FCA NFC SEMINAR PAPER FRANCHISING – CASE UPDATE 9 October 2016 Ben Coogan, Partner, Thomson Geer Legal/47226698_1
CASE UPDATE 2016 CIVIC VIDEO PTY LTD –V- PATERSON [2016] WASCA 69 [27 APRIL 2016] 1 The background to this decision is really a struggling franchisee under an aging franchise product model (Civic Video) and then the involvement of a competing video store (Video Ezy) in Geraldton, Western Australia. 2 The trial judge's decision was delivered in 2014. 3 Aside from considering the factual circumstances and a claim by Civic Video regarding the tort of inducing a breach of contractual relations, the Western Australian Court of Appeal also reviewed the principles that are applicable to assessing damages for repudiation of an agreement. THE KEY FACTS 4 Civic Video Pty Ltd ( Franchisor ) and the Thompsons ( Franchisee ) entered into agreements under which the Franchisee would operate two stores using the Civic Video System ( Franchise ). 5 Franchisor consent was required in order for the Franchisee to sell, assign or transfer any interest in the Franchise business or any rights under the Franchise agreements. 6 The Franchisee was required to pay a monthly franchise fee to the Franchisor under the Franchise Agreements. 7 The Franchisee fell behind in their payment of Franchise fees. 8 The Franchisee listed the stores for sale through a business broker, Mr Smith. 9 The Franchisee entered into an agreement to transfer all of their plant and equipment, excluding trade supplied equipment, to a competitor of the Franchisor (a prospective purchaser) so that the Franchisee would cease running the Franchise business. The Franchisee did not obtain the Franchisor’s consent before doing so. This sale did not proceed. 10 Later, a Mr Paterson took over the Head Lease of the complex that the Franchisee was trading at. 11 Mr Paterson made written offers to the Thompsons to purchase the assets of each of the two stores owned by the franchisee. 12 At trial, Mr Paterson gave evidence that it was his intention in acquiring both businesses to consolidate them into one Video Ezy business so that, with his existing Video Ezy store, he would then have two strong Video Ezy stores in Geraldton. THE PRIMARY JUDGE'S DECISION 13 The primary judge found that the conduct of the Franchisee constituted a repudiation of the Franchise agreements. 14 In assessing damages, the primary judge found that at the time of the repudiation the Franchisee could not continue trading due to their financial position. 15 Accordingly, the primary judge found that the Franchisor would not have received any further Franchise fees from the Franchisee even if they had not repudiated the Franchise agreements in the manner that they did. Therefore, the primary judge found that there was no loss suffered by the Franchisor in this manner. 16 The primary judge assessed damages only on the basis of the loss of opportunity of the Franchisor finding another purchaser for the stores or the Franchisor itself taking over the stores. This opportunity was denied to the Franchisor by the Franchisee’s breach of the Franchise agreements. Commercial in confidence 2 Legal/47226698_1
17 It was alleged by Civic Video that Mr Paterson had interfered in contractual relations between it and the Franchisee. 18 The primary judge identified the elements of the tort of intentional interference with contractual relations were as follows: (a) There must be a contract between the plaintiff and a third party; (b) The defendant must know that such a contract exists; (c) The defendant must know that if the party does, or fails to do, a particular act, that conduct of the third party would be a breach of the contract; (d) The defendant must intend to induce or procure the third party to breach the contract by doing or failing to do that particular act; and (e) That breach must cause loss or damage to the plaintiff. 19 In relation to that aspect, the primary judge concluded that Mr Paterson did not know, one way or another, whether the sale of the businesses to him would be a breach by the Franchisee of the Franchise Agreements. While the primary judge considered that Mr Paterson had grounds to suspect that by selling the businesses the Franchisee might be in breach of the Franchise Agreements, he concluded that the suspicion did not amount to reckless indifference or wilful blindness. He therefore rejected the claim against Mr Paterson in relation to the tort of interference of contractual relations. ISSUE BEFORE THE COURT OF APPEAL 20 The Franchisor appealed the primary judge’s decision. The Franchisor argued that the damages should have been assessed on the basis of the Franchisor’s loss of bargain rather than its loss of opportunity. 21 The Franchisor alleged that the primary judge erred in finding that Mr Paterson did not induce the Franchisee to breach their Franchise Agreements with the Franchisor. THE COURT OF APPEAL DECISION 22 The Court of Appeal found in favour of the Franchisor in relation to the issue of damages, but against the Franchisor in relation to its allegation that Mr Paterson induced the Franchisee to breach their Franchise Agreements. Did Mr Paterson induce the Franchisee to breach their Franchise Agreements? 23 Civic Video attacked two findings of fact of the primary judge; namely that Mr Paterson did not know the sale of the businesses by the Franchisee would breach their Franchise Agreements, and that Mr Paterson did not intend to induce or procure the Franchisee to breach the Franchise Agreements for the following reasons: (a) while Mr Paterson did not receive a copy of the Franchise Agreements, he was experienced in the operation of video stores pursuant to Franchise Agreements (due to his operation of Video Ezy franchised businesses) and was aware that the Franchise Agreements generally had the provision requiring the Franchisor's consent for early termination; (b) there was evidence from Mr Paterson's enquiry of the business broker as to Civic's attitude to the sales that Mr Paterson was alive to the fact that the Franchisee might be breaching the Franchise Agreements; (c) the inclusion of an indemnity in the Sale Agreement to protect Mr Paterson is an acknowledgment that the sale of the businesses by the Franchisee would be in breach of contract; Commercial in confidence 3 Legal/47226698_1
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