Case & Legislation Update

Transcription

1 Case & Legislation Update

2 Legislation No new franchise specific legislation Plenty of general legislative changes Competition and Consumer Act 2010 (Cth) Personal Property Securities Act 2009 (Cth) Small Business Commissioner Bill 2011 (SA)

3 Cases - Outline We will cover 4 key cases in detail Some other cases of interest that should be read

4 Cases Body Bronze International Pty Ltd & Ors v Fehcorp Pty Ltd [2011] FSCA July 2011

5 Cases Body Bronze Facts Body Bronze agreed with Fehcorp to lend Fehcorp such amount as fit out costs exceeded $250,000 Body Bronze receives an invoice for some fit out costs totalling $22,207 and passes it onto Fehcorp for payment on the basis that the $250,000 trigger point had not been reached. Fehcorp refuses to pay alleging $250,000 trigger point had been reached Body Bronze serves a breach notice, then terminates franchise agreement

6 Cases Body Bronze Trial Outcome Held Body Bronze wrongfully terminated franchise agreement and was liable to pay damages of $325,851 Body Bronze misled and deceived Fehcorp by representing, without reasonable grounds, that it would make the fit out loan Body Bronze acted unconscionably by refusing to make the fit out loan then terminating the franchise agreement on improper grounds Meneilly & Mitchell personally liable as accessories

7 Cases Body Bronze Appeal Body Bronze, Meneilly & Mitchell appeal to Court of Appeal No attack on breach of contract finding against Body Bronze Appeal limited to findings of misleading & deceptive conduct, unconscionable conduct and accessorial liability

8 Cases Body Bronze Appeal Held on Appeal No misleading & deceptive conduct No unconscionable conduct Therefore no accessorial liability

9 Cases Body Bronze Appeal Mere fact that representations as to future matters do not come to pass does not mean they are misleading or deceptive Body Bronze intended to make loan at time representation was made, but could not make loan due to economic and business factors Body Bronze therefore had reasonable grounds

10 Cases Body Bronze Appeal Unconscionable conduct entails: No regard for conscience Irreconcilable with what is right or reasonable Usually a deliberate or reckless act (not negligent act) A high degree of moral obloquy

11 Cases Body Bronze Appeal A mere breach of contract (even a deliberate breach) does not necessarily amount to unconscionable conduct Decisions can be made to break a contract on commercial grounds (as in this case) but more is needed for that decision to amount to unconscionable conduct Guidance comes from s.51ac(3)

12 Cases Body Bronze Appeal To establish accessorial liability under s.75 an applicant must prove that the individual Intentionally aided, abetted, counselled or procured the company s contravention (which in the case of misleading or deceptive conduct entails knowledge of the representation and its falsity) Had knowledge of the essential facts constituting the representation and knew of its falsity

13 Cases Body Bronze Lessons If you have a good clean breach of contract claim, don t complicate it with a hard to prove statutory claim or an accessorial liability claim Unconscionable conduct is morally reprehensible conduct Be careful of double edge sword flowing from section 4 of Australian Consumer Law (formerly s.51a of TPA)

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

15 Cases Stones Corner Facts Keema had longstanding oral handshake agreement with Suzuki for an indefinite term Suzuki not previously vigilant about dealers meeting sales targets Keema advises Suzuki that it proposes becoming a Great Wall dealer and seeks Suzuki s consent Suzuki raises concerns about level of sales of Suzuki vehicles and requests Keema s commitment to new 3 stage Performance Requirements Keema refuses to agree

16 Cases Stones Corner Facts Suzuki s lawyers assert that if Performance Requirements not met Suzuki has right to immediately terminate the oral agreement Keema starts selling Great Wall vehicles Keema meets first stage Performance Requirements but not second stage Performance Requirements Keema proposes an Action Plan, which it alleged Suzuki accepted Suzuki given 4.5 months notice of termination Keema seeks interlocutory injunction Suzuki from proceeding with termination

17 Cases Stones Corner Issues Was there one or more serious questions to be tried? If so, did the balance of convenience favour the granting of an injunction restraining Suzuki from proceeding with termination

18 Cases Stones Corner Decision Held that there were serious questions to be tried as to: Suzuki s unilateral imposition of Performance Requirements on basis that non compliance would give Suzuki a right of termination of the agreement Whether Suzuki had acted unconscionably (inconsistent conduct and unilateral variations) Whether reasonable notice of termination had been given Whether lack of reasonable notice might amount to unconscionable conduct

19 Cases Stones Corner Decision On evidence available bad faith by Suzuki could not be inferred The balance of convenience favoured the grant of an interlocutory injunction Damages might not provide an adequate remedy Therefore an interlocutory injunction should be granted

20 Cases Stones Corner Lessons Don t allow oral handshake agreements to remain in place. Formalise them when the relationship is rosy Don t link a right to terminate on reasonable notice without cause to some act of the franchisee that might be contested But remember to meet clause 22 of Code requirements Err on the generous side when determining length of reasonable notice

21 Cases SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 1) [2011] FCA September 2011

22 Cases SPAR Facts Interesting counterpoint to Stones Corner case re application for injunction arising from proposed termination of franchise agreement. Cut-price supermarket industry. SPAR wholesale suppliers of groceries the Applicant. MIS (and its officers) operated a SPAR franchised supermarket and were obliged to purchase wholesale groceries from SPAR the Respondents. MIS wanted to take up with Metcash and to operate as IGA store. SPAR sought interlocutory relief seeking to prevent MIS going over to Metcash.

23 Cases SPAR Facts SPAR put entitlement to injunctive relief on three bases: SPAR was entitled to orders preventing MIS from terminating the franchise agreement SPAR was entitled to orders preventing MIS from acquiring its groceries from other than SPAR SPAR was entitled to injunctive relief on the basis of certain competition law claims

24 Cases SPAR Decision The franchise agreement did not confer any express rights of termination on MIS. No entitlement by MIS to terminate unless SPAR had repudiated or breached a condition not suggested that this had occurred. There was nevertheless a serious question to be tried as to whether MIS was entitled to terminate franchise agreement lack of entitlement to terminate was overwhelming. MIS submitted that no injunction should issue for the following reasons: The evidence as to irreparable harm was inadequate. There was no basis to restrain MIS directors, even if there was a basis to restrain MIS.

25 Cases SPAR Decision The Court would not order specific performance. The franchise agreement did not bind MIS to purchase groceries from SPAR once MIS had ceased operating a franchised store. If the injunction were granted, considerable harm would be caused to MIS because it had already taken substantial steps towards implementing the IGA store.

26 Cases SPAR Decision Irreparable harm evidence: Various difficulties would arise for SPAR if franchise agreement was terminated. MIS store was the only cut-price supermarket in the area not supplied by Metcash. Metcash supplied 98% of market vs SPAR s 2%. Metcash had articulated a strategy internally to kill SPAR. Metcash had been contemplating very aggressive tactics to recruit SPAR franchisees. The loss of MIS might make it considerably more difficult for SPAR to find and retain franchisees. Court: switching of sides by MIS would cause harm not compensible by money.

27 Cases SPAR Decision No contractual basis to restrain directors: Court agreed. Court would not order specific performance: Court disagreed. The franchise agreement simply required MIS to keep a store open and buy groceries from SPAR. Observance of these obligations would be unlikely in short term to require much in the way of superintendence. There is no longer a general prohibition against specific performance look at particular circumstances and degree of supervision which would be necessary.

28 Cases SPAR Decision The franchise agreement did not bind MIS to purchase groceries from SPAR once MIS had ceased operating a franchised store: Court disagreed. MIS was not permitted to evade the obligation to purchase groceries from SPAR by breaching its obligation under the franchise agreement to conduct the franchise. It is well established that a contract will not be construed as permitting a party to benefit from its own wrongdoing or by its conduct to deprive the opposing party of the benefit of the contract.

29 Cases SPAR Decision If the injunction were granted, considerable harm would be caused to MIS because it had already taken substantial steps towards implementing the IGA store: Court disagreed. Many of the steps which MIS had taken since it purported to terminate the franchise agreement were of little consequence. Further, those which would constitute a prejudicial change of position (such as ordering and paying for a shipment of groceries from Metcash) were all selfinflicted and that nothing that SPAR had done in any way fostered the notion that MIS could simply walk away from the contract.

30 Cases SPAR Decision Conclusion: The Court accepted that MIS should be restrained from walking away from the franchise agreement and more particularly from acquiring its groceries from anyone but SPAR. Competition Claims: Competition case also argued by SPAR based upon conversation between MIS director and SPAR employee: We approached IGA because we want to be able to protect our store from IGA. IGA has given us a guarantee that if we converted our SPAR store to an IGAbranded [store] then they would not develop the existing Foodworks site. You would know it would really hurt our business if they put a bigger sized new IGA store on the island, we need to protect ourselves and do whatever we need to stop them building it, it is why we need to move to them.

31 Cases SPAR Decision Alleged to be: Anticompetitive exclusionary conduct Metcash would restrict the provision of its goods and services by not opening the larger Foodworks site. Arrangement would substantially lessen competition. Court determined that there was a serious question to be tried despite likely objections to this claim at trial. SPAR was entitled under competition legislation to orders requiring MIS to acquire its groceries from SPAR. The three MIS directors were knowingly involved in the arrangement with Metcash and thus orders were made against them as well.

32 Cases SPAR Decision Costs: Prior to proceedings, SPAR suggested that MIS give undertaking to continue operating as a SPAR store and that SPAR would then urgently commence proceedings on an expedited basis to resolve the issues which existed between the parties. That course would have obviated the need for an interlocutory injunction. In these circumstances and given that the claim against MIS regarding its lack of an entitlement to terminate the franchise agreement was essentially overwhelming, it was unreasonable for MIS not to accept SPAR s proposal. That provided a basis for making a departure from the usual costs order on an urgent interlocutory injunction. Accordingly, MIS was ordered to pay SPAR s costs of and incidental to the application.

33 Cases SPAR Lessons Obviously, if one is to take steps to terminate a franchise agreement, a clear contractual entitlement to do so needs to be identified. Detailed evidence about the various difficulties which will be experienced by the aggrieved party and which will result in irreparable harm is required. Courts are prepared in a franchising context to order specific performance of a franchise agreement despite the fact that it is a franchisee which has purported to walk away from the franchise relationship. Self-inflicted harm carries little weight in the Court s consideration of where the balance of convenience lies.

34 Cases D Arling One Pty Ltd v Eagle Boys Dial-a-Pizza Australia Pty Ltd [2011] NSWSC April 2011

35 Cases D Arling Facts Good example of principles of misleading conduct and fraud in context of termination of franchise agreement. Eagle Boys franchise. Expired lease operating month-to-month. Dispute re compliance led to mediation and agreement to take various steps including to sell First Settlement Agreement. Sales Pack Document prepared to facilitate sale included various info but made specific statements re lease: Lease agreement in place was in 1 st year. Intending purchasers should liaise directly with landlord to confirm info.

36 Cases D Arling Facts Intending purchasers should liaise directly with landlord to confirm info. Sales Pack sent to Eagle Boys. Further disputes arose which led to another mediation and Second Settlement Agreement. Second Settlement Agreement clause referred to responsibility for assignment of the leases to a prospective franchisee. Further acrimony led to Eagle Boys contending that: The representations made by D Arling about the existence and terms of the lease in the Sale Pack and in the Second Settlement Agreement were misleading, deceptive and fraudulent.

37 Cases D Arling Facts The representations amounted to a representation that the option to renew had been validly exercised and that there was in force an existing current lease for a term of three years when in fact there was only a holding over on a month-tomonth tenancy. Asserted reliance on the representations in entering into the Second Settlement Agreement. This provided basis for termination of Franchise Agreement for fraud and setting aside the Second Settlement Agreement. Eagle Boys terminated on this basis (in reliance upon an express contractual right to do so) and refused to be bound by the Second Settlement Agreement.

38 Cases D Arling Decision Useful review of key authorities re misrepresentation and fraud. Misrepresentations re Sales Pack: Consider context. Draft document intended for presentation to 3 rd parties only. Not yet settled. At time sent to EB, EB had no intent to exercise right to purchase rather to assist in sale to 3 rd party. Accordingly, not directed to EB nor intended to be relied upon. D A reasonable grounds believe that lease would be in place and would be no problem with renewal negotiations with landlord. Sales Pack not provided to EB for purpose of mediation leading to Second Settlement Agreement mediation took place 5 months later.

39 Cases D Arling Decision Misrepresentations re Second Settlement Agreement clause re assignment of the leases: This was a general provision as to who should arrange for what to be transferred. Not sufficiently clear and unambiguous to amount to representation that a lease was in force for specific period or with specific rights. No misleading or deceptive conduct. Reliance: Strong doubt as to recollection of EB s GM. No record that importance attached to, or mention made of, relevant part of Sales Pack leading up to second mediation or in Second Settlement Agreement.

40 Cases D Arling Decision Inherently unlikely that GM would have recalled oblique reference to lease in Sales Pack after passage of time and when only seen on computer. If importance had been attached to content of Second Settlement Agreement clause, it might have been reasonably expected that this would be reflected in the Second Settlement Agreement. There was no such reflection. No reliance. Fraud: No fraudulent conduct because no misleading conduct. D A did not know or intend that statements re lease were false in any way. Genuine and well-founded belief that Sales Pack would be accurate in final form. No contractual right for EB to terminate for fraud.

41 Cases D Arling Lessons Context of representations is all important. Termination for fraud very serious and only ever take after comprehensive assessment of legal and factual position. Query whether material matters on which a party relies for the purpose of settling a franchise dispute at mediation should be recorded in the settlement agreement or included as a form of warranty. A detailed analysis of the evidence to support reliance is fundamental prior to proceeding to trial.

42 Other Cases of Interest Broad Spectrum Tanning Pty Ltd & Ors v Bidding Buzz Ltd & Ors [2010] FMCA 932 VIP Home Services (NSW) Pty Ltd v Swan & Anor [2011] SASC 110 ACCC v Allphones Retail Pty Ltd [2011] FCA 338

43 Other Cases of Interest Parker, In the matter of Purcom No 34 Pty Ltd (In Liq) [2010] FCA 263 Australian Maintenance and Cleaning Pty Ltd v AMC Commercial Cleaning (NSW) Pty Ltd [2011] NSWCA 103 Sportsco Pty Ltd v Singh Group Pty Ltd

44 Questions & Comments