LAW:International Business Transactions

Problem-Question Scenario:
Assume SMART Invention (SI), a US based company, gained significant trans-border reputation for it two distinctive brands: Paddy and Monda. In 2012, it decided to expand its market in Australia via two different modes of business such as franchising and licensing. Accordingly, SI entered into a franchise agreement with SOMA Pty Ltd in Sydney on 24 March 2012 for a period of four years. The agreement entitled SOMA to produce and sell Paddy across the nation by requiring it (SOMA) to inter alia, open two outlets in different locations of NSW subject to the approval and limited operational support of SI. On 11 April 2012, SI signed another licence agreement with High-Tech, a Melbourne based Australian company. SI while granting the power to manufacture Monda for a period of three years in return for a royalty accepted an undertaking from High-Tech that ‘the agreement does not intend to create a franchise relationship but requires High-Tech to follow a specific system of manufacturing plan approved by SI based on its financial and operational support.’

In March 2014, just after two years, SI realised that it could not afford any operational support to SOMA due to its huge financial loss incurred from several businesses with Elite, a UK based company, of which SOMA was not informed. Consequently, SI terminated the agreement. SOMA wishes to go for a legal battle. SI’s financial hardship with its various franchisees including SOMA eventually affected its (SI) ability to continue the licence agreement with High-Tech. Consequently, SI failed to provide High-Tech with the required operational support that led to the demise of Monda production in Melbourne. High-Tech is planning to go for a legal battle as it has already invested AUS$ 5 million in this project.

Frustrated and in despair, SI would like to proceed now with other modes of operating business overseas such as agency and distributorship but is worried about the start-up and operating cost and risk factors involved in those modes. Meanwhile, a number of companies from China and India have expressed their interest in using its brand name Paddy. SI, however, is unsure of what to do as it is yet to study the relevant factors.

Answer the following:

1. What are the possible legal issues raised in the above scenario from the perspective of International Business Transactions? Identify and examine briefly statutory and judicial authorities in Australia that could be relevant to adequately deal with those issues.

2. Advise SI and SOMA as to:

2.1. Whether SI has breached any statutory or common law duties to SOMA by:
(i) terminating the agreement;
(ii) not disclosing its business engagement with Elite and

Analyse the above issues with special reference to Competition and Consumer Act 2010 and leading judicial decisions in Australia.

3. Whether High-Tech has a strong case against SI. What grounds does High-Tech need to establish in order to obtain favourable remedies? What are other issues that may also arise in determining the ‘nature’ of the deed and the obligations of SI towards High-Tech? Support your argument by relying on relevant laws and judicial decisions.

4. What policy and legal consideration should be taken into account in expanding business abroad through agency and distributorship? Would you advise SI to negotiate separate agreements with those foreign companies for manufacturing and distributing Paddy? Why or why not?

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