Interlocutory injunction - Restraining franchisee from trading under franchisor's name and logo - Appeal - Discretion of Judge - Likelihood of ultimate success

Contracts - Discharge, breach and defences to action for breach

Beswicke v Alner [1926] VicLawRp 10; [1926] VLR 72

Cayne v Global Natural Resources plc [1984] 1 All ER 225

Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378

Selvanayagam v University of the West Indies [1983] 1 All ER 824

Water Board v Moustakas [1988] HCA 12; (1988) 180 CLR 491

1 ANDERSON J: I have had the advantage of reading the draft judgment of Wheeler J and entirely agree with it. There is nothing I can usefully add. I agree that the application should be dismissed.

2 WHEELER J: This is an application for leave to appeal from a decision of McKechnie J, delivered 21 May 1999, by which his Honour granted an interlocutory injunction restraining a franchisee from trading under the franchisor's name and logo until trial.

3 The respondent, Automasters Australia Pty Ltd ("Automasters") is the franchisor of automotive service centres in Western Australia, including one in Midland. Mr Canham is its general manger. The first appellant, Bruness Pty Ltd ("Bruness"), has been a franchisee of Automasters since September 1992, and in June 1997 the interest in Bruness passed to the second appellant, Mr Coombes. Mr Coombes is a director of Bruness and the manager of Automasters, Midland.

4 As is common in such agreements, there are a variety of provisions in the franchise agreement designed to ensure standardisation of services between franchises. Clause 14 provides that the franchisee must obtain accreditation in respect of certain standards and use the "QAM" system to ensure that the accreditation of the franchisor is protected. Clause 15.3 deals with an "Operation and Procedures" manual. The relevant portion of the termination clause, cl 29.4, provides that the franchisor may terminate the agreement where the franchisee has failed to remedy a breach specified within a period of 14 days of receipt of a notice in writing from the franchisor requiring the franchisee to do so. Relevant breaches include the failure of the franchisee "to operate the Franchisee's Business in accordance with the policies, procedure, standards and specifications set forth in the Operations and Procedures Manual". By cl 36.7, the manual is incorporated into the franchise agreement.

5 The system for recording of information about procedures undertaken at each of the franchised premises, is, broadly, that when a vehicle is delivered to the franchisee an invoice is to be raised and certain data entered into a computer. As the data is entered into the computer, there is a first screen raised upon which the customer's name and certain basic details are typed. At this time an invoice number is entered and allocated by reference to consecutively numbered invoice books provided to the franchisee. By pressing "print", the header on the invoice can be printed onto the hard copy. While the header is being printed, a further prompt can be activated which brings up a second screen which allows the selection of job descriptions such as "tune and service" or "brakes" and so on. Once details about the job are entered, a further prompt will permit the franchisee to enter that the invoice is completed or that the invoice needs to be suspended. If further information is required to be entered at some future time, the prompt "suspend invoice" is activated, saving the information into the second screen. An invoice is "created" when the user progresses to the second screen. Since the franchisee's computers are connected to the franchisor's computer, the franchisor can determine at any time whether or not the second screen has been completed and an invoice entered. Hard copies of each invoice are required to be created in triplicate. One is given to the customer, one retained by the franchisee, and a third required to be sent to the franchisor at specified intervals. When the computer system was down the information was required to be hand written on the invoices.

6 The systems just described perform a variety of functions, according to the respondent's affidavits. They are part of the quality assurance system, which is an important marketing tool for the franchises as a whole. The marketing strategy places emphasis upon the fact that each Automasters' franchise will conform to an independent quality assurance system and notices to that effect are displayed at the various franchises. It is important to the franchisor because part of its profit is derived from turnover and the system ensures that the franchisees are not evading payment of royalties. It also enables the franchisor to determine how busy the various franchises are which may in turn affect its marketing and promoting strategy. It further enables the franchisor to determine whether or not a particular franchisee is following procedures which have been set down.

7 The respondent served a notice of default on the second appellant in February 1999. It referred to failure to comply with the systems I have described in respect of a number of invoices, which were identified in a schedule. It also referred to failure to pay an audit fee of $200 and an alleged breach of a sub-lease; these latter two issues were not relied upon before his Honour and do not need to be further considered. The respondent asserted that the breaches had not been remedied within the specified time and that it terminated the agreement, as it was entitled to do, on 15 March 1999.

8 The appellants raised a number of matters in response to the contentions of the respondent. They said that constant problems with the computer system had made it difficult, and sometimes impossible, to comply with the procedure in relation to computer entry of data. Mrs Coombes filed an affidavit asserting that certain of the invoices the subject of the notice had been completed and that others had not been completed because they were still awaiting costing or there was work outstanding on them. The appellants further submitted that there was an implied requirement of reasonableness in the franchise agreement and that a technical breach should not result in termination; they further submitted that the respondent had engaged in unconscionable conduct and had breached its contractual duty to deal with the appellants in the utmost good faith. It seems to have been a feature of this submission that his Honour was invited to infer that the respondent was, in reality, motivated by a desire to force Mr Coombes to sell back his franchise at a price below the appropriate market figure, or alternatively, that it was acting out of a form of malice because of issues arising from a complaint to the ACCC, complaints about the computer system, or the prosecution of a Mr Holland.

9 His Honour held that there was a serious question to be tried, that he was satisfied to a high degree that the plaintiff would succeed at trial and that the balance of convenience favoured the grant of an injunction because the franchisee's business could be "seriously affected" if the second appellant continued to trade as Automasters, Midland. He was also satisfied that the appellants' business would be adversely affected by not trading under the Automasters' name, although he noted that the appellants would be able to continue to trade as a vehicle servicer and to use any personal goodwill that had been built up.

10 The grounds of appeal are lengthy and repetitive. They attack all aspects of his Honour's findings of fact and his assessment of the balance of convenience. It is difficult to deal with them without canvassing again all of the matters which were put before his Honour. However, for the purposes of this appeal it is, I think, possible to deal with them in broad categories.

11 An undertaking in the usual form was given by the respondent. The sufficiency of that undertaking appears to have been raised for the first time in argument before his Honour. There was no evidence to suggest that the respondent would be unable to honour its undertaking and there was evidence that it was a business with a very substantial turnover, in the millions of dollars, although there was no evidence as to the amount of profit derived or as to its assets. By the circumstances, it was not necessary for his Honour to conduct an inquiry into the respondent's capacity to pay before granting the injunction.

12 Much of the criticism of his Honour's findings of fact is concerned with the fact that the substantial affidavits in support of the application were sworn by Mr Canham. It was said that since they dealt at some length with the receipt or non-receipt of invoices and the system for receipt of invoices, that the best evidence available of those matters would have been the evidence of Ms Lane, who took direct responsibility for those matters within the respondent's organisation. It is said that his Honour should not have accepted Mr Canham's evidence relating to those matters, some of which would have been a matter of information and belief based upon what he was told by Ms Lane, in the absence of direct evidence from Ms Lane concerning those matters.

13 The short answer to these contentions is that Mr Canham was the general manager of the respondent and the person who supervised Ms Lane in her duties. It is plain from his affidavits that he had a considerable amount of direct experience of the system for receipt of invoices and other records and had been closely involved in monitoring the compliance of the appellants with that system. He personally prepared certain correspondence to the appellants and received correspondence from them, as well as causing others to correspond with them, and it appears that he personally received at least some of the courier bags into which the hard copy invoices were supposed to be placed for delivery to the franchisor. His Honour was entitled to rely on Mr Canham's affidavits.

14 It is further asserted by the appellants that Mr Canham did not depose to the appellants having been in default in relation to any invoices at the time of the issue of the default notices. However, Mr Canham's affidavit set out a lengthy history of default leading up to the issue of the default notice, and deposed that between the time of the issue of the default notice and the time of the termination, the defaults had not been remedied. There was evidence of those matters upon which his Honour could act.

15 A number of matters are complained of under this broad heading. First, his Honour noted that in her affidavit disputing the evidence of breach, Mrs Coombes referred to a number of invoices which she said had in fact been completed. However, because she did not say when those invoices had been completed, his Honour reached the conclusion that this did not occur prior to the end of the notice period.

16 It appears that this was not a matter that was raised during the course of argument. Had it been, Mrs Coombes could have sworn an affidavit, as she did shortly after publication of his Honour's reasons, deposing to the fact that the invoices had been completed during the relevant notice period and prior to termination.

17 However, I do not think that matter is of importance, because his Honour found that there were a number of other defects in the evidence of the appellants. His Honour noted that even if the evidence relating to computer faults was accepted, the appellants had not deposed to complying with the requirement to make entries manually on occasions when the computer was down. That is, his Honour found that difficulties with the computer should not have precluded manual completion of invoices in any event. This appears to be consistent with the evidence relating to the procedure set out in the manual.

18 Further, his Honour found the explanation in respect of some invoices implausible. Referring to the business system generally outlined in the affidavits, his Honour thought that it did not accord with that system to suggest that costings on parts would still be outstanding months later. His Honour further noted that delays in costings had never been raised by Mr Coombes as a difficulty during the notice period. In my view, his Honour was justified in arriving at this conclusion. A similar conclusion might be arrived at in relation to the assertions that certain invoices were outstanding because work on the vehicles had not been completed for weeks or even months.

19 It is to be noted that in the schedule to Mrs Coombes' affidavit in which she purports to explain delays relating to certain invoices, on two occasions delay in completion of work on a vehicle is explained by the words "(insurance claim)" but that in relation to all other entries relating to delays caused by uncompleted work or unavailable costings, no explanation is advanced as to how those delays had been occasioned. Nor is there exhibited to Mrs Coombes' affidavits, with a couple of exceptions, photocopies of the copies retained by the franchisee of any of those invoices which Mrs Coombes alleged had in fact been completed.

20 While he was unable to make a final determination on the disputed affidavit material, it was in my view open to his Honour to regard the lack of detail in critical aspects of the explanation advanced by the appellants as pointing to a significant weakness in the appellants' case. It should further be noted that this Court is now aware, as his Honour was not, that even after his Honour's comment relating to the implausibility of certain aspects of Mrs Coombes' explanation, when Mrs Coombes later swore a supplementary affidavit which was used in an application seeking to dissolve the injunction, she did not see fit to add any further explanation of matters his Honour found to be implausible.

Balance of Convenience and the Respondent's Motives

21 These issues are intertwined. The submission as it was developed before us was that the breaches alleged by the respondent were "trivial". It was said that the appellants' franchise had not in fact lost its quality assurance accreditation and that the franchise agreement provided for automatic termination if it did so. It was calculated that only minimal amounts of royalty would have been foregone by the respondent even if, contrary to the appellants' submissions, work had in fact been completed on the invoices and had not been disclosed to the respondent. It was said in those circumstances, given the lack of any real damage to the respondent or threat to the respondent's business, that the respondent was acting unreasonably in failing to give the appellants an appropriate opportunity to rectify any faults. The submission seems to have been that it therefore followed that the respondent must have been motivated by other considerations.

22 This submission, I think, simply misconceives the significance of the breaches to the respondent. As I have noted, the respondent placed considerable emphasis on its quality assurance accreditation and upon the system of record keeping as a means of ensuring consistency across franchises, as well as being a means of ensuring that it obtained its royalties. If, as the respondent asserted, these matters were of central importance to its business, then one can see why the respondent would wish to take action to terminate the appellants' franchise and to seek for a new franchisee prior to the appellants actually losing accreditation. Further, as his Honour noted, Mr Canham's affidavit set out a long history of alleged non-compliance by the appellants with the system, including previous non-compliance which had led to the issue of a notice of default upon which, eventually, no action was taken by the respondent. It was open to his Honour to conclude as he did that if the respondent were not able to restrain the appellants from trading under the respondent's name and logo, the potential damage to the respondent would be "incalculable".

23 So far as the respondent's motives and possible breach of a duty of good faith are concerned, it seems clear from the argument both before his Honour and before us that the appellants rely upon a history of disputes between the appellants and the respondent concerning a variety of matters, together with the respondent's alleged unreasonableness and disproportionate reaction to the present alleged breaches. Once the second of those limbs of the argument is shown to lack foundation, the first alone is not sufficient to raise any reasonable prospect of the appellants making good their allegations of want of good faith. It is not possible to determine from the affidavits whether the other disputes stem from unreasonableness on the part of the appellants, or the respondents, or some combination of those factors.

24 In this context, the appellants complain in particular of his Honour's remark during the course of his reasons that he was "not presently persuaded that there is undisputed evidence" from which he could draw a conclusion of a lack of utmost good faith on the part of the respondent. His Honour did err if, as this remark suggests, he took the view that it was necessary at that stage for the appellants to provide such undisputed evidence. The question for his Honour, which he correctly identified later in his reasons, was whether he felt "a high degree of assurance" that the respondent would ultimately succeed. For the appellants to make good the proposition that his Honour should not feel such a high degree of assurance, it was not necessary for them to provide undisputed evidence from which it might be concluded that they would succeed at trial but only evidence which reasonably pointed to that possibility. However, an examination of the transcript of argument before his Honour makes it plain that his Honour took the view that there was no such evidence, and in my view he was correct in this conclusion.

25 The appellants submit that his Honour erred in failing to exclude certain materials in the affidavits of Mr Canham, which they identified as hearsay. Mr Canham deposed that the matters deposed to in his affidavits were within his own knowledge unless otherwise stated. As earlier noted, while Mr Canham deposed in certain parts of his affidavits that he relied upon information from others, it seems reasonably clear from his affidavits that there were occasions when he personally inspected documents or communicated with the appellants. There is no material identified by the appellants which appears to me to be both plainly hearsay and lacking in any relevant identified source of information.

26 The appellants also complain that his Honour failed to refer to an affidavit of Mr O'Dwyer. Failure to refer to the affidavit does not, of itself, establish that his Honour failed to consider it. In any event, the affidavit is one which deposes that Mr O'Dwyer too experienced difficulties with the computer system and that on occasions work was not completed for days or sometimes weeks or months. So far as the computer system is concerned, as I have noted, the reliability of this system does not appear to have been central to his Honour's findings. So far as the delays are concerned, Mr O'Dwyer's general assertion does not cure the difficulty created for the appellants by the lack of particularity in Mrs Coombes' affidavit, in which she fails adequately to explain matters which were presumably within her own knowledge, or within the knowledge of Mr Coombes.

27 Finally, it is complained that his Honour wrongly excluded evidence of Mr Taylor, a solicitor, who wished to depose to his belief as to the truth of the unsworn statement of a Mr Stewart, which was annexed to Mr Taylor's affidavit, with Mr Stewart in turn stating that he had been told something by a Mr Natale. While hearsay is admissible in interlocutory proceedings, the purpose of tender of the affidavit appears to have been proof of the truth of what was said by Mr Natale. It is difficult to see how Mr Taylor could believe in the truth of a statement made by Mr Natale not to him but to another party, in circumstances of which Mr Taylor was presumably unaware, not having been present at the time. Even if the affidavit had been admitted, his Honour would not have been justified in placing any weight in it in those circumstances.

28 It is apparent from the transcript of proceedings before his Honour that he took a close interest in the detail of the affidavit material tendered to him. He reserved his decision for a number of weeks in order to consider the matter and arrived at a view of the facts which was open to him. He took the view that in the light of the undisputed facts and on the view he took of the likelihood of success of the respondent's case that the balance of convenience favoured the granting of an injunction.

29 This is a discretionary decision with which the court will not interfere unless satisfied that a wrong principle has been applied or that injustice will result from it. It may be that it was open to his Honour to have arrived at a different conclusion, particularly as to the balance of convenience. However, in my view the appellants have failed to establish that any wrong principle has been applied by his Honour which has affected the decision which he reached, or that injustice will result from the order which he made.

30 His Honour's decision is not, in my view, attended with sufficient doubt to justify a grant of leave to appeal. It follows, therefore, that the application should be dismissed.