New South Wales Supreme Court CITATION : AMC Commercial Cleaning (NSW) Pty Ltd v Coade (No. 3) [2010] NSWSC 1428 HEARING DATE(S) : 22 November 2010 JUDGMENT DATE : 9 December 2010 JURISDICTION : Equity Division JUDGMENT OF : Rein J 1. AMC National's refusal to consent to the ACT sub-master franchise was a breach of the MFA. DECISION : 2. Defendants to pay the plaintiff's costs of these further proceedings. 3. Plaintiff to bring in Short Minutes of Order in respect of any ancillary orders required. CATCHWORDS : CONTRACTS - general contractual principles - construction and interpretation of contracts - whether Master Franchise Agreement granted power to master franchisee to enter into ACT sub-master franchise agreement - whether MFA itself permitted sub-master franchises - whether amendment to manual and incorporation of manual into MFA resulted in sub-master franchises being permitted - whether amendment to manual valid under cl 17.3 of MFA CATEGORY : Separate question AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2010] NSWSC 832 AMC Commercial Cleaning (NSW) Pty Ltd v Coade (No. 2) [2010] NSWSC 1179 CASES CITED : Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 The Glendarroch [1894] P 226 AMC Commercial Cleaning (NSW) Pty Ltd (plaintiff) PARTIES : Stephen Keith Coade (first defendant) Australian Maintenance and Cleaning Pty Ltd (second defendant) FILE NUMBER(S) : SC 2009/289426 COUNSEL : T A Alexis SC (plaintiff) M A Ashhurst SC, M Seelig (defendants) SOLICITORS : Rockcliffs Solicitors (plaintiff) Linacre Lawyers (defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Rein J Date of Hearing: 22 November 2010 Date of Judgment: 9 December 2010 2009/289426 AMC Commercial Cleaning (NSW) Pty Ltd v Stephen Keith Coade and anor (No. 3) JUDGMENT 1 REIN J: These reasons assume a familiarity with my reasons for judgment published on 21 July 2010 (AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2010] NSWSC 832) and 3 September 2010 (AMC Commercial Cleaning (NSW) Pty Ltd v Coade (No. 2) [2010] NSWSC 1179) and use the same abbreviations. They are concerned only with one of the many complaints made by the master franchisee (AMC NSW) against the franchisor (AMC National) and AMC National's managing director (Mr Coade). The current issue relates to the entry by AMC NSW into an agreement with a company controlled by Mr Ajaj whereby that company would become the sub-master franchisee for the Australian Capital Territory, for which AMC NSW sought the consent of AMC National, which AMC National refused. 2 I considered this issue in my reasons of 21 July and held that but for the fact that a manual issued by AMC National dealt with the topic of sub-master franchises and was incorporated into the MFA by the terms of the MFA, sub-master franchises were not recognised by the MFA. I held that none of the other bases upon which AMC National had withheld its consent to the agreement were valid and that since sub-master franchises were recognised by the MFA (incorporating the manual), AMC National's refusal to consent was a breach of the MFA. 3 Subsequent to the publication of those reasons for judgment and before orders had been finalised, AMC National sought leave to re-open its case on the basis that it had been wrongly assumed by the defendants' representatives at the hearing that the manual (Exhibit L) was, in similar terms, in force as at the time that the MFA was executed in 2003 (or earlier). AMC National produced evidence that the manual actually in force in 2003 did not contain any reference to sub-master franchises. I granted leave to AMC National to re-open its case, and the 2002 manual and an amendment to it became Exhibits 4 and 5. I shall refer to Exhibit L as "the 2009 manual" because that is the year it was issued. 4 AMC NSW eschewed any case on the ACT sub-master franchise issue based on estoppel or misleading and deceptive conduct on the part of AMC National. Its case is solely one of construction of the MFA, either alone or in combination with the 2009 manual. 5 The single question for determination now is whether the MFA grants a power to AMC NSW to enter into the ACT sub-master franchise agreement. The argument advanced by AMC NSW that the MFA does grant such a power has two strands: (1) as a matter of construction of the MFA itself (without any reference to the 2009 manual), sub-master franchise agreements are a form of franchise agreement and are permitted; and (2) if the MFA does not of itself permit AMC NSW to enter into sub-master franchise agreements, the incorporation of the 2009 manual permits sub-master franchise agreements. 6 The second argument itself entails these arguments: (1) AMC National issued the 2009 manual to AMC NSW and therefore, by definition in the MFA, its terms became a part of the MFA, the issue of the 2009 manual being sufficient without more; and (2) if the issue of the 2009 manual was not sufficient and the amendment contained in the 2009 manual had to meet the criteria in cl 17.3 of the MFA, criteria (c) and (d) were met; To support the argument that cl 17.3(c) and (d) of the MFA were met, AMC NSW relied on the fact that AMC National had permitted the creation of other sub-master franchises within NSW (for example, for the Blue Mountains and part of Western Sydney) and was positive about sub-master franchises. There is no dispute that AMC National had consented to sub-master franchise agreements on previous occasions and used agreements drafted by AMC National's solicitors, Macpherson + Kelley Lawyers. 7 AMC National contends that: (1) the MFA does not refer to sub-master franchises in its terms, and cl 20.4(c) of the MFA prohibits the transfer of any of AMC NSW's interest in the franchise; (2) the 2009 manual does not purport to amend the MFA, rather, it only sets out rates to be paid if sub-master franchise agreements are entered into. AMC National does not dispute that it has permitted AMC NSW to enter into sub-master franchise agreements in the past, but it says that it cannot be compelled to do so now. Thus, on its case, the 2009 manual's provision of rates is in aid of situations where AMC National has chosen to consent to something outside the MFA; and (3) the 2009 manual has not been shown to meet the criteria in cl 17.3(c) or (d) of the MFA. Does the MFA itself permit sub-master franchises? 8 I remain of the view expressed in [78] of my reasons for judgment of 21 July that the MFA, standing alone, does not permit the creation of sub-master franchises. The ACT sub-master franchise agreement confers on Mr Ajaj's company the exclusive right to create franchises in the ACT, a right which AMC NSW presently has. In my view, that involves a transfer of part of AMC NSW's interest in the franchise. This applies even if it is accepted that a sub-master franchise agreement is a type or species of franchise agreement. The manual in 2003 9 It is AMC National's case that the 2002 manual (Exhibit 4) and an amendment (Exhibit 5) were issued to AMC NSW prior to or on the execution of the MFA in 2003. AMC NSW now accepts that it received a document substantially in those terms (Exhibit 6) by 2005. Nothing turns on the factual dispute, because none of Exhibits 4, 5 or 6 mention sub-master franchises. Amendment of the manual 10 Clause 17.1 of the MFA provides: "17.1 Compliance with Manual The terms and contents of the Manual are incorporated into the terms of this Agreement and the Master Franchisee must observe and comply with the Manual." Clause 17.3 of the MFA provides: "17.3 Amendment of Manual AMC may amend the provisions of the Manual from time to time in order to: (a) protect the Marks, business names, reputation and other Intellectual Property owned, under the control of or used by AMC; (b) comply with any statutes or judicial or administrative decisions; (c) maintain administrative efficiency and profitability; (d) improve the quality of facilities and the Services offered by AMC, the Master Franchisee or Franchisees." Clause 20.4 of the MFA provides: "20.4 Transfer Prohibition (a) Except as set out in this Agreement, neither the Master Franchisee nor any director, shareholder, immediate or remote successor to the Master Franchisee's interest in this Master Franchise may sell, assign, transfer, convey, give away, pledge, mortgage, charge or otherwise encumber or deal with any interest in this Master Franchise or in the Master Franchisee. (b) Interest in the Master Franchise or the Master Franchisee includes any indirect interest such as a share in a corporation or entity which is the Master Franchisee, or the declaration by a shareholder that a share is held on trust for another person, without the prior written consent of AMC. (c) No partial transfer of the Master Franchisee's interest is allowed nor, in the case of a corporate Master Franchisee, any change whatsoever which has the effect of altering the underlying beneficial ownership of the Master Franchise, or the control of the Master Franchise in any way." 11 Leaving aside the question of the validity of the amendment to the manual, notwithstanding the fact that the 2009 manual does not expressly state that sub-master franchises can be sold by master franchisees, I remain of the view that the incorporation of amendments to the manual and the incorporation of the manual into the MFA by the terms of the MFA produce the result that the MFA recognises sub-master franchises as a species of franchise covered by the MFA and that sub-master franchises are not rendered impermissible by cl 20.4 of the MFA. The MFA must be read as a whole and given a commercial and businesslike interpretation: see Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15 at 25-27 ([19]-[23]) per Allsop P and at 99 ([361]-[362]) per Campbell JA, Giles JA agreeing with Campbell JA at 29 ([42]-[43]) and with Allsop P at 33 ([63]). 12 I do not think that the contents of the manual, and hence the MFA, can be construed so as to give AMC National the benefit of recognition in the 2009 manual of a fee payable for each and every sub-master franchise agreement entered into without the burden of an obligation to consent to sub-master franchise agreements, subject to the terms of the MFA. 13 I accept that it is somewhat surprising that AMC National would agree to the introduction of sub-master franchises by means of issuing a manual rather than preparing an amendment to the MFA, but it is clear that: (1) AMC National agreed to sub-master franchises before the ACT sub-master franchise; and (2) AMC National issued the 2009 manual expressly recognising sub-master franchises and even specifying the amount to be paid and the alteration of the manual can be seen as reflecting the consensus that sub-master franchises were a desirable development. Clause 34.4 of the MFA requires any amendment to the MFA (by means other than through issue or amendment of the manual) to be in writing executed by the parties, but this was not required for the manual. 14 I turn now to the question of the validity of the amendment to the manual. I start with the fact that AMC National issued the 2009 manual. AMC NSW has never challenged the ability of AMC National to issue that manual. 15 It is clear that AMC National entered into sub-master franchises prior to 2009. There is evidence from Mr Kijurina that Mr Coade thought that the use of sub-master franchises was a good idea. Mr Coade did not deny that he had been positive about the use of sub-master franchises (see paragraph 10.3 of Mr Kijurina's affidavit sworn 16 September 2010 and T17 and T20), and Mr Coade was certainly positive towards sub-master franchises in relation to IFG: see T19 and T21. The fact that AMC National agreed to enter into sub-master franchises for the Blue Mountains and for the North Coast supports the contention that AMC National did regard the introduction of a fourth tier to the franchise structure (that is, franchisor, master franchisee, sub-master franchisee and franchisee) as advantageous. Those sub-master franchise agreements were in a form prepared by AMC National's solicitors. 16 There are a number of difficulties with AMC National's position. It asserts that pages 18 and 19 of the 2009 manual do not amend the MFA, but rather simply provide for what is to be paid in the event that AMC National agrees that AMC NSW can enter into a sub-master franchise agreement. Logically, this means that if AMC NSW entered into a sub-master franchise agreement, it would still do so in breach of the MFA. I accept that the two pages of the 2009 manual do not expressly purport to amend the MFA, but the MFA, as I have noted, incorporates the manual as amended from time to time. Since AMC National says that the 2009 manual, having the meaning it contends for, is valid, then AMC National accepts that it meets the requirements of cl 17.3 (cl 17.3(c) and (d) seem to be accepted as the only relevant subclauses). The third problem is that since it is AMC National which asserts that the manual was ultra vires (on the interpretation put forward by AMC NSW), it bears the onus of establishing that none of the subclauses of cl 17 permitted it to do what it did. There was no discussion of onus in the submissions, but I think that it falls within the general rule that "he who avers must prove" (expressed in the maxim ei incumbit probatio qui dicit, non quo negat: Digest xxxii 3, 2; and see The Glendarroch [1894] P 226 at 234 per Lopes CJ and at 231 per Lord Esher MR and Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 at 226-227 per Sheller JA, with whom Cripps JA agreed and with whom Handley JA agreed on this point). 17 There is evidence which suggests that the introduction of sub-master franchises is or might be advantageous to both AMC National and AMC NSW because the services offered by AMC National and AMC NSW would be improved if a sub-master franchise with local presence and knowledge were involved in the business (see T18-19 and paragraph 10.3 of Mr Kijurina's affidavit sworn 16 September 2010) and profitability would be improved: see pages 22-48 of exhibit GK3. Mr Coade agreed that the reference to "Regional Area Franchises" on page 22 of exhibit GK3 was a reference to sub-master franchises, but he asserted that the document was concerned with IFG and did not include AMC National. However, page 45 and the form of the document suggest otherwise, and I have doubts about the veracity of Mr Coade's assertion (I have previously expressed my views about Mr Coade's unreliability as a witness). It is not necessary to resolve the point because of the evidence of Mr Kijurina to which I have referred earlier and because of the way the argument developed. 18 Mr Ashhurst argued that it is not sufficient to establish that sub-master franchises are a "good idea" or would maintain profitability – what had to be established for the purposes of cl 17.3(c) and (d) was whether making it mandatory for AMC National to agree to sub-master franchises maintained efficiency and profitability or improved the quality of facilities and services. Quite apart from the reversal of onus involved (and the fact that AMC National still has the right to refuse to consent for the reasons specified in the MFA), I do not accept that submission. The question is: why did AMC National amend the manual? The answer, I think, is because AMC National accepted that sub-master franchises were a worthwhile additional tier and wanted to specify the fees that would be applicable if a sub-master franchise agreement were entered into, which fees AMC National believed would be appropriate (I have commented in my reasons of 21 July that I think an error was made by AMC National in the expression of the fees payable and see Exhibit 1, but that is not relevant to the present issue). The consequence of according recognition to sub-master franchises in this manner was that they became an acceptable type of franchise governed by the MFA. To look only at the question of whether there was a benefit to AMC National in being required to consent is too narrow a focus for a consideration of whether the purpose of the amendment met the requirements of cl 17.3(c) or (d). 19 As a separate and further point, AMC National has not discharged the burden of establishing that the anticipation of maintaining administrative efficiency and profitability and/or improving the quality of facilities and services offered by it, the master franchisees or the franchisees was not the purpose of the amendment. 20 Having reached this conclusion, I do not need to deal with two other arguments advanced by Mr Alexis. The first argument was that the ACT sub-master franchise agreement is a franchise agreement because it is in a form prepared by AMC National's lawyers and falls within the definition of "franchise agreement" in the MFA. The second argument was that because the 2009 manual was "issued" by AMC National, cl 17.3 of the MFA does not need to be satisfied. Conclusion 21 In my view, it follows that AMC National's refusal to consent to the ACT sub-master franchise was a breach of the MFA. 22 The defendants should pay the costs of these further proceedings, and the plaintiff should bring in Short Minutes of Order in respect of any ancillary orders required. ********** 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.