(a) The central issue of construction
176 The issue relates to the proper construction of the relevant agreements to determine the nature and extent of the franchises granted to both RPR and Marmax. Before addressing relevant provisions in the agreements, it is convenient to summarise some general principles of contractual construction, noting that the parties were in substantial agreement in relation to them.
177 First, it is uncontroversial that the task of construction is objective and not subjective. As the High Court stated in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40] (citations omitted):
It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
178 Secondly, clauses in commercial contracts should be given their ordinary commercial or business like meaning, in a manner which promotes "business common sense" and should be construed fairly and broadly without being too astute or subtle in finding defects (see, for example, Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110 per Gibbs J; Franklins Pty Ltd v Metcash Trading Pty Ltd (2009) 264 ALR 15 at [19]-[23] per Allsop P and Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297 at [13]-[14] per Basten JA (McColl and Campbell JJA agreeing)).
179 With these general principles in mind, it is convenient to deal with RPR's allegation that Spanline breached cl 2.1 of the second RPR franchise agreement (the terms of cl 2.1 are set out in [14] above) and cll 8 and 15 of the disclosure document, as incorporated into the second RPR franchise agreement (the terms of those provisions are set out in [8] and [11] above) by not ensuring that the RPR franchise was in fact exclusive for the South Coast territory. Spanline contends that, on their proper construction, the exclusivity provisions in these documents (as well as the comparable provisions in the Marmax franchise agreement) are concerned only with excluding other businesses from operating in the same territory, in the sense of establishing business operations there, and not with restricting customers from choosing where they go to purchase Spanline products. For the following reasons, I reject that contention.
180 Spanline promised to grant RPR (and Marmax) an "exclusive" territory. As RPR submitted, there is surprisingly little authority on the meaning of that term in the context of franchise law. According to the Macquarie Dictionary (5th edition), its primary ordinary meaning is "not admitting of something else; incompatible". The same flavour is evident in the definition given in Stroud's Judicial Dictionary of Words and Phrases (5th edition), which is:
The "exclusive right" to supply goods is equivalent to a negative covenant but no other person shall be the supplier: Catt v Tourle, 4 Ch 654 applied in Metropolitan Electric Supply Co v Ginger [1901] 2 Ch 799…".
181 In Haviv Holdings Pty Ltd v Howards Storage World Pty Ltd (2009) 254 ALR 273; [2009] FCA 242 (Haviv), Jagot J described the value of the right of exclusivity under a franchise arrangement at [45]:
It can readily be inferred that one of the primary purposes of the grant of an exclusive franchise territory is to regularise competition between [franchisees]. Exclusivity of territory is a valuable right for a franchisee. Decrease in sales revenue (and thus the potential for net profits) is precisely the type of loss that would be expected from breach of the promise of an exclusive franchise territory.
182 That is not to say, however, that the grant of an exclusive territory under a franchise agreement necessarily brings with it exclusivity of customers. That issue turns on the proper construction of all relevant contractual provisions. The point is well illustrated by Haviv itself. Significantly, cl 1C of the franchise agreement there described the relevant exclusivity in the following terms, which are significantly different from the relevant provisions in the agreements between Spanline and RPR:
1C TERRITORY
The Franchisee acknowledges that they are granted an exclusive franchise territory. However it is also acknowledged by the Franchisee that there is no exclusivity of customers and customers or potential customers may openly choose to deal with any "Howards Storage World" business whether it is operated by a franchisee or the franchisor.
(Emphasis added).
183 Under cl 2.1 of the second RPR franchise agreement (see [14] above), Spanline granted RPR an exclusive franchise to conduct inter alia the Franchised Business within the granted Spanline Franchise area in circumstances where "Franchised Business" was defined in cl 1.8 to mean "the business of retail sale and the installation of the Products to existing residential dwellings for consumers conducted by the Franchisee under this Agreement in the Territory".
184 I accept RPR's submission that the effect of these provisions, at least insofar as the retail sale of Spanline products is concerned, was to grant RPR the exclusive right to sell and install Spanline products to consumers whose residential dwellings are located within its franchise territory and to constrain it from selling and installing those products to customers whose dwellings are located outside its territory. In my opinion, the same right and constraint apply to Marmax under the Marmax franchise agreement (see further below).
185 This right and the correlative constraint which is implicit in the notion of "exclusivity" is reinforced by cl 6.14 of the second RPR franchise agreement. Under that clause, RPR is obliged not to "trade" the Franchised Business or any similar business outside its South Coast territory. I reject Spanline's contention that this provision (along with cll 6.16, 6.17 and 6.20.2, the terms of which are set out in [24] above), support its construction.
186 The term "trade" has many meanings but it is generally regarded as having a broad meaning. According to the Macquarie Dictionary (5th edition), the primary relevant meanings of the term when used as a verb are "to give in return; exchange; barter". Its primary meanings as a noun are "the buying and selling, or exchanging, of commodities, either by wholesale or by retail, in a country or between countries" and "a purchase, sale, or exchange". Ultimately, the particular meaning will depend on the context in which the term is used (see, for example, National Association of Local Government Officers v Bolton Corporation [1943] AC 166 at 184-185 per Lord Wright). In my view, the term "trade" in cl 6.14 should be given a broad meaning which includes the selling and installation of Spanline Products outside RPR's franchise area. I reject Spanline's contention that it simply means not selling or transferring the RPR South Coast franchise or business as a whole outside RPR's franchise area. That construction would leave cl 16, which deals specifically with the transfer or sale of the whole or any part of the Franchised Business, largely otiose.
187 For the following additional reasons, I reject the construction advanced by both Spanline and Marmax which, if accepted, would not have these provisions applying to the activity of selling and installing Spanline products, but would confine them to an exclusive right to conduct, operate or carry on a franchise business within the boundaries of the franchise territory and exclude another Spanline franchisee from setting up and operating a competing business within that territory. On that construction, there is no breach if another Spanline franchisee sells and installs a Spanline product to a customer whose dwelling is located within RPR's territory, as long as the other franchisee does not "conduct" or "operate" a relevant business in RPR's territory, in the sense of physically establishing a business within that territory.
188 Both Spanline and Marmax rely on the well-known judgment of Mason J in Hope v Bathurst City Council (1979) 144 CLR 1 at 8-9 (Hope) where, in considering what constitutes "carrying on the business of grazing" for the purpose of municipal rates under s 118 of the Local Government Act 1919 (NSW), his Honour said that it "denotes grazing activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis". Spanline and Marmax submit that similar criteria apply to the phrases "operate a business" (which appears, for example, in cl 8 of the disclosure document) and "conduct the Franchised Business" (which appears, for example, in cll 2.1 and 2.2 of the second RPR franchise agreement). Accordingly, they say that, even though Marmax has sold and installed Spanline products in RPR's territory, it has done so only on an ad hoc and infrequent basis and there is no evidence that it has operated, conducted or carried on a business in RPR's territory. They emphasise that Marmax has not established a showroom in that territory, nor has it been involved in marketing itself by way of advertising or pamphlet drops outside its own franchise territory (Marmax says that its television advertising inadvertently extends beyond its territory but it has no control over that coverage, which I accept). Both Spanline and Marmax emphasise that Marmax has simply responded to approaches made directly to it from customers who happen to live in RPR's territory.
189 Even if all these factual assertions were accepted, they are in my view predicated on the wrong construction of the relevant exclusivity provisions. I do not consider that Mason J's observations in Hope have any application in the circumstances here. Those observations were directed to the concept of "carrying on the business of grazing" for the purposes of municipal rating legislation and in the context of statutory construction, which is readily distinguishable. In circumstances where the exclusive franchise relates to the right to sell and install Spanline products within the franchise territory, in my view it makes no sense to import into this context concepts from revenue law, which include asking whether the activities are engaged in for the purpose of profit on a continuous and repetitive basis. In my opinion, it is not determinative whether Marmax sought to achieve a profit when it carried out work within RPR's territory (although one can reasonably assume that it did, as Mr Byrne eventually accepted). Likewise, I do not consider that it is determinative that Marmax only carried out such work on an ad hoc and infrequent basis. On the contrary, I consider that it is sufficient to establish a breach to demonstrate that Marmax has done only a single job, involving the sale and installation of Spanline's products in RPR's exclusive territory (and vice versa). The only exception relates to where such a job is done as a referral and is covered by the practice which has been adopted by Spanline, Marmax and RPR in relation to such matters (see [95] above).
190 The term "business" is protean. As Lord Diplock said in Town Investments Ltd v Department of Environment [1978] AC 359 at 383:
The word "business" is an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art and its dictionary meanings… embrace "almost anything which is an occupation, as distinguished from a pleasure - anything which is an occupational or duty which requires attention is a business".
(Citations omitted).
191 In my view, the activity of selling and installing a Spanline product is captured by the relevant phrases and it is not necessary to demonstrate that those activities were accompanied by such physical actions as establishing a showroom in the relevant territory or actively advertising for work within the territory. No doubt such physical actions may also be captured by the relevant phrases but that does not mean that they have to be present before a finding can be made that there has been a breach of the exclusivity provisions by another Spanline franchisee selling and installing Spanline products in another Spanline franchise's territory.
192 When consideration is given to both the text of the relevant contractual provisions relating to exclusivity and to the subject matter, being a franchise arrangement at the core of which there is a right conferred upon the franchisee to sell and install Spanline products within an exclusive franchise territory, I have no hesitation in strongly preferring the construction which I have set out above. The position may have been different if the relevant agreements contained a provision along the lines of cl 1C of the franchise agreement in Haviv, which made it abundantly clear that the grant of exclusivity did not displace customer choice, but that is not the case here.
193 Furthermore, I consider that the construction advanced by Spanline and Marmax, if accepted, would seriously erode the value of the right of exclusivity in a way which does not make business sense. I respectfully agree with the observations of Jagot J in Haviv on the importance of that right for a franchisee, which are applicable to Spanline's franchisees. That is particularly so having regard to the subject matter of Spanline's franchises. As noted above, the exclusivity relates to the sale and installation of Spanline products in the nature of home additions to dwellings which are located within the franchise territory. Different considerations may arise in respect of other goods or services the subject of other franchise arrangements. Much depends, of course, on the terms of the relevant franchise agreement.
194 The preferred construction is also supported by relevant provisions of the disclosure document and, in particular, cll 8, 10 and 17 (the terms of which are set out respectively in [8], [9] and [12] above). Clause 8 expressly states that no other Spanline franchisee may operate a business that is substantially the same as the franchised business in RPR's exclusive territory and that the franchisee may not operate a business that is substantially the same as the franchise business outside its territory. Both cll 10 and 17 reinforce the fact that the franchise agreement relates to the franchisee selling and installing Spanline products.
195 I do not accept Spanline's submission that cl 17(a) of the disclosure document (as set out in [12] above) supports its construction. I consider its effect to be neutral. It begs the question as to what is meant by "conduct of the business of retail sale and the installation of the Products…".
196 I have explained above why I do not accept the relevance of Hope in construing the relevant provisions in the relevant agreements. Similar comments apply to Spanline's reliance on cl 5 of the second RPR franchise agreement, which was supported by Marmax, that RPR's exclusivity is only breached if Marmax physically established business premises within RPR's territory.
197 As noted above, there are some differences in the wording of the first and second RPR franchise agreements. I do not consider that any of those differences warrants a different construction of the relevant provisions relating to exclusivity in the first RPR franchise agreement. In particular, I do not accept Marmax's contention that particular significance attaches to the different definition of the "Franchised Business" in cl 1.7 of the first RPR franchise agreement (the terms of which are set out in [20] above). The text of that provision does not indicate that sales and installations were separate activities. In addition, cl 6.5 expressly stated that the franchisee must not sell by retail sale the Spanline Products as defined, but only as part of the service to install them.
198 Marmax further submits that its preferred construction of the relevant exclusivity provisions in the franchise agreements should also apply to the relevant provisions of the sub-franchise agreement and the TBLA. I disagree. The definition in cl 1.8 of the sub-franchise agreement of the "Franchised Business", which was in identical terms to the definition in cl 1.7 of the first RPR franchise agreement, takes the matter no further. In my view, there is nothing in the text of the sub-franchise agreement which suggests that there are any significant relevant differences.
199 As to the TBLA, Marmax contends that the restraint imposed on it by cl 3.9 not to "operate or engage in a business or operation similar to or competitive to a Spanline Franchise business" has a narrow scope and is confined to preventing it from carrying on a business in RPR's territory within the meaning of that phrase as established in Hope. In other words, it submits that the only activity which is prohibited is the establishment of a physical presence in the RPR territory in the nature of Marmax's business in the Illawarra. I reject that contention for similar reasons to those given above.
200 Marmax further contends that cll 3.10 and 3.11 of the TBLA support its construction (see [56] and [57] above). I disagree. Merely because an express exception to the restraint was made in respect of Marmax holding up to 5% of the issued shares in a publicly listed company does not assist in the relevant task of construction. Nor in my view does any particular relevant significance attach to the fact that cl 3.11 specifically restrained Marmax from soliciting or securing the custom of an existing RPR customer. I do not accept the argument that this suggests that the activities covered by cl 3.8 were different from those contemplated by cl 3.11. Rather, cl 3.11 imposes a particular and targeted restraint in respect of people who were RPR's customers within one year of the Adjustment Date (i.e. 1 July 2003). It operates to prevent RPR from seeking to maintain a relationship with the existing customers of the business it sold to Marmax.
201 For completeness, I should also state that the construction set out above of the exclusivity provisions in the first and second RPR franchise agreements also applies to the comparable provisions in the Marmax franchise agreement.