Walhane & Ors v Wendys Supa Sundaes & Ors No. DCCIV-96-1580

Mark Joseph Walhane, Sarah Jane Walhane & Arumah Pty Ltd (Plaintiffs)
v
Wendy’s Supa Sundaes Pty Ltd, Daroko Pty Ltd, Davrog Pty Ltd, Trevor Herriot & Kerry Stirling Hanel
(Defendants)
Christine Alice Hanel
(Third Party)
[2000] SADC D39.

Judge C R Lee
Civil

The plaintiffs are seeking damages with respect to each of two separate but related events: first, the purchase by them of a Wendys franchise store in the Regent Arcade, Adelaide, in June 1994; and second, their attempted resale of that store between October and December 1996. The business of Wendys franchise stores is the sale of ice-creams and related products in locations of high pedestrian traffic flow such as shopping centres.

The parties

The first defendant (“Wendys”) is known within the Wendys organisation as the National Franchisor. The second defendant (“Daroko”) is the franchisee in South Australia, Northern Territory and Mildura. Daroko is known as the Master Franchisee. The third plaintiff (“Arumah”) purchased the Regent Arcade store from the third defendant (“Davrog”). Davrog is owned in or controlled by the same interests as Wendys. The first plaintiff (“Mr Walhane”) and the second plaintiff (“Mrs Walhane”) are husband and wife and the shareholders and directors of Arumah. The fourth defendant (“Mr Herriot”) was employed by Daroko at the relevant time as its development manager. The fifth defendant (“Mr Hanel”) and the third party to the third party notice issued by Wendys (“Mrs Hanel”) are husband and wife and the shareholders and directors of Daroko.

The claims

In general terms, the plaintiffs’ claims are threefold: first, that they were induced to buy the store by misrepresentations by the defendants concerning the value of the store; second, that Daroko’s approval of the resale of the store was unreasonably withheld in breach of a franchise agreement; and third, that Daroko converted the plaintiffs’ stock by refusing access to it after evicting the plaintiffs from the store. For the first claim, the plaintiffs rely upon causes of action under the Trade Practices Act 1974 (Cth), the Fair Trading Act 1987, the Misrepresentation Act 1971 and the common law of deceit.
The statement of claim summarises the plaintiffs’ damages as follows:-
Loss of value of business  $22,229.00
Interest on borrowings  $ 6,821.00
Loss of contract to sell franchise  $49,000.00
Advertising expenses wasted  $ 1,238.81
Stock wrongly converted  $ 2,724.00
$82,012.81
By counterclaim, Daroko seeks to recover from the plaintiffs the following expenses incurred by it allegedly in consequence of a breach by the plaintiffs of the franchise agreement:-
Rent  $2,350.00
Promo levy  $   160.00
Electricity  $   646.48
Franchise fees  $1,250.84
Advertising fees  $   902.45
Wendy’s pumps  $   285.00
Register upgrade  $   180.00
Locksmith  $     62.00
Total  $5,836.77

By third party notice, Wendys is seeking, in the event that its defence of the plaintiffs’ claims is unsuccessful, to enforce indemnities given to it in various agreements by Daroko and Mr & Mrs Hanel.

The witnesses

Oral evidence was given by Mr Walhane, Mr Herriot and Mr Hanel. None made contemporaneous notes of relevant conversations, and so were forced to fall back on memories some years old. As a consequence of that, and not I think because of any deliberate attempt to mislead, each of the witnesses seemed to me to engage in a significant degree of reconstruction. I approach all the oral evidence with caution.

The purchase of the store in June 1994 and associated events

Mr Walhane contacted Mr Herriot in about April 1994 in response to an advertisement for the sale of Wendys stores at Regent Arcade, Unley and Marden. The advertisement said that the Regent Arcade store “is being run under management and would ideally suit someone looking to start their own business”. The purchase price was stated to be $150,000.
Following meetings with Mr Herriot and Mr Hanel, and a visit to the ANZ Bank, Mr Walhane wrote to Mr Herriot on 13 May 1994 submitting an offer of $140,000. Entries in appointment diaries made in advance show that the meetings took place on 27 April 1994 and 10 May 1994.
Mr Hanel was not present at the meeting on 27 April 1994. Mr Walhane’s evidence is that Mr Herriot made three representations at least at that meeting:
1...... stores were trading at dollar for dollar for turnover and some stores were operating at a premium to their respective annual turnovers
2.the turnover for the Regent Arcade store for the financial year due to end in June 1994 would be about $150,000
3...... if as an owner/operator you take over a company run store, the chances are that you will do a lot better.
As for the meeting on 10 May 1994, Mr Walhane said that he spent the majority of the time with Mr Hanel, and that Mr Hanel made the following representations:
1...... the Regent Arcade store would sell in the vicinity of $140,000 to $150,000
2. the value of stores is proportionate to the level of the turnover
3...... a bank loan of approximately 65% of the value of the store would be like forced savings over the period of the loan, somewhat like superannuation
4.if Mr Walhane were to take over a company-run store, he could proportionately increase the turnover by his efforts and get some capital growth out of the resale value of the store.
Mr Walhane said that at one or other of these meetings he was handed, he thinks by Mr Herriot, a document showing that the turnover of the store to that point of the financial year was approximately $111,000. That document, known as a Form 19, is now in evidence as exhibit D9. It comprises statements required by the Land Agents, Brokers and Valuers Act 1973. One of the statements purported to show the trading results of the store. For the year ended 30 June 1993 and for the period 1 July 1993 to 28 February 1994, the gross takings were $158,287 and $111,717 respectively. From the latter figure, which was for the first eight months of the year ended 30 June 1994, it was possible to project a turnover of, in round figures, $167,000 for the full year. As events turned out, however, the actual turnover for the full year was $157,029.
The evidence of Mr Herriot and Mr Hanel about the meetings on 27 April 1994 and 10 May 1994 is to the following general effect.
Mr Herriot said that he was present at the meeting on 27 April 1994, but the discussion then related to the Wendys organisation in general and the Unley store in particular. Mr Hanel said that he was present at the meeting on 10 May 1994, but he has no exact recollection of what was said. He would have discussed the asking price for the Regent Arcade store, but he would not have said anything about projected turnover. He said that Wendys had a definite policy of not discussing projections on existing stores.
Mr Walhane gave evidence about further meetings on 27 May 1994 and 2 June 1994.
On the first occasion, he met again with Mr Herriot and Mr Hanel, and it was represented that the value of the store was proportionate to the level of turnover dollar for dollar, that once the store was out of the hands of management turnover should increase and then he would be able to increase the asking price on a future resale, and that repayments on a loan from the bank would be the same as forced savings. Mr Walhane said that at the conclusion of the meeting he took the contract away with him to sign.
Present at the meeting on 2 June 1994 were Lyn Marks, who introduced herself as retail manager for Wendys, and Mr Herriot. Lyn Marks said, in effect, that Wendys stores were reselling at approximately the value of their turnover, that repayment of the loan was similar to forced savings, and that company managed stores would not perform as well as owner operated stores.
Except to record that neither Mr Herriot nor Mr Hanel has any diary note or memory of a meeting on 27 May 1994, I need not deal further with the meetings said by Mr Walhane to have occurred on that date and on 2 June 1994. By those dates, Mr Walhane had already decided to offer to buy the store for $140,000, and that was the price which was eventually agreed and paid.
The formal agreement for the sale of the store between Davrog and Arumah was executed on 1 June 1994 with settlement to take place on 27 June 1994. Settlement was delayed as a consequence of the National Australia Bank replacing the ANZ Bank as the lender. The loan was for $93,000 over five years at 12.2%.
Three other documents came into existence at about that time.
On 7 July 1994, a franchise agreement was executed by Wendys as the National Franchisor, Daroko as the Master Franchisee, Arumah as the purchaser of the store, and Mr and Mrs Walhane as guarantors of the obligations undertaken by Arumah. By this agreement, Daroko granted to Arumah with the approval of Wendys a franchise to operate the Wendys store at the Regent Arcade. The consideration was a nominal initial franchise fee and then a franchise service fee representing 6% of gross receipts calculated and payable weekly. With respect to the premises which were leased by the owner of the Arcade to Daroko, clause 3.1 provided that Daroko would grant a sub-lease to Arumah for the term of the head lease less one day. The head lease was due to expire on 31 October 1996. The other clause which is relevant for present purposes is clause 8.1, which sets forth the conditions under which the franchise could be assigned to a third party by the franchisee.
On 7 July 1994, Mr and Mrs Walhane executed a deed of guarantee and indemnity in favour of Wendys and Daroko with respect to Arumah’s obligations under the franchise agreement.
On 8 July 1994, Daroko granted to Arumah a licence to occupy and use the premises for the purposes of the franchise agreement in consideration of Arumah paying rent and other sums due under the head lease.
To go back to 1 July 1994, Wendys wrote two letters to Mr & Mrs Walhane on that day advising that all new stores after 1 July 1994 will have a tenure of five years (subject to lease) with a further five year renewal. One of the letters advised that the renewal fees payable by new franchisees “will be structured to equitably share the value of the increased tenure being offered given store performance”. The other letter advised that the “indicative Renewal Fee” for the Regent Arcade store “is currently $1000”. Included in an accompanying set of questions and answers was a statement that the minimum fee is $1000 and the maximum $50,000.
This “new renewal policy”, as it was described, did not apply to Mr and Mrs Walhane, because they purchased the Regent Arcade store before 1 July 1994. Renewals by them remained subject to the old renewal fee of $10. Nevertheless, Mr Walhane’s evidence was that he was concerned at the impact that the extra cost would have on the resale price of his store. He said he expressed his concern to Mr Hanel over the telephone, but Mr Hanel’s response was that nothing could be done. Mr Hanel denied that any such conversation took place. He said that he had already discussed the new policy with the plaintiffs before they entered into the contract of sale.
On 19 August 1994, Wendys wrote a long letter to Arumah, and presumably to other franchisees, which began: “Over the last few weeks we have been receiving many letters and phone calls regarding our Franchise renewal policy”. The letter went on under various headings to discuss the rationale of the policy, to explain all of the fees that Wendys charged its franchisees, and to advise that the maximum renewal fee would be reduced to $25,000.
The final heading of the letter was “Store Valuation”, and amongst a number of paragraphs under that heading is a paragraph which reads:-
“As a consequence of the above we now believe that the average sale price of stores across the Wendys system should be no more than 75% of store turnover”.
As to whether that was a matter of concern, I quote relevant questions and answers from Mr Walhane’s examination in chief:-
“A. Was that a matter of concern to you when you read it.
Q...... Somewhat of a concern to me, because of the level that I paid for the entry into the business. If I had known that, I would never have purchased the business in the first place - not at the level that I did, anyway.
Q.Why do you say that.
A...... Because if someone hears of such a concern, then obviously they are not going to - I can’t resell the business, can I?”
Mr Walhane said he telephoned Mr Hanel and said in effect that he thought he had been unfairly and harshly treated by Wendys for off-loading one of their stores on an in-coming franchisee knowing the stores were not worth that money. Again, according to Mr Walhane, Mr Hanel’s response was that there was nothing that he could do. And again, Mr Hanel denied that any such conversation took place.

What if any actionable representations were made at the meetings which preceded Mr Walhane’s offer to purchase the store in 1994?

The plaintiffs’ solicitors wrote to Daroko on 15 October 1996 that “our clients were told that the store would turn over between $140,000 to $150,000 per annum and that $140,000 was the true value of the store”, and doubtless the solicitors were accurately reporting their clients’ instructions at that time. Indeed, it would be surprising if Mr Hanel had not taken the opportunity afforded by his meeting with Mr Walhane to stimulate Mr Walhane’s interest in buying the store. Mr Hanel eventually conceded that he may have told Mr Walhane that the pattern of sales was initially at a premium to turnover and then evening out towards June 1994. Exhibit P33, headed “Comparative Store Sales”, shows that, of the eleven stores sold between December 1992 and November 1994, one sold at 64% of turnover, two sold at 99% of turnover, one sold at 100% of turnover and the remaining seven sold at a premium to turnover. The average sale price of stores over the period was 108% of turnover.
Mr Herriot’s evidence that the meeting on 27 April 1994 was concerned with the Wendys organisation in general and the Unley store in particular is supported by the application which Mr Walhane completed on the same day, in which Mr Walhane states that his preferred suburb for a franchise is Unley.
I find that, at the meeting on 10 May 1994, Mr Hanel said words to the effect that stores were selling at or about the level of turnover. But, as exhibits D9 (the form 19) and 33 (comparative store sales) show, that representation was neither false nor misleading.
Since disclosure of one fact but not another may amount to a misrepresentation, I need to go back to the letter of 19 August 1994, and to the plaintiffs’ contention that the defendants knew, and should have disclosed, “the 75% policy”, as it was described in the statement of claim. To put the contention another way, the representation about the value of the store should have been qualified by disclosure of “the 75% policy”, because there was every reason to suppose that the eventual resale price of the store would not exceed 75% of turnover. I should say at once that I accept Mr Herriot’s evidence that he knew nothing of the so-called policy until he received a similar letter as a franchisee in his own right.
The early paragraphs under the heading “Store Valuation” show that the Wendys organisation had become concerned about whether franchisees were receiving an adequate return on their investment in a competitive retailing environment, given the sale prices that had been paid for stores in the late 1980’s and early 1990’s. Then the following paragraphs appear:-
“The health of the Wendys System in the long term is at significant risk if new franchisees continue to buy stores which do not allow an adequate return to be achieved.
As a consequence of the above we now believe that the average sale price of stores across the Wendys System should be no more than 75% of store turnover.
However we stress that if the store is achieving a high rate of return on investment then this must be the major driver of the sale price. A return on investment method will be our approach for calculating all new store purchase prices/franchise fees, this will provide major benefits to new franchisees entering the System or alternatively existing franchisees purchasing new stores.
You are of course entitled to sell your store at market valuation, our role as a responsible Franchisor/Master Franchisee is to make the incoming franchisee aware of the likely impact the sale price will have on their return on investment.
At the end of the day it is the incoming franchisee’s decision on how much he/she pays.”
The plaintiffs focussed on the second paragraph at the trial, and argued that Mr Hanel must have known about “the 75% policy”, because on his own admission he knew about the fee which was inextricably linked, namely the franchise renewal fee which was the primary subject of the letter. But when the second paragraph, and I emphasise the words “belief” and “average”, is read in the context of the other paragraphs that I have quoted, no such “policy” emerges. As I assess the context, Wendys was wanting to warn incoming franchisees of the impact that sale prices were having on investment returns, whilst still upholding the right of franchisees to sell at prices dictated by market forces.
I am not persuaded that the substance of these paragraphs was in Mr Hanel’s mind in April and May 1994, given his evidence and the absence of any reference to the topic in the letters which Wendys wrote to Mr and Mrs Walhane, and presumably to other franchisees as well, on 1 July 1994. But even if that was Mr Hanel’s state of mind at that time, I do not consider that he was obliged to disclose it to Mr Walhane. Such disclosure would not have invalidated the representation that I have found was made, and it would not have influenced Mr Walhane’s decision to buy the store for the price that he paid.
By paragraph 14.4.1 of their defence, Wendys and Davrog admit that “between April 1994 and June 1994 a new policy was discussed whereby it was recommended that the purchase price of new stores not exceed 75% of the annual gross turnover”. I take this admission to be a shorthand reference to the paragraphs which I have quoted from the letter of 19 August 1994. I have already expressed my view of the meaning of those paragraphs. I do not consider that Wendys and Davrog were obliged to disclose their states of mind to Mr Walhane. As I have already said, such disclosure would not have invalidated the representation that I have found was made, and it would not have influenced Mr Walhane’s decision to buy the store for the price that he paid.
If Wendys did in fact disclose to incoming franchisees after August 1994 its belief that the average price of stores should be 75% of turnover, such disclosure seems to have had no effect on sales. Exhibit P33 shows that, of the ten stores sold between August 1994 and January 1997, five sold at less than annual turnover and the remaining five sold at a premium to turnover. The average sale price of stores over the period was 99.6% of turnover.
I hold that no actionable representations were made to Mr Walhane at any of the meetings. To this extent at least, the claim against each of the defendants must fail, and I think that it must follow from my findings that the plaintiffs have failed to establish that there was a difference between the price that they paid for the store and its true value at the date of the contract of sale.

The attempted resale of the store between October and December 1996

Mr Walhane foreshadowed his intention to sell the store when he wrote to Daroko on 27 April 1995 and 22 February 1996. On the first occasion, he wrote that his purpose was to upgrade to a larger store in the Wendys’ System. Nothing further eventuated then. On the second occasion, Daroko responded by letter of 23 February 1996 “to remind you of the obligations contained in your franchise agreement with respect to the sale of your store and some matters you should keep in mind during negotiations with interested parties”. As I said earlier, clause 8.1 of the franchise agreement deals with the topic of assignment, and I now need to quote so much of that clause as is relevant to the dispute between the parties:-

“8.1 Assignment by Franchisee
......... The Franchise is personal to the Franchisee and may not be in whole or in part voluntarily, involuntarily, directly or indirectly assigned, subdivided, sub-franchised or otherwise transferred by the Franchisee without the prior approval in writing of the Master Franchisee PROVIDED THAT approval to assign the Franchise in whole shall not be unreasonably withheld. If such approval to assign the Franchise in whole or in part is granted it will be conditional upon but not limited to the following:
8.1.1.Transfer Fee: the Franchisee paying to the Master Franchisee SIX THOUSAND FIVE HUNDRED AUSTRALIAN DOLLARS (AUD A$6,500.00) which sum the Franchisee acknowledges is reasonably required to cover the National Franchisor’s and the Master Franchisee’s reasonable costs of completing such assignment;
......... 8.1.2         Retention Fund: the Franchisee paying to the Master Franchisee the sum of TEN THOUSAND AUSTRALIAN DOLLARS (AUD $10,000.00) OR TEN PER CENTUM (10%) of the sale price whichever is the greater to be held in trust by the Master Franchisee for a maximum period of three (3) calendar months from the date of assignment. The money is to be applied by the Master Franchisee towards the payment of outstanding creditors (including employees of the Business) who have supplied goods for or services in relation to the Business and towards remedying breaches of this Agreement by the Franchisee;
8.1.3Training Fee: the assignee paying to the Master Franchisee the current fees for the national training programme (which fees exclude travelling, accommodation and other expenses which are to be borne by the assignee) which programme must be attended by the assignee and the manager (if any) prior to taking possession of the Premises and operating the Business;
......... 8.1.4         Franchise Agreement: the assignee executing the National Franchisor’s then current Franchise Agreement (which shall have a term equal to the remainder of the Term) and such other documents that the National Franchisor and the Master Franchisee require Wendys franchisees to execute PROVIDED HOWEVER that this shall not derogate from the Franchisee’s obligations under this Agreement prior to assignment;
8.1.5         General Release: the Franchisee executing a general release of the National Franchisor, Master Franchisee and their officers, directors and employees from all claims, rights and actions that the Franchisee may have against the National Franchisor and the Master Franchisee in respect of this Agreement. Such general release shall be in a form acceptable to the National Franchisor;
......... ....
8.1.7Criteria: the assignee being capable (in the sole judgment of the Master Franchisee) of operating the Business, respectable, responsible, solvent, possessing adequate financial resources and meeting the criteria of the Master Franchisee for the selection of new franchisees;
......... ....
8.1.13Default: the Franchisee not being in default under this Agreement or any other agreement between the Franchisee and any one or more of the other parties hereto;”.
Eventually, through a business broker, the plaintiffs found a buyer, namely a Mr & Mrs Johnson and their company Lowrie Investments Pty Ltd. A contract of sale was executed by Lowrie Investments on 2 October 1996 and by Arumah on 3 October 1996. The purchase price was $100,000, and settlement was to take place on 14 November 1996.
The contract of sale was entered into about the time that the plaintiffs received from Daroko a letter dated 1 October 1996 advising that the franchise agreement was due to expire on 28 October 1996 and offering the option of applying for a further term.
I pause to say that it was not explained why the purchase price for the store was so low. The plaintiffs paid $140,000 in June 1994, the annual turnover to 30 June 1994 was $157,029, and the turnover for the years ended 30 June 1995 and 30 June 1996 was $182,129.24 and $180,687.09 respectively. As exhibit 33 shows, the purchase price is way out of step with other sales at about that time. On the other hand, correspondence in 1996 between Mr Walhane and Mr Hanel discloses that both were concerned about the level of rent that was being charged for the store by the owner of Regent Arcade. Whatever the reason for the low price, the plaintiffs consulted solicitors at about the time of the contract of sale, and communications between the plaintiffs and Daroko thereafter occurred mostly through those solicitors.
The first letter from the plaintiffs’ solicitors to Daroko was on 15 October 1996. As already mentioned, the letter asserted that the plaintiffs were told that the store would turn over between $140,000 to $150,000 per annum and that $140,000 was the true value of the store. The letter also drew attention to the belief of Wendys, mentioned in the letter of 19 August 1994, that the average sale price of stores should be no more than 75% of turnover. The letter then went on to complain that Daroko’s conduct in and about the sale of the store was actionable as misleading and/or deceptive conduct.
The plaintiffs’ solicitors wrote again to Daroko on 18 October 1996 forwarding a copy of the contract with Lowrie Investments and seeking the necessary consents as a matter of urgency. Daroko wrote to Arumah on 21 October 1996 and to the plaintiffs’ solicitors on 24 October 1996 concerning the conditions that needed to be fulfilled before consent to the sale could be considered. With the letter to the plaintiffs’ solicitors were enclosed copies of and extracts from previous documents, and “a sample of the standard Deed of Release”. The sample deed provided for a release by the plaintiffs of Wendys and Daroko:-
......... “from liability for all sums of money accounts actions proceedings claims demands costs and expenses whatsoever arising by reason of or in respect of any act course matter or thing or arising from any relationship or agreement, whether written or oral made between all or any of the parties up to and including the date hereof”.
Between October and December 1996, further letters and faxes passed between the parties and their solicitors concerning the sale of the store to Lowrie Investments. In the meantime, settlement on the sale was deferred, and the plaintiffs were granted extensions of the franchise agreement to 18 November 1996 and then to 30 December 1996.

For the plaintiffs, it was contended that

·.. as there was no assignment of the franchise agreement such as to trigger the operation of clause 8, they were not obliged to pay the transfer fee of $6,500
·.. the deed of release would not be executed in the form proposed, because it purported to release Wendys and Daroko from all claims including the claim of misleading and/or deceptive conduct made in the letter of 15 October 1996
·.. in an attempt to mitigate damages, they were prepared to execute the release “upon the basis that they reserve the right to make the claims foreshadowed in our letter to you of 15 October 1996”.

For Daroko, it was contended that consent to the sale would not be forthcoming until the plaintiffs
·.. paid a transfer fee of $6,500 pursuant to clause 8.1.1 of the franchise agreement
·.. paid retention monies of $10,000 pursuant to clause 8.1.2 of the franchise agreement
·.. executed a deed of release in the form of the standard requirement of both the National Franchisor and the Master Franchisee.
On 17 December 1996, another judge of this Court refused an application by the plaintiffs for an order that the defendants be restrained from requiring the plaintiffs to execute the deed of release. The plaintiffs were ordered to pay to the defendants the costs of the application as agreed or taxed.
On 23 December 1996, the plaintiffs’ solicitors wrote to Daroko’s solicitors in response to “a revised Settlement Agenda for the Regent Arcade store”. The letter repeats the plaintiffs’ complaint about the proposed deed of release, but makes no specific reference to the transfer fee of $6,500.
By various formal notices dated 24, 30 and 31 December 1996, Daroko gave to Arumah notice of defaults under the franchise agreement. Those notices dealt with various breaches including non-payment of rent for the month of December, and warned that failure to remedy the breaches would lead to a termination of the franchise agreement.
Events after the expiry of the franchise agreement on 30 December 1996 can be briefly summarised. Daroko gave formal notice dated 3 January 1997 of termination of the franchise agreement “without prejudice,” as the notice said, “to any or all of its rights arising under the franchise agreement and/or the licence agreement”. On 6 January 1997, Mrs Walhane prepared a stocktake of the stock that remained at the store. The total value of the stock at cost was, to the nearest dollar, $2,724. On the same day, the locks were changed and Mrs Walhane was evicted from the store. On 7 and 10 January 1997, Daroko wrote to the plaintiffs concerning removal of the plant and equipment which they had earlier contracted to sell to Lowrie Investments. After further correspondence between the solicitors for the parties, the plaintiffs eventually agreed to sell the plant and equipment to Lowrie Investments for $51,000. As for the stock, it was sold or disposed of by Daroko.

Was Daroko’s approval of the resale of the store unreasonably withheld?

By the time of the expiry of the extended term of the franchise agreement on 30 December 1996, the only dispute which stood in the way of the sale proceeding, as I assess the evidence and particularly the correspondence, was the dispute about the form of the deed of release. It is true that, by various formal notices dated 24, 30 and 31 December 1996, Daroko gave notice to Arumah of various defaults under the franchise agreement. But some at least of those breaches occurred in the context of the wider dispute between the parties, and, in the absence of any evidence to the contrary, I do not consider that the parties would have allowed those breaches alone to stand in the way of a sale. Nor do I consider that the plaintiffs would have allowed their contention with respect to the transfer fee to stand in the way of a sale. Plainly it would not have been in their interests to do so. I find that, if the plaintiffs had been prepared to execute the deed of release, both Daroko and Wendys would have given their consent and the sale would have proceeded. By the time of settlement, the plaintiffs would have received from Lowrie Investments the sale price of $100,000, and Daroko would have received from the plaintiffs at least the retention fund of $10,000, and probably the transfer fee of $6,500 as well. From the retention fund, Daroko would have been at liberty, in reliance upon clause 8.1.2 of the franchise agreement, to apply moneys “towards remedying breaches of this Agreement by the Franchisee”.
I consider that Daroko acted unreasonably in insisting upon a form of release which was so all-embracing that it included the claim on the representation foreshadowed by the plaintiffs’ solicitors in their letter of 15 October 1996. The representation was made prior to the execution of the franchise agreement, and about the value of the store and not about the agreement or any of its terms. As wide as the words “in respect of this Agreement” in clause 8.1.5 of the franchise agreement may be, I do not consider that they extend to the claim on the representation.
I should mention briefly the submission of plaintiffs’ counsel that there could have been no assignment to attract the operation of clause 8 of the franchise agreement after 28 October 1996, because the term of Arumah’s licence to occupy the store expired on that date. The plaintiffs were wanting to sell their interest in the business, albeit on the assumption that there would be tenure of the premises, and in my opinion a sale of that kind would have qualified as an assignment for the purposes of clause 8. Perhaps even more decisive than that, is the second paragraph of clause 8.2 allowing the franchisee, if the master franchisee does not exercise its right of first refusal, to complete the sale subject to the provisions of clause 8.
I hold that Daroko as the master franchisee unreasonably withheld approval to assign the franchise to Lowrie Investments in terms of clause 8.1 of the franchise agreement.

Is Daroko liable to pay damages to the plaintiffs?

Counsel for Daroko contended, in reliance upon certain landlord and tenant cases, primarily Yared v Spier (1979) 2 NSWLR 291, that his client is not liable in damages to the plaintiffs merely because of a finding that consent was unreasonably withheld.
In Yared v Spier, a memorandum of lease of land incorporated from lessee’s covenants in the Conveyancing Act 1919 (NSW) a covenant which provided “the lessee ... will not, during the continuance of the lease ... sublet ... the demised premises ... without the consent in writing of the lessor, but such consent shall not be refused in the case of a proposed respectable and responsible ... tenant ...”. Waddell J held that the term with respect to refusal of consent was to be construed as a qualification on the generality of the lessee’s covenant not to sublet the premises, and accordingly a refusal by the lessor to consent to a sublease to a respectable and responsible tenant did not give the lessee any cause of action for damages for breach of covenant against the lessor.
The following passage from Treloar v Bigge (1874) LR 9 Exch 151 at 156 and 157, one of the earliest cases cited by Waddell J, discloses the reasoning which underlies, to use his Honour’s words, “this settled state of the law”:
“It may be that the words themselves might, if it were necessary to carry out the intention of the parties, be sufficient to raise a covenant by implication in the lessor. But no such obligation ought to be implied if the true intention of the parties can be carried out by adopting a literal and natural construction. Now, looking at the place in which the words relied on occur, I think they ought to be construed as a qualification on the covenant of the lessee. That covenant is in derogation of his common law rights, and it is more convenient and reasonable to hold that the words were introduced to limit the generality of the covenant than to hold them to impose an obligation on the lessor. The true interpretation of the words, I think, is to release the plaintiff from his covenant not to assign without the plaintiff’s assent, if that assent is arbitrarily withheld. If that be so they cannot be construed as creating a cross liability. They either qualify the tenant’s covenant, or they create a covenant on the landlord’s part. They cannot do both. If they create a covenant the result would be that, even although there was an arbitrary refusal, the lessee would be unable to assign without incurring a forfeiture. If he did assign he would be liable to eviction, and yet would have an action accrued to him against his landlord in respect of the arbitrary refusal. Such a construction would be highly inconvenient, and there is nothing in the words which renders it necessary so to construe them. The other construction is the more convenient. The lessee may assign, if the lessor arbitrarily refuses his assent, without any assent, and the arbitrary refusal would be an answer to any proceedings which might be taken against him. The lessor, on the other hand, would escape a continual liability to a crossaction.”
The term in Treloar v Bigge, like the term in Yared v Spier, was a lessee’s covenant. It read: “And the said (the lessee) doth covenant with the said (the lessor) that he shall not nor will assign this present lease .... without the consent in writing of the said (the lessor), such consent not being arbitrarily withheld.” In the end, as these and other cases make clear, the question is one of construction of the agreement to ascertain the true intention of the parties. Is clause 8.1 a franchisee’s covenant not to assign without approval, with the proviso amounting to no more than a qualification that the franchisee can assign in any event if consent is unreasonably withheld? Or does the clause contain a covenant by the master franchisee that its approval will not be unreasonably withheld? I consider that these questions should be answered no to the first and yes to the second. In contrast to the clauses under consideration in Yared v Spier and Treloar v Bigge (“the lessee will not ...sublet” and “(the lessee) doth covenant ... that he shall not nor will assign”), the obligations of clause 8.1 are cast in passive form, and direct words of covenant are not attached to either party.
Moreover, the relationship of the franchisee and the master franchisee under the franchise agreement is a personal one. The introductory words of clause 8.1 say as much, and recital D explains why:
“The Wendys System is a comprehensive system the foundation and essence of which is the adherence by franchisees to standards and policies of the National Franchisor providing for the uniform operation of all Wendys stores including but not limited to the use of only prescribed equipment and products, efficient and courteous service and business operation. Compliance by franchisees with the foregoing standards and policies in conjunction with the use of the National Franchisor’s trade marks, logos and business names in such manner as may be determined by the National Franchisor from time to time, provides the basis for the valuable goodwill and wide acceptance of the Wendys System. Moreover, the establishment and maintenance of a sound working relationship between the National Franchisor, Master Franchisee, Franchisee and any other franchisees, their accountability for performance of the obligations contained in this Agreement and their adherence to the Wendys System constitute the essence of the Franchise provided for herein.”
Clause 8.1.7 reinforces the personal nature of the relationship. As earlier appears, the clause provides:-
“8.1.7 Criteria: the assignee being capable (in the sole judgment of the Master Franchisee) of operating the Business, respectable, responsible, solvent, possessing adequate financial resources and meeting the criteria of the Master Franchisee for the selection of new franchisees;”
In light of these provisions, it can scarcely be suggested that the intention of the parties was that, upon the master franchisee unreasonably withholding its approval, the franchisee’s only remedy would be to proceed with the assignment in any event, with no redress in damages.
It is true that in this case Daroko’s refusal to approve the assignment had nothing to do with the suitability of the incoming franchisee. Indeed, the Johnsons had completed the necessary training, and Mrs Johnson had entered into a franchise agreement with Daroko and Wendys on 28 November 1996 to take effect from 9 December 1996. But the circumstances of the application of clause 8.1 in any given case cannot govern its meaning. A further point is that the inconvenience of a tenant incurring a forfeiture but accruing an action for arbitrary refusal, a consideration which weighed with the court in Treloar v Bigge, has no parallel here.
I hold, in the result, that clause 8.1 of the franchise agreement imposes an obligation upon Daroko not to unreasonably withhold its approval to assign the franchise, and that Daroko’s breach of that obligation entitles Arumah, as the franchisee, to damages.

Is Wendys liable for Daroko’s breach of the franchise agreement?

By paragraphs 29 and 30 of the statement of claim, the plaintiffs allege that Wendys owed a fiduciary duty to the plaintiffs to intervene or otherwise direct Daroko to approve Arumah’s assignment of the franchise to Lowrie Investments. In the end the point was not pressed, and so, except for a reference to paragraph 12.1 of the franchise agreement, I need say nothing more about it.

Counsel for Daroko submitted that any unreasonable withholding of approval by Daroko was at the direction of Wendys, and Daroko is entitled to be indemnified by Wendys under the master franchise agreement. There is no evidence of any such direction, and so that point fails as well.

What damages are Daroko liable to pay?

The damages comprise a number of separate amounts.
The first is the difference between the contract price of $100,000 and the price received for plant and equipment of $51,000, less the transfer fee saved of $6,500, namely $42,500.
The second is the interest which would have been saved by Arumah if $42,500 had been repaid to the National Australia Bank on the date of settlement. I consider that a reasonable interpretation of the evidence is that, but for Daroko’s withholding of approval, settlement would have occurred on 9 December 1996. The rate of interest that initially would have been saved is 12.2%, but I need to hear from the parties on whether, given the history of the loan from the National Australia Bank between 9 December 1996 and the present, that rate or some other rate or rates should be applied during the balance of the period.
The third is the amount of $1,238.81 for “Advertising expenses wasted”. That amount is supported by an invoice from the business broker.
The fourth is the amount of $2,724 claimed for conversion. I am satisfied that Daroko wrongly refused the plaintiffs access to the stock, and that this aspect of the claim should succeed. It is common ground that the value of the stock should be fixed at the amount claimed.

The counterclaim

With the exception of the locksmith’s fee, the counterclaim appears to deal with occupancy and business costs incurred but not paid by the plaintiffs prior to the expiry of the extended franchise agreement on 30 December 1996. I understood counsel for the plaintiffs to argue that no costs incurred after 9 December 1996 should be recoverable, but it seems to me that that depends upon whether Arumah received any and what offsetting benefit from its operation of the store between 9 and 30 December 1996. I need to hear further from the parties on that aspect.

Conclusion

Arumah is entitled to an award of damages against Daroko for breach of clause 8.1 of the franchise agreement. Before entering judgment, I need to hear further from the parties on the topic of interest.
Daroko may be entitled to an award of damages against the plaintiffs on the counterclaim, but I need to hear further from the parties on whether Arumah received any and what offsetting benefit from its operation of the store between 9 and 30 December 1996.
Wendys, Davrog, Herriot, Hanel & Hanel are entitled to judgment in their favour.

[2000] SADC 39

30 March 2000