Gatehouse v Middleton HC Hamilton CIV 2006-419-808
[2007] NZHC 1764
•29 May 2007
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV 2006-419-808
BETWEEN CHRISTOPHER CHARLES GATEHOUSE
Appellant
AND PETER JOHN MIDDLETON First Respondent
AND KAREN MARGARET MIDDLETON Second Respondent
Hearing: 19 April 2007
Appearances: D Hayes for the appellant
A Nolan for the respondents
Judgment: 29 May 2007
JUDGMENT OF STEVENS J
This judgment was delivered by me on Tuesday, 29 May 2007 at 11am pursuant to r 540(4) of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
D Hayes, PO Box 9323, HamiltonA Nolan, PO Box 1268, Hamilton
GATEHOUSE V MIDDLETON AND ANOR HC HAM CIV 2006-419-808 29 May 2007
Introduction
[1] This is an appeal from a decision of Judge Burnett in the District Court at Hamilton following the hearing of a civil dispute involving the termination of a Crewcut lawnmowing sub-franchise agreement (the franchise agreement). The hearing in February and March 2006 extended over six days and the notes of evidence, including affidavits and witness statements, comprised some 387 pages. In addition, the parties produced considerable documentation relevant to the points in issue.
[2] The reserved decision of Judge Burnett was delivered on 25 May 2006 and set out the reasons for judgment in 117 paragraphs. The result was that the claim of the appellant (Mr Gatehouse) for damages for wrongful repudiation of the franchise agreement failed. The respondents (the Middletons) were found to have been entitled to cancel the franchise agreement due to breaches by the plaintiff. The Middletons were successful on a counterclaim for loss of income and were awarded the sum of $1,000 and interest and costs.
[3] This appeal was set down for a half day hearing following the grant of leave to appeal out of time and the resolution of several jurisdictional issues relevant to the leave application. For the reasons which follow, Mr Gatehouse fails on all grounds of appeal and the appeal must be dismissed with costs.
Factual background
[4] The District Court proceedings were filed following the termination of the franchise agreement by the Middletons in early November 2002. The Middletons had originally entered into the franchise agreement in February 1997 with a Mr and Mrs Griggs who were holders of a Crewcut master franchise for the Hamilton area. The Griggs were entitled to operate lawnmowing and property maintenance services as a regional master franchisee from Crewcut Property Maintenance Ltd by virtue of a master franchise agreement. The master franchise covered the Hamilton area, as well as an area in Te Awamutu. The Griggs then entered into sub-franchise
agreements with parties such as the Middletons in a range of franchise territories within the area covered by the master franchise.
[5] One of the franchise territories was granted to the Middletons and it covered no less than 1,000 households located broadly in the Dinsdale and Frankton areas. The franchise relationship between the Griggs and the Middletons was very successful. However, Mr Griggs died and as a result, on 17 January 2000, the franchise agreement was assigned to Mr Gatehouse.
[6] It is common ground that when Mr Gatehouse took the assignment, the Griggs were not engaged in operating any allocated franchise areas in the capacity of operator. Their approach had been to target new territories and new customers outside the existing territories and develop new territories to sub-franchise within the area covered by the master franchise. However, some time after the assignment, Mr Gatehouse acquired some three franchise territories which he then operated as the operator on behalf of the existing operator who was seeking to divest.
[7] The Judge found that there was dissatisfaction with the way in which Mr Gatehouse ran the master franchise from operators across the board. In the case of the Middletons, there were complaints about failures to pass on requests for quotes which, it was said, was the franchisor’s responsibility. Moreover, Mr Gatehouse was mowing lawns and providing services either himself or through agents or contractors in the Middletons’ territory. As a result of these and other concerns, the Middletons terminated the franchise agreement in November 2002. Mr Gatehouse treated the Middletons’ unequivocal intention to terminate as repudiation and responded with a letter of cancellation.
[8] The Judge further found that there was an implied term in the franchise agreement that the franchisor had to supply work and quotations for each franchisee within the relevant territory allocated to that franchisee. The Judge also found that the Middletons did not wrongfully repudiate the franchise agreement in 2002, as Mr Gatehouse was in continuing breach of his obligations as franchisor under the franchise agreement. However, the Middletons’ counterclaim based on loss of income was only successful in the amount of $1,000 because of a limitation in cl 73
of the franchise agreement. Their counter-claim for misappropriation of their advertising contribution was dismissed.
Nature of appeal
[9] This is a general appeal under s 72 of the District Courts Act 1947. Section
75 of that Act provides that all appeals must be by way of rehearing. This also accords with r 718 of the High Court Rules.
[10] The meaning of “rehearing” in the context of an “appeal by way of rehearing” was considered by the Court of Appeal in Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA), where Tipping J (for the majority) said (at p 198):
“Any tendency or wish to engage in a general factual retrial must be firmly resisted. This Court will not reverse a factual finding unless compelling grounds are shown for doing so.”
[11] Rae has been subsequently approved on a number of occasions: see for example Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289 (PC) and Urbani v Gillions & Sons Ltd (2004) 17 PRNZ 112 (SC). Rae involved an appeal against a finding of the High Court regarding whether a particular conversation had taken place. Tipping J concluded at 198 that, while appellants often wish to treat appeals as retrials of fact, the Court will not reverse a factual finding unless compelling grounds to do so are shown. The two circumstances in which an appeal Court could intervene were discussed at 197. The first is where the conclusion reached was not open on the evidence, i.e. where there was no evidence to support it. The second is where the Court on appeal is satisfied that the trial Judge was plainly wrong in the conclusion reached: see also Moodie v Agricultural Ventures Ltd [1998] 3 NZLR 129 (CA) at 132.
[12] In Rae, Thomas J further clarified the situation regarding retrials of fact in the course of a separate and more detailed, though concurring, judgment. At 199, he stated that the trial Judge (here the District Court Judge) possesses numerous advantages in determining matters of fact: seeing witnesses firsthand to get an
impression of reliability or credibility; an ability to gain an impression of the evidence based on more than the “cold typeface of the transcript”; the completeness of the picture presented at the hearing; and the first-hand impression of the probabilities inherent in the circumstances traversed in evidence. In short, Thomas J concluded that there has been “too great a willingness to explore a trial Judge’s findings of fact and too little regard to the advantages which that Judge enjoyed in the area of fact finding”.
Key issues on appeal
[13] The key issues for decision may be distilled from the notice of appeal and the appellant’s submissions, as refined at the hearing. Essentially, the following points arise in this appeal:
(i) Does the alleged implied term meet the legal test for implied terms?
(ii) Does cl 88 in the franchise agreement prevent the introduction of implied terms?
(iii) If there was an implied term, was non-compliance with it a breach of an essential term or did non-compliance cause a substantial reduction in the benefits to the Middletons?
(iv) Were the Middletons precluded from cancelling the franchise agreement by conduct affirming it?
[14] A procedural issue was raised in the submissions arising from an alleged failure to plead the implied term. However, Mr Nolan, counsel for the Middletons, referred in his submissions to the pleading in paragraph 13 of the statement of defence to the amended statement of claim and counterclaim. That paragraph alleged that Mr Gatehouse repudiated the franchise agreement inter alia by failing to provide the Middletons with sufficient work as required by cl 15 and cl 16 of the franchise agreement, or failing to answer the master franchise telephone and/or respond to telephone messages left on the telephone by customers and franchisees,
and failing to pass onto the Middletons quotes for lawns within their allocated territory.
[15] Mr Hayes, for Mr Gatehouse, fairly acknowledged that this pleading particularised the contentions raised by the Middletons in support of the right to terminate the franchise agreement. Paragraph 13(f) of the statement of defence specifically alleged, as a ground upon which the franchise agreement was repudiated, that the appellant failed to pass on quotes for lawns within the Middletons’ allocated territory. Hence this pleading deals with the precise point of the implied term and the only aspect that is missing is a description of whether this term was express or implied.
[16] Mr Hayes accepted that he had not sought further and better particulars of this allegation. Moreover, he accepted that the issue was fully covered in the District Court both in terms of the evidence and the legal argument. Plainly, the District Court Judge considered that the issue had been well traversed and she was able to consider the legal arguments presented in relation to the point and to make all relevant detailed findings.
[17] I conclude that there is nothing in the pleading point. I therefore turn to consider the other points raised on the appeal.
Factual findings
[18] Mr Hayes realistically accepted that, in view of the principle in Rae, an appellate Court will not reverse a factual finding unless compelling grounds are shown for doing so. He acknowledged that he could not challenge the bulk of the findings in the Judge’s decision. It is convenient to refer to the factual findings, in order to set the issues for determination in context. The circumstances in which the parties contracted will be particularly relevant when an implied term is in issue.
[19] The Judge first referred to the franchise agreement between Mr and Mrs Griggs and the Middletons as it was established in 1997. As to the organisation of the master franchise, the Judge found that:
[13] …Mr and Mrs Griggs divided their area into “territories” (see map Exhibit 7) each of which were to function as an exclusive target territory to which the respective operator was restricted, subject to certain events. The purposes and effect of this was common sense business efficacy for both the franchise holder (Mr and Mrs Griggs) and the operators. The concentration of work by restricting operators into territories had the advantage of maximising profit to the operator by minimising travel and time costs. An operator could develop a commitment and loyalty to the conduct of the Crew Cut business within that territory and become loyally committed to the proper execution of the lawnmowing and other tasks for the customers he came to know over a period. This loyalty was two-way resulting in, inter alia, referrals and fresh requests for quotes from potential customers in that territory. For the franchise holder there was the advantage of an effective method of allocation of opportunities to quote i.e. it was not good business practice to allocate the same opportunity to quote to more than one operator. The allocation to an operator within that operator’s territory resulted in an efficient response and avoided discontent between operators. The franchise holder and operators could maximise the capture of business growth and minimise the cost of conducting the business.
[20] The Judge then considered the approach taken by Mr Gatehouse when he took the assignment of the master franchise from the Griggs in January 2000. The Judge found:
[20] …overall Mr Gatehouse did not appear to display appropriate experience or appropriate businesslike conduct of himself or his franchise operation. Ms Jackson did not provide full time back up to Mr Gatehouse which the previously successful operation of the franchise holder’s side of the business had seen when operated by Mr and Mrs Griggs. It was the essence of Mrs Griggs’ evidence that the franchise’s success resulted from it being a two person enterprise with Mr Griggs undertaking the requirements of an operator to capture and service fresh lawns for ultimate sale as a fresh territory and deal with the practical matters viz. existing operators; and for Mrs Griggs to answer the phones and pass on requests for quotes to the appropriate operators, manage the operators, arrange meetings, agendas, minutes, attend to paper work and general administration.
[21] …a picture emerged in which neither Mr Gatehouse nor Ms Jackson managed the business in this manner. Both gave the impression of lacking knowledge and experience of the particular demands of the business with no instinctual appreciation of the physical demands and tight financial margins of what is an essentially manual business of servicing – in Mr Middleton’s case – initially 74 lawns per fortnight (6.16 lawns per day/6 days per week).
[22] It seems that Mr Gatehouse initially undertook the physical side of the business but was unable to maintain this and then employed contractors (not Crew Cut operators) whose level of commitment to the Crew Cut work was criticised by Mr Middleton and which I accept produced some negative impressions of the quality of Crew Cut workmanship to the detriment of the business overall including the Middletons.
[23] …the impression emerged that neither Mr Gatehouse, nor Ms Jackson’s efforts produced an effective or efficient management and administration of the franchise business viz. the operators.
[24] …an operator purchases from the franchise holder, inter alia, the right to mow or do section work for a number of existing customers (approximately 70-100) in a territory allocated to him. There is of course a natural attrition in that customer numbers will decline through circumstances such as death, relocation, sale of property etc.
[25] The operator’s signage includes the franchise national 0800 number. If a call to the 0800 number was made from a Waikato landline the programme diverts it to the Plaintiff. If it came from a cellular it was answered by the national operator. It is part of the purpose of the franchise holder (Plaintiff) and 0800 operator to take requests for quotes (“RFQs”) and act on them.
[26] Mrs Griggs and Mr Gatehouse gave evidence that it was their responsibility/obligation to relay those requests to an operator. This is the opportunity to maintain and perhaps grow the number of customers serviced by an operator. This is in keeping with the established territories. This in effect meant relaying this opportunity to the operator in the ‘request’ territory – unless the operator had advised that RFQs be put on hold for reasons such as holiday, sickness, sufficiency of work. In which case to ensure the RFQs were not lost due to delay, the opportunity would to go another operator in an adjoining territory which was then available for possible subsequent exchange, or the opportunity would be taken by the Griggs who could add it to a group of customers being built up for sale as a fresh territory of customers or swap it. If the RFQs came from an area that was not in any operator’s territory or was on a boundary, the franchise holder may offer it to an adjacent operator or if ‘ride on’ work, then to an operator with a ride on machine (of which Mr Middleton was one), or take the opportunity to quote for himself.
[27] I accept this was the practice that was to operate when the Defendants entered the contract and was practised by the Griggs throughout their time as franchise holders. I also find on the balance of probabilities that a substantial number of RFQs were missed by Mr Gatehouse or Ms Jackson and that RFQs were not passed on to Mr Middleton. Overall, I did not find Ms Jackson to be a reliable witness on matters relevant to this hearing and where challenged, I preferred the defence evidence. Additionally, I find that the business phone was not staffed for significant portions of time and there was a relevant period when the phone was out of order. Additionally I have accepted that there was an absence of referrals passed to Mr Middleton. Ms Jackson’s assertion that she passed on RFQs weekly was not supported by the “jungle drum” programme print-out. (Vol 4 p 97, 98 and NOE p 103 line 15). There were also periods when Ms Jackson had clients or was at classes when she did not take calls.
[28] As a result Mr Middleton lost out on opportunities to quote and his number of regular lawn customers declined through attrition and without the opportunity to replace them. Despite this loss, and through Mr Middleton’s endeavours – including leaflet drops – he maintained a level of gross income through an increased number of less profitable ‘one off’ section type work which was casual work. However the decline without replacement of regular lawn customers produced a decline in profitable work.
[29] As can be gleaned from the warranted maximum turnover (gross $700 per week) and the Middleton’s accounts (Exhibits Vol 2/36-43), the income after expenses is moderate: (gross sales: $48,163. Nett profit: $22,206 in
2001/2002, the last full year of franchise operation). This is the operators’ wages for the year. An increase in non-profitable work (casual work) whilst increasing costs, may not add to but rather may reduce the actual bottom line profit and it was the decline without replacement in the numbers of regular lawn customers due to the Plaintiff’s conduct that produced that decline in profitable work. I also accept Mr Middleton’s evidence that Mr Gatehouse mowed lawns in Mr Middleton’s territory in competition to him. Mr Middleton’s customer numbers fell from 74 to 31 at termination.
[30] From the evidence which I accept, I find that Mr Gatehouse was:
a) Failing to capture RFQs through non-answering of telephone – and delayed response.
b) Delaying and failing to pass on RFQs received for Mr Middleton’s territory.
c) Mowing lawns in Mr Middleton’s territory in competition to
Mr Middleton – in breach of Clause 13.
d) This resulted in Mr Middleton having 31 Crew Cut customers at the time of termination, down from 74 – a reduction of approximately 60% (NOE 168/30).
[21] During the hearing of the appeal, Mr Hayes was invited to indicate which of these findings was erroneous. He faintly suggested that there was no evidence that Mr Gatehouse mowed lawns in Mr Middleton’s territory in competition with him. However, Mr Nolan referred in reply to the finding of Judge Burnett at [29] and [30]. He also pointed to several references in the witness statements and the notes-of- evidence which confirmed the accuracy of the finding.
[22] Mr Hayes also relied upon an analysis that the Middletons’ turnover had not fallen. For example, in the financial year to 2002, the analysis of the accounting records showed that there was a modest increase in net profit, despite there having been a fall in turnover. However, Mr Nolan referred me to the findings of the Judge at [28] and [29] noting in particular that the Middletons customer numbers fell from
74 to 31 at the time of termination. Hence, any increase in net profit does not tell the full story. If, as the Judge found, the Middletons lost out on opportunities to quote for work in their territory, and if Mr Gatehouse took work from the Middletons by mowing lawns in the territory in competition, then there would inevitably have been a loss of revenue in addition to the actual fall in customer numbers. Although there
had been a slight increase in net profit, this only occurred because the Middletons had to make up the difference with casual sales.
[23] Accordingly, despite the careful submissions on behalf of Mr Gatehouse, I conclude that no grounds have been shown, let alone compelling ones, for reversing any of the above factual findings of the Judge.
Franchisor’s obligations regarding referrals and requests for quotes (RFQs)
[24] A critical issue in the District Court was whether there was an obligation on Mr Gatehouse to pass on referrals and RFQs to the Middletons within their territory. It was common ground that such an obligation is not expressly stated in the franchise agreement. The existence or otherwise of such a term was important to the parties. For the Middletons, if such a term was established and if breach by Mr Gatehouse could be proven along with other alleged breaches, it would give rise to grounds for lawful cancellation. For Mr Gatehouse, the absence of such a term in the franchise agreement gave rise to a claim for wrongful repudiation by the Middletons. In order to determine this question, the Judge considered the relevant clauses in the franchise agreement, including the clauses dealing with “non-competition” between the franchisor and an operator.
[25] Set out below are the four clauses of the franchise agreement under the heading “Provision of Information and Non-Competition”.
10.THE Franchisor shall make available to the Operator any procedure manuals (“the Operation Manual”) issued by the Franchisor with respect to the Services generally and all amendments made thereto from time to time and the Operation Manual, the Customer List and this contract shall be read and construed as one document.
11. THE Franchisor shall provide the Operator with marketing expertise, advice, training seminars and budget guidelines to assist the Operator in establishing the Business, and shall also be available for consultation regarding the operation of the Business.
12. THE Franchisor shall provide the Operator with a full Customer List within four weeks of the commencement of this contract. The Operator must send to the Fanchisor monthly updates of the Customer List upon the forms provided by the Franchisor for that purpose. The Franchisor
may require that Customer List updates be provided more regularly than monthly if deemed necessary by the Franchisor.
13. THE Franchisor and its subsidiaries, directors and shareholders will not compete with the Operator in the Territory during the term of this contract or any renewal thereof nor allow any of the Franchisor’s other Operators to so compete save as is set out in the Operation Manual.
[26] In the District Court, the Judge found that none of the documents produced by the parties constituted a customer list as mentioned in the above clauses. While certain lists which seemed to provide updates on customers were in the document bundle, no formal customer list as required by the franchise agreement was produced. The same is true of any operation manual. No such document had been produced on discovery, none was referred to by the witnesses in the District Court and none was available to the Court on appeal.
[27] The varied obligations of the Middletons appear in different parts of the franchise agreement. The franchise agreement sets standards for conversion of RFQs to income, standards obliging the Middletons to operate to particular levels, requirements to operate the business to the best commercial advantage, as well as many other provisions governing the management of the franchise.
[28] The franchise agreement also includes a number of clauses, strongly relied upon by the appellant, dealing with the franchisor’s warranty as to turnover. The key clauses relevant to the turnover warranty are as set out below:
15. IN consideration of the franchise price, the Franchisor shall provide the Operator with sufficient work to enable the Operator to earn a minimum of $700 in average weekly income for the term of this agreement.
16. IF on any anniversary of the Commencement date the Operator has been unable to earn the minimum turnover warranted by the Franchisor over preceding twelve months then the Franchisor will pay to the Operator the shortfall required to increase the Operators income to the warranted level for the relevant twelve month period. The Franchisor undertakes to pay such shortfall to the Operator within twenty-eight (28) days of the anniversary of the Commencement Date.
17. THE provisions of clauses 15 and 16 of this Agreement shall bind the Franchisor provided the Operator converts 66% of quotations for lawn and casual work into income and does not under-quote work and otherwise complies with all the provisions of this agreement and the Operation Manual.
88. THIS Agreement, the Customer List and the Operations [sic] Manual set forth the entire agreement between the parties as to the subject matter of this Agreement and no amendments to same of [sic] any other agreement in respect of the franchise business shall be effective unless in writing and signed by or on behalf of each of the parties. The Operator agrees that he has entered into this agreement solely on the basis of his own enquiries and does not rely on any statement, warranty or representation made by or on behalf or the Franchisor (other than a statement, warranty or representation made in this Agreement) whether such statement, warranty or representation os [sic] oral or in writing or expressed or implied.
[30] Having referred to the various clauses in the franchise agreement, the Judge reached the following conclusions on the question of an implied term:
[41] Apart from the operator’s express obligation to generate “referrals” as defined, it is one of the unsatisfactory aspects of the franchise agreement that it is not expressly stated who has responsibility for generating other new customers. While it can be implied from Clause 37 that it is the franchisor’s responsibility to generate new customers through advertising, this is not expressly stated. Nor is it expressly stated whose obligation it is to actually give quotes. It is clear from Clauses 17 and 35 that the operator has an obligation not to under-quote. In Clause 21 the operator has an obligation to respond by telephone on the same day as receiving a “request for a quote on his pager” and make reasonable efforts to follow it up. Furthermore, there is an expectation given in Clause 17 that the operator will convert 66% of quotes received into income.
[42] Although these clauses strongly infer there is an obligation for the operator to give quotes to customers, the contract does not expressly state this as a positive obligation. Rather, it is inferred as an obligation, gleaned from the tenor of the contract. Therefore, the obligation upon the operator to give quotes is an implied rather than an express obligation, despite the fact that it would appear to be an essential term without which the business could not operate. This is significant as, in essence as stated, whether the Defendants cancelled or wrongfully repudiated, rests (subject to the relevant findings of facts) on whether or not an essential term can be implied into the agreement.
[43] Regardless of Clause 88, it seems self-evident that there must be an obligation upon the Defendants as operators to undertake quotes. Similarly, it seems self-evident that there must be an obligation upon the Plaintiff to refer onto the Defendants any RFQs in the Defendants’ territory received by the Plaintiff.
[44] This obligation upon the Plaintiff to pass on RFQs is further supported by the contract. This can be gleaned from the tenor of Clause 21, which refers to the operator receiving “request for quotes” on his pager and to respond within a stipulated time. Clause 21 would have no real efficacy or purpose if the requirement to pass on referrals to the Middletons’ pager was not an obligation by the Plaintiff. Furthermore, Clauses 45 and 46 – which
set out the pager requirement of the operator – would also have no real purpose. Why else would the operator be required to have an approved pager and subscribe to the paging service provided by the franchisor in order to receive messages from the franchisor, if there was no obligation upon the franchisor to pass on RFQs via the paging service.
[45] There is also support for the franchisor’s obligation to pass on RFQs in
Clause 15 that deals with the franchisor’s Warranty to Turnover. …
…
[47] The evidence accepted by me on the balance of probabilities is that the Griggs assumed this obligation under the contract, even though (in the absence of knowing what is contained in the Operations Manual), it was not an express term. It was only when the franchise was assigned to Mr Gatehouse that problems arose with passing on of RFQs. It is the essence of the Plaintiff’s evidence that RFQs were made, inter alia, to the Plaintiff’s number. Ms Jackson accepted it was her responsibility to “page” those requests or refer them on to Mr Middleton.
[48] The nature of this franchise also supports the existence of an obligation upon the Plaintiff to pass on RFQs. The contract is devised for each party to gain some financial benefit from the work opportunities generated and it is necessary for those work opportunities to be passed to an operator in order that the opportunity be converted into income.
[49] It also seems clear that the obligation to pass on RFQs to the Middletons give [sic] rise to the operator’s opportunity to quote as it is implicit in Clauses 33 and 35 that the operator will give quotes.
[50] In summary, the tenor of the contract strongly infers that the operator has an obligation to quote. Similarly, the tenor of the contract also strongly infers that the franchisor has an obligation to refer RFQs in a territory to the relevant operator. Clause 21, amongst other clauses, supports the existence of each obligation. Once the referrals from the franchisor are made, the operator then has the opportunity to make authorised quotes.
[31] As a result of the above analysis, the Judge was able to conclude that:
a) The practice of the franchisor to pass on RFQs to an operator within the territory was an obligation upon Mr Gatehouse; and
b) It was this obligation to pass on RFQs that gave rise to the Middletons’ opportunity to quote for work, which was also an obligation upon them; and
c) Under the franchise agreement, each of those obligations was an implied, rather than an express, obligation.
[32] On appeal, Mr Gatehouse first argued that the test for implying a term into the franchise agreement had not been met. Mr Hayes submitted that the obligation of the franchisor to pass on RFQs did not meet the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC) at 283. It was common ground that the five factors listed in BP Refinery for establishing the existence of an implied term are that:
a) The term must be reasonable and equitable;
b) The term must be necessary to give business efficacy to the contract, so no term can be implied if the contract is effective without it;
c) The term must be so obvious that it goes without saying;
d) The term must be capable of clear expression;
e) The term must not contradict any express term of the contract.
[33] The Judge held that the franchisor’s obligation to pass on RFQs satisfied the first four of those criteria. In particular, she held that it was a term necessary to give business efficacy to the franchise agreement. Moreover, it was reasonable, capable of clear expression and seemingly so obvious that it was not actually included in the express agreement between the parties.
[34] Relevant to the above conclusions were certain factual findings which were made by the Judge as follows:
[58] …the original franchisors (the Griggs) did agree to pass on RFQs to the Middletons for work in their territory. The relationship worked well, and Mr Middleton was a “top” operator. It was only when the franchise was assigned to Mr Gatehouse that problems arose with RFQs. Mr Gatehouse and Ms Jackson failed at times to answer the telephone and to capture potential customers. Additionally, at times Mr Gatehouse kept RFQs to himself and also delayed passing on RFQs. This was in breach of Mr Gatehouse’s obligation under the agreement. As I have already held, Mr Middleton consequently lost out on opportunities to quote and his number of
regular lawn customers declined by 60%. Despite this loss, and through Mr Middleton’s additional endeavours he maintained a level of gross income through an increased number of less profitable “one off” section type work (casual work). However the decline of regular lawn customers produced a decline in profitable work.
[59] In this franchise agreement, where both parties’ mutual interests are served by the generation of opportunities to quote through the passing on of RFQs, the obligation to pass these on appears to go to the heart of the agreement: that the parties will co-operate to facilitate the generation of the franchise’s turnover. If the turnover falls away through the failure of the franchisor (or likewise through the failure of the operator) to carry out his obligations, then the agreement is of little value to either party. So the obligation to pass on RFQs can be seen as critical to the continued existence of the bargain between the parties.
[60] The failure by Mr Gatehouse to meet the obligation to pass on RFQs could also be seen as leading to a totally different performance of the contract from that intended and agreed to by the Griggs and the Middletons when they became parties to it.
[35] The Judge concluded that the real issue for decision arose in relation to the fifth criteria, namely, that the term must not contradict any expressed term of the contract. The Judge observed at [80] that cl 88 appeared to preclude the implication of any obligation to pass RFQs on to operators on the basis that no amendments would be effective unless in writing. I will return to this aspect later. But it is first necessary to deal with the appellant’s contention that the other factors in the BP Refinery test were not met. In this regard, Mr Hayes correctly submitted that it is not the Court’s function to make the contract for the parties: see Tasman Pulp & Paper Co Ltd v Newspaper Publishers Association of New Zealand Inc [1983] NZLR 600 (CA) at 608.
[36] Mr Hayes submitted that the implied term was not necessary to give the franchise agreement business efficacy and contended that the franchise agreement was merely providing a right to the operator to operate in a territory rather than a right to receive work. The only obligation on the franchisor was to ensure that a minimum level of turnover is achieved, under cl 15, but nothing further.
[37] Mr Nolan submitted that the implied term meets all five points in the test. Further, he submitted that, on a common sense view, the implied term is necessary for business efficacy: why would an operator enter into a contract to mow lawns if there were no obligation on the person who receives the information about the
“opportunities”, i.e. the RFQs from potential customers, to pass on those requests to the operator? Mr Nolan also emphasised the obligation on the franchisor in cl 13 not to compete with the operator in the franchised territory. If there were no obligation to pass on RFQs to the operator and the quotations given by the franchisor and work retained for the franchisor himself, this would simply be a charter to breach cl 13.
[38] Burrows, Finn and Todd Law of Contract in New Zealand (3ed 2007) acknowledge at 6.3.3 that the test in BP Refinery “…imposes a stringent standard, and makes it apparent that terms will only be implied in the clearest cases: the device is not an invitation to the Courts to rewrite contracts.” There has been argument over whether the test is appropriate or is too harsh in certain situations, but the authors go on to say that:
[The BP Refinery] test is particularly appropriate where the contract before the Court is a detailed written contract, which creates an initial presumption that the parties have recorded the whole of their agreement in the written document.
[39] The stringency of such test was the subject of discussion by the Court of Appeal in McNeill v Gould (2002) 4 NZ ConvC 193,557. The case involved a constructive or resulting trust over half a residential property and Hammond J (giving the judgment of the Court) said at [25]-[27]:
The BP Refinery case which was cited by Heron J has to be approached with a good deal of caution in a case such as the present. That case concerned the suggested implication of a term in a rating agreement to make it accord with a refinery construction agreement. Patently, a stringent approach was required in such a context, where a great deal of care had already been taken over complicated documents.
We think it more appropriate to adopt, in the context of this case, the formulation of the learned editors of Chitty on Contract, Vol 1, para 13-004 viz,
[A] Court will be prepared to imply a term if there arises from the language of the contract itself, and the circumstances under which it is entered into, an inference that the parties must have intended the stipulation in question. An implication of this nature may be made in two situations: first, where it is necessary to give business efficacy to the contract, and secondly, where the term implied represents the obvious, but unexpressed, intention of the parties. These two criteria often overlap and, in many cases, have been applied cumulatively,
although it is submitted that they are, in fact, alternative grounds. Both, however, depend on the presumed intention of the parties.
(emphasis added)
Treitel, The Law of Contract (9th ed) at p 185 et seq takes the same view as
Chitty, viz, that the tests are "alternative".
[40] Such an approach to importing an implied term still looks essentially to the presumed intention of the parties. To determine such intention, it is necessary (as Chitty urges) to examine the language of the contract and the circumstances in which it was entered into. The factual matrix is likely to be material: see Devonport Borough Council v Robbins [1979] 1 NZLR 1 (CA) at 20, citing Lord Wilberforce in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL), 997.
[41] In determining this issue, the Judge applied the correct legal principles. She also examined in a comprehensive and careful manner all of the applicable clauses of the franchise agreement. The Judge also saw all the witnesses, considered all of the relevant evidence and made critical findings as outlined at [35] above. Having carefully considered the submissions on behalf of Mr Gatehouse, both the written submissions and those given orally at the hearing, I do not consider that it has been shown that the Judge was wrong or that compelling grounds exist for disturbing the factual findings made on this issue. I am also of the view that the implied term relied upon by the Middletons meets both the BP Refinery test and the formulation in Chitty referred to at [40] above. Accordingly, the second must be considered.
Effect of clause 88 – issue (ii)
[42] Does cl 88 preclude the implication of the term requiring Mr Gatehouse to pass on the RFQs? There is reference in cl 88 to the franchise agreement itself, the customer list and the operation manual. These three documents are said to comprise “the entire agreement between the parties as to the subject matter of this Agreement”. But there was a difficulty both in the District Court and on appeal that no document purporting to be an operation manual or a customer list was produced. The Judge was therefore forced to deal with the issue in the absence of these potentially critical documents.
[43] The Judge concluded on this point:
[85] In the absence of these documents and at the very least the Operations Manual, it is impossible to construe the meaning of Clause 88 in light of the whole of the contract between the parties as it is not known what stipulations, statements, warranties or representation may be contained in the manual and therefore what constitutes the whole of the contract. …
[86] Accordingly, the Plaintiff cannot discharge the onus on the balance of probabilities that the entire express agreement as agreed between the parties has been set forth and that such excludes the obligation to pass on RFQs.
[87] Furthermore, there remain problems with the wording of Clause 88 itself. It is not clear and unambiguous. There is clearly a typing mistake in the final sentence. “Is” is spelt “os”. Nothing really turns on this. More importantly, the third line reads “…no amendments to the same of any other agreement shall be effective unless in writing…”. While the Plaintiff (presumably) may contend that Clause 88 ought to be read as preventing “…amendments to the same [or] any other agreement … unless in writing…”, it does not say this. On it’s [sic] face, Clause 88 prevents amendments to the same subject matter of any other agreement, rather than the present agreement. The Plaintiff has not sought rectification and there is no evidential basis for rectification.
[88] Given this ambiguity, the Plaintiff has failed to discharge the onus on the balance of probabilities to show that the exclusion in Clause 88 applies clearly and unambiguously to the contract in issue. Therefore strictly construed, the implied obligation to pass on RFQs is not actually contradicted by an express term of the contract and the BP Refinery test is satisfied.
[44] Mr Hayes submitted that the Judge placed too much emphasis on the first sentence in cl 88. He submitted that the second sentence of cl 88 makes perfect unambiguous sense in that it stands on its own and is unaffected by the previous sentence. He submitted that it was clear from the second sentence of cl 88 that implied terms were excluded.
[45] With respect to this submission, it is difficult to criticise the approach taken by the Judge to cl 88, particularly given the absence of the operation manual. She Judge correctly identified, in [83] of her decision that, if cl 88 is not clear and unambiguous, the contra proferentem rule requires that the clause be construed against the party relying on it: see SGS (NZ) Ltd v Quirke Export Ltd [1988]
1 NZLR 52 (CA). Plainly, the onus would be on Mr Gatehouse to show that cl 88 has a clear and unambiguous meaning in the context of the entire agreement. It was on that basis that the Judge held, in my view correctly, that Mr Gatehouse had been
unable to discharge such a burden. Accordingly, the first sentence of cl 88 was not effective to exclude the implied obligation of the franchisor to pass on RFQs to the operator.
[46] Addressing Mr Hayes’ submission regarding the second sentence, the problem is the content and scope of the wording itself. It relates to what might be called pre-contractual statements or statements made during contractual negotiations. There is specific reference in the sentence to an agreement by the operator that he has “entered into this agreement solely on the basis of his own inquiries”. Then there is reference to the operator not relying on “any statement, warranty or representation made by or on behalf of the franchisor”. I consider that this is a reference to pre-contractual statements, warranties or representations. The sentence goes on to refer to such reliance not including any such statement, warranty or representation whether “oral or in writing or express or implied”.
[47] However, the difficulty with relying upon the second sentence of cl 88 is that the case on appeal concerns an implied term regarding the obligation of the franchisor to pass on RFQs to the operator. That obligation is not in the category of a pre-contractual statement, warranty or representation. Accordingly, in my judgment the second sentence in cl 88 is not effective to exclude the implied term in this case.
[48] Having carefully considered all of the arguments in the written submissions advanced by Mr Hayes and the matters developed orally at the hearing, I conclude (like the Judge below) that cl 88 of the franchise agreement does not preclude the existence of an implied term relating to the passing on of RFQs to the Middletons.
Breach of essential term – issue (iii)
[49] Next, Mr Hayes contended in his written submissions that, if the implied term were upheld by the Court, it was not an essential term as it did not substantially reduce the benefit of the contract. The point was less strongly advanced at the hearing. I therefore deal with the issue briefly.
[50] For cancellation, s 7(4)(a) of the Contractual Remedies Act 1979 requires that the breached term be an essential term of the contract. Alternatively, under s 7(4)(b), the effect of the breach must be to substantially reduce the benefit/increase the burden under the contract. The two limbs of s 7(4) largely codify the common law: see Betham v Margetts [1996] 2 NZLR 708 at 712.
[51] In addressing this issue, the Judge reached the following conclusions:
[71] The failure to pass on RFQs can also be categorised as a primary obligation, in that it’s breach would result in substantially or considerably depriving the Middletons of much of the whole benefit that it was intended they were to gain under the contract. The contract does not appear to contemplate the position whereby the franchisor was not actually co- operating to fulfil the contract, so the construction of the contract indicates that cancellation, rather than damages is appropriate. Nor could an award of damages necessarily force Mr Gatehouse to co-operate and so ensure the success of the franchise.
[72] I conclude therefore, that, the obligation to pass on RFQs is an essential term because it goes to the heart or the root of the contract between the parties. Its non-performance would result in a contract being undertaken different than that intended by the parties. Moreover, it can also be seen as a primary obligation, upon which other express contractual obligations rely. Its performance was critical: without it the economic benefits to be conferred under the contract were substantially altered and the economic burden carried by the Middletons’ substantially increased. In the circumstances breach of the implied term is unable to be satisfactorily compensated by damages.
[52] Accordingly, the Judge held that the obligation was an essential term and, as a result, the Middletons were entitled to cancel due to the breaches by Mr Gatehouse.
[53] Having carefully considered the written submissions and the oral elaboration at the hearing, I conclude that Mr Gatehouse has not demonstrated that the conclusion of the Judge was wrong. Indeed, I agree with the conclusions that she has reached for the reasons that she gave.
Was cancellation of the franchise agreement precluded by affirming conduct –
issue (iv)
[54] Having considered the question of whether the obligation to pass on RFQs was an essential term, the Judge then referred to s 7(5) of the Contractual Remedies
Act. A party cannot cancel the contract if, with full knowledge of the breach, they have affirmed the contract. Obviously, any such affirmation must be made with full knowledge of the breach of contract. Essentially, the Judge held that the nature of the business and the ongoing breach meant that the reason for the decline in customers and overall profitability would not have been immediately apparent to the Middletons. When it became so, they cancelled rather than affirming the franchise agreement.
[55] Mr Hayes submitted that the fact that the Middletons were not receiving RFQs meant that, if the implied term was essential, they would have known that Mr Gatehouse was in breach. By continuing for a period with such knowledge, they affirmed the contract. The Middletons accept that they were aware that the flow of RFQs was drying up, but were not aware of the full extent of the breaches until spring 2002, the busiest mowing season, when they were told no quotes were available.
[56] The judgment at [92]-[94] contains a brief discussion on the law of affirmation. The Judge then made the following findings:
[96] I have already held that Mr Gatehouse obtained work that should have gone to the Middletons and that this was done through himself or his contractors quoting on RFQs that should have been but were not passed on to the Middletons. That Mr Gatehouse and his contractors thus wrongly operated in competition to the Middletons and in breach of Clause 13. Additionally it is apparent that these were breaches that were both ongoing and fresh breaches, in respect of which the Middletons were unable to accurately gauge the full extent until the accumulative effect became somewhat evident. Initially, Mr Middleton had attributed the drop in RFQs to the failure by the Plaintiff to advertise. With the passage of time, and actual sightings of Mr Gatehouse and his contractors (including mowing in Mr Middleton’s territory), Mr Middleton appreciated that there must in fact have been RFQs and that he was not getting them. This took time to unfold to the Middletons but became apparent to them in the spring of 2002 – the busiest season for lawn mowing – when told by Mr Gatehouse that there were still no available RFQs. Mr Middleton’s lawn numbers had dropped to
31 and were not being replaced. I agree with Mr Middleton. This response by Mr Gatehouse was not credible. Mr Gatehouse would have it that despite being in the busiest season there were no available RFQs.
[97] The circumstances cumulated to demonstrate fresh breaches which came to an evident point at the busiest season. Mr Middleton was then able to gauge the extent of the breaches and cancelled.
[98] I am satisfied on the balance of probabilities that the work undertaken by Mr Gatehouse was not restricted to work he was entitled to do or to that which he took over from other operators who pulled out of the franchise following the assignment to Mr Gatehouse.
[99] By contrast, on this issue where there is a challenge to the effect of, or conflict in the evidence, I prefer the defence evidence and although each witness gave some evidence which they subsequently varied or made concessions in respect of, generally I preferred the defence evidence and the evidence of Mr Middleton to that of Mr Gatehouse (and where relevant), to that of Ms Jackson.
[100] I found Mr Middleton’s evidence touching this issue more compelling, logical and credible. I also found the Middletons to be hardworking and unstintingly committed to the success of their operation and the reasons for the loss in profitability of their previously successful operation are attributable to the Plaintiff’s conduct by failing to capture all RFQs, failing to pass on RFQs that should have gone to the Middletons and by retaining some of that resulting work for himself. I have already referred to the evidence of the jungle drum programme printout and the failure to answer the landline. Additionally I accept the evidence that Mr Gatehouse grew his customer numbers, some of which should have been offered to the Middletons. The overall effect of this conduct was to substantially damage the profitability and viability of the Middletons’ operation under the franchise agreement and in breach of that agreement.
[57] As a result of making these factual findings, the Judge was able to reach the following conclusion on the issue of affirmation:
[105] The Middletons became aware that they were receiving less RFQs for lawns from the Plaintiff than they had from the Griggs and also became aware that there was competition from the Plaintiff in their territory. So the Middletons were generally aware that there were breaches of the contract. However they could not have had full knowledge of the extent of the Plaintiff’s breaches unless they were actually in a position to monitor the RFQs in the form of phone calls being received by the Plaintiff – which they were not. A failure by the Plaintiff to pass these on to the Middletons meant that the Middletons must have lacked the full knowledge of the breaches that is required for affirmation. They could not have known the full details of the ongoing breaches because they were not given the RFQs.
[106] Therefore on the balance of probabilities, the Plaintiff has not established that the Defendants were obliged to cancel at a point earlier in time than they did despite their earlier complaints.
[58] Despite the skilful and comprehensive arguments of Mr Hayes for Mr Gatehouse, having considered the written submissions and the matters of elaboration raised orally at the hearing, I do not consider that Mr Gatehouse has demonstrated that the Judge was wrong. On the question of affirmation, the Judge made critical findings of fact at [96]-[100] inclusive. Mr Gatehouse has failed to
show any basis upon which such findings were wrong, let alone the compelling reasons required by the Court of Appeal decision in Rae.
Result
[59] The appeal has failed in respect of all four grounds advanced as a basis for showing that the decision under appeal was in error.
Decision
[60] For the detailed reasons set out above, I have rejected Mr Gatehouse’s submissions on each of these grounds. It follows that the appeal must be dismissed.
Costs
[61] The Middletons are entitled to costs. If the category of costs has not already been established, I direct that the costs be calculated on a 2B basis.
Stevens J
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