Termination and Repudiation of Contract

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Termination and Repudiation of Contract
FCA National Conference Legal Symposium, Perth
October 2009
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Termination and Repudiation of Contract Recent
Cases

• Billy Baxters (Franchising) Pty Ltd v Trans-It
  Freighters Pty Ltd Ors
• Philips Electronics Australia Ltd v Insight
  Oceania Pty Ltd
• Thorne Anor v Literacy Circle Pty Ltd Ors
  Bailey v Tone 'n' Tan Pty Ltd
• IOOF v Foxeden Pty Ltd IOOF v Kenneth Taylor
  Janet Taylor

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Billy Baxters v Trans-It Freighters

• Citation 2009 VSC 207 (28 May 2009)
• Facts
• Billy Baxters (Franchisor) operates a restaurant
  franchise chain.
• Trans-It Freighters Pty Ltd (Franchisee) entered
  into a franchise agreement (Agreement) with the
  Franchisor.
• Franchisee refused to pay the Franchisor certain
  fees, in breach of the Agreement.
• Franchisee sought to terminate the Agreement.
• Franchisor accepted the termination notice as
  repudiation.
• The Agreement was terminated.

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Billy Baxters v Trans-It Freighters

• The Claim
• Franchisor initiated proceedings against the
  Franchisee for
• non-payment of fees and
• damages in the amount of fees that it would have
  received.
• The Counter-claim
• Franchisee claimed that it was not required to
  pay the fees as the Franchisor was in breach of
  the Franchising Code of Conduct (the Code).

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Billy Baxters v Trans-It Freighters

• Decision
• Found in favour of Franchisor.
• Franchisee had no grounds to terminate the
  Agreement, the Franchisor could accept the
  termination notice as repudiation of the
  Agreement.
• Franchisees claims were dismissed (no breach of
  the Code).
• Franchisee had acknowledged receipt of the
  disclosure document within the required time
  period.
• Franchisee had received independent advice.
• Franchisee did not rely on the Franchisors
  representations.
• Franchisors beliefs regarding profitability were
  honestly held.

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Billy Baxters v Trans-It Freighters

• Lessons for Franchisors
• A well drafted franchise agreement can and will
  be enforced by the courts.
• Wrongful termination by a Franchisee is grounds
  for the Franchisor to terminate.
• Ensure your disclosure document complies with the
  Code.
• Do not make misleading and deceptive
  representations.

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Philips Electronics v Insight Oceania

• Citation 2009 NSWCA 124 (28 May 2009)
• Facts
• Philips granted InSight the exclusive rights to
  distribute medical products in Australia and New
  Zealand, pursuant to a distribution agreement
  (the Distribution Agreement).
• 2007 Philips decided to replace InSight and
  distribute the medical products itself. Philips
  sought a basis to terminate the Distribution
  Agreement.
• late 2007 Royal North Shore Hospital (RNSH)
  decided to purchase a scanner from InSight.
• 31 December 2007 InSight placed an order with
  Philips to purchase the scanner, without
  receiving a formal order from RNSH.
• Philips refused to fill the order.
• Philips sought to terminate because InSight did
  not meet its sales target.
• InSight challenged Philips termination notice.

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Philips Electronics v Insight Oceania

• Decision of the trial judge
• If Philips had allowed the order to count towards
  the 2007 sales target, InSight would have reached
  its target and Philips would have no grounds for
  termination.
• Philips refusal to include the order, gave
  Philips grounds to terminate.
• The terms of the Distribution Agreement regarding
  the sales target for 2007 were unclear.

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Philips Electronics v Insight Oceania

• Decision of the trial judge cont.
• Distribution Agreement defined InSight's
  obligation to obtain a number of bookings
  (defined as binding written commitments from a
  customer to purchase the product) to satisfy
  its sales targets.
• Amendments replaced definition of InSights
  obligation with an obligation that Insight obtain
  a number of units sold with no reference to a
  requirement for a binding written commitment from
  a customer.
• The order did count towards the sales target for
  2007.
• The termination notice was invalid.
• Philips appealed.

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Philips Electronics v Insight Oceania

• Issue on appeal
• Whether a binding written commitment from the
  customer is required for a sale to be counted
  towards InSight's sale targets.
• Decision
• A binding written commitment to purchase the
  scanner was not required.
• Notice of termination was invalid.

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Philips Electronics v Insight Oceania

• Decision cont.
• It would be "commercially odd" if products
  acquired by InSight in certain circumstances did
  not count towards the sales target.
• As it could be commercially sensible for InSight
  to place an order without a binding written
  commitment, it would be unreasonable not to
  include those orders when assessing the
  satisfaction of sales targets.
• Trial Judge ought to have found Philips in breach
  of an implied term by using the right of
  termination to achieve its ulterior purpose.

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Philips Electronics v Insight Oceania

• Lessons for Franchisors
• Ensure minimum performance requirements are
  clearly defined in the franchise agreement and
  understood by all parties.
• Termination should not be effected for an
  ulterior purpose.
• Unfair treatment of franchisees can impact
  network morale and support of the brand.

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Thorne v Literacy Circle

• Citation 2009 FMCA 507 (29 May 2009)
• Facts
• Literacy Circle Pty Ltd operates a childhood
  literacy education business (Literacy Circle).
• In February 2006, Literacy Circle offered Matthew
  and Hollie Thorne (the Franchisee) a Literacy
  Circle franchise.
• No written agreement was executed.
• The Franchisee began trading on 1 July 2006.

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Thorne v Literacy Circle

• Facts cont.
• In early July 2006, the Franchisee discussed its
  hesitation to continue operations.
• On 12 July 2006 the Franchisee deleted essential
  training materials and told Literacy Circle it
  has decided to leave Literacy Circle.
• Despite this, the Franchisee then negotiated with
  Literacy Circle to continue operation of the
  franchised business.
• On 25 July 2006, Literacy Circle provided
  Franchisee with new franchise documents.

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Thorne v Literacy Circle

• Facts cont.
• On 14 August 2006, Literacy Circle withdrew its
  offer of a franchise.
• Franchisee alleged the withdrawal amounted to
  repudiation.
• Franchisee sought damages.
• Literacy Circle claimed that the withdrawal of
  the offer did not amount to repudiation.

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Thorne v Literacy Circle

• Issues
• Was there a contract between Literacy Circle and
  the Franchisee?
• Did the parties terminate the contract by mutual
  abandonment on 12 July 2006?
• Did the Franchisee repudiate the contract before
  Literacy withdrew the offer on 14 August 2006?
• Did Literacy Circle repudiate the contract on 14
  August 2006 by withdrawing the offer?

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Thorne v Literacy Circle

• Decision
• Court found in favour of the Franchisees against
  Literacy Circle.
• A contract existed.
• A binding contract was on foot - execution of the
  documents was a mere formality.
• The parties intended to be bound by the contract.

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Thorne v Literacy Circle

• Decision cont.
• Mutual abandonment
• The parties had not mutually abandoned the
  contract.
• The court, in dismissing the allegation of mutual
  abandonment, certain facts were noted.

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Thorne v Literacy Circle

• Decision cont.
• Repudiation
• Literacy Circle, and not the Franchisee,
  repudiated the agreement by withdrawing its offer
  on 14 August 2006.
• The court relied on certain facts in finding that
  Franchisee did not repudiate the agreement.
  E.G. Literacy Circle did not have knowledge of
  the deletion of the documents until the parties
  had commenced negotiations to continue
  operations.

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Thorne v Literacy Circle

• Lessons for Franchisors
• Franchisors should ensure the franchise
  documentation is executed by all parties before
  Franchisees are allowed to begin trading.
• Franchisors permitting their franchisees to
  commence trading before signing the franchise
  documentation are putting the franchise system
  and brand at risk.

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IOOF v Foxeden IOOF v Taylor

• Citation 2009 VSCA 138 (19 June 2009)
• Two cases with similar facts were appealed.
• IOOF Building Society Pty Ltd (IOOF) was a
  building society which conducted business through
  various branches.
• Facts - The Foxeden Agency Agreement
• May 1996 Robert Wood of IOOF (Wood) informed
  Warwick Hawksworth (Hawksworth), sole director of
  Foxeden Pty Ltd (Foxeden), of its decision to
  close its Mildura branch.
• Hawksworth told Wood he wanted to operate the
  branch.
• 18 November 1996 Most of the terms of a draft
  franchise agreement had been agreed upon, however
  the termination clause (allowing 60 days notice)
  was not.
• Early 1997 Hawksworth refused to execute a new
  draft agreement.

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IOOF v Foxeden IOOF v Taylor

• Facts cont. (Foxeden)
• 28 May 1997 Foxeden began operating the
  franchise without an executed agreement.
• August 1998 Hawksworth again refused to execute
  the agreement.
• 3 March 1999 Bendigo Bank public announcement.
• 20 April 1999 Bendigo Bank circular.
• 12 May 1999 Dennis Bice of Bendigo Bank (Bice)
  advice.
• 30 June 1999 Telephone lines were disconnected.

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IOOF v Foxeden IOOF v Taylor

• Issue (Foxden)
• Hawksworth brought proceedings in the VSC
  claiming IOOF breached its agreement by failing
  to provide sufficient notice.
• IOOF claimed it had given sufficient notice.

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IOOF v Foxeden IOOF v Taylor

• Findings of the trial judge (Foxden)
• IOOF had not given sufficient notice.
• IOOF ordered to pay damages to Foxeden.
• The parties had not settled the termination
  clause.
• There was an implied term that the agreement
  could be terminated only on reasonable notice
  being provided.
• Reasonable notice was 12 months.
• The public announcement, circular and Bices
  advice was not valid notice.
• IOOF appealed the decision of the trial judge.

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IOOF v Foxeden IOOF v Taylor

• Facts The Taylor Agency Agreement
• January 1996 IOOF informed Mr Taylor (Taylor)
  the Frankston branch was closing.
• Taylor told IOOF he wanted to operate the branch.
• 4 March 1996 Taylor commenced operations.
• 8 July 1996 IOOF sent Taylor a draft agency
  agreement (with a 60 day termination notice
  provision). Taylor did not sign the agreement.
• Taylor stressed 12 months plus 60 days was
  required for a reasonable notice period. Wood
  acknowledged this was not unreasonable.
• March 1997 Wood agreed to further negotiate the
  termination provision.

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IOOF v Foxeden IOOF v Taylor

• Facts cont. (Taylor)
• March 1997 Taylor signed the agency agreement.
• 13 August 1998 IOOF presented Taylor with a new
  agency agreement, terminable upon 60 days
  notice. Taylor did not execute.
• December 1998 Taylor heard rumours regarding
  Bendigo Bank's proposed acquisition of IOOF.
• January 1999 Taylor raised his concerns with
  Wood.
• 30 June 1999 Frankston branch customers were
  electronically transferred to Bendigo Bank.

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IOOF v Foxeden IOOF v Taylor

• Issues (Taylor)
• Taylor brought proceedings claiming IOOF breached
  the agency agreement as it failed to provide the
  requisite period of notice.
• Taylor submitted IOOF should be estopped from
  relying on the express termination clause as IOOF
  represented that they would further negotiate
  that clause.
• IOOF argued that requisite period of notice is 60
  days.

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IOOF v Foxeden IOOF v Taylor

• Findings of the Trial Judge (Taylor)
• The agency agreement was binding and terminable
  upon 60 days notice.
• IOOF was estopped from relying on the termination
  clause.
• IOOF was only able to terminate upon giving
  reasonable notice.
• IOOF failed to provide reasonable notice.
• IOOF ordered to pay damages to Taylor.
• IOOF appealed the decision of the trial judge.

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IOOF v Foxeden IOOF v Taylor

• Court of Appeal Decision
• The Court of Appeal upheld the decisions of the
  trial judges, finding that
• Foxden Hawksworth had not agreed to be bound by
  the 60 days notice of termination provision.
• Taylor the parties agreed that the termination
  clause be further negotiated.
• An obligation of reasonable notice of termination
  was implied into each agreement. Reasonable
  notice of termination was 12 months notice.

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IOOF v Foxeden IOOF v Taylor

• Issues
• The media release, circular and Bices advice
  were not valid forms of notice of termination
  because
• media release and circular were not communicated
  personally
• Foxeden and Taylor not advised agreements would
  be terminated
• the media release and Bice's advice was not in
  writing and
• Bice's advice was not provided by a person
  authorised by IOOF.
• Estoppel

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IOOF v Foxeden IOOF v Taylor

• Lessons for Franchisors
• Ensure that the executed written agreement
  reflects the true agreement made between the
  parties.
• Ensure a written agreement expressly states the
  notice period for termination. Reasonable notice
  may be implied.
• Be cautious when making representations to
  franchisees. Franchisors may be estopped from
  relying on provisions within an executed
  agreement.

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Questions

• Further information

Chris Nikou Partner T 61 3 9640 4354 E
chris.nikou_at_middletons.com