FEDERAL COURT OF AUSTRALIA

Haviv Holdings Pty Limited v Howards Storage World Pty Ltd [2009] FCA 242

CONTRACTS – franchise agreement – breach of exclusive territory provision – grant of another franchise within exclusive franchise territory already granted

DAMAGES – loss arising from breach of franchise agreement – loss of net profits – causation – question of evidentiary onus – date and period of assessment – calculation – discount rate – loss of gross profits – fixed costs

TRADE PRACTICES – misleading and deceptive conduct – misrepresentations – franchise agreement – exclusive territory provision – financial benefit provision – whether reasonable grounds for making representations – whether representations misleading

Trade Practices Act 1974 (Cth)  

Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61

Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55

The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64

The Commonwealth of Australia v Silverton Ltd (1997) 130 ACTR 1

Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473

Fink v Fink (1946) 74 CLR 127

Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145

Henville v Walker (2001) 206 CLR 459; [2001] HCA 52

Johnson v Perez (1988) 166 CLR 351

Malec v JC Hutton Pty Ltd (1990) 169 CLR 638

Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; [1998] HCA 69

Murray Irrigation Ltd v Balsdon (2006) 67 NSWLR 73; [2006] NSWCA 25

Otrava Pty Ltd v Mail Boxes Etc (Australia) Pty Ltd [2004] NSWSC 1066

Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516

Rosser v Marine Ministerial Holding Corporation [1999] NSWCA 72

Sellars v Adelaide Petroleum NL (1992) 179 CLR 332

State of New South Wales v Moss (2000) 54 NSWLR 536; [2000] NSWCA 133

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd 83 ALJR 390; [2009] HCA 8

Wenham v Ella (1972) 127 CLR 454

Luntz, H. Assessment of Damages for Personal Injury and Death, 4^th ed. Australia: LexisNexis Butterworths, 2002

Pratt, S, Reilly, R and Schweihs, R. Valuing a Business: The Analysis of Closely Held Companies, 4^th ed.  McGraw-Hill: United States of America, 2000

Seddon, N C and Ellinghaus, M P. Cheshire and Fifoot’s Law of Contract, 9th Australian ed. Sydney: LexisNexis Butterworths, 2008

Willis, Justin B. “Independent Experts’ Reports and Valuations”. Ch 122 in Freckelton, Ian R and Selby, Hugh. Expert Evidence. Australia: Law Book Company, 2001

HAVIV HOLDINGS PTY LIMITED (ACN 101 265 730) AND PAUL AGHION v HOWARDS STORAGE WORLD PTY LTD (ACN 094 719 490), PLAZA HOME-IMPORTS PTY LTD (ACN 069 891 201) and DIRK SPENCE

NSD 523 of 2007

JAGOT J

18 MARCH 2009

SYDNEY

THE COURT ORDERS THAT:

1.                  The proceedings are adjourned for further directions on a date to be allocated.

2.                  The exhibits may be returned.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                     These proceedings involve claims for loss and damage for an admitted breach of a Howards Storage World franchise agreement and alleged misrepresentations about two aspects of the operation of the franchise. 

2                     Howards Storage World is a specialty retailer of household storage items.  The franchise agreement, made on 18 July 2002 between Howards Storage World Pty Ltd (HSW) (as franchisor) and Haviv Holdings Pty Limited (Haviv) (as franchisee), related to a Howards Storage World business in a store within the Westfield shopping centre at Burwood (the Burwood store).  Paul Aghion is a director of Haviv and negotiated the franchise agreement on Haviv’s behalf.  Plaza Home-Imports Pty Ltd (Plaza) is a company related to HSW, initially proposed to be the franchisor and subsequently responsible for the supply of products to Haviv under the franchise agreement.  Dirk Spence is a director of HSW and Plaza.  He is responsible for the day-to-day operations of both companies and negotiated the franchise agreement on their behalf. 

3                     By the franchise agreement HSW granted to Haviv an exclusive franchise territory for a radius of 5 kilometres around the Burwood store.  However, in August 2004 HSW entered into another franchise agreement for a Howards Storage World business in a store within the Rhodes shopping centre (the Rhodes store).  The Rhodes store, and indeed the whole of the Rhodes shopping centre, is within the exclusive franchise territory HSW granted to Haviv (the Rhodes store being between 4837 and 4843 metres from the Burwood store).  Haviv vacated the Burwood store on 17 August 2007 leaving it to HSW to operate.  Haviv and HSW each purported to terminate the franchise agreement in early 2008, some three years after the opening of the Rhodes store in late November 2004. 

4                     Haviv claimed to have suffered loss and damage by reason of HSW’s breach of the franchise agreement (the contract claims).  Haviv and Mr Aghion also claimed to have suffered loss and damage by reason of two representations by HSW and Plaza allegedly in breach of the Trade Practices Act 1974 (Cth) concerning: - (i) the true position with respect to Haviv’s exclusive franchise territory, and (ii) the lack of any financial benefit to Plaza for the supply of goods to Haviv (the trade practices claims).  Haviv and Mr Aghion claimed further that Mr Spence is liable as an accessory of HSW and Plaza with respect to the trade practices claims. 

5                     Haviv put its claims for breach of contract in a number of ways.  For its part, HSW admitted that its grant of a franchise with respect to the Rhodes store breached the express terms of the franchise agreement.  HSW also accepted that: - (i) the Rhodes store could not be located elsewhere within the Rhodes shopping centre without breach of the franchise agreement because the shopping centre as a whole is within Haviv’s exclusive franchise territory, and (ii) the evidence did not permit any inference that there was another location in Rhodes outside Haviv’s exclusive franchise territory where an HSW store could be placed.  However, HSW contended that Haviv had not proved any loss or damage caused by the breach or that, at most, any such loss and damage was nominal.  HSW, Plaza and Mr Spence denied any misrepresentations as alleged in the trade practices claims.

ISSUES

6                     Apart from Haviv’s additional allegations of breach, the contract claims ultimately raised the following issues for resolution:

(1)          Is Haviv’s “scenario 2” claim for damages consistent with principle and tenable on the evidence?  Haviv claimed damages pursuant to two alternative scenarios – “scenario 1” and “scenario 2”.  Damages under “scenario 2” are calculated by reference to the hypothesis that, but for the breach, HSW would have granted Haviv the franchise for the Rhodes store and Haviv would have operated that store instead of the Burwood store.

(2)          With respect to its “scenario 1” claim, has Haviv proved any loss of net profits from the operation of the Burwood store caused by the breach?  Darel Hughes and Brendan Halligan (the expert accountants who gave evidence) both calculated damages for the “scenario 1” claim by comparing the net profits Haviv in fact earned from the Burwood store with the net profits it is hypothesised Haviv would have earned but for the breach.  HSW submitted that, although the opening of the Rhodes store within Haviv’s exclusive franchise territory was in breach of the franchise agreement, the following circumstances disclosed a fundamental gap in Haviv’s evidence about causation:

(a)           the opening and operation of the Rhodes shopping centre (and all other shops within that centre, including an IKEA) within Haviv’s exclusive franchise territory was not in breach of the franchise agreement;

(b)          Mr Hughes and Mr Halligan agreed that their calculations assumed that there was no cause of loss other than the breach of the franchise agreement;

(c)           Haviv had not proved that the opening of the Rhodes shopping centre alone was not the cause of any net lost profits; and

(d)          before the opening of the Rhodes store, the Burwood store made a small profit in financial year 2003 ($15,000) and a small loss in financial year 2004 ($(1000)) and thus was unprofitable irrespective of the breach.

(3)          How should any net lost profits caused by the breach be assessed? Mr Hughes and Mr Halligan agreed that net lost profits should be assessed having regard to the sales revenues of a benchmark group of HSW stores.  They disagreed about the stores to include in the benchmark group and how the benchmark group should be used.  Mr Hughes included all 11 HSW stores in metropolitan Sydney as at 2007 in his benchmark group.  He applied the average rate of growth of sales revenues to determine the net profits Haviv would have earned but for the breach.  Mr Hughes also considered that the increase in sales revenues that the Burwood store enjoyed for the first five months of the 2005 financial year should be assumed to continue for the balance of that year but for the breach.  Mr Halligan ultimately included two metropolitan Sydney stores in his benchmark group and applied the average of these sales revenues to determine net profits Haviv would have earned but for the breach.  Mr Halligan considered Mr Hughes’ approach to the Burwood store’s pre-breach sales revenues inconsistent with his use of the benchmark group (which experienced a decline in sales revenues in the latter half of the 2005 financial year).

(4)          Does Mr Hughes’ method assume that Haviv continued to operate the Burwood store after 17 August 2007 (the date Haviv ceased operating the Burwood store) and, if so, what effect does that have on the validity of his assessment?  Mr Halligan maintained that Mr Hughes’ method of assessment included an invalid assumption that Haviv continued to operate the Burwood store when, in fact, it ceased to do so on 17 August 2007.  Mr Halligan said Mr Hughes’ approach was incorrect in principle, understated the lost sales revenue and undermined the application of other variables (particularly fixed and variable costs saved by the cessation of trading).  Mr Hughes rejected these concerns.

(5)          At what date should loss be assessed?  Mr Hughes’ assessment was at the date of (a notional) judgment on the basis that the breach of contract was not merely the entry into the franchise agreement for the Rhodes store but also the operation of that store within Haviv’s exclusive franchise territory.  Mr Halligan’s assessment was on or about the date when the Rhodes store started trading (29 November 2004), being the date from which HSW’s breach affected Haviv’s net profits.

(6)          Over what period should loss be assessed?  Mr Hughes and Mr Halligan both used the date the Rhodes store opened as the start of their assessment period but disagreed about the date on which the assessment should end.  Mr Hughes assessed loss on two alternative bases: - (i) up to 17 July 2012, being the end of the term of the franchise agreement, and (ii) up to 17 July 2022, being the end of the term of an assumed further franchise agreement granted to Haviv pursuant to an option in the franchise agreement.  Mr Halligan assessed loss on three alternative bases: - (i) up to 17 August 2007 (being the date on which Haviv vacated the Burwood store) on the assumption that this event was not caused by the breach, (ii) up to 17 July 2012, and (iii) up to 17 July 2022.

(7)          How should any discount rate be calculated in order to ascertain the present value of net lost profits caused by the breach?  Mr Hughes adopted a discount rate of 5% for future net lost profits based on his experience in cases in which Todorovic v Waller (1981) 150 CLR 402 has been applied and noted that, in addition, courts frequently applied a further discount of 15% in such cases to account for vicissitudes or contingencies.  Mr Halligan’s discount rates of 30% (past losses) and 35% (future losses) reflected the pre-tax weighted average cost of capital (pre-tax WACC) for the business, using the standard formula for that calculation (which includes the post-tax required rate of return on equity, itself determined by applying a standard formula).  Using the same formulae, but different inputs (specifically, the proportions of debt capital and equity capital for the pre-tax WACC calculation and the amount of the premium for the small size of Haviv’s business in the post-tax required rate of return on equity calculation), Mr Hughes calculated a discount rate of 22%.

(8)          How should any discount rate be applied in order to ascertain the present value of net lost profits?  Mr Hughes divided net lost profits into “past” (all net lost profits incurred before the notional judgment date) and “future” (all net lost profits to be incurred after the notional judgment date).  Mr Hughes did not discount past net lost profits.  Mr Halligan discounted all net lost profits back to 29 November 2004 but at one rate (30%) for those incurred before the notional judgment date and another rate (35%) after the notional judgment date.

(9)          What gross profit percentage should be used in order to calculate the lost gross profit?  Mr Hughes and Mr Halligan both calculated lost gross profit by multiplying lost sales revenues by a gross profit percentage.  However, Mr Hughes used the actual gross profit percentage of 52% for 2006 and applied that percentage to 2007 and all future years on the basis that gross profit declined in 2007 by reason of Haviv’s desire to reduce stock.  Mr Halligan used the actual gross profit percentages achieved by the Burwood store for 2006 and 2007 and the average of all percentages from 2003 to 2007 for the future.

(10)      How should fixed costs including rent and refurbishment costs be treated?  Mr Hughes and Mr Halligan approached the issue of the rent payable under the lease and fixed costs differently.  They also applied different assumptions about the amount and timing of refurbishment costs.  Further, Mr Hughes calculated net profits on an accruals basis whereas Mr Halligan used a cash basis (a difference which impacts refurbishment costs).  

7                     The trade practices claims require resolution of the following issues:

(1)          What, if any, representations did HSW and Plaza make to Haviv and Mr Aghion about:

(a)           the exclusivity of Haviv’s franchise territory; and

(b)          financial benefits from the supply of goods or services to Haviv?

(2)          Were any such representations as to exclusivity and financial benefits misleading at the date the representations were made and, if so, did HSW and Plaza have reasonable grounds for making the representations?

(3)          Did Haviv and Mr Aghion rely on the exclusivity and financial benefits representations?

(4)          Did Haviv and Mr Aghion suffer any loss or damage arising from the exclusivity and financial benefits representations and, if so, in what amount?

(5)          Is Mr Spence liable as an accessory for any breach of the Trade Practices Act by HSW and Plaza?

8                     I deal with the evidence only insofar as it is potentially relevant to the issues requiring resolution. 

THE CONTRACT CLAIMS

The franchise agreement and other relevant facts

9                     Recital A of the franchise agreement identified HSW as “engaged in the business of specialty retailing and offering associated products and services” relating to a “complete retailing system catering to the public at large” known as the “HOWARDS STORAGE WORLD System”.  Recital C recorded that Haviv wished to be “granted the right to adopt and use the “HOWARDS STORAGE WORLD System” in the territory, as specified in Schedule 1 (“the Territory”)”.  Schedule 1 defined the approved premises as “shop 348/50 Burwood Shoppingtown”.  The territory was shown as follows:

TERRITORY:   5km (Actual physical boundaries to be specified)

10                  Clause 1A of the franchise agreement contained the grant of the franchise.  It was in these terms:

1A.      FRANCHISE

The Franchisor hereby grants to the Franchisee, the franchise and the right (the “Franchise”) to use the ‘HOWARDS STORAGE WORLD’ System, in conducting the ‘HOWARDS STORAGE WORLD’ business (the “Business”) in the territory for the term set out in Schedule I, (the “Term”) commencing on the date as set out in Schedule I (“the Commencement Date”).

11                  Schedule 1 identified that the franchise agreement had an initial term of 10 years from the commencement date (18 July 2002, being the date of the execution of the franchise agreement) and a renewal term of a further 10 years.  Accordingly, the initial term of the franchise agreement would end on 17 July 2012 and any renewed term would end on 17 July 2022.

12                  Clause 1B of the franchise agreement concerned HSW’s obligation to renew the franchise.  It provided that HSW would renew the franchise for one renewal period (10 years) if, and only if, certain conditions were satisfied (in effect that Haviv complied with the franchise agreement, the terms of the renewed franchise agreement would not be substantially different, and Haviv would pay all costs of renewing the franchise).

13                  Clause 1C of the franchise agreement dealt with the territory as follows:

1C.       TERRITORY

The Franchisee acknowledges that they are granted an exclusive franchise territory.  However it is also acknowledged by the Franchisee that there is no exclusivity of customers and customers or potential customers may openly choose to deal with any “Howards Storage World” business whether it is operated by a franchisee or the franchisor.

14                  Clause 2A of the franchise agreement provided that it was the joint responsibility of HSW and Haviv to find suitable premises.  Clause 2A contemplated that HSW would be the lessor under any lease with Haviv to pay the rental directly to the lessor.

15                  Clause 2B of the franchise agreement dealt with relocation in these terms:

2B.       RELOCATION

In the event of relocation the franchisee may within 14 days of receipt in writing of notification of relocation give notice of termination of this Agreement and upon termination the provisions of Clauses 9D, 9E, 9F and 9H shall apply.

The Franchisee shall operate the Business only from the approved location (“the Premises”) and if rendered unusable by fire, storm, act of God or other cause beyond the Franchisee’s control, or if the Premises are acquired by the proper exercise of the HOWARDS STORAGE WORLD of compulsory acquisition by any governmental or statutory authority, or if the Franchisee’s possession thereof, is lost through no fault of the Franchisee, or if, in the Franchisor’s judgement, there is a change of character of the location, sufficiently detrimental to the business to warrant relocation, the Franchisor will grant permission for the relocation of the Business to a site within the Territory, acceptable to the Franchisor.  Any relocation of the Business shall be at the Franchisee’s sole expense and the Franchisee shall pay to the Franchisor all costs incurred by the Franchisor in assisting with and approving the relocation.

16                  Under cl 2C Haviv was responsible for the fit out costs of the premises.

17                  Clause 2E obliged Haviv to renovate, refurbish and remodel the premises when HSW required (but subject to any overriding requirements specified in the lease and not more often than once every 5 years from the date of the franchise agreement).

18                  Clause 4D of the franchise agreement was as follows:

4D.      LOCAL ADVERTISING

The Franchisee shall spend a further amount of local advertising as specified in Schedule One and account to the Franchisor monthly as to what monies have been spent.

The Franchisee shall actively promote the Business within and only within the Territory and shall submit all advertising materials to the Franchisor for approval at least seven (7) days prior to its use.

19                  Clause 5O of the franchise agreement contained a covenant not to compete in these terms:

5O.      COVENANT NOT TO COMPETE

If this Agreement is terminated prior to its normal expiration by the Franchisor in accordance with the provisions of this Agreement or by the Franchisee without proper cause or upon termination at the expiration of the Term, the Franchisee and the Guarantor jointly and severally agree that for a period of eighteen (18) months commencing on the effective date of termination of this Agreement, or the date on which the Franchisee ceases to conduct the Business, whichever is the later, they will not, either jointly or singularly have any interest as owner (except of publicly traded securities), partner, director, officer, consultant, employee, representative or agent, in any retailing business (which could reasonably be regarded as a market competitor or a colourable imitation of the HOWARDS STORAGE WORLD products and services) within:

(a)        i)          5 kilometre radius of the outer boundaries of the Territory; or

ii)          5 Kilometers of any other ‘HOWARDS STORAGE WORLD’ business then in operation (whether franchised or not), or

(b)        as employee or in any other capacity not specified in this Clause in any similar business to that of the Business within 5 kilometers of the Premises.

The provisions of sub paragraphs (a) I) ii) and (b) hereof are several each from any other.

20                  On 18 July 2002, HSW and Haviv entered into the franchise agreement.  Mr Aghion and his partner in Haviv’s business, Derek Rooney (a former employee of HSW), also executed the franchise agreement as guarantors of Haviv’s obligations.

21                  Following entry into the franchise agreement, Plaza entered into a lease of the Burwood store in the Burwood shopping centre.  PT Limited (a company associated with Westfield) leased the shop to Plaza.  Haviv, Mr Aghion and Mr Rooney were guarantors under the lease.  The lease commenced on 1 September 2002 and was for a term of 5 years (with no option to renew).

22                  Haviv occupied and fitted out the Burwood store before the commencement of the lease.  On 31 August 2002 Haviv commenced trading from the Burwood store as an HSW franchisee.

23                  On 17 August 2004 HSW entered into a franchise agreement with a third party with respect to the Rhodes store.  As noted at [3] above, the Rhodes store is within 5 kilometres of the Burwood store, as is the whole of the Rhodes shopping centre.  Further, HSW acknowledged that the evidence does not permit an inference that the Rhodes store could have been located elsewhere in Rhodes but outside Haviv’s exclusive franchise territory. 

24                  The Rhodes store opened in or around late November 2004, at about the same time as the Rhodes shopping centre opened.

25                  HSW negotiated with Westfield for a new lease over the Burwood store from early February 2007.  Haviv was dissatisfied with the negotiations concerning the rent payable and the fit-out required.  Haviv commenced the present proceedings on 29 March 2007.  Haviv’s solicitor gave notice of Haviv’s intention to vacate the premises by a letter dated 7 August 2007.  Haviv vacated the Burwood store on 17 August 2007.  HSW agreed to operate the Burwood store until 31 March 2008 or until suitable alternative premises were found for Haviv.  The lease over the Burwood store expired on 31 August 2007.  HSW took over the Burwood store pursuant to a monthly licence from PT Limited.  Suitable alternative premises could not be located.  On 21 December 2007 HSW offered Haviv occupancy of the Burwood store on certain terms.  Haviv did not accept those terms.  HSW solicitor’s notified Haviv that HSW had terminated the franchise agreement by letter dated 18 January 2008.  Haviv denied HSW’s right to terminate and, on 6 March 2008, notified HSW that Haviv terminated the franchise agreement on the basis of HSW’s repudiation.  HSW continued to operate the Burwood store.  On 1 April 2008 PT Limited and a company associated with HSW entered into a new lease of the Burwood store for a term of 5 years.

Relevant principles

26                  The parties agreed about the main principles relevant to the assessment of damages for breach of contract but disagreed about their application to the circumstances of this case. 

27                  The following statements of principle are relevant to the issues which require resolution in the present case:

(1)          In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 83 ALJR 390; [2009] HCA 8 at [3], the High Court said that the “"ruling principle", confirmed in this Court on numerous occasions, with respect to damages at common law for breach of contract is that stated by Parke B in Robinson v Harman [[1848] EngR 135; (1848) 1 Exch 850 at 855; 154 ER 363 at 365]:

"The rule of the common law is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."”

(2)          The same principle has been stated as follows (The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 116):

The general principle governing the assessment of compensatory damages in both contract and tort is that the plaintiff should receive the monetary sum which, so far as money can, represents fair and adequate compensation for the loss or injury sustained by reason of the defendant's wrongful conduct. The application of that general principle ordinarily involves a comparison, sometimes implicit, between a hypothetical and an actual state of affairs: what relevantly represents the position in which the plaintiff would have been if the wrongful act (i.e. the repudiation or breach of contract or the tort) had not occurred and what relevantly represents the position in which the plaintiff is or will be after the occurrence of the wrongful act.

(3)          The loss for which compensation is claimed must not be too remote.  The remoteness criterion “is determined by reference to the so-called rule in Hadley v Baxendale, according to which a loss caused by a breach of contract is not too remote if it:

…may fairly and reasonably be considered either [as] arising naturally, that is, according to the usual course of things, from such breach of contract itself, or…may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as the probable result of the breach of it”

(Seddon, N C and Ellinghaus, M P. Cheshire and Fifoot’s Law of Contract, 9th Australian ed. Sydney: LexisNexis Butterworths, 2008 at [23.34] citing Hadley v Baxendale (1854) 9 Exch 341 at 354; 156 ER 145 at 151).

(4)          Further (Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 365 – 366):

An important matter in ascertaining whether the loss or damage is too remote is the extent to which the parties may be taken to have contemplated the events giving rise to that loss or damage. The parties need not contemplate the degree or extent of the loss or damage suffered…Nor need they contemplate the precise details of the events giving rise to the loss. It is sufficient that they contemplate the kind or type of loss or damage suffered.

(5)          Although damage is not an element of a cause of action for breach of contract, “a plaintiff bears the onus of establishing the extent of his loss or injury on the balance of probabilities.  To satisfy the requirements of that rule, a plaintiff must, if he is to recover more than a nominal amount in such an action, affirmatively establish assessable damage, that is to say, loss or injury which is capable of being measured in monetary terms” (Amann Aviation  at 118). 

(6)          However, it “is irrelevant to inquire whether the defendants' default was the dominant, effective or real cause of the plaintiff's loss.  If the evidence is suggestive of multiple causation, the inquiry to be made is whether the defendants' default was a cause of the plaintiff's loss…The test of causation poses the question whether the plaintiff's loss would not have been suffered but for the defendants' default.  The question is to be answered by applying that test in a practical commonsense way” (Alexander v Cambridge Credit at 315; see also at 350).  Hence, the “but for” test is not “the exclusive test of factual causation” (Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55 at [24]).

(7)          Where an intervening event arises “the intervention will not have the effect of terminating the defendants' responsibility for the loss caused by it, if the parties should have contemplated at the time of the contract that in the event of the sort of breach which did occur an intervention of that general kind was a serious possibility or a not unlikely occurrence: Koufos v C Czarkinow Ltd [1969] 1 AC 350” (Alexander v Cambridge Credit at 315).

(8)          It has also been said that, while the plaintiff has the onus of showing loss caused by the breach, “if the loss in question is the apparent or likely result of the breach, the onus shifts to the contract-breaker to prove that it was not” (Seddon and Ellinghaus at [23.34] citing Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516).  Further, in Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 at [148] McHugh J said (albeit in a trade practices context) “(a)rguably, once a plaintiff demonstrates that a breach of duty has occurred that is closely followed by damage, a prima facie causal connection will be established.  It is then for the defendant to show that the plaintiff should not recover damages.  In the words of Dixon CJ in Watts v Rake [(1960) 108 CLR 158 at 160], it is the defendant who must disentangle, so far as possible, the various contributing factors”. 

(9)          The rule that a “defendant is not liable in damages for not doing that which he or she has not promised to do is necessarily subject to the rule in Hadley v Baxendale.  According to Alderson B's renowned formulation, the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach [Hadley v Baxendale (1854) 9 Exch 3, at p 354; 156 ER, at p 151].  Hence, loss of the prospect of securing a renewal of contract may be within the contemplation of parties as probable result of breach” (Amann Aviation at 91 – 92; see also at 102 – 103 and 112).  

(10)      Accordingly, as was stated in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 642 – 643 per Deane, Gaudron and McHugh JJ):

When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than 1 per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded.…The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place.

(11)      The statement in Malec v JC Hutton has been further explained (Sellars v Adelaide Petroleum NL (1992) 179 CLR 332 at 350) as follows:

In Malec v J C Hutton Pty Ltd, this Court drew a distinction between, on the one hand, proof of historical facts - what has happened - and, on the other hand, proof of future possibilities and past hypothetical situations. The civil standard of proof applies to the first category but not to the second, particularly when it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages.

(12)      The general rule is that damages are assessed at the date of breach of contract but “this rule is not universal” and “must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered” (Johnson v Perez (1988) 166 CLR 351 at 355 – 356).  This is consistent with the approach that rules which constitute “useful guidance in the ascertainment of damages” should not be treated “as rigid rules of universal application” incapable of being “displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept” (Wenham v Ella (1972) 127 CLR 454 at 466; see also Amann Aviation at 119). 

(13)      The general rule that damages are usually assessed at the date of breach of contract does not mean that events that have occurred after that date may never be considered (Wenham v Ella at 473).

(14)      Further, “where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat the only remedy it provided for breach of contract, an award of damages” (Fink v Fink (1946) 74 CLR 127 at 143; see also State of New South Wales v Moss (2000) 54 NSWLR 536; [2000] NSWCA 133 at [72]).

Findings on breach

28                  I have recorded HSW’s admissions and acknowledgments in [5] above.  These admissions and acknowledgments relate to the fact that HSW granted a franchise to another HSW store within the 5 kilometre radius of the Burwood store promised by the franchise agreement as Haviv’s exclusive franchise territory.  HSW accepted that this conduct breached cll 1A and 1C of the franchise agreement (read with Schedule 1).

29                  Haviv also contended that it was an implied term of the franchise agreement that HSW would ensure that no one other than Haviv would operate an HSW franchise from premises within the 5 kilometre radius.  Clause 1C of the franchise agreement granted to Haviv an “exclusive franchise territory”.  In the context of cl 1A this must mean an exclusive right to conduct a business from premises within the 5 kilometre radius.  It necessarily follows from HSW’s admissions and acknowledgments that the operation of the Rhodes store within this 5 kilometre radius also constituted a (continuing) breach of the express terms of the franchise agreement.  Thus, recourse to an implied term is unnecessary.

30                  Haviv contended further that HSW breached a term of the franchise agreement by permitting the territory of the Rhodes store pursuant to its franchise agreement (being a territory described as a 5 kilometre radius from the Rhodes store) to overlap with Haviv’s exclusive franchise territory.  In other words, that the grant of the “exclusive franchise territory” to Haviv in cl 1C meant not only that another HSW store could not be located within the territory but also that franchise territories could not overlap.  Given HSW’s admissions and acknowledgments, and the approach to damages of Mr Hughes and Mr Halligan, I questioned whether this issue of construction needed to be resolved (at least for the contractual claims). 

31                  Insofar as this issue of construction might need to be resolved, I consider that the provisions of the pre-contractual disclosure documents that Plaza and HSW gave to Haviv (and on which Haviv relied for the purpose of construction of the franchise agreement) do not cast any particular “light on the genesis of the contract, its objective aim, or the meaning of any descriptive term: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 347–352” (Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [24]).

32                  The meaning of cll 1A and 1C of the franchise agreement is reasonably clear once the context is considered.  The grant was the grant of a franchise to use the “HOWARDS STORAGE WORLD System”.  The system was the business of specialty retailing of the HSW product line to the public at large.  The “HOWARDS STORAGE WORLD System” involved retailing from premises (cl 2A).  There was no exclusivity of customers (cl 1C).  It follows that the “exclusive franchise territory” in cl 1C is territory within which there would be one premises from which a business using the “HOWARDS STORAGE WORLD System” would operate.  The provisions of the franchise agreement do not support Haviv’s contention that territories of different premises from which a business using the “HOWARDS STORAGE WORLD System” operates may not overlap.  Clause 4D, requiring local advertising only within the territory, does not mandate a contrary construction.  Provided a franchisee advertises only within their own territory, the franchisee will not breach the clause merely because their territory may overlap with another territory.  The ordinary meaning of cl 1C, objectively construed in the light of cll 1A, 2A, 2B, 2C, 2D and 2E, 4D and 5O of the franchise agreement, supports HSW’s submissions on this issue of construction.  HSW did not breach the agreement merely because the territory of the Rhodes store overlapped with Haviv’s territory.  It breached the franchise agreement because it granted a franchise to a third party to use the “HOWARDS STORAGE WORLD System” from premises within Haviv’s territory.  That grant inevitably led to the use of the System (by the operation of the Rhodes store) from premises within Haviv’s territory in breach of the franchise agreement.

The “scenario 2” claim (para 6 issue (1))

33                  As noted, Haviv claimed damages under “scenario 2” calculated by reference to the hypothesis that, but for the breach of the franchise agreement by HSW granting the Rhodes store franchise to the third party, HSW would have granted Haviv that franchise and Haviv would have operated the Rhodes store instead of the Burwood store.  In this claim Haviv’s loss is the present value of net profits Haviv would have earned from the operation of the Rhodes store from its opening date in late November 2004.

34                  Haviv submitted that its “scenario 2” claim arose from the promise of exclusivity of franchise territory within the franchise agreement.  It said that damages on this basis were available as: - (i) the availability of the opportunity was a result of performing the contract, and (ii) the loss of opportunity to conduct another franchise within the territory must have been within the contemplation of the parties when they entered into the franchise agreement. 

35                  I do not accept these submissions.  The business of specialty retailing using the “HOWARDS STORAGE WORLD System” which is the subject of the grant of the franchise requires that there be premises (see cll 2A, 2B and 2C in particular).  Haviv’s approved premises were the Burwood store.  The rights and obligations associated with the franchise are interdependent with the rights and obligations with respect to the premises.  There is a difference between: - (i) a promise not to grant another franchise permitting premises to use the “HOWARDS STORAGE WORLD System” within the territory (which the franchise agreement required), and (ii) a promise to grant Haviv another franchise within Haviv’s territory (which the franchise agreement did not require or contemplate). 

36                  Accordingly, and as HSW submitted, HSW never promised that it would grant Haviv any franchise other than the franchise relating to the Burwood store (and its associated territory, and subject to the provisions of the franchise agreement, including those provisions concerning relocation).  Hence, the availability of the opportunity to operate another franchise in the territory was not a result of performing the contract.  The breaches of the franchise agreement I have found are inconsistent with the conclusion that any net profits Haviv might have earned by being granted the franchise for, and operating, the Rhodes store arise naturally from the breaches, according to the usual course of things.  Further, the loss of opportunity to conduct another franchise within the territory would not have been within the contemplation of the parties when they entered into the franchise agreement.  To the contrary, by reason of the promise of exclusivity, the parties contemplated that no other premises within the territory would use the “HOWARDS STORAGE WORLD System”.  Neither limb of the rule in Hadley v Baxendale is satisfied with respect to the “scenario 2” claim.  The claim also does not accord with the principle that “damages for breach of contract must be co-extensive with the breach” (Murray Irrigation Ltd v Balsdon (2006) 67 NSWLR 73; [2006] NSWCA 253 at [1]).  It follows that damages in the form of hypothesised net lost profits from the operation of the Rhodes store are not recoverable by Haviv.

37                  There are other difficulties with the “scenario 2” claim, both factual and legal.  It is true that the Rhodes shopping centre presented HSW with a good business opportunity if considered in isolation.  But irrespective of the attractiveness of that business opportunity, HSW had Haviv as the franchisee of the Burwood store.  HSW was bound to pay PT Limited the rent on the Burwood store for the duration of the lease (until 31 August 2007).  Haviv was bound to fulfil that obligation by paying the rent directly.  Mr Aghion, understandably given the hypothetical nature of the inquiry, could say only that he would have seen the Rhodes store as a more attractive proposition than the Burwood store and would have considered the Rhodes opportunity (had it been offered) and taken advice.  No doubt he would have done so – but Haviv was bound to the Burwood store before any opportunity at Rhodes arose.  As HSW submitted, but for Haviv’s continuing operation of the Burwood store, HSW would have been left with vacant premises and lease obligations. 

38                  In these circumstances the lack of any obligation of HSW to grant Haviv another franchise within the territory is critical.  Irrespective of – (i) the after-the-event evidence of Mr Spence and Alex Dobrin (also a chief executive officer of HSW and Plaza) about the reasons they would not have favoured Haviv as the operator of the Rhodes store, (ii) the evidence about the grant of other Howards Storage World franchises, or (iii) the evidence of Mr Rooney’s experience of HSW’s operations – the fact is that the evidence does not rise above mere speculation if the existing obligations of the parties with respect to the Burwood store are taken into account.  Once these existing obligations are considered, Haviv’s submissions about the business case for granting the relevant rights to it with respect to the Rhodes store lose force.  Instead, HSW’s submissions, emphasising that it had no obligations to Haviv other than those in the franchise agreement, become persuasive.  Contrary to Haviv’s submissions, the evidence as a whole supports the conclusion that the grant of any other rights was “dependent on the mere unrestricted volition” of HSW (Fink v Fink at 143).  It also follows from these conclusions that damages under the “scenario 2” claim are not recoverable.

Has Haviv proved any loss (para 6 issue (2))?

39                  Some additional factual findings are necessary to resolve the issue with respect to Haviv’s “scenario 1” claim for damages.  The Rhodes shopping centre opened at or about the same time as the Rhodes store in late November 2004.  The Rhodes shopping centre is a large retail centre including cinemas, supermarkets, major stores (such as an IKEA, Bing Lee and Harris Farm Market) and numerous specialty retail shops (one of which is the Rhodes store).  As noted, the Rhodes shopping centre is relatively close to the Burwood shopping centre (another large retail centre), within a distance of 5 kilometres. 

40                  The accountants agreed that Haviv’s damage was best assessed by reference to lost net profits (requiring a comparison between the net profits Haviv would have earned but for the breach and those it earned resulting from the breach).  This approach is consistent with principle (see Amann Aviation at 116).  The accountants also agreed that it was not possible to identify customers who went to the Rhodes store instead of the Burwood store or the value of their purchases.  Accordingly, the required comparison between the hypothetical and actual circumstances involved reference to the sales revenues of the Burwood store against some benchmark.  This method disclosed the difference in sales revenues but not whether any part of the difference was caused by reasons other than the breach.  Mr Halligan identified a number of other potential causes of difference in hypothetical and actual sales revenues including: - (i) poor management and marketing of the Burwood store compared to other HSW stores, (ii) the opening of the Rhodes shopping centre after the Burwood shopping centre, with the Rhodes shopping centre being modern and attractive in its own right, and (iii) the presence of an IKEA in the Rhodes shopping centre (but not the Burwood shopping centre). 

41                  The evidence does not support the inference that the Burwood store was poorly managed or marketed compared to other HSW stores.  HSW’s criticisms of the management and marketing of the Burwood store mainly arose after Haviv gave HSW notice that the Rhodes store infringed Haviv’s exclusive franchise territory.  The manager of the Burwood store, Mr Rooney, had worked in the HSW business since 1999 and was appointed by HSW to train staff from the second half of 2000.  Under Mr Rooney’s management the Burwood store was awarded HSW’s silver achievement award for excellence in mid 2003.  The management and marketing of other HSW stores is unknown.  For these reasons I do not accept Mr Halligan’s identification of these matters as potential causes of any loss of net profits from the Burwood store. 

42                  However, the fact that the Rhodes shopping centre opened in about late November 2004 and was a large modern complex, containing an IKEA and other major retailers, was not in dispute and requires further consideration.  The basic issue is that both accountants assumed that all of the net lost profits they identified were caused by the breach of the franchise agreement.  HSW said that this must be incorrect as it ignored the effect on the Burwood Store of the Rhodes shopping centre itself.  HSW argued that Haviv had the onus of proving that the difference between the Burwood store’s actual and hypothetical net profits was not caused by the opening of the Rhodes shopping centre.  As the evidence did not permit any finding about the proportion of customers who were or would be attracted away from the Burwood shopping centre to the Rhodes shopping centre irrespective of the HSW stores in each centre, HSW said that Haviv’s case for damages failed at the outset.

43                  I do not accept these submissions either on the facts or as a matter of principle.  As to the facts, I accept that the Rhodes shopping centre probably attracted some custom away from the Burwood shopping centre but there was no evidence before the Court as to the magnitude of that likely impact.  Equally, there was little or no evidence about a range of other factors that might have contributed to or ameliorated the Burwood store’s losses such as population increases or available income for retail expenditure.  The lack of evidence about these matters is beside the point once the proper function of the exercise of discounting to ascertain the net present value of the hypothetical income stream is taken into account.  While the accountants undertook this exercise by different methods, their basic object was the same – to convert an uncertain future income stream into a lump sum as at a particular date because damages are assessed on a once and for all basis (Malec v JC Hutton at 642 discussed at [27(10)] above).  Both accountants used HSW stores in metropolitan Sydney as their benchmark (albeit different stores and on a different basis).  Nothing in the evidence suggests that the Burwood store was in a unique position by being located in a major shopping centre confronting competition from another major shopping centre.  The risk of competition, as Mr Halligan’s evidence disclosed, is one of the important factors in assessing a discount rate.  Mr Halligan described competition as “one of the usual commercial risks associated with a franchised retail business” that he took into account as part of his discounting exercise.  I agree with his approach.  His approach reinforces Haviv’s submission, which I accept, that HSW (in respect of this argument) has conflated causation and risk.

44                  Other facts also disclose the problem with this aspect of HSW’s submissions.  The evidence shows that HSW stores draw largely from their local area (hence, the focus in the franchise agreement on local advertising).  HSW stores are specialty retailers of home storage systems.  HSW stores have no direct competitors offering the same full product line or quality of product.  Other retailers, such as IKEA, Big W and K-Mart, offer some of the same types of products as HSW but not the full range.  In the period June to November 2004 the sales revenues from the Burwood store showed a 6% increase above the 2003 revenues for the same period.  After the Rhodes store opened the sales revenues for December 2004 fell 11% compared to the same period in December 2003 and thereafter remained low.  In contrast, the Rhodes store traded well and, within six weeks of opening, was the fourth ranked HSW store on the basis of average weekly sales. 

45                  It can readily be inferred that one of the primary purposes of the grant of an exclusive franchise territory is to regularise competition between HSW stores.  Exclusivity of territory is a valuable right for a franchisee.  Decrease in sales revenue (and thus the potential for net profits) is precisely the type of loss that would be expected from breach of the promise of an exclusive franchise territory.  Such a decrease occurred in the present case immediately following the opening of the Rhodes store within Haviv’s exclusive franchise territory.  Further, the fact that the Rhodes store is only just within Haviv’s exclusive territory is immaterial because the whole of the Rhodes shopping centre is within that territory and HSW acknowledged that there was no other location within Rhodes where an HSW store could have been located.  In other words, the relevant actual and hypothetical comparison is between – (i) the Burwood store and the Rhodes store (the actual situation caused by the breach), and (ii) the Burwood store with no store in Rhodes (the hypothetical situation). 

46                  These circumstances, including the trading figures for the Burwood store referred to above, show a breach of contract “closely followed by damage”, thus indicative of a “prima facie causal connection” between the breach and damage (see the observations of Kirby J in Chappel v Hart at 273, [93.8]).  A “practical commonsense” approach to the question of damage indicates that the Rhodes store was a material cause of loss of net profits from the Burwood store after November 2004.  I also accept Haviv’s submissions that, as Haviv had proved a prima facie causal connection between the breach and the loss, it was a matter for HSW as the party in breach to “disentangle” any contribution to Haviv’s loss caused by the Rhodes shopping centre (Henville v Walker at [148]; see also Amann Aviation at 94).  HSW did not do so.  When this is considered with the proper function of the discount rate (discussed at [63]-[78] below) it is apparent that the state of the evidence does not disclose any fundamental gap in or undermine Haviv’s case for damages.  No allowance need or should be made for any potential contribution of the Rhodes shopping centre because HSW has not proven any such effect and, in any event, that is part of the function of the application of a discount rate.

Assessment of net lost profits (para 6 issue (3))

47                  Mr Hughes considered that the benchmark group should reflect the overall demand for HSW products in the Sydney metropolitan area including the closest store to Burwood, being the Rhodes store.  He also thought that using the 11 stores in the Sydney metropolitan area operating in 2007 was most likely to eliminate local factors affecting only one store.  He disagreed with Mr Halligan’s approach as it involved only two stores, one of which was the worst performing store of all HSW stores (Hornsby). 

48                  Janita Rankin, HSW’s national operations manager, identified that of the HSW stores in the Sydney metropolitan area, the largest stores are at Belrose (552sqm), Castle Hill (535sqm), Rhodes (460sqm) and Campbelltown (400sqm).  Of the remaining stores, four are between 325sqm (Warringah Mall) and 350sqm (Rouse Hill).  Six stores have an area in the range 174sqm (Leichhardt) to 287sqm (Bondi Junction), including the Burwood store at 286sqm.  Five of those six are in shopping centres (including Bondi Junction, East Gardens, Hornsby and Macquarie).  Ms Rankin considered those latter four “comparable stores” to Burwood by reference to area and the stores’ location in shopping centres. 

49                  Mr Halligan initially used these four stores (Bondi Junction, East Gardens, Hornsby and Macquarie) as his benchmark group, with a benchmark group of three (excluding Bondi Junction) as an alternative.  By the time of the accountants’ joint report Mr Halligan used a benchmark group of two stores only (East Gardens and Hornsby).  Mr Halligan assumed that the four stores Ms Rankin identified were the most comparable to Burwood.  He then tracked their sales revenues to the sales revenues of the Burwood store and concluded that the tracking was very close for all benchmark groups before the breach.  He excluded Bondi Junction and Macquarie because they did not operate for long before the breach and a liquidator was appointed to the Bondi Junction store after which trade markedly improved.  Mr Halligan concluded that his benchmark group of two stores provided the best evidence of hypothetical sales revenues but for the breach.  He considered that Mr Hughes’ benchmark group of 11 Sydney metropolitan stores did not show a good fit with the sales revenues of the Burwood store at any time, being well above the trading level of that store (that is, average weekly sales revenues per store of $118,400 compared to $99,800 for the Burwood store and $94,000 for Mr Halligan’s benchmark group of two stores).

50                  The identification of the most appropriate benchmark group does not yield any certain answer on the available evidence.  The concerns each expert raised about the other’s approach have a rational basis.  Nevertheless, it is necessary to do the best I can on the available evidence.  Difficulties of assessment cannot preclude the grant of the remedy (Fink v Fink at 143). 

51                  One problem with Mr Halligan’s approach is that Ms Rankin’s initial method of identifying comparable stores is obscure.  I accept that there is a rational basis for inferring that HSW stores in shopping centres may be subject to different forces from other stores.  HSW’s preference for shopping centre locations bears this out.  I also accept that a material difference in store area is a relevant criterion for comparison.  However, Ms Rankin excluded all stores having an area between 341 and 350sqm (that is, about 50 to 64sqm larger than the Burwood store) yet included as comparable the Hornsby store (which is some 44sqm smaller).  This is not persuasive.  I also do not accept Mr Halligan’s reasons for excluding the Bondi Junction and Macquarie stores.  The Bondi Junction store traded from mid May 2004 and the Macquarie store from March 2004.  That is a sufficient period before the breach to see whether their trading performance was subject to some exceptional factor (which appears not to be the case).  The appointment of a liquidator to the Bondi Junction store (if that in fact occurred, which is unclear) and the resulting improved trading is not a reason to exclude that store from the comparison exercise.

52                  What then of Mr Hughes’ approach of including all Sydney metropolitan stores as at 2007 in his benchmark group?  While I generally accept the theory that, all other things being equal, the larger the benchmark group the more reliable the likely outcome, criteria other than size of sample are relevant.  Hence, I consider both experts correct to focus on locations within the Sydney metropolitan area.  I also consider, however, that material differences in store area are relevant.  Four stores, including the Rhodes store, are over 400sqm in area whereas the Burwood store is 286sqm.  This is a material difference in area and suggests those much larger stores should be excluded.  There is another reason for eliminating the Rhodes store.  As the cause of the breach, that store did not trade at any time before the breach.  The Bondi Junction store, in contrast, did so, even if for a short period.  Relative sales revenues are also important, which gives weight to Mr Halligan’s concerns about Mr Hughes’ benchmark group. 

53                  When all of these conclusions are taken into account it is apparent that, on the available evidence, the most appropriate benchmark group is Mr Halligan’s initial selection of four stores (Bondi Junction, East Gardens, Hornsby and Macquarie).  Mr Halligan’s evidence shows that the average sales revenues of this benchmark group compared to the Burwood store track as well as his group of two (if not better leading up to the breach).  Importantly, the group involves stores that appear to be trading well (for example, Bondi Junction) and poorly (such as Hornsby).  Given the trading performance of the Burwood store immediately before the breach there is no basis to infer that the store would have been either the worst or best performer amongst HSW Sydney metropolitan stores.  This too supports the use of Mr Halligan’s initial benchmark group of four stores in preference to his subsequent benchmark group of two stores.

54                  As noted, Mr Hughes used his benchmark group to assess an average growth rate in sales revenues for the purpose of comparison between the Burwood store’s actual and hypothetical sales revenues.  Mr Halligan used the average of the sales revenues of his benchmark groups for this purpose of comparison.  For a number of reasons I prefer Mr Halligan’s approach.  As Mr Halligan pointed out, Mr Hughes’ approach to these matters involved taking the 6% increase in growth for the Burwood store in the period up to 29 November 2004 and extrapolating that growth for the rest of the 2005 financial year.  However, Mr Hughes’ benchmark group showed a marked average decline in growth up to June 2005.  If benchmark groups are to be used then they should be used for the whole period after the opening of the Rhodes store.  It is unjustifiable to assume continued growth over the entire 2005 financial year before applying the information available from the benchmark group. 

55                  Further, I consider that the difference between the actual sales revenues of the benchmark group and the actual sales revenues of the Burwood store (Mr Halligan’s approach) is likely to be a more reliable measure of lost net profits of the Burwood store than applying a growth rate derived from the benchmark group to a hypothesised 2005 sales revenue for the Burwood store (Mr Hughes’ approach).  As discussed, Mr Hughes’ baseline for the Burwood store is hypothetical rather than actual because of his assumption of continued growth throughout the 2005 financial year, contrary to the performance of his benchmark group.  The dramatic negative growth rates experienced by most Sydney metropolitan HSW stores in the 12 months before June 2005 confirms that actual sales revenues are likely to be a more reliable measure of Haviv’s loss.

Assumption about continued operation of the Burwood store (para 6 issue (4))

56                  Mr Hughes’ approach, as Mr Halligan said, assumed that Haviv continued to operate the Burwood store after 17 August 2007 (the date on which Haviv vacated the store).  Mr Hughes’ explanation was that, irrespective of the presentation of his calculations (which shows “actual” sales after Haviv ceased to operate the Burwood store), the basis of assessment was simply the assumed sales in 2007 increased by the average growth rate of 9.7% from the benchmark group. 

57                  Apart from the fact that I have not accepted the assumed sales in 2007 (because it is based on the assumption of continued growth throughout the 2005 financial year), I accept Mr Halligan’s conclusion that, if Mr Hughes’ method is correct, the relevant comparison after 17 August 2007 is between the hypothetical sales revenues of the Burwood store and no sales revenues.  This issue is not merely one of presentation because the assumption affects the treatment of expenses.  Haviv ceased to earn any sales revenues after 17 August 2007 but it also ceased to pay any expenses.  That fact must be taken into account.  Finally, although Mr Hughes and Mr Halligan agreed on the percentages for variable expenses, Mr Hughes’ approach, as Mr Halligan pointed out, involved applying those percentages to an incorrect amount of lost sales revenues (because Haviv’s actual sales revenues from the Burwood store ceased after 17 August 2007). 

58                  These considerations affect the whole approach of each expert.  For the reasons given I prefer the Mr Halligan’s overall approach to that of Mr Hughes.  I also accept that Mr Halligan’s approach to the actual situation after breach is unaffected by any assumptions with respect to causation (such as whether the breach caused Haviv to vacate the Burwood store); it is simply a reflection of the fact that Haviv ceased to operate the Burwood store on 17 August 2007 and thus earned no more sales revenues after that date.  Only Mr Halligan’s periods of assessment are affected by his assumptions about causation, which is a different issue (and addressed at [61]-[62] below).

Date of assessment of damage (para 6 (issue (5))

59                  I have identified the breaches of the franchise agreement above.  Although the operation of the Rhodes store constituted a continuing breach of the agreement that operation was an inevitable consequence of the grant of the franchise agreement for the Rhodes store.  The continuing breach arose directly from that grant, which occurred on 17 August 2004.  However, neither party advocated the use of 17 August 2004 as the date for assessment.  Mr Halligan chose 29 November 2004 as the relevant assessment date because Haviv suffered no loss or damage until the Rhodes store opened.  Mr Halligan discounted the losses back to a net present value as at 29 November 2004 (albeit at two different rates for losses incurred before and after a notional judgment date).  Mr Hughes chose a later (notional) judgment date as the relevant date for assessment.  Mr Hughes discounted losses after a notional judgment date back to a net present value at that date, but did not discount losses incurred between 29 November 2004 and the notional judgment date.

60                  I consider Mr Halligan’s approach preferable for a number of reasons.  Both experts took the date of opening of the Rhodes store as the date on which Haviv’s revenues from the Burwood store were potentially affected.  From that time Haviv experienced the effect of HSW’s breach of the franchise agreement.  In Johnson v Perez, Mason CJ observed (at 356-357) that the general rule of using the date of breach as the date of assessment “has been applied more uniformly in contract than in tort for good reason”, primarily due to concerns about mitigation.  In the present case, Haviv ceased trading on 17 August 2007, before Mr Hughes’ notional judgment date.  Despite the accountants’ agreement that Haviv could do nothing to mitigate its loss, ceasing trading had that effect.  Further, use of the earlier date of 29 November 2004 (being the date on which the breach first had an effect on Haviv) does not necessarily prevent consideration of subsequent events (Wenham v Ella at 473).  Haviv also has not identified any particular circumstance that makes it unjust to use the earlier date.  Accordingly, there is no reason to depart from the approach that better reflects the general rule that damages for breach of the franchise agreement should be assessed at the date of breach.  In this case, Mr Halligan’s approach better reflects that general rule.

Period of assessment (para 6 issue (6))

61                  On the facts of this case I am unable to see why damage should not be assessed over the whole period from 29 November 2004 to 17 July 2022.  Haviv’s loss caused by the breach (whatever the amount) did not necessarily cease on 17 August 2007 (the date Haviv vacated the Burwood store just before expiry of the lease on 31 August 2007) or 17 July 2012 (the date the franchise agreement expired if Haviv did not choose to exercise its option).  The risk that lease negotiations with Westfield on behalf of PT Limited would impose burdens that Haviv found unacceptable (leading to it vacating the Burwood store) is a factor that should be taken into account in determining the appropriate discount rate (as, indeed, Mr Halligan did).  The discount rate should also incorporate the chance of unsuccessful (and thus also successful) lease negotiations.  The same reasoning must apply to the renewal of the franchise agreement.  There was a chance that Haviv might not renew the franchise agreement for reasons unconnected to the breach, such as HSW requirements for refurbishment that Haviv considered excessive.  But renewal was largely in Haviv’s hands given the terms of the franchise agreement.  A properly assessed discount rate would take that chance into account (as, again, Mr Halligan did). 

62                  In other words, although not expressed as the loss of a chance in Mr Halligan’s evidence, the risks associated with the lease, refurbishment requirements and franchise renewal should be (and have been) taken into account in the discount rate (as is appropriate).  The application of a discount rate that takes into account those (amongst other) factors should reflect the net present value of Haviv’s loss caused by the breach, including the loss of its chances with respect to these matters.  It follows that there is no logical basis upon which to confine the period of assessment to any date before 17 July 2022 (the date on which the renewed franchise agreement would expire).

What discount rate(s) should be applied (para 6 issue (7))?

63                  The evidence of Mr Hughes and Mr Halligan diverged substantially on the issue of discount rates.  Mr Halligan described Mr Hughes’ approach as the “personal injury” approach (a discount rate of 5% applied to all future losses to take account of the time value of money, with the Court to apply a further 15% discount on account of contingencies).  Mr Hughes described Mr Halligan’s approach as a “business valuation” for sale purposes approach (a discount rate of 35% for future losses and 30% for past losses). 

64                  Haviv pointed to cases in which an approach similar to that of Mr Hughes was adopted.  In Rosser v Marine Ministerial Holding Corporation [1999] NSWCA 72 the New South Wales Court of Appeal noted that the trial judge had applied the 3% tables used in Todorovic v Waller (at [71]).  However, the Court of Appeal also observed that this seemed generous and, in applying a discount rate of 18% for contingencies, said the rate would have been higher but for the expert evidence (at [70]). In Otrava Pty Ltd v Mail Boxes Etc (Australia) Pty Ltd [2004] NSWSC 1066 the parties agreed about the application of the 3% tables for the time value of money and 15% for contingencies or vicissitudes (at [127]).  In The Commonwealth of Australia v Silverton Ltd (1997) 130 ACTR 1 at 29 Higgins J said that the approach in Todorovic v Waller is “not a method of calculation confined to personal injury awards” but did so in the context of a discussion about discounting an interest award on account of tax.  These decisions do not provide strong support for adopting Mr Hughes’ approach in the present case.

65                  I find Mr Halligan’s evidence about the purpose and calculation of discount rates compelling.  The 5% discount table that Mr Hughes used is arithmetical (see Luntz, H. Assessment of Damages for Personal Injury and Death, 4^th ed. Australia: LexisNexis Butterworths, 2002 at [6.1.6]).  The 15% discount rate is a “conventional starting point” in New South Wales for contingencies or the vicissitudes of life (State of New South Wales v Moss at [31]).  These vicissitudes have been identified as death, sickness, accident, unemployment and industrial disputes (Luntz at [6.4.6]).  These discount rates have little, if anything, to do with a small retail franchise as in the present case.  The fact that the accountants agreed on a rate of 5.2% as the “risk-free” rate of interest confirms this conclusion.

66                  Mr Halligan gave evidence about discount rates specifically applicable to a small retail franchise such as Haviv’s Burwood store.  He explained that his discount rates accounted for both the time value of money and the risks to cash flows inherent in such a business.  Mr Halligan was right to insist that all differences in sales revenue identified from 29 November 2004 onwards were hypothetical and thus subject to risk (a conclusion relevant to Mr Hughes’ decision not to discount “past” losses, as discussed below).  While Haviv criticised Mr Halligan for using a business valuation approach, he observed, correctly in my view, that the exercise is one of valuation because the aim is to determine “the present value of a series of risky future cash flows by discounting those cash flows at a discount rate that reflects both the time value of money and risk” (Mr Halligan’s first report at [132]).  Given that this is the object of the exercise, the use of the pre-tax WACC as the discount rate is appropriate.  I do not accept Haviv’s submission, based on Mr Hughes’ evidence, that the inputs into this approach are inappropriately subjective.  They are based on experience and judgment, applied to the particular circumstances of the business in question.  This is likely to yield a more meaningful result for the present case than the alternative method used by Mr Hughes. 

67                  When presenting his alternative opinions (using Mr Halligan’s method), Mr Hughes agreed with Mr Halligan about all inputs to the relevant formulae except the ratios of debt and equity capital (in the pre-tax WACC formula) and the small size premium in the post-tax required rate of return on equity capital formula. 

68                  Mr Halligan used a ratio of 25% debt and 75% equity which he considered was disclosed by the financial statements for the Burwood store and was a reasonable estimate of an appropriate capital structure for the business.  Mr Halligan considered that market ratios rather than book ratios of debt and equity had to be used and that various texts supported this requirement.  All other values in the assessment were based on market values.  Hence, using book values in part of the assessment would produce a “nonsense” result. 

69                  Mr Hughes said that Haviv’s actual ratios were 34% for debt and 66% for equity.  As Haviv had chosen that ratio it should be used.  Mr Hughes pointed to at least one text which he considered supported this approach (Willis, Justin B. “Independent Experts’ Reports and Valuations”. Ch 122 in Freckelton, Ian R and Selby, Hugh. Expert Evidence. Australia: Law Book Company, 2001).  This states that “a long term sustainable capital structure” should be adopted using either the structure potential buyers would adopt (a market approach) or the current capital structure of the business depending on the purpose of the exercise (at 10-478).  Haviv submitted that this approach was more consistent with the reality of Haviv’s position.

70                  I prefer Mr Halligan’s evidence on this issue.  In most cases a long term sustainable capital structure generally should reflect the structure potential buyers would adopt for the purpose of determining the market value of the business.  Mr Hughes did not suggest that Mr Halligan’s ratios did not reflect a long term sustainable capital structure.  Further, and as Mr Halligan said, all other inputs to the formulae are based on market values.  These factors indicate that Mr Halligan’s approach to the ratio of debt and equity is to be preferred. 

71                  Mr Halligan adopted a small size premium of 15% for the period up to 17 July 2008 and 20% thereafter.  He did so having regard to the adjustments customarily made to the capital pricing model which, while suitable for large businesses, understates the return required to compensate for the higher level of risk associated with small businesses.  Mr Hughes considered these adjustments extreme and recommended an adjustment of 10% on account of size.  Mr Hughes referred to the text on which Mr Halligan relied (Pratt, S, Reilly, R and Schweihs, R. Valuing a Business: The Analysis of Closely Held Companies, 4^th ed. McGraw-Hill: United States of America, 2000) as supporting a lower premium for small size.  Mr Hughes also pointed out (and Haviv submitted) that the Burwood store, while small, was part of a much larger franchise, with a recognised product and market, facing no direct competitors for its full range.  Haviv also submitted that any “usual commercial risks associated with a franchised retail business” would be diminished by the strength of the established HSW brand and system, the marketing and field support provided by HSW and the sourcing of product lines through Plaza.  Mr Hughes considered these factors also weighed against Mr Halligan’s premiums for size and supported a premium of no more than 10%.  Mr Halligan pointed out in response that the Pratt, Reilly and Schweihs text dealt with listed companies so that businesses with an average market capitalisation of US$30 million, average sales revenue of US$40 million and an average workforce of 223 employees were classed as small.  Mr Halligan observed that franchise stores also experienced failure and HSW franchises were not comparable to more tightly controlled enterprises such as McDonald’s.

72                  I do not accept Haviv’s criticism of Mr Halligan’s modification of the capital pricing model to include a small size premium.  Mr Halligan explained the reason why it was appropriate to do so (to take into account the higher risks associated with a small business).  Mr Hughes accepted the need for some small size premium if the model were to be used.  The Burwood store was a small business.  Despite being a franchise it carried the higher level of risk associated with small businesses.  I prefer the evidence of Mr Halligan about the small size premium to that of Mr Hughes.  It follows that I do not accept Mr Hughes’ evidence (on his alternative basis) of a discount rate of 22%.

73                  One aspect of Mr Halligan’s evidence on the appropriate discount rate requires comment.  Mr Halligan adopted a different discount rate for the periods before and after 17 July 2008 (a notional judgment date), treating the former as past and the latter as future.  According to Mr Halligan the hypothetical past presents fewer risks than the uncertain future because the past took place in a known economic environment.  This approach makes sense if known facts up to the date of judgment are able to be taken into account.  Such an approach (permissible by reference to Wenham v Ella at 473) affects certain other inputs into Mr Halligan’s calculations (dealt with below).

74                  Another aspect of Mr Halligan’s evidence on the appropriate discount rate requires qualification.  A part (albeit small) of Mr Halligan’s discount rates was based on HSW’s allegations of poor management and marketing of the Burwood store compared to other HSW stores.  As discussed, the evidence does not permit a finding about the relative quality of the management and marketing of the Burwood store.  As a result, Mr Halligan’s discount rates must be too high.  Mr Halligan said that, if he disregarded these factors, the impact probably would be a decrease in the discount rate of 1 to 2% for the future and 5% for the past. 

75                  On this basis I consider that the evidence supports the application of a discount rate of 28% to past (pre-judgment) losses and 30% to future (post-judgment losses).  These rates, I also note, would each yield a capitalisation multiple within Mr Halligan’s range for small businesses of between 2.5x and 5.5x. 

How should the discount rate be applied? (para 6 issue (8))

76                  It will be apparent from the discussion above that I do not accept the reasoning which led Mr Hughes not to discount to past net lost profits (being, on his analysis, net lost profits before a notional judgment date).  Leaving aside the issue of the correct date of assessment, Mr Hughes’ approach to past losses inappropriately treats them as certain, when they are not.  As Mr Halligan said in the joint report at [42]:

The losses, whether past or future, are the difference between the hypothetical net profits that would have been earned but for the Alleged Breach and the net profits that were earned following and as a result of the Alleged Breach.  There is no certainty regarding the amount or timing of timing of the hypothetical net profits that would have been earned but for the Breach, whether in the period of the past loss or the period of the future loss.

77                  This is consistent with an observation of the New South Wales Court of Appeal in Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 at [142] that it:

…can make no difference in principle if a past hypothetical event is in question rather than a future hypothetical event, or if damages for loss of profits rather than for lost earning capacity is in question.

78                  The only way in which Mr Halligan’s (correct) observation can be accounted for is to ensure that an appropriate discount rate is applied to all losses whether past or future.  Mr Hughes did not discount past losses.  Accordingly, as Mr Halligan said, Mr Hughes’ approach (which I do not accept) necessarily inflates Haviv’s past losses.

The gross profit percentage (para 6 issue (9))

79                  Mr Hughes and Mr Halligan used different gross profit percentages for 2007 and for the future.  Mr Hughes used the 2006 percentage on the basis of instructions that Haviv was reducing stock in 2007 because of its decision to cease operating the store.  Mr Halligan said there was no evidence that the opening and operation of the Rhodes store affected Haviv’s gross profit percentage.  Further, Mr Hughes used 52% which was the gross profit percentage only for the 2006 year (after the breach and being the highest percentage for any trading year).  Mr Halligan used the average percentage over all trading years. 

80                  I consider the gross profit percentage in 2007 is out of kilter with the results for other years.  This supports a finding that the 2007 year should be treated with caution.  Further, Haviv only traded until 17 August 2007 (a small part of the 2007 financial year) yet Mr Halligan has weighted the result in that year equally with all other years for the purpose of his average.  I consider the approaches of both experts too extreme about this issue.  The average gross profit percentage disregarding the 2007 financial year (for which Haviv traded only for a short period and may readily be inferred to have been moving stock at reduced rates) is 50.3%.  Accordingly, the figure of 50.3% should be used as the gross profit percentage for the 2007 financial year onwards.

Fixed costs including rent and refurbishment costs (para 6 issue (10))

81                  The experts agreed that saved variable percentages should be applied to lost sales revenues.  They treated the fixed costs including rent and refurbishment costs differently.

82                  Mr Hughes’ calculations did not treat the fixed expenses as saved after 17 August 2007 other than increased rent and outgoings for the 2008 financial year.  Mr Halligan treated all fixed expenses after 17 August 2007 as saved because Haviv had ceased to operate the Burwood store and thus had ceased to incur those expenses.  I agree with Mr Halligan’s approach to the saving of all fixed costs including rent.  However, to be consistent (given Mr Halligan’s dual discount rate on the basis that the hypothetical past is more certain than the hypothetical future) the actual rental figures for the Burwood store (rather than Westfield’s initial offer of $220,000 per annum) should be used.  Apart from this, I consider it unreasonable to use a large landlord’s opening offer as the actual rent in the assessment of net lost profits.  The market (even with the limited knowledge available when the franchise agreement was executed) would not expect such a steep increase in rent.  Mr Aghion certainly did not expect it and HSW did not accept that opening offer.  The actual rent varied from a monthly licence fee of $138,490.56 per annum for seven months from 1 September 2007 and an annual rental of $187,000 from 1 April 2008 to the end of the current lease on 31 March 2013.  Appropriate adjustments should be made thereafter from that base.  There is no reason to think that, but for the dispute between HSW and Haviv, HSW would not have been able to negotiate a rental position on Haviv’s behalf equally beneficial as the position it negotiated for itself.

83                  Mr Hughes assumed refurbishment costs of $40,000 (a minor refit) in July 2007, $155,000 (a major refit) in July 2012 and $40,000 (a minor refit) in July 2017.  Mr Hughes used the accruals method of accounting to calculate net profit which affected his treatment of the refurbishment costs.  Mr Halligan assumed refurbishment costs of $155,000 each in March 2009, March 2014 and March 2019.  Mr Halligan calculated net profits on a cash basis which affected his treatment of the refurbishment costs. 

84                  The franchise agreement permitted HSW to require a refit of premises not more than every five years (and subject to any overriding requirements of the lessor).  As Haviv submitted, the evidence (particularly that of Chad Braithwaite, HSW’s national retail sales manager) leaves the timing and cost of any refurbishment as speculative.  HSW negotiated a deferral and reduction of Westfield’s refurbishment requirements on its own behalf.  Given that HSW controlled the timing and magnitude of any refurbishment (subject to the lessor’s demands), HSW needed to provide reliable evidence about those issues (disregarding the circumstances of its dispute with Haviv).  In my view HSW has not done so.  Accordingly, I prefer the costs and timing used by Mr Hughes for refurbishment, which appear more reasonable than those Mr Halligan assumed.  Mr Halligan also treated the refurbishment costs as having to be paid in full at the beginning of each year rather than using mid-year discounting.  I consider this inappropriate given: - (i) the uncertainty surrounding the refurbishment costs, (ii) HSW’s status as the party in breach, (iii) the franchisee’s capacity to fund such works over time, and (iv) the treatment of all other costs.  It follows that, although I accept Mr Halligan’s reasons for preferring a cash basis to calculate net profit, I consider adjustments need to be made to his treatment of refurbishment costs by, first, using the figures of $40,000 in July 2007, $155,000 in July 2012 and $40,000 in July 2017 and, second, subjecting those figures to mid-period discounting in common with all other costs.  I prefer the cash basis generally because, as Mr Halligan said, it presents a more realistic picture of the lost net profits than the accruals basis by recognising revenues and expenses when received and paid respectively.

Another observation about the expert evidence

85                  Haviv criticised Mr Halligan in final submissions for adopting a partisan approach to his evidence when, as an expert, his primary duty was to assist the Court.  As HSW submitted, this is a serious allegation which was never put to Mr Halligan.  I do not accept that Mr Halligan (or, for that matter, Mr Hughes) did anything other than provide opinions consistent with the obligations of an expert witness.  Although many differences in method between the experts remained, they prepared a useful joint report and gave evidence in concurrent session which clearly identified the nature of, and reasons for, their differences. 

Conclusions about contract claims

86                  I am satisfied that the evidence establishes that Haviv has suffered loss (in the form of lost net profits by reason of decreased sales revenue) caused by HSW’s admitted breach of the franchise agreement, the remedy for which is damages.  I do not accept that Haviv could not have suffered loss because the Burwood store was unprofitable in its first two years of trade.  The Burwood store was a long-term business proposition (albeit subject to the risks relating to the expiry of the lease and otherwise).  Haviv’s rights included the exclusive franchise territory, rights associated with relocation (if the lease could not be renewed), and the option for a further franchise agreement largely at Haviv’s discretion.  Mr Halligan’s method only resulted in no or minimal loss to Haviv when applied to alternatives either not supported by the evidence (specifically, that the Rhodes store could have been located elsewhere in the Rhodes shopping centre or nearby without breaching the franchise agreement) or which I have rejected (specifically, the assessment of damages over periods shorter than I consider necessary).  Otherwise, Mr Halligan’s assessment disclosed a material loss to Haviv caused by the breach (described by Mr Halligan as “alternative C”).  The adjustments to Mr Halligan’s calculations which are required (for the reasons given above) should result in a conclusion of increased loss.

87                  Consistent with the findings above, damages should be calculated in accordance with Mr Halligan’s method subject only to the following matters:

(1)          Mr Halligan’s “alternative C” period of assessment should be used (that is, damages should be assessed from 29 November 2004 until the end of the option period, being 17 July 2022).

(2)          The benchmark group should comprise the Hornsby, East Gardens, Macquarie and Bondi Junction stores.

(3)          The discount rates applied should be 28% for losses to the date of judgment and 30% for losses thereafter.

(4)          The rent increase should reflect the true position where known (that is, $138,490.56 per annum for seven months from 1 September 2007 and an annual rental of $187,000 from 1 April 2008 to the end of the current lease on 31 March 2013, with appropriate adjustments thereafter from that base).

(5)          The figure of 50.3% should be used as the gross profit percentage for the 2007 financial year onwards.

(6)          The refurbishment costs should be $40,000 in July 2007, $155,000 in July 2012 and $40,000 in July 2017 and subject to mid-period discounting. 

THE TRADE PRACTICES CLAIMS

General

88                  Haviv and Mr Aghion alleged that HSW, Plaza (and Mr Spence as an accessory) engaged in misleading and deceptive conduct in breach of s 52 (and s 53(g)) of the Trade Practices Act with respect to two matters – the exclusivity of Haviv’s franchise territory and any financial benefits to be obtained by Plaza from the supply of goods to franchisees.  Both classes of representation involve a future matter.  Accordingly, the representations will be taken to be misleading if HSW and Plaza did not have reasonable grounds for making the representation (s 51A of the Trade Practices Act). 

Claims based on exclusivity representations

89                  There was no debate between the parties about the primary facts.  HSW (via Mr Spence) provided Haviv (via Mr Aghion) with a disclosure document dated 17 June 2002.  Mr Aghion read that document carefully.  That document identified Plaza as the franchisor and made no reference to HSW.  The disclosure document contained the following statements:

Territory

8.3     Does the franchisee have a territory that is exclusive…….……….yes

8.2     Does the franchisee have a territory that is non-exclusive…………no

8.3     Is the franchisee limited to a particular site………………………...no

Provide the following details for the franchised territory

90                  On or about 1 July 2002 the HSW business was restructured.  HSW became the franchisor and Plaza a supplier of HSW products to franchisees.

91                  HSW (Mr Spence) and Haviv (Mr Aghion and Mr Rooney) met on 18 July 2002.  During that meeting Mr Spence identified the “territory” for the purpose of the franchise agreement as a 5 kilometre radius from the Burwood store.  Mr Spence also handed over another disclosure document identifying HSW as the franchisor and making consequential amendments, but Mr Aghion did not read that document or the final franchise agreement (having already read a draft provided earlier).  The draft and final franchise agreements provided for Haviv to have an exclusive franchise territory (see the discussion about the contract claims above).

92                  HSW entered into a franchise agreement for the Rhodes store on 17 August 2004.  The Rhodes store is between 4837 and 4840 metres distance from the Burwood store.

93                  Haviv and Mr Aghion alleged that the representations were that no other HSW franchise premises would be located within the territory and that the territory would not overlap with any other franchise territory.  Further, that the representations were misleading because HSW and Plaza: - (i) did not have or apply an accurate and reliable system to ensure that stores were or would be far enough apart so that they did not fall within or overlap with another franchise territory, and (ii) did not ensure and did not intend to ensure that franchise territories were not co-extensive and did not overlap.

94                  The conduct on which Haviv and Mr Aghion relied discloses that HSW and Plaza represented to Haviv that it would receive an exclusive franchise territory of a 5 kilometre radius from the Burwood store pursuant to the franchise agreement.  Ordinary and reasonable prospective franchisees would have understood by this that no other HSW franchised premises could be located within 5 kilometres of the store the subject of their own HSW franchises.  I do not accept the submission that the representation was also to the effect that Haviv’s territory would not overlap with the territory of any other HSW franchise.  Moreover, and as HSW submitted, the evidence does not support a finding that Mr Aghion (or Mr Rooney) thought the representation went any further than I have found at any relevant time (namely, that no other HSW franchise premises would be permitted in the territory).  The evidence, indeed, is to the contrary (including the evidence about the Auburn franchise and the letter from Haviv’s solicitor dated 26 November 2004 which makes no complaint about overlapping territories).  Accordingly, I do not accept Haviv’s submissions about overlapping territory.

95                  The primary difficulty with the claims based on the exclusive territory representation is that HSW has adduced evidence demonstrating that HSW and Plaza had reasonable grounds for making the representation. 

96                  Mr Spence said that the location of other HSW stores was part of HSW’s guidelines for selecting premises.  On the wall of HSW’s office is a large map of Sydney at a scale of 1:75 (in fact, the map is at a scale of 1:75,000).  Since 2001 Mr Spence has used this map to measure the distance between stores.  When the Rhodes shopping centre opportunity emerged Mr Spence was given drawings of the centre showing its location between Blaxland Street and Homebush Bay Drive, Homebush Bay.  He used the map to mark his estimate of the location of the Rhodes shopping centre and the Burwood shopping centre.  He measured the distance between the two dots as approximately 5.3 kilometres.  This occurred in about July 2003.  Mr Spence did not undertake any other form of measurement as he believed the two shopping centres were more than 5 kilometres apart.  Subsequently, after these proceedings were commenced, HSW introduced a different system of measurement using a firm of consultants and a computer mapping system.

97                  Haviv and Mr Aghion submitted that the truth of the representation depended on HSW and Plaza accurately allocating and measuring distances between stores and between stores and territories yet to be allocated.  However, they said, there was no reliable evidence that the wall map was routinely used, or used to measure out Haviv’s territory and, in any event, the method was sketchy and unreliable.  Mr Spence’s estimate was inaccurate by 460 metres.  In consequence, there were no reasonable grounds for the making of the exclusivity representation.

98                  I do not accept these submissions.  I infer from the evidence that HSW’s franchise agreements usually contained an exclusive territory provision.  At the time it made the representations, HSW had control over the location of franchised premises and had available to it the means to ensure the representations were satisfied.  Mr Spence was responsible for franchising arrangements until February 2004 and used the wall map to locate HSW franchised premises.  There is no evidence that, before the Rhodes franchise, the use of the wall map had proved unsuitable for the purpose to which Mr Spence put it.  There is no evidence that, when HSW and Plaza made the representations, they contemplated doing anything other than maintaining Haviv’s exclusive territory through use of the wall map.  Mr Spence’s evidence supports this.  All of the objective circumstances also support acceptance of this evidence. 

99                  It is true that Mr Spence’s estimate of 5.3 kilometres between the shopping centres was wrong.  However, the grant of a franchise for premises some two years after the making of the representations, where the premises are 163 metres within the boundary of Haviv’s exclusive franchise territory, does not establish that the representations were misleading and deceptive.  HSW had reasonable grounds for the making of the representations when they were made because it controlled the grant of franchises, had available a system for locating franchised premises sufficiently far apart in the usual course (imperfect as that system ultimately proved in the present case) and, on the evidence, must be inferred to have intended to use that system to ensure compliance with its obligations under the franchise agreement.  The claims based on the exclusivity representations, accordingly, must be rejected.

100               If it be necessary to say so, I also accept HSW’s submissions about another difficulty with these claims.  Mr Aghion’s evidence did not support a finding that, but for the exclusivity representation, Haviv would have not entered into the franchise agreement.  Rather, it established that, but for the exclusivity representation, Mr Aghion would not have permitted Haviv to enter into the franchise agreement “there and then” and would have taken advice.  Although the exclusivity representation was important to Haviv, the evidence is insufficient to support a “no transaction” case (Leadenhall Australia Limited v Peptech Limited (2001) 39 ACSR 265; [2001] NSWCA 272).  The evidence also does not establish any different course of action Haviv or Mr Aghion might have taken.  In these circumstances, Haviv and Mr Aghion have not established the necessary evidentiary foundation for any award of damages under s 82 of the Trade Practices Act even if HSW and Plaza had engaged in misleading and deceptive conduct by reason of the exclusivity representation (which they did not).

Claims based on financial benefits representation

101               This claim is based on the disclosure document dated 17 June 2002 which Mr Aghion read.  Clause 9 of this document included questions and answers in these terms:

9          Supply of goods or services to a franchisee

9.1       Details of franchisor’s requirements for supply of goods or services to a franchisee.

(a)  is the franchisee required to maintain a level of inventory or acquire an amount of goods and services.

Yes……………………………………..minimum of $90,000 stock

(b)  is the franchisee restricted from acquiring goods or services from other sources.

No. As long as those sources are approved by the franchisor and meet its Supply specifications.

(c)    is the franchisee required to acquire goods or services from a supplier in which the franchisor or its associate has an ownership interest.

Yes. Plaza Home Imports Pty Ltd is also an importer of certain storage Products.

(d)    is the franchisee obliged to accept goods or services from the franchisor.

Yes. As per above and the management and marketing field support the Franchisor will provide.

…

102               Clause 10 provided:

10        Supply of goods or services by a franchisee

10.1   The franchisor’s requirements for the supply of goods or services by a franchisee are set out below.

103               Haviv and Mr Aghion claimed that the statement in cl 10.2(a) of the disclosure document was misleading and deceptive because it represented that Plaza would not receive any financial benefits from the supply of goods or services to HSW franchisees, yet Plaza intended to receive and in fact received financial benefits for the supply of goods to those franchisees.  The evidence said to support this intention and fact is that Plaza: - (i) sought to make a return on its trading operations, (ii) budgeted to return a profit from its trading operations, (iii) priced its goods to make a profit, and (iv)  made gross profits from its trading operations which financially benefited HSW and its associates.  Haviv and Mr Aghion also relied on a Plaza document headed “Items List [Summary]” showing items, suppliers, the number of items on hand, their total value, their average cost, current price and the total current price.  This document identified a total “mark-up in current price” of 43%.  Mr Aghion said he understood the statements in cl 10.2 of the disclosure document to be true and was unaware of any mark-up.  Haviv submitted that, if he had been so aware, Haviv could have negotiated a discount on Plaza’s prices before entering into the franchise agreement.  Mr Hughes calculated that, at a mark up of 43%, Haviv had overpaid Plaza $314,138 in excess of the amount Haviv ought to have paid had the financial benefits representation been true.

104               HSW submitted that, because Mr Aghion read only the version of the disclosure document dated 17 June 2002 and the draft franchise agreement (as discussed at [91] above), he could not have understood cl 10.2(a) as referring to Plaza other than in its capacity as franchisor, and not as the supplier of goods.  I find that distinction artificial and unpersuasive.  Plaza was the intended supplier of goods under the franchise agreement at all relevant times.  The restructure in 2002 affected Plaza’s role as franchisor not supplier. 

105               HSW’s submissions assumed that the representation could only be understood by a reasonable prospective HSW franchisee as a statement that Plaza made no net profit from the supply of goods.  The representation in fact may be narrower than this given the context (particularly that the words used are “rebates or other financial benefits from the supply…”).  I consider that, construed in context, cl 10.2(a) means nothing more than that which Mr Spence understood it to mean, namely, that Plaza did not and would not earn any “backhanders” from suppliers.  In my view, this is how reasonable prospective franchisees would understand the representation.  There is no evidence Plaza received or any time intended to receive incentives from suppliers.  On this basis, the claim should fail.  Given HSW’s submissions, however, I have determined the claim on the basis that the statement meant that Plaza would not make any net profits from the supply of goods to Haviv. 

106               The “Items List [Summary]” document shows the price Plaza had to pay the supplier of each unit but does not disclose any other costs that Plaza must have incurred in the supply operation.  The evidence establishes that these other costs (freight, cartage, warehousing and insurance) were added on to the price at which Plaza sold items to franchisees.  Properly understood the evidence shows only that Plaza priced its goods to make a profit margin above the wholesale price in order to cover all of the costs associated with its trading operations as a supplier of goods to franchisees.  The evidence shows that Plaza (and HSW) had reasonable grounds for the making of the representation and does not show that the representation was false.  The evidence is insufficient to prove a net profit by Plaza on the supply of goods to franchisees. 

107               Further, and again as HSW submitted, Mr Aghion did not suggest that, had he known about a mark-up on Plaza’s sale of goods to Haviv, he would have refused to sign the franchise agreement or insisted on paying the wholesale cost only at the risk of not entering into the franchise agreement.  Mr Spence’s evidence also did not support a finding that Haviv, by reason of the representation, lost any opportunity to negotiate payment only of the wholesale price for goods.  To the contrary, his evidence indicated that, but for the margin to cover Plaza’s costs, the products would not have been available.  Discounts had only been offered on discontinued lines and, even then, rarely.  I accept Mr Spence’s evidence that Haviv would not have been offered a wholesale price for the supply of products by Plaza because, had that been done, there was no distinction between Haviv and other franchisees and the commercial consequence of all franchisees obtaining products at wholesale prices would be that Plaza could not continue its supply business and remain solvent.  Even if that were not the case, Mr Hughes’ calculation cannot be the proper measure of any damage for breach (had breach been established) because the calculation is inconsistent with the principle that loss in this context requires some proof that greater benefit or less detriment otherwise would have been obtained or incurred (Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; [1998] HCA 69 at [16], [47] – [48], [51] and [110], Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14 – 15).  Haviv and Mr Aghion have not proved that they could have obtained a 43% discount (or any other particular discount) as part of the negotiation of the franchise agreement. 

108               For these reasons the financial benefits claims must fail.

Mr Spence’s accessorial liability

109               Given that I have not accepted the trade practices claims, the issue of Mr Spence’s accessorial liability as a person involved in any contravention under s 75B of the Trade Practices Act does not arise.

CONCLUSIONS

110               For the reasons given above I am satisfied that HSW breached the contractual promise of an exclusive franchise territory which it gave Haviv in the franchise agreement (cll 1A, 1C and Schedule 1) by granting the franchise for, and permitting the operation of, the Rhodes store.  I am also satisfied that Haviv suffered loss caused by HSW’s breach of the franchise agreement in the form of decreased sales revenue and, thereby, decreased net profits.  I consider that Haviv’s loss should be assessed by applying Mr Halligan’s method and inputs except that:

(1)          Mr Halligan’s “alternative C” period of assessment should be used (that is, with damages assessed until the end of the option period, being 17 July 2022).

(2)          The benchmark group should comprise Hornsby, East Gardens, Macquarie and Bondi Junction stores.

(3)          The discount rates applied should be 28% for losses to the date of judgment and 30% for losses thereafter.

(4)          The rent increase should reflect the true position where known (that is, $138,490.56 per annum for seven months from 1 September 2007 and an annual rental of $187,000 from 1 April 2008 to the end of the current lease on 31 March 2013 with appropriate adjustments thereafter from that base).

(5)          The figure of 50.3% should be used as the gross profit percentage for the 2007 financial year onwards.

(6)          The refurbishment costs should be $40,000 in July 2007, $155,000 in July 2012 and $40,000 in July 2017 and subject to mid-period discounting. 

111               I do not accept any of the claims made by Haviv and Mr Aghion under the Trade Practices Act.

112               I propose to discuss the making of further directions with the parties concerning the recalculation of the loss by Mr Halligan (with an opportunity for Mr Hughes to check those calculations) and the submission by the parties thereafter of agreed orders reflecting my reasons for judgment.  The proceedings are thus adjourned for further directions on a date to be allocated.

Associate:

Dated:         18 March 2009