Lindfield NSW Pty Ltd v Netdeen Pty Ltd t/as G.J. Gardner Homes (No 3)

At the commencement of the hearing the plaintiff indicated that the trial would be run within the scope of the pleadings. Throughout the trial the defendant took the point that a particular matter being led was outside the pleadings and also objected to certain evidence on the same basis. The plaintiff made no concession that its case had strayed outside of the pleadings, although some of the submissions encasing certain evidence within the pleadings required a somewhat indirect approach.

My view is that the plaintiff did adhere to the pleadings, perhaps sometimes on their very edge, but overall to an extent that the defendant was well able to meet the case being put and never suffered any prejudice by reason of not being able to meet any assertion made by the plaintiff.

To this end, during the defendants’ final submissions, I put this question to his Majesty’s counsel, at Tcpt, 10 August 2024, p 736 (5):

Other than repeating the general complaint about the pleadings the defendant did not come back to give me examples or deal with the matter in more detail. Between my assessment that the pleadings were not ignored and the defendant not returning to the question posed above, I am satisfied that the plaintiff’s case was put without any prejudice to the defendant’s capacity to identify the allegations against it and to meet them.

In 1983 Mr Greg Gardner commenced a homebuilding business called GJG Homes. In 1995 the defendant company was incorporated (G.J. Gardener Homes Pty Ltd) in order to facilitate the franchising of Mr Gardner’s building enterprise.

The business structure had three tiers: at the top was the Master Franchisor. There was then a Master Franchise Agreement (MFA) with a Master Franchisee. The Master Franchisee then had franchise agreements with Sub-franchisees.

In short, the Sub-franchisees were (generally) small building firms that built residential homes under the banner of G.J. Gardener Homes. The Master Franchisee, who was not a builder, provided support to the Sub-franchisees.

An earlier Master Franchisee for the combined NSW and ACT areas was not successful. Mr Matthew Hope, through his company Lindfield NSW Pty Ltd (the plaintiff), became the Master Franchisee for the combined NSW and ACT areas on 18 November 2005. To become a Master Franchisee he needed to invest $500,000. The MFA between the plaintiff (Lindfield) and the defendant (Netdeen) had a term of 10 years.

Mr Hope, who had lived in New South Wales, moved to Queensland in October 2009. In February or March 2014 Mr Hope asked the defendant to prepare a new MFA, which was prepared and executed on 1 July 2014. The parties to the MFA were the plaintiff and the defendant. The new MFA had a term of 10 years, and also an option to renew for a further 10 years.

The option to renew is the primary issue in the proceedings. This is because on 3 July 2023 the plaintiff endeavoured to exercise the option to renew. On 24 July 2023, the defendant issued a Refusal Notice declining the application for renewal. The refusal was made pursuant to cl 4.7 of the MFA.

It is also relevant to note here that after the plaintiff had requested renewal on 3 July 2023, the defendant, on 5 July 2023, provided the plaintiff with a copy of its “current” MFA. It did so because, pursuant to cll 4.2 and 4.6, any renewal would be subject to the current MFA. It is part of the plaintiff’s case that the current MFA was deliberately so disadvantageous to the plaintiff that it formed part of the defendant’s predetermined decision to exclude the plaintiff from the G.J. Gardener Homes franchise. The use of the current MFA to achieve a similar purpose was said to have been utilised by the defendant in dealings with a Master Franchisee in Victoria.

The result of the refusal to renew the MFA is that the plaintiff is no longer the Master Franchisee and therefore no longer able to derive an income from the Sub-franchisees (the builders).

The ten-year term of the MFA expired on 1 July 2024. On 27 May 2024, the defendant served a notice of termination of the MFA on the plaintiff and took an assignment of the franchise agreements between the plaintiff and the Sub-franchisees, thus ending the plaintiff’s role in the G.J. Gardener Homes enterprise. Effectively, the three-tier model was abandoned and replaced with two-tiers with the Master Franchisor at the top having a direct relationship, through the assigned Sub-franchise agreements, with the Sub-franchisees. This was referred to as a direct model and the process of achieving the model, as ‘de-mastering’.

The assignments mentioned above were contemplated by the MFA and had the effect of excluding the plaintiff from its income source. The income structure, referred to as royalties under the three-tier model worked in this way:

As a general statement, the plaintiff as a Master Franchisee, worked hard and did well. There is no dispute that the plaintiff had an annual profit of about $4 million.

The plaintiff alleges that it has been ‘pushed out’ of the G.J. Gardener Homes enterprise leaving it with no income and no realisable asset. The loss said to emerge from this circumstance has been assessed by the plaintiff, through an expert, at $25.6 million. In this litigation the plaintiff claims this amount as damages. There is also an alternative claim for damages of $3,942,330.

The plaintiff put its case in a number of ways:

I think the four topics described in the preceding paragraph will provide a convenient structure for my reasons. However, I also note that by the end of the case the plaintiff advanced three “meta” issues:

It is notable that the above three concluding issues omit any reference to the Franchising Code.

In addition, I will deal with damages and arguments on termination. The latter arises from Mr Hope’s involvement in a business venture called Wattle Court Homes.

This topic has two elements: construction of the relevant clauses and whether, on the plaintiff’s construction, there has been a breach of the MFA.

This is a convenient point to insert the relevant clauses of the MFA.

Clause 14 is also important. It dictates certain matters arising upon the termination or expiration of the MFA. The most relevant subclauses are:

A point I will make here, although it may not be of much significance, is that contrary to the submissions of the defendant that there was no goodwill attached to the franchise, cl 14.6 (g) does recognise the existence of goodwill although attaches no value to it.

The construction argument centred on cl 4.7. The plaintiff submitted that the clause required the defendant to take into account the best interests of the plaintiff. Initially the plaintiff said that the words “and/or” did not involve an alternative. At the end of the hearing however, the plaintiff had slightly amended its position by conceding the ‘alternative’ possibility but nevertheless saying that the exercise of the power under cl 4.7 necessarily included a limitation which made it necessary to consider the best interests of the plaintiff. This limitation arose from the words “that may be reasonably taken into account”. These words gave effect to the overall purpose of the MFA which catered for the interests of both the plaintiff and the defendant, as well as the Sub-franchisees.

The defendant submitted that the terms of cl 4.7 did not oblige it to consider the best interests of the plaintiff.

The general approach to be taken in construing a commercial contract was set out in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 from [46]-[50]:

Both parties also relied upon the decision of Edelman J in H Lundbeck A/S v Sandoz Pty Ltd; CNS Pharma Pty Ltd v Sandoz Pty Ltd (2022) 276 CLR 170; [2022] HCA 4. At [93] his Honour identified three categories of interpretation:

And then from [96]-[99], his Honour continued:

The defendant submitted the decision of Beach J in the Federal Court in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 was particularly applicable. It was pointed out that the plaintiffs in that case had put their case in a similar way to the plaintiff here. The non-renewal clause in AHG was cl 8. Beach J stated at [65]-[75]:

The plaintiff pointed out that AHG was under appeal and submitted:

I think AHG is distinguishable and that the primary distinguishing feature can be seen from [69] and [70] of the judgment (quoted above). As I observed to counsel:

In AHG a number of purveyors of Mercedes-Benz motorcars brought proceedings against Mercedes-Benz Australia to prevent the introduction of a new style of relationship, effectively by forcing the dealers into an agency relationship, as opposed to the dealer agreements that they previously enjoyed. The dealers complained that the switch involved “the appropriation of the dealers’ goodwill and customer relationships for no or inadequate compensation” at [19].

The dealer agreements were not for a fixed term, but they did include a non-renewal power which was at the centre of the dispute. The dealers argued that as long as they did not breach the dealer agreements and they met their targets, then Mercedes-Benz could not activate the non-renewal clause.

In addition, the dealers asserted that “MBAuP’s conduct in issuing the NRNs was motivated by a purpose which was antithetical to the dealer relationships and dealer agreements, being to take the customer relationships and the profits to be earned from the unexpired lifetime value of their customers, without paying anything to the dealers for that taking” at [20].

Beech J, at [65], said that:

His Honour continued, at [79]:

It can immediately be seen that unlike cl 4.7, which imposed certain obligations on the exercise of the non-renewal power following an application for renewal, the relevant issue in AHG was the exercise of the non-renewal clause where there had not been any request to renew a fixed term and where the implementation of the clause was derived from the unilateral actions of Mercedes-Benz.

I do not suggest that AHG is irrelevant to the current case, but only that caution must be taken in applying its conclusions to the present, and different, facts.

The plaintiff submitted that the interpretation of cl 4.7 must take into account the purpose of the clause and in particular that the inclusion of the best interests of the Master Franchisee was a meaning “that would have been intended by a reasonable person in the position of the parties.”

A number of matters were put as indicating both the purpose of the agreement and what might have been intended by a reasonable person. When the MFA was being negotiated in 2014, at the genesis of the agreement, it initially did not include a renewal option. Mr Hope wrote to Mr Wallis, by email, on 3 April 2014, stating:

Mr Wallis responded the following day. He said that the agreement that had been sent to Mr Hope had been, in essence, a standard draft. He continued:

The just quoted exchange indicates the value recognised by both parties in a term of renewal. This is not surprising. As a general concept, an option to renew, for example in a lease, is a valuable commodity in the hands of the person who might exercise the option. If the exercise of the option required no more than a simple refusal, it would be an option without content, purpose, or value.

I also think it necessary to return to the origins of the MFA and in particular the philosophy guiding the making of agreements with Master Franchisees.

This is exemplified in the information booklet which states:

Mr Wallis agreed that the philosophy dictated the attitude of the defendant until 2019:

The effect of the non-renewal was to utterly deprive the plaintiff of the asset that had grown in value. There was nothing to sell. The defendant says that the MFA allowed it to take the action that it did. In particular, its actions were completely consistent with its rights under the MFA, which were exercised in accordance with the clauses of the agreement, in particular cl 4.7.

Put another way, the defendant’s construction of cl 4.7 allowed the defendant to override the best interests of the plaintiff in favour of the best interests of itself and the Sub-franchisees.

On this construction a major incentive in a person becoming a Master Franchisee is ignored.

The plaintiff also relied on that part of cl 4.7 which directly referred to the performance of the Master Franchisee, in particular as to market share, servicing Sub-franchisees, skill and performance, achieving targets and “support or lack thereof” for the overall franchise. If these were matters that might be considered then, it followed, by use of the words “without limitation as to other matters that may reasonably be taken into account” that the best interests of the Master Franchisee should also be considered.

Returning to Lundbeck, I think my view on interpretation falls mostly within the second category identified by Edelman J (at [93]), although as his Honour says, the border between the categories is “ephemeral” or short lived. If the term that I think should be implied, namely that cl 4.7 necessitates the consideration of the best interests of the Master Franchisee, then I think the Codelfa test is also passed.

Applying the test as set out in [96] of Lundbeck, I am satisfied that:

In relation to the fifth factor I have discussed in the previous paragraph, my view is endorsed by the following:

I was also referred to the principles of interpretation as set out in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7, at [35]:

Applying the interpretation as just described, I am satisfied that a reasonable businessperson would understand cl 4.7 to contemplate that a renewal clause would have, as a factor to be considered, the interests of the person seeking the renewal. To conclude otherwise would be, as I have already said, to completely extinguish the value of an option to renew. The lure that had induced the Master Franchisee into the agreement would reduce to little more than mere marketing and the existence of the option would be meaningless.

Having reached this conclusion, the next step is to see whether the best interests of the Master Franchisee had been taken into account. There was no real issue that they had not. The defendant’s case was that there was no need to do so, and it had not been done. It follows that I am satisfied that the defendant breached its obligations under cl 4.7 and therefore breached the MFA. This entitles the plaintiff to damages for breach of contract.

Theoretically I could proceed directly to damages. However, against the possibility that I am wrong in the interpretation of cl 4.7, I will proceed as if I had preferred the defendant’s interpretation.

Under the defendant’s interpretation, the defendant was entitled to refuse renewal under cl 4.7 if it had “honestly and reasonably held, that renewal of the Master Franchise would not be in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-franchisees.” The defendant said that it had reached the conclusion contemplated by the clause that it was not in the best interests of the Franchisor and Sub-franchisees to renew the MFA.

The plaintiff submitted that the important question was not whether the defendant had reached a conclusion as envisaged by the clause, but rather whether it had reached a conclusion at all. By this I mean that the plaintiff submitted that there had not been a decision made on the merits, even under the defendant’s interpretation of cl 4.7, to renew or not renew; rather the decision had been made well before the renewal application was made. This imports two notions: that a report prepared for consideration by the defendant’s board (the COO report) was not a report prepared for genuine consideration, and secondly that the meeting on 20 July 2023 did not involve the making of a decision but was no more than a ‘rubber-stamping’ of a previously made decision.

The plaintiff put the question about a decision in this way: did the directors bring an open mind to the meeting about the renewal? The plaintiff submitted that the defendant’s reliance on cl 4.7 was an effective subterfuge to an already made, but concealed, decision to ‘de-master’ (or switch to a direct model).

In my view there is a subtlety to the question posed by the plaintiff which needs to be considered. This was the possibility that a decision had been made before the meeting but, at the meeting, a separate decision was made as to whether to stand by the earlier decision. If this had happened then the existence of the earlier decision, as an indicator of a breach of the defendant’s obligations under cl 4.7, would be of much less significance.

In order to answer the question about the true nature of the decision to refuse renewal made at the board meeting on 23 July 2023, I think it necessary to go back in time to events that had already occurred.

Between 2009 and 2015 the number of Sub-franchisees grew from 19 to 26. The combined turnover of the Sub-franchisees, over this period, grew from $89,095,966 to $171,082,099.

In March 2015, the plaintiff was entirely purchased by a company called Colour Capital Pty Ltd. This company was then owned by the Hope Family Trust. The defendant’s approval for the purchase was required by the MFA. The defendant gave approval.

In 2017 Colour Capital sold 33.3% of its shares to Teaminvest Private Group Limited (‘TIP’) for $5 million. The defendant consented to this transaction.

The result of the above transaction was that the plaintiff “is wholly owned by Colour Capital and Colour Capital is owned by TIP as to 33.3% and the Hope Family Trust as to the balance.”

On 24 May 2019, TIP was listed on the Australian Securities Exchange. In 2020 TIP had discussions with Mr Hope about increasing its shareholding in Colour Capital, initially to 49% and then, after two years, to 66.66%.

Again, because of the requirements of the MFA, Mr Hope sought approval from the defendant for the graduated sale to TIP. The defendant indicated that it did not wish TIP to have a majority interest in Colour Capital. At about the same time Mr Hope asked the defendant if it would purchase Colour Capital for $18 million, this being the valuation that TIP had placed on the plaintiff’s business. The defendant declined the offer.

Also in May 2019, Mr Christopher Thornton was employed by the defendant as its Chief Operating Officer for Australia and New Zealand. Mr Thornton had a marketing background and had not worked in the building industry previously. He did have experience in the franchise industry.

In July 2019 Mr Thornton met with the Master Franchisees at a meeting in New Zealand. At that time, his employer’s goal was “for every Franchisee to be profitable and the largest and most respected builder in their area (Vision) and the goal was to become the #1 home builder in Australia by 2023 (what became the ‘1@23’ goal) (Goal).” (Exhibit A p 175 [23]).

In December 2019 Mr Thornton commissioned reports from two franchise experts, Mr David Campbell, and Mr Jason Gehrke. Both reports had been received by the defendant by May 2020. The two experts also provided supplementary reports. Mr Gehrke summarised his opinion in his report dated July 2023:

Mr Campbell reached similar conclusions in his second report, also dated July 2023.

Mr Wallis, Mr Trent Gardner, and Mr Thornton met in May 2020 to discuss the initial reports. Mr Thornton was asked to prepare a report making recommendations for the G.J. Gardner Homes business.

Following the meeting in May 2020 the defendant’s intention was to go to a “direct model” operation. Mr Thornton, under cross-examination, seemed reluctant to refer to this model as “de-mastering” notwithstanding that this phrase was frequently used by him in his reports to the board. Mr Thornton’s use of the heading “alleged de-mastering strategy” in his affidavit in Exhibit A, page 209, is somewhat disingenuous.

Notwithstanding the intention to move to the direct model, Mr Thornton was adamant that this did not mean that MFA’s would be abandoned and in fact this was not done. Mr Thornton referred to the Victoria/Tasmania position as an example. The example demonstrated the very opposite because within a month of a new MFA being agreed with the Victorian Master Franchisee, that Franchisee agreed to a Deed of Relinquishment bringing the new MFA to an end. Mr Thornton referred to the closeness in time of the deed to the signing of the new MFA as a coincidence. I do not accept that description. The fallacy in Mr Thornton’s coincidence was demonstrated by the new MFA and the Deed of Relinquishment being signed on the same day. I think it is quite clear that the new MFA was executed in order to facilitate the entering into of the deed.

I mentioned above that the plaintiff asserted that the current MFA was deliberately disadvantageous to a Master Franchisee. This was to assist the defendant in effectively engineering the exclusion of an existing Master Franchisee and thereby implementing a direct model.

The unattractiveness of the new MFA was well illustrated in the evidence of Mr Trent Gardner where he conceded that the obligation on the Master Franchisee, under the new MFA, would be to pay $600,000 to the Franchisor for the provision of a business development manager, but this manager would receive an annual salary of $100,000 from the Master Franchisor. In other words, the Master Franchisee would pay $600,000 for the services of a person whose actual services were valued at $100,000. Clearly an agreement of this type would be untenable, unworkable, and unprofitable.

Mr Trent Gardner denied the payment of $600,000 was to “shift the profit” from the Master Franchisee to the Master Franchisor. Somewhat unconvincingly he said the purpose was to “change the commercials”:

I also observe that shifting the profit is a more obvious example of changing the “commercials”.

The ramifications of the board’s decision to go to the direct model was at the core of a good deal of the cross-examination of Mr Thornton, particularly, but also of the other defendant witnesses. The suggestion, which was continuously emphasised, was that the decision having been made, that decision dictated the relationship with the Master Franchisees even if the Master Franchisees were not made aware of the decision. In other words, renewal of MFAs, other than as in Victoria, would not occur no matter what other factors existed. Thus, it did not matter that the plaintiff was doing very well because the profits he was making were better off in the hands of the defendant. This point is graphically illustrated in the PowerPoint presentation which was shown to Mr Hope on 17 November 2020 and can be found at p 967 of Exhibit A.

Mr Thornton agreed that the direct model strategy involved “getting rid” of MFAs. He agreed that the strategy involved the backing of the plaintiff into a corner where the only person who could take over the Sub-franchisees was the defendant. Mr Hope could not increase third-party involvement in Colour Capital nor effectively take any other action, other than terminate the MFA.

Mr Thornton denied that this strategy was “lacking in integrity”. He also denied that cl 4.7 was an integral part of the strategy, to the effect that if all else failed, the defendant would simply not renew the MFA.

On 17 November 2020 Mr Hope met with Mr Trent Gardner and Mr Thornton. According to Mr Hope, Mr Thornton told him that:

Mr Thornton does not dispute the assertions made about him as quoted in the preceding paragraph. He does however say that he met with all of the Master Franchisees, in November 2020, to discuss “the vision for GJG.”

In his report to the board on 14 January 2021, referring to the November 2020 meeting, Mr Thornton said that the Master Franchisees were told of “the significant problems with the Master Franchise model” and that:

Mr Thornton then stated, in his report, that:

As conceded by Mr Thornton, Mr Hope was far from appreciative, as shown in his email to Mr Thornton and Mr Trent Gardner on 18 November 2020. Here are some excerpts:

What Mr Hope was actually saying was a precursor to his position in this litigation. He was warning Mr Thornton that the defendant was making an attempt to take away his business in order to have the profits that the plaintiff was achieving.

On 4 March 2021 the plaintiff was offered $7.83 million “in exchange for the early termination” of the MFA. The offer was rejected. Mr Thornton said that the valuation had been prepared by a Mr Peter Haley who calculated the value of the NSW/ACT Master Franchise at $8.23 million but deducted $909,475, being the negative value of the Western Australian Master Franchise. $500,000 was added “as a gesture of good faith, considering Mr Hope’s involvement with GJG for around 20 years.”

Mr Haley’s valuation was based on the value of the remaining term of the MFA. Therefore, the possibility of a renewal was not a factor in the valuation. Mr Thornton denied that not mentioning cl 4.7 was “not in the right spirit.”

Mr Thornton’s approach was that he had concluded that Mr Hope wished to terminate the MFA and the defendant “wanted to help.”

Following rejection of the offer of $7.83 million, Mr Hope contacted Mr Trent Gardner and told him that the valuation was deficient because it did not take into account the possibility of renewal and did not value the likely growth to the end of the term. Mr Gardner apparently agreed with the second point. Mr Thornton said that during the COVID-19 epidemic building projects increased dramatically because people were reassessing their housing needs and there were financial incentives from government.

In June 2021, a further offer was made to Mr Hope of a termination sum of $14 million. The offer was accepted but did not come to fruition because the parties disagreed on some terms, in particular a term of release from future claims against the plaintiff.

My reading of the correspondence about the disagreement I think illustrates a possibly over-anxious approach on the part of Mr Hope, although both parties clearly reached a stage where they simply would not move from their respective positions. This was indeed unfortunate because the $14 million agreement, if it had come to fruition, would have avoided this litigation.

Following the failure of the $14 million agreement, the plaintiff’s case is that the plaintiff returned to its commitment to the MFA and did very well (for itself and the defendant) and always considered it had the right to renew for a further 10 years. The plaintiff asserts that the defendant did not disabuse it of this possibility but, surreptitiously, never intended to even consider renewal, the defendant having committed itself to progress to the direct model.

In his report to the board on 20 October 2021 Mr Thornton observed that:

Despite these positive comments Mr Thornton wrote that “Matt could invest and focus resources in the remainder of the term to shore up his case for renewal on this point.” Mr Thornton ended his comments on New South Wales and Western Australia by stating:

Mr Thornton denied that the honest conversation referred to Mr Hope being informed that he had no chance of obtaining a renewal. The honest conversation is said to have occurred on 22 February 2022. There is, unusually for the system that seems to have prevailed in the defendant’s offices, a file note of this meeting. Based on the file note, which is at Exhibit A p 1177, the meeting began well but descended into a heated exchange:

The reasons that Mr Thornton provided included the views of the two independent franchising experts (Mr Gehrke and Mr Campbell), a commitment to the direct model (with qualifications), reference to a new MFA which had been negotiated in Victoria and Tasmania and the defendant’s objection to further investment from TIP.

The reference to the new MFA is, as I have discussed above, something of a smokescreen because the new MFA, at least the one utilised in Victoria and Tasmania was in reality a part of the de-mastering strategy that occurred in those states.

The file note of 22 February 2022 continued:

I think it evident from the file note that Mr Thornton had the view that there was an un-fettered right held by the defendant to terminate the agreement. This is essentially the allegation of the plaintiff concerning the manner in which the defendant ultimately refused renewal.

Mr Thornton denied that he had told Mr Hope, at the February meeting, that there would be no renewal of the MFA. Again, the suggestion was that the defendant, while allowing the plaintiff to continue doing well, and making a profit, had decided that there would not be a renewal no matter what factors might be considered. Further, in other words, a pre-meditated position had been made and concealed.

The file note I have just mentioned came under intense scrutiny. This is because it transpired that it had been changed by Mr Thornton on 27 February 2024, only two days before his affidavit of 29 February 2024 was sworn. The file note is referred to in his affidavit at par 87 where it is stated:

There is no suggestion from Mr Thornton that the annexure is not a copy of the original file note. The original note is Exhibit K. The differences are small but their import is large. For example, the file note annexed to Mr Thornton’s affidavit states:

The original file note stated:

The differences in the file notes indicate a distinction between a decision to be made and a decision having already been made about the plaintiff’s MFA. I think the alteration to the file note is both a condemnation of Mr Thornton’s credit and a significant point in favour of the plaintiff’s case.

Following the meeting on 22 February 2022 Mr Hope wrote to Mr Thornton asking him to “provide written notice at your earliest convenience regarding the information that you shared at yesterday’s meeting regarding corporate offices decision to not offer a renewal for our Master Franchise Agreement, which is due to be renewed on 1 July 2024.”

Mr Thornton replied, on the same day, that he was “putting together a letter with our position.” He foreshadowed that the letter would need the board’s approval so thought it would be received by Mr Hope in the following week. In fact, no letter was received in the following week and the letter which did eventuate did not arrive until 24 June 2022 and it had not been drafted by Mr Thornton. In fact, it was signed by Mr Trent Gardner but drafted by the defendant’s solicitor.

On 25 February 2022 Mr Wallis came to the house of a friend (“Techy”) where Mr Hope was present at a poker game. Mr Wallis and Mr Hope did not get on well at the game, presumably because of the conversation that had occurred between Mr Hope and Mr Thornton on 22 February 2022.

Under cross-examination Mr Wallis would not concede that Mr Hope was upset because he had been told by Mr Thornton some three days earlier that his MFA would not be renewed. Mr Wallis said that Mr Thornton did not have the authority to make that statement. On 7 March 2022 Mr Wallis sent an email to Mr Hope apologising for “turning up to poker under the circumstances.” The balance of the email concerns the negotiations about the $14 million agreement and ends with some remonstrations about name-calling apparently engaged in by Mr Hope.

The letter of 24 June 2022 (Exhibit A p 1282) states that “it is too early for Netdeen Pty Ltd to determine whether a renewal of the NSW/ACT Master Franchise, in accordance with Item 4 of the Schedule, is in the best interests of the Franchisor and other G J Gardner Homes Master Franchisees and/or Sub-franchisees.” This wording, by referring to “other G J Gardner Homes Master Franchisees” (emphasis added) suggests that the best interests of the plaintiff are not a relevant consideration.

The letter also reminds Mr Hope that the right to renew is conditional, and reference is made to cll 4.2 and 4.7.

The plaintiff submitted that the letter was another example of a subterfuge in that, by June 2022, the defendant had already decided to not renew the MFA. This conclusion is consistent with the unaltered file note Mr Thornton had prepared on 22 February 2022.

The letter of 24 June 2022 ends in this way:

As I have already pointed out, alleged acts of non-compliance with the MFA, such as wearing uniforms, do not seem to have been of much consequence to the defendant’s directors. Although raised in the COO report prepared for consideration of the renewal of the MFA, Mr Wallis regarded them as “not the kind of breaches which would result in a non-renewal” (Exhibit A p 153).

In December 2022, Colour Capital, the plaintiff, GJWA Investments Pty Ltd and Matica Pty Ltd commenced proceedings in the Federal Court against the defendant. I was told the latter two companies were irrelevant to the current proceedings and should be ignored. I accept that advice. The proceedings were discontinued on 1 March 2023 on terms that included the applicants paying the defendant’s (Netdeen’s) costs.

As stated above, the plaintiff gave notice of the exercise of its option on 3 July 2023. On 20 July 2023, the defendant’s board met to consider the option. Mr Wallis, Mr Trent Gardner, and Mr Greg Gardner (as board members) were present together with Mr Thornton, Mr Conrad Gardner, Mr Patrick Haley, and Mr Chris Pace.

The sole purpose of the board meeting was to consider the exercise of the option. At the meeting, Mr Thornton presented the report (the COO Report) which he had been asked to prepare. The report had been circulated to the board members on 14 July 2023.

The COO report, like the meeting itself, was asserted to be an effective cover designed to give an appearance of justification for the refusal to renew the MFA. I think there is some substance in the assertion.

Under cross-examination Mr Thornton initially said that the COO report was his “own independent work”. However, before the report was distributed, Mr Thornton sent a draft to the defendant’s solicitors. The solicitors suggested some amendments which Mr Thornton took on board and incorporated in the final report. At least two of the comments and amendments are noteworthy.

Firstly, the draft included this paragraph:

The solicitors, perhaps with guile or simple cynicism, made this comment about the just quoted paragraph:

The draft paragraph did not change in the final report, but a graph was annexed showing some marketing data. It is obvious that the defendant, by seeking the input of its solicitors, was acting with the risk of litigation in mind.

The supposition that a judge would be astonished might have been seen by the solicitors as a message to a judge that the plaintiff had done very well and should not be complaining. On the other hand, such figures would equally explain the defendant’s endeavours to terminate the MFA and take the plaintiff’s profits for itself.

Secondly, words of praise inserted by Mr Thornton in the draft were removed and replaced with a different paragraph. Under the heading of Renewal, Mr Thornton made some positive comments about Mr Hope. He said, “It certainly seemed that Matt was genuine in his intent to achieve a successful transition in 2021.” (Exhibit A p 1915)

The solicitors deleted the compliment and inserted a new paragraph calling into question “whether Mr Hope’s continued presence would be to the benefit or detriment of the Franchise Owners.” This comment was made about the amendment:

As I have already observed the proposed MFA was essentially a device to persuade, if not force, the Master Franchisee to terminate the MFA. The solicitors’ comment is both informative of the defendant’s attitude, as well as, again, somewhat cynical.

The defendant submitted that the COO report was a genuine and fair assessment of the relevant circumstances to be presented to the board. I note that there was no challenge to the correctness of any fact stated in the report. This was partly a product of an evidentiary ruling I made at Tcpt, 30 July 2024, p 101(15):

The defendant submitted that the COO report was a “comprehensive and detailed analysis of relevant factors”.

The defendant pointed out a number of parts of the COO report which it said highlighted the factors that the board meeting would need to consider. Remembering that I am now assuming the correctness of the defendant’s construction of cl 4.7, some examples are:

I have only listed some of the considerations and analysis contained in the COO report, to illustrate the defendant’s submission that the report was comprehensive and covered all of the factors that might be taken into account in deciding upon the best interests of the Franchisor and the Sub-franchisees.

The report ends with a conclusion and recommendation. The last three paragraphs are:

The defendant submitted that the purpose and point of the COO report was to provide the board with the information that it required to make the necessary decision under cl 4.7. The extent and detail of the report were suggested to be entirely inconsistent with a subterfuge whereby the report was a justification for an already made decision as opposed to a working paper providing the board with the necessary information to make its decision.

Before examining the actual board meeting, I observe that if renewal under cl 4.7 could be refused, then assuming an open mind was brought to the exercise, that the contents of the COO report could well be seen as providing the necessary information for the board to make up its mind.

The plaintiff’s case is that the board meeting, like the COO report, was no more than a ‘rubber-stamping’ of a predetermined decision to ‘de-master’ the Master Franchisees. Mr Wallis and Mr Greg Thornton have a very different view. According to Mr Wallis:

It is notable from the just quoted passage from Mr Wallis’s affidavit that his focus is on the interests of the Franchisee and the Sub-franchisees. Put another way the focus is not on the interests of the Master Franchisee. However, on the scenario I am now dealing with (the defendant’s construction of cl 4.7) that is an acceptable approach.

According to Mr Thornton, the meeting took the renewal decision very seriously. He said:

Mr Thornton stated that he summarised his report to the board and the board then “discussed it in considerable detail”. He stated that after his presentation he concluded by stating:

Following his presentation Mr Thornton says that the board members had a detailed discussion of the merits of the decision they were about to make. This discussion went so far as to include Mr Thornton and Mr Trent Gardner effectively reminding Mr Greg Gardner and Mr Wallis about the need to consider the terms of cl 4.7.

Mr Thornton rejected the suggestion that the renewal refusal was “a foregone conclusion”. There are no minutes of the meeting. The implied suggestion was that the board meetings were fairly casual interactions which did not require minutes to be taken. But this was a very important meeting, one for which Mr Thornton had prepared a report which had been scrutinised by solicitors and would involve the finalisation of a long-standing relationship with the plaintiff. Mr Thornton made a file note of the meeting on 22 February 2022. I find it, at least suspicious, that no minute was taken of the board meeting.

What Mr Thornton did do however, at 9:25pm on the day of the board meeting, was send a note to Mr Tony Conaghan, the solicitor who had ‘helped’ him with the preparation of the COO report. In the email (Exhibit H) Mr Thornton endeavours to give a detailed description of the discussion ending with a unanimous vote against renewal. It was put to Mr Thornton that the note had been sent to a solicitor to give it the benefit of legal professional privilege. It was also suggested that he had embellished his account of the meeting in his affidavit. He rejected both suggestions. It is notable however that the reference at par 133 of his affidavit to, effectively, the terms of cl 4.7, was left out of the email to the solicitor because it had not occurred.

With this background, the defendant submitted that the decision-makers (Mr Greg Gardner, Mr Trent Gardner, and Mr Wallis) were entitled to “have regard to it and rely on it (the COO report) to the extent they thought it appropriate.” (Tcpt 30 July 2024 p 72(26). Mr Couper submitted:

I think this is a very important submission. It contemplates the possibility of a decision having already been made but then confirmed after further discussion. Is the confirmation of a decision any less of a decision than if there had not been a pre-existing opinion?

The attitude behind the defendant’s conduct is quite logical. The plaintiff, under the MFA, was doing well. The defendant was also benefitting but could have done better if the royalties going to the plaintiff went to the defendant. Of course, the defendant would have had to provide the Sub-franchisees with the services that were being provided by the plaintiff. Nevertheless, this would no doubt have been possible, perhaps with their efficiency growing over time, but ultimately leaving the defendant in possession of the royalties that would have gone to the middleman.

I will endeavour to summarise and make some comments on, what was stated by Mr Wallis, Mr Thornton, Mr Greg Gardner, and Mr Trent Gardner about the board meeting. There were other participants, Mr Conrad Gardner, Mr Patrick Haley, and Mr Chris Pace, but none of them provided evidence about the meeting.

According to Mr Wallis:

Mr Wallis, in his affidavit of 29 February 2024 concluded his description of the meeting with this paragraph:

If his reference to “personal circumstances” refers to his friendship with Mr Hope, then there is perhaps some logicality to his statement. However, it is to be remembered that his personal circumstances, to the extent that they included his financial circumstances, would be likely to significantly improve as a result of the increased profits to the defendant and in turn to his share of those profits.

Under cross-examination Mr Wallis specifically denied the above scenario:

I do not accept Mr Wallis on this point. He was entitled to 30% of the profits. He would not have received a corresponding increase on the direct model because of the increased costs to the franchisor associated with it, but he would have certainly obtained a substantial profit increase. There was this concession in his cross-examination:

Like Mr Wallis, Mr Thornton in his description of the meeting, also seems to go out of his way to emphasise the genuineness of the task before the board. He stated: “The weight of the decision facing the Board was apparent in the tone of the meeting.”

Mr Thornton said that he discussed the COO report in considerable detail, and in par 119 of his first affidavit, he recounts what he said. He concluded his presentation with these words: “before making any decision about renewal, the Board should take into consideration the need to grow the GJG business and how to best increase GJG’s market share and move towards becoming No. 1 in the residential home building market.” Yet again, there is the concentration on the interests of the franchisor’s business.

Mr Thornton said that there was considerable discussion through the meeting with questions being asked by all the board members. There was specific discussion of cl 4.7 with Mr Thornton stating:

Again, by use of the word ‘other’ the notable point about the passage just quoted is that it specifically omits the plaintiff’s best interests.

According to Mr Thornton, by the conclusion of the discussion:

The uncertainty imagined by Mr Thornton is of course in direct contrast to the plaintiff’s case. However, my impression of Mr Thornton was that he was trying to present a picture of the meeting as containing more ‘pro and con’ discussion than actually occurred.

In oral evidence Mr Thornton said this:

Two matters are evident from the answer given by Mr Thornton:

I observe at this stage that I was not overly impressed by the performance of both Mr Wallis and Mr Thornton in the witness box. I think they were both evasive, and sometimes misleading, and endeavoured to paint a picture of concern for Mr Hope playing a part in their decision, when in reality the decision was one purely of business efficacy. Mr Wallis was particularly adept at avoiding what often should have been a simple answer to a direct question.

It follows that I agree with the plaintiff’s submission concerning the credit of Mr Wallis and Mr Thornton and I disagree with the defendant’s submission that they “gave clear, cogent and honest evidence.”

Mr Greg Gardner made a special effort to attend the board meeting on 20 July 2023 in person. This was the first time he had done so for several years. He did so “because it was important and a critical decision from us needed to be made.” (Exhibit A p 257).

In his affidavit Mr Greg Gardner says that he had analysed the figures before the meeting, bearing in mind the higher costs that would be involved by cutting out the middleman. He concluded that “Netdeen would be ahead but not by much.” This would only occur after some time.

Mr Greg Gardner’s description of the meeting, from par 89 of his affidavit of 17 February 2024, involves explanations, questions, and expressions of concern. He states that he had his own reservations because the MFA model had previously been successful. He ultimately voted for non-renewal because:

The franchisees he is referring to are presumably the Sub-franchisees and not the plaintiff. This is consistent with the defendant’s view about the construction of the contract but also consistent with the plaintiff’s submission that its interests were never taken into account.

My impression of Mr Greg Gardner was that he really had little memory of the meeting, as exemplified by this passage in his cross-examination:

And then a little later, I asked him:

There is one other feature of Mr Greg Gardner’s evidence that deserves mention. Mr Greg Gardner said that he had a simple formula in his mind as to the profits that he would obtain from the building of houses. According to him, each house built gave him $1000. This was his evidence:

I asked him some questions about this evidence:

It defies reason and logic that the profit would not increase with the doubling of the royalty.

Mr Trent Gardner said that the meeting was intended to take an hour but “due to the discourse and major decision, it ran over.” In his affidavit of 28 February 2024, from par 90, Mr Trent Gardner describes the meeting. The description roughly follows that of the other witnesses, namely one of deep discussion and genuine consideration. He gave his reasons for not supporting renewal, as follows:

From par 109 of the above affidavit, Mr Trent Gardner sets out the manner in which the decision of the board was communicated to Mr Hope. He refers to some email correspondence with Mr Hope in which he says that the board had not made a decision prior to the meeting.

I think it is very clear, both in regard to Mr Trent Gardner’s evidence and that of the other defendant’s witnesses, that they had a firm view that non-renewal would lead to legal proceedings. This is evident from the involvement of the defendant’s solicitors in the COO report and the communication with the solicitors, for example by Mr Thornton following the meeting.

The defendant cannot be criticised for having a perception that legal proceedings would follow non-renewal, but its actions do give some weight to the suggestion that it was necessary to create a picture of compliance with cl 4.7, at least to the extent of the defendant’s construction of that clause. Thus, the preparation of the COO report, for example, ostensibly demonstrates a basis for a reasoned decision on renewal. The same may be said about the consideration said to have been given through the meeting to the question of renewal.

I am not as critical of Mr Greg Gardner and Mr Trent Gardner although there were aspects of their evidence where I think they endeavoured to withhold the truth from the court.

At the core of my findings on credit is an acceptance by me that de-mastering became a policy of the defendant, probably from about 2019, and then dictated its attitude to renewal and its behaviour in respect of creating an apparent justification for the failure to renew the plaintiff’s MFA.

However, I would find it very difficult, against the evidence of four of the persons at the meeting, to conclude, as requested by the plaintiff, that the COO report and the meeting were part of an elaborate disguise of an already made decision.

I am satisfied that the decision to not renew the MFA had been made before the special board meeting, however I do not think I can go so far as to say that the meeting was an entire ‘fake’ in which no decision was made.

This brings me back to Mr Couper’s words, which I have quoted above, but will repeat here:

I think I can refine my conclusions to the current question to these three propositions:

These conclusions are reached on the premise that the question being discussed assumes the defendant’s construction of cl 4.7 is correct.

In the course of dealing with the current topic I have made some comments about the credit of the defendant’s witnesses. Although not strictly a part of the same topic I think it’s convenient to say something about Mr Hope.

Subject to one reservation, I do not accept the criticism of Mr Hope. Firstly, a number of the accusations made against him were actually not put to him. Secondly, although the cross-examination was short, he nevertheless made a good impression upon me with his forthright answers to the questions he was asked.

The reservation I have concerns the evidence about the Wattle Court Homes venture. I will return to the venture below where I will elaborate on why I have exempted this subject from my general acceptance of Mr Hope.

A number of clauses in the Code were initially relied upon by the plaintiff. This reliance seemed to fade, although not completely, as the matter progressed. By final submissions, the plaintiff had little to say about the Code. I noted above the three “meta” issues that the plaintiff said arose through the hearing. They do not include the Code. This is not surprising as the matters raised in the Code probably fall within the substantive allegations made by the plaintiff. Thus, for example, the notice of termination that had been served by the defendant on 27 May 2024 was said to be a breach of both the MFA and the Code.

Clause 6 of the Code imposes an obligation to act in good faith. The defendant submitted that if it had complied with the condition of cl 4.7 that it act on “honest and reasonable grounds” then it had necessarily acted in good faith. I think this is correct but only on the defendant’s interpretation of cl 4.7. If the clause required consideration of the best interests of the Master Franchisee then, conversely, the defendant would have not acted on “honest and reasonable grounds” and in turn would not have acted in good faith.

Clause 23 of the Code relates to a restraint of trade where a franchise agreement is not extended. The clause really has no applicability here because there was no cross-claim by the defendant seeking, for example, a declaration to prevent trading by Mr Hope or the plaintiff.

The next possibly relevant clause of the Code is cl 27. This clause relates to a breach of a franchise agreement by the franchisee which, if it occurs, must generate reasonable notice being given to the franchisee if the franchisor intends to terminate the franchise agreement as a result of the franchisee’s breach.

The defendant submitted that cl 27 was essentially concerned with a breach of the MFA which, following the giving of notice, was susceptible to rectification. This was not the case here. This litigation is concerned with an allegation of breach by the defendant and not by the plaintiff. I agree with the defendant that cl 27 is not applicable.

The final relevant clause in the Code is cl 29. This clause sets out the grounds upon which a franchisor may terminate an agreement and, if it does so, the notice that must be given to the franchisee.

The defendant submitted that the clause did not apply, because:

The defendant then submitted that if cl 29 did apply then, besides any civil penalty, the most that the plaintiff could gain would be damages for the seven days of notice that the franchisor was required to give under cl 29(2).

I do not think it necessary to discuss the Franchising Code any further. It does not take the plaintiff’s case beyond a finding of breach of contract or unconscionability, and it would not have helped the plaintiff had I found that the defendant’s construction of cl 4.7 was correct.

Section 21 of the Australian Consumer Law states:

Section 22 then provides a non-exhaustive list of matters a court may take into account in making a decision under s 21. The plaintiff submitted that the more important considerations were to be found in subsections (a), (h), (i), (j) and, especially (l), which refers to:

There was no suggestion that the plaintiff was not entitled to the protection of the ACL. The defendant submitted however, that it’s conduct came nowhere near unconscionability.

The plaintiff described the defendant’s unconscionable conduct as “sharp practice 101”. It occurred in this way, Mr Hope was given an incentive to make a lot of money. Armed with this incentive:

A point to be made initially is this: A finding of unconscionability does not rest on a finding of breach of contract. In Adani Abbot Point Terminal Pty Ltd v Lake Vermont Resources Pty Ltd [2021] QCA 187, at [79] McMurdo JA, in the Queensland Court of Appeal said:

Notwithstanding the possibility of a finding of unconscionable conduct absent a breach of contract, I would find such a finding difficult to reach if I had found in favour of the defendant’s construction of cl 4.7.

The plaintiff also emphasised that unconscionable conduct can include a course of conduct, as envisaged by s 21(4)(b) of the ACL. This is relevant here because the plaintiff asserts that after the defendant (through its board) decided to move to the direct model in 2020, it then engaged in a prolonged course of deception whereby the plaintiff was led to believe that renewal was still available, but in reality would never occur.

In the plaintiff’s opening I was also taken to the second reading speech on 15 June 2011 by the Parliamentary Secretary to the Treasurer (Mr David Bradbury):

The defendant, both in relation to the Franchising Code allegations and the unconscionability took me back to AHG and in particular to these passages from [32]-[45]:

I have already discussed AHG under the construction question and found that it was distinguishable from the present case. However, for present purposes I will add the following comments:

Another case referred to was the recent High Court decision in Productivity Partners Pty Ltd (trading as Captain Cook College) & Anor v Australian Competition and Consumer Commission & Ors [2024] HCA 27.

Gageler CJ and Jago J, at [62], endorsed the approach that had been taken by the primary judge to unconscionability under the ACL:

Gordon J, at [100]-[101] expressed her view on s 22:

Steward J referred to the judgment of Allsop CJ in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199; (2015) 321 ALR 584 and to his Honour’s reference to moral obloquy. Allsop CJ had said, at [260]:

After some discussion of the term “moral obloquy” Steward J in Productivity Partners said at [304]:

It is clear however, for example at [307], that Steward J regarded moral obloquy as involving “sharp practice”:

In respect of the analysis of s 22 of the ACL, Gleeson J agreed with Gordon J, Beech-Jones J agreed with the Chief Justice and Jago J. Taking all of the views together I think the requirement to find unconscionability is probably best summarised in the phrase sharp practice. At the very least, serious deceptive conduct is required.

Has this occurred here? I think it has, as illustrated by the chronology of events I have set out above, in answering the question which assumes the defendant’s construction of cl 4.7 is correct.

In my view the defendant, by May 2020, had made a decision to ‘de-master’. This decision could not co-exist with renewal of the plaintiff’s MFA. The defendant thereafter allowed the plaintiff to believe, in particular after the abandonment of $14 million agreement, that renewal was a real possibility. The plaintiff continued to work towards renewal, believing it was a realistic prospect. Mr Thornton, in his board report dated 20 October 2021 specifically acknowledged that:

The defendant was wary of litigation by Mr Hope. This was a reasonable perception. However, its wariness infected the manipulation of at least one file note and the preparation of the COO report. The COO report was constructed, with the help of the defendant’s solicitors, to be a justification of the defendant’s intended position to reject the application for renewal.

Although I have accepted the possibility that a genuine ‘fresh’ decision may have been made at the 20 July 2023 meeting to not renew, that decision was against a background of an already resolved course. In other words, if there was genuine consideration of the renewal application, it was a decision of ratification rather than a start from a "blank page".

I am further satisfied that, as part of the strategy to defeat any entitlement to renewal, the defendant provided the plaintiff with a current contract (pursuant to cl 4.6), which was so untenable and unattractive to a Master Franchisee, that it would render any renewal unworkable. The defendant’s response that a similar contract was agreed in Victoria completely ignores the fact that the contract was an integral part of bringing the Victorian MFA to an end.

The defendant had resolved to maximise its profits. That was reasonable. What was not reasonable, and instead was sharp practice, was deceiving Mr Hope, and therefore the plaintiff, into believing that renewal was a real possibility to be decided in accordance with cl 4.7. This point is also behind my observation above, that a finding of unconscionability may be inconsistent with a finding that the defendant’s construction of cl 4.7 was correct.

More precisely, in terms of s 22 of the ACL, I am satisfied that the defendant did not act in good faith in rejecting the plaintiff’s application to renew the MFA, that rejection being a culmination of a course of conduct to conceal its true intentions (to not renew the MFA) from the plaintiff, and at the same time allowing the plaintiff to believe renewal was a viable possibility.

The plaintiff relied on reports from Mr Terence Potter to support its primary economic loss claim. Mr Potter’s reports are an attempt to assess the value of the plaintiff having retained the MFA through to 30 June 2034. The defendant responded with a report from Mr Ross which criticised various aspects of Mr Potter’s approach. Mr Potter took on board some of the criticisms and made adjustments accordingly in his second report.

Mr Potter and Mr Ross are forensic accountants.

An objection had been taken to Mr Potter’s reports which I dealt with in a separate decision. Suffice to say I allowed the reports into evidence.

Mr Ross pointed out that Mr Potter had used the Discounted Cash Flow (DCF) method to value the 10 years from July 2024. Mr Ross specifically said:

I note at this stage that there is an apparent misconception on the defendant’s part as to the approach taken by Mr Potter. The defendant submitted:

The difficulty with the way the above submission has been put is that it refers to a prediction of what would have been earned as opposed to a calculation of what would have been earned subject to the necessary discounts that needed to be applied. At the most basic level it could be said that what would have been earned over the 10-year period was 10 x $4 million, but this would ignore the nature of the claim as a loss of chance and the discounts that both Mr Ross and Mr Potter said needed to be applied. In addition, an award of $40 million would overlook the accelerated payment of the lost income.

Mr Ross points out that in order to use the DCF method Mr Potter needed to estimate future cash flows. His estimation of the cash flows is generally the subject of Mr Ross’s criticism. After discussing Mr Potter’s method of calculating the cash flows Mr Ross turns to the discount rate applied by Mr Potter. Mr Ross does not think the rate was large enough and should have been in the range of 20% to 25%.

The cash forecasts are essentially based on an estimate of royalty income that would be derived from the Sub-franchisees. Mr Ross was critical of some of the estimates of future royalty income. Taken together with his comments on the appropriate discount rate, these two elements were at the core of Mr Ross’s criticisms of Mr Potter’s reports. As stated above, Mr Potter reacted to Mr Ross’s report by making amendments where he thought appropriate. This was done in his second report, dated 17 July 2024.

Mr Potter’s second report includes a useful table which applies Mr Ross’s suggested discount rates to Mr Potter’s low scenario cash flow. This table appears at par 118 of his report:

The Potter High and Potter Low scenarios were a product of his instructions to

As to the discount rate Mr Potter explained:

Mr Potter was at pains to emphasise the cyclical nature of the housing construction industry, a factor he said had not been appropriately considered by Mr Ross.

Mr Potter was cross-examined. The intent of the cross-examination was to demonstrate that a number of Mr Potter’s conclusions, in particular his cash forecasts and his discount rates, could not be supported on the evidence. Mr Potter’s methodology was attacked, in particular the manner in which he calculated what he referred to as “Potter High” and “Potter Low” parameters.

It was suggested to Mr Potter that the primary source of his information should have been the Sub-franchisees but information about them had not been given to him and he had not asked for it. He responded, that as an expert retained for litigation purposes he did not have “carte blanche” to make enquiries of persons whom he might otherwise have approached for information.

Notwithstanding my decision on the admissibility of his reports, Mr Potter was questioned about the reliability of information from the Housing Industry Association (the HIA) and from the Master Builders Association (the MBA). Mr Potter said that he had used these sources in other valuations and that they were an accepted source of information in respect of residential building in New South Wales. He said he could use the data to chart the historical growth of the Sub-franchisees over time.

Mr Potter was shown Exhibit 4. He had not seen it before. The intent of taking him to the document was that it demonstrated the following:

The purpose of taking Mr Potter to Exhibit 4 was to challenge his assumption, commencing in July 2024, that there would be 35 Sub-franchisees. Mr Potter would not concede that his approach was erroneous because, he said, that the historical rise in Sub-franchisees justified the use of a 35 Sub-franchisee forecast. In addition, he said that he had applied discounts to ameliorate the possibility of an overestimate. These discounts were referred to as “downtime adjustments.”

It was put to Mr Potter that his approach was necessarily shown to be in error because of the only 30 Sub-franchisees revealed by Exhibit 4. He was asked how he could possibly have expected the number of Sub-franchisees to have increased from 30 to 35 over the space of only a month. While technically correct, the attack on Mr Potter’s approach misses the thrust of the plaintiff’s case; namely, that had the plaintiff’s MFA been renewed the plaintiff would have continued with its historical vigour so that the number of Sub-franchisees might well have reached 35 by 1 July 2024.

Further, Mr Potter pointed out in his second report:

The attack also ignores the defendant’s admission in the further amended commercial list response, filed on 24 July 2024, that the plaintiff was supporting approximately 34 Franchisees in NSW and the ACT. I note that in the same paragraph the defendant also admits that the plaintiff earned an annual net profit, before tax, of $4 million.

The defendant’s cross-examination of Mr Potter was more an exercise of scoring points than putting forward an alternate damages assessment. An example of the defendant’s approach was to criticise Mr Potter about his qualifications. It was put to Mr Potter that he had very little experience with the building industry. This question was put against the background that Mr Ross’s otherwise impressive list of businesses he has valued, does not seem to contain a business in the home building industry.

In closing written submissions, the defendant put forward a list of reasons for rejecting Mr Potter’s valuations, and then submitted:

I think the attack on Mr Potter, in particular on his credit, was unjustified. His methodology and some conclusions are certainly open to criticism, but to impugn his credit was in my view not appropriate.

The HIA and MBA sources used by Mr Potter were accepted standards in the industry, used even by Mr Trent Gardner.

It is notable that the Potter low scenario used some calculations higher than those used in the Potter high scenario, but the result maintained a difference in the scenarios which preserved the Potter high being higher than the Potter low. Firstly, Mr Potter explained that his figures were a “mathematical outcome” (not a creation of his own), and secondly, where there was no available forecast material:

Mr Potter addressed the apparent anomaly in this way:

Mr Potter explained his methodology was necessitated by his use of the discounted cash flow model. He said:

I repeat that Mr Ross said the discounted flow methodology was appropriate.

Assuming for the moment that Mr Potter’s opinion has flaws, there is nevertheless a proper and reliable basis to fill the deficiencies.

It emerged during the cross-examination of Mr Ross, the defendant’s expert, that Mr Ross did not have a markedly different view of the value of the business. Mr Ross accepted that the discounted cash flow model used by Mr Potter was an appropriate, if complicated, method of valuing the business. Mr Ross also accepted that the exercise performed at Table 6 of Mr Potter’s reply report (included above) was a legitimate expression of Mr Ross’s suggested discount rates, although he did not agree with the cash flow assessment of $49.5 million.

But much more importantly, Mr Ross suggested that there was a simpler and alternative method of valuing the business. This is the ‘multiples’ approach which Mr Ross refers to at par 7.7.8 of his report:

Mr Ross was asked about the multiples approach and eventually gave these answers to some questions I asked:

Mr Ross then went on to say that a multiple of '5' was at the bottom of the range and could be higher. Combining Mr Ross's evidence with the admitted cash flow of $4 million per year, the result is that Mr Ross's valuation of at least $20 million, is a reflection of the value of the business over the ten years to July 2034. As I have said, this is not very different from Mr Potter’s valuation especially when factoring in that the multiple is assessed on a no growth basis and the business had displayed significant growth. Arguably, inserting a higher multiple to reflect historical growth, would result in a figure higher than Mr Potter’s valuation.

The $20 million, based on the multiples calculation, is also not very different to the $19.6 million achieved by applying Mr Ross’s suggested discount rate of 20% to Mr Potter’s revised cash flows (see the table inserted above).

Objection was taken by the defendant to any valuation based upon Mr Ross’s evidence because the damages claim had not been pleaded according to the method used by Mr Ross. I reject this criticism. Mr Ross was the defendant’s expert. He was made available for cross-examination and in the course of his evidence indicated, albeit through a different system of calculation, that the value of the lost 10 years was $20 million or more.

Mr Ross’s instructions from the defendant were confined to criticising Mr Potter’s report. Mr Potter observed:

But, as seen above, Mr Ross referred to the multiples approach in his report which was tendered by the defendant. Then, once in the witness box, he was available to be cross-examined, or asked clarifying questions by me, and if it emerged that he had a particular view then I do not see why that view cannot be utilised in the plaintiff’s favour. It is not uncommon for evidence given by an opposing witness to be adopted by the ‘other’ side.

The defendant cautioned me against taking a ‘doing the best I can’ approach. I was first referred to this passage from Master Homes Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA 88, from [420]-[421]:

Then I was taken to the decision of the majority in the High Court in Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 where Gibbs J and Aicken J at pp 37 and 38 said that damages must be proved with a degree of certainty. However, it is also clear from the judgment of Aicken J that in the case under consideration “there was simply no evidence of the value of the resource”.

This is far from the position here where even the defendant’s expert, Mr Ross, concedes a valuation for the term of the renewal. Adopting a figure of $20 million is not doing the best I can. It is relying on the evidence of two experts from opposing sides whose opinions are ultimately not widely different.

$20 million is the lower figure in Mr Ross’s multiples approach. Adopting the $20 million figure, as opposed to, for example, Mr Potter’s low figure of $23.7 million does perhaps have an element of rounding off or settling somewhere within the difference. In Hungry Jacks Pty Ltd v Burger King Corporation [1999] NSWSC 1029, Rolfe J, at [607], referring to the decision of the High Court in Sellars v Adelaide Petroleum NL (1994) 179 CLR 1386, said:

If Mr Potter has applied enough of a discount, as suggested by Mr Ross, then the reduction of the Potter Low to $20 million is appropriate.

In my view the attitude taken by the defendant was consistent with its overall approach of obstructing the plaintiff’s case at every opportunity notwithstanding that some matters, such as the acknowledgement of damages, really should not have been the subject of such vigorous dispute, and not to the extent of the unmitigated criticism of the plaintiff’s expert, without any concession being made as to an alternative damages amount. It was only through the professionalism of Mr Ross as an expert witness that the lack of a real damages issue emerged.

It was submitted by the defendant that cl 14.6(g) precluded the awarding of damages. The plaintiff submitted that the clause could only be referable to the alternative damages claim. I do not think it is relevant at all. The clause relates to any “payment, repayment or compensation for any goodwill …”. As I have already said, this is not a claim for goodwill. It is a claim for damages arising from breach of contract or unconscionability. I do not think cl 14.6(g) has any part to play.

The measure of damages is to put the plaintiff in the position it would have been but for the breach. The measure was expressed in this way by Mason CJ and Wilson J in Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8 at 143:

The damages here are a calculation of the amount that would have been earned over the 10 years of renewal. They cannot be said to be remote. No suggestion was made of a failure to mitigate.

I acknowledge of course that the claim for the future losses may be described as a loss of opportunity giving rise to the necessity for significant discounting. This discounting however is an integral part of the damages assessments made by the two experts. Mr Ross actually refers to a “sensible discount rate” in his use of the multiples calculation.

Both experts have not only discounted the future earnings for an accelerated receipt but also because of the various vicissitudes that they have mentioned. I am therefore satisfied that the $20 million I will award takes full account of the fact that the plaintiff’s claim is for a loss of chance.

Because I have found for the plaintiff on the primary damages claim, I will deal with the alternative damages claim briefly.

According to Mr Castle: “The sale is when you, effectively, take a deposit, and the slab is when the builder goes on site.” In opening written submissions, the plaintiff described the alternative claim in this way:

Mr Castle, in oral submissions, said the approach was:

The plaintiff’s claim is for $3,942,330. The defendant’s submission was, if the claim was allowed at all, it should be for $2,330,232. The reasons leading to the difference between the two figures is the application of a different conversion rate. The plaintiff applied 80%, the defendant applied 65%.

The conversion rate is the amount of sales that are converted into signed contracts. The plaintiff’s 80% came from Mr Hope, based on his estimation of the conversion rate. Mr Trent Gardner, in his affidavit of 5 August 2024, said that he analysed “information in the software regarding historical conversion rates from sales to slab rates in the NSW/ACT territory.” His analysis produced a result of 64.3%. In addition, Mr Trent Gardner analysed the conversion rate between 1 January 2012 and 31 December 2022. This analysis produced a rate of 67.2%. Accordingly, he effectively averaged the results of his analyses to reach 65%. The plaintiff conceded the possibility of “unforeseen contingencies” which would justify reducing the 80% to 75%. This would bring the damages down to $3.75 million.

The plaintiff’s 80% is based on Mr Hope’s estimate. The defendant’s 65% is based on a comprehensive analysis performed by Mr Trent Gardner. I think this fact favours the defendant’s submission. Had I awarded damages on the alternative basis they would have been in the sum of $2,330,232.

Wattle Court Homes Pty Ltd (‘Wattle Court’) was set up by Mr Hope in November 2023. The company carries on the business of a franchisor of home building franchisees.

As at July of this year no franchise agreements had been concluded with any homebuilders. The business was also not on the Franchise Disclosure Register (as required by Pt 5A of the Franchising Code of Conduct).

Wattle Court has a website which, in paper form, came into evidence as Exhibit 1.

The cross-examination of Mr Hope on Wattle Court was the subject of objection. It was said to be not relevant because it referred to matters that had occurred after 27 May 2024 (when the MFA was terminated). The defendant said that “it goes to credit”. I allowed the questions to continue, but only on this basis.

The position in relation to events before 27 May 2024 is relevant because it relates to the defendant’s assertion that Mr Hope’s (and in turn the plaintiff’s) conduct from December 2023 amounted to a repudiation of the MFA. Breach of cl 8.39 was said to be at the core of the repudiating conduct.

The purpose of the questioning on credit was to suggest that Mr Hope, while purporting to be acting in the interests of the defendant, was actually ‘white anting’ the defendant’s business by trying to compete with the defendant including poaching franchisees of the defendant. There is a draft franchise agreement with one such company, owned by a Mr Luecki. This company has actually commenced trading in North Sydney under the banner of Wattle Court Homes Sydney North.

Mr Hope said he was starting Wattle Court and trying to attract franchisees “should we not get a renewal”. Presentations had been made to a number of GJ Gardner franchisees but, said Mr Hope:

This passage of the cross-examination was submitted to be important:

The defendant submitted:

Following this submission, I asked Mr Couper if the defendant was seeking a restraining order against the plaintiff. He replied that there was no counterclaim. Mr Couper seemed to then appreciate the limits of his submissions about Wattle Court by stating:

I think it important to bring the Wattle Court issue, at least after 27 May 2024, back to its only point of relevance, namely the credit of Mr Hope. I said above that I generally accepted Mr Hope’s evidence with the possible exception of his evidence concerning Wattle Court. I appreciate that Mr Hope would have been anxious to keep trading in a business he knew well, in particular when it was obvious that his future did not lie with the defendant. Notwithstanding the reasonableness of looking for a new venture, I did think that Mr Hope was perhaps being a little underhand in his approaches to the defendant’s Sub-franchisees.

In overall terms however, I still prefer, where there is a conflict, the evidence of Mr Hope over that of Mr Wallis and Mr Thornton. I formed such a poor impression of these two witnesses that my reservations concerning Mr Hope have no practical effect.

I will deal with the position before 27 May 2024 under the following heading of Termination.

Despite what I have just said about the Wattle Court issue, the defendant submitted that Mr Hope’s conduct in respect of Wattle Court amounted to a repudiation of the MFA between December 2023 and 27 May 2024. Mr Couper submitted:

Mr Couper continued:

Clause 8.39 states:

The difficulty facing the defendant, as I have already said, is that the Wattle Court evidence, at least after 27 May 2024, was restricted to Mr Hope’s credit. My reservations concerning Mr Hope’s credit do perhaps allow for a finding that, pursuant to cl 8.39 he had not acted with “Diligence, Good Faith and Loyalty.”

The more important difficulty is my finding that, well before 27 May 2024, the defendant was in breach of the MFA giving rise to the plaintiff’s entitlement to damages. Again, I repeat that there is no cross-claim by the defendant seeking any declarations of dishonesty or restraint of trade.

Accordingly, assuming my findings on breach of contract and unconscionability are correct, the termination and repudiation issue does not arise. I should add that if repudiation is a valid issue, I would conclude that the repudiation was by the defendant and accepted by the plaintiff.

On 27 May 2024, the defendant issued a Notice of Termination to Mr Hope. There were two notices, one in respect of the plaintiff and the other concerning the Western Australian franchise agreement. The latter is not relevant.

In the Notice of Termination the defendant says that:

The letter then goes on to set out alleged breaches by the plaintiff of the MFA and then says that the incorporation of Wattle Court Homes Pty Ltd amounted to repudiating conduct.

The plaintiff’s lawyers (Addisons) responded on the same day. The letter points out that at the same time as the notice was issued the defendant blocked the plaintiff from accessing the G.J. Gardner computer system. This system included emails and business records.

The letter also points out that the Franchising Code had been breached in that seven days’ notice of termination had not been given (pursuant to cl 29 of the Code). The letter then says that the defendant’s conduct “in wrongfully terminating the MFA today is itself a repudiation of the MFA, and all related agreements.” This repudiation is accepted by the plaintiff.

To repeat, I do not see the question of who repudiated the agreement as relevant to the resolution of the litigation. Resolution flows from my findings of breach of contract, well before 27 May 2024, and the defendant’s unconscionable conduct. These findings are the basis for my award of damages.

The receipt of damages for breach of contract does not depend on the termination of the contract as stated by Barwick CJ in Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444; [1976] HCA 21 at 451:

In Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286; [1938] HCA 66, Latham CJ said at 300:

I have found that there was a breach of the MFA by the defendant and that, separately, there was unconscionable conduct on the part of the defendant.

The measure of damages for breach of contract is to put the plaintiff in the position it would have been but for the breach.

This position is one in which the plaintiff would have been able to operate the business for a further ten years or have had a realisable asset, albeit of a diminishing value as the ten years progressed, noting of course that the plaintiff would have been making a profit in the elapsed years.

I have already decided that, based on the two experts, the value of the lost business should be $20 million. By adopting this sum, I have taken into account the discounting that is required. I do not think it necessary to apply any further discounting.

In relation to unconscionability, s 236 of the ACL provides for the recovery of “loss or damage” for contraventions of the provisions of Ch 2 or 3 of the ACL (which includes s 21). The loss or damage here is the loss of the value of the option to renew which I think must equate to the value of the business lost, namely $20 million.

It follows that the plaintiff is entitled to a verdict for $20 million with costs. Because the $20 million is almost entirely for a future loss, I do not see a basis for any entitlement to interest. However, I will give the parties leave to make any submissions on interest and variation of the costs order.

I make the following orders: