Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310

Supreme Court of Victoria|2000-08-18|Before: Byrne J

CONTRACT - franchise - implied term of good faith and fair dealing - whether franchisor acted for extraneous purpose.

Since 1998, the secondnamed plaintiff, Rodney Arthur Hackett, has, through his company, Far Horizons Pty Ltd ("Far Horizons"), the firstnamed plaintiff, been a successful owner/operator within the McDonald's chain of quick service restaurants. He conducts two restaurants, called "stores" in the McDonald's jargon, one at the Fountain Gate Shopping Centre and another at the corner of Heatherton Road and Matthew Flinders Avenue, Endeavour Hills.

At each location, Far Horizons conducts the store under a licence agreement entered into with the defendant, McDonald's Australia Pty Ltd ("McDonald's"): that at Fountain Gate under a licence agreement dated 31 January 1989 which expires on 13 October 2008; and that at Endeavour Hills under a licence agreement dated 8 September 1993 which expires on 19 July 2013. The freehold of each site is held by McDonald's Properties Pty Ltd, which company has granted to Far Horizons a lease commensurate with the term of each licence.

McDonald's stores are located throughout Australia as part of a world-wide chain of quick service restaurants which are ultimately controlled by the McDonald's Corporation in the United States of America. The stores, at least in this country, are more or less standard in presentation and sell standard food, notably hamburgers, and associated products. McDonald's stores in Australia fall into two classes. First there are those owned by McDonald's itself and conducted by it through employee managers and staff. These are called McOpCo stores. The second class comprises those stores conducted by independent operators under licence agreements such as those in this case. Each owner/operator conducts their own business, although they do so under very strict control and supervision by McDonald's. They are required under the terms of their licence agreement to conform to the requirements of McDonald's in nearly every aspect of their business. These requirements concern food type and standards, kitchen and service areas, the manner, presentation and sale of food, the design, appearance and standard of the premises including adjacent parking areas, hours of trading, staffing including training and presentation, and financial reporting.

It was not uncommon in 1995 for an owner/operator within the McDonald's System to own and operate more than one store. The question whether, in a given case, McDonald's would grant to an existing licensee a licence to operate another store was one which involved a consideration of its policy known as the National Store Owner Expansion Criteria which was referred to before me as "the McDonald's Expansion Policy". This policy was amended from time to time and different versions are in evidence. Under the policy, as it stood in 1995, an existing licensee would qualify as eligible to take a further licence where they satisfied the McDonald's requirements in respect of seven criteria outlined below.

(a) Operational level of quality, service and cleanliness

This criterion, which received a good deal of attention at the trial, is referred to by its initials, QS&C. In terms of the requirements of the policy, the following was specified in respect of this criterion:

"Your store, or stores, must be rated `B' or better in QSC, as determined by a variety of documented visits over the review period. These visits will be a minimum of one Full Field Review, one Full Field Follow-up, two CSVR's and other unannounced store visits. You are committed to the following: s A minimum of one Full Field Review per year. s One Owner/Operator Review per 18 months, at which eligibility for expansion or the lack thereof will be clearly stated to you. s Other such visits as deemed necessary. Stores graded `F' as a final grade in QSC shall receive another Full Field Follow-up within six months from the date of the prior visit."

This criterion concerned the prices and profitability of the store. It was not a significant criterion in the present case.

The relevant policy in respect of this criterion is as follows:

"You must demonstrate that you are capable of attracting, developing, rewarding and retaining a quality management team and a well trained, motivated crew, in your existing store(s). A commitment to good employee relations is absolutely essential, and is demonstrated by such things as participation in Crew Opinion Surveys, the PAL System, providing quality crew rooms, the operation of safety committees and the hosting of crew and parent events. McDonald's requirement in this area are summarised in the `P' Factor, which should be completed by your field consultant, as part of (or recently before) the review process. At least the minimum requirements identified in the `P' Factor should be met (as of 1 July, 1995). You are not required to have additional management on hand in anticipation of a new store being offered to you, however, you would be required to nominate an existing Manager who would be ready for promotion to Store Manager. A management depth chart must be completed as part of the review process, including details on both crew and management turnover. Existing Store Owners, Store Managers and new Store Managers are required to be AOC graduates and must keep current on an on-going basis with McDonald's management training program by recycling through all courses on a timely basis and through AOC at least every five years. Our intention is to select the Store Owner for new stores within thirty days of signing the Real Estate Contract. This allows the new Owner approximately three to four months to hire and develop additional assistant managers, whilst we secure all necessary permits for the site. Construction takes approximately four to five months, allowing additional time for the Store-Owner to develop the management team."

This was not a significant criterion in the present litigation.

This criterion required the operator to maintain a satisfactory level of reinvestment in the business so as to maintain and upgrade facilities and decor.

This criterion also received a great deal of attention at the trial. In terms of the policy it is expressed as follows:

"The Store Owner must have a positive, co-operative and contributive attitude towards the McDonald's System. He/she must have demonstrated a pro-active record of sales building and involvement in their local community; an attitude which is in tune with today's competitive market place for good solid business rationale and one that will enhance the future growth of their store and the development of the McDonald's System."

This was explained by the McDonald's witnesses as having two components, first an appropriate attitude towards the McDonald's organisation including other licensees, and, second, an appropriate attitude to the conduct of the business, including a readiness to engage in local activities which would promote the image of the business and of McDonald's.

This criterion, which concerned the application of the operator to the business, was not the subject of any attention at the trial.

An operator who satisfied the criteria of the McDonald's Expansion Policy was rated "eligible for expansion" or "expandable". This was the terminology adopted to denote a satisfactory assessment of an owner/operator made upon a more or less annual review of their operation, called a "Business Review", an "Operator Review" and sometimes an "Annual Review". I shall adopt the terminology "Business Review". The assessments were made whether or not the owner/operator wished to expand or to be considered as a possible operator of another store. Its use reflects a fundamental tenet of the McDonald's System - that expansion or the opening of new stores is a desirable objective.

Expansion was thought to be desirable from a marketing point of view, for the greater the number of points of sale, the greater the hold of McDonald's on the fast food market generally. Moreover, the presence of a McDonald's store often acted as a deterrent to the intrusion of a rival organisation into a particular location. Contrariwise, it is sometimes seen as desirable from a marketing point of view for rival fast food stores to cluster together so that their collective presence attracts patrons.

Expansion was thought to be desirable from the point of view of McDonald's because it receives income by way of rent from its licensees. Moreover, generally speaking, the greater the number of stores, the greater the total sales of the chain, seen collectively, and consequently, the greater the income for McDonald's. This is an important consideration because it was suggested in this case that this meant that McDonald's was inclined to open new stores for its own benefit, without sufficient regard to the fact that the market of an individual licensee might thereby be reduced. In the terminology of McDonald's, such a reduction in turnover is referred to as "impact".

Expansion was thought to be desirable from the point of view of existing licensees. This may be because a particular licensee obtains the licence for the new store and so acquires a new business or new outlet for an existing business. Even if this be not the case, it is said by those who devised the McDonald's System that the opening of the new store should, in the long term, add to the value of existing stores notwithstanding that there be a short term impact. The logic behind this is that the new store will add to the market of McDonald's as a whole and the extended advertising will increase product recognition to the benefit of all.

This case concerns the decisions made by McDonald's in 1996 to open two new stores in the vicinity of those owned by Far Horizons and, furthermore, not to offer the licences for either store to Mr Hackett or to his company. It is necessary to pause a moment at this point to underline that it is these decisions which are the subject matter of this trial. For reasons which will appear, a good deal of the evidence concerned matters prior to these decisions but these matters and evidence relating to them are relevant only in so far as they bear upon those decisions.

On 2 April 1996, McDonald's decided to open a new store in the shopping complex at Fountain Gate with a planned opening date of September of that year. The proposed location in the food court of the complex was about 800 metres from the Far Horizons store, which stood on the Princes Highway some distance from the complex. It was estimated by McDonald's that the establishment of this new store would have impact of 3% to 8% on Far Horizon's existing Fountain Gate store. This means that the sales of this existing store were expected to suffer an initial decline of 3% to 8%. Mr Hackett was told on 4 April 1996 that he would not be offered the licence of the new store. In fact, the decision to open this store was revoked in September 1996, shortly after the commencement of this proceeding.

The second new store was at the corner of Clyde Road and Kangan Drive, Berwick. This site is near the Princes Highway about 4.5 kilometres from the Fountain Gate store travelling away from Melbourne. The decision to establish this store was made on 24 June 1996 with a planned opening date of December of that year. On 5 June 1996 Mr Hackett was told that the licence would not be offered to him. The impact of this new store on his Fountain Gate store was expected to be between 6% and 9%.

The claims of the plaintiffs are set out in their further amended statement of claim filed on 28 May 1999. In essence, they assert six causes of action:

(1) Breach of one or other of the following duties alleged in paragraph 20:

"(a) not to open or to grant a licence for a new McDonald's System restaurant located so as to prejudice significantly the profitability of either of the Fountain Gate restaurant or the Endeavour Hills restaurant. (b) alternatively to sub-paragraph (a), not to grant a licence for a new McDonald's System restaurant which if opened would prejudice significantly the profitability of either of the Fountain Gate restaurant or the Endeavour Hills restaurant unless either Hackett or [Far Horizons] had been offered a licence to operate the new restaurant and had declined the grant of the licence; (c) generally, not to do or perform any act or engage in any conduct which would prejudice or harm the interests of Hackett or [Far Horizons] in its capacity as a licensee of the Defendant; (d) generally, not to perform its obligations or to exercise its rights under the Licence Agreements unfairly or in bad faith towards Hackett and [Far Horizons]; (e) specifically, not to use the confidential information in determining to grant a licence for a new McDonald's System restaurant which if opened would prejudice significantly the profitability of either the Fountain Gate restaurant or the Endeavour Hills restaurant unless it was the Defendant's intention to offer the grant of the licence for the same to [Far Horizons] or Hackett. (f) to advise and consult with them before taking any action which may prejudice significantly the profitability of either of the Fountain Gate restaurant or the Endeavour Hills restaurant; (g) to advise and consult with them after taking any action which adversely affects the profitability of either of the Fountain Gate restaurant or the Endeavour Hills restaurant to ensure that diminution of profitability is minimal and profitability is returned as soon as practicable; (h) to ensure that Hackett and [Far Horizons] receive the same level of service, opportunity for expansion, information, assistance, expertise and treatment from the Defendant as any other licensee."

When asked as to the legal foundation for these duties, counsel for the plaintiffs told me that they were contractual, that is, manifestations of the implied term as to general honesty and fair dealing. They added that the duties might also arise from the fiduciary relationship which existed between McDonald's and their licensees. Nothing further, however, was said about this alternative basis.

(2) Breach of one or other of the following implied terms in the licence agreements as alleged in paragraph 20A.

"(a) the Defendant would not carry out any act or take any step that would or would tend to prevent, hinder or impede Hackett and [Far Horizons] from enjoying the full benefit and advantage conferred upon them by the grant of the Licence Agreement; (b) the Defendant would not carry out any act or take any step that would or would tend to destroy, depreciate or devalue the goodwill of the business conducted pursuant to the Licence Agreement; (c) the Defendant would not carry out any act or take any step that would or would tend to divert or result in the diversion of the custom enjoyed by the business conducted pursuant to the Licence Agreement; and (d) the Defendant in performing its obligations and in exercising its rights under the Licence Agreements, was under a duty to act fairly and in good faith towards Hackett and [Far Horizons]."

(3) A breach of the duty to conduct the Operator Review and to apply the Expansion Policy honestly and reasonably and not arbitrarily, capriciously or unconscionably. In the context of this duty to act in good faith, counsel for the plaintiffs argued that the decisions in question were made by McDonald's in bad faith as part of a strategy it had adopted to apply improper pressure upon the plaintiffs in order to persuade them to withdraw from the McDonald's System. The establishment of the two new restaurants was described in this context as a "pincer movement" directed to this end.

(4) Breach of cl. 5.01 of the licence agreement under which the licensor is obliged to advise and consult with the licensee in certain circumstances and to make available to the licensee "all additional services, facilities, rights and privileges" which it makes generally available to other licensees.

(5) Unconscionable conduct in breach of section 51AA of the Trade Practices Act 1974.

(6) Misleading and deceptive conduct contrary to section 52 of the Trade Practices Act 1974 or section 11 of the Fair Trading Act 1986.

Before me, the contest lay principally in the existence of the terms alleged in the first three causes of action, the existence of which terms was denied by McDonald's. It contended that the terms of the two licences did not constrain its right to open new stores nor when and where it chose to open them, nor its right to offer the licence to conduct them to any person. The licences confer on the licensee no right to be offered or to be considered for the licence of any new store and no exclusive right to trade in any area beyond the geographical boundaries of the store. McDonald's further said that, in any event, it had at all times acted honestly and reasonably in making the decisions which were in issue. It denied that the decisions had been taken as part of a strategy to remove Mr Hackett and his company from the McDonald's System. There is no direct evidence of these matters and I was invited to infer lack of good faith or mala fides from events which antedated the decisions by some 12 months or more and, in the case of the Fountain Gate Food Court store, from the abandonment of the proposal after this proceeding was commenced.

It is convenient that I set out the relevant terms of the agreements and the background facts as I find them before turning to the decisions themselves, the applicable legal principles and, ultimately, to the conclusions which I have reached.

The licences and the accompanying leases are in standard form. The parties are McDonald's as licensor and lessor, Far Horizons as licensee and lessee and Mr Hackett who is described as the principal. Under the terms of the licence the principal guarantees the performance of the licensee. Recital B sets out what is, in the document at least, the meaning of the expression "the McDonald's System":

"B. The McDonald's System is a comprehensive restaurant system for the retailing of a limited menu of uniform and quality food products, emphasizing prompt and courteous service in a clean and wholesome atmosphere which is intended to be particularly attractive to families. The foundation and essence of the McDonald's System is the adherence by licensees to standards and policies of McDonald's and its related corporations providing for the uniform operation of all McDonald's restaurants within the McDonald's System including, but not limited to, serving designated food and beverage products; the use of only prescribed equipment and building layout and designs; and strict adherence to designated food and beverage specifications and to prescribed standards of quality, service and cleanliness in restaurant operation. Compliance by licensees with the foregoing standards and policies in conjunction with McDonald's trademarks, service marks and trade names provides the basis for the valuable goodwill and wide acceptance of the McDonald's System. Moreover the establishment and maintenance of a close personal working relationship with Licensee in the conduct of his McDonald's restaurant business, his accountability for performance of the obligations contained in this agreement, and his adherence to the tenets of the McDonald's System constitute the essence of the licence provided for herein."

Recital D sets out the wish of the licensee to adopt and use the McDonald's System in a restaurant at the location defined in the Schedule, which is itself defined as "the Restaurant".

The operative part of the licence in each case commences with the following general interpretation clause:

"1.01 Interpretation The provisions of this agreement shall be interpreted to give effect to the intent of the parties stated in the Recitals hereof so that the Restaurant specified in this agreement shall be operated in conformity with the McDonald's System through strict adherence to Licensor's standards and policies as they exist now and as they may from time to time be modified."

"2.01 Licence In consideration of the payment by Licensee to Licensor of the licence fee referred to in clause 3.01 hereof and the performance and observation by Licensee of the obligations referred to in clause 6 hereof, Licensor hereby grants to Licensee the right, licence and privilege to adopt and use the McDonald's System in the Restaurant subject to the terms covenants and conditions contained herein."

The other obligations of the licensor are those of consultation, the provision of know-how and manuals and training as set out in cl. 5. Sub-clauses 5.01 and 5.02 are in these terms:

"5.01 Consultation Subject at all times to clause 6.03 hereof, Licensor shall from time to time as it deems appropriate advise and consult with Licensee in connection with the operation of the Restaurant and shall upon Licensee's request do so at other reasonable times. 5.02 Know How, Services Subject at all times to clause 6.03 hereof, Licensor shall communicate to Licensee its know-how and details of new developments, techniques and improvement in areas of restaurant management, food preparation and service which are pertinent to the operation of a restaurant using the McDonald's System. The communication of such know-how and details shall be accomplished by visits by personnel of Licensor or of Licensor's wholly owned subsidiaries or affiliated companies, printed and filmed reports, seminars and newsletter mailings. Licensor shall also make available to Licensee all additional services, facilities, rights and privileges which Licensor makes generally available from time to time to Licensor's other Australian licensees."

Extensive obligations are imposed on the licensee. First, it is obliged to pay a one-off licence fee of $22,500 in each case, a monthly service fee of 4% of gross sales for Fountain Gate and 5% of gross sales for Endeavour Hills, and in each case, an advertising charge of not less than 4% of gross sales. The rental payable under each of the leases is also calculated by reference to gross sales.

Returning to the licences, there are extensive provisions in clauses 6 and 7 obliging the licensee to comply with the requirements of the McDonald's System. These deal with the manner of presentation of the stores and every aspect of the operation of the business, including an obligation in cl. 6.05 upon the principal to use their best efforts in the operation of the business. Clause 7 obliges the licensee to provide financial reports and accounting information to McDonald's.

The licence in each case contains an entire agreement clause:

"18.10 Entire Agreement This agreement constitutes the entire agreement between the parties and supersedes all prior, contemporaneous, oral or written agreements or understandings of the parties with respect to the subject matter hereto. No obligations of the Licensor shall be implied in addition to the obligations herein expressly provided. No interpretation, change, termination or waiver of any of the provisions hereof shall be binding upon Licensor unless in writing signed by an officer of Licensor. No modification, waiver, termination, rescission, discharge or cancellation of this agreement shall affect the right of any party hereto to enforce any claim or right hereunder, whether or not liquidated, which occurred prior to the date of such modification, waiver, termination, rescission, discharge or cancellation."

Finally, there are in each case the following acknowledgments:

"21. ACKNOWLEDGMENT Licensee and Principal jointly and severally acknowledge that: (a) the term of this agreement is as set out in item five of the schedule hereto with no promise or representation as to the renewal of this agreement or the grant of a new agreement; (b) Licensee hereby represents that he has received a copy of this agreement and has had an opportunity to consult with his solicitors with respect thereto at least fourteen (14) days prior to his execution thereof; (c) no representation has been made by Licensor as to the future profitability of the Restaurant; (d) this agreement gives no exclusive, protected or other territorial rights in the contiguous market area of the Restaurant; ..."

In the case of the Endeavour Hills licence, which was executed some five years after the Fountain Gate licence, there is to be found a further special condition 24. For present purposes, cl. 24.02(a) contains the following agreement:

"Pursuant to provision 4.2 of the [Franchising Code of Practice] the Licensee agrees to comply with and act in accordance with the Code."

This is a puzzling covenant because provision 4.2 of the Code provides principally for an agreement by franchisors, not franchisees, to comply with the Code. It is true that the provision also obliges complying franchisors to insert in their new franchise agreements a requirement that franchisees "act in accordance with the Code", but the use of the expression "comply with" in cl. 24.02(a) of the Endeavour Hills licence suggests that the drafter intended to bind McDonald's to comply with the Code and the licensee to act in accordance with it, as provision 4.2 of the Code provides. I should add in this context that the evidence showed that, at this time, McDonald's was a supporter of the Code and saw itself as bound by it. The Code contains standards of conduct for both franchisors and franchisees in provision 12.

"12. Standards of Conduct 12.1 Franchisors and Franchisees will not participate in unconscionable conduct, in relation to Franchise arrangements. 12.2 Franchisors and Franchisees should act in an ethical, honest and lawful manner and endeavour to pursue best franchise business practice of the time and place. They should in their dealings with one another, at least avoid the following conduct, where such conduct would cause significant detriment to either party's business: (a) Substantial and unreasonable overvaluation of fees and prices; (b) Conduct which is unnecessary and unreasonable in relation to the risks to be incurred by one party; (c) Conduct that is not reasonably necessary for the protection of the legitimate business interests of the Franchisor, Franchisee or Franchise system."

These provisions, however, may perhaps be put to one side since the plaintiffs do not plead any breach of the Code and since the allegations made against McDonald's concern Far Horizons' interest as operator of the business at Fountain Gate, and not that at Endeavour Hills.

I should add before leaving these agreements that it was not suggested on behalf of the plaintiffs that Mr Hackett was unaware of their terms. Indeed, the evidence showed that he read the agreements before executing them and there was no suggestion that he, as an experienced commercial solicitor, failed to understand them or was at any disadvantage in agreeing to their terms.

Mr Hackett is by training a legal practitioner who had practised from 1977 to 1987 as a solicitor in a suburban commercial practice. In 1986 he approached McDonald's with a view to becoming a licensee operator of a store and in due course successfully completed the required training and evaluation procedures.

In early 1988 Mr Hackett was offered the licence of the newly established Fountain Gate store on the Princess Highway about 35 km south east of Melbourne between Dandenong and Berwick. After some negotiation, the terms of the licence were agreed and it was executed on 31 January 1989. He had previously commenced operating the store in October and the twenty year term commenced on 14 October 1988.

Mr Hackett was a successful operator at Fountain Gate and this was reflected in his sales. In the course of negotiations, it was expected that his annual turnover would be of the order of $1.6M to $1.9M. In fact his sales in the first calendar years were $2.57M in 1989, $2.93M in 1990, $3.46M in 1991, $3.91M in 1992 and $4.38M in 1993.

During these early years he was from time to time assessed for QS&C by McDonald's franchise consultants and inspectors. For this purpose a store may be rated for each of quality, service and cleanliness as follows: A, B, C or F. These gradings represent the following scores: A - 94% to 100%; B - 84% to 93.9%; C - 76% to 83.9%; and F - 0% to 75.9%. The ratings for Fountain Gate in these early years were as follows:

In 1993 McDonald's established a new store at Endeavour Hills, approximately 11 kilometres north of the Fountain Gate store. Notwithstanding that Mr Hackett was not then rated as eligible for expansion, that his was not the nearest store and that his store was not expected to be the most severely impacted by the new store, he was offered the new licence and he accepted it. The licence for this store, which is in similar terms to the Fountain Gate licence, was executed on 8 September 1993. Its term was twenty years commencing 20 July 1993, the date the store opened.

It seems from this that Mr Hackett was regarded favourably by McDonald's as a successful operator at this time and no witness suggested otherwise. This is borne out by the ratings obtained by him at his annual Business Reviews. There was no evidence of reviews in 1991 or 1993.

It will be recalled that under the McDonald's Expansion Policy an operator is not expandable unless they had achieved an expandable rating under seven headings. These assessments were made upon a Business Review. Business Reviews were conducted on a fairly formal and structured basis every twelve to eighteen months by the franchise consultant responsible for the licensee. A time was fixed approximately two months before the appointed date. A "Store Owner Package" was sent to the operator for completion and return to the consultant before the review. This package included a requirement that the operator assess their own performance on various criteria, including QS&C. In order to be rated expandable on QS&C, the operator had to be rated at least BBB for the preceding 12 months.

The 1994 Business Review for Mr Hackett and his company took place on 23 February 1994 at McDonald' s office in Collingwood. Mr Hackett's franchise consultant was Arthur Xipolitos. At this review he achieved the following ratings:

The grading on QS&C was a consequence of the fact that Endeavour Hills had not been open for 12 months and a product of the assessments over the previous 12 months which were as follows:

Mr Hackett's own assessment of his QS&C grading as shown in his return of the Store Owner Package for the 1994 Business Review was AAA for Fountain Gate and BBB for Endeavour Hills. Mr Xipolitos attributed this decline in standard to the difficulties Mr Hackett was encountering in conducting business at two locations since July 1993.

The adverse grading on People was a consequence of Mr Xipolitos's assessment that there had been an excessive turnover of staff and a lack of management depth. This "People problem" was also reflected in the high number of customer complaints received at head office. Mr Xipolitos explained that customers do not usually complain to head office about some deficiency if their complaint has been satisfactorily dealt with by the store manager or staff.

Mr Xipolitos said that Mr Hackett's People problem did not resolve itself. On 18 August 1994, he discussed the manager turnover difficulties with Mr Hackett, suggesting that he, Xipolitos, meet the managers to discuss any concerns or issues they might have. Mr Hackett resisted this, adding, significantly in my view, that he felt "as if McDonald's was trying to dissect his business apart and that it was looking for ways to pick on him". In the event, Mr Hackett agreed for Mr Xipolitos to conduct individual interviews with his managers. The complaints of these managers concerned Linda Hackett, Mr Hackett's wife, and an excess movement of staff between the two stores. Mr Hackett was critical of Mr Xipolitos as his franchise consultant. He said that he found him unhelpful and non-constructive.

Nor did the QS&C gradings improve. They were as follows for the balance of 1994:

The 1995 Business Review was scheduled for Friday 24 March 1995. Earlier in that year Mr Xipolitos was replaced as Mr Hackett's franchise consultant by Christopher Mark Barlow. On 17 January a meeting took place at McDonald's Camberwell store. The purpose of the meeting was to introduce Mr Barlow and to discuss the pending review for which Mr Xipolitos remained responsible. Present, in addition to those I have mentioned was Mrs Hackett. It is common ground that Mr Xipolitos said at this meeting that Mr Hackett would be graded non-expandable on QS&C having regard to the standards achieved at Endeavour Hills since the last Business Review. It is common ground, too, that Mr Hackett objected to this assessment and that he became upset and agitated. Mr Xipolitos agreed to revisit the assessment and he did. On 16 February he informed Mr Hackett at the Endeavour Hills store that the assessment would stand. Mr Hackett protested, but in vain. He sought to have the Director of Operations, Michael Lewis Tregurtha, and the State Regional Manager, Anatolij Cork, intervene on his behalf or to override the assessment, but they declined to do so. Mr Hackett's reaction to this rejection is best seen in the words of his own witness statement:

"Because Mr Xipolitos appeared to me to be determined and insistent on grading me as operationally unsatisfactory, I told him there was little point attending my formal business review meeting with McDonald's which was scheduled for on or about 24 March 1995. On the basis of my unhappy experience with the grading given to me by Mr Xipolitos, I came to realise that my future security and prospects in the McDonald's System, being my $2 million plus investment in my restaurants and my desire to expand, were ultimately in the hands of a very subjective evaluation of my restaurants by one or two people and the personal relationship between myself as licensee and my Consultant."

It seems that he announced this decision to Mr Barlow sometime later, during a coffee break at a meeting on 9 March 1995, with the explanation that the Business Review was a "kangaroo court" and that he wanted no part of it.

About this time, too, there occurred another unrelated incident which suggests that Mr Hackett was then considerably troubled by feelings of frustration. It concerns difficulties he was having at his Endeavour Hills store with car-parking. The problem, it seems, dated back to 1993 when the McDonald's real estate department had failed to come to an arrangement with the proprietors of the shopping centre for exclusive car-parking for McDonald's customers. Mr Hackett's company was entitled to such a car park under the terms of its lease with McDonald's. This was a cause of dissatisfaction for him with the real estate department. He maintained that the lack of parking was costing him sales, and the real estate department wrote to the Centre Manager of the shopping centre on 13 December 1994 making this point. Its response dated 16 December disputed the allegation and the Centre Manager went on to assert that, on the previous day, there were abundant vacant spaces close to the store. It added, rather provocatively, that the sales performance may be more related to the quantity and quality of customer service at Mr Hackett's outlet. Mr Hackett's response was one of outrage at this criticism of his product and service. By letter dated 22 February 1995 he asserted that the statement was defamatory and threatened legal action in the event of a repetition. It was said, to my mind with some justification, that this response was an inappropriate one. For my present purposes I mention it to show his extreme sensitivity to criticism in these first months of 1995.

Meantime, on 28 January, Fountain Gate was assessed for QS&C as FBB on an unannounced "store feedback review". And on 19 and 20 January Mr Barlow, the incoming franchise consultant, had conducted a Full Field inspection at Endeavour Hills. This is a detailed inspection of the store from an operations standpoint, the first of which is made upon notice to the operator. The store and its operations were assessed on a very great number of items adopting a specified scoring procedure. It is indeed a very detailed inspection. It is followed up a month or so later when the process is repeated, so that any matters of criticism on the first visit may have been addressed.

The Endeavour Hills store was assessed by Mr Barlow on QS&C as BBB on this first Full Field inspection. He told me that this was a high grading, but Mr Hackett was again dissatisfied. A matter which particularly upset him was the deduction of two points out of a possible 160 points for Service, because his counter staff had their long hair tied back in pony tails. Mr Barlow said that the McDonald's requirement was that long hair be braided or tied in a bun. There was some debate at the time and before me about whether this was a formal requirement on this matter or merely a recommendation. I decline to involve myself in this controversy. An examination of the score sheet shows that the points in question had no bearing on the ultimate grading. Mr Barlow described Mr Hackett's reaction as "extremely argumentative and defensive" and commented that this took place in the presence of his staff and customers. Mr Barlow considered his reaction inappropriate and unprofessional, and he rebuked him for it.

Mr Hackett again sought to overturn the grading. He approached Mr Tregurtha on 2 February 1995. He told me that Mr Tregurtha said to him it was the consequence of the fact it was Mr Barlow's first Full Field Review. I do not accept that this was said. It is true that this was the first of such reviews that Mr Barlow had conducted as franchise consultant, but he had previously participated in them on a number of occasions.

In February, too, Mr Hackett became aware that the Franchising Code of Practice was under review. This code is a voluntary code of conduct introduced in 1993 as a result of the efforts of a taskforce initiated by the Commonwealth Minister for Small Business. Under the Code there was established a Franchising Code Administration Council of 15 members, of whom five represented franchisors and five franchisees. In 1995 McDonald's supported the Code and its Executive Vice President, Stephen Craig Jermyn, was a franchisor member of the Council. The Minister had in 1995 commissioned a review of the Code which was conducted by Robert Gardini and on 7 March 1995 the Gardini report was released for public comment. Comments were to be lodged in Canberra by 31 March 1995.

On 9 March Mr Hackett obtained copies of the Gardini report and formed the view that it might be in the interests of licensees that they submit comments to the Minister. At a meeting of the Victorian Licensee Marketing Cooperative (the "Co-op") on the same day, he handed a copy of the report to three licensees who were members of the executive of the Co-op, with a request that they should speak with him if they wanted to pursue the matter. They did not accept this invitation.

The Co-op comprises all McDonald's Victorian licensees, the McDonald's Regional Manager, Mr Cork and its Director of Marketing. Mr Hackett attended this meeting of 9 March, as did Mr Tregurtha and Mr Barlow. It had been called to discuss the success of a marketing strategy called the "Extra Value Meals Strategy". This was a discounting strategy directed to increasing the volume of sales. Mr Hackett had for some time been an opponent of it for it worked, he told me, to the disadvantage of licensees. McDonald's derives income from licensees by reference to gross sales achieved; increasing sales by discounting meant that the net profit of the licensees was being sacrificed in favour of the licensors. Mr Hackett had publicly expressed his opposition to such strategies and he repeated this at the Co-op meeting. He did not mention the Franchising Code Review at the meeting, but he inquired privately of a licensee who had attended a Top Management Team meeting of licensees on the previous day whether Mr Jermyn had then mentioned it to those present. He was told that Mr Jermyn had not. At the Co-op meeting there was some concern expressed among licensees about profitability generally and it was decided to convene a special meeting to discuss this topic.

It was at this Co-op meeting, too, that Mr Hackett told Mr Barlow of his decision not to submit to the Business Review which was to be held in about a fortnight.

I was told by Mr Cork, Mr Barlow and Charles Hamilton Bell, then McDonald's Chief Executive Officer, that it was unheard of for a licensee not to attend a Business Review. Mr Tregurtha said that he thought it was compulsory but he was challenged on this. In any event, it is clear enough that the Business Review was seen as an important opportunity for a licensee to achieve the standard of eligibility for expansion and for the franchise consultant to assist the licensee to maintain and improve the operation and profits of the store. It is an opportunity for the licensee and the McDonald's representative to discuss in a formal way issues, grievances and problems generally which might exist. It also provides an occasion for an assessment of the eligibility of the licensee for expansion. Mr Hackett's decision represented, in the view of the McDonald's witnesses, and I think correctly, a significant step in the deterioration of the relations between him and McDonald's.

Notwithstanding this advice, in the week commencing 20 March 1995, Mr Barlow telephoned Mr Hackett to confirm arrangements for the forthcoming Business Review. He was told by Mr Hackett, who sounded agitated, that he would not attend the review, a point on which he remained adamant. Accordingly, the review did not then take place.

The decisions with which this litigation is concerned still lie more than 12 months ahead. I remind myself that the events which I now describe are relevant only insofar as they go to credit or provide a factual basis for the inferred motivation of McDonald's in making these decisions. In particular, it is no part of my task to pass upon the rights and wrongs of the differences which may have existed at this time.

On the day after the Co-op meeting of 9 March, Mr Hackett prepared a memorandum entitled, "Matters for Consideration Relating to the Franchise Code of Practice" dated 10 March 1995. He said that this was done to assist him in preparing a submission to the Minister regarding the review of the Franchising Code. He faxed a copy together with the Minister's press release to the same three Co-op executive members to whom he had provided copies of the Gardini report the previous day. The memorandum concludes by soliciting their thoughts or contributions as soon as possible. The three franchisees made no response. He sought to contact them by telephone. He succeeded in speaking with one of them only, a Mr Fitzgerald, in an attempt to have him convene a licensees-only meeting to discuss the issues. Mr Fitzgerald told him that this was not necessary and no such licensees meeting was called. Mr Fitzgerald told him also that there was sufficient interest among licensees for the issue to be fully expressed at the forthcoming profitability meeting.

Mr Hackett told me that he sought to arrange meetings between himself and Mr Cork and Mr Tregurtha with the purpose of further discussing his gradings and also to discuss the pending review of the Franchising Code. He said that two appointments were made, one on 20 March which he cancelled, and the second on 28 March which Mr Cork cancelled. Mr Cork and Mr Tregurtha denied any knowledge of these arrangements. In any event, no meeting took place.

And so the scene is set for the eventful profitability meeting which was held at the Radisson Hotel on Wednesday 29 March 1995. According to Mr Hackett, there were 30 to 40 licensees present. Mr Cork thought there were about 60 and that these represented about all Victorian licensees. Present, too, were four McDonald's personnel, Mr Cork who took the chair, Mr Tregurtha, Eric Gladio and Robert Semmel, the senior licensing accountant. Mr Semmel had some days previously prepared and circulated a memorandum dealing with the subject matter of the meeting. This was profitability. The memorandum identified the fact and some causes of the reduced profitability experienced in 1994. These matters were discussed for some 10 to 15 minutes at the meeting.

Mr Cork then asked whether there were any other issues anyone wanted to raise while all the licensees were there. There were some matters raised and then, as the meeting was breaking up, Mr Hackett rose to his feet. He started to distribute his 10 March memorandum. He said that he wanted to talk about the issues which it raised and the review of the Franchising Code. He told those present that Mr Jermyn should have, but had not, raised these matters at the earlier Top Management Team meeting of licensees held on 8 March. His efforts met a mixed response from the licensees present. Mr Campbell, the president of the Co-op and one of the licensees to whom he had previously sent his memorandum and who had not responded to his invitation for comment and who had not returned his follow-up telephone calls, told him to sit down as the issues were not relevant to the meeting. Some other licensees expressed a similar attitude. Mr Hackett said that some wanted to hear what he wanted to say.

Mr Cork from the chair seems to have become very angry and impatient. He had not seen the memorandum and did not know its contents. He, nevertheless, was stung by the allegation that Mr Jermyn, and thereby McDonald's, had deliberately withheld knowledge of the review of the Franchising Code from licensees and was perhaps mindful of the exchanges Mr Hackett had had with him and Mr Tregurtha and Mr Barlow over the past few months. He reacted with the comment, "and this is from a licensee who refused to attend his Business Review". Mr Hackett snapped back with a reference to the Business Review as a 'kangaroo court'. And so, as Mr Hackett says in his witness statement, "the meeting turned into a bit of a shambles", and in due course it broke up.

This was a most regrettable meeting and it was to have a profound effect on the relationship between Mr Hackett and McDonald's and the McDonald's management. Mr Hackett was upset, nervous and defensive. It is not necessary for me to express any view upon the appropriateness or otherwise of his conduct in so acting and I do not do so. My concern is with its impact upon McDonald's and, in particular, upon Mr Cork and upon his decisions, yet in the future, with respect to the new stores. He was outraged at Mr Hackett's behaviour, and angry. He conceded in cross-examination that his comment uttered in the heat of the moment was inappropriate, unwise and perhaps a regrettable attempt to belittle Mr Hackett in the eyes of the other licensees.

Mr Barlow heard about the profitability meeting from Mr Tregurtha. As his franchise consultant, he spoke with Mr Hackett about it shortly afterwards. It is apparent from Mr Barlow's account of the conversation that Mr Hackett was already regretting that the incident had been charged with more emotion than was appropriate. This was certainly the impression he gave to Mr Barlow although he maintained to the consultant that he had done nothing wrong. A similar regret was expressed by him to Mr Tregurtha at a meeting held in early April. At this meeting, too, Mr Hackett indicated that he would undergo the Business Review and a date for this was fixed for 19 June 1995.

About this time, on Saturday 1 April 1995, Mr Barlow returned to Endeavour Hills to carry out the Full Field follow-up inspection. His gradings on QS&C reflected an improvement from BBB to BAA, notwithstanding that he deducted one point from Service, again for long hair in pony tails among the dinner staff. It is an indication of the deterioration of Mr Hackett's relationship with McDonald's that he criticised even this grading on two counts. First, that it was done unannounced and, second, that the gradings were inconsistent with the earlier gradings because no significant operational changes had occurred since January.

After the profitability meeting Mr Cork obtained a copy of Mr Hackett's memorandum of 10 March. He told me that he took exception to its content. He saw it as calculated to create a "them and us" relationship between licensees and McDonald's which was totally inconsistent with the partnership ethos which he thought was the strength of the McDonald's System. He saw the list of matters as a list of criticisms of McDonald's expressed by a disenchanted licensee. He described it as an inflammatory document. It was suggested that he was wrong about this and that the memorandum simply raised for discussion, generally, a number of abuses which might theoretically occur in any franchising system and which the licensees might care to consider with a view to strengthening the Franchising Code of Practice generally. I will set out the memorandum in full.

"Re: Matters for Consideration Relating to the Franchising Code of Practice The following points are to stimulate thought and discussion arising from the report to senator The Hon. Chris Schacht Minister for Small Business, Customs and Construction - entitled Review of the Franchising Code of Practice prepared by Robert Gardini. The points are not exhaustive and are raised on a conceptual basis to deal with actual or potential issues which may need to be resolved pursuant to the terms of the Code. 1. Benefactorial method of Licensor `granting' licenses (both to new and existing licensees) 2. Licensor's concern with alleged Licensee `obscene profits' 3. Licensor's stock option plan and related concerns 4. Licensor policies having the effect of increasing Licensor's return on investment at expense of Licensee's return on investment 5. Marketing policies - including `focus' on increasing gross sales at expense of Licensee's net profit 6. Impact of new stores on pre existing stores - including devastating effects on Licensee net profit and cash flow (whilst increasing Licensor's revenue) 7. Licensor intimidation methods 8. Licensor's method of `rating/assessing' Licensees - (and its use as a method of control) 9. Licensor arbitrariness (e.g. Licensee assessments: restrictions on Licensee acquisitions geographically of further stores - yet still denying Licensee has `territory' etc) 10. Constraints on Licensee's sales of business - including `restraint of trade' method of forcing reduced sale prices (by Licensor's `right' to effectively `fix' the sale price) 11. .............. etc. I would appreciate any thoughts or contributions you may have ASAP as any comments on the report must be submitted by Friday 31st March."

Bearing in mind that I am concerned with Mr Cork's perception and not with Mr Hackett's intent, I am satisfied that Mr Cork reacted to the memorandum as he described and further, that this was, in the circumstances, not an unreasonable reaction. These circumstances include the events of the early months of 1995 which I have described, including Mr Hackett's refusal to submit to the Business Review on the stated basis that it was a kangaroo court.

Mr Cork went to a McDonald's meeting in Sydney after the profitability meeting where, he said, the events of that meeting were the subject of some discussion. He returned to Melbourne expressly for a meeting with Mr Hackett on 5 April 1995 in order to discuss the events of the previous week. He told me that he was concerned about Mr Hackett's attitude and behaviour and he wanted to have him focus on these and presumably, to moderate them. This was a very significant meeting in terms of the relationship between McDonald's, notably Mr Cork, and Mr Hackett. Present at the meeting were Mr Tregurtha, Mr Cork and Mr Hackett. Mr Cork told Mr Hackett that his conduct was upsetting the McDonald's management. He asked whether Mr Hackett understood that "his conduct had people in McDonald's asking `when do we fuck Hackett'". Not surprisingly, this expression, although not much else, was Mr Hackett's recollection of this meeting. He recalled that Mr Cork told him that if he did not like the McDonald's System he should consider getting out of it. Mr Hackett said, as he often said, that he loved the McDonald's System and that he wanted to stay. I accept that all of this was said at the meeting.

Mr Hackett told me that he saw this meeting as a not too subtle hint that he should leave the McDonald's System. Mr Cork denied this. He said that he was trying to fix the relationship between Mr Hackett and McDonald's which was deteriorating and that he wanted Mr Hackett to modify his conduct so that he might continue in the system as a successful operator. My difficulty in assessing this conflict is that the message which these words might convey depends a good deal upon the tone, the context and even the body language of the speaker. When it was put to Mr Bell that Mr Cork's referring in this way to the attitude of the people at McDonald's and to the fact that he, Hackett, might like to leave the System, might be taken as a threat, he agreed. I find that the words were said in circumstances which reasonably indicated that Mr Cork was offering to Mr Hackett an ultimatum: he might moderate his conduct or he had no place in the McDonald's System. Mr Hackett said that it was at this time that he began to think that McDonald's were "out to get him", adopting the expression put to him by senior counsel for McDonald's. What was put to me on behalf of the plaintiffs was that McDonald's conduct towards Mr Hackett from this time on reflected a decision then taken to remove him from the McDonald's System.

On 19 June 1995 the Business Review was held at Fountain Gate. It was carried out by Mr Tregurtha with Mr Barlow rather than by the franchise consultant alone, as would normally be the case. Counsel for the plaintiffs sought to place significance on this but I do not. Mr Barlow rated the licensee on all criteria other than Positive Contribution, upon which Mr Tregurtha made the decision. In summary the results achieved were as follows:

Mr Hackett accepted this adverse grading on People as warranted. He complained about the grading on Financial Capability, which was based upon the undisputed fact that he had failed to submit financial information. This is a puzzling failure on his part, for, as he said, it is difficult to see how the review could have taken place without this information. In any event it is common ground that the failure was due to his changing accountants at this time and I accept that he provided the information sometime later with this explanation for the delay. It was, however, Mr Tregurtha's adverse assessment on Positive Contribution which attracted a good deal of attention.

In their final address counsel for the plaintiffs said that this grading was made mala fides; it was made in breach of the defendant's duty of acting reasonably and in good faith; it was not made on the merits but rather to discipline Mr Hackett for his mutinous behaviour, especially at the profitability meeting. The consequence was that Mr Hackett, or his company, was not eligible for expansion when the licences for the new stores at Berwick and Fountain Gate Food Court were under consideration. This ineligibility for expansion was an operative reason for the decisions of McDonald's not to offer these licences to him. These decisions were, therefore, infected with this breach of duty and were themselves made in breach of duty. This submission, I must say immediately, is fatally flawed at a number of levels. I shall assume, without expressing any view upon the point, that each of the licences contained a provision which obliged McDonald's to exercise the powers conferred upon it by the agreement reasonably, fairly and in good faith. I shall not dwell upon the difficult question as to what such a duty means; I shall, for present purposes, accept the analysis offered on behalf of the plaintiffs. The submission, notwithstanding this, must fail. First, because I am not satisfied that the June 1995 grading on Positive Contribution was made mala fide; second, because this adverse grading had nothing to do with the decision to open the two new stores; and third, it did not have the consequence that Mr Hackett or his company was not considered as a licensee for the new stores: it was not an operative reason for the decisions to offer these stores to others.

As to the first, it is true that by June 1995 Mr Hackett had offended Mr Cork who had reacted angrily to him when he did so. Let it be assumed that Mr Cork was unsympathetic to his various complaints and that he, Cork, had suggested that Mr Hackett might consider leaving the System. The grading decision as to Positive Contribution was not that of Mr Cork; it was Mr Tregurtha's decision. There is no evidence of personal antipathy between Mr Tregurtha and Mr Hackett. There was no evidence that Mr Tregurtha's decision was the result of some direction from above or that it was affected by his knowledge that Mr Cork, and perhaps those above him, wanted to discipline Mr Hackett. It was certainly, however, made in part from information he obtained from others, including Mr Cork and Mr Barlow.

My task is not to determine whether Mr Tregurtha was correct in his assessment of Mr Hackett on Positive Contribution. Even less is it to substitute my own impressions. I am to decide whether there was material upon which Mr Tregurtha could have made the decision he reached and, even so, whether the decision was based on irrelevant or improper considerations.

In Mr Barlow's memorandum of 8 July 1995 which summarised the discussions which had taken place on the Business Review held on 19 June, he records the following under the heading "Positive Contribution":

"Rod, I understand that in the past you have been a big believer in communication, and have a lot of faith in the McDonald's systems. It is unfortunate that over the past months, you have failed to demonstrate a positive outlook towards the company, its decisions and its direction. I can understand that you are entitled to your opinions, however, I believe that this is beyond that. You have aired your views through the wrong forums and that has made the corporation feel uneasy about growing with you. It is imperative that, for you to grow, in the system, you maintain an open mind over issues. I am sure that this attitude, towards the corporation is effecting not only yourself, your people, but also your business."

Mr Barlow himself had, two days later in the list of priority stores dated 21 June, included Mr Hackett as an operator under his care who had, or potentially had, issues to be addressed under the attitude component of Positive Contribution.

In his witness statement Mr Tregurtha offered seven reasons for the grading:

"(a) There had been a breakdown in communication for which I regarded Mr Hackett as being responsible and I regarded as being particularly significant his failure to attend his 1995 Review in March for no sound reason and his failure to provide his financial statements, despite repeated requests to do so. (b) I considered that Mr Hackett did not have a positive outlook on McDonald's or the System. That was apparent to me from what he did and said at McDonald's meetings with licensees, including, in particular, the profitability meeting held on 29 March 1995. (c) I believed that Mr Hackett had aired his views in the wrong manner, and in the wrong forum, at the wrong time and place. (d) I considered Mr Hackett to have shown poor judgment in both the subjects which he had raised at the profitability meeting, which did not concern profitability, and in his criticism of Mr Jermyn (who was not present to defend himself). (e) I regarded Mr Hackett's behaviour in relation to his 1995 Endeavour Hills Full Field as substandard. (f) I was concerned by Mr Hackett's response to centre management at Endeavour Hills in relation to parking issues at Mr Hackett's restaurant and particularly his letter to centre management dated 22 February 1995. (g) I was troubled by the number of customer complaints received by McDonald's in relation to Mr Hackett's restaurants."

He was cross-examined on each of these suggested reasons with the evident purpose of showing them not to have been a significant factor in the attitude component of Positive Contribution which he had assessed. Other McDonald's witnesses who were not involved in this decision but who were familiar with the grading process were pressed as to their attitude to these suggested reasons. It was put to Mr Tregurtha that it was difficult to reconcile his reasons, when the facts are properly understood, with the grading criteria set out in McDonald's Expansion Policy. Putting aside the component of Positive Contribution with which I am not here concerned, the question for Mr Tregurtha in June of 1995 was whether Mr Hackett and his company had "a positive, cooperative and contributive attitude towards the McDonald's System". To my mind there was ample evidence to entitle him to conclude that Mr Hackett was a disenchanted and embittered franchisee who had resented and reacted aggressively to decisions which he saw as adverse, who had sought to undermine those decisions insofar as they did not accord with his views and who had sought to foment disaffection and to create a "them and us" attitude among other licensees by his conduct at the profitability meeting. In short, he was entitled to conclude that his was not a positive, cooperative and contributive attitude towards the McDonald's System.

It was suggested that the grading was merely a step in a strategy, adopted by McDonald's following the profitability meeting, of punishing Mr Hackett and of marginalising him and ultimately of removing him from the McDonald's System, and that these reasons were built up by the witness to justify the grading. Mr Tregurtha denied this. He impressed me as a fair minded witness in whom I should have confidence. Moreover, there was really no evidence of substance to contradict him. On this important point, as with so much of Mr Hackett's case, he relied upon inference. The difficulty in this case is that, as soon as one approaches the facts without a disposition to find conspiracy, the suggested conspiracy evaporates.

At the Senior Officers' Meeting of 5 July 1995, McDonald's five year plan was published. There, it appears that the number of stores in Australia was expected to increase from 1000 to 2000. For my purposes, the document discloses that in 1996, among the 21 new stores to be opened in Victoria there was to be opened a free-standing store at Berwick with an estimated sales volume of $2.5M and a restaurant at Fountain Gate with an estimated sales volume of $1.5M. The plan for the Berwick store is confirmed by the memorandum from Tim Spencer of 10 July 1995. This was the first indication of a decision within the McDonald's organisation that these stores are to be opened. It is an important date because it is clear that, by the beginning of July, some work had already been done in investigating these proposed locations. When this was first put in hand and whether this was before or after 29 March 1995, the date of the profitability meeting, is not known to me. It does not appear that Mr Hackett was informed of these plans.

On 14 July 1995 Mr Hackett had a meeting with Mr Cork and Mr Tregurtha to discuss a complaint which he had made about one Denise Nabb, the Licensee at Pakenham and Cranbourne who, he said, had poached Leeane Dowling, a manager formerly employed by him. Clause 9 of the McDonald's Licensing Agreement prohibits a licensee from employing or seeking to employ a person "who is at the time employed by... any person who is at the time operating a McDonald's restaurant" or from otherwise inducing or attempting to induce directly or indirectly, such person to leave such employment. What was put in this proceeding was that Mr Cork, faced with a complaint of poaching contrary to this clause, dismissed Mr Hackett's complaint without properly investigating it. This, it was said, showed the Mr Hackett was a persona non grata within the McDonald's System.

The facts as they appeared in the evidence before me showed that Mrs Dowling was in May 1995 a casual manager employed at Fountain Gate. She was disenchanted with her employment situation and contacted the Nabbs to enquire if they might be interested in offering her employment. She forwarded her resume to them and on 25 May she was interviewed by them at her house. They offered her employment and on the next day she gave four weeks' notice to Mr Hackett of her resignation. The resignation was effective on 26 June. After her notice of resignation and at the suggestion of Mrs Nabb's husband, John Nabb, she wrote to Mrs Nabb on 16 June a fictitious letter seeking employment. Mr Nabb on 27 June, the day after Ms Dowling's notice had expired, wrote to Mr Hackett asking whether there was any reason why he might not employ her. This was a misleading letter for the Nabbs had already agreed to employ her. Mr Hackett objected but, on 30 June, Mr Nabb informed him that he would employ Ms Dowling notwithstanding his objection.

On the evidence, it seems that this whole episode was beset with duplicity on the part of Ms Dowling and the Nabbs. Ms Dowling told Mr Barlow that she was leaving Mr Hackett's employ to seek a position with the Commonwealth Bank when this was not correct. The Nabbs led Mr Hackett and McDonald's to believe that she had approached them for employment after she had given notice to Mr Hackett. The significance of this incident for my purposes, however, lies in the attitude of Mr Cork to Mr Hackett's complaints. It is now clear that Mr Cork's information was incorrect. On behalf of the plaintiffs it was put that he failed to investigate the incident properly. It was put that he failed to do so because he had decided to marginalise Mr Hackett and, further, because he was partial to the Nabbs. He was a friend of Mr Nabb with whom he had a racing interest. The second reason is not relevant for my purposes. What is put in this case is not that Mr Cork was acting adversely to Mr Hackett for his self-interest, but that he was doing so in furtherance of his decision to exclude Mr Hackett from the McDonald's System. I find that he did not do so. On the information then available to him this was not a serious case of poaching and there was no occasion and no good purpose to be served in requiring the Nabbs to dismiss Ms Dowling from their employment in July 1995 nor to take steps to terminate the Nabbs' licence nor to take other punitive steps towards them.

In July 1995 Mr Hackett left a voicemail message for Mr Cork. There he set out his suspicions that the Nabbs had acted improperly with respect to Ms Dowling. To a very large extent, his suspicions have been borne out by the evidence before me. The tone of the voicemail is, however, aggressive and demanding. It is not surprising that Mr Cork did not comply with Mr Hackett's not very specific demand that he bring influence to bear on this matter.

And so, on 14 July 1995 Mr Hackett had a meeting with Mr Cork to discuss this issue. He demanded that Mr Cork tell the Nabbs that they should not proceed with hiring Ms Dowling. Not surprisingly, the response was that there was nothing that he could do. Mr Hackett again became angry and, as he said, "our discussion degenerated". The conversation shifted to other matters including Mr Hackett's dissatisfaction with McDonald's real estate department. He described this department as "pathetic" or "hopeless". This provoked an angry reaction from Mr Cork who told Mr Hackett to leave the building. Mr Hackett said that he wanted to speak to the Chief Executive Officer, Mr Bell.

Mr Bell was contacted by telephone and there followed a conversation with him on speaker phone. Mr Hackett outlined his complaint. Mr Bell said that there was nothing he was going to do. He commented that it appeared that Mr Hackett was not happy with the McDonald's System and added "it looks as if one of us has to go and it sure isn't going to be us". He suggested that if Mr Hackett was not happy to work in the McDonald's System he should consider selling his restaurants and leaving the system. This statement was seen by Mr Hackett as a confirmation of the decision of McDonald's that he was to be removed from the System if he did not capitulate.

In terms of the issues of this case, the significance of this poaching incident is that it appeared to Mr Cork and Mr Bell that Mr Hackett was becoming increasingly disenchanted with the System. They had, each of them, suggested to him that he should moderate or modify his behaviour towards the System or leave it. I infer that they saw the first option as unlikely.

Mr Hackett in August 1995 faxed to Mr Bell a letter dated 23 July. This letter was circulated to Mr Tregurtha and Mr Cork for comment and these comments appear on the various copies of this letter which were in evidence. It is an angry letter written by a man who sees himself as wronged. It is, as may be expected, tendentious, but it concludes with the hope that his grievances might be resolved rationally.

Mr Bell's response was to invite Mr Hackett to dinner to discuss these issues. This took place at the Rockman's Regency Hotel on 15 August at 8.00 pm. Mr Bell had also invited Julie Owen, Vice President, Corporate Relations, to attend. According to Mr Hackett she was described to him as McDonald's "Licensee Happy Relations Manager". This meeting appears to have been entirely unsatisfactory in terms of its intended purpose. It finished at about 9.30 pm with Mr Hackett excusing himself on the basis that he had other things to attend to.

It seems that none of the matters which were troubling Mr Hackett was discussed. Mr Hackett handed the original of the 23 July letter to Mr Bell but, he said, it was put aside on the basis that Ms Owen had already read it. Topics discussed were of a general nature including Mr Hackett's attitude to discounting and marketing and his concerns about the poaching incident. Mr Bell told Mr Hackett that his dissenting views on marketing and discounting or other issues would not be held against him provided they were expressed appropriately. Mr Bell said that a number of the matters raised by Mr Hackett in his letter of 23 July were discussed and that Mr Hackett appeared to be satisfied. This detail was not put to Mr Hackett. Ms Owen was not called as a witness. I do not accept Mr Bell's evidence on this matter. I find that Mr Hackett attended this dinner nervous and apprehensive because he was aware that he had aroused hostility in McDonald's middle management. At the dinner he found himself in the presence of senior managers. I accept his evidence that the topics discussed were of a general nature only and that he left dissatisfied.

On 30 January 1996 Mr Tregurtha and Mr Barlow went to the Fountain Gate store for a mid year review. They spoke there with Mr Hackett about QS&C and People and Positive Contribution. Mr Hackett put the meeting in February or March of that year, but I prefer the evidence of Mr Barlow that it took place on 30 January, supported as it is by a contemporary filenote. It was, all witnesses agreed, an amicable meeting.

The McDonald's representatives remarked about the progress on QS&C: ratings for the two stores in 1995 had been high. At Fountain Gate ratings recorded were AAA in October, ABB in November and AAA in December. For some reason no adverse comment was made of the single grading at Endeavour Hills in this period. This was on 6 November 1995 where the grading was only FCA. With respect to People they told Mr Hackett there was still not enough depth in his management but that he was heading in the right direction.

On the question of Positive Contribution, Mr Tregurtha told Mr Hackett that he was still not seen as expandable. They discussed with him that he had aired his views in the wrong forum and that McDonald's had doubts about his ability "to communicate or problem solve". Mr Tregurtha told him that it would take time to heal the relationship between him and McDonald's notwithstanding that Mr Hackett had not put a foot wrong in this area since July 1995.

The question of Mr Hackett's Postive Contribution was raised later in a meeting held on 5 June 1996 between him, Mr Cork and Mr Tregurtha at McDonald's headquarters. A number of topics were discussed including the decisions of Mr Cork to offer the new Berwick store to a Mr Seal and to open a new store in the Fountain Gate Food Court and not to offer the licence of this new store to Mr Hackett. The reason given for this last decision was Mr Hackett's ineligibility for expansion which was based on his rating for People, QS&C and Positive Contribution, particularly the latter. Mr Tregurtha told me that in his opinion Mr Hackett was then no longer ineligible on the grounds of QS&C and People. Mr Hackett's evidence was that Mr Cork told him that his ineligibility on the ground of Positive Contribution was because he, Hackett, was "critical of the business and critical of McDonald's management". Mr Cork told Mr Hackett that McDonald's was not comfortable in growing with him at this stage having regard to what had happened. Mr Cork referred to the tone of the letters which Mr Hackett had written.

"Mr Cork said McDonald's does not want to do business with people in a testing, unfriendly and confrontational manner and that they don't feel that the way they were doing business with me was such that they wanted to continue to do business at another location at this stage with me."

Mr Hackett said in his witness statement that he responded to this by saying that he saw McDonald's as attempting to destroy the livelihood he had established as an operator of McDonald's stores. Mr Cork's account of this meeting shows that Mr Hackett's reaction was even more hostile. He told me, and I accept, that the meeting finished when Mr Hackett appeared to lose his temper. He, Hackett, spoke of "personal decapitation" and "decimation" of his business and said that McDonald's would hear from his lawyers, or words to that effect. Mr Cork also told him that another incident which caused McDonald's concern was Mr Hackett's reaction to the poaching incident. Mr Hackett responded by accusing Mr Cork of bias due to his having a share in a racehorse with Mr Nabb. Again, these responses show how little he had been able to temper his reaction to criticism. At this time, too, Mr Tregurtha was of opinion that Mr Hackett was still ineligible on the ground of Positive Contribution.

On 14 June 1996 Mr Cork wrote to Mr Hackett confirming his decisions. It is a letter couched in personal and conciliatory terms. He concludes, apparently referring to Mr Hackett's statement that he was going to seek legal advice, as follows:

"Rod, should all of these factors not dissuade you from your indicated course of action, or you are otherwise unhappy with the situation as it stands, then perhaps the best result for you and the System would be to sell your stores now, prior to any impact. If you choose this course of action we would be prepared to buy the stores, at the valuation we recently completed for your matrimonial proceedings, and then re-licence them to new licensees. This is not our preferred course - which is that we continue to work together to build the System for our mutual benefit, but given the depth of your feeling at this time, your long-held concerns regarding return on investment particularly in the context of the System's growth plans, it is a course you should consider. For the record, I confirm also my willingness to offer you the Fountain Gate Food Court store if you were willing to sell the Endeavour Hills store so as to achieve for you a 2 store `integrated' marketing entity. In summary Rod, I understand your disappointment and concern (while not agreeing with the basis on which they are founded) but your reaction and proposed course of action can only be detrimental for both you and the System. I urge you to consult your colleagues or talk to Charlie before you fix your final course."

The reference to "Charlie" in the last sentence is a reference to Mr Bell.

Although Mr Hackett did complete an application to sell the stores he did not submit it to McDonald's or otherwise pursue Mr Cork's proposal that he leave the System. He, even now, continues to operate his two stores. The suggestion that Mr Hackett take the Fountain Gate Food Court store in substitution for his Endeavour Hills store, was castigated by Mr Hackett in evidence as "totally disingenuous and just a sham offer". I do not share that view.

Mr Hackett did not have a 1996 Business Review. It was postponed at his request by agreement in early and again in mid-1996. After the commencement of this proceeding it was agreed again at his request that no further review take place until its resolution.

These are the decisions which are central to this case and which are said by the plaintiffs to have been made in breach of duty. There are in fact four, or perhaps five, decisions. The decisions to open each of the new stores at Berwick and at Fountain Gate Food Court, the decisions to offer each of the licences to persons other than the plaintiffs and, perhaps, the decision to open the two stores more or less at the same time. Each of these decisions, it was said, and all of them collectively, had an adverse effect on the plaintiffs.

The decision process to open a new store is a lengthy one, involving preparatory investigations and other work by both the real estate department and the operations people, culminating in a decision by Mr Cork as regional manager before it passed to the Real Estate Director in Sydney. As I have mentioned, the proposal to open these stores and estimates of their sales had been included in the five year plan prepared for the Senior Officers' Meeting on 5 July 1995. In August to September 1995 two sites at Berwick had been identified by the real estate department and Mr Cork was prepared to include in his October 1996 store budget an opening in this location. By 17 August the proposal for Berwick was sufficiently advanced for Mr Cork to have sought and obtained an assessment of a prospective licensee. In his October store budget Mr Cork also included a new store at Fountain Gate Food Court. Mr Cork said that the idea of a store in the food court had been under consideration for some time but it was only in mid-1995 that Westfield, as the new owner of the shopping centre, brought to his attention that a site was available and it was at this time that the prospect of this particular location was first entertained by McDonald's.

Although these two store openings were disclosed in documents circulated among all licensees, it does not appear that there was any discussion about them with Mr Hackett, at least before the end of 1995.

Mr Hackett said that he first learnt of the proposal to open a new store in the food court when he saw a sign erected in the shopping complex in about March 1996. This may not be correct, at least as to the date, for his diary entry of 11 January 1996 shows that he was then monitoring the progress of this store. He said that he telephoned Charles Bartlett, a member of McDonald's site development team, about it and was told that nothing was happening; there were only informal chats taking place with Westfield. Mr Bartlett was not called as a witness. Depending upon the date of this telephone conversation, Mr Bartlett's response may have been less than candid. On 19 March, as real estate manager he signed off the proposal with a June 1996 opening date.

On 21 March 1996 there occurred a meeting at the proposed Fountain Gate Food Court site between Mr Hackett, Mr Cork and Mr Bartlett. The two McDonald's representatives told him that McDonald's proposed to open a store with an annual turnover of $1.352M in December 1996. Mr Hackett's own estimate of annual sales was $936,000 and the impact on his store would be, he thought, 15% to 25%. He told them this and they disagreed. Mr Cork's estimated impact on the store was five to 6% only. There was some discussion about the appropriateness of the location within the shopping complex; Mr Hackett contending that the proposed location was a poor one.

In a telephone conversation a few days later Mr Cork told Mr Hackett that he did not agree that this store should be operated by an existing licensee. This was because the turnover was relatively low and the profit would be consumed by the store manager's salary. Mr Cork developed this in the witness box. The store would be suited to a couple running it as a single enterprise because the hours of operation would be limited and because they would themselves manage it and thereby save a salary. Mr Tregurtha was also of opinion that the store should not be offered to Mr Hackett and he told Mr Cork this in May 1996. His stated reasons were that Mr Hackett was ineligible for expansion and, further, because "it may create difficulties with other licensees". I take this last reason to mean that it would not be helpful for the morale of the majority of licensees if they perceived that a person known to be a dissident should be permitted to expand when he was not expandable in terms of the policy to which they were all subject.

Mr Hackett wrote to Mr Cork a letter dated 27 March 1996 in which he argued his case that the proposal not go ahead or that he be given a right of first refusal. His position at this time was that the location was not an appropriate one but that, if McDonald's nonetheless determined to go ahead, the store should be offered to him.

Notwithstanding these arguments, Mr Cork signed off the proposal on 2 April and, on 4 April, wrote to Mr Hackett challenging a number of the factual assertions in his letter of 27 March. He also advised Mr Hackett that a new operator, yet to be selected, would be the licensee. He concluded with the following:

"The facts are that in both your 1994 and 1995 Reviews you were rated ineligible for expansion. Given that in my considered assessment no other issues arise, I am clear in my view that a new operator is the only choice for me to make."

Counsel for the plaintiffs contended that these decisions were not driven by legitimate commercial interests of McDonald's but by the decision by it or its senior management, made in about April 1995, to apply pressure on Mr Hackett to encourage him voluntarily to sell his stores and to leave the McDonald's System and to make an example of him to encourage other licensees to be submissive to its dictates. This suggestion is rejected by counsel for McDonald's. They referred to the decision logic prepared by the real estate department which preceded the decision to open the store and to Mr Cork's evidence. As to the decision to offer the store to a person other than Mr Hackett, they pointed to his ineligibility for expansion. Before I deal with these contentions, it is convenient, because reliance was placed upon this, that I recount briefly the subsequent history of this proposed store.

It seems that, notwithstanding the willingness of Mr Hackett to take the franchise, McDonald's had considerable difficulty in attracting an operator. Four persons were considered and three were approached. None of these was willing to operate the store. In May 1996 Mr Cork spoke to Mr Bell about this difficulty and Mr Bell suggested that the store be offered to Mr Hackett, but on the basis that he relinquish his Endeavour Hills store. This was said to be a compromise, because an exchange would not amount to an expansion awarded to an operator who was not eligible for expansion. This proposal was communicated to Mr Hackett in Mr Cork's letter of 14 June 1996 and he rejected it. Mr Hackett explained that it would have been commercially ridiculous to exchange a profitable medium sized store, in which he had expended considerable money and effort to build up, for a new small store. Mr Cork disagreed. He said that the Endeavour Hills store was only marginally profitable notwithstanding its turnover and that the swap was therefore commercially attractive. Mr Hackett said that a further disadvantage of the proposal was that it would diminish his "patch", the geographical area in which he had developed goodwill. Counsel on behalf of the plaintiffs put it that this proposal was not an advantage offered bona fide to Mr Hackett but a further example of McDonald's duplicitous strategy of disadvantaging him.

By June 1996 the terms of the tenancy of the proposed Fountain Gate Food Court store had been finalised with Westfield without any operator having been selected. Nor, it seems, had this position changed by 10 September 1996 when this proceeding was commenced. In the writ the plaintiffs claimed that the decision to open the store was made in breach of duty. Shortly afterwards, in September 1996, Mr Bell and Mr Cork visited the location. Mr Bell made an immediate decision that the store should not proceed. He did so, he told me, because it was apparent that the store would be only marginally profitable; the site was not a good one; McDonald's had decided to cut back on its growth strategy in late 1996; there was no commitment to Westfield to proceed; and because this litigation had been commenced. He instructed Mr Cork that no further action be taken and this was done. Mr Bell wrote to Mr Hackett on 29 October 1996 advising him of the decision and indicating that, should another opportunity in the Food Court arise, McDonald's would consult with him as to its viability and, if a decision was made to proceed, Mr Hackett would be given the right of first refusal, subject to his being then eligible for expansion.

Counsel for the plaintiffs attacked Mr Bell's reasons for the abandonment of the store. They suggested to him that all of the reasons which he offered for his decision to reverse Mr Cork's decision, other than that relating to this litigation, were known to McDonald's months before and at the time when Mr Cork's decision was made in April. It was put as a consequence that these reasons therefore demonstrated that the April decision was not commercially motivated. Mr Bell resisted these suggestions but, to my mind, not convincingly. The decision was Mr Cork's and he maintained that it was a good one. He argued against Mr Bell's September decision not to proceed. He saw a long term advantage for McDonald's in opening the store. He said that McDonald's had a good relationship with Westfield and that it had a store in 23 or 24 of Westfield's shopping centres. He saw an advantage in extending this relationship to the Fountain Gate shopping centre. He said that Mr Bell's decision was, in part, prompted by the commencement of this proceeding.

If it be necessary that I make a finding on this question, I would conclude that this litigation was a major consideration in Mr Bell's decision that the store not go ahead. Moreover, McDonald's was prepared to pay for this reversal of its decision in the form of a substantial penalty to Westfield for withdrawing from the tenancy arrangements. Whether the motive for this was an appreciation that Mr Cork's April decision was legally flawed or an effort to appease Mr Hackett or to forestall one of his claims and thereby to bring this litigation to a speedy end, is more difficult. Having seen the witnesses, I would prefer the latter. In my assessment, if Mr Hackett had not commenced this proceeding the Fountain Gate Food Court store would have gone ahead.

I remind myself that it is not my function to determine whether Mr Cork's April decision to open the store was a commercially prudent one; it is to determine whether it was substantially based on the non-commercial consideration of disadvantaging Mr Hackett or his company or of removing them from the McDonald's System. I am not satisfied that Mr Cork's decision was so actuated. I accept that he saw a commercial advantage to McDonald's in opening the store and that he seized that advantage.

It is true that the new store would have an impact, at least in the short term, on Mr Hackett's nearby store and Mr Cork appreciated this. His estimate of the impact was 3% to 5%; Mr Hackett thought it would be very much greater. Mr Cork said that he considered this impact was not such that it would have been unfair on Mr Hackett's business to open the competing store. I accept that he considered these matters and that he held this view in April 1996.

The second decision was not to offer the store to Mr Hackett or to his company. Mr Cork said that a decision to offer a new store to an operator whose existing business is impacted by the new store is one which he makes on the basis of "fairness". It is a question, he said, of weighing up a number of factors of which the gravity of the impact is only one. He said, for example, that where the predicted impact was 15% he would, as a rule of thumb, need a very good reason not to offer the new store to the impacted operator. But even the application of this rule of thumb depends upon the circumstances. Another consideration which would adversely bear upon the decision is the ineligibility for expansion of the impacted operator, but, even so, the store might be given to such an operator where the countervailing circumstances strongly pointed that way. Indeed, Mr Hackett was not eligible for expansion when he was given the Endeavour Hills franchise. The complexity of the decision increases when the factors introduced include the commercial interests of McDonald's itself. The decision may be affected by its perception as to the message which might be sent to the community or to other licensees by the decision to give or not to give the new store to the impacted operator. Mr Cork spoke of this in the context of his decision with respect to a new store at Warrnambool. The decision may be also affected by his assessment of the contribution which the existing operator or the new operator might make to the McDonald's organisation as a whole in the new store. In this sense, too, the loyalty to the McDonald's organisation of the existing operator is a factor which might weigh in their favour, for it is good management to be seen to be rewarding committed and loyal operators. Presumably, disloyalty would have the contrary effect. Mr Cork explained at some length how it was that these factors operated in general and how he concluded that the Fountain Gate Food Court store should not be offered to Mr Hackett or to his company. I accept his evidence that the decision was based on a balancing of these considerations, with the promotion of the interests of McDonald's as a whole being the fundamental objective, rather than on a desire to punish Mr Hackett, to pressure him to leave the McDonald's System or to make an example of him for his perceived transgressions or mutinous conduct.

It was, I think, not suggested that there was no good commercial reason to open a new store in Berwick. The evidence shows that this was a fast growing area which could comfortably support a McDonald's store. There was in this case, too, a need to establish a presence before a rival organisation did so. The logic behind this decision is set out in the site evaluation data prepared by the real estate department. This shows an expected impact on Mr Hackett's store at Fountain Gate ranging from 7% to 9%. No other existing store was expected to be as heavily impacted.

As to the choice of licensee, Mr Cork said that he and Mr Tregurtha discussed this matter and that Mr Tregurtha suggested one Ian Seal as appropriate. Mr Seal was a graduate of the McDonald's training school with a strong business background. It was not suggested before me that he was an inappropriate candidate as licensee of a new store at Berwick or that Mr Hackett was better qualified that he. Mr Cork took the view that it was appropriate to give this store to a new licensee. This was because it was a new store and because the System generally benefits from the introduction of new people. Mr Cork sought and obtained an assessment of Mr Seal from the Licensing Manager, Gerrie Richardson. This assessment dated 17 August 1995 was positive. Accordingly, Mr Seal's name appears as the licensee in Mr Cork's New Store Openings list dated 30 October 1995. It should be noted, however, that at this stage there was no certainty that the opening would proceed as planned. The document requires confirmation by June 1996 and, further, it shows the opening as having only a 20% certainty.

The result of all of this was that the decision not to offer the store to Mr Hackett was tentatively made in the latter half of 1995 although the formal letter of offer was sent to Mr Seal many months later, on 4 July 1996. This decision was made without reference to Mr Hackett.

The Berwick store proposal passed through its various stages and sometime in early 1996 McDonald's advertised in the local paper for managers. This advertisement was brought to Mr Hackett's attention on a date which was not disclosed in evidence. There is some evidence of general discussions between him and Mr Barlow, his franchise consultant, about an expected opening date but no suggestion or request by Mr Hackett in the early months of 1996 that he be considered as the operator.

By May 1996 the Berwick Store was definitely going ahead. At that time Mr Cork said he finally determined to offer the licence to Mr Seal. He said that he did not think it appropriate to offer it to Mr Hackett as he was not eligible for expansion and would not be heavily impacted by the new store. His estimate of the impact was small - 6% to 9%. Mr Tregurtha added that, in his opinion, Mr Seal was an outstanding applicant who lived near Berwick and that it was in the interests of the McDonald's System that new blood be introduced. He also mentioned as a factor that it would have appeared strange to other licensees if Mr Hackett had been awarded a new licence given the events involving him at previous meetings. He recommended to Mr Cork that the licence be awarded to Mr Seal and Mr Cork agreed. Nevertheless, he instructed Mr Tregurtha not to inform Mr Seal of the decision until Mr Hackett had been told upon his return from the United States. Mr Bell was informed of Mr Cork's decision and Mr Hackett was told on 5 June 1996.

At the meeting of 5 June Mr Cork and Mr Tregurtha spoke to Mr Hackett about the decision to offer the Berwick store to Mr Seal. This was the meeting at which Mr Cork said that, because of Mr Hackett's reluctance to accept the decisions of McDonald's and because of his making complaints in an inappropriate, unacceptable and aggressive fashion, McDonald's was uncomfortable in working with him. This was the meeting at which Mr Hackett left angrily, speaking of consulting his lawyers.

The decision was confirmed by Mr Cork's letter to Mr Hackett of 14 June and, on 24 June 1996, he signed off the decision to establish the Berwick store. On 4 July the licence was formally offered to Mr Seal and he accepted this on 10 July. The store was opened on 16 December 1996.

It was further submitted on behalf of McDonald's, and correctly in my view, that Mr Cork was not challenged in cross-examination on this decision to offer the licence of Berwick to a person other than Mr Hackett nor on the reasons he gave for this.

In summary, I am not satisfied that the decisions with which I am now concerned were made for a purpose other than the furtherance of McDonald's legitimate interests. They were not substantially motivated by an intent to prejudice Mr Hackett or his company or to drive him from the System or to make an example of him as a warning to would-be dissident licensees.

The final decision, if indeed it may be called a decision, is that to open the new Berwick store and the Fountain Gate Food Court store more or less contemporaneously, at the end of 1996. The coincidence of the planned opening dates cannot be disputed although at the time that the decisions to open were signed off the projected opening dates were September 1996 for the Fountain Gate Food Court store and December 1996 for the Berwick store. It was put, and denied, that this was decided in order to maximise the adverse impact upon Mr Hackett's store at Fountain Gate. Accepting as I have that neither of the decisions to open was motivated to disadvantage Mr Hackett, and the fact that the Fountain Gate Food Court store did not open at all, the significance of the opening dates, for this litigation, disappears.

The principal area of debate concerned the question whether there was to be implied in each of the licences some provision which obliged McDonald's to act honestly, fairly and in good faith in the exercise of its powers under the agreements and, if so, what, in this case, was the scope of such an obligation. On behalf of McDonald's, counsel submitted in the alternative that no such obligation should be implied in commercial agreements, such as these; that in the case of these licences, such implication was excluded by the entire agreement clause; and that, in any event, the formulation of such an implied obligation should have regard to the express terms of the agreements. Given the findings of fact which I have made, it is not necessary that I consider these submissions in detail. Nevertheless, in deference to the arguments addressed, I shall touch upon them briefly.

As I indicated to counsel in argument, I do not see myself as at liberty to depart from the considerable body of authority in this country which has followed the decision of the New South Wales Court of Appeal in Renard Construction (ME) Pty Ltd v Minister for Public Works.[1] I proceed, therefore, on the basis that there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreement in good faith and reasonably, and not capriciously or for some extraneous purpose. Such a term is a legal incident of such a contract.[2]

Counsel for the plaintiffs then submitted that the various terms pleaded in paragraphs 20 and 20A of the statement of claim and which I have set out at [13] above, are manifestations of such an implied term. Against this, it was put that the operation of the implied obligation in a given case must have regard to the express agreement between the parties, negotiated at arms' length and not on unequal terms and to the relationship which this creates.[3] It cannot operate to deny to a party the right to exercise a power conferred by the contract for the promotion or protection of its legitimate interests, in circumstances where that party seeks to exercise that right to protect or promote those interests.[4]

In each of the McDonald's licences, the licensee is given no area of market exclusivity. Its licence is to use the McDonald's System "in the Restaurant".[5] In cl. 21(d) the parties acknowledge that the licensee is given "no exclusive, protected or other territorial rights in the contiguous market area of the Restaurant". This provision has been interpreted by a number of Federal District Courts in the United States to mean that McDonald's is not thereby precluded from opening a new store in the area from which an existing store draws its patrons.[6] For present purposes, I am content to proceed on that basis but without expressing any concluded view on the point. The debate then shifted to the operation of the implied term to restrict McDonald's from operating a new store close to an existing store where its objective in so doing was, not to promote its own commercial interests, but rather to apply pressure on the operator of the existing store to sell the business or otherwise surrender the licence. I have found in this case that McDonald's decisions were not so motivated. It is not necessary, therefore, that I pursue the point further and I do not do so.

Next, it was said that the implied obligation was excluded by cl. 18.10, the entire agreement clause, which I have set out in [23] above. Counsel for the plaintiffs conceded that such an obligation might be excluded by agreement, but maintained that this had not been achieved by cl. 18.10. Again, this is not a matter which I am required to determine and I shall assume that the obligation has not been so excluded.

It remains for me to consider whether the terms pleaded in paragraphs 20 and 20A of the statement of claim are part of the licence agreement in each case. Dealing first with those pleaded in paragraph 20, it became clear in argument and counsel for the plaintiffs accepted, that, in the formulation of these contractual prohibitions alleged in sub-paragraphs (a), (b) and (c), it was necessary to add a requirement that the act in question be performed in bad faith. The prohibition in sub-paragraph (d) takes the matter no further. The case then proceeded on the basis that, in order to make out a breach of these duties, if the duties exist, the plaintiffs must establish bad faith, that is, that McDonald's exercised its powers for an extraneous purpose - to punish Mr Hackett or to force him to leave the McDonald's System. This onus they have not discharged.

Sub-paragraph (e) would restrict the use McDonald's might make of confidential information obtained from Mr Hackett. It was put that McDonald's was in breach of this obligation inasmuch as it used information provided by Mr Hackett as to his financial performance for the purpose of deciding whether to open a new store. There is no substance in this submission. The licensee is obliged to provide financial returns to McDonald's. There is nothing in the contract to prevent it using this information in planning its growth strategies; indeed its tenor is that the information is for use by McDonald's for its own statistical and management purposes.

Sub-paragraph (f) and (g) would require McDonald's to advise and consult with Mr Hackett in certain circumstances. It will be recalled that cl. 5.01, which I have set out above in [20], obliges McDonalds to advise and consult with the licensee when it deems appropriate and, in any event, after a request by the licensee. The subject matter of this advice and consultation is "in connection with the operation of the Restaurant" of the licensee. The duties alleged in the pleading are, at the same time, wider than this inasmuch as they would require McDonald's to advise and consult on its growth plans; and arguably more restricted, inasmuch as they arise only before McDonald's takes any action which may prejudice the profitability of the licensee's stores or after it has taken a step prejudicial to the licensee's business interest. I doubt whether any such duties can be said to be a manifestation of the implied term contended for. In any event, there is evidence of much consultation with Mr Hackett before the decisions were taken. As for advice and consultation after this, there was abundant evidence of this. Mr Hackett, however, was reluctant to follow the advice which he was given.

Sub-paragraph (h) alleges a duty to ensure that Mr Hackett and Far Horizons receive "the same level of service, opportunity for expansion, information, assistance, expertise and treatment" from McDonald's as any other licensee. This duty is similar to that contained in cl. 5.02 of the Licence Agreements which I have set out in [20] above. The evidence does not show that Mr Hackett or his company failed to receive the same treatment as other licensees. Insofar as a service may have affected him in a way differently from other licensees, this was because of his different position.

The contractual terms alleged in paragraph 20A of the statement of claim, which are also set out in [13] above, appear to be manifestations of the general obligation imposed on a party to a contract "to do all the things as are necessary on his part to enable the other party to have the benefit of the contract"[7] and not to do anything which will derogate from the benefit of the contract. In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd,[8] Mason J discussed this principle and concluded that the question whether a party to a contract is at liberty to do an act whose consequence is to disentitle the other party from a contractual benefit, must be determined from the intention of the parties as manifested by the contract itself. In the case of the McDonald's licences, the licensor is expressly entitled to do acts which may adversely affect the commercial interests of the licensee in a number of respects. This caused counsel for the plaintiffs again to retreat somewhat from the terms as pleaded. They said that the terms expressed in sub-paragraphs (a)-(c) should be qualified by the importation of the words "unreasonably or unfairly". This had the consequence that the suggested terms would prevent McDonald's from unreasonably or unfairly carrying out an act or performing a step which would adversely affect the plaintiffs in different ways.

The insertion of the suggested qualification in each of the terms (a)-(c) pleaded in paragraph 20A distorts them considerably. Moreover, I am not at all confident that the insertion of these words really addresses the difficulty unless, perhaps, "unreasonably" and "unfairly" are given very particular meanings. In the present case, two parties to a contract have interests which are in conflict in the circumstances which have arisen. One party wishes to perform an act which the law ordinarily would permit it to do - to open a new store. This may have an adverse effect upon the other party. The right to perform that act is not conferred by the contract but by the ordinary freedom of a commercial enterprise to pursue a commercial opportunity. The act is not, in terms, prohibited by the contract. The question is not, as in Renard Construction (ME) Pty Ltd v Minister for Public Works,[9] whether the right conferred by the contract is fettered by the terms of the contract; rather it is whether the contract between the parties impliedly prohibits or limits the right of one of them to perform an otherwise lawful act. In such a case the contract will operate to prohibit or limit the performance of that act by a party to a contract only where this prohibition or limitation is necessary for the performance by that party of its obligations under the contract.

The question, therefore, becomes whether the exercise by McDonald's of its right to open a competing store, which will have an adverse impact on the profitability of one or other of the Far Horizons stores, cannot sit with the right, conferred by McDonald's through its licences in favour of Far Horizons, to operate those stores. The difficulty with the plaintiffs' submission on this point is that this last-mentioned right is not one for exclusive, protected or territorial rights. Moreover, the agreement was entered into in an environment when each party was well aware that the opening of new stores was an ordinary part of the McDonald's way of doing business and that this will in many cases involve an impact upon the business of an existing licensee or licensees. Accordingly, the suggested implications have not been made out. I leave for another day the case where the impact caused by the new store is such that it effectively destroys the business which the impacted operator had bargained for or where the degree of impact is such as to give rise to the inference that its opening was for a purpose which might give rise to the operation of the implied obligation of good faith and fair dealing. In this case, indeed, the plaintiffs contended that the unreasonableness or unfairness arose from the improper and extraneous motive of McDonald's in making the decisions in question. I have found that they have not established that the decisions in question were motivated as alleged. I am, therefore, not satisfied that McDonald's acted unreasonably or unfairly, as contended, in making the decisions in question.

Very little, if anything, was said about the alternative claims based on unconscionability, misleading and deceptive conduct and a breach of cl. 5.01 of the licences. It would seem that the claims based on unconscionability depend upon the suggested improper motivation of McDonald's. They must fail on the facts, if not on the application of unconscionability, in this case. The misleading and deceptive conduct claims depend upon representations as to future matters said to have been made before the licences were entered into. I am not satisfied that the representations were made or that they were misleading. For reasons which I have previously set out there is no breach established of cl. 5.01.

I will not prolong this judgment by a detailed analysis of the considerable body of evidence led for and against the losses alleged by the plaintiffs. I will content myself, however, with making three points.

First, such losses as were suffered, were suffered not by Mr Hackett but by Far Horizons whose businesses were affected by the acts of McDonald's.

Secondly, the losses were relatively minimal. The Fountain Gate Food Court store did not open so that no loss was suffered by the abandoned decision of April 1996. The loss alleged as a consequence of the opening of the Berwick store was either the diminution of the profit of Fountain Gate or the loss of the opportunity of Far Horizons to earn profit as the operator of the Berwick store. It was not seriously suggested that McDonald's breached any obligation in opening the Berwick store, so that the first measure of damages is inappropriate. The thrust of the plaintiffs' case, as it was presented to me, was that the store should have been offered to Mr Hackett or his company. Let this be assumed; the loss suffered as a consequence is the loss of this asset or, more correctly, of the opportunity to obtain this asset. The evidence of Mr Jermyn showed that its value was a little less than $155,000. The accuracy of this estimate is confirmed by his valuation on the alternative discounted cash-flow basis of $197,580 after allowing for the initial outlay of $1.1M. It is further confirmed by his present day valuation of the Berwick business as approximately $182,000. I accept for the reasons given by Mr Jermyn that this was the value of the Berwick business in 1996. This, however, is not necessarily the measure of Far Horizon's loss under this head. What it lost was the opportunity to acquire this asset had it been offered. I assume that in such an event Mr Hackett's company would have been minded to accept the offer and that he had the means to acquire the business. Accordingly, I would not discount the value for any risk that he might not have obtained the licence for the Berwick store. In these circumstances I would value the loss at $154,206.

Thirdly, no aggravated damages are available to Far Horizons as it is a corporation which has no feelings to injure.[10]

It follows from this that the claims of the plaintiffs must fail. It would seem, therefore, that there should be judgment for the defendant with costs.

[2] Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151 at 191-3, per Finn J; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 368-9, per Sheller JA; Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; (1999) ATPR 41-703 at [37] per Finkelstein J

[3] GSA Group Pty Ltd v Siebe plc (1993) 30 NSWLR 573 at 580, per Rogers CJ Comm D

[4] Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 368, per Sheller J

[6] Payne v McDonald's Corporation 957 F Supp 749 at 754-5 (1997 - Md); Perez v McDonald's Corporation (unreported, E Dist of California, 7 May 1998); Nibeel v McDonald's Corporation (unreported, N Dist of Illinios, 26 August 1998).

[7] Butt v M'Donald (1896) 7 QLJ 68 at 70-1, per Griffith CJ (Cooper and Power JJ concurring). See, too, Mackay v Dick (1881) 6 App Cas 251 at 263, per Lord Blackburn

[10] Australian Broadcasting Corporation v Comalco Ltd (1986) 12 FCR 510

Fair Trading Act 1986

At a glance

Court

Decision date

Before

Source

Judgment (185 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (6)