JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AUTOMASTERS AUSTRALIA PTY LTD -v- BRUNESS PTY LTD & ANOR [2002] WASC 286

HEARD : 22, 25-28 MARCH, 8-12 APRIL, 4-7 & 20-21 JUNE 2002

BETWEEN : AUTOMASTERS AUSTRALIA PTY LTD (ACN 066 676 239)

Contract - Breach of franchise agreement alleged - Alleged breaches principally referable to obligation to maintain data entry system - Scope and significance of breaches - Whether breaches sufficient to justify termination of contract - Meaning and effect of good faith provision - Whether plaintiff acted unconscionably in purporting to terminate contract - Defendants' counterclaim for damages - Turns on own facts

Supreme Court Act 1935, s 32

Trade Practices Act 1974, Pt IVA, s 51AC

Trade Practices Amendment (Fair Trading) Act 1998

Trade Practices Amendment Act (No 1) 2001

Abadom v The Queen [1983] 1 WLR 126

McMahon v State Bank of New South Wales (1990) 8 ACLC 315

Paric v John Holland Constructions Pty Ltd [1985] HCA 58; (1985) 62 ALR 85

Ramsay v Watson [1961] HCA 65; (1961) 108 CLR 642

Retail Equity Pty Ltd v Custom Credit Corporation (1991) 4 ACSR 23

1 HASLUCK J: The plaintiff, Auto Masters Australia Pty Ltd, alleges that the first defendant, Bruness Pty Ltd, was in breach of a Franchise Agreement relating to the operation of an automotive service business conducted by the defendants at Midland. Bruness operated the business as a franchisee from 1 July 1997 until the plaintiff purported to terminate the Franchise Agreement on 15 March 1999.

2 The plaintiff seeks damages for breach of the agreement and an order that the defendants be restrained from using a trademark and business name to which the plaintiff is entitled. The plaintiff seeks also an order for possession of certain premises and mesne profits from 15 March 1999 until the date the first defendant gives up possession of the premises.

3 Bruness denies that the plaintiff is entitled to the relief sought and seeks relief by way of counterclaim against the plaintiff. The relevant prayer for relief seeks a declaration that the Franchise Agreement in question has not been terminated, a declaration that a sub-lease of the premises occupied by the first defendant has not been terminated, damages for breach of contract, and damages pursuant to certain provisions of the Trade Practices Act 1974. Bruness claims that the plaintiff engaged in conduct, in trade or commerce, in connection with the supply of goods and services to the first defendant which was unconscionable.

4 Bruness remains in possession of the subject premises, and continues to carry on business, but not as an Auto Masters franchisee. This has been the position since the commencement of the proceedings.

5 A central issue in the case is whether the defendants complied with the requirements of the franchise system being operated by the plaintiff. I note in passing that shortly after the purported termination of the Franchise Agreement the plaintiff applied for and obtained an interlocutory injunction to restrain the first defendant from trading under the franchisor's name, goodwill and logo. The injunction has remained in force up to and including the trial of the action and is still in force. Lengthy affidavits were filed by the parties in the course of the interlocutory injunction proceedings.

6 Auto Masters entered into Franchise Agreements for 21 services in Western Australia including Midland. It is the registered proprietor of Australian Trademark No 477432 and is the registered proprietor of the name "Auto Masters". Auto Masters holds quality assurance certification and is therefore subject to periodic audits applicable to the quality management systems of companies certified to international standards of quality assurance. The relevant audit services in this State are performed by a company known as Quality Assurance Services Pty Ltd or QAS.

7 I understand that the Auto Masters franchise group obtained quality accreditation in July 1992. The group was acquired by the plaintiff in July 1996.

8 At all material times the plaintiff company was being administered in this State by Mr Nigel Warr who has been the sole director of the company since 1996. Mr Douglas Canham was the general manager from July 1996 until August 2000. He was the person who had the day to day control of the franchise operation. He dealt with the various franchisees on a daily basis and supervised the work carried out by Monica Lane, the only other employee in the Auto Masters office during the relevant period. Ms Lane held the position of administration officer.

9 The Franchise Agreement the subject of the present proceedings was entered into originally as a standard Franchise Agreement between Auto Masters and a Mr and Mrs Hinks. It is dated 3 September 1992.

10 The second defendant, Mr Coombes, negotiated to acquire the business and this was effected by a deed of assignment dated 30 June 1997. It follows that the first defendant, Bruness Pty Ltd, under the direction of Mr Coombes, acquired an exclusive licence to use the Auto Masters' system for a term from 1 July 1997 to 3 September 2002. Mr Coombes guaranteed performance by the company and became the active manager of Auto Masters at Midland. The company occupied the premises at Midland pursuant to a sub-lease agreement.

11 There are a wide range of clauses in the Franchise Agreement designed to ensure standardisation of services between franchises.

12 Clause 4 deals with intellectual property and provides that upon termination the franchisee will cease to trade as Auto Masters and, in effect, transfer all names back to Auto Masters. Clause 10 deals with payments to be made by the franchisee, including a franchise fee and an account service fee. The franchisee is also obliged to pay an advertising levy. It is important to understand that the franchisor is remunerated by way of a royalty which is calculated by reference to the turnover of the particular franchise business.

13 The effect of cl 14 is that the franchisee must obtain accreditation in respect of certain standards and use the "QAM" system to ensure that the accreditation of the franchisor is protected.

14 Clause 15 deals with the obligations of Auto Masters and makes provision for technical, managerial and administrative advice. Clause 15.1 obliges the franchisor to use its best endeavours to promote the performance and success of the franchise business and to deal with the franchisee in absolute good faith.

15 By cl 15.3, Auto Masters was to provide to the franchisee an "operations and procedures" manual ("O&P Manual"). It was required by cl 15.4 to make available such information as the franchisee reasonably requires in relation to the franchise business.

16 Clause 16 provides that the franchisee and its employees will at all times give prompt and efficient services to the customers of the business and will not deviate from the specification standards procedures prescribed by the O&P Manual. By cl 16.8, if at any time the franchisor is reasonably of the opinion that the franchisee is not complying with these requirements, the franchisor, without prejudice to any of the other remedies available to the franchisor including termination of the agreement, can give the franchisee a written notice of the steps required by the franchisor to be taken to ensure compliance with the relevant requirements.

17 The relevant portion of the termination clause 29.4 provides that the franchisor may terminate the agreement where the franchisee has failed to remedy a breach specified within a period of 14 days of receipt of a notice in writing from the franchisor requiring the franchisee to do so. Relevant breaches include the failure of the franchisee to operate the business in accordance with the requirements of the O&P Manual. By cl 36.7 the manual is incorporated into the Franchise Agreement.

18 Mr Warr said in evidence, on behalf of the plaintiff company, that the effect of the Franchise Agreements is to grant to the proprietors an exclusive licence within a particular territory within Western Australia to carry on the franchise business. The franchisees are at liberty to use the Auto Masters' trading name and trademark and to access other benefits of the business system. These benefits include quality assurance accreditation and administrative and marketing support. In addition to an initial franchise fee, the franchisee pays royalties and advertising levies to Auto Masters based on the sales turnover of the business.

19 Mr Canham, as general manager of the plaintiff company at the relevant time, gave lengthy evidence describing the nature of the systems established by Auto Masters and evidence directed to maintaining a general compliance with the requirements of the system and of the O&P Manual at the various franchise locations.

20 Mr Mark Lapins is a computer specialist. In mid 1997 he was the proprietor and operator of the business Online Business Solutions which was engaged by the plaintiff to develop a data base to maintain customer records and service histories. He said in evidence at the trial that the data base thus established was designed to link the various franchisee's personal computers to the plaintiff's computer via telephone connections. The idea was for a system to be implemented which enabled the plaintiff to determine how busy each of the various franchise businesses were as this would impact on marketing and advertising strategies. It also permitted the plaintiff to receive customer details and charges rendered so as to ensure the proper amount of royalties under the Franchise Agreement based on turnover was being paid.

21 Mr Lapins said that he installed the data bases on each of the then franchisee's personal computers in July and August 1997. At that time, he provided each of the franchisee branch managers with training on how to use the data base. Franchisees, including Bruness, had been supplied with computer hardware and software by the plaintiff.

22 The system for recording information about work undertaken at each of the franchise premises follows a common form. When a customer brings in a vehicle to the franchisee an invoice is to be raised and certain data entered into a computer. Mr Lapins said, that with respect to the entry of data and the creation of invoices at the relevant time, the data base worked in the following way.

23 When a customer enters a franchisee's premises and requests certain work to be done, the franchisee, when using the data base, raises a "first screen". On this screen, the franchisee can type in the customer's name, customer contact details, the vehicle details of the customer and how the customer came to Auto Masters. At this time (from the hard copy on the upper most copy of an invoice pad) an invoice number is entered and allocated. The franchisee can press "print" and the header on the invoice is then printed onto a hard copy of the invoice.

24 Whilst the header on the invoice is printing out, a permanent prompt on the bottom of the screen is activated which says "create new invoice for this vehicle". When that prompt is activated, the data base brings up a "second screen". This has a number of prompts which allow a franchisee to select one or more job descriptions. For example, "tune", "tune and service", "mechanical", "brakes" and so forth.

25 By using prompts on the screen, the franchisee can then enter details about the job. Once this is done there are other permanent prompts on the screen which are "invoice complete", "suspend invoice" or "back to switchboard". If a franchisee cannot enter all the information regarding the services to be performed by that franchisee then the franchisee activates the prompt "suspend invoice" which saves the information entered into the second screen. The franchisee can then return to the second screen at any time to add, enter or edit the information previously entered.

26 It is important to understand, having regard to the nature of the present dispute, that it is only when the user progresses to the second screen that an invoice is said to be created. In other words, an invoice has not been "entered" onto the data base until such time as the franchisee has completed the second screen. The mere fact that customer details have been entered onto the first screen and the header printed out on a hard copy of an invoice does not mean that an invoice has been entered into the computer. Only the customer details are recorded and that customer is allocated the relevant job sheet number.

27 Mr Lapins observed in the course of his evidence, that if any invoices are said to have been entered but cannot be located in the data base because of loss of data then, in his view, this was a case of operator error. A regular auditing of the data base would quickly show if the data base was flawed and "losing data". As the data base of a franchise business such as the business at Midland is part of a synchronised replica set (which means that all branch data bases are identical) an error in one is an error in all.

28 Mr Lapins said further that if an invoice is damaged, lost or destroyed then it should be entered into a cancelled invoices section of the data base. All franchisees were informed of this function when he and other employees of his firm Online Business Solutions trained them in the use of the data base.

29 It was part of the case for the plaintiff that the effect of the franchise documentation was to impose an overriding obligation upon the franchisee that if the computer system went down all relevant information was to appear on hard copy of the invoices and the hard copies were to be delivered to the plaintiff on a regular basis.

30 Mr Canham said in evidence that the specifications and procedures which Auto Masters requires its franchisees to use in the conduct of their franchise businesses are set out in the O&P Manual.

31 An important part of the system is that the Auto Masters' franchise group maintains quality assurance standards accreditation. The QAS accreditation process required a complete review of all operational aspects of the Auto Masters' system to ensure appropriate standards of quality in the delivery of services could be met and that such compliance could be verified with accepted QAS procedures. Periodical QAS audits enables the plaintiff to ensure that all Auto Masters Service Centres are providing a consistent level of high quality service. Further, it enables deficiencies in the Auto Masters' system and defaults by franchisees in the operation of the system to be identified so that appropriate steps can be taken to rectify those defaults.

32 Mr Warr in his evidence emphasised that one of the virtues in the standardised system is that in the event of a franchisee being absent from his business due to ill health or for some other reason, the business can be easily managed by an outsider on a short term basis because the system and style of record keeping is common to the group. The Auto Masters' advertising strategy essentially promotes each of the service centres as a cohesive group. The success of this strategy requires that there be consistency among the various centres as to all aspects of their operations.

33 When one draws together these various evidentiary threads it emerges that since the franchisee's computers are connected to the franchisor's computer, the franchisor can determine at any time whether or not the second screen has been completed and an invoice entered. In that way the franchisor is able to monitor the performance of a franchisee and has a basis for calculating the royalty payment and advertising levy.

34 Hard copies of each invoice are required to be created in triplicate. One is given to the customer, one is retained by the franchisee, and a third - the "yellow copy" - is required to be sent to the franchisor at specified intervals. According to the plaintiff, the effect of the franchise documentation is that when the computer system was down the information was required to be handwritten on the hard copy invoices. The yellow copy of the invoice would be delivered to the franchisor in due course.

35 The marketing strategy for the group as a whole places emphasis upon the fact that each franchise will conform to an independent quality assurance system and notices to that effect are displayed at the various franchises. It is important to the franchisor because part of its profit is derived from turnover and the system ensures that the franchisees are not evading payment of royalties. It also enables the franchisor to determine how busy the various franchises are which may in turn affect its marketing and promoting strategy. It further enables the franchisor to determine whether or not a particular franchisee is following procedures which have been set down.

36 The second defendant, David Coombes, said in evidence that when he first considered purchasing an Auto Masters franchise in 1997 it was his intention to purchase three franchises. He calculated that each franchise would have a turnover of approximately $40,000 per month, generating a profit of approximately $40,000 per annum and thereby providing him with an income of approximately $120,000 per annum. He decided that the franchise known as "Auto Masters Midland" would be the first of the franchises which he would endeavour to acquire through his company, Bruness Pty Ltd.

37 Mr Coombes said that he had several discussions with Mr Warr in the month of June 1997 concerning the operation of the computer system. He was assured by Mr Warr that the new computer system would be operational by 1 July 1997, which was the date he was proposing to commence trading at Midland. Mr Coombes then proceeded to acquire the Midland franchise for $130,000. However, the new computer system was not operational at that time. The new computer hardware was not delivered until 16 July 1997. He said in evidence that various problems with the system quickly emerged. A difference of opinion also emerged concerning the quality of uniforms supplied to the franchise by Work Force Clothing Co.

38 It seems that on 3 December 1997 a management meeting between the plaintiff and its franchisees was held at an office in Northbridge. In attendance were Mr Warr, Mr Canham and Monica Lane on behalf of the plaintiff, Mr Coombes and Mr Steven Hollands from the Midland Branch and most of the other franchisees. Under general business, Mr Canham told all of the franchisees that all invoices had to be entered on the computer on the same day as the job arrived. At this meeting, Mr Canham announced that the customer service award for that particular meeting was to go to the Midland franchise. A small trophy was presented to Mr Hollands in his capacity as manager of the Midland franchise.

39 Various management meetings were held during the course of 1998 in the course of which, according to Mr Coombes, problems with the computer system were under discussion and other issues had to be addressed. On the defendants' case, as illustrated by the award just mentioned, the defendants were not the subject of any criticism during the first twelve months of the franchise.

40 On or about 31 August 1998 Steven Hollands orally gave notice to Mr Coombes that he would be ceasing his employment as manager of the Midland franchise on 7 September 1998. He said that he would be working temporarily for the plaintiff on a sub-contract basis with the intention of purchasing a new franchise from the plaintiff as soon as it became available. He did not name the new franchise but Mr Coombes understood it was the Maddington franchise close to where Mr Hollands had lived and worked.

41 Mr Hollands' notice of termination of his employment and his advice that he intended to purchase a new franchise from the plaintiff came as a shock to the second defendant because during the month of August 1998 he had had several discussions with Mr Warr in regard to purchasing the Maddington franchise himself. He had reached an oral agreement with Mr Warr to purchase that franchise for $160,000. Shortly after the agreement had been reached he was told that the purchase price had increased to $185,000. At the same time that he had been negotiating with Mr Warr, he had been negotiating with Mr Hollands to manage the Maddington franchise to the intent that he, Mr Coombes, would take over the manager's position of the Midland franchise himself.

42 On 2 September 1998 Mr Coombes prepared a short memorandum recording Mr Hollands' notice of termination and his reasons for termination. In his view, the plaintiff had acted unconscionably in offering the Maddington franchise to Mr Hollands at a time when an oral agreement had been reached for Mr Coombes to purchase the Maddington franchise. It was against this background that, on 2 September 1998, Mr Coombes had a meeting with Mr Ian Nicholas of the Australian Competition and Consumer Commission, otherwise known as the ACCC. He was advised by the ACCC that an allegation that the plaintiff had acted unconscionably could not be substantiated and in the light of that advice Mr Coombes did not pursue the matter.

43 On 17 September 1998 a customer attended Mr Coombes' premises and requested that warranty work be carried out on his vehicle. In support of his request, he provided a photocopied Auto Masters' invoice for the sum of $340. The photocopied invoice indicated that the $340 had been paid in cash. It had been filled in by hand and Mr Coombes recognised the handwriting as that of Mr Hollands. The invoice did not have a legitimate Auto Masters' invoice number in the top right hand corner which suggested that it had not been entered on the data base. The banking records indicated that no such sum had been banked. In the light of all this, Mr Coombes formed the opinion that Mr Hollands had misappropriated the sum of $340 from the franchise. He telephoned Mr Canham on 17 September 1998 and advised him of his findings.

44 I will return to this matter in due course. It was common ground at the trial before me that Mr Hollands was dismissed from his employment with the first defendant as a result of this incident. It was an agreed fact that many months later he was convicted of an offence before the Court of Petty Sessions arising out of the allegation that he had misused his position as an employee.

45 It was apparent from evidence given by Mr Warr at the trial of the action that both Mr Warr and Mr Canham were of the view that Mr Coombes had been overly censorious in respect of this matter. Mr Warr said that it often happened in the automotive industry that employees and mechanics did or arranged for work to be done on vehicles for family members and he characterised the Hollands' incident as an occasion of that kind.

46 It was part of the defendants' case at trial that as a consequence of a disagreement between the parties concerning this and other matters, the plaintiff proceeded to act contrary to its obligation in cl 15.1 of the Franchise Agreement to deal with Bruness in absolute good faith at all times ("the good faith term").

47 By this time, in September 1998, there were various areas of disagreement between the parties.

48 It seems that, as a consequence of the Hollands' incident, in early September 1998 Mr Coombes assumed management of the first defendant's business. By this time Mrs Coombes had assumed the main responsibility for ensuring that the Midland Branch's invoices were entered and completed on its computer and that hard or yellow copies were delivered to the plaintiff. She was experienced in data processing, having done such work at Coventry Motors Replacements, Computel Computers, Gliddons Stationery, Haemophilia Foundation, and as Business Service Manager at Challenge Bank for 5 years. She said that from the outset she experienced many problems with the computer at the Midland Branch. She reported these problems to Mr Canham and Monica Lane but they were never able to eradicate them.

49 According to Mr Canham, the second defendant soon made it clear that he was experiencing constant computer down time attributable to alleged hardware and software inefficiencies. Mr Canham said that he was surprised by this because for in excess of one year the same computer hardware and software had been used by the first defendant without complaint. In any event, Mr Canham made arrangements for the computer to be collected and to be serviced by Online Business Solutions, the company run by Mr Lapins.

50 Online was an independent contractor but had a continuing association with the plaintiff company to address problems that might arise in the various franchise branches concerning the operation of the common data base system. It seems that the computer was collected from the first defendant on 4 September 1998 and returned to the company on 15 September 1998.

51 Mr Canham said that prior to the computer being removed for servicing, Mr Coombes had not provided invoices for a period of three weeks. This was said to be a breach of the obligations of the first defendant. Mr Canham said that Monica Lane then had to enter those invoices into the Midland computer and reconcile all the information in them. The Midland Branch was charged an extraordinary audit fee of $200 pursuant to cl 14.4 of the Franchise Agreement in respect of the time spent by Ms Lane in carrying out that task.

52 The defendants refused to pay the fee when requested to do so. This represented a further area of controversy between the parties which is reflected in the subsequent correspondence. I will call this the "audit fee issue". This issue was subsequently complicated when Online sought to recover a sum of $130 for certain discrete services and this amount was, for a time, added to the plaintiff's claim, being a source of some annoyance to Mr Coombes.

53 I understand that after the return of the computer, Mr Coombes continued to assert that the hardware and software was defective. As a result, Mr Canham recommended to Mr Warr that the plaintiff purchase at its cost a new computer and new software for the first defendant. He recommended this not because he believed there was any problem with the computer or the software but out of a desire to bring the matter to an end once and for all. On 26 November 1998 Ms Lane attended at the Midland Branch to install the new computer and to enter all outstanding invoices at no cost to the Midland Branch. Mr Canham said further the new computer was acquired at a cost of approximately $1,800 to the plaintiff.

54 The plaintiff's case was that the contentious computer (the "first Midland computer") was transferred from Midland pursuant to the arrangements I have just described and reinstalled at the Maddington franchise. The tenor of evidence given on behalf of the plaintiff by Mr Lapins and by the operator of the Maddington franchise, Mr Craig Glassby, was that the first Midland computer worked satisfactorily at the new location. This suggested that the problems previously complained of by Mr Coombes and his wife, Denise Coombes, were due to human error. This allegation was denied. Mrs Coombes and a computer expert engaged by the defendants, Mr Kirk Gray, gave evidence directed to this issue. I will return to this aspect of the dispute in due course. For ease of reference, I will henceforth refer to the computer installed at Midland on or about 26 November 1998 as the "second Midland computer".

55 The practice of the plaintiff when there were discrepancies between the hard copy of an invoice issued by a franchisee and details "entered" onto the plaintiff's computer was for Ms Lane to send a fax to the franchisee requesting that the discrepancy be rectified. Ms Lane's witness statement contained certain passages bearing upon the plaintiff's practice as follows:

"2. As part of my duties as administration officer I was responsible for checking all information in the hard copy of the invoices received from the plaintiff's franchisees against the information entered by those franchisees into the plaintiff's computer system. I usually did this on a weekly basis when the hard copy of the invoice was delivered to Auto Masters.

3. My practice was to then write to any of the franchisees in respect of missing invoices. Once the further information was received by them I would then correct the status on my lists."

56 Towards the end of 1998 there were frequent exchanges between the parties on the subject of invoices. By a memo dated 22 October 1998 from Ms Lane to Mr Coombes (which was copied to Mr Warr and Mr Canham) Ms Lane asserted that Bruness had not completed certain invoices and there was said to be other failures to comply with the O&P Manual procedures. This gave rise to an internal audit which was conducted by Mr Canham at the Midland premises on 27 October 1998.

57 The internal audit led to further exchanges. It was at this stage, by letter dated 29 October 1998, that Mr Coombes confirmed in writing to the plaintiff his desire to sell the Midland franchise. He referred to a possible sale price of $300,000, such figure being based on other sales in Welshpool, Balcatta and Perth. Mr Canham replied by letter dated 30 October 1998 to the effect that, in his view, in the current market the asking price was on the high side. He added "it would obviously be the starting point for negotiations". He said further that "Auto Masters will not be taking first option as per the Franchise Agreement but we will assist you in any way possible."

58 A further internal audit was carried out at the Midland Branch on 17 November 1998 by Mr Canham in the presence of Mr Coombes. The outcome of that internal audit is reflected in an internal audit report prepared by Mr Canham dated 17 November 1998. The report said that the presentation of the Branch as to reception, office and workshop was excellent and as to the booking in sheets, control was evident. The report contained this passage in regard to invoices:

"The days invoices are printed as required, some are not completed fully but most are. In checking last week's invoices most are completed fully, however, most were completed on the 14th November and not during the week on the day the job entered the workshop. The brakes invoices were correct."

59 The report included a comment to the effect that invoices are required to be completed every day on the day of job completion.

60 A few days letter by letter dated 24 November 1998 Mr Canham asserted on behalf of the plaintiff that a notice to remedy issued on 12 October 1998 was currently being reviewed by the franchisor. The intention was to resolve matters in issue between the parties shortly after the quality assurance services audit in January. He said that his office would continue to "monitor your progress."

61 Mr Coombes said that he continued to experience problems with the computer system and by this time Mrs Coombes, who was an experienced operator, was attending to these problems. It seems that on 4 December 1998 Ms Lane asked Mr Coombes to explain why certain invoices had not been received by Auto Masters and why they had not been entered into the data base. As there was no response to this fax Mr Coombes was requested to attend to the first defendant's alleged breaches of the Franchise Agreement in failing to provide the outstanding invoices.

62 On 18 December 1998 Mr Canham sent to Mr Coombes another memo by fax enclosing a list of invoices that allegedly had either not been received by Auto Masters or had not been entered onto the data base or completed. Mr Coombes was told in the fax that if he could not explain the reason the outstanding invoices had not been received within the next seven days it might be perceived that "you are purposely evading payment of your royalties." Mr Canham went on to say that his office was monitoring the Midland business for compliance with the notice to remedy that was still current.

63 Mr Canham said in evidence that in late December 1998 he instructed Mr Chris Hewitt of the plaintiff's law firm, Deacons Graham & James, to prepare a notice of default specifying the defaults by Bruness in regard to compliance with the agreement and the manual and demanding that Bruness rectify the defaults within 28 days.

64 It can be seen from the notice of default in question, namely, a notice of default signed on behalf of the plaintiff by its solicitors Deacons Graham and Jones and dated 24 December 1998, that four areas of breaches are specified. The breaches relate to, first, failure to complete data entry in respect of invoices and to submit invoices to the plaintiff; second, failure to pay the plaintiff's account services fee and advertising levies in the time required; third, failure to pay an extraordinary audit fee of $200 and fourth, breach of the lease of the franchise's premises by virtue of interference with the use and enjoyment of the common property. The third ground of alleged default was a reference to the audit fee issue I mentioned earlier.

65 In following weeks further memos were faxed to Mr Coombes requesting confirmation of the status of certain invoices which, allegedly, had either not been received by the plaintiff, not been entered on the data base or not been completed on the data base. The list was largely a repeat of invoices contained in the list attached to a memo dated 31 December 1998.

66 Mr Coombes said in evidence that in response to a memo of 7 January 1999 and the attached list of invoices, his wife prepared a four column schedule in relation to those invoices which was faxed to Monica Lane on 10 January 1999.

67 The fax to Monica Lane dated 10 January 1999 which purports to be signed by "David" (agreed Bundle 298) reads as follows:

"As per our conversation, I am forwarding the list of invoices to you (which Denise has placed in numerical order for easy reference). The list is self explanatory with four columns. I am endeavouring to complete the pending invoices this week. As you can see, Denise has put the total invoice amount next to any invoices in which the yellow copy has already been forwarded to you. The balance of the invoices are being looked into.

Could you please fax past memo's, listing missing invoices for the months of July, August, September and October for easier cross reference.

Please note, Invoice Number 208634 has been listed twice on the copy you supplied me."

68 The four column list of invoices provides details of those invoices which have been sent and those which are pending. Reference is made to two "run time" errors in regard to one of which it was asserted that the second Midland computer "would not accept data - run time error cannot process (refer your copy)".

69 I digress briefly to note that at the trial of the action the plaintiff contended that this and other memos purporting to have been sent by Bruness had not in fact been received by the plaintiff. I was referred to another document (AB441) dated 5 March 1999 which was in exactly the same terms as the fax dated 10 January 1999. Reference was made to the fact that no mention was made of the 10 January and similar faxes in affidavits filed on behalf of the defendants concerning the interim injunction proceedings. This was said to be an indication that on occasions documents might have been prepared but not sent. It was said that from about this time onwards the defendants gave up communicating with the plaintiff. Mr and Mrs Coombes denied any such suggestions.

70 By letter dated 13 January 1999 Mr Canham wrote to Mr Coombes in these terms:

"The answer to your inquiry to Monica at Head Office is as follows:

Notice sent and received on the 24th December 1998, the 25th December 1998 being the first day, then 28 days will expire on Thursday the 21st January 1999.

On Friday the 22nd January 1999 an internal audit will be conducted at Auto Masters Midland at 9:00am to determine whether you have complied with the Notice of Default.

A report of that audit will be forwarded to the Franchisor and Deacons Graham & James for their appropriate response. If you have failed to comply, the Franchisor reserves the right to commence cancellation of your Franchise. However, you will also receive a Quality Assurance Audit on the 10th February 1999 and this will be confirmed seven (7) days prior to that date.

It will be the decision of the Auditor present from the Quality Assurance Services whether you comply with the standards or not and whether your certificate will stand or be cancelled.

David, in failing the Quality Assurance Audit will result in immediate cancellation of your Franchise and Sub-lease.

I have confirmed the above with Mr Chris Hewitt of Deacons Graham and James as of today's date."

71 In an endeavour to resolve the dispute over the $200 audit fee, Mr Coombes said in evidence that he opened a trust account with the National Australia Bank in the name of Bruness Pty Ltd as trustees for the Auto Masters Midland Unit Trust and Auto Masters Australia and deposited the sum of $200 into that account. He wrote to the plaintiff informing it of his action and informing it that the monies would be released to the plaintiff if an independent arbitrator recommended that the funds be released.

72 On 18 January 1999 Mr Canham sent a memo with an attached list of invoices under query and advised that an internal audit would be carried out at Midland four days later.

73 On 22 January 1999, an internal audit was conducted at the premises by Mr Canham and Mr Warr in the presence of Mr Coombes and his wife. Mrs Coombes discussed the list of invoices attached to the memo dated 18 January 1999 and produced office copies of various completed invoices which, according to the list, had either not been entered or not been completed on the data base. According to Mr Coombes, having sighted the completed office copies, Mr Warr and Mr Canham agreed that those invoices must have been entered and completed on the data base. Mr Coombes said further that, ultimately, his wife was able to provide an explanation as to the status of nearly all of the invoices on the list. This evidence is disputed by the plaintiff's witnesses.

74 The witness statement of Denise Coombes concerning this matter includes the following passage:

"On 22 January 1999, an internal audit was conducted at the Midland franchise by Douglas Canham and Nigel Warr. During the course of the audit, I discussed with Douglas and Nigel the list of invoices which had been attached to Douglas Canham's memo dated 18 January 1999 and I explained my annotations to them. I was able to account for all but 3 of the invoices on the list. Douglas and Nigel said that they were satisfied with my explanation. I showed them our office copies of various completed invoices which, according to the list, had either not been entered or not been completed on the database."

75 The responsive statement of Mr Canham was to this effect:

"3.13 I refer to paragraph 21 of Mrs Coombes' Statement. Mr Warr and I did conduct an internal audit on 22 January 1999. Mrs Coombes did provide office copies of some of the invoices in respect in respect of which queries had been raised. She offered various explanations as to why other invoices could not be accounted for. For example, the hard copies of the invoices might have been misfiled or lost by the mechanic.

3.14 I dispute that Mr Warr and I said that were "satisfied" with her explanations. I said words to the following effect: 'I see what you have been doing and what has happened. We will review the status of the missing invoices on our database but if they are not located following that review then the data from the hard copies of the invoices shown to us (but not forwarded to head office) will need to be re-entered onto the computer and a copy of the hard copy of the invoices you have been showing us must be forwarded to head office.'

3.15 I dispute that either I, or Mr Warr in my presence, 'agreed that those invoices must have been entered and completed on the database'."

76 On 22 January 1999 Mr Canham sent a memo to Mr Coombes, the subject matter of which was "internal audit follow up to notice of default". In this memo he referred to the meeting at Midland and to the audit carried out on Friday, 22 January 1999. He asserted that "on completion of the audit, you were found to be still not complying fully with the procedures set out in the operations manual." He went on to say that the franchisee had failed in regard to a number of specific matters which were listed under the headings "Contract Review", "Document Control", "Product Identification and Traceability", "Process Control", "Inspection and Test Status", "Control of Non-Conforming Product", "Corrective and Preventative Action", "Quality Records" and "Training".

77 At a first glance the catalogue of alleged deficiencies seems formidable but upon closer inspection there is less substance in the document. It is significant that, save for the matter of document control, the various non-compliances with the manual detailed in this memo were not relied upon four weeks later when the plaintiff by its solicitors prepared a further notice of default. In any event, the memorandum from Mr Canham concluded with this passage:

"We confirm that your branch will on the 10th February 1999 be subject to a QAS audit, if you fail to comply fully with that audit and if you do not achieve a level of performance sufficient to pass that audit and you lose accreditation to the Quality Standards, the Franchise Agreement will immediately terminate.

In regards to the NOTICE OF DEFAULT, Chris Hewitt of Deacons, Graham & James will be reviewing the Franchisor's position and advising accordingly. Auto Masters reserves all its rights under the Franchise Agreement and Lease Agreement."

78 Mr Canham instructed his solicitor Mr Hewitt to write to the defendants concerning the internal audit. The relevant letter dated 4 February 1999, purported to review the results of the audit carried out on 22 January 1999 with a view to determining the extent to which the Midland franchise had complied with the requirements of the Franchise Agreement and the previously served notice of default. This letter also purported to outline "the nature of the breaches" of the Franchise Agreement by reference to the provisions of the agreement.

79 Again, it is significant that the only matter subsequently characterised as a breach and so relied upon in the notice of default prepared a short time later is the matter of document control. Nonetheless, as at 4 February 1999 the plaintiff's solicitor proceeded to say that the franchise business at Midland was "'riddled' with areas of non-compliance" and the fundamental breach of the agreement was such that Auto Masters was "entitled to terminate the Franchise Agreement immediately". I will call this "the 4 February letter".

80 The author of the 4 February letter had this to say in passing about the plaintiff's attitude to minor breaches:

"Auto Masters in the past has been prepared to accept one or two minor breaches by various Franchisees in relation to the mandatory procedures. It has done so on the basis that:

(1) the breach(es) were relatively isolated;

(2) the Franchisee concerned established an intent and desire to rectify the breach(es);

(3) the Franchisee concerned took appropriate tangible steps to rectify the breach(es) as quickly as was reasonably possible in the circumstances; and/or

(4) the breach(es) did not damage or put at risk the integrity of Auto Master's Quality accreditation.

81 For ease of reference, I will henceforth refer to this part of the letter as "the four point summary of the plaintiff's attitude to minor breaches".

82 There were other exchanges between the parties concerning areas of disagreement. On 11 February 1999, Mr Coombes received a memo from Monica Lane, enclosing a further list of invoices said either not to have been received by the plaintiff or not to have been entered on the data base or not to have been completed on the data base. This was followed later in the day by a revised list.

83 Mrs Coombes said in par 24 of her witness statement that she was becoming increasingly frustrated with the constant bombardment of lists of invoices, particularly as there was a very high degree of repetition of invoices from one list to the next. In addition, quite a few of the invoices which were listed as not having been entered or completed on the data base had been acknowledged by Mr Canham and Mr Warr at the internal audit on 22 January 1999 as having been entered and completed on the data base.

84 Mr Canham had this to say about the matter in his responsive statement:

"3.16 I refer to paragraph 24 of Mrs Coombes' Statement. The frustration referred to on the part of Mrs Coombes as to the high degree of repetition of invoices from one list to the next would not have arisen if a proper response had been received to the plaintiff's long standing queries about those invoices. Again, I deny that 'quite a few of the invoices that were listed as not having being entered or completed on the database' had been acknowledged by Mr Warr and I on 22 January as having been entered and completed on the database. It was because an adequate response had not been received that Auto Masters continued to make requests for a response about those invoices."

85 Between 10 and 12 February 1999 QAS carried out an audit of five of the plaintiff's franchisees. The work was performed by an experienced assessor, Mr Edward Waloch. According to the plaintiff, it was a requirement of the QAS certification held by Auto Masters that six monthly audits of its franchisee operation be carried out. Audits were carried out usually on five franchisees at a time. They were progressively carried out every six months so that each franchisee would be audited by QAS at least once every 18 months to two years. The franchisees audited on this occasion were Midland, Maddington, Rockingham, Mandurah and Subiaco.

86 On 16 February 1999, prior to receiving a copy of the QAS audit report, the plaintiff's solicitor wrote to the first defendant and Mr Coombes informing them that the results of the QAS audit would probably be received on the following day. According to the plaintiff's solicitor, "a preliminary verbal indication" from the auditor suggested that the results were "similar to the internal audit conducted in relation to your business on 22 January 1999, and that as a consequence, Auto Masters will be regarded as being non-compliant with its quality accreditation requirements." If that occurred, it was said, Auto Masters was at risk of losing its accreditation, and all of the branches would be affected. Mr Coombes was asked to attend a meeting at the plaintiff's office on Thursday, 18 February 1999 to discuss the matter and the options that the plaintiff was willing to make available to Bruness in order to rectify the situation.

87 On 17 February 1999 in the course of a telephone conversation with Mr Canham, Mr Coombes offered to have the proposed meeting at his premises because of his work commitments, but Mr Canham terminated the telephone call. The plaintiff received a copy of the QAS report on that day.

88 By letter dated 17 February 1999, Mr Coombes requested a copy of the QAS report and the plaintiff's written proposal as to the options which it was willing to make available to the defendants. The defendants' letter dated 17 February 1999 is in these terms:

"I refer to the letter from Deacons Graham & James dated 16 February 1999 and its contents.

From my notes taken at the completion of the audit and after discussing with the auditor Mr Edward Waloch, I find it very hard to concede that 'my business is riddled with areas of non-compliance with Auto Masters mandatory procedures and the system, evidencing a complete lack of attention to the systems requirements, in relation to 7 of the 8 aspects of the Auto Masters procedures which derive directly from Auto Masters' Quality Accreditation.'

Mr Waloch also intimated that for any breaches he may find, Auto Masters would be given up to three months to rectify them before Quality Assurance would take any serious action.

The statement in the Notice of Default of 4 February 1999 from Deacons Graham & James that 'you have made comments to Doug Canham previously and said words to the effect that you believe the system does not work and that you have no intention of implementing it' is in my eyes mischievous and simply not true. Certainly, I believe there is plenty of room for improvement in the way the Franchise Group is run and that the computer software is nowhere near acceptable. It's inefficiencies are turning what should be quite simple tasks into difficult and drawn out procedures. At the last Franchisee's meeting it became quite apparent that I'm not the only Franchisee dissatisfied by its performance.

With regard to your request for my attendance at a meeting at Deacons, Graham and James tomorrow morning, I must decline. As per our telephone conversation of this afternoon, I offered to have the meeting at Auto Masters Midland because of my ongoing commitment to the business. Further, I don't make enough money out of the business to afford me the luxury of taking my legal advisors to a meeting where it would appear that you have already decided what options Auto Masters Australia Pty Ltd are willing to make available to me to rectify the situation.

Until we have been given a copy of the auditors report, there would appear to be little to discuss that wasn't stated in the Notice of Default of 4 February 1999 from Deacons, Graham & James or that could not be put to me in writing as per the options you are willing to make available.

Sections 15.1 and 15.4 of the Franchise Agreement and Disclosure Documents refer to the Franchisor:

(1) acting in good faith and

(2) making available any information reasonably required in respect to all matters relating directly to the franchise business.

I therefore request a copy of the auditors report and your proposal."

89 I pause to say that although in the letter just quoted Mr Coombes refers to the "notice of default of 4 February 1999", the true position was that in their letter of 4 February 1999 the plaintiff's solicitors were commenting on matters reflected in the previously issued notice of default dated 24 December 1998. This may have left Mr Coombes with an impression that in some way the notice had been reissued. Alternatively, and more probably, he may have mistakenly characterised the solicitor's detailed letter as being in the nature of a notice of default.

90 Mr Canham said in evidence that he received a copy of QAS's audit report on 17 February 1999. He referred to that passage in the report where the auditor Edward Waloch found that five branches were visited, all of which appear generally well administered and resulting servicing operations of customers' vehicles were well controlled. All five branches displayed good husbandry standards and, as such, all present well in terms of cleanliness and general appearance. This comment applied to part storage areas, all of which demonstrated appropriate levels of accountability, control in terms of issue, and necessary means of identifying contents.

91 Mr Waloch went on to say in his report that, notwithstanding these observations, a significant degree of non-compliance to procedures was clearly demonstrated at one branch, this being to the extent that confidence in the continued implementation of the respective elements of the documented management system was compromised.

92 Mr Canham said he was told that the "one branch" being referred to was the Midland Branch and various defaults were identified in complying with the document management system which defaults were said not to be restricted to the computer invoicing and data input procedures.

93 I note in passing that this represented a somewhat partisan view of the QAS report. The report contains a passage to the effect that the Midland Branch appeared to be satisfactorily managed, the premises well presented and apparently subject to sufficient resources to maintain consistent standards of workshop practices and servicing operations. The final paragraph of the summary of the report reads as follows:

"Overall, branches present well and commitment to customer satisfaction is apparent from all concerned. Recommendation for continuing registration will be reconsidered, therefore, subject to the successful completion of a follow-up audit to verify corrective action requirements in respect of NCR 99-01. Ideally this to be within thirty days. However, if not possible or time restraints preclude sufficient evidence to ensure confidence in levels of compliances, then within three months with a progress assessment after thirty days."

94 Mr Waloch gave evidence at the trial of the action. He is a qualified electrical engineer holding a Diploma of Electrical Engineering. He also holds a Higher National Certificate in Marine Engineering having trained and served in the Royal Navy between 1963 and 1990. He currently holds the position of Senior Certified Auditor with QAS. He confirmed that between 10 and 12 February 1999 he carried out an audit on five franchises including the Midland Branch.

95 In summary, Mr Waloch was sufficiently concerned by the lack of compliance with the Auto Masters quality assurance system to issue "a System Failure Report" to Auto Masters as a consequences of the deficiencies found at the Midland Branch. The effect of the issue of that report was that Auto Masters would be granted three months within which to propose steps to remedy the deficiencies identified and correct the anomalies. This meant that he would return within three months to review the plaintiff's operations to ascertain if the deficiencies had been rectified. If they had not, then the likely result would have been that he would have recommended decreditation of quality assurance for Auto Masters. Whether to do so would be a decision for his superiors.

96 Mr Waloch went on to say that having carried out approximately 1,300 inspections since 1995 he estimated that he had only issued between three and five System Failure Reports. Accordingly, in his view the level of non-compliance by Auto Masters with the document management system found at the Midland Branch during this February 1999 review was a significant concern.

97 Nonetheless, it is quite clear that the QAS report did not provide for immediate action. It allowed a period of three months within which deficiencies could be rectified. Thus, when one reverts to the Canham letter of 13 January 1999 and his later memo of 22 January 1999 in which it was foreshadowed that the Franchise Agreement would immediately terminate if accreditation was lost, the need for immediate and drastic action of that kind did not appear to be warranted in the period following presentation of the QAS report.

98 Mr Coombes gave evidence concerning the QAS report. The relevant passage in his witness statement is to this effect:

"131. On 23 February 1999, I received a further memo from Douglas Canham in which he informed me that during the last QAS audit, a number of 'non-conformances' had been found and that I would receive a copy of the QAS audit report from Deacons Graham & James. Annexed hereto and marked 'DIC-96' is a copy of that memo. Despite the promise of receiving a copy of the QAS report from Deacons Graham & James and despite my request for a copy of that report in my letter to Douglas Canham dated 17 February 1999, I did not receive a copy of the QAS audit report prior to the commencement of these proceedings."

99 This evidence was not controverted by the plaintiff. Mr Coombes went on to say that on 25 February 1999 he received from the plaintiff a further list of invoices which, allegedly, either had not been received by the plaintiff or had not been entered or completed on the database.

100 Within a few days of receiving the QAS report, the plaintiff proceeded to serve a notice of default on the first defendant dated 26 February 1999. The notice commences with a recital in which reference is made to the Franchise Agreement and related documents. The recital contains a particular reference to cl 16.8 whereby Bruness agreed to operate the business in accordance with the Auto Masters manual.

101 I pause to remind myself (although this is not a matter mentioned in the recital) that the plaintiff as franchisor was entitled to give a written notice of the steps to be taken to ensure compliance "if at any time the Franchisor is reasonably of the opinion that the Franchisee is not complying with the provisions of this sub-clause." This suggests that it is not enough for there to be some trifling or technical breach of the procedures prescribed by the manual, the franchisor must be "reasonably" of the opinion that the franchisee is not complying. The presence of this requirement probably serves to explain the four point summary of the plaintiff's attitude to minor breaches set out in the letter written by its solicitors to the defendants on 4 February 1999.

102 I remind myself also that cl 29.4 provides for termination where the franchisee fails to remedy breaches within 14 days of the same being specified in a written notice. It is apparent from the recital that this was the procedure being initiated by the plaintiff. The recital referred to a breach of cl 14.4 in that Bruness had failed to pay an audit fee of $200 and to an alleged breach of a sub-lease. It referred also to a breach of cl 16.8 in that Bruness had failed to comply with the document procedures prescribed by the manual. The breaches of cl 14.4 and 16.8 were defined as the defaults. Particulars of the latter default were described as a failure to comply with the document control system in respect of 54 invoices which were identified in a schedule annexed to the notice. I will call this the "default schedule". Mention was also made of an alleged breach of cl 16.11 in that Bruness had allegedly interfered with the use of an adjoining property, but as this was not an issue that surfaced in the pleadings at trial I will say nothing further about it.

103 The recital to the notice of default was followed by a formal demand that the defaults in question be rectified by Bruness within 14 days. The notice was executed under the common seal of the plaintiff company.

104 It follows from this description of the notice that after several months of increasing criticism by the plaintiff as to the way in which the defendant was operating the franchise, the plaintiff had decided to take a stand principally upon an alleged non-compliance with the manual in respect of 54 invoices. Such a stance required that the plaintiff be reasonably of the opinion that the shortcomings associated with the subject invoices represented a non-compliance with the prescribed procedures.

105 The plaintiff's case at trial was that the "default" specified in the notice of default was not remedied within the specified time and upon that basis the plaintiff purported to terminate the agreement. The plaintiff's notice of termination of the Franchise Agreement dated 15 March 1999 was adduced in evidence.

106 There was some controversy between the parties at the trial of the action as to whether any steps were taken by the defendants to communicate with the plaintiff after receiving the notice of default, or otherwise to take remedial action. Essentially, the stance of the defendants at that time, and at the trial of the action, was that nearly all the invoices on the list attached to the notice of default could be accounted for, having regard to the various exchanges between the parties in the preceding weeks, or did not amount to a significant lack of compliance, with the result that the defendants were not in default.

107 According to the defendants, the notice of default and the subsequent termination were simply a manifestation of the plaintiff's determination to bring the Franchise Agreement to an end. The steps taken by the plaintiff were referable to matters other than breaches of the contractual relationship between the parties and were therefore in breach of the good faith term and unconscionable.

108 Mr Coombes had this to say in evidence about events subsequent to service of the notice of default on 26 February 1999:

"134. In early March 1999, I received the Plaintiff's invoice for the month of February 1999. Annexed hereto marked 'DIC-100' is a copy of that invoice. The invoice did not contain the extraordinary audit fee of $200.00.

135. On 3 March 1999, the Plaintiff sent my franchise a further list of invoices said either not to have been received by the Plaintiff or not to have been entered on the database or not to have been completed on the database. The list contained nearly all of the invoices listed in the schedules to the Notices of Default dated 26 February 1999 as well as a few extra invoices. Annexed hereto marked 'DIC-101' is a copy of that list.

136. My wife prepared a schedule of invoices in response to the Plaintiff's list of 3 March 1999. On 5 March 1999, I sent a facsimile message to Monica Lane together with my wife's schedule of invoices. In my facsimile message to Monica Lane, I requested her to fax to me past memos listing missing invoices for the months of July, August, September and October 1998 for easier cross-reference. Annexed hereto marked 'DIC-102' is a copy of my facsimile message. I did not receive any response from the Plaintiff to my request for the past memos.

137. On 12 March 1999, the Plaintiff sent my franchise a further list of invoices said either not to have been received by the Plaintiff or not to have been entered on the database or not to have been completed on the database. The list of invoices was almost identical to that sent on 3 March 1999. Annexed hereto marked 'DIC-103' is a copy of the list of 12 March 1999.

138. On 12 March 1999, I telephoned the Office of the Mediation Adviser, Franchising Code of Conduct, in Sydney, with a view to proceeding to mediation with the Plaintiff pursuant to Part 4 of the Franchising Code of Conduct. In response to my telephone call, I received a facsimile message the same day from Ms Nicky Ferguson of the Office of the Mediation Adviser enclosing a Notice of Dispute to be completed by me and sent to the Plaintiff. Annexed hereto marked 'DIC-104' is a copy of that facsimile message and a copy of the blank Notice of Dispute enclosed with that facsimile message.

139. ...

140. On 15 March 1999, I faxed a Notice of Dispute to the Plaintiff. Annexed hereto marked 'DIC-106' is a copy of that Notice. The same day, I sent a facsimile letter to Ms Ferguson of the Office of the Mediation Adviser, enclosing a copy of the Notice of Dispute which I had sent to the Plaintiff and requesting the Office of the Mediation Adviser to appoint a mediator in an endeavour to resolve my dispute with the Plaintiff. Annexed hereto marked 'DIC-107' is a copy of my facsimile letter to Ms Ferguson.

141. On 15 March 1999, I also wrote a letter to Ian Nicholas of the ACCC, enclosing a copy of the letter from Deacons Graham & James dated 12 March 1999. Annexed hereto marked 'DIC-108' is a copy of my letter to Mr Nicholas.

142. On 15 March 1999, the First Defendant and I were served with a Notice of Termination of Franchise Agreement and a Notice of Termination of Sub-lease. Annexed hereto marked 'DIC-109' is a copy of each of those Notices of Termination. Later the same day, I received a facsimile letter from Deacons Graham & James in respect of the Plaintiff's purported termination of the Franchise Agreement. Annexed hereto marked 'DIC-110' is a copy of that franchise letter.

143. On 15 March 1999, I also wrote a letter to Nigel Warr of the Plaintiff, requesting an undertaking from him not to proceed with any further action until the mediation had been concluded. Annexed hereto marked 'DIC-111' is a copy of my letter.

144. Later on 15 March 1999, the First Defendant was served with a Writ of Summons in CIV 1255 of 1999.

145. I received a further letter from Deacons Graham & James on 15 March 1999, replying to my letter to Nigel Warr earlier the same day and to my Notice of Dispute which I had sent to the Plaintiff earlier that day. The letter informed me that the Plaintiff would not participate in mediation. Annexed hereto marked 'DIC-112' is a copy of that letter. Later, at the urging of the Honourable Justice McKechnie at the injunction hearing on 12 April 1999, the Plaintiff did agree to participate in mediation.

146. During the course of 15 March 1999, Nigel Warr and Douglas Canham called at my franchise's premises and asked me to leave. I declined to do so."

109 The Bruness notice of dispute dated 15 March 1999 purports to have been issued under cl 29(1) of the Franchising Code of Conduct. The effect of this and other provisions of the Code is that a party may start the procedure for resolving disputes by issuing such a notice. If the parties cannot agree upon an outcome either party may refer the matter to a mediator. The parties must attend the mediation and try to resolve the dispute.

110 The Bruness notice of dispute described the dispute as a failure by Auto Masters to support the franchisee with reference being made to the inability of the computer software to operate efficiently. The action required to settle the dispute was for Auto Masters to "withdraw all notices, rectify the computer software, support the franchisee, and act at all times in good faith". It foreshadows mediation if an outcome cannot be agreed.

111 The letter of the solicitors for the plaintiff, Deacons Graham and James, mentioned above in par 145 of the Coombes' statement, is indeed dated 15 March 1999. It confirms receipt of "your fax" dated 15 March titled "Notice to Cease and Desist" and of the Bruness notice of dispute. The letter suggests that the procedure for resolving disputes under the Code is optional and calls attention to cl 31(1) whereby a party remains at liberty to take legal proceedings under the Franchise Agreement.

112 It was a matter in controversy at the trial as to whether Bruness issued its notice of dispute prior to being served with the plaintiff's notice of termination, for both documents are dated 15 March 1999. Mr Canham said at par 101 of his witness statement that he was present at the Midland Branch with Mr Warr when the notice of termination was served on Mr Coombes. He acknowledged that on 15 March 1999 he received a fax containing the notice of dispute. It is not made clear in which order these events occurred, although clearly the plaintiff's solicitors were instructed to say that the plaintiff would not participate in the proposed mediation on the grounds that such a step had become irrelevant. I infer from the language and fax details of the relevant exchanges that the notice of dispute was served first, and make a finding to that effect. Certainly, on any view of the matter, no steps were taken by the plaintiff to defer or withdraw the notice of termination. The plaintiff commenced legal proceedings on the same day.

113 The defendants refused to accept that the Franchise Agreement and sub-lease had been terminated as alleged. It was against this background that the plaintiff applied for and obtained a mandatory injunction from the Honourable Justice McKechnie on 21 May 1999. This injunction restrained the first defendant from trading under the plaintiff's name, goodwill and logo until trial.

114 On 26 July 1999 the defendants' application for and order discharging the injunction was refused. Appeals to the Full Court were mounted concerning these orders but in the end the appeals against the grant of the injunction and the refusal to discharge the injunction were dismissed.

115 The first defendant, Bruness, continued to trade from the same premises in Midland but under the name Auto Mechanics Midland.

116 The plaintiff by its statement of claim sets out the terms and provisions of the Franchise Agreement and related sub-lease. By par 8A of the statement of claim the plaintiff alleges that in breach of cl 14.4 of the Agreement the first defendant failed to pay the plaintiff the audit fee of $200. The plaintiff says further that in breach of cl 16.8 of the Agreement and the O&P Manual, the first defendant failed to submit invoices to the plaintiff and carry out computer data entry on a daily basis and ensure that all customer records and financial data were entered on the computer management system on a daily basis.

117 Reference is made to the notice of default dated 26 February 1999 being served on the first defendant and an alleged failure to rectify the default specified in the notice. The plaintiff pleads that the Franchise Agreement was terminated on 15 March 1999. In the alternative, it is said that the first defendant repudiated the Franchise Agreement and the plaintiff, as it was entitled to do, accepted the repudiation. The plaintiff claims damages and injunctive relief.

118 The defendants by its statement of defence denies that it is liable to the plaintiff as alleged and denies that the first defendant was in breach of the provisions of the Franchise Agreement relied upon. It pleads that it entered invoices on the computer data base on a daily basis and otherwise complied with the provisions of the Agreement. The first and second defendants deny that the first defendant repudiated the Franchise Agreement as alleged or at all.

119 The defendants say in their counterclaim that the plaintiff has wrongly and unlawfully purported to terminate the Franchise Agreement prior to the expiration of the term as a consequence of which, the defendants have suffered loss and damage.

120 The defendants say further that it was an express term of the Franchise Agreement contained in cl 15.1 thereof, that the plaintiff would use its best endeavours to promote the performance and success of the franchise business and would deal with the first defendant in absolute good faith at all times ("the good faith term").

121 It is said further in par 39 that in breach of the good faith term, the plaintiff did not deal with the first defendant in absolute good faith at all times. Particulars of the breach are alleged and include an allegation in par 39(a) that the plaintiff purported to terminate the Franchise Agreement and the sub-lease when the plaintiff was not entitled to terminate the same because there had not been a breach of either agreement; in (b) that the plaintiff purported to terminate the Franchise Agreement and the sub-lease when such termination was not reasonably necessary for the protection of the legitimate interests of the plaintiff; in (c) in purporting to terminate the Franchise Agreement and the sub-lease, the plaintiff was not motivated by a desire to protect its legitimate interests but by malice and/or revenge.

122 Four matters are relied upon in support of the improper purpose allegation in par 39(c) of the defence. It is said the plaintiff was activated first by the defendants' frequent criticism of the computer hardware and software supplied by the plaintiff; second, the defendants' insistence that Hollands should be prosecuted; third, the defendants' complaints to the ACCC and fourth, the defendants' complaints to Work Force Clothing concerning the supply of uniforms.

123 The defendants in sub-paragraphs 39(d) to (f) refer to further matters in support of the allegation that there was a breach of the good faith term. It is said in sub-paragraph (d) that the plaintiff refused the first defendant's request to be supplied with a copy of the QAS report. It is said in sub-paragraph (e) that the plaintiff purported to terminate the Franchise Agreement notwithstanding that in the auditor's report QAS did not terminate the first defendant's accreditation. It is said in sub-paragraph (f) that the plaintiff wrongfully and unlawfully refused the defendants' request in a letter to the plaintiff dated 15 March 1999 for mediation pursuant to Part IV of the Franchising Code of Conduct.

124 The defendants go on to say in the counterclaim that in breach of s 51AC(1) of the Trade Practices Act 1974, the plaintiff has engaged in conduct, in trade or commerce, in connection with the supply of goods and services to the first defendant which conduct was in all the circumstances unconscionable. They rely upon the particulars pleaded in support of the allegation concerning breach of the express or good faith term.

125 It is against this background that the defendants claim damages for the loss and damage which has been allegedly suffered as a consequence of the plaintiff's conduct.

126 The burden of proving the existence and exercise of a right to terminate for breach or repudiation rests on the party who claims that the right existed or has been exercised. Whether a contract expressly confers a right to terminate for breach depends, of course, on the construction of the contract. Whether the right can be exercised in the circumstances which have occurred also depends on the construction of the express terms of the contract: Carter and Harland: Contract Law in Australia (4th ed) par 1902 and par 1909.

127 A right to terminate may be general, and arise on a breach of any term of the contract, or specific, and arise only on the breach of a particular term or a particular kind of breach. Subject to the requirements of the particular contract, the courts have generally held that breaches of an essential term entitle the other party to terminate the contract. The test of essentiality is whether it appears from the general nature of the contract considered as a whole that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the contract: Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR(NSW) 632 at 641; Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322.

128 There is no requirement that contractual rights to terminate for breach must be exercised reasonably. However, it seems that in particular contexts requirements of reasonableness and good faith have been implied. Carter and Harland (supra) at par 1983.

129 It emerges, then, to this point, that it is open to the plaintiff in the present case to contend that any failure to comply with the requirements of the franchise system should be sufficient to justify a termination of the contract, for an essential feature of the franchise arrangements is that the system should be fully integrated and run smoothly. Such a view is reinforced by the default provisions which afford an opportunity to the franchisee to remedy any defaults complained of within a prescribed time. Thus, on this view of the matter, the crucial question is whether the matters complained of in the notice of default can be characterised as breaches, and whether Bruness attended to the matters complained of within the period of 14 days allowed by the notice.

130 On the other hand, it is open to the defendants not only to dispute that they were in default as alleged but also to contend that, upon the proper interpretation of a contract containing a good faith term, the breaches complained of, if any, were not sufficient to justify termination, and cannot be regarded as a repudiation of the contract.

131 It therefore becomes necessary to look at some of the decided cases concerning the concept of good faith in contractual arrangements.

132 During the past decade in Australia there has been much written about whether or not an obligation of good faith and fair dealing can be implied in commercial contracts. Much of the discussion arose from a judgment of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 who held that a contractual power in a building contract, which permitted the principal to take over the builder's work was required to be exercised reasonably, this requirement being as a result of the implication of a term that the principal should act in good faith when exercising discretions under the contract.

133 Priestley JA noted at 265 that in ordinary English usage there has been a constant association between the words "fair" and "reasonable". Similarly, there is a close association of ideas between the terms "unreasonableness", "lack of good faith", and "unconscionability". Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in a different context, there can be no doubt that in many of their uses there is a great deal of overlap in their contents.

134 Although there was some early deprecation of the application of Priestley JA's reasoning, it has since been applied in several cases with approval. I refer to the discussion and cases referred to in Peden: "Incorporating Terms of Good Faith in Contract Law in Australia" [2001] SydLawRw 9; (2001) 23 Sydney Law Review 222 and W.D. Duncan: "The Implication of a Term of Good Faith in Commercial Leases" (2002) 9 Australian Property Law Journal 209.

135 Reference was made to this debate recently by various members of the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289. Whilst the issues respecting the existence and scope of a "good faith" doctrine were thought to be important, that case was not thought to be an appropriate occasion to consider them.

136 However, Kirby J at par 88 observed in passing that in Australia such an implied term appears to conflict with fundamental notions of caveat emptor that are inherent in common law conceptions of economic freedom. It also appears to be inconsistent with the law as it has developed in this country in respect of the introduction of implied terms into written contracts which the parties have omitted to include.

137 It seems that if a term of good faith is to be implied in a contract it must be construed to aid and be consistent with the explicit terms of the Agreement: Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94.

138 Counsel on both sides in the case before me seemed to accept that there was no need for me to dwell upon the question of whether a good faith provision can be implied. In the present case, the reality is that there is an express provision concerning good faith in cl 15.1 being the term I referred to earlier as the good faith term.

139 Clause 15.1 forms part of a provision concerning the franchisor's obligations. It appears under the heading "Promotion of the Franchise Business" and reads as follows:

"The Franchisor will use its best endeavours to promote the performance and success of the Franchise Business and will deal at all times with the Franchisee in absolute good faith."

140 The courts have held in a number of previously decided cases that effect can be given to an express term concerning good faith, although the content of the term will be a matter of interpretation.

141 In Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255 the Full Court in this State was faced with a dispute over a mining contract which contained cl B1.1.5 in these terms:

"The successful operation of this contract requires that [Thiess] and [Placer] agree to act in good faith in all matters relating both to carrying out the works, derivation of rates and interpretation of this document."

142 The Full Court took this to mean that the parties were obliged to agree on rates in advance of work done and they were required to co-operate in the establishment of rates based as far as reasonably possible on actual costs. This meant that Thiess had to disclose all facts relevant to the establishment of rates based on actual costs. This was the "content" of the obligation of good faith. When Thiess knowingly misrepresented to Placer that certain costs were its genuine estimate of costs, but they actually included profits, this was in breach of the express terms to act in good faith.

143 In Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996; (1999) 153 FLR 236 Einstein J was prepared to hold that a clause requiring negotiation in good faith could be characterised as sufficiently certain to be valid, although, on the construction of the contract as a whole, the clause in question was held to be unenforceable.

144 Einstein J was also prepared to provide a summary of the "core elements" of an obligation to negotiate or mediate in good faith. A party under such an obligation is obliged to subject himself to the process of negotiation or mediation (which must be sufficiently precisely defined by the agreement to be certain and hence enforceable). In subjecting himself to the process, he is obliged to have an open mind, in the sense of a willingness to consider such options for the resolution of the dispute as may be propounded by the opposing party. His Honour acknowledged that such a party is not required to act for or on behalf of or in the interests of the other party or to act otherwise than by having regard to self-interest. His Honour thought that the concept of good faith acquires substance from the particular events to which it is applied and is best determined on a case by case basis using the broad discretion of the trial court.

145 In Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 the High Court was concerned with the implication of a duty to co-operate in the doing of acts necessary for the performance of a contract by the parties. It had to consider whether one party had acted capriciously or arbitrarily in its performance of the contract. Mason J expressed the view at 609 that "arbitrarily" connotes "unreasonably" in the sense that what was done was done "without reasonable cause". He doubted whether "capriciously" adds anything except perhaps to direct attention to the motivation of the respondent.

146 Consideration of this and other decided cases prompted Duncan (supra) to express this view:

"It might be concluded that such an obligation [to act in good faith] would import notions of all the elements of reasonableness, honesty, fair play, lack of caprice and lack of arbitrariness. It is submitted that the motives of the party whose actions are the subject of an alleged breach of the implied obligation of good faith are very relevant."

147 The learned author went on to refer to s 51AC(3) of the Trade Practices Act. In determining whether a corporation has engaged in unconscionable conduct, the Courts are directed to have regard to a number of matters, one of which, as prescribed by s 51AC(3)(k), is the extent to which a party has acted in good faith. The learned author observes at 216 "there is a clear implication exemplified in this legislation of a community expectation that all contracting parties to whom the legislation applies will, in their dealings with other parties, act with probity and, to some extent with fairness."

148 It is apparent from the decided cases and related discussion that an express term concerning good faith, either in negotiation or in performance, is likely to be considered certain and the term will be interpreted to give it meaning. What constitutes good faith will depend on the circumstances of the case and upon the context of the whole of the contract. The Courts will allow normal and reasonable business behaviour, with the result that the parties are not obliged to put aside their own self-interest or proprietary rights. A court considering such a provision is entitled to have regard to the reasonableness of the conduct and whether a party has acted unconscionably or capriciously. This may require the court to give some consideration to the motivation underlying the relevant events.

149 When the time comes to address the defendants' counterclaim, in which direct reliance is placed upon the good faith term and S 51AC of the Trade Practices Act, it will be necessary to give further and more detailed consideration to these principles. However, for the time being I am concerned with the question of whether the plaintiff can establish that Bruness breached the terms of the Franchise Agreement and, if so, whether the breaches justified termination of the contract, or amounted to repudiation.

150 It follows from earlier discussion that, in my view, the good faith term in the Franchise Agreement was sufficiently certain to be enforceable. The content of the term is to be established by reference to the contract as a whole and the nature of the franchise arrangements. That being so, it was not open to the franchisor to exercise its rights and powers unreasonably or capriciously, although it was entitled to have regard to its own commercial self-interest. This all suggests that the plaintiff was not at liberty to rely upon technical or minor infringements unless it was able to point to a clear and persistent course of misconduct. The four point summary of the plaintiff's attitude to minor breaches suggests that the plaintiff itself saw the contractual position in this light.

151 I must now return to the circumstances of the present case.

152 It will be apparent from my overview of the pleadings that the plaintiff relies upon breaches of the Franchise Agreement in seeking relief by way of damages. In addition, it seeks the grant of a permanent injunction to restrain the defendants from trading as or under the insignia of Auto Masters. The plaintiff says that Bruness breached cl 14.4 of the Franchise Agreement in that it failed to pay the audit fee of $200. More importantly, it alleges that Bruness breached cl 16.8 in that it failed to submit invoices to the plaintiff, carry out computer data entry on a daily basis and ensure that all customer records and financial data were entered onto the computer management system on a daily basis.

153 For ease of reference, where the context permits, I will call the alleged breaches of cl 16.8 collectively "the alleged document control breach". For the time being, I will put the audit fee issue to one side as it represented a comparatively minor area of controversy between the parties.

154 The alleged document control breach lies at the heart of the plaintiff's notice of default dated 26 February 1999. Thus, a central issue at the trial of the action was whether the plaintiff could establish that the description of the defendants' default in regard to each of the 54 invoices mentioned in the default schedule was accurate as a matter of fact and, if so, whether all or any one or more of the defaults were sufficient as a matter of law to justify the plaintiff's termination of the Franchise Agreement.

155 The plaintiff's case was that the defendants failed to remedy the various alleged acts of non-compliance detailed in the default schedule. It was apparent from the way the case was fought at trial that the breaches relied upon fell broadly into two sub-categories. The first (as pleaded in par 25(2)(a) of the claim) concerned an alleged failure to deliver hard or yellow copies of invoices to the plaintiff's office. I will call this "the alleged delivery breach". The second (par 25(2)(b) and (c) of the claim) concerned an alleged failure to enter and complete the entry of data. I will call this "the alleged data entry breach".

156 It must be kept in mind that nearly all of the 54 invoices mentioned on the default schedule are the subject of more than one alleged failure on the defendants' part. It follows from this that, on the plaintiff's case, the breaches relied upon to justify termination of the Franchise Agreement are said to be extensive and, viewed collectively, can properly be regarded as a breach of the franchise system sufficient to justify termination of the contract between the parties. Nonetheless, before one can determine whether the breaches relied upon in the notice of default were sufficient to justify termination it is necessary to make findings bearing upon the status attributed to each of the contentious invoices by the notice of default.

157 This brings me to the legal principles concerning the burden of proof in a case of this kind.

158 The relevant principles are described in Cross on Evidence (Aust ed) at pars 7,001 to 9,055. The burden of proof in a civil case is the obligation of a party to meet the requirements of a rule of law that a fact in issue be proved upon the balance of probabilities.

159 The possibility of a contrary finding does not prevent a finding reached on the balance of probabilities from being appropriate. It is not enough for a plaintiff to fail that his account may not be correct: Goodwin v Nominal Defendant (1979) 54 ALJR 84.

160 Any party who bears a legal burden of proof with respect to a fact will also bear an evidential burden with respect to that fact. The evidential burden has been defined as the obligation to show, if called upon to do so, that there is sufficient evidence to raise an issue as to the existence or non-existence of a fact in issue, due regard being had to the standard of proof demanded of the party under such obligation.

161 Cross notes at par 7,205 that the practice of speaking of the shifting of the burden of proof is quite inveterate among both judges and writers. In essence, this is simply a reference to the tactical reality that where a party with the legal burden has discharged the associated evidentiary burden it then becomes prudent for the other party to adduce contrary evidence if possible. This is not really a shifting of any burden as the party who initially bears both the legal and evidential burden may fail to satisfy the legal burden, even if the other party calls no evidence.

162 The proper approach in evaluating circumstantial evidence may be illustrated by reference to Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125. In that case the insured's house was damaged in a fire which had been deliberately lit. There was a large body of circumstantial evidence that the insured had lit the fire, including that he was on the property immediately before the fire started. The Court of Appeal held that the trial Judge erred in considering each item of circumstantial evidence in isolation from the others and seeking to determine whether the ultimate fact could be inferred from each such item of evidence. The proper approach was to consider the weight of the combination of proven facts and to determine whether the combined weight of those facts supported the inference as a matter of probability. It is not necessary to exclude reasonable hypotheses consistent with the contrary of what is alleged.

163 It emerges from my review of the authorities that in the present case the plaintiff bears the legal burden of satisfying the Court upon the balance of probabilities that there were breaches of the franchise system as alleged in par 25 of the claim. A burden of the same kind will lie upon the defendants in respect of their counterclaim.

164 The plaintiff says in overview that the defendants were in breach of the Franchise Agreement prior to the issue of the notice of default on 26 February 1999. The defendants failed to remedy those breaches within the time allowed and the plaintiff was thereby entitled to terminate the Franchise Agreement. By reason of the first defendant's breach of the agreement and continued occupancy of the Midland premises the plaintiff has suffered loss. The plaintiff advances a claim for damages for breach of the Franchise Agreement. It seeks also a permanent extension of the injunction previously granted and possession of the Midland premises.

165 The plaintiff's claim for loss and damage is set out in Answer 4 to its further and better particulars of claim (at pages 23 and 24 of the papers for the judge). The plaintiff contends that the average turnover of the Midland Branch prior to termination was $41,927.35 per month. This represents an average loss of $5,450.56 per month in respect of the plaintiff's entitlement to an advertising levy of 6 per cent on turnover and a royalty charge of 7 per cent of turnover. Accordingly, as at February 2000 the plaintiff's loss of benefits and bargains since February 1999 was $65,406.66 which loss continued to accrue thereafter at the rate of $5,450.56 per month until the expiration of the agreement in 2002.

166 The particulars of claim foreshadow a claim for consequential expenses including costs incurred by the plaintiff in entering into a new Franchise Agreement and diminution in the plaintiff's goodwill by reason of the defendants' conduct.

167 Counsel for the defendants presented an overview of the defendants' case in the course of his opening address. He submitted that the breaches being relied upon by the plaintiff as a basis for terminating the Franchise Agreement did not occur and, in any event, were of a comparatively small order. Clause 16.8 of the Franchise Agreement says that if at any time the franchisor is "reasonably" of the opinion that the franchisee is not complying with the agreement then steps can be taken to ensure compliance. This brings into issue the question of whether the plaintiff acted reasonably in the circumstances of the present case.

168 Counsel for the defendants acknowledged that in the alternative to its claim that the Franchise Agreement had been properly terminated pursuant to cl 29.4 of the agreement, the plaintiff claimed that, as a result of the alleged breaches of the Franchise Agreement, the first defendant had repudiated the agreement. It was said that the plaintiff had accepted the repudiation by service of the notice of termination of the Franchise Agreement on the first defendant.

169 According to counsel for the defendants, in order to be entitled to terminate the Franchise Agreement on the ground of repudiation of the same, the plaintiff was obliged to establish that Bruness had manifested an inability or unwillingness to perform the whole of the Franchise Agreement or an essential term of the Franchise Agreement.

170 On this view, if there was never any clear renunciation of the Franchise Agreement by Bruness, or if attempts by Bruness to perform the Franchise Agreement were in progress, then the plaintiff was not justified in terminating the Franchise Agreement on the ground of repudiation.

171 In determining whether Bruness had repudiated the agreement, considerable weight had to be given to the good faith term and related provisions which obliged the franchisor to act reasonably. The plaintiff was not at liberty to complain of repudiation and terminate the contract unless it could satisfy the Court that it was acting in good faith. The plaintiff's failure to give the defendants a copy of the QAS report before issuing the notice of default demonstrated its lack of good faith.

172 Counsel for the defendants went on to say, more particularly, that if the chronology of events were looked at closely it showed that, as a consequence of various issues that arose between the plaintiff and Bruness towards the end of 1998, the plaintiff became impatient with the franchisee. The plaintiff was determined to bring the relationship between the parties at an end. The frequent demands for compliance with the manual and for attention to invoices were a manifestation of the plaintiff's purpose. When one looked at the amounts of royalty referable to the disputed invoices, the amounts in question were very small and could not be said to impact upon the plaintiff's legitimate commercial interests.

173 I digress briefly to say that in regard to this aspect of the matter, the defendants pointed to the evidence of Mrs Coombes. Her evidence showed that in the period of 21 months prior to the date of termination 3,700 invoices had been created on the Midland premises, making an average of approximately 176 invoices per calendar month. The value of each invoice on average was $241.23 of which 13 per cent ($31.36) was payable to the plaintiff per the franchise levy (7 per cent) and the advertising levy (6 per cent). The plaintiff had (allegedly) conceded that of the 54 invoices listed in the notice of default, only 24 had not been received by the plaintiff. The royalties due to the plaintiff in respect of these 24 invoices in dispute amounted to $752.64. The royalties due in respect of a further 7 invoices which the defendants could not locate and a further 8 which (on the defendants' case) were awaiting costing amounted to $219.52 and $250.88 respectively.

174 The defendants contended that the small proportion of invoices in dispute brought into issue the question of whether the plaintiff acted in good faith and whether the breaches relied upon by the plaintiff could be characterised as a significant default. The comparatively small amounts in issue suggested that in terminating the Franchise Agreement the plaintiff was not motivated by legitimate commercial concerns. The plaintiff's failure or refusal to mediate, notwithstanding the notice given by Bruness in that regard prior to termination, was said to underpin the defendants' case.

175 I will turn to the details of the defendants' case in a moment concerning the status of the 54 contentious invoices listed in the plaintiff's default schedule. However, broadly described, the defendants' position at trial was that the obligation to complete invoices on the data base and deliver yellow copies to the plaintiff only arose when the relevant work had been completed. Bruness had generally complied with that obligation. The evidence would show that the plaintiff had incorrectly characterised a substantial number of invoices listed in the default schedule. The plaintiff's allegations as to the remainder were not compelling having regard to inadequacies in the plaintiff's computer system and the defendants' contention that certain of the invoices concerned work that had not been completed. Further, and in any event, the degree of non-compliance, if any, was comparatively insignificant and, in the context of a contract conditioned by a good faith term, the non-compliance complained of did not amount to a repudiation.

176 The plaintiff sought to answer these contentions by emphasising the importance of compliance with the quality controls in order to preserve the integrity of the franchise system as a whole. Further, the plaintiff adduced evidence (and cross-examined the defendants' witnesses accordingly) with a view to showing that the defendants' complaints about the computer system were unreasonable; that they were largely referable to operator error; that Mr Coombes was upset by the plaintiff's stance in negotiations concerning the future of the Midland and Maddington Branches; that Mr Coombes and his wife generally ceased to be co-operative and gave up communicating with the plaintiff.

177 The plaintiff's case proceeded from the premise that the defendants' adversarial attitude and lack of compliance with the quality control system was responsible for undermining the relationship of trust that ought to have existed between the parties. Eventually, the plaintiff was left with no option but to terminate the Franchise Agreement, and thus it could not be said to have acted unconscionably or in breach of the good faith provision in doing so.

178 The defendants challenged the regularity of the plaintiff's procedures for identifying non-compliance. Counsel for the defendants drew attention also to a number of alleged deficiencies in the notice of default. It will be useful at this stage to make a few general observations about such matters as an aid to understanding the nature of the controversy between the parties.

179 There are 54 invoices referred to on the schedule affixed to the notice of default. On the plaintiff's case, the comments in the default schedule referable to each invoice are said to define the nature of the alleged non-compliance with the franchise system. It was common ground that one of those invoices on the default schedule, namely, 05215041, is duplicated and it may thus be said that 53 invoices are in dispute.

180 The default schedule is to be found at the agreed bundle of documents at pages 408 and 409. For ease of reference, I will follow the approach adopted at trial and identify each invoice by the last three numbers. Thus, the first invoice on the list, namely, 05201423 becomes 423. It follows from earlier discussion that the invoice number was derived initially from a hard copy pad of invoices and that a number of pads were being used by the Midland franchise.

181 In this case the "status" attributed to invoice 423 by the default schedule as at the date of the notice of default, namely, 26 February 1998, is "not received by franchisor nor completed in data base". I understand from evidence adduced by the plaintiff that this amounts to an assertion that as at the relevant date a hard copy (or yellow copy) of the invoice had not been delivered to the plaintiff's office as required by the manual. The plaintiff assumed that work was being performed for a customer pursuant to such an invoice in that upon the keying in of data on the second screen the invoice was "entered" on the data base. The assertion is, however, that the invoice is not "completed" in the data base, that is to say, the full range of data required to finalise the customer's account has not been completed by the franchisee.

182 I digress briefly to say that I used the word "assumed" a moment ago advisedly, because it was clear from the evidence given at trial by Mr Canham and Ms Lane that in monitoring compliance with the franchise system the plaintiff relied to a significant extent upon a process of inference and deduction.

183 For example, as appears at page 253 of the transcript, Mr Canham said that Ms Lane compiled the default schedule in this manner. If she had located hard copy for, say, invoices 05201422 and 05201424 but despite her best endeavours could not locate a completed entry on the data base or hard copy for the number in between, namely, 05201423, being aware that there was a pad in existence containing sequential numbers, she would assume that Bruness was in default. It had failed to complete and deliver hard copy concerning the "missing" invoice. She would feel entitled to make a notation on the default schedule - see the first item on the schedule - "05201423: not received by franchisor nor completed in database."

184 The steps reflected in this process are reflected in Exhibit 83. This was an informal Index of Missing Invoices maintained by Ms Lane. One can see from the list the way in which certain invoices were assumed to be missing, and were then marked off as they came to hand.

185 There are, of course, some problems with such a process. It assumes first, that hard copies delivered to the plaintiff's office are being handled and stored efficiently, so that a particular invoice could be located easily; second, that work on the vehicle has been completed and was not subject to an issue concerning work in progress or cancellation.

186 As to the description on the default schedule (such as the fourth invoice 05206254) "not received by franchisor nor entered into database" there is a further complication. In the absence of an initial entry it seems the plaintiff is largely dependent on the assumption that hard copy invoices in the pads are all being used and mostly in sequential order. There was evidence before me, however, that franchisees, including the Midland Branch, often used several pads simultaneously. Under cross-examination, Mr Canham conceded at transcript page 248 that franchisees "don't necessarily use the invoices in the order in the booklet". He conceded at transcript page 251 that a franchisee could have two or three pads running at once. Evidence from Mr and Mrs Coombes suggested that difficulties with a customer or the computer could lead to an invoice being cancelled or discarded.

187 The implications of the process I have just described will become apparent in due course. For the moment, however, it is sufficient to say, in general terms, that the weight to be given to the allegations of default reflected in the default schedule depends to a large degree upon the assumption that the system ran smoothly and that those administering it were efficient and impartial. I must now return to the main thrust of these further observations.

188 Hard copies of the invoices listed in the default schedule were received in evidence as Exhibit 176. Copies are to be found also at the agreed bundle pages 735 to 782. These hard copies comprise the 53 invoices in dispute save for five invoices in respect of which a hard copy does not exist. The missing copies are in respect of invoices 255, 614, 389, 228 and 817.

189 I pause to say that the 48 hard copy invoices comprising Exhibit 176 were tendered by Mr Coombes (at page 900 of the transcript) as part of the defendants' case. These were green copies of the subject invoices, that is to say, office copies held by Bruness at the Midland Branch.

190 A significant feature of the defendants' case at trial was that the plaintiff had destroyed its hard or "yellow" copies of the invoices delivered to it and could therefore only rely upon the word of Mr Canham and Monica Lane as to which yellow copies were actually received. It followed from this, the defendants contended, that the assertions contained in the default schedule that various hard copies were not received was questionable.

191 The defendants' stance can be illustrated by the following passage from the transcript in which Mr Canham was being cross-examined by counsel for the defendants about his affidavits of discovery:

"In paragraph 5 of your affidavit you say:

The plaintiff's copies of the first defendant's repair invoices are no longer in the possession, custody or control of the plaintiff. In accordance with its usual business practices copies of those invoices were destroyed after the expiration of the 12-month warranty period dating from the supply of parts and/or services by the first defendant?

---Yes.

But they were destroyed long after these proceedings were commenced, weren't they? --- They were destroyed once the 12-month period was up, after the warranty, so it would be 18 months.

But why didn't you retain those documents for this action? --- At that time I didn't believe that we required them. They'd been checked off. They'd been ticked off. The ones that we had were there.

But you knew that one of the matters in dispute was what documents - what hard copies of the first defendant's invoices you had received? --- But we hadn't received them. They weren't there anyway.

But if you retained your collation of invoices then you could produce that to the court and say, 'Here's what we've received from the first defendant,' and one could see what was missing? --- Yes, I can see that.

You have destroyed - - - ? --- I can see that now.

Yes. You have destroyed all of that? --- But we destroyed them because they were the ones we received in the process of carrying out our correlation.

So in terms of the issue as to what hard copies of the first defendant's invoices you received as at 26 February 1999 and 15 March 1999, we are left in the position where the court takes yours and/or Monica Lane's word for what you have received? --- Yes."

192 The defendants' challenge to the regularity of the plaintiff's procedures and the reliability of its evidence at trial was pressed further in closing by reference to the evidence of Monica Lane.

193 In her witness statement Ms Lane refers to a list on which ticks represent items not received until after the notice of default was issued on 26 February 1999. Her witness statement is to this effect:

"10. In about March 1999 I was requested to prepare a schedule of all invoices either missing or not entered relating to the Midland franchise at that time.

11. Annexed hereto and marked with the letters 'MML2' is a copy of a schedule that I prepared in respect of missing/not entered invoices relating to the Midland Branch of Auto Masters ('Schedule').

12. Apart from the asterisk or tick I have placed next to each invoice number, it is the same Schedule as that attached to the notice of default of Franchise Agreement dated 26 February 1999 issued to Bruness ('Notice of Default').

13. An asterisk denotes that as at 11 June 1999 (when I swore an affidavit in these proceedings) the status of those invoices remained unchanged from what was stated in the right hand column of the schedule.

14. A tick next to an invoice number denotes that those particular invoices were received or alternatively completed or alternatively entered onto the database after the Notice of Default was issued.

15. The invoices that have a tick next to them in the Schedule were not received by Auto Masters until they were handed to me by Mr Coombes when I attended at Unit 3, 245 Great Eastern Highway, Midland on 17 March 1999 at approximately 6.15pm."

194 Under cross-examination, however, it was established that in some cases the invoices designated with a tick must have been received prior to 17 March 1999. This is evident from the entries on the default schedule itself. For example, invoice 290 is said to have been "received" on the default schedule, but this is one of the invoices which Monica Lane has ticked, and thereby claims to have received on 17 March 1999, after the lease had been terminated.

195 Mrs Coombes disputed the truth and accuracy of the default schedule. She said at par 26 of her witness statement that she had worked through the schedule and made appropriate comments in respect of each invoice. Annexed to her statement was the document DEC 10 which is a copy of the default schedule together with her comments in respect of each invoice as to its date of entry on the data base, date of completion on the data base (if completed), whether or not the invoice is pending, whether the yellow copy had been forwarded to the plaintiff's head office and as to other matters relevant to the status of the invoice. The yellow copy was delivered by placing the same in a courier bag for collection by the plaintiff each Wednesday.

196 Mrs Coombes' evidence concerning the inadequacy of the default schedule was partly based upon an examination of the plaintiff's data base. She created job "print outs" from which she was able to ascertain the relevant dates for various jobs. The information thus obtained was compared to the status details appearing upon the default schedule. According to her, the default schedule was in error, for in many cases the data reflected on the job print out did not agree with the status details on the default schedule.

197 Monica Lane was cross-examined about the relevant job print outs attached to DEC 10 and conceded that many of the assertions appearing on the default schedule must be in error. For example, invoice 332 is described on the schedule to the notice of default as "not entered" as at the date of that notice, namely, 26 February 1999. However, if one goes to item 6 attached to the Denise Coombes' exhibit DEC 10 one can see that the job date for the relevant invoice is 14 November 1998. Monica Lane conceded, in respect of this and various other invoices, that the job must have been entered on the job date with the result that the description "not entered" on the default schedule was in error.

198 The cross-examination seemed to establish by this and other avenues that a considerable number of the 53 disputed invoices on the default schedule were incorrectly described. In respect of the data entry details (ie where the schedule asserts that an entry has not been entered or completed) it was accepted by Mr Canham in cross-examination that at the time of issuing the notice of default on 26 February 1999 the status of 18 of the invoices was incorrectly stated and at the date of termination on 15 March 1999 the status of 27 invoices on the default schedule was incorrectly stated.

199 Perhaps the most telling example of a need to approach the plaintiff's default schedule with care concerns invoice 041. This invoice is not only duplicated on the default schedule (with the result that 54 disputed invoices becomes 53) but when it first appears the "status" of invoice 041 as at 26 February 1999 is said to be "not received by franchisor nor completed on data base." When it next appears in the schedule (a few lines further on) the "status" of 041 is said to be "received by franchisor but not completed on data base". In other words, this description, in regard to the delivery of hard/yellow copy, clearly contradicts the earlier entry.

200 The defendants relied also upon Denise Coombes' evidence concerning the internal audit meeting of 22 January 1999. On that occasion, she said in evidence, she was able to account for all but 3 invoices on the current non-compliance list. Mr Warr and Mr Canham acknowledged that they were satisfied with her explanation. Counsel for the defendants pointed to this evidence as another reason for concluding that the default schedule had to be viewed with caution.

201 I was urged to take account also of a document called the "blue" spreadsheet which was marked as Exhibit 128. This was prepared by the defendants. The date given to each column on the spreadsheet was the date of a non-compliance list faxed or sent to the Midland Branch by Ms Lane commencing essentially on 29 September 1998 and concluding on 15 March 1999. There are 22 columns in all. Blue rectangles on the spreadsheet purport to track the history of invoices brought into contention by the plaintiff's faxes to Bruness in the period preceding termination.

202 The blue spreadsheet was relied upon by the defendants to demonstrate that from time to time invoices appearing upon lists submitted by the plaintiff to the defendants (which were therefore invoices said to be in a state of non-compliance) subsequently disappeared from the plaintiff's list. Mr Canham and Ms Lane confirmed in evidence that when an invoice was taken off the non-compliance list this meant that the plaintiff was satisfied that hard copy had been received and the invoice was properly completed on the database. It was apparent from the blue spreadsheet, however, that from time to time an invoice that had been taken off the non-compliance list was subsequently brought back into play as an allegedly non-complying invoice. Evidence of this kind was used in support of the defendants' case that the default schedule was defective and should be viewed with caution.

203 Defence counsel's submission concerning the blue spreadsheet was illustrated by various examples. The duplicated invoice 041 first appeared on the plaintiff's lists of matters outstanding on 11 February 1999. It was omitted from a non-compliance list dated 25 February 1999 but was subsequently included in two places on the plaintiff's default schedule dated 26 February 1999. This suggested that an invoice which had in fact been accounted for was included in the default schedule in an arbitrary and improper way.

204 Counsel then referred to a cluster of 11 invoices that lay immediately below invoice 041 on the blue spreadsheet. Each invoice in the group, according to the default schedule, was in a state of non-compliance as at 26 February 1999. Counsel went on to say:

"So if you follow down, if you look at all those invoices from 215041 going down to 215067, you will see all those invoices there listed in the list of 17 February 99. All except three are then deleted from the list of 25 February 99. You then have them all being listed again in the default notice schedule. Then in the next line on 3 March 99 they are all deleted, except for three, and then they are all deleted from the list of 12 March 99 except for one but the plaintiff's position is that as at 15 March 99 their status is unchanged from 26 February 99, so in effect they are back on the list, or, on the plaintiff's submission, they should be back on the list as at 15 March 99.

There are a number of other examples I could take your Honour to to illustrate but what one of the things this summary list indicates is that what the plaintiff said as to not having received invoices was incorrect because you have invoices whose status is not received, not completed on the database, they are removed from the list. On the evidence of Mr Canham and Ms Lane that means the plaintiff is satisfied that they have received it and it has been completed on the database. Then it's back on."

205 Put shortly, the considerable number of blue rectangles on the blue spreadsheet suggested that certain invoices on the non-compliance lists prepared by Monica Lane were re-included, after being deleted from an earlier list. This evidence was not specifically rebutted by the plaintiff. I am satisfied that the blue spreadsheet was prepared in a thorough and conscientious way and should be regarded as an accurate representation of how each invoice was dealt with in the lists prepared by Monica Lane during the course of the dispute. I have to say that the blue spreadsheet added to my grave reservations about the reliability of the status details set out on the default schedule.

206 My general observations would not be complete without making some reference to matters of context and credibility. In reviewing the principles concerning burden of proof I mentioned that items of circumstantial evidence should not be considered in isolation. It will therefore be useful to draw together some of the matters referred to in earlier discussion.

207 There is evidence before me that the defendants operated the Midland Branch successfully during the first 12 months of the franchise. The Midland Branch received the Customer Service Award from the plaintiff at the end of 1997. The trading figures (which I will look at in more detail later) show an upward trend. Communications between the plaintiff and the defendants during this period do not reflect adverse criticism of the defendants. The internal audit report of 17 November 1998 spoke well of the Midland Branch.

208 However, it is apparent to me when the evidence is considered as a whole that the relationship between the parties deteriorated markedly from November 1998 onwards and that by late December 1998 the plaintiff by its principals Mr Warr and Mr Canham were determined to find fault in the way in which the Midland Branch was being managed. The change in attitude is evident in the increasing fractious tone of the communications between the parties and in the frequency with which demands for compliance with the manual were directed to the Midland Branch.

209 There are various possible explanations for the changed relationship. It is possible that when Mr Hollands ceased to manage the Midland Branch and day to day control was left in the hands of Mr Coombes and his wife that standards of compliance slipped to such an extent that the plaintiff was left with no option but to complain. It might be said, having regard to the evidence of Mr Lapins, that Mrs Coombes was unable to operate the computer system effectively with the result that increased demands for compliance with the document control requirements were inevitable. It was said on the plaintiff's side that Mr Coombes ceased to be co-operative as a consequence of failing to achieve what he wanted in negotiations with the plaintiff concerning the future of the Midland and Maddington Branches. This meant that he ceased to comply with the procedures prescribed by the Franchise Agreement.

210 I have to say, however, that I am not convinced by explanations of this kind. I am satisfied on the balance of probabilities that the change in the relationship was activated by two significant events, namely, the second defendant's complaint against Mr Hollands that led to the latter's conviction of a criminal offence, much to the annoyance of Mr Warr and Mr Canham, and the second defendant's complaint to the Australian Competition and Consumer Commission that the plaintiff had acted unconscionably. I am satisfied that as a consequence of these matters Mr Warr and Mr Canham became increasingly critical of the Midland Branch until a point was reached on or about 13 January 1999 at which they were looking for ways and means of bringing the franchise to an end. I draw upon various facts and matters in support of this conclusion.

211 I will not traverse the entirety of the evidence bearing upon the adequacy of the plaintiff's computer system. To my mind, the evidence indicates that the system designed by Mr Lapins was generally sound but subject to occasional shortcomings which could not reasonably be characterised as operator error. Ms Lane seemed to accept that from time to time the only solution she could suggest for getting around a problem was to switch off the system.

212 I am satisfied that Mrs Coombes was generally a knowledgeable and competent operator of the system at the Midland Branch. I found her to be a reliable and credible witness. She had an impressive record of working with computer systems in her previous employment. She responded reasonably and conscientiously to the increased flow of faxes and non-compliance lists sent to her by Ms Lane. This accords with my finding that she should be regarded as a reliable witness. Mrs Coombes' evidence was supported by Mr Kirk Gray, a computer programmer and analyst called by the defendants. He described the way in which malfunctions in the plaintiff's system could occur independently of the operator error. He said in evidence that a failure in one of the many systems that support the data base could easily prevent data entry. Mr Gray's evidence was supported also by the evidence of a Bruness employee, Diane Kelly, who was unable to enter data on occasions because the computer system would not receive the entry. She conferred with Monica Lane who could not suggest any means of sorting out the problem and became abrupt.

213 The supportive evidence from these two witnesses added weight to the evidence of Mrs Coombes. I found the defendants' evidence on this point to be compelling. Accordingly, I put to one side defective operation of the computer system as the most likely explanation of the plaintiff's increasingly critical stance.

214 I take account also of the nature of the communications between the parties in the period prior to issue of the notice of default, and of subsequent events.

215 The plaintiff's notice of default dated 24 December 1998 and the letter from the plaintiff's solicitors to the Midland Branch dated 4 February 1999 strongly suggests that the plaintiff was casting around for matters of complaint to be levelled against the defendants. As I have already noted, it is significant that most of the matters referred to were eventually not proceeded with. It is significant also that by his written communications of 13 and 22 January 1999 Mr Canham foreshadowed an intention by the plaintiff to terminate the Franchise Agreement upon the basis of the likely outcome of the forthcoming QAS report. However, when the report proved to be less critical of the Midland Branch than expected, and allowed a period of three months for defects to be remedied, the plaintiff nonetheless proceeded to issue a notice of default. It rejected the defendants' request for mediation and terminated the agreement.

216 It follows from my earlier observations concerning Mrs Coombes' credibility that I give weight to her evidence that at the audit meeting of 22 January 1999 she was able to account for all but three invoices on the relevant non-compliance list and that Mr Warr and Mr Canham were satisfied with her explanation. This incident, which took place a month before issue of the notice of default, reinforces my conclusion that, as a consequence of the acrimony between the parties, by 13 January 1998 the plaintiff was not really interested in explanations and attempts to sort out matters on the non-compliance lists but was looking for an opportunity to bring the Franchise Agreement to an end.

217 I take account also of the sequence of events following the delivery to Mr Canham of the QAS report on 17 February 1999. To that point, because of the fractious mood between the parties, Mr Canham and Mr Warr may have arguably been no more than extremely vigilant in scrutinising the defendants' management of the Midland Branch. However, when it became apparent that the QAS report might not be sufficient to justify the plaintiff's foreshadowed intent to terminate, it would seem to follow that, in compliance with their obligation under the Franchise Agreement to deal with Bruness in absolute good faith, one would expect Mr Warr and Mr Canham to draw back. It was open to them to make a copy of the QAS report available to the defendants and in the manner contemplated by the QAS report allow Bruness further time to rectify the deficiencies identified by the report. As appears from the subsequently issued notice of default, the only matters they could realistically complain of at that stage concerned document control. The 22 January 1999 audit meeting had not produced a decisive outcome in that respect. On any view of the matter, there was no other event signifying a wilful refusal by the defendants to comply with the terms of the Franchise Agreement. The tenor of Mr Coombe's letter dated 17 February 1999 was to the contrary, for it pointed to the QAS report as the appropriate point of reference, and that report contemplated that further time should be allowed for outstanding problems to be remedied.

218 In my view, in the period immediately after delivery of the QAS report, the plaintiff could arguably be said to have ceased dealing with the defendants in absolute good faith in the manner prescribed by the Franchise Agreement. Such a view is reinforced by subsequent events, that is to say, by the plaintiff's refusal to meet the defendants' request for a copy of the QAS report and by the plaintiff's service of the notice of default upon the first defendant in circumstances in which there was a degree of uncertainty as to the reliability of the plaintiff's non-compliance lists and where the plaintiff had previously indicated that it would be guided by the QAS report as to what action was necessary. The refusal to mediate during the period prescribed by the notice is a further indication that the plaintiff was determined to bring the Franchise Agreement to an end.

219 I have used the word "arguably" with some care, for the views I have just expressed are dependent to a large extent upon findings being made about what I have called the central issue at the trial, namely, the question of whether the default schedule was accurate and the related question of whether the defendants' alleged defaults, as set out on the schedule, were sufficient to justify the plaintiff's termination of the contract. In other words, if the plaintiff has a sufficient case that Bruness was in default as alleged then this could be one answer to its equivocation over the QAS report and other matters of complaint. On this view of the matter, it was entitled to proceed in respect of the alleged document control breach, and did so, this being a matter which overshadowed all facets of the ongoing acrimony between the parties.

220 I will turn to this central issue in a moment. Before doing so, however, it is important to make some final observations.

221 The matters I have just referred to have a bearing upon the central issue. The various non-compliance lists and, ultimately, the default schedule were the work of Monica Lane as an administration officer acting under the direction of Mr Warr and Mr Canham. Counsel for the plaintiff suggested that she should be regarded simply as a clerical officer, that is to say, as a neutral party who was committed to gathering accurate data from the Midland Branch, as she did with all the branches.

222 I am not persuaded that she should be viewed in this light. Ms Lane gave her evidence in a hesitant and unconvincing manner. I was left with an impression that at the time of preparing the various non-compliance lists she was well aware that her employer was keen to arrive at conclusions concerning the contentious invoices that were adverse to the Midland Branch. Under cross-examination, as I have already indicated, she was forced to concede that as a consequence of Mrs Coombes' intensive analysis of the job "print outs" underlying the entries on the default schedule many of the entries were wrong. It seemed that she must have been aware of this as a consequence of the exchange of affidavits at the interlocutory stage of the proceedings but she had nonetheless been willing to sign a witness statement for the purpose of trial affirming the accuracy of the contentious entries.

223 It must be remembered also that much of Ms Lane's evidence concerning the alleged non-delivery of hard copies was based on assumptions about the numerical sequence of hard copy pads being used by the Midland Branch. The plaintiff's destruction of its hard copy invoices meant that an avenue by which to test the accuracy of Ms Lane's methods was removed. The blue spreadsheet cast doubt upon the accuracy of her non-compliance lists and the status of the invoices on the default schedule prepared by her.

224 All this is to say that I was left with grave doubts about the credibility of Ms Lane and about the reliability of the information appearing on her non-compliance lists and upon the default schedule.

225 As to Mr Coombes, an attempt was made in the course of cross-examination to portray him as argumentative and dogmatic. I did not see him in this light. He was mindful of his own interests, but not unreasonably so. I found him to be generally an honest and reliable witness in regard to those matters of which he had direct experience. He was less reliable in regard to certain financial and computer matters, but as to those matters he did not purport to be the principal witness for the defendants.

226 Against the background of these general observations, let me now turn to various facets of the alleged document control breach commencing with the delivery issue.

227 The plaintiff's case is that the defendants failed to rectify certain defaults specified in the notice of default dated 26 February 1999. The principal default concerns the alleged document control breaches and, as I noted previously, in regard to the first area of contention within that central issue, the plaintiff is obliged to establish pursuant to cl 16.8 of the Franchise Agreement that it was reasonably of the opinion that Bruness had failed or refused to deliver hard or yellow copy invoices to the plaintiff as franchisor.

228 Of the 54 disputed invoices listed on the default schedule, 9 were marked as being received with the result that the Midland Branch, by implication, was said to be in default in respect of the remaining 45 invoices.

229 In making an appraisal of the delivery issue I must keep in mind the objects of the document control system. The franchisor is entitled to a royalty based upon the value of work performed by the franchisee. The royalty is determined essentially by reference to completed work, although it must be kept in mind that the Franchise Agreement provides for a minimum revenue per year. This means that there is a requirement and an incentive upon the franchisee to convert work in progress into sales because otherwise the franchisee will not reach the minimum.

230 Completed work is measured by information entered on the data base and by delivery of the yellow copy invoice. If the computer system fails the yellow copy will become the crucial point of reference. As the invoice number is determined by the number appearing on the hard copy pads supplied by the franchisor it was open to Ms Lane on behalf of the franchisor, by reference to yellow copies received and entries on the data base, to calculate what invoices seemed to be outstanding. The complicating factor is, however, that it is a matter to be worked out between the franchisee and the customer as to when the work was done so that data previously entered on the data base was finally rounded off and the invoice completed in a form payable by the customer. Mr Canham accepted that this was so and he accepted also that there was no obligation on behalf of the franchisee to send in hard copy until work on the subject vehicle was completed.

231 The plaintiff's case that Bruness was in default in regard to delivery of the 45 contentious invoices rested essentially upon the evidence of Mr Canham and Ms Lane. The former was able to make some general observations about the document control system and the way in which it was administered. The latter was the principal point of reference in regard to the 45 invoices.

232 It emerges from earlier discussion that in compiling the various non-compliance lists and ultimately the default schedule Ms Lane's conclusion as to what invoices were outstanding was based to a considerable degree upon a process of deduction. The nature of the document control process was such that she had no means of determining, other than by way of enquiry to the franchisee, whether an invoice remained outstanding because of some ongoing negotiation between the franchisee and the customer or, as a facet of such negotiations, because of some difficulty with the supply of parts or other work.

233 As I have noted, the plaintiff had deprived itself of the opportunity to reinforce its case at trial as to the delivery issue by its decision to destroy the yellow copy invoices actually delivered to it by the Midland Branch, notwithstanding that proceedings had been commenced. A review of these documents might have removed an element of doubt as to what had actually been delivered.

234 The defendants' case as to the delivery issue was centred upon the DEC 10 document or schedule prepared by Mrs Coombes after termination in which she sought to account for each of the disputed invoices on the default schedule with a view to establishing that the defendants were not in default.

235 Broadly described, the DEC 10 document sought to establish that the Midland Branch was not in default because either work had not been completed or the description of default by the plaintiff was either wrong or could not be relied upon. The assertions contained in the DEC 10 document were underpinned by a number of matters I have already mentioned, namely, Mrs Coombes' account of the 22 January audit meeting at which (on her evidence) Mr Warr and Mr Canham were satisfied by her explanations in regard to all but three of the invoices in dispute at that time, by the blue spreadsheet which cast doubt on the reliability of the plaintiff's non-compliance lists and by a challenge to Ms Lane's credibility, especially in regard to certain invoices which were said to have been delivered after termination.

236 I observed in earlier discussion that the burden of proof to the civil standard lies upon the plaintiff and the burden does not shift. Thus, in the circumstances of the present case, it is not for the defendants to establish that all the assertions in DEC 10 are correct. It is for the plaintiff by the evidence of its principal witnesses and especially Ms Lane to establish on the balance of probabilities that the breaches reflected in the default schedule occurred and that, having regard to the normative framework of the Franchise Agreement that they were sufficient to justify the purported termination of the agreement. The DEC 10 document and the evidence of Mrs Coombes are important factors in weighing up whether the plaintiff's burden has been discharged but, subject to my further observations concerning the counterclaim, the presence of certain errors in the DEC 10 document should not be regarded as decisive, for the burden of proof rests upon the plaintiff.

237 Counsel for the defendants acknowledged in closing that after all the evidence was in certain comparatively minor adjustments were required to the DEC 10 document. These were that as to 423 the status comment should read "work in progress. Refer annexure 1"; as to 763 the comment should read "awaiting costing. Require invoice from supplier. Refer annexure 11"; as to 109 the comment should read "Awaiting costing. Require invoice from supplier. Refer annexure 21"; as to 377 the comment should read "Yellow copy forwarded on 10.03.99". None of these adjustments amounted to an admission of fault. They were consistent with the broad description of DEC 10 I gave a moment ago that each of the invoices was accounted for on the defendants' case in that the relevant obligation had either been attended to (contrary to the plaintiff's assertion in the default schedule) or breach of the obligation had not been demonstrated.

238 It will be apparent from earlier discussion that I regarded Mrs Coombes as an experienced computer operator and as a credible witness in respect of her summary of what she contended to be the true position as reflected in DEC 10. As to various invoices she contended that the yellow copy was in fact forwarded to the plaintiff prior to the date of termination. The relevant invoices were said to be 594, 041, 042, 047, 053, 054, 063, 065, 064, 066, 067, 132, 144, 394, 369 and 377.

239 In arriving at her conclusion concerning the delivery of these invoices Mrs Coombes was able to draw upon the defendants' hard copies and upon an analysis of the job print outs. I found her evidence convincing. On the other hand, for the reasons I have previously given, I was not satisfied on the balance of probabilities that the assertions of Monica Lane that these invoices had not been received prior to termination were correct. The blue spreadsheet and her method of deducing that delivery had not occurred left me with grave doubts that the plaintiff's position was accurately described.

240 It follows that of the 45 invoices in contention on the delivery issue a further 16 can be taken as accounted for on the basis, on my finding, that they were accounted for by delivery.

241 This leaves 29 invoices in contention as to the delivery issue. On the plaintiff's side I am left with a bare assertion that delivery was not effected with reliance being placed principally upon the evidence of Ms Lane. On the defendants' side, the DEC 10 document was relied upon as a sufficient explanation for the undelivered status in each case. On some occasions the defendants indicate that the obligation to deliver has not matured because the subject work is in progress or is awaiting costing. On other occasions it is said that the invoice could not be located but could be filed out of numerical sequence or may have been lost and a new invoice raised.

242 In the course of her evidence Mrs Coombes had explained that as soon as the customer and vehicle details are printed on the triplicate invoice form, that form can be given to the franchisee's mechanic who is to carry out the work. The mechanic writes the details of the work by hand on the invoice as the work is carried out. Once the work is completed, the invoice total has been calculated and the payment method has been ascertained, the computer operator can enter the invoice number (which brings up the customer and vehicle details), proceed to the second screen via the "create new invoice for this vehicle" prompt, and add details as to costing and payment methods. The white copy of the triplicate invoice form is given to the customer, the green copy is retained by the franchisee and the yellow copy is placed in the courier bag for collection by the plaintiff.

243 Mrs Coombes went on the say that there are many reasons why an invoice cannot be completed on the day on which it is entered on the data base including parts may need to be obtained from outside sources, part of the work may be contracted out to other parties, the work itself may take several days, the customer may not return to collect his or her vehicle for several days and the customer may request additional work on his or her vehicle. On occasions, it may take weeks or even months to complete a job. It is only after the invoice is completed that the yellow copy is placed in the courier bag for collection by the plaintiff.

244 Mrs Coombes said that her comments on DEC 10 were directed to the status of each invoice, namely whether each invoice had been completed or was pending. Her comments reflected the "state of play" prior to the date of the plaintiff's purported termination of the Franchise Agreement and of the sub-lease on 15 March 1999.

245 In the course of her evidence she provided some elaboration of her comments. For example, invoice 255 is characterised by the plaintiff as "not received by plaintiff nor entered onto database". Her comment in the DEC 10 document was "Cannot locate but could be filed out of numerical sequence or may have been lost and a new invoice raised". In the case of an invoice of this kind, this meant that it may have been entered and completed on the data base, but it could not now be located on the data base because of the loss of data, and the first defendant's hard copy of the invoice had been filed out of numerical sequence and could not be located in the first defendant's office files. In the case of some other of these invoices, they may have been lost by the first defendant's mechanics while carrying out the work to which the invoice related, in which case a new invoice would have been raised for the work.

246 I note in passing that 255 was one of the five invoices not included within the defendants' bundle of green copies comprising Exhibit 176. I noted earlier that as the plaintiff had disposed of its yellow copies before trial, the plaintiff was unable to rely upon hard copy records to establish that invoice 255 was not delivered.

247 Invoice 609 is characterised in the default schedule as "Received by plaintiff but not entered onto database". The comment in DEC 10 concerning the invoice is "Has been entered and completed, but can no longer be located." Invoices of this kind, which the plaintiff acknowledged in each case as having been received, had been entered and completed on the data base, but could no longer be located on the data base due to loss of data.

248 There was a good deal of controversy at the trial of the action as to whether the defendants' explanations were convincing or sufficient. Counsel for the plaintiff submitted in closing that explanations as to work in progress or computer errors of the kind set out in the DEC 10 document were not reflected in the pre-termination correspondence between the parties. Further, and in any event, having regard to the evidence of the plaintiff's computer expert, Mr Lapins, many of the explanations were implausible. Extensive delays in respect of work in progress were implausible also. He submitted that as to pending work Mrs Coombes was reliant upon information provided by Mr Coombes, and there was no direct evidence before the Court from customers of the Midland Branch that work was pending at the material dates in respect of vehicles the subject of the disputed invoices. The DEC 10 document, which was put together after termination, should be characterised as an unconvincing attempt to explain away the defaults complained of and should be accorded little weight.

249 To my mind, criticisms of this kind were sufficiently answered by the defendants' witnesses. I am satisfied that Mrs Coombes made a genuine and co-operative attempt to deal with the items on the various non-compliance lists submitted to her. There are a number of contemporaneous documents such as the DEC 3 list (returned to the plaintiff by fax within a few days of its receipt on 21 December 1998) and the DEC 6 list (the subject of the audit discussion on 22 January 1999) which bear annotations of "work in progress" and other matters. I am satisfied that these documents were submitted to the plaintiff, for I cannot accept that Mrs Coombes prepared the annotations in question but failed to acquaint Mr Canham and Ms Lane with the fruits of her research. I am satisfied also that, notwithstanding their reservations about the plaintiff's conduct, Mr and Mrs Coombes endeavoured to keep open the lines of communication between the parties.

250 It follows that I was inclined to accept the defendants' account of what took place as articulated by Mrs Coombes. Her evidence and the DEC 10 document showed that the defendants were not in default.

251 Further, I consider that the sub-issue concerning delivery must be resolved by reference to the principles I have enunciated concerning the burden of proof. As to the remaining 29 invoices, I was not persuaded that the relevant invoices were the subject of a non-compliance by the defendants with the manual as alleged by the plaintiff. The plaintiff was simply unable to place before me direct or compelling evidence that there had been a sufficient admission of default or a failure to deliver in circumstances amounting to default. This observation brings me to some further documents concerning the delivery issue.

252 In his closing address, counsel for the plaintiff placed a considerable emphasis upon 13 yellow copy invoices that were found on Mr Coombes' file and formed part of the 53 invoices listed on the default schedule (Exhibit 185). The relevant numbers are 495, 254, 332, 090, 368, 763, 820, 001, 850, 026, 032, 131 and 132. These documents were said to provide "incontrovertible evidence" of the defendants' failure to deliver hard copy to the franchisor as prescribed by the Franchise Agreement.

253 The 13 yellow copy invoices certainly establish that there was no act of physical delivery. However, it is apparent from DEC 10 that the stance of the defendants in regard to these invoices was that the obligation to deliver had not matured. These invoices were in the pending category as they were subject to work in progress and related matters. The physical appearance of the invoices, and the fact that Bruness kept them, is consistent with such a claim.

254 In each case, the invoice has an opening date, but as the items of work are not dated, the document is equivocal as to the manner in which the work proceeded. In some cases, however, when a comparison is made between the yellow copy in Exhibit 185 and the green copy in Exhibit 176 the different colours of ink suggest that the costing of certain items was added subsequently. Invoice 254 is one example.

255 Put shortly, the 13 yellow copy invoices do not directly refute the defendants' contention that the obligation to deliver had not matured, and to some extent they assist the defendants' case. They certainly demonstrate the difficulties confronting the plaintiff in regard to the work in progress issue. This brings me to another document.

256 An evidentiary issue arose concerning the index of missing invoices maintained by Ms Lane. According to the defendants, this index tended to refute the plaintiff's case that certain invoices on the default schedule had allegedly not been received.

257 I have already noted that it was Ms Lane's practice to tabulate on this index sheet (Exhibit 83) the invoices that were thought to be outstanding, and then to put a line through the number when the invoice was received. Significantly, some of the invoices described on the default schedule as "not received" are marked off as received on the Exhibit 83 Index.

258 A few examples will suffice to demonstrate the way in which the Exhibit 83 weighs against the plaintiff. According to the default schedule, invoices 05215053 and 05215054 were "not received" as at 26 February 1999. In both cases, the defendants' DEC 10 describes them as "yellow copy forwarded 24.02.99", that is to say, prior to the default date. On the Exhibit 83 Index they are marked off by Ms Lane as having been received. One cannot be certain as to the precise date of reception but it appears to be prior to the date of termination.

259 A similar situation applies in respect of invoice 05215064. It is described as "not received" on the default schedule but marked off as received on the Exhibit 83 Index. Curiously, the nearby invoices 0215065, 0215066 and 0215067 which are also described as "not received" on the default schedule do not appear at all in the "missing" column of the Exhibit 83 Index. They have never been listed as missing. The defendants' DEC 10 document says "yellow copy forwarded 24.2.99".

260 The Exhibit 83 Index is not a conclusive piece of evidence but it tends to refute the plaintiff's case concerning the delivery issue and to weigh in favour of the defendants' case.

261 For the reasons I have given in the course of making some general observations about the case, including observations as to context and credibility, there were various facts and matters that weighed against a finding in favour of the plaintiff that the burden of proof had been discharged in regard to the delivery issue.

262 By the time the default schedule was prepared, the plaintiff, on my finding, was determined to bring the Franchise Agreement to an end, notwithstanding that the QAS report had allowed a further period of grace to the defendants. In circumstances where there was a degree of ambiguity concerning the status of certain invoices this finding weighs against the plaintiff's stance in regard to the resolution of factual issues as to whether invoices had been delivered and whether work in progress had been completed.

263 Further, and perhaps more importantly, I am not satisfied in regard to the delivery issue that the factual basis relied upon by the plaintiff was sufficient to justify a termination of the contract as a matter of law. The plaintiff's witnesses were forced to concede that there were various errors in the default schedule. It follows from my earlier observations and findings that there was a live issue between the parties as to whether the Midland Branch breach was in error as to 29 invoices. As to those invoices the plaintiff did not have access to direct evidence capable of refuting the defendants' stance, as reflected in DEC 10. The plaintiff had disposed of its hard copies of the invoices. Certain contemporary records such as Monica Lane's tick list and the Exhibit 83 Missing Invoices Index weighed against the plaintiff.

264 There was an issue between the parties as to whether a satisfactory explanation for the non-delivery had been provided. The plaintiff was not able to provide evidence from witnesses directly rebutting the explanations provided by the defendants as to work and progress and other matters. It had to rely upon the evidence of Mr Lapins and Ms Lane concerning the operation of the data base system and related inferences. Ms Lane's monitoring of the system was complicated by the practice that was common to all branches of using various hard copy invoice pads simultaneously, and without any requirement that all invoices in the pad be used. This, plus the work in progress issue, meant that invoices were bound to be entered, completed and delivered out of sequence. The blue spreadsheet suggests that the monitoring undertaken by Ms Lane and Mr Canham was not reliable, and may have been influenced by their desire to find fault with the Midland Branch.

265 Against this background, there was a significant doubt as to whether a default of the kind relied upon in the notice of default and notice of termination had actually occurred. I am not satisfied on the balance of probabilities that Bruness was in breach of the Franchise Agreement as alleged or that the breaches relied upon by the plaintiff concerning the delivery issue amounted to a repudiation of the agreement.

266 Further, the matter in issue arose within a contractual framework whereby the plaintiff was obliged to deal with the franchisee in absolute good faith and to be reasonably of the opinion that a default had occurred. The matter in issue arose also within a context in which the amount of royalty in issue was small and the QAS report had allowed a breathing space of three months to the defendant. The franchisee had kept open the lines of communication. It was open to the franchisor to mediate but it refused to do so.

267 The contractual provisions weigh against the notion that the franchisor was entitled to seize upon a default of any kind as an avenue to bring the contract to an end. The 4 February letter containing the four point summary of the plaintiff's attitude to minor breaches reflected this reality. Accordingly, even if it be held, contrary to my earlier finding, and with the benefit of hindsight, that, notwithstanding the explanations provided in DEC 10, the defendants were in default as to the delivery of 29 invoices, I do not consider that the plaintiff can be said to have been reasonably of the opinion that the franchisee was in default at the time the notice of default was issued.

268 Further, I do not consider that the plaintiff was justified in purporting to terminate the Franchise Agreement on that ground. It follows from earlier discussion that the entitlement of a party to the Franchise Agreement to complain of breaches was affected by the good faith term. The plaintiff was not at liberty to act unreasonably or capriciously in determining the agreement. To my mind, in the circumstances I have described, it cannot be said that the plaintiff acted reasonably and in compliance with the good faith term in seeking to terminate the contract by reliance upon the alleged delivery breaches issue. Nor do I consider that any of the actions of Bruness prior to issue of the notice of default or notice of termination amounted to repudiation of the Franchise Agreement as alleged by the plaintiff in par 9 of the claim.

269 Much of what I have said under the previous heading flows into the conclusions I have come to concerning the data entry issue.

270 The plaintiff is obliged to satisfy the Court on the balance of probabilities that the plaintiff's assertions on the default schedule as to data not being entered or not being completed on the data base were correct as a matter of fact and justified a termination of the Franchise Agreement as a matter of law. Again, the contest is essentially between the evidence of Mr Canham and Ms Lane on the plaintiff's side and the position depicted in the DEC 10 document by Mrs Coombes. The burden of proof lies upon the plaintiff.

271 I remind myself that while under cross-examination Ms Lane conceded that in the light of the analysis made by Mrs Coombes which was derived from the job print outs many of the assertions on the default schedule were wrong. Mr Canham was cross-examined at length in a similar way and made admissions to the same effect. This series of admissions and the analysis reflected on the blue spreadsheet, to my mind, raised grave doubts concerning the reliability of the default schedule in regard to the data entry issue, both as to entry and completion of data.

272 The admissions made by Mr Canham added to my doubts about his credibility, bearing in mind that at pars 3.20 to 3.23 of his responsive statement he said that he had personally checked the accuracy of statements made in the default schedule and notice of termination by reference to information on the data base. He confirmed these statements in the witness box while giving evidence-in-chief.

273 The nature of my concerns emerge from the following passages in the transcript at pages 210 to 214. Counsel for Bruness had taken Mr Canham to a number of invoices on the default schedule and obtained admissions that the status attributed to them must be incorrect having regard to the print outs brought to light subsequently. Counsel rounded off this part of the cross-examination as follows:

"So just in terms of the state of play as at 26 February 1999, and from what we can see on the plaintiff's database, I make it 17 invoices which are incorrect on the schedule. We will go through them just to make sure there's no mistake: 05206254, 05207290, 05207332, 05208594, 05027376, 05213850, 05215047, 05215053, 05215054, 05215056, 05215063, 05215065, 05215066, 05215144, 05034385, 05034394 and 05032369. All those are incorrect as at 26 February 1999, aren't they? --- We've just said that, yes.

Yes, all right. Your evidence also was that you at termination again checked through this and satisfied yourself as to the correctness of the schedule? --- Yes."

274 Some further exchanges established that, contrary to what Mr Canham had said in his evidence-in-chief, the status of certain invoices changed between the 26 February 1999 (the notice of default) and 15 March 1999 (the notice of termination). The cross-examiner then moved to the general question of the reliability of evidence given by Mr Canham in support of the plaintiff's case:

"...let me just be clear on this. There are 18 invoices which are incorrectly recorded on the schedule as at 26 February 1999. What I put to you is you couldn't possibly have checked this schedule against the database if there were so many mistakes on the schedule as that? --- There's only one reply and that is that they were missing and not received and they may have been changed on the database but when I checked them, I was happy to say that they were not received and not entered on the database.

Mr Canham, what I suggest to you is you were happy to say whatever would result in termination of the first defendant's franchise? --- I'm not happy now at all.

And then again you say at termination you reviewed it to ascertain the status had not changed. What you said was in paragraph 3.23 of your responsive statement:

'As at 15 March 1999 when the notice of termination was issued, I again reviewed the status of the outstanding invoices referred to in the schedule and was satisfied that there had not been a satisfactory response to these queries.'

Your evidence was, and has always been, that the status of those invoices remained unchanged between the date of issue of the notice of default and the date of termination. Isn't that the case? --- That's the case.

Yes. That's what you said in the affidavit which you swore in support of the injunction and that's what you said in your first statement for this trial and your counsel has said that that was the position in his opening address, that there was no change in the status of these invoices until after termination? --- Yes.

In fact, if we look through this schedule we see as at the date of termination there are 27 invoices, half of the entire invoices in the schedule, whose status is incorrectly described as at the date of termination. I put it to you, you couldn't possibly have physically checked the schedule against the database because if you had you would have noticed all these mistakes? --- I can see, with these schedules that you have given me and these readouts, that that's the case, but I say I checked the statement at the time.

You also say that you checked the schedule in terms of invoices received and not received? --- Yes."

275 Elsewhere in the cross-examination, counsel for the defendants was able to establish that in the injunction proceedings shortly after termination, Mr Canham had been prepared to affirm by affidavit that he had checked the default schedule, and found it correct, even though, by then, he had been put on notice by an affidavit from Mrs Coombes that many of the entries were clearly incorrect.

276 Let me now draw this together. Errors in the default schedule, as shown by the computer print outs from the plaintiff's data base in respect of data entry as at the date of issue of the default notice, namely, 26 February 1999 were exposed in regard to 18 invoices. The relevant invoice numbers are 254, 290, 332, 594, 376, 850, 047, 053, 054, 056, 063, 065, 066, 067, 144, 385, 394 and 369.

277 Errors in the default schedule, as shown by computer print outs from the plaintiff's data base, in respect of data entry as at the termination date, namely, 15 March 1999, were exposed in respect to 27 invoices. The relevant invoices are 254, 290, 332, 594, 376, 781, 820, 850, 041, 042, 047, 053, 054, 056, 059, 063, 065, 064, 066, 067, 132, 144, 385, 394, 369 and 377.

278 It follows from this analysis that there was a significant degree of controversy at the trial concerning those invoices on the default schedule in respect of which the plaintiff's witnesses were not prepared to acknowledge that they were in error. I will call these the "contentious invoices". The plaintiff sought to persuade the Court that the status of these invoices was correctly described on the default schedule with the result that Bruness was in default as at 26 February 1999, and remained in default as at 15 March 1999.

279 The plaintiff relied heavily upon the evidence of Ms Lane that she had prepared her non-compliance lists including the default schedule in a careful and conscientious manner. The defendant relied upon the evidence of Mr and Mrs Coombes and the comments as to status depicted on the DEC 10 document. As I have already indicated, many of these comments were directed to work in progress or other circumstances that might serve to explain as to why data had not been entered or completed. Again, the amount of royalty involved is a small amount.

280 It will now be useful to take a closer look at certain evidentiary issues concerning the invoices which are thought to be especially contentious in respect of the data entry issue.

281 I have to say, as appears from my earlier observations, that if the only evidence before me concerning these invoices was the evidence adduced by the plaintiff then it is questionable whether I would be satisfied upon the balance of probabilities that Bruness was in default in regard to the data entry issues depicted on the notice of default. For the reasons I have previously given, I have grave reservations about the credibility of the plaintiff's principal witnesses concerning this and other matters.

282 However, as to this aspect of the matter, the issue between the parties at trial was essentially defined by a comparison between the allegations made by the plaintiff in respect of the contentious invoices as reflected in the default schedule and the explanations provided by Bruness in the DEC 10 exhibit as to why it should be found that Bruness was not in a state of default. A document corresponding to DEC 10 formed part of the statement of defence, although some amendments to it were made during the course of the trial.

283 Some of the evidence given by Mr and Mrs Coombes seemed to accept that data entry had not been completed in regard to certain of the invoices, although reasons are provided as to why this should not be viewed as a default. Thus, to a certain extent, the plaintiff sought to fortify its case against the defendants by reliance upon these statements as being in the nature of admissions, at least to the extent that data entry had not been completed.

284 It would be prolix and repetitive to look at each of the contentious invoices in turn. The most convenient course is to identify various areas of disputation and to deal with the issues accordingly.

285 The defendants assert in DEC 10 in regard to a number of invoices that they cannot locate the invoice. On some occasions it is said that these invoices could be filed out of numerical sequence or may have been lost and new invoices raised.

286 The defendants' stance in regard to this issue is reflected in par 8(a) and par 8(b) of their statement of defence which read as follows:

"(a) the First Defendant entered invoices on the computer data base on a daily basis whenever the First Defendant's computer would permit that to be done;

(b) the First Defendant's computer frequently malfunctioned, in consequence whereof invoices could not be entered or completed on the computer data base and, in addition, some invoices which had been entered or completed on the computer data base could not subsequently be located;"

287 Mrs Coombes gave evidence at the trial to this effect:

"27. Some of my comments in the "Status" column may require some elaboration and, accordingly, I provide the following elaborations of my comments:

(a) 'Cannot locate but could be filed out of numerical sequence or may have been lost and a new invoice raised'

In the case of some of these invoices, they may have been entered and completed on the database, but they cannot now be located on the database because of the loss of data, and the first Defendant's hard copy of the invoice has been filed out of numerical sequence and cannot be located in the first Defendant's office files. In the case of some others of these invoices, they may have been lost by the first Defendant's mechanics while carrying out the work to which the invoice relates, in which case a new invoice would have been raised for the work.

(b) 'Has been entered and completed but can no longer be located'

These invoices, which the Plaintiff has acknowledged in each case as having been received, have been entered and completed on the database, but can no longer be located on the database due to loss of data."

288 It follows from this that reference to "cannot locate" on the defendants' DEC 10 document is a reference to the defendants being unable to locate the invoice on the data base.

289 The plaintiff submitted in closing that the explanation that the invoice could not be located on the computer was never given to the plaintiff prior to termination of the franchise. This was an explanation raised for the first time during the injunction proceedings.

290 In earlier discussion concerning the delivery issue, I noted that the plaintiff's monitoring of the invoice system was complicated by the fact that the practice was for hard copy invoice pads to be used simultaneously by franchisees and without a strict requirement that all invoices in the pad (and thus all sequential numbers) be used. In the course of her evidence, while addressing the location issue, Mrs Coombes doubted that Bruness ever utilised these invoices, and said that these so-called invoices may simply have been passed over in a particular pad. That is why an invoice referable to a sequential invoice number could not be located. The plaintiff was unable to rebut this assertion by direct evidence, and had to rely upon countervailing inferences referable to the overall integrity of its system. However, as I have already noted, the blue spreadsheet and other aspects of the evidence at trial cast doubt upon the reliability of the system.

291 Invoices in this category include 255, 614, 389, 228 and 817. To my mind, it follows from the observations I have just made that the position concerning these invoices is ambiguous. I harbour doubts about the reliability of the plaintiff's system and about the reliability of its witnesses. I am generally of the view that Mrs Coombes should be regarded as a trustworthy witness. That being so, for the reasons I have previously given, the plaintiff has not managed to persuade me on the balance of probabilities that the defendants are in default.

292 The view I have just expressed applies also to invoices such as 103 and 020 which the defendants by DEC 10 seem to concede were entered on the system but could not be located. It is apparent from the way the system worked in practice that a new invoice might be raised in respect of work on a particular vehicle because of difficulties with the computer system or with the nature of the instructions received.

293 As to invoice 609, the plaintiff contends that this was received by the franchisor but not entered into data base. The defendants respond that the invoice was entered on 2 December 1998 and completed by 26 February 1999 but can no longer be located on the computer. They contend that it was filed out of numerical sequence or may have been lost and a new invoice raised. I characterise this as another instance of the plaintiff's inability to adduce sufficient evidence of default. It is material to note as to this and the following invoices there can be no question of wilful disobedience by Bruness, for an attempt was made to place them on the system.

294 As to invoice 365, the plaintiff contends that the invoice has not been entered on the database. The defendants contend that they entered it on 22 November 1998 and completed it by 26 February 1999 but it can no longer be located. Again, this gives rise to an ambiguity, with the result that the plaintiff has not established its case.

295 As to invoice 195, the plaintiff contents that the invoice has not been completed on the database. The defendants respond that they entered it on 5 January 1999 but as at the date of termination work was still in progress. They say it cannot be located. I characterise this as another instance of the plaintiff's inability to adduce sufficient evidence of default.

296 As to invoice 752, the plaintiff asserts the invoice was not entered onto the database. The defendants respond that the invoice was entered on 14 January 1999 and completed by 26 February 1999. They say it cannot be located but could be filed out of numerical sequence or may have been lost and a new invoice raised. I characterise this as an instance of the plaintiff's inability to adduce sufficient evidence of default.

297 As to invoice 009, the plaintiff contends the invoice was not entered on the database. The defendants respond that the invoice was entered on 5 February 1999 and completed by 26 February 1999 but they can no longer locate the invoice because it could be filed out of numerical sequence or may have been lost and a new invoice raised. I characterise this as another instance of the plaintiff's inability to adduce sufficient evidence.

298 As I have previously indicated, a number of the invoices on the default schedule are subject to a dispute about work in progress. I have already made some observations about this matter. However, as I have chosen to deal with various issues discretely, a degree of repetition is necessary in dealing with those instances in which Bruness seeks to excuse an alleged data entry breach on the grounds that the job to which the invoice relates was awaiting costing or was subject to work in progress.

299 I remind myself that the defendants' stance concerning this issue is defined by par 8(c) to par 8(f) of the statement of defence which read as follows:

"(c) the obligation on the part of the First Defendant to complete invoices on the data base and submit those invoices to the Plaintiff only arose when the work in respect of those invoices had been completed and the labour and parts costed by the First Defendant;

(d) as soon as the work in respect of any invoice had been completed and the labour and parts costed, the First Defendant completed the invoice on the data base, provided the First Defendant's computer permitted the First Defendant to do so, and then submitted that invoice to the Plaintiff by placing the yellow copy of that invoice in the courier bag for collection by the Plaintiff each Wednesday;

(e) the costing of some invoices involved labour and/or parts from sub-contractors and, accordingly, the costing of such invoices could not be completed until the First Defendant had received invoices from those sub-contractors;

(f) on occasions, the First Defendant's mechanics would lose or damage an invoice before the work relating to that invoice had been completed, in which case the First Defendant would raise another invoice for that work;"

300 The invoices the subject of the work in progress issue can be identified by comparing the default schedule and the defendants' DEC 10 document. At the centre of the controversy were the 13 yellow copy invoices I mentioned earlier.

301 Mr Coombes gave evidence to the effect that delay in completing the invoice in respect to this category of invoices could be due to an outstanding insurance claim, waiting for parts to be supplied, or waiting for further instructions from the client. The relevant invoice might not be completed on the database but this did not mean Bruness was in default. It was not until the work on the vehicle was completed that the invoice could be completed on the data base.

302 The plaintiff submitted in closing in regard to invoices of this kind that no evidence was led by the defendants as to the alleged work in progress. In particular, the owner of the vehicles were not called, nor was any mechanic or sub-contractor called in relation to the work in progress. It was said further that this explanation was never offered to the plaintiff prior to termination of the franchise.

303 I consider that this issue must also be resolved by reference to the principles concerning burden of proof. The plaintiff put up some evidence that Bruness had not completed the invoice. By implication, I am asked to draw an inference that the defendants are in default. However, here is a case where the defendants have offered some evidence to indicate that because of work in progress the non-completion in regard to this invoice does not amount to a default.

304 To my mind, the evidence of Mr Coombes and his wife as to the way in which the requirements of customers were attended to, in regard to work in progress, tends to establish that they were not in default. The plaintiff tested the evidence by cross-examination, but it was not able to rebut the evidence, for Mr and Mrs Coombes continued to affirm that DEC 10, subject to some comparatively minor adjustments, provided an accurate account of the work in progress invoices. As I observed in earlier discussion, the 13 yellow copy invoices did not directly refute the defendants' case, and to some extent they supported the defendants' position. The plaintiff has therefore not discharged the burden of proof upon it to show that Bruness was in default.

305 My reasoning in regard to the work in progress issue can be tested by looking in more detail at the first invoice on the default schedule, invoice 423. The green copy of this invoice forms part of the bundle of green copy invoices comprising Exhibit 176. I am therefore in a position to check the evidence given by Mr Coombes against the invoice itself.

306 Mr Coombes said in evidence that invoice 423 relates to a vehicle owned by a Mrs Andrews. The initial instructions were received in mid-November 1998 with the result that the relevant invoice was entered on the data base as at 16 November 1998. He said further that ongoing work was done. Work would be done on the car, Mrs Andrews would take it away, and then bring it back for some further work to be done. This meant that the job was correctly characterised as at the date of the notices of default and termination as work in progress because work on the vehicle had not been completed. He therefore denied that the characterisation of invoice 423 on the default schedule as "Not received by franchisor nor completed in data base" could be viewed as a default. The invoice had not been completed in the data base but this was because work on the vehicle had not been completed. He denied a suggestion put to him in cross-examination that it was an unlikely scenario that an invoice entered on the data base in mid-November 1998 would still be outstanding as at mid-March 1999.

307 It is true that Mrs Andrews was not called to give evidence confirming Mr Coombes' account of the transaction, and thus any implied assertions by this customer as to the nature of her instructions concerning the vehicle had to be excluded as hearsay. However, counsel for both parties accepted that Mr Coombes was at liberty, as the supervisor of work at the Midland Branch, to assert that work being done on behalf of the customer had not been completed with the result that the invoice on the data base was not completed.

308 The Court was therefore left in the position that it had some evidence before it as to why invoice 423 could not be regarded as a failure to comply with the Franchise Agreement, notwithstanding that the invoice had not been completed on the data base. The green copy of the invoice confirmed that there was a client called Andrews and that a considerable amount of work was done on her vehicle involving the provision of parts that had to be separately costed.

309 The plaintiff tested this evidence by cross-examination but was not able to offer any direct evidence rebutting the defendants' case concerning the invoice in question. In essence, the plaintiff relied upon the evidence of Monica Lane that the characterisation of invoice 423 on the default schedule was correct and upon the defendants acknowledgement in DEC 10 that the invoice had not been completed in the data base. Thus, it was said, it was open to the Court to infer from its knowledge of the system that Bruness was in default. However, balanced against this, was the evidence of Mr Coombes and his wife concerning the vehicle in question and the work in progress characterisation.

310 Against this background, and having regard to the reservations I have expressed earlier concerning the administration of the plaintiff's computer system, I am not satisfied on the balance of probabilities that Bruness was in default in respect of invoice 423. I was left in much the same position in regard to various work in progress invoices forming part of the group of contentious invoices. For example, invoices 090 and 397 related to work in progress concerning the vehicle of Coralee Willcocks. There were many other examples. Corroboration that work proceeded progressively is to be found in the bundle of green copy invoices which were kept by Bruness and received into evidence as Exhibit 176.

311 Put shortly, then, the burden of proof lies upon the plaintiff to establish that in respect of the various invoices on the default schedule the franchisee was in default. It appears from the evidence of Mr Coombes that prior to his falling out with the plaintiff it was always regarded as a sufficient explanation for non-completion of an invoice on the data base that the vehicle in question was subject to work in progress. The plaintiff was not able to establish on the balance of probabilities in respect of the invoices in this category that the explanation for non-completion on the data base set out in DEC 10 was not sufficient. For ease of reference, I will call this the "work in progress ruling".

312 As to invoice 368, the plaintiff contends that the invoice was not entered on the database. The defendants assert that the invoice was entered on 18 November 1998 but was the subject of work in progress. The work in progress ruling applies. The same response applies to invoice 699.

313 As to invoice 763, the plaintiff says the invoice has not been completed on the database. The defendants responded that the invoice was entered on 8 January 1999 but was not completed because the vehicle, the subject of the invoice, was awaiting costing and they required an invoice from a sub-contractor. The work in progress ruling applies.

314 As to invoice 001, the plaintiff says it was not completed on the database. The defendants respond that the invoice was entered on 10 February 1999 but was not completed as at the date of termination because the vehicle, the subject of the invoice required additional work. I repeat my earlier finding in regard to such an issue.

315 As to invoices 026, 032, 109 and 131 the plaintiff complains of non-completion and the defendant in each case raised a work in progress issue. The work in progress ruling applies.

316 Certain of the invoices are subject to a dispute about cancellation. The stance of the defendants was that invoices had to be cancelled at times when, for one reason or another, the invoice was defective or a charge could not be legitimately raised for work.

317 For example, Mr Coombes referred to invoice 820 at transcript 1124 and the entry "to be cancelled". Under cross-examination, he said specifically that this invoice related to the incident for which Hollands was convicted and that he [Coombes] characterised the invoice as "to be cancelled" as the particular invoice was in the police file at that stage. The plaintiff was unable to offer any evidence in rebuttal and I therefore could not be satisfied that Bruness was in default. The explanation provided by Mr Coombes, which was based on his own knowledge, appeared to be a sufficient explanation as to why the invoice should not be characterised as a default, notwithstanding its description on the default schedule, as "received by franchisor but not entered into the data base."

318 As to invoices 364 and 357, the plaintiff says these invoices were not completed on the database. The defendants respond that the invoices were entered on 5 and 10 February 1999 respectively and say that the invoices were to be cancelled.

319 The evidence of Mr and Mrs Coombes was supported by their expert Mr Gray who said that cancellations occurred in other branches. In the absence of compelling evidence that it was not to be cancelled I am not satisfied that this should be characterised as a default.

320 Mrs Coombes answered the alleged default in respect of invoice 132 with the assertion that it was entered out of order. The computer print out shows it as being entered on 13 March 1999. It was essentially a pending invoice at the date of termination.

321 The plaintiff alleged that invoice 414 was not completed on the data base. According to DEC 10 this was entered on 9 October 1998 but was regarded by the defendants as a "run-time error (unable to complete processing)". The evidence of Mrs Coombes concerning this invoice was that she was unable to process this invoice on the first Midland computer. She rang up Monica Lane and got the advice to turn off the computer and leave it for five minutes or so. This did not work, and she could not cancel the invoice. Her further evidence concerning this evidence was as follows:

"There was nothing I could do with the invoice. I had the run-time error. There was a lot of glitches in our computer. I think that that was the last invoice I could put into the computer. Nigel ended up coming out, I believe, within 2 days to see what was wrong with the computer. Within 2 days after that, I believe it was the 16th, they came out and they took the computer away. I could not cancel the invoice. I couldn't do a thing with it."

322 I have referred previously to the dispute between the parties and their experts as to whether the defendants' complaints about the computer system were justified or due to operator error. In dealing with this invoice, I will not cover the same ground. I am prepared to accept Mrs Coombe's account of what took place.

323 It seems that on any view of the matter the issue concerning invoice 414 was resolved by direct negotiation towards the end of 1998 when the plaintiff agreed to replace the Midland Branch's first computer. I am therefore not persuaded that the plaintiff remained at liberty to rely on an alleged default in respect of this invoice as at 26 February 1999 when the problem had essentially been resolved by direct negotiation at an earlier stage.

324 When one looks at the situation concerning the contentious invoices in a summary form, it seems that a number of invoices cannot be located by the defendants on the computer. There is a conflict between various witnesses as to whether this could be so. However, for the reasons previously given, I am left with reservations about the plaintiff's evidence bearing upon this point and am not persuaded to the plaintiff's point of view on the balance of probabilities. I am left in a state of doubt as to what the true position is concerning this and the so-called run time errors and it therefore follows that I am not in a position to make a finding adverse to the defendants.

325 There are a number of invoices where reference is made to awaiting costing, work in progress or to cancellation. It follows from earlier discussion concerning the burden of proof that lies upon the plaintiff that I am not persuaded that these contentious invoices should be characterised as instances of default by the defendants.

326 Having looked at the contentious invoices in more detail, and having made a comparison between the default schedule and the DEC 10 document relied upon by the defendants as supplemented by evidence given by Mr Coombes and his wife at the trial, I must now stand back from the matters of detail and draw together my findings in a more general form.

327 For the reasons previously given, I am not satisfied that the factual assertions on the plaintiff's default schedule as to entry or completion of data are correct. I am not satisfied that Ms Lane compiled her lists in a careful and conscientious way. The blue spreadsheet is a significant indication that there was a somewhat arbitrary quality to the way in which the non-compliance lists were prepared and submitted to the defendants, and this bears upon my assessment of the weight to be attached to the default schedule.

328 Further, and in any event, having regard to the provisions of the Franchise Agreement I am not satisfied that the plaintiff can be said to have been reasonable in the formation of its opinion that a default had occurred. There was obviously a degree of ambiguity in the circumstances as to the state of alleged non-compliance. This ambiguity had been the subject of the 22 January audit and from that point on, in view of the finding I have made in favour of Mrs Coombes' version of the meeting, the plaintiff was on notice that a degree of doubt surrounded the accuracy of its lists. Accordingly, in my view, the plaintiff cannot be said to have formed an opinion reasonably about the state of default if, in the circumstances, it simply proceeded to issue the default schedule without prior reference to the defendants.

329 A question then arises as to whether the alleged delivery breach and the alleged data breach, when considered in combination, were sufficient to justify termination, or whether they could be characterised as a repudiation of the agreement by the defendants as alleged. It follows from my findings that the plaintiff was not able to prove the defaults relied upon to the civil standard, that this question cannot be resolved in the plaintiff's favour.

330 In addition, and in any event, I am not persuaded that proof of the plaintiff's case as to the 29 contentious invoices under the delivery issue and 27 contentious invoices under the data entry issue would be sufficient to justify a termination of the contract. The royalty amount referable to the contentious invoices was small, if not trifling. The invoices in issue were a tiny fraction of the 3,700 invoices created during the defendants' period as a franchisee at Midland.

331 Further, the defendants' conduct, on my findings, and according to the QAS report, did not represent an immediate threat to the integrity of the system. Compliance with the good faith term required that a copy of the QAS report be provided to the franchisee before any attempt was made to terminate the contract and that an attempt be made to mediate the dispute when notice of dispute was given. I have found that the plaintiff was not prepared to act in that manner. The QAS report was not delivered and, after receiving the notice of dispute, the plaintiff did not defer or withdraw its notice of termination. In a situation of considerable ambiguity as to the status of the invoices listed on its default schedule, it purported to insist upon a strict enforcement of its rights.

332 On this view of the matter, the plaintiff could not be said to be acting in accordance with its obligations to deal with the franchisee in good faith and not to issue a notice of default unless it was reasonably of the opinion that the franchisee was not complying with the requirements of the system. On a proper interpretation of the Franchise Agreement, and giving due weight to the good faith term, the breaches in respect of the contentious invoices were not sufficient to justify a termination of the contract, or to be regarded as a repudiation of the Franchise Agreement by Bruness.

333 The findings I have made concerning the alleged delivery breach and the alleged data breach are probably sufficient to lead to a dismissal of the plaintiff's claim. However, for the sake of completeness, I feel obliged to deal briefly with the audit issue.

334 Counsel for the plaintiff conceded in the course of debate at trial that the issue concerning the audit fee of $200 would not be sufficient of itself to justify termination. Mr Canham appeared to concede under cross-examination that the deletion of the claim for $200 for the sales for the monthly statement for January 1999 was as a result of Mr Coombes paying the $200 into a trust account and requesting what he referred to as an arbitration. The weight of the evidence suggests that from that time forward the matter effectively ceased to be an issue in any real sense although there was reference to it in the notice of default. Further, and in any event, the work the subject of the audit fee was work done by Ms Lane as an employee of the plaintiff during her normal hours.

335 Against this background, I am not persuaded that non-payment of the audit fee can be characterised as a breach of the Franchise Agreement or that a refusal to attend to it was sufficient to justify termination or be characterised as a repudiation of the agreement. Mr Canham accepted under cross-examination that if the audit fee was the only matter in issue the parties would not be in dispute.

336 The plaintiff in these proceedings sought relief by way of injunction and damages subject to making out a case that it was entitled to terminate the contract or, alternatively, that Bruness had acted in breach of the contract by improperly continuing to occupy the premises and to trade under the Auto Masters insignia. In the event, I have held that the plaintiff has failed to establish its case for relief.

337 Against the background of these findings, I must now turn briefly to the position concerning the sub-lease.

338 In essence, the plaintiff said in pars 19 to 31 of the statement of claim that the breaches relied upon in respect of the Franchise Agreement amounted to a breach of the sub-lease agreement. The plaintiff terminated the sub-lease on 15 March 1999 with the result that Bruness has been in wrongful possession of the premises since that time. The plaintiff is said to have been deprived of the use of the premises and there has been a reduction in the value of the same amounting to $35,000.

339 At the trial of the action very little mention was made of this facet of the dispute. Both parties seemed to accept that if the plaintiff could not substantiate its claim in the principal action that the defendant was in breach of the Franchise Agreement, then the claim concerning the sub-lease in the consolidated proceedings would fall away. The trial was fought upon this basis accordingly. It therefore follows from my ruling in favour of the defendants concerning the Franchise Agreement that the plaintiff's claim in respect of the sub-lease will be dismissed.

340 This brings me to the defendants' counterclaim.

341 The defendants pleaded in par 32 of their statement of defence and counterclaim that the plaintiff wrongfully and unlawfully purported to terminate the Franchise Agreement prior to the expiration of the term. It is said the plaintiff has treated Bruness as no longer being a franchisee and has withdrawn its goodwill, assistance and support which it was required to provide under the Franchise Agreement. It is said further that the plaintiff sought and obtained an injunction to restrain use of the name Auto Masters. In addition, the plaintiff has solicited the first defendant's customers by offering them a $50 discount on the price of any major service.

342 The defendants say further that in breach of cl 15.1 of the Franchise Agreement the plaintiff did not deal with Bruness in absolute good faith at all times.

343 I remind myself that cl 15.1 of the Franchise Agreement is expressed in these terms:

"The Franchisor will use its best endeavours to promote the performance and success of the Franchise business and will deal at all times with the Franchisee in absolute good faith."

344 I provided a description earlier in this judgment of the particulars relied upon in par 39 of the counterclaim in support of the allegation that the plaintiff acted in breach of the good faith term. I will not repeat them.

345 I mentioned also, in the course of my review of the pleadings that the plaintiff is alleged to have acted unconscionably in breach of s 51AC(1) of the Trade Practices Act.

346 Section 51AC(1) of the Trade Practices Act reads as follows:

"(1) A corporation must not, in trade or commerce, in connection with:

(a) The supply or possible supply of goods or services to a person (other than a listed public company) or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

(c) engage in conduct that is, in all the circumstances, unconscionable."

347 Section 51AC(3) provides that without in any way limiting the matters to which the Court may have regard for the purpose of determining whether there has been a contravention, the Court may have regard to various matters set out in that provision including whether any undue influence or pressure was exerted on the business consumer, the extent to which the supplier's conduct was consistent with its conduct in similar transactions, the requirements of any applicable industry code, and the extent to which the supplier and the business consumer acted in good faith.

348 I pause to note that in the circumstances of the present case the precept which is to be found in s 51AC(3)(g) that the Court may have regard to the requirements of any applicable industry code is a matter of some importance. The effect of regulations which took effect on 1 July 1998 (prior to the purported termination in the present case) was to bring into force a Franchising Code of Conduct, the purpose of which is to regulate the conduct of participants in franchising. Part 4 makes provision for the resolution of disputes by mediation, being the procedure that Bruness attempted to activate in the present case by faxing a notice of dispute to the plaintiff on 15 March 1999. I have found that the notice of dispute was faxed before the plaintiff served its notice of termination on Bruness.

349 Before returning to the circumstances of the present case it will be useful to take a further and more detailed look at the legal principles bearing upon the good faith clause and the concept of unconscionable conduct.

350 I noted previously that recent decisions reveal an increasing trend for courts to recognise and uphold express and implied obligations of good faith. However, there is still some uncertainty as to the meaning of "good faith" and the actual content of the obligation in any context.

351 The decided cases suggest that good faith takes on different meanings depending upon its context. There is some support for the proposition that "good faith" embraces three notions being, first, an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); second, compliance with honest standards of conduct and third, compliance with standards of conduct which are reasonable having regard to the interests of the parties: See Peden: "The Meaning of Contractual Good Faith" (2002) 22 Australian Bar Review, p 235.

352 Having regard to Renard Constructions (ME) Pty Ltd v Minister for Public Works (supra), I noted that in ordinary English usage there has been constant association between the terms "unreasonableness", "lack of good faith", and "unconscionability". Although they may not be always co-extensive in their connotations, partly as a result of the varying senses in which each expression is used in a different context, there can be no doubt that in many of their uses there is a great deal of overlap in their content.

353 I concluded that an express term concerning good faith, either in negotiation or in performance, is likely to be considered certain and the term will be interpreted to give it meaning. What constitutes good faith will depend on the circumstances of the case and upon the context of the whole of the contract. The courts will allow normal and reasonable business behaviour, with the result that the parties are not obliged to put aside their own self-interest or proprietary rights. A court considering such a provision is entitled to have regard to the reasonableness of the conduct and whether a party has acted unconscionably or capriciously. This may require the court to give some consideration to the motivation underlying the relevant events.

354 I was of the view that these principles could be applied to the present case with the result that the good faith term was to be treated as certain and enforceable and had a part to play in determining how the default provisions should be interpreted. I must now take a further and more detailed look at the decided cases in order to resolve the issues raised by the defendants' counterclaim.

355 In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; (1999) ATPR 41-703 Finklestein J of the Federal Court observed that in appropriate contracts, perhaps even in all commercial contracts, a good faith and fair dealing term would ordinarily be implied. A term of a contract that required a party to act in good faith imposed an obligation upon that party not to act capriciously. It would not operate so as to restrict the actions designed to promote the legitimate interests of that party.

356 In Burger King Corporation v Hungry Jacks Pty Ltd [2001] NSWCA 187 the New South Wales Court of Appeal, having noted what Priestley JA said in Renard (supra), observed that the Australian cases make no distinction of substance between the implied term of "reasonableness" and that of "good faith". There was a suggestion that the implied covenant of good faith is breached only when one party seeks to prevent the contract's performance or to withhold its benefits.

357 The notion that good faith imports a requirement to have regard to the interests of the other party was given support by Barrett J in Overlook v Foxtel [2002] NSWSC 17; (2002) Aust Contract R 90-143 at pars [65] - [67] where he states:

"It must be accepted that the party subject to the obligation is not required to subordinate the party's own interests, so long as pursuit of those interests does not entail unreasonable interference with the enjoyment of a benefit conferred by the express contractual terms so that the enjoyment becomes (or could become) ... 'nugatory, worthless or, perhaps, seriously undermined' ... the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary ... The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms."

358 Section 51AC of the Trade Practices Act extends the unconscionable conduct provisions of the Act to business transactions involving the supply to or acquisition of goods or services of under $3 million by a person or corporation, other than a listed public company. It is a relatively new provision, which was inserted into Pt IVA of the Trade Practices Act by the Trade Practices Amendment (Fair Trading) Act 1998. The provision came into force on 1 July 1998, that is to say, 9 months prior to the purported termination in the present case. The original transactions limit was $1 million but that limit was increased to the current $3 million limit by the Trade Practices Amendment Act (No. 1) 2001. It was common ground at the hearing before me that the presence of a limit does not present an obstacle in the circumstances of the present case.

359 It is noted in Millers Annotated Trade Practices Act 2002 (23 ed) that the meaning of the term "unconscionable" in the shorter Oxford Dictionary is "showing no regard for conscience; irreconcilable with what is right or reasonable." The Macquarie Dictionary defines the term as follows: "1. Unreasonable excessive 2. Not in accordance with what is just or reasonable: unconscionable behaviour. 3. Not guided by conscience; unscrupulous."

360 The Federal Court relied on the Shorter Oxford Dictionary's definition of "unconscionable" in Qantas Airways Ltd v Cameron [1996] FCA 1483; (1996) 66 FCR 246 and ACCC v CG Berbatis Holdings Pty Ltd (No 2) [2000] FCA 2; (2000) 96 FCR 491.

361 It is apparent, then, that because s 51AC is a relatively new provision, there is scant authority on the exact interpretation to be given to the term "unconscionable" in the context of the relevant provision. It seems, however, that the section imports the common law concepts of unconscionability albeit beyond the usual bounds of the concept of equity. That is, s 51AC is not limited to the prohibition of Amadio type unconscionability. The wording of the section is clearly intended to prohibit broadly unconscionable conduct in the range of transactions to which it applies.

362 The Full Federal Court of Australia said in Hurley v McDonalds Australia Pty Ltd [1999] FCA 1728; (2000) ATPR 41-741 at 40,585 that whatever "unconscionable" means in s 51AB and s 51AC, the term carries the meaning given by the Shorter Oxford Dictionary. So for conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable must be demonstrated.

363 In ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376 French J said at 5 that s 51AC was not limited by the equitable doctrines which cover the interpretation of s 51AA and is therefore wider in its application. This issue was not considered in the appeal: CG Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757; (2001) 185 ALR 555.

364 In the Garry Rogers' case (supra) the first respondent gave written notice of its intention to terminate a dealership arrangement. The parties had been in dispute about the implementation of a design and decoration programme known as the "Six-Star Program". The applicant alleged that the first respondent had engaged in unconscionable conduct but its application for an interlocutory injunction was dismissed.

365 Finkelstein J noted that one of the matters to which regard can be had in determining whether there was unconscionable conduct was the requirements of any applicable industry code. In this case the Franchising Code of Conduct was applicable. The Code provided that in the case of termination the franchisor must give reasonable written notice and written reasons for the termination to the franchisee. In this case, the first requirement was satisfied. Although written reasons were not given, the failure to do so did not constitute unconscionable conduct. The applicant was aware that one factor motivating the termination was its failure to adopt the Six-Star Program.

"Further, I do not regard the refusal by the first respondent to withdraw its notice of termination as unconscionable conduct. I take as the measure of unconscionability, conduct that might be described as unfair. In the present circumstances I do not believe that the first respondent has acted unfairly in not wishing to reinstate the applicant as a dealer. The applicant had been a dealer for seven or eight years. Whilst it was not obliged to adopt the Six-Star Program, that is, it was not contractually obliged to do so, its failure to adopt the program and its criticism of certain aspects of the program, could reasonably be regarded by the first respondent as an indication that the applicant was not willing to act in the best interests of the first respondent and of the dealership group as a whole. No doubt this led to a loss of confidence in the applicant. That loss of confidence would not necessarily be overcome by a change in attitude on the part of the applicant. Many relationships can only operate satisfactorily if there is mutual confidence and trust. Once that confidence and trust has broken down the position is not easily restored. It is not unconscionable to terminate a relationship where that trust and confidence has been undermined."

367 In ACCC v Lee Lee Pty Ltd (2000) 22 ATPR 41-742 Mansfield J said at 40,606 that the fact that the respondents might be exercising contractual rights was not necessarily a circumstance which precluded a finding of unconscionable conduct in the circumstances of the matter before him.

368 The insistence on rights in circumstances which make that harsh or oppressive is a form of unconscionability. In Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 Mason and Deane JJ said at 444 that "a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct".

369 In Hurley v McDonalds (supra) the Court held that mere reliance upon the terms of a contract cannot, without something more, constitute unconscionable conduct. Before s 51AA, 51AB and 51AC can be applicable, there has to be some circumstance other than the mere terms of the contract itself, that would render reliance on the terms of the contract unfair or unreasonable or immoral or wrong.

370 In ACCC v Samton Holdings Pty Ltd (2002) 189 ALR 76 the Federal Court referred to the Laws of Australia, vol 35 Unfair Dealing, tab 35.5. The relevant text sets out four classes of cases attracting the application of the language of unconscionability. Those four classes of cases are:

(iii) Insistence upon rights in circumstances which make that harsh or oppressive; and

371 These four categories were further said to be supported by three broad standards namely:

(i) That those in positions of strength or influence should not take advantage of another's relative weakness.

(ii) That people should not, by appeal to strict legal rights, cause hardship to others by violating their reasonable expectations; and

(iii) That those in fiduciary positions should act only in the interests of those to whom those fiduciary duties are owed.

372 The plaintiff contended that the evidence adduced at trial did not disclose any evidence of a failure by the plaintiff to act in good faith. The law does not prescribe a precise meaning of the term "good faith" and it is probably no more than a prohibition on acting unconscionably. In that respect it is significant that s 51AC of the Trade Practices Act refers to the requirement for both parties to act in good faith in their dealings with each other. See also the discussion on the meaning of good faith by Priestley JA in Renard (supra) at 263 - 268.

373 According to the plaintiff, there was insufficient evidence to ascribe to the plaintiff a subjective intention in the nature of malice or retribution arising out of a supposed grievance associated with a matter such as the Hollands' dismissal or the defendants' complaint to the ACCC. Further, and in any event, questions of intent are usually irrelevant in determining whether or not there has been a breach of contract and this approach should be applied to an alleged breach of the good faith provision: Secretary of State for Employment v Associated Society of Locomotive Engineers & Firemen (No 2) [1972] 2 QB 455 at 506.

374 Counsel for the plaintiff noted that the counterclaim under s 51AC of the Trade Practices Act involved an allegation of unconscionable conduct and the particulars in that respect were the same as the particulars of failing to act in good faith.

375 On the plaintiff's case, the evidence showed that the plaintiff gave the defendants repeated opportunities to comply with the Franchise Agreement and on several occasions overlooked the first defendant's breaches or extended the time for compliance in circumstances where the plaintiff was lawfully within its rights to issue notices of default and act upon them. The decided cases indicate that it is not unconscionable to terminate a commercial relationship where one party's trust and confidence in the other party has been undermined by the latter's conduct: Garry Rogers Motors (supra).

376 Further, counsel for the plaintiff argued, a finding of unconscionable conduct can only be made in respect of allegations of serious misconduct such as behaviour which is unreasonable, unfair, bullying and thuggish or which shows no regard for conscience: Hurley v McDonalds Australia Ltd (supra); ACCC v Simply No-Knead (Franchising) Pty Ltd (2000) ATPR 41-744; ACCC v Samton Holdings Pty Ltd (supra). It is not unconscionable if, as the plaintiff has done here, a franchisor simply relies on the provisions of the relevant contract in seeking to protect its own position.

377 Counsel for the plaintiff submitted that the plaintiff's alleged unwillingness to refer the dispute to mediation prior to termination of the Franchise Agreement could not be characterised as unconscionable conduct. Part IV of the Franchising Code refers to mediation as permissive rather than mandatory. Further, and in any event, even if the plaintiff had failed to comply with the Franchising Code (which was not the case) such conduct was not sufficient of itself to establish that there had been unconscionable conduct contrary to s 51AC of the Trade Practices Act. The plaintiff relied again on Garry Rogers Motors (supra) in that regard.

378 It was not unconscionable for the plaintiff to insist on strict compliance by the defendants with the terms of the Franchise Agreement, counsel argued, notwithstanding the defendants' proposition that the number of defaults was small compared with the overall volume of its trading. The context of the evidence revealed that the plaintiff repeatedly and without success urged Bruness to comply with the requirements of the Franchise Agreement for the entry and delivery of invoices over several months before termination of the Franchise Agreement.

379 Counsel for the plaintiff submitted that the factual circumstances in CG Berbatis Holdings Pty Ltd v ACCC (supra) highlight the need for serious misconduct to justify a counterclaim of the present kind. In that case tenants in a shopping centre had brought claims against the landlords in the commercial tribunal. Some of the tenants sought a renewal of their leases. The goodwill of their various businesses depended largely on the location of their businesses. The landlords were only prepared to renew the leases if the tenants agreed to abandon their rights to proceed with what the Court agreed was bona fide litigation in relation to their rights under the existing leases.

380 The Full Federal Court held that there was nothing unconscionable in the landlords demanding that the tenants abandon the litigation before granting them a renewal of their leases. The Full Court pointed out at par 81 that the landlords were under no obligation to renew or extend the leases. The tenants had the choice of either maintaining their legal claims against the landlords and losing the opportunity to sell their businesses or abandoning their claims and gaining the opportunity to sell their businesses. The Full Court held that this may have been a hard bargain but the stance of the landlords was not unconscionable.

381 The defendants' position in the present case was that the plaintiff had purported to terminate the Franchise Agreement and the related sub-lease when that termination was not reasonably necessary for the protection of the legitimate commercial interests of the plaintiff. The financial consequences of the alleged breaches, whether considered collectively or individually, were small when compared to the financial consequences of termination to Bruness. The monetary amounts involved could not have had any significant bearing upon the plaintiff's financial planning and the alleged breaches concerned only financial matters of accounting between the plaintiff and Bruness which could have been resolved by other means. The alleged breaches did not concern Bruness' relations or dealings with its customers or the general public. It was significant also that the monthly turnover of Bruness was far in excess of the turnover of its predecessor at the Midland Branch and, accordingly, the plaintiff had received a very substantial increase in royalties from the Midland Branch after Bruness acquired that franchise.

382 I remind myself that in regard to the 54 contentious invoices listed in the default schedule Bruness claims to have complied with its obligations. It says that the plaintiff incorrectly characterised a substantial number of the invoices and that, as to the remainder, sufficient explanations have been provided as to why Bruness is not in default. It says further that the degree of non-compliance, if any, was comparatively insignificant and, in the context of the contract conditioned by a good faith term, the non-compliance did not amount to a repudiation.

383 I have made findings in favour of the defendants in regard to these matters, although some of those findings proceed from the premise that the plaintiff was unable to discharge the burden of proof. The further question then arises, with respect to the counterclaim, as to whether the plaintiff's conduct in purporting to terminate the Franchise Agreement amounts to a breach of the good faith term or the statutory provisions. In this context the burden of proof lies upon the defendants.

384 The defendants contended that the plaintiff's purported termination of the agreement was motivated by vindictiveness referable to the defendants' frequent criticism of the plaintiff's computer system and Mr Coombes' insistence that Steven Hollands (the former manager of the Midland Branch) be prosecuted for an offence allegedly committed in the course of his employment. The defendants said further that their complaints to the Australian Competition and Consumer Commission that the plaintiff had acted unconscionably, and their complaints to Work Force Clothing Co about the supply of uniforms, were matters that played a part in the plaintiff's decision to terminate the Franchise Agreement for reasons other than a regard for its legitimate commercial concerns.

385 The defendants contended also that the plaintiff used the threat of termination in an attempt to force the defendants to dispose of the franchise to the plaintiff for a price well below its true market value. Further, the plaintiff anticipated that the QAS audit would recommend termination of QAS accreditation and justify the plaintiff in terminating the Franchise Agreement. However, when the QAS report did not make that recommendation and reported instead that the Midland Branch presented well, with a commitment to customer satisfaction, and recommended a follow up audit to verify corrective action requirements in 30 days to three months, the plaintiff purported to terminate the Franchise Agreement in any event. These events reflected a form of unreasonable and oppressive conduct that should properly be characterised as unconscionable conduct within the meaning of the statutory provision.

386 In support of its case pursuant to s 51AC of the Trade Practices Act, the defendants relied also upon the plaintiff's refusal to provide Bruness with a copy of the QAS report, and the plaintiff's rejection of the Bruness request for mediation pursuant to Pt IV of the Franchising Code, notwithstanding that mediation was mandatory in those circumstances.

387 Against this background let me turn first to the alleged breach of the good faith provision.

388 It follows from my review of the decided cases that there is often thought to be a link between the obligation to act in good faith and the obligation to act fairly and reasonably. The notion of unconscionable conduct may not be co-extensive with conduct conforming to the requirement to act in good faith but conduct which is held to be unconscionable within the meaning of s 51AC of the Trade Practices Act will probably be sufficient to constitute a breach of an express term providing for absolute good faith between the parties. The decided cases indicate that a party will not be acting in good faith if it acts capriciously or in an oppressive, unfair or intimidatory manner. The Court will have regard to the reasonableness of the conduct in question. The term "good faith" imports a duty to have due regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract. In some circumstances a cynical resort to the black letter or literal meaning of a contractual provision may be taken into account in determining whether there has been a lack of good faith.

389 In the course of making some general observations at an earlier stage under the heading "Context and Credibility" I said that, in my view, in the period immediately after delivery of the QAS report, the plaintiff could arguably be said to have ceased dealing with the defendants in absolute good faith in the manner prescribed by the Franchise Agreement. This was because, on my finding, the defendants had kept open the lines of communication and the tenor of the dealing between the parties was that the QAS report would be treated as a benchmark as to what would happen next.

390 I have found that the plaintiff refused to meet the defendants' request for a copy of the QAS report. It proceeded to serve the notice of default in circumstances in which there was a degree of uncertainty as to the reliability of the plaintiff's non-compliance lists. I recognised that the plaintiff's actions could possibly be viewed in a different light if it were established by the evidence that Bruness was in default as to a significant number of invoices in the manner specified on the default schedule. In the event, however, the plaintiff has been unable to satisfy me on the balance of probabilities that the default schedule evidenced breaches sufficient to justify a termination of the agreement.

391 Having made that finding, I am obliged to return to the general observations I made concerning the course of business between the parties. I affirm the conclusion I expressed previously that, in my view, that as a consequence of the Hollands' incident, and the second defendant's complaint to the ACCC, a stage was reached in January 1999 when Mr Warr and Mr Canham were looking for ways and means of bringing the franchise to an end. I consider that they acted unreasonably and capriciously in deciding to proceed with the issue of a notice of default in circumstances where such a course was not contemplated by the QAS report and where, on my finding, there was a considerable degree of ambiguity as to the reliability of the various non-compliance lists and the status of the 54 invoices on the default schedule.

392 I am satisfied, on the balance of probabilities, that Mr Warr and Mr Canham were both aware that they were acting contrary to the spirit of the QAS report (which allowed further time for compliance) and that this influenced their decision not to make a copy of the report available to Bruness. I am satisfied also that they were conscious of imperfections in the lists of invoices being submitted to the defendants by Ms Lane including the list comprising the default schedule. I find that, notwithstanding this state of knowledge, they decided to proceed with the issue of the notice of default as a means of bringing the franchise to an end without having made any detailed analysis as to whether Bruness was truly in default. It follows from this, and from earlier discussion, that, contrary to the requirements of the Franchise Agreement, they were not reasonably of the opinion that the franchisee was not complying with the requirements of the system.

393 In my view, in these circumstances, the plaintiff not only acted capriciously and unreasonably but also failed to recognise and have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract: Overlook v Foxtel (supra). There was an element of oppression in the plaintiff's conduct. Accordingly, I consider that the plaintiff was in breach of the good faith term and the defendants are entitled to relief.

394 I must now turn to the claim of unconscionable conduct contrary to s 51AC of the Trade Practices Act.

395 I noted in my review of the decided cases that the fact that the plaintiff might be exercising contractual rights was not necessarily a circumstances which precluded a finding of unconscionable conduct: ACCC v Lee Lee Pty Ltd (supra). I noted also that for conduct to be regarded as unconscionable it seems that serious misconduct or something clearly unfair or unreasonable must be demonstrated. It is not necessarily unconscionable to terminate a relationship where trust and confidence has been undermined. A number of the decided cases certainly suggest that a party to a contract is entitled to insist upon strict enforcement of the relevant obligations and to drive a hard bargain.

396 However, in the circumstances of the present case, I consider that the plaintiff's conduct, on my findings, amounts to an infringement of s 51AC of the Trade Practices Act. I have already observed, in the course of dealing with the good faith issue, that the plaintiff acted capriciously and unreasonably in circumstances where there was not a sufficient basis to terminate the contract. I have found that there was an element of oppression in the plaintiff's conduct, and this was referable to a conscious determination to bring the Franchise Agreement to an end, notwithstanding an awareness that there was a degree of ambiguity surrounding the allegations of default to be relied upon.

397 It is significant that the shortcomings on the part of Bruness, identified by the QAS report were not thought to be worthy of inclusion in the notice of default, and the QAS report itself did not contemplate any immediate termination of the contract. It is true that the relationship of trust and confidence between the parties seems to have broken down prior to 26 February 1999 but, on my findings, that was due to the determination of the plaintiff to bring the contractual relationship to an end.

398 I am of the view also that the plaintiff was in breach of the requirements of the Franchising Code of Conduct. The Code is mandatory in the sense that if one party (in this case Bruness) activates the process allowed for resolving disputes in Pt 4 of the Code then, ultimately, that party will be able to insist that the parties attend mediation. Upon receipt of the Bruness notice of dispute the plaintiff should have tried to agree about how to resolve the dispute. In fact, it decided to proceed with the notice of termination and commenced legal proceedings on the same day. It is apparent from s 51AC(3)(g) that I am entitled to take these considerations into account in determining whether the plaintiff engaged in conduct that was unconscionable.

399 For all these reasons, I consider that the conduct of the plaintiff should be characterised as unconscionable. The evidence supports a finding that the misconduct complained of in the counterclaim was serious, unfair and oppressive and showed no regard for conscience. To my mind, this is not a case in which the plaintiff can be said to have simply acted in accordance with its contractual rights, for in various respects prior to termination the plaintiff had led the franchisee to believe that the matters complained of would be resolved by reference to what was in the QAS report. It follows that the defendants are entitled to relief.

400 The defendants pleaded in par 37 of the defence and counterclaim that as a result of the plaintiff's breach of the Franchise Agreement in wrongfully purporting to terminate the same, the first defendant has suffered loss and damage. Reference was made to the plaintiff withdrawing its support and service from Bruness, and soliciting customers.

401 The defendants said further in par 40 that as a result of the plaintiff's breach of the good faith term the first defendant has suffered loss and damage. It was said in par 43 that as a result of the plaintiff's contravention of s 51AC(1) of the Trade Practices Act the first defendant has suffered loss and damage. In each case, the pleadings were formulated initially upon the basis that particulars of loss and damage would be provided prior to trial.

402 The plaintiff by its solicitors eventually sought further and better particulars of the counterclaim. In response to the relevant request, the first defendant said in Answer 3 (which assumed its final form by an amendment on 13 September 2000) that the loss and damage was said to be the financial difference between the first defendant's actual trading performance and the first defendant's likely trading performance had the breach by the plaintiff not occurred.

403 The first defendant in its answer then set out certain figures which were said to represent the relevant loss on the information currently available. It was said that in addition to the financial difference between the actual and the likely trading performance the first defendant had suffered a further financial loss in that the goodwill of its franchise business had been diminished by a certain figure.

404 It follows from this description of the pleadings that the plaintiff had been put on notice at the commencement of the trial as to the nature of the claim for damages. In the first phase of the trial an attempt was made by counsel for the defendants to lead evidence from Mr Coombes in support of the claim for damages reflected on the face of the pleadings. He did not have accountancy qualifications but he was able to give evidence concerning the way in which the financial records of the Midland Branch were kept and as to his role in supervising the work of a bookkeeper. He referred also to his role in the payment of expenses and the banking of receipts on behalf of the business. It was against this background that certain portions of his witness statement concerning financial matters were received into evidence pursuant to reasoning of the kind reflected in Potts v Miller [1940] HCA 43; (1940) 64 CLR 282.

405 However, it must have been apparent to the defendants and their advisers that the evidence before the Court was not likely to be sufficient to underpin the claim for damages being advanced. When it became apparent that the case would have to be relisted for hearing at a later date, leave was obtained to adduce further evidence. This led to evidence being received from a qualified accountant, Graham Trevor Lean, a principal in the firm GT Lean & Associates, on behalf of the defendants. Directions were given which allowed the plaintiff to lead responsive evidence from a practising accountant, Norman Mel Ashton.

406 Mr Lean said in evidence that he is a Fellow of the Australian Society of Certified Practising Accountants. He is a registered company auditor and liquidator. It emerged in the course of his evidence that he has had considerable experience of small businesses in the Midland area and in 1991 acted as receiver manager of Tune Masters, being a precursor of the Auto Masters business. He conceded under cross-examination that prior to receiving instructions from Bruness he had not prepared financial statements for any of the Auto Masters franchisees.

407 Mr Lean was instructed to prepare financial statements for Bruness for the purposes of the present trial. He described his work in preparing financial statements for the period of the first defendant's occupancy of the Midland Branch and the relevant financial statements were adduced in evidence accordingly. The first of the statements is in respect of the year ended 30 June 1998. These financial statements reflected the trading position for the Midland Branch. It follows from earlier discussion that the figures up to 15 March 1999 represent a period of trading during which Bruness was entitled to and was in fact using the Auto Masters insignia. Thereafter, Bruness was trading on its own account.

408 In the course of his evidence, Mr Lean presented to the Court a spreadsheet reflecting his financial "projections" in respect of the period commencing 1 July 1998 and continuing to 30 April 2002. The Lean projections reflect the actual trading performance of the business in respect of each relevant period as derived from the financial statements he had prepared in accordance with his normal practice save that certain deletions such as director's wages had been deleted from expenses bearing in mind that the projections were required for the purpose of the litigation. This permitted him to contend for certain figures which were said to represent the actual trading performance of the Midland Branch. For example, on the adjusted basis, the Bruness profit (representing actual trading performance on the adjusted basis) for the period 15 March 1999 to 30 June 1999 was said to be $9,405.

409 Mr Lean then proceeded to make some further projections which were said to represent the likely trading performance had the plaintiff not withdrawn its logo and support. In that regard, he drew upon the trading pattern reflected in his financial statements and upon his experience of other businesses in order to arrive at monthly average sales and outgoings in respect of wages and superannuation and other business expenses. Pursuant to this reasoning, the likely trading performance had the trading continued with the imprimatur of Auto Masters in respect of the period 15 March 1999 to 30 June 1999 was said to be a profit of $11,084. The difference of $1,679 was said to represent the loss in respect of that period. He applied the same approach to subsequent years. His projections were used to substantiate the defendants' pleaded claim for damages.

410 Having regard to this evidence, the first defendant's re-amended particulars of loss and damage were set out in an amended pleading dated 13 June 2002 in these terms ("the defendants' claim for damages"):

"(1) Loss of Profit:

The loss and damage suffered by the First Defendant under this head of damage is the financial difference between the First Defendant's actual trading performance following the Plaintiff's purported termination of the Franchise Agreement on 15 March 1999 and the First Defendant's likely trading performance had the Plaintiff's breach of the Franchise Agreement and contravention of Section 51AC of the Trade Practices Act 1974 not occurred. The financial difference is calculated as follows:

N.B. The actual trading performance and the likely trading performance for each period include superannuation, but do not include director's wages or legal costs.

(2) Diminution of Goodwill:

First Defendant's actual trading performance for the period 1 July 2001 to 30 April 2002 (10 months) : $27,877.00 profit

Profit per month for the period 1 July 2001 to 30 April 2002:

$27,877.00 [rparenmid] 10 = $2,787.70

Projected profit for the period from 1 July 2001 to 30 June 2002 (based on the First Defendant's actual trading performance for the period 1 July 2001 to 30 April 2002):

$2,787.70 x 12 = $33,452.40

Like profit for the period 1 July 2001 to 30 June 2002 had the plaintiff not purported to terminate the Franchise Agreement: $57,224.00

Decrease in profitability of the First Defendant as a result of the Plaintiff's purported termination of the Franchise Agreement:

$57,224.00 - $33,452.40 = $23,772.00

As a result of the decrease in the profitability of the First Defendant, the First Defendant has suffered a diminution in its goodwill as follows:

$23,772.00 x 1.5 = $35,658.00

(3) Summary of loss and damage suffered by the First Defendant:

411 In summary, then, the defendants' claim for damages in respect of each of the causes of action reflected in the counterclaim amounted to $128,842.67. The claim was substantiated by the evidence of the defendants' expert, Mr Lean, although a challenge was mounted to many of the assumptions underlying his figures. It follows from all of this that I will put to one side the earlier evidence of Mr Coombes, for most of what he had to say, apart from his description of the first defendant's records and procedures was overtaken by events. The crucial issue was to determine what weight, if any, should be given to the evidence of Mr Lean.

412 A significant component of Mr Lean's projections concerning likely performance was the estimate of sales that might have been achieved by Bruness if the plaintiff's support had not been withdrawn. In respect of the year ended June 1999 Mr Lean projected monthly average sales of $45,000 and presumed that the monthly average would have been increased by $5,000 per month in following years. Upon that basis the monthly average sales for the year ended 30 June 2000 were $50,000 per month with the result that total sales on this scenario would have amounted to $600,000 per annum. I note in passing, for the purpose of comparison, that the actual sales of the Midland Branch for the year ended 30 June 1998 were $450,340.

413 It was put to Mr Lean in the course of cross-examination that his estimate of sales in the likely performance scenario was unrealistic. He was cross-examined about the location of the Midland business and his lack of detailed knowledge about other franchises. It was put to him that in preparing figures relevant to the performance of the Midland Branch he had not gone beyond the books maintained by the business and was largely dependent on Mr Coombes' estimate of closing stock in respect of the years in question.

414 Mr Lean acknowledged that he was guided essentially in the formation of his projected sales figures by the performance of the Midland Branch as reflected in its books of account. The Branch was averaging sales of $45,000 as at March 1999. This compared to average sales per month of $37,778 for the year ended 30 June 1998. Against this background, he adopted the figure of $45,000 as a base figure and, consistently with what appeared to be an established upward trend, made an assumption of growth in sales of $5,000 per month. He referred to his knowledge of the district and the huge demand for cars in the Midland area as factors which probably tended to explain the improvement in the first defendant's performance. In his view, this improvement seemed likely to continue and his projections had been framed accordingly.

415 Mr Lean was also challenged about the way in which he had dealt with fixed costs and overheads. It was put to him also that the way in which he had dealt with superannuation, wages and legal fees was questionable. It was put to him that he had not made sufficient allowance for increased outgoings and expenses. He conceded that with increased turnover, outgoings such as electricity were likely to go up. He was of the view, however, that the current litigation had distorted the position concerning legal costs and that, in any event, the principal issue for a business of this kind in regard to profitability was the level of sales. He stood by his projections in regard to that issue.

416 The plaintiff adduced evidence from Norman Mel Ashton, a principal in the accountancy firm PPB Consulting Services Pty Ltd. Mr Ashton is a Fellow of the Institute of Chartered Accountants, a member of the Australian Society of Certified Practising Accountants and is a registered liquidator. He has undertaken various consulting assignments in regard to civil litigation.

417 Mr Ashton confirmed in his written report dated 18 June 2002 that he had been asked to examine profit and loss projections prepared on behalf of Bruness by Mr G Lean. He noted that the assumptions underlying the Lean evidence were that had the franchise not been terminated, Bruness would have achieved monthly sales in the period 16 March 1999 to 30 June 1999 at approximately the level actually achieved in the period 1 July 1998 to 15 March 1999, that is to say, $45,000 per month. Sales would have increased after the year ending 30 June 1999 at the rate of $5,000 per month or $60,000 per annum in each year up to 30 June 1996. It was assumed that the first defendant's purchases over the period covered by the projections would have been 35 per cent of sales. Further, wages (including sub-contractors expenses) would have been 26 per cent of sales, advertising and franchise fee would have been 13 per cent of sales. Fixed overheads would have been $27,000 in the period 16 March 1999 to 30 June 1999 and $105,000 in the year ending 30 June 2000 increasing at $5,000 per annum. It is apparent from this that the estimate in regard to sales is a central feature of the projections as it has a bearing both upon gross revenue and upon Mr Lean's projections as to outgoings.

418 In Mr Ashton's view, the growth rates assumed by Mr Lean were speculative and should be treated with caution. If no objective grounds were available on which projected increases in sales could be based, it should not be assumed that sales will increase by an arbitrary percentage or at all. Mr Ashton undertook an analysis based on the actual results achieved by Bruness during the period 1 July 1997 to 15 March 1999 with the relevant figures being adjusted for known movements in the Perth Consumer Price Index Movement (CPI) for the years ended 30 June 2000 and 2001. The figures thus produced were significantly less than the projected figures contended for by Mr Lean. For example, as I have already noted, Mr Lean's projected sales figure for the year ended 30 June 2000 was $600,000. The operative figure on Mr Ashton's analysis for that year is $514,700. Mr Ashton undertook a similar analysis in respect of overheads.

419 Under cross-examination, Mr Ashton conceded that he had not inspected any of the Auto Masters sites or obtained sales figures from any of the other Auto Masters franchisees. He was obliged to concede that the effect of his figures was to suggest that the Midland Branch was performing better since the termination than it would notionally have performed if it had continued to receive the plaintiff's support as a franchisee. He acknowledged that with only 20 months of trading by Bruness as a source of information his (Ashton's) basic stance was that there was not a basis for predicting an increase in sales in trying to determine the likely performance position.

420 Counsel for the defendants took Mr Ashton to Mr Lean's figures for sales for the year ending 30 June 1998 which were $453,340, representing a monthly average of approximately $38,000. It was put to him that Mr Lean's figures for sales of $389,226 for the period 1 July 1998 to 15 June 1999 produced a monthly average of approximately $45,000, being a significant increase in the average monthly sales as against the previous year. It was put to him that it was therefore not an accurate approach in trying to project what might happen after 15 March 1999 to simply average the sales out over the entire 20 month period of trading and then to adjust them marginally by reference to the CPI movement.

421 Mr Ashton continued to assert that in his view it was quite reasonable to take an average and make the calculation as he had done. He did not accept that increased turnover and purchasing power could result in discounts on purchasing costs. Mr Ashton said:

"As I've stated, we don't know particularly the reasons why things have increased or decreased and in the absence of information, particular information, as to why the costs have decreased while the sales have increased, I can see no other basis but to take an average."

422 This exchange then occurred between the cross-examiner and Mr Ashton:

"So basically, the way you have calculated them, then had Bruness continued as an Auto Masters franchisee, from 15 March 1999 onwards, its next, say 8 and a half months of trading would have been less than its previous 8 and a half months on your projections? --- The average, it would have been less.

But there's no real basis for assuming it's going to be less, is there? --- There's no real basis for assuming it's going to be anything really. There's no basis. All I have tried to do is take a situation where there is so many unknowns, and put some rational scientific method of going forward. That's all I have done. I don't have any other basis for predicting what the sales will be in the future or what the overheads will be in the future. There is no evidence to say what they are going to be.

I accept that? --- So in the absence of that, then you must concentrate on what has happened in the past, and what has happened in the past is there has been some sales that have increased. We don't know the reasons for that, so I have taken the average. There has been some decrease in the overheads and I have treated it on a like basis.

So your average sales basically is about it looks like 40,000 or 41,000 and then CPI adjusted. I'm just trying to see if I can go to a figure. The average sales over the 20 and a half months, from memory, is approximately 40,000 to 41,000. It's certainly significantly less than the average monthly sales in the last 8 and a half months for trading, isn't it? --- It is."

423 Mr Ashton also said in the course of his evidence that one of the indicators of a company's ability to meet its obligations is the working capital of the business, being the difference between its current assets and its current liabilities. It appeared from the financial statements prepared by Mr Lean that Bruness had a substantial deficiency of working capital which seemed to increase over time. The presence of this factor suggested that the trading performance of the first defendant was not likely to improve.

424 In his closing submissions counsel for the plaintiff drew attention to the Lean financial statements for the year ended 30 June 1998 and the loss of $44,855 reflected in the relevant document. He queried the credibility of projections made by Mr Lean which suggested that after adjustments were made for certain matters including director's wages, this could be used to substantiate a thesis that the first defendant's business was profitable and in a state of growth. He reaffirmed the plaintiff's case that the projections made by Mr Lean as to likely performance with increments being allowed in respect of monthly average sales was not convincing. Mr Lean had not provided a sufficient basis for adopting an increase of $5,000 per month in respect of sales in the years the subject of his projections. It was not convincing that the yardstick of projected monthly sales should be regarded as increased by $5,000 in each successive year. Further, Mr Lean's assumption about getting discounts for volume trading was not persuasive in regard to a business that had a large deficit in working capital.

425 When I endeavour to resolve the matters in issue between the two experts I incline to the view that Mr Lean had a more intimate knowledge of the subject business and the factors bearing upon its success or failure. I have to say also that I was not persuaded to Mr Ashton's view of the matter by the answers he gave in the course of cross-examination as exemplified by the passages mentioned earlier. It is true, as he pointed out, that there was inevitable an element of speculation in attempting to assess the first defendant's future performance against the background of a 20 month trading period. However, it seemed to me, that his approach of simply averaging sales figures over the 20 month trading period in order to produce a projection of likely performance was not realistic. There was evidence of increased sales and the averaging method did not make a sufficient allowance for this. At the end of the day, I was persuaded that Mr Lean's stance of adopting $45,000 per month as a starting point was appropriate bearing in mind that this figure was substantiated by actual sales figures in the period immediately preceding termination of the Franchise Agreement.

426 I recognise that Mr Lean's allowance of $5,000 per month by way of increased sales from year to year in the successive years of trading was open to challenge. However, to my mind, the challenge put up by Mr Ashton was not sufficient to rebut the claim. I am satisfied on the balance of probabilities that the figures contended for by Mr Lean were defensible and that the loss of profit of $93,184.67 contended for represents the operative measure of loss in respect of that head of the claim.

427 When I turn to the claim for diminution of goodwill in the sum of $35,658 I am confronted with certain difficulties. I have emphasised in previous discussion, that the burden of proof in respect of each constituent of the counterclaim lies upon the defendants. It was not made sufficiently clear to me by the evidence adduced on behalf of the defendants as to the manner in which the loss of profit complained of would be translated into the alleged diminution of goodwill in the sum of $35,658. Accordingly, I am not satisfied that the amount in question should be allowed to the first defendant on its counterclaim.

428 It follows from earlier discussion that I am not satisfied on the balance of probabilities that the plaintiff's claim for damages should succeed. However, if I be wrong in that view, it will be necessary for consideration to be given to my findings about the details of the claim. I must deal with this matter for the sake of completeness.

429 I noted in earlier discussion that the plaintiff's claim for loss and damage is set out in Answer 4 to its further and better particulars of claim. In essence, the plaintiff contends that by its occupation of the Midland premises Bruness has prevented the plaintiff from using the premises. It has not paid royalties. The average turnover of the Midland branch prior to termination was $41,927.35 per month. This represents an average loss of $5,450.56 per month in respect of the plaintiff's entitlement to an advertising levy of 6 per cent on turnover and a royalty charge of 7 per cent of turnover.

430 The case for the plaintiff was that as at February 2000 the plaintiff's loss of benefits and bargains since February 1999 was $65,400.66 which loss continued to accrue thereafter at the rate of $5,450.56 per month until the expiration of the agreement in 2002. The particulars of claim foreshadowed a claim for consequential expenses including costs incurred by the plaintiff in entering into a new Franchise Agreement and diminution in the plaintiff's goodwill by reason of the defendants' conduct.

431 Mr Warr gave evidence in support of the figures mentioned above. He said that $10,000 would be involved in re-establishing a franchise at Midland. He provided estimates concerning the value of the time devoted by Mr Canham and Ms Lane to resolving the dispute with Bruness. This evidence was supported by Mr Canham. The cost of Mr Canham's services was said to be $100,800. Mr Warr valued the diminution in the plaintiff's goodwill at $45,000.

432 Under cross-examination, Mr Warr conceded that he did not have expertise as a valuer and the diminution figure was simply an estimate based on his personal experience. In these circumstances I am not persuaded that the amount claimed should be allowed. I do not consider that the plaintiff can recover the amounts sought in respect of the services of Mr Canham and Ms Lane. They are indirectly referable to the dispute between the parties but I am not satisfied that there is a sufficient causal connection between the loss claimed and the breaches complained of.

433 I consider that if the plaintiff had been successful in its claim, it would be entitled to recover from Bruness and from the second defendant as guarantor a loss of revenue referable to the Midland premises and the re-establishment costs of $10,000.

434 An award of damages in a case of this kind is affected by the rule that a claimant is obliged to mitigate its loss. The evidence in the present case suggests that after termination it would have been comparatively easy for the plaintiff to have found another franchisee, and thus another tenant at the Midland Branch. If such a course had been open to the plaintiff then it would not be reasonable for the plaintiff to attribute a loss of revenue to Bruness beyond a period of, say, 12 months. In the present case, however, Bruness has remained in occupation. In the absence of evidence to the contrary, I am obliged to hold that the defendants are responsible for a loss of revenue to the expiry of the projected franchise and sub-lease agreements.

435 The relevant figure with respect to loss of revenue appears to be $234,350 being $65,400 to February 2000 plus $168,950 for 31 months thereafter to September 2002 at the rate of $5,450 per month. The total amount due to the plaintiff would therefore be the sum of $244,350. However, as the plaintiff has not in fact succeeded in its claim, I will say no more about this aspect of the matter.

436 The plaintiff's claim for relief in relation to the Franchise Agreement (as set out in par A of its prayer for relief) and in relation to the sub-lease (as set out in par B of its prayer for relief) will be dismissed. The injunction previously granted to the plaintiff will be discharged.

437 The first defendant is entitled to relief pursuant to pars 39 to 43 of the statement of defence and counterclaim in that the plaintiff was in breach of the good faith term of the Franchise Agreement and infringed s 51AC(1) of the Trade Practices Act.

438 Pursuant to the defendants' prayer for relief there will be a declaration that the Franchise Agreement was not terminated; a declaration that the sub-lease was not terminated and damages allowed to the first defendant in the sum of $93,184.67 in respect of loss accruing to 30 April 2002. The first defendant will be allowed interest on the said amount pursuant to s 32(1) of the Supreme Court Act 1935 at the rate of $6.00 per centum per annum as from 30 April 2002 to the date of payment. I will hear from the parties as to the nature of any further orders or directions that might be required as to the use of trading names and/or insignia or generally. I will hear from the parties also as to costs.