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[2026] NSWSC 370
Supreme Court of NSW
2026-05-15
Peden J
Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Lindfield NSW Pty Ltd v Netdeen Pty Ltd (No 4) [2026] NSWSC 370
Hearing dates: 29-30 April, 4 May 2026; further submissions received 13 May 2026
Date of orders: 15 May 2026
Decision date: 15 May 2026
Jurisdiction: Equity - Commercial List
Before: Peden J
Decision: Plaintiff’s amended summons is dismissed; Plaintiff pay Defendant’s costs for the original trial and remitted trial as agreed or assessed, subject to an application for an alternative costs order: at [139]
Catchwords: CONTRACTS – Construction – Master Franchise Agreement – Renewal clause of Master Franchise Agreement – Directors’ decision not to renew – Whether the requirements under agreement were satisfied
CONTRACTS – Interpretation – Whether each of the directors formed an “honest and reasonable” opinion that renewal of the Master Franchise Agreement would not be in the best interests of sub-franchisees – Appropriate interpretation of “honest and reasonable” – Whether that opinion was the “substantial grounds” for deciding non-renewal – Where the contemporaneous record of meeting did not detail the reasons or decision-making process – Where report prepared by COO for the board meeting was considered by the directors – Where conduct of the master franchisee was in breach of the Master Franchpise Agreement
CONTRACTS – Remedies – Damages – Calculation of damages for breach of contract – Relevant principles for determining damages for loss of a valuable commercial opportunity – Appropriate calculation of damages based on the parties’ competing expert evidence
CIVIL PROCEDURE – Inappropriate provision of unrequested supplementary submissions
Original judgment source is linked above.
Legislation Cited: Civil Procedure Act 2005 (NSW)
Evidence Act 1995 (NSW)
Cases Cited: Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302
Carr v Finance Corporation of Australia Ltd (1981) 147 CLR 246
Eastman v Director of Public Prosecutions (ACT) (2003) 214 CLR 318
Et China.com International Holdings Ltd v Cheung [2021] NSWCA 24
Hartnett v Trustees of the Roman Catholic Church [2026] NSWCA 35
Long Spring Pty Ltd v RD Beechworth Pty Ltd [2025] NSWSC 437
Netdeen Pty Ltd t/as GJ Gardner Homes v Lindfield NSW Pty Ltd [2025] NSWCA 196
Netdeen Pty Ltd t/as GJ Gardner Homes v Lindfield NSW Pty Ltd (No 2) [2025] NSWCA 218
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90
Searle v Commonwealth of Australia (2019) 100 NSWLR 55
Singh v AKM Investments [2024] NSWCA 268
Trade Practices Commission v Tubemakers of Australia Ltd (1983) 47 ALR 719
XJS World Pty Ltd v Central West Civil Pty Ltd [2025] NSWCA 133
Texts Cited: Practice Note SC Eq 3
Category: Principal judgment
Parties: Lindfield NSW Pty Ltd (Plaintiff)
Netdeen Pty Ltd trading as GJ Gardner Homes (Defendant)
Representation: Counsel:
T D Castle SC with D Levi (Plaintiff)
S Couper KC with J Gooley (Defendant)
Solicitors:
Addisons (Plaintiff)
Thomson Geer Lawyers (Defendant)
File Number(s): 2023/00237902
Publication restriction: Nil
This judgment concerns a limited retrial of a franchising dispute, ordered by the Court of Appeal in Netdeen Pty Ltd t/as GJ Gardner Homes v Lindfield NSW Pty Ltd [2025] NSWCA 196 (Stern, Ball JJA, and Griffiths AJA) (Netdeen CA) and Netdeen Pty Ltd t/as GJ Gardner Homes v Lindfield NSW Pty Ltd (No 2) [2025] NSWCA 218.
The background to the proceedings was set out by the Court of Appeal in Netdeen CA at [7]-[35]. The following is a sufficient summary of key facts:
Netdeen is and was the franchisor of GJ Gardner Homes (GJG).
In 2014, Netdeen entered into a master franchise agreement (MFA) for New South Wales and the ACT with Lindfield as the master franchisee. Mr Matthew Hope was director of Lindfield and the “Specified Person” under the MFA and had particular responsibilities. Mr Hope was a director of Colour Capital Pty Ltd, which was the sole shareholder of Lindfield; he was also the director of the Western Australian master franchisee, and was a gym master franchisee and café franchisor.
After Lindfield exercised its option to renew the MFA for another 10 years, on 20 July 2023, Netdeen’s board, made up of Messrs Gregory Gardner, Darren Wallis, and Trent Gardner, resolved not to renew the MFA, relying on clause 4.7. That clause required the board to form an “honest and reasonable opinion” that based on matters relating to Lindfield’s performance under the MFA, it was in the best interests of Lindfield’s sub-franchisees and Netdeen not to renew the MFA. Before the board was a lengthy report of Netdeen’s COO, Mr Christopher Thornton. On 24 July 2023, Netdeen informed Lindfield of the board’s decision. On 27 May 2024, Netdeen served on Lindfield a notice of termination of the MFA.
Lindfield alleged that Netdeen’s refusal to renew was invalid because clause 4.7 was not satisfied, and it was entitled to damages for the lost opportunity of a renewed MFA.
Other claims that Lindfield brought were resolved by the Court of Appeal.
The two matters remitted for this hearing were:
Whether Netdeen proved it complied with clause 4.7 of the MFA, on its construction found by the Court of Appeal in Netdeen CA; and
What damages ought to be awarded if the non-renewal decision breached clause 4.7 of the MFA.
For the purposes of this hearing and based on the Court of Appeal’s orders in Netdeen CA:
The proceedings were conducted on the basis of the respective parties’ cases, including pleadings, affidavit evidence, documentary tender, rulings on evidence, oral evidence and cross-examination as recorded in the transcript, and any concessions or admissions made by a party at or before the hearing;
Netdeen did not exercise the leave granted to reopen its case and lead further evidence on the clause 4.7 issue; and
I am not bound by any findings by the original trial judge and must make findings of fact relevant to the two remitted issues.
For the following reasons, I consider:
Netdeen satisfied the requirements of clause 4.7; and
If that conclusion is erroneous, Lindfield would be entitled to damages of $13.4 million.
(Franchisor's Rights) Notwithstanding that the Master Franchisee may be otherwise entitled to exercise the option for renewal, the Franchisor may, by written notice to the Master Franchisee within 21 days after receiving notice under Part 4.3, refuse to renew the Master Franchise upon grounds, honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-Franchisees. Without limitation as to other matters that may reasonably [sic] taken into account in determining whether such grounds are reasonable, regard may be had to the Master Franchisee's -
(a) percentage of market share to date;
(b) ability to service Franchisee to date;
(c) demonstrated skill and performance to date;
(d) ability to achieve the targets set out in the Development Schedule;
(e) demonstrated support or lack thereof for the Franchisor, its Directors and officers, the Franchisor's business as a whole and the Franchise Network.
In our view, properly construed, cl 4.7 requires three things. First, that Netdeen form an opinion that renewal would not be in the best interests of Netdeen in its capacity as Franchisor and other GJ Gardner Homes Master Franchisees and/or Sub-Franchisees. Secondly, that the opinion be based on “grounds” that are honestly and reasonably held by the entity making the decision to refuse renewal, here the Netdeen Board. Thirdly, that those grounds are the substantial reason for the refusal to renew.
Provided that these three requirements are met, it matters not that the opinion as to the best interests of Netdeen and, relevantly, the Sub-Franchisees is formed in a context where Netdeen is considering two potential alternatives, being on the one hand renewal of the Master Franchise and, on the other hand, a de-mastered structure. This is particularly so given that, under cl 24.1 of the MFA, the consequence of non-renewal in the absence of any election by Netdeen to transfer the Sub-Franchises to another master franchisee would be, in effect, a direct contract between Netdeen and the Sub-Franchisee. But the grounds must be as stated in cl 4.7.
In addition to the explicit limitations circumscribing Netdeen’s power under cl 4.7, there is an important question whether, in forming the necessary opinion about the best interests of Netdeen and, relevantly, the Sub-Franchisees, for the purpose of cl 4.7 of the MFA, Netdeen was required to have regard only to matters arising from Lindfield’s performance in its role as Master Franchisee under the MFA. Although the factors set out in cl 4.7(a)-(e) are matters which “may” be taken into account, and cl 4.7 expressly states that the listed matters do not limit other matters that may reasonably be taken into account, the inclusion of those sub-paragraphs suggests that the parties intended that non-renewal under cl 4.7 should be based upon the manner in which [Lindfield] performed as Master Franchisee under the MFA and the impact of this upon the interests of Netdeen and, relevantly, the Sub-Franchisees. Those metrics of performance are manifestly not limited to the matters listed at cl 4.7 (a)-(e) and would include, for example, any disparagement or undermining by Lindfield of the GJ Gardner Homes brand. Moreover, it is not necessary that Netdeen reach the opinion that Lindfield underperformed as Master Franchisee, as the requirements of cl 4.7 may be satisfied if Netdeen holds the necessary opinion that having regard to relevant metrics of Lindfield’s performance under the MFA, the interests of both it and Sub-Franchisees will be better served by non‑renewal (such that renewal is against the best interests of both). But Netdeen could not properly form the opinion required under cl 4.7 of the MFA in reliance upon matters unrelated to the performance of Lindfield under the MFA.
That is not to say that, on its proper construction, the de-mastering policy was entirely irrelevant to cl 4.7. For example, if the Board honestly and reasonably believed that there were grounds which justified a conclusion that Lindfield’s performance as Master Franchisee was such to warrant non-renewal having regard to the best interests of Netdeen and, relevantly, the Sub-Franchisees, it would be open to the Board to refuse the renewal and give effect to the de-mastering policy.
Our construction of cl 4.7 is consistent also with the object and purpose of the MFA as disclosed by the terms of the MFA as a whole. We are mindful of the need for caution in attributing a commercial purpose to a contract: The J&P Marlow (No 2) Pty Ltd v Hayes (2023) 112 NSWLR 29; [2023] NSWCA 117 at [76]–[80] (Bell CJ in dissent). However, having regard to the MFA as a whole, it is apparent that its object and purpose was to provide for Lindfield to undertake the role of Master Franchisee against the backdrop of the Business, defined (as set out above) as a master franchise business. The discretion under cl 4.7 of the MFA should not be interpreted as permitting Netdeen to refuse renewal for a substantial purpose that is extraneous to that purpose (see Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 at 346-347; [1953] HCA 31 per Fullagar J (Williams, Webb and Kitto JJ agreeing); NSW Rifle Association Inc v Commonwealth [2012] NSWSC 818; 293 ALR 158 at [126] per White J).
Construing cl 4.7 in that way is also consistent, at least by way of analogy, with the principle established in Stirling v Maitland at 1043, where Cockburn CJ said:
I look on the law to be that, if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.
Ultimately, however, this principle (to the extent that it applies) adds little to what would follow on the proper construction of cl 4.7, that we have set out above. If Netdeen exercised its discretion substantially for the purpose of putting an end to the state of affairs under which the MFA could operate rather than because it believed that it would be in its best interests and those of Sub‑Franchisees not to renew the MFA having regard to Lindfield’s performance, it would breach the obligation of renewal because the exception in cl 4.7 would not apply. As will shortly be developed, however, the primary judge did not make clear findings on these fundamental questions.
I must determine whether Netdeen has discharged its onus of proving compliance with clause 4.7 from the documentary evidence, including affidavits, and the transcript of the cross-examination: Netdeen CA at [84].
It is necessary to determine the three matters identified in Netdeen CA at [66]:
Did Netdeen, through its board members, form an opinion that, based on Lindfield’s performance of the MFA, renewal would not be in the best interests of Netdeen in its capacity as Franchisor and other master franchisees and/or sub-franchisees?
Was the opinion of each board member based on grounds that were honestly and reasonably held?
Were those grounds the substantial reason for the refusal to renew?
Lindfield’s counsel emphasised well-known authorities concerning the operation of s 140 Evidence Act 1995 (NSW) and the necessity to weigh all evidence in determining whether Netdeen has discharged its onus: see eg Singh v AKM Investments [2024] NSWCA 268 at [44]-[46] (Gleeson JA, Bell CJ and Stern JA agreeing); Hartnett v Trustees of the Roman Catholic Church [2026] NSWCA 35 at [124] (Bell CJ, Kirk JA and Ball JA agreeing); XJS World Pty Ltd v Central West Civil Pty Ltd [2025] NSWCA 133 at [54] (Kirk JA); Et*‑China.com International Holdings Ltd v Cheung* [2021] NSWCA 24 at [24]-[25], [27]-[29] (Bell P, Bathurst CJ agreeing).
Lindfield’s repeated submission was that Netdeen’s board’s opinion of non-renewal was not based on grounds that it would not be in the sub-franchisees’ interests to renew based on Lindfield’s performance. It submitted that Netdeen had instead predetermined not to renew, because it was intent on “de-mastering” its franchise system around Australia by removing all master franchisees. For example, by the time the Special Board Meeting took place, Netdeen had removed master franchisees (and moved to a “direct model”) in Victoria, Tasmania, Queensland and the Northern Territory.
Lindfield’s submissions focused on a narrow meaning of its “performance” of the MFA, repeatedly referring to financial and statistical records and earlier Netdeen board reports that recorded that in the lead up to the Special Board Meeting, Lindfield was achieving good sub-franchisee numbers and sales. Lindfield’s cross-examination of the Netdeen directors focussed on this construction of “performance”. However, the Court of Appeal made it plain that the board was not limited to consideration of the “metrics” in clause 4.7(a)-(e), nor was it required to find that Lindfield “underperformed”; it could also reasonably consider other matters, including “any disparagement or undermining by Lindfield of the [GJG] brand”: Netdeen CA at [68]. Lindfield’s cross-examination of the directors on performance beyond sales and market share was very limited, and much of the directors’ evidence on those topics was not challenged. As explained below, I accept the directors’ evidence.
A corporation acts through living persons; that person is acting as the company and the mind which directs his acts is the mind of the company: see eg Trade Practices Commission v Tubemakers of Australia Ltd (1983) 47 ALR 719 at 737 (Toohey J); Australasian Annuities Pty Ltd (in liq*) v Rowley Super Fund Pty Ltd* (2015) 318 ALR 302 at [106] (Warren CJ). Here it is not disputed that the mind of each of the directors on Netdeen’s board form Netdeen’s corporate “mind”.
It was further not disputed that Netdeen’s board’s consistent approach to important decisions was that they required unanimous resolution of the directors. The same approach was taken concerning the decision not to renew. All of the directors voted against renewal. The question is whether they each came to that decision substantially based on a consideration of Lindfield’s performance and the impact on Netdeen and the sub-franchisees of renewal.
Lindfield’s submission was that it is not possible for me to find that the board formed the relevant opinion. It relied heavily on the fact that there were no documentary records detailing the decision-making process. Netdeen did send Lindfield a letter with the conclusion not to renew because Lindfield and Mr Hope were in “serious breach” of the MFA, but that letter did not include the board’s reasons for that decision.
Lindfield also emphasised the Court of Appeal’s statement in Netdeen CA at [83]:
… there is no minute of the Board’s meeting on 20 July 2023 and there is evidently no clear documentary statement of the Board’s reasons for its non-renewal decision. In those circumstances, the focus on remittal is likely to be on the evidence of the individual Board members as to their recollections of their reasons for not renewing Lindfield’s MFA. Undoubtedly, the contents of the COO report will also be significant.
However, the Court of Appeal did not conclude that there had been no compliance with clause 4.7; instead, the focus in determining that issue is on the evidence of the board members and a report prepared by Netdeen’s COO, Mr Thornton, which set out, inter alia, factors for the board to consider in making its decision whether to renew the MFA.
While detailed records may have assisted Netdeen, I do not consider that the lack of those documents necessarily tells against the reliability of the directors’ evidence or that the necessary opinion was not actually formed by each of the directors. I was not taken to evidence of Netdeen’s board keeping fulsome minutes of other meetings and/or communications with Lindfield or other master franchisees, that might have led to an inference that the Special Board Meeting did not occur as the directors deposed. During cross-examination, Mr Wallis denied the suggestion that it was a conscious decision to not take meeting minutes or notes at the Special Board Meeting. He stated he did not “need to” take notes; he also stated that while his affidavit was prepared, he did not have any document to help him recall what was said in the meeting. He denied that he reconstructed his recollection of the meeting in a way more “favourable” to Netdeen. He gave evidence that previously, he and other director, Mr Gregory Gardner would take daily walks and discuss what was “going on”, and that they “often didn’t keep minutes”.
The other document in evidence about the meeting was an email Mr Thornton sent to lawyer Mr Tony Conaghan at Thomson Geer about 10 minutes after the board meeting. Lindfield submitted that email demonstrated that the board members did not form the relevant opinion, because the email did not refer to the requisite issues of the interests of sub-franchisees and Lindfield’s performance, and instead catalogued Mr Thornton’s recollection of the meeting which focused on the de-mastering plan: see Netdeen CA at [31]. However, part of that email did reference discussions in the meeting about Mr Hope’s negative interviews to national media and litigation against Netdeen, “compliance with the MFA, further considerations the Board may have (as suggested in the MFA), the relative merits of the direct model for G.J. Gardner”, the “superior resourcing, marketing, management practices” Netdeen offered under a direct model, which are further discussed below. I do not consider the email is conclusive evidence in Lindfield’s favour; parts are also consistent with the directors’ evidence.
Lindfield sought to attack Mr Thornton’s credit because he redrafted a note of a meeting with Mr Hope in February 2022. I do not consider the fact that Mr Thornton tidied up a file note is material. That file note recorded that at the time of the meeting Mr Thornton considered Netdeen had reasons not to renew the MFA and wanted to move to a direct model; Mr Thornton had no authority to make a decision for the board, and he did not suggest he did. Mr Hope noted that Mr Thornton’s statement about non-renewal at the meeting was inconsistent with earlier statements that the MFA could run its course, including the renewal. Mr Hope’s recollection appears consistent with the evidence of the directors that the idea of de-mastering was being approached on a state by state basis, and that the directors had not decided about the MFA renewal before the July 2023 meeting.
There is no doubt that later in 2022 and 2023 the relationship between Netdeen and Lindfield was more strained, with Lindfield issuing Netdeen a purported breach notice, Colour Capital commencing proceedings in the Federal Court against Netdeen, and Mr Hope making negative statements to media about Netdeen.
Below I:
Outline the COO report, which was prepared for the purpose of the Special Board Meeting and the decision whether to renew the MFA; and
Consider each of the directors’ opinions not to renew the MFA and the grounds for each of those opinions, including their consideration of the COO report, Mr Hope’s conduct in his capacity as “Specified Person”, the interests of the sub-franchisees and the alternative of “de-mastering”, and their experience and knowledge of the franchise system.
The COO report was prepared over some time and with the assistance of lawyers. In addition to setting out factors for the board to consider in making its decision on renewal of the MFA, it also includes Mr Thornton’s assessment of those factors and supporting evidence and indicates his preference not to renew.
I do not accept Lindfield’s criticism that the involvement of lawyers made the report in some way unreasonable or unreliable. I consider a prudent COO might obtain legal advice to assist the board consider an important question involving the operation of an important contract, such as the MFA. Directors might legitimately consider and rely upon the opinions given by the COO, particularly where that report was detailed and includes further expert reports.
The COO report was provided to the directors about one week before the meeting. The executive summary noted that the board was being asked to consider a request to renew the MFA, and that the report set out factors “which the Board may consider in making its decision on renewal”. The directors understood that the report was generated for the purpose of the Special Board Meeting, and each of the directors gave evidence that they read and considered this report prior to the meeting.
Netdeen’s submission was that the COO report was considered by each of the directors, who individually formed the opinion based on Lindfield’s performance that it was not in the best interests of Netdeen and the sub-franchisees to renew the MFA.
However, the COO report also recognised at [4.4] that Netdeen:
… has extensive experience of character, judgments, commitment, strengths and weaknesses of Mr Hope during his tenure as the Specified Person and sole director of [Lindfield].
In accordance with Part 4.6 of the [MFA], [Netdeen] may refuse to renew the [MFA] upon grounds, honestly and reasonably held, that renewal of the [MFA] would not be in the best interests of [Netdeen] and … Sub-Franchisees.
The report’s section 4 dealt with whether Lindfield had complied with the MFA and the matters (“metrics”) specified in clause 4.7, to which regard might be had, and other matters that the board might take into account when considering whether to grant the renewal (at [4.11]-[4.15]).
At [4.9], the COO report set out the conduct of Mr Hope in his role of “Specified Person” that Mr Thornton characterised as breaches; breaches by the Specified Person were deemed Lindfield’s breaches of the MFA. Those alleged breaches are as follows.
First, recital H of the MFA states it is:
… essential to the operation of the Master Franchise that the Specified Person directly manages and supervises the Master Franchise and has beneficial ownership of a controlling interest in the Master Franchisee.
The COO report stated that Mr Hope, who was based in Queensland, was not directly managing or supervising on a day-to-day basis; he left most of the day-to-day management and supervision to his employees, though, he did have a good relationship with some franchisees. While Mr Hope did have a beneficial ownership in the master franchisee, for a number of years, Mr Hope was seeking to transfer the controlling interest to an ASX-listed company, TeamInvest, including by selling a further 36.67% of the issued shares in Colour Capital to TeamInvest. Mr Hope had also previously sought to sell down his interest in Lindfield, which would have been contrary to the MFA.
Also, in 2016, Mr Hope admitted to Netdeen that he was “tired” of the Master Franchise and “no longer had the motivation” to deal with sub-franchisees.
Secondly, the MFA provided that the Specified Person:
… must at all times:
(a) faithfully, honestly and diligently perform their obligations under this Agreement;
(b) operate the Master Franchise strictly in accordance with all of the standards, practices and obligations set forth in the Manual;
(c) continuously exert their best endeavours to promote the Master Franchise and operate the Master Franchise so as to maximize the revenue and profits of the Master Franchise;
(d) operate the Master Franchise so as to reflect favourably on the Franchisor and all G J Gardner Homes Franchisees; act with loyalty and good faith towards the Franchisor, Master Franchisee and the GJ Gardner Homes Franchise Network;
(e) not perform any act which is designed to, or is likely to, assist any competitor of the Master Franchise or any competitor of any other G J Gardner Homes Franchisee.
The COO report recorded that Mr Hope could display an “unattractive temper, which officers and directors of the franchisor have experienced first-hand”. Further, Mr Hope had demonstrated an “increasing lack of loyalty and good faith” towards Netdeen, including in December 2022, where Colour Capital commenced legal proceedings against Netdeen alleging unconscionable conduct by Netdeen in relation to the MFA. It appears Mr Hope spoke to journalists and media about the legal proceedings. Mr Thornton stated that this had the effect of impairing Netdeen’s reputation as franchisor.
Thirdly, the MFA provided that the Specified Person:
will not conduct or be involved in any other business interests that would interfere with or prejudice in any way the satisfactory performance by the Master Franchisee of its obligations under this Agreement, or the financial position of the Master Franchisee and the Specified Person.
The report recorded that Mr Hope has interests in other franchise systems resulting from his directorship of Colour Capital, (which is the sole shareholder of Lindfield) and that can cause conflicts of interest in some decisions. For example, the COO report identifies Mr Hope’s breach of a media buying policy; Mr Hope purchased media through his local buying agency, rather than adopting Netdeen’s national marketing campaign, meaning that his Colour Capital brand, and not Netdeen’s sub-franchisees, benefitted from the buying power brought by the NSW/ACT and WA Master Franchise. Despite not having taken issue with any factual matter in the report, in submissions Lindfield took me to a deed of variation of the MFA, which provided that Netdeen acknowledged that Mr Hope had other obligations because of his Colour Capital position, and would need to devote some time to those. However, that does not explain the breach of the media buying policy.
Fourthly, there were other more trivial breaches identified:
Mr Hope had never worn the branded uniform, and his staff seldom wore it (except sometimes at franchise meetings).
The MFA required the Specified Person to have experience in the home construction industry. While Mr Hope was not a builder, the COO report recognised that he had significant experience within the franchise.
Section 5 of the report provided a consideration of the clause 4.7 metrics and the best interests of Netdeen and the sub-franchisees.
Each of the clause 4.7 metrics are considered below. However, at the outset, I reject Lindfield’s submission that because the COO report and previous board papers referred to Lindfield and Mr Hope’s achievements in some aspects of performance of the MFA, that the board must have acted with an ulterior purpose in refusing renewal of the MFA.
I otherwise note that at the previous trial, Lindfield made no challenge to any of the factual matters included in the report; Lindfield in essence accepted that same position in the hearing before me. I do not consider it was open to Lindfield to make any submissions before me to the effect that the COO report was factually inaccurate. During submissions and during cross-examination of the directors, Lindfield drew attention to documents that might suggest that Mr Thornton’s views in the report were inaccurate, or that the report did not completely capture Lindfield’s performance in terms of data and previous board reports, to support the submission that the report was generated with the pre-determined intent to not renew the MFA. However, as Netdeen submitted, and the report stated, the directors knew the true position in relation to those matters; this is also reflected in the evidence given by the directors, discussed below. I reject Lindfield’s critique of the report. Further, Mr Thornton denied that from late 2019 he “la[id] the groundwork to justify a board decision of non-renewal” which “culminated in his report”, or that the COO report was “designed purely for litigation purposes”; he was not meaningfully challenged on that evidence. In any event, it is the evidence of the directors, and not Mr Thornton, that is critical.
Clause 4.7(a) – Percentage of market share to date: The report recorded that the NSW/ACT franchise had had minimal growth and had made “very little (if any) progress towards the known and agreed goal of becoming the number one builder in NSW/ACT” or increase market share. Lindfield submitted that such a goal was “aspirational” and therefore could not be the standard, against which Lindfield’s performance was measured. The report effectively accepts that because it states it is a “high level goal”, but added “the expectation … was for [Lindfield] to substantially or at least materially increase its market share”, including because recital J of the MFA was that Lindfield “acknowledges and agrees that it must fully use and exploit its Master Franchise Area to maximum advantage”. The Colour Capital website also recognised this goal by stating “… the NSW Master Franchise is aiming to become the No.1 residential building company in NSW in 2022.” The report cited figures including an overall increase in market share from 1.35% to 2.51%, noting that the number one home builder had increased its comparative size in the same period. The report noted that the growth was “barely one per year”.
The report also noted that Lindfield could have invested more in recruiting, skills training and support. In comparison, it stated that under a direct model, Netdeen would be able to provide more resources across recruiting, onboarding, training, coaching and support.
Clause 4.7(b) – Ability to service Franchisee to date: The report acknowledged that Lindfield had put in place “a number of solid franchising systems and processes for franchise management”. However, it noted that there was little support for sub-franchisees, because one employee with 0.5FTE (full time equivalent) was required to onboard, train and provide reactive support for a network of approximately 30 franchise offices.
The report noted that in 2019, Netdeen developed a strategy with master franchisees to improve franchise recruitment, new homes consultant recruitment and productivity, system support, franchise capital funding and brand. The report indicated that it was agreed that each should have a full-time business development manager in every area, but in NSW/ACT that manager only gave 30% of their time to the role.
By comparison, Netdeen could provide seven specialists including two roles dedicated to supporting franchise offices. Other support would be “support with display homes, reporting, complaints, site health & safety, communications and events… HR support, financial health support, supplier management”. The report noted that Netdeen could provide more funding towards supporting sub-franchisees.
The report noted that Lindfield had in FY2022 invested less than 8% of retained income in support and growth, whereas Netdeen planned to invest 24% of income in wages in 2023. It also noted that Lindfield charged sub-franchisees for some costs, which Netdeen would pick up under a direct model.
Clause 4.7(c) – Demonstrated skill and performance to date: The report acknowledged there was performance outlined in other sections of the report and that Lindfield had a generally functional group with a number of good leaders and “Mr Hope should take some credit for this”.
Clause 4.7(d) – Ability to achieve the targets set out in the Development Schedule: Similar to the matters raised in the context of market share, it was noted that increases in the number of sub-franchisees was slow, and was said to be a “direct outcome of lack of commitment to growth”.
Clause 4.7(e) – Demonstrated support or lack thereof for the Franchisor, its directors and officers, the Franchisor’s business as a whole and the Franchise network: The report acknowledged that over the MFA term there had been support demonstrated by Lindfield and Mr Hope. However, it stated that there had been attempts by Lindfield to frustrate the “roll out of the national brand campaign and the adoption of national marketing partners”. Further, reference was made to damage to the Franchisor’s reputation and brand “that our sub-franchisees depend on” through media publications regarding the litigation commenced by Colour Capital against Netdeen.
Mr Gregory Gardner founded the GJG business in 1983, and holds the majority share interest in GJG and is a director of Netdeen.
Mr Gardner gave evidence that his decision to vote for non-renewal was based on the best interests of Netdeen and the franchisees, having regard to information available to him, including the COO report, expert reports, his evidence of the discussions and clarification at the Special Board Meeting, and his own knowledge of the GJG business. I accept his evidence. As detailed below, he considered the relevant question and determined honestly and reasonably that based on Lindfield’s performance of the MFA, it was not in Netdeen and the sub-franchisees’ best interests to renew the MFA.
COO report: In cross-examination, Mr Gardner denied that the COO report was not intended to provide a “balanced assessment” of whether the master or direct models were in the best interests of NSW franchisees; he stated that the COO report was “directed for me, to talk about the business, and whether we’re ready or not” to make a decision. He stated that during the meeting, he was looking at the COO report more than “thinking about anything else”. Mr Gardner acknowledged that the master model system was working. He was thereafter challenged that when attending the meeting, he “didn’t care” how well the master model was working because he “had an ulterior motive in relation to the demastering decision”. However, he denied that the purpose of the report was to generate a “pretext” for exercising the clause 4.7 power of non-renewal or that he had decided prior to the meeting that he was going to “get rid of” Mr Hope and Lindfield as master franchisee. He was challenged further that he did not have an open mind about renewal and that the rational question to have asked was “are we trying to fix something that isn’t broken”; Mr Gardner denied this and said that he was looking at the evidence to hand to make a decision.
Mr Gardner gave evidence that prior to the Special Board Meeting, he undertook an analysis of the figures contained in the COO report and performed calculations about the financial changes that would occur going from the master model to the direct model. During cross-examination, Mr Gardner denied the suggestion that he did not undertake these analyses and calculations, because he did not raise it during the meeting; those calculations were done in his head. It was suggested that his evidence of these calculations was untrue and also that this untrue evidence was included to “distract from the vast amount of money [he] would be reaping from this decision to de-master”. Mr Gardner denied that, and also denied the suggestion that the only matter of concern for him in making his decision was “how to take the profit stream back from the New South Wales sub-franchisees”. He was not further meaningfully challenged.
Lindfield’s financial performance: During cross-examination, it was suggested to Mr Gardner that he “didn’t care about sales and what had generated those sales in [NSW]”, to which Mr Gardner answered, “That’s correct”. However, he denied that the reason he did not care about the sales was because the decision to not renew was pre-determined.
Sub-franchisees’ interests: Mr Gardner specifically considered the interests of the sub-franchisees. He considered the direct model would mean “more direct support for the sub-franchisees”. In his affidavit, he said he had in mind prior to the meeting the discussions he had with sub-franchisees during 2023 GJG annual conference, including that they wanted “more support and [Mr Hope] was hard to get”. In effect, he asserted that sub-franchisees would always tell him things when socialising. He also recalled Mr Thornton raising issues about Lindfield not spending enough to support sub-franchisees. He reiterated this lack of support to sub-franchisees as an important reason for him voting against renewal.
It was suggested to Mr Gardner that the “right thing to have done would’ve been to do what the sub-franchisees suggested, which is to get in contact with Mr Hope and sort out the problems”. Mr Gardner conceded that in “hindsight” this might have been appropriate, but denied the proposition that the reason he did not relay this feedback to Mr Hope was because he realised he “made a mistake in de-mastering [NSW] by refusing the renewal”. His evidence was that he knew Mr Hope’s “side of the story”, because he knew that Mr Hope was not servicing the sub-franchisees and that he was not contactable. This was not further meaningfully challenged.
He also denied the proposition that cutting out the “middleman” (Lindfield and Mr Hope) would create a “real risk” to the sub-franchisees that they would be left in a worse position than under a de-mastered model, or would be exposed to potential “risks”. His evidence was that the decision to terminate was not based on a “gripe” from a franchisee or because Mr Hope was “rude” to Mr Wallis.
Ultimately, Mr Gardner thought that the sub-franchisees “might do better without the … master”. He reasonably gave weight to the lack of support to sub-franchisees by Lindfield (and Mr Hope) in their role as master franchisee, which could be improved by Netdeen dealing directly with the sub-franchisees. I accept his evidence.
I otherwise reject Lindfield’s submission that Mr Gardner “cannot assist the Court as he could not remember what he thought at the time.” I was taken to part of the transcript where Mr Gardner conceded he could not remember “all of this”, in the context of being asked questions about Mr Wallis requesting data where there had been de-mastering and the order of voting at the meeting. I do not accept Mr Gardner was saying he could not remember anything about the meeting at all. His evidence was that he could not remember the order of voting, but that he remembered the “board meeting” and that he voted for non-renewal. The cross-examination did not question him on any further details of the specific matters he did or did not remember at the board meeting. I do not accept that in the context of the specific questions it can be concluded that he was saying he could not remember any discussions at the meeting, or that he could not remember the reasons why he voted for non-renewal. I also do not accept that his concession in cross-examination would lead to a conclusion that none of his evidence ought to be accepted, and instead, that the non-renewal was predetermined.
Mr Darren Wallis commenced working with GJG in 1994, and has been a non-executive director and chairman of Netdeen since GJG became a franchise in 1995.
Mr Wallis understood that the role of the master franchisee was essentially to duplicate his work, which was direct franchising and involved dealings with the franchisees, to “help grow the business”. He stated that the master franchisee’s job was to “recruit the franchisee, train the franchisee and mentor the franchisee with our systems and procedures to help make them a successful builder”. This is consistent with his cross-examination evidence that Netdeen’s philosophy was to help set up sub-franchisees to make them the “biggest and most successful business in their area”.
Mr Wallis gave evidence that he “honestly and genuinely believed” that based on all the material concerning Lindfield’s performance and comparative impacts on sub-franchisees, non-renewal was the best course of action and in the best interests of the sub-franchisees and the franchise network as a whole, and I accept his evidence as detailed below.
COO r****eport: He read the COO report and was familiar with the facts and data in it. He acknowledged that while the COO report would carry some “merit” (as it had been prepared by the COO), he ultimately did not accept the conclusions in the report as “gospel”, and recognised that the report contained the opinion of the COO based on fact or research to help him make decisions.
He stated that he had been in the franchising business for 20 years, and gave evidence that he analysed the strength or relative weaknesses of the COO’s recommendations, and their validity and relevance, including the growth and success of the business. He made appropriate concessions. For example, while in his affidavit he said that the facts and data in the report had been extracted from GJG’s databases and systems and so “to my knowledge, were accurate and correct”, he acknowledged that some of the matters raised in the report were “possibly new” and not in GJG’s systems, and also that he thought some of the figures were “a bit wrong”, but he did not consider those potential inaccuracies were critical in the context.
Mr Wallis clearly identified the aspects of the COO report upon which he placed particular importance, including Mr Hope’s conduct and absence from the GJG business, as well as the potential benefits of the direct model for sub-franchisees, discussed further below.
Mr Hope’s performance: Mr Wallis had regard to Mr Hope’s performance as Specified Person. He noted Mr Hope’s consistent absence from the business; for example (and as noted in the COO report), Mr Hope was based in Queensland and largely left the day-to-day running of the master franchisee to his employees. He particularly considered Mr Hope’s desire to end the relationship and sell the master franchisee for some time, and his attempts to sell his interests to a publicly listed company.
Further, he gave evidence of Mr Hope’s aggressive conduct towards him at a poker game, including that Mr Hope told him words to the effect of “what the hell is going on”, “you need to fix this f**cking problem”. He also considered Mr Hope's “extremely unprofessional” consultation with journalists and media in or around December 2022 regarding the litigation commenced by Colour Capital against Netdeen; he considered that this behaviour “displayed a lack of good faith and loyalty to the franchisor” and caused significant damage to GJG’s brand.
Ultimately, Mr Wallis denied that a breakdown in relationship was a breach or that it justified exercising a power that resulted in a non-renewal. In fact, he considered that, conversely, a decision of non-renewal might result in the loss of his close friendship with Mr Hope, and wanted to negotiate with Mr Hope. Mr Wallis considered Mr Hope’s behaviour as the “Specified Person” and his disparagement of the GJG brand was one factor, albeit an important one, which he considered in forming his opinion not to renew.
Lindfield’s financial performance: While he considered the growth in the number of franchisees under the master franchise model compared to what could be achieved under a direct model, Mr Wallis stated that there was more to consider than just “finances”; he also gave weight to Lindfield’s performance in terms of support being given to sub-franchisees, which is detailed further below. This was consistent with his other evidence that his concern with the previous master franchisee was that they were not giving the sub-franchisees the “right” support.
Sub-franchisees’ interests: Notably, Mr Wallis compared the support sub-franchisees were being given by Lindfield to what they would receive under a direct model. He gave evidence that he specifically considered Netdeen’s increasing costs and staff in order to increase the resources available to sub-franchisees and to grow the business. He recalled that Mr Thornton’s modelling and budgets showed Netdeen could offer more resources and assistance to sub-franchisees more efficiently under a national direct model rather than individual master franchisees trying to do the same thing, and stated that “what’s in the best interests of the franchisee, is how we get the resources to that franchisee, technology-wise”. He deposed that during the Special Board Meeting, Mr Thornton said that the direct model would provide increased support and resources for franchisees, including access to experts in various areas rather than one general support specialist, so that franchisees would have a “higher level of knowledge” upon which to draw. Further, he considered the potential for direct and unfiltered communication and engagement with sub-franchisees by Netdeen.
It was suggested to Mr Wallis that it would be irrational to form the view that de-mastering in NSW was in the best interests of sub-franchisees unless there was evidence “on an area-by-area basis” that a new model would make the franchisees more successful. Mr Wallis responded, “No. I think you’re looking at it – a holistic level across all the franchises”. I do not accept that a decision made in the interests of sub-franchisees required consideration of each individual sub-franchisee; Mr Wallis’ evidence was that he considered the interests of sub-franchisees in terms of holistic resourcing and support, and the performance of Mr Hope and Lindfield.
He denied the suggestion that his decision not to renew was because he would get more money personally without the “middleman”, Mr Hope.
His focus appeared to be whether Lindfield (and Mr Hope) were appropriately supporting sub-franchisees, and he formed the opinion that the interests of sub-franchisees would be better served if the MFA was not renewed. His opinion that it would be in the best interests of the sub-franchisees if all states operated under the direct model arose in the context of Lindfield (and Mr Hope’s) conduct as master franchisee, including the lack of support provided to the sub-franchisees, and that Netdeen would be able to provide more support without Lindfield as the master franchisee.
Mr Trent Gardner has worked in various roles at GJG since February 2010, and in October 2020, was appointed as director and CEO of Netdeen.
Mr Gardner gave evidence that he weighed the pros and cons in forming his opinion regarding the non-renewal of the MFA, and compared the current situation to that if there was a de-mastering. He gave evidence of his consideration of the COO report, Lindfield’s performance and Mr Hope’s conduct. I consider that his opinion was honestly and reasonably formed and I accept his evidence, which is detailed below.
COO report: Mr Gardner stated that the facts and data contained in the COO report were “already known” to him, and that he believed its contents to be “true and accurate”. However, he also stated that he considered the content of that report, including the annexed expert reports, “in light of [his] own experience with Lindfield, the NSW/ACT franchise network, and the Australian franchise network as a whole”.
He denied that the COO report was “simply a pretence about Netdeen’s true strategy”; this was not meaningfully challenged in cross-examination.
Sub-franchisees’ interests: Mr Gardner also considered the interests of sub-franchisees based on matters arising from Lindfield’s performance as master franchisee. He gave evidence that over prior years, he had heard from sub-franchisees that they had not “seen Mr Hope, or heard from him, and that he wouldn’t answer when contacted”. He also acknowledged that whilst the direct model might not be as profitable as the master franchise model in the short-term, in the long-term, they will have “stronger and more profitable business … and without the additional support we have greater risk of losing sub-franchisees”.
I reject Lindfield’s submission that because this evidence was framed by reference to the master franchisees generally that it demonstrated that Mr Gardner was not addressing the correct question posed by clause 4.7. Mr Gardner referred to the value of the franchise “at all levels” in response to the master franchisees “underinvesting in support”. Taken together with his evidence during cross-examination, it is clear that he had in mind the interests of the sub-franchisees specifically, and was considering the lack of support provided to them by reference to the master model and Lindfield’s role as master franchisee.
Mr Hope’s conduct: Mr Gardner gave evidence regarding Mr Hope’s “waning levels of engagement” with the GJG brand, including that Mr Hope had established various employees as General Manager rather than himself. He also gave evidence that Mr Hope was seeking to sell further shares in Colour Capital because he was seeking to exit from his role as Specified Person/master franchisee in NSW/ACT and also WA.
Further, Mr Gardner recalled that during the Special Board Meeting, Mr Thornton said that although Mr Hope continued to communicate that he wanted to grow market share and become “number 1” in NSW, “over the last few years his growth has not supported that … Where NSW has 1 full time person supporting 27 odd franchises, we have 7 where we are supporting 51”. Mr Gardner gave evidence that Netdeen develops and updates comprehensive training materials for sub-franchisees; it was Lindfield’s job to assist sub-franchisees in accessing those materials, which he could not do if he was not available to sub-franchisees.
It was suggested to Mr Gardner that it would have been “honest and reasonable” to give Mr Hope the COO report to allow him to respond to matters raised before a decision was made not to renew; he responded “no”. I do not accept that the board was required to engage with Mr Hope in that way.
Additionally, during cross-examination, Mr Gardner denied the proposition that his mind “wasn’t open to anything other than negative statements or facts about Mr Hope, because [he] believed that that would support [his] strategy of taking over the [NSW] profits”. He was not meaningfully challenged on this denial, and I do not accept that Mr Hope’s behaviour was the sole basis for Mr Gardner’s decision, nor do I accept that it was basal to any alleged predetermined decision not to renew. Mr Gardner explained the various factors he considered in deciding not to renew, which was not limited to Mr Hope’s behaviour.
I reject Lindfield’s submission that it was obvious that the decision not to renew was predetermined and part of a plan that started in 2020 for Netdeen to “de-master” and instead have a direct relationship with franchisees.
While none of the directors shied away from the fact that Netdeen had engaged Mr Thornton as COO in 2019 to move the business forward, and he in turn had engaged experts to consider the future model of the business, I do not accept consideration of a direct model, or even the implementation of a direct model in other jurisdictions, meant the directors failed to address the correct question in determining non-renewal of the MFA.
Based on their respective evidence, it is clear that in reaching their decision, they each considered whether, with Lindfield performing the MFA, sub-franchisees and Netdeen were being appropriately supported, and how the alternative model might be preferrable.
I also reject Lindfield’s further submission that Netdeen conflated the two issues of whether the renewal was not in the best interests of Netdeen, and whether there were honest and reasonable grounds which provided sufficient basis for the refusal. The COO report at [5.3] refers to the “future of Netdeen” “with” and “without” the master franchisee. Lindfield submitted that the de-mastering strategy could only arise for the board to consider, after it had formed a reasonably and honestly held opinion that Lindfield’s performance as master franchisee was not in the interests of Netdeen and sub-franchisees. However, that overlooks the Court of Appeal’s statement in Netdeen CA at [69] that the de-mastering strategy was not “entirely irrelevant” to clause 4.7.
What Netdeen must demonstrate is that the board decided that, based on Lindfield’s performance of the MFA, renewal would not be in its interests and sub-franchisees’ interests, and it was open to consider the comparator of the sub-franchisees’ interests with de-mastering.
The Court of Appeal in Netdeen CA at [68] stated that, having regards to the relevant metrics of performance, Netdeen must be satisfied that it and its sub-franchisees would be better served by non-renewal; this is what the COO report and the directors explored.
I consider that each of the directors made clear their respective decision-making processes and grounds for voting for non-renewal, including not only reference to the COO report, but also drawing on their personal industry experience, extraneous knowledge and the discussions had at the Special Board Meeting.
As there was no meaningful challenge to the honesty of the directors' evidence, the issue in dispute was whether the opinion was based on Lindfield's performance and was reasonable in the circumstances. I consider each of the directors’ opinions were reasonable in the circumstances because at the very least:
The concept of Lindfield's performance under the MFA was a broad one, and included conduct beyond issues of market share and numbers of sub-franchisees;
Consideration of insufficient support of sub-franchisees was reasonable; and
Consideration of Lindfield and Mr Hope's conduct, including in disparaging the brand and breaching the media buying policy, was reasonable.
I consider what damages I would have awarded Lindfield, had it been successful in its claim.
The Court of Appeal set out the relevant principles for determining damages for loss of a valuable commercial opportunity; here, it is the further renewal of the MFA for 10 years: Netdeen CA at [214]. There, the Court of Appeal quoted Bell P’s (as the Chief Justice then was) statement of principle in Searle v Commonwealth of Australia (2019) 100 NSWLR 55 at [206] (Searle):
It is not essential for a trial judge assessing damages for loss of a chance to nominate a particular percentage of probability to be attributed to the prospect of the chance being realised, and to insist on this would be prone to artificiality. A global approach not requiring the specification of particular percentages or degrees of probability or possibility was endorsed as acceptable by this Court in Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 at [147]. In Malec at 640, Brennan and Dawson JJ said:
… we think it undesirable for damages to be assessed on the footing of an evaluation expressed as a percentage. Damages need not be assessed by first determining an award on the footing that the hypothetical situation would have occurred and then discounting the award by a selected percentage. Damages founded on hypothetical evaluations defy precise calculations.
At the first trial, both parties relied on the evidence of expert accountants: Lindfield relied on Mr Michael Potter and Netdeen relied on Mr Andrew Ross. Before me, the parties relied upon further expert reports and a joint report from these experts, who were cross-examined before me.
By the time of the trial, various matters were agreed between the experts.
There was no disagreement that a discounted cash flow (DCF) methodology was appropriate, and that if Netdeen had not complied with clause 4.7, then Lindfield had lost a valuable opportunity, which was to be assessed as capital and not income, so that there was no need for a gross-up for taxation. Mr Potter prepared a DCF model, estimating various integers.
A DCF model calculates the present value of all future cash flows over the lost opportunity period. The cash flows comprise:
Predicted revenue in each of the 10 years (Lindfield’s revenue is a net 2% of the revenue earned by sub-franchisees from their building contracts when a slab is laid); and
Predicted operating costs in each of the 10 years.
Once that calculation has occurred, various discounts can be applied to account for the time value of money and the risk that the calculations may be inaccurate (eg due to more distant forecasts).
The methodology relies upon actual facts known, which also form the basis of assumptions about future performance, in order to arrive at an opinion as to a likely sum for damages. Therefore, Netdeen accepted that Lindfield’s loss was appropriately determined by reference to:
Historical data relating to market conditions during the initial term of the MFA and the financial outcomes achieved by Lindfield under those market conditions; and
Industry forecasts or predictions as to likely market conditions.
Netdeen’s letter of instruction to Mr Ross expressly required him to identify any errors with Mr Potter’s model, but not “undertake the exercise of remedying [them]”. Mr Ross therefore did not propose solutions to some of the issues he identified in the Potter model.
Netdeen submitted that Mr Potter’s calculations were not conservative enough to account for the risk that his integers were too generous. Netdeen’s primary position was that because it could demonstrate that Mr Potter’s integers were uncertain, I ought to adopt a higher discount rate.
Lindfield accepted that such an approach would be open, or alternatively, it would be open to discount for “contingencies” generally: see Searle at [203], [206], [209]-[210]. Lindfield also considered it would be open to me to determine the appropriate integers and direct the experts to determine the final figure. In the circumstances and the length of this litigation to date, I do not consider it “just, quick and cheap” to adopt that course and leave open the possibility of a further dispute between the parties, and instead consider it more appropriate to adjust Mr Potter’s calculations by way of a discount.
I deal with each of the disputed integers below.
The agreed integers were:
Lindfield’s net revenue in each of the 10 years was to be calculated as follows:
(a) The number of slabs in that year, multiplied by (b) The average slab value in that year, multiplied by (c) 2% to represent Lindfield’s share of sub-franchisees’ continuing franchise fee.
Market size was determined based on actual ABS data up to 2025 and the most recent industry data (on an averaged basis) to forecast market size in each sub-franchise area for each of the 10 year renewal period.
Initial franchise fees could be determined using a 10 year average.
Lindfield’s future operating costs could be estimated using Lindfield’s actual operating costs for FY2014-FY2023, increased annually by the RBA predicted CPI increases, and a tax rate of 30%. Further, an $80,000 per month administration fee adjusted by CPI was an appropriate estimation.
Interest would run from 1 July 2024.
The following are the disputed integers, where Netdeen submitted Mr Potter’s assessment was too generous to Lindfield and therefore a greater discount was appropriate.
In the first trial (referenced in Netdeen CA at [227]) and in the hearing before me, Lindfield submitted that Netdeen had admitted in its Further Amended Commercial List Response that as at the date the trial proceedings were commenced, there were 34 sub-franchisees in New South Wales. That is not correct. The pleading admitted there were “approximately” 34 sub-franchisees. I do not consider that pleading amounted to a formal admission of the exact number of sub-franchisees at the date of non-renewal. Instead, Lindfield’s own data demonstrated that the number of sub-franchisees fluctuated over the MFA term. Netdeen also submitted orally that, based on Lindfield’s 2024 profit and loss statement, there were 30 sub-franchisees in New South Wales as at May 2024, partly because one sub-franchise area was described variously as Tamworth and Tamworth Region and ought not be double counted. I do not consider I must find that an approximate number of sub-franchisees admitted by Netdeen was the actual number.
I consider that at the time of the non-renewal, Lindfield’s records demonstrated there were more likely 30 or 32 sub-franchisees. Mr Potter accepted that he had no instructions or factual basis for assuming the starting number for his calculations was 34 or 35. He appeared to adopt the number of 35, because he had seen that Netdeen had intentions to expand to 45 sub-franchisees. I consider the adoption of 35 as a starting point included a risk of overstatement.
Market share is informed by the number of slabs laid by each sub-franchisee in each of the 10 years. Mr Potter calculated a single market share for each sub-franchise area based on historical 3 and 5-year averages, which he assumed would then apply in each of the 10 years. Mr Ross considered that Mr Potter’s approach resulted in an overstatement in FY2024 and, because of the cumulative nature of Mr Potter’s approach, all future years in the renewal term were also likely overstated. Mr Ross preferred to use 2024 market share data as the starting point. He extrapolated the 11-month market share data (the MFA having ended in May 2024) to a full year.
Both experts accepted that there had been a downturn in market share in the last 3 years (post a COVID-19 spike), however, there was no real analysis as to why that was the case. I accept in those circumstances there is a risk that using a 5 year average is too generous to Lindfield as it cannot be assumed that the downward trend would immediately be reversed. While I accept that any approach involves some uncertainty, I prefer Mr Ross’ opinion that using the most recent year of 2024 provides an appropriate “mid-point”, as it could be possible that the trend reversed or continued downwards.
I also accept that it was appropriate to extrapolate for the missing month in 2024 to have an annual figure. I reject Lindfield’s brief written submission that Mr Ross’ extrapolated data was somehow “unreliable”; this submission was not materially expanded on orally. Mr Ross explained how he extrapolated the figures and during cross-examination Mr Potter considered Mr Ross’ extrapolated figure was acceptable if it was assumed that the observable trend in declining slab sales value/market share continued in 2024. Mr Potter had no specific evidence upon which to base an assumption that the market share figure would have increased. In those circumstances, I do not accept the criticism of Mr Ross’ approach, and consider there is some risk that Mr Potter’s calculations favour Lindfield.
Another issue related to where there was either insufficient or no data for 7 sub-franchise areas. I accept that it would have been inappropriate to assume no slabs would be laid in those areas for the whole of the renewal period and that Mr Potter’s use of comparably sized sub-franchise areas was an appropriate methodology to estimate market share, particularly where Mr Ross did not provide an obvious alternative.
Slab value was partly agreed. It was agreed that it was appropriate for Mr Potter to forecast future slab values using existing actual data from Lindfield for average slab values in each sub-franchise area in FY2023 and increase the average slab values each year to reflect forecast price changes. Where historic average slab value data did not exist for a particular area, the experts agreed it was appropriate to use data from comparable areas to derive an average slab value for that area.
Mr Potter used a 4.5% annual price increase (ie compounding), having regard to published Reserve Bank of Australia data. That was lower than Lindfield’s historic actual data for annual slab value increases of 7.7%.
During the trial, Mr Ross said he could not give an opinion that 4.5% was unreasonable, because he had no expertise to do so. However, Netdeen made the submission that there was still a risk that the percentage was too high, as it would mean a 55% increase in slab value over the renewal period, and therefore a further discount ought to be incorporated for the risk that the market would not absorb such a sustained increase.
I accept there is necessarily some uncertainty, even though 4.5% is less than Lindfield’s historic data and the CAPM formula (discussed below) already includes allowance for future market price risks. I do not accept it can automatically be concluded that this means there is “double-counting” of risk in relation to forecast of slab values, because the estimates discounts are necessarily imprecise: Searle at [208].
Downtime was an allowance for risks associated with Mr Potter’s forecast slab numbers based on historical data during the period of the current MFA, for the risk that some sub-franchise areas would not have had an operational sub-franchise or for the possibility if there was a lag between a sub-franchisee signing up and the laying of the first slab. It was “intended to identify a reasonable number of slabs being produced by each sub-franchisee during the 10-year period.” Mr Potter referred to the “downtime adjustment” as “a rather imprecise, blunt type reduction in the expected future revenue”.
Mr Potter’s downtime factor of 19.7% was said to avoid the need for any further “specific risk” discount factor for risk of overstatement in slab number forecasts. He considered it was conservative, because it discounted across all sub-franchise areas, even in those that were operating successfully. An example was provided in closing submissions to demonstrate that drilling down in the formula and the actual numbers, the estimate was likely to be conservative.
Netdeen submitted that the “downtime factor” was not a sufficient discount to ensure a reasonable estimate, because there was insufficient analysis around the lag time and possibility there would be no slabs in some sub-franchise areas. Netdeen said Mr Potter had chosen to deal with the “lag” not as part of his downtime calculation, but as part of his market share adjustment. It further said Mr Potter’s approach ignored the “lengthy periods of time when there had been a sub-franchisee and there ceased to be one.”
I accept that “downtime factor” was an appropriate mechanism to account for the lag time, however, there was still some risk that it was not “conservative” because of the assumptions made, including that sub-franchisees were “new sub-franchisees” when in fact there had been a sub-franchisee in that area previously, but that area had become vacant for the start of the calculations. I note there was no evidence about why vacancies occurred and likely lag time before first slab sale to support Mr Potter’s approach. I therefore accept there is some risk that Mr Potter’s downtime discount is insufficiently conservative.
Mr Potter used a CAPM model to determine a discount rate of 16%. The CAPM formula multiplies the beta by the market risk premium and adds to this figure the risk free rate and the specific risk premium. In Mr Potter’s first report, the formula yielded a figure of 14.8%, rounded up to give a discount rate of 15%. Mr Potter subsequently increased his discount rate to 16% to account for the risk free rate increasing from 4% to 5%.
Mr Potter’s discount elements were as follows:
Risk free rate of 5% (which he increased from 4% in his first report);
Market risk premium of 6%;
Beta of 1.3;
Specific risk premium for company size of 3% (on the basis that smaller companies carry greater risk than large, listed companies).
Mr Ross criticised Mr Potter’s specific risk premium for company size. He considered Mr Potter did not explain what weight he placed on various studies he listed as supportive, and in fact the studies did not relate to a business of Lindfield’s size. Mr Ross indicated he would have chosen a risk premium of 5% for company size.
Mr Ross also considered there should be a further specific risk premium, beyond that applied for company size. His opinion was that a business operating on a franchise model was inherently riskier because it depended on the franchise agreement continuing, and that their “customers are themselves franchisees”. He also opined that there is “no reliable research or data which allows a valuer to arrive at a suitable specific risk premium”, and instead it depends on the valuer’s experience and expertise. I accept this opinion that a greater risk premium ought to be included.
Mr Ross considered a discount rate of between 20-25% was appropriate to take into account any risk unrelated to the specific variables, upon which Mr Potter’s assessment relied. Mr Potter conceded that 20% discount rate would not be unreasonable if some of his assumptions were not well made:
So if you were looking for where's the give and take in the discount rate because it's not precise, I wouldn't quibble with 20% because of that imprecision in the way the discount rates assessed. But I think 25 is too high given the settings in the model. But that's assuming in principle that some of the right sensitivities which are determined are applied. So if it's determined there's only 32 subfranchisees and there's the market share should be the single [2024] year's market share because that was unaffected by the event of non‑renewal, then you would apply those assumptions with the range of discount rates I mentioned.
Mr Potter also did not consider a greater discount was required because in his view he had factored in a discount in his “downtime factor”.
Further, I note that Mr Potter prepared various sensitivity analyses, where he tested how changes to certain integers would affect the overall damages calculation (eg using different combinations of data to determine market size, using different figures for average market share etc). Mr Potter did not suggest that even these analyses meant that there was no risk of overcompensation.
On balance, because I have identified some imprecision with some of Mr Potter’s integers above, I consider a discount of 20% is appropriate, being accepted by both experts as reasonable.
Netdeen submitted orally that the appropriate starting point was the calculation at D5 of Mr Potter’s valuation model (MP1), which calculated damages based on 32 sub-franchisees and using Mr Ross’ figure for market share. As I have accepted both of these integers above, I agree that D5 is an appropriate starting point.
The calculation at D5 led to three identified quantifications of damages (before pre-judgment interest), depending on the discount factor adopted:
If Mr Potter’s 16% was adopted, damages would be $15.4 million.
If Mr Ross’ 20% was adopted, damages would be $13.4 million. Mr Potter did not consider that discount rate was unreasonable.
If Mr Ross’ 25% was adopted, damages would be $11.4 million.
As I have found a discount of 20% is appropriate, Lindfield’s damages would have been $13.4 million, had it been successful in its claim.
Lindfield submitted that in the alternative, it would be open to me to accept Mr Potters “simplified DCF calculation” which was based on:
An alleged admission by Netdeen that Lindfield’s pre-tax revenue was $4 million;
An increase in that revenue of 2.5% based on CPI;
Allowing for the average industry forecasts for market growth; and
Applying Mr Potter’s previous 16% discount rate.
I do not accept that Netdeen admitted in its pleading that Lindfield’s revenue was $4 million a year as at the date of non-renewal. Instead, the pleading admitted “approximately” that much. It is more appropriate to require Lindfield to prove its alleged loss in the circumstances using Mr Potter’s detailed model as discussed above. I therefore reject the alternative calculation of loss.
During the hearing, I accepted the suggestion that the parties collaboratively narrow the particular parts of the affidavit evidence which had been referred to and therefore were relevant to this judgment. After a week, the parties provided my Chambers with a list of paragraphs of the affidavits referred to in submissions. However, the affidavit evidence was not “narrowed” by either party and many of the paragraphs of the affidavit evidence which were listed were not specifically referred to in written or oral submissions.
The parties also made further submissions, including about onus and the factual matters in the COO report. These were not requested and ought not to have been provided; the time and place to present argument is at the hearing, and communications to the Court after the hearing without leave should not be made: see eg Carr v Finance Corporation of Australia Ltd (1981) 147 CLR 246 at 258 (Mason J); Eastman v Director of Public Prosecutions (ACT) (2003) 214 CLR 318 at [27]-[31] (McHugh J, Gummow J agreeing); NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at [191]-[192] (McHugh A-CJ, Gummow, Callinan and Heydon JJ); see also Practice Note SC Eq 3 at [67].
For the reasons above, Lindfield has failed. There is no reason why costs ought not follow the event.
I note that costs of the first trial were reserved. In light of the outcome, Lindfield must pay Netdeen’s costs of the first trial and this trial, as agreed or assessed. However, I will grant the parties leave to seek a different costs order.
I make the following orders:
The plaintiff’s amended summons is dismissed.
The plaintiff to pay the defendant’s costs of the original trial and this remitted trial, as agreed or assessed.
Grant liberty to either party to apply for an alternative costs order to order 2 within seven days of today's date, setting out the application and any evidence and submissions of no more than 3 pages upon which it relies.
Should such an application be made for an alternative costs order, the responding party is to provide evidence and submissions of no more than 3 pages opposing any alternative costs order within seven days of receiving the first application.
The Court will determine any such alternative costs application on the papers, if appropriate.
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Lindfield NSW Pty Ltd
Netdeen Pty Ltd (No 4)
[2025] NSWCA 133
(2015) 318 ALR 302
(1981) 147 CLR 246
(2003) 214 CLR 318
(2004) 219 CLR 90
(2019) 100 NSWLR 55
(1983) 47 ALR 719
(2023) 112 NSWLR 29
(1953) 89 CLR 327
(1999) 47 NSWLR 473