Ferfolia and anor v Master Education Services Pty Limited and ors

SECOND RESPONDENT Robert Athol Ollis

THIRD RESPONDENT Suzanne Gai Ollis

CATCHWORDS: s 106 - jurisdiction - s 108B - where termination date of franchise agreement is in conflict - where termination correspondence sent to franchisee's solicitors was returned - whether correspondence effectively terminated agreement - held solicitors had no authority to accept correspondence - held notice of termination ineffective - not appropriate time to consider the other factual issues - motion dismissed - costs.

Industrial Relations Act 1996 LEGISLATION CITED: Trade Practices Act 1974

CASES CITED: IVI Pty Ltd v Baycrown Pty Ltd (2005) QCA 205

APPLICANTS Mr S Burchett of counsel Solicitors: Mr G Gilmour Mason Lawyers LEGAL REPRESENTATIVES:

RESPONDENTS Mr V Bedrossian of counsel Solicitors: Mr P Meehan Meehans Solicitor Corporation

• 1 - INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: Marks J Wednesday 21 December 2005

ROBERT MARIO FERFOLIA AND ANOR v MASTER EDUCATION SERVICES PTY LIMITED

Application under s.106 of the Industrial Relations Act 1996

JUDGMENT ON STRIKE OUT APPLICATION [2005] NSWIRComm 453

1 The applicants, Robert Mario Ferfolia and Vicki Anne Ferfolia, have commenced proceedings against a number of respondents, including Master Education Services Pty Limited, seeking certain relief under s 106 of the Industrial Relations Act 1996 ("the Act"). The proceedings relate to a franchise agreement entered into between the applicants and that company in June 1999. There are allegations of unfairness so as to attract relief under s 106, in circumstances which it is not necessary to deal with for the purpose of this judgment. 2 The proceedings were originally commenced by summons filed 12 August 2004. They have since been amended in a manner to which is not relevant to refer. Both the summons and the amended summons alleged that "by letter dated 12 August 2003 from the first respondent's solicitors to the applicants, the first respondent terminated the contract". 3 Section 108B of the Act compels the initiation of proceedings within 12 months of the termination of the contract sought to be impugned as unfair. By motion the respondents have sought to have the proceedings dismissed on the ground that the applicants failed to file their summons within 12 months of termination of the contract. The respondents assert that the franchise agreement was in fact terminated by letter dated 30 July 2003. The parties urged that the Court deal with this matter at this stage in order to avoid costs. 4 The sole matter for determination is, therefore, whether the franchise agreement was terminated by letter dated 30 July 2003 or whether it was terminated on the date asserted by the applicants. 5 It is necessary to refer briefly to some provisions of the franchise agreement. They are: (a) There is a continuing obligation to pay franchise fees. Clause 3(d) states that failure to make any payment entitles the franchisor to terminate the agreement in accordance with the provisions of the agreement relating to termination; (b) Clause 26 states that the franchisor may terminate the agreement where the franchisee has breached a term, the franchisor has given the franchisee notice of the breach and notice of intention to terminate and has required that the breach be remedied and the franchisee fails to remedy the breach within a reasonable time, defined as being no longer than 30 days. (c) By Clause 26.3(a) the franchisees are said to be in default of the agreement for any failure to pay the franchisor when due any monies under the franchise agreement "or any other agreement made between the franchisor and the franchisee". There was evidence admitted for the purpose of the proceedings constituted by the notice of motion that there had been a loan agreement by which the franchisor loaned certain monies to the franchisees for the purpose inter alia of allowing them to acquire the franchise and otherwise operate the franchise business. (c) Clause 36 provides that all notices under the agreement are to be written and may be given by personal delivery or mail addressed to the franchisee at the address set out in the agreement or "at such other address as either party may designate in a Notice to the other party in such manner". There is a provision to allow the giving of notice by pre-paid mail deemed to have been received 3 business days after forwarding. 6 By letter dated 27 May 2003, the solicitor for the franchisor forwarded to the applicants as franchisees a letter enclosing a "Notice of Termination". The Notice asserted that the applicants were in default of payment of a continuing franchise fee, interest payments and repayments for a loan made by the franchisor to the franchisees to enable them to acquire the franchise. 7 The Notice of Termination purported to give 30 days notice to pay all outstanding monies otherwise the franchise agreement would be terminated "without further notice to you". The opportunity was also provided, in the event that any amount claimed was disputed, to provide details of the nature of the dispute. 8 A letter was forwarded by Bilbie Dan Solicitors to the franchisor's solicitor dated 12 June 2003. It stated that they had been handed a copy of the letter of 27 May 2003 and informed the franchisor's solicitors that they acted on behalf of the franchisees. The letter enclosed certain correspondence and said that the solicitors were instructed that the franchisor was in breach of the agreement, had not performed its obligations, and that the franchisees denied that they were in breach of the agreement and that they owed any monies to the franchisor. The letter concluded by saying that the franchisees were "considering their rights with a view to taking action against your client for breach of his agreement". Messrs Bilbie Dan also forwarded to the franchisor's solicitors a "without prejudice" letter dated 11 June 2003 which stated that their clients did not wish to continue with the franchise agreement "as the business relationship has completely broken down", and set out an offer in an effort to resolve the matter. 9 The franchisor's solicitors responded by letter dated 17 June 2003 addressed to Messrs Bilbie Dan, rejecting the assertions made in the letter and stating that unless the monies claimed were paid the franchisor would terminate the agreement. 10 The next piece of correspondence is the letter dated 30 July 2003 from the franchisor's solicitors forwarded to Messrs Bilbie Dan which the franchisor alleges constituted the termination of the franchise agreement. The letter noted the failure to remedy the breach and said, in part, "…and now in accordance with the Notice confirm termination of the Franchise Agreement". The letter also contained a request for return of certain documentation, completion of a transfer of business name form and referred to a non-competition covenant contained within the franchise agreement. 11 By letter dated 4 August 2003, Bilbie Dan wrote to the franchisor's solicitors saying: "We refer to your letter of 30 July 2003 and return the same as we are not acting for Mr and Mrs Ferfolia". 12 The applicants sought to resist the notice of motion on a number of grounds. It is only necessary that I refer to two of them. The first is that the letter of 30 July 2003 was not an effective termination of the franchise agreement because it was not given to the franchisees. It was said that Messrs Bilbie Dan had neither express nor ostensible authority to receive the notice of termination and it was therefore ineffective. The second ground advanced by the applicants was that there was, in effect, no breach which would justify the giving of a notice of termination and that therefore the termination was ineffective. I shall consider each of these assertions in turn.

Was the letter of 30 July 2003 effective to terminate the agreement? 13 I have set out above all that is known concerning the retainer of Bilbie Dan Solicitors. There is no suggestion that at any stage those solicitors were given express authority by the applicants to accept service of the notice of termination and that any notice of such authority was given to the franchisor or its solicitors. 14 The applicants relied substantially on a decision of the Full Court of the Supreme Court of Queensland in IVI Pty Limited v Baycrown Pty Limited (2005) QCA 205 ("IVI"). Those proceedings arose out of negotiations between parties involving solicitors for the purchase of real estate. The question arose as to whether a withdrawal of an offer to purchase forwarded to a solicitor was effective. At first instance the trial judge had concluded that the solicitor did not have actual authority to receive a withdrawal of the offer and a communication of the withdrawal of the offer was therefore ineffective. This was because the solicitor concerned had not been engaged to act on behalf of that particular party in the negotiation of the contract for purchase, nor was otherwise engaged to communicate with the other party in the pre-contractual stage, but there had been no duty on the solicitors to communicate the revocation email to their client and there could be no imputed knowledge of the email by which the revocation occurred on the basis that the solicitors were the "alter ego" of the client in respect of that communication. The judge at first instance had determined that there was "no implied authority to accept communications withdrawing offers" because the solicitors had no actual authority to represent their client in the contractual negotiations or to communicate with the other party. 15 These conclusions were upheld on appeal. Keane JA, in discussing relevant principles and in discussion authorities in this area, said: "[33] There is no basis in principle or authority for the proposition that one party may successfully revoke an offer to another party by giving notice of that revocation to the solicitor for the other party in the absence of an express conferral of authority on the solicitor to receive such communication. In this regard, in Singer v Trustee of the property of Munro & Anor (bankrupts) [1981] 3 All ER 215 at 218, Walton J said: "It is, of course, a common fallacy to think that solicitors have an implied authority on behalf of their clients to receive notices. They may have express authority so to receive them, but in general a solicitor does not have any authority to accept a notice on behalf of his client." [34] Reference may also be made to the statement of James LJ in Saffron Walden Second Benefit Building Society v Rayner (1880) 14 Ch D 406 at 409: "I have had occasion several times to express my opinion about the fallacy of supposing that there is such a thing as the office of solicitor, that is to say, that a man has got a solicitor not as a person whom he is employing to do some particular business for him, either conveyancing, scrivening, or conducting an action, but as an official solicitor, and that because the solicitor has been in the habit of acting for him, or been employed to do something for him, that solicitor is his agent to bind him by anything he says, or to bind him by receiving notices or information. There is no such officer known to the law. A man has no more a solicitor in that sense than he has an accountant, or a baker, or butcher. A person is a man's accountant, or baker, or butcher, when the man chooses to employ him or deal with him, and the solicitor is his solicitor when he chooses to employ him and in the matter in which he is so employed." Similar views were also expressed in that case by Baggallay and Bramwell LJJ at 413 and 415. [35] A solicitor is a professional person capable of performing a range of services on behalf of a client, but he or she need not necessarily perform across that entire range with respect to any one transaction. That position is to be distinguished from, to use the example given by McPherson JA in Victoria Park Golf Club Inc v Brisbane City Council [2001] QCA 528 at [17]; "an office like that of managing director of a trading company in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480, of which the incidents and powers are well known". The managing director takes his or her powers or authority from the position that he or she holds under the corporate constitution. The distinction is supported by the observation of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Pacific Carriers Limited v BNP Paribas [2004] HCA 35 at [36]; that: "The assurance with which outsiders deal with a company is more often than not based, not upon inquiry, or positive statement, but upon an assumption that company officers have the authority that people in their respective positions would ordinarily be expected to have. In the ordinary case, however, it is necessary, in order to decide whether there has been a holding out by a principal, to consider the principal's conduct as a whole." [36] The decision in Saffron Walden has recently been applied by Powell JA, in a judgment with which Hodgson JA and Hamilton J agreed, in White v Illawarra Mutual Building Society Limited [2002] NSWCA 164, where his Honour said that: "The fact that a client might be accustomed to retain the services of a particular solicitor or firm of solicitors in matters of a particular type does not constitute that solicitor or that firm of solicitors the client's standing agent to receive notice of material facts ( Saffron Walden Second Benefit Building Society v Rayner (1880) LR 14 Ch D 406)." [37] In Midland Bank plc v Serter & Anor [1995] 1 Fam Law R 1034 at 1046 - 1047, Glidewell LJ, with whom Pill and Aldous LJJ agreed, commented that: "Mr Salter reminds us of the general principle of law that a solicitor, like any other agent, may be instructed specifically to act for a party for one particular purpose in relation to a transaction, but not to act for him generally for other purposes. Thus it is only knowledge which he acquires when carrying out that part of the transaction in which he is instructed to act as agent which is to be imputed to the party who for that purpose is his principal ... "". 16 His Honour rejected any suggestion that, in the circumstances of those proceedings, communication through the solicitor "was an authorised means of communication". 17 His Honour also dealt with an allegation that the solicitor concerned had ostensible authority to receive documents which might adversely affect the rights of the client of that solicitor. In this regard his Honour discussed the relevant principles and authorities in the following manner: "[42] As a matter of legal principle, the boundaries of the ostensible authority of an agent are drawn according to what the principal represents, whether implicitly or explicitly, about the authority of the agent and the extent to which these representations have been relied upon by the third party. [43] In Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Limited & Anor [1964] 2 QB 480 at 503 Diplock LJ said: "An 'apparent' or 'ostensible' authority ... is a legal relationship between the principal and the contractor created by the representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed upon him by such contract." [44] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ said recently in Pacific Carriers Limited v BNP Paribas [2004] HCA 35 at [36]: "In Crabtree-Vickers Pty Limited v Australian Direct Mail Advertising & Addressing Co Pty Limited, and in Northside Developments Pty Limited v Registrar-General, this court followed and applied Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited as to the general principles concerning the apparent or ostensible authority of an officer of a company dealing with a third party. Where an officer is held out by a company as having authority, and the third party relies on that apparent authority, and there is nothing in the company's constitution to the contrary, the company is bound by its representation of authority. 'The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract.' It is not enough that the representation should come from the officer alone. Whether the representation is general, or related specifically to the particular transaction, it must come from the principal, the company. That does not mean that the conduct of the officer is irrelevant to the representation, but the company's conduct must be the source of the representation." [45] The appellant's attempt to make out a case of ostensible authority fails to show that there was a relevant holding out of the agent by the principal, or reliance by the third party on that holding out". 18 Keane JA held that there was no evidence of any words or conduct on the part of the client, by which it represented to the other party or anyone acting for the other party, that the solicitor represented it in relation to the receipt of communications concerning the conclusion of negotiations. Accordingly, it could not be said that there was any relevant ostensible or implied authority to accept the notice. 19 Counsel for the franchisor submitted that the factual situation which applies in the context of these proceedings is materially different from that which occurred in IVI. He also submitted that the franchisor's solicitors were bound by ethical considerations to forward the notice to the solicitors who had purported to represent the applicants rather than to forward it to them personally because they were on notice that those solicitors had been retained in the matter. In my opinion, whether or not there were ethical considerations involved in the franchisor's solicitors writing direct to the applicants as franchisees is irrelevant to a determination as to whether or not the solicitors Messrs Bilbie Dan had ostensible or implied authority to receive a notice of termination. This would need to be determined by reference to the principles and authorities referred to in IVI. 20 I respectfully adopt and accept the approach of the Supreme Court of Queensland in IVI, especially as this judgment is at appellate level. By analogy, although it is clear that Messrs Bilbie Dan were retained and instructed to communicate the position of the applicants with respect to the notice of termination, there is no suggestions that those solicitors were empowered to do anything other than on the instructions of their clients. Nor was there any indication of any kind that the solicitors were authorised or otherwise empowered to receive formal notices issued by the franchisor under the franchise agreement. In these circumstances there is certainly no actual power or authority to receive any notices, nor am I prepared to imply that such a power or authority existed. For these reasons I conclude for the purpose of the determination of this notice of motion that the letter from the franchisor's solicitor dated 30 July 2003 was ineffective to terminate the franchise agreement.

Entitlement of the franchisor to terminate the agreement 21 Strictly speaking, because of the conclusion which I have earlier reached, it is not necessary for me to determine this matter. I should state, however, that the applicants denied that any monies were due and owing under the franchise agreement because it was said by them that the franchisor had failed to provide a copy of the franchise industry code of practice as required by Part IVB of the Trade Practice Act. The applicants asserted that there had been a failure to comply with regulation 11 of the Trade Practices (Industry Codes - Franchising) Regulations, the effect of which was that a franchisor may not receive "non-refundable money under a franchise agreement" unless the franchisor has received from the franchisee or a prospective franchisee a written statement that the franchisee has received, read and had a reasonable opportunity to understand the disclosure document. There was debate between the parties as to whether regulation 11 applied, particularly as Clause 46.2 of the franchise agreement contains acknowledgement that the franchisees had received, read and understood the disclosure document and the Code of Conduct. The Code of Conduct is defined in clause 20(a) by reference to the relevant code under the Regulation. 22 There is obviously a factual issue concerning this matter. Consistent with well-known authority, I am of the view that this is not the "appropriate" time to consider this aspect. The same comment applies to an assertion made by one of the applicants in an affidavit tendered for the purpose of the notice of motion that the franchisor had agreed to defer the repayment of any loan monies for a period and that, accordingly, no loan monies were due and owing at the time that the notice of termination was given. Again, it appears to me that this is a factual issue which will need to be resolved, and that the appropriate time for this to occur is during the substantive hearing of the proceedings. For these reasons also the respondent's motion should be dismissed. 23 For completeness, I should add that there were other bases upon which the applicants sought to resist the motion brought by the respondents. Having concluded, for the purpose of the notice of motion, that termination of the franchise agreement did not occur in the manner asserted by the respondent, it is not necessary that I deal with these other matters. 24 Accordingly I make the following orders: 1. The respondents' notice of motion is dismissed; 2. The respondents are to pay the applicant's costs of the motion assessed in default of agreement.

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