FEDERAL COURT OF AUSTRALIA

Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    Orders 1, 2 and 11 (in so far as they concern the appellant) made by the Federal Court of Australia on 3 June 2014 be set aside.

3.    Costs be reserved.

4.    Within 14 days of the date of this judgment, the parties file and serve either:

(a)    a joint proposed minute of order in relation to costs; or

(b)    in the event of disagreement, proposed minutes of order in relation to costs with short written submissions in support.

5.    The parties have liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT ORDERS THAT:

1.    The appeal be allowed in part.

2.    Within 14 days of the date of this judgment, the parties file and serve either:

(a)    a joint proposed minute of order; or

(b)    in the event of disagreement, proposed minutes of order with short written submissions in support,

reflecting these reasons, including as to costs.

3.    Costs be reserved.

4.    The parties have liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1    Marmax Investments Pty Ltd (“Marmax”) and Spanline Weatherstrong Building Systems Pty Ltd (“Spanline”) appeal from two decisions of a single judge of this Court: RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2014] FCA 409 (“first reasons for judgment”) and RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2014] FCA 514 (“second reasons for judgment”).

2    The case concerns a protracted dispute between Spanline, Marmax and RPR Maintenance Pty Ltd (“RPR”) over the various parties’ rights and obligations in connection with Spanline franchise businesses operated by Marmax and RPR respectively on the south coast of New South Wales. In circumstances described below, RPR and Marmax had franchises to conduct Spanline businesses in adjacent territories. The dispute primarily concerns rights and obligations following the grant of “an exclusive franchise to conduct the franchised business” in specified territory.

3    Among other orders, the primary judge ordered Marmax and Spanline to pay RPR damages for breach of contract. The damages awarded in RPR’s favour against Marmax totalled $9,423, in respect of which Spanline was found to be jointly and severally liable. Additionally, Marmax was ordered to indemnify RPR in respect of any costs and expenses (as assessed) incurred by RPR relating to the bringing of the proceeding as against Marmax, such costs and expenses to include RPR’s costs of its interlocutory application the subject of a decision of Yates J: RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2012] FCA 681.

4    The primary judge ordered Spanline to pay RPR additional damages of $120,834, as well as damages for RPR’s costs of the proceedings against Spanline.

Grounds of appeal

5    The notices of appeal were complex. Marmax raised 17 grounds of appeal. Spanline ultimately pressed 15 grounds of appeal.

6    The issues included the duration of certain contracts, the interpretation of the express terms of various agreements and the scope of Spanline’s implied contractual obligation to do all such things as were necessary to enable RPR to have the benefit of its franchise agreements.

7    Then, there were issues concerning whether Spanline or Marmax had breached their respective contractual obligations; whether RPR had demonstrated that it suffered loss as a result of any breaches of contract by either Spanline or Marmax; whether that loss was a simple loss of profits or a loss of the opportunity to earn profits; and whether any losses included the costs and expenses of the litigation.

Summary of conclusions

8    For the reasons given below, we will allow Marmax’s appeal, although not on all grounds. In summary, we have concluded that the primary judge erred in finding that there was a contractual relationship between Marmax and RPR (pursuant to a sub-franchise agreement) after about February 2005. As a result, we have concluded that Marmax’s conduct in doing work in RPR’s territory during the period September 2007 to July 2008 did not breach the sub-franchise agreement. Further, we have concluded that Marmax’s “incursions” into RPR’s territory in 2007 and 2008 did not breach the transfer of business agreement between Marmax and RPR. It follows that Marmax is not liable to pay damages to RPR.

9    Marmax succeeds on grounds 3, 4, 7, 12, 16 and 17 of its notice of appeal.

10    Spanline’s appeal will be allowed in part. In our view, the primary judge erred when he found that Spanline breached its contractual obligations to RPR by not taking “reasonable and available” steps to ensure that RPR’s territory remained exclusive. We respectfully disagree that Spanline breached its obligations to RPR by failing to investigate adequately the complaints it received from RPR about Marmax’s activities. We also disagree that Spanline’s failure to demand that Marmax give full disclosure of work it had done in RPR’s territory was a breach of contract. However, we accept that the permission given by Spanline to Marmax to perform work in RPR’s territory did involve a breach of contract and that this breach caused RPR loss being the lost opportunity to secure the work performed by Marmax.

11    Accordingly, Spanline succeeds in part on grounds 5, 7 and 16 and on grounds 19 and 20 of its notice of appeal.

RELEVANT FACTS

12    Through a national network of franchises and sub-franchises, Spanline designs, manufactures and sells home extensions or additions, including patios, roof awnings or covered verandas, glass and screened enclosures and carports.

13    At all relevant times, Mr Anthony Way was the managing director of Spanline.

Franchise agreements between Spanline and RPR

14    At the relevant times, the directors of RPR were Mr and Mrs Marron.

15    In 2001, RPR entered into a written five year franchise agreement with Spanline to conduct a business called “Spanline Home Additions South Coast” (“first RPR franchise agreement”). Under the agreement, Spanline granted to RPR “an exclusive Franchise to conduct the Franchised Business in the Territory”. The “Franchised Business” was defined to mean “the business of retail sale, installation and trade wholesales conducted by the Franchisee under this Agreement”. The “Business” was defined to include “the building of additions and improvements to residential and commercial buildings and the granting of franchises to conduct the Business”. The “Territory” was defined as “NSW South Coast Area, as per attached hatched map”. The map identified the south coast of New South Wales from just south of Campbelltown to the border with Victoria, and included an area known as the “Southern Highlands” covering the towns of Mittagong and Bowral.

16    The first RPR franchise agreement was accompanied by a document entitled “Spanline Home Additions Disclosure Document” (“first disclosure document”).

17    The first RPR franchise agreement was expressed to expire on 17 January 2006. There is no evidence that it was replaced with a further agreement until August 2009, when RPR and Spanline executed another written franchise agreement (“second RPR franchise agreement”). By this time, RPR had entered into the various agreements with Marmax described below.

18    It is convenient to set out relevant terms of the second RPR franchise agreement, because the primary judge focussed his attention on that agreement when considering the proper interpretation of various agreements between the parties.

19    Clause 2.1 of the second RPR franchise agreement provides:

The Franchisor grants to the Franchisee an exclusive Franchise to conduct the Franchised Business within the granted Spanline Franchise area and also provides the rights to manufacture and wholesale and/or supply of Spanline patented products to other Spanline Franchisees throughout New South Wales … in consideration of payment by the Franchisee to the Franchisor the Franchise Fee and the other Payments on the terms of this Agreement.

20    The phrase “granted Spanline Franchise area” was not defined. However, “Territory” was defined as “South Coast Area as per attached hatched map”. The primary judge noted that this map “excised” Marmax’s franchise area in the Illawarra (around Wollongong) from the hatched area. In other words, the “Territory” was the same as the area identified in the first RPR agreement except that it did not include Marmax’s franchise area. Although his Honour did not say so explicitly, we understand his Honour’s subsequent references to “RPR’s territory” to refer to the area identified by the map attached to the second RPR franchise agreement.

21    In the second RPR franchise agreement, the “Franchised Business” was defined to mean “the business of retail sale and the installation of the Products to existing residential dwellings for consumers conducted by the Franchisee under this Agreement in the Territory”. The “Products” were “the Spanline Home Addition Products specified in Manuals, Spanline MastaLink Codes and Spanline Warranty”.

22    Clause 5.1 of the second RPR franchise agreement provided:

The Franchisee must conduct the Franchised Business from the Business Premises and must not relocate the Franchised Business to other or additional premises without the prior written consent of the Franchisor.

23    Clause 6 of the second RPR franchise agreement set out obligations imposed on RPR including, by clause 6.14, that the franchisee must not “trade the Franchised Business or any similar business outside the Territory nor trade any similar business within the Territory”.

24    Clause 6.5 provided that the franchisee must:

Without the prior written consent of the Franchisor not substitute nor amend the Spanline building contract, the Spanline building product titles, patented products approved building designs, product specifications, engineering, building and construction methods, the approved Franchise Business Name, the Franchise corporate, sales, promotion, advertising and brand images, the Product warranties and the franchise software approved by the Franchisor.

25    Clause 8 of the disclosure document which accompanied the second RPR franchise agreement (“second disclosure document”) provided relevantly:

The franchise is exclusive for the franchised territory. No other Spanline franchisee may operate a business that is substantially the same as the franchised business in that territory. The Franchisor or an associate of the Franchisor may not operate a business nor establish other franchises that are substantially the same as the franchise in that territory.

The Franchisee may not operate a business that is substantially the same as the franchised business outside the territory.

The Franchisor may not change the territory without the consent of the Franchisee….

26    The second disclosure document also provided relevantly:

10. SUPPLY OF GOODS OR SERVICES BY A FRANCHISEE

(a)     Restrictions on the goods or services that the Franchisee may supply

The Spanline products sold and installed by a Franchisee to a customer must be made and installed by the Franchisee in accordance with the Spanline manuals and comply with the Spanline Mastalink Codes. This enables the Franchisee to give a Spanline warranty for the products.

11. SITES OR TERRITORIES

The choice of the site for the retail franchised business made by the Franchisee must be in a prominent location for retailing business within the territory. …

…

15. FRANCHISOR’S OBLIGATIONS

The Franchisor’s obligations are set out in the Spanline Franchise Agreement attached. The Franchisor’s obligations include the granting to the Franchisee of an exclusive franchise to conduct the franchised business in the territory with the right to use the intellectual property.

…

17. SUMMARY OF OTHER CONDITIONS OF AGREEMENT

(a) The Spanline Retail Franchise Agreement provides for conduct of the business of retail sale and the installation of the Products to existing residential dwellings for consumers by the Franchisee under this agreement. …

Sub-franchise agreement between Spanline, RPR and Marmax

27    In 2003, RPR obtained Spanline’s consent to “sell” part of its franchised territory to Marmax. At that time, the principals of Marmax were Anthony and David Gualdi. On 9 October 2003, RPR, Spanline and Marmax entered into a five year sub-franchise agreement by which RPR granted to Marmax “an exclusive sub-franchise to conduct the Franchised Business in the Territory” (“sub-franchise agreement”). The name of Marmax’s business was “Spanline Home Additions Illawarra”. The “Territory” was defined as “Illawarra Area as per attached hatched map” (“Illawarra area”).

28    The primary judge noted that two maps were attached to the sub-franchise agreement. The first depicted an area around Wollongong and is marked with the words “western boundary is base of escarpment” and “southern boundary is start of Shoalhaven area”. The second map appears to be similar to the map attached to the first RPR franchise agreement, except for a marking around the Wollongong area and the words “Wollongong area in relationship to franchise area.”

29    Clause 2.1 of the sub-franchise agreement provided:

The Franchisor grants to the Franchisee an exclusive sub-franchise to conduct the Franchised Business in the Territory for the Term in consideration of payment by the Franchisee to the Franchisor of the Franchise Fee and the other Payments on the terms of this Agreement.

30    The “Term” was five years expiring in September 2008. As noted above, the evidence did not address the terms on which RPR operated its franchise during the period between the expiry of the first RPR franchise agreement and the commencement of the second RPR franchise agreement. As a result, whether RPR had the capacity to continue to grant the sub-franchise from 18 January 2006 is unclear. The primary judge did not make a specific finding, but appears to have assumed that RPR continued to have the right to grant the sub-franchise for the period ending September 2008 because he ultimately found that the sub-franchise agreement operated for its full term.

31    The “Franchise Fee” was “Nil”. The other “Payments” were specified in a schedule to the sub-franchise agreement as follows:

2.1 Nil payable on the date of this agreement for the initial training

2.2 Payments for ongoing training under the Code of Business Practice with the attendance at regional seminars and appropriate conferences an undeterminable value which is a variable between franchises.

32    Clause 1.8 of the sub-franchise agreement defined “Franchised Business” to mean “the business of retail sale, installation and trade wholesales conduct by the Franchisee under this Agreement”, that is, in similar terms to the definition of “Franchised Business” in the first RPR franchise agreement.

33    Clause 6 of the sub-franchise agreement provided relevantly:

The Franchisee must:

…

6.5 not sell by retail sale the Products separately but only as part of a service to install the Products;

…

6.12 not trade the Franchised Business or any similar business outside the Territory.

34    By clause 13.1, RPR was entitled to terminate the sub-franchise agreement by giving “six months written notice of termination and the just reasons for it to [Marmax] at any time”. Marmax was also permitted to terminate the sub-franchise agreement at any time, by giving three months’ written notice “and the just reasons for it”.

35    Clauses 14 and 15 provided for the consequences of termination. Clause 14.1 set out various requirements upon Marmax in the event of termination, including to cease to conduct the Franchised Business and to do various things to protect RPR’s continuing interest in the business. Clause 14.2 provided that certain obligations did not merge on termination. Clause 14.3 provides:

For two years after termination the Franchisee, its directors and the Manager and the Guarantors must not conduct nor be financially or otherwise interested directly or indirectly in any business of a similar nature to the Franchised Business in the Territory without the prior written consent of the Franchisor and Spanline.

36    Clause 14.4 provided that Spanline would offer a franchise of the sub-franchise territory to Marmax on termination of the franchise agreement between Spanline and RPR.

37    Clause 20.2 of the sub-franchise agreement contains the following indemnity:

[Marmax] and the Guarantors jointly and severally indemnify [RPR] and Spanline in respect of any claim, action, damages, liabilities, costs and expenses incurred by [RPR] and Spanline as a consequence of any breach or default by [Marmax] and/or the Guarantors under this Agreement or in the conduct of the Franchised Business.

2004 Deed of Termination between RPR and Marmax

38    On about 18 November 2004, Marmax, RPR, the Gualdis and Mr Marron executed a document entitled “Deed of Termination” which:

(a)    terminated all previous draft agreements for the sale of part of “Spanline South Coast” to Marmax;

(b)    obliged Marmax and the Gualdis to enter into a transfer of business and loan agreement and deed of guarantee with RPR and Mr Marron within seven days of receiving the executed deed of termination; and

(c)    affirmed the sub-franchise agreement.

39    The recitals to the deed of termination included:

B. In a Sub-franchise agreement dated 9 October 2003, Spanline and RPR granted to Marmax a Spanline franchise over the Illawarra area (the “Business”)….

D. The parties have now reached a new agreement with respect to the transfer and operation of the Business and have agreed that this Deed of Termination and the associated Transfer of Business and Loan Agreement and Deed of Guarantee shall take priority over the Previous Agreements and any previous understandings or arrangements with respect to the Business.

40    Clause 2 of the deed of termination was in the following terms:

2.1 The Purchasers [Marmax and the Gualdis] agree to enter into the Transfer of Business and Loan Agreement with the Vendors [RPR and Mr Marron] within seven (7) days of the Purchasers receiving a counterpart of this Deed duly executed by the Vendors.

2.2 The Guarantors agree to enter into the Deed of Guarantee with the Vendors within seven (7) days of the Purchasers receiving a counterpart of this Deed duly executed by the Vendors.

2.3 Subject to clauses 2.1 and 2.2, the Vendors and Purchasers agree to terminate the Previous Agreements from the date of execution of the agreements referred to in 2.1 and 2.2.

41    “Previous Agreements” was defined to mean “any agreements between the Vendors and Purchasers relating to the transfer and operation of the Business before the date of this Deed, including:

(i)    the draft Contract for Sale of Business;

(ii)    the draft Supply Agreement; and

(iii)    any other binding arrangements or understandings in respect of the Business.”

42    Clause 3.3 provided that “[t]he parties affirm that notwithstanding this Deed, the [sub-franchise agreement] remains valid and binding on the parties”.

43    Clause 7.1 provided:

This document, the Transfer of Business and Loan Agreement, the Guarantee and the [sub-franchise agreement] contain the entire agreement between the parties about the sale of and continued operation of the Business. The Previous Agreements, any previous understanding, agreement, representation or warranty relating to the Business has no further effect and is replaced by this Deed, the Transfer of Business and Loan Agreement, the Guarantee and the [sub-franchise agreement].

Transfer of Illawarra business agreement between RPR and Marmax

44    Soon afterwards, RPR and Marmax executed a document entitled “Transfer of Business and Loan Agreement” (“transfer of Illawarra business agreement”) by which RPR sold to Marmax the “Spanline-Illawarra” business for $296,367.41. The purchase price was paid by an upfront payment of $116,367.41, and by vendor finance of $180,000.

45    In the agreement, “Business” is defined to mean “the business of the Vendor set out in Schedule 1, which the Purchaser has had possession of since the Adjustment Date”.

46    Schedule 1 is headed “Particulars of the sale of business”. In that schedule, the “type of business” is described as “Spanline Illawarra Home Additions”.

47    Clause 3.1 stated:

The Vendor as beneficial owner sells to the Purchaser, and the Purchaser buys from the Vendor, for the Purchase Price, the Business (including all the right, title and interest of the Vendor in the Business) on the terms set out in Schedules 1 & 2, free from any encumbrance, security or third party interest.

48    Clause 3.2 stated:

The title to, property in and risk of the Business passes to the Purchaser on and from the Completion Date.

49    Clause 3.7 contained an acknowledgement by Marmax that Spanline has consented to the sale of the “Business”.

50    Clause 3.9 of the transfer of Illawarra business agreement provided:

Except as permitted by clause 3.10, [Marmax] must not, and must ensure that each of its affiliates does not, during each restraint period in the South Coast Franchise Area:

(a)    promote, participate in, finance, operate or engage in (whether on its own account or in partnership or by joint-venture); or

(b)    be concerned or interested (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary, or as an independent contract, consultant or in any other capacity) in,

any of the Restrained Businesses.

51    “Restrained Business” was defined in clause 1 to mean:

a business, or operation:

(i)    similar to the Spanline franchise businesses such as the Business; or

(ii)    competitive with the Spanline franchise businesses such as the Business; or

(iii)    supplying similar products and services to the Spanline franchise businesses such as the Business.

52    Clause 3.8 of the transfer of Illawarra business agreement imposed upon RPR a similar restraint to clause 3.9, applicable to the “Illawarra Franchise Area”.

53    Clause 3.10 provided:

Permitted involvement

Clauses 3.8 and 3.9 do not prevent either party, together with any of its Affiliates, being the holders in aggregate of less than five per cent (5%) of the issued shares or units of a body corporate or unit trust listed on a stock market of Australian Stock Exchange Limited.

54    Clause 3.11 stated:

Vendor’s Non-interference

On and from the Completion Date, the Vendor must not, and must ensure that each of its affiliates does not, during each restraint period:

a)    Solicit, canvas or secure the custom of a person who is at the Completion Date, or was within 1 year before the Adjustment Date, a customer of the Business or the Vendor in connection with the Business;

b)    Represent itself as being in any way connected with, interested in or associated with the Business (except as its proprietor before the Completion Date) or any business conduct by the Purchaser; or

c)    Solicit, employ or engage the services of any transferring employee or any other person who becomes an employee of the Purchaser in connection with the Business.

55    There was no corresponding provision restricting Marmax from interfering with RPR’s business.

56    Clause 11.1 of the agreement provided:

11.1 [RPR] agrees that [Marmax] may enter into a Franchise Agreement with Spanline for the Illawarra Franchise Area without the consent of [RPR] and:

(a)    if required by [Marmax, RPR] shall agree in writing to terminate the Sub Franchise Agreement…; and

(b)    if required by [Marmax, RPR] shall confirm in writing that it relinquishes any rights or entitlements it held under the Spanline franchise and arising from any agreement with Spanline in respect of the Illawarra Franchise Area.

57    In February 2005, Margaret Byrne purchased 50% of the shares in Marmax from Anthony Gualdi. Mrs Byrne is the wife of Glenn Byrne, Marmax’s construction manager.

Franchise agreements between Spanline and Marmax

58    On 19 February 2005, Spanline, Marmax, David Gualdi and Mrs Byrne entered into a five-year franchise agreement with Spanline for Marmax to conduct the “Spanline Home Additions South Coast” business in the Illawarra area (“Marmax franchise agreement”).

59    The evidence was that the Marrons expected Spanline and Marmax to enter into such an agreement. At [60], the primary judge noted RPR’s contention that the parties expected Marmax to enter into a franchise agreement with Spanline directly, which would impose territorial restrictions on Marmax’s activities. However, it is not clear whether the Marrons were ever told that the agreement had, in fact, been made.

60    In April 2006, Mrs Byrne acquired David Gualdi’s remaining 50% share in Marmax. On 11 April 2006, Spanline entered into another franchise agreement with Marmax and Mrs Byrne.

61    In February 2007, Marmax entered into a further franchise agreement with Spanline.

62    The terms of the Marmax franchise agreements were relevantly similar to the terms of the second RPR franchise agreement.

Marmax’s activities in RPR’s territory

63    By late 2007, Marmax began doing jobs for customers who lived in RPR’s territory. In the 12-month period from September 2007 to September 2008, Marmax made sales of $55,515 to customers in RPR’s territory.

64    The primary judge’s reasons set out, at [79] to [147], the detailed correspondence between the parties from early June 2009 to 2012 concerning complaints by RPR about work done by Marmax in RPR’s territory. The first written complaint (from Mr Marron of RPR to Mr Way of Spanline) was dated 1 June 2009. It is not necessary to repeat the detail of the primary judge’s findings. Aspects of those findings which are germane to the appeals are set out below.

65    In response to RPR’s complaints to Spanline that Marmax was encroaching on RPR’s territory, in July 2009, Mr Way arranged for one of his staff to do a search of a database which then contained information that Marmax had done 13 jobs in RPR’s territory. Mr Way concluded that “nothing that we could see at that stage looked suspicious”. The primary judge found that this was an “unsatisfactory and unreasonable assessment of the position”.

Spanline’s “conditional permission”

66    At [89] of his Honour’s reasons, the primary judge said:

Mr Way … acknowledged in cross-examination that, during the course of his meeting with the Byrnes [in mid-July 2009], he gave them what he described as “conditional permission” for Marmax to do work outside the Marmax franchise territory and within RPR’s franchise territory. He described that permission as requiring Marmax to first tell a customer who approached Marmax about doing a job in RPR’s territory that the customer lived outside Marmax’s franchise territory, to then broadly describe the franchise territories to the customer, and if the customer then said that they were unwilling to drive to Nowra or have RPR do their job, Marmax had Spanline’s permission to service the lead. Mr Way acknowledged that he did not require the Byrnes to notify RPR of any lead they received from a customer from RPR’s territory. He said that he viewed that as “a matter between franchisees”. Mr Byrne agreed under cross-examination that the permission did not require him to tell customers that Marmax could pass on their details to Nowra.

67    At [90] of his Honour’s reasons, the primary judge rejected RPR’s submission that he should find that it was unlikely that Mr Way attached any conditions to his permission.

68    At [92], the primary judge found that Mr Way’s management of the dispute between Marmax and RPR “strongly favoured the interests of the Byrnes at the expense of the Marrons”. At [93], the primary judge inferred that Mr Way’s reason for favouring the Byrnes was because he considered that this was in Spanline’s best commercial interests. This finding was, in substance, repeated at [223].

69    As previously noted, the second RPR franchise agreement was then made in August 2009.

70    At [100] of his Honour’s reasons, the primary judge found that Mr Way had “given permission to the Byrnes to do certain projects in RPR’s territory”.

71    In September 2009, Mr Way wrote to Marmax seeking its response to further complaints by RPR in respect of four jobs and said, relevantly:

... I will not tolerate any further breeches (sic) in territory. I understand the issues that exist with the Southern Highlands and in a perfect world I know what solution would be in the best interest of the customers. However, the Marrons wisely purchased the area when the opportunity arose and unfortunately at this stage I can’t do anything about it other than warn you off contracting in that area.

72    At [102] to [104] of his Honour’s reasons, the primary judge found:

[102] Mr Way confirmed in cross-examination that his reference in the letter to “in a perfect world” was a reference to his desire that RPR set up a showroom in the Southern Highlands and have a local telephone number for that area. He also acknowledged that RPR was under no legal obligation to take these steps. Mr Way’s “warning” to the Byrnes was at odds with the permission he had given in mid-July. Unsurprisingly, Mr Byrne contacted him about the inconsistency and then followed that up with a letter dated 8 October 2009 to Mr Way.

[103] In that letter, the Byrnes provided comments on the 4 jobs identified in Spanline’s letter dated 30 September 2009. The Byrnes wrote (emphasis added):

We are fully aware that the Southern Highlands area belongs to Spanline South Coast.

Back in July when we had previous allegations made by Spanline South Coast, you gave us permission to service clients that walk into our Showroom from the Southern Highlands area, as they would not travel another hour to Nowra.

As I mentioned in our phone call on the 30th September this leaves us now in a predicament, has (sic) we have a project in Council waiting approval. Could you please advise us where we stand on this issue now?

[104] It is clear from this letter that the Byrnes were troubled by what they regarded as the inconsistency between the “permission” which Mr Way had granted them during the course of their meeting in mid-July 2009, and the contents of his letter dated 30 September 2009. It is also notable that there is no reference in the letter to any understanding on the part of the Byrnes that they were to contact RPR about leads arising from customers from the Southern Highlands who walk into their showroom. That is consistent with their understanding that there was no such requirement. I find that in fact there was no such requirement.

73    At [108] of his Honour’s reasons, the primary judge found:

Marmax continued to do jobs for customers who came into its showroom but lived in RPR’s territory. Mr Byrne gave evidence, which I accept, that he considered that if he abided by the permission given by Mr Way at their July meeting, he was unlikely to have any difficulties with Spanline.

74    The primary judge made further findings concerning the ongoing dispute between RPR and Marmax over work done by Marmax in RPR’s territory are set out at [109] to [119]. At [118], his Honour said:

I accept RPR’s submission in the proceeding that Mr Way sought to justify his inaction on the basis that he did not see Spanline’s obligation as franchisor to do anything more than it in fact did in response to the complaints. Mr Way saw the matter essentially as a dispute between two franchisees. In my view, he singularly failed to grasp the franchisor’s role and legal responsibilities in the matter.

75    In response to a complaint from Mr Marron to Mr Way dated 11 May 2010, Mr Way did not take steps to check whether Marmax was servicing telephone leads. He did not raise this complaint with the Byrnes and he did not look at the available database (“the SMARTS database”) to see whether Marmax had been doing more jobs outside its territory. Mr Way did not take any action in response to the 11 May 2010 complaint because he had done a “side deal” with Marmax.

76    Later in the judgment, the primary judge noted Mr Way’s acceptance in cross-examination that he “had done a side deal with Illawarra to allow them to service Southern Highlands customers [in certain circumstances]”. At [222] of his reasons, his Honour said:

…early in the history of the matter, Mr Way gave conditional permission to the Byrnes to perform work in RPR’s territory. He admitted in cross-examination that he had done a “side deal” with them which was not authorised by the relevant franchise agreements.

77    At [224] and [225], the primary judge found:

[224] The effect of the permission was to vary and derogate from RPR’s rights of exclusivity under the first and second RPR franchise agreements. RPR never consented to that variation. Indeed, it was totally unaware that the variation had been made unilaterally by Mr Way. And Mr Way never notified RPR of the fact that he had granted the permission to the Byrnes to do certain work in RPR’s franchise territory notwithstanding that he had numerous opportunities to do so, not the least in the context of his investigations of RPR’s ongoing complaints regarding Marmax’s activities.

[225] Accordingly, I find that the permission was unlawful because it was not authorised by the terms of the first RPR franchise agreement (which is the agreement which was in place at the time the permission was granted). Nor was it subsequently regularised by the parties entering into the second RPR franchise agreement in August 2009 in circumstances where that agreement is silent as to the existence of the permission and RPR was totally unaware that it had been granted.

78    On our reading of his Honour’s reasons, the primary judge considered the “conditional permission” and the “side deal” to refer to the same authorisation given by Mr Way, given in mid-2009, and the terms of which are described at [89] of his Honour’s reasons, set out at paragraph 66 above.

79    By reference to his Honour’s findings at [100] and the evidence set out at [101], [103], [105] and [111], we conclude that his Honour found the “conditional permission” or “side deal” to concern jobs in the Southern Highlands area and not the whole of RPR’s territory.

80    Throughout 2011, RPR continued to provide Spanline with evidence of Marmax’s incursions into RPR’s territory.

81    In late October 2011, Ms Marron of RPR emailed Ms Oakley of Spanline advising that Marmax was also following up on telephone leads because Ms Marron had arranged for one of RPR’s staff to call and pretend to be a customer from the Southern Highlands.

82    On 1 December 2011, there was a meeting held between representatives of Spanline, RPR and Marmax. The primary judge found (at [130]):

…there was a discussion at the meeting about a process or protocol being agreed which would allow each franchisee to process leads in accordance with the permission which Mr Way had granted to Marmax alone back in mid-July 2009. Ms Marron was not told about that permission at the meeting or that Marmax had been acting in accordance with it for more than two years. As Mr Way candidly acknowledged, that permission was the product of a “side deal” he had done with Marmax and RPR was never told about it.

83    At [132] to [134], the primary judge found:

[132] After the meeting, on 5 December 2011 Ms Oakley circulated a document headed “Agreement”, which purported to reflect the “matters agreed by all parties on 01st December 2011”, and requested that the agreement be signed and returned to Spanline. The “Agreement” was expressed to be between RPR and Marmax (with provision also for Mr Way’s signature although Spanline was not expressly stated to be a party to the “Agreement”) and it was in the following terms:

1.    The process between both parties for handling the leads from the others’ (sic) territory is as follows:

i.    Phone call – must be referred on;

ii.    Display – customer choice, advise other territory only, but retain lead;

iii.    Referral – advise other territory only, but retain lead;

iv.    Past client – advise other territory only, but retain lead; and

that the above retained leads advice must be provided in writing to the other franchise, in a reasonable amount of time.

2.    No “badgering” of a customer should occur in circumstances where territories are crossed, but that both parties will provide in writing details of the circumstances to the other as to why the customer lead has become theirs.

3.    That no deliberate action with intent will be undertaken by either party to poach leads from others territory (sic).

4.    That, in principle, (full detailed proposal is to be submitted for approval) Spanline Weatherstrong Building Systems Pty Ltd ACN 002 968 087 t/as Spanline Australia (Spanline Australia) has approved the proposal by SpHA South Coast to establish a display centre in the Highlands area and Spanline Australia seeks that this proposal be submitted for approval as soon as possible.

5.    That, the matter of projects completed by both parties in the others’ (sic) territory as at the 01st December 2011 is resolved to the satisfaction of all parties.

[133] The “Agreement” was signed by the Byrnes but the Marrons declined to do so. On 14 December 2011, Ms Marron telephoned Spanline and advised that RPR would not sign the document. After that telephone conversation, Ms Marron wrote a letter dated 19 December 2011 in which she set out the reasons for not signing the agreement, which included the Marrons’ belief that they had exclusive territory rights under the second RPR franchise agreement which should be adhered to. She said that they saw the new agreement as amending the existing franchise arrangement and that it was open to “too many interpretations and dishonest conduct”.

[134] Ms Oakley informed Mrs Byrne on 14 December 2011 that the Marrons had refused to sign the document and that there were additional jobs about which they wished to complain. Mrs Byrne sent a reply email expressing her disappointment that matters could not be moved forward and she asked:

Where do we stand now with customers from the Highlands, coming into our showroom in the mean time?

Spanline’s December 2011 written permission and subsequent variations of permission

84    At [135] of his Honour’s reasons, the primary judge referred to an email dated 14 December 2011 from Spanline to Marmax, which described the process for attending to leads for prospects outside Marmax’s territory in the following terms:

(a)    Referrals – advise other territory of details as soon as possible, but you may retain the lead;

(b)    Past client – advise other territory of details as soon as possible, but you may retain the lead;

(c)    Display – advise prospects of alternative territory allowing prospect to make an informed decision on who they prefer to deal with; if prospect expresses preference for your franchise due to proximity to their location, advise other territory of details as soon as possible, but you may retain the lead;

(d)    Phone call – all prospects must be referred on to other territory.

85    At [138] and [139], his Honour found:

[138] …without [RPR’s] knowledge or consent, this process for dealing with leads was subject to further changes by Spanline and Marmax. First, Marmax obtained Spanline’s approval to Marmax not informing RPR of any referrals or leads. This was because, as Mr Byrne ultimately accepted in cross-examination, Marmax did not want RPR to contact the customers directly as there was a risk that if they did the business might go to RPR and not Marmax. Mr Byrne also confirmed that Spanline always gave its permission for Marmax to pursue the leads or referrals.

[139] Secondly, the process was extended to permit Marmax to retain leads which came its way by telephone and not just by customers who visited its showroom at Albion Park.

2012

86    On 1 March 2012, Spanline and Marmax entered into another five-year franchise agreement.

87    On 26 March 2012, RPR issued a “breach notice” to Spanline and a letter of demand to Marmax and then commenced proceedings in June 2012.

88    On 29 June 2012, Yates J dismissed RPR’s application for interlocutory injunctive relief against Marmax: RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2012] FCA 681. Although Yates J found a prima facie case that Marmax’s conduct was in breach of contract, he was not satisfied that the balance of convenience favoured injunctive relief, in the light of an undertaking proffered by Marmax. In a second judgment (RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd (No 2) [2012] FCA 1311), Yates J ordered that Marmax’s costs of the interlocutory application be its costs in the cause. He declined to order that RPR’s costs be its costs in the cause because the balance of convenience was plainly against the granting of the relief sought.

89    Concerning work done by Marmax in RPR’s territory, the primary judge made the following additional findings:

(a)    In cross-examination, Mr Byrne acknowledged that he considered that Marmax was at liberty to sell to customers in RPR’s territory as long as Marmax followed Spanline’s process. He further agreed that, over the 20 month period after RPR had failed to obtain interlocutory relief, Marmax had done jobs in RPR’s territory to the value of approximately $200,000, which equated to approximately $10,000 a month. Mr Byrne accepted that Marmax took a calculated risk that RPR’s legal action would fail; and

(b)    Marmax admitted that it has carried out work and supplied products to customers in RPR’s franchise area in respect of approximately 50 jobs.

INTERPRETATION OF THE AGREEMENTS: EXCLUSIVITY

Primary judge’s reasons

90    At [151], the primary judge identified as “the central question of construction…whether the doing of ad hoc jobs in RPR’s territory amounted to a breach of any of the relevant agreements in circumstances where Marmax took no steps to establish a physical presence in that territory or actively promote its business to customers within RPR’s territory”.

91    The primary judge addressed the interpretation of the “exclusivity provisions” in the franchise agreements by reference to the second RPR franchise agreement at [179] and following, noting that the second RPR franchise agreement and the Marmax franchise agreements contained relevantly comparable provisions. The relevant provisions are clause 2.1 of the second RPR franchise agreement and clauses 8 and 15 of the second disclosure document, set out at paragraphs 19, 25 and 26 above.

92    At [177] and [178], his Honour set out general principles of contract interpretation.

93    At [179], his Honour recorded and rejected Spanline’s contention (also advanced by Marmax) that the exclusivity provisions were “concerned only with excluding other businesses from operating in the same territory, in the sense of establishing business operations there, and not with restricting customers from choosing where they go to purchase Spanline products”.

94    The primary judge gave the following reasons:

(1)    Spanline promised to give RPR an “exclusive” territory;

(2)    Exclusivity of territory is a valuable right for a franchisee, although it is a question of construction whether the grant of an exclusive territory necessarily brings with it exclusivity of customers;

(3)    The definition of “Franchised Business” led to the conclusion that clause 2.1 of the second RPR franchise agreement conferred on RPR the exclusive right to sell and install Spanline products to consumers whose residential products were located within its franchise territory and to constrain it from selling and installing those products to customers whose dwellings are located outside its territory;

(4)    This right “and the correlative constraint” implicit in the notion of “exclusivity” is reinforced by clause 6.14. The term “trade” in clause 6.14 should be given a broad meaning which includes the selling and installation of Spanline products outside RPR’s franchise area;

(5)    It is not appropriate to import concepts from revenue law about the meaning of “carrying on a business” into the construction of the relevant exclusive franchise agreements;

(6)    The activity of selling and installing a Spanline product is captured by the relevant phrases, namely “operate a business”, “conduct the franchised business” and “trade the Franchise Business”;

(7)    The construction advanced by Spanline and Marmax, if accepted, would seriously erode the value of the right of exclusivity in a way which does not make business sense, particularly having regard to the subject matter of the franchises which involves installation of products;

(8)    Clauses 8, 10 and 17 of the second disclosure document supported his Honour’s construction. Clause 8 expressly states that no other Spanline franchisee may operate a business that is substantially the same as the franchised business in RPR’s exclusive territory and that the franchisee may not operate a business that is substantially the same as the franchised business outside its territory. Clauses 10 and 17 reinforce the fact that the franchise agreement relates to the franchisee selling and installing Spanline products;

(9)    Clause 5 of the second RPR franchise agreement is neutral as to the correct construction; and

(10)    Clause 6.5 of the second RPR franchise agreement supported his Honour’s construction.

95    At [189], the primary judge considered that it is “sufficient to establish a breach to demonstrate that Marmax has done only a single job, involving the sale and installation of Spanline’s products in RPR’s exclusive territory”. This finding can be understood either to relate to a breach by Spanline of one of the RPR franchise agreements, or of a breach by Marmax of the sub-franchise agreement or the transfer of Illawarra business agreement.

Relevant legal principles

96    There is no challenge to the primary judge’s identification of relevant principles of contractual interpretation.

97    His Honour noted that the task of construction requires consideration of what a reasonable person would understand by the language in which the parties have expressed their agreement, having regard to the text of the agreement, the surrounding circumstances known to the parties and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40].

98    His Honour also noted that clauses in commercial contracts should be given their ordinary commercial or business like meaning, in a manner which promotes “business common sense” and should be construed fairly and broadly without being too astute or subtle in finding defects, citing Australian Broadcasting Corporation v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109-110; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 264 ALR 15 at [19]-[23] and Miwa Pty Ltd v Siantan Properties Pty Ltd [2011] NSWCA 297; (2011) 15 BPR 29,545 at [13]-[14].

Grounds 1 and 4 of Spanline’s notice of appeal

99    Ground 1 of Spanline’s notice of appeal contends that the primary judge erred in finding that the exclusivity provisions “restrained other franchisees from undertaking any work for customers who did not reside…in that franchisee’s territory”. The notice of appeal refers to [183] to [189] and [192] of the primary judge’s reasons.

100    Ground 4 contends that the primary judge should have found that, on the proper construction of the franchise agreements, the exclusivity provisions “only operated to exclude ‘other business’ from ‘operating’ or trading’ in the same territory, and that they did not operate to restrict or restrain customers from choosing which franchisee they might go to purchase ‘Spanline’ products”.

101    These grounds of appeal were not addressed separately, either in oral or written submissions on behalf of Spanline. The language of the grounds of appeal fails to pay attention to the rule of privity of contract. The primary judge did not make a finding to the effect stated in the first ground of appeal. The rules of privity prevent a finding to the effect proposed in the fourth grounds of appeal. Accordingly, these grounds of appeal must fail.

Grounds 2 and 5 of Spanline’s notice of appeal: exclusivity under the RPR franchise agreements

102    Ground 2 of Spanline’s notice of appeal contends that the primary judge erred in finding, at [184], that the effect of the exclusivity provisions was “to grant RPR the exclusive right to sell and install Spanline products to consumers whose residential dwellings [were] located within its franchise territory and to constrain it from selling and installing those products to customers whose dwellings are located outside its territory”.

103    Ground 5 of Spanline’s notice of appeal is that the primary judge erred in finding that Spanline breached any implied term, or failed to fulfil the implied obligations of good faith and fair dealing as franchisor. It was clear from Spanline’s submissions that this ground of appeal encompassed a challenge to the scope of the implied terms found by the primary judge. Thus, Spanline submitted that the primary judge erred in finding (at [210]) that there could be an implied obligation that went so far as to oblige Spanline to take steps to protect RPR’s exclusivity.

Scope of RPR’s exclusive right

104    Spanline argued that the exclusivity provisions were concerned only with excluding other businesses from operating in the same territory, in the sense of establishing business operations there, and not with restricting customers from choosing where they went to purchase Spanline products.

105    In its written submissions, Spanline contended that:

(a)    The exclusivity provisions provided an exclusive right to RPR to sell Spanline products within its franchisee territory but did not “prohibit another franchisee”, who had sold a product to a customer at a retail store located within its own franchise territory, from then installing that product in RPR’s territory. In support of this contention, Spanline noted that franchisees were prevented from selling any Spanline products unless that franchisee also installed it; and

(b)    The exclusivity provisions did not provide RPR with an exclusive right over all customers (or potential customers) who had premises located in RPR’s franchisee territory.

106    Spanline focussed attention on the franchisee’s obligation not to “trade the Franchised Business” (clause 6.14 of the second RPR franchise agreement) as “giving content” to the grant of exclusivity, submitting that:

(a)    The notion of installation is conceptually different from the notion of trading;

(b)    Installation was an activity that followed trading and is not part of it;

(c)    Construing the prohibition on trading as directed to solicitation, and making of agreements, is more consistent with a commercial construction of the agreement; and

(d)    The construction adopted by the primary judge would require Marmax to refuse to make a sale to a customer who resided in RPR’s territory.

107    In oral submissions, Dr Birch SC, senior counsel for Spanline, referred to the franchisee’s obligation to conduct the business from particular business premises (in clause 5 of the second RPR franchise agreement, set out at paragraph 22 above) as another matter that gives content to the grant of exclusivity. He accepted that his argument rested upon the proposition that conducting the franchise business (clause 2.1) was a different and broader concept than trading the franchise business (clause 6.14).

108    In our opinion, the primary judge was correct to conclude that, by the RPR franchise agreements, Spanline granted to RPR an exclusive right to sell and install ‘Spanline’ products to customers whose residential dwellings were located within its franchise territory. That construction is derived from:

(a)    Clause 2.1 of the first RPR franchise agreement by which RPR was granted an exclusive franchise “to conduct the Franchised Business in the Territory”. As set out at paragraph 15 above, the “Franchised Business” was defined to include the business of installation;

(b)    Clause 2.1 of the second RPR franchise agreement by which RPR was granted an exclusive franchise “to conduct the Franchised Business within the granted Spanline Franchise area”. Again, as set out at paragraph 21 above, the definition of “Franchised Business” in the agreement included the business of installation;

(c)    The nature of the franchised business, which involved installation undertaken at residential premises. In this regard, in addition to the definition of “Franchised Business” in the agreements, each of the disclosure documents contains a description of the franchised business as “the building of additions and improvements to residential and commercial buildings”;

(d)    Clause 8 of the disclosure documents, which contains a representation that no other Spanline franchisee may “operate a business that is substantially the same as the franchised business in [the franchised] territory”. That representation implies a right on the part of RPR to operate its franchised business free from competition from a substantially similar business operated by a Spanline franchisee in the franchised territory. We do not accept the submission that the word “operate” has a narrow or specific meaning that is intended to qualify the scope of the activities that are the subject matter of the exclusive franchise identified in clause 8. To “operate” a business means, as a matter of ordinary English, to carry on a business: cf Lawrence v Lloyd [1930] SASR 194 at 198. It is a separate question whether a single activity of installation by another Spanline franchisee within the franchised territory amounts to operating a business in that territory;

(e)    The construction contended for by Spanline involves an artificial dissection of the activities of making a contract for installation and undertaking the installation; and

(f)    The prohibition on “[trading] the Franchised Business…outside the Territory” is a protection of Spanline’s power to confer on other franchises the right to conduct the franchised business in their respective territories free from competition from other franchisees. There is no obvious reason why the words “trade the Franchised Business” cannot be read to have the same meaning as “conduct the Franchised Business”, particularly in the light of clause 8 of the disclosure documents. This construction is supported by the following statement at clause 17.2 of the disclosure documents which uses the concepts of operating and conducting interchangeably:

Restrictions on Franchisee operating other businesses during and after the term of the Franchise Agreement. The Franchisee must not conduct the same or similar business during the term of the Franchise Agreement outside the territory nor for two years after termination of the Franchise Agreement within the territory.

109    We reject the argument that the term “trade” connotes an ongoing activity or the carrying on of a business such that occasional installations of Spanline products outside the franchise territory could not offend clause 6.14 of the second RPR franchise agreement. In our opinion, that construction is inconsistent with the context in which the franchise agreements are made, which is a network of apparently exclusive franchises. A prohibition on the installation of Spanline products on residential dwellings outside the franchisee’s territory is an obvious restriction that a franchisor in the position of Spanline might seek to impose, as is revealed by Spanline’s dealings with Marmax.

110    In Montedeen Pty Ltd v Bamco Villa Pty Ltd [1999] VSCA 59 (“Montedeen”), the Victorian Court of Appeal found that the grant of a franchise and an exclusive right to use parts of the franchisor’s system within a specified territory included a prohibition upon the franchisor from itself establishing, or licensing another franchisee to establish, a branch within the relevant territory. These prohibitions were said to be the consequence of the operation of the clause by which the franchise was granted.

111    In our view, similar prohibitions arise from the grant of the exclusive franchise. That is, Spanline was obliged not to establish (or operate) its own Spanline business in RPR’s territory. Similarly, Spanline was prohibited from licensing another franchisee (including Marmax) from establishing (or operating) a Spanline business in RPR’s territory. As the Victorian Court of Appeal put it in Montedeen at [31]:

…the avowedly exclusive nature of the right conferred on the franchisee…means that the franchisor is under a correlative obligation not to infringe that right whether by directly trenching upon it or by authorising another franchisee to do so.

112    To the extent that exclusive franchises are granted (as was the case for RPR and Marmax), there was a correlative promise on the part of Spanline not to authorise other franchisees to engage in the franchise business within the territory of the franchise.

113    Accordingly, ground 2 of the Spanline notice of appeal fails.

Spanline’s correlative obligation

114    RPR contended, in effect, that the grant of an exclusive franchise by Spanline required Spanline to take steps to ensure that the exclusivity was maintained.

115    The primary judge accepted RPR’s case and concluded that Spanline’s obligations extended beyond refraining from positive conduct, basing his reasons on implied contractual terms that the parties would:

(a)    act in good faith and deal fairly with each other;

(b)    do all things necessary on their part to enable the other party to have the benefit of the contract and not do anything that would derogate from the benefit of the contract.

116    The primary judge’s analysis commences at [202]. His Honour observed that, in the circumstances of this case, the second implied term contended for by RPR “may well… [add] little to the implied terms of good faith and fair dealing”.

117    His Honour referred to the decision in Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 in which terms of the kind alleged by RPR were implied, as well as other decisions in which the possible implication of similar terms was discussed.

118    At [208] of his Honour’s reasons, the primary judge noted Spanline’s acceptance that “there is an implied term as a matter of law in the first and second RPR franchise agreements which obliges each party to exercise the powers conferred on it under those agreements in good faith and reasonably, and not capriciously or for some extraneous purpose” and that there was an obligation on Spanline and RPR to cooperate to achieve contractual objectives.

119    At [210], the primary judge gave content to the implied obligations as follows:

I consider that by not taking reasonable and available steps which were open to it to ensure that RPR’s territory remained exclusive (see further below), Spanline breached its contractual obligations to RPR under the first and second RPR franchise agreements. I also consider that Spanline breached the implied terms of those agreements relating to good faith, fair dealing and providing the other party with the benefit of the agreements. It did so by not taking reasonable and available steps to protect RPR’s exclusively (sic) and by impermissibly and clandestinely giving permission to Marmax to do work within RPR’s territory (see further below).

120    At [216] of his reasons, the primary judge said:

I accept RPR’s submission that Spanline promised to give RPR a franchise which was exclusive for the franchised territory and which prohibited any other Spanline franchisee from operating a business that was substantially the same as RPR’s franchised business in the sense described above. These promises carried with them a representation that Spanline would do all things which were necessary and reasonable on its part to enable RPR to have the benefit of that exclusivity.

Terms implied by law and necessity

121    The implication of a contractual duty to cooperate and “to do all such things as are necessary…to enable the other party to have the benefit of the contract” is well established: Secured Income Real Estate (Aust) Ltd v St Martins Investment Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 (“Secured Income”); Commonwealth Bank of Australia v Barker [2014] HCA 32; (2014) 253 CLR 169 (“Barker”) at [26] and [37] (French CJ, Bell and Keane JJ) and [61] (Kiefel J).

122    Whether an implied duty of good faith is implied by law into contracts generally has not been resolved: Barker at [42]; cf Specialist Diagnostic v Healthscope [2012] VSCA 175; (2012) 305 ALR 569 at [86]. Even so, we accept that the authorities relied upon by the primary judge would support the implication of such a term in this case.

123    In Barker, discussing the implication of contractual terms in law, French CJ, Bell and Keane JJ said at [28] and [29]:

[28] An implication in law may have evolved from repeated implications in fact. As Gaudron and McHugh JJ observed in Breen v Williams (1996) 186 CLR 71, some implications in law derive from the implication of terms in specific contracts of particular descriptions, which become "so much a part of the common understanding as to be imported into all transactions of the particular description.": (1996) 186 CLR 71 at 103, quoting Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 449 per McHugh and Gummow JJ. The two kinds of implied terms tend in practice to “merge imperceptibly into each other”: (1996) 186 CLR 71 at 103, quoting Glanville Williams, “Language and the Law – IV”, Law Quarterly Review, vol 61 (1945) 384, at p 401. That connection suggests, as is the case, that the “more general considerations” informing implications in law are not so remote from those considerations which support implications in fact as to be at large. They fall within the limiting criterion of “necessity”, which was acknowledged by both parties to this appeal. The requirement that a term implied in fact be necessary “to give business efficacy” to the contract in which it is implied can be regarded as a specific application of the criterion of necessity. The present case concerns an implied term in law where broad considerations are in play, which are not at large but are not constrained by a search for what “the contract actually means.”

[29] In Byrne v Australian Airlines Ltd, McHugh and Gummow JJ emphasised that the “necessity” which will support an implied term in law is demonstrated where, absent the implication, “the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined” ((1995) 185 CLR 410 at 450) or the contract would be “deprived of its substance, seriously undermined or drastically devalued”: (1995) 185 CLR 410 at 453. See also Jarratt v Commissioner of Police (NSW) (2005) 224 CLR 44 at 68 [78] per McHugh, Gummow and Hayne JJ. The criterion of “necessity” in this context has been described as “elusive”: (Crossley v Faithful and Gould Holdings Ltd [2004] ICR 1615 at 1627 [36]) and the suggestion made that “there is much to be said for abandoning” (Pell, Treitel: The Law of Contract, 13th ed (2011), p 231 [6-043]) the concept. Necessity does, however, remind courts that implications in law must be kept within the limits of the judicial function. They are a species of judicial law-making and are not to be made lightly. It is a necessary condition that they are justified functionally by reference to the effective performance of the class of contract to which they apply, or of contracts generally in cases of universal implications, such as the duty to cooperate. Implications which might be thought reasonable are not, on that account only, necessary: University of Western Australia v Gray (2009) 179 FCR 346 at 376–377 [139]–[142] The same constraints apply whether or not such implications are characterised as rules of construction.

124    At [36], the plurality said that the broad concept of “necessity” in this context could be defined “by reference to ‘what the nature of the contract itself implicitly requires’ [referring to Liverpool City Council v Irwin [1977] AC 239 at 254 per Lord Wilberforce]. It may be demonstrated by the futility of the transaction absent the implication. It is not satisfied by demonstrating the reasonableness of the implied term.”

125    At [85] and [86], Kiefel J said:

The requirement of necessity for the implication of a term in a contract, or a contract of a particular kind, cannot be brushed aside as "elusive". It is fundamental to the basis for implications. It is not uncertain. It has the meaning referred to in Irwin and in Byrne. It has the advantage of providing objectivity to the test employed by the courts.

It is not the particular relationship of the parties to the contract which is in question respecting implications by law. It is the relationship of employer and employee more generally which identifies what is necessary to the operation or fulfilment of employment agreements. The relationship of landlord and tenant, the example earlier referred to, necessarily implies that the landlord will ensure that the tenant has quiet enjoyment of the premises the subject of the tenancy and access to that part of the premises rented.

126    Her Honour also observed, at [90], that a term is not necessary in the relevant sense if the contract is effective without it, citing BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 and Secured Income at 605-606.

127    At [114], Gageler J said:

Determination by a court of whether or not a new term should be implied in law into a particular class of contracts has often itself been described as involving the application of a “test” of “necessity”. The sense in which “necessity” is used in this context is that of “something required in accordance with current standards of what ought to be the case, rather than anything more absolute”: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 261; Devefi Pty Ltd v Mateffy Pearl Nagy Pty Ltd (1993) 113 ALR 225 at 240. The requisite inquiry is informed by a consideration of what is needed for the effective working of contracts of that class: Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 450. But the inquiry is not exhausted by that consideration (Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 469 at 489); it does not exclude considerations of justice and policy (Hughes Aircraft Systems International v Airservices Austalia [No 3] (1997) 76 FCR 151 at 194-197; University of Western Australia v Gray (2009) 179 FCR 346 at 377 [142]). Couching the ultimate evaluation in terms of necessity serves usefully to emphasise this and no more: that a court should not imply a new term other than by reference to considerations that are compelling.

128    In Mona Oil Equipment & Supply Co Ltd v Rhodesia Railways [1949] 2 All ER 1014 (referred to by Young J in RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417 at 420-421), Lord Devlin said at 1018:

It is, no doubt, true that every business contract depends for its smooth working on co-operation, but in the ordinary business contract, and apart, of course, from express terms, the law can enforce co-operation only in a limited degree – to the extent that is necessary to make the contract workable.

129    The concept of “necessity” has significance for determining the content of the implied terms in this case. As was observed by Gummow, Hayne, Heydon and Kiefel JJ in Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 at [168], care must be exercised in identifying both the content and operation of an implied obligation to cooperate lest it be at odds with the terms upon which the parties have expressly agreed.

Duty to cooperate and do all things necessary to give the other party the benefit of the contract

130    In Secured Income, Mason J (Gibbs, Stephen and Aickin JJ agreeing) referred to the implied obligation on each party to cooperate to secure performance of the contract, citing the following passage in Mackay v Dick (1881) 6 App Cas 251, at 263:

as a general rule…where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.

131    Mason J continued (at 607 to 608):

It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith CJ said in Butt v. M'Donald (1896) 7 QLJ 68, at pp 70-71:

It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

132    In Wolfe v Permanent Custodians Ltd [2013] VSCA 331; (2013) 9 BFRA 88 at [28], the Victorian Court of Appeal stated:

Although the duty to cooperate is broadly stated in Butt v McDonald, the scope of the duty is defined by what has been promised under the contract; it is not a general duty to ensure another party obtains an anticipated benefit.

133    Similarly, in James E McCabe Ltd v Scottish Courage Ltd [2006] EWHC 538, Cooke J said:

A duty to cooperate in, or not to prevent, fulfilment of performance of a contract only has content by virtue of the express terms of the contract and the law can only enforce a duty of cooperation to the extent that it is necessary to make the contract workable. The court cannot, by implication of such a duty, exact a higher degree of cooperation than that which could be defined by reference to the necessities of the contract. The duty of cooperation or prevention/inhibition of performance is required to be determined, not by what might appear reasonable, but by the obligations imposed upon each party by the agreement itself.

134    In the absence of a fiduciary relationship, there cannot be a duty to cooperate in bringing about something which the contract does not require to happen: Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 124D. In that case, the Court of Appeal said at 125: “A contract may ‘contemplate’ many benefits for the respective parties, but each can only call on the other to provide, or cooperate in the providing of, benefits promised by that party.”

135    In the Full Court of this Court in Barker, (Commonwealth Bank of Australia v Barker [2013] FCAFC 83; (2013) 214 FCR 450) Lander and Jacobson JJ said:

[121] An alternative formulation of the [duty to cooperate], drawn from earlier High Court authority, was set out by Mason J in Secured Income at 607. It states the implied obligation as one which requires a party to a contract to do all things necessary to enable the other party to have the benefit of the contract.

…

[124] The difficulty in the present case is, as Jessup J points out, to identify the benefits conferred on [the respondent] under the contract which give rise to the implied obligation on the Bank to take the necessary steps towards deployment. We agree with his Honour that the benefits cannot be the observance of the implied term itself. Rather it is necessary to identify a benefit conferred by the contract, upon which the implied term can operate.

136    At [307], Jessup J said:

In Australia, the duty of co-operation was stated by Griffith CJ in Butt v M’Donald (1896) 7 QLJ 68, 70-71 and confirmed in the High Court in Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 607 (per Mason J, Gibbs, Stephen and Aickin JJ concurring):

It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.

Clearly, in the application of this rule, one commences with the contractual benefits to which the presumptively innocent party is entitled under the contract. What are the benefits which make the imposition of duties of trust and confidence upon the employer a step towards the achievement of contractual co-operation? If the argument is not to become circular, the benefits cannot be those that would derive from observance of the implied term itself. It is necessary to locate within the contract some other benefit for the employee, the enjoyment of which makes it necessary for the employer to act consistently with the implied term.

137    Although the Full Court’s decision was overturned by the High Court, these passages of the decision were not doubted. It is important to recognise, as did Lander, Jacobson and Jessup JJ, that the duty “to do all such things as are necessary…to enable the other party to have the benefit of the contract” is as an expression (which the plurality in Barker described as “expansive”) of the duty to cooperate. Thus, in Butt v McDonald (1896) 7 QLJ 68, Griffiths CJ applied his formulation of the duty by implying a promise in a contract for sale of a sale of property that the purchaser shall have a title to the property.

138    In Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33 at [16], Malcolm CJ said:

The obligation by each party to do all such things as are necessary on his part to enable the other party to have the benefit of the project carries with it the suggestion of an implication that the parties to a contract are obliged to deal with one another in good faith to ensure that each will have the benefit of the performance of the contract by the other. In each case, however, the question is whether the contract imposes a duty to cooperate on the first party, or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of the decision is to deprive the other party of a benefit.

139    It might be asked whether the obligation to grant an exclusive franchise, together with the correlative prohibitions, is one to which the implied duty to cooperate can have any real operation: cf Jackson Nominees Pty Ltd v Hanson Building Products Pty Ltd [2006] QCA 126 at [52] (McMurdo JA). To what extent, it might be asked, is cooperation required to make workable the relevant prohibitions? In our view, the content of the obligation to do all things necessary to give the other party the benefit of the contract required Spanline to refrain from taking positive steps that would infringe upon or cause a third party to infringe upon the exclusive franchise granted to RPR. To require Spanline to do more, such as to take positive steps to investigate possible incursions by Marmax upon the rights of RPR, would exceed the requirement of necessity. It could not be said that the absence of a requirement to investigate such conduct would render the RPR Franchise agreement nugatory, worthless or seriously undermined.

140    For the same reasons, we also do not accept RPR’s contention that Spanline was under an obligation to take steps to enforce its contractual rights against Marmax for the benefit of RPR.

141    An additional difficulty with an implied obligation to take “reasonable steps” to ensure that RPR’s territory remained exclusive is the uncertain scope of such an obligation: cf Ansett Transport Industries (Operations) Pty Ltd v Commonwealth [1977] HCA 75; (1977) 139 CLR 54 at 62; State Bank of New South Wales v Currabubula Holdings Pty Ltd [2001] NSWCA 47; (2001) 51 NSWLR 399 at [61]. The mere fact that the term operates by reference to a criterion of reasonableness is not the problem: it is that the contract does not supply any means for determining what is reasonable in the circumstances. It was argued that Spanline’s obligation to RPR could extend to termination of the contractual relationship between Spanline and Marmax. How the interests of Spanline and Marmax would be taken into account in determining whether such a step would be “reasonable” was not explored.

Good faith and fair dealing

142    In Esso Petroleum Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, Warren CJ noted at [3]:

If a duty of good faith exists, it really means that there is a standard of contractual conduct that should be met. The difficulty is that the standard is nebulous. Therefore, the current reticence attending the application and recognition of a duty of good faith probably lies as much with the vagueness and imprecision inherent in defining commercial morality. The modern law of contract has developed on the premise of achieving certainty in commerce. If good faith is not readily capable of definition then that certainty is undermined. It might be that a duty of good faith is no more than a duty to act reasonably in performance and enforcement, a long established duty: see Electronic Industries Ltd v David Jones Ltd [1954] HCA 69; (1954) 91 CLR. 288 at 297. Of course, some commentators have regarded the duty to act reasonably as properly subsumed within the duty of good faith: See N.C. Seddon & M.P. Ellinghaus, Cheshire & Fifoot’s Law of Contract, (8th ed., 2002) at 428, 10.48.

143    In Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558, the New South Wales Court of Appeal found implied terms of reasonableness and good faith in an agreement between franchisor and franchisee. As to the meaning of those terms, at [146] and [169], the Court referred with approval to the following statement of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 268:

…that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.

144    At [160], the Court of Appeal quoted, relevantly, the following statement of Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703 (43,008) at (43,014) [35]:

If [a term of good faith] is implied it will require a contracting party to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the exercise of a power conferred by the contract.

145    At [169] to [172], the Court of Appeal expressed the view that there is no distinction of any substance between the implied term of reasonableness and that of good faith. At [172] and [173], they observed that such a term “will not restrict a party acting so as to promote its own ‘legitimate interests’” and quoted with approval the following passage from Metropolitan Life Insurance v RJR Nabisco Inc 716 F Supp 1504 (1989) at 1517:

…the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation ‘which would be inconsistent with other terms of the contractual relationship’. ... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits. ... As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement.

146    Spanline submitted that the “touchstone” of the implied obligation of good faith is the improper exercise of powers under the contract. If this submission was intended to suggest that the obligation of good faith does not apply to the performance of obligations under the contract, then we disagree, having regard to the authorities set out above. However, it is necessary to identify with precision Spanline’s obligations which may be affected by the implied obligation of good faith. In particular, it is necessary to determine what obligations are entailed in the grant of the exclusive franchise.

147    In Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228, at [28], Buchanan JA said:

The content of an implied contractual duty of good faith has been variously described. In Renard [Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263] Priestley JA equated good faith with reasonableness. In Garry Rogers [Motors Aust Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703 at 43014] Finkelstein J said that an obligation of good faith required a party “not to act capriciously”. Breach of the obligation has been described as seeking to prevent the performance of the contract or withholding its benefits [Metropolitan Life Insurance Co v RPR Nabisco Inc 716 F Supp 1504, 1617 per Walker J] and as seeking to further an ulterior purpose or purpose extraneous to that for which a right or power is conferred [Far Horizons v McDonalds Australia (2000) VSC 310 at [120] per Byrne J; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 368 per Sheller JA].

148    In Central Exchange Ltd v Anaconda Nickel Ltd [2002] WASCA 94; (2002) 26 WAR 33 at [62], Steytler JA referred to the test identified in Gateway Realty Ltd v Arton Holdings Ltd (No 3) (1991) 106 Nova Scotia Rep (2d) 180 at 197 that “a party will breach an obligation to exercise rights under an agreement honestly, fairly and in good faith if that party, without reasonable justification, acts in relation to the contract in a manner which substantially nullifies the bargained for benefits or defeats the legitimate expectations of the other party.”

149    The implied obligation of good faith does not place contracting parties in a fiduciary relationship. That is, it does not require a contracting party to prefer the interests of the other contracting party, or to subordinate its self-interest: Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558 at [187]; Esso Petroleum Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 at [29].

150    In our opinion, the implied duty of good faith did not require anything more of Spanline than the duty to cooperate. RPR did not suggest to the contrary.

Ground 3 of Spanline’s notice of appeal: exclusivity under the Marmax franchise agreements

151    Ground 3 of Spanline’s notice of appeal is that the primary judge erred by finding, at [186], that the term “trade” in clause 6.14 of Marmax’s franchise agreements includes the selling and installation of Spanline products outside RPR’s franchise area.

152    There is no dispute that the terms of the franchise agreements between Spanline and Marmax are relevantly similar to the RPR franchise agreements. It follows, therefore, from our reasons above, that the primary judge was correct to conclude, at [186], that the word “trade” in clause 6.14 of the second RPR franchise agreement (and consequently, clause 6.14 of the various franchise agreements) should be construed to include the selling and installation of Spanline products.

153    Consequently, ground 3 of Spanline’s notice of appeal also fails.

Grounds 1(a) and 2 of Marmax’s notice of appeal: exclusivity under the sub-franchise agreement

154    Ground 1(a) is that the primary judge erred in his construction of the exclusivity provisions contained in clauses 1 and 6 of the sub-franchise agreement (excerpted at paragraphs 32 and 33 above) in holding that the effect of such provisions was to “grant” RPR the exclusive right to sell and install Spanline products to any customer who resided in RPR’s franchised territory. The primary judge did not make a finding to this effect. At [198] of his Honour’s reasons, the primary judge rejected Marmax’s submission that its preferred construction of the relevant exclusivity provisions in the franchise agreements should also apply to the relevant provisions of the sub-franchise agreement.

155    Ground 2 of Marmax’s notice of appeal is that the primary judge should have found that, on the proper construction of the sub-franchise agreement, Marmax was permitted to sell and install Spanline products in RPR’s territory provided Marmax did not operate any business premises or undertake any specific marketing activities in RPR’s territory.

156    In oral argument, senior counsel for Marmax, Mr Gyles SC, accepted that clause 6.12 of the sub-franchise agreement (in similar terms to clause 6.14 of the second RPR franchise agreement) protected RPR from cross-border activity. However, the written submissions filed on behalf of Marmax included a submission to the effect that clause 6.12 was intended to restrict the setting up of competing businesses. Those submissions asserted that this was the extent of the exclusivity that the franchisor could require, and that the franchisor had no control over customer preference and choice and one would infer that parties understood that there would be customer choice. Accordingly, Marmax submitted, there was no need for an explicit clause acknowledging that customers may choose to deal with any franchisee, of the kind considered in Haviv Holdings Pty Ltd v Howards Storage World [2009] FCA 242; (2009) 254 ALR 273.

157    Accepting that the franchisor had no control over customer preference and choice, for the reasons given in relation to the RPR franchise agreements, we consider that clause 6.12 of the sub-franchise agreement imposed an obligation upon Marmax to refrain from selling and installing Spanline products in the RPR territory.

158    Accordingly, grounds 1(a) and 2 of the Marmax notice of appeal must fail.

BREACHES OF CONTRACT BY SPANLINE

159    The primary judge identified, as breaches of Spanline’s obligations:

(1)    Spanline’s failure to investigate adequately complaints received from RPR about Marmax’s activities ([217] and [218]);

(2)    Spanline’s failure to demand that Marmax give full disclosure of all the work it had done in RPR’s territory ([219]);

(3)    Permission given by Spanline to perform work in RPR’s territory ([222] and [223]).

Ground 5 of Spanline’s notice of appeal: breach of implied obligations of good faith and fair dealing

160    Ground 5 of Spanline’s notice of appeal is that the primary judge erred in finding that Spanline had breached any implied term of RPR’s franchise agreement, or that it did not fulfil its implied obligations of good faith and fair dealing as franchisor.

161    In our view, the primary judge erred when he found (at [210]), that Spanline breached its contractual obligations to RPR by not taking “reasonable and available” steps to ensure that RPR’s territory remained exclusive. As a result, ground 5 of Spanline’s notice of appeal succeeds to the extent that the primary judge found that Spanline had breached any implied obligation by failing to act. That does not resolve the question, addressed below, whether the primary judge erred in finding that Spanline breached the RPR franchise agreements by permitting Marmax to perform work in RPR’s territory.

Ground 6 of Spanline’s notice of appeal: failure to investigate complaints

162    Similarly, Spanline’s failures to investigate RPR’s complaints and to demand action from Marmax do not amount to breaches of the RPR franchise agreements. Spanline was not required to use the SMARTS database to determine the scope of Marmax’s activities. Nor was it required to conduct an audit of Marmax’s business records for the purpose of testing RPR’s complaints.

163    Ground 6 contends that the primary judge erred in his finding at [218] of his Honour’s reasons. His Honour stated at [218]:

It is true that Spanline purported to investigate most of the complaints it received from RPR about Marmax’s activities. In my view, however, those investigations were seriously deficient. Spanline seemed to take the view that it was incumbent upon the Marrons to adduce the necessary evidence to establish a breach and that Spanline should not conduct its own independent inquiries other than to ask the Byrnes to respond to each individual complaint. It was plainly open to Spanline to search the SMARTS database and also conduct an audit of Marmax’s relevant business records. A search of the SMARTS database would have revealed jobs entered in that database by Marmax in respect of customers who lived in RPR’s territory including, but not limited to, particular jobs which were known to RPR and about which it complained. Spanline had access to that relevant information – RPR did not. The SMARTS database was searched by a Spanline employee at Mr Way’s request in mid-2009 following receipt of the initial complaints from RPR. That search revealed that Marmax had done 13 jobs in RPR’s territory up to that time, which was more than the number of jobs complained of by RPR at that point. Yet Mr Way did nothing with that information, primarily because he believed that he could not see anything that “looked suspicious” at that stage. As I indicated in [86] above, this was an unsatisfactory and unreasonable assessment in the circumstances. And despite the numerous subsequent complaints by RPR it appears that Spanline made no further effort to search the SMARTS database for relevant material. Nor did it conduct an audit of Marmax’s business records which presumably would have revealed relevant information and placed Spanline in an informed position to determine what further action it, as franchisor, should take against Marmax.

164    His Honour made no finding of breach by Spanline at [218] of his Honour’s reasons. It was open to his Honour to make the factual findings that he made in this passage. Accordingly, we would reject ground 6.

Ground 7 of Spanline’s notice of appeal: failure to enable RPR to have the benefit of its franchise agreement

165    Ground 7 is that the primary judge erred in finding that Spanline did not do all things that were necessary and reasonable on its part to enable RPR to have the benefit of its franchise agreement. The notice of appeal refers to [216] of his Honour’s reasons, set out at paragraph 120 above.

166    Our view as to the extent of Spanline’s obligation is set out at paragraph 142 and following above.

167    The primary judge did not make a finding of breach by Spanline at [216]. For the reasons already given, we do not accept that Spanline’s failure to investigate adequately complaints received from RPR about Marmax’s activities ([217] and [218]) or Spanline’s failure to demand that Marmax give full disclosure of all the work it had done in RPR’s territory ([219]) involved any contractual breach by Spanline.

168    The issue of the permission given by Spanline to Marmax to perform work in RPR’s territory ([222] and [223]) is addressed below.

Ground 8 of Spanline’s notice of appeal: Finding that Mr Way favoured Marmax

169    Ground 8 of Spanline’s notice of appeal contends that the primary judged erred in finding that Mr Way favoured the Byrnes and that Mr Way’s conduct was driven by a desire to maximise Spanline’s revenue. The findings, made at [93] and [223], are set out at paragraph 68 above.

170    Spanline complained that his Honour gave no reason for finding that Mr Way’s reason for favouring the Byrnes was because he considered that this was in Spanline’s best commercial interest. It was noted that the finding was contrary to evidence given by Mr Way.

171    However, at [223], the primary judge records:

Mr Way candidly acknowledged in cross-examination that he was concerned to avoid Spanline losing work to its competitors because some customers who lived in RPR’s territory were unwilling for whatever reasons to use RPR to acquire Spanline’s products. He therefore gave permission to the Byrnes to do such work rather than potentially lose such jobs to Spanline’s competitors. Whether Mr Way’s greater confidence in the Byrnes was well-placed or not is beside the point. Mr Way allowed his desire to maximise Spanline’s revenue to trump the legal rights and obligations of RPR and Spanline under their franchise agreements.

172    In our opinion, these findings are ample to support the finding at [93].

173    Accordingly, ground 8 of Spanline’s notice of appeal fails.

Ground 9 of Spanline’s notice of appeal: breach of second RPR franchise agreement

174    Ground 9 of Spanline’s notice of appeal is that the primary judge erred in finding, at [225] of his Honour’s reasons (set out at paragraph 77 above), that the so-called “side deal” was unlawful or contrary to any express or implied obligation under the RPR second franchise agreement. The “side deal” is described at paragraphs 66 to 78 above.

175    It follows from our conclusions concerning Spanline’s “correlative obligation” referred to in paragraph 112 above, that the side deal was contrary to that obligation which was an implied term of the RPR second franchise agreement.

176    Accordingly, ground 9 of Spanline’s notice of appeal fails.

DURATION OF SUB-FRANCHISE AGREEMENT (MARMAX NOTICE OF APPEAL GROUNDS 3, 4 AND 7)

177    Marmax’s “incursions” into RPR’s territory first occurred in 2007 and 2008. By that time, RPR had sold the Illawarra franchise to Marmax and the first RPR franchise agreement had expired and had not been replaced. Accordingly, there is an obvious question as to whether Marmax was still bound by the terms of the sub-franchise agreement.

178    Relevant terms of the sub-franchise agreement are set out at paragraphs 27 to 37 above.

179    The primary judge rejected Marmax’s argument that the sub-franchise agreement ceased to have effect from the commencement of the first Marmax franchise agreement in February 2005.

180    His Honour concluded (at [311]) that the sub-franchise agreement was in force until September 2008, on the basis that RPR was not required by Marmax to make a written agreement of the kind referred to in clause 11.1(a) of the transfer of Illawarra business agreement (set out at paragraph 56 above). In his view, to conclude that the agreement was terminated in February 2005, by reason of the execution of the Marmax franchise agreement, would render clause 11.1(a) “virtually otiose”.

181    On the appeal, Marmax contended that the primary judge erred in reaching this conclusion and should have found that the sub-franchise agreement was terminated in about February 2005.

Marmax’s submissions

182    The written submissions on behalf of Marmax argued that the primary judge should have found that the sub-franchise agreement was rescinded or terminated, or ceased to have effect, when the first Marmax franchise agreement was executed in February 2005. In argument, Mr Gyles SC initially submitted that, rather than having been terminated, the sub-franchise agreement was simply mutually abandoned in about February 2005 when the Marmax franchise agreement was executed. However, Mr Gyles SC accepted that there was no positive evidence of abandonment on behalf of RPR, and ultimately submitted that the sub-franchise agreement was frustrated.

183    Mr Gyles SC noted that the franchise fee under the sub-franchise agreement was nil, consistent with the fact that the agreement was intended to operate as a temporary measure only until such time as Marmax purchased the franchise for the Illawarra area, as eventually happened under the transfer of Illawarra business agreement.

184    Mr Gyles SC contended that the “sub-stratum” of the sub-franchise agreement was lost upon Spanline and Marmax’s entry into such a direct franchise agreement, by reason of clause 11 of the transfer of Illawarra business agreement. He argued that, upon this event, RPR relinquished its previous right to franchise the same territory to Marmax and that this relinquishment was implicit in the language of clause 11.1(b) by which RPR agreed, if required, to “confirm…that it relinquishes any rights or entitlements that it held under the Spanline franchise and arising from any agreement with Spanline in respect of the Illawarra Franchise Area (emphasis added).”

185    Mr Gyles SC also argued that the sub-franchise agreement and the Marmax franchise agreement “could not practically stand together”, because there could not be two exclusive franchises granted for the same territory, and the efficacy of the sub-franchise agreement depended upon the grant of an exclusive franchise by Spanline to RPR to conduct the franchise in the Illawarra area. He argued that clause 14 of the sub-franchise agreement was also directly inconsistent with the transfer of Illawarra business agreement because, among other things, it obliged Marmax to cease to conduct the very business for which it paid under the transfer of Illawarra business agreement. He contended that RPR and Marmax’s intention to rescind the sub-franchise agreement was disclosed by the transfer of Illawarra business agreement: cf Tallerman Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10; (1957) 98 CLR 93 at 144.

186    Marmax’s written submissions also referred to the following passage in Koh v Pateman [2005] WASC 172 at [78]-[80]:

78. It has been said that a contract in writing, whether or not required to be in writing, may be abandoned or terminated by an oral agreement between the parties…. However, it is not clear that a contract to abandon or discharge is required…. In any event, it is clear that an abandonment or rescission of a contract may be implied where “the parties have effected such an alteration of its terms as to substitute a new contract in its place”: [“Chitty on Contracts”, 29th ed (2004)] at 22-028. As that passage explains, abandonment or rescission is to be distinguished from a "variation which merely qualifies the existing rights and obligations". In determining which is the correct characterisation, one looks to the intentions of the parties "to be gathered from an examination of the terms of the subsequent agreement and from all the surrounding circumstances". The passage in Chitty (22-028) goes on (footnotes omitted):

Rescission will be presumed when the parties enter into a new agreement which is entirely inconsistent with the old, or, if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it. The change must be fundamental and ‘the question is whether the common intention of the parties was to “abrogate”, “rescind”, “supersede” or “extinguish” the old contract by a “substitution” of a “completely new” or “self-subsisting” agreement’.

79. However, while the inference of an intention to replace the former agreement with a new one will be more readily drawn where "the new terms are so far inconsistent with the original contract as to destroy its substance", this will not invariably be drawn in such circumstances….

80. Abandonment or termination will also be made out when a party can show that the other parties so conducted themselves as to entitle her to assume, and she did assume, that the contract was abandoned or terminated sub silentio (Chitty (supra) at 22-027)).

187    Mr Gyles SC noted that there was no evidence of any conduct by RPR after February 2005 by which it sought to exercise any rights over the Illawarra area, or any rights under the sub-franchise agreement (before the commencement of the litigation).

RPR’s submissions

188    On behalf of RPR, Ms Rees SC argued that the sub-franchise agreement could only be terminated in accordance with clause 13.1 of that agreement, set out at paragraph 34 above. It is common ground that clause 13.1 was not invoked.

189    Ms Rees SC contended that Spanline had no right to franchise the Illawarra territory unless RPR relinquished its contractual right to the territory. This contention involved the application of the property rule “nemo dat quod non habet” (no one can give a better title than he or she possesses) and can be dismissed immediately. The nemo dat rule does not apply to contractual rights that are not being assigned. Put another way, by Spanline’s grant of an exclusive franchise to RPR, a bundle of contractual rights were created in RPR’s favour, but no property was conveyed to RPR. Accordingly, the most that could be said is that, by granting a franchise to Marmax, Spanline may have breached a continuing contractual entitlement of RPR to an exclusive franchise over the Illawarra territory.

190    Ms Rees SC argued that Marmax’s reliance upon Tallerman Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10; (1957) 98 CLR 93 was misplaced because RPR was not a party to the Marmax franchise agreement. Ms Rees SC also argued that the sub-franchise agreement could co-exist with the Marmax franchise agreement in that Marmax had similar obligations to refrain from operating in RPR’s territory under each agreement.

191    Finally, Ms Rees SC argued that the primary judge was correct to find that Marmax’s construction of clause 11.1 would render the clause otiose.

Consideration

192    We do not accept that clause 13 of the sub-franchise agreement provided the sole mechanism by which the sub-franchise agreement could cease to operate. Parties to an agreement may rescind an agreement by making a subsequent agreement: Tallerman Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10; (1957) 98 CLR 93 at 144; Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520 at [22]-[24]. The parties to an agreement may also conduct themselves so as to abandon or abrogate a contract: Summers v Commonwealth [1918] HCA 33; (1918) 25 CLR 144 at 151-2; DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 434.

193    In CGM Investments Pty Ltd v Chelliah [2003] FCA 79; (2003) 196 ALR 548 at [18], Finkelstein J concluded that “the question whether an agreement has been abandoned does not require one to examine whether the parties actually had the intention of abandoning the agreement; only whether their conduct, when objectively viewed, manifests that intention”.

194    Spanline and Marmax could not unilaterally end the sub-franchise agreement by their entry into the Marmax franchise agreement. The question is whether the transfer of Illawarra business agreement operated to rescind, wholly or partially, the sub-franchise agreement, or whether RPR and Marmax conducted themselves so as to abandon the sub-franchise agreement.

195    In our view, by the transfer of Illawarra business agreement, RPR impliedly agreed to relinquish its pre-existing right to conduct a Spanline franchise in the Illawarra area, including its right to grant a sub-franchise to Marmax, upon Spanline and Marmax entering into a direct franchise agreement. This implied agreement arises from the following terms of the transfer of Illawarra business agreement:

(1)    Clauses 3.1 and 3.2 (set out at paragraphs 47 and 48 above), which necessarily imply that RPR will, so far as possible, cease to retain rights to conduct its business in the Illawarra territory following completion of the sale, having sold the relevant rights to Marmax. The very thing that Marmax paid for under the transfer of Illawarra business agreement was RPR’s business called “Spanline Illawarra Home Additions”. It was inconsistent with RPR’s sale of that business that it could assert a continuing right to conduct that business, except to the extent that this was necessary to give Marmax the benefit of the transfer of Illawarra business agreement (that is, for so long as Marmax’s source of rights to operate in the Illawarra territory was the sub-franchise agreement rather than a direct franchise agreement).

Having regard to the terms of the first RPR franchise agreement and the sub-franchise agreement, a “Franchise Agreement” of the kind contemplated by clause 11.1 can be taken to be an agreement in similar terms to those agreements, that is, an agreement by which Spanline would grant to Marmax an exclusive franchise to conduct the franchised business in the territory in consideration of payment by Marmax to Spanline of a franchise fee and other payments. For Spanline to grant such an exclusive franchise, it must have been the case that RPR’s previous rights to conduct the franchised business in the territory would be relinquished;

(2)    The express agreement in clause 11.1 that Spanline and Marmax may make a direct franchise agreement without RPR’s consent, indicating (by obviating the need for consent) an intention that RPR’s rights will be affected by such an agreement, and acknowledging that Marmax may obtain rights to operate its business from Spanline;

(3)    The words of clause 11.1(b), imposing an obligation on RPR to provide a written statement about the relinquishment of rights. Having regard to the language of the chapeau, and the requirement for the sub-franchise agreement to remain on foot as the source of Marmax’s entitlement to conduct its business in the Illawarra territory, it is reasonable to infer that the relinquishment occurred upon the commencement of a direct franchise agreement.

196    Once it is accepted that RPR’s right to grant the sub-franchise was extinguished upon Spanline and Marmax entering into a direct franchise agreement, it must follow that RPR was thereafter not obliged to perform its obligations under the sub-franchise agreement. That raises the question whether the sub-franchise agreement nevertheless remained on foot to the extent of Marmax’s obligations under the agreement.

197    In our view, the sub-franchise agreement did not survive the commencement of the Marmax franchise agreement, because the transfer of Illawarra business agreement operated to rescind the sub-franchise agreement from the time that it ceased to be the source of Marmax’s entitlement to operate the business that it purchased from RPR. RPR could not both sell the business to Marmax and sub-franchise it to Marmax. The sub-franchise agreement contained numerous provisions that were intended to protect RPR’s rights as a franchisor, which rights were sold to Marmax. An obvious example is the right to a transfer of the business name “Spanline Home Additions Illawarra” upon termination of the sub-franchise agreement. That right is plainly inconsistent with the transfer of Illawarra business agreement and could not have been intended to survive the transfer of Illawarra business agreement. Thus, the nature of the transfer of Illawarra business agreement and the inconsistency of its terms with the sub-franchise agreement give rise to an implication that the sub-franchise agreement would be terminated or rescinded upon the commencement of a direct franchise agreement.

198    Alternatively, once RPR had agreed that Marmax could enter into a franchise agreement with Spanline for the Illawarra franchise area without RPR’s consent, as it did under clause 11.1, Spanline and Marmax were thereafter free to enter into the Marmax franchise agreement without the prospect that the agreement could infringe the first RPR franchise agreement. In our opinion, by this agreement, RPR conducted itself so as to entitle Marmax to assume that the sub-franchise agreement was abandoned at least from the time of entry into any franchise agreement between Spanline and Marmax.

199    Finally, we do not accept that clause 11.1(a) would be rendered otiose if the sub-franchise agreement was terminated upon the commencement of a direct franchise agreement. In our view, clause 11.1 should be read as an evidentiary provision, entitling Marmax to written evidence of the true state of affairs if it sought such evidence which might be required by lenders to Marmax or the Gualdis (who were guarantors under the sub-franchise agreement).

Conclusions

200    Accordingly, we would allow grounds 3 and 4 of Marmax’s notice of appeal and conclude that the primary judge should have found that the sub-franchise agreement was terminated in about February 2005.

201    It follows from this conclusion that the primary judge erred in finding that Marmax breached the sub-franchise agreement by doing work in RPR’s territory during the period September 2007 to July 2008. Accordingly, ground 7 of Marmax’s notice of appeal must be allowed.

Alternative conclusion: sub-franchise agreement ceased to have effect from January 2006

202    Although it was not relied upon by Marmax, an additional difficulty for RPR in relying upon the ongoing operation of the sub-franchise agreement is that there is no franchise agreement between RPR and Spanline post January 2006 by which RPR was entitled to any rights over the Illawarra territory. Given the transfer of Illawarra business agreement and the Marmax franchise agreement, there is no reason to believe that Spanline would have given RPR further rights over the Illawarra territory once the first RPR franchise agreement expired. In those circumstances, RPR must be taken to have been incapable of performing its obligations under the sub-franchise agreement from the time of the expiry of the first RPR franchise agreement. In our view, the circumstance that RPR became incapable of granting a sub-franchise should be treated as tantamount to a destruction of the subject matter of the sub-franchise agreement, with the result that the sub-franchise agreement was frustrated by RPR’s inability to perform its obligations: cf Turner v Goldsmith [1891] 1 QB 544.

203    It would also follow from this conclusion that ground 7 of Marmax’s notice of appeal would be allowed.

Ground 1(b) of Marmax’s notice of appeal: breach of sub-franchise agreement

204    Ground 1(b) of Marmax’s notice of appeal contends that the primary judge erred in his construction of the sub-franchise agreement in finding that Marmax would breach the relevant provisions of that agreement if it did a single job involving the sale and installation of Spanline’s products in RPR’s territory. That finding is implicit in his Honour’s rejection (at [198]) of Marmax’s submission that its construction of the exclusivity provisions in the franchise agreements should also apply to the sub-franchise agreement.

205    Since we have concluded that the sub-franchise agreement did not bind Marmax after February 2005, this ground of appeal falls away.

206    However, we note that for the reasons given above, we accept RPR’s contention that the effect of clause 6.12 was to prohibit Marmax from conducting a single job involving the sale and installation of Spanline’s products in RPR’s territory. Accordingly, ground 1(b) of the Marmax notice of appeal fails.

TRANSFER OF ILLAWARRA BUSINESS AGREEMENT (MARMAX NOTICE OF APPEAL GROUNDS 5, 6, 8, 9 and 12)

207    On the appeal, Marmax’s primary case was that, properly construed, clause 3.9 of the transfer of Illawarra business agreement did not require Marmax to refrain from installing Spanline home additions in RPR’s territory during 2007 and 2008.

208    If that was wrong, Marmax argued that clause 3.9 was an unenforceable restraint of trade.

Construction of clause 3.9

209    Clause 3.9 is set out at paragraph 50 above. The definition of “Restrained Businesses” is set out at paragraph 51.

210    At [299] of his reasons, the primary judge accepted RPR’s submission that clauses 3.8 and 3.9 did “no more and no less than require the parties to comply with their obligations under the exclusive franchising arrangements”.

Marmax’s submissions

211    Mr Gyles SC argued that clause 3.9 was not directed to dealings with individual customers or individual “incursions” by Marmax into RPR’s territory. That was an issue that could have been addressed by a provision of the kind in clause 3.11. Mr Gyles SC argued that clause 3.9 was directed to the operation of businesses apart from the business acquired by Marmax. He said that the definition of “Restrained Business” concerned a business which was different from the business the subject of the transfer of Illawarra business agreement, being a business similar to or competitive with that business. Mr Gyles SC contended that this interpretation was supported by clause 3.10 (set out at paragraph 53 above) which permits involvement in a “Restrained Business” by way of shares in a listed company or unit trust.

RPR’s submissions

212    Ms Rees SC argued that the definition of “Restrained Business” expressly included the business acquired by Marmax as an example of a “Restrained Business”.

Consideration

213    Clauses 3.8 and 3.9 are directed to protecting RPR and Marmax’s interests in RPR’s territory and the Illawarra franchise area respectively. Clause 3.11 provides an additional protection to Marmax by way of a promise on the part of RPR not to interfere with the Illawarra business.

214    From RPR’s perspective, an obvious source of competition was Marmax’s business to the extent that competition was not prevented (whether as a matter of law, or a matter of practicality) by Spanline’s grants of exclusive franchises. Equally, RPR was an obvious source of competition for Marmax’s business. However, we are not persuaded that clauses 3.8 to 3.10 impose restraints on that competition. We accept that the language of clauses 3.8 to 3.10 reveals that those provisions are directed to restricting the parties’ involvement in other businesses (similar to, competitive with, or supplying similar products and services as the franchised business). In our view, the words “such as the Business” in the definition of “Restrained Business” should be read as giving content to the meaning of “the Spanline franchise businesses” by way of an example. Thus, the words refer to businesses which are similar to, competitive with or which supply similar products and services to the Spanline Illawarra franchise.

215    In further support of this interpretation, we accept that, if the parties had intended to make an agreement that Marmax would not engage in “incursions” into RPR’s territory, the agreement would have contained an agreement of the kind set out in clause 3.11.

Conclusion

216    It follows that Marmax’s incursions into RPR’s territory in 2007 and 2008 did not breach clause 3.9 of the transfer of Illawarra business agreement and ground 12 of the Marmax notice of appeal succeeds.

217    Having reached this conclusion, it is unnecessary to consider whether clause 3.9 is an unenforceable restraint of trade. On the assumption that RPR’s interpretation of clause 3.9 is correct, and Marmax’s conduct contravened clause 3.9, we would accept the general proposition, put by RPR, that RPR had an interest in protecting itself from incursions by Marmax into RPR’s territory. The facts of this case bear that out RPR’s right to exclusivity was an important aspect of the value of its franchise which, in our view, and subject to laws to the contrary (such as competition laws), it had a real and legitimate interest in seeking to protect. We do not accept that this interest was fully satisfied by RPR’s rights vis-à-vis Spanline. As this case illustrates, those rights prevented Spanline from engaging in positive conduct derogating from the grant of the exclusive franchise but they did not protect RPR in the event of incursions by Marmax which were not procured or authorised by Spanline.

Grounds 10 and 11 of Marmax’s notice of appeal: exclusivity under the transfer of Illawarra business agreement

218    Finally, grounds 10 and 11 of Marmax’s notice of appeal concern exclusivity provisions said to be contained in the Illawarra transfer of business agreement. Ground 10 contends that the primary judge erred in holding that the effect of clauses 1 and 3.9 of the transfer of Illawarra business agreement was:

(a)    To grant RPR the exclusive right to sell and install Spanline products to any customer who resided in RPR’s territory; and

(b)    That Marmax would be in breach of such provisions if RPR could establish that it did a single job involving the sale and installation of Spanline’s products in RPR’s territory.

219    Again, his Honour did not make a finding that the transfer of Illawarra business agreement “granted” RPR a right to sell and install Spanline products. Accordingly ground 10 of Marmax’s notice of appeal fails. It follows that ground 11 must also fail. However, we also note that the provisions of the transfer of business agreement are substantially different from the franchise agreements. The interpretation of the transfer of Illawarra business agreement is addressed in more detail below.

220    Accordingly, we would reject ground 11 of Marmax’s notice of appeal.

RPR’s right to indemnity under the Sub-Franchise Agreement (Marmax’s notice of appeal grounds 16 and 17)

221    In his first reasons for judgment, the primary judge concluded that RPR was entitled to rely on clause 20.2 of the sub-franchise agreement (at paragraph 37 above) to recover its costs and expenses relating to the bringing of the proceeding for Marmax’s breaches of the sub-franchise agreement.

222    In his second reasons for judgment, his Honour concluded that the indemnity extended to Marmax’s breaches of the transfer of Illawarra business agreement.

223    His Honour also concluded that the indemnity covered the costs of the interlocutory application before Yates J, as costs incurred “as a consequence of” Marmax’s breach of the sub-franchise agreement.

224    As we have concluded that Marmax did not breach either agreement, Marmax’s appeal in relation to the indemnification order must succeed.

225    Had Marmax breached either or both agreements, it contended that the indemnity did not cover the costs of the proceedings on an indemnity basis and in particular, did not cover the costs of the RPR’s unsuccessful interlocutory application.

226    Whether a contract provides a full indemnity for costs, or only an indemnity for costs assessed on a party/party basis, is a question of the proper construction of the relevant provision or provisions: Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45; Ringrow Pty Ltd v BP Australia Pty Ltd [2006] FCA 1446; Van de Veld v Ng [2011] FCA 594; Chen v Kevin McNamara & Sons Pty Ltd [2012] VSCA 229.

227    Ms Rees SC acknowledged that the indemnity, whether a full indemnity or only for party/party costs, covered only costs which were “properly incurred”: cf Re Shanahan (1941) 58 WN (NSW) 132 at 134; Ringrow Pty Ltd v BP Australia Pty Ltd [2006] FCA 1446 at [42]; University of Western Australia v Gray (No 28) [2010] FCA 586; (2010) 185 FCR 335 (“Gray”) at [51].

228    Even so, she contended that the fact of Yates J’s costs order did not preclude Marmax from then seeking to recover its costs of the interlocutory application under a contractual indemnity, on the basis that it could not be said that those costs were not properly incurred.

229    The making of a costs order does not extinguish or override a contractual right to costs: Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45 at [8]. Even so, and noting that we do not express a final view about the matter, we consider the fact that Yates J declined to make a costs order in favour of RPR to be a significant indicator that the costs should not be regarded as costs “properly incurred”.

BREACHES AND QUANTUM OF DAMAGES

Primary judge’s reasons

230    His Honour’s finding of breach (at [262]) was that Spanline had failed to ensure “that RPR’s franchise was in fact exclusive for its territory and [had not taken] reasonable and available steps to ensure that Marmax did not service customers who lived in RPR’s territory”.

231    At [264], the primary judge found that 40 of 49 jobs raised by RPR were done in breach of its right to exclusivity.

232    At [271]-[272], his Honour said:

[271] I am also satisfied that RPR suffered losses in respect of all the relevant jobs done by Marmax in its territory. I accept Ms Marron’s evidence that RPR was able to undertake that work without increasing its fixed costs or overheads. I also consider that there is a strong likelihood, with the exception of the jobs done for Mr Thomas and the Cockburns, that RPR would have secured the work for all the jobs done by Marmax in its territory in breach of its exclusivity or if its opportunities had not been taken by Marmax. I accept RPR’s submissions on this topic as outlined in [166] above.

[272] I do not accept Spanline’s contention that RPR failed to mitigate its loss. As is only too apparent from the history of the matter set out above, RPR repeatedly raised with both Marmax and Spanline the fact that its right to exclusivity was being denied by Marmax’s activities. In light of the frustrating responses it received from both those parties, it eventually brought this proceeding to enforce its rights in respect of this and other matters. I also accept Ms Marron’s evidence regarding the additional marketing steps taken by RPR during the relevant period (see [168] above).

233    At [166], the primary judge recorded:

RPR alleges that Marmax has undertaken 49 jobs (i.e. about 8 jobs a year) in RPR’s territory, for which Marmax received approximately $700,000 (excluding GST). It says that it could have, and would have, done all these jobs in circumstances where:

(a)    an additional 8 jobs a year would not have required it to increase its fixed costs or overheads;

(b)    according to RPR’s accountant, Mr Moore, RPR’s average gross profit over this period of time was 33.75%;

(c)    goods and services which RPR and Marmax were selling were relevantly identical;

(d)    the two companies were charging comparable prices and, in several instances, RPR was cheaper;

(e)    customers would not be inconvenienced by RPR servicing a lead;

(f)    customers who gave evidence or attended for cross-examination did not support the respondents’ claims that the customers would not have used RPR if Marmax had not done their job. The single exception relates to Mr John Thomas who said that he would have looked to use a local business in the Illawarra (and not RPR) if Marmax had not done his job near Robertson. RPR says that the Court could make a small discount in the light of this evidence.

Ground 16 of Spanline’s notice of appeal: jobs in respect of which RPR suffered loss

234    Ground 16 of Spanline’s notice of appeal is that the primary judge erred in finding, at [271], that RPR suffered losses in respect of all the relevant jobs done by Marmax in its territory. As a result of our conclusions above, it is necessary to examine whether Spanline breached its obligations to RPR in relation to all 40 of the relevant jobs done by Marmax in RPR’s territory.

235    From the schedule handed to the Court by Ms Rees SC as an aide memoire, it appears that 10 of those jobs were done before Spanline’s “conditional permission” or “side deal”.

236    As to the remaining 30 jobs, the primary judge did not distinguish between jobs in the Southern Highlands and jobs in other areas within RPR’s territory. From the schedule, it appears that at least some of the jobs may not have fallen within the scope of the “conditional permission” or “side deal” because they were not done in the Southern Highlands. We refer in particular to jobs done in Berry, Nowra and Ulladulla.

237    At [130] of his reasons, the primary judge referred to the permission and said that Ms Marron was not told about it at a meeting in December 2011 “or that Marmax had been acting in accordance with it for more than two years”. On the basis of this finding, we conclude that his Honour was satisfied that the jobs listed on the schedule and dated between August 2009 and October 2011 were probably done within the scope of the permission given by Spanline. Excluding jobs in Berry and Nowra, there are 14 jobs in this category.

238    The remaining 12 jobs appear to have been obtained after December 2011. The issue is whether they were covered by Spanline’s December 2011 written permission, varied in the manners identified by the primary judge. The December 2011 written permission covers work throughout RPR’s territory, that is, it is not restricted to work in the Southern Highlands.

239    The primary judge did not make a specific finding that Marmax obtained these jobs in accordance with Spanline’s permission. At [138], his Honour recorded that Mr Byrne “confirmed that Spanline always gave its permission for Marmax to pursue the leads or referrals”. At [149], his Honour noted that Mr Byrne “acknowledged that he considered that Marmax was at liberty to sell to customers in RPR’s territory as long as Marmax followed Spanline’s process”. Mr Byrne gave evidence that he followed Spanline’s procedure from March 2012. There does not appear to have been any suggestion by Spanline that Marmax did not act in accordance with its permission in obtaining various jobs in RPR’s territory. On this basis, we consider it reasonable to conclude that the remaining 12 jobs were obtained in accordance with Spanline’s permission.

240    Accordingly, we would allow ground 16, but only insofar as it concerns the 14 jobs comprising 10 jobs done prior to the conditional permission and 4 jobs done during the operation of the conditional permission but not within the Southern Highlands part of RPR’s territory.

Grounds 17 to 20 of Spanline’s notice of appeal: discount for loss of opportunity

241    Grounds 17 to 20 are in the following terms:

17. The primary judge erred in finding that there was a strong likelihood, with the exception of two jobs, that [RPR] would have secured the work for all the jobs done by Marmax in its territory in breach of its exclusivity or if its opportunities had not been taken by Marmax.

18. The primary judge should have found that there was no, or insufficient, evidence to find that [RPR] would have secured the work for any [of] the jobs done by Marmax in its territory, and that [RPR] failed to discharge its onus in this regard

19. Alternative, the primary judge erred in failing to apply a discount to the number of jobs lost by [RPR] as there was no, or insufficient evidence that [RPR] would have secured …those jobs or that the customer would have chosen [RPR] to perform their work.

20. Alternatively, the primary judge should have discounted the number of jobs said to have been lost by [RPR] as there was no, or insufficient evidence, [that RPR] would have secured…those jobs or that the customer would have chosen [RPR] to perform their work.

242    The primary judge’s findings as to the losses suffered by RPR included a finding that there was a “strong likelihood, with the exception of the jobs done for Mr Thomas and the Cockburns, that RPR would have secured the work for all the jobs done by Marmax in its territory in breach of its exclusivity or if its opportunities had not been taken by Marmax”.

243    We accept that the matters set out in [166] of his Honour’s reasons (at paragraph 233 above) support a conclusion that RPR had a very good chance of securing the relevant jobs if its opportunities had not been taken by Marmax. That inference arises, in particular, from the high degree of homogeneity of the franchised goods and services, referred to at [166](c) of his Honour’s reasons, as evidenced by the franchise system itself. His Honour accepted RPR’s submission (recorded at [166](e)) that customers would not be inconvenienced by RPR servicing a lead, despite Marmax’s evidence to the contrary. In our view, the primary judge was entitled to accept that submission on the basis of the evidence about the nature of the franchise business and the locations of the affected customers.

244    In his oral submissions in reply, Dr Birch SC argued that Spanline’s permission was to take jobs in circumstances where, consistently with the permission, the customer would not have been willing to travel to RPR’s showroom in Nowra so that there was no realistic chance of RPR obtaining the jobs. As a result, any breach could not have caused loss to RPR.

245    Dr Birch SC argued that the primary judge’s starting point in identifying the 49 jobs did not involve a decision about the likelihood that jobs would have been won by RPR but for the permission. His Honour did not ask the crucial question what jobs would have gone to Nowra but for the permission.

246    To the extent that this argument was based on the factual question whether customers would have been willing to travel to RPR’s showroom, it is answered by the primary judge’s factual finding that customers would not be inconvenienced by RPR servicing a lead. In our view, the primary judge was entitled to draw the inference which he did as to the likelihood (but not certainty) that RPR would have won those jobs.

247    Accordingly, we would not allow grounds 17 and 18.

248    As to grounds 19 and 20, we agree with Spanline’s contention that the primary judge should have applied a discount to take account of the lack of certainty that RPR would have obtained the relevant jobs.

249    The franchise agreements conferred on RPR an opportunity to obtain a benefit, namely profits from jobs done at the request of customers. Where the loss suffered depends on the exercise of a customer’s discretion to acquire services, in our view, the loss can only be calculated by reference to RPR’s chance of obtaining those customers had they not obtained services from Marmax: cf Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 at [2].

250    In Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 349, Mason CJ, Dawson, Toohey and Gaudron JJ said:

…there can be no doubt that a contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for damages for the loss of that advantage or opportunity…. So, in The Commonwealth v Amann Aviation Pty Ltd, Mason CJ and Dawson J., Brennan J and Deane J concluded that a lost commercial advantage or opportunity was a compensable loss, even though there was a less than 50 per cent likelihood that the commercial advantage would be realized. Damages for breach of contract were assessed by reference to the probabilities or possibilities of what would have happened.

251    In this case, the second RPR franchise agreement provided RPR with the opportunity to obtain jobs in the RPR territory. When Spanline breached the contract by permitting Marmax to obtain jobs of this kind, RPR thereby lost opportunities to which it was entitled. The effect of Marmax’s conduct was to deprive RPR of the benefit of its exclusive franchise, by which it obtained the right to such sales to customers as it was able to secure. It cannot be said that there was a 100% likelihood that RPR would have secured the jobs obtained by Marmax and the primary judge did not make a finding to this effect. His finding was that there was a “strong likelihood” of this outcome. A discount should have been applied to take into account the possibility that RPR would not have secured one or more of the jobs.

252    As noted above, Dr Birch SC argued that RPR would not have won any of the jobs because the relevant customers should be taken to be persons who said that they were unwilling to travel to Nowra. The difficulty with this submission is that it fails to take into account the primary judge’s finding that customers would not be inconvenienced by RPR servicing a lead.

253    In our view, accepting the strength of the likelihood that RPR would have secured the jobs, damages should be awarded on the basis that RPR would have secured 80% of the work obtained by Marmax or 20 of the 26 jobs, whichever is the greater amount.

Claim against Marmax

254    It follows from our conclusions above that Marmax did not breach its contractual arrangements with RPR under either the sub-franchise agreement or the transfer of Illawarra business agreement. Accordingly, Marmax’s appeal must succeed and it is unnecessary to deal with grounds 13, 14, 15 and 16 of Marmax’s notice of appeal.

COSTS (INDEMNITY)

255    As corrected by the corrigendum dated 22 May 2004, at [273] of his Honour’s reasons, the primary judge said:

I am also satisfied that RPR’s losses include the costs and expenses of it having to bring the proceeding to establish [Marmax’s] breach. Accordingly, to the extent that any order for costs in its favour does not cover all its legal costs of and incidental to it prosecuting its claim successfully against [Marmax], it should recover that amount as part of its claim for damages against Spanline.

256    By order 3(c) made on 3 June 2014, the primary judge ordered that Spanline:

pay to [RPR] damages being all of [RPR’s] costs and expenses (as assessed) of and incidental to the proceedings against [Spanline], such costs and expenses to include [RPR’s] costs of its interlocutory application filed on 8 June 2012 together with interest pursuant to s 51A of the [Federal Court of Australia Act 1976 (Cth)].

257    His Honour also ordered by order 11 that, subject to order 3(c), Spanline and Marmax were to pay RPR’s costs “as assessed” of the proceedings.

258    At the hearing of the appeal, Ms Rees SC conceded that RPR had not sought an order of the kind made by order 3(c). Ms Rees SC did not seek to argue in favour of order 3(c).

259    Ms Rees SC argued that order 3(c) should be substituted with an order to the effect that Spanline pay RPR’s costs of the proceeding against Marmax as damages. She relied upon Gray at [51] to say that there was nothing to preclude the award of costs as damages where the costs have been incurred as a result of somebody’s breach of contract. In Gray, Barker J said:

51. …I would have thought, as a matter of principle, that in a situation where a party is put to the trouble of maintaining an action or defending an action by reason of the wrongdoing of another party, and is entitled to an indemnity from that party, then absent usual principles such as those relating to mitigation of damage and the reasonableness of legal costs incurred, they should be able to recover as damages those costs expended either in a separate action subsequent to the primary action or in a related proceeding in the primary proceeding.

260    The difficulty with this submission is that there is no sufficient connection between Spanline’s breach of contract, in permitting Marmax to do certain jobs in RPR’s territory, and the costs of the proceeding against Marmax, in which RPR unsuccessfully argued that Marmax breached the sub-franchise agreement and the transfer of business agreement. This argument must be rejected.

FINAL CONCLUSIONS

261    Marmax’s appeal will be allowed. Spanline’s appeal will be allowed in part.

262    Spanline and RPR will be directed to submit draft orders giving effect to these reasons.

263    The parties will be directed to make submissions on costs.

Associate:

Dated:    9 September 2015