Industrial Relations Commission of New South Wales in Court Session CITATION : R&C Henry Pty Ltd v AAAAAA All Types of Rubbish Pty Ltd [2002] NSWIRComm 257 APPLICANT R&C HENRY PTY LIMITED PARTIES : RESPONDENT AAAAAA ALL TYPES OF RUBBISH PTY LIMITED FILE NUMBER: IRC177 of 2001 CORAM: Peterson J CATCHWORDS : unfair contract - franchise of a tip truck and bobcat - site cleaning work - earnings from source not expected by applicant - whether misrepresentation is involved - whether loss suffered - substantial earnings - decision by franchisee to sell to take up father's business - failure to pay franchise fees - franchise terminated - ongoing fees due - contract found unfair only in respect of obligation to meet ongoing payments after termination of franchise - other losses due to applicant's conduct. LEGISLATION CITED : Industrial Relations Act 1996 s106 Trade Practices Act 1974 s51AE HEARING DATES: 11/12/2001; 11/13/2001; 11/14/2001; 11/16/2001; 02/07/2002 DATE OF JUDGMENT: 10/09/2002 APPLICANT Mr D M Bernie of counsel SOLICITOR Williams The Law Firm PETERSHAM LEGAL REPRESENTATIVES: RESPONDENT Mr M A Ashhurst of counsel SOLICITOR Price Waterhouse Coopers Legal SYDNEY. JUDGMENT: - 12 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: PETERSON J DATE: 9 OCTOBER 2002 Matter No IRC 177 of 2001 R & C HENRY PTY LIMITED v AAAAAA ALL TYPES OF RUBBISH PTY LIMITED Application under s106 of the Industrial Relations Act 1996. JUDGMENT 1 R & C Henry Pty Limited is the corporate vehicle through which Mr Robert Henry and his wife, Carolyn Henry, conducted a business as a franchise operator of a Bobcat skid steer loader and tip truck. While the applicant in these proceedings, which are brought under s.106 of the Industrial Relations Act 1996, was the company, its alter ego was, in effect, Mr Henry and, to an extent, Mrs Henry. The actions of one seem, on the evidence, to be those of the other together. 2 In August 1999 Mr Henry was conducting a transport business as a contractor to CSR, carting gyprock. He had three vehicles engaged in this business, one of which he drove himself. He was anticipating that the cartage work for CSR would come to an end with the introduction of a major transport company to perform all of the CSR work. He was therefore looking for another business. In August 1999 he made contact with the respondent, AAAAAA All Types of Rubbish Pty Ltd, (referred to hereafter as 'ATR') a company which conducts a site clearing and cleanup and waste disposal business, principally acting as a franchisor and operating through franchisees, but also then employing a number of persons directly in that work. 3 In broad summary, the applicant obtained a franchise on the basis of alleged representations about the source of work and on terms which are now claimed to have been inadequate and to have provided no reasonable opportunity to earn an income at even the basic level suggested. The consequence, the applicant claims, was to leave it in the position of not being able to meet the fees relating to the franchise. An attempt to sell the business was not fruitful and the agreement was terminated by ATR on 2 January 2001, with $11,254.75 in fees outstanding up to the date of termination of the franchise agreement and $52,525.00 in respect of the period thereafter up to the expiry of the 5 year term of the franchise agreement. This sum has been the subject of a summons filed by ATR in the District Court seeking recovery. 4 The amended summons for relief upon which the applicant proceeded sought an order declaring wholly or in part or varying the franchise agreement so that: (a) The applicant not be liable to pay for the franchise fee in Item 7 of the agreement and is entitled to a total refund of the franchise fee paid to the respondent from the date of commencement of the agreement; (b) Alternatively, the applicant not be liable to pay the said franchise fee in Item 7 and be entitled to a pro rata refund of the franchise fee to reflect the actual period of operation of the agreement from 3 September 1999 until 2 January 2001 as against the period between 2 January 2001 and the initial proposed expiry date, 3 September 2004. 5 The summons also sought similar orders with respect to the liability of the applicant for the marketing levy and the franchise service fee. 6 The summons sought recovery of expenses or losses incurred by the applicant in respect of the Bobcat Skid Steer Loader and Mitsubishi tiptruck leased by it to perform its obligations under the agreement. 7 It sought that cl.21.8 and any other associated clauses of the agreement be declared void; and costs. 8 Clause 21.8 of the franchise agreement entitles ATR to recover from the franchisee its loss of the benefit of the whole agreement including both for the periods before termination and after termination until the expiry date of the term of the agreement. 9 It may be said at the outset that the respondent's franchise system is a sophisticated one. The means by which prospective franchisees are dealt with appears to have been exemplary, assuming for the moment that the franchisees were businesses of substance. Whether that was so, in the applicant's case, is a matter in issue. The system appears to have been designed to conform with the Franchising Code of Practice prescribed under s51AE of the Trade Practices Act 1974. 10 Mr Henry's first contact with ATR was in response to a newspaper advertisement. He met the chief executive, James Leary, at which time he was provided with some background information and a "General Information Document" providing information concerning the franchise. The process which followed was that, upon paying a one thousand dollar returnable deposit, Mr Henry was provided with a "General Disclosure Document" which was much more extensive. That document contained four income and expense "scenarios". Upon having these explained to him, Mr Henry's response was "It looks like then we will have to create a scenario 5, I want to earn more than scenario 4" (the highest level of income postulated). 11 Mr Henry passed the General Information Document on to his accountant. The General Disclosure Document he passed to his solicitor. In respect of both documents his evidence was that he did not read them closely but relied upon his advisors to report to him about the content. I am satisfied, on the evidence, that the relevant portions of the documents were drawn to Mr Henry's attention. Indeed, it appears that his solicitor counselled him that he might be capable of establishing a like business in his own right without a need to pay a franchise fee. However, his evidence was that he was attracted to the franchise by the assurance that he contended Mr Leary gave him, to the effect that he would have a constant stream of work from customers who were "head office accounts", namely regular customers of ATR and that there would be more than enough work to keep him flat out. It was this stream of work which he considered justified the payment of the relevant franchise fee. 12 The fees payable under the franchise agreement were an initial payment of $50,000, as a franchise fee payable once for the term of 5 years. Upon renewal for a further 5 years a renewal fee of 10% of the initial franchise fee would be payable. Additionally, a franchise service fee of $275.00 per week, payable fortnightly for 48 weeks of the year, was payable. A marketing levy of $55.00 per week payable fortnightly for 48 weeks of the year was also payable. Those fees were payable however the work from the franchisee's territory was obtained. ATR operated head office accounts with customers who had a credit facility with ATR. In respect of work obtained by franchisees from such head office accounts a 6% head office account administration fee was payable. The General Information Document described the marketing levy as payable into a Central Marketing Fund to be utilised to cover the central telephone support services, certain promotional aids, advertising and administration costs as determined by the franchisor. After obtaining the franchise, Mr Henry was told by Mr Leary that for the first six weeks of operation ATR would meet the cost of local newspaper advertising but thereafter this became the responsibility of the franchisee. Mr Henry contended in evidence that this was not explained to him prior to this. It should be noted that the General Information Document, in describing estimated scenarios of income and expenses, included in each scenario the contribution to expenses made by the Franchise Service Fee, the Marketing Contribution Levy, the 6% fee in relation to head office accounts as an estimate, mobile phone and pager service charges, stationary and uniforms and protective clothing. It did not factor in an advertising cost. It made a note to the effect that no allowance in the expenses was made for particular items which were identified, including motor vehicle insurance and registration, fuel, accounting fees, bank fees, personal insurance, communications charges, GST and other items but again no reference was made to advertising costs. 13 However, the disclosure document in describing the Central Marketing Fund provided in cl.12.1(j): The franchisor is not required to spend any part of the fund directly on marketing, advertising or promoting the franchisee's business. 14 The disclosure document provided to Mr Henry identified expenses of the Central Marketing Fund for the year ended 30 June 1998 as including $34,038.04 for "Local Press" out of total expenses of $65,997.30. 15 The terms of cl.11, Marketing and Advertising, of the franchise agreement deal with the application of the marketing levy and require the levy to be paid into the Central Marketing Fund and used in "promoting, marketing, advertising and administering the System; and in subsidising the contributions made by ATR towards the costs of the operation and maintenance (including upgrades of the Communication system) . . . ". The Central Marketing Fund is required to be maintained in accordance with the requirements of the Franchising Code of Practice. 16 Clauses 11.3 and 11.4 are significant and are prescribed as follows: 11.3 Nothing contained herein shall be deemed to prohibit the Franchisee from engaging in any additional advertising or promotion of the franchised business provided that such advertising or promotion shall be at the sole cost of the Franchisee and without deduction or credit against any fees or other moneys owed by the Franchisee to ALL TYPES OF RUBBISH - ATR. The Franchisee shall not use, display, publish, broadcast, or in any manner disseminate any such advertising or promotional material unless the same has been first approved in writing by ALL TYPES OF RUBBISH - ATR. 11.4 The person administering the Marketing Fund shall not be under any obligation to ensure that expenditures with respect to a System franchisee's franchised territory are proportionate to the contributions of that System franchisee or that a System franchisee benefits directly or proportionately from any marketing, promotion or advertising of the System or authorised Products & Services. 17 Mr Henry deposed to the meeting with Mr Leary at ATR's Alexandria office where they discussed the possibility of a franchise. The conversation included, according to Mr Henry, the following: Mr Henry: "How do you get work and how do you ensure that I'm going to get plenty of work?" Mr Leary: "Don't worry about the work, we will give you so many leads and refer directly to you so many customers that you'll be flat out off your feet and won't be able to keep up with them. It will be all generated by us and that's why you pay us a franchise fee and ongoing levies. We do all the marketing, local and national and all the ads are put in the local paper and also in the yellow pages and that's why you pay the franchise fee and ongoing fees and this would generate you all of your work and keep you totally active. It is our job at all times to generate enough leads to keep you busy all of the time with work." Mr Henry: "Can I organise my own work?" Mr Leary: "You can do your own work, but you won't have to because we will give you enough Head Office leads and enough work from our Head Office Accounts to keep you busy at all times." 18 Mr Henry then put the conversation, after his perusing the income and expenditure scenarios in the General Information Document as follows: Mr Leary: "Here are the scenarios and income earned by our current operators. If you look at scenario 1, that is what our lowest performing operator is earning and scenario 4 is what our highest performing operator is earning." Mr Henry: "It looks like then we will have to create a scenario 5, I want to earn more than scenario 4." Mr Leary: "With your hard work ethic and your attitude, you'll probably do it. Let me take you to your costings, they're the only expenses that you have to bear for this business. Anyway, what I want you to do is take this document away and read it and get back to me for a further appointment after you've read it." Mr Henry: "James, I want to be sure of this opportunity. I am earning good money driving for CSR. This opportunity has to be worthwhile before I would consider it." Mr Leary: "We won't disappoint you." 19 The scenarios were set out in the General Information Document as follows: Scenario Scenario Two Scenario Three Scenario Four One ESTIMATED INCOME Estimated annual Income (48 wks) 182,400 237,600 302,400 367,200 Estimated Annual Gross Profit from Trading 127,680 166,320 211,680 257,040 Total Estimated Annual Expenses 19,669 20,244 20,922 21,623 Estimated Net Income Before Tax, Interest, Salary and variable expenses 108,011 146,076 190,758 235,417 20 Mr Henry also deposed to this conversation as to his concern about the source of work: Mr Henry: "James, I am very concerned about how we get work from all this and how I get my leads." Mr Leary: "Here is a list of our head office accounts. This is where most of your work will come from and this will be supplemented by our marketing plans and our advertising that we currently have in place and we will do further marketing for you. Don't worry about work, you will be inundated by work. We will see to that. You will have so much work, you won't know what to do with yourself. We will work you off your feet." 21 Mr Henry later said in evidence that the list he was shown he was not able then to retain, although he obtained a copy of it after becoming a franchisee. The conversation continued: Mr Leary: "This is the area that we intend to appoint you for a franchise. It is covering the areas of Blacktown 8 and Penrith 9. This is a larger area and a great catchment for work." Mr Henry: "What happens in recessionary times when the building industry goes down?" Mr Leary: "If you look at this graph you will see that we have grown phenomenally and we've pulled through a recession and this is a recession proof business. When hard times come we just increase marketing to your benefit and we employ new and more numerous strategies to get you through any tough times so there's no lulls in business and you will always have work. That's the point of the Franchise. You will see that our group turnover has increased phenomenally. Let me show you this graph." 22 After deciding that he would proceed with the franchise, Mr Henry deposed to a subsequent meeting with Mr Leary in which the following discussion occurred: Mr Leary: "How did you go reading the Disclosure Statement?" Mr Henry: "I read it, I'm fine with it but I took it to my solicitor and he has asked for me to give you a whole lot of questions." Mr Leary: "Don't worry about solicitors and accountants, just go with what you believe to be the right thing. Solicitors always try and be too cautious, make your own mind up we have given you plenty of information to make your mind up. We are offering you a good deal here, we are offering you Penrith and also Blacktown which are two areas. You're actually getting two for the price of one. And you can see and let me show you the value of these franchises have gone up considerably. You will see that the franchise fee that we used to charge was $8,000 they're now $50,000 and they will soon go up, so you will need to move quickly. If you get stuck in and work hard for a couple of years and build it up, you will either have the option of keeping the business or halving it and selling part of it off or putting on more equipment to extract more income." Mr Henry: "There's a lot of building work out where we live. We should really get out and attack that sort of work." Mr Leary: "If you give me the names and phone numbers of these people, I'll make contact with them and make sure you get their work. How are we going to finance all of this? You know there is a $50,000.00 fee for the Franchise and it is a requirement of the Franchise to lease or purchase a hand loader tipper and a large tipper and bobcat." Mr Henry: "I can pay the $50,000 from my savings, as to the truck it will probably cost me around $100,000 for that. I am going to have to lease that through the Commonwealth Bank and a Bobcat will probably costs be (sic) about $40,000 or $45,000. I'll lease that as well." Mr Leary: "Why don't you go through our broker?" Mr Henry: "No, I've got my own people. I'm just worried about getting enough work to pay for it all." Mr Leary: "No worries, we will always give you enough work to pay all your debts off and make profit." 23 The applicant then incurred the following expenses: (a) A CBFC Lease Agreement over 60 months for a Bobcat Skid Steer Loader, the cost of which was $41,400 repayable at $739.07 per month. (b) A CBFC Lease Agreement for a Mitsubishi 9 tonne tipper truck at a cost of $103,000, repayment at $1,838.75 per month. (c) A Franchise Fee of $50,000. (d) Other incidental expenses. 24 The franchise was commenced to be operated by the applicant during the last week in October 1999, subsequent to which, Mr Henry deposed, Mr Leary spoke to him as follows: Mr Leary: "Bob, we only pay for your advertising for the first 6 weeks of your franchise. Here are some invoices for ads that we have put in the local paper on your behalf. You will have to pay for these ads." Mr Henry: "Isn't this part of the marketing and service levy that I pay you?" Mr Leary: "No it's not, this isn't included." 25 Much of the initial work by the applicant came from one customer, Michael Hull, an existing client of ATR who was supplied skip bins to his building sites. Mr Henry knew a number of persons working in the Michael Hull operations and activated contact between Mr Leary and a number of supervisors on those sites. Mr Henry declined a proposal to undertake the work on a per site basis for the reason that he felt he could lose a lot of money that way and was prepared to do it only on a per load rate. Subsequently, he was advised by Mr Leary as follows: "The only way I can do the work is, I quoted them $400 per load. I know the normal going rate is $450 but we need to get you working and don't worry we will push the charges up later so you won't miss out." 26 The applicant was required to pay a 6% Head Office Account charge for this work although the Michael Hull supervisors would fax jobs directly to his home and Mr Henry regarded them as his client rather than ATR's. 27 From April 2000 Mr Henry received little work from Michael Hull. The work he did receive from head office accounts occurred on only 11 days, with jobs ranging between a price of $450.00 to $1,475.00, the total sum being $8,731.00. Over the same period the applicant paid service fees, marketing levies and head office account charges amounting to $6,768.011 and is expected by ATR to pay a further sum of $8,944.39 for the same period. This further amount of $8,944.39 is marketing levy and franchise service fees in respect of the payment of which the applicant had fallen behind. Mr Henry deposed to having found it difficult to continue to pay the lease finance agreements on the truck and bobcat. 28 In respect of the overall period of operation of the franchise from 1 October 1999 to 31 December 2000 the applicant's total revenue was $177,672.77. Of this $48,892.00 was for work from head office accounts, $40,401.00 of which was earned in the first seven months of operation at an average of $5,771.57 per month and $8,731.00 was earned in the following eight months at an average of $1,091.00 per month. 29 On 27 November 2000 the applicant, through its solicitors, wrote to the respondent. A termination notice, following a notice of intention to terminate the franchise, was given on 6 December 2000 by ATR to the applicant, claiming the payment of the outstanding sum of $8,944.39 in 21 days and warning of a termination in the event of a failure or refusal to comply (Exhibit 9). 30 On 2 January 2001 the respondent through its solicitors, gave the applicant notice of termination of the franchise. The notice recited the claims that the applicant had failed or refused to pay the franchise moneys due to ATR under the franchise agreement and notice of that breach having been given pursuant to cl.21.3 of the franchise, the applicant had failed or refused to remedy those breaches for a period in excess of 21 days. 31 The territory allocated to the applicant was an area covering Parramatta and Penrith. The territory was ostensibly two territories added together which had previously been operated as a "company" area. The applicant spent some hours with another bobcat driver, Ernie Vaughan, at a site in Parkleigh which was within Mr Henry's area. The only conversation he had was as follows: Mr Henry: "Is the business okay" Mr Vaughan: "Yeh, I'm making plenty of money, just work hard." 32 Subsequently, after commencing the franchise Mr Henry observed Mr Vaughan working in his area on a daily basis. He approached Mr Leary about this who said "Look Rob, it's a catch-22. Your area used to be a company area and Ernie has his own clients in your area. You can't take that work away from him. We'll just have to phase him out over time." 33 Later Mr Henry said to Mr Leary "James, why do I have to go outside my area to find work when you have Ernie doing work in my area." The reply was "That's the way it is, I'll follow it up, we'll phase him out eventually". 34 The major complaint going to unfairness in the arrangement under which the work was undertaken by the applicant does not concern the amount of money earned during the period of operation but the source of the work. 35 During the period October 1999 to January 2001 the gross income of the business was, on one view of it, $209,850. Expenses totalled $112,653 giving a profit of $87,197 for the 15 month period. 36 In the course of cross-examination the applicant's evidence in this regard was: Q. So would you agree then that if you did in fact obtain sufficient work while you were a franchisee of ATR it was irrelevant whether the work came from head office accounts or came from sources other than head office accounts? A. No. Q. Why not? Why would you not agree with that proposition? A. I paid $50,000 so I had constant work all the time, and didn't have to chase it myself. Q. If indeed the amount of work you obtained was consistent with the scenarios that you had been shown, you would agree that you had no complaint about the amount of work that you obtained? A. The complaint is the amount of work I got from ATR from head office, not the amount of money I earned. Q. Financially you were better off in getting this work from other sources, correct? A. Without the 6 per cent. Q. So it was actually in your financial interest to have the work from other sources, rather than having it from the head office accounts? A. No, not really. Q. If it was from head office accounts you had 6 per cent surcharge? A. Yes. Q. If it is from some other form, referenced by another driver, see sign on truck, or from the group marketing exercise, you pay no such surcharge, correct? A. That's correct. Q. It makes no difference to you. It is still a contact that comes to you in the same manner, correct? A. Hmm. Q. And you are actually 6 per cent financially better off? A. On that type of work, yes. Q. See, I suggest to you this claim about being shown a list of head office accounts cannot possible have caused you any detriment, could it? A. Yes, because that's the main reason I signed the contract. Q. If the main reason you signed the contract was because you claim you saw a list of head office accounts, but you acknowledge that you actually obtained the majority of your income without having to pay the 6 per cent surcharge, you were really better off, weren't you? A. I wouldn't have to pay the advertising then either. 37 In response to the suggestion that he had no reason to claim that ATR had treated him unfairly having regard to his overall income under the franchise, Mr Henry said: A. Yes, because it means that income was generated through my own efforts. Work come through from head office in regards to head office account work, as I was told, added up to $48,000. (I accept the answer yes to have in context intended to mean no). 38 Mr Henry also indicated that he had to face an unexpected expense of an average of $300 per month advertising on his own account. It was this advertising, in part, which generated much of his work; the total sum involved was of the order of $4,500 over the 15 month period. 39 Mr Henry was cross-examined about his understanding of the disclosure document which, it was suggested, would have revealed this expenditure to him. In the course of that cross-examination the following occurred: Q. You think it was not enough that ATR should supply you with this document setting out all your fees and charges, you do not think that was sufficient? A. It was mentioned in there and I didn't read the actual agreement and I didn't know what was in there. 40 The subject matter continued to be dealt with in this way: Q. Instead you claim that somehow ATR treated you unfairly by only putting into a document setting out all your fees and charges and getting your solicitor to check it, do you say that was unfair? A. Yes. Q. And that is all because of this sum of $4,000 a year? A. Yeah, which added up to a lot of work that I have generated myself and that is why I have made the income. Q. All that means is you have put in advertisements using the ATR name? A. Yes, they have phoned me direct and ATR has had no involvement in supplying that work. 41 There was a considerable degree of evidence dealing with Mr Henry's performance under the franchise agreement. Much of this material affects the view one takes of the franchise agreement and its prospects. Essentially, two aspects of that evidence seem to me pertinent in this context. One is the failure alleged against Mr Henry of making contact with many clients. The other is his apparent tendency to not record cash clients. This matter was raised in Mr Leary's affidavit but not directly answered in Mr Henry's affidavit in reply. 42 In cross-examination this exchange occurred: Q. Do you recall having a discussion with Mr Leary about a lot of cash work that was not declared? A. No. Q. Do you say that didn't happen at all? A. No. Q. Any conversation about cash work arrangements? A. I had had conversations obviously, and he said, "If you are doing any cash work please put it on your day sheet, because it makes the company's figures look good at the end of the month?" Q. Do you say you did not have a conversation with Mr Leary about cash work at all? A. He mentioned it to me - if you are doing any cash work, make sure you put it on your day sheets. Q. Did you confirm during this conversation with him that you were doing cash work that was not going on your day sheets? A. No I did not. As you see from my day sheets, any cash work I have done has been entered. Q. Mr Henry, if you are doing cash work that wasn't recorded on your day sheet, there would be no record of it on the day sheet at all, would there? A. Yes. No. We were struggling financially. So how could I get the cash? I needed to bank the cash to pay the bills. Q. If you were struggling financially, there would have been a considerable incentive for you not to have declared cash, would there not? A. Then how do you pay the bills? Q. You pay in cash. You'd pay in cash, wouldn't you, Mr Henry? A. No. I have got lease payments and everything that come through direct debit out of the bank. 43 The evidence included company records kept by ATR relating to the operation of Mr Henry's franchise. One such contemporaneous record was made by Mr Leary on 22 March 2000. It recorded two incidents. The first was that it recorded Mr Henry as having said that he "forgot" to do a job booked by the wife of a shareholder and director of ATR. After being so informed by that director Mr Leary paged Mr Henry at 10.50am asking him to make contact as soon as possible. By 2.15pm no contact had been made so Mr Leary left another message with him identified as the second call. Around 3.00pm Mr Henry rang to say he had missed a call on his mobile phone and asked was it Mr Leary calling him. He said he had left his pager at home. 44 In this conversation Mr Leary queried why Mr Henry's last pay period recorded only $5,571 income as opposed to the previous one of $9,662. Mr Leary's record sheet then records this: He said not to worry because he had heaps of "domestic cash work" that wasn't shown on his day sheets. I again explained the importance of including all his cash work ie it gives us at the office a false idea as to how well, or otherwise, he is going. It would more than likely be illegal as far as the tax man was concerned and if he was wishing to sell, we at the office could only ever substantiate the income declared on his day sheets to a potential purchaser of his business. He conceded what I had said made sense . . ." I also encourage (sic) him to make an appointment for a "Business Review Meeting" and as usual he said he would contact me to make a time. I expressed my concern that there had been some "worrying signs" for a while now re: his conduct of the business and he assured me he was on top of everything. In light of him saying this he agreed that I could presume that everything was "hunky Dory" re: his business, unless I heard otherwise from him." 45 Numerous record sheets note occasions on which Mr Henry was not in contact by mobile phone or was not responding to his pager. 46 In addition, the pager message reports provided to ATR by Link Telecommunications, the operator of the pager system, record obvious difficulties experienced by customers contacting Mr Henry. The following are useful illustrations (having omitted identifying names and addresses): 18/09/2000 09:11:38 (o:) JOHN (ph:********) SILVERWATER NEEDS TRUCK & BOBCAT URG NOW - CALLED 7AM THIS MORN - 2ND CALL - PLS RESPOND 18/09/2000 10:58:31 (r:) PLS CALL ANNE ON ph ******** (2ND CALL) 18/09/2000 11:08:27 (s:) ROB PLS PH RAY ON ph ********* 18/09/2000 15:29:27 (x:)PLS PH RAY - HAVE JOB FOR YOU 18/09/2000 17:05:09 (y:) SINGH IS WAITING FOR YOU AT BLOCK OF LAND ph ******* 19/09/2000 09:06:50 (c:) PLS PH RAY ph ******** 20/09/2000 11:33:49 (k:) NANCY ph ******** CARLINGFORD RE HIRE OF BOBCAT 20/09/2000 15:18:27 (m:) PLS PH NANCY ph ******** 21/09/2000 10:42:52 (r:) NANCY ph ******** CARLINGFORD PLS PHONE ASAP RE BOBCAT - 4TH MESSAGE 23/09/2000 11:05:52 (z:) AZIZ J ph ******** PANANIA NEED SMALLEST BOBCAT AND EXCAVATION DONE - NEED YOU TO COME AND LOOK AT JOB FIRST 23/09/2000 11:50:20 (a:) AZIES PHONED AGAIN PLS PH ME ph ******** URGENT RE NEEDING EXCAVATION WORK DONE/RETAINING WALL 25/09/2000 07:29:24 (h:) PLS FAX YOUR PAY PERIOD DOCUMENTATION URGENTLY FOR H20 THANKS RICHARD ATS OFFICE 25/09/2000 09:01:02 (j:) PLS PH ANNE RE: APPOINTMENT AT 8:30AM PLS PH TO ADVISE OF ARRIVAL TIME ph ******** 25/09/2000 09:45:32 (l:) PLS PH ANNE ON ph ******** ASAP AT WEST PENNANTS HILLS, WHEN ARE YOU COMING THIS MORNING? 2ND CALL 25/09/2000 10:44:23 (n:) PLS PH ANNE P ON ph ******** RE: YOUR APPT (HAS CALLED SEVERAL TIMES) 25/09/2000 11:27:29 (o:) 4TH CALL PLS PH ANNE OF WEST PENNANT HILLS - ph ******** RE 8.30AM APPT- PLS CONFIRM WHAT TIME U WILL BE THERE AS NEEDS TO DO OTHER THINGS 25/09/2000 11:47:02 (p:) PLS PH JAMES S ph ******** 26/09/2000 07:59:57 (s:) PLS PH JAMES S ON ph ******** 27/09/2000 08:19:54 (x:) PLS PH MRS E ph ******** IN CARLINGFORD ASAP RE NEEDS TO KNOW IF YR COMING OR NOT 27/09/2000 08:47:48 (z:) 3RD MSG - PLS PH ELMI ON ph ******** RE: A JOB THAT 27/09/2000 09:14:30 (a:) IAN J ph ******** ROUSE HILL QUOTE FOR EXCAVATION - DO YOU TAKE THE EARTH AWAY AFTER EXCAVATION? 27/09/2000 09:17:18 (b:) NANCY ph ******** CARLINGFORD HAVE PHONED 3 TIMES - PLS CALL - NEED BOBCAT FOR RUBBISH REMOVAL 27/09/2000 11:45:45 (e:) URGENT PLS PH NANCY E ph ******** HAS CALLED 6 TIMES WAS EXPECTING YOU WITH BOBCAT AT 7.30A.. THIS MORNING 27/09/2000 11:52:51 (f:) URGENTLY PLS RING NANCY ON ph ******** 27/09/2000 11:56:32 (g:) PLS PH NANCY URGENTLY ph ******** 27/09/2000 15:22:04 (k:) IAN ph ******** ROUSE HILL PLS CALL RE EXCAVATION 30/09/2000 11:24:50 (z:) PLS PH ANNE ph ******** ASAP RE; 11AM BOOKING WHERE ARE U? 30/09/2000 11:48:55 (a:) PLS PH ANNE ON ph ******** 30/09/2000 12:14:23 (b:) PLS PH ANNE ph ******** 2ND CALL 03/10/2000 16:53:51 (k:) PLS PH JOHN ON ph ******** 03/10/2000 17:37:50 (m:) **URGENT 2ND MSG** - STILL AWAITING RET CALL. ERNIE - PLS PH JOHN K ph ******** RE: BOBCAT AND TRUCK FOR TOMORROW (WED. 4/10) 03/10/2000 18:05:40 (n:) PLS PH JOHN ASAP ph ******** 05/10/2000 21:21:48 (z:) PLS PH CHERYL W ph ******** BEFORE 10 ph ******** AFTER 10 06/10/2000 12:59:19 (a:) PLS PH JO C MOB ph ******** RE I AM WAITING AT THE SIDE OF C ST BLACKTOWN 06/10/2000 13:49:31 (b:) RANJIT ph ******* KELLYVILLE QUOTE ON HIRING A BOBCAT - PLS PH AFTER 7PM TONIGHT 07/10/2000 08:05:39 (c:) PLS PH BOB R ON ph ******** XX/XX/2000 08:29:02 (d:) ROB HENRY PHN BOB R ph ******** URGENT 09/10/2000 21:28:04 (h:) PLS PH RANJIT FROM K TO CONFIRM BOBCAT EXCAVATION WORK FRIDAY AFTERNOON ph ******** TO DISCUSS ABOUT THE WORK 10/10/2000 07:38:24 (j:) PLS PH RANJIT ON ph ******** RE - FRIDAY WORK 10/10/2000 16:56:59 (o:) PLS PH MRS. W ph ******** 10/10/2000 17:12:22 (p:) PLS PH RANJIT ON ph ******** RE: FRIDAY WORK 10/10/2000 19:49:50 (q:) PLS PH RANJIT ph ******** REQUIRES YOU TO CONFIRM FRIDAY WORK OR I WILL ASSUME YOU WILL NOT BE STARTING ON FRIDAY IF YOU DO NOT RING ME BACK TONIGHT 11/10/2000 07:13:06 (r:) PLS PH CHERYL W ph ******** RE: ARRIVAL TIME TODAY 11/10/2000 08:28:06 (s:) CHERYL W - HAVE ANOTHER WORKER HERE WAITING FOR YOU. IF YOU ARE NOT COMING PLS CANTACT ME ASAP ph ******** 11/10/2000 11:10:42 (v:) PLS PH CHERYL W ph ******** 11/10/2000 15:13:23 (b:) PLS PH CHERYL W - I NEED TO KNOW IF YOU'RE DOING THE JOB? 5TH CALL - BEEN WAITING ALL DAY 12/10/2000 13:34:00 (f:) CRAIG ph ******** MT PLEASANT BOBCAT NEEDED - 2ND CALL 12/10/2000 15:47:00 (i:) CRAIG ph ******** MT PLEASANT SECOND CALL 13/10/2000 09:41:10 (j:) PLS PH RANJIT VERY URGENT RE BOBCAT WORK AS WE DISCUSSED ph ******** 16/10/2000 07:10:32 (m:) PLS PH IVAN ON ph ******** RE PICKING UP RUBBISH FROM 5 SUNRIDGE PL WEST PENNANT HILLS 16/10/2000 10:24:06 (n:) PLS PH GRAHAM M FROM GLENORIE ON ph ******** THANKS ANDREW ATR 16/10/2000 13:37:23 (o:) PLS PH ph ******** GRAHAM M 17/10/2000 07:24:20 (p:) PLS PH IVAN ph ******** RE: YESTERDAY PICK UP OF RUBBISH FROM WEST PENNANT HILLS DID NOT ARRIVE WHAT IS HAPPENING 17/10/2000 08:44:56 (q:) PLS PH IVAN FROM WEST PENNANT HILLS ON ph ******** 17/10/2000 11:20:06 (r:) 2ND CALL: CALL IVAN PLS - ph ******** 17/10/2000 13:34:30 (t:) PLS PH IVAN ph ******** 21/10/2000 09:31:09 (f:) PLS PH JOE ON ph ******** RE: THE BOB-CAT FOR SALE 03/11/2000 12:27:02 (m:) ROB - I CANNOT RING YOU BACK ITS DIVERTING TO A PHONE MESSAGE THANKS RICHARD ATS OFFICE 13/11/2000 13:18:47 (a:) APPRECIATE A CALL - PAUL W ph ******** 14/11/2000 06:45:25 (f:) I NEED/ I WANT A CALL PLS - PAUL W ph ******** 47 In March 2000 Mr Henry contacted Mr Leary to advise that his father was seriously ill and wished Mr Henry to take over his business. Mr Henry wished to sell out of the franchise. 48 On 27 November 2000 solicitors for the applicant wrote to the respondent making a number of allegations concerning the arrangement, which were denied by the respondent's solicitors on 4 December 2000. Mr Leary deposed that "This correspondence was the first communication in any form to us, indicating that Mr Henry was in any way dissatisfied with his business". Conclusions 49 While there was some dispute in the evidence about the March 2000 conversation referred to in par. 47 and, in particular, whether Mr Leary had said, as Mr Henry alleged, that he would "put it to the Board" it seems to me that little turns on that conversation. Both parties were then aware of the desire of Mr Henry to sell the franchise. Two things of relevance occurred thereafter. The first was that the amount of head office account work referred to Mr Henry dropped dramatically as the earlier figures show. The second is that at least two prospective purchasers of the business were referred to Mr Henry by ATR. It is noteworthy that the evidence of particular difficulty with Mr Henry's responses to clients and his failure to meet the obligations under the franchise agreement with respect to the payment of fees occurred in the latter part of the year 2000. I developed, in the course of the evidence, the view that Mr Henry, who effected a generally uncommunicative air, had determined to take over his father's business and sell the bobcat franchise with the consequence that his application to it diminished thereafter. He also developed, I consider without any rational foundation, a sense of grievance about the fact that head office account work was no longer coming his way at the same rate as formerly and that this in some way worked to his prejudice: he was not getting what he thought he had paid for with the upfront franchise fee of $50,000 - head office account work. That view paid no regard for the fact that as a franchisee he was an essential part of an overall system which itself had attributes and advantages flowing back to him. The capacity to advertise himself as part of that system, utilising ATR's name, was one such benefit. 50 The reduction in the head office account work was the feature which caused the submission to be made for the applicant that the "operation of the franchise became unfair for the Applicant due to the conduct of the Respondent". 51 It may be seen from the extracts from cross-examination of Mr Henry concerning the source of his work being predominantly other than head office accounts (see par. 36) that the complaint he now makes is one more of form than substance. While there is a dispute between his evidence and that of Mr Leary concerning their pre-agreement discussions about the source of work, an acceptance of Mr Henry's evidence (a conclusion I am not prepared to make) over Mr Leary's in that regard would introduce only a notional change in the position. It would mean that Mr Henry was exposed to an additional, unanticipated expense of $4,500 in order to attract work other than head office account work. As against that, bearing in mind that almost $49,000 of the total received of $209,850 was head office account work, the balance of $154,000 was received as a result of Mr Henry's efforts, including his advertising, and attracted no 6% head office account fee. If the total income had derived from head office accounts as Mr Henry desired, he would have avoided paying some $4,500 in advertising charges but been liable to pay another $9,240 to ATR through the 6% head office account fee. Thus the sourcing of the work extraneously to head office accounts avoided those fees. Had all of Mr Henry's work been head office account work he would have been out of pocket to a greater extent and without any basis for concern, as now argued, about the source of the work. 52 Given that it is not advanced that overall income was so deficient as to justify a finding of unfairness, this aspect of the case cannot support a relevant finding of unfairness. Accordingly, it is necessary to look at other aspects of the arrangement to ascertain whether such a finding is open in relation to those aspects of the amended summons which remain. Any scope for such a finding must be found in the circumstances surrounding Mr Henry's desire to leave the franchise, including by its possible sale and the means and aftermath of its termination. 53 I must record my view that I prefer Mr Leary's account of the pre-franchise discussions to that of Mr Henry. Generally, I found Mr Henry's evidence of conversations in which he was asserting representations to have been made, or those where his actions were being called into question, to have been unconvincing. 54 It seems to me there is room for the view that the operation of the terms of the franchise agreement, upon a termination of the franchise, were capable of visiting unfairness on the franchisee. If it be accepted that reasons other than the level of income caused the applicant to wish to terminate the arrangement and, consequently, the applicant fell behind in meeting its franchise payments, the only area for concentration is the residual obligations imposed by the franchise agreement. There can, in my view, be no unfairness attaching to the initial payment of a franchise fee in circumstances where (a) the parties intended the arrangement to operate for five years, and (b) the fundamental terms and operation of the franchise agreement are not able to demonstrate unfairness. 55 The accountant's evidence adduced in the applicant's case was designed to establish that the franchise operation was being conducted at a loss, but the cross-examination was effective to remove that element. As I understood that evidence, at the end, it became consistent with the position put by ATR, that after all legitimate expenses there was a residual profit at or about the level I have recorded; some $87,000 over 15 months. 56 It was necessary that the applicant's earnings total, over the period of 15 months' operation of the franchise agreement, $209,000 in order to equate on an annual basis with scenario one of the General Information Document which suggested an income of $182,400 per annum. The figures in the evidence vary between $177,672 total income alleged by Mr Henry and $209,850 recorded by ATR. I accept the income to have been at the higher level. The evidence tendered through the applicant's accountant was confused by an amalgam of figures due to the applicant's having conducted two businesses (the CSR cartage work and ATR work) simultaneously for a period. In cross-examination the accountant accepted numerous propositions put to him having the effect of qualifying his figures and his conclusions. The propositions were made out in ATR's case. It follows that the accountant's conclusions as to income and profit cannot be accepted. However, whatever be the position in that regard, the overall income was neither the basis upon which the applicant's case was mounted nor was it at a level which I would consider required the intervention of this court under s106. 57 The issues raised by the respondent, namely the activity associated with the operation and/or sale of the applicant's former business; whether Mr Henry was absent from work on particular days; whether he failed to disclose or record cash receipts do not, on balance, persuade me that there were major deficiencies in Mr Henry's operation. In the light of the gross income over 15 months of some $200,000 there is little to be gained by an attempt to travel through the minutia of the day-to-day activities to ascertain whether it might have been greater. While the pager records I have earlier set out herein might give reason for disquiet in that they suggest failures to work diligently, they record, as was submitted for Mr Henry, only the incoming calls and not Mr Henry's responses. Those records, without more, cannot permit a conclusion that the work for particular customers was not done or was lost. 58 Given that the results of the applicant's income and activities under the franchise agreement cannot be found to be relevantly unfair, the applicant's election to place itself in a position where the franchisor was entitled to terminate the agreement makes it impossible to consider that there should be a return to the franchisee of the original $50,000 franchise fee or of the proportion thereof which relates to the unserved period of the franchise term. There is no provision in the agreement for a return of all or any part of the franchise fee in these circumstances. Where the franchisee was not deceived by any misrepresentations and was not cheated in the sense that what was gained was much less than was bargained for, it seems to me a unilateral withdrawal for personal reasons relating to preference could not justify a re-writing of the franchise agreement to the benefit of the franchisee. Equally, this finding seems to me to necessitate a conclusion that any losses associated with the subsequent sale of the truck and bobcat are referable not to the circumstances of the franchise agreement itself and the work under it but rather the applicant's decision to, in effect, withdraw from compliance with the franchise agreement's obligations. 59 This is not a case of an applicant having been subjected to an impossible burden, the result of which would be likely, if not inevitable, bankruptcy as so often emerges in cases of this kind. As earlier noted, the residual profit of the applicant over 15 months, after meeting the expenses of the business including ongoing franchise related fees, lease repayments, fuel and the like, still remained at the sum of $87,197. Indeed, one is inclined to think that had Mr Henry's father's business not become available to him these proceedings may have not eventuated. 60 However, were the upfront franchise fee now to be treated as something returnable proportionally to the applicant, it would seem to me to make a mockery of what is a legitimate form of business operation, namely by way of franchise, providing that operation may withstand tests such as that imposed by s106. If a party willingly, and with the benefit of such advice as the applicant here obtained, enters into a franchise arrangement for a term of years with an upfront fee then, in the absence of some aspect of unfairness found to justify the avoidance of the agreement, there seems to me to be no merit in the proposition that the upfront fee should not remain in the hands of the franchisor. 61 On the other hand, different considerations arise with respect to the requirement of a franchise agreement that a franchisee meet ongoing payments by way of special marketing levies and administration service fees once the franchise agreement has been terminated. The concept of marketing levies and administration fees seems to me to dissipate considerably once the franchise no longer operates. True it is that in a given case head office administration costs and marketing levies may continue but it must be remembered that the termination, particularly by a franchisor, of a franchise due to the failures of an otherwise successful franchisee to comply with its obligations, presents to the franchisor an opportunity to engage a further franchisee with fees such as marketing levies and administration costs to be paid by that franchisee. In one sense, the franchisor in a case such as this, would obtain a windfall if it were able to charge levies against the new franchisee and then enforce the same levies against the former franchisee. Here, ATR argues that the remaining franchise fees and marketing fees represent the ongoing costs of the franchise that are necessary for ATR to provide the support and marketing of its name that enabled the applicant to obtain the profits it did. On the other hand, there is no evidence to suggest that the advent of the franchise agreement with the applicant introduced an immutable cost burden to be imposed on ATR. Without any persuasive material to the contrary, I consider it would be unconscionable to expect the applicant to continue, for a period of some three years nine months, to be liable for fees of that kind when the applicant will obviously not benefit to any degree from those services. 62 In the result, I would decline the relief sought with respect to the $50,000 upfront franchise fee and ongoing levies and fees related to the 15 month period of operation but grant relief in respect of franchise fees and marketing levies otherwise due under the agreement in respect of the period after the termination of the agreement. 63 As to costs, I consider that the degree of success by the applicant being less than complete, it would be inappropriate that a costs order be made in the applicant's favour. On one view of the matter it might be said that the respondent has been successful to a material degree and should have that success sounding in costs. Looking at the matter overall, I consider the most appropriate order with respect to costs would be that each party pay its own costs. In the absence of any application to my Associate within 7 days for a hearing on the issue of costs, I would so order. 64 The court orders that: 1. The franchise agreement between the applicant and the respondent be varied ab initio to provide to the effect that in the event that the agreement is terminated before the expiry of its 5 year term, the franchisee shall be absolved from the obligation to meet franchise fees and marketing levies relating to the period after the date of termination of the franchise agreement. 65 The applicant shall file and serve, within 14 days, short minutes of order to give effect to this judgment. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.