Case note: Meetfresh Franchising v Ivanman Pty Ltd

By Sian Harding, Law Clerk and Alicia Hill, Principal, MST Lawyers

The recent decision of Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234 was made in the context of a franchising contract dispute in which the Franchisor terminated the franchise agreement as a result of losing access to the right to use the intellectual property, as this right was revoked by the Head Franchisor.

This case outlined that when framing a breach of contract defence under force majeure clauses, it is vital to be cognisant of the burden of demonstrating that the relevant event was outside of your control. Additionally, when operating under franchise agreements, it is important to be aware of any changes occurring above you in the supply chain that may impact upon your ability to uphold your obligations under a franchise agreement.

Background

The Meet Fresh business involved the sale of traditional Taiwanese desserts, beverages, snacks and other food products and Easy Way Station Co Ltd (Easy Way) was the owner of the Meet Fresh intellectual property. Easy Way granted Meetfresh Australia Pty Ltd (Meetfresh Australia) the right to grant franchises to carry on that business in Australia using the Meet Fresh intellectual property, and Meetfresh Australia granted such a right to Meetfresh Franchising Pty Ltd (Meetfresh). The Appellant, Meetfresh, then granted the Respondent, Ivanman Pty Ltd (Ivanman) a franchise agreement to expire on 31 October 2017 and a licence from Meetfresh to conduct business at a Burwood Premises.

Meetfresh required Ivanman to undertake a fit out of the Premises and made representations that they would not renew the franchising agreement and licence if this did not occur. This fit out was completed at a cost to Ivanman of $119,579.88. Following this, the parties entered into a second franchise agreement, containing a standard force majeure clause.

Ivanman then received notice from Easy Way that Meetfresh Australia was no longer entitled to use the Meet Fresh intellectual property, and subsequently Meetfresh was disentitled to grant any right to use the intellectual property. Meetfresh then authorized Ivanman to continue using the Meet Fresh intellectual property; however a few months later advised that the name of the business was to be changed to Meet Deserts and began supplying Ivanman Meet Desserts rather than Meet Fresh products

When the Burwood Premises licence expired, Meetfresh did not offer a renewal or extension to Ivanman and later served a notice of termination of the franchise agreement and any ‘holding over’ licence to the premises then in existence.

In response, Ivanman brought proceedings against Meetfresh for breach of contract and unconscionable conduct. Meetfresh then, by cross claim, claimed from Ivanman licence fees and other amounts payable amounts under the licence of the premises.

Issues discussed in the appeal

At trial Robison DCJ held that Ivanman was entitled to a judgement for $113,171, being reflective of the amount that Ivanman spent on the fit out of the premises, and dismissed Meetfresh’s cross claim. He also found that the force majeure clause did not exempt Meetfresh from liability as there was a lack of evidence provided to indicate the loss of the right to use the Meet Fresh intellectual property was outside Meetfresh’s control. Finally Robison DCJ found that Meetfresh engaged in unconscionable conduct within the meaning of s 21 of Schedule 2 of the Competition and Consumer Act 2010 (Cth).

The primary issues of relevance of Meetfresh’s appeal were:

• whether trial judge erred in finding that the force majeure clause was inapplicable,
• whether he erred in his calculation of the damages awarded, and
• whether he erred in dismissing the cross-claim of Meetfresh.

The applicability of the force majeure clause

The NSW Court of Appeal upheld the decision of the trial judge that the force majeure clause was not applicability to excuse Meetfresh’s breach of the second franchise agreement.

Their Honours held that the onus is upon Meetfresh to demonstrate that the events leading to the termination of their ability to use the Meet Fresh intellectual property was outside their control.

Although Meetfresh Australia existed as a company between Easy Way and Meetfresh, this did not discharge Meetfresh’s onus to demonstrate that events were outside their control. The trial judge observed that the termination of the ability to use Meet Fresh intellectual property arose from a dispute regarding stock with Easy Way yet the responsibility or lack thereof of Meetfresh in the dispute was left completely unproven.

This is demonstrative of the importance when running an argument under a force majeure clause of positively outlining how exactly the responsibility for the vitiating event is outside the party’s control.

The quantum of damages

Robison DCJ outlined that the damages were to be calculated in reference to Ivanman’s costs of refitting the premises that were incurred in response to Meetfresh’s threat not to extend the franchise agreement if the refit was not undertaken. This is in contrast to the usual expectation damages that arise in contract disputes, and instead focuses upon the reliance of Ivanman upon Meetfresh’s representations in incurring the cost.

This method of calculating damages was recognized by Commonwealth v Amann Aviation Pty Ltd in 1991 and assumes that the plaintiff would have at least recovered the expenditure in the future.

The Court of Appeal recognized that therefore the onus of proof rests on the party that breached the contract to show that it was unlikely that the other party would, in the future, have earned sufficient revenue to cover the expenditure.

In deciding that Meetfresh did not discharge the above burden, the Court of Appeal focused upon the circumstances in which Ivanman sought the second franchise agreement, outlining that it can at least be assumed that they would not have undertaken the refit and sought an extension to the agreement if they did not anticipate that they would at least recover the costs of the refit. Meetfresh’s arguments that Ivanman’s business was not doing well and had not yet made a net profit thus was not going to recover the cost of the refit was therefore ineffective.

The cross-claim made by Meetfresh

Meetfresh claimed that Ivanman’s obligations under the licence agreement for the premises were independent of any obligations under the franchise agreement, and thus any breaches of Meetfresh to the franchise agreement were irrelevant to Ivanman’s liability under the licence agreement.

The Court of Appeal agreed with Ivanman’s argument that they were interdependent (save for $6,146.23) and focused upon the form of the licence agreement. The licence agreement was inextricably linked because the premises were licensed for the sole purpose of Ivanman carrying on the franchise business. Ivanman was in fact obligated to carry on that business under the licence. Thus, Ivanman’s performance of its obligations under the licence was contingent and dependent upon Meetfresh’s obligations under the franchise agreement.

Meetfresh’s appeal was dismissed on all grounds, bar that Ivanman was liable for $6,146.23 which they admitted to in their pleadings.

Implications for Franchisors

This case is demonstrative of the burden of proof that Franchisor’s may face when arguing a defence under a force majeure clause. It also notes the importance to be aware of any disputes further up in the chain in a franchise system that may impact upon your ability to uphold your franchising agreements.

If you have any queries regarding your obligations as a franchisor, please do not hesitate to contact Alicia Hill on 03 8540 0200 or alicia.hill@mst.com.au