Supreme Court of WA|2002-12-04|Before: Hasluck J

Automasters Australia Pty Ltd v Bruness Pty Ltd & Anor [2002] WASC 286 (4 December 2002)

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

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

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.

Automasters Australia Pty Ltd v Bruness Pty Ltd & Anor [2002] WASC 286

At a glance

Court

Decision date

Before

Catchwords

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Judgment (495 paragraphs)

Automasters Australia Pty Ltd v Bruness Pty Ltd & Anor [2002] WASC 286 (4 December 2002)

Parties

Legislation Cited (4)

Cases Cited (14)