COURT OF APPEAL
CA 40924/99
CA 40325/00
EQ 50258/96
SHELLER JA
BEAZLEY JA
STEIN JA
Thursday, 21 June 2001
The appellant was the franchisor of the second largest fast food chain in the world. The respondent was the largest franchisee in Australia and for many years had been the sole franchisee. The respondent used its own name Hungry Jack’s for its franchised stores rather than the Burger King brand name. The franchise agreements were for a term of 15 years (although the term of the later franchise agreements was 20 years) with provision for one renewal of the same term.
In 1990, after several years of disputes the parties entered into four agreements, the Settlement Agreement, the Development Agreement, the Service Agreement and the Registered User’s Agreement, which, together with the individual franchise agreements in respect of each of the respondent’s Hungry Jack’s stores, governed the contractual relationship of the parties, including the respondent’s development rights in Australia.
Under the Development Agreement the respondent had an unrestricted, non-exclusive right to develop throughout Australia and was required to develop a total of at least four restaurants per year in Western Australia, South Australia and Queensland. Its development rights in those states were protected from competition by a non-encroachment clause. The term of the Development Agreement was five years with provision for three renewals for the same term. There was a provision for termination for breach, and a provision that a 30 day notice was required to be given in respect of any breach capable of cure.
From at least 1993, the appellant determined to take a more active role in the Australian market, including buying out the respondent or making it the minority party in some form of joint venture arrangement. It also had discussions with other parties with the same intent, namely, of reducing the respondent’s role in the Australian market.
During 1994, the parties entered into discussions with the Shell Oil Company Australia about the feasibility of establishing outlets in Shell service stations under the brand name Hungry Jack’s. Initially, a test site agreement was proposed to assess the viability of a long term venture. Two test sites were in fact opened. The initial discussions were conducted on the basis that, if the test sites were successful, the parties would enter into a long term tripartite venture. However, during the course of these discussions, the appellant commenced to deal with Shell separately. Months after having decided to proceed with Shell without the respondent, the appellant informed the respondent of the position. During that intervening period, the respondent had spent time and considerable moneys in advancing the proposed tripartite venture.
There were also continuing disputes between the parties and these developed and intensified from at least 1993 onwards. From the end of March 1995, Jim Montgomery, the respondent’s National Development Manager, began communicating directly with the appellant, providing information, advice and recommendations in breach of his fiduciary duty to the respondent. The appellant utilised Montgomery’s assistance for its benefit to the detriment of the respondent up until after the proceedings were commenced.
In 1995, the appellant took three significant steps which seriously impeded the respondent’s ability to develop: it advised that it would not approve any further recruitment of third party franchisees; and it withdrew both financial and operational approval.
From 1992 through to 1996, a number of franchise agreements expired or were due to expire. Stores in this category were called “successor stores”. The appellant did not offer new franchise agreements for a further term in accordance with the original franchise agreement, but required the respondent to enter into a series of agreements extending the term of the original franchise agreement until the respondent agreed to and completed works which the appellant demanded were necessary to bring the restaurants up to its standard. The extension agreements were not authorised by the terms of the franchise agreements. There were significant disputes between the parties about the scope of work being required by the appellant. Montgomery, the person responsible within HJPL for successor stores, had provided information and offered advice to the appellant in relation to these issues. From 1 January 1996, the appellant varied the form of extension agreement so as to provide that there would be no further extensions except at its discretion. It also began to threaten closure of the stores unless the works were carried out and completed within increasingly shorter time frames.
On 18 November 1996, the appellant served two Notices of Termination of the Development Agreement (the Shorter Notice and the Longer Notice). The Shorter Notice alleged a failure to develop the required number of stores as specified in cl 2.1 of the Development Agreement. The Longer Notice alleged a series of breaches of the trademark and advertising provisions of the Development Agreement and Registered Users Agreement.
On 26 November 1996, the respondent commenced proceedings against both the appellant and Shell. The claim against Shell was subsequently settled.
On 8 September 1997, the appellant served a further Notice of Termination (the 1997 Notice) alleging that the respondent had continued to operate the successor stores notwithstanding that the term of the franchise agreements had expired. It also alleged further trademark and advertising breaches.
His Honour held the Notices of Termination were invalid and that the appellant had breached its implied obligations of good faith and reasonableness in the Development Agreement. He held that the Extension Agreements should be set aside as having been entered into under a mistake. His Honour also held these agreements had been entered into in circumstances where the appellant was knowingly involved in a breach of duty by Montgomery in relation to successor stores, and further, were obtained in breach of cl IX of the franchise agreements and of the appellant’s implied obligations of good faith and reasonableness.
The trial judge awarded the respondent damages under four heads:
(i) $43,522,200 for delay in opening company owned restaurants (the parties subsequently agreed that the calculation was erroneous and the true figure was $38,369,250.);
(ii) $23,955,00 for loss of the opportunity to introduce third party franchisees;
(iii) $1,515,428 for equitable compensation for the loss of service royalties from restaurants opened at seven Shell service stations;
(iv) $1,852,800 for “cannibalisation” claims resulting from BKC’s authorising Shell to open three restaurants in breach of the Development Agreement.
His Honour set aside the Extension Agreements and ordered the appellant to offer to the respondent new 15 year terms for the successor stores.
The appellant sought, and by consent was granted, a stay of the trial judge’s damages award. It did not seek a stay of the order that it offer new agreements for the successor stores. Except for one store, Murray Street, new agreements for terms of 15 years were entered into in respect of the successor stores on 10 February 2000. A new agreement was entered into in respect of Murray Street on 21 August 2000.
The appellant appealed against all findings as to liability save that it conceded that Montgomery’s conduct amounted to a breach of fiduciary duty.
The appellant also appealed against each award of damages on a large number of grounds, which can be loosely categorised as challenging:
· findings as to how the respondent’s business would have developed had it not been for the conduct of the appellant, and how it would now develop given this conduct;
· the finding that sales at certain of the respondent’s restaurants were adversely affected by the opening of the appellant’s restaurants in Shell service stations;
· the finding that there was no overlap between the “cannibalisation” claim and the loss of service royalty claim;
· the rate of discount for contingencies and vicissitudes used;
· the rates for incremental overheads used;
· the rate of discount used to give the present value of the sum awarded;
aspects of the method of calculation.
The respondent cross appealed in relation to:
· the 16.5 per cent rate of discount used to give the present value of the sum awarded in relation to the third head of damages.
(i) (a) The respondent was not in breach of cl 2.1 of the Development Agreement at the time of the Notice of Termination dated 18 November 1996;
(b) Accordingly, that Notice was not a valid Notice of Termination under cl 15.1 of the Development Agreement;
(ii) Clause 2.1 of the Development Agreement was not an essential term so that the appellant had no independent right to terminate for breach at law:
Tramways Advertising Pty Limited v Luna Park (NSW) (1938) SR (NSW) 632;
DTR Nominees Pty Limited v Mona Homes Pty Limited (1978) 138
CLR 421 applied;
(iii) (a) The development agreement was subject to implied terms of co-operation, good faith and reasonableness:
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234;
Hughes Bros Pty Limited v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91;
Alcatel Australia Limited v Scarcella & Ors (1998) 44 NSWLR 349 considered;
(b) The appellant had breached those terms by imposing the third party freeze and by withdrawing financial and operational approval;
(iv) The appellant’s conduct in imposing the third party freeze and withdrawing financial and operational approval was, in any event, a breach of the express terms of the Development Agreement;
(v) In circumstances where the parties had entered into new franchise agreements in respect of successor stores pursuant to the trial judge’s orders, the appellant could not, on the appeal, seek to set aside those orders as restitution was not possible:
Production Spray Painting & Panel Beating Pty Limited and Ors v Newnham and Ors [No 21] (1991) 27 NSWLR 659;
Zegluga Polska SA v TR Shipping Ltd [1996] 1 Lloyds Law Rep’s 337 considered;
(vi) The respondent had entered into the various extension agreements under a mistake of fact and they should be set aside: Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422;
Tutt v Doyle (1997) 42 NSWLR 10 applied;
(vii) The appellant was accessorially liable for the breach of fiduciary duty by the respondent’s National Development Manager, who was causative of the respondent having entered into the extension agreements:
Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378;
Brickenden v London Loan & Savings Co [1934] 3 DLR 465;
Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 applied;
(viii) The Longer Notice of Termination and the Notice of Termination of 8 September 1997 were invalid.
(ix) The appellant owed a fiduciary duty to the respondent in respect of its dealings in relation to the Shell venture and had breached that duty by encouraging Shell to proceed without the respondent’s involvement, by taking the benefit of royalties from these restaurants and by withholding advice from the respondent that it was negotiating with Shell to proceed without the respondent’s involvement:
United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1 applied.
(i) The amount awarded under the first head of damages should, as agreed between the parties, be amended to $38,369,250.
(ii) In relation to most of the grounds of appeal, the trial judge’s findings were open to him and should not be disturbed.
(iii) Many of the grounds of appeal could not be pressed by the appellant since they contained matters which had not been presented in cross examination of key witnesses, or raised at trial:
Suttor v Gundowda Pty Limited [1950] HCA 35; (1950) 81 CLR 418;
Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1;
Water Board v Moutsakas [1988] HCA 12; (1988) 180 CLR 491;
University of New South Wales v Metwally (No 2) [1985] HCA 28; (1985) 59 ALJR 481 applied;
(iv) The challenge to the calculation of the second and third heads of damages succeeded. Although the trial judge accepted that the rate of incremental overheads was 7 per cent of franchise revenue, he mistakenly failed to calculate damages under these heads in accordance with this finding. The award under the second and third heads should be recalculated accordingly.
(v) The trial judge erred in failing to recognise that there was an overlap between the award of damages under the third and fourth heads of damage.
(vi) The trial judge erred in finding that the respondent suffered any damage due to “cannibalisation” beyond that already compensated for under the third head of damages, since the respondent failed to prove any such damage.
(vii) The total damages award should be reduced by the amount awarded under the fourth head of damages.
(i) Allowed - the discount rate used in relation to the third head of damages should, consistently with that used in relation to the first two heads of damages, have been 9 per cent rather than 16 per cent. The award under the third head should be adjusted accordingly.
(i) Appeal allowed in part;
(ii) Cross-appeal allowed in part;
(iii) Set aside Rolfe J’s damages verdict and substitute therefor an award of damages in favour of the respondent in a sum to be calculated in accordance with the reasons for judgment and in particular para 761.
(iv) Parties to bring in short minutes of order (except in relation to costs) to give effect to the judgment within fourteen (14) days from today;
(v) Costs reserved;
(vi) Appeal 40325/00 (the Murray Street appeal) is dismissed with costs reserved;
(vii) Appellant to file and serve its written submissions of not more than five (5) pages in relation to costs fourteen days from today;
(viii) Respondent to file and serve its written submissions of not more than five (5) pages in relation to costs seven (7) days thereafter;
(ix) Parties to approach the Registrar within 3 days of all submissions being filed for appointment of a date for hearing of the question of costs.42
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40924/99
CA 40325/00
EQ 50258/96
SHELLER JA
BEAZLEY JA
STEIN JA
Thursday, 21 June 2001
1 This is an appeal by Burger King Corporation (BKC) from a decision of Rolfe J, in which his Honour awarded damages in the sum of $70,845,428 to Hungry Jack’s Pty Limited (HJPL) for BKC’s wrongful termination of a 1990 agreement granting HJPL a non-exclusive right to develop and to be franchised to operate Burger King Restaurants in Australia, which it did under the brand name “
Hungry Jack’s”.
2 Before dealing with the issues on the appeal a brief introduction to the corporate entities, the principal personalities and the background relationship between the parties is required.
3 A detailed review of the facts is contained in a schedule to the judgment (the Schedule of Facts) and is hereby incorporated in the judgment. The Schedule of Facts also includes such analysis and comment on the facts as was considered appropriate. However, the analysis of the facts as relevant to the issues on the appeal is contained herein.
4 BKC conducts, worldwide, a franchised fast food system. It is currently the second largest of such fast food chains in the world, after McDonalds. It has nearly 9,000 restaurants worldwide which it conducts primarily through a uniform franchise system. It also operates a small proportion of restaurants itself.
5 BKC entered the Australian market in the early 1970’s, after being approached to do so by Jack Cowin, the principal of HJPL. HJPL is a company within the Competitive Foods Group of companies, which operates a number of fast food restaurant outlets, including Kentucky Fried Chicken and Domino’s Pizza. It also operates five food manufacturing plants which sell both to the domestic and export market. The interests in the group are owned as to 55.5% by companies controlled by the chairman of the group, Jack Cowin, and the balance by overseas companies.
6 HJPL’s first formal franchise agreement with BKC was entered into on 1 June 1973, although by that time there were already 14 restaurants operating under the name
Hungry Jack’s using the BKC system and trademarks. The franchise agreement permitted the continued operation of the system under the
Hungry Jack’s banner. A franchise agreement was required for each store opened by HJPL.
7 Shell Oil Company (Shell) was initially a party to the proceedings, but proceedings between it and HJPL settled. However, Shell has remained a relevant entity in the proceedings because it is alleged by HJPL that, as a result of dealings between Shell and BKC to set up
Burger King outlets in Shell service stations to the exclusion of HJPL, BKC breached its fiduciary duty to HJPL. This remains an issue on the appeal to the extent that BKC contends that no fiduciary duty was owed in the circumstances. It concedes that if there was such a duty it was in breach.
8 At the time when the issues between the parties first arose, Jim Adamson was the Chief Executive Officer of BKC. By mid 1995 he had been replaced by Candido Rodriguez. However, the CEO played little part in the conduct and transactions relevant to these proceedings. The major participants were various vice-presidents and executives in BKC’s administrative and legal departments.
9 David Fitzjohn (Fitzjohn) was a Senior Vice President. Between August 1993 and April 1994 he was the interim Managing Director, Asia-Pacific division. From 1994 onwards he was Senior Vice President, World Wide Development, retaining responsibilities for Australia.
10 Ray Miolla (Miolla) was Regional Vice President and Assistant General Counsel of BKC. From 1995 until September 1997, he was chief legal counsel for BKC’s franchising activities worldwide (excluding Europe). Miolla was an experienced legal practitioner. He was a member of the International Franchise Association and the American Bar Association’s franchise section. Prior to joining BKC he had been a partner in a major US law firm in Boston. He was familiar with the obligations of confidence owed by employees to employers. In particular, he understood that a wrongful disclosure of information by an employee could amount to a breach of legal obligation owed by that employee to an employer.
11 “Colt” Hothorn (Hothorn) was Vice President and General Manager, Development International and, from 1994, onwards was responsible for development in Europe, the Middle East, Africa and Asia-Pacific including Australia.
12 Roy Blauer (Blauer) was Senior Vice President of Operations for the USA and Vice President responsible for operations in Australia. He held those positions from February 1994 until 1996.
13 Marc Gough (Gough) was Director of Marketing for Australia and the Asia-Pacific region from March 1995 onwards.
14 Will Gooden (Gooden) was the Finance Director during the entire period relevant to the proceedings.
15 Stephanie Driscoll (Driscoll) was a member of BKC’s finance department between April 1993 and December 1996. She was a member of BKC’s franchisee financial analysis group and reported directly to Gooden.
16 Tony Power (Power) was BKC’s Development Manager in Australia from July 1994.
17 Terry Horowitz (Horowitz) was Franchise Manager, Australia and New Zealand from May 1994 until January 1997. He was based in Australia.
18 John James “Jack” Cowin (Cowin) was the Chairman and Managing Director of Competitive Foods Australia Pty Limited (Competitive Foods) and HJPL from 1969.
19 Jim Montgomery (Montgomery) was the National Development Manager of HJPL.
20 Stephen McCarthy (McCarthy) was the Franchise Recruitment and Development Manager for New South Wales and the Australian Capital Territory from 1992.
21 John Mazzone (Mazzone) was HJPL’s Development Manager in Victoria and also assisted Montgomery on national development matters.
22 Malcolm Green (Green) was the Operations Manager for HJPL from July 1994. Prior to that he had been the Western Australian state manager.
23 John Butler (Butler) was a Director of and Company Secretary for HJPL.
24 Warren Honkey (Honkey) was HJPL’s Franchise Operations Manager.
25 James Wilson (Wilson) was HJPL’s National Marketing Manager.
26 On 1 June 1986, after a period of disputation, BKC and HJPL entered into an agreement (the 1986 Agreement), whereby HJPL was granted a non-exclusive right to develop and to be franchised to operate Burger King Restaurants in Western Australia, South Australia and Queensland. The other states and territories of Australia were not included in the grant: Article I. The Agreement provided for three stages of development within specified time frames. Strict adherence to the development schedule was made of the essence of the agreement.
27 However, further disputes arose between the parties giving rise to a new development agreement (the 1989 Agreement) stated to be “
effective as of 4 August 1989”. This agreement differed in one significant respect from its predecessor, in that, under Article I, HJPL was granted the exclusive right to develop and to be franchised to operate Burger King restaurants throughout “
all of the states and territories comprising the entire country of Australia”.
28 The development schedule in the 1989 Agreement also provided for staged development but on a more intense scale than required by the 1986 Agreement. Strict adherence to the development schedule at each stage was required and was stated to be of “
the essence of [the] Agreement”.
29 The 1989 Agreement did not effectively resolve the parties’ then difficulties and in late 1990 four agreements (the 1990 Agreements) were entered into in total settlement of the dispute. The agreements, each made 13 November 1990, were:
(i) The Settlement Agreement
(ii) The Service Agreement
(iii) The Registered User Agreement, and
(iv) The Development Agreement.
These proceedings principally arose out of BKC’s purported termination of the Development
Agreement.
30 The Development Agreement conferred upon HJPL the non-exclusive right to develop and to be franchised to operate Burger King restaurants in Australia. Under that Agreement HJPL was required, either by itself or through a third party franchisee, to develop and open for business a minimum of four new Burger King restaurants per year in Western Australia, South Australia and Queensland: cl 2.1. The Development Agreement also provided for non-exclusive development rights in the other Australian states and territories.
31 Clause 4.1 of the Development Agreement required HJPL to obtain individual franchises for each restaurant developed under the Agreement. This involved complying with a number of procedures including entering into a further agreement, known as a Preliminary Agreement, which provided for conditional franchise approval in respect of nominated sites and to have certain approvals, namely operational, financial and legal approval at the time of application for a franchise agreement for a newly developed restaurant.
32 Notwithstanding that the 1990 Agreements were intended to be in settlement of the disputes then affecting the parties, it soon emerged that BKC was seriously reviewing its role in the Australian market with an eye to increasing its own direct participation. Its deliberations during this period included a consideration of buying out HJPL, either directly or through a third party, or entering into a joint venture, in which it would maintain overall control. As it was not part of HJPL’s corporate plan at that time to sell, it was obvious that tensions between the two were likely to develop.
33 From late 1991 until 1993 there were a series of disputes between the parties in respect of a wide range of issues including signage, trademarks, operational issues, new stores and third party franchisees. These culminated in BKC serving a Notice of Dispute upon HJPL on 19 November 1992 and a Notice of Default on 3 February 1993. These notices were the subject of continuing negotiation throughout 1993 and were either not pursued or were resolved.
34 1993 saw another phase of development in the relationship between BKC and HJPL. Commencing in about the middle of the year, there were discussions between BKC and Shell as to the feasibility of using Shell service station sites as Burger King outlets. The details of this development will be discussed later in these reasons. HJPL was advised of this development in February 1994. From March, HJPL was included in what became a tripartite test arrangement between BKC, Shell and HJPL.
35 In June 1994, BKC established a new corporate entity in Australia, Burger King Australia Limited. Blauer and Horowitz were appointed its directors. Power was appointed Development Manager. For the first time, BKC had operational staff in Australia. However, the principal decisions were still made by BKC in Miami.
36 In September 1994, the Shell proposal took a new turn when BKC and Shell commenced discussions to pursue a bipartite relationship which excluded HJPL. HJPL was not advised of this development until May 1995, by which time Shell had clearly decided to pursue its own relationship with BKC. These circumstances gave rise to the breach of fiduciary duty claim by HJPL.
37 In about March 1995, BKC replaced the Preliminary Agreement with a new Target Reservation Agreement (TRA). This introduced two significant changes. First, it levied a “
non-refundable deposit” of US$10,000 for each new restaurant to be opened. Secondly, it overrode HJPL’s preferential rights under cl 7.1 of the Development Agreement.
38 In 1995, three further significant matters occurred in the BKC/HJPL relationship. BKC imposed a freeze on HJPL recruiting third party franchisees. It also withdrew financial and operational approval from HJPL. The effect of these actions was to impede HJPL’s development of new outlets. The impact of this was critical as HJPL was required under the Development Agreement to develop a minimum of four stores in Western Australia, South Australia and Queensland each year.
39 Another issue developed significantly in 1995. Commencing in 1992 the initial terms of a number of original franchise agreements expired. By 1995, the initial terms for restaurants at Fulham, Strathpine, Claremont, Ipswich, Springwood, Balga, Barrack Street Perth, Beak House, Brisbane, Bunbury and Bull Creek had expired. These stores were referred to as “
successor stores” and an agreement for a further term pursuant to the franchise agreement was referred to as “
successor agreement”. However, BKC did not in the first instance offer HJPL successor agreements. Rather, it offered a series of Extension Agreements. The Extension Agreements were a means whereby BKC extended the initial term of the franchise agreements for a period to enable capital improvements to be carried out before BKC granted a successor agreement. By the second half of 1995, BKC began to threaten that it would not issue any more Extension Agreements if the necessary work was not completed, and in that circumstance the stores would have to be closed.
40 As from 1 January 1996, BKC changed the terms of the Extension Agreement, so as to provide that there would be no further extension, except in its discretion, and HJPL waived and released BKC from any claim that BKC had not provided a reasonable opportunity to comply with the requirements for obtaining a renewal of the franchise. A number of these new forms of agreement were entered into in 1996. HJPL contends, inter alia, that it entered into them under a mistake. This issue became known in the proceedings as the Successor Store issue.
41 By two separate notices, each dated 18 November 1996, BKC purported to terminate the Development Agreement for breach. The first notice (the Shorter Notice) particularised HJPL’s failure to develop new restaurants as required by cl 2.1 as the breach giving rise to the right to terminate. The second notice (the Longer Notice) alleged a number of breaches relating to a sunglass promotion campaign, advertising without approval and improper trademark use.
42 A third notice was given on 8 September 1997 (the 1997 Notice of Termination) after the commencement of proceedings against the possibility that the earlier notices were held to be invalid.
43 At the time the Shorter and Longer Notices were given, HJPL was operating 148
Hungry Jack’s restaurants and operating another two restaurants controlled by Shell on service station sites. Eighteen
Hungry Jack’s restaurants were operated by third party franchisees and HJPL provided training and other services to those restaurants. Over the six year period from November 1990 until November 1996, HJPL had paid royalties to BKC exceeding $20 million.
44 HJPL challenges the validity of each notice of termination. It also alleges that, at the time of issue of the notices, BKC was itself in breach of the Development Agreement and, therefore, not entitled to give any Notice of Termination. The breaches alleged by HJPL arose out of the third party freeze and the alleged wrongful withdrawal of financial and operational approval.
45 HJPL was substantially successful in the proceedings and was awarded damages for delay in opening company-owned restaurants, for loss of opportunity to introduce third party franchisees, and for equitable compensation for the loss of service royalties for restaurants opened at seven Shell service stations and for the loss sustained by HJPL as a result of three Shell restaurants being opened in the near vicinity of existing
Hungry Jack’s restaurants. This last head of damages was referred to in the proceedings as the “
cannibalisation claim”. In addition to the challenges on liability, BKC challenges his Honour’s quantification of the damages.
46 Rolfe J also ordered that the Extension Agreements for Fulham, Springwood, Strathpine, Claremont, Ipswich, Balga and Barrack Street and a form of agreement, called a Successor Agreement, for Springwood, Strathpine, Claremont and Ipswich be set aside. He further ordered that BKC offer to HJPL a new franchise agreement for a further term of 15 years for those seven stores, as well as for the restaurants at Bunbury, Beak House Brisbane and Bull Creek. BKC offered the new franchise agreements and on 10 February 2000 new agreements were entered into in respect of all stores but Barrack Street. A distinct issue had arisen in respect of that store and there was a separate hearing in relation to it. HJPL relocated this store to Murray Street and the proceedings in respect of that store became known by that name. HJPL was successful in those proceedings and his Honour extended the time previously ordered to offer a new franchise agreement in respect of that store. That new franchise agreement was entered into on 21 August 2000.
47 HJPL contends that even if BKC is successful on the successor store issues it cannot now have the renewed franchise agreements set aside. Put shortly, it was said that those agreements, having been entered into pursuant to the Court’s orders, stand according to their terms and any challenge on this point is moot.
48 Some of the issues on the appeal have been referred to in passing. However, as a point of
reference to these reasons, we identify below the issues in the case in the order we deal with them in
the judgment.
(i) the validity of the Shorter Notice of Termination; and in particular -
(a) whether, upon its proper construction, HJPL was in breach of the obligation to develop restaurants in accordance with cl 2.1 of the Development Agreement;
(b) whether, if HJPL was in breach, it was necessary for BKC, pursuant to cl 15.2 of the Development Agreement, to give a 30 day notice to cure any breach before a Notice of Termination could be given for breach of cl 2.1;
(ii) whether BKC had, in any event, as at the date of the Shorter Notice, a right to terminate at common law on the basis that cl 2.1 was a condition of the Development Agreement which required strict compliance with the development schedule;
(iii) whether there were implied terms of good faith and reasonableness in the Development Agreement;
(iv) whether, if there were implied terms of good faith and reasonableness, there was breach of those terms and of the implied term of co-operation (the implication of which was not disputed) because of the conduct of BKC in -
(a) imposing a third party freeze on HJPL by refusing to permit HJPL to recruit new third party franchisees;
(b) withholding financial disapproval (the financial disapproval issue);
(c) withholding operational approval (the operational disapproval issue);
(v) the validity of the Longer Notice of Termination, and in particular -
(a) whether, assuming there was a breach of cl 6.5 of the Development Agreement which required, in brief, that HJPL comply with all applicable statutory regulations and BKC’s advertising standards, and submit all advertising to BKC for prior approval, BKC was entitled to terminate under cl 15.1;
(b) if BKC was entitled to terminate under cl 15.1, whether it was first required to give a 30 day notice to cure under cl 15.2;
(c) whether there was, in fact, a breach of cl 6.5; The particular factual matters in issue were a sunglasses promotion, trade mark breaches and advertising breaches;
(vi) the Successor Store issue, and in particular -
(a) whether his Honour’s order that BKC enter into franchise agreements for a further term of 15 years for
Hungry Jack’s restaurants at Fulham, Springwood, Strathpine, Claremont, Ipswich, Balga, Barrack Street Perth, Bunbury, Beak House Brisbane and Bull Creek can now be challenged (‘the moot point issue’);
(b) whether HJPL was acting under a mistake when entering into the Extension Agreements and the agreements entered into in 1996 (called Successor Agreements but which were in fact conditional agreements prior to entry into a franchise agreement for the renewed term);
(c) whether the failure of BKC to advise HJPL of Montgomery’s actions gave rise to accessory liability;
(d) the construction of cl IX(A) of the franchise agreement;
(vii) the Murray Street appeal;
(viii) the validity of the 1997 Notice of Termination: this issue involves the consideration of alleged trade mark breaches as well as the questions which arise under the successor store issue;
(ix) the Shell issue, to which reference has already been made;
(x) damages, and in particular whether HJPL is entitled to -
(a) damages for delay in opening company owned restaurants;
(b) damages for loss of opportunity to introduce third party franchisees;
(c) equitable compensation for loss of service royalties;
(d) damages for the cannibalisation claims;
(e) the amount of such damages.
49 The Settlement Agreement might be described as the umbrella agreement. It recited that there had been differences between the parties which they had agreed to resolve by entry into the 1990 Agreements. Schedule 3 catalogued the “
Matters in Dispute”. The substantive provisions of the Settlement Agreement terminated certain of the existing agreements, in particular the 1986 Agreement. It specified which other agreements, including existing franchise agreements, remained on foot and approved the then existing unapproved restaurants and sites. It also provided that it was agreed that the 1989 Agreement was not to be binding on the parties.
50 The Development Agreement replaced the 1986 Agreement, making provision for the future development of Burger King restaurants in Australia by HJPL: Recital F. It both conferred a right to and imposed an obligation on HJPL to develop Burger King restaurants. It was intended that this would be done under the
Hungry Jack’s banner. Thus by cl 1 HJPL was granted:
“... a non-exclusive right to develop and, subject to the full satisfaction of the terms and conditions of this Agreement, to be franchised to operate Burger King Restaurants in Australia.”
51 Clause 2 imposed the obligation on HJPL to develop Burger King restaurants:
“2. Development Schedule
2.1 HUNGRY JACK’S or any BKC franchisee introduced by HUNGRY JACK’S to BKC shall
develop and open for business in Australia in accordance with the franchise and site approval
procedures described in this Agreement a minimum of four (4) new Burger King Restaurants per
annum commencing on 12 November 1990 in the area comprising Western Australia, South
Australia and Queensland (‘the Development Schedule’).
2.2 If delay in meeting the Development Schedule is caused by acts of God, labor strikes, shortage
of building supplies or other unforeseeable events beyond the reasonable control of HUNGRY
JACK’S, then BKC after an independent examination of the underlying facts will not unreasonably
withhold its consent to a reasonable extension of time to meet the Development Schedule.”
52 We will refer to the number of restaurants to be developed under cl 2.1 as the development schedule and the three states in which development was required under the clause as the development states.
53 A central issue in the proceedings is whether cl 2.1 was an essential term so as to give rise to a common law right of termination. The terms of cl 3, and 3.2 in particular, are relevant to this question.
54 Clause 3 provided for a five year term with provision for three terms of renewal as follows:
“3. TERM
3.1 The term of this Agreement shall be five (5) years commencing on 13 November 1990.
3.2 Upon expiration of that term, provided that HUNGRY JACK’S shall have opened 20 (20) Burger King Restaurants during the previous five (5) years (with a minimum of two (2) restaurants per annum) in the area comprising Western Australia, South Australia and Queensland in accordance with the franchise and site approval procedures described in this Agreement, HUNGRY JACK’S shall have the right to renew this Agreement upon the same terms for a further period of five (5) years, at the expiration of which, subject to the same proviso, HUNGRY JACK’S shall have the right to renew this Agreement upon the same terms for a further period of five (5) years, at the expiration of which, subject to the same proviso, HUNGRY JACK’S shall have the right to renew this Agreement upon the same terms for a further period of five (5) years.”
55 Clause 4 specified the procedures and conditions necessary for HJPL to be entitled to be franchised in respect of each restaurant developed under the Development Agreement. Its terms and their proper construction are at the core of the dispute between the parties. Clause 4 provided:
“4. DEVELOPMENT PROCEDURE
4.1 This Agreement does not constitute a franchise for the operation of a Burger King Restaurant but is intended by the parties to set forth the terms and conditions which, if fully satisfied, would entitle HUNGRY JACK’S to individual franchises for each restaurant to be developed under this Agreement. HUNGRY JACK’S must apply for and obtain franchise and site approval from BKC for each restaurant to be established pursuant to this Agreement through BKC’s standard franchise and site approval procedures, including, without limitation, submitting the then current Multiple Franchise Application, Management Committee Form, Capitalization Plan and Preliminary Agreement. As a condition to the granting of a Franchise Approval, HUNGRY JACK’S must have, in the sole discretion of BKC, operational, financial and legal approval at the time of application for a franchise. In this Agreement the terms operation, financial and legal mean:
(a) Operational
HUNGRY JACK’S conducts each of its Burger King Restaurants in accordance with the terms and conditions of this Agreement, the applicable Franchise Agreements, and the standards, specifications and procedures specified in the volumes comprising the Manual of Operating Data, as amended, including the maintenance of interior and exterior of the restaurants so as to reflect an acceptable Burger King image. HUNGRY JACK’S understands that changes in said standards, specifications and procedures may become necessary from time to time. HUNGRY JACK’S agrees to accept, as reasonable, said changes and HUNGRY JACK’S further agrees that it is within the sole discretion of BKC to make such changes.
(b) Financial
HUNGRY JACK’S has performed and is faithfully performing all terms and conditions under each individual Franchise Agreement issued, and is not in default of any money obligations owed by HUNGRY JACK’S to BKC. HUNGRY JACK’S acknowledges and agrees that it is vital to BKC’s interests that a franchisee be financially sound to avoid a business failure affecting the reputation and good name of the Burger King marks.
(c) Legal
HUNGRY JACK’S has promptly submitted to BKC all information and documents reasonably requested by BKC prior to and as a basis for the issuance and consummation of individual franchises, has taken additional action requested from time to time and is in compliance with all obligations under all agreements with BKC.
4.2 Failure to meet operational, financial or legal standards shall constitute grounds for refusing to grant or withdrawing a franchise approval and shall not extend, modify or reduce the development requirements of Clause 2.”
56 If and when franchise approval was obtained under cl 4, HJPL was then required to obtain site approval: cl 5. Site approval was a prerequisite to the grant of authorisation to construct a restaurant at a particular location.
57 Once site approval was obtained, HJPL was solely responsible for constructing the restaurant, which was to be
“constructed, equipped and furnished with then current BKC approved plans and specifications”: cl 5.2(a).
58 Clause 6 contained a variety of provisions relating to fees and franchise agreements. Relevant
to the issues on appeal are the terms of cl 6.5. It provided:
“6.5 HUNGRY JACK’S agrees to adhere to all applicable statutory regulations and to BKC’s
advertising, sales promotion and public relations standards and all advertisements and other
materials published circulated or exhibited shall first be approved by BKC. FRANCHISEE agrees
to remove or discontinue immediately the use of any objectionable advertising material upon
receipt of BKC’s notice; BKC or its authorized agent may at all reasonable times enter the
premises to remove and destroy objectionable material without compensation to FRANCHISEE.”
59 Clause 7 made provision, first for HJPL to introduce third party franchisees to BKC to operate under the HJPL banner: cls 7.1 and 7.2; and secondly, for BKC to develop restaurants either directly or through third party franchisees: cl 7.3.
60 Any third party franchisee introduced under cl 7.1 was subject to the same approval procedures as applied to HJPL under cl 4.1, including having operational, financial and legal approval.
61 BKC’s right to develop or franchise restaurants in the development states was conditional upon HJPL’s prior approval provided HJPL was up to date with the development schedule: cl 7.3.
62 Clause 7.3 is also relevant to the question of whether cl 2.1 is an essential term of the agreement. It provided:
“7.3 Burger King may operate its own restaurants anywhere in Australia and may franchise third parties anywhere in Australia save that in the states of Western Australia, South Australia and Queensland if HUNGRY JACK’S is in compliance with the Development Schedule, the prior approval of HUNGRY JACK’S for the operation of any such restaurant must be obtained. Such approval may be withheld only if a Burger King Restaurant at that location would be likely substantially adversely to affect sales at another existing location or at a location for which an application for approval has been formally lodged with BKC. In the event of disagreement the question of likely substantial adverse effect shall be resolved in the same manner as under Clause 7.1.”
63 Clause 8 makes provision in respect of franchise fees for sites required to be developed by cl 2.1. In effect it gives HJPL a development incentive by providing, first, for the waiver of the franchise fee for each restaurant developed in accordance with the development schedule, and secondly, a further period of a year to make good the failure to comply with the development schedule. Its terms are relevant to the construction of cl 2.1 and the question of whether there was a breach of that clause so as to give rise to a right of termination. Its terms were:
“FRANCHISE FEES
8.1 Franchise fees payable by HUNGRY JACK’S in respect of restaurants operated by it shall be waived in any year commencing on 12 November so long as HUNGRY JACK’S adheres to the Development Schedule in that year. Any failure to adhere to the Development Schedule shall attract a liability to pay a franchise fee in respect of each restaurant required to be but not opened under the Development Schedule. Such franchise fees shall be paid at the end of the year following the failure, but not if such failure is made good by that time.64 The franchise fee was a once only payment in respect of each restaurant.
65 Royalties were payable under each franchise agreement. Clause 9 of the Development Agreement provided for a reduction of the amount of royalty by half a percent in each of two situations:
(i) if HJPL provided services in accordance with the provisions of the Service Agreement to itself, to third party franchisees, BKC restaurants and franchisees introduced by BKC: cl 9.1(a);
(ii) for each HJPL restaurant which was
“in compliance with BKC’s menu and brand image standards as specified in [the Development Agreement]”: cl 9.1(b).66 Clause 9.3 provided:
“9.3 Nothing in this Clause 9 shall limit BKC’s rights in relation to any breach by HUNGRY JACK’S of its obligations under this or any other agreement.”
67 The standards referred to in 9.1(b) were specified in cl 10. In relation to menu, HJPL was required at all times to serve BKC’s base menu in its restaurants: cl 10.2. There was also provision for the sale of additional BKC products (cl 10.2); the ingredients to be used (cl 10.4); and the sale of non-BKC products (cl 10.5). Clause 10.6 provided for “
Brand Image”. It required HJPL to comply with BKC’s written standards as to signage, menu board and the “
use of the Burger King marks”.
68 Clause 11 dealt with trade marks and trade names. Clause 11.3, amongst other requirements, specified:
“11.3 ... Use of the Burger King Logo shall also appear in all advertisements in form as approved by BKC. In all television advertisements, the Burger King Logo shall appear in the tag line or final frame of the commercials in a manner acceptable to BKC. Should HUNGRY JACK’S, having been notified by BKC that is in default under this provision, fail to remedy the default within three (3) weeks of such notification, BKC may, in addition to taking any other action that may be available to it, by its authorised representative take such steps as it considers necessary to remedy the default ...”
69 Clause 11.4 required HJPL to enter into Registered User Agreements, in the form prescribed by BKC, authorising HJPL’s use of the Burger King marks. Pursuant to cl 11.5, HJPL was not permitted to use trademarks or trade names of BKC or any variation or abbreviation of marks or names without BKC’s prior authorisation.
70 Clause 12 was concerned with training and cl 13 with services available to the franchisee. Clause 14 was a dispute resolution clause.
71 Clause 15 provided for the right to terminate for default. It is one of the clauses which is critical to the determination of the issues between the parties, as BKC purported to terminate under its provisions on three separate occasions. It provided:
“DEFAULT
15.1 The occurrence of any of the following events shall constitute good cause for BKC, at its option and without prejudice to any other rights or remedies provided for hereunder or by law or equity, to terminate this Agreement.
(a) HUNGRY JACK’S fails to obtain site approval from BKC prior to the commencement of construction at a particular location.
(b) HUNGRY JACK’S fails at any time to meet and satisfy fully the operational, financial and legal requirements set forth in Clause 4, whether for the purpose of seeking franchise approval or in the day-to-day operation of a Burger King Restaurant.
(c) HUNGRY JACK’S assigns, encumbers, transfers or otherwise disposes of, or attempts to assign, transfer, encumber, or otherwise dispose of this Agreement in whole or in part, or of any Franchise Agreement other than in accordance with the provisions of the Agreement.
(d) HUNGRY JACK’S fails to comply with any of the other terms, provisions or conditions of this Agreement, any Franchise Agreement, or any other obligation owed to BKC.
(e) HUNGRY JACK’S seeks any type of relief under the provisions of a bankruptcy or insolvency law; or any person files a petition or application seeking to have HUNGRY JACK’S adjudicated a bankrupt and HUNGRY JACK’S does not take action to defend itself; or HUNGRY JACK’S admits in writing or upon oath the inability to pay debts as they mature; or a receiver (permanent or temporary) is appointed over any of HUNGRY JACK’S assets; or a final judgment is entered against HUNGRY JACK’S and is not paid or satisfied within thirty (30) days.
(f) HUNGRY JACK’S fails to obtain or renew any licences or permits necessary for the performance of HUNGRY JACK’S obligations under this Agreement or any Franchise Agreement.
(g) HUNGRY JACK’S opens a Burger King Restaurant without franchise approval, site approval, payment of any fees as required, or execution of all required agreements and documents.
15.2 In the case of any breach which is capable of being cured, BKC shall not terminate this Agreement unless and until HUNGRY JACK’S shall have failed to cure such breach within ten (10) days in the case of default of any obligation to pay money to BKC and within thirty (30) days in the case of any other breach after being notified by BKC of the nature of the default.”
72 Clause 16 provided:
“TERMINATION
16.1 Upon termination of this Agreement, whether resulting from default or expiration of the term of this Agreement, HUNGRY JACK’S shall have no further rights under this Agreement, but this shall not affect then existing Franchise Agreements.”
73 Clause 19 contained a severability provision. It provided that if construction of any clause rendered it
“unlawful, void, voidable or unenforceable” then a construction which rendered it valid was to be adopted. It also contained a provision neutralising the contra proferentem rule, providing:
“The language of all provisions of this Agreement shall be construed according to its fair meaning
and not strictly against BKC or [HJPL].”
74 The Development Agreement was governed by the laws of New South Wales: cl 25.
75 The other provisions of the Development Agreement are not presently relevant.
76 Certain of the terms of the other 1990 Agreements are relevant to the issues on the appeal.
77 The Registered Users Agreement governed HJPL’s use of BKC’s trade marks. Clause 4 (a) required HJPL promptly:
“[to] comply with all reasonable directions regarding the manner of use of the Trade Marks issued
from time to time by [BKC].”
78 Clause 4 of the Service Agreement governed the arrangements relating to staff training and education. Under this agreement HJPL was required to provide training for its own staff, for its third party franchisees and such other franchisees as BKC nominated from time to time.
79 The Service Agreement contains a convenient reference to the amount of the franchise fee which was payable as at the time the 1990 Agreements were entered into - namely $US25,000. There was no evidence of any change in that fee during the period relevant to the proceedings.
80 A franchise agreement was required to be entered into for each store which was opened. BKC had a standard form of franchise agreement which was used worldwide. At the time HJPL entered into its early franchise agreements the standard from of the agreement was 15 years. Subsequently, BKC introduced a 20 year term.
81 Under the franchise agreement, a franchisee agreed to pay a monthly royalty, being a percentage of gross sales for use of BKC’s trademarks: cl VA; to take out and maintain a comprehensive and general liability policy: cl VII B and was responsible for all loss or damage and contractual liabilities to third persons arising out of the conduct of the franchised restaurants: cl VII B.
82 Clause IX of the standard form of franchise agreement provided for a once only renewal of the term as follows:
“OPTION AT END OF TERM
Provided that Franchisee shall have substantially complied with all of the terms and conditions of this agreement and any other agreement between Franchisee and Company, and shall have substantially complied with the operating standards and criteria established for Burger King Restaurants, then at the expiration of the term hereof, Company will offer Franchisee the opportunity to remain a Franchisee hereunder for one additional period of fifteen (15) years, provided that:
A. Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernize the restaurant buildings, premises, signs and equipment so as to reflect the then current image of Burger King Restaurants.
B. Franchisee must have the right to remain in possession of the premises, or other premises acceptable to Company, for the new term. If Franchisee elects (or is required) to relocate, then Franchisee shall pay Company’s reasonable expenses in relocating, developing or evaluating new premises. Company shall not be required to extend its credit or resources in obtaining financing for premises or equipment.
C. Franchisee shall execute a new Franchise Agreement on the form then being used by Company in the United States, which may differ from this Franchise Agreement as to royalty. The rate of royalty shall be re-negotiated at that time taking in account the Burger King rate of royalty then prevailing in other countries of the world.
D. Franchisee shall give Company written notice of its desire to exercise its option to continue as a franchisee not less than fifteen (15) months prior to the expiration of the term of this agreement.”
83 Clause XI B provided that BKC and the franchisee were independent contractors and the franchisee was not an agent, partner, subsidiary or joint venturer with BKC.
84 Clause XII provided for events of default and termination.
85 Clause XIII was an Arbitration Clause. It made provision for the resolution of disputes both in respect of termination and in respect of “
any other dispute”. Arbitration of a termination dispute was expressed to be mandatory: cl XIIIA. Arbitration of any other dispute was elective. The clauseprovided that in each instance the result of the arbitration was binding.
86 It will be recalled that cl 4.1 of the Development Agreement required HJPL to submit, as part of the procedure for obtaining a franchise for a new restaurant, a Preliminary Agreement and a number of other Plans and Applications, including a Capitalisation Plan.
87 The Capitalisation Plan was one of BKC’s pro forma documents which sought basic information as to the amount of capital required and the details of the ownership of a proposed new restaurant. It also specified the financial analysis BKC would undertake in determining whether to grant a franchise for the proposed new restaurant. The financial analysis to be undertaken was as follows:
“1. The financial evaluation to be completed by BKC will consist of the computation of the following key financial ratios for all existing and new restaurants:
a. Cash Flow
Primary focus will be on the fixed charge coverage ration. i.e., total fixed charges - cash flow. - total fixed charges. Fixed charges are royalty, ad fund contribution, rent, interest and principal payment on debt. Standard = 1.20:1 or higher.
b. Debt as a % of Total Capital
Standard = 35% or greater where all investors have given guaranties to BKC; or 50% or greater where some investors have not given BKC a guaranty.
c. A review of current Personal Net Worth Statements for all Principals.
The above ratios are the general standards that BKC uses to evaluate your financial strength. In considering your application, BKC will give consideration to other factors which include ... any other factor which affects the Operating Entity’s financial strength.
2. BKC will also review the following:
a. Accounts Payable Status
If you are already franchisees, you must all be current on all accounts and notes payable to BKC at the time of application. This current status must have been maintained for a period of six (6) months prior to application.”
88 There was another document not expressly mentioned in cl 4.1 but which BKC appears to have required as part of the cl 4 procedure. That was also an Expansion Application and General Release. In that document, the applicant was required to advise such other interests as it had in non-BKC restaurant businesses (other than ownership of less than 5% of shares in publicly traded corporations).
89 In the Shorter Notice BKC purported to terminate the Development Agreement pursuant to its
rights under cl 15.1(d).
90 The Notice stated:
“NOTICE OF TERMINATION
... ‘BKC’ ... pursuant to the provisions of clause 15 of an agreement dated 13 November 1990 and made between it and ... ‘HJPL’ (‘Development Agreement’) hereby gives notice to ... ‘HJPL’ of the following breach by HJPL of the Development Agreement.
...
PARTICULARS OF BREACH
Between 12 November, 1995 and 11 November, 1996, HJPL developed and opened only one (1) new Burger King® Restaurant in Western Australia, South Australia and Queensland, and BKC franchisees introduced by HJPL developed and opened no new Burger King® Restaurants in those three (3) states
Accordingly BKC hereby terminates the Development Agreement pursuant to the provisions of clause 15.1 of the Development Agreement.
DATED 5 November 1996
BURGER KING CORPORATION”
91 The particulars of breach involved an allegation of non-compliance with cl 2.1 of the Development Agreement, which required HJPL or a third party franchisee to develop and open a minimum of four new restaurants in the development states in each year. There was no dispute that HJPL had not opened the required number of restaurants in the preceding 12 month period. HJPL had also conceded at trial that it could not do so within 30 days of the giving of the notice. This concession was relevant to the question of whether BKC were required, under cl 15.2 of the Development Agreement, to give a 30 day notice to cover a default of the Agreement.
92 HJPL contended that, upon a proper construction of the Development Agreement, there was in fact no breach of cl 2.1, so as to give rise to the right to terminate under cl 15, and that in any event the Notice was defective because no notice to cure the breach under cl 15.2 had been given prior to the giving of the Notice.
93 BKC contended that even if the Shorter Notice was defective, it retained its right to rescind under the general law. The success of that submission depends upon whether cl 2.1 was an essential term of the Development Agreement.
94 The trial judge determined these three issues against BKC.
95 Under cl 2.1, HJPL was required to develop, either directly or through third party franchisees, and open for business, a total of at least four new restaurants a year in the development states. Read on its own, cl 2.1 is mandatory and unqualified, so that non-compliance might be thought to give rise to a right to terminate under cl 15.1(d). However, a number of other clauses deal with non- compliance. There are also significant qualifications to cl 2.1 found elsewhere in the Development Agreement.
96 First, cl 2.2 requires BKC to give a reasonable extension of time for compliance with the development schedule in the case of delay outside HJPL’s control.
97 Clauses 7.3 and 8.1 make provision for a failure to comply with the development schedule due to HJPL’s own fault, as opposed to delay outside its control. Both clauses impose a form of penalty on HJPL for non-compliance with cl 2.1. Clause 8.1 also provides a benefit in a way to which we will refer later.
98 Clause 7.3 placed a restriction on BKC’s right to develop restaurants, either directly or through its own franchisees in the development states. Under that clause BKC required HJPL’s consent (such consent only to be withheld if it would competitively interfere with an existing or proposed HJPL site). However, if HJPL was not in compliance with the development schedule the requirement to obtain HJPL’s consent was removed.
99 Clause 8.1 provided for the waiver of the franchise fee in respect of each restaurant operated by HJPL on the proviso that it adhered to the development schedule. However, a failure to adhere to the schedule did not immediately cause the franchise fee to become payable. It did not become payable until the end of a further period of 12 months and only if the failure to comply had not, by then, been made good.
100 HJPL submitted that cl 8.1 directly impacted upon the time provision in cl 2.1, in the sensethat non-compliance with the development schedule did not amount to a breach giving a right to terminate under cl 15.1(d). That right did not arise until the end of a further 12 months. It was submitted that if it were otherwise, HJPL would be deprived of the right to make good the default as provided for by cl 8.1. Put another way, it was submitted that the effect of BKC’s construction would be that BKC could, at its option, render the benefits conferred on HJPL by cl 8.1 nugatory.
101 His Honour accepted that this was the proper construction of the agreement for essentially those reasons.
102 The operation of cl 8.1 and its effect on cl 2.1 has to be considered in the light of cl 15 itself. Clause 15.1 provided that the matters specified within its sub-paragraphs are events which “
shall constitute good cause for BKC, at its option and without prejudice to any other rights or remedies provided hereunder ... to terminate this agreement” (emphasis added). Clause 15.1(d) is wide and does not depend upon the event of breach being a breach of a condition or essential term of the Agreement. A breach of
any term of the Development Agreement is sufficient to give rise to the right to terminate (subject to cl 15.2): see
Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620.
103 The right to terminate is also expressed to be “
without prejudice to any other rights or remedies provided hereunder”. One of BKC’s rights was to have the franchise fees reinstated if HJPL failed to comply with the development schedule. The right revived immediately upon non- compliance but was deferred for a period of 12 months in which HJPL was given the opportunity to make good the failure. HJPL contended that the effect of cl 8.1 was to extend the period for compliance with the development schedule.
104 BKC submitted that, when the operation of cl 8.1 is properly understood, it is apparent that it does not extend the time for compliance with the development schedule. Rather, it only operated for the benefit of HJPL if BKC elected not to terminate under cl 15.1(d). If it did elect to terminate, the Development Agreement and any ensuing benefit to HJPL would come to an end. It followed, on BKC’s submission that, if HJPL was to obtain the benefits of the Development Agreement, it had to remain on foot (a matter about which there could be no argument). Thus, on the construction for which BKC contended, the various clauses had their own independent operation. Clause 8.1 provided for one consequence of non-compliance and cl 7.3 provided another. The right to terminate under cl 15.1(d) (for example, because of a breach of cl 2.1) was a separate right, unaffected by the operation of the other clauses.
105 There is considerable force in BKC’s argument. In particular, it allows the phrase “
without prejudice to any other rights or remedies provided hereunder” in cl 15.1 to operate according to its terms.
106 However, there are also difficulties with such a construction. In the first place, it involves a direct conflict with HJPL’s right under cl 3.2 to renew the Development Agreement at the end of the term, provided first that it had opened the full complement of restaurants during the term and had opened a minimum of two per year. Thus, by the commencement of the fifth year, HJPL may have opened 18 restaurants in the development states (at least two per year). To secure its right to a renewed term under cl 3.2, it would only need to open two restaurants in that year. However, to stave off the risk of termination at the end of the year it would be required to open four.
107 There are also practical difficulties which flow from BKC’s construction. For example, let it be assumed that HJPL had opened three restaurants in the 12 month period and was significantly advanced with the construction of the fourth and that that restaurant would be ready to be opened in three months time. Let it also be assumed that there were no other contractual impediments to completion and opening. Notwithstanding that development of the fourth restaurant would have involved considerable expenditure, BKC could exercise its right to terminate. Indeed on BKC’s construction, BKC could do so even after the completion of the work, and arguably may do so even after its opening, as there is no time limitation on the right to terminate. Another example is where HJPL failed to develop and open any restaurants in the year but had undertaken work to make good the non-compliance in the succeeding 12 months. BKC could still terminate, leaving HJPL with an obligation to pay franchise fees for the four restaurants and with no recourse to recover the cost of the work undertaken. There are other obvious variations.
108 The question is whether, notwithstanding these difficulties, the construction for which BKC contends, is correct. In
Australian Broadcasting Commission v Australian Performing Right Association Limited [1973] HCA 36; (1973) 129 CLR 99 Gibbs J said at 109:
“Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. ... On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust”
109 However, the construction for which BKC contends involves construing cl 2.1 and the right conferred by cl 15.1(d) in isolation from the other terms of the contract. If a failure to strictly comply with cl 2.1 gave rise to an event entitling BKC to terminate under cl 15, the effect would be to potentially abrogate the benefits conferred upon HJPL by cl 8.1. It is not a response to that to say that HJPL might have equitable remedies which it could pursue. The principles of construction, to which we have referred, do not relegate a party to those rights if there is a construction which otherwise allows the contract to operate harmoniously.
110 We have come to the conclusion that his Honour’s construction was correct and that upon its proper construction, there is no breach of cl 2.1 giving a right to terminate under cl 15.1(d) until the expiration of a further period of 12 months from the end of the yearly period specified in cl 2.1. Further support for this being the correct construction is found in cl 4.2 which provides that failure to obtain financial, operational or legal approval as required by cl 4.1 “
shall not extend, modify or reduce the development requirements in cl 2”. There is no like provision in cl 8.1.
111 As BKC did not allow for that period in the Shorter Notice, it was ineffective to terminate the Development Agreement.
112 We would add only one further comment. Rolfe J considered that the first sentence of cl 19 assisted, but was not necessary for, the construction of cl 8.1 that he had reached, because, if BKC’s construction was correct, it would make cl 8.1 unenforceable. We do not consider this to be correct. HJPL’s rights under cl 8.1 might become unavailable if BKC was entitled to terminate as it contended. However, that is quite different to a provision being “
unenforceable” which is the language of cl 19. Our disagreement with his Honour on this issue does not, however, affect our decision on the proper construction of cl 2.1.
113 Our finding that there was no breach of cl 2.1 at the time the Shorter Notice was given makes it unnecessary for us to determine whether, before a notice of termination could be given under cl 15.1(d) for this alleged breach, it was necessary to give a 30 day notice to cure under cl 15.2. However, as the matter was argued fully, we express our view on this issue briefly.
114 HJPL conceded for the purposes of this issue that it could not have opened the restaurants required even if a 30 day notice to cure had been given. BKC contended that, in that circumstance and upon the proper construction of cl 15.2, the giving of a 30 day notice to cure was not a pre- condition to the exercise of its right (assumed for the purposes of considering this issue) to terminate under cl 15.1(d). BKC also contended that it would have been nonsense for BKC to give a 30 day notice under cl 15.2 when HJPL had been operationally disapproved in November 1995 and remained operationally disapproved in November 1996. We leave aside for present purposes the question whether BKC was entitled to withhold operational approval at the time.
115 BKC also submitted that a failure to comply with the development schedule was not a breach capable of being cured as the period had come to an end and BKC had forever lost the benefit of those restaurants being opened at that time. In other words, “
the temporal shortfall was ineradicable”.
116 HJPL submitted that cl 15.2 is concerned with a breach which is capable of cure, not one which was capable of being cured within a specified number of days. Rolfe J held this to be the proper construction of the clause,
“the purpose of each clause [being] to give the party [in breach] the opportunity of curing the position for the future”. His Honour concluded:
“A clause such as 15.2 is aimed at providing certainty. On one view the approach taken by Mr Oslington leads to uncertainty. It leaves open the argument, if no notice to cure is given, whether the breach was capable of being cured, such as to require the giving of a notice. However, if the notice is given and the breach is not cured the arguments are confined to whether there was a breach and whether it was cured within the time specified. On this basis the giving of notice is, in my opinion, a condition precedent to the right to terminate.”
117 His Honour considered that the construction which he found should be given to the clause was supported by authority: see
Batson v De Carvalho (1948) 48 SR (NSW) 417;
L Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2; [1974] AC 235; and
Tricontinental Corporation Ltd v HJFI Ltd (1990) 21 NSWLR 689.
118 It is apparent from the above that there are two questions involved in the construction of cl 15.2. First, is the first part of the clause “
any breach capable of being cured” qualified by the time provision which appears in the next part of the clause
“BKC shall not terminate [the DA] unless and until [HJPL] shall have failed to cure such breach in thirty (30) days ... of ... breach after being notified by BKC of the nature of the fault”? We do not believe it is. The clause is quite specific. If there is a breach capable of remedy, then a 30 day notice must be given.
119 That then leaves the second question. Is a breach, which is a once and for all breach, for example, failure to comply with a time provision, capable of being cured?
120 In L Schuler AG v Wickman Machine Tool Sales Ltd, Lord Reid, in construing a notice of termination clause in an agreement said at 249-250:
“It appears to me that clause 11(a)(i) is intended to apply to all material breaches of the agreement which are capable of being remedied. The question then is what is meant in this context by the word “remedy”. It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning. The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place. And in general it can only be in a rare case that any remedy of something that has gone wrong in the performance of a continuing positive obligation will, in addition to putting it right for the future, remove or nullify damage already incurred before the remedy was applied. To restrict the meaning of remedy to cases where all damage past and future can be put right would leave hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of language to say that a breach can be remedied.” (Emphasis added)
121 The statement of Sugerman J in
Batson v de Carvalho, at 427, is to the same effect:
“To ‘remedy’ a breach is not to perform the impossible task of wiping it out - of producing the same condition of affairs as if the breach had never occurred. It is to set things right for the future, and that may be done even though they have for some period not been right, and even though that may have caused some damage to the lessor. ... A breach may be remedied ... even though the time for doing the thing under the covenant may have passed ...”
122 In
Tricontinental Corporation v HDFI, Samuels JA said at 702:
“It is arguable that the ‘Event of Default’ in this case was one that could not be rectified because the precise time was fixed on 30 November 1987, that time had passed and could therefore not be retrieved: cf the remarks of Lord Wilberforce in Bunge Corporation, New York v Tradax Export SA, Panama [1981] UKHL 11; [1981] 1 WLR 711 at 715; [1981] UKHL 11; [1981] 2 All ER 513 at 541, in relation to breaches of time clauses; but see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1987) 162 CLR 549 at 562. If that is the case, then there would be no need to go beyond cl 2.2.1(a). In his judgment Waddell A-JA has set out a passage from the judgment of Sugerman J in Batson v De Carvalho (1948) 48 SR (NSW) 417 at 427, concerning the construction of the words ‘capable of remedy’ in s 129(1)(b) of the Conveyancing Act 1919. I agree with Waddell A-JA that an analogous approach should be taken to the construction of cl 2.2.1. If that is that case, then one fixes upon the effect of the default in the given circumstances rather than upon the historical fact of its occurrence. The principal effect of Selkis’ default is that Tricontinental did not receive its money. If Selkis were given a (sic) opportunity to remedy this, it is possible that it could so arrange its affairs as to enable it to pay up. Hence it might be said that in this sense the event of default was capable of remedy.” (emphasis added)
123 Waddell AJA said at 722-723:
“It is said that failure to pay on a particular date is not a default which is capable of rectification because the date has passed and nothing can be done to re-establish what should have been done. On this view, only a continuing default could be regarded as capable of rectification. However, in my opinion, the default in failing to pay the bills due on 30 November was capable of rectification by paying the money due, together with additional interest as provided by the facility agreement, at a future date. I adopt the reasoning of Sugerman J in Batson v De Carvalho ... in relation to whether a default under a lease can be remedied.”
124 In our opinion, these authorities support his Honour’s construction of cl 15.2, which we consider to be correct.
125 BKC contended that, even if it was compelled by cl 15.2 to give a notice to cure, it was still entitled to terminate the Development Agreement for breach of cl 2.1 which, BKC submitted, was an essential term of the contract. In this regard, BKC pointed out that time stipulations in commercial contracts are ordinarily construed as conditions: see for example Halsburys, 4th Ed, vol 9, para 482;
Bunge Corporation v Tradax S.A [1981] UKHL 11; [1981] 1 WLR 711 (cf Lord Wilberforce at 716F-H);
Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537 (at 555 per Mason J).
126 However, this is only a prima facie rule and whether a term is essential depends upon the proper construction of the contract. The principle to be applied was stated by Jordon CJ in
Tramways Advertising Pty Limited v Luna Park (NSW) (1938) SR (NSW) 632, at 641 - 642:
“The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor: Flight v Booth; Bettini v Gye; Bentsen v Taylor ...; Fullers Theatres Ltd v Musgrove; Bowes v Chaleyer; Clifton v Coffey. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight.”
127 See also DTR Nominees Pty Limited v Mona Homes Pty Limited (1978) 138 CLR 421, where Stephen, Mason and Jacobs JJ, referring to this passage, said at 431:
“This statement of the law, which was approved in Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322 at 331, emphasizes that the quality of essentiality depends for its existence on a judgment which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances.”
128 Strictly, it follows from our determination of the immediately preceding question that, once cl 2.1 is considered in conjunction with cls 7.3 and 8.1, it cannot be said that cl 2.1 satisfies the requirements for essentiality specified by Jordan CJ. Our view in this regard is reinforced by the provisions of cl 2.2.
129 These three clauses, cls 2.2, 7.3 and 8.1, are each predicated on and make provision for various circumstances where there has not been strict compliance. It is impossible to say, given the terms of these provisions, that BKC
“would not have entered the contract unless assured of a strict and literal performance of the promise”:
Tramways Advertising Pty Limited v Luna Park (NSW) per Jordan CJ at 642.
130 Clause 3.2 falls into a different category. However, in our opinion, by looking at whether there has been development of the total number of restaurants, viewed over the five year term, with the proviso that at least two be built in any one year, cl 3.2 underscores that strict compliance with cl 2.1 is not
“of the essence” of the Development Agreement.
131 However, BKC submitted that to construe cl 2.1 other than as an essential term requiring strict adherence to the development schedule, would be to ignore the fundamental nature of the provision. Put another way, it was said that cl 2.1 contained the ‘core provision’ of the contract - namely the requirement that HJPL develop restaurants in accordance with a specified time. It was submitted that the essential nature of the provision was reflected not only in cl 2.1 but also in Recital F, which provided:
“BKC and [HJPL] now wish to make further provision for the development of Burger King restaurants in Australia ...”
132 We do not consider that this submission advances BKC’s case. Clauses 3.2, 7.3 and 8.1 also recognise that the development of restaurants is both the core entitlement and core requirement under the Development Agreement. But as we have already pointed out, various consequences flow from a failure to strictly comply with the development schedule. These consequences of non-compliance are not minor and cls 7.3 and 8.1 in particular involve significant benefits to BKC.
133 The 1990 Agreements provided other significant benefits to BKC. In particular, it had the benefit of the substantial development of the BKC system in Australia at HJPL’s cost. It also had the benefit of training, advertising and promotion of the system being provided by and at the cost of HJPL under the Service Agreement. Notwithstanding that these services had to be provided by HJPL, BKC was entitled to royalties, including one half of the royalties payable by third party franchisees. The evidence gave context to the real benefits obtained by BKC under the 1990 Agreements. For example, the Service Agreement was virtually unique, having only one other counterpart worldwide. The royalties which BKC received from its Australian operation, which at the time was essentially HJPL, provided the main source of income which enabled BKC to run the whole of the Asia Pacific operation.
134 It was next submitted that the right granted to HJPL in cl 1.1 was dependent upon HJPL meeting the rate of development in cl 2.1 (subject only to events of force majeure). We do not think this is a correct construction of cl 1.1. It is the right to be franchised which is subject to the full satisfaction of the terms and conditions of the Agreement, although, we acknowledge that the right to develop, without the right to be franchised, would be of little or no commercial value to HJPL. Even so, because of the actual terms of cl 1.1, we do not consider that it advances BKC’s case on this issue.
135 It was further submitted by BKC that the requirements of cls 4 and 5, taken with cl 2.1, involve a complex series of related obligations, which emphasised the essentiality of cl 2.1. However, cls 4 and 5 do not within their terms involve time provisions. They specify the matters which HJPL has to satisfy (for example operational and financial approval) or which must be obtained (for example site approval) before a restaurant is opened. It might be said that these requirements were designed to keep HJPL ‘on the straight and narrow’ and operating strictly within the BKC system. However, these clauses do not impact in any way on the essentiality of the time provision in cl 2.1.
136 HJPL submitted, in its Notice of Contention, that recourse could be had to the 1986 and 1989 Agreements for the purposes of construing clause 2.1. As was the case with his Honour, we have reached our conclusion as to the proper construction of cl 2.1 without doing so. However, as the matter was argued, we propose to consider the point shortly. The structure of the 1986 and 1989 Agreements was relevantly similar to the Development Agreement. The provision for development was contained in cl 2 of both agreements and, in both, there was an express term that
“strict adherence to the above development schedule is the essence of this agreement”. There is no such provision in cl 2.1 of the Development Agreement. Nor is there any provision in the 1986 and 1989 Agreements which is similar to cls 7.3 or 8.1. Indeed there could not be, as such provision would be inconsistent with the express essentiality provision of cl II of the earlier agreements.
137 It is an accepted principle of construction that deleted words in a standard form contract can be referred to as an aid to the meaning of ambiguous words in a term which remains: see
Postle v Sengstock [1994] 2 QdR 290;
Louis Dreyfus & Co v Parnaso cia. Naviera S.A. [1959] 1 QB 498; and
London & Overseas Freighters Ltd v Timber Shipping Co S.A. [1972] AC 1. In
Punjab National Bank v de Boinville [1992] 1 WLR 1138, Staughton LJ (Mann and Dillon LLJ agreeing) also considered (at 1148) that the fact of deletion could be used as an aid to construction. See also
Mottram Consultants Ltd v Bernard Sunley & Sons Ltd [1975] 2 Lloyd’s Rep. 197.
138 This case is not a case of deletion within the terms of a standard form contract. However, in
South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 Spigelman CJ said at 35:
“It is permissible to look at surrounding circumstances for purposes of interpretation of a contract ‘if the language is ambiguous or susceptible of more than one meaning’. (Codelfa supra at 352 per Mason J). As this passage indicates, in this context the word ‘ambiguity’ - ironically a word not without its own difficulties - does not refer only to a situation in which the words used have more than one meaning. A broader concept of ambiguity is involved: reference to surrounding circumstances is permissible whenever the intention of the parties is, for whatever reason, doubtful.”
139 We have found that, having regard to the provisions of the Development Agreement as a whole, the parties could not have intended that the development schedule in cl 2.1 called for strict compliance. However, if there was any ambiguity about the parties’ intention, then it would be proper to resort to surrounding circumstances, including consideration of the terms of the Development Agreement, which was entered into as a settlement of disputes arising under the 1986 and 1989 Agreements, as compared to the terms of those Agreements. The omission of the express provision of essentiality and the inclusion of terms inconsistent with cl 2.1 supports the conclusion to which we have come.
140 Accordingly, no right to rescind at common law had arisen at the time BKC gave the notice.
IMPLIED TERMS
141 HJPL claimed that there were implied into the Development Agreement terms: that BKC would do all that was reasonably necessary to enable HJPL to enjoy the benefits of, inter alia, the Development Agreement (the implied term of co-operation); that BKC must act reasonably in exercising its powers under the Development Agreement; and that there was an implied obligation on BKC to act in good faith in the exercise of its contractual powers.
142 Rolfe J held that these terms could be implied and that there had been a breach of each of the implied terms. His Honour concluded that the consequence of BKC being in breach was that HJPL was
“dispensed ... of the necessity to continue performance”. His Honour also held:
“in the absence of [a] factual justification there would be no basis [for BKC] to exercise the sole ... discretion [under cl 4.1 of the Development Agreement].”
143 BKC disputed that there were implied terms of reasonableness and good faith and also disputed that it was in breach of any of the implied terms as found by Rolfe J. It accepted, however, that if there were such implied terms and it was in breach, it would follow that it could not rely on the Shorter Notice.
144 The implication of the implied term of co-operation was not controversial nor a matter in dispute between the parties: see McKay v Dick (1881) 6 App Cas 251 where Lord Blackburn stated at 263 that:
“as a general rule, ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.
145 In relation to the second and third of these terms Rolfe J held that he was bound by decisions of this Court:
“to hold that there is an implied term of either reasonableness or a duty of good faith or, perhaps both.”
See
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234;
Hughes Bros Pty Limited v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor (1993) 31 NSWLR 91;
Alcatel Australia Limited v Scarcella & Ors (1998) 44 NSWLR 349.
146 Until
Renard, there had only been tentative acceptance in Australian jurisprudence of an implied term of good faith. However, in Renard Priestley JA said at 268:
“... that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.”
147 Priestley JA reviewed the influence that the
Uniform Commercial Code (1951), and its later formulation in the
Restatement (Second) of Contract (1981), had had on American case law.
148 We respectfully refer to his Honour’s detailed treatment of this development and do not repeat it, except to refer to of the
Restatement (Second) s 205 (1981) which provides:
“Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”
149 Priestley JA considered, at 268, that there were strong arguments
“for recognition in Australia of [such a] duty”.
150 His Honour also observed that the American experience indicated that judges used the notion of good faith flexibly as an
“excluder”. In other words, the concept
“serve[d] to exclude many heterogeneous forms of bad faith” so as
“to do justice according to law”. See generally R S Summers in “Good Faith” in
General Contract Law and the Sales Provisions of the Uniform Commercial Code (1968) 54 Virginia Law Review 1995, discussed by Priestley JA at 266-7.
151 In seeking to find a place for the established American jurisprudence in Australian law, Priestley JA drew upon a wide source of material. We wish to refer only to two of those sources. First, there is the well documented Australian experience of controlling the operation of general rescission clauses by preventing their use
“for improper and extraneous purposes”: see
Godfrey Constructions Pty Limited v Kanagra Park Pty Limited [1972] HCA 36; (1972) 128 CLR 529 at 548. See also
Pierce Bell Sales Pty Limited v Frazer [1973] HCA 13; (1973) 130 CLR 575 per Barwick CJ at 587. Secondly, there are the many statutory provisions, which require contracting parties in a variety of circumstances to act reasonably and fairly. Priestley JA cited by way of example (at 268)
The Money-Lenders and Infants Loan Act 1905, the
Hire Purchase Agreement Acts of 1941 and 1960, s 88F of the
Industrial Arbitration Act 1940 (inserted in 1949 and expanded in 1966), the
Contracts Review Act 1980, the
Credit Act 1984 and s 51A of the
Trade Practices Act 1974 (Cth) (inserted to operate from 1986).
152 His Honour then concluded at 268:
“Although each of these statutes dealt with carefully defined types of contract, in their totality they covered contractual situations affecting a great many people, so that, to repeat something I have said elsewhere, ‘a very large area of everyday contract law is now directly affected by statutory unconscionability provisions carrying with them broad remedies’. As the words used in the sequence of statutes show, the ideas of unconscionability, unfairness and lack of good faith have a great deal in common. The result is that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations.” (emphasis added)
153 The other members of the Court in
Renard were Meagher and Handley JJA. All three members of the Court agreed in the result. Meagher JA at 276 considered that, on the facts, the respondent acted under such a misapprehension and prejudice in relation to the correct factual circumstances, he could not have been “
satisfied” within the meaning of the clause. Handley JA at 279 held that, as a matter of construction, the respondent’s power to
“take over the whole or any part of the work” or cancel the contract, had to be exercised reasonably. Priestley JA, as a postscript to his judgment, said at 271:
“... I have had the benefit of reading what Handley JA has written. He brings to light cases which both bear directly on the principal question of substance in this case and provide illustrations of my general theme of the anxiety of courts, by various techniques, to promote fair and reasonable contract performance. His materials, and his analysis of them lead directly and powerfully to the conclusion I more laboriously reached when considering implication. However, I will still restrict the reasoning upon which I base my own conclusion about the implied term to that preceding the heading ‘Statutory Analogy’.
154 His Honour then stated that he restricted the reasoning upon which he based his conclusion on the appeal in
Renard to the issue of reasonableness. We have referred and relied extensively upon his Honour’s judgment in so far as it deals with an implied obligation of good faith, as it provides, obiter, authoritative background to the development of the law on this issue.
155 In
Alcatel, Sheller JA (Powell and Beazley JJA agreeing) accepted that there could be an obligation of good faith implied into commercial contracts. His Honour said at 368:
“If a contract confers power on a contracting party in terms wider than necessary for the protection of the legitimate interests of that party, the courts may interpret the power as not extending to the action proposed by the party in whom the power is vested or, alternatively, conclude that the powers are being exercised in a capricious or arbitrary manner or for an extraneous purpose, which is another [way] of saying the same thing. Thus, a vendor may not be allowed to exercise a contractual power where it would be unconscionable in the circumstances to do so: Pierce Bell Sales Pty Ltd v Frazer.”
156 Sheller JA concluded at 369:
“The decisions in Renard Constructions and Hughes Bros mean that in New South Wales a duty of good faith, both in performing obligations and exercising rights, may by implication be imposed upon parties as part of a contract. There is no reason why such a duty should not be implied as part of this lease.”
157
Hughes Bros v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney was not concerned with an implication of good faith, but with the implied term of reasonableness in connection with a different but related term in the same contract which was under consideration in
Renard. The Court in
Hughes Bros considered itself bound by
Renard.
158 In
Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151, Finn J at 192 considered that the
“more open recognition [of an implied term of good faith] in our own contract law is now warranted”. In expressing that view, his Honour pointedly departed from the view, expressed by Gummow J in
Service Station Association Limited v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 96, that it required a
“leap of faith” to convert well established equitable doctrines and remedies
“into a new term as to the quality of contractual performance implied by law”.
159 A review of cases since
Alcatel indicates that courts in various Australian jurisdictions have, for the most part, proceeded upon an assumption that there may be implied, as a legal incident of a commercial contract, terms of good faith and reasonableness. For example, in
Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310 Byrne J, in dealing with the provisions of a standard licence agreement whereby independent operators were licensed to conduct McDonalds fast food stores, said at para 120:
“... I do not see myself at liberty to depart from the considerable body of authority in this country which has followed the decisions of the New South Court of Appeal in Renard Construction (ME) Pty Ltd V Minister for Public Works. I proceed, therefore, on the basis that there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreement in good faith and reasonably, and not capriciously or for some extraneous purpose. Such a term is a legal incident of such a contract”.
160 In
Garry Rogers Motors Aust Pty Limited v Subaru (Aust) Pty Ltd (1999) ATPR 41-703, which involved a standard form motor vehicle dealership agreement, Finkelstein J said at 43,014:
“The first respondent was prepared to accept the implication of [a term of good faith] in the dealership agreement for the purposes of the interlocutory application. It could hardly do otherwise. Recent cases make it clear that in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied; not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship; see Renard v Constructions (VIC) Pty Limited v Minister for Public Works; Hughes Bros Pty Limited v The Trustees of the Roman Catholic Church for the Archdiocese of Sydney & Anor; Alcatel Australia Limited v Scarcella & Ors.
If such a term is implied it will require a contracting party to act in good faith and fairly, not only in relation to the performance of a contractual obligation, but also in the exercise of a power conferred by the contract. There is no reason to think, prima facie at least, that the obligation of good faith and fair dealing would not act as a restriction on a power to terminate a contract, especially if that power is in general terms.”
161 In
Saxby Bridge Mortgages Pty Ltd v Saxby Bridge Pty Ltd [2000] NSWSC 433, Simos J rejected the implication of a term of good faith in an agreement, inter alia, for the provision of mortgage services. However, his Honour approached the question on the basis of whether the conditions necessary for the implication of a term, ad hoc, had been satisfied. He does not appear to have considered whether such a term was a necessary legal incident of the contract.
Saxby Bridge appears to stand on its own in this regard.
162 In
Asia Television Ltd v Yau’s Entertainment Pty Ltd (2000) 48 IPR 283 Gyles J stated that the implication of a term to act in good faith in a licence agreement, in which the second applicant licensed entertainment programmes for reproduction and distribution by the respondent, and the scope and content of such a clause were
“controversial questions”. Without finally determining whether there were such implied terms, his Honour held that there was no relevant application of such an obligation on the facts of that case.
163 This necessarily brief survey of the case law post
Alcatel indicates that obligations of good faith and reasonableness will be more readily implied in standard form contracts, particularly if such contracts contain a general power of termination. Clearly, however, the cases where these terms are to be implied are not limited to standard form agreements.
Alcatel itself, which involved a 50 year lease agreement of commercial premises, provides an example of a one off contract where such terms were implied.
164 There also appears to be increasing acceptance (
Saxby Bridge aside) that if terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law. We consider that to be correct. The argument by Mr Archibald, senior counsel for BKC, proceeded on that basis. He submitted, however, that the pre-conditions for the implication of a term at law had not been satisfied in this case, and that the implication was unnecessary as the contract comprehensively dealt with the rights of the parties. This raises the question of when a term will be implied at law.
165 Traditionally, specific terms have been implied as a matter of law into contracts of a certain class. Examples include contracts between employer/employee (implied term not to disclose secret processes), for the sale of goods (implied terms of reasonable fitness and merchantable quality and that payment and delivery of goods are concurrent obligations), for the provision of work and materials, between landlord and tenant (implied term that premises will be reasonably fit for habitation) and in contracts of carriage by sea (an implied warranty of seaworthiness): see
Byrne v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410 at 448;
Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 487; Professor Glanville Williams, “Language and the Law” (1945) 61 Law Quarterly Review 403. Of course, some of these are implications now codified by statute: for example, contracts for sale of goods under the
Sale of Goods Act 1923 (NSW).
166 The Development Agreement does not fall into any of the traditional class of cases where terms have been implied as an incident of the contract.
167 For a term to be implied at law in a new category of case, it must be both reasonable and necessary: see Castlemaine Toohey and Byrne. In Byrne, McHugh and Gummow JJ explained the meaning of necessity in this context. They said at 450:
“Many of the terms now said to be implied by law in various categories of case reflect the concern of the courts that, unless such a term be implied, the enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless, or, perhaps, be seriously undermined. Hence, the reference in the decisions to ‘necessity’. ... This notion of ‘necessity’ has been crucial in the modern cases in which the courts have implied for the first time a new term as a matter of law.”(emphasis added)
168 It is within the framework of that notion of necessity that we consider in detail the submissions of each of the parties as to whether there should be implied into the Development Agreement the terms of good faith and reasonableness. Before doing so however, it is convenient to understood what is involved in those terms if they are implied.
169 We have already touched upon this: see especially from paragraph 146. However, it is worth noting that the Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley JA said in Renard at 263:
“The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith”.
170 Priestley JA commented further at 265 that:
“... in ordinary English usage there has been constant association between the words fair and reasonable. Similarly there is a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability.”
171 Rolfe J observed that in Alcatel, Sheller JA at 369 appeared to equate the notions of “
reasonableness” and “
good faith”. Whilst Sheller JA did not say that in terms, his review of the case law and academic and extra-judicial writings on the topic, clearly support the proposition. In addition to his references to
Renard, Sheller JA referred to the statement of Sir Anthony Mason in his 1993 Cambridge Lecture, that it was probable that the concept of good faith “
embraced no less than three related notions”:
“(1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the
promise itself);
(2) compliance with honest standards of conduct; and
(3) compliance with standards of contract which are reasonable having regard to the interests of
the parties.”
172 In
Garry Rogers, Finkelstein J considered at 43,014 that such a term imposed an obligation on a party “
not to act capriciously”. He pointed out, however, that such a term will not restrict a party acting so as to promote its own “
legitimate interests”. As his Honour explained, “
provided the party exercising the power acts reasonably in all the circumstances the duty to act fairly and in good faith will ordinarily be satisfied”.
173 The same point was made in
Kham & Nates Shoes No 2 Inc v First Bank of Whiting (1990) 908 F 2d 1351, at 1357, that
“[p]rinciples of good faith ... do not block use of terms that actually appear in the contract”. There must be something more. This was explained in
Metropolitan Life Insurance Co v RJR Nabisco Inc (1989) 716 F Supp 1504, at 1517:
“In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation ‘which would be inconsistent with other terms of the contractual relationship’. ... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits. ... As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement.”
See also
Rio Algom Corporation v Jimco Ltd (1980) Utah, 618 P 2d 497.
174 BKC submitted that there should not be implied into the Development Agreement implied terms of reasonableness or good faith (or any hybrid of the two). It raised two general objections to the implication of such terms. First, it was said that caution should be exercised in implying any such terms, as
“such terms are calculated to subvert and distort the carefully negotiated and articulated contractual balance which the parties have achieved”.
175 Secondly, it was submitted that such a term should not be implied where the application would occasion contradiction of, or friction with, express provisions of the contract: see for example
Metropolitan Life Insurance Company v RJR Nabisco Incorporated. It was submitted that His Honour erred in not asking whether there would be such contradiction or friction. It was then submitted that as the express provisions of the Development Agreement
“comprehensively and exhaustively delineate the rights and obligations of the parties. [They] cover the field” and any implied term of reasonableness or good faith would
“pro tanto” be inconsistent. The provisions of cl 4.1 (a) and cl 4.2 were said to demonstrate this point.
176 Those clauses, it was submitted, established an “objective benchmark against which the grant or withholding of operational approval” was to be made. It was submitted that “[t]he introduction of a generalised qualification of reasonableness to that subject matter would alter the expressly formulated benchmark and to effect a substantive modification to the operation of the express term”. We understand this submission to mean that the objective benchmarks were the need to have operational, financial and legal approval as defined in cl 4.2. This submission is acceptable in so far as it goes. However, it does not grapple with two fundamental issues. First, the granting of operational, financial and legal approval is within “the sole discretion” of BKC. If full force is given to that concept, it would allow BKC to give or to withhold relevant approval “at its whim” including capriciously, or with the sole intent of engineering a default of the Development Agreement, giving rise to a right to terminate. That is hardly the language of objectivity. The point is well illustrated by the observations of Priestley JA in Renard at 258:
“It seems clear that the words of the clause empower the principal to give a notice to show cause upon any default in carrying out any requirement in the contract. Thus for a completely trivial default the principal can give a notice to show cause. It is possible to imagine many situations in which, if a notice for some trivial breach were given the contractor might fail, as a matter of fact, to show cause within the specified period to the satisfaction of the principal why the powers should not be exercised against him. (One obvious example would be where, through some mistake, the contractor’s attempt to show cause was delivered late.)
For the principal, in such circumstances, to be able then to exclude the contractor from the site and/or cancel the contract would be, in my opinion, to make the contract as a matter of business quite unworkable. One way of explaining this view is to say that no contractor in his senses would enter into a contract under which such a thing could happen. The reasonable contractor, the reasonable principal and the reasonable looker-on would all assume that such a result could not come about except with good reason.
The over-riding purpose of the contract from both the contractor’s and the principal’s point of view is to have the contract work completed by the contractor in accordance with the contract, in return for payment by the principal in accordance with the contract. The insertion of a sub-clause such as subcl 44.1 not subject to the constraint of reasonable use by the principal is quite inconsistent with all the main contractual promises by each party to the contract to the other.”
177 Secondly, on BKC’s submission, an exercise of discretion on wrong facts fell within the ambit of cl 4.1 provided that the wrong facts were not fraudulently determined. That too would permit BKC to effectively put an end to HJPL’s valuable development rights under the Development Agreement for reasons which could not be justified on the facts if they were accurately ascertained. In our opinion, applying the words used by McHugh and Gummow JJ in
Byrne, the
“enjoyment of the rights conferred by the contract would or could be rendered nugatory, worthless or perhaps seriously undermined” if the clause was able to operate in the manner for which BKC contended.
178 BKC sought to resist this result by submitting that the clause remained workable without the implication, as a fraudulent exercise of the discretion would not satisfy the clause (which is correct) and that
de minimis breaches would not permit an exercise of discretion against the grant of approval. In regard to the latter point, it was submitted that whilst de minimis contraventions of operation or financial requirements were simply
“to be disregarded”, minor breaches were not.
179 On HJPL’s construction of cl 4.1, the matters specified in sub cls (a), (b) and (c) operate as conditions precedent to grant of approval to a franchise application. HJPL submitted, however, that the criteria for operational approval were wide and indefinite in two respects.
180 First, cl 4.1(a) required that the interior and exterior of restaurants be maintained to reflect
“an acceptable Burger King image”. Mr Bathurst, senior counsel for HJPL, sought to demonstrate this point by reference to the requirement to comply with the standard specifications and procedures contained in BKC’s Manual of Operating Data. The manual contains the most detailed requirements relating to every aspect of operating a Burger King restaurant from food handling to recruiting, cleaning and manner and style of service. Page five of the Service Procedure Requirements provides an example. It sets out a nine phase service procedure starting with the first requirement
“smile greet and order” and ending with the
“smile thank you and parting phrase” such as
“thanks very much, have a great day” or
“thanks for coming, hope to see you again soon”. Senior counsel submitted it would be impossible not to find at least one operational breach in each restaurant, so that, unless some restriction was placed upon the operation of cl 4.1 the rights under the Development Agreement would be illusory.
181 Secondly, it confers upon BKC the right to change its standards, specifications and procedures at its sole discretion. It would appear to follow, on this submission, that it could do so without notice to HJPL, there being no contractual obligation to give notice of the change, unless the provision was conditioned by an obligation of reasonableness or good faith.
182 Senior counsel further submitted that BKC’s response that a
de minimis breach would not disqualify a contracting party from operational approval did not provide an adequate answer to this problem because of the uncertainty that this would otherwise import into the operation of the clause. Rather, it was necessary to imply the terms of reasonableness and good faith so as to ensure that HJPL had the contractual benefits to which it was entitled under the Development Agreement.
183 In our opinion, HJPL’s submission must be correct. There is such an extraordinary range of detailed considerations, particularly in relation to whether operational requirements have been satisfied, contained within cl 4.1(a), that unless there was an implied requirement of reasonableness and good faith, BKC could, for the slightest of breaches, bring to an end the very valuable rights which HJPL had under the Development Agreement. Further, contrary to BKC’s submissions, cl 4 does not contain only objective criteria against which the discretion is to be exercised. There are many subjective, evaluative notions involved. The reflection of
“an acceptable Burger King image” is one example. Senior counsel’s example is another.
184 The meaning of cl 4.1(b) provides further support for the implication of these terms. That clause requires that for the purposes of financial approval, HJPL’s stores must all be performing their obligations under their individual franchise agreements and HJPL must not be in default of any of its financial obligations to BKC. These two criteria qualify as objective benchmarks against which to grant, or not to grant, financial approval. However, BKC contended that HJPL’s obligations under cl 4.1(b) went further and that the provision that HJPL
“acknowledges and agrees that it is vital to BKC’s interest that a franchisee be financially sound to avoid a business failure affecting the reputation and good name of the Burger King marks” imposed a contractual requirement to that effect on HJPL. The other possible construction of this part of cl 4.1(b), and that favoured by HJPL, is that it was no more than an acknowledgment of a particular circumstance and did not impose a contractual obligation.
185 For present purposes, and without deciding the matter, we propose to assume that BKC’s submission on this is correct and that this part of cl 4(1)(b) has contractual content. Once that assumption is made, it can be immediately seen that the provision is also wide and can have both an objective and subjective content. That being so, it reinforces our view that BKC’s contractual powers under cl 4.1 are to be exercised in good faith and reasonably. That does not mean that BKC is not entitled to have regard only to its own legitimate interests in exercising its discretion. However, it must not do so for a purpose extraneous to the contract - for example, by withholding financial or operational approval where there is no basis to do so, so as to thwart HJPL’s rights under the contract.
186 In conclusion, therefore, we are of the opinion that the Development Agreement is subject to implied terms of reasonableness and good faith and his Honour was correct to so find.
187 We should observe at this point that contrary to the submission of BKC, his Honour did not equate the implication of the terms of reasonableness and good faith with BKC’s fiduciary obligations. In other words, his Honour did not find that BKC was required to prefer the respondent’s interests to its own or to subjugate its interests to those of the respondents - the fiduciary duty point. Rather, his Honour found that the discretion conferred in cl 4.1 was one which was required to be exercised reasonably, so that it could not be used for a purpose foreign to that for which it was granted, such as to thwart the respondent’s right to develop and ultimately to procure a situation where the Agreement could be terminated. This approach is consistent with the principles stated in
South Sydney District Rugby League Football Club v News Ltd (2000) 177 ALR 611 and is the conclusion to which we have come.
188 His Honour held that BKC had breached the implied contractual provision of good faith and reasonableness in the following respects:
(i) its conduct in purporting to terminate the Development Agreement;
(ii) placing a freeze on the ability of HJPL to recruit third party franchisees;
(iii) withholding financial approval to development under the Development Agreement; and
(iv) refusing operational approval under the Development Agreement.
189 In reaching his conclusion, his Honour applied an objective standard in deciding that BKC’s actions were neither reasonable nor for a legitimate purpose. In coming to that conclusion, his Honour considered the actions of the individuals at senior management/decision making level within BKC. Upon an evaluation of the actions of those persons his Honour held that they did not conform with an honest person’s view of what would constitute fair dealing. His Honour’s approach, if correctly based, is consistent with
Renard at 258, 261 and 268.
190 BKC submitted that his Honour erred in finding breach, submitting that it was necessary to distinguish between conduct which took advantage of power and information in the hands of one party to advance a party’s own position to the detriment of another and conduct which was correctly characterised as lacking good faith in a legal sense.
191 In considering the of question whether his Honour was correct in finding that there had been a breach of the implied terns, it is convenient to deal with the issues of third party freeze and financial and operational disapproval as BKC’s conduct in giving the Shorter Notice is dependant, in some respects, upon the determination of those issues. The conduct in giving the Longer Notice raises separate considerations.
192 Before dealing with any of these issues, however, we refer to BKC’s attempts to impose upon HJPL the requirement to enter into Target Reservation Agreements (TRA) in respect of proposed new restaurants. This was in place of the Preliminary Agreement which was one of the agreements specified in the Development Agreement as being a preliminary requirement to the grant of franchise approval. This attempt occurred first in point of time and is part of the contextual background in which the other events occurred.
193 BKC sought to introduce the TRA in about March 1995 in place of the Preliminary Agreement. Although some of the terms of the TRA reflected those of the Preliminary Agreement, there were a number of substantial departures. Thus, Article 1.1 of the TRA provided:
“Exclusive Development Rights. Subject to the terms of this Agreement, the Developer is hereby granted the exclusive right to ... search for potential Restaurant sites at or within the Target Locations. A Target Location is defined as either a specific area with clear, describable boundaries or a specific property description or address. It is expressly understood, however, that this exclusivity is solely for the purpose of locating potential sites prior to development of a Restaurant, and that after opening of a Restaurant pursuant to the terms of this Agreement, (a) all exclusivity and all territorial rights terminate, (b) BKC is free to locate additional Burger King restaurants anywhere near or within the Target Locations as it deems appropriate in its sole business judgment, and (c) the Developer waives any right it may have to oppose the location of such additional Burger King restaurants anywhere near or within the Target Locations.”
194 It will be immediately observed that this provision is contrary to the rights granted to HJPL under cl 7.3 of the Development Agreement in relation to HJPL’s development rights in the development states. In particular, under the TRA, once HJPL built a restaurant, its rights of exclusivity were abrogated, whereas, under cl 7.3 of the Development Agreement, provided HJPL was in compliance with the development schedule, BKC could only develop restaurants in the development states (either directly or through franchisees) if it had HJPL’s prior consent (such consent not to be unreasonably withheld).
195 Clause 1.4.1 purported to provide some protection to existing stores. However, it significantly detracted from HJPL’s rights under the Development Agreement. It provided that an existing franchisee had 15 days to object to any proposed new store within a five kilometre radius. The existing franchisee then had another 15 days to:
“(a) Provide BKC with evidence, including without limitation a written rationale and a proforma income statement, supporting the Developer’s belief that the New Location will render all reasonable sites within the Impacted Target Location no longer economically viable or profitable:
and
(b) Use its best efforts to locate and submit to BKC a Substitute Target Location for approval by BKC pursuant to BKC’s then current approval criteria.”
196 Article 4 of the TRA set out the target reservation and development procedures in respect of any proposed new site. Clause 4.2.2 replicated cl 4.1 of the Development Agreement.
197 Clause 4.2.4 then added an additional requirement to that found in the Development Agreement in respect of site approval. It provided that an applicant (referred to in the TRA as ‘the developer’) required written site approval from BKC as a prerequisite to authorisation to begin construction of a restaurant at a particular location. BKC had the right in its sole business judgment to deny site approval if it considered:
“that the location is not an appropriate restaurant site: the location is inconsistent with BKC’s market planning: the location lies within a trade or market area which may materially affect an existing franchisee of BKC: development at the site proposed by the developer will cause a material loss of sales to an existing BKC licensed restaurant: or the proposed site is unacceptable to BKC for any other good faith reasons”.
198 The effect of this clause was that, even after franchise approval had been granted, the applicant, who relevantly for present purposes was HJPL, was at the mercy of BKC in relation to the site at which a restaurant could be developed. Clause 2 of the Preliminary Agreement had also required site approval but did not contain the restrictions found in the TRA. The terms of cl 4.2.2 of the TRA were therefore a significant step in advancing BKC’s aim to regain control of the Australian market. Miolla agreed that it was this provision of the TRA which contained
“the sting in the tail”.
199 Article 5 related to fees. In particular cl 5.1.1 introduced for the first time the requirement that the applicant pay a non-refundable deposit of US$10,000 for each target location specified in the application. However, as appears from the correspondence from BKC to HJPL on 17 March 1995 and is confirmed in the letter to Cowin on 7 May 1995, the fee was intended to be offset against franchise fees and in HJPL’s case, would be repaid upon opening of a new store.
200 Fitzjohn said he believed that the TRA was designed to achieve a similar objective to the Preliminary Agreement through a different mechanism. Both Fitzjohn and Miolla agreed, however, that the requirement that there be a payment as a consideration of entering into the TRA was a fundamental difference from the provisions of the Preliminary Agreement. In practice, that requirement may not have been so drastic, except to the extent that an up front payment had to be made, whereas none had been previously required. Of much greater significance in our opinion, was the extent to which the provisions of the TRA diminished HJPL’s existing rights, particularly under the Development Agreement. In this regard, Miolla conceded that the introduction of the TRA was one of the steps involved
“in taking back the market place”.
201 On 10 July 1995, there was a meeting between Miolla and Blauer on behalf of BKC and Cowin. The issue of the TRAs was raised at that meeting. Cowin advised them that the TRA took away HJPL’s rights under the Development Agreement. Cowin said that he did not
“object to a co-ordinated approach to market planning [but one], which preserves our rights”.
202 The issue in relation to the TRAs remained on foot until early 1996. At the end of the day, BKC did not succeed in having HJPL enter into any TRAs. However, it was submitted on behalf of HJPL that BKC’s attempts to introduce the new form of agreement was evidence that BKC, in this period, was intent on taking control of the Australian market and was prepared to do so in disregard of HJPL’s rights. We will return to this submission later.
203 It was also submitted that the matter is relevant to damages as it was an example of another hurdle put in the way of HJPL in the development of its restaurants.
204 In order to determine whether his Honour’s conclusion that BKC had deliberately pursued a course to thwart HJPL’s rights under the Development Agreement is correct, it is necessary to review BKC’s corporate conduct in the period leading up to the withholding of operational and financial approval and the imposition of the third party freeze.
205 His Honour held that BKC’s freeze on third party recruitment was not justified by the Development Agreement nor by any of the factual matters upon which BKC sought to justify it being imposed. His Honour concluded, at 544, that by imposing the freeze:
“BKC was pursuing a course of attempting to thwart HJPL’s further development, so that BKC could develop the market without regards to the rights of HJPL”
206 His Honour was also satisfied that the effect of the freeze:
“dispensed HJPL of the necessity to continue to tender performance. In the circumstances BKC was in breach of contract by imposing the freeze.”
207 The third party freeze was imposed in May 1995 to allow for the finalisation of an updated pro forma Profit and Loss statement (the pro forma P&L) to be included in the new Information Package which was being prepared at that time for proposed franchisees. Power advised Miolla, by email dated 17 May 1995, that he had instructed McCarthy to cease third party franchisee recruitment. Effectively, the freeze was never lifted.
208 It should be noted at the outset that BKC did not assert that the freeze was authorised by the terms of the Development Agreement or any other contract between the parties. Rather, BKC relied upon a concession by McCarthy in cross-examination that he agreed to the third party freeze. BKC submitted, therefore, that there was no legal fault in it having imposed the freeze.
209 There was evidence which suggests that there was nothing unreasonable in BKC requesting that third party franchisees not be recruited at that time until finalisation of the pro forma P&L statement. Certainly McCarthy considered it was an appropriate step to take at that time. A new Information Package was being prepared and, in early May 1995, Power had found some discrepancies in the draft pro forma document which had been prepared, as well as in the actual figures, at least for one state. This led to discussion, not only as to whether the information in the draft document was correct, but also what financial information should be included.
210 Senior counsel for HJPL submitted that HJPL had not consented to a freeze as such. Rather, it was submitted that the subject of both the letter of 17 May 1995, when Power informed Miolla that he had instructed McCarthy to cease third party franchisee recruitment, and Miolla’s letter to McCarthy, confirming that he believed they were in agreement in relation to the freeze, was the need to have accurate information in the pro forma P&L, which was part of the Information Package forwarded to prospective franchisees. It was further submitted that McCarthy’s concession in cross-examination was restricted to that issue. It was submitted that in any event Cowin objected strenuously to the freeze. This was particularly so when, in December 1995, BKC changed the basis upon which it said the freeze was required, namely HJPL’s weak financial performance. Cowin wrote to Miolla, on 19 December 1995, asking that BKC
“[p]lease explain” its position, especially as HJPL had met BKC’s
“financial criteria at the most recent review”. HJPL submitted that the freeze was neither contractually based nor otherwise justifiable, but was merely another step, as was the TRA issue and the exclusion of HJPL from the Shell venture, along the way to BKC
“[taking] back the market”. It followed on this submission that the trial judge’s finding that McCarthy had not agreed to the third party freeze was correct.
211 It is important to keep in mind that when the third party freeze was imposed, Power indicated to McCarthy that this was a “lull” only, so that forms and procedures could be “settled on”. It is clear from Power’s letter of 20 June 1995, that the lull was intended to be for a short period only and that this is how it was understood by McCarthy. This is apparent from his facsimile to Power, on 25 July 1995, when he asked when it was expected that the pro forma P&L would be finalised. Power responded that it would be within the next four weeks. McCarthy advised persons inquiring in relation to third party franchises accordingly.
212 This, in our opinion, confirms that HJPL did not consent to any ongoing freeze.
213 Miolla asserted in his cross-examination that McCarthy’s agreement went beyond a freeze until the pro forma P&L was prepared. He said that the agreement was that there should be no further franchising until the pro forma P&L situation was sorted out and
“if, once getting to the right numbers, they showed that the system was on average making a loss, then it was my understanding that Fitzjohn, Power, Blauer and McCarthy all agreed that we should temporarily suspend recruiting franchisees”. Miolla said that the idea was that the freeze was imposed until, on a restaurant profit and loss level, the position was reversed. Miolla also asserted that this agreement was subject to an exception in respect of large or institutional franchisees, who had the financial resources to incur a loss.
214 However, acting on Power’s advice, McCarthy in the ensuing months put forward a number of third party franchisee applications for approval. He followed up these applications seeking advice as to when they would be approved. He put forward suggestions as to how BKC could deal with the applications in the short term. When no result was forthcoming from BKC, he advised Cowin that he considered the matter was urgent and HJPL should seek a review of the situation.
215 Thus, neither the communications between the parties nor McCarthy’s actions after having been informed that third party recruiting was to cease, support BKC’s submission that McCarthy had consented to the freeze, as opposed to a short term interruption to enable the pro forma P&L to be finalised - a task which was BKC’s to undertake and complete.
216 Accordingly, we agree with his Honour’s finding that McCarthy did not consent to the freeze, in the sense contended by BKC. Rather, he agreed to a temporary suspension whilst the matter of the pro forma P&L was sorted out.
217 That leads to two other matters. First, in order for BKC to finalise the pro forma P&L, it needed HJPL’s financial information. There was no suggestion that HJPL did not provide this. Indeed, up until about June 1995, HJPL was providing financial information on a monthly basis. On 3 July 1995, Butler wrote to Power, enclosing P&L’s for each state for the financial year ended June 1994 and stating
“I am not sure where you are with the pro forma P & L’s but from a recent discussion with [Cowin] I believe this is in your court”. No one in BKC advised HJPL that the position was otherwise. Indeed, the position from about the middle of June 1995 was that BKC did nothing to advance the preparation of the pro forma P&L.
218 The second matter is this. In about mid-October 1995, BKC changed, or at least expanded upon, the reason why it had imposed the freeze. On 18 October, Miolla wrote to Cowin and advised him that BKC had decided to suspend franchisee recruitment
“given the lack of financial performance by the system”. BKC did not again refer to the issues concerning the pro forma P&L until mid March 1996.
219 Miolla said that he assumed the 18 October 1995 letter was a considered letter. He was then cross-examined as follows:
“Q I want to put to you again that the freeze on third party franchisees, because outlets were operating unprofitably, was a freeze unilaterally imposed by Burger King. Do you agree with that?
A I don’t think I can agree with that, no, and I’m not trying to imply ... that they didn’t protest. What I’m trying to say that initially there was a discussion of our concerns and the way they sought to address those concerns was by saying we were reading the financial information incorrectly. That was the nature of the protest, so if that equals doing it unilaterally, then, yes, we did it unilaterally. If that equals we talked about it, expressed our concerns and we tried to work through them, I mean, that’s all I’m trying to say.” (emphasis added)
He added that HJPL
“protested vehemently our analysis of the financial issue”.220 Miolla was cross examined further:
“Q I want to suggest to you that when you said that Hungry Jack’s agreed to a freeze because of
poor performance in the system, that was false. Do you agree with that?
A No.
Q I also want to suggest to you that the evidence you gave [that McCarthy agreed that there would
be a freeze because Hungry Jack’s was making a loss] was false. Do you agree with that?
A As I’ve just said, my answer today is correct. I would agree on looking back [at my previous
answer] that my answer is incorrect and that its not adequate(sic) detailed.”
221 This evidence does not support the proposition that HJPL consented to the freeze because of its financial position. Significantly, Cowin was never cross examined to the effect that he had done so.
222 It should also be noted at this point that, although BKC in its submissions relied upon a consensual third party freeze, it has never done so on the basis that the consent was given because of lack of financial performance by the system.
223 In summary, the position in relation to the third party freeze was as follows. Except to the extent that McCarthy agreed to a temporary and short term suspension of third party franchisee recruitment, we are satisfied that HJPL did not consent to the imposition of the freeze. BKC did not seek to support the freeze on any contractual basis. The freeze was imposed at a time when BKC had made a policy decision to, in some way, take back the Australian market. It was clear that what was meant by this was that it was actively seeking ways to at least reduce HJPL’s dominant role if it could not remove it from the market altogether. One of the means available to HJPL to both satisfy the development schedule and to develop generally was through third party franchisee arrangements. HJPL was precluded from doing so from mid May 1995 at a time when there was evidence that there was active interest by prospective franchisee applicants. Although in May 1995 there may have been a reasonable basis to suspend the processing of applications for a short time, there was no basis for BKC to do so from at least early June 1995 onwards.
224 We consider, therefore, that the continued imposition of the freeze was in breach of the implied terms of reasonableness and good faith.
225 HJPL was financially disapproved by BKC on 12 September 1995 when Miolla wrote to Cowin advising that pending
“expansion requests are delayed due to the delay in delivering your year-end financial statements”. The reason given for BKC’s action was that:
“the terms of the Development Agreement prohibit HJPL from expanding unless it submits annual, audited financial statements which show that it is in compliance with our financial requirements for expansion.”
226 The Development Agreement contained no express provision to that effect. Miolla eventually conceded that in cross-examination.
227 Rolfe J held that on the proper construction of cl 4.1,
“as a matter of contract, BKC was not entitled to the further financial information it was seeking”. BKC submitted, however, that the effect of the provisions of cl 4.1 and, in particular, the terms of the standard Capitalisation Plan and cl 4.1(b) enabled it to seek the information and conduct the review it did.
228 Before dealing with the provisions of the Capitalisation Plan and cl 4.1(b), it is necessary to return to an earlier point in the chronology.
229 In May 1994, HJPL lodged applications for 28 new restaurant sites. The applications were eventually forwarded to Driscoll for financial approval in about October 1994. On 14 October 1994, she wrote to Butler advising:
“In order to process the financial piece of the approval, I need Hungry Jack’s most recent fiscal year-end financial statements, that include individual restaurant P&L’s, a consolidated P&L for the entire business, a consolidated balance sheet and statement of cash flows, as well as all accompanying notes to the financial statements. Also, if available, I would need a debt service schedule, outlining the terms and the annual principal payments and interest payments.”
230 Although the company referred to in the fax transmission header was
“Competitive Foods Aust Ltd”, it appears from the context generally and other correspondence that the accounts being requested were HJPL’s. It is not certain from the judgment at first instance how Rolfe J understood the letter. However, we have treated it as a reference to HJPL.
231 In November 1994, Butler provided HJPL’s “Special Purpose Financial Reports”. These were audited accounts prepared in a form to enable HJPL to comply with the requirements of the Corporations Law and were in the correct form of accounts for subsidiaries.
232 On 29 November 1994, Power, on Driscoll’s instructions, wrote to Butler in the following terms:
“I forwarded the copy of the financial statements you gave me recently in Perth to ... Driscoll in Miami. While these are a help, there are still gaps in the information as we noted might potentially be the case during our meeting.
At this stage ... I would like to address exactly what the Burger King financial approval process is and what it entails, so that you have a full understanding of why all this information is being sought.
You would be aware that every time a franchisee applies for a new franchise to open an additional restaurant, they must first be reviewed for legal, financial and operational approval. ...
...
Financial approval is based on assessment of certain ratios, including the Fixed Charge Coverage Ratio (FCC) and the Debt to Equity ratio (D:E). FCC must be a minimum of 1.15:1 or higher. D:E must be a maximum of 1.5:1 or less. I attach an explanation of how they are respectively calculated.
... there is no data in regard to the debt liability or repayment terms of the franchisee organization, no interest expense, no depreciation/amortization, nor rent or lease costs either on land, buildings or equipment.
I note your comments in your letter to her in regard to cash flows and borrowings, but this does not resolve the requirement for her to assess the debt status of your organization and calculate the D:E ratio, as well as the FCC ratio. We essentially need you to provide [this] appropriate data that will allow her to make all her calculations.
I have belabored (sic) this matter intentionally, as it is very important for a franchisor organization to regularly verify the financial status of its expanding franchisees for obvious reasons. This verification in regard to Hungry Jack’s, has not been done for some time and will be done a minimum of once or possibly twice per annum going forward.”
233 In response to Power’s letter, Butler provided further information on 5 December 1994, by precise reference to the components in the calculation of the Fixed Charge Coverage Ratio and the Debt to Equity Ratio advised by Power in his letter. The components of that calculation are set out in the Schedule of Facts.
234 Rolfe J found that BKC was not entitled to the information sought by Driscoll in her letter of 14 October 1994, holding that
“it went beyond [the information] contemplated by the Development Agreement or the Guidelines”.
235 The Guidelines referred to by Rolfe J were Development Guidelines which the parties were discussing in 1993 as part of a proposed Corporate Plan. They do not appear to have been finalised and BKC was asserting a right to much wider financial information than HJPL was prepared to offer.
236 However, considering the matter from the basis of the requirements of the Development Agreement, contrary to his Honour’s conclusion, we consider the information sought by Driscoll in October/November 1994 was within the range contemplated by the Development Agreement.
237 That brings us back to the Capitalisation Plan. It was one of the standard form documents required to be submitted as part of an application for a new franchise agreement. Relevantly, it provided that BKC was entitled, amongst other things, to have regard to
“any other factor which affects the [applicant’s] financial strength”. We agree that that provision enabled BKC to look beyond an applicant’s standard accounts and to seek additional information if it appeared there were matters which affected the applicant’s financial strength. HJPL’s inter-company loan provides an example. If an item such as that in the accounts raised a genuine question which required the provision of additional information to answer it, BKC could, under this provision, require that to be provided. Whether BKC was entitled to information such as
“the full consolidated, detailed P & L and balance sheet for the entire family of companies” and the disclosure notes and auditor’s report for the Competitive Foods group, as it sought here, is a matter which would need to be assessed in any given circumstance.
238 We are not convinced on the facts here that BKC was entitled to the extensive information it sought over the period October 1995 to February/March 1996 in relation to Competitive Foods, although
if it was entitled to conduct an annual review, we consider it would have been entitled to the accounts as sought in Power’s letter of 1 September 1995. However, we prefer to base our conclusion on another ground. If BKC was entitled to the accounts and the other financial material it sought relating to the Competitive Foods group, it was only entitled to it as part of the process of approving a particular application for a franchise agreement. This is clear from the terms of cl 4.1.
239 We are of the opinion that BKC did not seek the information in that context. The initial request for financial information was sought for an
“annual review”. Although HJPL did lodge applications for expansion at this time, the correspondence clearly reveals that the requests for financial information, including the later expanded requests for the accounts for the Competitive Foods group, were not made in the context of those applications.
240 That leaves the question whether cl 4.1(b) entitled BKC to the information it sought. Clause 4.1(b) is easily divisible into three parts. First, it required that HJPL had performed and was performing all terms and conditions of each individual franchise agreement.
241 BKC submitted that this part of the clause extended to all terms and conditions and not only financial terms and conditions of each franchise agreement. We do not agree. Its context makes it clear that the clause relates to financial terms and conditions. BKC proceeded with its submission that it did not matter for its purposes whether this part of the clause was restricted to financial terms. Nor did it rely on this part of the clause to justify its claim to seek the financial information it did.
242 Secondly, HJPL was not to be in default of any of its money obligations to BKC. There was no allegation it was.
243 The third part of the clause is an acknowledgment and agreement by HJPL
“that it is vital to BKC’s interests that a Franchisee be financially sound to avoid a business failure affecting the reputation and good name of Burger King Marks”. BKC submitted that the construction of this part of cl 4.1(b) and the requirement to submit the then current Capitalisation Plan, established that in exercising the discretion to grant or withhold financial approval, BKC was entitled to seek the information it did, including the extensive information for the group. It was submitted that
“[a]ll of this information was critical to an assessment of the financial soundness of HJPL”.
244 There are immediate difficulties with this construction for BKC’s case. In the first place, we have concluded that the Capitalisation Plan was part of the process of approval of a franchise application. The financial disapproval was imposed generally and not as part of that process.
245 Rolfe J held that the third part of cl 4.1(b):
“is an acknowledgment and agreement by HJPL of the significance of ‘a franchisee’ being ‘financially sound’, which adds point to the necessity to comply with the requirements in the first sentence, but which does not, on the view I consider is preferable as a matter of construction, impose any further obligations on HJPL or the franchisee. This construction is reinforced, at least to a not insubstantial extent, by the first sentence of clause 7.1.”
246 We agree with his Honour that the third part of cl 4.1(b) does not have independent contractual content. However, with respect to his Honour, we think his reasoning is too confined, if, as we think cl 4.1 should be construed, the grant of financial approval is one of the processes which related to the approval of franchise applications. On that premise, we consider that the third part of cl 4.1(b)
“adds point to”, as his Honour put it, or underscores, not only the need for compliance with the financial requirements of the franchise agreements and HJPL’s money obligations to BKC, but also the requirements of, inter alia, the Capitalisation Plan, which encompasses the broader matters to which we have referred.
247 We consider, therefore, that BKC’s submission that:
“[w]hilst it may be true that the Development Agreement did not contain a provision [that prohibited HJPL from expanding unless it submits annual, audited financial statements which show that it is in compliance with BKC’s financial requirements for expansion], it is submitted that these are the very types of financial statements which are referred to in the Capitalisation Plan ... which plan is referred to in the Development Agreement. The finding was therefore unjustified”
misses the point.
248 BKC either had a right to conduct an annual review or it did not. There was no express right to do so. It was not argued that such a right should be implied, nor could it be. The right to be able to require certain information and the circumstances in which the information may be required are quite distinct matters. BKC’s submission fails to recognise that distinction.
249 Accordingly, although for reasons which differ to some extent from Rolfe J’s, we consider that his Honour’s conclusion that there was no contractual entitlement to the information BKC was seeking, was correct.
250 It follows that as BKC was not entitled, as a matter of contract, to financially disapprove HJPL on 12 September 1995, HJPL must succeed on this issue.
251 We also consider that BKC was in breach of the Development Agreement for another reason. No date was specified in the letter of 1 September 1995 by which the information was to be supplied. In withdrawing financial approval on 12 September 1995, BKC only gave HJPL nine clear days or six working days to respond. This was unreasonably short and constituted a breach of the implied obligation of reasonableness, even if BKC had some right to disapprove in the manner it did. We should point out that HJPL did not rely on this specific point in its submissions. Rather, its submissions focussed on BKC’s conduct as a whole as constituting a breach of the implied terms of good faith and reasonableness. As considerable attention was given to this issue on the hearing of the appeal, we propose to examine it in some detail. In doing so, we acknowledge BKC’s position that this issue only becomes relevant if it is unsuccessful on its appeal in relation to operational disapproval. However, as our consideration of Montgomery’s role indicates, the
“good faith” issue involves BKC’s conduct commencing from before the time it imposed the third party freeze. Financial disapproval was the second step of a process whereby HJPL’s ability to expand was affected and we consider it in that context.
252 In December 1994, Driscoll gave financial approval for a 12 month period in respect of the 28 sites she was then considering and to which we have referred earlier. No questions were raised as to its financial viability at that time. During the first part of 1995, BKC was actively considering ways of repositioning itself in the Australian market. It needed to minimise or even remove HJPL’s presence to achieve its objective. It was also seeking ways of pursuing its relationship with Shell without HJPL’s involvement.
253 In March 1995, Montgomery had begun communicating confidentially with Power and Miolla. During the course of a series of telephone calls, facsimiles and e-mails over the following months, Montgomery provided information to BKC about every issue which concerned the parties’ dealings, including HJPL’s financial position and its financial and commercial vulnerability. He both suggested specific deals and reported on Cowin’s reaction, or expected reaction, to a range of options which BKC had proposed to Cowin or had under consideration. He also made tactical suggestions as to how and when to both pressure and assuage Cowin.
254 In the earliest of these communications, which occurred in late March 1995 during the course of the Shell discussions, Montgomery indicated to BKC that HJPL was experiencing financial difficulties which
“will cause [Cowin] to be more amenable to a reasonable deal scenario in his mind”.
255 Montgomery continued throughout April to provide similar information. On 11 April 1995, he told BKC that by July 1995 HJPL would be unable to engage in further development and that BKC would want to capitalise on HJPL’s difficult financial position.
256 Then, on 18 April 1995, Montgomery suggested that rather than approach Cowin at that time to seek some form of buy out, a preferable approach would be to conduct a
“structured review of Burger King/Hungry Jack’s future strategies and issues in Australia”, including HJPL’s pending applications for 45 new sites.
257 Montgomery began expanding upon the financial information he was giving to BKC. For example, in late June 1995, he discussed the
“worsening financial situation of [Cowin’s] businesses” generally.
258 The possibility of financial disapproval first arose in an internal BKC memorandum from Miolla to Power on 29 June 1995. At that time, BKC was considering whether and how to block a proposal by HJPL to open at a BP site. The opening of a site at a rival petrol station outlet would have had repercussions for BKC’s proposals regarding Shell. Based on the financial information being provided by Montgomery, BKC believed that HJPL was in a difficult financial state. It was also aware through Montgomery that Cowin was considering legal action in relation to the Development Agreement. Against that background, Miolla sent an email to Power advising that BKC could
“probably disapprove HJPL on both financial and operational bases”. However, he conceded in cross-examination that he could not recall whether, as at 29 June 1995, BKC had any basis for financially disapproving HJPL. Certainly it had no formal information from HJPL which would have enabled it to conclude that HJPL did not meet BKC’s financial requirements.
259 On 16 July 1995, Montgomery advised Miolla that HJPL’s financial situation was becoming critical. He again suggested the steps BKC should take to achieve its aim of buying out HJPL, advising that a
“carrot and stick” approach would be necessary. He provided an assessment ofHJPL’s current situation, including a state by state survey. He made specific proposals as to
“a deal I think could work”. He advised that BKC should request financial results for the years 1993, 1994 and 1995, both system wide and state by state. Montgomery also emphasised the importance of timing in BKC’s dealings with HJPL.
260 BKC had a meeting with HJPL on 4 August 1995 in which Miolla put forward proposals which were very similar to those proposed by Montgomery in his 16 July 1995 memorandum. In particular, BKC adopted the proposal suggested by Montgomery that a new company be set up to operate in Queensland, New South Wales and Victoria, with BKC to maintain operational control and to have 51% of the shareholding. However, on 30 or 31 August 1995, Cowin advised Miolla he was not interested in having BKC buy into HJPL. Miolla responded by informing Cowin that the
“relationship is now going to change”.
261 The next two events, Power’s letter of 1 September 1995 and Miolla’s letter of 12 September 1995, are ones to which we have already referred. In his letter of 1 September 1995 Power requested financial information from HJPL for the purpose of
“the annual review”. The terms of the letter are important. It stated:
“Now that June 30, 1995 has passed, we would like to perform the annual financial review of Hungry Jack’s Australia Pty Ltd. In this regard, we need to receive a copy of the P&L and balance sheet as well as details of all debt held by this company. Such debt details should indicate the nature of each debt in term of the debtor, repayment terms and applicable interest rate(s).
Would you kindly send this data direct to Ms Yolanda Coffman at Burger King Corporation Miami.”
Coffman was an analyst in BKC’s Finance Group in Miami.
262 Power had no role in the financial department. He said he wrote the letter of 1 September 1995 because about eight to ten months previously, when the 1994 financial approvals were being processed in relation to the pending applications for expansion, he said he had asked:
“... I think Stephanie Driscoll, ‘how often do you want to receive this data for the purposes of doing the reviews?’ and she said ‘once per year’.”
263 Power said he did not recall whether he had diarised the matter so as to routinely request financial information on 1 September 1995. However, he had advised Butler in November 1994 that
“regular financial reviews would be undertaken”.
264 On 5 September 1995, Montgomery advised Miolla that material was being prepared and would be ready in one to two weeks. Miolla’s letter of 12 September 1995 advising HJPL that it was financially disapproved was sent a week after receiving Montgomery’s advice.
265 In between those two dates, on 8 September 1995, Power had forwarded the site package for Broadway to Jeannie Serra. Serra was the franchise co ordinator in the Development Group. In his covering memorandum to Serra, Power said that HJPL
“still owes BKC (Yolanda [Coffman]) a copy of their year-end financial data which was requested [on 1 September 1995]”.
266 This series of correspondence directs attention to the question as to who was responsible for financial disapproval. Miolla, in his letter of 5 October 1995, during the course of the financial disapproval process advised Cowin that Gooden was the person responsible for financial approval for expansion. The evidence certainly revealed that, along with Miolla, Gooden took an active role in the financial disapproval process. However, Gooden did not give evidence in the proceedings.
267 In his evidence, Power said that Miolla took the decision that BKC would not process the applications HJPL had lodged at that time, that is September 1995, until the
“next financial approval was in place”. Miolla said that financial matters were not
“within [his] area at all”.
268 Driscoll filed a statement in August 1999, (at an advanced stage in the hearing of the proceedings), stating that she was the person who had the discretion to financially disapprove for expansion. She reiterated in her cross-examination that she was the person with authority to financially disapprove HJPL. She said that Gooden was her superior and she kept him informed as to what was happening. She said, however, that HJPL had been financially disapproved in connection with applications for new site approval.
269 Power, in his evidence, took responsibility for the letter of 1 September 1995 in the circumstances to which we have referred.
270 Driscoll in her evidence thought she was responsible both for the content of the letter of 1 September and for it being sent. However, the terms of the letter of 1 September 1995 bear no resemblance to the task Driscoll thought she was undertaking. The reason given in the letter as to why financial information was being sought was for the purposes of
“the annual financial review”. Driscoll asserted in her evidence that when, on 1 September 1995, she had sought financial information from HJPL, it was done in the context of her consideration of financial approval for the Myaree, Bolivar and Broadway sites. That could not have been correct as the site packages for Myaree and Broadway were not forwarded to BKC until 4 September 1995. Bolivar was forwarded on 20 September 1995. The site package for Hurstville was also forwarded on that day.
271 According to the letter of 12 September 1995, HJPL was disapproved for failure to provide the information requested on 1 September 1995, to enable the annual review to be undertaken. Driscoll did not see a copy of Power’s letter of 8 September to Serra in which Power contended that HJPL
“owed” financial information for the annual review, and did not think Coffman was involved in the process of assessing whether or not HJPL should be financially approved, unless she was
“lend[ing] a hand”. Coffman was not called to give evidence.
272 Miolla, who was the author of the 12 September letter, said he believed that annual reviews were done
“as an accommodation to some of the large franchisees”, as opposed to doing a review each time a new application was made. However, he really knew nothing about the practice. HJPL had never previously been subjected to an annual review, although there was the evidence of BKC’s intention to commence to do so. However, the timing here is quite critical. Although Miolla asserted that he believed the request was made to tie in with BKC's end of financial year, the letter of 1 September 1995 was expressly directed to HJPL’s end of financial year. Even more critical, in our opinion, is that it followed within a day or two of Cowin’s rejection of BKC’s 4 August 1995 proposal, to which Miolla had responded
“the relationship is now going to change”.
273 Driscoll remained adamant that BKC was not undertaking annual reviews at the time of the letter of 1 September 1995 and that she was not conducting a financial review for BKC for
“any purpose [other] than an expansion request which came across my desk”. She was asked:
“Q Irrespective of expansion, was it your understanding, Mrs Driscoll, that Hungry Jack’s required some form of financial approval each year?
A Financial approval is given in connection with expansion, so they come in and ask to build a site, we grant approval for that site.”
274 That evidence is particularly significant, as it appears that BKC was engaging in two quite separate processes at this time - an annual financial review, which Power and possibly Miolla had decided to undertake, and financial approval relating to applications for new sites. It is possible that Driscoll, the person put forward by BKC at the hearing as having responsibility for financial approval, was not aware, at least initially, that BKC was purporting to carry out an annual review. This might explain why Driscoll did not receive a copy of Power’s 8 September 1995 letter to Serra, which made express reference to the annual review, although she said it was correspondence she would have expected to receive. It might also explain why she did not have any real knowledge of Coffman’s role, which Driscoll surmised, in her evidence, could have been
“to lend a hand”. That is not, however, the nature of Coffman’s task as conveyed by Power’s memorandum to Serra.
275 Furthermore, Driscoll did not become aware until late September 1995 that HJPL had a small operating loss of approximately $81,000 for the financial year 1995. That was the matter which Driscoll said was, for her,
“the huge red flag which came up”. However, HJPL was already financially disapproved by then.
276 There is, therefore, considerable force in the trial judge’s observation at paragraph 497 that:
“The odd thing about BKC’s approach, which, in my opinion, is only explicable because of the attitude BKC was taking to HJPL, is that the financial disapproval preceded the receipt of the various information, rather than followed an analysis of it and the exercise of the discretion based on that analysis.”
277 However, we do not agree that the facts bear out the next part of his Honour’s comment:
“As will appear, the matters Mrs Driscoll regarded as a ‘red rag’(sic) and which she used to try to justify her concerns was never one she took up with any officer of HJPL and particularly, Mr Cowin or Mr Butler. She sought no direct explanation for the turn around in the profits.”
278 As the schedule of facts reveal, Miolla expressly referred to the operating loss in his letter of 5 October 1995 to Cowin. The matter was also discussed at the meetings that Cowin had with Miolla, Gooden and Driscoll in Miami on 26 and 27 October 1995. Further, Butler was requested to provide an explanation for the fall in the operating profits in BKC’s letter of 27 October. He responded by letter dated 6 November 1995. Driscoll did not, however, follow up on that explanation.
279 Even Driscoll’s concerns about the
“operating loss” must be put in context. Driscoll conceded that despite HJPL’s operating loss, she had observed from the accounts that HJPL had both
“positive retained earnings” from the previous year of $1.6 million and
“positive net assets” of $16 million. She was also aware that HJPL’s non current liabilities of $45 million was an inter-company debt. Although she advised Miolla that because of the operating loss she did not see how HJPL could meet
“our cash flow and fixed charge coverage requirements”, she conceded in cross-examination that she did not have all the information to enable her to determine whether, in fact, that was the case.
280 Driscoll was then cross-examined:
“Q You decided to proceed on the basis that you wouldn’t give financial approval until such time as you were satisfied.
A That’s the basis of all financial approval. I have to be satisfied that they are financially healthy, and until I review the financial statements and I’m satisfied they meet the ratios, then no, we don’t proceed.”
281 It was clear from this and the evidence generally on this issue that the primary focus in determining whether or not to financially approve was whether BKC’s ratios were complied with. For example, Driscoll said in cross-examination:
“... the goal of the financial approval is to determine and understand the franchisee’s financial ability to expand, and the fixed charge coverage ratio and the debt to equity ratio are the primary ratios that we look at ...”
282 However, it was apparent on the evidence that the financial ratios which BKC was applying to HJPL were different to those which it had advised in December 1994 were the applicable ratios. Driscoll recognised this in late December 1995, and again in May 1996, a matter she raised in her memorandum to Miolla and Gooden of 28 May 1996.
283 On 2 October 1995, shortly after Butler forwarded the 1995 accounts, Montgomery advised
Miolla that a confrontation with Cowin sooner rather than later would be inevitable and that BKC
should look at Competitive Foods, which, he noted, BKC had not done previously.
284 Miolla wrote to Cowin on 5 October 1995, advising that HJPL’s operating loss meant that it was impossible for it to satisfy BKC’s cash flow and fixed charge coverage requirements. He said that BKC could not determine whether the debt as a percentage of total capitalisation ratio had been satisfied without further financial information. He added
“we will not be approving expansion at any additional sites until we have a better understanding of the financial issues”. Driscoll, who also accepted responsibility for the terms of the letter, conceded in cross examination that the statement in relation to the operating loss was
“too strong”.
285 The letter of 5 October 1995 was copied to Montgomery. Although Miolla denied this was to keep Montgomery
“in the loop”, he did not provide any explanation as to why he did so. Montgomery was not responsible for the provision of financial information to BKC. That was Butler’s responsibility, although Cowin, on occasions during this time, assumed direct responsibility for dealing with BKC. For example, Cowin replied to the 5 October letter, by letter dated 11 October 1995, in which he asserted that HJPL did in fact meet both the fixed charge coverage and the debt to equity ratios. Driscoll accepted in cross examination that the material provided by Cowin on 11 October 1995 complied with the request made in Miolla’s letter of 5 October 1995. She also accepted that on the analysis that Butler had provided with the information the ratios had been satisfied. However, she said that she was not prepared to accept Butler’s analysis. She was asked in cross-examination:
“Q Why was it that, having asked for this information from Mr Butler, or causing Mr Miolla to ask for this information, you weren’t prepared to accept it?
A Because there is a huge red flag that came up and that was the loss. The turnaround in profit between ’94 and ’95 told me I should go back and understand these accounts better, understand what was happening, understand all of the allocations that Mr Butler was using and why he was doing it, and that I needed not to just accept Mr Butler’s representations but to review the financial statements and come to the conclusions on my own.”
286 Driscoll added that whilst she had no basis to doubt Butler, her job was to verify the information.
287 The next step occurred on 18 October 1995. Miolla again wrote to Cowin and said that BKC was having
“a hard time understanding the financial information due to the limited nature of the balance sheet and the absence of a profit and loss statement”. He raised three major areas of concern: (i) the loss of $1.6 million in cash flow between 1994 and 1995; (ii) BKC’s inability to understand the liabilities of HJPL without more information on inter-company loans and leases; and (iii) the question of the pledge of HJPL’s assets to secure repayment of a $49.5 million loan from the bank to the parent company. He noted that the calculations provided by HJPL had apportioned that loan,
“pro-rata”, between HJPL and other companies in the group, which, he commented understated the contingent liability of HJPL. He stated:
“In order to determine the likelihood that the full contingent liability would come due, we need to examine the full, consolidated, detailed P & L and balance sheet for the entire family of companies.”
288 It had only taken Miolla just over two weeks to act in the precise way Montgomery had suggested in his advice of 2 October 1995. Miolla continued:
“We will not be able to grant any further expansion approvals unless we can get the information necessary to deal with the issues set forth ... above.”
289 Notwithstanding the stance taken in this letter, and without the provision of any further information, Gooden had formed the opinion by 20 October 1995, that HJPL satisfied BKC’s financial requirements.
290 This apparently caused Power some concern as he emailed Miolla and Hothorn on the same date. He said:
“While I understand the conclusions drawn by ... Gooden et al regarding probable compliance with our FCC ratio and DE ratio, don’t overlook the statement included in our Section B ‘Financial Analysis’ in the Management, Ownership and Capitalisation Plan ...
In our overall assessment of the condition and quality of operations of the franchisee (HJPL), we would appear to have some discretion to still disapprove the franchisee financially for expansion purposes.
[For your information] ... Horowitz also advised last night that it would appear that HJPL will be disapproved for expansion operationally on [15 November].”
291 Power denied that, in this email, he was advocating that HJPL be financially disapproved. However, at that time, he was expecting to receive 60 to 70 TRAs from Shell, eight of which related to test sites, the balance being
“serious requests for 20 year franchise agreements” together with approximately $US300,000 as TRA deposits. Power agreed in cross-examination that Shell was
“pretty important” to BKC’s
“future in the Australian market”.
292 Montgomery advised Miolla on 23 October 1995 that Cowin was definitely of the view that HJPL met BKC’s ratios. By 24 October Driscoll had independently reached a similar conclusion, although she remained concerned that she was dealing with unaudited accounts and reached her conclusion by making certain assumptions, particularly in respect of the inter-company loans referred to in the accounts.
293 The evidence that both Gooden and Driscoll (even with the reservations she had) believed the ratios had been met, supports his Honour’s conclusion that by October 1995, BKC had concluded that HJPL probably complied with its financial requirements. His Honour noted that notwithstanding this, financial approval continued to be withheld. Driscoll said she took this position because she decided that there should be no approval of future sites until she had more complete financial information including that of the Competitive Foods Group. This was, of course, a shift in the task Driscoll initially asserted she was undertaking. It was also a shift in her original evidence that financial approval and disapproval was given in respect of a particular application.
294 Driscoll was asked:
“Q [HJPL were] generally disapproved otherwise; correct?
A Yeah, it’s a question of semantics, if you will. Everybody is disapproved for sites until they specifically ask for approval for a site. I wasn’t - my message to Hungry Jack’s is I did not want to consider more sites; please don’t come back and ask for more sites and ask me to grant exception approval for more sites until you give me the financial information I have been requesting all along. That was my position, and I’d compromised a couple of times already with them.”
295 This conduct was unprecedented. It was neither an annual review of the type Miolla asserted was done to accommodate larger franchisees nor was it a site specific review. In effect, it was the imposition of another ‘freeze’. Fitzjohn recognised this when he agreed in cross-examination that the letter of 20 September 1995 prevented further development by HJPL unless BKC made exceptions.
296 On 26 October 1995, after a meeting with Driscoll, Miolla and Cowin, Gooden again sought information in regard to the consolidated accounts of Competitive Foods.
297 At a meeting the following day, when Cowin continued to protest that there was no basis for BKC to continue to financially disapprove HJPL, Miolla advised him that there would be no operational approval for expansion as from 18 November 1995, even if the financial issues were resolved.
298 On 1 November 1995, Montgomery forwarded to Power Competitive Foods’ internal accounts, as well as the working accounts for KFC and Domino’s Pizza. Power forwarded these on to Gooden with a direction they were for internal use only and no mention was to be made to HJPL that it had the information.
299 Driscoll did not receive these accounts until about mid-December 1995. Nor did she receive a copy of Power’s accompanying email. She believed, even up to the time of giving evidence, that the information had come officially from HJPL.
300 On 8 November 1995, Fitzjohn again sought Competitive Foods’ financial information. When doing so he did not inform HJPL that he already had extensive financial information for the Group in his possession. We pause to comment that the financial information it had far exceeded what BKC should have had on any view of its entitlement under the Development Agreement. Power conceded as much in cross-examination.
301 The stalemate over financial approval continued through November and December 1995, during which time HJPL continued to provide financial information as required. For example, we have already referred to BKC’s letter of 26 October 1995, which Butler responded to on 6 November 1995, explaining that the main reason for the fall in gross profit was discounting which had occurred in that financial year. Driscoll accepted that Butler’s response had been a full answer to BKC’s letter of 26 October. She said that Butler’s information raised a number of questions for her. However, she did not follow up her concerns with Butler or with anyone else. She conceded that she could have made enquiries of Power to verify what Butler was asserting.
302 On 29 December 1995, Cowin again sought confirmation that the financial issues had been resolved and that financial approval had been granted. Miolla responded on 8 January 1996, stating that BKC still needed the consolidated financial package.
303 There was, however, no basis for BKC to keep pressing for further information. We have already referred to Rolfe J’s finding that by October 1995 BKC had concluded HJPL had complied with its financial requirements. Although BKC challenged the finding on the appeal, it was clearly open on the evidence and BKC’s challenge to it must fail.
304 Even Driscoll conceded that by 23 February 1996, the material in her possession
“was sufficient on any view to grant financial approval”. Yet financial approval continued to be withheld.
305 BKC accepted in its submissions to this Court, that by May 1996 it had reached the position internally where it considered that all financial criteria necessary for financial approval had been satisfied. It did not convey that to HJPL. It justified its stance in not doing so because, it said, exception approvals had been granted for all restaurants applied for, no further restaurants had been applied for, and in any event, HJPL was operationally disapproved at the time.
306 The foregoing demonstrates a number of things. First, BKC asserted a right to conduct an
annual financial review when it had no right to do so.
307 Secondly, BKC’s conduct at this time could not properly be characterised as an annual financial review of HJPL. At least by late October/early November 1995, the analysis had shifted to an investigation of the Competitive Foods Group, as evidenced by the fact that, commencing from Fitzjohn’s letter of 8 November 1995, no further requests were made in relation to HJPL’s accounts. All enquiries and requests related to the Competitive Foods Group. However, even if BKC was conducting an annual financial review and such review was permitted by the Development Agreement, the Development Agreement did not authorise withdrawal of financial approval pending completion of the review.
308 Next, BKC’s failure to grant financial approval after the time it had assessed HJPL as having complied with its ratios, was a breach of the implied term of good faith. There are three possible dates at which BKC had concluded that there was compliance with the ratios. Rolfe J found that it had reached this conclusion in October 1995. That finding was clearly open to his Honour on the evidence. Driscoll conceded in cross-examination that that assessment had been made by February 1996. During the course of the appeal, senior counsel for BKC conceded that as at 28 May 1996 HJPL was entitled to be financially approved.
309 Many of BKC’s actions relating to financial disapproval followed closely on the information supplied or suggestions made by Montgomery. The decision to financially disapprove was taken at a time when BKC was actively seeking ways to either buy out HJPL or otherwise take a much larger stake in the Australian market. When Cowin refused to co-operate he was told, bluntly, that
“the relationship is now going to change”.
310 In our opinion, the evidence clearly establishes that BKC’s conduct is properly characterised as being directed not to furthering its legitimate rights under the Development Agreement but to preventing HJPL from performing its obligations under the Development Agreement. As Rolfe J put it:
In the end, I am forced to the conclusion that it was in pursuance of a deliberate plan to prevent HJPL expanding, and to enable BKC to develop the Australian market unhindered by its contractual arrangements with HJPL.”
311 We agree with this conclusion.
312 BKC submitted, however, that his Honour’s finding as to bad faith could not be sustained as HJPL had failed to establish that the decision maker, Driscoll, was motivated by bad faith or was influenced by those whom his Honour held to have been motivated by bad faith. ‘Those’ persons were, in particular, Miolla, Fitzjohn and Power.
313 We do not think it matters that his Honour made no express finding in relation to Driscoll, although we note that he expressed scepticism about the manner in which she pursued her task (see especially para 497). It is the conduct of BKC which is relevant. In any event, his Honour did not find that Driscoll was responsible for BKC’s decision to financially disapprove, conveyed to HJPL in Miolla’s letter of 12 September 1995, nor is there any evidence that she did make that decision. The evidence points to Miolla as the decision maker. The evidence of BKC’s conduct overall clearly supports his Honour’s conclusion that BKC acted in bad faith, a conclusion which we consider to be correct.
314 BKC’s final submission on the good faith issue was that his Honour:
“[D]id not measure up against his findings in relation to Messrs Miolla, Hothorn, Fitzjohn and Power in relation to the following matters:
(a) that the responsibility was Ms Driscolls’ and Ms Driscolls’ alone and no-one told her to apply
different standards;
(b) the Finance Department within Burger King was a ‘separate business silo’;
(c) financial disapproval arose in the context of an actual application which required exercise of the contractual discretion because the previous financial approval did not cover the sites which had been applied for in September 1995 and, in any event, exception approval was granted. His Honour failed to consider how he could find the existence of bad faith in circumstances where each site applied for was granted an exception approval and within a short period of time;
(d) the concerns expressed by Ms Driscoll were legitimate and based on the material received by her and the documents sought were within the scope of the documents to which she was entitled to have access pursuant to the Development Agreement;
(e) there is an(sic) legitimate explanation for the contrast in approach between 1994 and 1995, which explanation appears above;
...”
315 We have already dealt with most of these matters. We would only add that the grant of exception approvals does not neutralise BKC’s conduct which we consider was in breach of its implied obligations of reasonableness and good faith.
316 Rolfe J was, therefore, correct in holding that the withdrawal of financial disapproval was in breach of BKC’s contractual obligations of good faith and reasonableness. In coming to this conclusion we have not fully endorsed the facts as found by his Honour and accept BKC’s submission that some of his findings were wrong. For example, contrary to his Honour’s finding, HJPL were advised that BKC was concerned about the operating loss of $81,000. However, those matters do not affect our view as to the correctness of his Honour’s conclusion.
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