FEDERAL COURT OF AUSTRALIA Timic v Hammock [2001] FCA 74 ARBITRATION ‑ Stay of proceedings ‑ Arbitration agreement ‑ Disputes or claims "arising out of or relating to" franchise agreement ‑ Whether claims for misleading and deceptive conduct and breach of duty of care relate to franchise agreement. Commercial Arbitration Act 1990 (Qld), s 53 International Arbitration Act 1974 (Cth), s 7 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 applied Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547 cited IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466 followed Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 followed Ethiopian Oilseeds v Rio del Mar [1990] 1 Lloyd's Rep 86 followed Huddart Parker Ltd v The Ship "Mill Hill" (1950) 81 CLR 502 applied Lewis Construction Co Pty Ltd v Tichauer SA [1966] VR 341 cited Leigh‑Mardon Pty Ltd v PRC Inc (1993) 44 FCR 88 cited Qantas Airways Ltd v Dillingham Corporation (1985) 4 NSWLR 113 cited WC Thomas & Sons Ltd v Bunge (Aust) Pty Ltd [1975] VR 801 cited Hi‑Fert Pty Ltd v Kiukiang Maritime Carriers Inc (No 5) (1998) 90 FCR 1 considered ZORAN TIMIC v BRYAN HAMMOCK, SUBWAY SYSTEMS AUSTRALIA PTY LTD, SUBWAY REALTY PTY LTD and JONES LANG LASALLE (VIC) PTY LIMITED V 686 OF 2000 SUNDBERG J 14 FEBRUARY 2001 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 686 OF 2000 BETWEEN: ZORAN TIMIC APPLICANT AND: BRYAN HAMMOCK FIRST RESPONDENT SUBWAY SYSTEMS AUSTRALIA PTY LTD (ACN 009 277 034) SECOND RESPONDENT SUBWAY REALTY PTY LTD (ACN 009 277 374) THIRD RESPONDENT JONES LANG LASALLE (VIC) PTY LIMITED (ACN 004 582 423) FOURTH RESPONDENT JUDGE: SUNDBERG J DATE OF ORDER: 14 FEBRUARY 2001 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be stayed as against the first and second respondents. 2. The applicant pay the first respondent's costs of the motion notice of which was filed on 24 October 2000. 3. The applicant pay the second respondent's costs of the motion notice of which was filed on 18 October 2000. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 686 OF 2000 BETWEEN: ZORAN TIMIC APPLICANT AND: BRYAN HAMMOCK FIRST RESPONDENT SUBWAY SYSTEMS AUSTRALIA PTY LTD (ACN 009 277 034) SECOND RESPONDENT SUBWAY REALTY PTY LTD (ACN 009 277 374) THIRD RESPONDENT JONES LANG LASALLE (VIC) PTY LIMITED (ACN 004 582 423) FOURTH RESPONDENT JUDGE: SUNDBERG J DATE: 14 FEBRUARY 2001 PLACE: MELBOURNE REASONS FOR JUDGMENT THE APPLICANT'S CASE 1 The applicant's statement of claim is in three parts. The first can be summarised as follows: · The first respondent ("Hammock") is the agent of the second respondent ("Subway Systems") and the third respondent ("Subway Realty"). · Dominic Aloi was in possession of premises in Toorak Road South Yarra ("the premises") under a sublease from Subway Realty as an approved Subway franchisee. · In April 1998 Aloi was in default under the sub‑lease and franchise agreement in the sum of approximately $32,000. · On or about 3 April 1998 Hammock represented to the applicant ("Timic") and warranted that if Timic made good Aloi's sub‑lease and franchise defaults · he could purchase the franchise from Subway Systems for $34,000 · he could operate the franchise from the premises for at least five years unless he decided to relocate the franchise business · the price was "dirt cheap" and in a few years he could sell the franchise business for between $100,000 and $120,000 or relocate it to Chapel Street · he would make lots of money ("the Hammock representations and warranties"). · On or about 3 April 1998 the fourth respondent ("JLL") represented to Timic and warranted that if Timic made good Aloi's sub‑lease default he could · take possession of the premises as the replacement sub‑lessee · remain in possession of the premises at the monthly rent of $2,415.92 ("the JLL representations and warranties"). · The Hammock representations and warranties were untrue in that Hammock did not intend Timic to operate the franchise from the premises for at least five years, did not believe the price was dirt cheap, and did not intend to allow Timic to relocate the franchise to Chapel Street or any other location. · The JLL representations and warranties were untrue in that JLL failed to inform Timic of the existence of a termination clause in the head lease, and that JLL knew or ought to have known that the head lessor could at any time instruct JLL to invoke the termination clause as a result of which Timic would have to abandon the franchise at the premises. · Hammock's representations and warranties were misleading and deceptive conduct in contravention of the Fair Trading Act 1985 (Vic). · JLL's representations and warranties were misleading and deceptive conduct in contravention of the Trade Practices Act 1974. · Hammock, Subway Systems and JLL owed Timic a duty to disclose the existence of the termination clause, and that the head lessor could at any time instruct JLL to invoke that clause as a result of which Timic would have to abandon the franchise at the premises. · In breach of the duty Hammock, Subway Systems and JLL failed to disclose those matters. · In reliance on the Hammock representations and warranties, the JLL representations and warranties and the anticipated performance of the said duty, Timic made good the Aloi defaults. · On or about 31 August 1998 Timic took a sub‑lease of the premises from Subway Realty and entered into a franchise agreement with Subway Systems ("the 1998 franchise agreement"). · On 11 December 1998 JLL notified Subway Realty that the head lease was to be determined because the head lessor intended to demolish the building of which the franchise premises were part. · In breach of the Hammock warranties notice of termination of the Timic sub‑lease was given with effect from 11 December 1999. · Subway Systems and Subway Realty were knowingly concerned in or party to the contraventions of the Fair Trading Act and the Trade Practices Act. · Consequent upon the termination notice Timic vacated the premises and abandoned the franchise in August 1999. · But for the Hammock representations, the JLL representations and the anticipated performance of the duty, Timic would not have taken possession of the premises, entered into the sub‑lease, discharged the Aloi indebtedness and commenced the franchise business. · As a result of the foregoing Timic has suffered loss and damage. 2 By the second part of his statement of claim Timic alleges: · It was a term of the 1998 franchise agreement that Subway Systems would use its best endeavours to offer Timic a replacement franchise or relocate him to alternative premises from which to carry on the old franchise. · In breach of the term Subway Systems failed to do either of those things. · As a result Timic has suffered loss and damage. 3 The third part of the statement of claim can be summarised as follows: · In November 1997 Timic and Subway Systems entered into a franchise agreement in relation to the business conducted from premises in St Kilda Road Melbourne ("the 1997 franchise agreement"). · It was a term of the 1997 franchise agreement that Subway Systems would ensure that no other Subway franchisee would be permitted to operate close to Timic's premises so as to cause him loss and damage by reason of reduced takings. · In breach of the term Subway Systems located another Subway franchisee in St Kilda Road some 900 metres from Timic's premises. · By reason of the foregoing Timic suffered loss and damage. THE STAY MOTIONS 4 By notice of motion Subway Systems seeks an order that the application be dismissed or permanently stayed or stayed pending compliance by Timic and Subway Systems with clause 10 of the 1998 and 1997 franchise agreements. By notice of motion Hammock seeks similar relief, and in the alternative that the application be transferred to the County Court pursuant to s 86A of the Trade Practices Act. The applications for a stay are made pursuant to s 53 of the Commercial Arbitration Act 1990 (Qld), s 7 of the International Arbitration Act 1974 (Cth), and because this Court is said to be an inappropriate forum. CLAUSE 10 ‑ DISPUTE RESOLUTION CLAUSE 5 Clause 10 of each franchise agreement contains a lengthy dispute resolution clause setting out the process for resolving disputes or claims "arising out of or relating to" the franchise agreement. Clause 10 can be summarized as follows: (a) Timic is initially obliged to use his best efforts to communicate with Subway Systems, including the Ombudsman's Department and the Subway Franchise Owners Advisory Council, to attempt to resolve the dispute or claim; (b) if the dispute or claim has not been resolved within thirty days after receipt of written notification of the dispute, Timic and Subway Systems agree to negotiate and in good faith use their best efforts to resolve the dispute; (c) if negotiation fails, Timic or Subway Systems can give written notice to the other of its intent to settle the dispute through conciliation at a hearing in Queensland, such conciliation to be conducted by a conciliator nominated by the Franchise Code Administration Council or by such other mutual negotiation service agreed upon by the parties; (d) if the conciliation provision in (c) is unenforceable, or if any dispute or claim arising out of or relating to the franchise agreement is not settled by conciliation, the dispute is to be arbitrated in accordance with the United Nations Commission on International Trade Regulations and Law (UNCITRAL) Arbitration Rules administered by the American Arbitration Association at a hearing in Connecticut, United States of America; (e) if the arbitration provision in (d) is unenforceable, any dispute arising out of the franchise agreement is to be adjudicated in the United States District Court for the District of Connecticut; (f) Timic and Subway Systems agree to submit to the exclusive jurisdiction of any court or tribunal in Connecticut any litigation or arbitration pursuant to the agreement (except intellectual property litigation or arbitration brought by Subway Systems against Timic). Hammock is not a party to either of the agreements. However the case was conducted on the basis that, for one reason or another, he could take the benefit of clause 10 THE FACTS 6 Doctor's Associates Inc, an American corporation, is the owner of proprietary and other rights and interests in various service marks, trade marks, trade names and goodwill used in its business including the trade name and trade mark "Subway". Subway Systems is the Australian licensee of Doctor's Associates. Subway Systems operates, and franchises others to operate, sandwich shops under the name "Subway", using recipes and methods licensed by Doctor's Associates. Clauses identical or substantially similar to clause 10 appear in franchise agreements for over 14,000 Subway franchises throughout the world. The reason Subway Systems and Doctor's Associates require disputes with franchisees to be resolved in accordance with clause 10 is that they want to develop an internationally consistent approach to dispute resolution with franchisees. 7 Before Timic entered into the 1997 franchise agreement he received from Subway Systems a Disclosure Statement/Offering Circular which drew attention to the dispute resolution provisions. Timic acknowledged receiving the document. The document contains the following information in large print under the heading "Risk Factors": "The franchise agreement requires that all disagreements between you and Subway Systems Australia Pty Ltd not settled by conciliation in Queensland be arbitrated and only in Connecticut, USA. If a court determines the arbitration clause is not enforceable, the franchise agreement permits you to sue Subway Systems Australia Pty Ltd only in Connecticut, USA (subject to any contrary law of your State, if it applies). Out of State arbitration or litigation may force you to accept a less favourable settlement for disputes. It may also cost you more to arbitrate or litigate with the franchisor in Connecticut, USA than in your home State." COMMERCIAL ARBITRATION ACT, S 53 Section 53(1) of the Commercial Arbitration Act provides: "If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may, subject to subsection (2), apply to that court to stay the proceeding and that court, if satisfied ‑ (a) that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and (b) that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration; may make an order staying the proceedings and may further give such directions with respect to the future conduct of the arbitration as it thinks fit." Sub‑section (2) provides: "An application under subsection (1) shall not, except with the leave of the court in which the proceedings have been commenced, be made after the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance." 8 In a provision such as s 53(1) the "matter" to be determined in the proceeding is to be ascertained by reference to the subject matter of the dispute in the proceeding and the substantive, although not necessarily the ultimate, questions for determination in the proceeding. The scope of the matter is to be ascertained from the pleadings and from the underlying subject matter upon which the pleadings are based. See Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 351 and Recyclers of Australia Pty Ltd v Hettinga Equipment Inc [2000] FCA 547, decisions on the word "matter" in s 7(2) of the International Arbitration Act. The "matter" to be determined in the present case, so far as it involves Hammock, is Timic's entitlement to recover damages by reason of Hammock's representations and warranties and breach of duty. So far as it involves Subway Systems, the "matter" is Timic's entitlement to recover damages from Subway Systems by reason of its involvement in the Hammock representations and warranties, its breach of duty and breach of contract, and its entitlement to an order that Subway Systems refund the amount he paid to discharge the Aloi defaults. 9 The opening part of clause 10 recites that the provisions that follow apply to the resolution of any disputes or claims "arising out of or relating to this Agreement". An expression such as this is to be broadly construed so as to include more than disputes about the interpretation or performance of the agreement. By force of the words "or relating to" it includes issues beyond the agreement itself, such as misrepresentations allegedly made before the agreement was entered into, claims in tort and claims under the Fair Trading Act and the Trade Practices Act. IBM Australia Ltd v National Distribution Services Ltd (1991) 22 NSWLR 466 concerned the words of an arbitration clause ‑ "Any controversy or claim arising out of or related to this Agreement or the breach thereof". After an extensive review of the decisions on clauses of this kind Kirby P said (at 477): "From the foregoing trend of authority, both in Australian and overseas courts, it can be seen that an arbitration clause, expressed in the language of the clause here under consideration, is not to be narrowly construed. It is sufficiently wide to include claims for rectification and for relief on the grounds of misrepresentation or mistake …. Whilst it is true that the conduct complained of as being in breach of the Trade Practices Act (Cth) is alone sufficient to enliven the provisions of that Act and whilst such provisions do not depend upon the agreement of the parties, such considerations do not determine the simple question posed. That question is whether the misrepresentations alleged are 'related to this agreement or the breach thereof'. It is enough to say that, in this case, it was open to Rogers CJ Comm Div to determine that the relationship was made out on the pleadings." Clarke JA (at 483) said the clause was sufficiently wide to encompass claims that the pre‑contractual misrepresentations induced the complaining party to enter the contract. Handley JA at 487 said the words "related to this Agreement or the breach thereof": "can only have been added to include within the submission claims other than in contract such as claims in tort, in restitution, or in equity. I can see no basis for excluding claims arising under statutes which grant remedies enforceable in or confer powers on courts of general jurisdiction. For example, the Contracts Review Act 1980, the Frustrated Contracts Act 1978 or the Insurance Contracts Act 1984 (Cth). Once this position is reached there is no basis, in my opinion, for excluding claims arising under the Trade Practices Act." The same approach was adopted by the Court of Appeal in Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160. See also Ethiopian Oilseeds v Rio del Mar [1990] 1 Lloyd's Rep 86. 10 The claims in the first part of the statement of claim based on the Hammock representations and warranties are claims "relating to" the franchise agreement. The breach of duty claim (failure to disclose the termination clause) made against Hammock and Subway Systems is a claim "relating to" the franchise agreement. The claim for breach of the Hammock warranties by reason of the giving of the termination notice is one "relating to" the agreement. The cause of action in the second part of the statement of claim (breach of best endeavours term) is a claim under the contract, and thus "arises out of" the contract. The cause of action in the third part of the statement of claim (breach of term that no other franchisee would operate near Timic) is in the same position. Accordingly, so far as it affects Hammock and Subway System, the proceeding is "in respect of a matter agreed to be referred to arbitration" for the purposes of s 53(1). I am satisfied that Hammock and Subway Systems have satisfied the ready and willing requirement in s 53(1)(b). 11 When an applicant takes proceedings in the forum in breach of an agreement to refer disputes to arbitration, the court's discretion to grant a stay is exercised in favour of the grant unless strong cause for not doing so is shown. See for example Huddart Parker Ltd v The Ship "Mill Hill" (1950) 81 CLR 502 at 508‑509; Lewis Construction Co Pty Ltd v Tichauer SA [1966] VR 341 at 347; Leigh‑Mardon Pty Ltd v PRC Inc (1993) 44 FCR 88 at 95‑99. Timic put forward the following factors as constituting sufficient reason why a stay should not be granted: · the evidence on the issues arises from within Victoria · the parties are connected with Australia · the applicant's measure of loss will be determined according to Australian law · there is no international element in the issues in dispute · there are no issues relating to the franchise procedures for operating the Subway franchise business in question between the parties · the applicant will be prejudiced by the expense and inconvenience of having to sue in the United States · the application for a stay is to secure a procedural advantage over the applicant. 12 The expense and inconvenience of an international arbitration were expressly drawn to Timic's attention before he executed the agreements. See par 5. They were described as "risk factors", and the warning was printed in large type. In those circumstances I am not persuaded that expense and inconvenience are reasons for not insisting on compliance with the bargain the parties made. See also Qantas Airways Ltd v Dillingham Corporation (1985) 4 NSWLR 113 at 118‑119. It is true that there is no international element in the issues in the case. The bias in favour of granting a stay is particularly strong in the case of a contract with an international element. See WC Thomas & Sons Ltd v Bunge (Aust) Pty Ltd [1975] VR 801 at 805. The absence of an international element does not constitute a reason for not referring a matter to arbitration. It merely has the consequence that the bias in favour of granting a stay does not have the added strength applicable to cases where there is an international element. The fact that the issues in dispute do not relate to procedures for operating the franchise business does not seem to me to be a reason for not granting a stay. The desire for an internationally consistent dispute resolution regime is not limited to franchise procedures. I do not accept that the application for a stay is to secure a procedural advantage over Timic. It is true that he will be disadvantaged by having to proceed in the United States, and that the connecting factors are all with Australia. But Subway Systems stipulated for arbitration there, warned Timic of the risks incident upon a foreign arbitration, and gave its reason for inserting an arbitration clause. See par 5. Timic made no attempt to impugn that reason. He has not persuaded me that sufficient reason exists why the matter should not be referred to arbitration in accordance with the agreement. 13 All respondents have filed Defences, and accordingly Hammock and Subway Systems require leave to make their applications. On 6 October 2000 Registrar Efthim ordered that Defences be filed and served on or before 27 October. Hammock and Subway Systems filed their Defences pursuant to that order. It would not be right to penalise a party in a s 53(2) context because of the doing of an act pursuant to a Court order. The applicant did not submit that I should not grant leave, and I will grant it. 14 Hi‑Fert Pty Ltd v Kiukiang Maritime Carriers Inc (No 5) (1998) 90 FCR 1 concerned a clause providing that "disputes arising from this charter" were to be referred to arbitration. All members of the Court agreed that while claims for negligence and breach of duty as a carrier and for breach of the charter contract were claims that "arose from" that contract, claims that a respondent had engaged in misleading and deceptive conduct, made negligent misrepresentations and breached collateral warranties, did not. In view of this it was unnecessary for the Court to deal with the appellants' submission that even if the arbitration clause applied to the trade practices claims, they were not capable of settlement by arbitration. This was said to be because the arbitration clause did not clothe the arbitrators with the powers conferred by the Trade Practices Act on Australian courts. However Emmett J examined the question to some extent. His Honour said it was open to the parties to a dispute as to whether or not a claim arises under the Act to refer that dispute to arbitration. It was also open to them to agree, subject to the proviso to which he later referred, that if a dispute arises between them in the future as to whether one is entitled to a remedy under the Act, they would refer that dispute to arbitration. His Honour continued: "The proviso is that if such a dispute did arise, and one party wished to have the dispute resolved by a court with appropriate jurisdiction, that party could not be compelled to have the matter resolved by arbitration if the effect would be a contract excluding the application of the Trade Practices Act. If the effect of the agreement would be to exclude a claim under the Trade Practices Act and to deprive the parties of the remedies which a court may grant under the Trade Practices Act, in favour of a determination by an arbitrator, the provision may be void by the operation of the Trade Practices Act. If the effect of such a provision would be to exclude the jurisdiction of the court and enable the parties to contract out of the remedies conferred by the Trade Practices Act, the provision may be void." All counsel made use of various passages in Hi‑Fert, but it was not submitted for Timic that the above passage bore on the matter for decision. When Emmett J's proviso is pressed by a party resisting a stay, it will be necessary to consider the observations of the Court of Appeal in IBM Australia Ltd v National Distribution Services Ltd and Francis Travel v Virgin Atlantic Airways. INTERNATIONAL ARBITRATION ACT S 7 15 In view of my conclusion on the respondents' case under s 53 of the Commercial Arbitration Act I need not deal with the other ways in which the case for a stay was propounded. I should say, however, that I would not have ordered a stay under s 7 of the International Arbitration Act. In order to obtain a stay under s 7 it has to be shown, amongst other things, that "the procedure in relation to arbitration under an arbitration agreement is governed … by the law of a Convention country", in this case the United States. The material before me does not establish that the UNCITRAL Arbitration Rules referred to in clause 10(c) of the agreement form part of the law of the United States. CONCLUSION 16 The application should be stayed as against Hammock and Subway Systems. In the circumstances I need not deal with Hammock's application for a transfer of the proceeding to the County Court. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg. Associate: Dated: 14 February 2001 Counsel for the applicant: J C Simpson Solicitors for the applicant: Trumble Szanto Lawyers Counsel for the first respondent: P Bingham Solicitors for the first respondent: R J Curtain & Associates Counsel for the second and third respondents: P J Cosgrave Solicitors for the second and third respondents: Mason Sier Turnbull Date of Hearing: 5 February 2001 Date of Judgment: 14 February 2001