Pizza Pan Group Pty Ltd v AKD Investments Pty Ltd

JUDGMENT

1. Pizza Pan Group Pty Ltd pursues an appeal against orders made by Schurr Acting LCM in Pizza Pan Group Pty Ltd v AKD Investments Pty Ltd (Local Court (NSW), Schurr Acting LCM, 29 April 2022, unrep). Its claims concerned a franchise agreement Yum! Restaurants Australia Pty Ltd had entered with AKD Investments Pty Ltd in 2005, which had later been renewed and a continuing guarantee provided by Mr Steve Darwiche, Ms Aida Darwiche and Mr Ziad Darwiche in 2005 as a precondition to the grant of the franchise. Mr Steve Darwiche was AKD's sole director.
2. In 2016 Yum! had assigned its interest in a number of franchise agreements, including that of AKD, to Pizza Pan by a written assignment deed. That deed did not expressly refer to the guarantee. After the assignment Pizza Pan pursued claims against AKD for payment of outstanding royalties, advertising and goods and services payable under the franchise agreement, not all of which AKD paid. In the Local Court Pizza Pan then pursued the balance, some $43,720.93, against both AKD and the guarantors.
3. Default judgment was entered against the fourth defendant. Pizza Pan's other claims were successfully defended.
4. Schurr Acting LCM dismissed those claims with a costs order in favour of the defendants, for reasons given, which the parties agreed at the hearing of the appeal established error in relation to the orders made against AKD. That was because her Honour had dismissed Pizza Pan's claims without making any finding in relation to what Pizza Pan claimed AKD owed it, even though there had been no real issue between the parties about that in the Local Court.
5. What was otherwise pursued on appeal remained in issue and the parties also disagreed about the course which should follow, as a result of what had been agreed.
6. I concluded that the balance of the appeal, which concerned the claims Pizza Pan had pursued against the guarantors, and which turned on the construction of the deed of assignment of the franchise, had to be heard and determined. The reasons are explained below.

The reinstatement of AKD's registration

1. It had also emerged shortly before the hearing that AKD had been deregistered. By motion filed in February 2023 orders reinstating AKD's registration were sought. They were not opposed by the defendants, after ASIC's attitude to the application had been ascertained. The orders made by consent at the hearing were: "1. Pursuant to section 64 of the Civil Procedure Act 2005 (NSW), the Appellant be granted leave to amend the Notice of Appeal filed 27 May 2022 in the form annexed to this motion and marked "A". 2. Pursuant to r 6.24 of the Uniform Civil Procedure Rules 2005 (NSW) order that the Australian Securities and Investments Commission (ASIC) be joined as the 4th defendant to these proceedings. 3. Order that the Amended Notice of Appeal be returnable instanter. 4. Order that unless ASIC applies to the Chambers of Schmidt AJ within 14 days of the date of these orders that pursuant to section 601AH(2) of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission reinstate the registration of AKD Investments Pty Ltd (ACN 107 664 362). 5. Note that if any application is made by ASIC to be heard on the reinstatement issue, as per order 4 above, that the Plaintiff bears the onus of satisfying the Court that the order for reinstatement should be made. 6. Order the plaintiff to serve a copy of these orders upon ASIC by 4pm on 9 February 2023."
2. By later email advice of 10 February 2023 ASIC indicated that it did not oppose AKD's reinstatement, so long as no cost orders were made against it. None were sought, with the result that the order for reinstatement of AKD has taken effect.

Why orders remitting the entire matter to the Local Court without hearing the balance of the appeal were refused at the hearing

1. Pizza Pan had pursued two grounds of appeal: "1. The Magistrate erred in law by determining that the Franchise Guarantor Deed was not an "Ancillary Document" under the Deed of Assignment. 2. The Magistrate erred by not making any finding about the liability of the First Respondent."
2. From their written submissions it emerged that it was common ground that Schurr Acting LCM had erred in failing to deal with the issue of AKD's liability. It also emerged that what remained in issue between the parties concerned the proper construction of the assignment deed, not merely the meaning of the term "ancillary document" used in its recitals.
3. Written submissions which had been advanced for AKD that the appeal was to be by way of rehearing, in accordance with s 75A(5) of the Supreme Court Act 1970 (NSW) were withdrawn at the hearing. It was not in issue that on an appeal from the Local Court under s 39 of the Local Court Act 2007 (NSW) when an error of law has been established, the Court does not have the power to make findings of primary fact: Rose v Tunstall [2018] NSWCA 241 at [31].
4. In the result it was also agreed that this aspect of the appeal would have to be remitted to the Local Court for the liability issue in relation to AKD to be determined and orders made against it. It was common ground that there was likely to be little issue about this, given the cases which had been advanced in the Local Court on this question.
5. But it emerged that what had not been discussed or agreed was whether the balance of the appeal should be heard and determined, or the entire matter remitted without that aspect of the appeal being resolved. That was in issue.
6. Having heard the parties, I concluded that given what remained in issue; bearing in mind the requirements of s 56 of the Civil Procedure Act 2005 (NSW), to have regard to the overriding purpose there specified, the just, quick and cheap resolution of the real issues in the proceedings; and all that had already been traversed by the parties in their written and oral submissions on this issue, as well as what they had advanced in addressing the question of remittal, that the hearing of the balance of the appeal had to proceed.
7. These are the reasons for that decision.
8. Pizza Pan contended that without the question of AKD's liability to it having been determined by the Local Court's order, no order could be made against the guarantors on this appeal. Accordingly, the entire matter should be remitted to the Local Court for determination afresh, rather than the balance of the appeal being determined. Splitting the issues otherwise risked the possibility of conflicting appeals.
9. That was resisted by the guarantors, given all that had already been done and incurred in the Local Court and on appeal. They accepted that the construction of the deed of assignment was not affected by the question of AKD's liability under the franchise for the sum Pizza Hut was pursuing. That sum had not been put in real issue below and thus it was accepted, as the result of what had been decided in Rose v Tunstall, that the claim against AKD had to be remitted and could not be resolved on this appeal, given her Honour's failure to make the necessary underpinning factual findings.
10. It was also common ground that if the construction of the assignment deed for which the guarantors contended was accepted, no orders could be made against them in the Local Court, whatever AKD's liability was found to be. The guarantors also accepted that if their construction was rejected, that orders would also be made against them in the Local Court, in respect of any amount AKD was ordered to pay Pizza Pan.
11. Given those concessions, the guarantors contended that it would not be just to proceed as Pizza Pan sought, declining to hear and determine what remained in issue on the appeal. The course it proposed, it was argued, would give Pizza Pan an unjust opportunity to revisit forensic decisions it had made in the Local Court, with considerable unnecessary extra cost and further delay. The result would be that it would be given another opportunity to advance its claim against the guarantors, on a different factual basis to that which it had advanced in the proceedings below.
12. It was argued that it was thus relevant that Pizza Pan, now differently represented, perceived the case which it had pursued below to have been to its disadvantage. It could not justly be given an opportunity to revisit those decisions.
13. I accepted, in all the circumstances, that what Pizza Pan proposed would neither be quick nor cheap and potentially unjust.
14. There was no issue that if Pizza Pan did not succeed on the construction issue, no money orders could be made against the guarantors, whatever orders were made against AKD in the Local Court. What had to be remitted to the Local Court to be dealt with in relation to AKD could also have no impact on the proper construction of the assignment deed, to which neither it nor the guarantors were a party.
15. Resolution of that issue depended on a consideration of the appealed decision, evidence led below without objection or cross-examination, unchallenged documentary evidence and legal arguments which the parties had there advanced, as well as those advanced in their written appeal submissions, which had also in part already been addressed orally.
16. In the result I declined to make the orders which Pizza Pan sought, remitting the entire matter to the Local Court, without hearing and determining what remained in issue on the construction question.
17. I also took the view that account had to be taken of what had been conceded by the guarantors. There was no real dispute about AKD's liability to Pizza Pan, with the result that orders will be made in its favour on remittal. The guarantors' acceptance that orders would also be made against them in the Local Court, if their construction of the deed was not accepted, could thus also be encompassed by the orders made on this appeal.
18. Given the conclusions which I have reached on the construction question, the parties will thus be ordered to agree on terms of an order which reflects that concession, which will have to be taken into account in the Local Court.

Issues

1. The issue which remained to be determined was thus the proper construction of the assignment deed entered by Yum! and Pizza Pan, to which neither AKD nor the guarantors were parties.

The Local Court decision appealed

1. Schurr Acting LCM's judgment dealt with some issues which are not the subject of this appeal or relevant to it. Her Honour's construction of the renewal deed was not appealed. But as I will explain, that is relevant to the issue of the proper construction of the assignment deed, about which the parties disagreed.
2. Her Honour concluded after the renewal agreement was entered in 2010 by Yum!, AKD and the guarantors, the guarantee they had given in favour of Yum! continued to apply, even though it had not been referred to in that agreement. That was because the guarantee had been given as an inducement to Yum! to enter the franchise agreement; the guarantee had no termination date; and it expressly provided for assignment: at [18]-[22].
3. Her Honour noted that by the later assignment deed the franchises of 270 existing Pizza Hut franchises in Australia, including that of AKD, had been assigned by Yum! to Pizza Pan: at [23]. Pizza Pan claimed that the assignment deed had the result that as well as Yum!'s interest in the franchise agreements, its entire right, title and interest in its obligations and benefits in the renewal agreement and the guarantee given in respect of AKD's franchise, had also been assigned: at [24].
4. In issue was the proper construction of the assignment deed, which also did not refer to the guarantee. What was referred to in the recitals were "ancillary documents". What they were was in issue.
5. Her Honour noted that Pizza Pan had relied on the principles of construction explained in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51], to advance its construction of the assignment deed. But she considered that they did not have the outcome for which it contended: [26]-[27].
6. Her Honour concluded that "the phrase 'ancillary documents' is at best ambiguous": at [28]. She also there observed that: "It encompasses arrangements with 270 Pizza Hut franchises, and there could be a myriad of 'ancillary documents'. In this case there was no evidence of 'events, circumstances and things external to the contract' that could assist in the interpretation of the phrase 'ancillary documents'."
7. This conclusion was challenged on appeal as involving a misapplication of the principles explained in Mt Bruce, given the terms of the assignment deed and the evidence, particularly the documentary evidence, which arose to be considered in resolving what lay in issue over the proper construction of the deed.
8. Her Honour also concluded at [38]-[41] that: "38. In relation to the Plaintiff's argument that the terms of the Franchisee Guarantor Deed themselves provided a basis for finding the Defendants liable even in the absence of express or implied assignment, I note the finding of Yeldham J in Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd & Ors [1976] 1 NSWLR 5 at 12: In his judgement in International Leasing Corporation (Vic) Ltd v Aiken [(1966) 85 WN(Pt 1) (NSW) 766 at 796, 797] Asprey JA expressed a tentative view that there may be cases where the terms of the guarantee it self was such that it operated in favour, not only of the original creditor to whom it was addressed, but also to any person to whom the debt made for the time being be owing. However, I had not been able to find, in any of the cases which his Honour cited or in any which my own researchers have located, one where, merely by reason of the guarantee being expressed to be made with the creditor "and his assigns", the person who claimed to be such an assign, and who was not a party to the contract has been held entitled to enforce it. 39. I am satisfied that cl 7.2, while it provides for the assignment of the Guarantor Deed, is not sufficient, by itself to give the Plaintiff the entitlement to enforce the guarantee: Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd & Ors [1976] 1 NSWLR 5 at 12. 40. Further, I am not satisfied that the transfer of the guarantee can be implied from the term "franchise agreements and ancillary documents to all those franchisees listed in Schedule 1 (Franchise Agreements)". There were approximately 270 franchise agreements transferred, and there was no evidence as to the nature of the "ancillary documents" attached to any or all of them. 41. I am not satisfied that the Plaintiff has proven on the balance of probabilities that the Franchisee Guarantor Deed was assigned to them by the Assignment Deed, either directly or by implication from the terms of the documents."
9. There was also an issue as to when notice of the assignment deed had been given. Her Honour found that it was given only in 2020, but that had not placed the defendants at any disadvantage: at [48]. But Pizza Pan had not proven on the balance of probabilities, that the guarantee had been assigned to it: at [50].
10. In the result Pizza Pan's claim against the guarantors failed.

The applicable rules of construction

1. On appeal there was no issue between the parties about the applicable rules of construction. They are as discussed in Mt Bruce. In summary:

• parties' rights and liabilities under a contract are determined objectively, "by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose": at [46];
• it is necessary to ask what a reasonable businessperson would have understood the terms of a commercial contract to mean. That requires "consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects" it secures: at [47];
• ordinarily, this process is undertaken by reference to the contract alone and if an unambiguous expression is used, or if it is susceptible of only one meaning, evidence of surrounding circumstances external to the contract cannot be adduced to contradict its plain meaning: at [48];
• it may be necessary to have recourse to events, circumstances and things external to the contract to identify the commercial purpose or objects of the contract where that task is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating": at [49];
• that may also be necessary where there is a constructional choice to be made: at [49];
• such events, circumstances and things external to the contract are objective and must be known to the parties, or assist in identifying the purpose or object of the transaction. They may include its history, background and context and the market in which the parties were operating: at [50];
• evidence of the parties' statements and actions reflecting their actual intentions and expectations is, however, inadmissible: at [50]; and
• unless a contrary intention is indicated in the contract, a court is entitled to assume "that the parties ... intended to produce a commercial result" and a commercial contract should be construed so as to avoid it "making commercial nonsense or working commercial inconvenience": at [51].

1. It was also explained at [51] that this was not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at 351-352 and Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at 656-657.
2. In Codelfa it was accepted that "mutually known facts" may assist in understanding the meaning of a descriptive term or the "genesis" or "aim" of the transaction: at 351. In this case the known facts included the deed of guarantee, the renewal agreement and its results. There was no issue that they were all known to the parties to the assignment deed.
3. Those documents shed light on the genesis of the transaction in question, its background and context and the market in which the parties operated: Woodside Energy at [35].

Her Honour failed to approach the construction question in accordance with the applicable principles

1. As Pizza Pan complained, her Honour's reasons establish that she did not approach the construction issue in accordance with the applicable principles.
2. Her Honour concluded that the term used in the recitals to the assignment deed "ancillary documents" was ambiguous. It followed that the construction process which had to be undertaken, had to have regard to what a reasonable business person would have understood that term to mean. That required regard to be had not only to the terms of the assignment deed, the circumstances it addressed and its commercial purpose, but also the evidence of the surrounding circumstances which the parties led.
3. Her Honour was thus incorrect in concluding that there was no evidence of "events, circumstances and things external to the" assignment deed, that could assist in its interpretation.
4. It was, of course, for the parties to determine what evidence they led in respect to the matters which they put in issue and the cases which they each advanced. It was the matters over which the parties so joined issue which her Honour had to determine, having regard to the crucial arguments which they advanced, resolving the issues of law and fact which needed to be determined, explaining how their competing arguments were dealt with and why the resolution her Honour reached was arrived at: DL v R (2018) 266 CLR 1; [2018] HCA 26 at [33].
5. It was thus common ground on appeal that there having been limited other evidence led by the parties about the surrounding circumstances, the construction of the assignment deed fell to be decided largely on the documents in evidence. They included the original franchise agreement, the guarantee and the renewal agreement.
6. Those documents suggested that the assignment of the franchise may have been between related companies. That accords with Mr Steve Darwiche's experience after the assignment and the deed indicated that the companies have the same address. But this was not dealt with in the evidence. Nor was another document referred to in the assignment deed, a shareholders' agreement, put in evidence.
7. Despite this, given the evidence which was led and the way in which the parties advanced their cases, a consideration of the terms of the other agreements which the parties addressed, did have to be undertaken in construing the assignment deed. This her Honour failed to undertake.
8. It must thus be accepted that Pizza Pan's complaint on this aspect of the appeal has a foundation, her Honour having failed to engage in the construction exercise, as the binding principles discussed in Mt Bruce required.

The evidence

1. Pizza Pan led evidence from Mr Jarrett, its chief commercial officer, who annexed the franchise agreement, the guarantee, renewal and the assignment deeds to his affidavit. His evidence was that in September 2016 notice of the assignment of the franchise agreement, renewal agreement and guarantee had been sent to the defendants. That notice was, however, not in evidence, it not having been located.
2. A further notice had been sent to AKD on 3 August 2020 by Pizza Pan's solicitor. It advised that: "We confirm we act on behalf of Pizza Pan Group Pty Ltd. We note the Franchise Agreement and the Franchise Guarantor Deed dated 12 September 2005, together with the Renewal Agreement dated 23 December 2010. Pursuant to clause 23.3 of the Franchise Agreement and clause 3 of the Renewal Agreement, Yum! Restaurants Australia Pty Ltd ACN 000 674 993 has assigned its interest in the Franchise Agreement and the Renewal Agreement to Pizza Pan Group Pty Limited ACN 614 499 213. We expect that you received the Notice of Assignment of 15 September 2016 advising of the Assignment, however in the event you did not, this correspondence is to be treated as Notice of the Assignment. If there are any queries, please contact our offices."
3. Mr Jarrett also explained the tax invoices and notices of demand Pizza Pan had sent in relation to the claimed outstanding $43,803.43, which remained unpaid, Mr Steve Darwiche having advised in July 2020 that he was in no position to pay this amount.
4. Mr Jarrett was not cross-examined.
5. In his affidavit Mr Darwiche said that AKD, he and his wife had not received any notice of the assignment until August 2020, when they received the solicitor's correspondence. A copy of the 2016 notice had been requested, but not provided. He had never signed any documents and had continued to deal with the same people at Pizza Hut head office. His understanding was that this did not change at all.
6. Mr Darwiche was cross-examined. He then explained the operation of the franchise; that his wife had no involvement; that AKD had paid royalties, advertising and for goods and services while it operated the franchise; and that at the time it ceased to trade, he was not aware that it still owed $43,720.93. He was taken to demands which had been made, but he could not recall all of them and said that he had not sought legal advice. He also said that he had never received notice of the assignment of the franchise, until he received the solicitor's advice.
7. This explains why there was no real issue about the outstanding amount which Pizza Pan was pursuing in the Local Court.

The cases advanced in the Local Court

1. The parties relied on case summaries they had filed.
2. Pizza Pan there relevantly explained that:

• the case turned on a construction argument which required reference to be made to the franchise agreement and the guarantee;
• an alleged failure to give notice of the assignment also had to be considered;
• the defence construction of the assignment deed was misconceived, given that Pizza Hut had unconditionally thereby had assigned to it, the benefit of the franchise agreement;
• the defendants were all parties to the franchise agreement, which by cl 12.3 created guarantee obligations; cl 18.3 provided for renewal and cl 23.3 permitted assignment;
• the effect of the renewal agreement had been to continue both the franchise agreement and the guarantee. Their continuation was unaffected by the assignment;
• the guarantee was also an "ancillary document" under the deed of assignment; and
• the evidence showed that the guarantors had been given sufficient notice of the assignment.

1. The defence case was pertinently that:

• while the assignment deed was capable of assigning Yum!'s rights under the franchise agreement, it had not assigned to Pizza Pan either the renewal agreement or the guarantee;
• the assignment deed, defining as it had in the recitals the term "franchise agreements", the benefits of the guarantee had not been assigned to Pizza Pan;
• the 2020 notice referred to an assignment of the guarantee in accordance with its terms, but that had not occurred;
• the assignment deed did not encompass the guarantee, it: - having made no reference to the guarantee; - only being expressed to give effect to an assignment under cl 23.3 of the franchise deed; and - the guarantee not being an "ancillary document" caught by use of that term in the recital to the assignment deed.
• while the guarantee contemplated an assignment and Pizza Pan claimed it had been assigned, there had in fact been no assignment made; and
• even if the assignment deed was capable of such an assignment, Pizza Pan could not enforce the guarantee, not having given express notice of the assignment.

1. These cases were further explained in oral submissions.
2. Then Pizza Pan submitted that the relevant background facts which had to be taken into account on the construction question were the terms of the various documents, to which her Honour was taken.
3. The guarantor's case accepted that those documents had to be taken into account, but it still contended that all that had been assigned was the franchise agreement. It was also argued that if the renewal agreement had not been assigned, the sums pursued could not be recovered against either AKD or the guarantors. There was also a supplementary issue as to the failure to give the required notice.
4. It was also submitted that the franchise agreement had not created a guarantee, but that it imposed an obligation on AKD to acquire one. Thus the stand alone deed of guarantee was entered, but it did not rely on the franchise agreement for its existence. It was cl 23.3 of the franchise agreement which permitted the assignment of that agreement and the guarantee also contemplated the possibility of assignment, but that was by a separate mechanism.
5. For Pizza Pan to succeed, it had to establish that the franchise agreement, the renewal agreement and the guarantee had all been assigned. The renewal agreement also had its own assignment mechanism. But the assignment deed did not provide for the assignment of either the renewal or the guarantee, which was an express indication that neither had been assigned.
6. The deed also referred to a share sale agreement, which was not in evidence. While that was part of the commercial context, there had been no other evidence led about that context.
7. The guarantee could not be an ancillary document, existing as it did outside the franchise agreement and beyond the term of that agreement. The renewal agreement also did not overlap, they all being stand alone, having independent spheres of operation and being separately assignable.
8. It could also not be assumed that the guarantee would travel with the debt, although that can be agreed expressly or arise by implication: Adelaide Bank Ltd v Property Builders Pty Ltd [2009] NSWSC 849. There too a guarantee provided for assignment, but the presence of a clause allowing for such assignment was held to be "not of itself sufficient to infer that the guarantee was assigned with the debt": at [64]. This was a similar situation.
9. It followed, it was urged, that the orders sought could not rest on Pizza Pan's tortured construction of the recitals to the deed of assignment.

The proper construction of the assignment deed

1. For the reasons which follow I have concluded that Pizza Pan must succeed, her Honour having fallen into error not only in her approach to the construction of the deed, but in the conclusion which she reached as to its proper construction.

The parties' cases on appeal

1. In this Court the parties were differently represented and advanced somewhat different arguments.
2. For Pizza Pan it was contended that in construing the assignment deed her Honour had failed to have necessary regard to the commercial context in which the assignment occurred. That was established by evidence of the witnesses and the documents in evidence, even though the share sale agreement referred to in the recitals to the deed had not been relied on.
3. It was submitted that it should have been concluded that properly construed, the deed which had assigned the benefit of the franchise agreement to Pizza Pan encompassed the guarantee, given the ordinary meaning of the word "ancillary", used in the definition of "franchise agreement". It was capable of including guarantees and conditions precedent to entry into an agreement.
4. The conclusions which had been reached in the Local Court had thus resulted from the misapplication of the principles explained in Mt Bruce.
5. Further, the construction question turned not only on the recitals to the assignment deed, but also on its text, context and purpose. The purpose of the deed of assignment had been to transfer the "benefit" which Yum! then enjoyed under the franchise agreement to Pizza Pan. That was what had been expressly conveyed and included the continuing guarantee which AKD had procured as a precondition to Yum!'s entry into the 2005 franchise agreement. The reasonable businessperson would have understood that this was transferred by the deed of assignment, given its terms and those of the other agreements.
6. The construction for which the guarantors contended also made no commercial sense, given that the guarantee had been given not only to Yum! as a precondition to its grant of the franchise, but also to its successors and assigns.
7. For the guarantors it was accepted that the meaning of a contractual document is to be determined by what a reasonable person would have understood it to mean, having regard to its text as well as surrounding circumstances known the parties and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40].
8. But it was argued that an objective reading of the words used in the recitals of the assignment deed established that the deed did not encompass the guarantee, given the composite term there used to define the term "Franchise Agreements." That is that Yum! "has granted franchise agreements and ancillary documents to all those franchisees listed in Schedule 1", that being the issue raised by the appeal. It had not "granted" the guarantee.
9. Further, Pizza Pan's reading of the recitals would cause dissonance with other provisions of the deed, including the notice provision. It provided for notice of the assignment to be given to franchisors, not guarantors.
10. It was also relevant that the guarantee was not referred to in the deed, despite the drafters being aware of it and that the guarantors thus had separate obligations, given under a different agreement, which had its own provisions, including for assignment. In the result, the franchise agreement worked "perfectly well" without the guarantee.
11. The submission that the interpretation arrived at by Schurr Acting LCM made no commercial sense was argued to be unpersuasive, because it was made in a vacuum of evidence of Pizza Pan's making. It had had the opportunity to lead evidence, which it did not pursue, to establish the commercial framework in which the assignment was agreed and the parties' intended commercial outcome. That was a forensic decision which barred it from making this submission.
12. Further, properly construed, the franchise agreement would have empowered Pizza Pan to require new guarantees to be given to it by the guarantors, after the assignment. That the guarantee also provided a guarantee for the "CSC agreement", about which there was no evidence, also made it probable that it had been intended only to assign the franchise agreement, not the guarantee, by the assignment deed.
13. In the result, there having been no reference made at all to the guarantee, of which the drafters of the deed were aware, given the terms of the franchise agreement, it would be accepted that if it had been intended to transfer the guarantee, that would have been done expressly.

The terms of the agreements

1. What was so put in issue turns on what was provided in the assignment deed, entered by the parties in the commercial context in which they were operating. This included that Yum!, AKD and the guarantors were bound by the renewed franchise agreement; the original franchise having been granted after the guarantee was given, in order to satisfy a precondition to its grant; the franchise later having been renewed as it had been in circumstances where the guarantee continued; a shareholders' agreement referred to in the assignment deed having later been entered and the assignment of the franchise agreed on terms specified in the deed.
2. All but the shareholders' agreement and the CSC agreement referred to in the guarantee were in evidence. That they would have shed any light on the construction of the assignment deed is not readily apparent. The parties are seemingly all aware of the terms of the CSC agreement, but no one tendered or relied on it to advance their cases.
3. The terms, or even all the parties to the shareholders' agreement, are not known. That there is any pertinent evidentiary gap as a result, is not apparent. But at the least it may be assumed that whatever that agreement provided, it would not have assisted Pizza Pan's construction argument.

The franchise agreement

1. The parties to the 2005 franchise agreement were not only Yum! the franchisor and AKD as trustee for a discretionary trust, the franchisee, but also the three personal guarantors, who were identified in the schedules to the agreement. Mr Steve Darwiche was there also identified to be the principal operator. Thereby what was agreed included: 1. AKD's right to use Yum!'s restaurant system, property and marks at its outlet for specified fees: sch 2, cl 1; 2. a precondition under sch 2, cl 12.3, that: "As a precondition to the grant of rights pursuant to Clause 1.1, Franchisee will procure the execution by the Guarantors of a guarantee of Franchisee's obligations and liabilities under this Agreement, in the form required by Franchisor and including such covenants by the Guarantors regarding the terms and conditions of the Agreement as Franchisor may require"; 1. termination on the giving of notice by Yum! in the event of breach of the agreement by AKD or the guarantors, or breach of the guarantee: sch 2, cl 15.1; 2. AKD's right to transfer its interests under the agreement with Yum!'s prior agreement: sch 2, cl 14.2; 3. AKD's right of renewal of the agreement on expiration of its term, on identical contractual and financial terms: sch 2, cl 18; and 4. by sch 2, cl 23.3 Yum! that: "This Agreement will inure to the benefit of Franchisor, its successors and assigns and may be transferred by Franchisor to any party without Franchisee's prior approval upon notice to Franchisee. With effect from receipt by Franchisee of such notice, Franchisor is released from all obligations of the Agreement and Franchisee will have a new contract on the same terms as this Agreement with the transferee, successor or assign named in the notice."
2. "Inure" means "to come into use; take or have effect": Macquarie Dictionary, online ed, accessed 15 February 2023.
3. There was thus no issue between the parties about the result of the assignment of a franchise agreement. Thereby the assignee effectively steps into the assignor's shoes, without any renewal of contractual rights or the creation of a new agreement, unlike the result of a novation: ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (NSW) (2012) 245 CLR 338; [2012] HCA 6 at [12]. What the "benefit" which assigned to Pizza Pan by the assignment deed still remained in issue.
4. In final written submissions it was contended for the guarantors that the language and contractual context support the conclusion for which they contended and that: "... clause 2.1(a) of the Deed of Assignment effected the assignment of the benefits of the "Franchise Agreements" to the assignee. One of those benefits was the contractual obligation on the franchisee to procure guarantees (clause 12.3 of the Franchise Agreement). It was able to procure a guarantee at any time during the term of the Franchise Agreement, or enforce such right by a suit for specific performance. If the Failing (sic) to do so did not lead to any waiver (see clause 23.4 of the Franchise Agreement), so the franchisor retained the benefit of clause 12.3. In those circumstances, the contractual terms sit in harmony with the interpretation for which the defendants contend... ".
5. I am satisfied that this cannot be accepted.
6. Firstly, that does not reflect the proper construction of cl 12.3 of the franchise agreement, which required the guarantors, also a party to the franchise agreement, to give Yum! the guarantee it required, as a precondition to the grant of the franchise to AKD, not the provision of any later guarantee. It was the satisfaction of that precondition which resulted in the grant of the franchise and the continuing guarantee given in favour of Yum! and its assigns, from which the guarantors could not withdraw even after renewal or assignment of the franchise.
7. This is reinforced by the terms of the deed of guarantee itself. It not only provided that the guarantee was also given to Yum!'s assigns, but envisaged that Yum! assigning its interest in the franchise would not require either an assignment of the guarantee to the new franchisor, or the provision of a new guarantee.

The deed of guarantee

1. To give effect to what had been agreed in the franchise agreement, on the same day as it was entered, the guarantors entered the deed of guarantee with Pizza Hut Australia, a division of Yum!. Mr Steve Darwiche was there described to be the shareholder and Ms Aida Darwiche and Mr Ziad Darwiche the guarantors.
2. This deed had no fixed term. Its terms and the 2010 renewal of the franchise led Schurr Acting LCM to the conclusion that the guarantee had continued after the renewal. That conclusion has not been challenged.
3. This deed recited as background facts: "Shareholder and Guarantors have agreed to sign, seal and deliver this Deed in favour of Franchisor as an inducement to Franchisor to enter with AKD INVESTMENTS PTY LTD A.C.N. 107 664 362 as trustee for The AKD Investment Discretionary Trust (Franchisee) a Franchise Agreement and any renewal of the Franchise Agreement (Franchise Agreement) and a CSC Agreement (together the Agreements) relating to the operation by Franchisee of an outlet conforming to the concept, and at the address, specified in Schedule 1 and any relocation of the outlet or other variation of the outlet."
4. References in the guarantee to "the Agreements" thus encompassed the franchise agreement, any renewal and the CSC agreement.
5. Clause 1 relevantly provided: "1. GUARANTEE 1.1 Shareholder and Guarantors guarantee to Franchisor the due and punctual payment of all moneys to be paid under the Agreements and the due and punctual performance by Franchisee of all Franchisee's obligations and liabilities under the Agreements. 1.2 The guarantee in Clause 1.1 will be a principal and continuing obligation and will not be abrogated, released, affected or discharged by: .. (d) any sale, transfer or assignment of the Agreements or of any interest in the Agreements or any interest or share in Franchisee; .. (h) any other act, event or omission which would otherwise abrogate, release, affect or discharge Shareholder's or Guarantors' liability under Clause 1.1."
6. Consistently with the guarantee having been given to Yum! as a precondition to the grant of the franchise, what was so expressly promised was that the guarantee given was a continuing obligation, unaffected by any assignment of the franchise. The indemnity thereby given Yum! was also expressly given in favour of its assigns: "2. Indemnity Shareholder and Guarantors jointly and severally indemnify and will keep indemnified Franchisor, its affiliated companies and their agents, employees, directors, successors and assigns from and against any and all claims, liabilities, losses, costs and damages (including legal costs and expenses) arising directly or indirectly in connection with or related to: (a) Franchisee's breach of any term or condition of any of the Agreements; (b) the occurrence of any termination event under any of the Agreements; (c) Franchisor's exercise of any right pursuant to any of the Agreements; (d) any act or omission or violation of law by an agent, representative, contractor, licensee or invitee of Franchisee; or (e) Franchisor taking any action to enforce any of its rights and remedies under this Deed."
7. This deed did not permit the shareholder or guarantors to assign their rights or obligations: cl 7.3. It also contemplated the possibility of Yum! assigning the guarantee to parties other than its successors and assigns, providing in cl 7.2: "This Deed will enure to the benefit of Franchisor, its successors and assigns and may be assigned by Franchisor to any other party without Shareholder and Guarantors' prior approval."
8. It also provided at cl 7.8 that: "The obligations of Shareholder and Guarantors under Clauses 1, 2 and 3 will survive the expiration or termination of the Agreements, any renewal of the Franchise Agreement or this Deed."
9. Schurr Acting LCM referred to Yeldham J's observations in Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5, that a guarantee could operate in favour of an assignee of a debt, but that no authorities had concluded that an assignee could enforce a guarantee to which it was not a party, "merely by reason of the guarantee being expressed to be made with the creditor 'and his assigns'": at 12.
10. But that was not what here arose to be considered, the guarantee having been given as a precondition to the grant of the franchise, the benefit of which had been assigned.
11. Consistently with the terms of the guarantee, Schurr Acting LCM thus found that contrary to the guarantors' case, the guarantee did continue to operate after the renewal agreement was entered. That has not been challenged.
12. But her Honour did not conclude that the guarantee also continued to operate in favour of Pizza Pan, after Yum! assigned the benefit of the Franchise Agreements to it. This was despite the franchise agreement thereafter continuing, with Pizza Pan having stepped into Yum!'s shoes; both the franchise agreement and the guarantee expressly contemplating that the guarantee, which had been given as a precondition to the grant of the franchise in favour of both Yum! and its assigns, would continue in force after its assignment by Yum!; and the assignment deed having assigned Yum!'s "benefit" of the Franchise Agreements to Pizza Pan, not merely its interest in the franchise.

The renewal agreement

1. Consistently with the terms of the guarantee, this agreement between Yum! and AKD, to which the guarantors were also parties, did not refer to the guarantee. The background facts were specified to be: "A. By the Franchise Agreement, Franchisor granted to Franchisee a non-exclusive licence to use the PIZZA HUT trade marks, business format and system to conduct a business involving a comprehensive pizza preparation system at the Outlet. B. Franchisee has requested to renew the Franchise Agreement once, upon the identical contractual and financial terms and Franchisor has agreed to renew the Franchise Agreement subject to the following terms and conditions."
2. The terms and conditions specified in the deed did not purport to affect what had been agreed in relation to the guarantee, either under the franchise agreement or the deed of guarantee. This agreement granted a franchise "to operate the Outlet for the Term on terms and conditions identical to" the original franchise, with specified exceptions which are not relevant: cl 2. It was also specified to "enure to the benefit of Franchisor and its successors and assigns": cl 3.
3. Consistently with cl 7.8 of the guarantee, no new guarantee was provided after the new franchise agreement was so brought into existence. As Schurr Acting LCM found, the guarantors continued thereafter still to be bound by its terms.

The assignment deed

1. This deed between Pizza Pan and Yum! also did not refer to the guarantee. It recited: "A. Yum Australia is the franchisor of the Pizza Hut system in Australia and has granted franchise agreements and ancillary documents to all those franchisees listed in Schedule 1 (Franchise Agreements). Pursuant to clause 23.3 of each of the Franchise Agreements Yum Australia is entitled to assign the benefit of the Franchise Agreements to a third party. B. Yum Australia wishes to assign the benefit of the Franchise Agreements to the Company, and the Company wishes to accept the assignment, on the terms of this Deed."
2. The defined term "Franchise Agreements" thus had to be taken into account when determining what was assigned to Pizza Pan, as did the fact that AKD was one of the listed franchisees.
3. Clause 1(b) also contained provisions which cannot be overlooked in construing this deed, including that: "The following rules apply unless the context requires otherwise. … (vi) A reference to an agreement or document (including a reference to this Deed) is to the agreement or document as amended, supplemented, novated or replaced, except to the extent prohibited by this Deed or that other agreement or document. (vii) A reference to a party to this Deed or another agreement or document includes the party's successors, permitted substitutes and permitted assigns (and, where applicable, the party's legal personal representatives)."
4. What was assigned under cl 2.1(a) was: "With effect from 11.05pm (Sydney time) on the date prior to the Completion Date (as that term is defined in the document entitled "Share Sale Agreement" dated 5 September 2016 between Yum Australia and the Company, among others) (Effective Time), Yum Australia absolutely and unconditionally assigns the benefit of the Franchise Agreements to the Company. (b) The Company accepts the assignment."
5. It is thus what was assigned as the result of the phrase "absolutely and unconditionally assigns the benefit of the Franchise Agreements" on which the issues in the Local Court turned.
6. Clause 2.3 is also relevant. It provided: "Rights and obligations On and from the Effective Time, the Company: (a) will enjoy all the rights and benefits conferred on Yum Australia under or in respect of the Franchise Agreements (whether arising before or after the Effective Time); and (b) undertakes to perform Yum Australia's obligations under or in respect of the Franchise Agreements arising or accruing on or after the Effective Time (but does not undertake to perform any obligation of Yum Australia under or in respect of the Franchise Agreements arising or accruing before the Effective Time)."
7. Clause 2.2 required Yum! to give notice of the assignment to the named franchisees, but not the guarantors.
8. Clause 5 further assurances, also required each party "to do anything necessary (including executing agreements and documents) to give full effect to this Deed and the transactions contemplated by it."
9. It follows that if it was necessary for Yum! to assign its interest in the guarantee to Pizza Pan by a separate assignment, in order for it to obtain the benefit Yum! had agreed to assign to it, it could require Yum! to provide it with such a written assignment.
10. But the question that remained to be resolved in the Local Court was whether the guarantee was part of the benefit of the franchise agreement, which had been assigned to Pizza Hut under cl 2.1.

The guarantee was part of the assigned benefit

1. Contrary to her Honour's approach, the applicable principles of construction not only required an objective consideration of these commercial parties' rights and liabilities under the assignment deed, by reference to its text. They required that consideration to be undertaken in light of what had actually been agreed by the franchise agreements, the deed of guarantee and the renewal agreement, that being the commercial context in which the assignment was agreed.
2. In resolving the issue as to what had been assigned, the phrase used in the definition of "Franchise Agreement" in the recitals to the assignment deed had to be considered.
3. That definition referred to the fact that Yum! "has granted franchise agreements and ancillary documents" to the listed franchisees, which included AKD. The limiting words used in that definition, "has granted", could not be overlooked in construing what was meant by the defined term.
4. In AKD's case Yum! had not only granted it a franchise under the 2005 agreement, but also a renewal of that agreement, which it and the guarantors had sought in 2010. There can be no question that the grant of that renewal did not bring the guarantee to an end. Schurr Acting LCM's conclusions about the continuation of the guarantee after entry into that agreement not being in issue and plainly correct.
5. It must also be accepted that Yum! had not "granted" that guarantee. But that it had been entered as a precondition to the grant of the franchise, a requirement which continued as the result of the renewal agreement, could not be overlooked in construing the deed. It was, after all, that renewal which had enabled Yum!'s interest in the franchise to be assigned as it was.
6. Yum! not having "granted" the guarantee, thus did not resolve the question of the proper construction of the assignment deed.
7. Accordingly, while the term defined in the recitals to that deed had to be considered in resolving the issue of what the deed had actually assigned, that turned on the meaning of the term "the benefit of the Franchise Agreements". That was not defined and did not depend only on the recitals to the deed, but also on the terms of those agreements and what benefit they had conferred on Yum!.
8. This was what the parties joined issue over below and on appeal and depended on application of the binding principles earlier discussed, which her Honour failed to apply.
9. Pizza Pan relied on the terms of the franchise agreements and the guarantee. The giving of that guarantee having been a precondition to the grant of the franchise and the obligation to provide that guarantee continuing after the agreed renewal. On its case the guarantee was part of the benefit which had been transferred.
10. The guarantors disputed this. They contending that the ongoing guarantee was not part of the benefit of the franchise which had been assigned. That was partly because under cl 12.3 of the franchise agreement, Pizza Pan could have required them to provide it with a new guarantee, even on different and more onerous terms to those which Yum! had required.
11. I am satisfied that this cannot be accepted.
12. That is not what either cl 12.3 of the franchise agreement or the renewal agreement provided for. Nor what the guarantee which Yum! had required, contemplated. The 2005 franchise agreement had required a guarantee to be given on the terms Yum! had then required, as a precondition to its grant of the franchise. After that guarantee was given, the franchise was then "granted". In 2010 a renewal of the franchise had also been "granted" on the relevantly same terms, with the result, Schurr Acting LCM concluded, that the original guarantee continued.
13. Understandably, given the terms of the franchise agreements, neither that guarantee nor the renewal or even the assignment deed contemplated an assignee later imposing on the guarantors new and even more onerous terms, after an assignment of the franchise. The original franchise agreement simply did not contemplate any new guarantee being given, either on renewal or assignment. Nor did the further franchise agreement granted in 2010. These agreements contemplated that the guarantee given as a precondition to the grant of the original franchise would continue even after assignment, on the same terms, in favour of the assignee.
14. Different terms could have been agreed by the parties when the renewal was agreed, but they were not.
15. That the franchise agreement did not contemplate any new guarantee being given after its assignment is commercially understandable, given that the guarantors would not then have had an opportunity even to consider, let alone negotiate its terms. All that they had to be given was later notice of the assignment.
16. I am thus satisfied that it must be accepted that Yum!'s receipt of the guarantee it had been given as a precondition to the grant of the original franchise, exercising the rights given it by cl 12.3 of the franchise agreement, including for the benefit of its assigns, which continued after it granted the renewal AKD and the guarantors had sought, was part of the "benefit" of the franchise agreement which it had obtained as the result of its grant of the franchise under the two agreements.
17. In the result, what was agreed by the assignment deed was the assignment of all that benefit to Pizza Pan. That did not depend on a separate assignment of the guarantee.
18. As her Honour found, the result of the renewal of the franchise was that the guarantee also continued, without the need for its renewal or the giving of a fresh guarantee. The same result followed the later assignment of the benefit of the franchise agreement, without the necessity for a separate assignment of the guarantee.
19. If I am wrong in that conclusion, it appears that under the assignment deed Yum! also had an ongoing obligation to assign its interest in the guarantee to Pizza Pan, in order that it could receive the benefit of what Yum! had intended to convey to it by the assignment of the franchise. There was no time limit imposed on that obligation. But it makes commercial sense that assignment of the guarantee was intended by the parties to the assignment deed, given the context in which their agreement was arrived at and what they agreed would be assigned.
20. It was Mr Jarrett's evidence that written notice of the assignment had been given in 2016, albeit it was claimed by the defendants that it had not been received and a copy of that notice was not in evidence. Another notice was later given. But the construction question does not depend on this.
21. For reasons which I have explained, I am satisfied that the construction of the deed of assignment for which the guarantors contended cannot be accepted, the principles discussed in Mt Bruce being applied, as they must be.
22. On the evidence, I am satisfied that in the commercial context in which the assignment deed was entered, a reasonable businessperson would have understood the terms agreed to mean that for which Pizza Pan contended. Namely, that the benefit of the franchise which Yum! assigned to Pizza Pan included the ongoing guarantee it and its assigns had been given as a precondition to the grant of the franchise, a requirement which had remained in force following its renewal.

Costs

1. The usual costs order under the Uniform Civil Procedure Rules 2005 (NSW) is that costs follow the event: r 42.1. That is an order that the guarantors pay Pizza Pan's costs, as agreed or assessed.
2. Unless the parties approach to be heard within 14 days, that will be the Court's order. If there is a dispute, the parties should also file short submissions on what is in issue as to costs.

Orders

1. The parties should also file short minutes of order which otherwise reflect the conclusions which I have reached. In the event that there is any disagreement, the parties should also file short submissions on what is in issue within 14 days.

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DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 February 2023