In brief

  • Whether a Chinese subsidiary of an Australian group of companies was ‘carrying on business’ in Australia was a central question in this application to strike out a claim involving alleged contraventions under the former Trade Practices Act 1974 (Cth).
  • In refusing to summarily dispose of the claim, the Court indicated that in determining this question it will weigh up a range of factors relevant to the case including control, corporate structure, registration as a foreign corporation and physical presence.

Summary

Manhattan (Asia) Limited v Dymocks Franchise Systems (China) Limited [2014] FCA 1143.

On 27 October 2014 Farrell J of the Federal Court of Australia handed down judgment on an application by Dymocks Franchise Systems (China) Limited (DFS China) to strike out a statement of claim filed against it by Manhattan (Asia) Limited (Manhattan). 

In determining the application, the court examined, in circumstances where both the applicant and the defendant were foreign companies, whether the court had jurisdiction to hear a matter involving allegations of contraventions of s 52 and 59 of the Trade Practices Act 1974 (Cth) (TPA) (the precursor to the Consumer and Competition Act 2010 (Cth) (CCA)).   Relevant to the examination was the question as to whether DFS China was carrying on business in Australia.

The claims arose out of franchise and leasing arrangements for businesses in Hong Kong.  The matter came before the Federal Court because the relevant franchise agreements were governed by New South Wales law and contained a New South Wales jurisdiction clause.  DFS China had not objected to the court’s jurisdiction.

The parties acknowledged that the impugned conduct took place outside of Australia and that because it was a foreign company, ss 52 and s 59 of the TPA would only apply to DFS China if DFS China was carrying on business in Australia at the relevant time and the alleged representations (said to constitute the conduct) occurred in trade or commerce between Australia and a place outside of Australia.

Manhattan claimed that DFS China was controlled by two persons who were Australian citizens or ordinarily resident in Australia, that all matters relating to the operations of [DFS China] in Hong Kong were subject to the approval or ratification of those persons in Australia and that persons in Australia acting on behalf of DFS China were in regular contact with representatives of Manhattan by phone and email.  Manhattan further submitted that DFS China carried on business in Australia through the conduct of its parent and sister companies (which were incorporated in Australia) because employees of those companies performed their functions as part of the international group. 

DFS China filed affidavit evidence in relation to its operations.  Amongst other things, the general counsel of the parent company deposed that DFS China is, through a non-Australian intermediate holding company, owned as to 55% by [the parent company) and 45% by the South China Morning Post, that DFS China is not registered as a foreign corporation in Australia, that the business of DFS China is to set up franchises in Hong Kong, that the staff who carry on the business are all based in Hong Kong and that DFS China does not carry on its activities in Australia.

Farrell J accepted that the factors to which the general counsel deposed indicated that DFS China’s business was conducted in Hong Kong, but did not answer definitively whether DFS China was carrying on business in Australia through the international Dymocks group.  His Honour noted further that the fact that DFS China was not registered in Australia was again not definitive evidence that it was not carrying on business in Australia.  In evaluating the case law referenced by the parties in submission, Farrell J said that it:

relies on factual matters which are predominantly of a kind which would more readily support a conclusion that Australian based entities in the Dymocks Group of Companies may have been carrying on business in Hong Kong, rather than that DFS China was carrying on business in Australia.

observing that:

… the resolution of the questions of whether a parent operates through the agency of a subsidiary or (much more unusually) whether a subsidiary acts through the agency of a parent or a sibling subsidiary will always rely on the facts of how the group entities operate.

and:

… it would not be enough for Manhattan to show that DFS China’s operations may have been subject to supervision or control from its Australian parent.

His Honour cited and relied, inter alia, on the decision of the Victorian Court of Appeal in Sunland Waterfront (BVI) Limited v Prudentia Investments Pty Ltd [2013] VSCA 237, noting that having regard to the reasons in that case, it may be difficult for Manhattan to establish its contention that DFS China carried on business in Australia through the Dymocks Group of Companies, or engaged in trade or commerce between Australia and Hong Kong.  However, his Honour said that the question before the court in relation to the strike out application was only whether it would be open to Manhattan, on the pleadings, to prove facts at the trial which would constitute a cause of action; his Honour therefore did not express a concluded view as to whether the activities of DFS China were sufficient to demonstrate that it was carrying on business in Australia for the purposes of the TPA.  His Honour concluded that the claim ought not be disposed of on a summary basis, adding that DFS China had not yet filed a defence and that there may be further evidence come to light which impacted on the relevant factual analysis.

The decision leaves open the question as to whether a subsidiary company operating, on its face, wholly outside of Australia, but with links to Australia through its corporate structure, might be found for the purposes of the TPA (and now the CCA) to be carrying on business in Australia.  The judgment demonstrates that the court in determining this question will focus on the specific facts of each case and that facts such as registration as a foreign corporation or physical presence will not be sufficient to dispose or prove the relevant connection.