Australian Maintenance and Cleaning Pty Ltd v AMC Commercial Cleaning

Court of Appeal (NSW)|2011-03-30|Before: Hodgson JA, Macfarlan JA, Young JA, Rein J

Judgment 1HODGSON JA : I agree with the orders proposed by Macfarlan JA and with his reasons. 2I would add that, in my opinion, there is a further consideration supporting the inapplicability of cl.7.5 of the Master Franchise Agreement (MFA) to the proposed Sub-Master Franchise Agreement. 3A Franchise Agreement as contemplated by the MFA is an agreement between AMC NSW as Master Franchisee and a Franchisee, as is confirmed by the form provided by AMC National (2 Blue 501-558). In relation to such an agreement, the language of cl.7.5, referring to prior written consent of AMC National, is apposite. 4However, a Sub-Master Franchise Agreement, in the form provided by AMC National and as contemplated in this case, is an agreement in which AMC National is a party, as well as AMC NSW and a Sub-Master Franchisee. Such an agreement (2 Blue 559-631) contains the grant of rights by AMC National (cl.2), imposes duties on AMC National (cl.4), and subjects it to dispute resolution procedures (cl.31). Thus such an agreement requires more than "prior written consent" to an agreement between AMC NSW and some other party; and in my opinion the language of cl.7.5 is not apt to impose on AMC National an obligation to bind itself to such an agreement. 5MACFARLAN JA : By a written Master Franchise Agreement (the "MFA") dated 5 March 2003 the appellant ("AMC National") granted to the respondent ("AMC NSW") a "Master Franchise" to use AMC National's "systems, procedures and intellectual property to grant franchises" in New South Wales and the Australian Capital Territory (Recital C). The franchises to be granted by AMC NSW were ones to operate cleaning businesses using the distinctive image and other intellectual property of AMC National. 6In 2009 AMC NSW commenced proceedings against AMC National seeking declarations, injunctions and other relief related to the MFA. The proceedings were resolved by judgments dated 21 July, 3 September and 9 December 2010 of Rein J sitting in the Equity Division of the Court. Only one aspect of the issues determined by his Honour is the subject of appeal. 7The appeal arises out of a request made by AMC NSW to AMC National for the latter's consent to, and execution of, a Sub-Master Franchise Agreement relating to the Australian Capital Territory (the "ACT SMFA") that AMC NSW and Ultimate Facility Services Pty Ltd ("Ultimate") had executed. By the ACT SMFA, AMC NSW sought to grant to Ultimate a franchise "to use [AMC National's] systems, procedures and intellectual property to grant franchises" in the ACT (Recital C). AMC National refused to give its consent to and to execute the agreement. 8The primary judge accepted AMC NSW's contention that, by reason of Clause 7.5 of the MFA, AMC National was obliged to give its consent (and to execute the ACT SMFA) unless its consent was withheld in AMC National's "reasonable discretion". His Honour said that he was "not satisfied that AMC National's refusal to consent was reasonable (First Judgment [85]). As a result, he concluded that AMC National should be compelled to execute the ACT SMFA. 9On its appeal AMC National contends that Clause 7.5 of the MFA did not apply to a Sub-Master Franchise Agreement (an "SMFA"), with the result that it had no obligation at all to grant consent to, or to execute, the ACT SMFA. Alternatively it contends that its refusal to consent to that agreement was reasonable. 10The first issue that arises on the appeal is accordingly whether Clause 7.5 was applicable to an SMFA. Like the primary judge I shall deal with this issue in two steps. First, by considering the proper construction of the MFA without regard to an Operations Manual (the "Manual") that was issued by AMC National in 2009 and that AMC NSW alleges had the effect of varying the MFA. Secondly, I shall reconsider that question of construction by taking account of the Manual.

The Proper Construction of Clause 7.5 of the MFA - the Manual Aside 11Clause 7.5 of the MFA was in the following terms: "Prior to entering into a Franchise Agreement with any person, the Master Franchisee must give AMC a written notice containing the details of that person (including any financial information required by AMC) and the Master Franchisee must not enter into any Franchise Agreements or grant any rights to carry on business using the Marks, the System, the Image or the Intellectual Property in any circumstances without the prior written consent of AMC, which consent may be withheld in AMC's reasonable discretion". 12The critical question to be addressed is whether the expression "Franchise Agreement" in this clause included not only an agreement to franchise a person to conduct a cleaning business using AMC National's intellectual property but also an agreement to franchise a person to grant franchises to persons to conduct cleaning businesses and to manage and supervise the franchisees of those businesses. In other words, the question is whether the expression "Franchise Agreement" was capable of referring not only to a cleaning franchise but also to a "Sub-Master Franchise". If it was, AMC National was obliged to give its consent to the ACT SMFA unless it had a reasonable basis for withholding it.

Provisions of the MFA 13The recitals in the MFA were in the following terms: "A. AMC has developed a distinctive reputation, identity and image and certain business systems and operating procedures relevant to the successful conduct of commercial cleaning businesses. B. AMC has also expanded its business through the development and running of a network of franchisees. C. AMC agrees to grant a Franchise to the Master Franchisee to use AMC's systems, procedures and intellectual property to grant franchises in a specified territory on the terms and conditions of this Agreement. D. The Master Franchisee agrees to acquire the Franchise to grant AMC Franchises in the Territory and to take on certain initial and ongoing responsibilities to its Franchisees on the terms and conditions of this Agreement". 14Relevant definitions contained in Clause 1 of the MFA were as follows: "'Business' means the business of operating pursuant to this Agreement a Master Franchisee cleaning business specialising in the servicing of commercial, industrial, office and other cleaning contracts using the System, Image, Marks and the Intellectual Property. 'Client' means a client to whom a Franchisee provides cleaning services. 'Franchise Agreement' means a franchise agreement to be entered into between AMC, the Master Franchisee and Franchisees in the form provided by AMC, as amended from time to time. 'Franchisee' means a franchisee of the Master Franchisee under a Franchise Agreement. 'Franchise' means the rights under a Franchise Agreement to operate an AMC franchise 'Franchised Operation' means the network of Franchisees conducted by the Franchisees within the Territory pursuant to a Franchise Agreement between Franchisees and the Master Franchisee. 'Franchisee Manual' means any manual and/or audio visual presentation and/or other relevant material which may be issued by AMC relating to the Business or the conduct of the Franchised Operation from time to time including any amendments made to such manual, audio visual presentation or other material from time to time by AMC. 'Master Franchise' means the business of managing the Franchisees located in the Territory and seeking, recruiting, supplying, motivating, training, supervising and supporting the Franchisees located in the Territory in accordance with terms of this Agreement". 15By Clause 2.1 of the MFA, AMC National granted to AMC NSW "a Master Franchise" relating to New South Wales and the ACT. Clause 2.3 was in the following terms: "2.3 Exclusive Master Franchise (a) Subject to 2.3(b), AMC must not during the Term, for or in the Territory: (i) grant any other Master Franchises to any person; or (ii) carry on business itself nor grant to any other person the right to carry on business using the System and the Intellectual Property. (b) If the Master Franchisee does not meet the Minimum Performance Criteria, AMC retains the right to appoint further Master Franchisees in the Territory". 16Clause 4.6 provided that AMC National would "issue and send tax invoices to each Client to whom cleaning services were provided by the Franchisees in the previous month, as reported by the Master Franchisee". Amounts collected were then to be distributed between AMC National, AMC NSW and the Franchisees. 17Clause 7 of the MFA related to the recruitment of Franchisees and the granting of franchises by AMC NSW. In addition to containing Clause 7.5 as quoted above, it included the following: "7.6 The Master Franchisee must only use a Franchise Agreement and disclosure document prepared and issued for the relevant prospective Franchisee by AMC or in accordance with AMC's directions". 18Clause 8 imposed an obligation on AMC NSW to "effectively supervise and assist Franchisees within the Territory in the conduct, management and operation of their Franchises". 19Clause 20 conferred limited rights upon AMC NSW to sell the whole or part of its Master Franchise. Absent conformity with the conditions specified in Clause 20 (which included offering AMC National first right of refusal) transfers of AMC NSW's "interest in this Master Franchise" were prohibited. Clause 20.4(c) was in the following terms: "No partial transfer of the Master Franchisee's interest is allowed nor, in the case of a corporate Master Franchisee, any change whatsoever which has the effect of altering the underlying beneficial ownership of the Master Franchise, or the control of the Master Franchise in any way".

The judgments at first instance 20In his first judgment the primary judge stated the following conclusion on this issue: "78 Were it not for the State Masters Operations Manual (" the manual ") (Exhibit L), to which I refer below, I would not regard the sub-master franchise agreement as falling within the MFA, not only because an agreement which transfers the right of creating franchises (which is given to AMC NSW under the MFA) to another person does not appear to me to be a franchise agreement, but also because clause 20.4(c) prohibits the partial transfer of AMC NSW's interest or any change which has the effect of altering the underlying beneficial ownership of the master franchisee or AMC National's control of the master franchisee" (First Judgment [78]).

Consideration 21For the reasons following I agree with the primary judge that, if the Manual is left out of consideration, the ACT SMFA was not a "Franchise Agreement" within the meaning of that expression in Clause 7.5. 22In my view the MFA clearly distinguished between a franchise to grant franchises (and to supervise and manage those to whom such franchises were granted) and a franchise to operate a cleaning business using AMC National's intellectual property. The former was referred to in the MFA as a "Master Franchise" and the latter as a "Franchise Agreement". The nature of a Master Franchise was indicated by Recital C (which referred to a franchise "to grant franchises") and by the definition of "Master Franchise" which plainly was not a franchise to conduct a cleaning business. Rather, the expression referred to the business of finding, recruiting, training and supervising franchisees who were to conduct the cleaning businesses (the "Franchisees"). This was confirmed by the definitions of "Client" and "Franchisee", the former being defined as someone to whom the Franchisee provided cleaning services and the latter being defined as someone who was franchised by the Master Franchisee to provide cleaning services. It was further confirmed by Clause 10 which contemplated that the role of Franchisees was to perform cleaning contracts. 23Nowhere in the MFA was there any indication that the role of a Franchisee, as distinct from that of the Master Franchisee, included the granting of franchises to other persons to conduct cleaning businesses. 24The ACT SMFA was, as its name and contents indicated, a franchise to permit Ultimate to grant Franchises and supervise Franchisees. Thus it was a type of Master Franchise and outside the purview of Clause 7.5 which was only concerned with franchises to conduct cleaning businesses. 25One of the reasons given by the primary judge for construing Clause 7.5 as he did was that an agreement such as the ACT SMFA amounted to a "partial transfer of the Master Franchisee's interest" in contravention of Clause 20.4(c), with the result that Clause 7.5 should not be construed to have covered such an agreement (Third Judgment [11]). However in my view the ACT SMFA did not amount to a transfer or assignment of AMC NSW's rights under the MFA so far as they related to the ACT because, under the terms of that SMFA, AMC NSW was to remain very much involved in the ACT operations, including by supervising the sub-master franchisee and receiving a share of the fees and royalties paid by the sub-master franchisee. 26Whilst I agree with the primary judge that the conferral of rights upon the sub-master franchisee by the ACT SMFA was a "partial transfer of the master franchisee's interest" as described in Clause 20.4(c) of the MFA, I regard this as a factor of only limited significance in construing Clause 7.5. If (contrary to my view) Clause 7.5, when construed in the context of the provisions of the MFA other than Clause 20.4(c), clearly embraced sub-master franchise agreements, Clause 20.4(c) would have to be construed in a more limited way than might otherwise have been the case. That is, the broad prohibition in Clause 20.4(c) would have to be read down so as not to derogate from the assumed clear right effectively granted by Clause 7.5 to AMC NSW to grant franchises unless there was a reasonable basis for AMC National objecting to that course. This approach to construction of Clause 20.4(c) is supported by the fact that Clause 20.4(a) commences with the words "[e]xcept as set out in this Agreement" and that it is arguable that those words should be understood as also applicable to Clause 20.4(c). 27I should add that whilst the only obligation Clause 7.5 expressly imposed upon AMC National by Clause 7.5 (assuming that there were no reasonable grounds for withholding its consent) was to give consent to the proposed "Franchise Agreement" tendered by AMC NSW, it is clear from the definition of "Franchise Agreement" that AMC National was intended to become a party to a Franchise Agreement if it consented to it. Accordingly, if the circumstances were such that AMC National was obliged to consent to a Franchise Agreement (whether that was a cleaning business franchise or, if AMC NSW's argument be correct, an SMFA) AMC National was also required to execute that Franchise Agreement. 28I should consider a further argument of AMC NSW that the primary judge found unnecessary to deal with because of his decision on other points. This argument is raised on the appeal by AMC NSW by way of a Notice of Contention and postulates that the ACT SMFA was a "Franchise Agreement" within the meaning of Clause 7.5 of the MFA because it was in a form provided by AMC National (through its solicitors). This argument is founded upon the definition of a "Franchise Agreement" as a franchise agreement "in the form provided by [AMC National], as amended from time to time" (see [14] above). The effect of the argument is that it did not matter if "the form provided" was not of an agreement that would otherwise be a "Franchise Agreement" within the meaning of the MFA. AMC NSW submitted that the meaning of that expression was fluid, with the result that its meaning would expand to cover the type of agreement that was the subject of a form provided by AMC National. 29I do not accept this submission. I have referred earlier to a number of indications in the MFA that a "Franchise Agreement" was an agreement to franchise a person to conduct a commercial cleaning business using AMC National's intellectual property. The reference in the definition to the agreement being "in the form provided" by AMC National was simply to an ability of AMC National to dictate the form that an agreement to franchise the carrying on of a commercial cleaning business would take. The words could not reasonably be understood as permitting AMC National to change the fundamental character of a "Franchise Agreement" by providing a form for an entirely different type of agreement.

Provisions of the MFA 30Clause 1 contained the following definition of "Manual": "'Manual' means any manual and/or audio visual presentation and/or other relevant material which may be issued by AMC: (a) relating to the Master Franchise or the conduct of the Master Franchise; and (b) for the Master Franchisee to provide to its Franchisee; from time to time including any amendments made to such manuals, audio visual presentation or other material from time to time by AMC". 31Clauses 17.1, 17.2 and 17.3 were in the following terms: "17.1 Compliance with Manual The terms and contents of the Manual are incorporated into the terms of this Agreement and the Master Franchisee must observe and comply with the Manual. 17.2 Breach A breach of any term, standard or procedure contained in the Manual is a breach of a term of this Agreement. 17.3 Amendment of Manual AMC may amend the provisions of the Manual from time to time in order to: (a) protect the Marks, business names, reputation and other Intellectual Property owned, under the control of or used by AMC; (b) comply with any statutes or judicial or administrative decisions; (c) maintain administrative efficiency and profitability; (d) improve the quality of facilities and the Services offered by AMC, the Master Franchisee or Franchisees". 32In 2009, prior to AMC NSW submitting the ACT SMFA to AMC National for consent, AMC National issued its State Masters Operations Manual 2009 (the "Manual"), apparently to replace a manual that was previously operative. One of many topics dealt with in the Manual was that of engaging franchisees. In the section dealing with that topic the following appeared: " F. Fees and Royalties (Master Franchise) State Master Franchisee Fees The State Master Franchisee receives the following fees from their franchisee's. Franchisee Initial/sign on fee (Schedule 8 of their Franchise agreement) *14% of gross income $50.00 a month Marketing Fee #$50.00 a hour Operational Training support Submaster Franchisee 2% of gross income Initial/sign on fee (Schedule 8 of their Franchise agreement) 50% of the 15% of the new Franchise Initial/sign on fee (Schedule 8 of their Franchise agreement) The percentage of gross income (as defined in the Disclosure Document/Franchise Agreement) varies depending on the Franchisee's income. #Ongoing Training (see page 77) Franchisor The Franchisor receives the following fees from the State Master Franchisee. 2% of gross sales Initial/sign on fee (Schedule 8 of the Franchise agreement) Franchisee 15% of the Initial/sign on fee (Schedule 8 of their Franchise agreement) Submaster Franchisee 15% of the Initial/sign on fee (Schedule 8 of their Franchise agreement 50% of the 15% Initial/sign on fee (Schedule 8 of the Franchise agreement Any National training deemed necessary. Annual Group Insurance The initial fee payable by Submaster Franchisees has been increased to 20% as of 1 st January 2009 for any Submaster signed after that date. G. Master Franchise Operational Structure AMC Head Office will provide for all invoicing and collection from clients and payment to all Franchisees and the Master Franchisee".

The judgments at first instance 33The primary judge accepted AMC NSW's contention that if (as he held to be the case) the term "Franchise Agreement" in Clause 7.5 of the MFA did not extend to the SMFA when the Manual was disregarded, taking it into account led to a different conclusion. In his first judgment his Honour's conclusions were expressed as follows: "79 [B]y the MFA itself, the manual is made a part of the MFA, and the manual expressly contemplates the entry by the master franchisee into sub-master franchise agreements [his Honour then referred to and quoted the portions of the Manual set out in [32] above]: 80 There is a tension between the MFA and the manual, but in my view, AMC National must be taken to have agreed that sub-master franchise agreements were a legitimate form of franchise agreement within the terms of the MFA; not only that, but the manual provided what amount would be paid to AMC National should a master franchisee enter into such an agreement, that is: (a) 15 per cent of the initial/sign on fee set out in Schedule 8 of the MFA; and (b) 50 per cent of the 15 per cent of the initial/sign on fee. Although poorly expressed, these would seem to be cumulative". 34It was necessary for the primary judge to return to the issue in his third judgment as by his second judgment his Honour had granted leave to AMC NSW to reopen its case on the issue. In his third judgment the judge said the following relevant to this issue: "11 Leaving aside the question of the validity of the amendment to the manual, notwithstanding the fact that the 2009 manual does not expressly state that sub-master franchises can be sold by master franchisees, I remain of the view that the incorporation of amendments to the manual and the incorporation of the manual into the MFA by the terms of the MFA produce the result that the MFA recognises sub-master franchises as a species of franchise covered by the MFA and that sub-master franchises are not rendered impermissible by cl 20.4 of the MFA. The MFA must be read as a whole and given a commercial and businesslike interpretation: see Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 at 25-27 ([19]-[23]) per Allsop P and at 99 ([361]-[362]) per Campbell JA, Giles JA agreeing with Campbell JA at 29 ([42]-[43]) and with Allsop P at 33 ([63]). 12 I do not think that the contents of the manual, and hence the MFA, can be construed so as to give AMC National the benefit of recognition in the 2009 manual of a fee payable for each and every sub-master franchise agreement entered into without the burden of an obligation to consent to sub-master franchise agreements, subject to the terms of the MFA. 13 I accept that it is somewhat surprising that AMC National would agree to the introduction of sub-master franchises by means of issuing a manual rather than preparing an amendment to the MFA, but it is clear that: (1) AMC National agreed to sub-master franchises before the ACT sub-master franchise; and (2) AMC National issued the 2009 manual expressly recognising sub-master franchises and even specifying the amount to be paid and the alteration of the manual can be seen as reflecting the consensus that sub-master franchises were a desirable development. Clause 34.4 of the MFA requires any amendment to the MFA (by means other than through issue or amendment of the manual) to be in writing executed by the parties, but this was not required for the manual". 35His Honour's reference at the commencement of [11] just quoted to a question concerning the validity of the amendment to the Manual was to a contention of AMC National that if the Manual would otherwise have had the effect for which AMC NSW contended (that is, to amend Clause 7.5 of the MFA to extend its operation to Sub-Master Franchise Agreements), the issue of the Manual was pro tanto "invalid". It submitted that Clause 17.1 did not to that extent operate in respect of the Manual because on this assumption the issue of the Manual amounted to the amendment of the existing manual for a purpose that was not one of those specified in Clause 17.3 as a purpose for which the existing manual could be amended. 36The primary judge's conclusion in relation to this contention was expressed as follows: " ... The question is: why did AMC National amend the manual? The answer, I think, is because AMC National accepted that sub-master franchises were a worthwhile additional tier and wanted to specify the fees that would be applicable if a sub-master franchise agreement were entered into, which fees AMC National believed would be appropriate (I have commented in my reasons of 21 July that I think an error was made by AMC National in the expression of the fees payable and see Exhibit 1, but that is not relevant to the present issue). The consequence of according recognition to sub-master franchises in this manner was that they became an acceptable type of franchise governed by the MFA. To look only at the question of whether there was a benefit to AMC National in being required to consent is too narrow a focus for a consideration of whether the purpose of the amendment met the requirements of cl 17.3(c) or (d)" (Third Judgment [18]).

Consideration 37The question raised as to the "validity" of the issue of the Manual can in my view be disposed of briefly. Even if the Manual had the contractual effect concerning Clause 7.5 of the MFA for which AMC NSW contended, it can in my view readily be inferred that it was issued for one or both of the purposes specified in Clause 17.3(c) and (d). That is, the conferral upon AMC NSW of the right to enter into a Submaster Franchise Agreement (albeit one qualified by a right of AMC National to withhold consent on reasonable grounds) and the specification of fees to be paid to AMC National in the event that AMC NSW entered into any such agreement can be inferred to have been related to the maintenance of efficiency and profitability in connection with the MFA and the improvement of services offered by all the parties in the contractual regime. 38This conclusion is confirmed when regard is had to the fact, as I consider to be the case, that Clause 17.3 was concerned at least in part with AMC National's subjective purpose in amending the manual. In these circumstances AMC National bore at least an evidentiary burden of adducing some evidence that the manual was amended for a purpose other than those specified in Clause 17.3. It did not call such evidence. Indeed such evidence as was given by its sole director, Mr Coade, pointed in the opposite direction because Mr Coade said that the purpose of issuing the relevant part of the Manual was to "clarify what was currently being done" (Transcript p 32), a purpose that seems to be consistent with those in Clause 17.3(c) and (d). The difficulty that this evidence causes AMC National is exacerbated by the fact that AMC National, and not AMC NSW, was the party with the knowledge of the purpose for which AMC National issued the Manual (see further [64] below). 39AMC National contended in the alternative that the issue of the Manual did not constitute an amendment as contemplated by Clause 17.3. Rather, it submitted that it was in effect a new issue of a manual because the Manual appeared to be comprehensive in its terms. I do not accept this submission. The evident purpose of Clause 17.3 was to restrict the circumstances in which AMC National could change the existing manual. It would not in my view make any sense for the restriction to operate only in respect of limited amendments and not in respect of wholesale amendments. The word "amend" is capable of referring to both types of changes and bearing in mind the evident purpose of the provision I consider that it so extends in the present case. 40The next question to be considered is whether the issue of the Manual broadened the ambit of Clause 7.5 of the MFA to extend its coverage to Sub-Master Franchise Agreements. 41By reason of Clause 17.1 of the MFA, the Manual was given contractual effect notwithstanding that its issue was a unilateral act on the part of AMC National. As I have concluded above that, absent consideration of the Manual, Clause 7.5 does not extend to Sub-Master Franchise Agreements, it is appropriate first to consider whether the Manual said or implied something different from what Clause 7.5 said and, if it did, whether the fact that the Manual became part of the contract between the parties requires a different interpretation to be given to Clause 7.5. 42First it should be noted that the relevant part of the Manual did not purport to amend Clause 7.5 of the MFA. Indeed it did not expressly deal with the topic to which Clause 7.5 was directed, that is, a prohibition on AMC NSW entering into Franchise Agreements or granting other rights without the consent of AMC National. 43Nevertheless AMC NSW argues that this part of the Manual assumed a different contractual position than that for which Clause 7.5 otherwise provided. That is, it indicated that, at least from the date of the issue of the Manual, Franchise Agreements with cleaners and Sub-Master Franchisors were to be regarded as sub-categories of a broader category of franchise agreements referred to by the expression "Franchise Agreements" in Clause 7.5. The effect of AMC NSW's submission is that there would have been no need to specify fees and royalties payable in the event of AMC NSW entering into Sub-Master Franchises unless there was an obligation upon AMC National to consent to AMC NSW's entry into such agreements, absent AMC National having reasonable grounds for withholding such consent. These submissions reflect the approach taken by the primary judge. 44I do not however accept the submissions. The specification in the Manual of fees and royalties applicable in the event that Sub-Master Franchisee Agreements were entered into was not consistent only with the qualified right conferred upon AMC NSW by Clause 7.5 applying to SMFAs. AMC National was able to give its consent to AMC NSW entering into such agreements irrespective of the existence of any contractual provision requiring it to give that consent. Parties to a contract are not prevented by their contract from doing consensually something that the contract prohibits, or for which the contract does not provide. Indeed the parties appear to have done such a thing after the inception of the MFA but prior to the issue of the Manual because, with the agreement of AMC National, AMC NSW entered into Sub-Master Franchise Agreements relating to the New South Wales South Coast and the Newcastle/Central Coast regions. There was, on the view I have taken of the meaning of Clause 7.5 when construed without regard to the Manual, no contractual provision authorising the parties to take such a step. Nor did there need to be. 45AMC NSW does not contend that its entry into those SMFAs with the concurrence of AMC National of itself indicated that the parties had agreed to extend the ambit of Clause 7.5. Such an argument could not have succeeded because the acts concerned did not give rise to that inference. The acts were simply consensual acts of the parties that did not need to be governed by the MFA. 46As on some previous occasions AMC NSW had entered into Sub-Master Franchises with AMC National's consent, it is not surprising that AMC National might have wanted, by the Manual, to specify for AMC NSW's information what fee and royalty provisions would be applicable in the event that that occurred again. To my mind there is nothing in those provisions in the Manual to indicate that AMC National was, by including them in the Manual, indicating an intent to assume an obligation to give consent by rendering Clause 7.5 applicable to the grant by AMC NSW of Sub-Master Franchises. 47I respectfully disagree with the view apparently taken by the primary judge that it would be an uncommercial and unbusinesslike interpretation to construe the relevant part of the Manual as entitling AMC National to "a fee payable for each and every sub-master franchise agreement entered into without the burden of an obligation to consent to sub-master franchise agreements, subject to the terms of the MFA" (Third Judgment [12]). In my view the provisions in the Manual made good sense as a specification of the fees and royalties that AMC National would require to be paid in the event that it consented to further Sub-Master Franchises. Fees and royalties were only to be payable if AMC National gave that consent. There is not in my view any reason why the provisions should be construed as imposing an obligation on AMC National to give its consent. Its assumption of such an obligation would have been gratuitous as the Manual only provided for AMC National to receive remuneration if it chose to give consent. 48From one point of view the form of the relevant part of the Manual in any event conflicts with AMC NSW's submissions. That is, by using separate headings for "Franchisee" and "Sub-Master Franchisee" the Manual could be taken as leaving intact the concept of a "Franchisee" as a person who was franchised to conduct a cleaning business. 49In response to this approach, AMC NSW emphasised that the words in the Manual preceding these headings where first used were "from their franchisee's" (sic) and that elsewhere in the same provisions of the Manual the expression "Franchise agreement" was used in a context where was is a, or included, reference to a Sub-Master Franchise Agreement. However in my view these references were simply a shorthand means of referring, or including reference, to the Sub-Master Franchise Agreements. It would be attributing far too much significance to words used in passing in provisions concerning fees in an operational manual to regard them as manifesting a contractual intent to change, in a significant way, the meaning of the formal written contract between the parties. 50This conclusion is supported by the fact that the word "franchisee's" and the word "agreement" in the provisions upon which AMC NSW relies did not commence with a capital as would have been the case if the words had been intended to precisely mirror (or indeed to impact upon) the expressions "Franchisee", "Franchise Agreement" and cognate expressions in the formal written contract.

Pre-contractual discussions 51AMC NSW submitted that certain pre-contractual discussions (see the evidence at Blue Appeal Book pp 198-9, 210-12, Black Appeal Book pp 114-5) assisted its argument as to the correct construction of Clause 7.5 of the MFA. I accept that insofar as evidence of those discussions revealed that prior to entering into the MFA, AMC NSW was aware that AMC National had consented, or at least intended to consent, to another Master Franchisee entering into a Sub-Master Franchise Agreement, the evidence was admissible as evidence of a surrounding circumstance known to both parties at the date that the contract was entered into. However, the terms of the MFA as subsequently entered into were clear and I cannot see how the parties' knowledge of this background circumstance favours AMC NSW's construction of Clause 7.5 of the MFA. 52Insofar as evidence of the pre-contractual discussions may have revealed what the parties subjectively intended that their subsequently entered into contract would mean, the evidence was plainly inadmissible for the reasons given by Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352-3. 53It is unnecessary in these circumstances to consider AMC National's submission that the evidence was in any event disputed.

The Franchising Code of Conduct 54On the appeal AMC NSW submitted that the Franchising Code of Conduct as prescribed by Part IVB of the Trade Practices Act 1975 (Cth) (the "Code") assisted its argument as to the correct construction of Clause 7.5. Senior Counsel for AMC NSW emphasised that he sought to rely upon the Code only for the purpose of assisting his construction argument and not to suggest that the Code had a mandatory operation relevant to any issue on the appeal. He recognised that he was precluded from asserting that the Code had any wider relevance by reason of matters that had occurred at first instance. 55Clause 30 of the MFA referred to the Code. It provided for the parties to the contract to comply with the Code and for the MFA to be construed so far as possible in a way that would ensure that it did not contravene the Code. 56AMC NSW relied upon two aspects of the Code. 57First it pointed out that the definition in the Code of "franchise" includes a "subfranchise" and that the definitions of "franchisee", "franchisor" and "master franchise" similarly include references to subfranchises. These definitions do not in my view assist AMC NSW. They indicate that the Code operates in relation to subfranchises. Neither they, nor any other part of the Code, indicate that any grant of a franchise is to be construed as including authority to the franchisee to grant a subfranchise (with the arguable consequence in the case of the MFA that Clause 7.5 gave qualified authority to AMC NSW to grant both Franchises and Sub-Master Franchises). The provisions of the Code simply indicate that if there is a relevant subfranchise, the Code applies to it. 58In any event the Code's operation is limited to franchises conferring "the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor ([4(1)(b)]). The Franchises to which the MFA referred, that is, those granting permission to conduct commercial cleaning businesses using the intellectual property of AMC National were franchises of this type. Accordingly if, as AMC NSW contends, the effect of the Code is that the MFA should be construed as permitting subfranchises, those Franchisees conducting commercial cleaning businesses could have subfranchised the operation of their businesses. 59The position is however different in respect of AMC NSW's Master Franchise. This was not a franchise of "the right to carry on the business of offering, supplying or distributing goods or services ... " It was, as described in Recital C, a franchise "to grant franchises" or, as described in the definition of "Master Franchise", a franchise to recruit, train and supervise (etc) franchisees, that is, franchisees who would conduct commercial cleaning businesses. In short AMC NSW was not franchised to conduct cleaning businesses. What it was franchised to do was not appropriately described as "offering, supplying or distributing goods or services". Accordingly, even accepting AMC NSW's primary argument, the Code does not require Clause 7.5 of the MFA to be construed as having authorised AMC NSW to grant Sub-Master Franchises. 60The second way in which AMC NSW submits that the Code is relevant to construction is in response to AMC National's contention, reflecting the view of the primary judge (see [20] above), that an agreement in the form of the ACT SMFA was a partial transfer within the meaning of Clause 20.4(c) of the MFA and was prohibited by that provision. AMC submits that in light of Clause 20 of the Code which is concerned with the rights of franchisees to transfer their interests, Clause 20.4(c) of the MFA should be construed as not having precluded AMC NSW entering into the ACT SMFA. As I have for other reasons determined that Clause 20.4(c) of the MFA does not preclude this, it is unnecessary to consider whether that result might, in the alternative, have been reached by consideration of Clause 20 of the Code.

The Withholding of Consent 61In light of the views that I have expressed above AMC National had no obligation to consent to, or execute, the ACT SMFA. As a result its appeal should be allowed. 62In these circumstances the question of whether AMC National unreasonably withheld its consent does not arise. Nevertheless it is appropriate that I make the following limited observations. 63The primary judge dealt with the question of whether AMC National had a reasonable basis for withholding its consent as follows: "84 Mr Coade sought the provision of a business plan, and AMC National's argument is that it was reasonable to require that information. I am satisfied that AMC NSW did not provide a business plan, because what was sent was in no way specific to the ACT (and in fact was the business plan AMC National had provided to AMC NSW in 2002). However, in my view, the reference to financial information was clearly a reference to financial information about the proposed sub-master franchisee, Mr Ajaj, and further information about him, and no complaint has been made about the absence of such information. 85 Even if it is accepted that the request for a business plan was not information of the type referred to in clause 7.5 of the MFA, it does not mean that the request was not a valid request, provided that AMC National can establish that it was reasonable for its consent to be withheld because of the failure to provide that plan. AMC National, however, chose to put on no evidence as to why the business plan was relevant to the exercise of its discretion. Mr Alexis made the point that given that AMC NSW required the sub-master franchisee to guarantee the contract work being offered by the sub-master franchisee to their franchisees and that there was a statement by the franchisee purporting to exclude all warranties, it is not clear what relevance the business plan would have to AMC National's decision whether to approve or not. AMC National had knowledge of all of the contracts entered into in the ACT, so it knew the capacity of that region to absorb new franchisees, and indeed AMC National insisted that the number of franchisees per year be set at three, rather than two. I am not persuaded that the business plan was relevant to AMC National's decision, and hence I am not satisfied that AMC National's refusal to consent was reasonable" 64AMC National submitted that his Honour's reasoning involved a reversal of the onus of proof. AMC National said, I consider correctly, that the onus of proving that AMC National unreasonably withheld its consent was on AMC NSW because that company asserted in the proceedings that it was entitled to receive that consent ( Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 609). The evidence that AMC National had on previous occasions consented to Sub-Master Franchise Agreements, when taken with the correspondence between the parties concerning the ACT SMFA, may well have justified the view that AMC NSW had made out a sufficient case of an unreasonable withholding of consent by AMC National to cast an evidentiary burden on AMC National to lead evidence of the reasonableness of its conduct ( Purkess v Crittenden [1965] HCA 34; (1965) 114 CLR 164 at 167-8). This was especially so where it was AMC National rather than AMC NSW that was likely to have had knowledge of any circumstances that justified the withholding of consent (Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367 at 371-2; Apollo Shower Screens Pty Ltd v Building and Construction Industry Long Service Payments Corporation [1985] 1 NSWLR 561). Nevertheless the legal, as distinct from the evidentiary, burden of proof remained on AMC NSW to satisfy the primary judge that AMC National had unreasonably withheld its consent ( Purkess at 168). 65AMC National submitted that the primary judge did not simply treat AMC National as subject to an evidentiary burden but went further and erroneously treated it as bearing the legal burden of justifying its refusal to consent. On balance I am satisfied that his Honour did do this. A number of statements that his Honour made indicate this to be the case. His Honour said at one point "provided that AMC National can establish that it was reasonable for its consent to be withheld" and at other points "I am not persuaded that the business plan was relevant to AMC National's decision" and "I am not satisfied that AMC National's refusal to consent was reasonable". There is no indication in these statements that his Honour was simply referring to an evidentiary burden upon AMC National and the language he used suggested that he regarded AMC National as bearing the legal burden of proof. 66In these circumstances my view is that his Honour's approach to the question of whether AMC National was justified in withholding consent was erroneous. As this question does not arise in light of my earlier conclusions and the primary judge did not make any alternative findings to reveal what findings he would have made if he had considered that AMC NSW bore the legal onus of proof, I do not consider it appropriate to express views on the question.

Competency of the Appeal 67By its Written Submissions AMC NSW raised an issue as to whether AMC National's appeal was competent. As it did not do so by the means for which the Uniform Civil Procedure Rules 2005 provide (that is, by filing a Notice of Motion: see r 51.41) and I would in any event grant leave to appeal, the submission should not in my view be entertained.

Orders 68For the reasons I have given AMC National's appeal should be allowed. I propose the following orders: (1) Appeal allowed. (2) Order that Orders 1 to 5 made at first instance on 15 December 2010 be set aside. (3) Order the respondent to pay the appellant's costs of this appeal. (4) Order the respondent to pay the appellant's costs of the proceedings at first instance insofar as those costs were incurred after the filing of the respondent's Notice of Motion on 11 May 2010. (5) The respondent to have a certificate under the Suitors' Fund Act 1951, if qualified. 69YOUNG JA : I agree with Macfarlan JA.

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. Decision last updated: 02 May 2011

Trade Practices Act 1975(Cth)

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Judgment (14 paragraphs)

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