Blockbuster Australia Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089 (16 October 2009)

Last Updated: 22 October 2009

NEW SOUTH WALES SUPREME COURT

CITATION:
Blockbuster Australia Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089
This decision has been amended. Please see the end of the judgment for a list of the amendments.

JURISDICTION:


FILE NUMBER(S):
4338/2008

HEARING DATE(S):
18 February 2009
19 February 2009
20 February 2009
24 April 2009

JUDGMENT DATE:
16 October 2009

PARTIES:
Blockbuster Australia Pty Ltd (plaintiff)
Karioi Pty Ltd (1st defendant)
Peter Lindsay Fife (2nd defendant)
Ronald James Fortington (3rd defendant)

JUDGMENT OF:
Price J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
F Kunc SC (plaintiff)
I Pike (defendants)

SOLICITORS:



CATCHWORDS:
CONTRACT
franchise agreements
whether franchise agreements were terminated or expired
negotiations between the parties and continued operation of franchise businesses
whether estoppel by convention made out
whether option to purchase such assets of the franchise businesses as franchisor selects was validly exercised
whether franchisor could validly exercise lease assignment
whether inconsistent terms of franchise agreement could be harmonised
whether lease assignment clause should be read down so as to apply only upon termination
RESTRAINT OF TRADE
identification of franchisor's interests
common law
construction of franchise agreements
interest in goodwill
confidential information
whether restraints more than required to protect franchisor's interests
directors' restraints
whether confidential information required to be delivered up

LEGISLATION CITED:
Evidence Act 1995 s 55(1)
Franchising Code of Conduct
Restraints of Trade Act 1976
Supreme Court Act 1970 s 68
Trade Practices Act 1974 (Cth) s 54AD

CATEGORY:
Principal judgment

CASES CITED:
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commonwealth v Verwayen (1990) 170 CLR 394
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Insurance) Ltd [1986] HCA 14; (1986) 160 CLR 226
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420
Foran v Wright [1989] HCA 51; (1989) 168 CLR 385
Forbes v Git [1922] 1 AC 256
Friend v Brooker [2009] HCA 21
GEC Marconi Systems v BHP-IT [2003] FCA 50; (2003) 128 FCR 1
GMA Garnet Pty Ltd v Barton International Inc [2009] FCA 439
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702
Kirkby v Turner [2009] NSWCA 131
Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535
Putsman v Taylor [1927] 1 KB 637
Raine & Horne Pty Limited v Adacol Pty Ltd [2006] NSWSC 945
The Bell Group v Westpac Banking Corporation [2008] WASC 239
The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625
Toll (FGCT) v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Limited [2009] NSWCA 315
Waterman v Gerling Australia Insurance Company Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300
Watson v Phipps (1985) 63 ALR 321
Westpac Banking Corporation v Tanzone Pty Ltd [1999] NSWSC 1129; (2000) 9 BPR 17,521
Wickman Machine Tool Sales Ltd v Schuler A.G (HL(E)) [1973] UKHL 2; [1974] AC 235

TEXTS CITED:
Sir Kim Lewison, The Interpretation of Contracts, 4th ed (2007) Street and Maxwell Ltd
JD Heydon, The Restraint of Trade Doctrine, 3rd ed (2008)
RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane's Equity of Doctrines and Remedies, 4th ed (2002) Australia, Butterworths LexisNexis

DECISION:
See paragraph 186



JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

EQUITY DIVISION

PRICE J

16 October 2009

4338/08 Blockbuster Australia Pty Limited v Karioi Pty Limited & 2 Ors

JUDGMENT

1 HIS HONOUR: These proceedings concern two franchise agreements (the Noosaville and Nambour franchise agreements). Blockbuster Australia Pty Limited (Blockbuster) a video movie hire franchisor entered into the Noosaville and Nambour franchise agreements on 2 April 1998 with Karioi Pty Limited (Karioi) a video hire store operator which granted to Karioi a franchise to conduct a Blockbuster video movie hire business in Karioi’s stores in Noosaville and Nambour in Queensland. The term of each agreement was 10 years, subject to an option for renewal for a further 5 years. Peter Lindsay Fife and Ronald James Fortington who were directors of Karioi guaranteed the obligations of Karioi under the franchise agreements. They also entered into deeds of restraint with Blockbuster.

2 It is common ground that by 31 August 2008 the franchise agreements between the parties had been brought to an end. The matters in dispute in the proceedings include the basis upon which the agreements were brought to an end. Another issue is the construction of and enforceability of restraint of trade clauses in the Noosaville and Nambour franchise agreements and the deeds of restraint. The matters in dispute will be identified during this judgment.

3 Karioi continued to operate the Noosaville and Nambour stores as video hire businesses after 1 September 2008. Karioi has entered into an arrangement with Network Video a video buying group.

The relief sought by Blockbuster

4 By an amended statement of claim Blockbuster (the plaintiff) seeks injunctions restraining Karioi, Mr Fife and Mr Fortington (the defendants) from operating a video hire business within 30km of the Noosaville and Nambour stores for a period of two years from 1 September 2008. Orders are sought for the defendants to deliver up all copies of confidential information as defined in the Noosaville and Nambour franchise agreements. Injunctive relief is also sought to restrain the defendants from using any part of the confidential information for their own benefit, except to the extent that the information is in the public domain.

5 Blockbuster asks for orders that Karioi assign to Blockbuster or its nominee the lease, sub-lease or licence (as the case may be) of the premises from which the Noosaville and Nambour franchise businesses were operated immediately before 31 August 2008 or in the alternative that Karioi use all reasonable endeavours to procure the assignment of the lease, sub-lease or licence (as the case may be) of these premises to Blockbuster or its nominee. Blockbuster seeks declarations that by letter dated 6 August 2008 or otherwise, Blockbuster has validly exercised its option under cl 18.6 of the Noosaville and Nambour franchise agreements to purchase such assets of the businesses it selects. Further and in the alternative, Blockbuster seeks damages at law and/or in equity, including under s 68 of the Supreme Court Act 1970, and/or account of profits.

The Cross-Claim

6 By a first cross-claim the defendants ask for a declaration that the franchise agreements are void with effect from 3 April 2008 or such other date as the court thinks appropriate. The cross-claim arises from Blockbuster’s assertion of an estoppel by convention which the defendants deny. If such an estoppel is found to have arisen, the defendants claim that Blockbuster has breached regulations 6B, 10 and 11 of the Franchising Code. Blockbuster’s conduct is claimed to have contravened s 51AD of the Trade Practices Act 1974 (Cth) (the TPA). Karioi seeks relief pursuant to s 87 of the TPA.

Background

7 Mr Fife and Mr Fortington have been involved in the video hire business since 1987. They have been directors of Gainlaw Pty Limited (Gainlaw) since 1987 and Karioi since 1990. In 1987, Gainlaw started a video hire business in Gympie, Queensland. During 1987 to 1989 Gainlaw operated the Gympie business as an independent video store, that is, it was not associated with a franchise or buying group. Between about 1989 and 1993, the Gympie store was operated by Gainlaw as a Video Ezy franchise.

8 In 1990, Karioi opened a video hire business from premises located at the Noosa Homemaker Centre in Mary Street Noosaville. During 1990 to 1993, the Noosaville store was operated by Karioi as a Video Ezy store, as franchisee under a Video Ezy franchise agreement with Video Ezy Australia Pty Ltd. Karioi left the Video Ezy franchise group in 1993 and entered into a franchise agreement with the Video Flicks franchise group. The Noosaville store was operated as a Video Flicks franchise until the Noosaville franchise agreement was entered into with Blockbuster.

9 Karioi opened a video hire business from premises located at Sunshine Beach Road, Noosa Junction, Queensland, in 1991. From 1991 to 1993, Karioi operated the Noosa Junction store as a Video Ezy franchise under a franchise agreement with Video Ezy Australia Pty Ltd. When Karioi left Video Ezy in 1993 and joined Video Flicks, the Noosa Junction store operated as a Video Flicks franchise.

10 In 1994 Karioi opened a video hire business from premises located at the corner of Currie and Mitchell Streets in Nambour. The Nambour store was operated as a Video Flicks franchise until the Nambour franchise agreement was entered into. The Nambour store was relocated in 1994 to 33 Short Street Nambour.

11 Blockbuster is a global video hire brand which was started in the United States of America in the 1980s. Blockbuster commenced opening stores in Australia in late 1993 and early 1994. By 1998, Blockbuster operated around 140 corporate stores in Australia. On 2 April 1998, Blockbuster commenced franchising its business when it entered into franchise agreements with Video Flicks franchisees.

12 Patrick Smith who owned the Video Flicks franchise stated in his affidavit dated 30 October 2008 that Blockbuster did not actually buy the Video Flicks chain as such. Blockbuster offered to pay him a sum of money and in return he agreed to deliver to Blockbuster the 35 video rental businesses which were then Video Flicks franchisees. These businesses were owned by a group of about 20 franchisees and Mr Smith’s role was to convince each of them that they should convert their stores to the Blockbuster brand. Karioi was one of these owners. The Blockbuster franchise agreements were signed by each of the 20 Video Flicks franchisees on 2 April 1998.

13 Mr Smith recounted at [59-60] of his affidavit that Blockbuster did not offer the individual Video Flicks franchisees any monetary incentive to convert their stores to the Blockbuster brand. The vast majority of the franchisees had to invest between $20,000 and $25,000 of their own funds per store to convert them to the Blockbuster brand. Mr Smith recalled that Mr Fife did not receive any funds from him towards the cost of converting Karioi’s stores to the Blockbuster brand.

14 Prior to the delivery of the Video Flick franchisees to Blockbuster, Blockbuster was rated third in the Australian video rental market behind Video Ezy and Civic Video. In an affidavit dated 29 October 2008, Paul Uniacke, the Manager Director of Blockbuster, stated that Blockbuster grew rapidly after it commenced franchising in 1998 and became the market leader in Australia by around 2003 to 2004, even though it had approximately 100 fewer stores than Video Ezy. In October 2007, Video Ezy purchased the Blockbuster franchise in Australia.

15 Karioi sold the Gympie store to Blockbuster in November 2005.

The issues in dispute

16 The following issues have been argued:

(1) The credit of Mr Fife.

(2) How should the court characterise the relationship between the parties from 3 April 2008 to 31 August 2008? Did an estoppel by convention arise?

(3) Did the Noosaville and Nambour franchise agreements expire or were they terminated?

(4) If the franchise agreements were terminated, did Blockbuster validly exercise its rights under cl 18.6?

(5) Can Blockbuster validly exercise the lease – assignment right under cl 18.9 ?

(6) Are the restraints of trade in cl 14 of the franchise agreements and the directors’ restraint in schedule 2 to appendix B of the franchise agreements valid?

(7) Does the Confidential Information required by the franchise agreements to be delivered up include:

(a) all copies of the customer database for each store as at 31 August 2008; and

(b) the subsequently developed customer database in respect of each store?

The credit of Mr Fife

17 Blockbuster submitted that Mr Fife demonstrated in his oral testimony a tendency to reconstruct his recollections about the legal relationship between Karioi and Blockbuster in a way that suited his perception of the defendants’ interests at the time he gave evidence. Blockbuster contended in light of this tendency, the court should not accept Mr Fife’s evidence about what he thought the legal relationship between the parties was, except where that evidence is against the defendants’ interests in these proceedings.

18 Two other matters were identified. The first was the argument that the court should not accept that Mr Fife sent the letter dated 17 July 2007 (ex P) to Blockbuster earlier than February 2008. The second was the contention that the court should not accept that Mr Uniacke said at a meeting in November 2007 that any Blockbuster franchisees who did not wish to renew their franchise agreements would be free to leave the Group – a statement which Mr Uniacke denies. In Blockbuster’s case, these two matters are irrelevant. To the extent, however, that the defendants seek to build a case based on either fact, Blockbuster submitted that those facts should not be accepted as proven on the balance of probabilities.

19 It is convenient to deal with the argument concerning the letter dated 17 July 2007.

The letter dated 17 July 2007

20 In his affidavit dated 22 December 2008, Mr Fife stated at [39] that on or around 17 July 2007 he sent a letter to Blockbuster a copy of which is as follows:

“Blockbuster Head Office

Attn Rick Wight

17 July 2007

Dear Rick,

I note from my Franchise Agreements that I may take up the option of an extension of 5 years to the original term.

I therefore exercise clause 2.2 of both the Nambour and Noosaville Territories.

Please supply me with copy of the current Franchise Agreement so that I may peruse the document to ascertain the difference in conditions from the one exercised by the Company and us on 2^nd April 1998.

Thank you,

Yours faithfully,

Peter Fife
Karioi Pty Ltd
PO Box 13
KIN KIN Q 4571”

21 The significance of the letter is that cl 2.2(d) of the Noosaville and Nambour franchise agreements required Karioi in exercising the option to renew the franchise for the renewal term of 5 years (Schedule 5) to produce “written notice to [Blockbuster] of [Karioi’s] intention to exercise the option not earlier than nine (9) months, but not later than six (6) months, before the end of the Original Term.” Schedule 5 to the agreements provided for an original term of 10 years whereas Schedule 2 specified that the commencement date was the date “executed by [Blockbuster]”. It is common ground that Blockbuster executed the franchise agreements on 2 April 1998. If the letter was sent, Karioi had fulfilled the notice requirements under cl 2.2(d). One of the benefits to a franchisee in exercising an option for renewal in accordance with cl 2.2 was that the franchisee was not obliged to pay a further franchise fee: cl 2.2(c).

22 Mr Fife stated that he understood that Video Ezy was attempting to purchase the Blockbuster franchise group which was subject to Australian Competition and Consumer Commission (ACCC) approval. A week or so later, Mr Rick Wight responded to his 17 July 2007 letter. He recalled at [41] of his affidavit that Mr Wight said words to the following effect:

“I have received your letter. Given that the ACCC’s decision about the Video Ezy buyout is close, we will address the extension of your franchise agreements at a later date after a buyout.”

23 Mr Fife responded by saying that he would wait for Mr Wight to get in touch with him about it.

24 Further evidence on this issue includes [44-45] of Mr Fife’s affidavit in which he states:

“On or about 8 January 2008, I sent an email to Mr Dennis Banfield, General Manager of operations at Blockbuster in which I state:

‘I raised my desire to discuss the option of a further 5 years with Head Office in July 2007, I was informed to await the outcome of the Video Ezy buyout decision.’

On or around 8 January 2008, Mr Banfield responded, stating:

‘We are in the early stage of preparing to discuss your renewals with you. The first stage in this process requires a ‘Store Visit Report’ to be completed by an FBM. He (David Burt) is on leave until next Monday 14 Jan. On his return I am going to arrange for him to contact you to organise a day/days to complete the report on Nambour & Noosaville. Once I have this report I will then make contact with you to discuss the terms of the renewal.’

On 20 February 2008 I had a telephone conversation with Mr Banfield, which included words to the following effect:

Mr Banfield

‘Paul [Uniacke] has spoken to Rick [Wight] and Rick told him that he does not recall receiving your letter expressing your intention to exercise your option to renew the franchise agreements. Since we have no written record of your intention, we do not consider that you have validly exercised the option to renew in accordance with your franchise agreements. As a result, we will not offer you a renewal of your franchise agreements at no cost. We will require you to pay the franchise territory fees. I expect that the Noosaville fee will be about $25,000 and the Nambour fee will be about $15,000.’

Me:

‘Forget it, I’m not paying that. I sent a letter in July last year. I am not surprised that Rick can’t remember my letter. Rick’s management has waned over the last couple of years.’

Mr Banfield:

‘Also, in accordance with our current franchise agreement, you will be required to pay an increase in the monthly franchise fees to 4% of your turnover from April 2008.’”

25 Prior to the telephone conversation with Mr Banfield on 20 February 2008, Mr Fife sent an email to him on 13 February 2008 (ex O vol 2 at 2-76) in which he explained:

“I recently lost the complete contents of Outlook Express on my home computer which prohibits me from re-sending the email to Rick Wight and his possible response to it.

I therefore chose to look through my files on the franchises and found the copy of a letter to Rick, which was attached to the email sent to him last July.”

26 Mr Fife promised that he would fax to Mr Banfield a copy of the letter which he did the next day. In the covering letter, Mr Fife stated (ex O vol 2 at 2-77):

“I cannot recall with certainty whether Rick responded by email or telephone. He simply advised me that as a decision of the ACCC was close that we would examine my request at a later date”.

27 Another email on this issue was sent by Mr Banfield to Mr Fife on 29 February 2008 which included the following (ex O vol 2 at 2-84):

“...we have checked emails for Rick within that period you mentioned, incoming, deleted etc, no missing files in Rick’s emails that relate to your letter 17 July 2007.

We have checked Martin Breheny’s email records as well and again found no evidence to suggest there was correspondence relating to this matter.

Also we have checked over hard copy files re renewals and have nothing recorded noting any advices from yourself to BBA or vice versa re renewals.

We are concerned that with only a faxed letter there are no other documents you have to confirm this.

Rick advised that he has no recollection of any advices verbal, email, or written mail.”

28 In a letter dated 4 March 2008 Mr Banfield advised Mr Fife “that Rick Wight denies having discussed or corresponded with you on this matter”.

29 Mr Fife in his affidavit at [42] recounted a conversation that he had with Mr Uniacke at a franchise meeting in Brisbane in or about November 2007 following the approval by the ACCC of the buyout by Video Ezy of Blockbuster during which Mr Fife said:

“There are a number of stores in Queensland that are governed by franchise agreements that are due to expire in April 2008, and my two stores are among them. I wrote to Rick Wight earlier this year about my option to renew the agreements. Since you have bought Blockbuster, it is now up to you to commence negotiations with me in relation to renewing the agreements.”

To which Mr Uniacke replied:

“I think that Eddie [Nedelko] and I will have a lot of work to do to encourage those franchisees to want to continue with the group.”

30 Mr Uniacke in his affidavit dated 12 February 2009 did not agree with Mr Fife’s recollection of the conversation. Mr Uniacke stated that Mr Fife said words to the effect of:

“You will need to talk to us about store renewals as there are quite a number of Video Flicks stores due soon.”

31 There was no mention, Mr Uniacke said, of Rick Wight in that conversation or in any similar conversation around that time.

32 Mr Kunc SC who appeared for Blockbuster cross-examined Mr Fife on the letter. Mr Kunc directly put to Mr Fife that the letter was not sent which Mr Fife denied. There was much criticism by Mr Kunc of Mr Fife’s testimony. Mr Pike of counsel who appeared for the defendants put to me that any suggestion that the 17 July 2007 letter was not sent should be rejected. He argued that significantly Mr Wight, the recipient of the letter, gave evidence in the proceedings on behalf of Blockbuster, but did not say that he did not receive the letter. He cited Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 where Handley JA said at 418 E-F:

“In my opinion the Court should not draw inferences favourable to the insured on these matters when no attempt was made to prove them by direct evidence and in particular when no relevant questions were asked of Mr Ferrarese. Rather it seems appropriate to apply the principles of Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.”

33 Mr Pike submitted that it was not even open to Blockbuster to make the factual claim, let alone to use it as the central plank to an attack on Mr Fife’s credit.

34 It is true, as Mr Kunc pointed out, that Mr Fife testified at first that he sent the letter to Blockbuster as a Word attachment to an email but when his attention was drawn to the letter bearing a signature he explained that he had assumed that he had created the letter on his Word software, then it had been scanned and sent. There was no evidence, however, which suggested that this could not have been done. Mr Kunc was critical of Mr Fife’s response to the question as to why he had not raised in his affidavit an explanation for the letter being in much larger type than other letters sent by him to Blockbuster. In answer to that question Mr Fife said (T 93 L 26-29):

“Nobody was challenging the document so that I didn’t see the reason why I would have to turn around and substantiate about my eye operation, which I am now doing.”

35 Mr Fife had earlier testified he had created the letter in bold type to enable him to read it on the computer as he had had intra-ocular lens replacements in July and August 2007. Mr Kunc submitted that the explanation that nobody had challenged the document before was not correct and Mr Fife had accepted that the letter was challenged by Blockbuster in correspondence in early 2008. Whilst that is so, Blockbuster did not raise the size of the print in the letter with Mr Fife and it was plain that Mr Fife was referring to the font size when he testified that “nobody was challenging the letter.”

36 I did not find Mr Fife’s inability to recall whether Mr Wight spoke or sent an email to him as detracting from the honesty and reliability of his testimony. Furthermore, there was nothing to indicate that his evidence of losing the whole of his computer hard drive because of a lightning strike was not truthful.

37 The evidence which Blockbuster adduced as to the receipt of the letter by Mr Wight and to its inability to find the letter was confined to the contents of the emails and letters which were sent from Blockbuster to Mr Fife. Mr Banfield did not give evidence nor was there evidence from anyone who conducted searches for the letter on behalf of Blockbuster. An affidavit of Mr Wight dated 19 October 2008 was read but there was no reference in the eleven pages of that affidavit to the letter or the conversation with Mr Fife.

38 It is unnecessary, in my opinion, to resort to a consideration of the principles in Jones v Dunkel. Overall, Mr Fife impressed me as being a credible witness. Mr Fife had been in charge of the business side of Karioi for many years and it is evident that he had reviewed the franchise agreements to enlighten his “fellow Queensland Franchisees at Franchise meetings regarding our rights”: see Ex O vol 2 2-79. I do not think that Mr Fife overlooked the time limitation in cl 2.2 of the franchise agreements and then lied about the sending of the letter in order to avoid the payment of the franchise fees. I give little weight to the previous representations in the emails and the letter from Blockbuster of denials by Mr Wight of receipt of the letter dated 17 July 2007, the discussions with Mr Fife and that the letter could not be found after searches.

39 I am satisfied that the defendants have established on the balance of probabilities that the letter dated 17 July 2007 was sent by Mr Fife to Blockbuster on or about the date that the letter bears.

40 Another matter that was raised was the conflict in the evidence of Mr Fife and Mr Uniacke as to what was said at the meeting in November 2007 to which I have referred at [29-30] above. At [43] of his affidavit, Mr Fife further recalls Mr Uniacke saying to the franchise meeting words to the following effect:

“If any stores that come to the end of their franchise terms in the future and wish not to continue with the group for whatever reason then they can leave the group. We only wish to have franchisees who are happy to be with us.”

41 Mr Uniacke denied at [16] of his affidavit dated 12 February 2009 ever saying words to that effect.

42 As well as being the Managing Director of Blockbuster, Mr Uniacke was appointed as the Managing Director of Video Ezy in August 2005. Video Ezy purchased the Blockbuster franchise in October 2007. The purchase had been delayed by the obligation to obtain the approval of the ACCC. Although the number of Blockbuster stores at the time of the purchase is not detailed in Mr Uniacke’s affidavits, it is apparent there were a considerable number. Mr Uniacke recounts that in 2004 there were 430 Blockbuster branded stores in total and at the time of the swearing of his first affidavit, there were 339 Blockbuster franchise stores operating in Australia. The meeting which both Mr Uniacke and Mr Fife attended in November 2007 was a franchise meeting in Brisbane.

43 During his oral testimony, Mr Uniacke accepted that he had said to Mr Fife words to the effect that he and Mr Nedelko had a difficult job ahead of them in persuading the franchisees to stay because the purchase had been delayed by the ACCC process. There was a qualified acceptance by him that he was wanting to say things to the franchisees that would encourage them to remain with Blockbuster. Mr Uniacke, however, was adamant that he did not say anything that would give the franchisees ‘false hope’ or was ‘over promising’.

44 I consider it unlikely that Mr Uniacke who had the responsibility of the Video Ezy and the Blockbuster purchases could accurately recall whether Mr Fife made a reference to Mr Wight in their conversation whereas the primary focus of Mr Fife was Karioi’s business. I prefer and accept Mr Fife’s evidence of this conversation.

45 Mr Kunc contended that the Court could not be satisfied that Mr Uniacke said the words attributed to him by Mr Fife which have been quoted at [40] above. He submitted that Mr Fife’s oral testimony that he had discussed what was said in the address by Mr Uniacke to the 2007 meeting a number of times with fellow franchisees suggested that he might have favourably reconstructed his evidence. To my mind, these discussions could either re-enforce or detract from the reliability of this piece of Mr Fife’s evidence. Mr Fife’s recollection of what was said is not a matter of recent invention as it was raised in a letter dated 7 May 2008 from William Howes, Blockbuster’s legal counsel, as was Mr Uniacke’s denial. Mr Howes stated in that letter:

“Paul Uniacke and Eddie Nedelko, for their part, refute that they have made a general offer to stores to release them from their franchise agreement in the event they were not happy with the franchise business.”

46 Mr Uniacke was seeking to address at the meeting unhappiness of some of the franchisees with the delay in Blockbuster’s purchase. Whilst that is so, I am not persuaded that it is more likely than not that Mr Uniacke did provide encouragement to Blockbuster franchisees to leave the group. I prefer and accept Mr Uniacke’s evidence of this conversation.

Did the Noosaville and Nambour franchise agreements expire or were they terminated?

47 Blockbuster submitted that there was a mutual understanding that the franchise agreements would not expire on 2 April 2008. It was contended that the correspondence between the parties and Mr Fife’s testimony about the correspondence demonstrated in the clearest terms a mutual understanding that the franchise agreements would continue in force until 31 August 2008. Blockbuster’s argument emphasised that the facts demonstrated that both parties after 2 April 2008 continued to perform both sides of the franchise agreements. Karioi continued to carry on business as usual and to receive the benefit of (and actively participate in) Blockbuster’s marketing programs. Blockbuster pointed to the admissions made in paragraph 10 of Karioi’s defence. Blockbuster noted cl 8.6 of the franchise agreements whereby Karioi’s licence to use Blockbuster’s industrial property is automatically revoked on termination or expiry. It could not have been the intention of the parties that the licence to use Blockbuster’s intellectual and other industrial property was revoked from April 2008.

48 Blockbuster put to me that there was no basis for the court to conclude that there was an extension of a “negotiation period” without a continuation of the mutual obligations under the balance of the franchise agreements. The franchise agreements, it was said, do not provide anywhere for a negotiation period and the parties behaved as though they were bound by the terms of the franchise agreements. Both parties had conducted themselves on the underlying assumption that the franchise agreements would continue in force until either Karioi exercised its option under cl 2.2 or the franchise agreements were terminated. With this understanding, Blockbuster was said to have acted to its detriment. In the circumstances, an estoppel by convention, it was argued, arose out of the dealings between the parties to the effect that the franchise agreements would continue from 2 April 2008 “until terminated”.

49 Karioi, on the other hand, argued that the evidence falls well short of demonstrating that either of the parties conducted itself on the conventional basis alleged, let alone both. Karioi contended that after 2 April 2008 there existed an interim arrangement between Karioi and Blockbuster whereby Karioi would be permitted to continue to operate both the Noosaville and Nambour stores in return for the payment of an increased licence fee. This interim arrangement was able to be brought to an end by either party on giving reasonable notice. The bringing to an end of this interim arrangement should not be regarded as a termination under the franchise agreements. Karioi submitted that the franchise agreements expired by effluxion of time on 2 April 2008 or an alternative construction of the conduct of the parties is that the arrangements expired on 31 August 2008.

50 Included in the franchise agreements are the following clauses:

“18. ACTION UPON TERMINATION

Upon this Agreement being terminated or expiring for whatever reasons.

18.1 Pay Monies Owing

The FRANCHISEE must immediately pay to COMPANY all amounts owed to COMPANY under this Agreement, including amounts owed for purchases, and interest due on any outstanding monies owning (sic).

18.2 Deliver Up Documents and Cease to Exploit Industrial Property

The FRANCHISEE must deliver to COMPANY any signs, Franchise Operations Manuals, instructions, notices, writings and other documents relating to the Franchised Operation including all copies of Confidential Information or Industrial Property. The FRANCHISEE must cease to use or exploit in any way Industrial Property or Confidential Information including any techniques and skills developed by COMPANY and used by the FRANCHISEE in the Franchised Operation.

18.3 Remove or Obliterate Signs and Features

The FRANCHISEE must if COMPANY requires removes (sic), obliterate or destroy (as appropriate) any signs, colour schemes and other features associated with the Franchise, whether appearing at the location from which the Franchised Operation is conducted, on any motor or other vehicle used in the Franchised Operation or otherwise to the satisfaction of COMPANY. If the FRANCHISEE does not comply with this requirement FRANCHISEE authorises COMPANY or its nominee to comply with the requirement and COMPANY may recover the cost of doing so from the FRANCHISEE. The FRANCHISEE may not indicate any connection with COMPANY and may not represent self to the public as a former franchisee, except as required by law.

18.4 Divesting of any Industrial Property rights

The FRANCHISEE must execute all documents and do all things necessary to remove the name of the FRANCHISEE from any register and to divest the FRANCHISEE of any rights relating to the business name, trade marks and other Industrial Property belonging to COMPANY. For the purpose of transferring to COMPANY the ownership and registration of the business name stated in Schedule 6 of the [agreement] FRANCHISEE appoints COMPANY as its attorney to execute all documents and to all things necessary for these purposes.

18.5 Transfer telephone service

The FRANCHISEE must transfer the telephone service (including all telephone, mobile and facsimile numbers) used in the Franchised Operation to COMPANY or its nominee.

18.6 Sale of Selected Fittings and Equipment

18.6.1 IF the Agreement is terminated, and if COMPANY

requires, the FRANCHISEE must sell and deliver to COMPANY any of the FRANCHISEE’s fittings and equipment and any unsold stock of videos, accessories and consumables used in the conduct of the Franchised Operation that COMPANY selects.

18.6.2 The purchase price of the fittings, equipment, videos, accessories and consumables will be as agreed between the parties but if they cannot agree then as determined by an independent valuer nominated by the then President of the Queensland Law Society or his/her nominee. The valuers fees will be paid equally by the parties but if one party pays the whole fee they may recover the other party’s share as a debt due and owing or, at its option, COMPANY may set-off FRANCHISEE’s share against the purchase price.

18.6.3 The purchase price will be paid by COMPANY to the FRANCHISEE within sixty (60) days of the date upon which the price for the items purchased is ascertained.

18.6.4 COMPANY is entitled to set off or apply any monies payable by it in reduction of any monies then due to COMPANY by the FRANCHISEE.

18.6.5 The FRANCHISEE must permit COMPANY and its authorised agent to have reasonable access to the premises within which the fittings and equipment and videos, accessories and consumables of the FRANCHISEE are located to enable them to be inspected.

18.6.6 If the Agreement expires, refer to Option to Purchase, paragraph 32.
18.7 No Rebate

The FRANCHISEE will not be entitled to any rebate or refund or any money paid by it under this Agreement.

18.8 Pay for Goods

The FRANCHISEE must pay the supplier of any stock supplied to the FRANCHISEE any amount outstanding within seven (7) days after the date of termination.

18.9 Leases

If required by COMPANY the FRANCHISEE must assign, transfer or surrender (as the case may require) of all the FRANCHISEE’s right, title and interest in any lease, sub-lease or licence of the Premises or equipment held by the FRANCHISEE as part of or in the course of the Franchised Operation.

...
32 OPTION TO PURCHASE

32.1 If upon the expiration of the Original Term or the Renewal

Term, (as the case may be) the FRANCHISEE does not renew the Franchise (if there is an option to renew) or is not otherwise granted a new Franchise COMPANY has the option to purchase from the FRANCHISEE the assets of the Franchised Operations (“the Assets”). For the purposes of this clause, “Assets” means the FRANCHISEE’s equipment, stock, leasehold interest in the Premises and improvements and the FRANCHISEE’s goodwill attaching to the Franchised Operation.

32.2 If COMPANY so elects COMPANY may sell the Assets to a third party as agent for the FRANCHISEE.

32.3 If COMPANY wishes to exercise its option under this clause it must give written notice to that effect to the FRANCHISEE within 30 days of the expiration of the Original Term or Renewed Term (as the case may be). After that time the option will lapse.

32.4 (a) The purchase price for the Assets will be the fair

market value as agreed between COMPANY and the FRANCHISEE but if they cannot agree then as determined by an independent valuer nominated for that purpose by the President of the Queensland Law Society or his/her nominee.

(b) The valuer’s fees will be paid by the parties equally. If one party pays the whole of the fee they may recover the other party’s share as a debt due and owing, or, as its option, COMPANY may set-off FRANCHISEE’s share against the purchase price.

(c) The purchase price as determined under clause 31.4 will be paid by COMPANY to the FRANCHISEE within 60 days of the date upon which the purchase price is ascertained.

32.5 (a) The parties agree to sign and deliver all documents

necessary to vest title to the Assets in COMPANY free and clear of all liens and encumbrances except those assumed by COMPANY.

(b) COMPANY is entitled to set off or apply any moneys payable to it in reduction of any moneys then due to COMPANY by the FRANCHISEE.

32.6 The FRANCHISEE must cooperate in the assignment to COMPANY of any interest which the FRANCHISEE has in any lease or tenancy with respect to the Premises and do all things reasonably necessary to obtain the landlord’s consent to the assignment. The option under this clause will lapse if the landlord’s consent to the assignment cannot be obtained.”

51 Before proceeding further, it is necessary to set out in some detail the communications between Blockbuster and Karioi after 17 July 2007 and the evidence of Mr Fife.

The communications between the parties

52 On 28 February 2008, Mr Fife wrote to Mr Banfield as he was travelling to South America on 4 March 2008 and would not be returning to Australia until 7 April 2008. It had become clear that the end of the original term of the Noosaville and Nambour franchise agreements would pass before the process in cl 2.2 for renewing the franchise agreements had been completed. Mr Fife stated in the letter that he had written to avoid any conflict between Blockbuster and Karioi “pending continuance of our Franchise Agreements for the Nambour and Noosaville stores whilst I am on holiday”. He informed Mr Banfield of his trip to South America and upon his return he would be available to address Karioi’s request “for a five year extension as urgently as you desire.” He pointed out that he had not received from Blockbuster “a copy of the new franchise agreement, a disclosure statement, a listing of any changes that you may require to the presentation of our stores or a formal statement from Blockbuster with the proposed changes to the terms within which we operate a Blockbuster Franchise.” He agreed to pay an increased monthly fee of 4 per cent of the stores’ turnovers of which he had been informed by Mr Banfield in the telephone conversation of 20 February 2008 “for both outlets, whilst we are in this period of negotiation.” Mr Fife emphasised that this “should not be construed that we accept all conditions that may change if we agree to proceed with a new Franchise Term from 2^nd April 2008.”

53 On 4 March 2008 Mr Banfield wrote to Mr Fife stating:

“...that we are agreeable to extend the current Franchise Agreements for a further 30 days from 7 April as requested.”

54 By a letter dated 28 March 2008, Mr Banfield wrote to Mr Fife referring to his letter of 28 February 2008 “and your agreement to pay the increased

4% franchise fee during the period of negotiation of the renewal of the Franchise Agreements for Nambour and Noosaville”. The four per cent franchise fee was to apply from the beginning of April 2008. Mr Fife was asked to contact Mr Banfield “to discuss the renewal of the Franchise Agreement terms” upon his return to Australia.

55 Following his return to Australia, Mr Fife wrote to Mr Banfield on 9 April 2008 noting “that the new franchise fees commence from the beginning of April and that you have agreed to extend the negotiation period to commence on the 7 April for 30 days.” He advised that he had not received “a listing of any requirements of change to my stores nor have I received a copy of the new franchise agreement.”

56 In a letter dated 18 April 2008 Mr Banfield wrote to Mr Fife as follows:

“I refer to our discussions concerning the renewal of your Franchise Agreement, which expired on:

Nambour 2^nd April 2008
Noosaville 2^nd April 2008

Pursuant to the renewal process with you, I confirm that the Store Visit Report has been completed which constitutes the first stage of the renewal process. BBA is prepared to offer you a renewal of your Franchise Agreement subject to the following terms and conditions:-

1. That the initial Term be for a period of five (5) years commencing 3^rd day of April 2008 and expiring on 3^rd day of April 2013.

2. That the initial Sub-Franchise Fee be the sum of:

Nambour: $4,500 ex GST

Noosaville: $10,000 ex GST

This sum can be paid by instalments over twelve (12) months incurring interest at current lending rates of 8.8%.

3. That the Licence Fee be 4% of the gross revenue of the store. Note this has charged from 2^nd April 2008.

4. That the Marketing Fund contribution be 2% of the gross revenue of the store. Note this has been charged from 2^nd April 2008.”

57 The letter made further reference to the legal fees for the preparation of the documentation and to the territory of the franchises being as “the current franchise territory”. As a further condition, the letter specified the refits which were to be undertaken at the Noosaville and Nambour stores “within 3 months from the date of commencement of the new Sub-Franchise Agreement”.

58 In a letter dated 24 April 2008, Mr Fife replied to Mr Banfield’s letter of 18 April 2008. He expressed surprise as to what he regarded as excessive charges for legal fees and his unhappiness about the work that had been requested to be made to each store. Mr Fife went on to state:

“It would be a shame to see them not continue to operate as Blockbuster stores and as I wish to avoid any confrontation with Blockbuster Australia I wonder whether you would entertain the opportunity to buy the two businesses from us. The Franchise Agreement provides for the Franchisor to have first right of refusal should the business become available for sale.”

59 On 29 April 2008, Mr Banfield responded by indicating that the Blockbuster provided its “in principle consent” to the transfers subject to conditions which included an inspection of the store and the proposed transferee and its owners meeting Blockbuster’s standards. In another letter written by Mr Banfield to Mr Fife on 30 April 2008 Mr Banfield stated:

“Until the businesses were in fact on the market for sale we would not give consideration to a first right of refusal to acquire the same. In that regard we strictly reserve our rights under the Franchise Agreements.”

Mr Banfield restated that Blockbuster was prepared to renew the franchise agreements on terms of the letter of 18 April 2008 and extended that offer for a further 14 days from 30 April 2008.

60 On 2 May 2008, Mr Fife wrote to Mr Banfield. In this letter he stated:

“After much consideration and agonizing I advise that we remain uncomfortable with the terms and conditions for an extension of our franchise agreements with Blockbuster Australia for Nambour and Noosaville territories...

We do wish to avoid any bitterness and conflict and believe it is best to sever our association with Blockbuster Australia as franchisees...

We would appreciate if our ties can terminate on 31^st May, which will include the amount for the advertising fund for May trading...”

61 On 7 May 2008 Mr Howes wrote to Mr Fife setting out what Blockbuster considered were its rights if the franchise agreements were terminated. Mr Howes made reference to a cl 18.4 (a restraint of trade clause) and to a cl 18.5 which applied “upon termination of the Franchise agreement or upon expiration of the Agreement by effluxion of time” and gave to the franchisor an option to purchase “all the assets used in the store.” Mr Howes stated:

“I note that you indicate that you wish to terminate on 31 May 2008. We will consider exercising our rights as above advised in the event that you in fact terminate the Franchise Agreements on 31 May 2008 as indicated.”

62 Mr Fife emailed Mr Howes on 7 May 2008 pointing out that in Mr Howes’s letter, Mr Howes was referring “to a newer franchise agreement with Blockbuster Australia than the one [he] signed on 2 April 1998.”

63 On 13 May 2008 Mr Fife emailed Mr Banfield saying, that while it had been “suggested that any negotiations should settle by today” as he had not received further correspondence from Blockbuster he considered “that the date should be at least after 31^st May 2008.”

64 In a letter dated 14 May 2008, Mr Howes wrote to Mr Fife. In that letter, Mr Howes confirmed that the clauses commented on in his letter of 7 May 2008 were from a subsequent standard version of the franchise agreement. He went on to state:

“Although your Agreement does not contain these precise provisions, it nevertheless contains similar provisions. In that regard, clause 32 grants an option to the Franchisor to acquire your business at the expiration of the original term or the renewed term, as the case may be, and in the event you do not renew the franchise. For the purposes of clause 32 “Assets” of the business are defined as “the Franchisee’s equipment, stock, leasehold interest in the Premises and improvements and the Franchisee’s goodwill attaching to the Franchised Operation.

...

As advised in our letter to you of 7 May 2008 we will consider exercising our rights as above advised in the event that you terminate the Franchise Agreements on 31 May 2008 as indicated.”

65 Mr Fife wrote to Blockbuster on 16 May 2008. In that letter he stated:

“I have repeatedly requested a copy of the current franchise agreement. I also requested a copy in my letter to Rick Wight in July 2007 when I advised that I wished to commence negotiations for a possible extension of my franchise terms. One of the essential factors in determination of an ongoing commitment to any franchise would be the perusal and satisfactory assessment of the binding document, a condition that is more than likely included in the franchise code.

Therefore, I make another request for that document to be sent to me to enable me to understand the content which may require the engagement of legal scrutiny.”

66 Following an email from Mr Howes which enclosed a blank sub-franchise agreement, the terms and conditions of which Mr Howes suggested be inserted in accordance with the successor agreement, Mr Fife wrote a letter dated 23 May 2008 to Mr Banfield. He stated that the sub-franchise agreement he received was not franchise “friendly” and considered that Karioi could not commit to the terms of the agreement. He went on to state:

“My letter to Rick Wight in July 2007 advised my intent to commence negotiations of a further term with Blockbuster and part of that process was to assess the new agreement to gauge whether we were able to commit to the terms of the content. We may have reached the point of that decision had we been sent the document earlier as requested.

We therefore determine that there are two remaining options,

1. Either that Blockbuster Australia purchases the two stores at market value or,

2. We continue to trade as Independents.

Option 1 has a special condition (Clause 32.3) that requires Blockbuster Australia by exercising this option to advise the franchisee in writing within 30 days of the expiration of the original term. Although this time has elapsed we would be agreeable to an extension of a further 30 days to 2^nd June 2008 should Blockbuster wish to commence a buyout process.

...

Option 2...will reflect some unavoidable disruptive influences including the loss of representation of the Blockbuster brand in the two territories.

Reference was made in earlier correspondence to the “Cascading Clauses” contained in section 14 of our agreement. We and the Video Flicks Franchisor contend that the intent of the clauses in this section were included in the agreement to prohibit a franchisee who has sold his or her stores to a third party from trading in any fashion that would negatively impact on the trading of Blockbuster store within that territory. Therefore, if we were left to trade as independents we would not be competing with a Blockbuster store in our territories as all reference to Blockbuster brand would cease following the removal of signage, labelling (sic), uniforms, etc, which leaves us conflict free.”

67 On 10 June 2008 Mr Howes replied to Mr Fife stating that the two alternatives proposed in his letter of 23 May 2008 were not acceptable to Blockbuster and that Blockbuster held “you to the option you exercised with respect to both stores by letter dated 17 July 2007.” Mr Howes sought confirmation that “you now refuse to take up that option validly exercised by you in accordance with your letter of 17 July 2007”. Mr Howes went on to state:

“We hereby confirm that pursuant to clause 14 of your Franchise Agreement that we will enforce the restraint of trade provisions against you in the event that you now refuse to proceed with the successor agreements in accordance with exercise of option above....”

68 Shultz Toomey O’Brien Lawyers (Schultz), Karioi’s solicitors, wrote to Mr Howes on 23 June 2008. The letter referred to cl 2.2 of the franchise agreement providing a procedure which had not been completed and that their client had been requesting that new franchise agreements be submitted since 17 July 2007. The solicitors sought confirmation that “no initial franchise fee” will be payable for the grant of the new agreements.

69 On 10 July 2008 Schultz sent a further facsimile to Mr Howes requesting a reply to the facsimile of 23 June 2008.

70 Mr Fife wrote to Mr Banfield on 15 July 2008 stating that he had not validly exercised the option to renew the franchise agreements and his letter of 17 July 2007 simply put Blockbuster on notice of his intention to exercise the option. He stated that the restraint of trade provisions were unreasonable and that he did not agree that the provisions were enforceable or binding. Mr Fife went on to state:

“Please be advised that Karioi Pty Ltd will not renew the agreements.

Rather, Karioi Pty Ltd will continue to trade independent video outlets at the Nambour and Noosaville stores.

The transition from Blockbuster outlets to independent outlets will be complete by 15 September 2008.”

71 On 28 July 2008 Mr Howes wrote to Schultz stating that Blockbuster remained willing to perform the contract on the terms that were set out in the letter of 18 April 2008. The letter attached “the documents contemplated by cl 2.2 for execution.”

72 Gadens lawyers who were then acting for Karioi wrote to Mr Howes and Mr Banfield on 31 July 2008. Gadens stated that Karioi did not accept the terms of Blockbuster’s offer to renew the franchise agreements as set out in Blockbuster’s letter dated 18 April 2008. Gadens stated:

“By this letter, Karioi gives notice to Blockbuster that it will terminate its Franchise Agreements with effect from 31 August 2008.

We consider that one month’s notice of termination is reasonable in the circumstances.”

73 On 6 August 2008 Mr Howes replied to Gadens stating:

“Your client did not have a right to terminate the Franchise Agreements on reasonable notice. We treat that letter as a repudiation, which Blockbuster Australia (BBA) accepts. With this letter, BBA terminates the Franchise Agreements effective 31 August 2008.

...

For the avoidance of doubt, BBA is relying on the position you have adopted in your letter of 31 July 2008 that the Franchise Agreement is currently on foot, and remained on foot until validly terminated. In particular, BBA is not pursuing any rights that it would acquire upon expiry rather than termination of the Franchise Agreements (such as the right to purchase the franchise under clause 32).”

74 Gadens stated in a letter dated 19 August 2008 to Mr Howes:

“The franchise agreements in respect of the Nambour and Noosaville outlets...expired on 2 April 2008 by effluxion of the ten year term of the Franchise Agreements.

In this regard, any extension of the Franchise Agreements was merely an extension of the negotiation period between Karioi and BB Australia in relation to Karioi’s option to renew the Franchise Agreements. Karioi made this position clear to BB Australia in its letter dated 9 April 2008, in which Mr Fife notes that:

‘[BB Australia has] agreed to extend the negotiation period to commence on 7 April 2008 for 30 days.’

...

The purpose of our 31 July 2008 letter was to put BB Australia on notice that Karioi did not intend to renew its Franchise Agreements with BB Australia and therefore that Karioi was terminating the negotiation period on foot for renewal of the agreement, and that Karioi would accordingly cease trading as a Blockbuster store on 31 August 2008.”

75 During his oral testimony Mr Fife said that it was his understanding that the franchise agreements were going to expire on 2 April 2008 and that from 3 April 2008, Karioi and Blockbuster would be in an extended period of negotiation to renew the franchise agreements. He testified that he had entered into the agreement with Blockbuster to pay the increased monthly franchise fees during the period of negotiation to show good faith and to keep operating the Noosaville and Nambour stores as Blockbuster stores during the negotiation period.

76 When cross-examined by Mr Kunc on the letter written by Mr Banfield on 4 March 2008 which is quoted at [53] above Mr Fife said that he did not realise that the franchise agreements had been extended beyond the expiry date. It was his understanding that it was the period of negotiation which was extended from 7 April 2008 for 30 days. He pointed to his letter to Mr Banfield of 9 April 2008 in which he expressly stated “that you have agreed to extend the negotiation period to commence on the 7 April for 30 days”. He explained that he was prepared to honour all the terms and conditions of the franchise agreements whilst Karioi and Blockbuster were in this period of negotiation.

77 Mr Kunc took Mr Fife to the terms of his letter dated 24 April 2008 which are quoted at [58] above. Mr Fife maintained that “[he] was purely trying to see whether Blockbuster wished to activate clause 32 after any enquiry.” T 124 L 9. He agreed that he did not say that in the terms of his letter and “could have written it differently”.

78 Mr Fife agreed that Mr Banfield’s response of 29 April 2008 was the sort of letter that he would have expected to receive if he had sought Blockbuster’s consent to the sale of the business to an unnamed third party. He agreed that Mr Banfield’s response made it clear that Blockbuster was not thinking in terms of an exercise of its rights under cl 32. He, however, did not accept that his reference to the “first right of refusal” was to cl 15.2 which relevantly provides:

“The FRANCHISEE may assign to transfer a Financial Interest in the FRANCHISEE or this Franchise to a bona fide, financially respectable and responsible purchaser BUT before doing so must first offer to sell the Franchised operation to COMPANY upon the same terms and conditions as the FRANCHISEE has offered them to the proposed purchaser.”

79 Mr Fife did not agree that the letter dated 30 April 2008 from Mr Banfield involved a further continuation of the franchise agreements until 14 May 2008. It was his understanding that his letter involved continuing the negotiation period. When his attention was directed by Mr Kunc to the references in his letter dated 2 May 2008 “to sever our association with Blockbuster Australia as franchisees” and “if our ties can terminate on 31 May”, Mr Fife said that he was referring to terminating the negotiation period and that he thought it was appropriate to give Blockbuster 30 days notice.

80 In further cross-examination, Mr Fife gave the following evidence: (T 131 20/2/09 45 to end; T 132 L 1-9):

“Q. From the period 2 April 1998 through to May 2008, if I had walked into the Noosaville or Nambour store, what I would have found was a fully operational Blockbuster franchise, wouldn't I?
A. Correct.

Q. It was just business as usual in terms of the ordinary incidents of the relationship of the franchisor and franchisee during that period, wasn't it?
A. Correct.

Q. That business as usual, you understood at the time, had to be governed by the franchise agreements that had been continued after 2 April 2008?
A. It had to be governed by the franchise agreement that I signed on 2 April 1998.”

81 And further (T 132 L 48-50 20/2/09; T 133 L 1-17):

“Q. As an incident of extending the negotiation period, you understood that that meant that the underlying franchise agreements had to continue?

A. That the rules of the franchise agreement that I signed on 2 April 1998 would still be in force.

Q. With the one exception; by the time we are in May you are on new franchise fee, or a new licensing fee rather?
A. In good faith.

Q. Not doubt your good faith, Mr Fife. I'm just asking you to accept the proposition that the rules governing your relationship at that time were the rules as set out in the franchise agreement you signed on 2 April 1998 with one variation, namely, that you are now paying a licensing fee that was 4 percent of turnover?
A. Which would be included in a new franchise agreement had I ever received it.

Q. That's right, but at the moment it was governed by the rules of the old agreement with that one change?
A. It was for the negotiation period.”

82 When referred to the first option in his letter dated 23 May 2008, Mr Fife testified that “the expiry date was 2 April and I was willing to grant Blockbuster a further 30 days and it is obvious that I was going down the expiry paths, not the termination path”: T 138 L 29-31. He accepted that “the rules” constituted by the agreement he entered into on 2 April 1998 continued to operate. As to the letter from Gadens dated 31 July 2008, Mr Fife accepted that he was not suggesting that anything in the letter did not accurately reflect his understanding of the position between Karioi and Blockbuster. He did not agree, however, that Karioi was giving notice to Blockbuster that it would terminate its franchise agreements from 31 October 2008. He said that the only thing he was terminating was the negotiation period.

Are the elements of estoppel by convention made out?

83 Blockbuster relies upon estoppel by convention. In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Insurance) Ltd [1986] HCA 14; (1986) 160 CLR 226 the High Court (Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ) said at 244:

“...Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying.”

84 It is well established that estoppel by convention is not confined to an underlying assumption of a state of facts and the underlying assumption may be one of fact, law or both: Foran v Wright [1989] HCA 51; (1989) 168 CLR 385 at 435, 457; Commonwealth v Verwayen (1990) 170 CLR 394 (at 413, 445, 501); GEC Marconi Systems v BHP-IT [2003] FCA 50; (2003) 128 FCR 1 at [427]; RP Meagher, J D Heydon and MJ Leeming, Meagher, Gummow and Lehane’s Equity Doctrines and Remedies, 4^th ed, (2002) Australia, Butterworths LexisNexis at 540 [17-020].

85 There are six elements which the plaintiff must prove to establish a conventional estoppel:

(1) The plaintiff has adopted an assumption as to the terms of his or her legal relationship with the defendant.

(2) The defendant has adopted the same assumption.

(3) Both parties have conducted their relationship on the basis of

that mutual assumption.

(4) Each party knew or intended that the other act on that basis.

(5) Departure from the assumption will cause detriment to the

plaintiff.

(6) In all the circumstances it would be unconscionable to allow

the other party to resile or depart from the assumption: Waterman v Gerling Australia Insurance Company Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300 per Brereton J at [83]; The Bell Group (in liq) v Westpac Banking Corporation [2008] WASC 239 at [3517].

86 Blockbuster identified the assumption mutually adopted between the parties as being the continuation of the Noosaville and Nambour franchise agreements from 2 April 2008 until the option to renew under cl 2.2 was exercised by Karioi or until the franchise agreements were terminated. But what does were terminated mean? It is Blockbuster’s case that there was a termination of the franchise agreement in the manner that term is used in the agreements. Clause 16 provides for termination upon default (by the franchisee) whereas cl 18 refers to “this Agreement being terminated or expiring for whatever reason”. Accordingly, Blockbuster has identified the assumption mutually adopted between the parties as being the continuation of the Noosaville and Nambour franchise agreements from 2 April 2008 until the option to renew under cl 2.2 was exercised by Karioi or until the franchise agreements were terminated and that such termination would be a termination under the franchise agreements. Blockbuster must establish on the balance of probabilities that it and Karioi had in fact adopted the alleged assumption as the basis of their relationship from 2 April 2008. The adoption of the alleged assumption may not necessarily be expressly made but may be inferred.

87 Blockbuster submitted, correctly in my opinion, that in asking whether there was a mutual assumption, the enquiry is not what the parties thought, but into their objective conduct. As was said by Owen J in the Bell Group (in liq) v Westpac Banking Corporation at [3521]:

“It seems clear that there must be some mutually manifest conduct by the parties that is based on a common but mistaken assumption. But what exactly does this mean? As McPherson J remarked in Queensland Independent Wholesalers Ltd v Coutts Townsville Pty Ltd [1989] 2 Qd R 40, 46, the conventional basis for the assumption relied upon must first be identified. The word 'conventional' in this context carries connotations of agreement, not necessarily express but to be inferred. There must be at least a demonstrable acceptance of a particular state of things as the foundation for the dealings of the parties. There has to be a course of dealing between the parties, that is to say, acts or conduct that impinge upon their mutual affairs. McPherson J also noted that acts done privately by one party without them coming to the knowledge of the other are not capable of forming a conventional or accepted basis of their relations. The point that communication is necessary was also made by Lord Steyn in Republic of India v India Steamship Co Ltd (No. 2) [1997] UKHL 40; [1998] AC 878, 913.”

88 There has been a deal of evidence about the subjective understanding of Mr Fife of his dealings with Blockbuster and his lawyers. I have concluded that this material is irrelevant to the question of whether Karioi adopted the assumption alleged by Blockbuster and conducted its relationship with Blockbuster on the basis of that mutual assumption: s 55(1) of the Evidence Act 1995; Toll (FGCT) v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165.

89 In Toll (FGCT) v Alphapharm Pty Ltd, the High Court (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ) said at 179:

“40 This Court, in Pacific Carriers Ltd v BNP Paribas [6], has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction [7].”

90 Whilst these remarks were directed to the principles of construction of a contract, they are, to my mind, apposite to the determination in these proceedings of the relationship between the parties after 2 April 2008. Their dealings which include those matters addressed at [17-46] above are relevant to the surrounding circumstances known to them. There is another matter which I wish to mention. Blockbuster’s application to have access to the material produced in answer to a notice to produce was rejected during the trial. It was suggested that the material might shed light on Mr Fife’s state of mind. Mr Fife’s state of mind, however, is irrelevant.

91 In the present case, I propose to consider objectively both the communications between the parties and the conduct by them of their relationship after 2 April 2008.

92 The communications passing from Blockbuster to Karioi, objectively considered, do not demonstrate a common understanding on Blockbuster’s part of the terms of its legal relationship with Karioi. In the letter dated 4 March 2008, Mr Banfield told Mr Fife that Blockbuster agreed to an extension of the franchise agreements for a further 30 days from 7 April. Mr Banfield’s letter dated 28 March 2008 indicates an acceptance by him that after 2 April 2008 the parties would be in a period of negotiation for the renewal of the franchise agreements. Notwithstanding what was written in the letter dated 4 March 2008, Mr Banfield’s letter dated 18 April 2008 expressly refers to the expiration of the franchise agreements on 2 April 2008. Mr Howes in his letter dated 14 May 2008 speaks of Blockbuster exercising its rights “as above advised” in the event that the franchise agreements were terminated by Karioi on 31 May 2008. Those rights to which he referred included cl 32. The option to purchase under cl 32 did not apply upon termination but, relevantly, upon the expiration of the franchise term. Both this letter and Mr Howes’s letter of 7 May 2008 do not sit happily with an assumption by the parties that a termination of their negotiations would be a termination under the franchise agreements. Mr Howes’s insistence in his reply of 10 July 2008 that Blockbuster held Karioi to the option to renew it had exercised by the letter of 17 July 2007 adds to the difficulty in discerning what Blockbuster considered were the terms of its legal relationship with Karioi and is inconsistent with the mutual assumption alleged. There is nothing in these communications which suggests that Blockbuster was acting upon the assumption that, if the negotiations between the parties were unsuccessful, the bringing to an end of the negotiation period would be a termination under the franchise agreements. It was not until Mr Howes’s response to Gadens’ letter of 31 July 2008 was there reference to termination being treated as a repudiation.

93 When the communications passing from Mr Fife to Blockbuster are objectively considered, it is evident that Mr Fife understood that the franchise agreements expired on 2 April 2008 and thereafter he was negotiating with Blockbuster as to whether Karioi would exercise its option for renewal under cl 2.2. There was no acceptance by Mr Fife of the offer by Mr Banfield to extend the franchise agreements for 30 days from 7 April 2008 but he restated in his letter of 9 April 2008 that the parties were in negotiations. There is some confusion in Karioi’s understanding of its legal relationship with Blockbuster in the letter dated 24 April 2008 when Mr Fife referred to “the right of refusal” but the letter dated 23 May 2008 makes it clear that it was Karioi’s position that the franchise agreements had expired. Furthermore, the terms of the letter are inconsistent with an adoption by Karioi of an assumption that the termination of the negotiating period would be a termination under the franchise agreements. The letter from Gadens dated 31 July 2008 which speaks of termination was clarified by the solicitors’ letter of 19 August 2008 – that Karioi did not intend to renew the franchise agreements and it was the negotiation period that was being terminated. When the communications from Mr Fife are objectively considered as a whole, it is plain that Mr Fife intended to give notice to Blockbuster that Karioi was terminating its negotiations to renew the agreements and in no way did he understand that he was terminating the agreements such as to trigger either cl 16 or cl 18. A reasonable person in the position of Blockbuster would not have been led to believe by the communications from Karioi that there was a termination under the franchise agreements.

94 After 2 April 2008, Karioi continued to operate the franchises with Blockbuster’s consent whilst they were negotiating. It was business as usual between the parties with an increased franchise fee paid by Karioi. Mr Fife accepted that the terms of the franchise agreements underpinned the legal relationship between the parties during their negotiations and understood they were not operating in a legal vacuum. The communications and conduct of the parties would have led a reasonable person to believe that the franchise agreements did not, as contended by Karioi, expire on 3 April 2008. The question, however, which remains is not, as Blockbuster submits, simply whether or not the agreements were terminated within the meaning of cl 18. A finding that the agreements did not expire does not establish that Blockbuster and Karioi had adopted and conducted their relationship on the basis that the Noosaville and Nambour franchise agreements would continue until the option to renew under cl 2.2 was exercised by Karioi or until they were terminated. It is fanciful to suggest that Karioi had adopted the assumption that a bringing to an end of the negotiations would be a termination under the franchise agreements. By an acceptance of the alleged assumption, Karioi would deprive itself of the possibility that upon the expiration of the franchise agreements, Blockbuster would exercise its option to purchase the assets of the franchised operations under cl 32.1 which included goodwill. Karioi had been operating the video hire business at Noosaville since 1990 and at Nambour since 1994. Blockbuster had negotiated with Mr Fife in around 1996 to buy the Gympie store from Gainlaw and the Noosavillle store from Karioi for $1.45 million. Blockbuster was under no obligation under the franchise agreements upon termination to purchase the goodwill of the franchised operations. It cannot be doubted that cl 32 was of significant value to Karioi. Furthermore, there was no provision in the agreements which enabled Karioi to terminate them without triggering cl 16 and cl 18. None of the provisions of cl 16 and cl 18 which applied upon the franchise agreements being terminated were, in the circumstances, to the advantage of Karioi. Each franchise agreement did not itself provide any right for Karioi to bring it to an end before its term upon reasonable notice being given to Blockbuster. The true substance of Blockbuster’s case is that the ability to cease negotiating without penalty was confined to itself. An acceptance of Blockbuster’s argument, in my view, does not accord with the commercial reality of the dealings between the parties and would not reflect what a reasonable person would believe that the parties had agreed to by their communications and conduct.

95 Neither the communications between the parties nor the operation of the franchises after 2 April 2008 establish the mutual assumption which is said by Blockbuster to found the conventional basis of the relationship between Blockbuster and Karioi. There was, I conclude, no estoppel by convention.

96 What do the dealings between the parties objectively reveal? Blockbuster and Karioi understood that after 2 April 2008 they were in negotiations about the renewal of the franchise agreements. It can be readily inferred that each party was aware that if those negotiations failed, Blockbuster would withdraw its consent to the operation of the franchise businesses by Karioi. I am satisfied on the balance of probabilities that a reasonable person would consider the communications and conduct of the parties demonstrate a common understanding that Karioi with Blockbuster’s consent would continue to operate the stores as Blockbuster franchises until either the option to renew under cl 2.2 was exercised or the negotiations were concluded without agreement. There was a mutual assumption that if they were unable to reach agreement upon the terms of a renewal of the franchises Blockbuster’s consent to Karioi’s operation of the franchises would be withdrawn.

97 The definition of a “Franchise Term” in clause 1 of the franchise agreements is as follows:

“Franchise Term” means the Original term, the Renewal Term and any other period during which the FRANCHISEE operates the Franchised Operation with Company’s consent.”

98 The franchise term had been extended beyond 2 April 2008 whilst the parties negotiated as Karioi had continued to operate “the Franchised Operation with [Blockbuster’s] consent”. No agreement had been reached to extend the franchise term for a fixed period. There are no provisions in the franchise agreements which specifically provide for the consequences of withdrawal of consent by Blockbuster during the period of the franchise term which is neither the original term nor the renewal term.

99 From the communications and conduct of the parties, a reasonable person would understand that the parties appreciated the franchise term would either be extended by a “Renewal Term” or would expire when the negotiations were unsuccessful and Blockbuster’s consent was withdrawn. The present circumstances can be distinguished from The Cheesecake Shop v A & A Shah Enterprises [2004] NSWSC 625 upon which Blockbuster placed reliance. In that case there were no negotiations between the parties of the kind which have been detailed in the present proceedings. The franchisee continued to operate the franchise business for a number of years after the end of the franchise term. Windeyer J considered at [33] that no other implication was possible other than the continuing operation of the franchised agreement being a license terminable on reasonable notice.

100 Equity looks to substance and not merely to legal form when it fixes upon the legal situation of the parties: Friend v Brooker [2009] HCA 21 at [47]. Whilst Blockbuster by Mr Howes’s letter of 6 August 2008 purported to terminate the franchise agreements, the true nature of its action was to withdraw its consent to Karioi operating the franchises from 31 August 2008 from which date the franchise terms expired.

101 For the foregoing reasons, I conclude that the franchise agreements were not terminated.

Did Blockbuster validly exercise its rights under cl 18.6?

102 Blockbuster seeks declarations that by letter dated 6 August 2008 or otherwise, it has validly exercised its option under cl 18.6 of each of the Noosaville and Nambour franchise agreements to purchase such assets of these franchise businesses as Blockbuster selects.

103 By Mr Howes’s letter of 6 August 2008, Blockbuster purported to exercise the right set out in cl 18.6.1 of the franchise agreements to require Karioi to sell to it selected fittings and equipment. As this right is confined to the agreements being terminated, it was not validly exercised by Blockbuster. I decline to make the declaration sought.

Can Blockbuster validly exercise the lease-assignment right under
cl 18.9?

104 In Mr Howes’s letter of 6 August 2008, there was no mention of Blockbuster exercising a right under cl 18.9 to require Karioi to “assign, transfer or surrender (as the case may require) of all [Karioi’s] right, title and interest” in the leases to the Noosaville and Nambour stores. Blockbuster, however, seeks an order that Karioi assign to it or its nominee “the lease, sub-lease or licence (as the case may be)” of these stores.

105 Blockbuster argued that the right in cl 18.9 of the franchise agreements applies to expiry or termination. It was pointed out that the chapeau of cl 18 expressly states that the clause applies upon “the Agreement being terminated or expiring for whatever reasons” and cl 18.6 draws a specific distinction between expiry and termination. This was said to indicate that the other parts of cl 18 apply to both expiry and termination. Blockbuster submitted that this application of cl 18.9 is unsurprising as the precise location of a store is an important feature of the business. The clauses ensure that this part of the goodwill of the business enures to the benefit of Blockbuster. Blockbuster said that the terms of cl 18 are clear and the court should give effect to them. There was no inconsistency between cl 18.9 and cl 32. There are, it was submitted, two constructions available to the court to harmonise cl 18.9 and cl 32. The first was that the combined effect of the clauses gave Blockbuster three options upon expiry of the franchise agreements:

(a) Blockbuster could purchase the assets of the operation (including the leasehold and the franchisee’s goodwill) in accordance with cl 32. This was an all-or-nothing purchase. Blockbuster would not have the right to cherry-pick the valuable assets of the business.

(b) Blockbuster could start a new store in the same premises from scratch. Blockbuster would be entitled to an assignment of the leasehold but nothing else. Karioi would then be free to sell to a third party its stock, goodwill (such as staff who have a particularly good reputation or relationship with the customers of the area) and any of Karioi’s own information that is not held by the franchise agreements to be confidential to Blockbuster.

(c) Blockbuster could decide that, as a matter of franchise strategy, it was not interested in maintaining a store in that area and could walk away from the business. Karioi would be free to sell the whole business including the leasehold to a third party, once the business had been de-badged.

106 By contrast, if the franchise agreements are terminated, Blockbuster, it was said, would not know in advance that the agreements were about to come to an end and would have to move quickly to preserve the strategic location if it wished to preserve it. Accordingly, Blockbuster is given the right to call for an assignment of the lease and purchase under cl 18.6 whatever assets it chooses.

107 As an alternative construction, Blockbuster submitted that cl 32 provides that Blockbuster may purchase the “Assets” and the assets are stated to include Karioi’s leasehold. However, this says nothing about the value to be ascribed to the leasehold. When a valuer comes to assess the value of the business, the valuer will take into account Blockbuster’s right to an assignment of the lease under cl 18.9. By reason of cl 18.9, the valuer will, in effect, assign a negligible value to the leasehold. Blockbuster contended that it was irrelevant to say that cl 32 might result in a relatively low value being ascribed to the “Assets”. The most valuable asset of the business is the customer database which is protected for Blockbuster’s benefit. The value of the rest of the business is inevitably going to be lower than the value of an entire video rental business.

108 A further argument was that, even if, as Karioi contends, cl 18.9 and cl 32 are inconsistent, the court should not prefer cl 32 over cl 18.9. Clause 32 should be read down by rejecting the reference in the definition of “Assets” to “leasehold interest in the premises and improvements”.

109 Karioi’s argument on this part of the case was that an acceptance of Blockbuster’s contention that Karioi was required pursuant to cl 18.9 to assign, transfer or surrender its interest in both the Noosaville and Nambour leases would not give a harmonious interpretation to all of the provisions in cl 18 and cl 32. Karioi contended that Blockbuster’s argument flouts business commonsense in that it would give Blockbuster the ability to take over the business in circumstances where it had elected not to buy it. A literal construction of cl 18 and cl 32 would lead to an absurd result. Clauses 18.9 and 32 cannot, Karioi argued, sit together and cl 32 takes primacy. Clause 18.6.6 provides that “if the Agreement expires, refer to Option to Purchase, paragraph 32.” Karioi claimed that this provision was significant as it reflected a contractual intention of the parties to give primacy to cl 32. Clause 18.9 should be construed so as not to have application when the franchise agreements expired.

110 Blockbuster argued that the reference to cl 32 is neutral and says nothing about the intention of the parties being to give that clause primacy. It simply pointed to clause 32, which either could be read with cl 18 or, if not, should be read down.

111 The question is whether Blockbuster’s construction of cl 18.9 applying upon the expiration of the franchise agreements leads to an absurd result looking at the situation when the agreements were entered into by the parties. As part of the construction of a written contract, words may generally be supplied, omitted or corrected where it is plainly necessary in order to avoid absurdity or inconsistency: Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420; Watson v Phipps (1985) 63 ALR 321. The whole of the written contract has to be considered, since the meaning of any one part of it may be revealed by the other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another: Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99 per Gibbs CJ at 109; Sir Kim Lewison, The Interpretation of Contracts 4^th ed (2007) Street & Maxwell Ltd at 379-381. Mere unreasonableness of itself is not enough to justify the application of the absurdity rule: Westpac Banking Corporation v Tanzone Pty Limited [1999] NSWSC 1129; (2000) 9 BPR 17,521 at [22]. It is the court’s obligation in construing a written contract to endeavour to discover the intention of the parties from its words. As was said in Kirkby v Turner [2009] NSWCA 131 at [37]:

“The ‘intention of the parties’ to a contract is, when one is considering questions of construction, the objective intention that reasonable observers with knowledge of any surrounding circumstances would attribute to the parties from their words and actions: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.”

112 It seems that there is no need for the contract to be ambiguous before being able to use surrounding circumstances as an aid to construction of the contract: Masterton Homes Pty Ltd v Palm Assets Pty Ltd & Ors [2009] NSWCA 234 per Allsop P at [3], per Campbell JA at [113]. In a commercial setting, the business objectives of the parties are to be accounted for and the relevant provisions given a “business commonsense” or a “business-like construction”: Waste Recycling and Processing Corporation v Global Renewables Eastern Creek Pty Limited [2009] NSWCA 315 per Tobias JA at [46]; GMA Garnet Pty Ltd v Barton International Inc [2009] FCA 439 per Barker J at [93].

113 The surrounding circumstances included the operation of a video hire business from the Noosa Homemaker Centre in Mary Street Noosaville by Karioi for about 8 years prior to the Noosaville franchise agreement being entered into. As to the location of the Noosaville store, Mr Fife gave the following evidence (T 65 L 39 to end; T 64 L 1-19) :

“Q. Insofar as Noosaville is concerned, can I suggest to you that in 1998 the distance between your store and the Video Ezy store was not so great as to make locality a decisive factor in where one would go and get one's videos?

A. If we are talking about actual location I would agree with that, however I include in location the availability of parking, and parking makes a lot of difference to that location in this city.

Q. I accept that but can I suggest to you that your premises in Noosaville are in the Homemakers Centre aren't they?
A. That's correct.

Q. And there is parking out the front of the Homemakers Centre isn't there? “

And Further:

“Q. Were there in August 2008 video stores that you regarded as being competitive to your Noosaville store that were not necessarily located in Noosaville?
A. Yes.

Q. What were they and where were they?

A. There was a Network store in Tewantin and there was a Video Ezy store in Noosa Heads.

Q. And in your opinion as an experienced operator in that area you are telling his Honour you would regard video stores in Noosa Heads and Tewantin as being competitive to video stores in Noosaville?
A. Yes.

Q. That is because isn't it Tewantin and Noosa are within a few minutes drive of Noosaville?
A. Correct.”

114 On this topic, the following testimony was given by Mr Smith (T 26 L 2-23):

“Q. Would you agree with me - in relation to 1998 - that the principle factor that determines the patronage of a particular video store was its convenience?
A. Yes, that's correct.

Q. You're familiar with the Noosaville store?
A. Yes, I am.

Q. Would you accept it is in a prime location?
A. Yes, that is the case.

Q. As at 1998 the pre dominant factor which in your opinion affected its patronage was its location?
A. That is the dominant motivator for consumers, correct.

Q. If I put a description to you that it was the jewel in the crown of Sunshine video stores in 1998 that would be something you would agree with?

A. The store is the largest store in the Sunshine coast, yes.”

115 Blockbuster, as I have recounted at [94] above, negotiated with Mr Fife for about two years to buy the Gympie store from Gainlaw and the Noosaville store from Karioi for $1.45 million. To Mr Fife’s recollection, the proposed purchase price was four times the combined net profit of the Gympie store and the Noosaville store.

116 Karioi had operated a Video Flicks franchise at 33 Short Street, Nambour for some 4 years before the Nambour franchise agreement was entered into. During cross-examination, Mr Fife stated that the Nambour operation ran at a disadvantage to its Video Ezy competitor because of a lack of parking. He then gave the following testimony (T 66 L 40-50; T 67 L 1-10):

“Q. So in fact your location in Nambour is not as good as the location of the Video Ezy competitor in Nambour?
A. Correct.

Q. Would you agree with me then that where you have two stores that are in roughly the same location, within five minutes drive of each other, and which have roughly equivalent parking, there would be other factors that would operate upon a consumer in deciding which store to go to?
A. Yes there would be.

Q. And a very important factor would be recognition of a brand wouldn't it?

A. In my opinion I don't believe in Nambour particularly or specifically that it makes any difference.

Q. Because you say the parking is so determinative of the situation?

A. I believe the reason that people would frequent our store as opposed to our competitor who has better parking is because of what we offer and our better staff.

Q. And what you offered from 1998 in your Nambour store was product offered in accordance with and using the benefit of the Blockbuster system?
A. Yes.”

117 Mr Smith had negotiated changes on behalf of the Video Flicks franchisees to the proposed franchise agreement with FL Chase who was on behalf of Blockbuster. At paragraph 7(b) of his affidavit sworn on 11 February 2009, he stated that amendments included “to ensure that if Blockbuster bought out the franchise business at the end of the term, then it would do so on fair terms.”

118 I am satisfied on the balance of probabilities that Blockbuster and Karioi were aware of the following background facts at the time they entered into the franchise agreements:

(i) Karioi had been operating the Noosaville store for about 8 years and the Nambour store for about 4 years. They were established stores with existing databases of members and profitable trading histories.

(ii) The goodwill of each store had substantial value.

(iii) Of importance to the substantial value of the goodwill of each store was the location at which the store had operated for a number of years. This consideration was of particular importance in the case of the Noosaville store because of that store’s prime location. Another factor which enhanced the value of the stores was the customer service, operating efficiency and video retail experience of Mr Fife, Mr Fortington and Karioi’s staff.

119 Clause 18.9 is found within cl 18. Clause 18 is headed “Action Upon Termination”. The contents of cl 18 are not restricted to a termination of the franchise agreement as the opening words are:

“Upon this Agreement being terminated or expiring for whatever reasons”

120 A literal construction of these opening words would mean that all of the sub-clauses apply not only when the agreement is terminated but also if it expires. What then is to be made of cl 18.6 which is headed “Sale of Selected Fittings and Equipment”?

121 The operation of cl 18.6.1 is expressly restricted to the agreement being terminated. Upon termination, Blockbuster has the right to purchase “any of the FRANCHISEE’s fittings and equipment and any unsold stock of videos, accessories and consumables used in the conduct of the Franchised Operation that COMPANY selects”. Clause 18.6.2 provides that the purchase price of the items selected by Blockbuster will be as agreed between the parties but if they cannot agree then as determined by an independent valuer nominated by the then President of the Queensland Law Society or his/her nominee. The purchase price is to be paid by Blockbuster within 60 days of the date upon which the purchase price is ascertained: cl 18.6.3. Clause 18.6.4 provides for a set off and cl 18.6.5 requires Karioi to permit Blockbuster to have reasonable access to the premises where the fittings and equipment are located. All of the words used are unambiguous and it is plain that clauses 18.6.1 to 18.6.5 apply only upon termination notwithstanding the width of the opening words of cl 18. The work of cl 18, however, is not done as cl 18.6.6 is as follows:

“If the Agreement expires, refer to Option to Purchase, paragraph 32.”

122 This is the provision which Karioi contends reflects a contractual intention of the parties to give primacy to cl 32.

123 Clauses 18.6 and 18.8 provide for matters of payment and rebates and are of no consequence in the present debate. Thereafter follows cl 18.9 which is headed “Leases”. Clause 18.9 provides:

“If required by COMPANY the FRANCHISEE must assign, transfer or surrender (as the case may require) of all the FRANCHISEE’s right, title and interest in any lease, sub-lease or licence of the Premises or equipment held by the FRANCHISEE as part of or in the course of the Franchised Operation.”

124 Unlike cl 18.6.1, cl 18.6.6 is not expressly restricted to termination. Blockbuster argues that the specific distinction in cl 18.6 between expiry and termination indicates that cl 18.9 has application both upon termination and expiration. There would be no difficulty in accepting that argument but for cl 32.

125 Clause 32 is headed “Option to Purchase”. Clause 32.1 provides:

“If upon the expiration of the Original Term or the Renewal

Term, (as the case may be) the FRANCHISEE does not renew the Franchise (if there is an option to renew) or is not otherwise granted a new Franchise COMPANY has the option to purchase from the FRANCHISEE the assets of the Franchised Operations (“the Assets”). For the purposes of this clause, “Assets” means the FRANCHISEE’s equipment, stock, leasehold interest in the Premises and improvements and the FRANCHISEE’s goodwill attaching to the Franchised Operation.”

126 Clause 32.2 enables Blockbuster at its election to sell the assets to a third party whereas cl 32.3 requires that the option must be exercised within 30 days of the expiration of the Original Term or Renewed Term (as the case may be). Clause 32.4(a) provides that the purchase price of the assets will be the fair market value as agreed but in default of agreement then as determined by a valuer nominated by the President of Queensland Law Society or his/her nominee. Clause 32.4(c) provides for payment within 60 days of ascertainment of the purchase price. Clause 32.6 is as follows:

“The FRANCHISEE must cooperate in the assignment to COMPANY of any interest which the FRANCHISEE has in any lease or tenancy with respect to the Premises and do all things reasonably necessary to obtain the landlord’s consent to the assignment. The option under this clause will lapse if the landlord’s consent to the assignment cannot be obtained.”

127 When clauses 18 and 32 are construed literally, Blockbuster could upon the expiration of the franchise agreements either:

(a) require Karioi to transfer to it its leasehold interests in the Noosaville and Nambour stores pursuant to cl 18.9 for no payment. There is no time provided within which Blockbuster is required to exercise that right; or

(b) exercise its option to purchase the assets of the franchised operations, which include the leasehold interests and Karioi’s goodwill pursuant to cl 32.1. The purchase price of the goodwill and leasehold interests (and other items falling within the meaning of “Assets”) is to be the fair market value. Blockbuster is required to exercise the option within 30 days of expiration of the franchise agreement.

128 As Karioi submits, a literal construction of cl 18.9 would permit Blockbuster to circumvent the operation of cl 32 by requiring Karioi, for no consideration, to transfer to it Karioi’s leasehold interests without purchasing the assets of the franchised operations. Not only would Karioi be prevented from continuing to operate the businesses from the Noosaville and Nambour stores Karioi would receive nothing for its valuable goodwill.

129 Clauses 18.9 and 32 literally construed are plainly inconsistent but that is not enough to engage the absurdity rule. Can they be read harmoniously so that effect can fairly be given to both clauses?

130 Blockbuster’s contention that these clauses can be harmonised is founded on the premise that cl 18.9 ensures that the part of the goodwill of the business which arises from its location enures to the benefit of Blockbuster. Karioi, it is suggested, would then be free to sell to a third party its stock, goodwill (such as staff who have a particularly good reputation or relationship with the customers of the area) and any non-confidential information. An acceptance of that submission would ignore the substantial value of the goodwill of each store that pre-existed the arrival of Blockbuster and the efforts of Karioi to successfully operate the business over the franchise terms. By themselves Karioi’s leasehold interests particularly in the Noosaville store are valuable assets. An acceptance of Blockbuster’s case would permit Blockbuster in substance to acquire the leasehold interests and the goodwill attaching to the store locations for nothing. The suggestion that Karioi could then sell goodwill such as staff is devoid of business commonsense and commercial reality. Blockbuster’s alternative construction which permits of a negligible value being assigned to the leasehold continues to ignore the valuable assets which Karioi held before it entered into the franchise agreements. Furthermore, there is nothing in the agreements which indicates that upon the option to purchase being exercised under cl 32.1 the fair market value of a leasehold interest should be written down because of Blockbuster’s rights under cl 18.9. Neither construction gives a fair effect to both clauses nor avoids inconsistency.

131 Blockbuster in support of its further argument that, even if cl 18.9 and cl 32 are inconsistent, cl 32 should be read down cited what was said in Forbes v Git [1922] 1 AC 256 per Lord Wrenbury at 259:

“If in a deed an earlier clause is followed by a later clause which destroys altogether an obligation created by the earlier clause, the later clause is to be rejected as repayment and the earlier clause prevails.”

132 It is true cl 18.9 is an earlier clause than cl 32. However cl 18.6.6 precedes cl 18.9. The later clause (cl 18.9) destroys altogether the requirement for Blockbuster to pay fair market value for Karioi’s leasehold interest upon expiry of the franchise agreement. This, to my mind, is another indicator which suggests that cl 18.9 is to be read down so as to have its application confined to a termination of the franchise agreement.

133 The construction contended by Blockbuster leads to a most unreasonable result for Karioi. Unreasonableness by itself does not justify the absurdity rule but it is a relevant consideration. As Lord Reid observed in Wickman Machine Tool Sales Ltd v Schuler A.G (H.L.(E)) [1973] UKHL 2; [1974] AC 235 at 251:

“The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.”

134 In my opinion, it defies business commonsense and commercial reality to suggest that reasonable observers with knowledge of the surrounding circumstances would attribute to the parties from their words and actions the objective intention that cl 18.9 was to apply upon expiration as well as termination of the franchise agreements. Such a construction of cl 18.9 would lead to a result which was absurd: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd. A reasonable person would understand, as Karioi submitted, that the right in cl 18.9 was intended to be facultative only in circumstances where the franchise agreement had been terminated and Blockbuster wished to continue to operate the business from the leased premises. I conclude that cl 18.9 should be read down so as to apply only upon termination. I do not make the order sought by Blockbuster.

Are the restraints of trade in cl 14 of the Noosaville and Nambour franchise agreements and the directors’ restraint in schedule 2 to appendix B of the franchise agreements valid?

135 The franchise agreements include cl 14 which is as follows:

“14. RESTRAINT OF TRADE

14.1 FRANCHISEE acknowledges that as FRANCHISEE, it will have been trained by COMPANY in the BLCOKBUSTER System and will have regular and continuing access to and knowledge of the Trade Marks and the Industrial Property. COMPANY may reasonably protect itself against competition from FRANCHISEE for a period of time after the expiration termination or Transfer of this Agreement and accordingly:

For a period of:

(i) Three years;

(ii) Two years;

(iii) Twelve months;

(iv) Six months;

following the expiration termination or Transfer of this Agreement FRANCHISEE will not directly or indirectly in any capacity whatsoever (including either individually or as a principal member franchisor franchisee licensor licensee lender joint venturer agent officer or employee of any business) engage in or have a Financial Interest in or render consulting or other services to any Competitive Business:

(i) within a radius of thirty kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

(ii) within a radius of ten kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

(iii) within a radius of five kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

(iv) within a radius of one kilometre of any BLOCKBUSTER Video Superstore outlet located in Australia;

(v) within a radius of thirty kilometres of the Site;

(vi) within a radius of ten kilometres of the Site;

(vii) within a radius of five kilometres of the Site;

(viii) within a radius of one kilometre of the Site;

(ix) Anywhere within the Territory.

14.2 For a period of:

(a) Three years;

(b) Two years;

(c) Twelve months;

(d) Six months,

following the expiration, termination or Transfer of this Agreement, FRANCHISEE will not by any direct or indirect inducement divert or attempt to divert to any Competitive Business any customer or business of the STORE or any customer or business of any other BLOCKBUSTER VIDEO Store.

136 The directors’ restraints of trade in schedule 2 to exhibit B to the franchise agreements which were executed by Mr Fife and Mr Fortington are in similar terms to cl 14. As cl 26 provides that the agreement is governed by the laws of Queensland, the question of the validity of the restraint of trade provisions is to be determined under the common law and not under the Restraints of Trade Act 1976 (NSW).

137 The common law requires consideration of the reasonableness of the restraint “in reference to the interests of the parties concerned and reasonable in reference to the interests of the public so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public”: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company, Limited [1894] AC 535 per Lord Macnaghten at 565. For a restraint to be reasonable in the interest of the parties “it must afford no more than adequate protection to the party in whose favour it is imposed”: Herbert Morris Ltd v Saxelby [1916] 1 AC 688 per Lord Parker of Waddington at 707. The circumstances with respect to which issues of reasonableness are to be judged are those existing at the time of the contract: JD Heydon, The Restraint of Trade Doctrine, 3^rd ed (2008) at 45. The court may have regard to what was foreseeable in the future at the time of the contract: Putsman v Taylor [1927] 1 KB 637 per Salter J at 643. What was foreseeable at the time of contracting “may be illuminated by subsequent events”: JD Heydon, The Restraint of Trade Doctrine at 48.

138 Blockbuster identified the legitimate interest that cl 14 and the directors’ covenants seek to protect as being its goodwill in the Noosaville and Nambour stores. There were three aspects of Blockbuster’s goodwill which were said to be:

(a) the patronage of the store, as set out in the customer database;

(b) an interest in the precise location of both of the stores (by reference to the right given by cl 18.9); and

(c) the other industrial property and confidential information preserved for Blockbuster’s benefit, including information about Blockbuster’s operating systems, marketing strategies and pricing structures.

139 What was said by Austin J in KA & C Smith Pty Ltd v Ward and others (1998) 45 NSWLR 702 at 722 was cited by Blockbuster. Austin J said:

“In my opinion, the franchisor has an interest at stake which is analogous to a purchaser’s goodwill. It has an interest in protecting the patronage built up through the operation of the franchise, which may be lost if the franchisee is permitted to compete without restriction. The franchisor also has an interest in preserving the confidentiality of confidential information provided to the franchisee, which could be used by the franchisee to compete with the franchisor if there were no restraint. However, the franchisee has an interest in protecting the goodwill of its business. The customers are customers of the franchisee’s business, though the franchisor also has a ‘interest’ in the customers since they are attracted to the business as a franchise business. The question is whether the restraint clause...is too wide, given the nature of the franchisor’s interest and the need to balance the interests of franchisor and franchisee.”

140 Also cited was Raine & Horne Pty Limited v Adacol Pty Ltd & Ors [2006] NSWSC 945 in which McDougall J considered at [48] that the extent to which the franchisee may have contributed to the goodwill was of no legal relevance.

141 I do not understand what was said by McDougall J precludes a court, when seeking to identify the franchisor’s interest which a restraint seeks to protect, from considering the contribution to goodwill that may have been made by a franchisee. How otherwise can the franchisor’s legitimate interest be discovered? Raine & Horne v Adacol Pty Ltd arose out of a different factual setting than the present proceedings. It was not a case (nor was KA & C Smith Pty Ltd v Ward and others) such as the present where the franchisee had built up substantial goodwill before the franchise agreements were entered into. It is trite to observe that each case depends upon its own circumstances.

142 Another argument by Blockbuster was that its interests were further legitimated by the fact that Blockbuster bought the franchises from the Video Flicks franchisor, Sailoak Pty Ltd for $800,000. The Video Flicks franchise agreement had a 2-year restraint of trade clause that applied after termination or expiry of the agreements and the assignment of the lease of the store that applied if the agreement was “cancelled for whatever reason”. The consideration for the purchase included Video Flicks releasing each franchisee from their obligations under the Video Flicks agreements and Blockbuster receiving in respect of each Video Flicks franchisee an executed Blockbuster franchise agreement: Exhibit O TB1 – 177. Blockbuster contended that in this respect the analogy with the purchase of goodwill was obvious.

143 Karioi raised a question of construction which was an extension of its argument on the proper construction of cl 18.9 and cl 32. The submission was that if Blockbuster exercised its option under cl 32, Blockbuster (or its nominee) would take over the business and Karioi would be paid for its substantial goodwill. In this situation, given that Karioi would have been paid for its goodwill, it would be reasonable to impose a restraint on Karioi under cl 14. If Blockbuster did not wish to buy the business, Karioi would be free to continue trading. In this situation there would be no restraint because this would completely flout the obvious intention of the parties that Karioi was permitted to continue trading. Karioi argued that to construe the agreement otherwise would be absurd. The only sensible and harmonious construction of the franchise agreements was that the reference to expiration in cl 14 means expiration where Blockbuster exercised its option to purchase the business under cl 32. Alternatively, if this argument was not accepted, Karioi submitted that cl 14 would be a wholly unreasonable restraint.

144 Karioi disputed Blockbuster’s claim that it had a legitimate interest to protect. In considering the reasonableness of the restraints, Karioi referred to the following matters:

(1) As at 1998, the industry leader Video Ezy did not seek to impose any restraint on a franchise or those associated with it, post the end of a franchise term. There was, Karioi argued, no logical basis on which to distinguish Video Ezy from Blockbuster in this regard. It was said that the obvious inference as to why Video Ezy did not have any restraint post-term was that there was no legitimate interest to protect.

I interpolate here that this argument is irrelevant. What may have been the case in respect of Video Ezy franchisees provides no assistance in identifying Blockbuster’s legitimate interests and whether the restraint affords no more than adequate protection.

(2) At the time the parties entered into the franchise agreements the Noosaville and Nambour stores were known by the parties to be extremely successful. Both had a substantial customer base, had considerable value, including goodwill. This goodwill was Karioi’s goodwill.

(3) Blockbuster did not offer any incentive or inducement to Karioi to enter into the franchise agreements. Rather, the entry by Karioi into the franchise agreements and the subsequent transfer of the stores from Video Flicks to Blockbuster came at a substantial cost to Karioi in terms of the cost of re-fitting and re-painting its stores.

(4) At the time of entering into the franchise agreements the parties contemplated and dealt with the ownership of goodwill after the expiry of the agreements. This is dealt with by cl 32.

(5) The agreement of the parties with respect to goodwill necessarily carries with it the agreement that it is the franchisee that is to retain any benefit that may be derived from the customer list attached to the store.

(6) The principal benefit to Karioi in entering into the franchise agreements was to take advantage of Blockbusters superior buying power with the movie studios. That matter does not give rise to any legitimate interest of Blockbuster requiring protection on the expiry of the term.

(7) On Blockbuster’s construction of the restraint provisions, each of the defendants is restrained from carrying on a video store business within 30 kilometres of either the Nambour or Noosaville stores. This is in circumstances where prior to the entry into the franchise agreements the stores were known to have substantial value and, on Blockbuster’s construction can be taken over by Blockbuster for virtually no consideration. The defendants have lost an extremely substantial asset, for no proper consideration, and are prohibited from carrying on their livelihood for 2 years. All of this was known in 1998.

Karioi argued that a more unreasonable restraint could not be imagined.

145 Blockbuster responded to Karioi’s construction argument by pointing out that Karioi had overlooked the possibility that Blockbuster might not wish to purchase Karioi’s business but would rather grant a new franchise in the Territory to someone else and there was no need for clauses 14, 18 and 32 to be harmonised. In my opinion, Blockbuster’s argument on this issue is to be accepted. The word “expiration” in cl 14 is not to be confined to the exercise by Blockbuster of its option to purchase under cl 32. Clause 14 can operate without inconsistency or absurdity by itself and should not be read down as Karioi contends.

What then are Blockbusters legitimate interests that it is entitled to protect?

146 Blockbuster bears the onus of establishing its legitimate interests on the balance of probabilities.

147 Mr Uniacke in his affidavit sworn on 29 October 2008 stated at [30] that

“in [his] experience in the industry, the primary factor in determining which video store a person will choose to belong to is the convenience of the location”. He stated at [31] that “customers tend to have strong brand loyalty and, as a general rule, in [his] experience, customers tend not to change video stores”.

148 In cross-examination by Mr Pike, Mr Uniacke on this issue gave the following evidence (T 7 18/2/09 L 26 –34):

` “Q. I take you to paragraph 31 of your affidavit, I suggest the phenomena that you have described as brand loyalty is not brand loyalty, is borne out by the location of the store?

A. The location of the store is certainly a factor and I believe brand loyalty is another factor. In isolation I would not say one is stronger or weaker than the other, brand loyalty can come back to some of the features, the ambience of the store, the operator of the store, the location of the store.”

149 It appears that Mr Uniacke equated the locality of the store and brand loyalty as factors in attracting clients.

150 Mr Fife estimated that between 2 April 1998 and 31 August 2008 the number of members of the Nambour store grew by approximately 18,942 and the Noosaville store by approximately 26,494. He calculated that the percentage of customers who were members of the Nambour store before entry into the Blockbuster franchise agreements was 37.13 per cent and the Noosaville store 29.92 per cent. He founded his calculations upon the data derived from Michael Gillett’s affidavit sworn 10 October 2008. Mr Fife did not accept that brand recognition would make much difference in Nambour but it would have some significance in Noosaville. It seems that the reason for this was that Noosaville was a holiday area and 10 to 15 per cent of the Noosaville customers were estimated to be holiday visitors. Mr Fife agreed that brand recognition could be an important factor to some of these visitors on their first visit to the store. He did not concede that Blockbuster’s advertising campaign increased their share of the total market in the Noosa, Noosaville and Nambour areas as Karioi was already the market leader in the Noosaville area and was operating a very successful business in Noosa. The advantage he saw in 1998 in joining Blockbuster was that Karioi obtained a substantial return from the franchise fees it paid by being within a bigger group for “buying power”. The buying power increased video copy depth. It gave Karioi a competitive advantage. Mr Fife agreed that the growth in membership was partly attributable to being a Blockbuster franchisee. He observed that since 1 September 2008, there had not been any decline in the businesses.

151 Mr Smith considered that a significant benefit of converting the Video Flicks stores to Blockbuster stores would be improved product buying power and being part of a large international marketing group. In re-examination by Mr Kunc, Mr Smith testified that he felt that Blockbuster “would be the best partner for us as well as the opportunity to [buy] products at the right price moving forward”: T27 L45-47.

152 I conclude that the growth in the patronage of the Noosaville and Nambour stores in the decade of trading as Blockbuster franchises may be attributed in part to the attraction of the Blockbuster brand to some customers and to the benefits provided by being part of a large marketing group. To this extent Blockbuster has an interest in the stores’ customers which is a legitimate interest to protect.

153 I am not persuaded, however, that Blockbuster’s contribution to the growth in patronage was substantial. Mr Fife has had much experience in the video retail market in the Noosaville and Nambour areas. I do not consider his evidence to be self-serving. I prefer his testimony on this issue to that of Mr Uniacke whose evidence was not founded upon knowledge of the local market in which Karioi operated.

154 As to Blockbuster’s contention that it had purchased goodwill in the Noosaville and Nambour stores by the payment of $800,000 to Sailoak Pty Ltd, Karioi did not receive any part of the monies paid by Blockbuster. In fact, money was paid by Karioi to convert the stores to the Blockbuster brand. There is no evidence from which the court can determine the interest, if any, that Video Flicks had in the goodwill of the businesses at the time that Blockbuster entered into the agreement with Sailoak Pty Ltd.

155 Blockbuster contends that the first aspect of Blockbuster’s goodwill is “the patronage of the store as set out in the customer database.” The opening words to cl 14 refer to Karioi’s acknowledgement that it “will have regular and continuing access to and knowledge of the Trade Marks and the Industrial Property”.

156 Industrial Property is defined in cl 1 to mean:

“The marks, patents, designs, trade secrets, Confidential Information, Know-How, copyrighted works and other intellectual and industrial property of all kinds used or acquired by COMPANY or its affiliates.”

157 The definition of Confidential Information in cl 1 relevantly includes:

“(g) membership lists of the STORE, historical data relating to the sale and rental of Video Products from the STORE, knowledge of membership profiles ...”

158 It is Blockbuster’s case that it had a legitimate interest in the customer base (identifiable in April 1998) because the customer base was to be built up and maintained over the course of 10 or 15 years on the basis of the support provided by Blockbuster. This means, Blockbuster argued, all of the customers on the database when the franchise agreements came to an end.

159 There is, in my opinion, an element of double counting in this submission as the third aspect of Blockbuster’s claim to goodwill is the “Confidential Information” preserved for its benefit. Blockbuster’s entitlement to confidential information which includes the customer database does not augment, in my view, Blockbuster’s legitimate interest in the stores’ customers which I have found at [152] above.

160 I am not persuaded that the second aspect of Blockbuster’s goodwill was, as Blockbuster contended, an interest in the precise location of the Noosaville and Nambour stores. Karioi undoubtedly had good sites for video stores (particularly in Noosaville) and good sites were in short supply in 1998. I accept that the location of the franchise operation was of importance to Blockbuster but this does not mean that the bargain struck between the parties (recorded in cl 14 and cl 18.9) was that Blockbuster’s support over the life of the franchise agreement would, in effect, purchase Blockbuster’s right to keep a store in that particular location. As I have previously stated, the leasehold interests that Karioi had were assets of value and, it seems to me, if what was contended by Blockbuster was the intention of the parties, the franchise agreement would have plainly made provision for it. Contrary to Blockbuster’s argument, cl 32.1 includes the leasehold interest in the premises as one of Karioi’s assets which Blockbuster had the option to purchase upon the expiration of the franchise agreement. In my view, Blockbuster has no legitimate interest to protect by cl 14 in the location of a store when the franchise agreement had expired.

161 I accept that Blockbuster’s goodwill includes industrial property and confidential information which is preserved under the franchise agreements for Blockbuster’s benefit. There is, however, an argument between the parties as to the material provided by Blockbuster and as to what amounts to confidential information. As it is necessary to identify Blockbuster’s legitimate interests, I turn to consider this issue.

162 Mr Smith testified that Blockbuster’s “good operating systems and intellectual property” were two of the reasons for his consideration in 1998 that Blockbuster would make the best partner. Mr Fife in his oral testimony said that (in 1998) he was hopeful that Karioi would get some benefit from Blockbuster’s experience in the video rental industry. In his affidavit sworn on 29 October 2008, Mr Uniacke detailed at [67-79] the confidential information which he considered Blockbuster provided to Karioi. He recounts at [76]:

“Over the past ten (10) years whilst operating as Blockbuster franchisees, the First and Second Defendants would have gained extensive knowledge of:

(a) the confidential information pertaining to the Blockbuster franchise system;

(b) the film data prepared and provided by the plaintiff to Blockbuster franchisees;

(c) marketing strategies of other Blockbuster franchisees and marketing plans of the plaintiff generally; and

(d) the nature of the customer base in Noosaville and Nambour, including customer hiring habits and what kinds of marketing would work best for particular segments of the market.”

163 And at [78]:

“The information described above is kept confidential by the plaintiff for the benefit of itself and its franchisees. Based on my experience, the information described above would give people operating other video stores a significant competitive advantage over franchise stores operating in the same area or in a nearby area.”

164 Mr Fife in his affidavit sworn 22 December 2008 stated at [36-37]:

“Between 2 April 1998 and 2 April 2008, Karioi:

a. received by post or email from Blockbuster information about marketing and promotional programs for Blockbuster stores;

b. acquired information about the film titles, categories of films and rental records of films held by the Nambour store and the Noosaville store;

c. acquired information about the customers of the Nambour store and the Noosaville store, including membership profiles and historical data relating to the sale and rental of DVD, video cassette or computer game products;

d. received from Blockbuster a financial ‘ranking’ in respect of the Nambour store and Noosaville store compared to the other stores in the Queensland group; and

e. received from Blockbuster the Operation Manual Disc Version

1 April 2004.

I do not consider that the information referred to in sub-paragraphs (b) and (c) above constitutes “confidential information” to Blockbuster. As to sub-paragraph (b) above, the information regarding films was available by many other means some of which we valued more highly than what we received from Blockbuster. For example, video trade magazines such as “Screen Print”, offered information about movies and help with determining which movies to buy. As to sub paragraph (c) above, the information about customers was created and maintained by Karioi using software called “Video Minder”. Video Minder is owned and licensed by Customsoft Developments Sydney. Video Minder is not Blockbuster software. Karioi purchased Video Minder for the opening of the Noosaville store in 1990 (as a Video Ezy franchise) and for the opening of the Nambour store in 1994 (as a Video Flicks franchise). Video Minder was used by Karioi to create a database of customers, to track rental entries and the video library, and to record all business transactions generally. Karioi has never been offered Blockbuster’s software. I understand that Blockbuster did use another system for their corporate stores; however, Blockbuster never offered Karioi that system to replace Video Minder. In or about November 2007 and December 2007, one or both of Mr Uniacke and Mr Nedelko have stated words to the Queensland franchisees at meetings held in Brisbane, at which I was present and heard words to the following effect:

“I hope that the Video Ezy software will be available to Blockbuster franchisees in the future. It is currently held up by an ACCC ruling.”

Furthermore, as to sub-paragraph (a) above, although we received information about marketing and promotional programs, much of it was never used by us; on other occasions we accepted the marketing, and at other times we were compelled by Blockbuster to participate in certain marketing and promotional programs. As to sub-paragraph (d) above, the document containing the ‘financial ranking’ sent by Blockbuster each week was a curiosity report that one could monitor to examine varying trends between stores. In order for Blockbuster to compile the report, each store provided Blockbuster with its financial information, from which Blockbuster would rank each store. However, stores were only identified by number, not store name, and so people outside the group would not know to what stores the report was referring. As to sub-paragraph (e) above, although we received the Operation Manual Disc, I never ran the CD, because I understood that it contained the operational manual adopted by the corporate Blockbuster stores, and I did not wish to adopt that system.”

165 Mr Uniacke in his affidavit sworn 12 February 2009 stated at [10] that the franchisees could “at times choose which marketing and promotional programs they wish to acquire (and pay for). Some of these programs are national, some state based, some regional and some local store only. Some are mandatory and others optional.” Mr Uniacke annexed the records of material delivered each month by Blockbuster to Karioi at tabs 2-4 of his affidavit.

166 Mr Uniacke, in my opinion, in the passages of his affidavit which have been quoted at [162-163] above, overstates the value of the information provided to Karioi and the competitive edge it would give to a Blockbuster competitor. Mr Fife is a very experienced video retail operator and I accept his evidence as to the limited value of the Blockbuster material.

167 Mr Fife’s opinion, however, that the information to which he referred in sub-paragraphs (a) and (b) in the passages of his affidavit at [164] above was not confidential information disregards the definition of Confidential Information in cl 1 of the franchise agreements which includes:

“(b) marketing and promotional programs for BLOCKBUSTER VIDEO STORES; and

...

(f) data regarding film categories, film titles, number of copies of each film title...”

168 The information referred to by Mr Fife in subparagraphs (d) and (e) would also fall within the definition of Confidential Information. Although Karioi did not use Blockbuster software to create the database of customers and member information to which Mr Fife refers in subparagraph (c) in the passages quoted at [164] above, it seems to me that this material which was acquired before the expiration of the franchise agreements falls within subparagraph (g) of the definition of Confidential Information.

169 I conclude that the nature of Blockbuster’s interest in the goodwill of the Noosaville and Nambour stores was:

(1) an interest in the growth in the patronage of the stores between 2 April 1998 and 31 August 2008; and

(2) the industrial property and confidential information preserved for Blockbuster’s benefit under the franchise agreements.

170 Having identified the legitimate interests of Blockbuster which cl 14 seeks to protect, the question is whether the restraint affords no more than adequate protection to Blockbuster. I propose to approach this task in the first instance by adopting the strict approach that no account can be taken of Karioi’s interest: JD Heydon, The Restraint of Trade Doctrine at 213.

171 Clause 14 is in the nature of a ‘cascading’ provision. The duration of the restraint declines from 3 years to 6 months and its radius declines from 30 kilometres to “anywhere within the Territory”.

172 Judging the reasonableness of the restraint at the time it was made, it appears to me that cl 14 confers greater protection to Blockbuster than can be justified to protect its legitimate interests upon the expiration of the franchise agreements. Both parties were aware at the time the franchise agreements were entered into that upon expiration of the franchise terms Blockbuster had the ability to protect its interest in the goodwill of the businesses by exercising the option under cl 32.1 and that cl 10 and cl 18.2 protected Blockbuster’s interest in any Confidential Information and industrial property. If any period of restraint is imposed the Noosaville and Nambour stores will be closed and some 19 staff will be dismissed. Mr Fife said at [112] of his affidavit sworn 22 December 2008:

“Karioi employs seven staff at its Nambour store and twelve staff at its Noosaville store. If Blockbuster is able to rely on the restraints in the Franchise Agreements, both the Nambour and Noosaville stores will need to be shut down. This will mean that all staff will be dismissed...”

173 I regard such a loss of employment as being detrimental to the public interest. I am unable to conclude on the evidence that Blockbuster intended to open its own video retail stores or to grant new franchises within the territory of the Noosaville and Nambour franchise agreements upon the expiration of the franchise terms. Any imposition of restraint in the circumstances is more than what is required to protect Blockbuster’s interests and, in my view, is unreasonable.

174 If the question for determination is whether the restraint clause is reasonable “given the nature of the franchisor’s interest and the need to balance the interest of the franchisor and franchisee”: KA & C Smith Pty Ltd v Ward at 722, another consideration is that the closure of the stores will have serious consequences for the defendants. The parties were aware at the time the franchise agreements were entered into that both stores had substantial value. Nothing will be paid to Karioi for its substantial goodwill and the defendants are likely to be obliged to pay rent under the leases until their expiration. Whilst the Nambour lease expires next November, the term of the Noosaville lease does not expire until 2013.

175 Given the need to balance the interests of Blockbuster and the defendants, I consider that any period of restraint is unreasonable. Upon either approach, I decline to grant injunctive relief to Blockbuster.

176 The directors’ covenants, however, constitute an “independent and separate” restraint: cl 7, schedule 2. Although the imposition of a period of restraint upon Mr Fife and Mr Fortington may not necessarily result in the closure of the stores, I am not satisfied that the upholding of a restraint is necessary to protect Blockbuster’s interests. As I have observed, Blockbuster had the ability to protect its interests by exercising its rights under clauses 10, 18.2 and 32 of the franchise agreements. In the circumstances I consider the restraints imposed upon the directors to be unreasonable.

The question of confidential information

177 The relief sought by Blockbuster includes orders requiring the delivery up of confidential information. Blockbuster contended that the Confidential Information protected by cl 18.2 includes the customer database maintained for each of the Noosaville and Nambour stores. The defendants, it was said, retained copies of these databases which they continued to use for the benefit of their business after 1 September 2008. Blockbuster pointed to cl 10.3 which it submitted prohibited Karioi from using the Confidential Information “for any purpose” after the end of the franchise term. Karioi should be ordered, Blockbuster submitted, to deliver up all copies of, and be restrained from using:

(a) the customer database as at 31 August 2008 for each store; and

(b) any customer database developed since then using the previous database (and other features of Blockbuster’s goodwill).

178 Karioi disputed that it was required to return any further information. Karioi accepted that it did retain a customer list after 1 September 2008 and had since that time used that list in the respects deposed to in para [100] of Mr Fife’s affidavit of 22 December 2008. It was put to me that cl 32 evinces an intention that upon the expiration of the franchise agreement, Karioi would own the goodwill an element of which would be its customers which was to some extent reflected in the customer list. In circumstances where Blockbuster had not exercised its option under cl 32, Karioi submitted that Blockbuster was not entitled to demand the return of the customer list. Furthermore, the information contained in the database was not information which Karioi had obtained as a result of the franchise agreements. Rather the information had been provided to Karioi by its customers since 1 September 2008.

179 Mr Fife stated at [100] of his affidavit sworn 22 December 2008 that since 1 September 2008, he had retained a copy of Video Minder to permit Karioi to track those movies that were recent unreturned rentals. He had deleted all historical records of past rentals of each customer from the customer database contained on the copy of Video Minder but had retained the name, address and contact details of each customer. From the commencement of trade on 1 September 2008, he had put in place a procedure that all customers were to complete a new membership form to join Network Video. When a new membership application was completed, the name was checked against the old database to ascertain whether the person had been previously barred or owed overdue fees. If the person was barred or failed to rectify outstanding fees, the application for membership was declined. For others, the members name, address and contact details on the new membership form were compared to the details in Video Minder or in Rocket after conversion to that program on 11 September 2008. If the information in Video Minder/Rocket was different to the new form, the Video Minder/Rocket file was updated. The customer’s records were then transferred to the new Network Video membership number.

180 At [100.g] Mr Fife stated:

“To the best of my knowledge, since the conversion to Rocket and since Rocket went “live” in the Nambour store on or about 11 September 2008 and in the Noosaville store on or about 12 September 2008, Karioi has not used the Video Minder system including the old customer databases. I do not, and to the best of my knowledge the staff of Karioi do not, intend to use the information contained in Video Minder in the future. On 17 December 2008 I copied the information in Video Minder onto a CD for both the Nambour and Noosaville stores, and deleted the data from the computers in each store, so that the data is no longer available to be used, and so that it can be disposed of if necessary. Accordingly, the copy of the Customer Database that I have retained and modified simply contains the name, address and contact details of customers (and debtor information about certain customers) that Karioi and its employees have built up over time. I do not consider that Blockbuster had done anything to create or grow that database of customers.”

181 On this issue, Mr Fife’s evidence was supported by Melinda Jackson, the manager of the Noosaville and Nambour stores. She stated at [24] of her affidavit sworn 23 December 2008:

“The information used in the Video Minder and Rocket software has only been used for administrative convenience when converting a new member who has asked to become a member of the Network branded store and to track delinquent members. The membership information has not been used for marketing purposes or for attempting to attract new members to either store.”

182 Clause 10.3 of the franchise agreements relevantly provides:

“The FRANCHISEE and its nominees, employees or agents must not use the secrets or Confidential Information

(a) ...

(b) or for any purpose after the Franchise Term without the prior written consent of COMPANY.”

183 I do not accept Karioi’s contention that as Blockbuster had not exercised its option under cl 32, it was not entitled to demand the return of the customer lists. Clause 32.1 makes no mention of the customer lists being included in the assets of the franchised operations. Karioi’s argument ignores the plain words of cl 18.2 and the definition of Confidential Information in cl 1(g). Mr Fife retained a copy of the customer database for each store which was utilised after 1 September 2008 in the completion of the Network Video customer databases. By using the customer databases in this way without the consent of Blockbuster, Karioi was in breach of its obligations under clauses 10.3 and 18.2.

184 Blockbuster is entitled to have delivered up to it all copies of the customer databases as at 31 August 2008 for each store and any databases of those persons who were customers as at 31 August 2008 which have been developed since then. I am not persuaded, however, that Blockbuster is entitled to any information concerning persons who have become customers since 1 September 2008. No Blockbuster confidential information or industrial property has been used or exploited by Karioi in the inclusion on databases of information concerning these persons. I am not satisfied that the defendants have retained or utilised any other confidential information.

The Cross-Claim

185 As I have found that the Noosaville and Nambour franchise agreements expired, it is not necessary to consider the issues raised in the cross-claim.

Orders

186 I make the following orders:

1. An order that the defendants deliver up to the plaintiff all copies of the customer database of the Noosaville franchise business as at 31 August 2008 and any database of persons who were customers of the Noosaville franchise business as at 31 August 2008 which has been developed since 1 September 2008.

2. An order that the defendants deliver up to the plaintiff all copies of the customer database of the Nambour franchise business as at 31 August 2008 and any database of persons who were customers of the Nambour franchise business as at 31 August 2008 which has been developed since 1 September 2008.

3. The defendants are restrained from using for their own benefit any part of the customer database of the Noosaville franchise business as at 31 August 2008 until further order of the court.

4. The defendants are restrained from using for their own benefit any part of the customer database of the Nambour franchise business as at 31 August 2008 until further order of the court.

5. The defendants are restrained from using for their own benefit any part of any database of persons who were customers of the Noosaville franchise business as at 31 August 2008 which has been developed since 1 September 2008 until further order of the court.

6. The defendants are restrained from using for their own benefit any part of any database of persons who were customers of the Nambour franchise business as at 31 August 2008 which has been developed since 1 September 2008 until further order of the court.

Any claim by the plaintiff for damages will be limited to damages through the defendants’ retention and utilisation of confidential information in accordance with my findings and is to be referred to an Associate Justice.

7. In all other respects, the plaintiff’s claim be dismissed.

8. I make a formal order that the cross-claim be dismissed.

187 Any argument on costs should await the conclusion of the action. Should the plaintiff decide not to proceed with a claim for damages, the proceedings may be re-listed before me for submissions as to costs.

**********


AMENDMENTS:


19/10/2009 - Typographical error - Paragraph(s) 4, 14, 22, 32, 90, 120, 142


LAST UPDATED:
21 October 2009