JUDGMENT No. £9! {&1. (LIMITED DISTRIBUTION) . CATCHWORDS TRADE PRACTICES - misleading conduct - purported termination of franchise agreement by franchisor - franchisee continuing to operate franchise - whether interlocutory injunction should issue - validity of termination - balance of convenience where franchise concerned. Trade Practices Act 1974, ss.52 and 53 MINISKIPS LIMITED v SHELTAN PTY LTD No. VG 441 of 1987 Woodward J. 3 December 1987 Melbourne IN THE FEDERAL COURT OF AUSTRALIA MELBOURNE DISTRICT REGISTRY GENERAL DIVISION BETWEEN: No. VG 441 of 1987 MINISKIPS LIMITED Applicant and SHELTAN PTY LTD Respondents MINUTES OF ORDER COURT: Woodward J. DATE: 3 December 1987 PLACE: Melbourne THE COURT ORDERS THAT: (1) (2) (NOTE: Upon the usual undertaking being given by counsel for the applicant, the respondent, by itself, its directors, officers, servants or agents or otherwise howsoever be restrained in terms of the order of Northrop J made 13 November 1987 until the trial of the action herein or further order. Costs of this application for an interlocutory injunction be reserved. Settlement and entry of orders is dealt with in 0.36 of the Federal Court Rules.) IN THE FEDERAL COURT OF AUSTRALIA MELBOURNE DISTRICT REGISTRY No. VG 441 of 1987 GENERAL DIVISION BETWEEN: MINISKIPS LIMITED Applicant and SHELTAN PTY LTD Respondents COURT: Woodward J. DATE: 3 December 1987 PLACE: Melbourne REASONS FOR JUDGMENT This 1s an application for an interlocutory injunction in proceedings brought chiefly under ss.52 and 53 of the Trade Practices Act 1974. The applicant 1s in the business of removing household and garden waste by hiring out moderate-sized containers or skips for the householder to f111, and then collecting these and disposing of the contents. The applicant has advertised the availability of the service very widely, particularly on television, and has spent over $3m in two and a half years. However, until recently, the company has largely operated through franchisees, who purchase the miniskips and pick-up trucks, pay a fee to the applicant for the use of 1ts name and various support services, and receive the hire payments from the clients. The franchisees contribute to the cost of general advertising and do their own local advertising. The respondent has been one of the applicant's franchisees. It has been disappointed with the results it has been able to achieve, and has in fact been operating at a loss ever since it entered into franchise agreements some 18 months ago. It alleges that, before it entered into the agreements, the potential earnings of the business were misrepresented to it by the then management of the applicant. This is the subject of a separate action between the parties. The present action has arisen from an alleged failure of the respondent to comply with certain requirements of the franchise agreements which in turn led the applicant to terminate the agreements. However the respondent continued to operate its business, in the main, as 1f the agreements were still on foot. The substance of the applicant's case is that, by doing so, it was likely to mislead its clients and the general public into thinking it was still part of the applicant's system. To describe the applicant's case more fully, it 1s necessary to set out some of the provisions of the franchise agreements, which were dated 22 May 1986. They related to two separate franchises, in Dandenong and Glen Waverley. Only one was in evidence, but the parties agreed that the other was in similar terms. The agreement tendered was expressed to be for five years, with an option of renewal for a further five years. The respondent had to pay the applicant $79,500, made up of $52,500 for 20 skips, $15,000 by way of establishment costs and $12,000 in annual payments, including $4,500 towards the costs of advertising and promoting the service. The respondent's purchase of a truck from a supplier was arranged by the applicant. The agreement went on to provide for the respondent to use the applicant's name, trade mark and logo on its truck, skips, letterhead and advertising matter. It went on to set out detailed obligations of the franchisee, mainly relating to the careful and efficient conduct of its business. The franchisor's obligations were to provide training and to supply operating manuals describing the service, to promote and develop the service and to make improvements to it wherever possible. There were a number of other detailed provisions, not relevant for present purposes, and then came two clauses central to these proceedings: "15.1 Franchisee to Maintain Books of Account. The Franchisee shall maintain proper books of account in connection with the Service and the Franchise. Such books of account shall be in accordance with the system specified from time to time by the Franchisor and the Franchisee shall employ a qualified Accountant to prepare final accounts and shall permit the Franchisor and any person authorised by the Franchisor to receive, upon reasonable notice, a copy of any such books of accounts, final accounts or other supporting documents. 15.2 Certificate of Auditor. The Franchisee shall within 45 days after the end of each financial year supply the Franchisor with a certificate from his auditor which certificate shall set out the Franchisee's turnover and the aggregate gross value of all work carried out by the Franchisee." Also relevant is the following: "21.21 Termination Py Notice. The Franchisor may terminate the Franchise created by this Agreement forthwith by notice in writing to the Franchisee:- (1) If the Franchisee fails to commence conducting the Service within six months from the date hereof or shall have committed any breach of its obligations under this Agreement and has failed to remedy the breach within a period of fourteen days of the receipt of a notice in writing from the Franchisor requiring him to do so. (2) If the Franchisee has committed an act of bankruptcy or a receiver or manager has been appointed in respect of any of his assets or affairs related to the Service or makes any arrangement or assignment with or for the benefit of his creditors or suffers distress or execution to be levied or threatened on any of its property or calls a meeting of his creditors." The applicant came under new management in February 1987. Because of certain takeover negotiations little could be done immediately about problems which had arisen in the franchise operation. But certain unhappy franchisees were bought out by the applicant and, when the takeover did not proceed, a letter was sent to remaining franchisees, including the respondent, dated 11 September 1987, requesting the audit certificate referred to in clause 15.2 above and copies of books of account and other material referred to in clause follows: in the affidavit of the applicant's managing director "... we are writing to you to ask for the Certificate from your Auditor that you are required to supply to Miniskips pursuant to Paragraph 15.2 of the Franchise Agreement within forty-five days of the end of the financial year. As we have not yet received your Certificate, we would appreciate it if you can forward the Certificate to us within seven days of the date of this letter. Should the provision of the Certificate cause you any difficulties, please do not hesitate to contact me to discuss an extension of time. We also draw your attention to paragraph 15.1 of the Franchise Agreement. Would you please arrange to forward to us, at the same time as you forward the Certificate of your Auditor, a copy of your books of account for your franchise together with any relevant supporting documents. Por your assistance, we have enclosed a copy of paragraphs 15.1 and 15.2". 15.1. The relevant parts of the letter read as The reason for seeking this information was stated these terms, "Even aside from the assistance this information would give to Miniskips in assessing the franchisees' problems the information that franchisees are required to supply pursuant to paragraphs 15.1 and 15.2 of the Franchise Agreements 18S essential to the Proper conduct of the franchising side of the Miniskips Business. A Franchisor such as Miniskips must know the profitability, expense levels, turnover and general Operating statistics of each of its franchisees in order constantly to monitor the market performance of the services or goods the subject of the franchise arrangement and for the development of 1ts own business including the expansion of franchise operations...." in On 14 October 1987 a further letter was sent to those franchisees, including the respondent, who had not complied with the earlier request or sought an extension of time. After referring to that request and the failure to comply with it, the letter continued: "We hereby give you notice pursuant' to paragraph 21.1(1) of the Franchise Agreement that by your failure to supply this material to Miniskips you have committed a breach of your obligations under the Franchise Agreement and that you are required to remedy that breach within 14 days of the service of this notice upon you. If you fail to remedy the breach by failing to supply the Certificate from your Auditor and a copy of your books of account and relevant supporting documents within 14 days of the service of this notice upon you, Miniskips has the right to terminate your Franchise Agreement". The respondent's reply to this letter, dated 20 October 1987, came from its then solicitor and was addressed to the applicant's solicitors. It was written on behalf of a number of franchisees, including the respondent, and included these relevant paragraphs, "I have been briefed with a letter from Miniskips to my clients dated 14th October 1987, and request that you advise your client that any future correspondence meant for my clients be directed to them through me as their solicitor and not forwarded to them directly. I have already advised my clients to have their accounts audited so that, Mr. John Wilkinson of Counsel may be briefed with an audited set of accounts. Having regard to the fact that my clients' account books and the audited financial statements would constitute their evidence I shall leave it to the1r Counsel to determine if and when the aforesaid documents be made available to yourselves or your local agents for an inspection." The reference in this letter to "their evidence" relates, no doubt, to proceedings already taken or proposed, on behalf of the various franchisees against the present applicant, alleging breaches of the Trade Practices Act 1974 before the franchise agreements were entered into. No further communication was received from the respondent or its solicitor, and on 5 November 1987 notices of termination of the agreement were served on the respondent. At the same time a letter was served reminding the respondent of its duty to cease operating the franchise and setting out arrangements for the applicant to buy back the truck and skips, as provided for in the agreement. The respondent's then solicitor wrote to _ the applicant's solicitors on 6 November 1987 in the following terms, so far as is relevant, "I have now received .... copy correspondence +... whereby your client has attempted to renounce unilaterally the franchise agreement entered into between our respective clients. I have advised my clients to ignore any such unilateral renunciation pending final resolution of the major issues involved." The applicants solicitors replied on 9 November. They referred to the respondent as "Miniskips Dandenong" and "Miniskips Glen Waverley", its operating names; another franchisee referred to was "Miniskips Western Districts". The letter read, "We refer to your letter dated 6th November 1987 and we also acknowledge receipt of your letter dated 20th October 1987. Our client demands that your clients provide our client with their written undertakings that neither they nor any of their directors, officers, servants or agents or otherwise howsoever will: (a) operate the franchise businesses known as 'Miniskips Western Districts', 'Miniskips Dandenong' or 'Miniskips Glen Waverley' in any way whatsoever; (b) and will use the name 'Miniskips' in any way whatsoever with respect to the operation of waste disposal and collection services; by 2 p.m. (South Australian time) today failing which our client will apply for interim injunctions in the Supreme Courts of Western Australia and Victoria respectively for orders to this effect against your clients. Our client has lawfully terminated the Franchise Agreement between itself and your clients as your clients were in default of their obligations under paragraphs 15.1, 15.2 and 20.1(1) of the Franchise Agreements. The termination by our client was not a 'unilateral renunciation' of the Franchise Agreements. Your advice to your clients to ignore the termination by our client will cost your clients considerable expense if the application for interim injunctions 1s made necessary by the failure to provide the written undertakings requested above". The respondent's solicitor replied as follows, "I refer to your letter of even date. I have advised my clients by telephone to desist from using ''Miniskips' name in any way whatsoever or operate as Miniskips franchisees as from 2.00 p.m. to-day on ae without prejudice basis to their right to claim that the franchise agreement between the parties is still valid and enforceable and to their respective claims for damages with costs including loss of income should your client be not prepared to fulfil its obligations under the franchise agreement". The reply of the applicant's solicitors, still dated 9 November, read, in part, "We must insist that your clients provide written undertakings either through yourself or directly from them in the terms set out in our letter to you dated 9th November, 1987. Whilst we understand that you have advised your client in the terms set out in your letter dated 9th November, 1987, we must insist that we be provided with written undertakings in that form, in order that the position between our respective clients be clear and unequivocal. Our client has instructed us to allow you a further twenty four hours to either obtain those written undertakings directly from your clients or obtain instructions from them for you to give those undertakings on their behalf". We also refer you to paragraphs 17.2, 17.3 and 23.2 of the Franchise Agreements which govern, together with other provisions of the Franchise Agreements, your clients' conduct after termination". The following day the respondent's solicitor wrote, "Please advise your said principals that according to advice received from their Counsel my clients do not accept Miniskips unilateral termination of the franchise agreement as conveyed in my previous letter of 6th November, 1987. It follows, therefore, that my clients are not prepared to give such undertakings as sought in your principals' said letter". In addition to this letter indicating, finally, the intention of the respondent to behave as if the franchise agreement was still afoot, there was evidence that an employee of the respondent was seen on 10 November delivering one of its skips from which the letters 'Mini' had been erased in some way. There was further evidence that an officer of the respondent had refused to allow - 10 - representatives of the applicant to have access to the franchise equipment {truck and skips) for the purpose of valuation. This was how matters stood when, on 13 November 1987, Northrop J issued an interim injunction restraining the respondent from, among other things, holding itself out as a franchisee of the applicant. This order was made without notice to the respondent and the matter was set down for hearing before me on 19 November. On that day I refused the respondent's application to lift the interim injunction, but adjourned the matter to 30 November to give the respondent time to file material in opposition to an interlocutory injunction. That material has been filed, and it lays the foundation for several arguments now put by counsel for the respondent. It is convenient to consider the arguments and the supporting material together. The first issue for the Court to determine is whether there 1S a serious question to be tried, see Epitoma Pty Ltd v AMIEU (No 2) (1984) 54 ALR 730; Bullock v Federated Furnishing Trades Society of Australasia (No 1) (1985) 5S FCR 464, 60 ALR 235; and cases there cited. It was conceded by counsel for the respondent that there was such a question. In submitting that there was an arguable defence to the action, he relied almost entirely on -~11- an argument that 1t would be unjust in all the circumstances to permit the applicant to terminate the contract and there should be a "relief against forfeiture". The injustice was said to lie in the facts that the respondent had carried out 1ts work under the agreement conscientiously and had invested a good deal of money in its venture; 1t had been given to believe, by the previous management of the applicant an 1986, that the requirements of clauses 15.1 and 15.2 of the agreement were largely technical and not to be taken too seriously; the applicant had itself fazrled to comply with another provision of the agreement requiring it to supply information to the respondent; and the respondent had only acted on the advice of its then legal advisers. {I was informed that, on 27 November 1987, the respondent had supplied the information sought to the applicant.) Although one must feel sympathy for the respondent in the events that have occurred, I do not find the submission persuasive. The franchise agreement was drawn very clearly. (I do not accept the respondent's subsidiary argument that the words in clause 15.1 "... the Franchisee shall permit the Franchisor .... to receive, upon reasonable notice ....", are ambiguous or uncertain.) The letters stating the franchisor's requirements and giving notice of failure to comply were admirably clear. They were not, in my view, vitiated in any way by anything said to the respondent's officers months before by the previous management of the applicant. It was not suggested that these statements raised any estoppel or constituted a waiver of -12- rights. In any event it seems clear that the substantial reason the respondent did not comply with the applicant's requirements under the agreement was that it was advised not to, for some reason which I do not understand, but which was apparently related to other proceedings pending between the parties. I am thus unable to see that a basis for 'relief against forfeiture' has been laid. I also think it highly unlikely that a court could be persuaded to apply those Principles —- until now confined, so far as I am aware, to the law of real property, Legione v Hately (1983) 152 CLR 406 - or give any comparable equitable relief, in the circumstances of this case, particularly where the chief requirements of the franchisee who breaks the agreement are to cease using the franchisor's trademark and logo and to sell the equipment it has been using to the franchisor at valuation. For these reasons I am bound to say - and I think 1t is in the respondent's best interests that it be said at this early stage of the proceedings - that, based on the evidence so far presented, I can see little hope of it successfully defending this action. Further evidence put before me indicates that, until Northrop J granted the interim injunction, the respondent was using the distinctive 'Miniskip' vehicle and skips, and the solicitor's letters showed it intended to continue doing so. Deleting part or all of the ''Miniskip' - 13 - name would only lead to confusion, and not make clear to consumers that there was no connexion between the two businesses. In view of the high level of public awareness created by its advertising campaign, it is important to the applicant that this 1s consolidated by the sight of its name and logo on the streets. In view of the difficulty I have in detecting any serious question to be tried in the respondent's arguments, I can deal quite briefly with the balance of convenience. The profit and loss figures of the respondent show that the two businesses at Dandenong and Glen Waverley were both losing money - even putting aside any payments made to the applicant and interest on money borrowed. Mr and Mrs Curtis, the company officers who were running it, could not even pay themselves modest wages. There was no evidence to suggest that business was improving. In these circumstances I cannot see that the company will lose much, if anything, if the injunction 1s continued until the next directions hearing at the beginning of February, when I hope this and related actions can be sent to callover. From the public point of view, there is no advantage in a business which has been consistently losing money, and has a most uncertain future, continuing to trade. The applicant's managing director has sworn to its ability to pay readily any damages awarded against 1t if the injunction should prove to have been unjustified. On the other hand, to dissolve the injunction, and thus in effect to order the applicant to hand back the -14- business which it has been developing for itself in Dandenong and Mt Waverley in the weeks since the interim injunction took effect, would be most awkward - particularly in view of its undoubted right to operate in surrounding areas - and difficult for the Court to supervise. A franchise arrangement which requires, for its success, co-operation between the parties, cannot conveniently be cobbled together by the Court after one of the parties has purported to terminate 1t and has since acted on that basis, particularly when the other party 1s suing for misrepresentation. A relatively speedy trial and damages, one way or the other, if the actzon cannot be settled, seems to me to be the more convenient way of dealing with the matter. Nothing I have said, of course, touches on the merits of the present respondent's parallel action against the present applicant for alleged misrepresentations made before the franchise agreement was entered into. Whether that action succeeds or not, 1t 1S important that the present respondent mitigate its damages, and so the sooner it quits a losing business, the better. For the reasons I have given, there will be an interlocutory injunction, on the usual undertaking, in the terms of the interim injunction granted by Northrop J on 13 November 1987. That injunction will continue until the trial of the action or further order. Costs of this application will be reserved. -~15 - I certify that the fourteen (14) preceding pages are a true and accurate copy of the Reasons for Judgment herein of The Hon Mr Justice Woodward ssociate Dated: 3 December 1987 Counsel for the Applicant: Mr R.C. Macaw Solicitors for the Applicant: Freehill, Hollingdale & Page Counsel for the Respondents: Mr L. Watts Solicitors for the Respondents: Jerry Belleli & Co