JLCS Pty Ltd v Squires Loft City Steakhouse Pty Ltd

REASONS FOR JUDGMENT 1 This unfortunate piece of litigation is not the first occasion upon which the parties have come to court. Indeed, the current dispute centres around what was decided in their earlier action. That action determined the rights of the parties to the trade mark "Squires Loft". The applicant, JLCS, is the owner of the mark as well as a device mark that includes the words "Squires Loft - Steak Specialists". In the earlier action (Miller v JLCS Pty Ltd (2007) 158 FCR 1) the trial judge, Sundberg J, granted a declaration that the respondents in that action, Harold Miller and Saul Miller (father and son), "are entitled to operate the City restaurant under the name Squires Loft". The City restaurant is located in Goldie Place, Melbourne. The parties to this action are at odds over the meaning of the declaration. In any event, JLCS contends that, whatever be its meaning, Harold and Saul's entitlement to use the mark in the operation of the City restaurant has come to an end. 2 The way this case has come about requires some understanding of the dispute that led to the earlier litigation. A company called Squires Loft Pty Ltd was incorporated by Lionel Miller (Harold's other son) and Joel Distiller to operate a steakhouse in Brighton. That restaurant closed in 1995 and a new restaurant opened in South Yarra. The South Yarra restaurant operates under the name "Squires Loft". 3 Saul started to work in the South Yarra restaurant in 1996. In the following year Lionel, Saul and Harold discussed the possibility of opening another Squires Loft restaurant in Goldie Place. Harold and Saul claimed that it had been agreed that, together with Lionel and Joel, they would establish the restaurant as equal partners and that they would jointly own the intellectual property, including the Squires Loft mark. For their part, Lionel and Joel denied there was any such agreement. On the other hand, they conceded that they had agreed to grant Harold and Saul a royalty free licence to use the name "Squires Loft" in the City restaurant. Joel explained that the licence was granted because Harold and Saul were at the time experiencing financial problems and also because of the family connection. In the event, Harold and Saul arranged for the respondent, SLCS, to establish the City restaurant which opened for business in October 1997. They became the directors and shareholders of SLCS. 4 Harold and Saul commenced the first action when it became apparent that Lionel and Joel disputed the existence of any partnership and denied that they (Harold and Saul) were joint owners of the mark. The immediate trigger to the dispute was a proposal by JLCS to grant a license to use the mark to a third party without first obtaining Harold and Saul's consent. 5 The first action was tried in late 2006. Judgment was delivered early in 2007. In his reasons for judgment Sundberg J rejected the contention by Harold and Saul that they were partners in the restaurant business. He also rejected their claim that they were joint owners of the trade mark. Sundberg J did, however, find that Harold and Saul were entitled to use the mark. During the course of his reasons Sundberg J made the following observations on this topic: Miller 158 FCR 1 [181]-[195] Lionel wanted to assist his father and brother establish a business. He spent a lot of time on the project. He took the lease and licence in his own name to facilitate the matter. He assisted with the opening of the City restaurant, and attended to the grill for some time after the opening. Joel went along with this, because he respected Lionel's concern to help Harold and Saul. … The clear intention of Lionel and Joel in mid-1997 was that Harold and Saul were to have their own restaurant. Although their agreement that Harold and Saul could use the name Squires Loft in the City restaurant has, for the purpose of distinguishing between a mere permission to use it and a grant of ownership rights, been dubbed a licence, the discussions between the parties were at a quite informal level. No more than 'You can use the Squires Loft name'. … [T]he appropriate intention to impute to the parties here is that Harold and Saul were to be at liberty to use the name in the City restaurant as long as they wanted to; that is to say, the use was not conditional on a continuation of the business relationship between the two restaurants. … [T]he licence was not terminable at will, … but was for the life of the City restaurant. … 6 Earlier, at Miller 158 FCR 1 [79] Sundberg J noted: The fact that no restrictions were placed by Lionel and Joel upon Harold and Saul's use of the name merely means that they were at liberty to use it, unconditionally, in the City restaurant for as long as they wished. It indicates the amplitude of the agreement that was undoubtedly made, but provides no occasion for expanding it. 7 Initially in the first action, Harold and Saul had not made any claim for relief in relation to a licence to use the mark. But, in his closing submissions counsel applied for leave to amend the originating application to add to the prayer for relief a declaration that Harold and Saul "are entitled to operate the City restaurant under the name Squires Loft". The amendment was allowed and the declaration was made in the terms sought. Neither Lionel and Joel, nor their company JLCS, made any submission on the form the declaration should take. 8 The evidence at the first trial was that Harold and Saul operated the City restaurant through their company, SLCS. This was mentioned in the reasons for judgment on several occasions. For example when recording a number of matters that were not in dispute between the parties Sundberg J said that one of those things was "that the City restaurant was, through their company, Harold and Saul's: Miller 158 FCR 1 [42]. 9 When SLCS was set up with Harold and Saul as its directors and shareholders, they did not intend for the company to be the beneficial owner of the business. SLCS was appointed as the trustee of the Squires Loft City Steakhouse Unit Trust and the City restaurant was the unit trust's principal asset. The trust had 120 units on issue. Harold and Saul each held 40 units and their wives, Doreen and Rozanne, held 20 units each. 10 The existence of the trust and the identity of its unit holders did not come out at the first trial, no doubt because those facts were irrelevant to any issue that had to be decided in that case. Nonetheless, that SLCS owned the City restaurant in its capacity as trustee would have come as no surprise to Joel. When SLCS was incorporated Joel suggested to Harold and Saul that they use a structure similar to that employed by Lionel and Joel in relation to the South Yarra restaurant. That business is beneficially owned by a unit trust in which Lionel, Joel and their respective families are the unit holders. 11 Now I can explain what has caused the current dispute. It arises out of a change in the ownership of the shares in SLCS and the units in the unit trust. In November 2007 there were several important changes made. Harold ceased to be a director of SLCS and Edwin Daniels was appointed in his place. Saul and Harold transferred their shares in SLCS to Webstir Pty Ltd, in its capacity as trustee of the Saul Miller Family Trust. Two new shares in SLCS were issued to Webstir. Four more new shares in SLCS were issued to Danfam Holdings Pty Ltd as trustee for the Daniels Family Trust. Four new shares in SLCS were issued to Silverside Investment Holdings Limited, two in its capacity as trustee for the Janar Trust and two in its capacity as trustee for the Krugersdrop Trust. Saul transferred his 40 units in the unit trust to Webstir. Harold transferred his 40 units to Danfam. Doreen and Rozanne transferred their units to Silverside. As a result of those transactions Saul (through the Saul Miller Family Trust) now holds one third of the shares in SLCS and one third of the units in the unit trust. The remaining shares and units are owned by Danfam and Silverside on the trusts I have mentioned. The principal beneficiary of each trust is related to Saul, in one case the person is a cousin and the other a partner of a cousin. 12 It is not in dispute that, notwithstanding the changes in ownership of the shares and units, there has been no change in the management of the City restaurant business. Since its inception the City restaurant has been run by Harold and Saul jointly, apart from a period between June 2002 and September 2004 when Saul did not work at the restaurant. During that period it was run by Harold. When I say that Harold and Saul run the business I mean that they manage the day to day operations of the City restaurant, make decisions about the purchase of stock, manage the staff, decide all matters about marketing, advertising and so forth. Importantly, the uncontested evidence is that neither the new director (Daniels) nor any representative of the new unit holders has any say in the running of the business. 13 The principal issue in contest is whether the licence granted to Harold and Saul and recorded in the declaration is still in existence. In terms, JLCS seeks a declaration that the licence "is no longer valid". I take this to mean that the term of the licence has come to an end. The contention put by JLCS is that the licence "is no longer valid" because of the change in the ownership of the shares in SLCS and the units in the unit trust. The proposition that lies behind this contention is that the licence was to operate for only so long as Harold and Saul owned the City restaurant through SLCS. Moreover, it is submitted that this is how the declaration should be understood. Put another way, the submission is that Sundberg J intended by his declaration to confine the licence to the period that Harold and Saul either personally or through SLCS owned the City restaurant business. 14 Although a good deal of argument was devoted to the meaning and effect of the declaration it is, in my opinion, quite clear that Harold and Saul's declared right is not in any way dependent upon them being shareholders in SLCS or unit holders in the unit trust. This is so for several reasons. The first and most obvious is that the declaration makes no mention of SLCS. The second and equally important reason is that according to its terms the declaration is not concerned with the ownership of the City restaurant. The right it records is a right to "operate" the restaurant using the Squires Loft mark. The "operation" of a restaurant is something different from its ownership. Next there is Sundberg J's finding at Miller 158 FCR 1 [79] that the licence is unconditional. That is to say the right to "operate" the City restaurant using the mark is unlimited, and runs until the death of the survivor of Harold and Saul. This finding is inconsistent with the supposed limitation. 15 In anticipation of not being able to mount a convincing argument about the meaning of the declaration, JLCS sought an order that I vary the declaration to read: "Squires Loft City Steakhouse Pty Ltd is entitled to use the Squires Loft name in the operation of the restaurant known as Squires Loft City Steakhouse, situated at 12 Goldie Place in Melbourne, for so long as Harold Miller and Saul Miller are its sole directors and shareholders". 16 It was accepted that, in appropriate circumstances, a declaration (as any other order) may be amended by the trial judge or, in his absence, by another first instance judge. The cases say that, apart from the need to correct error or make a supplementary order, an order may be amended to give effect to the intention of the judge or to record accurately what the judge had decided. 17 The argument here is that Sundberg J knew that SLCS was owned and, through their directorships, controlled by Harold and Saul and that SLCS owned the business. Accordingly, it is submitted that Sundberg J must have had in mind that Lionel and Joel had given their consent to Harold and Saul's use of the mark "so long as the [C]ity restaurant was operated by Harold and Saul … albeit through [SLCS], a company which they jointly controlled and jointly owned". 18 There is simply no substance to this argument. First of all, there is nothing in his reasons, or in his findings, to suggest that Sundberg J intended that the licence be subject to a condition relating to ownership. The opposite is the case, in my opinion. I have already cited from the reasons where the judge said that there were no restrictions placed by Lionel and Joel upon Harold and Saul's use of the name. This was one of the bases upon which the judge found that the licence was unconditional and that Harold and Saul could use the name in the City restaurant for as long as they wished. 19 Toward the end of the trial in a last ditch attempt to keep the argument alive JLCS sought leave to add to the relief it seeks in this action a declaration that the consent to use the mark granted to Harold and Saul is no longer effective because that consent lasted "for as long as Harold and Saul jointly owned and operated the [C]ity restaurant through [SLCS]". 20 I will not allow the amendment. Quite apart from the fact that it seeks to impose a condition upon a licence that Sundberg J found to be unconditional, it is far too late in the day (as well as impermissible in point of law) to contend for the existence of a conditional licence when the nature of that licence has been settled in another action. 21 This bring me to the cross claim that has been brought by SLCS, Harold and Saul. The reason for the cross claim is that JLCS has granted permission to a new steakhouse, located in Little Lonsdale Street, Melbourne, a distance of less than 500 metres from the City restaurant, to use the Squires Loft name. The restaurant, which is known to as the City Grill Room, first opened in October 2007. Initially it used only the words City Grill Room in its name. In mid December 2007, however, JLCS gave permission to the City Grill Room to use the words Squires Loft in conjunction with its name. According to Joel the change was to "help market" the store. Thus, since December 2007 the City Grill Room has traded under the name Squires Loft City Grill Room. 22 Harold and Saul argue that the City restaurant has an established reputation by reference to the "Squires Loft" mark and patrons will be confused when they see another steak restaurant operating close by that uses the same name. There is ample evidence that the City restaurant has a reputation by reference to the "Squires Loft" mark. That reputation has come about by word of mouth, through the publication of promotional material at a cost of approximately $20,000 per annum, and by the City restaurant's involvement in various trade organisations. Lionel himself conceded "the name Squires Loft is known to represent the Goldie Place restaurant". 23 Notwithstanding his acceptance that the City restaurant has a reputation by reference to the words Squires Loft, Lionel denies there is confusion between the City restaurant and the Squires Loft City Grill Room. Lionel acknowledged that there is some confusion between the South Yarra business and the City restaurant because each uses the same name. But he was not prepared to accept the possibility of similar confusion between the City restaurant and the City Grill Room. His explanation was that the two names (viz Squires Loft City steakhouse Squires Loft City Grill Room) are sufficiently different that there could be no confusion. 24 I do not think Lionel can be taken seriously when he gave this evidence. In my view there is a real likelihood of confusion, by patrons believing that one establishment is the other, with the two restaurants operating in such close proximity and using what is substantially the same name. Indeed, there is evidence of this confusion. Patrons often came to the City restaurant claiming to have made a prior booking and it turns out there is no record of any booking. It is reasonable to infer those patrons have made a booking but at the other restaurant. 25 The question in issue is whether this confusion gives rise to a remedy at the suit of Harold and Saul. In his evidence Lionel acknowledged that when the licence to use the mark was first granted its purpose was to set up Harold and Saul in a successful business. This was to produce benefits for both parties. It was therefore important, Lionel said, that nothing happen to damage the goodwill that would be generated by the City restaurant. The following exchange during Lionel's cross-examination is instructive: Q: [Y]ou did not, under any circumstances, want to undermine the potential profitability of the Goldie Place restaurant? A: No. Q: And you wanted to ensure that nothing might happen which would damage the goodwill which might be generated by Goldie Place restaurant, am I right? A: Yes, you're right. Q: And accordingly, there's no doubt, is there, that if someone had suggested that you could open up a Squires Loft steakhouse within 100 metres of the Goldie Place restaurant you would have said, "no that's not on", wouldn't you? A: If somebody other than my father or my brother would have suggested it, then, yes, I would have said "no, that's not on", but if it would have been under the same ownership and structure then I certainly would have considered it, yes. Q: But you certainly would not have considered allowing anyone not connected with your father and brother to open such a restaurant within 100 metres of the Goldie Place restaurant, would you? A: Probably not. Q: Yes. And indeed you wouldn't have contemplated such a thing happening within a kilometre of the Goldie Place restaurant? A: Well I don't know if I would go as far as a kilometre. Q: Is the answer "yes" or "no"? A: The answer is "no". Yes. 26 There is additional evidence which suggests that consideration was being given to the grant of an exclusive zone to protect the City restaurant. A draft licence agreement had been prepared for execution by the parties. The draft made provision for Harold and Saul to have an exclusive area in which Lionel and Joel would not grant any other party a licence to use the mark. The typed version of the draft did not specify the area of exclusivity. Lionel had, however, noted the area in manuscript as "two kilometres as the crow flies". 27 As to the reasonableness of an exclusive area of trade, reference might be made to discussions in 2002 between Lionel and Joel and two of their employees who wanted to open a Squires Loft restaurant in the city. Lionel and Joel indicated that the employee could have an exclusive zone of four city blocks. Lionel was asked whether this was an appropriate term to agree to as at June 1997. He said: "In broad terms, I do agree". He was also asked: "And even more appropriate that any restaurant should not bear the name Squires Loft; do you agree?" He replied: "Well, again, if it was under common ownership, then I think that that would be acceptable." He was then asked: "In circumstances, you mean, where Harold and Saul had some interest in the new restaurant?" He said: "Yes." 28 Harold and Saul contend there is an implied term in their licence that would give them a measure of security to protect the goodwill they generate from the use of the mark. They have put forward five terms which they say should be read into their licence, some of which are clearly overlapping. The proposed terms (somewhat paraphrased) are that JLCS, Lionel and Joel will not use, or authorise or permit any other entity to use the mark "Squires Loft" in relation to any restaurant located either (1) in the Melbourne CBD; and or (2) within a two kilometre radius of the City restaurant; and or in such close proximity to the City restaurant that it would (3) prevent, hinder or impede Harold and Saul enjoying the full benefit and advantage conferred upon them by the licence; and or (4) tend to destroy, depreciate or devalue the goodwill of the City restaurant; and or (5) divert or result in the diversion of the custom enjoyed by the City restaurant. 29 I propose to put to one side for a moment whether it is appropriate to imply one or other of those terms, for it may be that the solution to Harold and Saul's problem is to be found elsewhere. There is an old principle that a grantor must not derogate from his grant: he must not seek to take away with one hand what he has given with the other. This is "a principle which merely embodies in a legal maxim a rule of common honesty": Harmer v Jumbil (Nigeria) Areas Ltd [1921] 1 Ch 200, 225 per Younger LJ. Sometimes it is said that the principle rests on an implied promise (North-Eastern Railway Co v Elliott (1861) J&H 145, 153), but it is in truth an independent rule of law: Cable v Bryant [1908] 1 Ch 259. 30 The rule is most usually applied to the grant of an interest in land, whether by lease or sale: Cable [1908] 1 Ch 259; Woodhouse & Co Ltd v Kirkland (Derby) Ltd [1970] 1 WLR 1185. But it is not confined to dealings in land. For example, in British Leyland Motor Co Ltd v Armstrong Patents Co Ltd [1986] 1 AC 577 the rule was applied to the sale of a motor car by the manufacturer. See also Molton Builders Ltd v City of Westminster London Borough Council (1975) 30 P&CR 182. 31 In Johnston & Sons Ltd v Holland [1988] 1 EGLR 264, 267-8 Nichols LJ said: [T]he exercise involves identifying what obligations, if any, on the part of the grantor can fairly be regarded as necessarily implicit, having regard to the particular purpose of the transaction when considered in the light of the circumstances subsisting at the time the transaction was entered into. 32 The obligation is not to be unqualified. In Harmer [1921] 1 Ch 200 at 226 Younger LJ explained that: The obligation …. must in every case be construed fairly, even strictly, if not narrowly. It must be such as, in view of the surrounding circumstances, was within the reasonable contemplation of the parties at the time when the transaction was entered into, and was at that time within the grantor's power to fulfil. But so limited, the obligation imposed may, I think, be infinitely varied in kind, regard being had to the paramount purpose to serve which it is imposed. 33 It is, in my view, clear that JLCS is required to permit Harold and Saul to use the mark without undue interference. "Interference" would be "undue" if it diminished the value of the mark to Harold and Saul. The purpose of the grant of the licence to use the mark was to enable Harold and Saul to operate a successful business. The parties hoped that the business would be successful for their mutual benefit. Lionel quite fairly conceded that opening up a Squires Loft steakhouse next to the City restaurant would unduly interfere with the goodwill derived by Harold and Saul in the use of the name and that was something he would not do. I think that Lionel recognised that he was under an obligation not to frustrate Harold and Saul's operation of their restaurant. 34 To my mind, however, the obligation goes further than not opening up a Squires Loft restaurant next to the City restaurant. The obligation that falls upon JLCS is not to use, or permit the use of, the Squires Loft name in a location so proximate to the City restaurant that it would likely result in a significant adverse effect on the goodwill of Harold and Saul's operation. This is not to say that JLCS is thereby prevented from using the mark, or permitting the use of the mark, anywhere in the central business district. I readily accept that the use of the mark a reasonable distance away from Goldie Place would not result in an undue interference with Harold and Saul's goodwill. But a distance of less than 500 metres is too close in my opinion. 35 Harold and Saul have not sought relief based on the rule that a person may not derogate from his grant. Were they to apply to amend their cross claim to include relief in that regard I would accede to the application. 36 If that relief is not applied for, I would hold there to be a term of the licence that prohibits JLCS from using, or authorising or permitting any other entity to use the mark "Squires Loft" in relation to any steak restaurant located in such close proximity to the City restaurant that it would prevent, hinder or impede Harold and Saul from enjoying the full benefit and advantaged conferred upon them by their licence. In other words, activity that, in effect, takes away the substance of the benefit conferred by the licence is prohibited. Operating a Squires Loft restaurant within 500 metres would infringe this term. In In re Vylene Enterprises Inc 90 F 3d 1472, 1477 (9th Cir 1996) the Ninth Circuit held a restaurant chain franchiser had breached an implied covenant of good faith by opening a new outlet within a mile and a half of the franchisee's restaurant. The court said the franchisee was "entitled to expect that the franchiser would 'not act to destroy the right of the franchisee to enjoy the fruits of the contract'." 37 For the purpose of implying a term I need not apply the criteria set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 226 at 283. Those criteria are applied when a term is to be implied in a contract that appears on its face to be complete. Here the licence is informal and obviously incomplete. In such a case a term will be implied if it "is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case": Hawkins v Clayton (1988) 164 CLR 539, 573. 38 The term I would imply is no more than what is necessary to ensure that Harold and Saul are not denied the benefit of the licence. Put another way, I do think it is reasonable that Harold and Saul should face competition from JLCS, or another trader using the mark, in a similar kind of business in close proximity to their establishment. 39 Mr Goldblatt submitted that in this action Harold and Saul were estopped from raising any implied term. Various grounds were put forward. One was that the issue should have been raised in the first action. I do not agree. The existence of an implied term of whatever character was simply irrelevant to any issue raised in the first action. Another reason was that issues have been determined in the first action that are inconsistent with the putative implied term. There is nothing in the point. The judge made no attempt to define the scope of the licence, save to say that, from Harold and Saul's perspective, it was unconditional. In particular Sundberg J said nothing about the obligations, if any, the licence imposed upon Lionel and Joel. 40 Harold and Saul and their company have a claim for false and misleading conduct. They found their claim on the reputation in the Squires Loft name. They contend that the City Grill Room by reason of its use of the same name in close proximity to the City restaurant is representing that it is the City restaurant or that it is affiliated with the City restaurant. Once the City Grill Room's use of the mark in close proximity to the City restaurant's business is at an end, this complaint falls away. It would otherwise have been necessary for me to consider whether, and to what extent, deception by a licensee by the use of a mark is recognised or must be provided for. 41 For the foregoing reasons I would dismiss the application. On the cross-claim the cross-claimants should submit a memorandum regarding the relief they seek within 48 hours to which the cross-respondents should respond within a further 48 hours. When final orders are made they will include an order that the applicant pay the respondent's costs. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.