Trampoline Enterprises Pty Ltd & Ors v Fresh Retailing Pty Ltd & Anor [2019] VSCA 74

CONTRACT - Sale of franchise business - Extra purchase consideration payable to seller where store commences operation within 180 days - Alleged failure by franchisee to register store prior to opening contrary to Food Act 1984 - Illegality - Ex turpi causa non oritur actio (an action does not arise from a base cause) - Alleged illegality not pleaded or proved - Illegality if proved by third party - Relevant illegality would not preclude recovery - Appeal dismissed - Holman v Johnson [1775] EngR 58; (1775) 1 Cowp 341, 98 ER 1120, Fitzgerald v FJ Leonhardt Pty Ltd [1997] HCA 17; (1997) 189 CLR 215, Knowles v Fuller [1947] NSWStRp 72; (1947) 48 SR(NSW) 243, Civil and Allied Technical Construction Pty Ltd v A1 Quality Concrete Tanks Pty Ltd [2018] VSCA 157, St John Shipping v Joseph Rank Ltd [1957] 1 QB 267, Nelson v Nelson (1995) 184 CLR 538 applied.

CONTRACT - Sale of franchise business - Variation - Adjustment to completion statement for transfer of employee entitlements - Payment of employee entitlements by vendor in breach of contract as varied - Manifest error in expert determination finding that agreement not varied - Appeal allowed - Adjustment payable - AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173, Adnow Pty Ltd v Greenwells Wollert Pty Ltd [2016] VSCA 282 applied.

1 In proceedings in the County Court, the first applicant ('Trampoline Enterprises') made a number of claims against the respondents arising out of an agreement entered into between it and the first respondent ('Fresh Retailing') by which it purchased the franchise business of Fresh Retailing. In the same proceeding, Fresh Retailing made three claims by counterclaim against Trampoline Enterprises, and against the second applicant ('Franchised Food Co') and the third applicant ('Gordon'). In a detailed judgment,[1] the trial judge dismissed all but one of the claims made by Trampoline Enterprises against the respondents, and upheld each of the three cross-claims made by Fresh Retailing. The application for leave to appeal is confined to the judge's rejection of one of the claims made by Trampoline Enterprises against Fresh Retailing, and to the judge's decision to uphold one of the claims made by Fresh Retailing in the cross-claim.

2 At the time of the agreement, Fresh Retailing was the franchisor of the Trampoline retail ice-cream and gelato franchise business. It franchised six stores to third parties, and, in addition, it owned six Trampoline stores itself. The second respondent ('Burra') is a milk processor and supplier of ice-cream premix base for the Trampoline business. Fresh Retailing and Burra have a common director, Grant Crothers.

3 The second applicant, Franchised Food Co, is the holding company of Trampoline Enterprises. It owns a number of franchised retail food businesses through subsidiary entities. The third applicant, Gordon, is a director of Franchised Food Co and the sole director of Trampoline Enterprises.

4 By an agreement dated 4 September 2013, Trampoline Enterprises agreed to purchase the assets and business of the Trampoline franchise business from Fresh Retailing ('the sale agreement'). Pursuant to that agreement, Trampoline Enterprises took over the twelve existing Trampoline stores, comprising the six stores that were owned by Fresh Retailing, and six additional stores that were franchised to third parties. Franchised Food and Gordon each agreed to guarantee the obligations of Trampoline Enterprises under the sale agreement, and also under the Earn Out Deed to which we shall refer.

5 At the time of the agreement, Fresh Retailing was in the process of establishing a further franchised Trampoline store at premises at Craigieburn. On 2 August 2013, the landlord of those premises (Lend Lease) had sent a letter to Fresh Retailing containing an offer to lease premises for a Trampoline store, with approximate dates for handover of 3 October 2013 and a lease commencing 31 October 2013. At one point, Trampoline Enterprises and Fresh Retailing contemplated that the purchase price of the franchise business sold by Fresh Retailing to Trampoline Enterprises should be approximately $1m, including the proposed Craigieburn store. However, at the request of Gordon, the Craigieburn store was separated out from the sale agreement, and was dealt with by the terms of the 'Earn Out Deed' that was an annexure to that agreement.

6 The Earn Out Deed was also dated 4 September 2013, and was executed by the same parties in the same capacities as the sale agreement. Relevantly, by cl 2.1(2) of the deed, Trampoline Enterprises was obliged to pay to Fresh Retailing $140,000 if the Craigieburn store commenced to operate within 180 days of the completion date, namely, by 29 March 2014. Clause 2.5(6) required Trampoline Enterprises to act in good faith and not unreasonably or intentionally delay the signing of documentation or the performance of any other act necessary to recruit a new franchisee to open a new Trampoline store.

7 The Craigieburn store opened for trade on Monday 31 March 2014, two days after the 180 day cut-off date. By its cross-claim, Fresh Retailing claimed that in the period leading to the opening of the store, Trampoline Enterprises acted in breach of cl 2.5(6) of the Earn Out Deed, as a consequence of which it was entitled to payment of the 'earn out' amount of $140,000.

8 The sale agreement provided for a purchase price of $797,677 plus an amount described as 'completion net working capital', which was to be ascertained in accordance with a 'completion statement' specified in the agreement. The completion date fixed by the agreement was 30 September 2013. Clause 11 of the agreement provided for the provision of a completion statement by which the final amount of the purchase price for the sale of the business was to be adjusted. Clause 11.11 provided that if the parties failed to resolve any dispute in connection with the completion statement, that dispute might be submitted for determination by an independent accountant. Clause 14 of the agreement provided that Trampoline Enterprises was to make an offer of employment to all of the employees of the business, except for employees described as 'Excluded Employees' for Trampoline Enterprises. Under cl 14, Fresh Retailing was required to pay all salaries, wages and accrued entitlements of the transferred employees. The Excluded Employees included David Moore and Katie Malempre.

9 Subsequent to the conclusion of the Sale Agreement, the parties made an arrangement, by email, that Trampoline Enterprises would employ Mr Moore and Ms Malempre, and that their accrued leave entitlements would be adjusted, on the sale, in the Completion Statement. However, after making those arrangements, Fresh Retailing decided to, and did, pay out the accrued entitlements of Mr Moore and Ms Malempre. In November 2013, following settlement, the parties referred a number of disputes, in respect to the completion statement, for determination by an Independent Accountant. The accountant concluded that aspect of the dispute in favour of Fresh Retailing. In its amended statement of claim in the proceeding, Trampoline Enterprises claimed (inter alia) that the Independent Accountant erred in determining that no adjustment was required in respect of the leave entitlements of Mr Moore and Ms Malempre in the sum of $18,626.53.

10 As mentioned, the application for leave to appeal is confined to two issues determined by the trial judge, namely:

(1) (Ground 1) The determination by the judge, on the cross-claim, that Fresh Retailing was entitled to the amount of $140,000 under the Earn Out Deed in respect of the commencement of the operation of the Craigieburn Trampoline store.

(2) (Ground 2) The rejection by the judge of the claim by Trampoline Enterprises to be entitled to an adjustment on the sale in the sum of $18,626.23 in respect of accrued leave entitlements of the two Excluded Employees, Mr Moore and Ms Malempre, who were offered and accepted employment with Trampoline Enterprises after the conclusion of the sale.

11 Ground 1 of the application for leave to appeal is directed to the decision of the judge to uphold the cross-claim by Fresh Retailing to the 'Earn Out fee' of $140,000 under the Earn Out Deed.

12 Clause 1.1 of the Earn Out Deed defined the 'First Earn Out Amount' as meaning the sum of $140,000, and the 'Second Earn Out Amount' to mean the sum of $40,000.

13 Clause 2 of the Deed provided for the payment of those amounts. In particular, as to the First Earn Out Amount, cl 2.1 provided as follows:

2.1 The Purchaser must pay the First Earn Out Amount to the Seller if:

(1) a prospective franchisee is identified by the Seller that is not specified in Schedule 1 and who enters into a franchise agreement with the Seller or the Purchaser to operate a new Trampoline store within 90 days of the Completion Date, and the store commences to operate within 180 days of the Completion Date;

(2) a prospective franchisee identified by the Seller commences to operate a new Trampoline store in any premises other than those specified in Schedule 2, whether or not under a formal licence or franchise agreement has been signed with the Purchaser, within 180 days of the Completion Date.

The reference to a prospective franchisee includes an existing Trampoline franchisee that enters into a franchise agreement, or commences to operate, a new Trampoline store.

14 As mentioned, the Craigieburn store did not open for trade until 31 March 2014, which was two days after the 180 day period specified in cl 2.1 of the Deed. The cross-claim, by Fresh Retailing, alleged a breach by Trampoline Enterprises of cl 2.5(6) of the Deed, which provided as follows:

2.5 The Purchaser must and is only required for the purposes of this Deed to:

...

(5) offer to enter into a franchise agreement with any prospective Trampoline franchisee that has been identified by the seller (acting reasonably) prior to the Completion Date;

(6) act in good faith and not unreasonably or intentionally delay the signing of documentation or the performance of any other act required to recruit a new franchisee to open a new Trampoline store.

15 The judge upheld the cross-claim of Fresh Retailing, on the basis that, in the circumstances, Trampoline Enterprises did not act in good faith, and that it intentionally delayed the performance of an act required to open the Craigieburn store.

16 For the purposes of this application, it is necessary to set out the background facts, as found by the judge, in some detail.

17 As we have noted, on 2 August 2013, the owner of the Craigieburn premises (Lend Lease), sent a letter to Fresh Retailing offering to lease the Craigieburn premises. The letter noted that the approximate date of handover of the store would be 3 October 2013, and that the lease would commence on 31 October 2013.

18 After execution of the sale agreement and the Earn Out Deed, Gordon, on 12 September 2013, notified Lend Lease that he was to be copied into communications regarding the Craigieburn store. During that period Philip Tucker ('Tucker') was employed as the head of business development of Franchised Food Co. His role included lease site selection, franchise recruitment and the building of stores. Between 11 December and 20 December 2013, Tucker corresponded with Lend Lease to obtain handover of the store so that the fit out of it could commence. Ultimately, handover was scheduled for 22 January 2014, with a fit out period estimated to take five weeks.

19 For that purpose, Trampoline Enterprises engaged TU Projects as the shopfitter for the Craigieburn store. Between 17 January and 21 January 2014, Darren Turner ('Turner'), the project manager of TU Projects, communicated with Lend Lease to send to it the building permit and approved drawings, and to arrange a handover inspection for 22 January 2014. Turner was to carry out the works over a period of four to six weeks, which was standard for the type of tenancy involved.

20 On 3 February 2014, Gordon sent a letter to the solicitors for Lend Lease containing executed lease documents. In that letter he asked for the documents to be executed by Lend Lease and to be returned 'as soon as possible'. On 14 February 2014, the business support manager for Franchised Food Co (Mr David Moore) made a stock order for the new Craigieburn store, requesting that the stock be provided on Friday 21 February. Between 14 and 24 February 2014, a number of certificates, for matters such as the electrical fittings and air conditioning, were issued to Lend Lease, and other certificates were issued to TU Projects, including for a roller shutter, flooring, plumbing and tiling. Those certificates were required by the building surveyor as part of the application for the issue of an occupancy permit.

21 The occupancy permit application for the Craigieburn store was dated 18 February 2014. On that day, Turner communicated with the building surveyor in order to arrange a building inspection of the premises for Thursday 20 February, because 'Trampoline is handing over on Friday (21 February)'.

22 In his evidence Turner stated that in the week after the original handover date, he had telephone conversations with Tucker. He said that in those conversations Tucker asked him to 'put the occupancy certificate on hold'.

23 In the meantime, on 18 February 2014, TU Projects forwarded an email to the intended franchisee of the Craigieburn store, Vikramjeet Singh ('Singh'), attaching a 'handover invoice' for $29,652.21. The email asked that payment be received 'before handover on Friday 21 February 2014 to avoid any delays with handover'.

24 On 24 February 2014, Turner sent an email to Tucker requesting an update. Tucker responded by email that he would 'update later today re Craigieburn situation'.

25 Turner gave evidence that Tucker contacted him by telephone. He said that Tucker told him that there was 'a legal issue that they couldn't take handover due to ... purchasing of the Trampoline from previous owners, so they weren't able to ... operate the store until a certain date' about one month later. In his evidence, Tucker said that he had no recollection of any discussions with Turner in the period from late February 2014 to early March 2014 concerning the opening of the Craigieburn store.

26 The lease entered into by Trampoline Enterprises with Lend Lease provided for a commencement date of 26 February 2014. The lease also allowed for a three month rent free period. In cross-examination, Tucker agreed that accordingly it would have been a matter of some importance for Trampoline Enterprises to get the store open 'soon'. He said that he could not recall anything between 26 February and 18 or 19 March 2014 that explained why little happened in that period for the opening of the store. Nor could he recall doing anything, in that period, to get the store opened.

27 On 3 March 2014, TU issued a Practical Completion Certificate to Turner. It was signed by Kaisey Rizk who was then employed as the Head of Operations of Franchised Food Co. In signing that certificate, Trampoline Enterprises acknowledged 'that the Contractor has duly performed the contract to the Purchaser's satisfaction' and agreed that the works 'have reached practical completion and are in good order' except for twenty specified items. The nineteenth such item was 'final clean'.

28 When cross-examined about those twenty items, Turner said that they had nothing to do with the reason why the store did not open until later.

29 Subsequently, on 10 March 2014, the shopfitter made arrangements for a 'final clean' of the premises which was scheduled for the following day. On 18 March 2014, Trampoline Enterprises announced internally (including to Gordon) that the intended opening for the Craigieburn store would be 31 March 2014.

30 On 25 March 2014, Ms Susan Ryan, an employee of Lend Lease, forwarded an email to Tucker asking for confirmation when the Craigieburn store would open. In response, Tucker informed Lend Lease that the opening would be on 31 March (the next Monday).

31 As mentioned, the store opened for trade on 31 March. On 7 April 2014, Trampoline Enterprises entered into a franchise agreement with Trampoline CB Pty Ltd in relation to the store. That company was established by Singh to operate the Craigieburn store.

32 By its counterclaim, Fresh Retailing pleaded that in not opening the Craigieburn store for trade until 31 March 2014, Trampoline Enterprises breached its obligations under cl 2.5(5) and/or cl 2.5(6) of the Earn Out Deed. In their further amended reply and amended defence to counterclaim, the applicants denied breaching those obligations, and they specifically denied unreasonably or intentionally delaying the opening of the Craigieburn store.

33 At the trial, Trampoline Enterprises contended that it could not open the store before 31 March 2014. In particular, it referred to the following matters:

(a) Trampoline Enterprises submitted that it could not open the store without an occupancy permit. The application for the permit was lodged on 18 February 2014, but not issued until 21 March 2014.

(b) Trampoline Enterprises contended that the Craigieburn store could not open without first being registered under the provisions of the Food Act 1984.

(c) As at 20 March 2014, Mr Singh had not signed and returned documentation required under the Franchising Code made pursuant to the Competition and Consumer (Industry Codes Franchising) Regulation 2014.

(d) Mr Singh did not pay the franchise fee or the lessor's bank guarantee until 28 March 2014.

(e) As at 25 March 2014 Mr Singh was in dispute with TU Projects relating to defects.

(f) The hoardings were not removed from the store before 31 March 2014.

34 In her reasons for judgment, the judge noted that in fact, the lack of registration under the Food Act did not prevent the store from operating, as the store opened on Monday 31 March 2014 without such registration. Mr Ryan Maletsky, the chief financial officer of Trampoline Enterprises and Franchised Food Co, gave evidence that he had no recollection of what efforts were made to obtain payment of the franchise fee before 28 March 2014. Further, in an email to Tucker from Ms Ryan of Lend Lease dated 25 March 2014, it was indicated that the lessor's hoardings would be removed from the Craigieburn store when Tucker confirmed the date when the store would open.[2]

35 The judge then turned to the evidence of the witnesses in relation to the reason why the Craigieburn store did not open until 31 March 2014. Her Honour considered that Gordon was a witness who, in effect, would say what he thought would assist the case of Trampoline Enterprises, and that he was not a witness who at all times endeavoured to give true and accurate evidence. In particular, she noted that Gordon had said in his evidence that the store did not open on 29 March 2014 because it was a Saturday, and that Mr Rizk (a member of his operations team) told him not to. However, Rizk gave evidence that he could not recall having any such conversation with Gordon. He also gave evidence that he knew nothing about the cut-off date.[3]

36 The judge found that on about 18 February 2014, Tucker told Turner to put the occupancy certificate on hold. There is no appeal against that finding. Her Honour regarded Turner to be a truthful and credible witness, and she preferred the evidence of Turner to Tucker in relation to that issue. The judge further noted that Tucker did not recollect any steps taken by Trampoline Enterprises to open the Craigieburn store between 26 February and 19 March 2014.[4]

37 Having made those findings, the judge turned to cl 2.5(6) of the Earn Out Deed. The judge noted that while Fresh Retailing alleged a breach of that clause, it did not plead equitable fraud on behalf of Trampoline Enterprises.[5] The judge stated:

The task before me is one of contractual construction, namely to construe clause 2.5(6) of the Earn Out Deed so as to give content to the 'good faith' requirement, having regard to the contractual documents as a whole (the Earn Out Deed and the Asset sale and purchase agreement).[6]

Clause 2.5(6) is an express term of the Earn Out Deed. I am satisfied that Trampoline Enterprises did not act in good faith and intentionally delayed the performance of an act required to open up a new Trampoline store. A party acting in good faith does not tell the shopfitter to put a brake on the Occupancy Certificate.[7]

39 That decision by the judge is the subject of ground 1 of the application for leave to appeal. That ground, which is expressed in quite prolix terms, states:

Ground 1 ― The learned trial judge erred in law and in fact in:

(a) holding, in circumstances where:

(i) an 'Earn Out' fee of $140,000 would fall due by the Plaintiff to the First Defendant if a new store opened at Craigieburn by 29 March 2014;

(ii) the Plaintiff was contractually obliged to act in good faith and not unreasonably or intentionally delay any act required to open the new store; and

(iii) the new store opened on 31 March 2014,

that the Plaintiff had not acted in good faith and had intentionally delayed the performance of an act required to open the new store by telling its shopfitter to put a brake on the occupancy certificate when:

(A) the natural inference - which was consistent with the Plaintiff acting in good faith - was that the instruction to delay the occupancy certificate from about 20 February until 21 March 2014 was given with the objective of protecting the franchisee tenant from having to pay rent before the new store was able to be opened;

(B) the instruction to delay did not infringe the contractual obligation;

(C) the instruction to delay the occupancy certificate did not cause delay in the opening of the new store given that the proprietor of the new store was prohibited by section 35A(1) of the Food Act 1984 (Vic) from operating the new store without registration which was not obtained until after 29 March 2014;

(b) failing properly to take into account the fact that the proprietor of the new store was prohibited by section 35A(1) of the _Food Ac_t 1984 (Vic) from operating the new store without registration which was not obtained until after 29 March 2014 in that:

(i) her Honour failed to recognise that it broke the chain of causation between any intentional delay, even if in bad faith, on the part of the Plaintiff in the performance of an act required to open the new store and the defendant's loss of the Earn Out fee;

(ii) her Honour wrongly excluded documentary evidence of the date on which the new store was registered under the Food Act 1984, mistakenly considering that it was not relevant;

(iii) her Honour gave judgment on a basis that assumed that, absent the Plaintiffs' instruction to its shopfitter, the proprietor of the new store could, would and should have operated the new store in breach of section 35A(1) of the Food Act 1984;

(iv) the Court gave judgment on a basis that, actually or implicitly, endorsed a breach of section 35A(1) of the Food Act 1984 by the proprietor of the new store.

40 In response, the respondents, by a notice of contention, contend that the judgment of the County Court should be affirmed on a ground or factor that was not decided, or alternatively that was erroneously decided. The respondents rely on two such grounds, namely:

1. The judgment can be affirmed on other grounds: Paragraph 1(b) of the judgment, being the judgment for the First Respondent for damages for breach of the Earn Out Deed (such damages comprising the First Earn Out Amount of $140,000) can be affirmed on grounds of fact or law which were not decided, namely that the First Applicant/First Defendant by Counterclaim breached clause 2.5(6) of the Earn Out Deed:
   1. by doing nothing to progress the opening of the Craigieburn store during a four week period of unexplained inaction between 20 February 2014 (the building inspector's occupancy certificate inspection) and 18 March 2014 (the date on which the Applicants announced that the Craigieburn store would open on 31 March 2014);
   2. alternatively, by the matters above in conjunction with telling the shopfitter (Mr Turner) to put a hold on the occupancy certificate.
2. Alternative contention concerning the Second Earn Out Amount: Alternatively, if this Honourable Court were inclined to grant leave to appeal in respect of the aforesaid judgment, and in effect decide that the Craigieburn store opened after the 180 day window but due to no breach of clause 2.5(6) by the Applicants, judgment for the Respondent could nonetheless still be given on a ground of fact or law erroneously decided, namely that the First Applicant/First Defendant by counterclaim was in breach of clause 2.3 of the Earn Out Deed, properly construed, by reason that the Craigieburn franchisee is a 'subsequent' prospective franchisee for the purpose of clause 2.3 (for which the Respondent would be entitled to damages comprising the Second Earn Out Amount of $40,000).

41 Counsel for the applicants commenced by submitting that, as a matter of construction, in order to establish a breach of cl 2.5(6) of the Earn Out Deed, Fresh Retailing was required to prove two matters, namely, first, that Trampoline Enterprises unreasonably or intentionally delayed the signing of documentation or the performance of an act required to recruit a new franchisee or open a new Trampoline store, and, secondly, that by that delay, Trampoline Enterprises failed to act in good faith. In other words, it was submitted, it was not sufficient for Fresh Retailing to establish that Trampoline Enterprises had unreasonably or intentionally delayed in the signing of the document, or the performance of the relevant act required to recruit a new franchisee or to open a new Trampoline store. In addition, it was submitted, in order to establish a breach of cl 2.5(6), Fresh Retailing was required to demonstrate that that delay by Trampoline Enterprises constituted a failure by it to act in good faith.

42 Counsel for the applicants accepted the judge's finding, that, by the instruction given by Tucker to Turner, Trampoline Enterprises intentionally delayed the issue of the occupancy permit for the new store at Craigieburn. However, counsel contended that the conclusion by the judge, that that conduct by Trampoline Enterprises was not in good faith, was not supported.

43 In particular, counsel submitted that, in order that there be a failure to act in good faith, the party in breach must have acted intentionally in bad faith, such as acting for an ulterior, dishonest, arbitrary or capricious purpose or motive. He contended that the 'Briginshaw'[8] standard applies to the making of such a finding, so that it should not be made lightly. In the present case, counsel submitted, there was concern by Trampoline Enterprises that the premature issue of the occupancy permit would trigger commencement of the obligation to pay rent (or bring forward the rent free period) under the lease. Accordingly, there was an 'innocent' explanation for the instruction given by Tucker to Turner to delay the occupancy permit.

44 Counsel also noted that Tucker gave unchallenged evidence that he was not aware, at the relevant time, of the potential obligation of Trampoline Enterprises to pay the Earn Out fee of $140,000. Tucker was the 'directing mind' of Trampoline Enterprises for the purposes of ensuring the opening of the Craigieburn store. There was no evidence that he lacked good faith, and accordingly, it was submitted, the instruction given by him could not have been found to be the product of bad faith.

45 Further, counsel pointed out, the occupancy certificate was issued on 21 March 2014, so that the delay in the issue of it did not cause the opening to occur after 29 March 2014. A number of other matters needed to be attended to between 21 March and 29 March, including the execution by Singh of documentation required under the franchising code, the registration of the Craigieburn store under the Food Act 1984, payment of the franchise fee by Singh, resolution of the dispute between Singh and TU Projects in relation to defects, and removal of the lessor's hoardings. None of those matters were the responsibility of Trampoline Enterprises. Accordingly, it was submitted, if Trampoline Enterprises breached cl 2.5(6) of the Earn Out Deed in the manner found by the judge, that breach did not cause the Craigieburn store not to open on 29 March.

46 Counsel for the applicant next made a number of arguments concerning the requirement that the franchisee must first obtain registration of the Craigieburn store under the Food Act in order that it might lawfully open. Counsel first contended that the judge erred by excluding the admission of documentary evidence that the Food Act registration of the Craigieburn premises did not occur until 20 May 2014. He submitted that the judge did not have a sufficient basis upon which to exclude that evidence. Counsel further contended that the decision of the judge, that Trampoline Enterprises was liable to pay the Earn Out fee to Fresh Retailing, was founded on an underlying hypothesis that, but for the breach by Trampoline Enterprises of cl 2.5(6) of the Earn Out deed, the Craigieburn store would have opened on 29 March 2014. However, operation of the store at that time would have been in breach of s 35A(1) of the Food Act, as (he maintained) the store had not been registered under that Act as at that time. Counsel submitted that in order to prove its claim, Fresh Retailing thus needed to prove and rely upon the wrongdoing of the franchisee. Counsel contended that the Court will not lend its aid to a party that seeks to rely upon the wrongdoing or illegality, whether of itself, or of a third party. In support of that proposition, he relied on the principle stated by Lord Mansfield in the celebrated case of Holman v Johnson.[9]

47 In response, counsel for the respondent contended first, that as a matter of construction, in order to prove a breach by Trampoline Enterprises of cl 2.5(6) of the Earn Out Deed, it was not necessary for Fresh Retailing to establish that Trampoline Enterprises had failed to act in good faith. Rather, it was contended, it was sufficient for Fresh Retailing to establish (as it did) that Trampoline Enterprises had unreasonably or intentionally delayed the signing of documentation or the performance of an act required to open the new Trampoline store at Craigieburn. Counsel noted that the applicants do not challenge the finding of fact made by the trial judge that Tucker instructed the shopfitter, Turner, to put the occupancy certificate on hold. Further, the applicants accept that, by that instruction, they intentionally delayed the issue of the occupancy permit for the new Craigieburn store. Thus, it was submitted, the applicants accept that Trampoline Enterprises intentionally delayed the performance of an act required to open the new Craigieburn store. Accordingly, it was submitted, the findings by the trial judge were a sufficient basis for the conclusion that Trampoline Enterprises had breached cl 2.5(6) of the Earn Out Deed.

48 Counsel further contended that, in any event, the judge was correct to find that in the circumstances Trampoline Enterprises had failed to act in good faith in directing the shopfitter, Turner, to put the occupancy certificate on hold for a period of almost one month. Counsel contended that the natural inference, from that instruction, was that Trampoline Enterprises wished to delay the opening of the Craigieburn store so that it was not liable to pay the Earn Out fee to Fresh Retailing. In particular, counsel noted, Trampoline Enterprises did not adduce evidence as to any other explanation for the instruction so given by Tucker to Turner.

49 In addition, by reference to the notice of contention, counsel submitted that the judge's finding, of a lack of good faith by Trampoline Enterprises, may be supported, not only by the instruction given by Tucker to Turner to put the occupancy certificate on hold for a period of one month, but, in addition, by the evidence that, during that period, Trampoline Enterprises did nothing to progress the opening of the Craigieburn store until 18 March 2014, when it announced that the store would open on 31 March 2014.

50 Counsel for the respondent then turned to the matters raised by the applicants in respect of the legal requirement that, in order that the Craigieburn store open, it must first obtain registration under the Food Act. Counsel commenced by contending that the applicants failed to adduce any evidence that the proprietor of the Craigieburn store (the franchisee) had not, by 29 March 2014, obtained registration for the Craigieburn store under the Food Act. The evidence, at its highest, established that by 26 March, the store had not been registered, and the franchisee had not, then, taken steps to have it so registered. However, he contended, there was no evidence from which the judge could infer, on the balance of probabilities, that the franchisee had not procured registration of the store by 29 March.

51 Counsel for the respondent further contended that, in any event, the fact that Singh had not, by 29 March 2014, obtained registration of the Craigieburn premises under s 35A of the Food Act, did not, and could not, preclude the entitlement of Fresh Retailing to damages in the sum of $140,000, in respect of the breach by Trampoline Enterprises of cl 2.5(6) of the Earn Out deed. At the trial, Fresh Retailing contended that, if it had not been for that breach, the Craigieburn store would have opened two or more days earlier than 31 March, so that it would have been entitled to the first Earn Out amount ($140,000). Accordingly, by reason of the breach of cl 2.5(6) of the deed, Fresh Retailing was entitled to damages in that amount. The applicants' contention, that the lack of registration of the store under the Food Act, by 29 March, 'broke the chain of causation', was (it was submitted) misconceived for a number of reasons. First, it was not pleaded or advanced by the applicants at trial. Secondly, the Craigieburn store opened on 31 March 2014, notwithstanding the absence of registration under the Food Act. Thus, the absence of that registration of the store did not cause Singh to defer opening the Craigieburn store on 31 March.

52 Counsel for the respondents contended that the judge did not wrongly exclude from evidence a document evidencing the registration of the Craigieburn store by the Hume City Council on 20 May 2014. Rather, counsel noted, the judge did not exclude that document from evidence, but the applicants did not seek to tender any evidence. On the tenth day of the trial, senior counsel for the applicants sought to cross-examine Singh in relation to the document and whether an offence might have been committed under the Food Act. That foreshadowed cross-examination potentially gave rise to an issue under s 128 of the Evidence Act 2008. The judge held that such cross-examination would be irrelevant to any of the issues raised in the pleadings. That ruling, by her Honour, was correct, as the applicants did not plead that the absence of registration of the Craigieburn store under the Food Act was a legal impediment to the opening of that store, or that the opening of the store on 31 March 2014 was illegal.

53 In essence, the competing submissions under ground 1 raise four principal issues for determination, namely:

(1) Whether, on the correct construction of cl 2.5(6) of the Earn Out Deed, it was necessary for Fresh Retailing to establish that Trampoline Enterprises had not acted in good faith in intentionally delaying the performance of an act that was required to open the Craigieburn store.

(2) If so, whether the judge erred in finding that Trampoline Enterprises had not acted in good faith under cl 2.5(6) of the Earn Out Deed in intentionally delaying the performance of an act that was required to open the new Craigieburn store.

(3) Whether, if the judge was correct to conclude that Trampoline Enterprises breached cl 2.5(6) of the Earn Out Deed, Fresh Retailing established, on the balance of probabilities, that that breach by Trampoline Enterprises caused the loss and damage claimed by it, namely, the loss of its entitlement to the Earn Out fee under cl 2.3 of the deed.

(4) Whether the proof by Trampoline Enterprises of its claim involved the proof of an illegality or wrongdoing by the franchisee of the Craigieburn store that was of such a nature that would preclude recovery by Trampoline Enterprises of the damages claimed by it.

First issue: construction of cl 2.5(6) of Earn Out Deed

54 The first issue is whether the obligations in cl 2.5(6) of the Earn Out Deed, that Trampoline Enterprises act in good faith, and that it not unreasonably or intentionally delay the signing of documentation or performance of an act required to recruit a new franchisee or open a new Trampoline store, are each independent obligations, the breach of either of which would be sufficient to constitute a breach of cl 2.5(6).

55 As we have noted, the applicants have submitted that in order that a breach of that clause be established, it must be demonstrated, not only that there was such unreasonable or intentional delay by Trampoline Enterprises, but, further, that such delay must have constituted an act that was not in good faith by it. We observe that it was implicit in the primary judge's reasons that her Honour proceeded on the basis that that construction of cl 2.5(6) was correct. On the other hand, the respondents have contended that, in order to establish a breach of cl 2.5(6), it was sufficient for Fresh Retailing to demonstrate either that there was unreasonable or intentional delay by Trampoline Enterprises, or that Trampoline Enterprises did not act in good faith.

56 On its face, cl 2.5(6) is somewhat ambiguous. However, for three reasons, we consider that the construction, contended for by the applicants, and applied by the primary judge, was correct.

57 First, the text and structure of cl 2.5(6) favours that construction. If the parties had intended that the duty to act in good faith was a freestanding obligation by Trampoline Enterprises, it might be expected that it would have been contained in a separate clause, rather than being combined - by the conjunction 'and' - in the same sub-clause with the obligation by Trampoline Enterprises not to unreasonably or intentionally delay. The fact that the two obligations, to act in good faith, and not unreasonably or intentionally delay, were contained in the same subclause, favours a construction that those requirements were part of the one obligation, rather than two separate and independent obligations.

58 Secondly, the deed contained, in cl 2.5(1), a specific 'best endeavours' clause. That clause was confined to three obligations of Trampoline Enterprises, namely to use its best endeavours to recruit prospective Trampoline franchisees, to locate new premises for the operation of Trampoline stores, and to fit out any new premises as soon as reasonably practicable. The definition of those obligations, in that way, in a separate sub-clause, lends weight to the proposition that the obligation, contained in cl 2.5(6), was a composite obligation, as contended for on behalf of the applicants.

59 Thirdly, as senior counsel for the applicants pointed out, it is possible to postulate circumstances in which Trampoline Enterprises might have needed to intentionally delay the opening of a Trampoline store, which could not reasonably have been expected to be within the contemplation of the parties as a breach of cl 2.5(6). For example, as senior counsel for the applicants noted, it might, in particular circumstances, have been necessary to intentionally delay the opening of a Trampoline store because of a health scare, such as one involving the bacteria listeria. It would be surprising if the parties had intended that such a delay, in the opening of a store, would constitute a breach by Trampoline Enterprises of cl 2.5(6). The fact that the interpretation, contended for by the respondents, might produce such an unreasonable result in such circumstances, weighs against the acceptance of that position as the correct construction of cl 2.5(6).

60 For those reasons, we accept that, in order that Trampoline Enterprises be found to have breached cl 2.5(6) of the Earn Out Deed, the respondents were required to establish, not only that Trampoline Enterprises intentionally or unreasonably delayed the opening of the new Craigieburn store, but, in addition, that by delaying the opening in that way, Trampoline Enterprises did not act in good faith.

Second issue: whether judge erred in finding lack of good faith by Trampoline Enterprises

61 It was not in issue, in this application, that in order to establish a lack of good faith, the respondents were required to demonstrate that Trampoline Enterprises, in delaying the opening of the Craigieburn store, had acted for an ulterior, dishonest, capricious or arbitrary reason.

62 In Esso Resources Pty Ltd v Southern Pacific Petroleum NL[10] Buchanan JA, in the context of the implied contractual duty to act in good faith, said:

The content of an implied contractual duty of good faith has been variously described. In Renard Priestley JA equated good faith with reasonableness. In Garry Rogers Finkelstein J said that an obligation of good faith required a party 'not to act capriciously'. Breach of the obligation has been described as seeking to prevent the performance of the contract or withholding its benefits and as seeking to further an ulterior purpose or purpose extraneous to that for which a right or power is conferred.[11]

63 Similarly, in Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd[12] the Full Court of the Federal Court, in considering the implied contractual duty to act reasonably and in good faith, stated:

The obligation, expressed as one of good faith and reasonableness, is to be considered in a composite and interrelated sense. To the extent the consideration is given to whether a party's conduct is reasonable or not, it is directed to the primary component of the obligation, namely of good faith. Reasonableness ... goes to the quality of the conduct, here in exercising the price setting power, to discern whether it was capricious, dishonest, unconscionable, arbitrary or the product of a motive which was antithetical to the object of the contractual power. Conduct attended by any of those qualities could never be said to be in good faith. Consideration of the relevant conduct within these confines informs the question whether or not the power has been exercised in good faith.[13]

64 In view of the seriousness of an allegation that a party to a contract has failed to act in good faith, the court could only conclude that Trampoline Enterprises had breached that obligation, if it was satisfied, by cogent proofs, on the balance of probabilities, to that effect.[14] The conclusion, by the judge, that Trampoline Enterprises had failed to act in good faith, was necessarily the product of an inference based on the evidence in the case. In order to draw that inference, it was necessary for the judge to be positively satisfied that that conclusion was the more probable inference from all the facts that were found and proven in the case.[15]

65 The finding by the judge, that Trampoline Enterprises did not act in good faith, was based on the judge's acceptance of the evidence of Mr Turner that in late February 2014, Mr Tucker instructed him to delay obtaining an occupancy certificate until later in March. As we have noted, her Honour reasoned:

A party acting in good faith does not tell the shopfitter to put a brake on the Occupancy Certificate.[16]

66 This evidence provided a sound foundation for the conclusion thus drawn by the primary judge. The instruction given by Tucker to Turner, in late February 2014, was, in essence, an instruction to defer taking a basic step that was necessary to enable the Craigieburn store to be opened until a date close to the end of the critical 180 day period, fixed by the Earn Out Deed, for the accrual of the entitlement of Fresh Retailing to the First Earn Out Amount.

67 The evidence given by Turner, as to that instruction, was of significant importance in the trial. He stated that the handover for the shop fitting was fixed for 21 February. On that date, Tucker told Turner that he was not able to take handover on that day. Tucker told Turner that he would contact Turner in the following week. Subsequently, in the following week, Tucker contacted Turner. As we have mentioned earlier, in that conversation, Tucker told Turner that there was a 'legal issue that they couldn't take handover due to ... purchasing of the Trampoline from previous owners, so they weren't able to ... operate the store until a certain date'. Turner said that that date was 'something towards the end of March, there was about a month'.

68 Pausing there, the evidence, accepted by the judge, was that Tucker not only instructed Turner to defer handover and the obtaining of an occupancy certificate, but also that he asked for those steps to be deferred until the end of March, due to a legal issue between Trampoline Enterprises and the previous owners, namely, Fresh Retailing.

69 In cross-examination, Tucker denied that he knew of the potential obligation of Trampoline Enterprises to pay the Earn Out fee of $140,000. It is not clear whether the judge accepted or rejected that evidence. However, her Honour accepted the evidence of Turner, and preferred it to the evidence of Tucker. Thus, at the least, the judge found, as a fact, that the instruction was given by Tucker to Turner to delay a step, that was essential for the opening of the Craigieburn store, until late March, due to a legal issue between Trampoline Enterprises and Fresh Retailing. While Tucker may not have known, with precision, the nature of that legal issue, the only reasonable conclusion in the circumstances was that Tucker was aware that, in the legal arrangements between Trampoline Enterprises and Fresh Retailing, it was disadvantageous to the interests of Trampoline Enterprises to have the store opened before the end of March.

70 It is clear, further, that that instruction had the effect that the issue of the occupancy certificate was delayed for a period of one month, until 21 March. In further evidence, when asked why issue of the certificate did not occur until 21 March, Turner stated that during telephone calls between them, Tucker asked him 'to put the occupancy certificate on hold'. Mr Turner stated that Tucker did not follow him up, concerning the occupancy certificate, until such time as Trampoline Enterprises was ready to take handover of the store from him.

71 Additional support, for the inference drawn by the primary judge, is gained from the evidence that during the period between 24 February and 18 March 2014, Trampoline Enterprises did not do anything to advance the opening of the Craigieburn store, or to prepare it for being opened before the end of March. As noted, Turner was unable to identify any step taken by Trampoline Enterprises, during that period, to progress the opening of the Craigieburn store. Further, and significantly, on 18 March (three days before the issue of the occupancy certificate) Trampoline Enterprises then announced that the Craigieburn store would be opened on Monday 31 March. Only then, it appears from the evidence, did Trampoline Enterprises commence to take steps to procure the opening of the Craigieburn store. As stated by the applicants, in their written case in response to the respondents' written case on the Notice of Contention, there was substantial activity, in that regard, by Trampoline Enterprises immediately after 18 March 2014.

72 The lack of activity by Trampoline Enterprises in the one month period following the instruction, given by Tucker to Turner on about 24 February, to put the occupancy certificate on hold, reflects on the intention and purpose of the instruction. The inactivity by Trampoline Enterprises during the period from 24 February to 18 March supported the conclusion that, at the time that Tucker gave the instruction to Turner, it was the intention of Trampoline Enterprises not to open the store until the date that was subsequently announced by Trampoline Enterprises, namely, 31 March, which was just two days after the end of the 180 day period fixed for the accrual of the Earn Out fee to which Fresh Retailing would otherwise have been entitled.

73 On the evidence adduced at the trial of the proceeding, the only 'legal issue', concerning the purchase by Trampoline Enterprises from Fresh Retailing, which could have been affected by, or which was relevant to, the date on which Trampoline Enterprises was to take handover of the Craigieburn store from the shopfitter, was the potential liability of Trampoline Enterprises to Fresh Retailing for the first Earn Out amount payable under the Earn Out Deed. Based on the evidence, it may comfortably be inferred that - notwithstanding Tucker's evidence that he was ignorant of the liability of Trampoline Enterprises for the first Earn Out amount of $140,000 - the instruction given by Tucker to Turner was intended by Trampoline Enterprises to avoid a liability that it might otherwise have accrued to Fresh Retailing arising from the contract of sale.

74 In their submissions to this Court, the applicants sought to rely on two items of evidence as providing an alternative explanation for the instruction so given by Tucker to Turner to defer handover and obtaining an occupancy certificate. As we will discuss, neither of those matters provided, or could provide, an explanation for that instruction. However, the applicants did not, at trial, seek to adduce any evidence that was directed to providing an alternative explanation why Tucker gave that instruction to Turner. The capacity to provide any such explanation - if it existed - was in the hands of Trampoline Enterprises. In the absence of evidence by it of such an explanation, the inference, relied on by the respondents, that the instruction was given in order to avoid a potential liability by Trampoline Enterprises to Fresh Retailing arising from the opening of the Craigieburn store, might be more confidently drawn by the Court.[17]

75 In his submissions to this Court, counsel for the applicants contended that in fact there was evidence before the primary judge, from which it might be inferred that there was a different, and 'innocent', explanation for the instruction given by Tucker to Turner, and for the delay by Trampoline Enterprises in preparing the Craigieburn store for opening. In particular, it was submitted that the evidence supported a possible inference that Trampoline Enterprises sought to put the opening of the Craigieburn store on hold in order to avoid triggering the commencement of rent under the lease between Trampoline Enterprises and Lend Lease.

76 On its face, that explanation is fundamentally flawed. The lease was not tendered in evidence. However, in cross-examination, Mr Tucker stated that the rent free period started from the date of commencement of the lease, namely, 26 February. Thus, there was nothing to be gained - and valuable rent-free time to be lost - by delaying, from that date, the opening of the Craigieburn store.

77 Notwithstanding that circumstance, in their written case, the applicants sought to rely on a piece of evidence given by Mr Kaisey Rizk in cross-examination. Mr Rizk was asked by counsel for the respondents whether Tucker had been doing his best on behalf of the Craigieburn franchisee by getting everything the franchisee was entitled to 'in terms of rent free periods and things like that?' To that question Mr Rizk responded 'M'mm'.

78 It would be hard to extract, from that response, an affirmative assent to the proposition put by counsel for the respondents. Further, and more relevantly, in his evidence, Mr Rizk made it plain that at that time his role did not involve him having anything to do with the opening of new stores. He said that his only involvement 'was just design from a very early stage'. He said that at that time he had no involvement in 'training and things like that for new stores'. He also said that he was not aware of the three month rent free period provided under the Lend Lease lease for the Craigieburn store. Thus, the evidence relied on by the applicants, in their written case, did not support the competing inference contended for by the applicants.

79 In oral submissions, senior counsel for the applicants sought to rely on a different piece of evidence, namely, an email dated 19 March 2014 from Mr Con Kery, the leasing manager of Lend Lease, to Mr Tucker which noted that Trampoline Enterprises' shopfitter (Turner) 'has indicated you have asked him to withhold the occupancy certificate'. Mr Kery asked Tucker to report back what the 'actual situation' was, stating:

They have started the rent clock and I want to try and stall that for you if I can justify why.

80 Self-evidently, that email does not provide any evidentiary basis for the inference sought to be relied on by the applicants, namely, that Trampoline Enterprises intentionally delayed the issue of the occupancy certificate in order to 'stop' the 'rent clock'. As we have stated, under the lease, the rent free period had already commenced to run. At most, Mr Kery, on 19 March, was seeking an explanation for the delay which might enable him to 'stall' the rent clock. Most significantly, the date of the email was 19 March. It provides no evidentiary basis for an explanation why, on about 24 February, Tucker told Turner to put the occupancy certificate on hold.

81 Accordingly, the applicants failed to adduce any evidence upon which to found the possible inference now sought to be relied on, namely, that Tucker gave Turner the instruction to delay issue of the occupancy certificate for the purposes of somehow delaying the commencement of the date upon which rent was due to be paid under the Lend Lease tenancy.

82 In those circumstances, there was sound and cogent evidence to support the conclusion by the judge, on the balance of probabilities and applying Briginshaw, that the intentional delay by Trampoline Enterprises in procuring the issue of the certificate of occupancy in respect of the Craigieburn premises constituted a failure by it to act in good faith pursuant to cl 2.5(6) of the Earn Out Deed.

83 Further, in light of that conclusion, the inference, contended for by Fresh Retailing in ground 1 of the notice of contention, is well founded. The direction given by Tucker to Turner, to delay taking any steps to obtain the occupancy certificate until late March 2014, could not sensibly be regarded as being merely coincidental with the circumstance that, during that period, Trampoline Enterprises did nothing to progress the opening of the Craigieburn store until, at the earliest, 18 March. In the circumstances, the inference is well-nigh inevitable that the reason, for that otherwise inexplicable period of inactivity by Trampoline Enterprises, was the same as the reason for the direction given by Tucker to Turner to defer obtaining the occupancy certificate in respect of the Craigieburn store. It follows that that inactivity by Trampoline Enterprises, and its failure to take any step to progress the opening of Trampoline Enterprises during the relevant period, also constituted a breach by it of its duty under cl 2.5(6), namely, the duty to act in good faith and not unreasonably or intentionally delay the performance of an act required to open the new Craigieburn Trampoline store.

84 By its counterclaim, Fresh Retailing, in effect, claims that as a consequence of the breach by Trampoline Enterprises of cl 2.5(6) of the Earn Out Deed, it suffered damages, namely, the loss of its right to the first Earn Out payment to which it would otherwise have been entitled under cl 2.1 of the deed. In other words, Fresh Retailing claimed that the breach by Trampoline Enterprises of cl 2.5(6) had the effect that the Craigieburn store did not open by 29 March 2014, as a result of which Fresh Retailing was not entitled to the first Earn Out fee payable under cl 2.1 of the deed.

85 In her reasons, the primary judge did not make an express finding in relation to the issue of causation. Having concluded that Trampoline Enterprises breached cl 2.5(6) of the Earn Out Deed, the judge held that, accordingly, Trampoline Enterprises was liable to pay the first Earn Out amount of $140,000 to Fresh Retailing. It was common ground, on this application, that the issue should not be remitted to the primary judge to rule on the issue of causation, but that, based on the evidence in the trial, this Court should form its own conclusion on that aspect of the case.

86 In order to resolve that issue, it is not necessary for us to rehearse, at length, the principles relating to causation. They have been well established by a series of High Court decisions. In essence, the law does not take a philosophical or formulaic approach to the question of whether a breach of contract has resulted in loss to the injured party. Rather, the law approaches the issue of causation as a matter of common sense. In particular, it is not necessary for a plaintiff to establish that the relevant breach of contract was the sole or exclusive cause of the loss claimed. It is sufficient if, in the circumstances of the case, the breach of contract materially contributed to the loss.[18]

87 In addressing the issue of causation, it is important to focus on the two aspects of the conduct of Trampoline Enterprises which, we have concluded, constituted a breach by it of its obligations under cl 2.5(6) of the Earn Out Deed. First, Trampoline Enterprises, by Tucker, intentionally delayed the issue of the occupancy certificate, for the Craigieburn store, for a period of three and a half weeks, between 24 February and 21 March 2014. Secondly, Trampoline Enterprises took no step, during that period, to progress the opening of the Craigieburn store, at least until 18 March, when it decided that the store should open in thirteen days' time, on 31 March.

88 Ultimately, and notwithstanding that period of delay, the Craigieburn store was able to open, and did open, on 31 March, just two days after the expiration of the 180 day period set by the Earn Out Deed for the entitlement of Fresh Retailing to the first Earn Out fee. Without more, and based on those facts, it might be readily inferred that the delay by Trampoline Enterprises, which constituted a breach of its duty of good faith, had the effect that the store did not open until two days after the expiration of that period. As a matter of common sense, the three week period of inaction plainly made a material contribution to the circumstance that the store did not open on or before 29 March.

89 In order to resist that inference, the applicants have pointed out that, on the evidence, as at 24 March, a number of matters still had to be attended to by the franchisee, before the Craigieburn store was able to open. In particular, the franchisee was required to sign franchise documents, to pay the franchise fee, and to provide a bank guarantee, to Trampoline Enterprises. Thus, it was submitted, the Court could not conclude, on the balance of probabilities, that the deferment in obtaining the occupancy certificate, and the period of inaction by Trampoline Enterprises, played a causative role in the inability of the Craigieburn store to open before 31 March.

90 The director of the franchisee, Singh, gave evidence in respect of those matters. He stated that the franchise documents were signed by him on Thursday 27 March, and the franchise fee was paid, and the bank guarantee given, to Trampoline Enterprises on Friday 28 March. As mentioned, Tucker was unable to identify any step taken by Trampoline Enterprises to progress towards the opening of the store during the period 24 February to 21 March. Thus, the evidence at trial was that during that period no step was taken to secure from Singh franchise documents, the bank guarantee or the franchise fee. The only evidence, adduced in that regard, is that on 18 March, Trampoline Enterprises announced that it would open the Craigieburn store on 31 March. There was no direct evidence that that announcement was communicated to Singh. However, in the circumstances, on the balance of probabilities we infer that it was brought to his attention at about that time.

91 Thus, it follows, that it may be concluded that if Trampoline Enterprises had, in conformity with its obligations under cl 2.5(6), sought provision of the franchise documents, franchise fee and bank guarantee, without delay, they would have been made available by Singh within a period of about one week after being requested. In that regard it is relevant that, in cross-examination, Singh stated that in February, he had all the machines ready for the Craigieburn premises, and that 'everything was in place', other than that the Lend Lease hoardings needed to be removed. He said that from that stage 'we were able to make some product in store and train and everything ... we could have opened up'. In other words, Singh, by late February, was well advanced in his preparations to open the Craigieburn Trampoline store.

92 In those circumstances, the fact that, in the upshot, Singh did not sign the franchise documents until 27 March, and that he did not pay the franchise fee or provide the bank guarantee on 28 March, does not, logically, preclude the inference that the intentional period of delay by Trampoline Enterprises in the obtaining of the occupancy certificate, and in progressing the opening of the Craigieburn store, materially caused the loss and damage claimed by Fresh Retailing, namely, the loss of its entitlement to payment of the first Earn Out amount.

93 This conclusion is consistent with a document prepared by Turner and admitted into evidence in which he identified 'delay with occupancy certificate' as one of the items which 'caused delay to handover ... which delayed training and the opening date for trade'.

94 It follows from the foregoing that it may be concluded, on the balance of probabilities, that the breaches by Trampoline Enterprises of cl 2.5(6) of the Earn Out Deed caused Fresh Retailing to lose its entitlement to the first Earn Out Amount under cl 2.5(1) of the Deed.

Fourth issue: lack of registration of store under s 35A(1) of the Food Act 1984

95 The final issue is whether the fact (if it was proven) that the Craigieburn store was not registered under the Food Act by 29 March 2014 precluded Fresh Retailing from succeeding on its claim for damages in the amount of the first Earn Out Amount.

96 Plainly, the lack of registration of the Craigieburn store, by 29 March 2014, did not prevent the store opening at that date. The Craigieburn store opened two days later, on 31 March 2014 and (it is contended) without such registration. Thus, as the trial judge found, a lack of registration of the store under the Food Act did not stop the store from operating.[19] Thus, it did not break the chain of causation between the breach of Trampoline Enterprises of cl 2.5(6) of the Earn Out Deed, and the damages claimed by Fresh Retailing.

97 On this application, counsel for the applicants contended, however, that that reasoning by the judge had the effect of adopting and endorsing the unlawful operation of the Craigieburn store by the franchisee. Counsel contended that the Court must not and cannot be seen to adopt and endorse a breach of the law. In support of that proposition, he relied on the celebrated dictum of Lord Mansfield in Holman v Johnson:[20]

No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the Court says he has no right to be assisted.

98 As mentioned, the applicants did not adduce any evidence at the trial that the Craigieburn store was not registered under the Food Act by 29 March, or by 31 March 2014. It was common ground that the evidence, relating to that issue, went no further than establishing that, as at 26 March, the franchisee had not lodged an application to be registered under the legislation. There was no evidence, however, whether in the ensuing three days the franchisee lodged such an application and obtained registration of the store. In the absence of any evidence relating to that matter, and as to the practice of the relevant Authority (the Hume City Council) in assessing and processing such an application, it was a matter of mere speculation whether or not the Craigieburn store had been registered, under the Food Act, by 29 March. The onus of proof, in relation to that issue, rested firmly on the applicants. The allegation that, ultimately, they sought to advance at trial, namely, that the proprietor of the business opened it illegally, was a serious allegation, and thus was required to be pleaded, particularised, and proven by strict and cogent proofs. In those circumstances, it would have been inappropriate for a court to engage in speculation to fill the lacuna of evidence. It follows that, in the circumstances, the applicants failed to establish, on the balance of probabilities, that when the franchisee opened the Craigieburn store on 31 March, he did so illegally.

99 In order to address that problem, the applicants relied on ground 1(b)(ii) of the proposed grounds of appeal, namely, that the trial judge 'wrongly excluded documentary evidence of the date on which the new store was registered under the Food Act 1984, mistakenly considering that it was not relevant'.

100 That proposed ground of appeal was directed to a ruling made by the primary judge in January 2018. Contrary to the proposition contained in the proposed ground, and in the applicants' submissions, the judge did not, by that ruling, exclude the admission of evidence that by 31 March 2014, the franchisee had not procured the registration of the Craigieburn store under the Food Act. Rather, the ruling by her Honour was of a narrower compass, precluding certain cross-examination that was proposed to be undertaken by counsel for the applicants in respect of the witness Singh.

101 The background to the ruling is relevant. The trial commenced in May 2017, and proceeded for a period of nine days. It was then adjourned for reasons that are not material to this application. When the trial resumed in late January 2018, the respondents proposed to call Singh to give evidence. Before he commenced his evidence, senior counsel for the applicants foreshadowed that he intended, in cross-examination, to put before Singh a document demonstrating that the Craigieburn premises were not registered under the Food Act until 20 May 2014. Counsel noted that, in those circumstances, if Singh were required to give evidence relating to that matter, he should be provided with a certificate under s 128 of the Evidence Act. In response, counsel for the respondents contended that the proposed cross-examination was irrelevant. He submitted that no issue arose about the fact that the franchisee traded (or might have traded) in breach of the Food Act for two months after opening the store. He further noted that it was an agreed fact, on the pleadings, that the store opened on 31 March 2014, so that the opening of it was not held up because of the absence of any registration under the Food Act. In reply, senior counsel for the applicants contended that the cross-examination would be relevant, because the respondents could not make a claim against the applicants for failing to use their best endeavours 'to have something happen which was legally impermissible'.

102 The judge refused the application by the applicants to cross-examine Singh about the document, referred to by counsel, which indicated that the Hume City Council granted registration to the store on 20 May 2014. Her Honour reached that conclusion for the following reasons:

I have considered the submissions made by counsel. The course proposed by the plaintiff would give rise to issues concerning the applicability of the Food Act and the failure to comply with the provisions of that Act. The plaintiff's application was made on the tenth day of the trial. The overarching purpose of the Civil Procedure Act 2010 (Civil Procedure Act) and the rules of court in relation to civil proceedings is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute. Section 9 of the Civil Procedure Act provides that in making any order in a civil proceeding, a court shall further the overarching purpose of having regard to the efficient conduct of the business of the court. The course proposed by the plaintiffs would involve the consideration of issues which are outside the parameters of the pleadings and would necessitate the adjournment of the cross-examination of a witness who was subpoenaed by the first defendant to give evidence until he is able to obtain legal representation.[21]

103 Accordingly, it is clear that the judge did not, by her ruling, preclude the applicants from adducing evidence that, as at 31 March 2014, the Craigieburn store had not been registered under the Food Act. Rather, the ruling went no further than to preclude senior counsel for the applicants from cross-examining Singh to the effect that the store was not registered under that legislation until 20 May 2014.

104 Further, the ruling by her Honour, to that effect, has not been demonstrated to be in error. The applicants did not, in their reply and defence to counterclaim, plead or raise, any alleged illegality, or failure to register the Craigieburn store under the Food Act, in response to the counterclaim by Fresh Retailing for damages. Contrary to the submissions made by senior counsel for the applicants, if the applicants had sought, at trial, to raise that issue, it was necessary to plead it. It may be accepted that in cases in which a proof of a claim necessarily involves the introduction of evidence demonstrating that the claim is based on illegal or improper conduct, a court may decline to enforce that claim, notwithstanding that the other party has not pleaded such illegality or impropriety in response to it. However, this was not such a case. As we have said, the proof by Fresh Retailing of its claim for damages in the counterclaim, did not involve proof by it, or reliance by it, on any illegal or improper conduct. Rather, it was the applicants who sought to introduce and raise, in evidence, the issue of illegality.

105 In those circumstances, it was necessary for the applicants to plead that illegality, or, at the very least, to foreshadow it before the trial of the proceeding. The applicants failed to do that. They did not seek to adduce any evidence, as to that matter, in the course of the presentation of their own case. Rather, on the tenth day of the case, after the evidence in the proceeding was well established, they sought to introduce the issue in the course of cross-examination of Singh. In those circumstances, the judge was, we consider, well justified in not permitting such cross-examination, particularly given the overarching purpose specified by s 7 of the Civil Procedure Act 2010, namely, to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute.

106 Consequently, in light of the failure of the applicants to prove, by admissible evidence, that the Craigieburn store had not been registered under the Food Act by 29 March 2014, the major premise, to proposed ground of appeal 1(b), is not made out. Nevertheless, it is appropriate to address the issues raised by that ground, on the assumption (which was not proven) that the franchisee of the Craigieburn store had not obtained registration of the premises under the Food Act until after 29 March 2014.

107 The relevant principles, concerning the effect of an illegality on a claim under contract, are well established. They have been discussed, in relatively recent years, by the High Court in a number of decisions, including Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd,[22] Fitzgerald v FJ Leonhardt Pty Ltd[23] and Nelson v Nelson.[24] They have also been recently considered by this Court, in some detail, in Civil and Allied Technical Construction Pty Ltd v A1 Quality Concrete Tanks Pty Ltd.[25]

108 In Knowles v Fuller,[26] Jordan CJ stated the principles as follows:

... illegality was not pleaded; and it is well settled that a Court will not entertain a defence of illegality which has not been pleaded, unless (1) the transaction sued upon is ex facie illegal, or (2) the plaintiff cannot prove his case without proving also that he is claiming under an illegal transaction, or (3) exceptionally, where a fact comes to light in the course of the trial which of itself shows that the transaction sued on is illegal on grounds which nothing could cure ... In the last type of case, it is important that the Court be satisfied that it has before it the whole of the facts relating to the transaction which could throw any light on its legality or illegality.[27]

109 That passage has been cited and followed in a number of subsequent cases.[28]

110 In the present case, as noted, the applicants did not plead a defence of illegality in their reply and defence to the counterclaim of Fresh Retailing. On its face, the transaction, sued upon, was not illegal. There was nothing about the Earn Out Deed itself, or the provisions contained in it, that were relied on by Fresh Retailing - and, in particular, cl 2.5(6) - which was on its face illegal or improper. Plainly, Fresh Retailing was able to prove its case, in respect of the breach of that provision, without proving any illegality.

111 In Fitzgerald, the appellant, with his family, was interested in parcels of land in the Northern Territory. He engaged the respondent, a driller licensed under the Water Act 1992 (NT), to drill a minimum of three bores on the land. As it turned out, seven bores were drilled, but only three were productive. A dispute arose between the parties as to how much was owing to the respondent under the contract. When four of the bores were drilled by the respondent, the drilling was unauthorised under the Water Act, as, inadvertently, the appellant had failed to obtain bore construction permits under that Act. Section 56(1)(a) of the Act made it an offence to construct a bore unless it was authorised. The respondent commenced proceedings in the Magistrates' Court against the appellant claiming $24,540. The magistrate rejected the claim, holding that because the drilling of the bores was illegal, the respondent could not sue to recover for any work done in respect of them. The respondents' appeal to the Supreme Court of the Northern Territory was upheld. The appeal by the appellant from that decision to the Court of Appeal of the Northern Territory was dismissed. In turn, the appellant unsuccessfully appealed to the High Court, which held that the failure to comply with the Water Act did not render the contract unenforceable.

112 In reaching that conclusion, Dawson and Toohey JJ stated the relevant principles as follows:

[I]f the contract were to be affected by illegality it could only be because ... although lawful according to its own terms, it might be performed in a manner which the Act prohibited. That category, however, does not stand for the proposition that a contract, which is itself legal, will be unenforceable, if something illegal is done in the course of its performance. The cases provide no authority for such a proposition. As Devlin J pointed out in St John Shipping Corporation v Joseph Rank Limited:

When fully considered, it is plain that they do not proceed upon the basis that in the course of performing a legal contract an illegality was committed; but on the narrower basis that the way in which the contract was performed turned it into the sort of contract that was prohibited by the statute.[29]

113 Applying those principles, their Honours then concluded as follows:

As we see it, the only question that remains is whether the principle which, in contract, is expressed in the maxim ex turpi causa non oritur actio has any application. In our view, it does not. A plaintiff will not be denied relief under that principle unless he has to rely upon an unlawful or immoral transaction to establish his cause of action. Here the driller is not required to rely upon any illegality in order to establish his cause of action for the recovery of the money due to him under the contract. The principle that a court will not assist an unlawful transaction is therefore not called into play and provides no reason why the driller should be denied relief.[30]

114 McHugh and Gummow JJ, in their joint judgment, reached the same conclusion for similar reasons, stating:

... the courts should not refuse to enforce contractual rights arising under a contract, merely because the contract is associated with or in furtherance of an illegal purpose, where the contract was not made in breach of a statutory prohibition upon its formation or upon the doing of a particular act essential to the performance of the contract or otherwise making unlawful the manner in which the contract is performed.[31]

115 Further, and significantly, insofar as there was any illegal conduct involved in relation to the opening of the store, or in relation to the date on which it would have been opened if not for the breach by Trampoline Enterprises of cl 2.5(6) of the Earn Out Deed, the illegal conduct was solely that of the franchisee, Singh. Fresh Retailing was not involved, in any way, with the opening of the Craigieburn store without the requisite registration of it under the Food Act. Nor, in any sense, was Fresh Retailing responsible for the circumstance that Singh did not have the store registered under the Food Act by 29 March, or on 31 March when he opened it. In St John Shipping v Joseph Rank Ltd,[32] Devlin J stated the principles as follows:

There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable. The application of this principle depends upon proof of the intent, at the time the contract was made, to break the law; if the intent is mutual the contract is not enforceable at all, and, if unilateral, it is unenforceable at the suit of the party who is proved to have it.[33]

116 Further, the indirect, and tenuous connection between the illegality involved in the opening of the store by the franchisee, and the assertion by Fresh Retailing, of its rights under cl 2.5(6) of the Earn Out Deed, falls well short of the type of connection, between the illegality and the performance of the contract, which is sufficient to lead a court to deny the recovery by the party of its entitlements under a contract on the grounds of public policy.

117 In Nelson v Nelson[34] McHugh J considered the circumstances in which a court will withhold relief on the grounds that the performance of it involved or was associated with the performance of an unlawful purpose. In a passage which has been quoted in a number of subsequent decisions, McHugh J described those circumstances as follows:

Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.[35]

118 In Civil and Allied Technical Construction, this Court, having referred to a number of the authorities, including Fitzgerald, Nelson and St John Shipping, stated the applicable propositions in the following terms:

... it seems to us that the authorities reviewed relevantly stand for the following propositions:

(1) A contract does not become unenforceable merely because something illegal is done in the course of its performance.

(2) Where enforcement is said to be precluded on grounds of public policy, the illegality contended for must be of real significance in relation to the subject matter of the contract which is sought to be enforced. It cannot be a matter which is incidental or peripheral to the real purpose or object of the transaction. The illegal purpose must go to the substance of the transaction.

(3) The principle which precludes recovery on the basis of public policy is directed at preventing an affront to the public conscience or involving the court in upholding seriously anti-social conduct which is illegal or gravely reprehensible.

(4) In the modern context, courts should be slow to nullify a bargain on the basis of what may be properly characterised as regulatory non-compliance.[36]

119 In the present case, the indirect relationship between the illegality involved in the opening of the store by the franchisee, and the claim by Fresh Retailing of its rights against Trampoline Enterprises under cl 2.5(6) of the Earn Out Deed, could not be described as being of 'real significance' in relation to the subject matter of the agreement between Trampoline Enterprises and Fresh Retailing. The enforcement by this Court of the rights of Fresh Retailing, under cl 2.5(6), could not, on any sensible view, be regarded as an affront to the public conscience, or involve the Court upholding seriously anti-social conduct which was gravely reprehensible. In those circumstances, if it were established that the franchisee failed to register under the Food Act the business he was to conduct in the store by 31 March, that circumstance would not, as a matter of public policy, preclude the court awarding to Fresh Retailing the damages claimed by it.

120 In summary, the reliance by the applicants, on the doctrine ex turpi causa non oritur actio (an action does not arise from a base cause) must fail for a number of reasons, as follows:

(1) In their reply and defence to counterclaim, the applicants did not plead, or seek to rely on, the doctrine of ex turpi causa or illegality.

(2) The applicants failed to prove, at the trial, that the franchisee of the Craigieburn store had not procured the registration of the proposed business at that store under the Food Act.

(3) The cause of action, relied on by Fresh Retailing, was not founded on, nor did the establishment of it require or involve the proof of, any illegality. Insofar as the circumstances of this case involve any illegal conduct in the opening of the Craigieburn store, that conduct was not that of Fresh Retailing, but, rather, was the conduct of the franchisee of the Craigieburn store. Thus, the cause of action relied on by Fresh Retailing, in its counterclaim, did not involve, in any way, any illegality or wrongdoing by or on behalf of Fresh Retailing.

(4) Insofar as any illegality may have been involved in that aspect of the counterclaim, that illegality was not of such a nature as to preclude the right of Fresh Retailing to recover damages on the basis of public policy.

121 For those reasons, the applicants have failed to make out each of the four propositions contained in ground 1(b) of the application for leave to appeal. It follows that ground 1 of the application does not succeed.

122 In view of the conclusions that we have reached, concerning ground 1 of the application for leave to appeal, it is not necessary for us to determine the issue raised by ground 2 of the Notice of Contention by the respondents. However, we shall briefly express our views in relation to that notice.

123 In brief, counsel for the respondents contended that if it were determined that the failure to open the Craigieburn store within 180 days of the completion date was not due to any breach of cl 2.5(6) by the applicants, Fresh Retailing would be entitled to, and should have judgment for, the second Earn Out amount of $40,000 provided for by cl 2.3 of the deed.

2.3 The Purchaser must pay the Second Earn Out Amount to the Seller if the subsequent prospective franchisee commences to operate a new Trampoline store (excluding its store in respect of which the first Earn Out Amount was paid and excluding at any premises specified in Schedule 2) whether or not a formal written licence or franchise agreement has been signed with the Purchaser, on or prior to 31 August 2015.[37]

125 In response, counsel for the applicants contended, first, that the claim so made for the Second Earn Out Amount should not be the subject of a notice of contention, but, rather, it should have been advanced by way of cross-appeal by the respondents. More substantively, counsel contended that the second Earn Out Amount is only payable in respect of a 'subsequent' prospective franchisee commencing to operate a new Trampoline store. Thus, it was submitted, the obligation to pay that amount was predicated on there having been a prior prospective franchisee entering into a franchise agreement in accordance with cl 2.1.

126 Although it was not necessary for the primary judge to do so, she considered that the applicant would not have been entitled to the Second Earn Out Amount. Her Honour was of the view that the phrase 'subsequent franchisee' meant a franchisee who had not been identified as a prospective franchisee pursuant to cl 2.1 of the Deed.[38]

127 The substantive point, raised by counsel for the applicants, involves a short question of construction, particularly focusing on the phrase 'subsequent prospective franchisee'.

128 It must be acknowledged that the adjective 'subsequent' is, at least arguably, somewhat ambiguous. On the one hand, as contended by the applicants, it may refer to a second franchisee who opens a Trampoline store after a first prospective franchisee has opened such a store within 180 days of the completion date, for the purposes of cl 2.1(1) of the Earn Out Deed. Alternatively, as contended by the respondents, the adjective 'subsequent' may refer to a franchisee who opens a Trampoline store 'subsequent' to the period of 180 days of the completion date.

129 In our view, the construction, contended for by the respondents, is to be preferred. Commencing with the text, the words in parentheses in cl 2.3 make it clear that it is intended to apply to all prospective franchises, including those where there is a possibility of the First Earn Out Amount being paid, provided it is not in fact paid. This is the natural meaning of the words 'was paid' in the exclusion in the parentheses.

130 Further, reading the Earn Out Deed as a whole, it is clear that the intended purpose of cl 2 of the Earn Out Deed was to fix the purchase price, payable under the sale agreement, to take into account the potential value to the purchaser of new Trampoline stores opened within the two periods defined in cl 2 of the Earn Out Deed. First, the period of 180 days of the completion date, and, secondly, the period up to and including 31 August 2015. In that way, cl 2.1 of the Earn Out Deed provided for an additional payment of $140,000 (the first Earn Out Amount) if a prospective purchaser entered into a franchise agreement within 90 days of the completion date, and the store was opened within 180 days of the completion date; under cl 2.3, a further payment of $40,000 was to be paid in respect of a franchisee who opened a new Trampoline store subsequent to that period, but before 31 August 2015.

131 Viewed as a whole, cl 2.1 and cl 2.3 were designed to provide for a higher Earn Out Payment when a franchisee commences to operate a new Trampoline Store in the first period; and a lower payment when a prospective franchisee commences to operate such a store subsequently, but before 31 August 2015.

132 It is a moot point whether, as contended by senior counsel for the applicants, the claim to the second Earn Out Amount ought to have been agitated on this application by way of a cross-appeal, rather than by way of a notice of contention. If, contrary to the conclusions that we have expressed earlier, the applicants were to succeed in setting aside the award of damages against it in respect of the first Earn Out Amount, it would have been inappropriate to have permitted a matter of form, rather than substance, to have precluded the respondents recovering the second Earn Out Amount that was the subject of the second point in their notice of contention.

133 It follows from the foregoing that ground 1 of the application does not succeed.

Ground 2: The claimed adjustment in respect of the two Excluded Employees

134 The dispute, concerning the claim by Trampoline Enterprises to be entitled to an adjustment in respect of the accrued annual leave entitlements of Mr Moore and Ms Malempre, arose out of an exchange of emails between the parties three weeks after they entered into the sale agreement.

135 On 23 September 2013, Mr Gordon, on behalf of Trampoline Enterprises, sent the following email to Amanda Walton, the chief executive officer of Fresh Retailing and the wife of Crothers:

Subject to your comments we would like to propose the following.

We would like to offer David and Katie continued employment with us.

This will result in you not having to pay circa $30,000 in redundancy payment to them (18K David and 12K Katie) plus Notice of $7,300 (assuming they have each had 1 week already).

Their statutory (leave) obligations would still be due (circa 17K) and I am sure would have been provided for in your accounts.

We would thus propose that:

1. You rescind their 'notice' period and 'convert' it to continued employment. We would have a letter of appointment to you/them within 24 hours.
2. We agree to adjust for the statutory (leave) accruals in the adjustment account.

Although the S&PA contemplated transferring and non-transferring employees, with transferring employees' Statutory Entitlements being for our account, our rationale for this is we all win! You same some $37,000 in redundancy/notice, we get trained staff, assisting the ongoing business and they get continued employment.

Of course you are under no obligation to do b), but thought it a win|win|win for all.

Please let me know your decision

Stan[39]

136 In response, Ms Walton sent the following email to Mr Gordon dated 24 September 2013:

Stan,

Thank you for your offer of employment for Katie and David. Whilst technically they should be treated as all other transferring employees as you mention, we are prepared to accept your proposal for us to take on their accrued annual leave entitlements only and for it to be adjusted in the adjustment account. You will take on all of their other entitlements.

Re the date that their employment would be transferred, I require the assistance of David and Katie to do stocktake on Monday morning the 30th so that we can complete it expeditiously prior to trade commencing. In addition David has a few tasks he needs to do in the office on Monday (such as finding Fitzroy subtenant communication!). Their four weeks notice ends of the 4th October, so there are actually no savings there from us from a notice of perspective.

This concession by us would need to them eliminate the requirement under the SPA to provide you with 8 days of assistance post settlement.

Please advise that you concur with my summary of your proposal.

Kind regards

Amanda Walton[40]

137 Following settlement of the sale of the business, Trampoline Enterprises made an offer to Mr Moore and Ms Malempre, which they both accepted, to be employed by Trampoline Enterprises. As a consequence, Trampoline Enterprises recorded in its accounts a liability for annual leave entitlements accrued by those two employees in the total sum of $18,626.53.

138 However, in early October 2013, Fresh Retailing changed its mind about whether to pay out the annual leave of those employees. It had been advised by its lawyers that if it paid the accrued entitlements, it would be entitled to the tax benefit of that expense. Accordingly, Fresh Retailing decided to pay out the entitlements of both Mr Moore and Ms Malempre before they transferred their employment to Trampoline Enterprises.

139 That decision, by Fresh Retailing, led to a chain of emails passing between the parties on 3 October and 4 October. In the early morning of 3 October, Gordon sent to Ms Walton an email advising that Mr Moore had accepted a position at Franchised Food Co effective from that date, so that, in terms of the arrangement concluded by the email of 24 September, his employment would be seen as a continuing employment. Gordon also noted that he had then been advised that Ms Walton had told Mr Moore and Ms Malempre that Fresh Retailing would pay their statutory entitlements, and Gordon stated that that was incorrect, as, in accordance with the previous emails, the entitlements would be dealt with in the adjustment account. Later in the same day, Ms Walton responded by an email, acknowledging 'that that was what was agreed', but stating that Fresh Retailing was then unaware of the tax implications, so that it would be fair for Fresh Retailing to pay the entitlements and receive the tax credit for that payment. Gordon promptly responded to that email, stating that he would be abiding by 'the written terms only and not any other interpretations'.

140 In the meantime, on 3 October 2013, Mr Moore and Ms Malempre each signed employment agreements with Trampoline Enterprises. Clause 6.5 of each agreement provided that the employees' full statutory and recorded entitlements as at 29 September 2013 'will be carried forward from Fresh Retailing Pty Ltd'. As such, by that agreement, Trampoline Enterprises agreed to accept liability for the accrued entitlements of each employee.

141 On the following day, 4 October, Ms Walton sent an email to Mr Gordon stating:

Please find attached leave balances for David Moore and Katie Malempre as at September 30 2013.

As their annual leave balances are 0, there is no leave to be adjusted in the completion statement.

142 Following the sale of the business, a number of disputes arose between the parties in respect of the completion statement that was prepared under the agreement. One of those disputes concerned the claim by Trampoline Enterprises that it was entitled to an adjustment, in its favour, of the accrued annual leave entitlements in respect of Mr Moore and Ms Malempre in the sum of $18,626.53. Pursuant to cl 11.11 of the sale agreement, the parties chose to have the dispute submitted for determination by an Independent Accountant. For that purpose, Ms Piera Murone of Pitcher Partners was appointed Independent Accountant to resolve the disputed items in the completion statement.

143 The parties respectively made written representations to Ms Murone in respect of the items that were in dispute, including the annual leave entitlements of Mr Moore and Ms Malempre.

144 In its submission to the Independent Accountant, Trampoline Enterprises contended that the sale agreement was varied by the parties in their emails dated 23 and 24 September 2013. It further contended that Fresh Retailing subsequently sought to alter the varied agreement by paying out the two employees, but that Trampoline Enterprises did not agree to that alteration. Thus it was contended that 'Fresh Retailing have unilaterally sought to vary' the Sale Agreement.

145 In its submission to the Independent Accountant, Fresh Retailing agreed that by the emails it was agreed that outstanding leave entitlements could be adjusted 'in the completion statement'. However, Fresh Retailing maintained, it took a decision, which it contended was its right under the Fair Work Act, to pay out the annual leave entitlements, so that there were no accruals to be adjusted under the Sale Agreement. The submission further stated that under the Sale Agreement the items for adjustment in the Completion Statement were to be stock and prepayments, and there was no provision for employee entitlements to be adjusted in that statement. Fresh Retailing contended that it had paid out the entitlements, so that there was nil annual leave balance to be adjusted in the Completion Statement.

146 In support of its submissions, Fresh Retailing appended a number of documents including the emails to which we have just referred.

147 Ms Murone delivered her determination on 25 November 2013. Relevantly, her determination provided as follows:

6. Employee Entitlements

6.1.1 The Purchaser is claiming that the purchase price should be reduced for amounts relating to employee entitlements.

6.1.2 The Purchaser has submitted that agreement was reached to include Employee Entitlements in the Completion Statement and referred the Independent Accountant to email correspondence in section 15.1 of the Purchaser's submission.

6.1.3 However, my review of the Agreement indicates that the Completion Statement refers only to Stock and Prepayments. Items relating to employees are separately dealt with in clause 14 of the Agreement.

6.1.4 Therefore I have not provided an opinion on this matter as it falls outside the scope of the Independent Accountant.

148 In the amended statement of claim in the proceeding, Trampoline Enterprises pleaded that, in making no adjustment to the Completion Statement for the employee entitlements in respect of Mr Moore and Ms Malempre, the determination of the Independent Accountant failed to meet the requirements of a determination for the purposes of cl 11.12 of the Earn Out Deed, or, alternatively, was affected by manifest error. In submissions before the trial judge, it was contended, on behalf of Trampoline Enterprises, that the parties varied the sale agreement in respect of Mr Moore and Ms Malempre so that, instead of those employees being dealt with under cl 14 of the agreement, the accrued entitlements of each of those employees would be included in the completion statement to be provided under cl 11 of the agreement. Counsel submitted that the Independent Accountant fell into error by only considering cl 11 and cl 14, without giving effect to the variation of the agreement effected by the emails dated 23 September and 24 September respectively.

149 In her reasons for judgment, the trial judge rejected that submission in the following terms:

During its closing address, the plaintiff referred to the emails passing between Gordon and Walton on 23-24 September 2013 regarding employee entitlements and contended that they gave rise to a variation of the Asset sale and purchase agreement. The legal characterisation of these emails was not pleaded. The plaintiff submits that Ms Murone's refusal to do so because it was not what was in the original Asset sale and purchase agreement was a manifest error because the Asset sale and purchase agreement had been relevantly varied. The allegation that the Asset sale and purchase agreement had been varied was not pleaded. In any event, clause 25.8 of the Asset sale and purchase agreement provides that an 'amendment or variation to this Agreement is not effective unless it is in writing and signed by the parties'.

In its written submissions, the plaintiff repeated the submissions it made to Ms Murone. In my view the Determination by Ms Murone in relation to employee entitlements does not contain a 'manifest error'.[41]

150 In its application for leave to appeal against that aspect of the judge's reasons, Trampoline Enterprises relies on one ground (Ground 2), namely:

The learned trial judge erred in law in dismissing the plaintiffs' claim for $18,626.53 in employee entitlements and in failing to find that the Independent Accountant's rejection of this claim was a manifest error in circumstances where the amount was the subject of express written agreement by exchange of emails varying, or collateral to, the sale of business agreements.

151 In support of that ground, senior counsel for Trampoline Enterprises submitted that the exchange of emails, dated 23 September and 24 September, constituted a variation of the sale agreement or a collateral contract, to include the entitlements of Mr Moore and Ms Malempre in the completion statement and in the Independent Accountant process. He contended that the disallowance of the employee entitlements, by the Independent Accountant, on the grounds that the sale agreement itself did not provide for those entitlements to be included in the completion statement, constituted manifest error. Accordingly, it was submitted that the primary judge erred in failing to conclude that the Independent Accountant's disallowance of entitlements was such an error.

152 In response, counsel for the respondent submitted that Trampoline Enterprises had failed to establish any 'manifest error' by the Independent Accountant. Counsel observed that during the trial, the case of Trampoline Enterprises, concerning the entitlements of the two Excluded Employees, altered. Ultimately, as we have mentioned, in final address, it was contended that the parties had varied the sale agreement, or reached a collateral agreement, concerning those entitlements. However, that position was not pleaded by Trampoline Enterprises, and, it was submitted, was precluded by cl 25.8 of the sale agreement (that required variations to be in writing signed by the parties).

153 In oral submissions, counsel for Fresh Retailing accepted that the information provided to the Independent Accountant established that the parties had agreed to vary the sale agreement in the manner contended for by Trampoline Enterprises. However, the Independent Accountant was also informed that on 3 October 2013 Ms Walton told Mr Gordon that Fresh Retailing no longer wished to do so. At the trial in the County Court, Ms Walton was cross-examined about that matter. She gave evidence that she had arranged for the employee entitlements of Mr Moore and Ms Malempre to be paid out by Fresh Retailing, so that, on the sale of the franchise business, Trampoline Enterprises did not undertake any obligation for the accrued entitlements of those two employees at the completion date. In short, it was submitted, the binding arrangement made between the parties concerning the entitlements was abandoned, and, further, no such entitlements were transferred by Fresh Retailing to Trampoline Enterprises.

154 Clause 11.12(1) of the sale agreement provided that the Independent Accountant, appointed by the parties, must act as expert and not as arbitrator. By cl 11.12(4), the Independent Accountant was entitled to base his or her opinion on the information provided and submissions made by the Purchaser and the Seller and on the business records. Clause 11.12(6) specified as follows:

11.12 The Independent Accountants must be appointed to act on the following basis:

...

(6) the determination of the Independent Accountants is (in the absence of manifest error) conclusive and binding on the Seller and the Purchaser, and the Completion Statement adjusted to reflect the determination of the Independent Accountants is final and conclusive of all matters stated in it.

155 The principles, that apply to the basis upon which a court might interfere with an expert determination, are well established.

156 In AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd,[42] Nettle JA (with whom Maxwell P and Bongiorno AJA agreed) stated:

[W]hether it is open to review an expert determination on the ground of error is in the first place to be decided according to whether the determination answers the contractual description of what the expert was required to determine ... [T]he question of whether an error in determination deprives the determination of compliance with the contractual description of what the expert was required to determine is in the first place to be answered according to whether the error occurred in respect of a task which the contract entrusted to the expert.[43]

157 In Adnow Pty Ltd v Greenwells Wollert Pty Ltd,[44] this Court, in the context of a valuation that was produced pursuant to an agreement to refer a question of value to an independent valuer, stated:

In short, a court will only set aside such a valuation if it has not been made in accordance with the terms of the contract. Ordinarily, in the absence of fraud or collusion, a mere error in the production of the valuation will not constitute a departure by the valuer from the terms of the contract. In the case of fraud or collusion, it may be concluded that the valuation has not been made in accordance with the terms of the contract. However, otherwise, mistake or error by the valuer is not sufficient to invalidate the valuation, unless the error is of such a kind as to demonstrate that the valuation has not been made in accordance with the terms of the contract.[45]

158 In the present case, cl 11.12(6) of the sale agreement provided that the determination of the Independent Accountants is conclusive and binding, in the absence of 'manifest error'. It is axiomatic that a 'manifest error' consists of an error which is presented on the face of the expert's determination or the reasons provided by the expert for that determination. Clause 11.12(6) does not expressly restrict the concept of 'manifest error' to errors of fact or methodology; accordingly they may also include an error of law.[46] In their submissions before the primary judge, and before this Court, it was, at least implicitly, accepted by the parties that, in determining whether there was any manifest error in the expert report, the material which could be examined included the written submissions made to the Independent Accountant and the documents referred to in those submissions.[47] In appendix 3 to her report, the Independent Accountant stated that in preparing the report she had relied upon (inter alia) the sale and purchase agreement, the notice of dispute, and the submissions by each party.

159 Applying those principles, it is clear that, contrary to the decision by the primary judge, Trampoline Enterprises has established that there was 'manifest error' in the determination of the Independent Accountant of the aspect of the dispute between the parties relating to employee entitlements. In short, the Independent Accountant correctly noted that the sale agreement (cl 11) provided that the completion statement referred only to stock and prepayments, and that it did not relate to adjustments for employees. However, the Independent Accountant made a manifest error in failing to take into account the effect of the emails between the parties on 23 September and 24 September 2013 which, it was conceded by Fresh Retailing, had the effect of varying cl 11 of the Sale Agreement by providing that the Completion Statement was to include any adjustments to be made for the accrued entitlements of Mr Moore and Ms Malempre.

160 The Independent Accountant was appointed, pursuant to cl 11 of the Sale Agreement, to determine any dispute that arose between the parties relating to the Completion Statement that was prepared by Fresh Retailing and delivered to Trampoline Enterprises under cl 11.1 of the Sale Agreement. Under cl 11, the Completion Statement was concerned with the adjustment, on settlement, of the purchase price to take into account the value of the stock held by the seller's business at the time of settlement. Clause 1.1(17) of the Agreement defined Completion Statement to mean a statement setting out the 'Completion Net Working Capital' prepared in accordance with cl 11 and Schedule 8 of the Agreement. Clause 1.1(16) of the Agreement provided:

Completion Net Working Capital means the aggregate value of the Stock and Prepayments.

161 Schedule 8 of the agreement contains a 'proforma Completion Statement'. The items, contained in the Completion Statement, are divided into two categories, namely, 'stock' and 'prepayments'.

162 In the absence of any agreement varying cl 11, clearly, the Completion Statement, provided for by that clause, would not include an adjustment for the accrued entitlements of any employees, including Mr Moore and Ms Malempre, and the Independent Accountant would not have been authorised to provide an opinion in respect of the claim by Trampoline Enterprises to such an adjustment.

163 However, it is clear that the parties, by those emails, varied cl 11 to that effect. Importantly, in its submissions to the Independent Accountant, Fresh Retailing expressly acknowledged and accepted that the Sale Agreement had been varied to that effect. As we have noted, Fresh Retailing attached to its submissions the relevant email passing between the parties, including the emails of 23 September and 24 September. In its 'Summary of Background' to the relevant dispute concerning employee leave entitlements, it referred to Mr Gordon's email dated 23 September 2013, and stated:

He stated that he would 'adjust for the accruals in the adjustments account'. We agreed via email that any outstanding leave entitlements could be adjusted in the Completion Statement.[48]

164 In those circumstances, in the dispute that was put before the Independent Accountant, Trampoline Enterprises was correct to maintain that the adjustments, for the accrued entitlements of Mr Moore and Ms Malempre, were correctly included in the Completion Statement. As noted, Fresh Retailing, in its submissions, accepted that there was an agreement between the parties to that effect. The subsequent unilateral withdrawal, by Fresh Retailing, from that agreement reached between the parties on 24 September, did not and could not affect the rights of Trampoline Enterprises under that agreement.

165 It follows then that the Independent Accountant made a manifest error in para 6.1.3 of her determination in concluding that the Sale Agreement was to the effect that the Completion Statement referred only to Stock and prepayments, and in thus deciding not to provide an opinion on the claimed adjustment for employee entitlements on the basis that it fell outside the scope of the task required of the Independent Accountant. That error was evident on the face of the determination, taking into account the submissions made to the Independent Accountant, which were specifically referred to by the Independent Accountant in her report.

166 The primary judge, however, rejected the claim by Trampoline Enterprises that it had made out a manifest error, by the Independent Accountant, to that effect. As we have already set out, her Honour came to that conclusion, first, because (she considered) Trampoline Enterprises had not pleaded 'the legal characterisation' of the emails dated 23 September and 24 September 2013, and, secondly, because cl 25.8 of the sale and purchase agreement provided that an amendment or variation to that agreement was not effective unless it was in writing and signed by the parties.

167 However, it is evident that Trampoline Enterprises did plead the effect of the emails, dated 23 September and 24 September, in its amended statement of claim. In particular, in paragraph 15.3(c), it pleaded that the Independent Accountant erred by holding that an adjustment for employee entitlements was outside the scope of the adjustment by the Completion Statement, 'despite the fact that the plaintiff and Fresh Retailing had expressly agreed to include such employees in the Completion Statement'. The particulars to that plea stated that the agreement was contained in the emails dated 23 September and 24 September 2013.

168 The judge also placed some reliance on cl 25.8 of the sale agreement. However, that clause was not pleaded by the respondents, nor did they seek to rely on it in the trial. More importantly, as we have noted, Fresh Retailing, in its submission to the Independent Accountant, accepted that there was a concluded agreement in writing (by exchange of emails) between itself and Trampoline Enterprises that the relevant adjustment came within the province of the Completion Statement.

169 For those reasons, we consider that the primary judge erred in failing to conclude that Trampoline Enterprises had established that the Independent Accountant's determination was affected by a manifest error, namely, in failing to determine, and conclude in favour of Trampoline Enterprises, that the Completion Statement should contain an adjustment for the accrued leave entitlements of Mr Moore and Ms Malempre. The respondents did not contest that, if manifest error was established, the adjustment ought to have been made. It follows that Trampoline Enterprises should be granted leave to appeal on ground 2, and the appeal on that ground should succeed. It will be necessary for the judgment, authenticated by the judge, to be amended to include the amount of $18,626.53 payable by Fresh Retailing to Trampoline Enterprises.

170 For the foregoing reasons, we have reached the following conclusions:

(1) The applicants should be granted leave to appeal on ground 1 of the application for leave to appeal, but the appeal should be dismissed.

(2) The first applicant should be granted leave to appeal on ground 2, and the appeal should be allowed. As a consequence, the judgment entered below will be varied by adding, as paragraph 2A to that judgment, that there be judgment for the plaintiff (Trampoline Enterprises) against the first defendant (Fresh Retailing) for the sum of $18,626.53 as money had and received by the first defendant to the use of the plaintiff.

[1] Trampoline Enterprises Pty Ltd v Fresh Retailing Pty Ltd [2018] VCC 399 ('Reasons').

[8] Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 ('Briginshaw').

[9] [1775] EngR 58; (1775) 1 Cowp 341, 343; [1775] EngR 58; 98 ER 1120, 1121.

[10] [2005] VSCA 228.

[12] [2017] FCAFC 190.

[13] Ibid [164] (Gilmore, Nicholas and Moshinsky JJ).

[14] Evidence Act 2008 s 140(2); Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 362-3; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 110 ALR 449, 449-50 (Mason CJ, Brennan, Deane and Gaudron JJ).

[15] Holloway v McFeeters [1956] HCA 25; (1956) 94 CLR 470, 480-1 (Williams, Webb and Taylor JJ); Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125, 129-30 (Winneke P), 141 (Tadgell JA); Marriner v Australian Super Developments Pty Ltd [2016] VSCA 141 [73]-[77] (Tate ACJ, Kyrou and Ferguson JJA); Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88 [101] (Santamaria, Ferguson and Kaye JJA).

[17] Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, 308 (Kitto J), 312 (Menzies J), 320-1 (Windeyer J); O'Donnell v Reichard [1975] VicRp 89; [1975] VR 916, 929 (Newton and Norris JJ); Brandi v Mingot (1976) 12 ALR 551, 559-60 (Gibbs ACJ, Stephen, Mason and Aickin JJ).

[18] See, for eg, March v E & M H Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506, 514 (Mason CJ); Chappel v Hart (1998) 195 CLR 232, 244 [27] (McHugh J); Henville v Walker [2001] HCA 52; (2001) 206 CLR 459, 493 [106] (McHugh J); Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310, 315 (Glass JA), 357-8 (McHugh JA).

[20] [1775] EngR 58; (1775) 1 Cowp 341, 343; [1775] EngR 58; 98 ER 1120, 1121.

[21] Trampoline Enterprises Pty Ltd v Fresh Retailing Pty Ltd [Ruling No 1] [2018] VCC 41 [16].

[22] [1978] HCA 42; (1978) 139 CLR 410.

[23] [1997] HCA 17; (1997) 189 CLR 215 ('Fitzgerald').

[24] (1995) 184 CLR 538 ('Nelson').

[25] [2018] VSCA 157 [80]-[119] (Whelan, Santamaria and McLeish JJA) ('Civil and Allied Technical Construction').

[26] [1947] NSWStRp 72; (1947) 48 SR(NSW) 243.

[27] Ibid 245 (citations omitted); see also Gozzard v McKell [1931] NSWStRp 63; (1931) 32 SR(NSW) 39, 47, 49 (Halse Rogers J); GC Dickson & Yorston (Builders) Pty Ltd v Hattam [1935] VicLawRp 33; [1935] VLR 168, 170-2 (Martin J).

[28] See, eg, Varley v Spatt [1955] VicLawRp 67; [1955] VLR 403, 407 (Herring CJ); Ford v Bartley [1957] SR(NSW) 281, 285 (Herron J); Fitzgerald [1997] HCA 17; (1997) 189 CLR 215, 221 (Dawson and Toohey JJ).

[29] Fitzgerald [1997] HCA 17; (1997) 189 CLR 215, 219-20 (citations omitted).

[30] Ibid 220 (emphasis added) (citations omitted).

[32] [1957] 1 QB 267 ('St John').

[34] (1995) 184 CLR 538.

[35] Ibid 613; see also Fitzgerald [1997] HCA 17; (1997) 189 CLR 215, 230 (McHugh and Gummow JJ); Miller v Miller [2011] HCA 9; (2011) 242 CLR 446, 458-9.

[36] [2018] VSCA 157 [119] (Whelan, Santamaria and McLeish JJA) (citations omitted).

[39] Original emphasis in underline, emphasis added in bold.

[42] [2006] VSCA 173.

[44] [2016] VSCA 282.

[45] Ibid [40] (Tate, Ferguson and Kaye JJA); see also Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, 335-6 (McHugh JA); Shoalhaven City Council v Firedam Civil Engineering Pty Ltd [2011] HCA 38; (2011) 244 CLR 305, 315-16 [26]-[27] (French CJ, Crennan and Kiefel JJ).

[46] TX Australia Pty Ltd v Broadcast Australia Pty Ltd [2012] NSWSC 4 [20]-[21] (Brereton J).

[47] Funtastic Ltd v Madman Film & Media Pty Ltd [2016] VSC 708 [55] (Almond J).