BETWEEN : MASTERCLASS ENTERPRISES PTY LTD (ACN 105 461 292)

Contract - Restraint of trade - Franchise agreement - Term of franchise agreement that franchise business be under direct supervision of person with substantial interest in corporate franchisee - Whether restraint of trade - Whether reasonable - Turns on own facts

Franchising - Transfer of franchise by franchisee - Franchisee business would not be under direct supervision of anyone with substantial interest in proposed transferee - Whether franchisor's consent unreasonably withheld - Turns on own facts

Trade Practices Act 1974 (Cth)

1 NEWNES J: This case raises a novel question as to the enforceability of a provision in a franchising agreement which requires that the franchise business be at all times under the direct supervision of the franchisee or, in the case of a corporate franchisee, someone having a substantial interest in the corporate franchisee. The plaintiff (Masterclass) contends that such a provision is an unreasonable restraint of trade and is unenforceable.

2 Masterclass says that, in any event, in the circumstances the refusal by the defendant franchisor (Bedshed) to approve the transfer of the franchise business from Masterclass to an intending purchaser was unreasonable, contrary to the franchise agreement and to the Franchising Code of Conduct (Code) made under pt IVB of the Trade Practices Act 1974 (Cth). Masterclass seeks a mandatory injunction requiring Bedshed to approve the transfer.

3 Evidence was given on behalf of Masterclass by Mr Andrew Cary, one of the directors and shareholders of Masterclass, by Mr Graham Nixon and Mr Timothy Nixon, two of the directors and shareholders of Border Reivers Pty Ltd (BRPL), the prospective purchaser of the franchise business, and by Ms Janice Reid, the current manager of the franchise business on behalf of Masterclass.

4 On behalf of Bedshed, evidence was given by Mr Robert Mahoney, the chief executive officer of Bedshed, Mr Anthony Wrathall, the business development manager, and Mr Thomas Goggin, formerly the retail manager.

5 There was little material conflict in the evidence and I am satisfied that each of the witnesses gave their evidence honestly and to the best of their recollection. To the extent that there were discrepancies in the evidence, they came about simply by reason of honest but different recollections of events. I will deal with those discrepancies in dealing with the specific issues which they concern.

6 Bedshed carries on business as the franchisor of retail stores, principally in Western Australia but to a lesser extent in other States as well, which trade under the name 'Bedshed'. Bedshed has been engaged in that business since 1985 and there are currently more than 30 Bedshed stores around Australia. Mr Wrathall gave evidence that Bedshed franchises are generally run by husband and wife teams, and where there is a corporate franchisee it is generally a company set up by the husband and wife.

7 One of the franchise stores (Bedshed Claremont) has for some years been carried on from premises in Stirling Highway, Claremont. In 1995, Kirkvale Pty Ltd (Kirkvale) purchased the business of Bedshed Claremont and, on 21 November 1995, entered into a franchise agreement with Bedshed.

8 In August 2003, Masterclass agreed to purchase the Bedshed Claremont business from Kirkvale. On 12 September 2003, Masterclass, as franchisee, and Bedshed, as franchisor, entered into a written franchise agreement, that agreement being in the standard form used by Bedshed. The directors and shareholders of Masterclass, Mr Andrew Cary (Mr Cary) and Nicola Cary (Mrs Cary), entered into the franchise agreement as the 'Guarantor'. By cl 11, as Guarantor they agreed to guarantee the obligations of Masterclass under the franchise agreement. I should note that Mr and Mrs Cary are not parties to the action.

9 The recitals to the franchise agreement state, among other things, that the foundation and essence of the Bedshed franchising system is the adherence by franchisees to the standards and policies of Bedshed, providing for the uniform operation of all Bedshed stores 'including but not limited to the use of only prescribed products, marketing services, equipment, building layout and designs, certain techniques and efficient and courteous service and business operation'. The recitals also state that:

... the establishment and maintenance of a close working relationship with the franchisee in the conduct of the Business, his accountability for performance of the obligations contained in this agreement, and his adherence to the principles of the [retail system developed by Bedshed] constitute the essence of the franchise.

10 The effect of the franchise agreement was to grant to Masterclass a non-exclusive franchise, for a term of 17 years and 3 months from 1 September 2003, to use in the Bedshed Claremont business the retail system developed by Bedshed for the sale of bedroom furniture and certain other household products, and the use of certain trademarks and business and trade names owned by Bedshed. Under the franchise agreement, Masterclass agrees to pay to Bedshed certain specified fees, including a franchise service fee of 3.5% of sales, a franchise merchandising fee in a fixed but reviewable amount, and an advertising fee which is also calculated as a percentage of sales.

11 Under cl 4 of the franchise agreement, among other things, Bedshed agrees to assist Masterclass in the operation of the franchise and, prior to the specified commencement date, Bedshed agrees to provide, and Masterclass and the Guarantor agree to participate in, a training programme on the operation of a Bedshed store. Bedshed also covenants to provide other assistance to Masterclass, including such advice and assistance from time to time as Bedshed considers is reasonably required, and regular visits and advice in respect of such matters as the training of staff, sales methods and techniques, new products, and general operating procedures for the store. It also agrees to prepare and make available to Masterclass such oral or written information as Masterclass reasonably requires with respect to all matters relating directly to Bedshed Claremont. Bedshed agrees that not less than once every 12 months it will convene a meeting of all Bedshed franchisees in Western Australia to discuss the operation of the Bedshed franchise system.

12 The franchise agreement also contains a number of provisions designed to ensure uniformity and consistency in the presentation and conduct of the businesses of the various Bedshed franchisees. They include a requirement that the franchise premises be laid out and painted to Bedshed's standards and specifications, that staff of the franchisee wear the Bedshed uniform, and that Bedshed is permitted to train the franchisee's staff in sales techniques. Bedshed is entitled, on one day's notice, to inspect the franchisee's premises and records to ensure that the franchisee is complying with the franchise agreement.

13 Clause 6.2 provides, so far as relevant, as follows:

The [Bedshed Claremont business] and the [premises at which it is carried on] shall at all times be under the direct supervision of the Franchisee or the Guarantor except for short temporary absences and reasonable vacations from time to time (in which case the Business shall always be under the direct, on-premises supervision of a fully trained employee-manager approved by the Franchisor).

14 The franchise agreement also provides that during the term of the franchise agreement none of the franchisee (Masterclass), the Guarantor (the Carys) or any of their employees will have any interest in any business (apart from another Bedshed franchise) which competes with or is similar to the Bedshed Claremont business, without Bedshed's written consent. There was no issue as to the effect or enforceability of that provision.

15 Under cl 8, Masterclass and the Carys (as Guarantor) agree that no beneficial interest in any shares in Masterclass will be transferred, nor will any further shares in Masterclass be issued, 'to any person other than the Guarantor', without the prior written consent of Bedshed.

16 The franchise agreement provides, by cl 12.2, that Masterclass may not transfer the franchise without the prior written approval of Bedshed, which approval will not be unreasonably withheld. Clause 12.2 provides that such approval may be conditional upon, among other things, the transferee executing Bedshed's 'then current franchise agreement' and 'the transferee meeting the criteria of [Bedshed] for the selection of new franchisees and being capable of operating the business as a franchisee'. The transferee must also complete Bedshed's then current training programme of not less than three weeks.

17 Under cl 12.3, if Masterclass wishes to sell the franchise business, Bedshed has a first right to purchase it on the same terms as any bona fide offer received for it by Masterclass, exercisable within seven days of Masterclass providing (as Masterclass was required to do) the offer to Bedshed.

18 The role of the Guarantor under the franchise agreement is of central importance in these proceedings. It was common ground that in the case of a corporate franchisee the practical effect of the requirement in cl 6.2 that the business be supervised by the franchisee or Guarantor was that, by specifying who was acceptable to it as the Guarantor, Bedshed could ensure that the franchise business was supervised on a day to day basis by someone with a substantial interest in the franchisee.

19 In the case of a corporate franchisee, the central role of the Guarantor in the management of the franchise business is evident, too, from cl 12.4.2 of the franchise agreement. That provides, in effect, that if the Guarantor dies or is permanently incapacitated, Bedshed has a right to acquire the franchise from the franchisee, but if Bedshed does not exercise that right the executor of the Guarantor may transfer the shares of the Guarantor in the franchisee to the spouse, adult child or sibling of the Guarantor provided that person meets Bedshed's criteria for a transferee of the franchise.

20 Mr Cary gave evidence that after the Bedshed Claremont business was acquired by Masterclass he worked in the business on a full-time basis for some time and then gradually reduced the number of hours he worked in it. He said that since November 2005 the Bedshed Claremont business has been managed by Ms Reid. In January 2006, Mr Cary and his family moved to Bunbury. Mr Cary said he commuted between Perth and Bunbury for about six months and was not at the business full-time. He has since worked in Bunbury on a full-time basis in unrelated employment.

21 Ms Reid gave evidence that she commenced employment with Bedshed Claremont as a sales person in December 2003. According to Ms Reid, Mr Cary reduced his working time in the business to about three or four days a week shortly after she commenced work there. Ms Reid said that she was appointed manager of the business in June 2006. It appears that Ms Reid did not have a background in retailing, or at least of retailing of this nature, when she joined Bedshed in 2003 and Ms Reid said it took her six to eight months before she was fully conversant with the operations of the business and in a position to manage it effectively.

22 It is not clear whether, in practical terms, there is any real discrepancy between Mr Cary's evidence that the Bedshed Claremont business has been managed by Ms Reid since November 2005, and Ms Reid's evidence that she was appointed manager of the business in June 2006, but if there is a discrepancy I do not think anything turns on it.

23 On 1 March 2007, Masterclass entered into an agreement to sell the Bedshed Claremont business to BRPL. The agreement to purchase was expressed to be 'subject to approval of the purchaser by the franchisor'.

24 The directors and shareholders of BRPL (which was apparently incorporated specifically for the purchase of the Bedshed Claremont business) are Graham Nixon and Sandra Nixon and their son, Timothy Nixon. They live in New Norcia where they run a farm which they jointly own. The farm is described by the Nixons as producing sheep, cattle and some grain, and worth approximately $5 million. Mr Graham Nixon and Mrs Sandra Nixon each hold 25% of the issued shares in BRPL and Mr Timothy Nixon holds the other 50% of the shares.

25 On 20 March 2007, Mr Cary informed Mr Goggin of Bedshed that Masterclass had entered into an agreement to sell the Bedshed Claremont business to BRPL and asked that BRPL be considered for approval as franchisee.

26 A meeting was subsequently arranged between Mr Cary and representatives of Bedshed to discuss the proposed transfer of the franchise to BRPL. The meeting took place on 28 March 2007 at the offices of Bedshed. Mr Cary attended on behalf of Masterclass, and Mr Mahoney, Mr Goggin and Mr Wrathall attended on behalf of Bedshed.

27 At the meeting, Mr Cary provided the representatives of Bedshed with the sale agreement and a profit and loss statement for the Bedshed Claremont business. Mr Wrathall gave evidence that during the meeting Mr Mahoney said to Mr Cary that any new franchisee would need to give the business their full attention. Mr Cary said that was not a problem as the purchasers were a farmer and his wife and their son, and the son and his 'bride to be' were going to run the business full-time. Mr Cary said the purchasers intended to retain Ms Reid as manager 'to hold their hand and teach them the ropes'.

28 I should interpose that the expressions 'full attention' and 'owner-operator' tended to be used by the parties interchangeably as short-hand references to the supervision requirement under cl 6.2 of the franchise agreement.

29 Mr Mahoney told Mr Cary that Bedshed would consider the exercise of its right of first refusal to purchase the Bedshed Claremont business and contact him in about seven days.

30 On 4 April 2007, Mr Wrathall wrote to Mr Cary to say that Bedshed would not be exercising its right of first refusal. On the same day Bedshed provided to the Nixons application forms for the transfer of the franchise and some other related documents.

31 On or about 13 April 2007, the application forms, completed by Mr Graham Nixon and Mr Timothy Nixon respectively, were delivered by Mr Timothy Nixon to Mr Wrathall at Bedshed. It is unnecessary to canvass the contents of the forms in any detail. Relevantly, in answer to the question, 'Will you devote your full-time to the business?', both had answered 'No'. The form then stated, 'If no, please state how you intend to operate the business'. Mr Graham Nixon had responded, 'The business has very good management now. Our family will work one or two days a week in the business'. Mr Timothy Nixon responded to a similar effect, namely 'We will operate the business as a family with assistance from the current capable operations manager'.

32 It was clear from the evidence of both Mr Graham Nixon and Mr Timothy Nixon that it had been agreed within the family that none of the members of the family would attend the business on a full-time basis if it was acquired by BRPL. They would rely on Ms Reid as manager and Mr Graham Nixon would spend one to two days a week in the business and Mr Timothy Nixon would be involved from time to time. It was apparently not envisaged that Mrs Sandra Nixon would have any involvement in the running of the business.

33 Mr Wrathall said that when the completed forms were delivered to Bedshed he looked at them briefly but did not study them. Mr Wrathall said that he assumed from what Mr Cary had said in the meeting of 28 March 2007 that Mr Timothy Nixon would be giving the business his full attention.

34 At about the same time, Mr Wrathall made arrangements for an informal meeting with the Nixons at Bedshed's offices on 30 April 2007. Mr Wrathall said he told the Nixons that the meeting was an opportunity for them to ask him any questions about the new franchise agreement then being prepared by Bedshed.

35 Mr Wrathall said in evidence that at the meeting on 30 April 2007 there was a discussion of the key changes to the franchise agreement, being an increase in the royalty fee from 3.5% to 4.5%, the abolition of the management fee of $86 per week, and the reduction in the term of the franchise to 10 years, although Mr Wrathall told the Nixons that the reduction in the term would not affect them.

36 Mr Wrathall said that in the course of the meeting he told the Nixons that Bedshed required all of its franchisee stores to be owner-operated. According to Mr Wrathall, either Mr Graham Nixon or Mr Timothy Nixon said words to the effect 'We don't intend to be there full time but we have a good manager and would be available at any time'. Mr Wrathall said he told them that if they were not personally there for at least 40 hours a week, that would be 'a deal breaker'. He said the issue was not discussed in any more detail; the Nixons said they would wait until they received the franchise agreement and have a look at it then. Mr Wrathall said in evidence that he understood the Nixons were still working on a structure, that the structure 'was still fluid' and it was something they could resolve. Mr Wrathall said he arranged with the Nixons to send a copy of the new form of franchise agreement to them when it was available.

37 Mr Graham Nixon and Mr Timothy Nixon both denied that Mr Wrathall mentioned at the meeting there would be a problem if they did not intend to give the business their full attention. Mr Graham Nixon gave evidence that at the meeting Mr Wrathall said he had read their application and did not have a great problem with it. Mr Timothy Nixon's evidence was that Mr Wrathall had said that on the basis of the application forms he thought the transfer would be approved.

38 The new form of franchise agreement referred to by Mr Wrathall had been in the course of preparation by Bedshed since about February 2007. By late May 2007 the franchise agreement had been completely redrafted by Bedshed's solicitors and the franchise agreement in its new form had been reviewed in detail by senior management of Bedshed. It had been approved by Mr Mahoney as CEO of Bedshed but not, at that stage, by the board.

39 On 25 May 2007, Mr Wrathall emailed to the solicitors for the Nixons a copy of the new form of franchise agreement. In the covering email Mr Wrathall said, among other things, that 'of critical importance to your client is the requirement to give full attention'. On 28 May 2007, Mr Wrathall emailed a copy of the new form of franchise agreement, together with the required disclosure documents, to Mr Timothy Nixon.

40 On 30 May 2007, there was a telephone conversation between Mr Wrathall and Mr Graham Nixon. Mr Wrathall said in evidence that in the course of the conversation he told Mr Nixon that the new franchise agreement also required that they give the business their full attention. Mr Nixon said words to the effect 'but you've always known that we would not, it was in our application that we would not give full attention'.

41 Mr Wrathall gave evidence that at that point he had not fully reviewed the completed application forms. He said he had been waiting for the Nixons' response on the new form of franchise agreement and had been working on the assumption that Mr Timothy Nixon and his 'bride to be' would be giving the business their full attention. Mr Wrathall said that following his conversation with Mr Graham Nixon he read the application forms and noted that the Nixons had answered 'No' to the question whether they would be giving the business their full attention.

42 On the same day, after the conversation between Mr Wrathall and Mr Graham Nixon, Mr Timothy Nixon telephoned Mr Wrathall regarding the issue of full attention. He told Mr Wrathall that the Nixons did not intend to work in the business full-time. He said they would always be available and would appoint a very good manager whom they could assist by telephone, but no-one from the family would 'be doing 40 to 50 hours per week'. They intended to give the business two to three days a week. Mr Wrathall told him that would be a problem and would mean that Bedshed would refuse to consent to the transfer of the franchise. Mr Wrathall said in his evidence that as far as he was concerned the issue of 'full attention' came to a head during this conversation.

43 Later on 30 May 2007, Mr Graham Nixon, on behalf of BRPL, sent a facsimile to Bedshed referring to the telephone conversation between Mr Timothy Nixon and Mr Wrathall, and saying that BRPL proposed to appoint, as full-time manager, an experienced retail manager who would also be a shareholder in BRPL. In the facsimile, Mr Graham Nixon asked to be referred to the clause in the franchise agreement which required the owner of the franchise to be in full-time attendance at the store.

44 I am satisfied that Mr Wrathall's recollection of the meeting of 30 April 2007 is mistaken and that he did not tell the Nixons at that meeting that the failure to give the business their full attention would be 'a deal breaker' or use words to that effect. There is no mention of it in an email from Mr Wrathall to Mr Mahoney of 30 May 2007 in which Mr Wrathall refers to his contact with the Nixons up to that point, including the meeting of 30 April 2007 in respect of which he refers only to discussion about the new franchise agreement. He goes on to say that 'when the new franchise agreement was ready I spoke to [Mr Graham Nixon] and made special mention of the full attention clause.' That is clearly a reference to the conversation with Mr Graham Nixon of 30 May 2007.

45 Moreover, Mr Wrathall's recollection that it was only following the telephone conversation on 30 May 2007 that he became aware of the relevant statements in the Nixons' application forms is inconsistent with the evidence of Mr Mahoney that Mr Wrathall told him on or about 30 April 2007 that he (Mr Wrathall) had overlooked in the Nixons' application forms that they did not intend to give their full attention to the business.

46 The Nixons' contention that it was first raised as a stumbling block on 30 May 2007 is consistent with the fact that, following the conversation between Mr Graham Nixon and Mr Wrathall, Mr Timothy Nixon telephoned Mr Wrathall on 30 May 2007 about the issue of full attention and with Mr Graham Nixon's facsimile of the same date, following his telephone conversation with Mr Wrathall. I am satisfied that whatever may have been said about the issue on 30 April 2007, the importance of it to Bedshed was not brought home to the Nixons at that time.

47 I do not, however, accept the contention pressed on behalf of Masterclass that between the time Bedshed received the application forms from the Nixons in about mid-April 2007 and the telephone conversation with Mr Graham Nixon on 30 May 2007, Bedshed's position had changed, in that it had first decided not to maintain the 'full attention' requirement of franchisees and had then reverted to it. I accept the evidence of Mr Mahoney that Bedshed's position on that requirement never changed. I also accept Mr Mahoney's evidence that he always regarded it as a very important requirement. That is also consistent with the statement made by Mr Wrathall to Mr Mahoney after the 30 April 2007 meeting that he had overlooked in the application forms that the Nixons did not intend to give 'full attention' to the business. If 'full attention' was then not regarded as a requirement the fact that it had been 'overlooked' would have been of no significance.

48 In that connection, I also accept the evidence of Mr Mahoney and Mr Wrathall that the change in the wording of the new form of franchise agreement sent to the Nixons and their solicitors was not intended to change the 'full attention' requirement of franchisees. I do not accept the contention advanced on behalf of Masterclass that the terms of that form of the franchise agreement showed that, at that stage, Bedshed intended to do away with the requirement.

49 On 6 June 2007, Mr Wrathall, on behalf of Bedshed, wrote to BRPL to say that its application to become a Bedshed franchisee had been unsuccessful as BRPL had not met Bedshed's requirement that the store be 'owner-operated'. In the letter Mr Wrathall acknowledged that Bedshed Claremont had been operated under management in the past but said that that constituted a breach of the franchise agreement and was unacceptable to Bedshed.

50 Mr Wrathall wrote to Masterclass on the same day informing it that the application to transfer the franchise to BRPL had been refused on the ground that the business would not be 'owner-operated' by BRPL.

51 On 18 June 2007, Mr Cary wrote to Mr Wrathall enclosing a deed of undertaking (Deed) executed by BRPL and the Nixons, and stating that he was thereby submitting an amended application for the transfer of the franchise to BRPL. Mr Cary said in the letter that the effect of the Deed was that Ms Reid would be both the manager of the business and a shareholder of BRPL, 'thereby addressing the owner/operator issue'. He required Bedshed to consent to the transfer of the franchise.

52 The Deed is undated. By the Deed, BRPL and the Nixons covenant that, subject to the consent of Bedshed to the transfer of Masterclass's interest under the franchise agreement to BRPL and to that transfer taking place, the Nixons would:

• issue in favour of Ms Reid, and would cause Ms Reid to remain, the beneficial owner of 5% of the issued shares in BRPL;
• procure the appointment of Ms Reid as a director of BRPL; and
• procure Ms Reid's guarantee of the performance of BRPL under the franchise agreement.

53 The Deed was expressed to be made for the benefit of Bedshed, pursuant to s 11 of the Property Law Act 1969 (WA).

54 Mr Graham Nixon said in evidence that he told Ms Reid at the time the arrangement reflected in the Deed was put to her that the Nixon family would indemnify her for any claim made against her under the guarantee and that the family had quite substantial assets, to the value of some millions of dollars. In fact, the assets and liabilities statements submitted to Bedshed indicate that the Nixons' net assets exceed $7 million. Ms Reid gave evidence that she had agreed to guarantee BRPL's obligations to Bedshed on the basis that she was in turn indemnified by the Nixons. There was no evidence that Ms Reid was to pay anything for her 5% interest in BRPL.

55 On 25 June 2006, Mr Wrathall, on behalf of Bedshed, wrote to Mr Cary to say that Bedshed considered that the proposal did not satisfy the requirements of the franchise agreement or Bedshed's franchisee selection criteria. In the letter, Mr Wrathall said that the Deed appeared to be an attempt to circumvent the 'complete attention' and 'owner/operator' requirements of the franchise agreement. He said that the intent of the 'complete attention' provision 'is to ensure that the business will be under the direct and on premises control of a person who has a significant stake in the success of the business, this does not extend to token or minor interests'. Mr Wrathall went on to say that the Deed did nothing to provide Bedshed with comfort 'that the complete attention and "owner-operator" requirements' would be met.

56 At a meeting on 3 August 2007, Mr Goggin and Mr Wrathall informed Mr Cary that Bedshed was prepared to purchase the business for the same amount as the Nixons. By letter of 9 October 2007, Bedshed wrote to Masterclass making a formal offer to purchase the business from Masterclass for the same price as had been offered by BRPL. Bedshed's offer was not accepted by Masterclass.

57 Masterclass contended, first, that the requirement of 'full attention' under cl 6.2 of the franchise agreement is an unlawful restraint of trade and is void; secondly, if it is not void, that Bedshed's refusal to consent to the transfer of the franchise is unreasonable in that Bedshed's requirement that the business be supervised by a person having a substantial interest in BRPL was unreasonable; alternatively, the effect of the Deed was to satisfy any reasonable requirement of Bedshed in respect of the transfer as Ms Reid, who would be supervising the business, would be a director and shareholder of BRPL; and thirdly, that Bedshed cannot require BRPL to exercise the new franchise agreement because (a) that is contrary to the Code which requires the transfer of the franchise that is held by the transferor, and (b) it is contrary to the franchise agreement in that it is not Bedshed's 'then current franchise agreement' (cl 12.2) but merely a proposed franchise agreement. No other franchisee has entered into the proposed agreement and it is not sufficient that it is simply a document which has been approved by Bedshed for its future use.

58 Masterclass submitted that cl 6.2 of the franchise agreement is an unlawful restraint of trade as it exceeds what is reasonably necessary for the protection of Bedshed's legitimate interest. As franchisor, Bedshed has an interest in the competent management of franchise businesses. But in order to ensure competent management it is not necessary that a franchise business be 'owner-operated' and, in fact, a franchise business is best supervised by a person with experience in the retail sale of beds, bedroom furniture and related products. The requirement that the business be supervised by a person who has a substantial interest in the franchisee (irrespective of the skills and experience of that person) goes further than is reasonably necessary to protect the interests of Bedshed. It is evident from the fact that, in addition to the franchise stores, Bedshed itself owns and operates stores using employed managers that a franchise store can be competently managed (and Bedshed's interests adequately protected) without the store being personally supervised by a person who has a substantial interest in the franchisee.

59 In the alternative, Masterclass submitted that Bedshed's refusal to approve the transfer to BRPL was in breach of its obligation, under both cl 12.2 of the franchise agreement and cl 20(2) of the Code, not unreasonably to withhold its consent. The refusal to consent to the transfer of the franchise on the ground that no-one having a substantial interest in BRPL would be supervising the business was unreasonable, as in the circumstances such a requirement was entirely unnecessary, and even counter-productive, for the reasons already given.

60 In any event, the effect of the Deed was to satisfy any reasonable requirement that the franchise business be supervised by a person with an interest in the franchisee. On its proper construction, cl 6.2 of the franchise agreement did not require that the Guarantor be the majority shareholder or a person who had a substantial interest in the franchisee. Ms Reid would be a director and shareholder of BRPL and has, to the knowledge of Bedshed, managed the business since 2005. On the other hand, none of the directors of BRPL has any experience or expertise in such a business. As Ms Reid has extensive experience and expertise in the management of the business, there are no grounds to expect that Bedshed's interests would be better served if the business was managed by one or more of the existing directors and shareholders of BRPL rather than by Ms Reid.

61 In respect of the form of franchise agreement that BRPL would be required to enter into, Masterclass submitted that Bedshed could not require BRPL to execute the new franchise agreement proposed by Bedshed or any agreement other than the franchise agreement which had been entered into by Masterclass. It was argued that, on its proper construction, cl 12.2 of the franchise agreement requires Bedshed to approve the transfer of the franchisee's interest under the existing franchise agreement and does not permit Bedshed to require BRPL to execute some other franchise agreement.

62 In the alternative, if cl 12.2 of the franchise agreement does entitle Bedshed to require BRPL to execute some other form of franchise agreement, then cl 12.2 is inconsistent with the Code and unenforceable. In any event, the document proposed by Bedshed was not Bedshed's 'then current franchise agreement' under cl 12.2 of the franchise agreement, as it was not an existing agreement between Bedshed and any franchisee, but simply a proposed agreement that Bedshed sought to impose in the future.

63 Bedshed submitted that the doctrine of restraint of trade has no application in the present case but, if it does, the provisions of cl 6.2 were not contrary to the public interest and were reasonable as between Bedshed and its franchisees, including Masterclass.

64 It was submitted on behalf of Bedshed that cl 6.2 involved no relevant restraint nor did it involve any element of protection of Bedshed against competition. The clause is self-evidently for the advancement of both the franchisor and the franchisee, and such provisions are commonplace in franchise agreements. No question of a restraint of trade arose.

65 It was submitted that, in any event, the provision was reasonable for the protection of the legitimate interests of Bedshed. It is not the case that the only interest Bedshed has to protect is the competent management of the franchise business. Bedshed has an interest, as franchisor, in ensuring that each of its franchise stores is operated in a way that is not merely competent, but highly motivated and competitive. That includes an interest in ensuring continuity and consistency in the management of the franchise business and in avoiding its performance being subject to the vagaries of the labour market in the availability of competent and highly motivated store managers.

66 It was reasonable for the franchisor, by cl 6.2, to seek to harness the motivation and commitment that arises from the self-interest of an 'owner-operator', so as to ensure that overall its franchise businesses were operated most advantageously and competitively. That was particularly the case in a system of franchise stores where the reputation of the franchisor and each franchisee depends upon each of the franchisees maintaining the goodwill attached to the trading name.

67 Counsel submitted that in refusing its consent to the transfer Bedshed was not in breach of cl 12.2 of the franchise agreement or cl 20(3)(c) of the Code. Bedshed was justified in refusing to consent to the transfer as no-one with a substantial interest in the proposed transferee was prepared to undertake the direct supervision of the franchise business. That was one of Bedshed's selection criteria for franchisees and BRPL had failed to meet it. Clause 20(3)(c) of the Code expressly provides that a franchisor is entitled to withhold consent to a transfer where the proposed transferee does not meet the franchisor's selection criteria.

68 It was submitted on behalf of Bedshed that the Deed did not satisfy the requirements of cl 6.2 of the franchise agreement. It appears that Ms Reid's 5% interest in BRPL would cost her nothing and she would have no real exposure to any liability of the franchise business, that being the subject of an indemnity by the Nixons who had substantial assets to back that indemnity. Ms Reid had therefore no substantial proprietary interest in BRPL and was effectively free of risk in the operation of the franchise business.

69 It was submitted that it was irrelevant that Bedshed operated Bedshed stores supervised and controlled by salaried managers. There were reasonable operational reasons for that including training issues, marketing development and the development of stores for subsequent franchising. Moreover, it was more profitable for Bedshed to run its own store, from which it receives all the net profit from trading, rather than to have a franchise store from which it merely receives a royalty.

70 As to the form of the franchise agreement that BRPL would be required to enter into, Bedshed argued that it was not necessary that a franchise agreement be the subject of some existing agreement between Bedshed and a franchisee. The form of agreement offered to the Nixons in May 2007 was the form approved by Bedshed as the basis upon which Bedshed was prepared to accept a new franchisee. There was nothing in cl 12.2 that imposed as a condition of 'currency' any requirement beyond the bona fide resolve of Bedshed as to the form of agreement that it is then generally willing to contract upon.

71 Bedshed submitted that, in any event, the mandatory injunction should be refused on the grounds first, that such an injunction would bind Bedshed to accept BRPL as a franchisee in a close, ongoing commercial relationship for the next 13 years, in circumstances where the directors of BRPL have shown their unwillingness to comply with the methods of business mandated by Bedshed and have threatened Bedshed with litigation, and secondly, that Bedshed has offered to purchase the Bedshed Claremont business on terms equivalent to the benefit that Masterclass would obtain by BRPL's acquisition of it and therefore Masterclass will suffer no loss or prejudice if the transfer to BRPL does not occur.

72 I will deal first with the contention by Masterclass that cl 6.2 of the franchise agreement is an unlawful restraint of trade.

73 It was common ground that the effect of cl 6.2 was to require that the Bedshed Claremont business be at all times under the direct supervision of the Guarantor, the Carys. Masterclass contended that that was an unreasonable restraint of trade. Neither counsel, however, was able to direct me to any authority on point or of any direct relevance, and my own research has been equally unfruitful.

74 It is well established that a contractual provision that is otherwise valid will be void as contrary to public policy if it imposes an unlawful restraint of trade. In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535, Lord Macnaghten said:

The true view at the present time, I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interest of the parties concerned and reasonable in reference to the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public (565).

75 That statement of the law has been accepted as representing the law in Australia: see Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628, Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 and Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126.

76 The onus of establishing that as between the parties concerned the restraint is reasonable, having regard to their respective interests, lies on the person seeking to rely on the restraint, and the onus of establishing that it is nevertheless contrary to the public interest lies on the person who asserts that: Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 699.

77 In Peters (WA) Ltd v Petersville Ltd, Gleeson CJ, Gummow, Kirby and Hayne JJ observed, however, that:

A great number of the reported decisions respecting [the doctrine of restraint of trade] turn upon the reasonableness of the restraint, particularly in relation to the legitimate interests of the parties. However, in particular cases, before the question of reasonableness is reached, there may be one or more threshold or preliminary questions requiring resolution. Three may be mentioned. First, it may be asked whether there is a 'restraint' within the meaning of the doctrine. That is to be answered by having regard to the practical working of the alleged restraint rather than merely to its legal form. Secondly, it may be suggested that the restraint is not upon or in respect of 'trade'. Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 371-2 established that, for the purposes of the common law doctrine, the notion of 'trade' is not to be read narrowly, so that, for example, it is not limited to any category of skilled occupation and applies to employment generally. The third question is that with which this case is concerned, namely whether the restraint in question is one to which the doctrine applies so that, if the question is in the negative, there is no occasion to go on to consider the question of reasonableness (134 - 135). (references omitted)

78 In Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269, 328, it was concluded that the doctrine did 'not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that the prevention of any work outside the contract, viewed as a whole, is directed to the absorption of the parties' services and not their sterilisation.'

79 That, however, cannot be regarded as a correct statement of the law in Australia. The effect of the decision of the High Court in Peters (WA) Ltd v Petersville Ltd is that the doctrine of restraint of trade may apply to an ordinary commercial contract for the regulation and promotion of trade during its existence, even where the prevention of work outside the contract is directed towards the absorption of the party's capacity rather than the sterilisation of it. The High Court held that such circumstances would not, as a threshold test, avoid the potential application of the doctrine of restraint of trade; rather, 'such matters are better considered in an analysis of the reasonableness of the restraint rather than as an element in the process of reasoning by which the occasion for any analysis of such reasonableness is avoided' (142). See also Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, 203.

80 The application of the restraint of trade doctrine to a restraint in an extant contract was considered by the Court of Appeal of the Australian Capital Territory in Capital Aircraft Services Pty Ltd v Brolin [2007] ACTCA 8. In that case, the appellant provided technical support services to aircraft owners and operators, principally from Canberra airport, but also at regional airports. The respondent, an aircraft maintenance engineer, was employed on a full-time basis by another company, National Jet Systems, but his services were not in constant demand and so long as he remained on call he was permitted to accept other part-time work. He entered into an agreement with the appellant under which he agreed to provide his services on a casual basis for a period of two years or until he ceased to be employed by National Jet Systems. The agreement did not, however, require the appellant to provide the respondent with any work. It was a term of his agreement with the appellant that at the airports at which the appellant provided technical services the respondent would provide his services only to the appellant and National Jet Systems. That term was held to be an unreasonable restraint of trade. The term reflected an attempt to prevent the respondent from doing part-time work for anyone else. The only evidence as to the purpose of the term was to the effect that it had been intended to protect the appellant's business from competition. The court found that it was unreasonable, as between the parties, to have sought to prevent the respondent finding other work when he had no promise (as opposed to expectation) of work from the appellant, and there was no benefit to the public from such a restraint.

81 See also Young v Timmins [1831] EngR 309; (1831) 1 Cr & J 331, A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616.

82 In my view, however, this case is a long way removed from such circumstances. Clause 6.2 does not restrain Masterclass, or its directors and shareholders (the Carys) from any other activity. It does require that during the term of the franchise agreement the Carys exercise direct supervision of the Bedshed Claremont business. The practical effect of that, as with any full-time employment or business activity, may be to limit their capacity (and through them, the capacity of Masterclass) to engage in other types of business activity.

83 But there is no basis for concluding that cl 6.2 is calculated to have that effect or to limit competition with Bedshed's business, nor is there any basis to conclude that the requirements of cl 6.2 are contrived for any such purpose.

84 Any curtailment of the Carys' or Masterclass's opportunities to engage in other business activities arises simply because of the obligations necessarily involved in the direct supervision of the operation of the Bedshed Claremont business. That business is a substantial one. The question is not whether it needs full-time supervision but simply by whom that supervision should be provided. By cl 6.2 of the franchise agreement, Bedshed requires that the Bedshed Claremont business (as with its other franchise stores) be supervised by the Carys. On the evidence, it does so because it considers that such supervision is most likely to ensure the success of the franchise business, to the benefit of both franchisor and franchisee.

85 In the circumstances, I am quite unable to see that that contractual requirement can be regarded as a restraint of trade.

86 Although it is not necessary to go on to consider whether the supervision requirement in cl 6.2 is a reasonable restraint of trade, it is appropriate that I deal with that issue.

87 Whether in any particular case a restraint is reasonable depends upon whether the covenant in question goes no further than is reasonably necessary to afford the party who has the benefit of the restraint adequate protection of interests it is entitled to protect: Buckley v Tutty (376); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, 306. The question whether a restraint is reasonable is a question of law: Buckley v Tutty (377).

88 Whether a covenant in restraint of trade is no more than is reasonably necessary for the legitimate protection of the covenantee's interests is to be tested as at the time the covenant was entered into, and by reference to what the covenant requires or entitles the parties to do rather than by reference to what they intend to do or have actually done: Adamson v New South Wales Rugby League Ltd [1991] FCA 425; (1991) 31 FCR 242, 285; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337, 344.

89 One of the factors to which the court has regard is whether the parties have, as a result of negotiation on equal terms, freely made a bargain in which the particular restraint has been sought by one and given by the other. However, that factor, while of considerable weight, is not decisive: see The Queensland Co-operative Milling Association v Pamag Pty Ltd [1973] HCA 24; (1973) 133 CLR 260, 268; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (294). What is reasonably necessary to protect the covenantee's interests must be judged having regard to all of the relevant circumstances.

90 But as Walsh J observed in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (308), a decision upon the question of reasonableness depends upon a judgment, the reasons for which do not admit of great elaboration.

91 In determining whether the supervision requirement of cl 6.2 is no more than is reasonably necessary for the legitimate protection of the interests of Bedshed, it is first necessary to identify those interests.

92 The interests of Bedshed, as a franchisor, plainly extend to ensuring, so far as reasonably practicable, that the Bedshed Claremont business is operated not merely competently, but in a way that is as competitive in its market as it can reasonably be over the entire period of the franchise agreement. In addition to its interest in ensuring the financial return from the fees payable to it under the franchise agreement, Bedshed also has an interest in maintaining, and so far as possible enhancing, the value of its franchise system.

93 Given the nature of the close and continuing commercial relationship between Bedshed and Masterclass (as franchisee) that is contemplated by the franchise agreement, Bedshed's interests extend, in my view, to ensuring (so far as reasonably practicable) that over the lengthy term of the franchise agreement there is continuity and consistency in the management of the Bedshed Claremont business, among other things, to avoid the performance of the Bedshed Claremont business being dependent upon the availability, whenever one might be needed, of a suitably skilled and motivated store manager, and also to enable working relationships between Bedshed personnel and those supervising the day to day running of the Bedshed Claremont business, to be developed and maintained.

94 In turning, then, to whether the supervision requirement in cl 6.2 goes further than reasonably necessary, it is relevant that it is not suggested that Masterclass (and the Carys, as Guarantor) did other than freely enter into the franchise agreement. By entering into the franchise agreement Masterclass obtained the benefits provided by Bedshed's franchise system. In return, Masterclass (and the Carys) agreed, among other things, that the business would be under the Carys' direct supervision. In the circumstances, that bargain, freely struck, must be given considerable weight.

95 It is also not suggested that the objective of the supervision requirement under cl 6.2 of the franchise agreement was to prevent or limit the capacity of Masterclass or the Carys to compete with Bedshed's business or to engage in other business activities. In fact, as I have mentioned, the franchise agreement contains a separate provision by which Masterclass and the Carys agree that during the term of the franchise agreement they will not be involved in a business which is in competition with Bedshed, a provision about which no complaint is made.

96 The requirement of 'full attention', as it is given effect by cl 6.2, has been incorporated in Bedshed's franchise agreements since 1994. It was not in dispute that Bedshed's objective by that requirement was (and is) to ensure, so far as practicable, the success of the franchise business over the lengthy term of the franchise agreement. It was included by Bedshed in the franchise agreement on the basis that the continuous successful operation of a franchise business over the term of the franchise agreement is more likely to be achieved if the business is supervised by someone with a substantial interest in the success of the franchisee; that supervision by such a person provides, by dint of self-interest, the greatest motivation for the franchisee to succeed, and also ensures a necessary consistency and continuity of supervision that the employment of managers cannot.

97 That is reflected in Bedshed's franchisee selection manual, under the heading 'Franchise Personnel', as follows:

The most successful structure for a Bedshed outlet has been based on the owner-operator format. Apart from the benefit of reduced wages, the owner-operator, as the person whose capital is invested and whose livelihood depends on the maintenance and increase of overall sales figures, is highly motivated to provide the environment, service and product required by the customer. He or she is also likely to be more perceptive and knowledgeable regarding changing customer preferences, and will strive to fulfill customer demand as speedily and efficiently as possible, whilst concentrating on maintaining wages at an optimum level.

98 In light of the interests of Bedshed in the continuing successful operation of the franchise business, and of the 'maintenance of a close working relationship with [Masterclass] in the conduct of the [Bedshed Claremont business]' as contemplated by the franchise agreement, I do not consider it unreasonable for Bedshed to include in the franchise agreement measures which are intended to ensure that the franchise business is supervised in a manner which enables it to operate as effectively and competitively as reasonably practicable. In particular, I do not consider that the requirement of cl 6.2 in relation to the supervision of the Bedshed Claremont business goes further than is reasonably necessary to protect Bedshed's legitimate interests.

99 I should note that Masterclass did not seek to lead any evidence to suggest that the proposition that the prospects of success of the franchise business were likely to be enhanced if it was under the supervision of a person with a substantial interest in the franchisee was untenable, or that such a requirement was contrary to the usual practice in franchise businesses of this or any other nature. Masterclass simply asserted that the requirement was unnecessary and therefore unreasonable; that a store is capable of being conducted as well, if not better, if supervised by an employed manager as compared with a person with a substantial interest in the franchisee.

100 As I have mentioned, Masterclass sought to support that contention by pointing to the fact that Bedshed owns and operates some stores itself, using managers whom Bedshed employs. I do not consider it gains any assistance from that. I accept Mr Mahoney's evidence that those stores fall into a quite different category. They provide a much greater income to Bedshed than would be obtainable from franchise fees if they were franchised stores, and at the same time they enable Bedshed to provide training to new franchisees and their staff, and to experiment with such things as new product lines and store layouts before deciding whether to include those in the franchise system. They also enable Bedshed to secure appropriate sites for future Bedshed stores, ahead of any competitor.

101 In my view, the attack on cl 6.2 of the franchise agreement as an unlawful restraint of trade must fail.

Was consent to the transfer to BRPL unreasonably withheld?

102 It is necessary, then, to turn to the contention by Masterclass that Bedshed's refusal to consent to the transfer of the franchise to BRPL was unreasonable.

103 As I have mentioned, cl 12.2 of the franchise agreement provides that the franchise cannot be transferred by Masterclass without the prior written approval of Bedshed, which approval is not to be unreasonably withheld. It further provides, in effect, that Bedshed's approval may be subject to the transferee meeting Bedshed's criteria for the selection of new franchisees and being capable of operating the business as a franchisee.

104 The transfer of a franchise is also dealt with in the Code. The Code is mandatory. Under the Code, a 'franchising agreement' is (relevantly)

an agreement 'in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor ...

105 It was common ground that the franchise agreement falls within the provisions of the Code.

(1) A request for a franchisor's consent to the transfer of a franchise must be made in writing.

(2) A franchisor must not unreasonably withhold consent to the transfer.

(3) For subclause (2), circumstances in which it is reasonable for a franchisor to withhold consent include:

(a) the proposed transferee is unlikely to be able to meet the financial obligations that the proposed transferee would have under the franchise agreement; or

(b) the proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer of a franchise; or

(c) the proposed transferee has not met the selection criteria of the franchisor; or

(d) agreement to the transfer will have a significantly adverse effect on the franchise system; or

(f) the proposed transferee does not agree in writing to comply with the obligations of the franchisee under the franchise agreement; or

(g) the franchisee has not paid or made reasonable provision to pay an amount owing to the franchisor; or

(h) the franchisee has breached the franchise agreement and has not remedied the breach.

107 It is well established that generally where the word 'include' is used in a statutory definition, the definition is not intended to be exhaustive: see generally Pearce and Geddes, Statutory Interpretation in Australia (6th ed) [6.56] - [6.59]. As a matter of construction, it is, in my view, clear that it was not intended to set out in cl 20 all of the circumstances in which a franchisor is entitled to withhold its consent to the transfer of a franchise. The position with respect to cl 20 of the Code is, in any event, made clear by the explanatory memorandum published with the Trade Practices (Industry Codes - Franchising Regulations) 1998 No 162, which states:

Clause 20 prohibits a franchisor from withholding consent to the sale or assignment of a franchise unless it has a good reason to do so. Acceptable reasons for withholding consent are not exhaustively defined but include where the purchaser does not meet the selection criteria of the franchisor, or is unlikely to be able to meet the financial obligations required under the franchise agreement.

108 It is not the case, therefore, that a franchisor is only entitled to withhold consent in one or more of the circumstances set out in cl 20. It is, however, clear that there is an overriding requirement under the Code that consent to the transfer of a franchise cannot be unreasonably withheld. That is consistent with cl 12.2 of the franchise agreement.

109 Masterclass argued that the fact that no-one having a substantial interest in BRPL would be supervising the business at all times was not a reasonable ground for withholding consent. In the circumstances, there was no reasonable basis for that requirement. The legitimate interests of both Bedshed and BRPL would be served not merely as well, but in fact would be better served, by having the business subject to the supervision of Ms Reid, who is an experienced and proven manager of the business, than by one of the existing shareholders, none of whom has any experience in conducting a business of this nature.

110 It was further submitted that it was not open to Bedshed to contend that its requirement is simply one of its selection criteria, and therefore a permissible ground under cl 20(3)(c) of the Code upon which Bedshed may withhold consent. Counsel argued that, under cl 20, the selection criteria of the franchisor can only be relied upon as a ground for withholding consent if those selection criteria are themselves reasonable. The requirement of Bedshed that the franchise business must be managed by a person having a substantial interest in BRPL was itself an unreasonable element of Bedshed's selection criteria, and therefore cl 20(3)(c) of the Code did not assist Bedshed.

111 Bedshed, on the other hand, argued that, given the nature of the franchise agreement, it was not unreasonable for Bedshed to withhold its consent to the transfer to BRPL in circumstances where the business would not be under the direct supervision of someone having a substantial interest in BRPL.

112 It also submitted that, in any event, under cl 20(3)(c) of the Code, Bedshed was entitled to refuse its consent because BRPL did not meet one of Bedshed's selection criteria, namely, that a person with a substantial interest in BRPL must supervise the business. Under cl 20(3)(c), where a proposed transferee does not meet one of the franchisor's selection criteria for a franchisee, that is sufficient to entitle the franchisor to withhold consent to the transfer. There is no requirement under cl 20(3)(c) that the selection criteria themselves be reasonable. In that respect, cl 20(3)(c) differs from other provisions in cl 20(3). That is because the nature of any selection criteria, and any assessment as to whether or not an individual meets the criteria, involves inherently subjective commercial decisions upon which reasonable people may disagree. Counsel for Bedshed argued that while selection criteria could not offend equal opportunity legislation or amount to unconscionable conduct, or be a guise for bad faith or some ulterior reason for refusal, there is no requirement that they be reasonable.

113 On the question of what constitutes reasonable grounds for the withholding of consent to the transfer of a franchise, I was not referred to any cases on point. I was referred to the law dealing with assignments of interests in land in the context of landlord and tenant, but that was not, however, pressed with any enthusiasm by counsel and, in my opinion, rightly so. The circumstances of a franchise agreement will normally raise rather different considerations to those applying to a landlord and tenant: cf Esso Australia Ltd v RT and MI Abela Pty Ltd [1989] FCA 523; (1989) 91 ALR 476, 485. As is evident from the definition of 'franchising agreement' in the Code, a franchise agreement (unlike a lease) will normally involve a continuing close commercial arrangement between the parties to it: see Gas'n Go Petroleum Pty Ltd v Caltex Oil (Australia) Pty Ltd (Unreported, FCA, 26 April 1991); L E Stewart Investments Pty Ltd v Mercedes-Benz (NSW) Pty Ltd (Unreported, NSWSCA, 18 December 1991). That the franchise agreement between Bedshed and Masterclass involves a continuing close commercial arrangement over its term is evident from the terms of that agreement.

114 For the reasons I canvassed earlier in relation to the reasonableness of any restraint imposed, having regard to the nature of the franchise agreement, including the continuing 'close working relationship' between the parties in relation to the conduct of the franchise business, it cannot, in my opinion, be regarded as unreasonable for Bedshed to require that the franchise business be supervised by someone with a substantial interest in the franchisee. It is entitled to act, as from the evidence it does, on the basis that that provides greater motivation for the continuing success of the business over the lengthy term of the franchise agreement, and that it is also likely to ensure a continuity and consistent quality of supervision that is less likely to be achieved if the business is dependent upon employed managers.

115 In that last respect, counsel for Bedshed conceded that in the first six months of its operation it is entirely possible that Ms Reid would manage the Bedshed Claremont business more competently than any of the existing directors of BRPL. But as he pointed out, the overall value of Ms Reid's immediate competence must be viewed in the light of the length of the term left to run, the training and assistance that is provided by Bedshed to franchisees and their staff, and (given the length of the term) the hazards involved in leaving the availability of effective management of the business to the vagaries of the labour market.

116 In that connection, it is significant too that Ms Reid said it took her six to eight months to become familiar enough with the business to assume its supervision. While someone with experience in a similar business might take less time, it is reasonable to assume that any new manager would take some time to acquaint themselves sufficiently with the Bedshed franchise system, and that a suitably experienced manager might not be readily available whenever the need for one arose. In the circumstances, it is not unreasonable that Bedshed places such importance on the continuity of supervision of the business likely to be provided by someone with a substantial interest in the franchisee.

117 It is also the case, as Mr Mahoney acknowledged in cross-examination, that in assessing applications from prospective franchisees Bedshed does not require disclosure of the extent of the specific financial contribution of each director and shareholder to the franchisee, nor as to the manner in which a corporate franchisee distributes its income. Rather, it is evident that Bedshed proceeds on the basis that a person with a substantial shareholding in the franchisee will have a substantial stake in its success.

118 I do not, however, accept the submission on behalf of Masterclass that the fact that Bedshed proceeds on that basis undermines Bedshed's contention that it is in the overall interests of its franchise system that each franchise business is supervised by someone with a substantial interest in the franchisee. It is clearly the case that there may be circumstances where, in fact, a substantial shareholding does not reflect a commensurate financial interest in the franchisee. But there are plainly limits to the extent of the enquiries that Bedshed can reasonably make into the internal financial affairs of a prospective franchisee and, given the often relatively complex nature of even intra-family financial and taxation arrangements, there are equally limits to the conclusions that can reasonably be drawn from such enquiries as to the precise nature of the interest of a specific shareholder. In the circumstances, the assumption underlying Bedshed's requirement in respect of supervision is not unreasonable.

119 It was also, in my view, not unreasonable for Bedshed to reject the arrangement reflected by the Deed. In particular, there was nothing to suggest that Ms Reid would in fact have any significant stake in the Bedshed Claremont business. It was not suggested that she would have to pay anything for the shares constituting her 5% interest in BRPL and her entitlements as a shareholder were not explained, including her entitlement, if any, to dividends from the profits of the business over and above her salary. While Ms Reid was to provide a guarantee of BRPL's obligations under the franchise agreement, in turn the Nixons had agreed to indemnify her against any liability she may thereby incur, an indemnity backed by their substantial net assets.

120 It is not surprising that Bedshed viewed the arrangement simply as a device to circumvent their 'owner/operator' requirement. In any event, I consider that Bedshed reasonably regarded it as failing to provide the level of motivation and commitment to the business that Bedshed considers necessary.

121 I am satisfied that Bedshed did not act unreasonably in withholding its consent to the transfer on the ground that the franchise business would not be under the direct supervision of someone holding a substantial interest in BRPL. I do not consider it is necessary to decide the further question of whether, for the purposes of cl 20(3)(c) of the Code, the selection criteria of a franchisor must be reasonable.

122 In my view, the claim that the consent of Bedshed to the transfer of the franchise to BRPL was unreasonably withheld must fail.

Was the proposed agreement Bedshed's 'current franchise agreement'?

123 There remains the issue of whether the form of the franchise agreement that Bedshed proposed was its 'then current franchise agreement'. In view of the conclusion I have reached on the entitlement of Bedshed to decline to consent to the transfer, it is not necessary to determine this point. In addition, the form of agreement which Bedshed proposes to use in the future has since changed from the one provided to BRPL.

124 I might say, however, that in my view a form of agreement which is not the subject of any binding agreement with an existing franchisee but is simply a form of agreement which, at a particular point in time, Bedshed wishes future franchisees to enter into, is not Bedshed's 'then current franchise agreement' within the meaning of cl 12.2 of the franchise agreement. Clause 12.2 contemplates an agreement already in force between Bedshed and a franchisee, not one which is, in truth, simply, at a particular point in time, the form of agreement that Bedshed wishes future franchisees to enter into. The rather ephemeral nature of the proposed form of agreement put to the Nixons is illustrated by the fact that it has already undergone further revision by Bedshed.

125 I do not consider that the supervision requirement in cl 6.2 of the franchise agreement is an unlawful restraint of trade and nor do I consider that Bedshed unreasonably withheld its consent to the transfer of the franchise to BRPL. I would therefore dismiss the claim.