Video Ezy International Pty Ltd v Sedema Pty Ltd
[2013] NSWLC 24
•14 February 2013
Local Court
New South Wales
Medium Neutral Citation: Video Ezy International Pty Ltd v Sedema Pty Ltd and Ors [2013] NSWLC 24 Hearing dates: 10/09/2012, 31/10/2012, 21/01/2013, 1/02/2013 Decision date: 14 February 2013 Jurisdiction: Civil Before: Magistrate Favretto Decision: Verdict for the defendants/cross-claimants
Catchwords: CONTRACTS - franchise agreement - unpaid franchise fees - cross-claim -operation of similar online business by related entity of franchisor - whether franchisor breached restrictive covenant not to compete with franchisee within exclusive territory - unconscionable conduct - obligation to act in good faith Legislation Cited: Civil Procedure Act 2005
Competition and Consumer Act 2010 (Cth)
Trade Practices Act 1974 (Cth)Cases Cited: Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Limited (2003) 214 CLR 51
Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; [2000] FCA 1365
Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132
Burger King Corporation v Hungry Jack's Pty Limited (2001) 69 NSWLR 558
Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95
Canon Australia Pty Ltd v Patton (2007) 244 ALR 759
Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581
Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407
Hurley v McDonald's Australia Ltd [1999] FCA 1728; (2000) ATPR 41-74
Idoport Pty Ltd v National Australia Bank Ltd [1999] NSWSC 828
Jones v Dunkel (1959) 101 CLR 298
Louth v Diprose (1992) 175 CLR 621
Macdonald v Australian Wool Innovation Ltd [2005] FCA 105
Pacific Carriers Limited v BNP Paribas [2004] HCA 35
Royal Botanic Gardens v South Sydney City Council (2002) 240 CLR 45
Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52
Trego v Hunt [1896] AC 7Category: Principal judgment Parties: Statement of claim:
Cross-claim:
Video Ezy International Pty Ltd (plaintiff)
Sedema Pty Ltd (1st defendant)
Scott Newman (2nd defendant)
Samantha Newman (3rd defendant)
Lorraine Charnas (4th defendant)
Sedema Pty Ltd (1st cross-claimant)
Scott Newman (2nd cross-claimant)
Samantha Newman (3rd cross-claimant)
Video Ezy Australasia Pty Ltd (1st cross-defendant)
Video Ezy International Pty Ltd (2nd cross-defendant)
BB Australasia Pty Ltd (3rd cross-defendant)
EZYDVD Pty Ltd (4th cross-defendant)Representation: P Biber (plaintiff)
M & K Lawyers (plaintiff)
Cara Marasco and Company (defendants)
File Number(s): 2011/00245474 Publication restriction: Nil
Judgment
The Statement of Claim
Video Ezy International Pty Ltd ("VEI") sues the First, Second and Third Defendants as franchisees for unpaid franchise and advertising fees and the Fourth Defendant as guarantor under separate franchise agreements for "Video Ezy" outlets in the franchised territories of Hazelbrook and Katoomba in the Blue Mountains of New South Wales.
VEI claims $12,656.58 (taking into account September 2012 charges and payments) for the Hazelbrook Franchise ("Hazelbrook"). Sedema does not dispute its liability for this claim but seeks a setoff under its Cross-Claim.
VEI claims $58,694.97 for the Katoomba Franchise ("Katoomba") comprising $18,429.60 for arrears and $40,265.37 as damages for wrongful repudiation of the franchise agreement, being an amount equivalent to the franchise fees which would have been payable from the date of repudiation to what would have been the expiry of the franchise agreement on 31 July 2013.
The total claimed by VEI is $71,351.85.
Issues in the Statement of Claim
The Defendants deny liability on the following grounds:
(a) The defendants were released from the Katoomba Franchise by an agreement on 20 June 2008;
(b) alternatively, VEI is estopped from denying the release;
(c) alternatively, there was no acceptance by VEI of the repudiation; and
(d) alternatively, VEI failed to mitigate its loss.
The Statement of Cross-Claim
Sedema sues Video Ezy Australasia Pty Ltd ("VEA") for breach of a restrictive covenant in the Hazelbrook Franchise Agreement and for unconscionable conduct for both the Hazelbrook and Katoomba Franchises under ss 51AA and 51AC of the Trade Practices Act 1974 ("TP Act") and s 21 Schedule 2 of the Competition and Consumer Act 2010 ("CC Act")1.
Sedema sues VEI for unconscionable conduct for both the Hazelbrook and Katoomba Franchises under ss 51AA and 51AC TP Act and s 21 Schedule 2 CC Act.
Sedema sues BB Australasia Pty Ltd ("Blockbuster") and EZYDVD Pty Ltd ("EzyDVD") for accessorial liability through the principals VEA and VEI under s 75B TP Act and s 2 Schedule 2 CC Act.
Background
VEI, Blockbuster and EzyDVD through a corporate structure are all subsidiaries of VEA, which is controlled by the holding company Strassa Pty Limited (Exhibit 14). Mr Paul Uniacke is the sole director and shareholder of Strassa Pty Limited and in his oral evidence he conceded that he controls the group of companies.
VEI as Franchisor licenses to Franchisees the use of the Business Name, the system and certain marks in the operation of Video Ezy outlets under the Business Name in defined territories throughout Australia.
Blockbuster is responsible for the TiVo movie service, a set top box service that via a television screen allows access to on demand videos.
EzyDVD is responsible for the online retail business of "ezydvd.com.au" which allows customers to order DVDs online.
Sedema purchased the Hazelbrook Video Ezy business from VEA on 1 April 2003 for $225,000 conditional upon VEI granting Sedema a 10 year exclusive franchise for a defined territory in Hazelbrook. The goodwill component of the purchase price was expressed to be $146,701.
On 25 September 2003 VEI also granted Sedema a 10 year exclusive Franchise commencing 1 August 2003 for $18,700 for Katoomba. The goodwill component was expressed to be $15,000.
On 20 June 2010 Sedema closed the Katoomba business on the basis of an agreement entered into with VEI on 20 June 2008. VEI disputes that there was any such agreement.
Sedema continues to operate the Hazelbrook business.
It is not in dispute that Blockbuster took subscriptions from at least six persons in the Katoomba Franchise Territory after the TiVo movie service went live on 29 April 2009 at $35 each and rented movies to four of those persons.
It is also not in dispute that EzyDVD sold DVD movies to persons residing in the Hazelbrook and Katoomba Franchise Territory after VEA acquired the online business on 21 January 2009 and re-launched it on 20 February 2009. EzyDVD had 651 sales transactions in Hazelbrook totalling $13,603.61 (Exhibit 3) and 2,516 sales transactions in Katoomba totalling $62,504.95 (Exhibit 4). The amended data summary in Exhibit 2/Tab 36 shows a total of 3,168 transactions in both territories totalling $76,138.53.
Sedema claims that if Katoomba closed on 20 June 2010 then the total number of transactions in both territories was 1,991 for a return of $45,833.39.
During the period that Blockbuster and EzyDVD conducted these transactions VEI continued to charge franchise and advertising fees under the respective franchise agreements.
The relevant legal principles concerning the construction of contracts
The objective theory of contract is now clearly established in Australian contract law: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at 322. The rights and liabilities of parties to a contract are to be determined according to the principle of objectivity: Pacific Carriers Limited v BNP Paribas [2004] HCA 35 at [22]. In Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52 at [40] the High Court said:
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.
Is Sedema liable under the Katoomba Franchise?
Sedema asserts that it is not liable for any franchise or advertising fees after 20 June 2010 because it was released from its obligations by an agreement entered into with VEI on 20 June 2010. The franchise agreement was due to expire on 31 July 2013.
By early April 2008 Sedema was encountering a range of 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 considered taking legal action against VEI at that time (Exhibit 2/Tabs 11-13; T209.13-211.02).
On 3 April Mrs Charnas spoke to Mr Howes, Corporate Legal Counsel for the Video Ezy Group about the possible closure of Katoomba. Mr Howes invited Mrs Charnas to write to Ms Catherine Pritchard, the Business Partner of VEA. On 3 April 2008 (Exhibit 2/Tab 13) Mrs Charnas wrote by email, 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."
Mr Howes by letter dated 15 May 2008 attached to an email (Exhibit 2/Tab 14) which was copied to Ms Pritchard responded, in part: "Having entered into 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 says she understood the offer of release as being conditioned on the payment of franchise fees for 2 years only. In cross-examination it was suggested to her that the offer for release was on the condition of payment 'up front' of those fees but she rejected that understanding or interpretation. At the time of these discussions the lease of the Katoomba premises was due to expire on 30 June 2008 but Sedema had a 5-year option. On the basis of her understanding Mrs Charnas then negotiated a further 1 year lease with a further 1 year option on 16 June 2008 (Exhibit 2/Tab 16).
On 20 June 2008 Mrs Charnas telephoned Ms Pritchard and says they had a conversation in the following terms (Exhibit 2 para 28):
Mrs 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 will close the Katoomba store in June 2010
Ms Pritchard: OK. That sounds good.
Ms Pritchard in her affidavit evidence says:
I do not recall the conversation set out in paragraph 28, but do not believe I made the comment attributed to me.
In her oral evidence Ms Pritchard said she had no recollection of Mr Howes letter of 15 May nor of any conversation with Mrs Charnas in the terms claimed by Mrs Charnas. Had Mrs Charnas in fact said what she claims would have referred Mrs Charnas to either her supervisor Mr Young or Mr Howes (T168.06-172.06) and would have been something she would have said to that effect. In cross-examination Ms Pritchard said:
Q. No, if she said to you that she has agreed with the landlord to reduce the term of the lease for two years and said that she will pay franchise fees for Katoomba for the next two years and, "Then we will close Katoomba store in June 2010" if she had said that to you your understanding would have been that she will continue to trade in Katoomba for two years only.
A. I suppose. Yes, I suppose.
Q. Can I suggest to you that Ms Charnas said that to you and you responded to her down the telephone by saying, "Okay, that sounds good," or something to that effect?
A. I suppose that would have been something I had said. "That sounds fine," or something like that." (T170.13-24)
Sedema asserts that if the court accepts the evidence of Mrs Charnas then there was consideration flowing from Sedema because it would continue Katoomba for 2 years (and the court notes would relinquish the remaining 3 years) and VEI would accept an early termination and release Sedema from any further liability and the Katoomba agreement come to an end on 20 June 2010. If further consideration is required on Sedema's part then it claims its forbearance to sue as consideration. There is no issue that Sedema did not continue Katoomba and pay franchise and advertising fees until 20 June 2010.
VEI argues that the offer by Mr Howes of 15 May 2008 can only be construed by the ordinary reader as an offer of 'upfront payment' of 2 years franchise fees and it is not reasonable to construe it as Mrs Charnas claims. VEI also argues that the evidence of Mrs Charnas should not be accepted for a number of reasons. First, that the letter of 15 May 2008 invited Mrs Charnas to discuss the avenues available to Sedema with Mr Howes directly when she knew he was the only person with authority to do so and did not. It is not asserted by VEI that Ms Pritchard had no authority so the issue is limited to reliability. Secondly, if the asserted agreement of release is that with Ms Pritchard on 20 June 2008 then there was no consideration for that agreement and therefore no agreement. If the asserted consideration was the forbearance to sue then was no more than a possibility of "to seek legal advice" (Exhibit 2/Tab 13) and no consideration and no agreement. Finally, VEI argues that Mrs Charnas failed to confirm her acceptance of the offer in writing, which shows a deception and her recollection of the 20 June 2008 conversation 4 years later should not be accepted. Further, Mrs Charnas' account that she wrote a note of making that call on a hard copy of the email exchange with the landlord's agent (Exhibit 2/Tab16) and Telstra Invoice (Exhibit 2/Tab15) were made during the course of preparation of her evidence and not around the time of 20 June 2008.
Determination - Sedema was released from the Katoomba agreement
The court accepts the evidence of Mrs Charnas who gives actual evidence of recollection of the conversation with Ms Pritchard who on the other hand has no recollection of reading the 15 May 2008 letter or the 20 June 2008 conversation. Given the number of discussions and the meeting Mrs Charnas had with Ms Pritchard and Mr Young on 19 March 2008 leading up to 20 June 2008, it is improbable that she would not have read Mr Howes email and letter of 15 May 2008.The detail of the 20 June 2008 conversation regarding the renegotiated lease is corroborated by the email correspondence with the landlord's agent 4 days earlier on 16 June 2008 and one would expect that issue to be part of the discussions. Mrs Charnas had as early as at the 19 March 2008 meeting with Ms Pritchard and Mr Young raised the possibility of closing the Katoomba business (Exhibit 2/Tab 12), which was again raised by her in the email of 3 April 2008. With that state of mind, her understanding of what she took to be the offer contained in the letter of 15 May 2008 and her subsequent action in renegotiating the Katoomba lease before she spoke to Ms Pritchard, it is highly probable that she then would have taken the next step of accepting the offer as she understood it by telephoning Ms Pritchard on 20 June 2008.
The fact Mrs Charnas did not accept the 15 May 2008 offer in writing is not to the point as there is nothing in that offer that required acceptance in writing. In cross examination Mrs Charnas said she had no recollection when she made the notations of the 20 June 2008 call save that it was not in the last 12 months. Under challenge by Mr Darvall she prevaricated on this issue and the court concludes that it is probable she made those notes at some stage in the conduct and for the preparation of these proceedings. However, for the reasons given above of circumstances supporting her account the court is satisfied Mrs Charnas is a reliable witness both as to honesty and recollection.
Having accepted Mrs Charnas' 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 course 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.
The court is satisfied that the Katoomba Franchise Agreement came to an end on 20 June 2008 and Sedema has no liability after this date.
Having made this determination the court need not consider the alternative defences raised by Sedema, namely estoppel, no acceptance of repudiation and failure to mitigate loss.
The Cross-Claim of 'unconscionable conduct"
Sedema's claim of unconscionable conduct is twofold. First, a breach by VEA of an implied obligation to act in good faith by allowing or not preventing Blockbuster and EzyDVD from operating substantially similar businesses in Hazelbrook and Katoomba in breach of the Hazelbrook restrictive covenant and the respective franchise agreements.
Secondly, Sedema claims that VEI, VEA, Blockbuster and EzyDVD engaged in unconscionable conduct under ss 51AA and 51AC of the TP Act and s 21 Schedule 2 of the CC Act.
VEA disputes any implied obligation to act in good faith. VEI, VEA, Blockbuster and EzyDVD all deny that the business operations of Blockbuster and EzyDVD were substantially similar, arguing that the restrictive covenant and the exclusivity provisions of the franchise agreements applied to operating an actual store outlet ('bricks and mortar') in the franchised territory and not to online businesses.
Did Blockbuster and EzyDVD operate a substantially similar competing business?
The crucial issue for the courts determination for either basis of claim by Sedema is whether there were substantially similar competing businesses operated in the franchised territory by Blockbuster and EzyDVD. This is to be determined upon a construction of the Hazelbrook restrictive covenant and the exclusivity provisions of the Hazelbrook and Katoomba franchise agreements.
The restrictive covenant in Clause 9.1 of the Hazelbrook sale agreement with VEA provided:
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 any 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).
On the same day as the Hazelbrook sale agreement, VEI and Sedema entered into the Hazelbrook Franchise agreement for 10 years (Exhibit 2/ Tab 7, Schedule 1 p 20). The Katoomba Franchise Agreement entered into on 25 September 2003 contained similar provisions and a reference in these reasons to a particular provision is to be taken to be in either franchise agreement. Clause 1 provided so far as is presently relevant:
(1) GRANT OF FRANCHISE. Subject to the terms and conditions of this Agreement, the Franchisor hereby licences the Franchisee to use the Business Name, the system and the marks (as defined herein) in operation of Video Ezy outlets under the Business Name or such other similar names as are approved by the Franchisor from time to time (herein called "the licensed business") and the Franchisee hereby accepts such licence (herein called "the licence").
(2) LICENCE EXCLUSIVE. The licence shall be exclusive to the extent that the Franchisee shall at all times have the exclusive right to operate Video Ezy franchise outlets within the territory edged red on the plan annexed hereto and marked Exhibit "A" (herein called the territory")
...
(4) The right and licence granted to the franchisee to operate the licensed business shall extend only to the territory and 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 2(1)(a) provided that Sedema was:
(a) 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) provided that Sedema agreed to:
(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...
Before the purchase of Hazelbrook and prior to entering the franchise agreements for both Hazelbrook and Katoomba, VEI was required2 by Clause 6B of the Franchising Code of Conduct to provide Sedema with a Disclosure Document (Exhibit 2/Tab 4). The purpose of the Disclosure Document was to provide prospective franchisees with information to allow them to make an informed decision. Both parties rely upon provisions within the Disclosure Document as shedding light upon the construction of the restrictive covenant and the exclusivity franchise provisions.
Clause 2.3 provided:
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 services marks...
VEI 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 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 Vide Ezy franchised or corporate owned outlets; and
(d) the franchisor is not able to change the territory of the franchise without the consent of the franchisee.
Sedema further relies upon an updated Disclosure Document (Exhibit 17) issued by VEI on 19 July 2010 after the commencement of the Blockbuster TiVo movie service and 'ezydvd.com.au' on-line business. Blockbuster and EzyDVD were now included as an "associate" of VEI (Clause 2.4). Relevantly, Clause 8.1 still provided that the franchise was for "an exclusive territory" but Clause 8.2 (b) now reads:
(b) whether the franchisor or an associate may operate a business that is substantially the same as the franchised business
In accordance with the e-Commerce Addendum attached to Schedule 12, the franchisor may operate an e-Commerce retail business under the Video Ezy brand name.
Corporate associate BB Australia Pty Ltd can operate other franchised businesses which are substantially the same as the Video Ezy franchised business in the territory.
Since 21 January 2009 corporate associate EzyDVD can operate other franchised businesses which are substantially the same as the Vide Ezy franchised business in the territory.
Since 21 January 2009 EzyDVD also operates an on-line commercial retail business under the website ezydvd.com.au. This operates under a licence with EzyDVD Pty Ltd and its licensee.
The reference to the "e-Commerce Addendum" is a reference to a circular email sent to all franchisees by VEI on 30 September 2003 (after the commencement of Hazelbrook and Katoomba) attaching a proposed "Addendum to the Franchise Agreement: ecommerce-On Line Rental" (Exhibit 2/ Tab 10). The Addendum contained the following:
I agree to the content of this Agreement applying to the store below, and to participating in the e Commerce OLR model as outlined above. This will constitute a variation of the exclusivity provisions of your Franchise Agreement as granted to you but is limited to the e Commerce retail model only as herein set out. This acknowledgment constitutes a variation of our Franchise Agreement."
Sedema did not agree to the Addendum because in part Sedema "would have lost our territorial exclusivity and goodwill rights for which we had just paid a great deal of money" (Mrs Charnas' Affidavit Exhibit 2 at para 18).
Sedema's argument is that the restrictive covenant and exclusivity provisions (including similar provisions in the Disclosure Document) were for the exclusive right to rent or sell videos including "all products intended for display on a television screen or visual monitor" as so defined as the "licensed business". Sedema refers to the Shorter Oxford meaning of "exclusive...Not admitting of the simultaneous existence of something; incompatible..." and the similar Macquarie Dictionary definition "exclusive...not admitting of something else; incompatible...".
Sedema also relies upon a comparison of the 2003 and 2010 Disclosure Documents as an acknowledgement by VEI that in 2003 there were no competing similar businesses and in 2010 that the operations of Blockbuster and EzyDVD were competing similar business and that is why the exclusivity provisions did not from then cover those operations. After the commencement of the TiVo movie service and ezydvd.com.au online business Sedema asserts that VEI accepted through its own document that these businesses were substantially similar. Mr Uniacke acknowledged in his oral evidence that both were competing businesses (T107.39-108.35; T122.9-33; T127.7-36) but would not accept that they were substantially similar businesses to the Video Ezy franchise system and said he has legal advice to that affect in 2007 and 2008 (T122.35-123.22). The legal advice was subject to both an oral call to produce and a Notice to Produce by Sedema and the court was informed that were no documents to be produced and no documents fitting the description (T223.23-24). Mr Howes in his oral evidence said he was not aware of any legal advice to that affect being obtained (T216.38-47). Sedema asks the court to infer there is no such legal advice or that such legal advice does not assist the VEI, VEA, Blockbuster or EzyDVD: Jones v Dunkel (1959) 101 CLR 298. Mr Howes who drafted the 2010 document also said that the intent of the 2010 document was to inform prospective franchisees that that their businesses would be subject to the Blockbuster and EzyDVD businesses (T216.9-29).
VEI, VEA, Blockbuster and EzyDVD argue that all what VEA sold and VEI 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 2.2 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 marks together with the site (Clause 11) and location (Clause 13) of the franchised business. So far as concerns the 2010 Disclosure Document they assert that the document is 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].3
Determination - TiVO and ezydvd.com.au were substantially similar competing businesses
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 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.
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 online business then VEA and VEI could also have rightly complained.
The distinction suggested between the operation of a 'bricks and mortar' business and online 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 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 too would it be to suggest that the TiVo movie service and ezydvd.com.au on-line businesses were any different.
So far as Sedema seeks the court to draw a Jones v Dunkel inference the court does not do so. First, the court is not satisfied that the VEI legal advice exists which only goes to the reliability of Mr Uniacke's evidence. Secondly, even if it did exist it is no more than a legal opinion and ultimately it is for the court to decide the construction of the agreements.
Did VEA breach the restrictive covenant in Hazelbrook?
Sedema's claim for damages is that VEA through its subsidiary EzyDVD contravened the restrictive territory covenant in Clause 9.1 of Hazelbrook.
Sedema claims that the sale of DVD movies by EzyDVD over the Internet into Hazelbrook was a breach of the restrictive covenant. Mr Uniacke accepted in his evidence that DVD movies ordered online were typically delivered to customers in Hazelbrook by Australia Post (T117.9-16) and confirmed in Exhibits 15 and 16.
The evidence discloses that EzyDVD started selling online into Hazelbrook from 20 February 2009 (Exhibit 3 shows 652 sale transactions totalling $13,603.61). Sedema asserts that VEA has continued to directly derogate from the value of the goodwill over the last 4 years. Clause 1.15 of the Hazelbrook sale agreement defines the "goodwill" as "the goodwill of the business, including but not limited to all membership lists and confidential information", which was expressed to be valued at $146,701 as part of the purchase price.
As the court is satisfied that the EzyDVD online business was a substantially similar business then there is a breach of the restrictive covenant by those 652 sales. However, Sedema concedes that in the event that the court finds and awards damages for VEI, VEA, Blockbuster and EzyDVD engaging in unconscionable conduct then it abandons any claim for damages for breach of the restrictive covenant. For the reasons that follow the court is satisfied that there has been unconscionable conduct by all the Cross-Defendants and will make an award of damages. Consequently, the court will not proceed to make an award of damages for breach of the restrictive covenant.
Was there an implied obligation to act in good faith?
Sedema claims that apart from the express terms of the franchise agreements there was an implied obligation required on the part of VEI 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: Burger King Corporation v Hungry Jack's Pty Limited (2001) 69 NSWLR 558 at [163]-[164] and [169].
Further, there is also an implied obligation to act in good faith which extends to prevent a vendor from undermining the benefit of the sale of goodwill: Trego v Hunt [1896] AC 7 at 25; or a party from undermining of the contract: Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581 at 615, including by diverting custom: Idoport Pty Ltd v National Australia Bank Ltd [1999] NSWSC 828 at [222].
VEI, VEA, Blockbuster and EzyDVD dispute there needs to be any implied obligation to act in good faith when there are express provisions in the agreements to that effect: Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 at [557]; Royal Botanic Gardens v South Sydney City Council (2002) 240 CLR 45 at [72].
Determination there was an implied obligation to act in good faith
Leaving aside whether there was an implied obligation under the Trego principle VEI has not disputed the Burger King implied obligation.
The court accepts Sedema's claim that after the commencement of the franchises VEI recognised the exclusivity provisions by the "Addendum to the Franchise Agreement: ecommerce-On Line Rental" (Exhibit 2/ Tab 10) and the 2010 Disclosure Document (Exhibit 17). Thereafter, VEI did not prevent Blockbuster and ezydvd.com.au from operating substantially similar businesses in Hazelbrook and Katoomba (to 20 June 2010) in breach of that implied obligation. Mr Uniacke conceded that those 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 (T127.7-128.31).
Did VEI, VEA, Blockbuster and EzyDVD engage in unconscionable conduct in Hazelbrook and Katoomba within the meaning of the TPAct and CCAct?
Sedema's claim for damages is against:
(a) VEA (through its subsidiaries Blockbuster and EzyDVD) for engaging in unconscionable conduct within the meaning of sections 51AA and 51AC of the TP Act and sections 20 and 21 of Schedule 2 of the CC Act by allowing or not preventing the rental of movies into Katoomba and the sale of DVD movies into both Hazelbrook and Katoomba;
(b) VEI (through its subsidiaries) for engaging in the same unconscionable conduct by allowing or not preventing the rental of movies into Katoomba and the sale of DVD movies into both Hazelbrook and Katoomba; and,
(c) Blockbuster and EzyDVD having accessorial liability for VEA and/or VEI, by aiding, abetting or procuring the contraventions under section 75B of the TPA or section 2 of Schedule 2 of the CC Act.
Sedema in its written submissions succinctly puts its case of unconscionable conduct as follows:
(a) Sedema purchased an "exclusive" licence to operate "Video Ezy franchise outlets" in the 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 have 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 (see Trego v Hunt above). Competition between the franchisor (via its related entities) and the franchisee in the territories was in breach of the obligation of good faith, because VEI 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 VEI 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.
Section 51AA TP Act and s 20 CC Act provide so far as concerns trade and commerce that a corporation must not engage in "conduct that is unconscionable within the meaning of the unwritten law" or that a person must not engage in "conduct that is unconscionable, within the meaning of the unwritten law" respectively. Both exclude conduct from those provisions, which is prohibited under s 51AC TP Act and s 21 CC Act. The prohibited conduct is conduct that carries a sufficient level of judicial opprobrium to grant equitable relief: ACCC v CG Berbatis Holdings Pty Limited (2003) 214 CLR 51. The respective Acts then provide for appropriate remedies.
Section 51AC TP Act in relation to business transactions and s 21 CC Act 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" respectively. Sections 51AC (3) and s 22(1) then set out relevant matters to be taken into account in determining whether there has been unconscionable conduct. Relevantly and importantly one factor 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)).
Both parties have referred to a number of authorities on the meaning of unconscionable conduct: Louth v Diprose (1992) 175 CLR 621 at 626; Hurley v McDonald's Australia Ltd [1999] FCA 1728; (2000) ATPR 41-741 at [22]; ACCC v CG Berbatis Holdings Pty Limited; Attorney-General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583; Macdonald v Australian Wool Innovation Ltd [2005] FCA 105 at [279-280]; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132; Canon Australia Pty Ltd v Patton (2007) 244 ALR 759 at [40-45].
The court does not propose to extract the respective statements of principle referred to in those authorities nor is it necessary because Sedema conducted its case on the basis that VEI, VEA, Blockbuster and EzyDVD failed to act in good faith, either as principals or accessories. In this regard it relies upon Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253; [2000] FCA 1365 where Justice Sunberg found that the franchisor had engaged in unconscionable conduct by, inter alia, competing with franchisees. After considering a number of authorities, the legislative scheme and Explanatory Memorandum (at 30-36) his Honour said at [37]:
37 The present case does not involve s 51AB, and it is accordingly unnecessary to decide whether that section is as confined as Dowsett J in Hurley thought it is. But it is necessary to decide the ambit of s 51AC. For the reasons I have given in pars 31 to 33, the section is not confined in the manner Dowsett J thought s 51AB is. Whether conduct is unconscionable for the purpose of s 51AC is at large. In performing its task the Court is aided but not controlled by the factors listed in sub-s (3)."
His Honour then made the finding at [46]:
Competing with franchisees
46 Between July and November 1998 SNK
* advertised, in newspapers circulating within the franchisees' territories, in which the franchisees themselves advertised, the fact that franchised products were available for purchase from SNK, with free delivery on request for purchases of $25 or more
* advertised in those newspapers and in a promotional brochure that franchised products were available at independent retail outlets, including outlets within the franchisees' territories
* sold franchised products, directly and indirectly, to independent retail outlets, including outlets within the franchisees' territories.
This conduct was calculated to damage the franchised businesses, in the sense that SNK must have known it would damage them. It was inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith on the part of SNK within factor (k).
Determination there was unconscionable conduct
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 (T127.7-128.31). 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.
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.
How should damages be awarded?
Sedema seeks damages on alternative bases under s 82(1) TP Act and s 236(1) CC Act because it claims to have suffered loss and damage by the unconscionable conduct contraventions.
The first basis is that the contraventions have derogated from the goodwill purchased by Sedema. So far as concerns the Hazelbrook contravention Sedema claims (without trying to be mathematically precise) the loss of 4 years goodwill calculated at $60,000 (at $15,000 per year being the approximate annual percentage of the total 10 year goodwill) together with the loss of benefit of the franchise and advertising fees calculated at $125,000 (an average of $2,860 per month from February 2009. The total estimated damage and loss for Hazelbrook is about $185,000. Regarding Katoomba and as the court has found that agreement came to an end on 20 June then the loss (again without trying to be mathematically precise) would amount to about 2/10ths of the initial franchise fee of $18,700, calculated at $3,740, together with the loss of benefit of the franchise and advertising fees calculated at $34,000 (an average of $2,122.22 per month from February 2009). The total estimated damage and loss for Katoomba is about $38,000.
The claim for the combined damage and loss for both territories is estimated at $223,000 less the $12,656.58 admitted for Hazelbrook but sought as a set-off. As the total exceeds this Court's monetary civil jurisdiction of $100,000 Sedema concedes that the award of damages and loss is capped at $100,000 with interest pursuant to s 100 of the Civil Procedure Act 2005 to date of judgment.
The second and alternative basis is to assess Sedema's damage as if the contraventions had not occurred and the contravening transactions would have been achieved by Sedema to its own benefit. The extent of damages would then be $210 for the 6 Blockbuster TiVo subscriptions in Katoomba and $48,833.39 for the 1991 ezydvd.com.au transactions in Hazelbrook and Katoomba (to 20 June 2010). The total claimed for damages on this basis would then be $46,043.39 with interest pursuant to s 100 of the Civil Procedure Act 2005 to date of judgment.
VEI, VEA, Blockbuster and EzyDVD contend that Sedema has not established that they have suffered any loss as a result of the contravening streamed movie and online transactions, particularly when Sedema did not have the capacity to sell on line or stream movie content to achieve the sales. Further, they rely upon a concession by Mrs Charnas that Sedema had decided "we withdrew from Retail" (Exhibit 2/Tab13) so there could have been no expected profit from the contravening sales. In any event they contend that the lost transactions do not equate to lost profits because Sedema's operating costs would have gone up.
Determination of the amount of damages for the loss of sales
The court does not accept the first basis of assessment of damages for loss of goodwill as a reasonable measure. First, there is no evidence as to what was the loss of goodwill, if any, as a result of the contravening transactions. Katoomba was terminated by the release of 20 June 2010 so any goodwill expired upon release, such that it may now be impossible to calculate any loss of goodwill. Katoomba was in any event experiencing financial viability for reasons other than the contravening sales which would present as a significant difficulty in determining the value of the goodwill if that were possible. Hazelbrook continues to operate but to reiterate there is no evidence of the diminution, if any, of that goodwill. While Sedema continued to pay the franchise and advertising fees, again there is no evidence by which the court could determine some sum for loss of the value of those fees because Sedema was not getting the full benefit of the exclusivity provisions. In absence of any evidence it is speculative to assess damages on this basis.
The court does propose to award damages on the basis of the lost sales. 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, 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" (Exhibit 2 at para 45) so there is evidence of the actual loss of sales by Sedema. In her oral evidence Mrs Charnas 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 (T189.42-190.45) 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.
The proposed orders
Subject to hearing from the parties as to costs the court proposes the following orders:
(1) The Statement of Claim is granted but limited to the sum of $12, 656.58 for the admitted liability by Sedema together with interest (interest is sought on the alternative bases of the provisions of the franchise agreements or s 100 Civil Procedure Act 2005 which needs to be determined).
(2) The Cross-claim is also granted in the sum of $46,043.39 together with interest under s 100.
Magistrate Favretto
Downing Centre Local Court
14 February 2013
Footnotes
1 The CC Act applies to conduct after 1 January 2011 but Item 6 of Schedule 7 provides that the TP Act applies for conduct before then. Sedema claims spans over both periods so both Acts apply.
2 To comply with s 51AD of the TP Act (up to 1.1.2011) and s 51AD of the CC Act.
3 As Omar Khayyam indelibly said: "The Moving Finger writes; and, having writ, Moves on; nor all thy Piety nor Wit, shall lure it back to cancel half a line, Nor all thy Tears was out a Word of it": R v Moffitt (1990) 20 NSWLR 114 at 118E.
**********
Decision last updated: 20 May 2014
0
20
3