VIP Home Services (NSW) Pty Ltd v Swan - [2011] SASC 110

SUPREME COURT OF SOUTH AUSTRALIA
(Magistrates Appeals: Civil)
VIP HOME SERVICES (NSW) PTY LTD v SWAN & ANOR
[2011] SASC 110
Judgment of The Honourable Chief Justice Doyle
19 July 2011
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - CONDITIONS - CONDITIONS AND WARRANTIES
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - REPUDIATION AND NON-PERFORMANCE - ELECTION AND RESCISSION
VIP Home Services (NSW) Pty Ltd (VIP) granted a franchise to Mr and Mrs Swan (the Swans) in July 1998 under a Franchise Agreement (the Agreement) to carry on a lawn mowing business – clause 5.1 of the Agreement obliged VIP to allocate to the Swans ‘regular customers’ whose business was worth $500 in ‘average weekly income’ – clause 15.1.1 obliged the Swans to pay a once off ‘franchise fee’ of $10,250 – clause 15.2 obliged the Swans to make certain monthly payments to VIP including an ‘operating fee’ and ‘pager service fee’ – from the outset, VIP failed to perform clause 5.1 – VIP and the Swans informally agreed that the Swans would continue to operate the franchise but need not make any monthly payments until VIP complied with clause 5.1 – by February 2011, VIP still had not complied with clause 5.1 – the Swans ceased operating the franchise under the VIP name and set up their own lawn mowing business – in April 2009, VIP brought proceedings in the Magistrates Court against the Swans alleging breaches of the Agreement by the Swans and claiming various amounts allegedly due to VIP under the Agreement – whether VIP breached clause 5.1 – whether clause 5.1 was a fundamental – whether the Swans terminated the Agreement for breach by VIP in February 2001 – whether the Swans were obliged to continue payments under clause 15.2 prior to February 2001.
Held: clause 5.1 was a fundamental term of the contract – VIP must have realised that Mr Swan was no longer conducting a franchise business and had purported to terminate the agreement – VIP had reasonable notice of that intention and did nothing within a reasonable time to remedy its continuing breach – VIP admitted that it was in breach of clause 5.1 until October 2001 – the Swans were entitled to terminate the Agreement in February 2001 – the Swans were not obliged to make payment to VIP under clause 15.2 in respect of the period prior to the termination, having regard to the arrangement reached between the Swans and VIP
Appeal against Magistrate’s decision dismissing VIP’s claims for payments under clause 15.2 dismissed.

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSIDERATION - FAILURE OF CONSIDERATION
The Magistrate allowed the Swans’ counterclaim at trial – through their counterclaim, the Swans sought repayment of the franchise fee of $10,250 paid under clause 15.1.1 of the Agreement – the Magistrate found that clause 5.1 was a condition precedent to the obligation to make lump sum payments under the Agreement – whether clause 5.1 was a condition precedent.
Held: clause 5.1 was not a condition precedent – issue raised on appeal was whether the failure of VIP to allocate customers as required by clause 5.1 constituted a total failure of consideration for payment of the franchise fee – Mr Swan received part of the consideration – the failure of consideration was not total – the franchise fee was not recoverable.
Appeal allowed.
Limitation of Actions Act 1936 (SA) s 35, s 35(a) and s 38(1)(a), referred to.
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR(NSW) 632; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kiasha Ltd [1962] 2 QB 26; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549; David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353; Roxborough & Ors v Rothmans of Pall Mall Australia Limited [2001] HCA 68; (2001) 208 CLR 516, discussed.
VIP Home Services (NSW) Pty Ltd v Swan (Unreported, Magistrates Court of South Australia, 8 April 2011); Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322; Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409; Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105; Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87, considered.

VIP HOME SERVICES (NSW) PTY LTD v SWAN & ANOR
[2011] SASC 110
Civil

DOYLE CJ: VIP Home Services (New South Wales) Pty Ltd (VIP) is in the business of granting franchises to carry on the business of lawn mowing under the name “VIP”. VIP uses a detailed standard Franchise Agreement (the Agreement). In July 1998, VIP granted a franchise to Mr and Mrs Swan to carry on a lawn mowing business under the name VIP in a suburb of Sydney.
Under the Agreement Mr and Mrs Swan were required to make certain one off and periodic payments to VIP. VIP was obliged to allocate to Mr and Mrs Swan “regular customers” whose business was worth $500 in “average weekly income”. From the outset, VIP failed to discharge this particular obligation. The parties agreed informally that Mr and Mrs Swan would operate the franchise business, but need not make a monthly payment under the agreement until VIP had complied with its obligation to allocate regular customers.
By February 2001, VIP had not complied with its obligation to allocate customers. Mr and Mrs Swan stopped operating the franchise business under the VIP name, and set up their own lawn mowing business. They continued to service their existing clients. Before and after this happened there was some intermittent correspondence between solicitors for VIP and Mr and Mrs Swan. The evidence about contact between Mr and Mrs Swan and VIP directly or through solicitors, is scant. Thereafter, Mr and Mrs Swan went their own way it seems.
In December 2006, VIP gave notice to Mr and Mrs Swan alleging breaches of the Agreement and requiring that they be remedied. By notice dated 5 April 2007, VIP purported to terminate the Agreement on the basis of breaches by Mr and Mrs Swan. There is no evidence explaining what was happening between about 2003 and late 2006.
There is then another period of silence until 27 April 2009, when VIP brought proceedings in the Magistrates Court against Mr and Mrs Swan, alleging breaches of the Agreement and claiming various amounts allegedly due to VIP under the Agreement. Mr and Mrs Swan denied liability, relying mainly on the failure of VIP to meet its obligation to allocate customers to them. They claimed repayment of lump sums paid by them to VIP under the Agreement.
Neither the Particulars of Claim by VIP, nor the Defence and Counterclaim filed by Mr and Mrs Swan identified the real issues.
A Magistrate found that VIP was in breach of its obligation to allocate customers to Mr and Mrs Swan: VIP Home Services (NSW) Pty Ltd v Swan (Unreported, Magistrates Court of South Australia, 8 April 2011) (reasons). The Magistrate appears to have found that at no time up to late 2001 had VIP complied with its obligation. He found that this obligation was an essential term of the contract: reasons at [28]. The Magistrate said (clause 5.1 is the clause requiring the allocation of customers):
[28]Thus, there can be little doubt that Clause 5.1 epitomizes the fundamental essence of the contract
The Magistrate found that Mr and Mrs Swan had terminated the Agreement for breach by VIP in February 2001. The Magistrate appears to have found that the allocation of customers under clause 5.1 was a condition precedent to the obligation to make the lump sum payments under the Agreement, and so he ordered on the counterclaim that VIP repay to Mr and Mrs Swan the lump sum payment made to VIP.
VIP has appealed against this decision.
Facts
I will limit the facts, as best I can, to matters essential to the main issues. In any event, the evidence is scant. VIP did not call any witness who was able to give evidence based on direct knowledge of the events in question. Mr Swan was the only witness for the defendants. Hereafter I will refer to him as if he were the sole defendant. It is not surprising that when he gave his evidence in June 2011, over 10 years after severing his relationship with VIP, his memory was very limited. There is no evidence, apart from some intermittent correspondence between solicitors, explaining what happened between about 2002 and the purported termination by VIP in early 2007. Nor is there anything explaining what happened between then and the institution of proceedings in April 2009. As well, the Magistrate has not made many findings of fact, and some of them emerge as a matter of inference from his reasons. This is by way of explanation for the limited nature of the summary that follows.
The Agreement was signed on 16 July 1998. It was for a term of 20 years: clause 3.1. Clause 4.1 provides:
4.1VIP grants to the franchisee a franchise to carry on the Franchise Business in the Territory under the VIP name.
Clause 5 is at the heart of the dispute. It provides as follows:
5      ALLOCATION OF INITIAL CUSTOMERS
5.1     In consideration of the payment by the franchisee of the fees set out in clause 15 [Fees] VIP agrees to allocate to the franchisee Regular Customers to the value of $500.00 in Average Weekly Income.
5.2     The Regular Customers to be allocated to the franchisee under clause 5.1 will be identified in a list of customers provided to the franchisee within 7 days of the franchisee completing his training.
5.3     The franchisee shall sign the List of Customers before commencing operation of the Franchise Business.
5.4     Signature of the List of Customers shall be an agreement by the franchisee that
5.4.1the franchisee has been allocated Regular Customers to the value of $500.00 in Average Weekly Income
5.4.2the Customers identified on the List of Customers are Regular Customers
5.4.3the information provided on the List of Customers is accurate.
5.5     The franchisee should not sign the List of Customers if he does not agree as set out in clause 5.4.
5.6     Upon signature of the List of Customers the franchisee shall have no further claim whatsoever in respect of the obligations of VIP under clause 5.1.
…
Clause 6 provides for the allocation of additional “regular customers” by VIP, for whom the franchisee must make a payment in an amount determined under the Agreement. Clause 7 requires VIP to refer to the franchisee customer enquiries directed to VIP from persons who want services performed in the franchise territory. Clause 15 provides for payments by the franchisee. It provides as follows:
15 FEES
15.1The franchisee shall pay to VIP $16,000.00 on execution of this agreement by the franchisee which is
15.1.1as to $10,250.00 for franchise fee and
15.1.2as to $5,750.00 for training and advertising.
15.2The franchisee shall pay to VIP throughout the term of this agreement
15.2.1an operating fee of $389.00 each month. The operating fee shall be paid on or before the 7^th day of the month for which the operating fee is due. If the franchisee pays to VIP $339.00 on or before the first day of the month for which the operating fee is due then VIP agrees to accept $339.00 in full settlement of the operating fee due for that month. The operating fee payable under this clause $15.2.1 is for administration.
15.2.2a pager service fee of $66.00 each month. The pager service fee shall be paid on or before the 7^th day of the month for which the pager service fee is due. If the franchisee pays to VIP $56.00 on or before the first day of the month for which the pager service fee is due then VIP agrees to accept $56.00 in full settlement of the pager service fee due for that month.
15.2.3any insurance premiums due by the franchisee in respect of insurance arranged by VIP on behalf of the franchisee.
15.3All the sums described in clause 15.2.1 and clause 15.2.2 shall be increased each financial year on the 1^st day of July or such other date thereafter as VIP shall specify by such amount as VIP shall specify. The maximum increase in any one financial year shall be
15.3.1the same proportion as the increase in the CPI since the last increase or in the case of the first increase since the date of this agreement, or
15.3.210 per cent
whichever is the greater.
15.4Subject to clause 36.6 any sum payable in respect of operating fees under clause 15.2.1 shall continue to be payable until the Termination Date even if
15.4.1any intellectual property rights of VIP in relation to the Franchise Business shall not be granted be declared invalid or cease to exist or otherwise fail to protect VIP or the franchisee
15.4.2the franchisee has ceased carrying on the Franchise Business or
15.4.3the franchisee has transferred some or all of his Customers to VIP or Other Franchisees of VIP
prior to the Termination Date.
15.5The franchisee shall if VIP so directs execute a payment authority in a form nominated by VIP in relation to the sums payable under clause 15.2.
VIP agreed to provide training, promotional material, and to promote the name ‘VIP’: clause 16. Mr Swan agreed to conduct the business, to comply with VIP policies, to promote the business and to use equipment specified by VIP: clauses 17 to 19 and clauses 32 to 33. He agreed to subscribe to the VIP pager service: clause 21. The Agreement provides in considerable detail for termination of the Agreement by VIP: clause 36. Subclauses of particular relevance are the following:
36TERMINATION BY VIP
36.1VIP shall be entitled to terminate this agreement by notice in writing to the franchisee if
…
36.1.8the franchisee fails to pay to VIP any amount due by the franchisee to VIP and such amount remains unpaid 14 days after VIP notifies the franchisee in writing that such amount is unpaid
…
36.1.10the franchisee breaches this agreement or any other agreement to which VIP and the franchisee are parties and such breach remains unremedied 14 days after VIP notifies the franchisee of such breach
…
36.6 If VIP terminates this agreement and the franchisee fails
36.6.1to Sell to VIP all Customers for whom the franchisee has performed Services in the preceding 12 months or
36.6.2to deliver up to VIP all the Customer Records as at the Termination Date
then the franchisee shall pay to VIP as and by way of liquidated damages an amount representing the present value of any sums which would have become payable under clause 15.2.1 [Monthly Operating Fees] between the Termination Date and the date that this agreement would have terminated due to the expiry of the term of this agreement.
36.7 The termination of this agreement by VIP under clause 36.1 shall not affect or prejudice any other right of VIP.
Clause 41 imposes a restraint on Mr Swan competing with VIP in the franchise territory after the termination of the Agreement, and a prohibition on canvassing customers of the franchise business after the termination of the Agreement. A breach of the restriction on competition entitles VIP to a payment of $10,000 by way of “liquidated damages”: clause 41.1.4. Each breach of the restraint on canvassing entitles VIP to a payment of $500 by way of liquidated damages: clause 41.2.4.
The evidence about the start up of the business is scanty. I gather that Mr Swan was given some training, and acquired equipment from a previous franchisee. He gave evidence that he made the payments referred to in clause 15.1 (T57-58). The Magistrate ordered repayment only of the amount paid under clause 15.1.1. No explanation is given, and no complaint was made, about this on appeal.
The evidence and findings suggest that Mr Swan began to make the monthly payments for a pager under clause 15.2.2 and for insurance under clause 15.2.3.
It is not disputed that VIP failed to comply with the obligation under clause 5.1 to allocate regular customers to the value of $500 in average weekly income. Mr Swan never signed the list of customers as contemplated by clause 5.3. The only evidence on the point was from Mr Swan. It is to the effect that representatives of VIP said that they would do their best to find extra customers (T61). The problem was that VIP had sold two “rounds” at the same time, and there were not enough clients (T61). Mr Swan gave evidence, and this was the only evidence on the point, that in response to his complaint a representative of VIP told him that there was no need to make the monthly payment under clause 15.2.1 until, presumably, the non-compliance with clause 5.1 was remedied (T64-65). The Magistrate accepted this evidence. Exhibit P3, a handwritten note from one of the VIP staff, supports the evidence given by Mr Swan. On this basis Mr Swan began to operate and continued to operate the franchise, making the other monthly payments. From time to time VIP allocated further customers to him. Matters continued this way for some time. On 16 May 2000 a solicitor instructed by Mr Swan wrote to VIP complaining of the failure to comply with clause 5.1, and stating that in due course Mr Swan would seek compensation. The letter suggests that it is written because the demand has been made for the monthly payment under clause 15.2.1, notwithstanding the arrangement with VIP.
There is no evidence of any response to this letter until a facsimile was sent by VIP on 6 March 2001. I will come to that in due course. At trial counsel for VIP accepted that by May 2000 it had not complied with its obligation under clause 5.1.
In late 2000 it appears that Mr Swan had some problems with the pager. The evidence is vague. It is the only evidence on the topic (T88). He complained to VIP. He was given a new pager (T89). He paid for it, but it did not work. Then he says that he was cut off by VIP. He again complained to VIP, but got no response. This appears to have been about February 2001.
Mr Swan said that he thought that VIP was severing ties with him. At trial, counsel for VIP accepted that VIP still had not complied with clause 5.1: reasons at [9].
Mr Swan’s evidence was that at about this time he abandoned the Agreement. He painted over the trailer to remove the VIP brand. He stopped using its name, the uniform and documents linking the business to VIP. He began to operate the lawn mowing business as his own. The business comprised customers allocated by VIP and customers that he himself had found (T88-T90). It is implicit in the Magistrate’s reasons that he accepted this evidence. It is also implicit in the evidence, and in the Magistrate’s reasons, that contact between VIP and Mr Swan ceased about this time. Mr Swan believed that he had put an end to the Agreement because of VIP’s breach of clause 5.1.
VIP finally responded to the solicitor’s letter of 16 may 2000 by facsimile of 6 March 2001. The facsimile referred to direct contact with Mr Swan in July 2000, but there was no evidence to support this. The facsimile stated that payments under clause 15.2 were not being made, and offered to address “outstanding issues”. On the Magistrate’s findings VIP still had not complied with clause 5.1: reasons at [9].
On 9 August 2001, solicitors for VIP wrote to Mr Swan’s solicitors. The letter referred to the letter of 16 May 2000. It asserted that Mr Swan had received “his full allocation” in October 1999. That claim was not maintained at trial. The letter denied any agreement to defer payment of the monthly fee under clause 15.2.1. A demand was made for payment, and an offer was made to settle the claim by Mr Swan making a substantial payment, on the basis that thereafter the Agreement remained in force. One of the odd features of the case is that the letter makes no reference to the fact that there has been no contact between VIP and Mr Swan since about February that year.

Before the Magistrate, counsel for VIP claimed that VIP had met its obligation under clause 5.1 from October 2001, but not until then. The Magistrate rejected this submission: reasons at [12]. Mr Burnett, counsel for VIP on appeal, argued that VIP was entitled to “aggregate” customers allocated over the whole period of time, so that if VIP allocated customers to the value of $500 in average weekly income by October 2001 that was good enough, even if by then some of the customers allocated were no longer customers. It was on that basis that Mr Burnett contended that VIP had complied with its obligation by October 2001.
I will deal with this submission later.
VIP admits that however the matter is approached, it was in breach of clause 5.1 until October 2001.
The evidence supports a conclusion that about August 1998, after Mr Swan had had his training, he agreed to allow VIP time to remedy its admitted breach of clause 5.1, on the basis that until the breach was remedied the contractual obligation to make payments under clause 15.2.1 would be suspended. Meantime, Mr Swan would operate the business and pay the fees under clause 15.2.2 and clause 15.2.3, and otherwise observe the terms of the Agreement.
Just how the situation should be analysed as a matter of law is not straight forward, and was not explored by the Magistrate, nor in any detail in submissions before me. Counsel appeared content to approach the matter as the Magistrate had, on the basis that the monthly fee would become payable when VIP complied with clause 5.1. But the new arrangement changed things. Customers were to be allocated over a period of time, not in a single list at one time. The new arrangement probably amounted to a collateral oral agreement that, in return for Mr Swan allowing VIP time to allocate customers to the required value, VIP would release him from the making of payments under clause 15.2.1 until VIP had allocated customers to the required value. I consider that it is a necessary implication of this arrangement that VIP would be allowed a reasonable time to meet its obligations under clause 5.1, and that if it failed to do so within a reasonable time, Mr Swan would be at liberty to terminate the new arrangement. None of these details were addressed by the parties or in the correspondence between solicitors.
On 10 September 2001, Mr Swan’s solicitors replied to the letter from VIP’s solicitors. They maintained their previous stance. They made no reference to the fact that Mrs Swan was no longer operating the franchise business.
On 3 June 2002, VIP’s solicitors wrote again. The letter makes no comment on the fact that nine months had passed since the last letter. The solicitors maintained VIP’s claim that it had complied with its obligations under clause 5.1, demanded various payments under different clauses of the Agreement, and offered to settle for a nominated lump sum to be paid by Mr Swan. There being no response, a follow up letter was sent on 15 July 2002.
On 7 August 2002, Mr Swan’s solicitors wrote again to VIP. They asserted a fundamental breach on the part of VIP, and maintained the arrangement that the monthly fee need not be paid. They complained about the failure to provide a paging system. The letter contemplates discussions between Mr Swan and VIP, presumably in the hope of resolving a dispute. The letter states in part:
Our clients are desirous of the following outcome:
2.1     Termination of Franchise Agreement.
2.2     Refund of all monies paid by our clients to VIP.
2.3     Mutual releases.
The letter makes no reference to the earlier termination of the Agreement.
There was further correspondence between solicitors between September 2002 and February 2003. A mediation was canvassed. Nothing came of this.
Then there is silence until a notice from VIP to Mr Swan to remedy breaches of the Agreement. The notice is dated 15 December 2006. VIP purported to terminate the Agreement by a further written notice dated 5 April 2007. Between the two notices, and after the second notice, solicitors for Mr Swan maintained his position.
By letter dated 16 October 2008, solicitors for VIP made a further demand for payments under the Agreement.
The proceedings were instituted on 27 April 2009.
There is no evidence about dealings between Mr Swan and VIP between late 2002 and the purported termination of the Agreement by VIP. As I understand it, VIP does not deny that during this period there was no contact between it and Mr Swan of the kind one would expect if the Agreement was still in effect, the franchise business being operated by Mr Swan.
As will be evident from this summary, there are more questions left unanswered than are answered by the limited evidence. The parties appeared content to argue the appeal on the basis that the limited material before me sufficed to decide the issues that they argued. Indeed, there was no real dispute about the facts, such as they were, nor did either party try to read anything in particular into the periods of unexplained silence. There are a number of matters on which one might have expected the Magistrate to make findings, but again no complaint was made by the parties about the absence of findings. However, Mr Burnett, counsel for VIP on appeal, accepted that if his main submission succeeded it would probably be necessary to remit the matter to the Magistrate for further findings to be made.
In all the circumstances, I consider it appropriate to decide the case by deciding the issues argued by the parties, to the extent that I can do so on the very limited material before me.
Claim by VIP for payments under the Agreement
It is an unusual feature of the case that VIP admits it was in breach of clause 5.1 of the Agreement until October 2001. That is a period of about three years and three months.
Mr Burnett submits that performance by VIP of its obligation under clause 5.1 was not a condition precedent to, or a condition of, Mr Swan’s obligation to make payments to VIP under clause 15.2.1 of the Agreement. That is probably correct. The agreement to allocate customers is in consideration of the payment by Mr Swan of all of the fees set out in clause 15 of the Agreement. Clause 5.1 does not distinguish between any of the fees payable under clause 15. True, the “operating fee” under clause 15.2.1 will be paid only after the franchisee begins operation of a franchised business, and that is contemplated as coming after the allocation of customers, but that does not make the obligation to make payment under clause 15.2.1 conditional upon the allocation.
But as things have turned out, it is not necessary to decide that point.
I agree with the Magistrate that VIP’s obligation under clause 5.1 was to provide, at one time, a list of customers worth $500 per week. Just how that amount was calculated under the contract does not matter, and it suffices to express the obligation in this simple fashion. The arrangement between VIP and Mr Swan was to allow VIP time to achieve this level. That is, VIP was allowed time to allocate customers such that Mr Swan had, by allocation from VIP, a list of customers currently worth $500 per week. Like the Magistrate, I do not accept the submission that it sufficed for VIP, over a period of time, to bring about a situation in which it had allocated customers nominally worth $500 a week, even though along the way some of the customers might have fallen by the wayside. That approach would deny Mr Swan what he had bargained for, namely, an allocated list of customers at one time worth $500 per week. Once VIP had done that it would have complied with its obligation, as varied, but not until then.
In any event, VIP acknowledges that in February 2001 it was in breach, even if its contention as to the content of its obligation is accepted.
It was not argued that clause 5.1 is a condition of the Agreement, meaning a term any breach of which would give rise to a right on the part of Mr Swan to terminate the Agreement, without regard to any question of loss, or the extent of loss, caused to him by the breach. Clause 5.1 is not given that status by the Agreement. Nor, having regard to its role in the contract, is there any reason to conclude that it should be so treated. Although not referred to in argument, clause 51.1 of the Agreement is a further obstacle to that conclusion. It provides that the franchisee will not withhold payment of any amount due to VIP or fail to perform any obligation imposed on him by the Agreement, on the grounds of any alleged breach or non-performance by VIP.
Mr Manetta argued that clause 5.1 should be understood as creating an obligation on the part of VIP to provide a franchise worth $500 a week by allocation of customers, and worth nothing less than that. Accordingly, the failure to provide such a franchise would defeat the whole purpose of the stipulation in clause 5.1, and the purpose of the contract. This submission appears to be a variant of the argument that clause 5.1 is a condition, any breach of which gives rise to a right on the part of the franchisee to terminate the Agreement. While there is some force in the submission by Mr Manetta, I am not persuaded that it is correct. I rely on what I said in relation to treating clause 5.1 as a condition.
Nor am I persuaded that VIP’s conduct amounted to repudiation of its obligations under the Agreement. The failure to comply with the obligation under clause 5.1 for such a lengthy period suggests that VIP was not ready and willing to perform its obligation under clause 5.1. On the other hand, the concession in relation to the monthly fee is indicative of a willingness and intention to perform on the part of VIP. But in the end, the evidence about what was happening between the two parties shortly before and in about February 2001 is too limited for me to conclude that VIP had indicated that it was not ready and willing to perform in accordance with its contractual obligations.
Although I do not accept the submission by Mr Manetta to which I referred above, I agree nevertheless that clause 5.1 is an essential term of the Agreement, in the sense in which Jordan CJ used that term in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR(NSW) 632. There His Honour said at 641-642:
The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor …
If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.
Citations omitted
This approach was explicitly approved by the High Court (Dixon, Williams, Webb, Fullagar and Kitto JJ) in Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322 at 337. In the alternative, I consider that clause 5.1 is a term of the kind referred to in HongKong Fir Shipping Co Ltd v Kawasaki Kisen Kiasha Ltd [1962] 2 QB 26. There, in words often referred to with approval in later cases, Diplock LJ said at 70:
There are, however, many contractual undertakings of a more complex character which cannot be categorised as being “conditions” or “warranties”, if the late nineteenth-century meaning adopted in the Sale of Goods Act, 1893, and used by Bowen LJ, in Bentsen v Taylor, Sons & Co be given to those terms. Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a “condition” or a “warranty”. For instance, to take Bramwell B’s example in Jackson v Union Marine Insurance Co Ltd itself, breach of an undertaking by a shipowner to sail with all possible dispatch to a named port does not necessarily relieve the charterer of further performance of his obligation under the charterparty, but if the breach is so prolonged that the contemplated voyage is frustrated it does have this effect.
Citations omitted
This general approach appears to have been approved by Mason ACJ and Wilson, Brennan and Dawson JJ in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 561-562, where their Honours said that:
… nothing less than a serious breach of an innominate term entitles the innocent party to treat the contract as at an end …
On this approach one must consider the seriousness of a breach, that is the consequences of the breach, both actual and foreseeable, and the effect of the breach on the contract as a whole.
It is obvious that a breach by VIP of clause 5.1 could deprive a franchisee of substantially the whole of the benefit for which it had paid and for which it had contracted. A purchaser of a franchise from VIP, paying a lump sum of $16,000 to VIP, and making significant ongoing payments, would obviously want to acquire a worthwhile business in return. The purpose of clause 5.1 is to ensure that, by making sure that at the outset there is an agreed and predetermined level of income available to the franchisee. Subclauses 5.3 and 5.5 set out above, emphasise the importance to the franchisee of compliance by VIP with clause 5.1. These considerations support a conclusion that clause 5.1 must be substantially performed, and is an essential term to use the language of Jordan CJ.
At first Mr Swan did not insist on an entitlement to terminate the Agreement because of VIP’s failure to comply with clause 5.1. He and VIP agreed that VIP would be allowed time to comply with its obligation under clause 5.1. In return, he was not to be called upon to make the monthly payments.
By February 2001, the breach by VIP of the obligation under clause 5.1 had become a prolonged breach. VIP conceded that in February 2001 it was still in breach. The letter from Mr Swan’s solicitor to VIP of 16 May 2000 had protested about the breach, and about the loss being suffered by Mr Swan. The Magistrate did not make a clear finding about the extent of the gap between customers worth $500 per week and the value of the customers in fact allocated, but it is evident that the shortfall was not trifling: reasons at [11].
I consider that by February 2001 the prolonged breach of clause 5.1, coupled with the significance of that provision for Mr Swan as franchisee supports a conclusion that the breach was sufficiently serious to entitle Mr Swan to terminate. The performance of clause 5.1 by VIP was substantially different from that intended. After three years VIP had not met its obligation. Mr Swan was entitled to terminate the agreement with VIP, subject to him giving reasonable notice to VIP that he was no longer prepared to allow further time for compliance by VIP with clause 5.1. Mr Swan had agreed to a variation of the contractual obligations on terms from which he could depart only with reasonable notice.
The evidence of what happened in February 2001 is scant. Mr Swan said that he was no longer receiving “client lists from VIP”: T69-T70. Mr Swan repainted his trailer (it was his property), removing the name VIP, and he stopped using that name and anything to link him to VIP: T72. VIP had already cut off his pager: T73, T94. I infer that Mr Swan was no longer paying the pager fee or the insurance payments under clause 15.2 of the Agreement. Mr Swan was cutting lawns but, on any objective assessment, no longer under the name of VIP.
It is implicit in this evidence, evidence that the Magistrate accepted, that Mr Swan and VIP were no longer in contact in relation to matters under the Agreement that would generate contact between them if the Agreement was still operative. No payments were being made by Mr Swan, and there was no communication between them on the Magistrate’s findings.
I consider that the conduct by Mr Swan indicated unequivocally that the Agreement was at an end. There is no indication from the evidence that Mr Swan told VIP what he was doing in February 2001. But VIP must have known that Mr Swan was acting as if the Agreement was at an end, because of the complete cessation of contact as between Mr Swan and VIP. The lack of contact, and the absence of payments by Mr Swan, was consistent only with Mr Swan having terminated the Agreement.
The facsimile from VIP to Mr Swan’s solicitors of 6 March 2001 refers to the fact that Mr Swan is not paying fees under clause 15.2. While this document and the letter from VIP’s solicitors of 9 August 2001 assert that Mr Swan is obliged to make payments to VIP, there is nothing in either document suggestive of a continuing conduct of the franchised business. There is no reference to any of the things that one would expect would need to be attended to as between VIP and Mr Swan if he continued to operate the franchised business. The correspondence emanating from VIP’s solicitors is consistent, rather, with a stance that unless and until VIP chooses to terminate, payments under the Agreement continue to fall due, whatever the position in relation to the operation of the franchise.
In my opinion, having regard to the Magistrate’s findings, VIP must have realised in about February 2001 that Mr Swan was no longer conducting the franchise business, and had purported to terminate the Agreement in one way or another. His conduct was unequivocal, even if VIP was not aware of the whole picture. It could not have been unaware that he was proceeding on the basis that the franchise arrangement was at an end.
In the course of submissions the question arose whether it was necessary for Mr Swan to have communicated to VIP his intention to terminate the contract, and the fact that he had done so, and whether that intention and fact had been sufficiently communicated. It seems clear enough on the cases that to amount to a termination in a case like this, the conduct of the terminating party must be unequivocal. I am inclined to think that it is also necessary that the party in breach be aware of the termination by the terminating party, but whether that is in all cases a separate requirement is unclear. I refer to observations by Dixon J in Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409 at 416, to the observations of McHugh JA in Wood Factory Pty Ltd v Kiritos Pty Ltd (1985) 2 NSWLR 105 at 146 and to the observations by Young J in Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87 at 94-95. I do not have to resolve this question. As I have indicated, I am satisfied that VIP must have realised, about February 2001 or not long after that, that Mr Swan was no longer conducting a franchise business, and had purported to terminate the Agreement. To the extent that Mr Swan had to give reasonable notice of his intention no longer to allow VIP further time to perform its obligation to allocate customers, VIP had reasonable notice of that intention and did nothing within a reasonable time to remedy its continuing breach.
It follows that having regard to the prolonged substantial breach of the Agreement, Mr Swan was entitled to terminate the Agreement in February 2001, and sufficiently communicated that decision to VIP about that time.
He was not obliged to make payment to VIP under clause 15.2 in respect of the period prior to the termination, having regard to the arrangement reached between him and VIP. Once the Agreement was terminated, any obligation to make payment came to an end.

Accordingly, I dismiss the appeal against the Magistrate’s decision dismissing VIP’s claim for payments under clause 15.2.
The fact that VIP might have believed that Mr Swan was not entitled to terminate the contract, and that payments continued to fall due, is irrelevant.
I have dealt with this aspect of the appeal on a basis not pleaded, but the Magistrate’s reasons and the argument before me indicate that the case was fought before the Magistrate along these lines.
Mr Burnett accepted that if Mr Swan had terminated the Agreement in February 2001 VIP could not claim damages for breach of the covenants against competition. Accordingly, there is no need to consider that claim.
The counterclaim by Mr Swan
The counterclaim by Mr Swan was for repayment of the franchise fee of $10,250 paid under clause 15.1.1 of the Agreement.
The Magistrate treated compliance by VIP with clause 5.1 as a condition precedent to any obligation to make a payment under clause 15. As the condition precedent was never satisfied, the fee under clause 15.1.1 never fell due, and was repayable.
I do not agree with this analysis. The payments under clause 15.1 were payable “on execution of this Agreement by the franchisee”. Clause 5.1 links the allocation of customers to payment of each of the fees set out in Clause 15. It is arguable that the monthly payment under clause 15.2.1 became payable only upon compliance with clause 5.1, but that is not the payment in question here.
In fact, by his counterclaim Mr Swan pleaded that the failure to allocate customers as required constituted a total failure of consideration. That was the point argued before me on appeal.
This claim raises the question of whether Mr Swan received any of the performance for which he contracted as the agreed return for the payment of the franchise fee. The failure of consideration in this sense must be total. There can be no recovery on this basis if the failure is partial only.
It is apparent that Mr Swan received a number of benefits under the Agreement. He was allocated customers, although not to the agreed value. For some three years he carried on business earning income from those customers who were allocated to him. He had the benefit of the VIP business name and associations that went with that name. He received training. He was provided with the VIP uniform.
Accordingly, it cannot be said that viewing the Agreement as a whole, there was a total failure of consideration. Mr Swan received some part of that for which he contracted.
Nor can it be said, as a matter of construction, that the obligation to pay the franchise fee is tied to the obligation assumed by VIP under clause 5.1. However, as Mason CJ, Deane, Toohey, Gaudron and McHugh JJ said in David Securities Pty Limited v Commonwealth Bank of Australia [1992] HCA 48; (1992) 175 CLR 353 at 383:
In cases where consideration can be apportioned or where counter-restitution is relatively simple, insistence on total failure of consideration can be misleading or confusing. In the present case, for instance, it is relatively simple to relate the additional amounts paid by the appellants to the supposed obligation under cl. 8(b) of the loan agreements. …
In this case, the Bank must prove that the appellants are not entitled to restitution because they have received consideration for the payments which they seek to recover. It does not avail the Bank to argue that the appellants were provided with the loan moneys agreed. Indeed, the severability of the loan agreement into its relevant parts would seem to be accepted by the Bank for it submitted that the appellants' consideration for agreeing to pay the additional amounts under cl. 8(b) was the Bank's agreement not to charge a higher interest rate. In circumstances where both parties have impliedly acknowledged that the consideration can be "broken up" or apportioned in this way, any rationale for adhering to the traditional rule requiring total failure of consideration disappears.
Similarly, in Roxborough & Ors v Rothmans of Pall Mall Australia Limited [2001] HCA 68; (2001) 208 CLR 516 Gleeson CJ, Gaudron and Hayne JJ said at [24]:
[24]There having been a failure of a distinct and severable part of the consideration for the net total payments made by the appellants to the respondent, then, as between the parties to the payments, the respondent has no right to retain the amounts in question. …
Similarly, at [199] Callinan J said:
[199]Accordingly, I am of the opinion that the appellants have made out a case for the recovery of the money paid on the basis that relevantly there has been a total failure of consideration, that is to say, a failure in respect of a discrete, clearly identified component of the consideration.
Can it be said that Mr Swan has received part at least of the consideration for the payment that he made to VIP under clause 15.1.1? Can the attempted compliance with clause 5.1 be treated as the consideration for the payment of the franchise fee, and can it then be said that Mr Swan has not received any part of what he contracted to receive for the franchise payment, namely, the allocated customers?
To my mind there are two difficulties with Mr Manetta’s argument that there has been a total failure of consideration. First, the consideration for the franchise fee is not merely the allocation of customers under clause 5.1. It surely includes the use of the name and reputation of VIP, and other lesser benefits that flowed under the Agreement. Second, Mr Swan did receive some part of the consideration identified by Mr Manetta because he was allocated customers by VIP and he earned income servicing them. Mr Manetta endeavours to avoid this difficulty by arguing that it was critical that the value of the customers allocated be no less than $500. In his words, the thing for which Mr Swan contracted was an allocation worth $500 per week, and unless he got that, he got no part of that for which he had bargained. To my mind, with respect, this is too technical an approach.
For these reasons I conclude that there has not been a total failure of consideration, and the franchise fee is not recoverable by Mr Swan on that basis. I consider that the Magistrate has erred in relation to the counterclaim to recover the franchise fee.
I do not need to decide whether or not the counterclaim is barred by lapse of time. The claim to recover the payment under clause 15.1.1 was first raised by amendment in May 2010. In its Defence to Counterclaim, VIP pleaded that the counterclaim was statute barred by operation of s 35 or s 38 of the Limitation of Actions Act 1936 (SA) (the Limitation Act). The parties argued the appeal on the basis that s 35(a) of the Limitation Act applies, because the restitutionary claim for repayment was based on a fictitious “implied contract”. It provides:
35—Actions on simple contract and in tort
The following actions namely:
(a)actions founded upon any simple contract express or implied, or upon any award where the submission is not by specialty;
…
shall, save as otherwise provided in this Act, be commenced within six years next after the cause of action accrued and not after.
In the alternative VIP relied on s 38(1)(a) of the Limitation Act which provides as follows:
38—Limitation on actions for recovery of money
(1) Subject to subsection (2), an action for the recovery of money paid under a mistake (either of law or of fact) or otherwise based on restitutionary grounds must be commenced—
(a)if the cause of action arose on or after the commencement of this section—within 6 years after the cause of action arose; …
Mr Swan did not apply for an extension of time for the institution of the counterclaim. The Magistrate gave no explanation for his decision to allow recovery despite this plea.
Mr Manetta argued that time ran not from the making of the payment by Mr Swan to VIP, not from the time when the consideration could be said to have failed (presumably February 2001) but only when demand was made for payment, the relevant demand (he argued) being the filing of the counterclaim. The other view might be that the cause of action for recovery on this basis arose when the consideration failed: David Securities v Commonwealth Bank at 389 Brennan J. If that is the correct approach, the claim is statute barred.
This aspect of the matter was argued very briefly before me. I asked the parties for further written submissions, which they duly provided. However, in the end, it is not necessary to decide the point.
In the Magistrates Court, Mr Swan did not claim damages for the breach of clause 5.1, nor was any evidence presented upon which such damages might be assessed. A damages claim would have faced the same difficulty under the Limitation Act as did the claim that was made.
For these reasons, in my opinion, the Magistrate was wrong to order repayment of the franchise fee. To that extent the appeal must be allowed.
I order that the appeal be allowed; that the decision of the Magistrates Court be set aside; that a decision be substituted dismissing the claim by the plaintiff and dismissing the counterclaim by the defendants. I will hear the parties on the costs of the trial and of the appeal.