Analysis
116 Senior Counsel for Allphones submitted that his client was the victim of a series of "verbals". As I understood that submission, it was contended on behalf of Allphones that the entire or a substantial part of the case which the ACCC was putting depended upon evidence of conversations given by disgruntled franchisees, which was, for the most part, denied by Allphones and which could not be properly tested in an interlocutory hearing. The submission was then refined somewhat in order to invoke the principle explained by McLelland J in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 to which I have referred in [28] to [31] above.
117 As I have already indicated, I propose to apply what McLelland J said in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533.
118 However, I do not think that a correct application of that principle requires me to discount heavily or ignore the evidence given by the deponents of the affidavits which were read by the ACCC at the hearing of the present application.
119 The conversations to which the witnesses deposed took place in a context. To a large extent, that context was governed by the events which had occurred during the course of 2008 to which I have referred above and by the contents of the Baker email. Whilst the conversations have been denied for the most part, they are not of such a character as to lead me to conclude that the ACCC's case for final relief is a weak one.
120 It seems to me that I am entitled to give to the conversations due weight for the purpose of determining whether the ACCC has demonstrated a prima facie case or a serious question to be tried in respect of its unconscionability claim.
121 It seems to me that as at 20 October 2008, the following facts and matters were in play:
(a) On 25 March 2008 the ACCC had commenced the main ACCC proceedings. That case appears to be a very substantial case challenging many aspects of the way in which Allphones conducts its franchise system;
(b) Only a few months before, Allphones had lost the Hoy Mobile proceedings to a large extent. In particular, Rares J had held that Allphones was obliged to account to its franchisees who were engaged under the old franchise agreement for an appropriate share of the commissions and rebates which it earned from carriers and suppliers.
(c) Allphones had appealed from the decision of Rares J in the Hoy Mobile proceedings;
(d) Allphones was not prepared to accept that decision;
(e) In April 2008, Allphones through Mr Baker had attempted to bully franchisees into encouraging the ACCC to drop the main ACCC proceedings (as to which see [43]-[50] above);
(f) Allphones had taken steps under the Franchising Code of Conduct to renegotiate the terms of its existing franchise agreements in order to make clear that its franchisees had no entitlement to the commissions and rebates which it might earn from carriers and suppliers and also to obtain a release from any obligation on its part to pay a share of such amounts to its franchisees;
(g) The critical negotiations and mediation contemplated by the dispute procedure which Allphones had instigated under the Franchising Code of Conduct were imminent as at 20 October 2008;
(h) There were no stock shortages as at 20 October 2008;
(i) There were no real or unusual difficulties with the supply of stock as at that date;
(j) There were probably a stock excess as at that date; and
(k) There was no real reason to think that there would be unusual or extraordinary difficulties in obtaining all necessary stock for the upcoming Christmas/New Year period as at 20 October 2008.
122 In my view, as the evidence stands at the moment, there is a fair amount of force in the proposition that the circumstances relied upon by Allphones as justifying sending the Baker email either did not in fact exist or were not perceived or believed by Allphones in fact to exist as at 20 October 2008. It is apparent from the terms of the email that, according to Mr Baker, the three matters dealt with next to the first three dot points on the first page of the email constituted the justification or reason for what is said subsequently in the email. The first of these matters asserted that suppliers had asked Allphones to provide additional security for credit or had foreshadowed that they would be asking for the provision of such security. In the context in which that statement was made, it is arguably misleading. The only request or requests for additional security that were demonstrated by evidence were those which arose from Allphones' requests to increase the relevant credit limits. There would have been nothing unusual in Allphones' suppliers requiring additional security to support additional credit being afforded by them to Allphones. If the statement is to be understood as suggesting that suppliers had recently taken steps to alter and make more restrictive the credit terms under which Allphones was then trading with them, such a statement would not have been true at the time that it was made. The subject matter of the second dot point was undoubtedly correct. There was, however, no evidence as to when the impact of the fall in the Australian dollar would be felt in the Allphones business. As to the third matter, there was no evidence to suggest that the suppliers and financiers to Allphones were concerned about its dispute with its franchisees.
123 Further, as is apparent from a reading of the email, after Mr Baker referred to the matters with which I have just dealt, he then adverted to the possibility that the Directors of Allphones would in fact withdraw their existing guarantees and thus cause difficulties with the suppliers to Allphones and the credit which those suppliers might be prepared to allow Allphones.
124 In the email, Mr Baker then said that there would almost certainly be less stock to go around and that Allphones would, in effect, be forced to ration stock. He then moved on to explain the basis upon which he was asserting that Allphones was entitled to prefer the interests of franchisees who were operating under the new franchise agreement over those who were operating under the old franchise agreement when it came to the allocation of stock. In the email, Mr Baker made very clear that, if, at any given point in time, all franchisees have been stocked to a level of at least $30,000, then above that level preference would be given to franchisees who were on new agreements, franchisees who had signed a Deed of Release and company stores.
125 The evidence discloses that almost all franchisees habitually carry stock to a value which exceeds $30,000.
126 It seems to me to have been unlikely that Mr Baker or anyone else at Allphones seriously thought that any of the stores in the system would find itself in the coming months holding stock to a value of less than $30,000.
127 Finally, in the email, Mr Baker made the rather impractical suggestion that particular franchisees could provide a bank guarantee if that franchisee or those franchisees were unhappy with the allocations they receive.
128 The conduct relied upon by the ACCC as constituting unconscionable conduct was not confined to the sending of the Baker email by Mr Baker on behalf of Allphones. The ACCC also relied upon the subsequent conversations which the various franchisees who swore affidavits had with Allphones employees in the week or so after 20 October 2008.
129 On the version of the conversations given by the witnesses who provided affidavits on behalf of the ACCC, the following matters of substance were conveyed in those conversations by the Allphones employees with whom they spoke:
(a) Franchisees who sign the new franchise agreement and give up all of their rights in respect of past breaches of the old franchise agreement will get more stock than those who do not. Similarly, those who sign up to the new arrangements will be allowed far greater flexibility and be treated preferentially when it comes to stock transfers.
(b) Franchisees who do not sign the new franchise agreement and agree to abandon their rights against Allphones will have the terms of the old franchise agreement concerning stock strictly enforced against them. One such term is that, subject to some flexibility embodied within cl 6.14, each individual store is only entitled to hold stock up to a maximum of $30,000.
130 The surrounding subject matter discussed and the language used in the conversations create the impression in my mind that the Allphones employees involved were making clear that preferential treatment would be given to franchisees who migrate to the new arrangements and who release Allphones from past breaches and that any and all legal rights which Allphones might have under the existing arrangements will be enforced against those franchisees who choose to remain on the old franchise agreement.
131 On the franchisees' version of these conversations, there was a very clear threat made by Allphones to discriminate against franchisees who did not migrate to the new arrangements and to do so in respect of a matter which goes to the heart of the viability of the system viz. stock and stock allocations.
132 Threats to impose stock holds and to limit stock holdings to a value of $30,000.00 had been made in the past (in particular in 2006 and again in 2007) by Allphones in order to pressure franchisees into meeting Allphones' demands, some of which were for things to which Allphones was not legitimately entitled.
133 The evidence which covered the actual stock position up to 3 or 4 November 2008 does not demonstrate that there was, at that time, any significant stock shortages or any likelihood of any stock shortages in the immediate future.
134 It does seem to me that there is force in the contention made by the ACCC that there was no good or business reason for Mr Baker to send the Baker email at the time when he did so. The fundamental premises which were asserted by him as justifying his sending that email have hardly been borne out in the evidence. The type of formalistic communication exemplified by that email did not appear to have been the type of communication that was usually sent in the ordinary course of the dealings between Allphones and its franchisees. It was sent at a critical time in the program for negotiation and mediation which had been already been locked in. It set the scene for the subsequent conversations, which, on the version found in the ACCC's evidence, were clearly designed to pressure franchisees on the old agreement to give up their rights or face the threat of stock rationing or withholding of stock supply.
135 Allphones have submitted that I should not place such a complexion on the relevant events because to do so would ignore the powerful inherent probability that Allphones would be unlikely to "cut off its nose to spite its face" by artificially starving stores within the system of necessary stock solely in order to pressure the operators of those stores into the new arrangements. That submission also has a good deal of force. However, there is no particular reason to suppose that Allphones would make such a threat not intending, if necessary, to give effect to the threat even if only for a short time in order to bring to heel the franchisees to whom the threat was directed.
136 Allphones also contended that it would be a legitimate and appropriate exercise of its rights and business judgment for it to favour franchisees on the new agreement and those franchisees who have provided a Release in favour of Allphones in respect of past breaches of their existing arrangements in circumstances where stock rationing or withholding of stock as a result of commercial circumstances generally outside its control becomes necessary.
137 I am not necessarily in agreement with that contention. However, for present purposes, I need not consider it further.
138 In the present case, the ACCC argues that the sole or predominant or a substantial purpose of the stance adopted by Allphones reflected in the Baker email and in the terms of the subsequent conversations with the franchisees was to pressure those franchisees who remained on the old franchise agreement into giving up their existing rights to continue to remain on that agreement; into releasing Allphones from past breaches of that agreement and into entering into fresh contractual arrangements which were less favourable than those reflected in the old franchise agreement in so far as the franchisees' entitlement to a share of commissions and rebates is concerned and in respect of the supply of stock.
139 In effect, the contention of the ACCC is that, in the context in which Allphones' conduct took place, the threat to exercise the contractual and practical powers of control over stock enjoyed by Allphones vis-ŕ-vis its franchisees for a reason which is not legitimately connected to the requirements of the business as a whole, constituted unconscionable conduct. The ACCC argued that, in the present case, there was an actual exercise or a threatened exercise of those powers for such a purpose in that the motivation and objective of Allphones in engaging in the conduct of which complaint is being made was to pressure and bully franchisees engaged under the old franchise agreement into giving up their rights rather than to allocate rationally and fairly such stock as there was in the system on a basis which reflected the legitimate business needs of the system as a whole and of the individual stores comprising that system.
140 One way of testing the matter in issue is to ask the question: Would the Baker email have been sent and would the alleged conversations have taken place if Allphones was not at the very same time that these events took place, seeking to pressure franchisees under the old agreement to migrate to the new arrangements.
141 The ACCC's case is that the answer to that question is a resounding: No.
142 As the evidence stands at the moment, it is not likely that there will be stock shortages of such a magnitude that an unusual level of rationing of stock will need to be undertaken by Allphones in order to spread that stock around the system in a businesslike and rational way. However, if contrary to that expectation, stock shortages arise of such a magnitude that more serious efforts to ration must be undertaken by Allphones, I think that, as the evidence stands at the moment, Allphones would not be entitled to make its allocation decisions and act accordingly in the supply and allocation of stock by paying any regard to the circumstance that franchisees affected by those decisions may be on either the old or the new franchise agreement. The justification advanced by Allphones for taking into account whether a particular franchisee is under an old franchise agreement or a new franchise agreement when making stock allocations did not seem to me rationally to have much to do with such a decision and seemed rather to have been advanced as a justification for approaching allocations in a way that might really have been actuated by Allphones' desire to pressure its franchisees into entering into the new arrangements which it has in mind.
143 Although the evidence does not really support the ACCC's contention that Allphones has in fact already rationed stock on an inappropriate basis, I think that the evidence does amount to proof of a prima facie case that Allphones has threatened to allocate stock upon a basis and in circumstances which are not truly for legitimate commercial reasons but are rather for the ulterior purpose of forcing its franchisees into the new arrangements. In my judgment, Allphones was employing unfair tactics and was unfairly pressuring its franchisees when it sent the Baker email and made the threats which it made in the conversations which it subsequently had with some of its franchisees.
144 For these reasons, in my view the ACCC has established a prima facie case or serious question to be tried in respect of its claim that Allphones has been guilty of unconscionable conduct.
145 Allphones contends (and the evidence supports) that it has not, in fact, yet allocated stock on a basis which includes as a criterion that a franchisee may be on one or other of the types of franchise agreement in play. Allphones has given the temporary undertaking referred to above. There is no real evidentiary support for the contention that significant stock shortages are anticipated in the immediate future.
146 No particular hardship will be visited upon Allphones if injunctions in the form of the proposed orders are granted.
147 The interests of third parties to the present application (namely Allphones franchisees) and the public generally require that the negotiations and mediation commenced in October/November 2008 be carried out in a climate where the commercial dealings between the two sides of the dispute remain much as they have been historically and are not affected by sudden alterations to those arrangements effected unilaterally by one side which are designed to put pressure on one side in favour of the other.
148 In those circumstances, I think that the balance of convenience and the balance of justice favour the grant of injunction.
149 I do not propose to deal with the ACCC's case which depended upon the contention that Allphones had made hollow or empty threats.
150 In my view, the ACCC's case that there has been unconscionable conduct is a case which will support an injunction preventing Allphones from representing that it proposes to prefer the interests of franchisees who are operating under the new franchise agreement when allocating stock to its stores.
151 I propose to grant injunctions in the terms of the orders which are set out at the commencement of these Reasons. They vary from the orders sought by the ACCC to some extent. But, in my view, the orders which I propose more appropriately reflect the needs of the case.
I certify that the preceding one hundred and fifty-one (151) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.