Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd

Court of Appeal (NSW)|2020-07-30|Before: Bell P, Macfarlan JA, Meagher JA, MacFarlan JA

Solicitors: LegalVision Australia ILP Pty Ltd (Appellant) Sunfield Chambers Solicitors & Associates (Respondents) File Number(s): 2019/389053 Decision under appeal Court or tribunal: District Court Jurisdiction: Civil Date of Decision: 13 November 2019 Before: Robison DCJ File Number(s): 2018/20635

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

The primary judgment

It is unnecessary to refer to much of the detail of his Honour's judgment as the issues on appeal are limited. So far as the contract claim is concerned, the only issues are first whether the force majeure clause (clause 39) excused the appellant's breaches of contract found by the primary judge and secondly as to the quantum of damages. There is an issue on appeal as to whether the appellant engaged in unconscionable conduct but that allegation is an alternative to the contract claim. In respect of the cross claim, the issue is whether the franchise and licence agreements were interdependent such that the appellant was precluded from recovering amounts otherwise due under the licence agreement if it did not fulfil its obligations under the franchise agreements.
The primary judge found that the first franchise agreement contained the implied terms alleged by Ivanman including, in particular, a warranty by the appellant that Ivanman would throughout the term of the franchise agreement be authorised by Easy Way to conduct the franchise (Judgment at 61). His Honour further found that those terms had been breached (at 65). As well, his Honour found for the following reasons that clause 39 did not exempt the appellant from liability: "The further submissions also lead me to conclude that when it comes to any events beyond Meetfresh's control, there is, to a large extent, the lack of evidence about the books and records of the defendant and what it could control and what the defendant could not control. In particular, I remind myself of the position held by Mr Chan at the relevant times. The evidence clearly reveals that the defendant through Mr Wang and indeed Mr Charlie Chan, was in a considerable position of control and power, and I consider that a reasonable and rational inference to draw from the evidence overall was that it was entirely within the power and control of the defendant to address any particular problems it was confronted with, but at the end of the day there was really no further evidence about that." (Judgment at 62)
Mr Charlie Chan, who is referred to in the above passage, gave evidence before his Honour and identified himself as the Vice President of the appellant. He said that for most of the period relevant to the proceedings he was a brand manager of the appellant, his position having been assumed from late March 2017 by Mr Bryan Zhang. His Honour noted that Mr Wang, who was formerly an officer of the appellant and involved in negotiations with Ivanman, had not been called to give evidence (Judgment at 42-43).
As to damages for breach of contract, his Honour held that Ivanman was entitled to recover the amount it spent on the refit of the premises (agreed to be the sum that his Honour subsequently awarded) on the basis that it was wasted expenditure made in the expectation that Ivanman would obtain the benefit of the second franchise agreement for its full term, which did not occur.
His Honour further found that the appellant had engaged in unconscionable conduct as alleged by Ivanman. This conduct included the representation to Ivanman referred to in [4] above that in the event that its head franchise agreement with Meetfresh Australia was terminated, Ivanman's sub-franchise would be unaffected (Judgment at 65; para [24E] of the Amended Statement of Claim).
The primary judge rejected the appellant's cross claim for amounts claimed under the licence on the basis that Ivanman's non-payment resulted from, and was excused by, the appellant's breaches of the franchise agreements (Judgment at 63).

Grounds 1, 2 and 3: The force majeure clause

By its amended notice of appeal, the appellant contended that the primary judge erred by finding that the force majeure clause (see [5] above) was inapplicable on the basis that loss of the right to use the Meet Fresh intellectual property was within the appellant's control. It contended that his Honour should have found that the appellant could not have taken any "relevant and reasonable steps" to avoid that loss occurring.
Whilst the primary judge was prepared to draw the positive inference that the presently relevant clause 39 event (the appellant's loss of a right to use the intellectual property) was "entirely within [its] power and control" (Judgment at 62), this was based on the absence of evidence about how the event came about, notwithstanding the appellant's presumed ability to explain it. When it is recognised that the onus of demonstrating the applicability of clause 39 in the particular circumstances of this case was on the appellant, there can be no doubt that his Honour's conclusion was justified. As his Honour indicated, there was a distinct lack of evidence about the cause of the event and the appellant's inability to prevent its occurrence.
The furthest the evidence went in this respect was in the statements made by Mr Wang to Mr Wu, in response to Mr Wu's enquiry as to what was happening "between your company and the head franchisor", that "[t]hey are still litigating. The dispute is regarding stock with the head franchisor in Taiwan" (Judgment at 26). These statements left the responsibility for the dispute (and therefore the appellant's lack of control over what occurred) completely unproven. That there was a company (Meetfresh Australia) interposed between Easy Way and the appellant did not assist the appellant because, as his Honour held, the companies "effectively formed a chain of companies that may not be directly related, but as there is with any chain, there are links in the chain", thus giving a connection between Easy Way, Meetfresh Australia and the appellant (Judgment at 41-42).
As to the question of onus, authority establishes that in the present case the appellant bore the onus of establishing the applicability of clause 39.
Jordan CJ expressed the general principle as follows in Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231 at 237: "… a plaintiff seeking to enforce an obligation qualified by a general exception which is applicable to all cases must negative the exception; but if the obligation is general and qualified only by particular exceptions, a person seeking to rely on an exception must prove himself within it: Munro Brice & Co v War Risks Association [1918] 2 QB 78 at 88-89; Pye v Metropolitan Coal Co Ltd (1934) 50 CLR 614 at 625; Williston on Contracts (1936) III, p. 1939."
In Wallaby Grip Ltd v QBE Insurance (Australia) Ltd (2010) 240 CLR 444; [2010] HCA 9, the High Court referred to these authorities and emphasised that the issue of onus was largely to be determined, in the case of an insurance policy, "upon the construction of the terms of the contract of insurance and the insurer's promise contained within it" (at [27]). The observation is equally applicable in a general contract case such as the present.
In McLennan v Insurance Australia Ltd [2014] NSWCA 300 at [11]-[13], this Court, after referring to the summary in Williston, A Treatise on the Law of Contracts (rev ed 1936, Baker, Voorhis & Co) III, of the relevant principles, said: "[13] This summary follows the language of the second and third of Bailhache J's propositions [in Munro, Brice & Co v War Risks Association] which draw a distinction between a provision that qualifies the whole scope of a promise and one that excludes from the operation of the promise particular classes of case which, but for the provision, would fall within it: Munro, Brice & Co at 88. Reference also must be made to Bailhache J's fourth proposition that whether 'a promise is a promise with exceptions or whether it is a qualified promise is in every case a question of construction of the instrument as a whole' (at 89)."
The question is thus whether, as a matter of construction, the provision in question qualifies the ambit of the appellant's promise or whether it provides an exception to it. In my view, the latter is the case here. In the franchise agreements, the appellant's obligations are set out in a broad and relevantly unqualified fashion. Clause 39 is included amongst incidental clauses appearing at the end of the agreement, including ones dealing with confidentiality, governing law and jurisdiction, entire agreement, waiver and severability of terms. The clause is clearly an exception to, rather than a qualification of, the appellant's promises.

Grounds 4 and 5: Unconscionable conduct

Ivanman contended, and the primary judge held, that the appellant engaged in unconscionable conduct within the meaning of s 21 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) ("the ACL").
Ground 4 challenges that finding in a general fashion and ground 5 alleges that the primary judge failed to give adequate reasons for the finding. There is force in the latter contention because, after finding breaches of contract, the primary judge simply said that: "In addition, there has been indeed a breach of s 21 when it comes to the engagement by the defendant in its own conscionable conduct [sic], and in my view, the allegations [of unconscionable conduct] pursuant to para 24E of the amended statement of claim have been made out on the admissible evidence" (Judgment at 65)
As I indicated above, Ivanman contended that the damages award in its favour was supportable either as an award for breach of contract or for unconscionable conduct. Ivanman did not contend that there was any advantage to it in one rather than the other alternative being accepted. As I have held that the primary judge's findings of breach of contract were properly made, it is therefore strictly unnecessary to address the alternative basis of liability. Further, it is not in my view appropriate or convenient to deal with that alternative basis even on a contingent basis as the primary judge did not give reasons for upholding it which are available to be scrutinised by this Court.

Grounds 6 and 7: Damages

Ivanman claimed, and the primary judge awarded, damages of $113,171 representing Ivanman's costs of refitting the premises in response to the appellant's threat not to extend Ivanman's franchise agreements if the refit was not done. The claim was therefore not for a loss of profits, which would amount to a claim for expectation damages, but rather for what has been described as damages for wasted expenditure or reliance damages (see Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54).
The decision in Amann Aviation established that, in respect of such a claim, "the law assumes that a plaintiff would at least have recovered his or her expenditure had the contract been fully performed", with the consequence that the onus of proof rests on the party breaching the contract to establish "that the reliance expenditure would have been wasted even if the contract had been performed" (at 86-90 per Mason CJ and Dawson J).
In support of these grounds of appeal, the appellant submitted that damages for wasted expenditure are only awarded where it is impossible to quantify expectation damages. It then contended that this was not such a case because it was possible to quantify Ivanman's loss of profits, that being zero because its business had been performing poorly.
This approach is not supported by Amann Aviation or other authority. The effect of Amann Aviation is that the Court may award reliance damages where the evidence does not establish any loss of profits. Where, as here, a claimant does not seek to prove that the revenue it would have been likely to earn would have exceeded expenditure, such that profits would have been earned, it remains open to that party to claim that the prospective revenue would at least have been sufficient to recoup identified expenses.
The appellant submitted in the alternative that it had discharged its onus to establish that the wasted refit cost would not have been recouped by Ivanman. The primary judge did not deal with this argument, although it was not made clear to this Court whether the argument was put to his Honour. The appellant nevertheless relied on appeal on statements made by the primary judge elsewhere in his judgment that "the business, frankly, did not do very well. The financial accounts which are before the Court clearly reveal that" (Judgment at 20), that "the business was making a loss every year since it was purchased by Ivanman Pty Ltd" (at 58), and that there was a question about the solvency of Ivanman "and it was losing money" (at 59; see also at 40).
The accounts in evidence for Ivanman for the year ended 30 June 2016 covered most of its first year operating the Meetfresh business. They showed that Ivanman's trading income for that year exceeded its costs of sales by $273,368.23 which thus represented a gross profit from trading. Its net position after deduction of other expenses was a loss of $15,837.30. The expenses included substantial depreciation charges, directors' fees and wages.
For the following financial year, Ivanman's gross profit from trading was $241,685.73, with a net loss after other expenses of $76,334.49. Again, the expenses included substantial depreciation charges, directors' fees and wages.
Proof of these results for a period somewhat less than the first two years of Ivanman's operation of the business was not in my view sufficient to discharge the appellant's onus of proving that it was unlikely that Ivanman would, over the term of its agreements with the appellant (to 31 October 2017 under the first franchise agreement and then to 31 October 2022 under the second franchise agreement), have earned sufficient revenue to cover its costs including the costs of the refit.
Ivanman's decision to seek a second franchise agreement extending its right to carry on the business for five years from 31 October 2017 was made after it had been conducting the business for some time. It can therefore be assumed to have been in a position to make an informed decision as to the business' prospects for the future. It is hardly likely that it would have sought that extension if it had not reasonably anticipated that it would make profits from the business in the future, or at the very least cover its costs. Moreover, the existence of a significant prospect of profits being made was supported by an expert report in evidence that assumed that the business had a substantial positive value and projected that it would earn substantial profits from 1 November 2017.
Finally, the appellant submitted that Ivanman did not incur the refit costs as a result of any breach of contract by it. It submitted that, instead, Ivanman incurred the costs because it was obliged by clause 6.7 of the first franchise agreement to refurbish the premises at its own expense when the appellant reasonably required it to do so. The primary judge does not appear to have dealt with this argument, if indeed it was put to him. In any event I do not consider that on appeal the appellant has established that its request to Ivanman to undertake the refit was reasonable for the purposes of this clause. One obvious matter of significance in this respect is that the request was made in January 2016, only about 5 months into the two-year term of the first franchise agreement.

Grounds 8, 9 and 10: The cross claim

By its cross claim the appellant relevantly sought judgment for $41,575.12 for licence fees and other monies payable under the licence granted to Ivanman to occupy the premises, the amounts having been charged by way of four invoices provided to Ivanman in September, October, and November 2017. The cross claim acknowledged that the initial licence agreement had expired through effluxion of time on 14 August 2017 but alleged that it had been continued on a month to month basis thereafter.
The primary judge found that Ivanman was not liable to pay the amounts claimed because they arose out of the appellant's breaches of the franchise agreements (Judgment at 62). By its notice of appeal, the appellant contended that the obligations under the licence agreement were however independent of any obligations under the franchise agreements and any breaches of those agreements were irrelevant to Ivanman's liability under the licence. On the other hand, Ivanman contended that they were interdependent but accepted that it could not maintain this argument in respect of $6,146.23 of the appellant's claim and conceded that judgment should be entered against it (and the guarantor) for that amount. That concession does not however entitle the appellant to its costs of the appeal relating to the cross claim as it concerned only a relatively small amount which did not assume any separate significance on the appeal.
The parties' arguments thus proceeded on the basis that the merits of the appellant's cross claim depended on whether the obligations arising under the franchise agreements and the licence agreement were interdependent.
JW Carter, Carter's Breach of Contract (2nd ed, 2018, LexisNexis Butterworths) explains the principle involved in this respect as follows (at [1-08]): "Where an obligation to perform is a dependent obligation, the promise which creates the obligation is a dependent or conditional promise. Otherwise, the promise stating the obligation is an independent or unconditional promise. Whether an obligation or promise is dependent or independent depends on the construction of the contract."
To similar effect JD Heydon, Heydon on Contract (online ed, at 10 September 2020, Thomson Reuters) states at [21.260]: "If… one party's promise is independent of (that is, not dependent on) the other's, then either party may perform, and may be obliged to perform, even though the other has not. If… one party's obligation to perform is dependent on performance by the other, the latter must perform first, unless the contract indicates that performance is to be contemporaneous."
The primary judge was in my view correct to treat the obligations arising under the franchise agreements and the licence agreement (including its month to month extension) as interdependent. As a consequence, the appellant's failure to comply with the franchise agreements and thereby provide Ivanman with the ability to carry on the franchise business on the premises meant that Ivanman was not obliged to meet the obligations otherwise arising under the licence agreement for the premises. The two sets of agreements were inextricably interlinked because the subject premises were licensed to Ivanman for the sole purpose of Ivanman carrying on the franchise business on them and Ivanman was in fact obliged by the licence agreement to carry on that business there.
In this respect, both franchise agreements provided that Ivanman was to license the premises from the appellant and conduct the franchise business "from the Premises and only use the Premises for the conduct of a Meet Fresh Business" (clause 6.3).
Moreover, the licence agreement annexed the lease held by the appellant in respect of the premises under which the "permitted use" was specified to be "Taiwanese Dessert House". The licence agreement included the following presently relevant recitals and provisions: "A. The Licensor has the right to use and licence the name MEET FRESH in relation to the operation of retail premises specialising in the sale of beverages, snacks and other food products associated with the name MEET FRESH. … C. The Licensee has entered into a Franchise Agreement with the Lessor (Franchise Agreement) which governs the Licensee's rights and obligations in relation to the operation of a MEET FRESH Business from the Premises. … 1.3 The Licensee agrees with the Licensor that the Licensee has entered into this Licence Agreement to occupy the Premises for the duration of the Lease less one day in order to enable the Licensee to operate a business using the MEET FRESH System at the Premises and the Licensee shall observe all of the covenants and obligations contained in the Lease to be observed by the Lessee. … 4. The Licensee shall only use the premises for the Permitted Use under the Lease. … 6. This Licence Agreement may be terminated by the Licensor forthwith if the Licensee fails to commence operating the MEET FRESH Business at the Premises within two (2) months of the Commencement Date and in such event the Licensee acknowledges that the Licensor shall not be obligated to refund any monies previously paid to the Licensor by the Licensee."

ORDERS

As the appellant's grounds of appeal have been unsuccessful (save for the limited concession made in respect of the cross claim), I propose the following orders: 1. Appeal allowed only to the extent of giving effect to the respondents' concession that $6,146.23 is payable by the respondents to the appellant. 2. Enter judgment for the appellant against the respondents for that amount. 3. Otherwise dismiss the appeal. 4. Order the appellant to pay the respondents' costs of the appeal.
MEAGHER JA: I agree with Macfarlan JA.

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At a glance

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Judgment (10 paragraphs)

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