Industrial Court of New South Wales CITATION: Great Scott International Pty Limited & Anor (No 2) v Cosmetic Suppliers Pty Limited & Anor [2006] NSWIRComm 358 FIRST APPLICANT Great Scott International Pty Ltd SECOND APPLICANT Scott Evan Krauss PARTIES: FIRST RESPONDENT Cosmetic Suppliers Pty Ltd SECOND RESPONDENT Sebastian Australia Pty Ltd FILE NUMBER(S): IRC 4548 of 2002 CORAM: Staff J CATCHWORDS: Unfair contract - Applicant employee of company for eight years - Encouraged to enter into agency agreement - Failure to meet sales targets - Whether agency agreement unfair - Agency agreement summarily terminated - Whether period of employment and period of agency should be taken into account for purposes of payment in lieu of notice - Held employee alter ego of corporate agency - Arrangement unfair - Agreement failed to provide notice of termination provision - Consideration of the reality of legal relations not merely legal form - Appropriate to take into account both period of employment and period of agency arrangement for the purposes of assessing reasonable notice - Issue of notice in contracts of employment - Issue of notice in commercial agreements - Calculation - Mitigation - Contract varied - Industrial Relations Act 1996, s 105 and s 106. LEGISLATION CITED: Industrial Relations Act 1991 Industrial Relations Act 1996 (NSW) Abboud v The State of New South Wales (Department of School Education) (No 2) (2000) 99 IR 299 Bankstown City Council v Paris (1999) 100 IR 363 Barclays Australia Investment Services Limited and ors v Nordby (1995) 99 IR 258 at 279 English v Aradlay Insurance Brokers Pty Limited (2005) 145 IR 129 at 141 Gala v State Bank of New South Wales t/as Colonial State Bank (No 2) (1998) 84 IR 216 Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd (2005) 147 IR 95 Lavings v Barclay Mowlem Construction (New South Wales) Ltd (1994) 99 IR 247 Mark Trenter t/as 'Time Rite Onforwarders' v Australian Air Express Pty Limited [2006] NSWIRComm 314 CASES CITED: Mayne Nickless Ltd v Industrial Relations Commission of New South Wales (2004) 141 IR 1 Mills v Industrial Fish Tasmania Pty Ltd (Receivers and Managers Appointed) (1993) 49 IR 416 Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567 Payne v Foxboro L & N Pty Ltd (1998) 81 IR 404 Port Macquarie Golf Club Ltd v Stead and another (1996) 64 IR 53 Ross v GN Comtext (Australia) Pty Limited (2000) 107 IR 1 Stevenson v Barham (1977) 136 CLR 190 Westfield Holdings v Adams (2001) 114 IR 241 Westfield Limited and Another v Helprin Helprin v Westfield Limited and Another (1997) 82 IR 411 Wheeler v Philip Morris Ltd (1989) 32 IR 323 HEARING DATES: 22/08/2006, 23/08/2006, 24/08/2006, 21/09/2006, 22/09/2006 DATE OF JUDGMENT: 11/13/2006 APPLICANTS Mr D Chin of counsel Solicitor: Mr S Howard Henry Davis York LEGAL REPRESENTATIVES: RESPONDENTS JJE Fernon SC Solicitor: Mr P Brown Baker & McKenzie JUDGMENT: - 1 - INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: STAFF J 13 November 2006 Matter No IRC 4548 of 2002 GREAT SCOTT INTERNATIONAL PTY LIMITED & ANOR (NO 2) v COSMETIC SUPPLIERS PTY LIMITED & ANOR Application under s 106 of the Industrial Relations Act 1996 JUDGMENT [2006] NSWIRComm 358 1 Great Scott International Pty Ltd ("GSI"), the first applicant, commenced proceedings pursuant to s 106 of the Industrial Relations Act 1996 (NSW) ("the Act") against Cosmetic Suppliers Pty Ltd ("the first respondent"), and Sebastian Australia Pty Ltd ("the second respondent"). 2 In Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd (2005) 147 IR 95, a Full Bench upheld an appeal from an interlocutory judgment of Marks J who had refused an application by GSI to amend the summons to include, as a further applicant, Scott Evan Krauss. Mr Krauss was the sole Director and an employee of GSI and became the second applicant in the proceedings. 3 The application which has proceeded by way of amended summons for relief, seeks orders in addition to certain consequential orders in the following terms: 1. An order declaring that the contracts and/or arrangements between the first applicant, the second applicant and the respondents, including the Sales Agency Agreement between the first applicant and the second respondent signed on or about 20 January 2001 (the "SAA") and the related conditions and collateral arrangements, whereby the second applicant performed work in an industry ("the Arrangements") were in whole or in part unfair, harsh, unconscionable and against the public interest. 2. An order varying clause 4(a) of the Sales Agency Agreement between the applicant and the second respondent signed on or about 20 January 2001 (the "SAA") to insert in substitution of clause 4(a) the following: Targets SA requires Net Sales achieved in the Territory, to be not less than the monthly Net Sales Targets. Net Sales Targets for the first twelve (12) month period are as detailed in Annexure A. Net Sales Targets for each subsequent period must be agreed in writing prior to the commencement of the respective calendar year. In discussions leading to the agreement on Net Sales Targets and in proposing net Sales Targets, SA will not at any time propose to insist on unreasonable Net Sales Targets, having regard to: · demand in the Territory for the Products; · prevailing market conditions in the Territory; · past sales levels actually achieved in respect of the Products in the concluding calendar year; · factors within the control of SA which may impact on sales levels for the Products; and · other relevant external factors which may impact on sales levels for the Product. At any time after Net Sales Targets have been agreed, if it appears to the AGENT on reasonable grounds that the Net Sales Targets may not be achieved for any reasons other than the conduct or poor performance of the AGENT, then the AGENT may seek that SA vary the Net Sales Targets to reflect more realistic levels. In this regard SA will give full and proper consideration to the variation sought by the AGENT and SA will not unreasonably withhold its agreement to the variation sought by the AGENT. For the removal of doubt, under no circumstances will SA impose upon the AGENT unfair or unrealistic Net Sales Targets. 3. An order varying ab initio clause 6(c) and of the SAA to insert in substitution of clause 6(c) the following: Marketing & other Support SA will at all necessary times supply AGENT with an allocation of Products, Collateral, Promotional and Technical material relevant to the Products. SA will provide such other support to the AGENT as is reasonably requested by the AGENT from SA and its employees and related companies from time to time, in order to assist the AGENT in the performance of its duties and obligations under this agreement and to achieve monthly Net Sales Targets. 4. An order varying ab initio clause 8(b) and of the SAA t insert in substitution of clause 8(b) the following: Delivery Time Period SA's National Customer Service Policy is for delivery within 72 hours from receipt of order into the Sebastian computer system. SA warrants to the AGENT that it will supply Product to fulfil orders placed by AGENT within 72 hours of such orders being placed. SA indemnifies the AGENT in respect of any loss whatsoever arising due to the SA's inability, omission or failure to supply Products. 5. An order varying ab initio clause 10 and of the SAA to insert in substitution of clause 10 the following: Grant The AGENT and SA hereby agree that the AGENT may at any time sell, assign, transmit or transfer the rights granted to the AGENT under this agreement by SA, and may at anytime substitute for the AGENT the purchaser, assignee, transmitee or transferee of the AGENT's rights under this agreement. 6. An order varying ab initio clause 11(a) and of the SAA to insert the following: Sales Targets Not Achieved If the AGENT fails to meet monthly Net Sales Targets (which have been duly agreed in accordance with the terms of this agreement) for three consecutive months in the Territory, then the following will apply: · If the failure is related to the performance of the AGENT, then SA will give to the AGENT written notice of the failure; and · SA will then allow the AGENT a further six month period in which to improve sales performance prior to SA exercising any right to give notice of termination. · SA will not exercise any right to give notice of termination if during the six month period the applicant improves sales performance. 7. An order varying ab initio the SAA to insert the following new clause: Termination SA may only terminate the agreement for the reason of failure by the AGENT to meet monthly Net Sales Targets. It may only to do this: · where monthly Net Sales Targets have been duly agreed in accordance with the terms of this agreement; and · where failure to meet monthly Net Sales Targets is unrelated to the conduct or omissions of SA or other external factors beyond the control of the AGENT; and · after having allowed the AGENT the opportunity to improve its sales performance in accordance with clause 11(a). If SA terminates the agreement: · for performance by the AGENT which is related to the conduct or omissions of SA or other external factors beyond the control of the AGENT; or · in circumstances where monthly Net Sales Targets have not been duly agreed in accordance with the terms of this agreement; or · for failure to meet monthly Net Sales Targets in circumstances where SA has not fully complied with clause 11(a); or · for any other reason; then SA will pay to the AGENT and Mr Krauss compensation for the balance of the duration of the agreement. The calculation of that compensation will be based on average monthly earnings of the AGENT under the agreement during the immediately preceding calendar year (and will include an amount in respect of the remuneration or other benefits payable to Mr Krauss for the balance of the duration of the agreement). 8. Further and in the alternative to orders 2 to 7 above an order voiding ab initio any arrangement constituted by the letter dated 23 January 2002 (the "Target Letter"). 9. An order voiding ab initio the annexure to the letter of agreement dated 19 February 2002 and the annexure novating the SAA and substituting the first respondent (in place of the second respondent) as the contracting party in the SAA (the "Novation Agreement"). Background 4 GSI entered into a Sales Agency Agreement ("the SAA") with the second respondent on or about 20 January 2001 for a period from 1 January 2001 to 31 December 2003. The operations of the second respondent were transferred to the first respondent, effective from 1 January 2002 whereby the first respondent adopted the rights and obligations of the second respondent under the SAA. The first applicant signed a novation agreement dated 23 January 2002 which acknowledged the transfer of rights and obligations from the second respondent to the first respondent ("the first novation agreement"). The first respondent terminated the SAA on 3 May 2002 pursuant to cl 11(a) of the SAA which provided: 11 NON - COMPLIANCE a) Sales Targets Not Achieved If for three consecutive months Net Sales in the Territory does not meet the agreed monthly Net Sales Target then SA (Sebastian Australia) may, at its discretion, terminate this Agreement by written notice 5 The second applicant had been involved in the marketing, sales, salon training and distribution of the second respondent's hair care and cosmetic products since approximately 1985 when he became part of the "star" training network for the second respondent in New Jersey in the United States of America. During the period 1992 until 1994, the second applicant was employed as a specialist technical educator at Sebastian International Headquarters in California. 6 In or about February 1994, while holidaying in Australia, the second applicant was approached by Shantdelay Pty Ltd, the then distributors of "Sebastian" brand products in Australia, and offered employment in the role of Sales and Education, Greater Sydney and Newcastle. 7 In or around June 1996, Shantdelay Pty Ltd was purchased by the second respondent and became Sebastian Australia Pty Ltd. Then, in or around April or May 1998, the second applicant was approached by Mr Peter Ross, Chief Executive Officer of the second respondent, to take up a sales agency. The second applicant declined further approaches in 1999. In or around June 2000, the second applicant was again approached by Mr Ross and he agreed to enter into an agency arrangement effective from 1 July 2000. The second respondent required the sales agency to be conducted with a proprietary limited company and GSI was established for this purpose. As a result of entering into the SAA, the second applicant resigned his employment with the second respondent, effective 30 June 2000. The second applicant also had discussions at this time with Mr Peter Woodbury, the then Head of Human Resources for the second respondent. 8 On or about 20 January 2001, GSI entered into a new SAA with the second respondent to provide services. At the request of one of the agents for the second respondent, new contracts were entered into with all agents of the second respondent so that the contract term would be for three years, rather than one year. 9 The SAA required GSI's employees and agents to procure orders for the second respondent's products from hairdressing salons throughout New South Wales. GSI employed the second applicant on a fulltime basis to provide these services. In addition, GSI entered into sub-agency agreements with MSJP Pty Ltd (whose employee is Ms Maryetta Bailey) and Wendy Brown. Was the Second Applicant a Party to the Arrangement? 10 The first issue that arises for determination is whether the second applicant was in fact a party to the contract or arrangement in question, as s 108 of the Act requires. 11 Section 108 relevantly provides: 108 Who may apply for order An order may be made under this Division on the application of: (a) any party to the contract, or (b) any person who, but for the making of such an order, would be a party to the contract, or … and not otherwise. 12 Section 105 defines "contract" to mean "any contract or arrangement, or any related condition or collateral arrangement, but does not include an industrial instrument". 13 Mr JJE Fernon SC, who appeared for the respondents, submitted that the only contract or arrangement between any of the parties amenable to the jurisdiction of the Industrial Relations Commission is the SAA between GSI and the second respondent and the novation agreement between GSI and the first respondent. Counsel submitted the second applicant is not a party to any relevant contract and was therefore not properly an applicant to the proceedings pursuant to s 108 of the Act. 14 Mr D Chin of counsel, who appeared for the applicants, relevantly submitted in written submissions on this issue: 7. In addition to the agreed facts, the following evidence demonstrates that Krauss was a party to the Arrangement for the performance of work under the SAA: (a) Krauss set up GSI on 26 June 2000 for the specific purpose of entering into the predecessor agreement to the SAA (commencing 1 July 2000) at the request of the Sebastian. (b) Krauss was GSI's sole employee (in addition to being its sole director and shareholder). (c) The SAA and its predecessor was negotiated by Mr Peter Ross, then General Manager of the Sebastian and Krause personally, on the basis that Mr Ross regarded Krauss' personal reputation with Sebastian's customers (built up as an employed sales consultant) and his personal motivation as a sales agent would be a good way to build Sebastian's business. (d) Clause 7(i) of the SAA provided that the GSI "will guarantee all Sales Personnel, Sub-agents and Staff of the AGENT will abide by the terms and conditions of this Agreement", namely, including that Krauss (as GSI's sole employee) will: i. use his best endeavours to obtain orders for Products within the Territory (clause 7(a)); ii. conduct in-salon product knowledge/concept training for each salon stocking Sebastian Product (clause 7(c)); iii. provide to the Respondents weekly written activity reports (clause 7(d)); iv. agree to training and educational updates as reasonably required by the Respondents from time to time (clauses 6(d) and 7(g)); v. keep confidential all information regarding the Respondents and their business of which he may become aware prior to and during the term of the SAA (clause 7(i)); vi. not undertake any other employment, contracts or activities involved in the hair care industry during the term of the SAA without prior written agreement of the Respondents (clause 7(k)); vii. not disparage or deliberately or otherwise make any comment or statement which could reasonably be seen to be disparaging, critical or uncomplimentary of the Respondents, or any companies associated with the Respondents or the Products at any time (clause 7(l)); and viii. shall not make any representation or give any warranty or undertaking in relation to the Products other than expressly set out in the advertising or technical information provided or as otherwise authorized by the Respondents in writing (clause 8(f)). (e) It was important to the Respondents to have a known and trusted individual such as Krauss running GSI, and the Respondents had some control over the identity of the owner and manager of its agencies such as GSI. Clause 11(d) of the SAA prohibited GSI from making any changes to its business structure, including any changes to its management and ownership by Krauss, without the Respondents' prior written approval. (f) At all material times, all relevant communications between the Applicants and the Respondents concerning the commencement, operation and termination of the SAA was conducted with Krauss personally. (g) Krauss was personally responsible for making sales of the Respondents' products to salons in within Sydney (S002) which represented the majority of GSI's business. (h) The Respondents were aware that Krauss dealt personally with the more significant purchasers of the Respondents' products in New South Wales, and that Krauss had a close personal relationship or association with many of those customers. 8. In the premises, in accordance with principle established in the authorities the Arrangement arises in circumstances where: (a) Krauss was the alter ego of GSI in that he was the sole owner and controller of GSI; (b) Krauss devoted his personal services to the achievement of GSI's contractual obligations under the SAA in respect of the sale of the Respondents' products to the most significant customers in New South Wales which accounted for the majority of GSI's business; and (c) the SAA directly envisaged the work to be done by Krauss both as an employee and as the manager of GSI. 15 In my view, for an arrangement to fall within jurisdiction, it is not essential that there be an identity between the person working and the contracting party. The Court of Appeal observed in Mayne Nickless Ltd v Industrial Relations Commission of New South Wales (2004) 141 IR 1 at [45] - [48]: [45] The critical jurisdictional fact is the identification of a contract (as defined in s 105) "whereby a person performs work in any industry". Stevenson v Barham (1977) 136 CLR 190 explains how this criterion is satisfied. The critical passage in the joint judgment of Mason and Jacobs JJ at 201 (with which Barwick CJ agreed: see at 192) refers to the relevant jurisdictional fact being whether the contract is one which leads directly to a person working in any industry (see generally Solution 6 at [26]-[34] per Spigelman CJ). Since "contract" includes an "arrangement", it follows that it is not necessary in an "arrangement" case to prove that the work was performed pursuant to a legal obligation to do it ( QSR Ltd v Industrial Relations Commission of NSW & Ors [2004] NSWCA 199 at [47], [57], [58]). [46] Nor is it essential that there be throughout an identity between the person working and the contracting party ( Ex parte VG Haulage Services Pty Ltd: Re Industrial Commission of New South Wales [1972] 2 NSWLR 81 at 87–88, Stevenson at 200). It is commonplace for modern contracts of employment involving senior executives, professional persons and leading sportsmen and women to use a service company. [47] In Solution 6 (at [35]), Spigelman CJ referred to two paraphrases of the word "directly" that have received judicial acceptance. In Production Spray Painting and Panel Beating Pty Ltd v Newnham (1991) 27 NSWLR 644, Mahoney JA (at 649–50) posed the question in terms of "whether the purpose of the transaction was that relevant work be performed". Priestley and Handley JJA (at 657) posed the question in terms of whether the impugned contract "must directly, that is under or pursuant to its terms, provide for the performance of work in an industry". Another statement found in the cases is whether or not the work was "required" by the contract ( Production Spray Painting at 657, Majik Markets Pty Ltd v Brake and Service Centre Drummoyne Pty Ltd (1992) 28 NSWLR 443 at 465, Solution 6 at [35]). [48] In Solution 6 , Spigelman CJ (at 217[12]-[14]) cited the judgment of Jacobs JA in V G Haulage at 88 as supporting the proposition that a contract may be found to lead "directly" to the performance of work in an industry if it: (i) itself "directly envisages" performance of work; and (ii) has a "recognisable impact on the conditions of that employment" and "work". Identification of these elements was not intended to propound some kind of alternative test to that stated by the High Court in Stevenson (see Old UGC Inc & Ors v Industrial Relations Commission of NSW & Anor [2004] NSWCA 197 at [49]). 16 These tests or indicia set out by the Court of Appeal are well capable of being satisfied in the present case in circumstances where the second applicant performed work for the second respondent for many years before being persuaded by the second respondent to enter into an agency agreement with it. The second applicant was an employee of the first applicant and its sole director, employee and shareholder. The second applicant continued to perform, in essence, the same work for the second respondent, albeit, through GSI, as he had performed as an employee of the second respondent. The first applicant was established at the request of the then General Manager of the second respondent for the specific purpose of entering into an agreement similar to that which the second applicant had when employed by the second respondent. All relevant communications in respect of the SAA were conducted with the second applicant who was personally responsible for sales. In my view, the second applicant was, as Mr Chin submitted the alter ego of GSI. Unfairness of the Contract 17 In essence, the applicants allege that the arrangement was unfair in relation to the sales targets set by the respondents. The effect of the applicants' submissions are that the respondents set unachievable sales targets so as to trigger the termination clause in the SAA. 18 The applicants seek orders varying the SAA (as set out earlier), including varying the SAA to provide for payment of compensation by way of adequate notice by reference to GSI's average monthly profit (including remuneration paid to the second applicant), calculated over the balance of the term of the SAA, in circumstances where the respondents seek to terminate the SAA for poor performance that is not otherwise wholly attributable to the applicants. The applicants seek an additional 20 months notice. 19 It is contended that the arrangement was thus unfair within the meaning of s 106 in that it enabled the first respondent to summarily terminate the SAA on the grounds that GSI had failed to achieve unfair and unrealistic sales targets that otherwise had been imposed by the respondents unilaterally, or without adequate consultation. It was submitted that the unfairness of the imposed sales targets lies in the respondents' imposition of them as a trigger or justification for summary termination in the circumstances. 20 It was further submitted that the Court is therefore not called upon to determine fair targets for all purposes, but rather that GSI's targets were imposed unfairly to enliven cl 11(a) of the SAA. The Evidence 21 Mr Simon Pitt became the General Manager for the second respondent in October 2001. His evidence was that at the beginning of each year, as part of his duties, he was required to set the individual targets for each agency in each State. In anticipation of receiving the annual sales targets from Germany in January 2002, he began to assess the performance of each agency. This analysis is left as late as possible so that Mr Pitt was able to assess the agency's performance in October, November and December of 2001 (which are the most profitable months in the year). 22 Upon Mr Pitt becoming General Manager, he conducted an assessment of the 2001 performance of all agents with a view to setting new targets for 2002. This analysis demonstrated that in respect of GSI, 15 out of the top 22 salons had sales that were down year on year values and only four of the top 22 salons had increased their sales. Mr Pitt proposed to make arrangements to address these performance issues by initially meeting with the second applicant. However, in mid October 2001, the second applicant telephoned Mr Pitt to arrange a meeting with some of his clients and Mr Pitt. 23 The client meeting was scheduled for 3.00 pm on 26 October 2001. Mr Pitt arranged to meet with the second applicant at 1.00 pm. It was Mr Pitt's evidence that he took with him to this meeting a spreadsheet setting out the performance data of GSI, although this was denied by the second applicant. The second applicant contended that he was provided with the spreadsheet by Leanne Keeble via his email. The second applicant's evidence was that he recalled discussions about sales targets and the performance of GSI, as against monthly targets, although he denied that Mr Pitt advised him that the sales achievement for GSI for September 2001 was only 67 per cent of budget, for October 65 per cent of budget, and the total sales results for the year-to-date were only 81 per cent of budget. Mr Pitt's evidence was that, at the conclusion of the meeting, the second applicant asked if he could be provided with a copy of the spreadsheet so he could make comments next to each salon. 24 During cross-examination, the second applicant agreed that it was clear by the end of October 2001 that Mr Pitt was concerned about the performance of GSI as against its monthly targets. 25 On 6 November 2001, Mr Pitt forwarded a memorandum to each of the sales agents including the second applicant regarding salons' sales figures. The memorandum was in the following terms: MEMORANDUM TO Scott Krauss, Julie Fausett, Jacque Weston, Tim Tininczky, Jamie Hibble, Julie Gale, Sue Bongioletti, CC André Boyer FROM Simon Pitt - General Manager, Sebastian Australia. DATE 6th November 01 NO OF PAGES 1 RE Salon Sales Figures Dear All, Please find enclosed for your individual attention, a sales by salon analysis. These figures are up to the end of September, and shows how each salon is performing Year to Date versus Last Year. As you can see from the way the figures have been broken down, we can see where we have had gains with new accounts, increases on the last years sales, but, also where salons are down in Sebastian sales on last year. For all the hard work that has been put into new and existing accounts, there are far too many that are not growing in line with our companies needs. As a total, we have had new business and established salon growth to the value of $652,800.00, which is excellent. However we have lost business ion existing accounts to the value of $451,075.28, which is of great concerned specially as we are all desperately trying to achieve our year end target. Therefore, please can you look through your individual salon list and fill the commentary space where applicable, explaining why we have declined in each particular salon. Please may I have your responses by Friday 16th November. It is absolutely imperative that we achieve the budgets set for Sebastian Australia and therefore I ask each of you to dig deep in your efforts to make this come to fruition. Best Regards SEBASTIAN AUSTRALIA Simon Pitt General Manager 26 The second applicant denied receiving the memorandum of 6 November 2001. On 7 November 2001, Mr Pitt forwarded a letter confirming his discussions with the second applicant on 26 October 2001. Relevantly, this letter provided: … I have summarised our discussions: Sales Sales to the end of September were $100,227.25 against a budget of $148,724.00 resulting in a shortfall of $48,496.75 therefore representing 67% achievement to budget. Sales for October were $101,292.00 against a budget of $155,468.00 with a shortfall of $54,176.00 which represented only 65% achievement of budget. YTD achievement is $1,068,450.00 against a budget of $1,325,278.00 which creates a shortfall of $256,828.00. This is an achievement of only 81% of budget. You are expecting big orders in November from 'Cutting Point' and Salon Supply Group. Distribution and Salon Performance I have attached a summary of all NSW accounts by territory and their turnover up to the end of September as we discussed, and you have kindly offered to put comments to each salon as to their current status of sales and distribution. I would like you to give me these comments by Friday 16 November 2001. The main concern for your salons seems to be that out of the 179 salons listed, 95 of them are down YOY with Sebastian sales. This represents $230,656 in lost revenue. I appreciate we have experienced difficulties with deliveries and out of stocks, and added to this are discontinued ranges, and no doubt some salons are closing their doors. We agreed though, that $230,656.00 can not all be attributed to these reasons. … Summary I am concerned that Great Scott International has failed to achieve monthly budgets all year and, at the going rate, will not achieve its year-end budget. I am also concerned that over half the NSW salons are showing a decline in sales YOY. I would like to meet up with you on Wednesday 14th November 01, so that you can present your plan to achieve budget to the end of the year. At this time I would like you to also present to me your latest estimate for year-end sales. I need to feel comfortable that GSI has a plan and the right people in place to achieve the contractual obligations as agreed in the contract between us. Failure of this to occur would require me to consider the feasibility of contract continuation. If you require any information to assist you with this, then please contact me. Yours faithfully, SEBASTIAN AUSTRALIA SIMON PITT GENERAL MANAGER 27 The second applicant's evidence is that the summary of all New South Wales accounts was not attached to the letter of 7 November 2001. The second applicant's evidence is that he had contacted a Ms Keeble prior to 6 November 2001 and requested that she provide him with a document summarising all New South Wales accounts by territory. 28 The second applicant did not respond to the letter of 7 November 2001, but requested a further meeting with Mr Pitt, which ultimately took place on 14 November 2001. The second applicant contended in cross-examination that he did not discuss with Mr Pitt the matters set out under "Distribution and Salon Performance" in the letter of 7 November 2001. His evidence was that specific figures were not discussed, only overall performance issues. The second applicant's evidence was that he did not receive the memorandum of 6 November 2001 attaching the updated sales figures. The effect of the second applicant's evidence was that after the meeting with Mr Pitt on 26 October 2001, he contacted Ms Keeble to provide him with a schedule of the salons' figures for New South Wales. 29 The second applicant denied that he contacted Ms Keeble after 7 November 2001, although he conceded contacting her prior to that date and asking her to put a comments column on the spreadsheet. However, the spreadsheet that Mr Pitt states that he provided to the second applicant with his memorandum of 6 November 2001 included a comments column. The second applicant denied that this was the form of the document, at all times. 30 The second applicant's evidence was that he explained to Ms Keeble the discussions that he had had with Mr Pitt and what he required in the spreadsheet. I reject the evidence of the second applicant in respect of the spreadsheet. On the balance of probabilities, I find that Mr Pitt, after his discussions with the second applicant on 26 October 2001, prepared the spreadsheet and attached it to letter of 7 November 2001. Nowhere in the second applicant's affidavit of 2 December 2003, or his affidavit in reply, does he refer to any conversation with Ms Keeble prior to 6 November 2001. There is no reference by the second applicant to receiving a spreadsheet from Ms Keeble without the columns comment included as part of the spreadsheet. 31 The spreadsheet indicated that the dollar value decrease in sales over the previous year was approximately $230,000. The second applicant acknowledged that this was a significant decrease on the previous year's performance. This was in respect of customers that the GSI agency had sold products to in the previous year. Although the second applicant acknowledged that it was important to meet the targets in order to comply with the obligations GSI had under the SAA, his evidence was that the targets were aspirational. However, when pressed in cross-examination, the second applicant considered that they were targets which had to be met under the SAA. 32 On 14 November 2001, the second applicant and Mr Pitt met for somewhere between four to five hours, during which time they discussed how and why GSI's territory was not performing in the way that it should. Although there was some dispute as to the extent of the issues discussed during the lengthy meeting on 14 November 2001, it is clear that the second applicant's comments on the spreadsheet were discussed including delays in the delivery of certain products and cancellation of other products and that Mr Pitt made clear to the second applicant that his sales to salons were down year on year and that he would be required to reach his targets. The second applicant also discussed new plans he had for GSI's business in order to be able to achieve targets. On 23 November 2001, Mr Pitt forwarded a letter to the second applicant summarising the discussions which had occurred during the meeting on 14 November 2001. At the conclusion of this letter, under the heading "Summary" the following appeared: Since our meeting NSW figures have improved, and I feel Great Scott International has taken positive steps to rectify the decline in sales and distribution. As agreed at our meeting, we will monitor the sales on an ongoing basis from Sebastian Australias' point of view, and also Great Scott Internationals (sic). 33 The second applicant accepted that during the meeting there had been some discussion as to why he had not split GSI's territory geographically with his subagents, although he rejected that Mr Pitt had suggested that this would be a more efficient way to split GSI's territory. 34 The second applicant acknowledged that there was a need for GSI to monitor sales in order to ensure that it comply with its obligations to meet targets under the SAA and that he was aware of this obligation as at 27 November 2001. The second applicant agreed that at the meeting of 14 November 2001, he discussed a plan with Mr Pitt to grow GSI's business. He also acknowledged that Mr Pitt stated that he felt comfortable that GSI had a plan and the right people in place to achieve the contractual obligations and that the failure to meet those obligations would result in Mr Pitt having to consider the feasibility of the continuation of the contract. 35 In November 2001, GSI achieved 97 per cent of its target. During November 2001, pre-Christmas packs of products that had been ordered by salons were delayed. The second applicant's evidence was that the amount of sales for the pre-order Christmas packs was in the order of $19,000 and that if the packs had been delivered, or some of them, that would have increased his sales for November 2001. 36 The second applicant accepted that after the meeting with Mr Pitt on 26 November 2001, and the further meeting with him on 14 November 2001, he understood that there was a need for GSI to improve its performance and that was precisely what GSI did in the month of November. The November 2001 results were also affected by the cancellation of two other products. Notwithstanding that, GSI improved its performance in November 2001. The second applicant agreed that, as a result of his conversations with Mr Pitt, he made an effort to achieve GSI's target for November 2001, which indicated that the target was quite achievable. However, GSI only achieved 68 per cent of its target for December 2001, which the second applicant acknowledged was a poor performance. The overall performance of GSI for the year-to-date (January to October) was 81 per cent of target. The GSI agency achieved 87 per cent of its target for the 2000 calendar year. 37 The evidence demonstrated in respect of GSI that the sales achieved in 2001 were less than those achieved in 2000. However, in respect of the other States, the sales achieved in 2001 were greater than those achieved in 2000. The second applicant accepted this was a poor result for GSI. 38 At the beginning of January 2002, Mr Pitt was given the overall target to be achieved by Australia from Wella AG, the parent company in Germany. In order to set the individual targets for each agency, Mr Pitt would take into account the following factors: (a) the previous year's performance; (b) how many salons are in each State; (c) the productivity of the existing and new customers in each State; (d) the new products and marketing drives; and (e) price increases forecast for the products. 39 In his affidavit evidence, Mr Pitt deposed as follows: 52. In October 2001, I received notification from Germany of the annual sales target. I was then required to calculate the splits of the overall target: (a) split by agent; and then (b) split by month. 53. In November 2001, I used the Wella base template for the new sales targets. Annexed hereto and marked with the letter "SP15" is a true copy of these workings. I then considered the current year-on-year targets, that is I conducted comparison of the sales targets achieved to date by each agent on a monthly basis of the previous year. Annexed hereto and marked with the letter "SP16" is a true copy of a document setting out the sales targets and those achieved for the Applicant's agency in 2001. 54. In order to set the 2002 targets, I took into account the following factors, in order to determine the state by state splits of the overall target increase from Germany: (a) the budget for 2001; (b) the actual targets achieved for 2001; (c) the number of customers in the territory; (d) the potential clients; (e) the year-to-year actual figures; and (f) I will then consider the splits between the states by comparing the percentage of sales against the population size of each state. Annexed hereto and marked with the letter "SP17" is a true copy of my workings for the 2002 targets prepared by me in approximately November 2001. At the time of preparing these workings, it was apparent to me that: (a) the Applicant was the only agent in decline, on a Year-On-Year ("YOY") basis for 2000-2001; and (b) the Applicant's overall targets for 2002 had increased the least, compared to the other sales agents. 55. As a result of taking into account the abovementioned factors, I determined the overall percentage increase for each agent. However, up until this stage in the process, the analysis has been based purely on new data. I then look at the actual sales achieved in the current financial year by comparison to the percentage increase split. If, for example, one agency has underperformed in that year, it is necessary to ensure that the target is possible. It is not in the business interest to increase targets to such an extent that the agent will perceive them to be unfair or unrealistic and then not be motivated to perform. Rather, it is better to spread the increase required by Germany across all agents, motivating both under and over performances. 56. In December 2001, I received final confirmation of what the yearly target was to be. I then calculated each state's target on that basis, taking into account the factors listed above. Then, I waited until Mr Scheinert, Vice President of Sales - Asia Pacific, came to Australia in January 2002 to discuss and finalise these figures. I wanted, particularly, to discuss with him, the breakdowns per state, given this was my first year calculating these targets. 57. On 7 January 2002, I sent an email to all agents, including the Applicant, providing them with an update about the new targets. Annexed hereto and marked with the letter "SP18" is a true copy of this email. Further, I discussed the target increase generally with all agents as I spoke to them weekly, including the Applicant. I have no recollection of any agent, including the Applicant, contacting me and raising any objection to the matters contained in the email. 58. On 17 January 2002, I had a meeting with Mr Scheinert regarding these matters. During this meeting, words to the following effect were said: Myself "Can you have a look at these state breakdowns given you have experience in dealing with this market." 59. I recall having discussions with Mr Scheinert in early January 2002, during this discussion words to the following effect were said: Scheinert: "Which states are doing well and which aren't doing well?" Myself: "NSW is struggling ... " Scheinert: "What does Scott say about this?" Myself: "He's saying it's because of Performance Active and the discontinuations. " Scheinert: "Do you want me to catch up with him and have a chat whilst I'm over here?" Myself: "That would be great. I'll tee up a time for you " 60. I recall that on 9 January 2002, I suggested, by email, that Mr Krauss may like to meet with Mr Scheinert during his visit, given that they had known one another for many years. Annexed hereto and marked with the letter "SP19" is a true copy of the email. 61. … 62. On 23 January 2002, I sent a letter to the Applicant attaching the sales targets. Annexed hereto and marked with the letter "SP20" is a true copy of this letter. I refer to paragraph 112 of the SK Affidavit. I deny that I provided the targets without prior discussion or consultation. In accordance with company procedure, each agent was required to sign the document and send it back. The Amended Targets 63. On or about 29 January 2002, I received from Mr Owen Bradbury, Company Secretary, a copy of sales targets for 2002. I noticed that whilst the total was the same, the monthly breakdown was different. I then had a discussion with Mr Owen Bradbury in which words to the following effect were said: Myself: "Owen, these monthly splits are different." Bradbury "I did the splits based on what the monthly splits are for Wella hairdressing division." Myself: "They are different to mine. Bradbury: "These are the ones we have to go with because they have already been submitted to Germany." Myself: "Well I had better change mine to be the same then, hadn't I?" As a result, the targets had to be amended to accord with the directions from Germany. 64. Upon a review of the annual targets, it became apparent that the monthly split of the sales targets needed to be amended for all the agencies. The overall annual target did not change but the monthly targets did. By way of example, the original monthly targets and the amended targets per month for the Applicant (as extracted by me from SP21 below) were as follows: Month (2002) Original Target Amended Actual Target Sales Achieved January $101,520 $112,330 $103,849 February $135,360 $136,582 $87,818 March $135,360 $145,230 $94,825 April $135,360 $129,485 $119,326 May $152,280 $141,940 June $135,360 $131,224 July $143,820 $144,431 August $135,360 $136,206 September $152,280 $142,833 October $160,740 $162,714 November $160,740 $162,714 December $143,820 $156,181 Total $1,692,000 $1,692,000 40 The second applicant's evidence was that he said to Mr Pitt in February 2002 at the annual Sebastian Sales Conference ("the conference") when informed by Mr Pitt that the targets had been revised by Germany that "I still have a problem with the targets for my area" and "I do not agree with the targets and the new weightings". 41 The second applicant stated that he made a similar statement to Mr Pitt when discussing the letter he received on or about 19 February 2002 which contained the revised sales targets for 2002 ("second novation agreement"). Mr Pitt denied that the second applicant had raised any problem in respect of the targets that had been set. Mr Pitt's evidence, which I accept, was that during the conference held between 4 and 6 February 2002, each agent gave a presentation about the ways in which he or she would be improving the sales performance of the territory for 2002. Mr Pitt's evidence was that he spoke to each of the agents about the new monthly splits of targets. In a discussion with the second applicant, he said: "Scott, can we have a quick chat about your yearly target. The annual target has remained the same however the monthly splits have changed slightly. The January target is now 6.6% instead of 6%. It does mean that you will be under January's target but we are prepared to overlook that month. I'll take it as you achieved January. Are you OK with the new arrangement?" 42 The second applicant replied: "That's fine." 43 I will return to the evidence regarding what occurred at the conference shortly. 44 On 7 January 2002, Mr Pitt forwarded an email to the various agents including GSI, informing them that he was awaiting confirmation of the targets for 2002 from the United States. Mr Pitt advised that he thought the targets would be increased by approximately 20 per cent on the 2001 targets. Although the second applicant did not recall receiving this email as at 7 January 2002, he did not deny receiving it. 45 On 23 January 2002, Mr Pitt forwarded to the second applicant a letter attaching the sales targets for 2002. GSI was invited to indicate its acceptance of the targets by 31 January 2002. The letter advised that an increase over the previous year's targets of 4.2 per cent would occur. 46 GSI was also advised by a second letter dated 23 January 2002, that the operations of the second respondent were transferred to the first respondent, effective from 1 January 2002, and that the rights and obligations of the second respondent were adopted by the first respondent. This letter purported to novate the SAA by substituting the first respondent in place of the second respondent as the contracting party with GSI. This is referred to as the first novation agreement. 47 The second applicant's evidence is he was "incredulous and upset to see firstly, that the targets had simply been imposed without any consultation, and secondly the extent to which they had been increased. I fully expected Mr Pitt to give the opportunity to discuss and try to set these targets so that they were realistic." The second applicant's evidence was that he knew that there was no way GSI was going to be able to achieve the targets. The second applicant's evidence is that he expressed his objection to the proposed targets. This was rejected by Mr Pitt whose evidence is that there was ample opportunity to discuss the targets, particularly at the conference in February 2002. The targets were discussed with all agents at that conference. Mr Pitt's evidence was that the second applicant did not voice any concerns with respect to these targets. He says that he had numerous discussions with the second applicant at the conference and he gave no indication of disagreement. 48 The conference was held between 4 and 6 February 2002. Mr Pitt's evidence was that at this conference the proposed sales targets for 2002 were the subject of discussions and presentation of each of the sales agents. He says each agent gave a presentation about the ways in which he or she would be improving the sales performance of that territory for 2002. The second applicant's evidence is that there was only a very brief discussion about the targets. It was during the conference that Mr Pitt advised the second applicant that the annual target remained the same but that the monthly splits had been changed slightly. The January 2002 target was now 6.6 per cent, instead of six per cent. Mr Pitt's evidence is that he informed the second applicant that this meant that he would be under the January 2002 target, but he was prepared to overlook that month and take it that he achieved the January 2002 target. His evidence is he asked the second applicant if he was "ok with the new arrangement" and he informed him that he was. 49 Approximately one week after the conference in February 2002, Mr Pitt noted that the only agent who had not returned a signed document containing the agreed targets was the second applicant. When Mr Pitt raised this matter with the second applicant, his evidence is that the second applicant observed that the contract for the targets for 2002 had been sent on the wrong letterhead but that the second applicant did not have a problem with the figures. By email dated 17 February 2002 to Ms Keeble, the second applicant attached the original and revised targets for the New South Wales sales territory for 2002. He advised "You may adjust your system to reflect the appropriate breakdown for daily figures etc." Although a copy of this email was forwarded to Mr Pitt, the second applicant advised that he would officially advise Mr Pitt when he returned his signed contract and targets noting he was still awaiting the originals from Mr Bradbury. 50 By letter dated 25 February 2002, the second applicant wrote to Mr Pitt in the following terms: Dear Simon, I thought it pertinent to further establish my plans and objectives for the New South Wales Sebastian Sales Agency for 2002. Although I have acknowledged the targets set for my territory, I am certain that unless I make significant changes we will certainly fall short of our year-end goal. Since our conference, I have thoroughly reviewed what will be required to improve this outlook. Taking into account our current customers' spending, calculating the potential increase from within them and accounting for natural attrition, in NSW we will need in excess of 50 new doors. This will be an incredible feat to accomplish! Therefore, I am advertising for an additional full time Sub-Agent. This person will primarily follow up leads and scour the state for potential new business, as well as having a designated territory. There are countless opportunities out there, and I believe that constructing a better system for Maryetta, Wendy and myself will assist us in surpassing our goal. We will have time freed up in order to secure a stronger and lasting presence in our current doors, and also allow us to further expand our own designated territories. I am planning to further delineate these territories and will advise you more comprehensively once complete. Originally, our targets were set out with more weight in the second half of the year. As that has shifted to the opposite scenario, I would like to assure you that while we will likely fall short for a while, we will certainly endeavour to make it up in the latter part of the year once my plan has been fully actioned. I would like to believe that we would exceed expectations! Should you like to discuss this further, please give me a call and we'll organise a time to catch up. Kind regards, Scott E. Krauss Director 51 GSI's sales target for January 2002 was $112,330. GSI did not achieve this target. The actual sales made by GSI in this period was $103,849, being eight per cent below budget. As the original target for January 2002 had been lower prior to the adjustment of the splits for the year, sales agents who had not achieved their targets for January 2002 were given one month's grace. 52 GSI's sales performance for February 2002 was 36 per cent below budget. GSI only achieved sales to the value of $87,818 with the target being $136,582. In February 2001, GSI had achieved sales of $119,459. 53 The second applicant stated that the failure to reach the February 2002 target was due to the discontinuation of products in the Xtah range, the existence of many promotional packs left over from Christmas and the existence of new promotional packs. Mr Pitt rejected the second applicant's reasons, stating that the discontinuation of certain of the Xtah product range coincided with the launch of new products within the same range and that even though there were new products in the marketplace, the company still had ample stocks of these discontinued products. Although Mr Pitt acknowledged that the salons would still have had packs from Christmas, he was of the view that there were still many types of products which the salons would need to order as new promotional packs are offered regularly and assist good sales agents. 54 Mr Pitt also observed that all agents were equally affected by the discontinuance of products but were able to achieve their sales. Any discontinued lines always coincided with the launch or re-launch of another product. 55 The sales figures indicated that GSI had only achieved 64 per cent of the agreed target for February and year-to-date figures were only 77 per cent of target. GSI's performance had declined by 17 per cent in 2002 by comparison to 2001 and by eight per cent by comparison to 2000. On 6 March 2002, Mr Pitt telephoned the second applicant to discuss his letter of 25 February 2002. There is a dispute between the second applicant and Mr Pitt regarding this conversation. The second applicant contends that he asked Mr Pitt for "some grace" in the first quarter extending through to the first half of the year with regards to achieving targets. 56 If Mr Pitt was not prepared to reduce the targets, the second applicant's evidence was that, failing support being received from Mr Pitt, he invited him to come on the road to see what GSI was up against as a result of all the changes. 57 Mr Pitt's evidence is that he read the letter from the second applicant as asking to be "cut some slack" on the targets, but was told by the second applicant that was not what he asking. Mr Pitt's evidence is that the second applicant observed during the conversation that if Mr Pitt did not see GSI as being part of the plan for 2002, then it was necessary to have a different conversation. Mr Pitt's evidence was that that was not what he was saying. 58 Immediately after speaking to the second applicant, Mr Pitt spoke to Mr Woodbury, the Human Resources and Corporate Service Manager for the first respondent. Mr Pitt's evidence was that he said to Mr Woodbury that the second applicant had thrown a "wobbly" saying he is not part of our plans and appeared to be trying to put words into Mr Pitt's mouth. Mr Woodbury suggested that the issue should be discussed further with him and that Mr Pitt should clarify the contents of his discussion in writing. 59 On 18 March 2002, Mr Pitt attended a meeting with the second applicant and Mr Woodbury. Once again, there is a significant dispute between the second applicant and Messrs Pitt and Woodbury as to what was said at the meeting. In my view, it is unnecessary to resolve all of the issues in dispute. The second applicant's evidence was that he was denied an opportunity to discuss the plans GSI had for the year. This is denied by Mr Pitt, whose evidence is, they were discussed at length. As I have earlier observed, where there is a conflict in the evidence between Mr Pitt and the second applicant, I prefer the evidence of Mr Pitt. On occasions the second applicant's evidence was vague and unconvincing. It seems inconceivable to me that at a meeting arranged by Mr Pitt as a result of the second applicant's letter of 25 February 2002, and the subsequent discussions on 6 March 2002 that Mr Pitt would not have given the second applicant an opportunity to discuss the plans GSI had for the year. Mr Woodbury's evidence was that the second applicant was given an opportunity to discuss the plans. He recalled the second applicant discussing his idea to increase his staffing levels. 60 At the conclusion of the meeting, the second applicant was given a letter by Mr Pitt dated 7 March 2002. This letter was in the following terms: … ***PRIVATE AND CONFIDENTIAL*** Dear Scott Further to our telephone conversation yesterday regarding your letter dated 23 February, I would like to clarify my position. ° The increase of 50 new doors that you presented at conference is not purely new and up-grading existing accounts to a higher spending level, i.e. 'Partner' salon to 'Image' and 'Image' to 'Elite' etc. ° Your decision to take on another Sales Agents is a decision that only GSI can make. ° Targets were set at the beginning of the year and were duly signed by yourself. These targets have been set to give Sebastian Australia maximum sales impact in the first quarter of 2002 to ensure maximization of company cash flow. Therefore they must be achieved. ° At the current time GSI has missed February target of $136,582 by $48,764, achieving only $87,818, which represents 64% of the agreed target. On a year to date basis, GSI is already $57,245 behind the agreed target of $248,912, with sales of $191,667, which represents 77% achievement. ° 2001 sales year to date were $208,844, Sales year to date in 2002 is only $191,667, which shows a 8% decline in sales year on year. Summary I appreciate GSI presenting me with the details of the plan to grow our business in NSW. However, I must reiterate that the current trend is indicating that GSI will not be able to fulfil its sales targets as agreed and recently signed. I must now stress that, if target achievement is not met for 3 consecutive months, then Sebastian Australia will exercise its rights to terminate the contract under clause 11a. Thank you for your efforts and understanding in this matter. Yours faithfully, SEBASTIAN AUSTRALIA SIMON PITT GENERAL MANAGER 61 GSI only achieved 64% of the agreed target in March 2002. 62 In April 2002, GSI again failed to reach the target set. GSI only achieved $119,326 in sales when the agreed target was $129,385. The second applicant asserts that the failure to reach the April target was due to the first respondent requiring GSI to pre-sell products usually sold in April. This is rejected by the first respondent. In relation to complaints by the second applicant which included incorrect recording of invoices; alleged changes to the computer system (which was rejected by the first respondent); alleged delay in the re-launch of the "Xtah" range and the discontinuation of certain of its products, the first respondent contended that whilst the old range was discontinued, new products were launched and there continued to be ample stock at the warehouse of the discontinued range. There was also a reduction of price in a series of lines. The second applicant contended, but for these failures, GSI could have exceeded the April 2002 net sales target. In addition, the second applicant's evidence was that part of the total value of the April 2002 sales was incorrectly attributed to March 2002 and May 2002 in an amount of $10,215.42. When this figure is added to the GSI sales recorded in April 2002, the total GSI sales for the month of April 2002 is $129,541.42, or 100.04% of the target imposed under the second novation agreement. The actual sales figures achieved for April 2002 were less than the target for April 2001 of $128,726. 63 In the November 2001 meeting with Mr Pitt, part of the discussion focused on re-organising the areas worked by the second applicant and other sub-agents in New South Wales so that they were more re-aligned on a geographical area. Although it was put to the second applicant in cross-examination that this would have had the potential to increase sales, this was rejected by the second applicant. The second applicant agreed that there was some overlapping of the geographical areas that he serviced and that other sub-agents also serviced, although he rejected the proposition that if the geographical areas had been organised in a way that avoided the overlapping, the agency would have operated more efficiently. The second applicant acknowledged that there were many salons within the area for which GSI had the agency where there were no Sebastian outlets. Examples of towns where there were no Sebastian outlets included Coffs Harbour; Taree; Griffith; Wagga Wagga; Dubbo; Armidale, Tamworth and Albury. The second applicant agreed that he had not visited any of these towns. 64 Mr Pitt's evidence was that all agents were provided with a document entitled "New Salons and Target $ agreement figures" for 2002. Salons were divided into categories of "elite", "image" and "partner". Mr Pitt's evidence was that figures were written on a whiteboard during discussions at the conference. Sales agents then broke up into groups to discuss strategies for each of the categories of the salon and reported back to the group. Mr Pitt's evidence was that targets were specifically discussed, and in particular, how targets could be achieved with strategies written up on a whiteboard. The second applicant rejected Mr Pitt's evidence of what had occurred at the conference. Mr Pitt provided a timetable of the agenda for the conference. The agenda included discussions regarding strategy with the question posed "who is our customer". The agenda noted that the conference is divided into two groups of "brainstorm and present". Thirty minutes was allocated for this discussion, which was followed by a further period of thirty minutes during which under the heading "Strategy", sales agents were to discuss creating the sales plan and the number of new accounts per State. 65 During cross-examination, the second applicant, when asked whether sales targets for 2002 were the subject of discussion, gave the following evidence: Q. … The targets that were included in the second novation agreement, which you have included in your affidavit at attachment 41, were the subject of discussions at the sales agents conference that was held between the 4th and 6th February 2002, weren't they? A. No. Q. Not at all? A. Briefly. Q. So-- A. I'm sorry. Q. Is the answer that you have just given, "no", incorrect? The targets were the subject of discussion? A. The targets were not the subject of discussion, no. Q. No discussion or about the targets for GSI for 2002 calendar year? A. Yes, sorry, there was a very brief discussion. Q. You made a presentation about your targets, didn't you? A. Not these targets, no. Q. What did you present on? A. We presented on overall result. We didn't have a figure. Q. Well, you knew at the end of January of 2002 what the target was for 2002, didn't you? A. I knew what the expectation was. I had not agreed to those targets at that point of time. Q. You agreed to those targets you say on or about the 19th February, is that right? A. I signed the document on or about the 19th February. It was not a full agreement as - I signed the document on the 19th February. Q. Thereby agreeing to? A. Yes. … Q. During the sales conference there was a workshop, wasn't there, in which you discussed your targets as a group? A. We did not discuss dollar targets as a group, no. Q. But you discussed with the other sales agents present and the others present, how GSI was going to increase its performance in the year 2002 did you not? A. Yes. Q. And achieve its targets in 2002? A. No. 66 Leave was given to Mr Fernon to lead further evidence from Mr Pitt in respect of the conference between 4 and 6 February 2002. Mr Pitt gave the following evidence: Q. I'm asking you about the sales conference that you attended between 4 and 6 February 2002? A. Yes. Q. Were you present at that conference? A. I was. Q. Do you recall any discussion, presentation or other talk or conversation going to the subject matter of targets for the sales agents of the first respondent at that sales conference? A. Yes. Q. What do you recall about the subject matter of targets of agents being discussed at that sales conference? A. What we discussed openly was - we explained-- Q. First of all, did the discussion take place over a period of time? A. Yes. Q. Did the discussion take place between - first of all, were you present when the discussion took place? A. Yes. Q. With whom did the discussion take place? A. With all the sales agents present in the room. Q. What was the role that you performed in the discussion? A. I took the part of a facilitator. Q. I'm sorry? A. I was a facilitator. Q. In your role as facilitator, what did you do? A. We were showing our agents-- Q. I'm asking you what you did in your role of facilitator in these discussions? A. We showed-- Q. I'm asking you, Mr Pitt, what you did. HIS HONOUR: You are commencing the answer with "we". WITNESS: I showed all the sales agents their targets for the year, their achievement for the previous year and the balance that we needed to achieve to get that year's target. FERNON: Q. How did you show those? A. On the whiteboard. Q. Did you write something on the whiteboard? A. I wrote down-- Q. Did you write something on the whiteboard? A. Yes. Q. What did you write? A. I wrote down by State the target that was needed for the year 2002. I wrote down the achievements of 2001 and I wrote down the difference between the two that was needed to be achieved for that year. Q. Either before or after you wrote that down, did you say something about the subject matter of the targets? A. I said "Targets would be discussed", we would show you how we are going to achieve them. Q. Who did you say that to? A. To all the sales agents. Q. On your recollection, was Mr Krauss present? A. Yes. Q. Was there anybody else present, from your recollection, from the New South Wales agency? A. Yes, Ms Maryetta Bailey and Ms Wendy Brown. Q. During the course of the conference did anything take place amongst agents in respect of the discussion of sales targets? A. Yes. Q. What took place? A. I showed all the agents, as I said before, the targets that they needed to achieve and we showed them - I showed them the breakdown by account type that we had, which is Elite, Image, Partner and Retail because each of those types of salon represents a different dollar value in terms of how much they spend to the company. I demonstrated that by getting people to move their clients from a Partner salon to Image salon would improve revenue to the company and also taking people from an Image salon to Elite salon, this again would improve revenue to the company. This was in addition to tracking the individual accounts as well which would also bring additional revenue to the company. Q. Is what you just told us what you yourself said to the sales conference? A. Yes. Q. Was there discussion at the sales conference, of which you were aware, among sales agents about the subject of targets? A. No. Q. Or achieving targets? A. No. Q. Did group discussion or work groups occur? A. Yes. … Q. What do you mean by "working group"? A. A working group is where people work within a group to find a common goal. Q. What did you observe about the working group as far as the New South Wales agency was concerned? A. They were working as a team to find out how many salons they needed to move from one group to another and how many additional salons they needed to bring on in that year to be able to achieve the target. Q. Were you yourself part of that discussion? A. Not in the physical discussion, no. Q. After the discussion with the work group, what then happened? A. They presented back to the whole group their findings on how many additional salons should move from one group of salon to another - how many would need to do that that year in order to get their targets. Q. Do you recall who made the presentation on behalf of the New South Wales group? A. No. Q. Did you do anything when the presentation was being made by the New South Wales group? A. I made notes of which band of salons were to move from which band and how many accounts were needed. Q. What did you make the notes from? A. From the templates that I used to set up - to start with - what I showed them, by State, the target, their sales achievement and what they needed to do. Q. So you are referring now to the whiteboard? A. Yes. Q. Was something put on the whiteboard after the work group? A. Yes. Q. When was the whiteboard written on? A. After the work group, when the States presented back on their findings, from what they needed to achieve. Q. Who did the writing on the whiteboard? A. I'm not sure. Q. Can you have a look at your attachment 23 please. Can you tell us what that document is please? A. It's the document that I used to base the work groups from. It explains the States, the targets, what they achieved by share and what they needed to do. Q. Is that a copy of something? A. I prepared this document prior to conference. Q. What part of the document did you prepare prior to conference? A. The base of it with the States, To Do, the target for last year and also the numbers. 67 During cross-examination, Mr Pitt gave the following evidence regarding targets: Q. You rung him to ask why he had not sent back his target? A. Yes. Q. You are referring to the novation agreement proposing his change be in effect to Cosmetic Suppliers? A. No, I'm referring to the targets. Q. You noted Mr Krauss was the only agent who had not returned the target. You say in paragraph 73 Mr Krauss had not supplied, or returned the agreed targets. You are referring to the targets on which provision is made for the signature of the agents signifying their agreement? A. Yes. Q. Mr Krauss had not done so by the time you had this conversation? A. That's right. Q. I want to suggest to you he had not done so because he was not happy with the targets? OBJECTION. QUESTION REPHRASED Q. I want to suggest to you that you were concerned Mr Krauss would not return the targets, because he had indicated to you at the conference he was not happy with them? A. No. Q. In this telephone conversation Mr Krauss again said to you, "I don't agree with the targets and the new weightings"? A. No. Q. He asked you in this conversation for a meeting to discuss the targets, did he not? A. No. Q. It is the case, is it not, you would not consider varying the targets because they were simply not negotiable? A. No. 68 I found Mr Pitt to be an acceptable witness. He gave evidence that was truthful and honest and responsive to matters put to him. He made concessions that were obvious and needed to be made. Mr Pitt no longer has any association with the first respondent. I accept him as a witness of truth and his evidence as reliable. Where it is in conflict with that of the second applicant, I prefer the evidence of Mr Pitt. On occasions, the second applicant's evidence was vague and unconvincing, as I have already observed in these reasons. 69 I prefer the evidence of Mr Pitt in respect of what occurred at the conference, particularly in light of the agenda which was set for the conference, which clearly envisaged that sales agents would be provided with targets for 2002. 70 On 9 April 2002, Mr Pitt attended the Collection Launch. This launch was to promote new Sebastian products and haircut trends in New South Wales at the Rex Hotel, Elizabeth Bay. Approximately 80 salon owners and employees attended the launch, together with sales agents. Mr Pitt's evidence was that at the end of the evening he spoke to the second applicant regarding the MIA Group of salons. Mr Pitt informed the second applicant that regarding the MIA salons, he had received special dispensation from Mr Kuek, the Financial Director for Cosmetic Suppliers, that the second respondent could open an account with Acqua Spa in David Jones. The purpose of the dispensation was to assist the second applicant in opening an account with a client even though the first respondent was still in the process of negotiating on a national level. 71 On 1 May 2002, Mr Pitt's evidence is that he received the consolidated figures for April 2002 which indicated that GSI had again not achieved the agreed targets. Mr Pitt's evidence was that despite the additional assistance given to GSI, repeated counselling and warnings, it was apparent that the most crucial territory for the first respondent would continue to under perform. Mr Pitt discussed the situation with Mr Woodbury and Mr Boyer, Managing Director of the first respondent. On 2 May 2002, Mr Pitt telephoned the second applicant. Mr Woodbury was also present during the telephone conversation. Mr Pitt asked the second applicant to come to the first respondent's office to discuss the situation. The second applicant responded to this request by saying "I don't think I need to. There is no point in me coming in. If you were going to terminate me, there is no point in me coming up to North Ryde." 72 The second applicant's evidence was that he believed that he was going to be terminated because of the events of the past few months and what he believed were unrealistic targets. 73 Mr Pitt sought to persuade the second applicant to come to a meeting so that the issues could be discussed. Mr Woodbury indicated to the second applicant that the first respondent wanted to give him an opportunity to respond and to put forward any comments before a final decision was made. The second applicant advised that he would call back shortly as he felt overwhelmed and wished to take a few moments to get his thoughts together, consider his notes and talk to his partner. 74 The second applicant rang Mr Woodbury a few minutes later, who again asked him to attend a meeting. The second applicant was of the view that he did not need to come in and suggested that the issues could be discussed on the phone. The second applicant stated that he did not feel that he had the support of Mr Pitt, or had received support from Mr Sutherland regarding education programmes, or support from Head Office, Marketing Department, including getting deliveries out. Mr Woodbury advised the second applicant that he would consider all the matters raised by him before making any decision. Subsequently, Mr Woodbury decided to terminate the GSI contract. He gave the following reasons for the termination: (a) the Applicant had not achieved the targets set for its company for a period of 18 months; (b) I am aware that the targets set for the Applicant in 2002 on a percentage increase basis were less than any other state in Australia. This was done on the basis of trying to motivate the Applicant to increase its performance levels. However, the company could no longer bear under-performance of this kind in its most crucial territory, New South Wales. (c) The Applicant had raised initiatives it would undertake in order to try and increase its performance in the period between November 2001 and March 2002. However, such initiatives did not ever seem to be realised and did not have the desired effect on achieving the targets. (d) I was aware that Mr Pitt had continually been liaising with the Applicant about ways to support the Applicant to achieve these targets. However, even with this assistance, the Applicant still under-performed. Consideration 75 The first applicant seeks orders pursuant to s 106 of the Act, varying the SAA to provide for adequate consultation, or discussions with the first respondent prior to the setting of sales targets; provision for their subsequent revision; a prohibition against termination for failure to achieve monthly sales targets unless the targets were derived from adequate consultation with the first applicant and where any such failure is entirely attributable to the first applicant's conduct and payment of notice equivalent to the balance of the SAA (an additional 20 months) in circumstances where the respondents seek to terminate the SAA on performance grounds. 76 It is contended on behalf of the applicants that the arrangement was therefore unfair within the meaning of s 106 of the Act in that it enabled the first respondent to summarily terminate the SAA on the grounds that GSI had failed to achieve unfair and unrealistic sales targets that otherwise had been imposed by the respondents unilaterally, or without adequate consultation. It is contended that the unfairness of the imposed sales targets lies in the respondents using GSI's failure to achieve the targets as a trigger or justification for summary termination. 77 The applicants submitted that therefore the Court was not called upon to determine fair targets for all purposes, but rather that GSI's targets were imposed unfairly to enliven cl 11(a) of the SAA. It must be observed at the outset that, in my view, the evidence does not enable me to make such a finding. 78 The evidence discloses that the annual targets were determined in Germany in approximately October 2001. Mr Pitt was then required to calculate the splits by agent and then by month of the overall targets. Mr Pitt used the Wella template for the new sales targets. He then considered the current year on year targets by each agent on a monthly basis compared to the previous year. Mr Pitt stated that in order to set the 2002 targets, he took into account the budget for 2001; the actual targets achieved for 2001; the number of customers in the territory; the potential clients; the year-to-year actual figures and then considered the splits between the States by comparing the percentage of sales against the population size of each State. The evidence is that GSI's sales target increased by approximately four per cent in 2002 and its overall target increased the least compared to other sales agents. In December 2001, Mr Pitt received final confirmation from overseas for what the yearly target was to be. He then waited for the Vice-President of Sales - Asia Pacific to come to Australia in January 2002 to discuss and finalise the figures. Mr Pitt's evidence, which I accept, was that he discussed the target increases generally with all agents as he spoke to them weekly, including the second applicant. He had no recollection of any agent, including the second applicant contacting him and raising any objection to an email he forwarded to all agents on 7 January 2002 advising that he thought that targets would be increased by approximately 20 per cent. 79 It will be recalled that the evidence was that the second applicant never received this email. In any event, it does not seem to me that much turns on his receipt of it as the increase in targets was ultimately set at 4.2 per cent. Each agent was required to sign a document setting out the proposed targets. 80 The second applicant contends that he expressed his disagreement in respect of the sales targets. However, Mr Pitt's evidence was that there was no objection by the second applicant. The second applicant's evidence was that two of his sub-agents, Wendy Brown and Maryetta Bailey were standing beside him when he raised his objections to the targets with Mr Pitt. However, neither of these persons were called by the applicants. 81 It will also be recalled that by letter dated 25 February 2002, the second applicant acknowledged the targets set for the territory and noted that "unless he made significant changes, GSI would certainly fall short of our year end goal." The second applicant then went on to advise in that letter that he was advertising for an additional fulltime sub-agent to follow up leads and "scour the State for potential new business" noting "there are countless opportunities out there." The second applicant advised that he was proposing to further delineate the territories amongst his sub-agents, although he believed that GSI would fall short of reaching targets in the first half of the year because of the variation to the targets which were weighted more heavily in favour of the first half of the year. The second applicant believed that GSI would ultimately exceed expectations. 82 The thrust of the applicants' case was that the sales targets in effect set in 2000, 2001 and 2002 were demonstrably and generally for all agents unrealistic. GSI did not achieve its sales targets for the calendar years 2000 and 2001. It fell short of its November 2001 target by approximately $4,028. It achieved its January 2002 targets prior to the target being amended by weightings that required slightly higher targets in the early months of 2002. 83 The second applicant contends that GSI would have achieved the April 2002 target if some April sales had not been incorrectly attributed to the month of March. The evidence does not enable me to be satisfied that sales for April were incorrectly attributed to March 2002. It is important in my view to bear in mind that there is a difference between the Court setting what it regards as fair targets and the Court determining that the targets set by the first respondent were unfair. The procedure that the first respondent utilised to determine targets, particularly being based on previous years seems to me to be objective, appropriate and fair. Furthermore, it seems to me that unachievable targets do not serve either the first respondent or GSI's best interest. 84 In Port Macquarie Golf Club Ltd v Stead and another (1996) 64 IR 53, the Full Bench in considering s 275 of the Industrial Relations Act 1991, the predecessor of s 106 of the Act, conveniently summarised the principles to be applied in order to determine whether a contract or arrangement is unfair. Relevantly, their Honours observed at 59 as follows: 1. The initial question which arises, once it be established that the impugned contract or arrangement meets the necessary jurisdictional test of being one under which a person performs work in any industry, is whether the contract or arrangement offends one or more of the grounds in pars (1),(b),(c),(d),(e) or (f) of s 275(1); that process involves a mixed question of fact of law: Hodges at 63; and Autobake at 20. … 5. The nature and degree of the unfairness within the purview of s 275, as a matter of law, relates to ordinary standards of fairness by directing attention to the particular circumstances of the individual contract or arrangement concerned; whether or not a contract or arrangement is unfair is a matter to be decided upon examination of the facts of each particular case: Incitec Ltd v Barry (1992) 45 IR 148 at 154; and Baker at 270. 6. Unfairness may arise either from the terms of the contract or arrangement itself, the surrounding circumstances and/or from the manner of performance or operation of the contract or arrangement: Barry v Incitec Ltd (1991) 45 IR 143 at 146; Incitec Ltd v Industrial Court of New South Wales (1992) 45 IR 155 at 157 - 158; and Baker at 270-271. 7. The test of unfairness involves the commonsense approach characteristic of the ordinary juryman by applying standards providing a proper balance or division of advantage and disadvantage between the parties who have made the contract or arrangement, bearing in mind the conduct of the parties, their capability to appreciate the bargain they had made and their comparative bargaining positions when entering into the contract or arrangement: Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 374; A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1 at 13; and Baker at 271-272. 8. If a contract or arrangement be found to relevantly offend one or more of the grounds, such as it being unfair, contained in s 275(1) then the next question involves the exercise of a discretion, to be performed judicially, as to whether the contract or arrangement should be avoided or varied: Hodges at 63; Autobake at 20; and Baker at 267. 9. If it be decided to avoid or vary the contract or arrangement under s 275(1) then a further discretion arises as to whether an order should be made under s 275(3) for the payment of money in connection with the contract or arrangement declared void or varied: Hodges at 63; Autobake at 20; and Baker at 267. … 11. The discretions allowed by s 275 to the Court are extensive and the Court should not interfere with bargains freely made by a person who was under no restraint or inequality, or whose labour was not being oppressively exploited: Stevenson v Barham (1977) 136 CLR 190 at 192; and Baker at 276. 12. The nature of the orders which may be made under s 275(3) for the payment of money cover a wide field; underlying the subsection is a broad concept of a restitution of the parties to a situation which existed before the making of the contractual arrangement as well as in an appropriate case to make remedial provision for what has taken place or been done under the contract in the meantime: Brown v Rezitis (1970) 127 CLR 157 at 164; and Baker at 277. 85 The applicants contend that the arrangement was unfair in that it failed to prevent the respondents from terminating the SAA on the basis of a paper shortfall in sales targets without requiring the respondent to have regard to its own conduct and factors beyond the applicants' control. It is further contended that the arrangement permitted differential treatment of other sales agencies which had not achieved sales targets. 86 The evidence discloses that from October 2001, the second applicant, as the principal of GSI, was well aware of the concern of Mr Pitt regarding the performance of GSI. At that time, GSI had achieved but 67 per cent of budget for September 2001 and 65 per cent of budget for October 2001. The circumstances of each salon within GSI's agency area was addressed at the meeting of 14 November 2001. The second applicant was aware that the targets had to be met. I do not accept the second applicant's view that the targets were "aspirational". Mr Pitt made it abundantly clear in his letter of 7 November 2001 that it was necessary for a meeting to occur between himself and the second applicant so that the second applicant could present a plan to achieve budget to the end of the year. Mr Pitt, in this letter, referred to GSI's contractual obligations and concluded by observing that the failure to meet these obligations would require him to consider the feasibility of the continuation of the contract. By letter dated 23 November 2001, Mr Pitt sought to summarise the discussions which took place between GSI and himself on 14 November 2001. Mr Pitt concluded the letter by observing that, as agreed, the first respondent would monitor the sales of GSI on an ongoing basis. So much was acknowledged by the second applicant in his letter to Mr Pitt of 27 November 2001. In a subsequent letter dated 7 March 2002 to GSI, Mr Pitt stressed that if target achievement was not met for three consecutive months, then the first respondent would exercise its right to terminate the contract under cl 11(a). 87 Although there is a dispute between the second applicant and Mr Pitt regarding whether the second applicant complained about the targets fixed for GSI for 2002, I prefer the evidence of Mr Pitt on this issue. I find that the only complaint that the second applicant made in respect of the targets for 2002 was that they were provided on the second respondent's letterhead after its operations were transferred to the first respondent from 1 January 2002. By email dated 17 February 2002, the second applicant wrote to Ms Keeble acknowledging the revised targets for the New South Wales sales territory for 2002. He made no complaint regarding the targets in this email. In a letter to Mr Pitt dated 25 February 2002, the second applicant acknowledged the targets set for GSI's territory, although he observed that unless he made significant changes, he believed he would fall short of the year end goal. Having observed the evidence given by the second applicant and re-reading the transcript of the evidence, I am not able to accept the reliability of the second applicant's evidence in relation to complaints he made regarding the 2002 targets and what took place at the conference in February 2002. 88 I am of the view that the claim that the targets were too high or unrealistic does not sit with the evidence that GSI achieved 97 per cent of its sales target for November 2001, a target that was 12 per cent above the target for November 2000. This was achieved in circumstances where the second applicant observed that because of a delay in the delivery of certain products and the cancellation of others, November 2001 sales were affected by matters beyond his control. Had this not been the case, GSI would have exceeded the November 2001 sales target. 89 It must be borne in mind that these sales were achieved after meetings between the second applicant and Mr Pitt on 26 October 2001 and 14 November 2001, the latter meeting being in excess of four hours. 90 GSI achieved in excess of the original target fixed for January 2002. When this target was amended due to a change in the monthly weightings of targets, GSI had substantially complied with meeting its January 2002 target. The first respondent accepted that GSI had met its target for January 2002. 91 The second applicant contends that the first respondent terminated the SAA, based in part upon GSI's failure to achieve the revised sales target for January 2002. GSI's sales results for the calendar year 2001 was 81 per cent of target, and for 2000, 87 per cent of target. The targets for 2002 represented only a four per cent increase over the previous year. In his letter to Mr Pitt dated 25 February 2002, the second applicant advised that he was advertising for an additional fulltime sub-agent and planning to further delineate territories as there were countless opportunities out there. The second applicant believed that although with the change in weightings of target, GSI would fall short in the first part of the year any shortfall would be made up and his expectations exceeded. However, it appears that particular proposals discussed at the meeting of 14 November 2001 were not actioned. No evidence was led of advertisements being placed in any newspaper, nor was there any evidence of any person being engaged or to realign the territory of GSI. The overwhelming inference, in my view, is that no changes were made to improve the performance of GSI. 92 I have already observed that I accept Mr Pitt's evidence that discussions took place at the conference in February 2002 regarding strategies to achieve sales targets. The second applicant was a very experienced sales person who had been associated with the second respondent in a sales capacity for over 20 years. I am not prepared to find, on the evidence, that GSI was not provided with adequate support. The second applicant agreed that Mr Pitt had provided him with a document at the conference setting out strategies by which GSI could improve its sales performance. The second applicant treated this document as a "wish list". In November 2001, each salon of GSI was the subject of discussions between Mr Pitt and the second applicant. 93 I am also troubled by the second applicant's rejection of the invitation to meet with Mr Pitt and Mr Woodbury in May 2002 to discuss his failure to meet targets during the preceding three months. It may be that on one particular scenario, the second applicant achieved sales for April 2002. However, in order to reach this conclusion, it is necessary to credit sales from March 2002 to April 2002. In my view, there is insufficient evidence that would enable a positive finding to be made in this regard. 94 Nevertheless, the second respondent appears to have treated the targets for the majority of GSI's agency as essentially an objective or result to be aimed at in circumstances where GSI's consistent failure to achieve those targets had not warranted any comment whatsoever. It was submitted by the applicants, and I agree, that this induced a reasonable belief on the part of the second applicant that the targets were to be regarded as an objective as there was almost throughout the period 2000 to October 2001, sub-target performances by all agents. However, all this changed when Mr Pitt became the General Manager of the second respondent in 2001. He conducted an assessment of the 2001 performance of all agents with a view to setting the new targets for 2002. Although concerns regarding GSI's performance were raised on a number of occasions from 26 October 2001 onwards, including exercising the right to terminate the contract under cl 11(a), the circumstances then existing (the change in monthly weightings), doubts surrounding whether or not GSI reached the April target, inclines me to the conclusion that, as a matter of fairness the invocation of cl 11(a), which affected summary termination, should have included a provision for a period of notice. In my view, the Court needs to be wary of summary termination of contracts or arrangements where the reason a respondent advances to justify such termination is poor performance. The SAA did not contain a provision for notice of termination of the agreement that required the giving or payment in lieu of notice. 95 In reaching this view, I have been influenced by the long period of the contractual relationship between the parties; eight years as an employee; approximately two years agency arrangement; the period during which the relationship had apparently been mutually beneficial and amicable; the failure of the second respondent to censure or criticise GSI for its performance until October 2001; the decision by the second respondent to have the arrangement changed from that of employee to an agency. In my view, an employer should not be permitted to avoid its obligations to give notice of termination of a contract of employment or payment in lieu thereof by changing the relationship to that of an agency relationship. Such an alteration to the relationship may give rise to unfairness which, in my view, it has in respect of this matter. 96 I also take into account against the second applicant's his refusal to discuss GSI's failure to meet targets for the months of February, March, and April 2002 with Mr Pitt and Mr Woodbury in May 2002. The opportunity was offered to the second applicant to explain GSI's performance and explain any initiatives that it had introduced. The second applicant had been on notice of the respondents' concerns regarding its failure to reach targets from 26 October 2001. 97 I am not disposed, however, to hold the contract is unfair because of the absence of provisions requiring the first respondent to provide for adequate consultations or discussions with the second applicant prior to the setting of sales targets; provision for their subsequent revision; a prohibition against termination for failure to achieve monthly sales targets, unless the targets were derived from adequate consultation with the second applicant excepting where such failure is entirely attributable to the second applicant's conduct. No provisions as to these matters, of course, appear in the SAA which was freely entered into. Barwick CJ held in Stevenson v Barham (1977) 136 CLR 190 at 192: The legislature has apparently left it to the good sense of the Industrial Commission not to use its extensive discretion to interfere with bargains freely made by a person who was under no constraint or inequality, or whose labour was not being oppressively exploited. 98 Furthermore, the evidence is clear that the second applicant was consulted about the targets for 2002. Indeed, the SAA in cl 11(b) specifically provided for negotiations in respect of new sales targets prior to a new target period commencing. It seems to me that a target based agency agreement is not intrinsically unfair. 99 However, taking into account all of the circumstances of this matter, I find that the SAA between the parties is unfair in that it provided neither in respect of cl 11(a), Sales Targets Not Achieved, or cl 11(b) Revised Sales Targets for a notice of termination period. 100 I find the circumstances of the case reveal unfair conduct by the respondents where no such notice provision was included in the SAA, particularly bearing in mind the second applicant's long relationship with the respondents. Such unfair conduct requires a finding that there should be a variation to the contract to insert a notice of termination period. I therefore propose to exercise my discretion to vary the SAA to insert an appropriate notice provision. 101 In my view, and I find, it is just and appropriate to make a compensatory order. In Westfield Limited and Another v Helprin Helprin v Westfield Limited and Another (1997) 82 IR 411, a Full Bench allowed monetary orders in circumstances not totally dissimilar to those before this Court, albeit, dealing with a contract of employment, as opposed to an agency arrangement. Their Honours held at 439: … the question of whether that discretion should be exercised in relation to the question of notice arises for consideration in the context of all of the circumstances before us, which include the other orders which we have decided to make in relation to the giving of a warning before termination and the option scheme and the orders as to the payment of moneys which flow from those variations. … 102 Mr Chin submitted that in considering what may constitute an appropriate period of notice, it was proper for the court to take into account the second applicant's employment with the second respondent from 1996 to 2000 and his service with the Sebastian parent company in the United States, where the second applicant was employed between 1992 and 1994. Counsel relied upon Ross v GN Comtext (Australia) Pty Limited (2000) 107 IR 1 as authority for such an approach. 103 In the circumstances of this case, and in light of the submissions advanced by counsel for the applicants, I consider it proper to have regard to the entire period of service that the second applicant had with the parent company in the United States commencing in 1992, with the second respondent, or its predecessor from 1994 and as the sole Director and alter ego of GSI from 2000. I do not accept the submission of the respondents that I should look only at the period of the agency agreement between GSI and the first and second respondents. Such an approach plainly ignores the reality of the second applicant's employment situation with the second respondent, including his length of service with it and its parent company in the United States. 104 In Payne v Foxboro L & N Pty Ltd (1998) 81 IR 404, Hill J considered the case of an employee who had been employed by a number of related companies over a period of 27 years, all of which had been under the direction of two United States parent companies. In determining the fairness of notice of termination provided by the employer, Hill J clearly considered the entire period of service. His Honour concluded (at 407 - 408): So far as notice is concerned, it seems to me that the provision in the contract and/or arrangement for a period of one months notice of termination plus one months pay in lieu (the unilateral general policy of the respondents and their US parent/s) is patently unfair in the case of the applicant having regard to his length of service and the status of his position. He had been the National Sales Manager of the respondent/s since 1993 and prior to that the NSW Sales Manager since 1982, and with overall service in excess of 27 years. During the latter periods of his employment he was the most senior "technical" employee of the company in Australia and reported directly to the US parent; and it was his responsibility to ensure that its policy of "Business as usual" was complied with in order to make the business as attractive as possible so that the US parent could achieve its objective of sale. In my view, a period of 12 months notice (or payment in lieu) would have been fair and reasonable. 105 The evidence establishes that there was a close relationship for at least 10 years but in reality a significantly longer period between the second applicant and the parent company in the United States. The second applicant took a position with the second respondent in Australia at the request of its United States parent company, presumably to best serve the company's interests in Australia. Although the company's head office is in Germany where sales targets were set, they appear on the evidence to have been relayed via the parent company in the United States. To treat the period of the agency in isolation would be artificial and would result in obvious unfairness. In my view, such an approach does not involve the lifting of the corporate veil as the task of the Court is to determine whether the contract or arrangement was unfair, harsh or unconscionable. That determination must be made in the light of the entire circumstances of the case as the Full Bench in Port Macquarie Golf Club Ltd v Stead observed. The relevant circumstances in this case must include the fact that the second applicant had been employed by the second respondent and invited on more than one occasion to establish an agency. 106 In considering whether the contract is unfair the Court will have regard to the legal relations between the parties and of course the question of legal form. However, as the Court of Appeal observed in Mayne Nickless, the Court must consider the reality and not merely legal form. 107 The law is well settled in respect of the kind of factors which may be relevant in assessing whether a period of notice given on termination is fair or unfair in the context of a contract of employment. In Lavings v Barclay Mowlem Construction (New South Wales) Ltd (1994) 99 IR 247 at 253, Hill J stated: …As to the period of notice the authorities demonstrate that the period of "reasonable" notice to be implied in a contract of employment which is silent on the matter depends upon all relevant circumstances of the particular employment, including (but not limited to) the nature and status of the position, the degree of responsibility and authority involved, the qualifications and experience necessary, the availability of suitable alternative employment, the amount and form of the remuneration and the basis upon which it is expressed, any relevant trade custom or practice and the length of service of the employee. In the present case, of course, the contract contains express provision for notice of termination and the issue is whether it is fair or unfair in the context of the contract as a whole, the circumstances in which it was made and the circumstances of its application and operation… See also Westfield Holdings v Adams (2001) 114 IR 241 ; Quinn v Jack Chia (Australia) Ltd [1992] 1 VR 567 and Gala v State Bank of New South Wales t/as Colonial State Bank (No 2) (1998) 84 IR 216. 108 Recently, Staunton J considered in Mark Trenter t/as 'Time Rite Onforwarders' v Australian Air Express Pty Limited [2006] NSWIRComm 314 the failure to give proper notice of the intention to terminate an agency agreement. Her Honour observed at [115] - [116]: [115] The issue of notice in commercial agreements was considered in some detail by Boland J in Gough & Gilmour Holdings Pty Limited and ors v Caterpillar of Australia Limited and anor (No. 11) 2002 NSWIRComm 354 at [743] to [757]. In doing so, his Honour made reference to the decision of the Court of Appeal in Crawford Fitting Co v Sydney Valve & Fitting Pty Limited (1988) 14 NSWLR 438. That matter has certain factual similarities with the current proceedings in that Sydney Valve & Fittings had been appointed exclusive distributor of Crawford Products in New South Wales between 1969 and 1984. In March 1984, Crawford gave Sydney Valve six months notice of termination of the agreements. At first instance, the notice period was extended to two years. On appeal, by majority, it was reduced to six months. In that matter, McHugh JA at 444 made the following observations as to the relevant principles to apply in order to determine a reasonable notice period in commercial transactions: ... the reasonableness of the period of notice depends upon the circumstances existing when the notice is given. ... When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner. [116] Further, at 448 his Honour said: If, during the contract, a party, acting within the scope of the agreement, engages in extraordinary expenditure or effort, that factor must be taken into account in determining the reasonableness of any notice given. The weight to be given to the factor will vary from case to case and the particular circumstances. 109 In determining this matter, I propose to have regard to the principles found in the above authorities. I take into account that the contract or arrangement between the parties had been on foot for approximately 10 years either in the form of an employment contract between the second applicant and the second respondent, or an agency agreement between GSI and the first and second respondents with the second applicant, as the Principal of GSI. It seems to me that, consistent with my earlier finding that if I am to treat GSI as the alter ego of the second applicant, it is inappropriate for compensatory orders to be made separately in respect of both applicants. It is appropriate that I take into account that GSI was put on notice in respect of its poor performance as at the end of October 2001 with the SAA ultimately being terminated six months later on 2 May 2002. It is also appropriate that I take into account that the second applicant rejected the invitation of the first respondent to discuss it's failure to meet targets. It is appropriate that I look to the reality of the relationships existing between the parties and not merely in the legal form which, in this case, was created by the second applicant at the behest of the second respondent: Ross v GN Comtext (Australia) Pty Limited. 110 It is well settled that the Court may make such order as to the payment of money as it considers "just in the circumstances of the case". As was said by the Full Bench in Barclays Australia Investment Services Limited & Ors v Nordby (1995) 99 IR 258 at 279: … "the task of assessing a "just" monetary amount is one which, not infrequently, involves the exercise of a broad judgment without the assistance of defined and identifiable parameters or heads of loss or damage." 111 The amount of money which is "just" has caused me considerable difficulty in this case. 112 It was submitted by the second applicant that a substantial period of notice is warranted, having regard to the circumstances of this matter. Reliance was placed upon Gala v State Bank of New South Wales t/as Colonial State Bank (No 2) where the Court awarded nine months severance and notice in respect of 11 years service and Quinn v Jack Chia (Australia) Ltd where Ashley J, sitting in the Supreme Court of Victoria, awarded 12 months notice to a manager for two years service. In my view, the latter case is distinguishable from the circumstances found in this case, as the employer had expressed a confidence in the hope that the employment relationship would be for a 10 year project. 113 The final issue addressed by the parties concerns the question of mitigation of loss. The Court is required to consider whether and to what extent any payment, which would otherwise be made in consideration of any failure of the respondents to afford reasonable notice should be reduced in circumstances where the applicants had avoided its/his loss by obtaining reasonable alternate employment: Section 106(5) of the Act; Westfield Holdings v Adams at 275 - 276; English v Aradlay Insurance Brokers Pty Limited (2005) 145 IR 129 at 141. 114 The second applicant did subsequently obtain alternate employment in July 2002. 115 Mr Fernon submitted that in the financial year ending June 2002, GSI's net profit was $27,152.66 and therefore any loss to the applicants could be no more than $2,800 per month (excepting that GSI earned no other income in May 2002 and June 2002). 116 The gross receipts for GSI in the financial year ending 2002 was $205,726.23. Total commissions to sub-agents were $54,855.92, total motor vehicle expenses were $19,394.40; employment expenses - wages to the second applicant were $37,500; superannuation was $15,600; workers' compensation was $397.28, giving a total of $53,497. There were other expenses including advertising; accounting; tax advice; insurance; office rent and the usual expenses associated with running a business. The total expenses amounted to $171,157.05. Income tax expenses amounted to $13,832. The second applicant's income tax return for the financial year ending June 2002 showed a taxable income of $37,607 from which $9,126 tax was paid, leaving a net amount of $28,481. 117 It was common ground that the second applicant obtained alternate employment with Ansco Holdings Pty Ltd and was paid $40,913 for the financial year ending June 2003, on which tax payable was $8,653.90, leaving a net income of $32,262. This led the first respondent to submit that the second applicant received $3,856 more by way of salary in the 2003 financial year. It was further submitted by Mr Fernon that if allowance is made for the time of the termination of the agency in May 2001, two months short of the end of the financial year, no real loss is occasioned to the second applicant if mitigation is taken into account. 118 Mr Chin adopted a different approach, submitting that the income earned by the second applicant up to 31 December 2003, amounted to $50,050, but this was substantially offset by losses incurred by GSI over the same period being $41,184.17. Counsel for the applicants submitted that accordingly any deduction of actual income earned from a fair notice payment, would be negligible. The second applicant sought an order varying the sales agency agreement to provide for payments of money by reference to adequate notice measured by reference to GSI's average monthly profit over the period of the sales agency agreements and calculated over the balance of the term of the agreement that was terminated, which as I have earlier observed, amounts to an additional 20 months. Mr Chin submitted that it was appropriate to take the total earnings in sales commission for the financial years ending 30 June 2001 and 30 June 2002, less all operating expenses, except for the second applicant's wages and superannuation, averaged over the life of the sales agency agreement which resulted in a figure of $11,138.82 per month. It seems to me this is a fairer way to approach the determination of monthly income of GSI. To focus on the net profit, as submitted by Mr Fernon, ignores the actual income earned by both applicants. 119 Mr Chin emphasised that GSI was given an extension of the agency for three years and thereby had greater security and longevity in circumstances where it had not met sales targets. 120 With regard to mitigation, counsel for the applicant referred to Westfield Holdings v Adams, particularly at 271 - 272 and 275 - 276. In Westfield, the Full Bench observed at [134] - [135]: [134] The discretion conferred by s 106(5) of the Act to order the payment of money "in connection with" any contract declared wholly or partly void, or varied, as the Commission considers "just in the circumstances of the case" is wider than the power to award damages in the case of tort or breach of contract at common law. As has been discussed, the discretion conferred by s 106(5) of the Act is not restricted to awarding payment so as to compensate the applicant for actual loss suffered: see Brown v Rezitis at 164. As earlier observed, it was said by the Full Bench in State of New South Wales v Health and Research Employees' Association of New South Wales that the existence of s 88F(2) of the 1940 Act, now s 106(5) of the current Act, "indicates that the legislature found that common law remedies were not necessarily appropriate." For this reason, and as earlier observed, reliance solely on common law rules as to damages may, in certain cases, be inappropriate. [135] This does not mean that the common law principle of mitigation of damages will never be relevant to the discretion to order the payment of money in connection with a contract declared void, or varied, under s 106 of the Act. In Harcourt Brace , for example, the Full Bench of the Court indicated (at 337) that, in making monetary orders under s 106(5), it is proper to have regard to common law principles, including that of mitigation, although it may be inappropriate in particular cases to adopt them. We do not understand this to mean that the principles applicable to the assessment of damages at common law will themselves apply under s 106 of the Act. Rather, in Harcourt Brace , the Full Bench recognised that, in some respects, the approach of the courts to the assessment of damages at common law may properly influence the resolution of the question of what orders would be "just in the circumstances of the case". 121 Their Honours went on to observe that different considerations are likely to arise where an applicant has fully or partly mitigated his or her loss by obtaining alternate employment, or has failed to take reasonable steps to do so. The Full Bench noted that more complex questions are raised when consideration is given to the application of the principle of mitigation to any payment that it is proposed to be made in lieu of a specified notice period. Their Honours went on to observe at [146]: [146] We emphasise that the application of the principle of mitigation in cases under s 106 of the Act represents an aspect of the consideration of what orders are "just in the circumstances of the case". It may, in some cases, be appropriate not to reduce any amount otherwise payable, even in lieu of notice, notwithstanding the fact that the employee has earned some income following termination. For example, a number of cases have held that the amount otherwise to be awarded should not be reduced in circumstances where the employee was able to find alternative employment, but it was not reasonable alternative employment: see Harcourt Brace at 338; Payne v Foxboro L & N Pty Ltd (1998) 81 IR 404 at 408; Drake v UPM-Kymmene Pty Ltd (unreported, Kavanagh J, Matter No IRC 3926 & 7151 of 1997, 9 March 1999); Prince v Northern Rivers Area Health Service (unreported, Schmidt J, Matter No IRC 2422 of 1998, 25 August 1999); Caine v LEP International Pty Ltd (unreported, Glynn J, Matter No. IRC 2441 of 1998, 21 October 1999); Young v Tieman Industries Pty Ltd [2000] NSWIRComm 133 at [26]. There is nothing in what we have said which would necessarily preclude this approach. 122 It was submitted that the second applicant was unable to seek employment in the same industry because of a serious health issue. But for the decision that I have reached in this matter, I would take this factor into account in respect of mitigation. 123 In my view, the orders sought by the applicants are not, strictly speaking, in consideration of economic loss. The applicants sought orders for payment in lieu of notice. As was observed by Walton J, Vice-President in Ross v GN Comtext (Australia) Pty Limited at [59]: [59] … There is some force in what was said by Glynn J in Michel v Ogilvy & Mather Pty Limited (1996) 71 IR 417 at 432: "In my view, the concept of mitigation in relation to moneys earned after termination is not relevant in respect of this matter. What is being sought by the application is to re-write a contract to include a term ab initio that would, if actually in the contract at the time of termination, have required the payment, at that time, to the applicant of $X in lieu of a specified period of notice. Mitigation would not have been relevant then. I do not see it as relevant now." 124 Their Honours concluded that it was not appropriate to reduce any payment to be ordered in light of the principles of mitigation. I respectfully propose to adopt their Honours approach in respect of this matter. Interest 125 I consider it would be appropriate in the circumstances of this case to make an order for the payment of interest which should flow from the date of the application: see Abboud v The State of New South Wales (Department of School Education) (No 2) (2000) 99 IR 299. Conclusion 126 I consider that the SAA was unfair for the purposes of s 106 as it did not provide either in the agreement, or by its operation, for adequate notice of termination (or payment in lieu thereof). It should be varied to provide for notice of termination of six months of GSI's average monthly profit over the period of the sales agency agreement. This is calculated by taking GSI's total earnings in sales commission over the period of the agency agreement, less all operating expenses, except for the second applicant's wages and superannuation and calculated over the life of the sales agreement, which the applicants submitted, resulted in a figure of $11,138.82 per month. 127 I have considered, in reaching this conclusion, the adverse findings made by the Court in relation to the second applicant's evidence in respect of the conference and the discussions regarding the sales targets for 2002. While these findings of fact do bear upon the assessment of particular issues arising in the proceedings, they do not, in my view, deprive the second applicant of remedies which are otherwise appropriate having regard to the provisions of s 106 of the Act: see Wheeler v Philip Morris Ltd (1989) 32 IR 323 at 340 - 341, nor do such findings (which are limited to certain parts of the second applicant's evidence) necessarily preclude the acceptance of other components of the second applicant's evidence: Bankstown City Council v Paris (1999) 100 IR 363 at 369; Mills v Industrial Fish Tasmania Pty Ltd (Receivers and Managers Appointed) (1993) 49 IR 416 at 429 - 430. 128 In my view, the remainder of the second applicant's evidence (apart from the evidence associated with the adverse findings), and the other evidence before the Court warrants the conclusion, for the reasons already outlined in this judgment, that the SAA was, by its terms and its operations, unfair for the purpose of s 106 of the Act. ORDERS 129 The Court makes the following orders: 1. The Sales Agency Agreement between the first applicant and the first respondent is varied so as to provide for notice of termination or payment in lieu thereof of six months. 2. Pursuant to Order 1, the first respondent is to pay to the first applicant an amount equivalent to six months notice. This amount is to be calculated by reference to the total earnings in sales commission over the period of the Sales Agency Agreement, less all operating expenses, except for the second applicant's wages and superannuation averaged over the life of the Sales Agency Agreement, which results in a figure of $11,138.82 per month. 3. Interest is to be paid on that amount calculated in accordance with the Supreme Court scale from the date of the filing the application until the date of this judgment. 4. The respondents shall pay the costs of the applicants as agreed, or as assessed, in accordance with the Rules of the Court. --------------------------------- 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.