The validity issue
92 I turn now to consider the applicants' contention that the arbitration agreement is invalid or of no effect by virtue of cl 21 of the Franchising Code (the validity issue). The first question that arises is whether the Court should determine the validity issue itself or refer this issue to the arbitrator for determination in accordance with the kompetenz-kompetenz principle (also referred to as the competence principle).
93 In Hancock FFC, the Full Court (Allsop CJ, Besanko and O'Callaghan JJ) discussed two important principles that are also relevant to the present case. The first was the separability principle (discussed by the Full Court at [341]-[360]). The second was the competence principle (discussed by the Full Court at [348] and [368]-[377]). I refer to and rely on the Full Court's discussion of those principles. These aspects of the Full Court's reasons are unaffected by the appeal to the High Court in Rinehart HC.
94 In the circumstances of the present case, I consider the more practical, efficient and just approach to be for this Court to itself determine the validity issue. The issue whether the License Agreement is a "franchise agreement" for the purposes of the Franchising Code, and the issue whether the Franchising Code does not apply to the License Agreement by reason of cl 3(2)(b), are relatively confined, both legally and factually. I consider that the Court is well placed to determine these issues now.
95 Having decided that the Court will itself determine the validity issue, I start with the issues relating to the Franchising Code. The first issue is whether the License Agreement constitutes a "franchise agreement" for the purposes of the Franchising Code. The definition of "franchise agreement" is set out in [73] above. The particular issues are whether the License Agreement satisfies paragraphs (b) and (d) of cl 5(1). Of these, the main focus of the argument was on paragraph (b), with relatively little time spent on paragraph (d).
96 The question raised by paragraph (b) is whether the License Agreement is an agreement "in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor …". The leading authority in this Court on the definition of "franchise agreement" is the judgment of the Full Court (Kenny, Stone and Logan JJ) in Rafferty v Madgwicks (2012) 203 FCR 1 (Rafferty). This judgment was largely followed by the NSW Court of Appeal in Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd (2015) 89 NSWLR 594 (Workplace Safety), in which the leading judgment was given by Bathurst CJ, with whom Basten JA agreed and Emmett JA relevantly agreed (at [183]).
97 In Rafferty, the Full Court was dealing with an earlier version of the Franchising Code. The definition of "franchise agreement" was set out in cl 4 of that version of the Code: see the Full Court's judgment at [159]. Paragraph (b) of that definition was in the same terms as paragraph (b) of the current definition.
98 At [160] of Rafferty, the Full Court set out the gravamen of the contentions that the agreement in issue did not meet the criteria for a franchise agreement. The contentions focussed on the criterion in paragraph (b). The Full Court then stated at [161]:
… There are three distinct elements of cl 4(1)(b). That is, to satisfy cl 4(1)(b), there must be: (1) a person (the franchisor) who grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia; (2) under a system or marketing plan; (3) substantially determined, controlled or suggested by the franchisor (or an associate).
99 The Full Court considered the meaning of the expression "system or marketing plan" and identified several factors that may be indicative of a system or marketing plan:
171 We turn to the second and third elements of cl 4(1)(b) of the Code. The Code does not define the expression "system or marketing plan". In ordinary English usage, the expression would signify a co-ordinated method or procedure, or scheme whereby goods or services are sold. This is apparently the sense in which the expression is used in the Code. Further guidance can be obtained from cases in the United States of America, where there is similar, although not identical, legislation: see Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] ATPR (Digest) 46-254 (Capital Networks) at [101]-[119], where Bennett J set out the results of her research. See also Kyloe at [40] where Tracey J sets out a list of factors derived in part from Capital Networks. We are indebted to their Honours for their research and analysis, which forms the basis of the following discussion.
172 Broadly speaking, although much depends on the circumstances of the case, these cases indicate that the following factors may be indicative of a system or marketing plan: specific requirements for accounting and record keeping; reservation by the franchisor of a right to audit the books of account and other records; inability of the franchisee to supply goods or services to customers without the franchisor's approval; reservation by the franchisor of the right to approve promotional and advertising material; provision by the franchisor of bonus structures or equivalent for those selling its goods or services; provision by the franchisor of training for staff selling its goods or services; stipulation of retail pricing structures, sales structures, sales quotas and the like; creation of marketing and sales territories; reservation by the franchisor of the right to approve sales staff; reporting systems in relation to profit or turnover; restriction on the franchisee selling competing products; controls on the use of brand and trading names; requirements for signage and merchandising; management structure; and badging requirements (mandatory use of trading name, uniforms, stationery, etcetera).
173 In the ordinary course, whether a system or marketing plan is "substantially determined, controlled or suggested by the franchisor" is closely related to whether there is a scheme or marketing plan at all. Matters relevant to determination, control or suggestion may include: the extent to which the franchisee's business involves the sale of the franchisor's goods and services; the degree to which the franchisor assumes responsibility for some centralised management and for uniform standards regarding quality; whether or not the franchisor places the franchisee under an obligation with respect to advertising and promotional campaigns; and the extent to which the franchisor controls the franchisee's business, having regard to advertising and financial support, auditing of books, inspection of premises, hiring of staff, sales quotas, management training and the like.
100 The Full Court also stated, in [185], that it agreed with the trial judge that, in order to meet the requirement relating to system or marketing plan in cl 4(1)(b) of the Code, it is not necessary for the details of a system or marketing plan to be set out in the franchise agreement; it is enough that the agreement creates rights and obligations that would enable the franchisor substantially to determine, control or suggest that the business be conducted under a system or marketing plan.
101 Workplace Safety concerned the same version of the Franchising Code as in issue in Rafferty. At [80]-[83], Bathurst CJ described the three elements of cl 4(1)(b) in similar terms to the Full Court in Rafferty. Chief Justice Bathurst stated:
80 Clause 4(1)(b) of the definition contains three elements. The first is that it is an agreement containing a grant by the "franchisor" to the "franchisee" of the right to carry on the business of offering, supplying or distributing goods or services in Australia.
81 The second element is that the right to carry on the business must be a right to carry it on under a "system or marketing plan".
82 The third element is that the system or marketing plan must be substantially determined, controlled or suggested by the franchisor.
83 The matters relevant in considering whether the second and third elements exist will often overlap, but it is important to remember that they are separate requirements. Thus, it would not be sufficient if the alleged franchisor was only able to control certain aspects of the supply or distribution of the goods or services. Rather, it is necessary that the power of the franchisor extends to substantially determining, controlling or suggesting the system or marketing plan under which the business is carried on.
102 In discussing the second element of cl 4(1)(b), Bathurst CJ stated:
90 I have set out above, at [32], the summary by the High Court in Ketchell of the legislative purpose of the Code. As one of the principal purposes of the Code is to protect franchisees, the court should reject any interpretation of its provisions which would allow this statutory purpose to be circumvented.
91 Notwithstanding, it remains necessary to determine whether the right granted was the right to carry on a business under a system or marketing plan. In my opinion, the word system, in that context, refers to a method of operation under which a business is to be conducted. In Rafferty, the compendious expression "system or marketing plan" was described by the full Federal Court as signifying "a co-ordinated method or procedure, or scheme whereby goods or services are sold."
92 In Rafferty, the full court also stated that "it is not necessary for the details of a system or marketing plan [to] be set out in the franchise agreement. It is enough that the agreement creates rights and obligations that would enable the franchisor substantially to determine, control or suggest that the business be conducted under a system or marketing plan." I respectfully agree that a system or marketing plan does not have to be spelt out in a franchise agreement. The contrary proposition would allow the statutory purpose of the Code to be readily circumvented.
93 However, it may not be sufficient, in order to satisfy the purpose of the section, that the agreement enables the franchisor to determine, control or suggest whether the business will be conducted under a system or marketing plan. Clause 4(1)(b) of the Code contemplates that the business will be carried out under a system or marketing plan. It is at least necessary that the agreement provides for that to occur, even if the terms of the plan are not settled or prescribed in the agreement.
(Footnotes omitted.)
103 In the context of discussing the third element of cl 4(1)(b), Bathurst CJ stated:
105 In determining whether the third element is satisfied, it is convenient to focus on the question of control. In its submissions, WSA emphasised that the obligation to prepare a business plan was imposed on Simple and Simple had the power to determine how to promote and market the business.
106 In the present case, the meaning of the word "control" must be determined by reference to the object and purpose of the legislation. That, as I have explained above, is the protection of a particular class of person: franchisees. To give effect to that purpose, the word "control" should be taken to mean the power to direct or restrain the content of the business plan on any substantial issue. The question is to be determined by practical and commercial considerations.
(Footnotes omitted.)
104 There is perhaps a small difference of opinion between the Full Court in Rafferty and the judgment of Bathurst CJ in Workplace Safety, insofar as Bathurst CJ stated the following at [110]:
In Rafferty, the full court stated that a relevant factor in determining whether a system or marketing plan is substantially determined, controlled or directed by the franchisor may be "the extent to which the franchisee's business involves the sale of the franchisor's goods and services". In my opinion, the relevance of this factor is somewhat limited in circumstances where the Distribution Agreement relates to a discrete business activity to be carried on by the franchisor. The Code is concerned with the business the subject of the franchise agreement. So much is made clear by the definition in cl 4 and the differing disclosure requirements in cl 6 based on the turnover of the franchise business.
(Footnote omitted.)
However, if and to the extent that there is any difference, I do not consider it to affect the resolution of the present case.
105 The word "under" in paragraph (b) signifies that the business is to be carried on under the authority of, in accordance with, or pursuant to the system or marketing plan: cf Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 249; Queensland Premier Mines Pty Ltd v French (2007) 235 CLR 81 at [55]; Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196 at [137]-[139].
106 Applying the principles set out above to the present case, it may be accepted that the first element of cl 5(1)(b) is satisfied, in that the License Agreement is an agreement in which a person (BDG) grants to another person (FFPL) the right to carry on the business of offering, supplying or distributing goods or services in Australia (namely the business of offering, supplying and distributing the "Products" as defined in the License Agreement). Although one would not normally describe this as a separate "business" in circumstances where FFPL sold other products, for the purposes of the Franchising Code it is appropriate to treat this as a separate business.
107 The second element of cl 5(1)(b) of the Franchising Code is that the right to carry on the business must be a right to carry it on "under a system or marketing plan". It is convenient in the circumstances of this case to consider this together with the third element, which is that the system or marketing plan must be substantially determined, controlled or suggested by the putative franchisor. As set out above, in Rafferty the Full Court stated (at [171]) that the expression "system or marketing plan" signified "a co-ordinated method or procedure, or scheme whereby goods or services are sold". In the present case, the parties in their submissions focussed in particular on clauses 3(d) and 3(e) of the License Agreement, although reference was also made to other clauses of the License Agreement.
108 Clause 3(d) of the License Agreement is in the following terms:
Marketing Plan. Blue Diamond shall be responsible for the development and implementation of all annual marketing plans for marketing the Products in the Territory (each a "Marketing Plan"), including the payment of all costs therefore. Each annual Marketing Plan developed shall be designed specifically to promote awareness and trial and usage of the Products in the Territory. All annual Marketing Plans developed by Blue Diamond shall be reviewed by Licensee before they are implemented. Each annual Marketing Plan shall provide, and Blue Diamond shall expend in each Australian Financial Year (1st July to 30th June) covered by the plan, marketing expenditures equal in the aggregate to no less than five percent (5%) of Licensee's gross sales of the Products in the calendar year covered by the plan with the exception of the first two years of the agreement. The annual Marketing Plan for the first year of the Term will be invested on a specific dollar value based upon targeted sales volumes.
Year 1 minimum volume target will be set at not less than 150,000 cases (12 x 1 litre) based on a marketing investment of not less than US$650,000. In the event that this volume is exceeded in Year 1, Blue Diamond's marketing investment may be increased at Blue Diamond's sole discretion.
In the event that the volume target of 150,000 cases is not achieved in Year 1, Blue Diamond will have the right to terminate this Agreement.
In the event that the marketing investment of US$650,000 is not met in Year 1, Licensee will have the right to terminate the Agreement.
The right of termination for either Blue Diamond or Licensee referred to above will only be effective sixty (60) days following completion of Year 1 and in the event that the Parties have not otherwise agreed to continue the License Agreement.
Licensee recognizes the proposed financial year Marketing Plans and spending will be based on key assumptions regarding ranging decisions, timing of major retailers and sales volumes, and will be subject to change as required. In the event that Blue Diamond spends less than five percent (5%) of Licensee's gross sales of the Products in any Financial year, Licensee shall have the right to terminate this Agreement by the provision of six (6) months advance written notice to Blue Diamond.
Within sixty (60) days of the Effective Date, Blue Diamond will provide Licensee with a proposed Marketing Plan for the first full calendar year of the Term. Licensee shall review the Marketing Plan and promptly provide Blue Diamond with any comments or suggestions on said plan. If necessary, the parties agree to meet to discuss the Marketing Plan and any changes Licensee believes are necessary. Blue Diamond shall consider the input provided by Licensee and, if necessary, develop a revised Marketing Plan for review by Licensee. Once the Marketing Plan has been mutually agreed by the parties, Blue Diamond shall proceed to implement the plan in accordance with a schedule also to be reviewed by the parties.
Each subsequent year of the Term, Blue Diamond shall prepare and deliver to Licensee a proposed annual Marketing Plan for marketing the Products in the Territory for the coming financial year. Blue Diamond shall deliver the annual Marketing Plan to Licensee with sufficient lead time such that the plan can be reviewed by 1st April of the then financial year. Licensee shall review and comment on the annual Marketing Plan, and the parties agree to meet to discuss the annual Marketing Plan should either party deem it necessary to do so. A final annual Marketing Plan shall thereafter be developed by Blue Diamond by the 30th May deadline. Thereafter, Blue Diamond shall implement the annual Marketing Plan.
109 While this clause refers in terms to a "marketing plan", the difficulty for the applicants' case is that it does not appear that the relevant business (namely, FFPL's business of offering, supplying and distributing the Products) is to be carried on "under" the marketing plans contemplated by this clause. The marketing plans are to be implemented by BDG rather than FFPL. This is apparent from the first sentence, which states that BDG shall be responsible for the development "and implementation" of the annual marketing plans for marketing the Products in the Territory, including the payment of all costs thereunder. There are further references to BDG implementing the annual marketing plans in the penultimate and last paragraphs of the clause. The clause does not impose any obligations on FFPL as to the way in which it is to carry on the business of offering, supplying or distributing the Products. The clause does not, for example, require FFPL to take any particular steps, or to refrain from taking any particular steps, as set out in the marketing plans. Thus, there is no sufficient relationship between the marketing plans and the right to carry on the business.
110 Clause 3(e) of the License Agreement is in the following terms:
Promotional Plan. Licensee shall be responsible for the development and implementation of all annual trade promotion and account specific promotional plans (each a "Promotional Plan") for the promotion of the Products in the Territory, including payment of all costs therefore. Each annual Promotional Plan developed by Licensee shall be reviewed by Blue Diamond before it is implemented. Each annual Promotional Plan shall provide, and Licensee shall expend in each calendar year covered by the plan, trade promotion expenditures equal in the aggregate to no less than five percent (5%) of Licensee's gross sales of the Products in the calendar year covered by the plan. In the event that Licensee spends less than five percent (5%) of Licensee's gross sales of the Products in any financial year, Blue Diamond shall have the right to terminate this Agreement by the provision of six (6) months advance written notice to Licensee.
Within sixty (60) days of the effective date of this Agreement, Licensee will provide Blue Diamond with proposed current financial year trade promotion and account-specific Promotional Plans, including distribution goals, frequency of temporary price reductions, trade performance goals, promotional price targets and projected costs for the current financial year of the Term. Blue Diamond recognize the proposed current financial year trade promotional program will be based on key assumptions regarding ranging decisions and timing of major retailers and will be subject to change as required. Blue Diamond shall review the trade Promotional Plan and promptly provide Licensee with any comments or suggestions on said plan. If necessary, the parties agree to meet and discuss the trade promotion and account-specific Promotional Plans and any changes Blue Diamond believes are necessary. Licensee shall consider the input provided by Blue Diamond and, if necessary, develop a revised trade promotion and account-specific Promotional Plans for review by Blue Diamond. Once the trade plans have been mutually agreed by the parties, Licensee shall proceed to implement the plans in accordance with a schedule also to be reviewed by the parties.
Each subsequent financial year of the Term, Licensee shall prepare and deliver to Blue Diamond a proposed trade promotion and account-specific Promotional Plans for promoting the Products in the Territory for the coming year. Licensee shall deliver the proposed trade plans to Blue Diamond with sufficient lead time such that the plan can be reviewed by 1st April of the then current financial year. Blue Diamond shall review and comment on the trade Promotional Plans, and the parties agree to meet to discuss the trade Promotional Plans should either party deem it necessary to do so. The final trade promotional program shall thereafter be developed by the Licensee by the 30th May deadline. Thereafter, Licensee shall implement the trade Promotional Plans.
111 In contrast with cl 3(d), the promotional plans referred to in cl 3(e) are to be implemented by FFPL. Thus, there is some scope to argue that the business is to be carried on "under" these promotional plans. The difficulty, however, for the applicants' case, is the requirement that the system or marketing plan be "substantially determined, controlled or suggested" by the putative franchisor (BDG). Clause 3(e) provides that the Licensee (FFPL) is to be responsible for the development of the promotional plans. The second sentence of the first paragraph provides that each annual promotional plan developed by FFPL shall be "reviewed" by BDG before it is implemented, but I do not consider this to be enough to establish that the promotional plan is "substantially determined, controlled or suggested" by the putative franchisor (BDG). The second paragraph of cl 3(e) appears to provide for a higher level of involvement by BDG. However, that paragraph applied only to the first financial year of the License Agreement (that is, the License Agreement as originally entered into in October 2011). It does not apply to financial years during the term of the relevant agreement, being the License Agreement as renewed in October 2016. (As explained above, the applicants need to rely on the License Agreement as renewed in October 2016 because of the transitional provisions in the Franchising Code.) The last paragraph of cl 3(e), which is relevant to subsequent financial years, does not contain comparable provisions to the penultimate paragraph. It merely provides that BDG shall "review and comment" on the promotional plans prepared by FFPL, and that the parties are to "meet to discuss" the plans should either party deem it necessary to do so. In light of these provisions, it is not established that the promotional plans described in cl 3(e) are "substantially determined, controlled or suggested" by the putative franchisor (BDG).
112 Having regard to the list of factors referred to by the Full Court in Rafferty at [172], it is relevant to note that the License Agreement requires FFPL to keep and maintain, and provide BDG with access to, certain books and records (see cl 5(a), (b), (c) and (d)) and gives BDG the right to audit certain books and records (cl 5(b)). The License Agreement contains restrictions on FFPL selling competing products (cl 10(b)) and contains requirements regarding branding, packaging and promotional materials (cl 3(a), (f), (g), and (h)). There is also a brief provision regarding performance review (cl 5(e)). I do not regard these provisions, whether taken individually or collectively, as constituting or establishing or making provision for a "system or marketing plan" under which the business is to be carried on. They do not deal in any detail with the way the business is to be conducted. Further, a number of the factors referred to in Rafferty at [172] are absent. In particular: there is no provision by the putative franchisor of bonus structures or equivalent for those selling the goods; there is no provision by the putative franchisor of training for staff selling the goods; there is no stipulation of retail pricing structures (indeed, under cl 3(b), FFPL has the right in its sole discretion to determine the prices at which the Products will be sold to its customers); and there is no provision for management structure.
113 For completeness, I note that I do not consider the evidence of Ms Stoner assists with this issue. The evidence is concerned with the practical implementation of the License Agreement, rather than the rights under the agreement, and relates to a period of time after October 2016, which is when the relevant agreement for present purposes was entered into.
114 For these reasons, I conclude that the License Agreement does not satisfy paragraph (b) of cl 5(1).
115 In light of the above conclusion, it is not necessary to consider paragraph (d) of cl 5(1). Nevertheless, I will consider it for completeness. Paragraph (d) requires the agreement to be one under which, before starting or continuing the business, the putative franchisee must pay or agree to pay to the putative franchisor (or an associate of the putative franchisor) an amount including, for example, a payment for goods, but excluding "(v) payment for goods and services supplied on a genuine wholesale basis". There is no issue that the initial requirement of paragraph (d) is satisfied. Under the License Agreement, FFPL agreed to pay certain amounts to BDG, being payments for goods (almond base). The issue is whether the exclusion in sub-paragraph (v) of paragraph (d) applies. BDG submits that the exclusion applies; that is, it submits that the payments under the License Agreement were "for goods supplied on a genuine wholesale basis". It follows, BDG submits, that paragraph (d) is not satisfied. The applicants dispute this, relying on evidence that the price in the License Agreement was above the market price for almond base, and on the ability of BDG to change the price.
116 Neither party referred to any case law or extrinsic materials that shed any light on the construction of paragraph (d) generally or the exception in sub-paragraph (v) in particular. Reading the exception as a whole and in context, it seems to be designed to exclude payments which are simply for the supply of goods on a wholesale basis, as distinct from payments for a mixture of purposes. In the present case, it may be accepted that the almond base is supplied on a "wholesale basis", given that it is supplied in bulk by growers to a manufacturer. However, having regard to the License Agreement as a whole, I do not consider the payments to be made pursuant to cl 4(a) to be simply for the supply of the almond base. The License Agreement contains a number of different promises by the parties to each other. These include the grant, by BDG to FFPL, of an exclusive license during the term of the agreement to use the Formulations/Specifications to manufacture the Products, and to use the Trademarks to package, sell and distribute the Products (cl 3(a)). The payments to be made under the agreement are expressed to be for the almond base. However, in this context, the payments are in substance both for the almond base and for the other rights conferred by the agreement. This is consistent with the evidence that the price is above the market price. Accordingly, I do not consider the payments to fall in the exception in sub-paragraph (v) of paragraph (d). It follows that paragraph (d) is satisfied.
117 As set out above, I have concluded that the License Agreement does not satisfy paragraph (b) of cl 5(1) of the Franchising Code. It follows that the License Agreement is not a "franchise agreement" for the purposes of the Franchising Code. It further follows that cl 21, upon which the applicants' argument depends, does not have any operation. Accordingly, I reject the applicants' contention that the arbitration agreement is invalid or of no effect.
118 In light of the above conclusion, it is not necessary to consider the 20% Issue, namely whether the Franchising Code is inapplicable by virtue of cl 3(2)(b) of the Franchising Code. However, I consider it appropriate in the circumstances to make relevant findings and express a conclusion on this issue. I deal with this issue on the assumption that (contrary to the above conclusion) the License Agreement is a "franchise agreement".
119 For ease of reference, I again set out cl 3(2) of the Franchising Code:
3 Application
…
(2) However, this code does not apply to a franchise agreement:
(a) to which another mandatory industry code, prescribed under section 51AE of the Competition and Consumer Act 2010, applies; or
(b) if:
(i) the franchise agreement is for goods or services that are substantially the same as those supplied by the franchisee before entering into the franchise agreement; and
(ii) the franchisee has supplied those goods or services for at least 2 years immediately before entering into the franchise agreement; and
(iii) sales under the franchise are likely to provide no more than 20% of the franchisee's gross turnover for goods or services of that kind for the first year of the franchise.
120 As can be seen, cl 3(2)(b) of the Franchising Code provides that the Code does not apply to a franchise agreement if three requirements are satisfied, set out in sub-paragraphs (i), (ii) and (iii). There is no issue that sub-paragraphs (i) and (ii) are satisfied, given that the relevant agreement is the License Agreement as renewed in October 2016. The issue relates to sub-paragraph (iii). The question is whether "sales under the franchise are likely to provide no more than 20% of the franchisee's gross turnover for goods or services of that kind for the first year of the franchise". The applicants contend that the answer is "No". In other words, they contend that sales under the franchise are likely to provide more than 20% of the franchisee's gross turnover for goods of the relevant kind for the first year of the franchise (being October 2016 to September 2017). BDG disputes that proposition.
121 It is common ground that, for the purposes of this exercise, it is the gross turnover of the Freedom Foods group, rather than FFPL alone, that is relevant.
122 In relation to the expression "sales under the franchise", BDG contends that this refers to sales of the "Products" under the License Agreement (that is, the Almond Breeze products). While the applicants initially agreed, subsequently senior counsel for the applicants submitted that the expression referred to all products manufactured using almond base supplied by BDG. I do not accept that contention. Assuming (contrary to my earlier conclusion) the License Agreement constitutes a "franchise agreement", it could only be a franchise agreement in relation to the "Products" as defined in the License Agreement. This is because all or most of the clauses of the License Agreement upon which the "franchise agreement" contention is founded relate only to the "Products" as defined. I therefore proceed on the basis that "sales under the franchise" is a reference to sales of the "Products" under the License Agreement (that is, the Almond Breeze products).
123 In relation to the expression "goods … of that kind", there is a dispute between the parties. The applicants contend that in the present case this refers to plant-based beverages. Mr Standen clarified in his oral evidence that this expression refers to plant-based beverages that are milk or milk-like beverages (such as almond milk, soy milk and oat milk). BDG contends that in the present case "goods … of that kind" refers to all milk products, that is, both dairy milk and what the applicants refer to as plant-based beverages. In my view, the applicants' position on this issue is to be preferred. Having regard to the facts and circumstances as set out in the affidavit material, in my view, the reference in cl 3(2)(b)(iii) to "goods … of that kind" is appropriately identified as plant-based beverages, rather than all milk products. This seems to me to be the "kind" of product represented by the "Products" under the License Agreement. In this regard, I note that the "Licensee non-competition" clause in the License Agreement (cl 10(b)) provides that FFPL shall not during the term of the agreement sell any "non-organic nut beverage product" other than the licensed Products, suggesting, if anything, a narrower kind of product than that contended for by the applicants (namely, plant-based beverages). More generally, the evidence indicates that it is appropriate to identify plant-based beverages as the relevant "kind" of product for the purposes of the provision.
124 Clause 3(2)(b)(iii) of the Franchising Code refers to "likely" sales for the first year of the franchise. It is common ground that, as the relevant agreement for present purposes is the License Agreement as renewed in October 2016, the relevant year for the purposes of the provision is the year from October 2016 to September 2017. Further, it is common ground that the provision is concerned with the likely, as distinct from actual, sales for that year. This is to be assessed as at the commencement of that year, that is, as at October 2016.
125 In Mr Moreno's affidavit, Mr Moreno (who is the Finance Director of BDG) carried out some analysis, for the purposes of cl 3(2)(b)(iii) of the Franchising Code, based on the financial information he had available to him. The financial information and Mr Moreno's calculations are set out in paragraphs 5 to 26 of his affidavit. Given the nature of the information available to him, Mr Moreno's calculations are for the financial year ended 30 June 2016. In relation to the "sales under the franchise" (that is, the Freedom Foods group's sales of the Products), Mr Moreno estimates gross sales of $2,662,061 plus $3,767,007 (see his affidavit at paragraphs 21, 25), making a total of $6,429,068. In relation to the sales of "goods … of that kind", Mr Moreno's calculations treat this expression as meaning either all products or all milk products sold by the Freedom Foods group. Given my conclusion, above, that this expression refers in the present case to plant-based beverages, these calculations do not assist. However, the financial information reproduced by Mr Moreno also includes a figure for sales of plant-based beverages for the financial year ended 30 June 2016 (see his affidavit at paragraph 24). The figure appears in FFG's annual report for the financial year ended 30 June 2017, in which the results for the financial year ended 30 June 2016 have been restated. The figure for sales of plant-based beverages for the year ended 30 June 2016 is $54,105,000. Applying these figures (namely, $6,429,068 for sales of the Products and $54,105,000 for sales of plant-based beverages), the percentage produced is 11.88%.
126 In Mr Standen's first affidavit, he annexed spreadsheets with sales figures for the financial years ended 30 June 2016 and 30 June 2017. However, following the application by BDG for access to relevant documents, and the production of those documents by the applicants' solicitors to BDG's solicitors, Mr Standen prepared a further affidavit in which he substantially revised his evidence regarding the sales figures. In Mr Standen's second affidavit, he stated at paragraph 5 that, since preparing his first affidavit, he had been informed (and now believed) that the sales data provided in his first affidavit:
(a) included intercompany transactions within the Freedom Foods group during the financial years ended 30 June 2016 and 30 June 2017; and
(b) included sales of vegan stock (that is, vegetable stocks used in soups and the like) in the "Plant Based" category (i.e. not solely sales of plant-based beverages).
127 In light of these statements, I do not consider that any weight can be placed on the figures provided in Mr Standen's first affidavit.
128 Mr Standen's second affidavit goes on to provide sales figures extracted from FFG's accounting system for the periods October 2015 to September 2016, and October 2016 to September 2017. For present purposes, it is the figures for the period October 2015 to September 2016 (being the year leading up to October 2016) that are relevant. Mr Standen provides the following figures for that period:
(a) gross sales of Almond Breeze products (i.e. the Products under the License Agreement) - $17,249,046; and
(b) gross sales of all plant-based beverages manufactured during that period (excluding sales of liquid stocks) - $52,640,403.
129 On the basis of these figures, Mr Standen calculates that gross sales of Almond Breeze products were 32.77% of the total gross sales of plant-based beverages manufactured during that period (excluding sales of liquid stocks).
130 Mr Standen's second affidavit also contains certain calculations based on forecasts for the financial year ended 30 June 2017. On the basis of the forecasts, Mr Standen provided (at paragraphs 13 and 15 of his second affidavit) the following calculations for the forecast sales for the financial year ended 30 June 2017:
(a) total forecasted sales of Almond Breeze products - $20,280,933; and
(b) total forecasted plant-based beverage sales - $62,032,310.
131 On the basis of these figures, Mr Standen calculated that sales of Almond Breeze products were forecasted to comprise 32.69% of total forecasted sales of plant-based beverage products.
132 Mr Standen was subjected to quite strenuous cross-examination. Much of this focussed on the financial information in his first affidavit. However, as set out above, this was explained and corrected in his second affidavit. In my view, Mr Standen gave evidence honestly, and sought to provide the best available information to the Court. I accept the evidence in his second affidavit. While there is a substantial difference between the calculations in Mr Moreno's affidavit and those in Mr Standen's second affidavit, this is explained by Mr Moreno having only limited information available to him. In contrast, Mr Standen's figures have been extracted from FFG's accounting system. This seems to me to be the most reliable available source of the relevant sales data, notwithstanding the criticisms made by BDG.
133 Accordingly, I find that, as at October 2016, sales under the franchise (that is, sales of the Products) were likely to provide more than 20% of the franchisee's gross turnover for goods of that kind (that is, plant-based beverages) for the first year of the franchise (that is, the year October 2016 to September 2017).
134 It follows that I accept the applicants' contention that the exception in cl 3(2)(b) does not operate. It further follows that if (contrary to my conclusion above) the License Agreement constitutes a "franchise agreement", the Franchising Code does apply.
135 In light of my conclusion that the License Agreement is not a "franchise agreement" it is not necessary to consider the other contentions raised by BDG as set out at 77, (c) and (d) above. Nevertheless, in deference to the detailed submissions presented by the parties on these points, I will make the following brief observations.
136 Insofar as BDG submits that the issue of validity of the arbitration agreement is to be governed (solely) by Californian law (as the proper law of the arbitration agreement) or potentially another system of law that validates the referral to arbitration, I do not accept that submission. While I accept that, in general, the validity of an arbitration agreement is to be determined by the putative proper law of the arbitration agreement (see Dicey, Morris and Collins on the Conflict of Laws (15th ed, Sweet & Maxwell, 2012), rule 64(1), [16-008], [16-013]-[16,016], [16-022]), this may be subject to overriding legislation of the forum that applies irrespective of the governing law (as recognised in fn 49 to [16-022] in Dicey, Morris and Collins on the Conflict of Laws).
137 In the circumstances of this case, the applicants contend that cl 21 of the Franchising Code is a mandatory law of the forum (which I take to refer to overriding legislation of the forum that applies irrespective of the governing law) or, alternatively, a provision that renders the arbitration agreement "null and void" or "inoperative" for the purposes of s 7(5) of the International Arbitration Act. In my view, in the circumstances of this case, it does not matter whether one approaches the issue under the rubric of 'mandatory law of the forum' or through s 7(5). Clause 21 of the Franchising Code forms part of the law of the forum and provides that a franchise agreement "must not" contain a clause that requires a party to the agreement to bring an action or proceedings in relation to a dispute under the agreement in any jurisdiction outside Australia; and that, if a franchise agreement does contain such a clause, "the clause is of no effect". Having regard to the text, context and purpose of this provision, I incline to the view that, where cl 21 of the Franchising Code applies and operates in respect of an arbitration clause in a franchise agreement, it would be apt to describe the arbitration clause (or arbitration agreement) as "null and void" or "inoperative" for the purposes of s 7(5). I do not regard this as being inconsistent with the observations of the Full Court in Hancock FFC at [381]. The Full Court was not there considering an issue concerning whether domestic legislation could render an arbitration agreement "null and void" or "inoperative" for the purposes of s 7(5). Further, while the Full Court stated that the phrase "null and void" is to be limited as the Third and Eleventh Circuits said in Rhone Mediterranee Compagnia Francese Di Assicurazioni E Riassicurazoni v Lauro 712 F(2d) 50 (3rd Cir, 1983) and Bautista v Star Cruises 396 F (3d) 1289 (11th Cir, 2005) to "circumstances where it is commonly internationally recognised that the consequence of the vitiating consideration is to nullify or render void a contract, such as in the consequences of duress, mistake, fraud or fundamental policies", the expression "fundamental policies" is apt to include a provision such as cl 21, which evinces a strong policy position in respect of a particular class of clauses in a particular class of agreements (franchise agreements), consistently with the purposes of the Franchising Code (as discussed in Workplace Safety).
138 Insofar as BDG submits that the Franchising Code does not apply to an agreement that is made outside of Australia and has a proper law other than Australian law, I am not inclined to accept this submission. It seems more likely that the intended field of operation, having regard to the purposes of the Code, is franchising businesses conducted or to be conducted in Australia. It would be surprising if the protective purposes of the Franchising Code were not intended to operate in connection with a franchise business in Australia simply because the agreement was entered into in another country or included a foreign choice-of-law clause (or both).
139 Insofar as BDG submits that the Franchising Code is invalid on the basis that the Code (as delegated legislation) is inconsistent with s 7 of the International Arbitration Act, I do not accept this submission. As discussed above, I incline to the view that if cl 21 of the Franchising Code applies and operates, the arbitration agreement would be "null and void" or "inoperative" for the purposes of s 7(5) of the International Arbitration Act. Hence, there is no inconsistency.
140 For the reasons set out above, I conclude that the License Agreement is not a "franchise agreement" for the purposes of the Franchising Code and that, accordingly, cl 21 of the Franchising Code has no operation. I therefore reject the applicants' contention that the arbitration agreement is invalid or of no effect.