RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd

Federal Court of Australia|2012-06-29|Before: Yates J

NOTES that the applicant gives the usual undertaking as to damages.
ACCEPTS the undertaking by the first respondent to keep and maintain all business or accounting records in relation to sales/installations of Spanline Products since June 2006 until the final hearing and determination of this proceeding.
ORDERS that, in the absence of agreement between the parties on the question of costs, the parties are to provide within seven days drafts of the orders they seek supported by short written submissions which are not to exceed two pages in length.
ORDERS that, subject to the determination of the question of costs, the applicant's interlocutory application dated 7 June 2012 be otherwise dismissed. Note: Settlement and entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 804 of 2012

AND: MARMAX INVESTMENTS PTY LTD (ACN 001 147 511)

SPANLINE WEATHERSTRONG BUILDING SYSTEMS PTY LTD (ACN 002 968 087)

JUDGE: YATES J DATE: 29 JUNE 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicant seeks interlocutory injunctive relief in a proceeding involving alleged breaches of contract and alleged misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) in respect of acts and omissions that occurred before 1 January 2011, and s 18 of the Australian Consumer Law in respect of acts and omissions that occurred thereafter. 2 In general terms, the principal proceeding concerns the conduct of a franchisor and its franchisees operating under the Franchising Code of Conduct under the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth). However, the present application does not directly relate to rights and obligations arising under the Franchising Code. In order to fully understand the nature of the present application it is necessary to go to some detail of the history of the relationship between the parties.

Background 3 The second respondent is the franchisor of a system involving the retail sale and installation of products by franchisees in respect of the building of additions and improvements to residential and commercial premises. The franchise system is conducted under the name Spanline Home Additions, as well as other names. The applicant is the second respondent's franchisee in an area called the South Coast area. The first respondent is the second respondent's franchisee in an area called the Illawarra area. Each area is delineated by a map attached to the written agreement under which each franchise has been granted. 4 The two franchise areas were not always separate. In 2001 the applicant entered into a Franchise Agreement with the second respondent in respect of an area referred to in the relevant agreement as the "NSW South Coast Area", which included the Illawarra area now franchised to the first respondent by the second respondent. By an agreement dated 9 October 2003, the applicant and the second respondent granted the first respondent a sub-franchise in respect of the Illawarra area. The precise nature of this arrangement is unclear at the present time because the sub-franchise agreement is not in evidence, although its existence is referred to in a Deed of Termination, apparently entered into in about November 2004. At this time the applicant and the first respondent had reached agreement in relation to the first respondent's purchase of the franchise business in the Illawarra area. The Deed of Termination appears to have been entered into as part of the arrangements to effect that transfer. The deed contained a number of releases, while at the same time containing an express affirmation that the sub-franchise agreement dated 9 October 2003 remained binding on the parties. The deed also referred to a Transfer of Business and Loan Agreement (TB & L Agreement), which was also apparently entered into in 2004, sometime after the deed was executed. 5 The TB & L Agreement recited that the applicant, as vendor and lender, and the first respondent as purchaser and borrower, had agreed to transfer "the Business" to the first respondent for the purchase price of $296,367.41 and that to enable the transfer to be completed the applicant had agreed to advance $180,000 to the first respondent. The TB & L Agreement purported to define "the Business" by reference to a schedule. The schedule, unfortunately, provides a somewhat opaque definition of "the Business". It describes it as "Spanline Illawarra Home Additions" and refers to the business name as "Spanline-Illawarra". 6 The TB & L Agreement contained the following clauses: 3.8 Vendor's Restraint obligations Except as permitted by clause 3.10, the Vendor must not, and must ensure that each or its Affiliates does not, during each restraint period in the Illawarra Franchise Area: (a) promote, participate in, finance, operate or engage in (whether on its own account or in partnership or by joint-venture); or (b) be concerned or interested (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant or in any other capacity) in, any of the Restrained Businesses. 3.9 Purchaser's Restraint obligations Except as permitted by clause 3.10, the Purchaser must not, and must ensure that each of its affiliates does not, during each restraint period in the South Coast Franchise Area: (a) promote, participate in, finance, operate or engage in (whether on its own account or in partnership or by joint-venture); or (b) be concerned or interested (directly or indirectly, or through any interposed body corporate, trust, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant or in any other capacity) in, any of the Restrained Businesses. 7 The "Illawarra Franchise Area" referred to in cl 3.8 and the "South Coast Franchise Area" referred to in cl 3.9 correspond to the areas currently and separately franchised by the second respondent to the first respondent and the applicant, respectively. 8 Clause 3.10 provided as follows: Permitted Involvement Clauses 3.8 and 3.9 do not prevent either party, together with any of its Affiliates, being the holders in aggregate of less than five per cent (5%) of the issued shares or units of a body corporate or unit trust listed on a stock market of Australian Stock Exchange Limited. 9 The expression "Restrained Business" was defined as follows: 'Restrained Business' means a business or operation: (i) similar to the Spanline franchise businesses such as the Business; or (ii) competitive with the Spanline franchise businesses such as the Business; or (iii) supplying similar products and services to the Spanline franchise businesses such as the Business. 10 The expression "Restraint Period" was defined as follows: 'Restraint Period' means each of the following periods separately: (i) 10 years from the Adjustment Date; (ii) 5 years from the Adjustment Date; (iii) 2 years from the Adjustment Date (iv) 1 year from the Adjustment Date. 11 The "Adjustment Date" was defined to mean 1 July 2003. It can thus be seen that the maximum period of restraint that is provided for expires on 30 June 2013. 12 The applicant complains that over a significant period of time, at least from June 2006, the first respondent has sold and installed "Spanline" products in the South Coast area. Relevantly for the purposes of the present application, the applicant says that this is a breach by the first respondent of its contractual obligations to the applicant under the sub-franchise agreement and, separately, under the TB & L Agreement, specifically cl 3.9 thereof. 13 The evidence shows that the applicant has complained to the second respondent about this conduct over a significant period of time. Its case, in substance, is that these complaints have fallen on deaf ears. It says that the first respondent has been operating in breach of its obligations under its particular franchise agreement with the second respondent and that the second respondent has done little to stop it. 14 In a letter dated 1 June 2009 Richard Marron, one of the applicant's principals, wrote to the second respondent complaining that the first respondent was selling into Gerroa and the Southern Highlands, both areas falling within the South Coast area. Mr Marron said that "it has been estimated that the work sold could be as high as $500,000", excluding "leads". Mr Marron's letter also suggested that the first respondent was accounting for some of this work by recording addresses incorrectly in its computer system. This information appears to have been provided to the applicant by a person formerly associated with the franchise business in the Illawarra area. The implication in the letter appears to be that the first respondent was doing this in an attempt to hide its activities in relation to the South Coast area. The second respondent replied to this letter giving an assurance that it would investigate the matter. 15 After some correspondence between the parties (the details of which need not be recorded), the second respondent wrote to the applicant on 17 September 2009 stating that warnings had been given to the first respondent that it (the second respondent) "will not tolerate this type of behaviour". It extended the same warning to the applicant, although there was no suggestion that the applicant itself was engaging in conduct of the kind about which it had complained. 16 The applicant expressed disappointment with this response. Thereafter, it complained to the second respondent on a number of separate occasions about further "breaches" by the first respondent. In a letter to the second respondent dated 11 May 2010, Mr Marron said: It is unfortunate that I have to write this letter but I have been left with no alternative. For some time now I have had my suspicions (mainly due to the downward trend in the leads for the Southern Highlands) that Spanline Illawarra has been servicing this area. With all the advertising I do in this area I should be experiencing business growth. While we have been down this road before I now am asking for a more formal and disciplined based response from Spanline Australia … 17 The letter went on to express Mr Marron's frustration about the first respondent's "blatant disregard for the franchise agreement". The letter continued: Unfortunately, I cannot take legal action against Spanline Illawarra for this breach; this is the responsibility of Spanline Australia as the franchisor. As we have been down this road before I believe it is the duty of Spanline Australia to take whatever action is needed to rectify this continuing breach of boundaries, and to put in place a system/protocol that severely penalises breaches …" 18 On 7 June 2010, Anthony Way, the second respondent's managing director, responded to this letter. His response included the following: I am absolutely furious to hear your allegation that Spanline Illawarra have been in breach of the Franchise Agreement by servicing leads in the Southern Highland. I was of the opinion that we had solved the issue of poaching from adjoining Franchise Territories but obviously we need to take positive action to resolve this issue once and for all! It is necessary for us to take action through our Solicitor. This continual lack of regard for the Franchise Agreement must cease immediately and I can assure you that we will threaten further legal action if the activity persists. They have already formal warnings and I can assure you that we will deal with the issues using the appropriate disciplinary actions. … 19 In the period from September 2010 to October 2011 the applicant continued to write to the second respondent, complaining of recurring sales by the first respondent into the South Coast area. Mediation between the applicant and the first respondent was proposed by the second respondent. However, on 18 October 2011 Lisa Oakley, the General Manager of the second respondent, wrote to Mr Marron and his wife Paula Marron, the other principal of the applicant. In that letter Ms Oakley said: … The legal advice is that rather than go to mediation, at this point in time, the two conflicting parties are to meet on totally neutral grounds (preferably Sydney) with Mr A. J. Way the Managing Director of Spanline Australia to discuss the problems facing both of your franchises. In cases like these there is absolutely no problem that cannot be worked out. And our legal advice is that Mr Way ought to actively participate in the meeting between the three parties. Effectively the three parties are yourselves, Spanline Home Additions Illawarra and Spanline Australia. Mr Way having listened to the detailed complaints, explanations and so forth from both of the parties will then adjudicate as the Managing Director of the Franchisor Company as to the way the matter is to be resolved and the outcome(s) achieved … 20 On 1 December 2011 a meeting was held. Thereafter, on 5 December 2011, the second respondent sent a letter to Mr and Mrs Marron. In that letter Ms Oakley enclosed "a copy of the Agreement for the matters agreed to by all parties on 01st December 2011, for your signing". 21 On 19 December 2011 Mrs Marron responded in a letter addressed to Mr Way. She informed Mr Way that she and Mr Marron would not be signing the agreement sent to them on 1 December 2011. She placed reliance upon the existing franchise agreement between the applicant and the second respondent and referred to the draft agreement sent on 1 December 2011 as an "amendment" that was "open to too many interpretations and dishonest conduct". 22 Thereafter the applicant continued to press the second respondent to take action against the first respondent. On 8 March 2012, in response to notification by the applicant of further work being carried out in the South Coast area by the first respondent, the second respondent stated that it would not be taking legal action against the first respondent. 23 The applicant responded by informing the second respondent, on 12 March 2012, that it (the applicant) would take legal action itself. 24 To this end, on 26 March 2012, the applicant served a notice on the second respondent claiming breach by the second respondent of its franchise agreement with the applicant. Also, on about 27 March 2012, the applicant's solicitors served a letter of demand on the first respondent alleging breach by the first respondent of the TB & L Agreement. In that letter the applicant sought the first respondent's agreement to a "thorough review and audit" of the first respondent's records to determine the amount of profit derived from each job carried out by the first respondent in the South Coast area. The letter also sought the first respondent's agreement to pay the applicant the profits from each of those jobs within 14 days of the audit. The letter also sought a written undertaking addressed to the applicant that the first respondent would refrain from doing any future work in the South Coast area. The letter concluded by threatening the commencement of proceedings in the Supreme Court of New South Wales for damages and injunctive relief in the event that the first respondent's agreement was not forthcoming. 25 In the period 13 April to 29 May 2012 the parties engaged in "without prejudice" communications. 26 On 16 May 2012 the first respondent provided an undertaking to the applicant in the following terms: UNDERTAKING Marmax Investments Pty Limited (ACN 105 225 330) ("the Company") hereby agrees and undertakes, from this date forward, and pending further agreement, final resolution or court order, to the following: 1. To refrain from commencing any Work in the Spanline South Coast franchise territory as marked in the map forming Annexure "A" to this undertaking, except where consented to in writing by an employee or officer of RPR Maintenance Pty Limited (ACN 003 610 231); 2. To refer all future leads pertaining to Work in the Spanline South Coast franchise territory to the Spanline South Coast franchisee, RPR Maintenance Pty Limited; and 3. To refrain from destroying any financial, business or accounting records that relate to marketing or sales by the Company in the period since the execution of an agreement entitled "Transfer of Business and Loan Agreement" between the Company and RPR Maintenance Pty Limited from 1 January 2004 onwards. For the purpose of this undertaking the following definitions apply: "Work" means the supply, delivery and/or installation of Spanline Home Addition Products as they are defined in the current versions of the following documents published by Spanline Weatherstrong Building Systems Pty Ltd (ACN 002 968 087) (a) Manuals; (b) Spanline MastaLink Codes; and (c) Spanline Warranty. The Work does not include any Work which may be done by the Company to property owned by the Director of the Company or members of her immediate family including her husband, jointly or severally, within the Spanline South Coast franchise territory. "Company" includes its officers, servants or agents. 27 When providing the undertaking the first respondent's solicitors stated in a covering email: On the basis of your advice that your client will be commencing proceedings very shortly and seeking final orders, not only in terms of damages but also as to a restraint, these are given on an interim basis. I note your client will not now seek urgent interlocutory orders in terms of a restraint … on the basis of this undertaking being given. My client relies on this communication and signed undertaking in terms of costs if that situation changes. It is assumed by [my] client that at the first return date of the Initiating Process it is intended by your client to seek to have these undertakings made into interim orders by consent which will thereafter continue until amended or a final order made … 28 On 1 June 2012 the first respondent's solicitors wrote to the applicant's solicitors stating: We refer to the undertaking dated 16 May 2012 ("undertaking") given by our client. Our client notes that your client was not prepared to give a similar undertaking at the same time. Negotiations have since broken down. In these circumstances we are instructed to advise that our client withdraws its undertaking and does not regard itself bound by any of the obligations arising out of those express terms. 29 On 7 June 2012 the applicant's solicitors informed the first respondent's solicitors that an urgent application would be made to the Court on 8 June 2012 seeking interlocutory relief. 30 The applicant commenced the present proceeding on 8 June 2012. The application for interlocutory relief was heard by me on 14 June 2012. At that hearing, the applicant sought interim orders that the first respondent: (a) refrain from conducting any retail sales or installation of Spanline products in the "South Coast Franchise Area", as that territory is defined in the TB & L Agreement, except where consented to in writing by an employee or officer of the applicant; (b) refer all future leads pertaining to retail sales or installation of Spanline products in that area to the applicant; and (c) refrain from destroying any financial, business or accounting records that relate to marketing or sales by the first respondent in the period from June 2006 to date. 31 No interlocutory relief was sought against the second respondent. Nevertheless, the second respondent was present at the hearing and made submissions on the basis that it was a person who would be adversely affected by the orders sought against the first respondent.

The correct legal approach 32 The parties proceeded on the basis that the relevant principles for the grant of interlocutory injunctive relief were those referred to and discussed by the Full Court in Samsung Electronics Co Ltd v Apple Inc (2011) 286 ALR 257 at [52]-[74]. 33 It is not necessary to canvass those principles beyond noting the following statements made in that case: In all cases for an interlocutory injunction in aid of private rights, the Court addresses itself to two main enquiries. The first enquiry is whether the claimant for relief has made out a prima facie case in the sense that if the evidence remains as it is there is a probability that, at the trial for final relief, the claimant will be held entitled to relief. The strength of the probability depends upon the nature of the rights asserted and the consequences likely to flow from the interlocutory order that is sought. It is sufficient if the claimant shows a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial. The second enquiry is whether the inconvenience or injury which the claimant would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the respondent would suffer if an injunction were granted. The question of whether damages will be an adequate remedy for the infringement of the claimant's asserted rights will always need to be considered when the Court has an application for interlocutory injunctive relief before it. It may or may not be determinative in any given case. The question involves an assessment by the Court as to whether the plaintiff would, in all material respects, be in as good a position if he were confined to his damages remedy, as he would be if an injunction were granted. In exercising the discretion, the Court is required to assess and compare the prejudice and hardship likely to be suffered by the respondent, third persons and the public generally if an injunction is granted, with that which is likely to be suffered by the claimant for relief if no injunction is granted. In determining this question, the Court must make an assessment of the likelihood that the final relief (if granted) will adequately compensate the claimant for the continuing breaches which will have occurred between the date of the interlocutory hearing and the date when final relief might be expected to be granted. The two enquiries ("prima facie case" and "balance of convenience") are related in the sense that they should not be considered in isolation from each other. The apparent strength of the parties' substantive rights will often be an important consideration to be weighed in the balance.

Prima facie case - submissions 34 As I have noted, the applicant only seeks interlocutory relief against the first respondent. It bases its case in this regard on contractual rights found in two sources: the sub-franchise agreement entered into by the parties, and the TB & L Agreement. 35 It should be noted at the outset that there is, in my view, an insuperable obstacle to the applicant obtaining interlocutory relief on the basis of asserted contractual rights arising under the sub-franchise agreement. This is because the sub-franchise agreement itself is not in evidence and there is no other evidence of its precise terms. In any event, as the applicant frankly concedes, its contractual rights against the first respondent under the sub-franchise agreement may have been subsumed by the TB & L Agreement. In my view, on the present evidence, the only viable claim brought forward by the applicant for interlocutory relief against the first respondent rests on the TB & L Agreement as the source of contractual rights. 36 The applicant's case, in that regard, is that by undertaking projects involving the carrying out of work and the supply of products in respect of customers resident in the South Coast area, the first respondent has breached cl 3.9 of that agreement. Specifically, in so doing, the applicant submits that the first respondent has, in that area, during the period of restraint (which ends on 30 June 2013), promoted, participated in, operated or engaged in, or was concerned in or interested in, a "Restrained Business", namely, the business sold by the applicant to the first respondent. 37 The first respondent does not dispute that it has carried out work and supplied products to customers resident in the South Coast area. Its evidence, however, is that it has not established business premises in the South Coast area and has never conducted any advertising of its services so as to specifically target customers in that area. It does conduct television advertising on WIN TV which covers both the Illawarra and South Coast areas. Thus this television advertising could be seen by persons in the South Coast area. The advertising, however, is with respect to the first respondent's business address in Albion Park Rail. Albion Park Rail is easily accessible from areas within the South Coast area. The first respondent similarly has online advertising in the Yellow Pages, which would also extend to customers in the South Coast area. However, all other major advertising conducted by the first respondent is confined to the Illawarra area. This principally includes newspaper advertising, letterbox drops and local trade shows. The first respondent says that it has not established a business, as such, in the South Coast area but has provided goods and services to customers resident in the South Coast area who have approached its business in the Illawarra area. 38 The first respondent submits that, notwithstanding this conduct, the applicant has failed to establish a prima facie case for the relief that it claims, for the following reasons. 39 First, the first respondent submits that cl 3.9, on its proper construction, only restrains acts in relation to establishing a seat of business in the South Coast area or actively marketing a business in the South Coast area, and not simply providing goods or services to customers who happen to reside in the South Coast area and who have sought out the first respondent in the Illawarra area for that purpose. 40 Secondly, the first respondent submits that if cl 3.9 bears a construction which covers the first respondent's conduct, the restraint is a restraint of trade that is neither reasonable in the interests of the parties nor in the interests of the public. It is therefore void and unenforceable: Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535. In this connection the first respondent submits that the restraint in cl 3.9 is one imposed on the buyer of a business to protect the interests of a seller rather than one imposed on the seller to confer on the purchaser the full benefit of the goodwill acquired. It submits that the common law recognises that restraints of the latter kind may be in the public interest if otherwise reasonable as between the parties: Nordenfelt at 548, 552 and 566. However, the common law does not recognise covenants of the former kind to be the proper subject matter of restraint, because such restraints are a mere restraint against competition, which are not in the public interest: Giblin v Murdoch 1979 SLT (Sh Ct) 5 at 6; see Heydon JD, The Restraint of Trade Doctrine (3rd ed, LexisNexis Butterworths, 2008) at 199-200. The first respondent submits that the restraint created by cl 9.3 does not serve any public interest because customers should be free to choose from whom they acquire building services and products. 41 Furthermore, the first respondent submits that the restraint in cl 3.9 is not reasonable as between the parties, especially as to time. In this connection the restraint is one that purports to operate on the first respondent almost nine years after it was effectively imposed. The first respondent submits that the provisions of the Restraints of Trade Act 1976 (NSW) will not assist the applicant in this regard. Section 4(1) of that Act provides: A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. 42 In Orton v Melman [1981] 1 NSWLR 583 McLelland J (as he then was) said at 587F: In my opinion where the court is to determine, in relation to a restraint to which s 4(1) applies whether (having regard to public policy) the restraint is enforceable in respect of an alleged breach (or threatened breach), it is proper first to determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then by force of s 4(1) the restraint is to that extent valid, subject always of course to any order which may be made under s 4(3). See also IRAF Pty Ltd v Graham [1982] 1 NSWLR 419; Fleming Bros (Monaro Agencies) Pty Ltd v Smith (1983) ATPR ¶ 40-389; Knogo Corporation v Halligan (1984) ATPR ¶ 40-460. 43 The first respondent submits that the restraint in cl 3.9, as it now operates on it, is plainly contrary to public policy. 44 I should add that s 4(3) of that Act allows a person subject to a restraint to apply to the Supreme Court of New South Wales for an order that the restraint, as regards its application to that person, is invalid or valid to such extent as the Court thinks fit. In order to obtain such an order the person subject to the restraint must establish manifest failure on the part of the person creating or joining in creating the restraint to attempt to make it reasonable. No such application has been made by the first respondent.

Prima facie case - consideration 45 In my view the applicant has established a prima facie case that the first respondent's admitted conduct breaches cl 3.9 of the TB & L Agreement, despite the submissions advanced by the first respondent to the contrary. 46 In so finding I wish to record that the proper construction of the clause remains a live issue. My finding is no more than a recognition that there is a sufficient probability, for the purposes of granting interlocutory relief, that, at final hearing, the applicant will establish that the first respondent's conduct falls within the scope of the clause, properly construed. Even so, the applicant's case will need to confront the challenge to the validity of the restraint sought to be imposed by that clause. In this connection the first respondent has raised issues of substance that, in light of all the evidence to be adduced, may well lead to a finding that the clause is void and thus ineffective to impose any restraint upon the first respondent's business activities at the present time. I am not persuaded, however, that I should find at the present time that the challenge to the validity of the clause is so persuasive that it would deny a finding, on proper grounds, that no prima facie case has been established. Nevertheless, the strength of the applicant's case, seen in the context of the first respondent's challenge, is a matter which I should, and will, take into account when considering the balance of convenience. 47 I should add that the applicant also sought to call in aid the provisions of the franchise agreement between the first respondent and the second respondent, in particular the notion of exclusivity of territory. I am unable to see how those considerations support the present claim for interlocutory relief. The applicant is not a party to the franchise agreement between the first and second respondents, and the second respondent is not a party to the TB & L Agreement.

Balance of convenience - submissions 48 Although the first respondent's alleged breaches have been ongoing for some years - a factor that would strongly tell against the granting of interlocutory relief at the present time - the applicant points to the following matters which, it submits, establishes that the balance of convenience falls in its favour. 49 First, it submits that the applicant was entitled to, and did, look to the second respondent, as franchisor, to require the first respondent to comply with its franchise obligations. It was not until earlier this year that it was perfectly clear that the second respondent refused to do so. 50 Secondly, the applicant submits that, for a significant period of time, and certainly between 2009 and 2011, the second respondent represented that it would take action against the first respondent. In this connection I refer, for example, to the correspondence in June 2010 to which I have referred in [18] above. 51 Thirdly, the applicant submits that in 2010 and 2011 the applicant set out the procedures which it proposed to follow to resolve the dispute, including by way of mediation which, in the end result, was not a procedure which, on its legal advice, the second respondent was prepared to persevere with. The applicant submits that it was required, as a franchisee, to comply with the applicant's directives and also to look to these directives as a sensible way to resolve the dispute without recourse to litigation. 52 Fourthly, the applicant submits that, on the present evidence, the first respondent's alleged breaches do not appear to reflect huge monetary sums, being less than $50,000 per job and often much less. The implication of this submission is that the profit involved in relation to these breaches, if recovered as damages, would not be sufficient to justify the costs of legal proceedings. However, the applicant asks rhetorically: at what point does it say "enough is enough"? It submits that, having exhausted all non-litigious approaches, including alternative dispute resolution, the time for legal action has now arrived. 53 Fifthly, the applicant submits that it should not be penalised for permitting "without prejudice communications" to be pursued in March 2012. 54 Sixthly, the applicant submits that the first respondent itself has recognised that the balance of convenience favours the making of interlocutory orders of the kind now sought when it gave an undertaking, in somewhat similar terms to the relief now sought, on the basis that those undertakings would continue to be proffered on a consent basis in the event that proceedings were commenced. 55 Seventhly, the applicant submits that damages will be difficult to prove because the first respondent's conduct "tends to be secretive and not well documented". Moreover, if the first respondent's conduct is not restrained, the applicant will have to embark upon the exercise of divining the profit in respect of each breach. It submits that this is a cost to which it should not be put, particularly where the profit on each job may not warrant such expense. 56 Finally, the applicant submits that damages is unlikely to be an adequate remedy as the first respondent's conduct is adversely affecting the value of the applicant's franchise to an extent that may be impossible to quantify from the present time up to the time of trial. 57 In relation to that part of the relief that relates to the preservation of records, the applicant submits that there is some evidence that the first respondent has not accurately entered work into its computer system in an attempt to conceal the extent of its conduct. It submits that the first respondent may seek to conceal its conduct by destroying records. The undertakings given by the first respondent before commencement of the present proceeding included an undertaking not to destroy records. The first respondent has clearly indicated that it does not regard itself as bound by that undertaking. The applicant submits that this raises a real concern that the first respondent may regard itself free to destroy records. 58 For its part, the first respondent submits that, in all the circumstances, the present case is plainly not one of any urgency. In this connection it points to the considerable delay on the part of the applicant in commencing the principal proceeding. It also submits that if it has breached any valid contractual obligation to the applicant, the present evidence shows that these "breaches" have been, on average, four jobs per annum. Given the unchallenged evidence that its own net profit after allowances for overheads before tax runs at 8-10% of sales value, and assuming that the applicant's own profit margin is of the same order (a matter on which there is no evidence), the amount of damage suffered by the applicant is very small. For example, adopting a profit margin of 10%, the profit derived by the first respondent for this work in 2010 was approximately $6,755 and, in 2011, was $7,892. 59 The first respondent also submits that the restraint sought to be imposed on its conduct is onerous and that, in light of what it submits to be the lack of strength of the applicant's case, is likely to result in significant damage to itself. It submits that, in effect, it will be required to turn away customers who have sought to approach it, within the Illawarra area, based on its reputation, to perform the work and supply the goods that they require. The first respondent also raises the prospect that the restraint sought by the applicant would prohibit it from carrying out rectification work in respect of jobs already undertaken by it in the South Coast area. 60 As to the applicant's submission that the value of its franchise with the second respondent is being adversely affected, the first respondent points to the fact that the applicant has not adduced any evidence that it is negotiating with any prospective buyer of that franchise or that, indeed, there is any person who is interested in purchasing the applicant's franchise. Moreover, it submits that there is no evidence that the applicant would consent to any such sale. In this connection, the applicant's present franchise expires in March 2014. 61 The first respondent also points to the fact that the applicant has adduced no evidence of any reduced revenues whatsoever, beyond what the first respondent's own evidence reveals about the jobs it has performed in the South Coast area. The first respondent submits, with some cogency, that there is no evidence to suggest that, in relation to these jobs, the customers involved wished to deal with anyone other than the first respondent, let alone the applicant. 62 Finally, the first respondent submits that damages should be relatively easy to calculate given the apparently small number of jobs involved. 63 As to the preservation of records, the first respondent submits that there is no evidence that its own records have not been properly kept. Nevertheless, during the course of oral argument, and in response to my own enquiry, the first respondent stated its preparedness to give an undertaking: … to keep and maintain all business or accounting records in relation to sales/installations of Spanline Products since June 2006 until the final hearing and determination of [the present proceeding]. The applicant raised no issue about the terms in which this proffered undertaking was expressed. 64 The second respondent has made submissions on the question of the balance of convenience. It adopts the submissions made by the first respondent, particularly with respect to the onerous nature of the restraint sought to be imposed on the first respondent with respect to the work that it could carry out. The second respondent submits that the imposition of such a restraint has significant potential to subject it to a loss of revenue stemming from sales that would otherwise be made by the first respondent. In this connection, it submits that it simply does not follow that every job that the first respondent is restrained from undertaking will be a job that correspondingly would be undertaken by the applicant to provide a revenue stream to the second respondent in any event.

Balance of convenience - consideration 65 I am of the view that the undertaking proffered by the first respondent should be accepted in lieu of the preservation order sought by the applicant. However, in light of that undertaking, I am not persuaded that the balance of convenience favours the granting of the other interlocutory relief that the applicant seeks. 66 Although the applicant can point with some justification to the desirability of seeking to resolve its legal differences with the first respondent without recourse to litigation, including through the intervention of the second respondent as the franchisor to both the applicant and the first respondent, the fact remains that the first respondent's impugned conduct has been ongoing for a number of years. While the applicant has not been prepared to tolerate that conduct, it has not taken steps to vindicate its presently asserted contractual rights by court action until now. The delay has been significant. The rights now asserted as the basis for seeking interlocutory relief are rights of the applicant alone. They are said to arise under the TB & L Agreement. They are not rights that require for their enforcement the intervention of the second respondent or, indeed, its co-operation or assistance. In my view it is no real answer to this delay to say that the applicant unsuccessfully sought to prevail upon the second respondent to exercise whatever rights the second respondent had against the first respondent under its own franchise agreement. 67 Also, the fact that the commencement of proceedings at some earlier point in time may not have been justified on costs grounds does not seem to me to assist the applicant. Given the evidence before me, I doubt that there has been any change in the pattern of the first respondent's conduct that has materially altered that position. I have recorded the sums apparently involved for the 2010 and 2011 calendar years. The commencement of the present proceeding seems to have been born out of frustration; the applicant now feels that its concerns about the first respondent's conduct cannot be addressed except by recourse to the Court. 68 The present evidence plainly shows that damage to the applicant, insofar as it is referable to the loss of profit on sales, is relatively small and relatively easily quantifiable, if the first respondent keeps proper records. The first respondent's proffered undertaking preserves those records. I would add, in that regard, that the evidence before me does not justify any finding that the first respondent has falsified any of its records. Whilst the first respondent's earlier statement that it no longer considered itself bound by the inter partes undertaking given on 16 May 2012 may have given rise to some concern that it might not feel obliged to keep records, that concern has now been alleviated. 69 If the applicant ultimately succeeds on the case brought with respect to the alleged breach of cl 3.9 of the TB & L Agreement, I am satisfied that damages will be an adequate remedy in relation to any further such breaches occurring between the present time and the hearing for final relief. I make this finding in relation to both the loss of profit on sales and also any diminution in value of the goodwill of the applicant's business. 70 Finally, in coming to my conclusion on the balance of convenience I have also taken into account the relative strengths of the applicant's and first respondent's respective cases concerning the alleged breaches of cl 3.9 of the TB & L Agreement. It is sufficient for me to observe that it is a matter of considerable debate whether cl 3.9 has been breached or is a valid and enforceable contractual restraint.

Disposition 71 On the basis that the applicant has proffered the usual undertaking as to damages, the first respondent's proffered undertaking should be accepted. The balance of the applicant's claim for interlocutory relief should be refused. 72 I will hear the parties on the question of costs, unless that question can also be agreed between them. 73 In the absence of agreement between the parties on the form of orders for costs, the parties are to provide drafts of the orders they seek supported by short written submissions which are not to exceed two pages in length. The drafts and supporting submissions are to be provided within seven days. I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

Trade Practices Act 1974(Cth)

Trade Practices (Industry Codes - Franchising) Regulations 1998(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (1)