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Not Every Breach Entitles You To Damages

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By Krisha Reddy, Law Clerk MST Lawyers and Alicia Hill, Principal, MST Lawyers

The recent decision of the NSW Court of Appeal in BB Australia Pty Ltd v Danset Pty Ltd [2018] NSWCA 101 found that while there had been a clear breach of the franchise agreement, the franchisor had failed to show that they had incurred a loss or that a fiduciary duty had been breached, and thus, was unable to recoup damages. This finding demonstrates how the circumstances of a case can affect the remedies available for any breach.

The Factual Background

In October 2002, BB Australia Pty Ltd (BBA) entered into a 10-year franchise agreement with Danset Pty Ltd (Danset) for a Blockbuster rental business.

The franchise agreement stated that Danset could not transfer the franchise without BBA’s consent. BBA also had an option to purchase the assets upon termination of the agreement, expiration of the agreement, or sale of the business by Danset.

In October 2010, Danset without the knowledge or consent of BBA sold the assets of the Blockbuster franchise to Tresblue Pty Ltd (Tresblue) for $280,000.

Tresblue, who operated a Civic video rental business nearby, took over the store and began operating it under the Civic brand.

BBA terminated the franchise agreement with Danset.

The Issues on Appeal

The NSW Court of Appeal had to determine whether:

  • Danset was a trustee of the property for BBA and if so, whether Danset was required to hold the assets or profit from the sale of the assets on trust for BBA;
  • BBA had suffered any loss as a result of the sale which would entitle them to compensation from Danset.

Trust over Property

BBA claimed that the franchise assets had been subject to a trust in their favour and that it was entitled to equitable remedies due to the unauthorised sale of those assets by Danset.

The primary judge found that no trustee relationship arose in regards to the so-called ‘Option to Purchase Trust’.

On appeal, BBA submitted that the legal owner of property subject to a contract for sale/option to purchase is a trustee of the property for the purchaser/optionee.

The Court stated that Danset could not be held to be a trustee of mere chattels, such as DVDs and video games, which were not unique or rare. Equity would not give specific performance or an injunction in regards to such assets.

The Court found that the holder of an unexercised option to purchase assets has an equitable interest in the assets but that this does not provide the foundation for a claim to specific performance nor entitle the non-breaching party to receive an account of profits or equitable compensation.

In order to receive some form of equitable compensation, a trustee/fiduciary duty is required, not a mere equitable interest.

In this case, the franchising contract expressly excluded any such trustee / fiduciary relationship.

Loss on Sale

BBA argued that due to Danset’s breach of contract, BBA was unable to exercise its option to purchase the assets of the business for later resale and claimed to have suffered a loss.

The primary judge found that even if BBA had purchased the assets, there was no evidence that these could be sold at a profit.

There had been a ‘steady and inexorable decline’ in Blockbuster stores in Australia between 2007 and 2016, from 339 to 47.  There was also no difference in the primary judge’s view between the value of the assets sold and the price that would have been payable upon exercising the option.

On appeal, it was confirmed that the $280,000 paid for the assets was the fair market value for those assets at the time and BBA would not have obtained any profit from the sale of those assets if it had exercised its option obtained possession and then resold them. As such, BBA failed to show any loss resulting from Danset’s breach.

The appeal was dismissed, and no remedies were available to BBA despite there being a clear breach of the term of the franchise agreement.

Practical Implications

The decision reiterates that remedies are dependent on the circumstances of the case. Even if there is a clear breach of the franchise agreement, damages will not necessarily be awarded if loss cannot be shown.

If you have any questions about the content of this article or issues raised by it, please feel free to contact us by email or call us on +61 3 8540 0200.