Federal Court of Australia

Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86

ORDERS

THE COURT ORDERS THAT:

1.    There be leave to appeal.

2.    The appeal be dismissed.

3.    The appellants and Freedom Foods Group Limited do jointly and severally pay the respondent's costs of the appeal to be assessed if not agreed such assessment to be undertaken on the basis that costs ordered to be paid by the appellants by order of the Chief Justice dated 3 May 2021 shall be set off against the costs as assessed.

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

REASONS FOR JUDGMENT

THE COURT:

1    In 2011, Freedom Foods Pty Ltd (Freedom Foods), an Australian company, entered into an agreement with Blue Diamond Growers (Blue Diamond), a company incorporated in California. The agreement was styled as a licence agreement. It provided for terms on which Freedom Foods was licenced by Blue Diamond to manufacture and sell almond milk products under the name Almond Breeze and associated trade marks.

2    Pursuant to its terms, the licence agreement was automatically renewed in 2016. Freedom Foods claims that the licence agreement is a franchise agreement for the purpose of the Competition and Consumer (Industry Codes - Franchising) Regulation 2014 (Cth) which prescribed the Franchising Code of Conduct (Code) as a mandatory industry code. It says that the Code applies to conduct in relation to the licence agreement as renewed and that Blue Diamond has breached the Code. It has commenced proceedings in this Court seeking relief on that basis.

3    The licence agreement provides for the arbitration of any controversy between the parties as to the meaning of the agreement or its operation (except a controversy involving a claim for equitable relief). The agreed seat of the arbitration is Sacramento, California. On the basis of that arbitration agreement, Blue Diamond has commenced an arbitration.

4    A dispute has arisen as to whether Blue Diamond can commence the arbitration because the Code provides that a franchise agreement must not contain a clause that requires a party to the agreement to bring an action or proceedings in relation to a dispute under the agreement in any jurisdiction outside Australia. The Code provides that a clause of a franchise agreement in contravention of the prohibition 'is of no effect'. Relying on that provision, Freedom Foods (and certain related parties) sought interlocutory orders in this Court restraining the Californian arbitration. Its application was unsuccessful and Freedom Foods (and the related parties) now seek leave to appeal and, if leave is given, orders restraining the arbitration.

The Code

5    The Code takes effect by regulations made under s 51AE of the Competition and Consumer Act 2010 (Cth) which authorises the declaration of a mandatory industry code.

6    At the time the Code was declared, the Minister for Small Business issued an explanatory statement (being select legislative instrument no 168, 2014). In describing the purpose of the Code, the explanatory statement said that industry codes are 'designed to achieve minimum standards of conduct in an industry where there is an identifiable problem to address'. As to the Code itself the explanatory statement said:

The purpose of the Franchising Code is to 'regulate the conduct of participants in franchising towards other participants in franchising.' The key aspects of the Franchising Code are to require franchisors to disclose certain information to franchisees, prescribe minimum standards in franchise agreements and to provide dispute resolution processes.

(footnote omitted)

7    The quoted purpose is taken from the text of cl 2 of the Code. The description of the key aspects of the Code indicates that the Code is concerned with a particular type of agreement in which one party (the franchisor) is to be required, by regulation, to disclose specified information to the other party (the franchisee), to conform to minimum standards and to resolve their disputes according to specified processes.

8    As to disclosure, the Code requires the franchisor to provide a disclosure document that is in a prescribed form: cl 8. The prescriptions as to what is to be included in the disclosure document are detailed and run to some 23 clauses. They include a requirement to include on the first page of the disclosure document the following (at Annexure 1 of the Code):

This disclosure document contains some of the information you need in order to make an informed decision about whether to enter into a franchise agreement. It should be read together with the information statement you have received.

Entering into a franchise agreement is a serious undertaking. Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee.

A franchise agreement is legally binding on you if you sign it.

You are entitled to a waiting period of 14 days before you enter into this agreement.

If this is a new franchise agreement (not the transfer or renewal of a franchise agreement, nor the extension of the term or the scope of a franchise agreement), you will be entitled to a 7 day 'cooling off' period after signing the agreement, during which you may terminate the agreement.

If you decide to terminate the agreement during the cooling off period, the franchisor must, within 14 days, return all payments (whether of money or of other valuable consideration) made by you to the franchisor under the agreement. However, the franchisor may deduct from this amount the franchisor's reasonable expenses, if the expenses or their method of calculation have been set out in the agreement.

Take your time, read all the documents carefully, talk to other franchisees and assess your own financial resources and capabilities to deal with the requirements of the franchised business.

You should make your own enquiries about the franchise and about the business of the franchise.

You should get independent legal, accounting and business advice before signing the franchise agreement.

It is often prudent to prepare a business plan and projections for profit and cash flow.

You should also consider educational courses, particularly if you have not operated a business before.

9    As to the contents of the disclosure document, there are requirements imposed upon the franchisor to include in the disclosure document (a) a summary of the business experience of relevant persons involved for the franchisor; (b) details of all current criminal or civil or arbitration proceedings relevant to the franchise that are pending against the franchisor, its associates and officers; (c) details of any payments to be made by the franchisor to agents; (d) considerable detail about existing franchises to which the franchisor is a party; (e) considerable detail about the arrangements for the supply of goods and services by the franchisor to the franchisee and vice versa; (f) extensive details about various types of payment if they are to be made by the franchisor to the franchisee; (g) arrangements for the conduct of marketing or other cooperative funds; (h) material conditions of each financing arrangement offered by the franchisor, its agent or associate to the franchisee; (i) the circumstances in which the franchisor has unilaterally varied a franchise agreement in the last three years; (j) details as to the arrangements that will apply on termination of the franchise agreement; (k) earnings information for franchisees; and (l) financial details for the franchisor including details as to its solvency.

10    The provisions in the Code concerning the resolution of disputes between the franchisor and franchisee are also quite prescriptive. They prohibit any provision being made in the franchise agreement that would require the franchisee to sign a general release from liability or a waiver of any verbal or written representation by the franchisor. As has been noted, they also specify the jurisdiction where any disputes must be resolved. In addition to prohibiting provisions that require dispute resolution outside Australia, the Code requires a dispute to be resolved in the State or Territory within Australia in which the franchise business is based. It also requires a franchisor to have a procedure for handling complaints as to compliance with the Code and to submit unresolved disputes to mediation in Australia if the dispute is not resolved within three weeks. The parties must bear their own costs of attending the mediation.

11    The comprehensive nature of the disclosure requirements and the prescriptions in relation to dispute resolution are important contextual matters to be brought into account when construing those provisions of the Code that determine the scope of its application, being principally the definition of franchise agreement.

12    In addition the Code imposes a statutory obligation on the parties to the franchise agreement to act in good faith toward each other and imposes other requirements on the franchisor as to dealings with the franchisee in the course of the franchise relationship.

13    As to the duty of good faith and the dispute resolution provisions, their origins can be traced to an inquiry conducted by the Parliamentary Joint Committee on Corporations and Financial Services in 2008. Its terms of reference were to inquire into and report on the operation of the Code and to identify, where justified, improvements to the Code (then in existence in an earlier form). In December 2008, the Committee published its report: Opportunity not opportunism: improving conduct in Australian franchising. The report described the franchise business model in the following terms (para 2.1):

Franchising is an ongoing relationship between two separate commercial parties, a franchisor and a franchisee. The franchising relationship is based on a prescribed business model offered by the franchisor and carried out under their guidance and oversight by franchise owners (franchisees). The Franchising Code of Conduct (the Code) stipulates that, under a franchise agreement, franchisees are granted the right to trade under the franchisor's brand and use their system or marketing plan. This occurs on the basis of certain conditions, which include:

•    the franchisor retains control over the franchise system, including the use of the franchise brand, marketing and advertising, product/service quality and inputs;

•    the franchisee's business is associated with the franchisor's trademark, advertising or commercial symbol;

•    the franchisee pays a fee in exchange for the use of the franchisor's brand and systems. This can include initial one-off or continuing fees for either or all of the following: starting capital investment, payments for goods and services, royalties on profits and training.

14    The report also considered issues raised as to the scope of coverage of the Code and whether its terms were sufficiently clear. The Committee concluded (para 4.18):

For the purposes of the current inquiry, the committee is comfortable that there is sufficient shared understanding of what constitutes a franchise agreement and is therefore covered by the Code.

15    The history of the way the matters raised in the Committee's report came to be addressed by the Code were summarised in the Wein Review of the Franchising Code of Conduct released in April 2013 at pages 1-5. The Government's response to the report of the Committee was published in November 2009. In that response the Government announced that it would be making changes to the Code that were subsequently introduced in 2010. The announcement stated:

For franchisees, the appeal of a franchise is the potential benefits of being able to conduct a business under an established brand name using tested operational systems. In turn, franchisors are able to grow their business by allowing others to use the model they have developed, within an agreement that allows them to retain substantial control over its use but without the financial risks of significant capital expenditure.

Despite the popularity of franchising in Australia, the Joint Committee's report did find that the viability and success of individual franchise agreements can be impaired by:

•    differing expectations about the obligations of each party to a franchising agreement; and

•    an asymmetric power dynamic within franchise agreements, with potential to lead to abuse of power.

16    In the result, the Code provisions defining the term 'franchise agreement' as considered by the Committee were substantially unchanged since the Code was prescribed.

17    However, what can be observed from those contextual materials and the Code provisions as a whole is that by the terms of the Code the relationship between franchisors and their franchisees is a closely regulated business relationship in which much of the regulation is evidently protective of the franchisee. Further, its terms, and the contextual materials, manifest a concern about the existence of a power imbalance between the franchisor and franchisee that arises from the particular nature of the franchise relationship. Importantly, the context does not suggest a concern about distribution or supply arrangements in general. Rather, the terms of the Code and the context indicate a concern about agreements where one party (the franchisee) enters into a business relationship with another party (the franchisor) pursuant to which the business model or system (and associated brand) originates from the franchisor party who has an ongoing role in directing the nature of the business. In such cases, the success of the business depends to a considerable degree upon the capability of the franchisor and adherence by the franchisee to the business model. There is also a risk that there will be differing expectations as to the nature of such an arrangement where the franchisee is dependent upon the franchisor to provide the ongoing benefits of the business model and system, as well as being constrained to conform to the requirements of that business model and system.

The definition of franchise agreement in the Code

18    As has been noted, the Code applies to conduct 'in relation to' a franchise agreement. Certain of the Code's operative provisions concern what may be provided for in a franchise agreement and others concern the dealings between the parties in the course of performance. However, whether a business is required to meet the detailed regulatory requirements under the Code in any particular case turns upon the meaning of the words used to define franchise agreement.

19    The Code defines franchise agreement in cl 5 which is expressed in the following terms:

A franchise agreement is an agreement:

(a)    that takes the form, in whole or part, of any of the following:

(i)    a written agreement;

(ii)    an oral agreement;

(iii)    an implied agreement; and

(b)    in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c)    under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)    owned, used or licensed by the franchisor or an associate of the franchisor; or

  (ii)    specified by the franchisor or an associate of the franchisor; and

(d)    under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i)    an initial capital investment fee; or

(ii)    a payment for goods or services; or

(iii)    a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

(iv)    a training fee or training school fee;

but excluding:

(v)    payment for goods and services supplied on a genuine wholesale basis; or

(vi)    repayment by the franchisee of a loan from the franchisor or an associate of the franchisor; or

(vii)    payment for goods taken on consignment and supplied on a genuine wholesale basis; or

(viii)    payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.

20    The definition has four requirements all of which must be met in order for an agreement to be a franchise agreement. Broadly speaking, they are (a) an agreement; (b) the grant by the agreement of a right to carry on a business under a system or marketing plan that comes from the grantor; (c) the operation of the business is to be associated with a trade mark or other brand that is owned by the grantor; and (d) an upfront payment of some kind must be made by the franchisee to the franchisor (being a payment which does not have a purpose separate from the grant of the right to carry on the business). Of these, perhaps the most distinctive aspect is the requirement in para (b) and a number of the decided cases concerning the definition have focussed upon that part of the definition.

21    However, the definition of franchise agreement is not a list of disparate elements or features. It is the four aspects taken together that describe what is meant by a franchise agreement for the purposes of the Code (and its operative ambit). This context must be kept in mind.

22    As to the scope of its application the Code has certain carve out provisions including cl 3(2) (the 20% turnover carve out) which states that the Code does not apply if:

(i)    the franchise agreement is for goods or services that are substantially the same as those supplied by the franchisee before entering into the franchise agreement; and

(ii)    the franchisee has supplied those goods or services for at least 2 years immediately before entering into the franchise agreement; and

(iii)    sales under the franchise are likely to provide no more than 20% of the franchisee's gross turnover for goods or services of that kind for the first year of the franchise.

The decision of the primary judge

23    The primary judge determined that the licence agreement was not a franchise agreement for the purposes of the Code because it did not satisfy para (b) of the definition: Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172 at [114]. However, the primary judge did not accept an alternative submitted by Blue Diamond to the effect that the 20% turnover carve out applied.

Issues in the appeal

24    Freedom Foods seeks leave to appeal to argue that the primary judge was in error in finding that the licence agreement was not a franchise agreement. If it is successful it says that the primary judge should have restrained the Californian arbitration.

25    Blue Diamond disputes the merits of the claim. It opposes leave on the basis that the finding of the primary judge was not attended with sufficient doubt to justify the grant of leave. It also raises a number of points by way of contention to support the conclusion reached by the primary judge. They are to the following effect:

(1)    clause 5(1)(d) of the definition was not satisfied because Blue Diamond supplied Freedom Foods on a genuine wholesale basis;

(2)    the 20% turnover carve out provision applied;

(3)    the Code could not apply to the licence agreement because it was an agreement made outside Australia with a proper law other than Australian law; and

(4)    the agreement to submit their disputes to arbitration made between the parties under the terms of the licence agreement would not render the arbitration agreement 'null and void, inoperative or incapable of being performed' for the purposes of s 7(5) of the International Arbitration Act 1974 (Cth) and, for various reasons (including alleged inconsistency with the International Arbitration Act), the Code provision about dispute resolution is not a reason why the arbitration cannot proceed.

Outcome

26    For the following reasons, there should be leave to appeal but the appeal should be refused on the basis that the primary judge's conclusion concerning para (b) of the definition of franchise agreement in the Code was correct. As to the contention points, the construction of the 20% turnover carve out provision that was advanced by Blue Diamond should not be accepted. It is not necessary or appropriate to deal with the other contention points.

The proper construction of para (b) of the definition of franchise agreement

General principles

27    The meaning to be given to statutory instruments is their contextual meaning; that is, the text of the statute should be considered whilst at the same time having regard to its context and purpose: SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14] (Kiefel CJ, Nettle and Gordon JJ), [37]-[39] (Gageler J).

28    Statutes speak as an entire instrument so it is necessary to consider the words in the context of the instrument as a whole and to construe them so as to ensure consistency between all provisions: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [69]; and Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 297 at 320. The relevant context also includes legislative history and extrinsic materials: Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503 at [39].

29    In using purpose to resolve ambiguity, the Court must not conjure a purpose that is more specific than the context discloses and then use that purpose to construe the legislation: Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross [2012] HCA 56; (2012) 248 CLR 378 at [26]; and Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9; (2005) 222 CLR 194 at [21]. Further, the purpose must be one that 'resides' in the 'text and structure' of the legislation: Lacey v Attorney-General (Qld) [2011] HCA 10; (2011) 242 CLR 573 at [44]. Ultimately, 'the fundamental duty of the Court is to give meaning to the legislative command according to the terms in which it has been expressed': Northern Territory v Collins [2008] HCA 49; (2008) 235 CLR 619 at [16].

30    In an appropriate case where examination of contextual materials discloses an evident mischief that the statute was intended to remedy then the statute is to be read in that context: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408.

31    It was submitted for Freedom Foods that there should be regard to the remedial purpose of the Code and, for that reason, the terms of the definition of franchise agreement should be construed broadly to give the fullest relief which the fair meaning of the language allows.

32    However, there is a difficulty with applying the construction principles concerning remedial statutory instruments to the definition of franchise agreement in the Code. As has been explained, the definition serves to determine the scope of the Code. Self-evidently, its remedial or protective provisions are only to be extended to franchisees. It is not the case that there is a manifest intention that the definition of franchise agreement should be construed broadly. Quite the contrary. A decision has been taken to confine the protections afforded by the Code to franchisees as defined. No purpose can be discerned to the effect that the scope of the Code (as distinct from its provisions insofar as they operate with respect to franchisees) should be construed broadly.

33    References in the decided cases to the need to reject any interpretation of the provisions of the Code which would allow its statutory purpose to be circumvented should be understood as rejecting technical distinctions in applying the definition of franchise agreement of a kind that may encourage or facilitate avoidance of its application. They should not be taken to suggest that the Code's definition of franchise agreement should be construed broadly so as to expand the application to as much business activity as the language might possibly permit. The evident purpose of the definition is to confine the Code to a certain type of business activity. The language has been chosen for that purpose and should be given effect accordingly.

The decisions in Rafferty and Workplace Safety

34    The meaning of para (b) of the definition of franchise agreement has been considered in two cases at appellate level. The first is the decision of this Court in Rafferty v Madgwicks [2012] FCAFC 37; (2012) 203 FCR 1 and the second is the decision of the Court of Appeal in New South Wales in Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd [2015] NSWCA 84; (2015) 89 NSWLR 594. The decision in Rafferty was a decision of the Full Court (Kenny, Stone and Logan JJ). The principal reasons in Workplace Safety were delivered by Bathurst CJ (Basten JA agreeing).

35    The following matters concerning the meaning of para (b) of the definition of franchise agreement were decided by those cases:

(1)    para (b) contains three elements which express separate requirements, each of which must be met: Workplace Safety at [83];

(2)    the elements concern (a) the grant of the right to carry on the specified business; (b) the business to be carried on under a system or marketing plan; and (c) the system or marketing plan to be substantially determined, controlled or suggested by the alleged franchisor: Rafferty at [161]; and Workplace Safety at [80]-[82] (noting the further discussion of the three elements in these reasons, below);

(3)    the agreement need not concern the whole of the business to be carried on by the alleged franchisee, it is sufficient if the business to which the agreement relates is a discrete business and the three elements are met in respect of that discrete business: Workplace Safety at [111];

(4)    it is the terms of the agreement to which there must be regard in determining whether the three elements in para (b) are met;

(5)    a system or marketing plan is a 'co-ordinated method or procedure, or scheme whereby goods or services are sold' (Rafferty at [171]), 'a method of operation under which a business is to be conducted' (Workplace Safety at [91]);

(6)    the system or marketing plan does not have to be spelt out in a franchise agreement: Rafferty at [185]; and Workplace Safety at [92];

(7)    it may not be sufficient for the agreement to enable the franchisor to determine, control or suggest whether the business will be conducted under a system or marketing plan because the Code contemplates that the business will be carried out under a system or marketing plan: Workplace Safety at [93];

(8)    the reference to substantial control of the system or marketing plan by a franchisor is to be taken to mean the power to direct or restrain the content of the business plan on any substantial issue: Workplace Safety at [106];

(9)    there are various types of contractual provisions the presence of which may be indicative of a system or marketing plan but much depends on the circumstances of each case: Rafferty at [172];

(10)    the extent to which the franchisee's business involves the sale of the franchisor's goods and services is a factor that is of limited relevance where the business the subject of the agreement can be seen to be a discrete business: Workplace Safety at [110]; and

(11)    there must be regard to the agreement as a whole: Workplace Safety at [109].

36    Although there are three elements in para (b), they work together.

37    In Workplace Safety at [80]-[83], Bathurst CJ described the three elements in the following way:

Clause 4(1)(b) of the definition contains three elements. The first is that it is an agreement containing a grant by the 'franchisor' to the 'franchisee' of the right to carry on the business of offering, supplying or distributing goods or services in Australia.

The second element is that the right to carry on that business must be a right to carry it on under a 'system or marketing plan'.

The third element is that the system or marketing plan must be substantially determined, controlled or suggested by the franchisor.

(emphasis added)

38    Expressing the three elements in that manner reveals how the second element qualifies the first and the third element qualifies the second. The first requires that there be the grant of the right to carry on a business of the kind described. Then, the second element requires that grant to be of a right to carry on the business under a system or marketing plan. Finally, the third element requires that system or marketing plan to be substantially determined, controlled or suggested by the franchisor.

39    Therefore, each element operates to further narrow the category of cases that will come within para (b). For that reason, Bathurst CJ properly emphasised that all three requirements must be met. As his Honour said at [83] (immediately after describing the three elements):

The matters relevant in considering whether the second and third elements exist will often overlap, but it is important to remember that they are separate requirements. Thus, it would not be sufficient if the alleged franchisor was only able to control certain aspects of the supply or distribution of the goods or services. Rather, it is necessary that the power of the franchisor extends to substantially determining, controlling or suggesting the system or marketing plan under which the business is carried on.

40    Therefore, there is the possibility that undue focus on the existence of three distinct elements will detract from recognising that all three must be satisfied by the grant of a right to carry on a business to be carried on under an ongoing system or marketing plan that comes from the franchisor.

41    Therefore, the three cumulative elements of para (b) describe a distinctive aspect of a franchise agreement, namely that instead of the ongoing conduct of the business being dependent on the business acumen and skill of the grantee as the operator of the business, the system or plan for the business is substantially a matter for the grantor. The grantee does not have to develop the business system or marketing plan. Instead the grantor has the business concept and confers on the grantee the right to carry on the grantor's business concept under the trade mark, advertising or commercial symbol of the grantor for a fee.

42    Therefore, para (b) is not concerned with agreements made by a grantor with a grantee where, after the making of the agreement, the manner of the future operation of the business of the grantee is to be determined by the grantee. As a result, where the grantee has an existing business at the time of entry into the agreement with the grantor and that business has been established according to the system and business planning of the grantee then that will be an important matter of context in which to construe whether the agreement has the characteristics described in para (b). In such a case, there is the prospect that the business dealing between the grantee and the grantor (such as the entry into an agreement to distribute a product, or to manufacture and sell a product using the intellectual property of the grantor) will involve the application of the grantee's existing business acumen. That is because, in order for an agreement with such a grantee to be a franchise agreement, the nature of the agreement must be such that the grantee is subjecting its existing business to the determinations, controls or suggestions of the grantor (or is adding to its existing business activities a discrete business that has that character). Of course, these are possibilities, but the context of the existing business of the grantee is important in construing whether the agreement has the characteristics described in para (b) especially as a number of the incidents of the agreement may be similar in both cases.

43    There are many circumstances in which a businessperson may make an agreement that curtails the manner in which that person will conduct their business in the future without going so far as to give the business the character that it is being operated under a system or business plan that is sourced from another party. In particular, there are many different circumstances in which one party will agree terms on which that party will offer, supply or distribute goods or services. In order to protect the value of a supplier's brand, a wholesale or retail distributer may accept conditions imposed by the supplier on the way in which the product may be presented by the distributer in-store or advertised and may submit to terms that require salespersons to be trained in presenting the product in a particular way. However, a supplier seeking to impose conditions of that character is not offering a right to carry on a business that is subject to those controls or suggestions. It is not offering a right to carry on a business. It is entering into a distributorship arrangement with the operator of an existing business. Nor is the distributer (whether they be wholesaler or retailer) seeking to secure a right to carry on a business according to the system or plan of the other party. The way the distributer deals with wholesale or retailer customers is still substantially a matter for the distributer. The restrictions or obligations that the distributer accepts as a condition of supply are for the purpose of maintaining and protecting the brand not part of the grant by the supplier to the distributer of a right to carry on a business.

44    There are other reasons why suppliers may seek to control, to some extent, the manner in which their product is presented for on-sale. The product may need to be installed in a particular manner in order to operate effectively. There may be safety concerns that require certain procedures to be followed by anyone using the product and they may need to be properly communicated to anyone using the product. The product may be supplied to be incorporated into another product as part of a process of manufacture and then sold with the original supplier's brand as part of a dual branding that means that the original supplier has an interest in the quality of the manufacturing process. Such examples may be multiplied considerably. They serve to illustrate that in modern commerce where brand and reputation have considerable commercial value such arrangements are relatively common.

45    As the decision in Rafferty illustrates, similar incidents may also be present in franchise agreements. However, the distinctive character of franchise agreements as described in para (b) is that they involve the grant of a business where the system or marketing plan of that business is to be sourced from the grantor on an ongoing basis. The right granted to a franchisee is to carry on a business that depends for its ongoing success on the implementation of a system or marketing plan that continues to come from the party granting the right.

The licence agreement

46    Though first entered into well before the Code came into effect, it is the renewal of the licence agreement in 2016 that means that the Code will apply if it is a franchise agreement for the purposes of the Code. Therefore, it is the circumstances as at 2016 that are relevant.

47    The licence agreement recites that Blue Diamond 'desires to engage [Freedom Foods] in the manufacture, sale and distribution of the nut beverage products listed on Schedule A', defined as the Products. Schedule A lists eight 'Almond Breeze' products. It then recites that '[t]he Products are manufactured under Blue Diamond's formulations and specifications as described in Schedule B'. Schedule B is headed 'Blue Diamond products formulations and specifications' and states: 'To be published by Blue Diamond in the Production and Quality Assurance Manual after plant trials confirm the formulas'.

48    The recitals continue by stating that the Products are sold and distributed under Blue Diamond trade marks. Then the recitals state:

Blue Diamond desires to grant [Freedom Foods] the right to use the Formulations/Specifications to manufacture and to use the Trademarks in connection with the sale and distribution of the Products to wholesalers, distributors and retailers (collectively 'Customers') located and taking delivery of the Products … within the territory …

49    Of relevance to the issues raised by the appeal, though not determinative, is the absence of any indication in the recitals that the licence agreement involved the conferral by Blue Diamond upon Freedom Foods of a right to carry on a business in any particular manner. The recitals indicate that Blue Diamond is dealing with Freedom Foods as a party who has, and will continue to have, its own business as a manufacturer and distributer of products. There is no indication in the recitals that the subject matter of the agreement is the conferral upon Freedom Foods of a right to carry on a business of a kind that Blue Diamond has developed or that Freedom Foods will be looking to Blue Diamond for instruction (whether by way of direction or suggestion) as to the system or marketing plan by which the manufacture and sale of the Products will be conducted.

50    In its operative provisions, the licence agreement grants to Freedom Foods the exclusive right to use the Formulations/Specifications to manufacture the Products and to use the Trademarks to package, sell and distribute the products: cl 3(a). Therefore, the business activity to be carried on by Freedom Foods to which the agreement relates is manufacturing and selling the Products. Therefore, it is only a right to carry on a business activity of that kind that could be the subject of the grant of a right of the character described in para (b) of the definition. The question that arises is whether the licence agreement grants a right to Freedom Foods to carry on the business of offering, supplying or distributing the Products under a system or marketing plan that comes from Blue Diamond.

51    The licence agreement has provisions concerning marketing plans and promotional plans. It is important to pay close attention to the content of the provisions of the licence agreement as to these plans given the terminology in para (b) of the definition.

52    As to the marketing plans for marketing the Products, they are dealt with in cl 3(d). Blue Diamond is to be responsible for their development and implementation. They are to be 'reviewed by' Freedom Foods before being implemented. The parties are to meet to discuss the marketing plan should either party deem it necessary to do so. Blue Diamond is to bear the cost of the marketing plans and must spend at least 5% of the gross sales of the Products by Freedom Foods in any calendar year. Targets for marketing expenditure and sales were set in the first year (being well before 2016) and if they were not met then the other party could terminate the agreement.

53    These provisions could not by themselves or with other rights form a system or marketing plan by which Blue Diamond could substantially determine, control or suggest how Freedom Foods distributed the Products. Rather, they deal with the marketing by Blue Diamond of the Products within the Territory to those who may be interested in buying the products from Freedom Foods. They are not directed to the manner in which Freedom Foods will itself seek to sell or distribute the product. So much is made abundantly clear from the fact that the licence agreement provides that 'Blue Diamond shall implement the annual Marketing Plan' together with the absence of any mechanism by which the marketing plan may direct or suggest the way Freedom Foods will sell the Products (and the provisions of the agreement concerning promotional plans, see below).

54    As to the promotional plans, the licence agreement provides in cl 3(e) that Freedom Foods 'shall be responsible for the development and implementation of all annual trade promotion and account specific promotional plans'. Each of these plans is a promotional plan for the purposes of the agreement. Freedom Foods must expend at least 5% of its sales in each calendar year that is covered by the particular plan. Each promotional plan 'shall be reviewed by Blue Diamond before it is implemented'. Again the parties agree to meet and discuss the promotional plans should either party deem it necessary to do so. The implementation of the promotional plans is the responsibility of Freedom Foods.

55    These provisions place the responsibility for the formulation and implementation of the promotional plans in the hands of Freedom Foods. These are the plans that concern the way in which Freedom Foods will effect the promotion of sales of the Products to its customers (being wholesalers and retailers). Unlike the marketing plans, the promotional plans form part of the business activities that Freedom Foods is licenced to undertake. Yet, there is no mechanism in the agreement by which Blue Diamond could determine or control the content of the promotional plans. Nor are the plans themselves 'suggested' by Blue Diamond. It is the business acumen and experience of Freedom Foods that informs the content of the plans. In no sense do they originate with Blue Diamond.

56    The provision by which Blue Diamond may review the promotional plans before they are implemented and may call on Freedom Foods to meet and discuss the plan does not mean that Blue Diamond determines, controls or suggests the marketing plan. An ability to comment on a plan the content of which originates entirely with Freedom Foods unguided by any requirement of the licence agreement or any overall structure or form imposed or suggested by Blue Diamond is not a marketing plan with the requisite statutory character.

57    In a different case, a plan that is required to be prepared by the party alleged to be the franchisee may still have its content directed, controlled or suggested by a party who is a franchisor. The agreement as a whole may require the marketing plan to conform to the requirements of a system that originates from the alleged franchisor. It may require the alleged franchisee to produce a plan of a kind that gives effect to an overall system or marketing plan that comes from and is overseen by the alleged franchisor. It will be a factual question in each case whether the agreement as a whole takes a form whereby a system or marketing plan comes from the franchisor (whether by way of firm determination, control or suggestion) or whether it comes from the franchisee. The language of suggestion embraces those instances where the franchisor is expected to be the source of advice and instruction about how to conduct the business, rather than an instance like the present where Blue Diamond has a right to be consulted about promotion plans the preparation of the content of which is entirely a matter for Freedom Foods.

58    Consistently with the allocation of the responsibility for determining the manner in which the Products will be sold by Freedom Foods, the provisions of the agreement that require Freedom Foods to submit 'packaging, brochures, promotional materials and sales materials' prepared by Freedom Foods to Blue Diamond for approval also make clear that 'all trade promotion activities shall be conducted at the discretion and at the expense of [Freedom Foods]': cl 3(h).

59    Under the licence agreement, Blue Diamond has 'the right to direct packaging changes and changes to Formulations/Specifications as necessary for its business purposes': cl 3(f). It is to be noted that the right reserved by this provision is to be exercised for the purposes of the business of Blue Diamond. It is not couched in terms of a right to suggest how Freedom Foods will conduct its business. It is a protection for Blue Diamond's ongoing business interests as the owner of the intellectual property associated with the Products. This is reflected in the fact that the costs of implementing packaging changes are to be borne by Blue Diamond and will not be deducted from its annual marketing plan funding: cl 3(g).

60    Blue Diamond is also responsible for all packaging artwork and designs for the Products which shall be prepared at the cost of Blue Diamond: cl 3(h). As has been noted, promotional materials for the Products prepared by Freedom Foods must be submitted to Blue Diamond for approval: cl 3(h). These matters are equivocal when it comes to determining whether the agreement is of the character described in para (b) of the definition. They protect Blue Diamond's interest in its brand. By their character they control part of what Freedom Foods can do when selling the Products. However, the question is whether the agreement as a whole confers a right to carry on a business such that the business is to be conducted under a system or marketing plan that comes from Blue Diamond.

61    The agreement reserves to Blue Diamond the right to conduct market research at its cost and Blue Diamond agrees to make such research available to Freedom Foods without any warranty as to accuracy or completeness: cl 3(i). The form of this provision is consistent with Blue Diamond and Freedom Foods each conducting their own businesses rather than Blue Diamond suggesting to Freedom Foods the way in which its business will be conducted.

62    Freedom Foods must make available to Blue Diamond the results of all government inspections and audits including those 'related to or affecting [Freedom Foods]' facilities used to produce, store or transport Products produced under this Agreement, or any equipment, raw materials, ingredients, packaging materials, work in progress or Products located therein': cl 3(l). There are also requirements to notify Blue Diamond's quality assurance representative of the presence of anything harmful in the Products. There is also an obligation on the part of Freedom Foods to recall, withdraw and destroy any Products not in compliance with the Formulations/Specifications: cl 3(m). Again the specification of what must be in the products is consistent with brand protection and is therefore equivocal.

63    The extent to which the Code is concerned with the aspect of the licencing agreement that confers the right to manufacture the Products perhaps is not clear and was not the subject of any real argument. The definition is concerned with the grant of a right to carry on a business of 'offering, supplying or distributing goods or services'. It seems likely that supply includes manufacture and supply. However, it may be that the Code is confined to that part of the licence agreement that deals with the sale, supply or distribution of the Products. With that caveat, it may be observed that there are no detailed provisions in the licence agreement by which Blue Diamond may control or suggest the manner in which the manufacture of the Products is carried out (as distinct from the specifications to which the Products as manufactured must conform). The agreement may provide that the Products must be produced 'with utilization of a sheer mixer' and also specifies the contract manufacturer that Freedom Foods would use to make the Products: cl 12. Otherwise, the manufacturing activities are not the subject of provisions in the agreement that would allow for Blue Diamond to determine, control or suggest anything about the manner in which the manufacturing activities should be undertaken.

64    As to manufacturing, the agreement further provides expressly that Freedom Foods will have the right to arrange for manufacture by a co-packer approved by Blue Diamond 'in its sole discretion'. This is not a provision that enables Blue Diamond to say anything about the way Freedom Foods manufactures the Products. It is a protection from the risk that someone else will take over that role. There is also an obligation on the part of Freedom Foods to 'conform to the quality standards set by, and under the control of, Blue Diamond'. Again this is the type of equivocal provision that is of a kind that may be deployed with other provisions to determine, control or suggest a system or marketing plan to be followed by Freedom Foods. However, it may be deployed to specify outcomes that are to be achieved by the contracting party in circumstances where the manner in which the business is to be conducted to achieve those outcomes is entirely a matter for the grantee of the rights under the agreement.

65    The licence agreement then provides for the purchase by Freedom Foods from Blue Diamond of 'all of the almond base ingredients ("Almond Base") necessary to manufacture all Products': cl 4(a). A price for the Almond Base may be changed once per financial year. If the price is to be increased then Blue Diamond must give prior notice of the increase and give Freedom Foods 'a detailed breakdown of the basis for the price increase'. The agreement also specifies certain distribution goals to be met by Freedom Foods by dates that preceded the date of renewal in 2016: cl 4(c).

66    Significantly, the payment for the Almond Base is the only payment to be made by Freedom Foods under the licence agreement. There is no provision for a separate licence fee for the rights to the intellectual property conferred by the agreement. Further, as has been explained, Blue Diamond was required to expend 5% of the value of sales of the Products by Freedom Foods on marketing. It may be inferred that the price that Blue Diamond was to charge Freedom Foods for the Almond Base was to include remuneration for the value of the brands (the value of which was to be further enhanced by the ongoing marketing expenditure to be incurred by Blue Diamond) or that there was no charge for the value of that intellectual property. The latter is such an unlikely commercial position that, in the absence of the Court being taken to evidence to the contrary, it may be inferred that the Almond Base price included remuneration not just for the supply of the Almond Base. The primary judge was correct in reaching that conclusion.

67    Blue Diamond has a right to review and audit the records maintained by Freedom Foods 'with regard to production and unit sales of Products': cl 5(b). In some instances, rights of that character may be an incidence of the existence of a system or marketing plan for the purposes of para (b) of the definition. Such rights can be exercised in order for the party conferring the right to carry on the business of offering, supplying or distributing a product to cause those activities to be conducted under a system or marketing plan that comes from the grantor. However, in the absence of other rights by which such steps might be taken, the right to review and audit is explicable by the interest the Blue Diamond has as the exclusive supplier of Almond Base to Freedom Foods and the returns that it earns through the payment of the price for Almond Base on the sales of the Products.

68    There are provisions by which trade mark rights are conferred upon Freedom Foods: cl 6. There is no dispute between the parties that these aspects of the agreement satisfy para (c) of the definition.

69    Freedom Foods also agrees to accept a restriction from selling competing products: cl 10(b). This too is an equivocal provision. Restraints of trade are imposed in a wide variety of commercial circumstances. It is the kind of provision that would need to be shown to operate with other provisions to facilitate Blue Diamond being the party substantially determining, controlling or suggesting the system or marketing plan for the business before it could lead to a conclusion that para (b) was satisfied.

70    The parties to the licence agreement also agreed their own description of the nature of their relationship. Clause 15 of the licence agreement is headed in those terms and says:

This Agreement establishes a trademark licensing arrangement to manufacture or arrange for the manufacture and sale of the Products, and a requirements supply agreement for the purchase of the Almond Base. Nothing herein shall be deemed or construed to create a partnership, joint venture, agency or distribution relationship between the parties. To the fullest extent permitted by law, [Freedom Foods] hereby waives any and all claims against Blue Diamond for compensation for loss of agency rights, goodwill or other such loss otherwise than in accordance with the terms and conditions of this Agreement.

71    A description of that kind could not be determinative of the character of an agreement for the purposes of the Code. However, it may be observed that the description does not itself suggest that the licence agreement is a franchise agreement.

Conclusion as to para (b) of the definition

72    For Freedom Foods it was contended that the primary judge erred in finding that the distribution business was not carried on 'under' the marketing plans referred to in cl 3(d) of the licence agreement. In that regard, the primary judge found that it was significant that the marketing plans were to be implemented by Blue Diamond and not by Freedom Foods: at [109]. However, his Honour went on to state that the clause did not impose any obligations on Freedom Foods 'as to the way in which it is to carry on the business of offering, supplying or distributing the Products'. It is this further step in the reasoning that is significant.

73    There may be cases in which the means by which the franchisor determines, controls or suggests the scheme or marketing plan is by the franchisor itself preparing a marketing plan that is to be implemented by the franchisor in such a manner that it will govern the activities of the franchisee in conducting the business. Therefore, the fact that a marketing plan is to be prepared and implemented by the franchisor will not be determinative. However, that is not the present case and it was not the type of case described by the primary judge. Here, as his Honour correctly found (for reasons already stated in considering the terms of the licence agreement), the agreement in providing for a marketing plan to be prepared by Blue Diamond was not demonstrated to be a plan of a kind that would specify anything about the way in which the Products were to be sold. Rather, given the separate requirement for the preparation of the promotional plans, it was to be inferred that the marketing plans were to be concerned with the promotion of the Blue Diamond brand to potential consumers of the Products; not to govern the activities of Freedom Foods.

74    The further proposition advanced by Freedom Foods that it is sufficient for the scheme or marketing plan to have 'a relationship or connection' with the right to carry on the business that is granted by the agreement should also be rejected. A construction of that kind would not give due regard to the requirement that the business be conducted 'under' the system or marketing plan (not in connection with the system or marketing plan).

75    The term 'under' should be given the meaning attributed to the term by the primary judge at [105], as follows:

The word 'under' in paragraph (b) signifies that the business is to be carried on under the authority of, in accordance with, or pursuant to the system or marketing plan: cf Chan v Cresdon Pty Ltd [1989] HCA 63; (1989) 168 CLR 242 at 249; Queensland Premier Mines Pty Ltd v French [2007] HCA 53; (2007) 235 CLR 81 at [55]; Inghams Enterprises Pty Ltd v Hannigan (2020) 379 ALR 196 at [137]-[139].

76    The adoption of such a construction resolves any ambiguity in a manner that gives effect to the evident purpose of the Code to offer protections of a quite prescriptive kind in cases where there is some imbalance of power or dependence on the part of the franchisee on the franchisor's system or marketing plan.

77    For reasons already given, the promotional plans were not a means by which Blue Diamond determined, controlled or suggested a system or marketing plan under which the business of manufacturing and selling (or just selling if that be the correct approach) the Products was substantially conducted. As was stated by Bathurst CJ in Workplace Safety, the system or marketing plan must be a method of operation under which the business was to be conducted. For reasons that have been given, the licence agreement did not make such provision.

78    To the extent that Freedom Foods relied upon the presence in the licence agreement of the kinds of provisions that may be indicative of a system or marketing plan, for reasons that have been given, they were not so indicative in this case. There is nothing to indicate that the other rights conferred by the agreement were to be deployed as the means by which a method of operation for the business of Freedom Foods to be conducted under the agreement was to be substantially determined, controlled or suggested by Blue Diamond. Rather, for reasons that have been given, those rights considered in the context of the agreement as a whole were consistent with the licence agreement being one in which Freedom Foods was to be free to deploy its own business acumen as a manufacturer and distributer for the benefit of Blue Diamond as the holder of the intellectual property associated with the brands for the Products.

79    Therefore, the primary judge was correct to conclude that para (b) of the definition of franchise agreement was not met by the terms of the licence agreement.

Does the carve out provision apply?

80    In view of the conclusion that para (b) is not satisfied in the present case, it is not necessary to deal with the contention that the 20% turnover carve out from the application of the Code provided for in cl 3(2)(b) applied to the licence agreement. However, the contention was the subject of detailed submissions and it is a point of some significance for the application of the Code. For that reason, the argument is addressed below.

81    Clause 3(2) of the Code is quoted earlier in these reasons at [22]. The contention raised by Blue Diamond concerned the manner in which the 20% figure for gross turnover for goods or services as referred to in cl 3(2)(b)(iii) was to be determined. The answer is to be found in the sequential structure of cl 3(2)(b).

82    The 20% turnover carve out provision begins by describing in (i) an instance in which the franchise agreement is for goods or services that are 'substantially the same as those supplied by the franchisee before entering into the franchise agreement'. The terminology 'substantially the same' refers to a close degree of identity between the attributes of what is currently being supplied by the franchisee and that which is to be supplied under the franchise agreement. It invites a comparison between the good or service to be supplied under the franchise agreement and other goods or services supplied by the franchisee in the past. It is concerned with their characteristics viewed from the perspective of the franchisee as the supplier of those goods or services.

83    The provision then states in (ii) that there must have been supply of 'those goods or services' (the ones that are substantially the same as those to be supplied under the franchise agreement) by the franchisee for at least two years before entering into the franchise agreement.

84    Then in (iii) the provision specifies the 20% turnover requirement. It does so by looking forward to the position when the franchise agreement is in effect. It refers to 20% of the franchisee's gross turnover 'for goods or services of that kind for the first year of the franchise'. By referring to a percentage it requires a forward looking computation of all the future sales of the franchisee, including those to be sold under the franchise agreement. A calculation of that kind must require the aggregation of future sales of 'those goods or services' (being those sold over the previous two years that are substantially the same as those to be sold under the franchise agreement) and the goods or services to be sold under the franchise agreement. It is referring to a percentage of the combined business going forward, both the ongoing business and the new business under the franchise agreement.

85    Therefore, the reference to goods 'of that kind' in (iii) must be to the goods or services described in (i) as being substantially the same as those to be supplied by the franchisee under the franchise agreement together with those that are now to be supplied under the franchise agreement. It is because of the aggregation of these two categories that the expression 'goods or services of that kind' is used in (iii). It refers both to those that are substantially the same as the franchise goods or services as well as the franchise goods and services.

86    It follows that the contention advanced by Blue Diamond to the effect that (iii) is referring to all goods or services supplied into the future that might be said to be a 'substitute' according to some kind of analysis of the kind undertaken in the field of competition law should not be accepted.

87    What is required is the aggregation of the expected future sales of those goods or services that the franchisee has been selling in the past that are 'substantially the same' as those to be supplied by the franchisee under the franchise agreement.

88    It is understandable why there would be a carve out of that character. It may be confidently concluded that the protections afforded by the Code are not needed where the franchisee is already in the relevant field of business activity and is adding an incremental further amount to that activity. However, a different product that may be said to be a 'substitute' though not substantially the same is more likely to be a business of a different kind with different issues for which the protections afforded by the Code will be appropriate.

89    For that reason, the foundation upon which contention (2) was advanced should not be accepted. Therefore, it has not been shown that the primary judge was in error at [123] in finding that the category of products that was relevant in the present case was plant-based beverages.

Other contentions

90    As has been noted, Blue Diamond advanced three other contentions to support the decision of the primary judge. The appeal is interlocutory. Its resolution should not be delayed by the consideration of points which are unnecessary to decide. This is especially so given that the issue concerns whether a commercial arbitration to which Freedom Foods agreed to submit should proceed. Any views as to the contention points would be obiter. In one respect they seek to challenge a finding of fact by the primary judge. That finding was made for the purposes of the interlocutory decision. Therefore, the factual finding would not be binding as between the parties if Freedom Foods sought to rely upon the finding for any substantive purpose. For those reasons, it is neither necessary nor appropriate to address the remaining three points of contention raised by Blue Diamond.

Conclusion and costs

91    The appeal concerned a matter of importance for the parties. It affected whether Freedom Foods was required to submit to arbitration in California the claims that it seeks to advance in this Court. The arguments advanced had a reasonable basis. They raised issues of general importance as to the scope of the Code. For those reasons, there should be leave to appeal. However, for reasons that have been expressed the appeal should be dismissed.

92    As to costs, the respondent having been successful, the appellants should bear the costs of the appeal including the application for leave to appeal. Prior to the hearing of the appeal, the respondent sought security for costs. The application was opposed on the basis that there were cross-guarantee arrangements in place which meant that Freedom Foods Group Limited (FFGL), a publicly listed company, stood behind the liabilities of Freedom Foods. An opportunity was given for FFGL to advance any submissions as to whether, in the circumstances, it should not be liable for costs in the event that the appeal was unsuccessful.

93    The appellants submitted that, in the event that they were unsuccessful on the appeal, and in the light of their arguments regarding Blue Diamond's application for security for costs, it is not necessary nor appropriate for the Court to make a non-party costs order against FFGL. Instead, FFGL offered to give an undertaking to 'ensure that the [appellants] have sufficient funds to meet any costs order made' in favour of Blue Diamond.

94    It was submitted by Freedom Foods that such an undertaking ought be sufficient to allay the concerns raised by Allsop CJ in Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 461 at [45]-[47]. Freedom Foods further submitted that such an undertaking is to be preferred to the making of a non-party costs order as any such order against FFGL (as opposed to the appellants) may have a prejudicial effect on Freedom Foods and FFGL in circumstances where the appellants have the benefit of a set-off by reason of the costs order made in favour of the appellants in the security for costs application, and amounts said to be owed by Blue Diamond to Freedom Foods for outstanding invoices. Moreover, the appellants submitted that the deed of cross-guarantee to which FFGL and three of the appellants are parties has the effect that FFGL will contingently be liable for any costs ordered against the appellants in the event that they are unable to pay those costs: see, in this respect, Freedom Foods [2021] FCA 461 at [9]-[10], [25].

95    In response to the submissions of Freedom Foods, Blue Diamond pressed that each of the appellants and FFGL ought to be ordered to pay its costs. According to Blue Diamond, such an order would make it irrelevant as to whether one of the appellants has available for the purposes of set off debts said to be owed to it by Blue Diamond. If there is a valid debt owed by Blue Diamond to one of the appellants, Blue Diamond accepted that it is available for set-off against any costs order, irrespective of whether FFGL is, together with the appellants, ordered to pay costs. Blue Diamond further denied the existence of outstanding invoices said to be owed to Freedom Foods.

96    In relation to the sufficiency of the proposed undertaking, Blue Diamond submitted that the undertaking to ensure the applicants have sufficient funds, whether to the Court or inter partes, adds nothing of substance over and beyond the existing deed of cross-guarantee, and gives Blue Diamond no further protection than that available at present. In this respect, Blue Diamond highlighted that FFGL does not undertake to pay the costs, nor to ensure the appellants pay the costs, and Blue Diamond would be required to pursue enforcement proceedings in the regular course should the appellants fail to pay. Blue Diamond asserted that in circumstances where the application for leave to appeal and the original proceeding were conducted at the direction of FFGL and for its benefit, it is appropriate for FFGL to be liable for any costs.

97    We are not persuaded that the proffering by FFGL of an undertaking, whether inter partes or to the Court, in the terms proposed is a sufficient reason why the costs order should not be made jointly and severally as against both FFGL and Freedom Foods. This is not a case where such an order is proposed as a third party costs order. Rather, it is an order that is to be made in circumstances where the application for security for costs was successfully opposed on grounds that included, in substance, that FFGL stood behind Freedom Foods in relation to any liability for costs.

98    The award of costs is discretionary: s 43 of the Federal Court of Australia Act 1976 (Cth). The discretion is unconfined, but must be exercised judicially, that is according to relevant considerations and taking account of the contextual features and facts of the litigation: Kazar (Liquidator) v Kargarian; In the matter of Frontier Architects Pty Ltd (In Liq) [2011] FCAFC 136; (2011) 197 FCR 113 at [4].

99    In the particular circumstances of the present case, we are satisfied that it is appropriate to make a costs order that includes joint and several liability on the part of FFGL. However, the extent of that liability should be assessed taking account of the costs order in favour of Freedom Foods (and related parties) made by the Chief Justice on 3 May 2021.

Associate:

Dated:    28 May 2021