Master Education Services v Ferfolia

6299/03 MASTER EDUCATION SERVICES PTY LTD V ROBERT FERFOLIO & ANOR JUDGMENT (Ex tempore; revised 31 March 2004) 1 HIS HONOUR: This is an application by notice of motion filed on 16 December 2003 for interlocutory orders of various kinds. At the hearing of the application today the plaintiff handed to the Court draft short minutes of orders which, he said, defined the relief that the plaintiff was seeking beyond the contents of the notice of motion. For present purposes, and in substance, the primary interlocutory order that is sought is an injunction to restrain the defendants from carrying on business in contravention of two provisions of a franchising agreement between them, and ancillary and consequential orders. 2 The application is brought in proceedings where the statement of claim alleges that the parties entered into a franchising agreement on 15 June 1999. Under the agreement the plaintiff trading as Master Coaching, as franchisor, undertook to provide certain educational services to the defendants as franchisees, with respect to the conduct of an educational coaching business in premises at 245 Warners Bay Road, Mount Hutton. As part of the agreement the defendants were granted an exclusive right to conduct the franchise within a defined territory. The initial term of the agreement was for five years, with an option to extend for a further five years. 3 Clause 8 of the agreement, described as a non-competition clause, was a covenant by the franchisee, inter alia, not to have any direct or indirect interest in any educational coaching organisation located or operating within the designated territory or within a ten kilometre radius during the term of the agreement and for a period of one year after its expiry. 4 Clause 8 provided that the franchisee, if it were a corporation, would secure its shareholders and directors, or if it were a partner secure its partners, to enter into a non-competition covenant in the form of annexure C. The non-competition covenant in annexure C to the agreement is a covenant by those executing it, in this case the defendants, that they would not during the term of the agreement or for a period of two years after its expiry within the designated area, being a radius of ten kilometres, have any direct or indirect interest in any type of educational coaching business or establishment. 5 There appears to be a fault in the non-competition covenant. The covenant is directed to the plaintiff and bears the signatures of the defendants. It is expressed to be in consideration of the plaintiff entering into a franchise agreement with "Master Education Services Pty Limited", that is to say, the plaintiff itself. That appears to be a mistake. Counsel for the plaintiff submitted today that the non-competition covenant can readily be rectified because the clear common intention of the parties was to refer to the franchise agreement between the plaintiff and the defendants rather than any franchise agreement made by the plaintiff with itself. 6 For the purposes of this judgment I shall assume that the non-competition covenant has been rectified to alter references to the plaintiff company to as references to the defendants. In making that assumption, I do not express any opinion as to the prospects of success of a rectification suit. 7 It is these two covenants that the plaintiff says the defendants have contravened, and will continue to be contravening in the absence of equitable intervention. 8 The plaintiff has adduced some evidence to indicate what counsel for the plaintiff describes as clear breaches of the covenants. There is evidence given on behalf of the plaintiff that the defendants stopped paying the franchisee's fees in September 2002. In about January that year the name of their business was changed to "Top Tuition", without return to the plaintiff of any teaching materials or telephone numbers. Further, the plaintiff says that in December 2003 the defendants were continuing to operate a coaching college, Top Tuition, from the premises in Mount Hutton. The plaintiff gives evidence of searches of the Internet and Yellow Pages and inquiries at telephone numbers at that time, which indicate that Top Tuition was carrying on business as a coaching college from that address. There is also evidence of photographs taken in about December 2003 which show the premises at Mount Hutton with advertising signs indicating they are the premises of Top Tuition which provides coaching services. 9 On 27 May 2003 the plaintiff's solicitors purported to serve a notice of termination of franchise agreement on the defendants. The plaintiff submits that the defendants failed to remedy breaches of the agreement within the time stipulated in that notice. On 30 July 2003 the plaintiff's solicitors wrote to a firm of solicitors thought to be acting for the defendants, giving further notice of termination of the agreement. Upon being informed that that firm of solicitors no longer acted, the plaintiff's solicitors on 12 August 2003 wrote directly to the defendants notifying them of the termination of the agreement. In that letter the plaintiff's solicitors asked the defendants to provide a written undertaking that they understood the terms of the restraints in the agreement and that they had ceased operating an educational business, and said if the undertaking was not provided and the solicitors' investigations disclosed that the defendants were running an educational coaching business or being involved in one within the restrained area, their client would make an application to this Court to restrain the breach by injunction. 10 On 11 March 2004 Mr Kuit, a witness for the plaintiff, made a telephone call to Top Tuition to obtain a quote for tutoring a Year 10 maths student. The person who answered the telephone told him he had reached Top Tuition coaching school and gave him a quote at an hourly rate for tuition. 11 It seems to me that there is evidence sufficient to establish a serious question to be tried as to whether the defendants, after termination of the franchise agreement, have continued to carry on business in contravention of clause 8 and annexure C to the franchise agreement. Counsel for the defendants submitted to me that there was evidence of failure on the part of the plaintiff to comply with the Franchising Code at the time when the franchise agreement was entered into, such as to entitle his client to have the agreement set aside and have a refund of franchise fees. He also submitted there was evidence of misrepresentations made by the plaintiff at that time, inducing his clients to put their life savings into the business, and evidence that the plaintiff had failed to comply with those representations, or even the terms of the franchise agreement itself with respect to the material that it had supplied for the purpose of the defendants' coaching business. 12 Although this evidence is before the Court, it does not persuade me against the conclusion that the plaintiff has done enough to establish a serious question to be tried. The crucial issue for me is to determine whether the balance of convenience favours the granting of the interlocutory relief that the plaintiff now seeks. 13 Submissions were made at one time during the hearing, on behalf of the plaintiff, to the effect that the Court ought not to consider the balance of convenience at all, or if that criterion were taken into account, it should be given less importance in a case where the plaintiff seeks to enforce a negative stipulation in a contract than would otherwise be the case. 14 Reference was made by counsel for the plaintiff to the famous pronouncements of Lord Cairns LC in Doherty v Allman (1878) 3 App Cas 709 at 719-20, where his Lordship went so far as to say that where an application is made for an injunction to reinforce a negative covenant, a court of equity has no discretion to exercise and, "it is not then a question of balance of convenience or inconvenience, or amount of damage or injury." 15 His Lordship's sweeping remarks have been the subject of many subsequent comments, including comments of high authority in this country, such as the observation of Gibbs J that Lord Cairns' proposition is an "overstatement": Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552, 560. 16 It cannot be the case, even where the application is made for injunctive relief on a final basis, that the court has absolutely no discretion once the negative stipulation and breach, or threatened breach, is established. If that were so then, for example, discretionary defences such as lack of clean hands could not be taken into account: see generally Meagher Gummow and Lehane's Equity Doctrines and Remedies, 4th ed (2002) at 750-1. 17 More pertinently for present purposes, there is a fundamental distinction between application of two kinds. The first is an application for an injunction to enforce a negative stipulation on a final basis, such as was considered in Doherty v Allman, by the Full Court of the Supreme Court of New South Wales in Atlas Steels (Australia) Pty Limited v Atlas Steels Limited (1949) 49 SR(NSW) 157, and by the High Court of Australia in Maggbury Pty Limited & Anor v Hafele Australia Pty Limited (2002) 210 CLR 181 (and, analogously, an application for a perpetual stay of the kind considered by Yeldham J in Broken Hill Proprietary Co Limited v Hapag-Lloyd Aktiengesellschaft & Ors [1980] 2 NSWLR 572. The second is an application for an interlocutory order to preserve the status quo, such as the one before me (and, analogously, the application before Palmer J in Hannamex Hytech v O'Donnell [2001] NSWSC 634). 18 Where learned authors rely on Doherty v Allman and similar 19th century cases to assert that, as a general rule, the inconvenience of the defendant is not taken into consideration (see, for example, Kerr on Injunctions, 6th ed (1981) 479), they are not speaking of an application for interlocutory relief pending final hearing. On such an application, it is fundamental to the Court's consideration, in seeking to preserve the status quo, to make an assessment of the balance of convenience, as explained in Kolback Securities Ltd v Epoch Mining (1987) 8 NSWLR 533 at 535. 19 In the present case, the balance of convenience strongly favours declining the injunctive relief that the plaintiff has sought. The defendants' business was established shortly after the franchise agreement was made. The evidence indicates, on the balance of probabilities, that in conducting their business the defendants engaged in some activities going beyond the scope of the materials provided to them by the plaintiff. For example, coaching is offered in science subjects rather than only in maths, English and reading, and is offered to pupils outside the range of ages contemplated by the plaintiff's material. If the covenant in the franchise agreement were enforced, that would prevent the defendants from engaging in coaching business across the range of their present activities. Further, the business is now an established business which appears to be beginning to stabilise and seems to have reasonable prospects. There are 85 pupils. An injunction of the kind sought by the plaintiff would force the defendants to bring this business to an end, even though the issues raised, or to be raised at the final hearing, have not been determined for or against them. 20 Counsel for the plaintiff responded to a question put to him by the Court, by acknowledging that if the defendants remained in business in the Mount Hutton property, the highest the plaintiff's prejudice could be put is to say that their continuation would decrease the opportunity for the plaintiff to appoint another franchisee within the restricted area or to open up a competing business. This is not a case where there is evidence of intense competition within the same geographical area existing at the present time. 21 There was some debate in submissions as to whether on their proper construction the covenants in question would prevent the defendants from engaging in teaching activities, or only in conducting or being involved in a coaching business. Counsel for the plaintiff suggested that the matter could be clarified if the interlocutory injunction were to contain an exclusion to permit the defendants to be employed as teachers in the general education system. It is unnecessary for me to resolve that debate because it seems to me that the other matters I have mentioned are more weighty considerations going to the balance of convenience. 22 Finally, on 24 March 2004 the solicitors for the defendants wrote to the solicitors for the plaintiff offering to undertake, pending determination of the proceedings, not to use any stationery, notes or teaching material supplied by the plaintiff or the plaintiff's name in their business and to keep all proper accounts of the business. Today counsel for the defendants informed the Court that in addition his client will undertake to return unpublished copyright works and original documents of the plaintiff, subject to retention of copies to be used solely by the defendants' solicitors for the purpose of the present proceedings. 23 It seems to me those undertakings address any residual concern as to whether the defendants are making any use of the plaintiff's material in conducting their present business (a matter which the defendants' evidence suggests is not happening), and any concern about retention of copyright works or original documents. An undertaking to keep proper accounts of the business provides some protection to the plaintiff with respect to making out its claim for damages in the event it succeeds at the final hearing. On the basis that those undertakings are provided to the Court, they reinforce the conclusion I have reached that the balance of convenience strongly favours the defendants. 24 My decision is that the application by notice of motion is dismissed. I have not found blatant infringement, and it seems to me that the plaintiff miscalculated the case on balance of convenience in a substantial way. Therefore I order the plaintiff to pay the defendants' costs of the application. 25 The proceedings and the notice of motion for security for costs are stood over to the Registrar's list on 13 April 2004 at 9.30am. 26 I should note the defendants' undertakings to the Court in terms of pars (a) and (b) of Ex R4 and the further undertaking to the Court to return to the plaintiff unpublished copyright works and original documents of the plaintiff, subject to retaining copies to be retained by their solicitors for the purpose of these proceedings. **********

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