FEDERAL COURT OF AUSTRALIA

Stones Corner Motors Pty Ltd trading as Keema Automotive Group v Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co [2010] FCA 1465

UPON the usual undertaking as to damages:

THE COURT ORDERS THAT:

1.    Pending the trial of the proceeding the respondent is restrained whether by itself, its servants or agents or otherwise howsoever from giving effect to a purported termination arising out of a letter dated 10 August 2010 by the solicitors for the respondent to the applicant of a dealership agreement between the applicant and the respondent described as the Springwood Suzuki Dealership Agreement as pleaded in the Statement of Claim in the proceeding filed on 7 December 2010.

2.    The costs of and incidental to the application are reserved.

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

The present interlocutory application

1    On 7 December 2010, the applicant Stones Corner Motors Pty Ltd trading as Keema Automotive Group (“Keema”) commenced proceedings against the respondent Mayfairs W’Sale Pty Ltd trading as Suzuki Auto Co (“SAC”) by which Keema seeks as principal final relief an order under s 87 of the Trade Practices Act 1974 (Cth) declaring SAC’s termination of a dealership agreement with Keema for the sale of Suzuki vehicles in the “Springwood primary marketing area (‘PMA’)” (the “Springwood Suzuki Dealership Agreement”) unconscionable and unlawful and an order for damages and/or compensation under ss 82 and 87 of the Trade Practices Act.

2    By way of interlocutory relief, Keema seeks an injunction pending trial restraining SAC from terminating the Springwood Suzuki Dealership Agreement or giving effect to a notice of termination dated 10 August 2010 which purports to effect a termination of the Agreement on 31 December 2010.

3    Keema contends that the termination of the Springwood Suzuki Dealership Agreement occurred in circumstances where SAC purported to rely upon the provisions of a letter dated 8 July 2009 written by the solicitors for SAC to Keema which do not form part of the Agreement; the purported termination is ineffective because SAC by its conduct of accepting the elements of an action plan proposed by Keema bound itself not to terminate the Agreement in reliance upon the contended default arising out of a breach of the provisions set out in the letter dated 8 July 2009; SAC failed to comply with clause 21(2) of the Franchising Code of Conduct (Trade Practices (Industry Codes – Franchising ) Regulations 1998 (Cth) established under the Trade Practices Act); and SAC’s termination of the Agreement in reliance upon Keema’s failure to achieve proportional sales targets described in the letter dated 8 July 2009 constituted unconscionable conduct on the part of SAC in contravention of s 51AC of the Trade Practices Act.

4    SAC resists the interlocutory injunction on the footing that no serious question to be tried is demonstrated in respect of any of the matters contended for by Keema. Secondly, SAC contends that damages is an adequate remedy in any event. Further, the balance of convenience is said to lie in SAC’s favour. More fundamentally perhaps, SAC contends that the Springwood Suzuki Dealership Agreement is an agreement of indefinite length which is susceptible of termination upon reasonable notice and irrespective of any question about whether SAC purported to rely upon proportional sales targets contained in the letter of 8 July 2009, SAC was entitled to bring the Agreement to an end on reasonable notice. SAC says it gave reasonable notice of termination of the Agreement effective 31 December 2010 by giving Keema the letter of 10 August 2010.

5    SAC further says that the question of reasonable notice has to be assessed in all the circumstances and in determining that matter, or the strength of a serious question concerning that matter, regard must be had to the earlier correspondence and in particular the letter of 8 July 2009 by which SAC, through its lawyers, expressed concern about the financial performance of Keema at its Springwood dealership premises and foreshadowed, it contends, the matters which would ultimately inform its decision to terminate the Agreement. It follows, it is said, that Keema has been given a substantial and reasonable period of time to make the necessary commercial adjustments consequent upon the termination of the Agreement.

6    The principles governing the exercise of the discretion are those organising principles set out in the well known observations of Gummow and Hayne JJ at [65] to [72] and Gleeson CJ and Crennan J at [19] in ABC v O’Neill (2006) 227 CLR 57. The question is whether the applicant has made out a prima facie case in the sense of demonstrating a sufficient likelihood of success (a “serious question”) in the interlocutory application to justify the preservation of the status quo pending trial. The sufficiency of the likelihood of success depends, in part, upon the nature of the rights asserted and the practical consequences likely to flow from the orders sought: ABC v O’Neill, Gummow and Hayne JJ at [65] and [70]. The further question is where the balance of convenience lies.

The factual contentions

7    Keema relies upon the affidavit of Mr Ted Van Riel sworn 13 December 2010 and a further affidavit of Mr Van Riel sworn 15 December 2010.

8    The essential facts Mr Van Riel asserts in support of the application are these.

9    Mr Van Riel has been the Chief Executive of Keema since 2002. Keema has operated motor vehicle dealerships in Brisbane for over 50 years. Mr Van Riel’s family owns the Keema businesses. Keema currently operates four motor vehicle dealerships located at Springwood and Mt Gravatt with two dealerships at Cleveland. Keema is also a dealer for Honda, Hyundai, Nissan, Isuzu Ute, Kia and Great Wall motor vehicles. Keema employs 170 people in its dealerships.

10    SAC is an importer and distributor of Suzuki motor vehicles in Queensland and Northern New South Wales. Mr Van Riel’s father was the Chief Executive of Keema in 1975 when he, on behalf of Keema, entered into an oral agreement, by handshake, with Mr Muller the owner of SAC and Mr Carroll an employee of SAC to establish a Suzuki dealership at Springwood .

11    In 2002, Mr Ted Van Riel as CEO entered into an oral agreement with SAC to establish a Suzuki dealership at Cleveland. He also entered into an oral agreement to establish a Suzuki dealership at Mt Gravatt in 2003. Mr Van Riel says that the relationship with SAC has been a longrunning and successful one and no question has arisen of reducing the agreements to writing. Mr Van Riel says that he understands the three Suzuki Dealership Agreements with SAC to contain these material terms: Keema will use its best endeavours to promote and sell Suzuki vehicles and associated products; Keema will service Suzuki vehicles; and SAC will supply Suzuki vehicles to Keema at wholesale prices.

12    Mr Van Riel says that at no time over the past eight years during which he has been Chief Executive has SAC purported to renew or extend the oral agreements and nor has SAC, prior to the letter of 8 July 2009, asserted a right to terminate any one of the dealerships on the ground that Keema has failed to meet sales targets nominated by SAC. Nor has SAC asserted that the Agreements subsist at its will. Mr Van Riel understands that Keema has, under its Agreement with SAC, a nonexclusive right to sell Suzuki motor vehicles in what is described as the Springwood Prime Marketing Area which is defined by reference to 21 suburbs described at para 26 of Mr Van Riel’s first affidavit.

13    Keema has operated its Springwood dealership under the Agreement since 1975. Keema currently sells from its Springwood site Suzuki, Hyundai (from 1999), Isuzu Ute (from 2008) and Great Wall (from September 2009) motor vehicles. The annual gross turnover of the Springwood dealership in the financial year ending 30 June 2010 was $82 million, of which sales of Suzuki motor vehicles contributed $30 million or 36.5%. The Springwood dealership currently employs 77 to 83 people of which 28 to 30 are actively involved in the sale and servicing of Suzuki motor vehicles.

14    Since 2002, SAC has issued all of its dealers with monthly nonmandatory numeric sales targets described by Mr Carroll to Mr Van Riel as “stretch” targets. Mr Van Riel says that SAC has never suggested, prior to 8 July 2009, that serious consequences would follow should the targets not be met by which, presumably, Mr Van Riel means that it was not agreed that achieving numeric sales targets constituted a condition, by variation or otherwise, of the oral agreement made in 1975 concerning the Springwood Agreement or the 2002 and 2003 Agreements concerning Cleveland and Mt Gravatt. In any event, Mr Van Riel says that between January 2007 and September 2007 Keema met or exceeded the target on five occasions and did so in 2008 five times. In 2009 it did so four times. In 2010, Keema, Springwood has met and exceeded its target on five occasions.

15    On 20 May 2009, Mr Van Riel met with Mr Carroll, the General Manager of SAC, to discuss Keema’s sales performance and its desire to commence selling Chinese manufactured vehicles called Great Wall vehicles. On 21 May 2009, Mr Carroll expressed “great concern” about Keema’s sales performance and expressed opposition to Keema’s proposed sale of Great Wall vehicles from the existing dealership sites. That matter was discussed with Mr Muller and Mr Carroll again on 22 June 2009. On 24 June 2009, Mr Muller and Mr Carroll jointly signed a letter to Keema expressing concern about sales performance. They observed that Keema’s contribution to SAC’s total sales was 11.7% at the end of May 2009 reflecting a deterioration from the levels in 2007 and 2008 of 14.1% and 13.3%. Mr Muller and Mr Carroll noted the “significant relationship that Keema and SAC have established” and expressed concern about further deterioration in sales of Suzuki motor vehicles. Mr Muller and Mr Carroll observed: “Testament to our relationship, and unlike that of your other franchisees with lesser tenure, we reluctantly consent to the introduction of another franchise within the sales area, on the explicit understanding and acceptance that your percentage rate of contribution to [SAC’s] result must not fall below the current YTD of 11.7%”. The letter also foreshadowed that SAC would monitor sales over a three month period with a review to be conducted on 8 October 2009 with further review periods to be established with a view to Keema achieving a contribution rate of 14% over an agreed period. They also said: “Should, at this initial review, your percentage fall below the stated 11.7%, this will constitute grounds for immediate withdrawal of the Suzuki franchise”. The letter called for Keema’s “acceptance to this arrangement and commitment to the terms listed herein by Friday June 26, 2009”. The letter was endorsed with a place for Mr Van Riel as CEO to sign and date SAC’s letter under the statement “I accept the above arrangement and commitment”.

16    On 24 June 2009, Mr Van Riel told Mr Carroll that Keema could not accept the sales percentage targets nominated in the letter. Mr Van Riel received an email on 29 June 2009 pressing for acceptance of the letter. Mr Van Riel rang Mr Carroll on 29 June 2009 to say that he was unable to sign the letter; the targets were unachievable; and aspects of the letter contravened the Franchising Code of Conduct. Mr Van Riel deposes to commercial considerations which in his view made the targets unachievable.

17    On 8 July 2009, McInnes Wilson, the lawyers acting for SAC wrote to Keema.

18    By that letter SAC, through its lawyers, said that, so there could be no confusion, the sales targets that SAC requires Keema to achieve between 1 July 2009 and 24 December 2009 were those set out across three stages of review. The first period was 1 July 2009 to 30 September 2009 with a review to be conducted on 8 October 2009. Keema’s contribution to total Suzuki retail sales was required to be a minimum of 11.7% comprised of a minimum contribution of 5.733% from the Springwood dealership; a minimum contribution of 3.393% from the Mt Gravatt dealership; and a minimum contribution of 2.574% from the Cleveland dealership. By clause 7 of the letter, SAC said that if Keema failed to achieve the Springwood requirement and/or the Mt Gravatt requirement and/or the Cleveland requirement then “Suzuki will be entitled to immediately terminate its agreement with Keema regarding the dealership/s that does not achieve its result”. Moreover, by clause 7, SAC said that if the review of 8 October 2009 reveals that Keema’s contribution is below 11.7% Suzuki would be entitled to immediately terminate its agreement with Keema and withdraw the Suzuki franchises from Keema’s dealerships at Mt Gravatt, Springwood and Cleveland.

19    The letter by clause 9 said that if Keema achieved a contribution of 11.7% or higher and it achieved the minimum requirement for each of the three dealerships at the end of Stage 1, Keema would then be obliged to comply with the requirements of Stage 2. Stage 2 consisted of a nine month period commencing on 1 October 2009 and ending on 30 June 2010 with a review to take place in July 2010. Those requirements were the maintenance of an overall minimum contribution of 11.7% with Keema achieving a contribution by 30 June 2010 of a minimum of 13%. The minimum contribution of 13% by that date had to be comprised of minimum contributions from the Springwood, Mt Gravatt and Cleveland dealerships of 6.37%, 3.77% and 2.86% respectively. If Keema failed to achieve the minimum requirement at any one of the dealerships, SAC would be entitled to immediately terminate its agreement in respect of the failing dealership (Stage 2, clause 8) and if Keema failed to achieve the overall minimum contribution of 13% by 30 June 2010, Suzuki would be entitled to immediately terminate its agreement with Keema in relation to all dealerships.

20    By clause 10 (Stage 2) of the letter, Keema was told that if it achieved the overall minimum contribution and the minimum contributions from each dealership, Keema would be “obliged to comply with the Performance Requirement Stage 3”.

21    Stage 3 consisted of a six month period commencing on 1 July 2010 and ending on 24 December 2010 with a review to be undertaken in January 2011. During Stage 3, Keema’s minimum contribution was not to fall below 13% and by 24 December 2010 Keema’s minimum contribution must have risen to a minimum of 14% with minimum contributions from the Springwood, Mt Gravatt and Cleveland dealerships of 6.86%, 4.06% and 3.08% respectively. By clause 8 (Stage 3) if Keema failed to achieve the minimum contribution from any one or more of the dealerships SAC would be entitled to “immediately terminate” its agreement with Keema regarding any one of the failing dealerships and should Keema fail to achieve by 24 December 2010 a minimum contribution of 14% overall, SAC would be entitled to immediately terminate its agreement with Keema in respect of all dealerships.

22    On 21 July 2009, Mr Van Riel told Mr Carroll that he objected to the requirement to achieve the Staged Performance Targets. On 23 July 2009, Mr Van Riel met with Mr Craig, SAC’s Sales and Marketing Director, to discuss the letters of 24 June 2009 and 8 July 2009. Mr Van Riel says that he put to Mr Craig that Keema was “being discriminated against” as “no other dealer has had their key matrix changed unilaterally from market penetration matrix to proportion of Suzuki matrix” and “no other dealer has been told that sales of [demonstration vehicles] will not be allowed in the performance matrix”. Mr Van Riel says that Mr Craig agreed with each proposition. Between 4 August 2009 and 7 October 2009 SAC issued numeric vehicle sales targets to Keema and provided statistical reports of performance compared with the Stage 1 “Performance Requirements” (both monthly and for the period July to September 2009).

23    In approximately September 2009, Keema began selling Great Wall motor vehicles from its Springwood premises. On 29 September 2009, Mr Van Riel with Keema’s lawyers attended a meeting with representatives of SAC to discuss the Staged Performance Targets.

24    On 8 October 2009, SAC’s lawyers wrote to Keema saying that SAC considered Keema to have fulfilled the Stage 1 requirements.

25    Between October 2009 and 5 February 2010, SAC sent Keema monthly reports of Keema’s sales performance compared with the Stage 2 Performance Requirements. On 3 March 2010, 7 April 2010, 13 March 2010 and 7 June 2001 SAC provided performance sales statistics to Keema (and generally expressed disappointment at Keema’s level of sales) for the periods, in sequence, January, February and March 2010, October 2009 to April 2010 and October 2009 to May 2010. Each of these reports compares Keema’s statistical sales performance with the performance requirements SAC required Keema to achieve.

26    On 21 July 2010, SAC’s lawyers wrote to Mr Van Riel (Exhibit 32) putting Keema on notice that it had failed to achieve the Stage 2 proportional targets for the Springwood dealership “and had therefore breached its performance requirements for Stage 2”. The letter called upon Keema to explain why that was so and provide a strategy it proposed to put in place to achieve the performance requirements for Stage 3 in the event that Suzuki elected “not to terminate its agreement with Keema regarding the Springwood dealership”. Exhibit 32 is the letter addressing the Springwood dealership issue. That letter refers to another letter of 21 July 2010 concerning a “show cause” notice in relation to the entire Keema Automotive Group (that is, all dealerships) based on Keema’s failure to achieve a statistical contribution of 13% of sales overall in Stage 2. The invitation to put a strategy plan to SAC concerning Stage 3 was subject to SAC’s asserted entitlement to immediately terminate its agreement(s) with Keema “as a result of Keema’s failure to achieve the Stage 2 performance requirements”.

27    Mr Van Riel then caused a document to be prepared called “Keema Suzuki Springwood Action Plan and Key Considerations JulyDecember 2010”. On 28 July 2010, Mr Van Riel, at the direction of Mr Carroll, met with Mr Paul Dillon and Mr Stephen Craig of SAC to discuss the action plan. Mr Van Riel says that they agreed with and accepted Keema’s action plan. Mr Van Riel’s evidence is that Mr Dillon and Mr Craig agreed with Keema’s proposal to match or undercut other dealers’ prices in order to compete with discount pricing of vehicles on the internet. Mr Dillon requested a copy of the final business plan by email. Mr Van Riel implemented the action plan from 28 July 2010.

28    On 10 August 2010, SAC’s lawyers gave Keema notice of termination of the Springwood Suzuki Dealership Agreement to take effect on 31 December 2010. The termination letter recites the letter of 8 July 2009, the meeting of 29 September 2009, the Springwood show cause letter of 21 July 2010 and Keema’s responsive action plan. The letter says: “As a result of Keema’s failure to achieve the Springwood requirement for Review Period 2, Suzuki hereby provides notice of termination of its agreement with Keema regarding the Keema Suzuki Springwood dealership. Termination shall take effect on 31 December 2010”.

29    The termination of the 1975 oral Springwood Dealership Agreement that had been the foundation of the relationship between SAC and Keema for 35 years operated, on one view of the facts, on the footing that Keema was in breach of a material term of the agreement in failing to satisfy the Stage 2 Performance Requirements for proportional sales from the Springwood dealership site, under that agreement. On that view, SAC’s act of termination is referable to contended breach of a material term on the part of Keema.

30    There is a strong serious question to be tried on Keema’s case that SAC’s imposition of Stage 1, 2 and 3 “Performance Requirements” on the footing that a failure to comply with any one or more of them (disaggregated or aggregated as to the particular dealerships or taken overall) would give rise to a right to immediately terminate any one or more of the oral agreements or all of them, constitutes a unilateral imposition of material terms additional to those contained in each of the oral agreements. It may be that the course of dealings between Keema and SAC was such that the notification by SAC of numeric targets and, later on, proportional sales targets, elevated those matters to implied terms of the oral agreements. Keema disagrees. If SAC purported to terminate the Springwood Dealership Agreement on that basis, a serious question arises for determination at trial and an injunction ought to be ordered pending the determination of that question subject to other discretionary factors.

31    It may be, however, that SAC is otherwise entitled to terminate the Springwood Dealership Agreement effective on 31 December 2010.

32    As to that, SAC says that the question of whether SAC has sought to unilaterally impose terms as to proportional sales performance requirements is in one sense irrelevant because SAC told Keema in clear “Staged” terms as early as 24 June 2009 and in a more formal sense on 8 July 2009 that termination of the Springwood Dealership Agreement was likely should Keema fail to achieve benchmark sales required by SAC (that is, thought necessary in the commercial judgment of SAC) and those matters of statistical benchmarks simply inform the decision SAC is otherwise entitled to make. The benchmarks, properly understood, are simply an explanation to Keema of the reasons for so acting.

33    SAC says that the Springwood Dealership Agreement is an agreement for an indefinite term which cannot be taken to endure indefinitely and may thus be brought to an end on reasonable notice by SAC to Keema. SAC contends that its notice of 10 August 2010 gave Keema four months’ and 21 days’ notice of termination which, it says, is reasonable notice. Further, the notice is to be taken as reasonable having regard to all of the circumstances which necessarily include the earlier letters. Whatever the legal status of the requirements SAC sought to impose upon Keema may be, they are said to operate, in a practical sense, as notice to Keema of SAC’s systemic dissatisfaction with the level of Suzuki sales from each of the dealerships (and overall) with the result that Keema has been on notice for about 18 months of a real possibility of termination of one or more or all of the dealerships, and on notice of termination, in fact, for four months and 21 days.

34    That question necessarily involves the resolution of contested questions of fact. Whether SAC has given reasonable notice of termination having regard to all of the relevant circumstances, the discussions between the participants, the history of the relationship and all other relevant matters raises a serious question to be tried.

35    It seems clear, although the question is in no sense determined in an interlocutory application such as this, that according to settled principle the 1975 oral Springwood Dealership Agreement is subject to an implied term that the Agreement may be brought to an end upon either party giving reasonable notice to the other of termination: Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 per McHugh JA (Priestley JA agreeing and Clarke JA generally agreeing); The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA 1072 per Ryan J.

36    Affidavits have been filed in response to Keema’s application by Mr Muller, Mr Craig and Mr Dillon. Mr Muller says that there are large sections of Mr Van Riel’s affidavit of 13 December 2010 that he rejects. Mr Muller examines in his affidavit each of the principal contentions advanced by Mr Van Riel in support of the present application. It is sufficient for present purposes to observe two things. First, Mr Muller and SAC became and remained concerned throughout the relevant period about the sales performance of Keema both generally and at its various dealership sites and set about taking steps to address that concern. Second, for the purposes of this application, each of the factual contentions upon which Keema relies is contested and put in controversy. As to the commitments said to have been made by Mr Craig and Mr Dillon, Mr Muller says that those men did not have authority to bind SAC and accept the elements of Mr Van Riel’s action plan.

37    As to the action plan, the position on the present evidence in support of the application seems to be this. Mr Craig and Mr Dillon on the evidence of Mr Van Riel accepted the elements (particularly the pricing elements) of the action plan on 28 July 2010 and Mr Van Riel began to implement it. If Mr Craig and Mr Dillon bound SAC in that decision (which Mr Muller denies), SAC altered its position 13 days later on 10 August 2010 when it gave the notice of termination. The arrangements of 28 July 2010 (even if binding) are not said to amount to a contract or a variation of the oral agreement or an estoppel. The change in position may simply mean that SAC was not bound by the arrangement (which on the present interlocutory application seems an unlikely conclusion) or elected to change its attitude to the plan. SAC did not enter into arrangements with Mr Van Riel after the notice of termination.

38    To the extent that SAC relies upon a failure to achieve the proportional sales statistics as the basis for an immediate termination of the Springwood Dealership Agreement on the ground of breach of a material term, there is a serious question to be tried of that question. To the extent that SAC relies upon the letter of 10 August 2010 as the giving of reasonable notice of termination to Keema, there is a serious question to be tried as to that matter.

39    Keema contends that SAC’s conduct involves a contravention of s 51AC(1) of the Trade Practices Act on the footing that the imposition of sales targets was not necessary for the protection of the legitimate interests of SAC; no similar targets were imposed upon other franchisees; the targets severely prejudiced Keema’s commercial position because Keema was “performing well” and the proportional sales targets were not “achievable”. Keema contends that a “clear inference” is open that SAC was not acting in good faith in imposing the targets and then terminating the Springwood Dealership Agreement as SAC elected to only terminate the Springwood Dealership Agreement notwithstanding that Keema failed to achieve the cumulative target for Stage 3 for the period ended 30 June 2010. The inference of bad faith said to arise is that SAC chose to terminate the Springwood Dealership Agreement because Keema had elected to sell Chinesemade “Great Wall” motor vehicles from the Springwood dealership site.

40    To the extent that SAC imposed proportional sales requirements and sought to rely upon them as a basis for termination of the Agreement, Keema contends that the conduct is, in all the circumstances, unconscionable. If SAC contends for a contractual right to vary unilaterally a term or condition of the contract between SAC and Keema, s 51AC(3)(ja) may be engaged. To the extent that SAC adopted protocols in relation to proportional sales requirements which represented a difference of treatment in SAC’s conduct as compared with other franchisees in similar circumstances, s 51AC(3)(f) may be engaged. To the extent that a question of whether a provision of the Franchising Code of Conduct applies to the grounds or events of termination, s 51AC(3)(g) may be engaged and to the extent that a question of whether the conduct of imposing proportional Performance Requirements imposed conditions which were not reasonably necessary for the protection of the legitimate interests of SAC, s 51AC(3)(b) may be engaged.

41    For interlocutory purposes, I do not draw any inference of lack of good faith on the part of SAC or its officers.

42    To the extent that Keema relies upon contended contraventions of s 51AC of the Trade Practices Act, I am satisfied that a serious question arises on the present facts having regard to SAC’s reliance upon Keema’s failure to achieve the stipulated performance targets unilaterally imposed on Keema, as to whether s 51AC(3)(f) or (ja) is engaged.

43    As to the Franchising Code of Conduct, the applicant relies upon clause 21(2) of the Code. Clause 21 is concerned with termination of a franchise agreement by a franchisor for breach on the part of a franchisee. The Springwood Dealership Agreement is a franchise agreement for the purposes of clause 4 of the Code. Clause 21 provides that if a franchisee breaches a franchise agreement and the franchisor proposes to terminate the agreement (and assuming clause 23 of the Code does not apply) SAC must give Keema reasonable notice of the proposed termination for breach; tell Keema what SAC requires to be done to remedy the breach; and allow Keema reasonable time to remedy the breach. A franchisor is not required to allow more than 30 days’ notice so as to satisfy the “reasonable notice” requirement. Keema says that neither the purported show cause notice of 21 July 2010 nor the termination notice of 10 August 2010 complies with clause 21(2). On the footing that SAC has purported to terminate the franchise agreement by the letter of 10 August 2010 in reliance upon a breach of a Performance Requirement, SAC has given more than 30 days’ notice of termination. The contended breach is an irremedial breach of the contended term that Keema was required to achieve a certain benchmark of sales within a defined period, which had passed. I am not satisfied that a serious question to be tried arises in relation to clause 21(2) of the Franchising Code of Conduct.

44    If, on the other hand, SAC contends that it has terminated the franchise agreement in accordance with the Agreement before expiration and without the consent of the franchisee (clause 22(1)) and the franchisee is not in breach (also assuming clause 23 does not apply) SAC must give reasonable written notice of the proposed termination and the reasons for it to Keema. Clause 22 does not contain a provision such as clause 21(3) referring to a notice period of 30 days. Clause 22 may be engaged. There may however be a distinction between a notice which brings an indeterminate agreement to an end upon the giving of reasonable notice and termination “before [a franchise agreement] expires”. The latter phrase in clause 22 may suggest an agreement for a fixed term which may mean that clause 22 is not engaged, and for the purposes of the Franchising Code of Conduct at least, an obligation to give reasonable notice does not arise in respect of an agreement of indeterminate term.

45    The applicant however does not rely upon clause 22.

46    To the extent that SAC simply relies upon the letter of 10 August 2010 (albeit taken contextually with the letters of 8 July 2010 and 21 July 2010) as the provision of reasonable notice rather than effecting a termination for breach, a serious question arises as to whether reasonable notice was given. The affidavits of SAC do not assert that the notice given by the 10 August 2010 letter is reasonable notice as between these parties, in the circumstances of their particular Agreement, in the context of this industry. If the notice is not reasonable notice, a question arises as to whether SAC was thus acting unreasonably in giving the letter of 10 August 2010. If SAC was acting unreasonably in the context of an Agreement which had subsisted for 35 years and was characterised as a “significant relationship” (as Mr Muller and Mr Carroll said in their joint letter of 24 June 2009 by saying “We acknowledge the significant relationship that Keema and Suzuki Auto Co have established” and was one unlike SAC had with “other franchisees with lesser tenure”), it may be that the act of termination without reasonable notice is, in all the circumstances, unconscionable. Although ultimately that question itself turns upon whether reasonable notice was given having regard to all of the relevant circumstances, a failure to give reasonable notice as between these parties, in the circumstances of the facts asserted by Mr Van Riel, taking account of the context of the particular industry in question, may mean that there has also been a contravention of s 51AC of the Trade Practices Act.

47    I accept that there is a serious question as to that matter.

48    The central matter ultimately is this. The real controversy reduces itself to a question of whether SAC has given reasonable notice of termination irrespective of any other question.

49    SAC contends that if reasonable notice was not given, the period of reasonable notice to be given (by extension of the effective date of termination) will take account of the contextual matters consisting of the discussions between the parties and the important letters of 8 July 2009 and 21 July 2010. Ultimately, the additional period of further notice, it is said, is likely to be quite short. It follows that final orders are likely to be limited or alternatively, in the exercise of discretion, no final order would be made of short duration.

50    Secondly, SAC says that Keema can be compensated by damages for the loss it says it will suffer during the period it has been deprived of an additional period of reasonable notice having regard to whatever period might be established at trial (on the assumption that the existing notice is not reasonable).

51    Thirdly, SAC says that it will suffer prejudice and dislocation because it is not able to establish a new relationship with another dealer until these issues are resolved and the Springwood Dealership Agreement with Keema is brought to an end; negotiations with incoming franchisees are made particularly difficult; management time, energy and effort on the part of SAC officers will be consumed and wasted and will be irremedial; and, should an injunction be granted the Court would be required to continue to supervise the relationship between SAC and Keema during the course of the order.

52    As to the adequacy of damages, the annual gross turnover of the Springwood dealership in the financial year ending 2010 was $82 million and 36.5% of that revenue was represented by sales of Suzuki motor vehicles (that is, $30 million). The loss of the Agreement will deprive Keema of sales of Suzuki motor vehicles and the contribution of those sales to profit (having regard to the relevant margins) during the period throughout which reasonable notice has not been given. The dealership employs 77 to 83 people and of those employees 28 to 30 are actively engaged in the Suzuki dealership. Although, in one sense, it may be possible to calculate the number of sales of Suzuki motor vehicles which might be lost to Keema (during the period throughout which reasonable notice has not been given) by reference to average monthly sales, the circumstances concerning sales from month to month may vary and it may not be possible to establish an accurate calculation of the value of lost sales.

53    In addition, the area of the Springwood dealership site dedicated to Suzuki sales is significant and Mr Van Riel says that the result of the loss of the Agreement will be that Keema must give consideration to a sale of the site and contraction to a smaller dealership site. Keema contends that these transitional arrangements may take some time and Keema will suffer dislocation in the disposition of the site by reason of early termination. More fundamentally, Keema contends that if the correct construction, in all the circumstances, of the oral Agreement of 1975 is that it can be brought to an end upon reasonable notice, Keema is entitled to the benefit of its Agreement with its implied term that the Agreement subsist until it is properly brought to an end upon reasonable notice. The oral Agreement subsisting on that footing is not simply a financial instrument which confers upon parties an option to either perform the Agreement according to its express and implied terms or pay damages.

54    Keema contends that it is entitled to an interlocutory order in aid of that final order. I accept that this consideration should be weighed in the balance although the question on an interlocutory application is whether the applicant has made out a sufficient likelihood of a right to a final remedy of the kind contended for and whether an interim order ought to go in aid of that remedy. A further question is whether the applicant, upon a trial of the action, can be compensated in money terms for the amount of the loss or damage it contends it has suffered.

55    I am not satisfied that damages would be an adequate remedy such that the discretion ought to be exercised so as to refuse interlocutory relief.

56    As to the balance of convenience, although the matters raised by SAC concerning the dislocation caused by the dedication of management time, energy and effort is a matter of real concern and so too are the circumstances that SAC may not be in a position to progress discussions with other parties as they may wish, I am not satisfied that the prejudice or dislocation to SAC is such that the discretion ought to be exercised against the granting of interlocutory relief. It seems to me that SAC is in a position to continue to conduct discussions with others concerning the possible appointment of another corporation as a Suzuki dealer in the relevant catchment, as it has already been doing. The measure of the dislocation financially to SAC may simply be that the level of sales achieved by Keema during the period of reasonable notice is less than the level of sales SAC would prefer to see occurring in the catchment. SAC had an expectation that the level of sales in the catchment from the site would reach the proportional level of 14%. The measure of the difference may be 1% or 2% of sales during the period which arguably represents a reasonable period.

57    SAC and Keema have an enduring relationship in relation to Mt Gravatt and Cleveland. In any event, Keema and SAC have worked together at Springwood for 35 years. There is no reason to believe that the Court will be called upon to supervise the day to day working out of an interlocutory order pending trial.

58    The more fundamental proposition put by SAC is that because SAC and Keema have sustained a contractual relationship for 35 years, Keema has had a lengthy period of time to recoup its capital investment in the site made in reliance upon the Springwood Dealership Agreement. Under the notice, Keema will, it is said, have a reasonable period and a reasonable opportunity to bring all arrangements related to the Agreement to an orderly end. It will have a reasonable opportunity to enter into alternative arrangements and to wind up all matters which arise out of the relationship. Keema will be able to conclude all existing commitments. It has obtained the fruits of its extraordinary expenditures or efforts carried out within the scope of the Agreement. As McHugh JA observed at p 448 in Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (supra): “The line between ordinary recurrent expenditure and effort and extraordinary expenditure and effort will not always be easy to draw. But in general it will be determined by what the parties would reasonably have contemplated was extraordinary effort or expenditure”.

59    It is difficult to determine whether SAC’s propositions on this footing are correct. The evidence does not make the position clear. The question of whether the notice period allowed under the letter of 10 August 2010 provides Keema with a reasonable opportunity to conclude all existing commitments or whether Keema has obtained the fruits of any extraordinary expenditure or extraordinary efforts carried out under the Agreement is not, on an interlocutory basis, at all clear. Moreover, the evidence suggests that SAC accepts that the relationship with Keema concerning the Springwood Dealership Agreement (and perhaps more broadly) is a “significant relationship” and one which exhibits particular points of distinction as compared with agreements with other dealers. These matters of recoupment or an opportunity to secure the benefit of any extraordinary expenditures or effort go to the question of whether the notice is reasonable “in all the circumstances” and that matter can only be determined upon final findings of fact.

60    Accordingly, I am satisfied that an interim order pending trial ought to be made upon the usual undertaking as to damages.

Associate:

Dated:    22 December 2010