FBHS (Aust) Pty Ltd v Stone Homes Pty Ltd

Court of Appeal (NSW)|2014-08-21|Before: Barrett JA, Gleeson JA, Leeming JA, Stevenson J

) GHS Legal Lawyers (Respondents) File Number(s): 2014/123737 Decision under appeal Citation: [2014] NSWSC 370 Date of Decision: 2014-04-01 00:00:00 Before: Stevenson J File Number(s): 2012/365061

Judgment 1BARRETT JA: I agree with Leeming JA, both as to the disposition of the appeal and the reasons therefor and as to the reasons for the order made on 21 August 2014 dismissing the motion seeking leave to initiate a cross-appeal. 2GLEESON JA: I agree with the reasons of Leeming JA and the orders which his Honour proposes. I also agree with the reasons of Leeming JA for the orders made at the hearing of the appeal on 21 August 2014 refusing leave for the respondents to file out of time a notice of cross-appeal. 3LEEMING JA: The parties sell sheds. They trade under the names "Fair Dinkum Sheds" and "Best Sheds". There are similarities between the products, their marketing, their ordering systems and their pricing. There are differences too, chief amongst which is the fact that one sells sheds that are custom-designed, while the other sells from a catalogue. The primary judge found that the respondents' business was not "similar" to that of the appellants, and so did not contravene a restraint of trade covenant. The appellants challenge his Honour's construction of the covenant, his application of the covenant to the facts, and a refusal to permit an amendment sought on the sixth day of the hearing. I have concluded that none of those challenges should be accepted.

Parties to the proceedings and the 2 August 2007 sale of business 4The first respondent (Stone Homes) is a company which until around mid-2012 traded under the name "Best Sheds". Its shareholders are the second and third respondents, Mr Dennis McFadden and Mrs Gai McFadden, who are husband and wife. At all times Mr Dennis McFadden has been a director of Stone Homes. Other members of the McFadden family have from time to time been directors but from the middle of 2012 Mr Dennis McFadden has been Stone Homes' sole director. 5Mr and Mrs McFadden were beneficial owners, prior to 2 August 2007, of AG&S Building Systems Pty Ltd (AG&S), a company which had developed and owned and operated a computer software program called "MultiBuild". It was admitted on the pleadings that the program had the ability to custom-design steel sheds depending upon the needs and wishes of a customer, and that AG&S operated a business of selling and/or distributing those sheds through a network of distributors. The principal revenue stream to AG&S was commission paid by those distributors. 6The fourth respondent (Best Sheds) is a wholly owned subsidiary of Stone Homes. Its directors have at all times been members of the McFadden family. It was common ground that it changed its name on 14 June 2012 and that it supplies and sells steel sheds and components for steel sheds in competition with and in the same market as the appellants. However, it has not done so using the MultiBuild software; instead it sells a range of some 30 sheds. 7The second appellant Stramit Corporation Pty Ltd (Stramit) entered into a supply agreement with AG&S in 2001, pursuant to which Stramit became the exclusive supplier of roll-formed products and flashing to AG&S and its distributors. Previously those materials had been sourced from other suppliers. 8Stramit was at all times the sole shareholder of the first appellant FBHS (Aust) Pty Ltd (FBHS), which acquired the assets of AG&S in a transaction executed on 2 August 2007. FBHS trades as "Fair Dinkum Sheds". Its promotional material identifies it as "a member of the Fletcher Building Group". 9The transaction was effected by a suite of agreements, chief amongst which were two business purchase agreements. The first was for the purchase of the assets of AG&S for $28,528,073. The principal contributor to that purchase price was goodwill (in excess of $27,000,000). The second was for the price of the assets of related companies for $471,927. Speaking generally, those assets related to the overseas operations of the business. The sum of the prices paid under the first and second business purchase agreements was precisely $29 million. Each of those agreements included various contractual restraints upon, relevantly, the various vendors, members of the McFadden family and Stone Homes. It is common ground that the time during which those restraints operated has expired. 10On the same day, FBHS entered into a distributor agreement with Stone Homes (as Distributor) and Mr and Mrs McFadden (as Principals) (Distributor Agreement). The Distributor Agreement imposes the restrictive covenant on which FBHS sued and which is central to this appeal. 11It is convenient to note two contextual matters immediately. First, it was a condition of the business purchase agreement that Stone Homes and the McFaddens execute the Distributor Agreement. No challenge was made to the finding by the primary judge (at [26]) that: "FBHS insisted that Stone Homes enter into the Distributor Agreement (rather than simply continue as distributor under the 14 February 2007 agreement with AG&S) to demonstrate to other distributors Mr McFadden's commitment to the new commercial arrangements." 12Secondly, Stone Homes had already been a distributor before the sale to FBHS, pursuant to an earlier distributor agreement with AG&S dated 14 February 2007. Although FBHS drew attention to the restrictive covenants in the business purchase agreements entered into on the same day as the Distributor Agreement, in fact the contractual restraint in the Distributor Agreement is different from those restraints, and is substantially the same as that in the other distributor agreements used by FBHS thereafter, and as the earlier distributor agreement it replaced. 13Stone Homes operated pursuant to the Distributor Agreement from 2 August 2007 until 2 August 2012, trading under the name "Best Sheds". On 4 May 2012, it gave notice to FBHS of its intention to terminate the distributor agreement with effect from 2 August 2012. That date coincides with the expiration of the restraints imposed by the business purchase agreements.

Proceedings at first instance and on appeal 14The appellants commenced proceedings against the respondents on 23 November 2012. They sought final, but not interlocutory, injunctive relief. Questions of pecuniary remedies (if any) were separated. The litigation was expedited and a trial took place over seven days in February and March 2014, with a decision delivered by the primary judge (Stevenson J) on 1 April 2014. Issues were determined at trial going beyond those raised on appeal. What is presently relevant is that the primary judge construed the covenant which is expressed in terms of similarity to require a "substantial or significant" similarity before it was contravened. His Honour then found that the business of selling sheds conducted by the respondents lacked the requisite substantial or significant similarity; indeed, his Honour found (at [117]) that there was "no more than a passing resemblance". 15The appellants challenge the primary judge's construction (grounds 1-3). Alternatively, they contend that even on that construction, the primary judge erred in failing to find breach by the "Best Sheds" business (grounds 4 and 5). There is also a challenge to the refusal by the primary judge to permit an amendment on the sixth day of the trial (grounds 6 and 7). Each of those issues is addressed, in turn, below. 16For their part, the respondents sought leave, at the hearing of the appeal, to rely out of time on a cross-appeal. Leave was refused immediately after argument was concluded. My reasons for joining in that order are given below.

Grounds 1-3: Construction of the restrictive covenant 17There was no dispute either at first instance or on appeal as to the applicable principles of construction, although the appellants said that the primary judge had erred in applying those principles. However, two preliminary points may be made at the outset.

(a) Two preliminary points 18First, the parties disagreed as to the reliance to be placed upon the construction given by the primary judge. The respondents submitted in writing, relying on what Kirby P had said in Galcif Pty Ltd v Dudley's Corner Pty Ltd (1995) 6 BPR 14,134, that it was sufficient for the construction given by the primary judge to be "available", and that if it were not shown to be incorrect, it ought not to be interfered with. The appellants in their written reply said, in substance, that the proper construction of the covenant was a matter for this Court, to which no appellate deference applied. These submissions were not elaborated orally. 19The passage in Kirby P's reasons in Galcif on which the respondents relied is as follows: "The process before the Court is an appeal. We are not sitting at first instance. We are considering whether it has been shown that Bryson J erred in the judgment he entered against Galcif. Words of any language are commonly disputable in meaning. Words of the English language are particularly so because of the history of the English language. Few, if any, English words are completely unambiguous or not susceptible of more than one meaning or have an entirely plain meaning. See McHugh JA in Manufacturers' Mutual Insurance Limited v Withers (1988) 5 ANZ Insurance Cases 60-853, 75,343. In these circumstances the Court, even where faced with a task of legal interpretation, will pay respect to the opinion of the primary judge if that opinion is not shown to be [un]available and appears not to be wrong." 20The position is more complex than either party submits. Contrary to the respondents' submission, a contract can have but one legal meaning. As Isaacs J said in Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 78, "there is always one and only one true meaning to be given to fully expressed words". As Lord Hoffmann observed, if it had not long ago been determined that the unique meaning of a contract was a question of law, there would have been no certainty in the construction of standard commercial documents: Carmichael v National Power Plc [1999] UKHL 47; [1999] 1 WLR 2042 at 2049. It follows that the conclusion by an appellate court that the legal meaning of a contract (or for that matter a statute) is different from that adopted at trial carries with it the conclusion of error: Branir v Owston Nominees (No 2) [2001] FCA 1833; 117 FCR 424 at [25]. 21In determining the legal meaning of a contract, an appellate court will of course pay considerable regard to the reasoning process of the primary judge, who after all had in the present case the benefit of seven days of evidence and submissions in a trial where it was a primary issue. That is what I read Kirby P as intending to convey. Galcif is not to be read in the sense suggested by the respondents, as if there were a range of valid legal meanings, amongst which some deference was to be accorded to that selected by the primary judge (analogous to so-called Chevron doctrine applicable in the United States to the legal meaning of statutes which forms no part of Australian law: Corporation of the City of Enfield v Development Assessment Corporation [2000] HCA 5; 199 CLR 135 at [44]). That would be foreign to Australian law. 22That is not to deny that there is, in an appropriate case, scope for appellate deference. For the legal meaning of a written contract turns not merely on the linguistic meaning of the words but also on their context including the purpose and object of the contract. As to the latter there may be factual dispute and contested evidence and the need to make findings of fact: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; 76 NSWLR 603 at [19]-[20]. Moreover, the meaning of particular words (such as where there is a special trade usage) may be a disputed question of fact. It follows that construction may involve findings of primary fact to which conventional appellate deference must be given. However, considerations of that nature did not form part of the reasoning of the primary judge in this appeal. 23Secondly, "the courts differ in their attitude to goodwill and employment covenants, so that the decision as to which category a covenant falls into can be important": J D Heydon, The Restraint of Trade Doctrine (LexisNexis, 3rd ed, 2008), p 91. The covenants in the sale of business agreements were plainly directed to the protection of goodwill, in a context where the goodwill was rightly regarded as a very substantial component of the purchase price. In contrast, the covenant in the Distributor Agreement bears similarities to a covenant in a franchise agreement (as to which see KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 722). There is also need for care in referring to goodwill in this context, as appears from the judgment of Jonathan Sumption QC, sitting as a Deputy Judge, in Marshall v NM Financial Management Pty Ltd [1995] 4 All ER 785. There, in relation to a covenant which was imposed on a self-employed sales agent selling insurance and pension contracts, it was said at 792 that "Mr Marshall's business as an agent, including the goodwill arising from his reputation and connections, was his own property and not the defendant's. The only interest which the defendant itself could have to protect is its interest in the goodwill attaching to its own business as a seller of investment agreements". 24However, neither party contended that the nature of the covenant altered its construction. In large measure, that was a product of the fact that (save for a belated cross-appeal) it was common ground that the covenant was valid. Hence there is no occasion for considering the precise nature of the covenant in the Distributor Agreement or the goodwill protected by it.

(b) Applicable principles of construction 25The parties were agreed that the Distributor Agreement including the restrictive covenant within it was to be construed by reference to what a reasonable person would understand by the language in which the parties had expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [52] (Bathurst CJ, with whom Macfarlan and Meagher JJA agreed), which conveniently collects earlier authorities, and on which the primary judge relied. His Honour also referred to and applied the objective approach as articulated in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447 at [35], which: "will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'." 26The genesis, background and context of the Distributor Agreement includes both the transactions effected on 2 August 2007 and the pre-existing distributor agreement between AG&S and Stone Homes. The former was the occasion for the Distributor Agreement; the latter was the source of the contractual language in the restraint.

(c) The Concept, the Products and the Covenant 27The covenant in the Distributor Agreement on which FBHS relies turns on the defined terms "the Concept" and "the Products". Their definition is found in Recital A of the Distributor Agreement as follows: "Pursuant to Business Purchase Agreements dated 2 August 2007 between, among others, FBHS, the Principals and the Distributor ("Business Purchase Agreements"), FBHS is the owner of a distinctive computer software program (and/or any successor to the same and/or any other software authorised by FBHS) plans, engineering drawings, designs, and materials ordering system and pricing concept (collectively referred to in this Agreements as 'the Concept') for the design, costing and listing of components for Steel Sheds ('the Products')." 28The "distinctive computer software program" was the "MultiBuild" software mentioned above, which facilitated the design of sheds to the precise requirements of Stone Homes' customers, the pricing of such sheds and the sourcing of the components needed for the construction of such sheds. "Steel Sheds", although capitalised, was not defined. 29The Distributors were granted "a non-exclusive right to use the Concept for sales of the Product to be in Australia erected" [sic] and were obliged to pay "commissions for the use of the Concept during the term of this Agreement" (cl 4(b)(i)). Indeed, the Distributor was required to "pay the appropriate commission whether the Concept is used or not for any products similar in style to the Product or any derivative thereof that the Distributor sells during the term of this Agreement" (cl 4(b)(iii)). The commission was normally a flat $10 "MultiBuild Fee" plus a variable commission dependent upon the size of the shed and the number of its bays (ranging from $145 for sheds "up to and inclusive of 7.5 metres" to $726 for sheds "up to and inclusive of 20 metres" to $2420 for sheds "up to and inclusive of 40 metres"). In each case, there were additional fees of $73 per additional bay, a fee for lean-tos of $73 or $145 depending on whether the span exceeded 6 metres, and other variables. 30Annexure 2 contained a list of procedures, to which "strict adherence" was required, the first five of which were (a) the "MultiBuild" software is provided to the Distributor subject to paying usage fees, (b) when a sale was made, MultiBuild would generate a Bill of Materials, (c) the Distributor was required to check to materials on the order, and the applicable freight; (d) when an order was placed with FBHS, steps needed to be taken for the payment of commission (by funds transfer, debit or cheque); and (e) upon payment of the commission, FBHS would transfer orders to suppliers. Annexure 3 was a licence agreement for "MultiBuild". 31Thus, central to each Distributor Agreement was the licence to use MultiBuild and the obligation to pay a licence fee. As noted above, the licence fees were substantial. That was an important element of the context and surrounding circumstances for the imposition of a restrictive covenant, which was as follows: "Restrictive Covenants (a) The Distributor and Principal hereby covenant that during the term of this Agreement and for a period of 3 years after the termination of this Agreement, they (neither jointly nor separately) shall not without the prior written consent of FBHS directly or indirectly as an employee, proprietor, partner, director, shareholder, officer or otherwise engage in the operation of a concept identical to or similar to the Concept anywhere in Australia. (b) For the avoidance of doubt, Clause 5 shall operate to prevent the Distributor and Principal on the termination of this Agreement and for a period of 3 years thereafter from: i. Dealing with products similar to the Product by alternative methods, procedures, designs and plans; ii. Using such methods, designs and plans used by the Distributor prior to this Agreement to manufacture or sell similar products; and, in consideration of any confidential information and know how imparted by FBHS to the Distributor in relation to the Concept and the shed industry generally (the use of which by the Distributor cannot be restrained by FBHS for whatever reason), for a period of 3 years after the Distributor ceases to be a distributor of the Product for whatever reason. iii. Manufacturing similar products that the Distributor dealt with or manufactured prior to this Agreement; and iv. Dealing in software and associated media either directly or via agents to produce products similar to FBHS's Products or Concept. (c) The Distributor and Principals acknowledge these restrictions as fair and reasonable for the protection of FBHS' goodwill, the Product and the Concept."

(d) The construction of the Covenant 32The following matters emerge from the text and structure of that clause. First, paragraph (a) picks up the heading "Restrictive Covenants" and makes provision for a covenant, limited to the Agreement's term and the following three years, not to do certain things. 33Secondly, contrary to the appellants' submission, paragraph (b) is not a "free-standing" restraint. In support of the submission that paragraph (b) operated separately from paragraph (a), the appellants correctly submitted that a restrictive covenant need not use the verb "covenant", and pointed to the matters in paragraph (b) which the Distributor and Principals were prevented from doing. However, the opening words of paragraph (b) stand in the way of acceptance of the appellants' submission. The words "for the avoidance of doubt" suggest that cl 5(b) is directed to confirming aspects of the operation of the covenant in cl 5(a), as opposed to imposing a separate obligation. Accepting as I do that those words are not determinative of this issue, the next words, "clause 5 shall operate", make it plain beyond argument that the paragraph (b) is directed not to imposing a free-standing restraint, but instead to qualifying and confirming the operation of the covenant stated in paragraph (a). That is to say, the point of paragraph (b) is to confirm and perhaps alter the erstwhile operation of paragraph (a), rather than itself to impose an obligation. The words "clause 5 shall operate" could bear no other meaning, and the contrary construction propounded by the appellants would deny those words of meaningful operation. 34Further, that conclusion is strengthened by two additional textual considerations. It will be seen that paragraph (a) is expressly (i) subject to the prior written consent of FBHS, and (ii) limited in area to Australia. Paragraph (b) contains neither limitation. If paragraph (b) were free-standing, it would have worldwide operation, and not be subject to a qualification where prior written consent has been obtained. 35Thirdly, paragraph (a) focusses upon "engaging in the operation of a concept" which answers a certain description - of identicality or similarity to the "Concept". Content is given to those words by both the definition of "Concept" and the more precise elements in paragraph (b). 36The (capitalised) "Concept" must be to be taken to be that defined in Recital A. The ordering of the things which collectively are defined to constitute the Concept is significant. So too is the fact that the software program is the first element listed. So too is the fact that the computer software program is qualified by the adjective "distinctive", while none of the remaining elements are qualified. So too is the fact that there is a more elaborate definition of the computer software program - essentially, successors to the same or other software authorised by FBHS - than has been given to the other elements of the things which comprise the Concept. So too is the fact that there is a reference not merely to "pricing", but to a "pricing concept". 37The distinctive feature of the computer software program is that it permitted the design of sheds of whatever dimension the customer preferred (or, at least, gave a great deal of latitude). That emerges powerfully from the promotional material. It carries with it not a few consequences. It meant that it would be necessary to produce bespoke plans corresponding to the customer's specifications. Plans will (at least normally) be necessary in order to obtain planning approval; but if the dimensions are nominated by the customer, then it will be necessary for every sale to generate an individual plan. It also meant that it would be necessary to obtain engineering certification for those plans, and quite elaborate steps appear to have been taken to that end (there was a deal of evidence to this effect, associated with the appellants' prominent reliance on an accreditation known as "Shedsafe", which need not be recounted for the purposes of these reasons). It also meant that it would be necessary to place orders for primary materials which would vary depending upon the matters specified by the customer. Finally, it meant that it would be necessary for any particular design to establish a cost, on the basis of which a price to the customer could be determined. This bears a natural relation to the "pricing concept", quite different from a price list familiar in selling items from a catalogue. Indeed, it strains language to describe a fixed price list as a "pricing concept". 38In short, it may readily be seen that the "plans, engineering drawings, designs, and materials ordering system and pricing concept" which collectively described the "Concept" were all inevitable but at the same time derivative consequences of the distinctive aspects of the computer software program. 39Fourthly, paragraphs (a) and (b) referred to engaging in the operation of a "concept identical to or similar to the Concept" and "dealing with products similar to the Product". How is "similar" to be determined? As a question asked by the primary judge in the course of argument disclosed, it must be contextual. In some respects, rabbits and elephants are similar: both have four legs, two eyes and a nose and are herbivores. They may be similar for the purposes of an evolutionary biologist, but much less so from the perspective of a gamekeeper or taxidermist. Whether there is similarity thus turns on why the question is asked. 40The appellants, rightly, acknowledged that the comparison involved was qualitative, not quantitative. The following exchange illustrated the submission: "BARRETT JA: Where does this spectrum [of what is similar] come from and how do you pick the right spot on it? MOSES: In going to the facts of this case, the starting point necessarily must be what were the elements of the concept which were critical to the operation of the business of the first appellant which here was, of course, ultimately the sale of the sheds through shed kits to the public. BARRETT JA: So if you find five crucial elements, similarity would exist if three of those were present? MOSES: There has to be qualitative similarities, your Honour, and not just quantitative. We looked to the quality of the similarities in order to demonstrate our point and we will come to that when we deal with the question of breach, even on his Honour's own construction of the point." 41The appellants' submission is correct, but does not go far enough. The meaning of "similar to the Concept" in this context does not turn on any dictionary meaning of "similar": see the authorities in Smalley v Motor Accident Authority of New South Wales [2013] NSWCA 318; 85 NSWLR 580 at [47]. Nor does it turn on what has been held in other construction cases; as the primary judge correctly observed at [92], no two cases are identical and at best assistance may be obtained from the process of reasoning. 42Here, the parties have defined a "Concept" in a particular way and have forbidden engaging in conduct which is "similar" to it. It is the contract itself which contains the key to construing what the parties are to be taken have meant when referring to what is "similar". Within the qualitative analysis necessary to identify similarity, weight must be given to the way in which the Concept has been defined. In particular, there is stated to be one "distinctive" thing in it: the distinctive computer software program. If a concept comprises a distinctive element, as well as other elements, then it is likely that there will be "similarity" in the sense taken to have been intended by the parties if and only if a different concept shares the distinctive element. 43That is to say, if a person bound by the constraint uses the distinctive computer software program, then it is easy to see that the person will be engaging in a concept which is similar - in the sense taken to be intended by these parties - to the Concept. If the person uses software which replicates those aspects of the MultiBuild software which make it distinctive, then the same is true. Conversely, if the person does not use computer software, or uses computer software but not in a way which replicates that which makes MultiBuild distinctive, then that will be a powerful consideration suggesting that the conduct lacks the proscribed similarity. 44In short, much more important in the qualitative analysis is whether there is a corresponding use of a "distinctive computer software program", as opposed to whether two businesses use a "materials ordering system" and have a "pricing concept". Whether there is a use of plans, drawings, designs and a materials ordering system is relatively unimportant. 45Commercial considerations support this conclusion. FBHS paid $29 million for a business with few tangible assets and a large revenue stream based on commission paid by distributors. There could be no question of a licence fee being paid merely for selling a shed from a catalogue using an excel spreadsheet identifying prices or components. The licence fees were attributable to that which made MultiBuild distinctive - the ability for customers to design their own shed, with plans and structural integrity and components and pricing completed by the software. 46In the context of the Distributor Agreement, what would make a former distributor's business relevantly "similar" to the Concept would be the extent to which it used MultiBuild or something like it to give customers the same ability to specify the dimensions of their orders, with all that entails in terms of marketing, materials and pricing. It is quite natural that the post-contractual covenant in the Distributor's Agreement is narrower than those in the two business purchase agreements. That accords with the reasoning of the primary judge, who concluded at [101]-[103]: "In those circumstances, and consistently with the prefatory words to cl 5(b) ("for the avoidance of doubt"), a "reasonable businessperson" would in my opinion understand that in cl 5(b)(i) the parties: (1) are explaining how they intended cl 5(a) to operate during the three years following termination of the Distributor Agreement; and (2) making clear that, during that three year period (when Stone Homes and its related entities would no longer have no access to 'the Concept') they must not use 'alternative methods, procedures, designs and plans' to the 'Concept' to engage in a 'concept' which is 'similar to' the 'Concept'; but (3) were not seeking otherwise to prevent Stone Homes and its related entities from 'dealing with products similar to the Product'. I thus do not accept the submission advanced on behalf of FBHS that the effect of cl 5(b)(i) is that the defendants cannot, in any circumstances, sell sheds in competition with FBHS for a three year period after the termination of the Distributor Agreement. However, the defendants cannot act in the manner described in the preceding paragraph: they cannot sell steel sheds in competition with FBHS if, in so doing, they are in substance using a business model or system that mimics that of FBHS (engaging in a 'concept' similar to the 'Concept'). No doubt the parties could have used words that expressed these matters more clearly. However, this construction of their words brings cl 5(a) into harmony with cl 5(b)(i): see Australian Broadcasting Commission v Australian Performing Rights Association (1973) 129 CLR 99 at 109 per Gibbs J." 47There is no error in the substance of the primary judge's conclusion on the construction of the covenant.

(e) A separate, supplementary complaint 48Separately from the foregoing, the appellants contended that error was disclosed in [105] of his Honour's reasons, where his Honour said "Whether such harmony is achieved with the later sub-clauses of cl 5(b) (especially cl 5(b)(iii)) is a matter I need not consider, as they are not within the ambit of FBHS's pleaded case." Rightly, the appellants submitted that the contract should be read as a whole, with the clauses construed, if possible, so as to give harmonious meaning to them all: see for example North v Marina [2003] NSWSC 64 at [45]. 49However, nothing turns on this, for it is clear that subparagraph (b)(iii), which on any view is confined to manufacturing, will not materially alter the construction of the clause as a whole in its application to the case advanced by the appellants. (This is what I take his Honour to have intended to convey.) That is so for these reasons. 50There is a series of difficulties with subparagraph (b)(iii). There are two subparagraphs directed to manufacture: (ii) and (iii) (subparagraph (i) is directed to dealing, subparagraph (iv) is directed to dealing in software). Both (ii) and (iii) focus upon "similar products". It is less than clear what the requisite similarity is, in either case. Further, those two subparagraphs are to be construed so that both have work to do. The broad and simple language of subparagraph (iii) would not readily be construed so as to deny all operation to the more elaborate words of subparagraph (ii). Finally, it is clear that, in some aspects at least, something has gone wrong with the language in paragraph (b). It will be seen that the three year period of post-termination restraint occurs both in its chapeau and, redundantly, in the concluding words of subparagraph (ii). 51All those considerations suggest that the task of construing subparagraphs (ii) and (iii) may not be straightforward. But nothing suggests that they will alter the legal meaning of the clause such that its application to the appellants' pleaded case is different. 52The appellants also submitted that the primary judge failed to have sufficient regard to clauses 4(b), 4(d), 5(c) and 7(j). Clause 5(c) is reproduced above, and tends to confirm that the focus is upon the distinctive elements of the Concept. Of the remainder, the first deals with commission, the second with the software licence, the fourth with a right of termination if "the Distributor uses goods and/or materials which are not ordered through the Concept". None of these detracts from the conclusions reached above.

Grounds 4-5: Breach of the clause? 53The primary judge addressed breach relatively concisely, at [106]-[118]. The appellants contended that even on the trial judge's construction of the clause, it was breached. 54Given the nature of the appellants' submissions, the most convenient course is to reproduce the entirety of the dispositive elements of the primary judge's reasoning on breach. "109 FBHS conducts a distributorship on the basis of the 'Concept', the substance of which I have described above (at [19], [28] and [37]). FBHS does not sell sheds or the materials used to construct sheds to the public, or to its distributors. 110 FBHS's distributors are able to use 'the Concept' (in particular the software MultiBuild) to design and price, virtually at a keystroke, a shed to its customers' particular requirements, with almost no limitation on the configuration of the sheds able to be designed and supplied to the customer. For example, FBHS is able to design a shed to meet a variety of regional requirements (including as to capacity to withstand wind load). 111 Once a shed has been designed using MultiBuild, the distributor can then use other aspects of MultiBuild to cause orders to be placed on suppliers for all of the components needed for that particular shed. Those components are then delivered directly to the distributor or customer without further input from the distributor. 112 A striking feature of the FBHS 'Concept' is that the distributor does not need to maintain any inventory or stock of shed components. An FBHS distributor need not itself make any judgment about what components are needed for the particular shed ordered by the customer. The distributor need not make any prediction as to likely customer demand or decide what components should be on hand to meet demand; let alone fund the cost of maintaining an inventory. 113 In addition to being able to offer bespoke 'made to measure' sheds, FBHS now offers a range of standard "off the shelf" shed models; but only in response to Best Sheds' marketing campaign of its 'standard range'. 114 On the other hand, Best Sheds: (a) sells a standard range of some 25 pre-made sheds and is unable to custom build sheds to meet individual customer requirements or the proposed location of the shed; (b) is unable, for example, to design sheds suitable for particular wind forces prevalent in any given location; (c) can only vary its 'off the shelf' designs by moving the location of doors and windows around the plan using a licensed "Computer Aided Designed" package; (d) does not operate a distributorship; (e) does not operate within a distributorship; (f) must purchase components from various suppliers; (g) holds stock and inventory which it orders in anticipation of demand; (h) is only able to provide sheds with corrugated wall sheeting; (i) can only sell sheds with roller doors; (j) can only offer five different roofing colour options, one wall colour on large sheds and two wall colours on smaller sheds; (k) after receiving an order for a shed, must engage five to six people to take the order, retrieve the components from storage, pack them and deliver them to the customer; and (l) does not erect or build sheds and does not arrange for this to happen. 115 Best Sheds does use a software program in which it stores details of the components referrable to each of its standard shed sizes and which reveals whether those components are in stock. But its software problem does not have a capacity resembling that of MultiBuild; it cannot design or price a shed; it cannot source components for a shed and arrange delivery of the shed in accordance with a customer's requirements. 116 The only resemblance between Best Sheds' 'concept' as I have described it and FBHS's 'Concept' is that: (a) each uses computer software, albeit to achieve very different outcomes; and (b) each has as its end point the assembly of components for tin sheds which are made available for sale to the public (albeit sheds different in nature and variety and derived by quite different processes). 117 In my opinion, Best Sheds' 'concept' has no more than a passing resemblance to FBHS's 'Concept' and is not a business system or process that can fairly be described as being 'similar' to that of FBHS for the purpose of the Restraint." 55Ground 5 of the appeal was that there was error in the finding of absence of similarity, partly because the primary judge had failed to take into account evidence establishing other relevant similarities, and partly because some of the findings in [113] (namely, (a), (b), (c), (h), (i) and (l)) were not reasonably open on the evidence. I will deal with each in turn. However, I first note that there was (muted) criticism in the appellants' written submissions of the concision of this reasoning, in contrast to the extent to which evidence was tendered bearing on the issue. I would reject the criticism. As will be seen, the impression obtained from the record and the submissions is that a great deal of evidence of limited weight was tendered on this issue which, as will have been noted from the foregoing, is in truth readily susceptible to determination once it is appreciated what is distinctive about the Concept and what therefore is to be regarded as similar to it. 56The appellants identified a long list of matters (23 in all) not identified by the primary judge as constituting similarities. Most were documentary. It must be said that there was a deal of close attention to minor details resulting in a lengthier list. For example, the first two similarities to which the appellants pointed were "[Excel] (part of Microsoft Office) was used in the Best Sheds system of selling steel shed kits" and "the computer software used by Best Sheds was a 'package' which included the EXO program (part of the MYOB accounting software)". There is nothing in this to distinguish the two businesses from tens of thousands of other businesses. Then the appellants pointed to five features involving computers and the internet: "using a computer program involving a system of coding particular components", and "using a computer to generate purchase orders for components", and "using a computer system to generate quotes", and "use of phone, email and internet to sell sheds", and receiving inquiries over the internet for standard and non-standard sheds. Again, there must be thousands of businesses in Australia which share the first three characteristics, and thousands more which would share the fourth and fifth save that the latter are confined to sheds. Nothing turns on this. 57The appellants complained that the primary judge made no reference to MFI 6, which was a six page document provided by the respondents. Its first page identifies ten similarities. Its five remaining pages identify numerous differences. Again, there is nothing in this complaint. The primary judge was plainly familiar with the essential aspects of both businesses, and made findings accordingly. No error is shown by the fact that he chose not to use the MFI 6 to shape those findings. 58There was force in the respondents' submission that "the dissimilarities concerned major aspects whilst the similarities are generic similarities which are common amongst many businesses". For example, it was said that: "FBHS uses promotional brochures for the purpose of selling steel sheds. Best Sheds also uses promotional brochures for the purpose of selling steel sheds, which are similar in content and appearance." 59This Court is probably as well placed as the primary judge to assess the similarities between promotional material. They are similar, in that both contain numerous pictures of sheds in a variety of styles. They are different in that Best Sheds' material contained lists of prices, while FBHS's promotional material contained no prices at all, but emphasised flexibility ("Widths [of barns] start at 9m" and "Both length and width can expand to suit your purposes" and "Farm sheds are available in a vast range of sizes to meet your specific needs"). At the end next to where the distributor's details were to be placed, there was a box: "Customisation View your shed as you design using MultiBuild™ software exclusive to Fair Dinkum Homes & Sheds. Quickly and easily come up with a custom design best suited to you Instantly quote to the dollar your custom design Add and remove features of your design Certify your custom design in minutes Design from scratch or design an extension for your existing shed." 60The finding of similarity is an evaluative conclusion drawn from a range of matters, not all of which are documentary, and some of which were influenced by the testimonial evidence. In some respects, the primary judge was in a better position than this Court to determine and evaluate the various matters invoked by the parties which bore upon the issue. If I were minded to take a different view from that of the primary judge, then it might have been necessary to consider more carefully the deference to which the multi-faceted evaluative finding of similarity ought be accorded. (Prima facie, it amounts to a finding between alternatives and is reviewable pursuant to principles established in Warren v Coombes (1979) 142 CLR 531, as to which see Foley v Ellis [2008] NSWCA 288 at [3] and DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96 at [85].) 61However, it is not necessary to pause to do so, because no error is shown in the evaluative conclusion of the primary judge that there lacked the requisite similarity. His Honour's conclusion that there was "but a passing resemblance" was plainly directed to the differences in product, materials ordering, warehousing, promotion and price, all of which turns upon the non-use of MultiBuild. The primary judge was correct to conclude as he did. 62The respondents in effect conceded the factual errors identified by the appellants. Rather than "some 25 pre-made sheds", Best Sheds had a standard range of 30. To the contrary of what was said in [114(b)], Best Sheds could design sheds for particular wind forces, although that did not normally occur. To the contrary of what was said in [114(c)], there was greater scope for variation than moving doors and windows. Contrary to finding [114(h)], it was not that Best Sheds could only provide sheds with corrugated wall sheeting, but that it chose to do so. Contrary to finding [114(i)], Best Sheds also sold lean-tos and barn windows and personal doors. Contrary to finding [114(l)], while the evidence supported the finding that Best Sheds did not elect to build sheds, it could and did direct customers to builders who had built its sheds previously. However, none of those complaints, which may fairly be described as minor, detract from the force of the primary judge's conclusion that the businesses were not similar. 63Undoubtedly, the respondents were selling steel sheds. It was admitted that the parties were in competition and participated in the same market. 64But the key to the meaning of "similar" flows from what the parties have chosen to describe as "distinctive" - the computer software program that permits and drives the selection, ordering and pricing of bespoke sheds to the customer's specifications. The fact that the respondents use plans, drawings and designs to sell sheds does not make what they do similar to the Concept. Nor does the fact that they have a materials ordering system, or a price list on an excel spreadsheet. The critical qualitative aspect of the Concept is the software for bespoke sheds, and all that that entails. This the respondents do not do.

Grounds 6 and 7: refusal of amendment 65On 19 March 2014, being the sixth day of the trial, which had already been adjourned once following an amendment application by the plaintiffs, a further application was made to amend so as to allege breach of cl 5(b)(iii) of the Distributor Agreement. The occasion for doing so was that Mr Graham McFadden gave evidence that morning, over the objection of counsel for the defendants, that there was a stud machine and a roll-former at Best Sheds' premises at Picton. The question arose within the first page of the cross-examiner's questions. It had been preceded by a notice to produce issued 11 March 2014 (Exhibit AA) and was referred to in argument, to which the response was that documents relating to the purchase or use of any steel roll-forming machines did not relate to any pleaded matter. The notice to produce was never pressed and was not called on. The respondent said that the amendment would require an adjournment (although there was no evidence of that). It was also said that the same questions could have been asked of Mr Dennis McFadden who had given evidence some four weeks previously. 66Counsel for the plaintiffs said that the evidence demonstrated a clear breach of cl 5(b)(iii), which had not been previously disclosed by the defendant's evidence, that it was a short point, that the defendant had not said how long they would need, and that it was one of the real issues to be determined in the case, "otherwise, there is a serious risk of injustice in terms of the issue that has now been put before the court". His Honour's reasons refusing the amendment are at [67]-[71]. He recognised that his discretion was guided by ss 58 and 64(2) of the Civil Procedure Act 2005 (NSW). His Honour said that "it would be inimical to my duty to facilitate the 'just, quick and cheap' resolution of the real issues in these proceedings to permit the amendment sought". His Honour said that the focus of the proceedings had always been cl 5(b), that the amendment would have opened up new issues (namely, whether Best Sheds was "manufacturing" products and if so, whether they were "similar" to those which Stone Homes had "dealt with or manufactured" prior to 2 August 2012) and that the evidence could have been adduced from cross-examination of earlier witnesses. 67The appellants were conscious that the discretionary decision of the primary judge was to be attended by appellate deference and that they needed to establish House v R error in the exercise of that discretion. They pointed to the lack of substance in the evidence of prejudice, since there was nothing more than an assertion made by counsel, and to the fact that there would be a likely costs sanction as the price of an amendment. In contrast, it was said that the "potential for injustice which flows from the decision to refuse to amend is grave considering the evidence before the court that established manufacturing conduct". The submission was put on the basis that the primary judge had failed "to sufficiently take into account material consideration and in doing so plainly erred". 68The trial had been expedited. There had been one adjournment already. It is not necessary to establish by evidence the prejudice caused to a defendant in a case like this; it is self-evident. The appellants did not seek an injunction (which, if granted, would be accompanied by an undertaking as to damages). The hearing called for expedition not merely because the temporal window for the operation of the covenant in favour of the appellants was limited. It was also appropriately expedited because while the proceedings remained on foot, the respondents were at risk of a claim for pecuniary remedies if they were found liable. What is more, there was substance in the statement from the Bar table that it would be necessary to investigate the evidence which might be led as to what had been done prior to 2 August 2007. 69The applicable principles, which reflect the operation of s 64 of the Civil Procedure Act, were stated by Barrett JA (with whom Ward JA and I agreed) in Kelly v Mina [2014] NSWCA 9 at [44]-[48], and applied in Hannaford v Commonwealth Bank of Australia [2014] NSWCA 297 at [16] by Tobias AJA (with whom Beazley P and Emmett JA agreed). Where the application for the amendment was made without notice at the end of the already-adjourned and expedited hearing, it was open for the trial judge to resolve it immediately, and accordingly it was open for it to be resolved without the need to rely on formal evidence of prejudice. Although it is sufficient to conclude that the primary judge's refusal of leave to amend did not involve an error of discretion amenable to correction by this Court, I would go further, and add that, so far as can be seen from the materials available on appeal, his Honour was correct to take the course which he did.

Late application for cross-appeal 70At the commencement of the hearing of the appeal, the respondents sought, out of time, to bring a cross-appeal. The proposed cross-appeal had two components. First, grounds 1 and 2 challenged the conclusions of the primary judge that the restraint of trade was valid; it was contended that, in substance his Honour had erred in finding that FBHS had a legitimate protectable interest under the Distributor Agreement. Secondly, a challenge was made to his Honour's exercise of the discretion as to costs. A supporting affidavit was supplied in the afternoon or evening preceding the hearing of the appeal, and after the appellants had filed written submissions opposing leave to bring the cross-appeal, as well as opposing its substance. The affidavit of the respondent's solicitor, Mr Gregory Smith, was read on the application, and he gave short supplementary evidence when the gaps in his affidavit were exposed in the course of the hearing. He was cross-examined briefly. 71The appeal was brought, promptly, after judgment was delivered. The proceedings at first instance had been expedited, and were dealt with expeditiously by the primary judge. The subject matter of the proceedings is the three year period during which, taking the appellants' case at its highest, the restraint can apply, more than two-thirds of which have expired. 72The proceedings were listed before a Judge of this Court on 30 June 2014, where expedition was granted, a hearing date given, and directions made for the provision of appeal books and submissions. It was common ground that at that hearing, the Court was told that Mr Smith (by reason of existing overseas travel commitments) would "be unable to attend to the preparation of the respondent's response to the appeal, any notice of contention/cross-appeal nor instruct counsel as to the preparation of same". 73The evidence was that Mr Smith regarded himself as having standing instructions to take whatever steps in response to the notice of appeal seemed appropriate to him, including bringing a cross-appeal. However, he said he had received different instructions in relation to an appeal from the decision as to costs prior to 19 June 2014. 74What was left unexplained on the evidence was (a) why no steps towards the preparation of a notice of cross-appeal on the substantive question had been undertaken before 30 June 2014, (b) why no directions were made for the filing of the cross-appeal and submissions related thereto, and (c) why in this expedited matter sufficient steps had not been put in place prior to Mr Smith's departure for the cross-appeal to be filed in a more timely fashion. 75Mr Smith returned from overseas on 2 August 2014, after the time for the filing of the cross-appeal had elapsed. That must have been obvious to the respondents at the time he left. If it was not, it should have been. 76The proposed notice of cross-appeal was not served until 13 August 2014. The parties exchanged submissions on the cross-appeal against the prospect that leave might be granted. However, no application was made in advance of the hearing to seek leave, and Mr Smith's affidavit was only served shortly before the appeal was heard. 77So far as appears from the chronology summarised above, and the materials available on appeal, the parties have cooperated to have a final appellate determination of their dispute. It was in the interests of both parties to do so, as well as their obligation under s 56 of the Civil Procedure Act. It was for the respondents to show, clearly, on evidence and without the need to draw inferences, why the expedited proceedings in this Court ought to be expanded, out of time, by their belated application to file a cross-appeal. They failed to discharge that onus. It is not clear on the evidence whether the lateness of the proposed cross-appeal came about by reason of the clients or their lawyers, or both, nor does it matter for present purposes, as may be seen from Richards v Cornford (No 3) [2010] NSWCA 134 at [98]-[110] (failure by client) and Daily Examiner Pty Ltd v Mundine [2012] NSWCA 195 at [153]-[162] (failure by lawyers). 78The statutory framework is constituted by ss 56-60 of the Civil Procedure Act: Richards v Cornford (No 3) at [98]. The considerations are essentially the same as those identified in relation to grounds 6 and 7 above. The delay in serving the proposed cross-appeal was material, having regard to the timetable put in place to achieve a rapid hearing of the appeal, and was less than fully explained. For those reasons I joined in the Court's order to dismiss the notice of motion filed 20 August 2014 on the first day of the hearing of the appeal.

Orders 79For those reasons, the appeal should be dismissed, with costs.

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: 10 September 2014

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (15 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (19)