Supreme Court New South Wales Medium Neutral Citation: Jim's Group Pty Ltd v Quindar Pty Ltd [2014] NSWSC 647 Hearing dates: 21 May 2014 Decision date: 21 May 2014 Jurisdiction: Common Law Before: Beech-Jones J Decision: (1) The appeal be allowed. (2) The orders made by the Local Court on 19 June 2013 in proceedings number 108660/12 be set aside. (3) The matter be remitted to the Local Court to be determined in accordance with these reasons. (4) The defendant pay the plaintiff's costs of the proceedings in the Supreme Court. Catchwords: APPEAL FROM LOCAL COURT - franchise agreements - master franchise - business consists of right to sell franchises - right to compensation on termination of master franchise - whether amount of compensation includes sale proceeds of three franchises - set-off - whether Local Court can set-off judgment debt determined in separate proceedings against amount owing on claim it determines - notice of contention - relevance to appeal from Local Court restricted to question of law - scope of remittal. Legislation Cited: - Civil Procedure Act 2005 (NSW), s 3(1), s 21 - Contracts Review Act 1980 (NSW) - Law Reform (Law and Equity) Act 1972 (NSW), s 6 - Local Court Act 2007 (NSW), s 39 to s 41 - Primary Legislation (Statutes of Set-Off) (1729) 2 Geo II, c 22; (1735) 8 Geo II, c 24. Cases Cited: - Grant v Easton (1883) 13 QBD 302 - Ken Wolf Real Estate Pty Ltd v O'Halloran [2012] NSWSC 993 - Lahoud v Lahoud [2012] NSWSC 284 Texts Cited: - Rory Derham, Derham on the Law of Set-Off (Oxford University Press, 4th ed, 2010) Category: Principal judgment Parties: Jim's Group Pty Ltd (Plaintiff/Appellant) Quindar Pty Ltd (Defendant/Respondent) Representation: Counsel: N.A. Cotman SC, J.K. Meredith (Plaintiff/ Appellant) P.M. Barham (Defendant/Respondent) Solicitors: Harpreet Hayer (in house counsel for Plaintiff/Appellant) Somerville Legal (Defendant/Respondent) File Number(s): 2013/216313 EX tempore Judgment 1This is an appeal from a judgment of the Local Court upholding a claim by the plaintiff, Quindar Pty Ltd ("Quindar"), against Jim's Group Pty Ltd ("Jim's Group"). 2In the Local Court Quindar sought recovery of various amounts consequent upon the termination of its master franchise agreement with Jim's Group. The Presiding Magistrate awarded Quindar $119,182.06, which included interest. His Honour also ordered Jim's Group to pay Quindar's costs up to 17 August 2012, on an ordinary basis and on an indemnity basis thereafter. 3Jim's Group now appeals from his Honour's judgment. An appeal to this court from the Local Court is governed by s 39 to s 41 of the Local Court Act 2007 (NSW) which relevantly provide: 39 Appeals as of right (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court may appeal to the Supreme Court, but only on a question of law. ... 40 Appeals requiring leave (1) A party to proceedings before the Court sitting in its General Division who is dissatisfied with a judgment or order of the Court on a ground that involves a question of mixed law and fact may appeal to the Supreme Court but only by leave of the Supreme Court. ... 41 Determination of appeals (1) The Supreme Court may determine an appeal made under section 39 (1) or 40: (a) by varying the terms of the judgment or order, or (b) by setting aside the judgment or order, or (c) by setting aside the judgment or order and remitting the matter to the Local Court for determination in accordance with the Supreme Court's directions, or (d) by dismissing the appeal. ..." 4Jim's Group did not seek leave to appeal on a mixed question of fact and law. If follows that the scope and subject matter of this appeal is restricted to questions of law. 5Quindar also filed a notice of contention seeking to uphold the judgment in its favour on a different basis to that decided by the Presiding Magistrate. I will return to address its notice of contention later in this judgment. Background 6The following facts are taken from his Honour's judgment. 7Throughout the relevant period Jim's Group managed a franchising system which was said to be worldwide in its operations. Under this system it appoints a series of divisional franchisors. A divisional franchisor, in turn, locates regional franchisors in respect of regions in their division. These regional franchisors are described as master franchisees. 8Master franchisees do not enter into agreements with divisional franchisors. Instead they execute agreements with Jim's Group which are entitled, not surprisingly, master franchise agreements. In turn a regional franchisor, that is a master franchisee, can appoint franchisees for areas within their region. They can also appoint their own master franchisees to sub-regions within their region. Generally it is envisaged that franchisees appointed by master franchisees will conduct a business under the name "Jim's Antennas" and which involve the supply, installation and servicing of antennas for residential and commercial premises (an "antenna business"). 9In May 2003, Quindar entered into a master franchise agreement with Jim's Group (the "Master Franchise Agreement"). It was appointed the regional franchisor, that is, the master franchisee, in respect of a region which, broadly, can be described as the Central Coast of New South Wales. 10Pursuant to the Master Franchise Agreement, Quindar was obliged to pay a purchase price to Jim's Group. The relevant amount was paid. 11Between 2003 and 2006 Quindar "sold", that is appointed, two franchisees within its region. To that end, franchise agreements were entered into between those two franchisees, Jim's Group and Quindar. Those franchisees operated an antenna business in the Charmhaven and Saratoga areas of the Central Coast. It also appears that Quindar operated its own antenna business in other parts of the Central Coast during this time. 12At some point in either late 2005 or early 2006, Quindar experienced difficulty in making royalty payments to Jim's Group. According to his Honour, in March 2006 Jim's Group "sent a termination notice under" the Master Franchise Agreement to Quindar. The basis of the termination was the failure of Quindar to make those royalty payments. The validity of the termination was not disputed in the proceedings in the Local Court. 13Before his Honour there was some dispute as to what took place in the Central Coast region in the period after Quindar's appointment as master franchisee was terminated. Jim's Group claimed that it only appointed the divisional franchisor, Digital Broadband TV Installations Pty Ltd ("Digital Broadband"), as "caretaker" for the region. It asserted that the caretaker role involved it performing the functions of the regional franchisor, but not somehow acquiring the regional franchise itself. Jim's Group further asserted that from around September 2006, the regional franchisor from the Newcastle region became the caretaker for the Central Coast region. 14In any event, his Honour found that on 1 October 2011, the regional franchisor for Newcastle had its region extended to include the Central Coast region previously serviced by Quindar. For that extension, it paid $10,000, exclusive of GST. 15In the meantime, three transactions of potential significance occurred. On 15 December 2006, 7 August 2010 and 15 December 2010 respectively, Jim's Group entered into agreements for three individuals to operate franchise businesses, that is, antenna businesses, at Terrigal, Wyong and Woy Woy (the "Terrigal franchise", the "Wyong franchise" and the "Woy Woy franchise"). The purchase price for the Terrigal franchise was $24,545, exclusive of GST. The purchase price for each of the Wyong and Woy Woy franchises was $39,000, inclusive of GST. 16The agreements for the "sale" of these franchises were in identical form to those franchise agreements that Quindar and Jim's Group had executed in respect of the two franchisees that Quindar had appointed in the period that it operated as master franchisee. However, with these franchise agreements, the parties were the new franchisee, Jim's Group and Digital Broadband. Digital Broadband was described in each agreement as the relevant regional branch franchisor. Thus, it appears, for a period it had a dual capacity in the franchise structure. The Local Court judgment 17In the Local Court the principal claim made by Quindar was for recovery of an amount it said was owing to it as a consequence of the termination of the Master Franchise Agreement. As I will explain, clause 6.5 of the Master Franchise Agreement provides a mechanism for a dismissed master franchisee, who was paid at least 80 percent of the purchase price for their master franchise, to receive an amount on the termination of their appointment. The relevant clause is somewhat unclear, but on any view two amounts relevant to its calculation of the amount to be paid, are the "fair market price" of the master franchise and the proceeds of any re-sale of the master franchise. 18In relation to the former, a court appointed expert, Mr Gower, provided a report and gave oral evidence before his Honour. Mr Gower had purported to determine the value of Quindar's master franchise as at the date of the termination of Quindar's appointment and then again as at the date it was acquired by the regional franchisor from Newcastle, namely 1 October 2011. 19Ultimately, it seems that Quindar pitched its case by arguing that it was entitled to an amount representing 80 percent of the proceeds of the sale of three franchises already noted, that is, the Terrigal franchise, the Wyong franchise and the Woy Woy franchise, together with an amount representing the "fair market price" of the rights transferred on 1 October 2011. In relation to the latter, Quindar contended that the amount paid by the regional franchisor for Newcastle, namely $10,000 exclusive of GST, did not represent a fair market price. 20His Honour appears to have accepted this part of Quindar's case. The relevant parts of his Honour's reasons were as follows: "In my opinion clause 6.5 of the agreement applies in the following way. Upon termination of the appointment of the master franchisee, the master franchise, being the rights that the master franchisee has under the agreement, were either to be sold to another party or re-purchased by the national franchisor at a "fair market price." In my opinion the phrase "a fair market price" governs both the re-purchase or a sale." His Honour continued: "In my opinion clause 6.5 of the agreement provides that a master franchisee such as the plaintiff who, as at the date of termination, has paid at least eighty percent of the purchase price will receive a payment by way of either a percentage of the sale or repurchase price. In my opinion, the plaintiff is entitled to 80 percent of the sale proceeds of the sales of the Terrigal, Wyong and Woy Woy franchises. ... In my opinion, the sales of the Terrigal, Wyong and Woy Woy franchises by the defendant were caught by the terms of cl 6.5 and there ought to have been an accounting to the plaintiff of eighty percent of the purchase prices. ... In relation to the sale of the balance of the Central Coast region, in my opinion the evidence of Mr Gower established that, for the reasons he gave in evidence, arriving at a fair market price for the sale of the balance of the Central Coast region as at the date of that sale was a particularly difficult exercise. In my opinion, when one when has regard to his evidence, and the evidence concerning what occurred after termination, the fair market price for the sale of the balance of the Central Coast region would have been at the very bottom of his range given for a sale that occurred on 1 October 2011; that figure [is] $20,000. ... The plaintiff is entitled to recover eighty percent of the fair market price, being $15,000." (emphasis added) 21On the appeal Counsel for Quindar, Mr Barham, submitted that the figure of $15,000 referred to at the end of this passage was a slip. By reference to the paragraph that preceded it, he contended his Honour meant to utilise the figure of $20,000 as the appropriate value for the "balance of the Central Coast". Senior Counsel for Jim's Group, Mr Cotman SC, did not argue to the contrary. 22The remaining issue for his Honour's determination concerned a question of set-off. Jim's Group accepted that it owed Quindar $3,908.54, referable to certain royalty payments that had been paid by franchisees within the Central Coast region. In turn, Quindar accepted that it owed Jim's Group $6,846.37. 23Jim's Group further asserted that it was entitled to a set-off in the amount of $10,368.02, together with an amount of interest, being an amount said to be owing pursuant to a judgment that had been obtained in its favour against Quindar in the Magistrate's Court of Victoria (the "Victorian judgment debt"). 24His Honour did not reduce the judgment in favour of Quindar on account of the Victorian judgment debt. It is unnecessary to set out his Honour's reasons verbatim. It suffices to state that his Honour concluded that any power to order set-off could only be exercised by a court "with inherent jurisdiction". His Honour found that the Local Court had no such "inherent jurisdiction" but, even if it did, his Honour stated that, as a matter of discretion, it would not be exercised. Awarding 80 percent of the sale proceeds of the three franchises 25Grounds A, 1 to 4 and 7A to 7B of Jim's Group's amended summons in this Court contend that his Honour erred in law in awarding Quindar an amount for the forfeiture of its master franchise that included 80 percent of the purchase price of the Terrigal franchise, the Wyong franchise and the Woy Woy franchise. 26Jim's Group did not challenge so much of his Honour's finding that awarded Quindar an amount consequential on the termination of its master franchise that was determined by reference to a fair market price for the sale of the Central Coast region on 1 October 2011, found by his Honour to be $20,000. 27To address these grounds, it is first necessary to refer to the provisions of the Master Franchise Agreement in some detail. As I have stated, the Master Franchise Agreement was entered into between Jim's Group and Quindar. The recitals referred to Jim's Group as the "National Franchisor" and stated that it had "developed certain methods, computer software and systems for the conduct of the business of selling and servicing franchises under the Jim's name (the Business) and in connection with the Business has developed reputation throughout Australia in certain trade marks". 28The recitals further stated that Quindar, as master franchisee "wishes to be able to conduct the Business in the Region and to grant franchises to Franchisees". At the risk of stating the obvious, the "Business" that Quindar is recited as wishing to conduct is the business of "selling and servicing franchises under the Jim's name". 29Clause 1 of the Master Franchise Agreement was entitled "Appointment". Clause 1.1 recorded the grant by the National Franchisor to the Master Franchisee of, inter alia, "an exclusive right to sell the Jim's Franchises as described in Schedule 1 and to advertise for new clients in the Region". The reference to "Jim's franchises" as described in schedule 1, is a reference to the "[g]ranting of Franchises for Antenna Installation & Services". Clause 1.2 recorded a further grant to the master franchisee of "an exclusive right to sell further Sub-Regions within the Region" within the region granted to it. 30Clauses 2 and 3 describe the respective obligations of the National Franchisor and the Master Franchisee respectively. Clause 3(h) is of potential significance. It obliged the master franchisee to devote their sole attention and endeavours "to this Franchise", but added "however, the master franchisee may operate a franchise of the same nature within his region". The reference to the "Franchise" at the start of this sub-clause appears to be a reference to conducting a "Business" of the kind referred to in the recitals. The balance of the sub-clause appears to grant a permission to the master franchisee to conduct the business of installing antennas within their region, this being in addition to its conduct of the "Business" of selling franchises. In the case of Quindar, it was common ground that, to some extent, it engaged in such a business, ie an antenna business, within the Central Coast region between 2003 and 2006. 31Under clause 5 of the Master Franchisee Agreement, the master franchisee covenanted to pay certain royalties to the National Franchisor. They include certain minimum monthly fees, twenty percent of the gross sale price of a franchise, and twenty percent of the gross sale price from a sub-region of a master franchise. There is also provision for the payment of certain amounts received from the pursuit of any antenna business that the master franchisee conducts in their own right. 32Clause 6 is entitled "Withdrawal of Grant". Clause 6.1 enabled the grant of a master franchise to be "withdrawn" by the National Franchisor upon two weeks written notice in a number of circumstances, including if the master franchisee remained in breach of the Master Franchise Agreement after being given fourteen days written notice of the breach. It appears that it was this power that was exercised by Jim's Group when it terminated Quindar's appointment in March 2006. 33Clauses 6.2 and 6.3 specified further circumstances in which the grant of a master franchise was either terminated or withdrawn. 34Clause 6.5 is of particular importance. It stated: "Upon the termination of the appointment of the Master Franchise: (a) The Master Franchise will be sold to another party (note: it must be sold to a Purchaser acceptable to the National Franchisee business operator as an effective business operator) or re-purchased by the National Franchisor at a fair market price provided that the initial purchase price for the Master Franchise has been fully paid for by the Master Franchisee or in the case where the Master Franchise is being purchased on terms by the Master Franchisee, where at least 80% of the purchase price has been fully paid by the Master Franchisee at the date of termination; (b) For the purposes of this clause, the term 'fair market price' means: a price to be agreed upon by the parties and in the event that agreement cannot be reached, then it shall be either determined by way of Mediation as per the Franchising Code or alternatively, by way of arbitration pursuant to the Commercial Arbitration Act or both, if agreed; (c) In the event of sale or re-purchase as set out in Clause 6.5(a) then 80% of the net proceedings of sale of the Master Franchise shall be paid to the Master Franchisee in the same manner as provided for in all sales. This clause does not apply for physical items such as plant and equipment, hardware and stock where 100% will apply if a sale or re-purchase is applicable to the physical items; (d) The Master Franchise will be forthwith re-taken by the National Franchisor without payment to the Master Franchisee where the Master Franchisee is purchasing the Master Franchise upon terms and at the date of termination the Master Franchisee has not paid for at least 80% of the purchase price set out in the Franchise Agreement. Upon re-taking the Master Franchise the National Franchisor will grant a credit to the Master Franchisee of the payments made by the Master Franchisee (towards the purchase price) against and in full payment of any moneys outstanding to the National Franchisor by the Master Franchisee, such credit to be limited only to outstanding moneys owed by the Maser Franchisee to the National Franchisor; (e) The rights, benefits and subsequent burdens arising under the Franchise Agreements created by the Master Franchisee during the term of the Master Franchise pursuant to the Master Franchise Agreement SHALL upon termination vest with the National Franchisor or its nominated incoming Master Franchisee. Until the rights, benefits and subsequent burdens have vested with the National Franchisor, the Master Franchisee shall hold those rights and benefits on Trust for the benefit of the National Franchisor. Once the rights and benefits have vested with the National Franchisor, the National Franchisor shall thereafter indemnify the Master Franchise from and against any liabilities and obligations arising from and after termination of the Master Franchise other than and to the extent arising from or as a result of breach of this Agreement by the Master Franchisee; (f) It is specifically recognised that, in case of termination, all goodwill reverts to the National Franchisor. The Master Franchisee must not sell, mortgage or in any other way jeopardise the rights of the National Franchisor to this goodwill. The Master Franchisee will compensate the National Franchisor for any loss of money as a result of failure to comply with this Clause 6." (emphasis added) 35Thus, clause 6.5 provided a mechanism by which a former master franchisee was able to obtain some recompense after the termination of their master franchise. 36Three points should be noted about this mechanism. First, clause 6.5(a) mandated that, after termination, the master franchise would either be re-sold to a third party or "re-purchased" by the National Franchisor. In the case of a "re-purchase", it appears to be some form of notional sale in that sub-clauses 6.5(e) and (f) appear to effect an automatic re-vesting of all the possible rights and interests of the master franchisee that might otherwise subsist after the termination of their master franchise. 37Second, before his Honour there was some dispute about whether the phrase "fair market price" in clause 6.5(a) qualified both a re-acquisition and a sale to a third party. His Honour found that it did. This aspect of his Honour's judgment was not challenged on appeal. 38Third, Jim's Group did not contend before his Honour, or before this Court, that Quindar's claim should fail because it did not invoke the mechanism for fixing a price stipulated in sub-clause 6.5(b). If this matter is to be re-litigated, Jim's Group should be held to that position. 39Thus, the overall operation of clause 6.5 was that, upon the termination of the appointment of a master franchisee who is paid more than 80 percent of the original purchase price, the master franchise must either be sold to a third party or will otherwise be taken to have been re-purchased by the National Franchisor. Any such sale to a third party or notional re-purchase must be for "a fair market price". Pursuant to clause 6.5(c), the outgoing master franchisee is entitled to eighty percent of that amount. 40There are some nuances with so much of this clause that involve a notional '"re-purchase" by the National Franchisor. However, it is unnecessary to dwell on them in this case because Quindar's case, as upheld by his Honour, was that what had occurred via the sale of the three franchises between 2006 and 2010, and the acquisition of the Central Coast region in October 2011 by the Newcastle regional franchisor, was a piecemeal "sale of the Master Franchise" for the purposes of sub-clauses 6.5(a) and 6.5(c). 41As I have stated, Jim's Group attacked that aspect of his Honour's judgment. Although much was written on the topic, the essence of Jim's Group's complaints, as stated by Mr Cotman SC, were two-fold. First, Mr Cotman SC contended that his Honour erred in law in concluding that the sale of the three franchises between 2006 and 2010 were "caught by the terms of cl[ause] 6.5" (see [20]). 42Second, he submitted that his Honour erred in law in his treatment of Mr Gower's evidence in that, contrary to the passage that I have set out from his Honour's judgment, Mr Gower's evidence of the valuation of the Central Coast region was not a valuation of the "balance of the [Central Coast] region" excluding the three franchises that had been sold between 2006 and 2010, but was instead a valuation that embraced those three sales. 43There is no doubt that the first point raises a question of law. It concerns the proper construction of the Master Franchise Agreement and, in particular, whether on its proper construction the three franchise sales undertaken between 2006 and 2010 constitute a partial "sale of the Master Franchise" within the meaning of subclause 6.5(c). 44The agreements recording those franchise sales were before his Honour and before this Court. Those agreements simply record a grant to the franchisees of the right to operate a franchise business, namely a business of supplying, installing and servicing antennas. None of the franchisees acquired any rights to licence or grant any further sub-franchisees. 45The phrase "Master Franchise" in sub-clauses 6.5(a) and (c) is not defined. Mr Cotman SC contended that it reflected the right to conduct the business of selling franchises and servicing them. Thus he submitted that a sale of the master franchise is a sale of that business or at least part of that business, that is, a sale of the sales rights. Mr Cotman SC further submitted that the grant of a new franchise to operate an antenna business is not the sale of the right to grant franchises of that kind. To this point I agree. The grant of a new franchise to supply and install antennas clearly does not constitute the sale or even the transfer of any right that was conferred on Quindar pursuant to clause 1 of the Master Franchise Agreement. 46However, Mr Barham submitted that clause 1 did not exhaust the description of his client's rights under the Master Franchise Agreement. He contended that those rights included the permission conferred by sub-clause 3(h) to "operate a franchise of the same nature" within the region. Mr Barham pointed to other clauses which contemplated the master franchisee operating the business of not just selling franchises to install antennas, but also operating an antenna business. Thus he ultimately contended that the sale of the three franchises constituted a partial sale of the rights under the Master Franchise Agreement previously enjoyed by his client, and that that was sufficient to invoke sub-clauses 6.5(a) and 6.5(c). 47Of course, none of this reasoning was stated by his Honour. However, this debate concerns a matter of law being a question as to the proper construction of the Master Franchise Agreement. If I was to ultimately accept Mr Barham's argument then, notwithstanding an apparent lacuna in his Honour's reasons in this regard, I would reject these grounds of appeal. However, I do not accept Mr Barham's argument. 48At its highest, sub-clause 3(h) of the Master Franchise Agreement merely grants the master franchisee a permission to conduct an antenna business in the region, presumably by using the trademarks and the like of Jim's Group. The conferral of that permission is clearly an adjunct to the master franchisee's appointment as master franchisee. 49I accept that the phrase "sale of the Master Franchise" in sub-clause 6.5(c) is capable of embracing partial sales of some of the rights conferred on a master franchisee by the Master Franchise Agreement. However, I do not accept that it includes a sale of any right which might happen to be conferred on a master franchisee by the Master Franchise Agreement. 50The concepts of Master Franchisee and Master Franchise take their meaning from the definition of the "Business" in the recitals and the rights conferred by clause 1 which reflects the definition of the Business. It is those rights which there must be a sale of to invoke sub-clauses 6.5(c) and 6.5(a). In my view, the disposition of other rights which are merely incidental, such as the mere permission conferred by sub-clause 6.3(h), is not embraced by sub-clauses 6.5(a) and 6.5(c). To hold otherwise would be inconsistent with the overall structure of the franchise arrangements put in place by Jim's Group. 51It follows that I consider that his Honour erred in law in concluding that the sale of the three franchises between 2006 and 2010 was "caught" by the terms of sub-clause 6.5. 52In light of this conclusion, it is not necessary at this point to address Mr Cotman SC's further submission in relation to his Honour's treatment of Mr Gower's evidence. For the sake of completeness, I will note some matters concerning it. In his evidence, Mr Gower rejected the suggestion that was put to him that the sale of the three franchises between 2006 and 2010 represented a partial sale of the master franchise previously owned by Quindar. To that extent, his evidence was premised on a construction of the Master Franchise Agreement that I have found to be correct. In any event, Mr Gower considered that the sale of the three franchises had enhanced the value of the master franchise because they supported the receipt by the master franchisee of an increased royalty stream. It was for that reason that Mr Gower ultimately proffered a high value for the master franchise as at October 2011 when compared with the position as at March 2006. 53Hence one can see there is some force in Mr Cotman SC's submission that it was incongruent for his Honour to both accept Mr Gower's evidence of a value of the Central Coast region as at October 2011, and then add further amounts representing the sale proceeds of the three franchises that had occurred in the years prior to that date. 54However, ultimately this complaint runs with the point I have already determined. If, as a matter of construction, the sale of the three franchises did constitute a partial sale of the master franchise as contended for by Quindar, then it would have been entitled to eighty per cent of the proceeds of those sales pursuant to sub-clause 6.5(c), regardless of Mr Gower's views. In that event, Mr Gower's evidence would have been flawed in that it would have proceeded on an incorrect construction of the Master Franchise Agreement. In effect, he would have been undervaluing the nature of the rights that were conferred by that agreement. 55However, as the construction that I have found was one which accords with the basis upon which Mr Gower valued the relevant businesses, it is unnecessary to consider this further. 56It follows from the findings that I have made that I will uphold grounds A, 1, 2, 7A and 7B of Jim's Group's amended summons. Those grounds all reflect Mr Cotman SC's submissions as to the proper construction of clause 6.5. It also follows from my previous observations that I reject grounds 3 and 4. Those grounds all appeared to relate to the interaction between sub-clauses 6.5(a) and 6.5(e) and (f). 57In addition, ground 2 contends that his Honour erred "in not finding that the fair value of the master franchise for the plaintiff was no more than the sum of $25,000". 58As formulated, this ground requires that I reach a concluded view as to what was the "fair market price" for the master franchise. This ground is interrelated to the question of what relief I would grant as a consequence of Jim's Group success on the grounds that I have upheld. I will return to that topic shortly. Set-off 59Grounds 5, 5A and 6 of Jim's Group's amended summons complain of errors of law on the part of his Honour in relation to the finding that the Victorian judgment debt should not be set off against any judgment that was entered in favour of Quindar. 60A significant part of Jim's Group's written submissions was devoted to a discussion of the doctrine of equitable set-off, and whether s 6 of the Law Reform (Law and Equity) Act 1972 (NSW) enabled the Local Court to apply that doctrine. However, Mr Barham submitted that equitable set-off had no role to play in this context at all. He contended that this case involves an attempt to set off a judgment debt against a monetary liability. He submitted that the relevant jurisdiction, including that of the Local Court, is that posed in a Court to control its own processes of enforcement of judgments, rather than a jurisdiction to diminish the amount of judgments themselves. 61In support of that contention, Mr Barham cited the following passage from Derham on the Law of Set-Off (Rory Derham, Derham on the Law of Set-Off (Oxford University Press, 4th ed, 2010)) at 2.103 to 2.104, which was cited by Ward J (as her Honour then was) in Lahoud v Lahoud [2012] NSWSC 284 at [75], namely: "In the first place, equitable set-off is an action to enforce payment of a debt or other monetary obligation, the defence operating in equity as a complete or partial defeasance of the plaintiff's claim. A set-off of judgments and orders on the other hand is not a defence in that sense. Essentially, it is a procedural device which determines the amount for which execution may issue, and which may provide a ground for a stay of enforcement. Secondly, the practice of setting off judgments and orders was developed in the common law courts (as opposed to courts of equity), long before the Judicature Acts. It is true that the availability of the set-off has been described as an 'equitable' jurisdiction. However, that expression was used in the sense of justness and fairness as opposed to the jurisdiction of the Court of Chancery. The true basis of the set-off is the Court's inherent jurisdiction. Its purpose is to prevent absurdity or injustice to do that which is fair. It has long been accepted that the inherent jurisdiction is confined to judgments in the same action, or the same court without it being suggested that the claim nevertheless must be closely connected as for an equitable set-off." (emphasis added) 62It can be seen that the form of set-off exercised by the "common law courts" as referred to in this passage, is confined to a judgment in the same action or in the same court. Thus, as the author states, it is essentially a procedural device that avoids absurdity or injustice. It was for that reason that this passage was discussed in Lahoud because it was discussing the treatment of various orders for costs that had been made in the one proceeding. 63However, the above passage is not intended to be exhaustive of a Court's powers, including those of the Local Court, in considering a claim for set-off. In a different part of the same text, the learned author states (at [2.91]): "A judgment for payment of a sum of money gives rise to a debt, and there is a longstanding authority for the proposition that it may form the basis of a defence of set-off under the Statutes to an action by the judgment creditor for payment of a separate debt owing to him or her by the judgment creditor. The case would be one of mutual debts for the purpose of the Statutes." (citations omitted) 64The reference to the "Statutes" in this passage is to the United Kingdom Statutes of Set-Off enacted in 1729 and 1735 ((1729) 2 Geo II, c 22; (1735) 8 Geo II, c 24). At [2.64] of his text and following, the learned author traces the history of their application in New South Wales. That history leads to the current equivalent of the United Kingdom "Statutes", namely s 21 of the Civil Procedure Act 2005 (NSW) ("CPA") which provides: "21 Defendant's right to set-off (1) If there are mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant and that was due and payable at the time the defence of set-off was filed, whether or not the mutual debts are different in nature. (2) This section extends to civil proceedings in which one or more of the mutual debts is owed by or to a deceased person who is represented by a legal personal representative. (3) This section does not apply to the extent to which the plaintiff and defendant have agreed that debts (whether generally or as to specific debts) may not be set off against each other. (4) This section does not affect any other rights or obligations of a debtor or creditor in respect of mutual debts, whether arising in equity or otherwise. (5) This section is subject to section 120 of the Industrial Relations Act 1996. (6) In this section, debt means any liquidated claim." (emphasis in original) 65Mr Barham contended that this section could not be invoked in this case because the Victorian judgment debt did not answer the definition of "debt" in s 21(6). His written submissions accepted that "liquidated claim" was not defined but he sought to invoke the definition of "claim for relief" in s 3(1) of the CPA. He noted that one part of that definition provides that such a claim must be one which is "justiciable in the Court". He contended that the Victorian judgment debt was not justiciable in the Local Court. 66I do not consider that his attempt to invoke a definition of a different phrase advances the matter. Instead, the position was succinctly stated in Grant v Easton (1883) 13 QBD 302 at 303, namely that "[a]n action on a judgment has been treated as an action on debt". Otherwise I note that in this case the relevant debts were clearly "mutual" in that they are between the same parties. 67In my view, it follows that s 21 of the CPA conferred on Jim's Group an entitlement to set off the Victorian judgment debt against the amount it was said to owe Quindar. Of course, if such a set-off was effected, that would amount to a satisfaction of the Victorian judgment debt. 68It further follows that I consider that his Honour erred in law in denying that the Local Court had the power to allow a set-off, and in purporting to decline or exercise any discretion to allow a set-off. No question of discretion was involved. Instead, Jim's Group was entitled to set-off the Victorian judgment debt pursuant to s 21 of the CPA. 69The findings that I have made have the result that grounds 5 and 5A of Jim's Group's amended summons must also be upheld. 70Ground 6 contends that his Honour erred in law because of some alleged insufficiency in his Honour's reasons. In my view, his Honour's judgment sufficiently expressed the reasons that enabled his Honour to come to the conclusion that he did. This is illustrated by the fact that this Court has been able to consider the legal correctness of what his Honour found. I reject ground 6. Notice of Contention and Relief 71Quindar filed a notice of contention seeking to uphold so much of his Honour's judgment as attributed a fair market price to the master franchise that was forfeited by it upon the termination notice issued by Jim's Group. All of the various contentions that it sought to raise were exclusively factual in nature. 72I addressed the question of notices of contention in appeals from the Local Court restricted to errors of law in Ken Wolf Real Estate Pty Ltd v O'Halloran [2012] NSWSC 993 at [53] to [54] ("Ken Wolf"): "53. On an appeal under s 39(1) of the Local Court Act, the issues raised by a notice of contention will only arise for consideration at a point where either an erroneous decision by the Local Court on a question of law or, if leave has been granted, on a question of mixed law and fact has been established and the question arises as to what relief, if any, should be granted under s 41. If the notice of contention raises a pure question of law which is determinative of the case and is resolved in favour of the respondent to the appeal, then the appeal should be dismissed. If it only raises a question of fact determined adversely to the respondent by the Local Court then, consistent with the above authorities, it should not be entertained. If it raises a question of mixed fact and law then the same consideration that attends a grant of leave to an appellant under s 40(1) would attend the Court in considering the exercise of its discretion to grant relief and the form of that relief pursuant to s 41. 54. One matter raised by the notice of contention was a defence under the Contracts Review Act. Mr Duggan invited this Court to determine it de novo or at least as an appeal by way of rehearing. As this defence requires findings of fact, this is an invitation that must be rejected. However, if the plaintiff had succeeded on its construction argument, the fact that there was a defence that raised questions of fact that was not resolved by the Local Court would be a matter requiring the remittal to that court of at least so much of the matter as involved that issue rather than entering a verdict for the plaintiff." 73As best as I can ascertain, some of the contentions raised in Quindar's notice of contention were expressly rejected by his Honour. However, not all of them were. Without describing them in detail, it appears that a number of them appear to assert various independent bases for assessing the fair market price of Quindar's Master Franchise. These bases appear to have been agitated before his Honour, but his Honour did not expressly address them. For the reasons stated in the above passage from Ken Wolf, the relevance of that observation concerns the question of what consequential relief should be ordered as a result of Jim's Group's success on the appeal. In the end result, as there are aspects of Quindar's case concerning fair market price which remain to be determined, then it follows that the matter will have to be remitted to the Local Court. 74For the sake of clarity, I make it clear that upon remittal, the question of the set-off has now been resolved in favour of Jim's Group, and cannot be re-agitated. However, the question of fair market price of Quindar's master franchise can be re-litigated. At some early point, Quindar will need to identify with precision how it pitches its case in that regard. It will have to do so in a manner that does not invite the Local Court to depart from the reasons of this Court. 75Accordingly, the Court orders that: (1)The appeal be allowed. (2)The orders made by the Local Court on 19 June 2013 in proceedings number 108660/12 be set aside. (3)The matter be remitted to the Local Court to be determined in accordance with these reasons. [The parties addressed on costs and the scope of remittal.] Costs and remittal 76Subsequent to my giving judgment, two matters have arisen. The first was raised by Mr Cotman SC in an understandable effort to clarify the basis of a remittal to the Local Court. Mr Cotman SC queried whether the effect of my reasons was to, in effect, allow Quindar open slather to reformulate its claim for fair market price on a basis that included those identified in its notice of contention. As I understand it, this concern arose because it is not accepted by Jim's Group that it was within the scope of the pleading, or particulars, for Quindar to argue its case on the basis identified in that notice. 77The difficulty is that it is clear that, at least in submissions in the Local Court, Quindar did articulate a case concerning fair market price invoking the various points raised in the notice of contention. It does not appear that any objection was taken to that as being outside the pleadings or particulars. 78Generally, I am not in a position to judge whether such a case does fall within Quindar's case as pleaded or particularised. The simple fact is that a basis was articulated and appears not to have been addressed. 79Upon remittal to the Local Court, it will be a matter for that court whether to allow Quindar to pursue a case based on fair market price that relies upon the points raised in the notice of contention or, indeed, on any other basis. 80As I foreshadowed in the judgment, at some point Quindar will need to clearly articulate what its case is. To the extent that any case it articulates falls outside the pleaded or particularised case, it will no doubt seek leave. It will be a matter for the Local Court to determine whether any such leave should be granted. 81The remaining issue concerns the question of costs. Apparently there have been various offers. As is often the case with Local Court appeals, there is a difficulty with drafting offers where one of the potential outcomes is a remittal to the Local Court. 82Junior Counsel for Jim's Group, Mr Meredith, accepted that, given that the matter will be remitted, an assessment of whether his client may or may not have exceeded any offer of compromise it made to Quindar can only be determined when the final outcome is known. 83For that reason, I make it clear that the costs of the proceedings in the Local Court to date will be a matter for that court when it hears the balance of the proceedings. 84The present question concerns the costs of this appeal. Mr Barham submitted that the point of construction upon which Jim's Group ultimately succeeded was either not taken, or not taken with sufficient clarity, before the Local Court. He also submitted, perhaps more faintly, that it was only really articulated by Mr Cotman SC in oral submissions this morning. As to that latter contention, I reject it. If one reads the written submissions of Jim's Group before this Court quite closely, especially the submissions in reply, they are ultimately directed to the proposition that his Honour erred in law in concluding that the sale of the three franchise agreements fell within clause 6.5 of the Master Franchise Agreement. 85As for the proposition that this point was not properly taken, or at least not taken with sufficient clarity before the Local Court, I have been referred to various parts of the transcript of the oral argument in the Local Court. It seems that Quindar only put its case by reference to the sale of the three franchises quite late. In particular, it sent a letter to Jim's Group just prior to the hearing advising that it would rely on those sales and seek recovery of eighty percent of their net proceeds. That claim was opened on, and was then the subject of final submissions on its behalf. 86It does not appear that at any point there was an attempt to drill down to the terms of clause 6.5 and examine whether it embraced the proceeds of the sale of the three franchises. 87In the submissions made on behalf of Jim's Group, there was a reference to Mr Gower's evidence on this topic and a submission made rejecting the contention that the relevant parts of the Master Franchise Agreement included the three franchise sales in question. Again, it does not appear that the submissions descended to the precise words of the clause. 88While I mean no criticism of counsel who appeared, it does appear that his Honour perhaps did not receive a great deal of assistance in construing clause 6.5, at least so far as the three franchise agreements were relied on. That said, there was a clear joinder of issue on that question by the parties before his Honour. 89In a case that has a commercial context, the parties must ultimately abide the ultimate success of the way they framed their case. In circumstances where neither party took his Honour to the precise words upon which the success of the point depended, they have to simply accept that the costs will abide the ultimate decision on the correctness of the point. 90For that reason I think that Jim's Group is entitled to have its costs of the appeal. It otherwise succeeded on the set-off point. 91It is the case that there was a small measure of success for Quindar on the issue of the notice of contention, but that was only of relevance to the question of what relief should be granted. 92Accordingly, I order Quindar to pay Jim's Group's costs of these proceedings. ********** 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. Decision last updated: 27 May 2014