Civic Video Pty Limited v Yogies Pty Limited

Supreme Court of NSW|2011-09-15|Before: Ball J

Introduction 1On 3 July 2000, the first defendant, Yogies, entered into a franchise agreement with the plaintiff, Civic Video, to operate a video rental store at premises at Kingsford. Yogies' obligations under the agreement were guaranteed by the second defendant, Mr Minchuk. Mr Minchuk and his wife are the directors of Yogies. The franchise agreement was for a period of 5 years and contained an option exercisable by Yogies to renew it for a further period of 5 years on certain terms and conditions. Civic Video claims that Yogies exercised that option, but subsequently breached the terms of the renewed agreement by not paying amounts due under it. Ultimately, Civic Video terminated the agreement for breach. It claimed an amount of $57,169.92 as the amount due under the franchise agreement up until the date of termination (that is, 12 November 2007) together with interest on that amount. On the first day of the hearing, the parties reached agreement on the amount payable by Yogies up until the date of termination. I say more about that agreement below. 2Civic Video also claims damages representing the revenue it would have earned under the contract for the balance of the renewed term. The defendants, on the other hand, deny that the contract was renewed. In the alternative, they say that Civic Video has engaged in unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1974 (Cth) (now the Consumer & Competition Act 2010) ( TPA ), or s 43 of the Fair Trading Act 1987 ( FTA ), or has breached the Franchising Code of Conduct set out in the Trade Practices (Industry Codes - Franchising) Regulation 1998 (Cth) in contravention of s 51AD of the TPA. They seek relief in respect of those contraventions under s 87 of the TPA or s 72 of the FTA.

Facts 3Prior to 30 June 2000, the store at Kingsford had been operated as a Civic Video franchise by Mr and Mrs Voulgaris. Yogies acquired the business from Mr and Mrs Voulgaris for the sum of $193,000 pursuant to an agreement dated 30 June 2000. On the same day, Yogies took an assignment of the lease of the premises occupied by the business. The lease was expressed to terminate on 1 February 2002. However, pursuant to the deed of assignment, the lessor agreed to vary the lease by including 2 options for renewal in favour of Yogies each for 3 years. 4As I have mentioned, Yogies entered into the original franchise agreement with Civic Video on 3 July 2000. The agreement was also signed by Mr Minchuk in his personal capacity as guarantor. The agreement was for an initial period of 5 years. Clause 3 contained an option to renew in favour of Yogies. It was in the following terms: The franchise relationship under this Agreement may be extended by the Franchisee for the Renewal Term if: 3.1 the Franchisee gives the Franchisor notice in writing of its intention to continue operating the Business for the Renewal Term, not more than 180 days and not less than 90 days prior to the expiration of the Term; 3.2 the Franchisee is not in breach of this Agreement at the time it gives the notice referred to in Clause 3.1 or at the date of expiration of the Term; 3.3 the Franchisee has substantially complied with this Agreement throughout the Term; 3.4 to the extent permitted by law, the Franchisee enters into a new franchise agreement in the Franchisor's current form used at the time the notice in Clause 3.1 is given but: (a) without any further initial franchise fee or renewal term; and (b) if the Lease in force at the date of this Agreement is still in force, the then current franchise agreement must not materially differ from this Agreement, except as may be required by law; and 3.5 the Franchisee's performance of the new agreement is guaranteed by such of the directors and/or shareholders of the Franchisee (including but not limited to the Guarantor) as the Franchisor may require in its absolute discretion. "Renewal Term" is defined in cl 1 and item 8 of the first schedule to be the period of 5 years. 5The franchise agreement placed a number of obligations on Mr Minchuk as guarantor, including obligations of confidentiality (cl 14), an obligation to indemnify Civic Video against third party claims (cl 16) and an obligation not to permit a change in control of Yogies (cl 17). In addition, cl 20.1 of the agreement provided that: It is a condition of the Franchisor agreeing to execute this agreement that: (a) the Guarantor, if any, agrees to execute and executes a guarantee and indemnity in the form of Annexure "A"; and (b) ... Mr Minchuk executed a guarantee in that form on the same day as the franchise agreement was signed. Clause 1 of the guarantee provided: We ("the Guarantors") jointly and severally irrevocably and unconditionally guarantee to the Franchisor the payments, when demanded from us or any one or more of us as determined by the Franchisor, of every sum of money payable by the Franchisee to the Franchisor under or in accordance with or in consequence of the Agreement. "The Agreement" is defined in the guarantee to be the "annexed Agreement" - that is, the franchise agreement executed by the parties on 3 July 2000. 6The business did not live up to Mr Minchuk's expectations and it appears that, from about 2001, he started to investigate the possibility of Yogies selling it. On a number of occasions from 2002, Mr Minchuk wrote to Civic Video's head office complaining about the performance of the business and making reference to Yogies' desire to sell it. 7On 19 January 2005, Civic Video wrote to Mr Minchuk giving notice that the franchise agreement was soon due for renewal and asking him to complete the notification set out in the bottom half of the letter advising whether Yogies wished to renew the agreement or not. 8On 1 February 2005, the lease at the Kingsford premises expired and Yogies remained in occupation on a month to month basis. In the meantime, Mr Minchuk had several discussions with Mr Laycock, the general manager of Civic Video, concerning renewal of the franchise agreement. During the course of those discussions, Mr Minchuk and Mr Laycock discussed Yogies' attempts to sell the business. Mr Minchuk expressed a desire to continue the franchise agreement on a holding over basis while those attempts continued. Mr Laycock replied that Civic Video was not prepared to agree to a holding over period and that Mr Minchuk needed to make a decision whether Yogies would exercise its rights of renewal or not. 9On 4 April 2005, Mr Minchuk wrote to George Kafataris, the managing director of Civic Video, in these terms: As per our discussions, our preferred option is to sell this business to a Civic entity. But as a precaution against not being successful and as time has run out, we wish to comply with paragraph 3.1 of the franchise agreement dated 3 July 2000, and we give notice of our intention to continue operating the Business for the renewal term. The letter was sent on Yogies' letterhead and Mr Minchuk signed as a director. 10On 26 April 2005, Mr Laycock replied to Mr Minchuk's letter confirming that Civic Video had agreed to extend the franchise "on the condition that you enter into Civic Video's current form of franchise agreement". Mr Laycock enclosed the new standard form franchise agreement together with Civic Video's franchise disclosure document. The letter went on to say: Any trading by you under the "Civic Video" name after your current Franchise Agreement expires will be deemed to be on your acceptance of and will be on the terms of the enclosed new Franchise Agreement. 11The terms of the new franchise agreement differed from those of the old in a number of respects. Significantly, the term of the agreement was stated in Item 5 of the schedule to be for 10 years and the renewal term was also stated to be for 10 years. The fees payable under the agreement were calculated by reference to the "Total Turnover" of the business, rather than "Gross Turnover". "Gross Turnover" was defined in the original agreement to exclude revenue derived from the sale of new videos and revenue derived from the sale of confectionery, drinks and ice-creams. "Total Turnover" was defined in the new agreement to include that revenue. The new agreement also provided for an advertising fee of 2 percent of total turnover, although Civic Video's position was that it would not enforce the obligation to pay that amount until more than 60 percent of its franchisees were required to make that payment. In fact, that did not occur until March or April 2010. There were also a number of other changes to the way in which the fees payable under the new agreement were calculated. In addition, the new agreement required that any assignee of the business had to enter a new agreement for the "standard term" (then, 10 years). It also imposed obligations on the franchisee to refurbish the store every 5 years and required the franchisee to provide daily (rather than monthly) reports to Civic Video. 12Clause 20.1 of the proposed new agreement was in identical terms to cl 20.1 of the original agreement. The new agreement contemplated that Mr Minchuk would sign it as well as Yogies and would sign a deed of guarantee and indemnity, which was in substantially the same terms as the guarantee and indemnity he had signed on 3 July 2000. 13In June 2005, Yogies, with the agreement of Civic Video, relocated the store to Anzac Parade, Kensington. It did so to accommodate a potential purchaser and because the store at Kingsford was subject to a demolition order. 14The original franchise agreement expired on 2 July 2005. Yogies did not return a signed version of the new agreement to Civic Video before that date; and, indeed, Mr Minchuk says that he never opened the envelope containing it. Mr Minchuk said nothing to Civic Video about the new agreement between the time when he received it and the time when the old agreement expired. He did, however, continue to operate the franchise from the new premises. 15Civic Video started to invoice Yogies for franchise fees calculated in accordance with the new agreement. Mr Minchuk gave evidence that, in many cases, he did not open the envelopes containing invoices from Yogies because his experience was that they were often inaccurate. Despite that, there is no evidence that Mr Minchuk complained about the invoices and, up until the expiration of the old agreement, Yogies paid the amounts claimed by Civic Video. 16On 31 August 2005, Mr Minchuk sent Mr Peris, the chief financial director of Civic Video, a letter enclosing a cheque for $15,000 "on account". The letter went on to say: As we are selling the business, there has been no need to renew the franchise, which expired on 1 July 2005. We are operating as a franchisee on a daily basis until the date of sale which has been contracted to conclude on 12 September 2005. On Friday 9 th I will come in to pay up the balance owing. Mr Peris passed that letter on to Mr Laycock, who rang Mr Minchuk and told him that Civic Video took the view that Yogies had renewed the agreement on the terms of the new agreement and that Civic Video did not accept that Yogies could run the store on a daily basis. 17From that time on, Mr Minchuk maintained that he had not renewed the agreement and that he was operating the franchise on a day-to-day basis until a purchaser could be found. On the other hand, Civic Video insisted that the franchise agreement had been renewed and demanded on a number of occasions, both orally and in writing, that Mr Minchuk sign the new franchise agreement and return it. 18The sale referred to in Mr Minchuk's letter dated 31 August 2005 fell through. On 28 June 2006 Mr Minchuk wrote to Mr Laycock enclosing a further cheque for $5,000 "on account". Mr Minchuk went on in the letter to complain about a conference fee for which Yogies had been invoiced. He also criticised Civic Video for failing to provide assistance in relation to the sale of the business. Mr Laycock responded to that letter on 5 July 2006 by maintaining that Yogies was bound by the renewed agreement and by asking Mr Minchuk to return an executed copy. Mr Minchuk responded to that letter on 27 July 2006. In that response he said: I have now taken further advice on the matter. Civic Video as franchisor has not re-complied with Section 11(1)(a) and (b) of the Trade Practices (Industry Codes - Franchising) Regulations 1998 ... We did not sign the renewal franchise documents and your letter of 19 January 2005. As we want to sell the video store, we will not sign the documents you sent. These documents remain unread. 19That letter was followed by further correspondence and a number of demands by Civic Video that Yogies return the signed franchise agreement - all to no avail. Eventually, some time between 6 March 2007 and 17 April 2007, Mr Minchuk met Mr Laycock at a buyers meeting. At that meeting, Mr Minchuk handed Mr Laycock the new agreement (unsigned) and Civic Video's franchise disclosure document in the envelope in which they had been sent. Mr Minchuk gave evidence that the envelope was unopened and that he had never read its contents. Mr Laycock says that he cannot recall whether the envelope had been opened or not. 20Yogies failed to make further payments in respect of the franchise and, on 14 August 2007, Civic Video gave a notice of breach of the franchise agreement. Those breaches were not remedied and, on 12 November 2007, Civic Video served a notice of termination of the agreement. Nonetheless, Civic Video agreed to supply Yogies with its December and January movie orders "to ensure you are not caught short of product during this busy time of the year". 21Following termination of the franchise agreement, Yogies entered into an agreement to obtain videos from Network Video. Ultimately, it closed its business on 31 July 2011.

The Issues 22The issues that are to be determined in this case are helpfully summarised in Civic Video's statement of issues. They are: (a)Was the franchise agreement renewed on and from 3 July 2005 and, if so, for what period and on what terms? (b)Did Mr Minchuk guarantee the obligations of Yogies from 3 July 2005? (c)If yes to (a) or (b), should relief be granted to Yogies or Mr Minchuk under s 87 of the TPA or s 43 of the FTA in respect of the alleged breaches of the Franchising Code of Conduct or the alleged unconscionable conduct? (d)If yes to (a), what damages are Civic Video entitled to recover? 23As I have mentioned, the parties reached agreement on the first day of the hearing in relation to the amount that Civic Video is entitled to recover in respect of the period between 3 July 2005 and 12 November 2007 (the date the agreement was terminated). That amount is $45,000 on the assumption that the terms of the original agreement continued to govern the relationship between the parties during that period. That is the position if Yogies continued as a franchisee on a holding over basis. The amount is $52,500 on the assumption that their relationship was governed by the terms of the new agreement during that period. That is the position if Civic Video succeeds in its claim that the agreement was renewed.

The Franchising Code of Conduct 24Before dealing with the question whether the franchise agreement was renewed and, if so, on what terms, it is necessary to say something about the Franchising Code of Conduct, since that is part of the context in which the franchise agreement must be interpreted. 25Section 51AE of the TPA relevantly provides: The regulations may: (a) prescribe an industry code, or specified provisions of an industry code, for the purposes of this Part; and (b) declare the industry code to be a mandatory industry code or a voluntary industry code; and (c) ... Section 51AD of the TPA provides: A corporation must not, in trade or commerce, contravene an applicable industry code. "Applicable industry code" is defined in s 51ACA to include the prescribed provisions of a mandatory industry code relating to the industry. A "mandatory industry code" is an industry code declared by the regulations to be so. 26The Trade Practices (Industry Codes-Franchising) Regulation 1998 reg 3 states that the codes set out in the schedule to the regulation is prescribed and is a mandatory industry code. The regulation has been amended slightly since 2005. The version I describe below is the 2005 version. 27Clause 4(1) of the schedule contains a definition of "franchise agreement". There is no question in this case that the agreement between Civic Video and Yogies dated 3 July 2000 was a franchise agreement to which the code applies. Clause 4(2) provides that a "transfer, renewal or extension of the franchise agreement" is taken to be a franchise agreement. 28Clause 6(1) provides: A franchisor must, before entering into a franchise agreement, and within 3 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document ) for the franchise in accordance with this Division. Clause 6(2) sets out what the disclosure document must contain. Clause 6B(1) provides: A franchisor must give a current disclosure document to: (a) a prospective franchisee; or (b) a franchisee proposing to renew or extend a franchise agreement. 29Clause 10 of the schedule provides: A franchisor must give a copy of this code and a disclosure document: (a) to a prospective franchisee at least 14 days before the prospective franchisee: (i) enters into a franchise agreement or an agreement to enter into a franchise agreement; or (ii) makes a non-refundable payment (whether of money or other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or (b) to a franchisee at least 14 days before renewal or extension of the franchise agreement. 30Clause 11(1) provides: The franchisor must not: (a) enter into, renew or extend a franchise agreement; or (b) enter into an agreement to enter into, renew or extend a franchise agreement; or (c) receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement; unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code. Clause 11(2) also requires that, before a franchise agreement is entered into, the franchisor must have received from the proposed franchisee a signed statement that the franchisee has received advice from any of an independent legal adviser, an independent business adviser and an independent accountant or a statement by the proposed franchisee that the proposed franchisee has been told that that kind of advice should be sought and has declined to seek it. Clause 11(2) does not apply to the renewal or extension of a franchise agreement: cl 11(3)(a).

Was the 3 July 2000 agreement renewed and, if so, on what terms? 31There is no dispute in this case concerning the applicable legal principles. One relevant principle is that the 3 July 2000 agreement should be construed having regard to the surrounding circumstances known to the parties and the purpose and object of the transactions: Toll (FGCT) Pty Limited v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Limited [2008] HCA 3; 234 CLR 151 at [53]. Another relevant principle is that the question whether the parties have entered into a contract (or exercised an option) is to be decided objectively: Brambles Holdings Limited v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153 at [81]; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [4] per Allsop P. A third is that the court should give commercial documents a businesslike construction, preferring a construction which reflects business commonsense to one which flouts it: Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 at [68]; Challenger Group Holdings Ltd v Concept Equity Pty Ltd [2009] NSWCA 190 at [71]. 32Civic Video's primary contention is that Yogies exercised the option granted by cl 3 of the original agreement when it gave notice in accordance with cl 3.1 of that agreement. From that time, and subject to the satisfaction of the conditions set out in cls 3.2, 3.3 and 3.5 or waiver of those conditions by Civic Video, there was an enforceable agreement by which the parties agreed to execute an agreement on the terms set out in cl 3.4. According to Mr Pike, who appeared for Civic Video, the alternative construction - that cl 3.4 imposed another condition on the exercise of the option - would result in a commercially nonsensical outcome. That is because, on the alternative construction, the option would be denuded of any real effect, since the option could not be exercised until the parties agreed on the new terms. In agreeing on the new terms, the parties would be agreeing on a renewal and the exercise of the option would be otiose. 33I do not accept that submission. Clause 3.4 does not require the parties to reach agreement on the terms of the renewal. It proceeds on the basis that there is an objective standard (Civic Video's then current form of agreement) by which the terms of the renewed agreement can be determined. Clause 3 is included in the agreement for the benefit of Yogies. In order to take advantage of that benefit, Yogies must do two things. It must give the notice required by cl 3.1 within the time specified. In addition, it must enter into a new franchise agreement on the terms identified in cl 3.4. If it does those two things, Civic Video must give Yogies an extension for 5 years provided Yogies has also satisfied the conditions referred to in cls 3.2, 3.3 and 3.5. Those 3 conditions are clearly for the benefit of Civic Video and, for that reason, can be waived by it: Gange v Sullivan (1966) 116 CLR 418 at 430 per Barwick CJ; Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 543 per Gibbs CJ. In my opinion, this interpretation is in accordance with the natural meaning of the words used in cl 3. The introductory words state that the agreement may be extended "if" certain things occur. One of those things is identified by cl 3.4. There is no reason to treat that clause as operating in a different way from the other conditions set out in the clause. The structure of cl 3 suggests the opposite. Interpreted in this way, cl 3 still confers a valuable right on Yogies. It permits Yogies to insist on an extension of the agreement provided it satisfies the specified conditions. 34The language of cl 3.4 is slightly odd. The words "to the extent permitted by law" are likely to have been included with the Franchising Code of Conduct in mind. Taken literally, they are a qualification on Yogies entry into a new franchise agreement. But read in that way, they make no sense. Yogies must either enter into a new franchise agreement or not. It cannot do so in a qualified way. In my opinion, the words must be read as a qualification on the terms of the new agreement. The words are saying that, provided Yogies agrees to the new terms to the extent that those new terms are permitted by law, then it has satisfied the condition, even if the terms to which it has agreed do not comprise all the terms of Civic Video's then current form of agreement. In other words, the words are allowing for the possibility that the then current form contains a term not permitted by law and are saying that Yogies does not have to agree to that term in order to satisfy the condition. 35The requirement of cl 3.4 is that Yogies "enters into" a new franchise agreement. The words "enters into" are not entirely apt to describe a unilateral act by a party entering into an agreement. It is the parties to the agreement who enter into it, not one party absent another. In this context, it seems to me that the words "enters into" must mean "do the acts by which it becomes bound by" the agreement. The relevant acts could be the signing of the new agreement and returning it to Civic Video. However, there is no reason why those acts could not include other acts which are sufficient to cause Yogies to become bound by the agreement, such as silence combined with a decision to take the benefit of an offer: see Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 (CA); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; 53 NSWLR 153. 36In my opinion, this interpretation of cl 3 is more consistent with the Franchising Code of Conduct than the one advocated by Civic Video. Clause 10 of the code requires Civic Video to give Yogies a copy of the code, the disclosure document and the franchise agreement at least 14 days before renewal. It is difficult to see how this requirement fits with the preferred interpretation of cl 3 advanced by Mr Pike. On that interpretation, Yogies became bound to enter into an agreement on the new terms when it gave notice under cl 3.1. From a practical point of view, that will almost certainly be at a time before Civic Video has complied with cl 10 of the code. Mr Pike sought to answer this point by saying that the new agreement does not come into effect until the condition in cl 3.2 is satisfied, and that condition on its face cannot be satisfied until the date of expiration of the term of the original agreement. However, that condition could be waived by Civic Video. The result is that, on Civic Video's preferred construction, it was in a position to require Yogies to enter into a new agreement as soon as Yogies gave notice under cl 3.1; and that is so even though Yogies had not been given the information required by cl 10 of the Franchising Code of Conduct or, indeed, even knew the new terms by which it is said it have become bound. I do not think that that is what the parties intended. 37It might be said that the Franchising Code of Conduct gives content to the expression "enters into", and that Yogies does not enter into the new agreement until it provides Civic Video with a written statement in accordance with cl 11 of the Franchising Code of Conduct. I do not accept that proposition. It involves reading too much into the words "enters into". It is clearly possible for the parties to enter into an agreement without complying with the requirements of the code. Moreover, that agreement is enforceable unless it is set aside by the court under s 87 of the TPA: Master Education Services Pty Limited v Ketchell [2008] HCA 38; 236 CLR 101. If the parties intended that the new agreement would not take effect until they had complied with the provisions of the code, then they would have said so. 38Mr Pike submitted that a difficulty with interpreting cl 3.4 as a condition to the exercise of the option is that it would mean that Civic Video would not know whether the option had been exercised or not until that condition was satisfied - which may only be at the time the new agreement takes effect. But that difficulty existed in any event. It existed if Civic Video did not waive compliance with the condition in cl 3.2. It also existed in the absence of compliance with the Franchising Code of Conduct since, in the absence of compliance, there was always a risk that a court would set aside the agreement under s 87 of the TPA. In my opinion, the difficulty to which Mr Pike points is a difficulty that Civic Video accepted when it agreed to cl 3 of the original agreement. 39The question, then, is whether Yogies became bound by the terms of the agreement enclosed with Civic Video's letter dated 26 April 2005. In my opinion, subject to one qualification, it did. 40Mr Minchuk said that he did not read the agreement enclosed with that letter. I do not accept that evidence. That evidence is inherently implausible. Mr Minchuk was in the process of trying to sell his business. It would have been of importance to him to know the terms of the new agreement since those were the terms on which any purchaser would have to take the business. Moreover, when Mr Minchuk first started to assert that he was not bound by the new agreement he said that he had not read it. Only later did he assert that he had not opened the envelope. If that really was the position, it is likely that he would have made that assertion from the start. In addition, Mr Minchuk was not a reliable witness. He said that he did not open many of the invoices he received from Civic Video because they were unreliable and therefore of no interest to him. However, there is no evidence that he ever complained about the unreliability of those invoices. Moreover, he did complain about an invoice for conference fees. On Mr Minchuk's evidence it must simply have been good fortune that he opened the envelope containing that invoice and not others. That strikes me as implausible. Mr Minchuk came across as an intelligent person who well understood his rights. He was very concerned about the costs of the business, as his complaint about the conference fees demonstrates. I find it improbable in those circumstances that he would not have examined carefully the invoices sent to him by Civic Video. However, if his evidence about not opening the envelopes containing the invoices is not accepted, then I do not think that the court should accept his evidence about not opening the envelope containing the renewal agreement either. 41In any event, whether Mr Minchuk read the terms of the new agreement or not, does not matter. He received the agreement and said nothing to Civic Video before the expiration of the old agreement to suggest that he had not read those terms. Objectively, he must be taken to have read them. 42There is also considerable evidence in support of the proposition that Yogies agreed objectively to be bound by the terms of the new agreement. Yogies had given notice to Civic Video that it proposed to exercise the option granted by cl 3. Yogies knew from Mr Minchuk's discussions with Mr Laycock that Civic Video would not agree to a holding over period and it knew through him that Civic Video was proceeding on the basis that the option would be exercised. Mr Minchuk said nothing to disabuse Civic Video of that view. Instead, following the date of the expiration of the old contract, Yogies continued to exercise the rights of a franchisee. 43There are, however, two issues that need to be addressed. The first is that the option that Yogies sought to exercise was an option to renew the agreement for a period of 5 years. On the other hand, the obligation that Civic Video sought to impose on Yogies was an obligation to enter into a new franchise agreement for 10 years. Civic Video claims that it was entitled to insist on that term because that was one of the terms of the then current standard form contract. But cl 3.4 must be read together with the opening words of cl 3. Reading those two parts together, cl 3.4 cannot be read as imposing a requirement on Yogies to enter into a new agreement for the term of the then current standard form contract. It must be read as imposing a requirement to enter into a new agreement on the terms of the then current standard form other than the term concerning the length of the agreement - since that term was supplied by the opening words of cl 3. However, in my opinion, this point does not affect the question whether (objectively) Yogies exercised the option. Yogies gave notice that it intended to exercise the option. It was then given Civic Video's current standard form contract. It was not obliged to accept the terms of that contract to the extent that they provided for a longer contract than one for 5 years because the option it exercised was an option for 5 years. It was not open to Civic Video to impose as a condition of the exercise of that option that Yogies agree to a term of 10 years. When Yogies continued to exercise its rights as franchisee, it must be taken to have exercised the option that it was granted and, in doing so, agreed to the new standard terms to the extent that those standard terms were consistent with the option it had said it intended to exercise. 44The second issue concerns the guarantee. Clause 3.5 requires as a condition of the exercise of the option that Yogies obligations be guaranteed by such of its directors and shareholders as are specified by Civic Video. It is clear from the agreement enclosed with Civic Video's letter dated 26 April 2005 that Civic Video had specified Mr Minchuk as someone from whom it required a guarantee. In the events that occurred, Yogies and Mr Minchuk must be taken as having accepted that condition. Mr Minchuk had guaranteed Yogies obligations under the old agreement in the same terms as the terms sought in relation to the new agreement. All Civic Video was seeking so far as the guarantee was concerned was a continuation of the existing arrangements. The letter dated 26 April 2005 was addressed to Mr Minchuk and, indeed, all Yogies dealings with Civic Video were through Mr Minchuk. In those circumstances, I think that Yogies and Mr Minchuk must be taken to have agreed that Mr Minchuk would renew the guarantee that he had given in relation to the previous agreement when Yogies continued to exercise the rights of a franchisee. 45It follows from what I have said that the franchise agreement was renewed for a period of 5 years on the terms of the standard form contract sent under cover of Civic Video's letter dated 26 April 2005 (other than as to the term of the agreement and the option for renewal contained in that standard form).

Did Mr Minchuk guarantee the obligations of Yogies from 3 July 2005? 46It follows from what I have already said, that the answer to this question is "yes".

Are Yogies and Mr Minchuk entitled to relief under the TPA or FTA? 47Yogies and Mr Minchuk put their claim for relief on two bases. One is that Civic Video did not comply with the Franchising Code of Conduct. The other is that Civic Video engaged in unconscionable conduct.

The Franchising Code of Conduct 48A preliminary question is whether what occurred on 3 July 2005 should be treated as a renewal of the franchise agreement or as entry into a new franchise agreement for the purpose of the Franchising Code of Conduct. Mr McAuley, who appeared for Yogies and Mr Minchuk, submitted that it should be treated as entry into a new agreement because the terms of the new agreement differed substantially from those of the old. I do not accept that submission. In my opinion, the expression "renew" as used in the Franchising Code of Conduct includes renewal on different terms. The code treats renewal and the extension of the scope or term of a franchise agreement together and draws a distinction between those concepts and entry into a new franchise agreement. If "renew" simply meant "renew on the same terms" that concept already seems to be covered by the expression "extend a franchise agreement". It may be that in particular cases the variations are so great that, in truth, the resulting agreement should be regarded as a new agreement rather than a renewal of an old one for the purposes of the code. But that is not the case here. The old agreement and the renewed one are in similar terms. They concern the same franchise and the same products. They impose similar obligations on the franchisee and franchisor. The renewed agreement varies the fees payable by the franchisee and modifies some of the other obligations on the franchisee. But I do not think that those changes are sufficient to mean that the agreement is not a renewal of the old one. 49The only respect in which Civic Video has not complied with the Franchising Code of Conduct is that it has entered into a renewed franchise agreement without obtaining from Yogies a written statement that it has received, read and had a reasonable opportunity to understand Civic Video's disclosure document and the code. However, on the finding I have made, Yogies received a copy of the disclosure document and the code and Mr Minchuk read them. Yogies had over 2 months to consider them before the renewed agreement took effect. That was an ample opportunity to understand them. Indeed, there is no suggestion that Mr Minchuk did not understand them. Mr Minchuk clearly understood the code. It appears that the only reason Yogies did not provide Civic Video with the written statement required by cl 11(1) is that Mr Minchuk appreciated that Civic Video was not prepared to agree to a holding over period and he appears to have sought to use the code to obtain that result. Mr Minchuk may not have been familiar with the precise contents of the disclosure document. However, there is no suggestion that he did not receive previous disclosure documents in accordance with the code and he was clearly familiar with the risks of the franchise. In those circumstances, the court should not grant any relief in respect of Civic Video's failure to comply with the cl 11(1) of the code.

Unconscionable conduct 50The precise scope of s 51AC of the TPA and s 43 of the FTA remains unclear, although it is clear that the concept of unconscionability in those sections is broader than the concept of unconscionability at common law: ASIC v National Exchange Pty Ltd [2005] FCAFC 226; 148 FCR 132; Attorney General of NSW v World Best Holdings Ltd [2005] NSWCA 261. However, in my opinion, whatever the precise scope of the concept, there is no merit in the claim that Civic Video engaged in unconscionable conduct in this case. In the end, Yogies' submission in relation to unconscionability boiled down to the claim that the new agreement was unconscionable because its terms were less advantageous to Yogies than the terms of the old agreement. However, there was nothing unconscionable in the way in which those new terms became binding on Yogies. Yogies was not put under any pressure to agree to the new terms. It had ample time in which to consider them. Mr Minchuk was an experienced businessman who was clearly capable of making his own decisions about what was best for Yogies in the circumstances. Yogies was given a choice to agree to the new terms or to terminate the franchise. But there was nothing unconscionable in that. Nor was there anything unconscionable in the substance of the new terms. Those terms reflected the standard terms offered by Civic Video to all its franchisees. The fees payable under the new agreement increased. However, as Mr Laycock explained in cross-examination, that came about as a result of changes in the market. When the original agreement was entered into, video stores derived most of their revenue from rentals. Gradually, however, they derived more of their revenue from the sale of videos, drinks and confectionery. The changes to the way in which the fees were calculated under the franchise agreement reflected that fact. The new agreement required Yogies to pay an advertising fee of 2 percent of turnover. However, Civic Video only proposed to enforce that obligation when 60 percent of franchisees became liable to pay the fee. Again, the fee can be seen as a response to changes in the market and, in particular, increased competition from other systems of delivering video content. Yogies offered no explanation for how the other changes to the agreement could be regarded as unconscionable.

What damages are Civic Video entitled to recover? 51On the conclusions that I have reached, Civic Video is entitled to damages of $52,500 in respect of the period between 3 July 2005 and 12 November 2007. With one qualification that I deal with below, it is also entitled to interest on that amount. In addition, it is entitled to damages in respect of lost revenue for the period from 13 November 2007 to 2 July 2010. Civic Video served two expert reports from Mr Temple-Cole of KordaMentha who calculates that amount as $58,464 together with interest on that amount of $13,325 up to 30 June 2011. In calculating that amount, Mr Temple-Cole: (a)Estimated the revenue that Yogies would have earned during the period from 13 November 2007 to 2 July 2010 on the basis of past trading performance and calculated the amount Civic Video would receive under the renewed agreement by reference to that revenue net of tax payable by Civic Video and net of amounts actually paid by Yogies; (b)Determined the net present value as at 12 November 2007 (the date of termination) of those amounts applying a discount rate of 12 percent to arrive at a figure of $40,925; (c)Grossed-up the figure referred to in (b) for tax to arrive at the figure of $58,464; (d)Made no allowance for the fact that on 30 October 2009 Yogies offered to settle the proceedings for the sum of $66,000 and provided Civic Video with a bank cheque for that amount at that time, which continues to be held by the solicitors for Civic Video. 52In my opinion, with one qualification, the approach taken by Mr Temple-Cole is appropriate. Mr Temple-Cole used the actual revenue earned by Yogies up until 31 December 2009 (during which it was operating as a Network Video store). For the period from 1 January 2010 until 2 July 2010, Mr Temple-Cole used the average revenue for the years 2004 to 2009 because monthly revenue amounts were not provided by Yogies for 2010. The actual revenues for the years 2004 to 2009 were:

2005 $378,780.73 2006 $370,552.57 2007 $362,691.69 2008 $379,654.42

53These figures indicate that Yogies' revenue declined significantly from 2004 to 2005 and then remained more or less flat for the following 5 years. In those circumstances, it may have been more appropriate for Mr Temple-Cole to exclude the 2004 figures in obtaining an estimate for 2010 based on the average result of past years. However, the inclusion of the 2004 figure does not make a substantial difference to the estimate of revenue for the first 6 months of 2010. In addition, the last 3 years indicate that revenue was increasing slightly. Any estimate by its nature cannot be precise. Taking those matters into account, the approach taken by Mr Temple-Cole is acceptable. 54There is no suggestion that Mr Temple-Cole miscalculated the amount that would have been earned by Civic Video under the terms of the renewed agreement on the basis of the revenue figures he used. 55Mr Temple-Cole used a discount rate of 12 percent in calculating the present day value (as at 12 November 2007) of that revenue. Yogies submitted that it was more appropriate to use a discount rate of 35 percent because Yogies' total turnover decreased by 35 percent when comparing the period July to December 2003 and July to December 2010. Yogies also submitted that that discount rate was consistent with the rapidly declining state of the video market. However, Yogies led no evidence to support these submissions. The choice of an appropriate discount rate is a matter for expert evidence. On its face, the 12 percent chosen by Mr Temple-Cole does not seem unreasonable. As I have said, the evidence is that Yogies did not experience a rapid deterioration in its revenue during the relevant period. The idea that the discount rate can be determined simply by taking the percentage reduction in revenues over a period of time is misconceived. It is particularly misconceived when the decline occurred principally from 2004 to 2005, there was no significant decline after that time and the relevant cash flows are being discounted to 12 November 2007. 56There was no suggestion that it was inappropriate to gross up the discounted amount for tax. The cash flows used by Mr Temple-Cole were net of tax. Tax is clearly payable on the judgment amount. 57That leaves the treatment of the bank cheque for $66,000. In my opinion, it is not appropriate to deduct the $66,000 from any damages claim since that amount was not actually paid by Yogies. It was only paid on condition that Civic Video accepted the cheque in settlement of the proceedings, which it did not. On the other hand, it is obvious that if that cheque is applied towards the judgment obtained by Civic Video then, to that extent, it operates as a part payment of the judgment amount. 58However, in my opinion, Civic Video should not be entitled to interest on the amount of $66,000 from the date that it received the cheque. The cheque is a bank cheque. Yogies has been out of pocket for the amount of the cheque since it was purchased from the bank. In my opinion, Civic Video was not entitled both to keep the cheque and to claim interest on the amount of the cheque. If it wanted to maintain its claim for interest, it should have returned the cheque so that Yogies could credit it to its account.

Orders 59There should be judgment for Civic Video against Yogies and Mr Minchuk in the sum of $138,989.04 calculated as follows: Damages as at 12 November 2007 ($52,500 plus $58,464) $110,964.00 Interest on $110,964 from 12 November 2007 and 30 October 2009 $20,903.79 Interest on $110,964 less $66,000 (ie. $44,694) from 30 October 2009 to 29 September 2011 $7,121.25 Total $138,989.04

60Yogies and Mr Minchuk should pay Civic Video's costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 October 2011

Trade Practices Act 1974(Cth)

Consumer & Competition Act 2010) Trade Practices (Industry Codes-Franchising) Regulation 1998(Cth)

Trade Practices (Industry Codes - Franchising) Regulation 1998(Cth)

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