The Cheesecake Shop v A & A Shah Enterprises

Supreme Court of NSW|2004-06-11|Before: Windeyer J, Alan J

CITATION : The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625 HEARING DATE(S) : 3-7, 10, 12, 13, 14 May and 11 June 2004 JUDGMENT DATE : 16 July 2004 JURISDICTION: Equity Division JUDGMENT OF : Windeyer J at 1 DECISION : Judgment for possession. Order for specific performance. Cross claim dismissed.

CATCHWORDS : LEASES - Agreement to lease - Abandonment - lease for 5 years with option to renew validly exercised by plaintiffs/lessees - delay by plaintiffs in executing renewal of more than two years - whether agreement to lease abandoned. - EQUITY - Specific Performance - Availability of remedy - whether affected by laches or acquiescence - whether lack of action amounted to an implied representation that performance of renewed lease would not be required - where no evidence of disadvantage or prejudice. - CONTRACT - Franchise Agreement - Illegality - where breach of Franchising Code of Conduct, a mandatory industry code - whether breach resulted in an illegal franchise agreement - effect of Part VI of Trade Practices Act 1974 (Cth). - CONTRACT - Franchise Agreement - renewal - no new agreement ever signed - whether continued operation of franchise business constituted renewal of agreement - effect of continued operation. - CONTRACT - Franchise Agreement - termination - effect of termination on covenant not to compete. - STATUTE - Interpretation - Trade Practices Act 1974 (Cth) - effect and meaning of ss 51AD, 82, 87 Contracts Review Act 1980 LEGISLATION CITED : Franchising Code of Conduct Pt 2 s6, s10, s11 Trade Practices Act 1974 s51, s78, s80, s82, s87 Pt VI Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth), Reg 3 Brooke v Garrod [1857] 2 De G & J 62; 44 ER 911 Duke of Leeds v Earl of Amherst [1846] 2 Phill 117; 41 ER 886 Fitzgerald v Masters (1956) 95 CLR 420 at 432 Lindsay Petroleum Co v Hunt [1874] LR 5PC 221 CASES CITED : Lord Ranelagh v Melton 2 Dr & Sm 278; 62 ER 627 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 Fry on Specific Performance 6th Ed para 1103 Meagher Gummow & Lehane Equity Doctrine & Remedies 4th Ed at 36-010 Woodfall's Landlord & Tenant 24th Ed 173 The Cheesecake Shop (Plaintiff) PARTIES : A & A Shah Enterprises (First Defendant) Abid Shah (Second Defendant) Aiesha Shah (Third Defendant) FILE NUMBER(S) : SC 4831 of 2003 COUNSEL : Mr M T McCulloch (Plaintiff) Mr S Burchett (Defendants) SOLICITORS : Cutler Hughes & Harris (Plaintiff) Alan J McKimm & Associates (Defendants)

19 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4831/03 THE CHEESECAKE SHOP PTY LIMITED V A & A SHAH ENTERPRISES PTY LIMITED & ORS JUDGMENT Outline 1 These proceedings concern a dispute between the plaintiff as franchisor and the first defendant as franchisee over first, a lease of premises where the franchise business was conducted; second, the validity of the franchise agreement and whether the agreement was renewed; third, the termination of the franchise agreement and fourth, the operation of a restraint clause in the franchise agreement. Facts 2 The second and third defendants, Mr and Mrs Shah, are the directors and shareholders of the first defendant, A & A Shah Enterprises Pty Limited (Shah Enterprises). Mr Shah is forty-two years old. He was born in Pakistan and came to Australia in 1986. Mrs Shah is aged thirty-one. She was born in Australia. They were married in 1994. 3 Mr Shah obviously worked very hard in Australia. He obtained a taxi driver's licence in 1991, purchased a taxi plate in 1992 and a further plate in 1998. He and his wife became interested in the concept of running some franchise business. After a time they came into contact with the plaintiff company (TCS). That company had the right to franchise persons to use what was described as intellectual property in relation to what was called "The Cheesecake Shop System". Cheesecake shops make and sell cheesecakes, specialty cakes and other products and use particular names, logos, designs, recipes and cooking techniques and the like in preparing and selling cheesecake products. 4 TCS was lessee of a shop premises at Bonnyrigg under lease from a Mrs Wong as lessor. The lease was for five years commencing on 1 April 1996. There were two options for renewal, each of five years. A Mr Pallot was operating a cheesecake shop at the Bonnyrigg premises as franchisee pursuant to a franchise agreement and a licence to occupy the premises. 5 Mr & Mrs Shah made enquiries about a franchise in July 1999. They met with Mrs Grindrod, the state manager of TCS, at their home. Certain preliminary documents were signed and information given. On or about 27 September 1999, by which time the defendants were definitely interested in purchasing the Bonnyrigg business from Mr Pallot and obtaining a franchise, Mr & Mrs Shah went to the office of TCS at Villawood, paid a deposit and were given a copy of the then standard franchise agreement, the disclosure document and a franchise code of conduct brochure. Mr & Mrs Shah went about making arrangements to obtain loan moneys from the ANZ Bank to enable them to finance the purchase. Their accountant provided a business plan for them as this was required by the bank, and the bank required some evidence of security of tenure, receiving what might be described as a letter of comfort from TCS, referring to the options under the lease and the opportunity to renew the franchise agreement. 6 The Franchising Code of Conduct is a mandatory industry code, prescribed pursuant to s51AE of the Trade Practices Act 1974. Thus failure to comply with it is a breach of the Trade Practices Act giving rise to relief under s82 and s87 of that Act. The plaintiff was bound by it. Franchising Code of Conduct relevant provisions Part 2 Disclosure

(1) A franchisor must give a disclosure document in accordance with Annexure 1 to:

(b) a franchisee proposing to renew or extend a franchise.

(2) A person who proposes to transfer a franchise or a franchised business must give a disclosure document in accordance with Annexure 2 to the proposed transferee.

A franchisor must give a copy of this code and a disclosure document in the form set out in Annexure 1: (a) to a prospective franchisee at least 14 days before the prospective franchisee: (i) enters into a franchise agreement or an agreement to enter into a franchise agreement; or (ii) pays non-refundable money to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or (b) to a franchisee at least 14 days before renewal or extension of the franchise agreement.

11 Advice before entering into franchise agreement (1) The franchisor must not:

(a) enter into, renew or extend a franchise agreement; or (b) enter into an agreement to enter into, renew or extend a franchise agreement; or (c) receive non-refundable money under a franchise agreement or an agreement to enter into a franchise agreement; unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.

(2) Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee: (a) signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by any of: (i) an independent legal adviser; (ii) an independent business adviser: (iii) an independent accountant; or (b) for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee: (i) has been given that kind of advice about the proposed franchise agreement or franchised business; or (ii) has been told that that kind of advice should be sought but has decided not to seek it.

(3) Subclause (2): (a) does not apply to the renewal or extension of a franchise agreement with a franchisor; and (b) does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2) (a). 7 Mrs Grindrod gave Mr and Mrs Shah the s10 documents in September 1999. There is, however, doubt about the s11(1) document. The document in evidence upon which the plaintiff relies is, I find, the acknowledgement of the s6(2) document; in other words, the one appropriate for the transfer of business, not for a new agreement. There is doubt about the s11(2) document. In evidence Mr Shah said that he signed a statement; in oral evidence he denied that he had signed this particular statement. The plaintiff has not produced the s11(2) document and on the evidence has been unable to locate it. If it had been signed it would be expected to be with the other documents relating to the Bonnyrigg store. That is the evidence from the plaintiff's relevant witnesses. It is not there. There was considerable confusion around settlement time. On balance I find that the document was not received by TCS. Nevertheless, I find that Mr and Mrs Shah did receive advice from an independent solicitor and an independent accountant, the latter also producing a business plan. This would, in my view, suffice to satisfy s11(2)(b) if the statement had been signed and received. 8 Shah Enterprises was formed on 28 October 1999 as a result of accounting advice that the franchise should be taken in the name of a company. The franchisor was happy with this if Mr and Mrs Shah guaranteed performance by the company, which they ultimately did. Contracts for the purchase from Mr Pallot were exchanged on 26 November 1999. On 29 November 1999, Mrs Grindrod sent the required forms of franchise agreements, deed of licence and s11 statement and business name particulars statement to Mr and Mrs Shah at their home. There is no dispute that they took those documents, other than the s11 statement, to their solicitor, Mr McKimm. Settlement with Mr Pallot took place on 6 December 1999 and settlement of the franchise agreement took place on 7 December 1999. 9 The franchise agreement was for a term which expired on the same date as the lease. It required that the rent payable by TCS under the lease of the premises from Mrs Wong be paid by Shah Enterprises. It was in fact paid by Shah Enterprises direct to Mrs Wong. 10 In March 2000, TCS was considering opening a dry store at Liverpool. This would have been within five kilometres of the Bonnyrigg shop. Mr and Mrs Shah consulted Mr McKimm, who wrote to Mrs Grindrod apparently referring to breaches of the Trade Practices Act which were not identified. TCS asked what were the breaches. There was no response. The store at Liverpool did not go ahead. No TCS shop has opened in the territory under the postcode area of the Bonnyrigg shop, but the plaintiffs did remain concerned about this. A lot of attention was given at the trial to evidence of statements by Mrs Grindrod as to the distances between franchised operations. No pleading was directed to this. It was never stated there was an exclusive area; in fact, Mr McKimm's evidence made it clear that although Mr and Mrs Shah were concerned about this, they understood the terms of the agreement gave no exclusive area. They did not enter into the agreement relying upon some misleading statement and in fact suffered no damage through lack of an exclusive area. 11 The franchise business appears to have operated in a relatively normal way in the year 2000. There were quality assessment reports and inspections made by Mr Rodger of TCS from time to time which, although not producing perfect results, did not appear to be unreasonable. 12 In July and August 2000 the defendants commenced negotiations with Mrs Wong, the owner of the shop premises, to purchase her property, which included shops other than the TCS shop. TCS was not told of this. Contracts were exchanged on 3 November 2000 and completed on 24 April 2001. The Shahs said that their reason for keeping their negotiations secret was so that other shopkeepers would not know and that it was not for the purpose of keeping TCS in the dark. 13 As I have said, the franchise agreement was to expire on the same date as the lease, as was the licence to occupy the Bonnyrigg premises. Mrs Smart, the then operations manager of TCS, wrote to Mr and Mrs Shah on 26 September advising them about this and stating that they should consider whether or not they wished to exercise their option for a new term and a new licence. She sent the documents required by the Code, namely the current form of franchise agreement, a disclosure document and a copy of the Franchising Code of Conduct. Mr Shah said that as he was not happy about what he thought was a departure from a representation as to exclusive area, he threw the documents in the waste paper basket. Mrs Smart was apparently concerned to find out whether or not the agreement was to be renewed. She asked Mr Cockburn, who at that time had become responsible for this particular area of the TCS operations in New South Wales and who was responsible for the quality assurance inspections at the shop, to follow up the question of renewal. He apparently did so and on 5 December 2000, Mr Shah did sign a document purporting to be an exercise of the option for a new franchise agreement. The same document requested TCS to renew the lease. Neither Mrs Shah nor Shah Enterprises signed this document. Mr Shah said that he signed it after discussions with Mr Cockburn when he told him that he was not satisfied with the franchise agreement and considered it unfair and would not sign it as it was. He said that he was told by Mr Cockburn that the document was necessary for lease purposes and that negotiations about the franchise agreement could be entered into at a later date. Mr Cockburn agreed that was the position. I accept this evidence. It is supported by Mrs Shah who said that when her husband told her that he had signed it she was annoyed because she said that he should not have signed it without asking her, but that she was satisfied when he explained to her that he had been told that it was for the lease only and not for the franchise agreement. 14 The provisions of the franchise agreement relevant to this case are set out hereunder: 1. GRANT OF FRANCHISE NON EXCLUSIVE 1.2 The Franchisee acknowledges that he is TERRITORY not granted an exclusive franchise territory, although the Franchisor agrees that it shall give the Franchisee a first right to purchase (provided the Franchisee is in full compliance with this Agreement), of any franchise it proposes to offer at a site which is within the Territory specified in the Schedule. The terms and conditions upon which the new franchise will be offered to the existing Franchisee will be at least the same terms as the proposed offer to any other person or party. The offer shall be made in writing to the franchisee setting out the full terms and conditions of the offer and franchise. The Franchisee has twenty-one (21) days from the date of the offer in which to accept the said offer in writing. … 5. PREMISES … LEASE 5.4 Upon termination or expiration of this ASSIGNMENT Agreement the Franchisee shall immediately, upon request from the Franchisor, provide to the Franchisor possession of the Premises and shall do all such things as shall be necessary to have assigned the Lease of the Premises (if any) to the Franchisor or its nominee without delay. … 16. ACTION UPON TERMINATION … POST 16.5 The Franchisee, Nominated Manager TERMINATION and the Guarantors shall not during the COVENANT NOT term or the period, after the expiration TO COMPETE or earlier termination of this Agreement, as specified in the Schedule conduct on his own account or be concerned or interested in whether directly or indirectly as agent, representative, consultant, adviser, servant, employee, trustee, partner, shareholder, or director in any firm or corporation conducting a business similar to the Franchised Operation or in any cake manufacturing or cake retail or cake wholesale enterprise, within the distance from the location specified in the Schedule. …

RENEWAL TERM 18.1 Subject to the provisions of this paragraph, the Franchisee shall have an option (exercisable only by written notice delivered to the Franchisor less than nine (9) months, but more than three (3) months, prior to the end of the Term) to renew the Franchise for one (1) further period, the duration of which shall be the Renewal Term, if and only if: (a) the Franchisee is at the date of exercise of the option to renew in full compliance with this Agreement and has not during the Term materially breached this Agreement, the lease of the Premises, any other agreement between the Franchisor and the Franchisee or any other agreement with other parties which relates to or is incidental to the Franchise; (b) the Franchisee has paid to the Franchisor all outstanding amounts due to it; (c) the Franchisee is able to maintain possession of the Premises for the duration of the renewal term;

(d) the Franchisee, if required by the Franchisor, refurbishes the Premises to meet the then current standards and specifications for all the Franchisor outlets;

(e) the Franchisee shall pay to the Franchisor its reasonable cost of renewing the Franchise, including but not limited to legal fees incurred in the preparation of all necessary documents, as well as stamp duty on such documents, and

(f) the Franchisee enters into a new Franchise Agreement in the form and content then currently used for new Franchises (provided that there shall not be a further option to renew). 18.2 For the purposes hereof the Franchisee shall be deemed to have irrevocably elected not to renew the Franchise (and his option shall thereupon terminate) if he fails to execute and return to the Franchisor a Franchise Agreement upon the terms hereof and other documents required by the Franchisor for a renewal within one (1) month after the Franchisor has delivered same to the Franchisee upon receipt of the Franchisee's notice exercising the option to renew. Note: Under the Schedule: The term is 2 years. The Distances are (a) within the territory which is postcode 2177; (b) within a 5 kilometre radius of the territory (whatever that means); (c) within a 5 kilometre radius of any other "The Cheesecake Shop".

15 By letter of 11 December 2000 to Mrs Wong, TCS gave notice of exercise of the option of a new lease for five years on 1 April 2001. In the same letter, and without prejudice to its rights of renewal, TCS sought various amendments to the lease, including (a) a further option period; (b) the replacement of personal guarantees with a corporate guarantor; (c) an extended definition of "permitted use"; (d) ten amendments to various clauses; and (e) two new clauses. Some of these additions were of some significance, some of little significance. Although valid exercise of option was denied on the pleadings, which denial was continued up to the first day of the hearing, it was conceded at the commencement of the hearing that the option to renew had been validly exercised and in fact this had been acknowledged by Mr and Mrs Shah in correspondence. 16 No new franchise agreement or licence to occupy was ever signed. In fact no draft agreements were ever forwarded for signature. In 2001 Shah Enterprises continued to conduct the Cheesecake Shop apparently on the terms of the franchise agreement. 17 In 2002 to 2003 the relations between the parties seemed to get worse. There was constant tension between Mr and Mrs Shah and Mr Cockburn as a result of his reports on inspections. Various notices of breach were issued pursuant to the terms of the franchise agreement. There was a franchise resolution meeting at Villawood on 30 June 2003, when a number of issues were discussed. Some of the complaints may seem minor, but it was in the interest of TCS to insist on a very high standard of presentation and cleanliness in the franchised stores. On 11 July 2003 a store evaluation report came in with a result of 28% which was obviously unsatisfactory. Mr Shah said it was unfair. On one basis it probably was as it gave 0 out of 9 for products, not because of poor quality, but because of failure to date properly. 18 Two days later Mr Cockburn had a telephone conversation with Mrs Shah after leaving a message that a breach notice would be issued pursuant to the franchise agreement. Mr Cockburn said that Mrs Shah had said that the quality assessment was unfair and untruthful and "it's very, very dangerous for TCS and you to issue a breach notice" and "if you issue a breach notice we will consult our solicitor and we will instruct our solicitor to take further action". Quite why and in fact whether, Mr Cockburn felt threatened by this is not clear, but he said that he did so feel and four days later, apparently on legal advice, he reported this incident to the Balmain Police. He said that this was to have it on record. The relationship went from bad to worse. The defendants refused access to Mr Cockburn to conduct a further assessment. A new breach notice was issued on 1 August 2003. The franchisees refused to attend a franchise resolution meeting. 19 Mr and Mrs Shah consulted new solicitors, Messrs Robilliard Plowman Herat. Those solicitors wrote to TCS on 20 August 2003 stating (a) the franchise agreement and licence to occupy expired on 31 March 2001; (b) the option to renew the lease was not exercised; (c) the defendants did not consider themselves bound by the franchise agreement; (d) the defendants disputed the allegations in the notice of dispute; (e) the defendant would cease to use the TCS signs, get up and recipes and (f) the change would take effect on 31 August 2003. 20 Before this the defendants had made some arrangements to trade under a new business name of "Cosmopolitan Cheesecakes". That business name was registered by Shah Enterprises on 31 August 2003. Mr Cockburn knew that Mr and Mrs Shah had had discussions with a person who was associated with Cosmopolitan Cheesecakes and there is no doubt that he and TCS were concerned as to the suggestion that Mr and Mrs Shah might change their branding. 21 By letter of 2 September 2003, the solicitors for TCS wrote to the defendants stating (a) the option for a new lease had been exercised yet Shah Enterprises had failed to execute the new lease - I interpolate here that the opposite was the fact - (b) either the franchise agreement was still in existence or an option for a new agreement had been exercised or that the parties had continued to conduct themselves on the basis that the agreement continued in which event it could be terminated on reasonable notice; (c) that in view of the breaches of the franchise agreement the franchisee had repudiated the agreement, which repudiation TCS accepted and terminated the agreement; (d) that it did the same for the licence to occupy. 22 If the restraint clause in the franchise agreement continued to operate after termination it is clear that Shah Enterprises was bound by it, if it were valid. An interlocutory injunction was obtained on 23 September 2003 to restrain breach of the restraint covenant pending determination of these proceedings. 23 On 14 November 2003 the solicitor for TCS returned the lease in the form forwarded by the solicitors for the defendants on 4 October 2001 duly executed. Facts relevant to the lease 24 As I have said it was admitted on the first day of the trial that the option to renew was exercised. Notwithstanding the denial of renewal on the pleadings, Mr McKimm by letter of 30 April 2001, wrote to TCS advising of his clients' purchase of the property "over which you hold a lease" and sent a notice of attornment. 25 There was a considerable amount of correspondence between the parties and their solicitors and particularly between TCS and its solicitors about the lease most of which was only asking about the current situation but the following matters were of more significance:

A. On 7 June 2001 TCS wrote confirming exercise of the option and asking for a change in the permitted use and the deletion of the personal guarantees;

B. On 5 July 2001 Shah Enterprises wrote to Jane Smart at TCS acknowledging exercise of the option and stating that there would be no amendment to the term;

C. On 11 July 2001 Jane Smart was informed by Mrs Shah that there would be no change to the lease. Nevertheless she instructed Champion Legal to press for the changes;

D. Champion Legal wrote on that day asking for deletion of the guarantees as the franchisee was now the lessor;

E. On 30 August 2001 Champion Legal was informed by Mr McKimm that there would be no changes to the lease and a lease would be forwarded. He sent the lease for signature on 4 October 2001;

F. There was further correspondence between the solicitors but no change of stance;

G. On 4 April 2002 Champion Legal wrote to the defendants direct as requested by them. That letter was in the following terms: 24 April 2002

Mr A & Mrs A Shah A Shah Enterprises Pty Limited The Cheesecake Shop Shop 1, 1 Rigg Place BONNYRIGG NSW 2177

Re: THE CHEESECAKE SHOP PTY LIMITED LEASE FROM A SHAH ENTERPRISES PTY LIMITED PREMISES: 1/1 RIGG PLACE, BONNYRIGG

We act for the Directors of The Cheesecake Shop Pty Limited and understand that you are the Lessors of the premises. We have been advised that you wish us to correspond with you directly, rather than using your solicitor, Mr McKimm.

Our client requires a lease for the premises, but require [sic] the following changes to be made before it is suitable for signing by them:

As you are both the Lessor and the Franchisee we do not believe it is appropriate that the guarantees of Robert & Warwick Konopacki remain and we seek their release.

The Lease states that there is no GST payable in addition to the rent. Is this because you are below the GST threshold? Please advise.

There appears to be a provision in the option clause for a second option for renewal for five (5) years, however as this second option term appears neither in the Schedule nor on the front page of the Lease, we can only presume it is a typographical error and should be deleted. Please confirm.

Our client is currently reviewing its leaseholdings and identifying sites where leases could be assigned to the Franchisee. This is one such site and The Cheesecake Shop Pty Limited wishes to assign this lease to you the Franchisee at the same time as finalising the Lease. Naturally, we would be seeking the release of the Lessee and its guarantors under the provisions of the Retail Leases Act, upon the assignment of the Lease. If you agree with this proposal we shall forward you the necessary Deed of Assignment and Transfer of Lease documents for you to sign.

We understand that the Franchise Agreements will also be sent to you in due course.

We look forward to hearing from you, if possible, within the next seven (7) days.

M McDERMOTT As events have turned out it would have been a good thing for the franchisees had they proceeded along the lines of that letter. In any event after follow up letters Mr Shah made it clear no amendments would be agreed. Nothing happened for a long period. Champion Legal were told to keep the matter in abeyance. It seems from the evidence that TCS had realized that they did not have a renewal of the franchise agreement or licence to occupy and in those circumstances did not wish to commit themselves to signing the lease, at least without an agreement to immediately assign it or surrender it to the lessor.

H. On 14 November 2003 the lease in the form in which it had been submitted over two years earlier signed by TCS was forwarded to Mr McKimm.

I. No rent has been paid by TCS to Shah Enterprises as owner. On the other hand no demand for rent has been made. The terms of the original licence to occupy required the franchisee to pay the rent due under the lease of the shop premises to TCS or its nominee. Whether or not there was a nomination is not disclosed by the evidence, but while Mrs Wong was lessor Shah Enterprises paid the rent direct to her. Issues 26 The following issues are raised on the statement of claim and cross-claim and the defences to those claims.

Whether TCS is entitled to an order for specific performance of the agreement for a renewed lease created by the exercise of the option.

Whether the claim for specific performance is defeated because TCS has abandoned its right to a lease or whether the lease has been surrendered by operation of law.

Whether the claim for performance should be refused through laches or acquiescence.

Whether there is any other reason why specific performance should not be granted.

Whether the franchise agreement and licence agreement have been renewed.

Whether Shah Enterprises has repudiated the franchise agreement and the licence agreement.

Whether Shah Enterprises is estopped from denying renewal of the franchise agreement and licence agreement, or whether it is estopped from denying that the parties conducted themselves in terms of those documents as if holding over so that the rights could be determined by either side on reasonable notice.

Whether the covenant in restraint of trade is binding and enforceable against the defendants.

Whether TCS has breached the Franchising Code of Conduct and if so, what results from this. In particular whether the breach prevents TCS from receiving non-refundable money and whether the agreement became unlawful and unenforceable against Shah Enterprises.

Whether the renewal of the franchise agreement, if it occurred, constituted an unconscionable dealing which the court would not enforce.

Whether the plaintiff was engaged in misleading or deceptive conduct in relation to the purported renewal of the franchise agreement in breach of s11 of the Code and s51AD of the Trade Practices Act .

Whether in its entering into the franchise agreement and the renewal constituted an unconscionable dealing on the part of TCS pursuant to s51AC of the Trade Practices Act .

The continuance, validity and enforceability of the restraint clause. 27 An order has been made for a separate trial of the issues which arise other than the question of damages. Nevertheless it is proper to say that the plaintiff seeks an order for possession pursuant to its claimed lease and damages against Shah Enterprises for breach of its rights under the agreement for lease and for breach of the restraint covenant while the breach continued. 28 Shah Enterprises as cross-claimant seeks repayment of moneys paid under the franchise agreement and seeks damages for breach of contract and by reason of conduct in breach of the relevant provisions of the Trade Practices Act and seeks to recover damages for the franchise fees paid, the loss of value of the business, and the loss of rent of the premises. Mr and Mrs Shah seek orders under the Contracts Review Act 1980 that their guarantees not be enforced. 29 There are a number of subsidiary claims but when the main questions are decided there will be no problem in dealing with them. Was the franchise agreement renewed by letter of 5 December 2000? 30 The answer to this is that it was not. First the company did not sign the letter; second Mr Shah, by his signature, did not purport to bind the company; third Mr Cockburn was aware the letter was not intended to bind the franchisee to the terms of the franchise agreement; and fourth the requirements of Clause 18(f) were not satisfied. In addition, Clause 18.2 is predicated on the signature of documents to be provided by TCS. These were never provided. Estoppel claim 31 The next question for determination is whether Shah Enterprises is estopped from (a) denying renewal for a term expiring on 30 March 2006 or (b) from denying the continuance of the agreement for an indefinite term, subject to termination by the other party on reasonable notice. 32 This is a claim based on conventional estoppel that the parties conducted themselves on the basis of such renewal and so far as is pleaded reliance by TCS on this. There is no doubt that Shah Enterprises continued to trade as a Cheesecake Shop. It paid royalties, used the recipes and know how and allowed quality assurance inspections and resisted breach notices without denying any arrangement. There is no evidence of the reliance pleaded. The conduct does not lead to any conclusion of renewal. TCS knew that no lease was in place; it knew that there was no documented franchise agreement for renewal; the evidence was that it required a lease before renewal and the conduct which took place was not sufficient to overcome the clear wording of Clause 18. The estoppel claim, so far as it relates to a five year term, must fail. 33 The estoppel claim (b) above is different. It was made by amendment after evidence concluded and during submissions. I consider it should succeed. The parties were in some relationship; while no rent was paid, this was really unnecessary as the franchisee was required in ordinary terms to indemnify the franchisor against the rent and, in practice, pay the rent direct to the lessor. Once Shah Enterprises had purchased the reversion that was no longer necessary. The parties were not operating in a vacuum. The defendants were operating a Cheesecake Shop. TCS was allowing them to do so. They could only be operating on the basis of the terms of the agreement which had expired insofar as those terms would apply. While holding over is strictly applicable to a leasehold interest, the conduct of the parties was such that a continuing operation of the franchise agreement must have been taken to exist and as it had no fixed term, it was a licence terminable on reasonable notice. I do not think that any other implication is possible. The licence to occupy, which was not renewed, ran along with the franchise arrangement. The ending of the latter would bring about an end to the licence to occupy. How did the agreement end? 34 Neither party purported to terminate it on reasonable notice. On 2 August 2003 Shah Enterprises, through its solicitors, wrote to TCS stating it considered it was no longer bound and commenced to act in accordance with that statement. That was a repudiation of the implied term requiring reasonable notice. TCS accepted the repudiation thus bringing the arrangement to an end. It is thus not necessary to consider the breaches pleaded in paragraph 19 of the amended statement of claim and whether or not these together or some of them or even one of them would constitute breach justifying termination. As matters have turned out it does not appear to me that any of them would sound in damages. The restraint clause 35 Counsel for the defendants argued that, even if valid, the restraint ended two years after the initial agreement came to an end, namely 31 March 2003. But if the parties continued to operate on the basis of the terms of the franchise agreement, which I have held they did, it is not possible to excise from that arrangement particular terms unfavourable to the defendants. Thus I consider that the restraint was triggered by termination, however that occurred. 36 It may not be necessary to give further attention to the restraint. After all if TCS is entitled to a lease and possession, then Shah Enterprises cannot conduct a competing business in the premises. At present it is restrained from doing so. The restraint question would only arise if TCS is not entitled to an order for specific performance of the agreement for lease. If it is not so entitled I cannot see how the restraint could be justified. It is really a prohibition against competition without any evidence to establish anything being competed against. There is no evidence that TCS wished to open a Cheesecake Shop within the postcode referred to or anywhere near Bonnyrigg or anywhere within the restrained area. Thus there is no evidence of disadvantage to TCS if a shop selling cheesecake products operated from the premises. In the absence of evidence the covenant would seem to operate to preserve an area for TCS operations which do not presently exist and may never exist. On any basis such a restraint could not be upheld as it could not be shown to be necessary or reasonable to preserve the goodwill of TCS. I should add that the court has no evidence of the extent of the restraint. It should not obtain its own evidence as to the postcode and five kilometres from that area by looking at some unidentified map. It should also be understood that this part of the action is not a passing off claim. What is the effect of non compliance with the Code? Is it just s82 or s87 relief? 37 It is necessary to consider this as counsel for the defendant argued it and it was raised as a defence, that non-compliance rendered the agreement void as illegal. 38 The Franchising Code of Conduct, contained within the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth), commenced on 1 July 1998. The purpose of the Code is to regulate the conduct of parties involved in the franchising industry. The code covers topics including disclosure requirements, the conditions of franchise agreements, and methods for resolving disputes. Regulation 3 provides that the Code is - for the purposes of s51AE of the Trade Practices Act - a mandatory industry code. 39 Part IVB, s51AD of the Trade Practices Act provides that a "corporation must not, in trade or commerce, contravene an applicable industry code". The possibility of non-compliance with the Code was envisaged by Parliament. The Code introduced a form of mediation process as a key feature but it need not be implemented and does not preclude the right to take legal proceedings under the contract or under the relevant provisions of the Trade Practices Act. 40 The remedies available under Pt VI of Trade Practices Act range from injunctions (under s80), to damages (under s82) and remedial orders under s87. There is no criminal sanction for a breach of s51AD (s78). For damages to be awarded under s82, loss or damage must be suffered by conduct which contravenes a provision of Part IV, IVA, IVB or V. That is, the contravening conduct must be a cause of the alleged loss or damage: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 per Gummow J. While s82 is limited to persons who have suffered loss or damage, s87 is also concerned with cases where loss or damage is likely to be suffered as a result of contravention of the consumer protection provisions of the Act. Among the orders available to the court pursuant to this section, s87(2)(a) empowers the court to declare void the whole or any part of a contract, or collateral arrangement. 41 Section 51AD does not make contracts made in contravention of the Code illegal. The section, like s51AC, is addressed to conduct. The matter is really determined by a consideration of Pt IV of the Act. Section 52 prohibits certain conduct; s51AD prohibits certain conduct; s51AC prohibits certain conduct; s51AA prohibits certain conduct. For all breaches Part VI remedies are available, including a power to declare a contract void. If it is void as illegal, there is no need for this. The argument must fail. If it had succeeded it is difficult to see how it could assist the franchisee. No other claim for damages is clearly articulated by the cross-claim but in any event no damages are shown to have been suffered as a result of non-compliance with the Code. It is true that franchise fees were paid but on the evidence a profit was made so that no order would be made for return of the franchise fees.

Claim of unconscionable dealing 42 This claim is raised by paragraph 25 of the defence, but only in relation to the purported renewal of the franchise agreement. As I have held that the agreement was not renewed on the basis pleaded by the plaintiffs it is not necessary to consider that aspect any further. There is, however, in addition a pleaded claim under the cross-claim that both the franchise agreement and/or its renewal constituted an unconscionable dealing. Although some particulars of the claims as to unconscionable dealing were not pressed, in particular those relating to a failure to provide appropriate training and advertising advice, it is difficult to separate the claims relating to the original agreement and its renewal. Insofar as the particulars of unconscionability were pressed no such claim was made out. The matters to which I now refer relate to the original agreement and not to the renewal, which is no longer in issue. Insofar as it is claimed that the cross-claimants were not provided with any business advice prior to entry into the franchise agreement, that is really not correct. Their accountant produced a business plan. This was obviously discussed with them. Insofar as it is claimed that the terms of the franchise agreement were not the subject of negotiation and there was an inequality of bargaining power, while both matters may be true that again would not make the franchise agreement unconscionable. By their very nature, franchise agreements are in standard terms and it is not really a question of inequality of bargaining power. The Shah interests had proper advice, they wished to enter into the agreement and they did so. There was no pressure put on them in any way to enter into the franchise agreement. 43 The other particulars I can deal with briefly. First, it is claimed that the franchisees did not understand the relationship of the franchise agreement to the occupancy of the premises, especially following their purchase of the reversion. As to this it is true that they did not consider there was any need for a lease from themselves to the franchisor, but this has no relevance as by that time they were just continuing their franchise arrangement on a licence arrangement terminable on reasonable notice. Insofar as there were claims of unreasonable exercise of powers of inspection and the like, while I consider that at least on the last inspection Mr Cockburn might have acted in a somewhat unreasonable manner, that in itself can give no basis for relief. The franchise agreement was not brought to an end by reason of such conduct. 44 While it does not seem to have been pleaded by way of defence or by way of cross-claim there was put forward an argument of unconscionable conduct under s51AA of the Trade Practices Act. For the reasons I have given, no such conduct is made out. The franchisee and Mr and Mrs Shah were not in any position of disadvantage when they entered into the franchise agreement. They had proper advice from their solicitor and from their accountant. They purchased the business from Mr Pallot of their own volition. This claim cannot be made out. Insofar as there is a pleaded claim under s51AC then for the same reasons I have given under the general heading of unconscionability, that claim cannot be made out. Insofar as s51AC(3) provides that in determining whether or not there has been unconscionable conduct under that section the court may have regard to the requirements of any applicable industry code, once again this could only relate to the original franchise agreement and as I have said the Shah interests have suffered no damage as a result of the breaches made out.

The question of the guarantees 45 No attention was given to this during the hearing. No loss has yet been established. If it were established, the guarantors/defendants' claim that it was an implied term of the deed of indemnity they entered into that the plaintiff was lawfully entitled to any amounts claimed from them and again raise illegality as an answer to this entitlement. For the reasons given that defence fails. Was the agreement for lease abandoned or surrendered by operation by law? 46 Surrender is a term applicable to leases not agreements for lease. This is because what is surrendered is the lessee's interest in the land the subject of the demise. Contractual rights may be released or a contract may be terminated by abandonment. 47 The question is whether the agreement was abandoned. There was no release. Abandonment is not something that occurs unilaterally. Both parties to the contract must accept extinguishment of the contractual rights, in this case under agreement to grant the new lease. There is evidence that the defendants did not consider a new lease necessary as they were owners of the freehold. Nevertheless there was continuing correspondence and continuing communication about the lease and the request for amendment of the terms, including deletion of the guarantee clause. Counsel for the defendant said that it was an implied condition that the new lease in accordance with the option would be signed within a reasonable time. I accept that to be the position. Failure to so sign might amount to repudiation by the lessee. As there was no acceptance of the repudiation bringing about termination it was not necessary to consider whether or not notice is required prior to termination in such a case. 48 The letter of 20 August 2003 was not an acceptance of the repudiation, although this was argued by counsel for the defendants. In some ways it is contrary to an implied acceptance or understanding of abandonment. The evidence of Miss Smart was also relied upon by the defendants as indicating an intention to abandon the contract, but on examination it does not go so far. Certainly it was to the effect that a lease was a pre-condition for a new franchise agreement, but that is not sufficient to carry the day, particularly when I have determined that there was no renewal of the franchise. Contrary to counsel's submission Miss Smart did not say that there would either be no lease or a lease with the changes requested, plus assignment. 49 As between the parties nothing happened after the refusal of the defendants to agree to the terms of the Champion Partners letters of 20 April 2002. Miss Jury, who assumed conduct of the matter from Miss Smart, and who did not give evidence, instructed Champion Partners around 28 June 2002 to keep the matter in abeyance saying that there was nothing further to be done. That was not communicated to the defendants. The question is whether the contract has been discharged by agreement, each party being entitled to assume that to be the case as a result of the contract being ignored over a period of time: Fitzgerald v Masters (1956) 95 CLR 420 at 432. I have come to the conclusion that the attitude of both parties was to let sleeping dogs lie rather than to abandon rights by implied termination. In some ways this is the most difficult part of the case but abandonment is a matter not easy of proof in the case of contracts relating to interests in land.

Should specific performance be ordered - questions of acquiescence or delay Acquiescence 50 There was no express representation by TCS that it did not intend to enforce its rights if the "required" amendments were not agreed. Nor after consideration do I think the letter of 20 April and subsequent lack of action amounted to an implied representation to the defendants that performance would not be required. There is nothing to show that Shah Enterprises thought that to be the position or that it was in any way disadvantaged or prejudiced because TCS did not act. To the extent that acquiescence may give a separate discretionary ground for refusing an order for specific performance, it is not made out. Laches and acquiescence 51 According to Fry, delay is looked upon with special strictness in cases of contracts brought about by unilateral action, such as options for renewal: Fry on Specific Performance 6th Ed para 1103; Woodfall's Landlord & Tenant 24th Ed 173. But the cases most cited for this, Brooke v Garrod [1857] 2 De G & J 62; 44 ER 911 and Lord Ranelagh v Melton 2 Dr & Sm 278; 62 ER 627, go rather to delay in exercise of option, not delay in execution of the contract. Once the option is exercised the general rules prevail. In the case of agreements for lease, delay is usually overlooked if the proposed tenant is in possession and is paying rent as that assumes all is in order, but in the present case the position is not quite so clear because TCS did not in fact pay rent and possession might have been pursuant to a holding over under the original lease. For these reasons I do not consider any special rules relating to laches apply here. The case should be dealt with on general principles. 52 I consider that the plaintiff was guilty of unreasonable delay in not executing the lease to which it was entitled and I infer its eventual execution was because it thought this might be required for success in its claim for specific performance. However, it is now accepted that mere delay is not sufficient reason to refuse specific performance; there needs in addition to be some countervailing circumstance, such as acquiescence or some prejudice to the defendant if performance is ordered so as to make it unjust to so order: Fitzgerald v Masters at 433; Lindsay Petroleum Co v Hunt [1874] LR 5PC 221. 53 So far as delay with acquiescence is concerned this has been largely dealt with under abandonment and acquiescence. If the conduct of the plaintiff to let matters rest needs to be reconsidered then, while the matter is difficult, no different conclusion is required. TCS has not stood by seeing Shah Enterprises act contrary to the agreement: Duke of Leeds v Earl of Amherst [1846] 2 Phill 117; 41 ER 886 cited by Meagher Gummow & Lehane Equity Doctrine & Remedies 4th Ed at 36-010. Here it is really the conduct of TCS which is in question. So far as prejudice is concerned this should be looked at separately from the franchise arrangements, at least at the start. The fact that Shah Enterprises will, if specific performance is ordered, have as a tenant TCS with which company it does not wish to be associated, is not a ground of prejudice. Shah Enterprises did not rely on delay in making its decision to repudiate the franchise agreement. In fact, it said it relied on the fact the option for renewal was not exercised. Of course, if the claim for possession succeeds, Shah Enterprises will be unable to carry on any business in the leased premises, but that is the result of the lease, not the franchise arrangements and is unrelated to any breach of the Franchising Code of Conduct. The laches defence fails.

Readiness and willingness 54 In this State it is not necessary for the plaintiff to plead this fact. There can be no doubt the plaintiff was not wanting to enter into the new lease until it had exhausted its attempts to achieve amended terms. But leaving aside its failure to sign there has been no breach of the terms of the proposed lease by TCS up to the time the proceedings commenced. Its execution of the lease in the required form before the hearing date showed willingness to accept its terms. 55 Since the date of the injunction TCS has not paid rent. The liability of Shah Enterprises to indemnify TCS against rent ended when the right to occupy ended. In the way this action has been conducted I do not consider the claim of TCS should fail because it has failed to pay rent or because it has not offered to pay rent if its claim for possession succeeds. That would be too technical in the circumstances. 56 It is, however, necessary to consider whether the Court should impose, as a condition of an order for specific performance, a requirement that TCS pay rent from the date of the interlocutory injunction in light of the plaintiff's claim for possession being contested and the claim for damages for mesne profits or damages for breach of covenant. I consider the condition should be imposed. The rent is or should be certain; the damages which may eventually be found which would operate as a counter claim or even set off against the rent are uncertain and it was ordered the question of damages should be tried separately from other issues. 57 There is a further difficulty as to determining the rent payable. That is because the determination required by the somewhat conflicting terms of Clauses 4 (iii)(a) and 36(ii) of the lease has not been made. The proper construction of the lease requires acceptance or agreement or determination of the market rent. TCS will be required as a condition of performance to undertake to co-operate in fixing the initial rent at commencement date and the appropriate annual reviews. Until that is done the amount to be paid immediately will be the rent from the date of the injunction at the rent determined as last paid to Mrs Wong. The obligation to pay the additional amount after determination will arise 14 days after determination. Clean hands 58 This was raised as a separate defence. Little has been said about it. It could it seems, only relate to the purported renewal of the franchise agreement and as I have held that it was not renewed, the matter goes away. So far as it is claimed to relate to the original franchise agreement, it seems to be raised, not by way of defence, but in some way in connection with the claim for unconscionable conduct under the cross-claim. On that basis it cannot be maintained. General 59 Pursuant to the terms of the franchise agreement TCS is entitled to purchase the equipment used at the premises as it wishes at fair market value. Orders 60 The plaintiff's solicitor should bring in short minutes of order to give effect to these reasons after consultation with the solicitor for the defendants. 61 In general these should provide:

(a) An order for specific performance on the conditions stated;

(d) An order for dismissal of the cross-claim. 62 It will be necessary to decide whether any question of damages should be referred to a Master or dealt with by me. Any claim for damages will be limited to damages through denial of possession and for the period Shah Enterprises traded as Cosmopolitan Cheesecakes. 63 The costs of the separate issues should await the conclusion of the action and further argument. However, it is proper to state the plaintiff should not have all its costs. A lot of time was spent on the questions of renewal of the franchise agreement and an estoppel claim which failed; the estoppel claim which succeeded was an amendment as a result of comments by me during submissions; and finally considerable time was spent on the question of compliance with the Code. **********

Last Modified: 07/26/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

Part VI of Trade Practices Act 1974(Cth)

Trade Practices Act 1974(Cth)

Pt VI Trade Practices (Industry Codes - Franchising) Regulations 1998(Cth)

Trade Practices (Industry Codes - Franchising) Regulations 1998(Cth)

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