Meridian Retail v Australian Unity Retail Network [2006] VSC 223

What the court decided

Meridian operated an Australian Unity franchise at the Chadstone Shopping Centre under a franchise agreement dated 10 October 2003 [1]. The franchisor could, in its absolute discretion and by notice in writing, remove or add Products, including Essential Products [25]. It could terminate on three months' notice where, in its reasonable opinion, the network was no longer viable as contemplated, with significant change compensation then payable [26].

On 21 April 2005 the franchisor's Mr Stow addressed a meeting of franchisees at its head office [105]. His evidence was that he said existing agreements would be honoured but that on rollover the franchisor would look to new agreements "much more financial planning centric" [106]. The plaintiff's witnesses said that he stated, or conveyed the impression, that health insurance, general insurance and banking products would be withdrawn after the initial term [7]. By the date of the notice of termination the plaintiff was the only remaining franchisee in a network that had comprised ten franchises [4]. The notice was dated in October 2005 and was effective from 30 June 2006 [1].

The plaintiff alleged that the franchisor had engineered the significant change to force out the franchisees, in breach of an implied term of good faith [5]. It also alleged contraventions of section 52 and section 51AC of the Trade Practices Act 1974 (Cth) [8]. At trial it argued that the franchisor could not rely on non-viability because that condition had been achieved by its earlier breach [14].

Her Honour preferred the evidence of Mr Stow and of Ms Guy, a manager in the Australian Unity group who also attended, where it conflicted [109], [140]. She was not persuaded that he stated that health insurance products would be removed after rollover, or at all [215]. The statements he gave evidence of making could not reasonably be construed or intended as a threat to render the franchise businesses unviable [144].

Three franchises were surrendered before, and unconnected with, the meeting [215]. The plaintiff did not surrender its franchise as a result of statements made at the meeting [215]. Three franchisees surrendered as a result of the meeting, but not because of improper, unfair or unreasonable conduct or a threat of it [216]. The franchisor did not bully or pressure those three to surrender or to accept unfair terms or an unfair price [216]. Mr Stow formed the view on reasonable grounds that the network was non-existent or unviable, entitling the franchisor to serve the notice [217]. Her Honour was not persuaded that, although he desired the end of the franchises, he engaged in any improper, exploitative or unfair conduct to achieve it [218].

The franchisee had no contractual entitlement to an extension on the same terms, and the franchisor had an absolute discretion to add or remove products [219], [220]. Its intention to change conditions after rollover was an intended exercise of its contractual powers for a legitimate commercial purpose [221].

It was not established that these franchisees were vulnerable or substantially disadvantaged, though her Honour noted authorities indicating that implication may be particularly appropriate in franchise relationships [211]. In remarks not necessary to the decision, she considered that, assuming vulnerability, the term would preclude using or threatening to use the "literally unqualified power" to remove a vital product to secure a premature end at an undervalue [212]. In the same remarks she considered that if a breach materially contributed to satisfying the termination precondition, equity would preclude reliance on it or treat it as tainted [213]. It was unnecessary to decide whether the term was implied, because there was no breach on the facts found [214].

The Trade Practices Act claims were likewise not established on the facts [222]. The franchisor was entitled to serve, and may rely upon, its notice of termination, so the claims should be dismissed [223].

Why it matters

The result is fact-bound: the franchisor's opinion of non-viability was formed on reasonable grounds after every other franchisee had surrendered, and the existence of the term was left open [214], [217]. Her Honour's remarks, made on the assumption that the franchisees were vulnerable, suggest that threatening such a power to force franchisees out at an undervalue would breach the term, and that a franchisor may be unable to rely on a condition its own breach helped satisfy [212], [213].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.