Case & Legislation Update

Legislation

• No new franchise specific legislation

• Plenty of general legislative changes

Competition and Consumer Act 2010 (Cth)

Personal Property Securities Act 2009 (Cth)

Small Business Commissioner Bill 2011 (SA)

Cases - Outline

We will cover

• 4 key cases in detail

• Some other cases of interest that should be read

Cases

Body Bronze International Pty Ltd & Ors v Fehcorp Pty Ltd

[2011] FSCA 196

1 July 2011

Cases – Body Bronze Facts

• Body Bronze agreed with Fehcorp to lend Fehcorp such amount as fit out costs exceeded $250,000

• Body Bronze receives an invoice for some fit out costs totalling $22,207 and passes it onto Fehcorp for payment on the basis that the $250,000 trigger point had not been reached.

• Fehcorp refuses to pay alleging $250,000 trigger point had been reached

• Body Bronze serves a breach notice, then terminates franchise agreement

Cases – Body Bronze Trial Outcome

Held

• Body Bronze wrongfully terminated franchise agreement and was liable to pay damages of $325,851

• Body Bronze misled and deceived Fehcorp by representing, without reasonable grounds, that it would make the fit out loan

• Body Bronze acted unconscionably by refusing to make the fit out loan then terminating the franchise agreement on improper grounds

• Meneilly & Mitchell personally liable as accessories

Cases – Body Bronze Appeal

• Body Bronze, Meneilly & Mitchell appeal to Court of Appeal

• No attack on breach of contract finding against Body Bronze

• Appeal limited to findings of misleading & deceptive conduct, unconscionable conduct and accessorial liability

Cases – Body Bronze Appeal

Held on Appeal

• No misleading & deceptive conduct

• No unconscionable conduct

• Therefore no accessorial liability

Cases – Body Bronze Appeal

• Mere fact that representations as to future matters do not come to pass

does not mean they are misleading or deceptive

• Body Bronze intended to make loan at time representation was made, but

could not make loan due to economic and business factors

• Body Bronze therefore had reasonable grounds

Cases – Body Bronze Appeal

Unconscionable conduct entails:

– No regard for conscience

– Irreconcilable with what is right or reasonable

– Usually a deliberate or reckless act (not negligent act)

– A high degree of moral obloquy

Cases – Body Bronze Appeal

• A mere breach of contract (even a deliberate breach) does not necessarily

amount to unconscionable conduct

• Decisions can be made to break a contract on commercial grounds (as in

this case) but more is needed for that decision to amount to unconscionable

conduct

• Guidance comes from s.51AC(3)

Cases – Body Bronze Appeal

To establish accessorial liability under s.75 an applicant must prove that the

individual

– Intentionally aided, abetted, counselled or procured the company’s

contravention (which in the case of misleading or deceptive conduct

entails knowledge of the representation and its falsity)

– Had knowledge of the essential facts constituting the representation and

knew of its falsity

Cases – Body Bronze Lessons

• If you have a good clean breach of contract claim, don’t complicate it with a

hard to prove statutory claim or an accessorial liability claim

• Unconscionable conduct is morally reprehensible conduct

• Be careful of double edge sword flowing from section 4 of Australian

Consumer Law (formerly s.51A of TPA)

Cases

Stones Corner Motors Pty Ltd trading as Keema Automotive Group v

Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co

[2010] FCA 1465

22 December 2010

Cases – Stones Corner Facts

• Keema had longstanding oral “handshake” agreement with Suzuki for an indefinite term

• Suzuki not previously vigilant about dealers meeting sales targets

• Keema advises Suzuki that it proposes becoming a Great Wall dealer and seeks Suzuki’s consent

• Suzuki raises concerns about level of sales of Suzuki vehicles and requests Keema’s commitment to new 3 stage Performance Requirements

• Keema refuses to agree

Cases – Stones Corner Facts

• Suzuki’s lawyers assert that if Performance Requirements not met Suzuki

has right to immediately terminate the oral agreement

• Keema starts selling Great Wall vehicles

• Keema meets first stage Performance Requirements but not second stage

Performance Requirements

• Keema proposes an Action Plan, which it alleged Suzuki accepted

• Suzuki given 4.5 months notice of termination

• Keema seeks interlocutory injunction Suzuki from proceeding with

termination

Cases – Stones Corner Issues

• Was there one or more serious questions to be tried?

• If so, did the “balance of convenience” favour the granting of an injunction

restraining Suzuki from proceeding with termination

Cases – Stones Corner Decision

Held that there were serious questions to be tried as to:

– Suzuki’s unilateral imposition of Performance Requirements on basis

that non compliance would give Suzuki a right of termination of the

agreement

– Whether Suzuki had acted unconscionably (inconsistent conduct and

unilateral variations)

– Whether reasonable notice of termination had been given

– Whether lack of reasonable notice might amount to unconscionable

conduct

Cases – Stones Corner Decision

• On evidence available bad faith by Suzuki could not be inferred

• The balance of convenience favoured the grant of an interlocutory injunction

• Damages might not provide an adequate remedy

• Therefore an interlocutory injunction should be granted

Cases – Stones Corner Lessons

• Don’t allow oral “handshake” agreements to remain in place.

• Formalise them when the relationship is rosy

• Don’t link a right to terminate on reasonable notice without cause to some

act of the franchisee that might be contested

• But remember to meet clause 22 of Code requirements

• Err on the generous side when determining length of reasonable notice

Cases

SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 1)

[2011] FCA 1054

9 September 2011

Cases – SPAR Facts

• Interesting counterpoint to Stones Corner case re application for injunction

arising from proposed termination of franchise agreement.

• “Cut-price” supermarket industry.

• SPAR wholesale suppliers of groceries – the Applicant.

• MIS (and its officers) operated a SPAR franchised supermarket and were

obliged to purchase wholesale groceries from SPAR – the Respondents.

• MIS wanted to take up with Metcash and to operate as IGA store.

• SPAR sought interlocutory relief seeking to prevent MIS going over to

Metcash.

Cases – SPAR Facts

• SPAR put entitlement to injunctive relief on three bases:

– SPAR was entitled to orders preventing MIS from terminating the franchise

agreement

– SPAR was entitled to orders preventing MIS from acquiring its groceries from

other than SPAR – SPAR was entitled to injunctive relief on the basis of certain competition law

claims

Cases – SPAR Decision

• The franchise agreement did not confer any express rights of termination on

MIS.

• No entitlement by MIS to terminate unless SPAR had repudiated or

breached a condition – not suggested that this had occurred.

• There was nevertheless a serious question to be tried as to whether MIS

was entitled to terminate franchise agreement – lack of entitlement to

terminate was overwhelming.

• MIS submitted that no injunction should issue for the following reasons:

– The evidence as to irreparable harm was inadequate.

– There was no basis to restrain MIS’ directors, even if there was a basis to

restrain MIS.

Cases – SPAR Decision

– The Court would not order specific performance.

– The franchise agreement did not bind MIS to purchase groceries from SPAR

once MIS had ceased operating a franchised store.

– If the injunction were granted, considerable harm would be caused to MIS

because it had already taken substantial steps towards implementing the IGA

store.

Cases – SPAR Decision

• Irreparable harm evidence:

– Various difficulties would arise for SPAR if franchise agreement was terminated.

– MIS’ store was the only “cut-price” supermarket in the area not supplied by

Metcash.

– Metcash supplied 98% of market vs SPAR’s 2%.

– Metcash had articulated a strategy internally to “kill” SPAR.

– Metcash had been contemplating very aggressive tactics to recruit SPAR

franchisees.

– The loss of MIS might make it considerably more difficult for SPAR to find and

retain franchisees.

– Court: switching of sides by MIS would cause harm not compensible by money.

Cases – SPAR Decision

• No contractual basis to restrain directors: Court agreed.

• Court would not order specific performance:

– Court disagreed.

– The franchise agreement simply required MIS to keep a store open and buy

groceries from SPAR.

– Observance of these obligations would be unlikely in short term to require much

in the way of superintendence.

– There is no longer a general prohibition against specific performance – look at

particular circumstances and degree of supervision which would be necessary.

Cases – SPAR Decision

• The franchise agreement did not bind MIS to purchase groceries from

SPAR once MIS had ceased operating a franchised store:

– Court disagreed.

– MIS was not permitted to evade the obligation to purchase groceries from SPAR

by breaching its obligation under the franchise agreement to conduct the

franchise.

– It is well established that a contract will not be construed as permitting a party to

benefit from its own wrongdoing or by its conduct to deprive the opposing party

of the benefit of the contract.

Cases – SPAR Decision

• If the injunction were granted, considerable harm would be caused to MIS

because it had already taken substantial steps towards implementing the

IGA store:

– Court disagreed.

– Many of the steps which MIS had taken since it purported to terminate the

franchise agreement were of little consequence.

– Further, those which would constitute a prejudicial change of position (such as

ordering and paying for a shipment of groceries from Metcash) were all self-

inflicted and that nothing that SPAR had done in any way fostered the notion that

MIS could simply walk away from the contract.

Cases – SPAR Decision

• Conclusion:

– The Court accepted that MIS should be restrained from walking away from the franchise agreement and more particularly from acquiring its groceries from anyone but SPAR.

• Competition Claims:

– Competition case also argued by SPAR based upon conversation between MIS director and SPAR employee:

– “We approached IGA because we want to be able to protect our store from IGA. IGA has given us a guarantee that if we converted our SPAR store to an IGA-branded [store] then they would not develop the existing Foodworks site. You would know it would really hurt our business if they put a bigger sized new IGA store on the island, we need to protect ourselves and do whatever we need to stop them building it, it is why we need to move to them”.

Cases – SPAR Decision

– Alleged to be:

• Anticompetitive exclusionary conduct – Metcash would restrict the provision of its goods

and services by not opening the larger Foodworks site.

• Arrangement would substantially lessen competition.

– Court determined that there was a serious question to be tried despite likely

objections to this claim at trial.

– SPAR was entitled under competition legislation to orders requiring MIS to

acquire its groceries from SPAR.

– The three MIS directors were knowingly involved in the arrangement with

Metcash and thus orders were made against them as well.

Cases – SPAR Decision

• Costs:

– Prior to proceedings, SPAR suggested that MIS give undertaking to continue

operating as a SPAR store and that SPAR would then urgently commence

proceedings on an expedited basis to resolve the issues which existed between

the parties. That course would have obviated the need for an interlocutory

injunction.

– In these circumstances and given that the claim against MIS regarding its lack of

an entitlement to terminate the franchise agreement was essentially

overwhelming, it was unreasonable for MIS not to accept SPAR’s proposal. That

provided a basis for making a departure from the usual costs order on an urgent

interlocutory injunction. Accordingly, MIS was ordered to pay SPAR’s costs of

and incidental to the application.

Cases – SPAR Lessons

• Obviously, if one is to take steps to terminate a franchise agreement, a clear contractual entitlement to do so needs to be identified.

• Detailed evidence about the various difficulties which will be experienced by the aggrieved party and which will result in irreparable harm is required.

• Courts are prepared in a franchising context to order specific performance of a franchise agreement despite the fact that it is a franchisee which has purported to walk away from the franchise relationship.

• Self-inflicted harm carries little weight in the Court’s consideration of where the balance of convenience lies.

Cases

D’Arling One Pty Ltd v Eagle Boys Dial-a-Pizza Australia Pty Ltd

[2011] NSWSC 296

15 April 2011

Cases – D’Arling Facts

• Good example of principles of misleading conduct and fraud in context of

termination of franchise agreement.

• Eagle Boys franchise.

• Expired lease operating month-to-month.

• Dispute re compliance led to mediation and agreement to take various steps

including to sell – First Settlement Agreement.

• Sales Pack Document prepared to facilitate sale – included various info but

made specific statements re lease:

– Lease agreement in place was in 1st year.

– Intending purchasers should liaise directly with landlord to confirm info.

Cases – D’Arling Facts

– Intending purchasers should liaise directly with landlord to confirm info.

• Sales Pack sent to Eagle Boys.

• Further disputes arose which led to another mediation and Second

Settlement Agreement.

• Second Settlement Agreement clause referred to responsibility for

assignment of the leases to a prospective franchisee.

• Further acrimony led to Eagle Boys contending that:

– The representations made by D’Arling about the existence and terms of

the lease in the Sale Pack and in the Second Settlement Agreement

were misleading, deceptive and fraudulent.

Cases – D’Arling Facts

– The representations amounted to a representation that the option to renew had

been validly exercised and that there was in force an existing current lease for a

term of three years when in fact there was only a holding over on a month-to-

month tenancy.

– Asserted reliance on the representations in entering into the Second Settlement

Agreement.

– This provided basis for termination of Franchise Agreement for fraud and setting

aside the Second Settlement Agreement. Eagle Boys terminated on this basis

(in reliance upon an express contractual right to do so) and refused to be bound

by the Second Settlement Agreement.

Cases – D’Arling Decision

• Useful review of key authorities re misrepresentation and fraud.

• Misrepresentations re Sales Pack:

– Consider context.

– Draft document intended for presentation to 3rd parties only. Not yet settled.

– At time sent to EB, EB had no intent to exercise right to purchase – rather to

assist in sale to 3rd party. Accordingly, not directed to EB nor intended to be

relied upon.

– D’A reasonable grounds believe that lease would be in place and would be no

problem with renewal – negotiations with landlord.

– Sales Pack not provided to EB for purpose of mediation leading to Second

Settlement Agreement – mediation took place 5 months later.

Cases – D’Arling Decision

• Misrepresentations re Second Settlement Agreement clause re assignment

of the leases:

– This was a general provision as to who should arrange for what to be transferred.

Not sufficiently clear and unambiguous to amount to representation that a lease

was in force for specific period or with specific rights.

• No misleading or deceptive conduct.

• Reliance:

– Strong doubt as to recollection of EB’s GM.

– No record that importance attached to, or mention made of, relevant part of

Sales Pack leading up to second mediation or in Second Settlement Agreement.

Cases – D’Arling Decision

– Inherently unlikely that GM would have recalled oblique reference to lease in

Sales Pack after passage of time and when only seen on computer.

– If importance had been attached to content of Second Settlement Agreement

clause, it might have been reasonably expected that this would be reflected in

the Second Settlement Agreement. There was no such reflection.

• No reliance.

• Fraud:

– No fraudulent conduct because no misleading conduct.

– D’A did not know or intend that statements re lease were false in any way.

– Genuine and well-founded belief that Sales Pack would be accurate in final form.

• No contractual right for EB to terminate for fraud.

Cases – D’Arling Lessons

• Context of representations is all important.

• Termination for fraud – very serious and only ever take after comprehensive

assessment of legal and factual position.

• Query whether material matters on which a party relies for the purpose of

settling a franchise dispute at mediation should be recorded in the

settlement agreement or included as a form of warranty.

• A detailed analysis of the evidence to support reliance is fundamental prior

to proceeding to trial.

Other Cases of Interest

Broad Spectrum Tanning Pty Ltd & Ors v Bidding Buzz Ltd & Ors

[2010] FMCA 932

VIP Home Services (NSW) Pty Ltd v Swan & Anor

[2011] SASC 110

ACCC v Allphones Retail Pty Ltd

[2011] FCA 338

Other Cases of Interest

Parker, In the matter of Purcom No 34 Pty Ltd (In Liq)

[2010] FCA 263

Australian Maintenance and Cleaning Pty Ltd v AMC Commercial

Cleaning (NSW) Pty Ltd [2011] NSWCA 103

Sportsco Pty Ltd v Singh Group Pty Ltd

Questions & Comments