Legal Symposium – Case Update 2018 Robert Craig and Roxanne Burd Liability limited by a scheme approved under Professional Standards Legislation

Cases and topics Page heading goes here The obligation of good faith; unconscionable conduct Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190 Injunctive relief to restrain termination Delahunt v Swim Loops [2018] VSC 269 Distribution of monies held in a marketing fund upon the winding up of a franchisor Shepard and Chesser (in their capacity as joint and several liquidators of Stay in Bed Milk & Bread Pty Ltd (in liq)) v Commonwealth of Australia, Represented by the Australian Government Department of Jobs and Small Business  – 2018 SCV judgment reserved Settlement communications Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2018] FCA 984 Damages BB Australia Pty Ltd v Danset Pty Ltd [2018] NSWCA 101 Page heading goes here

Virk v Yum! [2017] FCAFC 190 Franchisees argued that in setting the maximum price of pizzas in the way that it did, Pizza Hut: breached the duty of good faith and reasonableness engaged in unconscionable conduct pursuant to the Australian Consumer Law was liable for negligence The franchisees were unsuccessful at trial and on appeal; special leave to the High Court was refused in May of this year A key question for the Full Court: to what extent is “reasonableness” within the obligation of “good faith and reasonableness” to be assessed separately from “good faith”

Virk v Yum! [2017] FCAFC 190 “Reasonableness” is not a separate obligation and is not to be assessed as a distinct concept The obligation of good faith and reasonableness is to be considered in a composite and interrelated sense Where there is a finding of good faith attaching to the exercise of a contractual power, then that exercise must necessarily also have been reasonable “Reasonableness” is to considered by reference to the standard of a party’s conduct or behaviour in relation to the performance of a contractual obligation. Consider for example: Real intention or purpose in exercising the power? Honest, capricious, arbitrary, or for an extraneous purpose? ”

Virk v Yum! [2017] FCAFC 190 The notion that the franchisor owed a duty of care to franchisees in relation to any conduct or decision made by the franchisor in providing services and/or in the exercise of its powers was inconsistent with the contractual relationship between the parties Franchisees contracted with the franchisor for the right to participate in the system; not for the provision of services The franchise agreement(s) did not contain any such promise The terms of the agreement(s) were positively inconsistent with a promise that there would be an opportunity provided for franchisees to make a profit

Re Stay in Bed Milk & Bread (in liq) – 2018 SCV judgment reserved Are moneys retained a separate account for the purposes of a marking fund held on trust for the benefit of those franchisees who contribute to the fund? The obligation to keep marking funds in a separate account was introduced into the Franchising Code of Conduct in 2015 Liquidators argued that the fund was held on trust because it was kept in a separate account and because it was to be used for the specific purpose of marketing the franchise (and individual franchisees at the franchisor’s discretion) The EM that accompanied the amending bill to the Code expressly rejected the notion that marketing funds be held as trust funds; franchise agreement did not expressly refer to a trust relationship

Davaria v 7-Eleven Stores Pty Ltd [2018] FCA 984 In what circumstances can and should the Court intervene in settlement negotiations made directly between a franchisor and franchisee members of a class? The Court may make orders regulating communications between parties in circumstances where the communications are misleading, unfair, or a breach of ethical rules The Court emphasised the importance of parties (including individual class members) being able to negotiate without inhibition – provided that the negotiations are conducted in a proper manner The parties “should be allowed to exercise their conventional freedom as business people to negotiate confidentially” ”

Delahunt v Swim Loops [2018] VSC 269 Ability to restrain termination of an agreement – failure to give reasonable time to remedy Injunction granted – franchisor restrained from treating agreement as terminated and required to give back possession of the premises Termination may have been ineffective because: franchisor may have failed to provide reasonable time to remedy? franchisor may have failed to comply with dispute resolution procedure? franchisor may have failed to accurately specify in the breach notice the sum required to remedy? before franchisor may act on breach notice, franchisee must fail to remedy breach ”

Delahunt v Swim Loops [2018] VSC 269 Ability to restrain termination of an agreement – failure to exercise power to terminate in good faith Franchisor may have contravened the obligation of good faith in purporting to terminate the franchise agreement: franchisor refused to allow extension of time for franchisees to seek legal advice (albeit on the expiry date of notice) franchisor aware that the franchisees disputed the amount claimed and had asserted right to set-off claim franchisees made an offer to immediately cure the breach the day before notice of termination served

BB Australia v Danset [2018] NSWCA 101 Damages for breach of contract – the need to prove loss The franchisee repudiated the franchise agreement; the franchisor was entitled to: sue for breach of contract recover damages to put it in the position that it would have been in had the contract been performed While the franchisor had a legal right to issue proceedings and seek damages, it was still required to prove its loss as a result of the breach Franchisor failed (at trial and on appeal) to prove loss; it was not entitled to the damages claimed