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[2001] NSWIRComm 8
Industrial Relations Commission (NSW)
2001-02-21
Peterson J
Original judgment source is linked above.
Industrial Relations Commission of New South Wales in Court Session
CITATION : Scanruby v Caltex [2001] NSWIRComm 8 APPLICANT Scanruby Pty Limited
PARTIES : FIRST RESPONDENT Caltex Petroleum Pty Limited
SECOND RESPONDENT Caltex Australia Petroleum Pty Limited FILE NUMBER: IRC3347 of 1998 CORAM: Peterson J CATCHWORDS : Unfair contract - s106 - leases and commission agencies - termination of occupancy - extension of tenure claimed - whether whole period intended to be limited to five years or extended to ten years - application refused. Industrial Relations Act 1996 LEGISLATION CITED : Petroleum Retail Marketing Franchise Act 1980 (Cth) Industrial Relations Act 1988 (Cth) Caltex Oil (Aust) Pty Ltd v Best (1990) 170 CLR 516 Stead v Port Macquarie Golf Club (1995) 63 IR 416 CASES CITED : West v AGC (Advances) Ltd 5 NSWLR 610 Finemores Case (1995) 37 AILR 3-003 at 1013 A&M Thompson Pty Ltd v Total Australia Ltd (1980) 2 NSWLR 1 HEARING DATES: 08/21/2000; 08/24/2000; 08/28/2000; 08/29/2000; 08/30/2000; 08/31/2000; 09/04/2000; 09/05/2000; 09/06/2000; 09/07/2000 DATE OF JUDGMENT: 02/21/2001
APPLICANT Mr B H Donovan QC with Mr S R Coleman of counsel
SOLICITOR Mr T J Williams Williams The Law Firm PETERSHAM. LEGAL REPRESENTATIVES: RESPONDENTS Mr D E J Ryan SC
SOLICITOR Mr R R Nathans Deacons SYDNEY.
JUDGMENT: - 1 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES
Matter No. IRC3347 of 1998 SCANRUBY PTY LIMITED v CALTEX PETROLEUM PTY LIMITED & CALTEX AUSTRALIA PETROLEUM PTY LIMITED
Application under s106 of the Industrial Relations Act 1996 JUDGMENT
1 The applicant, Scanruby Pty Limited, is a private company the shareholders and directors of which are Jim Dimis, Nick Pantsos, Arthur Papas and Nick Sotirios. In 1993, Scanruby undertook the management of a Caltex service station on the F3 Freeway, known as the Wyong Service Centre, as the initial operators thereof. Scanruby occupied the premises, in circumstances which I will detail shortly, for a little more than 5 years, it is said with an expectation of a further 5 years. The occupancy was terminated by Caltex in 1998 on the basis that Scanruby was not entitled to any extension of tenure. Caltex then commenced to operate the site as its own. 2 These proceedings concern Scanruby's pursuit of either an extended term based on the representations Scanruby alleged were made by representatives of Caltex, or, in the alternative, a sum of money which would compensate for the loss caused by what is seen by the applicant to have been a deprivation of an entitlement to operate what was a profitable enterprise in Scanruby's hands, for a further 5 years. Apart from a claim for the recovery of losses met in the unprofitable operation of the gift shop and a claim for goodwill for the site as a whole or, alternatively the restaurant business, there is no issue that Scanruby was not rewarded adequately for its efforts during its occupancy. 3 The further amended summons for relief claims the following orders under s106 of the Industrial Relations Act 1996 ('the Act'):
(a) An order declaring void in part or varying the written Agreements (and if applicable any unwritten Agreements, arrangements or understandings) (herein after referred to as to "the Agreements") relating to the Applicant's occupation of the F3 Service Centre at Wyong ("the Premises") so that such Agreements should not have terminated until the 1 July, 2003.
(b) or alternatively an order declaring void in part or varying the Agreements so that the First Respondent and/or the Second Respondent jointly and severally pay compensation to the Applicant for loss of profit, income and/or commissions that the Applicant would have made had the Applicant been in occupation of the Premises from the 1 July, 1998 until 30 June, 2003.
(c) an order declaring void in part or varying the Agreements relating to the Applicant's occupation of the gift/souvenir/tourist shop ("the Gift Shop") to reflect previous undertakings given by the servants of either the First Respondent or the Second Respondent relating to the usage of the Gift Shop so that the First Respondent and/or the Second Respondent jointly and severally pay compensation to the Applicant for losses sustained by the Applicant in relation to the operation of the Gift Shop, together with commercial interest.
(d) an order declaring void in part or varying the Agreements so that the First Respondent and/or the Second Respondent pay to the Applicant compensation for goodwill and or custom relating to either the whole of the Premises and the business thereon or alternatively the Restaurant portion of the Premises and the business thereon;
(e) that the Respondents pay the Applicant's costs;
(f) such other Orders as the Court deems fit. 4 The issues fall to be decided on the merits of the respective cases, there being no issue that the Commission has jurisdiction to hear and determine the matter pursuant to s.106 et al of the Act. The Facts 5 It is necessary at the outset to observe that nowhere in the written instruments relating to the basis of Scanruby's occupancy of the F3 site does one find any reference to tenure exceeding 5 years. The same is true of correspondence between the parties' legal representatives. The applicant's case hinges on the evidence of Mr. Dimis in that regard; the evidence of the other directors of Scanruby to whom Mr Dimis is said to have conveyed the proposition; the evidence of other witnesses such as Ronald Phillips, the former Caltex Training Manager, who referred in evidence to early discussions between Mr. Dimis and Caltex State Manager, Colin Manning about tenure of up to nine years; employees of Scanruby to whom Mr. Dimis made assertions of 10 years' occupancy, and Peter Zacharatos, the solicitor who acted for Scanruby in formalising the legal arrangements, and who testified that Mr. Dimis told him at an early stage the lease would be for ten years. Save for Mr. Phillips (ex-Caltex but called in Scanruby's case), every witness on Caltex's side of the case who participated in the formation of the parties' relationship contended that the term, while sometimes referred to as possibly being for longer, had always very clearly been for no more than 5 years certain; the future was a matter to be decided in due course, with Caltex having no continuing obligation to Scanruby after the expiry of the initial terms. 6 In 1992 Mr Dimis and certain members of his family operated, as licensees or lessees, a Caltex Service Station at Mittagong in the Southern Highlands. During 1992 discussions occurred between Mr Dimis and representatives of Caltex, particularly John Cook, but also his superior Mr Manning and Mr Phillips. These discussions concerned what later came to pass, namely the occupancy of the Wyong Service Centre, which was then under construction. The Wyong Service Centre was at the time the largest service station complex in the Southern Hemisphere and occupied two sites on opposite sides of the F3 Freeway. Each site provided petrol and related sales, a garage workshop, a restaurant and on the northbound side, a gift shop. 7 It appears that during 1992 Caltex called for expressions of interest in the management of the complex. The operators of a service station/restaurant/gift and souvenir operation, known as the Big Merino at Goulburn, applied for the F3 site in March 1992 and sought a 5 x 5 lease (that is, 5 years with a 5 year option). There is some evidence to suggest they may have sought a further option of 5 years. 8 Between May 1992 and December 1992 there were a number of discussions undertaken between Mr Dimis and representatives of Caltex, including particularly Mr Cook, which require detailed exposition. Mr Cook, in or about April 1992, had been appointed by the NSW Regional Manager, Bill Lockwood, to coordinate the retailing side of new service station facilities that Caltex was establishing on major freeways at Wyong and Eastern Creek. He deposed that at about that time Mr Lockwood indicated the following to him: "One way we could look at it would be to have the restaurant and souvenir shop under a two year lease with possibly a three year option but have the fuelling sections operate by way of our standard commission agency agreement. In any event, I want you to do the figures on a company operation scenario in case we cannot find a suitable operator who could take a lease of the restaurants and the souvenir shop and run the fuel side for us as commission agent." 9 Mr Cook met Mr Dimis in May 1992 at a meeting between Caltex representatives and a number of Caltex service station operators, for the purpose of reviewing what might be the best method to operate the F3 site. On 22 May 1992 Mr Dimis wrote to Mr Cook, submitting his application for the operation of that site. 10 On 16 October 1992 Mr Cook wrote to Mr Dimis and others who had expressed firm interest in the site, in terms which included the following paragraph: "We would appreciate the completion of the enclosed "Caltex Petroleum Products Franchise" application form. This form should be returned to Mr John Cook the Franchise Programmes Manager along with a business plan forecasting the first six months of trading."
(There was some significance in the suggestion implicit in that paragraph that the site might be franchised; such a course would import through the Petroleum Retail Marketing Franchise Act 1980 (Cth) a necessary term of 3 x 3 x 3 years. As to this, more later.) 11 Nevertheless, Mr Cook maintained that he was well aware of Mr Lockwood's intention to install a commission agent into the site for a period of 12 months which was the standard period which Caltex generally appointed its commission agents. Knowing this, he said that there is no way that he would have said to Mr Dimis, or anyone else at that time, that Caltex was contemplating a 5 year lease with a 5 year option. 12 On or about 3 November 1992 Mr Cook wrote to Mr Dimis seeking a business plan for the operation of the F3 site. Mr Cook had no recollection of receiving the copy of the plan, which was tendered in evidence. He said that had he received such a letter he would have immediately queried with Mr Dimis where he got the idea that the lease terms on offer were a 5 x 5 year arrangement and told him such tenure was not on offer. 13 In December 1992 Mr Dimis was informed by Mr Cook that the Big Merino Group would be appointed as the operator of the F3 site. However, that group faced insurmountable financial difficulties and the appointment did not proceed. Discussions were then entered into with Mr Dimis and his partners in which Mr Cook played no role initially. Mr Cook said the negotiations were left to Messrs Lockwood, Manning and Phillips. He said he returned from holidays on 18 January 1993 to be informed by Mr Manning that Scanruby was going to be appointed the commission agent for the car stops and the truck stops but that the term had not been finalised and that discussions were still going on both as to the length of the commission agency and the restaurant and souvenir shop leases and for the workshops which were part of the petrol refuelling sites. He said the actual period of tenure was not finalised until about May or June 1993. He specifically recalled prior to that time saying to Mr Dimis words to the effect: "Caltex's standard Commission Agency Agreements are for one year and I see no reason why the F3 site will be any different."
(It is hard to rationalise that observation with the information conveyed to Mr Cook by Mr Manning in January 1993 that discussions were ongoing as to length of the commission agency which suggests that a standard 1 year term may not have been appropriate.) 14 In mid-January 1993 Mr Dimis met with Mr Manning and Mr Phillips at the Epping office of Caltex. Mr Dimis was informed that the Big Merino Group would not operate the F3 and that "it looks like the F3 is all yours". Mr Phillips, who was called in Scanruby's case, gave evidence that in this conversation Mr Manning said to Mr. Dimis:
"Jim, I prefer the normal franchise arrangement of 3 x 3 x 3 as it should give you enough tenure to cover your initial investment. However, you may be on a commission agency deal and I need to check that with Head Office." 15 Mr Phillips also said that towards the end of January or in early February he was told by Mr Manning: "I have been told by head office not to operate the F3 by way of a franchise. I've spoken to Jim and he has been given a CA/Lease Deal and he won't be disadvantaged in any way." 16 Mr Phillips also deposed that Mr Dimis had stated to him in numerous discussions that Scanruby had been given tenure arrangements of 5 years and a further 5 years. He recalled one particular conversation as follows: Mr Dimis: "They are giving me 10 years tenure, five years and a further five years."
Mr Phillips: "How are they going to break it up between the restaurants and the petrol?"
Mr Dimis: "They will do leases in respect of the restaurants for five plus five and then I suppose the petrol parts will be for the same. Wouldn't they?"
Mr Phillips: "You should make sure of that and make sure that the petrol is the same as the restaurants, you need both." 17 Mr Dimis claimed that Mr Manning, on or about 19 January 1993, indicated to him in a meeting at the Epping office that Caltex would offer a 5 x 5 commission agency arrangement and lease. This was referred to by Mr Ryan as "the new case", it only having been raised for the first time by affidavit sworn 16 August 2000, the week before the hearing was due to commence. Mr Dimis' other affidavits were sworn on 23 June 1998 and 4 November 1999. Mr Manning was available to give any evidence he may have been able to give in refutation or support of this but was not called by either party, although he was spoken to by both sides. 18 Other indications in the evidence that ten years was being considered are:
He said that on that occasion he said to Mr Dimis: "Only that we wouldn't be able to do anything longer than what was in the agreements." 24 As to those words, Mr Dimis gave further evidence of this conversation as evidence in reply. On being asked whether that was what Mr Cook had said, he answered: "No, he didn't say that because we didn't have the agreements until the day we opened. What he said to me is, 'Yes, he said he will look into it and get the letter for the bank for the 10 period that we had'." 25 Mr Cook said that in about May 1993 he had a conversation with Mr Dimis to the following effect: Mr Dimis: "A one year Commission Agency Arrangement is not acceptable to my bank. I have borrowed a lot of money and they need more tenure before they will approve my loans." Mr Cook: "One year is the standard term. I will go back to Bill Lockwood and see what we can arrange. I will get back to you as soon as I can." 26 He then had a conversation with Mr Lockwood to the following effect: Mr Cook: "Bill I have spoken to Jim Dimis. His bank is not happy with the one year Commission Agency Arrangement. Jim says this is because of the large amount of money he needs to borrow. The bank needs to see that he will be there for longer than a year so that there is some chance they will be paid back."
Mr Lockwood: "This is a big operation. Dimis is putting in a lot of money. I think in those circumstances we should make an exception to our usual rule and grant the Commission Agency Agreement for 2 years." 27 He then telephoned Mr Dimis and they had, he said, the following conversation: Mr Cook: "Jim, Bill Lockwood has agreed to give you a 2 year Commission Agency Agreement in recognition of the large amount of capital that you are putting up."
Mr Dimis: "Can you put something in writing for my bank."
Mr Cook: "Yes, I will put something together and get it to you." 28 Mr Cook said he then arranged for the Caltex Corporate Solicitor, Mr Ochs, to write to the relevant Commonwealth Bank Manager; the letter, dated 23 June 1993, included the following terms: "We are preparing to enter into sub-lease and licencing arrangements respectively with Scanruby Pty Limited for various facilities being established at the twin-sided Caltex F3 Service Centre at Wyong. In particular the following is proposed with Scanruby Pty Limited: · Restaurant - 2 year sub-lease with 3 year renewal option · Souvenir Shop - 2 year sub-lease with 3 year renewal option · Emergency Break-down Facility - 2 year sub-lease · Car Stop - 3 year licence* · Truck Stop - 2 year licence* None of the proposed arrangements (counting option periods) exceeds five years in duration. The various sub-leases relate to portions of a single allotment on each side of the F3 Freeway. If we were to enter into terms (including options) exceeding five years, the provisions of the Local Government Act, 1919 (as amended) would require us to sub-divide those separate portions - something which would almost certainly not be approved by local council, and in any event something neither we (nor we suspect our head-lessor) would be prepared to agree." 29 The initial suggestion in the invitation by Caltex to Scanruby for a business plan in the context of a 3 x 3 x 3 franchise arrangement makes a 1 or 2 year commission agency quite unattractive save for the fact that a commission agency operates on the basis that the "petrol in the ground" remains the property of Caltex and the vendor receives commission on petrol sales without having any liability to fund the cost of that petrol. Alternatively, in a franchise situation the franchisee purchases the petrol directly from Caltex and re-sells it on its own account. In Mr Cook's estimation the cost of filling the tanks at the F3 would be of the order of $1,000,000, a further cost which Scanruby thus was not required to meet. It is interesting to contemplate that petrol cost, together with the set-up costs actually expended by Scanruby, which combined total something of the order of $1,750,000. Whether Mr Dimis' assertion that Mr Cook estimated costs at $1,800,000 might have been made, if made, in the context of a franchise arrangement does not seem to require decision. However, the truth of the matter seems to me to be that all indications were that the occupancy of the site by Scanruby would be for a minimum of 5 years with the possibility of an extension. 30 The site was due to open on 1 July 1993. On 30 June the lease documents, consisting of 1,500 pages, were first seen by Mr. Zacharatos. He deposed to receiving them at his Bowral office; on the other hand, Mr. Ochs' evidence was the two solicitors met at the Elizabeth Street, Sydney office of Mr. Zacharatos' firm at 3pm for a period of 2 to 2.5 hours during which they went through the important aspects of the documents. Mr. Ochs' diary record conforms with that summary of the time and place of the meeting. Mr Zacharatos also said he had insufficient time to read and consider them, although he was at least able to write to Scanruby indicating the security (the lease term) conflicted with that previously indicated to the bank. While I prefer Mr. Ochs' evidence as to the meeting, I do not consider much turns on it. However, two matters arise therefrom: the lateness of the provision of documentation and the fact that, by whatever means, Mr Zacharatos became aware of the lease and agency terms before the documents were executed. 31 Mr. Dimis and the other directors of Scanruby did not see these documents until 1 July at the F3 site. At a 7.30am meeting with Caltex staff members Mr. Cook, Bill Rankine and James Nixon-Smith, the latter said if Scanruby did not sign the documents the site would not open. Mr. Zacharatos then said time was needed to negotiate changes and that Scanruby was signing under duress. Mr. Nixon-Smith, while disputing that the word 'duress' was employed, conceded that the conversation may have otherwise gone as Mr Zacharatos claimed: Q. ". . . Did not Mr Zacharatos say to you words to the effect "I only received these documents yesterday"? A. He could well have.
Q. Did he not say "I could not read them in total"? A. He could well have.
Q. Did he not say "they are substantial and technical documents?" A. He could have.
Q. Did he not say "from what I went through, there are probably many things that were not agreed to and many things we don't understand that I need time to look at the same"? A. He could well have said that.
Q. Did you not say "if you don't sign the documents now you are not opening"? A. I would have made the statement that if the documentation was unable to be signed, the opening date would have been in jeopardy, would be my recollection.
Q. Did not Mr Zacharatos say something to the effect "there are clauses here we don't agree to, and we need time to negotiate changes"? A. Yeah, I don't recall that." 32 The signing then was undertaken for two hours but was not finished at 9.30am when the site was to open. The completion of signing was then agreed to be deferred. 33 Two other matters need be discussed. The first is the development of the terms of occupancy after the expiry of the initial terms. The second is the difficulties Scanruby had with the gift shop. 34 As to the first matter, on 10 February 1995 Scanruby gave notice of a desire to renew the leases. This notice was required by the provisions of cl.25, Renewal, of the lease which provided for a further term of three years subject to certain conditions here irrelevant apart from the matter of notice. That notice consisted of a business plan and the expression of desire to renew. As to the gift shop/tourist information centre, the document reported that: "Once again very disappointing results in this area with huge losses in the past 12 months. Further losses are anticipated in the future.
The future of these two outlets has to be looked at seriously now as we cannot absorb such losses ourselves.
The possibility or probability of another use of this building (food outlet) will turn the losses to profits for us and Caltex through the percentage of turnover ratio.
In the past 12 months we have done everything in our power to increase sales and interest in the shops. For example, stocking more gift lines, pottery, impulse lines, advertising and directional signage on site, seasonal promotions etc., all to no avail.
Attached is a trading summary for the last 12 months to December 94.
Therefore, we ask for rental rebate for the Gift Shops for the past 12 months so as we can continue to trade.
Any rebate received we would be prepared to put back into the site to assist in the refurbishment or transformation of these shops to food outlets. Caltex would get back its money in the form of percentage of turnover in increased trade and we would ask for the assurance of long tenure of the complex including the Restaurants and Motorspirits.
Assurance of long tenure will enable us to plan years ahead with confidence, give us a sense of security and belonging and enable us to invest in future business development on this site as demand grows eg truck/car wash and future extensions to existing business. "
The net loss for the gift shop, after taking into account the cost of sales including expenses and rent, was $175,262 for the 1994 calendar year. 35 Over the following months discussions between representatives of Scanruby and Caltex occurred with respect to the possibility of changing the use of the gift shop. At this stage, unbeknown to Scanruby, communications had been received and discussions undertaken between Caltex, the head lessor, Guina Developments, and potential fast food operators who might be interested in undertaking a fast food outlet on the site. Indeed, on 15 July 1993, two weeks after the site opened Mr Lyons, the Manager - Retail Marketing of Caltex Australia Pty Limited received an expression of interest from McDonald's Australia Limited in the following terms: "I would like to congratulate you on the outstanding appearance of the Service Centres that have been built on the Newcastle Freeway. I am sure I am not the first to do so.
I am sure you are aware that McDonald's is pleased to be with Caltex on the M4 and we would welcome any opportunity to discuss having a presence on your latest centre. I have spoken in the past to Tony Guina but I am sure that now that you are open for business, it is more appropriate to be discussing it with Caltex." 36 The material in evidence illustrates that subsequently through 1994 and into 1995 discussions were being held and evaluations made of a variety of alterations to the use of the gift shop at the F3 site including fast food operators and other retail and service outlets of a kind which need not be described. Mr Dimis attended a meeting with Caltex and fast food operators to discuss the matter in August 1994. As late as 29 March 1995 a Caltex internal memorandum said: "The negotiations are difficult as there are so many parties involved apart from us and Guina:-
So far, it appears that Dimis is the major hurdle given that his requirements are that he remain the sole operator on site even if McDs etc come in." 37 It was shortly before this, in February 1995, that Mr Dimis on behalf of Scanruby was seeking to assure Caltex that Scanruby did not wish to forgo the renewal of the lease of the gift shop area. As he indicated in evidence, to have done so would have made the area available to Caltex to establish a fast food operation in competition with the restaurant business Scanruby was conducting on the site. 38 During the first half of 1995 Caltex and Ampol merged. On 22 May 1995 Caltex advised Scanruby that the gift shop and restaurant leases would be renewed for 3 years. The commission agency agreements operating in respect of the petrol and distillate would be renewed for 12 months and the lease of the breakdown area would be renewed for 12 months in line with the motorspirit agreements. 39 At a meeting between Mr Dimis for Scanruby and Ms Chambers, Mr Gaertner and Mr Hainzer for Caltex/Ampol on 6 June 1995, discussion surrounded the means by which increased rentals might be avoided by Mr Dimis increasing turnover, by the introduction of things such as a truck wash, a car wash, and a cheese cake shop. Mr Dimis' record of the meeting said: "I suggested that I invest in the setting up of new ventures and in return I asked for long tenure."
At a further meeting on 19 June 1995 with Miss Chambers and Mr Gaertner, Scanruby's minutes record in the context of discussing the installation of a truck wash: "Jim is willing to fund it but only if he gets a long lease. He cannot be expected to invest that sort of money for a one year lease. David said that a letter stating a five year lease would be given to Jim to enable him to go to his bank."
The minutes also record: "Scanruby must have the security of a long lease. Going backwards by suggesting the sp(l)itting of the site. . . . Something longer than three years is required to spend the money that is necessary to put the site right." 40 At a further meeting on 30 June 1995 with the same representatives of Caltex/Ampol together with Mr Bill Lyons, the discussion related to McDonald's operating on the F3 site. Mr Lyons was said to be: "keen to make a deal with McDonald's as soon as possible".
Mr Dimis is recorded as indicating that he wanted the franchise of McDonald's. He said: "We have a large stake on the F3, and we don't want to loose (sic - lose) it to a McDonald's Company run outlet".
Mr Lyons is recorded as saying: "We could do it now with my consent or without my consent in three years". (I take "we" to be Caltex and "my" to refer to Mr Dimis) 41 The new leases and commission agency agreements were not effected by 1 July 1995. They were ultimately executed in September 1995, Scanruby holding over in the interim. 42 It is necessary to record also the evidence of a meeting held at the F3 with Caltex/Ampol on 13 November 1996 Mr Lyons. Mr Pateman and Mr Wiggins were present for Caltex and Mr Dimis, three of his co-directors and two employees were also present. Discussions again embraced the possibility of McDonald's entering the site. Mr Wiggins said in relation to the establishment of a specialised truckies' restaurant - "should do the move to truckies. Spend the money. Let Jim spend the money and us give the tenure to suit and put the three varieties in restaurant". Mr Lyons' responded: "Investment by Jim and giving the tenure to suit - solve the problem immediately - haven't got a problem with that." 43 The minutes of this meeting later record the following: Mr Lyons: "You have said this before - You will be here beyond 1998! No hidden agenda!"
Mr Dimis: "Need agreements in writing - as people change."
Mr Lyons: "Don't misunderstand me. You will have to determine whether the deal is viable. Your performance counts. You operate very well. We are very happy with you."
Mr Dimis: "We are not being told. We have been held back. No answers."
Mr Lyons: "Gary - what have I said to Jim. Doesn't know where he will be after 1988 (sic 1998). We are very happy. Have view - doesn't matter what happens with other parties - if you want to be here you will be." 44 Mr Dimis deposed that during a further meeting with Mr Gaertner and Mr Hainzer the following conversation occurred: Mr Gaertner: "Jim in respect of the Gift shops and certain segments of this business, you have to take the good with the bad and make a loss in respect of some of them."
Mr Dimis: "David that is ridiculous. Why would anyone be in business to make a loss?"
Mr Gaertner: "Imagine if you rented your house to Kurt and wanted more rent and Kurt could not pay the same, you would kick Kurt out, wouldn't you? That's what's going to happen with you."
Mr Dimis: "No David, if Kurt was a good tenant, I would work out some arrangements with him that he could afford and work out his future with him." 45 Mr Dimis said later that day Mr Gaertner said to him: "Look Jim, all bets are off, forget about what has happened before we are now a more aggressive company than the old Caltex in respect of the F3. Toss out all of the promises from before, its a new ball game. We do not acknowledge past promises." 46 During 1996 and 1997 and in the early part of 1998 discussions and correspondence continued regarding the future. In April 1997 Mr Wiggins indicated to Mr Dimis that he was recommending a 5 x 5 lease of the service station and restaurant to Scanruby. This however did not crystallise at any stage and on 11 March 1998 Mr Wiggins advised Mr Dimis that Caltex would run the whole site itself. Later that month he was advised in writing that no further lease would be granted. Caltex in the early part of 1998 had a number of meetings with Mr Dimis concerning Caltex's taking over the site. On 1 June 1998 Mr Dimis met with the National Manager of Caltex, Bob Sheppard who said: "You built a profitable business for you over the past five years and I hope that it will remain as profitable for us in the future." 47 On 16 June 1998 Supreme Court proceedings were commenced by Scanruby seeking interlocutory relief but were concluded unsuccessfully in early September. The F3 site was then taken over by Caltex on 9 September 1998. 48 The total losses for the gift shop over the period of 1 July 1993 to 30 June 1998 were $1,095,075.45. 49 The elements of the pattern relied on by Mr Donovan as indicating that the parties always had within contemplation a period of either nine or 10 years occupancy are as follows: 50 The first is Mr Dimis' oral evidence. 51 The second is the records by others contained in documents such as the bank records. 52 The third is Mr Dimis' letter to Caltex of 16 November 1992 which was an expression of interest. That letter contained the following: "Given the lease arrangements being offered being 5 + 5, I believe that we will be clear of external debt well within the first 5 year period of the lease."
The copy of the letter in evidence containing this reference purported to have been written by Mr Dimis but is unsigned. It was produced in the proceedings by Caltex. Mr Cook's evidence was that by correspondence dated 2 November 1992 he had sought a business plan from Mr Dimis. He recalled having received something but could not identify this document as that which he received. The document coming from the records of Caltex, I would accept on balance that it represents the plan as then expressed by Scanruby to Caltex and that it reflects Mr Dimis' understanding of the then thinking on the issue of the period of tenure. 53 The next element in the pattern advanced is what others say Mr Dimis said to them. Two persons in particular are relied on in this respect; Mr Murphy, the Scanruby Training Manager and Ms Maloy, the Administration Manager of Scanruby. The submission was that while Scanruby might be said to have an interest in telling the banks that the term was long, no benefit could have flowed from Mr Dimis having told these employees the term was ten years if it was to be only 5 years. 54 The fifth aspect of the pattern is what Mr Dimis' partners said independently to their banks. For example, Mr Pantsos invited his bank to speak directly to Caltex to confirm what he had told it about the proposal being for ten years. 55 The sixth area was what Caltex people say Mr Dimis said to them. Mr Cook had originally taken the view that Mr Dimis had never suggested 10 years but in his oral evidence he accepted that he did. Mr Phillips, another Caltex employee, but called by the applicant, attested to Mr Dimis having said he had 10 years tenure and Mr Phillips advised him to ensure that he had it tied up. 56 The seventh aspect concerns what Caltex staff said to Mr Dimis. First, Mr Manning and Mr Phillips was said in evidence by Mr Dimis to have said in answer to the enquiry about a draft lease that he "will look into it and get the letter for the Bank for the 10 year period that we had". 57 The eighth part of the pattern concerns the approach adopted by the Big Merino applicants seeking a 5 x 5 x 5 term. 58 The ninth part of the pattern concerns the Petroleum Retail Marketing Franchise Act, to which I will return. Conclusions
59 There was a strong suggestion in the applicant's case that Caltex failed to provide any or sufficient support to Scanruby in the matter of the establishment of the business and the training of staff. I do not intend to develop that matter because of the broader and more significant aspect of tenure. It must be recognised that the business was a complex one which was necessarily to involve considerable effort to set up and to operate. As I have already said, the compensation for those efforts, during the occupancy by Scanruby, is largely not in issue. The real and substantial issue is whether Caltex promised, or by its words or actions created a reasonable expectation of a term of ten years and, if so, whether as a result the contract or arrangement between the parties became an unfair one within the meaning of s. 106 of the Act. 60 There is a plethora of evidence which I find convincing that Mr. Dimis and through him Scanruby believed that the site would be theirs to operate for a period of nine or ten years. The caveats on that belief or expectation, relating to adequate performance, were not seen as obstacles: there seems never to have been any doubt in Mr. Dimis' mind about the adequacy of Scanruby's future performance, which perhaps was not unreasonable in the light of Mr. Dimis' experience and his selection to operate the flagship. This confidence seems to have been vindicated by the later actual experience.
While Mr Ochs' letter to the Commonwealth Bank (see par.28 hereof) makes clear that the legal terms are maximised with respect to the restaurant and souvenir shop at 5 years, the sentence "If we were to enter into terms (including options) exceeding five years . . ." implies to my mind that the bank was being given an explanation why the terms were so limited. Were it not for the difficulties adverted to in the balance of the letter the thought seems to emerge that the terms otherwise may have been longer. 61 Taking into account that prior to this happening the expenditure by Scanruby on preparations for the site was approaching $700,000, that their costs of operation had been estimated at $1,200,000 and later increased, according to Mr Dimis on Mr Cook's suggestion, who denied it, to $1,874,000 and the fact that the Caltex Credit Analyst assessed a reasonable term for the repayment of necessary borrowings at 7-10 years, it is inconceivable that the express terms of the arrangements as to the commission agencies, namely those set out in Mr Ochs' letter to the Bank, could have been intended by the parties to have been anything more than an initial term or terms. Were it otherwise the only reasonable anticipation would have been that Scanruby would be left at the end of those terms with outstanding debt to the Bank as the direct result of its operation of the site. No right-thinking person could have entertained that possibility. Accordingly, Mr Cook's repeated reliance upon the notion of a standard 1 year term or an increased term from 1 year to 2 years in relation to the commission agencies is quite pointless unless it was intended to merely reflect the legal position but not the actuality. 62 I do not think that at any crucial stage of the negotiations leading to the occupancy were the parties of a common mind on the matter of tenure. This was contributed to by the apparent inability of Caltex to make a decision as to tenure in a timely way. The foisting of the documentation upon Scanruby the evening before the site was to open, with a threat the following morning within two hours of the opening, was astonishing behaviour bearing in mind that by this stage Scanruby had already expended more than $674,000 in preparation for the operation, it had a large body of staff ready to go, and the site was to be launched with a great degree of fanfare, including political and media interest. It is interesting to ponder just what the effect of a refusal to sign by Mr. Dimis might have been in those circumstances; nevertheless, the threat emanated from Caltex and it achieved its obvious intention. 63 It might be said that the bargaining position of the parties was unequal at this time. On the other hand, it must be accepted that the tenure provided in the documents was not different to that which had earlier been conveyed to Mr Dimis by Mr Cook in May 1993 after he spoke to Mr Lockwood about the proposed 1 year commission agency, then increased to 2 years. 64 Further, this did not amount to duress. It was a pressured situation contributed to Caltex's delays, but there was no element of illegitimacy in Caltex requiring execution before the opening. The substance, with hindsight, is that the parties were agreeing to terms of a kind which did not expose Scanruby to losses. At the time a profitable result was the expected one. It involved possibly arduous application by the Scanruby directors and shareholders but with potential and ultimately actual net rewards of considerable size. Thus, any defect or element of unfairness in the late provision of contractual documents, that is, any "procedural unfairness", was not a substantive unfairness, as identified by Mr Ryan. (See West v AGC (Advances) Ltd (1986) 5 NSWLR 610. There was in this context no exploitation or oppression, but a contract or arrangement the benefits of which were fair and substantial. What the applicant seeks, in effect, is a continuation of those benefits for a longer term, viz 10 years rather than 5 years. 65 Similarly, there is no real basis in the evidence for a conclusion that the applicant was in an unequal bargaining position. It, through Mr Dimis, had experience of Caltex operations at Mittagong. It was selected as suitable and able to operate the F3 site; it had legal advice and financial capacity. 66 I have formed the opinion that the expectation of Scanruby was not totally unjustified or a fabrication but that it never crystallised as even an informal offer, let alone an agreement. The tenure to be finally offered was hoped by Scanruby to be, but never actually confirmed as, a nine or ten year term, including option periods. While the circumstances of the provision of the initial agreements and leases left Scanruby in a position where it felt little if any alternative could be taken but to execute them, there remains in the evidence a conundrum I have found extremely difficult to understand, if Scanruby's position was then as it is now claimed. That is that neither then nor at any stage thereafter in all the sequence of events and discussions through 1993 to 1998 that I have summarised, did Mr Dimis, or anybody else on Scanruby's behalf, including Mr Zacharatos, ever mention to a Caltex representative that Caltex had failed to honour a promise that Scanruby would have at least nine or ten years at the F3 site. If the expectation was grounded in some positive statement on behalf of Caltex to that effect, I find it impossible to understand how it could not have been identified repeatedly by Scanruby in the many discussions I have referred to. Equally, how could that understanding of the parties intention not be the subject of a note, letter or minute. Where there is to be found any such reference it is oblique and, taking into account the minutes from which I have extracted parts, suggestive of a desire rather than a perceived right. For example, there seems to me to be a world of difference between the minutes recording Mr Dimis having said "We need long tenure" and an alternative postulation such as "We need the long tenure we were promised at the outset by X on behalf of Caltex". 67 In the context of a multi-million dollar enterprise, as was the F3 site, I consider the absence of these observations, indications or complaints in effect at all times during the subsistence of the parties' relationship to speak powerfully against the proposition that the applicant has been denied something which was intended by Caltex that it have, namely, a total period of occupancy of up to 10 years. In my opinion, where the complaint made by an applicant in proceedings such as this relates to a lucrative business and the respondent has exercised the contractual rights to terminate conferred upon it by the legal instruments utilised by the parties to create their relationship, after having otherwise satisfied those terms, then a clear case ought be demonstrated that the exercise of those rights diverged from the mutual understanding of the parties on the matter of tenure. I am unable to find on the evidence that such a mutuality ever existed in this case. 68 In having come to my conclusions on this matter of the possibility of a ten year term I have found it unnecessary, save in one respect, to make any adverse finding as to the credit of any witness. I have had difficulty understanding how Mr Dimis was able to give evidence very late in the day that Mr Manning, and, only in reply, that Mr Cook had adverted to an intention in Caltex that Scanruby have a ten year period of occupancy, that matter not having arisen either in the course of his earlier two substantial affidavits or in the course of his oral evidence. It seems to me that Mr Dimis' later evidence may have been an attempt by him to recapture what he recalled the position to be but, based as it was on unsupported recollection over a period of years, I consider the evidence unreliable. In any event, in the context of the silence over 5 years when so many obvious opportunities arose to assert the alleged promise, I am not able to accept this evidence as the fact. 69 In considering this matter I have given attention to the majority judgment of the former Industrial Commission of New South Wales in Court Session (Perrignon, Dey JJ in A & M Thompson Pty Ltd v Total Australia Ltd (1980) 2 NSWLR 1 where the features of a licence to occupy and operate a service station were considered in the context of an unfair contract case. Their Honour's judgment provides very useful observations, in context, of the concept of fairness. Here I am unable to find that there was any unfairness involved which could justify a similar approach. I have found the bargaining positions were not unequal, one basis on which unfairness was there found. Similarly are absent the elements of harshness and unconscionability there referred to: "Having decided that the contract or arrangement was unfair, it is not necessary to pronounce any finding as to whether the contract or arrangement was also 'harsh' or 'unconscionable'. Were it so necessary, we would be disposed towards the conclusion that the contract or arrangement was also 'harsh', in the sense that it imposed on the Thompsons unduly severe disadvantages in regard to time of occupation, and in regard to the removal of any right to share ultimately in the value of the business built up by them, particularly in regard to the value of the workshop business. Looked at in this way, it follows that the 'bargain' accepted by them was less than that which in good conscience should have been offered to them. On that view of the case, the contract or arrangement could also be described as 'unconscionable'." 70 I turn to the argument based upon the Petroleum Retail Marketing Franchise Act 1980. Mr Donovan cited the judgment of the High Court in Caltex Oil (Aust) Pty Ltd v Best (1990) 170 CLR 516, concerning the application of that Act. That case involved an agreement which it was accepted came within the scope of that statute. A clause in the agreement purported to confer upon Caltex rights which it was argued were inconsistent with provisions of the Act. The majority (Mason CJ, Gaudron and McHugh JJ) stated the question in the matter this way: "The critical question then is whether the Act, on its true construction, manifests a purpose or policy which is at odds with the right which cl.17.4 purports to confer on Caltex." (ibid at p.523) 71 Section 7(1) of the Act prohibited contracting out of the statute. The majority said:
"An express statutory prohibition against contracting out renders void or inoperative contractual provisions which are inconsistent with the statute. Inconsistency between contract and statute is not confined to literal conflicts or collisions between the contractual provisions and the statutory provisions. Inconsistency in this context arises whenever there is a conflict between a contractual provision or the operation of such a provision and the purpose or policy of the statute. So, if the operation of a contractual provision defeats or circumvents the statutory purpose or policy, then the provision is inconsistent in the relevant sense and falls within the injunction against contracting out.
The principle is that it is not permissible to do indirectly what is prohibited directly …". (ibid at p.522) 72 It seems to me this case is not of particular assistance in the present case. As Mr Donovan accepted in the course of argument, the provisions of the Petroleum Retail Marketing Franchise Act do not extend to the arrangement under which Scanruby operated the F3 site, even though one might, in looking at the definitions and the purpose of the legislation as manifested by the second reading speech, see that its scope was intended to relate to operations which required substantial investment. However, the exclusionary provisions in s.3(5) provides:
"A reference in this Act, except in subsection 19(3), to retail sale by a person shall not be read as including retail sale by that person as servant or agent of another person."
It was accepted that the commission agency arrangement between the parties had the effect of making s.3(5) operative. 73 This then is not a case of attempting to do indirectly what could not be done directly. The express provisions of the Act exclude its operation in respect of a commission agency. However, the submission was that despite that position the Commission could, in the context of s.106, take into account the general expectation of dealers in the industry at the time when the arrangements were offered. If something has been so common that it amounts to an industry standard this court, it was submitted, can look at that standard when assessing the arrangement under s.106 (see Stead v Port Macquarie Golf Club 1995 63 IR 416) and a contrary case (Re Finemores (1995) 37 AILR 3-003, 1013 at 1018). The latter decision was one of Munro J under s.127 of the Industrial Relations Act 1988 (Cth). His Honour was dealing with the alleged unfairness of a lorry owner driver contract which had provided a certain level of severance benefits. His Honour there said: "There is no sound reason to treat alleged standards observed by major operators in the express delivery, or wider transport industry as the uniform measure of whether a particular subcontract is fair. Conversely, notice of termination is conceptually at least a more uniform measure. It is a concept also which attaches more specifically to the terms of the particular contract and the surrounding circumstances." 74 Stead v Port Macquarie Golf Club was also a decision which was concerned with standards of periods of notice in contracts under which golf professionals performed their services for golf clubs. Neither of these cases seem to me to be of much assistance in resolution of the present matter. They do not, in my view, lend any weight to the proposition that the Commission ought pay regard to the terms of the Franchise Act and in particular the minimum period which must be afforded to a franchisee as indicating a level of fairness which must or ought be afforded to a party to a relationship with which that Act is not concerned. 75 For these reasons, I have concluded that Scanruby must fail in its claim for tenure beyond 5 years or compensation for loss of profits in relation to that period. 76 I now turn to the evidence concerning Scanruby's performance in the whole business throughout its period of occupancy. Leaving aside the unprofitability of the gift shop area of the site, an issue which needs to be determined separately, the position is not one which overall involved Scanruby in an unprofitable venture. 77 The following is a summary of the relevant information concerning expenditure, income and the financial position of Scanruby, its directors and their family members over the period. 78 The directors loaned Scanruby $850,548 in the first year. In the 1995 year $335,212 of this sum was repaid. In the 1996 year $515,336 was repaid and loans totalling $202,023 were made to the directors by Scanruby. It appears these loans may have been forgiven as they do not appear in the 1998 accounts. The accounts confirm Mr Dimis' evidence that his bank loans were repaid within three years. The following additional benefits were received:
(i) Fully franked dividends of $2,200,000 were paid to the four directors of Scanruby. (ii) Salaries were paid to each director and commensurate superannuation payments were made on their behalf for the 5 year period. (iii) Salaries were paid by Scanruby to family members (and franked dividends, which are indicated with an asterisk).
Name FY 1994 FY 1995 FY 1996 FY 1997 FY 1998 Florina Papas 10,414 - Not produced 70,000* 75,000* Vicki Sotirios 17,307 Not produced Not produced 70,000* 75,000* Marilyn Pantsos - Not produced - 70,000* 75,000* Angie Dimis 17,332 21,468 25,437 29,890 29,597 Chris Dimis - - - 11,921 22,346
(iv) Scanruby provided and paid for cars for the directors. There is evidence from Mr Pantsos that the general expenses of directors were paid by Scanruby although Mr Dimis denied this, no evidence was adduced to support the denial. 79 There is also the matter of capital gains made by the directors of Scanruby over the period. By contrasting the information provided to the Commonwealth Bank in 1993 and that provided in 1998, it discloses that their net asset position (aggregating the results of all directors) improved from $2,892,940 to $7,300,000, an increase of $4,407,060 over the 5 year period. An allowance has to be made for a number of relatively small matters. They are that Mr Dimis' figures included property held as a joint tenant with his wife; three of the directors' figures reflecting their share of plant at the F3 appear to have been understated by $200,000 each; Mr Dimis appears to have obtained a benefit of the order of $350,000 from the sale of the Mittagong "Quick Bite" operation; and Mr Papas had a minority interest in a poultry business operated by his family. 80 I find that on the face of the evidence the only available inference is that the occupation of the F3 site by Scanruby substantially benefited the directors thereof. 81 I note also that Caltex relies upon the benefits obtained from the refusal by Scanruby to give up possession of the F3 site on 30 June 1998. As earlier noted, Caltex took possession of the site on 9 September 1998. It was contended by Caltex and not disputed that during this extended occupation Scanruby's net assets increased from $84,065 to $513,386 without any suggestion of the increase coming from other than the F3 site. The increase in net assets appears to have included a sum of $207,423 profit on the sale of items of plant and equipment to Caltex for $454,640. The net gain was thus $221,898. Salaries also continued to be paid during the three months of extended occupation. 82 One head of claim in the matter is for compensation for losses in the operation of the area described as the gift shop. Those losses quantified at $1,095,000 over 5 years. It appears from the evidence that the use to which the area was able to be put was a matter which involved the agreement of the head lessor, Guina Developments, Caltex and Scanruby. It further appears that prior to occupation of the F3 site Mr Dimis and Mr Cook took slightly different views of the prospects of the gift shop operation, Mr Cook believing that the area might make a profit and Mr Dimis being more positive in that regard. It further appears that Guina's interest was perceived by it to be most advantaged by the insertion of a major fast food operator such as McDonald's, KFC or Hungry Jack's with a flow on benefit by way of rent to Guina. This view seems to have operated to negative a suggestion made by Mr Dimis at one stage that the gift shop should be converted into a truckie's restaurant. McDonald's apparently were interested in the site only as a direct operator. As earlier noted, Mr Dimis' interest was to agree to the gift shop being utilised as a fast food outlet only if operated by Scanruby otherwise it would be in competition with Scanruby's existing restaurant. These difficulties seem to have caused in effect nothing to happen on the site in a positive sense to ameliorate the losses which were being experienced by Scanruby in relation to the gift shop. 83 The alternatives available to Scanruby were to maintain the gift shop operation, attempting to improve it but operating at a loss; to alter the use of the gift shop in a way which was agreeable to all relevant parties, but this was apparently impossible; and to relinquish the lease of the gift shop area, with the very real prospect that it would be converted into a fast food restaurant in competition with Scanruby's restaurant. 84 The submission for Caltex was that Scanruby made a business decision to adhere to the first alternative and to accept such losses as the gift shop experienced as a course preferable to the third alternative which might involve even greater losses. 85 The consequence of Scanruby's approach was to maintain the overall operation in the form in which it had been contracted. While the losses in the gift shop were substantial their effect was to reduce overall the profit otherwise achievable by Scanruby. In circumstances where Mr Dimis contemplated at the outset that the gift shop could be made viable and where, in the face of losses, Caltex and Scanruby attempted jointly to find a suitable alternative, there seems to me to be no reason to isolate the gift shop losses from the overall profitability of the operation. There is no element of unfairness inherent in the specification of use accepted by Scanruby which happened to be unprofitable. To do otherwise would be to make what was a profitable venture more profitable. That is not the purpose, as I apprehend it, of s.106 in the absence of some other feature which attracts relief. 86 I turn finally to the claim by Scanruby that Caltex ought pay in respect of "goodwill". The evidence in support of this claim essentially related to the effort undertaken by Scanruby to train staff, the introduction of computer operating systems, designed to meet the site's needs and the marketing effort undertaken by and systems installed by Scanruby. 87 Scanruby's evidence included that of Mr Paul Miller, a Chartered Accountant of Shepherd Miller & Hyslop, who expressed the following opinion: "In light of the setting up of the operations, the formulation and implementation of policies and procedures, the establishment and operating of a successful business I am of the opinion that Goodwill should be paid in relation to the non fuel section of the business carried on by Scanruby Pty Limited.
To quantify the amount of Goodwill I believe that one year's net profit before tax less one year's profit on fuel sales is appropriate." 88 Mr Miller's view that the profit on fuel sales should be excluded appears to reflect the terms of the licences under which the fuel sales were undertaken, which expressly provide that the goodwill therein is that of Caltex. The restaurant etc. leases are silent on the matter of goodwill. 89 Mr Geoffrey John Coy, the principal of Geoff Coy & Co., Certified Practising Accountant and Business Advisory Services, also prepared a report which included the matter of goodwill. The report refers to a rule of thumb calculation of goodwill in the service station industry based upon the adjusted net profit of the business and to the tenure. As the period of agreement erodes by time so too does the value of goodwill. The report contains the following paragraph: "6.4B Since the introduction of the Petroleum Retailing Marketing Franchise Act of 1980, the rule of thumb for services station goodwill has approximated one years adjusted net profit for an average performing service station with a reasonable period of tenure remaining.
6.5 A reasonable period of tenure could be described as any period sufficient to recoup the initial investment." 90 The report suggested that a reasonable period of remaining tenure would be approximately 5 years. It also contained the following: "6.8 Where the period is less than five years the task of recouping the initial business investment increases and a discount or risk factor could apply to the adjusted business profit." 91 It seems to follow unavoidably from Mr Coy's observations that the notion of goodwill in the context of Scanruby could only have force if there was a residual tenure of the order of 5 years, which of course I have found there was not. Accordingly, there is no room for an obligation for the payment of goodwill. 92 It follows that the summons for relief must be dismissed. I order accordingly. Costs would normally follow the event. Should the parties not resolve that matter and require that it be addressed I will hear them.
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Scanruby
Caltex
(1990) 170 CLR 516
(1995) 63 IR 416
(1980) 2 NSWLR 1
(1986) 5 NSWLR 610