FEDERAL COURT OF AUSTRALIA corporations - application for leave to proceed by way of cross claim PRACTICE - amendments to pleadings - leave to withdraw admission Corporations Law s 500(2) Bowes v Chaleyer (1923) 32 CLR 159 followed BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 applied Divcon (Australia) Pty Ltd v Devine Shipping Pty Ltd [1996] 2 VR 79 followed Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 applied Pukallus v Cameron (1982) 180 CLR 447 applied Southern Foundries (1926) Ltd & Federated Foundries v Shirlaw [1940] AC 701 considered William Cory & Son Ltd v City of London Corporation [1951] 2 KB 476 considered O.D. TRANSPORT (AUSTRALIA) PTY lTD (in liquidation), richard gell mansell and Simon alexander wallace-smith v O.D. TRANSPORT PTY LTD, noel robert may and lynette christine may vg 3145 of 1997 finkelstein j melbourne 20 march 1998 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 3145 of 1997 BETWEEN: O.D. TRANSPORT (AUSTRALIA ) PTY LTD (in liquidation) richard gell mansell Simon alexander wallace-smith APPLICANTS AND: O.D. TRANSPORT PTY LTD noel robert may lynette christine may RESPONDENTS JUDGE: FINKELSTEIN J DATE: 20 MARCH 1998 PLACE: MELBOURNE REASONS FOR JUDGMENT HIS HONOUR: This is the second occasion upon which the first respondent applies for an order under s 500(2) of the Corporations Law for leave to commence a civil proceeding by cross-claim against the first applicant. On 10 December 1997 I dismissed the first application but without prejudice to the first respondent's right to make a further application. The first respondent had failed to obtain the order it sought because it had not put forward any material to establish that its proposed cross-claim had sufficient merit to warrant the grant of leave. In my reasons for judgment given on the first application I summarised the causes of action that the applicants assert against the first respondent. I do not propose to repeat that summary. For the purposes of the present application all that need be mentioned is the first cause of action. That arises out of a franchise agreement which is dated 5 September 1990 and by which the first respondent granted to the first applicant a franchise to conduct a road haulage and transport business that previously had been conducted by the first respondent. The first applicant claims that it overpaid the royalties payable under that agreement and it seeks to recover the sum of those overpayments as money had and received by the first respondent to the use of the first applicant. The alleged overpayments total $295,524.03. The first respondent seeks to resist this claim on a number of grounds two of which give rise to the present application. First, the first respondent seeks to obtain declaratory orders that the franchise agreement contains certain implied terms the effect of which would be that the royalties payable under the franchise agreement are greater than the royalties that are payable in accordance with its express provisions. Secondly, the first respondent seeks to have the franchise agreement rectified to incorporate certain terms and conditions, some of which overlap with the alleged implied terms, and which would, if incorporated, also have the effect of increasing the royalties payable under the franchise agreement. If the first respondent is given leave to raise these claims and it is successful in either of them the amounts claimed by way of overpayment will be reduced or eliminated. In order to understand the nature of the proposed claims which the first respondent seeks leave to bring it is necessary to mention certain of the provisions of the franchise agreement. The grant of the franchise is dealt with in clause 1. It provides for the grant of a franchise of the business. It also confers the right to use certain intellectual property (the intellectual property is defined in the recitals) used in connection with the business. Two royalties are payable by the franchisee. The first is described as a Location royalty. It is defined in the Schedule to the franchise agreement to be, in effect, eight per centum of the gross receipts of the business. The second royalty is described as an Equipment royalty. It is defined in the Schedule to be five per centum of the leasing or hiring charges payable by the first respondent to the lessors or owners of certain plant and equipment referred to as "the Equipment". There is a list of plant and equipment in the Schedule that constitutes "the Equipment". The list comprises six vehicles and certain radio trucking equipment. Clause 2 of the franchise agreement should also be noted. It provides: "The franchisor will lease, sub-lease, hire or sub-hire the equipment more particularly itemised in the Schedule hereto ('the Equipment') on the terms and conditions contained in the various leasing, sub-leasing, hiring or sub-hiring agreements (as the case may be) to be entered into between the franchisor and franchisee and all other relevant parties." Although clause 2 is a curiously worded provision the intention of it appears to be that the first applicant would hire or lease the Equipment from the first respondent on the same terms and conditions as the first respondent had hired or leased the Equipment from third parties: at least the first applicant was prepared to assume that clause 2 had that meaning for the purposes of the present application. If this is the correct meaning to be given to clause 2 the result is that if the parties enter into the agreements contemplated by that provision and the first applicant satisfies the obligation to pay the Equipment royalty then the first applicant will pay 105% of the leasing or hiring charges payable by the first respondent for the leased or hired Equipment. There are five terms that the first respondent says are to be found in the franchise agreement by way of implication (the assertion is that it is an ad hoc implication): (a) the first applicant operate the business and use the intellectual property for a fee ("the location royalty"); (b) the first respondent would continue to own the business and the intellectual property; (c) the first applicant would use all of the plant and equipment owned or hired or leased by the first respondent and used by it immediately prior to entering into the Franchise Agreement to continue the business for a fee ("the equipment royalty"); (d) the first applicant would pay to the first respondent the full costs of leasing, sub-leasing, hiring or sub-hiring any item of equipment used by it after the commencement of the Franchise Agreement if such item of equipment was itself the subject of a lease, sub-lease, hiring or sub-hiring by the first respondent with a third party ("the lease payments"); (e) the first applicant would indemnify and keep indemnified the first respondent against all leasing, sub-leasing, hiring or sub-hiring charges incurred by the first respondent in respect of plant and equipment used by the first applicant after the commencement of the Franchise Agreement ("the indemnity"). The first respondent seeks to have the franchise agreement rectified: (a) by adding to the plant and equipment that presently comprises "the Equipment" all other items of plant and equipment owned, leased or hired by the first respondent and used by it in connection with the business as at 5 September 1990. (b) by the insertion into the franchise agreement of the fourth and fifth implied term. As I pointed out in the earlier application I must be satisfied that the first respondent's proposed claims are capable of serious argument before leave to bring the cross-claim will be granted. It is to this question that I now turn. The conditions that must be satisfied to permit the implication of an ad hoc term are well known. They were authoritatively stated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 in the following passage at 283: "(1) it [the implied term] must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying' (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract." Do the proposed implied terms satisfy these conditions? The first and second implied term present no real difficulty in the sense that it is at least arguable that, to give business efficacy to the franchise agreement, they should be implied. If the first applicant did not operate the business and use the intellectual property no Location royalty will be payable. Thus, in the absence of the first implied term the first respondent would be denied significant benefits under the franchise agreement. It may be presumed that the parties did not have this in mind as a possibility. The second implied term might be justified in accordance with cases such as Southern Foundries (1926) Ltd & Federated Foundries v Shirlaw [1940] AC 701 and William Cory & Son Ltd v City of London Corporation [1951] 2 KB 476 where it is established that when a party enters into an arrangement that can only take effect by the continuance of a certain existing state of things there is an implied promise that nothing will be done to put an end to that state. So, it could be said that the franchise agreement proceeded on the assumption that the first respondent would continue to own the business and the intellectual property for otherwise the first applicant might not receive the benefits conferred upon it under the bargain. I should indicate that there is a strong countervailing argument. If the first respondent did dispose of the business or the intellectual property to a third party during the currency of the franchise agreement in circumstances where the first applicant's rights under the franchise agreement were adversely affected the first respondent would no doubt be in breach of its obligations under clause 1. For this reason there may be no need for the suggested term. The first applicant also argued that the second implied term was inconsistent with the effect of the franchise agreement which was said to be that the franchisee had acquired proprietary rights in the subject of the franchise. I am not convinced that this is what the agreement brings about although it is certainly arguable that it does have that effect. However, all that I need to determine in order to grant the leave that is sought is whether the existence of the second implied term is at least reasonably arguable and I am satisfied that it is. However, the remaining implied terms appear to me to be neither reasonable nor necessary for the efficacious working of the franchise agreement. Moreover, they suffer from the insuperable difficulty that they contradict express provisions of the franchise agreement. Take the third implied term. It would assert that the first applicant is under an obligation to use all of the plant and equipment owned or hired or leased by the first respondent immediately prior to entering into the franchise agreement and to pay a royalty on that basis. This supposed obligation is contradicted by the equipment royalty clause by which the Equipment royalty is only payable in respect of the listed plant and equipment. Thus the implication could not be made. The fourth implied term suffers from the same deficiency. It seeks to impose an obligation upon the first applicant to reimburse the first respondent for leasing and hiring charges incurred by it in relation to all plant and equipment used in connection with the business. Clause 2 of the franchise agreement is intended to deal with the rights and obligations of the parties in respect of the leased and hired equipment. If the fourth proposed term is implied it would render clause 2 otiose. A term that will have that effect cannot be implied into the agreement. The final implied term also suffers from the difficulty that there is an indemnity provision in the franchise agreement which the suggested term would contradict and the additional difficulty that it seems to satisfy none of the conditions laid down by BP Refinery (Westernport) for an implication to be made. What of the contention that the agreement should be rectified to incorporate the provisions mentioned above? Rectification is available when it can be shown that by common mistake there is disconformity between an antecedent oral bargain or concurrent intention and the written instrument which was intended to embody that bargain or intention: Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 349; Pukallus v Cameron (1982) 180 CLR 447 at 456. The evidence upon which the first respondent relies to establish this disconformity can best be described as meagre. The evidence is contained in an affidavit by its director Mr Noel May who at the time the franchise agreement was executed was also a director of the first applicant. Mr May deposes that he gave the instructions to draw up the franchise agreement to a solicitor, Mr Milder. He says that the accountant for the two companies, Mr Wayne Stevenson, was present when those instructions were given. Then there is the following sentence in Mr May's affidavit which is the sole repository of the facts said to justify the case for rectification: "It was my belief at the time of the executing of the said franchise agreement that the (proposed conditions) were set out in the said document." There is no explanation why Mr May held this belief. He does not say that he told Mr Milder to include those provisions in the agreement. He does not say that he was advised either by Mr Milder or Mr Stevenson that the agreement would contain these provisions. He does not point to any surrounding circumstances upon which his belief might be based. Further, there is evidence that, at least in so far the quantum of the royalties is concerned, the franchise agreement does accord with the intention of the parties. That evidence is to be found in minutes of the meetings of the directors of the first applicant and the first respondent held on 4 June 1992. Mr May, his wife and Mr Stevenson were in attendance at those meetings. The minutes record that each company was of the view that the Equipment royalty payable under the franchise agreement was "commercially unrealistic". Accordingly it was resolved that the royalty should be varied by increasing it. There is no suggestion that the "commercially unrealistic" royalty resulted from the failure by Mr Milder to prepare the franchise agreement in accordance with Mr May's instructions or wishes. Even if these minutes are ignored I would decline to grant the first respondent leave to pursue a claim to rectify the franchise agreement by the insertion of the lease payments clause and the indemnity clause because it has not been demonstrated that the claim for rectification in those respects has any prospect of success. Taking into account the minutes it seems to me that the claim is not a bona fide one in any event. However the contention that the franchise agreement should be rectified by the addition of certain items of plant and equipment to the list of Equipment stands on a different footing. There is evidence that suggests that the list in the Schedule is incomplete. The liquidator of the first applicant conducted an examination of Mr May under s 596A of the Corporations Law. A portion of the transcript of that examination has been tendered by the first applicant. In that examination Mr May explained that the first applicant was established for the purposes of taking over the business of the first respondent to separate the ownership of the business from the ownership of the plant and equipment. The reason for this separation was that in the event that the conduct of the business led to claims being made against the company that operated the business the plant and equipment would not be available to satisfy those claims. Mr May said that it was his intention, based on advice that he had received from his accountant, that the first applicant should take possession of all of the plant and equipment used by the business in order for it to be able to operate the business. This assertion seems plausible enough. It might also follow from this that the parties contemplated that clause 2 would require the first applicant to take on hire or lease from the first respondent all of the plant and equipment that was on hire or lease to the first respondent at the time that the franchise commenced and that the Equipment royalty would be paid in respect of that plant and equipment. This would only come about if the list of plant and equipment in the Schedule included each item of plant and equipment that was the subject of a lease or hire agreement when the franchise agreement was made. The first applicant also tendered in evidence a copy of the minutes of a meeting of the directors of the first respondent held on 1 August 1990. Those minutes record that the following resolution was passed: "It was further resolved that the Trucks, Trailers and all heavy haulage equipment would remain the property of O. D. Transport Pty Ltd. but that a new Company, O. D. Transport (Australia) Pty Ltd operate the business of heavy haulage under a licence or franchise fee arrangement to be effective from the 1st September 1990 with O. D. Transport Pty Ltd. The following equipment would be available under this arrangement: - 11 Prime Movers - 1 Crane - 3 Tray Trucks - 13 Semi Trailers - 3 Low Loaders - 4 Steerable Jinkers" This lends further support to the assertion that the list of plant and equipment in the Schedule is incomplete. On the basis of this evidence the first respondent should be given leave to commence a proceeding to seek an order that the franchise agreement be rectified to add to the list of equipment described as "the Equipment" the plant and equipment leased or hired by the first respondent and used by it in connection with its business as at 5 September 1990. There is one other matter that requires attention but it does not arise out of the application for leave to proceed. In their original statement of claim filed on 21 May 1997 the applicants pleaded the existence of the franchise agreement and alleged it was made on 5 September 1990. The first respondent delivered its defence on 5 September 1997. In that defence it was admitted that the franchise agreement was made on 5 September 1990. Subsequently, the applicants obtained leave to deliver an amended statement of claim and did so on 10 October 1997. The plea in relation to the franchise agreement was not amended by the new pleading. The first respondent delivered an amended defence to the amended statement of claim on 5 September 1997. In its amended defence the first respondent did not admit that the franchise agreement was made on 5 September 1990 but alleged that it was made "on or about October 1992 dated 5 September 1990." The applicants say that the first respondent should not be entitled to withdraw its admission that the agreement was made on 5 September 1990 without good cause. They rely on a passage in the judgment of Beach J in Divcon (Australia) Pty Ltd v Devine Shipping Pty Ltd [1996] 2 VR 79 at 80 where his Honour said: "As a matter of principle a party who has made an admission in a pleading should not be entitled to withdraw that admission without good cause, for example, that the admission was made in error by the party who prepared or gave the instructions for the preparation of the pleading, or as the consequence of a misapprehension by counsel or solicitor concerning the client's instructions." The withdrawal of the admission is not a matter of mere form. As the case is presently constituted the precise date upon which the franchise agreement was made is likely to be a matter of indifference. But it is possible that the first respondent will renew its application for leave to proceed to claim that the franchise agreement should be rectified by the insertion of the lease payments clause and the indemnity clause. The first respondent will no doubt find it difficult to succeed in that application having regard to the fact that it failed to satisfy the Court on two occasions that such leave should be granted. However, I cannot discount the possibility that in due course leave will ultimately be granted. In that event the date upon which the franchise agreement was in fact made may be a matter of real importance. For this reason the first respondent should not be permitted to withdraw its admission without giving some explanation how the admission came to be made in error. I should point out that the fact that the applicants obtained leave to amend their statement of claim and that the first respondent was therefore required to deliver an amended defence did not give it liberty to make any amendments it thought appropriate. The need to deliver an amended defence came about because of changes to the statement of claim and the amended defence must be confined to meeting the new case. It is not an occasion upon which a respondent is entitled to alter its defence in whatever way it thinks fit. That is to say, the first respondent was not at large in the manner in which it could alter its defence: Bowes v Chaleyer (1923) 32 CLR 159. It follows that the first respondent must deliver a further amended defence that reproduces its admission concerning the date when the franchise agreement was made or make an application for leave to withdraw that admission supported by appropriate evidence. It will also be necessary to exclude from that defence those of the implied terms which I have held could not be implied into the franchise agreement. The parties should bring in short minutes of orders to reflect these reasons. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein Associate: Dated: 20 March 1998 Counsel for the Applicant: T Irlicht Solicitor for the Applicant: Irlicht & Broberg Counsel for the Respondent: S Glacken Solicitor for the Respondent: Coltmans Price Brent Date of Hearing: 10 February 1998 Date of Judgment: 20 March 1998