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[2008] FCA 810
Federal Court of Australia
2008-07-01
Original judgment source is linked above.
Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) [2008] FCA 810 TRADE AND COMMERCE - Trade Practices Act 1974 (Cth) and related legislation - Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) - Franchising Code of Conduct - consequences of franchisor's failure to comply with cll 10 and 11 of Code - whether franchisor's non-compliance made franchise agreement void - whether decision in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 should be followed - purpose of Code - need to seek guidance from implications in legislative framework Held: Franchising Code of Conduct does not evince legislative policy of striking down every franchise agreement entered into by franchisor who fails to comply with its provisions - intention of code is to protect franchisees and place obligations on franchisor to comply - failure of franchisor to comply entitles franchisee to seek to set aside agreement or to seek relief for unconscionable conduct CONTRACT - fraud - when each party is in breach of an essential term or has conducted itself in a manner amounting to a repudiation - whether one party may terminate based on other's breach or repudiation - whether one party may terminate under express contractual right to do so when other party has committed fraud - whether party must be ready and willing before being entitled to terminate Held: When each party is in breach of an essential term or has conducted itself in a manner amounting to a repudiation, neither is ready and willing to perform; neither may terminate at common law or pursuant to a contractual term: Foran v Wight (1989) 168 CLR 385 considered CONTRACT - general contractual principles - construction and interpretation of contracts - ambiguity in written provision regarding exclusive territory - relevance of pre-contractual discussions - conflicting evidence given by both parties - neither party's evidence believed - interpretation of common intention of parties - consideration of what each party, by words or conduct, would have led a reasonable person in position of other party to believe - consideration of surrounding circumstances known to parties and purpose and object of transaction - natural and common sense approach to construction - necessity to construe agreement so as to avoid commercial inconvenience Held: Ambiguousprovision to be interpreted by reference to objective common intention of parties based on reasonable person's understanding in circumstances of case CONTRACT - Fraud by franchisee - whether franchisor elected to affirm franchise agreement by its words or conduct - principles of election - whether franchisor confronted with two mutually exclusive courses of action necessitating a choice - whether franchisor communicated election to franchisee - whether reasonable person in franchisee's position would have understood franchisor's conduct to amount to affirmation of contract Held: Franchisor had not elected to affirm the contract - parties understood that franchisor would refrain from terminating for fraud until franchisee given opportunity to respond CONTRACT - general implication that parties contract to do all that is necessary for the other to have benefit of contract - duty to co-operate may be implied from objective consideration of whole of terms of contract - whether franchisor's right to impose certain charges on franchisee pursuant to agreement restricted Held: Franchisor's power to impose charge on franchisee to effect work required by terms of agreement limited to amount that is reasonable - necessary for franchisor to reduce amount charged to a reasonable amount COURTS AND JUDGES - precedents - statutory interpretation - State Court of Appeal in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 construed earlier version of legislation and decided every franchise agreement void when made in compliance with legislation - relevant provision re-enacted - whether single judge of Federal Court obliged to follow State Court of Appeal - whether State Court of Appeal decision 'plainly wrong' - whether subsequent decision of High Court in ACCC v Baxter Health Care (2007) 237 ALR 512 showed State Court of Appeal's approach to statutory construction wrong - whether intention of legislation to make void or to provide remedy Held: State Court of Appeal not followed; purpose of legislation remedial; not intended to avoid for any non compliance Trade Practices Act, ss 51AC, 51AD, 51AE, 87 Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth), cll 6A, 10, 11, 23(f)
Allen v Tobias (1958) 98 CLR 36 applied Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564 cited Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 cited Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 cited Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 461 cited Attorney-General v Guardian Newspapers Ltd [1987] 1 WLR 1248 cited Australasian Performing Rights Association Ltd v Monster Communications Pty Ltd (2006) 71 IPR 212 cited Australian Competition and Consumer Commission v Baxter Health Care (2007) 237 ALR 512 applied Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 25 cited Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 referred to Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 cited Blatch v Archer (1774) 1 Cowp 63 cited Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909 cited Cannon Australia Pty Ltd v Patton [2007] NSWCA 24 cited Champtaloup v Thomas [1976] 2 NSWLR 264 cited Clough v London & North Western Railway Co (1871) LR 7 Ex 26 cited Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 applied Collins v Baltern (1767) 2 Wils 347 referred to Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 cited Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 cited Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia (CEPU) v Australian Competition and Consumer Commission (2007) 162 FCR 466 cited Compomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 cited Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 30 cited DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 applied Duncan v Koster; The Teutonia (1872) LR 4 PC 171 applied Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108 followed Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 referred to Fitzgerald v Masters (1956) 95 CLR 420 referred to Foran v Wight (1989) 168 CLR 385 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 cited GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 cited Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40 not followed Green v Sommerville (1979) 141 CLR 59 referred to Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 referred to Hilditch Pty Ltd v Dorval Kaiun KK (No 2) [2007] FCA 2014 cited Horrocks v Lowe [1975] AC 135 referred to Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 cited Hunter BNZ Finance v GC Maloney Pty Ltd (1988) 18 NSWLR 420 cited Hurley v McDonald's Australia Ltd (2000) ATPR 41-741 referred to Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 followed International Air Transport Association v Ansett Australia Holdings Ltd (2008) 242 ALR 47 cited Jones v Dunkel (1959) 101 CLR 29 applied Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 not followed Koompahtoo Local Aboriginal Land Council v Sanpine (2007) 241 ALR 88 referred to Kyrwood v Drinkwater [2000] NSWCA 126 considered Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 referred to Lazarus Estates Ltd v Beasley [1956] 1 QB 702 cited Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 referred to Marshall v Director-General, Department of Transport (2001) 205 CLR 603 referred to Master v Miller (1791) 4 TR 320 followed Matthews v Smallwood [1910] 1 Ch 77 cited McNamara v Consumer Trader and Tenancy Tribunal (2005) 221 CLR 646 referred to Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 cited Nguyen v Nguyen (1990) 169 CLR 245 cited Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613 considered Owendale Pty Ltd v Anthony (1967) 117 CLR 539 referred to Paal Wilson & Co v Partenreedere Hannah Blumenthali [1983] 1 AC 854 referred to Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 cited Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 768, 196 ALR 257 cited Qantas Airways Ltd v Cameron (1996) 66 FCR 246 cited R v Burdett (1820) 4 B & Ald 95 cited R v Paulson [1921] 1 AC 271 cited Radaich v Smith (1959) 101 CLR 209 referred to Rawson v Hobbs (1961) 107 CLR 466 referred to Roadshow Entertainment Pty Ltd v CAN 053 006 269 Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 considered Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; 76 ALJR 436; [2002] HCA 5 referred to Scarf v Jardine (1882) 7 App Cas 345 applied Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 applied Sellars v Adelaide Petroleum NL (1992) 179 CLR 332 applied State Training Corporation of India Ltd v Golodetz Ltd [1989] 2 Lloyd's Rep 277 considered Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 referred to SZFDE v Minister for Immigration and Citizenship (2007) 237 ALR 64 cited Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 referred to The Ophelia [1916] 2 AC 206 cited Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 applied Tropical Traders Ltd v Goonan (1964) 111 CLR 41 applied Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 applied Vitol SA v Norelf Ltd (The Santa Clara) [1996] AC 800 cited Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 242 ALR 383 cited Watson v Foxman (1995) 49 NSWLR 315 applied Weissensteiner v The Queen (1993) 178 CLR 217 cited Yorkshire Insurance Co Ltd v Craine [1922] 2 AC 541 cited Zhu v Treasurer of NSW (2004) 218 CLR 53 cited HOY MOBILE PTY LIMITED (ACN 103 105 228) v ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228) NSD 1678 OF 2006
NEW SOUTH WALES DISTRICT REGISTRY NSD 1678 OF 2006
AND: ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228)
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
NEW SOUTH WALES DISTRICT REGISTRY NSD 1678 OF 2006
AND: ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228)
TABLE OF CONTENTS
REASONS FOR JUDGMENT 1 Craig Hoy was interested in setting up business on his own account as a franchisee of a mobile phone retail business. He had been working as a marketing manager for a medium sized mobile phone retailer with about ten outlets. In about September 2002 he approached Matthew Donnellan, then the general manager of Allphones Retail Pty Limited. Allphones was a mobile phone franchisor that had begun operating in Western Australia. By the time Mr Hoy met with Mr Donnellan, Allphones was expanding its operations onto the eastern seaboard. It had had a small number of outlets in New South Wales. These were franchised stores. They operated in large retail shopping centres or shopping malls. 2 Mr Donnellan explained that one of the features of Allphones' business model was that, through its franchisees, it offered retail customers the opportunity to enter into contracts for the provision of mobile phone services with a range of telecommunications service providers, such as Telstra, Optus, Vodafone, Hutchison (or '3') and other carriers or networks. Allphones could complete with other mobile phone retail outlets which were tied to individual carriers because it could offer various plans or deals with a range of carriers through its expanding franchise base. Thus, a customer who wanted to buy a mobile phone in an Allphones store could choose which carrier, and which plan or deal offered by that carrier, he or she wished to select. The model made the carriers competitive with one another about the plans or deals they would offer Allphones' stores. The various carriers offered different mobile phones with differing plans or deals, although there was some overlap on the more popular models of phones at the various levels of plans or deals. 3 The Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth) made the Franchising Code of Conduct as a mandatory industry code to which ss 51AD and 51AE of the Trade Practices Act 1974 (Cth) applied. The Code governed the relationship that Allphones had with its actual and potential franchisees. The purpose of the Code was to regulate the conduct of participants in franchising towards other participants in franchising (cl 2(1)). It required a franchisor to create a disclosure document for actual and prospective franchisees in accordance with the requirements of Div 2.1 of the Code both before entry into a franchise agreement, and also within three months after the end of each financial year after the agreement had been made (cl 6(1)). The purposes of the disclosure document were to give a prospective franchisee or an existing one who might wish to continue or renew the relationship: · information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; · current information from the franchisor that is material to the running of the franchise business (cl 6A). 4 The Code prescribed that a franchisee be given a considerable amount of information (see esp Annexure 1 to the Code). Critically, a franchisor was required to give to a franchisee a statement whether the franchise was for an exclusive or non-exclusive territory or was limited to a particular site (Annexure 1, cl 8.1). A franchisor was also required to give a copy of the Code and a disclosure document to a prospective franchisee at least 14 days before the franchisee entered into a franchise agreement (cl 10). 5 Importantly, the franchisor must not enter into a franchise agreement unless it had received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the Code (cl 11(1)). And, before a franchisee agreement could be entered into, the franchisor must have received from the prospective franchisee signed statements that the prospective franchisee had been given advice about the proposed franchise agreement or business by an independent legal advisor, independent business advisor or independent accountant. If no such statement were received, the franchisor had to receive from the prospective franchisee a signed statement, indicating that it had been given that kind of advice about the proposed franchise agreement or business or had been told that he or she should seek that advice but had decided not to seek it (cl 11(2)). 6 In this case, both parties agree that a disclosure statement was provided to Mr Hoy in about September 2002, but neither party has a copy of it and neither party can identify the contents. Additionally, both parties agree that a written franchise agreement was signed, but, once again, neither has a copy of it. They have, however, agreed that an unsigned version dated 27 June 2003 contained the written terms on which they entered into their franchise agreement for Hoy Mobile to operate as an Allphones franchise from a store in a Westfield shopping centre at Eastgardens, a suburb of Sydney. Before the franchise agreement was signed, Allphones should have ensured that Hoy Mobile Pty Limited or Mr Hoy and his wife, Nicole, gave it one or more of the statements required by cl 11 of the Code. Hoy Mobile was the company which formed to conduct the franchise business. However, no statements under cl 11 were given to Allphones. And, more remarkably, the franchise agreement described Hoy Mobile's exclusive territory as 'N/A', an abbreviation for 'not applicable'. 7 In that context, it is unsurprising that there is a dispute between the parties about the territory. Allphones asserted that its failures to comply with the Code lead to the result that any franchise agreement entered into between the parties was void. And, both sides accuse the other of having committed serious financial irregularities in their relationship. On the one hand, Mr Hoy has admitted that he committed fraud in the operation of the franchise business by unlocking and selling previously locked mobile phones for more than what he accounted and paid to Allphones in respect of the sales. On the other hand, Allphones did not pay to Hoy Mobile all the commissions that it had agreed to share. Nor did Allphones disclose, at material times, that the total commissions it reported to its franchisees, including Hoy Mobile, as payable by telecommunications carriers for sales they effected, had been deliberately understated by Allphones. Allphones kept the difference and did not share it with the franchisees as it was obliged to do so. 8 After learning of Mr Hoy's fraud, Allphones wished to rely on it to terminate the franchise agreement. Hoy Mobile claimed that Allphones was not in a position to terminate, first because it was itself in breach of essential terms of the franchise agreement and secondly, it had affirmed the franchise agreement by requiring Hoy Mobile to perform obligations under it, having full knowledge of the fraud committed by Mr Hoy. 9 The litigation has been particularly hard fought. The trial took over 16 days to hear. There were substantive disputes between the parties as to significant conversations and other events in their now dysfunctional relationship. Even so, the issues and amounts over which the parties have been fighting appear to be out of all proportion to the legal costs which each has incurred. Hoy Mobile claimed approximately $300,000 in underpaid commissions and damages. It also sought orders protecting its entitlement to be a franchisee. Allphones claimed to be entitled to bring the relationship to an end.
3.1 Hoy Mobile's evidence regarding territory 67 Mr Hoy said that following his first meeting with Mr Donnellan he discussed matters with his wife. He also said he went through the disclosure document and then had a second meeting in about September 2002 with Mr Donnellan at Allphones' office. He said that at the second meeting Mr Donnellan began the conversation saying: 'We offer 5 km territories'. Mr Hoy said that he asked whether that was diameter or radius, and Mr Donnellan enquired what the difference was. Mr Hoy said that he explained that a 5 km diameter was really only a circle of 2˝ km around the store. He said that Mr Donnellan replied that the measure was definitely radius. He said that Mr Donnellan had a large map of Sydney on the wall with coloured thumb tags and different colours for different purposes, including a colour for current stores and another for shopping centres that were available. It was at that point that Mr Hoy said that he raised the Eastgardens shopping centre location, because he was aware that an Optus dealer, Century 21 (or 'C 21'), had one of its most profitable stores in that centre. 68 Mr Hoy said that next he had a meeting with Mr McLennan to go through a sample lease later in September 2002. He said that at some point during that meeting they moved from the Allphones' board room to a cubicle and Mr Donnellan walked past popping his head over the cubicle wall to say hello. Mr Hoy claimed that he said: 'Matthew, I've just finished reading the disclosure document, it seems here that you're offering 25 km territories. You're not going to sell many of those in Sydney with that sort of territory.' Mr Hoy said that Mr Donnellan looked at him strangely and said: 'It's not 25, it's 5.' Mr Hoy then asked for a copy of a sample contract that he would be signing. Following this meeting, he received the China Lake franchise agreement by email on 8 November 2002 from Mr Donnellan's secretary. Mr Hoy said that he noticed in that agreement that the area of restraint and the area of the territory was defined as 'Castle Hill', which was not the same as the 5 km radius he claimed that Mr Donnellan had told him. He said that, at the time, he regarded the description 'Castle Hill' as fairly ambiguous and that he wondered whether it was the municipality of Castle Hill or the suburb of Castle Hill, yet he did not discuss that with Mr Donnellan or anyone else at Allphones. 69 Despite his claimed observations concerning the China Lake agreement, Mr Hoy denied that he read it carefully at the time he received it. He also denied that he read the actual franchise agreement for Hoy Mobile carefully at the time he received it. He asserted that he did not then look at the territory provided in the Hoy Mobile franchise agreement. I do not believe this evidence of Mr Hoy. 70 The territory which Hoy Mobile was to be granted was obviously important to Mr Hoy. It would be natural for someone in his position to turn to the schedule to make sure, among other things, of the territory and the commissions percentages which his company was to receive before he committed himself. I am not satisfied that any of the pre-contractual conversations concerning territory occurred in the way Mr Hoy asserted. First, no contemporaneous document supported his account that Allphones ever granted a 5 km territory or measured territory by a radius of 5 or 25 kms. Secondly, if Mr Hoy's evidence were accurate, then he had received the two documents, (namely a disclosure document showing a 25 km territory and the China Lake agreement showing his supposedly ambiguous 'Castle Hill') and had been given the explanations by Mr Donnellan, which were each inconsistent on the issue of territory. It is implausible that, in that situation, Mr Hoy did nothing to ensure that the territory was clearly defined after he had been given the franchise agreement proposed for Hoy Mobile. If his account were accurate, it would have been troubling for him that there was an ambiguity in the China Lake agreement's description of territory and that it was also inconsistent with Mr Donnellan's statement regarding a 5 km radius. Moreover, Mr Hoy was careful in 2002 to protect his position by obtaining from Mr Donnellan the letter identifying the conditions upon which he would be offered the three franchises, and to have those conditions repeated and made part of the franchise agreement in June 2003. I do not believe that Mr Hoy ever understood that Allphones would grant a 5 km territory to him or to Hoy Mobile. I do not believe his evidence that he did not notice 'N/A' in the schedule to Hoy Mobile's franchise agreement when the draft was provided to him. 71 Mr Hoy had a significant self-interest in the outcome of these proceedings. The radius of 5 km from the Eastgardens store sufficed to provide Hoy Mobile with a territory large enough to include Randwick, where Allphones had opened a store in late 2005. Yet only in May 2006, some time after that event occurred, did Mr Hoy make any assertion that the territory was 5 km. I do not accept Mr Hoy's evidence on the discussions concerning territory.
3.2 Allphones' evidence regarding territory 72 In his examination-in-chief, Mr Donnellan asserted that in late 2002, Allphones had a policy amounting to a 'strict prohibition on granting exclusive territories other than the lease line of the shop in which they were going to become a franchisee'. He asserted that the 2002 version of Allphones' disclosure document said that an Allphones' territory for its franchisees was a 'non-exclusive territory'. He said that the 2002 disclosure document had not been able to be located and had not been saved. 73 At the time of his negotiations with Mr Hoy in 2002, Mr Donnellan knew that Allphones had only five franchises in New South Wales. Mr Donnellan had negotiated the sale of the franchise to China Lake in 2002. He also negotiated the grant of a franchise, commencing on 1 June 2002, of a shop in Wollongong Central Shopping Centre. The franchisee agreement for that shop had a description of territory in the schedule of 'Wollongong, NSW'. That franchise agreement had an area of restraint that conformed with the area of the territory it had granted, namely Wollongong, NSW. 74 Subsequently, in cross-examination, Mr Donnellan was shown an Allphones franchise agreement entered into on 17 April 2003 for a franchise business in Shellharbour Square commencing on 10 July 2003 (i.e. around the time at which the negotiations with Mr Hoy were finalised). There, the territory was '[a]s per marked section on the attached map', but no such map was in evidence. The area of restraint, curiously, was a 25 km radius from the GPO. Mr Donnellan said that he did not negotiate the grant of the Shellharbour franchise. 75 After he had been shown these other three agreements made in 2002 and 2003, Mr Donnellan admitted that there was no policy or strict prohibition on the grant of franchised territories beyond the leased shop premises when he had his conversations with Mr Hoy in 2002. Mr Donnellan claimed that before he gave his evidence he had not looked at franchise agreements from 2002 but he said he had looked at franchise agreements from 2003. I do not believe that evidence either. Mr Donnellan was conscious at this point in his cross-examination that he had previously made an assertion of a strict policy in 2002 which, by that stage, had been shown to be false. Next, he agreed that he had not mentioned to Mr Hoy that there was any strict prohibition on the grant of franchised territories larger than the leased shop premises in any of his 2002 conversations. He was then asked: 'You had no further discussion with him about territory prior to signing the franchise agreement in 2003, did you? --- We did have one general discussion, yes. On the subject of territory? --- Yes. Why have you never mentioned that until just now? --- I did in my affidavit. Where is that in your affidavit? --- I denied the conversation that Craig [Hoy] said in his.' 76 The conversation that he denied was the one in which Mr Hoy had asserted that Mr Donnellan agreed to a 5 km radius territory. Mr Donnellan was then pressed about what he now claimed had occurred. He gave this evidence: 'Now, what do you say Mr Hoy said to you on this occasion in 2003 when he raised the subject of territory? Was it him who raised it or you who raised it? --- He raised it with Mark McClennan. I was walking past; asked how things were going, and he said, "What about territories?" I said, "We don't give them, mate."' I do not believe Mr Donnellan's evidence that such a conversation occurred. Mr Hoy was not cross-examined about any such conversation when he first gave evidence. I infer that this was because the conversation was first raised by Mr Donnellan in his cross-examination. When he was recalled at the end of the trial, Mr Hoy denied the conversation asserted by Mr Donnellan. Mr McClennan was available. He had a position as a consultant with Allphones, but was not called to give evidence. I infer that nothing Mr McClennan could have said would have assisted Allphones' case: Jones v Dunkel (1959) 101 CLR 298. 77 Allphones contended, based on the assertions initially made, but later disavowed by Mr Donnellan, that at the time the franchise agreement with Hoy Mobile was entered into, the only territory which Allphones was prepared to grant was limited to the physical shop in which the franchise was conducted. I reject this argument. Such a result does not fit within the matrix of mutually known facts or the very terms of the franchise agreement itself. 78 First, Mr Donnellan never told Mr Hoy, prior to signing the franchise agreement, words to the effect that the territory was the area of the shop lease. There is no evidence that Mr Hoy was informed to that effect prior to Hoy Mobile's entry into the franchise agreement. 79 Secondly, the Castle Hill franchise, known as Castle Towers, had opened in July 2002. That was operated under the China Lake franchise agreement. In November 2002, Mr Donnellan authorised his secretary to send Mr Hoy that agreement as a sample or template for the agreement which Allphones was proposing to enter into with Mr Hoy or his nominee once a site was agreed on by them. 80 Thirdly, the franchise agreement with Hoy Mobile distinguished between the franchised premises for Hoy Mobile, the shop, and the territory. It would be commercially absurd for Allphones to contract, as in cl 2, that it would not operate a franchised business in 'the Territory' where that territory was a leased shop of which its franchisee had exclusive possession: Radaich v Smith (1959) 101 CLR 209. So much was recognised by Mr Donnellan when he said in evidence: 'You can't go and open, I mean fundamental tenancy law, you can't go and open within the lease line of a lessee's premises. We didn't hold the lease.'
3.3 Findings regarding territory 81 For the reasons I have given, I do not accept either Mr Hoy or Mr Donnellan's account of his conversation with the other concerning what the territory was to be. The remaining possibilities are that 'N/A' was literally the territory agreed between the parties, so that there was no territory at all; or that there was some other meaning of territory. Allphones argued that the agreement could work perfectly well without the specification of a territory. I reject that argument. A reasonable person in the position of the parties would have considered that the exclusive territory, to which cl 2 of the franchise agreement referred, was an essential term. In doing so, they would be mindful, both, that the China Lakes agreement had used a simple means of defining the territory by making it the suburb in which the franchised premises were, and that the Code required specification of, first, a territory, and secondly, whether the territory was exclusive, non-exclusive or limited to a particular site (Annexure 1 of the Code, cl 8.1). In that specification, the Code recognised that a 'particular site' was different to an exclusive territory. 82 A reasonable person in the position of the parties here would reject as inappropriate a construction of their franchise agreement that it had no territory at all. The task of construing 'N/A' as the description of the territory must be approached in the manner described by Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 [40]; applied in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 242 ALR 47 at 63 [53] per Gummow, Hayne, Heydon, Crennan and Kiefel JJ. That requires the Court to put to one side the subjective beliefs or understandings of the parties about the rights and liabilities that govern their contractual relations, and to concentrate on the principle of objectivity for the ascertainment and definition of those rights and liabilities. Their Honours said that what mattered was what each party, by words or conduct, would have led a reasonable person in the position of the other party to believe. They continued: 'References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreements. The meaning of the terms of the contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction (Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462 [22].)' 83 In Fitzgerald v Masters (1956) 95 CLR 420 at 437 McTiernan, Webb and Taylor JJ said: 'It is trite law that an instrument must be construed as a whole. Indeed it is the only method by which inconsistencies of expression may be reconciled and it is in this natural and common sense approach to problems of construction that justification is to be found for the rejection of repugnant words, the transposition of words and the supplying of omitted words(cf Norton on Deeds 2nd ed (1928), p 91)' (emphasis added) 84 Importantly, in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; 76 ALJR 436; [2002] HCA 5 at [10], Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said: ' [10] In Codelfa, Mason J (with whose judgment Stephen J and Wilson J agreed) referred to authorities (In particular, speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1383-5; [1971] 3 All ER 237 at 239-41; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; [1973] 2 All ER 39 at 53; and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-7; [1976] 3 All ER 570 at 574-6) which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: (Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-6; [1976] 3 All ER 570 at 574) "… presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." Such statements exemplify the point made by Brennan J in his judgment in Codelfa: ((1982) 149 CLR 337 at 401; 41 ALR 367 at 416) "The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used."' 85 In Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 [11], Gleeson CJ, Gummow and Hayne JJ said: '[11] Interpretation of a written contract involves, as Lord Hoffmann has put it (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114. See also the remarks of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW)(1982) 149 CLR 337 at 350-352, and of Lord Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 259): "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." That knowledge may include matters of law, as in this case where the obtaining of intellectual property protection was of central importance to the commercial development of Mr Allen's ironing board (cf Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at 282, per Lord Clyde).' 86 It is necessary to construe an agreement so as to avoid making it commercial nonsense or working commercial inconvenience: Zhu v Treasurer of NSW (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. In Australasian Performing Rights Association Ltd v Monster Communications Pty Ltd (2006) 71 IPR 212 at 235-237 [103]-[108] I referred to the principles applicable to the construction of contracts. I am of opinion that the genesis of the franchise agreement, the background context and market in which the parties were operating were all relevant, as known to both of them, for the purpose of construing what was intended to be referred to by the use of 'N/A' in describing the territory. There is no evidence that the terms of the franchise agreement as settled between the parties was the subject of drafting, before execution, by lawyers. 87 The process of construction is intended elucidate and give effect to what the parties by their words or actions objectively conveyed to one another was their agreement. Courts seek to avoid being the destroyers of bargains and should be reluctant to find agreements void for uncertainty. The process of construction will result in a meaning which the court decides is the proper construction of the contract. As Barwick CJ emphasised in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-437, in the search for the parties' intention, no narrow or pedantic approach is warranted, particularly in the case of commercial agreements. Unless parties have expressed themselves in such a way that their terms are so obscure or incapable of any definite or precise meaning so that the Court cannot attribute to them any particular contractual intention, the Court will find a meaning which an objective person in the position of the parties at the time they entered into the contract would have understood them to have intended: see also Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 at 599 [15] per Gaudron, McHugh, Gummow and Hayne JJ; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia (CEPU) v Australian Competition and Consumer Commission (2007) 162 FCR 466 at 510 [164]-[166], 511 [171], 512 [174] per Weinberg and Bennett JJ and myself. 88 The facts mutually known to both Mr Hoy and Mr Donnellan were that the China Lake franchise agreement provided for a territory of the suburb in which the franchised premises were located. Both men also knew that Eastgardens was the suburb in which the franchised premises were to be located for Hoy Mobile's first franchise. In addition, they contemplated that there would be two other franchised premises for Hoy Mobile pursuant to Attachment A to the franchise agreement (being the letter of 27 June 2003). 89 I am of opinion that a reasonable person placed in the matrix of facts in which the parties were in June 2003 would have understood the reference to territory as 'N/A' was intended to convey that the territory would not be limited to the suburb in which the first of the three businesses would be established, but would in time expand to encompass severally the respective suburbs for each of the three businesses contemplated in Attachment A. That person would have understood that the franchise agreement provided that Allphones could neither operate, nor permit the operation, of a competing Allphones business within any of those suburbs. 90 In the circumstances, I find that on its proper construction, the franchise agreement provided that the territory referred to in it was initially to be the suburb of Eastgardens. If and when Hoy Mobile opened new franchised premises, as envisaged in the letter of 27 June 2003, the territory would be increased to add each suburb in which a Hoy Mobile store was located. 91 Allphones argued that when he was consulted by Mr Hoy, Mr Duff would have been able to notice, first, if there had been a non-compliance with the Code and, secondly, whether the description 'N/A' was meaningless. Significantly, Mr Duff's records have no reference to his advising for the purposes of the Code or generally on the franchise agreement. Rather, Mr Duff advised Mr Hoy on specific issues concerning the franchise agreement, raised by Mr Hoy and recorded by Mr Duff in his file note. There is nothing inconsistent with the construction at which I have arrived in him having done so. Contrary to its obligations under the Code, Allphones did not require Hoy Mobile to provide it with any statements under cl 11(2) of the Code (see below). I find that Mr Duff was not consulted by Mr Hoy for the purposes of receiving legal advice of the nature referred to in cl 11(2) the Code. The principal reason Mr Duff saw Mr Hoy was to give a certificate under s 16 of the Retail Leases Act, which he did. 92 In addition, given that Allphones failed to comply in significant respects with cll 10 and 11 of the Code, I am not prepared to draw inferences in its favour as to what Mr Duff would have advised, assuming he had been asked to provide any advice to Hoy Mobile of the kind referred to in cl 11(2)(a) of the Code.
ALLPHONES' NON-COMPLIANCE WITH THE FRANCHISING CODE OF CONDUCT 93 Allphones argued that the franchise agreement was void because of its contravention of cl 11 of the Code. It relied on the decision of the New South Wales Court of Appeal on the earlier version of the Code, in force in early 2000, in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161. Mason P, with whom Basten JA and Handley AJA agreed, held that s 51AD of the Trade Practices Act (prohibiting contraventions of the Code),read with the predecessor of cl 11 of the Code, directly prohibited the contract there in question: Ketchell [2007] NSWCA 161 at [30]. Mason P said: '[30] … As regards the instant transaction, cl 11(1) provided, in terms, that (given the non-receipt of a written statement in accordance with that subclause) the respondent "must not" enter into the franchise agreement; and that it "must not" receive non-refundable payments under a franchise agreement. [31] There is no need to seek guidance from implications in the legislative framework. This is not a case of implying from the silence of the legislature a statutory policy about illegality of contracting. What is prohibited under cl 11 is not just conduct but the contract itself and the recovery of money under it. …' (emphasis added, footnote omitted) His Honour also said that the Act contained no provision empowering a court to relieve against non-compliance with the directly prohibitory terms of cl 11: Ketchell [2007] NSWCA 161 [32]. The Code was subsequently amended in October 2001. 94 The version of the Code in force in 2003 contained the following relevant provisions. Critically, cl 6A had been added to the earlier version that was in force for the purposes of the decision in Ketchell [2007] NSWCA 161. Clause 6A provided that the purpose of a disclosure document was to give a prospective or existing franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and to give the franchisee current information from the franchisor that was material to the running of the franchise business. And, cl 11(1) provided that the franchisor must not enter into, renew or extend a franchise agreement unless it had received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the Code. Next, cl 11(2) provided that before a franchise agreement was entered into, the franchisor had to receive from the prospective franchisee either:
· signed statements that the prospective franchisee had been given advice about the proposed franchise agreement or business by any of an independent legal adviser, business adviser or accountant (cl 11(2)(a); or · if one or more of those statements had not been received, a signed statement by the prospective franchisee that it had been given that kind of advice about the proposed franchise agreement or franchise business, or had been told that that kind of advice should be sought, but had decided not to seek it (cl 11(2)(b)). 95 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 151-152 [135], Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ said that intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is 'plainly wrong': see too Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ. And, where an intermediate appellate court holds itself free to depart from an earlier decision it should do so cautiously and only when compelled to the conclusion that the earlier decision is wrong: Nguyen v Nguyen (1990) 169 CLR 245 at 250 per Brennan J, at 269 per Dawson, Toohey and McHugh JJ and at 251 per Deane J agreeing. 96 In McNamara v Consumer Trader and Tenancy Tribunal (2005) 221 CLR 646 at 661 [40] McHugh, Gummow and Heydon JJ discussed the construction of a section which had been re-enacted in the same words in new legislation. They departed from the construction of the earlier legislation in a previous decision of the High Court and said: 'It would be an error to treat what was said in construing one statute as necessarily controlling the construction of another; the judicial task in statutory construction differs from that in distilling the common law from past decisions (see Ogden Industries Pty Limited v Lucas [1970] AC 113 at 127; Brennan v Comcare (1994) 50 FCR 555 at 572.)' And, in Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 242 ALR 383 at 391 [31] Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ applied McHugh J's comments in Marshall v Director-General, Department of Transport (2001) 205 CLR 603, where he said (at 632-3 [62]): 'But that does not mean that the courts of Queensland, when construing the legislation of that State, should slavishly follow judicial decisions of the courts of another jurisdiction in respect of similar or even identical legislation. The duty of courts, when construing legislation, is to give effect to the purpose of the legislation. The primary guide to understanding that purpose is the natural and ordinary meaning of the words of the legislation. Judicial decisions on similar or identical legislation in other jurisdictions are guides to, but cannot control, the meaning of legislation in the court's jurisdiction. Judicial decisions are not substitutes for the text of legislation although, by reason of the doctrine of precedent and the hierarchical nature of our court system, particular courts may be bound to apply the decision of a particular court as to the meaning of legislation.' (emphasis added) 97 Allphones argued that I should follow the Court of Appeal's decision in Ketchell [2007] NSWCA 161 on the construction of Commonwealth legislation in accordance with the principles in Farah 230 CLR at 151-152 [135]. However, I am of opinion that the Court of Appeal's decision should not be followed for three reasons: 1. First, that decision was on a different legislation, namely an earlier version of the Code that was not in force at the time when Hoy Mobile and Allphones entered into the franchise agreement. 2. The subsequent decision of the High Court in Australian Competition and Consumer Commission v Baxter Health Care (2007) 237 ALR 512 demonstrates that the approach to construction adopted by the Court of Appeal was wrong (see below). (I note that special leave to appeal from the decision in Ketchell [2007] NSWCA 161 was granted by Gummow and Crennan JJ: Master Education Services Pty Ltd v Ketchell [2008] HCA Trans 89.) 3. I am convinced that the decision of the Court of Appeal is plainly wrong. 98 A principal purpose of the Code is to protect franchisees. Mere non-compliance by a franchisor with any requirement of the Code, including cl 11, could not have been intended to have the draconian consequence of invalidating of any agreement with a franchisor entered into by a franchisee. The intention of the Code was to protect the position of franchisees, not to denude them of the capacity to enforce rights against their franchisor, either under the agreements they entered into, or under the Code itself. Nor could it have been the intention of the Code to strike down every agreement, even where a mere oversight had occurred, for example, if a franchisee truthfully told a franchisor that he or she had signed all of the required statements under cl 11(2), but the parties forgot to ensure that the franchisor received them. 99 The framers of the Code would have been conscious that franchisees entering into franchise agreements would take on other obligations to third parties, such as to lessors for the premises from which the franchise businesses would be conducted, and to financiers from whom finance was to be obtained to run the business. If the franchisees were suddenly to be told that there was no franchise agreement at all that they could enforce, and that they would have to resort to court proceedings to establish their franchise agreement or to have s 87 of the Trade Practices Act invoked to impose a new agreement upon the parties, there would be commercial havoc where franchisors had perhaps innocently and inadvertently failed to do everything that was required by the Code. 100 I am of opinion that, in such circumstances, it is plainly wrong and inconsistent with cl 6A and the Code as a whole to find that it was the intention of the Parliament to make a franchise agreement itself illegal, as opposed to stigmatising the conduct of the franchisor for its failure to comply with the Code. The consequence of Ketchell [2007] NSWCA 161 is that any, even the most insignificant, technical breach of cll 10 or 11 of the Code renders a franchise agreement void, even if the franchisee wishes to enforce it. 101 The intention of the Code to protect a franchisee would be defeated in many cases to which it applies if a franchise agreement entered into after a failure to comply with any provision of cll 10 or 11 was held void. When he said that there was no need to seek guidance from implications in the legislative framework, in my respectful opinion Mason P did not undertake the task of statutory construction emphasised in the decisions of the High Court to which I have referred. The whole of the Code and the provisions of the Trade Practices Act bearing on its application required careful attention to discern whether it, indeed, was the intention of the Code to strike down as void every franchise agreement which had been entered into in circumstances where there was a failure to comply, whether technically or deliberately, with any of the provisions of cll 10 or 11. 102 In Baxter Health Care 237 ALR at 527-528 [44]-[48], Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ noted that there was nothing unusual about legislation providing for a circumstance in which making or giving effect to a contract involves an offence by one party to the contract, but not by the other. In that case their Honours were also construing the operation of the Trade Practices Act. They said that the consequences of such illegality for the rights of the respective parties would not necessarily be the same and, they continued (Baxter Health Care 237 ALR at 527 [44]): 'Furthermore, there is nothing unusual about the Act applying to one party to a transaction, or proposed transaction, but not to the other. Leaving aside the extended operation given by s 6, ss 46 and 47 according to their terms apply to conduct by corporations, not sole traders or partnerships. In a transaction between a corporation and an individual, the provisions may apply to the corporation but not to the individual. Differential application of legislation to parties to a contract is commonplace, although working out the legal consequences may be complex.' 103 Here the very prohibition in cl 11 of the Code is directed to the conduct of the franchisor. Clause 11 does not in its terms seek to affect adversely the position of the franchisee; rather its aim is to protect the franchisee. The Code did not prohibit a franchisee from entering into or enforcing a franchise agreement with a franchisor where cl 11 had not been observed. It would be an unusual result if beneficial legislation, intended to protect persons in the position of a franchisee, were to destroy the legal validity of a franchisee's bargain and then throw upon it the burden of having to apply to a court and take on the risk of litigation, in seeking to establish a franchise agreement against a defaulting franchisor, errant in its compliance with cl 11 of the Code. A franchisor would be entitled, as Allphones suggests here, to say that it was not bound by a franchise agreement because of its own default. 104 If the result in Ketchell [2007] NSWCA 161 is correct, the franchisee may be put in breach of its lease because it never had a franchise agreement. It may be put in breach of arrangements with its bankers or financiers for the same reason. The consequences which could fall upon a franchisee were not addressed by Mason P, because he said that there was 'no need to seek guidance from implications in the legislative framework'. Yet one express purpose of the legislation was to protect one of the parties to such a contract by giving that party rights arising from a corporation's failure to comply with an industry code as an instance of unconscionable conduct (see s 51AC(3)(g) and 4(g)). If that could be established, the franchisee may be entitled to obtain relief from a franchise agreement or certain related conduct under the Trade Practices Act. 105 That consequence tends to suggest that non-compliance with the Code was not intended to avoid the contract, but rather to give rise to rights under the Act to have the contract varied or made void so as to remedy the consequence of a non-compliance with the Code. Indeed, the language of cl 5(1) provides that the Code applies to a franchise agreement entered into on or after 1 October 1998. That suggests validity rather than invalidity of the franchise agreement even where some provision of the Code has not been complied with. Moreover, the purpose of the Code in cl 2(1) is said to be the regulation of 'the conduct of participants in franchising towards other participants in franchising'. The clause is silent as to any intention to destroy franchisees' rights in certain circumstances. A franchisee who does not obtain statements required by cl 11 and provide them to the franchisor may nevertheless be entitled to protection or relief. Protection of the interests and rights of a franchisee in such a case is not likely to ensue from the destruction of the very agreement that the franchisee has apparently sought to enter. As Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ said in Baxter Health Care 237 ALR at 527 [46] (citing Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1988] QB 216; [1987] 2 All ER 152 at 175-176 per Kerr LJ), when a statute contains a unilateral prohibition on entry into a contract, it does not follow that the contract is void. They said: 'Whether or not the statute has this effect depends upon the mischief which the statute is designed to prevent; its language, scope and purpose; the consequences for the innocent party; and any other relevant consideration. Ultimately, the question is one of statutory construction. As was pointed out in SST Consulting Services ([Pty Ltd v Rieson (2006)] 225 CLR 516 at 527 [30]), the Act is far from being silent on the question of the consequences of illegality, but, rather, contains elaborate provisions. That is not to say that the express provisions of the Act answer all questions that may arise, but they answer many of them, and set the context in which others are to be resolved.' (emphasis added) 106 I am of opinion that the Code does not evince a legislative policy of striking down every franchise agreement entered into by a franchisor who fails to comply with any provision in cl 11. To the contrary, I am of opinion that the intention of the Code is to place an obligation on a franchisor by setting a norm of conduct with which it is to comply. Failure to comply with that norm of conduct gives the franchisee rights to rely upon that failure in order to seek the setting aside of the agreement, if that relief is appropriate, and also to seek relief because of the unconscionable conduct such non-compliance by the franchisor may evidence: see ss 51AC(3)(g) and (4)(g) of the Trade Practices Act. But I am satisfied that it cannot have been the purpose of the Code to make void a franchise agreement for any failure, especially one by the franchisor, to comply with cl 11, however trivial, without any consideration of the franchisee's position. 107 The starting point for the enquiry as to the effect of the Code, as identified by the passage I have emphasised in Baxter Health Care 237 ALR at 527 [46], was not addressed by Mason P because he said there was no need to seek guidance from implications in the legislative framework. That enquiry includes the mischief which the statute is designed to prevent and the consequences for the innocent party. Here cl 6A of the Codes elucidates the purposes of the disclosure document. And cl 11(2) shows that a purpose of the requirement for the written statements is to provide the franchisee, at the very least, with the opportunity to be informed by appropriate independent advice, if he or she wishes to obtain it. Importantly, cl 11(2)(b)(ii) makes it plain that the franchisee can choose not to seek such advice. In such a case, the mere oversight to obtain a signed statement that the franchisee had been told that he or she could seek advice but had chosen not to, when he or she had told the franchisor of that decision, could not have been intended to avoid a franchise agreement. No protective purpose would be achieved by such pedantry and much commercial inconvenience could result. 108 In my respectful opinion, although his Honour did not have the benefit of the reasoning in Baxter Health Care 237 ALR 512, which was delivered subsequently to the reasons in Ketchell [2007] NSWCA 161, the reasoning of Mason P is plainly wrong. In addition, Ketchell [2007] NSWCA 161 was decided on different legislation: see McNamara 221 CLR at 661 [40]; Walker Corporation 242 ALR at 391 [31]. I am of opinion that the non-compliance by Allphones with its obligations under cl 11 of the Code did not make the franchise agreement void. That non-compliance is a factor which, had Hoy Mobile wished to do so, could have been raised by it to seek relief under s 87 of the Act. It would defeat the evident purpose of the Code if Allphones were entitled to rely on its own breach of its obligation imposed under cl 11 to deny a franchisee with whom it had entered into a contract, the entitlement to enforce that contract against it or to seek a variation of it or relief from it under the Act. For these reasons I reject Allphones' argument that the franchise agreement is void. 109 Allphones had raised this argument shortly after it learnt of the decision of the Court of Appeal and that caused the second fixture of the hearing in September 2007 to be vacated. Given that it has failed on this argument the parties will need to deal with the consequences in terms of costs.
HOY MOBILE'S CLAIM UNDER cl 11(1)(c) OF THE CODE 110 Hoy Mobile argued that a consequence of Allphones' non-compliance with cl 11 was that Allphones could not receive a non-refundable payment under the franchise agreement by force of cl 11(1)(c). Hoy Mobile argued that when a carrier paid MTSC or MTAC to Allphones, that payment was a non-refundable payment within the meaning of cl 11(1)(c) and that, as a consequence, Hoy Mobile was entitled to receive the whole of the commissions paid by the carriers to Allphones in respect of activations within its territory without Hoy Mobile having to account for distribution of those payments in accordance with cll 7.3 and 7.4 of the franchise agreement. It argued that each commission payment was a payment 'under a franchise agreement'. Hoy Mobile pointed to sub-cll 9.1(j) and (k) of Annexure 1 to the Code. They provided that a disclosure statement had to indicate the details of the franchisor's requirements for the supply of goods or services to a franchisee and whether the franchisor or an associate would receive a rebate or other financial benefit from the supply of goods or services to franchisees (cl 9.1(j)), and whether that was to be shared directly or indirectly with franchisees (cl 9.1(k)). 111 As will appear, I am of opinion that Allphones committed substantial breaches of its obligations in this regard for a considerable period of time prior to the events which gave rise to the present litigation. However, I am of opinion that Hoy Mobile's argument that the gross commissions paid by carriers to Allphones as MTSC or MTAC falls within the meaning of a 'non-refundable payment' under cl 11.1(c) is wrong. The purpose of cl 11.1 of the Code, having regard to cll 2 and 6A, in dealing with non-refundable payments is to protect a franchisee from the consequence of making a payment said to be non-refundable to its franchisor. Read together, cll 10(a) and (d)(ii) require a franchisor to give a copy of the Code and disclosure document to a prospective franchisee at least 14 days before the prospective franchisee makes a non-refundable payment to the franchisor. Although cl 10(d)(ii) uses the expression 'makes a non-refundable payment' with respect to a prospective franchisee, and cl 11(1)(c) does not identify the source of the receipt by the franchisor, I am satisfied that the 'non-refundable payment' in cl 10(d)(ii) refers to payment by or on behalf of the franchisee either under the franchise agreement (e.g. franchise fee) or in connection with the entry into it. It is difficult to discern any legislative purpose in the Code prohibiting the franchisor from receiving non-refundable payments made by third parties and not made under the franchise agreement. 112 The carriers themselves had no obligation under the franchise agreement to make a payment to Allphones in respect of activations conducted or caused by transactions effected by Hoy Mobile. Their obligations were under agreements entered into between them and Allphones, to which Hoy Mobile was not a party. The commissions payments by the carriers to Allphones were made under those agreements, not under the franchise agreement. Hoy Mobile had no contractual relationship with the carriers. The money paid by the carriers to Allphones was paid under a separate and distinct contractual relationship to that existing between Hoy Mobile and Allphones and embodied in the franchise agreement. I am of opinion that Hoy Mobile's argument under cl 11(1)(c) must be rejected.
HOY MOBILE'S CLAIM FOR THE RECOVERY OF 'CO-OP' FUNDS 113 Hoy Mobile incurred over $120,000 in expenses setting up and fitting out the Eastgardens store in August and September 2003. It also paid a $25,000 franchise fee to Allphones at this time. It claimed that $18,000 was due to it from Allphones in respect of co-op payments for its fit out costs, on the basis of Mr Donnellan's email of 24 October 2002, stating that Allphones' first two franchisees in New South Wales had been paid this sum. 114 The July 2003 Optus dealer agreement with Allphones also provided that Optus would establish a co-operative advertising, or 'co-op' fund for Allphones and contribute to it in accordance with predetermined conditions. The fund would be available to provide a contribution by Optus to Allphones for store fit outs or other promotional activities. However, prior to Allphones committing to spend any part of that fund, it had to seek Optus' approval, which could not be unreasonably withheld. 115 Mr Donnellan said that Optus and the other carriers updated their co-op guidelines regularly. He said that the guidelines had changed after his email of 24 October 2002 by the time of negotiations for the dealer agreement with Optus, and as a result Optus no longer contributed to store fit out costs through use of co-op funds. He said that by the first half of 2003 the other carriers had also made similar changes to their rules. Mr Donnellan said that he had been annoyed by these rule changes by the carriers. 116 After having received a letter from Mrs Hoy in July 2004 raising a number of issues, Mr Donnellan and Mr Davidson met with Mr Hoy at the Eastgardens centre in late November 2004. Among other things, the letter noted that they had not been paid any co-op payment for store fit out costs. Mr Donnellan explained that Allphones had not received any co-op payments for Hoy Mobile's fit out from the carriers because of their new policies. Mr Hoy said that it would have been better to have been told, prior to entering into the franchise agreement, that arrangements with the carriers had changed and that co-op money was no longer provided for fit out. Mr Hoy claimed that Mr Donnellan told him that Allphones was still receiving co-op money, but was not passing it on to individual franchisees, and rather 'they were keeping it in the pool for the benefit of all franchisees'. I do not accept that evidence. Rather, I accept Mr Donnellan's evidence that the carriers had changed their policies and were not then making co-op payments to defray fit out costs. It may be that Mr Hoy misunderstood what Mr Donnellan was saying to him in the sense that co-op funds were still paid to Allphones and pooled for the benefit of franchisees, but they were not paid to assist with fit out costs. 117 While the dealer agreement between Optus and Allphones envisaged that it was possible that co-op funds would be made available to defray the fit out costs of stores, in the absence of any evidence to the contrary, I accept Mr Donnellan's evidence that the carriers had formulated a different way of spending the co-op funds by the time Hoy Mobile entered into the franchise agreement. No reason was suggested why Mr Donnellan or Allphones would not have pursued the carriers for co-op funds to defray the fit out costs of Hoy Mobile's Eastgardens store, had the carriers indicated that such funding would be available for that purpose in mid-2003 or shortly thereafter. 118 There is no evidence that Allphones received any co-op funds referable to the fit out of Hoy Mobile's store. Mr Hoy appreciated that Mr Donnellan had said that Allphones would pass on what it received for co-op funding for this purpose and that if nothing were received by Allphones from carriers, then Hoy Mobile would not receive any co-op payment either. In these circumstances, I am not satisfied that Hoy Mobile has established any basis on which it can be awarded $18,000 as it claims. I reject this claim.
HOY MOBILE'S CLAIM FOR THE REDUCTION IN STOCK LEVELS 119 In July 2004 Mrs Hoy wrote a letter to Mr Donnellan which raised a number of issues that had arisen while they settled into their relationship with Allphones. Mrs Hoy's letter included a complaint about stock level restrictions imposed by Allphones in January 2004 which she said caused stock shortages on numerous occasions, particularly of popular models. 120 Mr Hoy gave evidence that when the business began, he had 45 days' worth of stock levels. That meant that, generally, the store had sufficient numbers of any particular phone to last for 45 days of trading. He claimed that once the restrictions were imposed by Allphones in January 2004, Hoy Mobile was given a stock budget based on the number of connections activated through its trading and allocated 60% or 70% of that stock budget, depending on Allphones' rules for the product type. He said this resulted in the shop running out of particular items of stock even when replacement stock had been ordered, as stocks were running low. Orders were not always processed quickly by Allphones. He said that if there was 'a run' on a particular item of stock, such as a popular model phone, his store would experience an increase in demand, and similarly, if one of the competing stores in the Eastgardens centre ran out of a certain model, customers would come to his Allphones shop to seek it. But because Allphones had limited the amount of stock that Hoy Mobile could hold, he was not always able to satisfy any such increases in demand. However, apart from one incident on 30 June 2006 (which I will discuss later in these reasons), there was no evidence of damage or economic loss suffered by Hoy Mobile as a result of any conduct of Allphones in relation to stock levels.
ALLPHONES ISSUES A NEW OPERATIONS MANUAL 121 In April 2004 Allphones issued to its franchisees an updated version of its operations manual. This included warnings that stores would occasionally be 'mystery shopped' by an employed shopper who would rate his or her encounter. It required the stores to use a daily check list at the beginning and end of each business day to ensure conformity with Allphones' standards. The manual noted a requirement that network merchandise was to be restricted to the top shelf of display units. Hence, in carrying out the fraud which I describe below, Mr Hoy was able to display unlocked phones for sale on a lower shelf of the Vodafone cabinet.
ALLPHONES' DEMAND THAT HOY MOBILE SIGN A NEW CONTRACT 122 In April 2004 Allphones issued a new template for its standard form franchise agreement. That provided, in item 14 of the schedule, that the territory was: 'Defined as the description as under the shop lease' (sic). A covenant against competition operated '… in the Territory; defined as the shopping centre [sic] occupied under the lease description' (cl 7.22). Mr Donnellan said that since the introduction of this template, the territories that had been granted had been limited to the shop lease of the franchisee. 123 Around July 2005 Allphones sent Hoy Mobile a new franchise agreement in the form of the new template. It was expressed to commence on 27 June 2003. The document had been executed by Mr Donnellan and Dominic Pompeii on behalf of Allphones. It was never signed by the Hoys or Hoy Mobile. 124 On 14 November 2005 Katie Smith (whose married name was Jales), Allphones' national administration manager and Mr Donnellan's then secretary, sent Mr Harkin an email in which she noted that she had been chasing seven franchisees, including Eastgardens, for signed copies of the new franchise agreements. This prompted Mr Harkin to ask Mr Hoy to let him know what the position was immediately. Mr Hoy responded on 14 November 2005 saying that he already had a signed franchise agreement and did not require a second one. He said that if what had been sent was meant to replace the existing agreement, then he required a written explanation detailing why Allphones needed the update, identifying each variation to the original and explaining why it wished that variation to be made. He said that he had received two agreements in the mail but there had been no explanation as to what he was expected to do with them. He said he had thought that because he already had an agreement, they 'were sent to me by mistake'. He said that the first direct contact he had had about the matter was Mr Clarke's email of 11 November 2005 which had asked him to contact him about the agreements. 125 Mr Harkin waited another ten days before replying to Mr Hoy's email, saying simply: 'The explanation was in bulletins. It's obvious why we require them. Let me know if you want to be a franchisee. Your non attendance at the quarterly franchise forum without a response to each of emails [sic] suggests something.' (emphasis added)
HOY MOBILE RAISES UNDERPAYMENT BY ALLPHONES OF OPTUS COMMISSIONS 126 On 24 November 2005, Mr Hoy corresponded with Allphones complaining of what he initially thought were underpayments of certain Optus commissions from July to October 2005. Allphones responded by saying that the tiered bonus agreement, to which Mr Hoy had referred, had expired in July 2005. Mr Hoy claimed in his response that it had expired in November 2005, not July, and reiterated his request for Allphones to confirm the underpayment. Mr Donnellan sent Mr Hoy an email that same day saying that 'it might be nice' if Mr Hoy turned up to meetings 'before making wrong statements'. On 1 December, Mr Hoy responded saying that he understood his claim had been rejected. He reminded Mr Donnellan that the franchisees were entitled to 'all moneys' received by Allphones from the carriers in the form of commissions. 127 Mr Donnellan responded saying that Mr Hoy's approach was 'all about blame and assumed knowledge', and that at the last two franchisee's forums Mr Donnellan had explained the workings of the Optus bonus. He said that a new 'flat $30 bonus' had been arranged with Optus when it had became clear that capped plans had changed the way that commissions had been payable. Mr Donnellan also referred to an admission by Optus that it had missed 6% of connections by Allphones in its commission payments, and that he, Mr Donnellan, had negotiated a settlement which was paid to franchisees, including Hoy Mobile. He said that the reason for the new change was to assist Allphones in identifying what had been paid or not paid and thus it could follow up shortfalls with Optus. Mr Donnellan denied 'the myth that somehow we were keeping this money', and pointed out that Optus had dropped its base commissions by $20 in 2005 and that airtime commissions had plummeted. He noted that if the Eastgardens store had had an average of three broadband connections per month for the previous five months it would have had an extra $16,800 in commissions. He asked what Hoy Mobile was doing to address that. He said that he had asked all State managers to send a monthly breakdown of commissions by store to the franchisees so that they could assess it to determine whether or not they had been underpaid. He said that he had 'no idea' whether Mr Hoy had been underpaid, but that he wanted Mr Hoy to 'make an appointment, sit down, go through things and work it out'. 128 Mr Hoy responded on 12 December saying that he accepted Mr Donnellan's explanation about the 'flat $30 bonus' and had re-submitted the claim to reflect this. He said that he had no issue with Mr Donnellan's other points, but that he did take issue with the diversion of the bonus structure from the originating dealer code to the head office code without being repaid to the franchisees. Mr Donnellan responded saying that Allphones' books were 'always open' and Mr Hoy only needed to ask for information or alternatively to come in. Mr Hoy sent another email to Mr Donnellan later on 12 December saying: 'Seeing you have decided to give me another little twirl in this dance of yours, could you also mail a copy of my signed disclosure document?' 129 This exchange of emails coincided with a number of Allphones franchisees complaining about short payment of the $30 standard bonus.
THE HOYS SEEK LEGAL ADVICE 130 In February 2006 Mr and Mrs Hoy went to see a solicitor, Leigh Adams, concerning difficulties they were having in their relationship with Allphones. Mr Adams noted that he was also acting for another unrelated franchisee of Allphones. He said that the Australian Competition and Consumer Commission (ACCC) was responsible for enforcing the Code. The Hoys had consulted him about the difficulties they faced in taking any action in relation to the opening of the new Randwick Allphones store, which they understood may have been affecting sales within their territory, without evidence of how far their territory extended. Mr Adams understood that the Hoys thought that this might be revealed in the disclosure document. Mr Adams gave his opinion that the notation 'N/A' in Hoy Mobile's franchise agreement indicated that the concept of territory did not apply to their agreement and, if that were the case, the opening of the Randwick store would not cause Allphones to be in breach. He observed that the new, proposed, form of franchise agreement which Allphones had sent to Hoy Mobile had defined the territory as simply being the description under the shop lease, a description which was, he said, 'entirely unsatisfactory'. 131 The Hoys then decided to consult Mr Birch, who has since acted as Hoy Mobile's solicitor. He wrote to Allphones on 8 March 2006 seeking a copy of the disclosure document provided to Hoy Mobile in 2003, prior to its entry into the franchise agreement. He referred to cl 19 of the Code which required Allphones to send a copy of the document within 14 days. 132 On 23 March 2006, Mr Birch wrote to Mr Donnellan noting that he had not been provided with a copy of the disclosure document as requested, and enclosing a notice of dispute under cl 29 of the Code identifying the failure to provide the disclosure document. Mr Birch advised Mr and Mrs Hoy, on that day, that it would be premature to commence proceedings against Allphones or make further demands until he could determine the exact terms of the franchise agreement and the disclosure document. 133 In April 2006, Allphones and Optus entered into a deed of release and set off under which they agreed to conduct a reconciliation process to determine the outstanding amount of the $2m loan made by Optus to Allphones in December 2003. Once that amount had been calculated, Allphones had to pay it within five business days. If payment were not made, then Optus was entitled to set off and apply any commission owed by it to Allphones under the original loan and special commission agreement and under Optus' authorised dealer agreement with Allphones. That is, monies owed by Optus to Allphones outside the original arrangements were to be made available to pay Allphones' debt due to Optus. This had the potential to affect all franchisees commission payments due by Optus to Allphones. 134 Also in April 2006, Allphones requested Hoy Mobile to sign an RCTI agreement giving Allphones authority to issue recipient created tax invoices (RCTIs). Significantly, it recorded that Allphones and Hoy Mobile had entered into a franchise agreement, pursuant to which Hoy Mobile provided taxable supplies, including the 'Franchisee services the subject of the [franchise] Agreement', to Allphones. Initially, Hoy Mobile returned a signed version of the RCTI agreement which deleted the provisions authorising Allphones to issue recipient created adjustment notes on behalf of the franchisee in relation to adjustment events for taxable supplies. (As appears below, Hoy Mobile later executed a version which had no deletions.)
MEDIATION ABOUT THE 2002 DISCLOSURE DOCUMENT 135 On 20 April 2006, Mr Birch referred notice of a dispute to the office of the mediation adviser in respect of Allphones' alleged breach of the Code arising out of its failure to provide the disclosure document. Shortly after that, Mr Harkin belatedly responded to Mr Birch's letter of 8 March 2006 by sending a copy of Allphones' January 2004 disclosure document. Mr Birch wrote to Mr Donnellan noting that the document supplied was the then current disclosure document which could be accessed by any franchisee from Allphones' intranet. He again reiterated that Hoy Mobile was seeking a copy of the disclosure document provided to Mr Hoy in about September 2002. 136 Mr Donnellan immediately replied saying that he had forwarded the letter and all correspondence to Mr Harkin, who was the national franchise manager, and that Mr Harkin would handle the matter. Mr Donnellan observed that the document which Mr Birch had received was the then current disclosure document, which had changed since 2002, but that Allphones was 'more than happy to warrant that this is no less favourable than what it was'. Mr Donnellan said Hoy Mobile's attitude was '… questionable. If they don't want tenure, noted and agreed'. He also noted that Hoy Mobile's failure to supply the RCTI agreement in the form prepared by Allphones would mean that adjustments could only be made after Hoy Mobile had done its own GST accounting, by preparing quarterly activity statements, which would delay payments to it by over 90 days. Mr Donnellan pointed out that the Hoys 'never turn up to franchise forums, where all major initiatives and changes to the system are discussed'. He said that he wrote to franchisees every quarter on everything that Allphones did. He said that it was extraordinary in every issue which the Hoys raised they sought to blame someone else and that the only time he had ever been asked for assistance by Mr Hoy was for a valuation of the business. Mr Donnellan offered to discuss the matter with Mr Birch, whom he had known for many years. 137 On 27 April 2006, the office of the mediation adviser confirmed with Mr Birch that it had appointed a mediator. On 4 May 2006, Mr Harkin wrote to the mediator saying Allphones felt there was 'no dispute', and that it had provided a copy of the oldest available disclosure document, although they failed to see how it had any relevance at that stage to the Hoys' tenure. He also said that Allphones held no 'official' franchise agreement with Hoy Mobile, since it had refused to sign its copy or a subsequently provided agreement which Allphones had warranted to be exactly the same as the original. Mr Harkin said Allphones was happy for Hoy Mobile to exist within its business 'without a guarantee of tenure until [Mr Hoy] signs the required franchise agreement, as long as compliance with our system is maintained'. He noted that Mr or Mrs Hoy was required to attend a franchise review meeting by mid-May, which up until then they had refused to do. 138 Following Mr Harkin's email, the mediator said that he would close his file because Mr Harkin had given a response that seemed to answer the notice of dispute.
THE MAY 2006 QUARTERLY REVIEW MEETING 139 On 9 May 2006 Mr Hoy attended at Allphones' head office early in the morning. He met with Mr Harkin and Mr Ilievski. After Mr Harkin had made an initial review of the figures that Mr Hoy had sent prior to the meeting he became overbearing and abusive towards Mr Hoy. Mr Harkin swore at him repeatedly. He demanded to know what Mr Hoy's intentions with Allphones were. Mr Hoy responded that the meeting was not for that purpose but that if Mr Harkin wished to pursue the topic he should put it in writing to the Hoy's solicitor. Mr Harkin then became more aggressive. His use of foul language increased. Mr Harkin said that he intended to make an example of Mr Hoy to show other franchisees what would happen to them if they opposed Allphones, as the Hoys had. Mr Harkin said that it was his right to come into Hoy Mobile's store and take the signage and stock away. He told Mr Hoy that Allphones had no signed franchise agreement for the Eastgardens store and that Hoy Mobile had no tenure. Mr Hoy said that he had a copy of the contract if they would like it. Mr Harkin said that he had no idea why the Hoys were suing Allphones. Mr Hoy retorted that he wanted to waste Mr Harkin's and Mr Donnellan's time. (I find that Mr Hoy said this as a reaction to the appalling way he was being treated by Mr Harkin.) 140 Mr Hoy told Mr Harkin that a claim had been submitted because Allphones was underpaying Hoy Mobile by $30 on every Optus connection. He said that at the end of the last quarterly review, he had informed Mr Harkin of his claim, and Mr Harkin had said that he would answer the claim for commissions by the following Friday. Mr Hoy said that because no answer had come, they had put the matter in the hands of their solicitors. Mr Harkin told Mr Hoy that he had no proof and that Hoy Mobile's claim for the $30 was 'bullshit'. Mr Harkin said to Mr Hoy that he was taking the word of one individual who was lying to him. Mr Hoy responded that he had all the proof he needed. Mr Harkin then said that he had supposed Mr Hoy had nothing to add to the quarterly review, such as what could be done to improve the business. Mr Hoy responded that Mr Harkin had said enough and that he could not see the point of continuing the meeting.
MR BIRCH'S LETTER OF 22 MAY 2006 141 On 22 May 2006, Mr Birch wrote to Mr Donnellan. The letter stated that there was a signed contract between Allphones and Hoy Mobile dated 27 June 2003. Mr Birch pointed out that there had been no agreement to any modification, alteration or amendment of that contract, and that Hoy Mobile was not prepared to sign the amended version which had been sent by Allphones. He said that Mr Harkin's assertion at the quarterly review meeting that there was no contract was incorrect. Mr Birch then asserted that the franchise agreement needed rectification because of the entry 'N/A' after the word 'territory'. He pointed out Allphones' contraventions of cl 11 of the Code, prior to entering into the franchise agreement. He said that the territory represented and warranted by Allphones was an exclusive territory with a radius of 5km from the location of the business premises. The letter asserted that the opening of the Randwick store within the radius of 5 km from the Eastgardens store was a breach of Hoy Mobile's exclusive territory. He complained about the 'bullying' style adopted by Mr Harkin and Mr Donnellan in dealing with Hoy Mobile, and referred to the decision of Sundberg J in Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at 268 [43]. 142 On the next day Mr Donnellan wrote an email back to Mr Birch with a copy to Mrs Hoy saying that he had just read Mr Birch's letter and that it was '[p]riceless stuff'. He said that if Hoy Mobile was in breach of the agreement and did not remedy, it would be terminated like any other franchisee and that he did not care who was told. He said that Mr Harkin would respond and that Allphones was 'ready'. No other response was ever made by Allphones to Mr Birch's letter. Nor did Mr Donnelan identify any breach of the franchise agreement that he then alleged against Hoy Mobile.
FRAUD OF MR HOY 143 Until this time, (late May 2006) Allphones had no knowledge that Mr Hoy had been committing a fraud over the previous two years. I will now deal with how the fraud arose and Mr Hoy's assertions that Allphones had condoned it before returning to the narrative of events.
15.1 Conversations with Mr Clarke 144 In about March 2004, Mr Hoy commenced the practice of unlocking previously locked mobile phones and selling them. He claimed he did this after a conversation he had with Allphones' area manager at the time, Brenton Clarke, while Mr Clarke was doing his regular check of the store at Eastgardens. Mr Clarke is still employed by Allphones and holds shares in it. That check involved going through a list of items to see whether or not the get-up and standard of the store was compliant with what Allphones required to ensure standardisation of the appearance and conduct of its various franchise stores. Three witnesses gave evidence about this conversation, Mr Hoy, Mr Clarke and one of Hoy Mobile's then employees, Ms Vanessa Jauregui. 145 According to Mr Hoy he said to Mr Clarke that he was having trouble with one Virgin and two Telstra mobile phones. He said he had reduced them to cost price but no-one was buying them and so he asked what he could do about it. Mr Hoy said that Mr Clarke responded: '[W]hy don't you unlock them? … [O]ther stores are doing it and they are finding it much easier to sell the Telstra phones because they are not restricted to just selling them to Telstra customers.' Mr Hoy said that he did not know how to unlock phones and asked how he would go about it. He claimed that Mr Clarke told him that if he knew a local repairer, they should be able to do it for him. 146 Ms Jauregui said that she recalled Mr Hoy and Mr Clarke discussing pre-paid phones. Her account was: 'Craig [Hoy] told Brent [Clarke] that he was having trouble selling the Telstra prepaid phones and Brent told him that he could unlock them and Craig asked if it was okay and he said 'yes'. 147 Ms Jauregui said that after this conversation, some phones were unlocked and kept in the back room. She said that display models of those phones were placed in a cabinet in the store to offer them for sale. Ms Jauregui did not remember Mr Hoy saying to Mr Clarke that he did not know how to unlock phones and asking how he could go about it. Nor did she remember Mr Clarke saying to Mr Hoy that he should take it to a local repairer who would know how to do it. She said that her recollection was very vague because she did not remember a lot of detail. Ms Jaugerui said that she remembered the conversation about the Telstra phones because it was very rare that they sold a Telstra phone. She did not recall any discussion about other carriers' phones. She would stand next to Mr Hoy if the shop was not busy and she did not have anything else to do. She said that Mr Clarke was probably flirting with her before the conversation took place because he did it every time he came into the shop and this was the reason that she remembered the conversation. She asserted that about a month after the conversation she saw Mr Hoy showing Mr Clarke the display in the cabinet and that Mr Clarke took photos. 148 Mr Clarke denied that any conversation concerning the unlocking of phones occurred. He did not recall Mr Hoy telling him that he was having trouble moving some of the pre-paid phones or that he had dropped the price on those phones. He did not recall Mr Hoy asking him what he could do about the problem. He was not sure whether the Telstra phones were harder to sell at that time. Mr Clarke, however, denied having told Mr Hoy 'why don't you unlock them' and that other stores were doing it. He denied saying that the other stores were finding it much easier to sell the Telstra phones unlocked because they were not restricted just to Telstra customers. He also denied that Mr Hoy told him that he did not how to unlock phones and enquired how to do it. He denied saying to Mr Hoy: 'Do you know a local repairer? They should be able to do it for you.' 149 Mr Hoy said that after this conversation he went to a mobile phone repairer called 'Andrew'. He did not know his surname. Mr Hoy continued to use Andrew's services until at least July 2006. Ms Jauregui remembered Andrew coming to the shop from time to time. She was not able to recall or estimate how many unlocked phones were sold while she worked at Hoy Mobile. Andrew was not called as a witness. I am comfortably satisfied his evidence would not have assisted Mr Hoy or Hoy Mobile. 150 Mr Hoy claimed that after Andrew had unlocked the three phones, he telephoned Mr Clarke and told him that he had sold them and was now ready to get new models of pre-paid phones, which Allphones had previously threatened not to supply because of the unsold old stock. He claimed that Mr Clarke responded: 'See, I told you it would work.' Mr Clarke said he did not recall Mr Hoy telling him this, although franchisees frequently called him about their problems. 151 On Mr Clarke's next visit, Mr Hoy claimed that he went into the storeroom and asked Mr Hoy about six phones sitting on the top shelf in the storeroom, separate from other pre-paid phones. Mr Hoy said that he replied: 'They're the new ones that I unlocked.' Ms Jaugerui said that about a month after the conversation about unlocking phones Mr Hoy and Mr Clarke had a conversation in the storeroom. She said that Mr Hoy said: 'This is where the phones are being kept.' He pointed to some phones on the top of the cabinet. She claimed that Mr Clarke said: 'OK.' 152 Mr Clarke remembered that on one occasion he went into the storeroom and asked Mr Hoy about six phones on the top shelf, although he did not remember when that was. He said it was because he noticed that the packaging was open. Mr Clarke denied that Mr Hoy said to him that they were new phones that he had unlocked. Rather, Mr Clarke said that Mr Hoy told him: 'They're the phones the staff are using.' Mr Clarke denied that pre-paid mobile phone packaging was open in the storeroom. He said the phones on the top shelf were 'high end handsets', meaning the more expensive handsets, rather than pre-paid ones. 153 Mr Hoy had a practice of trying out handsets to learn of their characteristics. He took those phones out of their packaging and used them. I infer that he later sold these as 'new' phones when a customer wanted to purchase the particular model. Thus, from time to time, these would be unpackaged phones which Mr Hoy had used but not unlocked and their packaging would be kept in the storeroom at the Eastgardens shop. 154 I am not satisfied that the conversation in the storeroom related to unlocked phones or pre-paid phones. Ms Jaugerui's account did not expressly identify whether she claimed to have observed unlocked or other phones in the storeroom when Mr Clarke was there. I find that Mr Clarke saw a number of phones which had been taken out of their packaging for use by Mr Hoy to enable him to learn of their characteristics. I accept Mr Clarke's evidence as to what occurred on that occasion in preference to Mr Hoy's. 155 Mr Hoy also claimed that after the conversation in the store room he received a call from Mr Clarke warning him that someone from Optus was about to visit the store and that he should '… hide the unlocked phones until after their visit'. I accept Mr Clarke's denial that such a conversation occurred.
15.2 How Mr Hoy carried out his fraud 156 Mr Hoy's method of processing sales of unlocked phones in the point-of-sale system had been carefully contrived by him. He instructed his staff to follow it, and they did. The price charged for the phone after it had been unlocked was always greater than the price fixed in the Allphones point-of-sale system for it as a locked phone. The customer received a handwritten receipt for the price he or she paid. It recorded the item or items sold and the serial, or IEMI, number of the phone. A carbon copy of the receipt was made in the receipt book which was kept next to the computerised cash register. If the customer paid cash, the cash was placed in the till. The computer generated receipt was not given to the customer but was put into the waste-paper bin next to the till since it would show a lower price than that which was actually paid. 157 If the customer paid by EFTPOS or credit card, he or she was also given a handwritten receipt together with a computer generated receipt for the electronic payment in the correct amount. In order to achieve this, the sales person entered into the point-of-sale system, sales of recharge cards equating to the difference in the system price for the locked phone and the sale price charged to the customer. However, the customer did not buy or receive those recharge cards and was not made aware of them being entered into the system. The computerised cash register generated a single receipt in two portions. One portion recorded the transactions entered (the locked phone at the price set in the system and recharge cards to the value needed to balance the price being paid by the customer). This portion was physically torn off by the sales person and thrown away when he or she handed over the handwritten receipt and remaining portion, which was the electronic transaction receipt for the purchase price actually paid by the customer. 158 Recharge cards were generated in Hoy Mobile's store by machines provided by carriers which were not electronically linked into the Allphones point-of-sale system. Typically, customers bought recharge cards for cash and did not ask for or get receipts for them. The sales person would write down details of the cash recharge card sales on a list kept next to the electronic cash register. This was to provide what Mr Hoy called 'a bank' of those transactions available to be entered into the point-of-sale system whenever they were needed to process an electronic payment for an unlocked phone sale. If no recharge card sales were in the 'bank', then the sales person generated sufficient recharge card sales for later sale to customers who needed them and entered the 'sale' of those cards into the point-of-sale system. The sales person retained the recharge cards next to the electronic cash register for later cash sale. 159 At the end of each day, Mr Hoy caused the copies of the handwritten receipts to be destroyed. The cash takings were reconciled and the surplus was taken by Mr Hoy, if he was doing the reconciliation, or left in a separate envelope for him by the staff member who did it. The balance of the takings, being all the cash sales as recorded in the Allphones point-of-sales system, was placed in an envelope for banking on the next business day. Thus, the unlocked phones would be recorded in Allphones' point-of-sale system as having been sold for the locked prices, together with all the recharge cards that had been sold to customers. But, a cash surplus was generated, which Mr Hoy kept, being the difference between the locked and unlocked phone prices for each sale. He paid Andrew from this cash. Mr Hoy said that initially he paid Andrew $30 per phone, but by December 2004 he claimed to have negotiated the price down to $15. Shortly afterwards, he acquired a computer programme which unlocked most, but not all, of the phones without the need for Andrew's assistance, therefore bringing the cost for unlocking down to what he claimed was an average of about $7 or $8 per phone. Ms Carey, another Hoy Mobile employee recalled that Andrew was paid about $5 to $10 per handset. She gave him the money from time to time. She thought male employees or Mr Hoy did some unlocking themselves. This appears to have been at the time in 2005 at which Mr Hoy asserts the price for unlocking had come down. 160 A considerable cash profit was made on the sale of the unlocked phones. Mr Hoy knew that these phones were not intended to be used on carriers' networks other than that of the carrier who had supplied them as a pre-paid or locked phone. He knew that he was not accounting to Allphones for the full price for which the phones were sold and he was not recording or reporting, for taxation purposes, the surplus cash these transactions generated.
15.3 Did Mr Davidson condone the fraud? 161 Mr Hoy also gave evidence that, in about June or July 2004, a newsletter was circulated by Allphones to franchisees referring to the practice of unlocking phones. He claimed to have telephoned Mr Davidson, then the New South Wales State manager of Allphones and asked him: '[W]hat's the story about this comment … regarding the unlocking of phones?' He claimed Mr Davidson responded that it was 'a political statement only, that Allphones has to be seen as doing the right thing'. Mr Davidson was not called. I am satisfied that he was in London and had not been willing to provide assistance to Allphones or give evidence in the proceedings. 162 Allphones argued that Mr Hoy could have not understood Mr Davidson to be saying that the requirement not to unlock phones could be ignored by a franchisee. However, it is possible that such a conversation did occur. It was in Allphones' interest for its franchisees to sell the stock which they held on consignment. Slow moving stock was of no benefit to Allphones anymore than it was to its franchisees. It was also in Allphones' interest to ensure that the carriers were satisfied that it was not seen to condone the practice of unlocking. The newsletter's circulation at the time indicated that unlocking phones was a known issue and was occurring. 163 In essence, Hoy Mobile's case is that Mr Clarke and, then, Mr Davidson suggested or condoned the unlocking of phones in 2004. Mr Clarke had nothing to gain from making the suggestion. He was not financially interested at that time in the outcome of Hoy Mobile's sales. The conduct involved Hoy Mobile doing something that was obviously wrong. Even on Mr Hoy's evidence, no-one from Allphones ever suggested to him that he should sell the phones at a price, or in a way, that involved Hoy Mobile making a profit from such sales or not accounting to Allphones for the sale proceeds. The way in which Mr Hoy structured the transactions establishes that Mr Hoy engaged in a planned and sophisticated fraud on Allphones, the carriers, the customers and the Australian Taxation Office. He knew his conduct was wrongful, because it involved interfering with the property of Allphones, being the locked phones held on consignment, and selling them in a way which misrepresented to Allphones what had happened. It also, of course, misrepresented to the customer the true nature of the transaction. He involved his staff members in this practice. These were often young people who had just left school and would look to him as a person in authority.
15.4 Did Mr Clarke condone the fraud? 164 Both Mr Hoy and Ms Jauregui gave evidence that Mr Clarke told Mr Hoy that he could unlock, at least the two Testra phones. Mr Clarke denied that he did. The conflict among their accounts is not able to be resolved by resort to any contemporaneous documents or independent evidence. In terms of demeanour when each was giving this evidence, I was unimpressed by Mr Hoy and Ms Jauregui. I was favourably impressed by Mr Clarke and I formed the view that he was a credible witness who was also reliable. I found Ms Jauregui a difficult witness to evaluate. She asserted a clear recollection of the conversations because she said Mr Clarke was flirting with her. I have no confidence that Mr Clarke's flirtations caused Ms Jauregui to remember snippets of two conversations over three years later. However, no reason was suggested for Ms Jauregui to have fabricated her account of the conversations. Although, Mr Hoy was her first employer after she left school, Ms Jauregui had no apparent reason to give false evidence. She ceased to be employed by Hoy Mobile in July 2004. She denied having spoken to Mr or Mrs Hoy about her evidence. She said she was approached by Hoy Mobile's solicitor (Mr Birch) to give a statement about a year before giving evidence. That was the first time she was asked about her recollection of events. 165 Ms Jauregui did not remember much of her time at the Eastgardens store. She could not recall much, if any detail, of how the handwritten receipt system worked, although she had used that system for three or four months until she ceased employment at Hoy Mobile in about July 2004. Given what was involved in that system I do not accept her evidence as reliable. On the one hand, she could not recall what the system for processing the sales of unlocked phones involved yet, on the other hand, she claimed to have a good recollection of the two conversations she recounted between Mr Hoy and Mr Clarke. When asked whether she thought what she had overheard about the unlocking of phones was 'a bit dodgy' she said that when she thought about it, after overhearing the conversation between Mr Hoy and Mr Clarke '… it was a bit weird but because I heard Brent say it was OK, well, then, I just assumed it was OK'. I do not accept that evidence. Rather, I find that because Mr Hoy, her employer, was engaged in this 'weird' conduct which involved her and, to her observation, the other staff at the Eastgardens shop, Ms Jaugerui assumed or accepted that it was appropriate. 166 I formed the view that both Ms Carey and Ms Jaugerui saw Mr Hoy as an authority figure and were grateful to him for having given them their first jobs after leaving school. When working at the Eastgardens store, they were prepared to do what appeared to them, initially, to be apparently wrong, because he condoned it. And, of course, it was not their place to question their employer about what he instructed them to do. Each of them acknowledged that there was something either 'dodgy' or 'weird' about what Mr Hoy required them to do with these transactions. 167 It is likely that because Ms Carey and Ms Jaugerui saw Mr Hoy conducting the fraud in front of them in the way he did that they became convinced that Allphones must have approved it, since to them it would be inconceivable that Allphones would not know of what was occurring. They saw that Mr Clarke, and the other area managers, regularly visited and inspected the shop and did not notice or raise any issues about what they knew to be the display of models of phones some of which Mr Hoy had unlocked. 168 Mr Hoy's conduct was much than 'dodgy', it was downright dishonest, deliberate and done for the personal financial gain of Mr Hoy. He concealed this activity even from his wife, although he regularly brought home some cash and gave it to her. Only when Mr Donnellan emailed Mr Birch accusing Hoy Mobile of fraud on 10 July 2006 did Mrs Hoy learn from her husband of what he had been doing. At that point she was so shocked and concerned, that she asked Mr Birch whether Mr Hoy would go to gaol. 169 Ordinarily, when one is faced with three people said to be present at the conversation, two of whom give a reasonably similar account and one of whom appears to have no present interest in the outcome of the proceedings, there is an instinctual tendency to think that the two people, giving consistent evidence, are more likely to be correct. However, I do not accept Mr Hoy's evidence about the conversations with Mr Clarke and Mr Davidson concerning the unlocked phones. Nor do I accept Ms Jaugerui's evidence, not because I believe she was consciously setting out to give false evidence, but rather because I consider that she has persuaded herself, unconsciously, that there must have been a justification for what she saw occurring. And, because Mr Clarke came to the shop, and would flirt with her, she must have come to the view that he saw nothing wrong in Mr Hoy's conduct even though unbeknown to her, he did not know what Mr Hoy was doing. She assumed he did. Her assumption led her to think that, because the Telstra phones were slow moving and Mr Hoy unlocked them, Mr Clarke had told Mr Hoy to unlock them. Of course, she knew that they were unlocked and that what Mr Hoy had done was odd. 170 It is likely that there were conversations from time to time between Mr Hoy and Mr Clarke in the shop to do with the slow-moving nature of particular phones and quite probably those of Telstra. It may be that Ms Jauregui overheard a conversation with Mr Clarke in relation to slow moving Telstra phones. But I do not feel persuaded that she heard a conversation in which Mr Clarke suggested unlocking those phones. In coming to these conclusions I have relied on my overall impressions of Mr Hoy, Ms Jauregui and Mr Clarke as they gave their evidence and on my perceptions of their reliability based on their demeanour. I am not satisfied that the conversation, alleged by Mr Hoy, occurred.
15.5 Did Allphones otherwise condone the fraud? 171 Mr Clarke was not the only area manager who visited the store in the ordinary course of his or her duties. Other area managers succeeded him, including Ms Tripoli, Mr Chandler, Mr Le and Ms Bortolo. Mr Hoy, Ms Carey and Ms Jauregui all said that the unlocked phones were displayed in the Vodafone cabinet on a lower shelf accompanied by a standard form Allphones display card. The card had been prepared by Mr Hoy. The card identified the phone, its features and price and stated, in the example in evidence of the promotional material for the phones: 'Phone Not Locked; Works On All Networks; Works Overseas'. That was a correct description of the capacities of the phones that had been unlocked, since they could also work in their original state (i.e. before carriers locked them) in the way described, and were models which were also sold without ever having been locked. 172 Some of the area managers gave evidence that they did not inspect as thoroughly as perhaps they should have. I accept the evidence of the area managers, Mr Clarke, Ms Tripoli and Mr Chandler that they did not notice that Mr Hoy was offering phones that had been unlocked for sale at any time. But, that may have been because the same model of the phone was also being sold legitimately as a phone that had never been locked. I am satisfied that Mr Hoy presented the unlocked phones in a way which made them appear to be ordinary products for sale. Their manner of presentation was such as to allay any suspicion by the area managers who regularly inspected the Eastgardens store. In particular, I formed the view that Ms Tripoli was an honest witness who was careful in the performance of her duties. She struck me as an intelligent and attentive person who would have been alert to an obvious irregularity. There was no suggestion that she condoned overtly, or had any knowledge of, Mr Hoy's fraudulent activities, yet I am satisfied that she did not notice anything unusual in her careful inspections of Hoy Mobile stores. Moreover, at the time she gave her evidence, she was independent of Allphones. 173 Thus, while I am satisfied that the unlocked phones were displayed in a way which indicated that they were being sold as phones that were not locked, I am equally satisfied that the display was made in such a way as did not draw attention to the fact that the fraud had been committed in respect of those phones.
15.6 Did Mr Shepherd observe Allphones condoning the fraud? 174 In October 2005, Tony Shepherd was an employee of Allphones. At Mr Donnellan's suggestion he transferred to work at the Eastgardens store as an employee of Hoy Mobile. Mr Donnellan had told Mr Shepherd that he was a good salesman and could lift the numbers of the store which were down and he would gain some experience along the way. Mr Donnellan described Mr Hoy to Mr Shepherd as 'a very good operator' who could teach him. Mr Donnellan was a friend of Mr Shepherd's father, and this was known to Mr Hoy. Mr Shepherd told Mr Hoy that he had drinks on a regular basis with Mr Donnellan and Mr Harkin. 175 Mr Shepherd recalled that when he worked at Hoy Mobile, Ms Tripoli had been replaced as area manager by either Philip Le or Carmen Bortolo. He became aware that the new area manager was going to visit Mr Hoy's store. Mr Shepherd said that before that visit, Mr Hoy removed the five or so unlocked mobile phones from the Vodafone cabinet and put them into the storeroom so that there were no unlocked phones in the selling area of the store when Mr Le or Ms Bortolo arrived. Within about half an hour after they left, he said Mr Hoy collected the phones from the top shelf of the storeroom and put them back on display. 176 However, Mr Hoy said that the only time at which Mr Le and Ms Bortolo were in the store was on the Friday afternoon before Mr Shepherd finished his employment, when Mr Hoy was returning from holidays in Kiama. 177 Mr Shepherd said that shortly after he began working at the Eastgardens store, and became familiar with the selling of unlocked phones there, he had to attend a training session at Allphones' head office. The area manager at the time, Philip Le, arranged to pick him up and take him to Burwood. Mr Hoy claimed that Mr Le arrived 45 minutes early and, because Mr Hoy and Mr Shepherd were busy, Mr Le went to assist a customer who wanted to buy a phone that was not locked. Mr Le pointed out that the customer wanted to buy the particular model phone which was in the bottom of the Vodafone cabinet. In fact, it was a phone which had been unlocked. Mr Hoy said that he would process the sale and did so. 178 Before Mr Shepherd left with Mr Le, Mr Hoy claimed that he asked Mr Shepherd to check with Mr Le whether it was in order for them to be selling unlocked phones. Mr Hoy then claimed that the next day Mr Shepherd came to work and said that he had spoken to Mr Le and that Mr Le did not care. In cross-examination, Mr Hoy claimed that he did not ask Mr Le this himself because he knew that Mr Shepherd was a friend of his and since they were driving together he could ask him on the way. Mr Shepherd gave this evidence: 'Before you left the store Mr Hoy asked you to check with Mr Le to see that he was OK with the store selling unlocked phones? --- I don't remember that conversation. … Do you recall that after attending the staff training seminar you returned to work the following day and told Mr Hoy that Philip [Le] didn't care about the sale of unlocked phones? --- I don't recall that at all.' 179 In his affidavit sworn in October 2006, Mr Shepherd said that within a week of commencing work at the Eastgardens store he noticed mobile phones of the kind that were locked to Virgin and Optus being offered for sale in the Vodafone cabinet at a higher price than locked handsets offered in the stores in other cabinets. He said he believed that the higher pricing was unusual. Mr Shepherd discussed the matter with Mr Hoy who told him that he had unlocked the phones and sold them himself. Mr Shepherd said that he asked: 'Isn't that dodgy?' but could not recall Mr Hoy's response. 180 Mr Hoy introduced Mr Shepherd to Andrew and told him that he paid Andrew $15 per phone. However, Mr Shepherd said that in around January 2006, Mr Hoy told Mr Shepherd that Andrew had increased his price to $30 per phone. He observed Andrew attending the store every two or three days, and being handed between five and ten mobile phones by Mr Hoy to unlock. When Andrew returned on the next visit, the phones would be in their packaging, which had by then been unsealed, and they were unlocked. He said that there was not a standard price for an unlocked phone, but as far as he could ascertain they were generally sold at a mark up of approximately $50 more than the price in the Allphones point-of-sale system. He recalled that about ten unlocked phones were sold per week. Mr Shepherd also saw Mr Hoy using the internet to find unlocking codes for certain phones which he then unlocked. 181 Hoy Mobile argued that because Mr Hoy was conscious of the relationship between Mr Shepherd, Mr Donnellan and Mr Harkin, it was unlikely that Mr Hoy would have persisted in the unlocking of phones had he not then believed that Allphones condoned the practice. I do not accept this argument. It is inconsistent with Mr Hoy's claim that he asked Mr Shepherd to enquire of Mr Le whether Mr Le was comfortable with the practice although I do not accept that such a conversation occurred. The fact that Mr Hoy asserted that it did enables me to draw the inference that he was conscious that recounting such a conversation would bolster his claim that Allphones had condoned the practice of unlocking. There was no reason that Mr Hoy could not have asked Mr Le himself, if what he was saying were true. If he thought that different area managers might have different views about unlocking, then he must have appreciated that none of those views was a formal authority given by Allphones, since, had such an authorisation been given once, there would have been no need to seek confirmation again. 182 However, I do not accept Mr Shepherd's evidence that Mr Hoy removed the phones prior to the visit by Mr Le or Ms Bortolo. It may be that Mr Shepherd did that of his own initiative because he was concerned that a visit from Allphones representatives might disclose some involvement by him, given that he felt the practice was 'dodgy'. Mr Shepherd said that he had made the wrong decision by not reporting to Allphones the sale of unlocked mobile phones by Hoy Mobile for fear that he would lose his job. But, nevertheless, Mr Hoy had no reason to act in this way given the success his fraud had had to that time.
15.7 How much profit did Hoy Mobile make from the fraud? 183 Mr Hoy claimed that he had received about $30,000 from his fraud. Both he and Mrs Hoy said that they included this figure in Hoy Mobile's 2006 tax return as net income after paying the costs of the unlocking. No documents in evidence support this claim and no analysis was made by Hoy Mobile to support it, other than by relying on this broad brush estimate. 184 Ms Carey worked about three days per week at the Eastgardens store. She speculated that perhaps she sold two or three unlocked phones on average per week but was not really prepared to offer any definite figure. Ms Jaugerui could not remember how many, on average, she sold a week but she thought that in total she had sold less than 100 and, perhaps, less than 50. The best Mr Hoy could do was to say that '… it would be close to 1,000'. He speculated that, after paying expenses, he made on average about $1,200 profit per month on the sale of the unlocked phones. He thought, on average, that he took home about $200 in cash from this profit each week in the first year of the fraud and about $400 per week in the second year. On another occasion he said that the gross profit (before paying for the unlocking) varied between zero and $60 per phone, but was on average about $50. On Mr Shepherd's estimate of ten unlocked phones being sold per week at a net profit of $35 each, Hoy Mobile made $18,200 cash per year. 185 Allphones suggested that the benefit received by Mr Hoy may have been greater than he claimed. It pointed to the fact that Mr Hoy had destroyed the handwritten receipt books containing the records from which his profit could be calculated. Where a person deliberately destroys a document that, depending upon which its contents may have been, would have told strongly either for or against the person, the strongest possible assumption arises that if it had been produced, the document would have told against the person. This is so even if there was no intention to destroy evidence. The principle is that the person is in the position that they would have been in without the corroboration which might otherwise have been expected: Allen v Tobias (1958) 98 CLR 367 at 375 per Dixon CJ, McTiernan and Williams JJ, applying The Ophelia [1916] 2 AC 206 at 229-230. 186 Allphones had a means of investigating and attempting to quantify the amounts Mr Hoy received through Hoy Mobile from the fraud. It knew that the modus operandi of the fraudulent scheme involved the sale of pre-paid mobile phones with recharge cards. Thus, Allphones could have made some investigations of its own point-of-sale system in respect of Hoy Mobile's sales to produce some form of analysis seeking to segregate legitimate, from illegitimate patterns of trading, but it did not do so. I am mindful of the difficulties in quantifying these amounts over a period where the records, such as they are, can only produce patterns or estimates. 187 However, in the end Allphones did not assert that Mr Hoy's largest estimate of $30,000 net profit from the fraud should not be accepted. While I am satisfied that the benefit Hoy Mobile derived from the fraud was in the order of Mr Hoy's largest estimate of $30,000, he offered that estimate on the basis that he ceased to unlock phones at about the beginning of June 2006, after seeing the newsletter of 31 May 2006. I do not accept that he ceased unlocking phones before 10 July 2006 in the circumstances recounted later in these reasons. Thus, Hoy Mobile derived a larger profit than Mr Hoy claimed. Doing the best I can, I find that the net benefit to Hoy Mobile from the fraud was $32,000.
THE FRAUD UNRAVELS: MR QUARMBY'S COMPLAINT 188 In the meantime, Mr Shepherd had been working at the Eastgardens store since about November 2005. Allphones, without telling Mr Hoy, asked Mr Shepherd to work as the manager of the Randwick store and to report to Allphones' offices on Monday 13 March 2006 for a training session. On 14 March 2006, Allphones told Mr Hoy that it would be paying Mr Shepherd's wages from the preceding day as he had been in training at Allphones' head office. Allphones suggested that Mr Hoy contact its learning and development manager if a replacement was needed. 189 Also on 14 March 2006 Graham Quarmby bought an unlocked mobile phone from Mr Hoy at the Eastgardens store. Mr Quarmby was an interstate truck driver. The phone originally had been locked to Optus but had been unlocked by Mr Hoy or at his direction. However, the unlocking was defective and some of the Optus programming remained on the phone so that it displayed information, branding and other Optus features. Mr Quarmby wanted to use his Vodafone SIM card with the phone, but when malfunctions occurred, he became annoyed. After going to a local Allphones outlet near his home, he returned to the Eastgardens store and complained to Mr Hoy who removed some, but not all, of the Optus features and downloaded some Vodafone features. Mr Quarmby left, but remained dissatisfied. Eventually he went to an Allphones outlet in Broadmeadows, Victoria. They told him that the phone had been unlocked and put him in touch with the New South Wales State manager of Allphones, Robert Ilievski. 190 On about 29 May 2006 Mr Quarmby first contacted Mr Ilievski. He provided Mr Ilievski with details of the IEMI number of the phone and the place and date of purchase. In the meantime Mr Donnellan came to learn of the allegations. He issued a quarterly newsletter on 31 May 2006 addressed to all Allphones' franchisees. In it he noted that Allphones had recently received correspondence from two carriers regarding the unlocking of handsets. He said: 'It seems to be an industry wide problem once again. Over the years, three franchisees have been terminated for this practice. We have a zero tolerance policy on this.' The newsletter also noted that there were broader implications for all Allphones stores if Allphones itself was found to be participating in the practice. He asked all staff to be reminded of this and noted that Allphones was committed to police the matter rigorously and to adhere to the best practices. 191 Mr Hoy claimed that when he read this he stopped unlocking phones, and from then on only sold phones that had already been unlocked. I do not believe that he did stop at that time. Mr Birch's contemporaneous file notes of discussions he had with Mr and Mrs Hoy on 10 and 11 July 2006 do not refer to Mr Hoy having stopped unlocking the phones at an earlier time. I find he stopped only later, after Mr Donnellan raised the question of fraud on 10 July 2006. 192 On 5 June 2006 Mr Ilievski arranged to meet Mr Quarmby at Allphones Randwick's store later that week. They had an interview there on 7 or 8 June. Mr Quarmby then described to Mr Ilievski his experience at the Eastgardens store, and gave him the original handwritten receipt that he had received from Hoy Mobile for $199 for the sale of a Nokia 6060 phone and Vodafone SIM card together with the portion of the point-of-sale system which receipt showed a corresponding credit card charge of $199. Mr Quarmby also gave Mr Ilievski the phone he had bought at Hoy Mobile's store, along with the packaging that came with it. Mr Quarmby said that Mr Hoy had given him, without charge, a $10 Vodafone SIM card. Mr Ilievski gave Mr Quarmby a replacement phone and asked him to co-operate in making a written statement later. Mr Ilievski also spoke briefly to Mr Shepherd before returning to Allphones' office where he discussed with Mr Harkin what he had been told by Mr Quarmby. I infer that no mention of recharge cards had occurred during Mr Ilievski's discussions with Mr Quarmby prior to this time. 193 Mr Ilievski said that Allphones was able to trace the transaction in the point-of-sale system with this information and understand how Mr Hoy had effected it. Mr Hoy, himself, had conducted this sale and the receipt was in his handwriting. The point-of-sale system disclosed that Mr Hoy was the salesperson who sold the phone as an Optus pre-paid Nokia 6060 at a price of $149 together with an Optus $30 recharge card and a Vodafone $20 recharge card. That information, especially when coupled with what Mr Quarmby had said about the sale, suggested that a fraud may have occurred. After Allphones found the point-of-sale record, Mr Harkin concluded that Mr Hoy had been 'skimming'. He explained what was involved in that practice to Mr Ilievski, namely that the franchisee had recorded the sale of an item at cost price in the point-of-sale system, but had in fact sold it to a customer at a price above the cost price reported to Allphones. 194 About a week after Mr Quarmby was interviewed, Mr Shepherd was interviewed by Mr Ilievski at the Burwood offices of Allphones. Mr Shepherd explained the processes that he had observed and used while working at the Eastgardens store in relation to the sale of unlocked phones. It was then obvious to Mr Ilievski that, not only were unlocked phones being sold at Hoy Mobile's store, but that cash was being received and not accounted for to Allphones. Mr Ilievski continued to discuss matters with Mr Harkin and Mr Donnellan. 195 In the meantime, on 9 June 2006, Mr Harkin emailed Mrs Hoy and Mr Birch saying that it was necessary for a complete RCTI agreement to be signed by Hoy Mobile so that Allphones could pay it commission as it had in the past. Mr Harkin said that Hoy Mobile's deletion of the two paragraphs in the RCTI agreement was unworkable in Allphones' system. He also noted that he would respond in full to Mr Birch's letter of 22 May 2006 by the end of the following week. On 15 June 2006 Hoy Mobile sent back to Allphones a fully completed RCTI agreement.
ALLPHONES SEEKS LEGAL ADVICE 196 By 14 June 2006, Mr Harkin had arranged with Ken Rook of Bartier Perry (Allphones' solicitors) for his firm to be retained both for the purposes of potential litigation with Hoy Mobile and to provide legal advice in relation to the latter's fraudulent conduct of unlocking phones, selling the unlocked phones without accounting to Allphones for the actual higher sale price and for failing to disclose the conduct to any of the carriers concerned, Allphones and customers who purchased the phones. Allphones had a number of communications with its solicitors in the period following the initial consultation with Mr Rook. 197 In April and June 2007, Bernard Lloyd, then an employed solicitor of Bartier Perry, swore affidavits in which he identified Allphones' discovered documents for which it had made a claim to legal professional privilege, which were read before Tamberlin J, who upheld the claim. Mr Lloyd also identified the facts supporting each claim for privilege. Hoy Mobile tendered Mr Lloyd's affidavits as admissions by Allphones of its state of knowledge during the period leading up to it giving notice of its intention to terminate on 28 August 2006 (see Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd [2008] FCA 369). Mr Lloyd's affidavits revealed that by 14 June 2006, Tony Baker, another director of Allphones, and Tony Mitchell, the chairman of Allphones, were involved in email exchanges relating to the dispute with Hoy Mobile. 198 On 23 June 2006, Bartier Perry discussed with Allphones the formulation of a strategy to deal with the dispute. On 26 June 2006, Mr Baker sent an email to Mr Harkin, Mr Ilievski and Mr Rook in relation to the sale of unlocked phones by Hoy Mobile, and provided Mr Baker's instructions about the process of 'skimming' by franchisees. On 30 June 2006, Gordon Berner, another partner of Bartier Perry, had a telephone interview with Mr Quarmby for the purposes of preparing a statement by him for use in providing Allphones with legal advice and for the anticipated litigation. He sent a draft statement to Mr Quarmby for his instructions on 5 July 2006. 199 In giving evidence, Mr Harkin claimed that he was not fully aware of how skimming actually worked until after he had read Mr Hoy's affidavit filed in the proceedings. Mr Harkin discussed with Mr Ilievski not just what Mr Quarmby had revealed, but also, following his interview in mid-June 2006, what Mr Shepherd disclosed as to the way in which unlocking of phones had occurred at Hoy Mobile while he worked there. In June 2006 Mr Harkin appreciated, after he had considered Mr Quarmby's handwritten receipt for the phone of $199 and its recommended retail price of $149, that the $50 difference needed to be reconciled. He said he first concluded that there had been a fraud by Hoy Mobile 'skimming' that difference after receiving internal advice from Allphones officers who were more familiar with the point-of-sale system than he was. But he claimed that he reached this conclusion only a week or weeks before Allphones issued the notice of intention to terminate. 200 I do not believe Mr Harkin's evidence that he became aware of the fraudulent nature of Hoy Mobile's selling of unlocked phones only shortly before 28 August 2006. Mr Shepherd's information was cogent and clear. By mid-June 2006 Mr Shepherd had told Mr Ilievski that while Mr Shepherd was employed at Eastgardens, Mr Hoy had profited by taking cash from sales of unlocked phones which he was not banking. I accept Mr Ilievski's evidence that Mr Harkin explained skimming to him about a week after he had reported to Mr Harkin on what Mr Quarmby had revealed in the interview at Randwick. Hence, by 26 June 2006, Mr Rook was being instructed by Allphones about the 'process of skimming'. I am satisfied that the process of skimming referred to in the email of 26 June 2006 from Mr Baker was a matter which Mr Harkin fully appreciated by the time of his receipt of that email. Mr Harkin was evasive in his evidence on this topic because he was conscious that Allphones had waited a considerable time after learning of the fraud before giving its notice of intention to terminate. He was conscious that Hoy Mobile had alleged Allphones had made an election to affirm the franchise agreement during that period after Mr Quarmby's complaint with knowledge of what Hoy Mobile had done. He was also aware that his knowledge was relevant to that issue because of his role and position. I was not impressed with Mr Harkin's reliability or credibility generally.
THE 30 JUNE 2006 INCIDENT AND THE STOCK AND COMMISSION HOLDS 201 On Friday, 30 June 2006 Mr Ilievski demanded of Mr Hoy that he release to Allphones one of the popular mobile phones so that Allphones could provide it to a customer identified by the new Allphones retentions team (which aimed to re-sign Allphones customers whose contracts were about to expire). Mr Hoy said that he would transfer the phone if he could be given a replacement so that he would have a sufficient number of these popular models to sell over the weekend. Mr Ilievski told Mr Hoy to organise a replacement for himself, and insisted that Mr Hoy provide the phone, but he did not do so. Shortly afterwards, the customer was sent by the retentions team to the Eastgardens store and entered into a contract upgrading his current Optus plan to include the new phone. 202 After the conversation, Mr Ilievski spoke to Mr Harkin who instructed him to send a 'breach letter' to Mr Hoy. On the following Monday, 3 July 2006, Mr Ilievski and Mr Harkin finalised the letter and sent it to Mr Hoy. The letter stated that Hoy Mobile was in breach of the franchise agreement by having refused to release the phone. It also insisted that until Hoy Mobile execute and return the new version of the franchise agreement, which had been sent previously, all stock and commission payments would be withheld from it. Mr Harkin had inserted that last condition. 203 Mr Birch responded to Mr Ilievski on 6 July 2006 stating Mr Hoy's version of what had happened. He wrote that the customer had complained to Mr Hoy that the retentions team had failed to supply a phone to him on time and that he had wished to go into a store to sign a contract and obtain a phone then and there, which he did. Mr Ilievski said that Mr Birch's letter only came to his attention a week or two later. However, there was no response to the letter. 204 On 18 July Mr Ilievski and Mr Hoy discussed Allphones' lifting of the hold on Hoy Mobile's stock the previous day. Mr Hoy enquired whether the hold on Hoy Mobile's commission would now also be lifted. Mr Ilievski said that it would not because Mr Hoy had not contacted him. Mr Hoy pointed out that Mr Birch had written to him on 6 July. Mr Ilievski said that he had not seen that letter. He told Mr Hoy that the hold on Mr Hoy's stock had been lifted because it had been long enough, but he persisted in the demand that a new franchise agreement be signed by Mr Hoy as the condition for lifting the commission hold. Mr Hoy accused him of blackmail and said that he had an existing franchise agreement which he had signed two years previously and would not sign another one. Mr Ilievski said that he would not lift the commission hold, but the next day, Hoy Mobile was paid commission. 205 Allphones did not attempt to justify any of the conduct involved in this episode. I am satisfied Mr Harkin was the architect of the conduct to withhold stock and commissions. Doubtless he and Mr Ilievski were aware by 30 June 2006 of the progress that was being made in the investigation into Mr Hoy's fraud. No provision in the franchise agreement entitled Allphones to demand the immediate release of an item of stock which Hoy Mobile had ordered and Allphones had supplied pursuant to cl 6.5(i). Moreover, it was unreasonable for Mr Ilievski to insist that Hoy Mobile provide the phone without making appropriate arrangements for it to be replaced over the course of the weekend, which was busiest trading time for the store. Still less did Allphones have any justification for insisting that Hoy Mobile return a new signed franchise agreement. The only financial loss claimed by Allphones was an amount of $15.75 for the commission hold. That claim was persisted in and resisted until the parties came to an agreement, on a without admissions basis, that Allphones would pay half of this amount and Hoy Mobile would abandon the balance. This conduct is, however, relevant to the claim for unconscionable conduct. 206 On 6 July 2006 Mr Birch wrote three letters addressed to different Allphones officers. First, he wrote to Mr Donnellan complaining that he had not received any written response to his letter of 22 May 2006, or the disputes and matters referred to in it. He asserted that Allphones was in breach of cl 24.3 of the franchisee agreement because it had not undertaken prompt action to settle the dispute. He wrote that the breach had been aggravated by Allphones' 'breach' letter of 3 July 2006. Mr Birch's second letter was written to Mr Ilievski. It dealt with the circumstances in which the commission and stock holds had been imposed. Mr Birch's third letter was written to Mr Harkin. This complained about the store refresh notice sent by Mr Harkin in late June, requiring Hoy Mobile to pay $10,000 to Allphones as the asserted cost of refreshing its store's fit out. (I will return to this issue later in these reasons.) Mr Birch's letter asserted that there was no provision in the franchise agreement entitling Allphones to require such action. Upon receiving the letter, Mr Harkin telephoned Mr Birch's office and left a message saying that he wished to arrange an appointment for the week commencing 17 July. 207 On 7 July 2006 Mr Birch emailed Mr Harkin referring to the telephone message of the previous day and agreeing to a meeting on a without prejudice basis. He sought an agenda five days in advance and advice as to who from Allphones would be present. He asked that the meeting be at a neutral venue. Mr Birch referred to his detailed letter to Mr Ilievski of the previous day and noted the fact that the deadline that he had set for Allphones to provide written confirmation of its withdrawal of the stock and commission holds had passed.
MR DONNELLAN'S LETTER OF 7 JULY 2006 AND ITS AFTERMATH 208 On 7 July 2006 Mr Donnellan replied to Mr Birch's letter of 6 July and noted that all correspondence from Allphones' office was being handled by Mr Harkin and Mr Ilievski. The letter continued: 'You and your client need to come and see us. Ian Harkin is on annual leave next week. We propose Thursday 20 July. There are very serious matters which need to be discussed. Your client will be given an opportunity to respond to those matters and failure to do so will result in immediate termination of his franchise agreement, based on the advice of our lawyers. I am not aware of the contents nor the circumstances of the breach letter. You and your client always have the option to refer any matter to any regulatory body. My strong advice would be to be careful about doing so prior to understanding the entire situation, which has very little to do with the recent correspondence between the parties.' (emphasis added) 209 Early on 10 July 2006, Mr Birch sent a response to Mr Donnellan complaining that he had received no response from either of Mr Harkin or Mr Ilievski. He noted that the proposed meeting in Mr Donnellan's letter had no agenda. He complained that the threat of 'immediate termination' of the franchise agreement had no weight but noted that Allphones had finally admitted the existence of a franchise agreement with Hoy Mobile. He pointed to the fact that it was difficult to understand any reference to an 'entire situation' when the conduct of Allphones appeared to be adversarial. 210 Mr Donnellan immediately sent back an email in the following terms: 'I refer to this morning's letter. As an officer of the court I would ask you to take care on taking what was said by a fellow officer out of context. We note that you have on behalf of your client waived the right to a meeting to put forward his side of the story. I again make the offer for the 20th of July. Your client is accused of fraud and the evidence in our view is overwhelming. We will be in touch shortly, through Ian Harkin. The whole approach of aggressive discussions, inflammatory letters and attempts to garner support from other franchisees through defamation have evaporated any goodwill. We will follow the procedures under the contract and our carrier agreements to the letter. We will protect the integrity of our system and our franchisees.' (emphasis added) 211 Mr Birch responded saying that the allegation of fraud was 'quite serious, in all of its ramifications', and continued: 'However, once again you make a blanket allegation without any substance or particulars. If your company is going to rely upon any allegation of fraud to terminate my client's agreement, you are required to provide full particulars of the allegation/s. I invite you to do so by return.' He also said that he had not waived any of Hoy Mobile's rights or willingness to attend any proposed meeting. Mr Donnellan responded that the allegations were serious and were not made lightly. He wrote: 'Once all the documents are completed they will be sent, along with sworn affidavits. It's not good.' 212 On 10 July 2006, Mr Birch phoned Mrs Hoy and asked her if there was anything he should know. She told him that Mr Hoy had been engaged in unlocking Optus pre-paid phones explaining what that involved. She told Mr Birch that she was unable to say how many unlocked phones had been sold, 'but a lot' had been and that her husband had told her that he had done this 'so they can eat'. She said that Allphones knew that Mr Hoy had been engaged in the activity because someone from Allphones had come to a store audit and advised Mr Hoy how to do it. Mrs Hoy said she understood that Optus had apparently served some form of notice on Allphones to comply strictly with Optus' conditions. Mrs Hoy asked Mr Birch whether they were in deep trouble. He advised that, at first blush, it appeared so. She asked whether Mr Hoy would go to jail and whether they could lose the store. 213 The next day Mr Birch had a conference with Mr Hoy. Among other things, Mr Hoy gave him a detailed explanation about how and why the phones were unlocked. He asserted that unlocking was prevalent in the industry, that Allphones was fully aware of this and its store representatives had initially suggested unlocking the phones to Mr Hoy. He asserted that subsequently the store representatives had acknowledged what had been happening and turned a blind eye. Mr Birch told him that on a preliminary basis it was difficult for him to know whether or not the activity Mr Hoy had described was a fraud at that stage. However, he said that it could be a fraud on the Australian Tax Office for failing to account. They then discussed issues of the stock and commission holds and preparing the application to the Court. He did not take a detailed note of the conference. 214 The next time Mr Birch discussed the question of unlocking or fraud with Mr and Mrs Hoy was after the proceedings commenced during the course of a conference with senior counsel on 24 October 2006. Mr Birch said it was only at that time that it became clear to him that Mr Hoy had not been accounting to Allphones for monies in respect of the sale of unlocked phones. 215 Then, between 17 and 19 July, the stock and commission holds were lifted. On 24 July 2006 Mr Hoy sought a meeting of two hours with Mr Ilievski in response to his email of 10 July 2006 to all franchisees requesting quarterly review meetings. Mr Ilievski replied that he was booked out for all that week and would be away on a conference for the following week. He suggested 8 August or later in that week. After a number of emails were exchanged, on 9 August 2006 they finally arranged to meet on 22 August 2006 at 2.00pm. 216 On 4 August 2006 Mr Berner spoke with Mr Ilievski and Mr Shepherd. He took instructions for the purposes of preparing Mr Shepherd's draft statement. Mr Berner had a further conversation with Mr Shepherd on 14 August 2006 to clarify some matters and sent him a draft statement on that day.
THE MEETING OF 22 AUGUST 2006 217 On 22 August 2006 Mr Birch and Mrs Hoy attended at Allphones' offices. They understood this was for the quarterly review with Mr Ilievski. However, Mr Harkin arrived with Mr Ilievski and said the meeting was for the purpose of advising Mrs Hoy that Allphones would be serving Hoy Mobile with a termination notice giving seven days' notice. 218 Mr Birch objected to what was happening. Mr Harkin asserted that Mr Donnellan had sent a letter telling them of the meeting and held up a document which Mr Birch could not identify. Mr Birch said that he had received no such letter and asked if he could see what Mr Harkin was referring to, but Mr Harkin refused. Mr Birch said that he did not believe that such a letter existed and that Mr Harkin was fabricating that it did. Mr Harkin said that Allphones would be alleging that Hoy Mobile had been involved in fraudulent activities associated with unlocking phones and skimming of money owed to Allphones. He said that Allphones was in possession of affidavits and statements supporting those allegations. He then invited Mr Birch and Mrs Hoy to enter into 'without prejudice' discussions. Mr Birch said that they would not do so and wanted to continue the meeting 'on the record'. Mr Harkin then brought Allphones' chief financial officer, Angus Begg, into the room and announced that the meeting was now to be 'with prejudice'. He repeated the allegations and again invited Mr Birch and Mrs Hoy to enter into without prejudice discussions, which Mr Birch again declined. Mr Birch asked if the quarterly review meeting was going to take place and Mr Harkin responded that he thought that would be a waste of time. Mr Birch asked when the termination notice would be served. Mr Harkin replied: 'Tomorrow.' 219 Mr Birch wrote the above account of the meeting, which I accept, in a letter to Mr Harkin on 24 August, noting that no notice of termination had been served by that stage. He also said that Mr Harkin had continued making threats against Hoy Mobile of a significant kind and that this conduct was 'harassing and unconscionable'. He foreshadowed that Hoy Mobile would seek an injunction if a notice of termination were served and, asserted that his client had '… no fear about having all of their issues dealt with by the court, including your allegation of fraud'.
ALLPHONES' NOTICE OF ITS INTENTION TO TERMINATE 220 On 28 August 2006, Allphones served on Hoy Mobile a notice of its intention to terminate the franchise agreement on 5 September 2006 on the basis of cl 9.3(viii). It stated that this was because Hoy Mobile had sold the unlocked phone to Mr Quarmby on about 14 March 2006 charging $199 him but only recording a sale of $149 and failing to account to Allphones for $50. The notice also recited that '… during the period of December [2005] to February 2006 [Hoy Mobile did] cause various pre-paid mobile telephones locked to the telephone network of telephone carriers to be unlocked and sold to customers'. Allphones gave notice that upon termination, it would require Hoy Mobile to cease operating as a franchisee, transfer to it all material relevant to the operation of business, assign or transfer the lease of the Eastgardens premises and pay any monies outstanding. The notice was said to be without prejudice to Allphones' right to terminate the franchise agreement at an earlier date in accordance with the provisions of cl 9 of the franchise agreement. 221 The notice was based on the information from Mr Quarmby and Mr Shepherd. Although the reference to the period of 'December to February 2006' omitted the date 2005, the evidence suggests that Allphones only had knowledge of the activities revealed by Mr Quarmby and Mr Shepherd. While it may have had suspicions that the fraudulent conduct had been occurring prior to Mr Shepherd commencing work at the Eastgardens store in around November 2005 and continuing after Mr Quarmby visited there in March 2006, at the time the notice was given, there is no evidence that Allphones had knowledge of any fraudulent activities outside that period.
DID ALLPHONES ELECT TO AFFIRM THE FRANCHISE AGREEMENT? 222 Hoy Mobile argued that Allphones had elected to affirm the franchise agreement during the period between late May 2006, when it learnt of Mr Quarmby's transaction, and 28 August 2006, when it gave notice of its intention to terminate. It asserted that Allphones became aware in late May and early June 2006 of what happened with Mr Quarmby and, by the middle of June 2006, of Mr Shepherd's observation while employed by Hoy Mobile, and thus had sufficient knowledge of the fraud to justify a finding that it had elected to affirm the franchise agreement. Hoy Mobile argued that at least one of the following seven matters amounted to such an election by Allphones: (1) On 9 June 2006, Allphones required Hoy Mobile to return an unamended RTCI agreement so that it could pay Hoy Mobile monies due to it. (2) Allphones' letters of 26 and 29 June 2006 required Hoy Mobile to pay for and participate in the store refresh. A further or alternative act of affirmation was Allphones' subsequent letter, reiterating this requirement on 28 July 2006. (3) Mr Ilievski's demand on 30 June 2006 for Hoy Mobile to release a phone to Allphones for its retention customer. (4) Allphones' letter of 3 July 2006 which referred to mutual obligations between it and Hoy Mobile, complained of a breach by Hoy Mobile of the franchise agreement, relied on cl 7.8 and required Hoy Mobile to comply with the franchise agreement. Moreover, Allphones then required Hoy Mobile to sign a new franchise agreement. (5) On around 17 and 19 July 2006 Allphones lifted, first the stock hold, and then the commission hold, it had imposed. Hoy Mobile said this was an unequivocal affirmation. (6) Allphones permitted the franchise agreement to continue on foot until 28 August 2006. In the intervening period it had received from and paid to Hoy Mobile various sums by way of commission and other monies due in accordance with the provisions of the franchise agreement. (7) In letters of 23 May, 7 July and 10 July 2006, Allphones had invoked dispute resolution procedures under the franchise agreement. The letter of 7 July had threatened to terminate if Hoy Mobile did not avail itself of the opportunity to respond to the allegations. Ultimately, the meeting was arranged for 22 August, but by then Hoy Mobile said that Allphones had affirmed the contract. 223 For the reasons which follow, I am of opinion that none of these seven matters was sufficient alone or in combination to constitute an election by Allphones to affirm the franchise agreement.
22.1 Principles of election 224 In Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at 41, Deane, Toohey, Gaudron and McHugh JJ said: 'The true nature of election is brought out in this sentence from the seminal work of Spencer Bower and Turner, The Law Relating to Estoppel by Representation (3rd ed (1977), p 313): 'It is of the essence of election that the party electing shall be "confronted" with two mutually exclusive courses of action between which he must, in fairness to the other party, make his choice.' 225 Their Honours had pointed out that the consequences of an election may well be serious for the party electing and that, in particular, election involves the abandoning of a right that is available. Thus, they held that a party could only be held to have elected if he had so communicated his election to the other party in clear and unequivocal terms: Immer 182 CLR at 39. They noted that there was a distinction between the situation where a party to a contract, faced with the choice of terminating it or keeping it on foot, chooses to terminate as opposed to when the contract remains on foot. In the case of a termination, the party ordinarily will have acted in a way that leaves no doubt as to the choice made, which would be clearly inconsistent with the exercise of the right to keep the contract on foot, because it no longer exists: Immer 182 CLR at 41. Deane, Toohey, Gaudron and McHugh JJ emphasised that at the heart of election was the idea of a confrontation which, in turn, produced the necessity of the party confronted making a choice: Immer 182 CLR at 42. 226 Mere awareness of a right to rescind or terminate or of facts giving rise to a right to rescind or terminate will not necessarily have the consequence that the party will be held to have elected to affirm the contract if he or she acts on the basis that the contract remains on foot. As Deane, Toohey, Gaudron and McHugh JJ noted (Immer 182 CLR at 43): 'Such an implication is at odds with the notion of being confronted with the necessity of making a choice.' 227 In the present case, Hoy Mobile did not identify when, in the period between Allphones learning of the transaction with Mr Quarmby in late May and giving its notice of intention to terminate in late August 2006, Allphones was required to make an election either to terminate the franchise agreement or abandon its right to do so. While in Mr Donnellan's email of 10 July 2006 Allphones had stated that it was relying on fraud, the precise nature of the fraud on which it was relying had not been revealed by it, despite requests through Hoy Mobile's solicitor, that it do so. Nor, had Hoy Mobile disclosed anything about the existence, nature or extent of its fraud to Allphones. Hoy Mobile, however, was acutely aware of the fraud it had committed and uniquely placed to understand its full implications. 228 In his classic speech in Scarf v Jardine (1882) 7 App Cas 345 at 360-361 Lord Blackburn discussed the principles upon which the doctrine of election had developed. He said that where a person had an option to choose one or other of two inconsistent things, when once he or she had made his or her election, it cannot be retracted: Scarf 7 App Cas at 360. He emphasised that the election had to be communicated (Scarf 7 App Cas at 361): '... to the other side in such a way as to lead the opposite party to believe that he has made that choice, he has completed his election and can go no further; and whether he intended it or not, if he has done an unequivocal act - I mean an act which would be justifiable if he had elected one way and would not be justifiable if he had elected the other way - the fact of his having done that unequivocal act to the knowledge of the person concerned is an election.' 229 And, his Lordship said that where there is a right to elect '... the party is not bound to elect once; he may wait and think which way he will exercise his election, so long as he can do so without injuring other persons ...' (Scarf 7 App Cas at 360, emphasis added). Lord Blackburn emphasised that election involved, first, the making of the choice between one of two inconsistent rights and, secondly, the notification or communication of that choice to the party against whom the rights existed in a way that affected that other party. Hence, in Immer 182 CLR at 43 Deane, Toohey, Gaudron and McHugh JJ referred to the party being '... confronted with the necessity of making a choice'. 230 In Tropical Traders Ltd v Goonan (1964) 111 CLR 41 at 55 Kitto J said that the person with the choice might keep the question open '... so long as it did nothing to affirm the contract and so long as the [other party's] position was not prejudiced in consequence of the delay'. He said that when the vendor in that case told the purchaser that it would not rescind a contract for the sale of land before a particular date if the purchaser paid an additional sum for interest, costs and expenses, the vendor was doing no more than promising that it would not elect to rescind the contract before that date if the conditions were complied with. Kitto J said that in that case a grant of an extension of time was not an election to affirm but, rather, amounted to an announcement of an intention to refrain from electing either way until the money had been paid or the extended time for performance had elapsed: see too Champtaloup v Thomas [1976] 2 NSWLR 264 at 268C-269B per Glass JA; 273D-274D per Mahoney JA; Street CJ agreeing with both at 266: Hunter BNZ Finance v GC Maloney Pty Ltd (1988) 18 NSWLR 420 at 435C-436B per Giles J: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at 89-92 [356]-[364] per Finn J. And, as the judgment of the Exchequer Chamber written by Blackburn J (see Scarf 7 App Cas at 360) established, this principle applies to a party to a contract who discovers his entry into it was induced by the fraud of the other: Clough v London & North Western Railway Co (1871) LR 7 Ex 26 at 34-35.
22.2 Consideration 231 The seven instances relied on by Hoy Mobile must be considered in the context of what Allphones knew at the time and whether, having acted in the way on which Hoy Mobile relied for its argument, Allphones can be said to have communicated to Hoy Mobile that it had made an election. 232 I am satisfied that by no later than 7 July 2006 Allphones had clear and detailed knowledge that Hoy Mobile had engaged in a fraud by unlocking phones and selling them for cash profits which were not paid to Allphones (i.e. skimming). Based on the information given to it by Mr Quarmby and Mr Shepherd, Allphones was then aware that this fraud had been carried out since at least before Mr Shepherd began work at Hoy Mobile in about November 2005. I find that Mr Donnellan's letter of 7 July relied on the power of termination without notice, expressly given to Allphones by cl 9.3(viii). Allphones, through Mr Donnellan and Mr Harkin, was also aware by 7 July 2006 that it had the choice of continuing with or immediately terminating the franchise agreement under cl 9.3(viii). 233 On the other hand, at that time Allphones did not know how long before November 2005 Hoy Mobile had engaged in the fraudulent conduct. Nor was it aware of the details of the number of phones or the amount of money involved (other than the transaction with Mr Quarmby). The full nature and extent of Mr Hoy's and Hoy Mobile's fraudulent conduct was not known to Allphones at any relevant time before these proceedings began.
(a) Demand for unamended RCTI agreement 234 As at 9 June 2006, when Allphones demanded the return of an unamended RCTI agreement from Hoy Mobile, I am satisfied that it had knowledge of what happened in the sale to Mr Quarmby. However, I am not satisfied that at that time it had discovered or fully absorbed the implications of two recharge cards appearing on its point-of-sale records in connection with the payment of $199 for Mr Quarmby's phone. Nor am I satisfied that Allphones' asking for the complete RCTI agreement to be signed was inconsistent with Allphones keeping alive its right to terminate. After all, there was no provision in the franchise agreement which required Hoy Mobile to execute the RCTI agreement. Its execution was proffered by Allphones as a means of facilitating prompt payment of money which was payable once the requirements of the Goods and Services Tax (GST) legislation were satisfied. I am not satisfied that, at this time, Hoy Mobile had any belief that Allphones had made a choice to affirm the franchise agreement. At that time, Hoy Mobile was ignorant that Allphones had any awareness of its fraud. It did not believe that Allphones made an election at any time in June 2006. Indeed, Hoy Mobile was then complaining directly, and through its solicitor, that Allphones was refusing to recognise the existence of any franchise agreement. Hoy Mobile was hardly in a position to suggest that, in fairness to it, Allphones was confronted with the requirement to make a choice then and there: see Immer 182 CLR at 41. 235 Nor, apart from ease of administration, and the obligation to pay Hoy Mobile more promptly, was there any identifiable 'benefit' accruing to Allphones from seeking execution of the RCTI agreement. I am of opinion that Allphones had insufficient knowledge by the time its receipt of the RCTI agreement on 15 June to find that it had elected not to terminate the franchise agreement by reason of Mr Hoy's fraudulent conduct.
(b) Store refresh requirement 236 By the time the store refresh letter was sent to all franchisees on or after 29 June 2006, Allphones was aware of skimming having occurred at Hoy Mobile through both Mr Quarmby's transaction and Mr Shepherd's revelations as to what had happened while he worked there. However, Allphones was still seeking legal advice as to its position. Mr Berner only interviewed Mr Quarmby on 30 June 2006, although I infer that the information Mr Quarmby had given to Mr Ilievski had been passed on to Allphones' solicitors by that time. And, by 30 June, Allphones' solicitors were proceeding on the basis that they were acting in anticipation of litigation as well as giving Allphones advice as to its position. 237 Nonetheless, as between it and Hoy Mobile, there was nothing to indicate to Hoy Mobile that Allphones was at that time aware of Mr Hoy's fraudulent activity. Mr and Mrs Hoy did not believe that by requiring the store refresh to be paid, Allphones had made a choice between keeping the franchise agreement on foot or terminating it, since Hoy Mobile was then unaware that its fraud had come to Allphones' knowledge. 238 And, although Allphones made the demand, Hoy Mobile did not act on it. Indeed, Mr Birch wrote to Mr Harkin on 6 July 2006 complaining that there was no provision in the franchise agreement entitling Allphones to require Hoy Mobile to undertake the store refresh or to pay for it. At the very least, that raised a bona fide argument as to whether one or other party was persisting in an erroneous interpretation of the contract.
(c) Request for stock transfer 239 The demand made on 30 June 2006, that Hoy Mobile transfer a mobile phone back to Allphones, and its imposition of the commission and stock holds were breaches of the franchise agreement, not actions taken under or in reliance on the terms the agreement such as to amount to an affirmation of it. Likewise, Allphones' demand that Hoy Mobile execute a new franchise agreement could not have been understood as an election to affirm a different agreement.
(d) Findings regarding election 240 I am satisfied that prior to Mr Donnellan sending his letter on 7 July 2006, Allphones had not communicated to Hoy Mobile that it had chosen between two mutually exclusive courses of action with which it had been confronted, at that time and between which, in fairness to Hoy Mobile, Allphones had to choose: Immer 182 CLR at 41. In addition, Mr and Mrs Hoy did not give evidence that they believed that Allphones had affirmed the franchise agreement existence prior to this time. To the contrary they perceived its actions as breaches of the franchise agreement, or denials of its existence. 241 Once Mr Donnellan's letter of 7 July had been received by Hoy Mobile, it was clear to both parties that Allphones wished to discuss a serious matter. By the following Monday, 10 July, Allphones had communicated that it believed Hoy Mobile had committed a fraud. Mr Hoy was instantly aware, on receiving that news from his wife, that the fraud concerned the unlocking of phones. Mr Donnellan's evidence was that he wanted a meeting so that he could hear what Hoy Mobile had to say about the allegations. I accept his evidence that he wanted to give Hoy Mobile an opportunity to provide its response, if any, to the allegations which were being made by Allphones. 242 However, Mr Hoy never attended a meeting with Allphones after 9 May 2006, when Mr Harkin had insulted and berated him during the quarterly review. I have some sympathy with Mr Hoy's reluctance to attend a further meeting after that experience. Allphones submitted that Mr Harkin's behaviour during this quarterly review was merely to be characterised as part of the rough and tumble of business dealings. I reject that submission. Of course, business dealings can be, and often are, robust exchanges. Mr Harkin did not offer any justification for his abusive conduct towards Mr Hoy on 9 May at the quarterly review. Objectively, there was no justification for it. He acted in a bullying, offensive and overbearing manner towards Mr Hoy. I reject the argument that such behaviour should be characterised as acceptable or normal in the relationship between franchisor and franchisee. Obviously, allowances must be made for different people and the way in which they react and interact. Having had the benefit of seeing both Mr Hoy and Mr Harkin in the witness box, I am satisfied that in a commercial negotiation and meeting, Mr Hoy was quite capable of looking after himself and his own interests. He was no 'wilting flower'. However, in his relationship with Mr Harkin, Mr Hoy was not in a particularly powerful position. To be abused and sworn at as Mr Hoy was, during the course of a business meeting, for no good reason, was not something which, in the ordinary course, anyone should have to face. Mr Harkin's behaviour was inappropriate. I do not draw any adverse inference against Mr Hoy for refusing to have a further meeting with Mr Harkin. 243 Hoy Mobile argued that by the time Mr Donnellan wrote the letter of 7 July 2006, Allphones had sufficient knowledge that it was in a position to allege fraud and thereafter to be held to an election to affirm the franchise agreement by its subsequent acts. I reject that submission. I am of opinion that Mr Donnellan's letter of 7 July 2006 and subsequent emails demonstrated that Allphones was asserting that it did not wish finally to elect to terminate the franchise agreement without giving Hoy Mobile an opportunity to explain conduct that, prima facie, appeared to be fraudulent. Allphones was entitled to keep the franchise agreement on foot while it considered whether or not to terminate. And, it was entitled to afford Hoy Mobile the opportunity to explain its conduct so that, if appropriate, the franchise agreement might be kept on foot. Allphones' conduct after 7 July 2006 communicated to Hoy Mobile that a meeting was necessary for the parties to understand how to assess the status of their relationship. 244 Through neither party's fault, a meeting was unable to be arranged between 7 July and 22 August. During that period, Hoy Mobile wished the contract to remain on foot while Allphones had indicated that it was keeping its options open until Hoy Mobile had had an opportunity to explain its, prima facie, fraudulent conduct. A reasonable person in Hoy Mobile's position could not have understood Allphones' conduct at this point to amount to an affirmation of the franchise agreement. Both parties were still pursuing the course of holding a meeting for the purposes set out in Mr Donnellan's letter of 7 July. That course was being pursued with Hoy Mobile's full knowledge, and indeed at its request, through Mr Birch's email of 10 July to that effect. And, neither Mr nor Mrs Hoy gave evidence that they understood that Allphones had chosen to affirm during this period. Allphones was not making a choice of affirming the franchise agreement, while holding matters in abeyance pending the meeting at which Hoy Mobile could explain its position. Rather (as Kitto J observed was permissible in Goonan 111 CLR at 55) Allphones had said that it intended to refrain from electing until the meeting occurred. Nor, in fairness to Hoy Mobile, was Allphones required to make a choice before that meeting had occurred: Immer 182 CLR at 41. 245 Based on what Mr Quarmby and Mr Shepherd had revealed, Allphones had knowledge by mid-June 2006 of Mr Hoy's modus operandi and the general nature of what he had done from late 2005 to mid-March 2006. But, Allphones was not aware of other fraudulent acts by Mr Hoy before or after that period. When she first discussed the matter with Mr Birch on 10 July 2006, Mrs Hoy did not know how many unlocked phones had been sold by her husband after he unlocked them or the extent of his failure to account. There is no evidence that Allphones knew the full picture at that time. And, at that time, Mrs Hoy raised with Mr Birch the question whether they could lose the store. He told her that if Allphones were able to terminate the franchise agreement because of the fraud, then Hoy Mobile would not be entitled to compensation. That showed that, as at 10 July 2006, Hoy Mobile had not been affected adversely by any delay on Allphones' part to communicate its election. 246 From 10 July 2006, the parties were acting on the common understanding that Allphones had postponed an immediate termination of the franchise agreement at Hoy Mobile's express request, so that Hoy Mobile could meet with it and discuss the serious matters involved. In that context, acts and performance required by Allphones in the period leading up to any meeting could not have been understood by a reasonable person in Hoy Mobile's position - and I find were not understood by Mr and Mrs Hoy - to be an unequivocal affirmation of the franchise agreement. Rather, these were matters which a reasonable person would have understood as occurring in the context of the position being left open by Allphones while the parties waited to have an arranged meeting to discuss what was to happen. The meeting was delayed for over a month through no one's fault. In that context, both parties knew that contractual performance had to occur in the interim. Commissions had to be collected, remitted, and then paid. Stock had to be ordered, delivered and other usual incidents of their contractual relationship had to be given effect. 247 Of course, there are limits to the ability of a party to a contract to act 'without prejudice' to the legal consequences of those acts in the particular relationship. Unlike a landlord accepting a payment of rent and thus electing to waive reliance upon any pre-existing breach, Allphones did not communicate an unequivocal intention that the franchise agreement remain on foot. Rather, at Hoy Mobile's request Allphones had agreed to postpone making an election until the meeting occurred: cp: Goonan 111 CLR at 55. In that context, a reasonable person in the position of the parties would have understood that Allphones was acting on the basis that it was acceding to Hoy Mobile's request to postpone making an election. It was not electing once for all by its conduct in offering and requiring performance pending the meeting to make a choice. Allphones, in the context in which the parties then found themselves, was not evincing by its actions an unequivocal choice to keep the franchise agreement on foot and not to terminate it. 248 I find that both parties proceeded on the agreed footing that Allphones would refrain from terminating for fraud until the meeting, ultimately arranged for 22 August 2006, had occurred. Both parties knew that, in the interim, they had to carry out the normal incidents of their relationship under the franchise agreement. 249 The principle of election operates to hold a party to a position it has communicated to the other party as the choice that it has made between two inconsistent rights. Communication of the choice cannot occur in a factual vacuum. The circumstances and context of the communication affect how a reasonable person in the position of the other party would understand it. A landlord accepting rent (Matthews v Smallwood [1910] 1 Ch 777 per Parker J) or a fire insurer, exercising rights to take possession of the insured's damaged premises (Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305 per Knox CJ, Isaacs and Starke JJ) acting unilaterally, could not say that it was acting 'without prejudice'. 250 However, those situations are far removed from that presented here. Hoy Mobile asked Allphones not to terminate pending a meeting. It cannot now say that, because Allphones expressly acceded to its request on 10 July for a meeting, it affirmed the franchise agreement. At the heart of the principle of election, as Deane, Toohey, Gaudron and McHugh JJ showed in Immer 182 CLR at 41, is not only the confrontation of the elector with a choice, but also the requirement that when so confronted the elector '… must, in fairness to the other party, make his choice' (emphasis added). Having requested Allphones not to make the choice before Hoy Mobile could meet with it, Hoy Mobile cannot complain that, in fairness to it, Allphones should be held to have made a choice that neither party intended it to have made. 251 Each party accepted that neither would be taken by the other as having unequivocally chosen between inconsistent rights until at least the time after the meeting had occurred. Fairness, in the sense referred to in Immer 182 CLR at 41, would be eschewed, not advanced, if Allphones' accommodation of Hoy Mobile's request not to terminate until a meeting occurred, were used to preclude it from terminating at or immediately after that meeting. 252 The position is analogous to the situation in which parties to a contract enter into a course of negotiation which has the effect of one leading the other reasonably to suppose that the strict legal rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, pending the outcome of the negotiation. Here, Hoy Mobile's request of 10 July that Allphones hold a meeting on its terms, can be seen as such a suspension. In those circumstances equity would not allow the parties' strict legal rights to be enforced so as to deprive Allphones of a right to terminate the franchise agreement because it acted on Hoy Mobile's request to delay doing so: cp Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448 per Lord Cairns LC (explaining the doctrine of equitable estoppel). Although no equitable estoppel was alleged here, a reasonable person in the position of the parties would have understood that nothing Allphones did after the exchange of emails on 10 July 2006 and until the meeting of 22 August 2006 amounted to an unequivocal election involving a choice between inconsistent rights. 253 Where one of the parties to a contract has committed a fraud in its performance, the fraudster cannot complain that he or she has been prejudiced by acts of the other party done without sufficient knowledge of his or her fraud. That is why the courts have always held that fraud fundamentally affects the way in which relations between parties are viewed. As Denning LJ said in Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712 (see also SZFDE v Minister for Immigration and Citizenship (2007) 237 ALR 64 at 68 [15]-[16]): 'No court in this land will allow a person to keep an advantage which he has obtained by fraud. ... Fraud unravels everything.' 254 By concealing from Allphones the nature and extent of what he was doing, Mr Hoy and Hoy Mobile continued to benefit from his fraudulent activity at least to 7 July 2006. Part of that 'benefit' involved concealing from or not disclosing to Allphones circumstances knowledge of which would entitle Allphones to terminate the franchise agreement. 255 Even where fraud is involved, it is possible for the innocent party to be held to have elected between inconsistent rights accruing to it in consequence of that fraud. But before the innocent party is held to such an election, clear evidence is necessary that it, with full knowledge of the facts, intended to do so. There would be an inherent unfairness if one party to a contract, who has already achieved, or sought to achieve a benefit by his or her own fraudulent conduct, was able to take advantage of the other party's ignorance of the fraud by holding the innocent party to an election that he or she has affirmed the contract. 256 The insidious nature of the fraud begins with the deception inherent in its commission. The innocent party to the contract, or sometimes a third party, is deceived by the fraudster's conduct. The nature of the deception is to convey a state of affairs, contrary to fact, on which the innocent party proceeds. Here, Hoy Mobile had for over two years unlocked phones and made undisclosed profits. Each of those activities put Allphones in breach of its arrangements with the carriers. Each was dishonest. And each was, at all times prior to the discovery of Mr Quarmby's transaction, unknown to Allphones. 257 I find that, in July and August 2006, Allphones was unaware that Mr Hoy had been committing the fraud beginning sometime early in 2004. All that Allphones knew at the time was what Mr Shepherd and Mr Quarmby had told it. There is no evidence that Allphones had any other knowledge of when, or the circumstances in which the fraud first commenced. Nor did Allphones have knowledge that the fraud continued after Mr Quarmby had purchased his phone, although I have no doubt it suspected that this had occurred. But suspicion is one thing, and knowledge another. Mr Hoy had made no, let alone full and frank, disclosure of what he was doing at any time prior to Allphones issuing the notice of intention to terminate. While Allphones may have suspected that more was involved than it knew, given the element of fairness inherent in the concept of election (Immer 182 CLR at 41) Hoy Mobile's assertion of election by Allphones based on incomplete information and disclosure by Hoy Mobile, does not provide any occasion to find that Allphones elected to affirm the franchise agreement. 258 So far as Hoy Mobile relied on matters occurring after 7 July 2006, I find that the lifting of the stock and commission holds were not unequivocal affirmations of the franchise agreement. Commissions had been earned prior to that time. It would be unjust to impute to Allphones an election, once for all to give up its right to terminate for Hoy Mobile's undoubted fraud, simply because, in ignorance of the full nature and extent of that fraud, it acceded to Hoy Mobile's request not to terminate until the 22 August meeting could occur. 259 And, Hoy Mobile's argument that Allphones had delayed unreasonably, until 28 August, from issuing the notice of its intention to terminate is, in my view, without substance. Hoy Mobile had requested the delay. Through neither party's fault, the meeting could not be arranged earlier than 22 August. Any delay in the six days after that was inconsequential. Mr Harkin said Allphones would issue the notice. Hoy Mobile did not contend that anything occurred, after he said this and before 28 August, which amounted to an election by Allphones. 260 Nor do I consider that the conduct of Allphones amounted to it invoking contractual procedures for dispute resolution in such a way as to preclude it from terminating. If disputes could not be resolved under the franchise agreement, the parties were entitled to exercise their rights under it, including, as it contemplated, terminating the relationship. The franchise agreement did not require the disputes to be resolved. It merely required the parties to follow a particular procedure in certain cases. Were the procedure not to produce the result of resolution, I am of opinion that, had it been ready and willing to perform, it would have been open to Allphones to terminate. I will consider this issue below. 261 For these reasons, I am of the opinion that Allphones did not make an election depriving it of any right to terminate the contract.
ALLPHONES' ARGUMENT BASED ON cll 15 AND 16 OF THE FRANCHISE AGREEMENT 262 Allphones also argued that cll 15 and 16 operated to prevent Hoy Mobile relying on any election, by Allphones to keep the franchise agreement on foot, which was not in writing. Because of my findings above it is not necessary to consider the application of R v Paulson [1921] 1 AC 271 at 282-283 to cll 15 and 16 on which Hoy Mobile relied. However, their Lordships indicated that the issue depends on the facts for they said, as Owen J pointed out in Owendale Pty Ltd v Anthony (1967) 117 CLR 539 at 610, that '[i]t may well be that many cases may occur to which the clause as to waiver would be applicable' before saying that, in that case, it was not: see too Owendale 117 CLR at 590 per Taylor J with whom Barwick CJ agreed on this issue at 569; per McTiernan J at 581; per Kitto J at 581-582. And, in any event, contractual provisions like cll 15 and 16 are strictly construed: Craine 28 CLR at 325-326; affirmed in Yorkshire Insurance Co Ltd v Craine [1922] 2 AC 541 at 546; (1922) 31 CLR 27; see too Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 at 584 per Knox CJ and Gavan Duffy J; 589 per Isaacs J; 590 per Rich J; and 594 per Starke J.
HOW ALLPHONES NEGOTIATED AND DEALT DISHONESTLY WITH COMMISSIONS PAYABLE BY THE CARRIERS 263 During 2004 and 2005 Mr and Mrs Hoy developed concerns as to whether Allphones was properly accounting to Hoy Mobile, notwithstanding that Mr Hoy was aware he was not properly accounting to Allphones. There was some justification in their concerns. 264 In the period leading up to the entry into the franchise agreement, Mr Donnellan was also negotiating for Allphones to be an authorised Optus dealer. A dealer agreement was executed between Optus and Allphones in mid-July 2003. Optus was obliged to pay to Allphones monthly the various amounts of commissions, which included bonus commissions due in respect of activations of services and airtime usage. Thus, Optus was contractually obliged to pay to Allphones, and not to its franchisees, what the franchise agreement described as MTSC and MTAC. 265 In the second half of 2003, Allphones began deducting or withholding portions of commissions paid to it by Optus in respect of activations made at the Eastgardens store. But Allphones did not disclose to Hoy Mobile that it was acting in this way A joint report prepared by Kieran Lynch, an expert accountant engaged by Hoy Mobile, and Carl Nicoll, Allphones' commercial manager, established that numerous deductions were made from different Optus commissions, including those commonly known as bonuses and super bonuses. 266 Capped plans became a prominent feature of the mobile phone market after mid-2003. The commission scales previously used by carriers in agreements with Allphones were not initially appropriate to reward the sales of this new product. Over time, between 2003 and 2005, Mr Donnellan negotiated with Optus and other carriers a new basis for the payment of commissions and bonus commissions. He said that the carriers kept changing the way in which they paid bonuses and super bonuses. He asserted that the carriers had no contractual obligation to give any such bonuses and they could be withdrawn at any time. 267 Commissions, including bonuses and super bonuses, were paid by some carriers directly to the Allphones' head office account, with the accounting code of 'ALL30', and then Allphones paid the franchisees a proportion of that commission. A super bonus was payable to Allphones by Optus if a store achieved at least one successful Optus broadband connection in a month. Other types or levels of bonuses were payable depending on the plan or product sold.
24.1 The Optus stretch bonus 268 In early May 2004, Optus negotiated with Allphones a bonus payment of $150 for each new post-paid phone activation in the three month period between May and July 2004. The parties have described this as 'the Optus stretch bonus'. Mr Donnellan said that this was introduced to help Optus compete with an aggressive marketing campaign by its rival carrier Hutchinson, which was also known as '3'. On 3 May 2004 Allphones' then chief financial officer, Yong Lim, sent an email to David Miller, Optus' national account executive for Allphones with copies to Mr Donnellan and Mr Baker saying: 'As discussed, please ensure that these $150 bonus payments are processed against our head office code ALL30. At no circumstances are these bonus payments to appear on the stores RTCIs. If these bonus payments appeared on the stores RTCIs, we would expect Optus to rerun and reprint all RCTIs to exclude these bonus commissions. Otherwise, your commission department could pay us the additional similar figures to Allphones head office (ALL30). Sorry to be a bit blunt, but we had a problem with the previous bonus commissions payments when it was first introduced.' (sic, emphasis added) 269 Mr Donnellan agreed that the commissions referred to in this email would be generated by activations or sales made in Allphones' franchisees' stores. Mr Donnellan said that Allphones retained at least a portion of the $150 bonuses that Optus paid under the agreement referred to in the email, without accounting for it under the franchise agreement. The email shows that by May 2004, Allphones was negotiating commission payments to itself based on its franchisees' sales which, however, it did not propose to disclose to, let alone share with, the franchisees in accordance with cl 7.4 of the franchise agreements. 270 Mr Donnellan claimed that he understood that cl 4 (which dealt with Allphones being able to make alterations to its system) authorised Allphones to take a higher share of commissions paid by carriers than cl 7.4 permitted, '[i]f it's for the interests of franchises'. He expressed his understanding of how cll 4 and 7 worked as follows: 'The system basically encompasses everything, your Honour, in terms of the way the stores look, promotion, sales from time to time, so from our perspective it is always that if we have an opportunity that enables us to make more money, that that's a core part of our system. A core part of our system is that we have choice between the networks and there is an inherent competitive tension between them, so my view is that clause 4 enables us to act subject to good faith and subject to our fiduciary obligations to make our franchisees - provide them with the opportunity to make more money, because we are an agent. It's not our money, remember. We are trying to act on behalf of others and if they put conditions around promotions and they want us to do things, then provided it fits within the overall ambit of increasing the pool of funds paid to franchisees, we generally support it. Is there anything you wanted to point to in clause 7 that bears on your understanding of the scope you have to have these commissions fall outside the clause that deals 72.5 per cent that you mentioned? --- No, your Honour.' (emphasis added) 271 Mr Donnellan claimed that he understood that cll 4 and 6.4(iv) (which dealt with the obligation of a franchisee to sell at the price and on the conditions set by the franchisor in advertising and promotions) authorised Allphones to withhold from its franchisees any entitlement to commissions, such as the $150 bonus in respect of competing with the '3' campaign, because he asserted these commissions were outside the reach of cll 7.3 and 7.4 which set MTSC at 72.5%. Ultimately, however, he agreed that cl 4 did not of itself authorise Allphones to change the agreed division of commissions provided in cl 7. He also admitted that cl 6.4(iv) did not specifically say anything about the division of commissions payable by carriers between franchisor and franchisee nor did it justify Allphones' head office retaining anything from those commissions. In the passage I have emphasised above, he then explained that he understood that Allphones had athe bility to be the judge of what was in the interest of the franchisees. 272 Mr Donnellan understood that if Allphones had acted strictly in accordance with cl 7, then 72.5% of the $150 would be payable to the franchisees under cl 7.4. But, he said that because Allphones had 'improved' the system under cl 4, it was entitled to take money out of the $150 bonus and keep it for itself. If he seriously thought that Allphones was acting in a fiduciary capacity in negotiating these arrangements, a proposition which Allphones' submissions denied, then Mr Donnellan had no understanding of the fiduciary's duty not to profit from its position without fully informed consent. He would also lack any understanding of contract law if he seriously thought that Allphones could avoid paying commission to franchisees under cl 7.4 by relying on cll 4 and 6.4(iv) as he asserted. 273 I find that Mr Donnellan considered that Allphones could do what it wanted in accounting to its franchisees for commissions, without regard to its obligations under cll 7.3 and 7.4, as well as in negotiating commercial benefits for itself based on the franchisees' sales with carriers. He did this because he knew that Allphones had concealed from its franchisees the true amount that it was paid by Optus. His explanations of how cll 4 and 6.4(iv) justified this conduct were specious. 274 Allphones argued that despite the 'seemingly clear terms' of the email of 4 May 2004 from Optus' Mr Miller, the evidence of Mr Donnellan 'suggests that there may have been some conditions applicable to the payment of this commission by Optus' (emphasis added). It argued that it was simply not possible to know whether there were such conditions, based on the email viewed in isolation. Whether there were conditions attaching to the payment which disentitled Hoy Mobile to receive its share of this commission had been in issue on the pleadings and in the expert evidence well before the hearing. However, Allphones called no substantive evidence on the matter, other than to rely upon Mr Donnellan's speculation. 275 In his examination in chief on this topic, Mr Donnellan said that Allphones had asked Optus to ensure that it was allowed to offer different incentives to different franchisees in order to promote performance, in the hope that the bonus payments would continue. He said that Optus had agreed to pay the $150 bonuses as per connection 'on a budget basis', meaning that Allphones had to modify its marketing, order stock and ensure that franchisees knew that they could make money over the three month period. He was not asked what the supposed conditions were for the payment of this commission to franchisees. His vague and general assertions do not fit with Mr Lim's insistence in his email of 3 May 2004 that if the payment of the $150 commission appeared on the stores' RCTIs, Allphones would expect the same money to be paid to it in full. The most natural inference to draw (as I do) from Mr Donnellan's failure to give any evidence on this aspect of the topic in chief, is that any such evidence as he might have given would have exposed facts unfavourable to Allphones' case: CEPU 162 FCR at 525 [230]; Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418E-G per Handley JA. 276 Mr Lynch traced through the correspondence and found no such conditions. I accept Mr Lynch's evidence that the commission was paid in full by Optus to Allphones. Mr Lynch found recipient created tax invoices addressed to Allphones from Optus evidencing Allphones' receipt of bonuses paid to Allphones' ALL30 account. That was what Allphones had instructed Optus to do in order to hide these payments from the franchisees so that they did not learn about the payments through their own recipient created tax invoices that they could generate at their stores. Thus Mr Lynch did not find any identified figure connecting those payments to Hoy Mobile. 277 Allphones argued that the experts merely assumed that the full $150 commission per connection had not been paid to Hoy Mobile, and that the experts had agreed than an amount of stretch bonus had been paid by Allphones during the three month period in 2004. I reject that submission. Mr Lynch established that Allphones received full payment. He also said that '[o]ther stretch bonus amounts were involved in that program'. The only material he had seen dealing with the stretch bonus payments were Allphones' RCTIs which he had seen before. I am satisfied that Mr Lynch did not consider that any money in respect of the $150 stretch bonus had been paid to Hoy Mobile by Allphones. Again, it would have been easy for Allphones to demonstrate that it had made such payments. But, it chose not to do so in circumstances where Mr Lim's email evinced a clear intention that Allphones wished to retain the whole sum for itself. I am satisfied that, on the evidence before me, that is exactly what Allphones did. 278 Allphones' instruction to Optus for the payment of this commission was a deceitful way of doing business with franchisees who were entitled, under cl 7.4, to be paid 72.5% of all commissions paid by Optus to Allphones for MTSC and MTAC. I am of opinion that Allphones' argument that there were possible conditions is spurious. I find that there were no conditions which disentitled Hoy Mobile to be paid its share of this commission in full under cl 7.4. The experts agreed that Hoy Mobile was entitled to $16,388.63 (including GST and excluding interest) for the stretch bonuses.
24.2 Other carriers' commissions 279 The joint report of Mr Lynch and Mr Nicoll showed that in February 2005 Allphones began deducting $10 from the commissions it received from Hutchison, without reporting this to franchisees. The total of these deductions in respect of Hoy Mobile's store was $2,041.66 excluding interest. And, between July 2006 and August 2007 Allphones deducted $5 per transaction for Virgin and Vodafone commission payments which involved, for Hoy Mobile, $1,132.45 and $709.78 respectively. The effect of these deductions was to reduce the amounts which Allphones reported were due by it to the franchisees under cl 7.4 for commissions earned. 280 Allphones issued a new disclosure document dated 29 August 2006, in which it disclosed to franchisees for the first time that it was charging a 'fee' of $5 for each post-paid contract 'for carrier reconciliation charges'. There was no contractual basis which entitled Allphones to charge this fee to Hoy Mobile. 281 In November 2006, after these proceedings were commenced, Mrs Hoy spoke with Mr Nicoll concerning her perception of irregularities in the payment of commissions by Allphones. Mr Nicoll reported this conversation to Mr Ilievski and Mr Harkin in an email on 22 November 2006 saying: 'When our payment for [Hutchinson] & Virgin went out, we did showed the commission before we take out the $10 admin fee ($5 for Virgin), but in the total commission calculated she has picked up the difference. She mentioned a big court battle going on and she wants to use this file we sent her as a "weapon" to prove her case. I THINK an email letter went out from Matthew confirming a deduction like this, but the commercial team buries it in the commission rec'd from carrier. I can't find this email or letter though …' (sic, emphasis added) 282 Mr Nicoll may have had in mind the August 2006 disclosure document when he referred to 'an email letter'. Mr Harkin's response was simply to refer, in insulting language, to Mrs Hoy being a fraud. On 7 December 2006 Mr Ilievski sent an email to Mr Nicoll noting that during the quarterly review meeting with the Hoys, there had been a discussion about sending the Optus RCTIs for the Eastgardens store to them. He asked Mr Nicoll to see if it was possible to send the last two months' RCTIs for Optus. This caused Mr Nicoll some concern. He sent an email to the finance director of Allphones, Steve Toth, and Mr Ilievski in response saying: 'Steve, we deduct $5 off each connect as an admin fee from the carrier's commission. The stores generally are not aware of this as all information from the carrier is filtered to account for this $5. For example, the commission schedule is adjusted for the $5 admin fee. I do believe that Matthew mentioned something about the $5 fee before, but can not find anything on this, nor has Katie [Jales] found anything. I have concerns that sending the Optus RCTI will flag to Eastgardens the discrepancy, and it will cause a fight. Can you think of a way out of this? I'd like to tell them that they will not get the RCTI, and they can get commission based on the schedules we provide and they can verify payment from the breakdown files we send them. Thoughts?' (emphasis added) 283 In cross-examination, Mr Nicoll said that he did not want to be the one to inform Hoy Mobile that the 'administration fee' of $5 had been deducted prior to Allphones accounting for commissions it had received from carriers. When asked why he responded: 'If someone told you you were going to have your wage garnished or your commissions garnished you wouldn't look on it favourably. … It is not my role to tell a franchisee that there is going to be a [change] in the commission structure they had not been aware of … before.' 284 The method by which Allphones made the deductions in respect of the Optus commissions due to franchisees involved calculated dishonesty by Allphones. Mr Nicoll explained one way in which this was done. At the beginning of every month, Allphones sent to franchisees a statement of the commissions and bonuses which were to be paid for the various plans and deals offered by the different carriers for that month. Those statements were the basis on which franchisees were informed what they and Allphones would earn by way of MTSC and MTAC for their sales activities in that month. The Optus statement was in the form of an excel spreadsheet prepared by Optus and electronically sent to Allphones. Typically, between 2003 and mid-2005, (before the flat rate of $30 was introduced) the Optus spreadsheet was three A4 pages long, with each page listing the details of over one hundred different commissions for the various plans and deals offered. However, unbeknown to the franchisees, including Hoy Mobile, Allphones had electronically manipulated Optus' version of the excel spreadsheet sent to Allphones, in order to reduce the commissions that it represented Optus would pay to Allphones in respect of activations made by the franchisee in that month. Mr Nicoll said that this manipulation took about twenty seconds. 285 For example, Allphones manipulated the schedules provided to it by the carriers by deducting the $5 'administration fee' from each item. The deduction did not appear on the face of the schedules which appeared to a franchisee as if it were the carrier's schedule of commission rates under cl 7.4. Thus Allphones reduced the amount it paid to the franchisees as MTSC. Mr Nicoll was asked about the commercial ethics of this practice. He emphasised that he was not the author of this deceit but was simply giving effect to his instructions. He gave the following evidence: 'And that was done every month? --- That's correct. Without ever telling the franchisees that the figures that were being sent to them were not the figures that were supplied by the carriers? --- Yes. Do you think that was honest? --- I think it was justified, yes. Do you think it was honest? --- Yes, that is the commission amount that is going to be paid for that connection. We are being honest in telling the franchisee that is what we are going to pay you for that connection. But what you were telling the franchisees was that that's what the carriers pay Allphones, isnt it? --- No, I'm telling the franchisees that is what we will pay you for that connection. HIS HONOUR: But this was on the carriers' stationery or emailed form that looked like it was one of the documents from the carriers that you say had been altered by Allphones? --- Yes. (emphasis added) 286 I find that Allphones intended franchisees to understand that the MTSC was calculated on the basis that the carriers were paying Allphones the commission amounts displayed in the manipulated schedules, when Allphones knew full well that that was an untrue representation. Hoy Mobile pleaded that this practice amounted to a breach of Allphones' obligation to pay 72.5% of the MTAC commissions received by Allphones, because it was a failure to account for and a withholding of that money from Hoy Mobile. I so find. 287 Allphones also sought to make a distinction between a 'commission' and a 'bonus' or 'super bonus' paid to it by a carrier, so that the definitions of MTSC and MTAC in the franchise agreement somehow applied only to 'commission' paid. On that basis, it argued that bonus payments of any description were not 'income received from the mobile telephone networks' in respect of either activation of a mobile phone customer or call revenue. I reject Allphones' argument. The bonus payments were 'income received' within the meaning of MTSC and MTAC in cll 7.4 and 7.5 of the franchise agreement. The carriers' schedules of commissions sent to Allphones and communicated by it to franchisees clearly treated the bonuses as part of the commission structure, rewarding particular sales or levels of sales. Such sales were the basis of activation and airtime usage of mobile telephone services.
24.3 The Optus 'bonus' and 'super bonus' commissions 288 In late June 2005, Optus introduced a new standard bonus commission for Allphones of a flat rate of $30 for every connection and mobile rate plan commencing on 1 July 2005. Optus was aware that some commission it paid was being retained by Allphones without this being reported to franchisees. Thus, in late June 2005, Mr Miller informed a commissions analyst within Optus that the flat $30 bonus had been approved for Allphones on a three month trial. The analyst asked: 'Is there to be a siphoned amount to head office?' Mr Miller replied: '… a flat $5 to head office', before correcting this in a later email that to say that 100% of the standard bonus should be paid to the Allphones' head office, account code ALL30. I infer that the reference to a 'siphoned amount' indicated Optus' understanding that Allphones was, by then, retaining sums from commissions paid to it by Optus, which were not disclosed to franchisees for the purposes of dividing commissions under cl 7.4 of the franchise agreement. 289 When he gave evidence, Mr Donnellan accepted that Allphones had to deal with commissions collected by it, from the carriers, in accordance with the terms of the franchise agreement. He also acknowledged that Allphones had 'to disclose what is due and payable to the franchisee as a result of their activities under their dealer code, [that is] the activation of a mobile service under the franchise agreement' (emphasis added). 290 Mr Lynch and Mr Nicoll in their joint report had concluded that, in the four years to 31 August 2007, Allphones withheld or deducted, from payments due to Hoy Mobile, $27,944.39 (including GST and excluding interest) in Optus bonus and super bonus commissions. Allphones argued that these deductions were justified because payments of commission by Optus, which were called 'bonus' or 'super bonus', did not fall within the ordinary and natural meaning of MTSC and MTAC in cl 7.5 of the franchise agreement. For the reasons given earlier I reject that argument. 291 Mr Lynch and Mr Nicoll agreed that the individual Optus RCTIs for each Allphones store (including Eastgardens) showed the amounts in this claim as having been payable by Optus to Allphones. That is, as between Optus and Allphones, Optus was liable for the relevant amounts as commission due in respect of Hoy Mobile's store. Allphones could only withhold such commission from Hoy Mobile pursuant to some provision in the franchise agreement. But, it was unable to identify any provision, either in the franchise agreement, or in any separate agreement it had with Optus, that changed the character of the payments by Optus, so that they were not commissions within the meaning of cll 7.4 and 7.5. Optus' own records showed no support for Allphones' argument. I reject it.
OTHER CHARGES 292 From 1 July 2006, Allphones advised franchisees that it would charge $150 per month for information technology (IT) costs which would, among other things, cover Allphones' costs incurred in providing the point-of-sale system. It sent a memorandum in mid-2006 outlining this charge and others, including a $50 rental fee for the EFTPOS terminal and banking fines of $50 per day for failure to bank for two consecutive days. Allphones also disclosed that it was then charging stores 74% of the merchant fees charged by banks and credit card companies and would continue to apply such charges.
25.1 Bank and credit card charges 293 Hoy Mobile argued that Allphones was not entitled to deduct any proportion of merchant fees in respect of credit card charges that Allphones had to pay to the credit card providers and its bank in respect of sales effected at the Eastgardens store. The definition of 'gross profit' in cl 7.5(i) required the deduction from the receipts from sales of the actual cost of goods sold, the cost of freight, and 'credit charges' (including all government duties and charges). 294 I am of opinion that the cost charged by a credit card provider for the use of its services to gain payment for goods sold, falls within the ordinary and natural meaning of 'credit charges' within cl 7.5(i) and that Allphones was therefore entitled to deduct from commissions payable to franchisees, 74% of the amount it had paid for merchant fees.
25.2 Rental fee for EFTPOS terminal 295 The mid-2006 memorandum advising of 'Head Office Charges' said that Allphones '…owns and retains legal ownership of all the EFTPOS machines throughout the Franchise Network. The monthly rental fee is $50 (Inc GST)'. That amounted to the unilateral imposition of a rental fee for equipment which Allphones required each franchisee (including Hoy Mobile) to have. Allphones asserted that this was a 'credit charge'. It deducted $50 per month, from the calculation of gross profit, for Hoy Mobile's use of the EFTPOS terminal provided. 296 This charge was not provided for under the franchise agreement. Indeed, the franchise agreement required the franchisee to use the Allphones point-of-sale system (see e.g. cll 6.5(ii), 7.1, 7.21(iii)). It did not provide for Allphones to charge the franchisee for its providing elements of that system. Allphones had decided what profit shares to offer its franchisees and what amounts it would be entitled to receive in order to operate its business when it entered into the franchise agreement. As the memorandum said, this was a 'rental fee', not a 'credit charge'. I am of the opinion that Allphones was not entitled to make a charge or deduction of $50 per month in respect of this matter for provision of the EFTPOS terminal.
25.3 IT management fees 297 Likewise Allphones charged what it called an 'IT management charge'. This fee was $50 per month prior to August 2006 and $150 per month thereafter. It was also charged in relation to the use by Hoy Mobile of Allphones' point-of-sale computer system. It is common ground that for a year before August 2006 Allphones charged Hoy Mobile $50 per month for IT costs. However, the mid-2006 memorandum purported to introduce this fee to franchisees by stating: 'Historically there has been is [sic] no charge passed onto franchisees for both the support of and maintenance of your IT environment, as well as the provision of access to both [the Allphones Point-of-Sale] and Focus systems via CITRIX.' 298 On 29 August 2006, Allphones issued a new disclosure document which did not refer to these deductions. Mr Donnellan asserted in evidence that Allphones was entitled to impose these charges, because they reflected a change by Allphones to the 'system' pursuant to cl 4 of the franchise agreement. In my opinion such an argument is without foundation. Clause 4 did not authorise Allphones to make demands or impose obligations upon its franchisee to pay money. The system remained the same, insofar as it was the same business developed by Allphones and described in recital B and cl 4 of the franchise agreement. Neither cl 4, nor any other provision in the franchise agreement entitled Allphones to make separate charges for the provision of a critical part of its 'system'. 299 Next, Allphones argued that cl 6.35 of the franchise agreement authorised it to issue a direction making a demand for a payment such as the IT management fee. It relied upon the sentence in cl 6.35 which read: '[Hoy Mobile] shall comply with all written directions and procedures given by [Allphones] in respect of the development, operation and management of the Franchised Business.' 300 However, that provision did not authorise Allphones to impose a new requirement on Hoy Mobile to make payments to Allphones. Rather, it dealt with procedural matters going to the operation of the system and business as agreed to by the parties. Express words would be necessary to confer a contractual and unilateral right on one party to a contract to create a new liability on the other to pay it money without the other's agreement. I am of opinion that Allphones was not entitled to deduct IT management fees from Hoy Mobiles' commission.
25.4 Balance of deductions for other charges 301 There is a balance of deductions from Hoy Mobile's commissions that comes to $3,581.49, which the experts agreed related to the credit charge fees, EFTPOS fees, IT fees, or late banking fees. However, they were unable to allocate that sum among the individual categories. In my opinion, it was for Allphones to justify its deductions. Hoy Mobile has established that Allphones made substantial deductions from commission amounts it was paid without a contractual basis. Mr Nicoll could have given evidence as to any basis for reducing the unallocated balance but did not. And, in their reports neither Mr Nicoll nor the two expert accountants could allocate the sums involved. Hoy Mobile has discharged any onus on it: Blatch v Archer (1774) 1 Cowp 63 at 64; 98 ER 969 at 970; Weissensteiner v The Queen (1993) 178 CLR 217 at 225 per Mason CJ, Deane and Dawson JJ and see too at 233 per Brennan and Toohey JJ; R v Burdett (1820) 4 B & Ald 95 at 161-162 per Abbott LCJ at 140 per Holroyd J; 106 ER 873 at 898 and 890. Since Allphones did not justify any portion of this balance as a fee payable by Hoy Mobile, the whole amount claimed by it should be paid by Allphones..
25.5 Retention canvassing 302 In about June 2006, Allphones appointed Lillianna Tripoli as its first national retention manager. She established a retention program and set up a telemarketing call centre. Ms Tripoli said that there are about 10 people working on the team, including the telemarketers. This program was designed to retain customers whose contracts with Optus were about to expire. The customers had entered into those contracts initially through an Allphones outlet. Optus provided Allphones with information concerning customers in this class, other than those who had switched carriers or had a bad credit history. Thus, Allphones, but not its franchisees, received the contact details of customers who were commercially worth pursuing for a new contract. The information provided by Optus identified the Allphones store at which the customer had entered into the original contract, so that the retentions team could refer the customer to that store to look at the latest model phones or to collect phones that had been ordered. Alternatively, if the customer re-signed with the carrier through the efforts of the telemarketers, a courier could deliver the phone to him or her at a charge to Allphones of about $11.00 per delivery. Ms Tripoli said that some of the franchisees were better than others at following up customers who were nearing the end of their contracts. 303 When the customer was re-signed, even if they never went back to the franchisee's store where the initial Optus plan was made, MTAC were continued to be paid by Allphones to the same franchisee (including Hoy Mobile) as if it had been earned under cl 7.4. Allphones charged $50 as an administration fee before passing on the MTSC paid by the carrier in respect of these retained customers. In addition, Optus paid Allphones the standard bonus of $30.00 for each customer retained by the retention program. There is no dispute that Hoy Mobile has been paid all MTAC for those retained customers. 304 Mr Lynch and Mr Bell agreed that for the 16 months from May 2006 to August 2007 the total amount Allphones had retained by deductions from payments of MTSC was an average of $102 per customer (inclusive of the $30 Optus retention bonus). They agreed that, if Allphones were not authorised to make these deductions, Hoy Mobile been underpaid $6,507.60 including GST and excluding interest. 305 Allphones argued that it was entitled to deduct these fees, and in fact that it had no obligation under the franchise agreement to make these payments in the first place, because Hoy Mobile had not itself retained the customers. However, part of the retention program envisaged that the customer might be referred back to the Allphones store where he or she entered into the original contract. Furthermore, there is no evidence that Allphones was altruistic towards its franchisees or made voluntary payments to them. Rather, on numerous occasions, it withheld or deducted amounts from commission earned by Hoy Mobile and other franchisees. For the reasons that follow, I infer that the payments made by Allphones of MTSC and MTAC in relation to retention canvassing were made as admissions by it that, at least, those sums were due to Hoy Mobile under cl 7.4. 306 Allphones admitted in its defence that it was required to pay Hoy Mobile 72.5% of the MTSC and MTAC received by Allphones '… as a result of the operation of [Hoy Mobile's] business'. The retention program was designed to identify commercial opportunities to earn further MTSC and MTAC from existing customers whose then current contracts with the carriers had come about directly as a result of the operation of Hoy Mobile's business. The decision by Allphones to pay to Hoy Mobile all MTAC, together with part of the MTSC due to it under cl 7.4, resulting from the re-signing of retained customers was a recognition that use of the 'system' referred to in cll 4 and 6.45 of the franchise agreement had brought about both the original and the new 'retention' contracts with those customers. 307 Hoy Mobile said that the telemarketing for retentions was a 'call centre activity' or 'related cost' referred to in cl 6.4(ii). Hoy Mobile argued that the terms of cl 6.4(ii), permitted Allphones to apply up to 5% of net revenue received by it to '... advertising, promotions (including web site and call centre activities) and related costs'. 'Net revenue' was defined in cl 6.4(v) as being equal to the gross profit defined in cl 7.5, less the monies transferred to Hoy Mobile pursuant to cl 7.4. And, cl 6.4(iii) required any advertising in relation to the franchised business in excess of the 5% of net revenue, specified in cl 6.4(ii), to be mutually agreed between the parties in writing. Hoy Mobile had not agreed that any amount in excess of 5% of net revenue could be used by Allphones for the retention program. Allphones first disclosed the retention team's activities in its quarterly update newsletter of 31 May 2006 to franchisees. 308 Despite the benefit that Hoy Mobile received from this retention program, it argued that it could have sought to to retain customers itself. Hoy Mobile did not have any retentions program in operation at the relevant time. But, it noted that it did not have access to the information that Allphones received from Optus, identifying which customers would be worth pursuing. Hoy Mobile argued that the money retained by Allphones from the retention program was revenue received by it 'pursuant to this [franchise] Agreement' within cl 6.4(ii). Thus, it argued cl 6.4(ii) permitted Allphones to retain only 5% of the net revenue from call centre related activities. 309 Allphones' retention program was mutually beneficial to both parties. However, Allphones prepared the standard terms of its franchisee agreement. Those terms expressly provided, in cl 6.4(ii), that no more than 5% of call centre charges were payable from net profit, unless otherwise agreed in writing between the parties. Allphones, did not take any step to obtain Hoy Mobile's agreement to any greater expenditure or amount of reimbursement for the retention program. It chose, unilaterally, to deduct money from what it owed to Hoy Mobile. As in other instances, Allphones acted as it pleased, regardless of the express terms of cl 6.4(ii) of the franchise agreement. I am satisfied that Allphones was not entitled to make the deductions that it did for the retention program. No suggestion was made in evidence or argument that any reduction of the sum claimed under this head should be made as part of the 5% allowance in cl 6.4(ii).
25.6 Store refresh deductions 310 From October 2006, Allphones made monthly deductions, from commissions it paid to Hoy Mobile, amounting to a total of $9,973.34 (about $10,000) inclusive of GST in respect of the amount necessary to refurbish the Eastgardens store, so that it would conform with the changed appearance and get-up of all other Allphones stores. Allphones arranged for shopfitters to do the work. There is no dispute that all franchisees were required to make the changes and were charged on an equivalent basis. The store refresh requirement had been made by Allphones in late June 2006. In late July 2006, Mr Harkin wrote a more detailed circular explaining the basis for the requirement. One purpose was to enable a new broadband display cabinet to be installed in each store for the benefit of Optus. Optus made a co-op payment of $1,100 (inclusive of GST) per store to Allphones for the cost of fitting out its broadband promotional cabinets for display. 311 Allphones applied the $1,100 from Optus to reduce the amount of the refresh charge payable by each franchisee, other than Hoy Mobile. In its written submissions, Allphones said that it had not credited Hoy Mobile with the co-op payment from Optus, because Hoy Mobile had not complied with the refresh requirement and, thus, was in breach of the franchise agreement. It also submitted that it would apply the Optus $1,100 toward the store refresh when Hoy Mobile undertook it. Allphones, however, had no evidence to support these submissions and I do not accept them. The submissions are inconsistent with Allphones giving a further $1,000 credit, received from an organisation named 'Dodo', to Hoy Mobile in reduction of the deductions made by Allphones for the store refresh. Hoy Mobile argued that Optus was not entitled to charge the store refresh deductions at all, and that it was also entitled to receive the benefit of the Optus co-op payment of $1,100. 312 Allphones claimed that it was entitled to require its franchisees to make changes to the standard appearance of their store pursuant to cll 4, 6.23 and 6.35 of the franchisee agreement. Clause 6.23 obliged Hoy Mobile to conduct the operation of its business in accordance with the standards and specifications in documents which identified what the system and the get-up were at any particular time. The store refresh direction was a written direction, in respect of the development, operation or management of a franchised business and the maintenance and appearance of the franchised premises, and with which Hoy Mobile was required to comply pursuant to cl 6.35. Allphones argued that this would be part of improving the system and enhancing Allphones' image within the meaning of cl 4. 313 In general, each party to a contract agrees, by implication, to do all that is necessary on its part to enable the other party to have the benefit of the contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 per Mason J applying what Griffith CJ had said in Butt v M'Donald (1896) 7 QLJ 68 at 70-71. A duty to co-operate is not always implied. Whether it will be is a question of construction based on an objective consideration of the whole of the terms of the contract: Secured Income 144 CLR at 607-608 per Mason J. Here, the work to refresh the Eastgardens store included the new Optus broadband display cabinet. Since Optus paid Allphones the money in order to achieve the installation of that work, it was necessary for Allphones, when exercising its contractual power to impose a reasonable charge for the work, to apply Optus' payment in reduction of the amount Hoy Mobile had to pay. 314 I am of opinion that cll 4, 6.23 or 6.35 and the franchise agreement as a whole, entitled Allphones to charge Hoy Mobile for no more than the reasonable cost to it of the work required for the fit out. If Allphones received money from carriers to do some of the fit out or refresh work or to defray its cost, it could not use any contractual power to reimburse itself by charging its franchisee with a sum greater than the reasonable cost that Allphones had incurred. The powers in the franchise agreement, on which Allphones relied to impose and charge for the store refresh, did not authorise it to make a profit from Hoy Mobile by requiring it to effect the store refresh for the benefit of a carrier, like Optus, yet retaining co-op sums paid by the carrier to Allphones to defray the very cost of that fit out. These clauses entitled Allphones to act reasonably for the purpose of giving effect to them. They did not confer a power to act capriciously. Allphones led no evidence to justify the reasonableness of the round figure of $10,000 as the charge it sought to impose on the franchisees, including Hoy Mobile. 315 Both parties had to co-operate to bring about the refresh. Hoy Mobile had to permit the shopfitters access to its store, and pay for the reasonable cost of the work. Allphones had to arrange for the work to be designed and carried out, as well as to fix a charge which was a reasonable reflection of the cost it incurred in respect of the refresh. It was not entitled to profit by use of its powers under the franchise agreement to impose a reasonable charge as cost of the work to be done. 316 Allphones deducted the amount of $10,000 from payments due to Hoy Mobile. That sum was greater than the amount it would have been entitled to deduct, were it shown to have been reasonable, because it failed to give Hoy Mobile the benefit of the amount of the Optus broadband fit out contribution. In the absence of evidence to justify it, I am not satisfied that the amount of $10,000 was a reasonable charge for the work, so as to be authorised by the franchise agreement. 317 The construction of the franchise agreement at which I have arrived (requiring Allphones to apply the money received from Optus to reduce the reasonable cost it charged Hoy Mobile for the work) may also be arrived at by implying a term that each party to the franchise agreement was under an implied duty to act in good faith. However, it is not necessary to determine that matter: cf Cheshire & Fifoot's Law of Contract (8th Aust ed, Lexis Nexis, 2002) at [10.43] ff. It was unreasonable for Allphones to impose or retain the part of the charge for the Eastgardents store refresh for which Optus had paid or agreed to pay. The unreasonableness of Allphones doing so was demonstrated by its actions in reducing every other franchisees' store refresh charge by the amount of the Optus payment. 318 There is no evidence that the imposition of the $10,000 charge, or that sum less the Optus contribution, in the circumstances, is reasonably capable of fulfilling the purposes of the powers under the franchise agreement on which Allphones relied. I find that Allphones has not established that it was entitled to deduct any sum for the store refresh on the basis it did so. While Allphones, no doubt, may be able to justify some deduction for this, it has not done so here. Accordingly, it must repay the sum of $9,973.37 (inclusive of GST) to Hoy Mobile.
LOSS OF COMMISSIONS IN RESPECT OF THE RANDWICK STORE 319 Hoy Mobile made a claim for loss of commissions due to the operation of the Randwick Allphones store based on its assertion that the territory in the franchise agreement was 5 km radius from the Eastgardens store. Allphones itself owned and operated the Randwick store. Because I have found that the 'territory' was only the suburb of Eastgardens, the Randwick store was outside that area. Accordingly, the only part of this claim which requires consideration is that relating to loss from the incorrect operation of the 138000 Allphones telephone number. 320 For a period of about one year, Allphones' advertised telephone number of 138000 failed to divert callers automatically from the territory of the suburb, Eastgardens, to Hoy Mobile's store. Mr Hoy gave evidence (which I accept) that on a number of occasions in 2006, he telephoned the 138000 number from Hoy Mobile's store or the shop next door, only to be put through to the Randwick store. Mr Hoy said (and I accept) that from about March 2006, the store received fewer telephone calls than before. Allphones' marketing director, Mr Pompeii, explained to Mrs Hoy in early October 2006, and in his evidence, that this fall in the number of calls appeared to have been the result of incorrect programming or incorrect operation of the technology used to divert calls made to the 138000 number to the appropriate store. Nonetheless, for six months after Mrs Hoy brought the matter to Mr Pompeii's attention, the incorrect diversion continued without being remedied. 321 Allphones argued that it had no responsibility because it had engaged an independent contractor, Zintel, to arrange for the way in which the 138000 number diverted calls to the most appropriate local Allphones store. Allphones contended that it was not contractually responsible to Hoy Mobile for any loss of sales if Zintel had made a mistake. I reject that argument. The 138000 number was a part of the system in cl 4 of the franchise agreement. Allphones covenanted first that it would not operate a franchised business in Hoy Mobile's exclusive territory (cl 2) and, secondly, that it would not grant to anyone a licence to use the system within the territory (cl 6.45). If the Randwick store achieved sales from calls which were diverted to it instead of Eastgardens, Hoy Mobile would have lost those sales and any commissions to Allphones. 322 Hoy Mobile called no evidence of any actual lost sales. However, it is difficult to establish a precise basis for assessment of the value of the loss of a chance to earn revenue resulting from the erroneous diversion of 138000 calls to the Randwick store. Mr Hoy did not give evidence about what sales the Eastgardens store achieved from or as a result of telephone inquiries. I infer that he could give no evidence helpful to Hoy Mobile's case: Ferrcom 22 NSWLR at 418. Significantly, Allphones considered the 138000 as commercially useful in generating sales opportunities. Indeed, at the franchisee forum on 6 October 2006, where Mrs Hoy first discussed with Mr Pompeii the problems that the Eastgardens store was experiencing with the 138000 number, he said that the number was an important tool for sales generation. Mr Pompeii showed Ms Hoy a number of Zintel documents on his laptop computer. These showed that the Eastgardens store had five calls diverted to it by the 138000 number in March 2006, but only one in September that year. 323 Mr Hoy had said that he had noticed a drop from 10 calls per day to only one or two. While I am not satisfied that the number of calls at the Eastgardens store was as high as 10 call per day before the drop, I infer that once Allphones began publicising the 138000 number, customers began calling it rather than the individual stores' phone numbers. As that happened, the number of calls that the Eastgardens store received fell. Mr Pompeii's Zintel files recorded only the calls diverted to the Eastgardens store, not those which were generated in the suburb of Eastgardens, or the ones made directly to Hoy Mobile's phone number. And, as Mr Hoy's experience showed, even calls from Hoy Mobile's store itself were diverted to the Randwick store. 324 Zintel had programmed the 138000 number to divert calls from the Rose Bay, Vaucluse and Edgecliff telephone exchanges to the Eastgardens store. The areas served by those exchanges were well away from Eastgardens and, indeed, Randwick was closer to them. Only in February 2007 did Allphones advise Zintel that those areas belonged to the catchment area for the Randwick store, and then it required them to be changed urgently. 325 The expert agreed that the period of the deficient operation of the 138000 number was about one year. During this period, Mr Lynch and Mr Bell concluded that the Randwick store generated revenue which would have resulted in about $90,000 in commissions and bonuses. That was less than one third of what Hoy Mobile earned in the equivalent period. Allphones argued that only $20 nominal damages should be awarded if a breach of its obligations in relation to the 138000 number to Hoy Mobile were established. 326 I am satisfied that Allphones was responsible for the diversion of calls from Hoy Mobile's territory of Eastgardens because of, first, the inappropriate programming by Zintel from March 2006 and, secondly, from October 2006 its own failure to correct what it knew was a problem. I am satisfied that Hoy Mobile lost the opportunity to make some sales from calls to the 138000 number during the period of the diversion. I am also satisfied that this loss had some value. Where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat an award of damages: see Sellars v Adelaide Petroleum NL (1992) 179 CLR 332 at 349-350 per Mason CJ, Dawson, Toohey and Gaudron JJ. However, it is not possible to make any precise calculation of the value of this loss, which included payments under cll 7.3 and 7.4 and the ongoing right to receive MTAC. Doing the best I can, I find the value of this to be the loss of about 1% of the sales of the Randwick store made during the period of the diversion. That results in a past loss of about $900, but this amount excludes any MTAC which Hoy Mobile would have earned after March 2007 on those sales. Although there is some guesswork involved, I find the total loss of Hoy Mobile as a result of the diversion to be $1,500: see generally Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257 at [37]-[38] per Hayne J with whom Gleeson CJ, McHugh and Kirby JJ agreed: Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564 at 569-570 [35]-[36] per Black CJ and Jacobson J, at 581 [99]-[101] per myself.
VODAFONE COMMISSIONS FROM PLANS WITH 'FREE' PHONES 327 Allphones, under cl 7.4, paid Hoy Mobile 72.5% of the money received by it in respect of sales of Vodafone goods and services. Hoy Mobile claimed that it was entitled to be paid at the higher rate of 74% as its entitlement to gross profit on sales under cl 7.3. The issue arised because, unlike the other carriers, Vodafone paid Allphones a fixed amount of commission on sales of particular plans. But, Vodafone allowed Allphones to select the phone which the customer received. Thus, when a handset was sold to a customer as part of an overall plan or contract for the provision of a mobile phone service by Vodafone, no separate amount was attributed in that contract to the value of the phone itself. In effect, the handset was given to the customer as part of the consideration for him or her entering into a long term plan or contract with Vodafone. 328 Mr Nicoll asserted that the handset was given away for free. He said that Vodafone had simplified the way in which it paid commission to Allphones, by combining the reimbursement for the cost of a handset provided to the customer, together with the initial commission (as would be payable on an MTSC basis) into one single payment. He said that this gave Allphones '… more freedom to use whatever handset we wish to use'. He said that because Allphones had purchased the handset initially, it recovered its cost against the payment of commission by Vodafone. Mr Lynch and Mr Bell agreed, however, that Allphones' internal accounting treatment for such transactions was done on a gross profit basis, like that involved in the calculations made for sales under cl 7.3 of the franchise agreement. 329 The transaction effected by Vodafone, with the ultimate customer, through the agency of Hoy Mobile and Allphones, was one in which the customer acquired a bundle of rights. Those rights included ownership of the mobile phone 'given away' to him or her 'for free', and the right to use Vodafone's mobile phone service, subject to complying with the obligations for payments over the term of the contract. Another contract existed between Vodafone and Allphones for payment of money in respect of such transactions effected with customers. No written terms of such an agreement were in evidence. Mr Nicoll gave an oral description of what he said were those terms. However, the documents examined by Mr Lynch and Mr Bell showed that, for its purposes, Allphones treated the transaction as a sale of goods, rendering it a gross profit. 330 The cognate transaction between Vodafone, through the agency of Allphones and Hoy Mobile, and the customer, involved the ultimate sale of the 'free' phone. The phone was not, in fact, 'free' to the customer but was part of the consideration provided by Vodafone under the plan it entered with its customer. The use of the word 'free' in this context is apt to mislead: cp Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 483B-G per Black CJ, von Doussa and Cooper JJ. 331 Mr Nicoll's description of Allphones' internal accounting, in the absence of any documentary evidence, was also revealing of the nature of the relationship between Alllphones and Vodafone. He said that Allphones could determine what the 'rebate', or amount it attributed to the sale price of the phone, would be. That is, Allphones could determine the amount of profit made on the transactions, as between itself and Vodafone, by selecting both the phone to be supplied to the customer, and the price to be attributed to it in accounting to Hoy Mobile. 332 Mr Lynch and Mr Bell characterised Allphones' accounting treatment of the transaction between it and Vodafone as a sale of goods. I accept their evidence and find that this was, indeed, a sale of goods. Allphones' internal accounting showed that it was treating the receipt from Vodafone as part of the calculation of the cost of goods sold, and not simply as the payment of commission by Vodafone. Allphones' gross profit would depend on the price it chose to attribute as the 'cost' of the phone in the transaction. 333 The literal terms of cl 7.3 dealt with monies received by Hoy Mobile (as opposed to Allphones) in relation to the sale of stock or services supplied by Allphones. As noted above, cl 7.4 has to be construed as relating to the commercial reality that Allphones, not Hoy Mobile, received payments of commission. Here, Allphones received a payment for what it treated as goods sold through the agency of Hoy Mobile. Allphones argued that the only difference between the way in which the other carriers reimbursed Allphones when a customer purchased a 'free' phone with a plan, was that Vodafone, as an administrative matter, did not break up the sum paid to Allphones into the components of MTSC and reimbursement for the cost of the phone. 334 However, Mr Nicoll explained a further difference, namely that Allphones could set the price of the phone as between itself and a franchisee. Thus, as Allphones' internal accounting showed, the transaction in fact had more in common with a sale of goods than with merely accounting for a payment of commission and reimbursement of the cost price of the goods. 335 Vodafone paid Allphones money, from which there was an apportionment of the price of the phone supplied to the customer, and a surplus for commission (MTSC). It does not matter that Vodafone made the payment. Where Hoy Mobile received money in relation to the sale of stock or services supplied by Allphones, cl 7.3(i) required that money to be deposited promptly by Hoy Mobile to Allphones' account. 336 Mr Donnellan's evidence showed that, in the industry, marketing of mobile phones and contractual arrangements with various carriers changed constantly. Sales methods, plans and marketing concepts varied frequently. For example, he pointed out that 'capped' mobile phone plans became very common only after 2003. The ordinary commission structure, which had been offered by carriers under previous marketing arrangements, did not directly accommodate capped plans. The dynamism of the various marketing techniques and structures for inducing customers to buy mobile phone products and services was known to both parties at the time the franchise agreement was made. And, both Mr Donnellan and Mr Hoy had been involved in the industry for some years before they negotiated it. The mutually known facts included that methods, by which mobile phone carriers sought to induce their customers to contract with them, were constantly evolving. The carriers then adjusted the way in which the retailers of their services were remunerated. 337 The commercial purpose of cll 7.3 and 7.4 was to provide an agreed basis to renumerate each of Allphones and its franchisee, for sales effected by Hoy Mobile. The clauses were intended to apply to the two sales activities contemplated by the parties - sales of stock or services supplied by Allphones to Hoy Mobile, and sales of plans or contracts with carriers generating MTSC or MTAC. Although the clauses are worded to deal with particular circumstances in which the payments for such sales might occur, they must be construed in a common sense way to cover other methods of receipt of the sale proceeds used in the relationship. 338 This is because no other provisions in the franchisee agreement applied to such receipts, and the essential purpose of cll 7.3 and 7.4 was to provide an agreed means of dividing them. Neither party could have intended that, in situations where the one named in cll 7.3 or 7.4 as receiving payment did not receive, but the other received, a payment matching the description, the receipt would be treated differently, even though its purpose was the same. Hence, Mr Donnellan's ready acknowledgement that cl 7.4 applied to monies received by Allphones, despite its literal wording. Likewise, cl 7.3 was intended by the parties to divide the receipts of payments for goods or services supplied by Allphones. If Hoy Mobile sold goods or services but processed the sale using the customer's credit card, it would not receive or bank such money under cl 7.3, but the parties must have intended the direct receipt by Allphones to be treated as if Hoy Mobile had been paid in cash. 339 Of course, at common law the courts cannot make a contract for the parties which they did not make for themselves (cp: s 87(2) of the Trade Practices Act). But commercial contracts '… ought to be construed fairly and liberally for the purpose of carrying out the object of the parties': Duncan v Koster; The Teutonia (1872) LR 4 PC 171 per Mellish LJ at 182, applied by Isaacs J in Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300. Isaacs J went on to hold that expressions in a mercantile contract are not to be read narrowly, but as the Court would suppose two honest business people would understand the words they actually used with reference to their subject matter and the surrounding circumstances: Cohen & Co 24 CLR at 300. And the Court construes a commercial contract to avoid it making commercial nonsense or working commercial inconvenience: Zhu 218 CLR at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. 340 I am of opinion that cl 7.3 applied to all transactions, involving either Allphones or Hoy Mobile receiving payment for sales of goods or services supplied by Allphones, which were effected by Hoy Mobile. Thus, the sale of goods, being the 'free' mobile phones provided to Hoy Mobile's customers who entered into plans with Vodafone, generated gross profit, to the division of which cl 7.3(ii) applied. 341 The internal accounting by Allphones for those mobile phones 'given away' to customers when they entered into contracts with Vodafone recorded the reality of the transaction, namely a sale of goods for which Vodafone ultimately paid Allphones. That entitled Hoy Mobile to be remunerated on the basis of cl 7.3, namely for 74% of the gross profit. Mr Lynch and Mr Bell agreed that if the transaction were a sale of goods, the gross profit calculation under cl 7.3 resulted in Hoy Mobile being entitled to a further $2,299.46 (including GST) than it was paid.
SUMMARY OF DAMAGES FINDINGS 342 In summary, I have found Hoy Mobile to be entitled to the total amount of $75,169.75, inclusive of GST and exclusive of interest, and based on the figures agreed to by the experts. (For a list of the individual damage amounts, see discussion headed 'Conclusion' below.) 343 From this sum I will deduct $32,000, the amount which I have found fairly reflects the benefit obtained by Hoy Mobile over the period in which it was committing the fraud. That leaves a net sum of $43,169.75 in damages. Interest will need to be added to this sum at the pre-judgment rates of interest used by the Supreme Court of New South Wales: cf Hilditch Pty Ltd v Dorval Kaiun KK (No 2) [2007] FCA 2014 at [110].
COULD ALLPHONES TERMINATE THE FRANCHISE AGREEMENT? 344 Counsel were not able to refer to any case in which one party sought to exercise a contractual right to terminate, when each party in an ongoing contractual relationship was in breach of an essential term, or otherwise had evinced an intention not to be bound, so as to amount to a repudiation of its obligations. Here, both the fraud of Hoy Mobile and Allphones' conduct, including its dishonesty in respect off commissions which I have found, affect the question whether Allphones can terminate the franchise agreement. Professor Carter has noted that such instances create serious difficulties of analysis (JW Carter, Breach of Contract (2nd ed, Law Book Co Ltd, 1991) at [1034] pp 346-347). He observed that there was tendency in the cases to eschew strictly logical analysis and rely on the general circumstances of the case.
29.1 The High Court's decision in Foran v White 345 Each party here referred to the somewhat problematic (in this context) decision in Foran v Wight (1989) 168 CLR 385 to support its case. There, the time for completion of a contract for the sale of land had been made of the essence. Two days before the contractual date for completion, the vendors' solicitor told the purchasers' solicitor that the vendors would not be in a position to complete on the appointed day. Neither party attempted to settle on the due date, but two days afterwards, the purchasers gave a notice of rescission. 346 Brennan, Deane, Dawson and Gaudron JJ, in separate judgments, held that the purchasers could rescind and were entitled to the return of the deposit. Mason CJ dissented. A number of the justices discussed, in obiter dicta, the position where there was an actual breach of contract entitling the other party to treat that breach as a repudiation. Mason CJ said that the principle established by the earlier decisions was that (Foran 168 CLR at 408): '[I]n relation to termination for actual breach … the plaintiff is required to show that he was ready and willing to perform the contract if it had not been repudiated by the plaintiff. In other words, the requirement is that the plaintiff be ready and willing to perform except to the extent that the defendant dispensed with his performance. … [I]n the case of actual breach the requirement of readiness and willingness is more stringent; it continues through to the time of performance. That is because the termination of the contract does not antedate the time for performance.' 347 Mason CJ applied what Dixon CJ had said in Rawson v Hobbs (1961) 107 CLR 466 at 481 (see Foran 168 CLR at 405-406). Dixon CJ had said in Rawson 107 CLR at 481 (Windeyer J agreed at 107 CLR at 492): 'One must be very careful to see that nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires is counted as an absence of readiness and willingness. On the other hand it is absurd to treat one party as tied to the performance of an executory contract although the other has neither the means nor intention of performing his part when his turn comes, simply because his incapacity to do so is not necessarily final or logically complete.' 348 Mason CJ said that Dixon CJ's reasoning applied to the entitlement of a party to terminate a contract for breach. Mason CJ continued (Foran 168 CLR at 406-407): 'A party who is disabled from suing for damages because he is not ready and willing to perform in the sense discussed above cannot exercise a right to treat himself as discharged from the contract on the ground that the other party is in breach of an essential term or is otherwise in fundamental breach of the contract.' 349 Brennan J (Foran 168 CLR at 424) said: 'Where a party claims to be entitled to rescind an executory contract on account of the other party's repudiation (whether by way of anticipatory breach or incapacity), the first party must show not only the other's repudiation but his own readiness and willingness up to the time of rescission to perform his essential obligations under the contract: [Rawson 107 CLR at 480-481] … Since a party's right to rescind an executory contract for the other party's repudiation is limited to cases where the first party is ready and willing to perform, neither party is treated as without fault where both would be at fault were the contract to continue until the time for performance arrives.' (emphasis added) 350 He too applied what Dixon CJ had said in Rawson 107 CLR at 481, see Foran 168 CLR at 425. When Brennan J referred to an entitlement to rescind, he used 'rescind' in the sense of one party electing to terminate for breach or repudiation by the other, as explained in Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 at [2] per Gleeson CJ, Gummow, Heydon, Crennan and Kiefel JJ. 351 Brennan J identified the principle to be applicable in the case of an anticipatory breach of mutually dependent and concurrent obligations, occasioned by one party informing the other that he would not be able to perform at the time for performance. His Honour said that, unless the other party were ready and willing at the time when that intimation was given, the first party's failure to perform was not a breach of contract. Thus, where the party to whom the intimation had been given was itself substantially incapable of future performance of its obligation, or had already definitively resolved or decided not to perform it, that party was also not ready and willing. Thus, he could not treat as a breach the other's intimation that performance would not be given on the future day for performance. If that be so, it must follow that neither party could have terminated for the failure of the other on the appointed date to offer performance (see Foran 168 CLR at 427). Brennan J said (Foran 168 CLR at 246-427): 'Of course, it is possible that a party who is not disposed to perform or capable of performing in any event may not be dispensed from his obligation by receipt of an intimation of non-performance: he may not have acted in reliance on the intimation at all. But, whether or not he placed some reliance on the intimation in abstaining from performance of his own obligation, a disposition not to perform or an incapacity to perform when the intimation was given denies the character of breach to a failure to perform by the party giving the intimation.' (emphasis added) 352 Deane J decided the case on the basis of an estoppel being created by the intimation that a party would not be in a position to complete on the appointed day. He then expressed the obiter view that, while the absence of the other party being able to show that it was ready and willing would preclude it from seeking an order for damages or specific performance, that other party could terminate based on the intimated repudiation: Foran 168 CLR at 437-438. He said that if the position were otherwise, the law would require useless and futile expenditure by innocent parties of whatever time, effort or money was necessary to place themselves in a position where they could positively demonstrate actual or potential ability to perform a contract in order to be able to bring it to an end on the ground that it had already been repudiated by the other party. He said (Foran 168 CLR at 438): '… it is difficult to see why the law should insist that, even though both parties to a contract have repudiated it, the contract must hang like an albatross around their necks unless and until they can reach a new agreement about its termination.' 353 Dawson J said that readiness and willingness included capacity (Foran 168 CLR at 451). He cautioned against carrying too far the principle that repudiation of a contract by one party could absolve the other party from the obligation of tendering useless performance. He said that when the principle applied, it could reduce the extent or alter the nature of the readiness and willingness which a plaintiff was required to show, but there was no reason why it should be eliminated as a requirement entirely. His Honour continued (Foran 168 CLR at 452): 'A party should not be able to sue for breach if he is unable or unwilling to carry out his part of the bargain; where, in other words, he is not the innocent party. Even where a party has been absolved by the repudiating party from performing his future obligations under the contract he must show that at the time of the repudiation he was ready and willing to complete the contract had it not been repudiated. But in proving his readiness and willingness where he has been absolved from tendering performance he may not have to prove a great deal.' 354 But nonetheless, in order to be able to terminate, Dawson J held (Foran 168 CLR at 454): 'All that the purchasers were required to show was that at the time of the repudiation, that is, at the time they were absolved from future performance, there was not a "substantial incapacity" on their part or a "definitive resolve or decision" against the performance of their obligations.' 355 Gaudron J analysed the position as being one in which the contract had come to an end because neither party performed on the day made essential for performance, and that was confirmed by the notice of rescission (Foran 168 CLR at 459). 356 Thus, three of the justices (Mason CJ in dissent, with Brennan and Dawson JJ) expressed the obiter view that where both parties were in actual (as opposed to anticipatory) breach of a fundamental term, or otherwise evincing an intention not to be bound, neither could terminate. The three justices did not confine their expression of the operation of this principle to cases of mutual or dependent obligations. Rather, they expressed the principle as deriving from a general readiness and willingness of each party to perform his obligations at the relevant time. Earlier, in Green v Sommerville (1979) 141 CLR 594 at 609 Mason J (with whom Murphy and Aickin JJ agreed) recognised that '[a]n obligation may be essential, yet not interdependent with an obligation imposed on the other party to the contract …' 357 At common law, a party who brings an action for breach of contract must show that he is ready and willing to perform his part of the concurrent acts: Cohen & Co 24 CLR at 298 per Isaacs J. Where, at least in English law, both parties to a contract are in breach of a mutual obligation owed by each to the other, neither can rely upon the other's breach as giving him a right to terminate, following the decisions of the House of Lords in Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909 at 978-988A per Lord Diplock, with whom Lords Edmund-Davies and Russell of Killowen agreed; Paal Wilson & Co v Partenreedere Hannah Blumenthal [1983] 1 AC 854 at 908H-909F per Lord Brandon of Oakbrook with whom the other members of the House agreed in separate speeches. 358 In Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 at [61]-[62], Keane JA (with whom Jerrard JA at [1] and Cullinane J at [66] agreed) expressed the obiter view that it did not make much commercial sense to say that where both parties had expressed a firm resolve not to perform the contract, the contract continues 'in existence in some legal limbo' for the reason that neither party is ready, willing and able to perform. His view is similar to that of Deane J in Foran 168 CLR at 438. Keane JA said that in such circumstances, the case could be characterised as one of termination by mutual consent, although he recognised that his was a tentative view and that the issue did not need to be resolved in order for him to decide the case: Highmist [2005] QCA 357 at [62]. Keane JA did not examine the authorities. 359 In Paal Wilson [1983] 1 AC at 915C-916D Lord Diplock discussed the entry of both parties to an executory contract into a 'new contract' which he styled 'the contract of abandonment'. He explained that in such a case, each party promises by words or conduct to release the other from further performances of obligations on its part which remain to be performed, including the obligation to pay damages. And in Australian law the parties to a contract can so conduct themselves that they can be seen to have mutually abandoned or abrogated the contract; for example where neither takes any steps to perform over a period: see Summers v The Commonwealth (1918) 25 CLR 144 at 151-152 per Isaacs J; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 434 per Stephen Mason and Jacobs JJ; Foran 168 CLR at 422-423 per Brennan J. 360 I am not satisfied that either party regarded the franchise agreement at an end or as having been abandoned or abrogated. Hoy Mobile wanted it to continue and Allphones sought to exercise its rights under cl 9.3 to terminate. Nor did Allphones plead that the franchise agreement had been abandoned or abrogated or terminated by mutual consent.
29.2 Was Allphones evincing an intention not to be bound? 361 It is not necessary, for repudiation of a contract, that the repudiator make plain that he will never perform his contractual obligations at all, as Deane and Dawson JJ pointed out in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 658-659. There, Mason CJ said that there was a difference between evincing an intention to carry out a contract only if and when it suited the party to do so, and evincing an intention to carry it out as and when it suited the party to do it. He said that in the first case, the party intended not to carry the contract out at all, in the event that it did not suit him. Whereas in the second case, the party intended to carry out the contract, but only to carry it out as and when it suited him. Mason CJ said that it is easier to say of the first than the second case that a party has evinced an intention no longer to be bound by the contract, although ultimately the question whether a party is taken to have evinced such an intention is determined objectively: Laurinda 166 CLR at 634; see also 643 per Brennan J, and 666 per Gaudron J. 362 In Koompahtoo Local Aboriginal Land Council v Sanpine (2007) 241 ALR 88 at 101 [44] Gleeson CJ, Gummow, Heydon and Crennan JJ said that unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. They said: 'In contractual renunciation, actions may speak louder than words.' Their Honours held that it was important to classify whether the obligation with which there had been a failure to comply had been agreed by the contracting parties to be essential, or whether there had been a sufficiently serious breach of a non-essential term enlivening the right to terminate: Koompahtoo 241 ALR at 101 [47] and 102 [49]. They held that the interests of justice were promoted by limiting the right to rescind the contracts (i.e. terminate for breach) to instances of serious and substantial breaches of contract: Koompahtoo 241 ALR at 104 [52]. 363 I am of opinion that the cumulative effects of Allphones' deliberate and secretive underpayments of commissions were of such seriousness that, had it wished to do so and been itself an innocent party, Hoy Mobile could have terminated the franchise agreement.
29.3 Entitlement to terminate: Interdependency and repudiation 364 Neither party was evincing loyalty to its contractual promises. In Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 at 481B-C Gleeson CJ, Handley JA and Brownie AJA, in the Court of Appeal of the Supreme Court of New South Wales said: 'A party in breach of non-essential terms who has not repudiated may rescind for fundamental breach: see Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; State Trading Corporation of India Ltd v Golodetz Ltd [[1989] 2 Lloyd's Rep 277] (at 286-287). A party in breach of an essential but independent term may also rescind for fundamental breach: see State Trading Corporation of India Ltd v Golodetz Ltd (at 285-287); compare Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40 at 50-51. Roadshow, we consider, was not, by reason of its conduct, unable to terminate on the ground of CEL/Vision's repudiation.' 365 However, their Honours' comments were obiter, since they had already acknowledged that that was not a case where the party attempting to rescind was in breach of a condition or had otherwise repudiated. And they said that they did not need to undertake a comprehensive analysis of the effect of a breach on a party's right to rescind: see Roadshow 42 NSWLR at 479F. They recognised that, although a party in breach of a non-essential term was not prevented from rescinding for a fundamental breach or a repudiation by the other party, there may be an exception where a causal relationship existed between the breaches of non-essential terms by the party attempting to rescind and the fundamental breach relied on: Roadshow 42 NSWLR at 479G-480B referring to Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613. When Gleeson CJ, Handley JA and Brownie AJA said in the passage, which I have quoted, that a party in breach of an essential but independent term may also rescind for fundamental breach, they relied on the decision of the English Court of Appeal in State Training Corporation of India Ltd v Golodetz Ltd [1989] 2 Lloyd's Rep 277. There, Kerr LJ (with whom Lloyd and Butler-Sloss LJJ agreed: Golodetz [1989] 2 Lloyd's Rep at 286) said that where both parties had obligations which had to be performed concurrently but neither was dependent upon the other: 'Since both obligations are (assumedly) in the nature of conditions, both parties had an equal right, so long as the other party's obligation remained unperformed, to treat the other party as having wrongfully repudiated.' 366 However, what his Lordship said there appears to have been obiter dicta, for he pointed out that it did not matter which party was first to treat the other as having repudiated, since neither lost its right to claim damages for the breaches by the other, irrespective of which of them brought the contract to an end (Golodetz [1989] 2 Lloyd's Rep at 287). Other parts of Kerr LJ's judgment have been disproved by the House of Lords: Vitol SA v Norelf Ltd (The Santa Clara) [1996] AC 800 at 812A-B. 367 Gleeson CJ, Handley JA and Brownie AJA also referred to what Ipp J had said in Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40 at 50-51 (Pidgeon ACJ and Franklyn J agreeing). The Full Court there was dealing with an appeal from the entry of summary judgment. Ipp J noted that the argument concerning the question whether a party in breach was entitled to terminate was faintly argued and had not been canvassed fully by counsel. He distinguished Foran 168 CLR 385 and Lombok Pty Ltd v Supetina Pty Ltd (1987) 14 FCR 226 from the facts of case before the Full Court saying that the terminating party's rights to payment of money were independent of, and not concurrent with, the obligations alleged to have been breached by it. He said that there was nothing in the principles in those cases to prevent the party allegedly in breach from relying on non-payment of progress claims to terminate the contract. 368 In Kyrwood v Drinkwater [2000] NSWCA 126 at [154] Powell JA (with whom Meagher JA agreed at [1]; see also the dissenting view of Fitzgerald JA at [231]-[251]) said: 'In Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613 it was held by this Court that, if non-compliance with a contractual obligation is to take away the defaulting party's right to terminate, there must be a direct causal relationship between the non-compliance and the failure to complete, the onus of proving which lies on the non-defaulting party, and there must be an absence of repudiation by the defaulting party prior to that time. The same approach was taken by this Court in Roadshow Entertainment Pty Ltd v CEL/Vision (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462 at 479-480.' 369 In Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108 at [68]-[69] Warren CJ, with whom Buchanan and Ashley JJA agreed said: '[68] N C Seddon and M P Ellinghaus state in Chesire & Fifoot's Law of Contract (8th ed, 2002) [at 943]: A party need only be ready and willing to perform the contract in substance. A party who is in breach may nevertheless have the right to terminate, so long as the breach is not repudiatory or of an essential term or such as to deprive the other party of the substantial benefit of the contract. This is the view espoused by the learned judge below and supported by Roadshow Entertainment Pty Ltd v CEL Home Video Pty Ltd (1997) 42 NSWLR 462 at 470-480 [sic]. [69] The question then becomes whether Emhill had repudiated the contract, breached an essential term of the contract or deprived the other party of the substantial benefit of the contract.' (emphasis added) 370 The Court of Appeal of Supreme Court of Victoria upheld the trial judge's decision that a tenant in five months' arrears of rent was not entitled to bring the lease to an end by accepting repudiatory conduct of the landlord (see at [55], [71] and [74]). 371 While the dicta of the Court of Appeal in Roadshow Entertainment 42 NSWLR at 481B-C are of great weight, I am of opinion that on analysis, they are inconsistent with the considered, albeit equally obiter dicta views of three of the justices: Foran 168 CLR at 405-408 per Mason CJ, 424, 427 per Brennan J and 452, 454 per Dawson J. 372 In DTR Nominees 138 CLR at 433 Stephen, Mason and Jacobs JJ held that for a party to be entitled to rescind for anticipatory breach, he must be at the time of rescission himself be willing to perform the contract on its proper interpretation. They said: 'Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach, and indeed could profit from his misinterpretation of the contract, as the appellant seeks to do in this case when it claims forfeiture of the deposit and damages.'
29.4 Findings regarding Allphones' entitlement to terminate 373 I am of opinion that a similar principle must apply in a case like the present, where both parties were, at the time at which Allphones sought to terminate, in breach in a way amounting to repudiation of their obligations. Allphones was not an innocent party, any more than Hoy Mobile. I am satisfied that Allphones considered itself to be free to account for commission as and when it pleased and in the way it pleased, regardless of its contractual obligation pay the whole amount of MTSC due to Hoy Mobile on the construction of the franchise agreement I have found. Each had engaged in dishonest conduct towards the other in a way which evinced an intention not to be bound. 374 Allphones argued that because Hoy Mobile had engaged in a fraud which fell within cl 9.3(viii) of the franchise agreement and which had continued for a considerable period, it should be allowed to terminate pursuant to its express contractual right. In Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712-713, Denning LJ referred to Master v Miller (1791) 4 TR 320 at 337-338; 1 Smith's LC, 13th ed ,780, 799) where Buller J said: 'It is a common saying in our law books, that fraud vitiates every thing. I do not quarrel with the phrase, or mean in the smallest degree to impeach the various cases which have been founded on the proof of fraud. But we must recollect, that the principle which I have mentioned is always applied ad hominem. He who is guilty of a fraud shall never be permitted to avail himself of it; and if a contract founded in fraud be questioned between the parties to that contract, I agree, that as against the person who has committed the fraud, and who endeavours to avail himself of it, the contract shall be considered as null and void. … Even as between the parties themselves we must not forget the figurative language of Lord Ch J Wilmot, who said [that]: "… the statute law is like a tyrant; where he comes he makes all void: but the common law is like a nursing father, and makes void only that part where the fault is, and preserves the rest."' 375 Wilmot LCJ's words are taken from his judgment in Collins v Baltern (1767) 2 Wils 347 at 351. They reflect a principle which still runs through the common law of identifying fault as an appropriate basis for the court exercising its power to grant or withhold relief. In Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 441, Latham CJ, Williams and Fullagar JJ discussed a contractual power to avoid a contract in circumstances where the consent of a third party, there the treasurer of the Commonwealth of Australia, had not been obtained within a particular time. They said that in that case, the event in question could be brought about by the failure on the part of either party to take certain necessary steps, or it could be brought about without default by either party. They concluded that the latter situation applied in that case, but determined that the clause made the contract not void, but voidable saying: 'The question of who may avoid it depends on what happens. If one party has by his default brought about the happening of the event, the other party alone has the option of avoiding the contract. If the event has happened without default on either side, then either party may avoid the contract. But neither need do so, and, if one party having a right to avoid it does not clearly exercise that right the other party may enforce the contract against him.' (emphasis added) Their Honours applied this reasoning as an extension of the principle that no party, directly or indirectly, may take advantage of his own wrong. 376 I am of opinion that in the contractual position which I have found, where each party was in default and acted dishonestly in respect of its financial accountability to the other, neither party was able to rely upon its contractual or common law rights to terminate the franchise agreement in late August 2006. While that may create a situation which Deane J described in Foran 168 CLR at 438 of making the franchise agreement 'hang like an albatross around their necks', I prefer the views of Mason CJ, Brennan and Dawson JJ that a party who wishes to terminate must be ready and willing to perform at the time at which the right is sought to be exercised. 377 Each party was in breach of the franchise agreement in a way which, had the other known of or appreciated that breach prior to late August 2006, would have entitled it to terminate, subject to it not being in any relevant breach itself. That is, Hoy Mobile was in breach of cl 9.3(viii), because it it had been fraudulent in connection with the operation of the franchised business through the unlocking and sale of mobile phones and its failure to account for the illicit profits that it had made from that activity. Likewise, Allphones was evincing an intention not to be bound by its obligation to pay the MTSC in the various manners in which I have found. 378 Each party's conduct amounted to an assertion by it of the freedom to act as and when it pleased in respect of fundamental obligations to the other. Each party was behaving quite dishonestly towards the other in relation to the performance of its obligations under the franchise agreement. Although Hoy Mobile did not plead that Allphones had committed fraud, Allphones' behaviour, in misrepresenting what carriers were paying as MTSC and keeping the difference, was every bit as dishonest as Hoy Mobile's fraud. 379 In essence, Allphones' behaviour in relation to the payment of commission amounted to it evincing an intention not to take seriously its obligations to pay MTSC in accordance with cll 7.3 and 7.4 the franchise agreement. Its conduct was that of a person who evinced an intention that he was prepared to carry out his part of the contract if and only when it suited him and, in the way that it suited him. That was a repudiatory breach which continued over virtually the whole time in which Hoy Mobile was in breach: see Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 at 351-352 per Fullagar J with whom the rest of the Court agreed. 380 A party to a contract cannot act with impunity in a way which amounts to a refusal to be bound. Allphones concealed its underpayment of commission by a continuing deceit. Its action in doing that month after month, evinced an intention not to adhere to its promise to pay commission in accordance with the provisions of cll 7.3 and 7.4. This is not a case of a bona fide mistake in interpretation. No bona fide interpretation of a contract could justify Allphones' electronic manipulation of material data to disguise the true position. 381 Here, Allphones' cumulative failures for over two years to account to Hoy Mobile for all of the commissions Hoy Mobile had earned from activations generated by its conduct of the franchise business, evinced an intention by Allphones not to be bound by the franchise agreement itself. Rather, Allphones evinced an intention to carry out that contract as and when it pleased. Mr Donnellan's evidence indicated that, as the chief executive officer, he saw it as open to Allphones to determine how and in what way it would perform its obligations in relation to the sharing of commissions. The evidence satisfies me that Allphones in fact did choose which commissions earned through activations of mobile telephone services generated by the sales of Hoy Mobile and other franchises would be shared. It did this regardless of the common understanding of Allphones and Hoy Mobile that cl 7 operated, as I have found, to cover all earnings of commissions from sales to customers in the stores of carriers' plan products, however the carriers paid those commissions (i.e. directly to the stores or to Allphones). 382 The deliberate concealment from the franchisees, including Hoy Mobile, of the true amounts paid to Allphones as commission for those activations is evidenced in the various emails to which I have referred and the conduct described by Mr Nicoll in his evidence. That conduct places Allphones' behaviour outside that of a party who is seeking to perform the contract according to its terms, but acting on an incorrect interpretation of it: cp DTR Nominees 138 CLR at 432 per Stephen, Mason and Jacobs JJ. The intention to conceal payments from the franchisees demonstrated a consciousness on Allphones' part that the revelation of what it was doing would be seen, correctly, by the franchisees as a fundamental departure from the conventional understanding of how their commissions were earned. Allphones was not seeking to perform the contract according to its terms, but rather was seeking to perform it as and when it pleased and in the manner it pleased. 383 Thus, at the time at which Allphones learnt of Hoy Mobile's fraudulent conduct, Allphones itself was evincing an intention not to be bound and to perform the franchise agreement as and in the manner it pleased. Although it was carrying out some of its obligations, it was concealing the existence of other obligations from Hoy Mobile, conscious that Hoy Mobile was asking for more detail about the way in which its commission had been calculated. 384 It was an essential term under the franchise agreement that the franchisee (Hoy Mobile) be paid the commissions to which it was entitled arising from its performance of its obligations. The evidence established that Allphones was not paying commissions earned by Hoy Mobile in full, and sometimes at all. Just as Hoy Mobile's conduct in relation to the fraud evinced an intention not to be bound, Allphones' conduct in respect of the short payment of the commission can be described as conduct which evinced an intention no longer to be bound by the franchise agreement or to fulfil it in a manner substantially inconsistent with Allphones' obligations: Koompahtoo 241 ALR at 100 [44] per Gleeson CJ, Gummow, Heydon and Crennan JJ applying; Laurinda 166 CLR at 634 per Mason CJ. 385 In my opinion, for the reasons given by Mason CJ in Foran 168 CLR at 408, Allphones was not entitled to exercise its rights under cl 9.3(viii). In August 2006, Allphones was not ready or willing to perform the franchise agreement. Nor has it proved that it is now ready or willing, so its cross-claim must fail.
WAS ALLPHONES A FIDUCIARY? 386 Hoy Mobile argued that Allphones acted in a fiduciary capacity in collecting commission for franchisees and that it had to account in respect of the MTSC. Allphones contended that their relationship was entirely contractual, and that Allphones did not hold or receive money in a fiduciary relationship, but rather pursuant to the terms of the franchise agreement. 387 There is a danger in approaching commercial relationships with an overlay of equitable considerations. The relationship between the parties here arose in the contractual settings of the franchise agreement and the Code. Indeed, cl 12 of the franchise agreement expressly stated that the relationship between the parties was not one involving agency, partnership or joint venture. Nor does the Code create a fiduciary relationship between franchisor and franchisee. The necessity to identify the precise content of an alleged fiduciary relationship was emphasised by McHugh, Gummow, Hayne and Callinan in Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 at 198-199 [77]-[79]. Here, each party expected to earn profit by its own efforts. 388 While it was in the joint interests of Allphones, and the franchisees, for Allphones to negotiate the best terms it could with carriers, the first question for consideration is what the terms of cll 7.3 and 7.4 require Allphones to do on their proper construction. If the contractual claims made by Hoy Mobile for the right to receive payments under one or other of those clauses in respect of the monies identified by it are correct, then it is not necessary to consider whether any fiduciary relationship existed. I propose to approach the problem in this way. 389 I am of opinion that the relationship between the parties had a commercial, rather than a fiduciary, character. In any event, nothing flows from the attribution of some fiduciary relationship in the present case. The breaches of contract which I have found relating to underpayment of commission by Allphones can find an effective remedy in the common law. Characterisation of a fiduciary relationship would not add any consequence from any breach of Allphones' fiduciary obligations since no different result would ensue for Hoy Mobile: see Blackmores Laboratories Ltd v Diskin Pty Ltd (unreported, Supreme Court of New South Wales, 20 December 1989, per McLelland J; BC8901294 at 7).
RECTIFICATION 390 Hoy Mobile sought rectification of the franchise agreement to include the terms reflecting its claims for the 5 km territory and the operation of cll 7.3 and 7.4. Having regard to my findings in relation to the territory and the construction of the franchise agreement at which I have arrived, rectification is not necessary.
WAS ALLPHONES REQUIRED TO ACT IN GOOD FAITH IN SEEKING TO TERMINATE? 391 Hoy Mobile also contended that Allphones owed it an obligation to exercise the contractual power of termination in good faith. It argued that the content of the obligation is that such a power could not be used for an extraneous purpose or capriciously. Hoy Mobile accepted that, subject to those limitations, the party entitled to exercise the power may do so in its own self-interest. 392 Hoy Mobile argued that a reasonable inference from the behaviour of Allphones, after it began investigating what Mr Quarmby had revealed to it, was to put pressure on Hoy Mobile in the negotiation or consideration of its claims. Hoy Mobile argued that Allphones' failure to respond on the merits to those claims, the letter Mr Donnellan sent on 7 July 2006 (seeking to reserve the power to terminate) and the email of 10 July from Mr Donnellan to Mr Birch (which referred to the claims made by Hoy Mobile in correspondence and to Mrs Hoy's correspondence with other franchisees) showed such a linkage. 393 Hoy Mobile also argued that under cl 24 of the franchise agreement, Allphones was obliged to co-operate and progress in dispute resolution. Thus, Hoy Mobile argued that it was an extraneous and an improper purpose to hold the power to terminate in reserve or 'as a lever' to stifle consideration and negotiation of Hoy Mobile's claim on their merits, as an inducement to Hoy Mobile to refrain from referring the dispute to the ACCC, to stifle discussion with other franchisees concerning issues and common concern and, contemporaneously, to demand that Hoy Mobile execute a new franchise agreement. 394 Allphones accepted that, while a requirement to act in good faith was implied in many contracts, it said that was not necessarily so in every contract. As Finn J observed in GEC Marconi 128 FCR at 208-209 [920] it is not yet clear in Australian law whether a duty of good faith and fair dealing is implied as term of all contracts, or is an incident of particular classes of contract. I need not decide that here because I am not persuaded that Mr Donnellan was motivated by an extraneous purpose, or that he acted capriciously or otherwise than in good faith when Allphones was contemplating the exercise of its right to terminate in early July 2006, or when he caused the notice of intention to terminate to be given in late August 2006. I find that Mr Donnellan was genuinely concerned by the discovery of the fraud in which Hoy Mobile had been engaged. He was entitled to be so concerned. 395 A party to a contract is entitled to exercise contractual rights conferred on him or her honestly. Rarely do people act from a single motive, particularly where they have been involved in a long-term relationship with the other party or parties. In a contractual context, relationships can give rise to a complex set of considerations which one party may apply to the other. Thus, in a contract for the sale of goods where time is of the essence, and one party defaults in timeous performance, the law merchant recognises that the innocent party has a right to terminate. And such rights exist in the Sale of Goods Act 1923 (NSW) and its analogues. 396 Thus, when a vendor fails to deliver goods, or a purchaser fails to pay for them, on the due date, the innocent party is permitted to terminate without being subjected to an enquiry as to its motive. Often merchants terminate contracts when the other party defaults so as to take advantage of a substantive change in the market price for the goods that has occurred between the date of contract and the date on which default occurs. Indeed, the primary reason for termination at that time may be that the innocent party wants to get the benefit of the market change. In one sense, that motivation could be characterised as a purpose extraneous to the contract because it implies a disloyalty to the mutually co-operative relationship created by the contract. However, such a view would protect contract breakers from the consequences of their own disloyalty to the contractual obligation of which they were in breach. 397 In a long term relationship such as that between Hoy Mobile and Allphones, it can be expected that the parties will develop personality differences, as well as commercial differences of approach to particular aspects of their relationship. Courts must be cautious in characterising or giving undue weight to particular aspects of or incidents in such a relationship when arriving at a decision that some action has been taken otherwise than in good faith. 398 Lord Diplock made the telling observation in his classic speech in Horrocks v Lowe [1975] AC 135 at 150C-E that in ordinary life it is rare indeed for people to form their beliefs by a process of logical deduction from facts ascertained by rigorous search for all available evidence and a judicious assessment of its probative value. He pointed out that, in greater or less degree, according to their temperaments, training and intelligence, men and women are swayed by prejudice, rely on intuition instead of reasoning and leap to conclusions on inadequate evidence. People tend not to recognise the cogency of material which might cast doubt on the validity of the conclusions they reach. And, he said, that despite the imperfection of mental processes by which a belief is arrived at, it may still be 'honest', that is, a positive belief that the conclusion reached is true. He said this in the context of assessing whether a person may or may not have been malicious for the purpose of the law of qualified privilege. But it is an observation about human behaviour. What Lord Diplock said can be applied as well to the way in which people act in contractual relationships. 399 As I have found, Mr Donnellan sought to give Hoy Mobile an opportunity to explain its conduct from 7 July 2006. He was the person within Allphones who made the decision issue the notice of intention to terminate. I am satisfied that he honestly believed that Allphones should terminate the franchise agreement because it was not in Allphones' interest to have a franchisee which had engaged in the fraud which Hoy Mobile had. The fraud was serious and, having seen and heard Mr Donnellan, I am satisfied he decided to terminate the franchise agreement because of the undesirability of having a relationship with Hoy Mobile as a party which had committed that fraud. 400 No doubt other factors, including some irritation at the way Hoy Mobile was behaving, may have been a part of Mr Donnellan's thinking processes, but I am quite unpersuaded that he acted, and thus Allphones acted, otherwise that in good faith in exercising the power to terminate. I reject this ground of Hoy Mobile's case.
DID ALLPHONES ENGAGE IN UNCONSCIONABLE CONDUCT? 401 Hoy Mobile alleged that if the franchise agreement were found to be illegal and void, as Allphones had alleged in reliance on Ketchell [2007] NSWCA 161, then much of Allphones' conduct since Hoy Mobile commenced operating as a franchisee was unconscionable within the meaning of s 51AC of the Trade Practices Act. I have found that the franchise agreement is a valid agreement, thus this basis for invoking s 51AC does not arise. 402 Next, Hoy Mobile alleged that, in the circumstances pleaded by it, it was unconscionable within the meaning of s 51AC for Allphones to deny that the franchise agreement contained or ought to contain the following three terms: · the 'territory' was a circle with a radius of 5 km from the location of the Eastgardens store; · Allphones would pay to Hoy Mobile a contribution of $18,000 towards the costs of establishing the merchandising and fit out from co-op funds made available by carriers; · the terms which I have found relating to Allphones' obligations to pay 72.5% of MTSC or MTAC based on all the amounts it received. 403 Based on my findings, the first two of those issues do not require consideration because no such terms were agreed. In relation to the third issue, the franchise agreement included, in substance, an entitlement of Hoy Mobile to be paid commissions as it claimed. Allphones was in breach of those obligations. 404 Hoy Mobile also alleged that by threatening, up to the present, to terminate the franchise agreement in all the circumstances pleaded, Allphones was acting unconscionably within the meaning of s 51AC. Thus, there were two bases for Hoy Mobile's claim under s 51AC namely: first, the failure of Allphones properly to pay all moneys due, including commission; and, secondly, its decision to terminate. 405 Hoy Mobile did not plead that any particular factor under s 51AC(3) and (4) had been enlivened. However, it is common ground that Allphones contravened cl 11 of the Code. That contravention attracts the operation under ss 51AC(3)(g) and (4)(g). Moreover, I have found that Allphones committed repeated breaches of the franchise agreement, under which it retained commission and other moneys to which it was not entitled: cf ss 51AC(3)(i), (4)(i) and see also (ja) and (k) of sub-ss (3) and (4). But, in the end, s 51AC(1) and (2) require the Court to have regard to all the circumstances in which the conduct complained occurred. 406 Based on the findings which I have made, Allphones: (a) acted deceitfully in breaching its obligations to pay commission over virtually the whole time of the relationship. Indeed the relationship began to sour around late 2005 when Mr and Mrs Hoy complained of underpayment of commissions. Mr Donnellan, who had recommended Mr Hoy to Mr Shepherd as 'a very good operator' in October 2005, began to address Mr Hoy in emails later that year in a derogatory way; (b) referred, in Mr Donnellan's email exchange of 10 July 2006, to Mr and Mrs Hoy's attempts to raise issues with other franchisees concerning Allphones' underpayment of commissions and unjustified fees as having 'evaporated any goodwill'; (c) acted, through Mr Harkin, in a bullying and oppressive way, beginning with the quarterly review meeting in May 2006. This behaviour included failing to address the substance of any of Mr Birch's correspondence after that time (except to a limited way by Mr Donnellan's exchange with Mr Donnellan on 10 July 2006), making the demand for Hoy Mobile to provide a mobile phone for the retention customer on 30 June 2006 (including the threatening way in which that was done) and then placing it on stock and commission holds, making unjustified demands that Hoy Mobile sign a new franchise agreement, combined with the threat that it had no 'tenure' as a franchisee. 407 On the other hand, some degree of righteous indignation on Allphones' part is understandable after its discovery of Hoy Mobile's fraud. However, Allphones' conduct to which I have referred went beyond any reasonable response. And, it never had the meeting Mr Donnellan said he wanted in his letter of 7 July, at which it may have been appropriate to ventilate some legitimate sense of disappointment. 408 Allphones argued that, in the period leading up to its giving notice of its intention to terminate on 28 August 2006, Mr and Mrs Hoy had no difficulty in airing their grievances robustly, not only with Allphones' personnel but also through Mr Birch and to the ACCC. It pointed to the fact that Mr Birch competently represented Hoy Mobile from March 2006 and was able to protect its interests. Allphones also argued in its written submissions that there was no evidence that its conduct had any effect on Hoy Mobile and that it was '… more than up to the task of batting back to Allphones anything that was thrown at them and did so'. 409 For all that, Hoy Mobile was overcharged and underpaid by Allphones. While Hoy Mobile could talk or send letters, it received an insouciant reception from Allphones. Whatever they 'batted back' was not scoring runs. And Allphones persisted throughout the litigation to force Hoy Mobile to prove its monetary claims. As I have found, Allphones not only evinced an intention to not to be bound, it acted in that way. Hoy Mobile could complain as much as it liked, but Allphones had the substantive power in the relationship and used it. This was evident not just in its financial breaches, but, as Mr Harkin said in his May 2006 meeting with Mr Hoy, (before his fraud had come to light) he was going to make an example of Hoy Mobile to show other franchisees what would happen to them if they opposed Allphones as the Hoys had. No justification existed, at that time, to treat Hoy Mobile in accordance with 'the Admiral Byng principle', viz: 'pour encourager les autres' (in order to encourage others): see Attorney-General v Guardian Newspapers Ltd [1987] 1 WLR 1248 per Lord Oliver Aylmerton at 1317; Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 461 at 464 per Deane J. Nor was Allphones able to advance any legitimate reason for refusing to credit Hoy Mobile with the $1,100 which Optus had allocated to defray the cost of the store refresh. I am satisfied that Allphones was acting vindictively in refusing to give Hoy Mobile that credit. I have found that Allphones had not proved that it was entitled to make the $10,000 charge (as opposed to a reasonable charge) but its conduct in relation to the Optus payment indicated that Allphones considered that it could make a profit at Hoy Mobile's expense without justification.
33.1 Principles 410 In Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 at 140 [30] Tamberlin, Finn and Conti JJ said that s 51AC, and its analogue s 12CC of the Australian Securities and Investments Commission Act (ASIC) 2001 (Cth), were not to be read down by limiting its operation only to circumstances where the common law would grant relief in respect of unconscionable conduct. They said that the section was intended to build on, and not be constrained by the common law. Their Honours said (National Exchange 148 FCR at 140 [33]): '… "[U]nconscionable conduct", on its ordinary and natural interpretation, means doing what should not be done in good conscience'. 411 They said that the question was whether the conduct of the corporation complained of was 'unconscionable' according to the natural and ordinary meaning of that term having regard to the list of statutory considerations in ss 51AC(3) and (4): National Exchange 148 FCR at 142 [39]. And their Honours said that the section was not, of course, intended to protect the reckless or the unreasonable. They approved what Spigelman CJ had said in Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583 [121] that '[u]nconscionability is a concept which requires a high level of moral obloquy'. 412 Tamberlin, Finn and Conti JJ held that the analogue of s 51AC required the Court to focus primarily on the unconscionable conduct of the corporation and to determine whether that conduct was contrary to the norm of conscientious behaviour. They held that the conduct in that case insisted of a carefully formulated and systematic approach which clearly offended against basic notions of good conscience and fair play: National Exchange at 148 FCR at 143 [44]. Although their Honours were speaking of s 12CC of the ASIC Act, their remarks apply equally to the notion of 'unconscionable conduct' in its analogue, s 51AC: Cannon Australia Pty Ltd v Patton [2007] NSWCA 246 at [43] per Campbell JA, with whom Harrison J agreed. Campbell JA had referred ([2007] NSWCA 246 at [40]) to the earlier decision of a Full Court of this Court in Hurley v McDonald's Australia Ltd (2000) ATPR 41-741 at [21]-[22]. There Heerey, Drummond and Emmett JJ said that for conduct to be regarded at an unconscionable, serious misconduct or something clearly unfair or unreasonable had to be demonstrated. They found that the term carried with it the meaning given by the Shorter Oxford English Dictionary, namely '… actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable', relying on Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. 413 In Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 324-325 [20]-[22], Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ said that the word 'unconscionable' involved the concept of unconscientious conduct. They said that the conscience which equity considers for these purposes is a 'properly formed and instructed conscience', citing Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 227 [45]. The onus is on the party alleging that the other has engaged in unconscionable conduct, so as to prevent the latter's exercise of its contractual rights to terminate. In this respect, the Code specifically permitted termination without notice where a franchisee was fraudulent in connection with the operation of the franchise business (cl 23(f)). However, for reasons unexplained, Allphones instead issued a notice of intention to terminate the franchise agreement on seven days' notice, rather that pursuant to cl 9.3(viii) which permitted termination in the circumstances without notice. A consequence of termination under cl 10 of the franchise agreement would be the transfer, at Allphones' request, of the lease of the shop premises at Eastgardens (cl 10.1(x)). 414 One purpose of s 51AC(1) was to set a norm of conduct for corporations acting in trade or commerce in the context in which the section operates: cp Compomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 at 85 [103]. The second reading speech stated that this norm of conduct had the purpose of protecting the legal rights of small businesses and ensuring that they could confidently deal with large firms: see National Exchange 148 FCR at 143 [48], 144 [50]. Here the supply or possible supply of services to Hoy Mobile included the rights, benefits and privileges which Allphones had to provide to it under the franchise agreement. That congeries contained an entitlement to be paid all amounts of commission due in accordance with the franchise agreement, as well as other valuable rights, such as Hoy Mobile's right to assign its interest under the franchise agreement with Allphones' consent (cl 8.1). 415 Termination of the franchise agreement by Allphones would actuate a contractual regime under which Hoy Mobile would lose the benefit of the congeries of services. Allphones argued that this result was justified because the franchise agreement and the Code contemplated it in the circumstances which have arisen. 416 The equitable jurisdiction to prevent an unconscientious assertion of legal rights by one party under a contract against the other is usually exercised only where the circumstances include one of the special heads of that jurisdiction, namely: fraud, accident, mistake or surprise: Tanwar 217 CLR at 335 [58]. Where accident or mistake is not involved, it is usually necessary to point to some conduct of the party asserting the rights which in some significant way has caused the other party to be in the position of being confronted by that assertion. It is not necessary that the circumstances be exceptional before equity will intervene, but the party challenging the assertion of the rights must show why it would against conscience (unconscientious) for the other to proceed: Tanwar 217 CLR at 335 [58]-[60]. 417 The statutory jurisdiction under sub-ss 51AC(1) and (2) of the Act has a broader reach than its equitable counterpart (see also s 51AA(2)). The non-exclusive range of matters to which the Court may have regard in sub-ss 51AC(3) or (4) suggest that the Parliament was concerned not to restrict the operation of the norm of conduct in sub-ss 51AC(1) and (2), simply to the focus which equity has on whether the corporation (as the party asserting the right) has caused the business consumer or small business supplier to be in the position where the corporation's right is available to be asserted. 418 Thus, here, equity would consider whether Allphones had caused Hoy Mobile to be fraudulent in connection with the operation of the franchise agreement (cl 9.3(viii)). On the facts, I have found Mr Hoy alone was responsible for that fraudulent conduct of Hoy Mobile. So, equity would not find a nexus between Allphones' entitlement to terminate and the fraud in which Hoy Mobile had engaged.
33.2 Consideration 419 But, s 51AC authorises the Court to look more broadly at the whole of the relationship and to assess the corporation's conduct in that broader context. That context includes the breaches of the franchise agreement which I have found Allphones to have committed as the basis of my finding that it was not entitled to terminate the franchise agreement because it was itself in breach of an essential term or evincing an intention not to be bound. In addition, Allphones engaged in other conduct which is relevant under ss 51AC(1) and (2). 420 A central feature of the Code is its requirement that a franchisor must maintain and utilise disclosure documents. The purpose of a disclosure document, in the context of an ongoing relationship between a franchisor and franchisee, is to give a current franchisee among other things: · information from the franchisor that is material to the running of the franchise business (cl 6A(b) of the Code); · details of the franchisor's requirements for the supply of goods or services to a franchisee specifying whether the franchisor or an associate will receive a rebate or other financial benefit from the supply of goods or services to franchisee, and whether any rebate or financial benefit is shared, directly or indirectly, with franchisees (Annexure 1, cl 9.1(j) of the Code). 421 Here, the first time Allphones disclosed to franchisees, including Hoy Mobile, that it charged them a $5 fee for each post-paid mobile phone contract as a carrier reconciliation charge, was in a disclosure document it issued on 29 August 2006. That was the day after it gave to Hoy Mobile its notice of its intention to terminate. That document contained no other disclosures about deductions made by Allphones from the MTSC, which I have held it was required to pay to Hoy Mobile. Those deductions did not fall within rebates or other financial benefits received by Allphones (because I have found that it was not entitled to them), however, if it had been frank about what it was doing, it should have revealed them. But, even if I were wrong in that finding, then Allphones should have given details about the terms it received from carriers in accordance with cl 9.1 in Annexure 1 to the Code. 422 I am satisfied that Allphones' conduct in relation to its suppression of the true commissions paid by carriers to it in respect of activations falling within cll 7.4 and 7.5 was a deliberate and significant departure from honest dealing with Hoy Mobile. This conduct evinced a high degree of moral obloquy. It created an imbalance in the relationship between Allphones and Hoy Mobile, because it deprived Hoy Mobile of earnings to which it was entitled under the franchise agreement, and concealed from Hoy Mobile its true entitlement. I do not consider that the conduct of Allphones towards Hoy Mobile in this regard was in good faith. 423 However, as sub-ss 51AC(3)(k) and 4(k) make clear, the propriety of the conduct of both parties may be relevant. Hoy Mobile also exhibited a lack of good faith in conducting its fraudulent activities of unlocking and selling phones for undisclosed profits. Unlocked phones would not usually be connected to a plan on which MTSC or MTAC or other commissions for sale of air time would be payable. It is relevant that Hoy Mobile engaged in equally dishonest conduct to that which Allphones did. 424 The prohibition in sub-ss 51AC(1) and (2) are against Allphones, as the relevant corporation, engaging in conduct that is, in all the circumstances unconscionable in connection with the supply or possible supply of goods or services by Hoy Mobile. The activities in which Allphones and Hoy Mobile were engaged under the franchise agreement amounted to conduct in trade or commerce. The question is whether Allphones' overall conduct up to the time at which it issued the notice of intention to terminate was unconscionable 'in all the circumstances' within the meaning of s 51AC. Hoy Mobile seeks to restrain Allphones from relying upon its notice of intention to terminate the franchise agreement. In addition, Allphones has indicated that it intends to terminate for fraud under cl 9.3(viii) of the franchise agreement. 425 In balancing the conduct of Allphones against that of Hoy Mobile for the purposes of determining whether or not, in all the circumstances, Allphones' intention to proceed towards a termination of the relationship is unconscionable, it is also important to appreciate that the commercial relationship of the parties is dysfunctional. Each has committed substantial financial irregularities towards the other. While Hoy Mobile's irregularities were categorised by the use of the epithet 'fraud', the behaviour of Allphones in relation to its non-payment and disguising of withheld commissions was equally dishonest. 426 In the conduct of this litigation, Allphones doggedly persisted in its denial of any entitlement of Hoy Mobile to any of the monies claimed until some time during the trial when an agreement was made, without admissions, that some of the parts of the claim would be recognised. That meant that Hoy Mobile has had to litigate those issues together with the others on which I have upheld its claims. These were in monetary terms, out of all proportion to the cost of the litigation. Of course, those costs have been attributable largely to Hoy Mobile's attempts to preserve its status as a franchisee. It sought to establish, unsucessfully, that Mr Clarke, on behalf of Allphones, condoned the unlocking of phones. But even if he had, there was no attempt made by Hoy Mobile to justify its fraudulent retention of money from those sales. 427 Allphones was not willing to carry out the franchise agreement honestly or in good faith according to its terms. Both parties have been in default of their obligations, both contractual and moral, towards one another in the conduct of the relationship. I have had regard to all of the circumstances, including Allphones' conduct leading up to the notice of intention to terminate, and the consequences on Hoy Mobile of a termination. I am of the opinion that it would be unconscientious for Allphones to insist upon its strict legal rights to force an immediate termination in all the circumstances where the performance of its own obligations under the franchise agreement has been lamentably and dishonestly short of the standards that it ought to have followed. It engaged in unjustified bullying and oppressive conduct: cf Simply No-Knead 104 FCR at 270 [51]. 428 I am of opinion that Allphones should be restrained under s 87 of the Trade Practices Act from relying on the fraud of Hoy Mobile effect a termination of the franchise agreement.
CONCLUSION 429 The appropriate course is to require the parties to agree upon orders to give effect to these reasons. The orders should also provide for the amount of the damages to be awarded for the breaches of contract that I have found, less the amount of profit that I have found Hoy Mobile to have retained. Interest will need to be added. The interest on Hoy Mobile's receipts from its fraudulent trading should offset some of that due by Allphones. It may not be possible to be mathematically exact, and the parties may need to adopt a practical position of halving each year's interest in respect of the new amount for that year to approximate its progressive accrual over that period. And the parties will need to address the question of costs. 430 To summarise, I have found that: 1. The territory granted to Hoy Mobile in the franchise agreement was the suburb of Eastgardens. 2. Allphones was obliged under cll 7.4 and 7.5 to pay commission to Hoy Mobile on all sums which Allphones received from carriers in respect of sales and activations of plans effected by Hoy Mobile. 3. The franchise agreement was not void because of Allphones' failure, before it was entered into, to comply with cll 10 and 11 of the Code, and that Ketchell [2007] NSWCA 161 should not be followed. 4. Hoy Mobile was fraudulent in connection with the operation of the franchise business within the meaning of cl 9.3(viii) of the franchise agreement. Allphones did not know of that fraud and did not condone it. Nor did Allphones elect, after it learnt of the nature of the fraud, to affirm the franchise agreement. 5. Allphones was not entitled to terminate the franchise agreement by reason of Hoy Mobile's fraudulent conduct because Allphones, itself, was not ready and willing to perform. This was because it, both, had evinced an intention not to be bound and had breached the essential term in cl 7.4 by its withholding and underpayment of commissions, and its dishonesty in concealing that conduct. 6. Hoy Mobile was not entitled to be paid by Allphones: (a) $18,000 in respect of co-op money when it began its franchise; (b) $32,000 in respect of the benefit Hoy Mobile derived from its fraud. 7. Allphones has not established that the amount it had charged Hoy Mobile in respect of the refresh charge was a reasonable sum to charge under cll 4, 6.23 or 6.35. In particular Allphones has shown that the sum was not reasonable by its failure to reduce it by the $1,100 paid to Allphones by Optus as a co-op payment for the purpose of defraying the store refresh charge for each Allphones' franchise. 8. Allphones is obliged to pay Hoy Mobile the following for its breaches of the franchise agreement: Optus stretch bonus $ 16,388.63
Optus bonus and super bonus $ 27,944.39
Virgin commission $ 1,132.45
Vodafone commission $ 709.78
Hutchison commission $ 2041,66
EFTPOS fees $ 1,045.49
IT management fees $ 2,045.43
Administrative fees and bank charges unable to be allocated $ 3,581.49
Store refresh deduction $ 9,973.37
Diversions of 138000 number $ 1,500.00
Retention canvassing $ 6,507.60
Vodafone commissions from plans with 'free' phones $ 2,299.46
Sub-total $ 75,169.75
Less amount earned by Hoy Mobile's fraud ($ 32,000.00)
Total $ 43,169.75
Counsel for the Respondent: D Pritchard SC, E Muston
Date of Hearing: 12-15, 18-22, 25-28 February 2008; 6, 10-12 March 2008
Hoy Mobile Pty Ltd
Allphones Retail Pty Ltd
(1964) 111 CLR 41
(1968) 118 CLR 429
[2007] NSWCA 161
[2007] VSCA 108
[2005] QCA 357
(1989) 168 CLR 385
(2007) 237 ALR 512
(1958) 98 CLR 36
(2007) 157 FCR 564
(2000) 202 CLR 588
(2005) 63 NSWLR 557
(1987) 75 ALR 461
(2006) 71 IPR 212
(2000) 104 FCR 25
(2005) 148 FCR 132
(1993) 177 CLR 485
(1917) 24 CLR 288
(1991) 22 NSWLR 389
(2007) 162 FCR 466
(2000) 202 CLR 45
(1920) 28 CLR 30
(1978) 138 CLR 423
(2007) 230 CLR 89
(1956) 95 CLR 420
(1995) 55 FCR 452
(2003) 128 FCR 1
(1992) 11 WAR 40
(1979) 141 CLR 59
(1988) 18 NSWLR 420
(1993) 182 CLR 26
(2008) 242 ALR 47
(1959) 101 CLR 29
(2007) 241 ALR 88
(1989) 166 CLR 623
(2001) 210 CLR 181
(2001) 205 CLR 603
(2005) 221 CLR 646
(1927) 39 CLR 570
(1990) 169 CLR 245
(1967) 117 CLR 539
(2001) 207 CLR 165
(1996) 66 FCR 246
(1959) 101 CLR 209
(1961) 107 CLR 466
(1997) 42 NSWLR 462
(2002) 186 ALR 289
(1979) 144 CLR 596
(1992) 179 CLR 332
(1950) 81 CLR 418
(2007) 237 ALR 64
(2003) 217 CLR 315
(2004) 219 CLR 165
(2008) 242 ALR 383
(1995) 49 NSWLR 315
(1993) 178 CLR 217
(2004) 218 CLR 53
(1940) 63 CLR 691
(1959) 101 CLR 298
(2004) 218 CLR 451
(1982) 149 CLR 337
(2004) 218 CLR 530
(1994) 50 FCR 555
(2000) 104 FCR 253
(1958) 98 CLR 367
(1920) 28 CLR 305
(1922) 31 CLR 27
(2003) 196 ALR 257
(1979) 141 CLR 594
(1918) 25 CLR 144
(1987) 14 FCR 226
(1953) 89 CLR 327
(2001) 208 CLR 199
[2002] HCA 5