Workplace Safety Australia Pty Limited v Simple OHS Solutions Pty Limited
[2013] NSWSC 1936
•11 December 2013
Supreme Court
New South Wales
Medium Neutral Citation: Workplace Safety Australia Pty Limited v Simple OHS Solutions Pty Limited [2013] NSWSC 1936 Hearing dates: 18 November to 21 November and 26 November 2013 Decision date: 11 December 2013 Jurisdiction: Equity Division Before: Rein J Decision: Judgment for cross-claimants against the cross-defendants in the amount of $208, 177.39 (plus interest calculated on the basis of Practice Note SC Gen 16).
Judgment for defendant on plaintiff's claim
Catchwords: CONTRACT - whether the defendant's failure to obtain 15 new customers per month over a six month period ("minimum customer requirement") and the failure to pay an instalment amount were breaches of the Distribution Agreement ("the Agreement") entitling the plaintiff to terminate; whether clause 2(c) of the Agreement required payment by a Saturday and whether, if it did, time for payment was essential permitting termination for non-payment without notice
TRADE AND COMMERCE - whether the Agreement was a franchise agreement subject to the Franchising Code of Conduct ("FCC") and hence whether the defendants contravened s 51AD of the Competition and Consumer Act 2010 (Cth) and the FCC
ESTOPPEL - whether the defendant was estopped from relying on the FCC and breaches by the plaintiff
ESTOPPEL - whether the plaintiff was estopped from relying on the breach of the minimum customer requirementLegislation Cited: Competition and Consumer Act 2010 (Cth) Cases Cited: Australian Competition and Consumer Commission (ACCC) v Kyloe Pty Ltd [2007] ATPR 42-194; [2007] FCA 1522
Barilla v James (1964) 81 WN (pt 1) (NSW) 457
Capital Networks Pty Ltd v
.Au Domain Administration Limited [2004] FCA 808
Equititrust Ltd v Franks [2009] NSWCA 128
Franks v Equitiloan Security Pty Ltd (No 2) [2008] NSWSC 33
Kell & Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 906
Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993
Master Education Services v Ketchell (2008) 236 CLR 101, (2008) 249 ALR 44
Overmyer Industrial Brokers Pty Ltd v Campbells Cash & Carry Pty Ltd [2003] NSWCA 305
Rafferty v Madgwicks; Time 2000 Systems (Aust) Pty Ltd v Rafferty (2012) 203 FCR 1, [2012] FCAFC 37
St Alder v Waverly Council [2010] NSWCA 22
Tudor Developments Pty Ltd v Makeig (2008) 72 NSWLR 624, [2008] NSWCA 263
Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49Texts Cited: Lewison and Hughes Interpretation of Contracts, 1st ed (1989) Sweet and Maxwell
Seddon et al Cheshire & Fifoot Law of Contract (Australian Edition) 10th (2012) LexisNexis ButtersworthsCategory: Principal judgment Parties: Workplace Safety Australia Pty Limited (plaintiff / first cross defendant)
Simple OHS Solutions Pty Limited (first defendant/ first cross claimant)
Sue Louise Bottrell (second defendant/ second cross claimant)
Kim Kerri Ann Schekeloff (second cross defendant)Representation: Counsel: T. Alexis SC and Z. Steggall (plaintiff/first and second cross defendants)
M. Ashhurst SC and L. Corbett (first and second defendants/ first and second cross claimants)
Solicitors: Von Muenster Solicitors & Attorneys (plaintiff and first and second cross defendants)
Cara Marasco & Co (first and second defendants/ first and second cross claimants)
File Number(s): 2012/106183
Judgment
REIN J: These proceedings relate to a "Distribution Agreement" ("the Agreement") entered into by the plaintiff Workplace Safety Australia Pty Limited ("WSA") and the first defendant Simple OHS Solutions Pty Ltd ("Simple). The second defendant Ms Susan Bottrell ("Ms Bottrell") guaranteed Simple's obligations under the Agreement. Both WSA and Simple are companies involved in occupational health and safety advice ("OHS") and training. By the Agreement Simple was appointed distributor in Victoria and Tasmania of OHS compliance software license "packages" which included access to a website and could include call centre assistance both of which were managed by WSA. Simple is also permitted to sell an annual handbook offering OHS information. All packages and the handbook were created by WSA.
WSA seeks to recover from Simple, and Ms Bottrell as guarantor, an amount of $101, 890 being the balance due under the Agreement and as against Simple damages for loss of further profits under the Agreement. Although initially an amount in excess of $800K was sought by WSA against Simple for damages for lost profits, this has been reduced to a claim for $46, 400.
There is no dispute that WSA sent a letter of termination of the Agreement on 26 March 2012. Simple disputes that WSA was entitled to terminate the Agreement. Simple does not contend that the Agreement remained on foot rather it claims that it has lost $208, 177.79 as a result of it having entered into the agreement or it being, wrongfully terminated. WSA disputes that it is liable for any amount but accepts that the $208K represents the quantum of loss suffered by Simple as a result of entering into the Agreement or from WSA's termination of the Agreement if that be found to have been wrongful.
WSA's termination letter of 26 March 2012 alleged that Simple was:
(1) In breach of a term of the Agreement (clause 5.4 and Schedule 1, Item 2) which required Simple to provide for a minimum of 15 new customers per month over a six month period ("the minimum new customer requirement").
(2) In breach of the terms of payment which required the instalment of $32, 896 due by virtue of clause 2.2(a)(v), on WSA's case, to be paid on 23 March 2012.
Simple accepts that it had not, as at 23 March 2012, introduced 15 new customers per month or 90 new customers over the 6 months between 23 September 2011 to 23 March 2012. Simple asserts however that WSA is estopped from relying on that clause because of what was said by Ms Kim Schekeloff, the principal of WSA, to Ms Bottrell on two occasions and to Ms Tracey Bentley, an employee of Simple who was to be responsible for sales of the WSA packages and handbooks on one occasion. I shall refer to this as "the first estoppel issue".
Simple accepts that it did not pay the amount of $32, 896 by 23 March 2013 but disputes that, on the proper construction of the relevant clause, it was required to do so by that date and disputes that, if required to do so, WSA was entitled to terminate the Agreement without further notice for that failure
Simple claims that clause 2.2(c) and clause 5.4 are provisions which are in the nature of a penalty because, by virtue of these clauses, WSA is, on Simple's breach, permitted to retain all money paid by Simple and to recover the client list for which Simple has paid a sizeable fee ($284K) in addition to the "Distributor Licensing Fee" of $95K.
By its cross claim Simple asserts that the Agreement was subject to the Franchising Code of Conduct ("FCC") made under the Competition and Consumer Act 2010 (Cth) ("CCA Act") and that the plaintiff contravened s 51AD by failing to comply with the disclosure requirements before the Agreement was entered into, and purporting to terminate the Agreement without the notice required under the FCC. I shall refer to this as "the franchise issue". WSA disputes that the Agreement is a franchise agreement and asserts that, if contrary to its contentions, it is a franchise agreement Simple is estopped from so asserting. I shall refer to this issue as the "conventional estoppel issue".
Simple also claims that the termination was invalid by reason of the first estoppel, contravention of the FCC notice requirements and breach of implied terms in the Agreement and that the plaintiff repudiated the Agreement. There was no dispute that the Agreement came to an end on 26 March 2012 on WSA's case because it had validly terminated it and on Simple's case because WSA had repudiated the Agreement. Although Simple did not immediately accept that repudiation it has implicitly done so since. Simple also claims that WSA and Ms Schekeloff engaged in unconscionable conduct within the meaning of the CCA by having WSA terminate the Agreement for Simple's failure to meet the minimum customer requirement in the face of the representation asserted by Simple.
The Agreement
I set out below the relevant clauses but also the many other provisions of the Agreement said to have a bearing on the franchise issue.
Interpretation 1.1 Definitions
In this Agreement, unless the contact [sic] otherwise requires:
"Agreement" means this Distribution Agreement between the Supplier, Distributor and Guarantors.
"Business Day" means a day on which banks are open for general banking business in Sydney;
"Confidential Information" means all information of a confidential nature of the Supplier, in any form or medium, including, without limitation:
(a) the Subscription Packages, including but not limited to the content, format, layout and look and feel of the products and services included in the Subscription Packages;
(b) all customer lists, marketing plans and methods, including lists of Customers introduced to by the Distributor; and
(c) all other trade secrets and Know-How.
"Customer List" means the list of Customers the Supplier shall supply to the Distributor in accordance with clause 2.2(b).
"Customer List Fee" means the fee set out in item 11 of the Schedule.
"Customer Subscription Fee" means the fee set out in item 6 of the Schedule.
"Customers" means customers who subscribe to a Subscription Package.
"Distributorship Fee" means the fee set out in item 4 of the Schedule.
"Guarantee" means the rights and obligations established under clause 25, and such rights and obligations shall continue beyond the term of this agreement as is necessary for the purpose of enforcement.
"Initial Term" has the meaning given in clause 9.1.
"Intellectual Property Rights" means all present and future rights conferred by statute, common law or equity anywhere in the world in or in relation to any copyright, trade marks, designs, patents, circuit layouts, business and domain names, inventions, and other results of intellectual activity in the industrial, commercial, scientific, literary or artistic fields.
"Know How" means the collective industry & campaign experience, information or know how gained and owned by the Supplier through the conduct of its business by its owners, employees and contractors (whether written or unwritten) including but not limited to the Supplier's systems, methods, technologies and affairs; financial approaches, strategies, directions, concepts, plans; research, development, operational, legal, marketing or accounting information, concepts plans, strategies, directions or systems; technology, inventions, discoveries, improvements, processes, formulae, techniques, understandings & insights, manuals, instructions, source & object codes for computer software; and supplier information.
"Laws" means all laws including rules of common law, principles of equity, statutes, regulations, proclamations, ordinances, by-laws, rules, regulatory principles and requirements, statutory rules of an industry body, statutory mandatory codes of conduct, writs, orders, injunctions, judgments, and Australian generally accepted accounting principles.
"Minimum Customer Requirement" means the minimum number of New Customers who must subscribe to a Subscription Package as a result of being introduced to the Subscription Packages by the Distributor (as set out in item 2 of the Schedule), excluding Customers renewing their existing subscriptions.
"Minimum Purchase Requirement" means the minimum number of Products the Distributor must purchase each time the Distributor places an Order with the Supplier for Products (as set out in item 3 of the Schedule).
"Order" means an order for Products placed by the Distributor to the Supplier in writing and in accordance with clause 12.
"Price" means the price that the Distributor must pay for each Product purchased from the Supplier, being $35 (plus GST) at the date of this Agreement or such other price advised by the Supplier in writing from time to time.
Product means the National Reference Handbook created and published by the Supplier.
"Risk Service Provider" Simple OHS Solutions Pry Ltd
"Subscription Packages" means the subscription package products as identified from time to time on including the subscription packages identified in item 8 of the Schedule including all updates, new editions and new versions and any other products which the Supplier and the Distributor agree to include in the Agreement from time to time and add to the Schedule. For the avoidance of any doubt, Subscription Packages does not include the "Safety Systems Interactive Online Audit Tool" owned by Workplace Safety Australia Audit Tools Pty Ltd or any similar products.
"Supplier's Proportion" means the proportion of the Customer Subscription Fee the Supplier is entitled to (as set out in item 7 of the Schedule).
"Term" means the Initial Term and any Subsequent Term.
"Territory" means the territory set out in item 10 of the Schedule.
"Trade Mark" includes but is not limited to the Supplier's common law trade mark WORKPLACE SAFETY AUSTRALIA and Registered Trade Mark No 111 8268:
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2. SCOPE
2.1 Sole Distribution
In consideration of the payment of the Distributorship Fee and subject to the terms of this Agreement, the Supplier grants to the Distributor and the Distributor accepts:
(a) subject to clause 2.4, the exclusive right to market and sell Subscription Packages in the Territory only; and
(b) a limited and revocable non-exclusive licence to use the Trade Mark for the purpose of marketing and selling Subscription Packages and Products in the Territory, but only in accordance with this Agreement.
2.2 Distributorship Fee and Customer List Fee
(a) Distributorship Licensing Fee. The Distributor must pay the Supplier the Distributorship Licensing Fee in the following installments and at the following times:
(i) $10,000-00 (plus GST) on or before the signing and exchanging the agreement. This installment shall not be refundable in the event this Agreement is terminated for any reason after this installment is paid; and
(ii) $85,000-00. (plus GST) on completion of one week's initial training in accordance with clause 17.1 (which shall be at a time and on a date nominated by the Supplier). This installment shall not be refundable event this Agreement is terminated for any reason after this installment is paid.
(iii)$281, 584.00 (GST Inclusive) Customer database fee, renewal list calculated and valued at point of sale (Going concern).
(iv) $150000.00 on completion of initial training in accordance with clause 17.1 (Currently scheduled to be completed by the 16th of September 2011).
(v) $32896.00 each quarter after the date of completion of initial training as detailed in (iv) above until the amount of $131584.00 is paid in full.
(b) Customer List Fee. In consideration of the Distributor paying the Supplier the Customer Licence Fee in accordance with this clause 2.2, the Supplier agrees to grant the Distributor an exclusive licence to use the Customer List in the Territory for the Term for the purpose of marketing and selling Subscription Packages and Products in the Territory, but only in accordance with this Agreement.
(c) The Supplier and Distributor agree that the amount of fee payable in respect of the Distributorship Fee and the time for payment of these fees is of the essence. The Supplier may immediately terminate this Agreement by notice in writing if the payments set out above are not paid to it in the manner and timeframes stated in this Agreement. If the Supplier terminates this Agreement in accordance with clause 2.2(c), clause 3.2 does not apply.
(d) For the avoidance of doubt, any GST payable on the Distributorship Fee shall be the responsibility of the Distributor and the Distributorship Fee are exclusive of any GST payable in accordance with the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Any GST payable under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) must be paid at the same time the Distributorship Fee instalments are paid to the Supplier.
(e) The Supplier shall issue the Distributor with a properly rendered tax invoice (as required by the A New Tax System (Goods and Services Tax) Act 1999 (Cth)) in respect of each Distributorship Fee instalment payable in accordance with this clause 2.2
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3. CUSTOMERS AND BUSINESS
3.1 Subscription Fee
The Distributor will charge each Customer the Customer Subscription Fee as set out in item 6 of the Schedule for each Subscription Package it sells, and must remit the Supplier's Proportion of the Customer Subscription Fee as set out in item 7 of the Schedule, within thirty (30) days of receipt of the Customer Subscription Fee from the Customer. The Distributor must use all reasonable endeavours to ensure a Customer pays for any Subscription Package purchased from the Distributor within fourteen (14) days of the relevant purchase. Payment of the Supplier's Proportion of the Customer Subscription Fee and the time for payment is of the essence.
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5.1 Obligations of the Distributor
The Distributor must:
(a) within 30 calendar days of signing and exchanging this Agreement submit to the Supplier a detailed business plan setting out how the Distributor intends to fund and operate the Distributor's business in the Territory;
(b) at all times during the Term, act dutifully, diligently and in good faith and diligently promote (in accordance with all reasonable directions of the Supplier) the Subscription Packages in the Territory;
(c) subject to clause 5.3, use its best endeavours to obtain subscriptions for Subscription Packages by Customers in the Territory;
(d) ensure at all times that it is clear to all third parties that the Distributor is a separate legal entity from the Supplier and that the Distributor is not an agent of the Supplier;
(e) disclose in all communications with Customers (including but not limited to written correspondence and literature regarding Subscription Packages) that it is the authorised distributor of the Company in the Territory;
(f) use the Trade Mark in its complete form and strictly subject to the Supplier's licence to use the Trade Mark (and terms of that licence) in respect of marketing and selling Subscription Packages in the Territory;
(g) immediately inform the Supplier of any matter which may affect the distribution of the Subscription Packages within the Territory (including but not limited to the Distributor's ability to market and sell the Subscription Packages);
(h) comply with all reasonable directions of the Supplier;
(i) ensure at all times that any notices relating to the Supplier's Intellectual Property Rights appearing in or on the any products or services that comprise the Subscription Packages, the Distributor website or marketing and promotion material or any other form of communication or literature regarding the Subscription Packages are not altered or removed;
(j) promptly communicate to the Supplier any complaints made by Customers regarding the Subscription Packages;
(k) comply with all applicable Laws regarding the distribution of the Subscription Packages at all times, including but not limited to laws in respect of marketing and advertising, product liability, fair trading and consumer protection;
(l) be competent and knowledgeable in and conversant with all aspects of each Subscription Package and ensure that any personnel of the Distributor are equally competent, knowledgeable and conversant;
(m) furnish to the Supplier within seven (7) calendar days of the Supplier's request, any information sought by the Supplier regarding the distribution of the Subscription Packages in the Territory;
(n) process and administer all sales of Subscription Packages or Products in accordance with the process advised to the Distributor by the Supplier from time to time;
(o) if the Distributor sells a Subscription Package or Product, immediately provide the Supplier with an exact copy of each invoice the Distributor issues to a Customer in respect of that sale and provide the Supplier with any other information the Supplier may reasonably request from time to time in respect of a Customer and/or any Subscription Packages or Products they purchase during the Term; and
(p) if the Distributor sells a Product to a Customer independent of a Subscription Package, sell the Product for the recommended retail price advised by the Supplier at the relevant time (or as stated on as applicable) and comply with all other provisions set out in this Agreement in respect of communicating with Customers, use of the Trade Mark, Confidential Information, Intellectual Property Rights, marketing and promotional material and any other clause in this Agreement expressly or impliedly relating to the purchase and sale of Products by the Distributor.
5.2 Prohibitions on the Distributor
The Distributor must not:
(a) appoint any agents or subcontractors to carry out any of its obligations under this Agreement without first obtaining the Supplier's express written consent (the terms and granting of which shall be in the Supplier's sole discretion);
(b) register any trade mark or develop or use any other branding or indicia in respect of the Subscription Package or the Distributor's business in distributing the Subscription Packages without first obtaining the Supplier express prior written approval (the terms and granting of which shall be at the Supplier's sole discretion);
(c) pledge the Supplier's credit for any purpose;
(d) make any false, misleading, deceptive or derogatory representations about the Supplier or Subscription Packages;
(e) incur any liability or assume any obligation on the Supplier's behalf;
(f) release to the market, sell or otherwise make available to a third party or distribute any products or services identical or similar to the products or services that comprise the Subscription Packages;
(g) use or make reference to any products or services other than the products or services that comprise the Subscription Packages in marketing the Subscription Packages;
(h) use or permit the use of the Subscription Packages for any unlawful purpose;
(i) alter, update or otherwise modify the products or services that comprise the Subscription Packages in any way including altering, updating or otherwise modifying their content or altering any badge, label, sign or trade mark on the Subscription Packages (or components of the Subscription Packages) as supplied by the Supplier; or
(j) use or permit the use of the Trade Mark, Subscription Packages or Supplier's Intellectual Property Rights in a manner that is not expressly authorised under this Agreement (or any other agreement in writing between the parties from time to time);
(k) without the Supplier's prior written consent (the terms and granting of which shall be in the Supplier's absolute discretion).(sic)
The Supplier and Distributor agree that the terms of this clause 5.2 are essential terms of this Agreement, if the Distributor breaches any term in this clause 5,2, the Supplier may elect, at its discretion, to immediately terminate this Agreement by notice in writing to the Distributor. If the Supplier terminates this Agreement in accordance with this clause 5.2, clause 3.2 does not apply.
5.3 Marketing and Promotional Material
The Distributor must:
(a) obtain the Supplier's approval and consent (the terms and granting of which shall be at the Supplier's sole discretion) in respect of all proposed marketing and promotional activities and communications, including but not limited to marketing or promotional activities and material, literature regarding the Subscription Packages or Products, email marketing, telephone marketing and all written communications (including mail based correspondence) before conducting such marketing and promotional activities or releasing such correspondence or communications (as applicable) in the Territory; and
(b) consult and receive the Supplier's prior written approval in respect of obtaining and registering a proposed domain name and creating a website in respect of the Subscription Packages or Products (the terms and granting of which shall be at the Supplier's sole discretion).
5.4 Minimum Customer Requirement
The Distributor must meet the Minimum Customer Requirement, as set out in Item 2 of the Schedule. If the Distributor does not meet the Minimum Customer Requirement for each six (6) month period during the Term of this Agreement, the Supplier may elect, at its discretion, to immediately terminate this Agreement by notice in writing to the Distributor. If the Supplier terminates this Agreement in accordance with this clause 5.4, clause 3.2 does not apply.
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6.1 Distribution
The Distributor must:
(a) not at any time directly or indirectly market or sell the Subscription Packages (or copies of the products contained in Subscription Packages) outside the Territory without the prior written consent of the Supplier (such consent may be withheld in the Supplier's absolute discretion). If the Distributor breaches this clause 6.1(a) the Supplier may elect, at Its discretion, to immediately terminate this Agreement by notice in writing to the Distributor. If the Supplier terminates this Agreement in accordance with this clause 6.1(a), clause 3.2 does not apply;
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7.2 Distributor to cease supplying old versions of Subscription Packages
The Distributor must, on receipt of notice from the Supplier that the Subscription Packages (or any contents of the Subscription Packages) have been changed in accordance with clause 7.1, immediately cease distributing old versions of the Subscription Packages (or relevant products included in the Subscription Packages) (provided that such old or superseded [sic] versions of the products have not been marked or used in any way whatsoever) and submit an Order for the new versions from the Supplier.
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8.3 Use of Supplier Issued Forms and Documents
Without limiting clause 5.3, the Distributor must at all times during the Term use in the manner required all standard forms and documents supplied to the Distributor by the Supplier in respect of marketing and selling Subscription Packages or Products, including but not limited to invoices issued to Customers for the purchase of Subscription Packages or Products, Subscription Package or Product information sheets and any other forms or documents created and issued by the Supplier from time to time. The Distributor must not at any time alter, modify or otherwise change any standard form or document issued to the Distributor by the Supplier in respect of marketing and selling the Subscription Packages or Products.
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11. SUPPLY OF COMPETITOR'S PRODUCTS OR SERVICE
11.1 No Competition
The Distributor and Guarantors must not:
(a) distribute, sell or market in the Territory or outside the Territory any products or service of a competitor of the Supplier which are similar to or perform the same or similar function as the Subscription Packages (or the products or services that comprise a Subscription Package);
(b) solicit, entice, persuade, encourage, or otherwise induce, or attempt to solicit, entice, persuade, encourage or otherwise induce, any individual or third party who is a client or Customer of the Supplier or Distributor to cease doing business or reduce the amount of business that individual or third party would normally do with the Supplier or Distributor or to do business with the Distributor (outside the scope of this Agreement) or any undertaking, entity, company or individual with whom the Distributor or Guarantors are associated with in any way (directly or indirectly); or
(c) solicit, entice, persuade, encourage, or otherwise induce or attempt to solicit, entice, persuade, encourage or otherwise induce, any individual or third party who is a contractor or employee of the Supplier to terminate their contract or contract of employment with the Supplier, whether or not the person or third party would commit a breach of their contract;
during the Term and for a period of:
(i) two years after the end of the Term; and
(ii) one year after the end of the Term; and
(iii) six months after the end of the Term.
If the Distributor breaches this clause 11.1, the Supplier may at its sole discretion immediately terminate this Agreement by notice in writing to the Distributor. If the Supplier terminates this Agreement in accordance with this clause 11.1, clause 3.2 does not apply.
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17. TRAINING AND MANUAL
17.1 Initial Training
During the Term, the Supplier will provide at the Distributor's premises for the Distributor's personnel such initial training in the use, marketing and sale of the Subscription Packages or Products as the Supplier considers necessary to facilitate the marketing, distribution and sale of the Subscription Packages. The Distributor will bear ail expenses and training costs associated with the provision of such training.
17.2 Additional Training
The Distributor may, from time to time, request additional training, and the parties will agree on the terms of provision of such additional training. The Supplier may also offer to the Distributor additional training during the Term, as may be required from time to time. Such additional training shall be provided by the Supplier at the Distributor's premises (unless otherwise agreed by the Parties) and the Distributor will bear all expenses and training costs associated with such additional training.
17.3 Manual
The Supplier may, during the Term, provide to the Distributor a manual in respect of marketing and selling the Subscription Packages or Products which shall include (but not be limited to) standard forms or documents the Distributor shall be required to use when marketing and selling the Subscription Packages. The Distributor must comply with the manual and any (updates to the manual that the Supplier may issue from time to time during the Term) at all times.
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19.2 Goodwill accrues to Suppliers
All goodwill relating to the Subscription Packages (including the products and services that comprise the Subscription Packages) arising from the effort of the Distributor under this Agreement accrues to the benefit of the Supplier. If the Distributor wishes to transfer its rights under this Agreement for valuable consideration (in accordance with clause 3.2) it shall only be entitled to transfer for valuable consideration the existing customer list and the database it developed independently through its sole efforts during the Term of this Agreement.
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21 RECORDS, INSPECTIONS AND AUDITING
21.1 Maintenance of records
The Distributor must maintain all records that are reasonable and necessary, or specified by the Supplier, to enable the Supplier to confirm the Distributor's compliance with the terms of this Agreement.
21.2 Audit
Upon giving seven (7) days' notice, the Supplier or its representatives may during the Term of this Agreement and for a period of 1 year after its termination, audit any of the Distributor's records or files, which are related to the Distributor's obligations under this Agreement. Any such audit will be conducted during normal business hours and will be at the cost of the Supplier.
21.3 Inspection
The Distributor must, after giving seven (7) days' notice from the Supplier, allow the Supplier and any person authorised by the Supplier, reasonable access during normal business hours to inspect any matter or thing connected with the Distributor's fulfilment of its obligations under this Agreement.
21.4 Books
The Distributor during the Term of this Agreement:
(a) keep complete and proper books and records of income and expenditure, assets and liabilities in a form which will allow the accurate and prompt extraction of information regarding the performance of its obligations under this Agreement;
(b) ensure that those books and records are prepared according to the Corporations Act and generally accepted Australian accounting principles and show a true and fair view of ail transactions and the financial and contractual position of the Agency relating to the performance of the Distributor's obligations under this Agreement; and
(c) organise and safely store all books, records, invoices, timesheets, bank statements, accounts, agreements and other documents relating to the Distributor's obligations under this Agreement.
21.5 Annual accounts
Upon reasonable request by the Supplier, the Distributor must provide to the Supplier accounts in respect of the services performed in the immediately preceding financial year, calendar year or 12 months of the Term.
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SCHEDULE 1
12. Minimum Customer Requirement:
15 new Customers per month to subscribe to a Subscription Package set out in item 8 during the Initial Term unless otherwise agreed between the parties in writing. The Minimum Customer Requirement for Subsequent Terms shall be nominated by the Supplier, at the relevant time but shall not to be less than the Minimum Customer Requirement in the Initial Term.
10. Territory
Victoria and Tasmania
Is the Agreement a Franchise Agreement?
The FCC applies to all franchise agreements entered into in Australia. By s 51ACA(3) of the CCA franchising is specifically identified for the purpose of Part IVB of the Act as an industry and "franchisors and franchisees are participants in the industry of franchising, whether or not they are also participants in another industry".
Section 51AD provides:
A corporation must not, in trade or commerce, contravene an applicable industry code.
The FCC is an applicable industry code and it, by regulation 4, defines a franchise agreement as follows:
4 Meaning of franchise agreement
(1) A franchise agreement is an agreement:
(a) that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and
(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
(i) owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii) specified by the franchisor or an associate or the franchisor; and
(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
(i) an initial capital investment fee; or
(ii) a payment for goods or services; or
(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv) a training fee or training school fee;
but excluding:
(v) payment for goods and services at or below their usual wholesale price; or
(vi) repayment by the franchisee of a loan from the franchisor; or
(vii) payment of the usual wholesale price for goods taken on consignment; or
(viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
(2) For subclause (1), each of the following is taken to be a franchise agreement:
(a) transfer, renewal, extension, or extension of the scope of a franchise agreement;
(b) a motor vehicle dealership agreement.
(3) However, any of the following does not in itself constitute a franchise agreement:
(a) an employer and employee relationship;
(b) a partnership relationship;
(c) a landlord and tenant relationship;
(d) a mortgagor and mortgagee relationship;
(e) a lender and borrower relationship;
(f) the relationship between the members of a cooperative that is registered, incorporated or formed under any of the following laws:
(i) Co-operatives Act 1992 of New South Wales;
(ii) Co-operatives Act 1996 of Victoria;
(iii) Cooperatives Act 1997 of Queensland;
(iv) Co-operative and Provident Societies Act 1903 of Western Australia;
(v) Co-operatives Act 1997 of South Australia;
(vi) Co-operative Industrial Societies Act 1928 of Tasmania;
(vii) Co-operative Societies Act 1939 of the Australian Capital Territory;
(viii) Co-operatives Act 1997 of the Northern Territory;
(ix) the Corporations Act 2001.
WSA points out that for an agreement to be a franchise each of the elements in the clause 4(1)(a)-(d) of the FCC must be met: see Capital Networks Pty Ltd v Au. Domain Administration Limited [2004] FCA 808 per Bennett J at [126] and Australian Competition and Consumer Commission (ACCC) v Kyloe Pty Ltd [2007] ATPR 42-194; [2007] FCA 1522 at [25] and [63]. WSA accepts clause 4(1)(a) is satisfied but contends that (b) is not satisfied and accordingly that (c) and (d) are not satisfied. However WSA accepts that the grant of the right to market and sell subscription packages in Victoria and the Tasmania pursuant to clause 2.1 and the licence to use the WSA Trade Mark for that purpose is "'substantially or materially associated' with WSA's trademark, within the meaning of clause 4(1)(c)" (see PCS para 37). I think the required association with WSA's trademark is clear in the Agreement: see clause 2.1(b), 5.1(f)(d) and 5.2(j) and in the manual by virtue of the form of the emails and letters which Simple is required to use.
I do not think that there can be any doubt that clause 4(1)(d) is met as Simple was required to pay two amounts (i.e. $284K as an initial capital investment fee) and another $95K as a license fee.
It follows that the only remaining element which Simple needs to satisfy is clause 4(1)(b) and if that is satisfied then 4(1)(c) will have been met.
The questions which I must determine in this connection are:
(1) Whether WSA granted to Simple the right to carry on the business of offering, supply or distributing goods or services in Australia.
(2) Whether if the answer to (1) is yes did it do so under a system or marketing plan substantially determined, controlled or suggested by WSA.
Mr Ashhurst and Mr Alexis both draw attention to the decision of the Full Federal Court in Rafferty v Madgwicks; Time 2000 Systems (Aust) Pty Ltd v Rafferty (2012) 203 FCR 1, [2012] FCAFC 37 per Kenny, Stone and Logan JJ. The case provides an authoritative statement of what is required to meet the criteria of a system or marketing plan whereby goods or services are sold. The following paragraphs are of particular importance:
[171] We turn to the second and third elements of cl 4(1)(b) of the Code. The Code does not define the expression "system or marketing plan". In ordinary English usage, the expression would signify a coordinated method or procedure, or scheme whereby goods or services are sold. This is apparently the sense in which the expression in used in the Code. Further guidance can be obtained from cases in the United States of America, where there is similar, although not identical, legislation: see Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808 at [101]-[119] (Capital Networks), where Bennett J set out the results of her research. See also Kyloe at [40] where Tracey J sets out a list of factors derived in part from Capital Networks. We are indebted to their Honours for their research and analysis, which forms the basis of the following discussion.
[172] Broadly speaking, although much depends on the circumstances of the case, these cases indicate that the following factors may be indicative of a system or marketing plan: specific requirements for accounting and record keeping; reservation by the franchisor of a right to audit the books of account and other records; inability of the franchisee to supply goods or services to customers without the franchisor's approval; reservation by the franchisor of the right to approve promotional and advertising material; provision by the franchisor of bonus structures or equivalent for those selling its goods or services; provision by the franchisor of training for staff selling its goods or services; stipulation of retail pricing structures, sales structures, sales quotas and the like; creation of marketing and sales territories; reservation by the franchisor of the right to approve sales staff; reporting systems in relation to profit or turnover; restriction on the franchisee selling competing products; controls on the use of brand and trading names; requirements for signage and merchandising; management structure; and badging requirements (mandatory use of trading name, uniforms, stationery, etcetera).
[173] In the ordinary course, whether a system or marketing plan is "substantially determined, controlled or suggested by the franchisor" is closely related to whether there is a scheme or marketing plan at all. Matters relevant to determination, control or suggestion may include: the extent to which the franchisee's business involves the sale of the franchisor's goods and services; the degree to which the franchisor assumes responsibility for some centralised management and for uniform standards regarding quality; whether or not the franchisor places the franchisee under an obligation with respect to advertising and promotional campaigns; and the extent to which the franchisor controls the franchisee's business, having regard to advertising and financial support, auditing of books, inspection of premises, hiring of staff, sales quotas, management training and the like.
Reference should also be made to para [174]-[185] where the Court examined the relevant clauses of the agreement in that case which this Court held justified the conclusion that clause 4(1)(b) of the Code was satisfied.
The plaintiff's closing submissions ("PCS") and the Defendant's closing submissions ("DCS") both address the specific indicia discussed in Rafferty but Mr Ashhurst and Mr Alexis were agreed on one matter which is that in making an assessment of whether or not there is a system or marketing plan controlled or suggested by the alleged franchisor the Court is required to stand back and consider the overall impression created by the agreement (or proposed agreement) rather than simply ticking off a scorecard: see T290.14-20 and T307 and T315 and see per Tracey J in Kyloe at [40].
Simple submits that by the Agreement it was given the right to sell supply or distribute goods and or services. It points to the fact that the nature of the business in which it was permitted to become involved was the sale of software licenses that permitted customers to obtain access to WSA's website for a year to utilise a range of occupational health and safety information and assistance and also the sale of an occupational health and safety yearbook. By clause 3.1 and Item 7 of the Schedule Simple was required to pay from each sale or grant of the license a fixed amount related to the size of the package being marketed. For example, on a sale of the Premium Package at a cost to a customer of $1,300, $450 was payable to WSA.
Mr Ashhurst drew attention to the fact that the business in question was quite different to a shop front business and nothing like a fast food outlet or a lawn mowing franchise and hence that some indicia referred to in the franchise cases are not relevant. The product was marketed by the distributor phoning the potential customer and the distributor receiving training in that call pursuant to clause 17.1 of the Agreement. The distributor was then instructed by the manual on how to communicate with the customer in relation to a virtual tour of the website. Access to the site for a trial period was very strictly controlled by WSA and the distributor was instructed on how to communicate with the customer after a sale was made. The manual directed the form of invoice to be sent to clients who had elected to subscribe.
WSA contends (see PCS para 40) that Simple was "engaged to obtain renewals and sales of the subscription packages and was to be paid for doing so, but was not providing goods/services packages i.e. the content of the subscription packages to the customer". Simple, says WSA, did not supply or distribute subscription packages but only offered the packages for sale.
Section 4(1) of the CCA defines supply as follows:
supply, when used as a verb, includes:
(a) in relation to goods-supply (including re-supply) by way of sale, exchange, lease, hire or hire-purchase; and
(b) in relation to services-provide, grant or confer;
and, when used as a noun, has a corresponding meaning, and supplied and supplier have corresponding meanings.
So if the items in question are goods "supply" includes sale and if they are services then supply includes "provide grant or confer". Mr Alexis accepted that the subscription packages might both goods and services: T289.1
Simple invoiced its customers and arranged for "delivery" of packages through WSA. Simple had to pay a proportion of the package subscription price but it was the vendor of the package. The Agreement itself refers to Simple as "selling" subscription packages and product (i.e. the handbook): see clause 5.1(o) and (p).
In my view, Simple was selling handbooks and also selling licenses or providing or granting licenses to customers for which Simple invoiced customers and I reject WSA's contention that the first element has not been met.
I turn now to whether Simple was, by virtue of the Agreement, supplying goods or services under a system or marketing plan substantially determined, controlled or suggested by WSA.
Simple draws attention to many clauses of the Agreement and to the content of the Administration Training Manual ("the manual"). The clauses to which attention is drawn by Simple are: clauses 1.1, 2.1, 2.1(a), 3.1, 5.1(a), 5.1(b), 5.1(e), 5.1(f), 5.1(g), 5.1(h), 5.1(i), 5.1(l), 5.1(m), 5.1(n), 5.1(o), 5.1(p), 5.2(a), 5.2(b), 5.2(f), 5.2(i), 6.1(a), 5.3(a), 5.3(b), 5.4, 7.2, 8.3, 11.1, 17.1, 17.2, 17.3, 21.1, 21.2, 21.3, 21.4, 21.5, Schedule I item 10.
Mr Ashhurst drew attention to the instructions in the manual for invoicing clients for trials at p 157 of Exhibit C3, order forms at p 191, requirements for record updating at p 325, tax invoices at p 214, the method of record payments at p 352, renewal letters at pp 197-213, welcome letters at p 272, procedure for payments at p 290 of the manual and the information sheet at p 357 which Simple was required by the manual to send.
There are a number of clauses which I regard as of particular importance in assessing the question of whether there was a scheme or marketing plan and whether it was substantially determined controlled or suggested by the franchisor:
(1) That Simple is required to submit, within 30 days of signing the Agreement, a detailed business plan setting out how Simple intends to operate (and less importantly fund) the Simple business.
(2) Simple is required to process and administer all sales in accordance with the process advised to Simple by WSA.
(3) If selling the Handbook, Simple must sell it for the recommended retail price advised by WSA "comply with all other provisions set out in this Agreement in respect of communicating with Customers, use of the Trade Mark, Confidential Information, Intellectual Property Rights, marketing and promotional material and any other clause in this Agreement expressly or impliedly relating to the purchase and sale of Products by the Distributor" (clause 5.2(p)).
(4) Simple is not permitted to sell competing products, cl 5.2(f) and cl 11.1, even outside the designated territory. WSA on the other hand is permitted to sell within Victoria and Tasmania but with payment of a percentage of the sale price to Simple.
(5) Clause 5.3 which states that Simple must obtain WSA's approval in relation to marketing and promotional material.
(6) The minimum customer requirement (clause 5.4)
(7) Clause 8.3 which sets out Simple's obligations in relation to use of supplier's issued forms and documents.
(8) WSA is to provide the training that WSA "considers necessary to facilitate the marketing, distribution and sale of the subscription package" the costs of which was to be borne by Simple (clause 17.1).
(9) Clause 17.3 dealing with the manual.
The manual is very prescriptive and it requires Simple to use pro forma letters, emails and forms with customers, including an email which is to be signed by a Simple staff member that describes that person as a Senior Account Manager of "Workplace Safety Vic/Tas" (with the logo of "Workplace Safety Australia" underneath).
Mr Alexis contended that Simple was free to market the packages and the Handbook how it liked but I do not think that is an accurate statement. Not only are there specific requirements to be followed but clause 17.3 permits WSA to include in the manual matters "in respect of marketing and selling the subscription package or products" with which Simple must comply. Also the information sheet specified in the manual is a form of marketing. The steps which the manual requires be followed are, in effect, a type of scripting. One example of this is if Simple is sending a complimentary edition of the handbook, it is required to use the letter at p 351 (and see p 350 of the manual, see also p 290, item 11 in relation to payment emails).
Mr Ashhurst made reference to what was said by the Full Court in Rafferty at [185]:
We agree with the trial judge that, in order to meet this requirement in cl 4(1)(b) of the Code it is not necessary for the details of a system or marketing plan to be set out in the franchise agreement. It is enough that the agreement creates rights and obligations that would enable the franchisor substantially to determine, control or suggest that the business be conducted under a system or marketing plan.
I think that comment is apt here as well given the terms of clause 17.3. Mr Alexis accepted that the relevant time at which the question of the Agreement's character as a franchise is to be viewed is at the time the Agreement is entered: see Rafferty at [137] ACCC v Kyloe per Tracey J [56]. It is not relevant whether WSA did or did not include in the manual directions as to the sale process or did or did not attempt to constrain Simple. What is important is that the Agreement gave WSA the power and right to control all aspects of the marketing and selling of the package and products.
There are other indicia of control to which the Simple points such as the right to require records to be maintained and to audit any of Simple's records or files relating to Simple's obligations under the Agreement, and to inspect "any matter or thing connected with" Simple's fulfilment of its obligations under the Agreement (clause 21.3).
Many of the indicia referred to in Rafferty are met. There are some indicia which are absent, namely:
(1) Simple is not by the express terms of the Agreement or the manual placed under an obligation with respect to advertising and promotion campaigns
(2) Simple is not required to have staff vetted by WSA
(3) Simple is not required to report in relation to profit and turnover
(4) There is no requirement for signage
(5) There is no imposition of a management structure
(6) There is no bonus structure
(7) Simple is permitted to use its own name
(8) There is no specification of the type of plant or equipment which Simple is required to use.
I think that items (4) and (8) need to be considered in the context of the nature of the business involved. It is very strongly web based and unlike, say a car dealership or a fast food outlet, signage in the normal sense is not significant. In relation to (1), it is true that there is no evidence of any advertising or promotional campaign which Simple is required to undertake but since the manual can specify any matter in respect of marketing and selling the packages (and products) control could extend to such requirement. The nature of the business precludes (8) being relevant.
Whilst there is no bonus structure I think the minimum customer requirement is relevant here - if Simple does not meet the specific target on average over 6 months WSA can terminate and the sale provisions of clause 3.2 do not apply.
In relation to Simple's use of name - it is true that Simple's name can appear on letters and emails but not with WSA's name and logo and the documents required by the manual to be used in much smaller print than WSA's name and logo which are required to be prominently displayed.
Simple points out that trial of the WSA website is equivalent to a sales display or marketing device (see Ms Schekeloff's affidavit dated 21 July 2012 para 40) and that is rigorously controlled. The extensive training which Simple staff were required to undertake is confirmatory of the importance of WSA control.
Another point made by Simple is that Simple is directed as to the price it can charge which price will be set out on the WSA website (see clause 3.1 and Schedule 6).
The three remaining indicia (2), (3) and (5) and relevant but their absence has to be weighed against the many indicia that are present.
I note that in [173] the Full Court in Rafferty refers as a factor to "the extent to which the franchisee's business involves the sale of the franchisor's goods and services". In relation to this point, Mr Alexis draws attention to the fact that Simple had an existing OHS business providing advice and training to its customers which it was intending to maintain. I accept that this is a relevant factor. One can imagine that where, for example, a business in selling hardware enters into an agreement to sell a particular brand of drill, the limited size of that aspect of the business might diminish the prospect that the agreement is a franchise. In many franchise operations the only business operated by the franchisee is the franchise business itself and this is particularly so in the fast food industry and in the real estate market. The fact that $95K was paid as the distributorship licensing fee and $284K for the customer list however points to a sizable business investment by Simple. In addition, the requirement of 15 new customers a month and the maintenance of the existing customers on the list points to a significant "operation" involved on the part of Simple even though the packages and Handbook was not the totality of its business.
Mr Alexis drew attention to the fact that at the time that the Agreement was entered into three other agreements were entered into by WSA (or a related company) and Simple. They were an Agency Appointment between Workplace Safety Australia Audit Tools Pty Ltd, a Service Agreement between WSA and Simple (for the provision by Simple of training and on site assessment of WSA clients) and a Consultancy Agreement between WSA and Simple whereby Simple would, if requested, provide risk evaluation and risk management training on a non exclusive basis. The other agreements are not expressed to be interdependent with the Agreement. Mr Alexis contends that it is relevant in examining whether or not the Agreement is a franchise agreement to have regard to those other agreements. Mr Ashhurst submits that the other agreements are irrelevant and he points out that nothing was done pursuant to them and that they terminated by effluxion of time. In fact WSA made only one referral to Simple: see para 103 of Ms Bottrell's affidavit dated 9 September 2012. Mr Alexis also submits that WSA made no demands and imposed no requirements on how Simple was to conduct its business in areas not covered by the Agreement, as such as in OHS site audits and in OHS advice and training. He also drew attention to the prospect that Simple could "leverage" work from customers who were on the client list, could in finding new customers for the WSA packages leverage work from them as well for other parts of its business that are not the subject of the Agreement.
Whilst I accept that the degree to which the Simple Agreement is involved in other non franchise business is relevant I do not see the fact that the WSA had no control, influence or say on how Simple conducted parts of its business that were not related to the Agreement is of itself relevant. The Act itself in s 51ACA which I have set out above at [11] recognises that a franchisee can be involved in both the franchise industry and an industry other than the franchise industry.
Another point made by Mr Alexis is that many of the clauses relied on by Simple are a type found in other agreements that are not franchise agreements. Accepting that is so, it seems to me that if the indicia treated as relevant by the authorities and in particular Rafferty are to be accorded weight they cannot be discounted because they might be found in an agreement which is not a franchise agreement. If there was no ability to control Simple in its marketing and other related aspects but WSA required Simple to make its records available to enable WSA check the number of sales made the existence of that right would not render the Agreement a franchise agreement.
Standing back from the matter, as it was agreed I need to do having regard to the clauses relied on by Simple, I am satisfied that Simple was required to market the subscription packages and handbooks under a system or marketing plan substantially determined, controlled or suggested by WSA.
It was agreed that if Ms Bottrell had been made aware that the Agreement was a franchise agreement and had she been given the notifications required by the FCC she would not have proceeded with the Agreement. As I have noted the extent of loss caused to Simple by virtue of having entered into the Agreement is agreed as $208K.
The Conventional Estoppel Issue
The next question which I need to determine is whether Simple is estopped from relying on the franchise point because both Ms Schekeloff and Ms Bottrell agreed that the Agreement was not a franchise agreement. Simple does not accept that characterisation of what was said and I shall return to this point. My attention was drawn to Overmyer Industrial Brokers Pty Ltd v Campbells Cash & Carry Pty Ltd [2003] NSWCA 305 per Basten JA with whom Beazley JA concurred, Tudor Developments Pty Ltd v Makeig (2008) 72 NSWLR 624, [2008] NSWCA 263, Kell & Rigby Pty Ltd v Flurrie Pty Ltd [2006] NSWSC 906, Barilla v James (1964) 81 WN (pt 1) (NSW) 457, at 464, 468 and Master Education Services v Ketchell (2008) 236 CLR 101, (2008) 249 ALR 44. Reference was also made to St Alder v Waverly Council [2010] NSWCA 22 per Handley AJA with whom Allsop P and Beazley JA concurred, a case concerned with an estoppel asserted against a statutory authority
I draw from these cases the proposition that, for conduct by private corporations or individuals which could give rise to an estoppel under the general law to be relied on against the operation of a statue, consideration must be given as to whether "the law that confronts the estoppel can be seen to represent a social policy to which the Court must give effect in the interests of the public generally or some section of the public" per Viscount Radcliffe in Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993, 1015-1016 cited with approval in Overmyer and Kell v Rigby.
As was pointed out in Tudor the statutory regulation of hire purchase and consumer credit transactions has consistently been found to fall within the principle that denies the effect of a waiver, acquiescence or conduct amounting to an estoppel: see [51] and at [71] per Basten J who made the point in relation to the Home Building Act 1989 (NSW) that a purpose of one of the sections of that Act was to "protect purchasers from themselves". As the High court explained in Ketchell breach of s 51AD of CCA does not make an agreement void, but as the Court also noted all of the remedies available under the CCA (such as s 80 and s 87 of the CCA) are available in respect of breaches of the FCC and I think that the legislation must be taken to have intended that franchises ought be protected by, at the very least, having the requisite notice and information provided to them. I regard the policy of the Act as precluding any "opting out" from its requirements even by express agreement let alone by virtue of an estoppel.
The estoppel asserted here is conventional estoppel based it is claimed on a mutual understanding arrived at from the fact that (on Ms Bottrell's evidence) Ms Bottrell said:
.... [I] am not interested in being a franchisee or anything like that. I want to have full control over how I do business.
And Ms Schekeloff replied:
Not this is not a franchise business and you will have complete control and autonomy over how you run the business.
See Exhibit C1, pp 59-60.
Assuming that, contrary to the view I have just expressed, the statute could be overridden it would be relevant that it was Ms Schekeloff who told Ms Bottrell that it was not a franchise agreement and that Ms Bottrell had no knowledge of the law relevant to franchises: see T222.15. Ms Bottrell was admitted as a solicitor several years ago but worked as such for a very limited time: T176. In Overmyer at [45], Young J was clearly of the view that there cannot be an estoppel by convention in respect of a statute where the person said to be estopped is unaware of the existence of the terms of the statute. I do not think that WSA can rely on an estoppel in such circumstances, even if it were not precluded from asserting an estoppel against the statute.
It was accepted by WSA that to support the estoppel detriment had to be established. This WSA sought to do by pointing to the fact that WSA paid the previous distributor Therapy Solutions Pty Ltd a portion of the monies received from Simple. The balance was used to wipe the debt which Therapy Solutions owed WSA. Mr Ashhurst relied on the fact that all of the monies paid to Therapy Solutions were monies paid by Simple and none of it came out of WSA's own pocket and it was clear that WSA was only paying out what it had obtained by, in effect, transfer of the distributorship from Therapy to Simple (see T127.45-T130.45 and Exhibit 1).
If WSA is entitled to the customer list WSA has, or will have, the asset valued in the Agreement at $284K. I am not persuaded that WSA will have suffered any relevant detriment if it is required to repay the money which it received from Simple.
I conclude that Simple is not estopped from relying on the fact that the Agreement was a franchise agreement.
In the light of my conclusion on the franchise issue and the Conventional Estoppel issue, it is strictly not necessary to address the other issues which arose but I shall briefly express my views on the main points.
Clause 2.2(c)
The "date of completion of initial training" was, it was agreed, 23 September 2012. Simple paid $32, 896 on 23 December 2012 and in an email confirmed that it would be paying the next instalment of $32, 896 on 23 March 2013. The question remains as to what was required by the words "$32, 896 per quarter after the date of completion of initial training" or to rephrase it more simply "$32, 896 per quarter after 23 of September 2011". The plaintiff claims it means 3 months after the 23 September (i.e. 23 March) and Simple contends that it means on the next business day after 23 (i.e. the 26 March 2012) because the 23 March was a Saturday.
In my view there is no warrant for reading the relevant date as the next business day - the fact that the 23 March was a Saturday is irrelevant. I note that at common law one of "four usual quarter days" was the 25 December 2012 (see Lewison and Hughes Interpretation of Contracts, (1989) Sweet and Maxwell, [13.02]) and given that modern technology permits the transfer of money at any time of the day or night I am not satisfied that there ought be any implied term that Simple was not required to have paid the money by the 23 March 2012.
Clause 2.2(c) Essential Term
The next question is, was the payment of $32K by the 23 March 2012, an essential term? WSA submit that clause 2.2(c) of the Agreement when read together with clause 2.2(a), (b), (d) and (e) made time for payment of the fees "of the essence". I think that reading is open but the clause is ambiguous because in the heading Distribution Fee and Customer List Fee are treated as quite separate fees - under the subheading as Distributorship Licensing Fee all of the fees are included and then in (c) there is a reversion to "Distributorship Fee" with no mention of the Customer List fee. I am inclined to think that the reference to Distributorship Fee in (c) was an error and that the words Distributorship Licensing Fee were intended but having regard to the fact that the clause, coupled with clause 23.3, grants WSA the right to immediately terminate for breach that the ambiguity must be construed against WSA: see Seddon et al Cheshire & Fifoot Law of Contract (Australian Edition) 10th (2012), para 21.4 and Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd (2005) 218 ALR 1; [2005] FCAFC 49 at [131] per Weinberg J. Accordingly Simple was not in breach by failing to pay the amount of $32K by 23 March 2012.
The First Estoppel Issue
The next issue is whether or not Ms Schekeloff, on behalf of WSA, represented to Ms Bottrell (and to Ms Bentley) that WSA would not initially insist on the minimum 15 new customers a month by stating at the Windsor Hotel on 10 August 2011 prior to execution of the Agreement ("the first occasion") saying
"I don't expect you to make your sales targets at first, but our office will help you and you will get there"
(see Exhibit C1, p 70) and on 22 September 2011, after execution of the Agreement ("the second occasion"):
"you and your staff have a lot to learn and it will take some time to come up to speed with all the processes so I don't expect you to make your sales targets initially but you will do very well I am sure and once you get someone to do the administration it will be a lot easier"
Ms Schekeloff denies that she said that she did not expect the sale targets to be met initially and asserts that she made it clear that she would be insisting on the minimum customer requirement. WSA drew support from Ms Schekeloff's son's evidence. Simple drew support from Ms Tracey Bentley's affidavit dated 10 September 2012 para 16 (Exhibit C1, page 112) in relation to an in occasion in the week after the Agreement was signed in which Ms Schekeloff said to Ms Bentley:
I don't expect you will generate 15 clients per month initially. You have a lot to learn in terms our processes and that will take some time.
In Franks v Equitiloan Security Pty Ltd (No 2) [2008] NSWSC 33 Brereton J summarised the ingredients of the equitable promissory estoppel as:
Thus in equitable promissory estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of a legal relationship with the defendant; (2) that the defendant has induced or acquiesced in the plaintiff's adoption of that assumption; (3) that the plaintiff has acted in reliance on its assumption; (4) that the defendant knew or intended that the plaintiff so act; and (5) that it will occasion detriment to the plaintiff if the assumption is not fulfilled [Waltons v Maher, 428-9 (Brennan J)]. Promissory estoppel, a creature of equity, is, typically, focussed on the conscience of the defendant: it operates when the defendant has induced, or acquiesced in, the adoption by the plaintiff of an assumption that the defendant will not assert its strict legal rights, so as to prevent unconscientious insistence by the defendant on those rights. It is essential to an equitable estoppel that the defendant knows or intends that the party who adopts the assumption will act or abstain from acting in reliance on it [Crabb v Arun District Council [1976] Ch 179 at 188; Waltons v Maher, 423 (Brennan J)].
The Court of Appeal in Equititrust Ltd v Franks [2009] NSWCA 128 (rejecting the appeal in Franks save in respect of the period for which the estoppel operated), at [17] noted that the parties had proceeded before it on the basis that the summary of Franks set out above was correct. Nothing was said before me to challenge its correctness.
By the PCS, paras 19-33, WSA argues that Simple's promissory estoppel case should be rejected. The first basis relies on the evidence of Mrs Schekeloff and her son that the representation was not made. The second basis asserted is that the period for the suspension of the obligation was not clear. Ms Bottrell said she thought that the period of suspension was the first six to twelve months (T194) but she agreed that she did not get that from Ms Schekeloff and she had not sought to clarify the period with Ms Schekeloff. The third basis asserted is that Simple cannot rely on any representations because reliance "would be inconsistent with the warranty in clause 18.4 and clause 28.7 of the agreement" (see para 29 of PCS).
Credibility of Witnesses and the Evidence as to the Representation
There was a marked difference between the credibility of Ms Shekeloff and her son John on the one hand and Ms Bottrell and Ms Bentley on the other. I have every confidence that Ms Bottrell was telling the truth - her credit was not impugned. Ms Bentley was also, I am satisfied, a truthful witness although for reasons I shall explain her evidence did not assist Simple to the anticipated degree.
Ms Schekeloff's credibility was impugned by Simple. In cross examination she frequently evaded questions by her answers: see T103.31, T107.46, T109.25-31, 37-40, 44-50, T111.16-28, T112.46-9, T118.44- T119.10, T138.5-12. The cross examination demonstrated that Ms Shekeloff's understanding was that Ms Bottrell was by asking "what is WSA's loss rate" (see T 114.39-44) interested in establishing the retention rate of clients in Victoria and Tasmania but Ms Schekeloff gave WSA's loss rate of 5% for NSW. The Victoria/Tasmania loss rate, she admitted, was 25-30% and she knew that at the time of her discussion. Ms Schekeloff was not able to give any satisfactory explanation as to why she answered a different question to the one which she understood she was being asked by Ms Bottrell (see T115.50-T116.4) but I think the answer is obvious. Ms Schekeloff, I infer, thought that if she told Ms Bottrell the position in Victoria and Tasmania Ms Bottrell would or may have wanted a bigger discount on the fee for the customer list than the 8% Ms Schekeloff in fact proposed. Ms Bottrell's evidence is that she did not specifically ask Ms Schekeloff about the retention rate in Victoria and Tasmania, that she knew that Therapy Solutions had not met its sales targets (see T186.40-T189.15) and that she believed that Simple could "make a far better fist of it" but as Mr Ashhurst pointed out that does not assist Ms Schekeloff on the credit issue.
Another matter was Ms Schekeloff's denial that she had sought the advice of her solicitor in writing the letter of 6 February 2012 when she did in fact have a solicitor, who regularly did work for WSA, look at those letters (T141-142).
Mr Ashhurst made the point that Ms Schekeloff's attempt (T134-135) to bring in as one of the "very serious" issues that had developed between WSA and Simple, the fact that she had received a call from an employer of Simple which she later conceded was not a serious issue (T137.30) was another example of her lack of credibility.
Ms Schekeloff asserted that she told Ms Bottrell about the dispute she had with Therapy Solution as to its failure to meet minimum requirements (see T118.42) but when asked about this she admitted she had not (see T119.1-34).
There are some indications that the lack of sales to new customers was not viewed as significant at least initially. First there was no written communication until 3 February 2012, notwithstanding the very limited number of sales in the period 23 September to 3 February. Ms Schekeloff did give evidence of a conversation in December 2011 with Ms Bottrell (see para 97 of Ms Schekeloff's first affidavit) in which Ms Schekeloff raised the limited number of sales and Ms Bottrell's response was that she would "get back" to her which conversation Ms Bottrell does not deny. It is suggested by Simple that what really drew Ms Schekeloff's ire was the implicit criticism by Simple staff and Ms Bottrell of the procedures in place. Ms Schekeloff admitted that she was annoyed by Ms Bottrell's response in relation to administrative procedures insisted upon by Ms Schekeloff but denied that that annoyance was the reason for advancing the failure to meet the minimum customer requirement.
The only point of the cross examination of Ms Schekeloff is that Simple sought by it to demonstrate that Ms Schekeloff's conduct was consistent with someone who did not mind if the sales to new customers did not initially meet the target laid down in the Agreement. Hence coupled with her knowledge of Therapy Solutions' failure over a long period to reach anything like the minimum new customer requirement (which was also a term of the Therapy Solutions distribution agreement), points to the likelihood of Ms Schekeloff making the comments which Ms Bottrell and Ms Bentley attribute to her.
I did not find Ms Schekeloff explanation as to why she had not sent an email to Ms Bottrell expressing her concern about the poor sales figures as convincing.
I think the absence of any written communication until February 2012 prior to the unpleasantness relating to administrative issues and Ms Schekeloff's agreement that it was necessary for Simple staff to be properly trained in the administrative procedures offers some limited support for the contention that Mrs Schekeloff anticipated that sales would be slow initially. However I prefer to place more weight on the fact that Ms Bottrell is a witness whose evidence I can accept without hesitation whereas I think Ms Schekeloff's credibility was open to doubt.
I do not think much store can be set on Mr Schekeloff's evidence. First he admitted to having conferred with his mother on several occasions before his affidavit was prepared and afterwards, on the central issue of fact on which he was called giving rise to the concern that he was willing to say whatever would assist WSA's case. Secondly, in answering the question of how many new customers WSA had achieved in Victoria and Tasmania after the termination of the Agreement as probably nineteen or twenty (at T250.35) he subsequently admitted he did not know the real sales figures in the period shortly after termination when giving his answer (see T250-252) giving rise to a concern, as was put to him by Mr Ashhurst that he was giving evidence that he thought would assist WSA's case without regard to its truth.
Ms Bentley in her affidavit gave evidence that Ms Shekeloff had said to her the words I have set out in [60]. When Ms Bentley was asked in cross examination to recount what Ms Shekeloff had said she did not include this piece of evidence. It was not however put to Ms Bentley that what she had said in her affidavit was false or was something from which she now resiles, leaving open the real possibility that Ms Bentley did recall what Ms Shekeloff had said when she prepared and swore her affidavit but which she has now forgotten. Ms Bottrell did offer Ms Bentley a bonus if she achieved 20 new customers a month. Her business plan prepared in February allowed for 20 new subscriptions a month (T205.30). Ms Bottrell says she had hoped to reach the minimum new customer requirement in the near future.
In relation to Ms Bottrell's evidence in cross examination, Mr Alexis contended that in any event Ms Bottrell had accepted that Ms Shekeloff had not said anything about the minimum number of customers when they met at the Windsor Hotel shortly before the contract was signed: see T201.25-29. Taken out of context, I think it is possible to view the passage in that way but having regard to the form of the question and the overall tenor of her evidence: see T193.45-T208, I do not accept that she was admitting that the representation, which she asserted in her affidavit was made on the first occasion, had not been made. In any event the concession only related to the first occasion and not to the second occasion.
Mr Alexis drew attention to the fact that when WSA sent its termination letter Simple did not refer to the alleged representation. I think this is a relevant matter but it is greatly reduced in weight by virtue of the fact that Simple's solicitors were asserting that the Agreement was a franchise agreement and if correct had no need to advance the estoppel argument.
I accept that Ms Bottrell's recollection of events is accurate and to be preferred to that of Ms Shekeloff and her son. I am satisfied that Ms Shekeloff did say to Ms Bottrell that WSA would not be insisting on the minimum requirement of 15 new customers a month "initially", both at the Windsor Hotel and a few days after the Agreement was signed.
In relation to the lack of specificity as to the period, Simple relies on the approach taken in Franks v Equitiloan Securities Pty Ltd (No 2) in which Brereton J held that an assurance that "nothing will happen if everything is proceeding properly" in connection with a contractual right in the lender to terminate the loan if interest and capital were not paid on a particular date, precluded the lender from acting on the default in repayment until it gave a notice of default. Thus a promisor can resile from his promise and bring the estoppel to an end but must inform the promisee that the promise will not continue. By February 2011 WSA made it clear that it would enforce the minimum customer requirement but it could not terminate for breach of the minimum customer requirement over the 6 month period if it was estopped from relying on even the first month of the first six month period. This leads on to the second argument advanced by WSA - namely that the representation properly understood meant only that WSA would not insist on 15 new customers per month for the first month not that it would not require 90 new customers over the first six month period. I am unable to accept that view of the representation. I regard the representation as being that for an initial period (unspecified but probably intended to be no more than a few months) WSA would not treat the period for minimum customer requirement as having commenced.
In relation to the "inconsistency" point referred to in [63] above I think it ignores the nature of promissory estoppel. Promissory estoppel accepts that the contract requires the representee to do something or permits the representor to do something - but holds that by virtue of the pre or post contractual representation, the representor should not be permitted to exercise its full contractual rights.
It follows, in my view, even if the Agreement was not a franchise agreement, that WSA was not entitled to terminate the Agreement when it did and hence that WSA's purported termination was wrongful. I do not need to consider Simple's contention that clause 2.2(c) and clause 5.4 were in truth penalty clauses, that breach of the minimum customer requirement does not entitle WSA to damages as claimed by WSA or the issue of unconscionable conduct.
Conclusion
There should be judgment for Simple and Ms Bottrell on the plaintiff's claim and judgment for Simple and Ms Bottrell in the amount of $208, 177.39 (plus interest to be calculated on the basis of Practice Note SC Gen 16) on Simple's cross claim. I will hear the parties on the issue of costs.
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Decision last updated: 20 February 2014
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