SPAR Licensing Pty Ltd v MIS Qld Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1501 of 2011

JUDGE: PERRAM J DATE: 9 SEPTEMBER 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This case involves the 'cut-price' supermarket industry. The first respondent ('MIS') has, until very recently, operated a cut-price supermarket under the name 'SPAR' at Shop 1, 41 Southsea Terrace on Macleay Island which is in Moreton Bay near Brisbane. It did so as a franchisee of the first applicant ('SPAR Licensing') under an extensive written franchise agreement. Because it will presently be material it should be noted that, under the agreement, MIS was obliged to acquire - and did acquire - its wholesale groceries from the second applicant ('SPAR Australia'). On 19 August 2011 MIS wrote to SPAR Australia purporting to terminate the franchise agreement ('it is with regret that we wish to advise that we are resigning as a member of SPAR and wish to withdraw from the Franchise Agreement as of todays date'). Negotiations ensued but they have proven fruitless. It now appears likely that unless restrained by this Court, MIS will cease being a SPAR franchisee and take up instead with Metcash Trading Limited ('Metcash') to operate one of its IGA stores under what appears to be an as-yet-unexecuted franchise arrangement. SPAR Licensing and SPAR Australia (together, the 'SPAR parties') have commenced proceedings in this Court seeking, in effect, to prevent MIS going over to Metcash. Those proceedings were commenced on Monday 5 September 2011 and, on the same day, as Duty Judge, I granted the SPAR parties leave to bring on an urgent application returnable on Thursday 8 September 2011. The claim for interlocutory relief was then fully argued on that day. 2 Mr Wylie, who, with Mr Kirby of counsel, appeared for the SPAR parties, put their entitlement to injunctive relief on three bases. First, they were entitled to orders restraining MIS from terminating the franchise agreement; secondly, they were entitled to orders preventing MIS from acquiring its groceries other than from SPAR Australia; and, thirdly, they were entitled to injunctive relief on the basis of certain competition law claims. Those claims are of some complexity and I will postpone their discussion until necessary. 3 It is useful in the first instance to deal with the claims for injunction based upon the franchise agreement. Although there was some uncertainty as to the precise date upon which the franchise agreement was executed there was no debate as to its terms. Clause 2.2 of the agreement bound MIS, inter alia, to 'conduct the Business' which was defined to mean 'the retail grocery outlet of the Franchisee operating under the Trading Name and conducted in accordance with the SPAR Licensing System from the Premises' (the trading name was 'SPAR Macleay Island'; the premises were 'Shop 1, 41 Southsea Terrace'). The term of the agreement was five years. Termination was dealt with in clause 19. It created rights in SPAR Licensing to terminate the franchise agreement but it did not confer any rights of termination on MIS. Consequently MIS had no entitlement to terminate the franchise agreement unless SPAR Licensing had repudiated or breached one of its conditions. It was not suggested that this had occurred. There was evidence before me which tended to suggest an oral arrangement between one of the directors of MIS and SPAR Licensing that would have permitted termination on notice; however, even accepting that evidence it would not have provided a basis for declining relief to SPAR Licensing. Its claim for relief is based on the proposition that MIS had no right to terminate which, given that is what the contract says, is plainly arguable. 4 I accept therefore at the requisite standard that there is an issue worth trying as to whether MIS was entitled to terminate as it purported to do on 19 August 2011. MIS submitted that nevertheless no injunction should issue for the following reasons: (a) the evidence as to irreparable harm was inadequate; (b) there was no basis to restrain MIS' directors, even if there were a basis for restraining MIS itself; (c) the Court would not, in effect, order specific performance of the franchise agreement; (d) properly construed the franchise agreement did not bind MIS to purchase its groceries from SPAR Australia once it had ceased operating a SPAR franchise store; and (e) if the injunction were granted considerable harm would be caused to MIS because it had already taken substantial steps towards implementing the IGA store. 5 I deal with each in turn. 6 As to (a), as Yates J recently pointed out in Instyle Contract Textiles Pty Ltd v Good Environment Choice Services Pty Ltd (No.2) [2010] FCA 38 at [57] proof of irreparable injury does not require proof of an injury which cannot be repaired but only of an injury 'for which damages would not be adequate compensation'. Mr Stephens, the chief financial officer of SPAR Australia, gave evidence about the various difficulties which would arise if the franchise agreement were terminated. At the moment, there is only one other cut-price supermarket on Macleay Island and this is a Foodworks store. Metcash is the wholesale supplier to Foodworks. The nearest stores off Macleay Island are on Russell Island and on the mainland at Redland Bay. Both are IGA stores and Metcash is the wholesale supplier to both. It follows, as Mr Stephens pointed out, that MIS' store is the only cut-price supermarket in the area which is not supplied on a wholesale basis by Metcash. Mr Costanzo, who is the Queensland Manager for SPAR Australia, gave evidence that until December last year he had been employed by IGA Distribution which is the largest division of Metcash. He described Metcash's approach to SPAR by pointing out that Metcash provided wholesale groceries to 98% of the cut-price supermarket market and SPAR Australia only 2% (I interpolate that Metcash provides wholesale groceries to other independent stores and not only to its own franchisees). Mr Costanzo gave evidence of a conversation he had with the Chief Executive Officer of Metcash in July 2010 in which the latter said to him 'I want you to do whatever you need to do to go out there and kill SPAR'. Mr Costanzo then detailed a number of aggressive tactics Metcash had been contemplating to persuade franchisees of SPAR stores to switch to IGA such as: provision of up to $10,000 worth of free stock; compensating the franchisee for terminating their existing franchise agreement; and increased trading terms from 7 to 17 days. 7 Mr Stephens' evidence of the difficulties the closure of the Macleay Island SPAR store would present needs to be seen in that light, that is, in the context of what appears - if only on interlocutory basis - to be aggressive behaviour from Metcash designed to drive SPAR Australia from the market. I emphasise that Metcash has not been heard and the evidence in the proceeding before me is only of an interlocutory nature; these reasons are not to be taken as involving any final findings of that kind (particularly by any media outlet which might choose to report these reasons selectively). Viewed, however, in that context Mr Stephens' concerns were that the loss of the Macleay Island franchise might make it considerably more difficult to find and retain SPAR franchisees. This seems to me quite arguable. If Metcash is, as presently appears, attempting to drive SPAR Australia out of the market, then the switching sides of what is the fourth largest SPAR store to IGA is likely to be a significant event from a commercial perspective. I do not see how that kind of harm could be compensated through money; it is the diminution of entire brand with all that that entails. 8 I accept (b). I do not see the legal basis in contract law for restraining the directors of MIS in the manner suggested nor the utility of doing so if MIS is itself restrained. No argument based on inducing a breach of contract was advanced. 9 I do not accept (c). The observance by MIS of its contractual obligations is unlikely in the short term to require much in the way of superintendence. The contract requires MIS to keep a store open and to buy groceries from SPAR Australia. That is quite different, for example, to many contracts of employment where some degree of supervision might be thought necessary. In any event, as Hamilton J explained in Liristis Holdings Pty Ltd v Q-Corp Marine Pty Ltd [2001] NSWSC 418 at [5]-[6], there is no longer any such general prohibition; the true principle requires a close attendance to the particular circumstances of each case and to the degree of supervision which would be necessary. I do not think that this is a case where that is a problem. 10 I do not accept (d). Clause 6.1(b)(ii) of the franchise agreement obliges MIS 'to purchase all goods it may require in the Business from [SPAR Australia] provided that [SPAR Australia] supplies those goods and services in the ordinary course of [SPAR Australia's] business'. MIS submitted that the obligation to purchase the goods from SPAR Australia only applied when it was conducting the 'Business' which was defined - as set out above - to mean, in effect, conducting a SPAR store. Since MIS was no longer conducting such a store the clause did not require it to purchase its goods from SPAR Australia. That reading of clause 6.1(b)(ii) allows MIS to evade the clause's operation by breaching its obligation under the contract to conduct the franchise. It is well established that a contract will not be construed as permitting a party to benefit from its own wrongdoing or by its conduct to deprive the opposing party of the benefit of the contract. As Lord Blackburn said in Mackay v Dick (1881) 6 App Cas 251 at 263: ... as a general rule ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that it is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. 11 It is therefore a general rule applicable to every contract 'that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract': Butt v M'Donald (1896) 7 QLJ 68 at 71 per Griffith CJ (Cooper and Power JJ concurring); see also Secure Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 per Mason J. 12 I therefore reject the proposition that clause 6.1(b)(ii) permits MIS to escape its obligation to purchase its goods from SPAR Australia simply by shutting up shop under the SPAR banner in breach of its obligation to conduct the franchise. 13 I do not accept (e). One of the directors of MIS, Mr Sichter, gave evidence of the steps which MIS has taken since it purported to terminate the agreement on 19 August 2011. Many of these were of little consequence - for example, receiving contractual documents from Metcash for execution. But there were some which would constitute a prejudicial change of position such as ordering and paying for a shipment of grocery items from Metcash. However, these are all self-inflicted. Nothing the SPAR parties have done has in anyway fostered the notion that MIS could simply walk away from the contract. In that regard, I would note for completeness that during the period between 19 August 2011 (when the purported termination occurred) and 5 September 2011 (when these proceedings were commenced) I am satisfied that the SPAR parties were endeavouring to negotiate with MIS to achieve a consensual resolution. I do not find any delay in the bringing of the application. I do not find relevant prejudice to MIS. 14 Accordingly, I accept that MIS should be restrained from walking away from the franchise agreement and more particularly from acquiring its groceries from anyone but SPAR Australia. The order I will make will be that MIS be restrained from (a) acting on its letter of 19 August 2011 and (b) from purchasing goods from any person apart from SPAR Australia except in the circumstances permitted by clause 6.1(b)(ii) of the franchise agreement. 15 I turn then to the competition case. The first limb was based on s 45(2)(a)(i) of the Competition and Consumer Act 2010 (Cth) ('the Act') which operates so that MIS 'shall not: (a) make a contract or arrangement, or arrive at an understanding if: (i) the proposed contract, arrangement or understanding contains an exclusionary provision'. What is an exclusionary provision? Without lingering at length on the definition of that term in s 4D such a provision will be present if the provision has the purpose of preventing, restricting or limiting the supply of goods and services to particular persons and the provision is between two persons who are in competition with each other. How do the SPAR parties make out their case that there was such an arrangement? The SPAR parties point to something Mr Sichter said to Mr Costanzo on 22 August 2011 which Mr Sichter does not deny: 'We approached IGA because we want to be able to protect our store from IGA. IGA has given us a guarantee that if we converted our SPAR store to an IGA-branded [store] then they would not develop the existing Foodworks site. You would know it would really hurt our business if they put a bigger sized new IGA store on the island, we need to protect ourselves and do whatever we need to stop them building it, it is why we need to move to them.' 16 The argument, therefore, was that MIS and Metcash were in competition with each other and that an understanding between them had been reached under which Metcash would restrict the provision of its goods and services to Macleay Island by not opening the larger IGA store at the Foodworks site. How were they in competition with each? The answer, Mr Wylie submitted, was that MIS was competing with the IGA stores on nearby Russell Island and Redland Bay. It was also because Metcash could take equity positions in independent stores like Foodworks (although it did not appear that it had done so). How were Metcash's goods and services restricted? By not opening the larger IGA on the Foodworks site. I accept that this is a triable argument. There may ultimately be objections to it. It may be that MIS is not competing with IGA but rather with IGA franchisees, so that the definition in s 4D does not apply. On the other hand, it may also be that - and this is economically complex - MIS, at the retail level, is in competition with Metcash at the wholesale level. For the purposes of an interlocutory injunction, however, I do not think that considerations of that kind ought to stand in the way. Nor do I think that the apparently modest size of the restriction in question should prevent an injunction being issued. Mr Wylie submitted, and I accept for present purposes, that the modest size of a restriction does not operate to prevent s 45(2) applying: cf. Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53; Australian Competition and Consumer Commission v Woolworths Ltd [2006] FCA 826. 17 The second limb of the argument rested on s 45(2)(a)(ii). That provision relevantly prevents a corporation from entering into an understanding whose purpose or likely effect is the substantial lessening of competition. The same understanding was said to be involved; that is to say, the understanding between MIS and Metcash that if MIS switched brands to IGA then Metcash would not open the larger Foodworks IGA. If that understanding were given effect to then the only entity providing wholesale grocery services to the Macleay Island, Russell Island or Redland Bay area would be Metcash for its sole competitor in that wholesale market, SPAR Australia, would have been driven from the market place. The respondents submitted that the market identified by SPAR Australia did not exist; rather the true market was a national wholesale market. It was true that SPAR Australia and Metcash competed in that market, but the closure of one store on Macleay Island could have no material impact at that level. 18 I do not think that that kind of dispute can be resolved at an interlocutory hearing such as the present. That does not mean that any market alleged will necessarily be embraced on an interlocutory hearing; there may be some - the present is not one - where the market is obviously absurd. In this case, however, I can see no obvious objection to there being a market for the supply of wholesale groceries in the surrounds of Macleay Island. It is a geographically confined area more or less marked out by Moreton Bay. It is in a class of well-known goods at an identified level in the market. For the purposes of the present application I accept, therefore, that there is a serious question to be tried as to whether such a market exists. 19 There was some evidence that there were other suppliers in that market. For example, it seems likely that Woolworths' online shopping is available on Macleay Island. I do not, however, think that this is relevant to either limb of the SPAR parties' argument. That Woolworths sells groceries on-line does not impact on whether the understanding between Metcash and MIS not to open the larger IGA store at the Foodworks site had the purpose of restricting the supply of Metcash's goods and services, so it has little relevance to the claim under s 45(2)(a)(i). Nor do I think that it can have too much impact on the claim under s 45(2)(a)(ii) for that argument is concerned with the wholesale market and Woolworths' activities on-line appear arguably to be at the retail level. Even if they can be characterised as operating in some way at the wholesale level I do not think that reduces the arguable nature of the SPAR parties' claim. I am not prepared to say that the potential lessening of competition in the Moreton Bay wholesale market is removed merely because Woolworths may be operating in it as well. 20 It follows that I accept that the SPAR parties are entitled to the orders sought under s 45(2). Unlike the contract claim, the claim under the Act extends to making orders against those knowingly involved in its contravention. The evidence before me satisfies me that the three directors of MIS are knowingly involved in the arrangement with Metcash recounted by Mr Sichter to Mr Costanzo. Accordingly, I am prepared to make orders against them as well. 21 The question then becomes what form of order should be made. Mr Wylie provided me with a form of order which followed the language of s 45(2) but I do not think it would be appropriate, in effect, to make an order in the same terms as the Act. What SPAR Australia really wants, on this limb of the case, is an order preserving the status quo in the wholesale market. On the contract limb of the case I have concluded that MIS should be restrained from acting on its letter of termination and from buying its goods from anyone apart from SPAR Australia. In terms that does not require MIS to acquire its goods from SPAR Australia although it may have that practical effect. The claim under s 45(2) does, however, justify an order that MIS acquire its goods from SPAR Australia which goes just a little further than the contract claim. Such an order will maintain the status quo ante in the wholesale market. Unlike the contract claim it will also be made against the three directors for the reasons I have already given. 22 Prior to the commencement of the proceedings the SPAR parties wrote to MIS and made various overtures to them as to how the debate as a whole might be settled. In the event that those overtures were not welcome, it suggested that MIS give an undertaking to continue operating as a SPAR store and that the SPAR parties would, on an urgent basis, then commence Federal Court proceedings on an expedited basis in order to resolve the issues which existed between them. Obviously had that course been taken there would have been no necessity for the present interlocutory application to have been heard. 23 Ordinarily that might rather hang in the balance but in this case the claim brought by the SPAR parties against MIS in relation to its lack of entitlement to terminate the agreement seems to me to be one which was essentially overwhelming. The franchise agreement contained no contractual entitlement whatsoever in MIS to terminate the agreement and it seems, therefore, almost inevitable that the application was going to succeed. In those circumstances, having regard to the strength of that claim, it was unreasonable of the respondents not to accept that offer. That provides a basis, not for the making of an indemnity costs order, but for a departure from the ordinary order which would be made in these circumstances, that is, costs be costs in the cause and instead the making of an actual costs order that the respondents pay the applicants' costs of and incidental to the application for the interlocutory injunction. 24 In those circumstances, I make the following orders: Upon SPAR Australia Ltd and SPAR Licensing Ltd giving the usual undertaking as to damages and that until the final determination of these proceedings at first instance I order that: 1. MIS QLD Pty Ltd be restrained from acting on its letter of 19 August 2011. 2. MIS QLD Pty Ltd be restrained from purchasing goods for the conduct of a retail supermarket from any person apart from SPAR Australia Ltd except in the circumstances permitted by clause 6.1(b)(ii) of the Franchise Agreement between MIS QLD Pty Ltd and SPAR Licensing Pty Ltd. 3. MIS QLD Pty Ltd acquire the goods needed for the conduct of its supermarket from SPAR Australia Ltd except to the extent that SPAR Australia Ltd does not supply those goods in the ordinary course of its business. 4. Christopher Martin Sichter, Sharon Lee Ward and Anthony Paul Aplin be restrained from taking any step to facilitate to the conversion of the supermarket conducted by MIS QLD Pty Ltd to the IGA brand. 5. The respondents pay the applicants' costs of, and incidental to, the making of the interlocutory application. 6. Stand the matter over for further directions before the Docket Judge at 9.30am on Friday 16 September 2011. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.