FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd [2010] FCA 525  

THE COURT ORDERS THAT:

1.                  The Applicant file and serve on the respondents proposed minutes of orders including orders as to costs to give effect to these reasons for judgement.

2.                  The matter be adjourned to a date to be fixed for consideration of the orders proposed by the parties and for pronouncement of final orders.

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 Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                     Seal-A-Fridge Pty Ltd (Seal-A-Fridge), the first respondent, carries on business in Australia as a franchisor of businesses concerned with the on site replacement of seals on refrigerators. That there existed a business opportunity in the replacement of refrigerator seals and in the later marketing of territorial franchises to conduct such a business was the product of the entrepreneurial acumen of Mr Rooney, the second respondent, who was and is the directing mind and will of Seal-A-Fridge.

2                     Seal-A-Fridge is the owner of a trade mark and a business name derived from its corporate name and style. It is also a subscriber to a Telstra “Priority 13” national telephone number used in conjunction with that business name. The facility exists for telephone calls to that 13 number to be distributed geographically. In a progressively increasing way, Seal-A-Fridge has entered into agreements whereby persons are granted, as franchisees, a right to conduct, in a defined geographic area, a business of replacing refrigerator seals under the name “Seal-A-Fridge” and under a marketing plan known as the “Seal-A-Fridge” franchise. Included in  that marketing plan is the promotion of the use of the 13 number as a contact point and the diversion of calls to that number from particular geographic areas to the franchisee in that geographic area.

3                     The case against Seal-A-Fridge and Mr Rooney as originally alleged by the Australian Competition and Consumer Commission (ACCC) was broader than that which, by permitted amendment at the commencement of the trial, ultimately came to be advanced. In summary, the case as so advanced is as follows.

4                     The ACCC alleges that Seal-A-Fridge has, contrary to s 51AC of the Trade Practices Act 1974 (Cth) (Trade Practices Act), engaged in unconscionable conduct by demanding and ultimately obtaining from certain of its franchisees payment of increased weekly franchise fees. These fee increases are said to have been demanded and obtained by Seal-A-Fridge without being authorised by the terms of the agreement which it had with that particular franchisee. The alleged conduct relates to two fee increases in the weekly franchise fee, from $50.00 to $75.00 per week in 2001 and from $75.00 to $100.00 per week in 2004. Related to these allegations is the alleged procuring by unconscionable conduct of deeds of variation to the franchise agreements making provision for an increased weekly fee.

5                     Another contravention of s 51AC alleged by the ACCC relates to conduct by Seal-A-Fridge in relation to the prospective sale by particular franchisees of their franchise business. The essence of that alleged contravention lies in what is said to be the unauthorised and the prospective purchaser enter into a form of franchise agreement containing a requirement for turnover based payments to the franchisor in circumstances where no then current franchise agreement imposed such a requirement.

6                     The form of written franchise agreement used by Seal-A-Fridge has evolved over time. I set out later in these reasons for judgement pertinent extracts from the agreements between Seal-A-Fridge and those particular franchisees upon which the ACCC’s case depends. As will be seen, it is also necessary to consider whether the written franchise agreements with these franchisees should be regarded as the complete repository of all of the terms of the agreement between those parties and Seal-A-Fridge.

7                     The ACCC further alleges that, contrary to s 51AD of the Trade Practices Act, Seal-A-Fridge, breached provisions for the time applicable in a relevant industry code namely, cl 10 and cl 19 respectively of the Franchising Code of Conduct (Cth) (Franchising Code) in the Schedule to the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (Franchising Regulations). Clause 10 relates to the requirement for a franchisor to provide to a franchisee what is known as a “disclosure document”. Clause 19 of the Franchising Code relates to the provision by a franchisor of an updated disclosure document to a franchisee within fourteen days after a written request for the same.

8                     As to Mr Rooney, the ACCC alleges that he was, for the purposes of s 75B of the Trade Practices Act, a party to each of the corporate contraventions it alleges against Seal-A-Fridge.

9                     Seal-A-Fridge and Mr Rooney were originally legally represented. At the trial though, for reasons associated with what he said was the cost of continued legal representation, Mr Rooney appeared on his own behalf and, by leave, on behalf of Seal-A-Fridge. He made a deliberate choice not to give evidence. The consequence of that choice is not that I am obliged to accept the evidence of the witnesses called by the ACCC but it does mean that, in respect of subjects upon which Mr Rooney also might have been able to give evidence, I can more readily draw inferences favourable to the ACCC from the accounts of those witnesses who were called: Jones v Dunkel (1959) 101 CLR 298.

10                  Mr Rooney conducted his and Seal-A-Fridge’s case astutely. He did not gainsay evidence as to his personal involvement. Rather, his essential submission was that, on the whole of the evidence, that involvement and hence Seal-A-Fridge’s conduct, while not commendable or perhaps strictly authorised by the agreement concerned, was not so morally reprehensible as to warrant being described as “unconscionable”.

Section 51AC

11                  Section 51AC was inserted into Part IV of the Trade Practices Act in 1998. It has since been amended. As it happens the later amendments are of no moment in the present case. So far as presently material, s 51AC provides:

51AC  Unconscionable conduct in business transactions

(1)        A corporation must not, in trade or commerce, in connection with:

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

(b) …

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

(2)       

(3)        Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the supplier) has contravened subsection (1) or (2) in connection with the supply or possible supply of goods or services to a person or a corporation (the business consumer), the Court may have regard to:

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

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

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

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

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

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

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

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

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

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

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

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

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

…

12                  “Unconscionable conduct” for the purposes of s 51AC is ultimately an open-ended concept. It is plain from the way the sub-section is cast that the considerations listed in s 51AC(3) (and s 51AC(4) for that matter) are neither intended to be exhaustive nor to limit the meaning of “unconscionable conduct”.

13                  The present Chief Justice of Australia, French CJ, speaking extra-judicially (Chief Justice R S French, In Praise of Unelected Judges,The John Curtin Institute of Public Policy, Public Policy Forum, Perth, 1 July 2009, http://www.hcourt.gov.au/speeches/frenchcj/frenchcj01July09.pdf), has made the following observations about the task confronted by judges in cases which require the application of broad legislative or common law standards to the circumstances of a particular case:

15            Beyond the interpretation of statutes, the words used may require judges to make choices about the outcomes of particular cases according to legal standards rather than precise legal rules. There are many judge-made common law rules which use language such as "reasonable" or "unconscionable" or "foreseeable" or "remote" or "good faith". The use of these words is not a new phenomenon. But they involve value judgments in their application to particular facts or circumstances.

16            Similarly, some statutes lay down legal standards expressed in broad terms rather than legal rules. These involve the use of evaluative expressions such as "good faith" which appears in over 160 Commonwealth Acts, "reasonable" which appears in over 140, the "interests of justice" which appears in at least 50 Acts and "unconscionable" which appears in at least 12. There are also terms like "just cause" and "just excuse". In taxing statutes, terms such as "in relation to" and "in connection with" require judges to consider their general range and make evaluative judgments about their application in particular cases. Interpretation and application of these standards case by case involves not only the development of a principled approach based on logic, but one necessarily informed by value judgments. Even in these cases the judge does not have free reign to indulge prejudices or predispositions or idiosyncratic values. The proper application of such standards will generally be limited to what is necessary to dispose of the case before the judge. It will also be constrained by binding decisions of higher courts on the same point. The decisions of the judge will also be subject to appellate review.

14                  The present is an example of the type of case described by the Chief Justice in the passage quoted. It calls for the making of a value judgement about whether “in all the circumstances” such conduct in which I am satisfied on the balance of probabilities on the evidence Seal-A-Fridge engaged constituted “unconscionable conduct” for the purposes of s 51AC of the Trade Practices Act. Particular care needs to be taken with respect to precedent in relation to the making of such value judgements. This is because, “The language used by judges to explain the reasons why they think the statutory words do or do not apply to the particular circumstances of the case under consideration is chosen with those particular circumstances in mind and is not intended as a paraphrase of the statutory words that is necessarily appropriate to all other circumstances”: Caltex Oil (Australia) Pty Ltd v Feenan [1981] 1 NSWLR 169 at 173 (Caltex Oil).

15                  Caltex Oil was a case which arose under another statute which provided for the making of judicial value judgements in respect of broad legislative standards, s 88F of the Industrial Arbitration Act 1940 (NSW) which was the then provision governing what is colloquially known as the “unfair contracts” jurisdiction of the NSW Industrial Commission exercised when sitting in court session. Though the observation of the Judicial Committee which I have quoted concerned statements which had been made concerning the meaning of the phrase “contract whereby a person performs work in any industry”, which was descriptive of the class of contract in respect of which that jurisdiction could be exercised, it might equally well have been made in respect of the broad legislative standards upon the application of which to such contracts entitlement to relief depended – “unfair”, “harsh or unconscionable”, or “against the public interest”. It has long been recognised in relation to the exercise of that jurisdiction that what is required in the application of those standards to particular cases is a common sense approach characteristic of the ordinary juror which can not be communicated and might even be clouded by an analysis of decided cases, even those factually analogous: Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 (Sheldon J) and Agius v Arrow Freightways Pty Ltd [1965] AR (NSW) 77 (Beattie J). In my opinion, similar sentiments attend the making of value judgements as to whether or not particular conduct constitutes “unconscionable conduct” for the purposes of s 51AC of the Trade Practices Act.

16                  These cautionary notes sounded, like Flick J in N A Retail Solutions Pty Ltd v St George Bank Ltd [2010] FCA 259 at [25] and Gordon J in Australian Competition and Consumer Commission v Dukemaster Pty Ltd [2009] ATPR 42-290 at [17], I consider that the following passage from the judgment of Foster J in Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) (2009) 253 ALR 324 at [113] provides a succinct and accurate summary of a number of propositions of general application thus far established concerning s 51AC of the Trade Practices Act:

(a)        The scope of s 51AC is wider than that of s 51AA. The meaning of unconscionable for the purposes of s 51AC is not limited to the meaning of the word according to established principles of common law and equity: per French J in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (No 2) (2000) 96 FCR 491 at [24] and [25] (p 503); per Sundberg J in Australian Competition and Consumer Commissioner v Simply No-Knead Franchising Pty Ltd (2000) 104 FCR 253 at [31] (p 265); per Selway J in Australian Competition and Consumer Commission v 4WD Systems Pty Ltd (2003) 59 IPR 435 at [183] (p 487) and per Jacobson J in Pacific National (ACT) Ltd v Queensland Rail (2006) 28 ATPR 46-268 (p 53,515) at [918] (p 53,527).

(b)        The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment: per Heerey, Drummond and Emmett JJ in Hurley v McDonalds Australia Ltd (2000) 22 ATPR 41-474 (p 40, 578) at [22] (p 40,585). This helpful articulation of the meaning of the word when used in s 51AC was followed by Selway J in ACCC v 4WD Systems Pty Ltd (2003) 59 IPR 435 at [183]–[185] (pp 487–488) and by Sundberg J in ACCC v Simply No-Knead Franchising Pty Ltd (2000) 104 FCR 253 at [30] (p 264); and

(c)        Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act: per Selway J in ACCC v 4WD Systems Pty Ltd (2003) 59 IPR 435 at [185] (p 488).

17                  Neither the ACCC nor Mr Rooney disputed these general propositions as to the meaning of s 51 AC of the Trade Practices Act.

18                  So far as material for the present s 51AC of the Trade Practices Act also requires that the conduct concerned must be in connection with the supply or possible supply of “services”. “Services” is a term defined by s 4 of the Trade Practices Act. The definition is a broad one:

services includes any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:

(a)        a contract for or in relation to:

(i)         the performance of work (including work of a professional nature), whether with or without the supply of goods;

(ii)        the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or

(iii)       the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction;

(b)        a contract of insurance;

(c)        a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or

(d)        any contract for or in relation to the lending of moneys;

but does not include rights or benefits being the supply of goods or the performance of work under a contract of service.

19                  Having regard to the definition, access to the 13 number by a franchisee is a right or benefit granted or conferred in trade or commerce. So, too, is a right which a franchisee has to have Seal-A-Fridge consent to the assignment of the franchisee’s interest to another.

20                  Mr Rooney’s conduct of the defence case and submissions demonstrated, I thought, an acute appreciation of the value judgement or jury function that necessarily attends the application of a broad legislative standard such as “unconscionable conduct” to the circumstances of a particular case.

21                  The ACCC’s case with respect to s 51AC was well presented. It eschewed moral relativism as far as whether the conduct it alleged was or was not worse than any which in the past had been regarded as unconscionable for the purposes of s 51AC. Instead, it took as a given the general propositions as to the meaning of the section evident from earlier authority and then highlighted what were said to be particular features of the conduct of Seal-A-Fridge in light of the actual costs being incurred by it from Telstra in relation to the 13 number and, as the case may be, the terms of the franchise agreement being used by it at the material time which made s 51AC applicable to that conduct. 

Section 51AD and the Franchising Code

22                  Section 51AD of the Trade Practices Act prohibits the contravention by a corporation in trade or commerce of an applicable industry code. Section 51AE permits the prescription of an industry code by regulation. The Franchising Regulations to which the Franchising Code is scheduled were made pursuant to this power.

23                  The contraventions of the Franchising Code are alleged to have occurred in 2005, 2006 and 2007. Given this, it is the Franchising Code as amended by the Trade Practices (Industry Codes - Franchising) Amendment Regulations 2001 (Cth) which falls for consideration.

24                  The provisions of the Franchising Code allegedly contravened, s 10 and s 19, are in the following terms:

10        Franchisor obligations

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

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

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

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

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

19        Current disclosure document

(1)        A franchisor must give to a franchisee a current disclosure document within 14 days after a written request by the franchisee.

(2)        However, a request under subclause (1) can be made only once in 12 months.

25                  The Franchising Code applies to “franchise agreements” (s 5). Having regard to the definition of “franchise agreement” in s 4 of the Franchising Code and the terms of each of the agreements in question in this case, there is no doubt that the Franchising Code is applicable to those agreements. Nor is there any doubt that Seal-A-Fridge is, for the purposes of that code, a “franchisor” as that term is defined by s 3.

26                  Section 6 of the Franchising Code governs the form which a disclosure document must take. The effect of that provision is that, where the franchised business has an expected annual turnover of $50,000 or more, the disclosure document must meet the requirements of Annexure 1 to the Franchising Code. The ACCC’s case is that, in the circumstances of this case, these are the requirements which are engaged in respect of a disclosure document. It will be necessary to detail some of those requirements in determining whether the contraventions of s 51AD which are alleged by the ACCC have been made out.

Section 75B – person involved in a contravention

27                  By s 75B(1) of the Trade Practices Act, the phrase “person involved in a contravention” is defined in the following way:

75B     Interpretation

(1)        A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 95AZN, shall be read as a reference to a person who:

(a)        has aided, abetted, counselled or procured the contravention;

(b)        has induced, whether by threats or promises or otherwise, the contravention;

(c)        has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)        has conspired with others to effect the contravention.

28                  It has been said of this section that it imports the requirements of the criminal law: Yorke v Lucas (1965) 158 CLR 661. What is not imported in a case of the present kind is a criminal law standard of proof, only the criminal law concepts of accessorial liability. For someone to be found to be a “person involved in a contravention” it must be shown that he or she had a knowledge of the essential elements of the contravention concerned: Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [8]. Thus in the present case to find that Mr Rooney is a person involved in any of the contraventions alleged against Seal-A-Fridge, I must be satisfied that he was aware of the elements of the alleged contraventions by it of s 51AC or, as the case may be, s 51AD.

The 13 National Number

29                  I have already made brief reference to the “Priority 13” national telephone number to which Seal-A-Fridge was a subscriber with Telstra. The telephone number concerned is 13 14 79.

30                  On the evidence, a 13 telephone number can be rung from anywhere in Australia without the need for an area code prefix. Telstra has the facility to redirect the caller to the 13 number to a telephone number in the geographic area from which the call has been made. In the case of its subscriber account with Seal-A-Fridge it redirects calls made to the number 13 14 79 to telephone numbers which are nominated to it by Seal-A-Fridge. These telephone numbers are, in turn, the contact telephone numbers which its franchisees for a given area respectively nominate to Seal-A-Fridge. In this fashion, the call placed to the 13 number comes to be answered by the franchisee for the given area. There is no direct relationship between individual franchisees and Telstra in respect of the 13 number. Crucially for the purposes of the present case, the right to nominate to Telstra the number to which redirection is to occur or not occur is held by Seal-A-Fridge as the subscriber for that 13 number.

31                  As subscriber Seal-A-Fridge is responsible to Telstra for the payment of the periodic accounts in respect of the 13 number. There are two principal components in these accounts – fixed costs and usage charges.

32                  A study of the various Telstra accounts given to Seal-A-Fridge in respect of the 13 number discloses that the fixed costs for the number comprise the following items:

(a)                an additional call management feature;

(b)                a Priority 13 national service charge; and

(c)                a Priority 13 number fee, which incorporates government charges.

33                  Usage fees relating to the number include costs relating to a mobile telephone call or an out of area call.

34                  Telstra’s charges to Seal-A-Fridge from time to time in respect of the 13 number were the result of extensive and intensive investigation by the ACCC. The various accounts furnished by Telstra to Seal-A-Fridge were in evidence. The costs incurred by Seal-A-Fridge as disclosed by these accounts were then subjected to analysis by a Mr Duncan also taking into account the number of Seal-A-Fridge franchisees at a given time. The number of such franchisees and the dates and amounts of payments which they made to Seal-A-Fridge in respect of weekly 13 number fee and telephone usage charges were the subject of separate and ultimately unchallenged proofs in the ACCC’s case (contained in a filed Court Book). What was controversial was what to make of this evidence in a wider context. I deal with that later in these reasons for judgement when considering whether the ACCC has made out its case under s 51AC. It is first necessary though to summarise the evidence concerning the costs of maintaining 13 number and the weekly fee income which Seal-A-Fridge received from time to time. What follows draws extensively upon the helpful and detailed summary of the evidence offered by the ACCC in its written submissions.

35                  As at November 1997 the charge for the 13 number itself was $145.83. This fixed cost was solely for the Priority 13 Service allocation. By September 1998 the charge had changed such that there was fixed monthly cost for the 13 number in the amount of $2,601.66 per month. In November 1999 this fixed monthly cost for the 13 number increased to $2,551.66. In May 2000 the fixed monthly cost for the 13 number remained the same at $2,551.66. In January 2001 the fixed monthly cost for the 13 number increased to $2,596.66 per month (exclusive of Goods and Services Tax (GST)).

36                  The rationale put forward by the ACCC for looking to GST exclusive amounts in ascertaining whether, when and to what extent incurred an increased cost in respect of the 13 number was this. Seal-A-Fridge was entitled to an input tax credit for the GST which Telstra added to the telephone accounts (tax invoices) which it sent to Seal-A-Fridge for the 13 number. In turn, Seal-A-Fridge added GST in the tax invoices which it sent to franchisees in respect of the 13 number. It was liable to remit to the Commissioner the resultant GST net amount. In respect of Telstra charges after 1 July 2000, unless GST is excluded there can be no like with like comparison with pre-1 July 2000 costs to determine the amount of any increase. I agree with this rationale. In the case of the spreadsheets prepared by Mr Duncan, this entails excluding from the post-1 July 2000 entries an amount in respect of GST.

37                  The monthly fixed cost for the 13 number remained the same from January 2001 to July 2001.In August 2001 the monthly fixed cost figure became $2,631.89 (exclusive of GST).In September 2001 that monthly fixed cost decreased by $46.99 (inclusive of GST) to $2,589.17 (exclusive of GST).

38                  In July 2002 the fixed cost for the 13 number was $2,742.11 (exclusive of GST). In August 2002 the monthly fixed cost figure was $2,688.58 (exclusive of GST) per month.  It remained at $2,688.58 (exclusive of GST) from August 2002 to June 2003.

39                  In August and September 2003 there was a slight decrease and then a slight increase.In September 2003 there was a marked reduction in the monthly fixed cost for the 13 number. From the hitherto $2,688.58 (exclusive of GST) per month it became in September 2003 a monthly figure of $2,185.61 (exclusive of GST). This reduced amount remained the monthly fixed cost for the 13 number between September 2003 and June 2004.In July and August 2004 there were further slight reductions in this monthly fixed cost.In September 2004 the fixed costs figure fell to $1,481.89 (exclusive of GST).  This remained the relevant monthly fixed cost from September 2004 to August 2005.

40                  In 1999, before Seal-A-Fridge entered into any of the franchises with which this proceeding is concerned, there were at least 18 existing franchises in Australia.  This is shown in the additional material provided to the Malishevs.  By February 1999 there were 19 franchisees paying $50 a week. That equates to a then annual total of $49,400.00 being paid to Seal-A-Fridge. At that same time (February 1999), having regard to Telstra’s charges to Seal-A-Fridge, the then annual fixed cost of the 13 number was $30,619.92. Seal-A-Fridge thus then had a net margin over its fixed cost in respect of the 13 number of approximately $18,780.08.

41                  As at August 2001 there were 28 franchisees paying a weekly fee in respect of the 13 number of not less than $50.00. Assuming the figure of $50 per week per franchisee, this equates to an annual payment by all franchisees to Seal-A-Fridge as follows:

$50 x 52 x 28 = $72,800.00

42                  By August 2001 Seal-A-Fridge had successfully increased the weekly fee for 25 of those franchisees to $75 per week. Annualised, the effect of Seal-A-Fridge securing this increase equated to its obtaining an additional annual payment as follows:

$25 x 52 x 25 = $32,500.00

43                  Annualised, the effect as at August 2001 of securing that increased weekly payment from $50 to $75 by these 25 franchisees was to increase the total Seal-A-Fridge would receive for the next twelve months to $105,300.00, even assuming that there were no further franchisees.  The fixed cost of the 13 number for the same period (from August 2001 to July 2002) was $31,265.73 (exclusive of GST). Had there been no increase beyond the $50 per week payment by franchisees, that would have meant that Seal-A-Fridge would have been left with a net amount of $41,534.27 clear of its fixed costs for that period.  The effect of the increase of $25 per week for 25 franchisees was that it resulted in Seal-A-Fridge instead being left with the greater net amount of $74,034.27.

44                  In 2004 Seal-A-Fridge proposed and in most cases secured from its franchisees an increase in the weekly fee from $75 to $100 per week. By that stage there were 31 franchisees. If all of those 31 franchisees had continued to pay $75 per week Seal-A-Fridge would have received a total gross fee income of $120,900.00 (exclusive of GST) annually. The actual cost of the 13 number, based on the charges in the accounts from Telstra to Seal-A-fridge for the twelve month period from May 2003 to April 2004 (exclusive of GST) was $28,184.95. Thus, had there been no increase from $75 per week across the network of franchisees Seal-A-Fridge would have received a net amount, after payment of its Telstra fixed costs in respect of the 13 number of at least $92,715.05.

Seal-A-Fridge (South-East Melbourne)

45                  Mr Peter Malishev and his wife, Mrs Irene Malishev each gave evidence as to their experiences in dealing with Mr Rooney in relation to the acquisition, operation and attempted sale of the Seal-A-Fridge franchise business for an area known as “South East Melbourne”. Having observed each of them under cross-examination and also having regard to the difficulties entailed in recalling events of up to a decade beforehand, as well as a degree of antipathy in their relationship with Mr Rooney, I thought they each gave an honest and generally reliable account concerning  these subjects. The following findings are based on their evidence, the franchise agreement into which they entered and contemporary correspondence.

46                  Pursuant to an agreement in writing dated 19 February 1999 made between Seal-A-Fridge and a partnership comprised of Mr Malishev and his wife, Seal-A-Fridge granted to them the right to market and operate the “Seal-A-Fridge System” within a territory defined in Schedule 1 to that agreement. Schedule 1 to the agreement defined a territory described as Seal-A-Fridge (South Eastern Melbourne) by reference to specified post codes areas, which were also delineated on a map forming part of that schedule. The initial term of the franchise was for 15 years from the date of execution of the agreement. There was provision for the successive extension of this term by exercise of option for two further 15 year periods.

47                  These rights were granted in return for the payment of an initial franchise fee of $95,000.00. The agreement specified how that fee was broken down as between equipment supplied, provision for the fitting out of a van, goodwill ($57,000) and various other items.

48                  The franchise agreement provided, inter alia:

3          PAYMENTS

3A.      Initial Fees

In consideration of the Franchisor’s grant of the Franchise to the Franchisee, the Franchisee shall pay to the Franchisor a non-recurring and non-refundable Initial Franchise Fee.

3B.      Advertising and Promotion

a)         The Franchisee shall submit advertising samples to the Franchisor and obtain the Franchisor’s prior written consent, which consent shall not be unreasonably withheld, regarding all advertising and promotional plans and materials which the Franchisee desires to use and which have not already been prepared or approved by the Franchisor.

b)         The Franchisee acknowledges that there are three Franchises within the Melbourne metropolitan area.  Seal-A-Fridge (South Eastern Melbourne), Seal-A-Fridge (North Eastern Melbourne) and Seal-A-Fridge (Western Melbourne).  The Franchisee must participate in a joint metropolitan television advertising campaign.  The campaign has a minimum budget of $2,000 per week. Contributions into the campaign are based on the following – the three metropolitan Franchisees will each pay 26.6% of the minimum budget, which when combined totals 80%.  The other 20% shall be divided in half and paid by Seal-A-Fridge (South Western Victoria) and Seal-A-Fridge (South Eastern Victoria).  In the event that the Franchisee fails to make payments towards the advertising campaign and is in arrears by two months or more then the Franchisor must suspend all calls received by the 13 14 79 phone number until such time that the Franchisee pays outstanding monies accrued.

Where the Franchisee is in arrears of television advertising by two months or more, the Franchisor is required to pay the outstanding contributions to the television advertising fund.  During the time the television funds remain outstanding the Franchisor may undertake work in the area without recourse by the Franchisee.

Any expenses incurred by the Franchisor during the period in which the Franchisor is filling in for the Franchisee shall be paid for by the Franchisee.  Before the 13 14 79 phone number is reconnected, the Franchisee must repay all outstanding debts to the Franchisor and any television accounts for the area.

The weekly television budget may be varied at any time with the consent of at least 70% by television advertising contribution of the parties.  The parties agree that this agreement does not cause any form of partnership or joint venture to be entered into and the parties must not hold the other parties out as being a partner.  Each party will be responsible for only their set percentage of the advertising budget.  The parties will each make arrangements with any corporation in which joint advertising is carried out to accept an individual liability for any accounts rendered for joint advertising placed.  Each of the Melbourne metropolitan parties will take turns in administrating the television advertising program for a period of 4 months.  The party who is entitled to administer the television advertising campaign will be entitled to make decisions as to the means of placing those television advertisements.  Any party will be entitled to advertise within their designated trading territory on their own behalf.

3C       Business Telephone and Yellow Pages Advertising

a)         The Franchisee acknowledges that the national telephone number for the Franchise is 131479 (or such other number as advised by the Franchisor from time to time) and the Franchisee shall ensure that all yellow pages advertising displays such telephone number and the Franchisee shall be responsible for paying its own costs associated with the use of the national phone number.

b)         Upon the Commencement Date, the Franchisor shall do all things necessary to transfer the telephone number 131479 to the Franchisee and to ensure that any calls made to such number from within the Territory are received direct by the Franchisee.

c)         Any alterations of changes to the 131479 telephone number within the Territory are to be made in written form to Telstra and jointly signed by the Franchisor and the Franchisee.

d)         On termination of this agreement, the Franchisee will do all things necessary to transfer the 131479 telephone number back to the Franchisor.

e)         The Franchisee acknowledges that there are three (3) Franchises within the Melbourne metropolitan area.  Seal-A-Fridge (South Eastern Melbourne), Seal-A-Fridge (north Eastern Melbourne) and Seal-A-Fridge (Western Melbourne).  The Franchisee must participate in a joint metropolitan advertising campaign in Melbourne Metropolitan Yellow Pages (VOOY).  The Yellow pages display advertising may be varied with the consent of at least two of the three parties.  The parties agree that this agreement does not cause any form of partnership or joint venture to be entered into and the parties must not hold the other parties out as being a partner.  Each party will be responsible for only their set percentage of the advertising budget.  Each party will make arrangements with the Yellow Pages (Pacific Access) to accept individual liability for any accounts rendered for joint advertising placed based on contributions of third each.

In the event that a Franchisee fails to make payments towards the Yellow Pages advertising campaign and is in arrears by two months or more then the Franchisor must suspend all calls received by the Franchisee from the 13 14 79 phone number until such time that the Franchisee pays outstanding monies accrued.

Where the Franchisee is in arrears of the joint metropolitan advertising campaign in the Melbourne Metropolitan Yellow Pages (VOOY) by two months or more, the Franchisor is required to pay the outstanding contribution to the Yellow Pages.  During the time the Yellow Pages account is in arrears, the Franchisor may undertake work in the area without recourse to the Franchisee.  Any expenses incurred by the Franchisor during this period in which the Franchisor is filling in for the Franchisee shall be paid by the Franchisee.  Before the 13 14 79 phone number is reconnected, the Franchisee must repay all outstanding debts to the Franchisor and to Yellow Pages (Pacific Access).

…

7          MISCELLANEOUS

…

7C       Franchisee may withhold payments

The Franchisee agrees that he shall not, on the grounds of an alleged non-performance by the Franchisor of any of its obligations or for any other reason’ withhold payment of any amount due whatsoever.  No endorsement or statement on any cheque or payment of any sum less than the full sum due to the Franchisor shall be construed as an acknowledgment of payment in full or an accord and satisfaction’ and the Franchisor may accept and cash such cheque or payment without prejudice to its right to recover the balance due or to pursue any other remedy provided herein or by law.  The Franchisor may apply any payments made by the Franchisee against any past due indebtedness of the Franchisee as the Franchisor may see fit.  The Franchisor may set off against any payment due to the Franchisee hereunder any unpaid debts of the Franchisee to the Franchisor.

…

7G       Entire Agreement

This Agreement contains the entire understanding and Agreement of the parties hereto concerning the matters herein contained.  The Franchisee agrees and acknowledges that he has not been induced to enter into this Agreement in reliance upon’ not as a result of any statements, representations, warranties, promises or inducements whatsoever, whether oral or written and whether directly related to the contents hereof or collateral thereto made by the Franchisor, its officers, directors, agents, employees or contractors.

49                  The term “franchise service fee” appears in the definitions clause (cl 1A) of the franchise agreement where it is said to be the amount specified in Schedule 1 but does not otherwise appear in the body of the agreement. In Schedule 1 the amount of the “franchise service agreement” is noted as “Nil”.

50                  Mr and Mrs Malishev each recalled that, prior to the signing of the franchise agreement, Mr Rooney had mentioned that there was a $50.00 per week fee payable in respect of the national 13 number. I accept their evidence in this regard. Of the two, Mr Malishev had the more extensive dealings with Mr Rooney prior to the execution of the franchise agreement.  They met on several occasions prior to the signing of that agreement. At one of these meetings Mr Rooney gave to Mr Malishev a Seal-A-Fridge publication describing the franchise business offered for sale in which, inter alia, it was stated that the amount of the “Area Franchise Service Fee” was “Nil”. This notwithstanding, I am satisfied that the effect of what Mr Rooney said to Mr Malishev at their earlier meetings as to the weekly fee was that “This weekly fee is a fee to cover the Telstra costs for the 13 14 79 number.” Before Mr and Mrs Malishev signed the franchise agreement Mr Rooney said to each of them words to this effect, “[t]he only fee you have to pay is for the National Phone Number at $50.00 per week.”

51                  A number of drafts of the franchise agreement were given to Mr and Mrs Malishev by Mr Rooney prior to their signing of the agreement in its final form. In one of these early drafts it is stated, “[t]he cost of the national phone service is $50.00 per week.” (draft cl. 3C(a)). Mr and Mrs Malishev took advice from a solicitor prior to their entering into the agreement with Seal-A-Fridge. That advice seems to have included a review of the terms of the proposed final form of the agreement.

52                  Neither Mr nor Mrs Malishev noticed the “Nil” provision for a franchise service fee prior to their signing the franchise service agreement. I am satisfied that, when they signed the agreement, each expected that they would be charged $50.00 per week for the national 13 number. They were pressed in cross examination as to whether they then had any expectation of that fee being increased over time. Their recollections differed. Having viewed them under cross examination and having regard to the terms of a letter they later came to write on 6 March 2001 (see below) my strong impression was that neither of them gave any real thought to the subject of the prospect of an increase at the time of signing the franchise agreement. Mr Malishev acknowledged as much in his affidavit. Be this as it may, and notwithstanding the terms of the franchise agreement, neither demurred to Mr Rooney about the charging of the fee when, after the commencement of the agreement, weekly invoices for the amount of $50.00 (with GST added to this after 1 July 2000). Such invoices were paid by them.

53                  In January 2001, via a letter authored and signed on its behalf by Mr Rooney, Seal-A-Fridge advised Mr and Mrs Malishev:

15^th January 2001

Re:  Changes to 13 14 79 Accounts

For the past three years Seal-A-Fridge has charged an amount of $50.00 per week to cover both Telstra and Seal-A-Fridge administration costs.  Whilst there have been several increases in the cost of the National Service Rental we have been able to absorb those increases during this period.

Recently Telstra has reduced the call usage charges for calls made to priority 13 numbers outside Metropolitan Areas, resulting in savings to the Franchisee, but has increased the cost of the National Service Rental charges.

It is now necessary to pass on those additional costs.  Accordingly, please be advised that the weekly cost of the administration of the 13 14 79 number will be $75.00 per week (plus GST).

Yours sincerely

Nigel Rooney

54                  In a letter in reply on 6 March 2001 Mr and Mrs Malishev expressed dissatisfaction with the notified increase. They stated, inter alia, “you gave no indication in the contract that there would be any increases in the priority 13 14 79 number and without any documentation to show the costs involved it is unreasonable of you to request such a huge increase.” They stated that they would continue to pay the sum of $50.00 per week (plus GST) “until the matter is resolved” and that, “if it is fond to be in your favour, we will pay any outstanding amount.”

55                  A further exchange of correspondence ensued between Mr and Mrs Malishev and Seal-A-Fridge in the course of which Mr Rooney, on behalf of Seal-A-Fridge, proposed a variation to the franchise agreement by which a revised clause 3C would be inserted making provision for a $75.00 per week administration fee with consumer price index movement adjustments. The prospect of disconnection of the 13 number and termination of the franchise agreement was foreshadowed by Mr Rooney in this exchange (Seal-A-Fridge letter of 7 June 2001).

56                  In the course of a visit to a client of his franchise business on or about 22 June 2001 it came to Mr Malishev’s attention that the 13 number may have been disconnected. He dialled that number and received in response a recorded Telstra message advising of disconnection. Mr Malishev then made telephone contact with Mr Rooney to inquire about this disconnection. The effect of what Mr Rooney then said to him was as follows:

You have to pay the increase up to date or you won’t be reconnected. The quicker you pay, the quicker you’ll be reconnected.

57                  Faced with this position on the part of Seal-A-Fridge, Mr and Mrs Malishev decided that they had no choice other than to pay the increased fee. All of their advertising utilised the 13 number. It was the contact point for their franchise business. They paid the arrears based on that increased fee by a cheque sent under cover of a letter dated 26 June 2001. Access to the 13 number was reconnected within a few days after that.

58                  Here matters rested until April 2004. By a notice dated 14 April 2004 signed by Mr Rooney on behalf of Seal-A-Fridge, Mr and Mrs Malishev were advised, “Seal-A-Fridge gives fourteen (14) days notice that, from the 1^st of May 2004 the fee associated with the use of the National Phone Number 13 14 79 will be charged at the rate of $100.00 per week plus GST, White Pages listing fees, mobile calls and out of area calls.” The following day via a letter authored and signed by Mr Rooney, Seal-A-Fridge proposed an amendment to the franchise agreement whereby “the weekly amount paid for the priority 13 service is $100.00 per week plus GST, and any increases shall be linked and capped to the rise in the CPI index”. In the alternative to this offer being accepted, it was stated in the letter, “I am more than agreeable to leave the agreement as it stands and increase the weekly fee for the use of our intellectual property by a reasonable amount as the value of our national phone number increases each year”.

59                  Mr Malishev responded to Seal-A-Fridge by a facsimile dated 26 April 2004 in which he stated, “Priority 13 Service to be capped @ $100/week & CPI related” (sic). In July 2004, under cover of a letter signed by Mr Rooney on its behalf, Seal-A-Fridge sent to Mr and Mrs Malishev a deed of variation. They signed this on 27 January 2006 having in the meantime commenced to pay $100.00 per week to Seal-A-Fridge as earlier requested. Materially, cl 2 of the deed of variation provided:

2          In respect to Section 3c(a)

Section 3c(a) of “The Franchise Agreement is amended now to state: Franchisee acknowledges that the national telephone number for the Franchise is 13 14 79 (or such other number as advised by the Franchisor from time-to-time) and the Franchisee shall ensure that all Yellow Pages advertising displays such telephone number and the Franchisee shall pay for the use of the national telephone number, based on a fee of $100.00 per week, plus any out of area calls, White Pages listing, mobile calls, reconnection and disconnection fees, plus Goods and Services Taxation.  Any alteration to the fee shall be linked and capped to the changes in the Consumer Price Index (CPI) in the city of Melbourne for the All Groups Index for the immediate previous financial year and shall take place on the 1^st of January each year.

60                  Mr and Mrs Malishev had further dealings with Mr Rooney on behalf of Seal-A-Fridge in 2006 in the context of an endeavour they made to sell their franchise business. By then they had decided that they wanted to sell their franchise business.

61                  Clause 6B of the franchise agreement provided:

6B       By Franchisee

The Franchisor must consent to the Franchisee selling or assigning its interest under this Agreement, conditional upon the following:

a)         the Franchisee paying to the Franchisor all unpaid accounts, an amount equal to the Franchisor’s reasonable legal and other costs of completing such transfer;

b)         the transferee executing the Franchisor’s then current Franchise Agreement (which shall have a term equal to the remaining term hereof), and such other documents the customarily used by the Franchisor for its Franchisees;

c)         the Franchisee executing a general release of the Franchisor, its officers, director and employees from all claims, rights and actions that it may have against the Franchisor in respect of this Agreement;

d)         the transferee having adequate financial resources and business acumen to meet criteria of the Franchisor for the selection of new Franchisees;

e)         the transferee has satisfactorily completed the Franchisor’s then standard training program for Franchisees (such standard training program to be conducted by the Franchisee at the expense of the Franchisee) and the transferee must otherwise be capable of operating the Business as a responsible Franchisee; and

f)          where the transferee is a company, the Directors of the transferee must give the appropriate guarantees and indemnities.

62                  In about May 2006 and via a referral from Mr Rooney, Mr Malishev came to telephone and later meet with a Mr Gery Oded. Mr Oded expressed interest in the purchase of the Malishev’s franchise business. The price which they asked, relayed by Mr Malishev to Mr Oded in their initial telephone call, was $200,000. Later, he spent a half day with Mr Malishev observing him go about his work in the franchise business Mr Oded expressed interest in buying the business for $200,000.

63                  Thereafter, Mr Malishev telephoned Mr Rooney and sought from him a copy of a replacement franchise agreement to give to Mr Oded. He received this and later dropped this replacement agreement into Mr Oded’s letter box for him to review. Before so doing, Mr Malishev perused the document. He recalled noticing that it made provision for a 10% turnover fee subject to a minimum fee and an exit fee.

64                  In about mid-July 2006 Mr Malishev met with Mr Oded at a café in Brighton for the purpose of discussing the sale of the franchise business. Mr Oded made reference to the 10% turnover fee. Shortly thereafter, Mr Malishev telephoned Mr Rooney and queried him about the 10% turnover fee in the replacement franchise agreement. Mr Rooney’s response was, “[a]ll franchisees pay ongoing fees and royalties.” He also made reference to Mr Oded’s not being a genuine buyer (on the basis that Mr Oded was but a “plant” and a “friend of someone in Brisbane trying to get a better deal for their sale”).

65                  Mr and Mrs Malishev pursued the subject of the turnover fee in a letter dated 19 July 2006 sent to Seal-A-Fridge and marked for Mr Rooney’s attention. They requested that the imposition of the 10% turnover fee be reconsidered. The import of the letter was that, in lieu, the existing weekly fee as provided for in the franchise agreement as varied be retained. They submitted that, the turnover fee was not reasonable as, unlike other franchise businesses, Seal-A-Fridge as franchisor did not provide support to franchisees.

66                  In a reply dated 20 July 2006 signed by Mr Rooney Seal-A-Fridge repeated the belief that the 10% turnover fee was reasonable and that Mr Oded was not a genuine buyer. The opening salutation in the letter was “Dear Peter, Irene, Grace and Jonny”. It is elsewhere apparent in the letter that the “Grace and Jonny” was a reference to a Mr Jonathan and Mrs Grace Benjamin, the operators of a Brisbane franchise and the persons Mr Rooney suspected of using Mr Oded as “leverage in the negotiations to assist [them] with the sale of their franchise in Brisbane”.

67                  As to the fee, the point made by Mr Rooney in the letter of 20 July 2006 was not only was it in line with other franchise systems but also it benefited both parties “as the better the franchise gross revenue is, the bigger for both parties”. Issue was also taken with whether the Seal-A-Fridge provided support to its franchisees. The last paragraph of the letter contained the following statement:

We are pleased to assist you in selling your Franchise if you wish to sell on the terms that we agreed to in our Franchise Agreement of 19 February 1999, on the other hand we are pleased to see you operate the Franchise fro the remaining 8 years of our Franchise Agreement until 14^th February, 2014.

68                  Mr and Mrs Malishev responded to this letter by a further letter to Seal-A-Fridge dated 2 August 2006 Mr and Mrs Malishev took umbrage with the implication that their correspondence had anything to do with the Benjamins. They also again took umbrage with the 10% turnover fee. In addition, they made a number of other criticisms of Seal-A-fridge’s conduct as franchisor which it is not necessary to detail.

69                  Later in August 2006, Mr Malishev secured from Mr Oded an offer dated 18 August 2006 to purchase the franchise business for $200,000 signed by Mr Oded which was expressed to be “subject to and conditional upon the parties entering into a Contract of Sale (Business Contract) agreement on terms and conditions acceptable to both parties”. Shortly thereafter, the exact time not being able to be recalled by Mr Malishev, Mr Oded withdrew from seeking to purchase the franchise business. His expressed reason for this was that he was not prepared to pay the 10% fee in the replacement franchise agreement. Mr Malishev recalls Mr Oded commenting, “Nigel Rooney will not agree to change that term.” While I do not doubt Mr Malishev’s recollection, that statement is not proof of any direct negotiation between Mr Oded and Mr Rooney having occurred in relation to the sale of the franchise. I did not understand the ACCC to put it forward on that basis. Rather, given that Mr Rooney was known both by Mr Malishev and evidently (via the initial reference) Mr Oded to be in control of Seal-A-Fridge, I took this statement to be but a shorthand way of Mr Oded conveying to Mr Malishev his understanding that Seal-A-Fridge had insisted on the proposed sale being subject to the execution by Mr Oded of the replacement franchise agreement. Inferentially from this statement, it seems inherently likely that Mr Malishev had informed Mr Oded that he would seek to have the turnover fee clause deleted in favour of the existing weekly fee provision.

70                  After their dealings in relation to the proposed sale of their franchise business to Mr Oded and on behalf of her and her husband, Mrs Malishev authored and sent to Seal-A-Fridge a letter dated 23 October 2006 in which, inter alia, a request was made for an updated copy of the disclosure document. The letter was sent to a Brisbane post office box rather than to the Victorian address for Seal-A-Fridge for service of notices specified in the franchise agreement. However, in the years which had passed after 1999, Mr Rooney seems to have moved to Queensland. Seal-A-Fridge had, before 2006, long been using that same post office box as its address in its correspondence to Mr and Mrs Malishev. Nothing turns therefore on the address to which Mrs Malishev sent the request.

71                  Mr and Mrs Malishev have never received a reply from Seal-A-Fridge to this request, let alone one which furnishes a copy of an updated disclosure document. There was no evidence from either of them that the making of this request had been raised by them with Mr Rooney in the course of any telephonic or face to face dealing with him.

Seal-A-Fridge (North-Eastern Melbourne)

72                  In early 1999, as a result of noticing some advertisements in local newspapers late in the previous year, Mr Donald Radford came to meet initially with a Mr Stariha and then, through him, Mr Rooney. Mr Radford recalls (and I find) that Mr Stariha was at the time a subordinate of Mr Rooney and a person involved in the establishment of the business of Seal-A-Fridge in Melbourne. Through them he learned of the availability of a Seal-A-Fridge franchise in a defined geographic area known as “North-Eastern Melbourne”.

73                  Mr Radford detailed in his affidavit the course of events which followed this introduction to Mr Rooney commencing with the taking up in February 1999 of the North-East Melbourne Seal-A-Fridge franchise by his family company, Camabe Pty Ltd (formerly known as Kamabe Pty Ltd) (Camabe) and continuing with the subsequent conduct of that franchise business and related dealings with Seal-A-Fridge and Mr Rooney. He was cross-examined on that affidavit by Mr Rooney. I thought that the he gave candid, frank and credible answers when under cross-examination. That was so even when an obviously sensitive subject of the extent to which, having regard to the terms of the franchise agreement (cl 38), his company needed to secure advance approval from Seal-A-Fridge in relation to advertising was canvassed with him in cross-examination. I have no hesitation in acting on his evidence. What follows is based on his affidavit and oral evidence as well as documents introduced into evidence via those means.

74                  In the course of his dealings with Messrs Stariha and Rooney prior to his signing a franchise agreement on behalf of Camabe, Mr Radford was told by each of them on more than one occasion that there was a weekly fee of $50 to cover the cost of the national 13 number used as a contact point. He was also told that there were usage charges in addition to this. Mr Rooney put it to him in words to this effect, “[i]t’s a ‘walk away situation from my perspective. I charge a high upfront fee and then a $50 weekly fee to cover the cost of using the 13 14 79 number.”

75                  Mr Rooney provided Mr Radford with a disclosure document before any franchise agreement was signed. In that document at item 13 – “Payments”, under the sub-heading, “Other Payments” the following disclosure is made in respect of recurrent payments to the franchisor in relation to the “Priority 13 Phone System”, “Estimated amount - $50 per week plus calls”. It is stated that the amount in respect of this is payable monthly to Seal-A-Fridge. Mr Radford recalled noticing this in the disclosure document.

76                  Mr Radford understood from the disclosure document and the statements which had been made in the nature of an estimate but nonetheless one related to the cost of the 13 number, not an ongoing general fee for the franchise. He consulted a solicitor in relation to the form of the proposed franchise agreement. A number of changes were made as a result. On 18 February 1999 and on behalf of Camabe he signed a franchise agreement between that company and Seal-A-Fridge in respect of the North-Eastern Melbourne area.

77                  Camabe’s franchise agreement with Seal-A-Fridge is, so far as presently material, in like terms to that of Mr and Mrs Malishev. Its written agreement, too, contains no express reference to the payment of any weekly fee to Seal-A-Fridge, only the provision in cl 3C(a) that, “the Franchisee shall be responsible for paying its own costs associated with the use of the national telephone number”.

78                  In January 2001 Camabe also received a notice dated 15 January 2001 from Seal-A-Fridge, signed by Mr Rooney, advising an increase in the amount of the weekly fee in respect of the 13 number from $50 to $75 per week. I have already set out the terms of that notice. On 27 January 2001 Mr Radford authored a response to this notice on behalf of Camabe, which was sent by facsimile to Seal-A-Fridge, marked for Mr Rooney’s attention. In that response he voiced a protest in respect of the increase, questioned its size having regard to the likelihood that Telstra costs had increased by as much as 50% and criticised the absence of any advance notice of or commencement time in respect of the notified increase. He sought a response from Seal-A-Fridge to the points he had raised prior to the any increase coming into effect.

79                  Mr Radford’s facsimile elicited a response by telephone from Mr Rooney to him later that day. The effect of what was said by Mr Rooney is readily able to be inferred from the contents of a facsimile which Mr Radford again authored on behalf of Camabe on 27 January 2001 following that telephone conversation. The effect of what Mr Rooney said in relation to the notified increase and parenthetically Mr Radford’s response was:

·                    Seal-A-Fridge had initial start up costs in respect of the 13 number (that should have been part of the consideration in respect of the initial franchise fee).

·                    The cost of country calls had reduced (this justification relates to Seal-Fridge apparently wanting to profit from a benefit it perceived some franchisees were enjoying as a result of this decrease).

·                    The number of telephone calls which Camabe was receiving via the 13 number (this justification seemingly also being related to a desire to profit from a perceived resultant benefit to Camabe without making any allowance for the amount it was spending on promotional advertising).

·                    “I am in business and want to make money”.

80                  In the course of that telephone conversation and by his later facsimile Mr Radford challenged Mr Rooney to provide justification for the increase by reference to the charges from Telstra. He followed up this protest by further facsimile communications to Seal-A-Fridge in February 2001. He also contacted most of Seal-A-Fridge’s other franchisees canvassing support for a joint response to the notified fee increase. A number, including Mr and Mrs Malishev, joined him making such a response. A solicitor was engaged for this purpose.

81                  This activity yielded further telephone calls to Mr Radford from Mr Rooney, two on 2 March 2001 and another on 5 March 2001. It is instructive to set out the effect of what Mr Rooney said on these occasions:

2 March 2001 – First phone call

I have received advice from a barrister and I have considerable money and I will win this case.  We’re only talking about $25.00 – I could have increased the fee to $300.00 per week.  Dispute resolution is not an issue – this is about non-payment of fees which is clearly dealt with in your franchise agreement.  You’re being mean because you receive more calls than any other Melbourne operator and you can easily afford the payment.  I have received payment from five operators who are happy about the increase and this will weaken your case against the increase.

2 March 2010 – Second phone call

Send me a copy of the names of all the franchisees you have written to.  You are being childish about paying an extra $25.00 per week.  You couldn’t stop me if I wanted to increase the weekly fee to $300.00.  You have been very sneaky by faxing other operators behind my back before coming to me first.  You are the first franchisee I’m going to go after and I look forward to getting you.  I will find out which franchisees you have written to and I’ll come after you with my barrister.  I am very annoyed at you and I’m like a mongrel when I get hold of something.

5 March 2001

He said:            “Are you sending me the letter with details of the franchisees you have written to?”

I said:               “No.”

He said:            “You will be getting a letter of demand for the outstanding amount of weekly fees.  Non-payment after seven days will result in your access to the 13 14 79 number being cut and after 21 days I will be terminating your contract.  I have retained a Melbourne barrister and I will be suing you for defamation for bringing the good name of Seal-A-Fridge into disrepute.  You are welcome to pursue dispute resolution but I will be proceeding with action in the meantime.  I did say to you at the time you purchased your franchise that I was making money from the sale and I didn’t need to make money from ongoing fees but now I am entitled to make a profit by raising the fees.”

82                  A letter of demand from Seal-A-Fridge to Camabe followed on 6 March 2001 in respect of the increased weekly fee. That letter was signed on behalf of Seal-A-Fridge by Mr Rooney. The sanctions of disconnection from the 13 number and termination of franchise were foreshadowed in that letter in the event of non-payment of the increased fee. In a separate letter to Camabe also dated 6 March 2001 and likewise authored on behalf of Seal-A-Fridge by Mr Rooney the claim was made that Telstra had charged a $6,000 increase in respect of the 13 number and that Seal-A-Fridge was still out of pocket in respect of that number from previous years.

83                  The latter information motivated Mr Radford to cause Camabe in May 2001 to commence paying $55 per week to Seal-A-Fridge in respect of the weekly fee.

84                  In June 2001 Seal-A-Fridge corresponded with Camabe directly and also sent a circular to it and all other franchisees the effect of which was to propose that the various franchise agreements should be amended so as to provide for a weekly fee of $75 (plus GST) with further fee increases being linked to CPI movements. The sanction of disconnection was again foreshadowed in the event of non-payment of the increase within 7 days.

85                  In May and June 2001 further correspondence was also directed to Seal-A-Fridge by the firm of solicitors which Mr Radford had engaged on behalf of the group of protesting franchisees. That correspondence had advanced a submission that Seal-A-Fridge did not have any contractual authority for the increase to $75 per week. Seal-A-Fridge did not, in responding to the solicitors engage with this submission directly. Rather, it stated that it was responsible to Telstra for payment of the charges in respect of the 13 number, in effect extended credit to franchisees by so doing, had a credit policy of payment within 7 days and had a duty to protect franchisees by not enabling those who did not pay the weekly fee to put the 13 number in jeopardy.

86                  Towards the end of June, Mr Radford came to be worn down by the dispute with Seal-A-Fridge in relation to the fee increase. He found that the related stress was affecting his enjoyment of life and his health and well being. He decided that Camabe should just pay the asserted arrears in respect of the fee increase and then continue to pay the increased fee. He caused a cheque for the arrears to be sent to Seal-A-Fridge. He telephoned the office of Seal-A-Fridge because he was apprehensive that the cheque would not arrive within the 7 day period notified in the circular letter of demand. He spoke with a Debra Guy (a Seal-A-Fridge employee). She assured him that it was satisfactory for the cheque to be received by 22 June 2001.

87                  On or about 22 June 2001 Mr Radford spoke directly with Mr Rooney and complained about his failure to negotiate concerning the increase. He also again requested details of the Telstra charges. Mr Rooney made reference to having recently sent a reply to the firm of solicitors which Mr Radford had engaged. He also asserted that he was “entitled to make money from the 13 number” and stated that he had no intention of providing to Mr Radford details of Telstra’s charges.

88                  On or about 24 June 2001 Mr Radford spoke with Mr and Mrs Malishev. They informed him that their access to the 13 number had been disconnected. This prompted him to telephone the 13 number from his home telephone number. He encountered a recorded message advising that the number had been disconnected. On or about 25 June 2001 Mr Radford received a call from Mr Rooney in which, having confirmed from Mr Radford that payment for the outstanding fee amount had been forwarded, Mr Rooney advised that “[t]here have been some problems with the 13 number and I have been in touch with Telstra to have the service restored to the affected franchisees.” Camabe’s access to the 13 number was restored on 26 June 2001.

89                  In April 2004 Camabe received a letter dated 14 April 2004 from Seal-A-Fridge notifying that the weekly fee associated with the use of the 13 number would rise from 1 May 2004 to $100 per week plus GST with White Pages listing fees, mobile calls and out of area fees being in addition to this. Also received that month by Camabe was a letter dated 15 April 2004 from Seal-A-Fridge signed on its behalf by Mr Rooney proposing an amendment to the franchise agreement to provide for a weekly fee of $100 per week with further increases linked to and capped by movement in the CPI. In this letter it was stated, inter alia:

If you decide not to accept this offer, then I am more than agreeable to leave the agreement as it stands and increase the weekly fee for the use of our intellectual property by a reasonable amount as the value of our national phone number increases each year.

90                  Recalling his experience when seeking to challenge the 2001 fee increase, Mr Radford decided that Camabe should pay the increased weekly fee which had been demanded.

91                  Later, in July 2004, Camabe received from Seal-A-Fridge a draft deed of variation which incorporated the variation proposed in its letter of 15 April 2004. Over the course of the next 18 months Mr Radford tried on a number of occasions to negotiate a different arrangement in relation to the weekly fee, particularly including a limit on the weekly fee that could be imposed by Seal-A-Fridge on any purchaser of Camabe’s franchise business. Nothing came of these attempts. In the result, on 19 December 2005, Camabe signed a Deed of Variation varying its franchise agreement with Seal-A-Fridge in the terms which Seal-A-Fridge had requested. Materially, that deed amended cl 3C(a) of the franchise agreement in a like way to the amendment made to the Malishevs’ franchise agreement.

92                  In 2006 Mr Radford again raised with Seal-A-Fridge the question as to what the position would be in relation to the weekly fee in the event that Camabe were to seel its business. The advice received, signed on behalf of Seal-A-Fridge by Mr Rooney, was that, “[i]n new franchise Agreements, future Franchisees will move to a franchise Service Fee structure based on a percentage of gross sales turnover. This fee is not additional to charges for the Priority 13 number as it is inclusive of the Priority 13 number charge” (emphasis in original).

93                  In January 2007, by a letter dated 15 January 2007 sent to Seal-A-Fridge at its Brisbane post office box Mr Radford sought a copy of the current disclosure document. As with the Malishevs, the address used was not that specified in the franchise agreement for the giving of notices to Seal-A-Fridge but was instead one long used by Seal-A-Fridge for its communications with Camabe. No disclosure statement was sent in response.

Seal-A-Fridge (Western Melbourne)

94                  The coincidence of a visit in or around November 2004 by Mr Ross Layton to see a friend at his home with an attendance at that home by a Mr John Ali, the then owner of the Seal-A-Fridge Western Melbourne franchise business for the purpose of repairing refrigerator seals there set in train a series of events which, on 31 January 2005, saw Mr Layton and his wife, Debra enter into a franchise agreement with Seal-A-Fridge whereby they became the new owners of the Seal-A-Fridge Western Melbourne franchise. Under a related agreement with Mr Ali they paid him the sum of $200,000 in respect of his relinquishment of that franchise business.

95                  Mr and Mrs Layton each gave evidence both by affidavit. They were each cross-examined by Mr Rooney. I am satisfied that, making due allowance for the lapse of over four years since the events in question and attendant imperfections of memory, each gave generally reliable and certainly honest evidence. What follows is based on their affidavit and oral evidence as well as contemporaneous documents.

96                  Having met Mr Ali by the coincidence mentioned, Mr Layton became interested in the acquisition of the franchise business he operated. He made this known to Mr Ali. Over a three to four week period between November 2004 and 31 January 2005 Mr Ali spent some 10 days with Mr Ali viewing how he undertook his duties in the business and assisting him in those duties. He did this to make sure that he was capable of undertaking the duties entailed as well as to form a view as to the reliability of what Mr Ali had told him about the availability of work and the earnings of the business. Mr and Mrs Layton also examined the books of account which Mr Ali kept in respect of the franchise business.

97                  Also in the period between November 2004 and 31 January 2005, most likely in the latter half of November 2004, Mr and Mrs Layton received in the mail from Seal-A-fridge a sample franchise agreement dated “2004” and a sample disclosure document dated 26 October 2003. Later, on or about, as they recall, 3 January 2005, Mr and Mrs Layton received from Seal-A-Fridge an undated franchise agreement and a disclosure document dated 30 December 2004 signed on behalf of Seal-A-Fridge by Mr Rooney, together with a receipt for the same which they were requested to sign and return to Seal-A-Fridge.

98                  Mr and Mrs Layton signed the receipt. They each recall sending that receipt back to Seal-A-Fridge. Mr Layton thought that this was done in mid-January 2005 but readily admitted that he could not be exact about this. Mrs Layton thought that it was sent back by post. In this regard, the passage of time did, I find, cause their detailed recollection to be at fault.

99                  A document which became Exhibit 5 was put to Mr Layton and tendered in evidence by Mr Rooney in the course of Mr Layton’s cross-examination. Exhibit 5 is a facsimile transmitted copy of a pro forma receipt dated 31 January 2005 attesting to the receipt on 10 January 2005 by Mr and Mrs Layton of a disclosure document dated 30 December 2004, a copy of the proposed franchise agreement and a copy of the Franchising Code. It bears facsimile machine imprints upon it which suggest it was transmitted and returned on 30 January 2005. It is signed by each of Mr Layton and Mrs Layton. The signature of each of them is witnessed by a “J P Allcorn”.

100               I see no reason to doubt the authenticity, as a contemporaneous document, of Exhibit 5. I put matters that way because, inferentially on its face, it is backdated. The date 31 January 2005 appears to have been present on the pro forma rather than typed in later. Though Mr Layton readily identified his signature on what became Exhibit 5 when Mr Rooney put the document to him, he remained adamant that neither he nor his wife had in fact received a copy of the Franchising Code from Seal-A-Fridge. His recollection was that his wife had had to download a copy of that code via the internet. The signed pro forma receipt was not put to Mrs Layton by Mr Rooney.

101               For her part, Mrs Layton recalled that neither the sample disclosure document nor the disclosure document dated 30 December 2004 contained an appendix 1 giving details of existing franchisees.

102               The business acquisition transaction itself was an important one for the Laytons. Mr Layton relinquished a secure, Victorian government appointment in order to take up the franchise business. However, neither Mr nor Mrs Layton had any particular reason in January 2005 to think that it was important for the future to note exactly when and by what means they returned the receipt to Seal-A-Fridge. Having observed each of them under cross-examination, the incongruence between the unqualified nature of the receipt and their evidence as to the non-receipt of a copy of the Franchising Code or, as the case may be that appendix 1 was missing from the disclosure document did not strike me as a basis for disbelieving their evidence generally. I regard it as inherently likely that each of them would remember missing items. I suspect the explanation for the incongruity lies in their not having studied all that was received in early January 2005 from Seal-A-Fridge in minute detail, as opposed to the terms of the proposed franchise agreement and the outgoings involved. I suspect that the absence of particular documents came to them shortly after they had signed the receipt and then the franchise agreement. The absence of appendix 1 and the Franchising Code copy does not seem to have been regarded by them at the time as worthy of follow up.

103               I note that the franchise agreement into which Mr and Mrs Layton entered provided for the payment of a “franchise service fee” in the initial amount of $130 per week with provision for an annual increase in that fee on 1 January each year by not more than 5% of the previous year’s fee (cl 3D refers).

104               In 2006, by letters dated 18 and 31 October and 21 November respectively, signed and sent by Mrs Layton to the Seal-A-Fridge facsimile number, Mr and Mrs Layton requested a copy of the current disclosure document. It was not until 27 February 2007 that they received such a document.

Unconscionable conduct in relation to weekly fee increases?

105               In my opinion, a necessary step in determining whether the ACCC has made out a case of unconscionable conduct in relation to the fee increases in 2001 or 2004 is answering a question as to what right, if any, Seal-A-Fridge had at the respective times under its agreement with each franchisee in question to effect an increase in the weekly fee or to charge such a fee at all? Answering that question as a matter of contract law is not as straightforward as the ready payment to Seal-A-Fridge of a weekly amount of $50 by Mr and Mrs Malishev and Camabe might suggest.

106               In their original form, the franchise agreement between Seal-A-Fridge and Mr and Mrs Malishev and the agreement between that company and Camabe each provided in respect of the 13 number that “the Franchisee shall be responsible for paying its own costs associated with the use of the national telephone number” (cl 3C(a)). Each of these franchise agreements also contained an “entire agreement” clause (cl 7G).

107               As a matter of language, the expression “responsible for paying its own costs associated with the use of the national telephone number” connotes firstly a liability to pay a fee that will vary according to the use made of that service rather than any fixed weekly fee. Secondly, that the fee is to be usage based and to comprise “its own costs”, i.e. those of the franchisee, does not readily suggest that the franchisee is to be under any liability to make any contribution at all towards the cost of establishing or any cost, fixed or variable, of maintaining the 13 number. Rather, that there is a “national telephone number” is a given which underpins cl 3C. That clause is predicated on the assumption that the number already exists with the necessary inference being that the franchisor, Seal-A-Fridge, has established it and is maintaining it. On that basis the establishment and maintenance costs for the 13 number are the “own costs” of Seal-A-Fridge, not a franchisee.

108               Clause 3C is not, of course, to be read in isolation from the franchise agreement as a whole. So doing only serves to reinforce the impression that there is no provision in the franchise agreement whereby a franchisee is under a liability to pay a fixed weekly fee to Seal-A-Fridge either in relation to the 13 number or at all. I have already referred to the “entire agreement” clause. This apart, “franchise service fee” though defined to be that specified in Sch 1, is not the subject of any operative clause in the franchise agreement and in any event its amount is stated to be “nil” in Schedule 1.

109               Yet it is pellucidly clear from their evidence that, at the time when each franchise agreement was signed, Mr and Mrs Malishev and Mr Radford respectively were expecting to pay a $50 per week fee to Seal-A-Fridge in respect of the 13 number in addition to usage costs and Seal-A-Fridge, by Mr Rooney, was also then expecting them to pay such a fee. Further, it seems then to have been common ground, in so far as any attention was then given to the subject, that the $50 per week figure was an estimate which may need to be adjusted over time so as to meet the cost fluctuations associated with the maintenance of the 13 number.

110               Thus, the written franchise agreement, though it contains an entire agreement clause and a clause which does not provide for a weekly fixed fee, omits provision in respect of one basis upon which both Seal-A-Fridge and each of the franchisees mentioned considered themselves to be contracting.

111               In these circumstances, the franchisees could not, in my opinion, even if they were so disposed, rely upon the written franchise agreement to ground a contention that, prior to the signing of the deed of variation, they had been under no contractual liability to pay any weekly service fee to Seal-A-Fridge.

112               The applicable legal principle is found in the following passage from an English Law Commission, Law of Contract, The Parol Evidence Rule, Report (English Law Commission, London, 1986), p 9700 at [2.12]:

The mere production of a contractual document, however complete it may look, cannot as a matter of law exclude evidence of oral terms if the other party asserts that such terms were agreed. If that assertion is proved, evidence of the oral terms cannot be excluded because the court will, by definition, have found that the contractual terms are partly to be found in what was agreed orally as well as the document in question. No parol evidence rule could apply. On the other hand, if that assertion is not proved, there can be no place for a parol evidence rule because the court will have found that all the terms of the contract were set out in the document in question and, by implication, will thereby have excluded evidence of terms being found elsewhere.

This passage commended itself as a correct statement of principle to McHugh JA (as his Honour then was) in State Rail Authority (NSW) v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 192 and, in turn, in this Court, to Sundberg J in Bruce v AWB Ltd (2000) 100 IR 129 at [8] (Bruce). In Bruce (ibid) Sundberg J added the following further observation, citing in support Youell v Bland Welch & Co Ltd [1990] 2 Lloyd's Rep 423, “[a]lthough the Law Commission and McHugh JA spoke of extrinsic oral terms, the parol evidence rule applies to all forms of evidence outside the written document, and not merely to oral evidence” (emphasis in original): see also Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 at [280] – [281] (Full Court). The rule thus also embraces the reference to a $50 weekly fee in a disclosure document.

113               Thus the existence of the entire agreement clause does not prevent a finding that not all of the terms of the agreement between Seal-A-Fridge and Mr and Mrs Malishev or, as the case may be, Camabe are to be found in the respective written franchise agreements. That said, an oral term cannot contradict a term in a written contract: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 472. However, if, as seems to me to be possible and preferable, one construes cl 3C(a) of the franchise agreement as providing for a usage charge but having nothing to say, one way or the other, about any further fee in respect of the 13 number, it does not contradict that clause to regard the agreement between the parties as carrying with it an oral term providing for the payment of a $50 weekly fee to Seal-A-fridge in respect of the 13 number.

114               Just to regard the franchise agreement as including an oral term that the franchisee will pay  a weekly fee of $50 to Seal-A-Fridge in respect of the 13 number would not though, in my opinion, carry fully into effect the intentions of the parties to that agreement. Each franchise agreement provided for an initial 15 year term with options to extend the agreement for two successive 15 year terms. The extensions were to be subject to the entry by the franchisee into Seal-A-Fridge’s then current franchise agreement which was, as to “non-financial terms”, to be substantially the same as the existing franchise agreement. Thus, it was contemplated that extensions might be on different financial terms. Even allowing for that, it seems inherently unlikely, given the considerable length of the initial term of the agreement, that the parties to the franchise agreement contemplated that the $50 per week fee would remain unchanged for the whole of the original 15 year term. Thus, the oral term providing for a weekly fee of $50 should be regarded as being supplemented by an implied term providing for its increase in a way that would give business efficacy to the franchise agreement: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 292.

115               The franchisees had no direct relationship with the provider of the 13 number. Part of the assumption underlying the franchise agreement in terms of the pre-existence of the 13 number was that Seal-A-Fridge had subscribed and would continue to be the subscriber for that number or any replacement. A corollary of this was that the franchisees would not come to be billed directly by Telstra (or any substitute national number provider). In these circumstances and though one way of adjusting the $50 per week fee over the 15 year term might be to imply a term that it would increase proportionately by the amount of any increase in line with provision charges to Seal-A-Fridge, that would import an obligation on the part of Seal-A-Fridge to provide the franchisee with complete copies of the provider account to it so that the amount of any increase in the line provision charge from time to time could be evidenced. Yet the $50 per week fee was only ever regarded as an estimate. Also the fee necessarily carried with it in the estimate something of an allowance for the administrative work entailed in analysing the account received by Seal-A-Fridge to identify usage charges appropriate to a particular franchisee.

116               An alternative and more likely way of making allowance for the impact on the continuing appropriateness of the $50 per week fee so as to give business efficacy to the franchise agreement would be to imply a term allowing for the annual adjustment of that fee, at the election of Seal-A-Fridge, in accordance with any movement in the CPI index, an objective, readily ascertainable benchmark. Once again, it seems unlikely that Seal-A-Fridge or any party would have contemplated multiple adjustment reference dates, varying in accordance with when each franchise agreement was made, as opposed to a common adjustment date across the entire network of franchisees. As to what such a common reference date might be, there is nothing much to chose as between the start of a calendar year and the start of a financial year.

117               It also seems inherently unlikely that either party to a franchise agreement contemplated that the weekly fee would ever be less than $50 per week.

118               The written franchise agreement in respect of Mr and Mrs Malishev and Camabe should be regarded as carrying with it an oral term that the franchisee would, in addition to usage charges, pay to Seal-A-Fridge a weekly fee of $50 in respect of the 13 number. It should also be regarded as carrying with it an implied term, necessary so as to give business efficacy to that franchise agreement, that the weekly fee of $50 per week might, at the election of Seal-A-Fridge, be increased once each year in accordance with the movement in the CPI since 1 January the previous year but no so as to be less than the then existing weekly fee.

119               Each party to the franchise agreement also seems to have taken it as a given that Seal-A-Fridge was entitled to add an additional amount in respect of GST to the weekly fee on and from the commencement of that tax. That this was regarded as contractually permissible is not the result of any oral or implied term as at the commencement of each franchise agreement but rather the result of a variation to the agreement as at the commencement of the GST regime to be inferred from the subsequent conduct of the parties. The relevant conduct is the inclusion of GST in Seal-A-Fridge accounts and the payment by each franchisee of those accounts.

120               The approach of the ACCC was that the phrase “the Franchisee shall be responsible for paying its own costs associated with the use of the national telephone number” in cl 3C(a) was capable of being construed as embracing the $50 weekly fee in respect of the 13 number. In support of this construction of that clause the ACCC pointed to the conduct of Seal-A-Fridge and each franchisee both prior to and after the signing of the franchise agreement. This approach would treat such conduct as extrinsic evidence admissible to give meaning to cl 3C(a).

121               So far as the pre-contractual conduct of the parties is concerned, it was once the case that, to use such evidence for an interpretative purpose, the contractual term or phrase concerned had to be ambiguous and, further, that conduct had to be part of the objective background to the agreement rather than just evidence of a party’s subjective intentions: Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352. More recently, the approach to the construction of a contract is that its meaning is to be determined by what a reasonable person would have understood it to mean having regard not only to the text but also to the surrounding circumstances known to the parties and the purpose or object of the transaction: Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd (2004) 219 CLR 165 at [41]. Ambiguity is no longer a pre-condition to the admission of extrinsic evidence as to the background to a contract: Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1. Even if it were, the phrase is attended with ambiguity. That there was express reference on behalf of Seal-A-Fridge to the liability which a franchisee would have to pay a weekly fee of $50 in respect of the 13 number is common ground, a mutually known fact, not just the subjective intention of Mr Rooney on behalf of Seal-A-Fridge.

122               Whether the post-contractual conduct of the parties may permissibly be used for the purpose of construing cl 3C(a) may be an open question at ultimate appellate level (qv Seddon N and Ellinghaus MP, Chesire and Fifoot’s Law of Contract, 9^th Australian Edn, LexisNexis Butterworths [10.16]) but, having regard to the expression of opinion on that subject by the Full Court in BowescoPty Ltd (rec & mgr apptd) v Zohar (2007) 156 FCR 129 at [78] – [79],I consider that I am bound to hold that evidence of subsequent conduct is not admissible for the purpose of construing cl 3C(a).

123               The starting point for construing cl 3C(a) remains the objective meaning of the language employed in that clause. I have already expressed my view as to how, read, in context, that clause is to be construed as a matter of language. While I accept that, looking to the pre-contractual surrounding circumstances, and particularly the mutual understanding of the parties, it is possible reasonably to argue that the phrase “the Franchisee shall be responsible for paying its own costs associated with the use of the national telephone number” in cl 3C(a) does carry with it in the notion of “its own costs” liability to pay a $50 weekly fee I do not find that argument persuasive given that the mutual understanding extended not just to a weekly fee but also to a usage charge liability. Regard to the surrounding circumstances, in my opinion, better supports a conclusion that the agreement between the parties incorporates an oral term as to the weekly payment liability.

124               Alternatively, the omission of an express reference to a weekly payment liability of $50 in respect of the 13 number was a mutual mistake capable of rectification even in the presence of the “entire agreement” clause: Macdonald v Shinko Australia Pty Ltd [1999] 2 Qd R 152 at 155-156.

125               The ACCC’s further submission in relation to cl 3C(a) was that it did not allow Seal-A-Fridge to charge a fee to generate a profit. On the construction of cl 3C(a) which I prefer, it was not the source of contractual authority to charge a weekly fee at all, only the separate usage charges. It was the oral term which supplied the contractual authority to charge the weekly fee. That term did not prohibit the making of a profit.

126               There was, unsurprisingly, no dispute by Mr Rooney with the proposition that Mr and Mrs Malishev and, as the case may be Camabe were contractually liable, on and from the commencement of the franchise agreement, to pay a weekly fee of $50 in respect of the 13 number.

127               In the course of the correspondence sent by the solicitors engaged by Mr Radford one of the positions advanced was that Seal-A-Fridge had no contractual right even to the payment of the weekly fee of $50. It follows from the foregoing analysis that I do not regard that position as sound in law

128               It emerged in evidence not only that Mr Radford had approved in advance the sending of this correspondence to Seal-A-Fridge by the solicitors but that so, too, had Mr and Mrs Malishev. Mr Rooney put forward in his submissions in this case that the advancing of the position that there was no liability to pay the weekly fee amounted to a repudiation of each franchise agreement by each franchisee but not one that Seal-A-Fridge had accepted. It is not necessary for the purposes of this case to determine the correctness of that submission if for no other reason than, even if correct, it would leave each agreement in place with the terms as to liability to pay the weekly fee being as I have described them.

129               The ACCC’s case as to why the conduct of Seal-A-Fridge in pressing for and securing increases in the weekly fee was unconscionable had a number of themes. Insofar as that case was predicated upon Seal-A-Fridge seeking to make a profit from the weekly fee in circumstances where it had no contractual right to make any profit at all from that fee it depended upon the acceptance of the construction of the franchise agreement advanced by the ACCC.  For reasons already given, I do not accept that the agreement should be so construed.

130               It does not follow from this that profit making considerations are irrelevant to the determination of whether the conduct of Seal-A-Fridge was unconscionable. The section directs attention to all of the circumstances.

131               I have already canvassed above, under the heading, “The 13 National Number” the gross income of Seal-A-Fridge from weekly fees at particular times and the costs being charged to it by Telstra at those times for the maintenance of that number. Some recapitulation is desirable so as to put in context conduct to which the ACCC referred in its submissions as to unconscionability.

132               Seal-A-Fridge had, from February 1999, a net annual margin, after payment of Telstra fixed costs, of $18,780 from the gross annual weekly fee income it was then receiving. By August 2001 and assuming a continuance of a $50 per week fee in respect of the 13 number its net annual margin after payment of Telstra fixed charges was approximately $41,534.  The effect of an increase in the weekly fee to $75 per week in 2001 was to add an additional $32,500 to that net margin. By 2004 when Seal-A-Fridge promoted and secured the weekly fee increase to $100 the charges to it by Telstra had actually decreased slightly. The effect of an increase of the weekly fee to $100 over the then network of franchisees was to yield to Seal-A-Fridge (assuming payment) a gross fee income of $120,000. Its actual Telstra fixed charges at the time amounted to $28,184.

133               The ACCC’s description of the conduct of Seal-A-Fridge in respect of the securing of the weekly fee instance in 2001 and 2004 was that, in each instance, it was a “unilateral profit gouge”. So it was. For the purpose of augmenting its profit, Seal-A-Fridge gouged further fee income from its franchisees thus reducing the profit margin of each franchisee. Seal-A-Fridge was not, as I have found, contractually prohibited from making a profit from the weekly fee of $50. What it had no contractual authority to do was unilaterally and arbitrarily to increase that weekly fee in 2001 by 50%, ie a further $25 per week or, in 2004, by a further 33%, i.e. a yet further $25 per week. At the most, in light of what I regard as an implied term in the franchise agreement, Seal-A-Fridge had a right once each year, if it chose, to increase the weekly fee by reference to CPI movement.

134               Though there was no evidence of actual relative movements in the CPI as between 1999 and 2001, common life experience over those years is sufficient to highlight that there was never any possibility that such an implied term would authorise percentage increases of the order demanded by Seal-A-Fridge. Even if, contrary to my preferred content of the implied term authorising an annual increase one were to regard the reference base for such an implied term as movements in Telstra’s charges to Seal-A-Fridge, on the evidence the position remains that such movements would have provided no authority for either of the increases Seal-A-Fridge demanded of and secured from Mr and Mrs Malishev and Camabe.

135               Some caution needs to be exercised not in describing the conduct of Seal-A-Fridge as “profit gouging” but in accepting at face value that the amount of additional profit thereby secured in 2001 and 2004 was as high as that put forward by the ACCC.

136               The evidence disclosed that Seal-A-Fridge assumed, and was intended by all concerned to assume, an administrative burden in the dissection of the accounts for payment which it received from Telstra so as to yield individual accounts to each franchisee incorporating usage charges specific to particular franchisees. There were doubtless labour and perhaps also premises costs which at least rateably related to the undertaking of this administrative burden by Seal-A-Fridge. There may also have been postage, stationery, equipment and incidental expenses which, again at least rateably, related to the sending out of the individual accounts to franchisees. All of such expenses could fairly be said to be in relation to the administration of the contractual liabilities of the franchisees in relation to the 13 number.

137               Such expenses aside, Seal-A-Fridge assumed a degree of entrepreneurial risk in its business model as reflected in the terms, written and otherwise, of its franchise agreements with, materially, Mr and Mrs Malishev and Camabe. That risk arose from the circumstance that Seal-A-Fridge was liable to Telstra, in accordance with Telstra’s terms of trade, for the whole of Telstra’s charges, usage related and otherwise, in respect of the 13 number. Further, that one or more franchisees might be in arrears did not relieve Seal-A-Fridge from a responsibility to maintain the 13 number at least for the benefit of those who were not in arrears. The evidence led showed that franchisees were sometimes in arrears in making payment to Seal-A-Fridge in respect of the weekly fee and usage expense charged to them. Mr Rooney rightly highlighted this risk in his submissions. What he did not do was to seek to quantify it by evidence. That might, for example, have been done by evidence as to the opportunity cost of funds deployed in the interval between when Seal-A-Fridge paid Telstra in accordance with Telstra’s terms of trade in respect of the 13 number and when Seal-A-Fridge received payment from franchisees or by evidence as to overdraft costs.

138               Though neither side led any evidence as to the actual or estimated cost to Seal-A-Fridge of its administrative burden in relation to the 13 number, it seems inherently unlikely from the nature of the tasks involved, having regard to the examples of the accounts from Seal-A-Fridge to franchisees which were in evidence, that related expenses approached the net amount that was left to Seal-A-Fridge from the weekly fee of $50 after it had paid the Telstra charges. Further, though again this was not the subject of any attempted quantification in either side’s case, it seems inherently unlikely, even making allowance for the entrepreneurial risk which I have mentioned, that this would consume all that remained to Seal-A-Fridge after the deduction of administration related expenses.

139               Mr Rooney put forward in submissions in relation to whether the conduct should be regarded as unconscionable that Seal-A-Fridge had been charging $50 per week plus call costs since 1997 and that the 2001 increase it demanded was the first in over 3 years. A like justification attended the 2004 increase demanded. Yet Seal-A-Fridge had no contractual authority at all to make either its 2001 or 2004 fee increase demands. At most, on the construction of the franchise agreement which I prefer, it had a right to demand annual CPI related increases.

140               The ACCC’s case in respect of unconscionable conduct did not just depend on the characterisation of the conduct of Seal-A-Fridge as “profit gouging”. Further, and correctly in my opinion, profit gouging was not treated as synonymous with unconscionable conduct. Rather, it was put forward as part of the overall factual matrix which the ACCC submitted revealed unconscionable conduct on the part of Seal-A-Fridge.

141               What was revealed overall, so the ACCC submitted, was “misstatement, non-disclosure of information, threats and intimidation and abuse of Seal-A-Fridge’s position of strength in relation to being able to cut off the phone number”. I agree.

142               In its circular letter to franchisees of 15 January 2001 in respect of the increase of the weekly fee from $50 to $75 Seal-A-Fridge put forward that Telstra’s charges to it had recently increased. This was false. There was no such recent increase. The promotion to the franchisees that there existed this basis for the increased demanded evidenced an absence of good faith on the part of Seal-A-Fridge.

143               Further, as is evident from the dissection of the initial franchise fee into component parts, part of that fee was attributed by the parties to the franchise agreement to “goodwill”. “Goodwill” has been said to be “a quality or attribute derived from other assets of the business”: Commissioner of Taxation v Murry (1998) 193 CLR 605 (Murry) at [12]. Insofar as what the franchisees in this case at least purportedly acquired in return for the initial franchise fee was goodwill (and it suffices for the purposes of this case to assume the aptness of the attribution of an amount in respect of goodwill), one of the sources of that goodwill was surely the 13 national number and the right to access calls from the same. Logically and, it seems in actuality, one way in which the capital cost to Seal-A-Fridge of establishing, though not maintaining, that source of goodwill might have been recovered was via the payment of the initial franchise fee. An alternative way of recovering that capital cost would have been to amortise it and then recover it as a component of the weekly fee paid by each franchisee. On the evidence, Seal-A-Fridge did not opt for the latter alternative. The point of adverting to this is that there was nothing even in the business model used by Seal-A-Fridge for the sale of its franchises which could provide a credible explanation for the statements made to franchisee in the letter of 15 January 2001.

144                In relation to the 13 number, Seal-A-Fridge was in a position akin to a utility. There is nothing inherently “unconscionable”, in terms of s 51AC, in a utility to which money is lawfully due having an ability to deny access to the service which the utility provides in the event of non-payment by a consumer of the service, drawing that ability to the attention of that consumer and then withdrawing that consumer’s access to that service in the event that payment of the money lawfully due is not made.  Seal-A-Fridge had such a right, by necessary implication, under each franchise agreement, in my opinion. Some, particularly a consumer in arrears, might describe the highlighting of the prospect of service withdrawal as threatening or intimidating. It is, in truth, no more than evidencing the reasonable proposition that, in a fee for service relationship, the person who has not been paid what is owed for the past supply of that service cannot be expected indefinitely to continue to supply that service without payment.

145               In the context of the present case, and having regard to the central role played by the 13 number in the promotion by various advertising means of the generic “Seal-A-Fridge” business name, there can be no doubt that continued access to calls directed to a franchisee following a call to that 13 number was essential to the continued conduct of that franchisee’s business. Essentiality of access to the 13 number by franchisees gave Seal-A-Fridge a position of strength in relation to them in the event of non-payment. Yet that essentiality does not per se make the highlighting of the withdrawal of access to that service in the event of non-payment unconscionable. So much was, as I understood it, accepted by the ACCC. Rather, so the ACCC submitted, it was the abuse of that position of strength that was relevant to the characterisation of the conduct of Seal-A-Fridge as unconscionable, in all of the circumstances. I agree.

146               What emerges is that the 2001 weekly fee increase was demanded and obtained by Seal-A-Fridge, without contractual authority but supported by falsehood and abuse of a position of strength for the purpose of gaining additional profit. These means also led eventually to the securing of the agreement of the franchisees concerned to the variation of their respective franchise agreements. Viewed as a whole and having regard to the general statements in the authorities mentioned above as to the meaning of s 51AC, the adoption of these means by Seal-A-Fridge in respect of the 2001 increase constituted unconscionable conduct on the part of Seal-Fridge.

147               A like conclusion should be made in respect of the conduct of Seal-A-Fridge which predated the 2004 price increase in my opinion. That conduct did not feature the cutting off of access by Mr and Mrs Malishev or Camabe to the 13 number. It did not have to. The ability which Seal-A-Fridge had to do that in the event its demands for an increase in the weekly fee, however unauthorised and extortionate, were not accepted had already been demonstrated.

148               Some further observations ought to be made about these conclusions.

149               Referring in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51 to s 51AA of that Act, which prohibits conduct that is unconscionable within the unwritten law from time to time of the States or Territories, Gleeson CJ observed, at [14]:

Unconscientious exploitation of another's inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of s 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer. [Footnote reference omitted]

150               The content of what is “unconscionable” for the purposes of s 51AC of the Trade Practices Act is not dictated by or limited to that which is unconscionable within the unwritten law from time to time of the States or Territories. That acknowledged, just exploiting a position of strength in trade or commerce for profit is not likewise “unconscionable” in terms of s 51AC of that Act. A provider of a utility service which is in demand and who has the ability to cut off access to that service in the event of non-payment doubtless enjoys bargaining power in negotiations as to price with a consumer and in the encouraging of payment within specified terms of trade. This bargaining power is though but a reflection of that demand and of an ability that is reasonably incidental to the supply of the service. In this particular sense, it would be an error to regard s 51AC as prohibiting the taking advantage of a superior bargaining position even though s 51AA of the Trade Practices Act does not. Where, as here, attributes of that superior bargaining position are abused by their deployment, in conjunction with falsehoods to the end of securing an increase in price to which there is no contractual entitlement the context and thus the scope for reaching a conclusion as to a contravention of s 51AC is different. It may or may not be the case that that same context might also reveal a contravention of s 51AA of the Trade Practices Act but the existence of such a contravention is neither a necessary element of nor a pre-condition to a conclusion that s 51AC has been contravened.

151               The ACCC sought to make something of the nature of the language that Mr Rooney had used in his dealings with franchisees. Unconscionability is not found in matters of nicety or uncouthness of language but in the ends to which that language is deployed. Here, Mr Rooney’s oral exchanges with franchisees form part of an overall factual matrix in which is revealed a concerted and successful endeavour by Seal-A-Fridge to force contractually unauthorised price increases and later contractual variations on the basis of falsehood. The conclusion that the conduct directed to these ends should be characterised as unconscionable is multi-factorial, not a matter of manners.

152               Unlike the ACCC, Mr Rooney did in his submissions invite me to engage in an exercise of moral relativism by comparing the circumstances of this case with those of others. He conceded that there were features of the conduct of Seal-A-Fridge which were not praiseworthy, e.g. misrepresenting an increase in Telstra costs but put forward that the conduct was not as bad as that evident in other, earlier cases in which unconscionable conduct had been found. Such a finding was, he submitted, a conclusion reserved for extreme cases.

153               I decline to engage in such a comparative exercise. Moral turpitude is an inherent element in the finding of a contravention of s 51AC of the Trade Practices Act. Thus, though this is a civil case in which proof on the balance of probabilities is all that is required in respect of controversial factual issues, I readily accept that “inexact proofs, indefinite testimony, or indirect inferences” do not suffice: Briginshaw v Briginshaw (1938) 60 CLR 336 at 362. None of these qualities was present in the ACCC’s evidentiary case. Further, the ultimate conclusion as to unconscionable conduct is not one lightly to be made. At this general level of abstraction there is, with respect, some substance in Mr Rooney’s submission. To descend into a detailed factual analysis of earlier decided cases is though, as I have already observed when discussing the meaning of s 51AC, to risk clouding the issues in the present case. If, in all the circumstances of the present case and acknowledging that it is not a conclusion lightly to be reached, the conduct of Seal-A-Fridge can be said to be “unconscionable” in terms of the meaning of that word as used in s 51AC then it is nothing to the point that that conduct may be comparatively better or worse than conduct which is the subject of other cases.

Unconscionable conduct in relation to assignment of a franchisee’s rights?

154               As with the price increases, a consideration of whether, in its dealings with Mr and Mrs Malishev in relation to the proposed disposal of their franchise business, Seal-A-Fridge engaged in unconscionable conduct requires an understanding of the meaning of the assignment clause in the franchise agreement, cl 6B (set out above). That clause obliges Seal-A-Fridge, subject to specified conditions, to consent to the assignment of its interest by the franchisee to a transferee.

155               It is evident from its dealings with Mr and Mrs Malishev that Seal-A-Fridge, by Mr Rooney, regarded condition (b) in cl 6B, “executing the Franchisor’s then current Franchise Agreement” as a licence to withhold consent unless the transferee was prepared to agree to a radically different formula by which the fee for access to the 13 number was to be calculated, a percentage of turnover based fee. I consider that this is a misinterpretation of cl 6B.

156               The consent which Seal-A-Fridge is obliged to give is to an assignment of the franchisee’s “interest under this Agreement”, ie of the interest created by the existing franchise agreement. Part of that “interest” is the right of access to the 13 number on payment of the weekly fee and usage charges. As noted, that contractual right is a source of the goodwill for which, in part, the initial franchisee was paid. The franchisee cannot assign the goodwill of the business in gross. Rather, as Barwick CJ pointed out in Geraghty v Minter (1979) 142 CLR 177 at 181, in a passage approved in Murry (at [22]), “it is something that attaches to a business. It cannot be dealt with separately from the business with which it is associated”. Thus, in order for the franchisee to realise whatever is the worth of the then goodwill of the franchise business, the franchisee must be able to dispose of the business as a whole, including such business assets as are sources of that goodwill. One such source is the right of access to the 13 number. Another measure of the worth of the business is the net profit able to be generated. That, in turn, is in part a reflection of the business expense represented by the price fixed by the agreement for access to the 13 number.

157               To construe cl 6B(b) in the way Mr Rooney evidently did on behalf of Seal-A-Fridge is to afford it a “Trojan horse” quality allowing Seal-A-Fridge to diminish the worth of the interest that it had sold to a franchisee by increasing the cost of access to a source of the goodwill of that business. It is to the assignment of that interest, not some different interest of diminished worth, to which Seal-A-Fridge can be obliged to give its consent. The franchise agreement already fixes the price of that access, albeit in a way that includes an oral and an implied term. There could be no objection to a new form of agreement for a transferee which took up expressly the oral and implied term in relation to the 13 number. Condition 6B(b) does not authorise Seal-A-Fridge to agree to consent only if the transferee agrees to take up some different interest to that possessed and sought to be assigned by the existing franchisee.

158               For all that, the mere promotion of an erroneous construction of a contract does not, in my opinion, constitute unconscionable conduct for the purposes of s 51AC. Though erroneous and productive of a related stance in dealings with the other party to the contract, all of that may have occurred in good faith.

159               The ACCC submitted that “current” in cl 6B(b) could not mean a form of agreement that no franchisee had ever agreed to. I agree that this is a possible meaning to afford to the condition, but there is an ambiguity in the language. That ambiguity is not removed by, as one must, reading the whole of the condition in the context of the whole of the agreement. The past tense word “used” in the concluding phrase “such other documents the customarily used by the Franchisor for its Franchisees” [sic] lends some support to the ACCC’s submission, as does the word “customarily” but they are not decisive. A new form of agreement adopted in lieu of ones used earlier, perhaps even very recently, is no less “current” because it has not yet been the subject of an agreement with another party. Further, the reference to “such other documents the customarily used by the Franchisor for its Franchisees” [sic] is capable of referring to types or classes of document rather than only previously used documents. On balance, I prefer a less restrictive construction of the word “current” in cl 6B(b) than that put forward by the ACCC. The latter construction would inhibit drafting innovation or the discarding of terms that the passage of time, technological change or legislative intervention had rendered arcane or irrelevant.

160               The temptation engendered by the behaviour of Seal-A-Fridge in relation to procuring weekly fee increases and later variations of the franchise agreements is to regard all of its behaviour in relation to its franchisees as venal. That is a temptation to be resisted.

161               There is no evidence that, at the time when Mr and Mrs Malishev proposed the sale of their business to Mr Oded in 2006, it then had any agreement with any franchisee which provided for a turnover based fee in relation to the 13 number. Yet, if, as I consider it should be, cl 6B(b) of the franchise agreement is to be construed as embracing a presently adopted form of franchise agreement, albeit one not yet assented to by any franchisee, the absence of any such evidence is without any material consequence. The error on the part of Seal-A-Fridge in the construction of cl 6B(b) was not in considering that the word “current” limited the form of agreement into which it could require a new franchisee to enter as a condition of giving its assent to an assignment of interest by the existing franchisee but rather in considering that the word “current” allowed it to insist on a new condition which derogated from the very nature of the interest which was sought to be assigned.

162               The evidence disclosed that Mr Rooney did have it in mind to seek a turnover based fee in relation to the 13 number when and if opportunity presented itself. There is no doubt that he saw such an opportunity presented by the request which Mr and Mrs Malishev made of Seal-A-Fridge to consent to an assignment of their interest for the purpose of a sale of their franchise business to Mr Oded. He also was suspicious of whether Mr Oded was a genuine buyer and made this plain to Mr and Mrs Mailshev. For all that suspicion, in authoring on behalf of Seal-A-Fridge the letter to Mr and Mrs Malishev of 20 July 2006 Mr Rooney communicated that his company was “pleased to assist you in selling your Franchise if you wish to sell on the terms that we agreed to in our Franchise Agreement of 19 February 1999”. In context, the reference to “sell on the terms we agreed to” carried with it an erroneous assumption as to what was permitted by cl 6B(b) but I do not doubt that this position was communicated in good faith. Seal-A-Fridge was prepared to give its consent to the assignment on the terms that it (relevantly Mr Rooney) conceived it was entitled upon which to insist. Further, the construction of cl 6B(b) adopted by Seal-A-Fridge, though erroneous, was not one which was so unreasonable or impossible that it could not possibly have been held in good faith. The extent of the embrace of the word “current” is pregnant with ambiguity.

163               In the result then, though Seal-A-Fridge had no right, on the basis it stated, to refuse to give its consent to an assignment of the interest of Mr and Mrs Malishev, its conduct in withholding that consent involved no moral turpitude. It was not unconscionable for the purposes of s 51AC of the Trade Practices Act.

Alleged Franchising Code Breaches

164               The evidence disclosed that, on and from 1999, there was an expectation that a Seal-A-Fridge franchise business would have an annual turnover of $50,000 or more. So much was evident from information provided by the Malishevs in 1999 by Mr Rooney at the time when they took up their franchise. By 2005 when the Laytons took over an existing franchise the position remained, having regard to turnover figures before and after that takeover that annual turnover exceeded $50,000. There was no evidence led which suggested that the position thus revealed in 1999 and 2005 in respect of these businesses was either in error or not indicative of a more general position across the network of franchisees.

165               The importance of this is that, at all material times, the disclosure document which Seal-A-Fridge had to provide in those circumstances required by the Franchising Code had to comply with Appendix 1 to the Schedule to that code.

166               What purported to be a disclosure document was received by Mr and Mrs Layton in January 2005. Having regard to item 6 in Annexure 1 to the Schedule to the Franchising Code, that document should, materially, have disclosed the names of existing franchisees, their contact details and when they started operating the franchised business. The importance of that disclosure requirement for a prospective franchisee lies in the opportunity thus presented for the prospective franchisee to ascertain the length of association with the franchise business of existing franchisees and to contact some or all of them to seek to draw upon their experience in the operation of that franchise business. It thus facilitates one aspect of what might be termed pre-acquisition due diligence inquiries.

167               Purportedly, the required information was contained in Annexure 1 to the document sent to the Laytons but that document did not, in fact, have an Annexure 1 attached. The information required by item 6 in Annexure 1 to the Schedule to the Franchising Code was not otherwise then provided by Seal-A-Fridge to Mr and Mrs Layton.

168               In these circumstances, Seal-A-Fridge failed to comply with the obligation imposed on it by s 10 of the Franchising Code and thus contravened s 51AD of the Trade Practices Act.

169               Having regard also to the requirements of item 20 in Annexure 1 to the Schedule to the Franchising Code, Mr and Mrs Layton ought also then to have received from Seal-A-Fridge in the disclosure document either:

(a)                Financial reports for each of the last 2 completed financial years that have been prepared by Seal-A-Fridge in accordance with ss 295 - 297 of the Corporations Act 2001 (Cth); or

(b)                a copy of an independent audit provided by a registered company auditor within 12 months after the end of the financial year to which the statement relates which supported a statement in the disclosure document signed by a director of Seal-A-Fridge that, in the opinion of its directors, there are reasonable grounds to believe that it is able to pay its debts as and when they fall due.

Once again, such information would have assisted in a “due diligence” investigation. No such information was provided in the purported disclosure document. This omission provides a further particular of a then failure to comply with s 10 of the Franchising Code and thus of how at the time s 51AD was contravened by Seal-A-Fridge.

170               I have referred above to the request made of Seal-A-Fridge by Mr and Mrs Malishev by letter dated 23 October 2006 for a copy of the current disclosure document. Having regard to s 19 of the Franchising Code, the failure on the part of Seal-A-Fridge to respond at all to that request let alone to provide a copy of the current disclosure document to them within 14 days after the receipt of their request, as that section of the code required, constituted a failure to comply with that section and thus a contravention of s 51AD on or about 8 November 2006.

171               The Laytons made separate requests for a copy of the updated disclosure document on 19 October 2006, on or about 31 October 2006 and on or about 21 November 2006. They were entitled by s 19(2) of the Franchising Code to make one such request every twelve months. Had Seal-A-fridge complied with the request made by the correspondence of 19 October 2006 it would have been under no obligation to respond to either of the two later requests made in 2006 by providing further copies of an updated disclosure document in response. In the circumstances, the contravention of s 51AD lies only in the failure to respond within fourteen days of receipt to the first of the requests which Mr and Mrs Malishev made of Seal-A-Fridge.  The contravention occurred on or about 3 November 2006.  It remains a contravention even though, eventually, at the end of February 2007 Mr and Mrs Layton received a copy of the updated disclosure document from Seal-A-Fridge.

172               On 15 January 2007 and on behalf of Camabe, Mr Radford made a request of Seal-A-Fridge for an updated copy of the disclosure document. A response enclosing the current disclosure document was not received until 27 February 2007. That response was made outside the 14 day period after receipt of request required by s 19 of the Franchising Code. The updated disclosure document should have been provided on or about 1 February 2007 and certainly before 27 February 2007. This failure to comply with s 19 of the Franchising Code constitutes a separate contravention of s 51AD of the Trade Practices Act by Seal-A-Fridge on or about 1 February 2007.

Was Mr Rooney a party to any contravention?

173               At the outset of these reasons for judgment I described Mr Rooney as the directing mind and will of Seal-A-Fridge. In so describing him, I had in mind observations concerning that phrase made by Lord Reid in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 171 with respect to its use by Denning LJ (as his Lordship then was) in H L Bolton Engineering Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159 at 172 in likening a company to a human body in terms of the roles of its various officers and employees. Mr Rooney was someone who, to adopt Lord Reid’s description, carried out functions of management and spoke and acted for the company. Section 84 of the Trade Practices Act takes the common law position described by Lord Reid much further by delineating a wider class of persons whose acts or state of mind will be taken to be that of a corporation for particular purposes of that Act. So far as the conduct and state of mind of Seal-A-Fridge in this case is concerned, Mr Rooney’s status is such that, for all its breadth, s 84 makes no material difference to the position which would obtain at common law in any event in relation to Mr Rooney’s state of mind and actions being those of Seal-A-Fridge.

174               It does not follow from this that Mr Rooney should, ipso facto, be regarded as a party to each of the contraventions which I have found proved. The position remains that he must be shown to have been aware of each of the elements of a particular contravention.

175               In the case of the contraventions of s 51AC which I have found, that awareness is not difficult to find, even having regard to the corollary that so doing involves attributing to him moral turpitude. He was the author of the circular letter of 15 January 2001 to franchisees which sought to justify the increase demanded on the basis of increased costs to Seal-A-Fridge from Telstra. The findings which I have made concerning the 2001 and 2004 fee increases disclose that he was actively engaged in the propounding and promotion of these increases and in dealing, on behalf of Seal-A-Fridge, with oral and written representations concerning those increases from franchisees.  Such is the level of active engagement in the company’s affairs by him over the years which is disclosed it seems inherently unlikely that he was not personally aware of the costs to Seal-A-Fridge of the maintenance of the 13 number.

176               Mr Rooney refers, in the correspondence he authored in the exchanges concerning the 2001 price increase, to having the benefit of a supportive legal opinion. That opinion was not produced in evidence but I expressly draw no adverse inference against Mr Rooney or Seal-A-Fridge on that basis. The evidence shows that Mr Rooney executed the franchise agreements in question on behalf of Seal-A-Fridge. I find it impossible to see how one could reasonably read those agreements on their face as authorising weekly fee increases of the kind he caused Seal-A-Fridge to demand. He was well aware that the position put in the relevant pre-agreement disclosures rose no higher than there was a weekly fee of $50 in respect of the 13 number which was an estimate. I am quite satisfied that it was greed, not good faith, which motivated the demanding of the 2001 and 2004 weekly fee increases. The inference I draw on the whole of the evidence as to these increases is that Mr Rooney was of the view that Seal-A-Fridge could unilaterally demand such weekly fee as it thought fit. That was not even remotely a reasonable view to take of the position obtaining under the franchise agreements concerned.

177               Like sentiments attend the procuration of the deeds of variation. By these Seal-A-Fridge, via Mr Rooney, sought to entrench a higher cost weekly fee regime than that it had originally bargained for. These deeds were a sequel to the earlier procuration of a weekly fee increase by unconscionable conduct. In particular, the sanction of disconnection from the essential 13 number, without reasonable cause, had been deployed by Seal-A-Fridge at the behest of Mr Rooney in support of the originally demanded fee increase.

178               I am satisfied that Mr Rooney was, for the purposes of s 75B of the Trade Practices Act, a party to each of the contraventions of s 51AC which I have found proven.

179               It remains to consider whether Mr Rooney should be held to be a party to the s 51AD contraventions.

180               On the evidence, Seal-A-Fridge does not have and has not ever had a large administrative staff. It appears to employ an office assistant or bookkeeper who processes or at least assists in the processing of accounts to franchisees and inquiries from them. A Mr Striha had some sort of corporate representational role for Seal-A-Fridge, apart from Mr Rooney, in the early dealings with Mr Radford. Overall though, the impression I have on the whole of the evidence is that Mr Rooney sighted most correspondence from franchisees. I note particularly that he authored the response which, albeit belatedly, provided an updated disclosure statement to Camabe in February 2007 in response to the request for the same Mr Radford had authored on its behalf the previous month. Inferentially, Mr Rooney was aware of that request and thus that the response was given well after the lapse of 14 days from its receipt. I am satisfied that he was a party to this particular contravention of s 51AD by Seal-A-Fridge, constituted by a failure to comply with s 19 of the Franchising Code.

181               Mr Rooney also signed on behalf of Seal-A-Fridge the deficient disclosure document which was sent to Mr and Mrs Layton in January 2005. He was thus a party to the contravention of s 51AD constituted by a failure to comply with s 10 of the Franchising Code in the ways which I have particularised.

182               As to the updated disclosure document requests made by Mr and Mrs Malishev and Mr and Mrs Layton in October and November 2006, There is no evidence to suggest that they were either misdirected or, even though correctly directed, that the requests were not received. The ACCC pointed to the requests including the salutation, “Dear Nigel”. I did not understand the ACCC to submit that this, in itself, indicated that the correspondence came to Mr Rooney’s attention. Rather, the import of the submission was that the salutation formed part of a factual matrix against which the inference might be drawn that, in the circumstances of this case, it was more likely than not that correspondence so addressed would indeed come to the attention of Mr Rooney. There most certainly could not be any rule of universal application that the use of such salutations carried with it the necessary implication that the correspondence concerned came to the personal attention of that nominated addressee. The larger the organisation and the more apparently routine the correspondence the less the persuasive weight one could give to such a salutation or “for attention” marking for the purpose of drawing an inference as to that item coming to the attention of the particular, nominated addressee. Here, though, there is every indication on the evidence of a very particular intimacy of managerial involvement by Mr Rooney in a small office. There were passing references in the evidence to Mr Rooney spending time in the United States in business activities. Had he given evidence in explanation as to why an inference otherwise open in the particular circumstances ought not to be drawn might have emerged, eg because he was absent from the country over the period concerned and the requests were not drawn to his attention on his return by the office assistant. As it is, an inference is, in my opinion, able to be drawn on the balance of probabilities in all of the circumstances I have mentioned that the requests made by Mr and Mrs Malishev and Mr and Mrs Layton did come to his attention in October and November 2006.

183               So far as Mr and Mrs Malishev’s request is concerned, I am comforted in drawing that inference for the following reasons. In their case, there is evidence that, as proximately as July 2006, Mr Rooney had perceived some sort of threatening alliance between them and other then franchisees, Mr and Mrs Benjamin. Yet further, in 2001, Mr and Mrs Malishev, along with Mr Radford, had been part of a group of franchisees that, for a time, sought to resist the weekly fee increase then demanded. Mr Rooney had, at that stage, particularly sought to ascertain from Mr Radford who were the franchisees involved in that group. To deny Mr and Mrs Malishev an updated disclosure document would be to deny them information as to the present names and contact details of all other franchisees. That, of course, would not prevent their seeking to make contact with such persons but it would make it more difficult. On the whole of the evidence, it would not be out of character for Mr Rooney and hence Seal-A-Fridge to find attraction in not facilitating the making of such contact.

184               For these reasons then I also find that Mr Rooney was a party to the contraventions of s 51AD constituted by the failure to comply with s 19 of the Franchising Code with respect to the requests for an updated disclosure document made by Mr and Mrs Malishev and, as the case may be, Mr and Mrs Layton.

Conclusions

185               The ACCC has succeeded in establishing some but not each of the contraventions of s 51AC which it alleged. It has succeeded in establishing the contraventions of s 51AD which it alleged. In respect of each of the contraventions in respect of which the ACCC has succeeded it has also succeeded in establishing that Mr Rooney was a party to those contraventions.

186               The ACCC proposed particular declaratory and injunctive relief as well as ancillary orders in its amended application. Some of those orders are not, on any view, appropriate now in respect of a contravention which has not been established. As to the proposed orders which remain and particularly in light of the detailed way in which the proposed declaratory relief is presently cast, I consider that the preferable course is not to make orders today but rather to offer the parties an opportunity to consider what changes, if any, ought to be made to the proposed orders having regard to these reasons for judgment. That is not to say that the case is not one for the granting of declaratory or injunctive relief. It plainly is. The case is also one in which I consider Mr Rooney would benefit from compliance training and professional assistance in the development of a complaint handling system in relation to the complaints made by Seal-A-Fridge franchisees. Mr Rooney struck me as an intelligent man who was aware of the Franchising Code but who would benefit from having the burdens and benefits it offers in relation to his entrepreneurial spirit brought home to him in some detail. I am quite sure, in light of my observation of him in conducting his and the company’s case that these proceedings have had a salutary effect in that regard but there is more needed in the public interest.

187               Another reason for not making final orders today is that the parties need to be given an opportunity to make submissions as to costs having regard not only to the belated narrowing of the ACCC’s case but also to the fact that it did not succeed on all issues in that narrowed case.

188               I propose therefore to make directions which will require the ACCC to file and serve on the respondents proposed minutes of orders including orders as to costs and which make provision for a response to those by the respondents. The proceeding will then be listed for the hearing of submissions in respect of proposed orders and for the pronouncement of orders.

Associate:

Dated:         27 May 2010