FEDERAL COURT OF AUSTRALIA
SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50
| IN THE FEDERAL COURT OF AUSTRALIA | |
| DATE OF ORDER: | 1 May 2014 |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. The appeal be upheld in part.
2. Orders 2 and 5 to 12 of the orders made by Griffiths J on 23 November 2012 be set aside.
3. The Franchise Agreement and the Special Offer Agreement made on 1 February 2011 be set aside from 1 May 2014.
4. The parties bear their own costs of the proceedings below and of the appeal.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).
| NEW SOUTH WALES DISTRICT REGISTRY | |
| GENERAL DIVISION | NSD 1959 of 2012 |
| ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
| BETWEEN: | SPAR LICENSING PTY LTD (ACN 002 965 193) First Appellant SPAR AUSTRALIA LTD (ACN 102 281 167) Second Appellant |
| AND: | MIS QLD PTY LTD (ACN 132 323 418) First Respondent CHRISTOPHER MARTIN SICHTER Second Respondent SHARON LEE WARD Third Respondent ANTHONY PAUL APLIN Fourth Respondent |
| JUDGES: | BUCHANAN, FOSTER AND FARRELL JJ |
| DATE: | 1 May 2014 |
| PLACE: | SYDNEY |
REASONS FOR JUDGMENT
BUCHANAN J:
Introduction
1 This appeal concerns whether the appellants engaged in misleading and deceptive conduct and whether they breached the Franchising Code of Conduct established by the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) by not providing a current disclosure document to the respondents prior to entering into a franchise agreement. For the reasons that follow, I would hold that the appellants did not engage in misleading and deceptive conduct, but that they did breach the Franchising Code of Conduct. Consequently, among other things, the franchise agreement should be set aside from the date of this judgment.
Background
2 The appellants (together “SPAR”) are related companies concerned with the supply of dry groceries and related services to independent retail grocery outlets. The first respondent (“MIS”) owned and operated a supermarket store on Macleay Island in Queensland. The second, third and fourth respondents were directors and shareholders of MIS. SPAR competed with Metcash Trading Ltd and its subsidiaries (“Metcash”), which include IGA Distribution Pty Limited (“IGA”). The MIS store was supplied by SPAR. The only other supermarket on Macleay Island was supplied by Metcash. In the judgment from which the present appeal has been brought, the trial judge found that “[t]here is fierce rivalry between Metcash and SPAR to supply dry groceries and related services to independent supermarkets in Queensland”. That rivalry manifested in attempts by Metcash during 2010 to persuade the directors of MIS that it should trade under the IGA banner, while at the same time MIS and SPAR were also negotiating.
3 On 1 February 2011, MIS entered into a franchise agreement with SPAR for a term of five years commencing on that day. (Although technically there were two agreements on foot between SPAR and MIS, it will generally be convenient to refer to them together as “the franchise agreement”). During the currency of the franchise agreement, MIS was required to operate the supermarket as a SPAR bannered store and to purchase dry groceries exclusively from SPAR. The second, third and fourth respondents were personal guarantors of performance by MIS under the franchise agreement. Before the franchise agreement was made, representations had been made by a senior executive of SPAR, which will be referred to below, to the effect that MIS could be released from the franchise agreement earlier than five years. The fourth respondent had sought such an assurance because MIS wished to take advantage of an initially attractive arrangement with SPAR, but the fourth respondent (and MIS) also wanted to be free to change suppliers if that seemed advantageous.
4 The franchise agreement did not provide for termination by MIS during the five year term. It permitted SPAR to terminate the agreement if MIS was in breach and if stated procedural steps were taken. In the event that the franchise agreement was terminated by SPAR for breach by MIS, then MIS was required to pay fees, charges and other costs (“the break fees”) identified in cl 20.6 of the franchise agreement.
5 Clause 28.2 of the Franchise Agreement provided:
Entire Agreement
This Agreement contains the entire agreement between the parties and supersedes any prior agreement between the parties made in connection with its subject matter.
6 On 19 August 2011, the second, third and fourth respondents sent a letter to SPAR which said:
Letter of Resignation
Due to unforeseen circumstances, it is with regret that we wish to advise that we are resigning as a member of SPAR and wish to withdraw from the Franchise Agreement as of todays [sic] date.
Regards,
Anthony Aplin, Chris Sichter and Sharon Ward
Directors of MIS QLD PTY LTD
7 The trial judge found that this advice evidenced a breach of the franchise agreement. That conclusion is not in issue for the purpose of the present appeal. SPAR elected to affirm the franchise agreement. It commenced proceedings in this Court seeking specific performance of the franchise agreement and requiring MIS to continue to take its supplies only from it. In September 2011, SPAR obtained an interlocutory injunction restraining MIS from purchasing its goods from a supplier other than SPAR (SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 1) [2011] FCA 1054). That interlocutory injunction was effective to maintain the status quo. That remained the position at the time the appeal was heard.
8 Apart from its claims in contract, SPAR brought claims under s 45 of the Competition and Consumer Act 2010 (Cth) (“the CC Act”). Those claims were dismissed at trial and no part of the appeal relates to them.
9 In answer to SPAR’s claims, MIS brought a cross-claim. It alleged that SPAR contravened s 51AD of the Trade Practices Act 1974 (Cth) (“the Trade Practices Act”) (which is concerned with franchising codes of conduct) and s 18 (formerly s 52 of the Trade Practices Act) of the Australian Consumer Law (“ACL”) (Schedule 2 of the CC Act), because it engaged in misleading or deceptive conduct.
10 Although MIS relied in its pleadings on the ACL, it was accepted on the appeal that its cause of action arose under s 52 of the Trade Practices Act because it depended on conduct constituted by representations made before the ACL commenced on 1 January 2011. Nothing turns on the distinction for present purposes.
11 The trial judge found for MIS on both limbs of the cross-claim. The trial judge made orders varying the franchise agreement so as to permit MIS to withdraw from it upon payment of the break fees specified by cl 20.6 of the franchise agreement. That variation was made because the trial judge accepted that a representation had been made to the effect that withdrawal on those terms would be available to MIS if it chose. In addition, the trial judge awarded damages to MIS based on a finding that MIS lost an opportunity for an increase in sales of at least 10% had it commenced to trade under the IGA banner, and lost profit as a result. The orders ultimately made were that MIS should have judgment in the amount of $59,935 as damages, but at the same time it was liable to pay $73,154 to withdraw from the franchise agreement. MIS was awarded costs.
12 Although SPAR was found to have breached the Franchising Code of Conduct, no additional damages were found to be warranted as a result. The trial judge decided that it would not be appropriate to set the franchise agreement aside in its entirety as a result of the breach.
13 Three issues are directly raised by the appeal. They concern the foundation for the finding that SPAR breached s 52 of the Trade Practices Act, the foundation for the finding that SPAR breached the Franchising Code of Conduct and the foundation for the award of any damages to MIS. Further issues arise consequentially.
Misleading and deceptive conduct
14 The basis of the claim under s 52 of the Trade Practices Act was that a representative of SPAR (then second-in-charge of SPAR) made representations to representatives of MIS in about late September 2010 that if MIS entered into the franchise agreement, and wished subsequently to withdraw from it, it would be able to do so if it paid the break fees. This cause of action was pleaded in the following way:
13. [At] All material times Geoffrey Gale:-
(a) was employed by the First Cross-Respondent as General Manager-merchandising & Marketing/Retail Operations;
(b) acted as such for, and on behalf of, and as agent for, the First Cross-Respondent.
14. In about late September 2010 the First Cross-Respondent represented to the Cross-Claimant that:-
(a) if the Cross-Claimants entered into the Franchise Agreement the First Cross-Respondent would agree to the First Cross-Respondent resigning from the conduct of the SPAR franchised store business and withdrawing from the Franchise Agreement so that the First Cross-Claimant could join the IGA franchised supermarket business;
(b) if the Cross-Claimants entered into the Franchise Agreement the First Cross-Respondent would agree to the First Cross-Respondent resigning from the conduct of the SPAR franchised store business so that the First Cross-Respondent could join the IGA franchised supermarket business and withdrawing from the Franchise Agreement and that the only penalty that the First Cross-Respondent would enforce against the Cross-Claimants was the payment by the Cross-Claimants of the sums referred to in clause 20.6 and the Schedule to the Franchise Agreement to the First Cross-Respondent;
(c) upon resigning from the SPAR franchised store business and withdrawing from the Franchise Agreement the Cross-Claimants would not be bound by the Special Offer Agreement.
Particulars
The representation was oral and was made by Gale at a meeting that took place between the First Cross-Respondent, by Gale, and each of the Cross-Claimants at the Cleveland Sands Hotel, cnr Middle and Broomfield Streets, Cleveland in late September 2010.
15. Acting in reliance upon the truth of the representations referred to in paragraph 14 and induced thereby:-
(a) the Cross-Claimants entered into the Special Offer Agreement with the Second Cross-Respondent on 14 December 2010;
(b) the First Cross-Claimant, as franchisee, entered into the Franchise Agreement with the First Cross-Respondent, as franchisor on 1 February 2011;
(c) the Second, Third and Fourth Cross-Claimants, as guarantors, entered into the Franchise Agreement with the First Cross-Respondent, as franchisor, on 1 February 2011.
16. The representations alleged in paragraph 14 were misleading and deceptive or likely to mislead and deceive because:-
(a) the First Cross-Respondent has refused to permit the Cross-Claimants to resign from the SPAR franchised store business or to withdraw from the Franchise Agreement;
(b) the Second Cross-Respondent has insisted that the Cross-Claimants continue to be bound by the Special Offer Agreement;
(c) the Cross-Respondents have sought specific performance by the Cross-Claimants of the Franchise Agreement and the Special Offer Agreement;
(d) the Cross-Respondents have sought and obtained an injunction to prevent the Cross-Claimants from giving effect to their resignation from the SPAR franchised store business and their withdrawal from the Franchise Agreement;
(e) the Cross-Respondents have obtained an injunction that requires the Cross-Claimants to continue to be bound by the Special Offer Agreement.
17. In the premises of the matters referred to in paragraphs 8-16 the conduct of the First Cross-Respondent as alleged in paragraph 14:-
(a) was misleading or deceptive or likely to mislead and deceive; and
(b) was thereby in contravention of Section 18 of the Australian Consumer Law.
15 In its defence to the cross-claim, SPAR pleaded:
13. In answer to paragraph 13 of the Cross-Claim, the Cross-Respondents:
(a) admit that Geoffrey Gale was employed by the Second Cross-Respondent as General Manager, Merchandise and Marketing and Retail operations from 19 April 2010 to 13 December 2010, and
(b) otherwise deny the allegations in that paragraph.
14. The Cross-Respondents deny the allegations in paragraph 14 of the Cross-Claim.
15. In answer to paragraph 15 of the Cross-Claim, the Cross-Respondents:
(a) save for the premise in paragraph 15, admit the allegations in sub-paragraphs (a), (b) and (c), and
(b) otherwise deny the allegations in that paragraph.
16. In answer to paragraph 16 of the Cross-Claim, the Cross-Respondents:
(a) save for the premise in paragraph 16, admit the allegations in sub-paragraphs (a), (b), (c), (d) and (e), and
(b) otherwise deny the allegations in that paragraph.
17. The Cross-Respondents deny the allegations in paragraph 17 of the Cross-Claim and say that the Competition and Consumer Act 2010 does not apply to the conduct alleged.
16 The matters relied upon by MIS were representations with respect to future matters within the meaning of s 51A of the Trade Practices Act (s 4 of the ACL). If the representations were made, SPAR was to be taken not to have had reasonable grounds for making the representations unless evidence was adduced to the contrary. As is apparent from its defence, SPAR denied that the representations were made at all. It conducted its evidentiary case upon that footing. However, contrary to SPAR’s intended case, cross-examination by counsel then appearing for SPAR elicited evidence from Mr Gale which confirmed the allegations. At a factual level, therefore, the trial judge accepted that the asserted representations were made. On the appeal, SPAR accepted that position.
17 In the circumstances which developed in relation to the conduct of the case, neither side referred the trial judge to some important authorities concerning the way in which representations as to future matters are to be assessed. On the appeal, those matters were raised. The principles are not in issue. They are referred to below.
18 In Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171; 50 ALR 242, Lockhart J recorded (at 172):
The applicant’s case rests upon the correctness of the proposition that a contravention of s 52 may occur merely if a representation by the respondent as to future conduct does not come to pass, notwithstanding that, at the time it made that representation, the respondent may have believed that it would come to pass or that it was not recklessly indifferent as to what it said.
Lockhart J rejected the proposition, saying (at 179):
The mere fact that representations as to future conduct or events do not come to pass does not make them misleading or deceptive, notwithstanding that the applicant has relied on them and has altered his position on the faith of them. …
19 The following year, in Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (“Global Sportsman”), a Full Court of this Court stated (at 88):
The non-fulfilment of a promise when the time for performance arrives does not of itself establish that the promisor did not intend to perform it when it was made or that the promisor’s intention lacked any, or any adequate, foundation. Similarly, that a prediction proves inaccurate does not of itself establish that the maker of the prediction did not believe that it would eventuate or that the belief lacked any, or any adequate, foundation. Likewise, the incorrectness of an opinion (assuming that can be established) does not of itself establish that the opinion was not held by the person who expressed it or that it lacked any, or any adequate, foundation.
The applicants argued that, nevertheless, the statement of an incorrect opinion is misleading or deceptive or likely to mislead or deceive merely because it misinforms or is likely to misinform. An expression of opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps that there is basis for the opinion. At least if those conditions are met, an expression of opinion, however erroneous, misrepresents nothing.
20 The legal principle stated in Global Sportsman has been applied many times in this Court. For example, in Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475, the Full Court said (at 521):
It is, of course, not sufficient to establish that a representation was made as to a future event and that a contrary decision was made some time afterwards. If it is established by the respondents that at the time a representation was made there were reasonable grounds for making it, it cannot be described as “misleading” or “deceptive”.
21 More recently, in Fubilan Catering Services Limited (Incorporated in PNG) v Compass Group (Australia) Pty Ltd [2008] FCAFC 53, the Full Court said (at [91]):
It is clear that to make a promise which is not performed or a prediction which is not fulfilled is not, without more, misleading or deceptive: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 1 FCR 82, at 88, per curium; Bill Acceptance Corporation Pty Ltd v GWA Ltd (1983) 50 ALR 242.
22 At the trial, Mr Aplin (the fourth respondent) gave evidence about a note he wrote before entering a meeting with the second and third respondents, Mr Gale and another representative of SPAR on 3 December 2010. In his evidence-in-chief, the following evidence was given:
COUNSEL: Who was Mr Gale from your perspective?
MR APLIN: I saw Mr Gale as number 2 in SPAR.
COUNSEL: Below?
MR APLIN: Below Leigh Carson.
COUNSEL: Thank you. Now, you wrote those on before the meeting?
MR APLIN: Correct.
COUNSEL: Right. Can you, by reference to each line in turn, explain what they refer to, and why was it that you wrote them on as being points of discussion before the Cleveland Sands Hotel meeting?
MR APLIN: Okay. The letter of offer / Geoff Gale relates to the fact that I had no [sic] received an official letter of offer document from Geoff Gale even though we had discussed the points that he had offered. Modify franchise agreement was a reminder to me to speak to Geoff Gale to suggest to him that I would like to modify the franchise agreement to allow me to take the business to IGA upon purchasing the remaining shares of my business partners, and the break costs was a term that I used to remind myself of what – from a cost perspective I would be up for when changing from a franchise SPAR store over to an IGA store.
and:
COUNSEL: Thank you? [sic]
MR APLIN: Modify franchise agreement basically when I had requested to Geoff that the modify – the agreement be modified, Geoff had suggested to me that it was a standard document, and then they’re not in the practice of modifying that document.
COUNSEL: And then the third. Break costs?
MR APLIN: Break costs. Conversations with Geoff Gale in relation to break costs. Basically, he called them a different term. They were “termination fees and other associated points” that he had shown me at this meeting, and explained to me how those termination fees, and so forth would work when I chose to - - -
COUNSEL: When you say, “How they would work,” can I ask you this? What if anything was said by – was there any discussion as to the circumstances in which break fees would arise?
MR APLIN: Yes. Basically, when I was ready to change to IGA and terminate the franchise agreement, and the penalties for us doing that before the end of the five year term would be that we would have to pay a termination fee, repay other associated fees.
(Emphasis added)
23 Cross-examination of Mr Aplin by counsel then appearing for SPAR elicited the following evidence from Mr Aplin:
COUNSEL: Mr Aplin, did you not rely on what you say Mr Gale said to you about an ability to exit in your decision to enter a SPAR franchise, did you?
MR APLIN: Yes, I did rely on what Mr Gale had said to me.
and:
COUNSEL: In the light of all the other matters on which you relied in making your decision, I want to put to you that you did not, in making your decision, for your own part, to enter into the franchise agreement with SPAR, rely on anything that Mr Gale said to you at the meeting at the Cleveland Sands Hotel on 3 December 2010 about your ability to terminate the proposed franchise agreement with SPAR or what fees would be payable if you did so?
MR APLIN: I did rely on what Mr Gale had said to me in that 3 December meeting. Beforehand, we had not been in a franchise agreement at all for a rather large period of time. I was very adamant that I wanted to go to IGA for my own sets of reasons. Considering that we had not been in a franchise agreement, had been making money, and as far as my personal plans and goals were concerned, there were only two, two and a half years left before I would be in a position to purchase the remaining shares of my business partners, I dare say that I would most definitely not have signed the franchise agreement and had – would have pushed through without any form of agreement or any form of incentives until I purchased the shares of my business partners. It would have been a stalemate, so to speak.
and:
COUNSEL: And I will put to you one final time. I suggest to you that you did not sign the agreement based on any representations from Mr Gale?
MR APLIN: As I said before, the reason that I signed the agreement was that I had had that conversation with Mr Gale which alleviated my fears of being locked into it for the five-year term and consequently signed the agreement knowing that I [sic] spoken with Mr Costanzo [from IGA] and there was a high probability that I could get whatever termination outlays that I would have to incur recovered via IGA and – and the like.
24 Mr Gale also gave evidence for MIS. Counsel for MIS made the following observation as Mr Gale entered the witness box:
COUNSEL: Thank you. Mr Gale? While he is being called, could I raise something now. It was not put to Mr Aplin that Gale did not say those things.
HIS HONOUR: No. I realise that. I realise that.
COUNSEL: So I propose to lead him through that evidence because it now seems uncontroversial, and indeed some questions that were asked presuppose that it had happened. …
25 Mr Gale’s oral evidence-in-chief on this point was:
COUNSEL: And what was your position in the hierarchy in Queensland, effectively?
MR GALE: Effectively, second in charge.
COUNSEL: And who was above you?
MR GALE: Leigh Carson.
COUNSEL: Thank you. Now, in terms of your operations in the latter part of 2010, you know Mr Aplin?
MR GALE: I certainly do.
COUNSEL: Thank you. Did you have a discussion with him towards the latter part of 2010 wherein you discussed the means whereby and consequences for a franchisee, or a SPAR franchisee, of resigning or exiting from the SPAR franchise system?
MR GALE: Yes, I did.
COUNSEL: Now can you in that respect tell me whether that sort of discussion was had by you with other franchisees, other than Mr Gale and – sorry, Mr Aplin and Mr Sichter, that is, franchisees in other locations?
MR GALE: Yes, I did.
COUNSEL: And do you recall some people called Singh?
MR GALE: I certainly do.
COUNSEL: And what store did they run?
MR GALE: Murwillumbah and Tweed Heads.
COUNSEL: And when were those discussions touching upon resigning from or exiting the SPAR franchise system undertaken? When did they happen?
MR GALE: I believe probably around September, August/September, around about the same sort of time.
COUNSEL: Now, in terms of that approach, when you were discussing it with Mr Aplin, did you tell him that if they wanted to exit from or resign from the SPAR franchise system, what they would have to do is pay certain fees back to SPAR?
MR GALE: Yes, I did.
COUNSEL: And in that state, did you take him to the franchise agreement?
MR GALE: Yes.
COUNSEL: May the witness see exhibit K.
That’s a draft – or, sorry, a copy of a franchise agreement which will work for these purposes. Will you go to clause 20.6, please?
MR GALE: Yes.
COUNSEL: You’re there. In your discussions with Mr Aplin, and indeed the Singhs, did you go through the amounts payable on termination in clause 20.6 with the franchisees in each instance?
MR GALE: Yes, we did.
COUNSEL: Did you also in those discussions go to – please move ahead, about a dozen pages, to the schedule which contains items 8 through to 15?
MR GALE: Yes.
COUNSEL: That’s on page 46?
MR GALE: Yes.
COUNSEL: Are they the – is that the clause and are they the fees that you told Mr Aplin a franchisee would be required to pay as the price of exiting the franchise system?
MR GALE: Yes.
COUNSEL: Thank you. Was that also the position that you took with the Singhs?
MR GALE: Certainly was, yes.
COUNSEL: The same clause, the same schedule?
MR GALE: Same schedule, yes.
COUNSEL: Was it then, from the perspective of SPAR, a policy discussed by you with Mr Carson: that if a franchisee indicated that they wished to exit or resign, the price of that would be payment of those amounts?
MR GALE: It was, yes.
COUNSEL: Tell me, was that the subject of discussion between you and Mr Carson?
MR GALE: It was.
COUNSEL: However, was that policy that you’ve spoken of ever written down or recorded or contained in a particular document?
MR GALE: Not that I remember. It was just the way we did business at the time.
COUNSEL: Was it something that was to be recorded or not?
MR GALE: Not that I’m aware of, no.
COUNSEL: No. Thank you. Now, in terms of other franchisees, did the SPAR franchisee at Hervey Bay also exit the system?
MR GALE: Yes, the River Head store. Yes, correct.
COUNSEL: And did the same policy apply?
MR GALE: Yes.
(Emphasis added)
26 In cross-examination, the following exchange occurred:
COUNSEL: You suggested, Mr Gale, that SPAR had a policy concerning how to
approach the resignation of franchisees. Can I ask you to indicate when you say that policy was implemented?
MR GALE: I couldn’t indicate when it was implemented but in the time that I was in charge of the retail operations department, that was the policy that we discussed with franchisees if they asked that question. We would tell them what the exit fees were.
COUNSEL: But you didn’t ever tell them, did you, that that was all they would have to pay or that – I will leave it there. You didn’t ever say that that was all that franchisees would be required ---?
MR GALE: I did, yes. I mean, as far as I was concerned, it was outlined in the franchise agreement and that was quite clear and it was one of our selling points in the franchise agreement.
COUNSEL: So this policy, you say, was in existence throughout 2009/2010?
MR GALE: Yes, I believe so.
COUNSEL: But you say also, don’t you, that there was a change in policy in SPAR to require store owners who joined the franchise to sign franchise agreements so that SPAR could stop the store owner leaving the franchise chain and so that SPAR could tie up the store owners in its franchise chain for the period of the franchise agreement?
MR GALE: Well, it was the idea of the franchise agreement, was to gain some guarantee that we had supply from – for both stores; that was why we were using the franchise agreement.
COUNSEL: And that was the policy of SPAR from 2009, wasn’t it; a policy of having franchise agreements signed so that SPAR could stop the store owner leaving the franchise chain?
MR GALE: In an attempt to keep as many customers as possible; that’s correct.
COUNSEL: Yes, and so that SPAR could tie up the store owners for the period of the franchise agreement?
MR GALE: Yes.
COUNSEL: And I assume you made that policy – I withdraw that. Did you make that change in policy clear to franchisees?
MR GALE: If the franchisee asked what the policy was to exit, we would tell them.
and:
COUNSEL: From the time of this change in policy at SPAR in 2009, that is, the change in policy which you’ve agreed, to require the signing of franchise agreements to stop the store owner leaving the franchise chain, that change in policy was something that you informed potential franchisees of?
MR GALE: I’m not sure it was actually a change in policy. The franchise agreement has had those – that clause in it all along, as far as I’m aware, and if the store asked what the exit fees were, we would explain to them what the exit fees were.
and:
COUNSEL: Yes. That wasn’t all that you said to franchisees about SPARs policy concerning the period and termination of franchise agreements with proposed franchisees?
MR GALE: Well, I would say that that was all that we said. If they asked what the exit fees were, we would discuss what was in the franchise agreement, and we were quite clear with those discussions.
and:
COUNSEL: And I will put it to you once again, and no further, but in that context of you being concerned to ensure that MIS was legally committed to a five-year franchise agreement, you made it – I put to you that you made it clear to Mr Aplin that the franchise agreement was a standard agreement which would not be changed?
MR GALE: The franchise agreement is a standard agreement, yes.
COUNSEL: And you never said it terms to Mr Aplin or anyone else on behalf of MIS that it had any right to exit the franchise agreement, did you?
MR GALE: I said if they chose to exit at a future date, they would have to pay the exit fees.
(Emphasis added)
27 So far as the evidence was concerned, the testimony of Mr Aplin and Mr Gale put an effective end to any denial that Mr Gale had made the pleaded representations. But it had a further significance also. Mr Gale’s evidence, including his cross-examination, revealed that what was said to Mr Aplin reflected a conscious policy and practice at SPAR at the time the representations were made. At that time (which is the time at which the representations must be assessed), therefore, the representations by Mr Gale were neither misleading nor deceptive and there were reasonable grounds for making them. Indeed, evidence to that effect had been adduced (however unintentionally) by SPAR, as well as by MIS. Those matters are of considerable significance for a case which, as the present case did, depended on impugning representations about future matters.
28 If Mr Gale’s evidence is accepted, the later decision by SPAR to attempt to hold MIS to the terms of the franchise agreement, and the successful application for an injunction, reflected a change of position on SPAR’s part after the representations were made. On the authorities referred to above, that circumstance was insufficient to make out the case under s 52 of the Trade Practices Act (s 18 of the ACL).
29 In the present case, the findings by the trial judge about those matters were expressed in the following paragraphs:
203 For the following reasons, I find that the representations were either misleading or deceptive or both. That is because, contrary to the terms of those representations, SPAR:
(a) refused to permit the cross-claimants to exit the Franchise Agreement;
(b) sought and obtained an interlocutory injunction preventing the cross-claimant from exiting the SPAR franchise and terminating the Franchise Agreement;
(c) sought and obtained an interlocutory injunction requiring the cross-claimants to continue to be bound by the Special Offer Agreement;
(d) brought proceedings seeking an order of specific performance against the cross-claimants in relation to the Franchise Agreement and the Special Offer Agreement; and
(e) sought an order restraining MIS from acquiring goods for the conduct of its retail supermarket from any person other than SPAR until the expiration or termination of the Franchise Agreement.
204 In other words, far from permitting MIS to exit the Franchise Agreement on payment to SPAR of the relevant termination and related fees, SPAR brought these proceedings seeking (and in the case of the interlocutory relief, obtaining) orders which prevent MIS from ending its franchise relationship with SPAR and aligning itself with Metcash/IGA. Having regard to SPAR’s conduct in commencing and pursuing these proceedings which are inconsistent with the representations made by Mr Gale, I find that the representations were misleading and/or deceptive. In my view, that finding is unavoidable in circumstances where, in accordance with authorities such as Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199 per Gibbs CJ, the applicants’ conduct is viewed as a whole. The representations were made, the respondents acted upon them in the belief that they were true and the applicants then commenced proceedings directed to obtaining relief which was inconsistent with their earlier representations. The applicants’ subsequent conduct revealed that the representations were misleading and/or deceptive.
30 In my respectful opinion, the approach taken by the trial judge (who received no assistance from the parties in this regard) must be regarded as an approach which is contrary to the statements of principle to which I have referred.
31 MIS submitted that it was not open to SPAR to rely on this argument on the appeal and that SPAR could not depart from the way it conducted the case below. MIS also submitted that had the point been taken before the trial judge, it would have been open to MIS to plead a case of promissory estoppel so far as the representations were concerned, in which case it would have inevitably have succeeded. In my view, neither contention should be accepted.
32 SPAR set out to resist the case against it on the cross-claim by denying that the alleged representations had been made at all. That case was unsuccessful on the facts. There is no doubt that the trial judge’s attention should have been drawn to the legal issue which then arose by counsel then appearing for SPAR. Equally, however, had the point occurred to counsel for MIS it would have been necessary, in discharge of professional obligations, also to draw it to the attention of the trial judge. In my view, the better view is that the point simply escaped everybody in light of the way in which the factual contest had proceeded. If SPAR’s submissions are correct, as in my view they are, then the legal defect is fatal to this part of the cross-claim. It would not be in the interests of the administration of justice to ignore the point. That part of the judgment and orders of the trial judge would rest on a legally unsound foundation. That is not desirable.
33 I do not accept that MIS could have retrieved the position by simply relying on the doctrine of promissory estoppel. First, it would have been necessary to seek leave to amend the cross-claim to rely upon an additional cause of action. Secondly, the elements of an action in promissory estoppel are not the same as the elements of a case based upon the statutory prohibition of misleading and deceptive conduct. In order to obtain relief in a case of misleading and deceptive conduct, it was necessary to show that MIS relied upon the representations made by Mr Gale. In an action for promissory estoppel it would have been necessary to show, in addition, that SPAR knew that MIS was relying upon the representations. Had it been faced with a case of promissory estoppel, SPAR may have wished to call evidence about that question. It would be unsafe to proceed upon any assumption that the evidentiary case at trial would have remained the same.
34 In my view, in the circumstances, there is no alternative but to set aside so much of the judgment as depends upon the finding by the trial judge that SPAR had breached s 18 of the ACL by making the pleaded representations.
Franchising Code of Conduct
35 The Franchising Code of Conduct is set out as a schedule in the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (“the Franchising Code”). The relevant provisions include the following:
3. Definitions
franchisee includes the following:
(a) a person to whom a franchise is granted;
(b) a person who otherwise participates in a franchise as a franchisee;
(c) a subfranchisor in its relationship with a franchisor;
(d) a subfranchisee in its relationship with a subfranchisor.
prospective franchisee means a person who deals with a franchisor for the right to be granted a franchise.
5. Application
(1) This code applies to a franchise agreement entered into on or after 1 October 1998.
…
6. Franchisor must maintain a disclosure document
(1) A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document) for the franchise in accordance with this Division.
…
6A Purpose of disclosure document
The purposes of a disclosure document are:
(a) to give to a prospective franchisee, or a franchisee proposing to enter into, renew, extend or extend the scope of a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and
(b) to give a franchisee current information from the franchisor that is material to the running of the franchised business.
6B Requirement to give disclosure document
(1) A franchisor must give a current disclosure document to:
(a) a prospective franchisee; or
(b) a franchisee, if the franchisor or the franchisee proposes to renew, extend, or extend the scope of the franchise agreement.
…
10 Franchisor obligations
A franchisor must give:
(a) a copy of this code; and
(b) a disclosure document; and
(c) a copy of the franchise agreement, in the form in which it is to be executed;
to:
(d) a prospective franchisee at least 14 days before the prospective franchisee:
(i) into a franchise agreement or an agreement to enter into a franchise agreement; or
(ii) makes a non-refundable payment (whether of money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or
(e) if the franchisor or franchisee proposes to renew, extend or extend the scope of the franchise agreement — a franchisee at least 14 days before renewal, extension, or extension of the scope of the franchise agreement.
…
19 Current disclosure document
(1) A franchisor must give to a franchisee a current disclosure document within 14 days after a written request by the franchisee.
(2) However, a request under subclause (1) can be made only once in 12 months.
36 The trial judge construed cl 6A of the Franchising Code so that the purpose stated in 6A(b) also applied to a prospective franchisee. I respectfully doubt that this construction is correct, although nothing will ultimately turn upon my disagreement with the trial judge about that issue. The reason I take a different view is that it seems to me, with respect, that a clear distinction is made between franchisees and prospective franchisees. The distinction is maintained throughout the Franchising Code by the use of the different terms, which are separately defined to refer to persons in different circumstances. However, as I have indicated, nothing will ultimately turn on that difference of view in the present case.
37 The trial judge found that MIS was given a disclosure document around 21 July 2010. The franchise agreement was not executed until 1 February 2011. There was evidence before the trial judge that the financial statements and reports for SPAR for the financial year ending 30 June 2010 were not finalised until 10 September 2010. The trial judge made the following findings:
125 Various material concerning SPAR Australia’s financial position as at 30 June 2010 was tendered. None of that material was disclosed to the cross-claimants prior to these proceedings. The material included SPAR Australia’s financial report for the financial year ending 30 June 2010, as well as the chief executive officer’s report to the board of SPAR Australia for its meeting held on 13 December 2010. Minutes of the board meeting were also in evidence.
126 That material revealed that:
(a) SPAR Australia had lost $5.8 million for the financial year ended 30 June 2010;
(b) in May 2010, SPAR Australia’s bankers, Westpac Banking Corporation, restricted SPAR’s credit by capping its finance facility at $6.2 million. SPAR Australia’s financial report for the year ended 30 June 2010 noted at page 2 that as the amount of the cap imposed on the financial facility by Westpac “presented a problem for the Group in meeting its debts, due to the large fluctuation in the Group’s cash flow, it presented a serious consideration for your Board”;
(c) the directors of SPAR Australia recorded at page 24 of the financial statements that, while they were confident that the Group would secure a $2 million capital injection by 30 September 2010 (which was a condition of the Group’s financier’s credit facility) and that they believed that the Group was a going concern and was able to pay its debts as and when they became due and payable, that statement was then qualified by the following information:
The Directors recognised that given the current legal impediment to securing a potential capital injection, difficulty of raising additional share capital from alternative sources, compliance with the Consolidated Group’s financier’s credit facility conditions and the current economic environment of reduced liquidity, there remains significant uncertainty that the Consolidated Group will continue as a going concern and, therefore, whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. No adjustments have been made relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Consolidated Group not continue as a going concern.
(d) to similar effect, the Group’s independent auditors declared that:
… there is significant uncertainty whether the group will be able to continue as a going concern and therefore whether they will realise their assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report.
127 The chief executive officer’s report for the SPAR Australia board meeting on 13 December 2010 revealed that:
(a) SPAR Australia suffered a loss of $161,000.00 for October 2010, against a budgeted profit of $11,000.00;
(b) monthly sales were under budget by $1.3 million; and
(c) SPAR Australia was engaged in a practice of holding cheques for payment to creditors and that this was causing “misreporting of both creditors and cash on hand numbers”.
128 The minutes of the extraordinary general meeting of SPAR Australia held on 31 August 2010 were also relied upon by MIS as revealing the following matters concerning the Group’s financial position as at 30 June 2010:
(a) as at that date, SPAR Australia’s financial position was deteriorating and SPAR Australia was close to insolvency when Westpac advised of the reduction in SPAR’s financial facility; and
(b) the reduction in that facility critically limited SPAR Australia’s ability to pay its debts as and when they fell due.
129 Finally, the cross-claimants contended that the minutes of the meeting of the board of directors of SPAR Australia held on 13 December 2010 revealed that:
(a) SPAR Australia had a poor profit performance caused by below budget sales; and
(b) SPAR Australia was continuing to trade at a loss.
130 Mr Aplin gave evidence, which I accept, that if he had known of the information contained in the financial statements and report for the financial year ended 30 June 2010 he would not have entered into the Franchise Agreement. He said that he already had:
… a range of issues at that time relating to volume and the flow-on effects that would have, to promotional pricing and the like, having an understanding at that time as to what the other aspects of the business were would have potentially made me feel somewhat uneasy at that stage.
131 I also accept Mr Sichter’s evidence that he would not have agreed to enter into the Franchise Agreement if he had been provided with those financial statements and reports. Mr Sichter provided the following explanation which I find to be entirely credible:
…[It] would have been very dangerous to be setting up a business arrangement with somebody who may or may not have been there in the long term and the disruption that that would have caused to our supply chain to the store. I wouldn’t have entertained it.
38 SPAR defended its position on the present appeal, as it had before the trial judge, by claiming that it had fully complied with its obligations by providing a disclosure document which was current at the time it was brought into existence. SPAR denied that it was required to create and provide a subsequent document to the same prospective franchisee. It drew attention to cl 6(1) and to the fact that the material which was not disclosed was not required at the date the disclosure document was created.
39 SPAR was obliged to give MIS a disclosure document before entering into the franchise agreement. Under cl 6(1), SPAR was required to create such a document. The obligation to give a disclosure document must be satisfied at least 14 days before entry into a franchise agreement. It may be accepted for present purposes, as SPAR argued, that the definition of prospective franchisee in cl 3 was capable of applying to MIS in July 2010. However, the purpose of the document was to give to a prospective franchisee information “to help the franchisee make a reasonably informed decision” (cl 6A). Moreover, the obligation in cl 6B is to give to a prospective franchisee a current disclosure document. The term “current disclosure document” in 6B is not defined.
40 In light of the findings of the trial judge, I do not accept that the document given to MIS complied with cl 6B of the Franchising Code at the time the franchise agreement was made. At the time the franchise agreement was made (or 14 days before it), the disclosure document was not current. Accepting, for the purpose of the argument, that there was an obligation to create a document as soon as MIS became a prospective franchisee and to give it to MIS at that time, that does not excuse a failure to have placed a current disclosure document into the hands of MIS at least 14 days before the franchise agreement was made. There is no argument available in the present case that the information not provided was inconsequential.
41 It my view, therefore, the trial judge was correct to conclude that SPAR contravened s 51AD of the Trade Practices Act. The trial judge was not obliged to set aside the franchise agreement as a result (Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101). However, it was open to do so. The trial judge decided (with some hesitation) not to set aside the franchise agreement. That appeared to be because he thought it appropriate to allow MIS to terminate the franchise agreement on payment of the break fees, as it had been told it could. In view of the finding that no case of misleading or deceptive conduct was made out, that approach is no longer available. Accordingly, it becomes necessary to decide what should be done about the breach of s 51AD.
42 In my view, the appropriate course to take is to set aside the franchise agreement. The trial judge accepted that the franchise agreement would not have been made if the current financial position had been disclosed before execution of the franchise agreement. Those findings were not challenged on the appeal. The more difficult question is the time from which such an order should take effect.
43 During the course of argument on appeal, the parties were invited to address what course should be taken if SPAR succeeded in demonstrating that there had been no failure by it to observe the requirements of s 52 of the Trade Practices Act but, nevertheless, it was properly found to be in breach of the Franchising Code. The parties were given leave, in particular, to make written submissions about the date of operation of any order that might be made that the franchise agreement be set aside for breach of the Franchising Code. SPAR made the following written submission about that issue:
3. A number of points are relevant to the issue raised by the Court.
4. The first is that there is no Cross-Appeal. The Appellants therefore cannot do worse than the orders made at trial, which provided for a net payment to the Appellants. If the Appellants do not succeed in obtaining the orders that they seek, then the Appeal should be dismissed.
44 The submission seriously misconceived the power available to the Court on an appeal. Relevantly for present purposes, s 28(1)(c) and (b) and (3) of the Federal Court of Australia Act 1976 (Cth) provide:
28 Form of judgment on appeal
(1) Subject to any other Act, the Court may, in the exercise of its appellate jurisdiction:
(a) affirm, reverse or vary the judgment appealed from;
(b) give such judgment, or make such order, as, in all the circumstances, it thinks fit, or refuse to make an order;
…
(3) The powers specified in subsection (1) may be exercised by the Court notwithstanding that the notice of appeal asks that part only of the decision may be reversed or varied, and may be exercised in favour of all or any of the respondents or parties, including respondents or parties who have not appealed from or complained of the decision.
45 To dismiss the appeal altogether, as SPAR invited, would not do justice to MIS, apart from the fact that it would perpetuate the legal error I identified earlier about the application of s 52 of the Trade Practices Act.
46 Other points, more soundly made by SPAR, were as follows:
5. The second is that the consequence of a contravention of s.51AD is not that the agreement in question is void: Masters Education Services Pty Ltd v Ketchell (2006) 236 CLR 101. Rather, as the High Court observed, the consequence of a contravention is to be found in the application of the detailed provisions in the Trade Practice Act 1974 (TPA) dealing with relief.
6. The third point is that in the Judgment the subject of the appeal, his Honour did not give separate consideration to the relief that would be granted if there was a contravention of s51AD alone. Rather, consideration of relief pursuant to ss.82 and 87 of the TPA was dependent upon the relief that his Honour was contemplating awarding for contravention of section 52 of the TPA. Thus, his Honour’s only consideration of the approach award of damages under s 82 was as to whether damages additional to those awarded for breach of s.52 should be awarded: J[157]. Further, in considering whether to set aside the agreement, his Honour concluded that he should not grant any relief that would “circumvent” the remedy he was proposing in relation to the section 52 contravention: J[165(c)]. This approach did not give adequate consideration to the appropriate consequences of the separate contravention of the Franchising Code found by his Honour.
47 In my view, these points are well made, but they only emphasise why it is now necessary to give separate attention to the breach of the Franchising Code. In my view, damages are not an appropriate remedy for the breach, which was a serious one and must now be addressed. The only effective way to do so is to set aside the franchise agreement, which on the evidence would not have been made if the breach had not occurred.
48 SPAR also argued that if the franchise agreement was set aside it should only be prospectively, and on the basis that MIS paid the break fees set out in cl 20 of the franchise agreement. In fact, MIS has been held to performance of the franchise agreement by the injunction obtained by SPAR. I do not agree that MIS should now be required to pay any break fees. Those fees are ones which, under the franchise agreement, are payable if SPAR terminates the agreement for breach by MIS. I do not accept, either, SPAR’s further argument that MIS should pay some form of penalty under cl 20 of the franchise agreement, or otherwise, due to the fact that the agreement will not run its term. That circumstance arises from SPAR’s breach of the Franchising Code.
49 MIS submitted that the franchise agreement should be set aside from its inception. It then mounted an argument about the calculation of financial loss which was not based on evidence at the trial. It suggested that the Court, on appeal, should enforce the undertaking as to damages given as the price of the injunction. This suggestion, and the calculation which it generated, overlooked the fact that MIS breached the franchise agreement, and was not entitled to withdraw from it when it did. The submission argued for the payment for restitution of lost profits of $452,000 and for damages pursuant to the undertaking of $66,850, whereas draft orders attached to the written submissions suggested figures of $11,340 and $66,850. The difference was not explained.
50 The orders proposed by MIS (and the calculation which would be necessary to support them) would only arise for consideration if the franchise agreement should now be set aside from its inception. Although, in my view, MIS is entitled to be relieved from the operation of the franchise agreement, owing to SPAR’s breach of the Franchising Code, that does not mean that there is any reason to think that MIS has suffered in a way which would require any financial adjustment in its favour, or that there should be a retrospective operation for an order setting aside the franchise agreement. Although I am satisfied that MIS was misled by SPAR about SPAR’s financial position, and I accept the evidence that MIS would not have made the franchise agreement if it had known the true position, I also accept the submission by SPAR that those matters were not shown by the evidence to have had an effect on the trading fortunes of MIS. I put aside the complaint which provided the foundation for the calculation of damages by the trial judge. Although SPAR was in breach of the Franchising Code, the franchising agreement was not void as a result. MIS, on the other hand, breached that agreement when it withdrew from it. In my view, it is not entitled to any damages arising from perceived loss of opportunity when it was restrained.
51 Therefore, while MIS is entitled to have the franchise agreement set aside, due to the breach of the Franchising Code, there is no reason to make such an order retrospective. The franchise agreement continued to apply, legally and in practice. The most orderly outcome is that it be set aside from the date of judgment on the appeal. No damages should be awarded to MIS, or to SPAR, as a result.
Damages awarded by the trial judge
52 In light of the conclusions earlier expressed, that the appeal should be upheld so far as it concerns misleading and deceptive conduct, no occasion arises to assess the challenge to the damages awarded by the trial judge.
Conclusion
53 I would uphold the appeal in part and set aside Orders 2 and 5 to 12. Setting aside Order 12 will bring the operation of the injunction to an end. I would order that the Franchise Agreement and the Special Offer Agreement made on 1 February 2011 be set aside from the date of judgment on the appeal.
Costs
54 The appropriate order is that the parties bear their own costs of the appeal and of the proceedings below.
| I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan. |
Associate:
| IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | |
| GENERAL DIVISION | NSD 1959 of 2012 |
| ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
| BETWEEN: | SPAR LICENSING PTY LTD (ACN 002 965 193) First Appellant SPAR AUSTRALIA LTD (ACN 102 281 167) Second Appellant |
| AND: | MIS QLD PTY LTD (ACN 132 323 418) First Respondent CHRISTOPHER MARTIN SICHTER Second Respondent SHARON LEE WARD Third Respondent ANTHONY PAUL APLIN Fourth Respondent |
| JUDGES: | BUCHANAN, FOSTER AND FARRELL JJ |
| DATE: | 1 MAY 2014 |
| PLACE: | SYDNEY |
REASONS FOR JUDGMENT
FOSTER J:
55 I have had the advantage of reading the Reasons for Judgment of Buchanan J in draft. I agree with the orders which his Honour has proposed and also agree with his Honour’s reasons for making those orders.
56 I wish to add some observations of my own in relation to the misleading and deceptive conduct case pleaded and run at trial by MIS and the other cross-claimants. The MIS cross-claimants pleaded that case in a Statement of Cross-Claim dated 23 November 2011 (Cross-Claim).
57 The MIS cross-claimants’ misleading and deceptive conduct case is founded upon alleged misrepresentations made to representatives of MIS by Mr Gale at a meeting which took place in about late September 2010. At that time, Mr Gale was a Senior Executive of SPAR.
58 Conduct which is alleged to be misleading and deceptive which took place in September 2010 was subject to the provisions of the Trade Practices Act 1974 (Cth). The Competition and Consumer Act 2010 (Cth) and the Australian Consumer Law did not come into effect until 1 January 2011.
59 As pleaded in their Cross-Claim and as conducted at trial before the primary judge, the MIS cross-claimants’ misleading and deceptive conduct case was a very simple one. At par 14 of the Cross-Claim, they alleged that Mr Gale made certain statements as to what SPAR would do if MIS entered into a Franchise Agreement with SPAR and how SPAR would treat the related Special Offer Agreement in the event that MIS subsequently resigned from the SPAR-franchised store business and withdrew from the Franchise Agreement. At par 16 of the Cross-Claim, the MIS cross-claimants pleaded that the representations alleged to have been made by Mr Gale were false because, in the events which happened, SPAR acted in a manner which was contrary to the manner in which Mr Gale had represented that it would act when he made the alleged representations.
60 The MIS cross-claimants’ case at trial was, therefore, that the mere non-fulfilment of a number of representations of a promissory nature was sufficient to render those representations misleading and deceptive within the meaning of that expression in s 52 of the Trade Practices Act.
61 The primary judge found that the representations were made as alleged in par 14 of the Cross-Claim. In the end, as the evidence unfolded, there was no real dispute about this at the trial. His Honour then went on to conclude that the mere non-fulfilment of those representations was sufficient to render them misleading and deceptive, thereby accepting the MIS cross-claimants’ case as pleaded and put.
62 As Buchanan J has pointed out at [17]–[21] of his Reasons for Judgment, the case propounded by the MIS cross-claimants ignored well-established principles developed in this Court as to the way in which statements made with respect to future matters are to be dealt with for the purposes of s 52 of the Trade Practices Act.
63 The difficulty created by the approach taken by the MIS cross-claimants to their case of misleading and deceptive conduct was compounded by the circumstance that SPAR did not raise in its Defence to Cross-Claim the proposition that, as pleaded, the MIS cross-claimants’ case of misleading and deceptive conduct was bound to fail nor did it make submissions to the primary judge suggesting that the MIS cross-claimants’ case did not pay any regard to the principles first developed by the Court in Bill Acceptance Corporation Ltd v GWA Ltd (1983) 78 FLR 171 and approved in subsequent cases to the effect that the mere non-fulfilment of a promissory statement is not, of itself, misleading and deceptive and that, in order to establish that a statement with respect to a future matter is misleading or deceptive, it is necessary to establish by evidence that the maker of the statement did not have reasonable grounds for making that statement at the time when the statement was made.
64 In addition, the MIS cross-claimants did not plead that they intended to rely on s 51A of the Trade Practices Act nor did they indicate by any other means to SPAR that they intended to rely upon that section.
65 At trial, SPAR contested whether the representations had been made as alleged and also put in issue whether some of the events pleaded in par 16 of the Cross-Claim had in fact occurred. It also put in issue the question of reliance. As I have said, it raised no other matters in answer to the misleading and deceptive conduct case sought to be raised by the MIS cross-claimants.
66 The primary judge found that the representations had been made as alleged. SPAR does not take issue with those findings in this appeal. It could not sensibly do so given that Mr Gale confirmed in his evidence that he made the statements as alleged.
67 Section 51A of the Trade Practices Act provided that:
51A Interpretation
(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
68 There is no doubt that the representations made by Mr Gale were “… representations with respect to a future matter …” within s 51A(1). They were also probably statements of present intention. The MIS cross-claimants made these matters clear in par 14 of the Cross-Claim. Both sides of the record must, therefore, be taken to have been well aware that the alleged misleading and deceptive conduct was said to be constituted by the making of representations as to what SPAR would do in the future if certain specified things occurred.
69 Section 51A(1) provided that a representation with respect to a future matter made by a corporation will be taken to be misleading if, at the time when the representation was made, the corporation did not have reasonable grounds for making the representation.
70 Section 51A(2) provided that, in a case based upon a representation with respect to a future matter and for the purposes of subsection (1), the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
71 For some time, there was a conflict of authority in this Court as to the effect of s 51A(2). One line of authority (exemplified by the judgment of Emmett J in Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276) stood for the proposition that all that s 51A(2) did was to cast an evidential burden on the respondent to adduce “… evidence to the contrary …”, that is to say, to adduce some evidence tending to establish that it had reasonable grounds for making the alleged statement at the time when it was made, rather than require the respondent to prove on the balance of probabilities that it had such reasonable grounds. The other line of authority (exemplified by the judgment of Stone J in Lewarne v Momentum Productions Pty Ltd [2007] FCA 1136) was to the effect that the deeming consequences of the engagement of s 51A(2) can only be defeated by a respondent who proves on the balance of probabilities that it had reasonable grounds for making the statement at the time when it was made. This view imposed the ultimate onus of proof in respect of the issue of reasonable grounds upon the respondent (representor).
72 The above difference of opinion was resolved by the Full Court in North East Equity Pty Ltd v Proud Nominees Pty Ltd (2010) 269 ALR 262 at 268–269 [29]–[35] where the Court said:
Section 51A(2) imposes an evidential burden on a respondent. It does not impose on a respondent the legal or persuasive burden of proving that reasonable grounds existed for making the representation alleged: see Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276 at [46] (Universal Sports). In Fubilian Catering Services Ltd v Compass Group (Aust) Pty Ltd [2007] FCA 1205 at [545] (Fubilian), French J said:
[545] Section 51A “… does not of itself create a cause of action, nor define a norm of conduct” … It does not create a cause of action independent of that created by s 52 when read with s 82 … It certainly casts the “evidential burden” on the respondent in the sense of an obligation to adduce evidence on the issue of whether there were reasonable grounds for making the representation. It does not impose on the representor the legal or persuasive burden to prove that it had reasonable grounds for making the representations alleged … [T]he section does not refer to the onus of proof when it applies. It merely requires the alleged representor to “adduce evidence to the contrary”. There may be a question whether the representor can discharge the evidential burden by pointing to evidence which forms part of the applicant’s case. In my opinion a respondent may rely upon evidence called by an applicant which answers the description “evidence to the contrary”.
Later at [548], French J said:
[548] … The causal connection between the respondent’s conduct [in a case based on statements of future fact] and the loss or damage claimed is not the breaking of the promise or the failure of the prediction. The causal connection which must be shown to exist is a causal connection between the loss or damage claimed and the making of the promise or prediction without reasonable grounds.
The observations of French J recorded at [29] and [30] were applied by the primary judge in the interlocutory ruling referred to at [25]: North East Equity Pty Ltd v Proud Nominees Pty Ltd [2007] FCA 1587 at [19]–[21].
An appeal to the Full Court in Fubilian was dismissed: Fubilian Catering Services Ltd v Compass Group (Aust) Pty Ltd [2008] FCAFC 53, but there was no discussion of the matters canvassed at [29]–[30].
What is said in Universal Sports and Fubilian about the evidential burden as opposed to onus of proof is important in the present case. If s 51A(1) stood alone, an applicant would have to establish the absence of reasonable grounds for making the representation. Without that, the cause of action under s 52 would be incomplete. The deeming effect of subs (2) arises only when the representor fails to adduce evidence to the contrary; that is to say, some evidence that it had reasonable grounds for making the representation. Once the representor discharges that evidential burden, the matter is thereafter dealt with under subs (1), the obligation being on the applicant to establish that the representor did not have reasonable grounds for making the representation.
The respondents illustrated the operation of the two components of s 51A by reference to one of the matters in its list of reasonable grounds, namely Proud Machinery’s letter of 30 September 2002 containing the pack out rate per hour representation. After making the representation the writer went on to explain its basis — “I have used the following as a basis of our calculation”. Then are set out pre pack line, carton filler and hand line calculations which, says the writer, explain how “we are able to achieve the desired pack out of 18.75 tonnes per hour”. The respondents submitted that while the court may not accept that the letter in fact establishes the existence of reasonable grounds, it nevertheless qualifies as “evidence to the contrary” so as to discharge the evidential burden in s 51A(2). Thus the issue reverts to subs (1) which, say the respondents, “depends entirely upon the applicant satisfying the court that the representation … is in fact misleading or deceptive as s 52 requires”.
We accept the thrust of this submission, though we think it more accurate to say that once evidence to the contrary is adduced, an applicant must, in order to establish a s 52 contravention, satisfy the court under s 51A(1) that the representor does not have reasonable grounds for making the representation.
73 A differently constituted Full Court expressed the same views in North East Equity Pty Ltd v Proud Nominees Pty Ltd (2012) 285 ALR 217 at 223–225 [28]–[34].
74 Thus, the ultimate onus of proof in respect of the issue of reasonable grounds rests with the applicant (the representee), that is to say, in a case where reliance is placed upon s 51A, once “evidence to the contrary” is adduced by the respondent (representor), it always was and remains part of the applicant’s case to prove that the maker of the statement did not have reasonable grounds for making the statement at the time when it was made. Here, the MIS cross-claimants should have pleaded that Mr Gale did not have reasonable grounds for making the representations pleaded in par 14 of the Cross-Claim at the time when he made those representations and should also have pleaded that they relied on s 51A if, indeed, they intended to do so.
75 It is highly undesirable that a case of misleading and deceptive conduct based upon representations as to future matters should have proceeded as the present case did with no reference in the pleadings or submissions to s 51A or to the issue of reasonable grounds.
76 In this Court, there is authority for the proposition that a party who wishes to rely upon s 51A ought specifically plead that it intends to rely upon that provision or ought at least to notify the counter-party that it intends to rely upon that provision (see O’Neill v Medical Benefits Fund of Australia Ltd (2002) 122 FCR 455 at 461–463 [15]–[21]). Only in that way can the counter-party be placed on fair notice that it is required to adduce “… evidence to the contrary …” (see s 51A(2)) if it is to avoid the deeming effect of s 51A(2).
77 In my view, a party who wishes to rely upon s 51A (or its equivalent in the Australian Consumer Law) should specifically plead its intention to do so in the first pleading where it is appropriate to do so. Although not bearing any ultimate onus of proof on the issue of reasonable grounds, the counter-party ought then be required to plead that it had reasonable grounds for making the relevant statement and to specify with particularity the nature of those grounds and, by way of particulars, the substance of the evidence it intends to adduce to establish those grounds.
78 Here, s 51A was not referred to at all at trial and both sides of the record conducted the trial without regard to the need to address the question of whether or not Mr Gale had reasonable grounds for making the statements which the primary judge correctly found he had made. In my judgment, there is no doubt that all of the alleged misrepresentations were statements with respect to a future matter. A difficult question arises in circumstances such as the present. That is this: Is the Court obliged to take account of s 51A even though its attention has not been drawn to the section and even though the applicant (representee) placed no reliance upon it? In the present case, for the reasons given by Buchanan J, that question does not need to be decided because SPAR has overcome the impact of s 51A in any event by evidence adduced by it at the trial.
79 At [24]–[26] of his Reasons for Judgment, Buchanan J has extracted portions of the evidence given by Mr Gale at the trial. His Honour has characterised that evidence as evidence establishing that Mr Gale had reasonable grounds for making the representations which he was found to have made at the time when he made those representations thereby negating the deeming effect of s 51A(2) and also providing a sound foundation for a finding on the balance of probabilities that Mr Gale did, in fact, have reasonable grounds for making those representations at the time when he made them.
80 This analysis is somewhat artificial in the sense that it proceeds down the path of considering the impact of s 51A of the Trade Practices Act in circumstances where the MIS cross-claimants never gave any indication that they relied upon that provision. Further, it seeks to address the effect of s 51A in the present case by drawing on evidence which was tendered for an entirely different purpose and which was tendered at a time when the question of reasonable grounds and the impact of s 51A was simply not in the arena.
81 I think that a party ought not to be permitted to rely upon s 51A unless it pleads that it intends to rely upon that provision. In this way, fair notice will be given to the counter-party so that it can consider what evidence, if any, it wishes to adduce in order to deal with the implications of s 51A in the particular case at hand.
| I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster. |
Associate:
Dated: 1 May 2014
| IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | |
| GENERAL DIVISION | NSD 1959 of 2013 |
| ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA |
| BETWEEN: | First Appellant SPAR AUSTRALIA LIMITED ACN 102 281 167 Second Appellant |
| AND: | MIS QLD PTY LTD ACN 132 323 418 First Respondent CHRISTOPHER MARTIN SICHTER Second Respondent SHARON LEE WARD Third Respondent ANTHONY PAUL APLIN Fourth Respondent |
| JUDGE: | BUCHANAN, FOSTER and FARRELL JJ |
| DATE: | 1 MAY 2014 |
| PLACE: | SYDNEY |
REASONS FOR JUDGMENT
FARRELL J:
82 I have had the benefit of reading in draft the reasons of Buchanan J. I agree with his Honour’s conclusions. I also agree with his Honour’s reasons except insofar as they relate to the claimed breaches of the Franchising Code of Conduct (the Code).
83 I agree with his Honour in his conclusion that the appellant breached the Code and the orders he proposes. I differ from him and the learned primary judge on the construction of the Code about the disclosure obligations it imposes on franchisors.
84 Relevant provisions of the Franchising Code are set out at [35] of Buchanan J’s reasons. The Code requires franchisors to, among other things, provide certain information to franchisees and prospective franchisees. That information must be provided by way of a disclosure document. Clause 6(1) of the Code directs a franchisor to create a disclosure document “before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement”.
85 Clause 6B(1) requires the franchisor to give a “current disclosure document” (emphasis added) to a prospective franchisee. It does not say when this is to occur. Clause 10(d) directs the franchisor to give a “disclosure document” to a prospective franchisee and adds the temporal requirement that the document be given “at least 14 days before the prospective franchisee … enters into a franchise agreement or an agreement to enter into a franchise agreement”. On its face, the obligation imposed by cl 10(d) relates only to a “disclosure document” and not a “current disclosure document”. However, in light of the “purpose of disclosure document” set forth in cl 6A, the absence of the adjective “current” in cl 10(d) is likely to be of no consequence.
86 Clause 6A(a) provides, relevantly, that the purpose of a disclosure document (insofar as it relates to a prospective franchisee) is
… to give to a prospective franchisee, or a franchisee proposing to enter into, renew, extend or extend the scope of a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise”.
I concur with the view of Buchanan J that a “prospective franchisee” and a “franchisee” are given differential treatment by the terms of the Code and that the primary judge erred in treating them as coextensive. However, to avoid an absurdity where a provision would commence with a reference to a “prospective franchisee” and then contain no content relevant to a “prospective franchisee”, I accept that “franchisee” in the latter part of cl 6A(a) should be taken to refer to both a “franchisee” and a “prospective franchisee”. The use of the inclusive commas preceding “or a franchisee” and following “a franchise agreement” supports this approach.
87 If a disclosure document is to be given for the purpose set out in cl 6A(a), it will need to be current enough to enable the prospective franchisee to make a “reasonably informed decision about the franchise”. Where I must respectfully depart from Buchanan J’s reasons is in relation to the time at which the currency of the disclosure document and its capacity to “help the [prospective] franchisee to make a reasonably informed decision about the franchise” should be assessed.
88 The terms of cl 6B(1)(a) indicates that the franchisor’s duty to give a current disclosure document is discharged once it has been provided to a prospective franchisee. If this occurs at least fourteen days before the prospective franchisee enters into a franchise agreement or an agreement to enter into a franchise agreement, the obligations imposed by both cl 6B(1)(a) and cl 10(d) will be discharged. It is true that cl 10 appears to operate on the assumption that the franchisor will provide the documents referred to in paragraphs (a), (b) and (c) reasonably proximately to the time at which the franchise agreement is executed, but this implication does not amount to a requirement. For such a requirement to exist, paragraph (d) would need to express not only a minimum time but also a maximum time in which those documents are to be provided to the franchisee.
89 If there is a material change in circumstances between the time that the franchisor gives the franchisee a disclosure document and the franchise agreement is signed, there is no requirement imposed by the Code to provide a fresh disclosure document (other than that provided for by cl 18 and paragraph 22 of Annexure 1 which are not germane to this case). I can see no basis to read into the Code a requirement that a franchisor update that document and provide it to a prospective franchisor at least 14 days prior to the signing of the agreement. I accept that there are good policy reasons that support imposing such an obligation but, in light of the express consideration given to the need to disclose materially relevant facts in cl 18, paragraph 22 of Annexure 1 and the clear temporal requirement “at least 14 days” in cl 10(d) – I do not consider that there is a textual basis for doing so. Perhaps the legislature should give consideration to imposing an obligation on a franchisor along the lines of s 719 of the Corporations Act 2001 (Cth). It is also open to, and it would be prudent of, a prospective franchisee to ask a franchisor before entering into the franchise agreement whether there have been any material changes to the information in the disclosure document since the franchisee received it.
90 However, I agree with Buchanan J’s conclusion that the disclosure document did not comply with the Code. Clause 6(2)(a)(i) provides that any such disclosure document must be in accordance with the requirements of Annexure 1 to the Code if the expected annual turnover of the franchised business is going to be $50,000 or more during the term of the franchise agreement. It was not in dispute that that was this case.
91 Annexure 1 of the Code sets out, in prescriptive detail, what must be included in that disclosure document. Relevantly, paragraph 20 of Annexure 1 requires that the disclosure document include “[a] statement as at the end of the last financial year, signed by at least 1 director of the franchisor, whether in its directors’ opinion there are reasonable grounds to believe that the franchisor will be able to pay its debts as and when they fall due” (a solvency statement).
92 The disclosure document provided by the appellants contained such a statement in relation to the 2008/2009 financial year. The purported disclosure document was provided in July 2010 – the first month of the 2010/2011 financial year. In light of the mandatory terms of cl 6(2)(a)(i) of the Code, for that disclosure document to have been provided in accordance with the requirements of the Code, it needed to contain a solvency statement in relation to the 2009/2010 financial year.
93 This approach is only reinforced by the purposes of a disclosure document as expressly identified by cl 6A(a) of the Code: “to give to a prospective franchisee, or a franchisee proposing to enter into, renew, extend or extend the scope of a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise”. If the mandate in cl 6(2)(a)(i) is not adhered to strictly (as the use of the word “must” indicates it should be), the purposes of the Code are frustrated because the franchisee or prospective franchisee has not been provided with enough current information to make such a “reasonably informed decision”.
94 This conclusion is buttressed by two other elements of the scheme established by the Code:
1. the obligation to give a “current disclosure document” (emphasis added) to a prospective franchisee or a franchisee under cl 6B(1);
2. the fact that a clear intention that the Appendix be complied with strictly is evident from other provisions of the Code including, for example, cl 7 which directs that the information in a disclosure document “must be set out … in the form and the order, and under the number set out in Annexure 1 …. and … under the titles used in the relevant Annexure”.
95 Notwithstanding this, senior counsel for the appellant urged the Court to adopt a “practical meaning to allow the franchise industry to operate in a sensible and commercial way”. I take this as an appeal to adopt the reasoning of the High Court in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) CLR 297. In that case, Mason and Wilson JJ observed at 320-321 that:
The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction.
… the propriety of departing from the literal interpretation … extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.
96 Senior counsel suggested that the conclusion that I have come to would be a draconian consequence (effectively, that no disclosure document could be provided in a new financial year until the previous financial year’s accounts had been settled) and that, accordingly, the requirement to adhere to Appendix 1 should be read subject to the overriding obligation in cl 6B that the information must be current.
97 With respect, it would be inappropriate to apply a general overarching obligation such as that contained within cl 6B in such a way as to contain and reduce the standard set by the express words of Appendix 1, paragraph 20. The approach advocated for by Mason and Wilson JJ in Cooper Brookes calls for a consideration of the legislative purpose of the enactment being interpreted. The patent purpose of the Code, consistent with the prescriptive disclosure obligations set out in it, is the protection of franchisees and prospective franchisees by the provision of information to them. The perils for a franchisee in entering into an arrangement with an insolvent franchisor are obvious. In the absence of clear words requiring the convenience of the franchisor to be taken into account, I can see no basis for a reading of cl 6B which would have the effect of confining or qualifying the express words of Appendix 1. Rather, it should be read as reinforcing them.
98 Furthermore, the Explanatory Statement to the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (the enactment that contains the Code) reinforces this interpretation: see Acts Interpretation Act 1901 (Cth) s 15AB. Several points are particularly pertinent:
1. The notes to cl 6 specifically state that “[a]ll issues contained in Annexures 1 or 2 of the code (whichever is relevant) must be addressed”; and
2. The notes to Annexure 1 states that “Annexure 1 details the minimum information required to be contained in a disclosure document to be provided to a franchisee or prospective franchisee” (emphasis added).
99 For completeness, I acknowledge that one of the purposes of the Code set forth in the Explanatory Statement is to “raise the standards of conduct in the franchising sector without endangering the vitality and growth of franchising”. Such a purpose necessarily demands that a balance be struck between regulation and the free growth and expansion of industry. The mandatory terms employed in cl 6 and paragraph 20 of Annexure 1 suggest that this has already been factored into that balancing exercise.
100 Because the disclosure document provided to the respondents was not in accordance with Appendix 1 of the Code, I do not accept that the disclosure document provided discharged the appellants’ obligations under cll 6B(1) and 10(d) of the Code.
101 I agree with the orders proposed by Buchanan J for the reasons which he gave.
| I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. |
Associate:
Dated: 1 May 2014
