Pro Arc International Pty Limited trading as World Gym Australia v Reddington

Supreme Court of NSW|2020-09-14|Before: Henry J

JUDGMENT (EX-TEMPORE REVISED)

By amended summons filed on 4 September 2020, the plaintiff, Pro Arc International Pty Limited trading as World Gym Australia, seeks interlocutory relief restraining the first defendant, Travis Reddington, and the second defendant, World Gym Southside Pty Limited (WGS), from operating the gym facility known as World Gym Southside and from engaging in any other health and fitness business within 10 kilometres of the current WGS site or within 10 kilometres of any other presently existing World Gym facility, from 5pm on 15 September 2020.
Pro Arc claims to be entitled to that relief on the basis that it has validly terminated the sub-franchise agreement pursuant to which Mr Reddington and WGS operated World Gym Southside, and the contractual restraints contained in the sub-franchise agreement which survive termination for 12 months.
Pro Arc's application for interlocutory relief is supported by three affidavits of Jonathan Davie, a director of Pro Arc, sworn on 28 August 2020, 3 September 2020 and 11 September 2020.
Mr Reddington and WGS oppose the granting of interlocutory relief. They say that the balance of convenience favours declining the relief and that the orders sought by Pro Arc are not appropriate as they do not provide sufficient time for Mr Reddington and WGS to undertake an orderly exit from the World Gym Southside facility and business. Mr Reddington and WGS rely on an affidavit of Mr Reddington sworn 8 September 2020.

Background

Pro Arc is the Australian licensee of the World Gym franchise system.
From 2012, Mr Reddington operated World Gym Southside in the southern suburbs of Brisbane, initially under the terms of a five year licence agreement from Pro Arc and then under the terms of the sub-franchise agreement with Pro Arc dated 17 May 2017.
Article 2.4 of the sub-franchise agreement contains the post-termination contractual restraints, and relevantly provides: Sub-Franchisee accordingly agrees that… for a period of one (1) year after the effective date of the termination or expiration of this Agreement … Sub-Franchisee shall not, without the prior written consent of Master Franchisee, directly or indirectly, individually or as a member of any business organisation, engage or have an interest, as an employee, owner, investor, partner (inactive or otherwise) or agent, or as a stockholder, director or officer of a corporation, or otherwise, in any business whose activities include the operation of one or more health and/or fitness facilities or businesses or the sale at wholesale or retail of products or services similar to those offered by World Gym Facilities or Master Franchisee, or the granting of sub-franchises or licenses for the development and/or operation of such facilities or businesses, and which conducts such activities: (a) within 10 kilometres of the World Gym Facility franchised herein, or (b) within 10 kilometres of any other then-existing World Gym Facility. In the event that Sub-Franchisee is a corporation or other entity, the restrictions set forth in this Article II shall apply to each Owner (as herein defined).
Article 8.8 provides that, upon termination of the sub-franchise agreement by Pro Arc, Pro Arc shall have the option to purchase all of the assets of World Gym Southside at market value and may appoint a manager to maintain the operation of World Gym Southside pending settlement.
WGS is the corporate entity through which Mr Reddington operates the World Gym Southside business. It is also the lessee of the premises from which World Gym Southside operates. The lease is due to expire on 31 May 2022 and provides for the permitted use of the premises to be a gymnasium and associated health uses. Pursuant to cl 8.1 of the lease, WGS must obtain the lessor's consent before it transfers its interest in the premises. The lessor must give its consent if, amongst other matters, WGS satisfies the lessor that the new lessee is financially secure and has the ability to carry out the lessee's obligations in the lease.
In 2019, Pro Arc and Mr Reddington were in dispute about whether Mr Reddington was in breach of the sub-franchise agreement and whether Pro Arc or Mr Reddington had repudiated, entitling the other to terminate the agreement. That dispute led Pro Arc to commence these proceedings on 18 December 2019 seeking, amongst other orders, a declaration that the sub-franchise agreement had been validly terminated by Pro Arc.
The parties subsequently entered into discussions and agreed to settle their dispute. Their agreement was documented in a deed of settlement which the parties executed and exchanged on 17 June 2020.
The deed of settlement relevantly provides that: 1. Mr Reddington must pay to Pro Arc: (i) $25,000 for legal costs within 14 days of the current government restrictions on the operation of Queensland gym facilities being lifted: cl 12(a); and (ii) $15,000 by way of security for his obligations in accordance with the terms of a security deed annexed to the deed of settlement within 28 days of the current government restrictions on the operation of Queensland gym facilities being lifted: cls 37 and 38; 1. Mr Reddington must commence and progress a cost assessment within seven days of receiving Pro Arc's solicitor's itemised account and pay the balance of Pro Arc's legal costs (as assessed) within seven days of the assessment determination being received: cls 12(b) and 14; 2. the sub-franchise agreement is amended such that WGS is added as a joint sub-franchisee: cl 26(a); 3. Mr Reddington and WGS are required to enter and procure the current lessor of the premises to enter into a deed of agreement to step into lease annexed to the deed of settlement: cl 26(d); 4. Mr Reddington must reinstate all World Gym branding and comply with Pro Arc's branding and style guide upon the earlier of the government restrictions being lifted and World Gym Southside being permitted to re-open for business or three months from the date of the deed of settlement: cl 15; 5. Mr Reddington must formally retract all derogatory and adverse statements made about Pro Arc to, amongst others, Debit Success, and update the World Gym owners' Facebook page: cl 22; 6. Mr Reddington and WGS agree that the post-termination contractual restraints in the sub-franchise agreement are valid and necessary to protect the goodwill and confidential information of Pro Arc and the World Gym brand, and apply to each of Mr Reddington, WGS and all owners of WGS, which relevantly include the shareholders of WGS: cl 28; and 7. if Mr Reddington or WGS breach the deed of settlement: (i) Pro Arc may terminate the deed and sub-franchise agreement and enforce the termination provisions in the sub-franchise agreement without further notice to Mr Reddington: cls 35(a) and (b); and (ii) Pro Arc will exercise its rights to acquire the assets of the World Gym Southside facility in accordance with the terms of the sub-franchise agreement and immediately appoint a manager to operate the facility pending the acquisition of the gym's assets: cls 35(b)(i) and (ii).
From at least 13 June 2020, the Queensland government restrictions that prevented gyms from operating during the COVID-19 pandemic were lifted, thereby enabling World Gym Southside to re-open, albeit on a basis that restricted the number of people who could be in the gym at any one time.
On 18 June 2020, Pro Arc's solicitors sent an email to Mr Reddington and WGS's lawyer to confirm the critical dates under the deed of settlement. The critical dates included the dates for payment of the amounts of $25,000 and $15,000 and the re-branding obligations, referred to at [12(a)] and [12(e)] above. The email referred to "your client's signed step into lease" that Pro Arc's solicitor had received, which was not in evidence but presumably relates to the deed of agreement to step into lease required by cl 26(d) of the deed of settlement, referred to at [12(d)] above.
On 29 June 2020, Pro Arc's director confirmed the critical dates under the deed of settlement by way of an email sent to Mr Reddington and Julianne Gregory, the manager of World Gym Southside and a shareholder of WGS.
On 30 July 2020, Ms Gregory sent an email from her and "Travis" (Mr Reddington) to Pro Arc's solicitors acknowledging that "payments were overdue" and requesting further time to make them. The email also states that Ms Gregory will investigate submitting Pro Arc's solicitor's account for a costs assessment and get Mr Reddington to retract the statements made to Debit Success.
It is not in dispute that, as at 17 August 2020, Mr Reddington and WGS had not paid the amounts required to be paid under the deed of settlement, had not progressed the cost assessment and had not made the retraction of statements to Debit Success.
By letter dated 17 August 2020 and served on Mr Reddington and WGS on 21 August 2020, Pro Arc's solicitors notified them that Pro Arc was terminating the sub-franchise agreement with immediate effect. The letter also notified that Pro Arc required Mr Reddington to immediately close World Gym Southside and cease using all social media accounts and the phone number used by the gym facility.
By letter dated 19 August 2020, Pro Arc's solicitor notified Mr Reddington and WGS that Pro Arc elected to exercise its option under the sub-franchise agreement and the deed of settlement to acquire the assets of the sub-franchise (including but not limited to the leasehold improvements, equipment, furniture, fixtures and lease of the premises) and take over management of World Gym Southside until the settlement of the sale of the assets. The letter also advised that Pro Arc's representative, Mr Davie, would attend the gym facility at 10am on 25 August 2020.
In a discussion with Pro Arc's solicitor on 24 August 2020, Mr Reddington acknowledged that Pro Arc had terminated the sub-franchise agreement and indicated that he was agreeable to Pro Arc purchasing the assets of the World Gym Southside business. Mr Reddington also advised Pro Arc's solicitor that Mr Davie was not permitted to attend World Gym Southside, that Mr Reddington and the landlord had contacted the police to prevent Mr Davie from doing so and that Mr Reddington believed that he could immediately open another gym from the site.
On 4 September 2020, Pro Arc filed an amended summons and amended commercial list statement joining WGS as a second defendant to these proceedings and claiming that the sub-franchise agreement had been validly terminated for various breaches of the deed of settlement. Pro Arc seeks declaratory and injunctive relief enforcing its rights pursuant to the deed of settlement and the sub-franchise agreement, including the post-termination restraints in Article 2.4 and various others restraints and obligations relating to the use of Pro Arc's intellectual property, telephone number and products.
By their response to the commercial list statement, Mr Reddington and WGS deny that they have breached the deed of settlement or that Pro Arc has validly terminated the sub-franchise agreement.
At the hearing, it was not in dispute that Mr Reddington and WGS have not provided Mr Davie with access to World Gym Southside, that they have not paid the amounts required under the deed of settlement, that they have continued to operate the gym, and continued to use the gym's telephone number, Facebook and Instagram accounts and World Gym branding.

Legal principles

The legal principles to be applied on an application for interlocutory relief are well known. The Court must determine whether Pro Arc has shown there is a serious question to be tried, that damages will not be an adequate remedy and that the balance of convenience favours the granting of an injunction of the nature sought: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 (ABC v O'Neill) at 68 (Gleeson CJ and Crennan J) and 81-84 (Gummow and Hayne JJ).
Pro Arc must establish that its claim for final relief raises a serious question to be tried in the sense that, if the evidence remains as it is, there is a probability at the trial of the action that Pro Arc will be entitled to the final relief claimed: ABC v O'Neill at 82; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618; [1968] HCA 1 (Beecham v Bristol) at 622-3.
As to the balance of convenience, the Court will consider the risks of doing injustice according to whether the injunction is granted or refused. It considers what would be the loss and inconvenience to Pro Arc if the injunction is not granted, compared to the loss to Mr Reddington and WGS if it is: Castlemaine Toohey Limited v South Australia (1986) 161 CLR 148; [1986] HCA 58 at 153; Beecham v Bristol at 622-3.
Whether Pro Arc has a seriously arguable case of final relief and of the balance of convenience are interrelated. The greater the extent to which the balance of convenience favours the grant of interlocutory relief, the less strong the case of final relief may be required; conversely, the stronger the case of final relief, the less may be required to establish the balance of convenience favours interlocutory relief: AMMG Pty Limited v Arndell [2016] NSWSC 203 at [3].
The purpose of an interlocutory injunction is to preserve the status quo until the rights of the parties can be determined at a final hearing of the proceedings: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199; [2001] HCA 63 at [62] (Gaudron J), [64] (Gummow and Hayne JJ), [162] (Kirby J).

Consideration and determination

At the hearing, counsel for Mr Reddington and WGS accepted that there is a serious question to be tried as to whether they have breached the deed of settlement, whether Pro Arc's termination of the sub-franchise agreement was valid and whether the post-termination restraints are enforceable such that Pro Arc would be entitled to the final injunctive relief it seeks by its amended summons.
In my view, those concessions were appropriately made having regard to the obligations of Mr Reddington and WGS under the deed of settlement, the evidence that no payments have been made by Mr Reddington as required by that deed, and the acknowledgements contained in Ms Gregory's 30 July 2020 email. There is also evidence that the adverse statements made to Debit Success have not been retracted, no steps have been taken to commence the costs assessment process and the re-branding of the facility has not been completed.
I accept there are factual disputes about performance of some of those matters that will need to be determined at the final hearing, such as the extent of the re-branding undertaken by Mr Reddington and WGS. Those factual disputes do not, in my view, detract from the conclusion that Pro Arc has established a prima facie case that Mr Reddington and WGS have breached the deed of settlement and that they have validly terminated the sub-franchise agreement.
I also accept there will be a dispute at the final hearing as to the reasonableness of the post-termination restraints, particularly the restraint that purports to operate on Mr Reddington and WGS within the 10 kilometre area of any existing World Gym facility for a period of 12 months. On an interlocutory application, the acknowledgement contained in the deed of settlement as to the validity, necessity and application of the restraints is prima facie evidence of their enforceability in circumstances where Mr Reddington and WGS were legally represented when the deed of settlement was negotiated and executed.
I am, therefore, satisfied that Pro Arc has established there are serious questions to be tried in respect of the final relief it seeks in these proceedings.
The main contest between the parties is whether the interlocutory relief sought by Pro Arc should be granted having regard to balance of convenience factors and whether damages are an adequate remedy.
Pro Arc submits that there is a risk Mr Reddington and WGS will misuse Pro Arc's confidential information during their continued operation of the gym facility and possibly damage equipment if they are not restrained by injunctive relief.
Pro Arc also submits that, absent injunctive relief, there is a risk it will lose the opportunity to maintain the World Gym Southside membership base as the evidence suggests that Mr Reddington intends to resurrect the gym facility in a different form owned by some other party and seek to work there as a personal trainer.
Mr Reddington and WGS submit, and I accept, that the risk of damage to the physical assets of World Gym Southside is likely to be low given they are to be purchased by Pro Arc and there is an incentive on Mr Reddington and WGS to maintain their value.
Mr Reddington and WGS also submit that Pro Arc's harm could, in general, be compensated by an award of damages. I am not persuaded by that submission. In my view, it is likely to be difficult to assess any loss Pro Arc would suffer if an injunction is not granted and it ultimately succeeds, such that damages would not be an adequate remedy.
There is evidence that a World Gym member was told by Mr Reddington that they would need to transfer their membership and "another gym would open soon". There is, therefore, a risk that Pro Arc will lose the benefit of maintaining the members of World Gym Southside as an asset of the business if an injunction is not granted. As counsel for Mr Reddington and WGS accepted at the hearing, the membership list is the confidential information of Pro Arc and an asset to which Pro Arc would be entitled to retain in circumstances where it has validly terminated the sub-franchise agreement.
In my view, there is also a risk that Pro Arc's reputation might be damaged if Mr Reddington and WGS continue to operate World Gym Southside on their own pending final resolution of these proceedings. The evidence suggests that they are dissatisfied with Pro Arc's conduct and Mr Reddington has made disparaging comments about Pro Arc in the past. In that context, it might be expected that Mr Reddington and WGS are unlikely to promote the World Gym business in a positive way. The damage to Pro Arc's reputation would also be difficult to quantify.
I accept that Mr Reddington and WGS would also suffer injury for which damages may not be an adequate remedy if interlocutory relief is granted and they ultimately succeed. But given their acknowledgement that the World Gym Southside business will be handed over to Pro Arc and the terms of their open offer dated 8 September 2020 which provides for that handover in November, it seems to me that their damages may not be significant. Pro Arc has also proffered the usual undertaking as to damages and no issue was taken at the hearing as to the adequacy of that undertaking.
Mr Reddington and WGS accept that the continuation of the franchise relationship with respect to World Gym Southside is no longer viable. But they submit that granting interlocutory relief which requires them to cease operating the gym tomorrow is a drastic step that will have a significant and detrimental impact, not just on themselves but on the current 2,600 members and the 14 employed staff and 15 personal trainer contractors. They also submit that there is a potential for harm to the landlord, who is not before the Court, as a restraint on WGS from opening a competing business at the site would lead to uncertainty about whether the premises will continue to be used as a gym.
As Mr Reddington and WGS's counsel stated at the hearing, what they essentially seek is some time to allow the parties to have discussions, engage in mediation and arrange for an orderly handover of the World Gym Southside business. I understand their counsel's submission to be that Mr Reddington and WGS need until 19 November 2020 to mediate and arrange the handover.
There is another factor which is relevant to take into account in considering what, if any, relief should be granted in this case. It is common ground that the parties can be ready for a final hearing on all issues of liability quickly and that the hearing will take one to two days. The Court has time to hear the matter on a final basis on 12 and 13 October 2020, which is only four weeks away.
Having considered all the submissions and evidence, I have concluded that the balance of convenience does not favour the grant of interlocutory relief in the terms sought in paragraphs 8 and 9 of the amended summons, which would require the World Gym Southside business to shut down tomorrow and restrain Mr Reddington and WGS in the terms sought.
This is primarily for the reasons that granting that relief with effect from tomorrow is likely to create hardship on the current members, employees and contractors of World Gym Southside, and the imminence of a final hearing in four weeks. The potential hardship to and interference with the rights of third parties is a relevant consideration as to whether the Court should exercise its discretion and grant interlocutory relief, particularly during the current COVID-19 pandemic. I am also not satisfied that the prejudice Pro Arc will suffer if the interlocutory relief in the terms sought is refused for a short period outweighs the risk of harm to those third parties if that relief is granted.
That said, I consider that it is appropriate for some regime to be put in place prior to the final hearing of this matter to protect Pro Arc's position and in the context where Mr Reddington has previously been provided with an accommodation by Pro Arc, as evidenced by the terms of the deed of settlement, and a subsequent opportunity for further time to make payments as required under that deed.
It seems to me that the appropriate balance in this case would be to appoint Mr Davie as manager of the World Gym Southside business from next Monday, 21 September 2020 until final determination of the proceedings. Appointing Mr Davie as manager will enable the World Gym Southside business to continue to operate and lessen the impact on third parties, thereby effectively maintaining the status quo. It also reflects the arrangements agreed to by the parties in the event Mr Reddington or WGS breached the deed of settlement, which breaches have been acknowledged by Mr Reddington and Ms Gregory. Such an order will not require the lessor of the premises to enter into a deed of agreement to step into lease at this time, rather it will require Mr Reddington and WGS to allow Mr Davie to participate in the World Gym Southside business as manager and have access to the business in the meantime.
For these reasons, I decline to grant the orders sought in the amended summons but will grant interlocutory relief to enable Mr Davie to step in as manager of the World Gym Southside business.
I invite the parties to confer on the precise terms of the orders. The parties should send an agreed form of orders to my chambers. The parties also have liberty to appear before me tomorrow when I sit as duty judge in the event there is some dispute as to the terms of the orders.

Addendum

Although the parties reached agreement on most aspects of the orders, there remained a few issues to be resolved, such as the timing of the order for Mr Davie to take over as manager and the way in which he would gain access to the premises. I dealt with those matters at a short oral hearing on 15 September 2020.
Accordingly, on 15 September 2020, I made the following interlocutory orders and directions for the further conduct of the proceedings: Interlocutory Orders 1. Upon the plaintiff giving the usual undertaking as to damages: 2. Order that effective 12:00 noon on Monday 21 September 2020, Jonathon Davie is appointed by the Court as Manager of the business known as "World Gym Southside" ("Business") situated at 7-10/10 Old Chatswood Road, Daisy Hill, Queensland ("Manager") until otherwise ordered by the Court. 3. The Manager is appointed to ensure the continuing operation of the Business in accordance with the Sub-Franchise Agreement during the period of the appointment. 4. The first and second defendants do all such acts and things required to facilitate Jonathon Davie exercising his appointment and power as Manager of the Business in accordance with Order 2, including but not limited to: 1. providing access to 7-10/10 Old Chatswood Road, Daisy Hill, Queensland, including by providing a swipe fob, as required; 2. providing access to bank account of the Business and software for electronic accounting and payroll for the purpose of review only (it being acknowledged that all accounting and payroll is undertaken by the first defendant's accountant); 3. providing access to all records and documents of the Business for the purpose of review only; 4. providing access, and passwords to all social media accounts associated with the Business; 5. allowing Jonathan Davie to: (i) manage the existing employees of the Business, noting the Manager does not have the right to hire and terminate any employee; (ii) if required by the Business, nominate key employees from World Gym Australia (Pro Arc International Pty Ltd and WGA Investments Pty Ltd) to assist with the operation of the Business; 1. authorising and permitting Jonathon Davie to discuss the operation of the Business with third parties including but not limited to Debit Success and the lessor of 7-10/10 Old Chatswood Road, Daisy Hill, Queensland. 1. The first and second defendants are restrained from interfering, or causing or allowing any other person to interfere, with Jonathon Davie exercising his appointment and power as Manager of the Business. 2. The costs of the interlocutory proceedings be reserved to the hearing on issues concerning liability. Procedural orders 1. The matter is listed for hearing on 12 and 13 October 2020 on issues concerning liability and declaratory and final injunctive relief (subject to any further amendment, as per the Amended Summons filed 4 September 2020 at paragraphs 1, and 1A - 1L, except 1C). 2. The plaintiff file and serve any Amended Summons and Commercial List Statement no later than 10:00am on 17 September 2020. 3. The defendants file and serve any Amended Commercial List Response no later than 10:00am on 21 September 2020. 4. The plaintiff serve any affidavit evidence on which it intends to rely by 25 September 2020. 5. The defendants serve any affidavit evidence on which they intend to rely by 2 October 2020. 6. The plaintiff serve any affidavit evidence in reply on which it intends to rely by 5 October 2020. 7. The plaintiff file and serve an Electronic Court Book in chronological order, consecutively numbered, and without tabs, containing all documents referred to in any affidavit proposed to be relied upon at trial by 7 October 2020. 8. Each party file and serve a folder of all affidavits to be relied upon at trial by that party, with each Affidavit annotated with references to the Electronic Court Book page number referred to in the Affidavit, by 8 October 2020. 9. Each party file and serve a short outline of submissions, a statement of the real issues for determination, a list of authorities, and a chronology of relevant events by 9 October 2020.

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: 21 September 2020

At a glance

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Judgment (6 paragraphs)

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Cases Cited (9)