FEDERAL COURT OF AUSTRALIA

Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903

CONTRACT – implied terms – duty of good faith – restriction on power to terminate a contract

TRADE PRACTICES – termination of dealership – whether unconscionable conduct contrary to s 51AC of the Trade Practices Act 1974 (Cth)

Trade Practices Act 1974 (Cth) s 51AC

Alcatel Australia Ltd v Scarcella [1998] 44 NSWLR 349 applied

Chan v Zacharia (1984) 154 CLR 178 cited

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 cited

Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1 cited

Martin-Baker Aircraft Co Ld v Canadian Flight Equipment Ld [1955] 2 QB 556 cited

Renard Constructions (ME) Pty Ltd v Minister for Public Works [1992] 26 NSWLR 234 applied

United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 cited

Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173 cited

GARRY ROGERS MOTORS (AUST) PTY LTD  V  SUBARU (AUST) PTY LTD AND CHRIS CASSAR

No. V 342 OF 1999

JUDGE:          FINKELSTEIN J

PLACE:          MELBOURNE

DATE:            2 JULY 1999

THE COURT ORDERS THAT:

1.         The application for interlocutory injunctions be dismissed.

2.         The applicant pay the respondents’ taxed costs of the application.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 21 May 1991 the applicant was appointed by the first respondent as an authorised dealer of Subaru motor vehicles for a period of three years with effect from 10 May 1991.  The terms and conditions of that appointment were set out in a letter from the first respondent.  The terms and conditions were comprehensive (they occupied some eighteen pages) and dealt with the rights and obligations of both the applicant (concerning matters as diverse as the nature of the dealership premises, the manner of merchandising, the training of staff, the promotion of the first respondent’s products, the volume of stock to be held, and so on) and those of the first respondent.  It is unnecessary to set out any of them apart from the provision concerned with termination.  That is to be found in clause 11.  Clause 11.1 provides:

“Notwithstanding anything contained in the Letter of Appointment and the Terms and Conditions, either party may terminate this arrangement by giving to the other notice in writing, forwarded by pre-paid post to the address shown hereon, or in the case of Subaru to such other address as may be notified to the Dealer in writing.  Such termination shall be effective thirty-two (32) days after posting as aforesaid, unless otherwise agreed between the parties in writing.”

2                     Clause 11.2 permitted the first respondent to terminate the appointment with immediate effect upon the happening of any one of a number of specified events.  It is also not necessary to describe those events.  They range from a change in the management and control of the applicant to its insolvency.

3                     Some four months after the expiry of the term of the dealership, the applicant’s appointment was renewed for a further three years commencing on 1 October 1994.  The terms and conditions of that appointment were substantially the same as those contained in the earlier appointment.  In particular, the provision concerning the termination of the appointment was, in all material respects, the same as that contained in the initial appointment save that, in the case of a termination other than for cause, the termination was to be effective sixty days after notice had been given and not thirty-two days after that notice as was the case with the initial appointment. 

4                     The second term expired on 30 September 1997.  No express agreement was reached that the appointment should continue.  However, the applicant continued to act as a Subaru dealer and it is common ground, at least for the purposes of the present application, that the terms and conditions that governed the relationship between the applicant and the first respondent under the second appointment continued to apply, save to the extent that any of those provisions were inconsistent with the appointment remaining in force.  In particular, it was accepted that the provision dealing with the termination of the dealership (clause 12 of the second agreement) continued to have application. 

5                     It is possible, of course, that after the termination of the second term the arrangement between the parties was terminable at will or, as seems to be more likely, on reasonable notice:  see eg Winter Garden Theatre (London) Ltd v Millennium Productions Ltd [1948] AC 173; Martin-Baker Aircraft Co Ld v Canadian Flight Equipment Ld [1955] 2 QB 556.  However, for reasons that will become apparent, whether clause 12 continued to operate (by implication) or whether the right to terminate was at will or on reasonable notice, will not effect the outcome of this application.

6                     On 17 June 1998 the first respondent gave written notice of its “intention to terminate [the] relationship” between itself and the applicant.  It advised that “the termination date [was] to be effective July 1 1999.”

7                     This proceeding was commenced on 25 June 1999.  The principal relief that is sought is an injunction restraining the first respondent giving effect to the termination.  The present application is for an interlocutory injunction to that effect. 

8                     The two main grounds relied upon to obtain interlocutory relief are:  (a) that by terminating the dealership the first respondent is engaging in unconscionable conduct in contravention of s 51AC of the Trade Practices Act 1974 (Cth); and (b) that the termination is in breach of an implied term of the agreement that the first respondent not exercise any power conferred upon it by the agreement, including the power of termination, otherwise than in good faith.  The applicant also alleges that the first respondent has waived reliance on its notice of termination or is estopped from relying upon it.  Other grounds were relied upon to enjoin the termination, but they were not seriously pressed.

9                     Before turning to consider the legal issues that are raised by this application it is necessary to say a little more about the facts.  Most of them were not in dispute and, to the extent that they were, I will proceed on the assumption, as I believe I must on an application of this type, that it is seriously arguable that the applicant’s version of the disputed facts will be made out at the trial.  None of them, that is none of the facts asserted by the applicant and disputed by the first respondent, are fanciful or inherently improbable.  That is not to say, however, that I accept all that the applicant says.

10                  The applicant’s showroom is located in Glen Waverley.  After its appointment as a Subaru dealer, the applicant updated its showroom and purchased plant and equipment to the value of approximately $110,000.  It spent a further $40,000 approximately for staff training, advertising and the acquisition of stock.  Since the introduction of sales targets in about 1995, the applicant has reached or marginally exceeded those targets.  Thus it is to be inferred that the Subaru dealership is a successful operation.

11                  In 1997 the first respondent engaged a marketing company to conduct research into how the image of Subaru dealers could be improved.  Following that research the first respondent introduced what it called its “Six-Star Revitalisation Program”.  The program called for changes to dealer showrooms, service departments and spare parts departments.  It required the adoption of a uniform and distinctive interior and exterior decoration, new signage, improvements in the standard of service and the like.

12                  In about December 1997 each Subaru dealer was sent an outline of the program and was asked whether the dealer was willing to participate in it.  In February 1998, Mr C Cassar, the network development manager of the first respondent, attended at the applicant’s showroom and identified a number of areas where the showroom facilities and the practices adopted by the applicant did not conform to the program.  The areas of concern included the size of the showroom, the positioning of certain signs, and the colour of the tiles, paint and carpets.  In addition, the applicant did not provide financial information to the first respondent along with lines called for in the program. 

13                  On 6 May 1998 Mr Cassar met Mr G Rogers, a director of the applicant.  According to Mr Cassar, Mr Rogers asked whether it was possible to compromise (that is not comply with) the standards of the program to a level where the first respondent would be happy with it.  In particular, Mr Rogers indicated that he did not wish to comply with the program in respect of the showroom size, the signage, the colour of the tiles, paint and carpets and the reporting requirements.  Mr Cassar says that he informed Mr Rogers that the first respondent would not compromise the standards of the program and that the applicant should find some way to resolve any difficulties that it had with it. 

14                  In a letter dated 18 May 1998 sent to Mr Cassar, Mr Rogers wrote that the applicant was willing to increase the size of the showroom by carrying out certain renovations to the existing building.  He indicated that plans for this work had already been finalised and the building works were due to commence within four weeks.  As to the other matters, Mr Rogers explained why he thought that they should not be carried out.  Some he described as “pedantic”.  Others he described as unappealing.

15                  Mr Cassar provided his response eight days later.  He wrote:  “Would you please hold off your planned extensions to the proposed Subaru showroom.  I will be in Melbourne in a couple of weeks and will plan to meet you at that time.” 

16                  A meeting then took place on 12 June 1998.  At that meeting Mr Cassar informed Mr Rogers that the first respondent had decided to terminate the dealership with effect from 1 July 1999.  The letter of 17 June 1998 constituted formal notice of that decision. 

17                  Following receipt of this letter the applicant consulted with its solicitors who then wrote to Mr Cassar on 7 July 1998.  In their letter the solicitors said:

“Our clients deny that Subaru (Aust) Pty Ltd [the first respondent] has any right to terminate the relationship between the parties as alleged in your letter [of 17 June 1998].  Our client reserve all of their rights in respect of your letter and actions consistent with any purported termination of the relationship.”

18                  On 1 September 1998 Mr Cassar again attended at the showroom and spoke with Mr Rogers.  Precisely what was said is in dispute between the parties.  According to Mr Rogers, Mr Cassar was told that the whole of the showroom would be devoted to Subaru vehicles.  At the time the applicant also held a Daewoo dealership and vehicles from both manufacturers were displayed in the showroom.  Mr Rogers said that Mr Cassar acknowledged that the showroom was “nice” and that Subaru would consider the suggestion that the showroom be devoted to its vehicles.  Mr Cassar has a different recollection of what was said.  He has deposed that Mr Rogers said to him words to the following effect:

“Chris, I have had my lawyers review this matter and, frankly, they believe that my chances of success are not strong.  But there are other measures I can take.  We all make mistakes.  I have made two big ones.  How I could have built a showroom for Daewoo and not for Subaru, I don’t know.  I also seriously misjudged Subaru’s commitment to its Six-Star Program.  I didn’t think that you guys were serious.  I have been in this position a long time and I understand that things sometimes progress too far to be able to go back.  But I am a big boy and I understand and I know that sometime we have to pay for our mistakes.”

19                  However, Mr Cassar accepts he was told by Mr Rogers that the applicant now wished to adopt the Six-Star Program.  Mr Cassar concedes that he told Mr Rogers, after viewing the showroom, that it was “lovely”.  He went on to say that the state of the showroom was only one of the reasons why the applicant’s dealership was being terminated.  He says that he outlined those other reasons to Mr Rogers. 

20                  Each of Mr Cassar and Mr Rogers agree that Mr Cassar made no commitment on behalf of the first respondent that the dealership would continue beyond 1 July 1999.  Both of them say that it was agreed that Mr Cassar would take the matter up with the first respondent. 

21                  Approximately four weeks later Mr Cassar informed Mr Rogers that “Subaru was not prepared to go along with [Mr Rogers’] proposal”.  I take this to mean that the first respondent was not willing to withdraw its notice of termination.  This is certainly how Mr Rogers understood the communication.

22                  This advice caused the applicant to approach the Victorian Automobile Chamber of Commerce (VACC) for assistance.  In a letter dated 19 October 1998 the VACC requested Subaru to withdraw its notice of termination.  In that letter the VACC wrote that:

“Mr Rogers is willing to meet the minimum requirements of the [Six-Point] Program under your usual terms and VACC seeks your agreement to recommence discussions.’

The letter concluded with a threat of legal action. 

23                  Mr Rogers and Mr Cassar met again on about 20 October 1998 at the applicant’s showroom.  Mr Rogers says that during the course of the meeting he told Mr Cassar that he was proposing to construct a new showroom that would be available for the Subaru dealership.  He said that he would arrange for plans to be drawn up.  He says that Mr Cassar accepted this as “an excellent idea” and that Mr Cassar said that he was very interested to see the plans when they were prepared.  Mr Cassar denies saying to Mr Rogers that the proposal was an excellent idea and that he would be interested in viewing the plans.  However he does admit that he told Mr Rogers that his proposal had some merit, but asserts that he said that the showroom was only one factor in respect of which there was dissatisfaction.

24                  I digress from a recitation of the facts for a moment to point out what Mr Rogers says was his state of mind at the conclusion of the meeting on 20 October 1998.  He says that by that time, he was working on the assumption that the first respondent did not intend to proceed with the termination of the dealership.  Mr Rogers says that he based this assumption on the fact that the first respondent was supporting his proposal for a major upgrade of the facilities at the applicant’s premises.  Needless to say, Mr Cassar had quite a different view of the position.  He took Mr Rogers’ new proposal to the board of the first respondent, but it was rejected. 

25                  Notwithstanding that Mr Rogers has deposed that he believed that the first respondent was no longer going to proceed with the termination, I do not accept that he held that view or, if he did, that it was in consequence of any conduct by the first respondent.  In the first place, it is clear enough that as at 19 October 1998, the date before his meeting with Mr Cassar, Mr Rogers did not hold the view that the notice of termination had been withdrawn.  If he had, then there was no need to cause VACC to write and request that the notice be withdrawn.

26                  In the second place, even accepting Mr Rogers’ account of what had occurred on 20 October 1998, nothing that Mr Cassar has said could be construed as a promise or representation that the notice would be withdrawn.  A statement that the proposed development was an excellent idea and that Mr Cassar would be interested in viewing the plans for the proposed development could not be taken as an indication that the termination would not proceed.  The best that could be said of these comments is that Mr Cassar was indicating that there was a possibility that he (or more accurately the first respondent) might consider withdrawing the notice of termination.

27                  In any event, presumably before Mr Rogers acted on the assumption that he said he had formed, he was notified that the first respondent had not changed its position with regard to the termination of the dealership.  Thus, on 4 November 1998 the first respondent’s solicitors wrote to the VACC informing it that the first respondent was not prepared to withdraw the termination notice.  I infer that Mr Rogers was shown this letter shortly after its receipt. 

28                  Further, there is the letter of 24 November 1998, under cover of which Mr Rogers sent Mr Cassar the preliminary drawings that he had prepared for the proposed new showroom.  In that letter Mr Rogers makes no mention of the notice of termination.  I do not proposed to set out extracts from this letter, as that would unduly burden these reasons.  However, I believe that I can fairly describe the letter as a submission to the first respondent to agree to continue the dealership.  In my view, the letter was written for the purpose of persuading the first respondent to reconsider its decision to terminate the dealership. 

29                  Finally, on this aspect of the case, there is a letter dated 4 February 1999 from the solicitors acting on behalf of the VACC to the first respondent’s solicitors concerning the applicant’s dealership.  In that letter the solicitors wrote:

“One of our client’s members, Mr Gary Rogers, has approached our client for assistance in relation to a dispute over your client’s intention to terminate his Subaru dealership.  …  We are of the view that your client’s conduct in respect of our client’s member is unconscionable.  Our client therefore intends to pursue this matter on behalf of its member and we are currently in the process of preparing documentation in order to take this matter further.”

It is inconceivable that this letter was written without Mr Rogers’ knowledge.  Moreover, the letter is fundamentally inconsistent with Mr Rogers’ assertion that he was of the opinion that the first respondent was not intending to act on its notice of termination.

30                  I should also mention that on 10 May 1999 Mr Cassar wrote to the applicant confirming that “on 30 June 1999 you will cease being a Subaru dealer.  As such, after that date, you will not be able to sell or deliver any new Subaru vehicles.” 

31                  I have referred to these last two letters because the applicant says that after Mr Rogers’ discussion with Mr Cassar on 20 October 1998 the first respondent conducted its relations with the applicant “as if nothing [would] happen” and that this led Mr Rogers “to understand that the termination would not be proceeding”.  It is true that the business dealings between the two companies did proceed in a regular manner.  This is not surprising given the fact that the first respondent was content to allow the applicant to continue to act as a distributor until 1 July 1999.  However, the fact that business dealings between the two organisations did continue could not have induced the view that the termination would not proceed.  On the contrary, having regard to the correspondence that I have mentioned, it is clear that this was not the view of Mr Rogers.

32                  In virtue of the facts as I have outlined them, there is no serious issue that the first respondent, by its conduct, is estopped from relying on its notice of termination.  To found such an estoppel the applicant must show that the first respondent has, by its conduct, led the applicant to suppose that the strict rights under the dealership agreement would not be enforced and that, in the circumstances, an enforcement of those rights would be inequitable having regard to the dealings between the parties.  It would be inequitable to enforce those rights if the applicant had acted, or refrained from acting, to its detriment in reliance on the first respondent’s conduct.  There is no serious issue here because there is no conduct of the first respondent that could have led the applicant to believe that the termination would not proceed in accordance with the notice.  There is also no serious issue because no act or

failure to act by the applicant would result in any relevant detriment if the termination proceeds.

33                  For a case of waiver (perhaps more accurately an election) to be made out, it is necessary for the applicant to show that the conduct of the first respondent is only consistent with the continued existence of the dealership after 1 July 1999.  Continuing the business relationship until the date of termination cannot constitute a waiver of the first respondent’s intention to terminate the dealership on 1 July 1999.  There is no other conduct from which it could be inferred that the first respondent has waived its rights.  In any event, the statements made from time to time that the dealership would come to an end on 1 July 1999 makes it impossible to conclude that there was any waiver.  In my view, the point is not even arguable. 

34                  The first of the two substantive arguments that the applicant has put forward in support of an interlocutory injunction is based on the alleged implied term of good faith and fair dealing.  The first respondent was prepared to accept the implication of such a term in the dealership agreement for the purposes of the interlocutory application.  It could hardly do otherwise.  Recent cases make it clear that in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship:  see eg Renard Constructions (ME) Pty Ltd v Minister for Public Works [1992] 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 146 ALR 1; Alcatel Australia Ltd v Scarcella [1998] 44 NSWLR 349. 

35                  If such term 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.  There is no reason to think, prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms. 

36                  It remains for me to decide whether the implication of that duty results in the conclusion that the first respondent has acted in breach of it.

37                  In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously.  It would not operate so as to restrict actions designed to promote the legitimate interests of that party.  That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.

38                  However, whatever the precise content of the restriction on the exercise of a contractual power to terminate a contract is, it has not been exceeded in this case.  I say this for two reasons.  First, the first respondent did have good reason to terminate the dealership when it served its notice in June 1998.  It had decided that its Six-Point Program was an appropriate means of improving the position of its dealers in the marketplace.  It had requested the applicant to adopt the program in full and the applicant had refused to do so.  The first respondent was entitled to treat this conduct as being contrary to its own business interests and to act accordingly.  The second reason is that thirteen months’ notice of termination was given.  So far as the evidence discloses, this was a sufficient period of notice to enable the applicant to reorganise its affairs to accommodate the loss of the dealership, to the extent that it was able to do so.  At least, it has not been suggested that the period of notice was unreasonable. 

39                  I should mention in passing that the applicant did contend, in reliance upon cases such as Chan v Zacharia (1984) 154 CLR 178, Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 and United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, that the relationship between the parties was such that the first respondent owed duties of a fiduciary character to the applicant.  However, it was not suggested that the content of any such duty would be different than that imposed upon the first respondent by reason of the implication of a term requiring it to act in good faith and fairly.  It follows that if there were fiduciary duties governing the conduct of the first respondent, they were not breached when it gave the notice of termination.

40                  The second substantive point argued by the applicant was that in giving the notice of termination and, more importantly, in failing to withdraw that notice after the applicant had indicated its willingness to abide by the Six-Star Program, the first respondent had acted unconscionably, in contravention of s 51AC of the Trade Practices Act. 

41                  I will assume, as the first respondent suggested I might, that s 51AC has application to the facts of this case.  Section 51AC(1) is in the following terms:

“A corporation must not, in trade or commerce, in connection with:

(a)       the supply or possible supply of goods or services to a person (other than a listed public company);or

(b)       the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.”

42                  Section 51AC(9) provides that a reference in the section to the supply or possible supply of goods or services does not include a reference to the supply or possible supply of goods or services at a price in excess of $1,000,000.  Section 51AC(10) imposes the same restriction in respect of the acquisition or possible acquisition of goods or services.

43                  Section 51AC sets out the matters to which regard may be had in determining whether there has been unconscionable conduct in relation to the supply of goods or services.  One of the matters mentioned is the “requirements of any applicable industry code”:  see s 51AC(3)(g).  There is an applicable industry code:  the “Franchising Code of Conduct”.  That code came into operation on 1 July 1998.  However, by clause 5 most of its provisions did not take effect until 1 October 1998.  The code is applicable to the facts of this case, because clause 4(2) provides that a motor vehicle dealership agreement is to be taken as a franchise agreement for the purposes of the code.

44                  Relevant for present purposes is clause 22.  It provides:

“(1)     This clause applies if a franchisor terminates a franchise agreement:

            (a)        before it expires; and

            (b)        without the consent of the franchisee; and

            (c)        if the franchisee has not breached the franchise agreement;

                        and

            (d)        clause 23 does not apply.

(2)       For paragraph (1)(b), a condition of a franchise agreement that a franchisor can terminate the franchise agreement without the consent of the franchisee is not taken to be consent.

(3)       Before terminating the franchise agreement, the franchisor must give reasonable written notice of the proposed termination, and reasons for it, to the franchisee.

(4)       Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.”

45                  It will be noticed that this clause permits the termination of a franchise agreement before the expiry of the term of that agreement even if the franchisee has not breached the agreement.  However, before terminating the agreement, the franchisor must (a) give reasonable written notice of the proposed termination and (b) provide written reasons for the termination.  The first requirement has been satisfied.  Thirteen months’ notice was given.  The second requirement has not been complied with.  The first respondent did not provide written reasons for the termination.  However, in the circumstances I do not regard this failure as constituting unconscionable conduct.  The reason is that the applicant was aware that one factor, if not the principal factor, motivating the termination was its failure to adopt the Six-Star Program.  It is true that the first respondent contends that there were other reasons why the notice of termination was given.  Mr Cassar has said that he orally informed Mr Rogers of those reasons and this is one of the matters that are in dispute.  Nevertheless it seems clear enough, in my opinion, that even if there were no other reasons for the termination, the dealership would have been terminated in consequence of the failure by the applicant to adopt the Six-Star Program.  A failure to state in writing what the applicant knew to be the case could not constitute unconscionable conduct in my opinion.

46                  Further, I do not regard the refusal by the first respondent to withdraw its notice of termination as unconscionable conduct.  I take as the measure of unconscionability, conduct that might be described as unfair.  In the present circumstances I do not believe that the first respondent has acted unfairly in not wishing to reinstate the applicant as a dealer. The applicant had been a dealer for seven or eight years.  Whilst it was not obliged to adopt the Six-Star Program, that is, it was not contractually obliged to do so, its failure to adopt the program and its criticism of certain aspects of the program, could reasonably be regarded by the first respondent as an indication that the applicant was not willing to act in the best interests of the first respondent and of the dealership group as a whole.  No doubt this led to a loss of confidence in the applicant.  That loss of confidence would not necessarily be overcome by a change in attitude on the part of the applicant.  Many relationships can only operate satisfactorily if there is mutual confidence and trust.  Once that confidence and trust has broken down the position is not easily restored.  It is not unconscionable to terminate a relationship where that trust and confidence has been undermined.

47                  For the foregoing reasons, I would dismiss the application for interlocutory relief with costs.

Associate:

Dated:              2 July 1999