[2019] VCAT 1305
General information, not legal advice.
Victorian Civil and Administrative Tribunal
2019-08-30
Original judgment source is linked above.
Contract for marketing services containing terms under which the client's business would transfer to the service provider in the event of default by the client. Whether void by operation of s 23 of the Australian Consumer Law; whether unconscionable conduct by service provider contrary to s 21 of the Australian Consumer Law.
Teen Entertainment Enterprise Network Pty Ltd (ACN: 625 342 174)
A & H Natoli Pty Ltd v Teen Entertainment Enterprise Network Pty Ltd (Civil Claims) [2019] VCAT 1305
What were the terms of the agreement between the parties?
an agreement for exclusive management consultancy services ... for the duration of the lease from 4 April 2018 to 19 August 2027.
services for retail and wholesale activities including but not limited to advertising (including social media), market research, procurement, purchasing and pricing of product and other goods and services, financial operations, cash flow management, sales and distribution strategy (including online), staff training, customer services, public relations and community involvement ("the services").
This Agreement is confidential and subject to non-disclosure of information by the parties.
The confidential information not to be disclosed under this Agreement ("Confidential Information") can be described as and includes:
Technical and business information relating to proprietary ideas, patentable ideas and/or trade secrets, existing and/or contemplated products and services, research and development, production, costs, profit and margin information, finances and financial projections, customers, suppliers, marketing, and current or future business plans and models, regardless of whether such information is designated as "Confidential Information" at the time of its disclosure.
[The Companies] agree not to disclose the Confidential Information obtained from [Teen] to any third party.
[The Companies] shall use the Confidential Information only for the purpose of evaluating potential business and investment relationships with [Teen] and agree to expand their existing businesses or open any further greengrocer business in Melbourne only with [Teen].
[The Companies] agree to rebrand their business as "Fattoria di Natoli". The brand name remains in the ownership of [Teen] and cannot be used or changed without prior written consent of [Teen].
[The Companies] agree that the acquisition of any goods or services from any new supplier of the business from the date of this Agreement are exclusive to this business with [Teen] and cannot be engaged for any other purpose.
[A&H Natoli Pty Ltd] is and remains the leaseholder at the premises and the owner of the equipment situated at the premises and vehicles (truck, van and forklift) which are used at the premises or for the business' purposes.
Natoli must maintain the lease and must not do anything that would cause a breach of the lease, and is responsible for the payment of the rent and outgoings for the premises under the lease and will be reimbursed by [Teen] for these expenses from the proceeds of the business (including service of vehicles (the truck, van and forklift) used to run the business at the premises).
[Tony Natoli] is engaged in the business by [Teen] from the date of this Agreement and [he] will receive payment for his engagement from the proceeds of the business.
All staff within [the Companies]' businesses will be engaged and managed by [Teen].[7]
[Teen] may invest in the [Companies]' businesses from time to time during the duration of this Agreement and as it finds fit.
[The Companies] agree to secure payment for the services provided by [Teen] or investments made in the business by [Teen] by providing security in the form of a charge over its business.
From the date of this Agreement to the end of the lease all proceeds of the [Companies] businesses will be managed and maintained by [Teen] for management dues. Payment systems at the premises will be provided and managed by [Teen] as part of the service. [Teen] will pay for the businesses' expenses, including rent and outgoings under the lease, from the proceeds of the business, but excluding the business loan with interest.
[Teen] has the exclusive right to make decisions on the purchase of any stock for the businesses. [The Companies] agree that [Teen] may change stock items, stock quantities and suppliers. [Teen] will reimburse [the Companies] for the purchase of required stock from the proceeds of the business.
All stock at the premises as of 4 April 2018 and stock purchased after the date of this Agreement is the property of [Teen].
All equipment for the business purchased by [Teen] from the date of this Agreement is the property of [Teen].
[Teen] will repay the debt to the suppliers as per the List of Debt Owed to Suppliers ("the List") from the proceeds of the businesses for as long as Natoli maintains the lease and trades from the premises. The amount as at the date of signing of this Agreement is $37,958.77. The List is attached as appendix "A" to and forms part of this Agreement and signed by Natoli's director Anthony Joseph Natoli.
The amount of debt recorded in the List is $37,958.77. [The Companies declare that they owe no further supplier debt other than the debt recorded in the List.
Business debt (Buxton Real Estate, Gorman Kelly, Knox Tax) will be paid by [Teen] from the proceeds of the business. The business loan plus interest remains the obligation of [A&H Natoli Pty Ltd.]
[The Companies] are prohibited under this Agreement to incur any further debt for the business from the date of this Agreement.
Copies of all keys to the premises and storage facilities, security system codes at the premises, computer passwords and logins and POS system codes of the businesses (sic) will be provided to [Teen] by Natoli from the day of this Agreement to the end of the lease 19 August 2027. [Teen] will maintain logins and passwords of the businesses (sic) and may change from time to time any login, code and password of the businesses (sic) for security purposes. [The Companies] will not prevent access to the premises to [Teen] and will not change any locks, passwords, logins, system and security codes without the written permission from [Teen].
[The Companies] are restrained from changing their directors, appointing any additional director, taking on a co-owner or partner or selling their businesses (sic) or giving away any company shares without the prior written permission of [Teen].
[The Companies] acknowledge that if [the Companies] breach the terms of this Agreement, ownership of [the Companies]' businesses will vest in [Teen].
Any addition or modification to this Agreement must be made in writing and signed by the parties.
WHEREFORE, the parties acknowledge that they have read and understand this Agreement and voluntarily accept the duties and obligations set forth herein.
the correct rule is that the existence of writing which appears to represent a written contract between the parties is no more than an evidentiary foundation for a conclusion that their agreement is wholly in writing. ... the mere production of a contractual document, however complete it may look cannot as a matter of law exclude evidence of oral terms if the party asserts that such terms were agreed. If that assertion is proved, evidence of the oral terms cannot be excluded because the court will, by definition, have found that the contractual terms are partly to be found in what was agreed orally as well as the document in question.".[9]
Mrs Natoli hereby charges in favour of the Service Providers with the payment of the moneys owing to the Services Providers for money advanced and services provided, all her right title and interest in the Hughesdale and any other land in Victoria in which Mrs Natoli has any interest in fee simple and consents to the Service Providers at their expense lodging a caveat or caveats for the purpose of securing the charge hereby granted." (emphasis added)
(ii) it must be necessary to give business efficacy to the contact, so that no term will be implied if the contract is effective without it;
(iii) it must be so obvious that "it goes without saying";
(v) it must not contradict any express term of the contract.
Is the Agreement a "consumer contract" or "small business contract" within the meaning of s23 of the ACL?
to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption.
(a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
(b) at the time the contact is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(i) the upfront price payable under the contract does not exceed $300,000;
(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
"[It includes] any payments to be provided for the supply, sale or grant under the contract that are clearly disclosed at or before the time the contract is entered into. This includes any contingent payments which are referable to the supply, sale or grant under the contract which are disclosed at the time the contract is entered into.
Some parts of the upfront price payable will not be able to be calculated at the time the contract is entered into. For example, where a payment will be calculated as a percentage of an unknown amount (such as a commission on the sale of a property or a franchise royalty calculated as a percentage of future sales). In these circumstances, the term of the contract that includes the contingent payment is unlikely to be subject to the unfair contract term provisions (i.e. it cannot be challenged as unfair), provided it was fully disclosed at the time the contract was entered into. However, for the purposes of determining whether a contract falls under the relevant threshold ($300 000 or $1 million) to meet the definition of a 'small business contract', any amounts that cannot be calculated with certainty at the time the contract is entered are unlikely to be included in the calculation of the upfront price payable. [12] (emphasis added).
A franchisee and franchisor enter into a five year franchise agreement. Under the agreement, the franchisee agrees to pay an upfront fee of $500,000 and then a monthly royalty calculated as 5 per cent of the franchisee's sales. When determining whether the upfront price payable falls under the $1 million threshold the $500,000 franchise fee will be included but the royalty payments will not. This is because future sales cannot be calculated with any certainty at the time of entry into the contract.[13]
"If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise."
(a) whether one of the parties has all or most of the bargaining power relating to the transaction;
(b) whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
(c) whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented;
(d) whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
(e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction;
(f) any other matter prescribed by the regulations.[14]
(1) A person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.
(2) This section does not apply to conduct that is prohibited by section 21.[18]
A person must not, in trade or commerce, in connection with
(a)the supply or possible supply of goods or services to a person (other than a listed public company); or
(b)the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
(a) the relative strengths of the bargaining positions of the supplier and the customer;
(b) whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier;
(c)whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services;
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against the customer by the supplier;
(e) the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier;
(j) if there is a contract between the supplier and the customer for the supply of the goods or services:
(i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer;
(iii) the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and
(iv) any conduct that the supplier or the customer engaged in, in connection with their commercial relationship after they entered into the contract; and
(k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and
(l) the extent to which the supplier and the customer acted in good faith.
What is the consequence of the finding of unconscionable conduct?
[1]Tony Natoli gave evidence in the hearing that although the Agreement was purportedly executed by Ms Posaric, when Bob Spaleta and Tony Natoli attended the local chemist for Tony Natoli's signature to be witnessed, Bob Spaleta asked the chemist to "witness" Ms Posaric's signature by reference to Ms Posaric's passport. The notation of the pharmacist on the Agreement accords with this evidence, which was not contradicted by Bob Spaleta. Ms Posaric was not called to give evidence. It is, therefore, open to doubt whether the Agreement was properly executed by Teen.
[2] Exhibit BK3 to the Affidavit sworn by Bill Karvela on 7 June 2018.
[3] Particulars of Claim filed by the Companies dated 13 June 2018.
[4] Although the Particulars of Claim referred only to one "deed of charge" it is apparent that this was a typographical error and both deeds were intended.
[5] Summarised from Teen's Further Points of Claim dated 29 October 2018.
[6] Neither Bob Spaleta nor Irene Spaleta were directors of the company at the time of its first registration. Irene Spaleta appears to have become the sole director of Teen some time prior to 21 August 2018.
[7] This did not occur. Teen was therefore in breach of this term at the date of termination by the Companies.
[8] Goss v Lord Nugent [1833] EngR 618; (1833) 110 ER 713, cited in Codelfa Construction Pty Ltd v Sate Rail Authority of New South Wales (1982) 149 CLR 337 at [457].
[9] State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 192, per McHugh J.
[10] BP Refinery Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at 26; referred with approval in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales etc.
[11] Sections 23 to 28.
[14] No other matters have been prescribed by the regulations.
[15] Australian Competition and Consumer Commission v ACN 117 372 915 Pty Limited (in liq) (formerly Advanced Medical Institute Pty Limited) [2015] FCA 368 at [946].
[16] Given that Teen was not formed until 30 March 2018, the drafting was, presumably, in anticipation of the formation of Teen.
[17] See, for example, 18th edition [27.20].
[18] Section 21 of the ACL is concerned with unconscionable conduct in trade and commerce relating to the supply or acquisition of good or services. Unlike the unwritten law, s 21 extends to systems of conduct and patterns of behaviour (s21(4)(b) and is not limited to the circumstances surrounding the formation of the contract (s21(4)(c)) but may include consideration of the terms of the contract and the manner in which the contract was carried out. The principles which inform whether conduct is unconscionable are common to both sections 20 and 21.
[19] Toll (FCGT) Pty Ltd v Alphapharm Pty Ltd & ors [2004] HCA 52; (2004) 219 ClR 165.
[20] Curtis v Chemical Dry Cleaning [1951] 1 KB 805.
[22] Lamare v Dixon (1873) LR 6 HL 414 at 423; Dowsett v Reid [1912] HCA 75; (1912) 15 CLR 695 at 705-706; Gurney v Gurney (No 2) [1967] NZLR 922 at 927.
[23] JC Williamson Ltd v Lukey [1931] HCA 15; (1931) 45 CLR 282 at 298 per Dixon J.
[24] Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565.
A & H Natoli Pty Ltd
Teen Entertainment Enterprise Network Pty Ltd
(1982) 149 CLR 337
(1986) 7 NSWLR 170
(1977) 52 ALJR 20
(1912) 15 CLR 695
(1931) 45 CLR 282
(1988) 48 SASR 565