Solicitors:
Macpherson Kelley Lawyers (Plaintiff)
Slater and Gordon (First, Second and Third Defendants)
File Number(s): 2016/94570
[2]
Judgment
HIS HONOUR: The plaintiff (BBA) operates the "Blockbuster" franchise in Australia. The first defendant (Danset) was a franchisee of BBA from October 2002 to October 2012. It conducted the franchised business from rented premises at Bondi. The second and third defendants (Mr and Mrs Miraldo) are the principals of Danset, and guaranteed its obligations under the franchise agreement. The fourth and fifth defendants can be left to one side for present purposes.
The video rental market declined in the years leading up to 2011. Mr and Mrs Miraldo, alarmed at the decline in their business, decided to sell out. Accordingly, they sold the assets of Danset's business to a competitor, the fourth defendant. This they did without giving any notice to BBA. There is no doubt, and Danset did not dispute, that in so acting, Danset breached the franchise agreement in a number of ways.
When BBA learned of the sale, it commenced proceedings. It sought damages, or alternatively equitable compensation or an account of profits.
I heard the dispute over five days commencing 28 August 2017, and gave judgment on 28 September 2017 [1] . I found (not surprisingly) that Danset had breached the franchise agreement. However, I concluded, BBA did not prove that it had suffered any loss. I found, further, that Danset owed no fiduciary obligations to BBA, and was not a trustee of the business assets for the benefit of BBA, so that there was no basis for awarding equitable compensation. As to the claim for an account of profits, I concluded that there was no basis on which Danset should be ordered to account to BBA for such profit as it had derived on the sale of its business assets.
My decision left unresolved one issue: BBA's claim that it was entitled to be indemnified, under the franchise agreement and a deed of guarantee and indemnity executed contemporaneously with it, for "enforcement expenses". I declined to deal with that claim, because BBA's evidence seeking to quantify it had been provided very late indeed, and Danset had had no opportunity to consider it. I said that if the issue were pressed, it should be referred out.
BBA appealed from the whole of my decision. However, it said, as part of its appeal, that I should have decided the enforcement expense issue, and done so in its favour. Danset and Mr and Mrs Miraldo cross-appealed. They, too, said that I should have decided the enforcement expense issue. However, they said, I should have decided it in their favour.
The Court of Appeal dismissed the appeal and cross-appeal [2] . Their Honours' decision left alive the enforcement expense issue.
The position now reached is that the parties ask me to decide whether, on the proper construction of the relevant provisions of the franchise agreement and the deed of guarantee and indemnity, BBA is entitled to recover enforcement expenses. It appears to be common ground that if I decide that question in BBA's favour, the quantification of those expenses can be dealt with either by reference out or in some other way.
The question of construction was fixed for hearing before me on 28 September 2018. The parties prepared a bundle of relevant documents, and provided written submissions. They then agreed that there was no need for the hearing, and that I could determine the question of construction on the papers.
[3]
Relevant provisions of the Franchise Agreement and the Deed of Guarantee and Indemnity
Mr Herzfeld of Counsel, for BBA, relied on cls 8.6 and 20.14 of the franchise agreement. However, as Mr Pike of Senior Counsel, who appeared with Mr Burnett of Counsel for Danset and Mr and Mrs Miraldo pointed out, those clauses need to be considered in context. The immediate contractual context includes cls 8.7 and 20.13.
I set out cls 8.6, 8.7, 20.13 and 20.14 of the franchise agreement:
8.6 FRANCHISEE and each of the Principal Owners must at all times indemnify and hold harmless, to the fullest extent permitted by law, FRANCHISOR, its Affiliates and the officers, directors, members, shareholders, partners, agents, representatives, independent contractors, servants, employees, successors and assigns of each of them ("Indemnitees"), from all Losses and Expenses incurred in connection with any action, suit, proceeding, claim, demand, investigation or inquiry (formal or informal), or any settlement thereof (whether or not a formal proceeding or action has been instituted) which arises out of or is based upon any of the following:
(a) Infringement, alleged infringement, or any other contravention or alleged contravention by FRANCHISEE or any of the Principal Owners of any patent, trademark, service mark, copyright or other proprietary right owned or controlled by third parties (except as may occur with respect to any right to use the Marks or other Confidential Information granted under this Agreement if such use is in accordance with the terms of this Agreement);
(b) The contravention, breach or alleged contravention or breach by FRANCHISEE or any of the Principal Owners of any federal, state or local law, regulation, ruling, standard or directive or any industry standard;
(c) Defamation of FRANCHISOR, its Affiliates, the BLOCKBUSTER System or any franchisee or developer operating under the BLOCKBUSTER System, by FRANCHISEE or by any of the Principal Owners;
(d) Breach by FRANCHISEE or by any of the Principal Owners of any condition, warranty, representation, agreement or obligation in this Agreement or in any other agreement between FRANCHISEE or any of FRANCHISEE'S Affiliates and FRANCHISOR or any of its Affiliates, or the officers, directors, members, shareholders, partners, agents, representatives, independent contractors, servants and employees of any of them; and
(e) FRANCHISEE's acts, errors, or omissions or those of FRANCHISEE's Affiliates or any of the Principal Owners and the officers, directors, members, shareholders, partners, agents, representatives, independent contractors and employees of each of them in connection with the establishment and operation of the STORE or under this Agreement, including, but not limited to, any acts, errors or omissions in the operation of any motor vehicle. The parties acknowledge and agree that FRANCHISOR cannot and does not exercise control over the manner or operation of any motor vehicles used on FRANCHISEE's behalf or by FRANCHISEE or any of FRANCHISEE's employees, agents or independent contractors and that the safe operation of those motor vehicles is FRANCHISEE's responsibility;
(f) allegations against an Indemnitee of any form of negligence, if a court of competent jurisdiction determines that such Indemnitee is not negligent.
8.7 FRANCHISEE and each of the Principal Owners agree to give FRANCHISOR immediate notice of any action, suit, proceeding, claim, demand, inquiry, or investigation described in clause 8.6. At FRANCHISEE's expense and risk and that of each of the Principal Owners, FRANCHISOR may elect to appoint lawyers of its own choosing with respect to, the defence, cross-claim, and/or settlement of any such action, suit, proceeding, claim, demand, enquiry or investigations. Any such appointment by FRANCHISOR will, in no manner or form, diminish FRANCHISEE's obligation and that of each of the Principal Owners to indemnify the Indemnities and to hold them harmless.
…
20.13 If FRANCHISOR or FRANCHISEE is required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in such proceeding shall be reimbursed by the other party for its costs and expenses, including, without limitation, reasonable accountants', lawyers', lawyer assistants', arbitrators' and expert witness fees, staff and administrative costs of investigation and proof of facts, court costs, other litigation expenses and travel and living expenses, whether incurred prior to, in preparation for or in contemplation of the filing of any such proceeding.
20.14 Subject to Clauses 20.17 to 20.28, if FRANCHISOR is required to engage legal counsel in connection with any failure by the undersigned to comply with this Agreement, FRANCHISEE shall reimburse FRANCHISOR for any of the costs referred to in clause 20.13 and expenses incurred by it.
It will be noted that cl 20.14 operates subject to cls 20.17 to 20.28. I do not propose to set out those clauses. They dealt with the topic of "Dispute Resolution". In outline, those clauses provided for a staged process for the resolution of disputes, comprising:
1. first, direct negotiation;
2. then, non-binding mediation; and
3. thereafter, arbitration.
I note that cl 20.21 provided that each party was to bear its own costs of the mediation, with the costs of the mediator being born by the parties equally. Clause 20.24 provided for the parties to bear their own costs of the arbitration, and for the costs of the arbitrator to be born by them equally unless the arbitrator decided otherwise.
Mr Herzfeld relied, alternatively, on cl 8 of the deed of guarantee and indemnity. That clause states:
8. Expenses
The Guarantor shall repay to FRANCHISOR any expenses incurred by FRANCHISOR in connection with the enforcement of any of its rights under this Guarantee, including legal costs on a full indemnity basis.
Since that clause effectively calls up the Guarantor's obligations, I set out cls 1 and 2 of the deed, where those obligations are found:
1. Guarantee
The Guarantor unconditionally guarantees the due and punctual performance by FRANCHISEE of its obligations to FRANCHISOR under the Agreement (other than obligations if any, which the Agreement imposes on both FRANCHISEE and the Guarantor).
2. Indemnity
As a separate and additional liability under this Guarantee, the Guarantor agrees to indemnify FRANCHISOR for any amount due to it from FRANCHISEE under the Agreement, and for any loss caused to FRANCHISOR by any breach of the Agreement by FRANCHISEE.
[4]
The parties' submissions
The submissions referred to the principles bearing on the construction of contracts of indemnity. It appeared to be common ground that the ordinary principles of construction of commercial contracts should be applied, with a rider that if, after applying those principles, there remained some doubt or ambiguity, the court should favour that construction which operates in favour of the indemnifier.
The submissions dealing with cl 8.6 referred to the decision of Mukhtar AsJ in BB Australia Pty Ltd v Constanti [3] . His Honour dealt with what appeared to be a franchise agreement in identical terms to the one with which I am concerned. At [46], his Honour said that cl 8.6 was "not an enforcement costs clause but an indemnity for losses caused to the franchisor for suits brought by third parties for wrongful conduct by the franchisee". His Honour's decision was referred to, without comment, in the judgment of Barrett AJA in the appeal referred to earlier [4] .
Mr Herzfeld submitted that Mukhtar AsJ had erred in his construction of cl 8.6. He accepted that the clause encompassed third party claims against BBA, but submitted that it should not be so limited. He submitted, further, that the fact of overlap between cl 8.6 on the one hand and cls 20.13 and 20.14 on the other did not require that a limited reading be given to cl 8.6.
Mr Herzfeld submitted, next, that there was no need for demand to have been made before cl 8.6 could operate. He submitted that the action on a contract of indemnity was one for damages, for breach of the promise to indemnify, not an action in debt to recover a liquidated amount.
Next, Mr Herzfeld submitted, cl 8.6 could operate even though BBA had not recovered substantial damages against Danset. He submitted that it was enough that had been breaches of the franchise agreement, and that BBA had commenced proceedings to enforce its rights.
Finally, as to cl 8.6, Mr Herzfeld submitted that the costs payable by reason of its operation were to be assessed on the indemnity basis. He relied in particular on the words "to the fullest extent permitted by law".
As to cl 20.14, Mr Herzfeld submitted that it was not limited in its operation by reference to cl 20.13. He submitted, as he had done with cl 8.6, that the operation of cl 20.14 was triggered because of Danset's admitted breaches of contract.
Mr Herzfeld submitted, next, that the reference to "reasonable lawyers' fees" (accepting that this statement elides somewhat the language of cl 20.14) should be construed to encompass costs on the indemnity basis.
As to cl 8 of the deed of guarantee and indemnity, Mr Herzfeld submitted, essentially for the reasons that he had given in relation to cls 8.6 and 20.14, that:
1. there was no need for demand prior to action; and
2. on its proper construction, cl 8 required the "Guarantor" to pay costs on the indemnity basis.
Mr Pike submitted that the decision of Mukhtar AsJ was correct. He submitted, as to cl 8, that:
1. it should be limited to defensive costs (in this respect, adopting the reasoning of Mukhtar AsJ);
2. the reference to "reasonable lawyers' fees" meant that the fees had to be reasonably incurred. It could not be correct, Mr Pike submitted, that the obligation to pay reasonable lawyers' fees could encompass costs incurred by Danset in the unsuccessful enforcement of its rights, because "the costs of engaging in expensive litigation [could not] be considered 'reasonable'" [5] ;
3. Clause 8.6 should not be construed in the abstract, but with regard to its context, including cls 20.13 and 20.14. It was necessary to limit the operation of cl 8.6 so as to give those clauses some real work to do.
4. the construction advanced by BBA would lead to capricious results, because cl 20.13 dictated that Danset should have its costs, and (on BBA's construction) cl 8.6 dictated that BBA should have its costs.
5. the court should strain to avoid a construction which had the result that BBA was entitled to recover its costs for engaging in unmeritorious litigation; and
6. the reference to "reasonable" costs meant that any indemnity should be limited to costs on the ordinary basis.
As to cl 20.14, Mr Pike submitted that it should be construed to operate in conjunction, or in tandem, with cl 20.13. In this case, the event for which cl 20.13 prescribed the costs consequences occurred. It followed, Mr Pike submitted, that there was no room for cl 20.14 to operate.
Next, Mr Pike submitted, it could not be correct to say that BBA was "required to engage legal counsel" in this case, because it had a choice. It chose to commence proceedings voluntarily by reason of admitted breach, and failed to prove any loss.
As to cl 8 of the deed of guarantee and indemnity, Mr Pike submitted that it did not apply because any "expenses" incurred in connection with the "enforcement" of rights could not catch unsuccessful attempts to enforce those asserted rights. He relied on the decision of Einstein J in Precious Metals Australia Limited v Xstrata (Schweiz) A-G [6] at [47].
As to both cl 20.14 and cl 8, Mr Pike repeated his submission that any indemnity available should be limited to costs reasonably incurred - that is to say, to costs on the ordinary basis.
Mr Herzfeld provided written submissions in reply. It is not necessary to summarise them. What I have said is sufficient to give content to the debate, and an indication of the issues with which I am required to deal.
[5]
General considerations
The franchise agreement appears to have been drafted by a process of accumulation rather than with the application of sustained intellectual effort. The apparent overlap between the various clauses to which the parties referred in their submissions is proof of that.
The point is particularly clear in relation to cl 20.13. It refers to a party commencing a judicial or arbitration proceeding if that is "required to enforce this Agreement", and provides that the party prevailing shall have its costs. However, in relation to arbitration, cl 20.24 provides that each party should bear their own costs of any arbitration (the discretion given to the Arbitrator to award otherwise appears to be limited, in its field of operation, to the Arbitrator's costs).
The confusion of thought, or perhaps simply laziness, that the drafting displays does not make it particularly easy to apply well-recognised canons of construction. That applies in particular to the well-known principle that the parties to an agreement should be understood to have intended every clause of it to have work to do, and that the agreement should be construed so far as possible to give effect to this understanding.
Leaving aside the confusion I have just mentioned, cl 20.13 is clearly intended to deal with the costs consequences of proceedings between the parties to the franchise agreement. That being so, one would not expect another clause of the same agreement to have been intended, objectively, to deal with the same subject-matter. This consideration suggests that cl 8.6 was intended to deal with costs and disbursements incurred in proceedings to which cl 20.13 had no application.
[6]
Clause 8.6
Turning to cl 8.6, its language is strongly suggestive, as Mukhtar AsJ recognised, of an indemnity against costs incurred by BBA in defending claims brought against it. The subject matter of the indemnity is "Losses and Expenses" incurred in connection with (to use a general term) claims arising out of the matters specified in paras (a) to (f). Those paragraphs contemplate that a claim may be made against BBA by reason of some act or default on the part of (in this case) Danset or Mr and Mrs Miraldo.
That reading of cl 8.6 is reinforced by cl 8.7. The opening sentence of cl 8.7 requires Danset and Mr and Mrs Miraldo to give BBA immediate notice of any claim of the kind described in cl 8.6. That could hardly be applicable where the claim in question is one brought by BBA as franchisor against Danset as franchisee.
Further, to construe cl 8.6 as extending to entitle BBA to be indemnified by Danset for the costs of unsuccessful proceedings brought by BBA against Danset would put it in direct conflict with cl 20.13. Again, that suggests that the two clauses are intended to have independent operation, each exclusive of the other.
In my view, cl 8.6 does not entitle BBA to be indemnified by Danset for costs incurred in investigating and litigating its claims against Danset and Mr and Mrs Miraldo. It applies in the circumstances identified at [35] above.
[7]
Clause 20.14
Turning to cl 20.14, it is to be read in conjunction with cl 20.13. Clause 20.13 applies where a dispute is taken to a court or to arbitration. Clause 20.14 applies where there is a dispute, and BBA engages "legal counsel", but neither litigation nor arbitration ensues.
It follows, in my view, that cl 20.14 has no application.
[8]
Clause 8
I turn to cl 8 of the deed of guarantee and indemnity.
In my view, it is correct to say, as Einstein J said in Precious Metals Australia, that BBA has not "enforced" any of its rights under the guarantee. What it did was call upon Mr and Mrs Miraldo pursuant to their obligations under cls 1 and 2. But in the event, there was nothing to which those clauses could attach, because BBA failed in its claim against Danset. To paraphrase what Einstein J said at [47], the word "enforcement" does not mean "unsuccessful attempts at enforcement" or "making an invalid claim to enforce". I set out that paragraph of his Honour's reasons:
The word "enforcing"
[47] In my view the word "enforcing" [in the context of enforcing the Guarantee and Indemnity] cannot be stretched to mean "unsuccessfully attempting to enforce" or "making an invalid claim to enforce". The natural meaning of the enforcement of a legal right is just that. An attempt to make [and pursue in curial proceedings] a misconceived claim to what is in due course held not to be a legal right, cannot properly be described as "enforcing a legal right". To the contrary this will have been shown to have been an attempt to enforce something entirely different.
[Square brackets in original.]
I agree with his Honour's analysis.
[9]
Conclusion
That is enough to decide, against BBA, the claim for enforcement expenses. I do not propose to deal with the other grounds on which Danset and Mr and Mrs Miraldo sought to resist that claim.
[10]
Orders
I make the following further orders:
1. order that prayers for relief E, F and K in the further amended originating process filed on 11 March 2016 be dismissed.
2. Order the plaintiff to pay the first, second and third defendants' costs of the proceedings, including of the reserved prayers for relief.
[11]
Endnotes
BB Australia Pty Ltd v Danset Pty Ltd [2017] NSWSC 1307.
BB Australia Pty Ltd v Danset Pty Ltd [2018] NSWCA 101.
[2017] VSC 114.
[2018] NSWCA 101 at [58], note 24.
Written submissions at [18].
[2005] NSWSC 141.
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Decision last updated: 14 November 2018