Digital Central Australia (Assets) Pty Ltd v Stefanovski [2017] FCA 1000 | Case summary

LOGAN J: 1 On 30 June 2017, I published reasons for judgment in respect of the applicant's application: Digital Central (Assets) Pty Ltd v Stefanovski [2017] FCA 738 (the principal judgment). These reasons for judgment must be read in conjunction with the principal judgment. For the purposes of continuity, I adopt in this judgment the same abbreviations that I used in the principal judgment. In so doing and in respect of the applicant, I retain the abbreviation, DCA even though, on 1 August 2017, at its request and without opposition, I ordered that the name of the applicant be changed to Digital Central Australia (Assets) Pty Ltd so as to correct a misnomer. 2 At the time when the principal judgment was published, there was a need for the parties to be offered an opportunity to make submissions as to the orders which ought to be made in light of the conclusions set out in the principal judgment. Accordingly, I made directions to that end, which included provision for oral submissions. 3 The subject of the relief to which DCA is entitled and against whom has proved a complicated one. In part, I am a party to that complication, for reasons which I shall shortly relate, a fact that ought frankly to be acknowledged at the outset and not evaded by attributing it just to a failure of counsel (who did not at that stage include Mr Couper QC for the respondents) earlier to advert to the point. 4 The particular point arises from the conclusion, responsive to and upholding an alternative submission made on behalf of DCA at trial, that, "The raison d'être for TK Sign Installations was to be the contemplated corporate operator of this franchise" (principal judgment, [37]). I found that TK Sign Installations had ratified the Franchise Agreement from the very moment of that company's existence. Neither this conclusion nor that finding was, in itself, controversial in the submissions which the parties made as to consequential relief. A controversy did, however, arise from a subsequent statement which I made in the principal judgment, exemplified in [113], where I stated, "Mr Stefanovski (like TK Sign Installations) is also bound by cl 24.2 of the Franchise Agreement." That statement is premised upon a view that, after the contemplated incorporation of TK Sign Installations and its ratification of the Franchise Agreement, Mr Stefanovski was personally bound by that agreement and amenable to being subject to relief arising from a breach of its terms. 5 Neither in the submissions of counsel at trial nor on my part in the principal judgment was reference made either to s 131 or s 133 of the Corporations Act 2001 (Cth) (Corporations Act). I suspect that a particular reason for this arose from the late ascertainment by DCA of the existence of TK Sign Installations and its consequential late joinder as a respondent party. However this may be, these statutory provisions are not irrelevant in relation to the relief to which DCA is entitled, as the parties correctly submitted. The view which I take is that, while I cannot resile from findings of fact which I made in the principal judgment, conclusions as to what flowed from those in terms of relief were necessarily provisional, given the need, recognised in that judgment, for the parties to be offered an opportunity to be heard in relation to relief. 6 Sections 131 and 133 of the Corporations Act, each within Pt 2B.3 of that Act, entitled, "Contracts Before Registration", respectively provide: 131 Contracts before registration (1) If a person enters into, or purports to enter into, a contract on behalf of, or for the benefit of, a company before it is registered, the company becomes bound by the contract and entitled to its benefit if the company, or a company that is reasonably identifiable with it, is registered and ratifies the contract: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time--within a reasonable time after the contract is entered into. (2) The person is liable to pay damages to each other party to the pre-registration contract if the company is not registered, or the company is registered but does not ratify the contract or enter into a substitute for it: (a) within the time agreed to by the parties to the contract; or (b) if there is no agreed time--within a reasonable time after the contract is entered into. The amount that the person is liable to pay to a party is the amount the company would be liable to pay to the party if the company had ratified the contract and then did not perform it at all. (3) If proceedings are brought to recover damages under subsection (2) because the company is registered but does not ratify the pre-registration contract or enter into a substitute for it, the court may do anything that it considers appropriate in the circumstances, including ordering the company to do 1 or more of the following: (a) pay all or part of the damages that the person is liable to pay; (b) transfer property that the company received because of the contract to a party to the contract; (c) pay an amount to a party to the contract. (4) If the company ratifies the pre--registration contract but fails to perform all or part of it, the court may order the person to pay all or part of the damages that the company is ordered to pay. 133 This Part replaces other rights and liabilities This Part replaces any rights or liabilities anyone would otherwise have on the pre--registration contract. 7 The correct position in relation to s 131 is, with respect, well summarised by Perram J in B J McAdam Pty Limited v Jax Tyres Pty Limited (No 3) [2012] FCA 1438, at [21] to [22] (B J McAdam v Jax Tyres): 21 … At common law, it was not possible for a party to ratify acts of an alleged agent which occurred prior to the party's existence: Kelner v Baxter (1866) LR 2 CP 174; North Sydney Investment and Tramway Company Limited v Higgins [1899] AC 263 at 271-272 per Lord Davey; Natal Land and Colonization Co Ltd v Pauline Colliery and Development Syndicate Ltd [1904] AC 120 at 126 per Lord Davey; Dudley Buildings Pty Ltd v Rose (1933) 49 CLR 84 at 94 per Starke J; Vickery v Woods (1952) 85 CLR 336 at 348 per Williams J. 22 Upon the introduction of the uniform companies laws in 1981 (including the Companies Act 1981 (Cth) and the Companies (New South Wales) Code 1981 (NSW)), the common law position was changed in relation to pre-incorporation contracts by s 81 of the Companies Code. This followed the Victoria Law Reform Commissioner's eighth report, Pre-Incorporation Contracts, Report No 8 [1979] VicLRCmr 8. The present version of that provision is now found in s 131 of the Corporations Act … 8 The upshot is that it was not correct to refer (as I did at [37] of the principal judgment) to Mr Stefanovski as having an undisclosed principal. That is because, at the time when he signed the Franchise Agreement, TK Sign Installations had yet to be incorporated. Therefore, it did not then exist and could not be an undisclosed principal. But the factual findings that I went on to make in that same paragraph, extracted above in [4], necessarily mean that s 131 of the Corporations Act was engaged. Thus far the parties were, as I understood their submissions, at one. Mr Stefanovski was not amenable at common law to a remedy for a breach of the Franchise Agreement on the basis of acting on behalf of an undisclosed principal, because he had no such principal. On the findings which I made in the principal judgment, it was TK Sign Installations which, by s 131 of the Corporations Act, became bound by the contract and amenable to remedies in respect of any breach by it of that contract. That TK Sign Installations had subsequently been registered and had ratified the Franchise Agreement also meant that s 131 of the Corporations Act did not make Mr Stefanovski personally liable in respect of a breach of that agreement. 9 Where the parties parted was in relation to the meaning and effect in the circumstances found of s 133 of the Corporations Act. DCA submitted: While section 133 of the Corporations Act says that this Part "replaces any rights or liabilities anyone would otherwise have on the pre-registration contract", it is submitted that DCA and Mr Stefanovski both objectively intended that Mr Stefanovski be a principal party to the franchise agreement, and accordingly the Court should make a finding that Mr Stefanovski was a principal party to that agreement. Section 133 cannot affect DCA's rights against, and causes of action against, Mr Stefanovski, as a principal party to the franchise agreement, because it is only rights and liabilities "on the pre-registration contract" that are replaced. [citations omitted] 10 I am not persuaded that this submission should be accepted. 11 Firstly, the invitation to find that "DCA and Mr Stefanovski both objectively intended that Mr Stefanovski be a principal party to the franchise agreement" must be declined. It is contrary to the finding of fact which I made at [37] of the principal judgment. There is no basis for re-visiting that finding, even were I persuaded that I had any ability so to do. 12 Secondly, the respondents' submission that Summergreene v Parker (1950) 80 CLR 304 (Summergreene v Parker), a case relied upon by DCA for the proposition that Mr Stefanovski could be made personally liable, was not apposite is correct. Their submission was that this case was concerned only with the position at common law, not under statute. That is so. That case affirms that, at common law, the question in every case must be resolved by "what the parties intended or must be fairly understood to have intended" (per Fullagar J, at 323, referring to and distinguishing on the facts Kelner v Baxter (1866) LR 2 CP 174). The intention which I found (at [37] of the principal judgment) was that it was contemplated that a company to be formed would take up the franchise. Summergreene v Parker has nothing to say about the impact of a statutory provision such as s 131 of the Corporations Act. One, if not the, reason for that is that there was then no such provision in companies legislation. That first came in 1981, as Perram J explains in B J McAdam v Jax Tyres in the passage quoted. 13 On the findings of fact which I have made, I am obliged by s 131(1) of the Corporations Act to find that it is TK Sign Installations which has become bound by the Franchise Agreement. Under s 131, Mr Stefanovski might have been rendered personally liable if TK Sign Installations had not been registered and not thereafter ratified the Franchise Agreement. But, as I have found, that is not what came to pass. 14 DCA also put that s 133 of the Corporations Act, "cannot affect DCA's rights against, and causes of action against, Mr Stefanovski, as a principal party to the franchise agreement, because it is only rights and liabilities 'on the pre-registration contract' that are replaced." One flaw in this submission has already been mentioned. It is contrary to the finding of fact made at [37] of the principal judgment. Another is described in the next paragraph. 15 Neither party was able to point to any case decided under s 133 or one which would otherwise offer any guidance. My own research has not disclosed one decided under s 133 but it has revealed that an equivalent predecessor, s 81 of the Companies (New South Wales) Code 1981, was considered by Grove J in Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429. In that case, Grove J held that s 81 did not cover the field to the exclusion of all liabilities or absence of liability that might otherwise have arisen at common law. More particularly, his Honour opined, provisionally, (at 431) that: Section 81 does not declare liability beyond the person or persons who execute on behalf of the non-existent company but nothing in its terms purports to exclude any rights or obligations flowing between that person or those persons and any principal nor does it otherwise impugn the doctrines of agency. As occurred in that case in respect of s 81, so in this case in respect of s 133 in that it is not necessary to express any concluded view about the effect of the section. As a matter of initial impression, s 133 does appear to render Pt 2B.3 of the Corporations Act a code but even that begs a question as to the extent of that code and of any related exclusion of the common law. In other words, it is possible to construe s 133 as not being incompatible with an imposition of liability on third party principals (ie those in existence at the time when the contract is executed). In this case, on the findings which I made in the principal judgment, there is no such third party principal. For that reason, it is unnecessary to reach a concluded view about the effect of s 133. 16 What flows from this is that it is only TK Sign Installations which is amenable to a common law remedy for any breach of contract in respect of the Franchise Agreement. 17 There should be judgment against TK Sign Installations for $58,476 as damages for breach of the Franchise Agreement, together with pre-judgment interest of $2,475 pursuant to s 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth). That represents the total royalty income stream loss referred to in the principal judgment, together with an allowance for interest. The amount of interest I did not understand to be controversial. In any event, the interest component is based on an acceptance that it is permissible under s 51A to look to the Reserve Bank of Australia (RBA) cash rate + 4%. During 2016 financial year, RBA cash rates averaged 2% and during 2017 financial year, RBA cash rates were 1.5%. Accordingly, I allow for interest on $30,000 (the sum proportion I regard as attributable to past loss) at 5.5% for a period of 18 months, which is $2475. 18 TK Sign Installations, has, of course, as the principal judgment discloses, sold its Sydney South West DCA franchise business. That might well be thought to suggest that there is no need for the granting of an injunction against it. But, as the principal judgment also reveals, neither Mr Stefanovski nor Ms Clark is without guile and the awarding of damages is emphatically not an adequate remedy. There remains a need fully to hold TK Sign Installations to the terms of its bargain, which materially includes the restraint clause (cl 24) in the Franchise Agreement. The breach of that clause supplies one reason why I have ordered particular restraints in respect of TK Sign Installations. 19 The restraint ordered entails an acceptance of a submission from DCA that there is a need to prevent involvement in a competing business which sells competing products to real estate agencies within the franchise post codes (which are set out in Schedule 1 to the Orders) and also to prevent involvement in a competing business which business is itself located within those franchise postcodes. This accords with what I regard as the intent of cl 24.2 of the Franchise Agreement. Acceptance of that submission also informs the terms of the restraint in the exercise of other sources of power. 20 Though Mr Stefanovski is not amenable to a common law remedy for a breach of contract in respect of the Franchise Agreement, because the parties to that agreement are DCA and TK Sign Installations, it does not follow that DCA is unable to secure any remedy against him on the basis of the findings made in the principal judgment. 21 The respondents, and Mr Stefanovski in particular, were initially disposed to submit that he was not amenable to any remedy in equity for a breach of confidence, because there was no finding that he had misused confidential information. As I understood it, that submission was not, in the end, pressed. In any event, it ignored the findings in the principal judgment that in substance though not in form he and Ms Clark were engaged in an activity in the nature of a joint venture in the operation by TK Sign Installations of the Sydney South West DCA franchise business (with each of them subverting that business to the benefit of the ARES business) and in the operation by ANT Printing of its ARES business. Those findings as to the essentially joint venture relationship between Mr Stefanovski and Ms Clark also inform the remedies to which each is amenable under statute. 22 Breach of contract apart, DCA submitted that Mr Stefanovski was, on the finding made in the principal judgment: (a) … (b) … liability as a procurer, or knowing participant, in TK Sign Installations breach of its good faith obligations under the Franchise Code and its unconscionable conduct and misleading conduct under the Competition and Consumer Act, in the period between January and August 2016; (c) … (f) … [subject to an] ancillary liability, for the wrongs of ANT Printing, on the basis that ANT Printing is in substance a joint venture between Ms Clark and Mr Stefanovski. 23 For their part, the respondents pointed to the observations made in [138] of the principal judgment: 138. There were contraventions of s 18 but all that this misleading or deceptive conduct did, in relation to DCA, was, more likely than not, to delay the institution of a proceeding against, at least Mr Stefanovski and more likely than not also ANT Printing and Ms Clark (to which, as it was in the present, TK Sign Installations would have been added if not an original respondent). In my view, there is a disjunct between the contraventions of s 18 and the injunctive relief claimed. That particular disjunct is of no consequence as an entitlement to injunctive relief is otherwise found in other statutory contraventions, breach of contract and equity. 24 Drawing upon these observations and in respect of remedies under statute, the respondents submitted that: … the other statutory contraventions, namely breach of section 21 of the ACL and section 51ACB of the CCA by reason of a breach of s 6 of the Franchising Code, are based on precisely the same conduct asserted by the applicant to have had the same result, a result which was not found to be the case by the Court. 25 But the course of conduct found, at [125] of the principal judgment, to have been embarked upon between January 2016 and August 2016 had as its overall aim the facilitation of the progressive subversion of the franchise "joint venture" with DCA by a new business, the ARES business, operated by a company controlled by Ms Clark, ANT Printing, in which Mr Stefanovski had a financial interest. The establishment and operation of the new business were part of the overall conduct which I found both to be not in good faith as well as to be unconscionable, each contrary to statute. Insofar as this entailed corporate conduct, Mr Stefanovski and Ms Clark were each knowingly concerned in it. The misleading and deceptive conduct content of that overall conduct camouflaged the existence of the ARES business and delayed the institution of a proceeding to restrain the operation of the new business (the ARES business) but that camouflaging was never an end in itself. It was part of a stratagem to subvert the restraint found in the Franchise Agreement and also to, in effect, "sell the cow and sup the milk". Mr Stefanovski and Ms Clark caused TK Sign Installations to sell, with DCA's procured permission, the Sydney South-West DCA franchise business while at the same time actively subverting that business prior to its sale and establishing and operating, before and after its sale, via ANT Printing, the ARES business in the manner described in the principal judgment. As explained in the principal judgment, this was contrary to statutory provision in respect of good faith conduct and statutory proscription of unconscionable conduct in trade or commerce. 26 On the findings made in the principal judgment, the combined reach of these statutory provisions includes but extends beyond TK Sign Installations to ANT Printing and Mr Stefanovski and Ms Clark personally (as accessory parties to corporate conduct). Each is a relevant actor in the overall conduct. 27 The relevant remedy, at the behest of DCA, on the findings which I made in the principal judgment must be to deny the relevant actors the benefit of the statutory contraventions. In relation to DCA, that benefit is not just a delay in the institution of proceedings but a subversion of the restraint or, put another way, of the DCA franchise system in which by the Franchise Agreement, Mr Stefanovski's and Ms Clark's joint venture corporate vehicle, TK Sign Installations, was permitted to participate. The establishment and operation by them of ANT Printing was an essential part of the overall conduct and it derived the benefits described in the principal judgment. 28 The restraint ought to operate no longer than a period after which TK Sign Installations would have been free, after the sale of its franchise, to compete in that same field and area. A remedy in respect of the statutory contraventions in the circumstances of this case is therefore to subject TK Sign Installations, Mr Stefanovski, Ms Clark and ANT Printing to the same restraint to which TK Sign Installations is separately liable in respect of breach of contract. Just to restrain Mr Stefanovski or Ms Clark from being knowingly concerned in restrained conduct either by TK Sign Installations or by ANT Printing would admit of the prospect that either or each of them would deploy an already demonstrated disposition to subversion with an attendant absence of good faith and unconscionable conduct by, for example, procuring another shelf company to rise phoenix like and operate a competing business during the restraint period and in respect of the restraint area. 29 There is also a need, in my view, taking up in substance a form of order promoted by DCA, to highlight to those who would deal with ANT Printing via its websites that, for a particular period, it is subject to particular restraints by virtue of the Court's order. A requirement by order ought to be made of Ms Clark, given her role in relation to that company, to cause such website notices to be published and to verify the same by affidavit. 30 The terms of s 80 of the CCA are broad enough to empower the ordering of such restraint and related requirements against each or, as the case may be, some of these respondents. These are an "appropriate" response to the proved contraventions: s 80(1) CCA. Additional sources of power are to be found in s 232(4) and s 232(5) of the ACL in respect of the restraining of a person from carrying on a business, or supplying goods and services, for a specified period. 31 Section 87 of the CCA was also mentioned in the principal judgment but it was not necessary at that time to consider whether it also provided a source of power to grant any relief. I accept DCA's submission that amendments made to s 87 by the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) have had the effect of limiting applications for orders under that section in respect of contraventions of industry codes. In keeping with that submission, DCA did not seek to rely upon, and I have not relied upon, s 87 of the CCA as a source of power to grant the restraint ordered. 32 In respect of the statutory contraventions, DCA is also entitled, against each of TK Sign Installations, Mr Stefanovski, Ms Clark and ANT Printing, pursuant to s 82 of the CCA and s 236 of the ACL to damages in the sum of $58,476 and interest in the sum already mentioned in respect of the lost royalty income stream, which loss was additionally caused by the statutory contraventions. Once again and as with the breach of contract ground for the restraint against TK Sign Installations, those damages alone are not an adequate remedy to redress the statutory contraventions, having regard to the ends to which those contraventions were directed and the findings which I have made in respect of Mr Stefanovski and Ms Clark. 33 This then leaves to be decided the nature and extent of the remedies in equity which should be granted. 34 In the principal judgment (at [112]), I concluded that the Manual contained "systems, processes and techniques" of proven commercial worth. I also there found that the DCA website contained a password protected area and that the disclosure of the password protected information would cause real harm if disclosed to a competitor of DCA (and I include in "DCA" an existing franchisee of DCA). 35 In respect of any injunctive relief there is always a need to give sufficient precision to an order so as to make it clear to a person restrained by that order exactly the nature and extent of the restraint. Necessarily that must be so in respect of an order the breach without reasonable excuse of which may be attended with penal consequences. This need is certainly present in relation to equitable remedies grounded in a misuse of confidential information, as the authorities aptly cited by the respondents exemplify: O'Brien v Komesaroff (1982) 150 CLR 310 at 326 - 328 per Mason J; Streetscape Projects (Australia) Pty Ltd v City of Sydney (2013) 85 NSWLR 196 at [159] per Barrett JA; Pioneer Concrete Services Ltd v Galli [1985] VR 675 at 710 - 712; lntelsec System Ltd v Grech-Cini [1999] 4 All ER 11 at 28; G. E. Dal Pont "Law of Confidentiality" [11.13] - [11. 14], [13.17] - [13.18], [15.11] - [15.12]). 36 DCA recognised this need. It struggled in its submissions both orally and in writing to give such precision, even after an additional opportunity was offered to refine the draft orders it initially promoted. 37 As to the information in the Manual and on the basis of the finding in [117] of the principal judgment, DCA is entitled to an order enjoining TK Sign Installations, Mr Stefanovski, Ms Clark and ANT Printing from imparting to any person the method described in the Manual of how successfully to apply (or remove) a vinyl print to a signboard. 38 As to the password protected information on the DCA website, the respondents submitted that the names of real estate agents in the franchise area were in the public domain and could not be regarded as confidential. This is true. What is not in the public domain is the association of particular real estate agents with particular purchasing histories or signage and pricing preferences. 39 As I concluded at [120] of the principal judgment, information has a limited "useful life" - 2 years from March 2016. At the conclusion of this period, any "head start" secured by Mr Stefanovski, Ms Clark and ANT Printing will have passed. The respondents are correct in their submission that such success as DCA has enjoyed in demonstrating a misuse of confidential information and a related springboard does not entitle it, in equity, to an order the effect of which would be to prevent competition: Zomojo Pty Ltd v Hurd (No 2) (2012) 299 ALR 621, at [394] - [395]. The foundation for the latter type of relief, and then only for a limited period and otherwise in a limited way, is, as I have already indicated, in statute. Again because of the behaviours and dispositions of Mr Stefanovski and Ms Clark as described in the principal judgment, I do not consider that damages alone are an adequate remedy. 40 DCA is also entitled to an order that each of these respondents deliver up to it each or any copy of the Manual and password protected information or any part thereof in their possession, power or control. Ancillary provision needs to be made for the filing of an affidavit verifying this has been done. 41 For reasons given in the principal judgment at [142], insofar as the application relates to T&K Group Properties, it must be dismissed. However, I expressly leave open, on the subject of costs, whether it was ever appropriate to join that company as a respondent. 42 It will be necessary for the parties to be given an opportunity to make submissions with respect to costs. I have made directions to that end. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

Digital Central Australia (Assets) Pty Ltd v Stefanovski

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