What's New in Franchising - July 2010

The New South Wales Court of Appeal in Camden Video Pty Ltd v Civic Video Pty Ltd [2010] NSWCA 122 illustrates the responsibility placed on Franchisors to establish that where a franchise agreement allows for reasonable estimates to be made in the calculation of fees, these estimates are in fact reasonable.

Ultimately, the Court held that where information of actual turnover was readily available to the Franchisor, the Franchisor cannot make a reasonable estimate of turnover by reference to unspecified and unsubstantiated alternative methods. Reference must be made to the available information.

Issue

Camden as Franchisee, entered into a franchise agreement with Civic, a Franchisor.

Civic terminated the agreement on 15 May 2010 on the ground of Camden’s repudiation of it after Camden abandoned its business.

It was 16 months and eight days before a new franchise began operating in the same location. Civic then commended proceedings against Camden for franchise and advertising fees owing at the date of termination and damages based on an estimated turnover of $680,000 per annum.

The principal issue was whether or not the estimate of turnover was reasonable in quantifying damages suffered.

Facts

During the operation of the franchise, Camden did not submit Quarterly Reports required by clause 11.4(b) of the agreement and Civic rendered invoices for franchise and advertising fees on the basis of what they claimed were reasonable estimates of Quarterly Turnover made pursuant to clause 5.4(b).

Evidence showed that these estimates made by Civic were 50% more than the actual turnover of the business, and the evidence also showed that Civic’s business managers had complete access to Camden’s terminals at the store which recorded its turnover.

In respect of many of the disputed months, these managers had prepared reports to Civic which set out Camden’s actual turnover for these months.

Civic’s national CFO, Mr Perios, explained that he made these estimates in the following way:

“we look at the store, look at comparable stores around the country. We look at the buying of the store – you know, how many copies of movies they buy. We look at the discounts that are subsequently received by the store because of their buying and its not just myself that sits down and estimates. There’s a process whereby there’s myself, the general manager and the managing director that go through the figures and determine, you know, an estimate for the store. We also have key performance indicators for every state and national indicators that tell us the movement of turnover for all our stores across the country, so we use those indicators in order to arrive at estimates”.

The primary judge held that because Camden did not comply with its obligation to provide returns it was reasonable for Civic to have assessed the turnover as it did. On that basis the primary judge found Civic was entitled to $70,000 plus costs.

Appeal

The appellants submitted that for two reasons Civic did not establish that its estimates were reasonable, and the primary judge was in error in holding that it had.

First, it was unreasonable for Civic not to have regard to information it had as to the actual turnover.

Second, Civic’s responsibility to prove reasonableness was not discharged by the mere assertions of Mr Peris that it was based on comparison with other stores, in the absence of admissible, or indeed any, evidence as to the performance of those other stores.

Findings

In the Court of Appeal Hodgson JA held that the primary judge was in error in holding that Civic had established that reasonable estimates had been made.

The court said that it was the responsibility of Civic to establish that the estimates made were reasonable in an objective sense. Civic should have done so by leading evidence of matters on the basis of which the Court could conclude the estimate was reasonable, or possibly by leading opinion evidence from someone qualified to give that evidence.

Mr Peris did not give evidence of experience which could qualify him to give an expert opinion as to the reasonableness of his estimate. Had evidence been led as to the actual turnover of actual franchises, the Court may have been able to draw a conclusion as to reasonableness, but here was no such evidence.

Hodgson JA also held that it was not reasonable throughout the whole period to have no regard to actual turnover where Mr Peris knew he could have access to information of that kind.

Allsop P agreed, adding that the question of reasonableness is to be understood in a business sense and informed in part by the inability under the contract to review it downwards.

This did not mean that the Franchisor had to “necessarily ransack” the records of the Franchisee rather than using another method. In this case, there was clear access to information that was apparently available without any apparent difficulty.

Thus, the Court found that to estimate by reference to “unspecified and unsubstantiated alternative sties, not illuminated in evidence, did not establish that the estimates of turnover and thus damages made were reasonable”.

This decision highlights that the responsibility placed on a Franchisor to illustrate by example a basis for its reasonable estimates that will not be easily displaced.

Whilst Franchisors do not need to go out of their way to access Franchisee information which may further inform their calculations, where this information is readily available, the Franchisor cannot turn a blind eye in order to further their own commercial interests.

It is therefore seemingly necessary for Franchisor’s to ensure that systems are in place such that reasonable enquiries are made to obtain legitimate and accurate information which may assist them in producing a estimates that will stand up in any subsequent court challenge.

Where this information is not readily available however, the Court appears to imply that the manner in which Civic produced their reasonable estimates, based on similar companies and circumstances, may suffice.

© DibbsBarker 2009