Apple Communications v Optus Mobile

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION WINDEYER J

3157/01 APPLE COMMUNICATIONS LIMITED V OPTUS MOBILE PTY LIMITED AND 2 ORS

General Outline 1 The plaintiff, Apple Communications Limited (Apple) entered into a distribution agreement with the Optus companies on 23 November 2000. The agreement was for a term of three years, but provided that Optus could terminate it for any reason upon thirty days' notice. The question for decision is whether the agreement was validly determined by notice of termination served on 28 June 2001. Basic Facts 2 Optus Mobile Pty Limited and Optus Internet Pty Limited are subsidiaries of Cable & Wireless Optus Limited. The first company supplies a range of pre-paid mobile telephone products and the second provides pre-paid Internet products. This action concerns pre-paid mobile telephone products, but no point is made about there being three defendants and I will refer to the defendants as Optus. 3 In November 2000, Mr Cheng, the chief executive of Apple, had negotiations with Mr Damien Kay, the national account executive of Optus, about the re-supply of pre-paid mobile and Internet products of Optus. This resulted in a contract being entered into between Apple and Optus on 23 November 2000 under which Apply was appointed as a distributor for certain Optus products. The agreement consisted of two parts; the first described as "agency details" and the second as "agency terms". Recital F to the details recorded that the agency details set out the variable information for the agency and the agency terms the contract terms that applied. The details provided for a commencement date of 1 December 2000 and an initial term of three years, with the agency being a non-exclusive one. The agency terms included the following: 1.2 Definitions : In this Agreement: … Term means the term of this Agreement determined in accordance with clause 2 … 2. TERM OF AGREEMENT

2.1 This Agreement begins on the Commencement Date (or if no date is specified, the date of this Agreement) and continues for: (a) if the Agency Details specify that there will be a trial period or a trial period is deemed to apply in accordance with clause 2.3 , an initial trial period of 6 months; or (b) the term specified in the Agency Details , unless terminated earlier in accordance with its terms.

17. TERMINATION AND AFTER TERMINATION 17.1 Either party may terminate this Agreement immediately by notice if: (a) the other party materially breaches this Agreement and that breach: (i) is not capable of being remedied; or (ii) is capable of being remedied by the other party fails to remedy the breach within 30 days after receiving notice requiring it to do so; or (b) if any event referred to in clause 18.3 happens to the other party. 17.2 Each party ( 'Notifying Party' ) must notify the other party immediately if; (a) it disposes of the whole or any party of its assets, operations or business other than in the normal course of business; (b) any step is taken to enter into any arrangement between the Notifying Party and its creditors; (c) the Notifying Party ceases to be able to pay its debts as they become due; (d) the Notifying Party ceases to carry on business; (e) any step is taken by a mortgagee to enter into possession or dispose of the whole or any party of the Notifying Party's assets or business; or (f) any step is taken to appoint a receiver and manager, a trustee in bankruptcy, a liquidator, a provisional liquidator, an administrator or other like person of the whole or any party of the Notifying Party's assets or business. 17.3 Optus may terminate this Agreement per any reason by providing 30 days' written notice to the Distributor. 17.4 On termination or expiration of this Agreement, the Distributor: (a) must immediately pay all amounts owed to Optus under this Agreement (b) must promptly return to Optus all displays, fittings, point of sale material, procedures and all copies of the Optus Guidelines provided by Optus; (c) must promptly return to Optus all stock of Products and Optus will as soon as reasonably practicable refund to the Distributor any amounts paid by the Distributor to Optus in respect of those returned Products that are in a saleable condition; and (d) any clause that expressly or by implication continues, will continue after termination. 17.5 If this Agreement is terminated in respect of some Retail Outlets only, the consequences of termination will apply only the terminated Retail Outlets. 4 Apple set out selling the Optus pre-paid mobile products in December with considerable success, at least from Apple's point of view. The interest of Optus was to obtain connections to its network and sales which did not result in connections were not regarded as really successful. 5 For reasons which I will set out in later paragraphs, Optus decided it would not continue with its arrangements for distribution of its products through a large number of distributors. By letter dated 28 May 2001, it purported to terminate the agency. This termination was to take effect after 30 days from the date of the letter. This notice was served on 22 May 2001 and for that reason it is not claimed it was effective or valid. Optus served a further notice by letter of 28 June, pursuant to clause 17.3 of the agreement. The reason for termination given was the desire of Optus to rationalise and regain control of its distribution arrangements. By cross-claim, Optus seeks a declaration that upon the expiration of thirty days after service of that notice the agreement will be terminated. On the hearing it was the validity or otherwise of that notice to which argument was directed. Situation around 23 November 2000 6 Optus had concerns about its distribution network over a period prior to November 2000. It had nineteen distributors of pre-paid mobile products. Those products comprised a start-up kit, a handset and pre-paid vouchers and were sold through three types of outlets, described as corporate outlets, petrol stations and corner store outlets, and route outlets. The commercial outlets included major department stores and specialist communications shops; the route outlets comprised small retailers, such as newsagents, milk bars, small mixed businesses and like enterprises. 7 Mr Rigby was the national sales manager for Optus pre-paid mobile products. By June 2000 he was concerned about this distribution system. He was concerned about unbundling, failure to obtain a strong exposure for Optus in retail outlets and the inability to ensure that retailers complied with regulatory requirements as to identification of customers. Unbundling was the major concern. It involved separating the handset from the package and re-selling it separately. The price of the handset in the package was subsidised as a competitive marketing tool to get customers to connect to the Optus network. This and the other problems identified were real, not imaginary, concerns of Optus. 8 Boost Tel Pty Limited was a company which re-branded and sold Optus pre-paid mobile products. Mr Rigby thought that there was an opportunity for a joint venture with Boost which might lead to a more satisfactory distribution system for Optus pre-paid mobile products. A meeting to discuss such a venture was held on 20 November 2000 with representatives of Optus and Boost attending. It was decided to go ahead with discussions for a joint venture distribution arrangement targeted at petrol stations and convenience stores. On 13 December, Mr Rigby gave a presentation to the managing director of Optus Mobile who gave approval for continued negotiations with Boost. The joint venture project was called "Project Predator". It was accepted by Mr Rigby that if it proceeded all distribution agency agreements would need to be terminated, although there might be a need to re-appoint three or four distributors for route outlets. 9 Before any final Optus board decision was made, Boost decided not to proceed. Mr Rigby knew this on 8 May. There was a further meeting to discuss alternative proposals and a few days later he obtained approval to proceed with Optus alone carrying out the distribution system through an Optus subsidiary company, Pre-paid Services Pty Limited. Once approval was given to proceed in that way, the termination notices of 18 May were given to all distributors except "Yes Distributors". 10 Mr Kay left Optus on 1 March 2001 and some four weeks later commenced employment with Apple. It seems that, although he signed the distribution agreement with Optus, he did not have authority to do so, but nothing turns on that. He was certainly aware of the proposal to re-organise the distribution system and reduce the number of distributors. He was told in January that it was unlikely that Mr Davey, who was senior to Mr Rigby in the chain of command, would agree to Apple being a Predator distributor. He put forward a proposal in March for Apple to be appointed as distributor under the Predator proposals for route outlets. Mr Rigby did not read this, but little turns on that. Apple though Mr Kay knew by then of the proposal for restructure and made no complaint about it. Mr Cheng was aware a proposal for Apple to purchase a card business was conditional upon Apple being appointed a Predator distributor. 11 The exclusion of Apple was not decided until 14 May. By that time it had been accepted or agreed that Telecorp, Jenlist and Yes Distributors would be appointed as distributors principally to the route outlets. On being told that this distribution could be successfully done by three distributors, Mr Davey said that Apple need not be included. 12 Mr Cheng's evidence was that before entering into the agreement with Optus he was considering entering into distribution arrangements with Optus, Telstra and Vodafone, and that the latter two companies both required exclusive agreements. He said that had he known of the intention to terminate distribution agreements he would not have signed up with Optus but would have finalised negotiations with Telstra or Vodafone. Whether he would have succeeded in this is not established.

Pleadings 13 The main claim of Apple is that: (a) by November 2000 Optus had concerns about its distribution arrangements; (b) by 11 November 2000, Optus had formed the view and/or was contemplating restructure which would involve termination of all current distributors; (c) Optus did not disclose these concerns or contemplations to Apple; (d) as set out in the amended statement of claim: 19. It was an implied term of the Contract that the power to terminate provided for in clause 17.3 may only be exercised in good faith and fairly and not capriciously or arbitrarily or for an extraneous purpose (good faith term) . Particulars This term is implied in fact and in law. 20. It was an implied term of the Contract that the power to terminate provided for in clause 17.3 could not be exercised for a reason which was in the contemplation of Optus as at 23 November 2000, or was substantially based upon such a reason, and was not communicated to Apple at that time (extant reason term) . Particulars The term is implied in fact to give business efficacy to the Contract and Apple relies on the matters pleaded above.

(e) that Apple was unaware of the view or contemplations of Optus; (f) that the second notice breached the good faith term pleaded because: (i) the termination reason was known but not communicated to Apple prior to entry into the agreement; (ii) Apple was not given a genuine opportunity to tender as a distributor under the new arrangements; (iii) the reason for termination had nothing to do with any failure on the part of Apple; and (g) the second notice breached the extant reason term as the reason was in existence and in contemplation of Optus as at 23 November. 14 The second claim of Apple is on entry into the contract it was not aware of any reason in contemplation of Optus upon which it might rely to exercise the termination power and it assumed that no such reason was in contemplation. This is claimed to give rise to an estoppel preventing Optus from relying on the second notice of termination. The good faith term 15 It is now established that such a term may be implied in contracts and that such duty applies to both performing obligations and exercising rights. Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349. Many of the relevant authorities are referred to in the judgment of Sheller JA in that case at pages 363-369. Whether or not the term must be implied in all contracts is perhaps not finally established, but I do not think that matters here. Although the contract here is a commercial contract there is no reason not to imply the term. 16 Three reasons are pleaded by the statement of claim for their being a breach of this term. I will deal with them out of order. The second reason is that there was a breach of good faith or failure to act fairly in terminating without giving Apple the opportunity to tender as a distributor under the new arrangements. That would, I think, place an unjustified condition upon a contractual right and the necessity to determine whether Apple was entitled to be considered for one of a reduced number of positions. 17 The third reason is that the termination was arbitrary or capricious or for an extraneous purpose because the termination reason had nothing to do with the conduct of Apple or its performance as distributor. If a contract allows for termination for any reason then it does not seem to me to be unreasonable to terminate it for a reason unconnected with conduct of a contracting party. If a system of operation is decided to be inappropriate, that would be a proper reason for changing that system. The claim under this head - which was much the same as failure to allow an opportunity to tender - that the selection criteria was not applied fairly in view of Apple's record, was not established. Although sales figures gave some support for this Mr Rigby gave an explanation of those figures which would at least give room for doubt. 18 I return to the first reason, namely that it was a breach of good faith to terminate because Optus wished to implement new distribution arrangements requiring fewer distributors and this change was based upon a view held or contemplated on 23 November 2000. 19 Optus is a major commercial enterprise; Apple, while not so large, is also a big enterprise. It was accepted that at any time changes must be in contemplation for such organisations. Mr Cheng himself said he would have expected changes in distribution arrangements over the three year expected term. He knew the details of the termination clause but asked nothing about it. There was no suggestion he was relying on past practices with other distributors. While I am inclined to think, and Mr Rigby seemed to accept, that it would have been better not to enter into the agreement other than for a trial period, that does not seem to me to translate to a holding that there was a breach of good faith in exercising rights under a contract when there was a proper reason to exercise those rights. Even if it were thought that there was lack of good faith in entering into the contract, I am by no reason certain that this should effect the entitlement to exercise rights under the contract. Businesses as large as Optus must constantly be considering changes to their modes of operation and certainly could not be expected to disclose these considerations in a way which might make them public. For instance, had they made the disclosure to Apple, one might well have expected that this information would somehow would get into the public arena, possibly causing loss of other distributors concerned about the future. As there was clearly considerable work to be done before any final new distribution system was decided upon, it does not seem to me that it was unreasonable to enter into the distribution agreement with Apple taking into account the fact of its being a commercial agreement in a competitive industry. Implied term - extant reason under paragraph 20 of the amended statement of claim. 20 This term is not made out. The contract is perfectly clear without it and is effective without it. It does not go without saying. Estoppel 21 There is no evidence that Mr Cheng assumed that "Optus did not have any contemplation or any reason to exercise the powers under 17.3 on 23 November 2000". He did not say that he did. He did not ask about this. He did not say he relied upon silence and in any event misrepresentation was not part of the plaintiff's claim which was founded upon the principles outlined in Thompson v Palmer (1933) 49 CLR 507. None of the matters referred to by Dixon J at page 549 as giving rise to an estoppel in pais or estoppel by convention are present in this case. Conventional estoppel requires an assumption by both parties as the basis of their relationship. That did not exist here. Result 22 It follows from this that the plaintiff's claim, so far as it is based on the second notice of termination, fails and the defendant is entitled to a declaration on the cross-claim that upon the expiry of thirty days from service of the second notice of termination, the agency agreement will be terminated. 23 As the proceedings were originally founded upon the first notice of termination I will hear argument as to whether or not any declarations are required so far as it is concerned and any question of costs.

Last Modified: 08/08/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.