Moonlighting International Pty Ltd v International Lighting Pty Ltd

REASONS FOR JUDGMENT 1 The applicants seek interim relief consequent upon what they contend is an unlawful termination of a distributorship agreement. 2 The fourth respondent, Kim Lighting Inc, a company incorporated in the United States, manufactures and sells outdoor lighting equipment. In about 1987 it appointed an Australian company, Lighting and Allied Products Pty Ltd, to be its exclusive distributor in Australia. The terms of the appointment are found in a letter from Kim Lighting dated 29 December 1987. One term is that each party could "cancel this agreement by giving thirty (30) days written notice to the other prior to the effective date of such cancellation". 3 Following a series of transactions, the details of which need not be recited, the first applicant, Moonlighting International Pty Ltd, says that it acquired the distributorship business. Whether it did in fact acquire that business is not conceded by Kim Lighting, but it does accept by that for the purposes of this application I should proceed on the basis that it did. I note that the distributorship business is very successful. 4 Until recently, two employees involved in the business were the second respondent, Brian Snashall, who was its general manager, and his brother‑in‑law the third respondent, Peter Poole, who was its finance controller. Each of them left the business in July 1999 or thereabouts. Shortly before Messrs Snashall and Poole left the business, the exclusive distributorship was terminated by Kim Lighting when it served a notice to that effect. However, as a result of conversations between representatives of Moonlighting and Kim Lighting, agreement was reached, so it is alleged by Moonlighting, that the distributorship would continue though not on an exclusive basis. Con Liosatos, a director of Moonlighting, says that the agreement was as follows: · Moonlighting would continue to be a distributor for Kim Lighting products in Australia but not on an exclusive basis. · The parties would further discuss whether Moonlighting would be appointed on an exclusive basis pending providing satisfactory evidence of financial standing. · Moonlighting would deal on the usual trading terms which have been set up between Kim Lighting and Tyrania and Lighting & Allied in the past. 5 It is not altogether clear why the exclusive distributorship was terminated. It seems that there were at least two matters which troubled Kim Lighting. First, there was concern about the failure to pay for goods on a timely basis. Second, there had been a change in the ownership of the shares in the distributor company. I also suspect that Mr Snashall may have had something to do with the fact that Kim Lighting decided to terminate the distributorship. For many years Mr Snashall was the person who was immediately responsible for dealings between the distributor and Kim Lighting and thus had close contact with employees of Kim Lighting. The evidence suggests that Mr Snashall was not happy with the new owner of the business and may have communicated his dissatisfaction to Kim Lighting. 6 On 8 November 1999, Kim Lighting wrote to Moonlighting advising that it intended to appoint a new exclusive distributor for Australia. The letter did not identify who that person would be. Ultimately it turned out to be the first respondent, International Lighting Pty Ltd, a company established by Mr Snashall and Mr Poole on 7 September 1999. The letter from Kim Lighting states that the appointment of the new distributor would take effect from 1 December 1999. Although not the subject of express comment, the inference is that the distributorship granted to Moonlighting, if it was indeed Moonlighting that was the distributor, would continue until 1 December 1999. 7 However, as regards what was to happen until the distributorship came to an end, the letter said: "To ease the transition of business, particularly for existing orders about to be placed, we are asking that every attempt possible be made to enter any outstanding orders by November 30, 1999. Should you feel that more time is required due to the nature of the client (ie government work like the State Rail Project) and the pace of paperwork, please advise us by a listing of any pending orders that may extend beyond the November 30th date. This list should be submitted to Kim Lighting by November 22, 1999. We are not looking to complicate this business or erode your profits by injecting the new distributor into the order loop. These jobs/orders will be handled directly between Kim Lighting and Moonlighting until they are shipped and complete. We will acknowledge back to you a listing of all the orders in which we are in agreement. Speculative orders for large quantities of product not specifically related to any projects will be returned to you for your further review." I will return to consider the effect of this proposal in a moment. 8 First I should record that Moonlighting acknowledges that Kim Lighting was entitled to terminate the distributorship, but it says that reasonable notice of termination was required to be given. Three weeks notice was in fact given. Moonlighting contends that this was less than what was reasonably required. Accordingly, so the argument goes, notwithstanding the letter of termination, the distributorship is still on foot. 9 If Moonlighting had been appointed distributor, I would have no difficulty in accepting that the distributorship agreement could only be terminated by one party giving reasonable notice of its intention to do so to the other. Indeed, for the purposes of this application, Kim Lighting does not challenge this view. It argues that twenty‑one days' notice or thereabouts was more than reasonable in the circumstances. It will be remembered that the period of notice that was required to terminate the exclusive distributorship was thirty days. Accordingly it might be said that if the parties regarded that period as sufficient for the purposes of the earlier agreement, a period not exceeding thirty days should be regarded as reasonable for the current agreement. 10 There is a superficial attraction to that approach. However, it seems to me that it is not correct. What will constitute reasonable notice will depend upon the facts existing at the time that notice is given. That is to say, while the existence of a term requiring the giving of notice is to be determined at the time the contract is made, the content of that obligation can only be ascertained when the power is exercised. The matters to be taken into account in determining what is reasonable will include whether Moonlighting has at the time of notice sold goods that it must still acquire from Kim Lighting. It would be unreasonable for Kim Lighting to place Moonlighting in a position where it will be in breach of contracts for the supply of Kim Lighting products as a result of the termination of its distributorship. No doubt the parties would have anticipated that before termination takes effect Moonlighting would be able to satisfy any outstanding commitments for the sale of Kim Lighting products. 11 For reasons that I will mention in a moment, it is not necessary for me to form a considered view on what would be a reasonable period of notice in the circumstances. In any event there is very little evidence dealing with this issue. For example, I know nothing of the number of executory contracts in existence as at 8 November 1999, although I assume that there were some. Nor do I know over what period of time those contracts were to be performed. Further, there is no evidence of the quantity of goods that Moonlighting requires from Kim Lighting to meet its outstanding obligations. From the little that I do know about the activities of Moonlighting, including the nature of the goods with which it deals and the volume of its business, I suspect that it is unlikely that twenty‑one days' notice is reasonable. However, at the moment this view is little more than guesswork and certainly not one that is based on any substantive evidence. 12 It is arguable that Kim Lighting has placed Moonlighting in the position it would have been in had reasonable notice been given by in effect agreeing to provide Moonlighting with a continuous supply of products to enable it to complete not only all executory contracts, but also those contracts that were imminent when the notice was given. Nevertheless, during the period that the distributorship was to remain on foot, it is also arguable that Kim Lighting was required to continue to supply Moonlighting with goods in the same manner and on the same terms as it had before the notice. Further, I am prepared to assume for present purposes that under its distributorship agreement, Moonlighting was entitled to purchase reasonable quantities of lighting products for resale in Australia. It is also reasonable to assume that there was an agreement in place that fixed the price for those goods. 13 Thus, although Kim Lighting's offer to meet existing and imminent orders goes part of the way towards satisfying what I would see as its continuing obligation, it does not go far enough. Accordingly if, for example, three months' notice was required to be given to bring the arrangement to an end and Moonlighting says that it was more than three months, there is no reason why Moonlighting should be denied goods during that three month period; provided it seeks to purchase those goods on the same terms as it had previously purchased them from Kim Lighting. 14 The reason Kim Lighting does not wish to continue to supply Moonlighting on this basis is that it might undermine its newly appointed exclusive distributor. But that is not to the point. The appointment of a new distributor cannot derogate from Kim Lighting's obligations under its agreement with Moonlighting. 15 Be that as it may, Moonlighting does not now seek interim relief against Kim Lighting. Initially it did seek an order that would restrain Kim Lighting from selling its goods to its newly appointed Australian distributor. Moonlighting dropped that demand and in substitution sought an order that Kim Lighting supply goods to it to meet the specific requirements of a contract which Moonlighting hoped to enter into to supply lighting equipment to the State Rail Authority of New South Wales. When it asked for that order Moonlighting was of the belief that it was likely that it would enter into a contract to supply lighting equipment to the State Rail Authority to the value of approximately $1.2 million which would bring it a profit of around $270,000. However, it seems that International Lighting tendered for and has entered into an agreement to provide that equipment to the State Rail Authority. In any event, Mr Riordan, who appears for Kim Lighting, said that his client will supply lighting equipment to which ever person has the contract to supply equipment to the State Rail project. Accordingly, if Moonlighting enters into such a contract Kim Lighting will supply Moonlighting with the equipment it needs to meet its obligations. This accords with the position taken by Kim Lighting as explained in its letter of 8 November 1999. 16 It is as well that Mr Golvan, counsel for the applicants, no longer seeks an order to restrain Kim Lighting from supplying equipment to International Lighting, because as I said during the argument, the result of such an order might not only put International Lighting in breach of its contractual obligations, but it would also have the effect of denying supply to its customers. On occasion an interim injunction might go that far, but only in an extreme case. Moreover, I would be loathe to make an order that affects third parties in such a dramatic way without those parties being on notice that such an order might be made. 17 Although Moonlighting no longer seeks interlocutory relief against Kim Lighting, it does ask for orders against International Lighting. When the matter first came on for hearing the proposed order that it sought was that International Lighting be restrained from selling lighting equipment to the State Rail Authority. That application was made at a time when Moonlighting did not know that International Lighting had entered into an agreement to supply goods to the State Rail Authority. When it became apparent that such an agreement had been made, Moonlighting asked for different relief. Now it seeks an order that International Lighting keep proper accounts and also that it retain the net proceeds received from the sale of lighting products to the State Rail Authority in a separate bank account. 18 There are various bases upon which Moonlighting seeks relief against International Lighting. First it says that Messrs Snashall and Poole, and through them International Lighting, misused a confidential list of its customers. The argument is that International Lighting was able to tender for the State Rail Project as a result of having access to a confidential customer list that had been prepared by Moonlighting. 19 The fact is, however, that there is little evidence to suggest that Messrs Snashall and Poole misconducted themselves in the manner alleged; that is to say, by taking and improperly using a customer list for the advantage of their newly incorporated company. Each of Mr Snashall and Mr Poole has filed an affidavit in which they have denied any wrongdoing. Ordinarily, such a denial would not carry much weight, having regard to the nature of the allegations that have been made. In most cases where it is alleged that confidential information has been abused, the party against whom the allegation is made has denied wrongdoing though it has turned out that the denial was false. 20 Here, however, the denial takes on an added significance for three reasons. First, apart from asserting that the two former employees abused their position, no evidence is put forward directly implicating them in making any improper use of confidential information. Second, once Mr Snashall and Mr Poole made the decision to go into the lighting business, the State Rail Project was hardly a secret undertaking of which they would have had no knowledge. So it is not surprising that they might seek to obtain business from that project. Third, the evidence strongly points to the conclusion that International Lighting was approached to tender for the supply of lighting equipment to the State Rail Authority and that Messrs Snashall and Poole did not solicit that business. 21 Moonlighting also says that Mr Snashall and Mr Poole had misconducted themselves as employees by misappropriating company business either to themselves or to the company that they established. It is also alleged that Messrs Snashall and Poole breached fiduciary duties that they owed to their employer. Each cause of action depends upon it being shown that Messrs Snashall and Poole were taking steps to establish themselves in business in competition with their employer at a time when they were still involved in the distributorship business. 22 On the present state of the evidence these allegations present difficulties. The first is that while it is clear that Mr Snashall and Mr Poole went into business in competition with the distributorship business after their employment had come to an end, there is no evidence from which I am prepared to infer that they commenced soliciting customers of their employer while they were still employees. 23 It is not easy for a former employer to prevent a former employee from setting up a competing business. Sometimes an employer can seek to protect himself by insisting that an employee enter into a contract where the employee agrees not to trade in competition with the employer after the employment relationship has come to an end. The common law sets itself against such agreements, upholding them only when they are necessary for the reasonable protection of both parties. Otherwise they are struck down as being contrary to the public interest. 24 Here that type of protection was not sought so what Moonlighting must show is some wrongdoing on the part of Messrs Snashall and Poole. Mere competition is not unlawful conduct. Something more must be shown. There is nothing more in this case, at least as far as the evidence presently stands. 25 The second difficulty, which in part might be explained by the fact that the evidence has been put together very quickly, is that it is not evident that Mr Snashall and Mr Poole were ever employees of Moonlighting. They may have been employees of the second applicant, Tyrania Pty Ltd, a former owner of the business. The applicants' case is that Moonlighting is now the successor of that business. That may be true, but in the absence of some evidence to show that Moonlighting also became the employer of the staff of the business, I am not prepared to make the inference. In other words, for me to contemplate even on a prima facie basis, that Messrs Snashall and Poole breached their duties as employees of Moonlighting, I would expect there to be some evidence that Moonlighting was their employer, together with evidence of the terms of their employment, and how those terms were breached. 26 For the foregoing reasons I decline to make any order against International Lighting. I should say that even if I thought that Moonlighting had established a sufficiently strong argument that Messrs Snashall and Poole had infringed its legal rights, implicating International Lighting in that wrongdoing, I would not have made the order sought. I will explain why. 27 An essential matter in deciding whether an interim injunction should be granted is to determine whether the applicant will suffer irreparable harm. That means that an applicant before trial must show that he is at risk of suffering an injury which cannot be compensated or remedied other than through the grant of injunctive relief. 28 It is difficult to define irreparable harm with any precision. One common way in which irreparable harm is shown is where it is difficult to evaluate the plaintiff's loss in money terms. At least, that was the old view. Nowadays a test of irreparable harm seems to be relatively flexible. I can recall a number of occasions when the courts have granted an interlocutory injunction where irreparable harm has not been demonstrated. In some cases there has been no attempt to demonstrate it. 29 Whether these cases should be regarded as a departure from principle or an indication that where a plaintiff's case is very strong, irreparable harm has become irrelevant, is difficult to say. In any event, this is not an occasion for me to attempt to examine whether an interlocutory injunction should be granted if irreparable harm is not shown, merely because the plaintiff's case is a strong one. One reason why I will not essay that task is because it is Christmas Eve and Moonlighting asks that the order run only for a period of two to three weeks. It is unlikely that International Lighting will receive any money during that period. The second reason is that there is no evidence to suggest that International Lighting will do otherwise than keep proper accounting records in accordance with its obligations. Thus, whatever profit, if any, it might make from the contract which it has entered into for the supply of lighting equipment to the State Rail Authority will be easily identified. Thus there is no need for an order that International Lighting keep proper accounts, in my opinion. 30 As regards the proposed order that the profit generated from the sale of those goods be retained, while I do not know anything about the financial capacity of International Lighting to meet any judgment in favour of Moonlighting I suspect that Moonlighting might face some difficulty in that regard. However, if International Lighting has wronged Moonlighting, its directors Messrs Snashall and Poole would have procured that wrongdoing and, if it turns out that International Lighting holds money or other property - that is its business or the State Rail contract - on trust for Moonlighting, and in breach of trust disposes of that property, prima facie it seems that Mr Snashall and Mr Poole will be liable to make good Moonlighting's loss. Thus Moonlighting has adequate protection and does not require an order tying up the funds. 31 What I have said so far must not be taken as an indication that I regard Moonlighting as having a weak case. These are early days. Very little evidence has been tendered. It may be that after further investigation and full discovery a different picture merges. 32 Moonlighting has asked for its application for interlocutory injunctions to be stood over until 17 January 2000. On that day Moonlighting has indicated that it will again press for an order against International Lighting along the lines that it sought this morning. If Moonlighting is able to improve its hand in establishing wrongdoing on behalf of Mr Snashall and Mr Poole and if it can show that irreparable harm will be suffered unless relief is obtained, Moonlighting might be entitled to the orders it sought. 33 In the result, I make the following orders. I will adjourn the motion for interlocutory relief until 17 January 2000. I will grant leave to the applicants to file and serve an amended application by 4.15 pm on 11 January 2000. I direct the applicants to file a statement of claim by 4.15 pm on 11 January 2000. I direct the applicants to file and serve any further affidavits on which they intend to rely by 4.15 pm on 11 January 2000. I direct the respondents to file and serve any further affidavits upon which they intend to rely by 4.15 pm on 14 January 2000. I will reserve the costs of the application thus far incurred. I certify that the preceding thirty‑three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.