Mr Whippy Pty Ltd v Oceanwalk Pty Ltd

Court of Appeal (NSW)|2007-12-04|Before: Giles JA, Howie J, Gilbert J

CITATION: Mr Whippy Pty Ltd v Oceanwalk Pty Ltd [2008] NSWCA 8

JUDGMENT OF: Giles JA at 1; Handley AJA at 90; Howie J at 91

CATCHWORDS: Contract - master franchise agreement - option for renewal - if and only if master franchisee had been and was in full compliance with the agreement for its term - whether breach of obligation to use best endeavours to locate retail outlets - or of obligation to furnish written reports on conduct of retail outlets - agreement novated to new master franchisor - consideration of what was the relevant term - and of what was required by way of best endeavours and for timely reporting - on facts, no breaches.

Autodesk Inc v Dyason (No 2) (1993) 176 CLR 3000; Azzopardi v Tasman UEB Industries Ltd (1985) 4 NSWLR 139; Bell v Thompson (1934) 34 SR 431; B S Stillwell & Co Pty Ltd v Budget Rent-a-car System Pty Ltd (1990) VR 576; Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473; CASES CITED: Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) 59 SR 122; Hospital Products Ltd v United Surgical Corporation (1984) 156 CLR 41; Olsson v Dyson (1969) 120 CLR 365; Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641; Vickery v Woods (1952) 85 CLR 36; Waverley Municipal Council v Swain [2003] NSWCA 61; (2003) Aust Torts Rep 81-694.

PARTIES: Mr Whippy Pty Ltd - Appellant Oceanwalk Pty Ltd - Respondent

COUNSEL: A Herskope - Appellant P J Woods - Respondent

SOLICITORS: Cara Marasco and Company, Brookvale - Appellant O'Keefe Mahoney Bennett, Southport, Queensland - Respondent

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40164/07 DC 3185/05

GILES JA HANDLEY AJA HOWIE J

Tuesday 19 February 2008 MR WHIPPY PTY LTD v OCEANWALK PTY LTD Judgment 1 GILES JA: The appellant franchised the retailing in Australia of soft serve ice cream and related products. The respondent was the master franchisee for a territory in south-eastern Queensland. The master franchise expired on 20 May 2003, subject to the exercise of an option to renew it for a further 10 years. The respondent claimed to have exercised the option, but the appellant refused to recognise the renewal. 2 In proceedings in the District Court the respondent recovered $991.09 for royalty share payable prior to the expiry of the master franchise and $143,654.25 as damages for breach of contract in refusing to renew it, together with interest. The appellant appealed against the award of damages. It contended that the option had not been validly exercised because the respondent had been and was in breach of the master franchise agreement, and that the judge erred in holding to the contrary. 3 For the reasons which follow, in my opinion the option was validly exercised. The appeal should be dismissed.

The master franchise 4 The master franchise was initially granted to the respondent in May 1993, not by the appellant but by a different company then bearing the name Mr Whippy Pty Ltd. As later described, in June 2000 the appellant became the master franchisor and there was a novation of the master franchise. 5 The grant of the master franchise was by a territory agreement dated 21 May 1993. The then Mr Whippy Pty Ltd was referred to as the Company and the respondent was referred to as the Agent. 6 By cl 2.1 of the territory agreement the Company - "… hereby grants to the Agent for the Term commencing on the Commencement Date the exclusive right within the Territory:- (a) To locate retail outlets which shall be available for lease; (b) To sell Approved Products from retail outlets; (c) To seek persons desirous of selling Approved Products from retail outlets within the Territory." 7 The Term was ten years. The Commencement Date was 21 May 1993. The Territory was an area in south-east Queensland running from the New South Wales border to Loganholme at the approximately latitude of Stradbroke Island, including the Gold Coast. The Approved Products were soft serve ice cream and related products. 8 The territory agreement provided in cl 2.2 - "2.2 Renewal Subject to the provisions of this clause, the Agent shall have an option exercisable only by written notice delivered to the Company on or before the date specified in Item 6(a) of the Schedule to renew this Agreement for the Renewal Term upon and subject to the terms and conditions of this Agreement with the exception of those clauses, if any, specified in Item 8 of the Schedule if, and only if the Agent has been, throughout the Term and at the expiration of the Term still is, in full compliance with this Agreement and all other agreements between the Company and the Agent." (emphasis added) 9 The date specified in Item 6(a) of the Schedule was "A date being six (6) months prior to the expiration of the Term". The Renewal Term was ten years. I have emphasised the words critical to the proceedings. 10 In general terms, under the territory agreement the Agent as master franchisee was to locate retail outlets suitable for the sale of soft serve ice cream and related products. A procedure would then be initiated under which, if the Company agreed upon suitability, the Company would lease the premises and grant a sublease and a franchise for all the Approved Products to the Agent or to an approved nominee of the Agent, or in default to a franchisee chosen by the Company. The Agent had a responsibility to monitor and report to the Company upon the conduct of the retail outlet by the approved nominee. The Agent was remunerated by way of commission, receiving half the franchise fee paid to the Company by the approved nominee and half the royalty paid by it pursuant to the franchise agreement, or if the Agent became the franchisee and thereafter assigned the franchise half the royalty paid to the Company by the assignee. The Agent would no doubt expect also to be remunerated from its own conduct of a retail outlet as franchisee. 11 Specific obligations of the Agent were set out in cl 4 of the territory agreement. Those upon which the appellant relied on appeal for non-compliance with the territory agreement were cll 4.1(a) and 4.1(k)(iii), but the latter should be seen as part of cl 4.1(k) as a whole. The obligations were - "4.1 The Agent undertakes and agrees with the Company that he will at all times during the continuance in force of this Agreement observe and perform the terms and conditions of this Agreement and in particular:- (a) Will use his best endeavours to locate retail outlets within the Territory which shall be available for lease and which he considers suitable for the conduct of the Business; … (k) Will in respect of any retail outlet the subject of a Franchise Agreement initially entered into by an approved nominee during the Term:- (i) visit such retail outlet from time to time and as often as may reasonably be necessary to ensure the Business is being conducted therefrom in accordance with the requirements of the Operations Manual; (ii) render such assistance and advice as may be necessary to the approved nominee or his successor or permitted assign in order to ensure the continued operation of same is in accordance with the standards and policies of the Company as set forth in the Operations Manual; (iii) furnish written reports to the Company from time to time and in any event at intervals of not less than thirty (30) days specifying whether the Business is being conducted from the retail outlet in accordance with the Operations Manual and where appropriate detailing any continued failure on the part of the party conducting the Business to comply with the requirements of the Operations Manual and the Agent's opinion as to what corrective steps should be taken by the Company in connection therewith; (iv) forthwith advise the Company in writing of any matter or thing which comes to his knowledge concerning the conduct of the Business from the retail outlet which he considers is adversely affecting or likely to adversely affect the image and goodwill associated with the name Mr. Whippy." 12 The Business was defined to mean "the business of marketing and selling the Approved Products from a retail outlet". Franchise Agreement was defined to mean "the Franchise Agreement in use from time to time by the Company". Later in these reasons I return to the words "any retail outlet the subject of a Franchise Agreement initially entered into by an approved nominee during the Term", as referred to in the chapeau to cl 4.1. 13 It was common ground that the appellant became the master franchisor in place of Mr Whippy Pty Ltd. Little attention was paid in the evidence, or in the conduct of the proceedings, to how that occurred or to the resulting contractual relationship between the appellant and the respondent. It should be appreciated that the appellant did not step for all purposes into the shoes of Mr Whippy Pty Ltd. 14 In the statement of claim the respondent alleged - "5. On or about 9 June 2000, the exact date of which is known to the Defendant, [Mr Whippy Pty Ltd] assigned the said agreement to the Defendant. 6. At all material times, the Defendant, by way of conduct, agreed with the Plaintiff to be bound by the previous company's obligations under the said agreement. 7. Pursuant to clause 4 of the agreement, the Plaintiff undertook and agreed that it would at all times observe and perform the terms and conditions of the agreement and in particular: (a) use its best endeavours to locate retail outlets within its defined territory available for lease and being suitable for the conduct of the business of marketing and selling Mr Whippy brand approved products from a retail outlet (the business); …" 15 The appellant's defence responded - "5. As to paragraph 5: (1) it says that on 1 June 2000, [Mr Whippy Pty Ltd] assigned its rights under the agreement to the defendant; (2) otherwise, it denies paragraph 5. 6. It admits paragraph 6. 7. As to paragraph 7: (1) it admits paragraph 7; (2) further, it says that there were further terms and conditions of the agreement that … (c) the plaintiff would in respect of any retail outlet the subject of a franchise Agreement initially entered into by an approved nominee during the term of the agreement: [Here were reproduced paras (i)-(iv) of cl 4.1(k).]" 16 In an affidavit of Mrs Maureen Marsh, a director of the respondent, it was said baldly that Mr Stan Gordon, who was the controller of the appellant, "purchased Mr Whippy on 1 June 2000". Mrs Marsh referred to a letter advising of a "change in the ownership of the Mr Whippy business", the new owner being Grejon Pty Ltd which was to change its name to Mr Whippy Pty Ltd, and to a letter from Mr Gordon saying that his company "has purchase the Mr Whippy franchise". The former letter included - "Attached you will find two copies of the Notice of Assignment and you are requested to sign the acknowledgment at the bottom of the front page and return one copy to Stan Gordon … ." 17 In his affidavit Mr Gordon said only that in or about June 2000 Mr Whippy Pty Ltd "assigned its interest in 'the Territory Agreement' to Grejon Pty Ltd and Grejon Pty Ltd changed its name to Mr Whippy Pty Ltd". He said in oral evidence that the territory agreement was "assigned to" the appellant. 18 There was no further exploration of this in the evidence; in particular, no evidence about the notice of assignment or the acknowledgment. 19 The territory agreement provided in cl 11.5 - "The Company may assign in whole or in part its rights and obligations under this Agreement and the same shall inure to the benefit of any assignee or other legal successor to the interest of the Company and upon such assignment the Company shall not, except for any antecedent breach, be liable under this Agreement PROVIDED THAT the assignee has entered into an Agreement with the Agent to be bound by the Company's obligations under this Agreement. Within fourteen (14) days after receipt of request therefor the Agent shall execute and return to the Company a declaration (if and to the extent that it is true):- (a) Ratifying this Agreement and all other agreements between the parties … ." 20 If Mr Gordon was referring to an assignment as contemplated by this clause, there was no evidence that the appellant had entered into an agreement with the respondent to be bound by the obligations of Mr Whippy Pty Ltd under the territory agreement, or that a ratifying declaration had been executed. Acknowledgment of a notice of assignment would not have that effect. If there could have been an assignment by Mr Whippy Pty Ltd to the appellant of its rights and obligations under the territory agreement, no such assignment was proved. 21 However, there could not have been an assignment by Mr Whippy Pty Ltd to the appellant of its rights and obligations under the territory agreement. Contractual rights or benefits may be assigned, although that statement needs qualification, but not contractual obligations. Despite its language of assignment, cl 11.5 appears to recognize this by requiring an agreement between the assignee and the Agent that the assignee will be bound by the Company's obligations and ratification of the territory agreement by the Agent. It is unnecessary to consider the contractual relationship which this would have produced, since it was not shown to have happened, but any relationship would have arisen from a novation through the agreement and the ratification, rather than by an assignment of rights and obligations. 22 There could have been a novation of the territory agreement otherwise than pursuant to cl 11.5. "Novation is a transaction by which all parties to a contract agree that a new contract is substituted for the one that has already been made … Novation involves the extinguishment of one obligation and the creation of a substituted obligation in its place": Fightvision Pty Ltd v Onisforou [1999] NSWCA 323; (1999) 47 NSWLR 473 at [78], referring to the well-known judgment of Windeyer J in Olsson v Dyson (1969) 120 CLR 365. As Windeyer J explained at 388-9, the novation may be between the parties to the old contract or between them and a new party or parties, in the latter case it being necessary that the new person or persons are a party to the novated contract, and the novation is a "substituted contract". The departing party to the old contract must join in the novation, its rights and obligations being extinguished: Olsson v Dyson; Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641 at 645-6. 23 A novation may be express, or may be implied from the circumstances. Vickery v Woods (1952) 85 CLR 36 at 345 per Dixon J; Fightvision Pty Ltd v Onisforou at [78]. By the statement of claim and defence the respondent and the appellant were at one that an agreement was made between them, at least in part attributed to conduct, that the appellant would be "bound by the previous company's obligations under the agreement". This was less than novation, but it appears to have been assumed (by the reference to assignment by Mr Whippy Pty Ltd) that Mr Whippy Pty Ltd agreed to the extinguishment of the obligations under the initial territory agreement, so that there was a substituted contract between the appellant and the respondent. 24 That there was a novation of the territory agreement became common ground in the appeal. The substituted contract came into effect some time in or after June 2000. The appellant as the new Company granted to the respondent as the Agent the exclusive right to which cl 2.1 of the territory agreement referred for the future, and similarly undertook the obligations of the Company for the future. The respondent as the Agent agreed with the appellant as the Company to use its best endeavours to locate suitable retail outlets (I use shorthand for cl 4.1(a)) for the future, and similarly for other obligations of the Agent. It was necessary to work out how the terms of the territory agreement operated as terms of the substituted contract. In particular, how should cl 2.2 of the territory agreement be understood, as a provision of the substituted contract, in its reference to compliance "throughout the Term"?

The trial judge's reasons 25 On 11 November 2002 the respondent gave the appellant written notice that it wished to exercise the option to renew the territory agreement for a further 10 years. The notice was timely in accordance with cl 2.2 of the territory agreement. 26 The respondent heard nothing until, on 21 May 2003, it received a letter from the appellant dated 19 May 2003 - " RE: TERRITORY AGREEMENT 1. The current Territory Agreement, dated 21 May 1993 ("The Agreement") for a term of ten years, expires on 20 May 2003. 2. The Agreement provides for an option to renew The Agreement for a further term, which option you have sought to exercise. 3. We do not believe that all of the terms for renewal, set out in clause 2.2 of The Agreement, have been met. 4. Without going into specifics, there are several areas of concern, not the least of which are: use of best endeavours; advice to the company; meeting of obligations; conduct of stores; support, all of which, in our opinion, are well document. [sic] 5. We have, therefore, decided not to grant you the option of renewing The Agreement. 6. Would you please return to this office all documents that belong to Mr Whippy Pty Ltd, including but not limited to the Operations Manual, by no later than 30 May 2003." 27 The issue at trial was whether the exercise of the option was invalid because it was exercisable "if, and only if the Agent has been, through the Term and at the expiration of Term still is, in full compliance with this Agreement …" and, as the appellant contended, the respondent had been and was in breach of the territory agreement. Implicit in the issue was the common ground that, in accordance with Gilbert J McCaul (Aust) Pty Ltd v Pitt Club Ltd (1959) 59 SR 122 and BS Stillwell & Co Pty Ltd v Budget Rent-a-car System Pty Ltd (1990) VR 576, full compliance with the territory agreement was a condition of acceptance of the offer of renewal contained in the option in cl 2.2. That common ground remained on appeal. 28 The appellant relied at trial on breaches of cll 4.1(a), 4.1(k)(i), 4.1(k)(ii) and 4.1(k)(iii). As I have indicated, on appeal it maintained only breaches of cl 4.1(a) and 4.1(k)(iii). 29 The respondent had begun to operate a Mr Whippy retail outlet at Loganholme prior to entry into the territory agreement. In November 1993 it opened a retail outlet at Mermaid Waters. It sold that operation in June 1994. In February 1995 it opened a retail outlet at Treetops Plaza at Burleigh Waters, and in October 1995 it opened a retail outlet at Runaway Bay. It sold the Burleigh Waters operation in August 1998, the Loganholme operation in March 2000 and the Runaway Bay operation in July 2001. 30 The judge said - "As I said earlier, it is the Defendant's contention that for the agreement period between 1998 and 2003 no new Mr Whippy outlets were opened in the territory and the clear inference I was to draw from this fact was that the Plaintiff failed to use its best endeavours to locate suitable retail outlets. The Defendant took over Mr Whippy as an ongoing business in June of 2000 and in my view it is from that date to May 2003 that is the relevant period for consideration. There was no evidence before me as to what the attitude of the owner, prior to the Defendant, was in relation to clause 4.1(k)(ii) of the territory agreement." 31 The judge did not further explain his view that the relevant period was from June 2000. As appears from his findings next set out, the judge regarded the period from June 2000 as the period for consideration in relation to the alleged breaches of both cl 4.1(a) and cl 4.1(k). 32 After detailed reference to the evidence, the judge said - "A close examination of the evidence and of the witnesses have led me to the following findings of fact: a) Mr Gordon purchased the Defendant in June 2000 and as the CEO immediately sought to impose, as was his right, his particular style of running the business. b) The territory agreement involving the Plaintiff was only one of a number of such agreements in Australia that was part of the Defendant's business operation. c) The Defendant was aware of the legal basis of each territory agreement, including the agreement with the Plaintiff and in correspondence with the Plaintiff specifically refers to the agreement and certain clauses in it. d) On various occasions, up until the termination on May 20, the Defendant gave the Plaintiff less than clear directions as to the Plaintiff's role and what the Defendant expected of the Plaintiff in both locating new business opportunities and reporting on the operation of existing businesses in the territory. This resulted in considerable uncertainty in the mind of the Plaintiff evidenced by the numerous letters to the Defendant, some of which I have set out earlier, in which the Plaintiff seeks guidance from the Defendant. e) The correspondence tendered shows clearly to me that the Plaintiff continued to look for prospective sites for new business almost up until termination. f) From the time the Defendant took control of the company, Mr Gordon was sending memos and letters to the Plaintiff on how he wanted his business run. The correspondence revealed to me a Plaintiff not sure in many respects of how, as a master franchisee, it was to function, particularly as to reporting. For example, Mr Tucker was operations manager for the Defendant from February 2002 following a company restructure and he was required to visit stores in the Plaintiff's territory from time to time and on at least one occasion (May 2002) Mr Tucker advised the Plaintiff that he would attend to the 6 monthly visit to Runaway Bay. In 2001 the Defendant changed the form in which the reports were to be set out. At no stage did the [sic] Mr Gordon advise the Plaintiff that he wanted reports 'at intervals of not less than 30 days', in accordance with 4.1(k)(iii) of the contract. As set out earlier, Mr Gordon advised the Plaintiff on 2.8.01 that 'to avoid unnecessary policing' he required reports only every 6 months. In these circumstances I consider that the reporting requirements under clause 4.1(k)(ii) [sic] to have been met by the Plaintiff. g) I also find as the evidence revealed that throughout the time of the contract in which the Defendant was the owner of the business, the Plaintiff was regularly looking for new sites for the business and reporting back to the Defendant. h) I find that the Plaintiff, pursuant to clause 4.1(k)(ii) of the agreement did render assistance and provide advise [sic] as may be necessary to the Loganholme and Runaway Bay stores in accordance with the operations manual of the Defendant between January 2000 and May 2003. Mrs Marsh gave evidence that she was in regular contact with both stores and provided assistance in the running of the stores. When the franchisees of the Loganholme store ran into financial difficulties Mrs Marsh held discussions with them on how best to assist and she worked on Easter Sunday at the store on a voluntary basis. (i) I therefore conclude on the on the [sic] balance of probabilities that the letter of termination of 21.5.03 [sic] constituted a breach of contract as between the Plaintiff and Defendant and I further find, for the reasons set out, that the activities of the Plaintiff in both reporting (clause 4.1(k)(iii)) and using best endeavours to seek new business sites (clause 4.2(a)) and render assistance and advice (clause 4.1(k)(ii), was sufficient in the circumstances to bring it within the term of the agreement and not be in breach of any clause. In my view the Plaintiff throughout the term of the agreement and at the expiration on 20.5.03, had complied with, in circumstances of the guideline imposed by the Defendant, with its obligations under the territory agreement."

The grounds of appeal 33 There were two grounds of appeal - "1. The Trial Judge miscarried in the exercise of his discretion and in so doing erred in law by failing to allow the Appellant to re-open its case prior to the making of final orders in the proceeding on 1 March, 2007, in order to make submissions as to the law relating to the contractual obligation on the part of the Respondent to use its best endeavours contained in clause 4.1(a) of the Territory Agreement dated 21 May, 1993, and its application to the facts in this case which was not addressed by the parties in their submissions to the Court. 2. (a) The learned Trial Judge erred in law in confining the period for compliance contained in clause 2.2 to the period 2000-2003 notwithstanding the contractual requirement specified in Clause 2.2. (b) The Trial Judge erred in law by finding against the weight of the evidence in paragraph 49 (i) of His Honour's reasons handed down on 12 December, 2006 that the letter of termination dated 21 May 2003 from the Appellant to the Respondent constituted a breach of contract by the Appellant by reason of His Honour's findings in that paragraph, that the activities of the Respondent in both reporting and using best endeavours to seek new business sites and render assistance and advice was sufficient in the circumstances to bring the Respondent within the terms of the Territory Agreement and not be in breach of any clause."

The first ground of appeal 34 There was no point to this ground of appeal, since in maintaining the second ground of appeal there would be exposed the law concerning best endeavours and its application to the facts in the case. Scant submissions were addressed to the first ground of appeal. However, something should be said of it. 35 The judge published his reasons on 12 December 2006. He did not then enter judgment, expressly so that the parties could check his calculations and make submissions as to interest. 36 The proceedings were before his Honour on 1 March 2007, when the parties provided short minutes of orders. The transcript records the judge saying that he would "have [the short minutes] stamped, then it's just a formal document then and it'll go with my judgment". Although not in terms, orders were made in accordance with the short minutes. 37 The transcript records the appellant's solicitor then saying - "KENNY: … Your Honour a couple of days ago I had counsel in Melbourne email an outline to you in respect to re-opening the trial. Do I understand correctly that your Honour is determined not to entertain that application?" 38 The judge responded that "[t]he judgment's entered now", and to the effect that use of best endeavours had been thoroughly ventilated and "if that's a legal point that you think should now be raised the time to raise it would be in the Court of Appeal". 39 The email sent to the judge by the appellant's counsel was not provided to this Court. Whether the judge erred in declining to permit re-opening could not sensibly be determined without knowledge of what it said. 40 In any event, the application to reopen was made after publication of reasons for judgment, arguably after formal judgment, and was subject to the principles found in Autodesk Inc v Dyason (No. 2) (1993) 176 CLR 300 at 303 per Mason CJ: his Honour said that - "… It must be emphasised that the jurisdiction is not to be exercised for the purpose of re-agitating arguments already considered by the Court; nor is it to be exercised simply because the party seeking a rehearing has failed to present the argument in all its aspects or as well as it might have been put. What must emerge, in order to enliven the exercise of the jurisdiction, is that the Court has apparently proceeded according to some misapprehension of the facts or the relevant law and that this misapprehension cannot be attributed solely to the neglect or default of the party seeking the rehearing. The purpose of the jurisdiction is not to provide a backdoor method by which unsuccessful litigants can seek to re-argue their cases." 41 The appellant's submissions did not address these principles, and it is far from apparent that the exercise of the power to permit a reopening was enlivened in the present case. However, since the ground of appeal has no point, it need not be considered further.

The second ground of appeal 42 The sub-grounds may conveniently be considered together. Ground 2(b) was not well expressed. It is not an error of law to find against the weight of the evidence (see for example Azzopardi v Tasman UEB Industries Ltd (1985) 4 NSWLR 139 at 155-7 per Glass JA, Samuels JA agreeing). A ground of appeal that a finding was against the weight of the evidence has its origin in appeals against a jury's verdict, and in Bell v Thompson (1934) 34 SR 431 at 437 Jordan CJ said that it required that the evidence "so strongly preponderate in [the appellant's] favour as to lead to the conclusion that the jury, in finding for the other party, have wilfully disregarded the evidence of failed to appreciate it"; see the discussion by Spigelman CJ in Waverley Municipal Council v Swain [2003] NSWCA 61; (2003) Aust Torts Rep 81-694 at [12]-[15]. The present appeal is from the decision of a judge sitting without a jury by way of rehearing pursuant to s 75A of the Supreme Court Act 1970, not an appeal after a jury verdict pursuant to s 102, and challenge to the decision of a judge sitting without a jury is not appropriately made by a ground in those terms. The challenge to a finding or findings of fact should be more focussed than was ground 2(b). 43 The substance of the appellant's submissions was that -

(a) the judge was in error in regarding the period from June 2000 as the relevant period for consideration, and should have considered non-compliance with the territory agreement throughout the ten years from May 1993;

(b) so considered, the evidence "could only have led to" a finding that the respondent had not complied with cl 4.1(a), and on the evidence the judge "should have concluded" that the respondent had failed to comply with cl 4.1(k)(iii); and

(c) even if the relevant period was a lesser period, the evidence compelled the same conclusions. 44 It was accepted that the appellant had borne at least the evidentiary burden of making out failure to comply with the territory agreement. The parameters of the failure with which the parties should be concerned in the evidence were defined by the appellant's defence, to which reference should be made. The reference will explain the judge's statement in the passage from his reasons first set out above that the appellant contended "that for the agreement period between 1998 and 2003 no new Mr Whippy outlets were opened in the territory" (emphasis added), and is fatal to the submission that the judge should have considered non-compliance with the territory agreement throughout the ten years from May 1993. 45 The defence alleged in para 47 that the appellant "was entitled not to renew the agreement, as it [sic: the respondent] had been or was in breach of the Agreement, as set out in paragraphs 25A(1) - (10)". 46 The breach alleged in para 25A material to cl 4.1(a) of the territory agreement was - "(1) in breach of the term set out in paragraph 7(a) of the statement of claim, it failed to use its best endeavours to locate retail outlets within its territory available for lease and suitable for the conduct of the business, in the period between 1998 and 2003 ; PARTICULARS The failure is to be inferred from the fact that no new retail outlets for the business were opened in the territory between 1998 and 2003 . Further particulars will be provided after discovery." (emphasis added) 47 The breach alleged in para 25A material to cl 4.1(k)(iii) of the territory agreement was - "(9) further and in the alternative, in breach of the term set out in paragraph 7(2)(c)(iii) above, it failed to furnish written reports to the defendant from time to time and in any event at intervals of not less than 30 days specifying whether the business was being conducted from the Loganholme retail outlet in accordance with the requirements of the Operations Manual, or detailing any continued failure on the part of the party conducting the business to comply with the requirements of the Operations Manual, between June 2000 and May 2003; PARTICULARS The plaintiff did not provide any reports prior to May 2001. On 29 January 2001, the defendant faxed to the plaintiff its preferred form of the reports, and requested the plaintiff to prepare a report on the Loganholme retail outlet. On 16 May 2001, the plaintiff faxed 2 reports on the Loganholme retail outlet, dated 6 March 2001 and 10 May 2001 to the defendant. On 1 August 2001, the plaintiff faxed a report on the Loganholme retail outlet dated 27 July 2001 to the defendant. On 2 August 2001, the defendant sent a letter to the plaintiff requiring inspections to be completed in the prescribed form, and once every 6 months. No other reports than those mentioned above were provided to the defendant by the plaintiff until September 2002. A copy of each document is in the possession of the solicitors for the defendant and may be inspected by appointment. (10) further and in the alternative, in breach of the term set out in paragraph 7(2)(c)(iii) above, it failed to furnish written reports to the defendant from time to time and in any event at intervals of not less than 30 days specifying whether the business was being conducted from the Runaway Bay retail outlet in accordance with the requirements of the Operations Manual, or detailing any continued failure on the part of the party conducting the business to comply with the requirements of the Operations Manual; PARTICULARS The plaintiff did not provide any reports prior to August 2001. On 1 August 2001, the plaintiff faxed a report on the Runaway Bay retail outlet dated 1 August 2001 to the defendant. On 2 August 2001, the defendant sent a letter to the plaintiff requiring inspections to be completed in the prescribed form, and once every 6 months. No other reports than that mentioned above were provided to the defendant by the plaintiff until September 2002. A copy of each document is in the possession of the solicitors for the defendant and may be inspected by appointment." 48 According to the defence, therefore, even if cl 2.2 of the territory agreement so operated as a term of the novated contract that it was necessary that the respondent had complied with the territory agreement from 1993, in relation to cl 4.1(a) the period for consideration was only from 1998 (I will assume from the beginning of 1998 rather than the end), and in relation to cl 4.1(k)(iii) the period for consideration as to the Loganholme retail outlet was only from June 2000. The obligation under cl 4.1(k) arose only in relation to a retail outlet the subject of a franchise agreement "initially entered into by an approved nominee", that is, operated by someone other than the respondent. The Loganholme operation was sold by the respondent in March 2000, so in any event the period for consideration in relation to cl 4.1(k)(iii) could not have run from earlier than March 2000. The Runaway Bay retail outlet was sold by the respondent in July 2001, and the period for consideration as to that retail outlet could not run prior to the sale. 49 The appellant submitted that in the conduct of the proceedings these parameters, or at least the 1998 commencement in relation to cl 4.1(a), had been abandoned, because Mrs Marsh's evidence addressed what the respondent did as master franchisee from 1993 and cross-examination was permitting going to failure to use reasonable endeavours during the period prior to 1998. 50 An understanding of what had been done prior to 1998 was material to the use of best endeavours from 1998, since what was required by way of best endeavours had to be assessed in the light of experience. Mrs Marsh's evidence of what the respondent did as master franchisee from 1993 had relevance consistently with the period for consideration running only from 1998. 51 Counsel for the respondent objected to cross-examination in relation to the period prior to 1998 on the ground that the defence confined the failure to use best endeavours to 1998 and thereafter. The appellant's solicitor asserted that the relevant period was "the term of the agreement" and that the assignment to the appellant "is irrelevant in terms of the agent's obligation". This did not respond to the basis of the objection, and when the respondent's counsel reiterated the pleading basis para 25A(1) of the defence was specifically identified. The appellant's solicitor said that he would "move on". There was no ruling. The cross-examination thereafter went in part to pre-1998 reasonable endeavours, without further objection, but the rather confused cross-examination made objection difficult and the respondent's position had been stated. 52 I do not think that the respondent's conduct of the proceedings was such that it acquiesced in a widening of the allegations of breach maintained by the appellant, and the judge plainly did not understand there to have been a widening. 53 It is a separate question whether the judge erred in regarding the period from June 2000 as the relevant period for consideration. As I have said, little attention was paid in the conduct of the proceedings to the contractual relationship resulting from the appellant becoming the master franchisor in place of Mr Whippy Pty Ltd, and the judge does not appear to have been assisted on the point in submissions. As I have also said, the judge did not explain beyond the passage earlier set out his view there stated that the relevant period for consideration was from when the appellant "took over Mr Whippy as an ongoing business in June of 2000". 54 Breach of cl 4.1(k)(iii) does not involve the period prior to June 2000. On the pleadings, and substantially on the facts, because of the dates of sale of the Loganholme and Runaway Bay operations, the relevant period did not run from prior to June 2000. 55 As to breach of cl 4.1(a), it is not necessary to decide whether "throughout the Term" in cl 2.2 of the territory agreement, as a provision of the novated contract, should be understood as extending to the period from 1993. Even if it should, so allowing regard to best endeavours from the beginning of 1998, breach of cl 4.1(a) was not made out. 56 It is convenient to go separately to breach of cl 4.1(a) and breach of cl 4.1(k)(iii).

(a) Breach of clause 4.1(a) 57 In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Gibbs CJ said at 64 that "an obligation to use 'best endeavours' does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but no more". His Honour observed that it was trite to say that the meaning of particular words in a contract "must be determined in the light of the context provided by the contract as a whole and the circumstances in which it was made". The context and circumstances operate at two levels. As well as informing the meaning of the words in the contract, they are material to the content of the criterion of reasonableness. The obligation is fact-specific and, in the criterion of reasonableness, judgmental. 58 The Agent's obligation under cl 4.1(a) was directed to the particular contractual object of locating retail outlets within the Territory "which shall be available for lease and which he considers suitable for the conduct of the Business" (emphasis added). What was required of the respondent was moulded by what it considered was a retail outlet suitable for marketing and selling soft serve ice cream and related products. Suitability was not wholly objective. What the respondent was required to do in using best endeavours had to take into account, no doubt subject to considerations of good faith, its view of suitability. 59 The judge noted that Mrs Marsh wrote to Mr Gordon on 30 August 2001 summarising sites which had been investigated. From the beginning of 1998 there were six sites, and it was said that eleven shopping centres had recently been re-identified and visited. For reasons given by Mrs Marsh, the sites were not available or considered unsuitable. In September 2001 "expressions of interest" were sent to nine shopping centres, and in November 2001 to another. The judge accepted that Mrs Marsh was "active in seeking new sites [and] realistic as to prospects of success". In the latter part of 2002 the respondent notified the appellant of two potential sites, describing them as "highly desirable", although nothing came of this when the consultants to which I will later refer reported that the sites would not be ideal. A number of other letters to which the judge referred evidenced communications between the respondent and shopping centres concerning availability of sites. 60 The judge said, see (e) and (g) in the passage earlier set out, that the correspondence showed that the respondent "continued to look for prospective sites for new business almost up until termination" and from June 2000 "was regularly looking for new sites for the business and reporting back to [the appellant]". Although the judge took June 2000 as the commencement of the relevant period, the evidence on which this was based would have led to the same conclusions for the period from the beginning of 1998. 61 The substance of the appellant's case was that there were more retail outlets which the respondent would have located if it had used best endeavours. It did not call its own evidence of other available and suitable retail outlets, but relied essentially on cross-examination of Mrs Marsh. 62 As earlier noted, the cross-examination included cross-examination in part as to pre-1998 reasonable endeavours: for example, it was to Mrs Marsh that after an inquiry to Australia Fair in July 1994 she did not contact that shopping centre until November 2001. Evaluating the cross-examination requires excision of the period prior to 1998. Further, the cross-examination did not pay regard to the words in cl 4(a) of the territory agreement, "which he considers suitable for the conduct of the Business". 63 In particular, Mrs Marsh gave evidence that "[a] Mr Whippy store is considered viable in no less than a sub-regional centre or a regional centre". She explained - "A. A sub-regional - shopping centres are classified in different groups, starting from a local neighbourhood centre, going up to a larger neighbourhood centre, a small sub-regional, a larger proper sub-regional. It may have - a sub-regional shopping centre would normally contain two maybe mini discount department stores like a Best and Less. It could contain a Target, a K-Mart, mini discount stores, department stores. A regional centre would contain a full department store like a Myers or a David Jones. It could contain both, and then plus Target, K-Mart, Best and Less. Those majors - so that is basically how we classified a shopping centre." 64 Mr Gordon said that "some of our better stores work in very small little towns", but there was no challenge to Mrs Marsh's bona fides in her view of what was suitable. 65 The cross-examination was conducted through what the appellant's solicitor described as "a list of shopping centres in the territory", although the list was not put into evidence. Mrs Marsh agreed as to some of the shopping centres in the list that the respondent had not contacted the shopping centre. Sometimes its nature was left up in the air, sometimes she said to the effect that it was not the type of centre considered suitable for a Mr Whippy outlet; for example, that it was a "specialist centre" and not "the type of centre that Mr Whippy traditionally would be looking for a site in and would probably not be viable for a Mr Whippy franchise", or "a small neighbourhood centre limited to warehousing type outlets". The cross-examination was not well directed to whether the shopping centres offered retail outlets which the respondent considered suitable for the conduct of the business. 66 The appellant submitted in particular that Mrs Marsh agreed that the Paradise Centre and Pacific Fair in the Surfers Paradise area and Australia Fair at Southport were premier or large centres. The Paradise Centre was contacted in April 1994 but not thereafter; Mrs Marsh said in re-examination that that was because "[i]t was a most unviable centre for a Mr Whippy franchise. It had an extremely high rent". Pacific Fair was contacted in June 1993 and July 1994 and then not until September 2001; Mrs Marsh said there were "extensive reasons" for not contacting it, but was not asked to elaborate, and in fact the September 2001 contact was unproductive. Australia Fair I have mentioned, and the position was similar; in a letter in November 2001 advising of the contact with it Mrs Marsh said "[w]e waited on this one because it was experiencing change of ownership and management". 67 Apart from the list of shopping centres, it was put to Mrs Marsh that there were a large number of shopping strips in the territory and that she had not attempted to establish a Mr Whippy shop in any of them; she agreed as to both. However, it was not put to her, or shown, that the shopping strips were suitable, as some equivalent to a sub-regional or regional centre or otherwise, and it is plain enough that she considered that they were not. 68 It must be remembered that the question is one of using best endeavours to locate available and suitable retail outlets, not one of establishing retail outlets. The cross-examination was not attentive to endeavours to locate as distinct from success in the endeavours. For example, obtaining Mrs Marsh's agreement that a Mr Whippy outlet was not established at Australia Fair said little as to endeavours to locate an available and suitable outlet; so also obtaining her agreement that outlets of Donut King, described as having a product range very similar to Mr Whippy, were "growing in number in your territory" provided but indirect support for a failure to use best endeavours as required by cl 4(a) of the territory agreement. 69 It could not be said that the appellant's case was devoid of support in the evidence. Save as to the acknowledged premier or large centres, however, I do not think that it showed failure to use best endeavours to locate retail outlets in the shopping centres raised with Mrs Marsh, and any failure in relation to the premier or large centres was hardly brought out. It may be observed that Mrs Marsh wrote to Mr Gordon in January 2001 saying "[t]here are of course possible sites within our territory - we have simply been waiting for the tools to pursue these". From later letters, she appears to have felt constrained because Mr Gordon's "concept" of Mr Whippy was uncertain and a knowledge of his "working model" was necessary in order to assess suitability of sites. Mrs Marsh was not asked about this in the cross-examination, and it does not of itself indicate a failure to use best endeavours. 70 However, such support as the appellant could find in the evidence was severely undermined by the evidence concerning the consultants earlier mentioned. 71 In November 2001 the appellant engaged Simpson Nicoll Woods, property consultants. Potential sites were to be referred to the consultants, but as well the consultants were engaged to locate sites on the eastern seaboard, including in the Territory. A number of the potential retail outlets notified by the respondent were rejected by them as unsuitable, and Mr Gordon gave evidence to the effect that they did not find any suitable new sites (they "made no positive recommendations"). That was why the engagement was terminated in about February 2003. The fact that the consultants did not find any new sites is a formidable indication that, contrary to the appellant's case, there were not more retail outlets which the respondent should have located had it used best endeavours. 72 The appellant has not shown that the judge was in error in concluding that, for the period from June 2000, the respondent had used best endeavours as required by cl 4.1(a). On consideration of the evidence, in my opinion that conclusion was correct and holds good also for the period from the beginning of 1998.

(b) Breach of clause 4.1(k)(iii) 73 The breaches alleged were in relation to the retail outlets at Loganholme and Runaway Bay. An initial question, not raised at the trial but ventilated on appeal, is whether they were retail outlets the subject of a Franchise Agreement "initially entered into by an approved nominee" during the Term. 74 According to Mrs Marsh, "Whilst negotiating our Master Franchise Agreement with Mr Whippy, we agreed to purchase from Mr Whippy a company owned store at the Logan Hyperdome Shopping Centre for the sum of $1.00. Pursuant to the Agreement this store was not considered a new outlet, and was additional to the 3 outlets we were required to establish within 3 years". 75 Mrs Marsh said that on 20 March 2000 "we sold the Loganholme store to Michael and Fiona Camilleri (Ewcam Pty Ltd) for $200,000.00. Camilleri/Ewcam became the franchisee from this date to April 2003". While it is unclear, it seems that by a direct dealing between the appellant and Ewcam Pty Ltd a new franchise agreement and licence agreement was entered into in December 2002. The retail outlet failed under its conduct by Ewcam Pty Ltd, and from early May 2003 the operation was conducted directly by the appellant and from June 2003 by a franchisee obtained by the appellant. 76 These dealings with the Loganholme operation were not elaborated in the evidence. The territory agreement made no provision for the master franchisor to approve the purchaser from the master franchisee of an operation initially franchised to the master franchisee, let alone an operation held by the master franchisee prior to entry into the territory agreement. It may be inferred that the sale of the Loganholme operation to Ewcam Pty Ltd involved a sublease and franchise agreement between it and the original Mr Whippy Pty Ltd, and that Mr Whippy Pty Ltd considered Ewcam Pty Ltd an acceptable sublessee and franchisee, although neither this nor what happened when the appellant took over in June 2000 was explored in the evidence. 77 Again according to Mrs Marsh, on 30 October 1995 "we opened the Runaway Bay store after the proposed franchisee failed", and on 4 July 2001 "we sold the Runaway Bay store to John Wilesmith for the amount of $85,000.00. The Wilesmith franchise commenced on this date until March 2004". Mr Gordon's affidavit referred to a "lease" of the retail outlet commencing on 1 April 2002 executed by the lessor on 11 June 2004: it was agreed that the correct commencement date was 1 April 2004, and this can not have been a lease (or sublease) to Mr Wilesmith. 78 These dealings with the Runaway Bay retail outlet were also not elaborated. It may be inferred that there was a sublease and franchise agreement between the appellant and Mr Wilesmith, and that the appellant considered Mr Wilesmith an acceptable sublessee and franchisee, but again that was not explored in the evidence. 79 It seems to me strongly arguable that neither of these outlets was the subject of a Franchise Agreement "initially entered into by an approved nominee" during the Term, leaving aside any question of what was the Term following the novation in June 2000, because those words did not extend to a retail outlet initially franchised to the respondent and sold by it, and that cl 4.1(k)(iii) of the territory agreement did not apply so as to require that the respondent furnish written reports to the appellant in relation to the Business conducted from the two retail outlets. However, the respondent said that it took no issue at the trial "as to whether the new store owners of Loganholme and Runaway Bay were approved nominees as defined in the territory agreement", and that it "maintains this position" in the appeal. Accordingly, the question need not be decided. 80 Assuming that the respondent was required to furnish written reports in relation to the Business being conducted from the two retail outlets, I do not think that breach was established. 81 Clause 4.1(k)(iii) obliged the furnishing of written reports "from time to time and in any event at intervals of not less than thirty (30) days". The 30 days was the minimum interval. No maximum interval was specified; the only guide was "from time to time", and in the ordinary course it would be implied that the reports should be furnished at reasonable intervals not less than the 30 days. 82 For what was a reasonable interval regard could be had to cl 4.1(k)(i), the visits being an evident source for the information in the reports, but each visit would not necessarily have a corresponding report. Reporting was distinct from advising pursuant to cl 4.1(k)(iv), and the apparent function of the reports was to keep the Company informed and allow it to become involved in the event of continued failure to meet the requirements of the Operation Manual. However, no evidence specifically addressed the features of the conduct of the Business bearing upon what might be reasonable intervals. 83 The intervals would not necessarily be constant - it could depend on the circumstances calling for reports. There was some evidence material to what were reasonable intervals, being the appellant's own supervision of the conduct of the retail outlets and its requests for reports. 84 Mr Gordon engaged Mr Phillip Tucker in a managerial role, his duties including visiting the franchise outlets to keep in contact with franchisees "and verify whether a franchise outlet was being operated in accordance with [the appellant's] operations manual". Mr Tucker held his position from September 2000 to August 2003 and from November 2003 until 2004. In a memorandum to "all stores" in February 2002 Mr Gordon said that Mr Tucker "will ensure he visits each store at strategic times". He visited the Loganholme retail outlet "on several occasions during 2002 and 2003" and the Runaway Bay retail outlet on occasions, and reported to Mr Gordon. The evidence of frequency was less than specific; Mrs Marsh thought that Mr Tucker did a "store inspection report" about every six months, and Mr Tucker said he would provide the reports to Mr Gordon generally three to four times a year. 85 It is apparent that the reporting by the respondent was moulded by Mr Tucker's reporting. In January 2001 Mrs Marsh wrote to Mr Gordon about Loganholme, saying that she did not want to "step on Phil's toes" and did Mr Gordon want the respondent's report. The answer was yes to "help me to assess how it all works", and did not encourage continued duplication in reporting. By a letter dated 2 August 2001 headed "Re: Reports of Loganholme & Runaway Bay" Mr Gordon asked that "[i]n order not to create unnecessary 'policing'" Mrs Marsh complete her inspections in the prescribed form only once every 6 months. In May 2002 Mrs Marsh wrote about Runaway Bay, saying that "upon liaising with Phil he advised me … that he would be attending to the 6 monthly visit … which had previously been allocated to myself" and asking for a copy of Mr Tucker's report. She explained the occasion in her evidence, and Mr Tucker's evidence that he did not say he would do a report for Mrs Marsh left the fact that he was reporting material to what was a reasonable interval for the respondent's reports. More generally, when asked in cross-examination why she had not provided a report as to the Loganholme retail outlet between March 2000 and March 2001 Mrs Marsh said that Mr Gordon "had a field operations officer and a Queensland support manager that did those jobs", and a little later that she knew that Mr Tucker "was attending to the store inspection reports on a regular basis". 86 As to the Loganholme retail outlet, reports were provided by the respondent dated 6 March 2001, 10 May 2001, 27 July 2001, 28 November 2001, 9 August 2002, 12 September 2002 and 5 December 2002. A report by Mr Tucker to Mr Gordon dated 16 May 2001 was in evidence, but there must have been a number of other reports, Mr Tucker's visits in 2002 and 2003 broadly covered the period of lesser reporting by the respondent, the end of 2002 reports (in the form of operational reviews) being at the specific request of Mr Gordon because Mr Tucker was said to be about to leave; when he did not, Mrs Marsh asked whether the respondent should still do those reports, and Mr Gordon said yes. 87 As to the Runaway Bay retail outlet, reports were provided by the respondent dated 1 August 2001, 2 August 2001 and 21 August 2002, 15 October 2002, 19 November 2002 and 10 December 2002. Mr Tucker's visits again broadly covered the period of lesser reporting, and the 2002 reports were again at Mr Gordon's specific request. 88 The appellant's case was not that the respondent's reports were inadequate in content, but that there were not enough of them. The measure of reasonable intervals was not the 6 months in Mr Gordon's letter of 2 August 2001, either contractually or as a result of the evidence, and as I have indicated there was no evidence of what reporting intervals were necessary for proper exercise by the appellant of overall supervision. It is not irrelevant to reasonable intervals that there was no significant complaint by the appellant, until the letter of 19 May 2003 and then only in the most general terms, that the respondent had not complied with cl 4.1(k)(iii). The evidence was not in a particularly satisfactory state. In my opinion, it did not establish that in the circumstances the intervals between reports were unreasonable so that the reporting requirement of cl 4.1(k)(iii) of the territory agreement were not met.

The result 89 I propose that the appeal be dismissed with costs. 90 HANDLEY AJA: I agree with Giles JA 91 HOWIE J: I agree with Giles JA. **********

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Judgment (22 paragraphs)

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Cases Cited (10)

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