HER HONOUR: This is an application in the Duty List for the relief claimed in prayers 4 and 5 of a summons filed on 4 June 2021 by the plaintiff, Spence's Coaches Western Pty Ltd (Spence's Coaches), against the defendant, Charles John McMahon.
On the application I have read a number of affidavits filed by the sole director and one of the shareholders of Spence's Coaches, Andrew Spencer, and by Mr McMahon and his wife Jennifer, who are the directors and shareholders of McRowe Pty Ltd (McRowe). The plaintiff in the present application is seeking an interlocutory injunction against the defendant to enforce a restraint of trade provided in the context of the sale of a business in Cobar.
[2]
Background
By way of background, the plaintiff has operated bus services around Dubbo since 2006. The defendant through his company (McRowe) operated a business in Cobar and owned a depot in Cobar from which that bus business operated. By contract dated 1 December 2020, the defendant entered into a contract to sell the business operated in Cobar (Ex A at 11-20). The type of business, as described on the cover sheet for the sale of business, was "Bus run - Contract Number: A0131". That contract involved certain bus routes operated by the vendor being from Nymagee to Cobar, Cobar Town Number 1 (NW) and Cobar Town Number 2 (NE/SW).
The particular bus run contract that was the subject of the contract for sale of business dated 9 March 2016 included (in recital (a)) reference to a passenger service contract entered into between an accredited operator of a public passenger service and Transport for NSW. I raise this because it is referred to in submissions the context of what amounts to a similar business as the business the subject of the contract for sale of business (and the restraint here being sought to be enforced).
Completion of the contract pursuant to special condition 36.2 was conditional upon either Transport for New South Wales (TfNSW) or the relevant authority, among other things, granting to the purchaser a new contract in respect of the "bus runs" on terms satisfactory to the purchaser.
Pursuant to the special conditions of the contract for sale of business, completion of the contract was to occur on the later of 1 December 2020 or within seven days of the date that TfNSW or the relevant authority provided approval pursuant to special condition 36.2.
Pursuant to clause 46.1 of the special conditions to the contract for the sale of business headed "Restraint", there was provision for the purchaser to procure the execution of a document annexed to the contract entitled "Deed - Restriction on Competition" (the Restraint Deed) (see Ex A at 101-102). Special condition 46.1 provided that on completion, the vendor, purchaser and guarantor, Mr Spencer, were to execute the Restraint Deed and deliver the same to each other.
Pursuant to the standard form conditions of the sale of business contract, cll 19 and 20 dealt with completion date and completion. Reference is made to cl 20 and in particular cl 20.5 in the context of a submission to which I will come to in due course that completion required a number of steps to take place, the final one of which, as it turned out, was payment of the purchase price.
The Restraint Deed, which is the deed pursuant to which the application for interlocutory relief is now brought, was entered into on 1 December 2020. Recital (a) referred to the agreement for sale of the business. Recital (b) provided that the vendor had agreed to provide the purchaser with vendor finance to assist the purchaser to complete the agreement.
The Restraint Deed contained a covenant in cl 3 which provides as follows:
3. Subject to sub-clause (d) and clause 4 hereof, the Vendor hereby covenants in favour of the Purchaser as follows:-
a. The Vendor will not, without the prior written consent of the Purchaser be involved in a business which is the same type or similar to the Business, within a radius of one hundred (100) kilometres from the Premises during the period of two (2) years after the date of completion of the Agreement.
b. The Vendor will not, during the said period of two (2) years engage in any conduct derogating from the Purchaser's right to obtain the full benefit of the goodwill of the Business, unless the Vendor first obtains the written consent of the Purchaser.
c. The Vendor acknowledges that the period of two (2) years and the radius of one hundred (100) kilometres from the Premises are no greater than are reasonably required to protect the goodwill sold to the Purchaser.
d. The Purchaser acknowledges and agrees that the restraint provisions set out in this Deed shall not restrain/prevent the Vendor from continuing to operate the bus run under his existing contract with the Endeavour Mine located in Cobar NSW (or any renewal or extension of that contract or under any new bus run contract in respect of the Endeavour Mine).
Clause 1 effectively set out a definition of what the words "be involved" meant, namely, being involved as a sole trader, partner, joint venturer, manager, agent, appointor, assistant, employee, clerk, director, majority shareholder or person with the capacity to exercise substantial control of a corporation. Pursuant to cl 4 of the Restraint Deed, the parties agreed and acknowledged that the vendor's covenants in cl 3 terminated and expired and would not apply if the purchaser breached the terms of the vendor finance.
The vendor finance agreement is an agreement headed "Vendor Finance Loan and Security Agreement" (the Vendor Finance Agreement) and dated 19 January 2021 (Ex A at 123-141). That included, amongst other terms, that the purpose of the loan was to assist with the company's purchase of the business from Mr McMahon and provided that the date of the loan was the date that the sale contract was completed.
Clause 3(e) of the Vendor Finance Agreement contains a definition of "event of default" including (ii) default by the company in the due and punctual payment to McMahon of all moneys as they fall due for payment.
Clause 5 of the Vendor Finance Agreement dealt with repayment of principal and interest. The payment of principal and interest was to commence from one month after the sale contract was completed and continuing on the corresponding day in each month until all moneys secured were repaid.
Clause 23 of the Vendor Finance Agreement headed "Waiver of Restraint" provided that:
23. The Company agrees with McMahon that where an Event of Default has occurred, then any restraint of trade provisions affecting McMahon as contained in the Sale Contract or any of its Annexures or in any Deed of Restraint or Deed - Restriction on Competition are terminated, but only to the extent that such provisions limit McMahon's right to operate a business (it is expressly acknowledge[d] that any restriction on the Company continues). For the avoidance of doubt, nothing in the Sale Contract prevents McMahon (once an Event of Default has occurred) from exercising any of its rights relating to the Collateral in the manner as it sees fit.
Relevantly, certain steps took place from 1 December 2020 in relation to the sale of the business the subject of the contract for sale of business. A deed of novation was entered into on that date between TfNSW, a corporation constituted under the Transport Administration Act 1988 (NSW), and the outgoing and incoming operators as defined under that deed. Each party agreed with the other that with effect from the effective date the incoming operator was taken to be a party to the relevant bus service contract in place of the outgoing operator.
The settlement sheet in relation to the payment of the purchase price records that settlement occurred as at 19 January 2021. The relevance of this is that, as I will explain in due course, it is the position of the defendant, that the Vendor Finance Agreement has been breached with the effect that the restraint is terminated. The breach in question relates to the alleged failure to pay the monthly payment of principal and interest punctually on the date provided for under the contract and, in one instance, a shortfall in the amount paid for the monthly instalments, that shortfall being in the amount of 85 cents. (In that regard, I was taken to correspondence in the evidence in which the purchaser's attention was drawn to the 85 cent shortfall and it appears that that shortfall was made up by an additional amount paid on the 6 April 2021 payment and that there have been subsequent monthly payments in April and May 2021.)
The complaint the subject of the present application is the fact that McRowe entered into a twelve-month contract with Tritton Resources Pty Ltd for the provision of bus services between Cobar and the Tritton Copper Mine. That contract is annexed to Mr McMahon's affidavit sworn 22 June 2021 and appears to be dated 2 March 2021. I will come back in due course to certain terms of that contract.
The application today is brought for an injunction pursuant to s 66 of the Supreme Court Act 1970 (NSW) or, alternatively, under the Court's auxiliary jurisdiction. The injunction sought is in the terms of prayers 4 and 5 as follows:
4. An order that, until the earlier of 30 November 2022 or a further order of the court, the defendant both personally; by his employees, servants or agents; or by any company of which he is a manager, employee, director, or majority shareholder, is restrained from:
a. operating bus services between Cobar and the Tritton Mine; and
b. operating bus services within a radius of 100 kilometres of 49-53 Cornish Street, Cobar NSW, other than the bus service referred to in order 5.
5. The defendant, both personally; by his employees, servants or agents; or by any company of which he is a manager, employee, director, or majority shareholder, is not restrained by order 4 from continuing to operate bus services to and from the Endeavour Mine in Cobar.
It is accepted by both parties that on an application of this kind what is required to be established by the plaintiff is that there is a serious question to be tried or a sufficiently seriously arguable case for a final injunction to justify the grant of interlocutory relief. Regard must be had to the balance of convenience and whether damages would be an adequate remedy in all the circumstances.
[3]
Plaintiff's submissions
As to the issue of the serious question to be tried, the plaintiff points to the provisions of the Restraint Deed; argues that the defendant, Mr McMahon, is involved in the mine charter bus business operated by McRowe because he is either a manager, director, majority shareholder or person with the capacity to exercise substantial control of the company; and submits that it is clear that the operation of mine charter buses from Cobar is a business which is the same type or similar to the business the subject of the contract for sale of business and so falls within the restraint in cl 3(a) of the Restraint Deed.
It is submitted that, if that were not so, then the exclusion in cl 3(d) of the Restraint Deed (by which the defendant's right to continue to operate the Endeavour Mine bus run is preserved despite the restraint) would not be necessary. It is submitted that there are a number of factors that support the reasonableness and enforceability of the restraint, including that the Restraint Deed was drafted by the defendant's solicitor, that by cl 3(c) the defendant acknowledged that the restraint period and distance were no greater than reasonably required to protect the goodwill of the business, that the restraint excluded the Endeavour Mine contract and that the defendant was legally represented at the time.
The plaintiff notes that, in relation to a sale of business, a covenant against competition is reasonable if confined to the area within which competition from the vendor would, in all probability, protect the goodwill acquired by the purchaser of a business (referring to Butt v Long (1953) 88 CLR 476 at 486). It is submitted that the interest capable of protection that the restraint would here protect is the customer connection that Spence's Coaches has acquired and that the goodwill protected can include both the patronage of existing customers and new customers. It is submitted that the relevant customers are primarily TfNSW and the customers who seek charter bus services such as mining companies and schools.
It is submitted that: (i) the business sought to be restrained, which encompasses business of the same or similar type to the vendor's business, namely, bus services, is appropriately limited to the goodwill interest being protected; (ii) that the restrained area is appropriate, given that Cobar is a small town in a relatively remote rural part of New South Wales, and the charter bus business involves bus services to surrounding areas outside of town; and (iii) that the restrained period of two years is appropriate as school and charter contracts run for extended periods of time and so are not frequently renewed.
The plaintiff contends that the Restraint Deed is clear and unambiguous in its terms, that there is no ambiguity that would justify the use of extrinsic materials to contradict its plain meaning and that it has established that there is a serious question to be tried as to the breach of the restraint clause.
[4]
Defendant's submissions
The defendant argues that there is no serious question to be tried as disclosed by the summons or the evidence adduced on the present application. In part, in submissions what is put is that the business the subject of the restraint clause is to be construed as involving a business in relation to public passenger services, not bus run services generally, and, as I have indicated already, there is an issue raised by the defendant as to whether the restraint has effectively been terminated already by reason of an event of default under the Vendor Finance Agreement.
It is submitted that the defendant's primary position is that completion under the sale contract occurred on 1 December 2020 when the deed of novation was executed and from which time a bus service in respect of the novated bus run contract commenced to be provided. It is said that if completion did occur for the purposes of the relevant contracts on 1 December 2020 then payments were not made within the required time in accordance with the amortisation schedule and it follows that the restraint terminated on the failure to make those payments.
The defendant says that, even if completion occurred at some time within seven days of the novation on 1 December 2020, completion must have occurred by 8 December 2020, in which case the third payment was due on the 9th of every month and it was not paid by the 9th of March 2021 as required because there was a shortfall of some 85 cents. Reliance is placed on Pierson v Arcadia Stores Guyra Ltd (1935) 53 CLR 571 for the proposition that, if by reason of the covenantee's own failure to perform interdependent covenants made by him the covenant has ceased to bind the covenantor at law, then there is no obligation to enforce by injunction. It is said that this is the situation in the present case and that the restraint terminated by the terms of the vendor finance on the plaintiff's default under the Vendor Finance Agreement.
[5]
Determination - serious question to be tried
On the question as to whether or not there is a serious question to be tried, I am satisfied that there is. There is argument put on both sides as to the particular dates on which it should be taken that completion occurred which gives rise to the question as to whether or not there has been an event of default under the Vendor Finance Agreement (and I would add that there is a question as to the ambit of the default clause on a de minimis breach).
Moreover, it is foreshadowed by the plaintiff that at a final hearing of the matter, issues would be raised in relation to acquiescence, waiver or the like in respect of any default under the terms of the Vendor Finance Agreement. It is suggested that there may be arguments, for example, by way of estoppel which would preclude the defendant seeking to rely upon the alleged event of default as giving rise to a termination of the restraint. It is not appropriate here to comment on the merits one way or the other of the legal arguments in relation to those issues; suffice it to note that I accept that there is a serious question to be tried as to the alleged breach of the Restraint Deed.
[6]
Submissions - balance of convenience/adequacy of damages
The question then is whether damages would be an adequate remedy. It has been said that where a negative covenant is being sought to be enforced damages will rarely be considered an adequate alternative remedy; see Cerilian Pty Ltd v Fraser [2008] NSWSC 1016 and the authorities referred to by me in Willis Australia Group Services Pty Ltd v Griggs (2012) 222 IR 172; [2012] NSWSC 659 (Willis Australia) at [130].
[7]
Plaintiff's submissions
In the present case the plaintiff says that damages will be an inadequate remedy because, if the injunction is refused, the plaintiff will lose the benefit of much or all of the restraint period in which to develop customer connections and the plaintiff notes the usual problems that may arise in restraint of trade cases of proving loss, causation and assessment of damages (and reference is made to what I said in Willis Australia in that regard).
The plaintiff says that, although it is appropriate to take into account the impact of an injunction on a third party, in this case Aeris Tritton Resources, here the position is that the plaintiff is willing and able to fulfil the Cobar to Tritton bus contract for Aeris Tritton Resources and that if an injunction were to be granted restraining the defendant from operating the service the plaintiff could step in to ensure that there was no disruption to services for the client.
It is submitted that an injunction would not deprive the defendant or McRowe of a livelihood as it is a commercial, not employee, restraint and there is evidence that Mr McMahon was looking to move and purchase a farm and it is noted that the company has other businesses, including being a lessor. Further, it is submitted by the plaintiff that the defendant is the author of its own misfortune in that the defendant caused McRowe to quote for the Tritton contract in October 2020 when the business sale to the plaintiff was being finalised and, on the defendant's own case, failed, either personally or by his solicitor, to cause the Restraint Deed to be drafted to allow for the Tritton bus run.
There was also a submission as to the adequacy of the undertaking as to damages. In this regard, the plaintiff points to the latest financial statements or balance sheet and profit and loss statement (Exs B, C). The defendant argues that the adequacy of the undertaking as to damages should take into account the possibility that the defendant or his company might be liable for consequential damages to the mining company if the injunction were granted and the mining company suffered loss. In this regard, both parties referred to the provisions of the Aeris Tritton Resources contract and, in particular, cl 20 which deals with the exclusion of consequential loss, but which under cl 20(b) contains an indemnity in respect of liability subject to the exception in cl 20(a).
[8]
Defendant's submissions
On the question of the adequacy of damages issue, the defendant argues that the plaintiff will not suffer any particular injury on the basis that there is no evidence that the mining company with whom the defendant has contracted would use the plaintiff's services and points to a letter indicating that the mining company relies only on the defendant's business to provide the services.
It is submitted that, unlike a case where damages are difficult to ascertain, the loss in this case by the plaintiff, were it to choose to bring a case for damages (and I interpose to note that a claim for damages is included in the summons), must be assessed simply by reference to the contractual payments due by the mining company to the defendant and that this would not be difficult to ascertain and that, even if there were somehow some difficulty in ascertaining the damages, the difficulty should not preclude such an award.
The defendant in answer to some of those submissions argues that the plaintiff has been aware of the defendant's intention to provide bus services to Aeris Tritton Resources since February 2021 and that there has, therefore, been significant delay in seeking any relief which should weigh against the grant of an injunction. The plaintiff cavils with the suggestion that there has been delay, disputes the time at which the plaintiff became aware of the Tritton bus services being provided and, in any event, says that the delay is not such as should preclude the relief.
The parties take diametrically opposed positions as to the strength of the plaintiff's case. The plaintiff maintains that the plaintiff has a strong case. The defendant maintains that, even if the plaintiff's case were to pose a serious question to be tried, the strength of the case must be viewed as weak and points to a dispute as to the evidence in relation to pre-contractual and post-contractual discussions about the operation of a bus service to the mine and whether objection was raised thereto.
[9]
Determination - balance of convenience/adequacy of damages
As to the applicable principles in relation to the balance of convenience generally, I repeat what I set out at [133] of Willis Australia:
As to the balance of convenience, the test as set out in Meagher, Gummow and Lehane, Equity Doctrines and Remedies (2nd edn) at [2168], and applied in ACP Magazines Pty Ltd v Southdown Publications Pty Ltd [2002] NSWSC 715, by Einstein J at [48] is one requiring the court to balance the hardship that would be suffered by the respective parties if the injunction were or were not to be granted. It is noted that some of the factors relevant to the assessment of the balance of convenience are: inadequacy of damages; the right to a livelihood; delay; impact on third parties; whether the employee was warned and went into the position with "eyes wide open"; whether any hardship that would be visited on the defendant has come about because he or she is the author of his or her own misfortune; the strength of the case; and any undertakings that have been given. The court must weigh the risk of loss and damage to the plaintiffs' business if the injunctions are not granted against the hardship which may be occasioned to the defendant if they are (Mr Moses citing Hannamax Hi-Tech Pry Ltd v O'Donnell [2001] NSWSC 634 per Palmer J at [35] in this regard).
One must take into account issues as to what the position would be if an injunction is granted but is found later not to have been warranted, as opposed to the position if an injunction is not granted and it is determined at a final hearing that the restraint clause was valid and enforceable and there had been a breach thereof.
In this context, it is relevant that, in the course of submissions, instructions were obtained for the proffering by the defendant of an undertaking to the Court in lieu of any injunctive relief being granted. That undertaking is in the following terms:
(a) The defendant undertakes to resign by letter as a director of McRowe Pty Ltd as soon as practicable and instruct his solicitors to record that change when it occurs with the Australian Securities and Investments Commission, and not to consent to reappointment as a director before a final hearing in these proceedings; and
(b) The defendant undertakes not to be involved in McRowe Pty Ltd save for the limited purpose of mechanical repairs, servicing and maintenance on the vehicles owned by that company until a final hearing on an expedited basis or 30 November 2022 whichever date is the earlier.
It is predicated on the plaintiff giving the usual undertaking as to damages. That undertaking is to be viewed in the context of the fact that the restraint clause contained in the Restraint Deed is a restraint on Mr McMahon in his personal capacity and not a restraint on the company itself, albeit that the conduct that is restrained is conduct by Mr McMahon being involved in the sense of that term as defined in cl 1 of the Restraint Deed. (The plaintiff quite fairly accepts that the restraint clause binds only Mr McMahon in his capacity as vendor and not the company.)
The undertaking proffered to the Court is not accepted by the plaintiff as being acceptable, in part because of a perception that it would be difficult as a practical matter to assess performance or non-performance with the undertaking. That, however, is a practical difficulty which would arise even if there were to be an injunction. Moreover, insofar as the plaintiff seeks to have injunctive relief on the basis of the seriousness of the consequences of breach of such an injunction, it was quite fairly conceded that the consequences of breach of an undertaking to the Court are equally as serious as a breach of an undertaking.
In my opinion, the ambit of the injunctive relief claimed is too broad in the sense that it seeks to restrain, not only the defendant, but other parties such as the defendant's employees, servants or agents or any company of which he is a manager, employee, director or majority shareholder from operating bus services within the terms of that proposed order. Any injunction, in my opinion, could only properly restrain Mr McMahon, albeit it could restrain him from being involved in a number of capacities, such as from being a director or person with the ability to exercise substantial control of a corporation.
In my view, the undertaking to the Court that has been proffered by the defendant is adequate to protect the interests of the plaintiff in the period pending a final expedited hearing. Had the undertaking not been proffered, I would have been prepared to grant injunctive relief on the basis that there was a serious question to be tried and the balance of convenience warranted the making of such an injunction, albeit that I would have limited the injunction to the conduct of the defendant himself as opposed to the wider ambit of the relief that has been claimed. As it is, in my opinion, the undertaking to the Court adequately encompasses the matters that, if the plaintiff's construction of the Restraint Deed and of events is correct, would address that issue.
The carve-out is in the undertaking is for mechanical repairs, servicing and maintenance on vehicles owned by the company. I accept that, on one view, that would be services provided to the company, but it is not clear that it would be services provided as an employee of the company and it seems to me that the undertaking should be understood as encompassing conduct that would amount to the exercise of substantial control of a corporation, whereas servicing and maintenance of road vehicles would not fall within that.
In the circumstances, therefore, I will accept the undertaking to the Court that has been proffered by the defendant on the plaintiff giving the usual undertaking as to damages. In those circumstances I see no utility in the grant of injunctive relief and thus, I refuse the application for injunctive relief.
[10]
Orders
For those reasons, I make the following orders:
Note the Undertaking given by the defendant to the Court as follows:
1. On the plaintiff giving the usual undertaking as to damages:
1. The defendant undertakes to resign by letter as a director of McRowe Pty Ltd as soon as practicable and instruct his solicitors to record that change when it occurs with the Australian Securities and Investments Commission, and not to consent to reappointment as a director before a final hearing in these proceedings; and
2. The defendant undertakes not to be involved in McRowe Pty Ltd save for the limited purpose of mechanical repairs, servicing and maintenance on the vehicles owned by that company until a final hearing on an expedited basis or 30 November 2022 whichever date is the earlier.
1. Refuse the application for injunctive relief.
2. Plaintiff to file and serve its statement of claim by 16 July 2021
3. Defendant to file and serve its defence by 6 August 2021
4. Plaintiff to file and serve any reply and serve any further evidence by 20 August 2021
5. Defendant to serve any further evidence by 3 September 2021
6. Plaintiff to issue any evidence in reply by 10 September 2021
7. 8. Defendant has leave to issue a subpoena to Peacockes Solicitors such subpoena to be returnable in the subpoena list on Friday, 2 July 2021.
8. List the matter for further directions before the Registrar on 23 August 2021.
9. Reserve the question of costs.
[11]
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Decision last updated: 30 June 2021