Plaintiff v Defendant

2 On 17 December 2010, Sportsco made application by originating process to set aside the demand. The application was supported by an affidavit of Andrew Carter, the chief executive officer of Sportsco of the same date. Singh relied on an affidavit of Hardeep Singh sworn 21 February 2011 in opposition to the application. Mr Carter swore an affidavit in reply to Mr Singh's affidavit on 4 May 2011.

3 Sportsco contends that there is a genuine dispute concerning the debt the subject of the demand and that it has an offsetting claim or damages against Singh for $300,000.

4 Sportsco is the franchisor of retail sports and leisurewear businesses. It has granted rights to establish and conduct franchises to a number of franchisees across Australia.

5 Sportsco was approached by Singh in September 2009 with a proposal that Singh take up a Sportsco franchise. On 6 October 2009, Sportsco provided Hardeep Singh and Jaween Singh with its franchise application form and requested that it be completed and returned together with an initial deposit of $5,000. The application form was completed on 7 October 2009 by Hardeep Singh and the application was subsequently approved by Sportsco.

6 Later that month, on 29 October 2009, Sportsco agreed with Singh that Singh would pay $71,500 inclusive of GST in payment of the initial franchise fee, training fee and establishment costs. Sportsco sent a number of documents to Singh including a form of franchise agreement and a disclosure statement. On the same day, Messrs Singh signed an offer to lease a premises at Bayside Shopping Centre from Perpetual Limited. The centre was managed by Colonial First State Global Asset Management (Colonial) on behalf of Perpetual. The offer to lease by Singh was unconditional.

7 Singh paid the $71,500, the initial franchise fee, training fee and establishment cost, in two instalments, $5,500 on 15 October 2009 and $66,000 on 20 November 2009. In its demand Singh claims that it is entitled to a refund of those funds (less $1,000 for a documentation fee).

8 Singh did not take up the lease at Bayside Shopping Centre pursuant to the offer made by Colonial on behalf of Perpetual. Sportsco says that as a result of this, the site is no longer available to Sportsco to negotiate a new franchise agreement with a new franchisee at that location.

9 Sportsco states that the moneys paid to it by Singh were paid pursuant to the terms of the franchise agreement provided to Singh on 29 October 2009 and that that agreement contained no condition that the agreement was subject to Singh obtaining finance. The franchise agreement was not signed, however Sportsco contends that Singh paid the $71,500 to Sportsco in compliance with its terms; Sportsco states that that payment is directly referrable to the letter of 29 October 2009 from Sportsco to Singh.

10 Sportsco says that a genuine dispute arises in respect of the debt the subject of the demand as to what constitutes the agreement pursuant to which the moneys were paid and, more particularly, whether such agreement was subject to finance or some other condition such that the moneys demanded are refundable.

11 In addition, Sportsco contends that it has an off-setting claim of $300,000 which is said to arise by reason that Singh is liable to pay it a franchise royalty fee for the period of five years under the terms of the franchise agreement. Sportsco says that Singh has breached that obligation and is liable to pay Sportsco $300,000 in damages, which is said to be an estimate of its income under the franchise agreement over its five year duration.

12 In his affidavit in opposition to the application, Mr Singh describes a meeting which he attended with Mr Jaween Singh and their accountant, Mr Mahaptra, in September 2009. At that meeting, they met with Mr Carter, Mr Andrew Nguyen and Mr Gaurav Khanna from Sportsco. Discussions ensued in relation to the franchise agreement. Mr Singh states that both he and Jaween Singh indicated that they were not sure if they would be able to secure finance for the project and were reluctant to commit to the franchise. He says that in response to that, Sportsco's representatives advised that the negotiations would be subject to finance and in the event that they could not secure finance for the project, then negotiations would be at an end.

13 Mr Singh says that a number of meetings took place between Jaween Singh and himself on behalf of Singh and representatives of Sportsco in September and October 2009. Mr Singh deposes that they expressed their concerns about securing finance for the project at those meetings. He states that Sportsco's representatives acknowledged that the negotiations were conditional on finance being obtained.

14 At a meeting which took place in or about October 2009, Sportsco's representatives enquired as to which entity would own the franchise. Mr Singh said that a new company, to be called Singh Trading and Investments Pty Ltd, would be incorporated, however Mr Nguyen enquired as to whether the Singh interests had a company already in existence. Mr Singh indicated that Singh operated a car wash business at Highpoint Shopping Centre and Mr Nguyen said that the paperwork for the franchise would be prepared in Singh's name as franchisee and another company could be nominated to operate as the franchisee at a later time. Mr Singh deposes that Mr Nguyen stated that Singh was required to pay an application fee of $5,000 plus GST in order to enter into the franchise agreement and that this fee would be fully refundable if finance was not able to be secured.

15 At one of the meetings which took place in or about October 2009, Mr Singh states that Sportsco's representatives indicated that a site in Frankston owned by Colonial First State was available and that as this was considered a good site, they would have to move quickly in order to secure it before it was leased to another party. In early October 2009, Sportsco sent an email to Singh attaching copies of the offer to lease in relation to the Frankston site, a franchise application form and other documents. In an email of 16 October 2009, Mr Nguyen sent a request that the application form be completed and that a deposit of $5,000 plus GST be paid.

16 On 22 October 2009, Mr Nguyen sent an email referring to the offer to lease signed by Messrs Singh and advising that Colonial First State had prepared a formal lease for them to sign together with a disclosure statement.

17 A week later, on 29 October 2009, at a meeting with Mr Nguyen, the Singhs were presented with documents in connection with the offer to lease. Mr Nguyen indicated that the offer should be signed because there was a risk of losing the site to another lessee. Mr Singh states that they did not have the opportunity to take the document away to read it or obtain legal advice and they signed it. Prior to the document being signed, Mr Singh states that concerns were expressed about committing to a lease in circumstances where the franchisee did not proceed as a result of inability to finalise finance. Mr Singh deposes that he told Mr Nguyen that they did not have loan approval yet and enquired this would affect the position with the lease, to which Mr Nguyen replied, "If finance doesn't go through, we will fix everything up". He states that Mr Nguyen also said to him that the offer to lease was also subject to finance but an examination of that document reveals that there is no mention of such a condition.

18 The draft of the proposed franchise agreement had been provided to the Singhs some time in October 2009. After the meeting on 29 October, there were a number of telephone calls from Mr Khanna on behalf of Sportsco to Messrs Singh. Mr Singh states that he informed Mr Khanna that he was reluctant to pay this fee as the franchise agreement had not yet been signed and finance had not been secured.

19 On 16 November 2009, that is, after payment of the initial deposit of $5,500 but before payment of the balance of $66,000, the Singhs received an email from Mr Khanna stating that in the event that finance was not secured, the entire amount of the franchise would be refundable, less a fixed amount of $1,000. That email states:

Hi Harry/Jaween/Rajiv,

I would like to reconfirm our earlier agreement made over the phone, that is (sic) case of you not obtaining finance in regards to the Frankston store, the only risk factor in regards to your Franchise Fees paid will be limited to a fixed amount of $1,000 (documentation fee) only. All other amounts paid to Sportsco HO are fully refundable.

Regards,

Guarav Khanna

20 Mr Singh states that on 20 November 2009, Mr Khanna attended at Singh's car wash. He referred to his email of 16 November 2009 and requested that he be provided with a cheque for $66,000 representing the balance of the franchise fee and that payment was made.

21 In the process of negotiations in October 2009, Mr Nguyen stated to Messrs Singh that Sportsco could assist in the securing of finance. Mr Nguyen referred them to a Mr Toledo who was a finance broker with JL Financial Services Pty Ltd. Contact was made with Mr Toledo, who was told that Singh required approximately $250,000 to secure the Sportsco franchise. Mr Toledo was provided with financial documentation to be used in connection with an application for finance.

22 Subsequently, in November 2009, Mr Toledo was contacted on a number of occasions and he provided updates in relation to the application.

23 On or about 24 December 2009, Mr Singh received a letter from Mr Toledo advising that the application for finance with the National Australia Bank was unsuccessful and finance could not proceed unless NAB was provided with adequate security.

24 In January 2010, Messrs Singh met with Mr Khanna and Mr Nguyen at Sportsco's offices and told them that the finance application was unsuccessful. Mr Nguyen indicated that he would speak to Colonial to arrange an extension of the proposed lease commencement date from 1 February 2010 to 1 March 2010. He stated that Singh should still approach lenders to finance the franchise.

25 Mr Singh states that following this meeting he made enquiries with ANZ, however ANZ was not prepared to advance funds.

26 After 5 February 2010, Mr Singh advised Sportsco's representatives that Singh was unsuccessful in securing finance and regarded negotiations as being at an end. A request was made for the return of the $70,500. This was confirmed in an email on 15 December 2010 to Mr Carter.

27 On 17 February 2010, a further meeting took place with Sportsco's representatives. At that meeting it was indicated that Colonial had given notice to the tenant to vacate the site and that as a result there would be repercussions against Singh if it did not proceed.

28 Sportsco's representatives provided the name of another finance brokers, Bankwest and one named Shaun who could be approached in relation to who could approach Mr McClelland the Commonwealth Bank. Documentation was provided to Mr McClelland in respect of the Commonwealth Bank finance application.

29 On 2 March 2010, Mr McClelland indicated in an email that the approach to the Commonwealth Bank for finance had been declined.

30 Shortly before this, on 25 February 2010, Sportsco wrote to Singh. The letter began as follows:

We refer to latest communications and confirm our understanding that all is now in order.

As indicated by you it appears your finance application is also now in order with at least one lender pending finalisation.

The letter went on to request that urgent attention be given to various matters involving the franchise. Urgency was said to arise as the scheduled site handover date was 1 April 2010. Sportsco required executed franchise documents, documentation in regard to the design of the premises from which Singh was to operate, request for information about fitout works and clarification as to whether lease documents had been received.

Mr Singh states that the contents of the letter came as some surprise because finance had not been finalised. Mr Singh wrote back to Sportsco pointing this out and detailing the various rejections of the applications for finance. Mr Singh then observed:

It was agreed at the start of this process that this deal is with condition (sic) to finance. It was discussed and promised by you in various meetings with us that all our money paid to you will be refunded except $1,000 (Document preparation fee) if we are not able to raise the required finance. (Refer email from Gaurav Khanna dated 15 November 2009).

According to the promised deal, can we expect to come and pick up our cheque of $70,500 on Monday? (Total paid = $71,500 - $1,000 documentation fee = $70,500.)

31 This was followed by a meeting between the respective representatives of the parties at Sportsco's office on 3 March 2010 at which a request was made by Singh's representatives that the money paid be refunded. This request was refused and it was also said that the landlord at Bayside Shopping Centre, Colonial, would take action against Singh.

32 On 12 March 2010, Colonial stated that in the event that Singh walked away from the lease it could be liable for damages. The affidavit then concludes with allegations involving a company General Investors Pty Ltd but these matters were not developed in or in the plaintiff's outline of submissions or in oral submissions at the hearing of this matter.

33 Mr Carter has sworn an affidavit on 4 May 2011 which purports to be in reply to Mr Singh's affidavit but for the large part repeats and to some degree develops what is contained in his first affidavit. He states that the documents required to be executed in respect of the franchise were sent by Mr Nguyen on 29 October 2009 including the franchise agreement. The second tranche of $66,000 was paid to Sportsco on 20 November 2009. Mr Carter states that in reliance of such conduct, including the payments totalling $71,500, Sportsco understood the 29 October 2009 documents to be unconditional, acted on the basis that the franchise agreement was "operative" and incurred costs in reliance on Singh's conduct.

34 In regard to the email from Mr Khanna of 16 November 2009 which is extracted above, Mr Carter states that Mr Khanna is no longer employed by the plaintiff. As at the date of the subject email he was the financial accountant and in that capacity was involved in negotiations with Singh. Mr Carter states that it was not his "understanding that the 29 October 2009 documents were subject to finance and the plaintiff's records with the exception of 16 November 2009 email, do not include any agreement by the plaintiff that the 29 October 2009 documents were subject to finance." He does not address the issue of Mr Khanna's authority to write such an email.

35 Mr Carter refers to the letter of 24 February 2010 from Mr Nguyen, which remarked as follows:

We refer to latest communications and confirm our understanding that all is now in order. As indicated by you it appears your finance application is also now in order with at least one lender pending finalisation. ... We acknowledge receipt of payment from you as your consideration in entering into the franchise agreement.

36 Mr Carter then goes on to detail the costs incurred by Sportsco. He states that there were administrative, legal and accounting costs to Sportsco of $18,300. In addition, he states that Sportsco have had to pay Mr Mahaptra a fee described by Mr Carter as a finder's fee for introducing Singh to Sportsco in respect of the subject transaction. That fee was payable, it is said, upon the entering into the franchise agreement by Singh and it has been paid by Sportsco. As to the losses mentioned in his first affidavit of $300,000, he details this as arising as follows:

(a) Sportsco's standard royalty percentage is 5% of the franchisee's gross sales.

(b) Colonial First State estimated the sales of a store in the category of Singh at the bayside site to be $9,000 per square metre and the bayside site is 141 square metres.

(c) Accordingly, for the purposes of sales projection, the gross sales achievable were estimated to be $1.2 million or $6 million over a five year period and applying the 5% royalty rate equals $300,000.

37 In considering an application under s 459G of the Act, there are by this point hundreds of authorities dealing with the question as to what constitutes a genuine dispute in the context of s 459G. In those authorities, a singular theme emerges that in order for an applicant to succeed there must be shown to be a plausible contention requiring investigation. In Powerhouse Australasia Pty Ltd v Viarc Pty Ltd,[1] DoddsStreeton J (as she then was) observed:[2]

The dispute or offsetting claim should, as has been recognised, have some objective existence, and the [plaintiff] bears the onus of establishing the genuineness of the dispute or offsetting claim.

38 Similarly, in Spencer Constructions v G&M Aldridge,[3] the Full Court of the Federal Court of Australia observed:

For a genuine dispute to exist, it must be "bona fide and truly exist in fact" and the grounds for alleging its existence must be "real and not spurious, hypothetical or misconceived". The dispute should have sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile.

39 In a decision of Panel Tech Industries (Australia) Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2),[4] Barrett J of the Supreme Court of New South Wales observed:

Once the [plaintiff] shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The Court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.

40 In the decision of Yoogalu Pty Ltd v Intertia Australia Pty Ltd,[5] Barrett J put it in this way:

[The Court's] sole function is to determine whether or not the state of account between the parties is (as to the particular matters referred to in s 459H(1)) so clear cut and uncontroversial that nonpayment of the sum demanded by the defendant should, entirely of itself and without further enquiry, mean that the plaintiff must, in a particular subsequent windingup proceeding, be regarded as insolvent unless it can itself affirmatively prove its solvency.

41 The determination of this application involves a consideration of whether there is a genuine dispute that the payments made by Singh were refundable in the event that finance was not able to be obtained and whether an offsetting claim is available to Sportsco based on Singh's failure to honour the unconditional franchise agreement. As a starting point, there seems to be no doubt on the evidence that Singh has used all reasonable endeavours to obtain finance but without success.

42 In his affidavit, Mr Singh detailed several oral representations allegedly made by representatives of Sportsco that the moneys would be refundable in the event finance could not be obtained. In particular, Mr Singh stated that Mr Nguyen indicated with respect to the first payment of $5,500 made on 15 October 2009 that it was refundable in such circumstances.

43 There is no affidavit from Mr Nguyen taking issue with that statement and Mr Carter has not addressed it in the affidavit filed by him in this application.

44 I regard the email of Mr Khanna of 16 November 2010 as being of considerable significance in this application. It is clear in its terms and is sent to Singh after the form of franchise agreement and other documentation was sent to Singh on 29 October 2009 and before the second payment, of $66,000, was made. It confirms "our earlier agreement made over the phone" that the moneys were refundable, save for the $1000 documentation fee. Mr Khanna was the financial accountant of Sportsco and would be cloaked with the apparent and ostensible authority to make such a representation in the absence of an argument to the contrary from Sportsco, which has not been forthcoming. It is a contemporaneously generated document from Sportsco which I consider overwhelms, in the absence of other facts, Sportsco's assertion that there are triable disputes to be determined.

45 Sportsco bears the onus of establishing that there are such disputes. As I have already noted, aside from Mr Carter observing that Mr Khanna is no longer employed by Sportsco, he is silent on the circumstances of the sending of the email, stating only that it was not his "understanding" that the transaction was subject to finance and that save for the email there is nothing in Sportsco's records to indicate that it was conditional. In particular, there is no evidence contradicting or attacking the authority of Mr Khanna to send such an email and there is no affidavit from Mr Khanna himself in regard to the email. Even if Sportsco put on an affidavit deposing that Mr Khanna was in some way estranged from it and would not swear an affidavit on its behalf, it would not impeach his implied or ostensible authority to send the email.

46 Sportsco says that the form of franchise agreement sent to Singh was unconditional. That document was never signed, unlike the document the subject of the decision of the Court of Appeal in Murray Goulburn Co-operative Co Limited v Cobram Laundry Service Pty Ltd.[6] which was referred to me in oral submissions. In that case, it was contended, unsuccessfully, that payments made before the signing of a contract could not be referrable to that contract even though the parties made such payments on the basis of the terms of the agreement which had been negotiated. That situation is quite different to the one under consideration here and in the absence of a signed agreement, the best evidence as to the basis upon which the monies were paid would be Mr Khanna's email and the evidence of Mr Singh as to the oral negotiations, which is not effectively contradicted.

47 When the documents were sent to Singh on 29 October 2009, aside from execution of the franchise agreement itself being required, several other documents, including various certificates were also required to be completed and they never were, so the status of such documentation as being the foundation for a contention that the payments were unconditional is not arguable in my view. Further, I am not persuaded by the contention which is made in paragraph 20 of Mr Carter's affidavit that, by payment of the $71,500 in some sense the unsigned franchise agreement became binding on Singh.

48 Despite their close involvement in the negotiations, there is no explanation as to why Mr Nguyen and Mr Khanna have not sworn affidavits contradicting Mr Singh's evidence as to the representations by Sportsco's representatives that the transaction was subject to finance.

49 I am not persuaded Sportsco has a genuine arguable claim which ought to be litigated.

50 The material put forward in respect of Sportsco's alleged offsetting claim will only succeed if it can establish that it has a binding agreement with Singh in relation to the franchise. As such, it turns on similar considerations to that raised in respect to the genuine dispute and I consider that for much the same reasons Sportsco has not established that it has a genuine offsetting claim that it ought be allowed to litigate.

51 I will order that the plaintiff's application be dismissed and that the plaintiff pays the defendant's costs of the proceeding including reserved costs, if any.

[1] [2006] VSC 508.

[3] [1997] FCA 681.

[6] [2001] VSC 57 at [16].