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Recent Cases

• Video Ezy International Pty Ltd v Sedema Pty Ltd [2014] NSWSC 143

• Civic Video Pty Ltd -v- Paterson [no 3] [2014] WASC 321

• SPAR Licensing Pty Ltd v MIS Queensland Pty Ltd [2014] FCAFC 50

Video Ezy Case - Facts

• The plaintiffs were a group of companies.

• Video Ezy sold to the franchisee, Sedema Pty Ltd, Video Ezyfranchises in Hazelbrook in April 2003 and Katoomba in September2003

Video Ezy Case - Facts

• The Katoomba franchise closed in June 2010.

• EzyDVD, a subsidiary of the franchisor, sold DVDs online to personsresiding within the franchise territory covered by both the Katoomba andHazelbrook Agreements.

Video Ezy Claim and Cross-Claims

• In July 2011 Video Ezy sued Sedema for unpaid franchise fees andadvertising fees.

• In a cross-claim Sedema alleged that from 2009 Video Ezy, by itssubsidiaries, engaged in online purchase and subscriptions of moviesand DVDs in the Katoomba and Hazelbrook regions which:

(a) breached an express exclusivity clause;

(b) breached an implied duty of good faith;

(c) was unconscionable.

Video Ezy - Breach of Contract Claim

Relevant Clause

• the Vendor ...shall not exercise, carry on or be in any manner whatsoever,either directly or indirectly concerned or interested ... in the trade orbusiness involving the rental and/or sale of video products or any otherbusiness of a similar nature within the territory of the franchise for'Video Ezy Hazelbrook' for the term of the Franchise Agreement

Breach of Contract - Franchisor’s arguments

• Video Ezy asserted that the ezydvd.com.au online sale and rentalbusiness of EzyDVD did not involve the rental and/or sale of videoproducts within the territory of the franchise.

• It argued that the use of the word "within" as found in the exclusivityclause does not refer to the rental and/or sale of video products "into"the territory from outside (Bricks and Mortar v. Online)

• It relied on the increased online sales and rental of DVDs between2005 and 2010 to argue online competition was not contemplated bythe clause.

Breach of Contract – Franchisee’s Arguments

• Sedema submitted that the exclusivity clause’s primary purpose was toprotect the goodwill it acquired by the purchase price for the franchisebusiness and could not mean that the expression "within the territory"meant that the franchisor's business must operate within the territory tohave breached the clause.

Breach of Contract – The Outcome

• The Court found that the distinction suggested by Video Ezy betweenthe operation of a 'bricks and mortar' business and on-line trading wasillusory.

• The Court found that the exclusivity clause had been breached.

Duty of Good Faith - Franchisee’s arguments

• Sedema argued that competition between Video Ezy via its relatedentities and Sedema within the Sedema’s territory was in breach of animplied obligation of good faith because Video Ezy had failed toremain loyal to the promise of the grant of the franchise.

• Sedema alleged it lost a significant volume of sales while it continuedto pay the franchise fees and advertising contributions it was requiredto pay.

Duty of Good Faith – Franchisor’s Arguments

• Video Ezy argued that while an implied term of good faith may apply totermination of a franchise agreement it should not be used to expandthe scope of an exclusivity clause.

• A detailed regime of restraint clauses in the franchise agreement leftno room for an implied obligation of good faith, which, in substance,extended the area of business within which Video Ezy was notpermitted to compete with Sedema.

Good Faith – Relevant Evidence

• One person was director of Video Ezy and all the relevant subsidiaries.In evidence this director conceded that the online TiVo, Blockbusterand EzyDVD businesses competed with the franchisee in thefranchised territories and that he had access to customers’ names andaddresses in those territories and he could have stopped thosetransactions

Good Faith – Outcome

• There is to be implied in franchise agreements a term of good faith andfair dealing which obliges each party to exercise the powers conferredupon it by the agreements in good faith and reasonably, and notcapriciously or for some extraneous purpose.

• Video Ezy had an obligation to act in good faith in relation to itscontractual obligations and to remain loyal to, and comply with, honeststandards of conduct, and act reasonably in relation to the promise ofexclusivity in the territories by not competing against the franchisee forrental or retail business.

Unconscionability

• The Court reviewed the authorities and emphasised that the statutoryunconscionability provisions set a high bar to be met by a plaintiff.

• Unconscionability is a concept which requires a high level of moralobloquy (referred to Sunberg J in ACCC v Simply No-Knead who heldthat unconscionability involved an overwhelming case ofunreasonable, unfair, bullying and thuggish behaviour).

Unconscionability - Franchisee’s Arguments

• Sedema had purchased an exclusive licence to operate Video Ezyfranchises in Hazelbrook and Katoomba for 10 years for which it paid asubstantial sum of money.

• The disclosure document stated that Video Ezy would not operate acompeting business that was substantially the same as the franchisedbusiness.

Unconscionability - Franchisee’s Arguments

• Sales into that territory were clearly in breach of the exclusivity clause.

• Since early 2009 Blockbuster and EzyDVD had actively competedagainst Sedema in Sedema's franchise territories and therebyundermined the goodwill associated with each of the franchises.

• Sedema lost a significant volume of sales in the territories.

Unconscionability – Franchisee’s Arguments

• Sedema continued to pay franchise fees and advertising contributionson a monthly basis, notwithstanding that Video Ezy’s related entitiesflouted the exclusivity of the territories for which Sedema had paid andcontinued to pay;

• Video Ezy, and its subsidiaries, had the same directing mind and wereall ultimately controlled by a director who knew that Video Ezy'ssubsidiaries were conducting business in competition with Sedema inSedema's territory and could have stopped but failed to stop thisconduct.

Unconscionability – Franchisor’s argument

• Video Ezy argued that there was no accumulation of incidents whichdisclosed an overwhelming case of unreasonable, unfair, bullying andthuggish behaviour in relation to Sedema that amounted tounconscionable conduct

Unconscionability – Outcome

• The Supreme Court found that it is not necessary that all factors suchas unreasonableness, unfairness, bullying and thuggish behaviourmust necessarily be present to find that conduct is unconscionable.

• Further, it is not necessary that the Court find motive, intent, bad faithand intent to injure with some purpose to drive a franchisee out of afranchise. What is required to find unconscionability is a high level ofmoral obloquy.

Unconscionability – Conclusions

• The risk of engaging in online businesses that compete with afranchisee’s rights to conduct a franchised business exclusively in aterritory.

• If franchisors wish to avoid in effect being restrained from operatingonline businesses similar to their franchisees’ businesses attentionneeds to be given to the terms in franchise agreements that bear onthe issue.

• Does this case lower the bar for establishing unconscionability?

Civic Video Pty Ltd -v- Paterson[no 3] [2014] WASC 321

• This case is about the attempt of franchisees in financial difficulties towalk away from two franchises.

• It is a case about a franchisor’s attempt to recover damages forfranchise and advertising fees for the unexpired portion of the terms ofthe franchise agreements.

Civic Video Pty Ltd -v- Paterson– The Facts

• Franchise agreements for two franchises in Geraldton were enteredinto in 1999 and 2001 respectively. Both were renewed at differenttimes with the expiry date of one agreement in 2014 and the other in2016.

• The franchisees, Mr and Mrs Thompson (second and thirddefendants), sought to sell the franchises from 2004 and made thisknown to the Civic Video.


• No offers were received between 2004 and mid 2006.

• The Thompsons fell into arrears in the payment of franchise fees andrent in this period. Did not renew lease for one store.

• In June 2006 there was an offer. The prospective buyer, Mr Rock,wanted to close one of the two franchises.

• Civic Video did not consent to the sale as it wanted two stores inGeraldton.

• If one store was closed it would lose market share and franchise fees.


• The First Defendant, Mr Paterson, had been involved in the videoindustry since 1983 and owned 17 Video Ezy stores. One of thesestores was at Geraldton.

• By August 2006 he wished to expand his presence in Geraldton andacquired the head lease of the premises, part of which the Thompsonshad sub-leased.

• Mr Paterson acquired the assets of the Thompsons’ two franchises inSeptember 2006. The stores close in early October 2006.


• Had the sale to Mr Paterson not proceeded the Thompsons wouldhave closed the two businesses in October 2006. The franchisoropposed the sale.

• At this time the Thompsons had unpaid accounts of $200,000.00 andsubstantial losses in the previous three years.

Civic Video Pty Ltd -v- Paterson– Franchisor’s claims

• Against the Thompsons, for breach of the contracts from repudiation;

• Against Mr Paterson, for tortious interference in a contract.

Civic Video Pty Ltd -v- Paterson– Breach of Contract

• No arguable Defence was alleged by the Thompsons. The Court wasconcerned with the question of damages flowing from therepudiation/breach of the franchise agreements.

Civic Video Pty Ltd -v- Paterson– Damages Claimed

Civic Video sought damages for:

• Loss of anticipated franchise and advertising fees;

• Loss of opportunity to procure a purchaser;

• Loss of reputation and goodwill. This was abandoned.

Civic Video Pty Ltd -v- Paterson– Damages

• No evidence of how an alternative purchaser may have been found orwhat profits if any would have been made if the stores werecorporatized.


• The general rule: Party to be placed as far as money can do so in thesame position as if the contract had been performed: Commonwealth vAmann Aviation Pty Ltd.

• A plaintiff is not entitled to be placed in a better position than it wouldhave been if the contract had been performed.


• Civic Video argued that franchise and advertising fees would havebeen paid for the balance of the terms of the two franchiseagreements.

• A forensic accountant gave evidence that the loss of this income was$92,366.00 for Store 1 and $146,050.00 for Store 2. He applied adiscount factor of 12%.

Civic Video Pty Ltd -v- Paterson– Thompson’s arguments

• The Thompsons alleged that they were insolvent as at October 2006and adduced evidence from an insolvency specialist.

• The opinion was that the Thompsons were insolvent in July 2006. Theevidence of turnover was contested.

• The Court found that even at its highest for Civic Video the evidence ofturnover showed that the franchises were trading poorly, were notviable and could not have continued after October 2006.

Civic Video Pty Ltd -v- Paterson– The Outcome

Store 1

• Civic Video could either have consented to the sale of the franchise or,if it did not consent to a sale and the Thompsons ceased operating thebusinesses, exercised its right to terminate the franchise agreementson the basis of voluntary abandonment.

• Paterson would not have renewed the lease of Store 1 which was dueto expire in December 2009.

• Therefore, Civic Video would not have corporatized this store and wasunlikely to have found another purchaser.


• Store 1 would have been abandoned by the Thompsons in October2010 and the franchise terminated by Civic Video. No franchise andadvertising fees would have been received given their financialposition.

• No damage. To award damage for future franchise fees andadvertising fees would have placed Civic Video in a better positionthan if franchise agreement had been performed (not repudiated).


Store 2

• Mr Paterson did not control the lease over Store 2.

• This store remaining open would have allowed Civic Video to maintaina presence in Geraldton.

• The breach by the Thompsons prevented the realisation of thisopportunity.


In assessing the value of this loss of opportunity the Court considered:

• Difficulty and delay in finding a new purchaser;

• Carrying on the business as a corporate store would have involvedadditional expenses to Civic Video;

• Unlikely the store would have been profitable in the short term.


• Court allowed no damages for advertising fees that would have beenpaid. Advertising fees would have been placed into the advertisingfund and impressed with a trust.

• A damages award equivalent to advertising fees would make the fundsavailable to Civic Video to use as it wanted and not subject to the trust.This would put it in a better position than had the contract beenperformed.


• Further, the Court found that had a Civic Video outlet operated fromStore 2 there was an increased risk of erosion of revenues from aVideo Ezy store operated by Mr Paterson from Store 1.

• In addition there was no dispute that the video hire industry had beenin serious decline for a number of years.

• Accordingly, a discount factor of 25% not 12% should be applied toaccount for these risks leading to a figure of $72,611.00 as the value ofthe lost opportunity to earn franchise fees from Store 2.


The Court then reduced this figure by a further 50% to $36,300.00 becauseof the following additional uncertainty factors:

• Possibility that the landlord might not grant a 10 year lease of Store 2(2006-2016);

• Possibility that Mr Paterson may have been the preferred tenant forStore 2;

• Likely difficulty in finding a new franchisee, and the interim additionalcosts running Store 2 as a corporate business.

Civic Video Pty Ltd -v- Paterson– Conclusions

• Franchisors should not expect to automatically recover all franchisefees for the balance of the term of the franchise relying only onforensic accounting evidence.

• The relevance of expert evidence of insolvency being a adduced byfranchisees which may limit a franchisor’s damages for unpaidfranchise fees.

• Shifts some of the risk of franchisee business failure back to theFranchisor.

• Consideration should be given on establishing a basis for recovery ofadvertising fees as a component of damages.

SPAR Licensing Pty Ltd v MIS Queensland Pty Ltd [2014] FCAFC 50

• The salient point from this case is that the obligation to makedisclosure in accordance with the Franchising Code of Conduct is notstatic.

SPAR v MISThe Facts

• The franchisee, MIS, was given a disclosure document on 21 July2010.

• On 1 February 2011 MIS signed a franchise agreement.

• The financial statements and reports of SPAR for the financial yearending 30 June 2010 were not finalised until 10 September 2010.

• This information was not disclosed in the disclosure documentprovided to MIS on 21 July 2010 and not disclosed before thefranchise agreement was signed.

SPAR v MISThe Facts

• SPAR had lost $5.8 million for the financial year ended 30 June 2010

• In May 2010 SPAR’s bankers had restricted SPAR’s credit by cappingits finance facility.

• Further information at the time of a board meeting of SPAR on 13December 2010 revealed that the franchisor had suffered a loss of$161,000.00 for October 2010 against a budgeted of profit of$11,000.00 and that monthly sales were under budget by $1.3 million.

• Other evidence showed SPAR’s position was deteriorating and wasclose to insolvency.

SPAR v MISThe Facts

• This information was not disclosed to MIS before 1 February 2011.

• MIS gave evidence, accepted by the court, that if it had known of thefinancial statements and report for the financial year ended 30 June2010 it would not have entered into the franchise agreement.

SPAR v MISThe Issue

The Issue

• Did SPAR fully comply with its disclosure obligations under theFranchising Code by providing a disclosure document to MIS on 21July 2010.

SPAR v MISFranchisor’s arguments

SPAR argued that it had complied with the Franchising Code because:

• At the time it was delivered the disclosure document was current and itwas provided more than 14 days before the franchisee signed thefranchise agreement;

• it was not required to provide a subsequent disclosure document to thesame prospective franchisee.

SPAR v MISCode Clauses

Section 6A of the Code provides that:

The purposes of a disclosure document are:

(a) to give a prospective franchise...information from the franchisor to helpthe franchisee to make a reasonably informed decision about thefranchise;

Section 6B of the Code provides that:

(1) A franchisor must give a current disclosure document to:

(a) a prospective franchise;

SPAR v MISThe Outcome

Buchanan J observed that:

• the purpose of the disclosure document was to give a prospectivefranchisee information to help the franchisee to make a reasonablyinformed decision;

• the obligation in clause 6B of the Code is to give a prospectivefranchisee a current disclosure document. The term "current disclosuredocument" in clause 6B of the Code is not defined.


• Buchanan J (with whom Foster J agreed) concluded the documentgiven to the franchisee on about 21 July 2010 did not comply withclause 6B of the Franchising Code because it was not current at thetime the franchise agreement was executed more than 6 months later.

• It was not a current disclosure document for the purpose of clause 6B ofthe Code.

• Accordingly, the franchisor had failed to comply with clause 6B of theCode at the time the franchise agreement was signed. The franchisorhad breached section 51AD of the Trade Practices Act 1974.


• Farrell J agreed with the conclusions and orders proposed by BuchananJ but not his reasons.

• A disclosure document given to a prospective franchisee for thepurpose set out in clause 6A of the Code must be current enough toenable the prospective franchisee to make a reasonably informeddecision, however the time at which the currency of the disclosuredocument should be assessed is when it is provided to the franchiseenot when the franchise agreement is signed.


• The disclosure document did not comply with the Code because it didnot satisfy the requirement of paragraph 20 of Annexure A to the Codewhich requires a solvency statement as at the end of the last financialyear before the disclosure document.

• On the facts of this case this requirement meant that the disclosuredocument delivered to MIS required a solvency statement for the2009/2010 financial year. In fact, it contained one only for the2008/2009 financial year.


• Because the disclosure document provided to MIS was not inaccordance with paragraph 20 of Appendix A of the Code SPAR hadfailed to discharge its obligations under clauses 6B(1) and 10(d) of theCode.

SPAR v MIS - Conclusions

• Franchisors should be aware of the need to ensure the disclosuredocument is current whether or not that is at the time it is delivered or atthe time the franchise agreement is signed.

• Given the majority reasoning, the greater the period that elapsesbetween the delivery of the disclosure document and the signing of thefranchise agreement the greater the risk the disclosure document is notcurrent.

• The need for an internal mechanism to ensure that the disclosuredocument is reviewed and revised before a franchisee signs a franchiseagreement.

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