were a subscriber they could access it via that service or alternatively go and rent or buy DVDs from the local Video Ezy store at Hazelbrook or Katoomba.

Mr Uniacke then accepted the proposition that, to the extent that Video Ezy entities were selling movies to customers in those territories of Hazelbrook and Katoomba, he knew that by making available movies for rent in the territories the Video Ezy group were competing with the franchisees in those territories.

Mr Uniacke agreed that from around 29 April 2009 he had access to that subscribed information and it would have been an easy thing for him to identify those subscribers who lived in the territories.

Mr Uniacke could have stopped a person residing in those territories from accessing the TiVo movie service by reason of his knowledge that they had resided in those territories other than contractual obligations. He knew that when a prospective customer applied to become a subscriber, and they provided their name and address; they could be simply and easily identified as a prospective customer seeking subscription to the TiVo movie service who resided in the franchise territories, but he did not do so (T 113). Mr Uniacke was asked a similar question in relation to EzyDVD and (in particularly ezydvd.com.au) and Blockbuster and gave similar answers.

In summary, Mr Uniacke knew that the TiVo, Blockbuster and EzyDVD businesses competed in the franchised territories. He had access to customer's names and addresses in those territories; he could have stopped those transactions but did not do so (T 127.7-128.31). As the Magistrate pointed out, Mr Uniacke had knowledge and was directly concerned with these contraventions. He could have stopped the Video Ezy entities conducting similar businesses within the Hazelbrook and Katoomba territories but he did not. In other words, Mr Uniacke had knowledge of the essential matters that go to the contraventions. The Magistrate's decision in relation to accessorial liability is correct. There is no error of law. This ground of appeal fails.

Grounds 7 and 8: Evidence and damages

Counsel for Video Ezy submitted that firstly, the Magistrate made an incorrect evidentiary ruling; secondly, Sedema had not established that they would have achieved the sales that were said to be the contravening sales made by Blockbuster and EzyDVD; and finally, there was no evidence of the measure of sales that Sedema had lost.

The Magistrate awarded damages for the lost sales in the amount of $46,043.39. Video Ezy submitted that even if it could be assumed that Sedema would have made all the transactions made by Blockbuster Australia and EzyDVD, there was no evidence that Sedema would have been $46,043.39 better off.

Video Ezy said that the evidence contained in the second sentence of paragraph 43 of Mrs Charnas' affidavit sworn on 24 August 2012 should not have been admitted.

The whole of paragraph 43 reads:

"Behind Tab 35 and 36 are documents produced by the cross-defendants in relation to sales in the Katoomba and Hazelbrook territories. The sales by Tivo Blockbuster and Ezy DVD in the period December 2008 to May 2012 have severely affected our business including our sales in relation to both Katoomba and Hazelbrook stores and our goodwill in relation to the Hazelbrook store."

In the Local Court, Video Ezy objected to this evidence on the basis of relevance and form. Video Ezy in this Court submitted that the evidence should have been ruled as inadmissible on the basis that it was lay opinion evidence. Sedema submitted that paragraph 43 of Mrs Charnas' evidence was admissible pursuant to s 78 of the Evidence Act1995 (NSW), and that s 80 of the Evidence Act also allows this evidence to be given.

Section 78 of the Evidence Act reads:

"78 Exception: lay opinions

The opinion rule does not apply to evidence of an opinion expressed by a person if:

(a) the opinion is based on what the person saw, heard or otherwise perceived about a matter or event, and

(b) evidence of the opinion is necessary to obtain an adequate account or understanding of the person's perception of the matter or event."

Section 80 of the Evidence Act provides that evidence of an opinion is not inadmissible only because it is about a fact in issue or an ultimate issue, or a matter of common knowledge. Sedema also asserted that a lay witness can give evidence of what they saw or perceived: Connex Group Australia Pty Ltd v Butt [2004] NSWSC 379, per White J at [20] to [27].

Mrs Charnas is a director and the sole shareholder of Sedema. A fair reading of her affidavit shows that she was actively involved in running the business of Sedema and that she actually worked in the stores.

The first sentence of paragraph 43 informs what follows in the second sentence. The second sentence of paragraph 43 cannot be read in isolation from the first sentence. When Mrs Charnas is saying that "The sales by TiVo Blockbuster and Ezy DVD in the period December 2008 to May 2012 have severely affected our business including our sales in relation to both Katoomba and Hazelbrook stores and our goodwill in relation to the Hazelbrook store" she is informed by the contents of the documents produced by the defendants.

They are spreadsheets that show the individual videos delivered by Sedema to clients who reside in the Katoomba Hazelbrook areas (Tab 35). The second document (Tab 36) referred to in the first sentence in paragraph 43 is a summary of two sets of data. Data Set 1 and Data Set 2. This accounting document refers to "Total sales excluding outside of territory sales for Hazelbrook and Katoomba"; Data Set 1 refers to the period 2009 and 2012 and gives a grand total of revenue of $71,138.58. Data Set 2 shows figures for Hazelbrook from 2009 to 2011, shows a total of 652 sales for Hazelbrook and 1339 for Katoomba which together produced a grant total of revenue of $40,833.39.

It is in the light of these sales that Mrs Charnas formed her view that the sales by TiVo, Blockbuster and EzyDVD severely affected Sedema's business. Hence, Mrs Charnas was in a position to know that the business was "severely affected" by those competing sales. In the Local Court, Video Ezy did not object to this evidence on the basis that Mrs Charnas was expressing an opinion without the proper foundation being set out in her affidavit. Had counsel done so the Magistrate may have decided to grant leave so Sedema's counsel had the opportunity to ask some questions of Mrs Charnas on this topic. In any event, it is my view Mrs Charnas' evidence in the second sentence of paragraph 43 was admissible.

Video Ezy's next complaint in relation to damages is based upon the proposition that Mrs Charnas' evidence in paragraph 43 is inadmissible. This proposition has been found to be incorrect so this ground of appeal falls away. During cross examination Video Ezy did not seek to challenge Mrs Charnas in relation to her evidence given in paragraph 43.

The Magistrate rejected the submission that the award of damages should be made on the basis of lost sales. The Magistrate awarded damages by taking the following approach:

"[79] ... The contravening TiVo and ezydvd.com.au sales establish that there was a demand and supply market for 'videos' in the limited geographical area of the territories. There is no evidence before the court that there were any other (than Blockbuster and EzyDVD) competing businesses in the territories. It is reasonable to expect therefore that in the circumstances, particularly the limited geographical areas that Sedema would have achieved and acquired the benefit of most, if not all of the contravening sales. Importantly, Mrs Charnas was not challenged about her affidavit evidence that the contravening sales '... severely affected our business' ... so there is evidence of the actual loss of sales by Sedema. In her oral evidence Mrs Charnas's explained that her reference to '...we withdrew from retail...' was a reference to a reduction in the amount of stock purchased from VEI and not from retailing altogether (T 189.42-190.45) and nor was it put to her that her operating costs would have increased if Sedema had achieved the contravening sales. The court discounts these contentions as a basis for not awarding damages."

While I accept that a question of whether there was any evidence of a particular fact is a question of law, if there is evidence of a particular fact and the Magistrate makes a finding in relation to that fact, a question of law does not arise. [Emphasis added]. I have not reproduced all of Video Ezy's submissions made in reply on the issue of damages as they are directed towards disputing factual matters.

Video Ezy further submitted that the Magistrate founded his conclusion on the evidence of Mrs Charnas and the proposition that as there was "no evidence ... that there were any other ... competing business in the territories [i]t is reasonable to expect therefore that in the circumstances, particularly in the limited geographical areas that Sedema would have achieved and acquired the benefit of most, if not all of the contravening sales" (J [79]). According to Video Ezy, neither of these findings provided a basis for the conclusion that, on the balance of probabilities, Sedema had suffered any loss or loss in the amount found by the Magistrate.

Once again, Video Ezy said that the evidence of Mrs Charnas should not to have been admitted but I have already addressed this issue.

Video Ezy asserted that the mere absence of evidence of competing businesses provided no basis to assume that the video stores operated by Sedema would have made the sales in fact made by Blockbuster and EzyDVD. Though they may have competed with each other, the businesses operated by Sedema, on one hand, and Blockbuster and EzyDVD, on the other, were quite different.

Sedema submitted that the finding on this basis that Sedema had lost sales in the judgment at [79] was clearly open on the evidence.

The Magistrate had the evidence of the competing sales. The defendants' records showed that there were nearly 2000 separate transactions involving customers residing within the exclusive territories, generating sales of $45,833.39. There was no evidence as to any other competitors within those territories. In the absence of the services whereby customers could buy a movie or rent the movie via TiVo or purchase the movie via ezydvd.com.au, it was open to the Magistrate find that those customers would have rented/purchased the movie from the only alternative source in the Blue Mountains, namely their local Video Ezy store in Hazelbrook or Katoomba. Mr Uniacke conceded that Blockbuster rented movies to subscribers within the territories, that EzyDVD was selling DVDs into the territories and that both were competing with Sedema for that business. In the absence of any relevant challenge, it was open to find that the revenue from the competing sales would have gone to Sedema. This ground of appeal fails.

The result is that the appeal is dismissed. The decision of his Honour Magistrate Favretto dated 14 February 2013 is affirmed. The amended summons filed 26 September 2013 is dismissed.

Costs are discretionary. Costs usually follow the event. The plaintiffs are to pay the defendants' costs as agreed or assessed.

The Court orders that:

(1) The appeal is dismissed.

(2) The decision of his Honour Magistrate Favretto dated 14 February 2013 is affirmed.

(3) The amended summons filed 26 September 2013 is dismissed.

(4) The plaintiffs are to pay the defendants' costs as agreed or assessed.

**********

Decision last updated: 27 February 2014

Medium Neutral Citation:	Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143
Hearing dates:	26/09/2013
Decision date:	27 February 2014
Jurisdiction:	Common Law
Before:	Harrison AsJ
Decision:	The Court orders that: (1) The appeal is dismissed. (2) The decision of his Honour Magistrate Favretto dated 14 February 2013 is affirmed. (3) The amended summons filed 26 September 2013 is dismissed. (4) The plaintiffs are to pay the defendants' costs as agreed or assessed.
Catchwords:	APPEAL FROM LOCAL COURT - whether Magistrate erred in finding a franchise agreement had come to an end - whether the franchisor breached the restrictive covenant not to compete with the franchisee in the exclusive territory - whether competing "within" the territory of the franchise is the physical territory or includes products purchased over the internet - whether the franchisor had an obligation to act in good faith to the franchisee - whether the conduct of the franchisor was unconscionable within the meaning of the Trade Practices Act 1975 (Cth) and the Competition and Consumer Act 2010 (Cth) - whether related entities of the franchisor were liable as accessories to the unconscionable conduct of the franchisor; EVIDENCE - admissibility of evidence on the ground that the evidence was opinion - evidence properly admitted
Legislation Cited:	Australian Consumer Law, ss 20, 21, 22 Competition and Consumer Act 2010 (Cth), Sch 2, ss 2, 20, 21, 22 Evidence Act 1995 (NSW), ss 78, 80 Local Court Act 2007 (NSW), ss 39, 40, 41 Trade Practices Act 1974 (Cth), ss 51AA, 51AB, 51AC, 51AD, 75B, 82, 87
Cases Cited:	Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333 Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365; (2000) 104 FCR 253 Australian Securities and Investments Commission v National Exchange Pty Ltd [2005] FCAFC 226; (2005) 148 FCR 132 Bullabidgee Pty Ltd v McCleary [2011] NSWCA 259 Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558 Canon Australia Pty Ltd v Patton [2007] NSWCA 246 CG Berbatis Holdings Pty Ltd v Australian Competition and Consumer Commission [2001] FCA 757; (2001) 185 ALR 555 Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 Connex Group Australia Pty Ltd v Butt [2004] NSWSC 379 Hurley v McDonald's Australia Ltd [1999] FCA 1728, (2000) ATPR 41-741 Swain v Waverley Municipal Council [2005] HCA 4; (2005) 220 CLR 517 Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 Tonto Home Loans Australia Pty Ltd v Tavares; FirstMac Ltd v Di Benedetto; FirstMac Ltd v O'Donnell [2011] NSWCA 389; (2011) 15 BPR 29,699 Wigan v Edwards (1973) 1 ALR 497 Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
Category:	Principal judgment
Parties:	Video Ezy International Pty Ltd ACN 003 532 269 (First Plaintiff) Video Ezy Australasia Pty Ltd ACN 073 076 294 (Second Plaintiff) BB Australia Pty Ltd ACN 058 986 673 (Third Plaintiff) EzyDVD Pty Ltd ACN 123 658 702 (Fourth Plaintiff) Sedema Pty Ltd ACN 002 734 643 (First Defendant) Scott Newman (Second Defendant) Samantha Newman (Third Defendant) Lorraine Margaret Charnas (Fourth Defendant)
Representation:	Counsel: P Durack SC/P Herzfeld (Plaintiffs) T Alexis SC/D Mackay (Defendants) Solicitors: Macpherson and Kelley Lawyers (Plaintiffs) Cara Marasco and Company (Defendants)
File Number(s):	2013/78400
Publication restriction:	Nil
Decision under appeal	Date of Decision: 2013-02-14 00:00:00 Before: Favretto LCM File Number(s): 2011/245474