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Competition Law

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Focus: Far Horizons Pty Ltd and Rodney Hackett v McDonald's Australia Ltd

5 September 2000

In brief: This is a summary of the judgment of the Supreme Court of Victoria (Commercial and Equity Division) in Far Horizons Pty Ltd and Rodney Hackett v McDonald's Australia Ltd ( 2000 VSC 310). Judge J. Bryne presided.

Questions raised

Whether the decision of McDonald's to open two new stores in the vicinity of two stores of Hackett, an existing McDonald's licensee, had:

  1. breached various duties owned by McDonald's to Hackett;
  2. breached various implied terms in the licence agreements;
  3. not applied McDonald's store 'expansion policy' honestly, reasonably and fairly;
  4. breached clause 5.01 of the licence agreement under which McDonald's was obliged to advise and consult with Hackett and make available all additional services, facilities etc which it makes available to other licensees;
  5. breached S 51 AA of the Trade Practices Act 1974 (unconscionable conduct); and
  6. breached S 52 of the Act (misleading and deceptive conduct).

Facts

Plaintiff no 2 was the owner of plaintiff no 1 company which had the licence for 2 McDonald's stores at Fountain Gate and Endeavour Hills in Victoria. Under the licence agreements all licensees including the plaintiffs were required to conform to McDonald's standards relating to food quality, food presentation, staffing, training etc.

The terms of the licence agreements did not constrain McDonald's in any manner from opening new stores. The licensee also had no right to be considered for the licence of any new stores and no exclusive right to trade in any area beyond the geographical area of the store..

Under McDonald's 'expansion policy', however, an existing licensee could qualify for grant of an additional licence if it satisfied 7 parameters such as food and service quality, staff , financial capability, reinvestment capability, positive contribution and operator involvement.

From 1994 onwards, whilst reviewing the plaintiffs' operations, as provided in the licence agreements, McDonald's had given adverse ratings on some of the specified parameters. The plaintiffs refused to acknowledge the shortcomings and afterwards there were a number of incidents which led to a breakdown of the relationship between the 2 parties.

As a part of its policy of expansion, in mid 1995 McDonald's decided to open 2 new stores, one at Fountain Gate food court in a shopping complex 800m from the plaintiffs' Fountain Gate store and the other at Berwick, 4.5 km from the plaintiffs' other store.

The plaintiffs were informed in early 1996 about McDonald's proposal to open the first store in mid 1996 and the other at the end of 1996 and were also told that they were not being offered the licences.

The plaintiffs commenced proceedings in the Supreme Court of Victoria seeking damages alleging that the decision not to award the new stores to them was actuated by McDonald's bad faith and with a view to damage their business and to compel them to give up their existing stores to McDonald's.

Subsequent to the commencement of the litigation, McDonald's decided not to open the Golden Gate store but opened the store at Berwick at the end of 1996.

Findings

McDonald's decision to open the new stores and not to offer the plaintiffs the licence for these stores was not substantially motivated by an intent to prejudice the plaintiffs or to drive them out of the system or to make an example for other licensees;

  1. McDonald's was not precluded from opening new stores and the licensees were not given any territorial exclusivity for their stores;
  2. The alleged breach of duties owed by McDonald's to the plaintiffs such as not to open a restaurant so as to affect the profitability of the plaintiffs or alternatively to first offer the licence to the plaintiffs, and only afterwards offer it to others was rejected as the plaintiffs had not established McDonald's bad faith;
  3. The alleged breach of the duty not to use the financial and confidential information of the plaintiffs in deciding whether to open a new store was also unsustainable as the plaintiffs were contractually bound to furnish the information to McDonald's and McDonald's was not precluded from using this information to plan its growth strategy;
  4. The provisions in the contract relating to 'advising and consulting' were in connection with the operation of the restaurants and did not restrict McDonald's decision to offer new restaurants to the plaintiffs;
  5. Both parties knew when they were entering into the licence agreements that the opening of new stores was an ordinary part of the McDonald's way of doing business and that it would in many cases involve an impact on the business of existing licensees.

The other pleas of misleading conduct and unconscionability were rejected by the court.

Conclusion

The plaintiffs' claim for damages was dismissed with costs. The plaintiffs continue to operate as a McDonald's licensee.

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