Farahbakht v Midas Australia Pty Ltd

DECISION : Interlocutory injunction restraining termination of franchise agreement and license granted

CATCHWORDS : INJUNCTIONS - Interlocutory injunctions - prima facie case or serious question - where defendant purports to terminate agreement for fraud - where onus will be on defendant at trial - what plaintiff must show to establish serious cause for final relief - where plaintiff will encounter obvious but not necessarily insurmountable credit difficulties - where plaintiff affirmatively establishes defence to some allegations of fraud

LEGISLATION CITED : Trade Practices Act 1974 (Cth), s 51AC

American Cyanamid Co v Ethicon Ltd [1975] AC 396 Australian Broadcasting Commission v O'Neill (2006) 229 ALR 457; [2006] HCA 46 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1 CASES CITED : Beecham Group Limited v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 Briginshaw v Briginshaw & Anor (1938) 60 CLR 336 Cayne v Global Natural Resources plc [1984] 1 All ER 225 Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 Rejfek v McElroy (1965) 112 CLR 517

PARTIES : Farid Farahbakht (plaintiff) Midas Australia Pty Limited (defendant)

COUNSEL : Mr G Sirtes (plaintiff) Mr B Shields (defendant)

SOLICITORS : Abbott Tout Lawyers(plaintiff) Deacons Lawyers (defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST

5040/06 Farid Farahbakht v Midas Australia Pty Limited JUDGMENT (Ex Tempore) 1 HIS HONOUR: The plaintiff Farid Farahbakht is, and has been since about 13 January 2003, the franchisee of a Midas motor vehicle repair franchise at West Ryde in the State of the New South Wales, and the licensee from Midas of the premises from which he conducts that franchise business. On 11 September 2006, Midas served on Mr Farahbakht a Notice of Breach of Franchise Agreement, and on 13 September 2006 Midas served Notices of Termination of the Franchise Agreement and the Licence Agreement, both dated 11 September 2006, purporting to terminate the franchise and the licence with effect from 27 September 2006. Mr Farahbakht commenced these proceedings on or about 26 September 2006, seeking an injunction restraining Midas from acting on the purported Notices of Termination. By agreement between the parties, the operation of the Notices has been extended from time to time, up to and including today.

2 On an application such as the present, for an interlocutory injunction, the issue generally is whether there is a sufficiently serious case for final relief as to justify, having regard to the balance of convenience, the grant rather than the withholding of an interlocutory injunction. So stating the test emphasises, first, that the plaintiff bears the onus of establishing a case for an interlocutory injunction; secondly, that one does not reach consideration of the balance of convenience unless there is a serious case for final relief [Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 76 ALJR 1]; and thirdly, that the strength of the case for final relief may influence the way one regards the balance of convenience, and (for reasons I explain below) the preponderance of the balance of convenience also may affect the sufficiency of the case for final relief required to justify the grant of an injunction [Australian Broadcasting Corporation v O'Neill (2006) 229 ALR 457; [2006] HCA 46]. Thus, a strong case for final relief may warrant the grant of an interlocutory injunction even though the balance of convenience tips barely, if at all, in favour of the granting rather than withholding relief; but even a weak case for final relief, so long as it be seriously arguable, may support an interlocutory injunction if the preponderance of the balance of convenience weighs heavily in favour of the grant of injunctive relief.

3 The circumstances in which a franchise agreement can be terminated are governed by the Franchise Code of Conduct made under Trade Practices Act 1974 (Cth), s 51AC. Regulation 21 of the Code deals with termination by the franchisor of a franchise for breach of agreement by the franchisee, and requires that the franchisee be given reasonable notice of the proposed termination and an opportunity to remedy the breach. Regulation 22 is concerned with termination by the franchisor other than for breach by the franchisee - for example, when the agreement provides for automatic termination in certain circumstances not involving breach by the franchisee; it also requires that the franchisee be given reasonable notice, and the reasons for the proposed termination. Regulation 23 is concerned with special circumstances which are exempted from the notice requirements of Regulations 21 and 22. It provides as follows:- 23 Termination - Special Circumstances A franchisor does not have to comply with clause 21 or 22 if the franchisee ... (f) is fraudulent in connection with the operation of the franchisee's business; ...

4 The effect of regulation 23(f) is that a franchisor may terminate a franchise agreement without notice if the franchisee has been fraudulent in connection with the operation of the franchise business. In this case, the franchise agreement between the parties contains a similar provision, but I do not think it is necessary, for present purposes, to go beyond the provisions of the Code in considering the circumstances in which the franchisor is entitled to terminate. Ultimately, in this case, it is on the basis of fraud in connection with the operation of the franchise business that the franchisor relies to justify its claim to be entitled to terminate.

5 Where a plaintiff comes to Court claiming a contractual entitlement - for example, indemnity under a policy of insurance - and the defendant asserts that it is entitled to refuse that claim by reason of some exception in the policy or misconduct on the part of the plaintiff - in the insurance context, for example, fraud or arson - then ordinarily it is for the defendant to justify its purported termination or declining of indemnity by proving the fraud on which it relies. I am inclined to the view that that position pertains in a case such as the present, so that where the franchisor claims to have terminated - or to be entitled to terminate - for fraud, the onus of justifying the termination and proving the exception entitling the franchisor to do so would fall on it. Moreover, that onus is one which - the allegation being as serious as it is - would have to be discharged to the "comfortable satisfaction of the Court", in accordance with Briginshaw v Briginshaw (1938) 60 CLR 336 and Rejfek v McElroy (1965) 112 CLR 517.

6 If that be correct, as I presently think it is, then at the final hearing of this case the plaintiff will not bear an onus of disproving fraud; rather the defendant will have to prove it. On an interlocutory application such as the present, then, the question should be whether the plaintiff has established that there is a serious possibility that at the final hearing it could defeat the allegations of fraud made against it, bearing in mind the onus and standard of proof which will then apply.

7 It has been submitted, by Mr Sirtes for Mr Farahbakht, that this is a case in which the determination of the interlocutory application will effectively determine the case for final relief. The approach of the Court in such a case was explained by McLelland J, as he then was, in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 (in particular at 535 - 536). Having dealt generally with the approach of the Court to applications for interlocutory relief, his Honour said:- Apart from this, although normally the Court "does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case" ( Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622), there are some kinds of case in which for the purpose of seeing where lies the balance of convenience (or more specifically "the balance of the risk of doing an injustice" - see per May LJ in Cayne v Global Natural Resources plc [1984] 1 All ER 225 at 237, cf per Brennan J in Brayson Motors Pty Ltd v Federal Commissioner of Taxation (1983) 57 ALJR 288 at 292; 46 ALR 279 at 285), it is desirable for the Court to evaluate the strength of the plaintiff's case for final relief: see, eg, Brayson Motors Pty Ltd v Federal Commissioner of Taxation (at 292; 285); Castlemaine-Tooheys Ltd v South Australia at 682; 559. One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue: see, eg, NWL Ltd v Woods [1979] 1 WLR 1294 at 1306-1307; [1979] 3 All ER 614 at 625-626 per Lord Diplock; Cayne v Global Natural Resources plc . The present is such a case. The substantial matter in issue is whether Epoch should be permitted to proceed with the issue of non-renounceable rights in accordance with the announcement of 13 March 1987. That will be irrevocably determined in a practical sense by the grant or refusal of an interlocutory injunction.

8 That passage - to which the High Court of Australia referred with apparent approval in its recent decision in Australian Broadcasting Commission v O'Neill - suggests that in a case where determination of the interlocutory application is likely to be practically conclusive, it is appropriate for the Court to embark on an evaluation of the ultimate prospects of the success of the parties.

9 In O'Neill, Hayne and Gummow JJ explained (at [65]) that what a plaintiff had to show, so far as "prima facie case" or "serious question to be tried" is concerned, is a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. With reference to Beecham Group Limited v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, (at 622-623), their Honours pointed out that how strong that probability needed to be depended upon the nature of the rights the plaintiff asserted, and the practical consequences likely to flow from the order sought. Their Honours proceeded to make clear that it was not sufficient simply for a plaintiff to establish a claim that was not frivolous or vexatious - as might be taken to be suggested by the speech of Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC 396 - as such an approach obscured the governing consideration that the possibility of ultimate success required to justify an interlocutory injunction depended upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.

10 I do not think that this is a case in which the interlocutory application is truly practically determinative of the final issue. If the application for interlocutory relief succeeds, then the final issue remains well and truly alive for debate on another day at final hearing. In those circumstances, I do not think the case is truly one that falls within the Kolbach doctrine. Rather, the practical consequences of granting or withholding interlocutory relief are matters which inform the balance of convenience, and the strength of the case required to justify the grant of an injunction.

11 In a case where, in effect, it falls to a defendant to an application for an injunction ultimately to prove a case of fraud, what a plaintiff will have to show to establish a serious possibility that that allegation can be defeated at trial will vary, depending on the allegations raised, the particularity to which the defendant's allegations descend, and the state of the evidence. If the allegations are generalised and unparticularised, a mere denial may suffice. If, as in the present case, the defendant has descended to considerable detail and produced evidence supportive of the allegations on which it relies, a plaintiff might be required to establish significantly more. I accept entirely Mr Shields' submission, for Midas, that it is insufficient for a plaintiff in such circumstances merely to say that everything has been put in issue and that the defendant will bear the onus at the trial. To the contrary, the plaintiff must, in my opinion, show a real prospect, though of course it may fall short of the balance of probabilities, that it will be able to defeat the allegations at trial.

12 In this case, the essence of the defendant's allegation is that the plaintiff has embarked on a course of fraudulently understating his sales, and thus retaining for his own benefit the whole of the proceeds of some sales to the exclusion of Midas, which is entitled under the Franchise Agreement to receive a proportion by way of its remuneration. Midas' case in this respect relies essentially, though not exclusively, on five matters.

13 The first is a decrease of revenue from the West Ryde franchise after Mr Farahbakht assumed its conduct, which is said to support an inference of fraud. However, there are, of course, many other possible explanations for a deteriorating revenue, and it would be a very bold step to draw an inference of fraud just because there has been a decline of revenue at a particular time. More significantly in this case, the extent of the decline in revenue seems, at first sight, disproportionate to the scale of the fraud that is alleged, which suggests that an explanation for the deterioration in revenue may be found elsewhere - for example, in mismanagement or market conditions - rather than necessarily in fraud.

14 The second, and perhaps most important, is the evidence of a former employee of Mr Farahbakht, one Thomas Adam Norman, who was employed as the Store Manager from 4 April 2006 until 23 August 2006. Mr Norman says that he was instructed by Mr Farahbakht to encourage customers to pay in cash and not to issue invoices, and that albeit reluctantly he thereafter did so under instructions from Mr Farahbakht until he left. Mr Farahbakht agrees that customers were encouraged to pay cash, but says that this was because cash and EFTPOS transactions did not incur additional charges which were incurred, for example, by credit card payments. However, he denies that he instructed Mr Norman not to issue invoices, and says that it was Mr Norman's responsibility as shop manager to issue invoices. He agrees that sometimes if cash was paid for a job he would place it in his wallet - he says for safekeeping, but not with the intention that no invoice be issued.

15 There is, therefore, a word-against-word issue between Mr Norman and Mr Farahbakht. On that issue, Midas begins with the significant advantage that, in the course of the application that Mr Farahbakht be dealt with for contempt of court, which I heard last week, on which both Mr Norman and Mr Farahbakht were cross-examined, albeit shortly, I found Mr Norman to appear entirely credible and I disbelieved Mr Farahbakht in circumstances where he resiled in a very material respect from a version of a conversation to which he had deposed in an affidavit, and propounded a version of events which I was satisfied could not be accepted in the context in which it was said to have taken place.

16 While that, no doubt, provides Midas with a strong starting point, it would be wrong to hold that, because Mr Farahbakht had been disbelieved by me on one occasion, that he would necessarily be disbelieved by me, let alone any other judge, on future occasions. Indeed, as I understand the position, the circumstance that a witness had been disbelieved by a judge on one occasion would not be admissible as evidence in other proceedings, and could not properly be asked of the witness in cross-examination.

17 There is now evidence before me, which was not before me on the contempt application, which shows that customers generally dealt with Mr Norman as shop manager rather than with Mr Farahbakht, and that Mr Norman pressured some of those customers, quite persistently, to pay cash rather than, for example, by credit card. It may be, as Mr Norman says, that that was because Mr Farahbakht had directed him to do so, and it is not readily apparent that Mr Norman would have any other motive for such conduct, but the customers' evidence does not go very far towards implicating Mr Farahbakht, or corroborating Mr Norman's version that what he did was on instructions from Mr Farahbakht. It does show Mr Nornan playing a rather more significant role than had emerged in the evidence, so far as it went, on the contempt application.

18 I should not overlook that in the contempt proceedings, my conclusions involved accepting that in the course of a telephone conversation with Mr Norman, Mr Farahbakht, having learnt that Mr Norman was to give evidence against him, must have appreciated that that would be seriously damaging to his case and said to Mr Norman words to the effect, "Are you going to tell them what really happened or are you going to tell them nothing?". There is certainly room to infer from that conversation, as I did on the contempt application, an appreciation that the truth would be damaging, and that has caused me real concern as to whether I should not simply reach the same conclusion on the present application. But to do so would, I think, overlook that additional evidence which bears on the viability of a defence is now before me, and that a court's decision is more soundly and desirably founded, where possible, not on a single statement in a disputed conversation, but on an analysis of as much evidence as can be assembled.

19 There are some matters which have now emerged, which were not in evidence on the contempt application, which suggest that while Mr Norman starts from a strong position so far as credit is concerned, it might be possible for his credit to be undermined. One instance of that is his response to the evidence of a witness whose affidavit was read in Mr Farahbakht's case - one Anuradha Thiers - who deposes to having taken her vehicle to the plaintiff's shop for service on 25 July 2006, having been put under considerable pressure by Mr Norman to pay cash when she wanted to pay by credit card, then having been told by Mr Farahbakht that she should pay by whatever means was easier for her, and that she paid by credit card but was not issued an invoice. The vehicle inspection report for the job shows a price of $179. Her credit card statement shows a payment to Midas West Ryde on the same day, 29 July, for $179. Mr Norman's response was that he did not give her an invoice "because there was a discrepancy about price". At first sight, this explanation is somewhat remarkable, because no discrepancy about price is apparent on the documentation which has been provided. Moreover, it illustrates that it was the responsibility of Mr Norman, as distinct from Mr Farahbakht, to provide invoices to customers.

20 Another basis upon which his credit might ultimately be undermined includes that Mr Farahbakht alleges that Mr Norman forged his signature on a cheque. Mr Norman counters by saying that he signed the cheque in his own name and did not forge a signature. This is, no doubt, an issue in respect of which Mr Norman's integrity will be explored in due course.

21 For those reasons, despite the considerable advantages with which Mr Norman begins in the credit stakes, it is not impossible that his credit might be undermined at a final hearing. It also needs to be borne in mind that at that final hearing it will be the case that relies on Mr Norman's evidence, and not the case that relies on Mr Farahbakht's, that has to be proved, and proved to the Briginshaw standard.

22 The third matter on which Midas relies is the evidence of Mr Houghton, an investigator who was retained to conduct surveillance of the shop. Mr Houghton was able to procure two cash transactions. The second was effectively entirely with Mr Norman, and thus proves nothing against Mr Farahbakht. The first was initiated through Mr Norman, although the cash payment was made to Mr Farahbakht and no invoice was issued. Mr Farahbakht's response is that it was Mr Norman's responsibility as shop manager to issue the invoice. He does not deny receiving cash, nor putting it in his wallet, but says that that is not itself a non-disclosure or understatement of sales: it would be so only if no invoice was issued that resulted in Midas learning of the sale. Mr Houghton's evidence says much more about Mr Norman than it does about Mr Farahbakht and it does not establish that Mr Farahbakht was engaged on the fraudulent course which Midas alleges.

23 The fourth matter is the evidence of a customer - Massoud Saad - that he paid cash and was not given a receipt, which appears to accord with records of Midas that no invoice for that particular transaction was issued or came to Midas' notice. Although he refers to dealing with a man whom he believed to be the owner, it is entirely unapparent from his affidavit whether he was dealing with Mr Farahbakht or Mr Norman, and his affidavit would not justify a conclusion that he was dealing with Mr Farahbakht.

24 But the most significant matter, in the view I have ultimately reached on this application, is the documentary evidence. In an affidavit of Mr Jarrett, Midas' State Manager New South Wales and ACT, sworn on 27 October 2006, evidence was adduced, which at first sight was compelling, of about twelve vehicle inspection reports, which had been issued to customers, apparently paid by cash or EFTPOS, and were not recorded in the list of sales reported to Midas. When first adduced, this evidence impressed me considerably as providing independent confirmation, from the plaintiff's records, of the defendant's case. And had the evidence remained in that state, then it is probable that when added to the other matters to which I have already referred, it would have persuaded me that there was no serious likelihood of the plaintiff ultimately succeeding. However, an adjournment was obtained to adduce evidence in response to Mr Jarrett's affidavit, and Mr Farahbakht has produced invoices corresponding with, I think, seven of those twelve instances; the absence of an eighth is explained because it occurred during a period to which Midas' computer records do not extend - apparently while there was a change in the computer system; and Mr Farahbakht has offered an explanation, though not production of an invoice, for at least three of the four others.

25 Any suggestion that the invoices are of recent manufacture to concoct an explanation can be rejected, because at least two of them appear in the list of sales which Midas put in evidence. The production of these invoices, in a case which until that point depended on the allegation that there had been cash sales for which no invoice was raised, means that at relatively short notice Mr Farahbakht has been able to show affirmativcely that the allegation is not correct in a substantial majority of the particular instances which have been so far identified. It is true that in the time available an invoice has not been able to be produced for every such occasion, but the fact that it has been possible, at least on a prima facie basis, to refute the allegation in the majority of cases is a telling indication that Mr Farahbakht may well be able to answer the allegation of fraud when it is reduced to particulars of individual occasions.

26 I do not, of course, look at each of the five matters on which Midas relies independently, and I have not overlooked that relatively weak strands might be spun together to form a strong case, but even looking at them all together, only the evidence of Mr Norman is necessarily inconsistent with the explanation that Mr Farahbakht has given. I do not doubt that the plaintiff's case faces significant hurdles, particularly on credit, and that it may not be easy to undermine Mr Norman, but not all the evidence before me now was before me on the contempt application, and in view of the answers that have been provided in respect of the specific transactions referred to in Mr Jarrett's affidavit of 27 October 2006, it cannot be said that it is not seriously possible that, with further evidence and further cross-examination, a court might come to a conclusion that the evidence does not establish fraud against Mr Farahbakht. The ability to refute a substantial majority of the specific allegations on quite short notice is to my mind telling, and shows that there is a seriously arguable case that the plaintiff will be able to refute particularised allegations of fraud. This goes substantially beyond the plaintiff simply saying that he has put everything in issue; rather it shows not only that he has put everything in issue, but that in a significant majority of the particularised instances of alleged fraud, he can affirmatively disprove the allegation.

27 Accordingly, in my judgment there is a sufficiently arguable defence to the allegations of fraud to justify considering the balance of convenience.

28 Assessment of the balance of convenience involves, as was said by May LJ in Cayne v Global Natural Resources plc [1984] 1 All ER 225, 237, balancing the risk of doing an injustice - that is, balancing the risk that greater injustice will be wrought by wrongly refusing an injunction than will be occasioned by wrongly granting one.

29 If I grant an injunction, Midas will be burdened, until the final hearing, with an unwanted franchisee who has on relevant assumptions defrauded it. Although there is perhaps a risk of further fraud, in the circumstances and given the vigilance with which Mr Farahbakht will, no doubt, be watched in the meantime, that seems unlikely.

30 On the other hand, if an injunction is withheld, Mr Farahbakht's franchise business will be destroyed, and it will not realistically be possible to restore it to him after a final hearing. I do not think that this is a case in which damages would be a sufficient remedy: if there is no injunction, Mr Farahbakht will lose his business and source of income, and it will not be practical to restore him, if ultimately he succeeds, to the position in which he would have been had he continued to operate the business in the interim. The difficulties in assessing damages in such a case are obvious.

31 It is at this point that the practically final consequences of deciding the application against Mr Farahbakht are relevant. The serious consequences of wrongly refusing an injunction cannot adequately be redressed, whereas the consequences of granting one are relatively slight. This weighs significantly in the balance of convenience. In my judgment, there is a very substantially less risk of ultimate injustice if an interlocutory injunction is wrongly granted, than if one is wrongly withheld.

32 Accordingly, while the plaintiff's case for final relief is not necessarily a strong one, it is, as I have said, sufficient to require consideration of the balance of convenience. As is clear from the statements of Gummow and Hayne JJ in the High Court in O'Neill, the strength of the case which has to be proved to justify an interlocutory injunction is influenced by the practical consequences. This is a case in which, even though the prima facie case might not be particularly strong, particularly in light of the credit difficulties which it will encounter, the practical consequences are such as to strongly favour the granting of interlocutory relief. There is a sufficiently arguable case, having regard to the practical consequences of granting and withholding interlocutory relief, to warrant the grant of the injunction sought.

33 Upon the plaintiff by his counsel giving to the Court the usual undertaking as to damages, and upon the further undertaking of the plaintiff that he will apply for expedition of the proceedings and prosecute the proceedings with all due diligence and expedition, I order that until the hearing or further order, the defendant be restrained from terminating the Licence Agreement or the Franchise Agreement between the parties in reliance on the Notices dated 11 September 2006 and entitled "Notice of Termination of Licence Agreement" and "Notice of Termination of Franchise Agreement" or otherwise by reason of the facts, matters and circumstances, referred to in the evidence in these proceedings. I order that the costs of the interlocutory application be costs in the proceedings. I stand the proceedings over to Thursday 9 November 2006 at 9.30am before me for directions. I order that the exhibits on the interlocutory application be returned. **********

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