Dresna Pty Ltd v Linknarf Management Services Pty Ltd

Dresna Pty Ltd v Linknarf Management Services Pty Ltd - [2006] FCAFC 193 - FCAFC 2006 case summary — Zoe

[12]

Lessor's dealings with Coles 10 The owners of the Mentone store freehold (herein referred to collectively as "the Lessor") were two companies controlled by Mrs Judith Wasser. Mrs Wasser was always keen to replace Franklins with a national chain operator such as Woolworths or Coles. This commercial objective was reflected in the stand taken by her lawyers in the litigation which ensued, namely that "comparable standing to" Franklins in cl 9.1.1 meant a company of such a nature and not an independent like Dresna. 11 Unbeknown to Dresna, Mrs Wasser entered into discussions with Coles and reached an arrangement to which I shall refer as "the Coles-Lessor deal". The terms of the deal were recorded in a letter from Coles to Mrs Wasser dated 28 June 2001 and countersigned by her on the following day. 12 In the letter of 28 June Coles confirmed that it was not their intention that Mrs Wasser "breach any contractual obligations" that she may have in respect of the Mentone store and nothing in the letter was intended to lead her to breach those contractual obligations. (At the end of May Dresna had what it claimed was an agreement with Franklins. Franklins had disputed this but after the issue of proceedings a settlement was reached and, as already mentioned, the Mentone BSA was entered into on 8 August.) The letter contained detailed provisions that would apply in the event of Coles acquiring the Mentone business, including provision for a lease of 15 years with two further terms of ten years each. The rental was higher than that payable under the existing Franklins lease. Coles offered a base rent of $311,880 as against $300,000 under the Franklins lease. Subsequently Coles calculated that, taking into account estimated sales and their effect on rentals, the total rental payable by Coles would exceed the Franklins rent by 25 per cent. Dresna did not become aware of the letter until it was produced by Coles in response to a subpoena on 18 December. 13 Also unbeknown to Dresna, between June and December 2001 Mr Ian Cornell, the Managing Director of Franklins, and Mr Gerry Masters, Managing Director of Coles Myer, held discussions about the possible sale of Franklins stores to Coles. Agreement was reached in respect of 33 stores for approximately $50 million.

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Dresna and Franklins sue the Lessor 14 On 6 September Arnold Bloch Leibler on behalf of Mrs Wasser wrote to Franklins refusing consent to the assignment to Dresna and stating that the proposed assignee "does not come within the ambit of cl 9.1.1". In a reiteration of that refusal in a letter of 24 September Arnold Bloch Leibler said: "…your client has not proved to the reasonable satisfaction of the lessor that the proposed assignee is of comparable commercial standing to our client. The requirement of clause 9.1.1 is for a major supermarket chain with national representation and the proposed assignee does not fulfil those criteria." 15 Following the Lessor's refusal of consent, Dresna and Franklins agreed to commence proceedings in the Supreme Court of Victoria to have the lessor's refusal of consent declared invalid. Without prejudging the legal nature and effect of the arrangements made, it will be convenient to refer to them as "the litigation agreement". 16 Mr Herbert Fischbacher of Dresna's then solicitors Mason Sier Turnbull wrote on 7 September to Mr Roger Stansfield of Home Wilkinson and Lowry, solicitors for Franklins. The letter expressed the view that the Lessor was unreasonably withholding consent. It sought an undertaking that Franklins would not exercise its right to terminate under cl 4.2 of the Mentone BSA without giving seven business days notice. It enquired whether Franklins was prepared to instigate legal proceedings against the Lessor and offered to indemnify Franklins against any costs consequences "provided our client can effectively stand in your client's shoes in respect of such litigation". Dresna would "fund and conduct the litigation in your client's name and fully indemnify your client in respect of any costs orders that may be made against your client". 17 In telephone discussions shortly thereafter, Mr Stansfield told Mr Fishbacher that Franklins would agree to the seven day period and would agree to participate in the litigation on the basis that it would require access to all information and that Home Wilkinson and Lowry would have the right on behalf of Franklins to give Mason Sier Turnbull instructions on the conduct of the litigation and that Franklins reserved all its rights to terminate the litigation. Mr Stansfield told Mr Fischbacher that the litigation had to be conducted expeditiously because Franklins would be unable to continue operating without the support of its owners. On at least one occasion Mr Stansfield said that any litigation had to be determined before the end of 2001. 18 Further requests for consent having been refused by the Lessor, on 16 October proceedings were commenced in the Commercial and Equity Division of the Supreme Court of Victoria. Franklins, Dresna and Mr and Mrs Blake and some associated companies were plaintiffs and the Lessor companies were defendants.

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November - December 2001 dealings; Franklins, Coles and ACCC 27 On 7 November the owners of Franklins instructed Mr Cornell that Franklins must cease operating all stores by the end of January 2002. After this date the owners would not provide any financial support. The instruction was final and irrevocable. To contravene it would expose Mr Cornell to personal liability. He realised that the instructions meant that sales had to be finalised in December with transfers completed in January. 28 As Weinberg J observed (at [138]), when the Supreme Court refused the application for expedition in the proceedings Franklins and Dresna had taken against the Lessor, Mr Cornell had only two options in relation to Mentone and the other remaining stores. The first option was to try to sell them to Coles (or perhaps Woolworths) with ACCC consent. The second was to close the stores and surrender the leases. Mr Cornell said the first option was best. However, it could take some weeks to complete. The second option meant that Franklins would obtain no value for the store, and risk attracting claims for damages. 29 Accordingly Franklins on 23 November by its solicitors made confidential submissions to the ACCC seeking its consent to the offering of the nine remaining Franklins stores (including Mentone) to Coles. 30 On the same day, Mr Cornell spoke with Mr Masters about the remaining Franklins stores. During this conversation, the two discussed "global indicative" or "ball-park" prices for the remaining stores that each of the companies would expect. Mr Cornell did not recall discussing an indicative price for the Mentone store. 31 Mr Cornell said that he did not "offer" these stores to Coles for sale at that time. He was still keen to get as many as possible to independents. He reasoned that the more stores Franklins could sell to independents, the more it would assist in getting ACCC approval on the remaining difficult stores that would in likelihood only have Coles as a buyer. 32 Also on 23 November, Mr Cornell attended a meeting in Canberra with the ACCC to discuss the ACCC's consent in relation to the nine remaining stores. On 5 December, the ACCC advised that it did not consent to the sale of the Mentone store to Coles, due to its still being subject to legal proceedings. It did, however, consent to the sale of some of the other nine stores to Coles. 33 In late November Mr Stansfield, on instructions from Ms Weir of Franklins, approached the Lessor's solicitors to enquire whether their client would be prepared to consent to an assignment of the lease to Dresna if Franklins paid "compensation". Ms Weir told Mr Stansfield that Franklins were "keen to have one more go" to try and secure an assignment for Dresna. On 27 November Arnold Bloch Leibler telephoned Mr Stansfield and said their client would not accept this proposal. Mr Stansfield passed the refusal on to Ms Weir that day. 34 By early December, Franklins no longer had a buying, marketing or advertising department, and had either disposed of or sold all of its warehouses. Mr Cornell expected that Franklins would have no substantial business assets by the end of the month, other than the unsold stores. 35 On 10 December an interim injunction was granted in the Supreme Court proceedings restraining Franklins from selling the Mentone store. That injunction was dissolved on 20 December. Once the injunction was dissolved (as to which see [40]-[44] below), the ACCC on the following day consented to the sale of the remaining stores, including Mentone, to Coles. 36 After this consent was received Mr Cornell spoke with Mr Masters about the sale price of the remaining stores. Having originally offered less than the $2.3 million that Dresna had agreed to pay, on 24 December Franklins and Coles signed agreements for the sale of the remaining stores, including Mentone. The sale price for Mentone was agreed to be $2.3 million, plus stock. 37 Mr Cornell said in evidence that there was no "secret deal or arrangement" between Franklins and Coles in relation to the Mentone store. When the deal was done with Mr Blake, he believed it was in Franklins' best interests to sell the store to Dresna. According to Mr Cornell, it was only when Franklins was running out of time that he considered a sale of the Mentone store to Coles. 38 These dealing between Franklins, Coles and the ACCC were not disclosed to Dresna.

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Supreme Court proceedings December 2001 40 On 10 December Dresna obtained an ex parte interim injunction restraining Franklins from disposing of the Mentone store. 41 On 13 December Mr Blake was informed by some contractors that Coles was seeking tenders for the fit-out of the Mentone store, the works to be carried out between 16 and 21 January 2002. 42 On 14 December the parties retuned to court before Habersberger J. His Honour also had before him a similar dispute concerning the Hampton Park Franklins store purchased by Ritchies Stores Pty Ltd. His Honour adjourned both matters to the following Tuesday 18 December and gave leave for the issue of a subpoena to Coles and notices to produce to the Lessor and Franklins. The injunction was continued. 43 On 18 December, as already noted, Coles produced its letter to the Lessor of 28 June. His Honour indicated that a judge was available to hear "either of these matters [ie Dresna or Ritchies] or any part of these matters between 15 and 17 January, only for those three days". His Honour adjourned both matters to 20 December and continued the injunctions. In the course of argument his Honour noted that Mr Collins SC, senior counsel for Ritchies, "keeps telling me that Coles are sitting in the wings ready to step in if only the injunctions could be lifted and the ACCC would agree". His Honour also observed that initially he had been told, in support of the application for expedition, "that the reason why it was so urgent was that either party was entitled under the sale of business agreement, the date for the consent having passed, to terminate and walk away". 44 On 20 December his Honour dissolved the injunction for the same reasons that he had given on the 18th in relation to the Ritchies matter. In that ruling his Honour had said there were "innumerable difficulties" in the way of the plaintiffs because even if the defendants had failed to use reasonable endeavours, nevertheless the sale of business agreement contemplated that the parties could terminate the agreement if the assignment was not forthcoming. The plaintiffs' case was "weak" and the balance of convenience was against continuing the injunction.

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Issue 1: fiduciary relationship 51 While the categories of relationships which give rise to fiduciary obligations are not closed (Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 68 per Gibbs CJ), it is hardly surprising that senior counsel for Dresna was unable to point to any case where the relationship between co-litigants, or anything remotely analogous thereto, had given rise to such a relationship. The hazards and inherent uncertainty of litigation are such that parties who join together as plaintiffs, or are joined together as defendants, are likely to be faced with contingencies which compel them to act in their own interests, ignoring the interests of their temporary allies. Sauve qui peut often becomes the guiding precept. 52 In the present case, as his Honour correctly stressed, the litigation agreement cannot be considered in isolation. The parties' relationship was founded on the Mentone BSA. If any relationship is non-fiduciary, it is that of vendor and purchaser. This particular sale agreement provided that after a certain date either party could terminate it on short notice, two business days, later extended to seven. This was for the benefit of Dresna as much as Franklins. Termination could be for any of an infinite number of reasons, of which self-interest was the most likely. 53 The surrounding circumstances were likely to change without warning, and not only because the Mentone BSA was terminable on short notice. The Lessor appeared intransigent. As was well known, Franklins were not going to be around for long. On 8 October Mr Cornell issued a media statement announcing that the sell-down was nearing completion and that Franklins planned "to have divested its store portfolio by December 31st." The statement was reported in the Australian Financial Review, Herald Sun, Age, Daily Telegraph and trade journals. Coles (or Woolworths) were obvious potential purchasers. The ACCC's attitude towards a sale to Coles or Woolworths was not set in stone and might change, depending on how these other elements developed. The ACCC might see a sale of Mentone to Coles or Woolworths as preferable to a closing down of the store, with loss of employment and damage to local competition and servicing of consumers. Getting an expedited trial would depend on the assessment a judge would make of, amongst other things, the true urgency of the case, its merits, and the availability of court resources in the light of other litigants' claims of urgency in the pre-Christmas rush. 54 It is doubtful whether the litigation agreement was a binding contract. The essence of it was that Franklins lent its name for the purposes of litigation in which Dresna suing alone might have had problems with standing. In so doing, Franklins went further than it was obliged to under the "reasonable endeavours" clause: Lehmann v McArthur (1868) LR 3 Ch App 496 at 501. The litigation was to be entirely at Dresna's cost and Franklins could withdraw at any time. At best, it was an agreement to commence proceedings, not to continue them indefinitely under the command of Dresna for as long as it suited Dresna's interests. 55 In the light of all this, it is difficult to conclude that Franklins converted a non-fiduciary relationship into a fiduciary one. It did not undertake the obligations of a fiduciary and was not required to consider anything other than its own interests. As it was, Franklins acted honourably and beyond its strict obligations in making the offer of compensation to the Lessor. Had it not been for Mrs Wasser's unwavering stand, Franklins would have completed the sale to Dresna. 56 Senior counsel for Dresna relied on United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 12 where Mason, Brennan and Deane JJ held that a fiduciary relationship "may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled". However, preparatory and informal arrangements for what will undoubtedly be a fiduciary relationship, such as a partnership or joint venture, stand on a different footing from ad hoc arrangements made between parties who have already entered into a detailed, formal agreement which is not fiduciary. 57 In my opinion, no fiduciary relationship came into being. It follows that issues 2 and 3 strictly speaking do not arise. However, I shall deal with them briefly.

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Issue 2(a): non-disclosure of the Coles-Lessor deal 58 Knowledge, or suspicion, of the Coles-Lessor deal was not something which, on the assumption that a Franklins-Dresna fiduciary relationship existed, Franklins would have been obliged to pass on to Dresna. 59 Dresna's fundamental premise in its argument before this Court was that the Coles-Lessor deal was highly material to the Dresna-Lessor litigation in the Supreme Court and that its disclosure would have ensured (i) an order for an expedited trial and (ii) success in that trial. 60 However, Mrs Wasser's firm preference for a major chain tenant to replace Franklins was a rational commercial judgment. Her view was widely shared by landlords of similar premises. Mr Kerry Jones was at the time a Commissioner of the ACCC. He had oversight on behalf of the ACCC of the sale by Franklins of its Australian stores. He gave the following reply to a question from his Honour: "Was there any kind of general view on the part of landlords that they would prefer to deal with Coles or have Coles come in rather than independents? Yes, that was a very common view among many landlords, that they would have preferred Coles to an independent." 61 Mr Blake himself accepted this. In cross-examination he was asked: "…You understood, did you not, that the reason why - one important reason why a landlord might prefer a chain store was because of the landlord's perception about the security of the rental income? Yes. And you understand, don't you, that the desire of landlords for chain stores is motivated also by the view that in terms of the saleability of their property, it will be enhanced by having a chain store there? Yes, a better yield. That is a general view? Yes. And that a landlord would be likely to take the view that the capital value - for these reasons: that the capital value of their property would be enhanced by having a chain store operator there? Certainly, yes." 62 It is thus hardly surprising, and would not have been surprising to Habersberger J, that Mrs Wasser took the view she did. Her desire for a chain store as a tenant rather than Dresna did not reveal some collateral, or improper, purpose; it went directly to the Lessor's interest qua landlord because it affected the value of the freehold. This was the very sort of consideration contemplated by the covenant: West Layton Ltd v Ford [1979] QB 593. 63 West Layton concerned a lease of premises used as a butcher's shop with upstairs residential flat. The lease provided in effect that the if the tenant wanted to use the flat for any other residential purpose dissociated from the butchery by way of assignment or sub-letting two conditions had to be satisfied. The landlord's consent had to be obtained, such consent not to be unreasonably withheld, and such tenancy had to be a furnished tenancy. The tenant proposed a sub-lease to persons whose personal suitability was not in question. However, after the commencement of the lease the Rent Act 1974 (Imp) had come into force with the result that tenants of furnished tenancies obtained statutory rights to possession which probably would extend beyond the period of the head lease. The landlord's refusal of consent was held by the Court of Appal to be reasonable. 64 Roskill LJ, with whom the other members of the Court agreed, said at 605: "The landlord has not got to consider anybody else's interests except his own. He is the person who has in all the circumstances to decide whether or not he will grant consent. As Lord Denning MR said [in Bickel v Duke of Westminster [1977] QB 517 at 524], circumstances may vary endlessly. In the present case one of the matters which has caused a change of circumstance is the passing of the Rent Act 1974 …" The Court confirmed that the reasonableness of a landlord's refusal is a question of fact; see also per Lawton LJ at 607 and Bickel at 523-524. 65 As will be discussed hereafter ([73]-[79]) the stand taken by Mrs Wasser was legally correct. On that footing, the Coles-Lessor deal was a contingency arrangement which any prudent landlord in Mrs Wasser's position might have made. It did not involve any departure by the Lessor from its contractual obligations under the lease, nor wrongful interference by Coles with such obligations. It was not a smoking gun, the revealing of which would dramatically affect the outcome of the Dresna-Lessor litigation, as witness the fact that the additional documents obtained from Coles were available to Dresna by the time of the hearing before Habersberger J on 20 December, but did not affect the outcome.

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Issue 3(b): prospects of success in the Dresna-Lessor litigation 73 It is unlikely that Dresna's case on cl 9.1.1 would have succeeded. 74 Before this Court senior counsel for Dresna submitted that the second "of" in the clause ("of comparable commercial standing") was inserted by mistake. I do not agree. The ordinary reading of the clause is that the proposed assignee has to have three qualities or attributes. It has to be a person or company (i) who is respectable, responsible and solvent and of sound financial standing, and (ii) which is of comparable commercial standing to the Lessee, and (iii) who will conduct a business on the Premises in accordance with the Permitted use. These are independent, cumulative requirements. In particular, the comparable commercial standing requirement has a role to play, beyond the purely financial requirements of (i), and has practical application, as the evidence already quoted shows ([60]-[61] above). 75 What the lease required was not the objective proof of such qualities or attributes but their establishment to the "reasonable satisfaction" of the Lessor. This did not confer on the Lessor an unexaminable discretion. Nevertheless the subjective nature of the condition needs to be kept in mind: see Re Town Investments Ltd Underlease [1954] Ch 301 at 314-315 where Danckwerts J said: "… it was sufficient for the (landlord's) purpose if a reasonable man in the (landlord's) position might have regarded the proposed transaction as damaging to his property interests, even though some persons might take a different view." In that case it was held that where a lessee proposed a sublease at a premium in consideration for a lower than market rental, the landlord was not acting unreasonably in refusing to approve a transaction which he honestly considered was calculated to depreciate the value of the property in the future. 76 Reference might be made to analogous decision-making powers in administrative law, Buck v Bavone ((1976) 135 CLR 110 at 118-119, Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 276-277. 77 The Lessor's stipulation for a "major supermarket chain" (see [14] above) did not involve a reading down of cl 9.1.1. In context, Arnold Bloch Leibler was merely giving content to the operation of the clause in the particular circumstances which had arisen. "Comparable commercial standing", apart from solvency, is an understandable concept. In argument before Habersberger J on 20 December, Mr Nettle noted that it had been conceded that Dresna was in fact not comparable with Franklins at the date of the commencement of the lease 78 The most sensible construction of cl 9.1.1 is that the comparability of the proposed assignee has to be considered as at the date of the lease. True it is that for many purposes the term "Lessee" will include assigns (cl 22.1.11), but the interpretation clause (cl 22) is subject to the contrary intention appearing. If the Lessor granted the lease initially to a lessee of a certain commercial standing, the rational conclusion is that the standing of that lessee then is to be the touchstone for future assignees. 79 In any event, even if the date of the proposed assignment is the relevant date, the fact remains that as at that date Franklins was a national chain and Dresna was not.

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Chronology of events 93 Franklins Limited (Franklins) operated a number of supermarkets in Australia. Dairy Farm International Holdings Ltd (Dairy Farm) was the Hong Kong based parent company of Franklins. 94 On 22 November 1994 a lease was entered into between Misu Nominees Pty Ltd and Kandara Pty Ltd (the Lessor) and a subsidiary of Franklins, Franklins Selfserve Pty Ltd, which later changed its name to Franklins Management Services Pty Ltd (FMS) (the first respondent) as lessee (the Mentone Lease) of a store at Mentone at which premises Franklins thereafter conducted a supermarket. 95 By 2001 Franklins operated 287 supermarkets. Dairy Farm decided to withdraw from the Australian market. This was to involve the sale and closure of all stores. This caused competition concerns because of the existence of the Woolworths Ltd and Coles supermarket chains as potential purchasers. 96 On 22 May 2001, the Australian Competition and Consumer Commission (the ACCC) announced that it had reached an in principle agreement with Dairy Farm. The agreement was for about 200 stores to be sold to independent retailers, and a maximum of 67 stores to be sold to Woolworths. The agreement was conditional on acceptable undertakings being given to the ACCC. 97 Mr Les Blake controlled a number of supermarkets in Melbourne, including the 'Leo's Fine Food and Wine' stores at Kew and Heidelberg. He was a director and shareholder of Dresna. His wife was the other director and shareholder. 98 On 31 May 2001, Mr Blake met with Mr Geoff Webb, a consultant to Franklins. A deal was struck for the sale of the Franklins supermarket business at premises at Mentone for $2.3 million. Mr Blake wrote a short handwritten note to 'cement' the deal which both he and Mr Webb signed. 99 On 4 June 2001, undertakings were given by Franklins and Dairy Farm Management Services Ltd (a subsidiary of Dairy Farm) to the ACCC pursuant to s 87B of the Trade Practices Act 1974 (Cth) (the Act). As part of the undertakings, over 100 stores were earmarked for sale to independent operators pursuant to a process called the Joint Independent Divestiture Alliance (JIDA). Undertakings were also given by Woolworths but not by Coles. 100 In June 2001, Franklins denied any agreement to sell to Mr Blake because Mr Webb was not authorised to sell. A proceeding was commenced by Mr Blake against Franklins seeking to enforce the agreement of 31 May 2001 (the Webb proceeding). 101 On 29 June 2001, unbeknown to Mr Blake, Coles and the Lessor entered into an agreement (then signed by the Lessor, not by Coles) in relation to the Mentone premises, the effect of which was that Coles agreed to lease the premises in the event that the Lessor was able to obtain vacant possession on terms more favourable to the Lessor than the existing lease. 102 On 8 August 2001, the Webb proceeding was settled and a business sale agreement for the sale of Mentone supermarket business (the Mentone BSA) was entered into between Franklins as vendor on the one hand, and Dresna as purchaser and Mr Blake as guarantor on the other. Obtaining the Lessor's consent to the transfer of the lease was a condition precedent for the completion of the sale. The Mentone BSA provided that the parties must use 'reasonable endeavours' to satisfy the condition. If consent was not obtained by 13 September 2001, either party could terminate on two days' notice. 103 On 13 August 2001, Mr Blake met with Ms Susan Herbert of Arnold Bloch Leibler (ABL), solicitors for the Lessor. He provided her with a submission in support of the assignment. On 14 August 2001, a letter was sent by Ms Joanne Turner, Franklins' National Property Development Manager, seeking the Lessor's consent to the assignment. 104 On 20 August 2001, ABL sent a letter stating that their client 'is currently on holiday and it may be some time before we receive instructions'. Further correspondence was exchanged in relation to the assignment of the lease. By early September 2001, the Lessor had not given its consent to the assignment. 105 On 6 September 2001, unbeknown to Dresna, Coles wrote to the Lessor stating that the Coles Myer Ltd Board had approved the terms of the offer letter sent on 28 June 2001, countersigned by the Lessor on 29 June 2001. On the same day, the Lessor refused consent to the assignment stating that 'it is clear that the proposed assignee does not come within the ambit of clause 9.1.1 of the Lease'. 106 On 7 September 2001, Mr Fischbacher of Mason Sier Turnbull (MST), solicitors for Dresna, wrote to Mr Stansfield of Home, Wilkinson & Lowry (HWL), solicitors for Franklins, seeking an undertaking that Franklins would not exercise its right to terminate the Mentone BSA without providing seven business days' notice of its intention to do so, and enquiring whether Franklins would be prepared to instigate legal proceedings against the Lessor seeking orders compelling the Lessor to consent to an assignment of the lease to Dresna on the basis of an indemnity as to costs. 107 On 10 September 2001, Mr Stansfield told Mr Fischbacher that Franklins would give seven business days' notice before terminating the Mentone BSA, as requested in Mr Fischbacher's letter of 7 September 2001 and would participate in the litigation on the basis that it would acquire access to all information, that HWL would have the right to give instructions on behalf of Franklins, and that Franklins reserved the right to terminate its involvement at its option. 108 On 14 September 2001 a second request for consent to the assignment of the lease was made by Franklins. 109 On 24 September 2001 ABL wrote to HWL stating that: "Your client has not proved to the reasonable satisfaction of the lessor that the proposed assignee is of comparable commercial standing to your client. The requirement of clause 9.1.1 is for a major supermarket chain with national representation and the proposed assignee does not fulfill those criteria." On the same day, Mr Stansfield of HWL wrote to Mr Fischbacher of MST enclosing a copy of the letter received from ABL refusing consent and stating: "As a matter of formality would you please confirm immediately in writing that your client still wishes to proceed with the sale of business. If that is the case, then immediate litigation would appear warranted." 110 On 8 October 2001 Mr Stansfield sent a further letter requesting consent. Mr Stansfield gave evidence that, by 8 October 2001: (a) subject to final confirmation from Franklins, it had been agreed between himself and Mr Fischbacher that proceedings would be commenced against the Lessor in relation to consent to assignment of the lease; (b) it had also been agreed between himself and Mr Fischbacher that Dr Croft SC and Mr Osborne would be retained to act in the proceedings; (c) it had also been agreed between himself and Mr Fischbacher that the proceedings would be funded by Mr Blake or his companies and that they would indemnify Franklins in respect of any costs orders. Mr Stansfield also gave evidence that around 8 October 2001, and certainly by 15 October 2001, he and Mr Fischbacher agreed that MST would be the solicitors on the record for the plaintiffs in the proceeding. 111 On or about 15 October 2001 some people within Franklins, comprising at least Ms Mary Weir (Franklins General Counsel), Ms Joanne Turner (National Property Development Manager) and Mr Alan Rattray-Wood (an external property leasing consultant engaged by Franklins), became aware that Coles 'have done a deal in principle here [ie in relation to Mentone], based on vacant possession'. The information about the Coles/Lessor deal was not passed on to Mr Stansfield of HWL or Mr Fischbacher of MST. 112 On 16 October 2001 proceedings were commenced in the Supreme Court of Victoria against the Lessor by FMS, Dresna, other members of the Blake group, and Mr and Mrs Blake. MST was the firm of solicitors on the record for the plaintiffs. The partner with conduct of the proceeding was Mr Herbert Fischbacher. 113 On 18 October 2001, unbeknown to Dresna, Coles provided a further letter of assurance to the Lessor. The Coles letter gave assurance to the Lessor that, in the event that Coles purchased the Franklins business at Mentone (and therefore could take an assignment of the existing lease), Coles would enter into a fresh lease on the (higher) rental that had been agreed in the 29 June 2001 agreement. 114 On 19 October 2001, the first directions hearing in the proceeding was held before Habersberger J. The plaintiffs were represented by Dr Croft SC and Mr Osborne. The Lessor was represented by Ms Gordon. FMS and the Blake parties sought to have a trial date fixed at the first directions hearing. The Lessor opposed the application for expedition. One of the grounds relied on was that the principal of the Lessor had gone on leave that morning for nine days. Habersberger J refused the plaintiffs' application for the matter to be given a hearing date straight away. His Honour said that a trial before Christmas was possible. 115 During October and November 2001, there were ongoing dealings between MST and HWL and Franklins in relation to interlocutory steps in the proceeding. 116 On 16 November 2001, a second directions hearing in the proceeding was held before Habersberger J. At that hearing Mr Osborne appeared for the plaintiffs and Mr Nettle QC and Ms Gordon for the Lessor. Mr Osborne sought a hearing date in December 2001. Habersberger J indicated that a hearing in December 'looks virtually impossible'. Habersberger J referred the matter to mediation, to be completed by 8 February 2002 and adjourned the summons for directions to 15 February 2002 and reserved liberty to apply. 117 On 23 November 2001, Mr Ian Cornell, the Managing Director of Franklins, held a discussion with Mr Gerry Masters of Coles about the sale of further stores to Coles. There was a dispute at trial about whether the agreement to sell the Mentone store to Coles was concluded on 23 November 2001. The learned judge held that there was not. 118 Also on 23 November 2001, Franklins made a submission to the ACCC seeking its consent to offer the Mentone business, as well as a number of others, to Coles. Neither the discussions with Coles on 23 November 2001, nor the submission to the ACCC on the same date, were disclosed to Dresna. The Mentone BSA and the litigation agreement were both still on foot on 23 November 2001. 119 From 23 to 26 November 2001, dealings between MST, and HWL and Franklins in relation to the interlocutory steps in the proceeding continued. 120 On 28 November 2001, a notice to terminate the Mentone BSA was served by Franklins and the litigation agreement was also terminated. 121 On 29 November 2001, Fischbacher (MST) wrote to Stansfield (HWL) responding to the terminations of 28 November 2001 and saying that it had come to their attention that Franklins had sought the ACCC's consent to the sale of the Mentone store to Coles. 122 On 30 November 2001, Franklins claimed that MST was precluded from acting on behalf of the Blake parties in the litigation against the Lessor. 123 On 10 December 2001, the Blake parties obtained an interim injunction restraining Franklins and FMS from disposing of the Mentone store. 124 On 13 December 2001, Mr Blake was informed by some contractors that Coles was seeking tenders to fit out the Mentone store. He gave this information to his solicitor, Mr Foster. 125 On 14 December 2001, a hearing took place before Habersberger J. On behalf of the Blake parties, a subpoena to produce documents was issued to Coles Myer and notices to produce were issued to the Lessor and Franklins. 126 On 18 December 2001, a further hearing took place before Habersberger J. Coles produced documents in response to the subpoena. The agreement between Coles and the Lessor dated 29 June 2001 was revealed to Dresna in the documents produced by Coles, in response to the subpoena. The Lessor filed an affidavit of a solicitor from ABL, Mr Paul Chiappi, sworn on 18 December 2001. The matter was adjourned, with the injunction continuing, until 20 December 2001. During the course of this hearing, Habersberger J indicated that three hearing days were available in January 2002 to hear either the related Ritchies matter or the Dresna matter. 127 On 20 December 2001, a further hearing took place before Habersberger J. On this day, an affidavit of Mrs Judith Wasser, the director and 'owner' of the Lessor, sworn 19 December 2001, was filed in Court. This affidavit referred, for the first time by the Lessor, to the 29 June 2001 agreement with Coles. Habersberger J ruled that the injunction restraining Franklins from disposing of the Mentone store should be dissolved. 128 On 21 December 2001, the ACCC consented to the sale of the Mentone store to Coles. 129 On 24 December 2001, Franklins and Coles entered into a business sale agreement under which Franklins agreed to sell the Mentone store to Coles for $2.3 million plus stock.

[52]

Fiduciary duty 130 In my opinion, the arrangements between Dresna and Franklins to pursue litigation to compel the Lessor to grant consent to assignment of the lease involved a fiduciary relationship insofar as that enterprise was concerned and gave rise to appropriate fiduciary duties, whether or not the arrangements were contractually binding in all respects. Many of the relevant authorities are set out in Expectation Pty Ltd v PRD Realty Pty Ltd (2004) 140 FCR 17 at [239]-[244]. See also Concrete Pty Limited v Parramatta Design & Developments Pty Ltd [2006] HCA 55 per Gummow ACJ at [15]; Hayne J at [124] and Callinan J at [156]. By way of example, Franklins could not have put itself into a position of conflict of interest and duty by dealing with the landlord behind Dresna's back in any manner which could prejudice the successful outcome of the litigation, such as disclosing details of positions to be taken in the litigation for instance. Each party had to subjugate its interests to that of the other in pursuit of the common goal. 131 The ability to terminate the arrangements on short notice did not affect the obligations which existed whilst the arrangements were on foot. The arrangement was not limited to the lending by Franklins of its name to the proceedings. The backdrop was that each was bound to use reasonable endeavours to achieve the result of obtaining consent. Each had an interest in achieving that result and the method of cooperation to achieve that result was arranged between them. The arrangements contemplated that Franklins would have a more active role than simply lending its name to the proceeding with an indemnity. It took an active role in practice. It is not relevant that Franklins may not have been compelled to litigate. It chose to enter into the arrangement to do so. The fact that Franklins successfully objected to the solicitors who had been engaged to act in the proceeding continuing to act for Dresna once the arrangement had ceased, is powerful support for the conclusion that there was a fiduciary relationship. 132 However, in my opinion, the non-disclosure, on or about 15 October 2001, by Franklins of its knowledge concerning the dealings between Coles and the Lessor to Dresna was not the breach of any fiduciary duty. Generally speaking, fiduciary duties are proscriptive rather than prescriptive. I regard a duty to disclose as prescriptive. A positive obligation of that kind is not imposed because of the fiduciary relationship that existed here. 133 The dealings between Franklins and Coles in late November 2001 could have been in a different category. If they had put Franklins into a position of conflict between its interests or duty, on the one hand, and its duty to faithfully pursue the litigation, on the other, then the dealings would be proscribed. The difficulty for Dresna is that the findings of the trial judge do not establish any such conflict. The trial judge declined to find that there was an agreement to sell the Mentone store to Coles, whether conditional or otherwise. It was found that the approach to the ACCC for consent to such a sale was precautionary against failure to obtain the Lessor's consent to the assignment to Dresna. 134 It is contended for the appellant that the primary judge should have found that there was a conditional agreement or, at least, an in principle agreement. I can see some substance in that argument but, even if there were such an agreement, I cannot see that, even though clandestine, it would have had any impact upon the faithful conduct of the litigation. It might be otherwise if there was an agreement or a conditional agreement to sell to Coles for greater consideration than the agreement with Dresna. That would create a proscribed conflict. However, there is no proper basis for departing from the trial judge's assessment of this issue. The advantage he had in assessing witnesses as the trial unfolded is too great to be set aside. It is not a case where the objective evidence and the inherent probabilities were contrary to the finding of fact (cf State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (in liq) and Others (1999) 160 ALR 588; (1999) 73 ALJR 306).

[53]

Breach of contract 135 In my opinion, the failure by Franklins to disclose its knowledge of the deal between Coles and the Lessor to the solicitors acting on the litigation was a breach of contract. The express terms of cl 4 of the Mentone BSA, together with the usual McKay v Dick duty to cooperate (Butts v O'Dwyer (1952) 87 CLR 267 per Dixon CJ, Williams, Webb and Kitto JJ at 280; Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596 per Mason J at 607-608; Concrete Pty Limited v Parramatta Design & Developments Pty Ltd per Gummow ACJ at [14], Kirby and Crennan JJ at [99]-[100] and Callinan J at [156])applied in the events which occurred so as to oblige each to disclose to the other party and to the solicitors acting in the proposed (and then actual) litigation of any fact or circumstance known to it which was material to the conduct of the litigation, whether or not there was a separate litigation agreement as alleged. If there was an implied obligation of good faith in performing the contract, then that conclusion is further supported. 136 It may be that Franklins could not have been compelled to litigate against its wishes. However, whether that be so or not, the parties, each of which was under the same obligation under the Mentone BSA, elected to give effect to those obligations by making the arrangements to litigate. That was the method by which the parties consensually chose to implement the agreement. 137 The trial judge did not make a finding as to whether there was a separate enforceable litigation agreement entered into by the parties. I favour the view that the terms of the arrangement were, in effect, an extension of the Mentone BSA and binding as such. However, if that analysis is not correct, I would find that there was a separate agreement supported by the consideration of mutual promises, albeit subject to the express power to terminate at will. (Concrete Pty Limited v Parramatta Design & Developments Pty Ltd per Gummow ACJ at [14] and Callinan J at [155] and [162].) On either view, in my opinion, there can be little doubt that, to make the agreement effective, a term would be implied that each would disclose to the other and to the solicitors acting in the matter, all facts and circumstances known to it which were relevant to the conduct of the litigation. 138 The trial judge did not make a finding as to whether such a term would be breached by the non-disclosure by Franklins to Dresna of the Coles-Lessor arrangements that were known to it. In my view, those matters were plainly material to the conduct of the litigation One of the issues to be determined in relation to the Lessor's failure to consent to assignment was whether the necessary facts had been proved to 'the reasonable satisfaction of the Lessor'. Another was whether the consent of the Lessor was 'unreasonably withheld'. Each involved subjective elements. The fact of a dealing between the Lessor and Coles that would tend against the bona fides of the refusal to consent to assignment, was potentially material to the preparation and presentation of the case. It was relevant to the bona fides of the Lessor's approach to the issue of consent even if not decisive. It certainly presented the possibility that the Lessor was seeking to achieve a collateral purpose by refusing consent, namely, the termination of the contract with Dresna leaving it free to enter or continue with a relationship with Coles. (Secured Income Real Estate (Australia) Limited v St Martins Investments Proprietary Limited (1979) 144 CLR 596 per Mason J at 609-610; Eddadock Pty Ltd v Denning Properties Pty Ltd [2002] NSWSC 208 at [48]-[58]; Tamsco Ltd v Franklins Ltd (2001) 10 BPR 19,077; [2002] ANZ ConvR 491; (2002) NSW ConvR 56-018; (2002) Q ConvR 54-573; [2001] NSWSC 1205 at [49]-[53].) 139 Any investigation would have quickly revealed that the contract with Coles had been entered into by the Lessor months before the consent was sought and that it was on terms which were more favourable to the Lessor than would be the terms of the assigned lease. That investigation would also have shown that Coles had confirmed its obligation to the Lessor after a request for consent to assignment to Dresna had been submitted to the Lessor and that there was a further confirmation immediately after the proceedings had been served and shortly prior to the first directions hearing. The timing was also crucial. The relevant knowledge was received by Franklins the day before the proceeding was commenced and several days before the first directions hearing in the Supreme Court of Victoria. 140 It follows that the cause of action for breach of contract was established and should have been found. 141 The dealings between Franklins and Coles in late November prior to termination of the Mentone BSA did not constitute a breach of contract, whether the dealings were as found by the trial judge or whether there was a conditional agreement as submitted on behalf of Dresna. There was no express or implied term of any contract which prevented Franklins from dealing with a third party in relation to the Mentone business at any time, provided that doing so did not affect the obligations it had in relation to seeking consent to assignment by the Lessor. There is nothing unusual about a vendor dealing with more than one potential purchaser at the one time and even entering into contractual relations of one sort or another with both. 142 Whether the litigation arrangement amounted to an aspect of the underlying BSA or was a separate agreement, dealings between Franklins and Coles would not be in breach of any express or implied term of any such agreement. The arrangement was limited to the conduct of the litigation and did not touch upon the underlying commercial relationship of vendor and purchaser.

[57]

Damages 147 The question is whether the trial judge was correct in holding that, even if a cause of action for breach of contract was established, no loss had been proved. In my opinion, counsel for Dresna is on sound ground in submitting that timely disclosure of the knowledge that Franklins had on or around 15 October 2001 of the dealings between Coles and the Lessor would have considerably changed the landscape of the litigation. As I have said, the information would have been of considerable significance in preparing for and presenting the case against the Lessor and would quickly have led to detailed knowledge of the dealings between the Lessor and Coles. My reading of the transcript of the hearings in the Supreme Court of Victoria between 19 October and 20 December 2001 leaves me in little doubt that, if that aspect of the matter had been known to counsel for the plaintiff, the case could have been heard before Christmas 2001, even if the counterclaim for breaches of lease was included. On analysis, those breaches were quite confined. It is not at all clear to me that such breaches as were alleged would have had any relevance to the issue arising on assignment. In any event, I have little doubt that the issue concerning the assignment could have been dealt with by then. I think it is likely that the judgment would have been delivered before the commencement of February 2002 in that event. 148 The question of the likely result is more problematic, but it seems to me that the trial judge was on sound ground when he said: "Had there been sufficient time to litigate the matters in dispute between himself and the Lessor, he [sic Dresna] may well have succeeded in establishing that the Lessor had no right to refuse consent to the assignment of the lease." The clause as to assignment did not include a requirement that the assignee be a national chain. 'Comparable commercial standing' cannot be read down in that way. 149 However, that scenario does not take account of the essential problem Dresna faced that was identified by the trial judge, namely, the ability of Franklins to bring the litigation arrangement at an end at any time and to bring the underlying Mentone BSA to an end on seven days' notice during the relevant period. There was no inhibition upon Franklins in making either decision. There was no need for it to have cause. It could act entirely in its own interests in doing so. In fact, it did so before the litigation could have been completed, even on the most favourable view to Dresna. Once the Mentone BSA was terminated, Dresna had no standing to continue the litigation. That was the essential reason for the injunction granted by the Supreme Court of Victoria not being continued. 150 Dresna's principal answer is to suggest that the ACCC would not have consented to any disposition to Coles if there had been a viable case on foot with the likelihood of an early determination of it. That may have been so, but the fact was that Franklins did terminate the Mentone BSA before receiving consent from the ACCC. That is consistent with Franklins' overall commercial imperative to close operations being more important to it than the fate of the business being conducted at any one store. I agree with the reasoning of the trial judge on this aspect. This leads to the conclusion that there was no real possibility of Dresna achieving the purchase of the Mentone business. The judge was right to reject a claim for damages on that account. 151 The claim for legal costs cannot be sustained. Dresna's case is that disclosure of the information not disclosed would have materially increased the chances of success in the litigation and perhaps, more importantly, very much increased its chance of having the litigation heard in a timely fashion. That surely would only have encouraged the pursuit of the case, making the spending of the legal costs even more certain. 152 Thus, even though there was a breach of contract by Franklins, no damages were established. I, therefore, agree with the orders proposed by Heerey J. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

[65]

Fiduciary relationship 155 Dresna submits that the fact that it was a co-plaintiff with Franklins in litigation itself gives rise to a fiduciary relationship. Dresna submits that the litigation agreement, the agreement between Franklins and Dresna to commence and maintain proceedings, gave rise to mutual fiduciary obligations between them. The solicitors would be Mason Sier Turnbull and counsel would be retained to appear for the plaintiffs. The proceedings would be funded by Dresna, who would indemnify Franklins in respect of any adverse costs orders. In those circumstances, it is not unreasonable that it was Dresna's solicitors who were retained to act in the litigation. However, Franklins retained its own solicitors to maintain a supervising brief over the proceedings. Franklins could terminate the Mentone BSA on two, later seven days notice and withdraw from the litigation agreement at will. Indeed, it did so on 28 November 2001. 156 I agree with Heerey J at [51]-[57] and the primary judge at [221] that, in the circumstances of this case, Franklins had no obligation of a fiduciary nature to refrain from pursuing its own, separate and individual interests, subject to its contractual obligations to Dresna arising out of the Mentone BSA and the litigation agreement. 157 As was stated in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 68 by Gibbs CJ, there is a difficulty in suggesting a test by which it may be determined that a fiduciary relationship exists outside the accepted categories. The basis of the relationship between Dresna and Franklins was the Mentone BSA. The fact that the arrangement between the parties was of a purely commercial kind is indicative of no fiduciary duty (Hospital Products at 70). In Hospital Products, Gibbs CJ referred at 71 to the fact that an agreement between parties which was, as here, terminable on reasonable notice argued against such a relationship. Factors such as a relation of confidence, inequality of bargaining power (considered to be of importance by Dawson J in Hospital Products at 142), the existence of a duty to be performed and an undertaking to act for another, are not of themselves sufficient to found such a relationship. It is a question of fact in each case (at 72). In discussing the proposition that where two people have dealt with each other as principals neither will be the other's fiduciary, Gibbs CJ commented that the duty did not exist where one party did not undertake, whether by representation or contractual provision, to act solely in the interest of the other and not in its own interest (at 72). Although in dissent on the existence of a fiduciary relationship on the facts in Hospital Products, Mason J observed at 97 that a contractual and fiduciary relationship may co-exist but the fiduciary relationship, if it is to exist, must accommodate itself to and be regulated by the terms of contract. 158 The primary judge considered at [217] the test of fiduciary relationship in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 12, which emphasised mutual confidence and trust as underlying most consensual fiduciary relationships. In United Dominions at 10 - 11, Mason, Brennan and Deane JJ drew a distinction between a "joint venture" and a simple contractual relationship. Their Honours gave as an example of the first a financial undertaking or endeavour with a view to mutual profit, each participant usually but not necessarily contributing money, property or skill; both parties are entitled to a share of profits. This was contrasted with a relationship where one party contributes only money or other property; money is payable to the party providing the money or property which may be determined by reference to the profits made by the other. The form of the particular joint venture and the content of the obligations undertaken are relevant. The fact that it is a single undertaking and not a continuing relationship does not prevent the relationship being a fiduciary one. 159 As the primary judge observed, the relationship between Franklins and Dresna was not one of "mutual trust and confidence" (at [218]). Franklins lent its name to the Supreme Court proceedings to obviate any problems of Dresna's standing to bring the proceedings (at [219]). It retained solicitors to maintain a "supervising brief". It reserved the right to be informed and to oversee the litigation. It would have the benefit of the sale to Dresna if the litigation were successful but that was pursuant to a contractual relationship. If the litigation were not successful or completed within the time suitable to Franklins, Franklins was not bound to sell to Dresna. Indeed, Franklins was entitled to terminate the Mentone BSA at any time, on notice. 160 In the circumstances, it cannot be said that the "joint venture" constituted by the litigation in which both Franklins and Dresna were plaintiffs gave rise to a fiduciary relationship. The litigation was at Dresna's cost. The fact that Franklins insisted that the solicitors withdraw when it did was not because of a fiduciary relationship with Dresna but because of the relationship between the solicitors and Franklins as a client from whom they received some instructions. 161 Franklins and Dresna did not, by reason of the litigation, join in a common enterprise in the sense of a common business enterprise in which the participants have a relationship of mutual trust and confidence or in which they were partners or "joint venturers" (cf Concrete Pty Limited v Parramatta Design & Developments Pty Limited [2006] HCA 55 at [124] per Hayne J; see also Gummow J at [15] and Callinan J at [156]). 162 It was the Mentone BSA that governed the relationship between the parties. That contractual relationship was strictly commercial in nature. Franklins participated in the litigation in order to avoid problems of Dresna's standing. That raised the necessity to be represented on the record by the same firm of solicitors and by the same counsel. The agreement to litigate must be understood in context and the superimposition of a fiduciary relationship would impermissibly alter the operation of the contract between Franklins and Dresna (Cubillo v Commonwealth (2001) 112 FCR 455 at [462] - [465]). In the circumstances, no fiduciary relationship nor fiduciary obligations arose.

At a glance

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Before

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Judgment (72 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (17)