FEDERAL COURT OF AUSTRALIA

Pampered Paws Connection Pty Ltd (ACN 116 460 621) (on its own behalf and in a representative capacity) v Pets Paradise Franchising (QLD) Pty Ltd (ACN 054 406 272) (No 2) [2008] FCA 1716

PAMPERED PAWS CONNECTION PTY LTD (ACN 116 460 621) (ON ITS OWN BEHALF AND IN A REPRESENTATIVE CAPACITY) v PETS PARADISE FRANCHISING (QLD) PTY LTD (ACN 054 406 272), PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391), PETS PARADISE FRANCHISING (NSW) PTY LTD (ACN 006 919 222), GLOBAL PET PRODUCTS PTY LTD (ACN 005 666 599), PETS PARADISE (FRANCHISING) PTY LTD (ACN 006 626 455), PETS PARADISE PTY LTD (ACN 005 558 378), PARADISE RETAIL HOLDINGS PTY LTD (ACN 105 253 441) and GARY DIAMOND

SAD.142 of 2008

MANSFIELD J

13 NOVEMBER 2008

ADELAIDE

THE COURT ORDERS THAT:

1.                  The application for interlocutory orders is refused.

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

1                     On 24 October 2008, on the application of Whiley Investments (Qld) Pty Ltd (Whiley) and Marshelle Pty Ltd (Marshelle), I made interim orders restraining Pets Paradise Franchising (QLD) Pty Ltd (PPFQ) and Pets Paradise Franchising (SA) Pty Ltd (PPFSA) respectively from giving effect to the documents entitled Notice of Termination of Franchise Agreement each dated 24 October 2008, given to Whiley and Marshelle in relation to the Franchise Agreements between them and PPFQ and PPFSA respectively.

2                     Each of Whiley and Marshelle has now applied for that injunction to be granted on an interlocutory basis, pending the hearing and determination of this proceeding.

3                     The proceeding is instituted as a representative proceeding by the applicant on its own behalf and a number of Pets Paradise franchisees including both Whiley and Marshelle.

4                     In the amended statement of claim, each of PPFQ and PPFSA, as well as Pets Paradise Franchising (NSW) Pty Ltd (PPFNSW) are alleged to carry on the businesses of granting franchises under the Pets Paradise name to provide pets and pet accessories by retail in Queensland, South Australia and New South Wales respectively.  They are each alleged to carry on their businesses in accordance with the “Pets Paradise Business Model” developed by Gary Diamond.  That model involves:

·                    the franchising of businesses, or the direct conduct of retail businesses, under the Pets Paradise name;

·                    the supply of goods to businesses operating under that name, including the franchisees, by Global Pet Products Pty Ltd (Global);

·                    the conduct of those businesses in accordance with disclosure documents, franchising agreements, confidentiality agreements and other documents, all in common form developed by Pets Paradise (Franchising) Pty Ltd (PPF);

·                    the use of certain registered trademarks in the businesses and the provision of fixtures and fittings used in the businesses in accordance with hire purchase agreements undertaken by Pets Paradise Pty Ltd (PP) and guaranteed by the other respondents (other than Paradise Retail Holdings Pty Ltd) through PP; and

·                    the provision of management and support staff to franchisees or potential franchisees through Paradise Retail Holdings Pty Ltd (Retail).

5                     Mr Diamond is said to be the controller of each of the corporate respondents.

6                     The amended statement of claim, in summary, alleges on behalf of the applicant and the group members four causes of action:

(1)               misleading and deceptive conduct, contrary to s 52 of the Trade Practices Act 1974 (Cth) (the TP Act) through statements in the standard disclosure document, the standard franchise agreement, and in other ways in circumstances where each of the corporate respondents participated in the making of the representations by being knowingly concerned in their making, as well as those representations being made by the particular franchisor with which the applicant and the group members separately dealt;

(2)               exclusive dealing by reason of the franchise agreement, the supply agreement, and a rental agreement and in other ways, engaged in by PPFQ, PPFSA, PPFNSW and Global (with the knowing involvement of the other respondents) contrary to s 47 of the TP Act;

(3)               breach of the Franchising Code of Conduct, and so of s 51AD of the TP Act, by all the respondents, either directly or by the knowing involvement of each of them; and

(4)               unconscionable conduct in breach of ss 51AA and 51AC of the TP Act, principally by the first to third respondents variously in relation to their respective franchisees and by the fourth respondent, and by the other respondents by their knowing involvement in that conduct.

7                     For purposes of their applications for interlocutory injunctions, Whiley and Marshelle rely upon the alleged contraventions of s 52 (misleading and deceptive conduct) and s 51AA and 51AC (unconscionable conduct) only.  It is not necessary to refer to the other causes of action.

8                     For the purposes of considering the application, I treat the evidence of Whiley and Marshelle at face value.  Accordingly, I accept that the disclosure document and the franchise agreement relating to each of them was in the same terms (other than the particular individual details).  In addition, the following findings are made simply on that basis.

9                     In the case of Marshelle, it has operated a Pets Paradise franchise at Elizabeth in the State of South Australia since about 12 October 2006.  It acquired that business, with the approval of PPFSA, from a previous franchisee pursuant to a business sale agreement for $165,000 plus stock valued at $50,000.  It also assumed responsibility to pay the ongoing commitments for the fitout of that business under a commercial hire purchase agreement between BOQ Equipment Finance Ltd and PP (guaranteed by Mr Diamond, Global and PPF) involving a monthly payment of $2,287.25 for a period expiring on 23 December 2009.  That agreement commenced on 23 December 2004.

10                  At the time Marshelle signed the franchise agreement with PPFSA, it acknowledged that it had received and considered the disclosure document and the franchising code of conduct.  It also acknowledged that it had been recommended to seek advice from a solicitor, a business advisor and from an accountant/tax advisor about the franchise agreement and the associated guarantee, and it had elected not to do so.  For reasons which appear below, nothing turns on those acknowledgments, so I do not have to consider their significance.

11                  PPFSA sent all relevant documents to Marshelle on 6 September 2006 including the “Global Conditions of Sale”.  Its letter said:

Global are our approved supplier of products to our Franchisees.  If you choose to purchase products you must sign and return the Global Conditions of Sale, Guarantee and Indemnity, Commercial Credit Application and the Customer Authority and Acknowledgement.  The Conditions of Sale outline the terms and conditions under which Global will supply products for your Business.

Like with the Franchisor, Global also requires that you as Director of the Company sign and return the Global Guarantee and Indemnity (where indicated) to secure the performance of the Company of its contractual obligations to Global.

The disclosure document provided, inter alia, in cl 9.1 as follows:

(b)        The Franchisee is provided with an “Approved Supplier List” and must only purchase goods from this list.  The Franchisee may apply to the Franchisor in writing to purchase goods from suppliers not contained within this approved list.  The Franchisor may, but is not required to, allow purchase from any such additional suppliers.

The Franchisor is also provided with an “Approved Stock List” and must only purchase goods from this list.  The Franchisee may apply to the Franchisor in writing to purchase other goods not contained within this approved list.  The Franchisor may, but is not required to, allow purchase of any such additional goods.

(c)        Global Pet Products Pty Ltd is one of the Approved Suppliers.  This company is owned by Gary Diamond who is also its shareholder.  The Franchisees are not required to purchase goods from this company.

12                  By notice on 29 August 2008 PPFSA gave notice to Marshelle of breach of the franchise agreement.  The breach relied upon was the failure to pay the fixtures and fittings lease commitments on time.  The monthly payments for March to August 2008 inclusive of $13,621.32 had not been paid.  That is common ground.  Marshelle was given until 5 September 2008 to pay that amount.  It did not do so.  The evidence indicates that it has not made those payments to date and, apparently, if it obtains the injunction it seeks, it will not do so until the proceedings are resolved.

13                  On 24 October 2008 PPFSA gave notice to Marshelle of the termination of the franchise agreement effective from 27 October 2008 by reason of its failure to remedy its breach of that agreement.

14                  It is the operation of that notice which Marshelle seeks to have injuncted until the hearing and determination of the proceedings.  It says that the consequence of the termination of its franchise agreement will mean that it will lose the goodwill in its franchise business, and will lose occupancy of the premises in which the business is conducted.

15                  There is some contention about that, but in my view it is clearly arguable that those consequences may flow from the termination of the franchise agreement.  The fixtures and fittings and stock are to be sold, and their value accounted for to Marshelle by PPFSA.  The franchise agreement is silent about what happens to any goodwill upon its termination.  Clause 20.8 requires Marshelle, if the lessee of the premises at which the business is operated, to surrender or transfer its interest in that lease to PPFSA or its nominee.  ln my view, it is arguable that any goodwill value will be lost to Marshelle upon its termination.  PPFSA will be in a position to offer a Pets Paradise franchise to a new franchisee for whatever it can negotiate, presumably reflecting such goodwill as there exists in the business conducted at that site. 

16                  PPFSA, and the other respondents, contend, however, that on the material before the Court, Marshelle has not established a serious question to be tried.  They further contend that, even if Marshelle gets over that obstacle, the balance of convenience having regard to the nature of Marshelle’s claim and the strength of the serious question to be tried, does not warrant the grant of an interlocutory injunction.  They also contend that damages will be an adequate remedy to Marshelle if, ultimately, it is successful in the proceeding.

17                  In the case of Marshelle, the affidavit evidence to establish a serious question to be tried, apart from indicating the matters to which I have referred, principally comes from Rochelle Semmler, a director of Marshelle.  As I have indicated, there is evidence sufficient to support the finding at an interlocutory level of the execution of standard documents as part of the Pets Paradise Business Model (as described in the amended Statement of Claim) by Marshelle.  It thereupon paid rent and outgoings of $8,000 to $8,500 per month pursuant to the licence agreement and conducted the business.  But it is there that the evidence falters.

18                  At present, in relation to the claim based on misleading and deceptive conduct, even if the documents conveyed the representations alleged in the amended statement of claim (there is no evidence supporting any other representations), there is no positive assertion by Ms Semmler on behalf of Marshelle that the representations were relied upon in a way which has caused Marshelle particular detriment.  I do not know why that is so, and it is not appropriate to speculate on that question.  I have read Ms Semmler’s affidavits.  Although she refers to the process by which Marshelle came to be a franchisee of PPFSA, including reference to the relevant documents, she does not assert that she or anyone else on behalf of Marshelle took the particular meanings from those documents which are alleged in the amended statement of claim as generic misrepresentations to all Pets Paradise franchisees, or that she or anyone else from Marshelle relied upon them to its detriment.

19                  Her affidavits indicate that by early 2007 she became concerned about the profitability of the Marshelle business, but that it “struggled through” 2007.  Complaints were made (presumably to PPFSA) about the value being received for the monthly service fee and advertising contribution.  Those complaints are said to concern lack of assistance in sourcing livestock, the supply of unordered stock (but without any detail, other than on one occasion when unordered stock was attempted to be returned unsuccessfully, but still without indicating the value of that stock or suggesting any impact upon Marshelle by having to pay for that stock), the quality of the goods supplied, the cost of the goods supplied relative to competitors’ products, the saleability of certain of the goods supplied, and the efficacy of the point of sale computer system and its cost.  As I have indicated, all but one of those matters is no more than a generic complaint expressed very briefly.  The remainder of her affidavits does not touch upon the representations alleged, or their misleading character, or their consequences to the business of Marshelle.

20                  Ms Semmler that in the 2007/08 financial year, Marshelle will have achieved about $6,000 of gross sales and a trading profit of about $600,000 without her drawing a wage.  As might be expected, she also says that the forthcoming Christmas season is likely to be a more productive sales period than other times of the year.

21                  Ms Semmler’s second affidavit refers to the shop fixtures and fittings.  She says that she assumed that, at the end of the term, Marshelle would own those fixtures and fittings.  She now understands that that is not the case.  That issue is obviously not immediately causative of any financial difficulties of Marshelle.  It is not asserted that she was misled about the instalments of $2,287 being payable.  As the present issues arise before the expiration of the period of those payments (December 2009), the issue as to the ultimate ownership of the fixture and fittings once the finance arrangement is resolved cannot be causative of Marshelle’s present problems.  I note that her second affidavit seeks to suggest that the value ascribed to the fixtures and fittings, presumably by the franchisee from which Marshelle acquired the franchise, may have been excessive.  That evidence is not presently sufficient to indicate anything more than that fact.  In particular, it is not sufficient to indicate any impropriety on the part of PPFSA or any of the other respondents in fixing their value.  Nor is it sufficient to indicate that, even if a lower fixtures and fittings instalment payment might have been negotiated, that has caused loss to Marshelle in a way which could not be adequately compensated in damages.  It is not sufficient to make out a claim based upon misleading and deceptive conduct even if taken at its face value.  I have referred to the contents of certain documents in [11] above as they were expressly drawn to my attention by counsel for Marshelle and Whiley.  They may relate to the claim based upon a breach of s 47 of the TP Act.  I do not consider that, in the light of Ms Semmler’s evidence, they take the claim based on breach of s 52 of the TP Act any real distance.

22                  The alternative contention was based upon unconscionable conduct contrary to ss 51AA and 51AC of the TP Act.  Counsel for Marshelle put the contention that the potential forfeiture of the goodwill of the business by termination of the franchise agreement was unconscionable.  I have assumed that consequence will follow.  As noted, I have also assumed that, upon termination of the franchise agreement, PPFSA can require Marshelle to transfer its occupancy rights in the premises it uses for its business. 

23                  However, in my view, the evidence does not support a proposition beyond the general proposition that the contractual right to terminate a franchise agreement for non-payment of moneys due to the franchisors by which the franchisee will lose any goodwill in its business is necessarily unconscionable, or is unconscionable if it is exercised.  Put so generally (as I think it must be, because the evidence does not enable a more factually specific proposition to be put), I do not accept that proposition.  To state it is to demonstrate why it should not be accepted.  There may well be cases where that proposition might be sustainable if confined to the particular circumstances.  However, in my view, the evidence does not enable a more precise analysis of the circumstances to be assessed.  At the time of the agreement, which is one of the relevant times for the purposes of assessing unconscionability, the nature and extent of any potential default by the franchisee could not be known.  It is not immediately apparent in either the case of Marshelle that the amount of the potential liability to PPFSA or to other respondents for failure to make payment of amounts due under the franchise agreement must be of such limited amount as to make it unconscionable for Marshelle to be exposed to forfeiture of the franchise agreement and so the loss of its goodwill upon default.  If the relevant point of time be at the time of the exercise of the right to terminate the agreement for non-payment, there is again in my view insufficient evidence to establish a serious question to be tried that there is such a disproportion between the liability or potential liability of either Marshelle to PPFSA or to other respondents relative to the potential forfeiture of its goodwill as to support that proposition.

24                  Consequently, on the material presently before me, I am not satisfied in the case of Marshelle that there is a serious question to be tried so that, depending upon other considerations such as the balance of convenience or whether damages might be an adequate remedy, I should grant the interlocutory injunction sought.

25                  I reach the same conclusion in the case of Whiley for much the same reasons.  I can deal with its circumstances relatively briefly, simply because it could be repetitious to do otherwise.  The following is based upon Mr Whiley’s affidavit.

26                  Whiley since February 2006 operated a Pets Paradise franchise at Redbank Plaza in Queensland, under franchise from PPFQ.  It too acquired the franchise, with the approval of PPFQ, from another franchisee.  It too received the “standard” Pets Paradise documentation.  It paid $100,000 for the business plus stock at valuation from the vendor.  It too commenced to pay the “equipment hire” recurrent payments and believed that upon final payment, it could own the fixtures and fittings.  In its case, PP was the “hirer” from BOQ Equipment Finance Ltd.  The term was 60 months, with monthly payments of $1,111.32, expiring in August 2009.  Whiley too has paid significant rental and other outgoings.

27                  Mr Whiley says the franchise “traded well” until around April 2007.  Then, he says, it was affected by a “Pet Goods Direct” business which began trading at Ipswich nearby.  He also says Whiley had communications with PPFQ and Retail about the content of its alleged indebtedness in the period June to July 2007, ultimately paid by September 2007.  He too refers to concerns about the quality of goods supplied and their price compared to the price of competitors’ products.  No details are given.  There is nothing more to support the existence of a serious question to be tried in relation to either of the two causes of action relied upon.  If one is to be established, it must be inferred from the generic documentation.  For reasons I have given, I do not think it is made out on the material presently before me.

28                  I note that, in the case of Whiley, its gross sales for 2007/08 were about $418,000 and its trading profit (without drawings by Mr Whiley or his wife) about $47,000.  In its case, too, it had made no payments in respect of the “equipment hire” expense for most of 2008.

29                  For those reasons, at present, I decline to make the interlocutory orders sought.

Associate:

Dated:         13 November 2008