At the commencement of the hearing the plaintiff indicated that the trial would be run within the scope of the pleadings. Throughout the trial the defendant took the point that a particular matter being led was outside the pleadings and also objected to certain evidence on the same basis. The plaintiff made no concession that its case had strayed outside of the pleadings, although some of the submissions encasing certain evidence within the pleadings required a somewhat indirect approach.
My view is that the plaintiff did adhere to the pleadings, perhaps sometimes on their very edge, but overall to an extent that the defendant was well able to meet the case being put and never suffered any prejudice by reason of not being able to meet any assertion made by the plaintiff.
To this end, during the defendants' final submissions, I put this question to his Majesty's counsel, at Tcpt, 10 August 2024, p 736 (5):
"HIS HONOUR: Is that your way of saying that everything that's outside the pleadings you've been able to meet?
Mr Couper KC answered:
COUPER: Not quite, your Honour, and we'll give your Honour some examples of where things have been raised‑‑
HIS HONOUR: You can come back to it, if‑‑
COUPER: Yes. We're conscious of what your Honour says and we will deal, in more detail, with how we approach those matters."
Other than repeating the general complaint about the pleadings the defendant did not come back to give me examples or deal with the matter in more detail. Between my assessment that the pleadings were not ignored and the defendant not returning to the question posed above, I am satisfied that the plaintiff's case was put without any prejudice to the defendant's capacity to identify the allegations against it and to meet them.
[4]
Background
In 1983 Mr Greg Gardner commenced a homebuilding business called GJG Homes. In 1995 the defendant company was incorporated (G.J. Gardener Homes Pty Ltd) in order to facilitate the franchising of Mr Gardner's building enterprise.
The business structure had three tiers: at the top was the Master Franchisor. There was then a Master Franchise Agreement (MFA) with a Master Franchisee. The Master Franchisee then had franchise agreements with Sub-franchisees.
In short, the Sub-franchisees were (generally) small building firms that built residential homes under the banner of G.J. Gardener Homes. The Master Franchisee, who was not a builder, provided support to the Sub-franchisees.
An earlier Master Franchisee for the combined NSW and ACT areas was not successful. Mr Matthew Hope, through his company Lindfield NSW Pty Ltd (the plaintiff), became the Master Franchisee for the combined NSW and ACT areas on 18 November 2005. To become a Master Franchisee he needed to invest $500,000. The MFA between the plaintiff (Lindfield) and the defendant (Netdeen) had a term of 10 years.
Mr Hope, who had lived in New South Wales, moved to Queensland in October 2009. In February or March 2014 Mr Hope asked the defendant to prepare a new MFA, which was prepared and executed on 1 July 2014. The parties to the MFA were the plaintiff and the defendant. The new MFA had a term of 10 years, and also an option to renew for a further 10 years.
The option to renew is the primary issue in the proceedings. This is because on 3 July 2023 the plaintiff endeavoured to exercise the option to renew. On 24 July 2023, the defendant issued a Refusal Notice declining the application for renewal. The refusal was made pursuant to cl 4.7 of the MFA.
It is also relevant to note here that after the plaintiff had requested renewal on 3 July 2023, the defendant, on 5 July 2023, provided the plaintiff with a copy of its "current" MFA. It did so because, pursuant to cll 4.2 and 4.6, any renewal would be subject to the current MFA. It is part of the plaintiff's case that the current MFA was deliberately so disadvantageous to the plaintiff that it formed part of the defendant's predetermined decision to exclude the plaintiff from the G.J. Gardener Homes franchise. The use of the current MFA to achieve a similar purpose was said to have been utilised by the defendant in dealings with a Master Franchisee in Victoria.
[5]
The plaintiff's case
The plaintiff put its case in a number of ways:
1. The terms of the MFA, properly construed, were breached by the defendant.
2. Even if the terms of the MFA are construed as advocated by the defendant, the defendant has still acted in breach of those terms.
3. The defendant's conduct, whatever the result of the argument about the terms of the MFA, was in breach of the Franchising Code (Code).
4. Whatever conclusions may be reached about the MFA and the Code, the defendant has in any event acted unconscionably in contravention of the Australian Consumer Law (ACL).
I think the four topics described in the preceding paragraph will provide a convenient structure for my reasons. However, I also note that by the end of the case the plaintiff advanced three "meta" issues:
1. Did the defendant bring an open mind to the decision to refuse renewal of the MFA?
2. Did the defendant exercise cl 4.7 for an improper purpose, namely to take away the plaintiff's successful business for nothing, that is at no cost to the defendant?
3. Was there unconscionable conduct on the part of the defendant? The plaintiff submitted this was achieved in the same way, namely by taking the plaintiff's business away from it in return for no compensation. The defendant's conduct was described by the plaintiff as "sharp practice".
It is notable that the above three concluding issues omit any reference to the Franchising Code.
In addition, I will deal with damages and arguments on termination. The latter arises from Mr Hope's involvement in a business venture called Wattle Court Homes.
[6]
The terms of the MFA, properly construed, have been breached by the defendant.
This topic has two elements: construction of the relevant clauses and whether, on the plaintiff's construction, there has been a breach of the MFA.
This is a convenient point to insert the relevant clauses of the MFA.
"PART 4 TERM
4.1 (Term of Master Franchise) This agreement is for a Term as specified in Item 3 of the Schedule provided however that the Agreement shall terminate on the date on which all Franchise Agreements granted pursuant to this agreement have expired or have been terminated, unless it is earlier terminated under Part 14 whichever is the earliest in time to occur.
4.2 (Renewal Term of Master Franchise) Provided that the Master Franchisee shall have duly complied with all its obligations under this and any related agreements and shall have taken all actions reasonably necessary to ensure that the Master Franchise conforms to the then current image of a G J Gardner Homes Master Franchise, the Master Franchisee shall, subject to Parts 4.6 and 4.7, have an option to renew the Master Franchise for the additional term set out in Item 4 of the Schedule upon the terms and conditions of the Franchisor's then current standard Master Franchise Agreement.
4.3 (Mode of Exercise) The option granted by Part 4.2 shall be exercised by the Master Franchisee giving written notice to the Franchisor of such exercise no more than twelve calendar months and not less than six calendar months prior to the expiration of the Term, time being of the essence.
4.4 (Renewal Fee) The Franchisor shall charge a fee for the renewal of the Master Franchise upon the exercise of the option granted by Part 4.2 as specified in Item 19 of the Schedule.
4.5 (Legal and Other Costs on Renewal) The Master Franchisee must pay or where appropriate reimburse the Franchisor for:
(a) the Franchisor's legal costs (on a solicitor and own client basis) and other costs associated with the negotiation, preparation and execution of the new Master Franchise Agreement; and
(b) any stamp duty or other taxes, duties, levies or charges payable in relation to the new Master Franchise Agreement.
4.6 (Effect of then Current Standard Terms on Option)
(a) The Master Franchisee acknowledges that, at the time of exercise of the option granted by Part 4.2, the Franchisor's then current standard Master Franchise Agreement and related agreements may contain provisions materially different from those of this and related agreements. Upon the due exercise of the option for renewal, the Franchisor shall forthwith forward to the Master Franchisee and the Guarantor copies of the Franchisor's then current Master Franchise Agreement and any other related agreements then used by the Franchisor in granting G J Gardner Homes master franchises together with the then current form of Franchise Agreement and any other related agreements then used by the Franchisor in granting GJ Gardner Homes franchises.
(b) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are not materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4, other than Part 4.1 shall be excluded).
(c) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, the Master Franchisee and the Guarantor (if any) may, within twenty-one (21) days of receiving such copies by written notice to the Franchisor, accept or reject such terms and conditions (other than those relating an option for renewal) and in default of such notice the Master Franchisee and the Guarantor as the case may be shall be deemed to have accepted the same.
(d) If either the Master Franchisee or the Guarantor rejects such terms and conditions under paragraph 4.6(c) then, unless the Parties within a further twenty-one (21) days after giving notice of rejection reach agreement as to the terms of renewal of the Master Franchise, the exercise of the option shall be deemed to be withdrawn and of no further effect.
(e) If both the Master Franchisee and the Guarantor accept such terms and conditions under paragraph 4.6(c) or the Parties agree to other terms and conditions under paragraph 4.6(d), then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4 or equivalent option for renewal shall be excluded) or in the form agreed as the case may be.
4.7 (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 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.
4.8 Holding Over
If the Master Franchisee continues to operate the Business at the expiration of the Term or Renewal Term with the consent or acquiescence of the Franchisor, that continued operation will be strictly on a month to month basis and in accordance with the terms of this Agreement. Either party shall be entitled to give thirty (30) days written notice to the other of their intention to terminate the continued operation of the Business."
[7]
Even if the terms of the MFA are construed as advocated by the defendant, the defendant has still acted in breach of those terms.
Under the defendant's interpretation, the defendant was entitled to refuse renewal under cl 4.7 if it had "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." The defendant said that it had reached the conclusion contemplated by the clause that it was not in the best interests of the Franchisor and Sub-franchisees to renew the MFA.
The plaintiff submitted that the important question was not whether the defendant had reached a conclusion as envisaged by the clause, but rather whether it had reached a conclusion at all. By this I mean that the plaintiff submitted that there had not been a decision made on the merits, even under the defendant's interpretation of cl 4.7, to renew or not renew; rather the decision had been made well before the renewal application was made. This imports two notions: that a report prepared for consideration by the defendant's board (the COO report) was not a report prepared for genuine consideration, and secondly that the meeting on 20 July 2023 did not involve the making of a decision but was no more than a 'rubber-stamping' of a previously made decision.
The plaintiff put the question about a decision in this way: did the directors bring an open mind to the meeting about the renewal? The plaintiff submitted that the defendant's reliance on cl 4.7 was an effective subterfuge to an already made, but concealed, decision to 'de-master' (or switch to a direct model).
In my view there is a subtlety to the question posed by the plaintiff which needs to be considered. This was the possibility that a decision had been made before the meeting but, at the meeting, a separate decision was made as to whether to stand by the earlier decision. If this had happened then the existence of the earlier decision, as an indicator of a breach of the defendant's obligations under cl 4.7, would be of much less significance.
In order to answer the question about the true nature of the decision to refuse renewal made at the board meeting on 23 July 2023, I think it necessary to go back in time to events that had already occurred.
Between 2009 and 2015 the number of Sub-franchisees grew from 19 to 26. The combined turnover of the Sub-franchisees, over this period, grew from $89,095,966 to $171,082,099.
[8]
The defendant's conduct, whatever the result of the argument about the terms of the MFA, was in breach of the Franchising Code.
A number of clauses in the Code were initially relied upon by the plaintiff. This reliance seemed to fade, although not completely, as the matter progressed. By final submissions, the plaintiff had little to say about the Code. I noted above the three "meta" issues that the plaintiff said arose through the hearing. They do not include the Code. This is not surprising as the matters raised in the Code probably fall within the substantive allegations made by the plaintiff. Thus, for example, the notice of termination that had been served by the defendant on 27 May 2024 was said to be a breach of both the MFA and the Code.
Clause 6 of the Code imposes an obligation to act in good faith. The defendant submitted that if it had complied with the condition of cl 4.7 that it act on "honest and reasonable grounds" then it had necessarily acted in good faith. I think this is correct but only on the defendant's interpretation of cl 4.7. If the clause required consideration of the best interests of the Master Franchisee then, conversely, the defendant would have not acted on "honest and reasonable grounds" and in turn would not have acted in good faith.
Clause 23 of the Code relates to a restraint of trade where a franchise agreement is not extended. The clause really has no applicability here because there was no cross-claim by the defendant seeking, for example, a declaration to prevent trading by Mr Hope or the plaintiff.
The next possibly relevant clause of the Code is cl 27. This clause relates to a breach of a franchise agreement by the franchisee which, if it occurs, must generate reasonable notice being given to the franchisee if the franchisor intends to terminate the franchise agreement as a result of the franchisee's breach.
The defendant submitted that cl 27 was essentially concerned with a breach of the MFA which, following the giving of notice, was susceptible to rectification. This was not the case here. This litigation is concerned with an allegation of breach by the defendant and not by the plaintiff. I agree with the defendant that cl 27 is not applicable.
The final relevant clause in the Code is cl 29. This clause sets out the grounds upon which a franchisor may terminate an agreement and, if it does so, the notice that must be given to the franchisee.
[9]
Whatever conclusions may be reached about the MFA and the Franchising Code, the defendant has in any event acted unconscionably in contravention of the Australian Consumer Law.
Section 21 of the Australian Consumer Law states:
Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person; or
(b) the acquisition or possible acquisition of goods or services from a person;
engage in conduct that is, in all the circumstances, unconscionable.
(2) This section does not apply to conduct that is engaged in only because the person engaging in the conduct:
(a) institutes legal proceedings in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition; or
(b) refers to arbitration a dispute or claim in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition.
(3) For the purpose of determining whether a person has contravened subsection (1):
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court's consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
Section 22 then provides a non-exhaustive list of matters a court may take into account in making a decision under s 21. The plaintiff submitted that the more important considerations were to be found in subsections (a), (h), (i), (j) and, especially (l), which refers to:
"The extent to which the supplier and the customer acted in good faith."
There was no suggestion that the plaintiff was not entitled to the protection of the ACL. The defendant submitted however, that it's conduct came nowhere near unconscionability.
[10]
Damages and the damages' experts
The plaintiff relied on reports from Mr Terence Potter to support its primary economic loss claim. Mr Potter's reports are an attempt to assess the value of the plaintiff having retained the MFA through to 30 June 2034. The defendant responded with a report from Mr Ross which criticised various aspects of Mr Potter's approach. Mr Potter took on board some of the criticisms and made adjustments accordingly in his second report.
Mr Potter and Mr Ross are forensic accountants.
An objection had been taken to Mr Potter's reports which I dealt with in a separate decision. Suffice to say I allowed the reports into evidence.
Mr Ross pointed out that Mr Potter had used the Discounted Cash Flow (DCF) method to value the 10 years from July 2024. Mr Ross specifically said:
"I agree that it is appropriate for use in the task Mr Potter set out to accomplish."
I note at this stage that there is an apparent misconception on the defendant's part as to the approach taken by Mr Potter. The defendant submitted:
"153. The Primary Damages Claim is said to be based on a prediction of cash inflows to the sub-franchisees which would ultimately translate to amounts paid to the plaintiff. Over the 10 year period up to the end of the financial year of 2034, the plaintiff's expert, Mr Potter, estimates the plaintiff would have, had the MFA been renewed, derived an amount within the range of $23.8 million to $25.6 million."
The difficulty with the way the above submission has been put is that it refers to a prediction of what would have been earned as opposed to a calculation of what would have been earned subject to the necessary discounts that needed to be applied. At the most basic level it could be said that what would have been earned over the 10-year period was 10 x $4 million, but this would ignore the nature of the claim as a loss of chance and the discounts that both Mr Ross and Mr Potter said needed to be applied. In addition, an award of $40 million would overlook the accelerated payment of the lost income.
Mr Ross points out that in order to use the DCF method Mr Potter needed to estimate future cash flows. His estimation of the cash flows is generally the subject of Mr Ross's criticism. After discussing Mr Potter's method of calculating the cash flows Mr Ross turns to the discount rate applied by Mr Potter. Mr Ross does not think the rate was large enough and should have been in the range of 20% to 25%.
[11]
The Potter High and Potter Low scenarios were a product of his instructions to
"… adopt a reasonable high and low estimated range of expected approvals in the areas for each sub-franchisee."
As to the discount rate Mr Potter explained:
"The discount rate was assessed to reflect market risk only. I have accounted for risk in the assumed cash flows by the application of both a 'downtime' factor to expected future housing approvals and a provision for 'bad debts' that is greater than that historically experienced."
Mr Potter was at pains to emphasise the cyclical nature of the housing construction industry, a factor he said had not been appropriately considered by Mr Ross.
Mr Potter was cross-examined. The intent of the cross-examination was to demonstrate that a number of Mr Potter's conclusions, in particular his cash forecasts and his discount rates, could not be supported on the evidence. Mr Potter's methodology was attacked, in particular the manner in which he calculated what he referred to as "Potter High" and "Potter Low" parameters.
It was suggested to Mr Potter that the primary source of his information should have been the Sub-franchisees but information about them had not been given to him and he had not asked for it. He responded, that as an expert retained for litigation purposes he did not have "carte blanche" to make enquiries of persons whom he might otherwise have approached for information.
Notwithstanding my decision on the admissibility of his reports, Mr Potter was questioned about the reliability of information from the Housing Industry Association (the HIA) and from the Master Builders Association (the MBA). Mr Potter said that he had used these sources in other valuations and that they were an accepted source of information in respect of residential building in New South Wales. He said he could use the data to chart the historical growth of the Sub-franchisees over time.
Mr Potter was shown Exhibit 4. He had not seen it before. The intent of taking him to the document was that it demonstrated the following:
1. As at May 2024 there were 30 Sub-franchisees.
2. Over the period covered by the exhibit there was never a time when more than 23 Sub-franchisees were laying slabs, and that this number descended to 12 at one time.
The purpose of taking Mr Potter to Exhibit 4 was to challenge his assumption, commencing in July 2024, that there would be 35 Sub-franchisees. Mr Potter would not concede that his approach was erroneous because, he said, that the historical rise in Sub-franchisees justified the use of a 35 Sub-franchisee forecast. In addition, he said that he had applied discounts to ameliorate the possibility of an overestimate. These discounts were referred to as "downtime adjustments."
[12]
The alternative damages claim
Because I have found for the plaintiff on the primary damages claim, I will deal with the alternative damages claim briefly.
According to Mr Castle: "The sale is when you, effectively, take a deposit, and the slab is when the builder goes on site." In opening written submissions, the plaintiff described the alternative claim in this way:
"Linfield's alternative calculation of the damages is for that part of the royalties payable after 1 July 2024, arising from sales entered into pre-termination, because royalties are only paid once the building work commences (known as the 'slab' date). Mr Hope has estimated there are about 1000 sales in this category at any given time."
Mr Castle, in oral submissions, said the approach was:
"to take a subset of all of the slabs which will be laid over the next ten years and to identify which slabs are actually the result of existing sales ... . In other words, we've done the work as master franchisee, sale has occurred, the slab comes later and your Honour, that's an alternative calculation."
The plaintiff's claim is for $3,942,330. The defendant's submission was, if the claim was allowed at all, it should be for $2,330,232. The reasons leading to the difference between the two figures is the application of a different conversion rate. The plaintiff applied 80%, the defendant applied 65%.
The conversion rate is the amount of sales that are converted into signed contracts. The plaintiff's 80% came from Mr Hope, based on his estimation of the conversion rate. Mr Trent Gardner, in his affidavit of 5 August 2024, said that he analysed "information in the software regarding historical conversion rates from sales to slab rates in the NSW/ACT territory." His analysis produced a result of 64.3%. In addition, Mr Trent Gardner analysed the conversion rate between 1 January 2012 and 31 December 2022. This analysis produced a rate of 67.2%. Accordingly, he effectively averaged the results of his analyses to reach 65%. The plaintiff conceded the possibility of "unforeseen contingencies" which would justify reducing the 80% to 75%. This would bring the damages down to $3.75 million.
The plaintiff's 80% is based on Mr Hope's estimate. The defendant's 65% is based on a comprehensive analysis performed by Mr Trent Gardner. I think this fact favours the defendant's submission. Had I awarded damages on the alternative basis they would have been in the sum of $2,330,232.
[13]
Wattle Court Homes Pty Ltd
Wattle Court Homes Pty Ltd ('Wattle Court') was set up by Mr Hope in November 2023. The company carries on the business of a franchisor of home building franchisees.
As at July of this year no franchise agreements had been concluded with any homebuilders. The business was also not on the Franchise Disclosure Register (as required by Pt 5A of the Franchising Code of Conduct).
Wattle Court has a website which, in paper form, came into evidence as Exhibit 1.
The cross-examination of Mr Hope on Wattle Court was the subject of objection. It was said to be not relevant because it referred to matters that had occurred after 27 May 2024 (when the MFA was terminated). The defendant said that "it goes to credit". I allowed the questions to continue, but only on this basis.
The position in relation to events before 27 May 2024 is relevant because it relates to the defendant's assertion that Mr Hope's (and in turn the plaintiff's) conduct from December 2023 amounted to a repudiation of the MFA. Breach of cl 8.39 was said to be at the core of the repudiating conduct.
The purpose of the questioning on credit was to suggest that Mr Hope, while purporting to be acting in the interests of the defendant, was actually 'white anting' the defendant's business by trying to compete with the defendant including poaching franchisees of the defendant. There is a draft franchise agreement with one such company, owned by a Mr Luecki. This company has actually commenced trading in North Sydney under the banner of Wattle Court Homes Sydney North.
Mr Hope said he was starting Wattle Court and trying to attract franchisees "should we not get a renewal". Presentations had been made to a number of GJ Gardner franchisees but, said Mr Hope:
"We were presenting the concept of Wattle Court Homes and what it was going to be. Whether that was a good idea for them or not was up to them."
This passage of the cross-examination was submitted to be important:
"Q. Is it the case that you had discussions with G.J. Gardner subfranchisees in New South Wales in 2023 about the idea that you would or might establish Wattle Court Homes as a franchisor for building homes?
A. That was our plan B that we presented to the franchisees.
Q. Did you present to the subfranchisees the idea that you had a proposal to set up Wattle Court Homes to become a franchisor for the building of homes in New South Wales?
A. If we weren't able to obtain a renewal, then yes.
Q. Did you first present that idea to representative subfranchisees in December or November 2023?
A. I first spoke about the concept of it to franchisees in December 2023, yes.
Q. Which franchisees were they?
A. That would've been Horst and Mel, Shaun and Nathan Vickery ‑ sorry, Shaun Vickery and Nathan Fay, Peter Leotta from Tweed Heads. Peter and Karen Leotta from Tweed Heights, Chris Mosha in Wagga. I believe they were the only people I spoke to in December.
Q. After December 2023, did you speak to other representatives of other New South Wales sub‑franchisees of GJ Gardner about your idea of potentially commencing business as Wattle Court Homes the franchisor?
A. One that had expressed in what I was doing post‑GJ Gardner Homes if it came to that, yes.
Q. It wasn't just one, was it?
A. One franchisee?
Q. Yes.
A. No.
Q. How many sub‑franchisees in New South Wales up to 27 May 2024 did you have discussions with about the idea that you were contemplating setting up Wattle Court Homes?
A. I believe in total I'd spoke to 12."
[14]
Termination
Despite what I have just said about the Wattle Court issue, the defendant submitted that Mr Hope's conduct in respect of Wattle Court amounted to a repudiation of the MFA between December 2023 and 27 May 2024. Mr Couper submitted:
"The repudiation was by the conduct in the period from December 2023 to 27 May 2024, and the notice of termination based on repudiation was given on 27 May 2024."
Mr Couper continued:
"First it is said that Mr Hope was entitled to do what he did, and we make the submissions that that ignores cl 8.39. Second, it is said that none of this matters ‑ paraphrasing ‑ because it was all conditional upon him not getting the renewal, but our point remains. To set out to undermine the G.J. Gardner Homes system in New South Wales, even if it's just, well, I might end up not needing to undermine it, and I'll walk away from it, doesn't mean that this hasn't been a repudiation of the agreement."
Clause 8.39 states:
"(Diligence, Good Faith and Loyalty) The Master Franchisee and 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;
(e) act with loyalty and good faith towards the Franchisor, Master Franchisee and the G J Gardner Homes Franchise Network;
(f) 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 difficulty facing the defendant, as I have already said, is that the Wattle Court evidence, at least after 27 May 2024, was restricted to Mr Hope's credit. My reservations concerning Mr Hope's credit do perhaps allow for a finding that, pursuant to cl 8.39 he had not acted with "Diligence, Good Faith and Loyalty."
The more important difficulty is my finding that, well before 27 May 2024, the defendant was in breach of the MFA giving rise to the plaintiff's entitlement to damages. Again, I repeat that there is no cross-claim by the defendant seeking any declarations of dishonesty or restraint of trade.
[15]
Conclusions
I have found that there was a breach of the MFA by the defendant and that, separately, there was unconscionable conduct on the part of the defendant.
The measure of damages for breach of contract is to put the plaintiff in the position it would have been but for the breach.
This position is one in which the plaintiff would have been able to operate the business for a further ten years or have had a realisable asset, albeit of a diminishing value as the ten years progressed, noting of course that the plaintiff would have been making a profit in the elapsed years.
I have already decided that, based on the two experts, the value of the lost business should be $20 million. By adopting this sum, I have taken into account the discounting that is required. I do not think it necessary to apply any further discounting.
In relation to unconscionability, s 236 of the ACL provides for the recovery of "loss or damage" for contraventions of the provisions of Ch 2 or 3 of the ACL (which includes s 21). The loss or damage here is the loss of the value of the option to renew which I think must equate to the value of the business lost, namely $20 million.
It follows that the plaintiff is entitled to a verdict for $20 million with costs. Because the $20 million is almost entirely for a future loss, I do not see a basis for any entitlement to interest. However, I will give the parties leave to make any submissions on interest and variation of the costs order.
I make the following orders:
1. Judgment for the plaintiff against the defendant in the sum of $20 million.
2. The defendant is to pay the plaintiff's costs of the proceedings.
3. The parties have leave to make further submissions in respect of the costs order and interest.
[16]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 17 October 2024
Parties
Applicant/Plaintiff:
Lindfield NSW Pty Ltd
Respondent/Defendant:
Netdeen Pty Ltd t/as G.J. Gardner Homes
Legislation Cited (2)
Competition and Consumer (Industry Codes - Franchising) Regulation 2014(Cth)
The result of the refusal to renew the MFA is that the plaintiff is no longer the Master Franchisee and therefore no longer able to derive an income from the Sub-franchisees (the builders).
The ten-year term of the MFA expired on 1 July 2024. On 27 May 2024, the defendant served a notice of termination of the MFA on the plaintiff and took an assignment of the franchise agreements between the plaintiff and the Sub-franchisees, thus ending the plaintiff's role in the G.J. Gardener Homes enterprise. Effectively, the three-tier model was abandoned and replaced with two-tiers with the Master Franchisor at the top having a direct relationship, through the assigned Sub-franchise agreements, with the Sub-franchisees. This was referred to as a direct model and the process of achieving the model, as 'de-mastering'.
The assignments mentioned above were contemplated by the MFA and had the effect of excluding the plaintiff from its income source. The income structure, referred to as royalties under the three-tier model worked in this way:
1. The Sub-franchisees paid the Master Franchisee 4% of the contract price of building contracts which the Sub-franchisee had made with customers.
2. The 4% was then divided as follows: the Master Franchisee paid 1% to the Master Franchisor.
3. The Master Franchisee put 1% into a marketing fund run by the Master Franchisee.
4. The Master Franchisee retained the remaining 2%.
As a general statement, the plaintiff as a Master Franchisee, worked hard and did well. There is no dispute that the plaintiff had an annual profit of about $4 million.
The plaintiff alleges that it has been 'pushed out' of the G.J. Gardener Homes enterprise leaving it with no income and no realisable asset. The loss said to emerge from this circumstance has been assessed by the plaintiff, through an expert, at $25.6 million. In this litigation the plaintiff claims this amount as damages. There is also an alternative claim for damages of $3,942,330.
Clause 14 is also important. It dictates certain matters arising upon the termination or expiration of the MFA. The most relevant subclauses are:
"14.6
(b): if requested by the Franchisor, the Master Franchisee shall immediately transfer to the Franchisor the Master Franchisee's rights under those Franchise Agreements nominated by the Franchisor and upon effective assignment, the Franchisor shall assume the obligations of the Master Franchisee under those agreements arising after the date of assignment.
…
(g): the Master Franchisee will not be entitled to any payment, repayment or compensation for any goodwill attaching to the Business.
…
14.10 (Option to purchase)
Upon expiration, surrender or termination of this Agreement, the Franchisor may by written notice to the Master Franchisee, elect to purchase free from encumbrances any or all of the assets of the Business including without limitation, equipment, signs, fixtures, fittings, improvements and supplies. The purchase price will be determined by a qualified valuer selected by both parties or failing agreement, by the President of the Institute of Chartered Accountants in Queensland ..."
A point I will make here, although it may not be of much significance, is that contrary to the submissions of the defendant that there was no goodwill attached to the franchise, cl 14.6 (g) does recognise the existence of goodwill although attaches no value to it.
The construction argument centred on cl 4.7. The plaintiff submitted that the clause required the defendant to take into account the best interests of the plaintiff. Initially the plaintiff said that the words "and/or" did not involve an alternative. At the end of the hearing however, the plaintiff had slightly amended its position by conceding the 'alternative' possibility but nevertheless saying that the exercise of the power under cl 4.7 necessarily included a limitation which made it necessary to consider the best interests of the plaintiff. This limitation arose from the words "that may be reasonably taken into account". These words gave effect to the overall purpose of the MFA which catered for the interests of both the plaintiff and the defendant, as well as the Sub-franchisees.
The defendant submitted that the terms of cl 4.7 did not oblige it to consider the best interests of the plaintiff.
The general approach to be taken in construing a commercial contract was set out in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 from [46]-[50]:
"46. The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
47. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
48. Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
49. However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
50. Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations." (references omitted)
Both parties also relied upon the decision of Edelman J in H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4. At [93] his Honour identified three categories of interpretation:
"There are ephemeral borders, to which lawyers sometimes cling, between three categories of interpretation of words in legal instruments: (i) interpretation of the meaning of express words in a clause; (ii) drawing inferences that recognise implications within a clause; and (iii) drawing inferences that recognise the implication of a new 'term'. All three are 'an exercise in interpretation'. All three are concerned with 'what the [instrument] actually means'. And all three involve drawing inferences and recognising matters that are implied in the sense that they are not confined to the semantics of literally expressed meaning. For instance, like the latter two categories, even the first category will often involve drawing inferences from context by recognising explicatures from the express text. In all three categories, context and purpose supply additional information for the meaning that combines with the literal text. By this means, the 'implication is included in [the meaning of] what is expressed.'" (references omitted)
And then from [96]-[99], his Honour continued:
"96. By contrast, the task of interpretation is sometimes expressed as a more rigid test, requiring much greater restraint, where the meaning of a clause requires an inference that is said to involve the addition or removal of words in the instrument. So, for drawing inferences that recognise an unexpressed implication within a clause, in Fitzgerald v Masters, Dixon CJ and Fullagar J said that '[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency'. And an even stricter approach to drawing inferences that recognise an entire implied term in a contract appears from the famous passage in Codelfa, where Mason J (with whom Stephen and Wilson JJ agreed) said that 'courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term' and that there are five 'conditions necessary to ground the implication of a term'. The proposed implied term: (1) must be reasonable and equitable; (2) must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) must be so obvious that 'it goes without saying'; (4) must be capable of clear expression; and (5) must not contradict any express term of the contract.
97. The ephemeral nature of the borders between the three categories of interpretation makes it difficult to justify any sharp distinctions between them. It has thus, albeit controversially, been suggested that the categories be entirely collapsed. The best approach is to recognise that implications fall on a continuum that depends upon the extent of the contribution that the general or particular circumstances of context or purpose must make to the required inference beyond the language of the provision. In contracts that are entirely in writing, like other entirely written instruments such as legislation, the larger the contribution from surrounding circumstances beyond the text that is required to recognise the implication the greater must be the relevance of those circumstances and the greater the 'force as to carry conviction to the mind' that is needed before the implication can be recognised as one that would have been intended by a reasonable person in the position of the parties.
98. At one end of the continuum, an implication beyond the literal meaning of express words might be slight and in contractual interpretation the inference of that implied meaning can be readily drawn if that was the meaning that would have been intended by a reasonable person in the position of the parties. It does not matter if the inference is described as inserting new words. As Lord Eldon LC said in Wight v Dicksons, '[i]t had been said that it was too strong to insert a word; but the answer was, that the other words in the [contract] could not have their proper effect without it'.
99. At the other end of the continuum, a contractual implication beyond the literal meaning of the express words might be large, requiring a high level of satisfaction by the court that the implication would have been intended by a reasonable person in the position of the parties. Hence, if the implication is properly characterised as a new, and separate, term of the contract, the present state of the law is that a court will require satisfaction of all five of the factors endorsed in Codelfa before the implication is recognised."
The defendant submitted the decision of Beach J in the Federal Court in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 was particularly applicable. It was pointed out that the plaintiffs in that case had put their case in a similar way to the plaintiff here. The non-renewal clause in AHG was cl 8. Beach J stated at [65]-[75]:
"65. The determination of the NRNs claim principally turns on the proper construction of clause 8 of the dealer agreements, including the ascertainment of the proper purpose of that clause.
66. The applicants allege that the object of the dealer agreements was to encourage and facilitate the investment in, establishment, operation of and/or maintenance by the dealer of an MB dealership at the premises identified in the dealer agreement, and the taking of financial risks by the dealer in relation thereto.
67. The applicants plead that the commercial bargain that MBAuP struck with each dealer was that each dealer would invest time, money, effort and entrepreneurial skill, and take financial risks, to build their MB dealerships, from which they would enjoy ongoing profits and which they could sell to reap the benefits of the goodwill they had generated.
68. The applicants submit that determining a proper purpose is a matter to be assessed in conformity with the object of the contract, which they also refer to as the nature of the bargain. That object or bargain contemplates a particular form of relationship between MBAuP and the dealer, on the faith of which the dealer has invested in its dealership to make future profits and enhance the goodwill of its dealership.
69. On that case, it is alleged that because a dealer made investments in their dealership, the dealer was entitled to continue to operate that dealership under the dealer model permanently, provided the dealer met their targets and made mutually agreed improvements. Indeed, the applicants say that is the case regardless of the quantum and timing of the investments made by a dealer.
70. On the basis of that asserted permanence of the commercial bargain, the applicants assert that MBAuP could never exercise the power of non-renewal as a precursor to a change of business model, regardless of how much notice it gave to dealers and no matter what the financial terms of that new business model were.
71. Now the applicants characterise the power by reference to what it does not empower MBAuP to do. So, it is said that the power of non-renewal granted to MBAuP is not at large and that the power of non-renewal is limited by the bargain reached between MBAuP and the dealer, and cannot be used in a manner which is antithetical to that bargain or to destroy it.
72. The applicants contend that the non-renewal power in clause 8 did not extend to permitting MBAuP to use that power to continue the existing relationship between MBAuP and each of the dealers on the basis of an agency relationship, which was contrary to clause 1.2 of the dealer agreements.
73. The applicants' case as to the purpose of the non-renewal power is that its purpose was to allow MBAuP to bring its relationship (cf the dealer agreement) with a given dealer to an end, in two circumstances.
74. The first circumstance was where that dealer had failed to meet its targets or make mutually agreed improvements.
75. The second circumstance was said to be some other purpose 'consistent with the object of the dealer agreement' and relevant 'business circumstances'. Now the facts described as the business circumstances that inform the exercise of the non-renewal power appear to be that the dealers operated as retailers and MBAuP as a wholesaler, each applicant had invested time, money, effort, entrepreneurial skill and took financial risks to acquire, establish, build and/or maintain the businesses comprising their MB dealerships, each applicant established relationships with customers such that they created a valuable asset of and/or goodwill in the business at their MB dealership, MBAuP encouraged the dealers to make those investments and take those risks, and MBAuP represented that the dealers could build a successful long-term relationship with MBAuP and/or the Mercedes-Benz brand provided that they achieved their targets and made any mutually agreed improvements. So, the business circumstances describe aspects of the dealer model under which MBAuP and the applicants had previously operated."
The plaintiff pointed out that AHG was under appeal and submitted:
1. The case was clearly distinguishable.
2. "I'll come to that a little bit later, but it was a different contract, different rights and the primary judge bravely opted not to follow the High Court, calling what one of the judges there, Justice Gordon, had set out as being intellectual fairy floss." (Tcpt, 29 July 2024, p 4 (18); [3506] of the judgment in AHG).
3. "It was an automatic renewing agreement, 'Unless written notice ... shall revive automatically', et cetera, 'Unless and until ... shall be given', that's what it said. His Honour [at 2781] said, 'As with clause ... could be issued'. That's completely different to this case because they have, in this case, honest and reasonable grounds. Then in terms of purpose and good faith, what his Honour said, really, following on from that lack of express constraint [at 3149], the highlighted words, 'The proper inquiry ... its true purpose'. Again, very different where you have the conditions in cl 4.7." (Tcpt, 29 July 2024, p 54(17).
I think AHG is distinguishable and that the primary distinguishing feature can be seen from [69] and [70] of the judgment (quoted above). As I observed to counsel:
"The plaintiff here doesn't say that you could never exercise 4.7, it just says that you didn't exercise it according to its terms."
In AHG a number of purveyors of Mercedes-Benz motorcars brought proceedings against Mercedes-Benz Australia to prevent the introduction of a new style of relationship, effectively by forcing the dealers into an agency relationship, as opposed to the dealer agreements that they previously enjoyed. The dealers complained that the switch involved "the appropriation of the dealers' goodwill and customer relationships for no or inadequate compensation" at [19].
The dealer agreements were not for a fixed term, but they did include a non-renewal power which was at the centre of the dispute. The dealers argued that as long as they did not breach the dealer agreements and they met their targets, then Mercedes-Benz could not activate the non-renewal clause.
In addition, the dealers asserted that "MBAuP's conduct in issuing the NRNs was motivated by a purpose which was antithetical to the dealer relationships and dealer agreements, being to take the customer relationships and the profits to be earned from the unexpired lifetime value of their customers, without paying anything to the dealers for that taking" at [20].
Beech J, at [65], said that:
"The determination of the NRNs claim principally turns on the proper construction of clause 8 of the dealer agreements, including the ascertainment of the proper purpose of that clause."
His Honour continued, at [79]:
"But in my view the purpose of clause 8 was to enable MBAuP to bring the term of a dealer agreement to an end. It was the only means by which MBAuP could bring a dealer agreement to an end, absent agreement of the parties or breach by the dealer. And it symmetrically matched a dealer's right to terminate the dealer agreement without cause on 60 days' notice. The only substantive constraint on its exercise was that it be exercised in good faith, which was, inter alia, an obligation imposed by clause 6 of the Franchising Code. Further, the applicants' concept of a broader bargain superimposed on the contractual framework must be rejected."
It can immediately be seen that unlike cl 4.7, which imposed certain obligations on the exercise of the non-renewal power following an application for renewal, the relevant issue in AHG was the exercise of the non-renewal clause where there had not been any request to renew a fixed term and where the implementation of the clause was derived from the unilateral actions of Mercedes-Benz.
I do not suggest that AHG is irrelevant to the current case, but only that caution must be taken in applying its conclusions to the present, and different, facts.
The plaintiff submitted that the interpretation of cl 4.7 must take into account the purpose of the clause and in particular that the inclusion of the best interests of the Master Franchisee was a meaning "that would have been intended by a reasonable person in the position of the parties."
A number of matters were put as indicating both the purpose of the agreement and what might have been intended by a reasonable person. When the MFA was being negotiated in 2014, at the genesis of the agreement, it initially did not include a renewal option. Mr Hope wrote to Mr Wallis, by email, on 3 April 2014, stating:
"I can't understand why a renewal term would not be included. This doesn't give you any extra security and only serves to piss off the people making money for you. If you ever wanted to terminate me it would be based on performance and there are enough clauses in the agreement to do this. Having no renewal term just gives me no motivation to stay with the business. The other point is that it completely devalues the master franchise as the length of the agreement and renewal are the only things that have any value!
…
I am trying to take on a large amount of debt to buy out Mickey which will take 10 years to pay off. Having no renewal means I will pay it off and will be without a business at all. I am making a big commitment to you, Greg and the brand and would hope that this would be reflected in the agreement, but at the moment it is not."
Mr Wallis responded the following day. He said that the agreement that had been sent to Mr Hope had been, in essence, a standard draft. He continued:
"Especially given your situation with buying out a partner at time of renewal, then a further renewal is something we certain talk about."
The just quoted exchange indicates the value recognised by both parties in a term of renewal. This is not surprising. As a general concept, an option to renew, for example in a lease, is a valuable commodity in the hands of the person who might exercise the option. If the exercise of the option required no more than a simple refusal, it would be an option without content, purpose, or value.
I also think it necessary to return to the origins of the MFA and in particular the philosophy guiding the making of agreements with Master Franchisees.
This is exemplified in the information booklet which states:
"Asset to sell
A common complaint amongst business people is that they work their entire life but have nothing to sell when they retire. We have set about changing this. By investing in a G.J. Gardner Homes Master Franchise you are investing in your future and helping to build a business that can later be sold.
G.J. Gardner Homes' goal for Master Franchisees is to allow Master Franchisees to build a valuable and saleable asset that will continue to grow in value."
Mr Wallis agreed that the philosophy dictated the attitude of the defendant until 2019:
"Q. So far as this information booklet was concerned, it set out the Netdeen position and philosophy about master franchising at the time; correct?
A. Mm‑hmm.
Q. You have to‑‑
A. Sorry. Yes. Yes, sorry.
Q. That philosophy, so far as you're concerned, about master franchising continued until at least 2019 in Australia?
A. Mm‑hmm. Yes."
The effect of the non-renewal was to utterly deprive the plaintiff of the asset that had grown in value. There was nothing to sell. The defendant says that the MFA allowed it to take the action that it did. In particular, its actions were completely consistent with its rights under the MFA, which were exercised in accordance with the clauses of the agreement, in particular cl 4.7.
Put another way, the defendant's construction of cl 4.7 allowed the defendant to override the best interests of the plaintiff in favour of the best interests of itself and the Sub-franchisees.
On this construction a major incentive in a person becoming a Master Franchisee is ignored.
The plaintiff also relied on that part of cl 4.7 which directly referred to the performance of the Master Franchisee, in particular as to market share, servicing Sub-franchisees, skill and performance, achieving targets and "support or lack thereof" for the overall franchise. If these were matters that might be considered then, it followed, by use of the words "without limitation as to other matters that may reasonably be taken into account" that the best interests of the Master Franchisee should also be considered.
Returning to Lundbeck, I think my view on interpretation falls mostly within the second category identified by Edelman J (at [93]), although as his Honour says, the border between the categories is "ephemeral" or short lived. If the term that I think should be implied, namely that cl 4.7 necessitates the consideration of the best interests of the Master Franchisee, then I think the Codelfa test is also passed.
Applying the test as set out in [96] of Lundbeck, I am satisfied that:
1. Against the background of the attractions to entering an MFA put forward by the defendant, the implied term is reasonable and equitable. To omit consideration of the best interests of the Master Franchisee, whose efforts have been an integral part of the success of the MFA, would be inequitable.
2. I do not think the contract would be effective without the implied term. This is because the prospect of renewal is such an integral part of the attraction of entering the MFA in the first place.
3. Again, I think that the attraction, perhaps inducement, of having a renewal clause which contemplates consideration of the best interests of the Master Franchisee is a term about which it might be said it "goes without saying". In other words, it might be seen as a natural product of a renewal term that the Master Franchisee will not be ignored.
4. I think an implied term that says the interests of the Master Franchisee must be considered, is a simple term and therefore one "capable of clear expression".
5. The implication of the term I have posed does not contradict any express term of the MFA. It might be said that it would be inconsistent with other terms allowing for the termination of the contract, but these only arise upon misconduct or poor performance by the Master Franchisee.
In relation to the fifth factor I have discussed in the previous paragraph, my view is endorsed by the following:
1. This part of the email, quoted above, sent by Mr Hope to Mr Wallis on 3 April 2014:
"If you ever wanted to terminate me it would be based on performance and there are enough clauses in the agreement to do this."
1. There is an entire clause devoted to termination (cl 14) which could be utilised to effectively expel the Master Franchisee from the MFA in applicable circumstances. The implied term that I have posed has, as an assumption, that the plaintiff had not acted in a way that would justify termination under cl 14. On this assumption there is no contradiction with cl 14. In this regard, Mr Wallis in his oral evidence from Tcpt, 1 August 2024, p 207 made little of asserted breaches by the plaintiff.
2. I have included cl 14.10 above, because it implies, in fact its terms are express, the possibility of an asset held by the Master Franchisor notwithstanding that, under the defendant's interpretation of cl 4.7, the interests and assets of the Master Franchisee are irrelevant.
I was also referred to the principles of interpretation as set out in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, at [35]:
"The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience' (references omitted)."
Applying the interpretation as just described, I am satisfied that a reasonable businessperson would understand cl 4.7 to contemplate that a renewal clause would have, as a factor to be considered, the interests of the person seeking the renewal. To conclude otherwise would be, as I have already said, to completely extinguish the value of an option to renew. The lure that had induced the Master Franchisee into the agreement would reduce to little more than mere marketing and the existence of the option would be meaningless.
Having reached this conclusion, the next step is to see whether the best interests of the Master Franchisee had been taken into account. There was no real issue that they had not. The defendant's case was that there was no need to do so, and it had not been done. It follows that I am satisfied that the defendant breached its obligations under cl 4.7 and therefore breached the MFA. This entitles the plaintiff to damages for breach of contract.
Theoretically I could proceed directly to damages. However, against the possibility that I am wrong in the interpretation of cl 4.7, I will proceed as if I had preferred the defendant's interpretation.
In March 2015, the plaintiff was entirely purchased by a company called Colour Capital Pty Ltd. This company was then owned by the Hope Family Trust. The defendant's approval for the purchase was required by the MFA. The defendant gave approval.
In 2017 Colour Capital sold 33.3% of its shares to Teaminvest Private Group Limited ('TIP') for $5 million. The defendant consented to this transaction.
The result of the above transaction was that the plaintiff "is wholly owned by Colour Capital and Colour Capital is owned by TIP as to 33.3% and the Hope Family Trust as to the balance."
On 24 May 2019, TIP was listed on the Australian Securities Exchange. In 2020 TIP had discussions with Mr Hope about increasing its shareholding in Colour Capital, initially to 49% and then, after two years, to 66.66%.
Again, because of the requirements of the MFA, Mr Hope sought approval from the defendant for the graduated sale to TIP. The defendant indicated that it did not wish TIP to have a majority interest in Colour Capital. At about the same time Mr Hope asked the defendant if it would purchase Colour Capital for $18 million, this being the valuation that TIP had placed on the plaintiff's business. The defendant declined the offer.
Also in May 2019, Mr Christopher Thornton was employed by the defendant as its Chief Operating Officer for Australia and New Zealand. Mr Thornton had a marketing background and had not worked in the building industry previously. He did have experience in the franchise industry.
In July 2019 Mr Thornton met with the Master Franchisees at a meeting in New Zealand. At that time, his employer's goal was "for every Franchisee to be profitable and the largest and most respected builder in their area (Vision) and the goal was to become the #1 home builder in Australia by 2023 (what became the '1@23' goal) (Goal)." (Exhibit A p 175 [23]).
In December 2019 Mr Thornton commissioned reports from two franchise experts, Mr David Campbell, and Mr Jason Gehrke. Both reports had been received by the defendant by May 2020. The two experts also provided supplementary reports. Mr Gehrke summarised his opinion in his report dated July 2023:
"The G.J. Gardner Homes executive team were asked to provide information for extra insight into the performance of the franchisor and the franchise network more broadly, and to compare where possible with performance under the previous master franchise arrangements for Victoria/Tasmania and Queensland/Northern Territory, versus the new arrangements in which franchisees in these states are directly managed and supported by the national franchisor.
Based on the information provided, there is sufficient evidence of improvement across a number of metrics for which quantitative or anecdotal data is available, or for which there is work in progress, for me to believe that the individual franchisees are now better-off overall by having a direct relationship with the franchisor, rather than a master franchisee. Equally, based on the information provided, I have seen nothing to convince me that franchisees are in any way worse-off as a result of this direct relationship.
I remain of the opinion that master franchising in the Australian domestic market is no longer of benefit to the G.J. Gardner Homes brand or individual franchisees, and is a barrier to high levels of network performance. I encourage ongoing monitoring of the performance metrics considered in this further supplementary report as a way of gaining valuable insights into further opportunities for brand and network improvement in future."
Mr Campbell reached similar conclusions in his second report, also dated July 2023.
"From industry analysis and my extensive experience, the Master Franchise model in this brand is now not fit for purpose and will (if not already) begin to have declining benefits through fragmentation of purpose as the Master Franchisees move into maturity/succession planning.
The financial modelling provided in my First Report and reproduce earlier in this report clearly established the logic and rationale to consider an alternate franchise support structure.
The recommendation to move to a straight-line franchise structure is the only viable alternative if the franchise concept is to be retained.
The restructure has clearly demonstrable benefits for the Franchisor and current/future Sub-franchisees.
While the Master Franchisees have a prima facie position of loss of recurring revenues, they are subject to a renewal process with no guarantee of a perpetual arrangement. The current structure has reached the end of its useful purpose.
Two Master Franchisees have already agreed to relinquish their master agreements. A hybrid system is simply not an option in the best interests of the brand, Franchisor and Sub-franchisees, particularly given the current market challenges and the unknown willingness for the shareholders in NSW/ACT and WA to provide any further reinvestment in support of their franchisees in direct contrast to the clearly stated Franchisor's intentions.
It is imperative that now this transition has commenced it needs to be fully completed in order to allow the full benefits to commence flowing to the brand, franchisor, sub franchisees and the clients of G.J. Gardner Homes."
Mr Wallis, Mr Trent Gardner, and Mr Thornton met in May 2020 to discuss the initial reports. Mr Thornton was asked to prepare a report making recommendations for the G.J. Gardner Homes business.
Following the meeting in May 2020 the defendant's intention was to go to a "direct model" operation. Mr Thornton, under cross-examination, seemed reluctant to refer to this model as "de-mastering" notwithstanding that this phrase was frequently used by him in his reports to the board. Mr Thornton's use of the heading "alleged de-mastering strategy" in his affidavit in Exhibit A, page 209, is somewhat disingenuous.
Notwithstanding the intention to move to the direct model, Mr Thornton was adamant that this did not mean that MFA's would be abandoned and in fact this was not done. Mr Thornton referred to the Victoria/Tasmania position as an example. The example demonstrated the very opposite because within a month of a new MFA being agreed with the Victorian Master Franchisee, that Franchisee agreed to a Deed of Relinquishment bringing the new MFA to an end. Mr Thornton referred to the closeness in time of the deed to the signing of the new MFA as a coincidence. I do not accept that description. The fallacy in Mr Thornton's coincidence was demonstrated by the new MFA and the Deed of Relinquishment being signed on the same day. I think it is quite clear that the new MFA was executed in order to facilitate the entering into of the deed.
I mentioned above that the plaintiff asserted that the current MFA was deliberately disadvantageous to a Master Franchisee. This was to assist the defendant in effectively engineering the exclusion of an existing Master Franchisee and thereby implementing a direct model.
The unattractiveness of the new MFA was well illustrated in the evidence of Mr Trent Gardner where he conceded that the obligation on the Master Franchisee, under the new MFA, would be to pay $600,000 to the Franchisor for the provision of a business development manager, but this manager would receive an annual salary of $100,000 from the Master Franchisor. In other words, the Master Franchisee would pay $600,000 for the services of a person whose actual services were valued at $100,000. Clearly an agreement of this type would be untenable, unworkable, and unprofitable.
Mr Trent Gardner denied the payment of $600,000 was to "shift the profit" from the Master Franchisee to the Master Franchisor. Somewhat unconvincingly he said the purpose was to "change the commercials":
"It was an effort to change the commercials of - if we were accepting the responsibility for business development, that the commercials around business development would be transferred to Netdeen."
I also observe that shifting the profit is a more obvious example of changing the "commercials".
The ramifications of the board's decision to go to the direct model was at the core of a good deal of the cross-examination of Mr Thornton, particularly, but also of the other defendant witnesses. The suggestion, which was continuously emphasised, was that the decision having been made, that decision dictated the relationship with the Master Franchisees even if the Master Franchisees were not made aware of the decision. In other words, renewal of MFAs, other than as in Victoria, would not occur no matter what other factors existed. Thus, it did not matter that the plaintiff was doing very well because the profits he was making were better off in the hands of the defendant. This point is graphically illustrated in the PowerPoint presentation which was shown to Mr Hope on 17 November 2020 and can be found at p 967 of Exhibit A.
Mr Thornton agreed that the direct model strategy involved "getting rid" of MFAs. He agreed that the strategy involved the backing of the plaintiff into a corner where the only person who could take over the Sub-franchisees was the defendant. Mr Hope could not increase third-party involvement in Colour Capital nor effectively take any other action, other than terminate the MFA.
Mr Thornton denied that this strategy was "lacking in integrity". He also denied that cl 4.7 was an integral part of the strategy, to the effect that if all else failed, the defendant would simply not renew the MFA.
On 17 November 2020 Mr Hope met with Mr Trent Gardner and Mr Thornton. According to Mr Hope, Mr Thornton told him that:
"(a) the GJ Gardner franchise network would now be better off as a direct model without master franchisees, as it was now in the defendant's financial interests;
(b) the defendant would not allow TIP to purchase more than 49% of the shares in Colour Capital; and
(c) the defendant would not allow the sale of shares by my family trust in Colour Capital to a third party at any stage in the future."
Mr Thornton does not dispute the assertions made about him as quoted in the preceding paragraph. He does however say that he met with all of the Master Franchisees, in November 2020, to discuss "the vision for GJG."
In his report to the board on 14 January 2021, referring to the November 2020 meeting, Mr Thornton said that the Master Franchisees were told of "the significant problems with the Master Franchise model" and that:
"Further, we also signalled that we would not be agreeing to the transfer of any ownership in existing Masters either between existing parties (except where there had already been explicit consent given) or with any 3rd parties. We reiterated that we expected Specified Persons to be actively driving the business (i.e. not retiring)."
Mr Thornton then stated, in his report, that:
"Most Masters appreciated us exposing this information to them."
As conceded by Mr Thornton, Mr Hope was far from appreciative, as shown in his email to Mr Thornton and Mr Trent Gardner on 18 November 2020. Here are some excerpts:
"I feel compelled to respond to yesterdays meeting and the information that was shared. I have come away with little understanding of what you feel was the point of your presentation. The pretext of the meeting was that you would be sharing 'the vision of G.J Gardner Homes', however at no point was anything close to a 'vision' presented. The only thing presented was a report prepared by an unnamed third party who obviously had no context on the operation of the franchise system for the last 15 years.
…
Now that the business is successful you now want to whinge about the fact that we are profitable and that those profits could be lining your own pockets. I find this incredibly insulting and disrespectful when I now pay well over $2,000,000 of fees per year, and besides the development of the software, have seen little assistance from the corporate office in return.
Now that I have also built equity into the business, you also want to limit my ability to on-sell the business to a third party because you don't have an appetite for continuing with master franchises. These actions are in such bad faith that it seems you would be in breach of your legal obligations under the franchising code and possibly trade practices law."
What Mr Hope was actually saying was a precursor to his position in this litigation. He was warning Mr Thornton that the defendant was making an attempt to take away his business in order to have the profits that the plaintiff was achieving.
On 4 March 2021 the plaintiff was offered $7.83 million "in exchange for the early termination" of the MFA. The offer was rejected. Mr Thornton said that the valuation had been prepared by a Mr Peter Haley who calculated the value of the NSW/ACT Master Franchise at $8.23 million but deducted $909,475, being the negative value of the Western Australian Master Franchise. $500,000 was added "as a gesture of good faith, considering Mr Hope's involvement with GJG for around 20 years."
Mr Haley's valuation was based on the value of the remaining term of the MFA. Therefore, the possibility of a renewal was not a factor in the valuation. Mr Thornton denied that not mentioning cl 4.7 was "not in the right spirit."
Mr Thornton's approach was that he had concluded that Mr Hope wished to terminate the MFA and the defendant "wanted to help."
Following rejection of the offer of $7.83 million, Mr Hope contacted Mr Trent Gardner and told him that the valuation was deficient because it did not take into account the possibility of renewal and did not value the likely growth to the end of the term. Mr Gardner apparently agreed with the second point. Mr Thornton said that during the COVID-19 epidemic building projects increased dramatically because people were reassessing their housing needs and there were financial incentives from government.
In June 2021, a further offer was made to Mr Hope of a termination sum of $14 million. The offer was accepted but did not come to fruition because the parties disagreed on some terms, in particular a term of release from future claims against the plaintiff.
My reading of the correspondence about the disagreement I think illustrates a possibly over-anxious approach on the part of Mr Hope, although both parties clearly reached a stage where they simply would not move from their respective positions. This was indeed unfortunate because the $14 million agreement, if it had come to fruition, would have avoided this litigation.
Following the failure of the $14 million agreement, the plaintiff's case is that the plaintiff returned to its commitment to the MFA and did very well (for itself and the defendant) and always considered it had the right to renew for a further 10 years. The plaintiff asserts that the defendant did not disabuse it of this possibility but, surreptitiously, never intended to even consider renewal, the defendant having committed itself to progress to the direct model.
In his report to the board on 20 October 2021 Mr Thornton observed that:
"Matt has subsequently decided to take a constructive approach to the relationship and has removed outstanding breaches including payments, policy compliance and collaboration on marketing."
Despite these positive comments Mr Thornton wrote that "Matt could invest and focus resources in the remainder of the term to shore up his case for renewal on this point." Mr Thornton ended his comments on New South Wales and Western Australia by stating:
"In Q4 an honest conversation is needed (not least to be fair to Matt) on the above position."
Mr Thornton denied that the honest conversation referred to Mr Hope being informed that he had no chance of obtaining a renewal. The honest conversation is said to have occurred on 22 February 2022. There is, unusually for the system that seems to have prevailed in the defendant's offices, a file note of this meeting. Based on the file note, which is at Exhibit A p 1177, the meeting began well but descended into a heated exchange:
"Very cordial opening exchanges ranging from the schools our kids are at to COVID to growing teams.
Eventually I said that I wanted to talk about how we both could make the best of the next two and a bit years (i.e. the remainder of the NSW MFA). First up I wanted to check what Matt's understanding was, given our previous discussions and negotiations, of the future at the end of the current MFA.
It was clear that Matt was not on the same page as me on this, him believing he would have another agreement and me seeing significant challenges, so I suggested that I lay out the reasons:"
The reasons that Mr Thornton provided included the views of the two independent franchising experts (Mr Gehrke and Mr Campbell), a commitment to the direct model (with qualifications), reference to a new MFA which had been negotiated in Victoria and Tasmania and the defendant's objection to further investment from TIP.
The reference to the new MFA is, as I have discussed above, something of a smokescreen because the new MFA, at least the one utilised in Victoria and Tasmania was in reality a part of the de-mastering strategy that occurred in those states.
The file note of 22 February 2022 continued:
"Matt believes that he is entitled to another agreement and/or a payout for building up the business over a number of years.
Matt stated that he was entitled to a 10 year renewal under the terms of his current MFA. I responded that my opinion was that we had the right not to offer another agreement."
I think it evident from the file note that Mr Thornton had the view that there was an un-fettered right held by the defendant to terminate the agreement. This is essentially the allegation of the plaintiff concerning the manner in which the defendant ultimately refused renewal.
Mr Thornton denied that he had told Mr Hope, at the February meeting, that there would be no renewal of the MFA. Again, the suggestion was that the defendant, while allowing the plaintiff to continue doing well, and making a profit, had decided that there would not be a renewal no matter what factors might be considered. Further, in other words, a pre-meditated position had been made and concealed.
The file note I have just mentioned came under intense scrutiny. This is because it transpired that it had been changed by Mr Thornton on 27 February 2024, only two days before his affidavit of 29 February 2024 was sworn. The file note is referred to in his affidavit at par 87 where it is stated:
"Annexed and marked 'AB' is a copy of my notes from the meeting."
There is no suggestion from Mr Thornton that the annexure is not a copy of the original file note. The original note is Exhibit K. The differences are small but their import is large. For example, the file note annexed to Mr Thornton's affidavit states:
"First up I wanted to check what Matt's understanding was, given our previous discussions and negotiations, of the future at the end of the current MFA.
…
We had subsequently shared with the Masters our intention to move towards the direct model over time."
The original file note stated:
"First up I wanted to check that Matt was of the understanding, given our previous discussions and negotiations, that there would be no new MFA offered.
…
The Board had subsequently made the decision to move to the direct model over time."
The differences in the file notes indicate a distinction between a decision to be made and a decision having already been made about the plaintiff's MFA. I think the alteration to the file note is both a condemnation of Mr Thornton's credit and a significant point in favour of the plaintiff's case.
Following the meeting on 22 February 2022 Mr Hope wrote to Mr Thornton asking him to "provide written notice at your earliest convenience regarding the information that you shared at yesterday's meeting regarding corporate offices decision to not offer a renewal for our Master Franchise Agreement, which is due to be renewed on 1 July 2024."
Mr Thornton replied, on the same day, that he was "putting together a letter with our position." He foreshadowed that the letter would need the board's approval so thought it would be received by Mr Hope in the following week. In fact, no letter was received in the following week and the letter which did eventuate did not arrive until 24 June 2022 and it had not been drafted by Mr Thornton. In fact, it was signed by Mr Trent Gardner but drafted by the defendant's solicitor.
On 25 February 2022 Mr Wallis came to the house of a friend ("Techy") where Mr Hope was present at a poker game. Mr Wallis and Mr Hope did not get on well at the game, presumably because of the conversation that had occurred between Mr Hope and Mr Thornton on 22 February 2022.
Under cross-examination Mr Wallis would not concede that Mr Hope was upset because he had been told by Mr Thornton some three days earlier that his MFA would not be renewed. Mr Wallis said that Mr Thornton did not have the authority to make that statement. On 7 March 2022 Mr Wallis sent an email to Mr Hope apologising for "turning up to poker under the circumstances." The balance of the email concerns the negotiations about the $14 million agreement and ends with some remonstrations about name-calling apparently engaged in by Mr Hope.
The letter of 24 June 2022 (Exhibit A p 1282) states that "it is too early for Netdeen Pty Ltd to determine whether a renewal of the NSW/ACT Master Franchise, in accordance with Item 4 of the Schedule, is in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-franchisees." This wording, by referring to "other G J Gardner Homes Master Franchisees" (emphasis added) suggests that the best interests of the plaintiff are not a relevant consideration.
The letter also reminds Mr Hope that the right to renew is conditional, and reference is made to cll 4.2 and 4.7.
The plaintiff submitted that the letter was another example of a subterfuge in that, by June 2022, the defendant had already decided to not renew the MFA. This conclusion is consistent with the unaltered file note Mr Thornton had prepared on 22 February 2022.
The letter of 24 June 2022 ends in this way:
"We reiterate that we continue to require strict compliance with the Master Franchise Agreements."
As I have already pointed out, alleged acts of non-compliance with the MFA, such as wearing uniforms, do not seem to have been of much consequence to the defendant's directors. Although raised in the COO report prepared for consideration of the renewal of the MFA, Mr Wallis regarded them as "not the kind of breaches which would result in a non-renewal" (Exhibit A p 153).
In December 2022, Colour Capital, the plaintiff, GJWA Investments Pty Ltd and Matica Pty Ltd commenced proceedings in the Federal Court against the defendant. I was told the latter two companies were irrelevant to the current proceedings and should be ignored. I accept that advice. The proceedings were discontinued on 1 March 2023 on terms that included the applicants paying the defendant's (Netdeen's) costs.
As stated above, the plaintiff gave notice of the exercise of its option on 3 July 2023. On 20 July 2023, the defendant's board met to consider the option. Mr Wallis, Mr Trent Gardner, and Mr Greg Gardner (as board members) were present together with Mr Thornton, Mr Conrad Gardner, Mr Patrick Haley, and Mr Chris Pace.
The sole purpose of the board meeting was to consider the exercise of the option. At the meeting, Mr Thornton presented the report (the COO Report) which he had been asked to prepare. The report had been circulated to the board members on 14 July 2023.
The COO report, like the meeting itself, was asserted to be an effective cover designed to give an appearance of justification for the refusal to renew the MFA. I think there is some substance in the assertion.
Under cross-examination Mr Thornton initially said that the COO report was his "own independent work". However, before the report was distributed, Mr Thornton sent a draft to the defendant's solicitors. The solicitors suggested some amendments which Mr Thornton took on board and incorporated in the final report. At least two of the comments and amendments are noteworthy.
Firstly, the draft included this paragraph:
"This lack of relative performance has been 'masked' by the micro economic increase on house (and construction) prices over the last few years. This has also allowed the Master Franchisee to gain extraordinary profits and rest on its status quo, reaping rewards without fulfilling its obligations in the Master Franchise Agreement and meeting KPIs."
The solicitors, perhaps with guile or simple cynicism, made this comment about the just quoted paragraph:
"Chris, do you know any reputable source which would verify this statement?
Chris, it would be really useful as I have mentioned on many occasions to have a neat table which sets out how much profit Lindifiefl (sic) has made since G.J. Gardner Homes has records. The number is very high and a Judge will be frankly astonished and influenced by how many $ this Master Franchisee has pulled out of the NSW/ACT Master Franchise"
The draft paragraph did not change in the final report, but a graph was annexed showing some marketing data. It is obvious that the defendant, by seeking the input of its solicitors, was acting with the risk of litigation in mind.
The supposition that a judge would be astonished might have been seen by the solicitors as a message to a judge that the plaintiff had done very well and should not be complaining. On the other hand, such figures would equally explain the defendant's endeavours to terminate the MFA and take the plaintiff's profits for itself.
Secondly, words of praise inserted by Mr Thornton in the draft were removed and replaced with a different paragraph. Under the heading of Renewal, Mr Thornton made some positive comments about Mr Hope. He said, "It certainly seemed that Matt was genuine in his intent to achieve a successful transition in 2021." (Exhibit A p 1915)
The solicitors deleted the compliment and inserted a new paragraph calling into question "whether Mr Hope's continued presence would be to the benefit or detriment of the Franchise Owners." This comment was made about the amendment:
"We have re-drafted this section. The previous drafting included a string focus on 'transitioning' powers and responsibilities to the Franchisor. This sends the wrong message: That a renewal is essentially a transition to a Direct Model and the MFA is meaningless."
As I have already observed the proposed MFA was essentially a device to persuade, if not force, the Master Franchisee to terminate the MFA. The solicitors' comment is both informative of the defendant's attitude, as well as, again, somewhat cynical.
The defendant submitted that the COO report was a genuine and fair assessment of the relevant circumstances to be presented to the board. I note that there was no challenge to the correctness of any fact stated in the report. This was partly a product of an evidentiary ruling I made at Tcpt, 30 July 2024, p 101(15):
"HIS HONOUR: What I got in mind, Mr Couper, is to allow these paragraphs in, but with the caveat that they are not permitted to be relied upon in support of an allegation that the facts set out in the COO report are incorrect. You live with that?
COUPER: We'd be content with that ruling.
HIS HONOUR: Mr Castle?
CASTLE: Yes, your Honour."
The defendant submitted that the COO report was a "comprehensive and detailed analysis of relevant factors".
The defendant pointed out a number of parts of the COO report which it said highlighted the factors that the board meeting would need to consider. Remembering that I am now assuming the correctness of the defendant's construction of cl 4.7, some examples are:
1. Mr Hope was not acting in the interests of the Sub-franchisees. He had an "unattractive temper" and was susceptible to "moments of rage" when dealing with Sub-franchisees.
2. Mr Hope "has demonstrated an increasing lack of loyalty and good faith towards the Franchisor."
3. Market share in New South Wales and the ACT had declined over a period of three years to March 2023 from 2.64% to 2.41%.
4. The plaintiff had not made investments (from its profits) to promote "network growth personnel and marketing, more skills training, more systems support, better support for staff recruitment, initiatives for reducing barriers to growth at a franchise office level, and a locally based staff." (Exhibit A p 2081)
5. Resources were effectively being diverted to other interests of the Colour Capital group.
6. There was a detailed analysis of the factors that had been outlined, commencing at par 5.5 of the report. These factors were said to be directly relevant as cl 4.7 considerations.
7. In par 5.6 of the report there is said to be a comparison of the "Master Model vs Direct Model." References are made to expert reports, like that of Mr Campbell and to "Weaknesses of Master Franchising and the G.J. experience."
8. A portion of the report is devoted to TIP and its involvement as a shareholder in Colour Capital. This is said to be "problematic". At par 5.36 it is stated: "Colour Capital (as the sole shareholder of the Master Franchisee, with TeamInvest having a 33.33% share in Colour Capital) has an inherent conflict of interest; on one hand, being the interest of Lindfield fulfilling its obligations under the Master Franchise Agreement and supporting the Sub-franchisees and, on the other hand, to Colour Capital's shareholders who (rightfully) expect maximum return on their dividends."
9. The report referred to, and annexed, the expert reports of Mr Gehrke, Mr Campbell, and Mr Haley. These were independent reports which provided a sound foundation for the direct model.
I have only listed some of the considerations and analysis contained in the COO report, to illustrate the defendant's submission that the report was comprehensive and covered all of the factors that might be taken into account in deciding upon the best interests of the Franchisor and the Sub-franchisees.
The report ends with a conclusion and recommendation. The last three paragraphs are:
"6.7 Given the conclusions in paragraphs 6.2 to 6.6 of this paper, I believe that it is in the best interests of the Franchisor and the Sub-franchisees that the Master Franchise Agreement not be renewed. In particular, I believe that the Sub-franchisees will benefit from the increased access to support, training and national uniformity which NextEraEnergy would provide, if it was appointed to act as the Franchisor for NSW/ACT Sub-franchisees in a Direct Model. This benefit would far outweigh the support which the Master Franchisee has indicated (by comment and conduct) that it is willing or able (taking into account the Teamlnvest issue) to provide.
6.8 Given Mr Hope's disparagement of the G.J. Gardner Homes brand and non-compliance with the national marketing strategy (Annexure N), it is also likely that other Master Franchisees (in particular, South Australia) could benefit from a non-renewal of the Master Franchise Agreement. This would reduce the risk of those other Master Franchisee's operations suffering reputational harm and increase the benefit of a national marketing strategy.
6.9 Given all of the available data, my opinion and experience, it is recommended that the Master Franchise Agreement not be renewed."
The defendant submitted that the purpose and point of the COO report was to provide the board with the information that it required to make the necessary decision under cl 4.7. The extent and detail of the report were suggested to be entirely inconsistent with a subterfuge whereby the report was a justification for an already made decision as opposed to a working paper providing the board with the necessary information to make its decision.
Before examining the actual board meeting, I observe that if renewal under cl 4.7 could be refused, then assuming an open mind was brought to the exercise, that the contents of the COO report could well be seen as providing the necessary information for the board to make up its mind.
The plaintiff's case is that the board meeting, like the COO report, was no more than a 'rubber-stamping' of a predetermined decision to 'de-master' the Master Franchisees. Mr Wallis and Mr Greg Thornton have a very different view. According to Mr Wallis:
"This meeting was particularly intense as Greg and I went through each point raised in the COO report. We debated for an hour and a half on the various points. It was not an easy meeting as I understood the ramifications of such a decision to not renew. In actual fact I believe Greg and I tried to see any possible way in which renewing the MFA would be in the best interests of the Franchise as a whole (particularly the Sub-franchisees). It was not until the final moments that Greg and I both agreed on the course of action to renew."
It is notable from the just quoted passage from Mr Wallis's affidavit that his focus is on the interests of the Franchisee and the Sub-franchisees. Put another way the focus is not on the interests of the Master Franchisee. However, on the scenario I am now dealing with (the defendant's construction of cl 4.7) that is an acceptable approach.
According to Mr Thornton, the meeting took the renewal decision very seriously. He said:
"The weight of the decision facing the Board was apparent in the tone of the meeting".
Mr Thornton stated that he summarised his report to the board and the board then "discussed it in considerable detail". He stated that after his presentation he concluded by stating:
"Before making any decision about renewal, the Board should take into consideration the need to grow the GJG business and how to best increase GJG's market share and move towards becoming No.1 in the residential home building market."
Following his presentation Mr Thornton says that the board members had a detailed discussion of the merits of the decision they were about to make. This discussion went so far as to include Mr Thornton and Mr Trent Gardner effectively reminding Mr Greg Gardner and Mr Wallis about the need to consider the terms of cl 4.7.
Mr Thornton rejected the suggestion that the renewal refusal was "a foregone conclusion". There are no minutes of the meeting. The implied suggestion was that the board meetings were fairly casual interactions which did not require minutes to be taken. But this was a very important meeting, one for which Mr Thornton had prepared a report which had been scrutinised by solicitors and would involve the finalisation of a long-standing relationship with the plaintiff. Mr Thornton made a file note of the meeting on 22 February 2022. I find it, at least suspicious, that no minute was taken of the board meeting.
What Mr Thornton did do however, at 9:25pm on the day of the board meeting, was send a note to Mr Tony Conaghan, the solicitor who had 'helped' him with the preparation of the COO report. In the email (Exhibit H) Mr Thornton endeavours to give a detailed description of the discussion ending with a unanimous vote against renewal. It was put to Mr Thornton that the note had been sent to a solicitor to give it the benefit of legal professional privilege. It was also suggested that he had embellished his account of the meeting in his affidavit. He rejected both suggestions. It is notable however that the reference at par 133 of his affidavit to, effectively, the terms of cl 4.7, was left out of the email to the solicitor because it had not occurred.
With this background, the defendant submitted that the decision-makers (Mr Greg Gardner, Mr Trent Gardner, and Mr Wallis) were entitled to "have regard to it and rely on it (the COO report) to the extent they thought it appropriate." (Tcpt 30 July 2024 p 72(26). Mr Couper submitted:
"An application for renewal then comes in. I then have to make a decision. Is it seriously said that because I have rational, honestly held views which I then apply in the context of my decision making, that my decision is somehow a pretext? That is the case which is put against us. That's what it amounts to.
That one cannot have any views of any sort prior to the decision actually having to be made. In fact, it's put more strongly than that in the case which is unpleaded but advanced. If I have a view, then if I make a decision based on that view, the decision must be based on a pretext. Again, that, with respect, is completely irrational."
I think this is a very important submission. It contemplates the possibility of a decision having already been made but then confirmed after further discussion. Is the confirmation of a decision any less of a decision than if there had not been a pre-existing opinion?
The attitude behind the defendant's conduct is quite logical. The plaintiff, under the MFA, was doing well. The defendant was also benefitting but could have done better if the royalties going to the plaintiff went to the defendant. Of course, the defendant would have had to provide the Sub-franchisees with the services that were being provided by the plaintiff. Nevertheless, this would no doubt have been possible, perhaps with their efficiency growing over time, but ultimately leaving the defendant in possession of the royalties that would have gone to the middleman.
I will endeavour to summarise and make some comments on, what was stated by Mr Wallis, Mr Thornton, Mr Greg Gardner, and Mr Trent Gardner about the board meeting. There were other participants, Mr Conrad Gardner, Mr Patrick Haley, and Mr Chris Pace, but none of them provided evidence about the meeting.
According to Mr Wallis:
1. He expressed regret at Mr Hope's attitude: "It was sad it had got to this point, but we had numerous offers and they never even really tried to negotiate - just a flat refusal in writing. I don't understand why Matt doesn't want to engage to sort this issue like the other masters had." One wonders why this expression of regret was necessary if the point of the meeting was to consider whether or not to renew the MFA. It was not a question of negotiation, it was simply a question of Yes or No.
2. Mr Thornton "ran through the main points" of the COO report. Mr Wallis said he did not "simply accept the conclusions of the report as a matter-of-fact." He said he considered the report "with an open mind in order to properly consider the growth and success of the business, including for the next 10 to 20 years". Although Mr Wallis referred to the business as the Franchise as a whole, I think he made it clear that he was referring to the business of the Franchisor and the Sub-franchisees. This would be consistent with the defendant's interpretation of what was required by cl 4.7.
3. The meeting was "intense" as he and Mr Thornton went through the COO report. They "debated for an hour and a half on the various points." Mr Wallis said he "wrestled personally" with a number of issues including his relationship with Mr Hope, the almost certainty of legal action and the increase in costs and staff that would be necessary to replace the middleman. I am somewhat sceptical of Mr Wallis's concerns about his personal relationship with Mr Hope. I think by this time they were well and truly no longer friends. This is exemplified by Mr Wallis's simultaneous prediction of legal proceedings against the defendant.
4. By the end of the meeting "when presented with all the findings we had to act in the best interests of Netdeen, the Sub-franchisees and the franchise network as a whole (including the remaining Master Franchisee which was South Australia), and I believed that a refusal to grant a renewal term was the best cause of action …". Again, notably, the interests of the plaintiff are absent.
5. Mr Wallis asked Mr Trent Gardner and Mr Thornton whether there could be a final opportunity to reach an amicable solution with Mr Hope, similar to that which had occurred with the Victorian and Queensland Master Franchisors. They expressed little hope but were willing to try. Again, I make the point that the purpose of the meeting was not to discuss the 'buying out' of the remaining term of the MFA; it was only to decide if it should be renewed.
Mr Wallis, in his affidavit of 29 February 2024 concluded his description of the meeting with this paragraph:
"172. While I had a desire to renew the MFA due to my personal circumstances, I could not ignore the evidence presented at the Special Board Meeting. I had to act in the best interest of the business, the franchisees and the franchise network as a whole and I honestly and genuinely believed this was the best course of action."
If his reference to "personal circumstances" refers to his friendship with Mr Hope, then there is perhaps some logicality to his statement. However, it is to be remembered that his personal circumstances, to the extent that they included his financial circumstances, would be likely to significantly improve as a result of the increased profits to the defendant and in turn to his share of those profits.
Under cross-examination Mr Wallis specifically denied the above scenario:
"Q. Mr Wallis, I suggest to you that so far as making a decision to refuse renewal of the New South Wales master franchise agreement of Lindfield, you decided to support that because of your own personal interest in obtaining the increased profit flow that would come from taking over the contracts. What do you say about that?
A. No."
I do not accept Mr Wallis on this point. He was entitled to 30% of the profits. He would not have received a corresponding increase on the direct model because of the increased costs to the franchisor associated with it, but he would have certainly obtained a substantial profit increase. There was this concession in his cross-examination:
"Q. Each of those franchise agreements will continue to produce significant royalties for the next 10 years, won't they?
A. Most likely.
Q. Those royalties now flow entirely to Netdeen, don't they?
A. Yes.
Q. Had Lindfield been granted a renewal, that money would've flowed through to Lindfield, wouldn't it?
A. Yes, but there was ‑ the option wasn't renewed.
Q. It wasn't renewed because you refused to renew it?
A. Correct."
Like Mr Wallis, Mr Thornton in his description of the meeting, also seems to go out of his way to emphasise the genuineness of the task before the board. He stated: "The weight of the decision facing the Board was apparent in the tone of the meeting."
Mr Thornton said that he discussed the COO report in considerable detail, and in par 119 of his first affidavit, he recounts what he said. He concluded his presentation with these words: "before making any decision about renewal, the Board should take into consideration the need to grow the GJG business and how to best increase GJG's market share and move towards becoming No. 1 in the residential home building market." Yet again, there is the concentration on the interests of the franchisor's business.
Mr Thornton said that there was considerable discussion through the meeting with questions being asked by all the board members. There was specific discussion of cl 4.7 with Mr Thornton stating:
"It is within Netdeen's rights to refuse the renewal if the Board honestly and reasonably believes that a renewal would not be in the best interests of Netdeen and other Master Franchisees and sub-franchisees."
Again, by use of the word 'other' the notable point about the passage just quoted is that it specifically omits the plaintiff's best interests.
According to Mr Thornton, by the conclusion of the discussion:
"It had been a tense meeting and after the questions and comments from Darren and Greg Gardner, I could not be sure which way they would go."
The uncertainty imagined by Mr Thornton is of course in direct contrast to the plaintiff's case. However, my impression of Mr Thornton was that he was trying to present a picture of the meeting as containing more 'pro and con' discussion than actually occurred.
In oral evidence Mr Thornton said this:
"Q. By when do you think you had made the decision that the direct model was the better one?
A. It was in 2020, so after we ‑ we received the two expert reports. Yep.
Q. What's being suggested to you is that from that time, so the decision's now been made; direct modelling is the way to go. That didn't matter what happened, who said what, that was the way you were going to go, and that was what you intended to achieve. That's really what's being suggested to you. Even if Mr Hope or anyone else had a better idea, or was doing better, you were focused only on that plan. Do you accept that or do you reject it, or a bit of both?
A. It's - we were clear that we were going to move to the direct franchising model. That's not the same as we're not going to renew - there's not going to be any new master franchise agreements, as we proved in 2021 when we signed a new agreement in Victoria for five years plus five years."
Two matters are evident from the answer given by Mr Thornton:
1. There is, I think, an inconsistency between a clear intention to move to a direct model and the statement that there would not necessarily be no renewal.
2. The use of the arrangement in Victoria is misleading because that arrangement, although including a renewal, was, as I have already observed, an effective ruse to facilitate de-mastering in Victoria.
I observe at this stage that I was not overly impressed by the performance of both Mr Wallis and Mr Thornton in the witness box. I think they were both evasive, and sometimes misleading, and endeavoured to paint a picture of concern for Mr Hope playing a part in their decision, when in reality the decision was one purely of business efficacy. Mr Wallis was particularly adept at avoiding what often should have been a simple answer to a direct question.
It follows that I agree with the plaintiff's submission concerning the credit of Mr Wallis and Mr Thornton and I disagree with the defendant's submission that they "gave clear, cogent and honest evidence."
Mr Greg Gardner made a special effort to attend the board meeting on 20 July 2023 in person. This was the first time he had done so for several years. He did so "because it was important and a critical decision from us needed to be made." (Exhibit A p 257).
In his affidavit Mr Greg Gardner says that he had analysed the figures before the meeting, bearing in mind the higher costs that would be involved by cutting out the middleman. He concluded that "Netdeen would be ahead but not by much." This would only occur after some time.
Mr Greg Gardner's description of the meeting, from par 89 of his affidavit of 17 February 2024, involves explanations, questions, and expressions of concern. He states that he had his own reservations because the MFA model had previously been successful. He ultimately voted for non-renewal because:
"I believed that transitioning to a direct franchise model in the NSW/ACT territory would be in the best interest of GJG, Netdeen and the franchisees."
The franchisees he is referring to are presumably the Sub-franchisees and not the plaintiff. This is consistent with the defendant's view about the construction of the contract but also consistent with the plaintiff's submission that its interests were never taken into account.
My impression of Mr Greg Gardner was that he really had little memory of the meeting, as exemplified by this passage in his cross-examination:
"Q. Just put that down for a moment. I'll have some more questions to ask you about it, but do you have paragraph 102 of your affidavit, on page 260 of the court book? Just read that to yourself. Do you see at the end of that paragraph you say, 'Trent then called for a vote from the directors. Trent voted for non‑renewal. Darren followed, and I finally decided to vote for non‑renewal'. Do you see that?
A. Yes.
Q. Is that evidence correct?
A. Yes.
Q. Does that represent the truth?
A. Yes.
Q. You have a recollection of that being true, do you?
A. No, I don't have any recollection of it, sorry.
Q. If you have a look at exhibit H, and turn to the second page. Turn to the second page and the third‑last dot point. You see it says, "Then the directors voted and Trent said he would be looking for an unanimous decision if non‑renewal were to be the chosen resolution". Do you see that?
A. Yes.
Q. According to Mr Thornton's note, it says, 'Greg Gardner, then Darren, then Trent all voted in favour of non‑renewal'. Do you see that it says that?
A. Yes.
Q. That's the opposite order, so far as you're concerned, than the order which you've given in your affidavit.
A. Well, yes, it is opposite, but I couldn't tell you which is correct."
And then a little later, I asked him:
"Q. Are you really saying that today, sitting there, you've just got no memory of all of this?
A. No. Look, I remember the board meeting, and I can remember voting for non‑renewal, but that's -
Q. That's about it?
A. Yeah, that's about it. Yeah."
There is one other feature of Mr Greg Gardner's evidence that deserves mention. Mr Greg Gardner said that he had a simple formula in his mind as to the profits that he would obtain from the building of houses. According to him, each house built gave him $1000. This was his evidence:
"A. No, because I'd disregarded Chris's figures, and used my own figures, which is that I usually make a thousand dollars per house, and so I looked at the numbers and it was about 35 sales a month, and so that was $35,000 extra coming into my pocket, which is, you know, three or $400,000 a year."
I asked him some questions about this evidence:
"Q. Wouldn't it automatically double it?
A. Because I know they don't get overheads, right. I know what happens with staff. You know, you have ‑ you know, the moment you have one staff, they want an assistant. As soon as you get an assistant, you know, one of them wants to become the manager, and then, 'I'm the manager. I now need a car,' you know. 'I now need my home phone paid for,' and it just all gets out of control, and -
Q. Effectively, the cost of doubling would be to, one way or the other, probably bring it back down to that thousand.
A. Yes."
It defies reason and logic that the profit would not increase with the doubling of the royalty.
Mr Trent Gardner said that the meeting was intended to take an hour but "due to the discourse and major decision, it ran over." In his affidavit of 28 February 2024, from par 90, Mr Trent Gardner describes the meeting. The description roughly follows that of the other witnesses, namely one of deep discussion and genuine consideration. He gave his reasons for not supporting renewal, as follows:
"In my opinion, and as suggested in Chris' report, we need to invest in support to ensure our Franchise Owners are profitable and successful and so that they see more value in the brand, and demonstrate to the Franchise Owners the opportunities they have to be able to grow. In the short term we may not be as profitable as the Masters, but we will have a stronger and more profitable business in the longer term, and without the additional support we have a greater risk of losing sub-franchisees. As identified in the Chris' Report including by the experts, the master franchises were underinvesting in support and the value of the franchise at all levels wasn't as strong as it should have been. This will create more value for everyone."
From par 109 of the above affidavit, Mr Trent Gardner sets out the manner in which the decision of the board was communicated to Mr Hope. He refers to some email correspondence with Mr Hope in which he says that the board had not made a decision prior to the meeting.
I think it is very clear, both in regard to Mr Trent Gardner's evidence and that of the other defendant's witnesses, that they had a firm view that non-renewal would lead to legal proceedings. This is evident from the involvement of the defendant's solicitors in the COO report and the communication with the solicitors, for example by Mr Thornton following the meeting.
The defendant cannot be criticised for having a perception that legal proceedings would follow non-renewal, but its actions do give some weight to the suggestion that it was necessary to create a picture of compliance with cl 4.7, at least to the extent of the defendant's construction of that clause. Thus, the preparation of the COO report, for example, ostensibly demonstrates a basis for a reasoned decision on renewal. The same may be said about the consideration said to have been given through the meeting to the question of renewal.
I am not as critical of Mr Greg Gardner and Mr Trent Gardner although there were aspects of their evidence where I think they endeavoured to withhold the truth from the court.
At the core of my findings on credit is an acceptance by me that de-mastering became a policy of the defendant, probably from about 2019, and then dictated its attitude to renewal and its behaviour in respect of creating an apparent justification for the failure to renew the plaintiff's MFA.
However, I would find it very difficult, against the evidence of four of the persons at the meeting, to conclude, as requested by the plaintiff, that the COO report and the meeting were part of an elaborate disguise of an already made decision.
I am satisfied that the decision to not renew the MFA had been made before the special board meeting, however I do not think I can go so far as to say that the meeting was an entire 'fake' in which no decision was made.
This brings me back to Mr Couper's words, which I have quoted above, but will repeat here:
"That one cannot have any views of any sort prior to the decision actually having to be made. In fact, it's put more strongly than that in the case which is unpleaded but advanced. If I have a view, then if I make a decision based on that view, the decision must be based on a pretext. Again, that, with respect, is completely irrational."
I think I can refine my conclusions to the current question to these three propositions:
1. I am unable to conclude that the board meeting did not involve a genuine discussion about the question of renewal, notwithstanding that Mr Thornton and the board members all came to the meeting with predetermined views that there should not be a renewal. In other words I cannot exclude the possibility that minds might have changed at the board meeting as a result of discussion.
2. The COO report was designed to give a foundation for non-renewal, perhaps as much as a defence to expected legal proceedings as a genuine discussion of the relevant factors.
3. The interests of the plaintiff were secondary to the financial interests of the defendant and, although to a lesser extent, the interests of the Sub- franchisees.
These conclusions are reached on the premise that the question being discussed assumes the defendant's construction of cl 4.7 is correct.
In the course of dealing with the current topic I have made some comments about the credit of the defendant's witnesses. Although not strictly a part of the same topic I think it's convenient to say something about Mr Hope.
Subject to one reservation, I do not accept the criticism of Mr Hope. Firstly, a number of the accusations made against him were actually not put to him. Secondly, although the cross-examination was short, he nevertheless made a good impression upon me with his forthright answers to the questions he was asked.
The reservation I have concerns the evidence about the Wattle Court Homes venture. I will return to the venture below where I will elaborate on why I have exempted this subject from my general acceptance of Mr Hope.
The defendant submitted that the clause did not apply, because:
1. repudiation by the franchisee brought the facts outside the scope of cl 29; alternatively
2. the rules did not apply because the facts fell within cl 29(1)(d) in that the plaintiff had voluntarily abandoned the MFA. The repudiation of the MFA by the plaintiff, submitted the defendant, amounted to an abandonment.
The defendant then submitted that if cl 29 did apply then, besides any civil penalty, the most that the plaintiff could gain would be damages for the seven days of notice that the franchisor was required to give under cl 29(2).
I do not think it necessary to discuss the Franchising Code any further. It does not take the plaintiff's case beyond a finding of breach of contract or unconscionability, and it would not have helped the plaintiff had I found that the defendant's construction of cl 4.7 was correct.
The plaintiff described the defendant's unconscionable conduct as "sharp practice 101". It occurred in this way, Mr Hope was given an incentive to make a lot of money. Armed with this incentive:
"Mr Hope made a lot of money. He built up the business and then they scrabble around and they find this agreement in the bottom drawer and there's the technicality. Now that in the language of unconscionable conduct is what's called sharp practice."
A point to be made initially is this: A finding of unconscionability does not rest on a finding of breach of contract. In Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187, at [79] McMurdo JA, in the Queensland Court of Appeal said:
"The trial judge observed, correctly, that 'the fact that there is no breach of contract is not a bar to the availability of the statutory remedy.'"
Notwithstanding the possibility of a finding of unconscionable conduct absent a breach of contract, I would find such a finding difficult to reach if I had found in favour of the defendant's construction of cl 4.7.
The plaintiff also emphasised that unconscionable conduct can include a course of conduct, as envisaged by s 21(4)(b) of the ACL. This is relevant here because the plaintiff asserts that after the defendant (through its board) decided to move to the direct model in 2020, it then engaged in a prolonged course of deception whereby the plaintiff was led to believe that renewal was still available, but in reality would never occur.
In the plaintiff's opening I was also taken to the second reading speech on 15 June 2011 by the Parliamentary Secretary to the Treasurer (Mr David Bradbury):
"Unconscionable conduct can also be apparent in the way in which a party exercises its rights under a contract or in the way in which a party behaves once a contract is made. It can also apply to the way in which contracts are renewed, renegotiated or terminated.
This interpretive principal will ensure that any unconscionable conduct - not just that occurring before contracts are made - is subject to the full force of the law.
The final interpretive principal to be introduced by the bill is that the prohibition on unconscionable conduct applies to systemic conduct or patterns of behaviour and that there is no need to identify a person at a disadvantage in order to attract the prohibition.
Unconscionable conduct is not limited to individual transactions or events. A pattern of systemic conduct or patterns of behaviour occurring over a period of time - which might include an accumulation of minor incidents - can also amount to unconscionable conduct.
This interpretive principal ensures that conduct, rather than individual transactions or events, is the focus of the provisions."
The defendant, both in relation to the Franchising Code allegations and the unconscionability took me back to AHG and in particular to these passages from [32]-[45]:
"32. The very purpose of the non-renewal power is to bring the existing contractual bargain to an end. And the content of MBAuP's obligation pursuant to any duty of good faith and to act with fidelity to the bargain between the parties is necessarily informed by the nature of the power which is to bring that bargain to an end.
33. So, the proper inquiry is directed to MBAuP's non-renewal of each dealer agreement and whether the non-renewal was faithful to that contractual bargain. It was. MBAuP exercised the non-renewal power for the purpose for which it was created, being to bring each dealer agreement to an end.
34. Moreover, the applicants' position fails to recognise that it will be difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred.
35. Further, once it is appreciated that the commercial bargain struck by the dealer agreements was not a permanent bargain, the proper analysis of the NRNs claim is to evaluate whether the exercise of the non-renewal power was faithful to that bargain. On the NRNs claim, the inquiry is not whether the introduction of the agency model, at large, was in good faith or faithful to the bargain struck under the dealer agreements. However, and in any event, even if that were the proper inquiry, the evidence demonstrates that MBAuP introduced the agency model in good faith.
36. Let me turn to some other matters concerning the applicants' case.
37. First, the applicants have brought a claim asserting that they were subject to economic duress. They say that they did not have the opportunity to give their consent freely to enter into any of the agency agreements, by reason of MBAuP's pressure or threat to treat the dealers' relationships with MBAuP and the MB brand as ceasing on 31 December 2021 if the applicants did not sign and return to MBAuP each of those agreements. They allege that the pressure exerted and the threats made upon each of the applicants to sign the agency agreements was illegitimate, thereby amounting to economic duress. They seek orders setting aside and/or rescinding the agreements. But for the reasons that I have set out later, such a claim is not made out.
38. Second, the applicants allege that other conduct of MBAuP was a contravention of its obligation of good faith under clause 6 of the Franchising Code. The applicants say that MBAuP contravened the good faith duty under the Franchising Code in relation to the negotiation of the agency agreements, the service and parts agreements and the agency related agreements, and also by imposing unfair terms. But again, such claims have not been made out.
39. Third, the applicants allege that MBAuP engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law (ACL), as set out in Schedule 2 to the CCA, in three principal respects.
40. The first principal respect was said to be by purporting to bring to an end the dealer model by not renewing each of the applicants' dealer agreements.
41. The second principal respect was said to be by imposing the agency agreements, service and parts agreements, and agency related agreements on each of the applicants as the basis for continuing to operate their dealerships.
42. The third principal respect was said to be by failing to compensate each of the applicants for the value of their dealerships, including the loss of the value of their goodwill, as a result of the termination of the dealer model, and the implementation of the agency model under the agency agreements, service and parts agreements, and agency related agreements.
43. Generally, the applicants allege that MBAuP has engaged in the unjustifiable pursuit of its self-interest by appropriating the substantial value of the assets and/or goodwill of the Mercedes-Benz dealership businesses, undermining the basis of the commercial bargain and relationship between itself and the applicants under the dealer model, implementing terms in the agency agreements to allow MBAuP to rationalise its network and implementing a global directive, strategy or policy of MBAG.
44. But I agree with MBAuP that the applicants in essence seek to rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests. They seek to convert the commercial judgment they made when they entered into those agreements into a guarantee of permanent tenure (subject to certain qualifications that it is convenient for them to concede) and a fetter on the exercise by MBAuP of its legitimate business judgment as to how best to adapt to a changing marketplace concerning the Mercedes-Benz brand in Australia. In essence, the commercial judgment made by each dealer was that MBAuP would not issue a notice of non-renewal if the dealer performed well, because it was assumed that it would be in MBAuP's commercial interest and the dealer's interest for that agreement to continue. No doubt that was a sensible commercial assumption to make. But it was not the contractual bargain that was struck. The NRNs could be given without cause.
45. Moreover, the applicants do not allege that the agency agreements have not provided them with a reasonable opportunity to make a return on their investments during the term of those agreements, that being a statutory requirement under clause 46B of the Franchising Code which provides that:
A franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement."
I have already discussed AHG under the construction question and found that it was distinguishable from the present case. However, for present purposes I will add the following comments:
1. AHG includes a claim for goodwill, which was found to not be available. A claim for goodwill is also excluded in the MFA (cl 14.6(g)). But the claim here is not for goodwill, it is for damages for breach of contract or unconscionable conduct both of which amount to the value of the renewal option. The plaintiff says the renewal option was wrongly denied.
2. This case concerns the plaintiff, as a Master Franchisee of the Master Franchisor, wanting to exercise an option it had in the MFA. In AHG the non-renewal was at the instigation of the Master Franchisor pursuant to its rights to effectively terminate franchise agreements. There were no options being exercised by the franchisees. Put another way the dealers were not exercising any options they had. Mercedes Benz was exercising its right to not renew dealership agreements on its own initiative. Therefore, AHG did not involve refusing an option to renew being exercised by the dealers.
Another case referred to was the recent High Court decision in Productivity Partners Pty Ltd (trading as Captain Cook College) & Anor v Australian Competition and Consumer Commission & Ors [2024] HCA 27.
Gageler CJ and Jago J, at [62], endorsed the approach that had been taken by the primary judge to unconscionability under the ACL:
"Further, the primary judge was cognisant of and expressly referred to the College's submission that its conduct did not 'have the requisite character of being unconscionable by reference to societal norms of acceptable commercial behaviour or the statutory criteria in s 22(1)'. The primary judge rejected that submission, correctly explaining numerous factors directly relevant to the matters in s 21 and s 22(1)(a)-(l) including:
(1) While the fact that no dishonesty was alleged is a relevant factor, 'the absence of dishonesty does not mean that the conduct was not unconscionable'.
(2) It was 'not so easy to accept the notion that there was an absence of undue influence, pressure or unfair tactics' given that the College knew its agents 'might use undue influence, pressure or unfair tactics on unsuspecting consumers, and indeed the evidence bore out that that form of CA misconduct risk materialised from time to time' and yet the College removed the two key safeguards in any event.
(3) While 'there is nothing inherently unconscionable about selling an online course by telephone', it was the College's system as a whole, in all of the known and reasonably foreseeable circumstances at the time of the impugned conduct, which was important.
(4) It could not be inferred that the College's campus driven withdrawals policy was 'consistent with the withdrawal policy of every other VET provider in Australia' and, in any event, 'just because everyone is rorting a poorly designed and/or administered scheme does not mean that no one's rorting is unconscionable'.
(5) While the VET Guidelines did not mandate that each VET provider have a campus driven withdrawals policy, and 'if particular conduct is not against the rules that may be relevant in the evaluative judgement with regard to unconscionability', it is not determinative. In any event, the VET Guidelines proscribed any 'barriers to withdrawal' and abolishing campus driven withdrawals introduced a barrier to withdrawal in the sense that an absence of awareness by a person that they have been enrolled or that they can withdraw constitutes a barrier to withdrawal. In all probability, most persons who had not engaged with the College online and were uncontactable by the College (meaning 'numerous telephone calls and emails go unanswered') were likely not to have been aware that they were enrolled. For these people, it is wrong to say that the abolition of campus driven withdrawals did not, in practice, introduce any barriers to withdrawal.
(6) People's personal responsibility and autonomy must be recognised, as 'we are indeed free to make our own bad decisions', but the conclusion of unconscionability in this case 'no more undermines notions of personal responsibility and autonomy than what Parliament requires by way of offering protection against a particular type of conduct, namely that which is in all the circumstances unconscionable'.
(7) Given that 'the pursuit ... for [one's] own advantage is an omnipresent feature of legitimate commerce', the profit-maximisation purpose of the College (and Site) said little about the quality of the conduct as unconscionable or not, but it was not irrelevant. For example, had the College acted intending to protect people from misconduct by agents, but misjudged how to do so leading to adverse effects, 'the situation would have been quite different'.
(8) The College's systems included numerous elements that existed before and after the process changes, but the dichotomy between the period before and after 7 September 2015 was not false as the College undertook the changes specifically aimed at reversing the trend of declining market share, knowing 'that there was a greater likelihood that unsuitable students would be enrolled and that they would progress to census without being withdrawn'.
(9) While there were contractual terms requiring the College's agents to act promptly and honestly, and they received training in that respect, 'it was known that there was a risk that they would not act as required'.
(10) The case did not depend on a 'false comparator' between the College's processes before and after 7 September 2015 (rather than, as the College argued was the correct approach, a consideration of the College's processes after 7 September 2015 evaluated against societal norms of acceptable commercial behaviour). Rather, the 'fact that the system was changed in material respects and the reasons for those changes, as well as the knowledge and understanding of the [C]ollege as to their predicted and subsequently realised effects, are all part of the relevant circumstances to be taken into account when making the ultimate evaluation'.
(11) Knowledge, intention, and reasonable foreseeability of consequences are all relevant to the required evaluation of the conduct, and consideration of them does not 'expand statutory unconscionability into the territory of tort and fiduciary duties.'" (references omitted)
Gordon J, at [100]-[101] expressed her view on s 22:
"100. The s 22 factors are non-exhaustive. They provide 'express guidance as to the norms and values that are relevant' to, and inform the meaning of, 'unconscionable' in s 21(1) and its practical operation. These norms and values include 'certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made' and the protection of the vulnerable.
101. As was explained in Stubbings v Jams 2 Pty Ltd, the s 22 factors "assist in 'setting a framework for the values that lie behind the notion of conscience identified in s 21]'". The s 22 factors "assist in evaluating whether the conduct in question is 'outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience'". (references omitted)
Steward J referred to the judgment of Allsop CJ in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; (2015) 321 ALR 584 and to his Honour's reference to moral obloquy. Allsop CJ had said, at [260]:
"In particular, the phrase 'moral obloquy' and a 'high level of moral obloquy' has been used to identify a feature of unconscionability". (References omitted)
After some discussion of the term "moral obloquy" Steward J in Productivity Partners said at [304]:
"All of the foregoing is consistent with a need for a grave level of moral obloquy to exist if a finding of unconscionable conduct is to be made."
It is clear however, for example at [307], that Steward J regarded moral obloquy as involving "sharp practice":
"For the reasons given by Gordon J, I respectfully agree that the conduct of Productivity Partners Pty Ltd constituted unconscionable conduct for the purposes of s 21. The removal of the two safeguards was sharp practice and involved the requisite degree of moral obloquy."
In respect of the analysis of s 22 of the ACL, Gleeson J agreed with Gordon J, Beech-Jones J agreed with the Chief Justice and Jago J. Taking all of the views together I think the requirement to find unconscionability is probably best summarised in the phrase sharp practice. At the very least, serious deceptive conduct is required.
Has this occurred here? I think it has, as illustrated by the chronology of events I have set out above, in answering the question which assumes the defendant's construction of cl 4.7 is correct.
In my view the defendant, by May 2020, had made a decision to 'de-master'. This decision could not co-exist with renewal of the plaintiff's MFA. The defendant thereafter allowed the plaintiff to believe, in particular after the abandonment of $14 million agreement, that renewal was a real possibility. The plaintiff continued to work towards renewal, believing it was a realistic prospect. Mr Thornton, in his board report dated 20 October 2021 specifically acknowledged that:
"Matt has subsequently decided to take a constructive approach to the relationship and has removed outstanding breaches including payments, policy compliance and collaboration on marketing."
The defendant was wary of litigation by Mr Hope. This was a reasonable perception. However, its wariness infected the manipulation of at least one file note and the preparation of the COO report. The COO report was constructed, with the help of the defendant's solicitors, to be a justification of the defendant's intended position to reject the application for renewal.
Although I have accepted the possibility that a genuine 'fresh' decision may have been made at the 20 July 2023 meeting to not renew, that decision was against a background of an already resolved course. In other words, if there was genuine consideration of the renewal application, it was a decision of ratification rather than a start from a "blank page".
I am further satisfied that, as part of the strategy to defeat any entitlement to renewal, the defendant provided the plaintiff with a current contract (pursuant to cl 4.6), which was so untenable and unattractive to a Master Franchisee, that it would render any renewal unworkable. The defendant's response that a similar contract was agreed in Victoria completely ignores the fact that the contract was an integral part of bringing the Victorian MFA to an end.
The defendant had resolved to maximise its profits. That was reasonable. What was not reasonable, and instead was sharp practice, was deceiving Mr Hope, and therefore the plaintiff, into believing that renewal was a real possibility to be decided in accordance with cl 4.7. This point is also behind my observation above, that a finding of unconscionability may be inconsistent with a finding that the defendant's construction of cl 4.7 was correct.
More precisely, in terms of s 22 of the ACL, I am satisfied that the defendant did not act in good faith in rejecting the plaintiff's application to renew the MFA, that rejection being a culmination of a course of conduct to conceal its true intentions (to not renew the MFA) from the plaintiff, and at the same time allowing the plaintiff to believe renewal was a viable possibility.
The cash forecasts are essentially based on an estimate of royalty income that would be derived from the Sub-franchisees. Mr Ross was critical of some of the estimates of future royalty income. Taken together with his comments on the appropriate discount rate, these two elements were at the core of Mr Ross's criticisms of Mr Potter's reports. As stated above, Mr Potter reacted to Mr Ross's report by making amendments where he thought appropriate. This was done in his second report, dated 17 July 2024.
Mr Potter's second report includes a useful table which applies Mr Ross's suggested discount rates to Mr Potter's low scenario cash flow. This table appears at par 118 of his report:
Table 6: Alternate Valuation Results: Ross discount rates
Ross 20% Ross 25%
After tax cash flows 49.5m 49.5m
Discount rate applied 20% 25%
Discounted after tax cash flows $19.6m $16.5m
It was put to Mr Potter that his approach was necessarily shown to be in error because of the only 30 Sub-franchisees revealed by Exhibit 4. He was asked how he could possibly have expected the number of Sub-franchisees to have increased from 30 to 35 over the space of only a month. While technically correct, the attack on Mr Potter's approach misses the thrust of the plaintiff's case; namely, that had the plaintiff's MFA been renewed the plaintiff would have continued with its historical vigour so that the number of Sub-franchisees might well have reached 35 by 1 July 2024.
Further, Mr Potter pointed out in his second report:
"Mr Ross claims my valuation is overstated on the basis I assume 35 active sub-franchisees (when only 32 were active in FY2023). I disagree on the basis that his opinion, does not take into account my applied downtime factor, which means I actually assume 28 active sub-franchisees (not 35) throughout the Renewal Term."
The attack also ignores the defendant's admission in the further amended commercial list response, filed on 24 July 2024, that the plaintiff was supporting approximately 34 Franchisees in NSW and the ACT. I note that in the same paragraph the defendant also admits that the plaintiff earned an annual net profit, before tax, of $4 million.
The defendant's cross-examination of Mr Potter was more an exercise of scoring points than putting forward an alternate damages assessment. An example of the defendant's approach was to criticise Mr Potter about his qualifications. It was put to Mr Potter that he had very little experience with the building industry. This question was put against the background that Mr Ross's otherwise impressive list of businesses he has valued, does not seem to contain a business in the home building industry.
In closing written submissions, the defendant put forward a list of reasons for rejecting Mr Potter's valuations, and then submitted:
"158. In summary, the reports of Mr Potter are deeply flawed in obvious and substantial ways, and his attempts to justify them did him no credit. His evidence should be rejected.
159. There is no proper basis upon which the Court can be asked to fill in the gap."
I think the attack on Mr Potter, in particular on his credit, was unjustified. His methodology and some conclusions are certainly open to criticism, but to impugn his credit was in my view not appropriate.
The HIA and MBA sources used by Mr Potter were accepted standards in the industry, used even by Mr Trent Gardner.
It is notable that the Potter low scenario used some calculations higher than those used in the Potter high scenario, but the result maintained a difference in the scenarios which preserved the Potter high being higher than the Potter low. Firstly, Mr Potter explained that his figures were a "mathematical outcome" (not a creation of his own), and secondly, where there was no available forecast material:
"I reverted ‑ because there wasn't any forecast, I reverted to the approach of relying on an actual historical average in the context where it appeared to me that over an extended period, broadly on average the ‑ the housing starts in New South Wales and ACT were relatively flat. There were cycles, ups and downs over the period, but it's ‑ broadly it was around that 30,000 housing starts, so in that ‑ that context, I went back to the rationale that actual data is a better basis of forecasting than trying to predict what might happen to New South Wales and ACT housing outside the forecast from the industry participants."
Mr Potter addressed the apparent anomaly in this way:
"I did agonise over that a bit when I wrote the report, and I sort of justify that on the basis that the cumulative growth in the Potter high is still 4% roughly higher than the cumulative growth in the low scenario."
Mr Potter explained his methodology was necessitated by his use of the discounted cash flow model. He said:
"Q. As I understand your evidence, you regard that approach as appropriate because over time you assume that housing starts are about the same. Is that what you're saying?
A. That's ‑ that's ‑ that's correct, and I could add, I did some ‑ within the ‑ accepting that I'm using a discounted cash flow methodology, so there is a discount rate that I'm applying for risk. The ‑ I looked at what does these assumptions mean for market share, so typically within the framework of a discounted cash flow model if the ‑ if the outcome of the assumed rate of growth each year, or forecast, means the market share increases compared to what it was recently, an increase in market share would normally attract a bit more risk as a discount rate, cause it's a riskier assumption. In this case, the outcome of the assumption we've been talking about through to 2034 is a stable market share. It's not increasing. It stays at the same level, so that, in the construct of a discounted cash flow model, that is not ‑ it's not an assumption that creates a need to increase the discount rate, or moderate the ‑ the future cash flow assumption, in the context of the discount rate being applied."
I repeat that Mr Ross said the discounted flow methodology was appropriate.
Assuming for the moment that Mr Potter's opinion has flaws, there is nevertheless a proper and reliable basis to fill the deficiencies.
It emerged during the cross-examination of Mr Ross, the defendant's expert, that Mr Ross did not have a markedly different view of the value of the business. Mr Ross accepted that the discounted cash flow model used by Mr Potter was an appropriate, if complicated, method of valuing the business. Mr Ross also accepted that the exercise performed at Table 6 of Mr Potter's reply report (included above) was a legitimate expression of Mr Ross's suggested discount rates, although he did not agree with the cash flow assessment of $49.5 million.
But much more importantly, Mr Ross suggested that there was a simpler and alternative method of valuing the business. This is the 'multiples' approach which Mr Ross refers to at par 7.7.8 of his report:
"In my opinion, this derived discount rate is still too low, in that it does not yet take into account any risk unrelated to the specific variables it relies upon. Based on my experience as a valuer, in my opinion a sensible discount rate for a business like that of Lindfield's would be in the range of 20% to 25% (which relates, in broad terms, to a cash flow multiple of between 4.0 and 5.0 times, ignoring growth). On that basis, the requisite specific risk premium would be in the range of 3.8% to 8.8%." (Emphasis added)
Mr Ross was asked about the multiples approach and eventually gave these answers to some questions I asked:
"Q. So if ‑ we're just assuming.
A. Yes, so assuming that ‑ assuming that it is ‑ that the reported profit for the most recent year prior the valuation is 4 million, then one could arrive at a value for the business by multiplying that 4 million by a multiple.
Q. Where do we get the multiple from?
A. Well, the multiple is either derived from your experience as a valuer, and that is usually referrable to transactions that have actually occurred in the market for businesses of this size, or less preferably, trying to do a reverse calculation, starting with a discount rate, to produce a multiple.
Q. If you do multiply the 4 million by the multiple you've arrived at, would you need to apply any further discount after that?
A. No. That would be the value of the business.
Q. Right, so what's the multiple for this one?
A. Well, in my view, on a no growth basis, it would be four to five, you know. Then in order to come up with an appropriate multiple, then one would have to make an assumption about growth in profits. Now, Mr Potter's model suggests very high growth in profits. Almost - more than two and a half times profit over the period. I don't think that's reasonable. Yeah.
Q. Just in the way you were looking at it.
A. Yeah.
Q. We've got the $4 million.
A. On the assumption that it is four, yes.
Q. Yes, the assumption. Got the multiple of four.
A. Or five. Yes. Yes.
Q. Or five.
A. Yep.
Q. Let's call it five.
A. Yep.
Q. We multiply four by five.
A. Yep. That's 20, yes.
Q. 20.
A. Yes. Exactly. So -
Q. The valuation of the business is $20 million.
A. Yes. So very similarly - "
Mr Ross then went on to say that a multiple of '5' was at the bottom of the range and could be higher. Combining Mr Ross's evidence with the admitted cash flow of $4 million per year, the result is that Mr Ross's valuation of at least $20 million, is a reflection of the value of the business over the ten years to July 2034. As I have said, this is not very different from Mr Potter's valuation especially when factoring in that the multiple is assessed on a no growth basis and the business had displayed significant growth. Arguably, inserting a higher multiple to reflect historical growth, would result in a figure higher than Mr Potter's valuation.
The $20 million, based on the multiples calculation, is also not very different to the $19.6 million achieved by applying Mr Ross's suggested discount rate of 20% to Mr Potter's revised cash flows (see the table inserted above).
Objection was taken by the defendant to any valuation based upon Mr Ross's evidence because the damages claim had not been pleaded according to the method used by Mr Ross. I reject this criticism. Mr Ross was the defendant's expert. He was made available for cross-examination and in the course of his evidence indicated, albeit through a different system of calculation, that the value of the lost 10 years was $20 million or more.
Mr Ross's instructions from the defendant were confined to criticising Mr Potter's report. Mr Potter observed:
"Whilst Mr Ross has criticised the data and assumptions leading to the forecast cashflows I have calculated, he has not offered an alternative approach."
But, as seen above, Mr Ross referred to the multiples approach in his report which was tendered by the defendant. Then, once in the witness box, he was available to be cross-examined, or asked clarifying questions by me, and if it emerged that he had a particular view then I do not see why that view cannot be utilised in the plaintiff's favour. It is not uncommon for evidence given by an opposing witness to be adopted by the 'other' side.
The defendant cautioned me against taking a 'doing the best I can' approach. I was first referred to this passage from Master Homes Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88, from [420]-[421]:
"420. Where expert evidence is concerned, the Court's role is to evaluate it critically. Where the evidence is cogent, it should not be ignored. In this regard, it is not part of the Court's role to bring a third set of opinions into the arena, nor to piece together its own valuation. However, where there is conflicting expert evidence, it may be necessary to accept part of each expert's evidence and reject other parts. In some circumstances, it may be necessary for the Court to make adjustments to the conclusion reached by an expert when that expert's opinion is shown to be flawed in one or more respects or based on an incorrect assumption. Moreover if, after careful examination, the Court forms the view that a piece of expert evidence is not cogent, then it may be disregarded.
421. Bearing these matters in mind, it is clear that judges should not take on the role of an expert. If an evaluation of the whole of the evidence demonstrates that the experts' opinions are not well founded, then the judge is left in the position of having to do the best that he or she can if satisfied that the plaintiff has sustained loss." (References omitted)
Then I was taken to the decision of the majority in the High Court in Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 where Gibbs J and Aicken J at pp 37 and 38 said that damages must be proved with a degree of certainty. However, it is also clear from the judgment of Aicken J that in the case under consideration "there was simply no evidence of the value of the resource".
This is far from the position here where even the defendant's expert, Mr Ross, concedes a valuation for the term of the renewal. Adopting a figure of $20 million is not doing the best I can. It is relying on the evidence of two experts from opposing sides whose opinions are ultimately not widely different.
$20 million is the lower figure in Mr Ross's multiples approach. Adopting the $20 million figure, as opposed to, for example, Mr Potter's low figure of $23.7 million does perhaps have an element of rounding off or settling somewhere within the difference. In Hungry Jacks Pty Ltd v Burger King Corporation [1999] NSWSC 1029, Rolfe J, at [607], referring to the decision of the High Court in Sellars v Adelaide Petroleum NL (1994) 179 CLR 1386, said:
"Their Honours said that the 'all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation', and that the approach conformed to the 'long-standing practice of taking into account contingencies in the assessment of damages'."
If Mr Potter has applied enough of a discount, as suggested by Mr Ross, then the reduction of the Potter Low to $20 million is appropriate.
In my view the attitude taken by the defendant was consistent with its overall approach of obstructing the plaintiff's case at every opportunity notwithstanding that some matters, such as the acknowledgement of damages, really should not have been the subject of such vigorous dispute, and not to the extent of the unmitigated criticism of the plaintiff's expert, without any concession being made as to an alternative damages amount. It was only through the professionalism of Mr Ross as an expert witness that the lack of a real damages issue emerged.
It was submitted by the defendant that cl 14.6(g) precluded the awarding of damages. The plaintiff submitted that the clause could only be referable to the alternative damages claim. I do not think it is relevant at all. The clause relates to any "payment, repayment or compensation for any goodwill …". As I have already said, this is not a claim for goodwill. It is a claim for damages arising from breach of contract or unconscionability. I do not think cl 14.6(g) has any part to play.
The measure of damages is to put the plaintiff in the position it would have been but for the breach. The measure was expressed in this way by Mason CJ and Wilson J in Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8 at 143:
"… the plaintiff is entitled to full compensation for the loss which he sustains in consequence of the defendant's wrong, subject to the rules as to remoteness of damage and to the plaintiff's duty to mitigate his loss."
The damages here are a calculation of the amount that would have been earned over the 10 years of renewal. They cannot be said to be remote. No suggestion was made of a failure to mitigate.
I acknowledge of course that the claim for the future losses may be described as a loss of opportunity giving rise to the necessity for significant discounting. This discounting however is an integral part of the damages assessments made by the two experts. Mr Ross actually refers to a "sensible discount rate" in his use of the multiples calculation.
Both experts have not only discounted the future earnings for an accelerated receipt but also because of the various vicissitudes that they have mentioned. I am therefore satisfied that the $20 million I will award takes full account of the fact that the plaintiff's claim is for a loss of chance.
The defendant submitted:
"To suggest that this is somehow not a breach by the plaintiff, because there was some independent decision involved by the franchisee, ignores what the case is actually about on this topic, which is the breach, by Lindfield, of the obligations in cl 8.39. 'I say to you I'll give you a deed of termination, so you can get off with the hook with GJ Gardner, on the basis that you want to come with me, and I want you to come with me'. To try to characterise that as being some form of independent decision by Sydney North, uninfluenced by Mr Hope of Lindfield, is to defy reality, with respect, your Honour."
Following this submission, I asked Mr Couper if the defendant was seeking a restraining order against the plaintiff. He replied that there was no counterclaim. Mr Couper seemed to then appreciate the limits of his submissions about Wattle Court by stating:
"That's why I'm trying to do this very quickly, and not waste time with it, because Lindfield doesn't seem to be saying they want to go out and do anything ‑ Wattle Court Homes has been set up to do something. I just wanted to very briefly tell your Honour what the issues are and move on to something perhaps more substantial."
I think it important to bring the Wattle Court issue, at least after 27 May 2024, back to its only point of relevance, namely the credit of Mr Hope. I said above that I generally accepted Mr Hope's evidence with the possible exception of his evidence concerning Wattle Court. I appreciate that Mr Hope would have been anxious to keep trading in a business he knew well, in particular when it was obvious that his future did not lie with the defendant. Notwithstanding the reasonableness of looking for a new venture, I did think that Mr Hope was perhaps being a little underhand in his approaches to the defendant's Sub-franchisees.
In overall terms however, I still prefer, where there is a conflict, the evidence of Mr Hope over that of Mr Wallis and Mr Thornton. I formed such a poor impression of these two witnesses that my reservations concerning Mr Hope have no practical effect.
I will deal with the position before 27 May 2024 under the following heading of Termination.
Accordingly, assuming my findings on breach of contract and unconscionability are correct, the termination and repudiation issue does not arise. I should add that if repudiation is a valid issue, I would conclude that the repudiation was by the defendant and accepted by the plaintiff.
On 27 May 2024, the defendant issued a Notice of Termination to Mr Hope. There were two notices, one in respect of the plaintiff and the other concerning the Western Australian franchise agreement. The latter is not relevant.
In the Notice of Termination the defendant says that:
"Mr Hope's conduct constitutes a repudiation of the Master Franchise Agreement. Netdeen hereby gives notice that it accepts Lindfield's repudiation and terminates the Master Franchise Agreement, bringing the Master Franchise Agreement to an immediate end".
The letter then goes on to set out alleged breaches by the plaintiff of the MFA and then says that the incorporation of Wattle Court Homes Pty Ltd amounted to repudiating conduct.
The plaintiff's lawyers (Addisons) responded on the same day. The letter points out that at the same time as the notice was issued the defendant blocked the plaintiff from accessing the G.J. Gardner computer system. This system included emails and business records.
The letter also points out that the Franchising Code had been breached in that seven days' notice of termination had not been given (pursuant to cl 29 of the Code). The letter then says that the defendant's conduct "in wrongfully terminating the MFA today is itself a repudiation of the MFA, and all related agreements." This repudiation is accepted by the plaintiff.
To repeat, I do not see the question of who repudiated the agreement as relevant to the resolution of the litigation. Resolution flows from my findings of breach of contract, well before 27 May 2024, and the defendant's unconscionable conduct. These findings are the basis for my award of damages.
The receipt of damages for breach of contract does not depend on the termination of the contract as stated by Barwick CJ in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444; [1976] HCA 21 at 451:
"However, the promisee's right to damages for any breach which has occurred up to the date of the termination of the contract, including the anticipatory breach or repudiation of it, remains."
In Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; [1938] HCA 66, Latham CJ said at 300:
"It is admitted by the plaintiff that if the defendant's construction of the clause is adopted the contract has been broken by the plaintiff. Therefore, as a matter of course, the defendant is entitled to nominal damages. This right does not in any way depend on whether the defendant was entitled for any reason to determine the contract. Thus, according to the construction of the clause which I regard as correct, there is no doubt whatever as to the defendant's right of action for damages for breach of contract in respect of the first two seasons."