Allphones Retail Pty Ltd V Hoy Mobile Pty Ltd [2009] FCAFC 85
The Parties
Allphones Retail Pty Ltd (Allphones) franchises a mobile phone business retailing mobile phones with the choice of numerous carriers. Hoy Mobile Pty Ltd (Hoy) was one of Allphone’s franchisees conducting its Allphones franchise business from Eastgardens Westfield Shopping Centre under a franchise agreement (Agreement).
Hoy took action against Allphones challenging various aspects of Allphones’ conduct as franchisor. Allphones then appealed the initial decision and during the appeal the Federal Court held that the Agreement was effectively terminated.
Key Points
- This case reflects the significance of the franchisor’s and franchisee’s agreed contractual rights and the courts’ preference to uphold the parties’ agreed terms. While a franchise agreement is not entered into with the intention of early termination it is important to clearly identify those circumstances which give the other party a right of termination (within the parameters of the Franchising Code of Conduct).
- In this case, the dishonesty of one party did not prevent them exercising contractual rights arising out of the dishonesty of the other.
The Initial Decision
The initial proceedings mainly focused on Allphones’ entitlement to make deductions of monies due by Allphones as franchisor to Hoy. The three main alleged unauthorised deductions were as follows:
- The first related to a commission received by Allphones from various carriers upon the activation of an account by a customer resulting from a sale through an Allphones store (MTSC commission). Under the Agreement, Allphones was obliged to pay 72.5% of any MTSC commission received to Hoy. In May 2004 Optus offered to pay Allphones a bonus payment of $150 every new post-paid phone activation in the three month period between May and July 2004 (Optus Stretch Bonus). Allphones did not treat the Optus Stretch Bonus as being part of the MTSC commission so did not pass any of it on to Hoy and Hoy objected to this.
- The second alleged unauthorised deduction related to the commission of $30 paid by Optus to Allphones when the contracts of Optus’ customers expired and the customer renewed their contract. Allphones took the view that this commission did not relate to a sale from Hoy Mobile’s store and was not part of the MTSC commission (72.5% of which would need to be given to Hoy) as the renewal occurred over the telephone. Upon such a renewal, however, Allphones continued to pass on to Hoy Mobile 72.5% of another commission received by it from Optus which was a commission based on the customers’ use of the mobile phone service (MTAC). When Allphones passed on the MTAC for the renewing customers, it deducted a $50 administration fee and a further fee of $11 for courier costs for any delivery of a new handset. Hoy Mobile objected to Allphones deducting the administration fee and further fee.
- The third alleged unauthorised deduction arose from a decision by Allphones to change the appearance of its stores. Allphones made monthly deductions from commissions due to Hoy to the costs of the “refresh” programme. These deductions ultimately totalled $9,973.37 and Hoy objected to Allphone’s right to make these deductions.
A further issue that was considered was that Hoy acted in a fraudulent manner by “unlocking” mobile phones. Unlocking is a practice where mobile phones that were meant to be sold packaged to a particular network are disconnected and sold as mobile phones to be connected to any network. The primary judge found that this fraudulent practice gained Hoy about $32,000. On 28August 2006 Allphones sought to terminate the Agreement on the basis of Hoy’s fraud.
The primary judge found that:
- Allphones had no entitlement to omit the Optus stretch bonus from Hoy Mobile’s entitlement to MTSC and that Allphones’ dealings with the Optus stretch bonus were deceitful. Consequently, the primary judge found that Allphones had repudiated the Franchise Agreement.
- Allphones was not entitled to deduct the amounts it deducted from the renewal payments received from Optus.
- Allphones was entitled to deduct a reasonable figure to cover the store refresh costs however the amount deducted ($9,973.37) was not reasonable and therefore not authorised under the Agreement.
- Although Hoy was guilty of fraud by unlocking the mobile phones, Allphones’ express power to terminate because of that fraud could not be exercised as a party which had repudiated an Agreement (as it was found that Allphones had) was not entitled to exercise an express power under the same agreement.
The Appeal
Issues that were addressed in the appeal include the following:
Allphones’ Dishonesty
It was found by the primary judge that Allphones’ failure to pass on the Optus Stretch Bonus was dishonest. Allphones submitted in the appeal that as the question of dishonesty was not raised by Hoy it was not a finding to be made. The Federal Court found that Allphones had raised the issue as it discussed the genuineness of its belief that the Agreement allowed it not to pass on the Optus Stretch Bonus. Having put the genuineness of its belief in dispute it was open to Hoy Mobile to contest that issue and the primary judge to make its finding.
The Repudiation Issue
The primary Judge found that Allphones repudiated the Agreement by withholding Hoy’s share of the Optus Stretch bonus. Allphones made two submissions in respect of the Primary Judge’s finding:
- its actions were based on its interpretation of the Agreement and could not be said to evince an intention not to be bound by the Agreement; and
- the obligation to pay the Optus Stretch bonus was not an essential term of the Agreement. The Full Federal Court supported the primary Judge and confirmed that a right to terminate does arise upon a breach of a fundamental or essential term of a contract (however there is no need that the term be an essential term). The Federal Court also stated that a right to terminate can also arise where a party evinces an intention no longer to be bound by the terms of a contract. The Federal Court found that Allphones did repudiate the Agreement however the Agreement was not terminated at that point.
The Right to Terminate Issue
The primary Judge found that although Hoy acted fraudulently by unlocking mobile phones permitting Allphones to exercise the express right to terminate the Agreement, as a matter of common law that right could not be exercised when Allphones had repudiated the agreement.
Allphones argued that the common law position was not relevant because Allphones had relied upon an express contractual right of termination. The Federal Court agreed that it was not necessary to reach a view on the position at common law as it had “no impact on the position of express powers of termination”. The Federal Court disagreed with the primary Judge and reasoned that it would not be correct for a party with an express contractual right of termination for another party’s fraud to be locked into an ‘inescapable bargain’ with the party as a result of an act of repudiation that may be trivial.
Further Perram J (in the appeal judgment) stated that parties could, by agreement, expressly provide that the rights of termination conferred under the agreement could be exercised, even where the party seeking to rely upon the power had repudiated the agreement. The Federal Court found that Allphones had the right to terminate the Agreement in accordance with clause 9.3(viii) of the Agreement (which stated that the Franchisor may terminate the Agreement where the Franchisee is fraudulent).
The Injunction Issue
The primary Judge granted Hoy an injunction restraining Allphones from terminating the agreement pursuant to s87 of the Trade Practices Act 1974 (Cth) (Act). Section 87 authorises the granting of an injunction to prevent or reduce loss or damage caused by conduct in contravention of the Act. Section51AC of the Act prohibits unconscionable conduct in business transactions and the primary Judge found that Allphones had engaged in such conduct.
Allphones submitted that the primary judge erred in restraining the termination of the agreement because he had not concluded that the termination of the agreement would be unconscionable. Allphones argued that the conduct characterised by the primary judge as unconscionable was its dishonest retention of portions of Hoy Mobile’s commissions (that is, the Optus stretch bonus) together with various acts of bullying and oppression. These, Allphones submitted, were not causally connected to the termination of the agreement and an injunction restraining that termination did nothing to reduce or prevent the loss or damage flowing from the unconscionable conduct identified.
The majority of the Federal Court found that Allphones’ contractual right to terminate the Agreement could not constitute unconscionable conduct under s51AC and the instances of unconscionable conduct had no nexus or causal relationship with Allphones decision to terminate the Agreement. If Allphones did not cause or contribute to the fraudulent conduct which gave rise to its entitlement to terminate the agreement (Hoy’s unlocking of mobile phones), there could be no causal connection between the unconscionable conduct and the termination of the agreement. The Federal Court set aside the primary Judges order and found that Allphones was entitled to terminate the Agreement and the Agreement was so terminated on 28 August 2006.
The Store Refresh Charge Issue
The primary judge concluded that Allphones was not entitled to deduct a charge from Hoy’s commission to fund the “refreshing” of Hoy Mobile’s store because it had not proved the sum deducted was reasonable. Allphones submitted that that the reasonableness of the charge has not been an issue at trial and that there was evidence before the primary judge that the charge was reasonable.
The Federal Court found that the reasonableness of the charge was not an issue to be dealt with as the case was run in a way that departed from the question of reasonableness of the Store Refresh Charge. The Federal Court overturned the primary judge’s decision.
Other litigation involving Allphones
The ACCC has taken action against Allphones, including a class action on behalf of current and former franchisees. These actions are reported on the ACCC’s website, http://www.accc.gov.au/, and we will comment on them once they reach a conclusion.
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