FEDERAL COURT OF AUSTRALIA

Australian Competition & Consumer Commission v Simply No‑Knead (Franchising) Pty Ltd [2000] FCA 1365

TRADE PRACTICES ‑ Prohibition of unconscionable conduct in connection with supply or possible supply of goods or services ‑ Meaning of “unconscionable” ‑ Whether limited to conduct that is unconscionable in equity.

Trade Practices Act 1974 ss 51AC, 51AD, 80

Hurley v McDonalds Australia Ltd [1999] FCA 465 considered

Hurley v McDonalds Australia Ltd (2000) ATPR 41‑741 applied

ACCC v Berbatis Holdings Pty Ltd (2000) 169 ALR 324 considered

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 445 cited

Blomley v Ryan (1956) 99 CLR 362 cited

ACCC v Leelee Pty Ltd (2000) ATPR 41‑742 considered

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v SIMPLY NO‑KNEAD (FRANCHISING) PTY LTD and CAMERON BATES

V 318 OF 1999

SUNDBERG J

22 SEPTEMBER 2000

MELBOURNE

THE COURT DECLARES THAT the second respondent was, within the meaning of section 87 of the Trade Practices Act 1974, a person involved in the first respondent’s contraventions of sections 51AC(1) and 51AD of the Act referred to in paragraphs 16, 21, 23, 27, 29 and 31 of the Amended Statement of Claim filed by leave on 13 September 2000.

THE COURT ORDERS THAT the second respondent pay the applicant’s costs of the application.

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

REASONS FOR JUDGMENT

INTRODUCTION

1                     On 16 June 1999 the applicant (“the Commission”) applied to the Court under ss 51AC, 51AD and 80 of the Trade Practices Act 1974 (“the Act”) for relief that included

·               a declaration that Simply No‑Knead (Franchising) Pty Ltd (“SNK”) had engaged in conduct in contravention of s 51AC(1) of the Act

·               a declaration that SNK had engaged in conduct in contravention of s 51AD of the Act

·               a declaration that the second respondent (“Bates”) was, within ss 82 and 87 of the Act, a person involved in SNK’s contravention.

On 17 May 2000 the Supreme Court of Victoria ordered that SNK be wound up in insolvency.  The Commission has made no application pursuant to s 471B of the Corporations Law for leave to continue with its claim against SNK, and now seeks relief against Bates alone.  Bates did not appear at the hearing, though he was aware of the hearing date.

2                     SNK was at all relevant times the owner of a business trading under the name “Simply No‑Knead” which supplied training and materials for making bread and related products in the home.  SNK’s directors were Ken Bates and Carol Bates.  Until 18 June 1998 they were joint managing directors.  At all material times since 1994 Bates was employed by SNK.  On 18 June 1998 he became a director and secretary of SNK, and was appointed managing director in place of his parents.  From about 1989 until 1999 SNK franchised the SNK business to certain franchisees.  In particular SNK entered into franchise agreements:

·               on or about 14 September 1995 with William and Gael Stach (“the McKinnon franchisees”) to establish a franchise in McKinnon

·               on or about 30 October 1993 with Maree Green and Teresa Margaret Cornwell (“the Heidelberg franchisees”) to establish a franchise in Heidelberg

·               on or about 16 November 1993 with Barry and Lola Bult (“the Canterbury franchisees”) to establish a franchise in Canterbury

·               on or about 1 March 1995 with Walter and Margaret Keating (“the Park Orchards franchisees”) to establish a franchise in Park Orchards

·               on or about 3 October 1994 with Whisper My Name Pty Ltd (“the Ferntree Gully franchisee”) to establish a franchise in Upper Ferntree Gully.

3                     The Commission identified six categories of conduct on the part of SNK which, it alleged, contravened s 51AC(1):

·               refusing to deliver franchised products to the McKinnon, Heidelberg, Canterbury and Ferntree Gully franchises

·               deleting the telephone numbers of the McKinnon, Heidelberg and Canterbury franchises from Telstra’s 013 Telephone Directory Assistance Service without the consent or the knowledge of the franchisees

·               unreasonably refusing requests from the franchisees to negotiate matters in dispute with SNK and to discuss matters of concern to the franchisees

·               producing and distributing advertising and promotional material which omitted the names of the franchisees and their franchised businesses

·               selling and offering to sell its products in the territories of the franchisees and in areas proximate to their territories

·               refusing to provide current disclosure documents to the McKinnon, Heidelberg and Canterbury franchisees in response to written requests.

The last item is also alleged to be a contravention of s 51AD.  Before dealing with these categories of conduct I will outline the provisions of Parts IVA and IVB of the Act and of the Franchising Code of Conduct prescribed under s 51AE of the Act.

THE LEGISLATION

4                     Part IVA of the Act consists of ss 51AAB to 51AC.  Section 51AA provides:

“(1)     A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

(2)        This section does not apply to conduct that is prohibited by section 51AB or 51AC.”

5                     Section 51AB(1) provides:

“A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person, engage in conduct that is, in all the circumstances, unconscionable.”

Sub‑section (2) contains a non‑exhaustive list of the matters to which the Court may have regard for the purpose of determining whether there has been a contravention of sub‑s (1).  The expression “goods or services” in the section is a reference to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption: sub‑s (5).  A reference to “the supply or possible supply of goods” does not include the supply or possible supply of goods for the purpose of re‑supply or for the purpose of using them up or transforming them in trade or commerce: sub‑s (6).

6                     Section 51AC(1) provides:

“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.”

Sub‑section (3) provides:

“Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the supplier) has contravened subsection (1) … in connection with the supply or possible supply of goods or services to a person … (the business consumer), the Court may have regard to:

(a)               the relative strengths of the bargaining positions of the supplier and the business consumer; and

(b)               whether, as a result of conduct engaged in by the supplier, the business consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and

(c)               whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services; and

(d)               whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and

(e)               the amount for which, and the circumstances under which, the business consumer could have acquired identical or equivalent goods or services from a person other than the supplier; and

(f)                the extent to which the supplier’s conduct towards the business consumer was consistent with the supplier’s conduct in similar transactions between the supplier and other like business consumers; and

(g)               the requirements of any applicable industry code; and

(h)               the requirements of any other industry code, if the business consumer acted on the reasonable belief that the supplier would comply with that code; and

(i)                 the extent to which the supplier unreasonably failed to disclose to the business consumer:

(i)         any intended conduct of the supplier that might affect the interests of the business consumer; and

(ii)        any risks to the business consumer arising from the supplier’s intended conduct (being risks that the supplier should have foreseen would not be apparent to the business consumer); and

(j)                the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer; and

(k)               the extent to which the supplier and the business consumer acted in good faith.”

7                     Sub‑section (5) provides that the mere institution of legal proceedings by a person is not to be taken as engaging in unconscionable conduct for the purpose of sub‑s (1).  Sub‑section (6) provides:

“For the purpose of determining whether a corporation has contravened subsection (1) …:

(a)               the Court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and

(b)               the Court may have regard to circumstances existing before the commencement of this section but not to conduct engaged in before that commencement.”

Sub‑section (7) provides:

“A reference in this section to the supply or possible supply of goods or services is a reference to the supply or possible supply of goods or services to a person whose acquisition or possible acquisition of the goods or services is or would be for the purpose of trade or commerce.”

8                     Part IVB ‑ “Industry Codes” consists of ss 51ACA to 51AE.  Section 51AD provides that a corporation “must not, in trade or commerce, contravene an applicable industry code”.  The expression “industry code” is defined in s 51ACA as a code regulating the conduct of participants in an industry towards other participants in the industry or towards consumers in the industry.  The expression “applicable industry code” is defined to include the prescribed provisions of any mandatory industry code relating to the industry. A “mandatory industry code” is an industry code that is declared by regulations under s 51AE to be mandatory.  Section 51AE provides that the regulations may prescribe an industry code and declare that an industry code is a mandatory industry code.

FRANCHISING CODE

9                     The Trade Practices (Industry Codes ‑ Franchising) Regulations 1998 prescribe as a mandatory industry code the Franchising Code of Conduct (“the Code”).  The Code is a joint publication of the Commission and the Department of Employment, Workplace Relations and Small Business.  It came into effect on 1 July 1998 and applies to franchise agreements entered into on or after 1 October 1998.  In relation to franchise agreements entered into before 1 October 1998, those parts of the Code relevant to the present case apply to the parties on and after that date.  Clause 6(1) of the Code provides:

“A franchisor must give a disclosure document under Annexure 1 to:

(a)               a prospective franchisee; or

(b)               a franchisee proposing to renew or extend a franchise.”

10                  Clause 9(1) provides:

“The purpose of a disclosure document under Annexure 1 is to give to a prospective franchisee, or a franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee or prospective franchisee to make a reasonably informed decision about the franchise.”

Clause 10 provides:

“A franchisor must give a copy of this code and a disclosure document in the form set out in Annexure 1:

(a)               to a prospective franchisee at least 14 days before the prospective franchisee:

(i)                 enters into a franchise agreement or an agreement to enter into a franchise agreement; or

(ii)               pays non‑refundable money to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or

(b)               to a franchisee at least 14 days before renewal or extension of the franchise agreement.”

Clause 11(1) provides:

“The franchisor must not:

(a)               enter into, renew or extend a franchise agreement; or

(b)               enter into an agreement to enter into, renew or extend a franchise agreement; or

(c)               receive non‑refundable money under a franchise agreement or an agreement to enter into a franchise agreement;

unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.”

Clause 19 requires a franchisor to give a franchisee a current disclosure document within fourteen days after receipt of a written request from the franchisee.

11                  Item 1.1(d) of the disclosure document (Annexure 1) requires a number of statements to be included on the first page of the document.  One of them is:

“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.”

Item 3 requires the document to include a summary of the business experience in the last ten years of each director, secretary, or partner of the franchisor who is likely to have management responsibilities for the franchisor’s business operations in relation to the franchise.  Item 6 requires disclosure of the number of existing franchised businesses, existing franchisees, and businesses owned or operated by the franchisor that are substantially the same as the franchise.  Item 8 requires information about the franchise territory, including whether other franchisees may in that territory operate a business that is substantially the same as the franchise, and whether the franchisor may in that territory operate a business that is substantially the same as the franchise.

THE CONTRAVENTIONS ALLEGED

Refusal to deliver franchised products

12                  By clause 6(i)(ii) of each franchise agreement the franchisees covenanted:

“To purchase from SNK the breadmaking and allied products referred to in Item 14 of the Schedule upon the terms and conditions of trading specified by SNK. The Franchisee may stock other products for sale to its customers provided that such products have been approved by SNK in writing and such approvals shall not be unreasonably withheld.”

13                  The Commission identified three occasions on which it alleged SNK refused to deliver products to one or more of the franchisees.  The first occasion involved the Heidelberg, McKinnon and Ferntree Gully franchises.  Between 21 July and early August 1998 the franchisees received, in addition to their orders, 1,000 “Product Range” brochures and a box containing 900 2kg bags of “Verona” flour.  The brochures had already been the subject of some dispute between the franchisees and SNK. By memo dated 6 July 1998 SNK had advised the franchisees they would soon be sent 1,000 product information leaflets to be handed out to customers, for which they would have to pay. SNK also planned to hold a competition involving all franchises, and obtain advertising on the 3MP radio station.  The franchisees were unhappy with the lack of consultation about the marketing plan as a whole and the cost of the brochures.  On 10 July the Ferntree Gully, Park Orchards, Canterbury and McKinnon franchisees faxed a letter to Bates advising that they did not agree to pay for the brochures, the competition or the advertising.  When the brochures arrived, they did not contain the name, address or contact number of any of the franchises (see par 23), and there were a number of spelling mistakes.  The boxes of 900 bags of Verona flour were a new product.  SNK had agreed that franchisees could order half boxes of flour for a slight surcharge.  This was important to the franchisees because it might take several years to sell a full box of 900 bags.  The Heidelberg, McKinnon and Ferntree Gully franchisees were billed for the flour and the brochures on 27 July.  All refused to pay for the brochures, and were only willing to pay for half a box of the “Verona” flour. Each sent off with their weekly orders a cheque for the amount in the invoice, less the cost of the brochures and half the amount for the flour.  On 4 and 5 August the franchisees were informed by the SNK delivery driver or by fax that their orders would not be delivered until the invoices were paid in full.  They were also told by the driver that he would not accept the half box or the brochures for return to SNK.  A few days later the franchisees were informed they could return half the “Verona” flour and the brochures at their own cost, but they would be held to be in breach of the relevant franchise agreement.

14                  The second occasion involved refusal to deliver franchised goods to the Heidelberg franchise between 21 September and 11 October 1998.  This followed a memo from Bates faxed on 21 September requiring the franchisees to return a diary given to them at the beginning of the year.  The diary was used to note the times of the classes that were held and the names of those who attended the classes.  The diary contained an insert saying it was to be returned to SNK in January 1999.  The Heidelberg franchisees refused to return the diary, because they believed SNK would use the contact details in it to send similar letters to those that had been sent to the customers of the Park Orchards and Ferntree Gully franchises in early September.  In those letters SNK claimed the franchises were not being properly conducted.  It alleged the franchisees had not correctly packaged products and had failed to pass on to their customers recipes and products that would have been of interest to them.  The delivery driver arrived later on 21 September with the franchisees’ order, but upon being informed of their refusal to return the diary he drove away without leaving the order.  On 28 September Bates faxed a memo to the Heidelberg franchisees entitled “Diary ‑ return of”.  It stated: “Can you confirm we will be receiving our diary today. Please confirm this before your delivery can be made, today.”  That day the franchisees’ solicitors wrote to SNK asking why the diary was needed. Bates’ response, by fax on 5 October, was “Will we be receiving our diary today.  Send confirmation.”  The goods were delivered on 12 October 1998.

15                  The third occasion was SNK’s refusal to deliver ordered goods to the McKinnon franchise between 2 November and 14 November 1998.  The McKinnon franchisees placed their order early on 2 November, because the next day was a public holiday.  They did so on the understanding that the goods would be delivered later the same day.  No delivery was received that day, or on 3 November (which was the public holiday) or on 4 November.  Upon calling SNK, the franchisees were directed to arrange to collect the delivery personally, or to wait until 5 November.  When the delivery truck did arrive, on the afternoon of 5 November, the driver informed the franchisees that no delivery would take place until they had signed a form requiring them to provide an exact stock figure by 10 November, in order to assist SNK with its stock flow.  The franchisees declined to sign the form immediately, and the goods were not delivered.

16                  By letter dated 7 November Bates informed the McKinnon franchisees they would be charged for the delivery of the goods despite their “refusal to accept the order”.  He demanded that the franchisees “decide in which direction you are going” before placing their next flour order. The franchisees did not respond to the demand, but placed their order on 9 November. Bates responded the same day: “As stated in the fax received by yourselves on Saturday, no orders will be placed until a decision has been made”.  At 3:10pm on 10 November the franchisees received a fax from Ken Bates, requiring an indication of the franchisees’ intentions by 3:15pm that day, after which delivery could not be guaranteed for the next day.  The franchisors responded on 12 November that they “would have thought that our intention to complete as much of our contract as possible was obvious” because “we remain in operation despite your continuing harassment”.  Bates replied the next day that “As Franchisor, we have the right to access any information required from a Franchise and at any time.  You must comply with these requests at all times”.  He again demanded to be informed of the direction the franchisees intended to follow, despite the previous day’s letter.  The franchisees ceased trading as SNK McKinnon on 14 November.

Deletion of telephone numbers

17                  The Park Orchards franchise ceased trading as SNK Park Orchards on 31 August 1998, and began trading under the name “So So Easy”.  Around 21 September “So So Easy” customers informed the former franchisee, Mr Walter Keating, that the only 013 telephone number provided under the name “Simply No Knead” was that of SNK Seaford, the franchisor’s operation.  Upon calling Telstra’s 013 Directory Assistance, Mr Keating was informed that SNK had requested the deletion of the franchises’ listings.  Mr Keating contacted the Heidelberg franchisees on 22 September to inform them of the de-listing.  One of the franchisees, Maree Green, called 013 and was told that there were no listings for any of the SNK Heidelberg, Canterbury, McKinnon, Park Orchards or Ferntree Gully stores.  She was also told that SNK had requested that the Directory Assistance be amended to remove the Heidelberg, Canterbury, McKinnon, Park Orchards and Ferntree Gully franchises.  Similar inquiries of Telstra were made by Barry Bult, one of the Canterbury franchisees, and Gael Stach, one of the McKinnon franchisees.  Similar responses were received.  The Heidelberg, McKinnon and Canterbury franchisees by facsimile requested Telstra to change its customer information so as to record them as lessees of the relevant telephone numbers.  Telstra complied with the request.

Refusal to negotiate

18                  The franchisees as a group made two written requests of SNK for a meeting to discuss matters in dispute between them and SNK.  The first was a response to the 6 July 1998 memo sent to each of the franchisees (see para 13).  On 10 July the Ferntree Gully, Park Orchards, Heidelberg, Canterbury and McKinnon franchises faxed SNK Seaford, stating:

“The above mentioned Franchises wish to state that we are not prepared to participate and commit financially to your competition, information handouts, 3MP advertising and bread making machines until we have a group meeting at which we are fully briefed on the procedures to be adopted.

Please contact the above mentioned Franchises as soon as possible to arrange a suitable meeting date.”

Bates’ response, by facsimile sent to “ Upper Ferntree Gully, Park Orchards, Heidelberg, Canterbury, McKinnon” on 13 July, was as follows:

“I acknowledge receipt of fax dated 10/07/98, undated, unsigned and source unknown.

To be officially recognised, this letter needs to be received on S.N.K. letterhead from each franchise, signed and dated by each franchisee.

Please do not send by fax.”

19                  On 21 July solicitors retained by the franchisees sent to SNK’s solicitors a formal letter signed by each of the Ferntree Gully, Canterbury, Heidelberg, McKinnon and Park Orchards franchisees.  It informed SNK that the franchisees “believe that it is time that we formally notified you of our universal dissatisfaction with the operation and management of the SNK franchising business”, and listed fifteen “major concerns”.  Under the heading “Mistrust” the franchisees asked:

“Why do you refuse to conduct Franchise meetings? Meetings are a recoginsed forum for exchanging information, clarifying issues, airing and resolving issues.

There has not been a Franchise meeting for over 18 months. During this time there have been numerous requests by Franchisees for meetings to discuss issues ranging from profitability to new recipes to advertising with the end result, nothing.”

At the end of the letter the franchisees stated “urgents steps need to be taken to resolve this unworkable situation”, and requested a meeting with Ken Bates, Carol Bates and Bates, chaired by a mutually agreed independent person.

20                  In a memorandum faxed to the franchisees on 22 July, Bates (who on 13 July had informed the franchisees he had replaced his parents as managing director on 18 June) replied to the letters of 10 and 21 July.  He sent the fax only to the Heidelberg franchisees.  He said he would hold a series of one to one meetings at SNK in Seaford on a weekday in the afternoon.  A letter informing the franchisees of the date and time for each meeting would be sent out. If the time was not suitable, “then a second and final time will be allocated to your franchise.”  The meeting would only cover advertising and the future promotion of SNK and its products.  The franchisees never received information regarding the time and place of the proposed meetings.  However on 26 August SNK’s solicitors wrote to the franchisees’ solicitors advising that SNK “has now had a chance to fully consider the various issues raised to date.”  The letter went through each of the fifteen points, denying any wrongdoing or breach of the franchise agreements.  SNK pointed to a lack of compliance with the SNK business systems, a refusal to attend further training, and obstructiveness by the franchisees, as reasons why further meetings were not held.  The letter went on to state:

“We are instructed that the meetings that did take place were unproductive and quickly degenerated into argument.

Rather than address the individual issues raised here in detail our client reiterates that your clients are not complying with the Franchise Agreement nor conducting themselves or their businesses in accordance with the systems and procedures set out…

It may well be due to your clients’ intractable position that our client has become frustrated in its attempts to include your clients in the decision making process.

…

Given the animosity between the parties, we suggest that prior to any round table occurring, that we discuss this matter further.”

No further correspondence occurred between the parties on this issue.  In the interval between the franchisees’ solicitors’ letter of 21 July and SNK’s solicitors’ reply on 26 August, the Canterbury franchisees had decided to terminate their franchise agreement.

21                  Another series of communications took place between Bates and Gael Stach, one of the McKinnon franchisees.  Ms Stach telephoned Bates on 30 September 1998 requesting an informal meeting to discuss the future of the franchise.  Bates said he would look at his diary and call back with a suitable date and time.  He did not do so.  On 2 October Ms Stach received a fax from Bates in which he said:

“As you have aligned yourself with other franchisees and being signatories to all correspondence through your solicitors, we require details in writing of the discussions you have asked for.  Forward these to our solicitors as follows.”

In a telephone conversation later that day Bates refused to discuss Ms Stach’s concerns, concentrating instead on the 21 July letter and whether Ms Stach had signed it.

22                  On 13 October the McKinnon franchisees responded in writing to Bates’ fax, saying they wished to discuss SNK’s future marketing policy, the availability of any Christmas recipes, and statements by customers that they had been informed that there would be no SNK franchises left by Christmas. No response was received.  On 23 October the franchisees wrote to SNK’s solicitors and formally requested mediation in accordance with the Franchising Code of Conduct.  They asked to be notified of SNK’s willingness to attend mediation within five working days.  On 27 October SNK’s solicitors wrote back stating that in order for the mediation procedure in the Franchising Code to be invoked, SNK must be informed in writing of the nature of the dispute, the outcome sought by the franchisees, and what action they thought would settle the dispute.  The letter continued “After our client receives such written notification the parties must then try to agree about how to resolve the dispute.  It is premature to be requiring mediation at this stage”.  On the same day Bates wrote to the McKinnon franchisees stating “If you [are] prepared  to comply with all Simply No Knead Franchising directives, then and only then will we be prepared to discuss any future matters relating to the running of S.N.K. McKinnon”.  The McKinnon franchisees subsequently gave up on the idea of mediation.

Exclusion of franchisees from advertising

23                  The “Product Range” brochures were delivered to the franchisees in late July and early August 1998. Franchisees were instructed that the brochures were “to be handed out to every customer who comes in”. However the brochures did not contain any contact details for individual franchises. Instead the brochures stated:

“FOR YOUR CLOSEST OUTLET CONTACT

SIMPLY NO KNEAD BREADMAKING

5 CUMBERLAND DRIVE

SEAFORD.VICTORIA 3198

TEL: (03) 9786 0266

FAX: (03) 9786 1123

For details on MAIL ORDER, FRANCHISING or DISTRIBUTION

Australia wide, please contact the above number.”

The franchisees were concerned about being required to pay for brochures that did not contain their own contact details.  This was compounded by the fact that the brochures invited customers to contact the SNK Seaford outlet for mail orders.  These matters, as well as spelling mistakes, were cited when they refused to pay for the brochures, an action which led to the arguments that took place on 4 and 5 August, outlined in para 13.

Competing with franchisees

24                  In clause 7(h) of the franchise agreement SNK covenanted that it would:

“Not sell SNK products or conduct the franchised business within the territory during the term of this Agreement by itself or its other franchisees or solicit business within the said territory PROVIDED that nothing in this paragraph shall affect SNK’s general corporate advertising campaigns in respect of the products or the method.”

25                  Between July and November 1998 SNK engaged in conduct which had the effect of competing with the franchised businesses.  Advertisements were placed in newspapers circulating inside the franchised territories.  Advertisements in September and October announced that SNK products could be obtained from independent retailers in areas inside the franchised territories, specifically a store in Kew, within the Canterbury franchise.  The prices at these stores were the same as those at the franchises.  The availability of SNK products at independent stores outside but near the territories, such as at Target Home in Greensborough, near the Heidelberg franchise, was advertised in newspapers circulating inside the territories.  Other conduct included selling franchised products to third parties, who onsold to health food shops within the franchised territories.  This conduct was acknowledged in SNK’s solicitors’ letter of 26 August 1998.  However, the solicitors claimed it was not a breach of the agreement, because “our client does not supply to any third party located within a franchised territory”.

26                  In October and November SNK placed advertisements in 26 different newspapers, including six newspapers in which the franchisees advertised. The advertisements announced that SNK products:

“Can now be delivered FREE

thoughout Melbourne Metro area with

any minimum order of $25.

This ‘offer’ is only available through

Simply No Knead SEAFORD

To place your order please contact

Cameron or Kirsty on 9786 0266

or 9773 5844

Or request a free product and price

brochure to be mailed or faxed.”

Refusal to provide disclosure documents

27                  On 1 October  the Heidelberg franchisees’ solicitors wrote to SNK’s solicitors asking if and when SNK would be providing a disclosure document.  In their reply dated 6 October, the solicitors confirmed their instructions:

“that unless and until your client informs us that it proposes to renew the Franchise Agreement there will not be a Disclosure Document provided.”

28                  The McKinnon franchisees wrote to SNK’s solicitors on 23 October requesting a disclosure document under the Code.  On 27 October the solicitors replied that “as far as we are aware our client does not have ready a ‘current Disclosure Document’ and, as such, is not in a position to immediately provide you with a copy”.  Another written request was sent on 12 November.  Bates replied on 13 November that a decision about the future direction of the franchise was required in response to his earlier letters before a disclosure document would be provided ‑ “A disclosure Document will be issued when all matters are resolved and our requests are met”.  (See para 22 for discussion of the wider context of the correspondence).  The franchisees ceased trading as SNK McKinnon on that day.

29                  On 26 October the Canterbury franchisees requested a disclosure document.  On 30 October SNK replied that since it was no longer selling franchises, it was unable to provide a disclosure document.  A further request for a disclosure document was ignored.

“UNCONSCIONABLE” IN PART IVA

30                  In Hurley v McDonalds Australia Ltd [1999] FCA 465 Dowsett J said:

“It is said [by the claimants] that s 51AA deals with unconscionable conduct in the traditional sense and that s 51AB relates to some other form of conduct.

…

For present purposes … unconscionable conduct in both sections encompasses traditional equitable concepts.  This approach also appeals to me because it avoids solving what appears to be an insoluble problem, namely what is meant by ‘unconscionable conduct’ in s 51AB if it is not the meaning attributed to the expression in the various cases, with the addition of the concept of undue influence.”

His Honour did not refer to s 51AC.  On appeal (Hurley v McDonalds Australia Ltd (2000) ATPR 41‑741) the members of the Full Court said (at 40,585) that they “should not be taken necessarily to be in agreement with” Dowsett J’s view.  The Full Court went on to say, it seems of both ss 51AB and 51AC:

“For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated ‑ Cameron v Qantas Airways Ltd … (1994) 55 FCR 147 at 179.  Whatever ‘unconscionable’ means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable ‑ Qantas Airways Ltd v Cameron … (1996) 66 FCR 246 at 262.  The various synonyms used in relation to the term ‘unconscionable’ import a pejorative moral judgment ‑ Qantas Airways Ltd v Cameron … at 283‑4 and 298.”

31                  Whatever might be the position with s 51AB, in my view “unconscionable” in s 51AC is not limited to the cases of equitable or unwritten law unconscionability the subject of s 51AA.  The principal pointer to an enlarged notion of unconscionability in s 51AC lies in the factors to which sub‑s (3) permits the Court to have regard.  Some of them describe conduct that goes beyond what would constitute unconscionability in equity.  For example, factor (j) directs attention to the extent to which the supplier was willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer.  Factor (g) relates to the requirements of any applicable industry code.  Further, it is to be remembered that the list of factors in sub‑s (3) is not exhaustive.

32                  In the second reading speech on the Bill that became the Trade Practices Amendment (Fair Trading) Act 1997, by which s 51AC was introduced, the responsible Minister said the section “will extend the common law doctrine of unconscionability expressed in the existing section 51AA”.

33                  ACCC v Berbatis Holdings Pty Ltd (2000) 169 ALR 324 concerned s 51AA.  French J examined at length the ambit of the unwritten law of unconscionability (at 330‑335).  At 335 his Honour said there was no reason to suppose that the unconscionable conduct prohibited by ss 51AB and 51AC is limited by reference to “specific equitable doctrines”, and pointed out that the factors to which the Court is required to have regard for the purpose of determining whether there has been a contravention, “include undue influence and duress and other issues falling outside the equitable doctrines to which reference has been made”.

34                  Dowsett J in Hurley concerned himself only with s 51AB.  The specific factors listed in sub‑s (2) to which the Court can have regard in applying that section are fewer than those enumerated in s 51AC(3).  They are:

“(a)     the relative strengths of the bargaining positions of the corporation and the consumer;

(b)               whether, as a result of conduct engaged in by the corporation, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the corporation;

(c)               whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services;

(d)               whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the corporation or a person acting on behalf of the corporation in relation to the supply or possible supply of the goods or services; and

(e)               the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the corporation.”

These factors correspond to the first five factors in s 51AC(3).

35                  The s 51AB(2) factors do not so clearly suggest, as do the s 51AC(3) factors, that unconscionability in s 51AB is a more ample concept than the unwritten law’s unconscionability.  Nevertheless, as with s 51AC(3), s 51AB(2) does not limit the factors the Court may consider.  It would be curious if “unconscionable” in the two provisions had different meanings ‑ in s 51AB the same as in s 51AA and in s 51AC a wider meaning.  The Full Court in Hurley seems to have assumed the word had the same meaning in both sections: (2000) ATPR at 40,585.  The Explanatory Memorandum on the Bill that became the Trade Practices Revision Act 1986, by which s 52A (which later became s 51AB) was inserted, does not throw much light on the matter.  It was said that the new section would “at least” cover conduct of the kind discussed in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 445.  It was pointed out that Amadio concerned a relationship between a banker and a guarantor, and that while many other unconscionability cases involved some type of fiduciary relationship, there was no requirement under the new section for a special relationship between the parties:

“if the conduct is unconscionable in the circumstances then it is prohibited, whether or not the parties are in a special relationship.  The section could apply to a contract between a supplier and a purchaser where the contract imposes onerous obligations on the purchaser and he/she was not in a position reasonably to protect his/her own interests.”

It was then observed that while equity recognises that unconscionable conduct and undue influence are separate grounds of relief, it was intended that the section would include conduct falling under either of these grounds.  Perhaps all that can be said is that, like s 51AB itself, the Explanatory Memorandum’s flavour is that the intention was not simply to adopt whatever the common law might from time to time say about unconscionability.

36                  The Explanatory Memorandum on the Bill that became the Trade Practices Legislation Amendment Act 1992, which introduced s 51AA (and relocated s 52A into the new Part IVA and renumbered it s 51AB), throws more light on the matter.  After noting that s 51AA embodies the equitable concept of unconscionable conduct as recognised by the High Court in Blomley v Ryan (1956) 99 CLR 362 and Amadio, the Memorandum continued:

“43.     It is clear that the equitable principles of unconscionable conduct do not embrace conduct which, with nothing more, is merely unfair or unreasonable, or which merely amounts to a hard bargain.

44.              Section 51AA is not intended to extend the principles of unconscionable conduct beyond those recognised by the courts of this country under the laws of equity ...

…

46.             … The insertion of section 51AA is not intended to modify the operation of section 51AB, or to imply that section 51AB has a meaning which differs from the current meaning of section 52A.

47.             The prohibition of unconscionable conduct in subsection 51AB(1) is expressed in different fashion to the prohibition in subsection 51AA(1), and is affected by the operation of subsections 51AB(2), (3), (4), (5) and (6).  To the extent that section 51AB may diverge from the equitable principles of unconscionable conduct, its interpretation will not affect the interpretation of section 51AA.”

Thus, albeit in a latter Explanatory Memorandum, it is made clear that “unconscionable” in s 51AB is not limited to what is unconscionable in s 51AA.

37                  The present case does not involve s 51AB, and it is accordingly unnecessary to decide whether that section is as confined as Dowsett J in Hurley thought it is.  But it is necessary to decide the ambit of s 51AC.  For the reasons I have given in pars 31 to 33, the section is not confined in the manner Dowsett J thought s 51AB is.  Whether conduct is unconscionable for the purpose of s 51AC is at large.  In performing its task the Court is aided but not controlled by the factors listed in sub‑s (3).

SECTION 51AC(6)(B)

38                  Section 51AC came into operation on 1 July 1998.  Sub‑section (6)(b) provides that for the purpose of determining whether a corporation has contravened sub‑s (1):

“the Court may have regard to circumstances existing before the commencement of this section but not to conduct engaged in before that commencement.”

The Commission submitted that the line between “circumstances” and “conduct” should be drawn so as to prevent a court from applying s 51AC remedies to conduct that occurred before 1 July 1998.  That is, s 51AC(6)(b) prevents a court from, for example, declaring that conduct that occurred prior to 1 July 1998 constituted a contravention, or was part of the conduct constituting a contravention, of s 51AC(1).  Thus, an unreasonable refusal to negotiate terms and conditions of a contract for the supply of goods which occurred on 30 June 1998 could not be found to contravene s 51AC(1).  However, where pre‑1 July conduct merely provides a proper context for post ‑ 1 July conduct, or provides a foundation for an understanding of the relationship between the relevant persons whose post ‑ 1 July conduct is in question, it is not excluded by sub‑s (6)(b).  A submission to the same effect was rejected by Mansfield J in ACCC v Leelee Pty Ltd (2000) ATPR 41‑742.  The Commission urged me not to follow Leelee.  Since my decision in no way turns on the proper construction of sub‑s (6)(b), and since for want of appeareance by Bates a view contrary to the Commission’s was not put, I do not propose to enter upon the correctness of this aspect of Leelee.

UNCONSCIONABLE CONDUCT?

Refusal to deliver franchised products

39                  The first occasion on which SNK refused to deliver franchised products was precipitated by the brochures/flour incident.  The brochures were of no commercial advantage to the franchisees.  They did not mention the franchises, their locations or their contact numbers.  Only SNK’s details appeared.  The franchisees had not been consulted about the content of the brochures.  Despite all this they were being asked to pay for them.  The brochures were sent to them notwithstanding that they had informed SNK they did not agree to pay for them.  The boxes of 900 bags of Verona flour were delivered despite an arrangement that only half boxes would be delivered.  The franchisees’ conduct in paying for half the flour and refusing to pay for the brochures was reasonable in the circumstances.  The refusal to deliver the franchisees’ weekly orders on 4 and 5 August unless the invoices were paid in full (ie the cost of the brochures and the full box of flour) was the exertion of pressure on, and the use of unfair tactics against, the franchisees within factor (d) in s 51AC(3).

40                  The refusal to supply the Heidelberg franchise over the diary incident was designed to put pressure on the franchisees to hand over the diary.  Bates’ memo of 28 September was clear ‑ return the diary or delivery would not be made.  SNK had no entitlement to the diary until January 1999.  It contained, amongst other things, the names of those who attended the franchisees’ classes.  The proper inference to draw is that the franchisees’ fear as to why SNK wanted the diary was well‑founded.  SNK’s solicitors did not respond to a reasonable request by the franchisees as to why SNK needed the diary.  The intimidating and belligerent memos and letters from Bates compounded the economic threats and pressure inherent in the refusal of the supply of goods known by SNK to be essential to the operation of the franchise.  The refusal to supply was the exertion of pressure on, and the use of unfair tactics against, the franchisees within factor (d) in s 51AC(3).

41                  The refusal of supply to the McKinnon franchise followed the same pattern.  Unless the franchisees signed the form, delivery of the goods sitting in the truck outside the premises would not be made.  Salt was rubbed into the wound by the baseless assertion that the franchisees had refused to accept the goods.  This was SNK’s justification for charging them for the goods.  Then the franchisees were harassed about disclosing their intention as to extension of the franchise as the price of receiving a delivery in November.  Again the refusal to supply was made in order to put pressure on the franchisees to do what SNK wanted done, but had no entitlement to have done.  It was the exertion of pressure on, and the use of unfair tactics against, the franchisees within factor (d).

Deletion of telephone numbers

42                  There is no admissible evidence that SNK caused Telstra to delete the franchisees’ 013 telephone numbers.  Nearly all the information recorded in par 17 is hearsay.  The faxes from the Heidelberg, McKinnon and Canterbury licensees requesting Telstra to change its customer information so as to record them as lessees of the relevant telephone numbers does not sustain the inference that SNK required the deletion of their numbers.

Failure to negotiate

43                  Bates’ memo of 13 July in response to a request for a meeting to discuss matters arising out of his earlier memo about the brochures was unacceptably provocative.  The franchisees’ request was reasonable.  They had not been consulted about the content of the brochures for which they had been told they had to pay.  Bates refused to acknowledge the request until it was put in a formal manner on SNK letterhead.  And, unlike most of his communications with the franchisees, they were not allowed to communicate their requests to him by fax.  Further, Bates refused to hold a joint meeting of the franchisees, who had made a joint request.  The meetings had to be one on one.  They could only deal with advertising and the future promotion of SNK and its products.  He promised to provide some dates, but never did so, and no meetings took place.  The claim in SNK’s solicitors’ letter of 26 August that SNK had “become frustrated in its attempts to include the franchisees in the decision making process” was baseless.  Every indicator is to the contrary ‑ refusal to consult, unilateral imposition of conditions, refusal of supply, intimidation, intransigence and lack of good faith.  Having regard to the nature of the relationship that ought to exist between franchisor and franchisee, SNK’s failure to negotiate in July and August 1988 was unfair, unreasonable and harsh.

44                  SNK’s refusal to discuss matters with the McKinnon franchisees except upon the terms contained in its fax of 2 October, and Bates’ refusal to discuss their concerns in a telephone conversation on the same day, was unreasonable.  The franchisees had the temerity to sign the joint letter of 21 July, and for that reason Bates was not going to discuss things with them.  His promise on 30 September that he would get back to Ms Stach with a date and time for a meeting was not honoured.  Bates failed to reply to the 13 October request for a meeting.  His 27 October fax was in his customary truculent style ‑ the price of a meeting was an undertaking by the franchisees to comply with all SNK’s “directives”.  “Then and only then will we be prepared to discuss any further matters …”.  SNK’s conduct in relation to the McKinnon franchisees was unreasonable, unfair, harsh, oppressive and wanting in good faith.

Exclusion from advertising

45                  The demand that the franchisees distribute to customers brochures that made no reference to them or their businesses, but only referred to the franchisor and the ways in which it could be contacted and traded with, and that the franchisees pay for the privilege, in default of which they were denied the very products they needed to run their businesses, was unfair and unreasonable having regard to the franchisor/franchisee relationship, and oppressive.

Competing with franchisees

46                  Between July and November 1998 SNK

·               advertised, in newspapers circulating within the franchisees’ territories, in which the franchisees themselves advertised, the fact that franchised products were available for purchase from SNK, with free delivery on request for purchases of $25 or more

·               advertised in those newspapers and in a promotional brochure that franchised products were available at independent retail outlets, including outlets within the franchisees’ territories

·               sold franchised products, directly and indirectly, to independent retail outlets, including outlets within the franchisees’ territories.

This conduct was calculated to damage the franchised businesses, in the sense that SNK must have known it would damage them.  It was inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith on the part of SNK within factor (k).

Refusal to provide disclosure document

47                  The Heidelberg, Canterbury and McKinnon franchisees made written requests for disclosure documents.  They were not provided.  The treatment of the Heidelberg franchisees’ request amounted to more than a mere failure to provide the document.  As a condition of agreeing to provide it, SNK insisted on knowing whether the franchisees intended to renew the agreement.  Until they indicated an intention to renew, “there will not be a Disclosure Document provided”.  The purpose of a disclosure document is to give a prospective franchisee, or one proposing to renew, information to help the franchisee make a reasonably informed decision on the matter.  SNK’s conduct was calculated to frustrate the intention of the Code ‑ that a franchisee would have relevant information before being required to commit itself.  Once again one sees the bullying tactics that characterise Bates’ conduct of his relations with SNK’s franchisees.  It was harsh and oppressive conduct.

48                  The position is much the same with the McKinnon franchise.  In October SNK’s solicitors indicated that a document would be provided, though it was not immediately available.  After another request Bates said that a document would be provided only after “all matters are resolved and our requests are met”.  The matters and requests included a demand that the franchisees first indicate whether they were intending to renew.

49                  The Canterbury franchisees requested a disclosure document in October.  Bates replied that SNK was no longer selling franchises and was therefore unable to supply a document.  A second request shortly thereafter elicited no response.

50                  SNK did not just fail to provide the Heidelberg and McKinnon franchises with a disclosure document.  The failure was aggravated by the unreasonable conditions attached to any provision of a document, conditions calculated to frustrate the intention of the Code and the entitlement of the franchisees.  The position with Canterbury does not have that aggravating feature.  But again the failure to provide the document does not stand alone.  The franchisees’ first request was met with a fatuous excuse ‑ that SNK was no longer selling franchises.  When the inadequacy of this excuse was pointed out to SNK, it simply ignored the renewed request for a document.

Conclusion on unconscionability

51                  Having had regard to the applicable sub‑s (3) matters, and all the other circumstances of the case, I have concluded that the accumulation of incidents discussed and characterised in pars 39 to 41 and 43 discloses an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee that amounts to unconscionable conduct by SNK for the purposes of s 51AC(1). Further, that conduct, in particular competing with the franchisees, refusing to supply products for (at least on two occasions) contrived reasons, omitting the franchisees’ names from the brochures, and the hostile and pugnacious manner in which Bates dealt with them, shows that soon after the franchisees’ letter of 21 July 1998 (if not before) SNK devised a plan intended to cause the franchisees to terminate or not renew their franchise agreements.  SNK’s conduct achieved its aim.  Between August and November all the franchisees either terminated their agreements or did not renew them.  There is no doubt that SNK’s conduct was a cause of their respective decisions in this regard.  Some support for the conclusion that SNK’s conduct was calculated to achieve the end result comes from its own mouth.  For example, after the Park Orchards franchise closed, SNK wrote to former customers of the franchise.  The letter contained these passages:

“We would like to apologise for the sudden closure of Simply No Knead Park Orchards.  We, like you, had no idea this was to happen.

…

Over the years we have found that franchising our business has been very restrictive.  We now have the opportunity to distribute our products over a much wider area and not be restricted to one central outlet as in the past.  This will make accessing SNK’s products much easier.”

SNK’s plan and its implementation constitute unconscionable conduct for the purposes of s 51AC(1).  The Commission submitted that the findings that have led to this conclusion also disclose intended conduct on SNK’s part that might affect the interests of the franchisees, which it unreasonably failed to disclose to them, within factor (i) in s 51AC(3).  I doubt whether they do.  But in view of my conclusion as to SNK’s plan to drive the franchisees out, I need not express a concluded view on this issue.

Section 51AD

52                  SNK’s refusal to provide disclosure documents to the Heidelberg, McKinnon and Canterbury franchisees contravenes s 51AD.

Bates

53                  It is obvious from the events I have recounted that Bates was involved in SNK’s contraventions of s 51AC and 51AD.  He was the person by whom SNK committed its contraventions.  He was therefore directly knowingly concerned in them for the purposes of s 75B(1)(c).

Relief

54                  I will make declarations substantially in the form sought by the Commission.  Bates must pay the Commission’s costs of the application.

Associate:

Dated:              22 September 2000

There was no appearance by the second respondent