Motel Federation of Australia Limited trading as Best Western Australia v Lenarbo Pty Limited trading as Golden Age Motor Inn

CASES CITED : Ashi Pty Limited v Karasco Investments Pty Ltd [2009] NSWSC 780

Motel Federation of Australia Limited t/as Best Western Australia (Plaintiff/Cross-Defendant) PARTIES : Lenarbo Pty Limited t/as Golden Age Motor Inn (First Defendant/Cross-Claimant) Leslie John Norris (Second Defendant/Cross-Claimant)

COUNSEL : J Raine (Plaintiff/Cross-Defendant) S Sirtes (Defendants/Cross-Claimants)

de Mestre & Company (Plaintiff/Cross-Defendant) SOLICITORS : Herring & Associates (Defendants/Cross-Claimants)

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

2009/296736 MOTEL FEDERATION OF AUSTRALIA LIMITED T/AS BEST WESTERN AUSTRALIA V LENARBO PTY LIMITED T/AS GOLDEN AGE MOTOR INN

JUDGMENT 1 Lenarbo operated a motel which was affiliated with Best Western, the Plaintiff, pursuant to a Membership Agreement dated 12 April 1999. 2 During 2006 and 2007 issues arose between the parties that ultimately led to the ending of the relationship in August 2007. The Plaintiff had brought proceedings claiming membership fees said to be owed by Lenarbo up to the end of March 2008. The issue in the proceedings before the Local Court was which party had repudiated the Agreement. 3 The Magistrate ultimately found a judgment for the Plaintiff in the sum of $2,400.95, a sum which did not include the membership fees but only incidental debts owing to the Plaintiff. As a result of that judgment the Plaintiff appeals to this Court and the Defendant cross-appeals.

The Agreement 4 Lenarbo Pty Ltd (the First Defendant) owned the Golden Age Motor Inn in Queanbeyan. John Norris (the Second Defendant) and his mother Leslie June were the Directors of Lenarbo. On 12 April 1999 it entered into a Membership Agreement with the Plaintiff which, for the public's purposes, makes them a Best Western Motel. Performance of the Agreement was guaranteed by John Norris. The Motel is listed on the Best Western website and there are financial benefits that flow to the Motel through this arrangement. So, for example, Best Western provides the Motel with advertising and booking services via a website as well as through the Best Western International Reservations system. Guests could become members of a rewards program provided and administered by Best Western, and Best Western provided the administration services for other reward programs including the Qantas Frequent Flyer program. 5 Each month Lenarbo received monthly statements from Best Western. The statement would show service fees, charges and monthly membership fees that Lenarbo was required to pay, but these charges would be offset by bookings. Whether monies were payable to Best Western at the end of each month would depend on the offset of accounts. Lenarbo had provided a direct debit authority so that Best Western could automatically withdraw any monthly amounts owing to Best Western. Correspondingly, Best Western would deposit any amounts owing to Lenarbo into its account. 6 The relevant terms of the Membership Agreement were these: 2.1 Period Unless your membership is terminated earlier, you are entitled to be a member of the Federation until 31 March 1999. Your membership will then be renewed automatically from 1 April in each year unless you notify the Federation in writing before 30 November in the preceding year that your membership is to terminate from the next 31 March, in which case your membership will automatically terminate from that date.

11.1 Events of Default Your membership may be terminated by the Federation immediately by notice if any of the following events occur: … (b) you do not comply with any obligation within 30 days after the Federation has given you a written notice to comply with the obligation; or

11.5 Other action by Federation for default Without limiting the Federation's right to terminate your membership, the Federation may take other action against you immediately you default. That action may include, but is not limited to, suspending, restricting or cancelling services or other membership benefits and imposing fines or other monetary charges.

… 13.3 Memorandum and Articles of Association of the Federation

(a) the Memorandum and Articles of Association of the Federation (as varied or replaced at any time);

(b) all of the by-laws, rules or regulations of the Federation, (as varied or replaced at any time); and

(c) all requirements arising out of decisions of the Board of Directors of the Federation.

13.10 No Waiver Any failure by one party to exercise a right under this agreement does not constitute a waiver of any obligation of the other party.

The signage dispute 7 On 6 March 2006 the Plaintiff wrote to Ms Norris and relevantly said: I am in receipt of your recent Quality Assurance assessment which was conducted on 20th February 2006 by Michael Haberland.

As we move into 2006, all signage is now being scored at all QA assessments, Although your QA report indicated a well presented property, I must advise that due to non-compliant signage, your property will need to be re-assessed in 6 months time. Michael will contact you to arrange a suitable date to conduct this re-assessment. 8 The Plaintiff wrote again to Ms Norris on 5 April 2006 in these terms:

We corresponded with all members on 16 th March 2006, regarding the need for all Best Western members to have fully brand compliant signage by 30 th September 2006. Accompanied with the correspondence was a "Signage Compliance Form" and we asked that any member that has non compliant signage and is prepared to install the signage within the next six months should complete and return the form to us.

To date we do not appear to have received your completed form and are now asking for your commitment to the group by signing and returning the form to us and working with us in resolving the non compliant signage issue at your property.

We do not want to lose any member from the group because of the signage issue as there are a variety of options that can be adapted to improving the appearance of your signage, which will result in added appeal to your property as well as strengthening the group through a consistent signage message to the travelling public.

Your participation with the group is very much appreciated, however we must again point out that the compliant signage issue must now be addressed with full compliance within six months. Those members who have installed new signage or have committed to do so are entitled to have the full support of all the members. 9 The evidence from Ms Norris was that these letters concerned a new Best Western logo that had been introduced. After receipt of the letters Ms Norris spoke with Mr Michael Mr Haberland from the Plaintiff who attended the property and told her that by the time of the next QA inspection the motel's signage had to comply with Best Western's specifications. 10 Ms Norris then made arrangements with a company called Panther and Neon Pty Ltd who Ms Norris understood was Best Western's preferred supplier of signage, to install the necessary signage to Best Western's requirements. She says that these new signs were constructed and erected about September 2006. 11 The next contact with Best Western about the signs was in about July 2007 when Mr David Beckett from Best Western attended at the Motel to make an inspection. He pointed out that the motel was required to have a Best Western sign on the front of the building. Shortly afterwards on 3 August 2007 the Plaintiff wrote to the Ms Norris saying this: I am in receipt of the recent QA assessment for Best Western Golden Age Motor Inn which was conducted on 25 th July 2007 by your Regional Services Manager David Beckett.

The QA report has concluded that fax and photocopying hours available, non-compliant secondary signs and items branded incorrectly such as compendium covers and telephone face plates have prevented a pass on this occasion, This has caused your property to fail the QA Assessment and will need to be re-assessed within 6-7 months. David will contact you to arrange a suitable date to conduct the re-assessment.

Your enclosed QA Action Plan is an excellent tool to help you address the issues identified in your QA report and I trust that David has discussed this with you in detail.

If you have any questions regarding the QA program, please do not hesitate to contact David or myself. 12 The enclosed QA Action Plan was in the form of a Schedule which listed problems that had been identified at the inspection on 25 July 2007. Relevantly the Schedule said this: Guest directories have reverse logo on the front and are starting to fade.

These items were said to have a high priority and in the column headed "Date Due" appeared the words "90 days".

The relationship comes to an end 13 In early August 2007 Mr Norris ascertained that the motel had been taken off the Best Western website. Ms Norris telephoned Mr Haberland to ask why and was told that the Lenarbo's membership had been suspended because of non-compliant signage. That was confirmed in a further conversation she had with someone at Head Office of Best Western. 14 On 14 August 2007 the Plaintiff wrote to Ms Norris saying this: We have been contacted by Best Western International regarding the non Best Western branded signage at your property. As you are aware Best Western Australia were given a deadline of December 2006 to have all property signage made fully brand compliant.

Due to not meeting this deadline Best Western International are now requiring immediate action on this matter. Unfortunately they have taken the action of suspending your property in all reservations systems until this matter is addressed.

We understand that you have had discussions with your Regional Service Manager David Beckett regarding the possibility of you leaving the group. We would be extremely disappointed if that was the case as you have been a great asset to the group for many years and we would hope that could continue. It is our earnest request that you address the issue with the secondary signage as a matter of urgency allowing us the opportunity to continue our relationship.

Best Western International has left us no room for negotiation as we have not met our strict deadline and to prevent termination proceedings they require a further QA assessment be conducted by 13 th October 2007, passing all areas of QA.

If you have any questions regarding this matter, please do not hesitate to contact David or myself. Unfortunately we will both be attending the annual convention and will not be back until 29 th August. 15 The reference in the 3rd paragraph of the letter concerns a conversation that John Norris had with Michael Haberland from Best Western in April 2007 indicating that he was thinking of leaving the Best Western arrangement. He was reminded at that time by Mr Haberland that the Lenarbo was locked in for 12 month periods with the arrangement renewable in March of each year. At the time Mr Norris said that they would stay in for the 12 month period. 16 However, on receipt of the letter of 14 August 2007 Ms Norris sent an email to Best Western with the subject stated as "Resigning from Best Western". The email simply said: Having received your letter on 14 th August 2007, and being told we have been suspended from all reservation systems, we formally resign as of 31 st August 2007.

We would like an official response to this resignation. 17 That led to a further letter from the Plaintiff of 29 August 2007 which said this: Regretfully I acknowledge receipt of your e-mail dated 19 th August 2007, tendering your resignation from Best Western.

As I expressed in my letter dated 14 th August the situation of suspending your property in the reservations system was made by Best Western International and totally out of our control due to non-compliant secondary signage. We realise that you had indicated that you were contemplating resigning from the group and this was not a good time to pursue the compliant signage situation but again I stress that this action was taken on an International level.

Lesley, we are sorry that our association is to end this way and we wish you every success for the future. 18 Despite the email and letter Best Western continued to charge Lenarbo monthly membership fees until October 2007, at which time Mr Norris cancelled the Direct Debit authority that enabled that to happen. Subsequently the Plaintiff demanded membership fees from November 2007 to March 2008. When they were not paid the Plaintiff instituted these proceedings in the Local Court.

The judgment of the Local Court 19 The matter proceeded on affidavit and documentary evidence alone. No one was cross-examined and no one gave oral evidence. The transcript is brief with the arguments put by the parties not recorded. 20 The Magistrate gave judgment immediately. He set out some of the factual material that I have dealt with above and noted that the parties asserted that the issue in the case was repudiation by one or other of the parties. 21 The nub of the Magistrate's decision appears to lie in the following passages to which counsel for both the parties directed my attention: It would appear that whilst there was this dispute over the signage and the desire of the defendants to leave the membership, it would appear that the ongoing customer based detailed relationship in terms of taking into account Frequent Flyer points and other booking systems ceased at the end of August, because there are no further tax invoice statements or anything that goes to activities after September, certainly October, November, December. So that it was not simply a matter of a minor punishment or action, I should say, taken by the plaintiff to suspend them from a website because they are not complying with the signage requirements, and perhaps not complying with the inspection report, it would appear in the court's view that there was a complete ceasing of all financial relations between them as set out in the tax invoices in the twelve pages. So at the end of August these financial arrangements between them, in addition to being suspended from the website, that the financial relationship finished at that time.

Now the plaintiff's lawyer, Mr Lum, says, "Well that's because they resigned, so we took them off that", and the court can understand that position. But as I understand it, it is repudiation in the court's (sic) - when the court looks at the detailed transactions and actions between the plaintiff and the defendant as set out in the affidavit of Christine Hausam and the exact documentation provided by her in her affidavit, it appears that quite clearly financial relations between them ceased.

And there has been no evidence of what benefits at all the plaintiff was continuing to provide after that. They are not on the website, there is no Frequent Flyer points or other reward programs or discounts or transactions between them that have been presented in documentary material to this court. It appears that the financial relations between the plaintiff and the defendant ended. And true it is that the defendant wanted to end them but in the Court's view the plaintiff accepted that repudiation by not continuing with any financial arrangements and not continuing to offer services to the defendant from October to March.

So when the Court applies its examination of its view of the factual scenario that was occurring between the plaintiff and the defendant and relevant legal principles, and taking into account the membership agreement, the court has not been satisfied on the balance of probabilities that the plaintiff is entitled to recover for the membership fees from November 07 to March 08. (emphasis added) 22 His Honour then said this: HIS HONOUR: THE PLAINTIFF FAILS IN ITS CLAIM FOR THE MEMBERSHIP FEES FROM NOVEMBER 07 TO MARCH 08 BUT SUCCEEDS IN THE OTHER SIX AMOUNTS, BEING THE FLYBUY POINTS, THE GCCI POINTS, THE FREQUENT FLYER, RESERVATION FEES, GUEST SIGN AND DONE FILE, REVERSAL OF CHARGE CARD GUEST. SO THE PLAINTIFF SUCCEEDS IN THOSE AMOUNTS. SO THE INTEREST CHARGES WILL HAVE TO BE CLEARLY ADJUSTED. Yes, that is the decision. 23 Those amounts, it is agreed, total $2,400.95.

The appeal 24 The Summons commencing the proceedings sought leave to appeal pursuant to s 40(1) and s 40(2)(c) Local Court Act 2007. Similarly the Cross-Summons sought leave to appeal by virtue of the same provisions. At the outset I raised with both counsel the question of whether there might not be a pure question of law involved whether the magistrate had correctly applied the law as it touched the doctrine of repudiation. Both counsel agreed that that was so. In the circumstances I am content to treat the Summons and the Cross-Summons as appeals as of right under s 39 of the Act. 25 The Defendants also filed a Notice of Contention concerning (inter alia) the way the Magistrate applied the doctrine of repudiation. 26 Although in the Cross-Summons the Defendants sought to set aside the judgment for $2,400.95 and claimed a verdict in their favour this was ultimately abandoned by the Defendants. The issue, therefore, was whether the Magistrate correctly applied the doctrine of repudiation in the events which had happened. This requires an answer to 2 questions First, was Lenarbo in default at 14 August 2007? Secondly, if it was not, did the purported suspension of Lenarbo by the Plaintiff amount to a repudiation by the Plaintiff justifying the email of 20 August bringing to an end the Agreement?

Who repudiated? 27 The letter of 5 April 2006 required signage to be compliant within 6 months. The evidence of June Norris is that she engaged Best Western's preferred signage contractor to attend to the matters and to liaise with Best Western about the requirements. The signs were completed and nothing further was heard until July 2007 when a Mr Beckett from Best Western, in the course of conducting a QA assessment, informed Ms Norris that there was supposed to be a sign at the front of the building. Lenarbo then received the letter of 3 August 2007 with the enclosed Action Plan giving Lenarbo 90 days to become compliant. 28 The Plaintiff argues that Lenarbo had been in default since 2006 when it had failed to comply with the letter of 5 April 2006, the proof of that being what was found in the inspection of 2007. Hence, cl 11.5 of the Agreement was triggered to enable the suspension to be imposed by the letter of 14 August 2007. The Plaintiff further argues that even though a 6 month period may have been given in 2006 to become compliant, and even though the letter and Action Plan given in August 2007 allowed a 90 day period for compliance, that does not mean that Lenarbo was not in default. This is because of the 30 day period in cl 11.1(b) and the right to suspend on default. 29 The evidence does not suggest to me any connection between the events of 2006 and the inspection of July 2007. The evidence was that some time prior to 2006 the Plaintiff was in the process of a re-branding exercise and that involved new signage. As far as Lenarbo knew from its dealings with Panther the required signage had been erected in 2006. 30 Then, in the course of a regular QA inspection, the Plaintiff identified a number of matters requiring attention. Some of these involved what were described as secondary signage. The Plaintiff, far from suggesting that Lenarbo was in default in some way, gave what could be taken as a notice under cl 11.1(b) requiring compliance, not within 30 days, but within 90 days. Even if Lenarbo was in default from 2006 (which I do not accept) Best Western elected not to terminate nor suspend but to give the notice attached to the letter of 3 August 2007. 31 There is no room for the operation of the No Waiver clause because there was not simply a failure of the Plaintiff to exercise a right - there was a positive step taken to invoke the cl 11.1(b) procedure. That was an election between 2 inconsistent rights (on the assumption made that Lenarbo was in default from 2006). Having done so, there was no power to suspend at least until 30 days had expired but, far more likely, until the 90 day period had expired because until that time arrived Lenarbo was not in default. 32 The result is that, in purporting to suspend by removal of Lenarbo from the website and the letter of 14 August 2007 when there was no default by Lenarbo, the Plaintiff repudiated the contract. It did so by wrongly withholding the services it had promised to provide under the Agreement. Lenarbo accepted this repudiation by its email of 20 August 2007. It was no longer bound to pay membership fees to the Plaintiff. 33 The Plaintiff argues that the Magistrate accepted that Lenarbo repudiated the contract by his statement "the plaintiff accepted that repudiation by not continuing with any financial arrangements". However, the Magistrate does not identify what "that repudiation" is. He refers a few times to the complete cessation of financial arrangements between the parties but, on any view, that is the outcome from some other act or acts. The cessation of financial arrangements is not the repudiation. He also says immediately before the reference to "that repudiation", "the defendant wanted to end them" but that desire or intention cannot be a repudiation. 34 More to the point, the Magistrate's conclusion from this is that the Plaintiff is NOT entitled to the balance of the fees, a conclusion completely inconsistent with a finding that it was Lenarbo that repudiated. Of course, that is the Plaintiff's point, that having found a repudiation by Lenarbo he ought to have found the Plaintiff was entitled to the balance of the fees. I have found, however, that there is no basis for the Magistrate's conclusion that it was the Defendant who had repudiated the agreement. 35 The Magistrate's verdict was correct but for completely wrong reasons. He made errors of law in apparently holding either that (a) the end of financial arrangements, or (b) some unspecified act of Lenarbo, amounted to a repudiation on Lenarbo's part. It is not possible from the absence of reasons in this regard to understand how, having apparently found a repudiation on the part of Lenarbo, the Magistrate then held that the Plaintiff was not entitled to the remaining membership fees. 36 But appeals are against judgments and not against reasons as such. The Defendants succeed on their Notice of Contention - paragraph 2 of that Notice correctly expresses what ought to have been the outcome and the reasons for it, as I have detailed above.

Costs 37 The Transcript records some of what passed between the Magistrate and the lawyers for the parties as follows: COUNSEL ADDRESSED HIS HONOUR: I propose to simply make the payment of costs the costs of the day because the court's view is that the plaintiff was seeking to pursue its rights under a membership agreement; where it was to March the court took the view that the plaintiff, by its actions in terminating, in the court's view, all its financial arrangements between the plaintiff and the defendant, and there was no further evidence supplied on what it was actually offering for the following months. THE COURT'S OF THE VIEW THAT THERE WAS A REALISTIC - IT WAS NOT UNREASONABLE FOR THE PLAINTIFF TO PURSUE THIS CASE, NOTWITHSTANDING THE COURT'S DECISION. SO I AM ONLY PROPOSING TO MAKE THE COSTS ORDER FOR TODAY. HERRING: Sorry, which way your Honour? I'm not sure.

HIS HONOUR: IN FAVOUR OF THE DEFENDANT. IN FAVOUR OF THE DEFENDANT, THE COSTS OF THE LITIGATION TODAY. So what do you say your costs for today --

HERRING: Well I'm the defendant, your Honour, so --

HIS HONOUR: I'm sorry, the costs in favour of the defendant? HERRING: I'm sorry, your Honour. HIS HONOUR: I've tangled myself up. THE PLAINTIFF TO PAY THE DEFENCE COSTS OF TODAY ONLY. HERRING: Thank you, your Honour. Excuse me just for one moment, I didn't bring the calculation. Or did I? We'd be seeking $1,500 plus GST, your Honour. HIS HONOUR: I beg your pardon? HERRING: $1,500 plus GST, your Honour.

HIS HONOUR: Do you have any submissions on that, Mr Lum? LUM: I don't see that as an unreasonable amount of costs.

HIS HONOUR: Yes. THERE IS AN ORDER FOR COSTS IN FAVOUR OF THE DEFENDANT OF TODAY, $1,500 PLUS GST.

LUM: Is that the only cost order your Honour proposed to make in these proceedings?

HIS HONOUR: Yes. LUM: Yes, may it please the court. HIS HONOUR: Yes, unless - are there any further applications? LUM: No. HIS HONOUR: No, the court's not going to - the court saw it as realistic - a not unreasonable claim by the plaintiff. But the court doesn't propose to make any costs other than the fact the costs of today. 38 The Plaintiff submits that if the verdict of the Magistrate is undisturbed the costs order he made should also remain. The Defendants say that his discretion miscarried for 2 reasons - first, because, but for the incidental sums totalling $2,400.95, the Defendants were successful on what was clearly the principal dispute, and secondly, because they had served a Calderbank offer which offered a sum greater than the Plaintiff ultimately recovered at a relatively early point in the proceedings. Although the Calderbank letter was not in evidence on the appeal, the Plaintiff's counsel did not demur to what I was told by counsel for the Defendants about the Calderbank letter. 39 Because the appeal will otherwise be dismissed, this costs dispute is not incidental to the appeal itself, and leave is necessary under s 40(2)(c). Were this the only appeal I would not have considered that there was any justification for granting leave although it appears to me that the magistrate's discretion miscarried (see the discussion in Ashi Pty Limited v Karasco Investments Pty Ltd [2009] NSWSC 780 at [30]-[35]). However, since the parties were here by right and established an error of law on the part of the Magistrate in relation to his application of the doctrine of repudiation, I consider that leave should be granted in relation to the costs order. 40 It is clear, even on the way the Magistrate decided the main issue of repudiation that the Defendants were successful in not having to pay the outstanding membership fees which Best Western claimed. The appropriate costs order would have been that Best Western pay the Plaintiff's costs. Nevertheless, the Plaintiff obtained a judgment for $2,400.95. I do not consider that the costs order made would have been outside the range of discretion if there was nothing more. However, when there is the additional fact of a Calderbank offer by the Defendants which exceeded the verdict I consider his discretion miscarried. He makes no reference in his brief reasons for his costs order why the Defendants should only be entitled to the costs of that day. His vague suggestion that that Plaintiff's case was not unreasonable suggests an irrelevant consideration, and his failure to mention the Calderbank offer suggests a failure to consider a relevant matter. 41 In my opinion the appropriate costs order before the Magistrate is that the Plaintiff should pay the Defendants' costs from the date of service of the Calderbank letter.

Conclusion 42 In my opinion the following orders should be made:

(2) Leave granted to the Defendants to appeal against the order for costs made by the Magistrate. (3) The Defendants' appeal against the costs order made by the Magistrate is allowed.

(4) Set aside the costs order made by the Magistrate and in lieu order that the Plaintiff pay the Defendants' costs of the proceedings in the Local Court from the date of service of the Defendants' Calderbank letter.

(6) The Plaintiff is to pay the Defendants' costs of the appeal. (7) No costs of the Cross-Appeal.

28/07/2010 - Coversheet amended "t/as" in title replaced with "trading as" - Paragraph(s) Coversheet 28/07/2010 - 't/as" in coversheet title replaced with "trading as" - Paragraph(s) coversheet

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.