Judgment (on leave to amend and to rely on expert evidence)
[3]
(ex tempore - revised 19 february 2016)
HIS HONOUR: By notice of motion filed in court today the defendants (the franchisees) seek leave further to amend their commercial list response, leave further to amend their commercial list cross-claim list statement, and leave to rely on expert evidence.
I propose to do as the parties did, and deal first with the issue of the proposed expert evidence.
The factual background is that up until 14 August 2015, the various franchisees had been franchisees of the plaintiff. The franchise business either comprised or included the renting out to consumers of items of household use. The franchisees say that, by reason of changes to the plaintiff's business system which were unacceptable to them, they ceased operating as its franchisees and began to operate the same business in their own names.
The franchise agreement between the plaintiff and each of the franchisees appears to have included a term under which, if the agreement expired or were terminated for any reason, the plaintiff should have the right (but not the obligation) to buy "such of the Business Assets" as it might select and, if it wished, to "have the Franchisee assign or transfer to the Franchisor...or surrender..." the lease of the premises from which the franchisee carried on the franchised business.
In those circumstances, if the option were exercised, a purchase price was payable. Clause 22.7 provided what that purchase price might be. Since, for reasons that I hope will become apparent, the resolution of the question of expert evidence depends very much on the language of cl 22.7, I set it out:
22.7 Purchase Price
The Purchase Price to be paid by the Franchisor (or its nominee) to the Franchisee upon the exercise of the option contained in clause 22.6 shall be the price nominated by the Franchisor in the notice exercising the option contained in clause 22.6 unless within 7 days of receipt of such notice the Franchisee notifies the Franchisor that it requires the price to be the lesser of:
(i) the written down value of the Business Assets selected by the Franchisor as recorded in the Franchisee's books of account; or
(ii) the fair market value of the Business Assets selected by the Franchisor as determined by the Valuer. In conducting the valuation the Valuer acts as an expert and not as an arbitrator and must not include any component for leasehold improvements. The Valuer's decision is final and binding on the parties and the Valuer's costs must be shared equally between the Franchisee and the Franchisor: or
(iii) The Valuer, in determining the fair market value, must take into consideration, in any goodwill calculation, the value of the goodwill, based on the current customer transfer policy in operation at that time.
The "Business Assets" were defined as follows:
Business Assets means fittings, fixtures, plant and equipment, goods rented by the Franchisee to a Customer under a Rental Agreement, vehicles and other assets owned and used by the Franchisee in the conduct of the Business;
The franchisees have procured a Mr Rodney Hyman to provide an expert opinion. It is dated 10 February 2016. According to the opinion, Mr Hyman was engaged "to provide certain advice about valuation practice". The instructions to him asked him to give opinions, among other things, as to:
1. how the fair market value of a business asset might be determined;
2. what is "goodwill", and how is it determined, in relation to a business asset; and
3. how the concept of goodwill could be used in determining fair market value.
Although I have not had the opportunity of reading Mr Hyman's splendid report in complete detail, it seems that he says in substance that the concept of goodwill is irrelevant to, or meaningless in the case of, a chattel asset of a business. He says, in substance, that goods do not have "goodwill" attached to them as a matter of valuation and expertise and practice. Further, he says, as a matter of such expertise and practice, the concept of goodwill cannot inform any calculation of the fair market value of goods.
The case for the franchisees, in relation to reception of this evidence, is that it is admissible to explain a special meaning to be given to the word "goodwill" in the practice of valuers: in effect, a meaning to be derived from that practice. Reference was made to the decision of McDonald J in Royal Insurance Australia Ltd v Government Insurance Office of New South Wales [1994] 1 VR 123 at 133. Although his Honour's views were there expressed in negative form, it appears that, from his detailed (and if I may say so, comprehensive) review of the authorities, he concluded that expert evidence might be admissible:
1. "to explain some special meaning to be given to...words and phrases...to be derived from trade custom or usage"; and
2. to support the implication of a term "through trade custom or usage".
If I may say so with respect, I do not doubt the application of those principles. However, I do note that, as his Honour said at 133-134, the evidence would not be admissible to demonstrate how particular words, or a particular clause of a contract, should be expected to apply in the particular circumstances of a given case.
It seems to me that there are several reasons that suggest that the evidence in question should not be admitted: more specifically, that the franchisees should not have leave to rely on it. The first is that the trial is fixed to commence on 14 March next, three weeks away. That hearing date was assigned as long ago as 27 November 2015. When it was assigned, the Court was given no indication that the evidence was incomplete, let alone an indication that the franchisees might wish to rely on expert evidence of any kind.
In my view, if the franchisees were given leave to rely on the opinion of Mr Hyman, the almost certain consequence would be vacation of the hearing date. I do not think that it is possible, in any realistic sense, to expect the plaintiff to obtain a report in reply, in sufficient time to enable the experts to confer and the hearing to proceed. In this context, I note that Mr Hyman was instructed to give his opinion on 2 December 2015, but did not produce it until 11 February 2016. Even allowing for the Christmas/ New Year break, the obvious inference is that it would take the plaintiff more than three weeks to procure a report in reply.
Where there is absolutely no explanation for the delay in obtaining the report (save that another expert had been briefed to give an opinion on a different point, and "it became apparent" to the franchisees that he was not the appropriate expert), I do not think that the plaintiff should be forced to lose its hearing date. That consideration is reinforced when one looks at what is involved in this case. The plaintiff is seeking specific performance of the options that it says it has exercised. Specific performance would require a determination of the purchase price and, thereafter, assignments of the leases and transfers of the customer contracts. (I use the word "transfers" advisedly.) It is manifestly undesirable, in relation to ongoing business operations, that the resolution of those issues, and the possible implementation of a decree for specific performance, should be further delayed. As the list stands at present, if the date were lost, it would be unlikely that a further date could be allocated before August or September this year, if then.
In any event, when one looks at the structure of the clause, it does not appear to me that the evidence on which the franchisees seek to rely has any real utility. As it was explained on their behalf, Mr Hyman's evidence is relied upon to show that "goodwill", being irrelevant, cannot form part of a valuation under cl 22.7(ii). Thus, it is said, an integral element of the calculation, namely that required by cl 22.7(iii) is illusory. Building on that, it was submitted, the provision for determination of purchase price must be regarded as unenforceable and void.
That seems to me to be a difficult argument. The first point is that the purchase price, at least initially, is to be that specified by the plaintiff in the notice of exercise of option. It is only if the franchisees do not accept that specified price that the remaining provisions of cl 22.7 come into operation. Those remaining provisions give the franchisees alternatives: written down value or fair market value. It is only if the franchisees choose the latter - as apparently they have done - that any question of valuation arises.
The next point is that under cl 22.7(ii), the valuer acts as expert, not as arbitrator, and his or her decision is final and binding.
The submission for the franchisees was far-reaching. First, it was put, if a valuer purported to take account of, and to give a value to, goodwill, then there would be an error of law. More fundamentally, however, the submission embraced the proposition that a valuation so performed would be erroneous, as not being any exercise at all of the task entrusted to the valuer.
It is hardly necessary to say that, on the franchisees' own analysis, that putative error would lead to invalidity of the valuation, on the principles described by McHugh JA in Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at, in particular, 335 to 336.
On that analysis, no injustice is done to the franchisees by refusing them leave to rely on the proposed expert evidence.
However, if (contrary to the position accepted in the course of submissions) the consequence is merely one of error of law, then what follows from that is a matter for the proper construction of cl 22.7. Suppose that the valuer who conducted the fair market valuation of the assets thought that goodwill was appropriate. That valuer would, presumably, perform a calculation of the value of goodwill, informing himself or herself by reference to para (iii). That might, as was submitted, amount to an error of law. Whether a mere error of law is sufficient to invalidate the resulting valuation is a matter that would depend on the proper construction of cl 22.7. If it did invalidate the valuation then, once again, there is no need for the expert evidence. If it did not, then, it may be said, that is a matter the franchisees covenanted to accept, as part of the price for the benefits that they thought they might get under their respective franchise agreements.
For those reasons alone, I would refuse the leave sought. However, and more fundamentally, I must say that this does not seem to me to be a case within the principles outlined by McDonald J in Royal Insurance. On the contrary, when one looks at the report (to the extent that I have been able to do so), it seems to me that what Mr Hyman is really trying to do is tell the Court how a valuer could and should apply the concept of "goodwill" in carrying out the exercise for which cl 22.7 calls. I do not think that this is an acceptable use of expert evidence.
Thus, as I have said, I am of the opinion that the franchisees should not be given the leave that they seek to rely on expert evidence.
I turn to the question of amendment. There was no objection to the amendments sought to be made to the amended commercial list cross-claim list statement, and I have already granted leave for those amendments to be made.
In relation to the proposed amendments to the amended commercial list response, there was no objection to the proposed particulars for para 5, on the basis that the franchisees would be confined to their existing evidence. Since I have said that they should not have leave to rely on Mr Hyman's evidence, that condition is satisfied, and leave to amend para 5 as sought should be given.
The only other amendment opposed was in respect of the proposed para 11A. The first particular to which objection was taken was para B, which asserted that the plaintiff was "not willing or able to perform its obligations under clause 22.7". A compromise position was reached, apparently acceptable to both the plaintiff and the franchisees, that leave should be given to allege that the plaintiff was not ready or willing, leaving aside (and unpleaded, as I think is appropriate) the question of ability. It follows that I will give leave in respect of particular B, restricted to alleging that in the circumstances particularised the plaintiff is not ready or willing to perform.
Particular D sought to allege that specific performance should be refused as a matter of discretion because if specific performance were granted, it would affect the interests of third parties. Those third parties were, obviously enough, the various lessors of the premises from which the various franchisees conducted their business, and the various customers of the franchisees, "transfer" of whose contracts to the plaintiff was sought as part of specific performance.
I do not know what the various leases provided in respect of assignment. It may be permissible (with or without consent). It may not. Those matters will be before the Court in any event. If a decree for specific performance is made, and it proves, in respect of any given franchisee, that it cannot be performed because a particular lessor refuses to consent (and is entitled in the circumstances to do so), that franchisee would be able to seek relief from the continued operation of the decree.
Likewise, I do not know what the customer agreements say. But effectively similar considerations would seem to me to apply.
True it is specific performance of this nature would need to be conditional, and might need to be supervised by the Court. However, there is nothing in the material to indicate that any conditions would be unusual, or that their supervision would be burdensome or difficult, let alone in any practical sense impossible.
Further, it being recognised that detrimental impact on the interests of third parties is a separate ground for refusing specific performance, I think it wiser to refuse leave to permit the franchisees to rely on particular D, lest someone get the bright idea that they can raise this. That however is a tangential or ancillary consideration which supports the conclusion to which I had come already.
The final particular to which objection is taken is para F. That would allege that the making of the orders would cause hardship because it would cause the termination of the employment of about 21 people in the various franchise businesses.
The franchisees accept that this might require some further evidence. They say that they could put it on quickly. However, the plaintiff's position is difficult. It would be entitled to investigate that evidence. It might require disclosure of documents to assist it to do so. Regardless, and as a matter of practical reality, if that ground is opened up, there would likely be a loss of the hearing date. For the reasons I have given, that is undesirable.
In circumstances where there is no explanation why it has taken until now for the franchisees to realise that they might have an argument based on hardship, I do not think that either the interests of justice generally nor the requirements of s 56 of the Civil Procedure Act 2005 (NSW) suggest that the leave sought should be granted.
The consequence is that I grant leave to amend to the extent that I have indicated, but otherwise order that the notice of motion filed in court today should be dismissed. The further amended commercial list response should be filed and served by 5.00pm on 22 February 2016.
[4]
Counsel addressed on costs
The plaintiff seeks its costs of the motion. The franchisees submit that costs should be costs in the proceedings. They say that they succeeded to some extent, because they obtained leave to make some of the amendments sought.
The reality is that the major issue in contention was the expert evidence. That was relevant, as I have indicated, not only in its own right, but also in respect of one of the group of proposed amendments.
Given that the matter had to come before the Court today in any event (since the question of expert evidence was in issue) and given that the franchisees have had very little success indeed, I think that this is an appropriate case where the costs of the motion should follow the substantive event, which is that the plaintiff succeeded and the franchisees did not.
I order the applicant/defendants to pay the respondent/plaintiff's costs of the notice of motion filed in court today.
[5]
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Decision last updated: 23 February 2016