woe ; . /, IN THE FEDERAL COURT OF AUSTRALIA ' aa NEW SOUTH WALES DISTPICT PEGISTRY a Q WwW ra) ve] o Fh eZ GENERAL DIVISTON BETWEEN : ETHER HOLDINGS PTY LIMITED First Applicant GREGORY RAYMOND LILLINGTON Second Applicant KEPRY ANNE LILLINGTON Third Applicant Fourth Applicant ELIZABETH MARTIN HOOD Fifth Applicant COLIN EDWAPD EMANUEL Sixth Applicant ROBYN MARGARET EMANUEL Seventh Applicant AND: CUT PPICE DELI PTY LIMITED Fespondent AND: OUT PPICE DELI PTY LIMITED cross Claimant AND: ETHEP HOLDINGS PTY LIMITED First Crass Fespondent WILCOX J. 12 AUGUST 1985 SYDNEY (2 GREGORY PAYMOND LILLINGTON KERRY ANNE LILLINGTON GERALD H90D ELISABETH MAPTIN HOOD COLIN EDWARD EMANUET ROBYN MARGARET EMANUEL Second Cross Respondents MINUTE OF ORDERS THE COURT ORDERS THAT: tJ . NOTE: The Cross Claim is dismissed, The cross claimant pay to the cross respondents any sasts incurred by them of the Cross Claim including any reserved costs. lement and entry of orders 1 > of Fhe s dealt with in Federal Court Rules. 'NOTE: Thia judgment rela tea predominantly to its own facts and us not of sufficient general interest to justify circulation) IN THE FPEDEPAL COURT OF AUSTPALTA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION BETWEEN : AND: No. ve] i) ra 'D of 1984 ETHER HOLDINGS PTY LIMITED First Applicant GREGORY PAYMOND LILLINGTON Second Applicant KERRY ANNE LILLINGTON Third Applicant GERALD HOOD Fourth Applicant ELIZABETH MAPTIN HOOD Fifth Applicant COLIN EDWARD EMANUEL Sixth Apelicant POBYN M&PGARET EM&aNVeEL Seventh Applicant CULr PRICE DELI PTY LIMITED AND; Pespondent cur PRICE DELI PTY LIMITED Ww AND: ETHER HOLDINGS PTY LIMITED First Cross Respondent GREGORY RAYMOND LILLINGTON KEPRY ANNE LILLINGTON GERALD HOOD ELIZABETH MARTIN HOOD COLIN EDWARD EMANUEL ROBYN MARGARET EMANUEL Second Cross Respondents TORAM: WILCOX J. DATE: 12 AUGUST 1985 PLACE: SYDNEY EXTEMPOPRE REASONS FOR JUDGMENT This is a hearing of a Cross Tlaim brought by Cut Price Deli Pty Limited against a company known as Ether Holdings Pty Limited and six individuals who were apparently associated with Ether Holdings at some stage of its activities. The principal proceedings were commenced on 19 Tulyv 1984 by Ether Holdings and six individuals, and in an amended Statement of Claim filed on 15 November 1984 varisus allegations were made against Cut Price Deli in relation tea conduct said te contravene $.52 of the Trade Practices Act 1974, One of the matters which was referred to was the fact that the company, Cut Price Deli, did not at the time of granting a franchise agreement have registration of that business name in the State of Queensland. I am not concerned with the substance of the allegations made in the amended Statement of Claim in any direct sense. The reason for this is that there was default in complying with directions in relation to the principal proceedings, that default apparently being associated with the financial vicissitudes of Ether Holdings. I qather that the company is now either in the course of liquidation or in receivership. On 31 May 1985 an application was made to dismiss the principal proceedinas for want of prosecution and I acceded to that application. I adjourned the matter of the Tross Claim and gave directions regarding filing and service of affidavits in support of the Cross Claim. The Cross Claim came on for hearing today when the cross claimant relied upon the affidavit evidence of Mr Enzo Saambellone, a director of Cut Price Deli Pty Limited. Mr Scambellons also gave oral evidence and a number of documents were tendered. 4. The most important exhibit in the case is the franchise agreement which bears date 29 July 1983. The exhibit is signed by four only of the individuals who are named as cross respondents: that is to say, by Mr and Mrs Lillington and by Mr and Mrs Emanuel. It is not signed by Mr and Mrs Hood. The role of these individuals under the agreement was to act as guarantor. Mr Slater on behalf of the cross claimant has drawn my attention to the pleadings in which it is admitted on behalf inter alia of Mr and Mrs Hood that they were quarantors. Having regard to the conclusion that I have reached 1t is not necessary to consider whether this furnishes sufficient evidence to attach liability to Mr and Mrs Hood in the absence of their signatures to the agreement. The franchise agreement contained certain recitals. The vendor company is identified in the agreement as Rechi Enterprises Pty Limited. This is the same company as the cross claimant. Cut Price Deli Pty Limited, the name having been changed in the meantime. Pecital A states that the vendor has owned and cperated retail businesses specializing in the gale of delicatessan-type products, identified principally by the trade name and mark, the name of which is set fcrth in the schedule beside the words "The Name". Recital B states that the franchisee. that is to gay, Ether Holdings Pty Limited. 5. desires to acquire the right to utilize the name within a specified area and to conduct therein a franchise-type business as a sub-franchisor of the franchisor on the terms and conditions hereinafter defined. Recital C states that the vendor is desirous of selling the rights on the terms and conditions hereinafter defined. The subject matter of the franchise 1s described in o1.2 of the agreement, namely, the right to own, operate and conduct a franchise business within the area of the State of Queensland. This right includes the option to conduct businesses at locations by itself and/or to franchise the operations to sub-franchisees. By cl11.3 and 4A provision is made for the choice of business locations, the granting of licences, advertising arrangements and so on. Clause 5 deals with the payment for the franchise and other fees. It requires an initial payment of $200,900 on settlement. It is not at all clear what is meant by the words "on settlement" but apparently the parties acted upon the basis that this meant when the contract came into affect. that 153 on completicn of execution. There is then provision made for further fees to he paid as subsequent businesses were cpened. They include. in subcl.(f), a reference to one-third of qoodwill being payable to the franchisor. In a document which is not distinquashed 6. for its draftsmanship this subclause is outstanding in being almost unintelligible. It is not at ali clear whether the requirement for one-third of the sale price of goodwill applies to each of the situations in the subclause cr only the third of them, in which case it is irrelevant to the present case. I am asked on behalf of the cross claimant to read subcl./f) as an agreement by the franchisee that if it causes any franchise business to be operated by a person other than itself then one-third of the amount payable by the purchaser of the business for goodwill is to be payable to the franchisor. As I say, this is far from clear to me but once again I do not think it is necessary for me to come toa conclusion as to whether this construction is open. Clauses 6, 7 and 8 deal with matters of common interest to the franchisor and the franchisees including the products to be supplied, prices and promotional activities. It was quite clearly contemplated that there would be benefits to both parties in joint activities; they no doubt attracting some economies of scale. Clause 93 describes what 15 called "the system". The system is said to have "the distinaguizhing characteristics" of "the Name" and of "a licence hereby transferred" including "a trade mark, a logo and business name fand) a developed marketing concept and uniform procedure for the operation of franchise locations". Clause 19 sets out certain obligations' of the franchisor and cl.11 sets out obligations of the franchisee. These include in subcl.(1) an acknowledgement of the franchisors "interest and exclusive right to the Name and its distinguishing characteristics including the name and style of the Name. materials and operating procedures". In subcl.(5) the franchisee is made to acknowledge "the need for uniformity in the System". In subcl.(6) the franchisee agrees to operate the franchise granted herein under the franchise name. The subclause goes on to provide for the franchisor to qrant to the franchisee the right to register within the location the franchise name and to licence it in its use by its franchisee. The agreement goes on to make orovision in respect of numerous other matters but I need not set those out as they are not material to the present question. The evidence indicates that before the making of the agreement two locations had been established in the State of Queensland, being the area in respect of which the franchise was to be given by the cross claimant to Ether Holdings, namely Toowoomba and Kawana Waters. Stores had been cpened in each of those places during the first six months of 1982, apparently under the name "Cut Price Deli". At some time around the middle of the year it apparently became known to the parties that there was a problem about the availability of the business name. "Cut Price Deli" because of the fact that 8. tha name had been registered in the State of Queensland by 4 company having no association with any of the parties, namely Cut Price Stores Retailers Limited. This led to something of a crisis and on 12 July 1983 Mr Sgambellone and his co-director, Mr Rechichi, went to Brisbane to have a meeting with Mr Emanuel and Mr Lillington, the latter two gentlemen being two of the six individual cross respondents and people who were apparently in charge of the affairs of Ether Holdings. Mr Sgambellone,. according to his own evidence. said that his company could sue Cut Price Stores for passing off. He said that he would follow that action and, as he put it in his avidence. "make sure we get our name back". He further iar said this was treated with relief by Messrs Emanuel and Lillington who accepted the assurance and that there was no further discussion about the matter of the name between that date and the date when the agreement was siaqned. The written agreement, as I have mentioned, required $200,000 to be paid on settlement. In fact, shortly after the date of the agreement. a total sum of $100.000 was paid, according to Mr Sgambellone, and there was discussion regarding the second half of the initzral amount. Mr Sgambelloane was told that there was some datficulty or delay in obtaining thia money because of finance requirements and he offered to extend the time until December ty without requiring any interest payment. In fact that second half of the initial payment has not ever been paid and that is part of the claim which is now brought. In the meantime some other stores were opened in Queensland. The store at Maroochydore was opened on 6 December 1983. A store was opened at Townsville on 28 November 1983, at Springwood on 5 Qctober 1983, at Tweed City -- which was apparently treated as part of Queensland for the purposes of this agreement -- on 3 November 1983. at Stafford City on 6 March 1984 and a Ashmore un April 1984. These stores were apparently opened by Ether Holdings but upon the basis that they would be operated by a sub-franchisee rather than Ether Holdings itself. The evidence 1s very skimpy in regard to that matter. However. Mr Sgambellone was able to give evidence by way of admissions made to him either by Mr Emanuel or by Mr Lillington as to sums of money said to have been paid by sub-franchisees of these stores for the right to enter the sub-franchise agreement. The total payments for the goodwill ingredient from the sub-franchisees in respect of these stores appear=e ta amount to $419,000. The cross claim claims to recover one-third of this amount pursuant to cl.5(f) of the agreement. The evidence as to subsequent events is even more skimpy. It appears that, in some cases, the th tores may still be operating; although Mr Sxyambellone save they are not 10. well operated and that they are badly run down. It appears that there is no present active involvement by Ether Holdings or by any of the six individuals in relation to any of the existing stores. Consequently, there 1s not any basis upon which injunctive relief could be granted. Nothing is being done by the cross respondents which presently adversely affects, or threatens in the future adversely to affect, the continuing interests of the cross claimant. Indeed, counsel for the cross claimant very fairly accepts that this 1s so. In essence then the claim comes down to one for recovery of the balance of the initial sum of $100,000 together with one-third of $410,000 which is $136,666. The fundamental problem in the path of the cross claimant as I see it 1s that it has never been able to overcome the difficulty regarding the unavailability to it of the name. The evidence indicates that Mr Sgqambellone did make an approach to Cut Price Stores in an endeavour to come to an amicable arrangement under which the name Cut Price Deli would be available for use by the cross respondents in Queensland. That approach failed. He then apparently gave some instructions to his solicitors about legal action but it is not clear whether legal proceedings were actually instituted against Cut Price Stores. If they were, they seem to have petered out very quickly. In any event, 1t is quite plain that no effective action was taken to enable any of the parties in this case to obtain registration in Queensland of ll. the name. There was from time to time discussion between them regarding a substitute name. At one stage a suggestion was put that the cross respondents might accept as a substitute the name "Rite Price Deli". This was apparently considered but rejected. At a meeting held in the Sydney office of the cross claimant in March 1984, Messrs Hood and Emanuel said that they would be prepared to accept the name "Slice the Price Deli" but in the same conversation they indicated the view that they should not be required to pay the outstanding $100,000 and they suggested quite extensive alterations to the schedule of payments due to the agreement. There was discussion during which Mr Sgambellone offered to spend certain money advertising the name "Slice the Price Deli" and to undertake the cost of changing the signboards on the existing shops. Mo resolution of the matter was reached and Messrs Hood and Emanuel said they would think about it and in fact according to Mr Sgambellone they never came back with an answer one way er the other. It is impossible to obtain out of the evidence of Mr Sgambellone in respect of the March meeting any concluded agreement by the parties to substitute a different name for that which is provided by the agreement itself. The critical question then is: what is the effect of the inability of the franchisor to procure for the franchisee the use of the name 12. specified in the agreement? Mr Slater contends that the reference to the name should not be read as a condition but merely as a warranty. He said it was not fundamental to the arrangement between the parties. I cannot accept that categorisation. The evidence indicates that the franchisor operated numerous stores in both New South Wales and Victoria under the name of "Cut Price Deli" and one would think it axiomatic that the value of a franchise would be greatly increased if the franchisee was able to obtain the use of a name which was well known in those two States. I have in mind the opportunities of benefitting by advertisements in those other States, whether in magazines or television or newspapers, or otherwise, together with such custom as might be available by people who have patronized the stores in the southern States. But one does not have to qo beyond the terms of the agreement itself to see the emphasis that the parties chose to place upon the name. As I have indicated, the system is described as including the name and the franchisee 1s made to acknowledge the need for uniformity in the system. It seems to me impossible, under those circumstances, to accept the submission made on behalf of ct aa i) franchisor that there 1s no need for uniformity in one aspect of the system, namely the name which is to be used by, and upon, the retail outlets at which trading 15 to be carried out. 13. It seems to me that the inability of the franchiser fo deliver to the franchisee the right to use the particular name nominated in the agreement and which was already itself the subject of some reputation and apparent goodwill in other places is something that struck at the heart of the agreement. It amounts to a fundamental approach and prevents any recovery by the cross claimant under the agreement. It is a matter of some surprise that the parties put themselves in this position. As I have pointed out, the agreement was dated 29 July 1983 at which time the parties were aware that there was a problem about the name in Queensland. However, Mr Sgambellone was apparently very confident that this was only a temporary problem and 1t would appear likely that his confidence not only led him to commit his company to go ahead with an agreement which was firmly tied to the name "Cut Price Deli", but also that his confidence swept along Mr Emanuel and Mr Lillington and their respective wives. In the event the confidence turned out to be misplaced. That is unfortunate from the point of view of the cross claimant but I think it is the direct result of a course which it chose to undertake. Had it been, as suggested in submissions before me, a matter not of critical importance to use the name "Cut Price Deli" then, particularly in the circumstances as they were 14, then known, I would have expected the agreement to provide a let-out clause with a substituted name in the event that "Cut Price Deli" was not able to be obtained. I have come to the conclusion that the cross claimant is precluded from recovering under this agreement and that the Cross Claim must be dismissed. In relation to costs of the Cross Claim I expect they will be very small indeed because Mr Emanuel appeared by leave to represent himself and the other five individual defendants. The company, Ether Holding rer , was not represented. However, there may have been some costs incurred in regard to the Cross Claim during the progress of the matter and, to the extent that there are such costs, they should be paid by the cross claimant. The order will be that the Cross Claim is dismissed and that the cross claimant pay to the cross respondents any costs incurred by them of the Cross Claim including any reserved costs. I certify that this and the thirteen (13) oreceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Wilcox. Associate: Date: 29 Auqust 1985 Appearance for the applicants and cross respondents: Counsel for the respondent and cross claimant: Solicitors for the respondent and cross claimant: Date of hearing: 15. Mr C E Emanuel in person Mr A H Slater Messrs Picone & Co 12 August 1985