CGM Investments Pty Ltd v Chelliah

REASONS FOR JUDGMENT 1 In the early 1980s the second applicant, A Whistle & Co (1979) Pty Limited, a company controlled by Mr Burchall, established a carpet cleaning business which employed the trademark "Electrodry" and an exothermic chemical process. This process claims to allow stains to be removed with minimum moisture so that the carpet can be used shortly after cleaning. When carpets are steam cleaned they cannot be used for many hours. The business was first conducted in country New South Wales. When it was decided to establish the business in the city, Whistle advertised for assistance. The fourth respondent, Mr Jain, answered the advertisement. In due course he and Mr Burchall agreed that, through their respective entities, the first applicant CGM Investments Pty Ltd and Jain Co Services, they would establish the third respondent, Wallera Pty Ltd, to operate the business in the cities. By an agreement dated 15 May 1984 CGM, which by then had acquired from Whistle the right to the business and to the use of the name, granted Wallera an exclusive licence to use the name Electrodry and the process in that part of Sydney which bounded the suburbs of Hornsby to the north, the east coast of Australia to the east, the township of Campbelltown to the south-west and the township of Penrith to the west. The agreement (by cl 2(c)) gave Wallera "an option for an exclusive licence to use the name Electrodry and a licence to use the process for each of the areas of metropolitan Brisbane and metropolitan Melbourne". The options were exercised. In this proceeding the applicants allege, among other things, that the agreement for metropolitan Melbourne has been brought to an end either by the express agreement of the parties, by their implicit agreement, or that it was terminated by CGM following its repudiation by Wallera. A claim that Wallera is estopped from contending that the agreement remains in force has itself been abandoned, no doubt because the facts did not support the estoppel. Further CGM contends that Wallera is now impermissibly using the process and the trademark. It seeks relief accordingly. Wallera's principal defence is that the Melbourne agreement remains in force. For this reason the parties requested that an order be made that I determine before trial whether or not the Melbourne agreement is subsisting. An order to this effect was made, although the precise form of the questions for determination has been refined somewhat since that time. 2 Before turning to the issues directly raised by the dispute, it is necessary first to consider a preliminary matter, namely what are the principal terms of the Melbourne agreement? On one view, being the view preferred by Wallera, there are no express terms to this agreement and all terms must be implied. This contention is based on the fact that the principal franchise agreement does not specifically mention any term that is to be incorporated into the agreement which comes into existence upon the exercise of the option conferred by cl 2(c). Accordingly, so this argument went, the only terms of that agreement that do exist are those that can be implied according to well established principles. 3 There is a competing view, and it is the view which I prefer. That view is that an agreement which comes about when an option is exercised is on the same terms as the principal agreement save for such changes as may be necessary to accommodate the fact that the agreement confers a licence for a different area. I think that this is the plain intendment of the agreement. That is, the common assumption made by the contracting parties is that their rights and obligations will be the same in each area where the licence operates: compare Bateman v Tsaocis [1960] NSWR 471, 473 . See also by way of analogy Brambles Limited v Daryl Wail [2002] VSCA 150 at [57]-[62]. On this view, the only terms of the principal agreement which are not included in the Melbourne agreement are those which describe the geographic area in which the licence is to operate. The area "metropolitan Melbourne" is substituted for the area that appears in the principal franchise agreement. 4 I suppose also that the option clause itself is not to be regarded as having been repeated in the Melbourne agreement. First, the option has been spent because it has been exercised for each option area. Second, even if the option for one area had not been exercised, it could still be exercised within the stipulated period (six months under the principal agreement), and thus there would be no point in repeating it. 5 The provisions of the Melbourne agreement to which attention should be drawn are the following. Clause 4 provides for the payment of a licence fee of $1.00 per month payable annually in advance. Clause 5 requires Wallera to "exploit its rights to use the name Electrodry and the process in a proper and businesslike manner". There is a provision for termination in cl 8. The agreement can be terminated forthwith should a party fail to remedy a breach one month after having been given notice that the breach should be remedied. It can also be terminated upon the winding up of Wallera, that company making a composition with its creditors, or a receiver or manager being appointed over its property. 6 The principal franchise agreement was "interdependent" upon an agreement of the same date "for the supply of services and materials by CGM to Wallera". This supply agreement required CGM to promote Wallera with certain defined "resources" for six months or longer by agreement. The "resources" were marketing personnel and such other resources, including transportation, equipment and supplies, as Wallera might reasonably require to exploit the licence. The consideration for the supply agreement was a cash payment of $50,000, one half of Wallera's gross profits and an obligation to pay certain advertising fees. 7 It is not clear whether a supply agreement was entered into in relation to the Melbourne franchise. I rather suspect that no such agreement was made, for if it was executed it is likely that it would have been produced by one of the parties. It was not suggested, however, that the absence of a supply agreement for the Melbourne franchise in any way affected the validity of the Melbourne agreement. 8 Wallera exploited the Melbourne franchise at least until late 1991. First it granted a sub-franchise of the Melbourne area to Seguta Pty Ltd, for which it received royalties for about two years. Seguta ceased operations in 1987 and the business lay dormant until 1 July 1991 when Wallera granted J & R Williams the exclusive right to exploit the name and the process in metropolitan Melbourne. In return, J & R Williams agreed to pay $75 per week for each vehicle that operated under the Electrodry name, as well as the cost of certain advertising. Williams' conducted the business directly and through a number of sub-franchisees until late 1991 when they ceased operations because of financial problems. 9 When the Williams' ceased conducting the business Wallera may have continued to operate the franchise until early 1992. Mr Jain gave evidence to this effect. During the same period (that is after Williams' stopped operations), CGM claims to have conducted the business in Melbourne by taking over Williams' former sub-franchisees. The conflicting evidence about this situation need not be resolved because nothing turns on it. 10 There is, however, a more important dispute which does require resolution. According to Mr Burchall, by the end of 1991 Wallera was indebted to CGM for about $35,000 and could not pay that debt. For this reason Mr Jain agreed to "relinquish its rights to the name 'Electrodry' in Melbourne" in return for CGM giving up its money claim. Mr Jain, on the other hand, denies there was ever any conversation between him and Mr Burchall relating to the relinquishment by Wallera of its right to use the name and process in Melbourne. 11 In support of this claim the applicants point to the fact that after 1991 (or perhaps after the early part of 1992) Wallera did not carry out any operations in Melbourne, either directly or through sub-franchisees. Mr Jain sought to explain away this inactivity by asserting that "[b]etween 1993 and 1997 Paul Burchall and I agreed that it was not opportune to tackle the Melbourne market as it appeared that Victoria was going through some unstable economic times and that carpet cleaning would be low on people's financial priorities". Mr Burchall denies there was such a conversation. 12 I should say, both to these and to other aspects where this is a conflict between Mr Burchall and Mr Jain, that I find the evidence of each to be thoroughly unsatisfactory. Although it is true that Mr Burchall was dealing with a conversation which he says occurred more than ten years ago, his description of it changed significantly. The first account presented a simple case of an agreement to forgive a debt in consideration for giving up an agreement. It turned out, however, that CGM had not given up its debt because some of it had been paid after the date of the alleged agreement. For there to be any agreement Mr Burchall had to change its terms. He explained that the agreement in fact had three elements, one was that some of the debt was to be paid, another was that the remainder of the debt was to be forgiven, and the third element was that Wallera agreed to give up its franchise. However Mr Burchall was all at sea when asked to explain what portion of the debt was forgiven and what portion had to be paid. In the end he opted for the position that the only part of the debt which required payment was that which had been the subject of a dishonoured cheque. The position became further complicated when it was revealed during the course of his cross-examination, that a significant proportion of what was alleged to have been owed by Wallera turned out to include debts which had been paid, as well as debts which were owed by other companies associated with Mr Jain. Moreover, when I asked the applicants' counsel to specify precisely the terms of the putative agreement, I was given an unsatisfactory response. All in all, I am not satisfied that there was any agreement to discharge the Melbourne franchise. 13 By the same token, I am far from satisfied that Wallera refrained from operating the Melbourne franchise according to some arrangement between Mr Burchall and Mr Jain. To the contrary, I reject Mr Jain's evidence on this score. I have considered Mr Jain's account of the arrangement, even though in the form that it was given it was clearly inadmissible. No objection was made as to its inadmissibility. The evidence does, however, suffer from the following deficiencies. No details of the conversations were given and one is only left to surmise what was said. Nor is there any indication on how many occasions the topic was discussed. Mr Jain's evidence implies that the matter was discussed on a number of occasions during the relevant period. But it was left to my imagination to determine how often. It is simply not good enough for such an important topic to be dealt with in this way. Perhaps one reason which may explain Mr Jain's reticence is that it is incorrect to suggest that the economic situation in Victoria was so poor for the whole of the period from 1992 through 1997 that the business could not operate. It is common knowledge (that is, knowledge of which I can take judicial note) that the picture was not so bleak as Mr Jain painted it to be. In the end Mr Jain's evidence was so unsatisfactory that it should be given no weight. 14 I will put to one side the claim that there was an agreement that Wallera need not conduct operations in Melbourne until an improvement of the economic climate and proceed on the basis there were no discussions about the conduct of the Melbourne franchise between 1992 and mid 1998. The Melbourne agreement was raised by Mr Burchall in the context of a dispute about the Sydney operations in late 1998. When dealing with that dispute (the details of which need not be mentioned), Wallera wrote to CGM on 7 November 1998 and said: "We are currently in the process of establishing sublicensing arrangements to re-enter the Melbourne market". CGM responded a few weeks later, stating: "As to the issue of Melbourne Wallera gave up its rights to the Melbourne area by agreement when it decided not to pay for the outstanding debts of the Franchise in that area. It was an agreement that if A Whistle would pay for those debts instead of Wallera then Wallera would release those rights. If Wallera wants to reimburse A Whistle & co (1979) Pty Ltd for its expense then that can be agreed to". 15 Shortly after the receipt of this letter, Wallera's solicitors forwarded to CGM its client's cheque for $420 "representing the license fee for the balance of the term" of the Melbourne agreement. In evidence Mr Jain said that the reason for this payment was "Rather than forgetting every year and being in arrears, we thought, '[l]et's cover the whole term in one go'." I reject this explanation. I am sure that the money was paid to deny CGM the opportunity to terminate the agreement for breach. In this connection I should also mention that Mr Jain asserted that prior to December 1998 Wallera had paid its monthly franchise fee. No evidence of any payment was produced. The few banking records that have been put into evidence do not support the assertion, and I am inclined to the view that it should be disregarded. 16 There is one further matter which is relevant. Although Wallera asserted in 1998 that it was then in the process of re-establishing the Melbourne franchise, that statement was not true. Mr Jain unequivocally conceded, that Wallera did "nothing" (his word) to use the name or the process in Melbourne between 1992 and 2002. 17 Whenever parties make a contract it is possible that they have conducted themselves in such a way that it can be said by implication that they have agreed to rescind their bargain: Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93, 114; Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520, 534. This was dealt with by Isaacs J in Summers v Commonwealth (1918) 25 CLR 144. In that case the parties had entered into a contract for the supply of a specified number of blocks of marble each of a certain dimension. For some time neither party took any step to perform the contract. It was held that the parties had abandoned or abrogated the contract. Isaacs J said (at 151-152): "Whatever the terms of contract may be, it is possible for the parties so to conduct themselves as mutually to abandon or abrogate it. A position not too altogether dissimilar arose in the case of De Soysa v De Pless Pol [1912] AC 194. There, neither party had repudiated or refused to perform the contract, nothing in the nature of recision had occurred, but, said Lord Atkinson for the Privy Council: - 'One party to a contract is not bound to give the other unlimited time after a day named to do that which the other has contracted to do. There must be some point of time at which delay or neglect amounts to refusal … In truth, the project seems to have been, to a great extent, if not altogether, abandoned by all the parties concerned.' In my opinion, that is the legal position here. Informally, but effectively, the parties have so acted in relation to each other as to abandon or abrogate the contract." Summers v Commonwealth has been applied by the High Court in D T R Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423. This case concerned a contract for the sale of land. The purchaser purported to rescind the contract on the basis that the vendor had repudiated the contract by not complying with a condition. The vendor asserted that the purchaser's rescission constituted a wrongful repudiation and that the contract was thereby at an end. Stephen, Mason and Jacobs JJ (with whom Aickin J concurred) said (at 434): "[T]here can be no doubt that … when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as still being on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract." 18 In my view, the authorities to which I have referred establish not only that an agreement can be abandoned by conduct, but also that the question whether an agreement has been abandoned does not require one to examine whether the parties actually had the intention of abandoning the agreement; only whether their conduct, when objectively viewed, manifests that intention. This conclusion accords with the objectivist theory of contract which is now irrevocably entrenched in our law: Taylor v Johnson (1983) 151 CLR 422. See also Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, where McHugh JA (as his Honour then was) said (at 336) that "[t]he weight of authority in favour of the objective theory is too great". 19 The position seems to be different in England. In Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 AC 854 the question that arose for consideration by the House of Lords was whether an arbitration agreement had been abandoned by delay. The speeches of the Law Lords disclose three different approaches to the resolution of that question. One approach (which I might describe as being similar to the Australian approach) is that of Lord Brandon who stated (at 913) that "[t]he question whether a contract has been abandoned or not is one of fact". He went on to add that (at 914): "Where A seeks to prove that he and B have abandoned a contract in this way, there are two ways in which A can put his case. The first way is by showing that the conduct of each party, as evinced to the other party and acted on by him, leads necessarily to the inference of an implied agreement between them to abandon the contract. The second method is by showing that the conduct of B, as evinced towards A, has been such as to lead A reasonably to believe that B has abandoned the contract, even though it has not in fact been B's intention to do so, and that A has significantly altered his position in reliance on that belief. The first method involves actual abandonment by both A and B. The second method involves the creation by B of a situation in which he is estopped from asserting, as against A, that he, B, has not abandoned the contract." [citation omitted] But these views may be contrasted with those of two other Law Lords. Lord Diplock said (at 915): "To the formation of the contract of abandonment, the ordinary principles of the English law of contract apply. To create a contract by exchange of promises between two parties where the promise of each party constitutes the consideration for the promise of the other, what is necessary is that the intention of each as it has been communicated to and understood by the other (even though that which has been communicated does not represent the actual state of mind of the communicator) should coincide. That is what English lawyers mean when they resort to the Latin phrase consensus ad idem and the words that I have italicised [underlined] are essential to the concept of consensus ad idem, the lack of which prevents the formation of a binding contract in English law." Lord Brightman said (at 924): "To entitle the sellers to rely on abandonment, they must show that the buyers so conducted themselves as to entitle the sellers to assume, and that the sellers did assume, that the contract was agreed to be abandoned sub silentio. The evidence which is relevant to that inquiry will consist of or include: (1) What the buyers did or omitted to do to the knowledge of the sellers. Excluded from consideration will be the acts of the buyers of which the sellers were ignorant, because those acts will have signalled nothing to the sellers and cannot have founded or fortified any assumption on the part of the sellers. (2) What the sellers did or omitted to do, whether or not to the knowledge of the buyers. These facts evidence the sate of mind of the sellers, and therefore the validity of the assertion by the sellers that they assumed that the contract was agreed to be abandoned. The state of mind of the buyers is irrelevant to a consideration of what the sellers were entitled to assume. The state of mind of the sellers is vital to a consideration of what the sellers in fact assumed." The principal differences between the speeches of Lords Diplock and Brightman on the one hand and Lord Brandon on the other is the former Law Lords insistence that a party must in fact understand that the other is intending to abandon, or is consenting to the abandonment (as the case may be) of the arbitration contract; Lord Brandon however appears to impose no such requirement. However, the difficulty with the views of all the Law Lords is the emphasis they place on the classic principles of formation by "sequential offer and acceptance". Phillips LJ in Tankrederei Ahren Keil GmbH v Frahuil SA (The Multitank Halsatia) [1988] 2 Lloyd's Rep 486, 491, criticised this approach, correctly in my view, saying that "[s]uch an analysis necessarily provides a somewhat formal and artificial process by which an agreement to abandon an arbitration is reached by silence." 20 As to the differences in approach of Lord Brightman and Lord Diplock, Phillips LJ said (at 492): "Lord Diplock [indicated] however, that the claimant must subjectively understand that the respondent is consenting to the abandonment of the arbitration. It is at this point that his speech conflicts with that of Lord Brightman who indicated that the state mind of the claimant as to the proper inference to be drawn from the conduct of the respondent was irrelevant. In recent cases Lord Justice Neill has expressed tentative approval of Lord Diplock's conclusion, in The Agrabele, Lord Justice Nicholls tentative disapproval in The Anticlizo and Lord Justice Bingham has stated that the position is unclear [in] the same case". (Citations omitted) As an illustration of the confusion see also: Allied Marine Transport Ltd v Vale Do Rio Doce Navegacao SA [1985] 2 Lloyd's Rep 18; Thai-Europe Tapioca Service Ltd v Seine Navigation Co. Inc (The Maritime Winner) [1989] 2 Lloyd's Rep 506. 21 In Australia this controversy need not be entered. First the cases to which I have referred, have opted for the objective ascertainment of the intention to abandon a contract. Further, a number of cases make it quite clear that the existence of a contract does not depend upon the strict application of the doctrines of offer and acceptance. It is sufficient in this regard to refer to Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32, a case in which Ormiston J (as he then was) had to consider that very issue. After a comprehensive review of Australian and overseas authorities he concluded (at 81) that a contract "can be extracted from circumstances where no acceptance of an offer can be established or inferred and where the most that can be said is that a manifestation of mutual assent must be implied from the circumstances". So it must be with an implied agreement to abandon a contract. 22 In my opinion to show that a contract has been abandoned by inactivity on both sides it is necessary to establish that the inactivity (which may sometimes amount to no more than silence on one side) produces the clear inference that one party does not wish to proceed with the contract and the other party consented to that situation. 23 This is precisely what has occurred. Wallera had assumed an obligation to exploit the name Electrodry and the process "in a proper and business-like manner". It did no such thing between 1992 and the end of 1998. I deal with the position up to that point because of the assertion made in by Wallera in December 1998 that it intended to reactivate the business. I think that where a franchisee without the consent of a franchiser does not conduct the franchise for seven years that is a sufficient indication that the franchisee intends no longer to be bound by the franchise agreement. Correspondingly CGM's silence throughout this period of inactivity (that is its failure to make any complaint that Wallera was not honouring its obligations under the franchise agreement) is a clear indication that it accepted Wallera's stance. In these circumstances the conclusion that the Melbourne franchise agreement has been abandoned is inescapable. It is a conclusion that cannot be avoided by the payment of $420 made in December. By that time it was simply too late for Wallera to breath life into the agreement. All that it could hope to achieve was to bring about a fresh agreement, and nothing along those lines has been alleged. 24 Accordingly, I propose to answer the preliminary questions as follows: Q: Was the franchise agreement made on 21 August 1984 between CGM and Wallera in relation to metropolitan Melbourne discharged by agreement? A: No. Q: Was the said agreement abandoned? A: Yes. It is not necessary to answer the remaining questions although, for the record, my inclination is that Wallera faces an uphill battle avoiding the conclusion that, if the agreement had not been abandoned, it had been terminated upon its repudiation. 25 I will hear the parties on costs. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.