New South Wales Court of Appeal CITATION: Camden Video Pty Limited v Civic Video Pty Limited [2010] NSWCA 122 HEARING DATE(S): 25 May 2010 JUDGMENT DATE: 25 May 2010 JUDGMENT OF: Allsop P at [1], [32], [35]; Hodgson JA at [2]; Basten JA at [34] EX TEMPORE JUDGMENT DATE: 25 May 2010 1. Appeal allowed. DECISION: 2. Orders of the District Court other than any order for costs set aside and in lieu thereof order judgment in favour of the plaintiff in the sum of $19,350 to take effect as of 25 May 2010. 3. The respondent pay the appellant's costs of the appeal including the costs of the leave application and the respondent to have a Suitors Fund certificate if otherwise qualified. CATCHWORDS: CONTRACT – Franchise agreement – Franchise fees in certain circumstances based on "reasonable estimates" by franchisor – Whether franchisor established its estimates were reasonable. CATEGORY: Principal judgment CAMDEN VIDEO PTY LTD (ACN 102 341 293) (first appellant) PARTIES: Peter BEGA (second appellant) Jeremy KOULOUBIS (third appellant) CIVIC VIDEO PTY LTD (ACN 003 851 152) (respondent) FILE NUMBER(S): CA 2009/298315 COUNSEL: Ms E M PEDEN (appellants) Mr W CARNEY (respondent) SOLICITORS: Bruce Stewart Dimarco (appellants) CK Lawyers (respondent) LOWER COURT JURISDICTION: District Court LOWER COURT FILE NUMBER(S): 39/08 LOWER COURT JUDICIAL OFFICER: Delaney DCJ LOWER COURT DATE OF DECISION: 20 March 2009 - 12 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 2009/298315 ALLSOP P HODGSON JA BASTEN JA Tuesday 25 MAY 2010 CAMDEN VIDEO PTY LIMITED and Others v CIVIC VIDEO PTY LIMITED Judgment 1 ALLSOP P: I will ask Hodgson JA to deliver the first judgment. 2 HODGSON JA: On 20 March 2009 Delaney DCJ delivered reasons for judgment in proceedings in which the respondent (Civic) had sued the first appellant (Camden), Mr Bega and Mr Kouloubis for amounts said to be due by reason of a franchise agreement. The primary judge gave a verdict for Civic against all three appellants for $70,000, and stood the matter over for calculation of interest and argument as to costs. The final judgment at first instance does not appear to be in the appeal papers. 3 The appellant applied for leave to appeal from that decision, and leave was granted in relation to specified grounds of appeal on 29 September 2009. For reasons I will give, in my opinion the appeal should be allowed, and judgment should now be given for Civic against the three appellants for $15,000 plus interest calculated from around May 2007. 4 I will begin by outlining the circumstances giving rise to the proceedings and the appeal. 5 On 10 December 2002, Camden, as franchisee, entered into a franchise agreement with Civic, as franchisor, concerning the operation of a video store business at Camden, with the performance of Camden's obligations being guaranteed by Mr Bega and Mr Kouloubis. The term of the agreement was 10 years. 6 For the purposes of this case the important terms of the agreement were clauses 5.1 to 5.4 and 19.1 to 19.3: 5.1 In consideration of the grant of the licence in Clause 2.1, the Franchisee must pay the Franchisor the Initial Franchise Fee and Initial Training Fee on execution of this Agreement. These fees are fully earned on receipt and, subject to clauses 18.6 and 18.7, these fees are not refundable. 5.2 The Franchisee must pay the Franchisor; (a) the Franchise Fee in respect of each calendar month of the Term, on or by the date specified in Item 2 of the Second Schedule. (b) The Advertising Fee equal to the sum specified in item 18 of the First Schedule in respect of each calendar month of the Term also on or by the same date specified in Item 2 of the Second Schedule. 5.3 The Franchise Fee payable in respect of each calendar month of each Quarter will be one third of the Fee Calculation for each Quarter, which is based on: (a) the Quarterly Turnover for the previous Quarter, where the Business has been conducted at the Premises for that full period; or (b) the Estimated Turnover if the Business has not been operating at the Premises for at least one full Quarter. 5.4 The Franchisor will calculate the quarterly Franchise Fee on the basis of: (a) the Quarterly Report for the previous Quarter provided by the Franchisee under clause 11.4(b); or (b) if no Quarterly Report is provided by the due date, the Franchisor's reasonable estimate of the Quarterly Turnover for the relevant Quarter. The Franchisor's reasonable estimate will be final and can be later adjusted up but not down. …. 19.1 The termination or Expiration of this Agreement will not release any party from the obligation to pay any sum then or subsequently owing to the other or prejudice any rights or remedies accrued to either party prior to the termination or Expiration. 19.2 Upon termination or Expiration of this Agreement, the Franchisee must immediately: (a) pay to the Franchisor and its Related Bodies Corporate any monies which have become due and remain unpaid; (b) cease all use of, and not recommence use of, the Marks, the Business Name and the Civic Video System and any name, symbol or device which indicates, directly or indirectly, any connection or association with the Franchisor and/or the Civic Video System or which is confusingly or deceptively similar to the Business Name or any Mark; (c) return the Operating Standards, advertising material and all other materials relating to the Civic Video System which have been received by the Franchisee from the Franchisor and which are in the Franchisee's possession or control at termination or Expiration and all other property of the Franchisor and all copies of it; (d) subject to clause 19.3, if the Franchisee remains in lawful possession of the Premises, remove from the Premises any sign, symbol or other physical material which identifies the Premises as having some connection with the Franchisor or the Civic Video System; and (e) co-operate with the Franchisor in taking such action as may be required by the Franchisor to cancel or (at the Franchisor's option) transfer all registrations relating to the Business including, without limitation, the registration of the Business Name. 19.3 Upon termination or Expiration of this Agreement (including, without limitation, the surrender of this Agreement by the Franchisee pursuant to clause 17.3): (a) the Franchisee will take all steps necessary to cancel or (at the Franchisor's Option) transfer to the Franchisor or its nominee directory listings relating to the Business and telephone numbers used in connection with the Business; and (b) the Franchisor will have the option, exercisable by written notice to the Franchisee within 30 days of the termination or Expiration, to purchase all or any Products, fixtures and fittings, supplies or materials owned by the Franchisee used in relation to the Business and to take over or be granted a lease or licence of the Premises as well as some or all of the leases of any equipment used in relation to the Business ("Assets"). During this period, the Franchisee will not deal in any way with any of the Assets without the prior written consent of the Franchisor. The purchase price of the Assets which the Franchisor decides to acquire will be their fair market value as agreed between the Franchisor and the Franchisee, excluding any component for goodwill or for leasehold improvements. If any amount is owing by the Franchisee to the Franchisor, at the time of termination, the Franchisor may elect to offset the value of the Assets against that debt. If the Franchisor and the Franchisee cannot agree on the fair market value of the Assets within [14] days after the Franchisee receives the Franchisor's notice issued under this clause 19.3(b), the fair market value will be determined by an independent Accountant nominated for this purpose by the President for the time being of the NSW Branch of the Institute of Chartered Accountants, acting as an expert and not as an arbitrator and whose decision will be final and binding in the absence of manifest error. The Accountant's costs will be shared equally between the Franchisor and the Franchisee. 7 The date specified in item 2 of the Second Schedule referred to in clause 5.2(a) was on or by the fourteenth day of the following calendar month. Each Quarter referred to in clause 5.3 was defined to be each three month period 1 July to 30 September, 1 October to 31 December, 1 January to 31 March and 1 April to 30 June. The Quarterly Turnover referred to in clause 5.3(a) was the amount in any Quarter of the total revenue in relation to the business excluding tax or duty imposed directly on sales or rentals. The Quarterly Report referred to in clause 5.4(a) was a report required by clause 11.4(b), which was to set out the Quarterly Turnover, and was to be provided by the franchisee to the franchisor within 14 days of the end of each Quarter. 8 Camden operated the video business from some date in December 2002 until 8 May 2006, when it abandoned the business. By letter dated 15 May 2006 Civic terminated the agreement on the ground of Camden's repudiation of it. The premises from which the business operated were then vacant until reopened by a new franchisee on 17 September 2007. It was common ground that the time between Camden ceasing to operate and the new franchisee opening was 16 months eight days. 9 In February 2008, Civic commenced proceedings against the appellant claiming $77,835.24, made up of $20,855.40 said to be franchise and advertising fees owing at the date of termination and $56,979.84 damages, calculated on the basis of an estimated turnover of $680,000 per annum. 10 There were a number of issues contested before the primary judge, but the principal issues relevant on appeal relate to the calculation of franchise and advertising fees having regard to the effect of clause 5.4. 11 During the operation of the agreement, Camden never submitted the Quarterly Reports required by clause 11.4(b) of the agreement, and at least in respect of the months commencing July 2003 Civic rendered invoices for franchise and advertising fees on the basis of what Civic claimed were reasonable estimates of Quarterly Turnover made pursuant to clause 5.4(b). Civic's claim in the District Court was made on the basis of those estimates, both in respect of the period prior to termination and the period after termination. However, the evidence showed that during the time of the operation of the business these estimates made by Civic were of the order of 50% more than the actual turnover of the business, and the evidence also showed that Civic's business managers had complete access to Camden's terminals at the store which recorded its turnover. In respect of many of the disputed months, these managers had prepared reports to Civic which set out Camden's actual turnover for these months. 12 Evidence was given by Mr Peris, the national chief financial officer for Civic, that he made estimates for the purpose of clause 5.4(b) on the following basis: Q. How would you go about that estimation process? A. Well we basically – we look at the store, look at comparable stores around the country. We look at the buying of the store – you know, how many copies of movies they buy. We look at the discounts that are subsequently received by the store because of their buying and it's not just myself that sits down and estimates. There's a process whereby there's myself, the general manager and the managing director that go through the figures and determine, you know, an estimate for the store. We also have key performance indicators for every state and national indicators that tell us the movement of turnover for all our stores across the country, so we use those indicators in order to arrive at estimates. 13 Mr Peris had access to the reports which contained information as to Camden's actual turnover but he did not have regard to them at all. In re-examination he gave the following explanation for this: Q. You were asked a number of questions about the site store visit reports and about their significance. First of all can you tell us what the significance of those reports is as far as the management of the company goes? A. The reports are produced by the field team in order to assist the franchisee on operational matters. They go through the various procedures and the figures that they extract from the system at the store and then put it altogether and analyse, assess what the store is doing and what it should be doing in order to improve the turnover of the store. It is purely meant for the field team to use for assistance and improvement in the turnover of the store. Q. Why didn't you rely upon these site visit reports for your calculations on turnover, you've told us you haven't? A. Well the situation is that I don't know when the field team is scheduled to go out to visit the various stores. They visit two or three times during the year. That may and may not coincide with the end of a particular quarter that's to be used for billing purposes or whether, you know it's part of one quarter and part of another quarter so - and I don't have the manpower to go through and look at every store that hasn't responded and check every store visit report in order to determine whether some of those figures may be in those store visit reports or they may not that's why we rely on and emphasise to the franchisee that it is up to them to provide the turnover figures to us and if it's not provided that we will be estimating. We make that very clear to them during discussions when they apply for a franchise, during interviews when they come in and also at training, when they first arrive, new franchisee training. We make it very clear to them that it's up to them to provide the figures, that we don't have access to the figures any other way. 14 Before the primary judge it was contended for the appellants that the estimates made by Mr Peris did not amount to reasonable estimates for the purpose of clause 5.4(b). However, the primary judge held that because Camden did not comply with its obligation to provide returns it was reasonable for Civic to have assessed the turnover as it did. On that basis the primary judge found Civic entitled to $70,000 plus costs. 15 The appellants rely on the following grounds of appeal: 1. His Honour erred in his finding that Civic Video satisfied the requirements of Cl 5.4 of the Franchise Agreement and in finding that Civic Video made reasonable estimates of Camden Video's quarterly turnover. 2. His Honour failed to give any, or any adequate, reasons for his findings and conclusions that that the estimated turnover prior to termination of the Franchise Agreement satisfied the requirements of Cl 5.4 of the Franchise Agreement. 3. His Honour erred in concluding that the Franchise Agreement mandated payment of franchising fees based on an estimated turnover of $680,000 per annum applied after the termination of the Franchising Agreement and when Camden Video had ceased trading. 4. His Honour erred in assessing damages at $70,000. 16 Ms Peden for the appellants submitted that for two reasons Civic did not establish that its estimates were reasonable, and the primary judge was in error in holding that it had. First, it was unreasonable for Civic not to have regard to information it had as to the actual turnover. Second, Civic's onus to prove reasonableness was not discharged by the mere assertions of Mr Peris that it was based on comparison with other stores, in the absence of admissible, or indeed any, evidence as to the performance of those other stores. Ms Peden submitted that since the requirements of clause 5.4 had not been satisfied, the obligations under clause 5.3 had not arisen. Alternatively, she submitted that if Camden was obliged under clause 5.3 to pay on the basis of its actual turnover, there should be an appropriate calculation, and Ms Peden provided a detailed calculation to show that actual payments made by Camden during the currency of the agreement exceeded the amounts due on that basis by $17,373.92. 17 As regards the period after termination, Ms Peden submitted that because the actual turnover for the 16 months was zero, the franchise and advertising fees were payable at a default rate of $2500 per quarter, giving a figure of $13,333 for the 16 months. Since that was less than the figure of about $17,000 overpaid by Camden, there was, on balance, nothing owing to Civic. In response to a suggestion from the Court that the claim for the post termination period was a claim for damages for loss of the bargain, Ms Peden submitted that the case below was not conducted on that basis, and she also submitted that such a claim was excluded by clause 19 of the agreement. 18 Mr Carney for Civic submitted that the explanation given by Mr Peris for not adverting to actual figures was a reasonable one, and that having regard to his position and experience his evidence was sufficient to discharge Civic's onus to show that a reasonable estimate had been made, notwithstanding the absence of evidence of the actual turnover of any other business. Mr Carney also submitted that in the absence of a cross-claim or a claim for set off, the appellants could not rely on overpayment in respect of the period when the agreement was in operation. 19 In my opinion the primary judge was in error in holding that Civic had established that reasonable estimates had been made. The onus was on Civic to establish that the estimates it made were reasonable, and reasonable in an objective sense. It may have attempted to do so by leading evidence of matters on the basis of which the Court would conclude the estimate was reasonable, or possibly by leading opinion evidence from someone qualified to give that evidence. If opinion evidence of that kind was to be given by a person such as Mr Peris, who was also giving evidence as to what actually occurred, requirements of rules as to reports and the like do not have to be complied with, but a ground for giving that evidence has to be laid and it has to be apparent that expert opinion evidence is being given on that basis. 20 In my opinion it is clear that this did not happen in this case. Mr Peris did not give evidence of experience which could qualify him to give an expert opinion as to the reasonableness of his estimate, and it was not made manifest by the way he gave evidence that he was purporting to give that kind of opinion. Had evidence been led as to the actual turnover of actual franchises, the Court may have been able to draw a conclusion as to reasonableness, but there was no such evidence. On that basis alone, in my opinion Civic did not establish that reasonable estimates were made. 21 It is not necessary to consider the other matter relied on by the appellants. There is some merit in the explanation given by Mr Peris for not adverting to actual figures, but I am inclined to the view that it was not reasonable throughout the whole period to have no regard to actual turnover, when Mr Peris knew he could have access to information of that kind. If this were the only basis on which the estimates were challenged, this may have produced different results for different Quarters, depending on the precise timing of events, having regard to the obligations as to when payments were to be made and when returns were to be submitted. 22 Although these conclusions mean that the clause 5.4 procedure was not satisfied, in my opinion this would not displace the basic obligation on Camden to pay fees on the basis of turnover as required by clause 5.3. 23 I think in substance clause 5.4(b) is a clause allowing the basic obligation in clause 5.3 to be overridden in circumstances where Quarterly Returns are not provided, and a reasonable estimate is made by Civic. Accordingly, in respect of the period of the currency of the agreement, in my opinion the result is in accordance with figures provided by the appellants to the effect that Camden overpaid a little over $17,000. 24 As regards the period after termination, in my opinion the claim below was made as damages, albeit calculated by reference to calculations under the agreement. In my opinion also, the right of Civic to claim damages for loss of bargain when it terminated the agreement for repudiation was not excluded by clause 19. In my opinion the words of clause 19 are not apt to have that effect. 25 Having regard to the views I have expressed on the effect of clause 5.4(b), in my opinion the damages should be calculated by reference to an assessment, on the basis of the figures of turnover during the currency of the agreement, of what the likely figures would have been for the 16 month period had Camden not repudiated but had continued to perform the agreement. 26 There are difficulties of assessment of the amount, but these difficulties arise because of the default of Camden; and in my opinion for that reason it is appropriate to take a figure higher rather than lower in the range suggested by the actual figures. 27 On the basis of the figures shown in the appellant's document setting out fees calculated on the basis of actual turnover, in my opinion the calculation for the 16 months should be based on fees payable of about $6000 per quarter or $2000 per month. That gives a figure for damages of the order of $32,000. 28 In my opinion the overpayment of $17,000 or thereabouts can be taken off that figure. Civic's claim in this matter was a claim for a balance due after taking account of various obligations from Camden to Civic and various payments made to Civic by Camden. In those circumstances I do not think it was necessary to specifically raise a set off or cross-claim for Camden to take advantage of the $17,000 overpaid during the period the agreement was in force. Had the agreement continued, then that $17,000 would need to have been applied by Civic in part payment of amounts falling due under the continuing agreement. 29 I would round off all these figures, and hold that Civic is on balance entitled to $15,000. This sum would bear interest. It seems to me that the appropriate date from which interest should be calculated is about four months before the end of the 16 month period. The rates prescribed for interest were 10% up to 5 March 2009 and 9% thereafter. Again I would take a broad brush approach and say that as of today Civic is entitled to a total of 29% of the figure of $15,000, giving an interest figure of $4,350, and on that basis I would propose that judgment be entered for Civic for $19,350 to take effect from today. 30 As regards costs, in my opinion the appellant should pay the respondent's costs of the proceedings. The amount recovered is significantly smaller than the amount claimed, but Civic had to come to Court to get a result. It obtained a result that was not insubstantial, and it does not appear that there is any severable issue on which Civic failed that appreciably added to the costs at first instance. 31 In my opinion the respondent should pay the appellant's costs of the appeal, including the costs of the leave application. The appeal has had the effect of substantially reducing the amount for which the appellants are liable. We do not have the calculations of interest below, but I would imagine they would have brought the judgment up to above $90,000, so the effect of the appeal has been to reduce the liability of the appellants by over $70,000. In my opinion there is no issue on which the appellants have lost that is severable and has significantly added to the costs of the appeal, and for that reason I would propose that the respondent pay the appellant's costs of the appeal and have a Suitors Fund Certificate if otherwise eligible. 32 ALLSOP P: I agree. I would only add the following. The evidence was insufficient, in my view also, to conclude from the fact that Mr Peris approached the matter in a particular way that the estimate he made was thereby reasonable. The question of reasonableness is to be understood in a business sense and informed in part by the inability under the contract to review it downwards. This is not to say that if no quarterly report is provided by the franchisee the franchisor must necessarily ransack the records of the franchisee in preference to using some other method of reasonable estimation. Here, however, there was clear access to information. That was apparently available without any apparent difficulty. In that context, to assess by reference to unspecified and unsubstantiated alternative sites, not illuminated in evidence, did not establish that the estimates made were reasonable. 33 The question of overpayment has been dealt with by Hodgson JA. I would only add that Mr Carney, who appeared for the respondent, accepted that there would be no prejudice in any amendment now being made to the defence to raise any formal question of set off if that be needed. In those circumstances, the parties should not be put to the expense of undertaking unnecessary formality. 34 BASTEN JA: I agree with the orders proposed by Hodgson JA. I agree with his Honour's reasons and with the further observations of the President. [ Discussion took place with counsel as to the costs order in the District Court and the Court varied what was contemplated by [30] of the reasons of Hodgson JA, to make no change to the costs order in the District Court .] 35 ALLSOP P: The orders of the Court are as follows: 1. Appeal allowed. 2. Orders of the District Court other than any order for costs set aside and in lieu thereof order judgment in favour of the plaintiff in the sum of $19,350 to take effect as of 25 May 2010. 3. The respondent pay the appellant's costs of the appeal including the costs of the leave application and the respondent to have a Suitors Fund certificate if otherwise qualified. oOo 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.