A1 Chemicals Pty Limited v Loremo Pty Limited

Court of Appeal (NSW)|2016-02-15|Before: Leeming JA, Simpson JA

Background

Loremo manufactures and imports a range of industrial chemicals for use in commercial and domestic applications. Loremo trades under the name "Cyndan Manufacturing".
Hampic is responsible for the distribution of chemicals to customers throughout Australia. It provides a range of support services to distribution agents, such as warehousing, sales training and invoicing. Hampic trades under the name "Cyndan Chemicals".
A1 is a competitor of the respondents. It was founded in 1999 by former employees of the respondents.
In November 2007, the respondents commenced Federal Court proceedings against A1 and Mr Russell, a former distribution agent of Loremo. The respondents alleged that Mr Russell had acted as a distribution agent for A1 and in doing so used confidential information of the respondents to procure customers on behalf of A1.
The Federal Court proceedings were compromised and consent orders were made on 17 December 2007. As part of the settlement, the respondents and A1, together with Mr Russell, executed the Deed. Clause 2.2 of the Deed relevantly provided as follows: "2.2.1 A1 agrees that it will not employ, appoint or supply any person, company or other entity who or which has been a Cyndan Distributor for at least one (1) year after that person, company or other entity has ceased to be a Cyndan Distributor. 2.2.2 A1 further agrees not to employ, appoint or supply any person, company or other entity who or which has at any time prior to the twelve (12) months referred to in clause 2.2.1 been a Cyndan Distributor without Loremo's prior written consent which consent will not be unreasonably withheld."
The Deed defined "Cyndan Distributor" to mean "a distributor of Loremo's products pursuant to a distribution agreement with Loremo".
On 15 October 2013, the respondents commenced proceedings against A1 in the District Court. The statement of claim alleged that in or about September 2012, A1 commenced to engage and thereafter continued to engage Twin Distributors Pty Ltd (Twin), a Cyndan Distributor, as a distributor of its own products without the respondents' consent. A1's conduct was said to constitute a breach and continuing breach of both cll 2.2.1 and 2.2.2 of the Deed. The respondents claimed damages for loss of business and the lost opportunity to earn profits from the customers of Twin Distributors.

Primary Judgment

The primary Judge, in a commendably concise judgment, addressed a number of issues. (i) Her Honour found that Twin, before starting its relationship with A1, had entered into an agreement with the respondents. Her Honour found that the original agreement was between the respondents and Mr Piper, a director of Twin, but that the respondents had subsequently entered into an agreement with Twin. Pursuant to that agreement, between 1 July 2011 and September 2012, Twin made sales on behalf of the respondents totalling $171,685.34. In making these findings, the primary Judge did not distinguish between the respondents. (ii) The primary Judge found that the agreement between the respondents and Twin was a "distribution agreement", and that Twin was a "Cyndan Distributor" for the purposes of the Deed. Her Honour rejected Twin's submission that it was merely a commission agent and that it had never been party to a distribution agreement. (iii) Her Honour found that A1 had appointed Twin under an agreement whereby A1 would pay it commission on orders forwarded by Twin to A1. The appointment of Twin occurred no later than 11 September 2012. (iv) Her Honour concluded that by reason of these findings, A1 breached both cll 2.2.1 and 2.2.2 and remained in breach of those provisions at the date of the trial. (v) Contrary to A1's submissions, in her Honour's view, the common law doctrine of restraint of trade did not apply to the relevant provisions of the Deed. This was because the public policy in favour of settlement of litigation rendered the restraint of trade doctrine inapplicable to the Deed. (vi) Even if the doctrine applied to the Deed, the primary Judge considered that the restraints imposed by cl 2.2 were reasonable in the interests of the parties and were not too broad. In any event, the restraints were designed to protect the respondents' legitimate business interests. The provisions were therefore valid and enforceable.
The primary Judge assessed damages on the basis of evidence that from 1 July 2011 until 30 September 2012, Twin made gross sales on behalf of the respondents amounting to $111,522.95 and that in the two years after Twin terminated its relationship with the respondents, gross sales to the relevant customers were reduced to $3,210.19. Her Honour considered that the respondents should be awarded damages equivalent to their actual loss of gross profits. For this purpose, she accepted the evidence of Mr Snounou, the sole director and chief executive of Loremo and Hampic, that the respondents' gross profit margin on sales was 60 per cent.
On this basis, her Honour calculated the respondents' loss of gross profits each year to be 60 per cent of $111,522.95, or $66,913.77. After allowing for profit of $963.06 (being 60 per cent of half of $3,210.19) attributable to the actual receipts by the respondents each year, the respondents' annual loss was $65,950.71. Her Honour awarded damages for the three years for which they were claimed (the years ending on 30 September 2013, 30 September 2014 and 30 September 2015). This resulted in damages of $197,852.13, to which her Honour added interest of $19,068.37, making a total of $216,920.50.
Although A1 sought a stay of the District Court's orders, no stay order has come into force. Nonetheless, for reasons that are presently immaterial, on 3 September 2015 A1 paid into Court the full amount of the judgment debt. A1 also gave an undertaking that, subject to further orders, the payment into Court would abide the determination of the appeal against the decision of the District Court.

The Calculation Error

Mr Zmood very properly drew the Court's attention to an error in her Honour's calculations. In his written submissions on the appeal, Mr Zmood pointed out that, because the hearing took place on 10 June 2015, damages should not have been awarded for the whole of the year ending on 30 September 2015. Mr Zmood calculated that in order to correct the error the damages awarded to the respondents should be reduced by $16,487.68 and the interest by $509.23. Accordingly, he accepted that the judgment sum should be reduced to $199,923.59 in total. Mr Eardley, who appeared for A1, agreed with these calculations.
There may possibly have been one other error in the calculation of damages. The primary Judge found that Twin made gross sales of $111,522.95 on behalf of the respondents over a 15 month period, namely 1 July 2011 to 30 September 2012. Her Honour appears to have adopted that figure as the respondents' lost annual gross earnings over the three years from 1 October 2012 to 30 September 2015.
A1 made no complaint about the extrapolation of sales over a period of 15 months to sales over a period of 1 year. In the absence of any complaint we say nothing more about this aspect of the calculations.

Reasoning

A1's notice of appeal contains a number of grounds, some of which are not altogether easy to follow. A1's written submissions, for the most part, also lack clarity. In his oral submissions, Mr Eardley did not press certain arguments and accepted that others had not been put to the primary Judge.
We shall address the principal arguments advanced by Mr Eardley as we understood them.

Restraint of Trade

A1's notice of appeal does not identify which part or parts of cl 2.2 of the Deed should have been found by the primary Judge to have constituted unreasonable restraints of trade. Mr Eardley's written and oral submissions asserted that cl 2.2.1 was "contrary to public policy as it operates in perpetuity" but made no reference to cl 2.2.2. In response to questions from the Bench, Mr Eardley expressly disclaimed any submission that cl 2.2.2 was void or unenforceable as an unreasonable restraint of trade or for any other reason.
In considering the significance of the submission concerning cl 2.2.1 it is important to appreciate that the primary Judge found that A1 had breached and continued to be in breach of both cll 2.2.1 and 2.2.2 of the Deed. In assessing damages she did not distinguish between the two breaches.
Given the absence of a challenge to the validity or enforceability of cl 2.2.2, Mr Eardley did not suggest that A1's position would be improved if this Court was to uphold the argument that cl 2.2.1 was an unreasonable restraint of trade. If anything, Loremo's claim for damages in respect of its losses over a period of nearly three years has to rest on the finding that A1 breached cl 2.2.2 of the Deed, rather than cl 2.2.1. This is because cl 2.2.1 imposes a restraint that is expressed to continue "for at least one (1) year", while cl 2.2.2 is not subject to a comparable temporal limitation.
In these circumstances, no purpose would be served in considering whether the primary Judge erred in concluding that cl 2.2.1 was not affected by the restraint of trade doctrine and, in any event, was not an unreasonable restraint. We did not understand Mr Eardley ultimately in his oral submissions to contend otherwise.

The Finding that Twin was Party to a Distribution Agreement

Mr Eardley submitted that the evidence did not support the primary Judge's finding that Twin had entered into a distribution agreement relating to the respondents' products. The basis for this submission was not entirely clear, although Mr Eardley placed some reliance on the failure of the respondents to tender a written distribution agreement.
This submission suffers from the difficulty that the Deed does not limit the definition of a "Cyndan Distributor" to a distributor which has a written agreement with Loremo (the Deed does not define the term "distribution agreement"). Her Honour considered it unnecessary to resolve a conflict in the evidence as to whether Twin and Loremo had ever entered into a written distribution agreement. However, she did find that Twin and the respondents had entered into a distribution agreement whereby Twin agreed to procure orders for Cyndan products in return for commission.
There was ample evidence to support her Honour's finding. As her Honour pointed out, Mr Piper, the principal of Twin, accepted in his evidence that Twin had been a distributor of Cyndan products. Mr Piper's evidence was consistent with the contents of emails and letters he sent to the respondents. For example, in a letter of 6 October 2010 on Twin letterhead, Mr Piper complained that Twin had not been paid commission due to it by reason of sales made on behalf of the respondents. Furthermore, the respondents' business records recorded details of sales made to individual customers through Twin.
A1 has not established that her Honour's finding that Twin was party to a distribution agreement was affected by error.

Twin as a "Cyndan Distributor"

In his oral submissions, Mr Eardley contended that even if the primary Judge was correct to find that Twin had entered into a distribution agreement, her Honour erred in finding that Twin was a "Cyndan Distributor" as defined in the Deed. If Twin had not been a "Cyndan Distributor", so Mr Eardley submitted, A1 could not have breached either cl 2.2.1 or cl 2.2.2 by dealing with Twin.
Mr Eardley's submission rested on the proposition that her Honour should have found that if Twin had a distribution agreement at all, it was with Hampic, not Loremo. Mr Eardley acknowledged that this argument had not been put to the primary Judge. As we have noted, it appears that the trial was conducted on the basis that there was no need to distinguish between Loremo and Hampic. Furthermore, the argument was not referred to either in the notice of appeal or in A1's written submissions.
Had this argument been raised at the trial, the respondents may well have sought to adduce further evidence showing that Twin had entered into an agreement with Loremo rather than Hampic. Moreover, if the argument was to be raised on the appeal, it should have been the subject of a ground of appeal and addressed in A1's written submissions. For these reasons, the Court declined to permit Mr Eardley to present the argument for the first time during the hearing of the appeal.

The Gross Profit Margin

Mr Eardley submitted that the primary Judge should not have accepted evidence given by Mr Snounou as to Loremo's gross profit margin on sales made by Mr Piper and Twin. Mr Snounou's evidence in chief, given without objection, was that after allowing for commission and overheads the gross profit margin on sales made by Mr Piper in the 2010-2011 year was 60 per cent. Mr Snounou also gave evidence without objection that the margin was relatively constant over the succeeding periods, when sales were effected by Twin on behalf of the respondents.
In his cross-examination Mr Snounou was asked how he calculated the gross profit margin. Counsel for A1 put to Mr Snounou that the respondents had failed to discover profit and loss statements and copies of tax returns for the three previous financial years. Mr Snounou agreed that the records existed and that the respondents had not discovered them. However, Mr Snounou was not directly challenged as to the accuracy of his estimate of the gross profit margin.
The trial occupied two hearing days. Mr Snounou gave evidence on the first day of the trial. No call was made on behalf of A1 for the respondents to produce the relevant financial records. Indeed no call was made, despite her Honour specifically asking counsel for A1 at the conclusion of Mr Snounou's evidence whether he was calling for the production of the documents. Had he called for the records to be produced, there seems on the particular facts of this case to be little doubt that the respondents would have been given an opportunity to inspect the documents and, if necessary, to recall Mr Snounou for further cross-examination.
Mr Eardley submitted in this Court that in the absence of the primary financial records it was not open to her Honour to accept Mr Snounou's evidence of the gross profit margin enjoyed by the respondents on sales of their products made on their behalf by Twin. It is true that the respondents should have discovered the records in response to the order for discovery, which was made on 29 August 2014. But that order was made 10 months before the trial. A1 had ample opportunity before the trial to take the steps necessary to ensure that the respondents fully complied with the order. At the trial itself, counsel for A1 could have accepted the primary Judge's invitation and called for the production of the financial records.
As her Honour observed in the Primary Judgment, if A1 had obtained by way of subpoena or notice to produce whatever documents it considered relevant, it could have tested Mr Snounou's evidence. But it did not take these steps. In these circumstances, it was open to her Honour to accept Mr Snounou's uncontradicted and unchallenged evidence.

Quantum

A1's notice of appeal challenged her Honour's finding that damages should be awarded in respect of the respondents' losses between September 2012 and the date of the trial. The error was said to lie in awarding damages for a period longer than 12 months when "the Deed only ever purported to restrain trade for a period of 12 months".
Counsel for A1 seems to have foreshadowed a similar submission at the trial. However, when asked by her Honour why damages for breach of cl 2.2 of the Deed would not continue beyond 12 months, counsel for A1 stated that he did not propose to take the issue any further.
On the appeal, as we understood Mr Eardley's position, he did not press this ground of appeal. In any event, given that the restriction imposed by cl 2.2.2 is not subject to a relevant temporal limitation, it is difficult to see how the argument could be sustained.

Orders

The Court made orders disposing of the appeal at the conclusion of the hearing. [2] As has been noted, Order 2 provides for judgment for Loremo, rather than for both respondents. This reflects the language of cl 2.2.2 of the Deed, and the definition of "Cyndan Distributor". The effect of cl 2.2.2 is that A1 agrees not to appoint any company which has been a distributor of Loremo's products, without Loremo's prior consent.
After the hearing concluded and the orders had been made, Mr Zmood sought a direction that the amount of $210,095.05 be paid to Loremo out of the moneys paid into Court by A1. This amount comprises the judgment debt of $199,923.59, plus post-judgment interest of $10,171.46 calculated pursuant to s 101 of the Civil Procedure Act 2005 (NSW).
Had the mistake in the calculation of damages been identified prior to A1 paying moneys into Court (as it should have been), A1 would only have paid in the amount for which judgment should have been awarded ($199,923.59). A1 should not now receive a benefit because of the undetected error.
Accordingly, the following additional orders should be made:
Direct that the sum of $199,923.59 be paid out of the moneys paid into Court by A1 to the solicitors acting on behalf of Loremo.
The balance of the moneys paid into Court, including any interest accrued, be paid out to the solicitors acting on behalf of A1.

Endnotes

Loremo Pty Ltd v A1 Chemicals Pty Ltd ([2015] NSWDC 159) (Primary Judgment). Orders were entered on 29 June 2015 after the parties provided her Honour with calculations as to interest.
See at [4] above.

Amendments 25 February 2016 - Coversheet and [4] - Mr S Spadijer DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 February 2016

Solicitors: Mercantile Legal (Appellant) Baron & Associates (Respondents) File Number(s): 2015/206147 Decision under appeal Court or tribunal: District Court of New South Wales Jurisdiction: Civil Citation: [2015] NSWDC 159 Date of Decision: 19 June 2015 Before: Balla DCJ File Number(s): 2013/310377

At a glance

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Judgment (12 paragraphs)

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Legislation Cited (1)

Cases Cited (1)