Bravale Pty Ltd v A Whistle & Co (1979) Pty Ltd [2015] QDC 174

DISTRICT COURT OF QUEENSLAND CITATION: Bravale Pty Ltd v A Whistle & Co (1979) Pty Ltd [2015] QDC 174 PARTIES: BRAVALE PTY LTD (plaintiff) v A WHISTLE & CO (1979) PTY LTD (defendant) FILE NO/S: D1209/12 DIVISION: Civil PROCEEDING: Trial ORIGINATING COURT: District Court, Brisbane DELIVERED ON: 9 July 2015 DELIVERED AT: Brisbane HEARING DATE: 26, 27, 28 November 2014 JUDGE: McGill SC DCJ ORDER: Judgment that the defendant pay the plaintiff $72,360.59. CATCHWORDS: CONTRACT – Termination – breach – failure to pay monies – whether equitable set-off for earlier overpayments to other party – whether right to terminate – assessment of damages. FRANCHISE AGREEMENT – Agreement – obligation to make regular payments – franchisor invoiced more than amounts payable under agreement – invoices paid - whether overpayment recoverable – whether available as equitable set-off – whether right to terminate. RESTITUTION – Monies paid – franchisor invoiced franchisee more than amount payable under the agreement – invoices paid – whether overpayment recoverable – whether set-off available – effect on right to terminate. Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority (Victorian SC Appeal Div, 22 February 1994, BC 9406099) – applied. Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439 – cited. Deacon v Transport Regulation Board [1958] VR 458 – cited. Mason v New South Wales (1989) 102 CLR 108 – cited. Federal Commerce and Navigation Co Ltd v Molena Alpha -- 1 of 27 -- 2 Inc [1978] QB 927 – cited. Forsyth v Gibbs [2009] 1 Qd R 403 – applied. Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 – applied. IRM Pacific Pty Ltd v Nudgegrove Pty Ltd [2008] QSC 195 – followed. John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 84 ALJR 446 – applied. Re Kleiss ex parte Kleiss v Captain Snooze Pty Ltd (1996) 61 FCR 436 – cited. Kostka v Addison [1986] 1 Qd R 416 – cited. McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 – cited. Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 – followed. Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 – applied. Streetscape Projects (Aust) Pty Ltd v City of Sydney (2013) 85 NSWLR 196 – cited. Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490 – cited. COUNSEL: M A Folster, director, for the plaintiff G W Dietz for the defendant SOLICITORS: The plaintiff was not represented Cronin Litigation Lawyers for the defendant [1] By an agreement in writing dated 25 September 2001 the defendant as franchisor granted to the plaintiff as franchisee a franchise to operate a carpet cleaning business in an area referred to as “Brisbane I”.1 On 10 October 2011 the defendant sent the plaintiff a letter communicating an election by the defendant to terminate the franchise agreement on 7 October 2011. The plaintiff in this proceeding alleges that the defendant’s termination of the agreement was wrongful and claims damages for that breach of contract, and for other breaches by the defendant of the franchise agreement. The plaintiff claims, in part in the alternative, damages for breach of a mediation agreement entered into between the parties, or in the further alternative, by way of restitution in respect of certain payments made by the plaintiff to the defendant, or equitable damages for breach of fiduciary duty. [2] Although the plaintiff had the benefit of legal assistance at the time this proceeding was commenced, at the time of the trial, and for some time previously, the plaintiff had been represented by its directors, Mr and Mrs Folster, and Mr Folster was the principal witness for the plaintiff. Understandably, they were not able to provide me with a great deal of assistance in relation to legal matters, though it is clear that they feel keenly that they had been badly done by by the defendant. To some extent 1 Exhibit 1. The document bears a range of dates, but this is the date stated in the schedule as the date of the agreement. -- 2 of 27 -- 3 the plaintiff’s complaints range over the whole period of the franchise agreement, and a good deal of the evidence related to events some years ago. The contract [3] The franchise agreement was for an initial term of one year from 5 November 2001, followed by a series of five year option periods thereafter, to a maximum of 50 years. There was a lump sum of $20,000 payable prior to commencement and a further $20,000 payable the day after the first anniversary of commencement, but thereafter there was no such premium, though there were other payments. There was a royalty fee of $300 per week plus GST, plus 10% of the amount by which the turnover exceeded $2,800 excluding GST. There was also a provision in clause 7C of the schedule to the agreement, that the plaintiff would: “Pay a contribution of $28,600 per annum towards advertising as deemed appropriate by Whistle. This will generally include a combination Yellow Pages, television and brochure advertising. This figure will generally be charged on a weekly basis. Any amount not spent during the period of the financial year will be refunded to the franchisee.” [4] Apart from this there was an obligation to contribute a weekly sum towards the running of the 13 number system,2 and an obligation to pay 10% of the sale price on the sale of the franchise, not including the value of any motor vehicle or equipment. Clause 2 of the franchise agreement provided inter alia that the plaintiff would: “(a) Pay to Whistle the considerations as provided at .7 of the schedule hereto. … (i) All payments due to Whistle shall be paid: … (iii) as to 13 number payments and advertising costs payed (sic) by the 10th day of each month for the preceding month and if this is breached then payments shall be made weekly. … … (n) Promote and expand the business in the area specified at .3 of the schedule hereto and undertake such additional advertising in that area as might reasonably be required from time to time subject to clause .1(d) hereof. (o) Meet all accounts of whatsoever nature or kind in relation to the conduct of the business within the area specified at .3 of the schedule as are incurred by the franchisee including such advertising as is required by Whistle.” [5] There were also obligations to purchase from the defendant materials used for the cleaning, and generally to protect the good name of the business, and to follow the procedures set out in the manual or otherwise notified by the defendant from time to time in relation to their processes: clause 2(b), (c), (zi). There was also a promise to maintain a minimum usage of a carpet cleaning chemical averaged over 100 jobs: clause 12. Clause 8 purported to give the defendant the right to terminate the franchise agreement without notice in the event that the franchisee commits, permits 2 $25 plus GST per week, and also pay the cost of non-local calls to the 13 number. -- 3 of 27 -- 4 or suffers to incur any breach or default in the due observance of or performance of any of the obligations imposed. Clause 9 permitted the defendant to terminate the agreement should the plaintiff commit any substantial breach of any of the provisions of the agreement. That clause contained a proviso requiring not less than 14 days’ notice of the breach be given by the defendant to the plaintiff, unless there had in any one year been two such notices issued previously, or if incorrect information as to the turnover of the franchise operation has been deliberately provided.3 Clause 18 provided: “This agreement shall not be modified, altered or amended in any manner whatsoever except by further agreement in writing executed by the parties hereto.” [6] The term “substantial breach” was defined in clause 23(e) as meaning any breach relating to any provisions of the agreement covering the payment of monies, reporting the true turnover or work completed, not using the chemical as indicated by Whistle or adulterating such chemicals, appearance of any franchisee or their staff regarding uniforms or the appearance of the truck, and various other matters. Clause 28 provided: “The franchisee acknowledges that Whistle can charge an administration fee for administering any Advertising Cooperative fund and such fee shall be limited to reasonable cost covering time and bank charges. In addition should the franchisees to the fund require that the fund be audited then the audit charge shall be paid for by the franchisees contributing to the fund unless it is shown that Whistle has not correctly accounted for the funds and in those circumstances Whistle shall bear the full cost of such audit.” The history of the relationship [7] At the end of the first year the plaintiff exercised the option to extend the franchise agreement for the following five years. In July 2003 the defendant increased the weekly contribution for advertising. Mr Paul Burchell asserted that the increase in the advertising charges occurred in the context of increasing printing costs for brochures and that a letter was sent out explaining the increase to franchisees; subsequently there was a conversation with Mr Folster where he was told that the only alternative to paying the increase was to reduce the number of brochures distributed for him, and that Mr Folster had agreed to pay the increase: p 2-65. Mr Folster denied that there was any conversation where the explanation for the increase was given to him in terms of printing costs (p 1-70) and denied that he had agreed to pay the increased amount after he was told that otherwise the number of his brochures would be reduced: p 1-71. There was no contemporaneous documentation of any such agreement, although the defendant sent invoices for the increased rate to the plaintiff and they were paid, without apparent challenge, until 2007. That would be consistent with there having been such an agreement.4 [8] The plaintiff renewed the franchise agreement again in 2007 for a further term of five years: Exhibit 3, dated 28 November 2007. The defendant had sought to have a 3 It is not necessary for me to seek to reconcile the inconsistency between clauses 8 and 9, but they illustrate that in at least this respect this agreement was not well drawn. 4 Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439, where indeed it was held that payment of the invoices amounted to acceptance of the offers to vary, but with much more evidence as to the circumstances in which they were paid: p 451, p 453. -- 4 of 27 -- 5 new agreement in terms of its more recent standard form franchise agreement, which was more favourable to the defendant than the version in Exhibit 1.5 The plaintiff resisted this, as it was entitled to,6 and eventually the defendant agreed to an extension after the plaintiff obtained assistance from lawyers: Exhibit 38. [9] One of the features of the agreement which has been changed in the new form of agreement is in relation to advertising contributions. The defendant’s position is that they should be increasing to reflect increased costs of advertising, such as the increased cost of printing brochures,7 but the plaintiff’s attitude was that much of the advertising money was spent in ways which it saw as being of little benefit to its business,8 and accordingly it did not want to spend any more on advertising than it had to. [10] The plaintiff complained in 2007 that the increase in advertising contribution was contrary to the terms of the agreement, as it plainly was: Exhibit 10. The response of the defendant was to accept that there was no right to increase the contribution in this way, but to say that the number of brochures being distributed in the plaintiff’s area, which the plaintiff regards as the most useful form of advertising, would be reduced as a result: Exhibit 11.9 Exhibit 11 contained no allegation of any oral agreement, but simply accepted that there was no entitlement to charge more. If there had been such an oral agreement as Mr Burchell described I find it very odd that there was no reference to that in Exhibit 11 or Exhibit 15. [11] The defendant also asserted that it would instead charge an administration fee in respect of the advertising fund, which would largely cancel out the amount of the overcharge which had built up since the increased amount had been charged by the defendant, which increased amount the plaintiff had in fact been paying: Exhibit 11. This seems to me to have been obviously just something made up in order to avoid having to pay a refund to the plaintiff. The franchise agreement did provide a right to charge an administration fee in respect of an advertising contribution fund, but it is clear from the wording of clause 28 that this was to be related to the actual cost of administration of a contribution fund as a separate fund, because, for example, there is a reference to bank charges which implies the existence of a separate bank account. In fact no such separate fund was maintained, there was no separate bank account, and all that existed were ledger entries in respect of payments for advertising.10 [12] The short answer to the claim for an administration charge is that one could only be charged in respect of the cost of administering an advertising contribution fund, and if there was no separate fund maintained there could necessarily be no cost of administering it, so there was no entitlement to charge. The answer given repeatedly by Mr P Burchell was that no administration fee was ever in fact 5 P Burchell p 2-66; Folster p 1-59. For the newer version, see Exhibit 66 p 3: p 2-91. 6 See e.g. email 26-10-07, Exhibit 10, which alleged the overcharge in advertising fees and royalty fees; P Burchell p 2-66. 7 Exhibit 15. 8 Exhibit 64, email 5 February 2008. 9 Mr G Burchell denied any recollection of this letter and the surrounding circumstances: p 2-18. Mr P Burchell said Mr G Burchell composed it, and he could not explain it: p 2-95. That was at least not frank; he had sent a draft to Grant the previous day, although his wording was not used: Exhibit 15. 10 Tadman p 37; P Burchell p 2-73, p 2-89. -- 5 of 27 -- 6 charged.11 This was at best disingenuous; the reference to the “administration fee” was simply trotted out in Exhibit 11 as an excuse to avoid paying a refund of the overcharged amounts which had in fact been paid,12 so that in truth because the overcharge was not refunded the plaintiff was in substance charged an administration fee. There was evidence that no-one else was charged an administration fee,13 and no attempt was made to relate the amount charged to the actual cost of administering any such fund. [13] After the issue was raised, and the defendant had purported retrospectively to impose the administration fee, there was still a small amount supposedly refundable to the plaintiff. This was not in fact refunded to the plaintiff; it was initially credited, but Mr Folster said that after a later meeting as a gesture of goodwill he refused to take it, so as to put the matter behind them and move forward.14 It seems to me very odd that the defendant would offer even a small refund if there had been an oral agreement earlier to pay the increased amount; accepting that the plaintiff was entitled to withdraw from that oral agreement, that would only operate in the future and would not give rise to any entitlement to a refund. In those circumstances, it seems to me that the letter and behaviour of the defendant in 2007 are inconsistent with there having been any such agreement in 2003 between Mr Burchell and Mr Folster as Mr Burchell alleges. As well, this was not a matter referred to in the defence. There is also the consideration that just imposing an additional charge is consistent with the behaviour that the defendant has displayed on other occasions in the business relationship between the plaintiff and the defendant, discussed below. [14] In those circumstances, I do not accept this evidence of Mr P Burchell. I appreciate that this is a serious matter, since Mr Burchell’s evidence on this point could hardly be the result of some mistake; it must mean that his account of this conversation was a deliberate invention to justify the charge that had in fact been imposed. That has significant consequences for his credibility generally. [15] It is true that there was no administration fee imposed thereafter. Shortly thereafter however, the weekly contribution for advertising was increased to the former rate, to which it had been increased without authorisation previously by the defendant.15 The defendant maintained that this was following an oral agreement to the effect that the plaintiff would pay the increased contribution in return for the restoration of the number of advertising brochures previously distributed in the plaintiff’s area. There were difficulties with the defendant’s case about this agreement however. 11 P Burchell p 2-66, p 2-85, p 2-86. But see his emails Exhibit 12, Exhibit 13, Exhibit 15. 12 The plaintiff was overcharged $33 plus GST per week from 4 July 2003 to 31 October 2007, and then $43 plus GST per week for four weeks, a total of $7,531 plus GST, $8,284.10. There is no credit for this or any part of this amount in Exhibit 5, or Exhibit 47. 13 The auditor’s report for 2007-8 and following years stated that no administration charge was in fact “withdrawn”: Exhibit 65. See also Tadman Exhibit 37, report p 3; p 36. Contra G Burchell p 2-19, 20, which I do not accept. He said later that it was not charged separately, but paid out of the ordinary contributions to advertising by franchisees: p 2-19. That was also contrary to the auditor’s report. 14 Folster p 1-56. He asked that the credit be cancelled: Exhibit 16, 25 February 2008, which indicates the amount was $1,329.27. It does not appear in Exhibit 47. 15 Exhibit 5, invoice 23955 1 April 2008. -- 6 of 27 -- 7 [16] It was pleaded as an oral agreement made on the telephone between Mr Folster for the plaintiff and Mr Grant Burchell for the defendant.16 He was at the time managing the business of the defendant, and is the son of the directors of the defendant; he is now managing a call centre in the Philippines, and gave evidence by video link: p 2-3. His evidence however was clear, that there was no oral agreement made by him; he said that his understanding at the time he had a telephone conversation with Mr Folster was that there had been an oral agreement between Mr Folster and his father Mr Paul Burchell, one of the two directors of the defendant, for the plaintiff to receive an additional distribution of brochures in its area in respect of which it would pay an additional contribution for advertising, which was said to represent half of the actual additional cost of the distribution of those brochures: p 2-5, 10. [17] In fact the evidence of Mr Folster and Mr Paul Burchell about this matter was fairly similar.17 There was a conference in northern New South Wales of franchisees, which Mr and Mrs Folster attended, and after the conference there was conversation between Mr and Mrs Folster and Mr and Mrs Burchell,18 in which it was agreed that the plaintiff would pay a weekly contribution to advertising in the amount which had been previously charged without authorisation, the distribution of brochures would go back to the previous level, and there would be an extra distribution of brochures each fortnight in the plaintiff’s area for which there would be an additional charge to the plaintiff based on half the cost of this. The details of the amount involved and the period for which this would run were left to be worked out between Mr Folster and Mr Grant Burchell. There was subsequently an exchange of emails dealing with this matter: Exhibit 17, which does not confirm or imply any conversation. [18] Mr Grant Burchell said there was a phone call for this in March 2008: p 2-5, 6. Figures were discussed: p 2-11. Mr Folster denied that there was a telephone conversation with Mr Grant Burchell; he said that as a result of previous experiences with him he would not speak to him on the telephone.19 It did not appear to me that Mr Grant Burchell’s evidence indicated any further oral agreement with Mr Folster beyond what was contained in the exchange of emails. I am cautious about the difficulties involved in making an assessment of a witness over a video link, but to the extent that I obtained an impression of Mr Grant Burchell it was not a favourable one,20 and I do not accept his evidence that there was a telephone call in March 2008. In any case, I am not persuaded that anything of relevance was agreed. What was agreed, by way of the email exchange, was the amount of the weekly contribution by the plaintiff for the extra distribution of brochures. 16 Such a conversation in March 2008 was put to Mr Folster and denied: p 1-80-1. 17 Folster p 1-56; P Burchell p 2-67; Burchell said that part of this was that no administration fee would be charged. He also claimed that the plaintiff agreed to make up the difference for the weeks, when the lower fee had been charged and paid, and this was invoiced: p 2-68. There is no such invoice in Exhibit 5, but see Exhibit 47, p 13, invoice 23660, $440.40, which does not match the “difference” which for 17 weeks was $617.10. Something different was put in cross-examination of Mr Folster: p 1-76. 18 Arranged by email: Exhibit 64. 19 Folster p 1-55, 56; G Burchell confirmed a prior conversation which became heated: p 2-22. 20 As well, his evidence about an administration fee being charged generally, at p 2-19, was inconsistent with the evidence in Exhibit 65 and of Tadman p 36; see also P Burchell p 2-66, etc. -- 7 of 27 -- 8 [19] It is also clear from the exchange of emails that this agreement was to be a temporary one.21 The defendant’s case however was that there were really two parts to this agreement: a permanent agreement to pay an increase in the weekly advertising contribution under the franchise agreement, and a temporary agreement in relation to the distribution of extra brochures. The plaintiff relied on clause 18 of the franchise agreement, but such a clause would not prevent an effective oral agreement between the parties.22 I have difficulty in accepting that Mr Folster would have agreed to a permanent increase in the advertising contribution under the franchise agreement, in circumstances where he had recently insisted on a reduction to the original figure, and said that this was linked to the temporary distribution of extra brochures. He put the matter on the basis that the defendant required the increase in the regular advertising contribution before it would agree to the arrangement for the distribution of extra brochures: p 1-56, 76, 78. [20] The matter is difficult because the evidence of this agreement was oral evidence on both sides, the conversation took place a long time ago, there is no proper contemporaneous record of the agreement, and I am wary about the reliability of the evidence of Mr Paul Burchell, for reasons already given.23 I am also cautious about whether Mr Folster’s evidence has been coloured by the depths of his feelings towards the defendant, but in general I prefer his evidence to that of either Mr Burchell. Ultimately it is a matter for the defendant to prove that the terms of the oral agreement entered into at this time included that the adjustment to the weekly contribution for advertising would be permanent, and I am not persuaded on the evidence I have heard that that was the case. [21] The temporary agreement did not in fact last very long. The employee whose presence had motivated the desire for additional advertising was offered another job and left in July 2008, and as a result the plaintiff sought the cancellation of the “additional brochure drops”: p 57; Exhibit 18, 8 July 2008. Nevertheless the plaintiff paid the invoice for July 2008, which included four weekly payments of $62.50 for the additional 5,000 brochures every second week: Exhibit 20. No charge for additional brochures was made in the August tax invoice24 and thereafter no reference to such an entry was made in the tax invoices. The advertising contribution rate, which had gone back to $583 plus GST, $641.38, in the April invoice, remained at that rate until the March 2010 invoice, when it increased by $11 per week: Exhibit 5. [22] On the August 2008 invoice there was a weekly charge of $11.00 added, identified as a “conference charge”: Exhibit 5. This was an arrangement offered by the defendant for representatives of franchisees who wanted to attend conferences which were held for them, where they could make a regular weekly payment and the balance of the cost of the conference would be met by the defendant.25 There was no evidence that the plaintiff ever agreed to this arrangement but he did not object to 21 Exhibit 17; Folster p 77. Indeed, the evidence of Mr Grant Burchell of the telephone conversation was to the same effect: p 2-6. 22 Seddon and Ellinghaus, “Cheshire and Fifoot’s Law of Contract” (9th ed., 2008) p 1062, para 22.4. 23 I do not take into account the fact that, while he was in the witness box, Brisbane experienced its worst hailstorm in living memory: p 2-93. 24 Exhibit 5 invoice 25629, which noted that the arrangement for the extra brochures finished at the end of June. 25 P Burchell p 2-74. -- 8 of 27 -- 9 it, at least where someone got to go to the conference.26 When that did not occur, the plaintiff complained about these charges, and a credit for them for the period September 2009 to February 2011 was processed in May 2011: p 2-41; Exhibit 60. Mediation agreement [23] By email dated 25 August 2010 the plaintiff gave notice of a dispute under the franchising code of conduct, referring to issues raised previously in emails: Exhibit 42. The three issues, not clearly identified in the notice of dispute, were scope of advertising, failing to enforce protection of the franchise area and overcharging for chemicals.27 There was an email in response dated 26 August 2010, and a reply of 4 September 2010, which was also somewhat cryptic: Exhibit 43. There was a response on 5 September 2010, Exhibit 12, of which I have only p 1 in evidence. There was a further response dated 7 September 2010, which took some technical objections to the notice, and which, in relation to stock pricing, said something which I do not follow clearly, but which implies that in certain circumstances the defendant was selling bulk quantities of chemicals to other persons at a discounted price. [24] Under clause 1(e) chemicals were to be supplied to the franchisee at the recommended retail price thereof, although the clause goes on to identify the components of the price which would not necessarily reflect “recommended retail price”. The email from the defendant did not seek to justify the stock price by reference to the terms of the agreement, but for that matter the email from the plaintiff did not seek to criticise prices charged on that basis. The plaintiff sent a further reply on 9 September 2010, pointing out that at the rate then being charged the plaintiff was being overcharged $2,444 per year for advertising: Exhibit 19. It is not necessary to go into further detail of the particular dispute on that occasion because there was a mediation which led to an agreement in writing dated 1 November 2010 between the parties.28 This contained three clauses as follows: “1. It is hereby agreed that the franchisee is able to sell the current franchise agreement and the franchisor will sign all documentation to facilitate this, without varying the terms and conditions of the original franchise agreement dated 1 November 2001. 2. In accordance with clause 3 of the above mentioned agreement, consent is hereby given by the franchisor for the franchisee to sell/transfer the franchise agreement. 3. The parties agree that the franchisee will continue to operate the business as they currently have been until sold without unreasonable interference from the franchisor.” [25] One matter that was not reflected directly in the mediation agreement was the question of advertising contributions. As mentioned earlier, as from 1 March 2010 there was an increase of $11 per week in the advertising contribution said to be attributable to the inclusion of the conference fee: p 2-81. This brought the weekly 26 Folster p 2-40. Apparently the 2008 conference was the first he had attended, and he enjoyed it: Exhibit 17, email 6 March 2008. 27 See emails in Exhibit 44. 28 Exhibit 24; Folster p 85; P Burchell p 2-70. -- 9 of 27 -- 10 contribution to $652.30. This continued for a total of eight weeks, but in the invoice of 1 May 2010 the weekly contribution, including “Asthma costs”, went up to $663.30: p 2-83. For no obvious reason this became $663.35 from 1 August 2010, but in the December 2010 invoice this figure was reduced by $11 per week to $652.35, still said to include “Asthma costs”, and the $11 per week conference charge was shown separately: p 2-84. That was the figure that was charged until termination, though from August 2011 the wording of the invoice changed to “marketing fee”: Exhibit 5. [26] On 2 November 2010 the plaintiff put the business on the market for $120,000 including van, equipment and stock: Exhibits 35, 41. In an email dated 13 November 2010 Mr Paul Burchell asserted an entitlement to charge the amount stated in the franchise agreement plus an administration fee of 5% which was said to have been the amount charged “for the last few years” although the charge was said to have risen since July 2010: Exhibit 13. He sought at the time to justify this by reference to clause 2(n) of the franchise agreement. Plainly it cannot be justified under that clause, which imposed an obligation on the plaintiff to promote and expand the business and to undertake “such additional advertising in that area as might reasonably be required from time to time”. That was concerned with advertising carried on by the plaintiff as required by the defendant. [27] There was no evidence that there was ever any requirement to do any particular advertising imposed by the defendant on the plaintiff, which in terms of the agreement could only be advertising in the plaintiff’s area, and even if there had been and the plaintiff had breached that requirement, that would not entitle the defendant itself to carry on advertising, not shown to have been confined to the plaintiff’s area, and charge the plaintiff some part of the cost. There was clearly no entitlement to impose this charge under this clause. Significantly, this email did not assert that the entitlement to charge arose outside the franchise agreement. Reference was also made to clause 13, which is lengthy but also does not contain any provision under which the defendant was entitled to charge the plaintiff extra for advertising arranged by the defendant. [28] I should say something about the reference to “Asthma costs”.29 The defendant entered into an agreement with the National Asthma Council Australia under which, for a fee, that body approved the carpet cleaning process which was the subject of the franchise agreement. The cost of this approval was said to work out at $11.00 per week per franchise area: Exhibit 67. This enabled the advertising arranged by the defendant to include reference to the approval of the NACA, as it did. It is obvious that the defendant was not entitled simply to charge the plaintiff for this amount. Assuming that this can be characterised as an advertising expense (which is debatable) it is simply one of the ways in which the defendant has chosen to spend the advertising contributions of the franchisees, but the agreement does not provide any basis upon which the defendant can charge the plaintiff a share of the cost of this in addition to the advertising contribution charge already imposed by the agreement.30 This charge was entirely unjustified. Final disputes 29 Based on P Burchell p 2-82 30 In submissions the defendant sought to rely on clause 2(o) of the agreement. This was not an account incurred by the plaintiff, so that clause did not apply. -- 10 of 27 -- 11 [29] In December 2010 the plaintiff consulted solicitors, who sent an email on 23 December complaining about the defendant’s conduct in various respects, including an unparticularised allegation of failure to honour the Mediation Agreement, and unilaterally trying to increase advertising costs and other charges: Exhibit 25. In response, the defendant offered to buy back the business for $40,000 plus truck and equipment: Exhibit 54. Mr Burchell said there was no response to this offer: p 2-70. [30] On 17 May 2011 Mr Folster complained about the distribution of advertising brochures which included a price concession which he was not happy about, and about the distribution of newsletters to customers: Exhibit 57.31 There was a reply on 24 May 2011 which essentially argued that the prices charged for cleaning should be reduced.32 Evidently he was not satisfied by the response, and on 24 May he threatened to deduct an amount for the newsletters from the advertising fees: Exhibit 57. On 30 May Mr Grant Burchell replied asserting that direct mail newsletters was a useful means of advertising the business,33 and again asserting that it would be advantageous to the plaintiff to charge a lower price, but ultimately offering to stop distributing the brochures for the lower price until the first week of July: Exhibit 48. That offer seems to have been taken up by a reply from Mr Folster of 30 May 2011, but he still threatened to deduct $1,050 for the newsletters: Exhibit 48. [31] The threat to deduct this money was carried out when the June invoice 37110 was paid on 7 June 2011: p 2-29; 2-38; Exhibit 5, Exhibit 7, Exhibit 57. There was an amount of $534 credited in respect of brochures or newsletters on 2 August 2011,34 but it does not appear that the balance of this amount was ever paid. [32] On 27 July 2011 Mr Folster complained that the defendant was not entitled to charge other than for calls on a particular number, and objected to invoice 37702 for $17.00, seeking adjustment to it and all previous invoices said to be in breach of the agreement: Exhibit 54. After a further exchange on 29 July 2011 Mr Folster was informed that no credit would be given and the plaintiff was to be invoiced for calls that came through the IVR system each month: Exhibit 55. The franchise agreement provided in clause 7D of the Schedule a requirement to contribute $25 per week plus GST towards the running of the 13 number system. There was also a requirement to pay the costs of non-local calls received from the 13 number, but there is nothing in the list in Exhibit 55 to suggest that the calls concerned were not local. The regular monthly invoices included a charge of $27.50 per week as “13 phone number contributions – price charged as per PB”: Exhibit 5. These additional invoices appear to be another example of the defendant just imposing a charge not provided for under the agreement. [33] In August a dispute arose in relation to television advertising, with which Mr Folster did not agree: he asserted that the advertising was misleading and deceptive, and said he would not pay most of the weekly contributions for advertising on the basis that he would not pay for this ad: Exhibit 50. Mr Folster also complained to the 31 For the defendant’s system, see G Burchell p 2-7. 32 Exhibit 37. I cannot find in Exhibit 1 any provision to the effect that the defendant was entitled to fix the prices for cleaning services performed by franchisees. 33 I wonder if he has ever asked a customer about that? I know what I think of them. 34 Exhibit 47. Credit for this was given in the breach notice: Exhibit 6. -- 11 of 27 -- 12 ACCC about this: Exhibit 29.35 It appears that his concern was that something in the advertisement suggested that previously a price of $200 had been charged for cleaning five seats, which price he said they had never charged: Exhibit 28. The amount of $2,420.00 was deducted by Mr Folster from the September account on this basis: p 2-33; Exhibit 51. This deduction was never paid by the plaintiff: p 2- 36. [34] On 5 September 2011 Mr Paul Burchell sent Mr Folster an email expressing the view that they had come to the point where “we need to resolve our differences in court”, and advised that a breach notice would issue if the amounts due on 10 September were not paid: Exhibit 53. In an email of 9 September 2011 Mr Folster seems to have treated this as indicating that the defendant was about to commence legal action against the plaintiff, but that did not occur. On 15 September 2011 Mr Folster asserted that invoice 38106 for $573.98 was paid that day by a computer banking transaction: Exhibit 52. On 19 September 2011 the defendant wrote to the plaintiff giving notice of what was described as a substantial breach of the agreement in failing to pay a total of $3,579.06: Exhibit 6. Particulars of this amount were not stated in the letter, and a statement said to be attached was not tendered by the plaintiff. The defendant tendered copies of the notice, together with 20 pages of statement of the plaintiff’s account: Exhibit 47.36 [35] On 4 October 2011 Mr Folster replied to the breach notice, asserting that in fact the defendant owed the plaintiff money, and that the plaintiff had been paying fees well in excess of the amounts in the schedule to the agreement: Exhibit 26. He also complained that he was being charged too much for phone calls, and that others had been allowed to do carpet cleaning work in their franchise area. On 4 October 2011 Mr Paul Burchell sent Mr Folster an email asserting that any overpayments had been used for advertising and had been agreed to by the plaintiff, and giving an extension of time to correct what were said to be breaches of the franchise agreement: Exhibit 56. In response Mr Folster in an email of 6 October 2010 maintained his position, and threatened to continue to operate his business on the basis that any attempt to terminate the franchise would be illegal: Exhibit 56. Mr Burchell replied on the same day maintaining his position and threatening to enforce any termination: Exhibit 56. [36] On 10 October the defendant sent to the plaintiff, and to the guarantors of the plaintiff, a notice terminating the franchise on 7 October 2011: Exhibit 8. It asserted that the amount outstanding was $10,326.79, but no particulars of that amount were put in evidence by either party, except for one page of a statement of 10 October 2011, covering the account from 5 May to 23 September 2011, showing a balance of $4,030.29: Exhibit 7. The plaintiff, then acting through solicitors, treated this as a repudiation of the agreement which it accepted: Exhibit 9. These proceedings were commenced the following year. The plaintiff’s claims [37] The plaintiff claims damages for breach of contract on the basis that the defendant’s termination of the franchise agreement amounted to a wrongful repudiation of that agreement by the defendant. The basis for this claim is that the various monies said by the defendant to be unpaid, and relied on as a basis for issuing the notice of 35 He received a long but essentially meaningless response: Exhibit 30. See also Exhibit 31. 36 Mr Folster accepted that at least the last page of this was included with the notice: p 2-28. -- 12 of 27 -- 13 default and subsequently the notice of termination, were not in fact owing because the plaintiff was entitled to set off larger amounts which were owing from the defendant to the plaintiff. These larger amounts arose because of overpayments which had been made over the years the franchise agreement had been operating, which sums were recoverable by the plaintiff, and as a result they were available to be set off against the amounts payable under the franchise agreement from time to time. On this basis it is alleged that there was no money owing by the plaintiff to the defendant at the time the notice for termination was given, and in fact there was money owing from the defendant to the plaintiff. [38] That argument depends on a number of steps: (a) the plaintiff had in the past paid money to the defendant in response to invoices sent to it which included amounts not properly payable by the plaintiff to the defendant under the agreement; (b) the plaintiff was entitled to recover those overpayments from the defendant; (c) the plaintiff was entitled to set off against its liability to make various amounts properly payable under the terms of the franchise agreement the liability of the defendant to refund such overpayments, and the plaintiff had done so. The pleadings [39] In paragraph 16(a) of the Statement of Claim it was alleged that the plaintiff paid the defendant more than was properly payable under the agreement in a particular sum, particularised as being an overpayment for advertising of $1,887.60 per year above the fee at 7(c) of the Agreement37 since 2005, plus an additional $11 per week from 10 March 2010. This is a somewhat odd pleading, in circumstances where paragraph 8 alleged invoicing too much for advertising after 2007, the particulars referred to overcharging since 2005,38 neither date produces, on the basis of the formula in the particulars, the sum alleged in paragraph 16(a), and the evidence revealed overcharging dating from 2003. The defence in response to this allegation merely said that the defendant had not breached the agreement and that the plaintiff had not paid the defendant more than was properly payable under the agreement. [40] In response to the allegation in the Statement of Claim para 8 that the defendant after 2007 invoiced the plaintiff for advertising in an amount that was in excess of the amount allowed in the agreement, the defendant denied that it invoiced the plaintiff for advertising under the agreement in an amount that was in excess of the amount allowed in the agreement because the defendant invoiced the plaintiff no more than the amount allowed in the agreement. It then further alleged an oral agreement for additional advertising made by a telephone conversation between Mr Folster and Mr Grant Burchell in March 2008. [41] These are the only allegations in the statement of claim about overcharging for advertising. In relation to the purported termination of the franchise agreement, the statement of claim merely alleged in paragraph 11 that on or about 7 October 2011 the defendant purported to terminate the franchise agreement on the ground that certain amounts were owing under it by the plaintiff to the defendant, and that at 37 This must have been a reference to clause 7C of the Schedule to the Franchise Agreement, Exhibit 1. 38 This date may have come from Exhibit 11: see p 2-87. -- 13 of 27 -- 14 that time those amounts were not owing by the plaintiff to the defendant. The very general statement in the pleading was in the defendant’s pleading denied on the basis that, by reason of the matters pleaded in paragraph 6, 9 and 15, the amounts were due and owing to the plaintiff. Paragraphs 6 and 9 pleaded the oral agreement in March 2008 in relation to the provision of additional brochures, and paragraph 15 pleaded that the amount claimed to be owing in the notice of breach, $3579.06, was owing. [42] The plaintiff in submissions sought to rely on all of the overcharged amounts for advertising dating from 4 July 2003 up until October 2011 in support of the proposition that this amount “more than offsets the amount owing at the date of the breach notice, therefore there was no amount due and owing at the date of the breach or at the date of the termination.” The plaintiff’s statement of claim did not give proper notice of the fact that the plaintiff would be relying on all of the overpayments from 2003 as giving rise to a debt owed by the defendant to the plaintiff which could be set off against the underpaid invoices in 2011. Nevertheless, the whole history of overpayments was litigated at the trial. Evidence of all of the payments was led, and the defendant called evidence of an oral agreement in 2003 which was relied on as justifying the increase in advertising contributions charged from 2003. This was not a matter pleaded by the defendant either. In the circumstances therefore it does not appear that the defendant is prejudiced by the plaintiff’s reliance on all of the overcharging in relation to his allegation of set off relied on as showing that the breach notice and termination of the franchise agreement were unjustified. The relevant facts have been litigated at the trial. Overcharging [43] I accept that between 4 July 2003 and 28 November 2007 the plaintiff was overcharged a total of $8,284.10, including GST, no part of which has since been credited or paid to the plaintiff. I do not accept that the defendant was entitled to charge an administration fee so as to offset some or all of this overcharge. Prima facie this amount is recoverable; an overcharge is recoverable by an action for money had and received, described now as a restitutionary claim, subject to any defence which is available. No defence of change of position was sought to be made out. [44] One possible defence is voluntary submission to a bona fide demand. If a demand for payment is made on someone who does not believe that the amount is payable, but chooses to make the payment intending to close the transaction, that person is generally not entitled to recover the amount subsequently even if it emerges that it really was not payable.39 This is based on the law’s reluctance to reopen settled transactions.40 The short answer to this defence is that it was not pleaded by the defendant, so it cannot be relied upon. There was no application at the trial for leave to amend to raise it, even when there was some discussion about it (p 2-45), and it would not be appropriate to give leave to amend in circumstances where the point was not actually litigated. 39 Mason v New South Wales (1989) 102 CLR 108 at 143; Deacon v Transport Regulation Board [1958] VR 458 at 460. 40 Goff and Jones, “The Law of Restitution” (4th ed., 1993) p 258. -- 14 of 27 -- 15 [45] There were two factual issues which could well have impacted on the defence had they been litigated or litigated more fully at the trial. The first is whether the demand was bona fide, that is whether the people behind the defendant actually believed that they were entitled to charge the increased amount.41 Given that I have found that Mr Paul Burchell invented an oral agreement with Mr Folster to justify the payment, if the matter had been explored more fully, it may well have emerged that he did not believe at the time that the defendant was entitled to charge this increase under the contract.42 In addition, Mr Folster gave evidence that on a number of occasions during the contract when there were disputes Mr Grant Burchell either threatened to terminate the contract or gave a breach notice, and in these circumstances he felt that he really had no choice but to pay the invoices sent.43 It is not clear that this pattern of behaviour extended back prior to July 2003, but there had already been a dispute in 2002 which led to a mediation between the parties,44 and a notice of substantial breach in April 2003,45 so the relationship between the parties was by no means smooth sailing before the increase in 2003.46 [46] It is not necessary to make any factual findings about this matter, because although there was some relevant evidence before me; had the matter been pleaded it may well have been dealt with more thoroughly and there may have been additional evidence led. I cannot now proceed on the basis that it has in fact been litigated. In those circumstances, the defendant cannot rely on the defence of voluntary submission to a bona fide demand. [47] Another issue is the Limitation of Actions Act. There are two issues about this, one going to recoverability of any overpayments now, to which the answer is that the Act has not been pleaded, and the other going to the question of whether a debt which would be statute barred under the Act can be set off. [48] I accept that there was an oral agreement between Mr Folster and Mr Paul Burchell in March 2008 under which it was agreed that the plaintiff would pay the increased amount of weekly contribution for advertising and there would in addition be extra brochures distributed in the plaintiff’s area each fortnight, on the basis that the plaintiff and the defendant would share the cost of those extra brochures. I also find that that agreement was a temporary agreement, the plaintiff was entitled to terminate it, and did so on 8 July 2008. However the defendant did not reduce the advertising contribution rates in the invoices from August, as ought to have happened on my view of the temporary agreement. Indeed in March 2010 there was a further increase of $11 per week associated with the National Asthma Council claim, which was not justified. Accordingly there has been overcharging in respect of advertising contributions since August 2008, until the termination of the agreement. The plaintiff was overcharged $36.30 per week for 95 weeks, then $47.30 for 13 weeks, then $47.35 for 61 weeks, a total of $6,770.25 including GST. 41 The discussion in Goff and Jones speaks of an honest claim (p 259) and assumes that the claim must be honest. 42 As was admitted in Exhibit 15. 43 Folster p 2-43; p 2-53; p 2-55. 44 P Burchell, pp 2-64. 45 Exhibit 62, 14 April 2003; it was disputed by the plaintiff (Exhibit 63), and later withdrawn, as “somewhat frivolous”: Exhibit 45, 19 August 2003. 46 See also Exhibit 4, p 2 para (6), p 3 para (9). -- 15 of 27 -- 16 [49] At one point Mr Burchell claimed that the effect of the mediation agreement was that the plaintiff had agreed to pay the higher level of advertising contributions which had been charged and paid prior to then: p 2-88. Clause 3 of the mediation agreement, quoted earlier, contained an agreement that the plaintiff “will continue to operate the business as they currently have been until sold”, and his point was that that involved an agreement to continue to do what he had been doing, which was paying larger contributions for advertising. On the other hand, clause 1, in confirming that the plaintiff was entitled to sell the business with the benefit of the franchise agreement according to its original terms and conditions, appears to me to confirm the original terms as the terms of the then current franchise agreement, and the point of clause 3 appears to be a restraint on unreasonable interference from the defendant, rather than a confirmation of a de facto variation of the franchise agreement. In any case, this agreement could not be interpreted as a retrospective validation of earlier overcharging of $4,734.70 for advertising, which would remain available as a set-off. [50] In my opinion the true position is that objectively the mediation agreement did not cover the question of advertising contributions, any more than it resolved the disputes as to the protection of the franchise area and the amounts being charged by the defendant for chemicals. This was not an agreement which settled the matters in dispute between the parties, rather an agreement to facilitate the sale of the plaintiff’s business and the associated transfer of the franchise, as a means of ending the relationship between the parties. This indicates that the parties had not resolved the differences which led to the mediation. I do not accept that there was here an agreement between the parties for the plaintiff to pay a higher advertising contribution, any more than I accept that the agreement in 2008 provided for a continuation of the higher advertising contribution indefinitely or permanently, after the arrangement for the additional brochures came to an end. [51] At one stage the plaintiff was also complaining about being charged regularly in relation to the annual conference, and indeed this is a matter raised in the pleadings.47 I am however persuaded that there has been no relevant overcharge in relation to conference contributions, in the light of the evidence of Mr Folster to the effect that the contribution payments which were made were in respect of conferences which were attended, and that when he complained about the plaintiff’s having made contributions for a conference which had not been attended those contributions were credited back to the plaintiff.48 Accordingly I am not persuaded that there has been any overcharging in relation to contributions for conferences. [52] One matter not raised in the pleadings, but disclosed by the evidence, was that the defendant was also overcharging for the telephone costs. Under Exhibit 1 the defendant was entitled to charge $25 per week, plus GST, together with the cost of non-local calls made to the 13 number. In fact the amount of $27.50 per week was charged until the invoice of 1 February 2009 when it was increased to $33 per week, and it stayed at that figure until the invoice of 1 December 2010, when it returned to $27.50 per week: Exhibit 5. This may have been in response to complaints by Mr Folster. Because of this and because the amount was so regular, it was clearly just an increase in the contribution rather than something which came as a result of some actual non-local calls to the 13 number, and was another example of the 47 Statement of claim paras 12(b), 16(b). 48 Folster p 2-40, 41; See also P Burchell p 2-75; Exhibit 60. -- 16 of 27 -- 17 defendant just unilaterally increasing charges to the plaintiff. This produced an overcharge of $5.50 per week for 96 weeks, a total of $528. Availability of set-off [53] The next question is whether the plaintiff was entitled to set off against its liability to pay various amounts, otherwise properly payable under the terms of the franchise agreement, the liability of the defendant to refund such overpayments. A set-off can be described in broad terms as the process which occurs when two people have money claims against each other, where the claims are dealt with together to determine the balance payable by one of them.49 Set-off is divided into legal set- off and equitable set-off. At common law there was no right to set-off except as between judgments50 but set-off at law was introduced by statutes first passed in the 18th century.51 The operation of these statutes was however terminated in Queensland by the Imperial Acts Application Act 1984 s 7.52 Thereafter there was no set-off at law in Queensland until the enactment of a statutory set-off by s 20 of the Civil Proceedings Act 2011, which commenced on 31 August 2012. At the relevant time therefore there was no set-off at law available in Queensland. [54] On the other hand, equitable set-off has been recognised in Queensland, and applied at the relevant time. This depended on the existence of circumstances which would give rise in equity to a defence on the part of the defendant, which required not merely the existence of a claim by the defendant against the plaintiff, but also that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim.53 In a situation such as the present, where there has been an overpayment in respect of earlier invoices, it can be said that there is a sufficiently close connection between claims for further payment under the franchise agreement and a claim for repayment of amounts which have been overpaid previously in respect of claims for payment under the franchise agreement. Accordingly the defendant’s claim to recover overpaid money was something which could be raised by way of equitable set-off. [55] Set-off is usually discussed in the context of litigation, but in the present case the defendant did not sue the plaintiff, but claims to have exercised either a contractual or a common law right to terminate the franchise agreement, on the basis of the plaintiff’s failure to pay amounts said to be payable under it. This gives rise to a question as to the scope of what is commonly referred to as a defence of equitable set-off. The “defence” originally arose if circumstances existed such that a party subject to a claim could have obtained from a court of equity an injunction restraining the party making the claim from pursuing it without allowing credit for the cross-claim, but it has been recognised that an equitable set-off is more than just a procedural defence, and stands as a substantive defence.54 49 See generally Derham “The Law of Set-Off” (4th edition, 2010) para 1.01. 50 Kostka v Addison [1986] 1 Qd R 416 at 420: execution was allowed only for the balance. 51 Cairns “Australian Civil Procedure” (5th edition, 2002) p 204. 52 Forsyth v Gibbs [2009] 1 Qd R 403 at n 1. 53 Forsyth v Gibbs (supra) at [10]. 54 Derham (op cit) para 4.29-4.61; Federal Commerce and Navigation Co Ltd v Molena Alpha Inc [1978] QB 927 at 982; Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490 at 494-5; Re Partnership Pacific Securities Ltd [1994] 1 Qd R 410 at 425; Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 at 481. -- 17 of 27 -- 18 [56] As pointed out by the New South Wales Court of Appeal, the effect of the existence of an equitable set-off is that a party liable to pay money otherwise payable is entitled to withhold payment without being thereby in breach of contract. As it was put in the leading textbook on the subject, “as far as equity is concerned, it is unconscionable for the creditor, even before judgment, to assert that monies are due to it from the debtor, or to proceed on the basis that the debtor has defaulted in payment, if and to the extent that circumstances exist which support an equitable set-off.”55 It follows, as pointed out in that work, that there is a consequence for a situation where “a contract may entitle one party to take a particular course of action if the other party defaults in making a payment pursuant to the contract. If the other party indeed fails to pay but has available a substantive defence of equitable set-off, the first party could not treat that other party as having defaulted, and accordingly could not take the action which is available upon default.”56 [57] Another consequence of the substantive nature of the defence of equitable set-off is that it can arise in respect of a claim which could not at that time be enforced in law because of the existence of a defence under the statute of limitations. It is not sufficient to deny an equitable set-off that the cross-claim on which it is based is one where the limitation period has expired.57 This can be relevant in the present case where the claim for overpayment, at the time of the breach notice, extended back more than six years. There is however said to be one important limitation on the operation of equitable set-off as a substantive defence in this way, and that is that an equitable set-off has to be asserted in response to a claim or demand, at least before action is taken by the other party in reliance on the failure to comply with the claim or demand.58 Although there are said to be theoretical considerations either way, the equitable nature of equitable set-off means that it would be subject to discretionary considerations, and accordingly issues of estoppel and waiver are likely to arise in circumstances where a party seeks to assert the existence of an equitable set-off, which was not asserted in a timely way before action was taken by the other party in reliance on the non-performance by the party claiming the equitable set-off. [58] Although no authority is referred to in the text, and I am not aware of any, the principle seems to me to be correct. It is one thing to say that, if one party to a contract claims from the other an amount of money payable under the contract, and the other party asserts the existence of an equitable set-off, if it ultimately turns out that the equitable set-off assertion was sound, the party asserting it should not be prejudiced because of any action taken in the meantime on the basis that the demand has not been satisfied, such as termination of the contract. But if a claim for payment under the contract meets with either no response or a response which does not rely on an equitable set-off, and the other party takes action which it is entitled to take if an amount payable under the contract is not paid, such as termination, it strikes me as hard if that party could be met later with an assertion that there really was a cross-claim which gave rise to an equitable set-off which should have caused the other party to stay its hand. 55 Derham (op cit) para 4.30, citing, in addition to Roadshow Entertainment, Re Kleiss ex parte Kleiss v Captain Snooze Pty Ltd (1996) 61 FCR 436 at 440-1, IRM Pacific Pty Ltd v Nudgegrove Pty Ltd [2008] QSC 195 at [11]. 56 Ibid para 4.45, citing inter alia Auspac Trade International Pty Ltd v Victorian Dairy Industry Authority (Victorian SC Appeal Div, 22 February 1994, BC 9406099) at 38 and 39. 57 Ibid para 4.51; the position is different in the case of set-off at law. 58 Ibid para 4.48, 4.49. -- 18 of 27 -- 19 [59] Whether this is on the basis of estoppel may be doubted, in circumstances where the difficulty arises because of an omission to assert a set-off, that is silence on the subject, which generally does not give rise to an estoppel. It does seem to me however that a discretionary equitable remedy would not be made available in circumstances where the other party was in effect denied the opportunity to make a timely response to the claim. Another way of looking at the matter is to say that an equitable set-off will arise in circumstances where it is unfair for the claim to be allowed without taking account of the cross-claim, and where a cross-claim has not been asserted it cannot be said to be unfair for the claim to be allowed without regard to the cross-claim. On that analysis, an equitable set-off will necessarily only arise when it is asserted, with the result that it is only an equitable set-off which is asserted which can, relevantly, prevent a failure to pay money payable under a contract from entitling the other party to terminate. [60] In response to the notice of breach, Mr Folster wrote on 4 October 2011: Exhibit 26. Among other things this said, “You actually owe us money” and “Paragraph 2 refers to the fees and the schedule of our agreement. As you well know we pay well in excess of these fees and have done so for many years, you actually owe us far more than this amount; please refer to dispute notices of our mediation.” The references to the dispute notices for the mediation might not have been very helpful, but the letter does fairly clearly assert that as a result of overpayment of amounts specified in the schedule to the agreement, the defendant owed the plaintiff more than the amount claimed to be unpaid in the breach notice, and that was being relied on as a reason for not paying the money specified in that notice. In my opinion that gave the defendant reasonable notice of the assertion of a set-off based on claimed overpayment. This was not the first time that the plaintiff had complained of overpayment, and the proposition that the plaintiff had been paying more than the amounts specified in the schedule to the agreement was clearly a reference to fees which were fixed by that schedule, in particular the advertising contributions. I find that that letter was sufficient to assert a right of set-off. It does not matter that the payments were originally withheld for other reasons, as they were. Application of set-off [61] It follows from discussion earlier that ultimately, including the amounts charged on the invoice dated 1 September 2011, there had been a total of $15,582.3559 by which the plaintiff had been overcharged since the commencement of the agreement. The breach notice referred to non-payment or short payment of invoices 37118, 37418, FC3663, 37702, 38018, 38106 and 38229. I have dealt with 37110: [31]. Invoice FC3663 reflected a finance charge of $12.08 imposed on 15 July 2010 in respect of the failure to pay the shortfall of $1,050 deducted from invoice 37110: Exhibit 68, p 2-84. The document on its face indicates that the amount concerned was paid. Mr P Burchell was not able to explain this, but it has not been shown that this amount was still owing when the breach notice issued, though it was included in the particulars of the amount then owing. Also included was invoice 37702 dated 27 July 2011, for $17, which Mr Folster maintained was not payable: p 2-35, Exhibit 54. There was no evidence led to show that this amount was properly payable by the plaintiff. 59 $8,284.10 from n 12 + $6,770.25 from [48] + $528 from [52]. -- 19 of 27 -- 20 [62] Invoice 38106 dated 19 August 2011 was for $573.98, which according to an email from Mr Folster of 15 September 2011 he had paid: Exhibit 52.60 The defendant has not led evidence that this amount was owing as at the date of the breach notice. Apart from that the breach notice referred to two other amounts claimed, invoice 37418 of 5 July 2011 for $27.50 and invoice 38018 of 16 August 2011 for $12.50; neither of these invoices was the subject of any evidence in the trial, except that these invoices are mentioned in the statement in Exhibit 47, and again the defendant has failed to show that these amounts were owing as at the date of the breach notice. The remaining amount relied on was the short payment of $2,420 in respect of invoice 38229 dated 1 September 2011, which Mr Folster agreed that he had deducted, as discussed earlier, because of the television ads with which he disagreed: Exhibit 49, Exhibit 50, Exhibit 51; p 2-33. It follows that the only amount proved to be owing at the date of the breach notice is $2,936. [63] I will assume in favour of the defendant that it was entitled to terminate the agreement under clause 9 if any part of the substantial breach in respect of which notice had been given was not remedied. Nevertheless, on the face of it, so long as the plaintiff was entitled to an equitable set-off of at least $2,936, there was no substantial breach and the defendant was not entitled to terminate under the contract. It follows that the defendant was also not entitled to terminate at common law, there not having been shown to be any breach of a term giving rise to a right to terminate, or repudiation of the contract on the part of the plaintiff. Mr P Burchell asserted that the amount owing as at the date of termination was over $10,000 (p 2- 76) but this figure was not proved in detail. One would expect that there would have been another invoice issued on 1 October 2011, but that invoice is not in evidence. Presumably it would have been similar to invoice 38229, which claimed an amount of $4,171.40, but even with that amount added,61 which would have involved a further overcharge of $211.40, the amount outstanding would not be $10,000, even assuming that all of the amount alleged to be outstanding in the breach notice was actually due. [64] Even if overcharging prior to the 2008 agreement is disregarded, on the basis that what happened then or at about that time somehow amounted to a waiver of any claims in respect of earlier overcharging, the subsequent overcharging of advertising contributions, including the Asthma Council contributions, was more than the amount claimed in the breach notice, let alone the amount shown to have been outstanding at that time. That remains so, even if overcharging after the mediation agreement is disregarded. In these circumstance in my opinion it is clear that the defendant was not entitled to terminate the franchise agreement for breach as it purported to do. [65] As a general proposition a purported termination for breach which is not justified under the terms of the contract amounts to a repudiation of the contract, unless the situation is such that the party purporting to terminate can be characterised as in some way willing to accept that, if a dispute over the interpretation of the contract is resolved against it, it is content for the contract to continue.62 There is no indication of that here, and in my opinion the conduct of the defendant in purporting to 60 It appears in Exhibit 7 on 16 September 2011. 61 It was not payable until 10 October: Exhibit 1 clause 2(i)(iii). There was an invoice for $1,149.95 for chemicals issued on 21 September 2011, but it was not payable until 21 October: Exhibit 7; Exhibit 1, clause 2(i)(i). 62 Seddon and Ellinghaus, op cit, p 1016 para 21.12. -- 20 of 27 -- 21 terminate the contract in these circumstances amounted to a repudiation of the contract by the defendant, which entitled the plaintiff to terminate, as it did: Exhibit 9. Breach of mediation agreement [66] The plaintiff also alleged that the defendant was in breach of the mediation agreement by increasing the advertising costs unilaterally, and by including conference charges within invoices in breach of the agreement. The difficulty with this allegation is that there was no increase in the advertising costs after the mediation agreement was entered into; the only change was that from the next invoice the conference fee was taken out of the advertising contribution and charged separately. Any unauthorised increases in the advertising contribution had occurred previously, and I could not characterise that as a breach of the mediation agreement. As to the allegation that conference charges were included in breach of the agreement, again conference charges had been included in the invoices from 1 March 2010, and as explained above I am not persuaded that there was any breach of the franchise agreement in connection with this. The only change after the mediation agreement was that the conference fees were charged separately rather than being included in the advertising contribution amounts. For the reasons given earlier in relation to the conference fees, I am not persuaded that there was any breach of the mediation agreement either because conference fees continued to be charged thereafter. [67] The reference to increasing the advertising costs may be a reference to Mr Folster’s allegation that he received correspondence where the defendant was proposing to increase the advertising fees, but that he had argued with this and eventually Mr Burchell had backed down: p 1-65. I do not recall any other evidence dealing with this topic, and I do not consider that merely by making this statement the plaintiff has shown that the defendant was in breach of the mediation agreement. At most this may have been foreshadowing or threatening conduct which, had it occurred, would have amounted to a breach of the agreement, but even on Mr Folster’s evidence it did not in fact occur. [68] Overall I am not persuaded that the breaches of the mediation agreement relied on in paragraph 12 of the statement of claim have been made out. I expect that purporting to terminate the franchise agreement without justification amounted to a breach of clause 3 of the mediation agreement, but this does not matter, because this is not pleaded as a breach, and because in any event the damages would be the damages already recoverable because of the breach of the franchise agreement. The plaintiff would not be entitled to additional damages simply because the same conduct was also a breach of another agreement. Fiduciary relationship [69] The plaintiff also alleged in the alternative that the plaintiff and the defendant were in a fiduciary relationship as a result of the existence of the franchise agreement. The traditional view is that no fiduciary relationship arises from the existence of a commercial contract entered into at arm’s length by parties who were dealing on an equal footing: Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 at 70 per Gibbs CJ. Nevertheless, as pointed out by Mason J in that decision (at p 100) it was too simplistic to suggest that commercial transactions necessarily -- 21 of 27 -- 22 stand outside the fiduciary regime: “The fact that in the great majority of commercial transactions the parties stand at arm’s length does not enable us to make a generalisation that is universally true in relation to every commercial transaction. … Every such transaction must be examined on its merits with a view to ascertaining whether it manifests the characteristic of a fiduciary relationship.” [70] His Honour then analysed the terms of the contract in that case between a manufacturer and a distributor, and their operation, and concluded at p 101 that in certain activities the distributor was acting in its own interest as well in the separate interests of the manufacturer: “Although, as we have seen, it was entitled to prefer its own interests to the interests of [the manufacturer] in some situations where those interests might come into conflict, this entitlement was necessarily subject to the requirement that [the distributor] act bona fide and reasonably with due regard to the interests of [the manufacturer]. In no circumstance could it exercise solely in its own interests without reference to the interests of [the manufacturer]. This, as it seems to me, fixed [the distributor] with the character of a fiduciary in relation to those activities mentioned, notwithstanding that in pursuing them [the distributor] was also acting in its own interests and that it was carrying on the distributorship business generally for its own benefit and in no sense as a trustee for [the manufacturer]. This conclusion is largely founded on the general nature of the responsibility which, according to the contract, [the distributor] undertook to discharge in pursuing the relevant activities, though the obligation not to compete and the obligation not to deliberately injure [the manufacturer’s] market were significant elements in that responsibility.” [71] The High Court has subsequently confirmed that the relevant principles regarding the existence of a fiduciary relationship which does not fall within an established category, and the incidents of such a relationship, are as stated by Mason J in that case: John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 84 ALJR 446 at [86]. In that case the Court went on to approve at [91] a statement by Mason J at p 97 in the following terms: “In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.” [72] The court went on to note at [92] that the terms of the contract include not only those expressed but those implied, and that, when a term to like effect as the suggested fiduciary obligation cannot be implied, it will be very difficult to superimpose the suggested fiduciary obligation upon that limited contract. In that case it was held that there was no relevant fiduciary obligation.63 63 See also Streetscape Projects (Aust) Pty Ltd v City of Sydney (2013) 85 NSWLR 196. -- 22 of 27 -- 23 [73] The relationship of franchisor and franchisee is not one of the generally accepted categories of fiduciary relationships. The authorities recognise that fiduciary obligations can arise in the context of a commercial contract, but it is necessary to show that the contract meets the test identified by Mason J. I am not persuaded there is any relevant feature of the contract between the parties in this case which gave rise to a fiduciary obligation on the defendant which was relevant to the matters in dispute in this proceeding. It also follows from the more recent decision that any fiduciary obligation must be consistent with the terms of the contract between the parties. It follows in my opinion that the plaintiff would not be entitled to greater relief on the basis of a breach of any fiduciary obligation than the relief available by way of damages for breach of contract. Damages [74] The termination of the franchise agreement did not have the effect of discharging any rights to damages for breach of contract which had accrued prior to that time.64 It follows that the plaintiff is entitled to damages for wrongful termination of the franchise agreement. In addition, the plaintiff has claimed damages for breach of the franchise agreement in relation to overcharging for advertising costs. I have already commented on the difficulties with this pleading. There may also be room for argument as to whether sending invoices for more than the amount properly payable under the agreement amounts to a breach of the agreement, but it may be a breach of an implied term that the defendant will only invoice amounts properly payable under the agreement. It is I think unnecessary ultimately to resolve the question of whether overpayments are recoverable as damages for breach of contract, because they are recoverable by a restitutionary remedy, though for this purpose it is necessary to resolve the question of just what the scope is of the plaintiff’s pleaded claim for recovery of overpayments. [75] In my opinion, the plaintiff is confined to the allegation that there was overcharging after 2007. This is the overcharging alleged in paragraph 8 to amount to a breach of the agreement, and in context it arises in respect of overcharging after the plaintiff renewed the agreement, alleged in paragraph 7. The damages for any such breach of the franchise agreement could only relate to the overcharging after that date, and accordingly in terms of a claim to recover money or to recover damages in respect of overcharging I consider the plaintiff should be confined to a claim in respect of overcharging from 2008. [76] There is a particular reason why a different approach should be adopted here from the approach in relation to the existence of an equitable set-off: as I have said, the fact that the limitation period has run in relation to recovery of an overcharge is not an answer to the availability of an equitable set-off. But it would be an answer to a claim either to recover the amount paid or to recover damages for breach of the franchise agreement in respect of overcharging. Because the claim is confined on its face to overcharging that occurred in 2008 and subsequently, the defendant would have had no occasion to plead that any part of this claim was statute barred. But if the plaintiff had pleaded a claim in respect of all of the overcharging going back to July 2003, the defendant would have been entitled to plead a Limitation of Actions Act defence in respect of that part of the claim which related to payments made more than six years before the commencement of the proceeding on 28 March 64 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-7. -- 23 of 27 -- 24 2012. Accordingly in this context it would be unfair to the defendant to allow the plaintiff to pursue a greater claim than that pleaded, that is to say, overcharging after 2007. The amount overcharged for advertising expenses, including the claim in respect of payments to the Asthma Council, from 1 August 2008 comes to $6,770.25. [77] In theory the defendant is entitled to set-off against this claim unpaid amounts which were shown to have been properly payable, but in the circumstances of this case I do not think any amount can in fact be set-off. This is because the defendant has not properly proved what amount did accrue due to the defendant under the agreement prior to termination, and because the plaintiff has already applied by way of equitable set-off against that sum the amount of the overpayment, including earlier overpayments in an amount of over $8,000 which I suspect was enough to extinguish it. In circumstances where there is a running account between the parties, I suspect that the correct approach would be to apply the oldest overpayments first by way of set-off to extinguish any debt actually payable. There is the further difficulty that no such set-off was pleaded, although in the circumstances I would not regard that as fatal if I thought there was otherwise a good set-off available. Accordingly the amount recoverable in respect of overpayments is $6,770.25. [78] The other aspect of the plaintiff’s claim is damages for wrongful repudiation of the franchise agreement leading to the loss of the benefit of the franchise. In the statement of claim paragraph 16(c), this is particularised as 40 years’ profit at the rate of the last full financial year, $9,453.06, together with the loss of the benefit of the sale of the franchise which was advertised for sale at $120,000. That approach is not correct: if the agreement had not been terminated by the defendant but allowed to continue, the plaintiff would not have both realised the sale price and earned the profits to be earned from operating the business for the next 40 years.65 What the plaintiff has lost is the business, and accordingly the plaintiff’s damages for loss of that business are properly assessed by determining the value of the business lost. [79] The business had value because of its capacity to continue to generate profits into the future. If the business lacked this, it would not have had any value. The valuation of anything is ordinarily assessed at its market value, that is to say, the price that would be achieved between a willing seller and a willing buyer in the market. From the end of 2010, the plaintiff was seeking to sell the business; this follows from the terms of the mediation agreement, and that after the mediation it was the plaintiff’s intention to sell the business was admitted in cross-examination by Mr Folster: p 1-64.66 The real significance of that evidence is that shows that there is no reason to depart from the ordinary approach to the assessment of damages in the present case. [80] Ordinarily one would expect to receive valuation evidence from a person suitably qualified to value a business; there was no such evidence led in the present case. 65 At the end of which the franchise would have expired, and the plaintiff would have had nothing to sell. At one point Mr Tadman quantified the potential return from the business if it ran this long at $2,711,193.70: Exhibit 37, p 9. See also Tadman p 46. This was based on wages and profits and depreciation. See also Exhibit 32. 66 He gave effect to this intention: Exhibit 35. He claimed however that he loved the business and wanted to continue with it: p 1-59. -- 24 of 27 -- 25 The plaintiff called evidence from an accountant with experience of auditing, but he had not particular experience in valuation: p 1-39. The accountant did a calculation based on the total return the business was achieving for Mr and Mrs Folster, and assuming that that would continue until the time when Mr Folster might be expected to retire, based on existing returns for the business.67 There is however no evidentiary basis for a conclusion that that reflected the market value of the business at the relevant time. I am aware from evidence that I have heard in other matters that valuers sometimes use a particular multiple of the annual return as a basis for valuing a business, but I have not had any evidence in this matter as to what multiple would be appropriate for this business. [81] I also had evidence from Mr P Burchell about some other sales of franchises, although he said that apart from these there had been cases where the franchisee had simply walked away from the franchise, presumably either abandoning it or just not exercising the option to renew it. The defendant’s evidence was that there were three other Brisbane franchises which were surrendered during 2013, after they had been on the market for years but were not able to obtain a buyer: Exhibit 66, which indicates that each of these had a higher annual turnover than that of the plaintiff. Sales ranged from $200,000 down, though the $200,000 figure was exceptional.68 The defendant identified 11 franchises which had sold in 2012-2014, where the value of the goodwill averaged $34,576, ranging from $14,310 to $59,000: Exhibit 66. [82] The defendant had this material because under the franchise agreement it was entitled on an assignment to 10% of the sale price of the goodwill, as would have been the case with any sale by the plaintiff of its franchise: Exhibit 1, Schedule, clause 7E. It occurs to me that in the light of this it might have been in the interests of vendors to apportion more of the sale price to things other than goodwill, such as vehicles and equipment, but obviously there was a limit to the extent to which they could do this. This evidence if true does suggest that the market value of these franchises is not very great, and there was no particular challenge by the plaintiff to the accuracy of this material. Despite my concerns about the reliability of Mr Burchell’s evidence, there is no reason not to accept the factual material in Exhibit 66. These however represent only figures for goodwill, and presumably the plaintiff could also have sold its vehicle and equipment and perhaps a small amount of stock. [83] Apart from my concern about the credibility of Mr Burchell, on which these figures ultimately rest, I have no way of comparing any of these franchises objectively with that operated by the plaintiff, although Mr Folster’s proposition, that his franchise would be more valuable because he had the benefit of an agreement in more favourable terms than the others who had the more recent form of agreement, seems right in principle. There is however no proper evidentiary basis on which I could quantify this advantage. There was evidence from Mr Burchell in January 2011 he offered to buy the franchise back from the plaintiff for $40,000, plus the truck and equipment, but did not receive a reply: p 2-70.69 I think I can take it that the business was worth at least that much. Mr Folster said that the business was earning good money (p 1-66) and that they had all the work they could do: p 1-67. He also 67 Exhibit 32; see Tadman p 46. This figure does not appear even to be discounted to a present value. 68 P Burchell p 2-91. 69 Exhibit 59, in fact on 27 December 2010. -- 25 of 27 -- 26 said that the hours that they worked during the week were somewhat restricted because of family commitments (p 1-67), so I suppose any potential purchaser could have taken on more work. The business was returning to the Folsters, by way of wages, dividends or profit, amounts in excess of $50,000 per annum,70 a figure which would have been a few thousand dollars higher had it not been for the defendant’s overcharging. The right to operate a business which was capable of achieving that sort of return must have some value. Mr Folster’s asking price is not evidence of value.71 [84] On the whole, and doing the best I can on the limited evidence available, I consider that the appropriate approach is to assess the value of the business as being more, but not much more, than the amount offered by the defendant to the plaintiff for the business in 2010, which was $40,000 plus vehicle and equipment, and presumably plus stock at value: Exhibit 59. Although the plaintiff may believe that the business had a much higher value than that, I am not persuaded that there is any evidentiary basis for a finding that the market value of the plaintiff’s business as at the date of termination was more than $50,000, plus plant and stock. The defendant was entitled to 10% of the value of any goodwill on any sale, so the realisable value was $45,000, which in my opinion is the correct measure of this part of the damages. [85] Unfortunately I have not been provided with a copy of the balance sheet for the plaintiff’s business, but I note that one document provided by the plaintiff referred to an expenditure on “vehicle lease”, which suggests that the vehicle used in the business was not actually owned by the plaintiff: Exhibit 32. Both that document and Exhibit 34, a profit and loss statement in respect of the business for the years 2009-2012, include significant sums for depreciation, but no detail on the book value of the assets being depreciated. By 2012 however the depreciation had dropped to $1,155.15 for the financial year, which suggests a fairly low book value. There may well have been some equity in the vehicle lease, but it is quite possible that there was none; this is not a matter in respect of which I am able to act without evidence. [86] In short, although there would undoubtedly have been some value in the plant and equipment and stock, in the absence of evidence all I can do is attribute a modest figure to this. I note that stock purchases, that is cleaning materials, were running at about $8,000 per year, and dropped to a bit over $6,600 in the 2011 financial year, so not much should be allowed for stock. Doing the best I can, I assess the value of the van, equipment and stock at $6,000. Accordingly I assess the value of the business lost by the plaintiff at $51,000. There is no suggestion that the defendant purchased the plaintiff’s stock and equipment when the business came to an end. It follows that the plaintiff’s damages due to the wrongful termination of the contract is assessed at $51,000. The total recoverable is $57,770.25. [87] The plaintiff also claimed interest pursuant to the Civil Proceedings Act 2011 s 58 from the date of the claim, which was 28 March 2012. There was no evidence of any actual relevant borrowing costs of the plaintiff, although I note that the profit and loss statements do include entries for interest: Exhibit 34. In the circumstances 70 Exhibit 34. 71 He said he had one serious enquiry but the defendant tried again to change the terms of the contract: Exhibit 38; p 1-65. I must disregard the fact that any potential purchaser would be buying into an unpleasant relationship with a difficult franchisor. -- 26 of 27 -- 27 I will allow interest on the amount recoverable in the sum of $14,590.34.72 There will therefore be judgment that the defendant pay the plaintiff $72,360.59. There is no counterclaim. I will hear submissions on the question of costs after these reasons have been published. 72 This is the figure produced by the interest calculator on the Queensland Courts website. -- 27 of 27 --