Federal Court of Australia Girchow Enterprises Pty Ltd v Ultimate Franchising Group Pty Ltd (Final Orders) [2023] FCA 500 File number(s): NSD 395 of 2020 Judgment of: THAWLEY J Date of judgment: 12 May 2023 Date of publication of reasons: 19 May 2023 Cases cited: Placer (Granny Smith) Proprietary Limited v Thiess Contractors Proprietary Limited [2003] HCA 10; 196 ALR 257 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 9 Date of hearing: 12 May 2023 Counsel for the Applicants: Dr A Greinke with Mr S Lamb Solicitor for the Applicants: Lodhia Lawyers Counsel for the Respondents: Mr N Olson Solicitor for the Respondents: HWL Ebsworth Lawyers ORDERS NSD 395 of 2020 BETWEEN: GIRCHOW ENTERPRISES PTY LTD First Applicant KARIM GIRGIS Second Applicant SHERIF GIRGIS (and others named in the Schedule) Third Applicant AND: ULTIMATE FRANCHISING GROUP PTY LTD First Respondent MAZEN HAGEMRAD Second Respondent SAMER HUSSEINI (and others named in the Schedule) Third Respondent order made by: THAWLEY J DATE OF ORDER: 12 MAY 2023 THE COURT ORDERS THAT: 1. The UFC Gym Franchise Agreement between the first applicant and the first respondent executed on 14 March 2023 be declared void with effect from 22 May 2023. 2. The personal guarantees given by the second, third and fourth applicants in respect of the franchise agreement referred to in order 1 be declared void ab initio. 3. The first, second and third respondents pay $1,789,848.99 compensation to the first applicant, inclusive of interest to 12 May 2023. 4. The UFC Gym Franchise Agreement between the fifth applicant and the first respondent executed on 14 March 2023 be declared void with effect from 22 May 2023. 5. The personal guarantee given by the sixth applicant in respect of the franchise agreement referred to in order 4 be declared void ab initio. 6. The first, second and third respondents pay $1,955,996.29 compensation to the fifth applicant, inclusive of interest to 12 May 2023. 7. The UFC Gym Franchise Agreement between the eighth applicant and the first respondent executed on 15 September 2017 be declared void with effect from 22 May 2023. 8. The personal guarantee given by the ninth applicant in respect of the franchise agreement referred to in order 7 be declared void ab initio. 9. The first, second and third respondents pay $1,485,643.10 compensation to the eighth applicant, inclusive of interest to 12 May 2023. 10. Reserve liberty to apply in respect of any matters arising in respect of the first, fifth and eighth applicants' exit from the UFC Gym franchise. 11. Pursuant to rule 28.67(1)(c) of the Federal Court Rules 2011, remit for further consideration by the Court-appointed Referee the assessment of the operating losses and borrowing costs of the franchise business operated by the eighth applicant, with the following directions: (a) the Referee shall exclude from the operating losses and borrowing costs any expenses unrelated to the Castle Hill UFC Gym franchise business including (but not limited to): (i) meeting expenses; (ii) national and international travel expenses; (iii) interest and operating expenses in respect of motor vehicles; (iv) such other personal expenses and expenses that are in the opinion of the Referee unrelated to the Castle Hill Gym franchise business; (b) the Referee shall be provided with copies of the following documents: (i) these sealed orders; (ii) the reasons for judgment dated 5 May 2023; (iii) the transcript of the cross-examination of the ninth applicant in respect of the accounts and expenses of the Castle Hill Gym franchise business; and (iv) Exhibit 12; (c) the Referee shall file his report with the Court by 31 May 2023; (d) the Referee otherwise conduct the inquiry pursuant to the directions of the Court made on 27 October 2022, with a view to accurately determining the actual operating lossess and borrowing costs of the eighth applicant. 12. The further costs of the Referee are to be borne solely by the eighth applicant. 13. The proceeding be stood over to 10:15am on 8 June 2023 to consider the adoption of the Referee's report and any further orders. 14. The claims against the fourth respondent be dismissed. 15. The third, fifth and eighth applicants pay the costs of the fourth respondent. 16. The cross-claim be dismissed. 17. The first, second and third respondents pay the applicants' costs of and incidental to these proceedings, including the costs of the cross-claim but excluding the costs of the claims against the fourth respondent, and in the absence of an agreement to be taxed on a party and party basis up to 11:00am on 9 March 2020 and thereafter, on an indemnity basis. 18. The respondents must file any notice of appeal on or before 12 June 2023 pursuant to rule 36.03(b) of the Federal Court Rules 2011. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (Revised from Transcript) THAWLEY J: 1 Reasons for judgment in these proceedings were delivered on 5 May 2023. The matter is listed today for the making of final orders. 2 There are only a few remaining issues in dispute. 3 First, the respondents oppose a further referral to the referee as to the operating losses of the eighth applicant. They submit that a further referral to the referee ought not be made because it gives the eighth applicant a further opportunity to prove its loss when it could have proven those losses through its lay witnesses, its expert and during the referral to the referee. The respondents point to the fact that the referee gave an opportunity for the eighth applicant to give evidence about whether financial reports included expenses unrelated to the operation of its business. 4 The referee asked the eighth applicant for a list "of income received or expenditure included in the financial accounts that does not relate to business operations": Exhibit 25 at 6854 - 6855. The eighth applicant through its solicitors answered that "there is no income or expenditure included in the financial accounts that does not relate to business operations": Exhibit 25 at 6900. That has proven to be incorrect, at the least to the extent established during Mr Mirdjonov's cross-examination. The respondents submit that there is no reason to think that a further opportunity for the eighth applicant to prove its loss will result in more accurate or reliable information being provided to the referee. 5 I have significant sympathy for this view. However, I am satisfied that significant losses have, in fact, been sustained by the eighth applicant and that it would not be a just outcome for no award to be made in respect of operating losses or borrowing costs. The operating losses claimed by the eighth applicant were over twice as much as the operating losses claimed by the other two corporate applicants. There may well be reasons for this, but in circumstances where it became clear in cross-examination that expenses unrelated to the business had been claimed, I was not able to be satisfied that the referee's report as to the operating losses of the eighth applicant was accurate. 6 In a different kind of case, it might have been appropriate to adopt the course advocated by the respondents. However, in this case, the parties agreed to the appointment of a referee and put aside reliance on experts being called by all sides. This was to achieve a reduction in costs and delay and to facilitate a shorter and faster hearing. 7 The respondents also relied upon the decision of the High Court in Placer (Granny Smith) Proprietary Limited v Thiess Contractors Proprietary Limited [2003] HCA 10; 196 ALR 257, particularly at [36] to [38]. The difficulty in this case is that I am satisfied that significant losses have been incurred by the eighth applicant and that because of the peculiar way that the case has developed in terms of the losses being quantified by a referee, it seems to me unfair to the eighth applicant to shut the eighth applicant out from any award in relation to operating losses by reason of the events which have occurred. It seems to me there should be a further referral to the referee but that the further costs of that should be borne entirely by the eighth applicant. 8 Secondly, the respondents submit that there should be no order as to the costs of the cross-claim because it did not need to be determined. I reject this submission. The parties had to address the cross-claim. The only reason it did not need to be determined in the end result was because of the conclusion reached that the franchise agreements should be declared void. 9 The third issue concerns the costs of the fourth respondent, Membership Services Australia Pty Ltd. The applicants abandoned the case against the fourth respondent in closing submissions after an opening address on that claim, the reading of several affidavits solely or largely devoted to the claim and cross-examination of the deponents. I accept the fourth respondent's submission that costs ought follow the event and that the relevant applicants, namely, the first, fifth and eighth applicants, should be ordered to pay the fourth respondent's costs. I certify that the preceding nine (9) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Thawley. Associate: Dated: 19 May 2023 SCHEDULE OF PARTIES NSD 395 of 2020 Applicants Fourth Applicant: PAUL CHAU Fifth Applicant: ACTIV HEALTH CLUBS PTY LTD Sixth Applicant: RICHARD KIM Eighth Applicant: ADVANCED CLUB MANAGEMENT PTY LTD Ninth Applicant: LAZIZ MIRDJONOV Respondents Fourth Respondent: MEMBERSHIP SERVICES AUSTRALIA PTY LTD