Narellan Franchise Pty Ltd v RBME Pty Ltd

Supreme Court of NSW|2022-11-01|Before: Parker J

Judgment

This is a restraint of trade case. The main claim in the proceedings is a claim by a franchisor to restrain a former franchisee from continuing to operate in the franchise area. The claim is principally based on a post-contractual restraint covenant in the franchise agreement.
The plaintiff companies are members of a corporate group which operate a franchise under which its franchisees sell and install fibreglass in-ground swimming pools and spas under the name "Narellan Pools". I will refer to the franchise as "NP" or "Narellan", and to the corporate group as the "Narellan Pools Group" or "NPG". The franchise operates throughout New South Wales and in other States of Australia.
The first plaintiff, Narellan Franchise Pty Limited ("NFPL"), is the company within the group which enters into the franchise agreements with franchisees. NFPL is also the owner of the group's business names and intellectual property. The second plaintiff, Narellan Pools Pty Limited ("NPPL") manufactures and supplies the fibreglass pool "shells" that are installed for customers. This takes place under supply agreements between NPPL and the franchisees.
RBME Pty Limited ("RBME") is the first defendant. It is the former franchisee. RBME is owned and controlled by Mr Tim Ranieri and Mr Matthew John Ranieri. They are brothers and are the second and third defendants.
There were two franchise agreements between NFPL and RBME (and two supply agreements between NPPL and RBME), each one relating to two different franchised territories in Sydney. The Ranieris were personally parties to the franchise agreements as guarantors. RBME was also obliged to execute deeds poll which contained further post-contractual restraint covenants. The plaintiffs' contention is that the deeds poll obligations are enforceable at the suit of NPPL as well as NFPL.
The franchise agreements between NFPL and RBME (and the supply agreements between NPPL and RBME) came to an end on 31 May this year. Since then, the Ranieris have, through another company which they own and control, continued to operate an in-ground pool installation business. That company is called T&M Pools Pty Limited ("TMP"). It is the fourth defendant.

Claims for determination

The proceedings were commenced on an urgent basis in June. The plaintiffs seek injunctions to enforce the restraints on RBME and the Ranieris in the franchise agreements and the deeds poll. TMP was not a party to those agreements, but the plaintiffs seek an injunction against it also.
There was a contested application for interlocutory restraints against the defendants which was heard by Richmond J in late June. His Honour gave judgment on the application in late July: see Narellan Franchise Pty Ltd v RBME Pty Ltd [2022] NSWSC 988. His Honour upheld the application and made orders accordingly. Those orders did not, however, apply to completion of contracts which had been entered into with customers prior to the date of the orders. I discuss this reservation in more detail later in this judgment.
As well as the restraint obligations, the franchise agreements contained obligations to keep confidential any documents or other information emanating from the plaintiffs in the course of the franchise, and to return or destroy copies of them upon the termination of the franchise. The plaintiffs alleged that the defendants had failed to do so. This allegation included TMP. TMP was alleged to have come into possession of the plaintiffs' confidential information through the other defendants; the claim against it was based on the equitable doctrine of confidence. Before Richmond J, undertakings were given by RBME and the Ranieris reflecting their contractual obligations to return or destroy any documents containing the plaintiffs' confidential information.
The proceedings were entered in the Expedition List and I made orders for the urgent claims to be determined in a separate hearing in that List. The remaining monetary claims by the plaintiffs were to be dealt with later. Those monetary claims were to include claims for damages for breach of contract. They also were to include a claim against the defendants for damages under the tort of conspiracy.
Then, shortly before the hearing, it was alleged on the plaintiffs' behalf that RBME and the Ranieris had failed to comply, or to comply fully, with their confidentiality undertakings. An application was made to have RBME and the Ranieris dealt with for contempt. This resulted in a cross-application by RBME and the Ranieris to vary the undertakings.
Originally, the claims for determination at the expedited hearing included a claim for injunctive relief against TMP concerning the confidential information. At the end of the hearing the parties agreed that that claim should be deferred. The contempt application, and the cross-application for variation of the undertakings, have also been held over. Whether they should be heard together with the monetary claims, or before them, can be considered in due course. The plaintiffs' claims for final injunctions by way of restraint of trade are now the only remaining claims for expedited determination.

Chronology

The Narellan Pools Group was founded in 1972. Initially, the Group operated as a swimming pool builder and installer. From 2002 onwards, its operations have become franchised. It is now the largest franchised pool operation in Australia. It operates in New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Queensland. Its areas of operation are divided into 35 franchise territories.
The Ranieris held two Narellan Pools franchises in the Sydney area from 2008 onwards. Those franchises were held in the name of TMP. Mr Tim Ranieri is a builder by trade. In the running of the Ranieris' business, he deals mainly with building and operations. Mr Matthew Ranieri focusses primarily on sales and marketing.
In 2016, the existing franchise arrangements came to an end and were replaced by two further franchise agreements with NFPL. These are the agreements which are the subject of the current proceedings. They were signed in May 2016. Annexure B to each franchise was a deed poll. There were also supply agreements for each franchise with NPPL.
At the time, the Ranieris had planned to shift their operations from TMP to two new companies, one of which was RBME. In the end, only RBME was able to obtain the necessary building licence.
RBME was named as the franchisee in the franchise agreements and the supply agreements. But RBME's involvement was to prove largely nominal. Contracts with customers continued to be entered into in the name of TMP. The employees continued to be employed by TMP, and TMP continued to retain any necessary subcontractors. The office premises and computer and communications facilities were owned by TMP. TMP also paid for all of the supplies, including the pool shells purchased from NPPL.
The NPG management were aware that the franchise's customers were contracting with TMP. They did not object. Formal consent was given in November 2018 to the pool shells being "on-sold" to TMP for sale to customers. In fact, TMP seems to have dealt directly with NPPL as purchaser of the shells.
The franchised territories which were the subject of the 2016 franchise agreements were known as "Sydney City" and "Sydney North". They are shown in the following map (with the Sydney North franchise area labelled as "Northern Sydney"):
The term of the Sydney City franchise agreement was five years, running from 1 May 2016 to 30 April 2021. The Sydney North franchise agreement was for a six year term, running from 1 May 2016 to 30 April 2022. The agreements were in substantially the same terms.
Each agreement provided for renewal if both parties agreed. NP was obliged to give notice seven months before the end of the term as to whether or not it wished to renew. If it did, RBME as franchisee had one month to agree to the renewal. The agreement then provided for renewal to take place, subject to compliance with various conditions, which I discuss in more detail below.
If there were no renewal, upon formal expiry of the franchise term, there was still a procedure for a month-to-month holding over arrangement which was described as a "licence". Again, this depended upon both parties' agreement.
In October 2020, formal letters were sent from NFPL to RBME offering to renew the franchise agreement in accordance with the procedure laid down in the agreements and inviting RBME to signify acceptance by signing and returning copies of the letters. Each letter stated that if RBME accepted the "option" to renew, compliance with the relevant conditions, including execution of a new franchise agreement, would be required. As RBME would need time to consider its position, acceptance would be treated as a statement of intention only. The Ranieris signed and returned copies of the letters a few days later.
So far as the Sydney City franchise was concerned, the offer of renewal and its acceptance complied with the timetable laid down in the franchise agreement: the agreement was due to expire six months later, on 30 April 2021. But the Sydney North franchise agreement was not due to expire until the following year. The fact that notice was given prematurely does not appear to have affected the parties' dealings with each other.
It seems that no immediate steps were taken to document the renewal of either franchise agreement. On 30 April 2021, the Sydney City franchise agreement formally expired. The franchise arrangement, however, continued under a month-to-month licence by agreement between the parties.
In the meantime, the relationship between the parties began to deteriorate. The Ranieris were members of a franchisee group known as the Australian Pool Builders' Association ("APBA"). The Association raised concerns with Narellan Group. Some of these concerns related to supply difficulties and quality problems. Narellan blamed these, among other things, on the COVID-19 pandemic. But there were wider concerns about the way in which the franchise was being conducted.
The dispute between the APBA and NPG seems to have flared up as a result of events at a franchisee meeting which took place in October 2021. The Association, through a firm of solicitors it had retained, began correspondence with NPG. Among other things, the correspondence complained about provocative statements allegedly made by one of the NPG executives. NPG responded by denying that any such statements had in fact been made.
In late March 2022, the Ranieris, through solicitors, wrote to NPG advising that neither of the franchise agreements would be renewed. Notice was also given of termination of the Sydney City licence as from 30 April. On 8 April, NPG replied, indicating that the franchises would be transferred to new franchisees.
There was some discussion between the parties about a transitional agreement to cover the customers whose installations had not been completed, but nothing came of this. Eventually, the parties agreed to extend the Sydney North franchise term and the Sydney City licence to 31 May. The business relationship between the parties ended on that date.

Witnesses

Evidence on behalf of the plaintiffs was given by Mr Peter David Baily. He has been employed by NPG for a little more than seven years (since September 2015 or thereabouts). He became the NPG managing director about fifteen or sixteen months ago (i.e., in about June or July last year). Mr Baily swore affidavits in support of the interlocutory injunction application. He then swore some supplementary affidavits for the final hearing.
For the defendants, evidence was given by both of the Ranieris. Each of them was cross-examined.
Mr Baily's credit was not challenged. Counsel for the plaintiffs did attack Mr Matthew Ranieri over the download of confidential information which took place at the end of March 2022. I shall return to that below. But, in the end, it is not necessary to reach any final conclusions about that incident. There was no challenge to the other evidence given by the Ranieris about the nature of their business and the course of their dealings with NPG.
The solicitors for the defendants retained Mr Spiros Dassakis as an expert witness. Mr Dassakis is employed by the Swimming Pool and Spa Association of Australia Limited as Chief Policy Officer. He annexed to his affidavit what he described as a report on the swimming pool industry in Australia.
Some evidence was given by Mr Baily, and also by the Ranieris, about the swimming pool industry generally, and the operation of the Ranieris' franchises in particular. I have summarised that evidence below. Counsel for the plaintiffs objected to Mr Dassakis' report, and it was received on a subject-to-relevance basis. In final submissions, it was not referred to by either party and I have not relied on the report for the purpose of this judgment.

NPG's franchise business

In the usual way, NPG has sought to develop a distinctive identity for its franchise business. The Group has three registered trademarks which it uses as brands. The trademarks include the name "Narellan Pools" and a stylised picture of the sun. A distinctive logo is also used.
The Group controls the registered business name "Narellan Pools" in each jurisdiction in which it operates. Franchisees are required to conduct their businesses under the business name "Narellan Pools [Area]", where the area is the name of the franchised territory. Franchisees are also required to "hand back" the business name when the franchise ends.
The Group prescribes the get-up which franchisees are to use for their premises and their business vehicles. The get-up incorporates visual elements of the trademarks and other intellectual property to which I have referred. There are similar requirements for letterheads, business cards and other documents provided by franchisees to customers.
The Group advertises its business extensively throughout the States where it operates. The Group has a call centre, a website, and email addresses for the customer enquiries which result. This was referred to in the evidence as "Head Office". Enquiries are automatically forwarded to the franchisee in the relevant territory for the franchisee to follow up. These enquiries are known as "leads". Customers can also use Head Office to make enquiries about existing orders and contracts.
From the customer's point of view, the dealings appear (at least initially) to be with NPG. But any actual contract is made between the customer and the franchisee. The Narellan pool shell is supplied by NPPL and on-sold to the customer. Other pool products are likewise supplied by NPPL or suppliers approved by NPG and on-sold.
The customer has the benefit of statutory warranties from NPPL as manufacturer of the pool shells (as well as warranties from the franchisee about the supply and installation of the pool). But there is no contractual relationship between NPG and the customer. The terms of the customer's contract (including, in particular, the price of the pool) are matters for negotiation between the franchisee and the customer. The cost to the franchisee of the pool supplied by NPPL would typically be only one quarter to one third of the total price charged to the customer.
NPG operates a customer relations management ("CRM") computer system, known as "Zoho", to which franchisees have access. The system records all of the dealings with customers and prospective customers. It enables not only communications with individual customers, but also group communications and marketing, and statistical analysis. Franchisees have access to allow them to retrieve this information and to enter their own dealings with customers.
NPG also has an intranet database, known as "Splash", to which franchisees also have access. This database includes electronic copies of specifications and other documents made available to franchisees for use in their businesses. Documents can be downloaded by franchisees through Splash, which keeps a record of what is downloaded and when. This system has operated since late 2011.
NPG provides franchisees with training, and organises other events to help franchisees in establishing and developing their businesses. Induction training is provided to franchisees prior to their taking on their franchise. This training includes training on pool installation and construction (as not all franchisees have prior experience of this work). NPG organises annual conferences for franchisees all over the country. There are also franchisee forums and meetings for franchisees in different States or franchise areas. NPG also employs "coaches" who can be made available to help franchisees (the evidence did not go into this in any detail, but I assume that such assistance is provided on a fee-for-service basis).
NPG also makes available to franchisees, and regularly updates, an Operations Manual for franchisee businesses. The manual contains a standard form of contract for use with customers and other templates, together with general information on business operation and administration. The manual itself was not in evidence, so it was not clear whether it required the standard form contract to be used by franchisees.
For these services, NPG (through NFPL) charges fees to its franchisees. The franchisee is usually required to pay an upfront fee for the grant of the franchise. That is referred to as a "territory acquisition fee". Franchisees are also charged a monthly franchise fee for membership (the "brand and territory fee"). They are further charged an advertising levy to cover advertising costs. For its part, NPPL derives revenue from the sale of pool shells and other products.

Franchise and supply agreements

The features of NPG's franchise business which I have described were reflected in the terms of the May 2016 agreements. For convenience, in the following summary of those agreements, I will refer in the singular to the "Franchise Agreement" and the "Supplier Agreement", as the case was presented to me on the basis that the terms of the agreements for the two franchises were effectively the same.
The Franchise Agreement was between NFPL as Franchisor and RBME as Franchisee. The performance of RBME's obligations under the Agreement was guaranteed by the Ranieris (referred to in the Agreement as the Guarantors). Likewise, the Supply Agreement was between NPPL as "Group Supplier" and RBME as Franchisee, with the Franchisee's obligations again guaranteed by the Ranieris personally as the Guarantors.
Franchise Agreement: Clause 2.1 of the Agreement provided that the Franchisor granted to the Franchisee, and the Franchisee accepted, "the right to operate and promote the Business in the Territory using the Intellectual Property in accordance with the terms of this Agreement".
The term "Business" was defined as meaning: … the business of selling and installing the Pools and Products … in conjunction with the Name, Trade Mark and Logo in accordance with the System and the terms and conditions of this Agreement.
The term "Name" was defined as meaning "the names(s) set out in Item 10 of the schedule". Item 10 then defined Name as "Narellan Pools".
The term "Trade Mark" was defined as meaning: the trade mark(s) set out in Item 13 of the schedule and any other trade mark(s) which the Franchisor substitutes for the specified trade mark(s) and authorises the Franchisee to use from time to time during the Term.
Item 13 was a table that set out the relevant Trade Marks. They included the word "Narellan Pools". The term "Logo" was separately defined as meaning the "logo the Franchisor specifies for use in the Business".
The terms "Pools" and "Products" were defined as follows: Pools means the range of in ground pools and spas that the Group Supplier [NPPL] manufactures or supplies for the Narellan Pools Franchise Network under the Name, Trade Mark and Logo from time to time. Products means the pool installation accessories being the range of pool associated products that are required for the installation of a Pool as determined from time to time by the Franchisor and which form part of Pools sold and installed.
The "Intellectual Property" was defined so as to pick up all forms of intellectual property associated with the conduct of NPG's business. It, of course, included rights associated with the Name, Trade Mark and Logo. It also included copyright in the Operations Manual and any other forms of intellectual property associated with the Narellan business system, namely, telephone numbers, computer software etc.
Clause 4.2 restricted the Franchisee's operation and promotion of the Business to the Territory. The Franchisee was obliged not to supply or install pools and Products outside the Territory (clause 4.2). This was subject to consent being granted by the Franchisor (clause 4.3(a)), and, in the case of activities in a Territory licensed to another Narellan franchisee, the consent of that franchisee (clause 4.3(b)).
Clauses 5.1 to 5.9 dealt with the Intellectual Property. Clause 5.1 repeated that the Franchisor granted to the Franchisee the right to use the Franchisor's IP during the term of the Agreement. Clause 5.2 obliged the Franchisee only to use the IP for the purposes of the Business and in accordance with the Agreement, and clause 5.3 reinforced that at all times ownership of it (and any developments or improvements to it) was retained by the Franchisor. Any materials containing the IP were to be turned over to the Franchisor, without payment, at the end of the Agreement (clause 5.4).
The Agreement expressly specified that the relationship between the parties was that of franchisor and franchisee. The Franchisee was prohibited from representing itself as being the agent, legal representative, or employee of the Franchisor (clause 2.2). This was reinforced by clause 5.6, which obliged the Franchisee to conduct the Business under its own name and to indicate clearly on all of its stationery and promotional material that it was a franchisee and the independent proprietor of the Business.
Clauses 6.1 to 6.8 dealt with the Operations Manual. The Manual was specified to be on loan from the Franchisor to the Franchisee, and was subject to confidentiality obligations. The Franchisee was also required to "comply with" the Manual (clause 6.2).
If the Franchisee wished to conduct the Business from a sales outlet in the Territory, it could only do so by obtaining the Franchisor's consent and by complying with specified terms and conditions (clause 8B). The outlet (defined in the Agreement as the Premises) had to be approved by the Franchisor before it could be used, and it could not be used for any other business purpose without the Franchisor's consent (clause 8B.2). The Franchisee was obliged, at its own cost, to fit out and decorate the premises, including the exterior, in accordance with the get-up specified by the Franchisor (clause 8B.3(a)). Any vehicle used by the Franchisee in the Business likewise had to be decorated, at the Franchisee's cost, in accordance with the requirements of the Operations Manual (clause 8B.3(e)).
Clauses 8C.1 to 8C.4 dealt with the supply and installation by the Franchisee of pools and ancillary products. The Franchisee was obliged to sell and supply Narellan pools only, and not to sell or supply any competing brand of pool, unless the Franchisor gave written consent (clause 8C.1(iii)). The Franchisor was obliged to obtain all Pools and Products from the Group Supplier (NPPL). For this purpose, the Franchisee was to enter into a Supply Agreement with the Group Supplier. The Franchisee was, however, entitled to obtain Products from other suppliers approved by the Franchisor.
Clauses 8D.1 to 8D.8 dealt with the franchisee's conduct of the Business and dealings with customers. The Franchisee was not permitted to conduct any other business without the written approval of the Franchisor (clause 8D.2; see also clause 12.5(a) referred to at [153] below). The Franchisee was subject to an obligation to devote its full time and attention to the operation and promotion of the Business (clause 8D.1).
This obligation was reinforced by clause 8D.6, which specified that the Franchisee, by its nominated managers, had to spend at least five days a week on marketing, sales and installation of Pools, and, in particular, maximising sales and obtaining the "goodwill" of customers. The Franchisee was obliged not to do anything which might harm the Business or might harm the "reputation or goodwill" of the Franchisor.
Clauses 8G.1 to 8G.4 dealt with the Franchisee's performance. Clause 8G.1 obliged the Franchisee at all times to use its best endeavours to "achieve and maintain the highest possible level of sales and installations of the Pools and Products and growth of sales and installations of the Pools and Products". Clause 8G.2 obliged the Franchisee to achieve certain minimum performance standards for each six month period of the Franchise Agreement.
Clauses 8F.1 to 8F.5 dealt with confidential information. For the purposes of the clause, the term "Confidential Information" was defined widely. It covered all documents provided to the Franchisee in the course of the franchise. Both the Franchisee and the guarantors were prohibited, without the prior written consent of the Franchisor, from disclosing the confidential information (clause 8F.1).
Clauses 8H.1 to 8H.7 dealt with records. The Franchisee was obliged to "maintain throughout the life of the agreement and for a period of not less than seven years afterwards, full and accurate books of account and records relating to all transactions in the course of conduct of the Business". The Franchisor had a right to require information from the Franchisee relating to the Business (clause 8H.2) and to inspect and audit the Franchisee's records (clause 8H.3).
Clauses 8J.1 to 8J.4 dealt with training and franchisee meetings. The Franchisee was required to attend training courses and franchisee meetings nominated by the Franchisor (clauses 8J.1 and 8J.2). Otherwise, the Franchisee was obliged to use best endeavours to attend regular franchisee meetings.
Clause 12 dealt with what was to happen upon "termination or expiry" of the Agreement. The Franchisee was obliged to "cease to exercise, directly or indirectly, all of the rights granted under the Agreement". In particular, the Franchisee was to cease to use the confidential information, and return any documents containing such information. If requested, the Franchisee was to remove and return or destroy all of the references to Narellan Pools from the Premises where the Business was being operated. The Franchisee was also to hand over the business name, and hand over or cancel the telephone number and email for the Business.
The Franchisor was also given a number of entitlements. The Franchisor might cancel any outstanding orders for Pools, Products, or ancillary or promotional materials which had been placed by the Franchisee with the Franchisor or with any approved suppliers (clause 12.1(b)). The Franchisor also had an option to purchase all of the Pools or Products held by the Franchisee at market value (clause 12.2). Finally, the Franchisor had an option to take over the Premises used for the Business by the Franchisee by way of transfer of the Franchisee's lease (clause 12.3).
Clause 12.4 provided that any referral and enquiries by the Franchisor to the Franchisee after the termination of the Agreement was not to be construed as a renewal. Clearly, this contemplated that the Franchisor might choose to make such referrals, but there was no obligation for the Franchisor to do so.
Supplier Agreement: This Agreement provided for an exclusive supply agreement between the Group Supplier and the Franchisee for the Pools (that is, the pool shells manufactured by NPPL) and other nominated Products and other nominated goods (referred to collectively as the "Goods"). The Franchisee was not entitled to acquire Goods from any other source (clause 3.2).
The Agreement contained specific covenants so as to protect NPPL's interests as manufacturer and supplier of the Goods. The Franchisee covenanted not to deal in any competing Goods (clause 9.1). This obligation was not limited to the Territory, and applied to the whole of Australia. The Franchisee also covenanted that it would not disclose the specifications for the Pools to "any competing pool company or brand" (clause 9.4).
On termination, the Franchisee was to remain liable "for all its obligations under this Agreement" (clause 8.1(a)). NPPL was entitled to complete any sale for which it had accepted an order as at the date of termination (clause 8.1(b)). But on the other hand, NPPL was authorised, if it chose, to enter upon any premises where the Goods were situated, and to take possession of them or remove them (clause 8.2).

Operation of franchises

Both of the Ranieris gave evidence by affidavit, supplemented orally, about the operation of the franchise business and the pool market within the franchised Territories. That evidence was not contested. In summarising it, I refer to the franchise as having been conducted by the "Franchisee" so as to avoid having to distinguish between RBME (which was the actual Franchisee under the agreement) and TMP (which actually entered into the contracts and undertook the installation work).
The planning requirements for the installation of swimming pools in the Territories differ from one Council area to another. In some areas, a full Development Application ("DA") must be made to the Council, and a Building Certificate ("BC") must be issued by the Council before the installation can take place. In other areas, it is sufficient to obtain a Complying Development Certificate ("CDC") from a private certifier.
In-ground pools are of two main types: concrete and fibreglass. Pre-cast concrete and vinyl shells are also available. A concrete shell can be fabricated on site, according to the particular requirements of the site, whereas fibreglass shells come in pre-moulded shapes and sizes. Accordingly, fibreglass shells are only suitable for use on some sites. On the other hand, fibreglass shells are usually cheaper than concrete shells and take less time to install.
The pool-building market is a highly competitive one. All that is formally required to set up a business is a building licence. According to Mr Matthew Ranieri, there are at least eighty pool builders operating in the Sydney area. Of these, at least twenty offer fibreglass pools. Apart from Narellan, there are several other fibreglass pool manufacturers who supply the Sydney market.
Mr Matthew Ranieri gave evidence about marketing the franchised business. The Franchisee made use of leads generated from Narellan's general advertising and promotional activities. But, according to Mr Ranieri, this did not generate enough business, and the Franchisee undertook its own marketing through agents engaged for that purpose.
That marketing was all undertaken under Narellan's name and did not mention the Franchisee or the Ranieris personally. Enquiries were funnelled into the Head Office system, and, to the extent that they resulted in leads from customers within the franchised Territories, would then filter through to the Franchisee in the usual way. Leads for potential customers outside the franchised Territories would be directed by Head Office to the franchisees of those territories. Mr Ranieri stated that he believed that NPG management was aware of this marketing and approved of it. This evidence was not challenged.
The evidence from both parties was that repeat business, in the form of a customer buying a second pool, is rare. Where customer satisfaction is important is that it can lead to "word-of-mouth" recommendations from customers to friends and family who are considering getting a pool.
On Mr Ranieri's evidence, word-of-mouth recommendations from former customers of the Franchise would usually be linked to the Narellan brand. Few, if any, recommendations were purely personal. Resulting leads would, therefore, pass through Head Office and reach the Franchisee (if coming from a customer in the Territory) in the usual way.
It was common ground between the parties that the vast majority of the Franchisee's business came from leads passing through Head Office. According to Mr Matthew Ranieri, when Head Office generated a lead, it would email the details of the prospective customer to TMP through its CRM system. But he said he also engaged a third-party marketing agency because the leads generated by Head Office were not sufficient. An analysis annexed to one of Mr Baily's affidavits of the outstanding pool contracts at the date of termination showed that ninety-three per cent had come from NPG leads. As Mr Baily pointed out, this was possibly an underestimate.
Typically, once the customer's requirements were agreed, a formal contract would then be signed between the Franchisee and the customer, and the customer would pay a deposit. The Franchisee would then place an order for the pool shell with NPPL. At this stage, the dates for delivery of the pool shell and its installation were not fixed.
The next step would be to obtain the necessary planning permission, either by way of DA/BC, or CDC. If only a CDC were required, the process would be simple and would typically take as little as two weeks. Obtaining a DA/BC would be a lengthier process, which would usually take at least two months, if not considerably longer.
Once planning permission had been obtained, delivery of the pool from the factory and its installation would be scheduled. At any one time, there would be numerous contracts in progress. The Ranieris used special software to help with the scheduling task.
Installation would essentially involve digging a hole for the pool and then using a crane to lift the pool into place. The surrounds then need to be concreted or paved and a fence installed. The Franchisee's business extended to concreting or paving the surrounds, but not the installation of a surrounding fence. This, and any associated landscaping, was left to the customer. As a result of their experience, the Ranieris have close relations with a number of fencing and landscaping contractors and can recommend such contractors to the owners if required. The actual installation would usually take two to three weeks at the most and a few days at the least.
According to Mr Tim Ranieri, the average period between a customer submitting an order (that is, entering into a contract with the Franchisee) was two to three months. But, from 2020 onwards, there was a time blowout, with the result that it might take seven months to complete the contract. Mr Ranieri attributed this to delays in supply from NPPL, partly as a result of COVID-19 and partly as a result of other manufacturing issues.
Mr Tim Ranieri stated that he recalled undergoing the initial induction training when he and his brother first acquired a Narellan franchise. He described the training as "adequate" for that purpose. Because of his building experience, he had not required any further technical training.
Mr Ranieri stated that the technical training offered by NPG was only generic in nature. It would not have been of any value for the Franchisee's Territories. Those Territories, and Sydney North in particular, have different requirements for the installation of pools from those in suburban or country territories. Typically, they involve small and complicated sites with limited access, and often, building in sand. The local councils are difficult and demanding, and so, in general, are the customers. It was clear from his affidavit evidence on this point, which was not contested, that Mr Ranieri considered that the NPG staff had nothing they could teach him about building pools in his franchised Territories.
The Ranieris acknowledged that NPG organised annual conferences, and other forums and franchisee meetings, which one or other of them would generally attend. This enabled them to share ideas with other franchisees, but the conferences and meetings do not seem to have involved any formal training or instruction. It was not suggested that the Ranieris were actually required to undergo any training or instruction in the exercise of NFPL's powers under the Franchise Agreement.
The Ranieris acknowledged that they had received the Operations Manual, but said that, at least since early in their first franchise, they had made no real use of it. Again, the information in the manual was generic in nature and they had sufficient experience not to need it. Mr Tim Ranieri stated that, about three or four years ago, the Ranieris ceased to use the standard form contract provided in the Manual. He described it as having various deficiencies. There was no suggestion that the Ranieris had actually been obliged by NFPL to comply with any particular requirement in the Manual, whether relating to the form of the Franchisee's customer contract or otherwise.

March 2022 document download

The solicitors' letter which was sent on the Ranieris' instructions to NPG advising that the franchise arrangements would not be renewed (see [28] above) was sent on 30 March this year. The Splash system records that, that night, there were extensive downloads from the system on RBME's account.
Between 8:47 pm and 9:20 pm on 30 March, RBME's account was used to generate and download a series of reports showing details of 2,600 customer leads and 6,700 further potential customers in the Sydney City and Sydney North Franchise Territories. This download is recorded against the IP address for Mr Matthew Ranieri's login.
Between 10:13 pm and 11:20 pm, RBME's account was used to download 244 further files. These downloads were logged to the IP address for Mr Tim Ranieri's login. The files seemed to have covered most of the information about the conduct of the franchise in the system: they included everything from signage templates to procedure manuals.
Counsel for the plaintiffs cross-examined both Mr Matthew Ranieri and Mr Tim Ranieri about these downloads. Mr Matthew Ranieri said that it was actually he who undertook the second batch of downloads, which were undertaken using Mr Tim Ranieri's access code. He suggested that he must have forgotten his own password. He maintained this evidence despite having given instructions, when the issue was first raised and the undertaking was given, that the second batch was undertaken by Mr Tim Ranieri. He said that this was simply a mistake.
Mr Matthew Ranieri was asked about why the downloads were undertaken. It was suggested that they were undertaken because of a desire to obtain the documents in case they proved useful to TMP's ongoing business after termination of the franchise agreement. He denied that this was the reason, saying that he was concerned that he and his brother would be cut off from access before the end of the franchise agreement. He conceded, however, that no such threat had been made to him at any stage.
Mr Tim Ranieri had little to say about the downloads. It seemed from his testimony that they had indeed been undertaken by Mr Matthew Ranieri, or at least at his request. Mr Tim Ranieri at first denied that he had been told by his brother that the documents could be used afterwards, but later agreed that he thought that the information could "be useful". Like his brother, he conceded that no threat had been made to cut the Ranieris off from access before the Franchise Agreement was to expire on 31 May.
As an event which post-dated the entry into the Franchise Agreements, the download can have no direct relevance for determining the reasonableness of the restraints in issue. The cross-examination about it took place before the parties agreed that the confidentiality claims would be held over to be dealt with at a later stage (see [12] above). That agreement left it unclear to me whether the download was of any remaining significance for present purposes.
The Ranieris, of course, had a contractual entitlement to download the information at the time they downloaded it. The Franchise Agreement was then still current. The real question from a confidentiality point of view is whether, after termination, the Ranieris retained, and made use of, the downloaded information. That is a question which will now be determined at a later stage. Suspicious as the events may be, I have found it unnecessary to reach a final conclusion who undertook the download (if that matters) or for what purpose.

TMP's new business

TMP now operates under the business name "Aquify Pools". The pool shells for the new business are made by a company called Aquatic Leisure Technologies Pty Limited ("ALT").
TMP appears to have retained substantially all of its former workforce (both employees and contractors). Presumably, it has retained its business premises (after removing any Narellan get-up and signage). As will be seen shortly, its pipeline of work over the months following the termination of the franchise was dominated by incomplete contracts entered into during the Franchise Agreement.
In accordance with the Franchise Agreement, TMP turned over its Narellan email addresses and social media accounts to the Franchisor. There is some suggestion in the evidence that there was a delay about doing this, but that issue does not need to be addressed in this judgment.
TMP has established new email addresses and a new social media presence using the Aquify Pools name. For promotional purposes, TMP made use of three testimonials from customers for whom it had built Narellan pools. Those testimonials refer to the Ranieris and their staff by name, and did not refer to any Narellan connection. It seems that the testimonials were selected (or obtained in this form) for that reason. One of the customers in question was in fact a family connection of the Ranieris.
According to Mr Matthew Ranieri, he thought that this was legitimate. But he said that when the plaintiffs made an issue of it in these proceedings, he took advice and ceased to use the testimonials.

Incomplete Narellan customer contracts

From around the end of January this year, the Ranieris altered the standard form contract used between TMP and customers. The Narellan name was removed from the contract and a clause was added permitting TMP, at its discretion, to substitute any "equipment" supplied to the customer (including the pool shell) with other equipment of "similar function, quality and cost". This clause was referred to in the evidence as the "Substitution Clause".
Subject to this change, TMP's contracting operations appear to have continued normally for the first quarter of this year. NPPL continued to accept orders placed by TMP to supply its customers for a period after formal notice was given that the Franchise Agreements would not be renewed on 30 March. According to Mr Matthew Ranieri ten pool orders were accepted by NPPL over the period from 5 to 12 April. Apparently, these were the final orders accepted.
As at 31 May this year, when the franchises ended, there were 188 contracts between the Franchisee and customers where the pool had not been installed. Some of these contracts contained the Substitution Clause and some did not. There were also some incomplete contracts for "sleeper pools". Such pools are installed as part of a wider renovation or construction project. The pool is installed but is then boarded over until the rest of the project is completed. At that point, the Franchisee's employees and contractors come back and finish the pool construction.
Presumably, pool orders would have been accepted by NPPL for most of the contracts which were incomplete as at 31 May. Under the Supply Agreement, it would have been open to NPPL to continue to supply Narellan pool shells so as to enable the completion of the incomplete contracts. But that has not apparently happened.
Since the proceedings began, the Ranieris and their staff have been trying to persuade customers to agree to the substitution of non-Narellan pool shells and completion of their contracts on that basis. It seems that the Ranieris have been asking customers to sign a written authority to substitute an ALT pool, even for contracts containing a Substitution Clause. Also, from complaints made by the Ranieris in their affidavits, it seems that NPG has contacted at least some customers to seek to dissuade them from that course.
But the evidence on this simply identified the number of contracts in different categories of completion (see below). There was no detailed evidence about the communications made by the Ranieris and their staff with their customers. Nor was there any evidence from the plaintiffs about communications with customers.
TMP appears to have entered into a handful of further contracts with customers in the weeks following the end of the franchise. As at 21 June, there were 197 incomplete contracts. Of these, 73 included the Substitution Clause. The injunction granted by Richmond J put a stop to new supply and installation contracts after 25 July.
The latest date for which there was information was 2 September this year. As at that date, 145 contracts remained outstanding. There were also 22 "sleeper pools". Of the outstanding contracts, 106 customers had agreed to substitution of an ALT pool. Mr Matthew Ranieri said that he expected that 22 of the remaining customers would cancel their contract. But he expected the other 17 customers to vary their contracts.
Mr Baily gave evidence that NPG would be able to take over contracts with customers who wished to have a Narellan pool. Although NPG is now a fully franchised operation, and no longer conducts installation work itself, Mr Baily was confident that it could use subcontractors known to it to complete those works. But NPG seems not to have taken any action in this regard.

Recruitment of replacement franchisees by Franchisor

Mr Baily also gave evidence about the process of installing a new franchisee. This might happen either as a result of the termination or expiry of a franchise agreement. It might also happen where the franchisee wishes to sell the franchise to someone else.
The starting point is to identify builders who are prepared to take over the franchise. This may be done by advertising and also by cold-calling, as well as by using contacts in the industry or even through customers. But, once someone willing to take on the franchise is identified, there is then a formal approval process. That involves the proposed franchisee submitting information, including a business plan, so that the Managing Director of NPG (who makes the final decision) is satisfied that the proposed franchisee is suitable.
Once the proposed franchisee has been identified, NPG provides training. There is a period of induction training which lasts about two weeks. Following that, an NPG employee is sent out to the franchisee's business to supervise installations being done by the new franchisee. That employee will continue to supervise until satisfied that the franchisee has reached a suitable level of competence to operate independently. Mr Baily said that the period of supervision was variable and that there was no standard, although, on average, the total period of time between the beginning of induction training and the end of installation supervision was about three months. This implies a supervision period of ten weeks or so.
The plaintiffs also sought, through Mr Baily, to lead evidence that competition from TMP in its new Aquify Pools business had interfered with NPPL's ability to let new franchise contracts for the two franchised areas. This was a critical factual element of the plaintiffs' case (see [125] below).
In his initial affidavit (made on 9 June), Mr Baily stated: The Franchisor has commenced recruitment for a new franchisee for the Sydney City Territory and the Sydney North Territory. The restraint period is critical to this process, because it provides the new franchisee with an opportunity to establish their business in the Territories and transition the Narellan Group's goodwill in the Territories to their business. Without the restraint period, I am concerned that the Franchisor will not be able to engage a new franchisee, and will therefore lose significant revenue.
In his affidavit sworn on 20 June for the purposes of the interlocutory injunction application, Mr Baily stated: … we have started our recruitment process for new franchisees for the Territories. That process will be more difficult due to the proceedings and we will be forced to accept a reduced sale price for the Territories if the restraint clauses are not enforced.
At the final hearing, the final sentence was the subject of an objection by counsel for the defendants. Counsel for the plaintiffs recognised that the evidence was in the form of an opinion and sought to justify its inclusion under the opinion rule in s 79 of the Evidence Act 1995. As expert evidence, it should have been the subject of prior directions from the Court (see Uniform Civil Procedure Rules 2005, r 31.19) but I was prepared to overlook this. However, I considered that the evidence was inadmissible. Its conclusory form left the expert basis, if any, for Mr Baily's opinion unclear. And there was no reasoning to show that the opinion was actually based on such expertise. I upheld that objection but permitted counsel for the plaintiffs to lead, if possible, evidence in chief from Mr Baily.
In his supplementary evidence in chief, Mr Baily said that, in his time with NPG the management structure had been as follows. At the head of the Group's management was the Managing Director. Below the Managing Director were executives designated as "Director", one of whom is responsible for franchising and another for operations. Reporting to the Director responsible for operations was a Manager with specific responsibility for "franchise development". It was this executive who was immediately responsible for the recruitment of new franchisees. That could occur both where the existing franchisee wished to sell the franchise and also where the existing franchisee did not wish to renew the franchise.
Mr Baily himself joined NPG as the Chief Operating Officer. At the time he joined, he nevertheless had some direct involvement in looking for new franchisees. It seems that, at that time, the position of franchise manager may have been vacant, but Mr Baily's evidence was somewhat vague about this. At all events, he said that when he started he was provided with a folder of names and contacts to fill franchise vacancies. It was unclear whether these vacancies arose by way of sale or recruitment of a new franchisee. It also seems that, for a period of time, Mr Baily was involved in finding new names as well.
It emerged from Mr Baily's cross-examination that an approach had been made to a proposed franchisee in June. Mr Baily said that the franchisee was not willing to undertake the franchise. After that, a dedicated employee was appointed to try to fill the vacancy. As already stated, the vacancy has not yet been filled.
I did not find the sequence of events easy to follow, but as best I can determine it, according to Mr Baily's evidence, it was thus. When Mr Baily started with NPG (which was in September 2015 or thereabouts) the dedicated position for franchise management was vacant (or perhaps had not yet been created). Mr Baily, who then appears to have been the Chief Operating Officer with NPG, was given the task of recruiting new franchisees. He did this for a period of between one and two years, extending until some point in 2017. At that stage, the position of Franchise Development Manager was filled (or established) and the person responsible for that assumed responsibility for the task. Mr Baily was, however, generally kept informed as a senior executive about the state of play. Later, when he became Managing Director at some point last year, it became his responsibility to sign off and approve new franchisees, but the immediate responsibility for finding the franchisees and submitting their applications remained with the Manager.
Mr Baily was asked to recall specific instances of recruiting new franchisees when this had been his responsibility. He mentioned two. One arose when the franchisee of the Central Coast wished to sell the franchise and a new franchisee was required. This took about eight weeks. The other was when the franchise for The Hills District of Sydney was terminated due to the lack of performance by the franchisee. Mr Baily did not specifically say how long the recruitment of a replacement transferee took in that instance, but said it happened "reasonably quickly".
It seems, although Mr Baily's evidence on this was somewhat vague, that no attempt was made to recruit a new franchisee between the letter of 30 March and the actual termination of the franchise on 31 May. Mr Baily's evidence was that the recruitment process began in early June. In his affidavit of 20 June, Mr Baily indicated that a potential franchisee had been identified but was not prepared to make any commitment until the outcome of the interlocutory application was known. In his oral supplementary evidence in chief, Mr Baily said that the proposed franchisee had ultimately withdrawn, saying that he lacked the appetite for taking on the relevant franchise territories.
It seems that, at the time the franchise was terminated, and for some months afterwards, the franchise management position was vacant. Mr Baily spoke of a franchise coach being involved in the recruitment process. This franchise coach reported to the General Manager of franchising. Eventually, and perhaps because of the difficulties being experienced, the position of Franchise Development Manager was refilled and that person assumed responsibility for the search. According to Mr Baily's oral supplementary evidence in chief, this occurred about "six to eight weeks ago", which would place it in the first or second week of September.
Mr Baily ultimately gave the following evidence: Q. And how long was that after the conversation where this person told you that he wasn't interested? Days, weeks, months? A. It would've been weeks, not days. But it was really not an instruction based off that conversation, it was an instruction based off the importance of these territories to our business, and the fact that we weren't getting the traction we needed to get. … Q. Have you ever been involved in a franchise recruitment effort for particular territory where you have had as much difficulty getting traction as this one? A. No, and especially given the value of this territory. Q. And why is this territory valuable? A. Because it's had so many pools - Narellan pools sold into it. It's a large territory.

Enforcement of restraints

The plaintiffs seek restraints lasting until 31 May 2023, which is the end of the restraint period specified in the Franchise Agreement and the Deed Poll. As against RBME and TMP, the plaintiffs seek four restraints, namely, restraints against: (a) Soliciting or enticing a person who had entered into a contract for the installation of a Narellan pool within the Franchise Territories to vary that contract to provide for the installation of any other brand or type of pool; (b) Entering into a contract which would involve the installation of inground pools or spas, or pool installation accessories, within the Franchise Territories; (c) Advertising the sale and/or installation of inground pools and/or spas within the Franchise Territories; and (d) Dealing with customers or potential customers for the supply and/or installation of inground pools and/or spas within the Franchise Territories.
As against the Ranieris personally, the plaintiffs seek the four restraints already identified, together with an additional six restraints, namely restraints against: (e) Managing the installation of an inground pool or spa within the Franchise Territories: (f) Being the Nominated Supervisor of any NSW builder licence holder, while that licence holder is engaged in the construction or installation of inground pools or spas within the Franchise Territories; (g) Being a director of a company whilesoever that company is engaged in any of activities detailed at paragraphs (a) to (e) above; (h) Being a shareholder of a company whilesoever that company is engaged in any of activities detailed at paragraphs (a) to (e) above; (i) Being an employee or contractor of a company whilesoever that company is engaged in any of activities detailed at paragraphs (a) to (e) above; and (j) Communicating instructions or wishes to any person in relation to the business of the fourth defendant.
I will deal first with the claims under the Franchise Agreement by NFPL for injunctions against RBME and the Ranieris personally. Next, I will deal with the claims under the Deed Poll by NFPL and NPPL for injunctions against RBME. The claim for an injunction against TMP is not based on contract but is presented as being ancillary to the contractual claims. I will deal with that last.

Injunctions under Franchise Agreements

The relevant restraint covenant is found in clause 12.5(b) of the Franchise Agreement, which provides: After termination or expiration For a period of 12 months, or if such period is unenforceable then 6 months, from the date of termination or expiration of this agreement, the Franchisee and the Guarantor(s) … jointly and severally covenant and agree with the Franchisor … that any of the Franchisee or the Guarantor(s) … shall not either directly or indirectly, either alone or in partnership, or as a director or shareholder of any company, or as an employee, consultant, lender, representative, agent, advisor or otherwise: (i) be engaged in, carry on any business or obtain a direct or indirect benefit from a business which is similar to the Business or offers Products or Pools (or products and/or pools similar to the Products and/or Pools) within the Restraint Area; (ii) solicit any clients of the Business or other Franchisees including those listed on the Database; (iii) otherwise market the Products or Pools or similar products or pools within the Restraint Area.
I have already set out the definitions of "Business", "Pools" and "Products". The terms "Pools" and "Products" mean Narellan pools and products. Likewise the term "Business" means the conduct of the franchised business, selling Narellan pools and products. The "Restraint Area" means the franchised Territories.
Claimed restraints (b), (c) and (d) would apply to the sale and installation of swimming pools generally. The claims for these restraints are based on limb (i) of the covenant which applies to the conduct of a "business similar to" the Business. Limb (iii), which deals with marketing, does not need to be separately considered.
Claimed restraint (a) would apply in terms to solicitation of customers whose contracts have not been completed. The claim for that restraint was presented as a specific application of limb (i). It was not clear to me whether the claim was also based on a specific application of the non-solicitation limb of the covenant (limb (ii)). There was no claim for a wider non-solicitation covenant which would apply to former customer generally.
Counsel for the plaintiffs relied on the general statement of principle by Gleeson JA, speaking for the Court of Appeal, in Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343 at [59]-[74]. Counsel for the defendants was content to proceed on that basis.
Where the Restraints of Trade Act 1976 applies, as it does here, the court must apply the restraint of trade doctrine by reference to actual or anticipated breaches, rather than theoretical ones. The first task is to decide whether the relevant conduct is, as a matter of construction, a breach of the restraint covenant (and that, in its application to such conduct, the covenant operates as a restraint of trade). Then the court must decide whether the plaintiff has proved that a restraint on that particular conduct goes no further than is reasonably necessary to protect the plaintiff's legitimate interests: at [61]-[62].
As to reasonableness, Gleeson JA stated at [63] (citations omitted): The validity of a covenant in restraint of trade is to be judged at the date of its creation. Nonetheless, the court may take into account future events that could have been foreseen. Hence, when exercising its discretion whether or not to grant relief, the court considers matters as at the date of the hearing.
It has sometimes been stated that the court should take into account events which are expected, rather than events which are only foreseeable; there is also some potential uncertainty about the extent to which the court can take into account future events which render the plaintiff's interest in enforcing the restraint more attenuated than they might otherwise have been: see Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWSC 1059 at [125]-[130].
Another potential area of doctrinal uncertainty concerns the refusal of injunctive relief. Of course, the Court may always refuse relief on grounds which would sustain an established equitable defence, such as hardship, leaving the plaintiff to pursue a claim for damages. But it has been suggested that there is a more general entitlement to refuse relief on reasonableness grounds based on events which have occurred after contract and before trial. That would be consistent with Gleeson JA's formulation, and in particular the use of the word "hence", although, in other formulations, the refusal of relief is treated as a separate stage of the analysis: see Label Manufacturers at [123]-[125].
These refinements were barely, if at all, addressed in the argument before me. To the extent possible, I propose to put them aside in what follows.
I will deal first with the claimed general restraints, before turning to the claimed specific restraint concerning uncompleted customer contracts. But, first, I will address an argument which would, if successful, mean that no relief could be granted in the Sydney City franchise territory.
Commencement date of Sydney City restraint period: It will be recalled that the five-year term of the Sydney City franchise ran out on 30 April 2021. Thereafter the franchise continued on a month-to-month basis under clause 3.4 of the Franchise Agreement. Counsel for the defendants submitted that the twelve-month restraint period under clause 12.5(b) began at the end of the five- year term. On this view, the restraint period for that franchise expired on 30 April this year, and no injunction would be available.
Clause 3.4 of the Franchise Agreement provided: Month to month franchise Should this Agreement terminate or expire for any reason and the Franchisor allows the Business to continue to be conducted by the Franchisee after the date of termination or expiration (as the case may be), then without prejudice to any rights or remedies the Franchisor may have: (a) the Franchisee may continue to operate the Business under licence on a monthly basis; (b) that licence may be terminated by either party on one month's written notice to the other party; and (c) the terms of that licence of the Business are: (i) those set out in this Agreement, as appropriate; or (ii) those contained in the then current form of franchise agreement, as notified to the Franchisee and as appropriate.
The debate was presented by counsel for the plaintiffs (at least initially) as a direct question about the construction of clause 3.4. On counsel's approach, clause 3.4 operated by picking up other provisions of the Franchise Agreement (there was no suggestion that the terms of any other agreement would be picked up pursuant to sub-clause (c)(ii)). Clauses so picked up would then operate by reference to the licence period. The question was therefore whether clause 12.5(b) was "appropriate" to be picked up by clause 3.4 and applied as from the end of the licence period.
Counsel for the defendants criticised this approach. Counsel submitted that it could hardly have been intended that clause 12.5(b) would apply twice, once of its own force at the end of the initial contractual term, and then a second time when it was picked up and applied at the end of the licence period.
I think that there is force in this argument. It seems to me that a provision such as clause 15.2(b) could only sensibly apply once. The question is whether it applied from the end of the initial contractual term or only took effect on the later expiry of the licence. In other words, the question is one of construction of clause 12.5(b): when the "termination or expiration" of the Sydney City Franchise Agreement took place for the purposes of that clause.
Counsel for the defendants pointed out that clause 3.4 spoke of the month-to-month licence from the date of "termination or expiration" of the Agreement. This was the same phrase as was used in in clause 12.5(b). Counsel submitted that the phrase should have the same meaning in both clauses. This submission relied on the usual principle of contractual construction to that effect.
Counsel also pointed out that clause 3.4 appears alongside the clauses of the contract which deal with renewal (clauses 3.1 and 3.2: see [143] above). Counsel submitted that this underlined the point that clause 3.4 did not involve any extension of the contractual term, but rather involved a new set of contractual obligations.
But the drafting of clause 3.4 has its problems. During the term, the Franchisor made a "grant' to the Franchisee of the "right to conduct the Business" (clause 2.1: see at [48] above). This language is not particularly apt, because at all times during the franchise the Business was, in law, being conducted by the Franchisee. What the Franchisee was really being "granted" was the right to use the Franchisor's brand for the purpose of conducting the Business. In this context, it is not easy to see what difference there was in substance between a "grant" and a "licence".
Moreover, clause 3.4 spoke of "continuing" the "Business" during the "licence". Because the "Business" was a business of selling Narellan pools, the idea of the "Business" continuing without the full advantage of the Intellectual Property (for example, on some sort of non-exclusive basis) makes no commercial sense.
On both parties' approach, the terms of the extension were the same as the terms of the Agreement, subject only to those terms being "appropriate" to the extension. But it is difficult to accept that any of the substantive obligations in the Franchise Agreement, except perhaps the six-monthly minimum sales requirement, would not be "applicable". No one suggested, for instance, that the Franchisee did not have to pay franchise fees and advertising levies during the period of the "licence".
Against this background, there are real commercial difficulties with the construction advanced by counsel for the defendants. Many critical obligations and entitlements of the parties were expressed to last until "termination or expiration" of the Agreement. Examples of such obligations and entitlements are the Franchisee's obligation to turn over the Intellectual Property (clause 5.4: see at [56] above), and the Franchisor's entitlement to take over the Franchisee's premises (clause 12.3: see at [68] above). It would be commercially nonsensical for these to be triggered before the end of the "licence".
This problem is particularly acute in the case of clause 12.5 itself. That clause contained two restraints. Sub-clause (a) applied during the Term, and sub-clause (b), as already noted, applied after "termination or expiration". Sub-clause (a) was in similar form to sub-clause (b) but was wider, as it applied to conduct of the Business, or any similar business, outside the Territories. It seems an unlikely result, if the Business continued under "licence" after the expiry of the five year term, for sub-clause (b) to apply instead.
Such a result would be more than capricious: it would be self-defeating. Sub-clause (b) would prevent the Franchisee from operating any business "similar to the "Business". Obviously that would include operating the Business itself. But operating the Business is the very thing the Franchisee "continues" to do under the "licence".
Consistency of meaning where the same term is used in different parts of a contract is indeed the usual principle. But it must give way where disparate meanings are required as a matter of contractual context, or to avoid absurdity. I think the better reading of the Agreement is one which is analogous to a holding-over under a lease. Clause 3.4 comes into play on the "termination or expiration" of the contractual term. But if the parties agree to a "licence" under the clause, then for the purposes of clause 12.5(b) (and the other "appropriate" terms which confer obligations and entitlements by reference to "termination or expiration") the "termination or expiration" of the Agreement does not occur until the end of the licence.
It is worth repeating that this issue only arises for the Sydney City franchise, because the extension of time on the Sydney North franchise was an agreed extension to the term. To my mind, this only serves to illustrate the artificiality of the defendants' construction.
For these reasons, I reject the defendants' argument. As a matter of construction, the post-contractual restraint in the Sydney City Franchise Agreement began on 1 June this year and continues until 31 May next year.
General restraint on competition: construction issues: Counsel for the defendants suggested in their written submissions that clause 12.5(b) should be construed as a "brass plate" covenant, that is, a restraint covenant which did not prevent the defendants from dealing with customers within the franchised Territories, but only from establishing a place of business within the Territories: see Lyne-Pirkis v Jones [1969] 1 WLR 1293 at 1299 per Russell LJ, with whom Edmund Davies and Fenton Atkinson LJJ agreed; Lu v Lim (1993) 30 NSWLR 332 at 334-5 per Young J. But I do not think the clause should be read that way. It can only realistically be the location where the pool is to be installed which defines the boundaries of the Territories for the purposes of the Agreement.
In theory, there could be an ambiguity about the sale of Products, to the extent that such sales involved goods sold over the counter to retail customers. But this does not have to be considered, as no restraint is sought on the sale of such goods.
The claimed restraints apply to the installation of any in-ground pool. This would include a concrete pool. In my view, it is questionable whether the installation of concrete pools is relevantly "similar" to the installation of Narellan pools, which are made of fibreglass. But on the views which I have formed, it is not necessary to consider this any further.
There is also potential room for debate about the scope of the restraint on the Ranieris. The claimed restraints apply to holding positions as shareholders, directors etc of a company engaged in, or carrying on, a business involving the sale or installation of pools within the Territories. TMP is such a company. But its business is being carried on by TMP as a corporate entity. Arguably the restraint covenant requires some personal involvement by the Ranieris (albeit their capacities as TMP's shareholders, directors or otherwise) in that business. Simply to hold shares without having any such personal involvement in the business would not be covered. Thus, claimed restraint (h) would not be justified. There might also be a question about claimed restraints (g) and (i) as well.
Counsel for the plaintiffs submitted that restraints in these terms were justified because of the use of the words "directly or indirectly" in the covenant. I think that this is questionable. Those words are adverbial. As a matter of grammar, they qualify the verbs specifying the actions which I have already quoted, but would not usually expand the meaning of those verbs. It is far from clear that they justify ignoring the corporate veil between TMP and the Ranieris as individuals.
Counsel accepted that the restraint would not apply in the case of a passive shareholding in a listed public company where there was no actual involvement in the company's business. But I find it difficult to see why the size of the company could affect the application of the words "directly or indirectly".
There is no doubt, however, that the Ranieris are currently involved in the management of the business. If necessary, the issue could be addressed by limiting the words of the injunction granted. On the view which I have formed, it is not necessary to reach any final conclusion.
General restraint on competition: reasonableness: The argument on the reasonable scope of the restraint took place around the Court of Appeal decision in BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347. In that case, the plaintiff ("Blockbuster") conducted a chain of video and DVD hiring outlets. Some of the outlets were operated by Blockbuster itself and some by franchisees. The proceedings concerned two franchised outlets in Queensland.
The outlets had previously been operated by the defendant ("Karioi") under its own name. In 1998, Karioi entered into franchise agreements with Blockbuster and thereafter operated the outlets as Blockbuster stores. The franchise agreement contained the usual provision requiring the franchisee to use Blockbuster's get-up and business systems in operating the stores and protecting the confidentiality of Blockbuster's intellectual property and the information built up in the course of the franchise (including the customer lists). There was also a post-contractual restraint on Karioi from carrying on a business of the same type within 30 kilometres of the store locations.
The agreements entitled Blockbuster, at its option, to purchase the stores at the end of the franchise agreements (clause 32). There was also an entitlement (clause 18) to take over the running of the stores and require an assignment of the lease, at no consideration, if the agreement was "terminated" as a result of default by the franchisee or by agreement between the franchisee and the franchisor. The acquisition covered fair value including the goodwill associated with the lease.
Blockbuster did not exercise its option to acquire Karioi's businesses. The agreement came to an end by the effluxion of time, following a holding over period of several months. Blockbuster claimed to be entitled to require Karioi to transfer the leases under clause 18. That claim was rejected because the agreement had not been "terminated" within the meaning of clause 18.
Despite its failure to obtain the leases, Blockbuster sought to enforce the post-contractual restraint clause in the franchise agreement. The Court of Appeal held that this was unreasonable and unenforceable as a restraint of trade. Because the relevant Agreements were governed by, and were being enforced in, Queensland, the common law applied rather than the modified version of the common law resulting from the Restraints of Trade Act 1976. But it was not suggested by either party that this affected the Court's analysis.
The leading judgment was given by Macfarlan JA, with whom Giles JA and Sackville AJA agreed. His Honour began by observing that a distinction had been recognised in the authorities between a restraint covenant given to the purchaser of a business by the vendor of a business and a restraint covenant given to an employer by an employee. A restraint in a franchise agreement has been seen as having a hybrid quality, in some circumstances and in some respects being closer to a vendor restraint and in others closer to an employee restraint: at [60]-[61].
His Honour began by considering whether the restraint in question was analogous to a vendor restraint. His Honour noted that Karioi had carried on a video hire business at the two stores for some years prior to the franchise agreement. As at the date of the franchise agreement, there was goodwill in the stores which belonged to Karioi. But Blockbuster had made no payment to Karioi for that goodwill. Nor had Blockbuster exercised its rights under clause 32 (or clause 18) to acquire Karioi's business. Thus, the vendor restraint cases were prima facie irrelevant: at [62]-[65].
His Honour then considered whether Blockbuster had some other interest in the nature of goodwill which it was entitled to protect. Three possible sources of franchisor goodwill in each store had been suggested. These were: "the patronage of the store, including the customer database"; the location of the store; and Blockbuster's intellectual property and confidential information, including the business know-how it supplied to the franchisee.
His Honour observed that, at the date of the franchise agreement, Blockbuster had pre-existing goodwill associated with its brand. But that goodwill did not entitle it to protection from other video store operators such as Karioi. The question was whether, at the date of the franchise agreements, reasonable people in the position of the parties would have expected that performance of the agreements and conduct of the franchised operations would be likely to generate significant new goodwill which Blockbuster would own and which Blockbuster could reasonably protect by imposing a restraint ([66]-[67]).
In considering this question, his Honour observed that, under the terms of the franchise agreements, all intellectual property and confidential information provided to Karioi or built up by Karioi were to be turned over to Blockbuster on termination of the franchise. The terms of the agreements thus precluded Karioi from making use of that intellectual property and confidential information for itself. There was no reason to think, as at the beginning of the franchise agreements, that any goodwill of Blockbuster in that information and in those customer contacts could be used by the franchisee. Therefore Blockbuster had no interest to protect: at [68]-[69].
As to the location of the stores, they had been established by Karioi and Blockbuster had not exercised its right to take over the relevant leases from the franchisee. When the agreements had been made, it was contemplated that Blockbuster might do so, but that in fact had not occurred. Accordingly, Blockbuster had no relevant goodwill in the store locations (at [70]).
As to the "patronage" of the stores, on the evidence this was not "in reality an independent aspect of any goodwill that Blockbuster owned". Customers were attracted to the stores essentially because of their locations and, to a lesser extent, by their Blockbuster branding. A personal connection with the franchisee and its employees, based for example on the quality of their service, was not a significant factor (at [71]-[75]).
As a result, there was no analogy with the vendor restraint cases. His Honour therefore turned to ask whether there was any analogy with cases where employee restraints had been upheld.
In addressing this question, his Honour first referred to the distinction drawn by Lord Wilberforce, speaking for the Privy Council in Stenhouse Australia Ltd v Phillips [1974] AC 391 at 400: The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man's improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information …, the employer's claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For while it may be true that an employee is entitled - and is to be encouraged - to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer's business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers.
Applying this distinction, it was necessary to identify some feature of the franchise business which Karioi would obtain as franchisee and retain following the end of the franchise agreement. But, at the end of the agreement, Karioi would surrender Blockbuster's brand reputation and the evidence established that Karioi's personal reputation built up during the franchise agreement was not a significant factor. Blockbuster's entitlement to retain the confidential information for itself at the end of the franchise was adequately protected by other clauses of the agreement (see at [81]-[83]).
His Honour went on to refer to the English decisions in Dyno-Rod Plc v Reeve [1999] FSR 148 and Chipsaway International Ltd v Kerr [2009] EWCA Civ 320. In the latter case, Dyson LJ said at [22]: … during the term of a franchise, goodwill is built up in the franchise territory with the use of a franchisor's name and branding. Such goodwill is a potentially valuable asset in the hands of the franchisee so long as he continues to trade in the franchise territory, and in the hands of a franchisor at the termination of the franchise agreement. A franchisor's interest in that goodwill is vulnerable to competition from a former franchisee who has knowledge of the area and experience of dealing with particular groups of customers. The commercial purpose of a post-termination covenant against competition is to prevent the franchisee for a period of time from continuing and competing in his former territory in the same line of business so as to enable the franchisor to exploit the goodwill that he has built up during the term, most obviously by recruiting another franchisee for the same area.
But Macfarlan JA stated (at [91]): In the present case there is, in contrast, no evidence, and no basis for an inference, that reasonable people in the position of the parties would have contemplated that by reason of Karioi having acted as a Blockbuster franchisee (rather than by reason of its entitlement to continue to operate businesses in the existing locations), any of the respondents would have a competitive advantage over replacement franchisees appointed by Blockbuster.
There are clear parallels with the present case. The Franchisor did not, in entering into the Franchise Agreement, purchase any goodwill in the incoming Franchisee's existing business. The Agreement did not provide for any later purchase of goodwill of the Franchisee either. At the end of the franchise, the Franchisee had to cease using the Franchisor's brand and customer database. The Franchisee also had to turn over any intellectual property and confidential information belonging to the Franchisor.
Counsel for the plaintiffs nevertheless contended that the Franchisor was entitled to maintain a restraint on the Franchisee from operating in the Territories for a sufficient period to allow the incoming franchisees to establish themselves in the Territories. Counsel submitted that the decision in BB on this point was to be distinguished on the facts. In the present case the training provided to the Franchisee and the experience gained by the Franchisee in operating the Franchise would give the Franchisee a competitive advantage over an incoming franchisee at the end of the Franchise Agreement.
Counsel characterised this alleged interest as part of the Franchisor's "goodwill". Counsel relied on clause 5.8 of the Franchise Agreement. That clause provided: The Franchisee recognises and acknowledges that all goodwill accruing to the Intellectual Property accrues to the exclusive benefit of the Franchisor, or its associated companies and that the Franchisee accrues no interest or right in such goodwill. The Franchisor acknowledges that the Franchisee is entitled to local goodwill relating to the local operation of its Business for so long as this Agreement is in force, but is not entitled to goodwill, or to be compensated by the Franchisor for the loss of such goodwill, upon termination or expiration of this Agreement except in the case of transfer in accordance with clause 13.
In my view, counsel's argument is unsound as a matter of principle. Any experience the Franchisee may have gained, and any resulting personal reputation with customers, was the result of the Franchisee's own efforts. It was in no sense gained by the Franchisee at the Franchisor's expense. To the contrary, it was the Franchisee who was paying the Franchisor for the (temporary) privilege of conducting the Business under the Franchisor's brand. How then can the Franchisee's accumulated experience and personal reputation be some sort of asset belonging to the Franchisor?
Clause 5.8 does not assist counsel's argument. The first sentence is concerned with goodwill derived from the Franchisor's brand, which remained the Franchisor's property. The second sentence, in referring to "local goodwill", is I think also concerned with such brand goodwill (as its context would suggest). The concern of the clause is to exclude the possibility of the Franchisor from making some sort of claim on the Franchisor for loss of "local goodwill" at the end of the agreement. Any personal goodwill of the Franchisee is by definition something which the Franchisee retains after the agreement has come to an end and the Franchisor's brand goodwill has been surrendered.
These conclusions are consistent with Lord Wilberforce's statement in Stenhouse about the boundaries of the restraint of trade doctrine. That statement was made in an employer-employee context, but in BB Macfarlan JA clearly thought the statement equally applicable to franchisees. With respect, there seems to me to be good reason for that. Employers can at least say that they are paying their employees while those employees build up their general skills and experience. As I have pointed out, franchisors cannot even say that.
Counsel for the plaintiffs submitted that the Franchisor also had a proprietary interest in maintaining the flow of orders for pool shells. But I do not think that that is correct either. The profits derived from the manufacture of the pools were generated by NPPL, not the Franchisor. The Franchisor's interest lay in the payment of fees from franchisees (or, in profits from the sales and installation part of the business itself). Even if the Franchisor manufactured the pools itself, it would have no legitimate entitlement to protection against competition from rival manufacturers.
As in BB, the Franchise Agreement permitted NFPL, at the end of the franchise, to retrieve the IP it had provided to the franchisee, and to retain for itself the benefit of the confidential information built up in the course of franchising operations. It therefore could not legitimately have been supposed that the franchisee would have been entitled to use that information to compete against the franchisor. To the extent that the Franchisee in the present case is alleged to have done so, that may be a matter for a claim for damages in due course, but it cannot affect the reasonableness or otherwise of the restraint.
In the employment area, it has been suggested that a clause protecting the employer's confidential information may not, because of its practical limitations, go far enough, and that this may justify a general restraint on competition, at least for "a short period": see Label Manufacturers at [135]-[136]. At the end of the argument, counsel for the plaintiffs submitted that the same reasoning could be applied to justify a restraint in the present case. The point, however, was not fully argued. Certainly, it does not seem to have troubled Macfarlan JA in BB. I think that, in the end, I should pass it by.
Although I have concluded that the Franchisor's argument is unsound in principle, I should say something about it on a factual level. The question is (adopting the language of Macfarlan JA in BB at [75]) whether the parties, acting reasonably, would have contemplated that the general skill and experience built up by the Franchisee in the course of the Franchise Agreement might have drawn customers to TMP's ongoing business after the end of the Agreement, or that that in fact happened.
The first point to make is that it is difficult to isolate the goodwill resulting from the period of the Franchise Agreement. The plaintiffs' argument cannot apply to skills and experience which were innate or developed before the Franchise Agreement was entered into. This is a particular issue in the present case, where the Franchisee had eight years of experience as a Narellan franchisee before the subject Franchise Agreement was signed in 2016.
On the evidence before me, customer leads are overwhelmingly generated by advertising and promotion (both general and local) of the Narellan brand. The defendants' evidence that there was no significant repeat business was not questioned.
The plaintiffs' evidentiary case was that incoming franchisees would be concerned about competition from the outgoing Franchisee and this would depress the fees they would be prepared to pay to take on franchises in the Territories. On the face of it, this does not seem very likely. The most important consideration would seem to be the strength of Narellan's brand and the volume of its leads. It seems unlikely, in a competitive market of the type described in the evidence, that competition from one more anonymous pool builder would make any great difference.
The plaintiffs' evidence on this question focussed on the difficulties the Franchisor in fact suffered, or claims to have in fact suffered, in finding new franchisees for the Territories, rather than on what the parties would have foreseen when entering into the Franchise Agreement in 2016. But, to the extent that the actual experience of the plaintiffs described in the evidence could validly be projected backwards to 2016, the evidence was still unconvincing.
It is notable that Mr Baily's evidence at the hearing never did reach the point of expressing in proper and admissible form the opinion that the Franchisor's failure to find a new franchisee was the result of concerns about competition from the outgoing Franchisee's new business. All I have is Mr Baily's initial affidavit evidence expressing his "concern", and his oral evidence about the "lack of traction" experienced by the Franchisor in obtaining new franchisees for the Territories. I think that this falls far short as evidence, let alone proof, that competition from the Franchisee's new business was to blame.
The plaintiffs' evidence on this point was vague. There were little or no specifics about the previous recruitment of new franchisees. This was despite the fact that the evidence showed that there would have been documentary evidence about previous recruitments, at least in the form of written reports and recommendations. The plaintiffs did not call evidence from the employees who were actually doing the recruitment work after Mr Baily ceased to do it in 2017.
The plaintiffs' evidence did not explain what was done about recruitment in the period leading up to the termination of the franchise, when NPG management was well aware that the franchise would not be renewed with the Ranieris. Nor did it explain why it took so long for a dedicated employee to be tasked with obtaining a replacement franchisee. Nor was there any evidence from prospective franchisees to identify why the franchises on offer have not so far been taken up.
In my view, the Franchisor has failed to prove that it had a sufficient interest to justify a restraint on competition on the part of the Franchisee after the end of the Franchise Agreement. The claim for injunctions under the Franchise Agreement fails.
General restraint on competition; reasonable duration: If I am wrong in the views I have expressed to this point, there would still be a question about the reasonable duration of the restraint. For completeness, I will now address that question.
In his evidence (see [113]-[115] above), Mr Baily gave a period of three months to train a new franchisee. This was made up of two weeks for induction training and a period of up to two and a half months for on-the-job supervision by an employee of the Franchisor.
The starting point is that, in my view, reasonable parties looking forward at the date of making the Franchise Agreement would have contemplated that the Franchisor would recruit a new franchisee (or take over the operation of the business itself) immediately upon the termination of the Agreement. The periods of time allowed for the Franchisor to take over the Franchisee's business premises (or compel the removal of the Franchisor's branding and get-up from the premises) and for the acquisition of the Franchisee's stock of pools and products were only a few days (see clauses 12.2, 12.3 above).
A further important factor was that the Franchise Agreement provided for any offer of renewal, and any acceptance of that offer, to take place not less than six months before termination. A six month period would, on Mr Baily's evidence summarised below, give the Franchisor ample time to recruit and train a new franchisee before the end of the Agreement.
There was, however, some debate about whether the Franchisor could always expect to have a period of six months to find a new franchisee. Sub-clause 3.2 of the Franchise Agreement provided: (4) If the Franchisee accepts the offer of the Franchisor for the renewal of this Agreement, then subject to clause 3.3 this Agreement will be renewed provided: (a) the Franchisee pays any stamp duty (if applicable); (b) the Franchisor approves the condition of the Premises (if operated from a retail sales outlet), and if the Premises have not been refurbished in the previous three (3) years then they must be refurbished and updated as reasonably directed by the Franchisor prior to renewal being granted; and (c) the Franchisee pays the Franchisor's Costs of Renewal including any legal fees; and (d) the Franchisee enters into the then current form of franchise agreement (which may contain different terms and conditions to those of this document (including, without limitation, amendments to performance criteria and no terms for further renewal).
Clause 3.3 provided that the Franchisor was not obliged to renew if, during the last six months of the franchise, the Franchisee breached the Franchise Agreement and failed to remedy the breach when notice to do so was given by the Franchisor.
The question raised by these provisions was whether they made any "acceptance" by the Franchisee of the Franchisor's "offer" of renewal illusory. The suggestion from counsel for the plaintiffs was that the Franchisee could renege at any point up to the end of the franchise period, leaving the Franchisor with insufficient time to line up a new franchisee.
Counsel for the defendants submitted that reasonableness had to be judged by reference to what the parties would expect to happen in the usual course, rather than a theoretical possibility. Neither party's interests would be served by uncertainty as to whether renewal would occur or not. And I think there is another point as well.
The Franchisor would not necessarily have to wait until the end of the franchise period to begin pressing the Franchisee to document the new Franchise Agreement. Arguably, the statement that the franchise "will be renewed" at least imported an obligation on the Franchisee to consider, and respond to, the terms of the Franchise Agreement put forward by the Franchisor within a reasonable period of time.
On Mr Baily's description, the on-the-job supervision could not begin until the new franchisee actually took on the franchise and started work for customers. It was only the induction training which needed to be undertaken before that time. In my view, it would be unrealistic to assume that the Franchisor and the incoming franchisee would not have the two weeks to undertake that training (if required). I note that, in the present case, the Franchisor had two months.
In any event, almost six months have now passed since the end of the Franchise Agreement. There was no suggestion that an incoming franchisee needed protection for some additional period beyond what was necessary to complete any training which was required. Therefore, if any period of protection from competition was required, even on the plaintiffs' evidence that period has now expired.
Restraint on variation of incomplete customer contracts: As I understood the argument from counsel for the plaintiffs, even if the Franchisor was not entitled to a restraint against competition generally, it was entitled, until the end of the Restraint Period, from preventing the Franchisee from soliciting franchise customers whose contracts were incomplete at the end of the Franchise Agreement to complete the contracts with different pool shells (see the terms of claimed restraint (a) above). Except where the Substitution Clause had been included in the contract, this would require a variation. But I did not understand it to matter, for the purposes of this argument, whether such solicitation involved a variation or not.
The first question is whether such a restraint is justified as a matter of construction. The Franchise Agreement did not contain any express prohibition on the Franchisee dealing with customers about incomplete contracts after the end of the Agreement; in fact, it did not expressly deal with incomplete customer contracts at all. But counsel for the plaintiffs relied on the general prohibition in clause 15.2(b) on carrying on a business "similar to" the Business. Supplying and installing substituted pool shells for customers under incomplete contracts would, in counsel's submission, be covered by this prohibition.
Counsel recognised that this would require the Franchisee, if it wished to reap the reward of customer contracts which it had entered into during the franchise, to complete those contracts before the end of the Franchise Agreement. But counsel submitted that the solution to this would simply be for the Franchisee to extend the Agreement under clause 3.4 as a run-off period until the contracts were finished.
Counsel for the defendants argued for a contrary interpretation of clause 15.2(b). The term "business" normally denotes an ongoing flow of commercial activity in which new contracts are regularly being entered into. Counsel submitted that that term did not, in the context of the Franchise Agreement, cover the mere completion of existing contracts within the Territories, if that was not accompanied by taking on new work for customers in those Territories.
This might be a somewhat strained construction, but it could be justified by the commercial considerations to which I refer below. There is, however, another analysis available. That analysis focusses on the parties' obligation of mutual co-operation under the Franchise Agreement.
It might be argued that where NPPL declines to accept an order or supply a Narellan pool for a customer contract, the Franchisor cannot properly object to the Franchisee completing the contract by substituting a non-Narellan pool, at least where the Franchisor does not approach the customer to take over the contract itself. In such circumstances, there might be an obligation, acting reasonably, to consent to the Franchisee completing the contract with a non-Narellan pool for the purposes of clause 8C.1(iii) (see [60] above). Alternatively, the failure by NFPL to approach the customer could be a deemed referral for the purposes of clause 12.4 (see [69] above). Clause 15.2 does not, in terms, contain a carve-out for transactions authorised by NFPL under the Agreement, but that would be a very ready implication.
But I have some reservations about reaching any conclusion about these issues now, given the circumstances. As I have stated, there was little evidence on the actual steps taken by the parties in the period up to and immediately following 31 May in their dealings with customers. There may be a complaint about the inclusion of the Substitution Clause as well.
I think that the construction issues, which were not debated at great length before me, are better determined in the context of specific factual findings. Given the conclusions which I have reached, it is not necessary to deal with those issues in this judgment. I will therefore pass over them, and deal with the reasonableness and enforcement issues on the assumption that clause 15.2(b) applies.
Counsel for the plaintiffs sought to justify the restraint by reference to the Franchisor's "goodwill" under the Franchise Agreement. The contention was that that goodwill included the benefit of the uncompleted customer contracts. This was said to be part of the "local goodwill" to which the Franchisor was entitled at the end of the Agreement under clause 5.8.
As already noted, the Franchise Agreement did not contain any provision dealing with what was to happen with customer contracts which were incomplete at the end of the Agreement. Under clause 12.1(b) of the Agreement the Franchisor was entitled to terminate any outstanding orders for Pools or Products. How this would work as a matter of contract law in cases where the Franchisor was not a party to the relevant contract (most obviously, in the case of the pool shells ordered from NPPL under the Supply Agreement) is not clear, although NPPL had its own entitlement under the Supply Agreement to withhold supply. The Franchisor was, however, entitled to compulsorily acquire the Franchisee's stock. For practical purposes, therefore, the Franchisor could, if it chose, prevent the Franchisee from completing any customer contract which required supply of such a shell.
But if the Agreement allowed the Franchisor to frustrate the completion of customer contracts with a Narellan pool shell, it did not contain any entitlement to transfer incomplete contracts to itself, nor to an incoming franchisee. That was a rather glaring omission. And it is significant that the Franchise Agreement went out of its way to require the Franchisee to trade, and contract with, customers in its own name and not on behalf of the Franchisor (see clause 5.6 referred to at [57] above).
I am inclined to agree with counsel for the defendants, who submitted that goodwill, in its usual sense, refers to the attraction of customers rather than the completion of contracts once signed. In any event, I have already indicated why I think that the reference to "local goodwill" in clause 5.8 is a reference to Narellan brand goodwill in the Territories. I do not think that the clause, understood in the context of the Agreement, has anything to say about completion of uncompleted contracts.
I also think that commercial considerations militate against the reasonableness of the Franchisor's claimed entitlement. The idea that the "goodwill" of the Franchisor would be enhanced if, following the refusal by NFG to supply a pool to complete a contract, the Franchisee could be prevented from completing the contract with a substitute pool, is a strange one. It is hard to think of anything more poisonous to the parties' commercial reputations than to tell customers that their pools cannot be built in accordance with their contracts because of a falling-out between the Franchisor and the Franchisee.
Moreover, the Franchisor is hardly in a vulnerable position. Nothing in the Agreement prevents the Franchisor from negotiating with the customer once the Franchise Agreement has expired. NFPL would be in a strong position to do this if it wished to. NFPL would be able to offer a Narellan pool shell, installed by a Narellan franchisee, in accordance with the original contract terms.
What the Franchisor contends for is also highly unreasonable from the Franchisee's point of view. It comes down to saying that the Franchisee should not have the ability to avoid, or at least, mitigate the damages for which it will otherwise be contractually liable by negotiating a variation to the contract which would allow the pool to be installed in accordance with the customer's wishes.
The suggestion of a "run-off" period under clause 3.4 is not an adequate solution. In the first place, it would require agreement from the Franchisor, which cannot be compelled Secondly, as already noted, the parties' "appropriate" obligations continue during the clause 3.4 licence period. This would include the Franchisee's obligation to maximise sales (clause 8D.6; see at [62] above). And entry into new contracts during the term of the Agreement is not only an obligation, it is an entitlement: the leads which the Franchisee receives are a critical part of what it is paying for under the Agreement.
None of this is to say that the Franchisee was necessarily entitled to insert the Substitution Clause in customer contracts before the end of the Agreement. But whether that involved a breach of the Agreement is for later. In my view, the claimed restraint cannot be supported by some sort of interest in the nature of goodwill.
There was some suggestion in the course of argument that the customer contracts might be confidential information for the purposes of the Agreement. In the end, I was not sure whether this was being put as an alternative justification for the claimed restraint. But if it was, I think that is unsound.
There was no evidence that the contract itself was included in the CRM database. And there would obviously be a problem if the Franchisee, as the party to a contract under which it was potentially liable to the customer, were obliged to turn that contract over to the Franchisor. That would be contrary to the Franchisee's statutory obligation to retain records of its contracts and other transactions (Corporations Act 2001 (Cth), s 286).
In fact, the definition of "confidential information" in the Agreement required that the information originate with the Franchisor. The Agreement itself recognises a clear distinction between such documents and documents generated by the Franchisee, which may in some circumstances be inspected by the Franchisor (clause 8H.3, see [65] above).
For these reasons, I consider that the claimed restraint is unreasonable. But, for completeness, I will briefly consider whether an injunction to enforce the restraint would have been refused anyway.
Richmond J excluded from the ambit of the interlocutory injunction which he granted the completion of contracts for the supply and installation of a pool and/or spa entered into by TMP with a customer prior to 25 July 2022. His Honour did so because of the hardship to customers with incomplete contracts.
Although counsel for the plaintiffs invited me to take a different view, nothing has happened to alleviate that hardship. The commercial considerations which I have mentioned point in the same direction. So does the fact that a further period of sixteen weeks has elapsed without any injunction being in place and without (it seems) NFPL making any attempt to take over and complete the contracts itself.

Injunction under Deed Poll

Enforcement of deed poll by NPPL: Counsel for the plaintiffs accepted that the deed poll could not be enforced by just anyone. The relevant test here is whether, as a matter of construction of the deed poll, NPPL, notwithstanding that it is not named therein, is sufficiently identified in the deed poll as a person able to sue upon it: see Netglory Pty Ltd v Caratti [2013] WASC 364 at [79] per Edelman J; Cong v Sheng (No 3) [2021] NSWSC 947 at [1249] per Ward CJ in Eq.
As already mentioned, the Deed Poll is an annexure to the Franchise Agreement. The obligation to execute the Deed Poll is found in clause 8F of the Franchise Agreement, which deals with confidential information. Clause 8F.3 provides: The Franchisee agrees that the Deed Poll at Annexure B is formed on the formation of this Agreement and the Franchisee must duly execute that Deed Poll upon the execution of this Agreement.
Clause 8F.4 requires that, if requested, the Franchisee must ensure that each Nominated Manager executes a Deed Poll in the same form and provides that Deed Poll to the Franchisor.
The Deed Poll itself records undertakings and covenants by the "covenantor", which undertakings and covenants are given in consideration of "the grant by the Franchisor to the Franchisee of the Franchise, of which this undertaking and covenant forms part".
Clause 1 is headed "Confidentiality". It contains a covenant in similar terms to the covenant protecting the Intellectual Property of the Franchisor and applies to information provided to the Franchisee "or the covenantor" pursuant to the performance of the Franchisee's responsibilities under the Franchise Agreement.
Clause 2 has no heading and therefore appears at first glance to fall under the Confidentiality heading of clause 2. It provides: The covenantor must not during the term of the Franchise Agreement, or for a period of 12 months thereafter (or if unenforceable, 6 months) in the Restraint Area, either directly or indirectly, either alone or in partnership, or as a director or shareholder of any company, or as an employee, consultant, lender, representative, agent, advisor or otherwise: (a) be engaged in, carry on any business or obtain a direct or indirect benefit from a business which is similar to the Business or offers Products, Pools or products or services similar to the Products and/or the Pools and/or associated with them (such as pool fencing, solar heating or above ground pools); (b) solicit the custom of any client of the Business (including those listed on the Database) or the Narellan Pools Franchise Network; or (c) otherwise market the Products or Pools or similar products or pools within the Restraint Area. except as permitted by the Franchise Agreement or agreed by the Franchisor.
Clause 3 contains a non-disparagement covenant by the "covenantor" preventing the covenantor taking any action which might harm the Business, the Franchisor and its officers, or might lead to unwanted or unfavourable publicity for the Business or the Franchisor. Clause 4 deals with interpretation and provides that all terms in the Deed Poll bear the meanings defined in the Franchise Agreement.
The non-competition covenant is in similar terms to the covenant imposed by the Franchise Agreement itself, although it covers both pre-termination and post-termination restraints, whereas the Franchise Agreement deals with those subjects in two separate clauses. The purposes of obtaining a covenant in this form from the nominated managers is clear, as they would not necessarily be parties to the Franchise Agreement itself. It is less clear what point the Deed Poll had so far as the Franchisee is concerned, when the confidentiality and non-competition clauses were already provided for in the Franchise Agreement itself.
The Deed Poll is closely linked to the Franchise Agreement. The confidentiality and non-competition covenants are closely modelled on those in the Franchise Agreement and do not refer to any other party apart from the Franchisor. In particular, the non-competition clause is closely modelled on the non-competition clause in favour of the Franchisee in the Agreement itself.
The Deed Poll does not refer at all to NPPL (the Group Supplier) or to the Supply Agreement. It is notable that the provisions dealing with confidentiality and competition do not follow the covenants contained in the Supply Agreement, which were designed to protect NPPL's interest as Group Supplier, though in quite different form from the covenants in the Franchise Agreement which were designed to protect NFPL. In my view, the non-competition covenant in the Deed Poll is not, on any view, enforceable by NPPL.
Reasonableness: If I am wrong in my conclusion that NPPL has no contractual right under the Deed Poll to enforce the restraints in it, then I consider that it would not be reasonable for NPPL (as distinct from NFPL) to enforce those obligations. NPPL's interests are not the same as NFPL's. No interest of a supplier was identified in argument. In any event, NPPL could, if it wished to avoid any prejudice, simply proceed with the contracts as it was professionally entitled to do. It cannot complain if it, or its related company chooses to bring those contracts to an end.

Injunction against TMP

Counsel for the plaintiffs acknowledged that there was no contractual basis for an injunction against TMP. Nevertheless, it was submitted that the Court should grant an injunction against TMP so as to make the other injunctions effective. When I asked counsel for the doctrinal basis for such an injunction, counsel relied on what he termed as the "alter ego doctrine" described by the Full Federal Court in Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 at [243].
This is no basis for making an order against TMP in the present case. If injunctions were available against the Ranieris personally, those injunctions would prevent the Ranieris from carrying on business through TMP. Should such an injunction be granted and TMP, as a corporate entity, assist the Ranieris in a breach, then it could be prosecuted for contempt of the injunction as a third party facilitating the breach. What would be the justification for granting a direct order, independently of any order against the Ranieris, especially where the evidence does not establish that TMP is a mere alter ego of theirs?
In the present case, I am dealing with an application for an injunction in the auxiliary jurisdiction, that is, in aid of contractual rights. There is no analogy, either factual or legal, with claims against accessories who receive property from trustees in breach of trust or assist trustees to breach their trust. The claim for an injunction against TMP fails.

Conclusions and orders

I have concluded that: 1. as a matter of construction of the Franchise Agreement, the post-contractual period of restraint on RBME and the Ranieris under the Agreement for both the Sydney City and the Sydney North franchises began on 1 June 2022; 2. but the competition restraints on RBME and the Ranieris in the Franchise Agreement, are, at least to the extent that they apply generally to the conduct of a similar business for the future, invalid and unenforceable as unreasonable restraints of trade; 3. to the extent that the competition restraints may prevent RBME and the Ranieris from soliciting customers to complete uncompleted customer contracts, they are invalid and unenforceable as unreasonable restraints of trade; 4. the same conclusions follow for the competition restraint on RBME in the Deed Poll; 5. in any event, NPPL has no contractual entitlement to enforce the restraints on RBME in the Deed Poll; 6. any such contractual entitlement to enforce the competition restraint in the Deed Poll by NPPL would in any event be invalid and unenforceable as an unreasonable restraint of trade; 7. neither plaintiff is entitled to an injunction enforcing the competition restraints in the Franchise Agreement or the Deed Poll against TMP.
So far as NFPL's claims are concerned, there should be a declaration reflecting conclusion (1) (about the term of the Sydney City Franchise Agreement) in case that becomes relevant for the future. The claim for injunctions against each of the defendants should be dismissed and the interlocutory orders discharged. The proceedings should be returned for further directions before me to determine how the remainder of NFPL's claims (and any claim the defendants may have under the undertaking as to damages) are to be heard. It follows from conclusion (5) that the claims by NPPL as second plaintiff in the proceedings are wholly unsustainable and should be dismissed.
I will adjourn the proceedings for a short period to allow the parties to bring in a minute of order to give effect to this judgment. If agreement cannot be reached, I will hear argument.
The orders of the Court are: 1. Adjourn the proceedings to 9:30 am on 25 November 2022 or such other time or date as may be arranged with my Associate. 2. Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with the remaining claims in the proceedings, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.

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: 22 November 2022

(Corporations Act 2001(Cth)

At a glance

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Judgment (17 paragraphs)

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Cases Cited (8)

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