Plaintiff v Defendants

Supreme Court of Victoria|2008-05-14|Before: Hollingworth J

Contracts - Sale of business - Restrictive covenant - Application for injunction restraining unauthorised contact with customers - Injunction granted

1 By a share sale agreement dated 21 May 2004, the first defendant, Mr Evans, and Gregory Noel Eva and Ivo Konopcik sold their shares in Tecsound (Vic) Pty Ltd ("Tecsound") to the plaintiff company, which is now known as TSV Holdings Ltd ("TSV").[1] Through this means, TSV acquired ultimate ownership and control of Tecsound's business.

2 The share sale agreement contains a restraint of trade clause forbidding Messrs Evans, Eva and Konopcik from contacting customers of, or operating a competing business to, the business operated by Tecsound. The restraint clause has both temporal and geographic limits.

3 Between the end of June 2004 and mid 2007, Mr Evans continued to be employed in connection with the Tecsound business, in circumstances which will be considered shortly. In that capacity, he continued to have contact with Tecsound customers.

4 In fact, even after the termination of Mr Evans' employment, he continued to have some contact with Tecsound customers, when TSV asked him to assist it in implementing new software which Mr Evans had developed through his company, the second defendant ("Summit").

5 TSV makes no complaint about the types of contact referred to in the two previous paragraphs, as that occurred with TSV's approval.

6 However, TSV complains that Mr Evans has also engaged, and threatens to continue to engage, in unauthorised contact with Tecsound customers, contrary to his restraint clause. In this proceeding, TSV seeks a declaration that Mr Evans has breached the restraint clause, orders restraining Mr Evans and Summit from continuing to do so, and associated orders to compensate TSV for any breaches which have already occurred.

7 By summons dated 31 March 2008, TSV seeks an interlocutory injunction restraining breach of the restraint clause by the defendants until trial. Although Summit is not a party to the share sale agreement, its counsel concedes that it should be enjoined if the court determines to enjoin Mr Evans.

8 In support of the injunction application, TSV relies on two affidavits of Jason Adam D'Arcy, secretary of TSV, sworn on 1 and 10 April 2008, along with an affidavit of Scott Munro, TSV's solicitor, sworn on 9 April 2008. In opposing the application, the defendants rely on an affidavit of Mr Evans, sworn on 9 April 2008.

9 As at the date of the share sale agreement, Mr Evans was the sole director and secretary of Tecsound, and owned 36 of the 40 shares in the company. Messrs Eva and Konopcik each owned two shares. Mr Evans was, by his own admission, the driving force behind the establishment and development of Tecsound's business.

10 The purchase price for the Tecsound shares was $3.3 million (subject to various adjustments), payable in cash and shares in TSV.

11 The business conducted by Tecsound is defined in the share sale agreement as:

The electronic communication distribution and service business, specialising in distribution, support and installation of retail communication, sound and video system infrastructure and associated products, conducted by [Tecsound].

12 Relevantly for present purposes, the "business" includes the installation and servicing of microphones, video cameras and location sensors for fast food restaurant drive-through facilities, along with the provision and servicing of a computer program designed to co-ordinate the drive-through process.

13 At the date of execution of the share sale agreement, Tecsound serviced around 1,400 McDonalds franchises in Australia, as well as numerous outlets in other fast food chains including Red Rooster, Hungry Jacks and KFC.

The Seller [Messrs Evans, Eva and Konopcik] must not, in any capacity including on its own account or as a member, shareholder, unitholder, joint venturer, trustee, principal, agent or in any other way or by any other means:

(a) during the period specified in Part 1 of Schedule 8 (Restraint Period) and in the area specified in Part 2 of Schedule 8 (Restraint Area) participate in, be interested in, assist with or otherwise be directly or indirectly involved, engaged, concerned or interested in a business, activity or operation that is the same as, substantially similar to, or competitive with, the Business or any material part of it (Restrained Business);

(b) during the Restraint Period, solicit, canvas, approach or accept an approach from any person who is at the Transfer Date, or was at any time during the 12 month period ending on the Transfer Date, a customer or supplier of the Business or [Tecsound] with any purpose of obtaining the custom or services of that person in a Restrained Business; or

(c) during the Restraint Period, represent itself as being in any way connected with, interested in or associated with the Business or [Tecsound] (except as its proprietor before the Transfer) or any business or activity conducted by [TSV].

15 Clause 11.2 requires each seller to ensure that no related body corporate does any of the things that the seller is himself restricted from doing under clause 11.1.

16 In this application, TSV only seeks to enforce the non-solicitation clause (clause 11.1(b)); no claim is made in respect of clauses 11.1(a) or (c).

17 Schedule 8 provides a maximum restraint period for Mr Evans of five years and a maximum restraint area of Australia. The maximum restraint period and area for Messrs Eva and Konopcik are significantly smaller.

18 The restraint areas and periods are set out in what is commonly known as a "waterfall" or "cascade" clause, containing a number of options. Clause 11.4 provides that each of the options is to be read separately and cumulatively. Clauses 11.5 and 17.7 specifically provide for the severability of any unreasonable parts of the clause.

19 The restraint clause operates from the transfer date under the share sale agreement. The transfer date was 22 September 2004, so, if the clause is given full effect, the restraint period in respect of Mr Evans will not expire until September 2009.

20 Finally, clause 11.6 contains an express acknowledgement by the seller that each of the restrictions imposed by the restraint clause is reasonable in its extent, having regard to the interests of each party to the share sale agreement; that it extends no further than is reasonably necessary; and that it is solely for the protection of TSV in respect of the goodwill of the business and the shares.

21 After the sale of the shares, Mr Evans was employed as managing director of TSV from 29 June 2004 until 1 May 2007, and as a director from 29 June 2004 to 1 August 2007.

22 There seems to be some confusion regarding the identity of Mr Evans' employer. A letter of employment, dated 28 May 2004 and accepted by Mr Evans on 7 June 2004, is exhibited to Mr Evans' affidavit. It is on Tecsound letterhead, and offers him employment on behalf of Tecsound. However, his duties are those of the managing director of TSV, including managing Tecsound. Although TSV is to pay certain allowances, the rest of the terms and obligations in the letter involve Tecsound. The letter is countersigned by a director of TSV. It is not necessary for me to make any finding as to the exact identity of Mr Evans' employer, as TSV makes no complaint about any contact Mr Evans had with Tecsound customers in his employee capacity. I will simply refer to Mr Evans as having been employed by the "TSV group".

23 The letter of employment contains a restraint of trade clause which differs from that in the share sale agreement, in that it contains non-solicitation and non-competition clauses within Victoria for a maximum of 12 months after termination of employment. As Mr Evans ceased employment with the TSV group in around mid-2007, the restraint clause contained in the letter of employment is still operative, however it is not sued upon here.

24 At the time of the share sale agreement, the vast majority of fast food restaurants with a drive-through facility used timer software which was developed by an American business, Harry Mirya Electronics ("HME"). Tecsound owns the Australian distribution rights for HME timers.

25 At some stage during the period of his employment by the TSV group, Mr Evans developed a number of software products, including an alternative to the HME timer, called the PTS timer.

26 In February 2005, Summit was incorporated and became the vehicle by which Mr Evans carried out these activities. Apparently Summit's products were ready for marketing by around 2006.

27 There is very little evidence about the circumstances in which these products were developed, including of any discussions between the parties during that period. It is apparent that Mr Evans made some disclosure of his and Summit's activities to TSV's board, however it is not necessary or possible for me to determine the precise nature and extent of this disclosure.

28 On 1 May 2007, around the time that Mr Evans was completing his employment with the TSV group, TSV entered into an agreement with Summit whereby TSV became the "main exclusive distributor" of Summit products throughout Australia and New Zealand ("the distribution agreement").

29 Relevantly, the distribution agreement contains the following provisions:

(a) TSV may brand the Summit products (being the products set out in schedule A to the distribution agreement) with TSV marketing materials;

(b) TSV agrees to present and promote the Summit products in a professional manner, and to ensure they are sold in accordance with Summit's recommendations, particularly as to product specification, use and warranty;

(d) TSV agrees to meet performance requirements and measures (to be set by agreement between TSV and Summit and reviewed from time to time).[2]

30 The distribution agreement had an initial term of two years, with an option (exercisable at TSV's sole discretion) of a further two years.

31 The software used in the Summit products operates in conjunction with the software used by the individual fast food chain, meaning the Summit products and the customer's software systems have to be programmed to interact with one another.

32 By August 2007, the programming process was complete and trials of Summit products began in KFC and McDonalds stores. Although TSV initially handled service calls for the Summit products, TSV soon requested Summit's assistance in implementing these trials.

33 Typically, these requests would be made by way of TSV staff forwarding to Mr Evans emails from franchisees, setting out the difficulties they were experiencing when installing or configuring the Summit products. In order to respond to many of these requests, Summit had to then have direct contact with certain franchisees. However, as TSV authorised this contact, it does not complain of it.

34 Mr Evans deposes that on some occasions he received emails or telephone calls directly from franchisees, complaining of problems they had encountered in installing the Summit products, or of the quality of the service they had received from TSV. Some of these contacts appear to have been unprompted, and some Mr Evans simply referred on to TSV.

35 However, what is often not deposed to by Mr Evans, but is evident from the emails which he exhibits, is that some contact appears to have occurred due to Mr Evans approaching franchisees without any request from TSV to do so. Examples of communications which fall into this category include:

(a) On 10 September 2007, Ian Gatherer from Yum! Restaurants (which runs KFC) asked Mr Evans' advice about whom he should speak to "at Tecsound" in view of the recent departure of a Tecsound employee. This email was written in reply to an email from Mr Evans providing his contact details and asking Mr Gatherer to "drop me a line sometime as we have made some nice new changes to Summit software that I am sure KFC would be interested in viewing when you have time."

(b) On 19 October 2007, Mr Evans passed on to TSV a request for assistance from a McDonalds franchisee, and admitted that Summit completed the service call on 22 October 2007, because TSV had not responded to the request.

(c) Mr Evans deposes that on 15 November 2007, Summit reinstalled software at a KFC store, following a direct approach from Yum! Restaurants. However, the email correspondence that Mr Evans exhibits in support of this contact commences with an email sent on 9 October by Mr Evans to a Yum! staff member asking, "How it is going are you happy and polling since you spoke with Lawrence".[3]

(d) By an exchange of emails on 4 December 2007, Mr Evans and Steve Eastwood of TSV discuss whether McDonalds has approved use of the Summit products' software. Mr Evans advises Mr Eastwood of what his "sources at [McDonalds]" have told him.

(e) Earlier on the same day, Mr Eastwood wrote separately to Mr Evans, reminding him not to breach the restraint clause and asking him to direct all queries from McDonalds to TSV. Mr Evans responded with details of meetings he had arranged with McDonalds franchisees and said, "if I cancel we will look very stupid... This is CHRISTMAS time and these are my friends so what do I do?"

36 It is clear on the material before me that Mr Evans regarded and still regards himself as free to contact Tecsound customers without being asked to do so by TSV, even in the face of specific requests that he not do so.

37 Mr Evans asserts in his affidavit that TSV did not offer sufficient servicing support during the process of installation of the Summit products, forcing Summit to have direct contact with franchisees in attending to service calls. Mr Evans alleges that TSV's provision of incorrect software to the franchisees was a cause of the problems.

38 Mr D'Arcy's answering affidavit denies that TSV's lack of support caused the problems. He says that although the Summit products were "feature rich" in comparison with HME products, the complexity and unreliability of the Summit products meant they required on-site intervention by Summit, making them unsuitable for large-scale deployment.

39 I am not able to determine on the current evidence what caused any technical problems with the Summit products. What is clear is that by the end of 2007, TSV was reconsidering whether it would continue to offer most of the Summit products for sale. On 22 February 2008, TSV wrote to Summit advising it wanted to amend the distribution agreement, removing all but one residual item in schedule A (called DVR software) ("the 22 February amendment"). Mr Evans signed and returned the letter on 25 February 2008. There is very little evidence as to any discussions which occurred at the time, although the 22 February amendment refers to the fact of an earlier telephone conversation.

40 During submissions, Summit foreshadowed that it would file a counterclaim in this proceeding, which will allege that TSV has breached or repudiated the distribution agreement, by reason of its conduct in no longer offering most Summit products for sale.

41 The 22 February amendment contained a requirement that Summit repurchase TSV's existing stock of approximately 30 PTS timers, one of the Summit products.

42 According to Mr Evans, Mr Eastwood of TSV had given permission to Summit to dispose of those PTS timers to McDonalds, as TSV no longer supplied them. The timers had been "specially configured for sole use by McDonalds in Australia", and Mr Evans says the lengthy process of reconfiguration and integration of the timers into another restaurant chain would not be cost-effective, as each of the 30 timers has a retail price of $4,423.

43 Mr D'Arcy denies that TSV gave any such permission to sell the timers to McDonalds, and says that the PTS timers are "saleable for most clients in most countries although [their] reliability is an issue".

44 Given this factual dispute, once again it is not possible for the court to determine on an interlocutory basis what was said about the 30 PTS timers.

45 Mr D'Arcy deposes that TSV first became aware that Mr Evans was dealing directly with McDonalds on 7 October 2007. By a letter of the same date, TSV insisted that "all unauthorized correspondence directly with McDonalds Australia or any of its franchisees is to cease immediately. Failure to comply with this request could jeopardise [TSV's] relationship with McDonalds for future work and this would be detrimental to both our companies." ("the 7 October letter")

46 On 4 December 2007, TSV repeated its request that Mr Evans stop contacting McDonalds franchisees directly.

47 It came to TSV's attention on about 18 March 2008, that Mr Evans was continuing to deal directly with Tecsound customers, notwithstanding the earlier requests to stop. Following an exchange of email correspondence on 18 March 2008, Robert Grey, managing director of TSV, repeated TSV's demand that Mr Evans "desist contacting TSV/Tecsound clients", and threatened legal proceedings if Mr Evans did not do so.

48 In his lengthy responding email, Mr Evans stated, "I do not want too and plan not too breach my restrictive covenant so let's clear the air on that point which you have high lighted." Notwithstanding that assertion, it is clear from the evidence that Mr Evans does not regard contacting or receiving enquiries from Tecsound customers (such as McDonalds) for Summit products as constituting a breach of the restraint clause. He asserts that he is entitled to make and receive such contact.

49 Mr D'Arcy deposes that on the following day, a vice-president of McDonalds advised Tecsound that Mr Evans had made direct contact with McDonalds franchisees with a view to promoting the distribution of the Summit products. This proceeding was commenced shortly thereafter.

50 It is well-established that, in order for the application to succeed, TSV much establish that there is a serious question to be tried, and that the balance of convenience favours an injunction.

51 In written submissions and during the course of initial argument, the defendants appeared to oppose the application both on the basis that there was no serious question to be tried, as well as on the balance of convenience. Then, mid-way through oral submissions, the defendants' counsel conceded, correctly in my opinion, that there was a serious question to be tried. However, he argued that TSV's case as a whole was weak. The relative strength of an applicant's case may be relevant to the balancing task that the court is required to undertake in deciding whether to grant an injunction.

52 The general principles relating to the enforceability of restraint of trade clauses are well-settled, and not the subject of dispute.

53 All restraint of trade clauses are prima facie unenforceable as contrary to public policy. Therefore, in order to establish a serious question in this instance, TSV must rebut this presumption and provide evidence of actual or threatened breach.

54 A party seeking to rebut the presumption and enforce a restraint clause must show that the clause goes no further than is reasonable to protect its legitimate interests. Once TSV establishes that, then the onus of establishing that the clause is nonetheless contrary to the public interest falls upon the defendants. The defendants did not seek to rely on any contrary public interest in this case.

55 Greater restrictions are generally allowed where the restraint clause appears in a sale of business agreement (as is effectively the case here), as opposed to those in employment agreements. That is because the purchaser has generally paid to purchase the goodwill of a business, which can often only be adequately protected by a restraint clause.

56 The parties agree that the court must assess the reasonableness of the restraint clause as at the date of the share sale agreement, and not by reference to subsequent events. One of the consequences is that the defendants cannot rely on the fact of Mr Evans' subsequent employment or the distribution agreement, in order to argue that the restraint period was unreasonable.

57 Each case turns on its own facts, but relevant considerations in determining the reasonableness of a restraint may include:

(a) The scope of the restraint in terms of both the geographic area and duration;

(d) The consideration paid in exchange for the restraint; and

58 Although the share sale agreement was prepared by solicitors, there is no evidence as to which of the parties may have had legal advice about its contents. Mr Evans was an experienced business person, who deposes to having been in business for more than 20 years. There is no evidence as to the business experience or backgrounds of the other sellers. Nevertheless, the sale of shares was a substantial commercial transaction, which appears to have occurred at arm's length. There is certainly no evidence that the restraint clause or the agreement were negotiated in circumstances of unequal bargaining power.

59 There is no evidence as to precisely how much of the share purchase price was attributed to goodwill. The share sale agreement contains a seller's warranty that the assets of the Tecsound business were such that goodwill would not exceed $2million of the total $3.3million purchase price. The actual value of the assets was to be determined by an audit process, about which no evidence has been led. No doubt these are matters which will have to be the subject of evidence at trial. Nevertheless, the contract provisions themselves suggest that goodwill may well have represented a very substantial part of the share purchase price. TSV has paid a substantial sum to acquire the business, through acquiring the shares, and it is strongly arguable that the restriction imposed by the restraint clause is a valid price to pay in return.

60 TSV argues that the maximum 5-year duration is reasonable having regard to the following matters:

(a) Mr Evans was a pivotal part of the Tecsound business. By his own admission, Tecsound was developed under his direction, and he remained the driving force behind the business. This is reflected in the fact that Messrs Eva and Konopcik are subject to much lesser restraints, befitting their lesser roles in the business;

(b) The period must be such as to allow TSV to establish a relationship with, and profit from, the customers of Tecsound, and to sever the existing relationship between Mr Evans and these customers. This is particularly so given that Mr Evans appears to have long-established personal relationships with some Tecsound customers.

61 The defendants argue that the differing periods of restraint upon the different sellers shows that the restraint clause was not intended to not protect the Tecsound business, but was instead designed to restrain Mr Evans (and the other individual sellers), and was therefore anti-competitive. I do not accept this argument. The differing restraint periods and areas shows that the parties specifically turned their mind to what was reasonable, having regard to the different roles played by the sellers. In providing differing levels of restraint, the restraint clause merely recognised that Mr Evans had made by far the greatest contribution to growing the business and creating the goodwill which was sold.

62 Mr Evans was sent the formal offer of employment with the TSV group a few days after the date of execution of the share sale agreement. Whilst neither party put forward any evidence as to the actual negotiations, it seems reasonable to infer that his employment was contemplated, or had been agreed in principle, at the time of execution of the share sale agreement. That may well have been a relevant consideration in determining the 5-year restraint period.

63 Mr Evans' employment agreement contained a restraint clause for one year only. The defendants seemed to argue that the court should take that as some sort of acknowledgement that one year was the only reasonable period for the restraint clause in the share sale agreement as well. There is no evidence before me as to the circumstances in which either restraint clause was actually negotiated. But, as already mentioned, what may be reasonable in the context of a sale of business is usually not the same as in the context of an employment contract. The defendants' argument also appears to conflict with the principle that reasonableness must be assessed at the time the share sale agreement was executed.

64 TSV is not seeking to enforce the general non-competition part of the restraint clause. It is therefore not necessary to consider the reasonableness of the geographic restraint for the purposes of clause 11.1(a). Rather, TSV's case focuses on the solicitation of Tecsound customers, for the purposes of taking such customers to the defendants' competitive business, wherever in Australia that business may be conducted.

65 The final point to make in relation to reasonableness is that, although not determinative, some weight may nevertheless be given to the express contractual acknowledgements by Mr Evans and the other sellers that the restraint clause is reasonable.

66 It is neither appropriate nor necessary on an interlocutory application such as this to express any concluded view as to the reasonableness of the restraint clause. However, having regard to the matters discussed above, there is clearly a serious question to be tried as to the enforceability of the restraint clause. Further, on the material currently before the court, I would not agree with the defendants' description of TSV's case as being a weak one.

Actual or threatened breach of the restraint clause

67 The defendants argue that TSV has not filed affidavits of its own, sufficient to establish any actual or threatened breach of the restraint clause. They complain that TSV can only make out its case by relying on the material set out in Mr Evans' affidavit. With respect, this complaint is misconceived. A party is entitled to rely upon all evidence before the court, whether tendered by that party or any other party. Indeed, it is often the case that a party complaining of breach of a restraint clause is unaware of the precise circumstances of the breach.

68 I pause to note that the affidavit material filed by both sides is, at times, unhelpful - it is vague, lacking in particulars, sometimes confusing and, particularly in the case of Mr Evans' affidavit, incorrectly describes the contents of some exhibits.

69 TSV needs to establish that there is a real risk of the defendants engaging in unauthorised contact with Tecsound's customers, for the purpose of obtaining their custom or services in a business which competes with the Tecsound business. Unauthorised contact for the purposes of clause 11.1(b) includes to "solicit, canvas, approach or accept an approach from" such a person.

70 A restrained business is a business the same as, substantially similar to, or competitive with, the Tecsound business. The definition of "business" within the share sale agreement is a wide one, including "distribution, support and installation" of "retail communication, sound and video system infrastructure". By the share sale agreement, TSV effectively purchased all of the Tecsound business, including its exclusive distribution rights over the HME timers. It is common ground that the Summit products include the PTS timer, a product which competes directly with the HME timer. Even if this were not the case, the definition of "business" within the share sale agreement is wide enough to encompass the sale, servicing and installation of products which assist in the processing of drive-through orders at fast food restaurants; that includes the Summit products.

71 It seems clear that Mr Evans' past, current and threatened contact with Tecsound customers is for the purpose of providing or promoting Summit's business. As discussed earlier, it appears from the email correspondence exhibited to Mr Evans' affidavit that Mr Evans has had unauthorised contact with franchisees and McDonalds' head office. In later emails, he expressed frustration that he was not able to deal with McDonalds directly, and said that he accepted approaches from former customers when he considered that TSV was providing an inadequate response to their service calls.

72 As to the risk of unauthorised contact with customers, Mr Evans has made it clear in recent correspondence that he wishes to have direct contact with McDonalds franchisees, and the evidence establishes he has had such contact after the 7 October and 18 March letters. Despite acknowledging the existence of the restraint clause, it would appear Mr Evans regards himself as free to make or accept approaches from Tecsound customers. Merely being reminded of the restraint does not appear sufficient to ensure Mr Evans complies with it.

73 I am satisfied that there is a real risk that, unless enjoined from doing so, the defendants will continue to have unauthorised contact with Tecsound customers.

74 The defendants say that events since the share sale agreement was executed (particularly the distribution agreement and the defendants' provision of services to Tecsound customers where TSV had neglected or refused to do so), "circumscribe or limit the commercial interests of [TSV] which the restraint may now be invoked to protect". It is not clear as a matter of principle why that is said to be so.

75 TSV argues that if the injunction is not granted, the defendants will cause serious damage to its customer relationships, and a potential loss of business, which may not be able to be adequately calculated or compensated in monetary terms.

76 TSV points to how Mr Evans' past contact with franchisees about the Summit products has already created discord between McDonalds' franchisees and McDonald's head office. I accept that such discord may have a detrimental effect on the commercial relationship between McDonalds and TSV. Although there is no evidence of the dollar value of McDonalds to the TSV business, there is sufficient to establish that McDonalds is (and was at the time of the share sale agreement) an important Tecsound customer.

77 TSV points to the obvious problems which it may face in trying to quantify and prove its loss, either due to damaged client relationships or loss of sales, if the interlocutory injunction is not granted and it succeeds at trial.

78 The defendants argue that such problems could be overcome by the proffering of an undertaking to keep account of any contact with customers of Tecsound. The proposed form of undertaking was:

[Mr Evans][4] undertakes, pending trial or further order, to keep a log of all contacts with any customer of [Tecsound] as at 4 September 2004.

This log shall record the date of contact, means of contact, person in contact, and purpose of contact, as well as a note of any action undertaken in response thereto, which records the date, place, time, and activity.

This log will be maintained and held by [Mr Evans] pending the outcome of the trial or further order.

In the event that the restraint which is the subject of this proceeding is upheld, this log will then be made available to [TSV] in such manner as the court may order.

79 TSV referred to Beecham Group Ltd v Bristol Laboratories Pty Ltd[5] as authority for the proposition that an order for the keeping of accounts will not be appropriate, if TSV can only be protected by an injunction. TSV argued that, on the facts of this case, the keeping of a log would not provide sufficient protection to the potentially "irreparable damage" that the defendants' continued contact with Tecsound's customers may cause.

80 I am not persuaded that the keeping of a log in this case would provide an effective means by which TSV could calculate the damages suffered by unauthorised contact. There is no effective measure by which TSV can identify the impact on its commercial relationship with its customers (or calculate the damages to be paid for the breach) by the defendants having kept a log of unauthorised contact.

81 On the other side of the scale, I turn to consider potential harm to the defendants if the injunction is granted and it is found at trial that it should not have been.

82 Mr Evans claims that TSV is no longer interested in servicing the Summit products already supplied under the distribution agreement, so Summit needs to be free to service those customers directly. Mr D'Arcy refutes that assertion. The 22 February amendment clearly provides that TSV will continue to maintain existing installed PTS timer systems for a period of 12 months from that date, and Summit agrees to provide TSV with "the necessary parts and technical support" to enable that to occur. Whether TSV will in fact provide the services itself, or enlist the defendants' assistance, is a matter for it to determine. If TSV fails to abide by that agreement, Summit may well have a remedy against TSV. I am not satisfied that there is a real risk that Summit's existing products will not be properly serviced (thereby causing damage to its reputation) if an interlocutory injunction is granted until trial.[6]

83 The defendants baldly assert that, if enjoined, Summit would be forced to lay off or dismiss two full-time employees and one part-time employee, who currently service existing Summit products. No details were given of exactly what service work those employees currently perform or whether they could be engaged in other work. Given the contents of the 22 February amendment, it is not apparent why any of those persons would in fact need to be laid off, at least before late February 2009, when the 12 month period expires.

84 The defendants also argue that the effect of the distribution agreement has been to create a market for Summit products, which only TSV has been able to promote. The defendants say that Summit, which has an obvious desire to do so in order to protect its own interest in the products, should be allowed to step into that breach, given that TSV does not wish to promote them any more. Whilst that desire is understandable, the fact is that both the distribution agreement and the 22 February amendment were entered into with full knowledge of the terms of the restraint clause. There is no evidence to suggest that TSV has acted in a way such as would make it inequitable for it to rely on the restraint clause if the distribution agreement effectively came to an end.

85 The defendants complain that TSV no longer wishes to distribute most Summit products. The 22 February amendment (which Mr Evans signed on behalf of Summit) resulted in the removal from schedule A to the distribution agreement of all bar one Summit product. It seems that the defendants now wish to allege that TSV has wrongfully repudiated the distribution agreement by removing those products; hence the threatened counterclaim for damages. If TSV has acted wrongfully in the way it has removed most of the products, it is common ground that TSV would be liable for damages for breach or repudiation of the distribution agreement.

86 Summit also complains that as part of the 22 February amendment, it has been forced to repurchase 30 PTS timers from TSV, at a total cost of over $130,000. If they can be disposed of to fast food restaurants other than Tecsound customers, Summit says that it would cost a significant (unspecified) sum to reconfigure them. Summit wants instead to be able to sell them directly to Tecsound customers, such as McDonalds' franchisees, to save on reconfiguration costs. Once again, if Summit has a complaint about having to repurchase these timers, it is really a dispute which arises under the distribution agreement and the 22 February amendment. The appropriate remedy, if TSV has acted wrongfully in respect of these timers, is in the threatened counterclaim for breach of the distribution agreement.

87 At best, on the material presently before me, the restraint clause could be said to operate in such a way as to prevent Summit from mitigating any loss it has suffered as a result of TSV's alleged breach or repudiation of the distribution agreement. However, this is a matter which could be taken into account on the trial of Summit's proposed counterclaim.

88 That Mr Evans might be frustrated at what he considers to be inadequate responses to service calls for the Summit products is understandable. It is also understandable that Mr Evans would desire to remedy the situation, possibly motivated by a desire to protect the reputation of the products. However, such action is contrary to the restraint clause which Mr Evans agreed to be bound by in 2004. The fact that Mr Evans may now regret his choice of purchaser does not change the fact that the parties agreed upon the restraint clause, and Mr Evans was paid a very substantial sum for the Tecsound business, including its goodwill.

89 For these reasons, the balance of convenience favours the grant of the proposed injunction.

90 A delay in seeking injunctive relief is a matter which can go to the court's discretion, even if the grounds for the grant of an interlocutory injunction have otherwise been made out.

91 The defendants argue that the court ought to refuse relief as TSV has delayed in seeking relief. Although TSV's first cease and desist letter was sent in early October 2007, this proceeding was not commenced until late March 2008.

92 Mr D'Arcy deposes that TSV sent the 7 October letter the same day that TSV discovered the conduct complained of. Almost five months passed between that date and the 18 March letter, however Mr Evans' correspondence with TSV staff during the intervening period appears to have been designed to reassure TSV that Mr Evans was mindful of his obligations, and did not intend to breach the restraint clause.

93 As already mentioned, TSV made several attempts in late 2007 to persuade Mr Evans to cease making unauthorised contact. Unsurprisingly, it does not seem to have been fully aware of the precise nature and extent of Mr Evans' conduct during that period. TSV was still distributing Summit products and trying to maintain a working commercial relationship with the defendants.

94 By March 2008, it had become clear that TSV was no longer going to promote Summit products, and that Mr Evans regarded contact with Tecsound customers as not being in breach of the restraint clause.

95 In the circumstances, I am not persuaded that TSV's conduct has been such as to disentitle it to an injunction.

96 As mentioned earlier, the defendants concede that if a restraining order is to be made, no objection would be taken to the order enjoining both Mr Evans and Summit.

97 The 22 February amendment assumes that the defendants may need to have some further contact with Tecsound clients until late February 2009, for the limited purpose of servicing existing installed PTS timer systems. The form of injunction will need to reflect the fact that such contact may be permitted, provided it is expressly authorised by TSV.

98 I will hear from the parties as to the precise form of orders and as to costs.

[1] At the time the share sale agreement was executed, the plaintiff was known as Tecsound Holdings Limited. It changed its name on 13 July 2004.

[2] In fact, no performance requirements and measures were ever set.

[3] "Polling" appears to be a technical term relating to operation of the Summit products.

[4] This form of undertaking was provided by way of a written note received from counsel after the hearing of the application.

[6] The 12 month period runs until February 2009. There is currently no reason to assume that a trial of the proceeding could not occur before then.

At a glance

Court

Decision date

Before

Source

Judgment (128 paragraphs)

Parties

Cases Cited (1)