Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101 (10 April 2003)

Last Updated: 22 May 2003

NEW SOUTH WALES INDUSTRIAL RELATIONS COMMISSION

CITATION : Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101

FILE NUMBER(S): IRC 1978

HEARING DATE(S): 18/04/2002, 19/04/2002

DECISION DATE: 10/04/2003

PARTIES:

APPELLANT:

Eagle Boys Dial-A-Pizza Australia Pty Ltd

RESPONDENTS:

Mark Clifford

Jeannette Clifford

Ranniso Pty Limited

Elksmooth Pty Limited

Timothy Dixon

JUDGMENT OF: Wright J President Walton J Vice-President Kavanagh J

LEGAL REPRESENTATIVES

APPELLANT:

Mr P Morrison QC and Mr A R Moses of counsel

Nicol Robinson Halletts, Solicitors

(Mr D Jenkins)

RESPONDENTS:

Mr R J Buchanan QC and Mr J E Keesing of counsel

Gells, Solicitors

(Mr P G Gell)

CASES CITED: Caltex Petroleum v Ostanone Pty Limited (unreported, 20 December 1999)

Clifford v Eagle Boys Dial-A-Pizza Australia Pty Ltd [2000] NSWIRComm 30

Commonwealth v Verwayen (1990) 170 CLR 394

Coulton v Holcombe (1986) 162 CLR 1

Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371

Gala v State Bank of New South Wales (No 2) (1998) 84 IR 216

Knowles v Anglican Church Property Trust (No 2) (1999) 95 IR 380

Perrott v XcellNet Australia Ltd (1998) 84 IR 255

Port Macquarie Golf Club Limited v Stead (1996) 64 IR 53

Stevenson v Barham (1977) 136 CLR 190

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387

Westfield Holdings v Adams (2001) 114 IR 241

LEGISLATION CITED: Industrial Arbitration Act 1940 s 88F

Industrial Relations Act 1996 s 106 s 188

JUDGMENT:

INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES

IN COURT SESSION

FULL BENCH

CORAM: WRIGHT J, President

WALTON J, Vice-President

KAVANAGH J

Thursday 10 April 2003

Matter No IRC 1978 of 2000

EAGLE BOYS DIAL-A-PIZZA AUSTRALIA PTY LTD v MARK CLIFFORD AND OTHERS

Application by Eagle Boys Dial-A-Pizza Australia Pty Ltd for leave to appeal and appeal against a decision of Justice Marks given on 14 April 2000 in Matter No IRC 2014 of 1998

JUDGMENT OF THE COURT

[2003] NSWIRComm 101

1 This matter concerns an application for leave to appeal and an appeal by the appellant, Eagle Boys Dial-A-Pizza Australia Pty Ltd, against the judgment delivered, and orders made, by Marks J on 14 April 2000 in proceedings pursuant to s 106 of the Industrial Relations Act 1996: Clifford v Eagle Boys Dial-A-Pizza Australia Pty Ltd [2000] NSWIRComm 30. The judgment dealt with a summons for relief by the first respondent, Mark Clifford and other respondents (Jeannette Clifford, Ranniso Pty Limited, Elksmooth Pty Limited and Timothy Dixon) alleging that franchise agreements between the appellant and the respondents, pursuant to which the respondents conducted two pizza and take-away restaurant businesses, were unfair contracts in terms of the relevant statutory provisions. Variations were sought to the agreements as were consequential monetary orders.

2 To broadly outline the factual background to the proceedings, Mark Clifford with his wife, Jeannette Clifford, operated two pizza stores in the Blue Mountains area - one in Springwood and the other at Winmalee. They sold the Winmalee store in June 1993 and moved to more suitable premises in Springwood where the business prospered. Through their company, the third respondent (Raniso Pty Limited, of which they are the sole directors and shareholders), they entered into a franchise arrangement with the appellant for the Springwood store in May 1994. The first and second respondents had been successfully operating pizza take-away restaurants for some three years prior to becoming involved with the appellant.

3 The initial success of the relationship led to discussions surrounding the potential to open a second franchise store which gave rise to the formation of a further company, Elksmooth Pty Limited (the fourth respondent) which entered into a further franchise arrangement with the appellant to commence trading at another store at Katoomba on 28 May 1995.

4 The relationship soured and proceedings were commenced in the Commission in Court Session pursuant to s 106 of the Industrial Relations Act in early 1998. In July 1998 the respondents took the decision to de-badge the two stores and continue to trade as independent take-away restaurants until February 1999 when they joined another franchise operation.

5 Marks J delivered judgment on 14 April 2000. Having set out the factual background to the proceedings and a brief discussion with how some of the expert accountant's evidence was treated, his Honour identified three issues which were pressed and required determination:

[20] Ultimately the claims made by the applicants against the respondent focussed on three areas. These were:

1. The franchise agreements and documentation were overall unfair when all of the terms and conditions were taken into account.

2. The pricing regime imposed by the respondent on the applicants for the sale of product rendered the franchising agreements unfair.

3. The amount of moneys expended by the respondent and the nature of the amounts so spent by way of advertising within the areas in which the applicants' businesses operated were so inadequate by reference to the levies paid by the applicants to an overall advertising fund as to render the agreements unfair.

Each of these issues were dealt with seriatim.

6 The respondents' claims as to the alleged "overall unfairness" were, for present purposes, summarised by his Honour in the following terms:

[22] In summary the applicants complained that the franchise agreements including all of the supporting documentation were unfair in that they were excessively complex and long, the number of fees charged by and payable to the respondent and the quantum of those fees were excessive, the respondent as franchisor was able to control the price at which the applicants sold their product, the goodwill of the businesses was transferred to the respondent so that the applicants had no benefit and there were restrictions imposed on the activities of the applicants after the termination of the franchise agreements.

7 Having referred to various expert evidence on which these claims were based, Marks J said that he was "not persuaded that any finding of unfairness can attach generally to the nature, extent and quantum of the fees payable by the applicants to the respondent or to the other matters relied upon by the applicants in this regard"; and continued:

Whilst the information set out in both documents is of interest, I am unable to derive any information from either which would allow me to draw any conclusions about whether any relevant unfairness attaches to these franchise agreements by reference either to the contents of the agreements or the quantum of fees charged. The information contained is by necessity of too general a nature and covers such a divergent area that no safe conclusions can be drawn with respect to the particular agreements which are the subject of these proceedings.

8 Finally, as to the alleged "overall unfairness", his Honour noted the respondents' reliance upon the provisions of the agreements which related to "goodwill". However, having regard to the relevant material and submissions, his Honour was "not persuaded that any unfairness attaches to the agreements in the manner alleged by the applicants". No appeal has been brought in relation to these findings.

9 Before considering the second of the identified issues it is important to refer to a passage in his Honour's judgment relating to undertakings proffered by the appellant during the course of proceedings at first instance:

[23] At the commencement of the hearing the respondent through its counsel Mr Goot indicated without making any concession as to unfairness that the respondent would not rely upon or seek to enforce for any purpose or for any circumstances some of the provisions of the franchise agreements particularly those which impacted consequent upon the termination of the agreements and which would have affected the ability of the applicants to continue to trade in the businesses.

10 His Honour then considered the allegations of unfairness said to have arisen on the terms of the appellant's pricing regime. The evidence surrounding this allegation was referred to, and in particular, the differing views as to the appropriate approach to price setting for the products offered, given the particular economic circumstances of the Katoomba and Springwood areas. His Honour's consideration as to this aspect of the proceedings is dealt with in the following extract:

[51] The evidence discloses that the philosophical and fundamental difference of approach to the pricing strategy which was imposed by the respondent on the applicants commenced from about late 1995 when the applicants experienced a down-turn in profitability. However there were other factors which may have impacted upon the profitability of the stores. I have already referred to the state of the local economy in Katoomba about which Mr Clifford complained to Mr Potter. In Springwood the operation was faced with competition in early 1996 with the opening up of Ronnies Pizza and some Chinese restaurants nearby as well as other pizza shops within the region.

[52] Furthermore, the applicants were unable to prove that the variations in the price of product imposed by the respondent on the two operations had any particular adverse impact on profitability. So much was conceded, appropriately, by Mr Keesing during the course of submissions. Part of the difficulty lies in balancing the advantages which Mr Clifford saw in becoming part of a national franchise operation against the disadvantage in what he saw as the imposition of a pricing policy which need not necessarily reflect precise trading circumstances in each of the Springwood and Katoomba areas.

[53] There is no evidence beyond the assertions of Mr Clifford that the pricing policy adopted by the respondent caused any particular quantifiable harm to the two businesses operated by the applicants. The evidence of the accounting experts to which I have previously referred could not quantify any loss suffered by the applicants in this area. There were obvious philosophical differences of approach between the applicants and the respondent. However I am unable, on the state of the evidence, to conclude which of these approaches was correct; perhaps at times both approaches may have been inappropriate for the particular circumstances of each business. But this is a matter of speculation and an unsatisfactory basis upon which to found a finding of unfairness.

[54] Having regard to the philosophical approach of both sides, with particular regard to the content of the communications between them and to their joint inability to pursue mediation, I am unable to conclude that any relevant unfairness exists by reason of the respondent's pricing regime and strategy as it affected the applicants' operations either in the terms of the relevant agreements or in terms of the conduct of the respondent. In reaching this conclusion I have also had regard to the evidence given by the accounting experts to which I have previously referred.

11 The judgment then dealt with the allegations of unfairness surrounding the advertising and marketing aspects of the franchise agreements. The material in this regard included clauses 11.23 - 11.25 of the agreements, which provided certain requirements as to the advertising to be undertaken by the respondents, and clauses 20.6 - 20.8 which dealt with the creation of the appellant's "advertising fund" and the method by which that fund would be administered.

12 His Honour noted that the franchise agreements required the respondents to pay an advertising contribution of six per cent of gross revenue to the advertising fund and to expend one per cent of gross revenue on local advertising. Additionally, one per cent of gross revenue for the Springwood store (later reduced to 0.5 per cent) and 0.5 per cent of gross revenue for the Katoomba store were to be paid as a contribution towards the cost of the appellant operating a "131" network telephone number to enable the easy purchase by telephone of Eagle Boys' products across its network. Reference was then made to a letter dated 22 December 1994, written to all franchisees by the appellant's managing director, Mr Tom Potter, which was of some significance to the outcome of the proceedings. The letter related to the expenditure of monies accrued in the appellant's advertising fund. Specifically, it indicated that in certain franchisee locations, it was "difficult for us to expend the level of funds needed" in order to meet a target that had apparently been set for such expenditure. The terms of the letter are set out in full in his Honour's judgment. It is sufficient to refer to the following part of it:

We are in a position to continue to attempt to spend 4.5% of the current 6% directly into each area on an ongoing basis, yet we wish to alter the current practice and in future attempt to spend the 4.5% in your area within the bounds of our marketing strategies and constraints. As Eagle Boys now has 55 stores we believe that this added flexibility, combined with some consideration from yourselves, will lead to an overall reduction in the cost of our current advertising thereby benefiting all Franchisees.

13 His Honour then refers to correspondence between the parties, or more particularly correspondence in which the first respondent put forward proposals to assist in the expenditure of the 4.5 per cent referred to, for both the Springwood and Katoomba stores, and the consistent rejection of these suggestions by the appellant. His Honour's reasoning as to this aspect of the summons for relief is:

[68] Mr Keesing prepared documentation which reflected moneys expended by the applicants by way of levies paid to the advertisement fund. For Katoomba during the period May 1995 to July 1998 the amount paid as adfund levy was $103,729.60. The amount spent on local advertising during this period was approximately $70,000. For the period during which the Springwood store was a franchisee of the respondent the sum of $185,409.75 was paid as adfund levy. During this period an amount of approximately $55,000 only was spent by way of local advertising. The expenditure in both cases is, of course, exclusive of any more widespread advertising expenditure incurred by the respondent with respect to the totality of its operations.

[69] The applicants' claim was that the manner in which the franchising agreements operated in connection with the payment by the applicants of an advertising levy of 6 percent produced unfairness. Firstly the disparity of the amounts paid by way of advertising levy as against what was directly spent in each of the areas, even allowing for 1.5 percent of the 6 percent being paid on an operations wide basis was ipso facto indicative of unfairness. This was compounded because, as the respondent conceded, there were in reality no other means available to it to effectively expend money by way of advertising in each of the catchment areas. In these circumstances, it was said to be unfair to require the applicants to pay such a large percentage by way of advertising levy. Even that part of the notional 1.5 percent of the 6 percent advertising levy which presumably went to advertising the totality of the operations would have been of a lesser utility to the applicants' operations than would apply to Eagle Boys outlets in areas where other advertising media on a national or more extensive regional basis would be of assistance.

[70] By way of example, profit and loss statements for the respondent's advertising account were produced for the financial years ending 30 June 1996, 1997 and 1998. In the 1997 financial year total revenues exceeded $2.3 million. The cost of production for television advertising and television advertising itself exceeded $600,000. The cost of production of advertising material in print form exceeded $560,000 although the distribution of printed material seems to have exceed in cost $610,000. In general terms there appears to have been expended on advertising by way of television about half the amount spent on print media. Mr Potter asserted that the television advertising material would have had no or little benefit for the applicants.

[71] The respondent sought to justify the lack of expenditure in the applicants' catchment areas on the basis that there was no other avenue available to it to provide worthwhile advertising for the applicants' operations.

[72] I should add that there is no evidence which would enable me to conclude that the applicants suffered any quantifiable financial loss by reason of the failure of the respondent to undertake more intensive advertising in or over any particular media. So much was conceded by Mr Keesing. Accordingly, any loss sustained by the applicants with respect to such unfairness must, in my opinion, be limited by way of compensation to the difference between 4.5 percent of gross revenue paid to the advertising fund and what was actually expended. The resultant amounts calculated by Mr Keesing were $84,023.34 for Springwood and $7,984.92 for Katoomba. Mr Goot did not dispute "the arithmetic concerning the 4.5 percent claim" but did, on behalf of his client dispute the methodology used in connection with the claim.

[73] Mr Goot submitted that firstly there was never an obligation to spend 4.5 percent in any particular area. I have previously set out an extract from the provisions of the franchise agreement. I accept Mr Goot's submission that there is no contractual obligation to spend 4.5 percent in the catchment area in which a franchisee operates. But there is an obligation to consider what moneys can reasonably be expended and in what manner. The respondent did not do so. Also, in my opinion, the disparity between what was expended and an amount which represents 4.5 percent of the gross revenue is so great as to itself indicate unfairness.

[74] The second submission made by Mr Goot in this area was that the suggestion that 4.5 percent would be expended in a franchisee's catchment area was made before the Katoomba documentation was entered into, and accordingly had no application to the Katoomba operation. I reject this submission because firstly, any omission to refer to this aspect in pre contractual negotiations does not preclude a finding of unfairness on the same basis as applied to the Springwood operation and secondly, both Mr Potter and other members of the respondent's organisation and Mr Clifford were at all relevant times aware of the existence and general thrust of the respondent's proposal in this regard during the period whilst the Katoomba operation was in existence; furthermore, the correspondence between the parties applied relevantly to both Springwood and Katoomba.

[75] Finally, Mr Goot pointed to moneys of about $3,600 which were spent "indirectly" during the relevant period. He submitted that the amount of this claim should be discounted by extrapolating a ratio of direct to indirect spending. I reject such a claim because any moneys paid by way of indirect expenditure on advertising would more appropriately come within the 1.5 percent part of the advertising fund levy that was to be spent generally on promoting the respondent's franchisees and operations.

[76] The respondent set for itself the aim of attempting to spend 4.5 percent of the 6 percent advertising levy paid to the advertising fund within each franchisee's area (if reasonably possible). There was no contractual obligation to do so; nevertheless it represents in my view a standard which the respondent ought to attempt to have achieved. The respondent was sensitive to the needs of franchisees and the requirement to achieve some form of balance between what was expended nationally and by way of "branding" and what was expended within each local region.

[77] In determining whether there was any relevant unfairness as contended for by the applicants I accept the approach adopted by the respondent as to what was an appropriate standard; that is 4.5 percent of the 6 percent adfund levy to be expended locally if reasonably possible. The respondent has asserted that it was not reasonably possible to expend 4.5 percent locally in connection with the applicants' businesses. I do not think it is fair in all the circumstances for the respondent to have required the applicants to pay 4.5 percent of gross revenue to the advertising fund. The discrepancy between 4.5 percent and what was actually expended locally is, in my opinion, so great in relative terms as to support a finding of lack of fairness, that is, unfairness.

[78] In reaching this conclusion I also have regard to the totality of the fee structure imposed on the businesses by the respondent, the details of which I have previously set out. Whilst I have not concluded that in the aggregate all of these fees including ongoing fees based on gross sales created any relevant unfairness per se, the payment of 4.5 percent to the advertising fund in circumstances where it was not reasonably possible to expend this amount locally tips the scales in favour of the applicants when looking at the totality of the ongoing fees payable by them to the respondent and what was given in return by the respondent to the two businesses as franchisees.

[79] Accordingly I uphold the applicants' submissions under this head.

14 Consideration was then given to the appropriate consequential orders. His Honour noted that the finding of unfairness was limited to the operation of the appellant's advertising fund. His Honour considered that "the unfairness attaches to the franchise agreements from inception" and moved to consider whether "the franchise agreements should be varied or declared wholly or partly void, and if so from what time". The judgment continued:

[82] In normal circumstances any such declaration should be appropriate only to the finding of unfairness. However in these proceedings the amended summons sought to attack a number of clauses of the franchise agreements, in particular clauses dealing with restraint of trade after termination, restrictions on competition and disposal of the franchise businesses. During the course of the proceedings concessions were made on behalf of the respondent that it would not seek to enforce any of those provisions and some additional provisions for any purposes. In these circumstances, it would seem more appropriate to declare the respective franchise agreements void from inception, preserving however all rights with respect to moneys paid by any party to any other party thereunder save for an order for payment of compensation which should follow from the finding of unfairness which I have made.

15 The payment of compensation was made in terms of the calculations undertaken by counsel for the respondent. Interest on the amounts due was ordered from 1 August 1998, the date on which the franchise agreements between the parties ceased to operate.

16 His Honour's orders were in the following terms:

[87] Consequent upon the finding of unfairness which I have made I make the following orders:

1. The franchise agreements between the respondent and each of the third and fourth applicants and all ancillary documentation are declared void from their commencement, but so as not to affect the payment of moneys already paid by the third and fourth applicants to the respondent.

2. The respondent to pay to the third applicant the sum of $84,023.34 and to the fourth applicant the sum of $7,984.92 together with interest thereon calculated in accordance with the provisions of the Supreme Court Act from 1 August 1998 to date of payment.

3. Costs are reserved.

4. Liberty to apply with respect to costs.

Leave to Appeal

17 Section 188(1) of the Industrial Relations Act provides that an appeal from a member of the Commission may only be made with leave of the Full Bench. Section 188(2) provides that leave will be granted if the Full Bench is of the opinion that the matter is of such importance that, in the public interest, leave should be granted. Section 188(3) provides that the Full Bench may deal with an application for leave to appeal separately and without conducting a hearing into the merits of the appeal.

18 The application for leave to appeal and appeal identified the following matters as the subject of the appeal:

1. Certain aspects of the learned trial judges judgment and consequential orders determining one of the Respondent's claims pursuant to s 106 of the Act, namely those set out below:

2. The findings that unfairness within the meaning of the Act attached to the Franchise Agreement between the Appellant and the Third Respondent (the "Springwood Franchise Agreement") and the franchise agreement between the Appellant and the Fourth Respondent (the "Katoomba Franchise Agreement");

3. The declaration that the Springwood Franchise Agreement and the Katoomba Franchise Agreement were void from inception;

4. The order that the Appellant pay compensation to the Third Respondent of $84,023.34, and to the Fourth Respondent of $7,984.92

19 In summary, the appellant challenged his Honour's finding of unfairness on the basis that his Honour failed to have regard, or give adequate weight to the evidence at first instance. In particular, the appellant contended his Honour had erred by failing to have regard to the fact that the respondents were not subject to any duress, were well advised, were not suffering from some inequality in bargaining power and had not been misled to enter the contract on the basis of some misrepresentation. The respondents were seeking to make a profitable arrangement, more profitable. Senior counsel submitted that the finding of unfairness was not open to his Honour on the evidence.

20 Further, it was contended the unfairness found related to conduct pursuant to the franchise agreements, not due to any term of the agreement. That is, the unfairness related to the "second limb" of unfairness identified in s 106(2). In those circumstances, it was inappropriate for his Honour to have made an order avoiding the agreements ab initio. This had the effect of extinguishing accrued rights held by the appellant, including rendering moot proceedings which had been commenced in the Supreme Court of Queensland, arising out of alleged breaches of contract. His Honour's discretion miscarried as the order made went beyond what was necessary in order to remedy the unfairness found. The orders at first instance ought be set aside and the summons for relief dismissed.

21 The respondents contended that no question of general principle was involved in the appeal. The case below turned on issues of fact, many of which were resolved in favour of the appellant. What was ultimately involved was a "... degree of judgment – in that sense, at least, a classic exercise of discretion": Caltex Petroleum v Ostanone Pty Limited, unreported, 20 December 1999. Leave to appeal ought to be refused.

22 At the conclusion of the first day of the proceedings, having heard the appellant as to both leave to appeal and the appeal, and having heard the respondents on the question of leave, the Full Bench determined that leave would be refused as to all matters raised on appeal which sought to challenge the second of the orders made by his Honour. As a result, the respondents were only called on to make further submissions on those aspects of the appeal which were directed to the first order; the order declaring the franchise agreements void ab initio. It was indicated that reasons would be given in due course as to the refusal of leave.

23 The most frequently cited contemporary authority on the grant of leave to appeal is to be found in Knowles v Anglican Church Property Trust (No 2) (1999) 95 IR 380 at 381 - 382. It is sufficient to observe that to warrant the grant of leave to appeal, the appellant needs to demonstrate that the appeal would involve issues which have significance beyond the inter partes litigation, sufficient to warrant the grant of leave in the public interest. Leave is not lightly granted by the Full Bench: Perrott v XcellNet Australia Ltd (1998) 84 IR 255. Further, the Full Bench of this Court has often stressed the importance of affording significant weight to the decision of the trial judge when approaching findings of fact or the exercise of a discretion: see Port Macquarie Golf Club Limited v Stead (1996) 64 IR 53 at 59, Westfield Holdings v Adams (2001) 114 IR 241 at [73].

24 As to the challenge directed towards the second of the orders made by his Honour, the appellant alleged his Honour had made errors in the findings of fact and had erred in the exercise of his discretion in making monetary orders. The extracts from his Honour's decision, set out above, demonstrate his Honour considered what moneys could be reasonably expended in the respondents' catchment area and in what manner. His Honour found, after a thorough examination of and reference to correspondence between the parties and other materials, that there was unfairness in the way in which the appellant had operated its advertising fund so far as it related to the respondents and found that such conduct rendered the franchise agreements unfair.

25 There was nothing as to that aspect of his Honour's decision to which we were directed that would warrant appellate intervention. We consider that the findings of fact were open to his Honour and accordingly there was no error in the exercise of his Honour's discretion, having regard to the principles as to appeals against discretionary decisions. Certainly the appeal raises in this respect no issue of general importance.

26 However, in respect of the aspects of the appeal challenging the first of the orders made by his Honour, we consider the appeal raises issues of sufficient importance as to warrant the grant of leave to appeal in the public interest: Gala v State Bank of New South Wales (No 2) (1998) 84 IR 216 and Westfield Holdings Limited v Adams. In particular, this matter raises for consideration at appellate level, the appropriate scope of orders affording relief by way of avoidance or variation to a contract as set out in s 106(3) of the Industrial Relations Act.

Appellant's Submissions

27 Mr P Morrison QC, who appeared with Mr A R Moses of counsel for the appellant, contended that his Honour's finding of unfairness related only to one provision in the contract, namely, the expenditure by the appellant of the advertising levy as contained in the contract. The orders of the Court, however, included an order declaring the contract "void ab initio". That order went beyond what was necessary to remedy the unfairness found and amounts to a miscarriage of his Honour's discretion.

28 As to the alleged unfairness, it was submitted there was no suggestion of any misrepresentation, non-disclosure, improper inducement, pressure, inequity of bargaining power, or any indicia previously considered as involving relevant unfairness. There was no evidence that the transaction was unprofitable; indeed, there had been no trading loss and significant profits had been made by both businesses.

29 The Court found the contract unfair, essentially in accordance with the "second limb" of s 106(2); that is, the contract "subsequently became an unfair contract because of ... conduct of the parties". The appellant submitted that in the circumstances consequential orders declaring the agreement void from inception were not appropriate. By declaring the franchise agreements void from inception his Honour effectively extinguished any claim for damages consequent upon the unilateral "de-badging" of the two stores by the franchisee.

30 In particular, by declaring that the agreements were void from inception, his Honour's orders, in effect, nullified proceedings which were on foot in the Supreme Court of Queensland. Senior counsel contended that the appellant should not lose its right to claim compensation for a unilateral breach of an agreement when the right to compensation arises out of clauses which were not challenged before his Honour and to which his Honour attached no finding of unfairness.

31 Whilst the appellant had made a number of undertakings, upon the commencement of the proceedings, not to enforce a number of the terms of the franchise agreements, at no stage did the appellant make concessions which would warrant the avoidance of the entirety of the contracts ab initio. The relief in the form of the first order was inappropriate in the circumstances.

Respondents' Submissions

32 Mr R J Buchanan QC who appeared with Mr J E Keesing of counsel for the respondents, contended that the relief granted by Marks J at first instance was a matter within his Honour's discretion. There has been no error demonstrated in the exercise of his Honour's discretion that would warrant intervention on appeal.

33 Further, it was contended the appellant cannot now complain of the consequences flowing from the contracts being set aside. His Honour was well aware of the Queensland proceedings and was well aware that any order he made may have affected those proceedings. At first instance, the avoidance of the contracts ab initio was a part of the respondents' case throughout the proceedings. If the appellant had a specific submission to make in relation to the effect an order avoiding the contracts would have on the proceedings in Queensland, then the appropriate time to make such a submission was passed over before his Honour.

34 Senior counsel contended that the mere one line reference contained within the appellant's written submissions before Marks J, contending that "the agreement ought not to be avoided, having regard to the rights of the respondent in relation to it", was simply not good enough. The appellant had made a number of concessions as to the future enforcement of the franchise agreements and there was nothing inappropriate in having regard to these concessions in his Honour's determination to set the contracts aside. There is no error warranting intervention on appeal.

Consideration

35 At first instance, Marks J considered the contract as to the alleged unfairness through the terms and/or performance of the contract in the following three areas:

1. whether the terms and conditions of the agreement were generally unfair;

2. whether the contract imposed a pricing regime on products which was unfair; and

3. whether the level of expenditure by the appellant on advertising in the local area was unfair.

No challenge by way of appeal or cross-appeal has been made to this identification of the issues, or his Honour's findings with respect to what may be referred to as "general unfairness" or the "pricing regime".

36 His Honour's findings of unfairness are to be found in the extract of his Honour's decision between paragraphs [73] and [78], set out earlier in these reasons. It would appear his Honour found the franchise agreements unfair because of the continued requirement to contribute monies to the advertising fund, coupled with the failure to expend a sufficient quantum of the advertising fund in the respondents' catchment area and the failure to consider what monies could have reasonably been expended in that area.

37 As such, the appellant would appear to have properly described the findings of unfairness as unfairness under the "second limb" of s 106(2), namely, that the contract "subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason".

38 Having regard to the limited nature of the unfairness found in the franchise agreements, it was, on the appellant's submissions, inappropriate to have avoided the contract in its entirety in that way. We agree.

39 Significant and relevant observations were made by Sheldon J in the seminal decision of Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 in relation to s 88F of the Industrial Arbitration Act 1940, a statutory predecessor to s 106. That is, that once a contract has been found to be unfair, the section acts with "drastic and pervasive effect", it "certainly plays havoc with the classic principles relating to contracts" (at 373). His Honour continued (at 374 - 375):

[T]he fact that the Commission has been given such massive power makes it imperative that it should be exercised with proper restraint. In particular, when issues arise under (a) or (b), it should not permit itself to become a refuge for those who are merely disgruntled with a bargain entered into on even terms. In my opinion, the discretion should be exercised to protect victims of wrong dealing not to prescribe anodynes.

40 The observations of Barwick CJ in Stevenson v Barham (1977) 136 CLR 190, would appear apposite. Having found the language of s 88F "intractable" and that it "must be given effect according to its width and generality", his Honour said at 192:

The legislature has apparently left it to the good sense of the Industrial Commission not to use its extensive discretion to interfere with bargains freely made by a person who was under no constraint or inequality, or whose labour was not being oppressively exploited.

41 When consideration is given to what should guide the Court when exercising its powers, whilst not decisive, it is useful to have regard to the way in which other courts, including courts of equity, have granted various forms of relief, analogous to that available under the Industrial Relations Act. For example, Brennan J said in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 419:

[I]n moulding its decree, the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct.

Deane J in Commonwealth v Verwayen (1990) 170 CLR 394 at 442 said:

There is clear support in the cases and learned writings for the view that, in this as in other fields, equitable relief must be moulded to do justice between the parties and to prevent a doctrine based on good conscience from being made an instrument of injustice or oppression. That being so, it should be accepted that the prima facie entitlement to relief based on the assumed state of affairs must, under a doctrine which is of general application in a system where equity prevails, be qualified if it appears that the relief would exceed what could be justified by the requirements of conscientious conduct and would be unjust to the estopped party.

42 Such observations are appropriate to the application of the power in s 106(3) of the Industrial Relations Act to wholly or partly avoid, or vary, a contract by the making of an appropriate declaration. Just as s 106(5) requires the Court in making a money order to make such order as the justice of the circumstances of the case require, there is no basis to consider that the power for avoidance or variation in s 106(3) is to be exercised on any wider basis; that is, on any basis beyond that required to ensure a just result between the parties having regard to the circumstances before the Court. Although we have found that his Honour had not stepped outside the appropriate bounds of discretion in declaring the franchise arrangements between the parties as unfair, we consider that to have consequentially avoided the contracts ab initio and in their entirety went further than was justified in the circumstances of the case.

43 In making orders providing for the variation of a contract, there can be little doubt that s 106(3) provides to the Court the discretion whether the contract should be declared "wholly or partly void, or varied, either from the commencement of the contract or from some other time". However, as was recently affirmed in relation to monetary orders under s 106(5) in Westfield Holdings v Adams, such a discretion is not at large and must be exercised judicially. Whilst this is plainly a matter which will depend upon all the circumstances, when determining to vary a contract under s 106(3), it would generally be inappropriate to order variations to a contract that travel beyond providing a remedy for the unfairness found - that is, as it were, righting the wrong found in the relevant contract or arrangement. So much was recognised in the decision at first instance.

44 This is particularly so where the contract has been entered into in the absence of misrepresentation, duress or an unequal bargaining situation and with the benefit of legal advice.

45 One feature of these proceedings nevertheless warrants particular attention. That is, the undertakings referred to in paragraph [23] of Marks J's judgment which is set out earlier in paragraph [9] of these reasons. As it is necessary to consider this matter in some detail, it is appropriate to refer to certain parts of the record where this issue was canvassed at first instance.

46 The undertakings referred to initially arose in the proceedings when counsel then appearing for the appellant was seeking to narrow the issues in the proceedings:

Goot: I want some precision. We would like some clarification and precision so that I can get instructions. What I want to deal with is the front end of the claim, if I can describe it that way.

If your Honour goes to the amended summons, you will see that in paragraphs 3 and 4 it is alleged that the franchise agreement or agreements were unfair in certain particulars - particular ways - and there is a list of clauses that are there set out.

Some of those clauses touch upon the situation that was peculiar to Springwood, being a pre-existing store which came into the network and went out as an independent store.

Your Honour should be aware that at no time has the franchisor sought to enforce the rights that it has under the franchise agreement in relation to goodwill and Restraint of Trade and that sort of thing.

His Honour: With respect to either store?

Goot: With respect to either store.

His Honour: Has it foregone any rights?

Goot: I am coming to that. Although in respect of Katoomba, of course that was a different scenario from Springwood. Notwithstanding that difference between Katoomba and Springwood, my instructions are to indicate to the court, as we have previously indicated to the other side, that we will forego any rights under clause 3.1E, 15.8, 31, 32.8, 33.7(i), the restraint deed, which is referred to in clause 7.1 of the amended summons, and the subsequent restraint deed referred to in 7.2 of the summons.

His Honour: That is Springwood and Katoomba?

Goot: That is correct, in relation to both Springwood and Katoomba, that is notwithstanding the factual difference we make no difficulties particulars (sic).

His Honour: I understand.

Goot: Because that reflects the reality of the situation, namely that we have not sought at any time to exercise our rights given under those clauses as to the goodwill of the business as opposed to Eagle Boys goodwill and the like; and we say that now – we have said it earlier – but we say that now, and we say that without making any admissions of course or concessions, that there is anything unfair about the terms of any of those documents; but with a view to reducing the matters that are before your Honour for decision, and hopefully thereby truncating or shortening at least the factual matters or the legal issues that your Honour will have to decide.

His Honour: Except for this, that if there is no admission or concession – and I understand why you would not want to make them – they have still got to be litigated, but in terms of the overall allegations of unfairness.

Goot: Not so. Well, I do not see why that is necessarily the case. If we had said we do not press them, why would anyone seek to have a determination that they were unfair when we have never sought to enforce them. It would be different if we sought to enforce them, or it might be different if we sought to enforce them. It was for those reasons, although I did not need to elaborate on it, that I objected to paragraphs 16 and 17 on the grounds of relevance of Mr Acheson's affidavit sworn today.

...

His Honour: Anyway, presumably if you concede without admissions et cetera that you are not to ... enforce the situation at Katoomba and Springwood that may be an end to the proceedings in Queensland.

Goot: No, that is a different issue. That is loss of bargain litigation and if I have inadvertently misled --

His Honour: What is the basis of the Queensland litigation again?

Goot: That the franchisees and I am not briefed in it but, as I understand it, and we have got the documents, the court documents here, that the franchises had a certain term of years. They ended prematurely, we say, repudiated by the franchisee by unilaterally debadging the stores and trading as I think initially Eagle Pizza Express. The franchisor anticipated the repudiation, terminated the agreement and instituted proceedings in the Queensland Supreme Court essentially for damages for loss of bargain, that is the royalties that would be foregone as a result of that in a situation where we couldn't and didn't retake possession of the store.

His Honour: Presumably any findings of unfairness that I make, if it impacts or leads to a finding avoiding some of the provisions may impact upon that litigation?

Goot: It may.

His Honour: Well, doesn't that leave us in a position where the unfairness which is alleged against your client is based, both of you will correct me if I am wrong, on the pricing policy which presumably had a sort of national approach and wasn’t based on local conditions where, for example, a fierce national or nationally based competition or pricing competition may have impacted overall. So pricing policy, advertising and I remember Mr Keesing's outline and then the high franchise fees. The nature is one thing but you lump them altogether I suppose. I think they are the three big ticket items, aren't they?

Goot: That is my understanding.

Keesing: They are, but with respect to the debadging of the stores that occurs as a consequence of the fact that there is simply no way out of this contract once one is in it.

His Honour: But what is said is: we, that is the respondent says, we will not seek to enforce the restraint of trade. We will allow you to continue to trade in that store and in fact although there is a claim for loss of profits there is no other entitlement to the goodwill as a capital item. And Mr Goot concedes that if there is a finding of unfairness there is a reasonable probability that that will impact upon the Queensland proceedings. So I am trying to look at the whole thing in a pragmatic fashion ...

47 Discussion then ensued about the potential for settlement. One matter should however be referred to. The discussion continued along the lines of the "three big ticket items" as identified by his Honour at which point counsel for the respondent indicated that "the biggest ticket item is Queensland".

48 The issue again arose towards the end of the proceedings in the following way:

His Honour: I will have a look at that but again I do not know how that translates into monetary payment, even if I were to find in favour of your clients. But ranking them in order in terms of my limited understanding of the evidence without having the benefit of anything Mr Goot might have to say to persuade me otherwise, my sympathies extend in the order in which I have mentioned each of the matters.

Keesing: Yes.

His Honour: And whether any of them get over the barrier will of course await my final consideration of the evidence and bearing in mind anything Mr Goot might say and say in reply. But I would be assisted, at least, with the first matter with that additional information.

Keesing: Certainly. We would also say we are entitled to leaving aside any monetary amounts which we are claiming - we would say we are entitled to the other remedies if there is any relevant defence.

His Honour: You mean avoidance?

Keesing: Yes.

His Honour: Your client's primary [position], as I recollect it, was avoidance of the [contracts] ab initio?

Keesing: Yes, or I think it makes little difference if it is ab initio or at the point of debadging.

His Honour: Yes.

Keesing: We still seek that remedy irrespective of any sums --

His Honour: I understand that to be the case.

49 Other references relevant to the Queensland proceedings occurred in final address. Counsel for the respondents was about to make submissions on a difficulty in his case, highlighted by Marks J, relating to the setting aside the franchise agreements in their entirety:

His Honour: But it seems to me that is a difficulty you may have to overcome or may not be able to overcome in terms of the generality claim, third claim.

Keesing: In his second affidavit, being Exhibit 3, principally there Mr Atcheson deals with clause 32.8, which is the goodwill.

His Honour: Yes.

Keesing: Your Honour has heard what my friend has to say about it.

His Honour: They abandon any reliance on that.

Keesing: They abandon it for the purpose of these proceedings.

Goot: Simply without admissions, it was unfair. We forewent any rights in relation to that. We made that clear on the first day.

His Honour: Which presumably would apply to the Queensland case as well.

Goot: No that is a different issue.

His Honour: I do not recollect what the Queensland case is about, but the non-reliance would be for the non-reliance in relation to the agreement including --

Goot: Yes, he has got the goodwill, no question.

50 The last reference to the concessions of the appellant in the transcript of the proceedings below is to be found towards the end of the trial when counsel for the respondents was dealing with the issue whether anything further was to be put by way of written submissions:

Keesing: The only thing that I wish to put some arguments in respect to is at 1.3 and I haven’t addressed that in my written submissions. I just want to say something very briefly about it but I would rather do that in writing.

His Honour: These are concessions made by the respondent which is I understand that which Mr Goot said yesterday extends generally, not only for the purpose of these proceedings but generally.

Goot: To the parties.

Keesing: Then I may not need to say anything. I understood that what was said on the first day that was only for the purposes of this case.

His Honour: No, as I understand what Mr Goot said yesterday: the respondent will not rely anywhere in any proceedings at any time upon the clauses to which the written submissions refer including restraint of trade and the like.

Goot: I did, as far as we are concerned.

His Honour: That is a concession which is made without admissions or any concessions to unfairness but they are just not going to be relied upon.

Goot: That is what I said on day 1.

His Honour: Whether that has an impact on what I understand might be another collateral situation somewhere else I don't know -

Goot: Nor do I. I am not briefed in it. I don't know anything about it.

51 From the transcript references set out, it is plain that counsel for the appellant made significant concessions in the proceedings, albeit without admission as to unfairness. His Honour concluded from the concessions that the appellant had conceded not to (emphasis supplied) "seek to enforce for any purpose or for any circumstances some of the provisions of the franchise agreement". His Honour's declaration to void ab initio the contracts travels beyond that conclusion and has important consequences. His Honour's order to set aside the franchise agreements ab initio has the effect of relieving the parties of all contractual obligations and denying all contractual rights to the parties.

52 The respondents had de-badged their stores after the proceedings in New South Wales had commenced. As a consequence, the proceedings in the Supreme Court in Queensland commenced with the appellant as the plaintiff and the respondents as defendants. Those proceedings had not come to trial at the time this matter was heard. It would appear that, in those proceedings, the appellant alleges the respondents breached terms of the contracts in the de-badging of the stores. It would not appear that the concessions made by the appellant, nor the unfairness found in the contracts by his Honour, necessarily related to the Queensland proceedings - although the precise nature of the proceedings in Queensland was not revealed in these proceedings.

53 The form of his Honour's orders were, no doubt, made having regard to the various concessions made by the appellant in the proceedings at first instance. In closing submissions, which were made by both parties in writing save for some questions asked by his Honour having reviewed the written submissions, the only reference to the potential consequences that would flow to the appellant should the contract be avoided was in the following terms:

The Agreement ought not to be avoided, having regard to the rights of the respondent in relation to it.

54 The appellant contended on the appeal that the issue of the Queensland proceedings had been discussed at length throughout the course of the proceedings and his Honour was well aware his decision may have an affect on those proceedings. Whilst it was conceded that the issue was only addressed in very "terse" manner in the closing submission, Mr Morrison QC asked rhetorically, when one considers the potential effect of avoiding the contracts ab initio, what more could have been said?

55 Mr Buchanan QC for the respondents contended that it was not good enough for the appellant to complain on appeal of a point not taken at first instance: Coulton v Holcombe (1986) 162 CLR 1. The appellant ought be bound by its conduct of the case. Whilst it was true that his Honour was aware of the Queensland proceedings and that any variation to the franchise agreements may have had a bearing on the Queensland proceedings, his Honour was not required to undertake, for himself, any analysis of the franchise agreements to see in what way he should vary the contracts. The respondents sought to have the contracts avoided ab initio and addressed his Honour to that effect. His Honour was aware the effect such an order would have on the proceedings in Queensland and such an order was within his Honour's discretion. The concessions of the appellant did not relieve it of the responsibility of highlighting specifically the potential consequences for their side of the record if his Honour determined to accede to the respondents' claim and avoid the contracts ab initio.

56 Although there may be some force in the contentions made by senior counsel for the respondents having regard to the imprecise assurances given by the appellant's counsel during the trial, we are satisfied that his Honour should have been aware that the Queensland proceedings would be likely to be nullified if the contracts on which they were based were avoided ab initio and thus alive to the appellant's resistance to the contract being dealt with in that way.

57 As earlier noted, his Honour's decision in this respect was in the following terms:

[82] During the course of the proceedings concessions were made on behalf of the respondent that it would not seek to enforce any of those provisions and some additional provisions for any purposes. In these circumstances, it would seem more appropriate to declare the respective franchise agreements void from inception, preserving however all rights with respect to moneys paid by any party to any other party thereunder save for an order for payment of compensation which should follow form the finding of unfairness which I have made.

58 It would appear that his Honour, in light of the numerous concessions made by the appellant at first instance, considered it appropriate to avoid the contract ab initio, despite the fact that "in normal circumstances any such declaration should be appropriate only to the finding of unfairness".

59 In our view, there was nothing in the concessions on behalf of the appellant that would have warranted the observation that the appellant "would not seek to enforce any of those provisions and some additional provisions for any purposes". The observations of counsel for the appellant at first instance were not precisely to that effect.

60 His Honour found unfairness only related to a part of the contract related to marketing. The franchisee contract under consideration regulated many matters between the parties. An order which effectively avoided the entire contract was disproportionate to the finding of unfairness. Orders which affect or extinguish legal rights should be made only to the extent necessary to remedy any relevant unfairness. The effect of his Honour's order was that all future rights arising from the contract were avoided either from the date of his Honour's order or, more likely, from the inception of the contract. We are satisfied that his Honour's discretion miscarried to that extent.

61 There was no basis to avoid the dealings or transactions between the parties any further than, first, what was necessary to ground the monetary orders made by his Honour and, perhaps secondly, to embody the undertakings given by counsel for the appellant in respect of the matters in issue where unfairness etc were alleged in the proceedings or the summons initiating them. We apprehend that his Honour intended that the orders should extend at least to the latter areas as well. The order made by his Honour should be set aside and replaced by an order limited to those two areas.

Costs

62 The question as to the costs of this appeal is not without some difficulty because of the varying degree of success the appellant has had on the issues agitated on appeal. In all the circumstances, having particular regard to the limited measure of success which it has achieved on appeal, the appropriate costs order is that the appellant shall pay 80 percent of the respondents' costs of the appeal.

63 The Court orders:

1. Leave to appeal granted and the appeal upheld to the extent identified in these reasons.

2. Order 1 made by Marks J on 14 April 2000 is set aside.

3. The respondents shall within 14 days file and serve short minutes of order to replace the first order made by Marks J, such order to reflect these reasons for decision.

4. In the event that there is any issue as to the terms of that order:

(a) the appellant shall within seven days of being served with the short minutes of order referred to in Order 3, file and serve short minutes of order and submissions as to the form of orders it proposes;

(b) the respondent shall file any submissions in reply within seven days thereof; and

(c) the Court shall determine the order(s) to be made on the basis of the minutes and submissions filed.

5. The appellant shall pay 80 percent of the respondents' costs of the appeal, which costs may be assessed in default of agreement.

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LAST UPDATED: 10/04/2003