Wallera P/L v CGM Investments P/L

[2001] NSWSC 96

CITATION:

Wallera P/L v CGM Investments P/L & Anor [2001] NSWSC 96

CURRENT JURISDICTION:

Equity Division

FILE NUMBER(S):

SC 3989/99

HEARING DATE(S):

7 February 2001

JUDGMENT DATE:

1 March 2001

PARTIES :

Wallera Pty Limited
(Plaintiff)

v

CGM Investments Pty Limited
(First Defendant)

A Whistle and Co Pty Limited
(Second Defendant)

JUDGMENT OF:

Davies AJ at 1

COUNSEL :	P: Mr P W Gray Ds: Mr J T Johnson
SOLICITORS:	P: Sullivans Solicitors Ds: McNeil James
CATCHWORDS:	Franchise Agreement - notice of breach - whether the notice adequately identified the breach - Practice - motion for judgment under Part 34 rule 8 - whether motion appropriate when counsel addressed generally on the case.
LEGISLATION CITED:	Supreme Court Rules, Pt 34 r 8 Conveyancing Act, 1919, s 129
CASES CITED:	Stroud's Judicial Dictionary, Fifth Edition Fletcher v Nokes [1897] 1 Ch 271 Fox v Jolly [1916] 1 AC 1 Austin v Secretary, Department of Family and Community Services (1999) 92 FCR 138
DECISION:	See paragraph 46.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

DAVIES AJ

THURSDAY, 1 MARCH 2001


3989/99 - WALLERA PTY LIMITED
v
CGM INVESTMENTS PTY LIMITED & ANOR

JUDGMENT

1    HIS HONOUR: The plaintiff, Wallera Pty Limited (“Wallera”), has sued for a declaration that a Franchise Agreement dated 15 May 1984, entered into between it as franchisee and the first defendant, CGM Investments Pty Limited (“CGM”) as franchisor, remains binding on CGM. The plaintiff claims orders restraining CGM and the second defendant, A Whistle and Co Pty Limited (“Whistle”), from taking any action which would implement or be dependent upon the purported termination of the Franchise Agreement and from doing any act or thing which would bring about the cancellation or omission of the plaintiff’s entry in the Yellow Pages telephone directory.

2    CGM and Whistle have cross-claimed for a declaration that the Franchise Agreement has been validly terminated and for orders restraining Wallera from holding itself out as being associated with a business under the name “Electrodry” or from utilising Trade Mark No A565298 and No A439894 issued in favour of Whistle.

3    At the hearing, Mr P W Gray of counsel appeared for Wallera and Mr J T Johnson of counsel appeared for CGM and Whistle.

4 At the conclusion of the plaintiff’s case, Mr Johnson moved the Court for judgment in accordance with Part 34 rule 8 of the Supreme Court Rules which reads, inter alia:-

…
(2) An opposite party may, after the conclusion of the evidence in the beginning party’s case in chief or after the conclusion of the evidence given for all parties, move the Court for judgment for that opposite party in the proceedings generally or on any claim for relief in the proceedings on the ground that, on the evidence given, judgment for the beginning party could not be supported.
(3) Where the ground of an opposite party’s motion under subrule (2) is established, the Court shall give judgment for the opposite party accordingly.
(4) Where an opposite party moves the Court under subrule (2), he may not adduce evidence or further evidence in the proceedings generally or on the claim for relief in question, as the case may be.
…

5    This rule has particular application in a case where it is alleged that a plaintiff’s case must fail for lack of evidence. On such a motion, the issue is whether, taking the plaintiff’s evidence at its highest, the plaintiff must fail. Notwithstanding that a motion under the rule may be dismissed, the court may nevertheless go on to dismiss the plaintiff’s case on the ground that one or more witnesses for the plaintiff should not be believed or that their evidence should not be given the effect for which the plaintiff contends. An application of the rule is useful when counsel for the defendant proposes not to address generally on the evidence in the case but rather to point to some specific matter or matters said to constitute a fatal flaw in the plaintiff’s case.

6    It appeared during the course of submissions that counsel were intending to address generally on all aspects of the case. It seems to me, therefore, that the motion under the rule achieved nothing other than to give Mr Johnson the tactical advantage of addressing first. As counsel addressed on the basis that they were making final submissions, I do not propose to deal separately with the motion.

7    Wallera was set up when, in 1984, Mr N K Jain, who is now the principal executive of Wallera, and Mr P H Burchell, who is the principal executive of CGM and Whistle, proposed that a company should be formed to take on, inter alia, the franchise for the Sydney area of a carpet dry-cleaning process which the defendants were promoting. Wallera was incorporated with a nominal share capital of $100,000 divided into 100,000 shares at $1 each. Originally, two shares were issued, one of which became registered in the name of CGM and the other in the name of Jain Co. Services.

8    On 15 May 1984, a Loan and Shareholders Agreement was entered into whereby it was agreed that CGM and Jain Co Services would each advance to Wallera $50,000 interest free for a term of three years. There was a right conferred upon each of the debtors to redeem the loan in whole or in part by the issue of shares at a premium of $999 each. On the same day, a Deed of License was executed which recited that Whistle owned the name “Electrodry” and had made application for a trademark and which further recited that Whistle had certain rights to use the process originally developed by Fibrecare Corporation of America to electromagnetically dry-clean carpets. The Deed went on to provide that Whistle grant to CGM an exclusive licence to use the name “Electrodry” and to operate the process for the term of fifty years from the date of the Deed.

The Franchise Agreement of the same date provided, inter alia:-


“1. C.G.M. warrants:

(i) It has the exclusive right to the use of the name ‘Electrodry’ and shall retain such right for the ensuing fifty (50) years for the area referred to in the First Schedule (hereinafter called ‘the area’).

(ii) It has the right to use the electromagnetic carpet drycleaning process (hereinafter called ‘the process’) originally developed by the Fibrecare Corporation of America.

2.(a) C.G.M. hereby grants to Wallera an exclusive license to use the name Electrodry but only for the area and in association with the process.

…

3. Wallera may divide the area into such sub-areas as it may deem expedient and grant sub-licenses within the terms of its rights conferred upon it by this agreement.

4. In consideration for the grant of license as aforesaid Wallera shall pay a license fee to C.G.M. of One dollar ($1.00) per month payable annually in advance.

5. Wallera shall exploit its rights to use the name Electrodry and the process in a proper and businesslike manner.

6. Wallera cannot publish and promote the name Electrodry for any other purpose than as a description of the process without the written consent of C.G.M..

…

8. This agreement shall be terminated forthwith upon the following grounds:

(i) Should either party fail to remedy any breach committed by it of the provisions of this agreement within one month after being given notice by the other party that it requires such breach to be remedied.
…”

9    Under another agreement entered into on 15 May 1984, CGM agreed to provide Wallera with personnel with expertise in the marketing of the process described by the name “Electrodry” and to make available to Wallera a certain television commercial advertising the name “Electrodry” and the process and the benefit of existing advertising time booked with Channel 10. In consideration therefore, Wallera agreed to pay CGM forthwith the sum of $50,000.

10 Both Mr Jain and Mr Burchell became directors of Wallera. It appears that Mr Burchell or members of his organisation took responsibility for teaching at least the first sub-franchisees who operated the franchises in the Sydney region. In 1985, apparently because a firm called Specialised Chemicals refused to allow the description “electromagnetic” to be used, the process ceased to be called an “electromagnetic” process and was referred to thereafter as an “exothermic” process. Mr Jain has given evidence, which I accept on this point, that despite the change in the description, no change was made to the practical operation of the dry-cleaning process. It is not suggested that any new licence agreement between Whistle and CGM was entered into.

11    Clause 9.1 of an agreement entered into on 27 November 1997 between several parties, including the present litigants, provided:-

“9.1 Wallera and CGM covenant agree and acknowledge with each other that in respect of the Franchise Agreement the process referred to in paragraph 1(ii) thereof ceases on or about June 1985 to be the process referred to and became and continues to be an exothermic process the subject of a contractual licence between Whistle and CMG [sic] .”

12    In 1997, Wallera had many sub-franchisees or subcontractors operating the franchise throughout Sydney. However, by then, disputes had arisen between Mr Jain and Mr Burchell. CGM had commenced proceedings against Wallera, Mr Jain and two other parties relating to an issue of shares. Whistle had sued Wallera for $59,000 which it alleged was owed to it.

13    The agreement of 27 November 1997 resolved a number of these disputes. Wallera agreed to pay Whistle $59,000 by 26 September 1998. Wallera agreed to pay CGM $2,300 by 26 September 1998. A company, Welcome Park Hotels & Resorts Pty Limited, agreed to pay Whistle $104,000 by 26 September 1998. CGM agreed to transfer to Mr Jain or his nominee all the shares held by it in Wallera for a consideration of $34,700. Various guarantees and indemnities were given.

14    Since that time, Mr Burchell has ceased to play a part in the affairs of Wallera. However, the licence fee provided by the agreement of 15 May 1984 is only $1 per month. The small amount of the licence fee might not have mattered had Wallera purchased all its chemicals from Whistle. The two main chemicals which were manufactured or distributed by Whistle were described as “Electro 1” (or E1) and “Electro 2” (or E2). Wallera did not always purchase all its chemicals from Whistle but from time to time it sourced comparable chemicals from other manufacturers. In 1999, Wallera, taking the view that Whistle’s prices were too high, commenced to purchase its chemicals from Shellmode Pty Limited (“Shellmode”). The chemicals, called by Shellmode “Shel 1” and “Shel 2”, when supplied to Wallera were named “Wal 1” and “Wal 2”.

15    In late 1998, CGM commenced to threaten termination of the Franchise Agreement. A letter from CGM to Wallera, dated 1 November 1998, which was signed by Mr Burchell, read, inter alia:-

“… At one time you agreed to allow Rick Nash to visit with each of the operators to show them how the process operates, as Wallera had never provided proper instruction. At that time it was discovered that the operators were not using the chemicals in the manner required to properly perform the process. The operators were at the time shown the correct way to achieve the proper results. Further the operators acknowledged that when shown the correct way to apply and use the process the difference in results was significant (the word remarkable was actually used). You are aware of the quantity of chemical required to complete the process in any given area. Further you are aware that with all Franchisees it is a condition that the chemicals SHOULD ONLY BE USED IN ACCORDANCE with the instructions and that includes the fact that the Electro 1 should not be diluted. …
…
In general terms each drum of Electro 1 will in retail sales clean about $1500.00 worth of cleaning. You appear to be advertising prices that are below the prices we have advocated and that is your choice. In those circumstances the amount you would normally achieve would be less than $1500. If we take the extreme that you achieve $2000.00 from each drum and your cleaning turnover is $400,000.00 then the number of drums used should be at least 200. I know that your turnover was at least $400,000 before you took over the area of Sutherland and Campbelltown. So one could only assume that the turnover should be at least $400,000 and in essence is most likely $500,000 plus.
…
In addition to the chemical usage mentioned above we note that Wallera has not purchased any E Gard since December last year. Whereas in the previous year Wallera purchase 16 drums of E Gard. Our company has allowed as a conditional concession Wallera to use the name Electrodry for the purpose of applying E Gard although the Franchise Agreement specifically does not allow that. It could be reasonably assumed that fabric protection is being applied to customers that have been promoted through Electrodry. If Wallera does not want to use the product supplied called E Gard solely supplied by A Whistle & Co (1979) Pty Ltd for the purpose of fabric Protection then CGM will insist that no other product can be used in association with the name Electrodry. If other products are used then this would be a breach of the agreement. If products other than E Gard are being used for fabric Protection then this should cease immediately.
As part of the cleaning process it is essential that all carpets should be vacuumed before they are cleaned. The reason is obvious. Any fluff left on the surface of the carpet will stop the Electro 1 penetrating the surface. In addition the process is designed to remove the oil, grease and any dirt held to the fibre by the same. It will not in itself remove particulate matter. This must be removed by proper vacuuming. In the main most householders do not have a vacuum cleaner of sufficient strength, vacuum flow or agitating ability to remove the particulate dirt. That is why we have always recommended vacuum cleaners that will do a proper job. I refer you to the Australian Standards (AS/NZ 3733;1995). In the Standard it specifically states that when using the bonnet method carpets should be vacuumed. It is so strong in its recommendation in this regard that it also states that carpets should be vacuumed when steam cleaning as well. Further the Standards refer to souring of carpets. This is the process of using the Electro 11. This is to neutralise the alkaline chemical that may be applied to the carpets such as Electro 1. Unless the Electro 11 is applied as per the directions the carpets will not be neutralised. They can be left with an alkaline residue, which will cause deterioration in the carpet fibre. For you [r] information, as has been advised previously, for each 100 litres of Electro 1 at least five litres of Electro 11 is required.
…
We consider the [sic] Wallera has breached its Franchise Agreement by not using the process in the proper manner and as such we give notice that the above mentioned breaches should be corrected immediately. ”

16    Notwithstanding that that letter was expressed as a notice under clause 8 of the Franchise Agreement, no step was taken at the end of the month to terminate the Agreement. It is not alleged that the Franchise Agreement terminated one month after service of that letter. On 7 November 1998, Mr Jain replied to that letter stating, inter alia:-

“(1) Quantity of chemicals used is a function of type of carpet and extent of soiling and has relationship to the surface area and not dollar value. T.O. would vary depending upon the price charged.
(2) Revenue of Wallera from cleaning operation is from carpet cleaning (both dry & steam), upholstery (fabric & leather) cleaning, flood/fire and water damage restoration, repairs, fabric protection, deodorisation and sanitisation treatments and anti static treatment. Except for carpet dry cleaning use of E1 & E2 has no relationship to total revenue.
…
(4) Quality cleaning is not only a function of right use of chemicals & process but also personal judgement of operators in deciding what else is appropriate to particular needs of the customer. This being a service, customer is ultimately the final arbitrator and our emphasis is very much on customer satisfaction. This is reflected in 70% of our customers being repeat or recommended which probably is highest of any ‘Electrodry’ operation in Australia.”

17    That letter was responded to by a letter, dated 20 November 1998, from CGM which read, inter alia:-

“The contract states that the name Electrodry can only be used by Wallera to describe the process and only be used in association with the process and for no other purpose. … Simply put it means that name Electrodry can only be used in association with the process which [is] subject to the agreement between A Whistle & Co (1979) Pty Ltd and CGM Investments Pty Ltd.
Further the agreement states that Wallera must conduct the business in a proper manner. This would include using the process as directed to all Franchisees and in accordance to the contractual license agreement between A Whistle & Co (1979) Pty Ltd and CGM Investments Pty Ltd. The conditions of the contract state the way in which the process should be used. Wallera has been made aware of those conditions on numerous occasions. CGM Investments states that any guidelines as laid down by the Australian Standards give the terms of the proper manner in which to clean carpet and should be read in conjunction with the terms as set out between A Whistle & Co (1979) Pty Ltd and CGM Investments Pty Ltd as to the correct use of the process. These guidelines state that the professional carpet cleaner prior to cleaning should vacuum all carpets and that all carpets should be neutralised as is the process in the case with the exothermic process.
…
Again you state in your letter that you are carrying out services such as fabric Protection, antistatic Treatment, leather cleaning, repairs, flood restoration using the hot water extraction method.
Again we will restate that these services are not to be provided under the name Electrodry.
If you continue to provided [sic] these services it will be a continuing breach of the agreement.
It is imperative that Wallera restrict its operation for use of the name to Electrodry to the ‘process’ as provided by A Whistle & Co (1979) Pty Ltd under the agreement with CGM Investments Pty Ltd for the cleaning carpets. In consideration for Wallera restricting its operations to the use of the process in a manner as prescribed to all other Franchisees who have a right to use the name Electrodry, CGM Investments Pty Ltd will agree to allow Wallera to extend the use of the name to include lounge cleaning services but not for any other service whatsoever. …”

18    By a notice dated 5 August 1999, CGM gave the following notice of breach in purported accordance with clause 8 of the Franchise Agreement. The notice stated, inter alia:-

“C. Wallera have failed to apply the process in a proper and business like manner by failing to apply and use the required levels of chemicals as specified and required in the process.
…
Take notice that:

1. Wallera may remedy the above mentioned default by immediate and strict compliance with the process, specifically in relation to the correct application of the required levels of chemicals utilised in the process.

2. Unless Wallera complies with the requirement of this notice within 28 days after service of this notice, CGM proposes to take such action as is specified in clause 8 of the Franchise Agreement and such further and other actions as it may be entitled to pursue.”
(emphasis added)

19    In response to that notice, the solicitors for Wallera, apparently thinking that it was the failure to purchase chemicals from Whistle which was the cause of the problem, replied by letter dated 12 August 1999, inter alia:-

“Clearly the notice is invalid as there is no obligation under [sic] our client to purchase chemicals from your client nor is there any defined process in the agreement between our respective parties.”

20    The solicitors for CGM, in a letter dated 18 August 1999, responded:-

“We refer to your letter of 12th August, 1999 and advise that our client would rely upon clauses 1(ii), 2(b), 5 and 7 of the Franchise Agreement dated 15th May, 1984; the entirety of the Agreement for supply of materials and initial training entered into between the parties on 15th May, 1994 [sic] and the Deed dated 27 November, 1997 specifically clause 9 thereof to establish the use by Wallera Pty Ltd of the electromagnetic carpet dry cleaning process and subsequent exothermic dry cleaning process, which processes require the use of specific chemicals for the process to be applied correctly. We would submit that there is a clear obligation on your client to purchase the chemicals from our client to enable the process advertised under the name of ‘Electrodry’ to be properly carried out. For your client to use chemicals obtained elsewhere is a clear breach of the Agreement or alternatively to utilise the chemicals provided by our client in a manner other than prescribed in the process of which your client is fully aware is similarly a clear breach of the Franchise Agreement and subsequent amending Deeds.
Accordingly, our client stands by its Notice pursuant to clause 8 requiring your client to rectify its current default.”
(emphasis added)

21    The evidence does not show that any further step was taken to terminate the Franchise Agreement. However, clause 8 of the Agreement uses the words “shall be terminated forthwith”. It does not provide for a further notice of termination.

22    Clause 8 of the Franchise Agreement requires that notice be given. It may be implied that notice be in writing. The use of the word “notice” imports an act of formality. The notice of 5 August 1999 was appropriate in that respect. In the context of clause 8, a notice must bring to the attention of the recipient the fact that it is alleged that a breach has occurred and that the franchisor requires such breach to be remedied. In this context, a notice must be sufficiently explicit to make it clear to the franchisee what is the breach which the franchisor requires to be remedied.

23    In Stroud’s Judicial Dictionary of Words and Phrases, Fifth Edition, Vol.3, p 1703, “notice” is described as “a direct and definite statement of a thing, as distinguished from supplying materials from which the existence of such thing may be inferred”. In Fletcher v Nokes [1897] 1 Ch 271 at 274, North J, discussing a notice required to be given under statutory provision similar to s 129 of the Conveyancing Act, 1919, said:-

“I think the notice which is to be given under s 14 ought to be such a notice as will enable the tenant to understand with reasonable certainty what it is which he is required to do. I do not mean that the landlord need go through every room in a house and point out every defect. But the notice ought to be so distinct as to direct the attention of the tenant to the particular things of which the landlord complains, so that the tenant may have an opportunity of remedying them before an action to enforce a forfeiture of the lease is brought against him. In my opinion, the notice which the plaintiff has given to the defendant is not sufficiently specific. Sect. 14 says that it is to be a notice ‘specifying the particular breach complained of.’ I do not think that is met by a notice which simply says, ‘You have broken the covenants for repairing.’ The plaintiff has not condescended upon any details, and, in my opinion, the notice is not sufficient under s 14.”

24    Likewise, in Fox v Jolly [1916] 1 AC 1, Lord Buckmaster LC, discussing the same statutory provision, said at p 15:-

“… The notice must state with sufficient particularity the breach of which the landlord complains, and that breach the tenant must satisfy within a reasonable time. If he does satisfy it, it would not be open to the landlord to allege that there was another breach of another covenant, which had been referred to in the notice, but had not been sufficiently specified, which had not been remedied.
In the present case I think the notice sufficiently specified the landlord’s complaints. It gave the tenant adequate notice of what he was required to do, and it provided full and sufficient information upon which he could determine what course of action he should adopt.”

25    Their Lordships were there discussing a statutory provision which gave greater detail to the obligation than is expressed in clause 8. Nevertheless, the term “notice” is used in clause 8 in a context which requires the notice to provide adequate notification to the franchisee of what he is required to do if the Franchise Agreement is not to be terminated for breach. Indeed, the fact that clause 8 provides for automatic termination is an additional indication that it is appropriate to require that the notice make clear what is the breach which, if not remedied, will lead to termination. It must be clear what is the failure which will bring about an automatic termination.

26    In Austin v Secretary, Department of Family and Community Services (1999) 92 FCR 138 at 146-7, Drummond J discussed cases in other contexts in which the term “notice” was given the meaning I have attributed to it in clause 8.

27    At the commencement of the proceedings, Mr Johnson was asked to identify the breach or breaches of the Franchise Agreement on which he relied. He said that he was not relying upon any particular instance, which I take to mean that he was not relying on any particular incidents or acts. Mr Johnson said that he was relying upon “a general failure”. Mr Gray added that he understood that there were two breaches alleged, one, the use of products other than the products which were appropriate to the process and the other that, whatever products were used, the process itself was not used properly. Mr Johnson expressed agreement with that explanation.

28    Mr Johnson submitted that it was not proved by Wallera that it was using the correct chemicals.

29    Mr Johnson cross-examined Mr Jain on two documents which were marked for identification but were not tendered in evidence. They were described as “material safety data sheets”. Mr Jain agreed that they referred to the chemicals being supplied by Shellmode. The data sheets were required to be kept in the operator’s vehicles as a safety measure. Mr Jain agreed that the data sheets described each of the chemicals as having an identical alkaline level of pH8-9. He agreed that, for the purposes of the process, it was necessary for one of the chemicals to be a neutralising agent and that an acidic chemical and an alkaline chemical may neutralise each other. When asked how the two data sheets came to show a similar alkaline level, Mr Jain said that he did not know but there may have been a typographical error. Mr Jain said that he had relied upon Shellmode to provide the correct chemicals.

30    Mr Jain’s knowledge, or lack of knowledge, of the process is shown by this passage of his cross-examination:-

“Q. So, would it be correct to say that, to your knowledge, there are products in addition to Electro 1 and Electro 2 utilised as a chemical process in the activities of Wallera under the name Electrodry?
A. I don’t know whether to call it a process but a number of chemicals are required to do a complete job.
Q. In respect of what you describe as the complete job, do you understand the way in which the two chemicals are intended to react together?
A. I’m not sure there is any chemical reaction.
Q. What do you understand to be meant by the words ‘exothermic process’?
A. My understanding is that when the carpet is scrubbed using the floor polishers, during the process the heat is generated and that’s why it’s called exothermic process.
Q. And the exothermic process involves the application of two chemicals?
A. Yes.
Q. And are you able to say why it is necessary to have those two chemicals?
A. Well, one is a cleaning agent and another is a neutralising agent.
Q. Again, I’m not a chemist, would it be correct to say - and correct me if I am wrong - from a layman’s viewpoint one chemical balances out the other chemical in a proper application?
A. Not really.
Q. Not really?
A. No, because the quantity of two chemicals used would vary depending on the soiling of the carpet. You will be using more Electro 1 when the carpet is highly soiled whereas you will not be changing the Electro 2 quantities.”

31    In my opinion, the notice dated 5 August 1999 did not allege that Wallera was using the wrong chemicals. The issue raised by that notice was “the required levels of chemicals”. A notice under clause 8 must be sufficiently precise to bring to the attention of the franchisee what is the particular breach complained of. Had the breach been that Wallera was using the wrong chemicals, it would have been easy for the notice to say so. The letter of 18 August 1999 from the defendants’ solicitors purported to give details of the breaches relied upon and it intimated that there was a clear obligation on Wallera to purchase the chemicals from “our client”. However, that allegation had no substance and it is not now relied upon. In my opinion, the notice dated 5 August 1999 did not encompass the fact, if it be a fact, that the chemicals purchased from Shellmode were different from E1 and E2 which Whistle supplied.

32    I should add that there was nothing in the affidavits filed prior to the commencement of the proceedings which indicated that there was an allegation on the part of the defendants that the chemicals used by Wallera were not the correct chemicals. Had that allegation been raised, it could readily have been dealt with by a chemical examination of what were alleged to be the correct chemicals and of what the chemicals used by Wallera actually were.

33    Annexed to an affidavit of Mr Jain, which had been filed prior to the hearing, there is a copy of a letter from Shellmode to Mr Jain, dated 3 August 1999, which had quoted for the chemicals which Mr Jain sought to purchase. The letter described “Shel 1” as “equivalent to E1” and “Shel 2” as “equivalent to E2”. Mr Johnson submitted during the hearing that this letter should not be accepted into evidence to prove that the chemicals produced by Shellmode were equivalent to those distributed by Whistle. Mr Johnson submitted that the issue was an important one and should not be proved by evidence of this type. Mr Johnson submitted that, if the letter was accepted into evidence, the effect of the evidence should be limited by an order made under s 136 of the Evidence Act, 1995.

34    I rejected the submission as it seemed to me that the letter of 3 August 1999 was some evidence that the Shellmode chemicals were equivalent to those distributed by Whistle. There was no evidence to the contrary and Wallera had not been informed, either by the notice of 5 August 1999 or by the letters which had been sent to it by the defendants’ solicitors, that the issue as to the content of the chemicals was one in respect of which the parties were truly in dispute. With this background, I consider that the allegations concerning the material safety data sheets, which are not in evidence, have little weight, the allegations being raised only during the course of the hearing in respect of documents which are not in evidence.

35    I turn now to the issue whether the chemicals were used by Wallera and its sub-franchisees at the required level.

36    Some days prior to the hearing, after briefly perusing the affidavits filed on behalf of both parties, I advised both counsel that it seemed to me to be essential that affidavits be filed describing the subject process and dealing with the issue as to whether or not there had been a breach by Wallera in carrying out the process. Subsequently, a further affidavit, sworn by Mr Jain on 5 February 2001, was filed. This affidavit stated, inter alia:-

“7. Carpet Dry Cleaning essentially comprises three steps:
(i) Vacuuming
(ii) Spraying the carpet with appropriate chemical
(iii) Scrubbing the carpet using a floor polisher but with cloth pads soaked with a neutralising agent.
As well, for particular spots and stains, particular additional chemicals are used. There is heat generated while scrubbing. The method in step (iii) is generally known as an ‘exothermic process’. As I understand it is a process of this general kind which is referred to as ‘the process’ in The Franchise Agreement.
8. The quantity of chemicals needed varies with each job, depending on numerous factors including for example:
(a) type of spot or stain
(b) severity
(c) type of carpet
(d) depth of carpet
These factors are assessed, job by job, by the operator carrying out the job. There is no one level of chemicals required for carpet cleaning using ‘the process’.”

37    Mr Johnson has relied upon cross-examination of Mr Jain with respect to a document which was a deed of variation to a franchise agreement between Wallera and Mr Ghali, a sub-franchisee. The deed was entered into by Whistle, Wallera and Mr Ghali. There was a reference in the cross-examination to the year 1996. Accordingly, it appears that this deed was executed in that year. However, the deed itself is not in evidence, having been merely marked for identification. I have not seen it.

38    The following evidence was given in cross-examination:-

“Q. It [a clause of the deed] reads, ‘The franchisee acknowledges that the quality of work performed is essential to the continuation of the business’?
A. Yes.
Q. ‘And agrees to use the chemicals that are used for the exothermic cleaning process’?
A. Yes.
Q. ‘In line with the stated guidelines as laid down by the franchisor’?
A. Yes.
Q. ‘The franchisee acknowledges that the general guideline is that for each $1,500 of turnover’?
A. Yes.
Q. ‘In carpet cleaning, approximately one 25 litres of Electro 1 of chemical’?
A. Yes.
Q. ‘Will be used and for each $6000 of carpet cleaning, five litres of Electro 2 will be used’?
A. Yes.”

39    Mr Johnson relied upon those answers given in cross-examination that the general guideline for the process was that for each $1,500 of turnover in carpet cleaning, approximately 25 litres of the chemical E1 would be used and that for each $6,000 of carpet cleaning, 5 litres of the chemical E2 would be used.

40    There is no document before the Court which describes the relevant process. If CGM or Whistle ever distributed a document specifying the process to be followed in the dry-cleaning of carpets and the required level or levels of chemicals to be used, that document is not in evidence. The letter of 20 November 1998 from CGM to Wallera, which I have, in part, set out above, contains a paragraph which purports to identify the process to be followed. The paragraph refers to “the conditions of the contract”. There is no condition in any contract which is in evidence before the Court, other than the oral evidence as to the terms of Mr Ghali’s contract, which sets out details of the process. The paragraph refers to “Australian Standards”, but they are not in evidence. The paragraph refers to terms as set out between Whistle and CGM as to the correct use of the process. However, no such terms are in evidence. The Deed of License between Whistle and CGM does not contain any such terms.

41    As two principal chemicals are used in the dry-cleaning process, I assume that they may have a reaction, the one with the other, and that some relative levels of application may be appropriate. However, what the process is and what the appropriate levels of chemical use are, is not something which is disclosed by any material before the Court. Because of the references in Mr Burchell’s letters to “Australian Standards”, I very much suspect that the appropriate levels could be ascertained from an examination of those Standards. However, that material is not before the Court.

42    I would reject, however, the simplistic proposition put forward, in reliance upon the deed of variation of Mr Ghali’s sub-franchise agreement, that the process required any strict correlation between the use of chemicals and the monetary value of work done. The plaintiff and the defendants have been in association since 1984. In that time, monetary values have changed markedly.

43    In the result, I am satisfied that the notice of 5 August 1999 was not a valid notice for the purposes of clause 8 of the Franchise Agreement. It did not draw Wallera’s attention to what was alleged to be the breach to be remedied. It referred to “required levels of chemicals” but it did not say what those levels were or where they may be found. It did not say whether the levels were referrable to the monetary value of work done or to a strict proportion as between the two principal chemicals that were applied or the nature of the work to be done or the difficulty of the cleaning task.

44    I am further not satisfied that there has been any breach by Wallera of the Franchise Agreement. No particular breach has been relied upon. Although I am satisfied that Mr Jain has an abysmal ignorance of the process which his company, its sub-franchisees and subcontractors have been applying to the carpets of the residents of Sydney, I am not satisfied that, even were the notice of 5 August 1999 a sufficient notice, Wallera and its agents have breached the Franchise Agreement by deliberately flouting or ignoring some specific requirement of the process. It is not sufficient that one could draw an inference that, having regard to Mr Jain’s ignorance of the process and his lack of supervision of the operators, it is probable that, from time to time, one or more of the operators has failed to perform the process correctly. When the issue is whether a franchise agreement has been terminated for breach, a court cannot conclude that it was so terminated, unless the court is satisfied that some specific breach has occurred and, as in the present case, that one month’s notice requiring the breach to be rectified has been given. Those are not the facts of the present case.

45    In the course of cross-examination, it was put to Mr Jain that he was using the title “Electrodry”, not only in relation to the dry-cleaning of carpets, but also in relation to associated activities such as the cleaning and protection of fabrics which, it was said, were not comprehended by the Franchise Agreement. No issue in relation to this matter is raised by either the Summons or the Cross Claim and it is unnecessary for me to deal with it.

46    For these reasons, I shall make the declarations claimed in paragraphs 1 and 2 of the Summons. It is premature to make the orders as sought in paragraphs 3 and 4 of the Summons. If CGM or Whistle acts inconsistently with these declarations, the plaintiff can then seek further relief. The Cross Claim is dismissed. The defendants are to pay the costs of the proceedings.

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Last Modified: 03/05/2001