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[2025] NSWCA 196
mixed. Appeal allowed in part. The orders dated 17 October 2024 were set aside. A retrial before a different judge was directed on whether the Board breached cl 4.7 by refusing renewal on 20 July 2023 and, if...
The Court of Appeal did not decide whether Netdeen was ultimately entitled to refuse renewal. It clarified that cl 4.7 required an honestly and reasonably held opinion, based on grounds connected to Lindfield’s performance, that renewal was not in the specified parties’ best interests, and that those grounds had to be the substantial reason for refusal. The trial judge had not made sufficiently clear findings on whether Netdeen proved those requirements, and the Court could not resolve the credibility issues itself. The expert valuation reports were admissible, but the $20 million damages assessment was inadequately reasoned. The case was sent back for a retrial on the contractual refusal and, if necessary, damages. The unconscionability claim was not remitted because it added no useful separate issue on the way it had been pleaded and decided.
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Netdeen Pty Ltd, trading as GJ Gardner Homes, operated a three-tier home-building franchise model: Netdeen as franchisor, master franchisees, and local sub-franchisees. Lindfield NSW Pty Ltd held the master franchise for New South Wales and the ACT. Their Master Franchise Agreement (MFA), dated 1 July 2014, ran for 10 years and gave Lindfield an option for a further 10-year term, subject to conditions including cl 4.7 [7]-[8], [12], [16].
Clause 4.7 allowed Netdeen to refuse renewal, despite Lindfield otherwise being entitled to exercise the option, where there were grounds honestly and reasonably held that renewal would not be in the best interests of Netdeen and other GJ Gardner Homes Master Franchisees and/or Sub-Franchisees. The clause listed factors that could be considered, including Lindfield’s market share, servicing ability, performance and support for the network [16].
From 2019, Netdeen obtained advice recommending a transition away from master franchising to a direct model. Its internal and external materials supported what the judgment calls “de-mastering” [19]-[25]. Lindfield exercised the renewal option on 3 July 2023. Netdeen sent a document described as its current Master Franchise Agreement on 6 July. The Board met on 20 July to consider renewal and refused it. Netdeen notified Lindfield on 24 July [26]-[32].
Lindfield sued, alleging that Netdeen had improperly refused renewal and acted unconscionably under s 21 of the Australian Consumer Law. The primary judge found in Lindfield’s favour and awarded $20 million [1]. On appeal, the Court of Appeal held that the construction of cl 4.7 was wrong, the findings on whether it had been breached were inadequate, and the damages assessment was not sustainable. It nevertheless rejected several other challenges, including the attack on the admissibility of Lindfield’s expert valuation reports. The appeal was allowed in part, with a retrial ordered on contractual liability and damages if liability were established [6], [233]-[235].
The central task was to interpret the words of cl 4.7 in the context of the MFA. The Court did not accept Lindfield’s argument that Netdeen could refuse renewal only if doing so served the interests of the franchise system as a whole, or the interests of Sub-Franchisees alone. It considered the clause’s language naturally allowed Netdeen to consider its own interests together with the interests of the other specified groups [64]-[65].
The Court identified three requirements. First, Netdeen had to form an opinion that renewal would not be in the relevant parties’ best interests. Secondly, the opinion had to rest on grounds honestly and reasonably held by the decision-maker, here the Board. Thirdly, those grounds had to be the substantial reason for refusing renewal [66]. The clause allowed the Board to compare renewal with a direct model. That comparison did not automatically invalidate a refusal [67].
But the power was not unlimited. The clause’s listed performance considerations, alongside its reference to other matters reasonably taken into account, indicated that the decision had to be connected to Lindfield’s performance as master franchisee. The Court said Netdeen could not properly rely on matters unrelated to that performance [68]. De-mastering could be relevant in the setting of a decision based on qualifying grounds, but could not itself serve as an extraneous substantial purpose for using cl 4.7 to end the master-franchise arrangement [69]-[72].
The primary judge’s alternative findings did not resolve the relevant questions. The Court found that the primary judge had not clearly determined whether the Board genuinely concluded that renewal was contrary to the relevant interests, whether the grounds were honestly and reasonably held, or whether they were the substantial reason for refusal [78]-[80]. The primary judge had made adverse credibility observations about key witnesses but had not made clear how those observations affected his conclusions about the Board’s decision [80].
The Court therefore did not make substitute findings. The issue depended on the whole evidentiary record, including oral evidence and credibility assessments, and the absence of a Board minute made the evidence of individual directors particularly important [80]-[83]. It also held that Netdeen bore the onus of establishing the conditions that qualified Lindfield’s renewal right [84]. A retrial was necessary to decide whether Netdeen discharged that onus [233].
The Court reached a different result on unconscionability. It examined how the claim had been pleaded and run, and identified the primary judge’s key reasoning as the finding that Netdeen had engaged in “sharp practice” by deceiving Lindfield into thinking renewal remained a real possibility [115]-[120]. That reasoning could not be maintained alongside the primary judge’s finding that he could not exclude the possibility of genuine consideration at the Board meeting. If Netdeen complied with cl 4.7, renewal remained a possibility until the Board made its decision [120]-[122]. The contractual and statutory claims therefore stood or fell together on the case presented, and the statutory claim would add nothing if the contract claim succeeded [122], [130], [234].
The damages award also failed. The primary judge criticised Mr Potter’s methodology without identifying which aspects were criticised or how they affected the final valuation. He then relied on an approach based on a business “multiple” that Mr Ross had described as a cross-check, not as the suitable primary method for valuing the lost renewal opportunity [215]-[226]. The judgment also identified an error in using a pre-tax EBIT figure without accounting for tax [228]. The Court considered that the damages question had to be reconsidered if liability were established [233].
The Court did not announce a general new rule for all franchise renewal clauses. Its decision turns on the particular language and context of this MFA. Before the appeal, the primary judge had treated cl 4.7 as requiring consideration of Lindfield’s own best interests. The Court of Appeal rejected that construction: the clause did not require Netdeen to take Lindfield’s interests into account [36], [64]-[66].
The Court’s construction instead gives effect to the specific contractual requirements. The franchisor’s opinion had to concern the interests identified by the clause; be supported by grounds honestly and reasonably held; and be substantially based on those grounds. In this agreement, the grounds could not be unrelated to Lindfield’s performance as master franchisee [66]-[70]. The Court also cautioned against treating a commercial purpose attributed to a contract as a substitute for construing its actual terms [70].
The judgment refers by analogy to Stirling v Maitland, where the stated principle concerns a party not putting an end, by its own act, to a state of affairs necessary for an arrangement to operate [71]. The Court said the analogy added little beyond the proper construction of cl 4.7 itself [72]. It also noted that neither party relied on an implied duty of contractual good faith or reasonableness to resolve the cl 4.7 issue [73].
On unconscionability, the judgment does not hold that a valid exercise of a contractual right can never contravene the ACL. It expressly accepts that unconscionable conduct can be established notwithstanding the valid exercise of a right [122]. Its conclusion is narrower: on the pleadings, findings and damages case before it, the identified statutory claim could not usefully be separated from the unresolved contractual issue [115]-[124], [130]-[153].
On expert evidence, the Court confirms the distinction between admissibility and weight. An expert opinion does not become inadmissible merely because some material used in forming it would not itself be admissible to prove the truth of its contents [203]-[207]. Whether that material makes the opinion less persuasive remains a matter for evaluating weight. The Court applied that distinction to a commercial valuation based on industry forecasts [208]-[213].
At [66], the Court says cl 4.7 requires “three things”. In plain English, the Board had to reach the specified opinion, have honest and reasonable grounds for it, and actually refuse renewal substantially because of those grounds. A decision-maker’s general preference for a different business model would not, by itself, answer those requirements.
At [68], the Court says Netdeen could not properly rely on “matters unrelated to the performance of Lindfield under the MFA”. This means the wide wording permitting other reasonable considerations did not make every corporate objective relevant. The grounds still had to connect to Lindfield’s performance as master franchisee and the impact of that performance on the interests named in the clause.
At [79], the Court says the primary judge “failed to resolve” whether Netdeen proved that cl 4.7 was satisfied. The appellate court was not saying the evidence established either side’s position. It was saying the trial judgment did not decide the controlling factual question clearly enough for the appeal court to determine it.
At [84], the Court explains why Netdeen carried the onus. The conditions in cl 4.7 qualified Lindfield’s contractual right to renewal, so Netdeen had to establish that those conditions were met if it relied on the refusal power.
At [203], the Court states that an expert opinion “does not need to be based on admissible evidence”. In context, that does not make the source material conclusive proof of its contents. It means the expert’s reliance on that material does not automatically make the expert opinion inadmissible. The material can still affect the weight given to the opinion.
At [217], the Court identifies why the damages reasoning was insufficient: the primary judge had not identified the criticisms or assessed their significance. In plain English, a court dealing with several disputed valuation assumptions should explain which assumptions it accepts and how those choices affect the result, rather than simply state that the report is open to criticism.
At [234], the Court says there was “no utility” in remitting the unconscionability issue. It did not mean that s 21 can never apply in a contractual dispute. It meant that this particular pleaded claim, on the findings and damages sought, added no separate practical issue to the retrial on cl 4.7.
This judgment is most directly relevant where a contract gives one party a renewal option but reserves a power to refuse renewal on specified grounds. The clause’s exact language matters. Here, the relevant wording named whose best interests were to be considered and required grounds “honestly and reasonably held” [16], [66].
It is also relevant where the party exercising the power has a wider organisational strategy that could explain the decision. A strategy such as moving to a direct model is not automatically excluded from consideration. The question is whether the contractual requirements were met and whether the qualifying grounds, rather than an extraneous purpose, were the substantial reason for the particular refusal [67]-[72].
For litigators, the judgment highlights the importance of clear findings on each part of a contractual test. Where a collective decision-maker has no formal minutes, the evidence about the decision-making process, individual members’ reasons, internal reports and oral evidence may become central [80]-[83]. Where credibility findings are made, the trial reasons need to make clear how they affect the ultimate conclusions.
The evidentiary reasoning may be relevant when an expert valuation uses industry publications, forecasts or other source material. The judgment distinguishes the admissibility of the expert opinion from the admissibility of the source material for proving the truth of every statement in it. The expert’s expertise, the purpose for which the material is used, and the reliability of the resulting opinion remain important to weight [203]-[213].
Finally, the damages discussion matters in complex commercial loss cases where the valuation uses multiple assumptions. The judgment emphasises the need to identify disputed inputs, decide which are sound, and explain their effect on the calculation [217]-[228].
The judgment is dated 28 August 2025. The supplied judgment does not identify any later court decision applying or interpreting Netdeen v Lindfield. It is therefore not possible, on this material, to describe later judicial treatment of this decision.
The Court itself considered AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86 in supplementary submissions. It regarded that decision as having very limited relevance to this dispute because the contractual renewal provisions were materially different [149]-[152]. It did not treat AHG as controlling the construction of cl 4.7.
For the contractual construction, the Court cited The J&P Marlow (No 2) Pty Ltd v Hayes and Carr v JA Berriman Pty Ltd on construing contractual terms in context and not permitting a discretion to be used for a substantial purpose extraneous to the contract [70]. It used Stirling v Maitland as an analogy but said it added little to the conclusion reached from the MFA itself [71]-[72].
For appellate fact-finding, it applied the approach in Warren v Coombes while explaining why credibility-dependent findings and unclear trial reasons prevented the Court from resolving the issue itself [231]-[232]. For expert evidence, it applied the principles discussed in Bodney v Bennell and Dasreef v Hawchar [203]-[207].
The principal unresolved question is whether Netdeen actually satisfied cl 4.7. The Court did not decide whether the Board genuinely formed the required opinion, whether its grounds were honestly and reasonably held, or whether those grounds were the substantial reason for refusing renewal. Those questions were expressly left for retrial [78]-[86], [233].
The retrial must also determine the amount of damages, but only if breach is established. The Court did not set a replacement figure or decide which valuation inputs should be adopted. It explained why the previous $20 million assessment could not stand and identified the need to engage with contested assumptions and the appropriate valuation method [215]-[228].
The judgment also leaves open, in a broader sense, how earlier representations or other conduct might affect an ACL s 21 assessment in a different case. The Court acknowledged that earlier deception may in some circumstances influence whether later non-renewal is unconscionable, while finding that the case as presented did not establish that connection [123]-[124].
The Court did not decide the general limits of contractual renewal discretions beyond the construction of this MFA. Its reasons stress the actual language of cl 4.7, including the specified interests and the connection to Lindfield’s performance. Different contractual wording could raise different questions.
This is general legal information, not legal advice. Zoe can make mistakes. Before acting on this, relying on it, or using any draft, have it checked by a qualified Australian lawyer.
Source: NSW Caselaw (www.caselaw.nsw.gov.au). Converted to plain text by ZoeLaw. Not the official version.
Medium Neutral Citation: Netdeen Pty Ltd t/as GJ Gardner Homes v Lindfield NSW Pty Ltd [2025] NSWCA 196
Hearing dates: 7 to 9 May 2025, further submissions on 28 July and 4 August 2025
Date of orders: 28 August 2025
Decision date: 28 August 2025
Before: Stern JA; Ball JA; Griffiths AJA
Decision: (1) The appeal be allowed in part.
(2) The orders dated 17 October 2024 be set aside.
(3) Direct that there be a retrial limited to determining:
(a) whether the Board breached cl 4.7 of the Master Franchise Agreement dated 1 July 2014 by its decision dated 20 July 2023 not to renew the Master Franchise Agreement; and
(b) the quantum of any damages to be awarded if that breach is established.
(4) Within 21 days hereof, the parties should seek to agree costs and any other necessary orders. If agreement cannot be reached, each party should within that time file and serve an outline of written submissions not exceeding 10 pages in length in support of their respective positions.
(5) Final orders will be made on the papers and without a further hearing.
Catchwords: CONTRACTS — master franchise agreement — renewal clause — construction of clause permitting franchisor to decline renewal of agreement — where franchisor declined request for renewal by master franchisee — whether decision to decline renewal properly made — whether franchisor had to consider best interests of master franchisee in declining renewal — whether non-renewal decision based on grounds “honestly and reasonably held” — findings by primary judge inadequate — inadequate findings unable to be cured on appeal — retrial necessary
CONTRACTS — repudiation — whether master franchisee repudiated agreement by establishing competitor business after franchisor refused renewal — no repudiation
CONSUMER LAW — statutory unconscionable conduct under s 21 of the Australian Consumer Law — non-renewal alleged to be unconscionable — finding of unconscionable conduct by primary judge — where finding of unconscionable conduct necessarily reliant on correct construction of non-renewal clause — where primary judge erroneously construed non-renewal clause — where success on argument that renewal was improperly refused would give rise to same relief as success on unconscionable conduct — no utility in remitting issue
EVIDENCE — expert evidence — admission of expert reports — valuation evidence — where expert relied on reports from industry bodies in drafting expert valuation report — reports of industry bodies admissible under s 60 of the Evidence Act 1995 (NSW) — reliance on industry reports permissible in circumstances — no error in admitting expert reports
DAMAGES — quantum of damages — valuation methodology — where primary judge criticised valuation evidence at a high level but did not identify specific errors in approach taken by expert — approach that should be taken in complex damages calculations that depend on multiple assumptions — finding on damages cannot be supported — error established — question of damages to be remitted in retrial
Legislation Cited: Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law, ss 21, 22
Competition and Consumer (Industry Codes—Franchising) Regulations 2014 (Cth), Sch 1
Evidence Act 1995 (NSW), ss 55, 56, 59, 60, 76, 79, 135
Retail Leases Act 1994 (NSW), s 62B
Supreme Court Act 1970 (NSW), s 74A
Uniform Civil Procedure Rules 2005 (NSW), r 51.53
Cases Cited: Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187; 399 ALR 302
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd (2023) 303 FCR 479; [2023] FCA 1022
AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Bodney v Bennell (2008) 167 FCR 84; [2008] FCAFC 63
Burger King Corp v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187
Cambridge v Anastasopoulos [2012] NSWCA 405
Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; [1953] HCA 31
Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21
Fink v Fink (1946) 74 CLR 127; [1946] HCA 54
Fox v Percy (2003) 214 CLR 118; [2003] HCA 22
Fuller v Avichem Pty Ltd (t/as Adkins Building & Hardware) [2019] NSWCA 305
Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15; 356 ALR 440
Jenyns v Public Curator (Qld) (1953) 90 CLR 113; [1953] HCA 2
Johnson v Perez (1988) 166 CLR 351; [1988] HCA 64
Lee v Lee (2019) 266 CLR 129; [2019] HCA 28
Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as GJ Gardner Homes [2024] NSWSC 937
Lindfield NSW Pty Ltd v Netdeen Pty Ltd trading as GJ Gardner Homes (No 2) [2024] NSWSC 982
Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) [2024] NSWSC 1305
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305
Mal Owen Consulting Pty Ltd v Ashcroft (2018) 97 NSWLR 1163; [2018] NSWCA 135
Malone v Queensland (No 3) [2022] FCA 827
NSW Rifle Association Inc v Commonwealth [2012] NSWSC 818; 293 ALR 158
Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344
Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27; 419 ALR 30
PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Saltalamacchia v Zamagias [2024] NSWCA 184
Searle v Commonwealth of Australia (2019) 100 NSWLR 55; [2019] NSWCA 127
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4
Stirling v Maitland (1864) 5 B & S 840; 122 ER 1043
The J&P Marlow (No 2) Pty Ltd v Hayes (2023) 112 NSWLR 29; [2023] NSWCA 117
Tok v Rashazar [2025] NSWCA 94
Wardle v Agricultural and Rural Finance Pty Ltd; Agricultural and Rural Finance Pty Limited v Brakatselos [2012] NSWCA 107
Warren v Coombes (1979) 142 CLR 531; [1979] HCA 9
Warringah Shire Council v Pittwater Provisional Council (1992) 26 NSWLR 491
Texts Cited: Hodge M Malek, Phipson on Evidence (20th ed, 2024, Sweet & Maxwell)
Category: Principal judgment
Parties: Netdeen Pty Ltd trading as GJ Gardner Homes (Appellant)
Lindfield NSW Pty Ltd (Respondent)
Representation: Counsel:
S Couper KC and JV Gooley (Appellant)
NC Hutley SC, TD Castle SC and D Levi (Respondent)
Solicitors:
Thomson Geer (Appellant)
Addisons (Respondent)
File Number(s): 2024/00392632
Publication restriction: Nil
[This headnote is not to be read as part of the judgment]
The appellant, Netdeen Pty Ltd (trading as GJ Gardner Homes) (Netdeen), carried on a homebuilding business through a master franchise model. The structure had three layers, comprising Netdeen as Franchisor; a second tier with entities called Master Franchisees; and a third tier involving Sub‑Franchisees, being small residential building firms using the banner of GJ Gardner Homes and who were supported by their Master Franchisee.
On 1 July 2014, Netdeen entered into a Master Franchise Agreement (MFA), with the respondent, Lindfield NSW Pty Ltd (Lindfield) as Master Franchisee operating in NSW and the ACT. The MFA was for a term of 10 years, with a right to renew for a further 10 years on the terms of Netdeen’s then current Master Franchise Agreement. Clause 4.7 of the MFA permitted Netdeen to refuse Lindfield’s request to renew the MFA, upon grounds, honestly and reasonably held, that renewal of the Master Franchise “would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-Franchisees”.
In November 2019, on Netdeen’s instructions, their solicitors commissioned the reports of two experts in the franchising industry to review the GJ Gardner Group structure and operations. Both reports recommended that Netdeen exit from the master franchising model and move to a direct model (de-mastering). Subsequently, in May 2020, Netdeen’s Chief Operating Officer was asked to prepare a report identifying recommendations for Netdeen (the COO report). From that time, Netdeen took various steps towards de-mastering, including attempting (unsuccessfully) to negotiate early termination of the MFA with Lindfield, and commissioning further reports from the same franchising experts.
On 3 July 2023, Lindfield gave Netdeen a renewal notice under cl 4.3 of the MFA exercising its option to renew the MFA for a period of 10 years. Three days later, Netdeen sent Lindfield what was described as the “current Master Franchise Agreement”. Having circulated the COO report to the Netdeen Board, on 20 July 2023 Netdeen convened a special Board meeting for the purpose of considering Lindfield’s exercise of the option to renew the MFA. On 24 July 2023, Netdeen sent a letter to Lindfield confirming that the outcome of the Board meeting was to refuse to renew the MFA.
Lindfield commenced these proceedings on 26 July 2023, claiming that Netdeen improperly exercised its right to refuse renewal of the MFA under cl 4.7 because its refusal was driven by its desire to move to a direct model, and that the decision to refuse renewal amounted to unconscionable conduct in contravention of the Australian Consumer Law (ACL).
In November 2023, Mr Hope, the controlling mind of Lindfield, formed a new building group, Wattle Court. Two former GJ Gardner Homes Sub-Franchisees ceased being GJ Gardner Homes Sub-Franchisees and commenced trading as Wattle Court franchisees. On 27 May 2024, Netdeen served a notice of termination of the MFA on Lindfield and took an assignment of the various franchise agreements between Lindfield and the Sub-Franchisees.
The primary judge held that there was an implied term in the MFA to the effect that Netdeen was required to consider the best interests of Master Franchisees, i.e. Lindfield, in exercising its rights under cl 4.7. As Netdeen did not suggest it had taken Lindfield’s best interests into account on the decision not to renew the MFA, the primary judge concluded that it necessarily followed that Lindfield succeeded in establishing liability. His Honour further found that Netdeen had deceived Mr Hope into believing that renewal was a real possibility when it was not, and that Netdeen’s conduct in all the circumstances amounted to unconscionable conduct in contravention of s 21 the ACL. His Honour awarded Lindfield damages of $20 million in respect of both claims.
Netdeen challenged both findings on liability on appeal. Additionally, Netdeen contended that the primary judge erred by: finding Netdeen breached cl 4.6 of the MFA by offering renewal terms on terms other than the then current master franchising agreement; not finding that Mr Hope’s establishment of Wattle Court amounted to repudiation of the MFA; admitting the expert valuation reports of Mr Potter (an expert Chartered Accountant retained by Lindfield); and in his assessment of damages.
The Court Held (Stern JA, Ball JA and Griffiths AJA) allowing the appeal in part and ordering a retrial to determine whether cl 4.7 had been breached and the quantum of damages to be awarded if breach is established:
As to the proper construction of cl 4.7:
(1) The primary judge’s construction of cl 4.7 was erroneous. Further, neither party’s construction of cl 4.7 was wholly correct. Properly construed, cl 4.7 requires three things. First, that Netdeen form an opinion that renewal would not be in the best interests of Netdeen in its capacity as Franchisor and other GJ Gardner Homes Master Franchisees and/or Sub-Franchisees for the reasons set out in cl 4.7. Secondly, that the opinion be based on “grounds” that are honestly and reasonably held by the entity making the decision to refuse renewal, here the Netdeen Board. Thirdly, that those grounds are the substantial reason for the refusal to renew. Provided those requirements are met, Netdeen was entitled to refuse renewal: [66]-[69].
The J&P Marlow (No 2) Pty Ltd v Joseph Hayes [2023] NSWCA 117; Stirling v Maitland (1864) 5 B & S 840; 122 ER 1043, considered. Carr v JA Berriman Pty Ltd (1953) 89 CLR 327; [1953] HCA 31; NSW Rifle Association Inc v Commonwealth [2012] NSWSC 818; 293 ALR 158, cited.
(2) The primary judge did not make clear findings on whether Netdeen had discharged its onus of proving that the substantial reason for non-renewal was Lindfield’s performance rather than its desire to implement the de-mastering policy. Those findings could not be made on appeal because they depended, among other things, on whether the evidence of the directors of Netdeen should be accepted on the issue, and the primary judge’s findings on that question were inconclusive. Accordingly, there would need to be a retrial on that issue: [78]-[80].
As to whether the primary judge erred in finding that Netdeen breached cl 4.6:
(3) The primary judge did not err in finding that cl 4.6 had been breached. The terms of the “then current MFA” given by Netdeen to Lindfield were never truly operative and could not properly be described as a “current” Master Franchise Agreement. That is so because when the parties entered into the new Master Franchise Agreement for Victoria/Tasmania (which was said by Lindfield to be the then current form of the agreement) they also entered into a deed of relinquishment of that agreement. In addition, the agreement sent to Lindfield contained terms that were substantially different from the terms of that agreement: [97]-[98].
As to statutory unconscionable conduct:
(4) If Lindfield succeeded in its claim that Netdeen had breached cl 4.7 of the MFA, the unconscionability claim added nothing because the damages claimed in respect of both causes of action were the same. On the other hand, if the true position was that Netdeen was entitled to refuse renewal because it had satisfied the requirements of cl 4.7, given the primary judge’s finding that Netdeen did not make a final decision whether to renew or not until the Board meeting on 20 July 2023, the unconscionability claim must fail. Accordingly, there was no utility in remitting the unconscionability claim: [111]-[122], [153], [233].
Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344, cited.
As to whether Lindfield repudiated the MFA by establishing Wattle Court:
(5) Lindfield did not repudiate the MFA by Mr Hope establishing Wattle Court. Mr Hope set up Wattle Court after he had sought to exercise the renewal option in the MFA and after Netdeen had refused renewal. By that time, any loss arising from Netdeen’s breach of cl 4.7 of the MFA (if there was one) had crystallised: [161]-[162].
As to damages and the admissibility of Mr Potter’s expert reports:
(6) The primary judge was correct to admit Mr Potter’s reports. There was no requirement that to be admissible an expert’s report must be based on admissible evidence. The selection of appropriate data to rely on and the way in which that data was to be used in projecting Lindfield’s future cash flows fell within Mr Potter’s expertise: [202]-[215], [209]-[212].
Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21; Bodney v Bennell (2008) 167 FCR 84; [2008] FCAFC 63, considered. Malone v Queensland (No 3) [2022] FCA 827; Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305*;* Cambridge v Anastasopoulos [2012] NSWCA 405, cited.
(7) The primary judge erred in his assessment of damages. The primary judge’s observation that Mr Potter’s methodology and some conclusions were “certainly open to criticism” does not shed any light on which aspects of Mr Potter’s report were open to such criticisms. The primary judge did not conduct any analysis as to the implications of the (unspecified) respects in which he appeared to have found that Mr Potter’s methodology and conclusions were open to criticism. Consequently, it is not possible to form any view on the significance of those criticisms, if any, for Mr Potter’s valuation. In circumstances where the primary judge made no attempt to articulate the correct integers that were in contest, his finding regarding the quantum of damages cannot stand: [215]-[217].
Fink v Fink (1946) 74 CLR 127; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4; Mal Owen Consulting Pty Ltd v Ashcroft (2018) 97 NSWLR 1163; [2018] NSWCA 135; Searle v Commonwealth of Australia (2019) 100 NSWLR 55; [2019] NSWCA 127, cited.
HEADNOTE
TABLE OF CONTENTS
JUDGMENT
Background
The primary judgments
Construction of cl 4.7 of the MFA
Breach of cl 4.7 of the MFA
Statutory unconscionability
Wattle Court
Damages and Mr Potter’s reports
Issue 1: The proper construction of cl 4.7 of the MFA
Issue 2: Did the primary judge find that Netdeen refused to renew the MFA upon grounds which it honestly and reasonably held that it was not in the best interests of Netdeen and the Sub-Franchisees to renew the MFA and if not, should this court make that finding?
Issue 3: Non-compliance with cl 4.6 and provision of the “then current standard Master Franchise Agreement”
Issue 4: ACL unconscionable conduct
Issue 5: The Wattle Court Homes venture
Issue 6: Damages and admissibility of the Potter reports
Admissibility of Mr Potter’s two expert reports
Quantification of Lindfield’s loss
Issue 7: Should any aspect of the matter be remitted?
Conclusion
THE COURT: The central issue in this appeal is whether the appellant, Netdeen Pty Ltd trading as GJ Gardner Homes (Netdeen), the Franchisor under a national home building franchise known as GJ Gardner Homes, was entitled to refuse to renew a Master Franchise for New South Wales and the Australian Capital Territory granted to the respondent, Lindfield NSW Pty Ltd (Lindfield), under a Master Franchise Agreement entered into on 1 July 2014 (MFA). Related issues arise as to whether the primary judge erred in his findings as to unconscionability, repudiation of the MFA, the admissibility of expert valuation reports of Mr Michael Potter (an expert chartered accountant retained by Lindfield) and in the assessment of damages. The primary judge, Elkaim AJ, found that in refusing to renew the Master Franchise Netdeen was in breach of the MFA and acted unconscionably contrary to s 21 of the Australian Consumer Law (ACL), being Sch 2 of the Competition and Consumer Act 2010 (Cth), and awarded Lindfield damages of $20 million and costs.
The appeal stems from three judgments by the primary judge. They are reported as Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as GJ Gardner Homes [2024] NSWSC 937 (PJ1); Lindfield NSW Pty Ltd v Netdeen Pty Ltd trading as GJ Gardner Homes (No 2) [2024] NSWSC 982 (PJ2) and Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3) [2024] NSWSC 1305 (PJ3). In the first of those judgments, the primary judge permitted Netdeen to amend its pleading so as to raise an alternative claim for damages arising from the termination of the MFA. The second judgment dealt with the admissibility of Mr Potter’s reports. The third judgment dealt substantively with Lindfield’s claims against Netdeen. It is the key judgment for the purposes of this appeal.
The notice of appeal raises no less than 41 grounds of appeal. The amended notice of contention is also extensive. The hearing of the appeal occupied three days.
The issues on appeal fall broadly into the following categories:
The proper construction of cl 4.7 of the MFA, which places limits on the right of renewal.
The findings the primary judge made, or failed to make, concerning whether the requirements of cl 4.7 of the MFA were satisfied by Netdeen, and whether findings on that issue can be made on appeal.
Whether the primary judge erred in finding that Netdeen breached cl 4.6 of the MFA by offering renewal terms on something other than the then current master franchising agreement.
Whether Netdeen acted unconscionably in breach of s 21 of the ACL, whether for the reasons relied upon by the primary judge or as contended in the amended notice of contention.
In 1995 Netdeen was incorporated as part of the structure for the franchising of the business that became known as GJ Gardner Homes previously set up by Mr Greg Gardner. The structure had three layers, comprising Netdeen as Franchisor; a second tier with entities called Master Franchisees; and a third tier involving Sub-Franchisees, being small residential building firms using the banner of GJ Gardner Homes and who were supported by their Master Franchisee.
Lindfield and Netdeen first entered into a master franchise agreement in November 2005. It covered the combined areas of NSW and ACT and was for a term of 10 years.
Prior to entering into the MFA, there were some negotiations between the parties. In particular, after a draft of the MFA was provided to Lindfield on 3 April 2014, Mr Matthew Hope of Lindfield responded by email to Mr Peter Love of Netdeen saying:
“The first point to discuss will be the fact that there is no further renewal term in the renewal agreement???
Im [sic] not sure why this has been done as when I first signed the documents with Darren I was told that renewals are always done as a rolling 10 + 10 agreement. A rolling renewal has always been done with franchisees.
I am not going to waste any more time on this with valuers, banks and lawyers if you expect me to take on a debt for 10 years and once I finally have it paid off that I will have no business to continue.”
“I can’t understand why a renewal term would not be included. This doesn’t give you any extra security and only serves to piss off the people making money for you. If you ever wanted to terminate me it would be based on performance and there are enough clauses in the agreement to do this. Having no renewal term just gives me no motivation to stay with the business. The other point is that it completely devalues the master franchise as the length of the agreement and renewal are the only things that have any value! The process I am going through of dealing with banks and valuers has only confirmed this.
Whenever I have terminated or removed a franchise it has been based on performance and not on the time of renewal. I would guess this would also be the same for you when you have removed master franchises. Therefore having no renewal has no upside for you, but a huge downside for me.
I am trying to take on a large amount of debt to buy out Mickey which will take 10 years to pay off. Having no renewal means I will pay it off and will be without a business at all. I am making a big commitment to you, Greg and the brand and would hope that this would be reflected in the agreement, but at the moment it is not.”
“Franchise and Master agreements have a term plus a renewal term, that is standard. So the agreement you were sent would have just been our standard master franchise agreement, which if it is a renewal, does not as standard, contain a further renewal term. Obviously we can then discuss any terms of the agreement that might be peculiar to your situation.
Especially given your situation with buying out a partner at time of renewal, then a further renewal term is something we certain [sic] talk about.”
The MFA was entered into on 1 July 2014. Relevantly, it includes the following terms.
By way of definition, in the MFA, Netdeen is the Franchisor, Lindfield is the Master Franchisee, and Sub-Franchisee means:
“an entity or person who has entered into a Franchise Agreement with the Master Franchisee for the operation of a Franchise within the Master Franchise Area.”
The Master Franchise means “the business of [Lindfield] conducted under [the MFA]”. The Franchise Network is defined as “the G J Gardner Homes businesses in their entirety including those of the Franchisor, Master Franchisee and all Sub-Franchisees”.
The business is defined as the “G J Gardner Homes master franchise business”. Consistent with this, Recital A states:
“The Franchisor carries on the Business, being the business of acting as Franchisor for G J Gardner Homes Master Franchisees and Franchisees who undertake house building throughout Queensland, New South Wales, Victoria, Tasmania, Western Australia, the Northern Territory and elsewhere.”
“4.1 (Term of Master Franchise) This agreement is for a Term as specified in Item 3 of the Schedule [10 years] provided however that the Agreement shall terminate on the date on which all Franchise Agreements [agreements between the Master Franchisor and Sub-Franchisees: Part 1 and cl 5.5] granted pursuant to this agreement have expired or have been terminated, unless it is earlier terminated under Part 14 whichever is the earliest in time to occur.
4.2 (Renewal Term of Master Franchise) Provided that the Master Franchisee shall have duly complied with all its obligations under this and any related agreements and shall have taken all actions reasonably necessary to ensure that the Master Franchise conforms to the then current image of a G J Gardner Homes Master Franchise, the Master Franchisee shall, subject to Parts 4.6 and 4.7, have an option to renew the Master Franchise for the additional term set out in Item 4 of the Schedule upon the terms and conditions of the Franchisor's then current standard Master Franchise Agreement.
4.3 (Mode of Exercise) The option granted by Part 4.2 shall be exercised by the Master Franchisee giving written notice to the Franchisor of such exercise no more than twelve calendar months and not less than six calendar months prior to the expiration of the Term, time being of the essence.
…
4.6 (Effect of then Current Standard Terms on Option)
(a) The Master Franchisee acknowledges that, at the time of exercise of the option granted by Part 4.2, the Franchisor's then current standard Master Franchise Agreement and related agreements may contain provisions materially different from those of this and related agreements. Upon the due exercise of the option for renewal, the Franchisor shall forthwith forward to the Master Franchisee and the Guarantor copies of the Franchisor's then current Master Franchise Agreement and any other related agreements then used by the Franchisor in granting G J Gardner Homes master franchises together with the then current form of Franchise Agreement and any other related agreements then used by the Franchisor in granting GJ Gardner Homes franchises.
(b) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are not materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4, other than Part 4.1 shall be excluded).
(c) If the terms and conditions (other than any condition relating to an option for renewal) contained in such copies are materially different from those of this and the related agreements and/or the current form of franchise agreement and related agreements, the Master Franchisee and the Guarantor (if any) may, within twenty-one (21) days of receiving such copies by written notice to the Franchisor, accept or reject such terms and conditions (other than those relating an option for renewal) and in default of such notice the Master Franchisee and the Guarantor as the case may be shall be deemed to have accepted the same.
(d) If either the Master Franchisee or the Guarantor rejects such terms and conditions under paragraph 4.6(c) then, unless the Parties within a further twenty-one (21) days after giving notice of rejection reach agreement as to the terms of renewal of the Master Franchise, the exercise of the option shall be deemed to be withdrawn and of no further effect.
(e) If both the Master Franchisee and the Guarantor accept such terms and conditions under paragraph 4.6(c) or the Parties agree to other terms and conditions under paragraph 4.6 (d), then the Parties shall execute agreements in the form forwarded by the Franchisor (save that this Part 4 or equivalent option for renewal shall be excluded) or in the form agreed as the case may be.
4.7 (Franchisor's Rights) Notwithstanding that the Master Franchisee may be otherwise entitled to exercise the option for renewal, the Franchisor may, by written notice to the Master Franchisee within 21 days after receiving notice under Part 4.3, refuse to renew the Master Franchise upon grounds, honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-Franchisees. Without limitation as to other matters that may reasonably [sic] taken into account in determining whether such grounds are reasonable, regard may be had to the Master Franchisee's -
(a) percentage of market share to date;
(b) ability to service Franchisee to date;
(c) demonstrated skill and performance to date;
(d) ability to achieve the targets set out in the Development Schedule;
(e) demonstrated support or lack thereof for the Franchisor, its Directors and officers, the Franchisor's business as a whole and the Franchise Network.”
“(b) if requested by the Franchisor, the Master Franchisee shall immediately transfer to the Franchisor the Master Franchisee’s rights under those Franchise Agreements nominated by the Franchisor and upon effective assignment, the Franchisor shall assume the obligations of the Master Franchisee under those agreements arising after the date of assignment;”
“24.1 (Franchise Agreements to continue) Upon the termination or sooner expiration of this Agreement, the Master Franchisee’s rights and obligations in respect of existing Sub-Licences shall at that time cease and those rights and obligations shall, at the election of the Franchisor be assigned to and vest in the Franchisor (or its nominee) absolutely and the Master Franchisee shall do all acts, matters or things as shall be required by the Franchisor to acknowledge and accept this assignment …”
In December 2019, Netdeen received advice from its solicitors, Thomson Geer, that it was necessary to review the GJ Gardner Group structure and operations, noting that growth of market share, profitability, opportunities for franchisees to grow and more franchisees to join had fallen well behind targets agreed in the past with the Master Franchisees and the Sub-Franchisees. In response, on Netdeen’s instructions, Thomson Geer commissioned and received reports from Mr Jason Gehrke and Mr David Campbell, both experts in the franchising industry. These reports were in evidence before the primary judge and Lindfield made no request to cross-examine either expert. Broadly, both experts recommended that Netdeen exit from master franchising (referred to in this judgment as “de-mastering”).
Following this, a meeting took place on 17 November 2020 between Netdeen and Master Franchisees, including Lindfield. At this meeting Netdeen provided a summary of the advice it had received as to the benefits of de-mastering. Shortly after this meeting, Mr Hope of Lindfield sent an email to Mr Chris Thornton, copied to Mr Trent Gardner (both of Netdeen) setting out his objections to any de-mastering.
In May 2020, Mr Thornton, Chief Operating Officer of Netdeen, was asked to prepare a report identifying recommendations for Netdeen (the COO report). The primary judge found, and this finding itself is not challenged, that Netdeen’s intention thereafter was to move to a direct model operation: PJ3[74]–[75].
In July 2021 Netdeen and the Victorian/Tasmanian master franchisee entered into a new master franchise agreement which was either immediately, or almost immediately, relinquished such that Victoria and Tasmania were de-mastered.
In 2021–2022 there were negotiations between Netdeen and Lindfield for the early termination of the MFA. Despite various figures being offered by Netdeen as part of this negotiation, ultimately, no agreement was reached.
In 2022 Netdeen commissioned further reports from Mr Campbell and Mr Gehrke, which were provided in July 2023. Mr Gehrke’s opinion in his July 2023 report, extracted by the primary judge at PJ3[71], included:
“Based on the information provided, there is sufficient evidence of improvement across a number of metrics for which quantitative or anecdotal data is available, or for which there is work in progress, for me to believe that the individual franchisees are now better-off overall by having a direct relationship with the franchisor, rather than a master franchisee. Equally, based on the information provided, I have seen nothing to convince me that franchisees are in any way worse-off as a result of this direct relationship.
I remain of the opinion that master franchising in the Australian domestic market is no longer of benefit to the G.J. Gardner Homes brand or individual franchisees, and is a barrier to high levels of network performance. I encourage ongoing monitoring of the performance metrics considered in this further supplementary report as a way of gaining valuable insights into further opportunities for brand and network improvement in future.”
“From industry analysis and my extensive experience, the Master Franchise model in this brand is now not fit for purpose and will (if not already) begin to have declining benefits through fragmentation of purpose as the Master Franchisees move into maturity/succession planning.
The financial modelling provided in my First Report and reproduce[d] earlier in this report clearly established the logic and rationale to consider an alternate franchise support structure.
The recommendation to move to a straight-line franchise structure is the only viable alternative if the franchise concept is to be retained.
The restructure has clearly demonstrable benefits for the Franchisor and current/future Sub-franchisees.
…
It is imperative that now this transition has commenced it needs to be fully completed in order to allow the full benefits to commence flowing to the brand, franchisor, sub franchisees and the clients of G.J. Gardner Homes.”
On 3 July 2023, Lindfield gave Netdeen a renewal notice under cl 4.3 of the MFA exercising its option to renew the MFA for a period of 10 years.
On 6 July 2023, Netdeen sent Lindfield what was described as the “current Master Franchise Agreement” purportedly in accordance with cl 4.6(a) of the MFA.
On 14 July 2023, Mr Thornton circulated the COO report to Netdeen’s Board, being Messrs Greg Gardner, Trent Gardner and Darren Wallis. This was described as setting out “factors which the Board may consider in making its decision on renewal … and the relevant supporting evidence”. A draft of the COO report had been sent to Thomson Geer and some changes had been made responding to their comments: PJ3[121]–[124]. Mr Thornton’s conclusion in the COO report was:
“6.7 Given the conclusions in paragraphs 6.2 to 6.6 of this paper, I believe that it is in the best interests of the Franchisor and the Sub-franchisees that the Master Franchise Agreement not be renewed. In particular, I believe that the Sub-franchisees will benefit from the increased access to support, training and national uniformity which NextEraEnergy would provide, if it was appointed to act as the Franchisor for NSW/ACT Sub-franchisees in a Direct Model. This benefit would far outweigh the support which the Master Franchisee has indicated (by comment and conduct) that it is willing or able (taking into account the Teamlnvest issue) to provide.
6.8 Given Mr Hope's disparagement of the G.J. Gardner Homes brand and non-compliance with the national marketing strategy (Annexure N), it is also likely that other Master Franchisees (in particular, South Australia) could benefit from a non-renewal of the Master Franchise Agreement. This would reduce the risk of those other Master Franchisee's operations suffering reputational harm and increase the benefit of a national marketing strategy.
6.9 Given all of the available data, my opinion and experience, it is recommended that the Master Franchise Agreement not be renewed.”
As the primary judge noted, partly as a consequence of an unchallenged evidentiary ruling, at trial there was no challenge to the correctness of any fact stated in the COO report: PJ3[129].
On 20 July 2023, Netdeen convened a special Board meeting for the purpose of considering Lindfield’s exercise of the option to renew the MFA. The COO report was before the Board for the purpose of the meeting, and three reports from Mr Gehrke and two reports from Mr Campbell were annexed to this report. Mr Thornton also attended the meeting and spoke to the COO report.
There is no minute of the meeting. However, approximately 10 minutes after its conclusion Mr Thornton sent an email to Mr Tony Conaghan at Thomson Geer. This included that the meeting went from 8.04 am until approximately 9.15 am and that:
“• Trent then described the events over recent years that have led to this choice: the lack progress towards the growth goal(s), the appointment in 2019 by TG Law [Thomson Geer] of two independent franchising experts to review the G.J. franchise with particular attention to the Master model, the communication of the outcomes of that to Masters in 2020, the subsequent offer and acceptance of a new MFA for VIC/TAS in 2021, the request by Matt Hope for a [sic] an offer. The expert Valuation of the NSW & WA Masters and subsequent offer at ~$7.5M. The rejection of that offer and a second offer of ~$14M, accepted by the Colour Capital board subject to paperwork, subsequently rejected. Matt's angry flare-up at a social event in 2022 directed at Darren, after which there was a third offer made by the Franchisor, also rejected. Then there was Matt's interviews to national media, and a federal court claim subsequently withdrawn in 2023.
• Chris T took the papers as read, then referred to the Collated Report. He spent about 20 minutes referring to the key points for consideration including the sources and background, compliance with the MFA, further considerations the Board may have (as suggested in the MFA), the relative merits of the direct model for G.J. Gardner, the issue of Teamlnvest, financial & investment consequences, the experience of the transition to direct franchising so far, and the specified person.
• Chris T concluded by repeating the Board Priorities and how the resolutions may support or detract from them.
• Darren asked whether we could yet prove the relative superior performance of network growth under the direct model and there was further discussion. Chris T asserted that we had superior resourcing, marketing, management practices and that the pipeline was giving cause for confidence even if final FAs were not showing yet. He said we could certainly be confident to do no worse than the Masters (including NSW & WA) over the past decade. Trent concurred.
• There was discussion around whether there remained any further opportunities to reach a negotiated settlement, as the consensus was that there would be legal action in the event of non-renewal. …
…
• After substantial discussion, Trent invited the Executive to express a view in support of renewal or non‑renewal. Pat, Chris P, and Conrad all supported non-renewal (Chris T having recommended this in the Collated Report).
• Then the directors voted and Trent said he would be looking for a unanimous decision if non-renewal were to be the chosen resolution. Greg Gardner, then Darren, then Trent all voted in favour of non-renewal.
• It was agreed that Trent would engage TG Law to draft a communication to Matt Hope.”
On 24 July 2023, Netdeen sent a letter (erroneously dated 20 July 2023) to Lindfield confirming that the outcome of the Board meeting was to refuse to renew the MFA “in accordance with its rights under part 4” of the MFA.
These proceedings were commenced on 26 July 2023.
In November 2023, Mr Hope formed a new building group, Wattle Court. Two former GJ Gardner Homes Sub-Franchisees ceased being GJ Gardner Homes Sub-Franchisees and commenced trading as Wattle Court franchisees.
On 27 May 2024, Netdeen served a notice of termination of the MFA on Lindfield and took an assignment of the various franchise agreements between Lindfield and the Sub-Franchisees.
As Netdeen did not suggest that it had taken Lindfield’s best interests into account on the decision not to renew the MFA, the primary judge stated that it necessarily followed that Lindfield succeeded in establishing liability. Notwithstanding this, against the possibility that his construction might on appeal be found to be wrong, the primary judge went on to consider the question of breach on the assumption that Netdeen had succeeded in its contentions as to construction.
Noting Lindfield’s claim that both the Board meeting and the COO report merely rubber-stamped a predetermined decision to de-master, the primary judge summarised the evidence given by Netdeen’s witnesses on this issue. In doing so, his Honour said that the focus of the Board’s consideration was not on the interests of the Master Franchisee but only on the interests of Netdeen and the Sub-Franchisees.
His Honour then assessed the evidence of Messrs Thornton, Wallis, Trent Gardner and Greg Gardner concerning the critical Board meeting. With respect to Mr Wallis’s evidence, the primary judge refused to accept Mr Wallis’s evidence that his support for the decision to refuse renewal of the MFA was not because of his own personal interest in obtaining an increased profit flow that would come from removing Lindfield: see PJ3[151]. His Honour also noted that, although both Mr Wallis and Mr Thornton went out of their way to emphasise the genuineness of the task before the Board, he considered that there was a concentration on the interests of Netdeen’s own business, which did not include Lindfield’s best interests: see PJ3[155]. (It is difficult to understand why the primary judge made those observations at PJ3[155] as well as similar observations at PJ3[147(4)], [153] and [165] given the context of this part of his Honour’s reasoning, which was said at PJ3[137] and in the heading to that section of the judgment (preceding PJ3[58]), to be predicated on an assumption that Netdeen’s construction of cl 4.7 was correct.)
At PJ3[160], the primary judge said that he was “not overly impressed by the performance of both Mr Wallis and Mr Thornton in the witness box”. He added:
“160 … I think they were both evasive, and sometimes misleading, and endeavoured to paint a picture of concern for Mr Hope playing a part in their decision, when in reality the decision was one purely of business efficacy. Mr Wallis was particularly adept at avoiding what often should have been a simple answer to a direct question.
161 It follows that I agree with the plaintiff’s submission concerning the credit of Mr Wallis and Mr Thornton and I disagree with the defendant’s submission that they ’gave clear, cogent and honest evidence.’”
“In my opinion, and as suggested in Chris’ report, we need to invest in support to ensure our Franchise Owners are profitable and successful and so that they see more value in the brand, and demonstrate to the Franchise Owners the opportunities they have to be able to grow. In the short term we may not be as profitable as the Masters, but we will have a stronger and more profitable business in the longer term, and without the additional support we have a greater risk of losing sub-franchisees. As identified in the Chris’ Report including by the experts, the master franchises were underinvesting in support and the value of the franchise at all levels wasn’t as strong as it should have been. This will create more value for everyone.”
The primary judge noted at PJ3[174] that Netdeen’s evidence was targeted to “create a picture of compliance with cl 4.7, at least to the extent of [Netdeen’s] construction of that clause” and that this also affected the contents of the COO report.
The primary judge said that he was “not as critical of Mr Greg Gardner and Mr Trent Gardner although there were aspects of their evidence where I think they endeavoured to withhold the truth from the court”: PJ3[175]. Ultimately, the primary judge’s conclusions as to the basis upon which Netdeen decided not to renew the MFA are found in the following paragraphs:
“176 At the core of my findings on credit is an acceptance by me that de-mastering became a policy of the defendant, probably from about 2019, and then dictated its attitude to renewal and its behaviour in respect of creating an apparent justification for the failure to renew the plaintiff’s MFA.
177 However, I would find it very difficult, against the evidence of four of the persons at the meeting, to conclude, as requested by the plaintiff, that the COO report and the meeting were part of an elaborate disguise of an already made decision.
178 I am satisfied that the decision to not renew the MFA had been made before the special board meeting, however I do not think I can go so far as to say that the meeting was an entire ‘fake’ in which no decision was made.
179 This brings me back to Mr Couper’s words, which I have quoted above, but will repeat here:
’That one cannot have any views of any sort prior to the decision actually having to be made. In fact, it's put more strongly than that in the case which is unpleaded but advanced. If I have a view, then if I make a decision based on that view, the decision must be based on a pretext. Again, that, with respect, is completely irrational.’
180 I think I can refine my conclusions to the current question to these three propositions:
(1) I am unable to conclude that the board meeting did not involve a genuine discussion about the question of renewal, notwithstanding that Mr Thornton and the board members all came to the meeting with predetermined views that there should not be a renewal. In other words I cannot exclude the possibility that minds might have changed at the board meeting as a result of discussion.
(2) The COO report was designed to give a foundation for non-renewal, perhaps as much as a defence to expected legal proceedings as a genuine discussion of the relevant factors.
(3) The interests of the plaintiff were secondary to the financial interests of the defendant and, although to a lesser extent, the interests of the Sub-franchisees.
181 These conclusions are reached on the premise that the question being discussed assumes the defendant’s construction of cl 4.7 is correct.”
The primary judge accepted at PJ3[198] that a finding of unconscionable conduct under s 21 of the ACL did not depend on a finding of breach of contract (citing Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187; 399 ALR 302 at [79]). However, his Honour also remarked that he “would find such a finding difficult to reach if I had found in favour of [Netdeen’s] construction of cl 4.7”: PJ3[199].
The primary judge relied upon his earlier findings in relation to the basis of Netdeen’s decision not to renew the MFA: PJ3[211] (summarised above). His Honour also made the following additional findings:
By May 2020, Netdeen had made the decision to de-master, which “could not co-exist with renewal of [Lindfield’s] MFA”. Netdeen nevertheless "allowed the plaintiff to believe … that renewal was a real possibility", such that Lindfield "continued to work towards renewal": PJ3[212].
Netdeen’s wariness of litigation "infected the manipulation of at least one file note and the preparation of the COO report", which was constructed "to be a justification of the defendant's intended position to reject the application for renewal": PJ3[213].
Even if there had been genuine consideration of the question of renewal application at the Board meeting, the formal decision was nevertheless made “against a background of an already resolved course” and “was a decision of ratification rather than a start from a ‘blank page’”: PJ3[214].
As part of "the strategy to defeat any entitlement to renewal, the defendant provided the plaintiff with a current contract (pursuant to cl 4.6), which was so untenable and unattractive to a Master Franchisee, that it would render any renewal unworkable": PJ3[215]. Earlier, at PJ3[100], the primary judge described the document as a “smokescreen” and later at PJ3[128], the primary judge found that this was “essentially a device to persuade, if not force, the Master Franchisee to terminate the MFA”.
His Honour’s ultimate conclusions as to ACL unconscionable conduct were then stated at PJ3[216]-[217] (emphasis added):
“The defendant had resolved to maximise its profits. That was reasonable. What was not reasonable, and instead was sharp practice, was deceiving Mr Hope, and therefore the plaintiff, into believing that renewal was a real possibility to be decided in accordance with cl 4.7. This point is also behind my observation above, that a finding of unconscionability may be inconsistent with a finding that the defendant's construction of cl 4.7 was correct.
More precisely, in terms of s 22 of the ACL, I am satisfied that the defendant did not act in good faith in rejecting the plaintiff's application to renew the MFA, that rejection being a culmination of a course of conduct to conceal its true intentions (to not renew the MFA) from the plaintiff, and at the same time allowing the plaintiff to believe renewal was a viable possibility.”
The primary judge’s assessment and determination of issues relating to Mr Hope’s establishment of Wattle Court are set out at PJ3[272]-[298]. His Honour assessed Mr Hope’s evidence regarding the venture, noting that he explained that he started Wattle Court and tried to attract franchisees to cover the contingency that Lindfield would not renew the MFA. The primary judge described at PJ3[282] why he regarded Wattle Court as reflecting adversely on Mr Hope’s credit. Although the primary judge said that it was reasonable for Mr Hope to look for a new venture, he thought “that Mr Hope was perhaps being a little underhand in his approaches to the defendant’s Sub-franchisees”. Despite this single reservation concerning Mr Hope’s evidence, the primary judge made plain at PJ3[283] that, where there was a conflict between Mr Hope’s evidence and that of Mr Wallis and Mr Thornton, he had such a poor impression of those two latter witnesses that his reservations concerning Mr Hope “have no practical effect”.
As to Netdeen’s claim that Mr Hope’s conduct in respect of Wattle Court amounted to a repudiation of the MFA between December 2023 and 27 May 2024, the primary judge identified the following difficulties:
the evidence concerning Wattle Court, at least after 27 May 2024, was restricted to Mr Hope’s credit: PJ3[288]; and
more importantly, Netdeen was in breach of the MFA well before 27 May 2024, which entitled Lindfield to damages.
The primary judge added that, if his findings on breach of contract and ACL unconscionable conduct were correct, no issue of termination and repudiation arose. But, if repudiation was a valid issue, his Honour would have concluded that the repudiation was by Netdeen and accepted by Lindfield: PJ3[290].
As noted above, the primary judge’s reasons for refusing Netdeen’s objections to the admissibility of Mr Potter’s two reports are set out in PJ2. In brief, these reasons were as follows:
His Honour did not accept Netdeen’s complaint (relying upon case law such as Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305 at [85]) that the data relied upon by Mr Potter from published reports by the Master Builders Australia (MBA), Housing Industry Association (HIA) and Australian Bureau of Statistics (ABS) were not reliable. His Honour said at PJ2[10] that he could take judicial notice of the fact that MBA and HIA reports were well-known in the building industry and were also used by Netdeen itself.
Although there was no independent evidence to say that the HIA, MBA and ABS material had been independently scrutinised and found to be reliable, such evidence was not necessary and would involve “an unnecessary waste of time and costs”: PJ2[12].
Having regard to the established use of the data, including by Netdeen, Lindfield could rely upon Mr Potter’s use of the material and treat them as assumptions from which calculations might be made: PJ2[13].
In circumstances where Mr Potter could use the data, the primary judge agreed with Netdeen’s expert (Mr Andrew Ross) that “the calculations were mechanical” and Mr Potter had appropriate expertise to carry out those calculations: PJ2[14].
Although the primary judge saw a good deal of weight in Netdeen’s complaint that figures for 2024 should not have been used to estimate the loss from 2030 to 2034 and Mr Potter should have extended the HIA forecasts which went up to 2029, the opportunity to cross-examine Mr Potter was sufficient: PJ2[15].
As to Netdeen’s complaint regarding averaging, namely that Mr Potter had impermissibly used data for NSW generally and not figures derived from each Sub-Franchisee, the point could again be dealt with in cross‑examination: PJ2[16].
Having admitted Mr Potter’s two reports into evidence, the primary judge explained in PJ3[246]-[258] how Lindfield’s damages should be quantified, relying on the evidence of both Mr Potter and Mr Ross. In summary (for a fuller discussion see [174]ff below), the primary judge adopted a valuation figure of $20 million, seemingly by taking three steps. First, he found that Mr Potter’s methodology and some conclusions “are certainly open to criticism”: PJ3[240]. Secondly, assuming that Mr Potter’s opinion had flaws, he determined that “a proper and reliable basis to fill the deficiencies” was evidence given in cross-examination by Mr Ross: PJ3[246]. In this regard, the primary judge interpreted Mr Ross’s evidence in cross-examination as having “suggested that there was a simpler and alternative method of valuing the business”, being the “multiples” approach referred to in Mr Ross’s report at [7.7.8]: PJ3[248]. The primary judge then said that, during his oral evidence in answer to questions from the primary judge, Mr Ross had given a “valuation of at least $20 million” on the basis of this approach: PJ3[250]. Thirdly, the primary judge described the $20 million figure (derived as set out above) as not very different to the figure of $19.6 million which could be achieved by using Mr Potter’s revised cash flows together with a discount rate of 20% which Mr Ross had described as appropriate: PJ3[251]. The primary judge then said that the $20 million figure involved something of a “rounding off” of Mr Potter’s low valuation figure of $23.7 million and said that if Mr Potter had applied “enough of a discount, as suggested by Mr Ross” then the $20 million figure was appropriate: PJ3[257]-[259].
The bulk of the hearing of the appeal was directed to Issues 1 and 2.
On appeal and by way of amended notice of contention Netdeen and Lindfield advance competing constructions of cl 4.7 of the MFA.
Netdeen contends that, having regard to its terms, all that cl 4.7 substantively requires for Netdeen to be entitled to refuse to renew the Master Franchise is that Netdeen do so upon grounds, honestly and reasonably held, that renewal would not be in the best interests of itself and, either or both, other GJ Gardner Homes Master Franchisees (which, whilst not defined in the MFA, would be taken to mean master franchisees of Netdeen other than Lindfield) or Sub‑Franchisees. It contends that, in this context, there is no difficulty with it refusing to renew Lindfield’s Master Franchise in the context of an overarching policy of de-mastering, provided that the decision was properly based upon grounds, honestly and reasonably held, that renewal was not in its best interests and was also not in the best interests of Sub-Franchisees. In this regard, when considering whether renewal is against the Sub-Franchisees’ best interests, Netdeen can properly have regard, as an alternative to renewal of Lindfield’s Master Franchise, to a de-mastered structure, involving a direct franchise relationship between Netdeen and the Sub-Franchisees with no replacement master franchisee.
Netdeen says that this flows from the language of cl 4.7 and is also supported by the contractual context. In particular, Netdeen points to cll 14.6 and 24.1 (set out above at [17]-[18]) which, it says, necessarily entail that non-renewal of a Master Franchise may well result in there being a direct relationship between Netdeen and the Sub-Franchisees. In this contractual context, where the terms of the MFA provide for the transfer of the franchise agreements to the Franchisor, Netdeen says it is artificial and inconsistent with the MFA as a whole to require that the relevant consideration of the best interests of Sub-Franchisees for the purpose of cl 4.7 be on the assumption that the existing Master Franchisee (here Lindfield) will be replaced by another Master Franchisee. Instead, they say, one choice under cl 4.7 when considering whether to refuse renewal, is de-mastering.
It follows, Netdeen says, that it would be an error to construe the MFA as if its purpose was to ensure that there was a master franchise system in place during the 20 year period covered by the MFA and any renewal. It says that Lindfield’s contention to the contrary involves reading words into the MFA that are simply not there or adding an implied term to the MFA.
Netdeen further relies upon the words “[w]ithout limitation as to other matters that may reasonably be taken into account …” preceding the list of matters to which regard may be had when making a decision to refuse renewal under cl 4.7. It says that this shows that the matters there itemised at (a) to (e) are “expressly not the end of the story”.
I look on the law to be that, if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative.
Ultimately, however, this principle (to the extent that it applies) adds little to what would follow on the proper construction of cl 4.7, that we have set out above. If Netdeen exercised its discretion substantially for the purpose of putting an end to the state of affairs under which the MFA could operate rather than because it believed that it would be in its best interests and those of Sub‑Franchisees not to renew the MFA having regard to Lindfield’s performance, it would breach the obligation of renewal because the exception in cl 4.7 would not apply. As will shortly be developed, however, the primary judge did not make clear findings on these fundamental questions.
For completeness, it might be noted that on the issue of breach of cl 4.7 of the MFA, neither party relied upon any implied duty to exercise contractual power in good faith or reasonably as discussed in cases such as Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 and Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187.
In the circumstances, grounds 1 to 4 should be upheld, albeit that our construction of cl 4.7 of the MFA differs somewhat from that advanced by Netdeen in submissions, and ground 1(a) of the amended notice of contention should be rejected.
Netdeen contends that at PJ3[180(3)] the primary judge effectively found that Netdeen’s decision not to renew the MFA was honestly based on renewal not being in the best interests of both Netdeen and the Sub-Franchisees. They contend, further, that the unchallenged findings in the COO report, and the unchallenged reports of Mr Gehrke and Mr Campbell annexed thereto, provide a reasonable basis for that view, such that this Court should find that Netdeen’s decision to refuse to renew the MFA complied with cl 4.7. These matters are raised in grounds 5 and 6 of the notice of appeal.
By contrast, Lindfield says that the primary judge made no such findings, and that at trial Netdeen failed to discharge its onus of proof. It contends, moreover, that the evidence accepted by the primary judge does not support Netdeen’s contention that it had grounds, honestly and reasonably held, that renewal would not be in the best interests of the Sub-Franchisees. In this regard, they place reliance upon the primary judge’s credit findings as regards Mr Wallis and his Honour’s finding that Mr Greg Gardner had no recollection of the Board meeting at which the decision was taken (see above at [41]) and upon the email sent by Mr Thornton to Mr Conaghan very shortly after the Board meeting on 20 July 2023 which, Lindfield says, goes no higher than that, under a direct franchise model, “we could certainly be confident to do no worse than the Masters (including NSW & WA) over the past decade” (see above at [31]).
Lindfield adds that the COO report does not “say much about the Sub‑Franchisee’s interests, that they would benefit” and that it qualifies its observations about benefits to Sub-Franchisees with the words “Whilst difficult to quantify”. Lindfield contends, further, that the primary judge ought to have found that the Board meeting on 20 July 2023 did not involve a genuine consideration of the questions under cl 4.7 and that the COO report was neither a genuine and fair assessment of the factors relevant to the decision whether or not to refuse to renew the MFA, nor was it a comprehensive and detailed analysis of matters relevant to that decision. These matters were raised in grounds 1(b) and 4 of the amended notice of contention.
The primary judge’s findings on these matters are opaque. They do not address the central point whether, if construed as Netdeen contended, the decision to refuse to renew the MFA complied with the requirements of cl 4.7 of the MFA. Contrary to Netdeen’s submission, PJ3[180(3)] cannot be read as a finding that the decision was made on grounds that renewal would not be in the best interests of the Sub-Franchisees. The finding appears to be a finding that the Board, in its consideration of whether to refuse renewal of the MFA, placed the financial interests of Netdeen and to a lesser extent the interests of Sub‑Franchisees ahead of those of Lindfield. But that is not a finding that the Board concluded that it was not in the best interests of Sub-Franchisees to renew the MFA. And it is certainly not a finding on the question posed by cl 4.7 as properly construed.
In the nature of human affairs, it is rare that individuals, still less corporations such as local government authorities, act as they do exclusively for a particular purpose. It is of the nature of human motivation (and still more, if it can be ascertained, the motivation of corporations governed and directed by numerous individuals) that their purposes are complex and multifarious. From this truism a controversy has arisen as to the extent to which an illicit, irrelevant or impermissible purpose for the exercise of statutory powers will render that exercise beyond power, with the serious consequences that follow. …
Kirby P added that, where a decision-maker is a collective body, “discerning its intentions, purposes and motives will necessarily be more problematical” because of the evidentiary difficulties, particularly where there is no document which formally records the reasons for the impugned decision.
Those practical and evidentiary difficulties may present themselves here, particularly where there is no minute of the Board’s meeting on 20 July 2023 and there is evidently no clear documentary statement of the Board’s reasons for its non-renewal decision. In those circumstances, the focus on remittal is likely to be on the evidence of individual Board members as to their recollections of their reasons for not renewing Lindfield’s MFA. Undoubtedly, the contents of the COO report will also be significant.
We add that we accept Lindfield’s contention that Netdeen bore the onus of proof of the matters which must be satisfied to justify a refusal to renew under cl 4.7 of the MFA. This is not simply because Netdeen pleaded in its second further amended commercial list response (SFACLR) that Netdeen honestly and reasonably believed that renewal was not in the best interests of the Sub-Franchisees. It is primarily because, under the MFA, these were matters that had to be established if Lindfield’s right of renewal under the MFA was to be qualified by Netdeen having a right to refuse renewal. Consistent with the analysis of Campbell JA in Wardle v Agricultural and Rural Finance Pty Ltd; Agricultural and Rural Finance Pty Limited v Brakatselos [2012] NSWCA 107 at [252], the onus of proving those matters thus fell on Netdeen.
It follows that ground 5 of the notice of appeal should be rejected but we are unable to make the findings required to determine ground 6 of the notice of appeal or ground 1(b) or (d) of the amended notice of contention.
To the extent that Lindfield contends in grounds 3 and 4 of its amended notice of contention that this Court should make findings as to the conduct and motivations of key individuals at Netdeen, we reject those contentions. We are not in a position to make the findings sought, particularly given the matters we have already discussed. Findings on matters of key significance to a complex commercial claim, where there is a lack of clarity about the primary judge’s ultimate approach to the evidence of witnesses about whom he made adverse credibility findings, should not be made by selective recourse to some, but not all, of the primary judge’s reasoning.
This issue relates to Netdeen having acknowledged receipt of Lindfield’s renewal notice on 6 July 2023 and then providing Lindfield with a document which purported to be the “then current standard Master Franchise Agreement”, as referred to in cll 4.2 and 4.6 of the MFA. In its SFACLR, Netdeen pleaded that the terms of that document “were substantially the same” as those “offered to and accepted by” the Master Franchisee in Victoria/Tasmania in 2021.
By ground 28 of the notice of appeal, Netdeen claims that the primary judge erred in failing to find that:
if Lindfield was entitled to renewal, renewal was only on the terms of Netdeen’s then current standard Master Franchise Agreement;
Netdeen did in fact deliver its then current Master Franchise Agreement on 6 July 2023;
by serving the summons and commercial list statement on 26 July 2023, Lindfield gave written notice for the purposes of cl 4.6(c) of the MFA that it rejected the terms and conditions of the then current standard Master Franchise Agreement; and
accordingly, the exercise of the option was deemed to be withdrawn and of no further effect having regard to the terms of cl 4.6(d) of the MFA.
Lindfield emphasises that, during the course of the trial, senior counsel for Netdeen acknowledged that cl 4.6 did not entitle Netdeen to create a “then current” agreement after receipt of a renewal notice. It contends that neither the document it received from Netdeen in July 2023 nor the new Victorian Master Franchise Agreement was the “then current standard Master Franchise Agreement” for the purposes of cl 4.6. It necessarily follows that Lindfield’s MFA as restated in 2017 constituted the “then current standard Master Franchise Agreement” for the purposes of cl 4.6.
In addition, pointing to the primary judge’s adverse findings regarding the new Victoria/Tasmania Master Franchise Agreement, Lindfield contends that:
Netdeen failed to comply with, and breached, cl 4.6(a) of the MFA by providing the document which it did on 6 July 2023 (ground 1(c) of the amended notice of contention);
Netdeen engaged in conduct that was not in good faith and/or was unconscionable by providing Lindfield with the document which it did on 6 July 2023, thereby representing it to be its “then current standard Master Franchise Agreement” for the purposes of cl 4.6(a) (grounds 1(d) and 2(d)(ii) of the amended notice of contention); and
the experts who gave evidence on damages correctly assumed that the financial terms of the putative Master Franchise Agreement for the renewal term were the same as those contained in Lindfield’s existing MFA (ground 5(c) of the amended notice of contention).
As to Netdeen’s claim that the exercise of the renewal option was deemed to be withdrawn because Lindfield did not respond to the document it received on 6 July 2023, Lindfield submitted that, when the 21 day response period expired (on 27 July 2023), this was after Netdeen’s own breach which occurred earlier on 24 July 2023 when Netdeen notified Lindfield that the renewal had been refused.
“6 It is and would be a breach of the MFA on its proper construction, and/or would be foreign to the purpose of the MFA, and in particular to the purpose of the Renewal Provisions, for the defendant:
(a) to provide a document under clause 4.6(a) of the MFA (see sub-paragraph 3(e) above) purporting to be the defendant's then current standard Master Franchise Agreement for the purpose of renewal, that includes provisions which are inconsistent, in form or substance, with the maintenance of the central role of the Master Franchisee in the operation of its business in its Master Franchise Area, and continuing to earn the financial rewards from so doing …”
In its SFACLR, Netdeen admitted that the 6 July 2023 document contained the renewal terms identified by Lindfield and then added that they “were substantially the same as the Renewal Terms offered to, and accepted by, the Master Franchisee in Victoria/Tasmania in 2021”. It may be interpolated here that Lindfield emphasises that Netdeen did not claim that the terms of the 6 July 2023 document were identical to the 2021 Master Franchise Agreement in Victoria/Tasmania, but rather were described as being “substantially the same”.
In its amended reply to Netdeen’s SFACLR, Lindfield joined issue with all of the SFACLR, including the parts relating to the 6 July 2023 document.
Plainly, then, the issue was raised by the pleadings. There was also a substantial issue at the trial about the terms of the 2021 Victorian Master Franchise Agreement. The primary judge made a series of findings to the effect that the Victorian document was not genuine, indeed calling it a “smokescreen” at PJ3[100].
We accept Lindfield’s contention that the terms of that document were never truly operative and could not properly be described as a “current” Master Franchise Agreement. That is so because when the parties entered into the new Master Franchise Agreement for Victoria/Tasmania they also entered into a deed of relinquishment within a month, as noted by the primary judge at PJ3[75].
We also accept Lindfield’s submission that the 6 July 2023 document was materially different from the 2021 Victorian/Tasmanian Master Franchise Agreement. This is well illustrated by the fact that, in the 6 July 2023 document, there were two significantly different provisions:
cll 3.2 and 3.3 provided for Netdeen to transition the functions of the Master Franchisee to itself; and
the provision in item 16 of the Schedule concerning the Master Franchisee paying Netdeen a “Support Levy Training Levy and Service Fee” was amended such that the Master Franchisee could be charged up to six times the multiple of wages for employees performing particular support and other functions for the benefit of the Master Franchisee. Indeed, in an attachment to the Board report dated 25 July 2023, express reference is made to the fact that the document provided to Lindfield as the current MFA was “largely based” on the Victorian/Tasmanian agreement but, significantly, it was then acknowledged that “material differences included changes to the Support Levy, Training Levy and Service Fee that would provide for a sustainable commercial model as the Franchisor pursues its strategy to centralise and expand services to Franchise Owners”.
Finally, in the light of the matters above, we reject Netdeen’s submission, relying on cl 4.6(d) of the MFA, that Lindfield’s exercise of the renewal option should be deemed to have been withdrawn because Lindfield did not respond to the 6 July 2023 document. That is all the more so in circumstances where the 21 day period stipulated in cl 4.6(d) expired on 27 July 2023, which postdated Netdeen’s notification on 24 July 2023 that it had refused to renew the MFA.
“1. The appellant challenges the following findings of fact:
(a) by May 2020 the appellant had made a decision to “demaster” and this decision could not co‑exist with renewal of the respondent’s MFA (J[212]);
(b) the appellant allowed the respondent to believe that renewal was a real possibility (J[212]);
(c) that the Chief Operating Officer’s report was constructed to be a justification of the appellant’s intended position to reject the application for renewal (J[213]);
(d) that the appellant had already resolved a course prior to the 20 July 2023 meeting to not renew the respondent’s MFA (J[214]);
(e) that the appellant had a strategy to defeat any entitlement to renewal and as part of that strategy the appellant provided the respondent with the current contract (pursuant to clause 4.6), which was so untenable and unattractive to a master franchisee, that it would render any renewal unworkable (J[215]);
(f) that the appellant deceived Mr Hope and the respondent into believing that the renewal of the respondent’s MFA was a real possibility (J[216]);
(g) the appellant’s rejection of the respondent’s application to renew the MFA was a culmination of a course of conduct that was designed to conceal its true intentions to not renew the MFA (J[217]).
2. The appellant contends that the learned primary judge ought to have found:
(a) a decision by the appellant in May 2020 to demaster did not dictate that the respondent’s MFA would not be renewed;
(b) the Chief Operating Officer’s report was prepared for the genuine purpose of consideration by the appellant’s directors at the meeting of 20 July 2023;
(c) the appellant’s directors had not before 20 July 2023 already resolved a course of refusing renewal;
(d) the appellant did not have a strategy to defeat an entitlement to renewal;
(e) the appellant’s then current Master Franchise Agreement was a genuine document and was not untenable;
(f) the appellant did not deceive Mr Hope and the respondent as to its position regarding renewal and did not conceal its true intentions.
…”
Grounds 2, 3 and 4 of the amended notice of contention seek to uphold the primary judge’s conclusion of ACL unconscionable conduct. By these grounds, Lindfield alleges, amongst other things, that the “sharp practice” rendering the exercise of the non-renewal power unconscionable was not limited to Netdeen having deceived Lindfield into believing that renewal was a real possibility. Ground 2 of the amended notice of contention also alleges that Netdeen acted otherwise than in good faith, in contravention of cl 6 of the Franchising Code of Conduct. This contention was not meaningfully pursued by Lindfield in its written or oral submissions and nothing further needs to be said about it.
In both written and oral submissions, Netdeen emphasises that the conduct primarily complained of by Lindfield in its pleadings below was “taking [Lindfield’s] business away from it in return for no compensation”. So framed, Lindfield’s case for ACL unconscionable conduct is said by Netdeen to be straightforwardly untenable, since it ignores the express terms of the MFA dealing with the issue of renewal, which are said to demonstrate that Lindfield had no right to compensation. In addition to cl 4.6, which has already been discussed, Netdeen emphasises cl 14.6(g) of the MFA, which relevantly provides:
**“**14.6 (Effect of termination) Upon termination or expiration of this agreement:
…
(g) the Master Franchisee will not be entitled to any payment, repayment or compensation for any goodwill attaching to the Business; …”
Netdeen further contends that the primary judge’s conclusion as to ACL unconscionable conduct depended on his Honour’s finding that non-renewal was the “culmination of a course of conduct to conceal its true intentions (to not renew the MFA) from [Lindfield], and at the same time allowing [Lindfield] to believe renewal was a viable possibility”: PJ3[217]. In Netdeen’s submission, this finding is also untenable, having regard to the primary judge’s ruling that it was not open to Lindfield to challenge the facts in the COO report (see at [29] above), as well as his Honour’s inability to find that the Board meeting did not involve a genuine determination in accordance with the terms of cl 4.7 of the MFA: see at PJ3[177] and [178].
Netdeen also places significant emphasis on the fact that the primary judge made no finding to the effect that Lindfield relied on or altered its position to its detriment based on any particular misrepresentation that renewal of the MFA was a viable possibility. Netdeen notes that Mr Hope gave no evidence that he made any investment in the business which he otherwise would not have made but for a representation that renewal was likely.
Lindfield’s primary submission is that Netdeen is wrong to view the terms of the MFA as dispositive in circumstances where the Court must look “to every connected circumstance that ought to influence its determination upon the real justice of the case” (citing Jenyns v Public Curator (Qld) (1953) 90 CLR 113 at 119; [1953] HCA 2 (where the Court quoted The Juliana (1822) 2 Dods 504 at 521; 165 ER 1560), which was referred to approvingly in Productivity Partners Pty Ltd (t/as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27; 419 ALR 30 at [105] per Gordon J). Referring to s 21(4) of the ACL and PT Ltd v Spuds Surf Chatswood Pty Ltd [2013] NSWCA 446, Lindfield submits that the lawful exercise of rights may nevertheless amount to ACL unconscionable conduct.
Having regard to these principles, Lindfield denies that its ACL unconscionable conduct case is properly characterised as “a mere representation case”. Any misrepresentations as to the viability of renewal are said to be a non-essential aspect of the connected circumstances which, taken together, rendered it unconscionable for Netdeen to exercise its rights under cl 4.7. It contends that the primary judge applied two tests for ACL unconscionable conduct – a “sharp practice” test and a “serious deceptive conduct” test. His Honour is said to have relied on his findings concerning deceptive conduct only in reaching the conclusion that the latter test was satisfied. The import of this submission is that any issue with those findings leaves untouched the primary basis on which ACL unconscionable conduct was found (PJ3[216]), which was that it was “sharp practice” for Netdeen to exercise its right of non-renewal having regard to his Honour's earlier findings concerning the chronology of events, as well as his finding at PJ3[212] that the decision to de-master "could not co-exist with renewal of [Lindfield's] MFA".
“Notwithstanding the possibility of a finding of unconscionable conduct absent a breach of contract, I would find such a finding difficult to reach if I had found in favour of the defendant’s construction of cl 4.7.”
“This point is also behind my observation above, that a finding of unconscionability may be inconsistent with a finding that the defendant’s construction of cl 4.7 was correct.”
These latter paragraphs suggest that, contrary to what he said at PJ3[211], his Honour in fact approached the issue of ACL unconscionability on the premise that his own construction of cl 4.7 of the MFA was correct.
As to the question of breach, as set out already the primary judge failed to make any clear finding as to whether or not he would have found that there was a breach on the assumption that Netdeen’s construction of cl 4.7 of the MFA was correct. On the one hand, the primary judgment includes a heading to the section of the judgment going from PJ3[58]–[184]: “Even if the terms of the MFA are construed as advocated by the defendant, the defendant has still acted in breach of those terms”. On the other hand, PJ3[180], which is described as setting out his Honour’s key conclusions on the assumption that Netdeen’s construction of cl 4.7 is correct, does not constitute a finding of breach of contract on Netdeen’s construction of cl 4.7 and (for the reasons discussed above) is obscure. It necessarily follows that there is a lack of clarity as to the premise on which the primary judge approached the issue of ACL unconscionable conduct.
Secondly, we do not accept that PJ3 is to be read as urged by Lindfield (see [107] above). Such a reading is inconsistent with the primary judge’s critical finding, at PJ3[216], that: “What was not reasonable, and instead was sharp practice, was deceiving Mr Hope, and therefore the plaintiff, into believing that renewal was a real possibility” (emphasis added). The emphasised words strongly indicate that the primary judge regarded Netdeen’s deception of Lindfield as a matter going towards the question of “sharp practice”, and not to some separate unconscionability test of “serious deceptive conduct”. Nothing in PJ3 contradicts this clear indication. It is true that the primary judge referred at PJ3[211] to the chronology of events set out earlier in PJ3 as “illustrat[ing]” that ACL unconscionable conduct had occurred. To this extent, Lindfield is correct that his Honour can be read as having referenced those events as part of his analysis of ACL unconscionable conduct. However, the primary judge’s determinative reason as to ACL unconscionable conduct was that expressed at PJ3[216]-[217]. Thus, the primary judge’s key finding which supported his finding of ACL unconscionability was that Netdeen had deceived Mr Hope into believing that renewal was a real possibility.
Thirdly, having regard to how Lindfield’s ACL unconscionable conduct claim was pleaded and the somewhat narrower basis upon which it was run at trial, it is a claim that cannot succeed given the primary judge’s findings at PJ3[177], [178] and [180(1)] that he could not conclude that Netdeen did not give genuine consideration to the question whether or not it should refuse to renew the MFA in reliance upon cl 4.7 at the Board meeting on 20 July 2023. Nor can it succeed absent a finding of breach of cl 4.7 of the MFA (on either of the constructions propounded by the parties or on the construction we have found to be correct).
“(g) the defendant has misrepresented its intentions to the plaintiff in relation to its ability to renew the MFA, by reason of the Representations stated in paragraph 17 above, with the consequence that the plaintiff has continued to invest in building and operating its Business, and in attracting, retaining and supporting new Sub-Franchisees;
(h) by reason of (g) above, the defendant unreasonably failed to disclose to the plaintiff prior to 24 July 2023 that its actual intention was to refuse renewal of the MFA, thereby affecting the interests of the plaintiff, including in relation to the risks to the plaintiff of the defendant exercising that power, within the meaning of s.22(1)(i) of the ACL;”
Additional “circumstances” were also pleaded in [33] and [34] of the SFACLS, including, at [34(a)], that Netdeen was seeking in its own self-interest to exercise its contractual power to refuse the renewal of the MFA so as to obtain an “unconscientious benefit and advantage to itself, at the expense of the plaintiff, which is inconsistent with ordinary standards of reasonableness and fair dealing”.
Turning to how Lindfield put this claim at trial, in his closing oral submissions in reply below, Mr Castle SC identified [34(a)] of the SFACLS as “the heart of the unconscionable conduct case”. Mr Castle SC also confirmed that the representations pleaded at [32(g) and (h)] of the SFACLS were not relied upon as constituting unconscionable conduct per se; rather, “they’re only relied on as circumstances”. Mr Castle SC also confirmed that the conduct which was impugned as unconscionable was the refusal to renew the MFA. The representations the subject of [32(g) and (h)] were described earlier in [17] of the SFACLS. They relate to statements made by Netdeen to Lindfield that it had made no decision about whether or not it would refuse to renew the MFA in circumstances where Netdeen failed to disclose to Lindfield prior to 24 July 2023 that its actual intention was to refuse renewal.
Consistent with how the ALC unconscionability claim was pleaded and run at trial, as we read PJ3, the critical finding underpinning the primary judge’s conclusion as to ACL unconscionable conduct was that Netdeen acted unconscionably in refusing to renew the MFA in circumstances in which it had engaged in the “sharp practice” of deceiving Lindfield into believing that “renewal was a real possibility to be decided in accordance with cl 4.7”: PJ3[216]. However, this finding cannot be sustained given his Honour’s earlier findings, at PJ3[177], [178] and [180(1)] that he was unable to conclude that Netdeen did not genuinely determine the question of renewal at the Board meeting. It necessarily follows from these findings that renewal was a real possibility at the Board meeting on 20 July 2023 and there was no basis for his Honour to have found that Netdeen deceived Lindfield into believing that “renewal was a real possibility to be decided in accordance with cl 4.7” (or, indeed, able to make the findings at PJ3[213]-[215]).
Moreover, and irrespective of this, on either of the constructions propounded by, respectively, Lindfield and Netdeen, and on the construction we have found to be correct, a finding that Netdeen complied with cl 4.7 of the MFA necessarily involves a finding that, at the Board meeting on 20 July 2023, Netdeen gave genuine consideration to whether or not it should refuse renewal under cl 4.7 of the MFA. If this were the case, then it must follow that there was no deception or “sharp practice” as found by the primary judge. This is because, compliance with cl 4.7 (on any of these three constructions) involves renewal remaining a possibility up to the time when a decision was in fact made at the Board meeting on 20 July 2023.
“… It should be noted that s 22(2)(l) expressly incorporates the concept of acting in good faith. In the context of the exercise of contractual powers, the concept is well understood as including, relevantly for present purposes, “compliance with honest standards of conduct” and “compliance with standards of conduct which are reasonable having regard to the interests of the parties”: Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 367D-E; Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187 (Burger King) at [171]; United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618; [2009] NSWCA 177, although, as was pointed out in Burger King at [172], referring to Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] ATPR 41-703 at [37], the obligation does not restrict a party from promoting its own legitimate interest.”
To this statement of principles may be added Bathurst CJ’s observations, in an earlier case concerning the common law meaning of contractual good faith, that such good faith “could not extend to imposing obligations on the parties that were, in effect, inconsistent with the terms of the Agreement” and “does not extend to being required to agree to something other than actual performance of the contract” (see Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [146] and [154(d)] Macfarlan and Meagher JJA agreeing).
If Netdeen honestly believed on reasonable grounds that renewal was not in the best interests of the relevant parties specified in cl 4.7, as is assumed for the purpose of the ACL unconscionability claim, then it is not clear how exercising its rights under cl 4.7 could be regarded as contravening honest and reasonable standards of conduct, or as otherwise being in bad faith. This is particularly so in the light of the principles noted above, namely that good faith does not restrict a party from promoting its own legitimate interests or impose obligations inconsistent with the terms of the relevant agreement. Having regard to these principles, there is considerable force in Netdeen’s submission that compliance with the terms of cl 4.7 is dispositive of the issue of ACL unconscionable conduct given that the conduct that was said by Lindfield to be unconscionable was the non-renewal itself.
That leaves for consideration whether Lindfield should succeed on the relevant part of its amended notice of contention which, in essence, seeks to defend the primary judge’s conclusion as to ACL unconscionable conduct on independent grounds.
At the outset, we reject Lindfield’s contentions at grounds 4(a) and (b) of its amended notice of contention that the primary judge erred in his findings at PJ3[176]-[178] and [180(1)] that he could not conclude that Netdeen did not give genuine consideration to the question whether or not it should refuse to renew the MFA in reliance upon cl 4.7 at the Board meeting on 20 July 2023. That was a finding that the primary judge made having considered the evidence as a whole, including assessing the witnesses giving their oral evidence. Notwithstanding that this finding sits somewhat uncomfortably with the more general credibility findings expressed above, we would not find that his Honour erred in reaching these conclusions having regard to the principles in Fox v Percy at [28]-[29] and Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [55]. Given that no challenge was made to the correctness of any fact stated in the COO report, as recorded at PJ3[129], we also reject Lindfield’s contention that we should find that the COO report was flawed as alleged in ground 4(c) of the amended notice of contention. Nor would we draw the adverse inferences against Netdeen as urged by Lindfield in ground 3 of its amended notice of contention.
“• PT accepted responsibility for ensuring that kiosks complied with the 2002 Height Restrictions.
• It was entirely understandable that Spuds assumed that PT would do exactly that. Moreover, Spuds made its position clear at an early stage.
• The 2002 Height Restrictions … quite clearly prevented the erection of kiosks incorporating the blade signs that were erected in each of the kiosks. Spuds understood the 2002 Height Restrictions in accordance with their plain language.
• PT not only did not insist on compliance with the 2002 Height Restrictions, it took no steps to enforce cl 29 of [other leases] which would have solved Spuds’ sightline difficulties. The failure to enforce the unequivocal provision in each lease was unexplained, despite PT’s Director of Leasing conceding in evidence that cl 29 was intended to give effect to the 2002 Height Restrictions …
• PT used its superior bargaining power to adopt an uncompromising position in its negotiations with Spuds concerning removing sightline interference cased by the kiosks.
• PT, having failed to enforce either the 2002 Height Restrictions in accordance with their plain meaning or the corresponding clauses in each of the kiosk leases, decided in 2005 simply to change course, and promulgated new guidelines. It did so in spite of the complaints by an existing tenant. The Appeal Panel characterised this conduct as “unfair tactics”; “high handed” would also be an appropriate description.”
“In the light of these findings and the statutory criteria to which the Appeal Panel quite properly had regard, it was entitled to conclude (using its own language) that PT acted in an unethical way and that its conduct involved some degree of “moral tainting” deserving of the opprobrium of unconscionability. In essence, on the Appeal Panel’s findings, this was a case of a powerful lessor using its superior bargaining power and unfair tactics to override the legitimate expectations held by a tenant as a consequence of the lessor’s own actions.”
Spuds Surf Chatswood does not assist Lindfield’s position. That is because, in that case, the lessor’s ability to erect the disputed kiosks and promulgate new height guidelines did not have its source in the terms of the disputed lease. Rather, the lease was simply silent as to the lessor’s rights in respect of these subject matters. The situation here is fundamentally different. Far from being a subject unregulated by the MFA, Netdeen’s ability to refuse renewal was specifically conferred by cl 4.7. Lindfield voluntarily signed an MFA which included cl 4.7. It has not been found that Lindfield relied on any representation that renewal was guaranteed or was not subject to the terms of cl 4.7. Nor has it been found that Netdeen somehow took advantage of Lindfield in including cl 4.7 or that Lindfield was unable properly to understand the terms of the agreement it was entering into. In these circumstances, the emphasis in Spuds Surf Chatswood on the overriding of “legitimate expectations” has no purchase. The only expectation which Lindfield could legitimately have had was that Netdeen would exercise its power to refuse renewal in accordance with the terms of cl 4.7, properly construed. In circumstances where Lindfield agreed to the MFA, including cl 4.7, Lindfield’s contention at ground 2(e) of the amended notice of contention that Lindfield was “vulnerable” to the exercise by Netdeen of its power to refuse renewal under cl 4.7 does not assist Lindfield’s contentions as to ACL unconscionability.
Further, little if any significance attaches to the fact that both parties acknowledged the value of a renewal option in pre-contractual negotiations, nor that the option was an integral attraction to Lindfield entering into the MFA. Such considerations are of little relevance to the question of ACL unconscionable conduct in circumstances where the parties voluntarily entered into an MFA which granted Lindfield an option to renew but also contained cl 4.7, which made clear that Lindfield’s right of renewal was not absolute and was subject to Netdeen’s rights under cl 4.7. As noted above, there is no finding that Lindfield was unable properly to comprehend the terms of the MFA or was otherwise taken advantage of by Netdeen.
We also reject Lindfield’s reliance on the primary judge’s findings that, if the power of non-renewal could be exercised without taking Lindfield’s interests into account, then Lindfield’s right of renewal would be “without content, purpose, or value" (PJ3[43]) and “[t]he lure that had induced [Lindfield] into the agreement would reduce to little more than mere marketing …”: PJ3[55]. Under cl 4.7, Netdeen was required honestly and reasonably to believe that renewal was not in the best interests of itself as well as "other GJ Gardner Homes Master Franchisees and/or Sub-Franchisees". This requirement clearly provides some protection to the exercise of Lindfield’s option to renew, since it prevents the arbitrary exercise of Netdeen’s power of non-renewal. In any event, these findings were made by the primary judge in support of his Honour’s construction of cl 4.7. We do not consider them to bear upon the issue of ACL unconscionable conduct in circumstances where it is common ground that cl 4.7 of the MFA does not require regard to be had to Lindfield’s best interests.
“One further aspect of the analogy can be considered. In the AHG Proceedings, the purpose of Mercedes Australia in terminating the Dealer Agreements was so that it could introduce the Agency Agreement model. That purpose did not render the termination of the Dealer Agreements unconscionable. In the present case, if one accepts that a purpose of the decision not to renew was to bring the Master Franchise model to an end, that purpose cannot render the non-renewal decision unconscionable. That is the case because if the decision was made on honest and reasonable grounds that non-renewal was in the best interests of sub-franchisees and of the Franchisor, Netdeen had the express contractual right to make the non-renewal decision. The fact that non-renewal also satisfies a purpose means only that Netdeen has, as it was entitled to do, take[n] into account its own interests.”
Lindfield’s post-hearing supplementary submissions may be summarised as follows:
The first-limb claim as described by Netdeen in its post-hearing supplementary submissions was not in issue in AHG Full Court, hence Netdeen’s submissions on that matter are beyond the terms of the grant of leave.
In any event, AHG Full Court is distinguishable because, unlike cl 4.7 of the MFA here, the respondent’s there could refuse to renew the dealer agreements without cause.
The Court should reject Netdeen’s submission that the contractual terms in AHG litigation and those here do not provide a valid basis for distinguishing the cases because the identification of the “bargain” between the parties necessarily depends upon the terms of the respective agreements.
The Court should not accept Netdeen’s submission that the AHG litigation supports its contention that the exercise of a contractual right is not unconscionable. Rather, assumed compliance with a contractual provision is the starting point for an unconscionable conduct analysis, forming part of the “connected circumstances”.
We accept Lindfield’s submissions as to the very limited relevance of AHG Full Court to the ACL unconscionable conduct case here. Netdeen’s submissions are beyond the terms of the grant of leave but, more significantly, they fail to appreciate the significance of the distinctly different relevant contractual provisions; in particular, the detailed provisions in the MFA concerning renewal.
Moreover, we do not accept Netdeen’s submission which is summarised at [149(5)] above concerning purpose. Contrary to Netdeen’s contention, the primary judge was required here to make findings in response to Lindfield’s claim that, on the proper construction of cl 4.7, the power therein was exercised by the Netdeen Board for a substantial and impermissible purpose of implementing the de-mastering policy independently from other relevant considerations.
In the circumstances, the primary judge’s conclusion that there was ACL unconscionable conduct cannot be sustained and it is unnecessary to address each of the findings challenged by Netdeen in grounds 11 to 22 of the notice of appeal.
At trial, Netdeen claimed that, independently of other matters, Lindfield was not entitled to renew the MFA because of Mr Hope’s conduct in setting up Wattle Court. Netdeen claimed that this amounted to Lindfield repudiating the MFA or, alternatively, involving such a serious breach of the MFA so as to disentitle Lindfield from a renewal under cl 4.2 of the MFA.
By grounds 23 to 27 of the notice of appeal, Netdeen challenges many of the primary judge’s findings regarding Wattle Court. Netdeen claims that the evidence was clear that, between December 2023 and May 2024, Mr Hope was actively promoting his own interests and that of Wattle Court to Netdeen’s detriment by encouraging Sub-Franchisees to follow Mr Hope if Lindfield failed to renew the MFA.
Netdeen further claims that Mr Hope’s conduct was plainly in breach of Lindfield’s obligations under the MFA to develop and promote the GJ Gardner Homes business with loyalty and good faith and not to act in a way which is likely to assist a competitor. Accordingly, that conduct amounted to a repudiation by Lindfield of the MFA, which justified Netdeen terminating the MFA on 27 May 2024. Alternatively, if the pleaded conduct did not amount to repudiation, it nevertheless constituted conduct which disentitled Lindfield from obtaining a renewal term, having regard to cl 4.2 of the MFA.
Netdeen challenges the primary judge’s finding at PJ3[288] that the evidence concerning Wattle Court was confined to Mr Hope’s credit, having regard to Netdeen’s pleaded case. It also challenges the finding at PJ3[289] that the termination and repudiation issue did not arise because Netdeen had breached the MFA by refusing the renewal. This finding is challenged on the basis that if Lindfield repudiated the MFA, and that repudiation was accepted by Netdeen who then terminated the MFA, Lindfield’s rights under the MFA, including the right of renewal, would cease and, consequently, it could have no claim for damages. Netdeen also challenges the primary judge’s finding at [290], claiming that the primary judge ought to have found that the claimed repudiation was established and that the alternative finding at PJ3[290] was inconsistent with the primary judge’s reasoning elsewhere and was otherwise unexplained and incorrect.
By its amended notice of contention at 1(f), Lindfield relies upon the primary judge’s tentative finding at PJ3[290] to the effect that, if repudiation was a valid issue, his Honour would have concluded that the repudiation was by Netdeen and accepted by Lindfield. This is in circumstances where Netdeen purported to terminate the MFA on 27 May 2024 and Lindfield claims that Netdeen breached its obligations under cl 14.2 of the MFA and/or cll 27 and 39 of the Franchising Code of Conduct, which is set out in Sch 1 to the Competition and Consumer (Industry Codes—Franchising) Regulations 2014 (Cth) (see [3(4)] of the amended notice of contention).
As noted above, the primary judge awarded Lindfield damages in the amount of $20 million, representing what his Honour found to be the loss of the value of the renewal term. In arriving at that figure, the primary judge referred to the evidence of both Mr Potter and Mr Ross. Mr Potter had prepared expert evidence as to the valuation of the opportunity that Lindfield lost. Mr Ross was not instructed to, and in his reports did not, prepare his own valuation. Rather, he was instructed to, and did, identify what were said to be errors in Mr Potter’s reports.
As also noted above, his Honour explained in PJ2 why he rejected Netdeen’s challenge to the admissibility of Mr Potter’s reports. On appeal, by ground 29 of the notice of appeal, Netdeen challenges that evidentiary ruling. It renews its claim that the materials from the HIA and MBA relied upon by Mr Potter regarding forecasts were themselves inadmissible and could not be relied upon by Mr Potter. Netdeen also contends that if the Potter reports had been ruled inadmissible, it would not have called Mr Ross as a witness, with the consequence that there would have been no evidence to support Lindfield’s primary damages claim. (For completeness, it should be noted that, on appeal, Netdeen did not press its challenge at ground 41 of the notice of appeal to the primary judge’s alternative damages assessment at PJ3[266]-[271].)
Netdeen further contends in grounds 30to 40 of the notice of appeal that, even if the primary judge was correct to admit the Potter reports, there were other matters raised by it below which rendered the reports an unacceptable basis for calculating the primary damages claim. Those criticisms include Mr Potter’s assumption that, for the next 10 years, there would be 35 Sub‑Franchisees, notwithstanding that he was not instructed to assume that number and there was evidence that, as at the end of May 2024, there were only 30 Sub‑Franchisees. Netdeen also points out that Mr Potter himself had acknowledged that, if his estimate was based on there being 30 Sub‑Franchisees, he would get a different result.
Netdeen also contends that, in arriving at a figure of $20 million as representing the value of the business Lindfield lost because of non-renewal, the primary judge erred in not using an annual profit figure which took into account the liability of the company to pay income tax.
Netdeen contends that the primary judge erred in not accepting Netdeen’s criticisms of the Potter reports. Paradoxically, however, it then contends that ultimately the primary judge did not in fact rely upon the Potter reports as the basis for his assessment of damages.
To the extent that the primary judge’s assessment of damages was based on Mr Ross’s evidence (as referred to at PJ3[247]-[259]), Netdeen challenges that approach on several grounds, claiming that the primary judge erred in:
misstating Mr Ross’s evidence at PJ3[248] in finding that Mr Ross “suggested that there was a simpler and alternative method of valuing the business”, being the “multiples” approach; and
Netdeen contends that the primary judge wrongly admitted two reports by Mr Potter, one dated 3 May 2024, which is Mr Potter’s primary report, and one dated 17 July 2024, which replies to Mr Ross’s report dated 3 July 2024.
As we have explained, two consequences are said to follow from the wrongful admission of Mr Potter’s reports. First, to the extent that the primary judge relied on Mr Potter’s reports in concluding that Lindfield’s damages were $20 million, that reliance was misplaced. Secondly, Netdeen submits that if Mr Potter’s report dated 3 May 2024 had been rejected, it would not have relied on the report of Mr Ross. Consequently, Mr Ross’s report would not have been in evidence and, to the extent that the primary judge relied on that report or oral evidence given by Mr Ross, he would not have been able to do so, with the result that there would have been no evidence before the primary judge concerning the quantification of damages and Lindfield would have failed to prove its loss.
Mr Potter’s reports were said to be inadmissible because they depended on unproven assumptions and in substantial respects were not based on his relevant expertise. To understand those criticisms, it is necessary to say something more about the valuation methodology adopted by Mr Potter.
Mr Potter was asked to prepare an expert report which “assesses the value to Lindfield of a ten-year renewal term from 1 July 2024 to 30 June 2034 (Renewal Term)”. He was asked to make several assumptions including that the “Essential Financial Arrangements between Lindfield, the Sub–Franchisees and Netdeen will remain unchanged during the Renewal Term”.
Mr Potter was also asked to adopt the following “approaches”:
“a. ‘An integer to forecast expected future cash flows over the Renewal Term will necessarily be the future volume of contracts. The volume of contracts that could be expected to be undertaken by the sub-franchisees over the Renewal Term should be based on the historical actual volume and market share obtained by reference to ABS approval data and a reasonable high and low estimated range of expected future approvals in the areas for each sub-franchisee having regard to publicly available home building industry forecast data you have been able to obtain’; and
b. ‘If, in the course of providing your opinion, you rely on any external data or assumptions, please identify that data or those assumptions’.” [footnotes omitted]
In his primary report, Mr Potter set out both historical and forecast information in relation to the house construction industry in Australia and in New South Wales and the ACT. The information in relation to Australia is taken from the IBISWorld Report, House Construction in Australia, October 2023. The information in relation to NSW and the ACT is taken largely from the August 2022 and April 2024 versions of an MBA publication titled “Building and Construction Forecasts NSW”. However, Mr Potter also says that he had regard to “ABS data as to the volume of detached house approvals granted per month from FY2019 to January 2024, by local government area (LGA)”.
Mr Potter also had regard to data provided by the HIA. He summarised the information obtained from the sources he referred to in the following terms:
“a. IBISWorld predicts an increase in housing industry revenue over the next several years, before declines in FY2029 and FY2030;
b. MBA predicts an increase in build start volume in FY2024, decline in FY2025, increases in FY2026, FY2027 and FY2028 before a decline in FY2030; and
c. HIA predicts a decline in build start volume in FY2024 followed by increases in FY2025 and FY2026.”
Mr Potter explained that in undertaking the requisite task he regarded the most appropriate methodology as a DCF (discounted cash flow) methodology. This involved estimating the expected cash flows that Lindfield would have derived from the MFA from 1 July 2024 and discounting those cash flows to obtain their present day value applying an appropriate discount rate.
In estimating cash flows, Mr Potter adopted what he described as a “bottom‑up” approach, which involved estimating the number of houses that would be built (or, more accurately, the number of slabs that would be laid) by each Sub‑Franchisee and the income (royalties less expenses) that would be earned by Lindfield from the construction of those houses.
In order to do that, Mr Potter sought to estimate the total size of each Sub‑Franchisee’s market and the expected market share of each Sub‑Franchisee. He also needed to make an assumption about the number of Lindfield’s Sub-Franchisees.
To estimate the total size of each Sub-Franchisee’s market, Mr Potter started with the historical ABS data (from which the market size for each Sub‑Franchisee area could be determined) and applied percentage increases or decreases using data available from MBA and HIA (which he preferred to “the revenue‑based outlook published by IBISWorld”). Two points may be made about Mr Potter’s approach. First, although he was instructed on the approach that he should take, it seems clear that he used his own judgment in selecting which data to use and what adjustments should be made to them. Secondly, and relatedly, it could not be said that Mr Potter made any assumption about the accuracy of the data that he chose to use. The most that could be said is that, as an expert, he considered it appropriate to use the data, making adjustments he considered relevant, to derive figures that he used in the analysis in his report.
Netdeen makes two broad criticisms of Mr Potter’s approach. First, it is said that Mr Potter assumed the accuracy of the data contained in the reports from MBA and HIA. However, the accuracy of those data could not be proved by the reports (since the reports were inadmissible hearsay and could not be admitted as business records). Consequently, Mr Potter’s reports depended upon unproved assumptions and were therefore inadmissible. Secondly, it is said that Mr Potter was not an expert in the housing market and therefore he was not qualified to express an opinion on the likely size of the market in the franchise areas over the following 10 years.
In considering these criticisms, it is convenient first to set out the relevant principles relating to the admission of opinion evidence.
Section 56 of the Evidence Act 1995 (NSW) (Evidence Act) provides:
“56 Relevant evidence to be admissible
(1) Except as otherwise provided by this Act, evidence that is relevant in a proceeding is admissible in the proceeding.
(2) Evidence that is not relevant in the proceeding is not admissible.”
Evidence is relevant if, if it were accepted, it “could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding” (s 55(1)).
Section 76 of the Evidence Act provides:
“76 The opinion rule
(1) Evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed.
(2) Subsection (1) does not apply to evidence of an opinion contained in a certificate or other document given or made under regulations made under an Act other than this Act to the extent to which the regulations provide that the certificate or other document has evidentiary effect.”
“If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.”
Pausing there, it is apparent that expert evidence is admissible if (1) it is relevant to an issue in the proceeding; and (2) it is wholly or substantially based on specialised knowledge that the expert has gained from his or her training, study or experience. If the underlying facts in respect of which the opinion is expressed are sufficiently different from the facts of the case, the opinion may not be relevant, although whether the proved facts are sufficiently different from the assumed facts to render the opinion irrelevant may itself be a matter of expert opinion. For example, the relevance of particular facts to a medical diagnosis may itself be a matter of expert opinion.
Section 135 of the Evidence Act provides:
“135 General discretion to exclude evidence
The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might—
(a) be unfairly prejudicial to a party, or
(b) be misleading or confusing, or
(c) cause or result in undue waste of time.”
An expert report which fails to comply with the principles set out in cases such as Makita at [85] per Heydon JA concerning the need of an expert to identify the assumptions on which his or her opinion is based and the expert’s reasoning may be excluded under s 135 if the requirements of that section are met.
Section 59 of the Evidence Act sets out the general principle relating to hearsay evidence. It relevantly provides:
“59 The hearsay rule—exclusion of hearsay evidence
(1) Evidence of a previous representation made by a person is not admissible to prove the existence of a fact that it can reasonably be supposed that the person intended to assert by the representation.
(2) Such a fact is in this Part referred to as an asserted fact.
(2A) For the purposes of determining under subsection (1) whether it can reasonably be supposed that the person intended to assert a particular fact by the representation, the court may have regard to the circumstances in which the representation was made.
Note—
Subsection (2A) was inserted as a response to the decision of the Supreme Court of NSW in R v Hannes (2000) 158 FLR 359.
(3) …”
“60 Exception: evidence relevant for a non-hearsay purpose
(1) The hearsay rule does not apply to evidence of a previous representation that is admitted because it is relevant for a purpose other than proof of an asserted fact.
(2) This section applies whether or not the person who made the representation had personal knowledge of the asserted fact (within the meaning of section 62 (2)).
Note—
Subsection (2) was inserted as a response to the decision of the High Court of Australia in Lee v The Queen (1998) 195 CLR 594.
(3) …”
“Before the Evidence Act it was well established that experts are entitled to rely upon reputable articles, publications and material produced by others in the area in which they have expertise, as a basis for their opinions. In Borowski v Quayle [1966] VR 382 at 386 (Borowski) Gowans J, quoting Wigmore on Evidence (3rd ed) vol 2 at 784-785, said that to reject expert opinion because some facts to which the witness testifies are known only upon the authority of others, ‘would be to ignore the accepted methods of professional work and to insist on finical and impossible standards’. Experts may not only base their opinions on such sources, but may give evidence of fact which is based on them. They may do this although the data on which they base their opinion or evidence of fact will usually be hearsay information, in the sense they rely for such data not on their own knowledge but on the knowledge of someone else. The weight to be accorded to such evidence is a matter for the court: see generally Borowski [1966] VR at 385-387; PQ v Australian Red Cross Society [1992] 1 VR 19 at 34-35; H v Schering Chemicals Ltd [1983] 1 WLR 143 at 148-149; Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141 at 161-163 and Jango (No 4) 214 ALR 608 at [8].
There is nothing in the Evidence Act that displaces this body of law. The Australian Law Reform Commission, on whose report the Act was based, said:
‘Under existing law hearsay evidence that is admissible for a non-hearsay purpose is not excluded, but may not be used by the court as evidence of the facts stated. This involves the drawing of unrealistic distinctions. The issue is resolved by defining the hearsay rule as preventing the admissibility of hearsay evidence where it is relevant by reason only that it would affect the court's assessment of the facts intended to be asserted. This would have the effect that evidence relevant for a non-hearsay purpose — eg to prove a prior consistent or inconsistent statement, or to prove the basis of the expert's opinion — will be admissible also as evidence of the facts stated.’
See Interim Report No 26, Evidence (1985) vol 1 at para 685.”
Although the Full Court was concerned with the Evidence Act 1995 (Cth), its comments apply equally to the Evidence Act.
The High Court in Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 at [41] adopted an approach consistent with that set out above. There, French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ said:
“Contrary to submissions on behalf of Mr Hawchar, this analysis does not seek to introduce what has been called “the basis rule”: a rule by which opinion evidence is to be excluded unless the factual bases upon which the opinion is proffered are established by other evidence. Whether that rule formed part of the common law of evidence need not be examined. It may be accepted that the Law Reform Commission's interim report on evidence denied the existence of such a common law rule and expressed the intention to refrain from including a basis rule in the legislation the Commission proposed and which was later enacted as the Evidence Act 1995 (Cth) and the Evidence Act 1995 (NSW). What has been called the basis rule is a rule directed to the facts of the particular case about which an expert is asked to proffer an opinion and the facts upon which the expert relies to form the opinion expressed.” (footnotes omitted)
“In cross-examination, Captain Kysil said that he had searched a number of websites to inform himself about the Donzi motorboat. That he did so was consistent with his having no relevant training, study or experience to express a view about the correct description of the vessel or as to its rarity. He explained that his conclusion that the vessel "may be rare" was due in part to the fact that the "information [he] received off the Internet was insufficient to give ... a more fulsome research background on the boat because there was insufficient evidence of the type of boat I was looking for" (Black 580). Captain Kysil did not identify or adopt as correct any information obtained from any particular website. Nor was it suggested or established that any of the websites to which he referred were sources of information which experienced valuers of Donzi motorboats treated as reliable and used when forming opinions as to value: as to the possible admissibility of such information, see English Exporters (London) Ltd v Eldonwall Ltd [1973] Ch 415 at 420; PQ v Australian Red Cross Society [1992] 1 VR 19 at 34-36; R v Fazio (1997) 69 SASR 54 at 63-64; Woods v Director of Public Prosecutions [2008] WASCA 188; 38 WAR 217 at [55]-[58]; Bodney v Bennell [2008] FCAFC 63; 167 FCR 84 at [92]-[93].”
See also Fuller v Avichem Pty Ltd (t/as Adkins Building & Hardware) [2019] NSWCA 305 at [89] (Payne JA, White JA agreeing).
It may be accepted that the reports from the MBA and HIA were hearsay and were inadmissible to prove the truth of the data they contained. However, the question was not whether the reports from the MBA and HIA were admissible. Rather, it was whether Mr Potter’s evidence was admissible because he relied on those reports. For the reasons given, they were. What made the reports from the MBA and HIA admissible was that they were part of the material relied on by Mr Potter to form his expert opinion, with the result that they were admissible under s 60 of the Evidence Act (see Malone v Queensland (No 3) [2022] FCA 827 at [58] per O’Bryan J).
It was not disputed that the valuation of the cash flows of a business is an area of specialised knowledge that Mr Potter had. In considering whether the opinion expressed by Mr Potter was based wholly or substantially on that specialised knowledge, it is important to bear in mind what Mr Potter did. Mr Potter was required to value the future cash flows that Lindfield would derive from the MFA had it been renewed for a period of 10 years. In order to value those cash flows, Mr Potter selected a particular valuation methodology that required him to reach conclusions about the likely size of the market for home building in various geographic areas. In order to do that, he identified what he considered to be the most relevant publicly available data and derived predicted increases (or decreases) in the size of the market over time using those data. The adjustments he made did not depend on his own knowledge of the relevant markets but rather on the adjustments that he thought were appropriate having regard to the different industry data and the fact that the industry data only covered some of the years in question.
In essence, then, Mr Potter relevantly did the following:
He selected the appropriate valuation methodology.
He selected the appropriate industry data to rely on.
He decided how to use that data and how to extrapolate from the data he had to derive figures for the 10 years.
He performed the necessary calculations.
The tasks referred to in (1) and (4) were plainly within Mr Potter’s specialised knowledge. Although perhaps not as obvious, the same is true of the tasks referred to in (2) and (3).
In the case of (2), it is to be expected that a valuer would have general knowledge of the sources of publicly available data, or how to go about finding the sources of publicly available data, relevant to general business activity, such as information about interest rates, inflation, employment and economic growth. Housing construction is such an important area of economic activity, that the same is true of it. Mr Potter gave unchallenged evidence that he had done “a number of analyses and reports in [the house building] industry” and that the reports that he identified were “widely used”. The same reports were used by Mr Ross; and it was not suggested that there were more reliable industry data.
“It is not essential for a trial judge assessing damages for loss of a chance to nominate a particular percentage of probability to be attributed to the prospect of the chance being realised, and to insist on this would be prone to artificiality. A global approach not requiring the specification of particular percentages or degrees of probability or possibility was endorsed as acceptable by this Court in Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 at [147]. In [Malec v JC Hutton Pty Ltd (1990) 169 LR 638; [1990] HCA 20] at 640, Brennan and Dawson JJ said:
‘… we think it undesirable for damages to be assessed on the footing of an evaluation expressed as a percentage. Damages need not be assessed by first determining an award on the footing that the hypothetical situation would have occurred and then discounting the award by a selected percentage. Damages founded on hypothetical evaluations defy precise calculation.’”
Netdeen’s challenge to the primary judge’s method of assessment of damages targeted his Honour’s reliance upon the evidence of Mr Ross as to the “multiples approach”, and the figure of $20 million which he said could be achieved on that approach, in circumstances in which the primary judge made a finding that Mr Potter’s methodology and some conclusions to be “certainly open to criticism”. But the primary judge did not conduct any analysis as to the implications of the (unspecified) respects in which he appeared to have found that Mr Potter’s methodology and conclusions were open to criticism.
We agree that the primary judge erred in the approach that he took.
The starting point is that the primary judge did not identify the respects in which Mr Potter’s methodology and conclusions were “open to criticism”. Consequently, it is not possible to form any view on the significance of those criticisms, if any, for Mr Potter’s valuation. In this regard, it is worth observing that Netdeen’s criticisms of Mr Potter’s methodology and conclusions were many, covering matters such as discount rate, rates of change and the choice of figures for rates of change which had no objective basis, rates of increase, use of averages, adjustments used, and averaging of data between franchises. Faced with criticisms of those types, it would be usual for a trial judge to consider whether the criticisms went to the reliability of the report as a whole, with the result that the conclusions of the report could not be accepted, or whether they went to individual integers of a complex calculation, in which case we would have expected that the primary judge would express a view on each of the integers in contest so that following delivery of the judgment further calculations could be performed to arrive at an appropriate figure for damages if liability had been established. It is not generally appropriate for a trial judge in a case where the assessment of damages is complicated to conclude that a plaintiff has failed to prove its damages because the trial judge has determined that some of the inputs used in calculations performed by the expert or experts on which the plaintiff relies were incorrect when the trial judge is in a position to form a view on the correct inputs that should be used in those calculations.
At PJ3[251], the primary judge seems to have placed some reliance upon the fact that what he interpreted to be Mr Ross’s valuation of Lindfield’s lost opportunity of at least $20 million was not “very different” from the figure of $19.6 million achieved by applying Mr Ross’s discount rate of 20% to Mr Potter’s revised cash flows. Given that, as set out above, the flaws in Mr Potter’s approach identified by Netdeen went well beyond the discount rate he used, there was no reliable basis for the primary judge’s adoption of the figure of $19.6 million. In particular, the primary judge does not suggest that the discount rate was the only matter in Mr Potter’s report that was “open to criticism” and what the primary judge describes as “Mr Potter’s revised cash flows” were the subject of the multiple criticisms by Netdeen set out above.
“In my opinion, this derived discount rate is still too low, in that it does not yet take into account any risk unrelated to the specific variables it relies upon. Based on my experience as a valuer, in my opinion a sensible discount rate for a business like that of Lindfield’s would be in the range of 20% to 25% (which relates, in broad terms, to a cash flow multiple of between 4.0 and 5.0 times, ignoring growth). On that basis, the requisite specific risk premium would be in the range of 3.8% to 8.8%.”
This paragraph is found in part 7 of Mr Ross’s report, where he sets out his criticism of the discount rate used by Mr Potter in his Discounted Cash Flow methodology. Mr Ross had made the point he makes at [7.7.8] earlier in his report at [2.6.2(g)], again setting out why he considered that Mr Potter had erred in his selection of the discount rate. Significantly, Mr Ross was not in these paragraphs advocating a multiples approach to valuation. He was simply referring to the cash flow multiple in the context of identifying his suggested discount rate to be used in a Discounted Cash Flow valuation methodology, which was determined having regard to a range of factors such as the risk free rate, market risk premium, beta, size premium and specific risk premium (see Mr Ross’s report at [2.6.2]).
It was put to Mr Ross in cross-examination that the multiples approach was “a different way of valuing a business and its cash flows”. He replied:
“It’s different to a DCF [Discounted Cash Flow] approach, yes.”
“Q. And the other alternative is to apply a cash flow multiple to the known earnings figure for the business; correct?
A. Your Honour, as a crosscheck of the – of the sense of reasonableness of Mr Potter’s outcomes – which in my view is an important process – yes, one way of doing that is to use another second, different valuation approach, and this approach, a multiples approach.”
Mr Ross, in the subsequent cross-examination, agreed that mathematically a discount rate of 20% equated to a multiple of 5, and a discount rate of 25% equated to a multiple of 4, and he agreed that a multiple of 4-5, ignoring growth, was appropriate for Lindfield’s business. He also agreed that another way of valuing Lindfield’s business would be to apply a multiple if it was possible to identify the reported or actual profit of the business for the most recent 12months. He agreed that that methodology could be used to “arrive at a value for the business” and that if you made an assumption that the EBIT figure was $4 million and multiplied it by his multiple of 5 (which Mr Ross said was at the bottom of the range) then “it could be” that that valuation would be $20 million.
What is significant, however, is that Mr Ross did not suggest that this was the appropriate method of providing a reliable valuation of the lost opportunity in the circumstances. His evidence was that this was a valuation methodology that could be used as a cross-check. That evidence had to be considered against the backdrop that both Mr Potter and Mr Ross considered that the appropriate methodology to use was the Discounted Cash Flow methodology. It was not put to Mr Ross (or Mr Potter for that matter) that an alternative reliable method of valuing Lindfield’s lost opportunity was the multiples approach. And the questioning of Mr Ross, which did not seek to challenge his description of this methodology as a cross-check, must be understood in that context. Having regard to this, the primary judge erred in interpreting Mr Ross’s evidence as supporting the multiples approach as providing an appropriate and reliable method of valuing Lindfield’s lost opportunity, or, as having “concede[d] a valuation for the term of the renewal”: PJ3[257].
If, as appears to be the case, the primary judge considered there to be flaws in Mr Potter’s methodology and some of his conclusions, then (in particular having regard to the common position of Mr Potter and Mr Ross that a Discounted Cash Flow methodology was the appropriate and most suitable method of valuation to use) the primary judge should have assessed the significance of those flaws and whether they undermined Mr Potter’s conclusion as to the proper valuation of Lindfield’s lost opportunity. If necessary, the primary judge could have directed that Mr Potter provide updated calculations based upon a correct methodology or conclusions. But in a claim of this value and complexity it was not appropriate to reach a conclusion as to valuation based upon Mr Ross’s oral evidence and [7.7.8] of Mr Ross’s report.
For completeness, we add it is difficult to accept Netdeen’s criticisms of the primary judge’s conclusion regarding the assumption Mr Potter made as to the number of Sub-Franchisees in circumstances where, in its SFACLR, Netdeen admitted that there were approximately 34 Sub-Franchisees in NSW and the ACT, as well as also admitting that Lindfield earned an annual net profit before tax of $4 million: see PJ3[237].
“Q. … … if we have an earnings multiple of 6.7, a million dollars profit, no growth, the profit being an EBIT figure after tax, valuation of the business of $6.7 million. That’s how this works, isn’t it?
A. Yes.”
As noted above, Netdeen urged the Court to exercise its power under s 75A(10) of the Supreme Court Act 1970 (NSW) to make findings which ought to have been given or made or which the nature of the case requires as an alternative to ordering a retrial.
There are good reasons for the Court being reluctant to order a retrial (see Saltalamacchia v Zamagias [2024] NSWCA 184 at [3] per Payne and Kirk JJA). That reluctance is reflected in r 51.53(1) of the Uniform Civil Procedure Rules (2005) (NSW), which provides that the Court must not make such an order unless it appears to the Court that some substantial wrong or miscarriage has been occasioned.
It should be acknowledged, of course, that in accordance with binding authority, an appellate court is generally in as good a position as a trial judge “to decide on the proper inference to be drawn from facts which are undisputed or which having been disputed, are established by the findings of the trial judge” (see Warren v Coombes (1979) 142 CLR 531 at 551; [1979] HCA 9). The position is different, however, if factual findings are likely to have been affected by the trial judge’s impressions concerning the credibility and reliability of witnesses where the trial judge has the advantage of seeing and hearing them giving their evidence. There is also the added complication of the obscurity associated with the primary judge’s ultimate approach to the evidence of witnesses about whom he made adverse credibility findings.
The general principle is also subject to other exceptions, as acknowledged in Saltalamacchia at [6]. A retrial was ordered in that case on the issue of liability where there were two competing versions of events and the contest fell to be determined solely by conclusions on reliability and credit. In circumstances where the primary judge’s only conclusion was affected by error, the Court considered that it was not in a position to make such findings itself. The Court said that a substantial wrong or miscarriage had been occasioned because the respondent had not been given a full and fair determination of his case on the evidence and this Court was not in the position to rectify that omission.
Having regard to the errors we have identified above concerning the proper construction of cl 4.7 and damages, we consider that substantial wrongs have been occasioned which, regrettably, require the following aspects of the case to be remitted for retrial by a different judge:
whether Netdeen has met its onus to establish that the conditions for the exercise of the right of refusal in cl 4.7 of the MFA, on its proper construction, are satisfied; and
the quantification of damages.
There is no utility in remitting the issue of ACL unconscionable conduct. For the reasons we have given, that claim could only succeed (if at all) if Lindfield succeeds in its claim based on a breach of cl 4.7 of the MFA. However, if the latter claim succeeds, the ACL unconscionable conduct claim adds nothing to it.
For all these reasons, the following orders will be made:
The appeal be allowed in part.
The orders dated 17 October 2024 be set aside.
Direct that there be a retrial limited to determining:
(a) whether the Board breached cl 4.7 of the Master Franchise Agreement dated 1 July 2014 by its decision dated 20 July 2023 not to renew the Master Franchise Agreement; and (b) the quantum of any damages to be awarded if that breach is established.
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Headnote amended to correct numbering and insert missing comma
Netdeen Pty Ltd t/as GJ Gardner Homes
Lindfield NSW Pty Ltd [2025] NSWCA 196
(2023) 303 FCR 479
(1998) 44 NSWLR 349
(2008) 167 FCR 84
(2001) 69 NSWLR 558
(1953) 89 CLR 327
(2011) 243 CLR 588
(1946) 74 CLR 127
(2003) 214 CLR 118
(1953) 90 CLR 113
(1988) 166 CLR 351
(2019) 266 CLR 129
(2001) 52 NSWLR 705
(2018) 97 NSWLR 1163
(2020) 104 NSWLR 62
(1992) 26 NSWLR 234
(2019) 100 NSWLR 55
(1994) 179 CLR 332
(2023) 112 NSWLR 29
(1979) 142 CLR 531
(1992) 26 NSWLR 491
(2009) 74 NSWLR 618
(2000) 158 FLR 359
(1998) 195 CLR 594
(1971) 17 FLR 141
(1997) 69 SASR 54
(1999) 47 NSWLR 473
Appeal allowed in part. The orders dated 17 October 2024 were set aside. A retrial before a different judge was directed on whether the Board breached cl 4.7 by refusing renewal on 20 July 2023 and, if so, the quantum of damages. The parties were directed to seek agreement on costs and any other necessary orders within 21 days, with written submissions to be filed if they could not agree: [235].
Whether the primary judge erred in failing to find that Lindfield repudiated the MFA by reason of its involvement in establishing a rival business to the one carried on by GJ Gardner Homes through a company known as Wattle Court Homes Pty Ltd (Wattle Court) and thereby lost the right to renew the MFA.
Whether the primary judge erred in admitting Mr Potter’s reports into evidence.
Whether the primary judge erred in his Honour’s assessment of damages and, if so, whether his Honour’s assessment can be sustained having regard to the matters relied upon in the amended notice of contention.
We have structured our judgment by reference to these issues, considering the individual grounds of appeal and contentions within this structure.
For the reasons set out below, the appeal must be allowed and the matter remitted to a judge of the Supreme Court to determine the following limited issues:
whether the refusal by Netdeen to renew the MFA was a decision made on grounds, honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of both Netdeen and Sub-Franchisees as required by cl 4.7 of the MFA, properly construed; and
the quantum of damages in the event that the claim that Netdeen breached cl 4.7 of the MFA is established on the retrial.
To the extent that Lindfield relies, in its contentions, upon the fact that the right of renewal was objectively known by both parties to be significant to Lindfield’s entry into the MFA, and that the right to renew was introduced following negotiations, Netdeen submits that it is necessary to have regard to what terms were ultimately agreed. More particularly, Netdeen says, the right of renewal under cl 4.2 of the MFA was made subject to Netdeen’s discretion under cl 4.7 to refuse renewal and the negotiations cannot require that cl 4.7 is read other than in accordance with its terms. Further, Netdeen says, Lindfield’s own case is that it made pre-tax profit of more than $24 million in the first 10 year term of the MFA, thus this is not a case where it would have been envisaged by the parties that a second 10 year term was essential for Lindfield to recoup its investment.
Lindfield contends that, as a matter of grammatical construction, cl 4.7 requires Netdeen to have regard either to the best interests of all of the Franchisors, the other Master Franchisees and the Sub-Franchisees or, as senior counsel for Lindfield put it, in the interests of the system as a whole or, alternatively, to the best interests of the Sub-Franchisees alone. As to the latter, however, Lindfield submits that that alternative (being that non-renewal is based upon consideration of the best interests of the Sub-Franchisees alone) is unavailable in any case in which Netdeen determines that it is not in its best interests to renew the MFA. In such a case, it submits, the decision will necessarily be based upon the best interests of Netdeen and can never be characterised as a decision based solely on the interests of the Sub-Franchisees. Thus, in any case where renewal is considered to be against the interests of Netdeen, it is only authorised by cl 4.7 if Netdeen honestly and reasonably considers that renewal is not in the interests of the system as a whole.
Lindfield says that this construction is appropriate from a commercial point of view because a right to deprive it of the benefit of an option which was central to the parties’ bargain should not be expansively construed.
Irrespective of whether the Court accepts its “grammatical construction”, Lindfield’s overarching contention is that the MFA as a whole is predicated upon the continuation of master franchising. Thus, it says, the “Business” is defined in Part 1 of the MFA as “the GJ Gardner Homes Master Franchise business”, that business is repeatedly referenced in the recitals to the MFA, and the entitlement to renew under cl 4.2 and the provisions of cl 4.6 are all predicated upon a continuing master franchising business. It follows, Lindfield submits, that cl 4.7 does not authorise non-renewal in effect to bring down the structure of master franchising as that would be a purpose antithetical to the structure and aim of the contract. Senior counsel for Lindfield agreed that this was an “analogous point” to that in Stirling v Maitland (1864) 5 B & S 840; 122 ER 1043.
In support of its construction, Lindfield points to the fact that the renewal term was added to the MFA after negotiations between Mr Hope from Lindfield and Mr Wallis from Netdeen, as reflected in the 3 April 2014 emails set out at [9] and [10] above. It also relied upon the fact that Netdeen’s guiding philosophy was to help Master Franchisees build valuable, saleable businesses, a principle that remained in place until at least 2019, and that on unspecified occasions Mr Greg Gardner had told Mr Hope that “the master franchisees would always have a business to sell”.
We do not wholly accept either party’s contentions as to construction.
The starting point is Lindfield’s proposed construction that a decision under cl 4.7 must be based either on the interests of the system as a whole or Sub‑Franchisees alone. That construction finds no support in the language of cl 4.7. Nor is there any basis upon which we would strain the language of cl 4.7 to so construe it. It is natural to read the first connective (the “and”) as the primary one. Clause 4.7 confers a discretion on Netdeen. It makes little sense to interpret that discretion as requiring it to ignore its own interests in certain circumstances and not others, which would be the result of the construction advanced by Lindfield. It makes greater commercial sense to interpret the clause consistently with the natural reading of the language, that is, as conferring a discretion on Netdeen to refuse renewal where that would not be in its own best interests and would not be in the best interests of at least one of other Master Franchisees and Sub-Franchisees.
Thus, as Netdeen contends, cl 4.7 is complied with provided its requirements are met by reference to what is not in the best interests, relevantly here, of each of Netdeen and the Sub-Franchisees.
In our view, properly construed, cl 4.7 requires three things. First, that Netdeen form an opinion that renewal would not be in the best interests of Netdeen in its capacity as Franchisor and other GJ Gardner Homes Master Franchisees and/or Sub-Franchisees. Secondly, that the opinion be based on “grounds” that are honestly and reasonably held by the entity making the decision to refuse renewal, here the Netdeen Board. Thirdly, that those grounds are the substantial reason for the refusal to renew.
Provided that these three requirements are met, it matters not that the opinion as to the best interests of Netdeen and, relevantly, the Sub-Franchisees is formed in a context where Netdeen is considering two potential alternatives, being on the one hand renewal of the Master Franchise and, on the other hand, a de-mastered structure. This is particularly so given that, under cl 24.1 of the MFA, the consequence of non-renewal in the absence of any election by Netdeen to transfer the Sub-Franchises to another master franchisee would be, in effect, a direct contract between Netdeen and the Sub-Franchisee. But the grounds must be as stated in cl 4.7.
In addition to the explicit limitations circumscribing Netdeen’s power under cl 4.7, there is an important question whether, in forming the necessary opinion about the best interests of Netdeen and, relevantly, the Sub-Franchisees, for the purpose of cl 4.7 of the MFA, Netdeen was required to have regard only to matters arising from Lindfield’s performance in its role as Master Franchisee under the MFA. Although the factors set out in cl 4.7(a)-(e) are matters which “may” be taken into account, and cl 4.7 expressly states that the listed matters do not limit other matters that may reasonably be taken into account, the inclusion of those sub-paragraphs suggests that the parties intended that non-renewal under cl 4.7 should be based upon the manner in which Netdeen performed as Master Franchisee under the MFA and the impact of this upon the interests of Netdeen and, relevantly, the Sub-Franchisees. Those metrics of performance are manifestly not limited to the matters listed at cl 4.7 (a)-(e) and would include, for example, any disparagement or undermining by Lindfield of the GJ Gardner Homes brand. Moreover, it is not necessary that Netdeen reach the opinion that Lindfield underperformed as Master Franchisee, as the requirements of cl 4.7 may be satisfied if Netdeen holds the necessary opinion that having regard to relevant metrics of Lindfield’s performance under the MFA, the interests of both it and Sub-Franchisees will be better served by non‑renewal (such that renewal is against the best interests of both). But Netdeen could not properly form the opinion required under cl 4.7 of the MFA in reliance upon matters unrelated to the performance of Lindfield under the MFA.
That is not to say that, on its proper construction, the de-mastering policy was entirely irrelevant to cl 4.7. For example, if the Board honestly and reasonably believed that there were grounds which justified a conclusion that Lindfield’s performance as Master Franchisee was such to warrant non-renewal having regard to the best interests of Netdeen and, relevantly, the Sub-Franchisees, it would be open to the Board to refuse the renewal and give effect to the de-mastering policy.
Our construction of cl 4.7 is consistent also with the object and purpose of the MFA as disclosed by the terms of the MFA as a whole. We are mindful of the need for caution in attributing a commercial purpose to a contract: The J&P Marlow (No 2) Pty Ltd v Hayes (2023) 112 NSWLR 29; [2023] NSWCA 117 at [76]–[80] (Bell CJ in dissent). However, having regard to the MFA as a whole, it is apparent that its object and purpose was to provide for Lindfield to undertake the role of Master Franchisee against the backdrop of the Business, defined (as set out above) as a master franchise business. The discretion under cl 4.7 of the MFA should not be interpreted as permitting Netdeen to refuse renewal for a substantial purpose that is extraneous to that purpose (see Carr v JA Berriman Pty Ltd (1953) 89 CLR 327 at 346-347; [1953] HCA 31 per Fullagar J (Williams, Webb and Kitto JJ agreeing); NSW Rifle Association Inc v Commonwealth [2012] NSWSC 818; 293 ALR 158 at [126] per White J).
Construing cl 4.7 in that way is also consistent, at least by way of analogy, with the principle established in Stirling v Maitland at 1043, where Cockburn CJ said:
Nor, contrary to Lindfield’s submission, should the primary judge be found to have rejected Netdeen’s contention that the evidence it relied upon did satisfy the requirements of cl 4.7 of the MFA. Rather, the unfortunate conclusion we are driven to is that the primary judge failed to resolve the factual issue whether Netdeen had satisfied its onus of proving that the requirements of cl 4.7 were satisfied.
Moreover, contrary to the parties’ contentions, this Court cannot reach any conclusion as to whether or not Netdeen honestly made the decision not to renew the MFA on the grounds set out in cl 4.7 of the MFA. Nor can it reach a conclusion as to whether or not there were reasonable grounds for that decision. These are matters that necessarily turn upon the primary judge’s assessment of the evidence as a whole, including the oral evidence. That assessment is complicated here by the somewhat opaque credit findings made by the primary judge, which leave unclear whether or not the evidence of Mr Wallis and Mr Thornton as to the discussion at the Board meeting on 20 July 2023 was rejected in its entirety, and what the primary judge made of Mr Trent Gardner’s evidence. Whilst the primary judge’s acceptance of Lindfield’s submission as to the credit of these witnesses, at PJ3[161] (see above at [40]) might suggest that the primary judge rejected Mr Wallis and Mr Thornton’s evidence unless corroborated, the primary judge’s conclusion at PJ3[180(1)] (see above at [43]) suggests a more qualified position. It is also not clear to what extent the primary judge found that the evidence of Mr Trent Gardner corroborated Mr Wallis and Mr Thornton’s evidence.
The task of determining whether or not a contractual power has been exercised for an impermissible purpose by a multi-member body such as the Board may be challenging. As Kirby P observed in Warringah Shire Council v Pittwater Provisional Council (1992) 26 NSWLR 491 at 509 (in the different context of judicial review on the ground of impermissible purpose in the exercise of a statutory power by a local government council) (Clarke JA agreeing):
In written and oral address on the appeal, Netdeen repeatedly claimed that the issue raised by Lindfield in its amended notice of contention, that the document provided by Netdeen on 6 July 2023 did not contain the then current terms of the Master Franchise Agreement, is beyond the pleadings and the way in which Lindfield conducted the trial below. We reject that claim.
It was made clear in Lindfield’s Second Further Amended Commercial List Statement (SFACLS) at [19] that the document sent around 6 July 2023 was claimed by Netdeen to be “its current MFA that was purportedly provided in accordance with cl 4.6(a) of the MFA”. After highlighting at [20] particular terms of that document, Lindfield stated at [24] that the renewal terms set out in the document in purported compliance with cl 4.6(a) was “a breach of cl 4.6(a) of the MFA on its proper construction as stated in paragraph 6(a) above”. Paragraph 6(a) stated:
For all these reasons, we reject ground 28 of the notice of appeal. It is unnecessary to determine ground 1(c) of the amended notice of contention.
If this reading of PJ3 is mistaken, then Lindfield relies on its amended notice of contention and submits that the primary judge’s conclusion as to ACL unconscionable conduct should nevertheless be affirmed. It claims that it was unconscionable for Netdeen to exercise its right of non-renewal because Netdeen failed to “give effect to the basis on which the parties contracted at the time of entering into the MFA”. The relevant basis on which the parties contracted is described in terms of an “an expectation of a renewal”. As to the findings of fact challenged by Netdeen in grounds 11 to 19 of the notice of appeal, Lindfield submits that Netdeen has failed to make good any challenge concerning the principles in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22.
In reply, Netdeen denies that the effect of Jenyns is to enable a party to raise unpleaded allegations concerning ACL unconscionable conduct at trial, on the basis that they form part of the “connected circumstances” going towards the issue of ACL unconscionable conduct. It submits in particular that Lindfield’s emphasis on the renewal option functioning as a “lure” to enter into the MFA can go nowhere in circumstances where there was no case on the pleadings below that Netdeen made any representation about renewal being guaranteed or likely. Nor, Netdeen submits, does the evidence support Lindfield’s characterisation of the primary judge’s reasoning. Netdeen also rejects Lindfield’s submission that it failed to make good a Fox v Percy challenge.
Before considering the detail of the primary judge’s findings as to ACL unconscionable conduct, we deal with three matters.
First, there is no clarity as to whether or not the primary judge approached the question whether Netdeen’s conduct was unconscionable in breach of s 21 of the ACL on the premise of his own (and we have found erroneous) construction of cl 4.7 of the MFA and/or on the premise that (on either his or Netdeen’s construction) Netdeen’s refusal to renew the MFA was in breach of cl 4.7. As to the first of these matters, at PJ3[211] the primary judge said that his finding as to ACL unconscionable conduct was based upon an assumption (contrary to his finding) that Netdeen’s construction of cl 4.7 of the MFA was correct. However, at PJ3[199] his Honour said:
Starting with Lindfield’s pleaded case, its central claim of unconscionability was set out in [35(a)] of the SFACLS. The conduct identified there as being unconscionable was simply Netdeen’s refusal to renew the MFA. The circumstances relating to that conduct upon which Lindfield relied were pleaded in [31]-[34] of the SFACLS. Paragraph [31] dealt with the uncontroversial claim that Netdeen was a supplier or possibly supplier of goods or services to Lindfield. Paragraph [32] specified 11 individual circumstances relating to the conduct. Lindfield pleaded that it relied on “any one or more and/or all” of those circumstances. Two of these circumstances figured prominently in the presentation of Netdeen’s case below and also in PJ3. Those two circumstances, pleaded in [32(g) and (h)], were:
Thus, whilst we accept, as Lindfield contends, that ACL unconscionable conduct can be established notwithstanding the valid exercise of a right (see Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344 at [135] per Leeming JA, with whom Bell P and Brereton JA agreed), given the key integer of unconscionability as found by the primary judge, in this case the breach of cl 4.7 of the MFA and the primary judge’s findings as to ACL unconscionability must stand or fall together.
Another complexity, which arises irrespective of the matters discussed above, is that the “sharp practice” as found by the primary judge was deceiving Mr Hope into believing that there was a possibility of renewal when, Lindfield says, that was not in fact the case: PJ3[216]. As Netdeen points out, the primary judge made no finding that Netdeen made any particular representation to the effect that renewal was guaranteed or more likely than not, nor that Lindfield relied to its detriment on any such representation. Nor does the evidence appear to support such a finding. Consistent with this, Mr Hope must have appreciated that the possibility of non-renewal was a real one. Given this, and that this “sharp practice” appears to have been central to the primary judge’s finding of ACL unconscionability (albeit that his Honour also relied upon the act of purporting to provide a “current” Master Franchise Agreement under cl 4.6 of the MFA), it is not clear from the primary judge’s reasons why it is that the unconscionable conduct was the failure to renew (as contended by Lindfield), as opposed to the earlier deceptive conduct (which Lindfield never relied upon as itself being unconscionable). More particularly, in circumstances where Lindfield knew that non-renewal was a possibility and did not lead any evidence that it changed its position in reliance upon any deception, it is difficult to see why non-renewal would be characterised as unconscionable. And the finding that non-renewal was itself unconscionable was, of course, critical. It was this finding that meant that the appropriate measure of damages was the value of the business lost because of the non-renewal as found by the primary judge at PJ3[303] (a finding which Netdeen has not challenged on the appeal).
We, of course, recognise that there may be cases in which earlier deceptive conduct might have the effect that a non-renewal decision is itself unconscionable. However, on the facts as found by the primary judge, even if there had been deception as to whether renewal was a “real possibility”, it is not clear why this was such a case.
Tensions also exist in respect of the primary judge’s finding that, by rejecting the application to renew under cl 4.7, Netdeen failed to act in good faith within the meaning of s 22(1)(l) of the ACL: PJ3[217]. The meaning of good faith in this context was considered by Bathurst CJ (with whom Beazley P and Leeming JA agreed) in Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15; 356 ALR 440. After noting at [197] that it is appropriate to have regard to “cases involving want of good faith” in considering whether conduct is in all the circumstances unconscionable under s 21 of the ACL, the then Chief Justice observed (at [198]):
As the Court observed during the hearing of the appeal, the ACL unconscionable conduct case only has practical significance if, on the proper construction of the MFA, Netdeen was entitled not to renew the MFA. This is particularly so in circumstances in which the essence of both claims was the failure by Netdeen to renew the MFA, where the damages claimed for both causes of action was the lost opportunity to Lindfield occasioned by non-renewal, and where there was no attempt made by Lindfield to quantify the claim for ACL unconscionability any differently from how it quantified its breach of contract claim.
We therefore approach Lindfield’s grounds in the amended notice of contention for upholding the primary judge’s finding as to ACL unconscionability on the predicate that Netdeen was entitled under cl 4.7 of the MFA not to renew the MFA, and, as necessarily follows from that (on any of Lindfield, Netdeen, or this Court’s construction of cl 4.7), that Netdeen made an honest and genuine decision at the Board meeting on 20 July 2023 not to renew the MFA on the basis that to do so would be against (at least) Netdeen and the Sub‑Franchisees’ best interests. It also follows that, up until the point when the non-renewal decision was made at that Board meeting, there remained a possibility that the MFA would be renewed.
On that predicate, for the following reasons we are not satisfied that the matters advanced by Lindfield in the amended notice of contention, whether individually or cumulatively, amount to unconscionability.
First, the matters in ground 1(a), (b) and 2(d)(i) of the amended notice of contention rely upon Netdeen being in breach of cl 4.7 of the MFA. They cannot be relied upon to support a finding of unconscionability on the predicate that there was no such breach. We also observe that Lindfield did not take the Court to any evidence as to the parties’ subjective or objective purpose for including cl 4.7 in the MFA that could have supported the contention, in ground 2(d)(i) of the amended notice of contention, that Netdeen had used cl 4.7 of the MFA for a purpose other than that for which it was “designed”.
Secondly, even if Netdeen’s conduct in providing a document to Lindfield on 6 July 2024 that was not its “then current MFA” was conduct calculated to discourage Lindfield from seeking renewal (and we make no finding as to this), contrary to grounds 1(c) and 2(d)(i) and (ii) of the amended notice of contention, it does not go directly to the conduct of Netdeen in making a contractually-compliant decision not to renew the MFA that that conduct could be characterised as unconscionable. We have reached this conclusion having regard to this conduct individually and in the context of the other matters relied upon.
Thirdly, contrary to grounds 1(e) to (g), 2(d)(v) and 2(e) of the amended notice of contention, Netdeen’s conduct in May 2024 in purporting to terminate the MFA occurred some nine months after the non-renewal decision and is not conduct that would lead us to characterise the non-renewal decision itself as unconscionable within s 21 of the ACL. Whilst there may well be circumstances in which events subsequent to allegedly unconscionable conduct can be relevant to the proper characterisation of that conduct for the purpose of s 21 of the ACL, that is not so here. The two are entirely separate events, albeit that both had the aim of ending the MFA.
Fourthly, in circumstances in which the parties entered into the MFA including, as it did cl 4.7, we reject Lindfield’s contention in grounds 2(b) and (c) of the amended notice of contention that, by exercising its rights under cl 4.7, Netdeen defeated the expectation of renewal which was the basis on which the parties had entered into the MFA. This contention was described by senior counsel for Lindfield as the “gist of [Lindfield’s] complaint” as to unconscionability.
As an example of ACL unconscionable conduct being established on the basis of defeated expectations, Lindfield relies on this Court’s decision in Spuds Surf Chatswood. That case concerned the lease of premises in a shopping centre in Chatswood. The main issue was whether the lessor engaged in unconscionable conduct under s 62B(1) of the Retail Leases Act 1994 (NSW). The lessee alleged that the lessor had acted unconscionably and in breach of its own guidelines (referred to as the “2002 Height Restrictions”) by permitting the construction of kiosks which partially obstructed the view of the leased premises by patrons travelling in a particular direction. When the issue was brought to the lessor’s attention, the lessor refused to acknowledge the problem and instead promulgated new guidelines (referred to as the “2005 Height Restrictions”).
The lessee failed in its case before the Retail Leases Division of the Administrative Decisions Tribunal but succeeded in part before the Tribunal’s Appeal Panel. An appeal from the decision of the Appeal Panel was dismissed by this Court, which identified the essential findings underpinning the Appeal Panel’s conclusion as to statutory unconscionable conduct at [128] (per Sackville AJA, with whom McColl and Leeming JJA agreed):
Little if any significance attaches to the fact that Netdeen’s advertising material offered prospective Master Franchisees an opportunity to “build a valuable and saleable asset that will continue to grow in value”: PJ3[44]-[46]. The advertised opportunity is consistent with the MFA, the terms of which empowered Lindfield to assign its rights subject to certain requirements (see cl 8.18 of the MFA). Nor is it inconsistent with the valid exercise of the right of non-renewal under cl 4.7 of the MFA.
We also reject Lindfield’s reliance on the fact that Mr Hope “worked hard and did well” and Mr Hope’s evidence that he would not have invested in the business to the same extent if he had known the power of non-renewal would be exercised. At best, this may demonstrate that Lindfield had a subjective expectation that it would have the benefit of the renewal term.
The fact that exercise of the non-renewal power deprived Lindfield of an asset which had grown in value (PJ3[47]) has little relevance in circumstances where the MFA contained not only cl 4.7, but also cl 14.6. The latter clause made clear that, upon termination or expiry of the MFA, Lindfield was not entitled to any payment, repayment or compensation for any goodwill attaching to the business.
The other matters relied on by Lindfield, including that changes were made to the COO report at Netdeen’s solicitors’ instigation (ground 2(d)(iii) of the amended notice of contention), Netdeen’s directors were motivated by personal financial considerations and that Mr Thornton altered a file note, do not (individually or considered together with the other matters relied upon) mean that Netdeen’s exercise of a contractual right was unconscionable for the purposes of the ACL on the predicate that cl 4.7 was complied with.
Some support for the view that there was ACL unconscionable conduct is provided by Mr Thornton’s evidence that the de-mastering strategy was designed to back “Lindfield into a corner where the only person who could take over the sub-franchisees was Netdeen, so that Mr Hope could not take any action other than terminate the MFA”. However, as Mr Couper KC (appearing for Netdeen together with Mr Gooley) pointed out in oral address, this “was a basis for unconscionable conduct which finds no expression in the further amended commercial list statement” below.
Finally, we do not think it is helpful to address the ACL unconscionable conduct case by primary reference to the question whether Netdeen’s conduct amounted to “sharp practice”, an approach which was taken by the primary judge at the urging of Lindfield and led him into error. While it is true that “sharp practice” may reflect some conduct which meets the requirements of ss 21 and 22 of the ACL, there is a risk that approaching the matter with primary regard to such a label, which is not reflected in any of the terms of ss 21 and 22 of the ACL, deflects attention away from the issues which require determination having regard to those statutory provisions and relevant case law.
We now turn to the parties’ post-hearing supplementary submissions on the significance of AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86 (AHG Full Court) on the ACL unconscionable conduct case. In its supplementary submissions dated 28 July 2025, Netdeen made the following relevant submissions:
There were two limbs to the complaint of unconscionable conduct in the AHG litigation. The first was that the respondent’s termination of the dealership agreements was unconscionable, while the second limb was that the respondent’s conduct in causing the dealers to enter into new agency agreements was unconscionable. Netdeen claimed that the first-limb claim was analogous to Lindfield’s claim of ACL unconscionable conduct.
The primary judge’s finding here at PJ3[216] and [217] that it was unconscionable for Netdeen to conceal from Lindfield that its true intention was not to renew the MFA while simultaneously allowing Lindfield to believe that renewal was a viable possibility is inconsistent with both Beach J’s reasons in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd (2023) 303 FCR 479; [2023] FCA 1022 at [3534] and the Full Court’s acceptance of the correctness of these reasons in AHG Full Court at [179].
The Court in AHG Full Court also affirmed Beach J’s findings concerning the scope of the bargain in that litigation and the dealers’ claim that the bargain had been undermined. They claimed that the commercial bargain with Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) was that each dealer would invest time, money, effort and entrepreneurial skill etc to advance their dealerships and from which they would enjoy ongoing profits and ultimately sell the benefits of the goodwill they had generated. The dealers argued that this commercial bargain was permanent and that MBAuP could never exercise its contractual power of non-renewal as a precursor to a change of business model. These contentions were rejected by Beach J in AHG at [67]-[70], which was affirmed in AHG Full Court at [196] and [197].
Netdeen contends that these matters contradict Lindfield’s position in the present appeal, to the effect that there was a broader commercial bargain than that in the MFA which had to be taken into account in determining whether the non-renewal decision was unconscionable. Furthermore, Netdeen contends that the AHG litigation cannot be distinguished on the basis of differences in the terms of the termination clause in the AHG litigation and cl 4.7. Netdeen claims that the cases are analogous in this respect.
Finally, Netdeen contends that the AHG litigation supports its appeal on unconscionability even if a purpose of the non-renewal decision was to implement the de-mastering policy. It is desirable to set out [15] of Netdeen’s supplementary submissions (footnote omitted):
Lindfield submits that:
Netdeen gave no notice under cl 14.1 of the MFA, which was required to enable Lindfield to rectify any breach.
Rather than serve a cl 14.1 notice, Netdeen purported to terminate the MFA on 27 May 2024, with immediate effect, which put it in breach of cl 14.1 of the MFA and cl 27 of the Franchising Code (which required at least seven days’ notice to be given).
No finding was made by the primary judge that Lindfield had abandoned or repudiated the MFA and there was evidence that it continued to support the Sub-Franchisees.
Netdeen’s conduct in notifying Lindfield that the MFA was terminated and its conduct in denying Lindfield access to its computer records disclosed an intention by Netdeen no longer to be bound by the MFA, which underpinned the primary judge’s alternative finding at PJ3[290] that Netdeen, and not Lindfield, had repudiated the MFA.
It was never put to Mr Hope in cross-examination that Lindfield did not intend to pursue its right of renewal under the MFA.
Lindfield ran a case below that Netdeen’s conduct in purporting to terminate the MFA and denying Lindfield access to its computer records was a breach of its duty of good faith under cl 6 of the Franchising Code, as well as amounting to unconscionable conduct.
In essence, Lindfield contends that it was Netdeen who repudiated the MFA in May 2024, and that repudiation was subsequently accepted by Lindfield.
We reject Netdeen’s claims. To understand why, it is critical to understand the following sequence of events:
Mr Hope set up Wattle Court in November 2023, with a view to carrying on a separate business as franchisor of home building franchisees. This occurred after Lindfield sought to exercise the renewal option on 3 July 2023 and, more significantly, after Netdeen had refused the renewal, a decision which it conveyed to Lindfield on 24 July 2023; and
necessarily, therefore, Mr Hope’s conduct in setting up Wattle Court and seeking to entice GJ Gardner Homes Sub-Franchisees to join his new rival venture all occurred after Netdeen refused the renewal sought by Lindfield.
The primary judge found at PJ3[289] that the fundamental difficulty with Netdeen’s claim that Mr Hope’s conduct in respect of Wattle Court amounted to a repudiation of the MFA was that Netdeen itself was in breach of the MFA well before 27 May 2024. Although his Honour made no express reference to cl 4.2, that finding is supported by that provision. The effect of cl 4.2 of the MFA was to give Lindfield an option to renew the MFA as long as it had duly complied with all its obligations under the MFA and subject to cll 4.6 and 4.7. Lindfield exercised that option on 3 July 2023 and the subsequent refusal by Netdeen to grant the renewal occurred on 24 July 2023. Thus, Mr Hope’s conduct in relation to Wattle Court post-dates that period. Despite being given the opportunity to do so, senior counsel for Netdeen was unable to point to any authority which supported its claim that Lindfield was not entitled to exercise the option in cl 4.2 having regard to Lindfield’s conduct which took place after Netdeen itself had refused the renewal.
If the true position was that Netdeen was not entitled to refuse renewal, then it breached the agreement on 24 July 2023, when it purported to serve a notice exercising its rights under cl 4.7. At that time, Lindfield became entitled to damages flowing from that breach, which would normally be assessed as at the date of the breach: see Johnson v Perez (1988) 166 CLR 351 at 367; [1988] HCA 64; Tok v Rashazar [2025] NSWCA 94 at [51]. Those damages were the value of the renewal. Apart from the possibility that Netdeen might have cured the breach subsequently (which it never did), nothing could affect that right. On the assumption that Netdeen breached cl 4.7, it is likely that Lindfield also obtained a right to terminate the MFA, which it did not exercise at that time. Consequently, it remained bound by the terms of the MFA. If it breached those terms subsequently, that may have given Netdeen a right to claim damages and a right to terminate the contract, which ultimately it purported to exercise on 27 May 2024. But that termination, even if valid, could not affect rights already accrued under the contract, including the right to sue for damages for breach of cl 4.7. The fact that Lindfield may have breached the MFA subsequently may also have given Netdeen a right to claim damages. However, no such claim was ever made by Netdeen.
In oral submissions senior counsel for Netdeen submitted that if Netdeen is found to be in breach, then Mr Hope’s conduct in setting up Wattle Court should not be ignored in determining damages and that Lindfield bore the onus of proving that it suffered loss as a consequence of that breach. That submission is misconceived. Generally speaking, a party asserting a fact as being relevant to the outcome of a case bears the onus of proving that fact: Hodge M Malek, Phipson on Evidence (20th ed, 2024, Sweet & Maxwell) at 6-06. In the present case, Netdeen did not explain why this is an appropriate case in which to take account of subsequent events in assessing damages. But even assuming it is, Netdeen bore the onus of proving the facts that demonstrate that the damages suffered by Lindfield as a consequence of the non-renewal of the MFA were less than they otherwise would have been because of the establishment of Wattle Court. It never sought to discharge that onus.
For these reasons, we reject grounds 23 to 27 of the notice of appeal.
In addition, if it were necessary to do so, we would have upheld Lindfield’s submissions in support of this part of its amended notice of contention relating to cl 14.1 of the MFA and cl 27 of the Franchising Code (see at [159] above).
The primary judge found at PJ3[290] that, should repudiation be a valid issue, he would conclude that the repudiatory conduct was by Netdeen and accepted by Lindfield.
It is first necessary to describe the events which informed his Honour’s conclusion. On 27 May 2024, Netdeen served a notice of termination upon Lindfield and proceeded to cut off its access to the GJ Gardner Homes computer system (which included business records and emails) and effectively brought an end to Lindfield’s business. On the same day, Addisons (Lindfield’s lawyers) responded on its behalf and accepted this conduct as repudiatory, pointing out that seven days’ notice of termination had not be given as required by cl 27 of the Franchising Code. It is important to note that in the intervening period leading up to Netdeen’s issue of the notice of termination, being from November 2023 through to May 2024, Lindfield continued to perform its obligations under the MFA, including the payment of royalties and servicing of Sub-Franchisees.
In oral submissions, senior counsel for Lindfield reiterated that the purported termination by Netdeen on 27 May 2024 was in fact a repudiation. It was observed that at the heart of Netdeen’s pleaded claim was that Lindfield’s conduct was in breach of cl 8.39, which provided that it must act at all times with “Diligence, Good Faith and Loyalty”. It was emphasised that at no point was the alleged breach incapable of rectification, as provided for under cl 14.1 (including cll 14.2, 14.3, 14.4 and 14.6) of the MFA and cl 27 of the Franchising Code. These clauses set out the procedures in the event of default or termination and were described by senior counsel as a “code” for dealing with the consequences of a breach of the kind described above.
Netdeen did not comply with these provisions. In making this submission, Lindfield relied on the statements and authorities cited in Burger King at [119]-[124] (per Sheller, Beazley and Stein JJA) in support of the proposition that the mere fact that a breach has passed does not mean it is incapable of rectification. Further, while it may be inferred from the primary judge’s reservations as to Mr Hope’s evidence at PJ3[282] that a positive finding could be made that his conduct in setting up Wattle Court amounted to a breach of cl 8.39, Lindfield was still entitled to receive notice of any asserted breach and afforded an opportunity to rectify. Netdeen did not claim that the breach was incapable of rectification.
For all these reasons, we accept Lindfield’s submission that by not complying with the obligations set out in the Franchising Code, Netdeen’s conduct in issuing the notice of termination on 27 May 2024 amounted to a wrongful repudiation, which in turn entitled Lindfield to terminate the MFA. Nothing, however, turns on this conclusion, since it does not affect the damages to which Lindfield is entitled if it can establish that Netdeen breached the MFA by not renewing it.
not proceeding on the basis that any “multiple” had to be applied to after‑tax income and that, if a multiples approach was applied to after-tax profit, it would produce a sum substantially less than $20 million.
Lindfield defends the ruling that Mr Potter’s reports were admissible, as well as the primary judge’s quantification of damages.
Essentially there are two issues:
the correctness of the primary judge’s ruling that Mr Potter’s two expert reports were admissible; and
the correctness of the primary judge’s approach to quantification of damages.
For the following reasons, we consider that Netdeen has failed to establish any appealable error regarding the primary judge’s ruling on admissibility, but we find that his Honour’s quantification of damages is flawed.
As to (3), those tasks involved a combination of what might be thought of as common sense – for example, averaging the figures obtained from the HIA and MBA reports – together with specialised knowledge concerning appropriate projections that can be made from historical and industry data. They did not depend on detailed knowledge of the house building industry as such but on expert accounting and valuation knowledge on what conclusions can reasonably be drawn from industry specific data. They are the types of tasks undertaken by valuers both in projecting the future income of a business and selecting an appropriate discount rate.
It follows that the primary judge was correct to admit Mr Potter’s reports. It is unnecessary, therefore, to consider what the position would be in relation to Mr Ross’s report or the evidence he gave if Mr Potter’s primary report had not been admitted.
The next important aspect of the evidence as to quantum is that both Mr Potter and Mr Ross said in their reports that the Discounted Cash Flow method of valuation was the most suitable, or appropriate, method of valuation in the circumstances. Mr Ross described that choice of methodology as “uncontroversial”. Neither resiled from this position. Although Mr Ross was critical of some aspects of Mr Potter’s estimate of future cash flows, he did not criticise the fact that Mr Potter had used the Discounted Cash Flow method to value the estimate of future cash flows over the 10 year period from July 2023.
Consistent with this, Mr Ross did not suggest that the multiples approach was an appropriate method of valuing the loss to Lindfield. The primary judge erred in interpreting either his report or his oral evidence as suggesting that he considered that that approach was a proper valuation methodology to use to value any lost opportunity to Lindfield. In finding that Mr Ross had adopted a multiples approach, the primary judge at PJ3[248] and [254] referred to Mr Ross’s report at [7.7.8]. In that paragraph Mr Ross said:
Netdeen identifies a further problem with the primary judge’s use of the multiples approach, which is that the primary judge erroneously applied a pre-tax (or EBIT) profit figure in applying the multiples approach. For the following reasons, this complaint is upheld:
In response to questions from the primary judge, Mr Potter confirmed that the figure of $4 million which he had used as Lindfield’s average annual income over the period 2013-2023 (as set out in table 3 of his report dated 3 May 2024) was based on earnings before income taxation, i.e. EBIT.
In its SFACLR, Netdeen admitted Lindfield’s pleading that Lindfield earned an “annual net profit (EBIT) … of approximately $4m”.
The terms of these pleadings were likely to create confusion, because they elide or equate the concepts of “annual net profit” with EBIT.
Even greater confusion was created by Lindfield’s cross-examination of Mr Ross. In the course of being cross-examined on the multiples approach, Mr Ross was asked by Mr Castle SC to confirm that the profit figure used by him in that approach would be at “the after tax level”. The transcript records Mr Ross as giving no verbal reply to that proposition. A series of questions were then put to Mr Ross which elided the distinction between profit based on an EBIT figure and after-tax profit. This is most tellingly demonstrated in the following exchange (emphasis added):