Australia Asia Pacific v Australian Frontier Holiday

1 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1788/2000 AUSTRALIA ASIA PACIFIC HOTELS LIMITED v AUSTRALIAN FRONTIER HOLIDAY OPERATIONS PTY LIMITED & ORS

1 The question for decision is whether certain hotel operating agreements have been validly terminated by the defendants or whether the defendants are estopped for relying upon the clause of the agreements under which they purported to terminate or whether they have waived their rights to rely upon that clause. Facts 2 The plaintiff company, which I will call "All Seasons" because that is how it was generally referred to in evidence, is a company engaged in operating hotels and motels under the "All Seasons" banner. The second and third defendant are respectively the owners of the Katherine Frontier Motel at Katherine and the Oasis Frontier Hotel at Alice Springs. The first defendant is the operating company of the Darwin Frontier Hotel which is owned by Darwin Frontier Hotel Pty Limited. The fourth defendant owns the shares of the first, second and third defendants. The fifth defendant named in the summons, Border Corporation Limited has nothing to do with the hotels in question. The statement of claim has as the fifth defendant Darwin Frontier Hotel Pty Limited. Quite how that happened is not clear: in any event it is of no concern. 3 Until 6 March 2000 the shares in All Seasons were owned by Thakral Holdings Limited (Thakral). The hotels in question were acquired by the relevant owner companies in July 1999. On 23 November 1999 All Seasons entered into what were described as short term operating agreements with the first, second and third defendants under which All Seasons was appointed operator of the three hotels for a period of eighteen months. At about that time it was known that Thakral was engaged in negotiations for the sale of the shares it held in All Seasons and for that reason it was agreed that the short term operating agreements should be amended by having a new clause 18.1A inserted in them. That clause is as follows: If a corporation, other than a related or associated company of Operator or an affiliate of Operator, acquires all or substantially all of the business and assets or shares of Operator, Owner may within 30 days of such acquisition terminate this Agreement without penalty, if it cannot be demonstrated to the reasonable satisfaction of Owner that such corporation is of the same or better standard of operator as Operator, as measured by previous profit performance, professional capabilities and/or geographic distribution. 4 The agreement set out the obligations and responsibilities of the operator and the owners, provided for events of default, notice of default, notice of dispute and a dispute resolution procedure, which on the proper construction of the agreement is unlikely to embrace clause 18.1A within its terms. In any event it was not pleaded or argued that the notices of termination were invalid through non-compliance with the dispute resolution procedure in clause 24.1. 5 By agreement made in December 1999 AAPC Limited (Accor) agreed to purchase from Thakral all the shares in All Seasons. Accor is wholly owned by Accor SA the world's largest hotel and tourist group. Accor is the largest hotel operator in Australia. All Seasons operated the three hotels in question here, together with other hotel and motels in Australia under the All Seasons banner, or name. 6 Mr Palasty is a director of each of the defendant companies. No other officer of the defendant companies gave evidence. It seems that Mr Palasty is in effective control. At a meeting in his office on 20 December 1999 he was told that Accor had acquired control of All Seasons. Mr Frawley, who was the managing director of All Seasons was at that meeting as was Mr Issenberg the managing directors of Accor. Mr Croke, an employee of one of the defendants, was also present. Mr Palasty said that the following conversation took place: MI We are the biggest operator in Australia. We think we can give you more business into your hotels. JP I would like to know what is going to happen to All Seasons, their staffing levels, technical services and their control of existing hotels MI There will be no changes. Everything will stay exactly the same as it is right now. The staff will be retained and All Seasons will run as All Seasons has run. JP I require documentation to show this. MI We will provide you with that documentation.

Mr Frawley denied the last two lines as did Mr Issenberg. For reasons which I will later set out I prefer the evidence of the latter two men. There was discussion about re-branding the Frontier Hotels under the Mercure name. That was a business name or banner which Accor used for some of the hotel properties it operated in Western Australia. 7 Mr Palasty at this time had some concerns about the All Seasons operation, that is the operation as conducted by All Seasons owned by Thakral. He was concerned about debtor levels, maintenance matters and running costs. On 25 January 2000 Messrs Baker and McKenzie, the solicitors then acting for the Frontier Hotels, wrote to Mr Frawley alleging breaches of the short term operating agreements. Those alleged breaches related to debtor policy, staff matters, staff accommodation and maintenance problems. In addition the letter referred to the question of the assignment or acquisition of the shares by All Seasons by setting out clause 18.1A and then stating: Our client understands that it is proposed to sell the ownership of All Seasons to Accor Asia Pacific. Our client has not consented to this nor have you demonstrated the above criteria has been met. Accordingly we are instructed to advise you that at this time our client is not satisfied that the criteria has been met. If the assignment takes place without our client being satisfied, our client will consider terminating the Frontier Agreements.

The letter ended by saying that the hotel owners gave notice that they were considering terminating the agreements pursuant to clause 14.2(a) and unless good cause was shown as to why they should not be terminated they would be so terminated. 8 On 28 January 2000 Messrs Baker and McKenzie wrote to Mr Issenberg stating that their clients understood that the shares in All Seasons had been sold to Accor and advised that certain management issues had arisen and consideration was being given to termination of the operating agreements. On 3 February, 2000 All Seasons invoked clause 24.1A of the operating agreements as to dispute resolution and suggested a meeting on 14 February to discuss those matters in dispute. 9 On 7 February 2000 Messrs. Issenberg, Palasty, Mooney and Balch met at the Rosehill office of Mr Palasty. Mr Mooney was the general manager - finance of Accor, Mr Balch is a consultant engaged by Mr Palasty and his companies. Mr Balch asked who would be Accor's representative dealing with the hotels. He was satisfied when he was told this would be Mr O'Connell. Mr Issenberg said that Mr Balch said that he thought Accor the best people to operate the hotels and that either Mr Palasty or Mr Balch asked whether a twelve year operating agreement could be obtained and asked for a form of the Accor general agreement. Mr Issenberg agreed to have one prepared and in fact did so. There was some discussion between Mr Balch and Mr Issenberg about Accor taking over All Seasons revolving round maintaining the brand name together with concerns about the operating costs of Accor in their marketing and accounting systems. Mr Issenberg said that the All Seasons name would be retained and that the cost structures in place would be honoured. 10 A further meeting took place in Darwin on 8 February attended by Mr Palasty, Mr Croke, Mr Balch and Mr Cochrane representing the defendants' interests, Mr Frawley of All Seasons and Mr O'Connell of Accor. The minutes show that it had been intended, or at least suggested, that the business be dealt with in the order of matters arising out of the Accor acquisition and then ordinary hotel management matters, but that this was reversed at the suggestion of Mr Palasty. However, nothing really turns on that. There was discussion concerning energy matters, renovations, staff and debtors. The minutes reveal little discussion about the Accor takeover other than discussion about future sales strategies which would relate to marketing of the hotels. The minutes show no concern or discussions of matters relevant to clause 18.1A. In cross-examination Mr Palasty said that the minutes were not complete and that at the meeting concerns were expressed about the Accor takeover. I do not accept that evidence. It was obviously crucial, yet it was not referred to in affidavit evidence and it was not suggested in any affidavit that the minutes were not complete. They were in fact annexed to the first affidavit of Mr Palasty. No attempt was made to lead evidence in chief about this, although it was mentioned by counsel at the commencement of the hearing. Mr Balch said nothing about it. Mr Croke was not called. I did not regard Mr Palasty as a very satisfactory witness and I find that nothing relevant to clause 18.1A was discussed at that meeting. 11 On 10 February Messrs Blake Dawson Waldron, then acting for All Seasons, responded to the letter from Messrs. Baker and McKenzie of 25 January. This dealt with the matters complained of and at the end dealt with the assignment matter as follows: 9.1 Assignment by Operator As noted in your letter an agreement has been entered into to sell all of the shares in of AAPH to Accor Asia Pacific ("Accor"). With respect to the requirements of Clause 18.1A we provide the following information in relation to Accor. As you are aware Accor is one of the largest hotel groups in the Asia Pacific region currently operating 168 hotels, 3 convention centres and restaurants in sixteen countries. This is to be compared to 27 hotels currently managed by AAPH. It has an extensive regional and international marketing network and access to an international reservations system which could only enhance the operating performance of the Properties. Accor is a wholly owned subsidiary of the publicly listed French hotel management group, Accor SA. Accor SA through its subsidiaries today operations in 141 countries and employs approximately 130,000 people and manages over 3,400 hotels worldwide. Accor is one of the worlds largest tourist enterprise with a market capitalisation of US$9 billion. Accordingly, Accor is clearly an operator of the same or better standard as AAPH, such that the requirements of Clause 18.1A would be satisfied. Accordingly in the circumstances it would be unreasonable for your client to seek to terminate the Frontier Agreements pursuant to Clause 18.1A.

The letter went on to deny there were any breaches giving rise to a right to terminate. Mr Palasty said he was not satisfied with the response about assignment. If so, he did not tell anyone responsible of this. 12 There was correspondence between the hotels and All Seasons as to the default procedure and extending the time for the meeting and at some stage after 14 February Mr Croke told Mr Frawley that he thought there was no need for the further meetings. 13 On 17 February 2000 Mr Balch and Mr Issenberg met. The main discussions concerned consideration of the question of Accor managing other properties that Mr Palasty controlled, namely an hotel at Double Island and Lennons Hotel in Brisbane. There was further discussion about a prospective twelve year operating agreement which may or may not have related to the hotels or may have related only to Double Island or Lennons. There was discussion about the re-branding of the hotels as Mercure and budget preparations. 14 On 24 February 2000 Mr Balch sent a fax to Mr Issenberg referring to their meeting on 17 February asking for the minutes of the meeting of 8 February and matters referring to the Mercure management agreement and some budget matters. There were other matters relating to other properties which tended to indicate that Accor might take over their management. Mr Issenberg responded to this on 25 February, but some additional information was to be supplied by Mr O'Connell, which was not supplied because although he furnished this to Mr Issenberg it was not sent on. That information I consider to have had nothing to do with clause 18.1A matters. 15 Accor completed its purchase of the shares in All Seasons on 6 March 2000. On that day Mr Palasty telephoned Mr Issenberg and said "We are terminating the agreement, we just want you out". Mr Issenberg said he did not understand the basis for this, but if there was a clause for termination without cause, then they would have to be paid out. Mr Palasty said again "I want you out immediately". Mr Palasty met with Mr Frawley at Rosehill the next day. Mr Palasty said he felt there had not been open communication with him about the sale of the shares in All Seasons to Accor. He complained about lack of communication, problems with debtors, weekly reports and other information due from Accor. Mr Frawley said that as Accor had only owned the hotels for 24 hours they could hardly be responsible for lack of debtors or weekly reports. Mr Palasty said that he said Accor had no presence for these types of hotels in the Northern Territory, that he was not sure of their financial position and they would need to prove themselves to him and the only way that could be done would be to provide a guaranteed owners return or a lease. Subsequently he said that he would pay $300,000 to Accor to walk away, but that if Accor obtained the Lennons management contract, which it seems may have been within the control of Palasty, then that money would have to be repaid. Mr Frawley denied that lack of presence in the Northern Territory and uncertainty about financial position were discussed. I accept the version of Mr Frawley, who I thought was a satisfactory witness as were all the witnesses of the plaintiff. 16 On 13 March 2000 each of the hotels issued termination notices and commenced to remove the All Seasons signs. On 4 April further notices of termination were given. While the first notice may not have been quite clear, the only basis relied upon for termination was the right to do so under Clause 18.1A of the operating agreements. 17 Prior to these events Mr Balch had been negotiating on behalf of the defendant companies with Mr Grant Hunt of Ayers Rock Resort Management to take over the operating agreements for the Northern Territory properties and for Double Island. A facsimile from Mr Balch to Mr Hunt of 3 March sets out matter which were confirmed at a meeting on 2 March including agreement that heads of agreement to manage all four properties had been agreed subject to amendments, that full management agreements would be drafted by solicitors, that notice of termination would be given to All Seasons on 8 March and that a formal announcement of the takeover would be made at an industry conference on 11 March. A copy of the fax was sent to Mr Palasty, although in evidence he said that he had not seen it. He also said that he did not know that Mr Balch was telling Mr Hunt that All Seasons were to be terminated on 8 March. It is not necessary to determine whether or not Mr Palasty did receive a copy of that fax, although I think it likely that he did. Mr Balch said that his negotiations were being undertaken with the knowledge of Mr Palasty and I think it perfectly clear that Mr Palasty was well aware of the details of the negotiations about change of management and I so find. It would of course explain what happened on 7 and 8 March. 18 Further relevant evidence was given by witnesses concerning what would be expected on a takeover. Mr Barbuto, called by the defendants as an expert, deposed in an affidavit as to what information about a new operation would be expected, but agreed in cross-examination that in the case where a hotel was being operated in accordance with existing manuals and procedures approved by the owner and was to be continued by the same operator - but with a different shareholder of that operator - in accordance with the existing approved budgets and managements then, he would not expect the operator to produce a new operating budget. He said this applied if there were a clause in the agreement similar to clause 18.1A. Mr Barge called in reply by the plaintiff as an expert, said that he had had occasion to put a clause along the lines of 18.1A in many agreements and that anyone with any experience in the industry would have knowledge of the comparable figures of All Seasons and Accor and would understand Accor to be a satisfactory operator. He said the clause was there to protect the owner in respect of the size and quality of the incoming manager and not to compare one hotel with another, which was almost impossible. I accept the evidence of Mr Barge, which really did not conflict with the evidence of Mr Barbuto after cross-examination. Termination and clause 18.1A 19 While the plaintiff is seeking an order restraining the defendants from acting on the notices of termination I consider the onus is on the defendant to justify the termination, although I do not think the decision here is to be arrived at on the basis of burden of proof. 20 I find that after the response of Blake Dawson Waldron on 10 February 2000 to the letter from Messrs Baker and McKenzie of 25 January 2000, nothing further was said about 18.1A. As I have said neither Mr Issenberg nor Mr Mooney knew of its existence until this litigation commenced. Mr Frawley did know of the clause but nothing further was said to him to make him think there was any problem with Accor as effective operator. As I said I do not accept the evidence of Mr Palasty to the contrary, which did not go so far as suggesting what was said. In the absence of any further request for information All Seasons was justified in giving no further attention to this question. If the defendant required further information then none was sought. It is correct that Mr Balch sought some further information from Mr O'Connell by fax of 24 February, but that was not related to 18.1A matters, but rather to the Accor regional accounts systems, sales strategy and cost of re-branding the hotels to the Mercure flag. If there were any concern about the Accor operation then Mr Balch and Mr Palasty would hardly have been suggesting a re-branding programme and even more unlikely to be suggesting that Accor might take over other interests of Mr Palasty including Rosehill and the Lennons Hotel. In fact the statement by Mr Palasty to Mr Frawley that he would pay All Seasons $300,000 to walk away, but that would have to be repaid if All Seasons obtained the Lennons operating agreement, shows if anything further were needed, that there were no concerns about the Accor operation. Its reasons given at the meeting of 7 March make this quite clear. In the same way so do the requests made by Mr Palasty and by Mr Balch for a draft of the ordinary Accor operating agreement and the suggestions that there should be a twelve year operating agreement entered into which did not necessarily mean when the existing short term agreements came to an end but may have been intended to have been put in place immediately or at least considered for immediate putting in place. Thus although I accept that Mr Palasty did express concern about the fact he was not taken into the confidence of Mr Frawley earlier as to the proposed purchase of the shares by Accor, that would give no justification whatever for a notice of termination based upon clause 18.1A. The other matters complained of on 7 March were not directed towards 18.1A. 21 Clause 18.1A presupposes reasonable conduct and not conduct directed to depriving a party of the benefit of an agreement without opportunity to answer. While its wording presents some difficulties there is no possible basis to think that if it had not been established to the reasonable satisfaction of the defendant that Accor fulfilled the standards required when the notice was given then it could not have been established. Reasonable conduct would require the defendants to inform All Seasons if there were any remaining doubt. In Service Station Association Limited v Berg Bennett and Associates Pty Limited (1993) 45 FCR 84 at 94 Gummow J stated:

Where one party has an express power the exercise of which will significantly affect the interests of the other party (eg by cancellation of their supply contract) if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily construed ( and the more so when the parties have given such a power to a third party) as requiring a reasonable as well as honest state of satisfaction: see the authorities referred to by Priestly JA and Handley JA in Renard Constructions (1990) 22 FCR 527 at 532, 542-543; and in the High Court, Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 95-97. But this is a result arrived at by a process of construction of the express terms in the setting of the contract as a whole. It is best not seen at all as the implication of a further term. I agree. There was not reasonable lack of satisfaction and there was no reasonable conduct in purporting to terminate without seeking further information. The facts point to the inevitable conclusion that a deal with Ayers Rock Resort management was somehow more attractive to the owners: Mr Frawley was correct when he came to that conclusion as indicated by the note he made after the meeting on 7 March. The second notices could not operate to assist the defendants except perhaps as to the estoppel claim. The parties were locked into this litigation shortly after the first notices were served. Nothing further was sought from the plaintiff. The purported termination was effective. Estoppel and waiver 22 In view of the conclusion to which I have come it is not necessary to determine these matters. However, for completion it is probably desirable to do so. So far as estoppel is concerned the claim is based on estoppel by conduct or perhaps estoppel by silent representation of the defendants in their actions between December 1999 and the date of purported termination. As pleaded it appears to be stated that Accor as well as All Seasons relied on this conduct but that has nothing to do with it as Accor is not a party. In any event, as neither Mr Mooney nor Mr Issenberg were aware of clause 18.1A they could not have relied on any conduct or representation by the defendant companies showing the clause would not be activated. If Mr Frawley did so then there was no evidence that he did so. The case on estoppel must fail. I should add that had there been an estoppel it would not have justify an order requiring the defendants to adhere to the claimed adopted position. So far as waiver is concerned there were no positive acts of abandonment of any right under clause 18.1A. Relief

23 Many orders are sought by way of relief in the statement of claim. Subject to any further argument the only order which the plaintiff should have is an order restraining the appropriate defendants from acting on or implementing the notices of termination. The cross-claim seeking a declaration that the operating agreements have been validly terminated should be dismissed. 24 The orders which I propose are as follows:

1. Order that the first, second and third defendants be restrained from acting on or implementing the purported notices of termination dated 13 March 2000 and 4 April 2000.

3. Order that the first, second and third defendants pay the plaintiff's costs of the proceedings.

4. No order as to costs of fourth and fifth defendants.

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