Hungry Jack's v Burger King [1999] NSWSC 1029 (5 November 1999)

Last Updated: 5 November 1999

NEW SOUTH WALES SUPREME COURT

CITATION: Hungry Jack's v Burger King [1999] NSWSC 1029

CURRENT JURISDICTION: Equity Division

Commercial List

FILE NUMBER(S): 50258/1996

HEARING DATE{S): 27/04/99-29/04/99, 03/05/99-07/05/99, 10/05/99-13/05/99, 17/05/99-21/05/99, 01/06/99, 03/06/99, 07/06/99, 10/06/99, 15/06/99-17/06/99, 23/06/99-25/06/99, 28/06/99-30/06/99, 01/07/99, 05/07/99, 06/07/99, 08/07/99, 12/07/99-16/07/99,19/07/99-22/07/99, 26/07/99-30/07/99, 02/08/99-04/08/99, 09/08/99-12/08/99, 16/08/99, 17/08/99, 23/08/99-25/08/99, 13/09/99-16/09/99, 20/09/99-22/09/99.

JUDGMENT DATE: 05/11/1999

PARTIES:

Hungry Jack's Pty Limited - Plaintiff

Burger King Corporation - First Defendant

The Shell Company of Australia Limited - Second Defendant

Burger King Australia Pty Limited - Third Defendant

JUDGMENT OF: Rolfe J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:

Mr T.F. Bathurst QC/Mr N.C. Hutley SC/Mr T.D. Castle - Plaintiff

Mr B.C. Oslington QC/Mr M.R. Ellicott - First and Third Defendants

SOLICITORS:

Mallesons Stephen Jaques - Plaintiff

Corrs Chambers Westgarth - First and Third Defendants

CATCHWORDS:

General Principles Relating to the Construction of a Commercial Contract:

Cehane NV v Bremer Handekgesellschaft mbH [1976] QB 44 at 71, Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109, Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 594 at 556-557 and Hide & Skin Trading Pty Limited v Oceanic Traders Limited (1990) 20 NSWLR 310 applied.

Whether a breach of contract is curable and meaning to be attributed to that word:

Batson v De Carvalho & Ors (1948) 48 SR 417, Tricontinental Corporation Limited v HDFI Limited (1990) 21 NSWLR 689, F.L. Schuler AG v Wickman Machine Tool Sales Limited [1973] UKHL 2; [1974] AC 235 applied.

Dr J.W. Carter "Termination Clauses" Vol 3 Journal of Contract Law (1990-1991) 90 at 95 referred to.

Whether a term or condition of a contract:

Tramways Advertising Pty Limited v Luna Park (NSW) Limited (1938) 38 SR 632, DTR Nominees Pty Limited v Mona Homes Pty Limited & Anor [1978] HCA 12; (1978) 138 CLR 423, Bentsen v Taylor & Sons & Co (No 2) [1893] 2 QB 274, Amann Aviation Pty Limited v Commonwealth of Australia (1990) 22 FCR 527, Hong Kong Fir Shipping Co Limited v Kawasaki Kisen Kaisha Limited [1961] EWCA Civ 7; [1962] 2 QB 26, and Shevill v Builder's Licensing Board (1981) 149 CLR 627 applied.

Whether a fiduciary duty created:

United Dominions Corporation Limited v Brian Pty Limited [1985] HCA 49; (1987) 157 CLR 1 at 12, Australian Breeders Co-operative Society Limited v Jones [1997] FCA 1405; (1997) 26 ACSR 26, Marr v Arabco Traders Limited [1985] NZHC 46; [1987] 1 NZBLC 102,732 at 102,745, Bialla v Mallina (1993) 11 ACSR 785 at 831, Hospital Products Limited v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 72-73, Bristol and West Building Society v Mathews [1998] 1 Ch 1 at 17, Biala Pty Limited v Mallina Holdings Limited & Ors (1993) ACSC 11.785, Dickie v Torbay Pharmacy (1986) Limited [1995] 3 NZLR 429 at 439-440 and Brunninghausen v Glavanics (1999) NSWCA 199 applied.

Consequences of Breach of Fiduciary Duty and Causation:

Beach Petroleum NL v Abbott Tout Russell Kennedy (1997) 26 ACSR 114 noted.

Greater Pacific Investments Pty Limited (In Liquidation) v Australian National Industries Limited & Anor (1996) 39 NSWLR 143 at 154, O'Halloran v R.T. Thomas & Family Pty Limited (1998) 45 NSWLR 262, Environment Agency (formerly National River Authority) v Empress Car Co (Abertillery) Limited [1998] UKHL 5; [1998] 2 WLR 350, Target Holidays Limited v Redferns [1995] UKHL 10; [1996] 1 AC 421, Cansor Enterprises Limited v Broughton & Co (1991) 85 DLR (4th) 129, Maguire & Anor v Makaronis & Anor [1997] HCA 23; (1997) 188 CLR 449, and London Loan and Savings Co v Brickenden (1934) 34 DLR 465 applied.

Term of Contract for Co-operation:

Mackay v Dick (1881) 6 App Cas 251 at 263, Butt v McDonald (1896) 7 QLJ 68 at 70-71, Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited [1979] HCA 51; (1979) 144 CLR 596 and News Corporation Limited v Australian Rugby League [1996] FCA 1256; (1996) 139 ALR 193 noted and applied.

Terms of Contract for Reasonableness and Good Faith:

Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234, Hughes Bros Pty Limited v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91, Alcatel Australia Limited v Scarcella & Ors (1998) 44 NSWLR 349 and Aiton Australia Pty Limited v Transfield Pty Limited (1999) NSWSC 996 noted and followed.

Dispensation with performance of contract:

Peter Turnbull & Co Pty Limited v Mundus Trading Company (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235, Mahoney v Lindsay & Ors (1980) 55 ALJR 118 and Foran & Anor v Wight & Anor [1989] HCA 51; (1989) 168 CLR 385 followed.

Application of Rules in Browne v Dunn:

Browne v Dunn (1894) 6 R 67 and Allied Pastoral Holdings Pty Limited v Commissioner of Taxation [1983] 1 NSWLR 1 applied.

Measure of Damages

Malec v J.C. Hutton Pty Limited [1990] HCA 20; (1990) 169 CLR 638; Tszyu v Fightvision Pty Limited & Anor (1999) NSWCA 323 (13 September 1999), Norris v Blake (No 2) (1997) 41 NSWLR 49 and Sellars v Adelaide Petroleum NL & Ors [1994] HCA 4; (1994) 179 CLR 332 at 355 applied.

Inference where a witness not called:

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, Favre v Arenales & Anor (1992) 27 NSWLR 437, Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336 and Payne v Parker [1976] 1 NSWLR 191 noted and applied.

Mistake and Breach of Fiduciary Duty:

Taylor & Ors v Johnson [1983] HCA 5; (1983) 151 CLR 422, Tutt & Anor v Doyle & Anor (1997) 42 NSWLR 10, Brickenden v London Loan & Saving Co [1934] 3 DLR 465 at 469 and Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 102 ALR 453 applied.

Accessory Liability:

Royal Brunei AIrlines Sdn BHd v Tan [1995] UKPC 4; [1995] 2 AC 378 applied.

Exemplary Damages Not Awarded for Breach of Contract:

McGregor on Damages (16th Edition) (1997) para 442, Halsbury's Laws of Australia (Volume 6) para 110-11060, Butler v Fairclough & Anor [1917] HCA 9; (1917) 23 CLR 78, Gray v Motor Accident Commission [1998] HCA 70; (1999) 73 ALJR 45, Flamingo Park Pty Limited v Dolly Dolly Creation Pty Limited & Ors (1996) 65 ALR 500 at 526 and Wehbe & Anor v Rolando Pty Limited & Ors (1990) NSWSC 384 applied.

ACTS CITED:

DECISION:

Held:-

1. That upon the proper construction of a "one off" agreement the defendant was not, in the circumstances, entitled to terminate it

2. That a breach is capable of cure, generally speaking and in the circumstances of this case, if it can be cured for the future

3. That on the facts, the defendant owed the plaintiff a fiduciary duty, which it breached, in circumstances entitling the plaintiff to equitable compensation

4. That the plaintiff was entitled to damages for breach of contract. Consideration given to the calculation of damages especially for loss of opportunity

That, on the facts, the defendant was liable under the accessory liability principle for the breach of fiduciary duty to the plaintiff of its employee, in which breach it had acted, and that certain contracts could be rescinded on that ground and for mistake

6. Circumstances in which

(a) the need to cross-examine arose, and

(b) the Jones v Dunkel inference would not arise

considered

7. Consideration of implied terms of reasonableness, good faith and co-operation.

JUDGMENT:

6

I N D E X

Page

Introduction 1

The Issues 20

The Relief Sought By HJPL 25

The Agreements 28

(a) The Settlement Agreement 28

(b) The Development Agreement 31

Operational, Financial And Legal Approval 35

The Letters Concerning The Withholding of

Financial Disapproval 39

The Letter Of 27 November 1995 Concerning

Operational Disapproval 42

A Return To The Development Agreement 46

The Dispute Resolution Provision 52

(c) The Service Agreement 55

(d) The Registered User Agreement 58

The Standard Franchise Agreement 58

The International Burger King Restaurant Franchise Agreement 61

The Letter And Notices of 21 March 1996 63

The Notices Of Termination 71

Some Matters Pleaded 73

The Notice Of Termination Dated 8 September 1997 95

The First Issue Of Construction 103

The Construction Of The Termination Clause 102

The Submissions On Construction Issues 117

Conclusions 161

The Shell Case 166

Mr Oslington's Submissions In Relation To The Shell Issue 212

Mr Oslington's Submissions On The Tripartite Test Agreement 223

The Fiduciary Duty 227

The Further Contractual Issues 250

The Withholding Of Financial Approval 277

Withdrawal Of Operational Approval 297

HJPL's Readiness, Willingness And Ability 323

The Evidence Of Mr Cowin 334

Opportunity Loss 344

The Issues On The Computation Of Damages 354

The Failure By HJPL To Call Mr Montgomery 381

Some Other Issues Which I Will Not Consider 383

The Successor Restaurants 383

Notices Of Default Of The Franchise Agreements For 404

Hexham And Maitland

Lack Of Good Faith 408

Conclusions 409

THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

COMMERCIAL LIST

ROLFE J

FRIDAY, 5 NOVEMBER 1999

50258/1996 - HUNGRY JACK'S PTY LIMITED v BURGER KING CORPORATION & ANOR

JUDGMENT

HIS HONOUR:

Introduction

1 The plaintiff, Hungry Jack's Pty Limited, ("HJPL"), for which Mr T.F. Bathurst of Queen's Counsel, Mr N.C. Hutley of Senior Counsel and Mr T.D. Castle of Counsel appeared, is a subsidiary of Competitive Foods Australia Pty Limited, ("CFAL"). Mr John James Cowin is the Chairman and Managing Director of both companies and has had, at all material times, the effective day to day control of them and other companies within the Competitive Foods Group. He was generally referred to in the evidence as "Jack Cowin" or "Jack".

2 He established that Group in about 1969, and various companies within it own and operate some 190 fast food restaurants in Australia trading as "Hungry Jack's" and "Kentucky Fried Chicken", and 128 home delivery pizza units in Queensland, the Northern Territory, Tasmania, New South Wales and Western Australia trading as "Domino's". The Group operates five food manufacturing and processing plants, which sell products within Australia and export them to approximately eighteen countries.

3 The interests in the Group are held as to 55.5 per cent by companies associated with Mr Cowin, 29.6 per cent by three Japanese companies, and 14.9 per cent by a number of Canadian investors. The business interests of HJPL are substantial and, as at 18 November 1996, when the first defendant, Burger King Corporation, ("BKC"), for which Mr B.C. Oslington of Queen's Counsel and Mr M.R. Ellicott of Counsel appeared, served two notices purporting to terminate a Development Agreement entered into between BKC and HJPL on 13 November 1990, HJPL operated 148 restaurants in Australia trading under the name "Hungry Jack's"; third party franchisees owned and operated 18 other restaurants trading under that name to which HJPL provided services; HJPL operated 2 test restaurants at service station sites controlled by the Shell Company of Australia Limited, ("Shell"), under the name "Hungry Jack's"; and HJPL had paid royalties of approximately $20.8m to BKC since 15 November 1990. During the twelve months to December 1997, HJPL paid royalties of approximately $4.48m to BKC. As at 30 June 1997, it employed some 8,900 people in Australia, and its sales for that financial year were in the order of $218m.

4 Mr Oslington and Mr Ellicott also appeared for the third defendant, Burger King Australia Pty Limited, ("BKAL"). There were no discrete issues between it and HJPL. At the commencement of the hearing the proceedings between HJPL and the second defendant, Shell, were settled.

5 In 1969 Mr Cowin became interested in obtaining the franchise for the Burger King System in Australia and New Zealand. BKC, which is an American corporation based in Miami and which has been at all material times a subsidiary of Grand Metropolitan plc, commenced trading in America in 1955. It developed a comprehensive fast food restaurant franchising system, ("the Burger King System" or "the System"), which consists of an overall restaurant format and operating system. The System "dictates a large number of aspects of running a restaurant, including recipes, food preparation, product specification, interior and exterior restaurant appearance, required furniture, fixtures and equipment, required maintenance, trade and product names, cleaning procedures, staff training and uniforms, and method of service".

6 BKC, which is currently the second largest world-wide food hamburger chain after McDonald's, operates restaurants, which it owns, and grants licences or franchises to third parties to operate limited menu restaurants using the System, from which franchisees it derives royalties. By July 1998 there were approximately 8,900 restaurants operating in 53 countries of which some 900 were owned and operated by BKC and the remainder were licensed or franchised BKC outlets. HJPL has been, at all material times, its largest franchisee outside the United States. All BKC franchises are conducted pursuant to franchise agreements which, subject to differences in local law, have essentially the same terms throughout the world. These agreements are designed to ensure that each Burger King outlet offers a substantially uniform menu, conforms to an identifiable restaurant image, and delivers the Burger King System at uniformly high levels of quality, service and cleanliness. It is perceived to be commercially important that customers will identify Burger King restaurants, wherever they may be, as having the characteristics and qualities which BKC requires, and BKC believes that its success is due to its outlets delivering quality, service and cleanliness, ("QSC"), "on the highest level".

7 BKC, to ensure compliance with its standards, employs people to assess the level of adherence by each franchisee to the standards specified in the franchise agreements and its various Operations Manuals.

8 Save in Australia, BKC restaurants trade under the name "Burger King". In Australia that name and "Hungry Jack's", which trade mark BKC owns, are used. All HJPL restaurants trade under the name "Hungry Jack's".

9 Mr Cowin's successful attempt to obtain non-exclusive franchise rights for Burger King operations in Australia is traced in paragraphs 10 to 22 and 24 to 27 of his witness statement of 29 January 1998, which is part of Exhibit Q. As those matters were not in issue, it is sufficient to note that for almost twenty years Selden Pty Limited, ("Selden"), which was also a company essentially controlled by Mr Cowin, and HJPL, which was, in effect, Selden's successor, built up the business in Australia by opening restaurants, initially in Western Australia and South Australia, and thereafter in most other States and Territories. These activities were financed mainly from bank borrowings and cash flow and the rate of development, particularly from 1970 to about 1987, was linked to the annual performance of the existing "Hungry Jack's" restaurants and influenced by general economic conditions.

10 BKC's principal decision-making body is an Executive Committee in Miami. There are three main functional arms. The development arm is responsible for seeking out new development opportunities. The operations arm is responsible for supervising the operations of restaurants and market areas. There is also a finance and legal arm. Because of the potential for conflict between the aspirations of those working for BKC in these various areas, fairly definite demarcation lines are applied.

11 Prior to 1989 or 1990 BKC did not have any real presence in Australia, save through HJPL, and, whilst it required HJPL to adhere to the various agreements into which the parties had entered, it was, generally speaking, content to allow HJPL to develop the businesses as it saw fit and basically conformably with the various contractual obligations. This led to HJPL's becoming, at least to BKC's perception, somewhat autonomous and, apparently as a result of that, to BKC's taking a more active interest in the way in which HJPL was operating. This new activity on BKC's part led, at least to some extent, to further disagreements between the companies, there having been earlier ones which led to agreements being entered into in the 1980's, and, on 13 November 1990, they entered into four agreements, which are central to the present litigation, namely a Settlement Agreement to which was annexed a Franchise Agreement, a Development Agreement, a Service Agreement and a Registered User Agreement. On 12 December 1991 and 26 February 1993 agreements were entered into to amend the Service Agreement.

12 Prior to August 1994, BKC had very limited permanent staff in Australia. On 1 June 1994 BKAL was incorporated and, from August 1994, BKC conducted its operations, to some extent, through BKAL employees. BKAL's initial directors were Mr Blauer, who was based outside Australia, and Mr Horowitz, who was based in Australia, and both of whom worked in the operations' area. From July 1994, BKC increased its presence in Australia by the employment of a specialist development manager, Mr A.P. Power, and 6 specialist operations staff under the direction of Mr Horowitz. There was also a Quality Assurance Manager, Mr Mark Smith, and a Director of Marketing, Mr Marc Gough. The BKAL employees reported to their superiors in the particular functional groups in BKC. Mr David Fitzjohn was the principal BKC employee responsible for development in a region, which took in Australia, and Mr Colt Hothorn, a BKC employee, was responsible to him. Mr Power was, at least initially, responsible for operations in the region, which included Australia. Mr Frank Miolla is and was, at all material times, a lawyer employed by BKC with special interest in, inter alia, Australia. The principal BKC employee concerned with finance was Mr Gooden to whom Mrs Driscoll answered. Mr Fitzjohn and Mr Miolla were Vice-Presidents of BKC based in Miami and the former sat on the Executive Committee. Mr Gooden and Mrs Driscoll worked in Miami and Mr Hothorn was based in London.

13 After the entry into the agreements of 13 December 1990 there were further disputes between the parties over a range of issues. By approximately 1992 BKC was contemplating "buying out" HJPL or arranging for a third party to do so. Consideration was also being given to a joint venture, which would be controlled by BKC. The various issues led to a flood of correspondence and memoranda, most of which seems to have been tendered, raising allegations, counter allegations and responses. There were further attempts to resolve the differences, all of which failed. By the latter part of 1995 it seems to have been accepted that HJPL would not agree to any form of a "buy out" or joint venture, thus leaving the parties in a state of disagreement with no real prospect of a commercial settlement, which is the only effective method by which the situation between them can be resolved. I doubt that my resolution of the particular issues tendered for decision will determine the overall commercial problems between the parties.

14 A particular area of dispute concerns the relationship developed between HJPL, BKC and Shell. This involved several elements after initial discussions between HJPL and Shell, and BKC and Shell. One was the negotiation for and subsequent entry into a tripartite test development agreement, pursuant to which several restaurants would be opened at Shell controlled service station sites to see whether the co-branding of petroleum products and a fast food restaurant would be successful, and also the extent to which the three companies could work together in that venture. Although the agreement was signed in February 1995 and exchanged in March 1995, the parties had been pursuing the arrangements since late 1993 or early 1994. The parties proceeded with the test on the basis that if it was successful they would enter into a long-term relationship for the development of a number of restaurants at Shell sites. Shell suggested there may be as many as 70. HJPL's case was that prior to the entry into that agreement, the parties were working towards the formation of a long-term relationship for the mutual financial benefit of each. It is alleged by HJPL that BKC and Shell, contrary to the spirit and intent of that agreement and the arrangement for the long-term relationship, and thus in breach of a fiduciary duty allegedly owed to HJPL, sought to deal with each other to achieve the same end but to the exclusion of HJPL. The submission was that the evidence established that prior to 1994 Shell had been dealing separately with each of BKC and HJPL because it was interested in introducing fast food restaurants at its service station sites. By March 1994 the parties came together to seek to develop the test agreement and long-term arrangement to which I have referred. Subsequently, and it will be necessary to consider the evidence in detail, Shell advised BKC that it was not prepared to go ahead if HJPL was involved. BKC did not seek to change Shell's attitude on this and, on one view, encouraged it not to proceed with HJPL, whilst pursuing arrangements for Shell to enter into an arrangement with it. BKC did not advise HJPL of its attitude, nor of Shell's, until Mr Fitzjohn wrote to Mr Cowin on 15 May 1995. Although BKC had been aware of Shell's attitude to HJPL for some months prior to May 1995, it not only did not advise HJPL of it, but it allowed HJPL to continue with the test arrangements, with the expense and time that involved, in the knowledge that Shell was stating that it would not participate in a long term dealing with HJPL. When BKC told HJPL of the position in May 1995, the tension between the two was heightened. Thereafter BKC sought to improve its own position in Australia through Shell to the disadvantage of HJPL. On the basis of these submissions HJPL has put that BKC and Shell breached fiduciary duties to it as a consequence of which it is entitled to equitable compensation from BKC.

15 During much of the period when the disputes were flourishing, a senior executive of HJPL, Mr J. Montgomery, who was its Development Manager, was furnishing confidential information to BKC about HJPL's and Mr Cowin's affairs and suggesting steps which BKC might take, which, in Mr Montgomery's opinion, would bring pressure to bear on HJPL and Mr Cowin of a type which would assist BKC in its aims to force HJPL to sell out or enter into some form of a joint venture. Mr Montgomery advised BKC of what he perceived to be commercial weaknesses in HJPL, which BKC could exploit for its own purposes, those purposes being, in essence, to increase BKC's presence in Australia and, if possible, to arrange for some form of "take-over" of HJPL by a "buy out". Mr Montgomery was trusted by Mr Cowin to the knowledge of BKC's officers. The submission was that his furnishing of such information was done, to the knowledge of BKC, without Mr Cowin's authority; that BKC was prepared to, and did, receive and use it to its advantage in dealing with HJPL; and that this was both thoroughly discreditable conduct on the part of Mr Montgomery, and reflected no credit on the BKC's officers willing to receive and act on the information. Those particularly involved were Mr Fitzjohn, Mr Miolla and Mr Power. Each of them had the qualifications and understanding to appreciate, and, I am satisfied, did appreciate, that what Mr Montgomery was doing was commercially and morally wrong. None did anything to stop it, to advise Mr Cowin of Mr Montgomery's activities, or to stop the use of the information by BKC.

16 Mr Montgomery, who, I was informed from the Bar Table without objection, is still employed by HJPL, was not called, although it is difficult to think of any plausible reason he could have offered for his conduct, if it bears the characterisation for which Mr Bathurst contended. It was submitted that the attempted explanations of various officers of BKC, including Messrs Fitzjohn, Miolla and Power, as to why they continued to receive the information, in an effort to excuse what, save for one explanation, they acknowledged, albeit in some instances with the benefit of hindsight, was otherwise highly discreditable conduct on their part, should not be accepted. The explanations included that no use was made of the information; that it was thought it was being planted as a negotiating ploy with authority; and that it was part of "a good cop, bad cop" strategy engineered by Mr Cowin, in an endeavour to obtain a better bargaining position. The other explanation proffered was that Mr Montgomery appreciated that HJPL was experiencing substantial difficulties because of Mr Cowin's lack of management skills and advised BKC of them with a genuine desire that BKC would help to right the situation for the ultimate good of HJPL. The suggestion that Mr Cowin lacked such skills, having regard to the business he had built up, is simply not credible.

17 I am able to state my conclusions about these explanations immediately. Each was, in my opinion, fanciful, and nothing more than ex post facto reasoning in an attempt to justify conduct, which, at a level of basic commercial morality, was unjustifiable to their clear understanding. I am satisfied that those officers of BKC who sought to resort to hindsight appreciated the significance of what they and Mr Montgomery were doing at the time it was occurring. I have no doubt that Mr Montgomery was passing on the information and offering the advice, which he requested the officers of BKC to keep confidential with which requests they complied, for some perceived benefit to BKC and/or himself and not to benefit HJPL, and that the officers of BKC, who received it, were content to do so and use it to advance BKC's position. There were compelling examples of Mr Montgomery's advice being followed, shortly after it was received, by BKC. I do not consider that this was merely coincidental. The receipt by Mr Power from Mr Montgomery of detailed internal financial papers of HJPL and other companies within the Group, to which Mr Power knew that neither he nor Mr Montgomery was not entitled, and, notwithstanding that lack of entitlement, Mr Power's analysis of them and his subsequent recommendations to BKC based on them, showed the length to which BKC was prepared to go to use the material to seek to undermine the position of HJPL. In so far as this finding involves criticism of the commercial conduct of the officers of BKC to whom I have referred, I am totally satisfied that it is justified by the evidence, including their ineffective attempts to explain what they did in any plausible fashion. In so far as the comments are critical of Mr Montgomery, I have taken into account that he was not called by any party and was, therefore, not given the opportunity to make an explanation. However, having full regard to that, I am unable to see how he could have explained what he did in any way which would deflect the criticism which such conduct, in my opinion, deserves. These findings make it necessary to consider the evidence of those BKC officers with great care, particularly in so far as they denied improper motives.

18 The matters to which I have referred were carried out in the context of BKC's wishing to regain control of the Australian market. Therefore, the conclusions to which I have come about the receipt and use of Mr Montgomery's material is supported not only by the adverse views I formed of the attempted explanations, but also by the probabilities. The information furnished by Mr Montgomery was obviously intended to further BKC's end. I have not the slightest doubt that from at least December 1993, when Mr Fitzjohn wrote a lengthy memorandum to the Chief Executive Officer, Mr J. Adamson, BKC embarked on a deliberate strategy to win back that market, which it acknowledged it had lost through its own neglect, and that in pursuance of that aim it pursued a policy of confining, disrupting and thwarting the activities of HJPL to the extent that it was within its interests to do so. A problem for BKC was that it was still very much dependent on HJPL to provide the infrastructure necessary for the continued successful conduct of the business in Australia. The contractual arrangements, into which BKC had entered with HJPL on 13 November 1990, also provided BKC with another difficulty. In so far as BKC officers denied that their objective and that of BKC was to affect HJPL in the manner to which I have referred, I accept Mr Bathurst's submission that I should reject their evidence. In my opinion, BKC considered that its way forward in Australia would be much assisted by restricting HJPL's activities as much as possible.

19 The memorandum of 1993 is instructive in understanding the changing attitude of BKC towards HJPL. It addressed a question, which had previously arisen so far as BKC was concerned, namely that BKC had allowed HJPL to, in effect, control the market in Australia in circumstances where the Burger King mark was subordinated to that of Hungry Jack's. The visit to which Mr Fitzjohn referred in that memorandum was one he made to Sydney in August 1993. The memorandum commenced with the observation that:-

"The idea that Australia is incapable of any BKC activity to drive development and that we have to rely on our franchisee to determine our place in the market is not only incorrect but dangerous. We are at a crossroads and need to make a directional decision. Even a decision to do nothing demands an understanding of our history in the market, our current competitive status, and future opportunities. There are real pro-active alternatives to a laissez-faire approach which merit consideration."

20 Mr Fitzjohn referred to the failure of BKC to express a strategic direction for Australia and New Zealand, and recounted the history of HJPL, noting that from 1973 to 1989 it was "de facto an exclusive territorial franchisee in Australia as BKC made no attempt to insert any others". He continued that HJPL and the Australian market received little attention "from Miami", and that Mr Cowin went his own way and over time acquired certain rights to all BKC's trademarks "due to our failure to supervise his activities, and attend to legal affairs of BKC in Australia".

21 The memorandum dealt with the settlement in 1990 and to the fact that:-

"Unfortunately, BKC failed to enforce its rights under the 1990 settlement agreements and Jack was once again left without supervision or assistance between 1990 and early 1992. Although a variety of trademark and menu issues were resolved in 1993, BKC missed an opportunity to improve its relationship with HJ and reinforced Jack's belief that BKC is not interested in or committed to the Australian market."

22 He referred to Mr Cowin's belief that he had never obtained any support from BKC, and to the fact that his very use of the name "Hungry Jack's" indicated how little support and brand value the System had been able to provide to the Australian market "over the last twenty years". He continued:-

"Under the new Agreement HJ has a non-exclusive right to develop anywhere in Australia except institutional locations. BKC cannot grant an exclusive territory to any other franchisee, and indeed large target areas could arguably violate HJ's rights. However the Agreement is specifically designed to allow BKC to participate in, or even to lead the process of recruiting third party franchisees."

23 Mr Fitzjohn, at p.3, wrote:-

"Since 1990 HJ continued to develop and the process of third party franchisee recruitment has begun, although its current status leaves much to be desired, if BKC's aim is adequate penetration of the Australian market. BKC is currently discussing recruiting guidelines with Jack, but he continues to resist any effort by BKC to approve or participate in the process of assigning target areas or locations to third party franchisees. HJ is `pacing' development and in my judgment deliberately `spreading' franchisees to ensure absolutely no encroachment on its own restaurants.

I sense that in certain areas there is a resentment of Jack Cowin's advantageous position with BKC. BKC has no one to blame but itself in 1990, and thereafter for having ignored the Australian market and largely left the franchisee to its own devices. We continue to pay the penalty for that laissez-faire attitude over twenty years."

Thus, Mr Fitzjohn was pointing out the difficulty in BKC's penetrating the Australian market whilst HJPL retained its contractual rights.

24 Mr Fitzjohn traced the position as it then existed and referred to the absence of any strategy for Australia. He also considered encroachment and, at p.7, under the heading:-

"So - What To Do?",

he set forth various alternatives including avoiding Sydney, which he considered to be a defeatist option; maintaining the status quo; or becoming pro-active, which he considered must be an alternative if either of the next two suggestions could not be achieved. They were:-

"(4) Purchase HJ - this would clearly give us the opportunity to internalise a substantial profit flow. With the business currently netting some nine million Australian dollars. It is clear from the discussions I have had with Jack Cowin that his valuation of the business and the real estate it controls will be substantially in excess of any multiplier we would place on that figure. I do not believe that a purchase of HJ could be a long term strategy, and it would be a buy to sell rather than a buy to hold. ...

(5) Get someone else to buy HJ - clearly this option and (4) above may be interchangeable assuming we would only buy to sell and this option will be more complex although less risky for us.

..."

25 Thus, from December 1993, the idea was being promoted by Mr Fitzjohn that either BKC or another party should buy out HJPL, in the context that the business was obviously financially desirable. The memorandum pointed out that the "business" was one of some worth either to BKC on a "buy to sell" basis, or to a third party. These comments are inconsistent with the later assertions of BKC that Mr Cowin was not running the business in an efficient and appropriate manner. His recommendations included making an open offer to HJPL to purchase and to establish whether terms could be agreed. He thought that given the past history this would be likely to be "a frustrating and prolonged process as actually getting Jack Cowin to commit will be at very least extremely difficult". He also considered providing Coles Myer Limited with further information.

26 The disputes led to numerous meetings, threats to terminate the agreements and several mediations. No settlement or resolution was forthcoming and, having served Notices of Default on 21 March 1996 under the Development and Service Agreements, which were not pursued, BKC, on 18 November 1996, served two Notices, "the Shorter Notice" and "the Longer Notice", each purporting to terminate the Development Agreement. Subsequently, on 12 September 1997, it served a further Notice purporting to terminate the Development Agreement, such Notice being stated to be without prejudice to whatever rights BKC may have pursuant to the November 1996 Notices. The Development Agreement was the one which BKC found the most irksome, as it not only provided for HJPL's continued long-term development of restaurants by itself and through franchisees it introduced, but it also restricted, to a certain extent, BKC's ability to develop in Western Australia, South Australia and Queensland by allowing HJPL to object to restaurants being opened if it took the view that that would lead to "encroachment" on HJPL's restaurants in those States.

27 A critical issue is the validity of these Notices. That is challenged as a matter of construction of the various agreements, in the sense that HJPL did not comply with the contractual requirements entitling it to give the Notices; and on the bases that in so far as HJPL is in breach and the Notices were otherwise valid, BKC is precluded from relying on those breaches because of waiver, estoppel and by the application of the principles of reasonableness and good faith, terms which are said to be implied in the agreement.

The Issues

28 The pleadings were voluminous. I am acquitted from a detailed examination of them by the parties' agreement that the issues fought were covered by them, although it will be necessary to refer to some of them. Therefore, I shall set out those issues. I have referred to a principal issue being whether the various Notices terminated the Development Agreement and to sub-issues arising thereunder. It was not ultimately submitted that if BKC was successful on the termination issue, that the franchise agreements and the Service Agreement were thereby terminated, it being stated by Mr Oslington that an assertion that the Service Agreement had been "frustrated" was not pursued.

29 I find Mr Bathurst's formulation of the issues, which I shall now set out in part, a useful summary of many of the matters raised for determination. I do not, however, propose to decide all of them, but only those necessary to resolve the main areas of dispute.

"Termination of the Development Agreement

(a) The construction issue - namely, whether BKC's attempts to terminate the Development Agreement were invalid because, on the true construction of the Development Agreement, BKC was not entitled to terminate that agreement:

(i) in respect of a breach of clause 2.1;

(ii) alternatively, without giving HJPL a notice to cure under clause 15.2, in respect of a breach of clause 2.1; and

(iii) further, without giving HJPL a notice to cure under clause 15.2 in respect of each of the alleged breaches relied on in the Longer Notice and in the September 1997 notice.

(b) Waiver/election - whether, BKC's attempt to terminate the Development Agreement by the Longer Notice was invalid, because BKC had affirmed the Development Agreement and waived its right to terminate the Development Agreement in respect of each of the breaches relied on in the Longer Notice.

(c) Breach of implied terms - whether, in respect of the Development Agreement:

(i) There were implied terms of the Secured Income type, or that BKC would exercise its contractual powers reasonably or in good faith and for a proper purpose.

(ii) BKC breached those implied terms by reason of its conduct from 1995 onwards, and in particular: the withholding of financial approval, the denial of operational approval, a direction not to submit any further franchise applications, the freeze on the recruitment of third party franchisees, and the notices purporting to terminate the Development Agreement.

(d) Other contractual issues:

(i) Whether, in respect of the Shorter Notice, BKC was not entitled to terminate for breach of clause 2.1 where that breach was caused by BKC's own wrongful conduct.

(ii) Whether, in respect of the Longer Notice, BKC was not entitled to terminate for any of the breaches on the grounds that such breaches were `de minimus'.

(iii) Whether BKC was entitled to require performance by HJPL, of the matters on which it relied in the September 1997 Notice, in circumstances where BKC had repudiated the Development Agreement from November 1996 onwards.

(e) Montgomery - whether, in respect of conduct by Montgomery:

(i) BKC was knowingly involved in a breach of duty owed by Montgomery to HJPL.

(ii) By reason thereof, BKC was disentitled from serving the Short Notice of Termination, withholding financial approval or denying operational approval to HJPL.

(iii) Compensation and loss arising from BKC's conduct referred to in (ii) ought to be determined applying equitable principles.

(iv) Certain waivers and acknowledgments obtained by BKC under extension agreements relating to the successor restaurants should be set aside, by reason of BKC's knowing involvement in Montgomery's breach of duty relating to successor restaurants, or for mistake, or under s.51AA and s.51AC of the Trade Practices Act 1974 (Cth).

Shell

(f) Shell - whether, in relation to the development of co-branded restaurants with Shell:

(i) BKC owed fiduciary duties to HJPL that prevented BKC from taking steps either itself or in conjunction with Shell to exclude HJPL from the development, operation and/or servicing of those restaurants;

(ii) BKC breached those duties; and/or

(iii) BKC engaged in misleading or deceptive conduct towards HJPL.

........

(h) Increased Royalties - whether BKC is entitled to an order that HJPL pay an increased rate of royalties.

(i) Shell Test Sites - whether BKC is entitled to an order that the franchise agreements for West Terrace and Kingsway were validly terminated by it.

Other issues

(j) Hexham and Maitland - whether the notices of default under the Hexham and Maitland franchise agreements are void.

(k) Relief against forfeiture - whether HJPL is entitled to relief against forfeiture of its interest under the Development Agreement.

(l) Clause 7.3 issue - whether HJPL is entitled to an injunction restraining BKC from acting in breach of clause 7.3 of the Development Agreement.

Successor Restaurants

(m) Whether, in respect of the successor restaurants:

(i) BKC must offer HJPL new franchise agreements for each of the Successor restaurants, for a 20 year, or alternatively a 15 year, term.

(ii) Alternatively, the waivers and releases by HJPL in BKC's Extension Agreements ought to be set aside by reason of the involvement of Montgomery; breach of BKC's contractual duty of good faith; mistake and/or unconscionable conduct under s.51AA of the Trade Practices Act.

(iii) Alternatively, HJPL is entitled to renewal of the franchise agreements because it complied, at least in all material respects, with BKC's requirements or would have done so but for BKC's refusal to cooperate.

(iv) Alternatively, BKC is estopped from failing to offer HJPL new franchise agreements for Beak House, Bunbury and Bull Creek.

(v) Alternatively, certain contractual provisions in the franchise agreements relating to the successor stores are unreasonable restraints of trade.

(vi) Alternatively, BKC has engaged in unconscionable conduct with respect to the Successor Stores.

Damages

(n) Heads of Damage - whether HJPL is entitled to damages or equitable compensation, and if so in what amount, for:

(i) loss of opportunity to open new company-owned restaurants;

(ii) loss of opportunity to introduce third party franchisees;

(iii) loss of service royalty at "Hungry Jack's" restaurants at Shell service stations;

(iv) loss arising from the loss of restaurants in Queensland, Western Australia and South Australia in breach of the Development Agreement; and

(v) alternatively in relation to successor stores, loss of profits for the continued operation of those stores for a 15 or 20 year term.

(vi) exemplary damages.

Outstanding Issues

(o) Matters which are not the subject of the present submissions by either HJPL or BKC:

(i) costs

(ii) separate issues arising in the Ivancic proceedings."

"Successor Restaurants" are ones in respect of which the original franchise agreements have expired and HJPL claims an entitlement to further franchise agreements pursuant to options to renew.

The Relief Sought By HJPL

30 By its Seventh Further Amended Summons, ("the Summons"), HJPL sought declarations that in the events which have happened and on the proper construction of the Development Agreement:-

(a) the Shorter Notice served by BKC on 18 November 1996 is void and of no effect;

(b) the Longer Notice served by BKC on 18 November 1996 is void and of no effect; and

(c) the Notice of Termination served by BKC on 12 September 1997 is void and of no effect.

31 HJPL sought injunctive relief restraining BKC from acting on the basis that any of those notices was effective to terminate the Development Agreement.

32 It sought relief related to the Notices served by BKC and their validity, and pursuant to s.87 of the Trade Practices Act. It also sought damages, equitable compensation and ancillary relief.

33 Under the heading "Nature of Dispute", HJPL raised whether the two notices purporting to terminate the Development Agreement and the notices given pursuant to the Service Agreement were effective, and whether BKC is otherwise entitled to terminate the Development Agreement. The dispute was stated as being whether BKC could rely on the breaches on the basis that:-

(a) they did not arise;

(b) they were caused by BKC's prior breach of the Development Agreement;

(c) BKC is estopped from relying upon them;

(d) they have been cured or are immaterial or stale; and

(e) BKC's reliance upon them involves a breach of good faith on its part.

34 Similar issues are raised in relation to the notice dated 12 September 1997.

35 It was also stated that the dispute concerned whether Notices of Default dated 1 October 1997 issued by BKC in relation to the Hexham and Maitland Franchise Agreements were effective, and whether BKC was otherwise entitled to terminate them by reason of those notices.

36 A number of matters of dispute were raised in relation to negotiations between BKC and Shell, and the dispute was also stated as concerning whether:-

(a) BKC was knowingly involved in a breach by Mr Montgomery of a fiduciary duty owed to HJPL;

(b) HJPL is entitled to relief against forfeiture of its rights under the Development and Service Agreements;

(c) BKC failed to comply with clauses 7.1 and 7.3 of the Development Agreement in relation to Burger King Restaurants situated at the locations referred to in Schedule B;

(d) BKC is obliged to execute and/or is estopped from declining to execute further Franchise Agreements for twenty year, or alternatively fifteen year, terms (or such lesser terms as HJPL may agree) in relation to a number of specified Burger King Restaurants by failing to offer HJPL a Franchise Agreement for such periods at the expiry of the additional terms of those Agreements; and

(e) certain clauses contained in the Franchise Agreements between BKC and HJPL specified in Schedule C constitute an unreasonable restraint of trade and are void and of no effect, and whether BKC's seeking to enforce those clauses would contravene ss.51AA and/or 51AC of the Trade Practices Act.

The Agreements

37 Because of the significance of the terms of the agreements, it is desirable to deal with them in some detail.

(a) The Settlement Agreement

38 The Settlement Agreement was entered into between BKC, Selden and HJPL. It recited:-

"A. BKC and its predecessor, The Pillsbury Company, have developed a system, known as the Burger King system, for operating limited menu restaurants known as Burger King restaurants.

B. BKC has granted Selden the right to operate Burger King restaurants under individual franchise agreements at certain locations in Australia and Hungry Jack's is the assignee from Selden of those franchise agreements.

C. A number of differences have arisen between the parties which they have agreed to resolve, and the parties have agreed to continue their relationship, on the terms and conditions of this agreement."

39 There are a number of definitions, one of which is "Matters in Dispute", which are defined as "the differences that have arisen between the parties, brief descriptions of which are set out in Schedule 3". It is desirable to refer to certain other definitions to understand the Matters in Dispute.

40 "Expired Restaurants" are defined as "the Burger King Restaurants operating at the locations set out in Schedule 1"; "Unapproved Restaurant" is defined as meaning "a Burger King Restaurant operating at a location set out in Schedule 4"; and "Unapproved Site" is defined as "a site set out in Schedule 5 at which Selden proposes to construct a Burger King Restaurant".

41 Schedule 3 stated the Matters in Dispute thus:-

"1. Hungry Jack's continued operation of the Expired Restaurants after expiry of the franchise agreements for those restaurants.

2. Hungy Jack's opening of the Unapproved Restaurants without BKC consent.

3. Hungry Jack's commencement of construction of Burger King Restaurants at the Unapproved Sites without BKC approval.

4. BKC's failure to approve the Unapproved Restaurants and the Unapproved Sites.

5. The validity of the 1989 Development and Service Agreements."

42 By clause 2 the parties terminated certain agreements and acknowledged that all Franchise Agreements executed prior to 13 November 1990 were valid and binding notwithstanding the provisions of the Settlement Agreement or the termination of the 1986 Development Agreement.

43 By clause 3 BKC approved each Unapproved Restaurant and the construction of a Burger King Restaurant at each Unapproved Site; and "must approve all other applications for approval of a proposed Burger King Restaurant that Selden has lodged with BKC as at the date of this Agreement".

44 Clause 4 required HJPL, upon execution of the Settlement Agreement, to execute and deliver to BKC a Franchise Agreement for each Expired Restaurant in a certain form, and Franchise Agreements for each Unapproved Restaurant and Unapproved Site and for the Burger King Restaurant operating at Browns Plains, Brisbane.

45 Clause 5 required the entry into the Development and Service Agreements and "an executed Trademark Agreement": the Registered User Agreement.

46 Clauses 6 and 7 recorded respectively the parties' acknowledgment that the 1989 Development and Service Agreements were not binding, and their release of each other from all claims and actions relating to or arising out of the Matters in Dispute.

(b) The Development Agreement

47 The parties to the Development Agreement were BKC and HJPL. The recitals recorded BKC's skill and experience in the development and operation of the Burger King System, and that in Australia such restaurants were known as Hungry Jack's Restaurants; that HJPL recognised the benefits to be derived from being identified with and franchised by BKC to operate in Australia limited menu restaurants utilising the Burger King System and the name and trademark Burger King and such other trademarks as may be authorised by BKC from time to time for use in connection with Burger King Restaurants; that Selden had entered into various agreements with The Pillsbury Company on 1 June 1973 and had since "opened numerous restaurants in Australia under the name Hungry Jack's, each having been separately licensed to Selden under an individual Franchise Agreement and assigned to Hungry Jack's with the consent of BKC"; the assignment by The Pillsbury Company, with the knowledge and consent of Selden, to BKC of various rights; the entry into an agreement on 1 June 1986 whereby BKC and Selden agreed upon a basis for the continued development of Burger King Restaurants in Australia and the termination of that agreement on 30 November 1990; and that:-

"Various difficulties having arisen between BKC and Hungry Jack's and having been resolved by agreement between them, BKC and Hungry Jack's now wish to make further provision for the development of Burger King Restaurants in Australia, to replace the provisions of the agreement of 1 June 1986."

48 Clause 1 dealt with the grant, clause 1.1 stating:-

"Hungry Jack's is hereby granted a non-exclusive right to develop and, subject to the full satisfaction of the terms and conditions of this Agreement, to be franchised to operate Burger King Restaurants in Australia. Specifically excluded from this non-exclusive grant are institutional locations such as but not limited to public buildings, schools, hospitals, airports, factories and military establishments. Hungry Jack's has no rights for development in New Zealand."

49 Clause 2.1, under the heading "Development Schedule", provided that HJPL, or any BKC franchisee introduced by it to BKC, shall develop and open for business in Australia in accordance with the franchise and site approval procedures described in the Development Agreement:-

".. a minimum of four (4) new Burger King Restaurants per annum commencing on 12 November 1990 in the area comprising Western Australia, South Australia and Queensland (`the Development Schedule')."

50 Clause 2.2 made provision for delay arising out of matters beyond the reasonable control of HJPL.

51 Clause 3.1 provided that the term of the agreement was five years commencing on 13 November 1990, and clause 3.2 stated:-

"Upon expiration of that term, provided that Hungry Jack's shall have opened twenty (20) Burger King Restaurants during the previous five (5) years (with a minimum of two (2) restaurants per annum), in the area comprising Western Australia, South Australia and Queensland in accordance with the franchise and site approval procedures described in this Agreement, Hungry Jack's shall have the right to renew this Agreement upon the same terms for a further period of five (5) years, at the expiration of which, subject to the same proviso, Hungry Jack's shall have the right to renew this Agreement upon the same terms for a further period of five (5) years, at the expiration of which, subject to the same proviso, Hungry Jack's shall have the right to renew this Agreement upon the same terms for a further period of five (5) years."

52 It will be apparent that there is a potential tension between clauses 2.1 and 3.2. Clause 2.1 required the development and opening of a minimum of four new restaurants each year in Western Australia, South Australia and Queensland. Clause 3.2, upon which the right of renewal was dependent, required the opening of twenty restaurants during the previous five years, with a minimum of two each year, in the same States. Therefore, arguably, to satisfy clause 2.1 HJPL had to develop and open a minium of four new restaurants each year, but to satisfy clause 3.2, whilst it was necessary for it to open twenty new restaurants in the five year period, it was sufficient if a minimum of two restaurants was opened each year.

53 Clause 4 is headed "Development Procedure". Clause 4.1 stated:-

"4.1 This Agreement does not constitute a franchise for the operation of a Burger King Restaurant but is intended by the parties to set forth the terms and conditions which, if fully satisfied, would entitle Hungry Jack's to individual franchises for each restaurant to be developed under this Agreement. Hungry Jack's must apply for and obtain franchise and site approval from BKC for each restaurant to be established pursuant to this agreement through BKC's standard franchise and site approval procedures, including, without limitation, submitting the then current Multiple Franchise Application, Management Committee Form, Capitalisation Plan and Preliminary Agreement. As a condition to the granting of a Franchise Approval, Hungry Jack's must have, in the sole discretion of BKC, operational, financial and legal approval at the time of application for a franchise. In this Agreement the terms operational, financial and legal mean:

(a) Operational

Hungry Jack's conducts each of its Burger King Restaurants in accordance with the terms and conditions of this Agreement, the applicable Franchise Agreements, and the standards, specifications and procedures specified in the volumes comprising the Manual of Operating Data, as amended, including the maintenance of interior and exterior of the restaurants to reflect an acceptable Burger King image. Hungry Jack's understands that changes in said standards, specifications and procedures may become necessary from time to time. Hungry Jack's agrees to accept, as reasonable, said changes and Hungry Jack's further agrees that it is within the sole discretion of BKC to make such changes.

(b) Financial

Hungry Jack's has performed and is faithfully performing all terms and conditions under each individual Franchise Agreement issued, and is not in default of any money obligations owed by Hungry Jack's to BKC. Hungry Jack's acknowledges and agrees that it is vital to BKC's interests that a franchisee be financially sound to avoid a business failure affecting the reputation and good name of the Burger King marks.

(c) Legal

Hungry Jack's has promptly submitted to BKC all information and documents reasonably requested by BKC prior to and as a basis for the issuance and consummation of individual franchises, has taken additional action requested from time to time and is in compliance with all obligations under all agreements with BKC.

4.2 Failure to meet operational, financial or legal standards shall constitute grounds for refusing to grant or withdrawing a franchise approval and shall not extend, modify or reduce the development requirements of clause 2."

Operational, Financial And Legal Approval

54 A failure to have operational, financial and legal approval does not constitute a breach of clause 4.1, as such approvals are conditions to the obtaining of franchise and site approval from BKC without which HJPL could not develop through individual franchises. However, each of the approvals depends on HJPL's complying with various of its contractual obligations to BKC, so that there can only be disapproval if HJPL is in breach of such obligations. Further, if HJPL is legally precluded from developing, as required by clauses 2.1 and 3.2, it may be in breach of the first and not able to exercise its rights under the second. This point is emphasised by clause 4.2.

55 Much of the evidence was concerned with whether HJPL had met the operational and financial criteria. There was no real suggestion that it had not met the requirements for legal approval, save, perhaps, in so far as that included compliance with all the contractual obligations, which alleged non-compliance was gathered up under the allegation that there was a failure to have operational approval. In relation to the meeting of financial criteria it was not in issue that HJPL had duly paid all money to which BKC became entitled by way of royalties or otherwise. The financial issues raised by BKC centred around HJPL's financial viability and stability, which, notwithstanding its meeting its payment obligations, were thought by BKC, at least in the second half of 1995, to be relevant. This, in turn, was said by BKC to require some consideration of the Group's overall financial position, which involved an examination of certain of the holding companies and the way in which the Group was financed.

56 In relation to operational matters a major area of dispute was the way in which restaurants were operated and maintained and, hence, rated. As I have noted BKC appointed persons to inspect the restaurants to ensure that, in the opinion of the inspectors, they were being run conformably with BKC's specifications. After inspections restaurants were rated as "Superior", "Satisfactory" or "Needs Improvement". Matters, which could lead to a "Needs Improvement" rating, covered all the requirements of BKC, but there was an obligation, if a restaurant was rated as "Needs Improvement", for the particular problems leading to that rating, to be overcome so that the restaurant reached an acceptable rating. These inspections covered matters such as cleanliness, food quality, health requirements, efficiency of service, presentation of the restaurants, staff cleanliness and efficiency, and the existence of defective and mal-functioning equipment. It is necessary, in considering the case, to have regard to the number of restaurants which fell within the "Needs Improvement" category.

57 The reason for this is that in 1994 BKC introduced a worldwide policy known as the "Expansion Policy", which was to be applied in Australia from about October 1994. It provided for operational disapproval if, relevantly for present purposes, more than ten per cent of restaurants were in the "Needs Improvement" category. Mr Oslington submitted that BKC did not have to apply the policy in Australia if it did not wish, but that it could have relied upon the more stringent obligations in the Development Agreement, which it decided not to do. The more stringent requirements were stated as being any failure by HJPL in relation to any one restaurant to conduct it in accordance with each and every BKC requirement. Thus, Mr Oslington's submission ran, even the most apparently minor breach by HJPL in one restaurant would be sufficient to allow BKC to refuse operational approval in its "sole discretion", with the result that until operational approval was restored by the breach's being remedied, development approval would be denied. This type of submission, in part, gave rise to submissions about the implication of terms based on reasonableness and good faith.

58 The restaurants were re-rated by BKC, consistently with the policy of doing so every six months, in February 1995, and, notwithstanding that it was BKC's contention that more than ten per cent were in the "Needs Improvement" category, it decided that it would be unfair to impose the Expansion Policy because HJPL had only been told of it in October 1994. The matter was raised by Mr Horowitz, who was by then BKC's Franchise Manager in Australia and charged with implementing the Expansion Policy, with Mr Green, HJPL's Operations Manager, who told Mr Horowitz that he thought he could bring the "Needs Improvement" restaurants out of that category within eight weeks. Mr Horowitz said he thought that was too ambitious having regard to the state of the restaurants, and suggested that twenty per cent of the "Needs Improvement" restaurants be upgraded out of that category every two months, and that if that were done there would be fewer than ten per cent in the "Needs Improvement" category, when the restaurants were rated in November 1995.

59 By November 1995 HJPL had, according to BKC, "failed dismally" to brings its "Needs Improvement" restaurants into proper operational condition. Some of the restaurants had been upgraded, but others had become "Needs Improvement". It will be necessary to deal with this matter in far more detail. Suffice to say, at the moment, that I am not satisfied that BKC was entitled to operationally disapprove HJPL in November 1995.

The Letters Concerning The Withholding Of Financial Approval

60 On 12 September 1995, Mr Miolla wrote to Mr Cowin stating that he understood from the Finance Department that the Parramatta site package "and any other expansion requests you have pending" were delayed due to the delay in the delivery of HJPL's year end financial statements. The letter continued, as Mr Miolla conceded contrary to the terms of the Development Agreement:-

"As you know, the terms of the Development Agreement prohibit HJPL from expanding unless it submits annual, audited financial statements which show that it is in compliance with our financial requirements for expansion."

61 The letter continued that as Cititogo Pty Limited was not "adequately capitalised, it must also look to the HJPL balance sheet to meet these expansion criteria". Mr Miolla said this was the reason for the delay, and:-

"As you know, we are also awaiting this information as the first step in our joint venture discussions. We will obviously not be meeting this week as we had originally hoped, but I understand that you are planning to attend the convention in Orlando next month and that would be a perfect opportunity for us to get together. ..."

62 On 20 September 1995, Mr Miolla wrote to Mr Cowin in response to some recent letters from him and, relevantly for present purposes, thanked him for the recent pro forma budget and financial statements of HJPL. The letter continued:-

"Those will be useful in connection with the joint venture discussion, although the fiscal 1995 financial statements are the real hard data we need to move forward. This is true with reference to both the joint venture and the pending applications for expansion. As I stated in my earlier letter, we cannot approve any expansion until we have completed a financial review of the actual audited financial statements and you are not authorised under the terms of the Development Agreement to commence construction at any of the proposed sites until we communicate such approval in writing. As we discussed, the Development Agreement (Section 4.1) requires you to follow our standard requirements, which are that such approval will come in the form of the standard Target Reservation Agreement being signed by all Australian and other BKC franchisees. If you acquire any real property interests in the interim, you do so at your own risk."

63 On 11 October 1995, Mr Cowin sent a facsimile transmission to Mr Miolla stating, inter alia:-

"I have attached the financial numbers which you requested and are presented in the same manner as provided last December. You will note that both the FCC and D/E ratios requirements are met by the HJPL entity. Please confirm that you are now satisfied with regard to your financial requests re approval process and we don't require the approval on a conditional exception basis."

After dealing with certain other financial matters, Mr Cowin ended:-

"I look forward to trying to reach some form of resolution as to how we can work out an ongoing development system that enables us to progress matters in a commercial manner."

64 On 18 October 1995, Mr Miolla replied. He said he had met with Mr Gooden and Mrs Driscoll to "go over" the supplementary information sent on 11 October 1995, and that BKC continued to have "a hard time understanding the financial information due to the limited nature of the balance sheet and the absence of a profit and loss statement".

65 He continued that whilst the discussion "was generally encouraging" there were three major areas of concern to which he referred in some detail, and that he believed he could have the Finance Department approve the sites at Myaree, Hurstville and Bolivar "on an exception basis shortly after receiving the consolidated, detailed P&L statement discussed in paragraph 1 above", and:-

"If you can have John Butler fax a copy directly to me I will attempt to obtain the final Finance Department approval within 48 hours and then send you the Target Reservation Agreements for the three sites. You will be authorised to proceed after you sign and return the Target Reservation Agreements and the standard US Dollar 5,000/site deposit will be due at that time.

We will not be able to grant any further expansion approvals unless we can get the information necessary to deal with the issues set forth in paragraphs 2 and 3 above."

It was not in issue that no general financial approval was granted thereafter.

The Letter of 27 November 1995 Concerning Operational Disapproval

66 On 27 November 1995, Mr Roy Blauer, a Vice-President of BKC in charge of operational issues in Australia, wrote to Mr Cowin. By then the time to renew the Development Agreement had passed. It had not been renewed and BKC took no point about this. The parties carried on as if that Agreement remained on foot. The letter referred to the Development Agreement, and to BKC's worldwide Expansion Policy. In relation to that policy it stated that the "Operational Expansion Criteria" had been delivered to HJPL at the commencement of 1995. After quoting clause 4.1(a), the letter stated that pursuant to its terms BKC had the authority to refuse to approve any expansion by HJPL, if HJPL failed to comply with the terms "of a single Franchise Agreement". It continued:-

"Notwithstanding this requirement, BKC has, without waiving its right to impose this standard in the future, agreed at this time to treat HJPL consistent with the less restrictive provisions of the Expansion Policy."

The letter referred to that policy and to the discussions between Mr Horowitz and Mr Green, including Mr Green's original request for less than a month to complete the Franchise Action Plan, "but at the urging of Terry Horowitz the Plan was increased to a total of more than eight months, ending on November 15, 1995". In fact no Franchise Action Plan had been provided to HJPL.

67 The letter continued:-

"When the Franchise Action Plan was initiated, there were approximately 36 HJPL restaurants in the Needs Improvement category. At the end of the Franchise Action Plan, there were still a total of 31 restaurants in the Needs Improvement category. A summary of the major issues at those 31 restaurants is enclosed.

Pursuant to the Expansion Policy, a franchisee may not expand if it has more than 10% of its restaurants in the Needs Improvement category. HJPL has more than 20% of its restaurants in the Needs Improvement category and is, therefore, in violation of both the Expansion Policy and the more restrictive provisions of Section 4.1(a) of the Development Agreement. Unfortunately, this means that at this time HJPL is not approved for any further expansion.

Specifically, BKC will not grant any additional `Franchise' or `Site' approvals as defined in Sections 4 and 5 of the Development Agreement, and you are in default under Section 15.1(b) of the Development Agreement.

Although Section 15.2 of the Development Agreement gives you only 30 days to cure this breach, BKC is willing to meet with you and discuss a mutually agreed plan to remedy this situation over a longer period of time if you are also interested in such a solution. Malcolm and Terry have already begun discussions on this subject. Any failure by BKC to act after this 30 days does not, however, constitute a waiver of any default or HJPL obligation under the Development or Franchise Agreements."

The letter concluded:-

"Jack, I believe that BKC has acted in good faith and substantially relaxed the requirements of the Development Agreement in order to work with HJPL in order to improve operations. There is, however, no question that there is an issue which needs to be resolved and I hope that the two companies can work together in the near future to reposition HJPL so that it can continue to expand within the Burger King system."

68 There are a number of points to be made about this letter. Firstly, as I have noted, BKC had not furnished a Franchise Action Plan, which was a standard form document of BKC, to HJPL. Secondly, the letter stated that a mutually acceptable solution may be found, and adopted the attitude that HJPL may continue to expand, which is inconsistent with a view that the arrangements between the parties were at a stage where they might require consideration to be given to termination. Thirdly, Mr Blauer appears to have exercised BKC's "sole discretion" on the basis that HJPL had 31 restaurants, which represented more than 20 per cent in the Needs Improvement category, and by virtue of that operational approval was denied. There was a substantial issue of fact, to which I shall have to refer in more detail, whether 31 restaurants were in that category. At the moment it is sufficient to note that Mr Blauer was not called, Mr Oslington stating that although a witness statement of his had been served and he was available, a deliberate decision had been taken not to do so. The significance of this, in the submission of Mr Bathurst, was that there was no evidence from Mr Blauer as to how he would have exercised his discretion if, for example, less than 31 restaurants were in that category. He submitted that one could not infer that Mr Blauer would, in those circumstances and having regard to the long relationship between BKC and HJPL, have exercised his discretion adversely to HJPL. He also pointed to the more conciliatory passages in the letter as tending to negate such a result. He further questioned the significance, so far as Mr Blauer was concerned, of 31 or 20 per cent of the restaurants being, according to Mr Blauer, in the Needs Improvement category, and submitted that by not calling him, BKC had failed to provide any adequate reason for refusing operational approval.

69 Mr Oslington relied on certain admissions by Mr Green that HJPL had more than 10 per cent of restaurants in the Needs Improvement category, and that it had otherwise failed to meet the agreement reached with Mr Horowitz. These admissions no doubt provided evidence of those facts. But HJPL's submission was that the refusal of operational approval, particularly in the circumstances of this case, was not based on an objectively ascertainable contractual requirement, which could be proved by an admission. It was dependent on the exercise of "sole discretion" and unless the person, who exercised the discretion, was called to prove that even if the factual position posited for its exercise was not proved none-the-less some lesser element of breach would have led to the discretion being so exercised, there was no evidence of the basis on which the discretion was exercised and BKC had simply failed to prove that the operational disapproval arose from the exercise of the discretion, including its exercise reasonably and in good faith.

70 The letter of 27 November 1995 made clear that BKC still regarded the Development Agreement on foot, notwithstanding that it had expired and HJPL had not sought to renew it. As I have said, that agreement continued to be the basis on which the parties conducted their affairs.

A Return To The Development Agreement

71 Clauses 7.1, 7.2 and 7.3 of the Development Agreement provided:-

"7.1 Hungry Jack's may introduce third parties to BKC and BKC shall approve such third parties as its own franchisees, subject to the same approval procedures as apply to Hungry Jack's, including operational, financial and legal approvals. BKC may decline to approve a third party franchisee at a particular location if a Burger King Restaurant at that location would be likely substantially adversely to affect sales at another existing location or at a location for which an application for approval has been formally lodged with BKC. In the event of disagreement the question of likely substantial adverse effect shall be referred to a neutral third party agreed by the parties or nominated by the President for the time being of the Law Society of New South Wales. The neutral third party shall consider submissions put by the parties and his or her opinion shall be binding.

7.2 All third party franchised Burger King restaurants introduced by Hungry Jack's to BKC shall be conducted under the same name as is used from time to time by Hungry Jack's.

7.3 Burger King may operate its own restaurants anywhere in Australia and may franchise third parties anywhere in Australia save that in the States of Western Australia, South Australia and Queensland if Hungry Jack's is in compliance with the Development Schedule, the prior approval of Hungry Jack's for the operation of any such restaurant must be obtained. Such approval may be withheld only if a Burger King restaurant at that location would be likely substantially adversely to affect sales at another existing location or at a location for which an application for approval has been formally lodged with BKC."

Clause 7.3 emphasised the significance of compliance with the Development Schedule. Operational, financial and legal approval was, accordingly, necessary both for HJPL and any third party franchisees it introduced before a restaurant could be opened. It is to be noted that clause 4.1 placed emphasis on "each restaurant" to be established, thus requiring, on Mr Bathurst's submission, individual consideration to be given to each application and not permitting a general disapproval to be utilised. In so far as third party franchisees were concerned, it was such franchisees that were required to meet the operational, financial and legal approvals, the obligation being on BKC to grant such franchises if those criteria were met.

72 Clause 15.1 of the Development Agreement provided that the occurrence of any of the events specified therein shall constitute good cause for BKC, at its option and without prejudice to any other rights or remedies provided for under the Development Agreement or by law or equity, to terminate it. Clause 15.1(b) provided, as such a ground, that:-

"Hungry Jack's fails at any time to meet and satisfy fully the operational, financial and legal requirements set forth in Clause 4, whether for the purpose of seeking franchise approval or in the day-to-day operation of a Burger King Restaurant."

73 Clause 15.2, the proper construction and operation of which is of critical significance in resolving portion of this case, provided:-

"In the case of any breach which is capable of being cured, BKC shall not terminate this Agreement unless and until Hungry Jack's shall have failed to cure such breach within ten (10) days in the case of the default of any obligation to pay money to BKC and within thirty (30) days in the case of any other breach after being notified by BKC of the nature of the default."

74 Another question is what other consequences flow from the withdrawal of operational, financial and legal approval, save the inability to develop further until such approval was restored. Whilst BKC considered that the termination provisions of clause 15 became applicable in the case of all breaches, it is necessary to have regard also to clause 8, which is headed "Franchise Fees". Clause 8.1 provided:-

"Franchise fees payable by Hungry Jack's in respect of restaurants operated by it shall be waived in any year commencing on 12 November so long as Hungry Jack's adheres to the Development schedule in that year. Any failure to adhere to the Development Schedule shall attract a liability to pay a franchise fee in respect of each restaurant required to be but not opened under the Development Schedule. Such franchise fee shall be paid at the end of the year following the failure, but not if such failure is made good by that time." (My emphasis.)

The obligation to pay franchise fees only applied if there was a failure to adhere to the Development Schedule. This indicated, quite clearly, that if development was delayed HJPL was not excused from paying the franchise fee, although it was once again excused if the failure was made good by the end of the year following the failure. Therefore, if there was not adherence to the Development Schedule, HJPL was subjected to a contractual obligation to pay fees for which it would not otherwise have been liable. That fee may be payable because HJPL did not comply with the Development Schedule, or because it was precluded by BKC from doing so in BKC's "sole discretion" on the basis that BKC considered that it was in breach of the requirements for any of operational, financial or legal approvals. In either case, provided that BKC exercised its discretion correctly, HJPL was in breach, the correct exercise of the discretion depending on that.

75 Clause 8.1 also gives rise to a substantial question of construction. The Shorter Notice purported to rely on the failure to adhere to the requirements of the Development Schedule. The question which arose is whether, if there was such a failure, clause 8, in conjunction with other provisions of the Development Agreement, provided a regime for termination different from that imposed by clause 15.

76 Clause 16 provided that upon termination:-

".. HUNGRY JACK'S shall have no further rights under this Agreement, but this shall not affect then existing Franchise Agreements."

77 Clause 18.2 provided:-

"This Agreement is not transferable in whole or in part, whether to other individuals, to corporations or other business organisations to which such might have been assigned, sold, transferred or conveyed, whether directly or by operation of law. If despite the prohibitions of this Article, there is an assignment, this Agreement shall automatically terminate. HUNGRY JACK'S shall have no right to sub-license others to operate Burger King Restaurants."

78 Clause 19.1 provided:-

"If any of the provisions of this Agreement may be construed in different ways, one of which would render the provision unlawful, void, voidable or unenforceable, such provision shall have the meaning which renders it valid and enforceable. The language of all provisions of the Agreement shall be construed according to its fair meaning and not strictly against BKC or Hungry Jack's. ...."

79 Clause 20.1 provided:-

"This Agreement embodies the entire Agreement and understanding between the parties as to its subject matter and supersedes all prior negotiations understandings and agreements, written or oral. The parties acknowledge that they are not relying upon any representation, warranty, condition, agreement or understanding, written or oral except as herein specified. Neither this Agreement nor any term or provision of it may not be changed, waived, discharged, or modified orally. The only changes, waivers, discharges or modifications that will be effective will be those which are in writing and signed by the parties to this Agreement. BKC shall not unreasonably withhold its consent to the sale or transfer of the whole of the issued shares of Hungry Jack's Pty Limited."

Counsel agreed that the word "not" in the third sentence was a patent error, and that the sentence should be read as if it were not there.

80 Clause 24 defined the relationship of the parties, and provided that nothing in the Development Agreement should make them partners or joint venturers, or an agent or representative of the other in any dealings with any third party.

81 Clause 26.1 stated that as an inducement for BKC to enter into the Development Agreement, HJPL acknowledged and agreed that the Burger King Restaurant Franchise System "is unique, especially in relation to building design, food preparation format, service format, menu, training programme, store operations and related manuals, book-keeping and report formats, marketing and advertising formats and that BKC has valuable goodwill which it develops and maintains pertaining to the foregoing".

82 HJPL acknowledged that BKC would make its knowledge and expertise in those areas available to it for use in assisting it with successfully operating Burger King Restaurants from which HJPL expected to profit significantly. HJPL further acknowledged and agreed that it would be "an unfair method of competition to accept" those benefits from BKC and to apply them in the operation of a non-Burger King Restaurant "which is the same as or similar to a Burger King Restaurant", and HJPL specifically acknowledged that it would be a violation of the Development Agreement, in essence, to compete in the same type of restaurant. The clause concluded with an acknowledgment that HJPL would, at all times during any term of the agreement, "devote its best efforts towards the operation of its Burger King Restaurants".

83 Clause 28, which was headed "Survival", stated:-

"The termination of the rights granted hereunder shall be without prejudice to any rights which shall have accrued to either party prior to the date of such termination, shall not affect or diminish the binding force or effect of any provision of this Agreement which expressly or by implication shall come into force or continue in force after termination, shall not release Hungry Jack's from obligations to pay any sums owed under this Agreement or to pay any franchise fees, royalties or other sums owed to BKC under Franchise Agreements or other agreements, and shall not terminate any Franchise Agreements between BKC and Hungry Jack's for operating Burger King restaurants." (My emphasis.)

The Dispute Resolution Provision

84 In each of the Development, Service and Franchise Agreements there was a provision for dispute resolution. Each clause was in the same terms and it is convenient to set out clause 14 in the Development Agreement as the example. It provided:-

"14.1 A party must not start Court proceedings (except proceedings seeking interlocutory relief) in respect of a dispute arising out of this Agreement (a `Dispute') unless it has complied with this clause.

14.2 A party claiming that a Dispute has arisen must notify the other party to the Dispute.

14.3 Within 10 days after a notice is given under clause 14.2 each party to the Dispute must nominate in writing a representative authorised to settle the Dispute on its behalf.

14.4 Each party must ensure that during the 45 day period after a notice is given under clause 14.2 (or longer period agreed between the parties), its representative uses his or her best endeavours, with the other representative:

(a) to resolve the Dispute; or

(b) to agree on:

(i) a process to resolve all or at least part of the Dispute without court proceedings (eg, mediation, conciliation, executive appraisal or independent expert determination);

(ii) the selection and payment of any third party to be engaged by the parties on the involvement of any dispute resolution organisation;

(iii) any procedural rules;

(iv) the timetable, including any exchange of relevant information and documents; and

(v) the place where meetings will be held.

14.5 The role of any third party will be to assist in negotiating a resolution of the Dispute. A third party may not make a decision that is binding on a party unless that party's representative has so agreed in writing.

14.6 Each party:

(a) must keep confidential all information or documents disclosed by a representative under this clause; and

(b) not use such information or documents except to attempt to settle the Dispute.

14.7 Each party must bear its own costs of resolving a Dispute under this clause and the parties must bear equally the costs of any third party engaged.

14.8 After the 45 day period referred to in clause 14.4 (or longer period agreed between the representatives), a party that has complied with clauses 14.2 - 14.4 may terminate the dispute resolution process by giving notice to the other party to the Dispute and may then act as it wishes, including commencing proceedings in Court." (My emphasis.)

85 One possible construction of this clause is that it is only concerned with conditions precedent to the institution of proceedings in Court. Certainly clause 14.1 imposes a prohibition on that occurring, save in limited circumstances, until the requirements of the clause have been met. Another is that clause 14.2 imposes an additional obligation on the parties, namely that whenever one claims a dispute to have arisen, the other must be notified and the various requirements of clause 14 must then be met. My first reading was that this was probably not the case. However, the concluding words of clause 14.8 indicate that in addition to commencing Court proceedings, which must mean other than for an interlocutory injunciton, a party "may then act as it wishes". One way of so acting would be by giving a Notice of Termination provided the various requirements for doing so had been met. Although I raised the possibility of this construction, I did not understand that any party sought to adopt it.

86 The Standard Franchise Agreement, which differed from the Franchise Agreement annexed to the Development Agreement and which applied to certain of HJPL's restaurants, provided in Clause XII for termination in the event of certain specified defaults, and if the franchisee violated "any other term or condition of this agreement and Franchisee fails to cure such violation within thirty (30) days after written notice from Company to cure same".

87 Clause XIII provided for arbitration if BKC terminated such a franchise agreement and HJPL disputed its right to do so or the reasonableness thereof: sub-clause A. Sub-clause B provided for a wider right for the parties to arbitrate "in the event of any other dispute ... between the parties ... in connection with the terms or provisions of this agreement ...".

(c) The Service Agreement

88 The Service Agreement was entered into between HJPL and BKC. It was subsequently amended on 12 December 1991 and on 26 February 1993. It recited that BKC had developed and acquired specialised knowledge, techniques, skills and expertise in the development and operation of limited menu restaurants known as Burger King Restaurants throughout the United States and other countries, and that in Australia such restaurants are known as Hungry Jack's Restaurants; that Selden and its assignee HJPL had, since 1 June 1971, opened and operated Burger King Restaurants in Australia "each having been separately licensed under an individual Franchise Agreement from BKC or its predecessor, The Pillsbury Company"; and that HJPL had also provided training for its employees and managers in addition to courses made available by BKC. The recitals continued that HJPL desired to develop and maintain an educational facility at an approved location in Australia for the training and education of its employees, managers and those of other franchisees of BKC to be serviced by HJPL; and that the parties desired that the training facilities be made available.

89 The Agreement made provision for the training of such people and the recruitment by HJPL of suitable franchisees. Article XI stated that BKC had advised HJPL of certain failures by it to comply with BKC's operational procedures, that the parties should prepare a separate letter agreement detailing a plan and commitment for the correction of those failures, and that HJPL would correct them in accordance with that plan. Article XII provided:-

"12.1 The agreement shall be terminable at any time by BKC upon giving 90 days notice of a specified default, if such default is not rectified within the notice period. The right of termination shall be exercisable only upon failure by Hungry Jack's to provide to any designated franchisee the services required to be provided under any of the Franchise Agreements or under the Service Agreement."

There was no attempt by BKC to terminate under that provision. Notices of Default and To Perform and a Letter of Instruction were furnished by it to HJPL under cover of a letter dated 18 November 1996. The Letter of Instruction, which was dated 18 November 1996, required HJPL to upgrade the training facilities and provide additional courses. The Notice to Perform, which was also dated 18 November 1996, required HJPL to perform and comply with its obligations under various clauses of the Service Agreement, asserted that HJPL had failed to comply with a number of obligations set out in the Schedule to the Notice, and stated that if HJPL failed to perform its obligations as set out in the Schedule within 90 days, time being of the essence, BKC would be entitled to treat that failure as a breach of any essential condition of the Service Agreement entitling BKC to terminate it without further notice.

90 The Service Agreement was amended by a further written agreement on 12 December 1991 to give effect to the parties' agreement that HJPL should be a party to all franchise agreements entered into with franchisees to which HJPL was to provide services. This amendment became a matter of significance in the light of the way in which the submissions developed. The Service Agreement was further amended on 26 February 1993 to give effect to the parties' agreement to vary its requirements relating to HJPL's providing marketing services to franchisees.

(d) The Registered User Agreement

91 The Registered User Agreement was entered into between BKC and HJPL. It recited that BKC was the registered proprietor in Australia of certain specified trademarks; that HJPL wished to use them in accordance with s.74 of the Trademarks Act 1955; and that BKC agreed to grant HJPL the right to do so on the terms and conditions set forth.

92 The Agreement provided for the use of the trademarks and the right to terminate it, so far as either party was concerned, by giving six months' written notice and, in the case of BKC, if HJPL was in breach of certain of its provisions. BKC has not purported to give any such notice. Clause 7.3 stated that immediately after termination HJPL must stop using the trademarks and take all steps to cancel its registration as a registered user of them.

The Standard Franchise Agreement

93 On 8 August 1979 The Pillsbury Company and Selden entered into a Standard Franchise Agreement, which recited, inter alia, that Selden desired to be franchised to operate Burger King Restaurants in Australia and New Zealand, and had had a full and adequate opportunity to be advised thoroughly of the terms and conditions of the Franchise Agreement by counsel of its own choosing. It provided that The Pillsbury Company would make services available to Selden, and that subject to the terms and conditions of the Franchise Agreement and the continuing good faith performance thereof by Selden, The Pillsbury Company granted to it "the franchise to operate a Burger King Restaurant at the location of the premises (which is defined in Appendix A attached hereto) and in consideration of the payment by franchisee of the royalties hereinafter specified".

94 The term of the Agreement was from the date of the opening for business of each restaurant until midnight on the day preceding the fifteenth anniversary thereof, unless sooner terminated in accordance with the Agreement.

95 The Agreement made provision for a number of detailed matters and, in clause IX, stated that provided that Selden had substantially complied with all its terms and conditions and those of any other agreements between the companies, and with the operating standards and criteria established for the Burger King Restaurants, The Pillsbury Company would offer it the opportunity to remain a franchisee for one additional period of fifteen years provided that:-

"A. Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernise the restaurant building, premises, signs and equipment so as to reflect the then current image of Burger King Restaurants.

B. Franchisee must have the right to remain in possession of the premises, or other premises acceptable to Company, for the new term. If Franchisee elects (or is required) to relocate, then Franchisee shall pay Company's reasonable expenses in relocating, developing or evaluating the new premises. Company shall not be required to extend its credit or resources in obtaining financing for premises or equipment.

C. Franchisee shall execute a new Franchise Agreement on the form then being used by Company in the United States, which may differ from this Franchise Agreement as to royalty. The rate of royalty shall be re-negotiated at that time taking into account the Burger King rate of royalty then prevailing in other countries of the world.

E. Franchisee shall give Company written notice of its desire to exercise its option to continue as a franchisee not less than fifteen (15) months prior to the expiration of the term of this Agreement."

There was argument as to what these provisions meant. It was not in issue that HJPL had not complied with sub-clause E, and that BKC had taken no point about that. However, the meaning of sub-clause A was very much in issue, particularly concerning when the franchisee had to carry out the work agreed to be done. Mr Bathurst's submission was that there only had to be an agreement to carry out the described work, without its being specified at that stage, as a condition for obtaining the renewal. Mr Oslington's submission was that there had to be agreement on the precise work to be carried out before the renewal was granted.

96 Clause XII provided for termination on default, including if Selden failed to maintain the standards set forth in the Agreement, as supplemented by the Manual, of cleanliness, health and sanitation. The effect of termination was agreed to be that Selden might not use the trademarks, and that it should not, thereafter, directly or indirectly, identify itself in any manner as a franchisee of The Pillsbury Company.

The International Burger King Restaurant Franchise Agreement

97 The International Burger King Restaurant Franchise Agreement was Annexure "A" to the Development Agreement. It recited the position of BKC and the recognition by HJPL of the benefits to be derived from being identified with and licensed by BKC and being able to utilise the Burger King System and the Burger King Marks, which BKC made available to its franchisees. It also recited that HJPL desired to be franchised to operate a Burger King Restaurant.

98 The term was twenty years from the date the Franchised Restaurant first opened for business, unless sooner terminated in accordance with the terms and provisions of the Agreement, and:-

"FRANCHISEE accepts this licence with the full and complete understanding that the licence is for twenty (20) years with no promise or assurance of renewal or the granting of a new licence at expiration. This constitutes the basic underlying substance of this licence. Suggestions from franchisees for improving products, equipment, uniforms, restaurant facilities, service format and advertising are encouraged and will be considered by BKC when adopting or modifying standards, specifications and procedures for the Burger King System."

99 The Agreement provided for a number of operational matters and stated, in clause 3J:-

"The parties recognise that conditions in Australia may require departure from the standards prescribed in A-I above. Franchisee shall be entitled to make such departure with the consent of BKC, which consent shall not be unreasonably withheld."

100 Clauses 4 and 5 dealt with services available to the franchisee and restaurant sites, and subsequent clauses dealt with training and royalties, including accounting procedures and a right to audit.

101 Clause 15, which was headed "Default and Effective Termination", provided:-

"If an act of default occurs and franchisee fails to cure the default within the cure period specified, and if no time is specified then within thirty (30) days of default, BKC may, at its option and without prejudice to any other rights or remedies provided for hereunder or by law or equity, terminate the franchise granted herein. If any applicable law or rule requires a greater prior notice of termination, the prior notice required by such law or rule shall be substituted for the notice requirements herein. The following shall be an act of default:

(i) Franchisee fails to maintain and operate the Franchise Restaurant in accordance with the standards and specifications established by BKC as to service, cleanliness, health and sanitation; knowingly sells any product which does not conform to BKC's specification; fails to sell products designated by BKC or sells products not approved by BKC. Franchisee shall have five (5) days after notification to cure the default."

102 There are a number of other provisions amounting to acts of default and a non-waiver provision. The effect of termination is stated to be that the franchisee's right to use Burger King Marks and the Burger King System shall terminate, and the franchisee shall not thereafter identify itself as a Burger King franchisee, or publicly identify itself as a former Burger King franchisee, or use any of BKC's business methods or trade secrets.

103 In clause 15(B)(3) there is the contemplation that the parties may enter into a "Successor Agreement", being a further Franchise Agreement after the termination of the existing Agreement. This assumed some importance in the litigation, the question being the circumstances in which, either by virtue of the agreement or of further arrangements into which the parties entered, HJPL was entitled to call for a continuation of the Franchise Agreements for the "successor restaurants".

The Letters And Notices Of 21 March 1996

104 On 21 March 1996 Mr Fitzjohn wrote to Mr Cowin referring to "a considerable degree of dissatisfaction", which had arisen "in respect of the manner in which the parties perceive their respective obligations under the Development and Service Agreements".

105 The letter continued:-

"As you know, the context of Ray's statement in August was that our efforts to combine resources in a way not contemplated by the existing Agreements had failed. His point was that if we also fail to negotiate a joint venture, then the failure of our attempts to work together more closely would result in our continued co-operation under the terms of the Development and Service Agreements.

This is in fact what happened, and each of us now expects the other to act in compliance with those Agreements. Unfortunately, it now appears that you are not willing or able to adhere to the terms of the Development and Service Agreements. In particular, we feel that you have been unresponsive to issues raised on our side, such as operational defaults and unauthorised sub-licensing. You have also failed to follow up on your agreements in areas such as the need to have our solicitors review proposed media. In short, you have not lived up to your side of the bargain. I have no desire to spend more money than is necessary on lawyers, but I also intend to insist on compliance with the previously negotiated contracts.

I have considered your proposal with input from Ray Miolla and other members of the Asia Pacific team over the last several weeks and we have agreed that non-binding mediation will not be productive. Instead, we believe it is best to approach the problem by following the terms of the existing agreements.

I propose to begin this process by providing you with a formal notice of the areas where we believe you have breached the agreements. You will then have the stated grace periods to cure these defaults and preserve your rights under the contracts. If you do so, we can then proceed to resolve our disputes over the exact meaning of the contracts pursuant to the stated dispute resolution provisions in the contracts.

Enclosed is a formal notice from our Legal Department which will begin the process. I regret this must be sent by fax, but that is the requirement set forth in the agreements. I hope the process can be as amicable as possible, but I recognise that the next few months will be a difficult time for all of us." (My emphasis.)

106 The Notices stated that they were forwarded under clauses 3.2 and 15 of the Development Agreement and 2.2 and 12.1 of the Service Agreement. The letter enclosed copies of the Australian Guidelines for Expert Determination "which we propose as the set of rules to govern arbitration of any disputes arising as a result of these Notices".

107 The Notice under clause 3.2 of the Development Agreement quoted certain of that clause and stated that the initial five year term expired on 12 November 1995, and that no notice had been given to BKC by HJPL of its intention to renew the agreement. It continued:-

"If no written notice is received by Burger King Corporation by 4 pm .. March 1996 as to Hungry Jack's Pty Limited's intention to renew the Development Agreement, the Development Agreement will be at an end and will be treated as such by Burger King Corporation."

108 The Notice under clause 15 stated that if "HJPL shall have failed to cure the breaches of the Development Agreement set out below within thirty (30) days of the date of receipt by HJPL of this Notice, the Development Agreement terminates". The particulars of the breaches, which I summarise, were:-

(a) that HJPL had failed to satisfy fully the operational requirements set forth in clause 4 in the day to day operation of a Burger King restaurant because:-

(i) HJPL had not conducted each restaurant in accordance with the terms and conditions of the Development Agreement, the applicable Franchise Agreements, and the standards, specifications and procedures specified in the volumes comprising the Manual of Operating Data, as amended, including the maintenance of interior and exterior of the restaurants to reflect an acceptable Burger King image;

(ii) at the beginning of 1995 BKC provided HJPL with its Expansion Policy and Operational Expansion Criteria; that there were meetings between Mr Horowitz and Mr Green about a Franchise Action Plan; that when that plan was initiated there were approximately 36 HJPL restaurants in the Needs Improvement category and as at the end of that Plan there were still 31 restaurants in that category, and that:-

"Although Roy Blauer of BKC offered in the Notice of Disapproval dated November 27, 1995 to meet and discuss a plan to cure this default over an agreed period of time, no progress has been made and BKC withdraws this offer";

(iii) HJPL had been aware for over twelve months of serious problems in the conduct of restaurants in Queensland by reason of unacceptably high temperatures;

(iv) HJPL was in breach of its obligations not to assign, relevantly for present purposes, by assigning to Messrs Hawryluk and Deugarde;

(v) HJPL was in breach of the Development Agreement in relation to the advertising fund; in failing to submit promotional material to BKC for approval; in providing inaccurate information to prospective third party franchisees, including Messrs Cox, Soo and McKinnon; in failing to pay the proper royalty amount, having regard to other breaches; in failing to use trade marks properly, which involved the purported withdrawal by BKC of a waiver previously made; in acting adversely to the interests of BKC; and in divulging trade secrets.

The Notice stated that if HJPL should "fail to remedy all of the above-mentioned breaches by the expiration of the said thirty (30) days period the Development Agreement will terminate as of that date".

109 The Notice ended on that note and referred to the dispute resolution procedures in clause 14. It stated:-

"As the continuation/termination of the Development Agreement is of primary commercial importance to BKC, BKC requires that HJPL provide it with notice of any factual or legal matter referred to or arising out of the above Notice which it disputes within fourteen (14) days of receipt of this Notice.

Should a notice of dispute be given by HJPL it is suggested by BKC that immediate steps be taken to have the matters in dispute resolved in a manner binding on the parties by means of Expert Determination in accordance with the Rules for Binding Expert Determination of the Australian Commercial Dispute Center.

Should no such notification be received by BKC within the time stipulated BKC will deem HJPL as having accepted the validity of the above Notice and the factual correctness of the assertions made in the above Notice, and will continue to monitor HJPL's conduct in remedying the breaches referred to in the above Notice."

110 The Notice under clause 2.2 of the Service Agreement related to the requirement to renew it and to the fact that that had not occurred. It ended in the same way as the Notice pursuant to clause 3.2.

111 The Notice under clause 12.1 of the Service Agreement set out a number of breaches, which HJPL was required to cure within ninety days of the date of receipt, otherwise the Service Agreement would terminate. That Notice concluded in essentially the same way as the Notice given pursuant to clause 15.1 of the Development Agreement.

112 Subsequently HJPL gave notice of its intention to renew the Agreements. It was not in issue that they were thereby renewed, or, at least, no point was taken that they had not been. Nor was it in issue that no steps were taken to terminate either Agreement pursuant to the provisions of the Notices of Default. None-the-less, it is relevant to consider the breaches alleged in the Notices given under clause 15 of the Development Agreement when considering the Notices of Termination.

113 HJPL attacked the validity of the Notices by commencing proceedings seeking declarations in relation to the correspondence and Notices of March 1996 in the Equity Division. Portion, at least, of those proceedings was referred to the Honourable T.R. Morling of Queen's Counsel, who reported to the Court on 23 May 1996. It seemed to be common ground that this report was never submitted to the Court for adoption. In essence, Mr Morling concluded that there were insufficient particulars furnished to enable HJPL to be aware of the defaults it was required to remedy. In the course of making that report he expressed the opinion that BKC may purport to terminate the Development Agreement because of a breach, which it claimed was not capable of being cured, and that such a purported termination would give rise to a dispute which could be made the subject of a notification under clause 14. He noted submissions that such a notification did not operate to extend the times referred to in clause 15.2, and that to achieve the result contended for by HJPL an implied term must be found in the Development Agreement to the effect that time for compliance with a Notice given under clause 15.2 did not commence to run until the expiration of the forty five day period referred to in clause 14. The contrary submission was that this would contradict the express terms of clause 15.2. Whilst Mr Morling saw the force of the submissions of HJPL, he did not think they should prevail. He said he was not unmindful of the commercial dilemma in which HJPL was placed by service upon it of the Notice under clause 15.2, because non-compliance gave rise to the risk of termination with grave commercial and financial consequences.

114 At paragraph 46 Mr Morling said that he had referred to the "possible Draconian consequences of failure to comply with a Notice under clause 15.2", and that those consequences were so serious:-

".. as to require a notice to specify with clarity and precision the alleged breaches of the Agreement. The time limits referred to in clause 15.2 are so short (having regard to the magnitude of Hungry Jack's business and to the complexity of the business relationship which exists between Hungry Jack's and BKC) that Hungry Jack's was entitled to be placed in the position that immediately upon reading the notice it knew exactly what it was required to do."

He was of the view that the Notice did not achieve this result. It will be relevant, in considering the breaches specified in the Longer Notice, to have regard to those stated in the Notice of 21 March 1996, particularly in considering BKC's submission that certain breaches were incapable of cure. However, BKC does not rely on the March 1996 Notices for present purposes.

The Notices Of Termination

115 On 18 November 1996, Mr Miolla wrote two letters to Mr Cowin enclosing Notices of Termination. One letter dealt with the Development Agreement and enclosed a Notice of Termination under clauses 2.1 and 15.1, and a further Notice of Termination under clause 15. The letter concluded:-

"The terms of both notices are self-explanatory, and the Development Agreement is thereby terminated upon the date of your receipt of this Notice of Termination."

116 The other letter referred to the Service Agreement and enclosed a Notice of Default under clause 12.1, and a Notice to Perform and a Letter of Instruction pursuant to it. The letter stated, inter alia:-

"The Notice to Perform and Letter of Instruction are delivered in addition to the Notice of Default and does (sic) not in any way constitute a waiver or modification of the Notice of Default."

117 The first Notice of Termination under the Development Agreement, ("the Shorter Notice"), asserted that clause 15.1(d) entitled BKC to terminate it if HJPL failed to comply with any of the other terms, provisions, or conditions of the Agreement, any Franchise Agreement, or any other obligation owed to BKC.

118 The notice set forth clause 2.1 of the Development Agreement requiring the opening of a minimum of four new Burger King Restaurants per annum in Western Australia, South Australia and Queensland, and continued that between 12 November 1995 and 11 November 1996 HJPL developed and opened only one new Burger King Restaurant in those States, and that BKC franchisees introduced by HJPL developed and opened no new Burger King Restaurants in them. The notice concluded that "accordingly" BKC "hereby terminates" the Development Agreement.

119 BKC conceded that it had not notified HJPL of this alleged breach, conformably with clause 15.2, and afforded it the opportunity to cure it. The submission on its behalf was that that clause was only activated if the breach was one capable of being cured, and that this was not such a breach as the period within which those restaurants were required to be opened had passed. Therefore, so it was submitted, the breach could not be cured because the restaurants could not be opened within the time specified. Further, Mr Bathurst conceded that even if 30 days' notice to cure the alleged breach had been given, HJPL would not have been able to do so within that time. However, his submissions were that the time to cure the default, which was a default capable of cure, was governed by clause 8.1, which provided for this particular type of default. He submitted that in any event there was no default because the reason the restaurants had not been opened was BKC's improper refusal to grant operational and financial approval and to allow third party franchisees to open restaurants. Nextly he submitted that if, contrary to his primary submission, clause 15 governed the position, the breach was one capable of cure; that on a proper construction of the Development Agreement that meant that notice to cure had to be given even though, as he conceded a cure could not be effected within 30 days; and that clause 15 therefore imposed a condition precedent to the giving of a Notice to Terminate, with which BKC had failed to comply. He submitted that on a proper construction clause 15 meant a breach "capable of cure", which if not cured within 30 days entitled BKC to terminate, not a breach "capable of cure within 30 days". It was essentially around these issues that the validity of the Shorter Notice is to be determined.

Some Matters Pleaded

120 It is convenient, at this point, to set out some of the matters pleaded by HJPL. That is so because they reflect, to some extent, on the issues raised by the Shorter Notice, and also, to a far more significant extent, on those raised by the Longer Notice.

121 HJPL has pleaded that BKC breached the Development and Service Agreements in a number of ways. In paragraph 48 it alleged that the following were terms of those agreements and the Franchise Agreements, which were implied by law, namely that:-

(a) BKC must act in good faith towards HJPL in exercising its rights;

(b) BKC would not terminate, or purport to terminate, those agreements if the grounds on which it purported to act were caused by breaches of them by BKC;

(c) BKC would do all that was reasonably necessary to enable HJPL to enjoy the benefits of them;

(d) BKC would not take any action, which would prevent HJPL from complying with its obligations under them;

(e) BKC would exercise its rights to terminate them in good faith or, alternatively, reasonably; and

(f) BKC must not act in bad faith and/or unreasonably withhold financial and/or operational approval to HJPL under the Development Agreement so as to deprive it of the opportunity to satisfy the requirements of the Development Schedule.

The last mentioned term was also pleaded as "implied in fact".

122 In paragraph 49 it was pleaded that since about August 1995, or, alternatively, 22 November 1995, BKC withheld financial and/or operational approval under the Development Agreement, and denied HJPL the opportunity:-

(a) to open Burger King restaurants in Western Australia, South Australia and Queensland so as to comply with the Development Schedule;

(b) to introduce third party franchisees to open such restaurants in those States to comply with the Development Schedule; and

(c) itself to open restaurants and to introduce third party franchisees to open such restaurants in other States.

Detailed particulars were given of these allegations.

123 In paragraph 50 it was pleaded that BKC's assertion that HJPL failed to comply with its requirements for financial and/or operational approval under the Development Agreement was made, and each of the actions pleaded in paragraph 49 was taken, in breach of the terms pleaded in paragraph 48. It was said that that purpose was to be inferred from the facts, matters and circumstances particularised in paragraphs 32 and 61; and from the fact that BKC's decision to refuse HJPL operational approval for further expansion was based on reports by BKC employees in respect of thirty one Burger King restaurants operated by HJPL, which were classified according to subjective and undisclosed criteria to be in a "needs improvement" category, as communicated by BKC to HJPL in a memorandum from Mr Horowitz.

124 Paragraph 61 pleaded that the Shorter Notice was ineffective to terminate the Development Agreement, or alternatively was void or unenforceable, by reason that:-

(a) the alleged breach of clause 2.1 of the Development Agreement by HJPL was caused by BKC's prior breaches of it as pleaded in paragraphs 49 to 52;

(b) HJPL was, at all material times, ready, willing and able to comply with clause 2.1 of the Development Agreement but was prevented from so doing by the wrongful refusal of BKC, from at least 20 September 1995, to grant HJPL financial and/or operational approval for further expansion;

(c) on the proper construction of clause 2.1 of the Development Agreement, HJPL had complied with the Development Schedule, it being alleged that in the five years between 1990 and 1995 it had opened twenty five restaurants in Western Australia, South Australia and Queensland and introduced one third party franchisee (other than Shell) to BKC in South Australia, and, further or alternatively, HJPL introduced Shell to BKC and by reason, inter alia, of the joint venture to which BKC was a party, Shell opened Burger King restaurants in Western Australia, South Australia and Queensland in the relevant period. It was pleaded that the introduction took place as a result of dealings between HJPL and Shell in about December 1989, or, alternatively, between Shell and HJPL in relation to the proposed Westgate Bridge site between August and October 1991, and in relation to the Kingsway site during September 1993, and steps subsequently taken by HJPL to progress the placement of "test sites" in Shell service stations, including meetings between Shell and HJPL held on certain specified dates;

(d) further and alternatively, clause 8.1 of the Development Agreement provided a period of one year following any failure on the part of HJPL to adhere to the Development Schedule in which to make good such failure, which alleged failure was denied, and that the period of one year did not expire until 12 November 1997; and

(e) further and alternatively, by reason of the participation of HJPL and BKC in the joint venture pleaded in paragraph 24, BKC accepted HJPL's participation in that joint venture and/or in the development of the test sites as sufficient compliance with the Development Schedule.

125 Paragraph 61A pleaded:-

"Further and in the alternative to paragraph 61, in answer to the default alleged in the Shorter Notice as pleaded in paragraph 60 above, BKC failed to give notice of the nature of the alleged default to HJPL in accordance with clause 15.2 of the Development Agreement prior to issuing the Shorter Notice, and is not entitled to terminate that agreement by reason of that alleged default."

126 In paragraph 51 it was pleaded that it was a further term of the Development Agreement that BKC must not seek to impose a condition upon the grant of approval for HJPL to open Burger King restaurants, which would deny HJPL its contractual rights under the Development Agreement. It was pleaded that this term was implied by law.

127 Paragraph 52 asserted that in breach of the term pleaded in paragraph 51, at least from 13 February 1995, BKC sought to require HJPL to enter into TRA's in a form required by BKC, and thereby to waive its rights under clause 7.3 of the Development Agreement, as a condition of obtaining BKC's approval to open further Burger King restaurants; and declined to permit HJPL to reserve further sites for expansion unless it entered into a TRA for each such site.

128 Paragraph 53 pleaded that by reason of the matters pleaded in paragraphs 49 to 52, HJPL suffered loss and damage, in that it lost the opportunity to secure further sites for expansion in Western Australia, South Australia and Queensland by opening Burger King restaurants at those sites so as to comply with the Development Schedule and earn profits, and to secure further sites for expansion in other Australian States and to open Burger King restaurants at those sites and to earn profits therefrom. It also particularised that HJPL had lost the opportunity to secure such sites for expansion, and those sites have now been reserved by third parties including Shell. The particulars continued that HJPL lost the opportunity to open further Burger King sites for which it had sought approval from BKC and for which it would have sought approval but for BKC's conduct pleaded in paragraph 49, and to earn profits therefrom, and, further, that HJPL has been exposed to the purported termination of the Development Agreement by BKC based on an alleged failure to comply with the Development Schedule.

129 The second Notice of Termination, ("the Longer Notice"), relied on breaches of clauses 15.1(c), 6.5 and, in a number of respects, 15.1(d). Once again it was not in issue that no notice had been given requiring the defaults to be cured, the essential submission of BKC being that they were not defaults capable of being cured. As I have said, these submissions have to be viewed in the light of the Notice of March 1996 requiring a number of breaches to be cured.

130 Commencing at paragraph 62 the Summons dealt with the Longer Notice. I propose, in setting forth the allegations, to state the conclusions to which I have come in relation to each. In doing so I shall make the assumption, for reasons to which I shall refer, that each alleged breach was capable of being cured, on a proper construction of clause 15.2 and that, accordingly, it was necessary for BKC to give a notice to cure before purporting to exercise the right to terminate. The Summons considered firstly the alleged breaches arising from the arrangements with Messrs Hawryluk and Deugarde. In paragraph 52 it pleaded that the Longer Notice asserted breaches of certain terms because of arrangements between HJPL and Mr Hawryluk and Mr Deugarde concerning, respectively, Burger King restaurants in Labrador, Queensland between early 1995 and 1 August 1996, and in Morphett Vale, South Australia since July 1995.

131 In paragraph 63 it asserted that BKC was not entitled to rely on those allegations to terminate the Development Agreement because:-

(a) it was unable to make good the factual basis of them, or alternatively the facts did not constitute a breach by HJPL of the various clauses;

(b) BKC asserted the same, or substantially the same, facts in the March 1996 Notices as being a breach, which was curable in accordance with clause 15.2 of the Development Agreement, and HJPL cured the breaches by terminating all arrangements with Mr Hawryluk and Mr Deugarde after service of the March 1996 Notices;

(c) BKC was estopped from relying on clause 15.1 because it was, at all times, aware of the arrangements and HJPL relied upon its failure to object to them; and

(d) the alleged breaches are "immaterial and/or stale and/or any purported reliance by BKC upon" them involves its breach of the terms pleaded in paragraph 48. The last particular was pleaded in respect of each of the alleged breaches and I shall not repeat it.

132 In my opinion, this was a breach which, if notice had been given whilst it was subsisting, was capable of being cured. So much could not have been in issue having regard to the March 1996 notice. Although Mr Oslington did not conceded that the relationships between HJPL and Messrs Hawryluk and Deugarde had been brought to an end prior to the giving of the Notice of Termination, he made no submission that they had not. The evidence satisfies me that this did happen and that BKC was advised. Even if that is not correct, the alleged breaches were clearly capable of being cured and before reliance could be placed on them to terminate the agreement, notice to cure had to be given and the time given to effect it had passed without any cure being effected.

133 Mr Oslington also submitted that the breach was not capable of being cured because HJPL had made each aware of confidential information relating to BKC. However, this was information which had to be made available to a range of people employed by or in a contractual relationship with HJPL, and there can be no suggestion that it was improper, in itself, to make the information available to them. Further, the March 1996 Notice considered that the alleged failure to "maintain the secrecy and confidentiality of all BKC proprietary information" was capable of being cured.

134 Finally, he submitted, I think, that if the breach had been cured before the giving of the Notice, it was no longer one which was capable of being cured and, therefore, the breach having occurred, BKC was not obliged to give notice to cure, as that had happened. I reject that submission. In March 1996, BKC was aware of the facts giving rise to these alleged breaches. It called on HJPL to cure them, which I am satisfied HJPL did. The effect of the breaches was therefore, in my opinion, spent. To submit that one could give notice requiring a breach to be cured and then, after it has been cured conformably with the notice, to give a notice of termination on the basis that there had been a breach which was no longer capable of being cured is an untenable submission. Further, in my view, BKC was estopped from relying on those breaches by its conduct to which I have referred.

135 HJPL nextly pleaded in relation to the "sunglasses promotion". It referred, in paragraph 64, to allegations of breach of the Development Agreement and specified Franchise Agreements in relation to the promotion involving the sale of "Shades" sunglasses from 18 to 24 September 1996 in Burger King restaurants in Western Australia in contravention of s.65C(1)(a) of the Trade Practices Act 1974. That section prohibits a corporation, in trade or commerce, from supplying goods intended to be used or likely to be used by a consumer if the goods are of a kind in respect of which there is a prescribed consumer product safety standard with which the goods do not comply.

136 In paragraph 65 it was pleaded that BKC was not entitled to rely upon that allegation to terminate the Development Agreement because:-

(a) a single contravention of that section did not constitute a failure to adhere "to all applicable statutory regulations within the meaning of clause 6.5 of the Development Agreement". That clause provided:-

"Hungry Jack's agrees to adhere to all applicable statutory regulations and to BKC's advertising, sales promotion and public relations standards and all advertisements and other materials published circulated or exhibited shall first be approved by BKC. The franchisee agrees to remove or discontinue immediately the use of any objectionable advertising material upon receipt of BKC's notice; BKC or its authorised agent may at all reasonable times enter the premises to remove and destroy objectionable material without compensation to franchisee."

It would appear that s.65C(1)(a) was an applicable statutory regulation with which HJPL was obliged to comply, and Mr Bathurst did not seek to support a view, which may have been open on the pleadings, that a breach of one statutory provision was insufficient to attract clause 6.5;

(b) BKC's rights against HJPL for a breach of clause 6.5 are regulated solely by it, and not by clause 15.1, and BKC did not give notice to remove or discontinue immediately the use "of any objectionable advertising material";

(c) alternatively, if BKC's rights were otherwise regulated by clause 15.1, it failed to give notice of the nature of the alleged default to HJPL and to afford it the opportunity to cure it in accordance with clause 15.2; or any breach was one which could have been cured by the removal of the sunglasses and/or remedial advertising; and

(d) BKC is estopped from relying on clause 15.1 because it was at all times aware of the intended promotion and HJPL relied upon BKC's failure to object to it.

137 In my opinion, the breach, if it was one to which clause 15 applied, was capable of being cured and, hence notice to do so should have been given before there was any purported termination. In this case the promotion was stopped by the intervention of the relevant regulatory authority. The circumstances necessary for it to be stopped, as provided by clause 6.5, therefore, did not arise. In my opinion, the circumstances necessary to give rise to termination did not arise, unless it could be said, in the sense of the first allegation, that the breach was not capable of being cured, which I would reject for the same reason, or that the breach was not capable of being cured because the conduct brought trade marks or product into such disrepute that making good the breach, in the manner required by the regulatory authority, could never remove the stigma thus created. I reject this submission also. There was no evidence that any stigma was caused to BKC's or HJPL's name, trade marks or products, and the March 1996 Notice obviously contemplated that such matters were capable of being cured.

138 In my opinion, an equally effective answer is that BKC's remedy lay in clause 6.5 and, for the reasons given, it became unnecessary to exercise it. As the breach was remedied by the intervention of the regulatory authority it could not be said by BKC, essentially for the reasons I have given, that a breach had occurred, which, even though remedied prior to the purported termination, gave a right to terminate.

139 At paragraph 66 HJPL commenced to consider allegations that it breached clause 6.5 and specified Franchise Agreements by failing to seek or obtain approval for advertisements and other materials published, circulated or exhibited by it. In paragraph 67 it pleaded that BKC was not entitled to rely upon the allegation because:-

(a) its rights against HJPL for a breach of clause 6.5 were regulated entirely by the terms of that clause, and not by clause 15.1, and BKC failed to give a notice requiring it to remove or discontinue immediately the advertisements or to take any other action in accordance with clause 6.5; and

(b) BKC was estopped from alleging that these allegations constituted a breach of clause 6.5 in circumstances where, to BKC's knowledge, HJPL had always been responsible for all advertising in Australia, had conducted such advertising without reference to BKC for its approval, and had kept BKC advised of advertising campaigns to be undertaken by HJPL upon which HJPL had relied; and, in October 1995, BKC advised HJPL that it would be sufficient for HJPL to submit a marketing plan and agency brief to BKC at quarterly intervals for approval, with which requirement HJPL had complied.

140 I consider that BKC's attempted termination on these grounds cannot succeed for two reasons. Firstly, I agree with HJPL's primary submission that BKC's remedy in relation to advertising was governed by clause 6.5. It was not in issue that no notice under that clause had been given. Alternatively, if the right to terminate arose from clause 15, the breach was clearly capable of being cured and no notice requiring that to be done had been given.

141 At paragraph 68 it was pleaded that the Longer Notice alleged that HJPL was in breach of various clauses of the Development Agreement by reason of the use of a previous Hungry Jack's logo; the failure to use the tag line "Hungry Jack's is a registered trademark of Burger King Corporation. Used under licence"; the failure to capitalise the words "Hungry Jack's"; and/or the failure to use a mark in various specified advertisements. In paragraph 69 it was pleaded that HJPL was in breach of the Registered User Agreement by reason thereof and, in paragraph 70, that BKC was not, and is not, entitled to rely upon the trademark allegation to terminate the Development Agreement because BKC's rights against HJPL for a breach of clause 6.5 were regulated entirely by its terms, and not by clause 15.1, and BKC failed to give notice requiring HJPL to remove or discontinue immediately the alleged offending advertisements and promotions, or to take any other action in accordance with clause 6.5.

142 It was also pleaded that BKC could not terminate on this ground because it asserted the same or essentially the same facts in the March 1996 Notices as being a breach curable in accordance with clause 15.2, and HJPL cured the alleged breach by, inter alia, instructing its agents to correct any misuse of trademarks and to ensure that trademarks were properly utilised in all advertisements and other material, thereby complying with the provisions of clause 15.2.

143 I consider, essentially for the reasons I gave in relation to the advertising complaints, that HJPL's contentions, in this regard, must be accepted. Mr Oslington also submitted that the misuse of the trade marks placed them in jeopardy, such that they may be lost. In these circumstances he submitted that the breaches could never be cured because they remained as some evidence of misuse, which could, together with other misconduct in relation to them, lead to their loss. However, he conceded that the breaches, of which complaint was made, could not, of themselves, lead to the loss of the trade marks or, relevantly, put them in jeopardy. In my opinion, such breaches as had occurred were, within the meaning of the Development Agreement, capable of being cured. This was the view BKC took when it gave its Notice of March 1996 and, in my opinion, that was a correct approach.

144 Commencing at paragraph 71 consideration was given to the bubble blower promotion in Woodridge, it being pleaded that BKC alleged that HJPL was in breach of clause 6.5 by reason of the promotion of a bubble blower in Woodridge in October 1996 in conjunction with a logo, which bubble blower had not been submitted to BKC for approval. It was pleaded, in paragraph 72, that BKC was not, and is not, entitled to rely upon the alleged bubble blower breach to terminate the Development Agreement because its rights against HJPL for a breach of clause 6.5 are entirely regulated by its terms, and not by clause 15.1, and BKC failed to give notice requiring HJPL to remove or discontinue immediately the promotion of the bubble blower or to take any other action in accordance with clause 6.5.

145 For the reasons I have given in relation to advertising, I do not consider that BKC was entitled to terminate for this alleged breach.

146 Beginning at paragraph 73, the allegation in relation to obligations under the Service Agreement was pleaded being the alleged defaults in the Notices dated 14 November 1996 issued under it. It was pleaded that BKC was not entitled to rely on those allegations because:-

(a) it was unable to substantiate or rely upon the alleged breaches of the Service Agreement for the reasons set out in paragraphs 87 to 93;

(b) by issuing a notice in November 1996 under the Service Agreement requiring that the alleged faults be corrected within ninety days, BKC elected to require HJPL to cure the alleged defaults under that agreement and was not entitled to rely upon them as a ground for termination of the Development Agreement;

(c) the alleged defaults did not constitute a failure to provide services required to be provided under the Service Agreement to any designated franchisee for the purposes of clause 12.1 of that agreement and, accordingly, BKC was not entitled to terminate the Service Agreement; and

(d) on 5 March 1997 BKC advised HJPL that the training facilities provided by HJPL in Perth, Adelaide, Brisbane and Melbourne were consistent with the requirements of the Development Agreement.

147 Clause 15.1(d) provided that an occurrence entitling BKC to terminate the Development Agreement is a failure to comply with "any other obligation owed to BKC". HJPL clearly owed obligations to BKC under the Service Agreement. That agreement provided its own regime for the curing of breaches under it of which BKC had availed itself by giving a ninety day notice to cure the breaches in November 1996. BKC could not, in those circumstances, rely on those breaches, (assuming there were breaches), within the ninety day period, because, on a proper construction of the Service Agreement, there had not been a failure to comply with the obligations under the Service Agreement. That failure could only arise if there was non-compliance with the Notice. The further problem arises that even if it did not cure the breaches within ninety days, they remained breaches capable of being cured, and, arguably, further notice to cure had to be given, pursuant to clause 15.2, before there could be termination.

148 Finally, Mr Oslington, in final submissions, said that he did not propose to address on the Service Agreement on the basis that if he could not succeed on the other allegations, these would not avail BKC.

149 In paragraph 75 it was pleaded that the alleged breaches upon which BKC relied by the provision by HJPL of written material to three potential franchisees, namely Messrs McKinnon, Mrs Soo and Mr Cox, could not be relied upon because, as was asserted in paragraph 76:-

(a) HJPL did not provide written material to Mrs Soo or Mr Cox as alleged;

(b) if, which was denied, HJPL provided any such written material to Messrs McKinnon, Mrs Soo and/or Mr Cox, it did not involve any misrepresentation;

(c) BKC was estopped from alleging that these allegations were in breach of clause 15.1 in circumstances where BKC was aware of the substance of those complaints and of the actions taken by HJPL to address them, and HJPL relied upon BKC's acquiescence in respect of HJPL's conduct in doing so; and

(d) by requesting HJPL to give notice of its intention to renew the Development Agreement by notices issued on 21 and 25 March 1996, pursuant to clause 3.2 of the Development Agreement, BKC elected to waive the breaches alleged.

In my opinion, BKC's request to HJPL to renew the Development Agreement with knowledge of the furnishing of this material was as clear a waiver as could be of the alleged breaches. Further, BKC considered, when it gave the March 1996 Notice, that these breaches were capable of cure.

150 In paragraph 77 the Summons asserted that the breaches alleged by BKC of the Franchise Agreement dated 2 November 1991 in relation to the operation of a restaurant at Mount Gravatt in Queensland by reason of voluntary abandonment of that restaurant could not, as alleged in paragraph 78, be relied upon by BKC to determine the Development Agreement because BKC was estopped from alleging that those alleged breaches were in breach of the Development Agreement, as BKC and/or Mr Power were aware of the impending closure of the Burger King restaurant at Mount Gravatt due to the expiry of the lease for that restaurant and assented to that closure; and BKC had not previously contended that the closure of BKC restaurants by HJPL, prior to expiry of the full term of the franchise and after notice to BKC, was a breach of the Development Agreement.

The evidence established that BKC was aware that the shopping centre, in which this restaurant was situated, was to be remodelled, that this would involve the closure of it and, in those circumstances it consented to that course. This was corroborated by the failure of BKC to complain, prior to the Notice of Termination, about this having happened. In these circumstances, BKC cannot be heard to say that the closure amounted to a breach of the Development Agreement. Even if it did, it was capable of being cured by re-opening when the remodelling was finished, a course which BKC opposed, thus, relevantly, failing to comply with the implied term of co-operation.

151 Commencing at paragraph 79 it was asserted that BKC was not entitled to rely on the issue of a letter of 22 September 1995 addressed "To Whom It May Concern", in which it was stated that the purpose of the letter was to confirm that Mr Chris Ryan was an approved franchisee of HJPL as from 18 September 1995 as constituting a breach of clause 9B of the Franchise Agreements, because BKC was not, and is not, entitled to rely upon the allegation in paragraph 79 to terminate the Development Agreement as the matters alleged did not constitute a breach of clause 9B; and by a facsimile transmission dated 24 July 1996 from BKC to HJPL, BKC elected to require HJPL to remedy any such breach by further educating Mr Honkey as to the limits of his authority. In final submissions, Mr Oslington agreed that if he could not succeed on other grounds, he could not succeed on this one. In the result it is not necessary to consider it further.

152 In relation to the Service Agreement it was alleged in the Notice of Default that that had been breached in various specified ways. It concluded that under clause 12.1 BKC may terminate the Service Agreement upon giving ninety days' notice to HJPL of a specified default, if such default is not rectified within the notice period, and:-

"BKC notifies HJPL that unless the defaults referred to above are rectified within ninety (90) days from the date of this Notice, BKC will at the expiration of ninety (90) days of this Notice be entitled to terminate the Service Agreement pursuant to clause 12.1 of the Service Agreement."

Accordingly, as I understand it, BKC was seeking to terminate the Development Agreement by reference to breaches of the Service Agreement, which it had required HJPL to remedy. I have referred to this. It was not in issue that BKC did not seek to terminate the Service Agreement at any stage. It had pleaded, as I have noted, that that agreement had been frustrated, but this assertion was not pursued.

153 In final submissions Mr Oslington stated that he had not, and did not propose to, address on the obligations under the Service Agreement pleaded in paragraphs 73-74; the Chris Ryan allegations pleaded in paragraphs 79-80; and the Fudge brownie allegation pleaded in paragraphs 93F-G, on the basis that if he could not succeed on the other allegations, these would not avail BKC.

154 In my opinion, for all these reasons, BKC has failed to establish that the Longer Notice was a valid notice terminating the Development Agreement.

The Notice of Termination Dated 8 September 1997

155 By letter dated 8 September 1997, BKC sent to HJPL a document purporting to be a Notice of Termination under clause 15.1(d) of the Development Agreement. The letter concluded:-

"The terms of the Notice are self-explanatory and the Development Agreement is terminated (if not already terminated due to prior Notices of Termination sent to you on November 18, 1996) upon the date of your receipt of this Notice."

156 The Notice of Termination recited, in effect, that by the two Notices dated 18 November 1996 BKC terminated the Development Agreement; that HJPL alleged that those two Notices were invalid and denied the Agreement had been terminated, and, on 26 November 1996, commenced proceedings in this Court challenging their validity; that BKC maintained that the Agreement had been validly terminated; that in the event that it be held that it had not been "BKC hereby gives notice to" HJPL "of the following breaches by HJPL of the Development Agreement"; and that the Notice of 8 September 1997 was given "without prejudice" to any or all of BKC's rights arising from its "prior termination" of the Agreement. Clause 15.1(d) was quoted and thereafter particulars of breach were set forth. The first eight breaches upon which reliance was placed related to continuing to operate specified restaurants in breach of the Franchise Agreement.

157 The first restaurant was at Fulham in South Australia, it being alleged that on 9 May 1979 BKC entered into a franchise with HJPL in respect of it. A number of terms of the Franchise Agreement were recited and it was asserted that pursuant to clause IIIC, it expired on 8 May 1994 and, thereafter, BKC and HJPL entered into a number of agreements to extend it, the last being dated 17 May 1996 and expiring on 15 November 1996. The particular breach was that from such expiration HJPL continued to operate the restaurant and to use trademarks owned by BKC "and is in breach of clauses XIIB.1 and .2".

158 The same basic allegations were made in respect of Strathpine in Queensland, it being alleged that the Franchise Agreement expired on 30 November 1996; Booval/Ipswich in Queensland, it being alleged that the Franchise Agreement expired on 30 June 1996; Springwood in Queensland, it being alleged that the Franchise Agreement expired on 13 December 1996; Balga in Western Australia, it being alleged that the Franchise Agreement expired on 16 December 1996; Barrack Street in Perth, it being alleged that the Franchise Agreement expired on 1 February 1997; Beak House in Brisbane, it being alleged that the Franchise Agreement expired on 21 December 1996; and Bunbury in Western Australia, it being alleged that the Franchise Agreement expired on 20 December 1996.

159 It was common ground that notwithstanding the purported expiry of the Franchise Agreements, BKC continued to accept royalties from HJPL in respect of each of these restaurants, and that no Notices were given pursuant to any of the Agreements into which the parties had entered to cure the alleged breaches. Accordingly, in the view I take, a condition precedent to the exercise of the right to terminate had not been fulfilled. The situation had continued for periods ranging from approximately 15 months to approximately 9 months before the Notice of Termination was given. In my opinion, the conduct of BKC amounted to a waiver of its right to terminate for these alleged breaches, or, alternatively, its conduct in allowing HJPL to proceed to carry on the business with the expenses and risk associated therewith, whilst BKC derived the benefit of the royalties, constituted an estoppel precluding BKC from relying on such rights as it had.

160 Mr Bathurst submitted that it was not open to BKC to make these complaints since, throughout 1997, it was asserting that the Development Agreement was at an end and that HJPL had no rights and BKC had no obligations under it; and that the breaches were capable of cure, but no notice was given under clause 15.2 for this to occur. I shall leave aside the issue whether BKC was entitled to rely on the various extension agreements, which Mr Bathurst submitted it could not. The short answer to this point, in addition to the waiver argument, is that the breach on which Mr Oslington placed reliance was "in continuing to trade using the trade marks and trade secrets of BKC after expiry of the Franchise Agreements". Mr Oslington submitted that this breach was not "a curable defect" and relied on the submissions "as to why notice need not be given in respect of trade mark breaches", and those about the furnishing of confidential information to Messrs Hawryluk and Deugarde, which submissions I do not accept. He added that the damage to goodwill arising from continued trading in restaurants in need of renovation was not capable of cure, as the System's reputation became tarnished. This point would seem, if factually valid, to have required far more timely action by BKC than it received.

161 The conclusion to which I have come makes it unnecessary, for present purposes, to go through the lengthy evidence about steps taken to extend the Franchise Agreements and to renovate the restaurants. These were not the grounds on which this part of the Notice to Terminate was based.

162 The next complaint in the Notice was an unauthorised "Coca Cola" distribution in alleged breach of clause 6.5 of the Development Agreement, it being asserted that a Coca-Cola Show Bag was sold and distributed to the public at the 1997 Sydney Royal Easter Show, which contained a coupon/flyer in relation to a sales promotion run by HJPL, which was not authorised by BKC. This was another "advertising" situation, which must fail for the reasons I have given.

163 Nextly it was asserted that in breach of clause 10.5 of the Development Agreement there was a sale of unauthorised products in that in or about March and April 1997 HJPL distributed, supplied and sold a certain dessert, Fudge brownie, at some or all of its restaurants in New South Wales, which was not a BKC approved menu item, was not made from ingredients and in accordance with the procedures approved by BKC, and was not approved by it before distribution, supply and sale. A further breach alleged was that HJPL did not notify BKC in advance of the proposal to distribute, supply and sell "the said non-BKC items". There was no evidence of any notice requiring HJPL to cure the alleged breach. In any event, Mr Oslington did not pursue this point.

164 Finally there was an allegation of failure to properly use trademarks. Clauses 10.6, 11.3 and 11.5 of the Development Agreement were quoted and it was asserted that on, 29 November 1993, BKC provided HJPL with a document describing how trademarks were to be advertised, and asserting that in various ways HJPL failed to use trademarks properly, with the result that the incorrect use of them was:-

".. in violation of each of the individual Franchise Agreements between HJPL and BKC. Such actions are also a violation of clauses 10.6, 11.3 and 11.5 of the Development Agreement."

In my opinion, the provisions of clause 6.5 and the requirement to give notice to cure apply to these alleged breaches in the ways to which I have referred.

165 The Notice then made reference to unauthorised promotions and, after quoting clauses 6.5 and 11.5 of the Development Agreement, it referred to several particulars of breach by virtue of HJPL's failing to obtain BKC's approval or authorisation for the promotional activities. In my opinion, this is another "advertising" situation, which must fail for the reasons I have given.

166 Finally there was alleged to be a breach of the Franchise Agreement in respect of the restaurant at Marion in Adelaide, in that on 31 January 1997 HJPL voluntarily abandoned and ceased to operate the Marion restaurant and had ceased to keep it open for business for the prescribed times without BKC's consent, such as to bring about a breach of clause VI.G of the Franchise Agreement. The evidence, which I accept, was that HJPL was required to close this restaurant because of the remodelling of the shopping centre in which it was situated. BKC gave no notice requiring the curing of this alleged breach. In view of its subsequent refusal to grant another franchise in respect of that restaurant, it could hardly have given such a notice.

167 Mr Oslington submitted that there was an obligation, in these circumstances, to obtain the consent of BKC to close the restaurant. There was no suggestion that HJPL had any control over the situation. The landlord forced the closure. That was not, on a construction of the agreement, the type of closure to which it was referring.

168 The Notice continued:-

"Termination

Accordingly, BKC, on the assumption, which it denies, that it has not validly terminated the Development Agreement, without prejudice to all of its rights arising from BKC's termination of the Development Agreement on 18 November 1996, now hereby terminates the Development Agreement pursuant to the provisions of clause 15.1 of the Development Agreement."

169 In my opinion, for the reasons I have given, even if it was still open to BKC to terminate the Development Agreement as at 8 September 1997, the Notice of that date was not valid and effective to do so.

The First Issue Of Construction

170 I shall deal with the potential tension between clauses 2.1 and 3.2 immediately. In my opinion, the resolution is that clause 2.1 is concerned with the obligation of HJPL to develop during the term of the Development Agreement, a breach of which would entitle BKC to exercise its rights under that Agreement. Clause 3.2 is concerned with the conditions, which must be met by HJPL if it wishes to exercise the right to renew given by that clause. On this basis each clause is dealing with different situations and must be considered accordingly, and in the light of all the other contractual provisions touching on each situation.

The Construction Of The Termination Clause

171 The next issue is whether the Development Agreement was, as a matter of construction, terminated by the Shorter and Longer Notices of Termination or either of them. I have, of necessity, referred to certain of the issues and my conclusions, some of which assumed answers to the construction points favourable to HJPL. I shall now seek to explain why I considered those assumptions are correct. The sub-issues are:-

(a) Whether the breaches alleged were conditions, which entitled BKC to terminate at law without recourse to the termination provisions in the Agreement. Mr Bathurst submitted that they lacked sufficient essentiality to satisfy that requirement. Mr Oslington submitted that that was not a necessary part of his case because the termination provision was wide enough to cover breaches not only of conditions, but of other terms or provisions. However, in case a different view is taken elsewhere I propose to reach a conclusion on this issue.

(b) Whether, in relation to the Shorter Notice, the right to terminate was governed by clause 15, as Mr Oslington submitted, or whether, as Mr Bathurst submitted, clause 8.1 governed the situation and, perhaps, clause 15 could only operate once there had been a failure to comply with clause 8.1.

(c) Whether, even if Mr Oslington was correct in relation to (b), the rights under clause 15 could only be exercised after notice was given requiring the breach to be cured, notwithstanding that it was conceded that it could not be cured within thirty days; i.e. whether a breach was capable of being cured within the meaning of the agreement, notwithstanding that it could not be cured within the time limited by clause 15.2 for it to be cured, thereby giving BKC the right to terminate, that right flowing from the failure to cure within the stipulated time.

(d) Whether, as Mr Bathurst submitted, the giving of a notice to cure, where the breach was one capable of being cured albeit it could not be cured within the specified time, was a condition precedent to the right to give a notice to terminate.

(e) Whether, in relation to the Longer Notice, the alleged breaches were capable of cure within the sense to which I have referred, such that the giving of a notice to cure was a condition precedent to the exercise of the right to terminate.

This consideration proceeds on the basis that, as a matter of fact, there were breaches and that BKC was not precluded by considerations of waiver, estoppel or implied terms of reasonableness or good faith from exercising its rights to terminate, save in so far as I have expressly made a finding on any such matter. Each of those matters was very much in dispute.

172 Firstly, it is established that implied terms of reasonableness and good faith mean that a clause allowing for termination will not necessarily be construed literally so as to allow that right to be exercised in relation to a breach no matter how minor nor susceptible of easy rectification. This is an important qualification having regard to Mr Oslington's submission that the breaches said to found the right to terminate are not ones "capable of being cured", because once the breach has occurred it can never be rectified. That submission, of necessity, denies operation to the words "capable of being cured" in a vast number of instances. If that be so it strengthens the view that, as a matter of construction also, the termination clause should not operate on minimal breaches, or ones which could, but for the submission, be readily cured.

173 The approach of a Court to such a clause, as with most clauses in commercial contracts, is that the parties intend to be bound by, rather than seek to avoid, their contract. As Roskill LJ said in Cehane NV v Bremer Handelsgesellschaft mbH [1976] QB 44 at p.71:-

"In principle contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions (of a contract) I think the court should prefer that construction which will ensure performance and not encourage avoidance of contractual obligations."

174 To similar effect Gibbs J said, in Australian Broadcasting Commission v Australian Performing Right Association Limited [1973] HCA 36; (1973) 129 CLR 99, at p.109:-

"It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, `even though the construction adopted is not the most obvious, or the most grammatically accurate' ..."

This approach has been applied frequently.

175 In Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 594, at pp.556-557, Mason ACJ, Wilson, Brennan and Dawson JJ said:-

"In deciding whether a promise has the status and effect of a condition, courts are not too ready to construe a term as a condition and, at least where other considerations are finely balanced, will hold that a term is of such a kind that breach of it does not give rise to an automatic right to rescind. This approach is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations: Cehane NV v Bremer mbH; Bunge Corporation."

176 In Hide & Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310 Kirby P considered a resolution of ambiguity in commercial agreements and, at pp.313-314, said:-

"Whoever may be the parties to the agreement, it is the fundamental rule, that a court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such a way."

177 Secondly, the question arises as to how the "curing" provision should operate. HJPL submitted that where a breach was capable of being cured the requisite notice had to be given and, thereafter, the specified time had to expire without a curing of it, before a notice to terminate could be given. BKC did not contest the first proposition. It submitted that a breach was not capable of cure, either because a breach having occurred the matter could never be put right for the future, or because it was not possible to remedy the breach, within the time specified, and, therefore, the breach was one incapable of being cured. In either event, Mr Oslington submitted, it was not necessary to give notice. I have also adverted to what I think may have been submitted, that once a breach has been cured it is no longer capable of cure so that a Notice of Termination may be given. If that submission was made, I reject it for the reasons I have stated.

178 It was submitted that there was no requirement to give notice where the temporal limitations had expired. I have difficulty with this submission. It seems to me that most obligations are governed by time limitations or restrictions, which are either specified by reference to a date or an event. Thus, it may be that it is necessary for an act to be performed within a specified time or by a specified date. Accordingly, it was provided that if money had not been paid, the payment being determined either by a specified time or date or by an event, HJPL had ten days within which to cure the breach. Any such curing of the breach must occur beyond the period when the payment should have been made and, therefore, after the breach. If Mr Oslington's submission is carried to its ultimate conclusion the breach would not be capable of being cured, notwithstanding that clause 15.2 obviously contemplates that it may be. Similarly, so it seems to me, breaches may be related to events. Thus there may be an obligation to keep premises clean. When the premises cease to be clean, such as to constitute a breach, there will be, at that time, a breach. On Mr Oslington's submission, because the time for keeping the premises clean has expired by allowing them to become dirty, the breach cannot be cured. However, to apply that construction would be to remove much of the effect of clause 15.2 and, in a vast majority of cases, to render those provisions of no effect. That would, in my opinion, lead to a result the Development Agreement never contemplated and would substantially defeat its purpose. The authorities support the view that where the time has passed a breach, which is capable of being cured, may be cured for the future.

179 Mr Bathurst responded that the purpose of clause 15.2 was to govern when breaches may give rise to the right to terminate. Firstly, if a breach was "capable of being cured", i.e. able to be put right for the future, the existence of that fact necessitated the giving of notice to cure. It mattered not that the breach could not be cured within the specified number of days because the clause was directed to breaches "capable of being cured", not "breaches capable of being cured within 10 or 30 days". Once it was established that the breach was capable of being cured that gave rise to a condition precedent to give notice prescribing either 10 or 30 days to do so. If the breach was not cured in that period, the right to terminate arose by virtue of that failure. Secondly, the fact that there had been a breach, which was capable of being cured for the future, could not give rise to a right to terminate without notice on the basis that the past breach could never be put right. Such a construction would deny the clause of much of its operation, and would be completely opposed to its obvious purpose and intent in the context in which it was found.

180 In Batson v De Carvalho & Ors (1948) 48 SR 417 the plaintiff leased premises from the defendant. He parted with possession to others in breach of a covenant in the lease, suggesting to them that they should conceal from, or misrepresent to, the defendant the terms of their possession. The defendant served a notice upon the plaintiff purporting to be given in compliance with s.129 of the Conveyancing Act 1919 and later entered into possession of and re-let the premises to those to whom the plaintiff had given possession. The notice merely recited the covenant alleged to have been broken, and stated that the breach was incapable of remedy. The plaintiff commenced a suit for relief against forfeiture and moved for an interlocutory injunction restraining the defendant and the occupants from depriving him of possession.

181 At p.424, Sugerman J began to consider a complaint made by the plaintiff of the failure to specify the particular breach as required by s.129(1). His Honour noted that the form provided by s.129(9) was one primarily designed for the case of a breach capable of remedy and, at p.425, he said:-

"Where the breach is not remediable, so that there is no opportunity of giving the particulars in the requirement to remedy (and that is the assumption I have made in discussing this point), then a notice `to a similar effect' should state the

particulars in some other way."

182 He dealt with the failure to require the plaintiff to remedy the breach and, at p.426, said:-

"I agree entirely with what was said on this subject by Morris J in Egerton v Esplanade Hotels London Limited: `I think it is clear that the phrase "remedy the breach" cannot mean, and was not intended to mean, that the breach was to be wiped out, for that clearly would be an impossibility. That which has taken place cannot be obliterated as an event or as a fact. Counsel for the second defendants submitted that a useful way in which to approach the phrase "remedy the breach" would be to consider whether the consequences of the breach were capable of remedy'."

The construction which Sugerman J and Morris J rejected was, essentially, that for which Mr Oslington contended, as indeed he had to, his client having chosen not to give notice requiring any of the breaches to be cured, which approach necessarily proceeded on the basis that the breaches were not capable of cure.

183 Sugerman J continued:-

"It is not necessarily true that every breach of a covenant not to assign etc without consent is capable of remedy. For instance the character of the assignee etc, or the use to which he puts the premises, may produce consequences making applicable the considerations which led to the actual decision in the two cases to which I have just referred."

184 His Honour considered various methods by which a remedy could be achieved and noted that the lessee was entitled to an "opportunity of complying with the requirements of the notice". He recognised that it may not be possible for that to happen and, at p.427, said:-

"To `remedy' a breach is not to perform the impossible task of wiping it out - of producing the same condition of affairs as if the breach had never occurred. It is to set things right for the future, and that may be done even though they have for some period not been right, and even though that may have caused some damage to the lessor (for which he is entitled to claim compensation under s.129(1)(c)) provided: Rugby School (Governors) v Tannahill, that the breach has not resulted in a detriment to the premises which cannot be removed within a reasonable time. The physical analogy in the use of the word `remedy' (and similar words, such as `cure', in other branches of the law) may be referred to, not as an argument but to illustrate what is meant. A breach may be remedied, I think, even though the time for doing the thing under the covenant may have passed, or the order of events stipulated for in the covenant can no longer be observed; to hold otherwise would be to deprive s.129(1)(b) of a great deal, if not all, of its operation.

For these reasons I come to the conclusion that the notice was also defective in that the breach was `capable of remedy', if not in any other way, then by seeking the consent of the lessor, and the notice did not require the plaintiff to remedy it." (My emphasis.)

Mr Oslington placed heavy reliance on the words I have emphasised and the authorities on which they were based. A principal submission was that conduct on the part of HJPL was not capable of being cured if the effect of it was to besmirch the products or name of BKC, or BKC through HJPL.

185 This decision was followed by the majority of the Court of Appeal, Samuels JA and Waddell AJA, in Tricontinental Corporation Limited v HDFI Limited (1990) 21 NSWLR 689. The agreement there in question allowed the appellant, in a contractually specified time, to demand repayment by the respondent if an event of default, which was not capable of rectification, had occurred, or if an event of default, which was capable of rectification, had occurred and remained unrectified at the expiration of seven days after the date of a written notice requiring rectification.

186 Waddell AJA, with whom Samuels JA essentially agreed, said, p.718, that the clear commercial purpose of the provisions was to provide a mechanism whereby the liability on the part of the respondent could be established in a way which was unambiguous and certain, and that it was essential in commercial dealings that such provisions be applied strictly "so that parties know exactly where they stand". His Honour considered that was sufficient to dispose of the appeal, but he dealt with certain other submissions and, at pp.722-723, noted a submission by the appellant that it was entitled to rely upon the agreement in that the failure to pay on a particular date:-

".. is not a default which is capable of rectification because the date has passed and nothing can be done to re-establish what should have been done. On this view, only a continuing default could be regarded as capable of rectification. However, in my opinion, the default in failing to pay the bills due on 30 November was capable of rectification by paying the money due, together with additional interest as provided by the facility agreement, at a future date."

187 His Honour adopted the reasoning in Batson and quoted the passage from p.427.

188 Samuels JA said, p.702, that it was arguable that the event of default was one that could not be rectified because the precise time for making the payment had passed "and could therefore not be retrieved". His Honour referred to the remarks of Lord Wilberforce in Bunge Corporation, New York v Tradax Export SA Panama [1981] UKHL 11; [1981] 1 WLR 711, in relation to breach of time clauses; but then referred to Ankar at p.562. He said:-

"If that is the case, then there would be no need to go beyond clause 2.2.1(a). In his judgment Waddell AJA has set out a passage from the judgment of Sugerman J in Batson .. concerning the construction of the words `capable of remedy' in s.129(1)(b) .. I agree with Waddell AJA that an analogous approach should be taken to the construction of clauses 2.2.1. If that is the case, then one fixes upon the effect of the default in the given circumstances rather than upon the historical fact of its occurrence."

He was of the view that the default was that the appellant did not receive its money, but if the respondent was given an opportunity to remedy it:_

".. it is possible that it could so arrange its affairs as to enable it to pay up. Hence it might be said that in this sense the event of default was capable of remedy."

189 It may be said that the reasons of the majority were obiter dicta in Tricontinental. However, even if that be the correct analysis, they are, if I may say so with respect, most powerful observations and they adopt the reasoning of Sugerman J, which clearly provided part of the ratio decidendi in Batson. Also, once again if I may say so with great respect, I find the reasoning totally compelling.

190 A somewhat similar situation was considered by the House of Lords in F.L. Schuler AG v Wickman Machine Tool Sales Limited [1973] UKHL 2; [1974] AC 235, in which a condition requiring the inspection of premises was imposed by clause 7. Clause 11 provided that the agreement could be terminated in, inter alia, the following circumstances:-

"The other shall have committed a material breach of its obligations hereunder and shall have failed to remedy the same within sixty days of being required so to do ..."

The question which arose was whether the breach of a condition meant that it was not necessary to rely upon clause 11, Wickman contending that Schuler was only entitled to determine the agreement for the reasons and in the manner provided in clause 11. Schuler, on the other hand, submitted that the terms of clause 7 were decisive in its favour, and that as there was a breach of a condition resort to clause 11 was unnecessary.

191 At pp.249-250 Lord Reid said:-

"But on any view the interrelation and consequences of the various provisions of this agreement are so ill-thought out that I am not disposed to discard the natural meaning of the words which I have quoted merely because giving to them their natural meaning implies that the draftsman has forgotten something which a better draftsman would have remembered. If the terms of clause 11 are wide enough to apply to breaches of clause 7 then I am inclined to hold that clause 7 must be read subject to the provisions of clause 11.

It appears to me that clause 11(a)(i) is intended to apply to all material breaches of the agreement which are capable of being remedied. The question then is what is meant in this context by the word `remedy'. It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning. The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place. And in general it can only be in a rare case that any remedy of something that has gone wrong in the performance of a continuing positive obligation will, in addition to putting it right for the future, remove or nullify damage already incurred before the remedy was applied. To restrict the meaning of remedy to cases where all damage past and future can be put right would leave hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of language to say that a breach can be remedied. For example, a breach of clause 14 by disclosure of confidential information could not be said to be remedied by a promise not to do it again." (My emphasis.)

192 At p.271 Lord Kilbrandon said:-

"On the whole, though without a great deal of confidence, I come to the conclusion that the use of the word `condition' in 7(b) was intended by the parties to isolate an individual fundamental term, and to provide for rescission, on any breach, in addition to the other more general provisions for rescission set out in clause 11, without the opportunity being given to the party at fault by clause 11 to put things right for the future, where the nature of the breach made that possible. Thus, when the appellants first had reason to complain in January 1963 of material breaches of clause 7(b), they could have called upon the respondents to make better arrangements within sixty days, upon pain of rescission. It is only in this way that I can give any meaning to the remedial provision."

193 As Dr J.W. Carter said in his article "Termination Clauses" Vol 3 Journal of Contract Law (1990-1991) 90 at p.95:-

"Finally, the clause may go beyond a simple requirement of notice and specify a particular process to be followed prior to termination. It is here difficult to make generalisations, but the two main possibilities are as follows:-

1. The promisee may be empowered to call upon the promisor to perform, by providing an opportunity to `remedy' the breach; or

.......

In the first case, if the promisor performs the obligation breached after being required to do so, the breach ceases to be available as a source of termination."

The Submissions On Construction Issues

194 Mr Bathurst submitted that, as a matter of construction of the Development Agreement, BKC did not have the right to terminate it on 18 November 1996, as the Shorter Notice purported to do, for failure to build four restaurants in the preceding year. HJPL's case was, firstly, that the rights conferred on BKC, in the event of non-compliance with the Development Schedule, were governed "in their entirety" by clauses 3.2, 7.3 and 8.1 and, as a matter of construction, a failure to comply with the Development Schedule was neither a breach of an essential term, such as to give rise to a right to rescind at common law, nor did it give rise to a right to terminate pursuant to clause 15. Secondly, if there is any right to terminate it could only be effected by the use of the mechanism specified in clause 15 and, as the breach was capable of being cured, the notice provisions requiring that to occur applied irrespective of whether HJPL would have been able to achieve a cure within the thirty day period; it being accepted by HJPL that it would not have been able to do so.

195 Mr Bathurst submitted that as to the Longer Notice and the Notice given in September 1997, BKC was not entitled, on a proper construction of the Development Agreement, to terminate for any of the breaches referred to therein without giving a Notice of Default required by clause 15.2, such submissions being made on the assumption that the various breaches were capable of giving rise to a right to terminate if such a notice was given. I have concluded that this submission is correct.

196 Mr Bathurst developed his submission in relation to the Development Schedule thus. He submitted that clause 2.1 is not an essential term of that agreement, is not described in it as a condition, and does not provide that the time limitation is an essential term. Whilst he conceded those matters were "by no means conclusive", he said they assumed some significance over and above what they usually assumed by dint of the surrounding factual circumstances but, in any event, constituted "the first pointer" to the term not being regarded as essential.

197 He submitted that an essential or fundamental term is one in respect of which it can be said that BKC would not have entered into the contract had it not been assured of strict or substantial performance of it.

198 In Tramways Advertising Pty Limited v Luna Park (NSW) Limited (1938) 38 SR 632 Jordan CJ, at p.640, said that in considering the legal consequences flowing from a breach of contract, it is necessary to determine the nature of the promise broken, because if it is a condition, which his Honour described as "an essential promise", the innocent party, upon becoming aware of the breach, ordinarily has the right at his option either to treat himself as discharged from the contract or to recover damages for its loss, or to keep the contract on foot and recover damages for the particular breach. On the other hand if it is a warranty that is breached, which his Honour described as a "non-essential promise", only the latter alternative is available to the innocent party. At pp.641-642 his Honour set forth the test of essentiality, in terms adopted by the High Court in DTR Nominees Pty Limited v Mona Homes Pty Limited & Anor [1978] HCA 12; (1978) 138 CLR 423 at p.431. Jordan CJ said:-

"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: .. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg. by a stipulation that it is the basis or of the essence of the contract: Bettini v Gye; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained; Bentsen v Taylor Sons & Co (No 2); Clifton v Coffey."

199 In Bentsen v Taylor Sons & Co (No 2) [1893] 2 QB 274, Bowen LJ said, at p.281:-

"Of course if it is often very difficult to decide as a matter of construction whether a representation which contains a promise, and which can only be explained on the ground that it is in itself a substantive part of the contract, amounts to a condition precedent, or is only a warranty. There is no way of deciding that question except by looking at the contract in the light of the surrounding circumstances, and then making up one's mind whether the intention of the parties, as gathered from the instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or as a condition precedent by the failure to perform which the other party is relieved of his liability. In order to decide this question of construction, one of the first things you would look to is, to what extent the accuracy of the statement - the truth of what is provided - would be likely to affect the substance and foundation of the adventure which the contract is intended to carry out. In the case of a charter party it may well be that such a test could only be applied after getting the jury to say what the effect of a breach of such a condition would be on the substance and foundation of the adventure; not the effect of the breach which has in fact taken place, but the effect likely to be produced on the foundation of the adventure by any such breach of that portion of the contract."

200 In DTR Nominees Stephen, Mason and Jacobs JJ said, at pp.430-431:-

"Whether a term of a contract is essential or not is a question of construction which is to be answered with due regard to the general nature of the contract considered as a whole and to its particular terms."

After citing the passage from the judgment of Jordan CJ to which I have referred, their Honours continued:-

"This statement of the law, which was approved in Associated Newspapers Limited v Bancks, emphasises that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances. Once this is understood, there is no sufficient foundation for holding that the respondents would not have entered into the contract had they known that the appellant had not lodged the contract plan of subdivision and that it would not proceed expeditiously thereafter."

201 Aicken J agreed in that judgment. Murphy J, who dissented, considered that the "test" stated by Jordan CJ was so vague that it could not be described as a test, and that it diverted attention from the real question:-

".. which is whether the non-performance means substantial failure to perform the contractual obligations. The inquiry into the motivation for entry into the contract is not the real point." (Page 436.)

202 Mr Bathurst submitted that the requirement that HJPL, or any BKC franchisee introduced by it to BKC, should develop and open a minimum of four new Burger King restaurants each year commencing on 12 November 1990 in the States of Western Australia, South Australia and Queensland was not, when one had regard to the test propounded by Jordan CJ, a promise of such importance to BKC that it would not have entered into the contract if it had not been assured of a strict or substantial performance of it.

203 The Development Agreement was for a term of five years, (clause 3.1), with the result that if the Development Schedule was maintained at least twenty new restaurants would be opened over the term.

204 Clause 2.2 provided for circumstances of a force majeure nature whereby BKC may, after an independent examination of the underlying facts, "not unreasonably withhold its consent to a reasonable extension of time to meet the Development Schedule". Mr Oslington agreed that if BKC did exercise that power or right and the restaurants were built within the extended time there would be compliance with clause 2.1.

205 Mr Bathurst submitted that clauses 3.2 and 8.1 made clear that clause 2.1 lacked the element of essentiality to which Jordan CJ referred. Whilst it is clear that clause 3.2, which provided for renewal of the Development Agreement, is dealing with a separate matter, it is equally clear that that right was dependent upon HJPL's having opened twenty restaurants during the previous five years in Western Australia, South Australia and Queensland, which obligation would be fulfilled if a minimum of two restaurants, rather than four specified in clause 2.1, were opened each year. I pause to note that neither party made a submission that the obligation imposed by clause 3.2 was different from that imposed by clause 2.1 in the sense that in clause 3.2 the obligation was on HJPL to open twenty restaurants, whereas in clause 2.1 the obligation was upon it or any BKC franchisee introduced by it to BKC to develop and open restaurants. The parties, as I understand it, accepted that there was no distinction between those two formulations.

206 The point made by Mr Bathurst was that the basic requirement of clause 2.1 was the development and opening of a minimum of four new restaurants each year and, therefore, the opening of at least twenty new restaurants over five years. The question was, conformably with Jordan CJ's test, whether BKC would have entered into the contract unless it had been assured of a strict or substantial performance of that promise. At the risk of repetition, the promise was to build a minimum of four new restaurants each year. When the promise was so understood, he submitted, the terms of clause 3.2 made it clear that this was not an essential term because the important provision allowing HJPL to renew the agreement, whilst requiring the opening of twenty new restaurants over the five year term of the agreement, provided for a minimum of two restaurants each year.

207 Under the Development Schedule HJPL was not restricted to opening four new restaurants each year, that being the minimum. Accordingly, it may open, for example, a greater number in any given year, but retain the right to renew the Development Agreement provided that over the five years it opened twenty with a minimum of two each year. Thus, Mr Bathurst submitted, there was no requirement of a strict or substantial performance with the promise to open a minimum of four restaurants each year, because clause 3.2 provided that the opening of half that number would be sufficient for its purposes.

208 He submitted, nextly, that clause 8.1 emphasised this lack of essentiality. The clause was the subject of much debate and is worthy of some further consideration. The first sentence means that franchise fees otherwise payable by HJPL would be waived in any year commencing on 12 November so long as HJPL adhered to the Development Schedule in that year, i.e. so long as HJPL built a minimum of four restaurants. The second sentence is predicated on a failure by HJPL to meet the requirements of the Development Schedule, and imposes on HJPL a liability to pay the franchise fee in respect of each restaurant required to be but not opened under the Development Schedule. Accordingly, so Mr Bathurst submitted, the parties had agreed that the consequence of failing to meet the Development Schedule would sound in a monetary payment by HJPL to BKC of an amount, the payment of which otherwise would have been waived. However, the third sentence qualifies the second by providing that the franchise fees, which become payable pursuant to the second sentence, are not payable until the end of the year following the failure and, only then, if the failure has not been made good by that time.

209 The submission ran that if one assumes that as at 18 November 1996 there had been a failure to comply with the Development Schedule, the consequence of that was to require HJPL to pay the franchise fee in respect of so many of the four restaurants as were not opened during the year ending in November 1996, but that such fees would not be payable until November 1997, and, only then, if the failure had not been made good. Mr Bathurst submitted that the consequence of this clause was, firstly, to allow HJPL a period of twelve months to make good the failure to develop in accordance with the Development Schedule in the previous year, which made it as clear as could be that there was no relevant essentiality in building a minimum of four restaurants each year, i.e. that looking at the matter objectively, clause 8.1, read in the context of the Development Agreement, showed that BKC did not enter into that agreement on the basis that there would be strict compliance with clause 2.1.

210 He submitted that those propositions were supported by two further matters "of somewhat less significance, but equally relevant in this particular case". Firstly, he referred to clause 2.2, which he said was a pointer, although not as strong as the others, to the fact that clause 2.1 is not an essential term. Secondly, he referred to clause 4.1 and submitted that as HJPL must have, in BKC's sole discretion, operational, financial and legal approval to develop, that tended against the conclusion that clause 2.1 is an essential term in the sense that, if there was not strict compliance, a right to terminate would immediately arise at law. The submission, as I understand it, was that clause 2.1 loses any relevant essentiality when HJPL may be desirous of expanding but is prevented from doing so in BKC's sole discretion. Put another way, by retaining to itself the sole discretion to refuse expansion, BKC could not be heard to say that it was essential from its point of view that there should be strict or substantial performance with the promise. I do not consider that this submission is correct. Rather, in my opinion, clause 4.1 enables BKC to refuse expansion where HJPL has not met the requirements for the approvals referred to in that clause. I do not consider that that points to the lack of essentiality, if it otherwise exists, of clause 2.1. However, I do consider that in construing the Development Agreement it is proper to have regard to the possibility that development may not proceed whilst operational, financial or legal approvals are withheld. I shall assume, for present purposes, that they are withheld properly. That would provide a reason, viewed objectively, why the parties would allow a longer period, as, in my opinion, is provided by clause 8.1, to comply with the Development Schedule.

211 Mr Bathurst's submissions proceeded that if it be correct to say that clause 2.1 is not an essential term, the right to terminate would only arise under clause 15 and, he further submitted, that even if clause 2.1 is an essential term, the right to terminate can only be exercised pursuant to clause 15, which provides that the occurrence of the events specified "shall constitute good cause for BKC, at its option and without prejudice to any other rights or remedies provided for hereunder or by law or equity, to terminate" the Development Agreement. Mr Bathurst submitted that notwithstanding that reservation of rights, clause 15, in terms, is expressed to apply to all breaches, and that regardless of the division of terms into essential, non-essential and intermediate ones, the clause 15 procedure had to be followed. This submission received support from the terms of clause 15.1(d), upon which Mr Oslington also placed reliance, which provided:-

"Hungry Jack's fails to comply with any of the other terms, provisions or conditions of this agreement, any Franchise Agreement, or any other obligation owed to BKC."

Thus it was said that clause 15 expressly embraced a failure to comply with, inter alia, "conditions". Mr Bathurst submitted that this was consistent with the approach taken by Lord Reid in Schuler.

212 Clause 7 of the agreement there under consideration provided that it was a condition of it that Wickman should send its representatives to visit six named firms at least once in every week to solicit orders for the purposes of the agreement. The agreement was to last for a period, which required Wickman under that condition to make a total of some 1,400 visits during its term. Wickman failed in its obligations. The agreement also contained a term allowing for termination if a party committed a material breach of its obligations, which it failed to remedy within sixty days of being required in writing to do so.

213 Wickman submitted that Schuler was only entitled to determine the agreement as provided in clause 11. Schuler contended that clause 7 constituted a condition, breach of which entitled it to terminate irrespective of clause 11. At p.249 Lord Reid considered the terms of the clauses and concluded that if the terms of clause 11 were sufficiently wide to apply to breaches of clause 7 he was inclined to hold that clause 7 must be read subject to the provisions of clause 11. I have quoted the relevant passage from his Lordship's speech at pp.249-250.

214 Mr Bathurst submitted that his Lordship had construed the contract as one in which the parties had provided the method whereby the agreement may be terminated and, had thereby, excluded other methods. He referred also to the speech of Lord Kilbrandon at p.271, which I have set forth.

215 Mr Bathurst relied nextly upon the decision of the Full Court of the Federal Court in Amann Aviation Pty Limited v Commonwealth of Australia (1990) 22 FCR 527. Although the matter went to the High Court, the appeal did not involve this aspect. In that case there was a termination clause, which provided:-

"Whenever and so often as the Contractor fails to carry out the Contract or comply with a condition of the Contract to the satisfaction of the Secretary then in either of these events the Secretary may, by notice in writing, require the Contractor to show cause in writing to the satisfaction of the Secretary, why the Contract or any specified portion thereof should not be cancelled. If the Contractor fails to show cause in writing, if so required, the Secretary shall be entitled to treat the Contract or any specified portion thereof as having been cancelled and may declare the whole or any part of the security lodged by the Contractor forfeited by the Commonwealth, and thereupon the amount so declared to be forfeited shall become the property of the Commonwealth absolutely." (My emphasis.)

216 At p.532 Davies J said that clause 2.24 eschewed the distinction between a condition, being a term going to the essence of the contract and breach of which would justify rescission, and a warranty, breach of which would give rise only to a claim for damages. He considered, that to that extent, clause 2.24 reflected the view expressed in Hong Kong Fir Shipping Co Limited v Kawasaki Kisen Kaisha Limited [1961] EWCA Civ 7; [1962] 2 QB 26 and Ankar Pty Limited v National Westminster Finance (Australia) Limited that the right to rescind can depend upon the extent and gravity of the breach upon which reliance was placed, rather than on its classification as essential or non-essential.

217 His Honour, after quoting and referring to certain passages in those cases, concluded that clause 2.24, whilst not dealing with a case of repudiation by the contractor, none-the-less provided the agreed procedure for cancellation on breach and that, accordingly, the Commonwealth was not entitled, of its own motion, outside the agreed procedure to specify that a term was of the essence and to rescind forthwith for the breach of that term: p.532.

218 At p.542 Sheppard J posed the question as being whether the parties intended that the operation of clause 2.24 should be limited to cases in which the common law would treat the breach relied upon as fundamental, or to ones where it would treat the breach as being an intermediate term. His Honour continued:-

"The strength of the view that the clause was intended to be restricted in this way arises from the serious consequences which may flow if the power is exercised and the fact that the contractor, for quite a minor breach, might lose the benefit of the whole contract. Coupled with this consideration is the circumstance that the contract provides in a number of places for liquidated damages which are to be paid in the event of particular breaches which are of a comparatively inconsequential nature.

To be measured against these considerations is, in my respectful opinion, the improbability that the parties intended that, in the course of the administration of a complex contract which was to be carried on over a number of years, either party was to be put in a position where a judgment had to be made, often of some nicety, whether a breach of s3 of the contract was, or was not, of a particular quality."

219 Mr Bathurst submitted that the Development Agreement dealt firstly with events of default as a matter of total generality, (clause 15.1(d)); that it treated as events of default under the Development Agreement, events which did not specifically arise under it, but arose under the various associated agreements, including the many Franchise Agreements; and that it would be surprising in those circumstances that the parties, having laid out the clause 15 regime, only intended to apply it to a limited class of breach. He continued:-

"It follows from that that, even if we are incorrect in saying that clause 2.1 should not be classified as an essential term, the only mechanism for termination as a consequence of default was the clause 15 mechanism, and if the clause 15 mechanism doesn't apply, then there is no right to terminate for breach at all.

What we submit is this, that the regime in clause 15.1 is inherently inconsistent with clause 3.2 and 8.1, and the only way those provisions can be read together is by limiting clause 15.1(d) so as not to apply to non-compliance with the Development Schedule, or, to put it another way, non-compliance with the Development Schedule, whilst it confers certain rights on the defendant for the purpose of clauses 3.2, 7.3 and 8.1, is not a failure to comply with the terms of the agreement for the purpose of clause 15.1(d)": Tp.3714.

220 The reliance on clause 7.3 stemmed from the rights it furnished provided there was compliance with the Development Schedule. I have quoted it.

221 The submission was that clause 15.1(d) did not apply to a breach of clause 2.1, which clause should be read as a statement of the manner in which it was envisaged development would occur and as a necessary pre-condition to a continuation of the protection against encroachment in Western Australia, South Australia and Queensland given by clause 7.3, and as ultimately triggering a liability to pay a franchise fee under clause 8.1.

222 Mr Bathurst submitted that clauses 2.1 and 3.2 could not be read together, because if BKC was entitled to exercise an immediate right of termination for a failure to build a minimum of four restaurants in any one year, a situation could arise where BKC could terminate in circumstances where HJPL had not lost its rights to a renewed term e.g. if during the first four years of the agreement HJPL constructed eighteen restaurants, compliance with clause 3.2 could be achieved by building two restaurants, the minimum number required by that clause, in the final year.

223 Mr Bathurst submitted that it was necessary to give effect to all the provisions of the contract, so far as possible. Therefore, he submitted that in certain circumstances HJPL may be in breach of clause 2.1, but not in breach of clause 3.2 and, if there was a right to terminate either for breach of an essential term or pursuant to clause 15, the accrued rights under clause 3.2 to renew the agreement could be defeated. The effect of the submission was that there were two rights travelling, in effect, in parallel, and that provided there was compliance with, for example, the requirements of clause 3.2, it could not have been the intention of the parties to defeat the rights accrued under that clause by reliance upon a breach of clause 2.1. In those circumstances, so the submission ran, the breach of clause 2.1 was accommodated by other remedies in the Development Agreement. I have referred to the remedy provided by clause 8.1, which, at least prima facie, is at odds with a termination pursuant either to a common law right based on the essential nature of clause 2.1, or pursuant to clause 15. Mr Bathurst relied also upon clause 7.3, which he said provided a further sanction for breach of clause 2.1, namely that if HJPL did not comply with clause 2.1 it would lose the rights conferred by clause 7.3. It is also relevant to note in this regard that the Development Agreement conferred on HJPL a non-exclusive right. There was nothing to prevent BKC expanding in the States of Western Australia, South Australia and Queensland, if it thought development was appropriate there and, for an abundance of caution, clause 7.3 made that clear. The only possible restriction on BKC in those States was that provided by that clause subject to HJPL's compliance with the Development Schedule. It was submitted that this was another pointer to the non-essentiality of the Development Schedule in that there was nothing to prevent BKC's opening the necessary number of restaurants or, to put it another way, BKC had not contracted away its rights to develop in those States and thus to meet any perceived need in them and, further, if HJPL was not complying with the Development Schedule, BKC's rights in this regard were unrestricted. Accordingly, Mr Bathurst submitted, viewed objectively the parties must be taken to have considered that to be an adequate solution to the failure by HJPL to comply with clause 2.1.

224 In relation to clause 8.1 Mr Bathurst submitted that it provided, as clearly as may be, that the Development Agreement would continue on foot so as to give HJPL the opportunity to achieve the necessary number of restaurants, and that, accordingly, there could not be a right to rescind for breach of an essential term or pursuant to clause 15, which would deprive HJPL of that right. In these circumstances his submissions were that it must follow that, viewed objectively, the parties' intention was not to confer a right to terminate, either at law or under the provisions of clause 15.1(d), because such a right was not necessary to enable BKC to expand its development activities, which was the primary concern of the Development Agreement. Of course fundamental to these submissions was that the period to cure under clause 8.1 could not be reconciled with the thirty day period to cure under clause 15.2.

225 Another point made was that whilst in some instances it may be possible to comply with clause 2.1 within a period of thirty days if, for example, only relatively minor matters had to be done to enable restaurants to be opened, in many cases the development of a new restaurant would take far longer than thirty days and, accordingly, the proper way in which to construe the Development Agreement was on the basis that the parties recognised this and, therefore, allowed the further period of twelve months in which to comply. I should also add that Mr Bathurst did not suggest that this submission precluded termination for repudiatory conduct on the part of HJPL, but there was no submission that HJPL had engaged in any such conduct.

226 Mr Oslington commenced his submissions by referring to the fact that the parties were entitled to include in their contract what they wished, and that the Court's duty is to give effect to those wishes, as expressed in the contract and construed objectively. Both those submissions are correct, the first giving rise to what the parties have stated in the contract, as a matter of construction, and the second to how, having regard to accepted canons of construction, including the implication of terms, the words used should be interpreted. He noted that HJPL had not alleged the existence of any implied terms relevantly for the purposes of the initial submissions, and the terms of clause 19.1. He submitted that the Court was required to give the Development Agreement its "fair meaning", conformably with that clause.

227 Mr Oslington then pointed to clause 20, which provided that the Development Agreement is an entire agreement superseding all prior negotiations, understandings and written or oral agreements. Nextly, he submitted that Mr Bathurst had not pointed to any clause of the Development Agreement which, in his submission, was ambiguous, but rather sought to use rules of construction of contracts for resolving an ambiguity in an attempt to achieve a construction of the Development Agreement, which accommodated HJPL in the circumstances.

228 Mr Oslington submitted, Tp.3761, that clause 2.1 constituted a condition, but that it was unnecessary for me to consider that because that question would only arise in the absence of express provision for termination for the particular breach, and that clause 15.1(d) entitled BKC to terminate for the breach, inter alia, of any condition; that it was expressed in the widest term; and that for the issue as to whether clause 2.1 imposed a condition to arise, it would be necessary for me to read the very wide language in clause 15.1(d) as demonstrating a contractual intent to allow termination on that ground for only some of the terms, provisions and conditions "an interpretation, which, in our submission, is contrary to a fair reading of the language used in clause 15.1(d)".

229 Therefore, Mr Oslington's primary submission was that it mattered not whether clause 2.1 was a condition, because it was a term or provision of the Development Agreement, and, accordingly, capable of being terminated pursuant to clause 15 in reliance upon clause 15.1(d). This removed the need to consider Mr Bathurst's submission that the Development Agreement could not be terminated for breach of a condition without recourse to the provisions providing for termination, although Mr Oslington continued that if HJPL's submission was correct that it must be demonstrated that clause 2.1 was a condition, the relevant test of essentiality had been established. In this regard he pointed to the fact that the agreement was called "a Development Agreement"; that HJPL derived rights to develop and obtained the benefit of development; that the benefit of that development was the opening of a minimum of four restaurants in the three States each year and a non-exclusive right to develop throughout Australia, subject to limited exceptions; and that development could be restrained in Western Australia, South Australia and Queensland pursuant to clause 7.3. The right to develop involved the derivation of income. On the other hand, he submitted the principal benefit given to BKC was the entitlement to have four restaurants built each year, and that these various matters were encapsulated in Recital F, which provided:-

"Various difficulties having arisen between BKC and Hungry Jack's and having been resolved by agreement between them, BKC and Hungry Jack's now wish to make further provision for the development of Burger King restaurants in Australia, to replace the provisions of the agreement of 1 June 1986."

230 Mr Oslington pointed out that clause 1.1, which provided the grant of the non-exclusive right to develop, was "subject to the full satisfaction of the terms and conditions of this Agreement", one of those terms and conditions being the obligation to develop as specified in clause 2.1. Therefore, it was submitted that a failure to comply with clause 2.1 meant that the right to develop further could be denied by BKC's electing to refuse further development without taking the next step of terminating the Development Agreement. This submission depends upon the correct construction of the agreement, i.e. an understanding of the agreement to determine what is necessary to achieve "full satisfaction".

231 Mr Oslington submitted nextly that clause 7.3 is also subject to a condition precedent, namely HJPL's compliance with the Development Schedule. Once again this submission proceeded on the basis that the failure to develop the minimum number of restaurants provided for in clause 2.1, without more, meant that there was not compliance with the agreement. That this is what the submission meant is made clear by Mr Oslington's contention that clause 2.1 was quite specific in requiring the opening of a minimum of four new BKC restaurants each year, the importance in meeting that requirement being underlined by the limited circumstances in which the parties agreed that any extension of time would be given, pursuant to clause 2.2, for doing so.

232 He referred to the requirements of clause 4.1 and he concluded that those various provisions demonstrated the importance of the promise to comply with the Development Schedule, and a full satisfaction of the terms and conditions of the Development Agreement before development could take place.

233 Mr Oslington submitted that clause 2.1 contained a time stipulation and referred to the authorities that such a stipulation, viewed objectively, were ordinarily construed as conditions. He submitted that once there was a breach of clause 2.1 the principal, or perhaps whole, object of the Development Agreement from BKC's point of view was thwarted, and he relied upon clause 2.1 being regarded as a condition because, in the case of its breach, it may be difficult to obtain an adequate remedy by way of damages. He referred to various ways in which this could occur.

234 At Tp.3770, Mr Oslington said that if it was necessary to find whether clause 2.1 is a condition in the strict sense "contrary to our submission", I should find that it was and that upon BKC's becoming aware of breach of the condition, it was entitled to elect whether to terminate or to leave the Development Agreement on foot with such rights as BKC had if it did so. He said one of those rights was the right under clause 8.1. However, if I may say so with respect, it seems to me that clause 8.1 confers rights on both BKC and HJPL. The first sentence clearly confers rights on HJPL, although on the hypothesis on which the matter is presently proceeding it had lost them. However, the loss was, arguably, only temporary, because whilst the second sentence conferred a right on BKC to payment, the third sentence conferred a right on HJPL to avoid that payment and to make good the failure in the way stated.

235 Mr Oslington then commenced to consider clause 15.1 and noted the generality of the words in sub-clause (d). He submitted that a fair reading of that clause required the conclusion that the parties intended to give BKC the right to terminate for breach of any term of the Development Agreement. In this context he referred particularly to the decision of the High Court in Shevill v Builders' Licensing Board (1981) 149 CLR 627, and especially to the statements of Gibbs CJ at p.631.

236 In addition Mr Oslington referred to the terms of the Settlement Agreement, to which I have referred, including the "Matters in Dispute", and concluded that in the light of that agreement it was not surprising that the Development Agreement, as part of the regime of settlement, provided for strict and full compliance with the terms of the Development Agreement and expressly for termination by BKC only. The submission continued that the events described in sub-clause (d) were not qualified by any other provision of the Development Agreement, so that there was no basis for reading down the event covered by that sub-clause to "hive off some of the terms, provisions and conditions and say that those terms and conditions are not covered".

237 The position thus reached was that Mr Bathurst was submitting that clause 2.1 was not an essential term of the Development Agreement, such as to make it a condition breach of which entitled BKC to terminate without recourse to the terms of clause 15. Mr Oslington's primary submission was that BKC did not have to establish that clause 2.1 was a condition as it was entitled to rely on clause 15 by dint of clause 15.1(d). However, if it was necessary for BKC to establish that clause 2.1 was a condition then he submitted that had been established.

238 In my opinion, clause 2.1 has not been shown to be a condition of the Development Agreement. It was, undoubtedly, a provision of significance, but it was not one which, on a proper construction of the agreement as a whole, contained an assurance of a strict or substantial performance of the promise without which BKC would not have entered into the agreement. I have come to that conclusion for the following reasons. Firstly, whilst the Development Agreement was obviously concerned with development by HJPL, HJPL was not given the exclusive right to develop and if BKC came to the view that development was not proceeding satisfactorily in Western Australia, South Australia and Victoria, it was able to remedy that by having others develop, or by developing itself, in circumstances where such development would be unfettered by the terms of clause 7.3. The situation may have been very different if BKC had been granted the exclusive right to develop in those States, such that BKC was dependent upon HJPL's compliance with the Development Schedule to maintain a satisfactory presence in them.

239 Secondly, the lack of essentiality is pointed up by the differing requirements under the Development Schedule and for obtaining a renewal of the agreement. If BKC would not have entered into the agreement unless it had been assured of the appropriate compliance by HJPL, it is difficult to see why BKC would agree to renew the agreement if there was a lesser compliance. Prima facie, if compliance with clause 2.1 was essential so far as BKC was concerned, one would have expected the renewal to be subject to HJPL's compliance with that clause. Thirdly, the lack of relevant essentiality also emerges from the terms of clause 8.1. It is a little difficult, at least on this aspect, to say more than I have about that clause. Suffice to add that it is totally inconsistent with a submission that it was essential to BKC to have a minimum of four restaurants built in each year.

240 In the result I am satisfied that clause 2.1 cannot be treated as an essential term or as a condition of the Development Agreement and, accordingly, breach of it did not give rise at law to terminate. Therefore, any termination must be made, as Mr Oslington submitted, pursuant to clause 15.

241 The next question, which logically arises, is whether and if so when, on a proper construction of the Development Agreement, clause 15.1(d) can apply. It is, as Mr Oslington submitted, wide in its terms. However, it must be read with the whole agreement and, therefore, accommodate other provisions of it. As I have noted Mr Bathurst submitted that upon a proper construction of the various clauses, clause 8.1 provided that there could be no breach of the Development Schedule until the expiration of twelve months after the year in which there was a failure to develop the requisite number of restaurants. By a plain reading, or to adopt the words of clause 19 a "fair reading", of clause 8.1, I think this must be correct. Mr Oslington's submission was that clause 8.1 did not fetter BKC's right to terminate under clause 15 for a breach of clause 2.1, the only fetter on that right being the requirement to give notice under clause 15.2 if the breach was capable of remedy. He submitted clause 8.1 was not expressed to qualify, modify or place restrictions on the right of termination under clause 15, and that it did not express any qualification or modification on the obligation under clause 2.1 to build four restaurants per annum. He submitted that what clause 8.1 did was to impose a penalty on HJPL for failing to comply with clause 2.1, and allowed HJPL to escape that penalty if it made up the shortfall in the following year. He continued that it is a clause only capable of operation if the Development Agreement remained on foot, and that if it was intended to qualify HJPL's obligations under clause 2.1, one would expect that to be expressed. He continued that clause 2 was "self-contained" and stated the circumstances in which HJPL was entitled to any relief from compliance with its obligations to build four restaurants a year.

242 That gave rise to the question as to why clause 8.1 did not modify clause 2, which Mr Oslington answered by stating, firstly, that it was not expressed as doing so, and secondly, that it "simply imposes" a penalty on HJPL for failing to comply with that schedule. He said the third sentence allowed HJPL to avoid that penalty if it made up the shortfall "provided of course that the agreement has not been terminated", which submission flowed from his submission that clause 8.1 must be premised on the continued existence of the Development Agreement, although not in any way limiting BKC's rights to terminate under clause 15. It was Mr Oslington's submission that clause 8.1 was designed to provide some remedy to BKC in circumstances in which it elected not to terminate for breach of clause 15. There are, in my respectful opinion, some difficulties with this submission. Whilst the right to terminate arises if there is a failure to comply with "any" of the terms, provisions or conditions of the Development Agreement or, "any other obligation owed to BKC", those provisions must be read subject to any express provision in the Development Agreement dealing with a particular circumstance.

243 I think it is correct to say that clause 8.1 does not prevent BKC from terminating the agreement for breach of various terms and obligations owed by HJPL to BKC, provided the appropriate steps are taken. If that were to occur the agreement would be terminated with such consequences as flowed from that, which would include, arguably, the loss of rights under clause 8.1. However, the immediately relevant question is whether a breach of clause 2.1 allows BKC to avail itself of the general terminating power contained in clause 15, in the light of clause 8.1, which is directed to the specific situation of breach of clause 2.1. In my opinion, it is not correct to say that clause 8.1 does not modify or qualify clause 2.1. I consider it obviously does. It provides what is to happen in the event of a minimum of four restaurants not being built each year. The second sentence is predicated upon "failure to adhere to the Development Schedule", i.e. it is predicated on breach of clause 2.1, and it states the consequences of any such breach. If the third sentence were not present then there would be more force in Mr Oslington's submission that all clause 8.1 was doing was providing BKC with a remedy if it elected not to terminate. But, in my opinion, the third sentence is of critical importance. Firstly, it predicates that the agreement will remain on foot, notwithstanding the breach of clause 2.1, until the end of the year following the failure. That is clear because at that point the franchise fees are to be paid, but the obligation to make that payment is removed if the failure is made good by then. Clause 8.1, accordingly, expands the time within which there may be compliance with the Development Schedule. In my opinion, it is only if the failure is not made good by the time specified that there is a breach of clause 2.1. The contrary conclusion would deprive HJPL of the rights it has been granted to remedy the failure to adhere to clause 2.1. The specific provisions of clause 8.1 are directed to this very point and, in so far as one needs to find any commercial reason for that, it is that the time for expanding pursuant to clause 2.1 may well exceed the time allowed in clause 15.2, namely thirty days. It is also relevant to bear in mind that whilst HJPL remains in breach of the Development Schedule it loses the rights under clause 7.3.

244 As I have said, it may well be that if the Development Agreement is terminated for some other breach the Development Schedule and the rights conferred by clause 8.1 fall with it. Similarly, the right to renew would fall. However, where reliance is placed by BKC upon a breach of clause 2.1, it is not open to BKC, in my opinion, upon a proper construction of the agreement, to go straight to clause 15. HJPL retains the right to remedy the breach during the twelve months specified in clause 8.1 and, until it has had that time it is not in breach of the Development Agreement in circumstances allowing BKC to seek to terminate it. If that is not so then a construction of the agreement would have to be adopted, which would write out the words "but not if such failure is made good by that time". There is no justification for taking that approach and every justification, on all appropriate principles of construction, for rejecting it.

245 I am also of the view that the first sentence of clause 19 assists, although it is not essential for, the conclusion to which I have come. The construction for which Mr Oslington has contended would make clause 8.1, in so far as it conferred rights on HJPL pursuant to clauses 2.1 and 8.1, unenforceable. The construction which I favour leads to the result that clause 8.1 remains enforceable.

246 There are other clauses, which provide for remedies to be exercised before the right of termination arises, such as clauses 6.5 and 18.2, which show that in certain circumstances the parties were prepared to view the method of termination, at least in the first instance, differently from that provided in clause 15.

247 The next question is the correct construction of clause 15. It assumes for the purposes of the Shorter Notice that the conclusion to which I have just come is wrong, and it is necessary to decide the point against that contingency and in relation to the Longer Notice. It is not suggested by BKC that it gave a notice to cure pursuant to clause 15.2. BKC's case was that none of the breaches alleged in the Shorter or the Longer Notices was "capable of being cured" and, therefore, notice requiring HJPL to do so was not needed. The right to terminate in the case of any breach, which is capable of being cured, is dependent upon the giving of such notice and the failure of HJPL to cure the breach within the contractually stipulated time. In relation to a breach of clause 2.1, on the assumption that clause 15 can apply to a breach of clause 2.1, rather than to a breach of clause 2.1 followed by a breach of clause 8.1, the period is 30 days. The basic submissions in this regard revolved around the words "which is capable of being cured". Mr Bathurst submitted that if the breach could be characterised as one capable of being cured then, notwithstanding that it may not be possible to cure it within the time specified in clause 15.2, the giving of the notice was a condition precedent to the exercise of the right to terminate. Mr Oslington submitted that where it was apparent that the breach could not be cured within the time specified, it was not a breach "capable of being cured" and, therefore, not one in respect of which a notice had to be given. The submission continued that as Mr Bathurst had conceded that the breach of clause 2.1 could not have been cured within thirty days, it was not a breach capable of being cured. The submission of Mr Bathurst was that it was a breach "capable of being cured", although the time to cure it would take more than thirty days but, as the breach met the specification of clause 15.2, the giving of notice was a condition precedent to exercising the right to terminate, notwithstanding that at the expiration of thirty days the breach would have subsisted and a Notice of Termination could have been given. Mr Bathurst submitted that clause 15.2 referred to a breach, which was capable of being cured; not to a breach, which was capable of being cured within a specified number of days. Thus, the specified number of days did not identify or qualify the breach. Their purpose was to provide a time certain within which the breach, which was capable of being cured, must be cured. If it was not then the right to terminate arose. Of course, this was a secondary submission to Mr Bathurst's principal submission in regard to the Shorter Notice, which was based on the more wide-ranging submissions and particularly clause 8.1.

248 Uninstructed by any authority I read clause 15.2 in the manner for which Mr Bathurst contended. That, in my opinion, is also consistent with the approach adopted in Batson, Schuler and Tricontinental. Although Mr Oslington referred to a number of authorities under s.146 of the English Law of Property Act, which is in essentially the same terms as s.129 of the New South Wales Conveyancing Act 1919, it seems to me that one is here confronted with a specific clause to which one must give commercial meaning in accordance with the authorities to which I have referred. The clause is, of course, of high significance in the present agreement because it determines the circumstances in which a reasonably complicated agreement and many rights associated with it may be terminated, and it seeks to accommodate not only breaches of the Development Agreement, but of the Franchise Agreements and any other obligations owed by HJPL to BKC. To say, as Mr Oslington submitted, that if the breach cannot be cured within the specified time it is not capable of being cured really begs the question. It also removes an element of certainty because it intrudes into consideration the question of by whom it is to be decided that the breach is capable of being cured within the specified time. The purpose of a clause such as this is, as the authorities to which I have referred make clear, to give the party the opportunity of curing the position for the future. It is only if that type of cure cannot be achieved that the breach is one which is not capable of being cured. What the clause does is to require in respect of breaches capable of being cured the giving of notice. The notice limits the time within which the default must be cured and, at the expiration of the specified times, the rights of the parties crystallise. There may be many breaches capable of being cured, which cannot be cured within those times. If that is so BKC has the right to terminate after the time provided in a notice to cure has expired, but that does not mean, nor does the construction of the Development Agreement demand, that the capability of being cured is dependent upon the time. In those circumstances I consider that in so far as the breach is capable of being cured the necessary notice must be given and, if there is not compliance with it within the specified time, the right to terminate may be exercised.

249 A clause such as 15.2 is aimed at providing certainty. On one view the approach taken by Mr Oslington leads to uncertainty. It leaves open the argument, if no notice to cure is given, whether the breach was capable of being cured, such as to require the giving of a notice. However, if the notice is given and the breach is not cured the arguments are confined to whether there was a breach and whether it was cured within the time specified. On this basis the giving of notice is, in my opinion, a condition precedent to the right to terminate.

250 Mr Bathurst also submitted that if Mr Oslington's construction was accepted it would lead to a very strange result. Let it be assumed that there was a breach at some point of time, which was capable of being cured and had been cured prior to the complaint being made. Because it had been cured it would not be capable of being cured within the time specified in clause 15.2. If Mr Oslington's construction is correct that is not a breach which is capable of being cured and, accordingly, notwithstanding that it had been cured it remains a breach upon which BKC could terminate without giving notice. As Mr Bathurst submitted, Tp.3733:-

"To construe the clause otherwise would produce an absurdity, as it would involve a party having the opportunity to cure a subsisting breach whilst remaining liable to termination in respect of breaches which had in fact previously been cured."

I consider, and I have referred to this, that Mr Bathurst's submission is correct.

251 Mr Oslington submitted that one must look at the facts of the breach in question to decide whether it is capable of being cured. The submission continued that because, on hypothetical facts, the breach was so capable, regardless of whether the facts giving rise to the particular breach enabled it to be cured, it could not be said that the breach was capable of being cured, because a fair reading of clause 15.2 denied that construction.

252 Mr Oslington submitted that if one could hypothesise circumstances in which the breach was capable of being cured, although it was agreed that the particular breach could not be cured or, to put it more accurately, could not have been cured, "the contract operates in a very uncommercial way because it results in some instances, such as the present, as a triumph of form over substance". He continued that what was required is an examination of the facts of the breach to see whether it was capable of being cured and not an academic analysis of seeing whether a breach can be envisaged that is capable of cure on the basis of facts totally unrelated to the breach. In any event Mr Oslington agreed that the words "which is capable of being cured" meant, so far as his submission was concerned, "which is capable of being cured within the thirty days during which the notice runs". As I have noted, Mr Bathurst submitted that this read words into the clause, which were not present, with which submission I agree.

253 Mr Oslington submitted that Batson demanded that one look at the facts of the particular breach to determine whether it was capable of remedy. In my respectful opinion his Honour was saying something a little different. At pp.426-427, he said:-

"A breach may, I think, be `capable of remedy', looking at the matter as at the date of giving notice, even though there is then no certainty that, notwithstanding the efforts of the lessee to remedy it, it will be remedied. What the lessee is entitled to is an `opportunity of complying with the requirements of the notice': Fox v Jolly. He may in the result be unable to do so, e.g. because he cannot, in the case of a breach of a covenant to repair, obtain the requisite material. Or the actual remedying of the breach may depend upon securing the concurrence of some other person other than the lessee, and in the result it may not be secured. But I think it may none the less be said, looking at the matter as at the date of notice, that the breach is `capable of remedy' within the meaning of the section. Hence it seems to me that a breach consisting in parting with possession or subletting without the consent of the lessor may, in some, if not in all, cases, be capable of remedy by applying for and securing that consent."

254 In my respectful opinion, his Honour was not, in this passage, asserting that as at the date the notice was given, one had to be able to say that the breach would be remedied. Rather, he was saying that one had to be able to say that the breach was "capable of remedy". The fact that it was not remedied within the time specified is not to deny the party, which is entitled to receive the notice, the opportunity to attempt to cure the breach.

255 In the present circumstances clause 15.2 is covering the widest possible range of breaches. To construe the clause in the manner for which Mr Oslington has contended would mean that, depending upon the particular facts, one would or would not give a notice. Thus, let it be assumed that the breach was the failure to have in a restaurant a particular piece of equipment, which was required to be imported from the United States. Let it nextly be assumed that usually such equipment was transported from the United States to Australia by sea and took, from the time of order to the time of delivery, more than thirty days to arrive in Australia. On that hypothesis it could, if Mr Oslington's submission be correct, be said that the breach was not capable of being cured. However, bearing in mind that the consequence of not curing the breach is potential termination of the Development Agreement, HJPL may, if given notice of the default, organise for the piece of equipment to be flown to Australia. At the end of the day it may or may not succeed in curing the breach, but it cannot be hypothesised at the date the notice is given in those, and indeed in very many, circumstances that the breach will not be cured. Mr Oslington sought to answer the paragraph I have just quoted, at Tp.3782, by stating that all his Honour was saying was that if there is a possibility that the breach can be remedied the words "capable of remedy" apply and:-

"But one thing is clear: his Honour is saying that a notice to cure may not be given if the facts of the particular breach lead to a conclusion that the breach is not capable of remedy."

256 The first question on this aspect is one of construction. I am satisfied that if the breach is one capable of being cured, whether or not it could be cured within the time specified in clause 15.2, notice must be given to activate that clause.

257 The next question is whether the breach to which reference is being made is one capable of being cured in the sense referred to in Batson, Schuler and Tricontinental, i.e. whether matters can be put right for the future. In this regard Mr Oslington referred to a number of English decisions based upon s.146 of the English Law of Property Act.

258 In Batson Sugerman J, commencing at p.524, gave attention to many of the cases upon which Mr Oslington relied. After considering those authorities, save for one subsequent to Batson to which I shall refer, his Honour set forth, at p.427, what he considered the word "remedy" to mean, namely "to set things right for the future".

259 The matter was re-visited in Expert Clothing Service and Sales Limited v Hilgate House Limited [1986] 1 Ch 340.

260 At p.356 Slade LJ accepted that a notice under s.146 need not be given requiring the tenant to remedy the breach if it was not capable of remedy within a reasonable time after service and, at p.357, he drew the distinction between breaches of negative user covenants, such as were under consideration in several cases to which Mr Oslington referred, and breaches of positive covenants. He contrasted the two, stating that the breach of a positive covenant to do something could ordinarily, for practical purposes, be remedied if a reasonable time for its performance was allowed. He distinguished cases in which a "stigma" arose by virtue of inappropriate use of premises, such as for prostitution or gambling. At p.358 his Lordship said:-

"In my judgment, on the remediability issue, the ultimate question for the Court was this: if the s.146 notice had required the lessee to remedy the breach and the lessors had then allowed a reasonable time to elapse to enable the lessee fully to comply with the relevant covenant, would such compliance, coupled with the payment of any appropriate monetary compensation, have effectively remedied the harm which the lessors had suffered or were likely to suffer from the breach? If, but only if, the answer to this question is `no', would the failure of the s.146 notice to require a remedy of the breach have been justifiable."

261 At p.362 O'Connor LJ asked how breaches not capable of remedy were to be identified. He considered that had to be answered by an examination of the matter at the date of notice. He continued:-

"Once a breach of covenant has been committed, the fact that there has been a breach cannot be expunged so that to remedy a breach must mean to do what is necessary to put the lessor back into the position he would have been in had no breach been committed. If this cannot be done within a reasonable time or at all, the breach is not capable of remedy; if it can, it is."

262 Whilst I have paid careful attention to all these authorities I do not think that the particular point is one which gives rise to much argument on a proper analysis of the Development Agreement. I say that because if the breach is not capable of being cured, it is not a breach in respect of which notice must be given under clause 15.2. If, however, the breach is one which is capable of being cured, notwithstanding that as matters stand at the date the notice is given it does not appear to be one which can be cured within the time specified, it is none-the-less a breach "capable of being cured" and the party in breach is entitled to notice to cure as a condition precedent to the giving of Notice of Termination. In the instant case it is conceded that as at the date of the giving of the Shorter Notice the breach of it could not have been cured within the time limited by the clause. However, it is not conceded that the breach was not one capable of being cured. The real question then is whether, on the basis of that concession in relation to the alleged breach of clause 2.1, there was any requirement to give a notice as a condition precedent to exercising the right to terminate.

263 As Waddell AJA said in Tricontinental, p.718, the clear commercial purposes of a provision such as clause 15.2:-

"... is to provide a mechanism whereby the liability on the part of HBFI can be established in a way which is unambiguous and certain. It is essential in commercial dealings that provisions of this kind should be applied strictly so that parties know exactly where they stand."

264 In my opinion the provision of certainty into clause 15.2 is achieved by construing the clause to mean that if the breach is capable of being cured, whenever that may be possible, BKC shall not terminate the agreement unless and until HJPL shall have failed to cure within the specified period. It is not correct to say, on a proper construction of this agreement, that a breach is not capable of being cured because it cannot be cured within the specified period. Once that submission is rejected then a breach capable of being cured remains as such. That capability requires a notice to cure a condition precedent to the operation of the clause. BKC suffers no real prejudice because after the expiration of relatively short periods it may, if the breach is not cured, terminate the agreement. Mr Oslington submitted that this approach meant that I was ignoring the particular facts, viz that as the breach was not capable of being cured within thirty days it was not a breach that was capable of being cured. I disagree on the basis of the construction of the agreement which I think is correct.

265 Certainly, in the way in which the submission was made, I do not consider it can be correct. At Tpp.3797-8, the following transpired:-

"HIS HONOUR: Certainly. Well, can I put this on the transcript as my understanding. Mr Bathurst's case is that where there is a breach which is capable of being cured, the right to terminate does not arise unless and until HJPL shall have failed to cure within, relevantly for presently purposes, thirty days.

Your case is that a breach is not capable of being cured unless it is a breach which can, relevantly for present purposes, be cured within thirty days.

MR OSLINGTON: Yes, your Honour.

HIS HONOUR: And if it is not a breach which is capable of being cured within thirty days, having regard to the facts of the particular breach, it is not a breach `capable of being cured', and therefore not a breach requiring a notice.

MR OSLINGTON: Yes, your Honour."

Mr Oslington agreed those were the competing arguments on clause 15.2. For the reasons I have given, I reject Mr Oslington's submissions.

Conclusions

266 The conclusions I have reached thus far are:-

(a) Clause 2.1 is not a condition of the Development Agreement.

(b) Clause 2.1 may not be terminated pursuant to clause 15 unless HJPL has had the opportunity of complying with clause 8 and has failed to do so.

(c) Clause 15.2 cannot be construed to mean that a breach is not capable of cure because it is not able to be cured within the time period provided.

(d) Clause 15.2 requires that if the breach is capable of cure then a condition precedent to exercising the right to terminate is the giving of notice pursuant to clause 15.2.

267 For all the reasons I have given, I consider that the Shorter Notice was invalid and had no legal effect in terminating the Development Agreement, and that the Longer Notice would only be valid, assuming clause 15 was the relevant clause, if the breaches were not capable of being cured, such that notice to cure did not have to be given. I have analysed the breaches alleged in the Longer Notice. For the reasons given I do not consider BKC was entitled to give that Notice and, therefore, I do not consider that it had any legal effect in terminating the Development Agreement.

268 I have also dealt with the facts relating to the Notice of Termination of 8 September 1997. I do not consider that this notice was valid or effective to terminate the Development Agreement.

269 The conclusion to which I have come is that on a proper construction of the contractual provisions and on the facts alleged and to the extent necessary proved, BKC did not, by the Shorter Notice, the Longer Notice or the Notice of 8 September 1997, terminate the Development Agreement, and that, accordingly, the purported termination of the Development Agreement constituted a breach of contract by BKC. This view is based, essentially, on the construction of the Development Agreement and my findings that the breaches said to found the right to terminate were all either capable of being cured, or had been cured, or, alternatively, were not such that the Development Agreement could be determined by clause 15. It did not seem to be in issue that if the terminations were breaches, BKC had repudiated the Development Agreement, and HJPL had not accepted the repudiation and terminated it. Rather, it maintained the Development Agreement on foot and elected to sue for damages for its breach.

270 Against the possibility that I may find that BKC had taken the appropriate steps to terminate the Development Agreement, HJPL pleaded that it had waived its right to do so, or was estopped from doing so, or in doing so had breached implied terms of reasonableness or good faith. It relied also on relief against forfeiture. Because of the view to which I have come it is not necessary, save to the extent I have, to consider these points. This case occupied sixty seven hearing days. There are 4,248 pages of transcript including opening and closing addresses. The closing addresses supplemented extensive written submissions, those of HJPL running to 353 pages and those of BKC to 280 pages. HJPL furnished 91 pages in reply in addition to oral submissions. If I am wrong in the view to which I have come as to the proper construction of the contract, the submissions cover with thoroughness the other points. Nothing, with the one exception to which I have referred, depends on an assessment of the credibility of witnesses, which would place me in a more advantageous position than the Court of Appeal to decide. Accordingly, I do not think it is necessary for me to determine those points and I do not propose to do so.

271 There are a number of other points to be decided and it seems to me that the preferable course, in all the circumstances of this case, is to decide the points which enable me to reach a decision on all issues. If the view is taken that I am in error, the material necessary for the Court of Appeal to hear and determine other issues is readily available, if that Court thinks it appropriate to decide them.

272 The one matter upon which I think it proper for me to make a finding is in relation to good faith, in the context of an assumption that there is an obligation to exercise good faith, in the implementation of a contract, in addition to acting reasonably and co-operatively. It was submitted by Mr Bathurst that BKC did not act in good faith in purporting to terminate the Development Agreement, as its actions were motivated by the desire to be rid of it. Obviously it acted as it did for that purpose. No other inference is open. At least prima facie, if it had been entitled in law to terminate that agreement, its motives for doing so may not have been relevant. The allegation of failing to act in good faith centred around a desire by BKC to be rid of the Development Agreement not because it was contractually entitled to do so, but to enable it to have greater control over the market conformably with Mr Fitzjohn's remarks in his note of December 1993 and in circumstances which may have enabled it to deal more advantageously with Shell. I have no doubt that BKC was motivated in the ways to which I have referred. It wished to achieve a different commercial playing field for its advantage. There is, in my opinion, nothing wrong with that provided it is not established that it acted with a lack of good faith in seeking to achieve that position. It is part and parcel of the working out of commercial contracts.

273 Where the absence of good faith may play a role is if BKC acted without proper regard to the rights of HJPL and in circumstances where its own conduct precluded HJPL's enjoyment of its contractual rights without justification.

274 In my opinion, it is not possible to take the conduct in isolation. There are a number of matters to which regard will have to be had. They include the desire to implement the suggestions set forth in Mr Fitzjohn's December 1993 memorandum, the willingness to receive and act on information supplied by Mr Montgomery, the dealings involving Shell and the concessions that in those dealings some conduct of officers of BKC was, at the least, potentially misleading, and the failures, as I find them to be, to exercise the discretion to withhold financial approval and refuse operational approval properly. The inferences to be drawn from all this conduct, and the consequences flowing from it, will have to be considered.

The Shell Case

275 HJPL summarised what Mr Bathurst referred to as "the Shell Case" thus. Firstly, prior to 1 March 1994, BKC and HJPL were negotiating separately with Shell with a view to their introducing Burger King restaurants to certain Shell sites. The essence of the submission was that BKC engaged in a deliberate and concerted course of action to deal with Shell to the exclusion, ultimately, of HJPL. HJPL's complaint was that by the end of 1993 or by early 1994 it had entered into negotiations with BKC and Shell on the basis that the three companies would be involved in a test site agreement, and, subject to that proving successful which the parties contemplated at the time it would, that they would together join in a co-operative situation or joint venture whereby there would be approximately seventy further Burger King restaurants at Shell sites mainly in New South Wales and Victoria. These would provide a financial benefit to each company from its involvement in the enterprise. Whilst the parties were waiting to see whether the test site agreement would be successful, they were taking steps, including the expenditure of money, in relation to the development of the larger envisaged arrangement.

276 HJPL's written submissions traced the discussions between Shell and it from 1988 in terms, which were not essentially in issue. HJPL attempted to establish a Hungry Jack's restaurant at the Shell site at Westgate Bridge, although this was not ultimately successful.

277 In June 1993 BKC had its initial discussions with Shell, during which Shell drew to the attention of BKC its prior dealings with HJPL.

278 By October 1993 BKC proposed that Shell become its "petroleum industry" franchisee in Australia and that a trial of the concept be tested. There were communications between the parties in furtherance of this and the internal communications between Mr Jones, who was then the senior BKC executive resident in Australia, and representatives of BKC in Miami, showed that Mr Jones was interested in dealing with Shell to the exclusion of HJPL.

279 On 15 February 1994 Mr Fitzjohn sent Mr Cowin the "Agenda for Action" in preparation for a meeting between Messrs Fitzjohn, Miolla, Cowin, Montgomery and McCarthy on 28 February 1994, which made specific reference to the proposed "Shell Test Agreement". The visit of the BKC executives to Sydney led to a meeting between them and representatives of Shell and HJPL on 1 March 1994, at which Shell made a presentation, about its intention in relation to the development of a "business alliance" with "the Burger King system". During that meeting that Mr Mummery of Shell stated that it wanted to build seventy units over a number of years and to achieve "exclusivity/first right" in respect of the operation of Burger King restaurants at service station sites. There was no specific reference at the meeting to the establishment of "test sites", nor to the possibility that the "business alliance" was contingent upon the conduct of such sites.

280 Mr Fitzjohn stated that the partnership between BKC and HJPL had been re-affirmed, that there would be a single point of contact between HJPL and BKC, and that he may have raised the question of the trade name. He agreed it was likely that he told Shell that HJPL was BKC's business partner and restaurant operator, which he considered to be the case.

281 On the following day Mr Cowin was briefed about the meeting with Shell by Messrs Fitzjohn, Miolla, McCarthy and Montgomery, and a decision was taken by BKC that Messrs Montgomery and McCarthy would be the principal contacts on behalf of BKC and HJPL to develop the Shell opportunity. There was no BKC representative in Australia then, Mr Jones having left for New Zealand and Mr Power not having been appointed. Mr Fitzjohn acknowledged in his evidence that BKC needed HJPL to participate in the proposed "business alliance" as the operator to run the restaurants at the Shell sites, the Shell presentation not having envisaged that it would be the operator of the restaurants.

282 These plans were implemented through various discussions, Shell advising on 7 March 1994 that Mr McKenzie and Mr Burrow would be the primary contacts on behalf of Shell "for the continued development of this concept". Mr McKenzie also advised that Shell was preparing information for Mr McCarthy about possible development sites around Australia. Mr Miolla acknowledged in cross-examination that he was aware, from that date, that Shell, BKC and HJPL were engaged in discussions as to the terms of the legal relationship between them and were also going forward and exploring appropriate sites, which may be appropriate if the test was successful, and further that HJPL's executives were spending time and investing money on the project.

283 On 23 March 1994 Mr McKenzie sent a facsimile transmission to Mr Montgomery confirming a meeting between Shell and HJPL representatives on 29 March 1994 in Melbourne. The agenda set out a number of matters, including the trial or pilot development, for discussion.

284 On 28 March 1994 Mr Fitzjohn wrote three letters in relation to the Shell development, the first being to Mr McCarthy, which stated, inter alia, that Mr Fitzjohn was "very excited by this opportunity" and that he was convinced "that the gas stations and oil companies represent a significant opportunity for this brand as we move forward over the next two to three years".

285 The significance of this statement was that there could be no suggestion that the relationship as envisaged by Mr Fitzjohn and communicated by him to HJPL was intended to be confined only to the test site arrangements, unless, of course, those arrangements failed to produce a satisfactory conclusion. Thus BKC was proceeding, at the least with HJPL, on a path of investigating a long-term future joint venture arrangement, with the belief that it would probably eventuate.

286 The second letter from Mr Fitzjohn was sent to Mr Cowin. Mr Fitzjohn raised the possibility of a BKC investment in the test sites with Shell:-

".. alongside Hungry Jack's to create a small number of test sites with Shell in what could become a joint venture if this results in a roll-out across Australia."

The prospect of a long-term joint venture could hardly have been stated more clearly. The letter continued:-

"The tests would be on a 50/50 capital investment basis, shared equally between Hungry Jack's and BKC. Shell, the landlord, will erect the building for us and fit it out prior to our equipment installation. The operation would then be managed on a day to day basis by your own organisation at cost and we would have to work out a fair distribution of the P&L impact so that we would both obtain a return on our investment.

I would emphasise that this is at present only an expression of interest. However, if we can firm up the precise nature of the sites and the financial evaluations backing up the investment proposal I will put it to Jim Adamson for a formal approval for the capital for a test on the first four to six units."

287 Mr Fitzjohn's third letter was to Mr Mummery, a copy being sent to Mr Cowin. A "preliminary agreement" to be entered into between BKC and Shell was attached to it, and Mr Fitzjohn stated:-

"In the event that we are able to agree on terms for buildings to give us representation on the site, these units will trade under the Hungry Jack's trade name capitalising upon the brand equity in the Australian market place. We at Burger King Corporation are excited about this opportunity to the extent that we are considering forming a joint venture to support our colleagues at Hungry Jack's with meaningful capital investment to test this concept."

288 Mr Miolla acknowledged that, at least as at 28 March 1994, HJPL, BKC and Shell were to be involved in the arrangements to develop Burger King restaurants at Shell sites, and it was contemplated that the three companies would be involved in at least some, if not all of those sites, if the test sites were successful.

289 On 29 March 1994 there was a meeting between Shell and HJPL representatives, which commenced with a similar presentation to that of the meeting on 1 March 1994. There was discussion about the test sites and various other matters, and the minutes recorded:-

"This particular meeting was intended to focus more specifically on how a relationship between Shell and BK/HJ could be progressed and put into operation on a test basis as soon as possible, in order to establish in the first instance compatibility of companies in systems and to look at guidelines and principles for a larger scale and long-term arrangement between the parties which could be implemented on a national basis."

290 Mr Fitzjohn received a copy of these minutes, which he read, and he accepted that between his meeting in early March and that meeting HJPL had been taking the principal role on behalf of BKC and itself in forwarding the proposals with Shell and was expending its capital to advance them. Mr Fitzjohn conceded that, to his perception, HJPL was doing so as it perceived that a long-term benefit could accrue to it and BKC from the proposal, and that it was his understanding that HJPL perceived itself as a joint venturer with BKC in relation to the proposal, subject to the qualification that the test was successful. His evidence made it clear that, at that time, he was contemplating a long-term relationship between the three companies: Tpp.2227-2228.

291 Mr McKenzie responded favourably to Mr Fitzjohn's letter of 28 March 1994, noting in that letter that Shell had been progressing the concept discussed "with your colleagues at Hungry Jack's" and that Shell was working "closely with them on a number of trial locations". Mr Fitzjohn said he was sure he read the letter from which he understood that the venture between BKC, Shell and HJPL was progressing well and:-

"Q. And of course the only purpose of pursuing this venture with Shell from both the position of Burger King and Hungry Jack's to your perception, was a belief that it could result in a long-term relationship with Shell for both Hungry Jack's and Burger King; correct?

A. Yes.

Q. If one came to be aware that there was no reasonable prospect of that, there was no purpose in going forward with this; correct?

A. Yes": Tpp.2228-2229.

292 The position thus far reached was that the three parties intended to proceed on a test site basis and on a more expansive basis over a long term provided that the test site situation did not lead to any business or commercial difficulties, which made a longer term relationship inappropriate. The significance of this was that there was a clear expectation by the parties that the test site arrangements were being pursued in the context of a potentially longer term relationship in which, at the least, the parties would be joint venturers.

293 Mr Bathurst put the submission in this way. He said it was important to remember that the meeting of 1 March 1994 was not in the context "of setting up a couple of restaurants to see what would happen". That submission was made to counter what he understood to be the thrust of BKC's submissions, namely that the negotiations were only in relation to restaurants the subject of the Test Site Agreement and did not go beyond that.

294 In paragraph 22.13 of his written submissions, Mr Bathurst commenced to deal with the chronology to which I have referred, which he submitted demonstrated that the negotiations were not confined to the Test Site Agreements, but were entered into with the intention of forming a long-term alliance, although that was "in some way contingent on the test sites being successful". However, he submitted that contingency was imposed in the expectation "that the arrangements would take place on a tripartite basis" and, if successful, this would eventuate. He referred to the evidence of Mr Fitzjohn in paragraphs 22.21 and .23 of the written submissions and stressed that he was unequivocal that a long-term relationship was being considered. The submission continued that there were good reasons for Mr Fitzjohn to take that position, the essential one being that BKC was not able, in March 1994, to proceed to develop with Shell without HJPL's assistance, because BKC did not have access to the necessary infrastructure, save through HJPL. Therefore, as the Shell arrangement was important from BKC's point of view, the involving of HJPL in it was a matter of great significance. The evidence on which reliance was placed to support this submission is collected in paragraphs 19.13 and .14 of the written submissions, in the latter paragraph it being noted, inter alia, that as late as February 1995 Mr Fitzjohn realised that if HJPL withdrew from the test arrangements there would be nobody to run the existing test restaurants in Australia, so that it suited the purpose of BKC, so it was submitted, for HJPL to become actively involved in the planning and discussions with Shell for the operation of co-branded restaurants.

295 In paragraph 19.5 of his written submissions, Mr Bathurst referred to evidence to support the proposition that throughout the remainder of 1994 and in early 1995 Messrs Fitzjohn, Miolla and Power were aware that HJPL was devoting substantial time and money to the establishment of the two test sites and in participating with Shell employees in the identification of future sites for co-branded development. So much was not in issue and, in so far as it may have been, I accept that HJPL was acting in that way. Indeed the evidence is that Messrs Fitzjohn and Miolla, at least, were caused acute embarrassment in early 1995 when Shell advised that it was not prepared to proceed with HJPL and, thereafter, in circumstances which reflect no credit on them, they failed to advise HJPL for some time. It was submitted by Mr Bathurst, and in my view this is the proper inference to draw, that Messrs Fitzjohn and Miolla adopted this course, i.e. delayed advising HJPL of Shell's attitude, until they were satisfied that Shell was prepared to enter into a firm relationship with BKC. Notwithstanding their earlier knowledge of Shell's attitude, Messrs Fitzjohn and Miolla were prepared to allow HJPL to continue to invest not insubstantial amounts and time in progressing what HJPL obviously understood to be the arrangements for a long-term tripartite agreement. Not only did those officers of BKC and others fail to advise HJPL of Shell's change of mind, but they also actively took advantage of it to bring about a situation whereby BKC would deal with Shell to the exclusion of HJPL. This conduct, on the part of BKC, gave rise to the allegations of breach of fiduciary duty.

296 The various activities in which HJPL engaged are set forth in paragraphs 22.25 to 22.28 of its written submissions and, in paragraph 22.26, reference is made to the evidence that when Mr Power took up his position with BKC in Australia in about late July 1994 he understood that if the test was successful there would be continuing involvement by both BKC and HJPL in any future relationship with Shell.

297 Mr Miolla conceded that he believed that HJPL expected to be involved in any venture with Shell, that that was the basis on which HJPL was investing time and money, and that it would have been "unethical" for BKC to encourage Shell to proceed to the exclusion of HJPL in those circumstances. However, that, so it was submitted, and I am satisfied that this is the fact, was precisely what BKC did.

298 In this context some very significant evidence was elicited from Mr Fitzjohn. It is referred to in paragraph 22.25(e) of the written submissions. On 14 July 1994 Mr Fitzjohn sent a facsimile transmission to Mr Mummery, which he copied to Messrs McCarthy, Montgomery, Miolla and Power. It stated that BKC continued to be "very excited about the possible strategic alliance"; that new BKC employees were to be appointed in Australia, but that it remained most efficient for Messrs Montgomery and McCarthy to be Shell's principal points of contact; and that they had done "an excellent job" of keeping BKC informed of progress in relation to the three test locations. Mr Fitzjohn agreed that when he sent that message BKC was still reliant upon either HJPL or Shell to provide resources to move forward the alliance with Shell, and that he was putting HJPL forward as an organisation eminently qualified to participate in the joint venture, which was to form the basis of the strategic alliance with Shell. He continued that he would not have risked that strategic alliance by putting HJPL forward in that context unless he had complete confidence in its competence to perform the role and that having made every attempt to satisfy himself of that matter he considered HJPL was appropriate to be so put forward. Reference was then made to re-examination of Mr Fitzjohn on this point at Tp.2470, when he was asked by Mr Oslington whether his views remained the same about HJPL after July 1994 and he said that they did. This concession was the more potent coming as it did in re-examination.

299 Mr Bathurst, quite understandably, fastened on it because, as he submitted, Mr Fitzjohn was the most senior officer of BKC on the development side, who was called. He continued that I would have to contrast the views he expressed with the submissions made by BKC, firstly, that the Shell arrangements, so far as HJPL was concerned, were terminated because of some mutually perceived dissatisfaction with HJPL by Shell and BKC. The submission was that this evidence showed that could not have been, as a matter of fact, the truth. Secondly, it was submitted that Mr Fitzjohn's evidence stood "in stark contrast to the denial of operational and financial approval", because if HJPL was "good enough" in Mr Fitzjohn's view to be involved in the development with Shell, there could be no real reason why it was not good enough to develop elsewhere in Australia. Mr Fitzjohn was involved with the development area and, as I have noted, there was a deliberate division between it and other areas. However, linked with this submission was the failure by BKC to call the relevant operations manager, Mr Blauer, who was the most senior man on the operational side with relevant responsibility to give evidence that, from an operational perspective, HJPL was not suitable to be considered for the joint venture with Shell. Mr Oslington's submission was that it was hardly surprising that Shell expressed dissatisfaction with HJPL having regard to its poor operational record, which manifested itself in many ways and led, ultimately, to operational disapproval. However, Mr Bathurst pointed to the fact that not only was no evidence called from BKC on this point, and that the evidence from Mr Fitzjohn and, so far as Mr Blauer's letter of 27 November 1995 disclosed, from Mr Blauer, was to the contrary, but that no evidence was called from Shell to explain the reason for the views to which, according to BKC officers, it was said to have come.

300 The submissions of HJPL were that notwithstanding that no final agreement was entered into in relation to the longer term development proposal between it, BKC and Shell, the fact that the parties were negotiating to bring about that agreement, and taking the preliminary steps of having several test sites, gave rise to a series of fiduciary duties owed by BKC and Shell, relevantly for present purposes, to HJPL, such that if either BKC or Shell sought to subvert the arrangements in so far as they included HJPL and, of course, without advising HJPL that the negotiations in which the parties were engaging were at an end, there were breaches of fiduciary duty entitling HJPL to equitable compensation.

301 The asserted breach of fiduciary duty was considered in detail in paragraph 30 of HJPL's written submissions. The terms pleaded are set forth in paragraph 30.1 and, in paragraph 30.2, it was submitted that the joint venture or proposed joint venture existed prior to the Test Site Agreement between the parties, which was executed in February 1995 and exchanged on or about 20 March 1995.

302 In paragraph 30.3 it was submitted that by reason of either the joint venture or proposed joint venture, BKC owed fiduciary duties and obligations to HJPL, which required that it not take steps, either itself or in conjunction with Shell, to exclude HJPL from the development, operation and/or servicing of Burger King restaurants at Shell service stations in Australia, and that those duties required that the two parties, namely BKC and Shell, must not secretly negotiate to exclude HJPL from the proposed joint venture. Alternatively, it was submitted, the dealings between HJPL and BKC, so far as they concerned negotiations with Shell, were directed to the formation of a joint venture between HJPL and BKC to establish and operate Burger King restaurants at Shell service stations in Australia, and BKC owed HJPL fiduciary and contractual duties of good faith in relation to that.

303 The submission continued that there existed from March 1994 either a venture by HJPL and BKC to deal jointly with Shell for the promotion of a long-term relationship with it through the medium of a Test Site Agreement; and/or a venture by the three companies to undertake the establishment and operation of a series of restaurants under the terms of a Test Site Agreement to be executed in due course, with a view to establishing a long-term relationship, which would involve Shell establishing restaurants at service stations utilising the Burger King system but operated or serviced by HJPL. The submission continued that the fact that detailed arrangements were still the subject of negotiation heightened the element of trust and confidence which existed between HJPL and BKC, the essential subject matter of the arrangement between them being the opportunity to develop a long-term relationship with Shell after the development of the test restaurants and provided that proved successful. Each was dependent on the other to do all in its power to convert that opportunity into reality, or, from a negative point of view, not to do anything which would jeopardise that occurring.

304 In these circumstances Mr Bathurst submitted that whilst the arrangements, albeit in a loose and not finally formulated form, continued, the fiduciary duties also continued, which had the effect of precluding BKC from encouraging, either expressly or impliedly, Shell from proceeding without HJPL's involvement and from not taking active steps to try to ensure that Shell would continue with the long-term plans.

305 Reliance was placed upon the decisions of the High Court in United Dominions Corporation Limited v Brian Pty Limited [1985] HCA 49; (1987) 157 CLR 1 at 12; Australian Breeders Co-operative Society Limited v Jones [1997] FCA 1405; (1997) 26 ACSR 26; and Marr v Arabco Traders Limited [1985] NZHC 46; [1987] 1 NZBLC 102,732 at 102,745.

306 The submission continued that the common object of BKC and HJPL was the promotion of a continuing relationship between them and Shell, the effectuation of that object depending upon both relying on the other to deal with Shell, and as between themselves, "with utmost good faith". In these circumstances it was submitted that in so far as BKC was in a fiduciary relationship with HJPL on either basis that carried with it a fiduciary duty to refrain from pursuing, obtaining or retaining for itself any collateral advantage from the proposed project without the knowledge and informed assent of the other participants: United Dominions at p.13. Further, it was submitted, BKC owed a duty of utmost good faith to HJPL: United Dominions at p.6 and Bialla v Mallina (1993) 11 ACSR 785 at p.831.

307 Clause 16 of the Test Site Agreement contained an "entire understanding" provision, which Mr Bathurst submitted was no answer to the allegation concerning the fiduciary obligations for which he contended. He submitted, firstly, that as a matter of construction the clause was only concerned with matters "connected with the subject matter of the agreement", and superseded and merged any prior agreement or understanding; and with the fact that each party entered into the agreement without relying on any representation by the other. The basic submission was that the clause was only concerned with the subject matter of the Test Site Agreement, which did not regulate or purport to regulate the entire relationship between the three companies, but rather was, in effect, one incident of the joint venture or proposed joint venture between them.

308 Secondly, Mr Bathurst submitted that in any event the Test Site Agreement was not executed until February 1995 and exchanged until after 20 March 1995, whereas the conduct which amounted to a breach of duty had occurred prior to that date. That conduct involved Shell's having raised the possibility of being a direct franchisee with BKC in September 1994; BKC and Shell having discussed in October 1994 the need to send a letter to HJPL indicating that Shell preferred to deal with BKC rather than HJPL; on 27 February 1995, Mr Lannen having reiterated Shell's position that it was not prepared to go forward opening restaurants, while they were called "Hungry Jack's" and supported by HJPL; and BKC's having not sought to dissuade Shell from that position or having obtained HJPL's fully informed consent to it.

309 It was submitted that in breach of the duties pleaded in paragraphs 28 to 31 of the Summons, BKC and Shell were discussing and developing plans, no later than September 1994, to expand the business of the joint venture to the exclusion of HJPL; that they pursued those plans; and that they did not inform HJPL until, at the earliest, mid-May 1995 of the possibility that HJPL might be excluded from participating in the joint venture. In the meantime they allowed HJPL to continue to pursue matters relevant to the joint venture, including expending considerable amounts. On 18 July 1995 BKC entered into a second Test Site Agreement with Shell to the exclusion of HJPL and, so it was submitted, BKAL was knowingly involved in BKC's breach of duty, at least from its incorporation.

310 At Tp.3880 Mr Bathurst put the way in which he asserted BKC breached its fiduciary obligations "a little more precisely". He submitted that that arose at the very least by BKC's encouraging Shell to go ahead without HJPL; secondly, by BKC's taking the benefit of the service royalties from the Shell restaurants to the exclusion of HJPL; and, thirdly, by BKC's withholding the fact that negotiations were taking place with Shell behind HJPL's back.

311 In paragraph 22.31 of the written submissions Mr Bathurst set forth a series of matters, which it was submitted supported these propositions. Reference was made to meetings between Messrs Power and McKenzie on 19 September 1994 and between Messrs McKenzie, Power, Paci, Miolla and Payne-Drueke on 14 October 1994; a meeting between Messrs Farnik, Fitzjohn, Paci, Beaudrand, Miolla and Power on 2 November 1994; a meeting between Messrs Power, McKenzie and Lannen on 5 December 1994; and a meeting between Messrs Fitzjohn, Hothorn, Power, Mummery and Lannen on 16 February 1995. By 19 February 1995 Mr Fitzjohn was concerned that if he told HJPL that it was effectively excluded from any long-term benefit from the arrangement with Shell, it would have withdrawn from further participation in that arrangement, and that that was one of the reasons why he decided not to do so. He agreed that, to his knowledge, HJPL at that time had no real possibility of benefiting in the long-term from the joint venture alliance with Shell.

312 In February 1995 there were meetings between Messrs Fitzjohn, Hothorn and Cowin at a Franchisee Convention in Bangkok. During one such meeting, Mr Hothorn, on Mr Fitzjohn's instructions, offered to Mr Cowin to reimburse HJPL for the costs of the tripartite Test Agreement. Mr Hothorn denied that the reason for making the offer was because of knowledge about Shell's attitude as expressed to Mr Fitzjohn at the meeting of 16 February 1995, and it was submitted that Mr Fitzjohn used Mr Hothorn to make the offer so that he, Mr Fitzjohn, would not have to do so and, accordingly, answer any embarrassing questions raised by Mr Cowin. Mr Fitzjohn said he assumed Mr Hothorn knew of Shell's attitude, although Mr Hothorn said he did not.

313 Mr Cowin did not accept the offer and, on 27 February 1995, Mr Power had a telephone conversation with Mr Lannen after which he sent a note to Messrs Fitzjohn, Miolla, Giresi and Hothorn, in which he advised that he had received a telephone call from Mr Lannen, who told him that the Kingsway site issue had been resolved and that Shell was ready to proceed with the second test site, but asked "how he wanted to manage this, before advising HJ that the site was now available". Mr Lannen asked how the site ought to be branded to which Mr Power said he replied that "ideally" BKC would like to have it branded as a Burger King site, but there was an agreement in place that required BKC to allow HJPL to operate the first three test sites. This was the memorandum that continued:-

"He took the trouble to reiterate the Shell position that they were not prepared to go forward opening restaurants with us while they were called HJ and supported by HJ. I confirmed that we had clearly received that message and were dealing not with the `whether to' question but with the `how to' question at this stage."

314 This, in my opinion, was a significant communication. Certain evidence was led to try to establish that it was nothing more than one between two low ranking officers and that, accordingly, no particular significance should be attached to it. Mr Bathurst submitted that proposition should not be accepted firstly, because the telephone conversation was "plainly a follow up of the meeting" of 16 February 1995, and, secondly, because the language was plainly referable to an earlier discussion on the various topics raised. I accept that submission and in my view, of high significance, is the failure by either Mr Fitzjohn or Mr Miolla, or indeed any other senior officer of BKC, to advise Mr Power that the position he had set forth was not the true one and to take any steps to correct the situation.

315 At the risk of repetition, it is to be noted that there was no evidence from Shell as to why it had taken this position, nor as to what its attitude would have been if BKC had stated that it was committed to proceeding with HJPL and intended to do so.

316 On 1 March 1995 Mr Fitzjohn had a conference telephone call with Mr Power and two representatives of Host Marriott, after which Mr Power sent a note of the conversation to Mr Miolla, which stated, inter alia, that Shell was not interested in moving forward with HJPL, but wanted BKC, including the brand name. Host Marriott was seen as a possible substitute for HJPL. It was made absolutely clear that Shell was seeking to proceed with BKC. Various attempts to explain away this evidence by Mr Fitzjohn and Mr Power should, in my view, be rejected. They were quite spurious and it was obvious that by 1 March 1995 Shell had made it clear to BKC that it wished to continue with BKC. BKC did nothing to dissuade it from that attitude nor to advise HJPL. Mr Power expressed his obvious reservations about the situation in the memorandum to Mr Fitzjohn of 21 March 1995. It is clear he appreciated that there was, at the least, the possibility that BKC was allowing the position to be misrepresented to HJPL. Mr Fitzjohn agreed that Mr Power's memorandum raised problems associated with not informing HJPL of Shell's attitude; that he had been conscious of those problems from early February; but that he did nothing to remove them until mid-May 1995. Mr Miolla agreed that at least by 21 March 1995 he was aware that Mr Power held the view that Shell wished to proceed with BKC and not HJPL, and that he did not recall any conversation in which anyone from BKC took the view that Shell should be discouraged from adopting that course, nor did he see any document taking that stance. I am satisfied BKC never adopted that attitude, its reason being that it suited its overall strategy of developing the market in Australia, in the way it wished, to have Shell abandon HJPL. BKC was content with that course, once it was satisfied that Shell was committed to it. Those arrangements were being entered into behind HJPL's back and whilst notwithstanding their existence and BKC's and Shell's obvious knowledge of them, HJPL was being allowed to continue to expend time and money to advance the joint venture not knowing that the others had no intention of doing so. In my opinion, BKC's approach, in all the these circumstances, was thoroughly discreditable.

317 Thereafter the position became worse so far as BKC was concerned. On 15 March 1995 Mr Cowin wrote to Mr Hothorn advising that Mobil had approached HJPL about the possibility of a strategic alliance in respect of thirty two Mobil sites between Sydney and North Queensland. On 16 March 1995 Mr Power had a meeting with Messrs Lannen, Mummery and McKenzie, during which there was discussion about Shell being a franchisee and a commitment by BKC to support Shell directly in Australia. Mr Power said he felt that there was "perhaps" a need for a communication to HJPL in relation to Shell's attitude. He also said that his notes indicated the likelihood that HJPL would not have ongoing access to Shell test sites as a franchisee.

318 On 21 March 1995 Mr Power sent two memoranda to Messrs Fitzjohn, Hothorn and some others in relation to Shell. In the first he advised that Shell had been very explicit about its intent to become the franchisee in all locations possible, and had sought a commitment from BKC for a clear sign of its commitment to the market for the long term:-

".. and also made it blatantly obvious that they did not want to continue the relationship for the long term with BK, if they would have to rely on the current service partner structure in Australia via HJ. This Marriott opportunity must involve into a drive by them to buy-out HJ at least in the East and then we address the field support/training issues with BK resources."

Mr Power referred to the necessity to be sensitive to the royalty question, meaning thereby that the concessional royalty agreement with HJPL should be avoided with Shell. In his second memorandum Mr Power said he had raised with Mr Mummery the possibility of a direct communication between Mr Fitzjohn and Mr Farnik about the opportunities associated with a potential Marriott/Shell relationship.

319 On 23 March 1995 Messrs Fitzjohn, Giresi, Hothorn, Miolla and Power conferred in relation to a resolution of the conflicting positions between HJPL and Shell about future development of co-branded restaurants, although, at this stage, HJPL had not been advised of the problems. It was agreed that there should be an immediate communication from BKC to HJPL about Shell's attitude, but that before that there should be a tele-conference between Messrs Fitzjohn and Farnik to re-confirm Shell's commitment to grow within the Burger King system and to seek its agreement in relation to the communication to be made to HJPL. This demonstrated, quite clearly, that BKC was determined to ensure that Shell would remain in an agreement with it, before BKC advised HJPL of the true position. It highlighted the way in which BKC was prepared to "use" HJPL, notwithstanding that there was a joint venture. It also went a long way to negating, as was subsequently alleged, a bona fide held view by BKC that HJPL was not operating in an acceptable manner. It was left to Mr Fitzjohn to determine how and when HJPL should be so advised. At this stage Mr Power also noted that Shell had requested a right of first refusal with BKC, and that BKC was initially disinclined to consider that request. Mr Miolla agreed that if HJPL was excluded from the arrangement with Shell, and Shell had a right of first refusal in any particular area, HJPL would be precluded from developing through the opening of stores at service stations in that area, and that the impact of that right of first refusal made it more important to inform HJPL immediately of BKC's understanding of Shell's intentions.

320 After that conference call Mr Hothorn prepared a draft letter to Mr Cowin on 23 March 1995 in relation to the Mobil Oil opportunity, which he sent by facsimile transmission to Mr Miolla. Some changes were made to the letter, which was sent on 30 March 1995, but it made no reference to the Shell position and, it was submitted, correctly in my view, that the letter was misleading. The letter "talked up" the advantages of proceeding with Shell, the obvious implication being that that would be in conjunction with HJPL, notwithstanding that BKC knew full well what Shell's asserted attitude was and that BKC was doing nothing to change its mind, and based on "the magnitude of the Shell opportunity and the adverse impact of beginning discussions with Mobil about an exclusive deal that would freeze out potential Shell sites" stated that it would not be "in our best interests" to enter into an exclusive arrangement with Mobil Oil "at this time". Mr Hothorn conceded that he drafted the letter intending to convey to Mr Cowin that Shell was the best partner for BKC and HJPL in Australia. He acknowledged that when he did so he knew of Shell's attitude to a long-term relationship with HJPL to which he made no reference in the letter; and he conceded it was possible that the reference to "partner" would be "somewhat misleading". It was obviously misleading and, in my view, the proper inference was that it was intended to be so, in so far as it suggested that Shell was interested in a long-term relationship with HJPL and that BKC was doing all it could to foster that relationship. It was also intended to act as a disincentive to HJPL's entering into arrangements with other service station proprietors on the basis that Shell was the most suitable. Mr Hothorn was a senior operations officer. Mr Miolla was the responsible legal officer. Their conduct in allowing such a letter to be sent was, for these reasons, commercially disgraceful.

321 On 23 March 1995 Mr Miolla drafted the letter to be sent to Mr Cowin in relation to the Shell view of the relationship, which was amended on 6 April 1995 after the video conference with Shell. This letter was being drafted when the other letter of 23 March 1995 was being prepared, which underscored the duplicity of BKC. Further revisions were made but the letter was not sent by Mr Fitzjohn until 15 May 1995.

322 On 24 March 1995, Mr Power received and forwarded to Messrs Miolla and Hothorn a preliminary advice from HJPL about the forty five sites it was interested in developing in the forthcoming year, and he raised the question as to how BKC was to handle the issue of Shell's wanting to operate their own sites in the event of an HJPL application having been made for the same sites. He also raised the question of applying TRA's with Shell and, on 27 March 1995, Mr Fitzjohn wrote to Mr Farnik advising that BKC was considering the ramifications regarding development beyond the three site Test Agreement.

323 On 30 March 1995 Mr Hothorn sent to Mr Cowin the final version of his letter about the Mobil inquiry, which was unchanged in relation to its reference to Shell's being the best possible partner. He conceded that it was obvious to him that Mr Cowin was talking about an exclusive longer-term arrangement with Mobil; and that he was responding to that possibility on the basis that it was better to stay with Shell, notwithstanding his knowledge of Shell's attitude.

324 Mr Miolla conceded that, in hindsight, parts of the letter were confusing and particularly misleading and he could not answer a question as to how the letter was sent having regard to BKC's knowledge of the Shell position. His evidence, Tpp.2936-2937, was:-

"Q. The problem I have about that answer, Mr Miolla, and I will indicate it for your consideration and response - is how that letter could possibly have been sent in light of the conference call a few days before, unless it was intended to lull Mr Cowin into a false sense of security.

A. I won't make something up. I don't have an answer for that.

Q. You've said several times that, with the benefit of hindsight, you would not have written that letter.

A. Or I would have delayed it until after the letter of May 15th.

Q. Yes, but as you sat in Miami in the latter part of March 1995, you must have been aware that the letter of 30 March 1995 was, at best, likely to mislead Mr Cowin, with all the store of knowledge you had, must you not?

A. Well I know that I don't have a great answer for that, but I know myself, and I know that I wouldn't have sent a letter that I affirmatively felt was going to deceive someone, so I know it sounds inadequate, but I can only say that I either wasn't thinking carefully enough or that, for some reason, I didn't make the connection in my mind between - you know. Like I said, I am not going to make something up. That's all I can recollect."

325 Mr Miolla said that he was not overborne by any senior executives in BKC to write the letter for which he took responsibility, and that he was authorised by BKC to write it.

326 On this issue, as appears immediately from a reading of the answers, Mr Miolla's evidence was totally unsatisfactory. I do not accept for one moment that he was neither thinking carefully enough nor did not make the connection in his mind. One of the major topics of discussion was the position so far as Shell was concerned and it is unthinkable, so far as I am concerned, that a person with the knowledge and intelligence of Mr Miolla would have overlooked this matter. It is also unthinkable, in my view, that Mr Miolla would not have paid careful regard to ensuring that HJPL was told by BKC that which BKC wished it to be told, namely that the negotiations with Shell were still proceeding on the same basis. In my view, the proper explanation of BKC's conduct was that it was seeking to ensure that nothing was changed, at that stage, because whilst BKC considered that Shell would agree to proceed with it to the exclusion of HJPL, there was no finality in that regard and BKC wished to achieve finality before advising HJPL of Shell's attitude to it. Further, and more reprehensibly from a commercial point of view, I am satisfied that BKC, through Messrs Miolla and Hothorn, were deliberately diverting HJPL's attention from Mobil, to make BKC's position with Shell the more attractive, and in the knowledge that HJPL would be excluded from that position. Therefore, not only did BKC fail to advise HJPL of the true position, but, in my opinion, it actively misled it about that matter for its own benefit and in circumstances where it was under an obligation to advise HJPL of Shell's attitude and, if it was in agreement with Shell's position, to inform HJPL of that fact. I have no doubt that Mr Fitzjohn and Mr Miolla actively engaged in this conduct, which not only constituted a failure to conform with basic commercial morality but, and perhaps there is no real distinction between the two in the circumstances of this case, also constituted a breach of fiduciary duty.

327 On 5 April 1995, Mr Power sent a facsimile transmission to Messrs Fitzjohn, Miolla, Hothorn and Horowitz in relation to the agenda items for the video conference with Shell, which included the need for communication between Shell and HJPL about the former's intention to develop co-branded sites itself, and the question of Shell's request for a right of first refusal. Mr Miolla acknowledged that the agenda proceeded on the assumption that Shell or its licensees would be BKC's franchisees at Shell sites, and he did not recall any conversations between 21 March 1995 and 5 April 1995 with any of BKC's representatives, which indicated that that assumption was incorrect. Thus, BKC was pursuing its relationship with Shell to the exclusion of HJPL. In the end so much was not really in issue, BKC's position being that it was entitled to do so in its own commercial interests and without regard to the arrangement with HJPL. The video conference took place on 6 April 1995 during which BKC and Shell agreed to establish a bipartite test based on seven new co-branded sites. This threw up the basic issue between the parties. BKC considered that its negotiations and activities with HJPL in relation to Shell created no rights or obligations, save for those enshrined in the Tripartite Test Agreement. That was its basic submission. HJPL submitted that as the venture was proceeding the conduct of the parties gave rise to fiduciary duties, which precluded BKC from doing anything to subvert the likelihood of the longer term arrangement going forward. It submitted that in so far as BKC did act in a way which put that position in jeopardy, at least without having terminated the arrangements, it breached that fiduciary duty. In summarising the conclusions reached during that video conference in his facsimile transmission, Mr Power said that the communication to HJPL "next week" would signal "that the result of the twelve month test is likely to be that Shell will enter the BKC system as franchisee operator on its own sites, essentially precluding HJ as franchisee opportunity. HJ has been offered the opportunity to have their capital position reimbursed by BKC and this offer is still open". This made clear, if that was necessary by that stage, that BKC had abandoned HJPL in consequence of negotiations into which it had entered with Shell and behind HJPL's back. This was so notwithstanding BKC's statements to HJPL that the longer term arrangements with Shell and HJPL would continue. The entry into the bipartite Test Agreement, without HJPL's knowledge, was further evidence of BKC's abandonment of HJPL in relation to the longer term arrangement.

328 It was agreed between BKC and Shell that a right of first refusal was "prudent and reasonable", and both agreed to advise HJPL independently that Shell did not require it to provide services but would deal directly with BKC.

329 Mr Fitzjohn accepted that the consequences of the video conference made it imperative for him to disclose what had evolved between Shell and BKC to HJPL as soon as possible, it being apparent that that disclosure was likely to lead to confrontation with HJPL. Mr Miolla saw the opportunity with Shell as being a large business one. He agreed BKC never sought to discourage Shell from adopting the course of seeking to exclude HJPL and that Shell's intention to develop the number of restaurants contemplated would make it difficult for any other franchisee to embark upon large scale expansion, thus making unlikely the ability of HJPL to introduce Mobil. He also agreed that as at the date of the video conference, Mr Power probably regarded Shell's position of going ahead without HJPL as a very desirable position for BKC.

330 Mr Power was aware that the parallel test, if it proceeded successfully, would have limited HJPL's access to sites, that there was no suggestion that HJPL could service restaurants being run under a bipartite test between BKC and Shell, and that that proposed test would take into account four months' work, information concerning the operations of West Terrace site and the work done by BKC and HJPL in the preceding year in inspecting and evaluating sites.

331 On 10 April 1995, Mr Miolla circulated a draft of the Test and eventual Development Agreement with Shell, and the current form of draft letter to be sent by Mr Fitzjohn to Mr Cowin setting out Shell's position. Mr Fitzjohn offered no explanation why the letter was not sent to Mr Cowin on 10 April 1995, and Mr Miolla agreed there was absolutely no excuse for not having notified Mr Cowin immediately after the video conference, and:-

"Q. And it would be grossly misleading, having regard to what happened at the video conference, to seek to discourage Mr Cowin from dealing with Mobil without informing him of the position as it emerged following that conference; correct?

A. Yes, I would say yes."

This was further evidence of the commercially disgraceful way in which, in my opinion, BKC was conducting itself in relation to HJPL.

332 In sending the documents to Shell on 17 April 1995, Mr Miolla referred to Shell's request for a right of first refusal, which he said would have to be worked out having regard to obligations to other franchisees and:-

"It's our understanding that this new test will run simultaneously with the existing three party test involving HJPL, but that you are willing to discuss withdrawal by HJPL from the existing three party test if HJPL is reluctant to compromise. David Fitzjohn will be speaking with Jack Cowin this week to communicate your current preference to become a direct franchisee of BKC and the related decision to begin a two party test of this arrangement. David will also be communicating your input regarding the appropriate trade name and our mutual concern regarding the ability of HJPL to serve as an effective provider of support services for restaurants run directly by Shell. David will call you or Jo Farnik with a report on that conversation and Jack's feelings about continuing with the existing HJPL run sites."

Mr Miolla agreed that by then it was clear that Shell or its franchisees would operate all restaurants if the long-term agreement came to fruition.

333 Notwithstanding the apparent intention to advise Mr Cowin in mid-April, on 18 April 1995 Mr Power had a discussion with Mr Montgomery the contents of which he communicated to Messrs Fitzjohn, Hothorn, Giresi and Miolla. Mr Power reported Mr Montgomery's understanding of discussions between Mr Cowin and his bankers and the following recommendations:-

"JM recommendation is that now may not be the right time to call as the reception may not be positive at all; however we both believe that to wait much longer will see the situation deteriorate further ...

We believe that the DF call later this week should be cancelled and in lieu, a communication from BK (either CH or DF) occur, focused on the positioning and timing of a formal BK/HJ strategy review session in Sydney with DF and CH plus RM and/or MG also in attendance."

This made clear that Mr Montgomery was aware that BKC intended to advise Mr Cowin of Shell's position and, hence, that Mr Montgomery was aware of it. There can be no suggestion that he told Mr Cowin about it, indeed the statement Mr Power attributed to him negated any possible inference that he did. Thus BKC was dealing with Mr Montgomery on the basis that he would be the recipient of information of obvious commercial importance to Mr Cowin, which he would not communicate to him, and also on the basis that he was prepared to advise BKC of what he perceived to be its best approach in the light of the information he received from it, and the information he had in consequence of his trusted position as a senior employee of HJPL. This situation only has to be stated to destroy the quite lame reasons sought to be advanced by Messrs Fitzjohn and Miolla for their understanding of the way in which Mr Montgomery was acting. Although Mr Montgomery was not called, it is difficult to imagine any commercially acceptable reason for his conduct, and that of BKC was, in my opinion, commercially reprehensible. Not only was BKC acting behind HJPL's back in its negotiations with Shell, but it was utilising advice from Mr Montgomery based on information it had furnished to him in confidence, knowing him to be a trusted employee of HJPL, to formulate its strategy against HJPL. That was bad enough. But it became much worse when it is realised that all this was taking place in gross dereliction of the fiduciary duties I am satisfied BKC owed to HJPL.

334 Mr Power accepted that the "we", being the first word of the last quoted paragraph, was a reference to Mr Montgomery and himself, and that he accepted Mr Montgomery's suggestion that Mr Fitzjohn should not proceed at that stage. So much for Mr Fitzjohn's evidence that Mr Montgomery's advice was not heeded. Mr Fitzjohn said he did not think his reason for not calling Mr Cowin was that he was acting on Mr Montgomery's advice, and Mr Miolla said he did not know whether the proposed call from Mr Fitzjohn to Mr Cowin was cancelled because of that advice. In my opinion, there can be no doubt that Mr Montgomery's advice was the reason, and in so far as Messrs Fitzjohn and Miolla expressed any doubts about the matter I totally reject their evidence.

335 Mr Bathurst submitted that the overwhelming likelihood was that Mr Fitzjohn's telephone call was cancelled on the basis of that advice because there was no other plausible explanation for the delay of a further month. He sought to reinforce this view by noting the change between the draft letter of 10 April 1995 and the final version of 15 May 1995 by the addition of the final paragraph, which it was submitted "echoed" the advice of Mr Montgomery:-

"I think we're approaching a cross-road and that we need to meet in person to discuss strategic issues in more detail. I am willing to come to Sydney to see you and I would suggest that we also have Roy Blauer attend."

These submissions reinforce the views I have expressed.

336 The difficulty confronting BKC on this issue is that if, contrary to the view to which I have come, the proper inference to draw is that BKC did not accept Mr Montgomery's advice, then it is that BKC delayed for some basically unexplained reason at a time when both Mr Fitzjohn and Mr Miolla clearly took the view that the appropriate course was to advise Mr Cowin. I say "basically unexplained" because some attempts were made to explain the delay by reason of matters such as difficulty of communication and the bringing on of a confrontation, which reasons I reject. The failure to advise Mr Cowin was commercially discreditable, because, on any view, the stage had been reached when, if BKC had been acting in a commercially proper manner it would have advised HJPL of the situation. In my opinion, the proper inference to draw is that BKC did not advise Mr Cowin because of the information received from Mr Montgomery. The reason for adopting that course was because it was obviously anticipated that Mr Montgomery was in possession of information concerning Mr Cowin's probable attitude, which made it inappropriate to do so and of which information BKC was prepared to take advantage.

337 Thereafter, progress was made between BKC and Shell and, on 15 May 1995, after a telephone conversation with Mr Cowin, Mr Fitzjohn sent the letter to him advising of Shell's position. Mr Fitzjohn offered various explanations relating to his busyness and travel arrangements for not communicating earlier with Mr Cowin. I reject these attempted explanations. There were various versions of this conversation. I prefer that of Mr Cowin which, in my opinion, is substantially corroborated by Mr Miolla, and which accorded with the probabilities. If the conversation took place in the way for which Mr Fitzjohn contended it was virtually meaningless. I do not accept Mr Fitzjohn's evidence as to why he delayed communicating with Mr Cowin. He was able to communicate world-wide through the most basic and sophisticated electronic equipment very quickly and did so, as hundreds of tendered documents show. He did so from many parts of the world to many other parts of the world accommodating time differences if need be. He did so particularly when he was travelling, as he frequently was. The same position applied to Mr Cowin. It is nonsense to suggest that either of the reasons advanced provided a valid reason, let alone an excuse. I think his final statement that he had no idea what caused the delay was inaccurate, for I am sure he knew what the reason was but was not prepared to divulge it, that being a belated attempt to extricate himself from the obvious difficulty of asserting that the reasons were busyness and travelling, whilst not disclosing the true reason.

338 In relation to the 15 May 1995 letter, Mr Fitzjohn agreed that the use of the word "never" in the first paragraph was inappropriate and wrong; that the third paragraph made no reference to the date of the conference call with the implication that the Shell communication was a recent occurrence and, even before that had occurred there had been an assertion, in relation to the Burger King brand being used by Shell in the Eastern States, of "unsolicited input without any encouragement from anyone at BKC". He said that he did not think that was false at the time. In relation to the second numbered paragraph on page 2 concerning HJPL's provision of services to Shell, Mr Fitzjohn said that was misleading as he knew by then that Shell had indicated a strong preference not to be supported by HJPL. There were, accordingly, significant matters in the letter which were conceded to be wrong, and which, I am satisfied, were known to be wrong when it was written. Thus, when Mr Fitzjohn finally reached the position of advising Mr Cowin he did so in terms which lacked frankness and veracity. This, in my opinion, was a continuation of BKC's wholly discreditable conduct in relation to this issue. Messrs Fitzjohn, Miolla and Power were all involved in it, the first two being very senior officers of BKC.

339 Mr Cowin responded to the letter on 2 June 1995 in robust terms and, it was submitted, "with a clear and strong rebuttal of each of the points made in" it. On 29 June 1995, Mr Fitzjohn replied in circumstances which avoided answering the specific matters raised by Mr Cowin.

340 Mr Bathurst's submissions then turned to the success of the tripartite test within the terms contemplated by the parties. He submitted that in a report to Shell's head office of 16 May 1995, Mr Kuehne, the senior Shell executive involved in the project, advised that sales growth had been strong at the West Terrace site operated by HJPL, that fuel and shop sales had improved at that site, and that the success of the concept was "excellent" making it suitable for twelve - twenty per cent of Shell's network. Further, the notes of a meeting between Messrs Cowin and Butler of HJPL, and Messrs Farnik, Mummery and Plaisted of Shell, on 15 April 1995, which were prepared by Shell, recorded that BKC was pleased with the success of the HJPL arrangement.

341 The test sites operated by HJPL at Kingsway and West Terrace had generated significant profits for both HJPL and Shell, and the success of the arrangement, from the perspective of BKC and Shell, is to be inferred from the fact that each entered into a bipartite arrangement contemplating the development of further sites, and that Shell subsequently opened "Hungry Jack's" restaurants at fourteen sites. It was submitted that the success of the arrangement from HJPL's perspective could be inferred from its wish to continue to operate the Kingsway and West Terrace sites and, under the terms of the settlement of these proceedings between HJPL and Shell, HJPL has sought and Shell has granted extended rights to occupy those sites. Finally, it was submitted that the inference of the arrangement's success may be more confidently drawn as BKC has not sought to lead evidence from its executives to suggest that the trial was unsuccessful and has not called any Shell witnesses to give evidence to that effect. In all these circumstances, I consider that the proper reference is that had BKC insisted on the tripartite joint venture going forward, Shell would have acquiesced. That, in turn, tends to negate any suggestion that there was no appropriate causal connection between the alleged breaches by BKC and any damages caused to HJPL.

342 Mr Bathurst submitted, Tp.3880, that BKC breached its fiduciary obligations by encouraging Shell to go ahead without HJPL's involvement, and by taking the benefit of the service royalties from the Shell restaurants to the exclusion of HJPL. Thirdly, it was submitted, that there was a breach by withholding that negotiations were taking place with Shell behind HJPL's back. In my opinion, the evidence establishes each of these breaches.

343 Mr Bathurst dealt with the assertion that the agreement between the parties was covered by the Test Site Agreement, his submissions being that the Test Site Agreement did not cover the contemplated larger agreement in relation to a possible seventy sites, was not entered into in respect of test sites until either February or March 1995, and, as a matter of construction, was not concerned with the present points. He dealt nextly with the assertion by BKC that there was separate legal representation for each party, and submitted that that, of itself, did not tend to show that a fiduciary obligation did not exist, nor did it absolve BKC from the consequences of its breaches of fiduciary duty.

344 Mr Bathurst submitted that there existed a joint venture or a proposed joint venture between, inter alia, BKC and Shell under which, among other things, HJPL was to open test stores at Shell service stations at Kingsway, Melbourne and West Terrace, Adelaide and at least one other site to be agreed; the operation of Burger King restaurants other than at the test sites would be conducted by HJPL or such third party franchisees as it might nominate after discussion with BKC; HJPL would operate most of the Burger King restaurants opened at Shell service stations after the conclusion of the tests; and HJPL would provide services to all of the Burger King restaurants opened as part of the joint venture. I should add, and so much seemed to be accepted by Mr Bathurst, that it was agreed that the further relationship should only go forward if the Test Site Agreement proved "successful", although, at all relevant times, the parties proceeded on the basis that that would, in all probability, occur. However, Mr Bathurst added that for the purposes of his submissions the fiduciary duty and the obligations imposed by it arose at the time the arrangement was entered into and implemented and remained until it was terminated, so that there was no need for the Test Site Agreement to be successful before those obligations arose or were breached, but rather that they were in place at all material times.

345 The submissions continued that the joint venture or proposed joint venture existed prior to the entry into the Test Site Agreement and, by reason of the joint venture or proposed joint venture, BKC owed fiduciary duties and obligations to HJPL, which required that it not take steps, either itself or in conjunction with Shell, to exclude HJPL from the development, operation and/or servicing of Burger King restaurants at Shell service stations in Australia. This showed, conformably with the pleading, that there was a potentiality for a wider ambit of operations than the Test Site Agreement. The submission continued that at the least those duties required that BKC and Shell must not negotiate secretly to exclude HJPL from the proposed venture. Alternatively, it was submitted, the dealings between HJPL and BKC, so far as they concerned negotiations with Shell, were directed to the formation of a joint venture between them to establish and operate Burger King restaurants at Shell service stations in Australia, and that BKC owed HJPL fiduciary duties and contractual duties of good faith in relation to that matter.

346 The submission was that from March 1994 there existed either a venture by HJPL and BKC to deal jointly with Shell for the promotion of a long-term relationship with Shell through the medium of a test site agreement; and/or a venture by HJPL, BKC and Shell to undertake the establishment and operation of a series of restaurants under the terms of a Test Site Agreement to be executed in due course with a view to establishing a long-term relationship, which would involve Shell's establishing restaurants at service stations utilising the Burger King system and operated or serviced by HJPL. This led, prior to the execution of the Test Site Agreement, to HJPL's being expected to and in fact expending time, money and effort for the benefit of itself and BKC, and taking the role of conducting the development of the proposal on behalf of each, it being apparent to BKC that the sole purpose of participation in the activity was the chance of a long-term business relationship with Shell. It was submitted that the failure to finally negotiate detailed arrangements heightened the element of trust and confidence, which existed between HJPL and BKC. The submission continued that the subject matter of the arrangement between them was the opportunity to develop a long-term relationship with Shell, which would be to the benefit of both, each being dependent on the other to convert that opportunity into reality because BKC had the entitlement to the relevant system and intellectual property rights and HJPL had the necessary infrastructure.

Mr Oslington's Submissions In Relation To The Shell Issue

347 Mr Oslington submitted that the only commercial arrangement into which the parties entered was a tripartite test agreement in respect of a limited number of sites, which was documented in the Tripartite Test Agreement entered into in February or March 1995. The submission was that the terms of this agreement not only negated any other agreement, but also the existence of any fiduciary duty. In my opinion, this submission should not be accepted. Not only was the Tripartite Test Agreement not entered into until well after the events giving rise to the fiduciary duty for which Mr Bathurst contended, but it did not, on its proper construction, have the consequences for which Mr Oslington contended. In my view, Mr Bathurst's submissions on the construction issue should be accepted.

348 Mr Oslington submitted that there was nothing in the relationships between BKC, HJPL and Shell, which prevented BKC from entering into commercial arrangements with Shell independently of HJPL. This submission depends on whether a fiduciary relationship existed and, if it did, its range. He submitted, in this regard, that the relationship between the various parties was not one which could give rise to fiduciary duties or obligations because they were essentially commercial relationships governed by contracts. Further, having regard to the history of the dealings between HJPL and BKC, particularly as evidenced by the 1990 agreements, that these were not shown to be the elements of confidence and trust upon which fiduciary relations are based.

349 Mr Oslington submitted that the proper analysis of the position was that the parties intended to enter into the Tripartite Test Agreement, which they did, and which they performed in circumstances where there were no other obligations between them such as to prevent BKC and Shell from entering into the Bipartite Test Agreement or, indeed, any other commercial arrangement they saw fit. The submission continued that the longer term arrangement, which was in mind, was wholly subject to the success of the Tripartite Test Agreement and that it was only if that was successful that the parties would decide whether and on what terms they would proceed further. He said that this was particularly so having regard to what he submitted was Mr Cowin's reluctance to enter into any long-term arrangement.

350 Mr Oslington submitted that there were two further broad issues relating to Shell, the first being the joint venture claim in relation to which he said HJPL had abandoned an attempt to prove any damages flowing from it, and that the evidence about the history of the Shell relationship seemed to be relied on as relevant to the bad faith issue. Secondly, the issue whether Shell was introduced by HJPL in respect of restaurants at its service stations at Mackay, Mudgeeraba, Granard Road, Campbelltown, Jacana, East Ringwood and Westlakes. He submitted that HJPL's claim was that it introduced Shell as a franchisee in respect of those restaurants and claimed the service royalty pursuant to clause 10.3 of the Service Agreement as damages.

351 Clause 10.3 provided:-

"Royalties - BKC shall cause to be paid to Hungry Jack's one-half of the royalty received from designated Franchisees other than Hungry Jack's. BKC contemplates a total royalty fee from designated Franchisees other than Hungry Jack's of 5% of gross sales. Such payment to Hungry Jack's shall be made on a monthly basis as long as Hungry Jack's is providing the services under this Agreement. BKC may change the royalty rate for designated Franchisees other than Hungry Jack's."

A "designated franchisee" was defined as:-

"Hungry Jack's, franchisees of BKC introduced by Hungry Jack's to BKC and such other franchisees of BKC as BKC may nominate from time to time."

Mr Oslington submitted that the factual issue was whether Shell was a franchisee of BKC introduced by HJPL to it.

352 Mr Oslington's written submissions traced the evidence of Mr Cowin in relation to HJPL's dealings with Shell, and he submitted that it was apparent from paragraph 9(b) of Mr Mazzone's statement that HJPL was trying to lease food outlets at Shell sites and not discussing a proposal with Shell that it become a franchisee. A similar type of situation was sought to be negotiated in respect of the Westgate Bridge site and the Kingsway site, involving the possibility of HJPL leasing food outlets. It was not until late 1993 or early 1994 that Mr Cowin learned of the proposal for Shell to become a franchisee and, it was submitted, neither Mr Cowin nor any other HJPL witness claimed to have initiated those discussions.

353 Mr Oslington then considered the discussions, which proceeded between different officers of Shell from those dealing with HJPL, between BKC and Shell. By the latter part of 1993 those officers of Shell had approached Mr Jones about the potential of entering the Sydney market, and the matter was proceeding, at least as between Shell and BKC, on the basis that an opportunity was being presented to BKC to introduce the Burger King brand into the New South Wales market.

354 On 20 October 1993, Shell sent BKC a draft letter of intent to become a franchisee of its, and, on 9 November 1993, an amended draft was furnished to Shell. On 29 November 1993, Mr Miolla prepared a draft Test Agreement, which predicated Shell's becoming a franchisee, but discussions, thus far, between BKC and Shell were on the basis that that relationship would be established without the introduction, knowledge, intervention or assistance of HJPL.

355 I consider that this analysis, at least to the end of 1993, is correct. The question that has to be addressed, however, is what occurred in early 1994. Mr Oslington placed emphasis upon Mr Montgomery's notes of the meeting of 29 March 1994, which Mr Mazzone said recorded the substance of what Mr Cowin had said at that meeting, namely that the purpose of the meeting was:-

"... to focus more specifically on how a relationship between Shell and BK/HJ could be progressed and put into operation on a test basis as soon as possible in order to establish in the first instance compatibility of companies and systems and to look at guidelines and principles for a larger scale and long-term arrangement between the parties which could be implemented on a national basis."

356 Mr Oslington submitted that such statements by Mr Cowin were not consistent with his wanting to commit to a long-term arrangement "at that stage". However, I do not regard that statement by Mr Cowin, which Mr Oslington seemed to accept as reflecting the true situation, as derogating from HJPL's case on this issue. It is completely consistent, in my view, with the aim of the parties that if the test arrangement was successful it would provide a basis for a long-term relationship and, whilst the test site arrangements were being implemented, steps were being taken to put in place such a relationship on the assumption that in all probability they would be successful.

357 Mr Oslington submitted that Shell became a franchisee of the restaurants in respect of which service royalty was claimed through its discussions with BKC in 1993, which ultimately led to the tripartite test agreement and, subsequently, the bipartite test agreement running in parallel with it. He reinforced this submission by stating that it was not until 19 July 1994 that it was decided to make HJPL a party to the Test Site Agreement, the previous drafts of that agreement not having mentioned HJPL. In all these circumstances, he submitted, Shell was not a "designated franchisee" in respect of those restaurants.

358 In response to the reliance on the terms of the Service Agreement, Mr Bathurst submitted in reply that the amendment to that agreement, effected by clause 10A on 12 December 1991, provided:-

"10A.1 Each party must ensure that each franchise agreement entered into with a Third Party Franchisee (a `Franchise Agreement') provides for the Third Party Franchisee to pay:

(a) to BKC an initial franchisee fee and a monthly royalty on gross receipts received by the Third Party Franchisee arising out of the Third Party Franchisee's operation of a Burger King restaurant (`Monthly Franchise Royalty'); and

(b) to Hungry Jack's an initial service fee of 1.5 times the initial franchisee fee and a monthly service royalty (`Service Royalty') equal to the Monthly Franchise Royalty."

359 Clause 10B.2 provided that BKC may require HJPL to cease providing services to a Third Party Franchisee if it was not introduced to BKC by HJPL without cause by giving ninety days' written notice to HJPL; and, in respect of any other Third Party Franchisee, only if HJPL failed to provide services to the Third Party Franchisee and failed to rectify that breach within thirty days of receiving notice from BKC or the Third Party Franchisee requiring it to do so.

360 He submitted that the effect of these clauses was that HJPL was entitled to receive a monthly service royalty from Shell of fifty per cent of the total monthly service royalty payable as Shell was a third party franchisee.

361 Mr Bathurst's submissions continued that this raised two issues, namely the meaning to be attributed to the word "introduced" and, whether on an analysis of the facts, Shell was "introduced" by HJPL. The significance of these questions was, notwithstanding that there had been no purported termination of the arrangements, that if HJPL had not "introduced" Shell, they could be terminated without cause by giving ninety days' written notice to HJPL, but if Shell had been "introduced" by HJPL the right to terminate was far more restricted. The right of termination reflected on the possible entitlement to equitable compensation.

362 Mr Bathurst submitted that BKC offered no explanation as to the meaning of the word "introduced", and appears to have assumed that it only referred to conduct which led to the grant of a successful franchise application. Whilst conceding that may be one application of the meaning of the term, he submitted that the better approach was to determine whether HJPL was the "effective cause" of the formation of a Franchise Agreement, which included drawing to BKC's attention the prospect of opening "Hungry Jack's" restaurants on Shell service station sites. By adopting that approach, he submitted, it removed the ability of Shell or BKC to "capriciously deny" HJPL the benefit of the introduction by later choosing to negotiate directly with each other.

363 He submitted that the evidence established that HJPL directly introduced Shell to BKC, by bringing its interest in the Burger King System to BKC's attention. He noted that Mr Jones had conceded that he was aware prior to 1993 that HJPL was dealing with Shell in relation to the Westgate site in Melbourne; that he acknowledged that it was possible that late in 1993 he had become aware that HJPL was negotiating with Shell for the establishment of a number of restaurants at Shell service stations; and that certainly by September 1993 Mr Jones was aware of HJPL's previous dealings with Shell by reference to his evidence in which he claimed that Shell had indicated it was not happy with them. From this Mr Bathurst submitted that "at the least", HJPL had indirectly introduced Shell to BKC by drawing the Burger King System to its attention prior to BKC's first dealings with Shell, and he referred to the following facts:-

(a) In September 1989, Mr Cowin had written to various oil companies, including Shell;

(b) during 1990 and 1991, HJPL participated in discussions with Shell concerning the possibility of "Hungry Jack's restaurants at the Westgate site in Melbourne"; and

(c) during 1993 and 1994, the discussions between HJPL and Shell expanded to include the possibility of the Kingsway site, which later became a "test site" under the tripartite arrangement.

364 The matters to which I have referred are significant not only in themselves, but also because of the claim by HJPL to have the equitable compensation, to which it has asserted it is entitled, measured by reference to the service royalty. As I have said, Mr Oslington's submissions proceeded on the basis that clause 10.3 of the Service Agreement governed the situation, which was also based on an introduction. Clauses 10A and B appear to me to change, or, perhaps more accurately, reinforce HJPL's position in this regard, and, whilst Mr Bathurst raised these matters in reply, they were obviously responsive to Mr Oslington's submission that clause 10.3 governed the situation. Mr Oslington's response to these matters, as I understood it and, perhaps, impliedly, was that HJPL had not introduced Shell. The consequence of that would be that the rights under the 1991 agreement could be terminated by the giving of 90 days' notice without cause being shown.

365 Mr Bathurst relied upon the analogy of an introduction by a real estate agent and, thereby, upon the general approach that the word "introduced" should be given a wide meaning to preclude parties seeking to avoid the fact of introduction for their own financial benefit. In my opinion, this is the appropriate approach to the construction of that word. The factual question then is whether there was sufficient activity by HJPL to justify a finding that it "introduced" Shell to the concept.

366 On Mr Oslington's submissions it is clear that there were discussions between HJPL and Shell well before there were discussions between BKC and Shell, the initial BKC presentation not being made until mid-1993. Even accepting, as I think it is correct to do, that those discussions related to leasing, although that was certainly qualified by the discussion Mr Cowin had in December 1989 with Shell in which there was a suggestion to open one restaurant to test the concept of Shell's changing from "Tuckers" to "Hungry Jack's", I think within the concept of "introduction" to which I have just referred that that was sufficient. The concept to which the agreement was referring was one of introduction, not negotiation of terms, and the evidence satisfies me that HJPL was an effective cause, and probably the effective cause, of Shell's becoming interested in adopting the "Hungry Jack's" brand and, accordingly, becoming interested in dealing with BKC. The word "introduction" would be deprived of all relevant commercial meaning if one then had to trace through the negotiations and to conclude that as the final form of arrangement between the parties was different from that originally contemplated, there was, accordingly, no "introduction".

Mr Oslington's Submissions On The Tripartite Test Agreement

367 Mr Oslington submitted that the only relevant contractual relationship was the Tripartite Test Agreement, which was the product of careful consideration by "three large commercial organisations and their lawyers". It was the only agreement with Shell to which HJPL was a party, and clause 16 stated that it contained the entire agreement and understanding between the parties on everything connected with the subject matter of the agreement, and that it superseded and merged any prior agreement or understanding on anything connected with that subject matter. Clause 16 also acknowledged that each party entered into the agreement without relying on any representation by any other party, and clause 19 provided that variations were not effective unless in writing.

368 I have referred to Mr Bathurst's response to these submissions and to my view that the agreement does not preclude the existence of a joint venture relationship between the parties from approximately March 1994 of the type I have described. In my opinion, and I shall consider the authorities in a moment, the facts give rise to a sufficient relationship to establish fiduciary duties, notwithstanding that there was no concluded agreement and that the entry into the long-term agreement was dependent upon the success of the Tripartite Test Agreement. In the meantime, the fiduciary duties impacted on the relationships the parties had established.

369 Mr Oslington placed reliance on the evidence of HJPL's then solicitor, Mr Peter Kemp, at Tpp.973-974. In my opinion, Mr Kemp's evidence does not negate the existence of circumstances giving rise to a fiduciary relationship. Rather, his understanding was consistent with the existence of facts, which would give rise to one. Nor do I consider that it is any answer to HJPL's contentions that it did not want to commit to a long-term relationship until it could form a view, as a result of the test, whether it worked. The parties were working towards a long-term agreement, provided the test was successful, and, in pursuance of that, HJPL was, to the knowledge of BKC and Shell, expending time and money. No party had any intention to enter into a long-term relationship at that time, but the arrangements into which they entered created, in the view to which I have come, fiduciary obligations between them, which were breached by BKC and Shell prior to the entry into the Tripartite Test Agreement. This was reinforced by the undoubted fact, established by the evidence, that all parties considered the Tripartite Test Agreement would be successful.

370 Mr Oslington submitted that by June 1995 HJPL had already decided that there was not enough money in the arrangement contemplated by the Test Site Agreement with Shell. He referred to Mr Butler's having told the banks on 29 May 1995 that there was insufficient profit in the trial of Shell outlets and that a decision had been taken to proceed on a franchise basis, which would entail Shell being the franchisee of the Hungry Jack's outlet. I do not see that this is inconsistent with the long-term arrangement the parties had in mind. As Mr Oslington's submissions made clear, the terms of that arrangement had not been worked out and there is no reason, so far as I can see, why they should not have been put into operation in the manner to which Mr Butler referred. In the same vein Mr Oslington noted that HJPL did not develop further test sites, which he submitted was consistent with its taking the view that the arrangements being explored with Shell through the test were unsatisfactory so far as it was concerned and consistent with what Mr Butler told the banks in May 1995. However, for the reasons I have given, I do not see that the change in the arrangements is a relevant factor. In other words it was never finally decided that any long-term arrangement should be carried out consistently with the Test Site Agreement, rather than by way of franchises.

371 In his further submissions Mr Oslington put that the parties were not in a fiduciary relationship and he referred to the statement of Gibbs CJ in Hospital Products Limited v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at pp.72-73 warning against importing fiduciary obligations into a commercial agreement, particularly one entered into by parties at arm's length and on an equal footing. I shall refer to the authorities in a moment.

372 At a factual level Mr Oslington relied upon the Tripartite Test Agreement which, if I may say so with respect, was not relevant to the fiduciary obligations for which HJPL was contending, to what was contemplated under that agreement, and to the ability of BKC and Shell to enter into separate agreements unfettered by the arrangements with a view to a long-term agreement. It is, at this point, that I do not accept Mr Oslington's submissions on this aspect. My reason is that whilst the parties were obviously negotiating, the circumstances in which they were doing so, including the activities in which they were engaging, precluded them from acting contrary to those arrangements and the mutually held expectations that, in all probability, a longer term agreement would be reached, unless and until those arrangements were terminated. The position, as I see it, which the evidence disclosed, was one of sinister simplicity. Three parties were purportedly working together to achieve a result, which would be for the financial benefit of all and to which each was making a relevant commercial contribution. Two of those parties, unknown to the third, were engaging in their own private negotiations to achieve substantially the same objective but to the exclusion of the third party. The issue is whether all these matters, particularly when taken in combination with the misleading conduct in which BKC was engaging to encourage HJPL to continue with the arrangement, with the dissuading of it from investigating an arrangement with Mobil and with failing to advise it of its dealings with Shell, gave rise to a fiduciary duty and its breach. In my view, it did.

The Fiduciary Duty

373 The first question is whether there was a relationship between BKC, HJPL and Shell or between BKC and HJPL that gave rise to fiduciary obligations. In Hospital Products Gibbs CJ, in referring to the nature of the duties owed, said, at p.67:-

"A person who occupies a fiduciary position may not use that position to gain a profit or advantage for himself, nor may he obtain a benefit by entering into a transaction in conflict with his fiduciary duty, without the informed consent of the person to whom he owes the duty."

374 At p.68 his Honour said that the authorities contained much guidance as to the duties, but "provide no comprehensive statement of the criteria by reference to which the existence of a fiduciary relationship may be established". After referring to a number of relationships, which created a fiduciary situation, his Honour said:-

"There is no reason to suppose that these categories are closed. However, the difficulty is to suggest a test by which it may be determined whether a relationship, not within one of the accepted categories, is a fiduciary one."

He referred to the finding by the Court of Appeal that the relationship existed where the facts established that "in a particular matter a person has undertaken to act in the interests of another and not in his own".

375 At p.69 his Honour said:-

"I doubt if it is fruitful to attempt to make a general statement of the circumstances in which a fiduciary relationship will be found to exist. Fiduciary relations are of different types, carrying different obligations .. and a test which might seem appropriate to determine whether a fiduciary relationship existed for one purpose might be quite inappropriate for another purpose. ... Moreover, different fiduciary relationships may entail different consequences, as is shown by the discussion of the respective positions of a trustee and a partner in relation to the renewal of a lease: .."

376 At p.70 his Honour noted that the fact that the arrangement between the parties was of a purely commercial kind, and that they had dealt at arm's length and on an equal footing, had consistently been regarded by the High Court as important, if not decisive, in indicating that no fiduciary duty arose.

377 His Honour, at p.72, considered that the test suggested by the Court of Appeal was "not inappropriate in the circumstances", although he concluded that even if it were applied it was not satisfied because, in his opinion, the appellant did not undertake "whether by representation or contractual provision, to act solely in the interests of USSC and not in its own interests". His Honour also considered that as the arrangements between the parties were governed by the contract into which they had entered, and because it could not be said that it was not intended that the appellant should profit from the contract, it could not be concluded that there was a fiduciary relationship.

378 Mason J posed the question as to whether a fiduciary relationship existed at p.96. His Honour referred to the accepted fiduciary relationships, and continued:-

"The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions `for', `on behalf of', and `in the interests of' signify that the fiduciary acts in a `representative' character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.

It is partly because the fiduciary's exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed .."

The observations in the second paragraph, as I would understand it, flow from the relationships described in the first. As Millett LJ said in Bristol and West Building Society v Mathews [1998] 1 Ch 1 at p.17:-

"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence."

379 Mason J said that it had never been doubted that contractual and fiduciary relationships may co-exist between the same parties, the former regulating their basic rights and liabilities, and the latter:-

".. if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."

380 His Honour, at pp.97-98, said:-

"My conclusion that HPI was at liberty to make some business decisions by reference to its own interests, subject to the obligations arising under the best efforts promise and the other terms of the contract express and implied, presents an overwhelming obstacle to the existence of the comprehensive fiduciary relationship found by the Court of Appeal. This is because HPI's capacity to make decisions and take action in some matters by reference to its own interests is inconsistent with the existence of a general fiduciary relationship. However, it does not exclude the existence of a more limited fiduciary duty for it is well settled that a person may be a fiduciary in some activities but not in others .."

381 His Honour set out a number of factors, which he considered relevant in determining whether a fiduciary duty was brought into existence in the circumstances of that case. They included the existence of a valuable market, the appointment of a party to take advantage of it, the leaving to that party of the manner in which the market was to be promoted subject to express and implied terms of the contract, the exercise by that party of that discretion, which provided a special opportunity of acting to the detriment of the other, the fact that the distributor was not acting as agent, the ability of the distributor to affect the supplier's goodwill, and the distributor's responsibility to protect and promote the supplier's product goodwill being subject to the qualification of reasonableness attached to the best efforts promise. Of course, the facts of each case will differ, but the role played by BKC can be relevantly equated to various of these situations.

382 At p.99 Mason J said:-

"The classical illustrations of the fiduciary relationship are those in which the fiduciary is under a duty to act not in his own interests or solely in his own interests but in the interests of another or jointly in the interests of another and himself, eg, a trustee and a partner. In the present case the nature of the distributorship relationship and the best efforts promise with its attendant standard of reasonableness necessarily entailed that HPI could make some business decisions by reference to its financial interests, without subordinating them to the promotion of the market for USSC's products, so long at any rate as HPI did not deliberately do something, or omit to do something, for the purpose of destroying or injuring that market."

383 His Honour continued:-

"But entitlement to act in one's own interests is not an answer to the existence of a fiduciary relationship, if there be an obligation to act in the interests of another. It is that obligation which is the foundation of the fiduciary relationship, even if it be subject to qualifications including the qualification that in some respects the fiduciary is entitled to act by reference to his own interests. The fiduciary duty must then accommodate itself to the relationship between the parties created by their contractual entitlements. An entitlement under the contract to act in the relevant matter solely by reference to one's own interests will constitute an answer to an alleged breach of the fiduciary duty. The difficulty of deciding under the contract when the fiduciary is entitled to act in his own interests is not in itself a reason for rejecting the existence of a fiduciary relationship, though it may be an element in arriving at the conclusion that the person asserting the relationship has not established that there is any obligation to act in the interests of another." (My emphasis.)

384 His Honour referred to "an understandable reluctance to subject commercial transactions to the equitable doctrine of constructive trust and constructive notice" and, at p.100, continued:-

"But it is altogether too simplistic, if not superficial, to suggest that commercial transactions stand outside the fiduciary regime as though in some way commercial transactions do not lend themselves to the creation of a relationship in which one person comes under an obligation to act in the interests of another. The fact that in the great majority of commercial transactions the parties stand at arm's length does not enable us to make a generalisation that is universally true in relation to every commercial transaction. In truth, every transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristics of a fiduciary relationship." (My emphasis.)

385 At p.101, his Honour concluded that as USSC entrusted HPI with a responsibility for protecting and promoting the marketing of USSC's products in Australia, it effectively constituted HPI the custodian of its product goodwill in Australia and, in exercising that responsibility, HPI "had a special opportunity of acting to the detriment of USSC which was, accordingly, vulnerable to the abuse by HPI of its position". Whilst his Honour accepted that each could act in its own interests, he held that HPI was necessarily subject to the requirement of acting bona fide and reasonably with due regard to the interests of USSC and, in those circumstances, could not act solely in its own interests without reference to those of USSC, such that HPI was fixed with the character of a fiduciary in relation to the specified activities notwithstanding that it was also acting in its own interests in pursuing them and was carrying on the distributorship business generally for its benefit and in no sense was a trustee for USSC.

386 At p.103 his Honour said:-

"McLelland J found - a finding with which I agree - that, as a fiduciary having responsibility for protecting and promoting the market for USSC's products in Australia, HPI was under a duty not to make a profit or to take a benefit by virtue of its position as a fiduciary without the informed consent of USSC and that within the ambit of its fiduciary responsibility it should not act in a way in which there was a possibility of conflict between its own interests and those of USSC: Queensland Mines Limited v Hudson."

387 He continued:-

"Accordingly, the fiduciary's duty may be more accurately expressed by saying that he is under an obligation not to promote his personal interest by making or pursuing a gain in circumstances in which there is a conflict or a real or substantial possibility of a conflict between his personal interests and those of the persons whom he is bound to protect: Aberdeen Railway Co v Blaikie Bros. By linking the obligation not to make a profit or take a benefit to a situation of conflict or possible conflict of interest the position, in accordance with the authorities, (a) excludes the relevance of an inquiry into the actual motives of the fiduciary; and (b) excludes restitutionary relief when the interest of the fiduciary is remote or insubstantial: Boulting v Association of Cinematrograph, Television and Allied Technicians; Phelan v Middle States Oil Corporation."

His Honour considered, therefore, that there was an obligation on the fiduciary to protect, that obligation being part of the basis for finding the existence of such a duty.

388 In considering the breaches, his Honour said, at p.106:-

"The two breaches described by his Honour need to be understood as involving actions taken by HPI during the term of the distributorship with a view to appropriating USSC's market for itself during that term and thereafter. Once the breaches are understood in this light, it is incontestable, as it seems to me, that his Honour was correct in finding that the relevant acts constituted breaches of fiduciary duty. HPI, though custodian of USSC's product goodwill, sought to appropriate that goodwill for itself by the means described in the declaration."

389 Wilson J was of the view that it was inappropriate, in the circumstances of the case, to import a fiduciary duty.

390 Deane J, at p.122, said that the relationship between a manufacturer and distributor is not, in itself, ordinarily one of a fiduciary nature where the distributor enjoys sole rights of distribution in a particular area, but rather it is ordinarily a relationship of seller and buyer. He did not consider that the clause requiring the distributor to use its "best efforts" to build up the market in Australia "to the common benefit" imposed a general fiduciary duty, and that there were no circumstances transforming the relationship into a partnership or joint venture. However, he said that the conclusion that the overall relationship was not of a fiduciary nature did not preclude the possibility that, either within or arising from it, a more restricted fiduciary relationship might exist. His Honour considered that relief did not flow from a breach of a fiduciary duty flowing from an identified fiduciary relationship, but he held that USSC was entitled to a declaration that HPI was liable to account as a constructive trustee for the profits of the Australian business in accordance with the principles under which a constructive trust may be imposed as the appropriate form of equitable relief in circumstances where a person could not in good conscience retain for himself a benefit, or the proceeds of a benefit, which he appropriated to himself in breach of contractual or other legal or equitable obligations to another: p.125.

391 Dawson J was of the view that in the circumstances of the case no fiduciary duty arose.

392 In United Dominions Corporation Limited v Brian Pty Limited & Ors [1985] HCA 49; (1985) 157 CLR 1 the High Court had to consider the position of parties to a joint venture. At pp.7 and 8 Gibbs CJ referred to the difficulty in defining the circumstances in which a fiduciary relationship will be found to exist and referred to the decision in Hospital Products. He considered that there was, in the circumstances of UDC, "a relationship between UDC and Brian based on the same mutual trust and confidence, and requiring the same good faith and fairness, as if a formal partnership deed had been executed".

393 In their joint judgment, at p.10, Mason, Brennan and Deane JJ said:-

"The term `joint venture' is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill."

Their Honours noted that a joint venture would often be a partnership.

394 They continued, pp.10 and 11:--

"The most that can be said is that whether or not the relationship between joint venturers is fiduciary will depend upon the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. If the joint venture takes the form of a partnership, the fact that it is confined to one joint undertaking as distinct from being a continuing relationship will not prevent the relationship between the joint venturers from being a fiduciary one. In such a case, the joint venturers will be under fiduciary duties to one another, including fiduciary duties in relation to property the subject of the joint venture, which are the ordinary incidents of the partnership relationship, though those fiduciary duties will be moulded to the character of the particular relationship: see, generally, Birtchnell v Equity Trustees, Executors and Agency Co Limited."

395 Their Honours considered that the relationship was a fiduciary one as the participants were joint venturers in a commercial enterprise with a view to profit, which was to be shared.

396 They rejected, pp.11 and 12, the general legal proposition that the relationship between prospective partners or joint venturers could not be a fiduciary one until a formal agreement was executed, and continued:-

"A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation." (My emphasis.)

It may be that this decision indicated a shift, in respect of the relevant relationship, from an obligation to act in the interests of another, to an obligation arising from mutual confidence and trust, or it may be that that obligation is merely an example of an obligation to act, at least partly, in the interests of another, i.e. in the interests of each other.

397 Their Honours considered that by the relevant time arrangements between the prospective joint venturers had passed far beyond the stage of mere negotiation, each having agreed by then to be and having been accepted as a participant in each of the joint ventures if both or either of them went ahead, and each having made or agreed to make financial contributions towards the costs of the project or projects in which it or he had agreed to participate. In my opinion, the facts of the instant case justify the conclusion that the parties had passed beyond "mere" negotiation, to a stage of the type their Honours identified.

398 At p.13 their Honours said:-

"It matters not, for present purposes, whether that relationship is seen as that which may exist between prospective partners or joint venturers before the terms of any partnership or joint venture agreement have been settled or whether it is seen as a limited preliminary partnership or joint venture to investigate and explore the possibilities of an ultimate joint venture or ventures. On either approach, it was a fiduciary one.

That being so, the proposed participants in each joint venture were under fiduciary obligations to one another in relation to the proposed project at the time when the first of the mortgages was given and accepted. In particular, each participant was under a fiduciary duty to refrain from pursuing, obtaining or retaining for itself or himself any collateral advantage in relation to the proposed project without the knowledge and informed assent of the other participants. `The subject-matter over which the fiduciary obligations' extended must be `determined by the character of the venture or undertaking for which' the relationship between the prospective joint venturers existed: per Dixon J, Birtchnell in a partnership context but equally applicable here." (My emphasis.)

Dawson J agreed in the reasons of Mason, Brennan and Deane JJ.

In my respectful opinion, the passage I have just cited (and indeed the whole judgment in United Dominions) gives rise to the fiduciary duty or obligation of the type for which HJPL contends.

399 In Biala Pty Limited v Mallina Holdings Limited & Ors (1993) ACSC 11.785, Mallina Holdings Limited and the sixth defendant, Dempster Nominees Pty Limited, jointly began to pursue an "exclusive mandate" from the Western Australian State Government to carry out a feasibility study for the development of a petro-chemical complex in Western Australia. The second defendant, Mr Dempster, was chairman and managing director of both companies and took charge of taking the project forward. There was no written or oral agreement between Mallina Holdings and Dempster Nominees concerning the joint venture, and no resolution of directors of Mallina relating to the formation of one. Thereafter, there was a series of somewhat complicated manoeuvres in which it was agreed that Mallina Holdings would give up its interest in the joint venture and pass on all relevant information to a new joint venture between Mr Dempster and Mr Connell. The plaintiffs, who were minority shareholders in Mallina Holdings, brought derivative claims seeking an account of profits or alternatively equitable compensation against Dempster Nominees, Dempster and other parties alleging breaches of fiduciary duty owed to Mallina Holdings under the joint venture.

400 At p.831, Ipp J said that Mallina Holdings and Dempster Nominees "associated together for the purpose of undertaking a single, but continuing venture out of which they hoped to make profits which they agreed to share equally". His Honour considered it was not necessary to decide whether they were partners or joint venturers because, whatever the characterisation of their relationship, it was plainly based upon mutual confidence and trust. This characterisation was consistent with United Dominions, and, accordingly, his Honour considered, in those circumstances, that the obligations specified in the majority decision in United Dominions were applicable. These included the obligations of the utmost good faith.

401 Mr Bathurst also relied upon the decision in Marr v Arabco Traders Limited [1985] NZHC 46; [1987] 1 NZBLC 102,732 at 102,745, which was quoted by Hammond J in Dickie v Torbay Pharmacy (1986) Limited [1995] 3 NZLR 429 at pp.439-440, where his Honour said:-

"If the course of dealing indicates an intention to carry out a common purpose by joint association in a way that involves mutual confidence in each other, fiduciary duties may well result. This of course is clearly the case where there is a partnership and where there is a joint venture other than a partnership. It can also be the case where the parties are negotiating to achieve either of those relationships or where they have formed an association of the kind I have described, which although it may not amount to a partnership or a joint venture, is akin to one or the other." (My emphasis.)

402 In Brunninghausen v Glavanics (1999) NSWCA 199 the Court of Appeal considered the existence of a fiduciary duty in the context of whether a duty was owed by a controlling director/shareholder to the only other shareholder. The director, who had the effective control of a company, was negotiating to buy the shares of that shareholder. In the course of those negotiations, he failed to disclose that he was negotiating for the sale of the company's assets at a price which would increase the shares' value substantially above that at which he was negotiating to buy them from the other shareholder. Bryson J held that a fiduciary duty was owed by the appellant, as a director, to the respondent as a shareholder, and that the failure to disclose the existence of the other negotiations was a breach of that duty. These findings were upheld on appeal.

403 The principal judgment was delivered by Handley JA, who quoted his Honour's finding that there was "no relationship of confidence, and indeed all trust had been broken years before and succeeded by hostility at the worst, wariness at the best". His Honour also noted that the established rule was that "in general a director's fiduciary duties are owed only to the company", and then considered the reasons why Bryson J had thought that not to be applicable in the present case and, at para 49, Handley JA said:-

"Some of the Judge's conclusions come close to a finding of unconscionable dealing or equitable fraud in the nature of a catching bargain with the plaintiff, but no such case was pleaded or litigated, and is irrelevant when considering whether there is a fiduciary duty."

404 In para 54, Handley JA noted the facts on which the existence of a fiduciary duty had to exist in that case, which were devoid of any relationship of "actual trust and confidence". His Honour said that for the duty to exist "it must arise from the bare facts of the relationship", which included "the exclusive advantage or opportunity which the defendant's position conferred on him to receive any offers to purchase the company's business from third parties". He said that the duty must be imposed "by law" as the defendant "did nothing which could be construed as the voluntary assumption of such a duty. Further, Bryson J held that there was not a comprehensive fiduciary duty, but one limited to the disclosure of the unexpected offer by a third party to purchase the entire business".

405 Handley JA considered in detail circumstances in which directors come under fiduciary duties, including those where commercial opportunities come to their notice by virtue of their office. He then turned to consider cases where, in a commercial context, there was an allegation that a fiduciary duty had arisen. At para 99, he held that the defendant, as the sole effective director, occupied a position of advantage in relation to the plaintiff, the advantage being that the plaintiff was virtually powerless to affect the course of the company's affairs or to ascertain the existence of the negotiations. In these circumstances he was, to use the words of Mason J in Hospital Products, "at the mercy of" and "vulnerable to abuse" by the defendant "of his position". In all these circumstances his Honour found that there was a fiduciary duty, a judgment in which Priestley and Stein JJA agreed.

406 There is some analogy between that case and the present, although, on one view, Brunninghausen may well stretch the range of fiduciary duty further than previously. This could well arise because that was not a case in which there was any element of "acting for" or trust. The present is, I think, a stronger case because the nature of the relationship, and the elements of the relationship, quite clearly gave rise to a fiduciary duty, in accordance, for example, with United Dominions, and because BKC deliberately refrained from advising HJPL of the true position so far as Shell was concerned in circumstances where it was under an obligation to do so, and because BKC exploited Shell's reservations about HJPL to its own perceived commercial advantage in circumstances in which HJPL was vulnerable to abuse by BKC of its position, and was left in a position of vulnerability by virtue of BKC's failure to make disclosure. In my opinion, it is also significant that in the instant case the parties were entitled to proceed on the basis of mutual trust and confidence brought about by the relationship constituted by the continuing negotiations in which they were engaging and the basis on which they were proceeding. HJPL was, in my view, entitled to expect that BKC would have regard to its interests, and certainly would not actively do anything to damage them. It was also entitled to expect that if BKC proposed to change its position BKC would advise it.

407 In my opinion, BKC, in all the circumstances, owed HJPL a fiduciary duty, which it breached in the ways for which Mr Bathurst submitted. Mr Oslington submitted that the proper inference to be drawn from the evidence was that irrespective of the conduct of BKC, Shell had decided that it would not proceed so long as HJPL was associated with the venture, irrespective of BKC's conduct.

408 He submitted that neither was there any evidence that BKC was the moving party in the breakdown of the relationship, nor was there any evidence that BKC did or said anything "to fuel Shell's dissatisfaction with HJPL". To the contrary, he submitted, at the teleconference BKC suggested to Shell that the tripartite test should continue in parallel with the proposed bipartite test, a suggestion Shell accepted.

409 I do not accept these submissions. There was an abundance of evidence to support the inference that BKC was well aware that Shell was seeking to deal with it to the exclusion of HJPL, that BKC did nothing to seek to dissuade Shell from this course, and that BKC was prepared to deal separately with Shell through the bipartite agreement and otherwise to the detriment of HJPL and for its own benefit. For some time prior to 15 May 1995, BKC was discussing with Shell how matters could be arranged in the absence of HJPL, a matter about which Mr Power's facsimile transmission spoke eloquently. The obvious willingness of BKC to fall in with and assist the achievement of Shell's stated desires, and its failure to take any steps to dissuade Shell from that attitude or to persuade it to deal with HJPL, which actions were clearly motivated by BKC's concerns for its commercial interests which it saw to be at odds with those of HJPL, were sufficient, in the circumstances of this case, to show the breach of the fiduciary duties, and to negate Mr Oslington's submissions.

410 Mr Bathurst drew attention to the facts that BKC conceded that it did nothing to seek to persuade Shell to continue with HJPL, notwithstanding that Mr Fitzjohn was of the view that HJPL was suitable to provide services to it, and that no evidence was called from Shell to seek to demonstrate that whatever may have been the attitude of BKC, it would, none-the-less, only have dealt with BKC. Indeed, the evidence of what transpired thereafter would have made it difficult to imagine that such evidence would have been given.

411 Mr Oslington submitted that HJPL's failings, as perceived by BKC, in compliance with its contractual obligations with BKC, made it hardly surprising that BKC did not mount "a spirited defence to Shell's dissatisfaction" of HJPL. However, there was no evidence either that Shell was aware of these problems or the facts giving rise to them, or that those matters led to Shell's dissatisfaction.

412 There were various matters, which would indicate that Shell was by no means as implacable as Mr Oslington suggested. Firstly, Shell was annoyed at BKC's having written to HJPL on 15 May 1995 without clearing the terms of the letter with it, such annoyance indicating that Shell did not want its attitude conveyed without its concurrence. This is hardly consistent with a determination not to deal with HJPL. Secondly, Shell was prepared to countenance the continuance of the tripartite test in parallel with the bipartite test. Thirdly, Shell was prepared to enter into the Tripartite Test Agreement as late as February or March 1995, which, at least to the extent of several sites, meant that it had direct contractual relations with HJPL.

413 The vexed question arose as to whether there was a causal relationship between the breaches by BKC and any loss caused to HJPL such as to entitle it to equitable compensation. Mr Bathurst submitted that in this context there was no need to establish causation to the extent required at common law, it being sufficient to prove that there was a breach of fiduciary duty and loss. In my opinion, that puts the matter too simplistically. Mr Oslington submitted that either HJPL had failed to establish, or he had established, that the loss would have occurred in any event because Shell would not have dealt with HJPL, such that even if BKC was in breach, the breach was not causative of loss. In my opinion, those factual cases have not been made out.

414 I do not find it necessary to repeat what I wrote in Beach Petroleum NL v Abbott Tout Russell Kennedy (1997) 26 ACSR 114 on this subject at pp.280 to 288. I referred to all the authorities of which I was then aware dealing with causation. I included in that survey the decision of the Court of Appeal in Greater Pacific Investments Pty Limited (In Liquidation) v Australian National Industries Limited & Anor (1996) 39 NSWLR 143 at p.154. I concluded:-

"In my opinion these authorities lead inevitably to the conclusion that the correct principle to apply, in assessing loss, is to have regard to an assessment of it caused by the breach on a commonsense view of causation: Greater Pacific Investments, or considering whether there is `an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty': Maguire."

415 Since I wrote that judgment, judgment in an appeal from which is reserved by the Court of Appeal, that Court has delivered judgment in O'Halloran v R.T. Thomas & Family Pty Limited (1998) 45 NSWLR 262. Priestley and Meagher JJA who, with Spigelman CJ, sat on the appeal concurred in the decision of McLelland AJA in Greater Pacific, although no reference appears to have been made to that case in argument, nor was it made in the judgments.

416 The Chief Justice commenced to consider causation at p.271. His Honour referred to the speech of Lord Hoffman in Environment Agency (formerly National River Authority) v Empress Car Co (Abertillery) Limited [1998] UKHL 5; [1998] 2 WLR 350, which was delivered after Beach. At p.273 his Honour accepted that the decisions of Lord Browne-Wilkinson in Target Holdings Limited v Redferns [1995] UKHL 10; [1996] 1 AC 421 and McLachlin J in Canson Enterprises Limited v Broughton & Co (1991) 85 DLR (4th) 129 represented the law in Australia. In Target Holdings, his Lordship stressed that the purpose of equitable compensation was:-

"To make good a loss in fact suffered by the beneficiaries and which, using hindsight and commonsense, can be seen to be caused by the breach."

417 McLachlin J said that the loss was to be assessed with the benefit of hindsight, and that whilst foreseeability was not a concern in assessing compensation ".. it is essential that the losses made good are only those which on a commonsense view of causation, were caused by the breach".

418 At p.276 the Chief Justice referred to the requirement in Maguire & Anor v Makaronis & Anor [1997] HCA 23; (1997) 188 CLR 449 that there must be "an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty".

419 Priestley JA was of the view that the test in London Loan and Savings Co v Brickenden (1934) 3 DLR 465 should be applied in Australia. Arguably that is a lower test of causation and, perhaps, is not consistent with that stated in Maguire. Meagher JA agreed with the Chief Justice.

420 In the present case applying the principles approved by the Chief Justice and Meagher JA, which, if I may say so with respect, are, I think, consistent with the approach I took in Beach, I have come to the conclusion that the breaches of fiduciary duty were causative of the loss sustained by HJPL, which it seeks to recover. I shall return to the quantification of those losses.

The Further Contractual Issues

421 In addition to the case based on the alleged invalidity of the termination of the Development Agreement, HJPL relied on other alleged breaches of it. In paragraph 31.2 of its written submissions in chief HJPL alleged that BKC was in breach of implied terms of the Development Agreement, in that it:-

(a) placed a freeze on the recruitment of third party franchisees from May 1995, the effect of which was to deny HJPL the right to "introduce" third party franchisees in accordance with clause 7.1 of the Development Agreement;

(b) withheld financial approval from September 1995;

(c) denied operational approval from November 1995; and

(d) directed HJPL not to submit any further franchise applications in June 1996.

422 Mr Bathurst submitted that the consequences of these breaches were:-

(a) That HJPL was wrongfully denied the opportunity to continue to expand by means of company owned stores from September 1995, for which it claimed damages.

(b) That HJPL was wrongfully denied financial benefits that would have accrued from the recruitment of third party franchisees, for which it claimed damages.

(c) That BKC's termination of the Development Agreement, in purported reliance upon clause 15, was itself a breach of contract by BKC.

(d) Alternatively that BKC was not entitled to terminate the Development Agreement in reliance upon the Shorter Notice because HJPL's failure to build the remaining three restaurants in 1995/1996 was a consequence of BKC's breach of contract. The submission in this regard continued that where BKC had caused HJPL's failure to perform an obligation or to satisfy a condition giving rise to an obligation, BKC could not take advantage of that failure to terminate.

423 In relation to implied terms, Mr Bathurst submitted that under the Development Agreement HJPL had a qualified right to develop Burger King restaurants in Australia, the right being qualified by the requirement that it secure "Franchise Approval" in accordance with clause 4.1, which entailed its following the procedures for franchise and site approval "through BKC standard franchise and site approval procedures", and the granting by BKC of approval being subject to "a condition" that HJPL must have "in the sole discretion of BKC", operational, financial and legal approval "at the time of application for a franchise".

424 Reference was then made to clauses 7.1, .2 and .3, which I have quoted.

425 Mr Bathurst's submission was that BKC was contractually obliged to approve third parties as franchisees, which were introduced by HJPL provided that such franchisees met BKC's approval procedures and there was no substantial adverse affectation of the type contemplated. Therefore, he submitted, there was no right in BKC to impose a blanket freeze on third party franchisees. Before coming to this, it is desirable to consider some other submissions.

426 The submission continued that the implied terms were set forth in paragraph 48 of the Summons. They were "condensed" into three. Firstly, that there was an implied term that BKC would do all that was reasonably necessary to enable HJPL to enjoy the benefits of, inter alia, the Development Agreement: Mackay v Dick (1881) 6 App.Cas. 251 at p.263; Butt v McDonald (1896) 7 QLJ 68 AT PP.70-71; Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited [1979] HCA 51; (1979) 144 CLR 596 at p.607; and News Corporation Limited v Australian Rugby League [1996] FCA 1256; (1996) 139 ALR 193. I do not think there can be any doubt that there was such an implied term. It was submitted that the benefit to HJPL of the Development Agreement was the right to develop company owned restaurants and to have third parties introduced by it establish restaurants and, to achieve that, it was "necessary" for BKC to grant franchise approval under clause 4.1; to consider each application lodged by each proposed third party franchisee introduced by HJPL on its merits; and not to terminate the Development Agreement which conferred those rights on HJPL.

427 I do not accept, in the unequivocal terms in which it appears, the third assertion.

428 The submission continued that in respect of this implied term the issue is whether, as a matter of fact and/or discretion, BKC was justified under the terms of the Development Agreement in deciding not to grant franchise approval to HJPL under clause 4.1; in deciding not to accept applications from third party franchisees introduced by it; and in deciding, I interpolate "in the circumstances", to terminate the Development Agreement.

429 The second term said to be implied was that BKC must act reasonably in exercising its powers under the Development Agreement: Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234.

430 In Renard the general conditions of a building contract provided for a procedure to be followed on default by a contractor. It was that if the contractor defaulted in the performance or observance of any obligation in the contract, the principal may suspend payment and call upon the contractor to show cause within a specified period why the powers contained in that clause should not be exercised, such powers being the right to take over the whole or any part of the work or to cancel the contract. Thus, any breach would give rise to that right however minimal or inconsequential or capable of remedy or cure it may be.

431 At p.258 Priestley JA pointed out the problems he perceived with the clause, namely the ability of the principal to give a notice to show cause upon any default, however trivial, with which notice the contractor may not be able to comply within the time specified. His Honour was of the view that if the principal, in those circumstances, was able to exclude the contractor from the site and/or cancel the contract, it would make the contract "as a matter of business quite unworkable". He continued:-

"One way of explaining this view is to say that no contractor in his senses would enter into a contract under which such a thing could happen. The reasonable contractor, the reasonable principal and the reasonable looker-on will all assume that such a result could not come about except with good reason.

The over-riding purpose of the contract from both the contractor's and the principal's point of view is to have the contract work completed by the contractor in accordance with the contract, in return for payment by the principal in accordance with the contract. The insertion of a sub-clause such as sub-clause 44.1 not subject to the constraint of reasonable use by the principal is quite inconsistent with all the main contractual promises by each party to the contract to the other. The contract can, in my opinion only be effective as a workable business document under which the promises of each party to the other may be fulfilled, if the sub-clause is read in a way I have indicated, that is, as subject to requirements of reasonableness."

If I may say so with respect, I am not certain of the justification for the assumption. The parties had entered into a written contract, which denied it. However, the decision is binding on me.

432 His Honour was of the view that that reading did not detract from the usefulness of the sub-clause to the principal because if there was "some significant default by the contractor then the principal can give notice to show cause". He was of the view that in each case the question to be answered was whether the principal, in exercising the power, was acting reasonably and that:-

"On the approach I favour, it will only be if the non-satisfaction of the principal does not have a reasonable basis or the decision to exercise a power or powers has no reasonable basis that the exercise of one or more of the powers will be in breach of one or both the implied obligations. It seems to me that if in such a case (that is, where there is no reasonable basis at either stage) the principal was contractually entitled to exercise one or more of the powers, and did so, the very exercise itself would deprive the contract of its business efficacy": p.259.

The precise juridical basis for finding that such a term exists must be that it is an implied term. The terms of a contract are either express or implied, the circumstances in which a term will be implied being well understood. However, if I may say so with respect, it is difficult to see how, consistently with those principles, one can imply a general term of "reasonableness". Meaning and content can only be given to that word by a judicial assessment, which may not match that of the contracting parties as to what is "reasonable", and which certainly may not be capable of clear expression. One only has to pose the question "At what point does action become unreasonable?", in the context of the administration of a complicated building contract, to highlight the potential problems and the wide range of possible answers.

433 Handley JA was of the view that there was an implication of reasonableness, and said, at p.279:-

"The power arises on the happening of any breach, however minor, and whenever the breach occurs. It also arises upon the contractor neglecting to comply with any direction given by the principal, however minor, accidental or temporary that neglect might be, and regardless of the importance or otherwise of the subject matter. This express power therefore covers many cases where the principal would have no power to rescind the contract for breach under the general law.

Apart from the great width of those powers, there are three other matters which support the existence of some restraint on their exercise apart from the normal requirement of honesty."

Presumably the reason for the clause was to avoid the point to which his Honour referred in the last sentence of the first paragraph I have just quoted. If the parties had wished to rely on these rights at general law such a clause would have been unnecessary. I am not certain why one does not assume that the words of the contract, into which they entered freely, indicated that they did not.

It is not permissible to imply a term which contradicts the words of the contract. The importation of an implied term of reasonableness is seen by some as an affront to the parties' freedom to contract in such terms as they choose, and as a derogation of rights and obligations on the basis of which they have contracted.

434 His Honour examined certain matters in relation to the power and said that there was provided some indication that the contractor was entitled to appeal to objective considerations, including questions of reasonableness in showing cause against the exercise of the powers. He continued:-

"The very notion of showing cause seems inconsistent with the view that the principal will be entitled to act, within the limits of honesty, on his own idiosyncratic opinion."

435 That may have left room for it to be submitted, in the present case, that as BKC was able to act "in its sole discretion" it could not give effect to its own "idosyncratic opinion". However, at p.280, his Honour continued:-

"The second matter depends on whether `the satisfaction of the principal' in clause 44.1 refers to an opinion which is reasonable or to one which is merely honest. The implication of reasonableness is readily made: see Willis & Co Limited v Arcos Limited .. where Lord Wright referred to: `.. the legal implication in contracts of what is reasonable, which runs throughout the whole of modern English law in relation to business contracts'."

Subsequently his Honour said:-

"It seems to me that clause 44.1 should be construed as requiring the principal to act reasonably as well as honestly in forming the opinion that the contractor has failed to show cause to his satisfaction and thereafter in deciding whether or not to take over the whole or any part of the remaining work or to cancel the contract: see generally Amann .."

This passage, together with some others to which I have referred, suggests that the question may be determined by construction of the existing terms, rather than implication of further ones.

436 Meagher JA dissented. His Honour noted that Cole J had rejected any submission that reasonableness could be imported as a limitation on the exercise of the powers and considered that his Honour was right to do so. His Honour was of the view that such a limitation, if it existed, could only arise either from the express words of the contract or by way of an implied term, and that, in that case, it arose from neither.

437 The matter was re-visited in Hughes Bros Pty Limited v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91. Once again clause 44.1 was in issue. Kirby P said, at p.92, that Priestley JA had demonstrated that the key question in the appeal was determined by the decision in Renard. His Honour was obviously of the view that the decision reached by Priestley and Handley JJA was one "concerning the true construction of" the clause: p.93. He considered that he was bound by that decision.

438 Priestley JA dealt with the conflicting views of Meagher JA and himself and, at p.100, said that an essential part of the reasoning of the majority was that the principal was required to act reasonably in deciding whether or not to exercise a power under the clause. His Honour was obviously of the view that the term as to reasonableness was an implied term: p.102. I have the same difficulties about the implication of such a term.

439 Meagher JA felt that he was able to distinguish the two cases.

440 In Alcatel Australia Limited v Scarcella & Ors (1998) 44 NSWLR 349 Sheller JA delivered the judgment of the Court in which Powell and Beazley JJA agreed. His Honour dealt with the matter on the basis of an implied term and, after analysing Renard, he considered the decision in Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1 and a number of other authorities. He concluded, at p.369:-

"The decisions in Renard Constructions and Hughes Bros mean that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract. There is no reason why such a duty should not be implied as part of this lease. But it remains to decide whether the implication of that duty has any consequence in the resolution of the dispute the subject of this appeal." (My emphasis.)

His Honour appears to be equating "reasonableness" and "good faith", probably by reason of the analogy Priestley JA drew between the two concepts in Renard at pp.263-264. The various authorities and academic writings are dealt with extensively by Einstein J in Aiton Australia Pty Limited v Transfield Pty Limited (1999) NSWSC 996. I find it unnecessary to examine the matter further as I am bound by the Court of Appeal decisions to hold that there is an implied term of either reasonableness or a duty of good faith or, perhaps, both.

441 The submission was that the reasonableness and good faith terms should be implied for the purpose of ensuring that BKC exercised its powers in a proper manner for the protection of its own rights and not, for example, to bring pressure to bear on HJPL to resolve other disputes between BKC and it, or to deprive HJPL of rights under the Development Agreement for ulterior or collateral purposes. Thus, so the submission ran, BKC could not, by the exercise of its sole discretion, deprive HJPL of, for example, operational approval for the purpose, ulterior to the contract, of preventing it exercising its right to develop unless there was factual justification provided by the terms of the Development Agreement for taking that course. It seems to me that, in the absence of such factual justification there would be no basis to exercise the "sole", even if also "unfettered" discretion, adversely to HJPL as a matter of construction, irrespective of the need to imply terms.

442 The factual bases allowing for the exercise of that discretion are specified in the Development Agreement. The matter does become of significance when it is alleged that very minor breaches, falling within the contractual proscription, will enable the sole discretion to be exercised. In those circumstances one must decide whether the proper approach is to construe the contract so as not to allow minor breaches, which do not affect its operation, to be the trigger for the exercise of the sole discretion; or to proceed or the basis that there is an implied term of reasonableness or a duty of good faith precluding reliance on those breaches. It is only by following one or other of these paths that I can explain, in a manner consistent with the law relating to contracts as I understand it, the conclusion which is appropriate.

443 The submission then pointed to BKC's having certain policies or established practices for the determination of financial and operational approval, and that whilst these did not have contractual force, each was relevant to determine whether BKC had acted reasonably and in good faith, i.e. for a proper purpose as provided by the Development Agreement.

444 The submission then moved to the freeze on third party franchisees, which was applied from about 17 May 1995 when Mr Power instructed Mr McCarthy to discontinue dissemination of information to prospective third party franchisees until further notice, which effectively prevented further third party recruiting. Thereafter, there was correspondence and discussion about that matter and, by 15 April 1996, Mr Miolla had confirmed that BKC had not changed its position in relation to third party franchisee recruiting, and he provided no indication that BKC would be reviewing its decision.

445 HJPL was under no contractual obligation to prepare any particular form of information to be issued to prospective third party franchisees, but it agreed to BKC's suggestion that an Australian Franchise Information Package be prepared for dissemination to such people. Thereafter BKC delayed in the finalisation of that Package, the stated justification being its requirement, contrary to its practice in the United States, that a pro forma profit and loss statement be included, and that HJPL's financial performance in 1995 indicated that the Hungry Jack's restaurant system was weak and that no third party franchisees should be permitted to open restaurants until its profit and loss accounts showed that the average restaurant in the system was profitable. It was submitted that this allegation of financial weakness was greatly exaggerated and that, apart from restaurants in Victoria, there was no indication of any lack of profitability of restaurants in other parts of Australia, BKC's concerns about lack of profitability apparently being derived substantially from inaccurate information passed on by Mr Montgomery to Messrs Power and Miolla. Mr Bathurst submitted that for the purpose of the reasonableness term, neither of BKC's purported justifications for the freeze could be justified as satisfying the test of reasonableness and, in relation to the good faith term, the purpose of the freeze was motivated by reasons other than those which would otherwise justify it.

446 In his oral submissions, Mr Bathurst contended that upon a proper construction of clause 7.1, if HJPL exercised its right to introduce third party franchisees to BKC, there was an obligation on BKC to approve them, arising from the words "shall approve", subject to the same approval procedures as applied to HJPL, including operational, financial and legal approval. He submitted that there was no evidence that any potential third party franchisee did not have those approvals or, perhaps more correctly, were not entitled to those approvals, and that the reason the applications were never considered, as BKC was obliged to do, was because BKC had taken the stance that it was not prepared to do so. This, so it was submitted, amounted to a breach of clause 7.1 and a breach of the implied term to co-operate.

447 In my opinion, the question of the entitlement of BKC to impose a freeze on the recruitment of third party franchisees can be dealt with quite quickly on a construction of clause 7.1 of the Development Agreement. HJPL had a right to introduce proposed third party franchisees. BKC was obliged, ("shall"), to approve such franchisees "subject to the same approval procedures as apply to" HJPL "including operational, financial and legal approvals". Therefore, provided those requirements were met and there was no "locational" conflict or problem, BKC had no right not to accept third party franchisees. It purported to reject them on the other grounds to which I have referred, but which did not comprise grounds for which the agreement made provision. That, in my view, is sufficient to dispose of this issue favourably to HJPL, but I think that I should deal with other submissions.

448 The written submissions on the freeze on the recruitment of third party franchisees are dealt with commencing at paragraph 23.30. It was submitted that the two primary reasons were the need to prepare a satisfactory pro forma profit and loss statement for inclusion in the Information Package, and HJPL's financial performance in 1995, which indicated a financial weakness in the operation of "Hungry Jack's" restaurants in Australia, such that it would be imprudent of BKC to permit any new franchisee to open a restaurant in those circumstances. Mr Bathurst submitted that neither of those objections would withstand scrutiny. The factual matters on which Mr Bathurst relied in relation to the first objection are set forth in paragraphs 23.31 and .32, it being put, generally speaking, that there was no attempt by BKC to respond to suggestions for an amended pro forma profit and loss account, and that BKC continually deferred a review of the Franchisee Information Package, which had still not taken place at the time of BKC's purported termination of the Development Agreement. BKC's gross delay, together with the failure to have any such requirement for proposed franchisees in the United States, indicates to me either that BKC did not consider the matter of any importance or, if it did, deliberately refrained from taking the necessary action to allow HJPL to continue recruitment. In either event BKC's action was unjustified and either breached the term of reasonable co-operation, or reasonableness, or good faith.

449 The second basic submission was that concerns about the profitability of the Hungry Jack's restaurants in Australia were greatly exaggerated. These matters are dealt with in paragraph 23.33. In this regard HJPL had received financial approval towards the end of 1994. It was not until later in 1995 that doubt was cast on its general financial viability, a doubt which, in my opinion and for reasons to which I shall refer, I do not consider was justified.

450 In March 1996 BKC also asserted a third purported justification, namely the differences between BKC and HJPL as to the operation of the Development and Service Agreements leading Mr Miolla, on 13 March 1996, to advise Mr McCarthy that the very serious issues between them over the meaning of those agreements threatened to create liability for BKC and HJPL if new franchisees were recruited without disclosing the issue in full, and that that was a course BKC was unwilling to pursue. However, on 19 March 1996, Mr Cowin responded that issues between BKC and HJPL could not give rise to liability to third party franchisees if full disclosure of such matters was made to potential franchisees and, in April 1996, such disclosure was made to persons who had already lodged franchise applications in a form required by BKC.

451 Mr Oslington, in his written submissions, submitted, firstly, that the freeze did not extend to existing third party franchisees, although the significance of this is not made clear. Secondly, he submitted it did not extend to institutional franchisees, although, once again, the significance of this is not made clear. Thirdly, it was submitted, that Mr McCarthy acknowledged that whilst there was a continued lack of performance by the restaurants in the HJPL system throughout 1995 and 1996, and whilst there was the need to prepare a satisfactory pro forma profit and loss account, which correctly took into account various accounting matters, it would have been inappropriate for HJPL and BKC to recruit third party franchisees because they would have been given misleading information or, if the truth was disclosed, the brand could be hurt. It is correct that Mr McCarthy agreed, Tp.1866, that if the pro forma profit and loss accounts in the Information Package were wrong, that could have a significant misleading effect on the potential third party franchisee, and, at Tp.1866, that if there was a disclosure that the average "system P&L showed an operating loss on trading for 12 months" that could hurt the brand. In the course of answering that question Mr McCarthy said the alternatives were either to disclose that fact or not proceed with the franchise recruitment programme, as Mr Miolla had suggested. The submission was then made that, at Tp.1894, Mr McCarthy agreed that because the brand may be hurt it was appropriate that there be a freeze on recruitment activity. I do not agree that there was any such concession by Mr McCarthy, nor, elsewhere in his evidence, did he accept that there should be a freeze on recruitment. The closest his evidence went to any such concession appears at Tpp.1891-1892. Mr Bathurst also submitted that the evidence was that third party franchisees were operating profitably, which in my opinion was correct, and that, in any event, there had been no financial disapproval of HJPL's expanding. Mrs Driscoll was satisfied in early 1996 that HJPL should be allowed to continue to expand on the basis that it was financially approved.

452 In my opinion, BKC had no contractual right to refuse to consider the granting of third party franchises if they were submitted by HJPL. Its obligation was to consider them and to determine whether, on the standards specified in clause 7.1, they should be approved. The blanket refusal to consider them was, in my opinion, an obvious breach of clause 7.1.

453 I am also of the opinion that the matters raised in opposition to granting further third party franchisees were contractually irrelevant matters to which BKC was not entitled to have regard and, in any event, they were not matters the existence of which BKC has established at an evidentiary level. Further, even if they were established BKC was under a contractual obligation, arising from the implied term to co-operate, to assist HJPL in providing the necessary information, if that was to be done. Finally, the assertion that HJPL's stores were not operating profitably lies uneasily with the continuance of HJPL's financial approval until late 1996, particularly as I am satisfied that the third party franchisees, generally, were trading profitably.

454 Nextly, there was, in my opinion, an obligation on BKC to act reasonably. Its failure to act conformably with the Development Agreement seems to me to make it unnecessary to consider further whether it acted reasonably, but, on the assumption that the view is taken that it was acting conformably with the contract, at a prima facie level, I am of the view that the way in which it purported to exercise its rights was unreasonable.

455 Finally, I do not consider that Mr McCarthy consented to the freeze. The evidence satisfies me that he was confronted by BKC with obstacles, but that he never agreed that the obstacles were such as to justify no further development.

456 The alleged breach by BKC of its obligations under clause 7.1 to grant development approval led to a submission that where a party to a contract makes it impossible for the other party to perform its obligations or is such that the other party is not required to continue to offer to perform, for the purpose of considering whether there has been a breach of contract the Court regards the obligations as performed, as a matter of fact. Reliance was placed, firstly, upon the decision of the High Court in Peter Turnbull & Company Pty Limited v Mundus Trading Company (Australasia) Pty Limited [1954] HCA 25; (1954) 90 CLR 235. The facts were that the parties entered into an agreement for the sale and purchase of a quantity of oats to be loaded on a ship or ships nominated by the plaintiff during January or February 1951, the plaintiff being required to give fourteen days' notice of ships and shipping dates. On 8 January 1951 the plaintiff mentioned 14 February 1951 as the approximate shipping date and later mentioned a ship, but at no time did it give the defendant an appropriate shipping notice as required by the agreement. On 15 January 1951 the plaintiff entered into a contract with a third party to sell it the same oats fob Sydney intending to deliver against the contract the oats it had contracted to buy from the defendant. At the end of January the defendant told the plaintiff that it could not supply the oats fob Sydney, but claimed that it would be able to deliver them fob Melbourne if the plaintiff could persuade the ship to accept them at that port. The plaintiff's efforts were unsuccessful and it informed the defendant by letter that the oats would have to be loaded in Sydney. The defendant replied that it had no oats and could not carry out its contract. Early in March the plaintiff bought oats against its contract with the third party at a higher price, after first informing the defendant of its intention to do so and giving it the opportunity of buying them. The plaintiff sued the defendant for breach of contract and recovered a verdict being the difference between the amount at which it had agreed to buy from the defendant and the amount it was obliged to pay to fulfil its re-sale contract. It was held that the plaintiff was entitled to succeed on the ground that in so far as there was non-fulfilment of the condition requiring the nomination of a February ship and the giving of fourteen days' notice of the ship and shipping date, the defendant dispensed the plaintiff from such fulfilment.

457 At p.244 Dixon CJ stated that the defendant's case rested upon the plaintiff's failure to name a ship available for loading in February and to give fourteen days' notice of the ship and the shipping date.

458 At p.245 his Honour expressed the view that the plaintiff was entitled to succeed on the ground that, in so far as there was a non-fulfilment of the condition requiring the nomination of a February ship and the giving of fourteen days' notice of the ship and shipping date, the defendant dispensed the plaintiff from such fulfilment. He continued:-

"In the Supreme Court the plaintiff failed because the case was treated as one in which the contract had been kept open by the plaintiff notwithstanding the defendant's intimation of its inability to perform it, with the consequence that the plaintiff was bound to fulfil the conditions on its part to be fulfilled. But this is not a case confined to a simple anticipatory refusal to perform or declaration of inability to perform on the part of one party followed by an election by the other not to treat the contract as discharged by breach. The course taken by the defendant involved something more than that and the additional element brings into application other principles of law. The defendant persisted up to 2nd March that it could perform the contract only in one way, namely by substituting a shipment by the same vessel in Melbourne for that in Sydney contracted for. By seeking the plaintiff's help in an attempt to effect this substitution and at the same time persisting that it could not perform the contract according to its terms the defendant clearly intimated to the plaintiff that it was useless to pursue the conditions of the contract applicable to the shipment in Sydney and that the plaintiff need not do so. The fact that under the rules of law governing anticipatory breach of contract, the plaintiff might have elected to treat the defendant's intimation as a discharge by breach may be disregarded. The plaintiff did not do so and that left the contract on foot. But it left it on foot subject to a continued intimation that only by substituted performance could the defendant carry it out, an intimation involving an attempt by all parties to effect the substitution."

459 His Honour then referred to the negotiations in relation to shipment in Melbourne and, at pp.246-247, said:-

"Now long before the doctrine of anticipatory breach of contract was developed it was always the law that, if a contracting party prevented the fulfilment by the opposite party to the contract of a condition precedent therein expressed or implied, it was equal to performance thereof: Hotham v East India Co. But a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so. If the plaintiff acts upon the intimation it is just as effectual as actual prevention."

460 At p.250 Kitto J stated the relevant principle thus:-

"The principle, which applies whenever the promise of one party, A, is subject to a condition to be fulfilled by the other party, B, may, I think, be stated as follows. If, although B is ready and willing to perform the contract in all respects on his part, A absolutely refuses to carry out the contract, and persists the refusal until a time arrives at which performance of his promise would have been due if the condition had been fulfilled by B, A is liable to B in damages for breach of promise although the condition remains unfulfilled."

461 For present purposes Mr Bathurst submitted that the statement by BKC that it would not consider further third party franchisees acquitted HJPL, as a condition precedent to obtaining such approval, from submitting names of such franchisees to BKC, thus making BKC liable to HJPL in damages for breach of its promise and notwithstanding that HJPL had not submitted further prospective third party franchisees to it.

462 This submission was raised in the context of a submission by BKC that neither HJPL itself nor through third party franchisees was in a position to open the restaurants within the required period even if there was operational or financial approval. This involved both the point to which I have just referred and a question of timing. In relation to that question it is quite artificial to consider it other than in the context of BKC's refusal, which made it otiose for HJPL to pursue third party franchisee recruitment. Thus, BKC cannot, for these purposes, take advantage of a situation which it had created wrongfully.

463 In Mahoney v Lindsay & Ors (1980) 55 ALJR 118 proceedings were brought for the specific performance of two contracts for the sale of land. A notice had been given to complete on or before 30 June 1979 and the solicitor for the respondent purchasers gave uncontested evidence that on 28 and 29 June 1979 he telephoned and spoke to the solicitor for the appellant/vendor seeking to make an appointment to complete, and that on each occasion he was told by that solicitor that he did not have instructions to settle. A decree for specific performance was made at first instance and upheld on appeal. The appeal to the High Court was dismissed. At p.119 Gibbs J, with whom Stephen, Murphy, Aickin and Wilson JJ agreed, cited the passage from the judgment of the Chief Justice in Peter Turnbull at pp.246-247, and noted the submission that the appellant's solicitor "did not expressly intimate that the appellant would not complete, or that it would be useless for the respondents to make a tender". His Honour concluded:-

"With all respect to that argument, I find it sufficient to say that in the circumstances to which I have referred it was open to the learned trial Judge to infer that the appellant's solicitor, acting on behalf of the appellant, did impliedly indicate that it was useless for the respondents to attend with the purchase money, since the appellant did not intend to perform his part of the contracts.

I agree with the Court of Appeal that the appellant had dispensed the respondents from fulfilment of the condition of the contracts and that the respondents were entitled to specific performance."

464 In Foran & Anor v Wight & Anor [1989] HCA 51; (1989) 168 CLR 385 a contract for the sale of land was due to be completed on 22 June 1983, time being of the essence. A special condition required the vendors to obtain registration of a right of way before completion. On 20 June 1983 the vendors' solicitor told the purchasers' solicitor that the vendors would not be able to settle on 22 June 1983 because the right of way had not been registered. Neither party attempted to settle on that date and, on 24 June 1983, the purchasers gave the vendors a Notice of Rescission. The purchasers claimed a declaration that they had rescinded the contract and for a return of the deposit. The vendors contended that the Notice of Rescission was invalid on the ground that the purchasers were not ready and willing to complete on the due date for want of funds and it was found, at first instance, that they would not have been able to complete on that date. It was held that the purchasers' Notice of Rescission was not invalid and that they were entitled to a return of the deposit on a number of grounds. Relevantly for present purposes Peter Turnbull was considered by Brennan J and Dawson J. At p.419 Brennan J quoted the passage from the judgment of Kitto J, to which I have referred, and a further passage and Mahoney v Lindsay. At p.420 his Honour said:-

"A consensual variation of the contract may be the inference to be drawn in some cases but, more frequently, the facts will show no more than that the party to whom the intimation is given abstains from tendering performance in reliance on the intimation that he need not trouble to perform and that it will be useless for him to do so. It would be inequitable for A, having induced B to abstain from tendering performance, to assert that B's failure to tender performance when the time for completion arrives is a breach of contract by B or constitutes a failure to fulfil a condition on which A's obligation depends. The basis on which a party is dispensed from tendering performance is that an equity is raised against the party giving the intimation which is satisfied by treating him as though he had prevented the innocent party from tendering performance: see Waltons Stores (Interstate) Limited v Maher. Such an equity enures for the benefit of the party who has acted on the intimation, but it does not impair the contractual obligation of the party giving the intimation."

465 For all these reasons, I am of the view that BKC's "blanket freeze" on third party recruitment was neither justified by the terms of the Development Agreement, nor by the factual matters to which I have referred. I am also satisfied that BKC's intimation to HJPL that it would not consider further third party franchisees dispensed HJPL of the necessity to continue to tender performance. In the circumstances BKC was in breach of contract by imposing the freeze.

The Withholding Of Financial Approval

466 Mr Bathurst's submissions commenced that the requirement for financial approval is specified as being that HJPL:-

".. has performed and is faithfully performing all terms and conditions under each individual franchise agreement issued, and is not in default of any money obligations owed by Hungry Jack's to BKC. Hungry Jack's acknowledges and agrees that it is vital to BKC's interests that a franchisee be financially sound to avoid a business failure affecting the reputation and good name of the Burger King marks."

467 It was not in issue that HJPL was not in default of any money obligation owed to BKC. A minor qualification was Mr Miolla's statement that there was a difference of opinion, which arose after service of the March 1996 notices, about the correct rate of franchise royalty which was payable. However, it appears that nothing more was made of this, and, for present purposes, nothing was suggested to turn on it.

468 Mr Bathurst's written submissions set out the financial information provided by HJPL to BKC and noted that the first suggestion that HJPL was required to provide annual financial information to BKC arose in the context of the drafting of Development Guidelines in 1993 in relation to the requirements of the "corporate plan" proposed by them. HJPL proposed that its company secretary would submit a consolidated profit and loss statement on a monthly basis, and a balance sheet on a quarterly basis. Mr Miolla responded that the requirement was for an annual non-consolidated balance sheet and profit and loss statement, and such other financial information as BKC should reasonably request.

469 BKC made its first request to HJPL for a financial review in October 1994, which coincided with the allocation to Mrs Driscoll of responsibility for the Asia Pacific region. Mrs Driscoll conceded that in conducting this review she was aware there was a Development Agreement, but did not read it and no one explained the effect of it to her in relation to approvals HJPL was required to obtain to be granted franchise approval. She did not suggest that she was subsequently made aware of the provisions. Accordingly, in so far as the exercise of the "sole discretion" was conferred on her, she was required to consider it unaided by knowledge of the contractual obligations. I regard that as a very strange state of affairs.

470 In a memorandum dated 14 October 1994, copies of which were forwarded to Messrs Gooden and Power, Mrs Driscoll told Mr Butler she needed further information to consider financial approval for the twenty eight sites requested by HJPL for the 1995 financial year. The information was sought:-

"In order to process the financial piece of the approval, I need Hungry Jack's most recent fiscal year-end financial statements, that include individual restaurant P&L's, a consolidated P&L for the entire business, a consolidated balance sheet and statement of cash flows, as well as all accompanying notes to the financial statements. Also, if available, I would need debt server schedule, outlining the terms and the annual principal payments and interest payments."

471 Whilst this information went beyond any contemplated by the Development Agreement or Guidelines, Mrs Driscoll said she did not make any enquiries about previous financial approvals for HJPL, although she knew it was BKC's largest franchisee outside America.

472 On 26 October 1994 Mr Butler sent her a copy of HJPL's Special Purpose Financial Reports for the year ended 30 June 1994. They were audited and prepared so that HJPL could comply with the requirements of the Corporations Law, and were in the common form prepared for subsidiaries the accounts of which were required to be consolidated with the accounts of a holding company. Mrs Driscoll made no enquiries about that and, when she reviewed the accounts, she observed there was an operating profit of $1.1m, retained profits of $5.7m, shareholders' equity of approximately $16m, a surplus of current assets over liabilities of $3m, and a surplus of non-current assets over non-current liabilities of $9m.

473 On 12 December 1994, Mrs Driscoll advised Messrs Gooden, Miolla and Power that HJPL was financially approved in respect of thirty four sites, although that approval did not depend on any analysis peculiar to any one of them. She stated that the basis of her approval was:-

"As I indicated, Hungry Jack's is financially approved for the sites on the attached list. The financial approval was based on my review of Hungry Jack's Pty Limited Special Purpose Financial Reports as of June 1994 and the representations made in John Butler's letter to you dated December 5, 1994. Significant reliance was placed upon all the members in that letter. In particular, I am relying on the representation by Butler that Hungry Jack's Pty Limited has no principal debt repayments."

474 The approval granted in 1994 was based upon the information Mrs Driscoll had received, which included knowledge that HJPL was part of the CFAL Group and that certain apportionments had been made in the audited accounts based upon obligations owed, in the first instance, by CFAL. Mrs Driscoll directed any enquiries to Mr Butler, and she accepted his responses and relied upon his statements. She required no independent verification of his information. BKC also took into account Fixed Charge Coverage ratio, (FCC), and the Debt to Equity ratio, (D:E). Mr Power had advised Mr Butler that the FCC was required to be a minimum of 1.15:1 or higher, and the D:E was to be a maximum of 1.5:1 or less.

475 Although Mrs Driscoll said initially in her evidence that she informed Mr Power of those ratios for the purpose of his advising Mr Butler of them, and that those were the ratios used in considering HJPL's financial position for expansion purposes in 1994, she corrected that evidence to state that she had used a FCC ratio of 1.20:1, although subsequently, on 5 December 1994, Mr Butler advised Mr Power that the FCC ratio was 1.44:1 and the D:E ratio was 1.24:1. It is immediately apparent that even though the ratios were thought to be significant by BKC, there was no consistency by it in its approach to them.

476 The position so far as late 1995 was concerned differed from that to which I have just referred. On 1 September 1995 Mr Power sent a facsimile transmission to Mr Butler stating that BCK wished to perform "the annual financial review of" HJPL, and needed a copy of the profit and loss accounts and balance sheet "as well as details of all debt held by this company". Details of the debt were sought.

477 The question which then arose was the entitlement of BKC to carry out an annual financial review of HJPL, rather than the necessary financial review when specific sites were proposed for approval. Mr Miolla said that Mr Power's memorandum of 1 September 1995 reflected BKC's practice of reviewing the financial position of larger franchisees on an annual basis, rather than undertaking a financial review when specific sites were proposed for approval. This may have been BKC's practice, but it was not a contractual entitlement.

478 Mrs Driscoll said she was involved in considering HJPL's financial position at that time because it had lodged an application for franchise approval in respect of sites which did not appear on the list of thirty four sites approved by her in December 1994. There is some difficulty in accepting this evidence because HJPL did not submit its application until 4 September 1995 and Mrs Driscoll did not become aware of it until 8 September 1995, at the earliest. Further, the financial approval granted in December 1994 was expressed to be for twelve months and, accordingly, had not expired by September 1995. It was also submitted that the decision to require an annual financial review could not be justified as having been made in good faith, but rather on the basis of "a stream of information from Montgomery" as to what he said was the "parlous financial situation of HJPL".

479 There were a number of difficulties in relation to the conduct of the "annual financial review", including the lack of connection between it and specific sites for which HJPL had sought approval. In any event BKC concluded in October 1995 that HJPL probably complied with its financial requirements. It does not appear that BKC was able to demonstrate that HJPL had failed to meet the requirements for financial approval but, notwithstanding that, that approval was withheld. The question which arose is why.

480 On 12 September 1995 Mr Miolla wrote to Mr Cowin advising him that HJPL had been financially disapproved. The letter said, inter alia:-

"As you know, the terms of the Development Agreement prohibit HJPL from expanding unless it submits annual, audited financial statements which show that it is in compliance with our financial requirements for expansion."

The Development Agreement contained no such provision. Mr Miolla must have been aware of that unless he had failed to read it and, accordingly, for either or both reasons the letter was putting forward an incorrect statement about the terms of the Agreement. Once again the question must be asked as to why Mr Miolla was misrepresenting the contractual requirements to HJPL.

481 On 15 September 1995, Mr Cowin sent HJPL's 1995/96 budget document to Mr Miolla, and, on 18 September 1995, Mr Montgomery sent a facsimile transmission to Mr Miolla advising that BKC should call for a full financial report on HJPL's holding company, as part of the process of "keeping the pressure on" HJPL, and should not approve commencement of any new stores until that had been provided. BKC had no right to this financial information, which, if Mr Montgomery's advice was followed, was being sought for an ulterior and improper purpose. On 20 September 1995, Mr Miolla wrote to Mr Cowin stating:-

"Thank you for the recent pro forma budget and financial statements for HJPL. Those will be useful in connection with the joint venture discussions, although the fiscal 1995 financial statements are the real hard data we need to move forward. This is true with reference to both the joint venture and the pending applications for expansion. As I have stated in my earlier letter, we cannot approve any expansion until we have completed a financial review of the actual audited financial statements and you are not authorised under the terms of the Development Agreement to commence construction at any of the proposed sites until we communicate such approval in writing." (My emphasis.)

482 Mr Fitzjohn agreed that in substance this letter prevented further development by HJPL unless BKC made exceptions; that he would have been consulted about the withholding of financial approval; and that such a communication was a serious one to a franchisee such as HJPL. The letter, of course, was completely consistent with Mr Miolla's acceptance of Mr Montgomery's advice.

483 Mr Power said it was Mr Miolla who took that decision and that none of the matters which led to it were raised with Mr Cowin or Mr Butler. This failure was extraordinary conduct on the part of BKC having regard to Mr Cowin's position, and BKC's knowledge that Mr Butler was HJPL's main financial officer. It points up the very strange way in which BKC was acting.

484 On 26 September 1995 Mr Cowin sent a copy of the draft 1995 HJPL accounts to Mr Miolla and, on 2 October 1995, Mr Montgomery provided further advice to Mr Miolla that BKC should choose its ground carefully and bring on a confrontation with HJPL "sooner rather than later". He suggested one of the matters on which there should be focus was HJPL's financial capacity, and that BKC should not grant it any further rights for new stores. A copy of this facsimile transmission was provided to Messrs Fitzjohn and Hothorn, and, essentially, BKC followed this course.

485 On 3 and 5 October 1995 Mr Miolla requested further financial information from Mr Cowin at a time when he conceded in cross-examination that Mr Gooden and Mrs Driscoll were not sure whether HJPL should be financially approved for expansion. Mrs Driscoll said she did not have sufficient information to form a view whether HJPL complied with BKC's financial ratios, although she was aware that some development agreements set timetables for expansion and that financial disapproval would prevent further development.

486 On 11 October 1995 Mr Cowin responded to Mr Miolla's request for information and enclosed a memorandum from Mr Butler, which concluded that HJPL satisfied BKC's ratios. On 18 October 1995 Mr Miolla sought further financial information, including a detailed schedule of inter-company information of the Competitive Foods Group. He said that if a detailed profit and loss statement was provided he expected the Finance Department would give exception approval for the additional sites at Myaree, Hurstville and Bolivar, although until the additional information was provided no further expansion approvals would be granted.

487 On 19 October 1995 Mr Butler sent Mr Miolla HJPL's detailed profit and loss accounts for the financial years ended 30 June 1994 and 1995 and, on 20 October 1995, Mr Power sent a communication to Messrs Miolla and Hothorn concerning HJPL's financial review. He said he understood the conclusions drawn by Mr Gooden and others regarding probable compliance with the ratios, but suggested that other matters, to which he referred, should not be overlooked, and added:-

"In our overall assessment of the condition and quality of operations of this franchisee (HJPL) we would appear to have discretion to still disapprove the franchisee financially for expansion purposes."

He also recorded that Mr Horowitz had advised him that it appeared HJPL would be disapproved for expansion operationally on 11 November 1995.

488 Mr Power, whose objectivity in relation to HJPL was doubted by Mr Fitzjohn, acknowledged in cross-examination that he was worried about the possible conclusion that HJPL properly complied with the ratios because he thought that might lead to its obtaining financial approval. Whilst he sought to deny that he was seeking to have BKC financially disapprove HJPL, that denial was unconvincing and I reject it. Mr Power was well aware that if financial approval was not granted that would cause HJPL "a dilemma" in that it may not be able to fulfil the requirements to open a minimum number of restaurants each year, with the consequences that entailed. I am also satisfied that Messrs Fitzjohn and Miolla were well aware of the problems which would be caused to HJPL. The conduct of BKC, in dealing in this way with a long-term franchisee of considerable standing which had never been in breach of any financial obligations to it, was astounding. In the end, I am forced to the conclusion that it was in pursuance of a deliberate plan to prevent HJPL expanding, and to enable BKC to develop the Australian market unhindered by its contractual arrangements with HJPL. Therefore, the conclusion to which I have come is that in acting as it did, BKC failed to act reasonably or in good faith, and was in breach of the implied term to co-operate. There was no evidence which satisfies me that in so far as there was an exercise of the "sole discretion" in coming to the decision to withhold financial approval, that that exercise was based on permissible facts to which regard could be had or carried out reasonably or in good faith.

489 On 24 October 1995 Mrs Driscoll prepared a file note of her review of HJPL's financial information in which she noted that it met BKC's required D:E ratio. She raised a series of questions in relation to the way in which debt and other inter-company charges may give rise to financial issues, such questions being essentially of a hypothetical nature, and notwithstanding that none of those hypothetical possibilities had caused her any difficulty in dealing with the 1994 financial statements.

490 On 26 October 1995 Mr Cowin met with Messrs Miolla and Gooden and Mrs Driscoll in Miami. There was specific discussion about HJPL's financial statement and some of Mrs Driscoll's hypothetical problems, and Mr Cowin was told that BKC would not grant approval for further expansion unless HJPL provided specified financial information about the Competitive Foods Group. Questions were formulated in a letter from Mr Gooden to Mr Cowin, which was referred to Mr Butler for reply.

491 On 27 October 1995 Mr Miolla told Mr Cowin that HJPL would be operationally disapproved for expansion from 18 November 1995, even if the issues concerning its financial approval were resolved. This showed that Mr Miolla was treating operational and financial approval separately, which I consider was correct, and the determination of BKC to achieve some disapproval, which would prevent HJPL's further development. In my view, that was for the reasons to which I have just referred.

492 On 1 November 1995 Mr Power obtained a set of complete accounts of the CFAL Group from Mr Montgomery, which he forwarded to Mr Gooden. Mr Power was well aware that Mr Montgomery had no authority to furnish him with this information and he made it clear, in sending it to BKC in Miami, that it was "for internal consumption only" and could not "be referenced directly in any discussions with HJPL or CFAL". The circumstances in which Mr Power came into possession of this information, other than its being handed to him by Mr Montgomery, was not satisfactorily explained. However, of more significance, Mr Power was unable to explain and, in my opinion, completely failed to explain, his conduct in receiving the information, analysing it, and forwarding it to BKC in Miami. He knew that Mr Montgomery was acting wrongly, and that he was taking advantage deliberately of that wrongful conduct to further BKC's ends and to the detriment of HJPL. He was closely cross-examined on this conduct. His evidence did him no credit and showed the lengths to which he was prepared to go to bring about, or seek to bring about, a result unfavourable to HJPL. His conduct, in this regard, was discreditable.

493 HJPL was never made aware that BKC had this information, and there was no evidence of the use it made of it, save that Mr Power made some analysis of it. Mrs Driscoll acknowledged that she received the documents and said she may have perused them, but she did no detailed work on them.

494 Further information was furnished by Mr Butler on 6 November 1995 and, on 8 November 1995, Mr Fitzjohn wrote to Mr Cowin requesting a full package of information for the entire Competitive Foods Group. He advised that HJPL was not financially, operationally or legally approved for expansion. He said the letter was drafted by Mr Miolla.

495 On 19 December 1995 Mr Butler sent information to Mr Gooden about the financial position of CFAL and inter-company loans between it and HJPL and, on 22 December 1995, Mr Miolla again advised Mr Cowin that HJPL did not have financial approval under clause 4.1 of the Development Agreement.

496 On 29 December 1995 Mr Cowin sought confirmation from Mr Miolla that all issues in relation to the provision of financial information had been resolved and financial approval had been granted, to which Mr Miolla responded on 8 January 1996 stating that approval would not be granted until BKC received the consolidated financial statement package as previously advised by Mr Fitzjohn. Thereafter there was further information provided and further work was done on the accounts by Mrs Driscoll. During the course of this dispute, particularly about whether ratios met BKC's requirements, Mrs Driscoll conceded that BKC:-

".. may have, in fact, not been consistent in our communication to HJPL"

on that topic.

497 Mrs Driscoll explained her concern in relation to the 1995 accounts by reference to the fact that the operating result had fallen by about $1.6m to a loss of some $81,000 from 30 June 1994 to 30 June 1995. She said this provided a "red flag", which necessitated her investigating the financial affairs of HJPL and the Competitive Foods Group much more closely. The odd thing about BKC's approach, which, in my opinion, is only explicable because of the attitude BKC was taking to HJPL, is that the financial disapproval preceded the receipt of the various information, rather than followed an analysis of it and the exercise of the discretion based on that analysis. As will appear, the matters Mrs Driscoll regarded as a "red rag" and which she used to try to justify her concerns was never one she took up with any officer of HJPL and, particularly, Mr Cowin or Mr Butler. She sought no direct explanation for the turnaround in the profits.

498 Mr Bathurst submitted that whilst BKC had a sole discretion to grant or withhold approval that had to be exercised in accordance with the requirements for financial approval, i.e. on the basis of the factual material to which BKC was entitled, and reasonably. He submitted that in so far as there was a necessity to perform all terms and conditions under each individual franchise agreement, that must mean, in the context of the Development Agreement, all terms and conditions of a financial nature and, further, that it was not in issue that HJPL was not in default of any money obligations. He submitted that the acknowledgment and agreement in the second sentence of clause 4.1(b) could only affect the granting of further franchises and that this was a matter governed by clause 7.1.

499 Mr Bathurst submitted, Tpp.3916-3917, that HJPL's obligations were to comply with its financial obligations under each Franchise Agreement and, in the present case, there was no evidence that that had not been done at a financial level. He continued that the other way of reading it, which is the way for which BKC contended, was that the matter of approval was one entirely for the discretion of BKC, such that it would not matter if none of the events of default had arisen or appeared likely to arise. Mr Bathurst also pointed to the fact that by intruding external considerations, such as ratios, BKC was having regard to matters to which the Development Agreement did not refer.

500 Mr Oslington submitted that the failure to obtain financial approval was not relied upon as a ground of termination and that clause 4.1 required HJPL to obtain franchise approval, and hence financial approval for each restaurant to be established. But the failure to develop, the right to do which was dependent on, inter alia, financial approval, was relied on in the Shorter Notice. He continued that by September 1995 there were only five restaurants for which franchise and site approval were being sought, namely Parramatta, Myaree, Bolivar, Broadway and Hurstville. Further, no other applications for franchise and site approvals to establish restaurants were made prior to the operational disapproval on 27 November 1995. BKC contended that the absence of financial approval for four of the five restaurants had no relevance to the breach of clause 2.1, and that the effect of operational disapproval in November 1995 prevented development, whether or not HJPL could meet the other conditions necessary for it.

501 Mr Oslington submitted that the meaning given to "financial approval" in clause 4.1(b) required three conditions to be met:-

(a) That HJPL had performed and was "currently" performing all terms and conditions under each individual Franchise Agreement;

(b) that there was no monetary default; and

(c) the acknowledgment and agreement of HJPL in the third sentence of clause 4.1(b), which set out what was necessary to satisfy the third requirement, namely that HJPL be financially sound to avoid a business failure affecting the reputation and good name of the BKC marks.

502 So far as (a) is concerned I have come to the conclusion that, on a proper construction of the Development Agreement, reference is being made to compliance with financial requirements. I am of that view because operational approval is dependent upon HJPL's conducting each of the restaurants in accordance with the terms and conditions not only of the Development Agreement, but the applicable Franchise Agreements and the standards, specifications and procedures specified in the Manual of Operating Data. To read the opening words of clause 4.1(b) as replicating those words does not seem to me to be justified, when the words appear under the heading "Financial". Furthermore, it seems to me that the requirement of "faithful" performance is more akin to the requirement of performance of financial obligations than of operational obligations and, accordingly, there must be not only that performance but also no existing default of any money obligations. A somewhat similar situation arises when one has regard to legal approval. The concluding words require that there be compliance "with all obligations under all agreements with BKC". If this is not confined to legal obligations it merely repeats, and this would be the argument put forward by BKC, compliance with requirements for operational and financial approval.

503 Accordingly, as a matter of construction, I reject Mr Oslington's first submission. The terms and conditions with which there must be compliance under clause 4.1(b) are those relating to financial matters.

504 The second point is not in issue. That raised in (c) requires a construction of the second sentence of clause 4.1(b) which, in my opinion, it will not bear, namely that HJPL must establish that it is "financially sound". In my opinion, on its proper construction, the sentence is an acknowledgment and agreement by HJPL of the significance of "a franchisee" being "financially sound", which adds point to the necessity to comply with the requirements in the first sentence, but which does not, on the view I consider is preferable as a matter of construction, impose any further obligations on HJPL or the franchisee. This construction is reinforced, at least to a not insubstantial extent, by the first sentence of clause 7.1.

505 In these circumstances I am of the view that, as a matter of contract, BKC was not entitled to the further financial information it was seeking.

506 Mr Oslington's submissions continued that it was left to BKC's "sole discretion" to decide whether HJPL was financially sound. However, in exercising that discretion, assuming that it extends in the way for which Mr Oslington contends, BKC must act reasonably and in good faith. I have referred to the difficulties which, in my opinion, BKC has in establishing that it was so acting. Further, as I have noted, the very matter which Mrs Driscoll said caused her concern was not referred to any officer of HJPL, let alone Mr Cowin or Mr Butler. She sought no explanation for the turn around in the profit situation, which she conceded could have been explained on a number of quite appropriate bases. If this was, in truth, a matter of such concern to her it is inexplicable, in my opinion, that she did not seek an explanation, particularly as she realised that the absence of financial approval may well impede further development.

507 In all the circumstances BKC has failed to satisfy me that it was entitled to withhold financial approval from HJPL, and that in purporting to do so it acted either reasonably or in good faith. Finally, the evidence does not satisfy me that any officer of BKC exercised the "sole discretion", on the basis of facts to which he or she was entitled to have regard, in withholding such approval.

Withdrawal Of Operational Approval

508 Under clause 4.1(a) HJPL "must have", as a condition of the granting of a Franchise Approval, "in the sole discretion of BKC", operational approval. "Operational" is stated as meaning that HJPL conducts each of its Burger King restaurants in accordance with the terms and conditions of the Development Agreement, the applicable Franchise Agreements, and the standards, specifications and procedures specified in the volumes comprising the Manual of Operating Data, as amended, including the maintenance of the interior and exterior of the restaurants to reflect an acceptable Burger King image.

509 The Development Agreement therefore reposes in BKC the discretion, which is described as "the sole discretion", whether HJPL will have operational approval. These observations apply equally to financial approval. I am uncertain whether the word "sole" adds to the nature of the discretion, it being BKC's discretion and, in so far as it may otherwise have been relevant to consider the point, it is only BKC, which can exercise the discretion. However, in my opinion, it is clear that the discretion can only be exercised conformably with the terms of the Development Agreement. By that I mean that it is not open for BKC to deny operational approval unless it concludes, acting reasonably and in good faith, that HJPL has failed to conduct each of the restaurants in accordance with clause 4.1(a). Even if HJPL does not do so there is no contractual obligation on BKC to deny operational approval. BKC retains the discretion to decide whether it will or will not. However, as I have said, that discretion can only be exercised if the factual basis contemplated by clause 4.1(a) exists.

510 In my opinion, there are several requirements to the exercise of the discretion. Firstly, BKC must have before it material on which it is able to exercise the discretion to operationally disapprove. Secondly, BKC must establish that based on that material it exercised the discretion. The fact that BKC may have before it material, which would entitle it to exercise its discretion, does not lead to the inevitable conclusion that if there was operational disapproval, it was in consequence of that material. In my opinion, it is necessary for there to be evidence from BKC to show that it was on the basis of that material that it decided to operationally disapprove. Obviously, if BKC were to assert breaches of the requirements of clause 4.1(a) and that in consequence of those breaches it was operationally disapproving, even if there were no reference to its doing so in its "sole discretion", the reasonable inference would be that it was exercising that discretion. However, in so far as it is relevant to establish that there has been operational disapproval conformably with clause 4.1, it is necessary, in my opinion, for BKC to prove each of the matters to which I have referred. This raises the further point, namely, that if BKC fails to prove certain of the matters on which it relied the onus remains on it to show that if the matters it has proved were the only matters to which it was entitled to have regard in exercising its sole discretion, those would have caused it, in its "sole discretion", to operationally disapprove.

511 The significance of these observations in this case is that Mr Blauer has not been called to give evidence. If all the matters to which he refers in his letter of 27 November 1995 are established then, for the reasons I have given, the reasonable inference would be that it was on the basis of them that he exercised the discretion. On the other hand, if any of those matters are not proved, so that the breaches are less than the ones on which he purported to exercise BKC's sole discretion, the question becomes whether he would have exercised that discretion on behalf of BKC in the changed circumstances. Mr Bathurst's submission was that the factual situation as outlined in his letter did not exist and, even if some lesser breaches existed, there was no evidence from him that they would have been such as to cause him to exercise BKC's sole discretion to deny operational approval.

512 The matter is also significant because of Mr Oslington's heavy reliance on the admissions made by Mr Green as to the state of certain of the restaurants. Mr Oslington continued that those admissions were sufficient to enable BKC to exercise its discretion to operationally disapprove. It may be, and I put the matter no higher than this, that that is so. However, Mr Bathurst's submission, with which I agree, is that there was no evidence from BKC that it communicated knowledge of the matters of which Mr Green made his admissions to Mr Blauer before he wrote his letter of 27 November 1995, nor that he exercised, or anyone else from BKC exercised, BKC's discretion on the basis of those admissions. Therefore, he submitted, the admissions became irrelevant, with which I agree. They do not assist in a consideration of what Mr Blauer may have done in a different factual situation.

513 It is now necessary to examine Mr Blauer's letter of 27 November 1995 with some care. It refers to the Development Agreement and BKC's world-wide Expansion Policy regarding minimal operational standards necessary to expand within the system, which it asserted was delivered to HJPL "at the beginning of this year". It quotes clause 4.1(a) in terms which are inaccurate, namely by stating that it "provides that HJPL may not open additional Hungry Jack's restaurants unless ...". That overlooks the requirement of BKC to exercise its sole discretion in denying operational approval, a matter which, on a reasonable reading of the letter, is addressed in the next paragraph. That paragraph gave some clues as to how BKC would exercise the discretion:-

"Pursuant to the terms of section 4.1(a), BKC has the authority to refuse to approve any expansion by HJPL if HJPL fails to comply with the terms of a single franchise agreement. Notwithstanding this requirement, BKC has, without waiving its right to impose this standard in the future, agreed at this time to treat HJPL consistent with the less restrictive provisions of the Expansion Policy."

Therefore, in so far as Mr Blauer was purporting to exercise the discretion, he was doing so based on the provisions of the Expansion Policy.

514 The letter continued that, as HJPL knew, that policy provided that a franchisee's eligibility for restaurant expansion in the Burger King system was dependent upon, among other things, "operational performance pursuant to the terms of each franchise agreement". The letter referred to HJPL's being subject to an operational assessment to determine its expandability in accordance with the "Operational Expansion Criteria", and, as part of that assessment, to the categorisation of restaurants into "Superior", "Satisfactory" or "Needs Improvement". It stated that those characterisations were based on many factors and referred to discussions between Messrs Horowitz and Green, and to the fact that pursuant to the Expansion Policy each restaurant was evaluated on an ongoing basis "through FM visitations, detailed OT visitations, and average Mystery Shopper scores". It is of significance that there was an on-going evaluation based on those matters.

515 The letter continued:-

"When the Franchise Action Plan was initiated, there were approximately 36 HJPL restaurants in the Needs Improvement category. At the end of the Franchise Action Plan, there were still a total of 31 restaurants in the Needs Improvement category. A summary of the major issues at these 31 restaurants is enclosed.

Pursuant to the Expansion Policy, a franchisee may not expand if more than 10% of its restaurants (are) in the Needs Improvement category. HJPL has more than 20% of its restaurants in the Needs Improvement category and is, therefore, in violation of both the Expansion Policy and the more restrictive provisions of section 4.1(a) of the Development Agreement. Unfortunately, this means that at this time HJPL is not approved for any further expansion.

Specifically, BKC will not grant any additional `Franchise' or `Site' approvals as defined in Sections 4 and 5 of the Development Agreement, and you are in default under Section 15.1(b) of the Development Agreement."

Clause 15.1(b) provided that an occurrence entitling BKC to terminate was:-

"(b) Hungry Jack's fails at any time to meet and satisfy fully the operational, financial and legal requirements set forth in clause 4, whether for the purpose of seeking franchise approval or in the day-to-day operation of a Burger King Restaurant."

516 The letter stated that whilst clause 15.2 gave "only 30 days to cure this breach", that BKC was willing to discuss the matter with a view to reaching a solution over a longer period "if you are also interested". I have referred to the terms of the March 1996 Notice, whereby this offer was withdrawn.

517 The letter concluded:-

"Jack, I believe that BKC has acted in good faith and substantially relaxed the requirements of the Development Agreement in order to work with HJPL in order to improve operations. There is, however, no question that there is an issue which needs to be resolved and I hope that the two companies can work together in the near future to reposition HJPL so that it can continue to expand within the Burger King system."

518 Presumably the relaxation of the requirements of the Development Agreement was the preparedness of BKC to rely upon the "less restrictive provisions of the Expansion Policy". The breach of that Policy was that more than twenty per cent of HJPL's restaurants were said to be in the Needs Improvement category. Mr Bathurst's submission was that that was the stated reason for denying operational approval, and that one could not, on a fair reading of the letter, determine that another reason was the breach of the more restrictive provisions of clause 4.1(a). I think that must be correct, the whole thrust of the letter being that, at least at that time, BKC was not applying the clause 4.1(a) requirements as reflected by breaches of the Expansion Policy. Thus, so the submission ran, the stated reason for the exercise of the discretion was that more than twenty per cent of the restaurants were in the Needs Improvement category and, unless BKC established that to be so, there was no evidence that BKC had exercised its discretion on any other basis.

519 The memoranda from Mr Horowitz in relation to the restaurant classifications, which were attached to Mr Blauer's letter, showed the classifications to have been done by Mr Horowitz during the period 27 October 1995 to 1 November 1995.

520 Mr Bathurst conceded that the Expansion Policy was applicable to its restaurants and was received by it in late 1994. Relevantly, it provided that if a franchisee had more than ten restaurants, no more than ten per cent of them could fall within the Needs Improvement category. At that time HJPL had at least 140 restaurants, so that it would be in breach of the guideline if 15 or more were properly classified "Needs Improvement".

521 The Expansion Policy provided the way in which a Franchise Action Plan would be implemented and for all restaurants to be re-evaluated "no less than once every six months based upon the (1) FM visitations, (2) Detailed OT visitations, and (3) Average Mystery Shopper Score. During the first quarter of every fiscal year, an action plan will be established, and it will be reviewed on an on-going basis. The quality with which the franchisee performs on each of these three factors will determine the on-going operational performance category".

522 When Mr Horowitz met with Mr Green in February 1995 he told him that 27 restaurants were classified "Needs Improvement". Mr Green was initially somewhat unsure about the figure, but, in cross-examination, Tp.1008, he became reasonably firm on the number 27, being clear that the percentage exceed 10.

523 Mr Green agreed that Mr Horowitz told him in February 1995 that he and Mr Green needed to come to an agreement as to how long it would take to get the restaurants below ten per cent of Needs Improvement, and that he was "open to how much time in the future" HJPL needed. Mr Green asked for eight weeks, and Mr Horowitz, he agreed, said that he, Mr Horowitz, thought HJPL needed "a lot longer than eight weeks to get anywhere near the target of 10% restaurants in NI". Mr Green agreed that Mr Horowitz said:-

"I suggest that every three months we plan on moving 20% of the NI restaurants into the `satisfactory' category. That would mean that in nine months, in other words, by 15 November this year, we'd reach our goal of getting less than 10% restaurants NI."

Mr Green said he agreed with that and told Mr Horowitz of his agreement.

524 However, Mr Horowitz told Mr Green at this meeting that Mr Blauer had agreed that BKC:-

".. would delay in forcing that expansion policy letter in Australia until we held a meeting with the franchisees and came to an agreement as to what date that letter would go into effect."

It was after that that he said to Mr Green that it was necessary to come to an agreement as to how long it would take to get the restaurants below ten percent Needs Improvement. No such meeting took place and no such communication was received.

525 Mr Horowitz did not prepare or provide a Franchise Action Plan to Mr Green at the meeting in early 1995, the first time that such a plan was furnished to him being on 5 October 1995.

526 The importance of when the Franchise Action Plan was delivered is apparent from Mr Hothorn's communication to Messrs Power, Horowitz and Miolla of 4 June 1995, in which he referred to there being only three categories in which a franchisee could be, namely approved, needs improvement with an action plan (able to expand), and disapproved. He continued that in the latter two cases the franchisee was supposed to have a written plan for what was necessary to become approved and asked to be advised if he had "this wrong". Mr Hothorn agreed in cross-examination that this was BKC's practice, and he identified the Franchise Action Plan sent to Mr Green by Mr Horowitz on 5 October 1995 as the type of written plan to which he had referred. None had been sent previously.

527 Mr Bathurst pointed to the emphasis placed on the Franchise Action Plan in Mr Blauer's letter of 27 November 1995 and to the fact that at its end "there was still a total of 31 restaurants in the Needs Improvement category". This, so Mr Bathurst submitted, was a significant factor in Mr Blauer's reasoning, and that the process of analysis as revealed in the letter was consistent with an application of BKC's practice as described by Mr Hothorn, but the factual premise for it, namely the provision of such a plan, was missing. However, Mr Bathurst submitted that as no Franchise Action Plan was provided until 5 October 1995, it mattered not whether Mr Blauer was ignorant of that or chose to ignore it.

528 Mr Bathurst submitted that the agreement of February 1995 could not be a substitute for a Franchise Action Plan because it failed to state "what is necessary in order to become approved". It was nothing more than a general statement of what should occur. In the result Mr Bathurst's submission was that there was no Franchise Action Plan provided until 5 October 1995, Mr Horowitz gave no evidence as to why this did not occur, Mr Blauer apparently ignored the fact, and the annexures to the letter of 27 November 1995 made it clear that he was referring to matters of specificity, rather than the generalities discussed in the February 1995 meeting.

529 Mr Bathurst relied nextly on the failure by BKC to comply with its restaurant visitation guidelines. The documentation issued by BKC described what was to occur, the number of visitations necessary being specified, relevantly for present purposes, in respect of Needs Improvement restaurants as ten occasions per annum, or one about every five weeks. On 10 May 1995 Mr Blauer advised Mr Cowin that he required HJPL's "new manager" to perform an expanded visitation at all restaurants "at a frequency of two, four or six times depending on the operational status of the restaurant", and, on 14 July 1995, Mr Blauer, in referring to Mr Honkey, said that he would conduct visits:-

".. under the following minimum frequency which is two visits for Superior restaurants, four visits for Satisfactory restaurants, and six visits for Needs Improvement restaurants."

The purpose of these visits was to check on the progress and improve operations "through observation, training, coaching, motivating and assisting; and allocating our resources to those restaurants most in need". Thus, it was clearly contemplated that by carrying out visits with the regularity specified there would be an achievement of reducing restaurants in the Needs Improvement category.

530 Against this background HJPL considered the visits to the 31 restaurants classified as "Needs Improvement", upon the existence of which restaurants in that category Mr Blauer relied in his letter. It was submitted that if the visitation requirements for Needs Improvement restaurants was not met there were two available inferences, the first being that BKC was failing to comply with its policy, which included assisting restaurants to come out of that category and thus not meeting the contractual obligations to co-operate and act reasonably and in good faith, and the second being that BKC operators did not regard the restaurants as being in the Needs Improvement category any longer in which event there was no basis for the adverse exercise of the discretion. The bases for these submissions are set forth in paragraphs 25.20 to 25.23, and proceed on the assumption that Needs Improvement restaurants, conformably with the 1995 restaurant visitation guidelines, were to be visited ten times per year or, approximately, once every six weeks.

531 Mr Bathurst prepared a schedule based on the visitation reports, (Volume 75 of the Tender Bundle), in which, in relation to the 31 restaurants which Mr Blauer said caused him concern, he noted the records of visitations. The first restaurant, Arana Hills, was visited on 24 March 1995 and not, so far as the evidence disclosed, thereafter until a visit by Mr Horowitz shortly before 1 November 1995. The second restaurant, Beak House, was visited on 13 March 1995 and then, by Mr Horowitz, on an unspecified date shortly before 1 November 1995. Thus, in a period of some seven months, during which one could have expected a visit, if the restaurant was in the Needs Improvement category, or if the visitation guidelines were being followed, every six weeks or so, there were only two visits. Mr Bathurst also pointed to the fact that only 16 of the 31 restaurants were visited in the three months preceding the Needs Improvement classification and from that the submission was made that 15 of the restaurants could not have been considered to be in the Needs Improvement category or there had not been compliance by BKC with its policy; a policy introduced for its benefit.

532 In respect of the remaining 16 a table was prepared, based on the visitation reports, which shows that Seaford and Shell Kingsway were only visited once each, Bulleen was only visited twice, Forest Hill, Fulham, Glen Waverley, Hindley Street, Mount Gambier, Oakleigh and Preston were only visited on three occasions and, although no visitation reports are still in existence for West Terrace, it appears only to have been visited on three occasions in the period February to October 1995. The balance were visited on four or five occasions. Mr Bathurst pointed also to the fact that of the 16 restaurants in this category only six were within the 27 classified in February 1995 as Needs Improvement.

533 From this point Mr Bathurst submitted that an analysis of 6 of those 16 restaurants revealed that there were no more than 10 that could properly be classified as Needs Improvement, i.e. less than the 15 necessary to meet BKC's criteria.

534 In paragraph 25.29 Mr Bathurst set forth his reasons for submitting that Preston, Forest Hill, Seaford, Geelong, Shell Kingsway and Bulleen could not be rated as Needs Improvement. Preston was visited on 26 September 1995 and an action plan was prepared. On 5 October 1995 Mr Horowitz advised BKC Singapore that this restaurant was rated Satisfactory and there were no subsequent visitations to it.

535 In his memorandum to Mr Green of 7 November 1995 it was noted as a Needs Improvement restaurant, but no reason was set forth for this, nor was any explanation offered as to the change of approach.

536 In relation to Forest Hill, Mrs Mary Felt rated it Satisfactory on 17 September 1995 and there were no subsequent visitations, so far as the evidence disclosed, to it. In his memorandum of 7 November 1995 Mr Horowitz said it was to be re-classified to a Needs Improvement basis, according to his memorandum of 29 October 1995, on the "most recent visit" which rated it Satisfactory. The evidence was that Mrs Felt was an experienced OT and no explanation was offered as to why her assessment was changed.

537 Geelong was last visited on 27 September 1995 and, on 5 October 1995, Mr Horowitz advised BKC Singapore that it was Satisfactory. Mr Horowitz visited it on 2 November 1995, although he had written a report to Mr Green on 28 October 1995 stating that there were Needs Improvement issues. On 7 November 1995 he advised that Geelong had been re-classified as Needs Improvement, but no evidence was given as to the basis for this and the District Manager protested about it.

538 On 5 October 1995 Mr Horowitz advised BKC Singapore that Shell Kingsway was rated Satisfactory on the basis of a single visit on 8 September 1995. There were no subsequent visits and Mr Horowitz used the restaurant for the purposes of training BKC staff in its procedures. None-the-less, in his memorandum of 31 October 1995 Mr Horowitz stated a Needs Improvement classification was applicable to it.

539 I have only dealt with four of the six restaurants to which Mr Bathurst drew attention. I have done so because the uncontradicted evidence is that shortly before Mr Horowitz prepared his memorandum to Mr Blauer he had advised BKC Singapore that three of the restaurants were Satisfactory and, Mrs Felt had advised that one was Satisfactory. Save for Shell Kingsway, Mr Horowitz based his subsequent assessments on the most recent visitation reports which meant, of course, that he was contradicting views either he or Mrs Felt had previously expressed. The analysis I have performed reduces the number of restaurants in the Needs Improvement category from 16 to 12, i.e. below the necessary number and, even at this point, it cannot be said that there was any justification, of the type Mr Blauer asserted, for refusing operational approval.

540 Finally Mr Bathurst relied on the Mystery Shopper Scores, with which he dealt in paragraphs 25.27 and .28. Mr Blauer discontinued this programme in September 1995. Mr Bathurst submitted that on a proper interpretation of the scores, there was no basis for treating many of the restaurants as Needs Improvement, e.g. only 6 of the 31 had a Mystery Shopper Score of less than 90%, and only 3 of the 16 referred to in Table A2 had a score of less than 90%.

541 Mr Bathurst then dealt at some length with the evidence of Mr Honkey. However, for present purposes I do not find it necessary to turn to that evidence. In my opinion, sufficient emerges from the evidence of BKC to negate any suggestion that there were, as at 27 November 1995, more than 12 restaurants in the Needs Improvement category. Certainly, the evidence does not support the assertion made in the letter of 27 November 1995 that 31 restaurants were in that category.

542 Mr Oslington submitted that I would find that, based upon the condition of the restaurants, BKC was entitled to operationally disapprove HJPL because, as a matter of fact, at least one HJPL restaurant was failing to comply with the BKC standards as at 13 November 1995, and because, if that be rejected as a sufficient basis for operational disapproval, at least 10% of restaurants conducted by HJPL as at 13 November 1995 were "Needs Improvement". If I may say so with respect, it seems to me that this submission asks the wrong question. The relevant question, as I have sought to point out, is whether BKC relied on certain facts as the basis for exercising its discretion to operationally disapprove. My analysis of Mr Blauer's letter of 27 November 1995 does not indicate any basis for thinking, in fact the conclusion would have to be to the contrary, that he exercised the discretion on the basis that at least one restaurant failed to comply with the BKC standards. Secondly, even I were of the view that he exercised his discretion on the basis that at least 10% of the restaurants were in the Needs Improvement category, the evidence does not satisfy me that this was so. However, as I have sought to explain, it seems to me more probable that the way in which Mr Blauer exercised his discretion was on the basis that more than 20% of the restaurants were in that category. In my opinion, on a proper reading of the letter, Mr Blauer was not directing his attention to how he would have exercised his discretion if only 10% of the restaurants were in the Needs Improvement category, but basing it upon the greater percentage. If that be wrong, I do not consider that the objective facts establish the basis on which he purported to exercise his discretion. However, I do not see that there is any need to speculate upon the point. Mr Blauer, who exercised the discretion, was not called in the circumstances to which I have referred. Accordingly, there is no evidence before me as to how he would have exercised his discretion if he had been aware of all the facts to which Mr Bathurst has pointed and which, in my opinion, have been established at a factual level. He was available to be called, but BKC chose not to do so, and, in all these circumstances, there is no reason for me to guess, nor do I consider I am entitled to, at what he may have done had he been aware of other factual circumstances, not the least of which would be the failure to comply with the visitation requirements; the statements by Mr Horowitz, who was also not called, of his advice to BKC Singapore as to the categorisation of various of the restaurants; and the finding by Mrs Felt as to one particular restaurant.

543 Mr Oslington submitted nextly that BKC had afforded HJPL an adequate opportunity to rectify the situation and imposed "the less severe 10% Needs Improvement standard rather than insisting on its right under the Development Agreement to deny operational approval if one restaurant was failing to comply". The evidence is that HJPL had satisfied the requirements.

544 Mr Oslington nextly submitted that I would find that the operational disapproval was not the product of a conscious and deliberate attempt by BKC, I think the submission then is intended to mean to prevent further development. Even if I were to come to that conclusion, I am satisfied that BKC was not entitled, on the facts, to operationally disapprove BKC. However, for the reasons I gave in considering the withholding of financial approval I do not consider that BKC acted reasonably and in good faith in this regard. In my view, BKC was pursuing a course of attempting to thwart HJPL's further development, so that BKC could develop the market without regard to the rights of HJPL.

545 Mr Oslington submitted that I should find that the operational disapproval was soundly based, as a matter of fact, on either of two grounds, they being that BKC conducted visitations throughout 1995 and 1996 and, in respect of both years during the relevant ratings period, at least 10% of the restaurants were in the Needs Improvement category; and that HJPL accepted and acknowledged that at least 10% of its restaurants were in that category both as at November 1995 and November 1996, which was a serious matter, as Mr Green conceded. Once again, if I may say so with great respect to the careful submission, I think it misses the point, viz that in so far as there was operational disapproval one must know the facts upon the basis of which the discretion was exercised. I have really dealt with the points made in this submission earlier.

546 Mr Oslington's submissions then dealt with the importance of operational issues at some length with which there does not appear to be any great dispute. The issue is, having regard to that importance, whether BKC was entitled, on the facts as it has demonstrated existed on 27 November 1995, to exercise, through Mr Blauer, the discretion. In my view it did not.

547 Mr Oslington then turned to a consideration of the facts and, in paragraph 43, seems to have conceded that 27 "if not more" of HJPL's 150 restaurants were rated Needs Improvement by BKC in February 1995. It is to be noted that 31 restaurants, to which Mr Blauer referred, is a shade in excess of 20% of 150 restaurants, adding to the likelihood that that percentage was the matter to which he was having regard. The submission continued that on this basis BKC could have operationally disapproved HJPL for expansion at that time. Whether or not it could, it did not. Rather, it chose to deal with HJPL, at least initially, in a quite different way. His submissions then dealt with the meeting in February 1995 and Mr Green's understanding that HJPL would not be allowed to expand if it had more than 10% of the restaurants in the Needs Improvement category. Mr Green regarded the matter as very, very serious and, after the conversation, took all actions which he thought necessary to get the restaurants into a satisfactory condition. He accepted it was HJPL's responsibility to keeps its restaurants operationally in order. The submission was made that no evidence was called from any restaurant manager, district manager, State manager or Mr Green to suggest that any form of plan was introduced into the system to ensure correction of what Mr Green regarded as a very serious state of affairs. In particular, Mr Oslington submitted, no such evidence was led concerning the period February to November 1995 or November 1995 to November 1996. Nor, he submitted, was any evidence called to suggest that the matters recorded on the visitation reports during those periods were not true.

548 Mr Oslington submitted that Mr Horowitz' memorandum to Mr Green of 7 November 1995 reflected the ratings immediately prior to that date, and that after receiving it it was Mr Green's evidence that he would have contacted the State managers and asked them the position in relation to action plans. He said he made no complaint to Mr Horowitz about the ratings, that he knew himself the general condition of those restaurants, that Mr Horowitz had told him in February that BKC was likely to refuse expansion approval, and, therefore, it did not come as a surprise to him that it did so.

549 As I have sought to show an analysis of the evidence within the records of BKC, which, as an analysis, was not challenged and which I accept, showed that it had a different view of the situation.

550 Mr Oslington's submissions then turned to the letter from Mr Miolla of 7 November 1996 in which he advised Mr Cowin that HJPL was still not meeting the conditions for operational approval to expand as set forth in the Development Agreement based on the November 1996 ratings. Mr Green agreed he did not bring the number of restaurants below 10%. This letter was followed by the Notices purporting to terminate the agreement on 18 November 1996.

551 In reply Mr Bathurst submitted that having decided or agreed to exercise the discretion given to it by clause 4.1 in a particular way, it is not now open to BKC to argue that the discretion could have been exercised in some other way, particularly where the alternative basis now proposed is one either rejected by the decision maker or which he or she does not seek to support. He referred to Mr Oslington's submission, at Tp.4058, that BKC, despite having a strategy in mind, did not enforce its full contractual entitlement under clause 4.1(a) "but, instead, decided to judge the plaintiff's operational standard on the basis that it wouldn't disapprove unless more than 10% of its restaurants were in the `Needs Improvement'. It applied that more lenient standard at the beginning of 1995, in November 1995 and in November 1996". Mr Oslington's submission pointed up the need for acceptable evidence as to how the discretion was exercised, and of evidence entitling that exercise.

552 In his submissions in reply Mr Bathurst also relied upon the requirement of BKC, in exercising the discretion, to act "reasonably" and "in good faith" as explained in Alcatel Australia Limited v Scarcella. These requirements, in my opinion, necessitated that Mr Blauer was aware of the precise facts before exercising the discretion and that it be shown that he acted on the basis of them. This was not done.

553 Mr Oslington acknowledged in his submissions that there was an obligation on BKC to review the status of restaurants, and so much is clear from the requirements for visitations. By its Defence, paragraph 49.2, BKC asserted, inter alia, that since 27 November 1995 and up to the date of termination HJPL never met the requirements for operational approval. The only evidence it tendered in support of that assertion, which Mr Bathurst described as its positive case, were the admissions of Mr Green as to the percentage of stores which did not meet the Needs Improvement criteria. However, the submission is that this does not satisfy the establishment of factual material on the basis of which the sole discretion to refuse approval was based. BKC, having undertaken the proof of that, no doubt to seek to avoid the consequences of it, has simply failed to discharge the onus. Mr Bathurst encapsulated the submission in paragraph 62 of his submissions in reply and, if I may say so with respect, that essentially accords with the view to which I have come, the evidentiary bases necessary to support the view having been established.

554 In the result I do not consider that BKC has established that it was entitled, in its sole discretion, to operationally disapprove HJPL. I have already concluded that it was not justified in financially disapproving it, and, in relation to both purported disapprovals, what BKC's motivation was.

HJPL's Readiness, Willingness And Ability

555 The question which then arises is whether, if these operational and financial disapprovals had not been put in place, HJPL would, in any event, have been ready, willing and able to comply with the requirements of the Development Schedule. Mr Oslington submitted that HJPL has alleged in paragraph 61(b) that it was, at all material times, ready, willing and able to comply with clause 2.1, but was prevented from doing so by the wrongful refusal of BKC to grant it financial and/or operational approval for further expansion, and that HJPL bears the onus of proving the allegation, which he submitted it has failed to discharge. Mr Oslington then referred to the fact that HJPL may itself have built the four restaurants in the relevant year in Western Australia, South Australia and Queensland, but that in November 1995 there was "legitimate" operational disapproval, which was accepted by HJPL as such. I have found there was no "legitimate" operational disapproval, and the evidence does not satisfy me that HJPL accepted that there was. However, Mr Oslington's submissions continued that whether there was operational disapproval was not relevant, because HJPL was not in a position to, nor was it prepared to, nor had it planned to open the four restaurants in the year November 1995 to November 1996. He referred to Mr Cowin's evidence that before September 1995 BKC had not refused any approvals sought to build new restaurants and thus, even if restaurants had been applied for, they were not constructed in the period up to November 1996 with the exception of Myaree.

556 Mr Oslington referred to the evidence of Mr Cowin that the average time to open a free-standing restaurant would be in the range of eighteen months, although each site had to be evaluated on the basis of its degree of difficulty. He noted that Mr Montgomery was not called, and that Mr McCarthy was of the view that third party franchisee applicants generally took twelve to eighteen months after approval of an application to open a restaurant. He referred to Mr Mazzone's having informed Mr Power in about March 1995 that under normal circumstances eighteen months would be an acceptable time frame for HJPL to open a restaurant, but that there were times when that was insufficient due to circumstances beyond its control. The conclusion from these submissions was that HJPL itself had no plans to open company restaurants in a sufficient time to enable it to comply with its obligations under clause 2.1 and, in the alternative, it could not have complied with those obligations by introducing third party franchisees and having them develop and open the required number of restaurants within the required time. The required time, for the purposes of these submissions, was that provided by clause 2.1, not that provided by clause 8.1. For the reasons I have given, I do not consider that is correct.

557 Mr Oslington referred to Mr McCarthy's evidence at Tp.1859 in which he had agreed that it was unlikely in the extreme, as at August 1995, that any third party franchisee stores would be opened in Queensland, Western Australia and South Australia by the end of 1996, and to his evidence at Tp.1930 in which he agreed it was unlikely in the extreme that any third party franchisee stores would open in those States at least by the end of April 1996, and, he repeated, it was "most unlikely" that any third party franchisee restaurants would open in those three States by the end of 1996.

558 Mr Oslington's submissions went on to deal with the files which were kept on prospective sites and to Mr McCarthy's evidence that the best way of assessing whether HJPL was likely to open a restaurant was to look at particular files. He also referred to Mr McCarthy's evidence of tracking reports as reliable guides to the restaurants on the "drawing board", and to the fact that no attempt was made by HJPL to put into evidence those files and no analysis of any files or tracking reports was attempted. Mr Oslington submitted that the quarterly reports, which dealt, inter alia, with development, did not indicate that the required number of restaurants would be built in 1996.

559 I admitted Mr McCarthy's evidence in paragraph 104 as to the number of restaurants which, in his opinion, would have been opened. Mr Oslington submitted that minimal weight should be given to this evidence for reasons upon which he subsequently elaborated. He also referred to the absence of any evidence from Mr McCarthy of the financial ability to open the stores.

560 In paragraph 104 of his witness statement of 28 January 1998, Exhibit S, Mr McCarthy said that on 30 May 1994 he sent a memorandum to Mr Miolla, with a copy to Mr Cowin and Mr Montgomery, enclosing HJPL's Development Plan and its Recruitment Plan for third party franchisees. He said he believed, in relation to Queensland, that he had a good knowledge and understanding of its property market and, in his opinion, it offered a prospect of substantial growth in the number of Hungry Jack's outlets. His experience was that the development process took about six to twelve months from the time that a site was investigated by HJPL until it was put forward for active consideration and, accordingly, he was conservative in his projections for the years from 1996 onwards, because the process of locating possible sites for opening stores in those years would be unlikely to start for another twelve to eighteen months after he had prepared his Development Plan. He noted that of the eight stores referred to in that plan HJPL opened three, and he expressed the opinion, to which objection was taken, that had it not been denied approval to expand from 1995 onwards, it and franchisees introduced by HJPL would have opened at least the number of stores he had set out in that plan for Queensland. In respect of Western Australia he gave similar evidence, although he regarded it as mature market for HJPL. He was of the view that if BKC had not denied HJPL approval to expand from 1995 onwards, HJPL and franchisees introduced by it would have opened at least the number of stores shown on the Development Plan for Western Australia. He expressed the same view in relation to four stores projected in that plan for South Australia.

561 Mr Bathurst submitted that BKC correctly acknowledged that HJPL could satisfy its obligations under clause 2.1 either by building company owned restaurants or by third party franchisee restaurants opened in Western Australia, South Australia and Queensland.

562 A very real question arose as to whether Mr McCarthy's evidence of the number of restaurants, which he considered would be built, should be accepted. In his submissions in chief Mr Bathurst referred, paragraph 9.4 et seq, to Mr McCarthy's being cross-examined about the various ways in which HJPL could have satisfied the Development Schedule. Mr Bathurst noted that the reports to the quarterly meetings, which were prepared by Mr Montgomery and into which Mr McCarthy had some input, were said by Mr McCarthy not to represent a complete statement of HJPL's development activities. His evidence in cross-examination in this regard was quoted.

563 Nextly Mr Bathurst referred to Mr McCarthy's cross-examination of the likelihood of third party franchisees opening restaurants in Western Australia, South Australia and Queensland by the end of 1996. He was asked those questions on the basis of those who had made a formal application by August 1995, and he said that there were none approved from any of those States and that it was fair to say that it was unlikely in the extreme, as at August 1995, that any third party franchisee stores would be opened in Western Australia, South Australia and Queensland by the end of 1996. Mr Bathurst criticised reliance on this evidence on the basis that it was limited to franchisees who had made a formal application by August 1995, which question excluded potential applicants who had not reached the point of lodging a formal application, although they may have been in discussions and known to HJPL for some time, and on the basis that it also excluded any persons, who subsequently approached HJPL after August 1995, who would have met the criteria. Mr Bathurst referred to Mr McCarthy's evidence that, as a rule of thumb, it was fair to say that if an applicant, not being an existing third party franchisee, completed the formal application and ultimately built the restaurant, it would by and large be open "following the formal application" in twelve to eighteen months. Mr Bathurst also submitted that August 1995 was "an artificial date in relation to third party franchisees" because of the imposition of the freeze on them in May 1995.

564 I have difficulty in reconciling Mr McCarthy's evidence that, even on the basis on which he was cross-examined, it was fair to say that it was unlikely in the extreme, as at August 1995, that any third party franchisee stores would be opened in Western Australia, South Australia and Queensland by the end of 1996, with the submission that other restaurants and those for which formal approval may have been given, would have been, although the time frame has to be considered, at least by me, in the context of clause 8.1. If the evidence had remained at that point then I consider that there is much force in Mr Oslington's criticism of it and of his submissions that minimal weight should be given to the opinion having regard to Mr McCarthy's failure to look to files, tracking reports, and the financial ability of HJPL to pursue the opening of third party franchisee restaurants. Mr Oslington submitted that on a true analysis of those documents Mr McCarthy's opinion was shown to be wrong. However, I think that all that has to be read in the light of two particular matters. Firstly, the freeze put in place in May 1995. Mr Oslington seeks to deal with that in paragraphs 74, 75, 76 and 77 of his written submissions and on the more detailed submissions in relation to damages. In my opinion, it is not possible to divorce that event from the apparent problems so far as third party franchisees were concerned. I consider that BKC's attitude in this regard was in breach of the agreement and, for the reasons I have given, that HJPL was acquitted from tendering further performance in relation to that aspect of the matter.

565 Mr Bathurst also relied upon the failure to cross-examine Mr McCarthy on his opinion stated in paragraph 104, on the basis of the documents to which he did not have regard. To put it more directly Mr Bathurst submitted that it was not open to indirectly challenge Mr McCarthy's evidence in paragraph 104 by having him agree that he had not looked at documents such as site files and tracking reports and that to make the submission permissible Mr Oslington was obliged to put to Mr McCarthy that a consideration of those documents and, I would include, the quarterly reports, meant that his opinion could not have been correct. If that had been done, so Mr Bathurst submitted, Mr McCarthy would have been able to either explain the situation, or, alternatively, acknowledge the correctness of the proposition put in cross-examination. The relevant principles, generally said to be derived from the decision of the House of Lords in Browne v Dunn (1894) 6 R 67, were dealt with at length by Hunt J in Allied Pastoral Holdings Pty Limited v Commissioner of Taxation [1983] 1 NSWLR 1.

566 At p.16 his Honour said:-

"First and foremost, however, there is one answer to the Commissioner's submission which raises an important question of practice that was debated at some length during the final addresses at the hearing. It arises from the fact that at no time did counsel for the Commissioner put to any of the taxpayer's witnesses in cross-examination the so-called `staged development' theory upon which his client so strongly relies to contradict their evidence denying any dominant purpose in the acquisition of each of the properties to re-sell it at a profit, nor did he give any notice that such was the case he would be seeking to make. It certainly was not a case which should have been apparent without such express notice.

It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn. That rule of practice follows from what I have always believed to be rules of conduct which are essential to fair play at the trial and which are generally regarded as being established by the decision of the House of Lords in Browne v Dunn ..."

567 The principle, if I may say so with respect, is probably not in doubt. The question is how, in any particular case, regard is to be had to it. The evidence of Mr McCarthy was that, in his opinion, a certain number of stores would have been opened by third party franchisees in Western Australia, South Australia and Queensland. It was relevant, at least on the view of the case put forward by Mr Oslington, that that should have been done by November 1996, although that is a view I reject. I do not think that the cross-examination of Mr McCarthy to which I have referred could have left anyone in any doubt that Mr Oslington was attacking that opinion and that he obtained a concession from Mr McCarthy that it was "unlikely in the extreme as of August 1995" that any such restaurants would have been opened in those States by the end of 1996. Mr McCarthy's answer was unqualified. The further cross-examination in relation to the lack of formal applications also made clear the position Mr Oslington was seeking to achieve.

568 In my opinion, the cross-examination went sufficiently far to comply with the requirements of Browne v Dunn. There were no objections to the questions on the basis that they were unfair or did not put the position in an appropriate way. Mr Oslington chose to rely on August 1995 as the date and, in any event, he had made it clear by his cross-examination on the failure to refer to other documents, that he was attacking the opinion based upon contemporaneous evidence.

569 At that point, I consider that the obligation was upon Mr Bathurst to re-examine Mr McCarthy to ascertain whether the information in the reports may have caused him to change his view and whether the selection of August 1995 was, in his opinion, an inappropriate starting date to consider the matter. It is one thing to make submissions about this, it is quite another to grasp the evidentiary nettle when the point has been raised and seek to re-examine the witness. I am not concerned, at this stage, whether the evidence would have been admissible as evidence in reply, my prima facie view being it would have been, because I was never called upon to determine that. The position was that Mr Oslington left the matter in a state where, in my opinion at least on a prima facie level, Mr McCarthy could have been re-examined to establish that the particular circumstances about which he had been asked did not cause him to change his opinion. This was not done and, in my view, the cross-examination of Mr McCarthy, unexplained by any further evidence as to the particular circumstances which then existed, substantially eroded his opinion.

The Evidence Of Mr Cowin

570 I have set out the steps taken by Mr Cowin to develop the business of HJPL and the extent to which he had been successful. There can be no real doubt that from a very modest beginning Mr Cowin developed HJPL into a large and, generally speaking, successful company. It has been operating now for some thirty years. It has built up an extensive business network throughout Australia. It appears to have the support of its shareholders and, notwithstanding some suggestions in the evidence to the contrary, generally speaking of its bankers. Whilst attempts were made by BKC to attack HJPL's financial and business position, they were, in my opinion, unsuccessful and inconsistent with the probabilities. BKC continued to operate with HJPL until it gave the Notices of Termination of 18 November 1996. Whilst they were directed to both the Development and the Service Agreements, they did not purport to terminate the Franchise Agreements and, ultimately, no attempt was made to maintain that the Service Agreement had been terminated. Accordingly, even if BKC had been successful in maintaining that the Development Agreement had been terminated, the position would have remained that there would still have been contractual arrangements under the Service and Franchise Agreements. This would have meant, obviously, continuing commercial relationships between the two companies.

571 BKC's putting HJPL forward as a suitable provider of services to Shell was, in my view, totally inconsistent with the view it has subsequently sought to propound about HJPL's inability to manage its affairs. HJPL's ability, in that regard, is well illustrated by the absence of any evidence to suggest that at any time it was in breach of any of its financial obligations to BKC. So far as its financial position was concerned, this matter was well illustrated by the inability of BKC, when it was seeking to withhold financial approval, to put forward any real grounds, and certainly not to put forward any ground supported by the Development Agreement, why HJPL should not have financial approval.

572 HJPL's success is, in my opinion, based on the business acumen of Mr Cowin. He has built the company up and is obviously determined to see it continue to grow. He gave evidence over a lengthy period, during which I had the opportunity to observe him closely. He impressed me as a hard, but fair, businessman with an excellent knowledge of the affairs of HJPL and a clear determination and vision as to how it should be run in the future. Correspondence emanating from him showed a full appreciation of the issues at a commercial level, and an ability to deal with them effectively at that level. I have no doubt that Mr Cowin was a truthful witness, who, on the evidence before me, was defending the position of HJPL against what I have concluded were the unjustified actions of BKC in seeking to terminate the Development Agreement and to create a freeze on third party franchisee recruitment and to withhold operational and financial approval to enable further development. Whilst these actions may have achieved BKC's ultimate end of gaining a greater control over the Australian market they were, for the reasons to which I have referred, unjustified in law, and Mr Cowin was dealing with that situation in as an effective manner as he could, whilst still maintaining the business.

573 Mr Cowin's overall knowledge and understanding of HJPL's business and the potential for development was immense and should be afforded the greatest weight. He understood, having run the business for so many years, how it could develop within a viable financial framework and it is his evidence, which, in my opinion, provides the greatest insight into the way in which the business of HJPL would have continued to develop, but for the unjustified actions of BKC.

574 In his statement of 29 March 1999, which is part of Exhibit Q, Mr Cowin dealt with HJPL's development. In paragraph 9 of that statement he referred to paragraph 179 of his witness statement of 29 January 1998, which was not read. In paragraph 10 he referred to the restaurants opened throughout Australia for the years 1990/1991 to 1994/1995. In Western Australia, South Australia and Queensland nine were opened in 1990/1991, two were opened in 1991/1992, four were opened in 1992/1993, four were opened in 1993/1994, and eight were opened in 1994/1995. In total, throughout Australia during that period, 53 restaurants were opened, an average of 10.6 per year. Mr Cowin was not cross-examined to suggest that these figures were inaccurate.

575 In paragraphs 11 and 12 he referred to Mr McCarthy's Development Plan dated 30 May 1994, which set out the number of third party franchisees Mr McCarthy anticipated would open restaurants for the period 1994/1995 - 1998/1999. On page 9 of that Development Plan Mr McCarthy estimated the number of restaurants which would be opened by HJPL and third party franchisees in each State over the period and, in relation to this, Mr Cowin expressed the opinion that the projection on that page that 17 company owned restaurants would be opened in the financial year 1995/1996 "was realistic", that the projected expansion of nine or ten stores per year for the years 1996/1997 - 1998/1999 "was very conservative", and he continued:-

"11. In my opinion, HJPL would have opened at least seventeen company-owned restaurants per year in the years 1996/97 and thereafter, if it had not been disapproved for expansion by BKC. A development rate at that level is equivalent to opening approximately three restaurants in each year in each of the markets in which HJPL operated (Western Australia; South Australia; Queensland; Victoria; and New South Wales).

12. In my opinion, of the seventeen stores per year which would have been opened by HJPL in the financial year 1995/6 and following years, HJPL would have opened a large number of company stores in each year in NSW/ACT and Queensland and a lesser number of stores in Victoria, South Australia and Western Australia in each year. In my opinion an average of four company-owned stores a year in each of Queensland and New South Wales, and three company-owned stores a year in each of Victoria, South Australia and Western Australia, would have been realistic. In 1995/6, HJPL would also have opened a `Hungry Jack's' restaurant in Palmerston, Northern Territory, at a site which it had acquired for that purpose."

576 In paragraph 19, he referred to page 9 of Annexure C and advanced the view "that the figures which are projected for third party franchisees in that Development Plan are realistic". He supported that by noting that from August 1995 to December 1998 there were 14 restaurants opened by franchisees introduced by HJPL to BKC, at a time when BKC only permitted third party franchisees, which had been previously introduced to open restaurants. The projected number from the year 1994-5 to 1998-9 was 85 or an average of 17 per year.

577 On 9 June 1999, Mr Cowin made a further statement, which is part of Exhibit U, in which he set out his financial position. In paragraph 9 he stated:-

"If HJPL had not been able to fund the opening of the new `Hungry Jack's' stores, by bank finance for the cost of acquisition of such properties or by the leasing of premises on which the store had been opened, and by internal finance for or lease of equipment for the store, I would, either personally or through proprietary companies associated with me, have been prepared to make further funds available to HJPL or its parent company by way of equity investment or loan, to fund that expansion."

This statement following a very detailed analysis by Mr Cowin of his extensive financial interests and of his borrowings. No objection was taken to any of this evidence and Mr Cowin was not cross-examined on it.

578 Notwithstanding the view to which I have come about the evidence of Mr McCarthy, the evidence of Mr Cowin has to be considered. In my view, Mr Cowin, for the reasons I have sought to explain, was in a far better position to assess the ability of HJPL to expand and, not only was he dealing with third party franchisees but also with expansion through company-owned restaurants. He had a vastly superior knowledge and understanding of the business, both as a whole and generally, to Mr McCarthy and, it seems to me that his evidence is highly persuasive. It becomes the more so as it was not challenged.

579 In paragraph 36.11 of his written submissions, Mr Bathurst made the potent point that Mr Cowin was not cross-examined on any of this evidence. In paragraph 36.15 of his written submissions Mr Bathurst dealt with BKC's contention that HJPL would not have been in a position to fund expansion of 17 stores per year in the period from August 1995. He conceded it was common ground that in mid-1995,CFAL was suffering a decline in profitability, which had given rise to concern on the part of its lenders. He noted that Mr Cowin acknowledged that CFAL was then having problems with its banks as a result of a price war within the industry, which led HJPL to make a strategic decision to increase advertising expenditure, resulting in a reduction in its profitability. He also referred to Mr Cowin's acknowledgment that its Victorian business was not making money at that time, and continued:-

"However, Cowin's evidence was that, while the profitability of HJPL had declined in mid-1995, the cash flow of the business was almost the same as it had been in previous years, and that he had advised the banks that the decline in profit reflected the strategy adopted by CFAL to compete against large companies in the market-place (Cowin xx 1390). Cowin's evidence was that CFAL then had a borrowing capacity of approximately $100m from the banks, against $150m of assets, and had borrowed $50-51m at the peak; and that HJPL could have readily gone into the market-place and sold another $50m of real estate, against which CFAL would have paid back a portion of debt to the bank."

580 Mr Bathurst referred to Mr Butler's evidence that CFAL had a need for additional short-term funding from Westpac and National Australia Bank in mid-1995, because of the amount of capital spent on building new stores and a substantial land purchase at Morley Shopping Centre in November 1994, which had resulted in a possible shortage of working capital. Mr Butler was concerned about a cash flow shortage and the likelihood of receivership, although his evidence was that a receivership could only have arisen if CFAL's banks had not been prepared to authorise property sales or the grant of the lease facility sought by CFAL, and that that was not likely to and did not occur. His submissions noted that both Mr Cowin and Mr Butler denied that HJPL would have ceased expansion and that they stated that, having regard to the financial provisions in place, HJPL would have funded the expansion at the rate of 17 stores per year.

581 At paragraph 36.25 Mr Bathurst referred to the evidence that Mr Cowin was willing and able personally to fund the expansion. He noted the internal memorandum from National Australia Bank of 29 June 1995, which recorded his "strong commitment" to the CFAL Group and his advise that he would be prepared to sell his large holding in the owner of Channel 10 to fund capital expenditure by the CFAL Group from 1996, had that been necessary. Mr Cowin was not challenged in cross-examination on this evidence.

582 It seems to me that it is also necessary to have regard to what has occurred since 1995-1996. Admittedly, because of the restrictions placed on it by BKC, HJPL has not been able to open new restaurants or obtain further third party franchisees, with some very limited exceptions. However, there was no suggestion that in that period HJPL has continued to suffer any financial embarrassment or difficulty, and the simple facts are that there is the unchallenged evidence of Mr Cowin as to his estimate of the rate at which restaurants would have been opened, and as to how they would have been financed if HJPL had been unable to do so, which was unchallenged.

583 The claim HJPL has made is a lost opportunity claim, namely that it has been wrongly delayed in opening 17 company-owned restaurants per year from September 1995, and that it has not had approval for 17 third party franchisee operated restaurants per year. The claim, as submitted by Mr Bathurst, is formulated on the basis that HJPL would have opened new restaurants progressively after 31 December 1996 to "make up" for the lost restaurants and, in calculating its loss, it has assumed that the "lost" and "make up" restaurants would have had a 20 year franchise term.

584 Mr Oslington submitted that HJPL has failed to prove an intention to open new restaurants after 1995, and he has pointed to Mr Cowin's evidence that before September 1995 BKC had not refused any approval sought to build new restaurants. He has noted the National Development Reports, which were prepared by Mr Montgomery in consultation with Mr Cowin, and the significant number of restaurants reported as being under consideration in the August 1995 Development Report as being consistent with a decision having been taken by HJPL, at least by August 1995, to significantly curtail further expansion.

585 Mr Oslington submitted that even if HJPL had proved there were no financial constraints on opening new restaurants, and that it would have been able to obtain the approvals required under clause 4.1, which it is submitted it has not done, the assumption of 17 restaurants per annum upon which the damages are assessed has not been made good, and the validity of the assumption is denied by an historical analysis of forecasts and store openings. He submitted that the reliable and cogent evidence which could establish HJPL's intention and/or ability to open new restaurants was in the hands of HJPL "and it was not called". He referred to the detailed files, which were not tendered; and the absence of evidence from Mr Montgomery, the National Development Manager, which, for reasons to which I shall refer, I do not regard as significant. In these circumstances he submitted that HJPL had failed to prove it would have opened 17 restaurants per year, and:-

"This is the only assumption about the number of new restaurant openings incorporated into Mr Gower's model. Mr Gower has not modelled the damages (if any) which would flow if different assumptions about restaurant openings are made."

Mr Gower was the expert accountant called on behalf of HJPL. Mr Oslington's submission, in this regard, was that the case made by HJPL was 17 restaurants "or nothing". I do not agree that that is the way in which damages have to be assessed.

Opportunity Loss

586 In looking at an opportunity loss the plaintiff is entitled to take a basis on which it alleges it has suffered loss. The defendant is entitled to say that that loss has not been established and, indeed, that no loss has been established. However, the fact that the plaintiff may have asserted loss at a certain level and the defendant may have asserted no loss does not mean that the Court can only determine which of those two extremes is correct. The Court's function is to decide the amount of damages which it considers the plaintiff has sustained. It is not correct, as a matter of law, to say that unless the Court can find the highest case for which the plaintiff contends, the Court cannot award damages for such loss as the evidence supports, the onus, of course, being on the plaintiff. No doubt recognising this, Mr Oslington submitted that if the view was taken that HJPL may have opened some new restaurants if the Development Agreement had remained on foot, the number of restaurants and the States in which they would have been opened "is left to speculation". It was submitted that it was left to speculation due to the failure of HJPL to call material evidence in HJPL's possession, namely the files, or within HJPL's power to call, namely through Mr Montgomery.

587 The submission continued:-

"All HJPL has done, through Mr McCarthy, is prove Mr McCarthy's 1994 projections, and given some evidence, of little weight, about the availability of restaurant sites in various States. If some new restaurants may have opened in some years after 1997, there has been no attempt by HJPL to prove which of seventeen restaurants distributed between the States in Mr Gower's model would have remained."

588 A submission such as this, in a case in which I have found that the inability to open new restaurants was the fault of BKC, has, if I may say so with respect, a somewhat hollow ring. Further, it is not correct, in my opinion, to say that HJPL had relied only on Mr McCarthy's evidence. There was a deal of evidence from Mr Cowin, to which I have referred, which was not challenged in cross-examination, and, for the reasons I have stated, Mr Cowin was the person in the best position to give such evidence.

589 Mr Oslington's submissions then moved to HJPL's financial ability to open new restaurants. He submitted the most telling reason to demonstrate its inability flowed from a comparison of the 1995/1996 budget given to the banks in April 1995 and the actual expenditure during that financial year. Mr Oslington referred to the evidence of Mr Butler, which stated that the restaurants to be opened were determined by Mr Cowin and Mr Montgomery and, ultimately, Mr Cowin approved the various development plans. Mr Oslington pointed to the fact that the business plan given to the banks in April 1995 forecast 15 restaurants opening during 1995/1996 at a total cost of $7.07m, and 12 new restaurants opening in 1996/1997. Reference was made to a possible concession made by Mr Butler that there may not have been enough money to engage in opening the number of new outlets included in the 1995/1996 business plan given to the banks by August 1995, and a fairly detailed analysis was made of his evidence about the moneys available. Emphasis was placed upon the fact that the bulk of the available capital was spent on refurbishments and miscellaneous equipment replacement.

590 Whilst Mr Butler's evidence, together with that appearing in memoranda from Westpac and National Australia Bank, was subjected to careful scrutiny, I do not consider it went beyond the concession made by Mr Bathurst and, in any event, the diary note of National Australia Bank of 21 June 1995 showed that steps were to be taken "until such time that trends have been arrested". This was hardly evidence of some terminal financial condition within HJPL or the Group. The financial position of HJPL and the CFAL Group was considered in some detail and, at p.259 of the written submissions, Mr Oslington referred to paragraph 9 of Mr Cowin's statement of 9 June 1999. He said if the matters referred to in that paragraph were truthful "new restaurants would have been included in the 1996/1997 budget, unless Mr Cowin knew operational approval could not be achieved". This, if I may say so with respect, is speculative. By that time BKC was asserting operational disapproval and withholding financial approval and, by about this time, it was purporting to terminate the Development Agreement. In these circumstances, Mr Cowin's evidence had to deal with the position which then existed in consequence of BKC's actions. Mr Cowin was disputing the right of BKC to act as it was. However, critical to this is the failure by Mr Oslington to cross-examine Mr Cowin to seek to make good these various propositions. I have referred to the position in relation to Mr McCarthy. In my view, there was a clear obligation to cross-examine Mr Cowin on this evidence if the submissions now relied upon were to be made.

591 This point is further made in Mr Oslington's submission that the statement of 9 June 1999 was put on after the commencement of the hearing and was the first time Mr Cowin made reference to any such preparedness. However, he was not cross-examined on it. Further, it was submitted that notwithstanding Mr Cowin's major equity in a number of private companies "whose accounts reveal significant wealth", no attempt was made to demonstrate how that wealth could or would have been accessed to fund HJPL or to demonstrate the terms upon which such funding would have been made available. None-the-less, the evidence of Mr Cowin was that this was his intention and, notwithstanding all the submissions which were made in relation to that, it was not a matter on which he was cross-examined. In my view, consistently with the principles enunciated in Browne v Dunn as explained in Allied Pastoral Holdings, there was an obligation to cross-examine Mr Cowin on these points if the submissions upon which reliance is now placed were to be made. This is pointed out in the last submission:-

"If Mr Cowin intended to make funds available for development, new restaurants would have been forecast in the 1996/1997 budget. They were not."

592 In my opinion, it is not open for such a submission to be made in the absence of cross-examination. Mr Cowin may have had a number of explanations, such as the operational disapproval, together with the freeze on third party franchisees as reasons for not including these matters in that budget. He may have been concerned about commercial confidences. He was never afforded the opportunity, notwithstanding his evidence as to his intention, to explain any of those matters. More importantly, his stated intention was not challenged. His evidence could not be suggested as so improbable or extraordinary as not warranting any credence, and that submission was not made. In those circumstances, I have come to the conclusion that in the absence of any cross-examination of Mr Cowin on these points there is no reason why his evidence should not be accepted. For the reasons to which I have referred, it was inherently probable.

593 Mr Oslington's submissions continued that HJPL has not established any readiness, willingness or ability to open any new company restaurants if the Development Agreement had remained on foot. In my view this submission must be rejected. He continued that if that submission was not accepted, and HJPL would have opened some new restaurants, it had not established a readiness, willingness and ability to have opened any new restaurants for at least the first two to three years after August 1995 "if for no other reasons than that HJPL has not proved it could have obtained operational approval, nor has it proved it had money to open new restaurants for at least the first two-three years". From this submission it flowed that the number of restaurants was a matter of speculation and had not been proved and, of course, there was continued reference to the absence of approvals under clause 4.1.

594 From this point Mr Oslington's submissions continued that Mr Gower's evidence was only capable of establishing "any damage" if the assumptions upon which his model was based were established, and he submitted that two critical assumptions were the number of restaurants to be opened each year and in what States and the discount rates. He said that the models did not enable damages to be assessed if changes were made to either of those assumptions. He continued that HJPL had not attempted to prove a method, which enabled me to find whether any damage had been suffered, and if so, how much if different assumptions were used, because his report only addressed the case "which HJPL chose to put". He continued that it was open to HJPL to attempt to prove damage on different assumptions or by a different method, and it could only be concluded that HJPL deliberately chose not to do so, and that neither Mr Gower nor Mr Bryant, the expert accountant called on behalf of BKC, suggested that damages on different assumptions could be arrived at through some process of extrapolation of the damages derived on the assumptions used by Mr Gower.

595 I shall return to a consideration of these submissions when I come to consider the amount of damages. At the moment that with which I am concerned is whether there is evidence on the basis of which it can be stated that HJPL would, but for the operational disapproval, the withholding of financial approval, the freeze on the recruitment of third party franchisees, and the purported terminations of the Development Agreement, have been able to continue with expansion. The onus is on HJPL to establish these matters. In my opinion it has discharged that onus. Firstly, it has proved that over the period from about 1969 there had been continuing development by way of the opening of restaurants by HJPL and third party franchisees introduced by it. Secondly, it has proved that that situation continued through the 1990's until, at least, the various actions of BKC to which I have just referred. Thirdly, it has proved that but for those actions that development would have continued although, in due course, I will have to look to see whether it would have continued at the same rate and, if not, whether it is permissible to accept another rate. Fourthly, notwithstanding such financial problems as HJPL was suffering in 1995, I am not satisfied that these were insuperable and, in any event, I am satisfied that had it been possible to continue to open restaurants Mr Cowin would have provided finance. Fifthly, the probabilities are all in favour of the conclusions to which I have come. Not only had HJPL been involved in this business for many years prior to the mid-1990's, but there was absolutely no rational reason why it would not continue to remain in it. It was obviously quite lucrative and HJPL had a massive amount of capital tied up in it. It had, through the various agreements with BKC, favourable franchise fee arrangements, and a business which BKC was seeking to either take over or have someone else take over. Sixthly, the business has continued, and on any view of the evidence, would have continued through the Service Agreement and existing franchisees. It has been continued in circumstances where BKC has, totally without justification, in my view, sought to hinder and thwart it. When one considers each of these matters, particularly taken in aggregate, there is no rational reason or explanation for HJPL wishing to abandon the business. Finally, if that had been its desire, the evidence is that there was ample opportunity for Mr Cowin to have entered into an agreement to sell out either to BKC or to a party BKC considered more favourably.

596 In its submissions in reply, HJPL dealt, commencing at paragraph 188, with the assumption of 17 restaurants per year from August 1995. After referring to Mr McCarthy's evidence, the submissions turned to the evidence of Mr Cowin and to his being "the guiding mind and will of HJPL" and the person "ultimately responsible for making all business decisions on its behalf". The submission was made, which I consider to be correct, that Mr Cowin had to be challenged on his relevant evidence and that he had not been.

597 It was submitted that the 17 restaurant assumption was supported by HJPL's having opened 16 during 1996, by the prior history of restaurant openings, and by Mr Gower's evidence that that assumption was not inconsistent with the ten year moving average for HJPL's restaurant openings as shown in Appendix C4 to Mr Bryant's report. Mr Bryant, who criticised the assumption, acknowledged that such criticism was based on the limited material provided to him by BKC's solicitors. The submissions then referred to the fact that BKC was looking at the position in the light of the breaches it had committed, rather than having regard to what would have occurred but for them. A telling comparison was drawn from the figures prepared by BKC to demonstrate the extent of HJPL's expansion and its success in recruiting third party franchisees, prior to BKC's impugned conduct. On the other hand Mr Oslington pointed to the fact that the history of restaurant openings did not support Mr Cowin's forecasts in relation to company owned restaurants and, more particularly, company owned restaurants combined with those opened by third party franchisees. Whilst this submission was made, it was not based on any cross-examination of Mr Cowin seeking to erode the forecasts or to make it appear unlikely that the forecasts would be met.

The Issues On The Computation Of Damages

598 A number of reports on the suggested methods of calculating damages were submitted by Mr Gower and Mr Bryant. There were differences in the assumptions made and the methodologies adopted by them and, in an attempt to narrow the issues, I requested them to prepare an Agreed Statement, which they did, it being dated 9 July 1999 and becoming Exhibit U. However, to a not insubstantial extent, this statement highlighted the differences between them, rather than narrowing to any great extent the issues. I do not say this critically, indeed I would wish to express my appreciation for the attempts by Mr Gower and Mr Bryant to provide a more easily understood method of calculating damages. It will be appreciated that their reports were lengthy and had appended to them various models and schedules.

599 I think a convenient starting point for determining the differences between the parties on the issue of damages is to have regard to Mr Oslington's submissions. I have referred to his written submissions. At Tp.4190, he commenced his oral address. He referred to p.243 of his written submissions and noted that the first claim to which attention was paid was that for damages arising from the loss of opportunity to open restaurants. He submitted, and this was accepted by HJPL, that it was not a claim that the restaurants were lost forever, but a claim that their openings would be delayed by five years, which is the lost opportunity calling for an assessment of damages.

600 The fundamental submissions of BKC were that the Development Agreement was duly terminated or, if it was not, HJPL had failed to prove any damage, because it had failed to prove that it was entitled to development approval and its readiness, willingness and ability to proceed with restaurant development. The submission then was that Mr Gower had modelled his damages on the basis of 17 restaurants being opened each year, and that he had not provided, nor been asked to provide, a formula or a method by which I could determine whether or not any damage was suffered if a different number of restaurants was opened each year.

601 This submission was developed, as it had been in the written submissions, by asserting that damages could not be assessed unless the assumptions made by Mr Gower, particularly as to the opening of 17 restaurants each year, was made good. It is convenient to deal with this submission immediately. As I understand it Mr Oslington was submitting that HJPL set out to prove a case based on the opening of 17 restaurants each year and that if HJPL failed to prove, as a matter of probability, that HJPL would have opened 17 restaurants each year, it had failed to prove any damage. Accordingly, if I am of the view that 17 restaurants would not have been opened, but a lesser number of restaurants may have been opened, it would not be open to me to award damages because the model provided by Mr Gower did not accommodate a lesser number of restaurants.

602 The task, which confronts me, is to consider whether HJPL has established that but for the breaches of BKC it would have opened restaurants, and that as a consequence of not being able to do so it has suffered loss for which it should be compensated, i.e. that it should be compensated for the lost opportunity to open those restaurants, although it is accepted that it will, in the future, on the hypothesis on which I am now proceeding, be able to do so. Thus the damages are restricted, at least to some extent, by the loss of opportunity to open the restaurants from 1995 to 2000, and the deprivation of income, which allegedly would have been earned in that period.

603 In Malec v J.C. Hutton Pty Limited [1990] HCA 20; (1990) 169 CLR 638, Deane, Gaudron and McHugh JJ said, at pp.642-643:-

"When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred."

604 In the present case I am not asked to determine whether the opening of further restaurants "has occurred", but whether that event "would have, but cannot now occur" during the period for which damages are sought or "allegedly might occur" at a later period.

605 Their Honours continued:-

"But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9% - or very low - 0.1%. But unless the chance is so low as to be regarded as speculative - say less than 1% - or so high as to be practically certain - say 99% - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51% probability of occurring, but to ignore altogether a prediction which has a 49% probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded. ... The approach is the same whether it is alleged that the event would have occurred before or might have occurred after the assessment of damages takes place."

At pp.644-645 their Honours said:-

"Secondly, in determining the chance that unemployability as the result of his back condition would have precipitated a similar neurotic condition, it is necessary to bear in mind that more than one probability is involved. There is the degree of probability that the plaintiff would have become unemployable in any event as the result of his back condition and there is the degree of probability that the happening of that occurrence would have precipitated a neurotic condition. When those two possibilities are combined, the chance that the plaintiff would develop a neurotic condition decreases exponentially. If, for example, and only by way of illustration, there was a 75 per cent probability of his becoming unemployable by reason of his back condition even if he had not contracted brucellosis and a 75 per cent chance that that unemployability would have caused a similar neurotic condition, there was only a 56.25 per cent chance (75 per cent x 75 per cent) that, if he had not contracted brucellosis, he would have developed a similar neurotic condition."

Their Honours concluded, p.645, that whilst the plaintiff was entitled to damages on the basis that the neurotic condition was a direct result of the defendant's negligence, those damages had to be reduced "to take account of the chance that factors, unconnected with the defendant's negligence, might have brought about the onset of a similar neurotic condition".

606 In the present case I consider that the probability is that HJPL would have continued to develop restaurants, but for the breach by BKC. However, I cannot be "practically certain", to the extent of 99 per cent, that such development would have proceeded, over each of the five years, at the rate of 17 restaurants per year. Therefore, I must take the chance that it would not have into account. The fact that I am satisfied, on the balance of probabilities, that HJPL would have proceeded to develop restaurants, does not entitle it, as a matter of law, to all the damages it claims on the hypothesis that it would have developed 17 restaurants each year, because I must assess that there was a risk that that might not have happened, such adjustment reflecting the chance that factors unconnected with the breach might have precluded its happening. At that point the relevant principle is re-stated by Mason CJ, Dawson, Toohey and Gaudron JJ in Sellars v Adelaide Petroleum NL & Ors [1994] HCA 4; (1994) 179 CLR 332 at p.355:-

"However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities."

607 Their Honours said that the "all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation", and that the approach conformed to the "long-standing practice of taking into account contingencies in the assessment of damages".

608 In this case, I am satisfied, on the balance of probabilities, that HJPL would have continued to develop. However, as I understand the principle, it is not open, unless I am at least 99 per cent sure, to award HJPL all the damages it would have suffered, as if that hypothesis had come to pass. Therefore, I must assess a figure to take into account the vicissitudes or contingencies to which the damages award must be subjected.

609 This question, in a context more akin to the present case, was considered recently by the Court of Appeal in Tszyu v Fightvision Pty Limited & Anor (1999) NSWCA 323 (13 September 1999). In that case a boxing fight promoter sought damages from, inter alios, a boxer, on the basis that but for his breach of contract he would have continued to fight in circumstances where the fight promoter would have derived income. The Court was necessarily confronted with the question as to what would have occurred but for the breach by the boxer of his contract, which involved considerations of the number of fights in which the boxer would have engaged, the profits which would have been derived from them, the amount to which the promoter would have been entitled from them, and, of course, the inherent vicissitudes and contingencies that the underlying circumstances would have transpired necessary to enable the boxer to have engaged in such fights before crowds and in circumstances where other income would have been derived which would support the damages claimed.

610 The Court, Sheller, Stein and Giles JJA, dealt with the attack on the trial Judge's findings of fact on damages in some detail, commencing their remarks by repeating that mere difficulty in estimating damages does not relieve a Court from the responsibility of doing so as best it can: para 111. In that case the trial Judge did not make an adjustment by having regard to a percentage figure to reflect vicissitudes and contingencies. He did, however, reduce certain of the plaintiff's claims. Presumably, in each case it is a matter of judgment.

611 At paragraph 138 their Honours referred to the passage in Malec, which I have cited, and, in paragraph 139, they said:-

"The context was assessment of damages in tort for loss of earning capacity, but the principle is the same in the assessment of damages for loss of profits in consequence of breach of contract (The Commonwealth v Amman Aviation Pty Limited at 88,104, 116-226) and of contravention of the Trade Practices Act 1974 (Cth) (Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 349-355). The effect of this approach to past hypothetical situations on causation of loss, as distinct from assessment of damages, was considered in this Court in Daniels v Anderson (1995) 37 NSWLR 438 at 527-531. Applying what the High Court had said in Sellars v Adelaide Petroleum NL at 353 and 355, Clarke and Sheller JJA, with whom Powell JA agreed on this point, said (at 531) `The issue of causation should be approached on the basis of proof upon the balance of probabilities with the qualification that an assessment of whether the chance which is said to have been lost had a value is to be made upon the possibilities or probabilities of the case.' Causation does not arise in the present case."

612 It was not suggested by Mr Oslington that if the breaches alleged against BKC were found to exist they were not, save in the way to which I have referred, causative of the loss. I am satisfied on the balance of probabilities, that the breaches were causative of loss because, I am satisfied to the same degree, that HJPL would have continued to open new restaurants.

613 At paragraphs 140 and 141 their Honours said:-

"140 It would have been erroneous to apply a balance of probabilities test to the programme and the earnings, treating as certain the past hypothetical events of promotion or co-operation by Fightvision of bouts in which Mr Tszyu participated and earnings from those bouts as put forward in the evidence of Mr Mordey if satisfied on the balance of probabilities that those events would have occurred. That would have then been unfair to the defendants, because it would have treated as certain a prediction of events with a 51% probability of occurring. It would equally have been unfair to Fightvision to have ignored the events altogether, and so awarded no damages, if the prediction of their occurrence was given only a 49% probability. The correct approach, given the causation of loss was not in issue and the task was to assess the damages for loss of the commercial opportunity of promoting or co-promoting fights in which Mr Tszyu participated, was according to the degree of possibility or probability of such bouts occurring and bringing earnings as claimed.

141 It is not essential, however, in making an assessment of damages of this kind, to express a percentage possibility or probability of the occurrence of the events necessary for the claimed lost profits, here the number of fights and the amounts of earnings."

Paragraph 141 was said in the context of the findings by the trial Judge in that case. Their Honours were not suggesting, as I understand it, that such an approach was not permissible. Indeed, in many cases, it is the test traditionally applied.

614 Their Honours then quoted with approval from the decision in Norris v Blake (No 2) (1997) 41 NSWLR 49, the passage in the judgment of Clarke JA, with whom Handley and Sheller JJA agreed, at p.67:-

"Where a valuation of a loss has to be made and the extent of the loss depends upon an uncertain event, which has not occurred by the time the evaluation is made, such evaluation must be made by reference to the chance of the event occurring, and not by reference to whether or not the occurrence was or is probable."

615 At paragraph 142 their Honours said it made no difference in principle if a past hypothetical event is in question, rather than a future one, or if the damages for loss of profits, rather than for lost earning capacity, is in question.

616 At paragraph 144 they continued:-

"So where there is controversy over the validity of a hypothetical exercise of earning capacity, or hypothetical events necessary for claimed lost profits, being the hypothesis for which the plaintiff contends, to say that it is more probable than not that something less than that for which the plaintiff contends would have occurred may be a way of allowing for imponderables or chances and coming to the degree of probability of that for which the plaintiff contends. In substance, that is what was done in Norris v Blake (No 2), although with further allowance for the particular prospect of greater success. If the question is whether, on a numerical scale, a past hypothetical event would have been 1 or 10, by a finding that it is more probable than not that the event would have been 6 may be meant that there was a 60% chance of its being 10."

617 It is my understanding that unless it can be said that there was no chance, in the sense to which the High Court referred in Malec, of the hypothesis coming to eventuality, one must reflect in the award of damages, even though one may not be satisfied that the damages amount to that for which the plaintiff contends, unless, of course, one is satisfied that there is a practical certainty, a discounting factor and the Court must, ultimately, work out the damages as best it can from the evidence. I do not understand any of this discussion to proceed on the basis that the onus does not remain on the plaintiff to prove its damages.

618 In this state of the law, I do not accept that unless HJPL proves, on the balance of probabilities, that it would have opened 17 restaurants in each and every year, it has not established an entitlement to damages.

619 Mr Oslington then submitted that I should accept Mr Bryant's "cash flow" approach, in preference to Mr Gower's "loss of profit" approach, and that I should accept Mr Bryant's preferred discount rate to that of Mr Gower's.

620 Mr Oslington's oral submissions did not go beyond identifying these three points as those relevant to a determination of damages for lost opportunity. His submissions reflected his written submissions and, commencing at Tp.4193, dealt with certain precise submissions made on behalf of HJPL. However, it seems to me, that in the light of those submissions the matters to which I am entitled to have regard, as being the matters in issue, are the three thus identified. I have dealt with the first. The second is the question as to whether the cash flow approach or the loss of profits approach should be preferred.

621 At Tp.3582 Mr Bryant stated his disagreement with Mr Gower's use of profit as opposed to cash flow as the basis for discounting, although he said he understood the inquiry was to establish the sum needed to restore HJPL to the position it would have been in but for the assumed breach. Mr Bryant disagreed that what HJPL had lost was various profits, which would have been available to it from time to time. He took the view that it was "purely a loss of access to cash", and he agreed that accounting standards had, as one of their objects, an attempt to bring about a matching between expenditures and receipts for the purposes of ascertaining whether a particular venture had made a profit or loss. He also agreed those conventions dictated to a great extent what use a company may make, for example by way of distribution of profits, of moneys it had from time to time, but he disagreed that a more accurate methodology for determining the real loss of HJPL, in the present circumstances, was to ascertain the profits it had lost from time to time, because it was in respect of them that HJPL could make unfettered decisions as to what it wished to do with the money. His reason for disagreement was stated thus:-

"Because profits, as recorded in profit and loss accounts, are an attempt to measure profits for the purposes of, for example, reporting to shareholders. But, as I indicated earlier on, they include calculations assuming that cash flow - cash that has actually been spent on fixed assets should, for the purposes of accounting, be treated as an expense over a number of years as those assets are used up. But what has actually happened is that the company has been deprived of cash inflows resulting - being the profits that it was expecting to earn from these restaurants, but before that it would have been required - before earning those profits, it would have been required to make cash outflows. When you discount a stream of figures that reflects the cash in and out as compared with discounting the profit and loss figures, you can get a very different answer. And the discounting of the profit and loss figures is fairly meaningless. In fact, it is almost completely meaningless, because discounting is all about the use of cash. It is all about what is the cost of not having some cash when I expected to have it, and it is the - what Hungry Jack's is claiming here that it has lost is a stream of future cash inflows which would have to have been preceded by some outflows, and only by discounting on that basis do you get a sensible figure to award to-day": Tp. 3583.

The discounting, to which reference was being made, was by a figure, which would properly compensate HJPL by deriving the present value at 31 December 1999 of lost profits that occur either prior to or subsequent to that date, not a figure to which regard must be had in assessing the contingences and vicissitudes.

622 At Tp.3585 Mr Bryant agreed that both the cash flow and the profit and loss methods dealt with same figures to be found in a profit and loss account over a number of years, "so we are not talking different figures; we are merely talking when do you reflect something as having happened". He continued:-

"And the reason we are doing it is to work out what has it cost Hungry Jack's not to have this money, or alternatively, for some period what have they saved through not spending money. For example, if there would have been a cash flow this year, my methodology would say that you have attributed some costs to that this year. There would have been a cost of borrowing money or using equity to access it, to use that money.

My methodology says, because that is happening this year, you have to calculate the interest in relation to this year and a whole year's worth of it. If you use a profit and loss methodology, you are assuming that that cash flow didn't happen this year, but it would be reflected as depreciation over the next twenty years. So you will then be calculating interest on a sort of notional borrowing of little amounts over twenty years when that is not what has happened. What has happened is a borrowing this year to fund the capital."

623 Mr Bryant agreed that he treated as an outgoing the expenditure of the sum to buy an asset, which formed part of the cash flow, whereas Mr Gower, as Mr Bryant understood it, assumed that the expenditure happened "in little bits over twenty years rather than all happening at once upfront".

624 At Tpp.3588-3589 Mr Bryant said:-

"When we were talking about the spending of money by the investor, the conventional profit and loss analysis would say that the spending of that money does not reflect in the profit and loss account that year. It reflects on the balance sheet but not on the profit and loss account. The profit and loss account will only record that expenditure progressively over twenty years as the asset is used up. That is very sensible for the purposes of reporting whether or not a company is making a profit in accordance with accounting standards, because what that is trying to do is to take account of the extent to which the assets are used up during each year. But that is not what we are trying to do here. What we are trying to do here is to say what has it cost Hungry Jack's not to have the business that it says it has been deprived of. In years in which there would have been cash inflows, it has been deprived of the use of those cash inflows, before any depreciation, and in the years in which there would have been cash outflows, it has, if you like, had the benefit of not suffering those outflows. And if you don't calculate the interest on that basis, you don't get to a sum that properly compensates for the loss of the use of the money or, alternatively, for the benefit of not spending the money."

Mr Bryant agreed that that last answer indicated the prime area of disagreement on this point between himself and Mr Gower.

625 In his written submissions Mr Hutley, who conducted the case for damages for HJPL, made the point that Mr Bryant's methodology took account of money "saved" where cash outflows had not occurred, but that he had acknowledged that a benefit of that kind would only have been received by HJPL, if its shareholders had already subscribed by way of capital the amount of money, which would have been expended for development in the period 1995 - 2000, before August 1995. However, in my opinion, that tends to point up the validity of the approach taken by Mr Bryant in the sense that unless one looked at what would actually have happened it becomes very difficult to make any meaningful assessment. The underlying assumption, at this point, was that HJPL would have had to have had the money from some source if it had proceeded with the development programme.

626 There was more evidence on this matter and great debate about it. I have come to the view that the cash flow basis is preferable to the loss of profits basis, when one is giving consideration to what might have occurred but for the breach, because it takes into account, in the view to which I have come, the reality of the situation with which HJPL would have been confronted; namely the necessity to expend money from which it would have derived benefits. As Mr Bryant pointed out, as a matter of reporting, the appropriate method may well be by having regard to the profit and loss situation. However, in seeking to put HJPL into the position in which it would have been but for the breach, in the particular circumstances of this case, it seems to me that that is achieved by looking at what HJPL would actually have done. That can be seen better, in my view, from the adoption of the cash flow method, and, what is more, it seems to me to accord better with the fact that HJPL, as I am satisfied it would have done, was developing its business, each restaurant forming a part of that business but, not relevantly, being used as a separate entity for the purpose of the determination of the overall profit and loss of the business. I appreciate that each individual restaurant contributed to that but, in a business of this type, one is dealing with restaurants, which have been part of it for many years and more recently acquired ones. Some are more profitable than others. But, in the end, one is concerned with the overall effect of their operations, which, I consider is better addressed by the actuality arising from the cash flow method, essentially for the reasons put forward by Mr Bryant.

627 The final matter concerns the discount rate, in the sense I have explained, to be applied. It was submitted on behalf of HJPL that in the Agreed Statement of Experts of 9 July 1999, Mr Gower expressed the view that a 9 per cent discount rate was appropriate based on a risk-free rate of 5.5 per cent. In his report of 31 May 1999 and in the Agreed Statement of Experts, Mr Bryant expressed the view that a 16.5 per cent discount rate should be applied, in reliance on the Capital Asset Pricing Model, ("CAPM"), and a risk-free rate of 9 per cent. Mr Gower did not consider that the application of the CAPM was appropriate.

628 Mr Bryant's evidence as to the use of the CAPM methodology was not entirely convincing. It is summarised in paragraphs 36.38 et seq and, in the end, it appeared that but for his application of a 25 per cent increment because HJPL was unlisted, he and Mr Gower would have had little difference as to the appropriate discount rate to be applied using the CAPM methodology. Mr Bryant also gave some evidence as to the risk-free rate, which was subsequently and very properly in all the circumstances, retracted to some extent by Mr Oslington on 23 August 1999: para 36.40. In all the circumstances I find that I am unable to adopt Mr Bryant's approach to the discount rate based on the CAPM method.

629 Subsequently, Mr Bryant expressed the view that a discount rate of not less than 17.5 per cent should be applied as reflecting the return of an "average restaurant" operated by HJPL in the future. He agreed that he had calculated this on a company-owned restaurant opened on 1 January 2000 and, to that extent, he had departed from the assumption that damages were to be measured from August 1995, and he had not sought to determine the return upon HJPL's existing business projected from August 1995 forward. He was unable to state whether the discount rate would have been higher or lower if calculated as at August 1995.

630 I have some further difficulties with Mr Bryant's evidence in relation to this matter, which are referred to in paragraphs 36.42 et seq.

631 Mr Gower preferred a discount rate of 9 per cent. This rate was not subjected to the same criticism as Mr Bryant's preferred discount rates. It is, in my opinion, the one which should be accepted.

632 The next question is the period for which the restaurants would have operated. HJPL submitted that the period should be for 40 years to accord with BKC's practice, rather than 20 years. It placed reliance on Mr Fitzjohn's evidence that "in most cases" franchisee agreements would be renewed at the expiry of the first 20 years: Tp.2202, and on HJPL's history in the business. I am of the view that the 40 year period should be adopted, but that a higher percentage for contingencies should be applied because of the longer period during which might occur. Finally, I consider that it is appropriate to proceed on the basis that the evidence established, which I accept, that leased restaurants would have been utilised.

633 On the question of the amount of damages for loss of opportunity to open new company-owned restaurants I am of the view that the cash flow method with the adoption of a 9 per cent discount rate should be applied over a period of 40 years.

634 In calculating the loss of profit Mr Gower adopted three alternative samples to represent the type of store which would have been opened in the period after August 1995. "Sample 1" was comprised of new or refurbished stores, located in suburban areas with drive-throughs, external seating, playgrounds and indoor seating, and 12 restaurants in Western Australia, 8 in South Australia, 11 in Victoria, 6 in New South Wales/ACT and 9 in Queensland. Mr Cowin gave evidence supporting that calculation upon which he was not cross-examined. The second sample, ("Sample 2"), comprised the 33 restaurants opened by HJPL between December 1992 and May 1996 and, accordingly, a larger sample of restaurants on which to predict the performance of those which would have been opened from August 1995, but for BKC's withholding of expansion approval. The third sample, ("All Stores Sample"), comprised all the stores, whenever opened. It seems to me that "Sample 1" is the appropriate one to use, as reflecting the type of stores Mr Cowin said would be opened.

635 I have noted Mr Oslington's attack that there was no evidence to support any method of calculating damages in the event of it not being found that 17 restaurants would have been opened. There is a response to this in paragraph 36.27 of HJPL's written submissions, in which it is noted that a discount of 22.5 per cent would be applicable if no more than 11 stores would have been opened. What I propose to do is to adopt a percentage for discounting for contingencies and vicissitudes, which will have regard to the risk, as best I can assess it, which assessment I make based on the history of HJPL and my estimation of the future as disclosed by the evidence. In making that assessment it is appropriate to have regard to the possibility that Mr Cowin's forecasts may prove unduly optimistic, an assumption which in no way derogates from my acceptance of his evidence. It is a judgmental assessment made doing the best I can to evaluate the various contingencies, with the benefit of the evidence of HJPL's history, the type of business, its aspirations for the future and the risks which may be encountered, particularly having regard to the length of time involved. The percentage I propose to apply is 55 per cent. Accordingly the damages for the inability to open company-owned stores is to be calculated by reference to the cash flow method based on a 9 per cent discount rate for "Sample 1" over a period of 40 years reduced by 55 per cent, namely, on the figure of $96,716,000 less 55 per cent, which equals $43,522,200.

636 The next figure to which I have regard is the loss of opportunity by HJPL to introduce third party franchisees. I have concluded, for the reasons to which I have referred, that this was caused by the conduct of BKC. The basis on which the claim is made is set forth in paragraphs 36.48 et seq. BKC's attack was, firstly, that the number of restaurants for which HJPL contended would not have been achieved, notwithstanding that it was founded, in part, on the uncontradicted evidence of Mr Cowin. There seemed to be no substantial dispute on the figures, the claim of HJPL based on the 9 per cent discount rate, which I accept and which was in issue, being $39,925,000. In my opinion, the contingencies involved in this exercise are not quite as great. I accept that there were franchisees available, and that HJPL would have taken advantage of them. In my judgment, there should be a discount of 40 per cent, reducing $39,925,000 to $23,955,000.

637 The next claim is for $4,405,000, based on the 9 per cent discount rate, for loss by HJPL of service royalty at "Hungry Jack's" restaurants opened at Shell service stations. This is the claim for equitable compensation based on the breach of fiduciary duty, which I have held to have been established. Mr Gower's evidence, at a financial level, on this aspect was not challenged and, in his oral submissions, Mr Oslington identified the issues between Mr Gower and Mr Bryant as ones concerning the allowance which ought to be made for overheads and the discount rate.

638 In his initial report Mr Gower made no allowance for overhead and used a discount rate of 9 per cent. Mr Bryant's response commenced at paragraph 245 of his report of 1 June 1999: part of Exhibit 9. Mr Bryant stated the assumptions on which Mr Gower proceeded, including that HJPL would have incurred no incremental overhead to provide services to these restaurants, and noted that that approach differed from the one taken by Mr Gower in calculating the loss relating to third party franchisees for which he allowed 2.5 per cent. Mr Bryant considered that 7 per cent, being the amount he had applied for third party franchisees, should be allowed. In the Agreed Statement of Experts, paragraph 16, Mr Gower had provided for 6 per cent out of franchise revenues, whilst Mr Bryant had asserted that at least 7 per cent was required. In my opinion, Mr Bryant has shown a consistency in approach, which should be followed, and, if that is done, the difference in the figures does not justify departing from Mr Bryant's assessment of 7 per cent.

639 In his report of 25 August 1999, part of Exhibit U, Mr Gower recalculated the figures by providing a 2.5 per cent figure, thus reducing $2,892,000 to $2,819,000, the base figure being worked on a 9 per cent discount rate. Assuming the 9 per cent discount rate for the moment, I consider the figure of $2,892,000 should be reduced by 7 per cent i.e. to $2,689,560 to which tax at 36 per cent, i.e. $968,242, must be added thus giving a figure of $3,657,802.

640 So far as the discount rate is concerned, Mr Gower maintained that the proper rate was 9 per cent. Mr Bryant was of the view that 16.5 per cent should be allowed on the basis that Mr Gower had failed to take into account the correct date of the losses. The losses in this instance are far more susceptible of being attributed to dates certain than those with which I have dealt thus far and, on that basis, it seems to me that Mr Bryant's analysis is the more compelling, founded, as it is, on the legal proposition, (which he assumed), that the damages flow from the date of breach after which the Court has a discretion to award interest. The result, as I understand it, is reflected in Appendix F1 to Mr Bryant's report of 1 June 1999 and produces a figure of $2,164,897. In my opinion that is the basic figure which should be applied.

641 Mr Oslington submitted that the contingencies and the continued enjoyment of the royalty must also be considered as the claim was to the year 2017 and based on a continuance at Shell sites until that time. On the other hand Shell, in its settlement agreement with HJPL, has indicated a desire to continue the restaurants. In my opinion the figure to which I have referred should be reduced by 30 per cent to reflect the contingencies, i.e. rounded to $1,515,428.

642 The next head of damage is the alleged loss to HJPL arising from the opening of stores in Western Australia, South Australia and Queensland in breach of the Development Agreement. This is the "cannibalisation claim". It arises from the fact that under clause 7.3 of the Development Agreement, if HJPL was in compliance with the Development Schedule, its prior approval was required to the opening of new restaurants in those States, and it could withhold that approval in the circumstances to which reference has been made. HJPL has alleged that BKC breached the Development Agreement by authorising Shell to open Hungry Jack's restaurants situated at two sites in Queensland and Westlakes in South Australia over HJPL's objection. Mr Gower was asked to make certain assumptions as to the extent of the cannibalisation on nearby HJPL stores. The assumptions referred to in paragraphs 36.63 and 36.64 were taken from a research study prepared by an entity commissioned by BKC to determine the extent of cannibalisation. There was a deal of evidence on this point, which, in my opinion, is adequately summarised in Mr Hutley's written submissions. Mr Oslington submitted, Tp.4193, that Mr Gower's report was based solely on a number of assumptions he made in which he did not address the criticism of the conclusions reached by Mr Bryant and the reasons Mr Bryant had for reaching them. On the other hand, Mr Bryant was cross-examined to some effect, as was Mr Power, to show that the assumptions on which Mr Gower proceeded, stemming as they did from the source to which I have referred, were not unreasonable.

643 However, it is not correct to say that Mr Gower did not address the criticisms proffered by Mr Bryant, his figure having been reduced from $3.4m to $3,088m. I am not satisfied that there is an overlapping between this and the previous claim. Each is predicated on a different basis and is separate.

644 The claim in this respect is for $3,088,000, which I accept. This claim must also be discounted. There are difficulties in making an assessment of the loss, notwithstanding that I am satisfied, on the balance of probabilities, that there would have been one. I would reduce it by 40 per cent to $1,852,800.

645 HJPL is, accordingly, entitled to:-

(i) $ 43,522,200 for delay in opening company-owned restaurants.

(ii) $ 23,955,000 for loss of opportunity in introducing third party

franchisees.

(iii) $ 1,515,428 for equitable compensation.

(iv) $ 1,852,800 for "cannibalisation" claims.

$ 70,845,428

The damages are payable, prima facie, from the date of breach and interest will have to be calculated.

646 A claim was made for exemplary damages. I do not consider HJPL is entitled to such an award in respect of its claims for breach of contract: McGregor on Damages (16th Edition) (1997) para 442; Halsbury's Laws of Australia (Volume 6) para 110-11060; Butler v Fairclough & Anor [1917] HCA 9; (1917) 23 CLR 78; and Gray v Motor Accident Commission [1998] HCA 70; (1999) 73 ALJR 45. Although Wilcox J left open the possibility in Flamingo Park Pty Limited v Dolly Dolly Creation Pty Limited & Ors (1986) 65 ALR 500 at p.526, I consider, as I held in Wehbe & Anor v Rolando Pty Limited & Ors (1990) NSWSC 384 that the authorities were such that exemplary damages could not be awarded.

647 So far as the claim for equitable compensation is concerned, and notwithstanding that I have held that the circumstances giving rise to it involve a gross breach of fiduciary duty, I am not satisfied that such a claim gives rise to an award of such damages or, if it does, that the facts demand more than compensation for the breaches, notwithstanding their serious nature.

The Failure By HJPL To Call Mr Montgomery

648 Mr Oslington submitted that I should draw the inference provided in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 that Mr Montgomery could not have said anything to assist HJPL's case, notwithstanding that he was its National Development Manager and, therefore, intimately involved in and associated with development, which is at the heart of much of the present dispute. I have referred in some detail to the way in which Mr Montgomery conducted himself. It is quite obvious that the proper inference is that he would not have been, as a matter of probability, helpful to HJPL. Indeed, as I have said, I have no doubt that he was actively seeking to undermine HJPL at all relevant times.

649 It is now well established that there is no obligation on a party to necessarily call a witness to avoid the inference arising from Jones v Dunkel.

650 In Favre v Arenales & Anor (1992) 27 NSWLR 437, Mahoney JA said, at p.450, that:-

"A Jones v Dunkel inference may not arise if, for example, a witness has a reason for not telling the truth or refusing to assist and the party who may call him is aware of this."

651 In the present case HJPL had strong grounds for believing, on the material before it, that Mr Montgomery may well not assist it and, further, the prima facie evidence is that he was in dereliction of his duties to HJPL.

652 In Ghazal v Government Insurance Office of New South Wales (1992) 29 NSWLR 336, Kirby P said, at p.343:-

"The rule in Jones v Dunkel is one of commonsense reasoning. It provides that an unexplained failure by a party to call a witness may, in appropriate circumstances, lead to an inference that an uncalled evidence would not have assisted the case of the party who might be expected to call the witness. It is important to note that this is a facility. It is not an obligation in the reasoning of the decision-maker cf Cafe v Australian Portland Cement Pty Limited (1965) 83 WN (Pt 1) (NSW) 280 at 287 ... The rule has no application if the failure to call the witness is satisfactorily explained or readily understood ... But failure by a party to call a witness likely to be friendly to the interests of the other party has been held sufficient to entitle a court not to draw an adverse inference from such failure." (His Honour's emphasis.)

There was no "unexplained" failure in the present case. The evidence made it clear, in my opinion, why HJPL did not call Mr Montgomery. Thus the failure by HJPL to do so was either "satisfactorily explained or readily understood".

653 It was submitted on behalf of HJPL that there was an obligation on BKC to call Mr Montgomery and that its failure to do so gives rise to a Jones v Dunkel inference in relation to his conduct and its complicity in it: Payne v Parker [1976] 1 NSWLR 191. I note the submission but, for the purposes of these reasons, it is not necessary to determine that point.

Some Other Issues Which I Will Not Consider

654 I have stated that I do not propose to consider the issues of election, waiver and estoppel in relation to the contractual counts. Nor do I propose to consider the claims for relief against forfeiture or the entitlement to construe the Development Agreement by reference to earlier agreements into which the parties had entered: Punjab National Bank v de Boinville [1992] 1 WLR 1138. Once again the parties have set out their submissions on these points in great detail and, if I be wrong in the views to which I have come, and if in consequence of my being wrong those points become relevant, the material necessary for their consideration by the Court of Appeal, if that Court is otherwise disposed to consider those issues, is available.

The Successor Restaurants

655 HJPL has claimed relief, including relief under s.87 of the Trade Practices Act, requiring BKC to offer it a Franchise Agreement for each of the Burger King restaurants situated at Fulham, Strathpine, Claremont, Ipswich, Springwood, Balga, Barrack Street, Beak House, Bunbury and Bull Creek for an additional period of either 20 years or, alternatively, 15 years from the expiry of the initial term of the Franchise Agreement for each of those restaurants. The initial term of each of those Franchise Agreements commenced on the date each restaurant opened for business and was to expire at midnight on the date preceding the 15th anniversary of that opening. I shall refer, perhaps repetitiously, to certain of the terms of those agreements. Clause 9 stated:-

"Option at end of term

Provided that Franchisee shall have substantially complied with all of the terms and conditions of this agreement and any other agreement between Franchisee and Company, and shall have substantially complied with the operating standards and criteria established for Burger King restaurants, then at the expiration of the term hereof, the Company will offer Franchisee the opportunity to remain a Franchisee hereunder for one additional period of fifteen (15) years, provided that:-

A. Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernise the restaurant building, premises, signs and equipment so as to reflect the then current image of Burger King restaurants.

B. Franchisee must have the right to remain in possession of the premises, or other premises acceptable to the Company for the new term. If Franchisee elects (or is required) to relocate, then Franchisee shall pay Company's reasonable expenses in relocating, developing or evaluating the new premises. Company shall not be required to extend its credit or resources in obtaining financing for premises or equipment.

C. Franchisee shall execute a new Franchise Agreement on the form then being used by Company in the United States, which may differ from this Franchise Agreement as to royalty. The rate of royalty shall be re-negotiated at that time taking into account the Burger King rate of royalty then prevailing in other countries of the world.

E. Franchisee shall give Company written notice of its desire to exercise its option to continue as a franchisee not less than fifteen (15) months prior to the expiration of the term of this agreement."

656 The clause provides a number of difficulties of construction. First, the opening words predicate that at the expiration of the term BKC will offer HJPL "the opportunity" to remain a franchisee for one additional period of 15 years. In the way in which the words appear BKC is not obliged to make that offer until the expiration of the term.

657 Sub-clause E contains the proviso that HJPL shall give BKC written notice of its desire to exercise "its" option, presumably that being the requirement that BKC "will offer HJPL the opportunity", not less than 15 months prior to the expiration of the term. It is not in issue that HJPL never gave such notice to BKC, nor that BKC took any point in that regard.

658 Thirdly, the giving of such notice so long in advance of the expiration of the term could create problems because, firstly, during that period there may be an allegation that HJPL had not "substantially complied" with the relevant terms and conditions, and, secondly, and perhaps more importantly, it may not at that stage have a right to remain in possession of the premises, or premises acceptable to BKC for the new term. Further, at that stage, HJPL may not be aware, and in all probability would not be aware, of the form of the Franchise Agreement "then being used" by BKC in the United States, nor of the royalty being charged.

659 Perhaps the answer to these perceived difficulties is that it was only necessary for the written notice "of its desire" to be given and the matters to which I have referred were to be sorted out in due course.

660 Finally, the provision in relation to the royalty is, in my opinion, an agreement to agree, the rate of royalty not being fixed as that prevailing in other countries of the world, but by "taking into account" that rate of royalty in the re-negotiations. BKC took no point about this.

661 I have also flagged the submissions in relation to proviso A. Mr Bathurst submitted that there is no need to enter into a concluded agreement in relation to capital expenditures, but an agreement to carry out such works as may be agreed to be, or be held by arbitration to be, necessary. Mr Oslington submitted that a concluded agreement was required as to the work to be done before a fresh Franchise Agreement would be granted. In my opinion, Mr Bathurst's construction is the more preferable. I do not think it would be consistent with the agreement to require HJPL to do more than to agree to carry out the work ultimately agreed or held to be necessary, without its being assured that the option would be exercised.

662 HJPL's "primary submission" was that the term of these Franchise Agreements did not expire until BKC offered it the opportunity to remain a franchisee for one additional period of 15 years. In my opinion, this submission must be rejected because the words of the clause require the offer to be made at the expiration of the term. I propose to ignore, as did the parties, the requirement for notice referred to in proviso E. I do not think BKC could purport to terminate the agreement until the offer had been made but, none-the-less, that does not mean that the term has not yet expired. The parties remain under contractual obligations by virtue of the failure of BKC to make the offer.

663 A fundamental problem confronting HJPL is said to be that the method adopted after the term of each Franchise Agreement expired was for the parties to enter into agreements to extend the Franchise Agreements, which were known as the "Extension Agreements". In other words the parties did not simply rely on whatever may have flowed from the option. The real dispute, on this issue, revolved around whether these agreements were enforceable. Each Extension Agreement provided for an "Extended Expiration Date" identifying certain dates up to which "all other terms of the Franchise Agreement shall remain in full force and effect". The clauses said to cause particular difficulty to HJPL are those providing for no further extension:-

"A. The Franchisee acknowledges that BKC has extended the term of the Franchise Agreement on multiple occasions that, taken together with this sixth extension, BKC has given the Franchisee ample and reasonable opportunity to take all steps necessary to meet the requirements for a renewal or successor agreement to continue to operate at the site of the franchised restaurant.

B. The Franchisee hereby agrees and acknowledges that BKC is under no obligation whatsoever to allow the franchised restaurant to continue to operate beyond the Extended Expiration Date and that unless BKC agrees in writing and in its sole and absolute discretion to further extend the Extended Expiration Date, the franchised restaurant shall close on the Extended Expiration Date and the Franchisee shall comply with all post-termination obligations under the Franchise Agreement, including a de-identification of the franchised restaurant as provided in Exhibit A hereto, within fourteen (14) days of the Extended Expiration Date.

C. The Franchisee hereby waives and releases BKC from any and all claims that BKC has not given the Franchisee a reasonable time and opportunity to comply with the requirements for obtaining a renewal or successor agreement."

664 In an attempt to meet those provisions HJPL has submitted that the waivers, releases and acknowledgments:-

(a) were obtained by BKC in circumstances that it was knowingly involved in a breach of duty by Mr Montgomery, in relation to the successor restaurants, and had failed to disclose that breach to HJPL so as to allow it the opportunity to remove him from responsibility for negotiating successor works with BKC;

(b) were obtained by BKC in breach of clause IX of the relevant Franchise Agreements and in breach of a duty of good faith owed to HJPL under the Development Agreement and under threat of closure of the successor restaurants; and

(c) were inconsistent with HJPL's rights under clause IX of the Franchise Agreements, and should be set aside for mistake.

It was submitted that if the acknowledgments, waivers and releases are set aside the position is governed by clause IX of the Franchise Agreements.

665 The first submission was that the waivers, releases and acknowledgments were obtained by BKC in circumstances where it was knowingly involved in a breach of duty by Mr Montgomery in relation to the successor restaurants, which breach it failed to disclose to HJPL, thus allowing it to proceed on the basis that its interests were protected properly by Mr Montgomery in negotiations concerning such restaurants when BKC knew that was not the case. The submission continued that but for that conduct HJPL could and would have received proper advice as to its rights under clause IX, including the right to insist that it was only required to undertake works reasonably required by BKC in respect of the successor restaurants.

666 In paragraph 303 of his witness statement of 29 January 1998, part of Exhibit U, Mr Cowin stated:-

"Throughout the period of my dealings with Fitzjohn, Miolla, Chapman, and all other BKC officers and employees with whom I dealt, concerning the matters referred to in this witness statement, none of them ever disclosed to me that BKC had been receiving information or advice from Montgomery concerning HJPL's business in Australia or the matters which were in dispute between BKC and HJPL. If I had ever become aware of Montgomery's secret dealings with BKC, I would have taken steps to ensure that Montgomery no longer had access to the confidential information of HJPL or Competitive Foods, would have required him to give an undertaking to have no further communications with BKC without my express knowledge and approval, and would have removed him from any responsibility for any matter in issue between BKC and HJPL."

667 Mr Cowin was not cross-examined on this statement and, apart from that, it is an inherently probable approach. A question which arises, therefore, is whether officers of BKC should have advised Mr Cowin of Mr Montgomery's dealings with them. If Mr Cowin had been told there is every reason to suppose that he would have removed Mr Montgomery from the position of negotiating for the successor restaurants.

668 The next submission was that the acknowledgments, waivers and releases are liable to be set aside, by the rescission of the agreements containing them, since HJPL gave them under "a serious mistake" in circumstances where BKC was aware that HJPL was under that mistake and deliberately set out to ensure that it did not become aware of its existence.

669 In Taylor & Ors v Johnson [1983] HCA 5; (1983) 151 CLR 422 Mason ACJ, Murphy and Deane JJ said:-

"The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated. It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension. What we have said is sufficient to demonstrate the broad basis of support which the authorities provide for that proposition. Moreover, and perhaps more importantly, it is a principle which is best calculated to do justice between the parties to a contract in the situation which it contemplates. In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the party's actual mistake proceeds from wilful ignorance because, knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it."

670 In Tutt & Anor v Doyle & Anor (1997) 42 NSWLR 10, the Court of Appeal applied the decision in Taylor v Johnson and, at p.14, Handley JA noted that in Taylor v Johnson the majority also endorsed "wider principles which entitle a court of equity to grant relief for unilateral mistake in cases not covered by this principle", i.e. the principle stated at pp.432-433 to which I have referred.

671 The test propounded in Taylor v Johnson requires findings that there was an entry into a written contract; that that occurred under a serious mistake about the contents of the contract; that that serious mistake was in relation to a fundamental term; and that in those circumstances rescission would be ordered if the non-mistaken party was aware that circumstances existed which indicated that the mistaken party was entering into the contract under some serious mistake or misapprehension and, further, deliberately set out to ensure that the first party did not become aware of the existence of the mistake or misapprehension.

672 Mr Bathurst's submissions continued that the evidence supported the conclusion that Mr Miolla in his dealings with Mr Cowin knew of HJPL's rights under clause IX "and sought to obtain the releases, waivers and acknowledgments in the knowledge that Cowin was not then aware of those rights, and so as to deprive HJPL of those rights".

673 The submission continued that Mr Power also knew of them and remained silent so as to prevent HJPL's relying on them, thus introducing an element of unconscionability in allowing HJPL to proceed on the basis that its interests were properly protected by Mr Montgomery when BKC knew that was not the case.

674 The submissions continued that Mr Power and Mr Miolla were aware of the requirements of clause IX and of the provision for arbitration in the event of a dispute about the scope of work required pursuant to proviso A. Mr Miolla acknowledged that, by mid-1995, he understood that Mr Montgomery was the person primarily involved in day to day negotiations concerning successor stores, and primarily responsible for review of the scope of work required by BKC, whilst Mr Cowin was dealing primarily with the issue of extensions of the Franchise Agreements. The main disagreement between the parties concerned the work to be done to bring successor stores up to a requisite standard and the timing of that work, on which matters Mr Power was dealing with Mr Montgomery.

675 The submissions trace the discussions in August 1995, including Mr Montgomery's advice to BKC that it should not let up on "successor requirements", which was conveyed by Mr Power to Messrs Blauer, Fitzjohn, Hothorn and Miolla on 18 August 1995. The reasonable inference from this statement is that Mr Montgomery chose to neglect the right of HJPL to have contentious issues, in relation to the work to be done, arbitrated. So much, in my opinion, must have been clear to BKC.

676 At Tp.3094 Mr Miolla agreed Mr Montgomery was dealing with successor restaurants and was, so far as he knew, a trusted employee of HJPL and the senior employee entrusted with issues of vital concern to it, including the successor restaurant issues. He was referred to clause IX, with which he said he did not think he was familiar by September 1995, although he agreed that by then the parties were proceeding to negotiate successor restaurant requirements in circumstances where no notice had been given under proviso E, a basis on which each party was content to proceed either through ignorance or otherwise. At Tp.3096 Mr Miolla said that he did not recall having looked at clause IX at that time, nor whether "I looked at this or whether I just used our standard form of Extension Agreement". Shortly thereafter he said it was evident that at least by May 1995 he had read the Franchise Agreement and whilst he could not recall perusing clause IX "it seems likely" that he did.

677 He was then cross-examined about proviso A, and he agreed that what was required was an agreement to bring the successor stores "to the then current image of Burger King restaurants, whatever that then current image was": Tp.3098, and if there was a dispute about that there was provision for arbitration.

678 At Tp.3099 Mr Miolla said:-

"Q. You, of course, throughout the period 1995 and 1996 adopted the stance, firstly, that the work which had to be carried out was work nominated by Burger King in its sole discretion. Do you agree?

A. I think in general that's correct, yes.

Q. You also adopted the position of Hungry Jack's had no right to the grant of a new franchise unless and until it had completed the work mandated by Burger King; do you agree with that?

A. Yes.

Q. Mr Cowin, as you understood it, disputed Burger King's right to mandate the work in its sole discretion?

A. I don't recall. I recall that he felt the work was too expensive, and I recall him saying that he believed it should be a joint - that it somehow should be a joint effort, but that is all I recall right now off the top of my head.

Q. Mr Cowin, as far as you were aware, relied on Mr Montgomery to advise him on the successor store issue; correct?

A. I would say I had that general impression, yes.

Q. And apart from dealing with Mr Kemp on one instance regarding the scope of release, it was Mr Montgomery who appeared to you to be advising Hungry Jack's on this particular issue?

A. My impression at the time was that Mr Cowin was making the decisions but that he was getting input, and - he was getting input and probably advice from Mr Montgomery.

Q. And it was probably important, as you perceived it, that any advice Mr Cowin got, whether from Mr Montgomery or anyone else, was fair, impartial and given with reference to Hungry Jack's interests rather than Burger King's interests?

A. I don't recall ever thinking about that, given, you know, the way this unfolded, which is that we gave one extension after another. I don't recall thinking about that at all."

679 It was put to Mr Miolla that Mr Montgomery was plainly acting against HJPL's interests on the successor store issue with which he said he did not think he could agree.

680 At Tp.3171 Mr Miolla said that he did not think that in drafting clauses 3 and 4 of the Extension Agreements he was consciously seeking to take from HJPL its rights in relation to successor stores, which he knew it had.

681 At Tp.3083 Mr Miolla said that by September 1995 he was aware that Mr Montgomery was representing HJPL in relation to the successor restaurant issues that were arising, and that it seemed likely that he perceived, when he saw the facsimile transmission from Mr Montgomery of 5 September 1995 that by Mr Montgomery's urging BKC to review matters such as successor restaurants, he may well have been putting himself in a position where he had a fairly serious conflict of interest. It was put to Mr Miolla that it was wrong of him to use material emanating from a person who had such a conflict of interest. Mr Miolla said he did not recall whether he thought about that, nor did he mean to imply from that answer that the information was used. However, at Tp.3103, Mr Miolla agreed that shortly after he wrote to Mr Cowin concerning the successor restaurant issue, and asking whether Mr Montgomery would be responsible for that so far as HJPL was concerned. He agreed that he did that in circumstances where he knew that Mr Montgomery may be in conflict in dealing with the successor restaurant issues, although he qualified that by saying he did not mean to imply that he thought about it at the time, "but you have walked me through that and so my answer is yes". He said, Tp.3104, that it did not occur to him to tell Mr Cowin that Mr Montgomery might be acting in a way inimical to HJPL's interests. That was an extraordinary approach by a trained lawyer in all the circumstances. He was prepared to deal with Mr Montgomery, who, to his perception, was acting in conflict of interests, on this contentious point without disclosing the problem to Mr Cowin. He was doing that in circumstances where he knew, I am satisfied, that he was acting contrary to HJPL's contractual rights in relation to the successor restaurants, and dealing with Mr Montgomery who was actively trying to assist BKC.

682 The evidence established that it was apparent to Mr Miolla thereafter that in relation to the successor restaurant matters at least Mr Montgomery had a conflict of interest. In all these circumstances, I do not accept Mr Miolla's evidence that the significance of these matters did not occur to him at the time, and that it did not occur to him that Mr Montgomery was acting in a way completely opposed to HJPL's interests. I reject his evidence in these respects.

683 The submissions traced through the further dealings, particularly with Mr Cowin, and, on 4 March 1996, Mr Miolla advised him that BKC was unwilling to modify its contractual rights regarding its authority to refuse to renew agreements unless HJPL made capital agreements acceptable to it "in its sole discretion". The acceptance by Mr Cowin of this position must have made it clear to Mr Miolla that Mr Cowin was mistaken as to HJPL's contractual rights. Mr Miolla also acknowledged that it was unlikely, in those circumstances, that Mr Montgomery would advise Mr Cowin to verify whether BKC had the right to nominate works at the successor restaurants in its sole discretion. In my opinion, Mr Miolla understood that Mr Cowin was acting under a mistake of which Mr Montgomery would not disabuse him.

684 Mr Bathurst submitted that in these circumstances BKC was a party knowingly involved in Mr Montgomery's breach of duty to HJPL, so that it could not argue that disclosure of those matters to HJPL would not have altered its position in relation to the successor restaurants: Brickenden v London Loan & Savings Co and Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 102 ALR 453. The submission was that Mr Montgomery owed a fiduciary duty to HJPL and that, in relation to the successor restaurants, he breached that duty to the knowledge of officers of BKC, but that those officers failed to disclose that breach of duty to HJPL.

685 The matter can, in my opinion, be expressed thus. Mr Montgomery was the National Development Manager for HJPL and the person primarily responsible for negotiating in relation to the successor restaurants. These matters, together with his being a trusted employee of HJPL, were known to BKC. BKC, whilst negotiating for the extension agreements, appreciated that in relation to these matters Mr Montgomery had a highly relevant conflict of interest, viz that he was propounding action inimical to the best interests of HJPL and favourable to the best interests of BKC. In these circumstances, Mr Montgomery could not have been acting with HJPL's authority. BKC, no doubt for its own commercial reasons, continued to receive and, in my opinion, make use of information supplied by Mr Montgomery for its own commercial advantages and, more importantly, it failed to advise Mr Cowin of Mr Montgomery's activities. The evidence was that if Mr Cowin had been aware of such activities he would have removed Mr Montgomery from a position of responsibility and, in my opinion, there can be little doubt that Mr Cowin would have taken the steps Mr Bathurst suggested to seek to protect the interests of HJPL.

686 The activities of Mr Montgomery were both in breach of his fiduciary duties to HJPL, as I am satisfied BKC well knew, and, because they were not authorised, they were not the actions of HJPL. BKC, in my opinion, acted dishonestly or with lack of probity in failing to advise Mr Cowin of Mr Montgomery's activities and in accepting Mr Montgomery's actions such as to be affected by his breach of fiduciary duties. BKC also breached the implied terms of reasonableness and good faith in the Franchise Agreements by failing to draw HJPL's attention to Mr Montgomery's conduct. Further, I am prepared to infer, as Mr Montgomery's acts were not those of HJPL, HJPL was, consistently with the principles to which I have referred, acting under a mistake of which mistake, I have no doubt, BKC was aware and prepared to take advantage. Thus two relevant principles, viz "accessory liability" for breach of fiduciary duty and mistake, in the sense I have described, came into play.

687 In my opinion, to allow BKC to take any benefit from its failure to advise Mr Cowin of these matters would be to allow it to benefit from its own wrong-doing, that wrong-doing being its complicity in the breach by Mr Montgomery of his fiduciary duties to HJPL. There was the necessary element of dishonesty or lack of probity on the part of BKC to give rise to "the accessory liability" of BKC in accordance with the principles enunciated in Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378.

688 In Smith the Full Court of the Federal Court adopted the following passage from the opinion of Lord Thankerton in Brickenden at p.469:-

"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another of the property proposed to be mortgaged. Once the court has determined that the non-disclosed facts were material, speculation as to what course the constituent would have taken is not relevant."

689 In my opinion, there can be no relevant distinction between that disclosure and the type of disclosure required by BKC as it had knowledge of Mr Montgomery's breach of his fiduciary duty to HJPL, which went to the very point in issue. Nor can there be any doubt that the non-disclosed facts were material. Obviously, it was material for HJPL to know that Mr Montgomery was dealing with BKC in a manner potentially detrimental to HJPL's interests and in breach of his fiduciary duties to HJPL.

690 Additionally, for the reasons to which I have referred, I am satisfied that HJPL is entitled to the same, or essentially the same, relief based on its mistake.

691 In considering the relief to which HJPL is entitled for the "accessory liability" there are several alternatives. One is compensation. However, it seems to me that the relief being equitable in nature, the Court can mould it to accommodate the particular circumstances of the case. In those circumstances I consider that the appropriate relief is to rescind the Extension Agreements and, accordingly, to leave the parties to their rights under the various Franchise Agreements. There is no doubt that rescission is available based on mistake.

692 Mr Bathurst also submitted that HJPL was entitled to relief pursuant to s.51AA of the Trade Practices Act 1974 conformably with s.87 thereof. In view of the conclusion to which I have come on his first submission, I do not find it necessary to examine that submission.

693 The answer by BKC is contained, essentially, in paragraph 157 of its written submissions. It was stated:-

"The defence must be rejected because continually throughout the period of the 1995/1996 successor restaurants, Mr Miolla was asserting that HJPL had to reach arrangements with it on a timely basis or Franchise Agreements would not be renewed. He was not acting on the basis of some previously concluded agreement other than the terms of the Franchise Agreement, and indeed denied such an agreement in his letter of 29 April 1996 (TB 9002). As he said in that letter, such agreement as there was in 1992 related to existing unapproved equipment. In any event, Mr Cowin agreed to make the modifications required by BKC in relation to the 1995 and 1996 restaurants and it is to be concluded that this was on the basis of the advice tendered to him by outside expert consultants and by his own development manager, Mr Montgomery. Mr Montgomery was not called to give evidence so it is to be assumed that his evidence would not have assisted HJPL in this regard."

694 In my opinion this submission avoids, but not deals with, the essential thrust of HJPL's main submission. There can be no basis, on the evidence, for concluding that Mr Cowin was acting in a knowing or consenting way, when Mr Montgomery, who was advising him, was acting in dereliction of his duties to HJPL to the knowledge of BKC.

695 In his oral submissions Mr Oslington commenced to deal with the issue of successor restaurants at Tp.4114. He did so on the basis that BKC was entitled to act as it did and considered matters of fact. At Tp.4118 Mr Oslington made submissions in relation to clause IX in which he said that upon the proper construction of proviso A there had to be an agreement reached about the scope of work before the expiration of the Franchise Agreement, and that was why Extension Agreements were granted. He continued that the Successor Agreements, in relation to the last three restaurants to which he had referred, all stated that BKC would give a renewal if HJPL completed the scope of works by a particular date.

696 The parties addressed a considerable amount of evidence and submissions to the state of the renewal work and to the provisions of the various Extension Agreements. In the view to which I have come BKC is not entitled to rely on those Extension Agreements and, subject to the moulding of appropriate orders, HJPL is entitled to a renewal in respect of the successor restaurants conformably with the Franchise Agreements. The parties did not address on the precise form of relief and this will be a matter to which attention will have to be given in due course.

Notices Of Default Of The Franchise Agreements For Hexham And Maitland

697 On 1 October 1997 BKC served notices under the Hexham and Maitland Franchise Agreements, notifying HJPL that it was allegedly in default under each such agreement by selling "Oak" products at those restaurants, and requiring HJPL to cure that default within five days of receipt of the notices. Each notice stated that BKC would be entitled to terminate each of those agreements if the alleged default was not cured within the times specified. No Notice of Termination has been given.

698 The Hexham Franchise Agreement was executed in September 1993, when Mr Cowin informed Mr Wong of BKC of Oak's requirement that HJPL continue to sell "Oak" dairy products at those premises. BKC and HJPL entered into an agreement entitled "Oak Product Test Agreement", which permitted HJPL to sell specified "Oak" products at that restaurant from 24 September 1993 to 24 February 1994.

699 On 22 August 1994, HJPL submitted a Site Package for a proposed restaurant at Maitland, which included plans for an Oak milk bar to sell products of the same type as were sold at the Hexham restaurant. BKC approved that Site Package and, on 22 November 1994, HJPL requested BKC to extend the Oak Product Test Agreement to the Maitland restaurant. On 2 December 1994 BKC and HJPL entered into the Franchise Agreement in respect of the Maitland restaurant.

700 In January 1996 HJPL requested BKC, pursuant to clause 10.5 of the Development Agreement, to approve the sale of "Oak" products. The clause provided:-

"Hungry Jack's may introduce into Burger King restaurants non-BKC menu items provided that:-

(a) Hungry Jack's notifies BKC in advance of the proposal, in sufficient detail to enable BKC to appreciate the nature of the proposed item and the likely impact of its introduction upon BKC's brand image;

(b) BKC does not object within 30 days of Hungry Jack's notification. The only ground upon which BKC may object is that, in BKC's opinion, the proposed item would be incompatible with or detrimental to BKC's brand image; and

(c) at no time shall the number of non-BKC menu items available in any Burger King Restaurant exceed twenty per cent (20%) of all items there available."

701 BKC did not notify any objection to or disapproval of "Oak" products within 30 days on any ground. Since the opening of each of these restaurants, HJPL has sold "Oak" products at them and has paid royalties to BKC in respect, inter alia, of those sales. Both restaurants have been visited by members of BKC staff, and the sale of "Oak"

products has been observed.

702 It was submitted on behalf of HJPL that, pursuant to clause 10.5, HJPL is entitled to sell "Oak" products at those restaurants.

703 BKC submitted, correctly, that it has not sought to terminate those Franchise Agreements and that, based on its submissions concerning relief against forfeiture, the interest HJPL is seeking to protect "is a mere contractual interest and not a possessory or proprietary interest". It was further submitted that the issue concerning those restaurants will only arise "if BKC seeks to terminate the Franchise Agreement (which it has not done)".

704 The submissions continued that there is no evidence from HJPL to establish that the sale of "Oak" products at the Maitland restaurant has been approved, and that clause 3E of that Franchise Agreement provides that no items, which are not set forth in the MOD Manual or otherwise authorised and approved by BKC in writing will be served. It was submitted there is no evidence that BKC has approved the sale of "Oak" products in writing and that, therefore, there is no basis for the claim that approval has been given in respect of that restaurant.

705 It seems to me that the memorandum from Mr Bruce McDonald to Mr Power was a sufficient request for approval to sell the "Oak" products, such that the failure to object to that course, which was totally understandable in view of all that had transpired, was sufficient, pursuant to clause 10.5 of the Development Agreement, to entitle HJPL to continue with that sale.

706 It may not be appropriate, as a matter of discretion, to grant declaratory relief notwithstanding my view that the notices purporting to terminate those two Franchise Agreements were not valid. However, if necessary, I will hear submissions on this point.

Lack Of Good Faith

707 HJPL submitted that BKC's actions were motivated by a lack of good faith. I am satisfied that in consequence of Mr Fitzjohn's memorandum of December 1993, BKC set about seeking to win back as much of the Australian market as it could. A major impediment was HJPL and the contractual rights it had, particularly under the Development Agreement.

708 I am also satisfied that BKC saw that it had a very real opportunity of advancing its position by an alliance with Shell, and I have described the circumstances in which, in my opinion, BKC came under a fiduciary duty to HJPL in relation to Shell, which it breached. In these dealings officers of BKC acted in the discreditable manner to which I have referred.

709 BKC also sought to impede HJPL's activities by placing severe difficulties in its path in relation to the further recruitment of further third party franchisees, by withholding financial approval and withdrawing operational approval. None of these actions, I am satisfied, was justified. In my opinion, the totality of the evidence leads to the conclusion, to which I have referred in dealing with each matter, that they were motivated by the desire to ensure that HJPL could not develop, in the hope that the Development Agreement could be terminated. This was, of course, an ulterior purpose and not one justified by the contractual arrangements.

710 Finally, officers of BKC were prepared to deal with Mr Montgomery in the circumstances to which I have referred and with the consequences I have found. This conduct was ample evidence of lack of good faith.

711 In my opinion, when all these matters, together with my stated assessments of the various witnesses, are taken into account, the overwhelming inference is that BKC did not act with good faith. The submissions that its delay in taking various steps points against this conclusion should not be accepted. It was determined to create a situation which would enable it to terminate. That, of necessity, took time, particularly as it wished to deny HJPL the opportunity to cure the breaches.

Conclusions

712 The conclusions to which I have come on the matters I have decided are:-

(a) The two Notices of 18 November 1996 and the one Notice of 8 September 1997 did not validly terminate the Development Agreement and, accordingly, are of no effect.

(b) The conduct of BKC in its dealings with Shell constituted breaches by it of its fiduciary duty to HJPL for which HJPL is entitled to recover equitable compensation in the sum of $1,515,428.

(c) The conduct of BKC in purporting to terminate the Development Agreement, placing a freeze on the ability of HJPL to recruit third party franchisees, withholding financial approval to development under the Development Agreement, and refusing operational approval under the Development Agreement, amounted to breaches by BKC of its contractual obligations for which breaches HJPL is entitled to damages in the following amounts:-

(i) $ 43,522,200 for delay in opening company-owned

restaurants.

(ii) $ 23,955,000 for loss of opportunity in introducing third

party franchisees.

(iii) $ 1,852,800 for "cannibalisation" claims.

(d) HJPL is entitled to rely upon the terms of the Franchise Agreements for the successor restaurants in relation to the renewal of those Agreements for a further period of 15 years from the date of renewal, and BKC is not entitled to rely on the various Extension Agreements as in any way defining the rights in relation to the options contained in the Franchise Agreements.

(e) In so far as it is appropriate to determine this point BKC is not entitled to rely on the Notices of Default under the Franchise Agreements for the Hexham and Maitland restaurants.

(f) BKC is not entitled, in all the circumstances, to rely upon the closure by HJPL of the restaurants at Mount Gravatt in the State of Queensland and Marion in the State of South Australia.

(g) It does not seem to me that on these findings BKC is entitled to any relief on its Cross-Claim.

(h) It will be necessary for me to hear submissions on the questions of interest and costs. My prima facie view is that HJPL has obtained such measure of success in these proceedings as to be entitled to an order that BKC pay its costs of the proceedings.

(i) I shall consider, in due course, what, if any, relief should be granted against BKAL.

I invite the parties to bring in Short Minutes of Order to reflect these conclusions.

713 I stand the matter over for mention to Friday, 12 November 1999.

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LAST UPDATED: 05/11/1999