ADSM Logistics Group Australia Pty Ltd v Zhang
[2022] VCC 877
•21 June 2022
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-22-01336
| ADSM Logistics Group Australia Pty Ltd (ACN 634 585 050) | First plaintiff |
| and | |
| The Legand Family Pty Ltd (ACN 166 722 694) as trustee for the Legand Family Trust | Second plaintiff |
| V | |
| Yucheng Zhang & Ors (according to the Schedule attached) | Defendants |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 June 2022 | |
DATE OF RULING: | 21 June 2022 | |
CASE MAY BE CITED AS: | ADSM Logistics Group Australia Pty Ltd & Anor v Zhang & Ors | |
MEDIUM NEUTRAL CITATION: | [2022] VCC 877 | |
RULING
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Subject:PRACTICE AND PROCEDURE
Catchwords: Plaintiffs’ application for interlocutory injunction enforcing restraint of trade clause – defendants’ cross applications for strike out, alternatively, a stay
Legislation Cited: Civil Procedure Act 2010; Corporations Act 2001 (Cth); County Court Civil Procedure Rules 2018
Cases Cited:Annesley v Westpac [2016] VSC 323; Bradto Pty. Ltd. v State of Victoria [2006] VSCA 89; Employsure Ltd v McMurchy; Employsure Ltd v Kumaran [2021] NSWSC 1179; Esso Australia Resources Limited v The Commissioner of Taxation (1999) 201 CLR 49; Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett [2012] VSC 82; Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett [2013] VSCA 24
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr T Scotter | Robinson Gill Lawyers |
| For the Defendants | Mr N Andreou | Apex Lawyers Pty Ltd |
HER HONOUR:
1This ruling relates to three interlocutory applications.
2The first application is made by the plaintiffs. By summons dated 14 April 2022, the plaintiffs seek an interlocutory injunction to restrain the first, second and third defendants from being involved in any way in a business in competition with the first plaintiff in New South Wales, including for the avoidance of doubt, the fourth defendant. The fourth defendant is a company which is alleged to be conducting a similar business in competition with the first plaintiff. The plaintiffs also seek to restrain the first, second and third defendants from directly or indirectly soliciting or servicing the first plaintiff’s clients.
3The second application is made by the defendants by summons dated 26 May 2022. The defendants seek an order that the plaintiffs’ statement of claim be struck out under rule 23.02 of the County Court Civil Procedure Rules 2018 (‘the Rules’) (‘the strike out application’).
4The third application is made in the alternative by the defendants by summons dated 3 June 2022. The relief sought is a stay of the proceeding (‘the stay application’) under rules 23.01(1)(a) and or (b) of the Rules.
5The plaintiffs rely on three affidavits affirmed by their solicitor, Ms Lu Cheng, on 14 April 2022 (‘the first Cheng affidavit’), 23 May 2022 (‘the second Cheng affidavit’) and 30 May 2022 (‘the third Cheng affidavit’). The plaintiffs also rely upon updated written submissions dated 6 June 2022.
6The defendants rely upon written submissions filed 30 May 2022 and 3 June 2022. In addition, they rely upon four affidavits affirmed by their solicitor, Mr Fangjie Chen dated 27 April 2022 (‘the first Chen affidavit’), 13 May 2022 (‘the second Chen affidavit’), 27 May 2022 (‘the third Chen affidavit’) and 2 June 2022 (‘the fourth Chen affidavit’).
Background
7The first plaintiff provides logistic services including warehousing and distribution, customs brokerage, and clearance from a warehouse in Sydney, New South Wales. The second plaintiff holds shares in the first plaintiff. Ms Yan Wang is the sole director of both the first and second plaintiffs.
8The shareholders in the first plaintiff are:
(a) Huaigen Wei (second defendant) – 20 percent shareholder;
(b) Gang Chen – 19 percent shareholder;
(c) Yucheng Zhang (first defendant) – 20 percent shareholder;
(d) Jiaming Chen (third defendant) – 20 percent shareholder; and
(e) the second plaintiff – 21 percent shareholder.
9On or around 27 June 2019, the first, second and third defendants, the second plaintiff and Gang Chen ('the investors’) signed a freight business partnership agreement with the first plaintiff as well as a shareholders agreement, both of which were written in Chinese.
10The plaintiffs’ case is that the same parties entered into a further shareholders agreement written in English on or about 18 February 2020. The plaintiffs rely upon clauses in this document described as ‘restraint of trade’ clauses which impose non-competition obligations on the first, second and third defendants. The defendants accept they signed this agreement but dispute for various reasons, including a foreshadowed defence of non est factum, that it is binding upon them.
11By this proceeding, it is alleged that the first, second and third defendants have breached their obligations under the English shareholders agreement by engaging in business that is competitive with the first plaintiff, diverted the first plaintiff’s business opportunities to the fourth defendant and solicited the first plaintiff’s clients. A separate claim is made against the first defendant for breaching fiduciary duties he owed to the first plaintiff whilst he was a director up until he resigned on 16 February 2022. He has been the sole director of the fourth defendant since 1 April 2020.
Defendants’ objections to plaintiffs’ affidavit evidence
12The defendants served a list of objections to the plaintiffs’ evidence shortly prior to the hearing on 6 June 2022. The list set out eight objections to various matters deposed to by Ms Cheng in her three affidavits. The plaintiffs responded orally to the objections at the hearing on 6 June 2022. The objections are as follows.
Objection 1 – Paragraph [27] of the first Cheng affidavit
13The defendants object to Ms Cheng’s statement of “estimated losses” of $18,000 relating to two shipments being diverted as impermissible opinion evidence as to quantum. The defendants submit the estimation is unsupported by expert material, quantum material or documentary support in the form of quotations and invoices.
14The plaintiffs submit that it is orthodox in interlocutory applications for client estimates to be included in affidavit evidence. Ms Chen is relying upon instructions given to her by her clients as the clients’ estimate of loss. The plaintiffs also point to the defendants’ reliance on this evidence in the first Chen affidavit at paragraph 53(c) in support of the defendants’ case that damages would be an adequate remedy.
15Whilst the estimation of loss is somewhat bald and no break up is given, I consider this goes more to the weight this evidence should be given rather than its admissibility. I will allow this paragraph to stand.
Objection 2 – Paragraph [37](a) and (b) of the first Cheng affidavit and the unsigned Nominee Shareholder Agreement and ASIC extract of MZ Global exhibited thereto
16The defendants object to the unauthorised disclosure of the Nominee Shareholder Agreement, as it was prepared for the “dominant purpose” of legal advice provided to the second and third defendant as to an agreement.[1] They submit that privilege has not been and is not waived, and there has been no attempt by the plaintiffs to clarify the consent of the defendants as to its disclosure.
[1] Citing Esso Australia Resources Limited v Federal Commissioner of Taxation (1999) 201 CLR 49
17They further submit paragraph 37(a) is opinion evidence by its assertion that the companies named conduct a business that competes with the first plaintiff. Paragraph 37(b) is submitted to be impermissible opinion evidence as to the defendants’ intention not to appear on ASIC searches. They further object to paragraph 37(a) and (b) on the basis of irrelevance as the plaintiffs have not established that MZ Global in fact competes with ADSM Logistics.
18The plaintiffs say the onus is on the defendants to show that the documents are protected by legal professional privilege. They submit that it is illogical that the defendants sought advice from the solicitors in relation to the Nominee Shareholder Agreement, as the document was drawn by the solicitors in question.
19The plaintiffs further submit that privilege in the documents has been lost as the documents have evidently been provided to a third party, who has in turn provided it to the plaintiffs via Wang’s husband, David Pang. Counsel for the plaintiffs submits that an inference can be drawn from the defendants’ failure to adduce evidence to oppose the plaintiffs’ submissions, when the plaintiffs’ submissions dated 25 May 2022 flagged that privilege has been waived.
20The plaintiffs submit that the depositions in paragraphs 37(a) and (b) are merely recitations of instructions from Ms Cheng’s clients, and that they can be put forward by counsel as submissions.
21I will uphold the objection made to the receipt of the Nominee Shareholder Agreement in circumstances where the defendants claim legal professional privilege over the document. There is insufficient evidence before the Court to determine the plaintiffs’ contention that the claim for privilege is not properly made out or that the privilege has in fact been waived by the defendants despite the fact that a copy of the document has come into the plaintiffs’ hands via a third party.
22I consider that the plaintiffs are able to give evidence through their solicitor about the competing business referred to in paragraph 37(a), being a matter within the plaintiffs’ knowledge and experience. I otherwise uphold the objections made to paragraph 37(b).
Objection 3 – Paragraph [42] of the first Cheng affidavit
23The defendants submit that paragraph 42 is an opinion and conclusory in its assertion that the defendants unless restrained “will continue to be involved in business(es) that compete with the business of the Company and divert the Company’s business for their own benefits”. It is submitted to be a conclusory statement that the defendants have been involved in other businesses in competition with ADSM Logistics.
24The plaintiffs submit that this paragraph is not objectionable as statements of these kind are customary in supporting affidavits for injunctive relief, and that it is for the Court to come to as a determination of fact. I agree and disallow this objection.
Objection 4 – Paragraph [4] of the second Cheng affidavit
25The defendants submit paragraph 4 includes conclusory statements in their assertion that the parties agreed to enter into a shareholders agreement in English that complied with Australian law.
26The plaintiffs submit that it is uncontested that the defendants signed both the Chinese and the English shareholders agreements, so it does not matter what their intention was. It is irrelevant what the motivations of the parties were to enter into the English shareholders agreement, as the document has been signed by the parties. The defendants prophesised defences of lack of consideration, penalties and non est factum are issues for trial.
27I uphold the objection and rule that the words “that complies with the Australian law” should be deleted in the third line as the document will speak for itself.
Objection 5 – Paragraph [12] of the second Cheng affidavit
28The defendants object to the description of the shipments being “diverted” as a conclusionary statement as an issue of contention, when the defendants submit that the dispute is whether the shipments were signed improperly for and on behalf of the fourth defendant.
29The plaintiffs submit that when reading paragraph 12 in the context of the preceding paragraph, it is evident that Cheng is responding to the allegations in paragraph 49 of the second Chen affidavit that shipments were diverted. Counsel for the plaintiffs submits this deposition is unremarkable. I will disallow the objection. It will be matter for evidence in due course whether or not shipments were diverted impermissibly to the fourth defendant.
Objection 6 – Paragraph [9] of the second Cheng affidavit
30The defendants object to the lack of clarity as to who “David” is negotiating with and thus the statement has very little probative value. In oral submissions, counsel for the defendants conceded their submission may go to weight rather than objection.
31Counsel for the plaintiffs submits that these are just recitations of the instructions from Ms Wang’s husband. I will allow the paragraph to remain albeit accepting that the statement seems to have little probative value.
Objection 7 – Paragraph [6](b) the third Cheng affidavit
32The defendants object to Ms Cheng’s deposition that it is “extremely unusual” that ADSM Logistics has received no more consolidation business since the defendants attended the warehouse. They submit it is opinion and conclusory, particularly as no evidentiary basis is exhibited.
33The plaintiffs submit that the deposition is merely the clients’ instructions based on their lay observations, and the following sentence gives context to the conclusion put forward. Counsel said the unusuality of the change in business can be put forward as a submission, and it is more an issue of fact. I consider the plaintiffs can give evidence about a change in their business which they observe is unusual. I will disallow this objection.
Objection 8 – Paragraphs [8] and [12] of the third Cheng affidavit and the WeChat records
34The defendants object to Ms Cheng’s translation of Chinese language documents, as even if she can speak Chinese, she is not a NAATI accredited translator. There is no deposition to her having a demonstrated “training, study or experience” in the Chinese language, and thus is providing the translation based on her personal knowledge.
35They also object to her giving expert evidence where she may be called to give evidence material to the determination of contested issues, which would result in unfair prejudice to the defendants by denying them and the court the advantage of an independent and impartial expert witness in accordance with r 44.01 and Form 44A of the Rules.
36The plaintiffs rely on both Ms Cheng and Mr Chen’s affidavits, deposing to delays in translation by NAATI accredited translators, and submitting that it therefore ought not be objectionable to rely on translations. The plaintiffs point to the defendants’ evidence relying on their clients’ translations of documents, and say that if the plaintiffs’ evidence is inadmissible, then the defendants’ translated evidence should be inadmissible too.
37Given the fact that neither party was able to get certified translations in time due to potential delays in doing so and this is an interlocutory application as opposed to a trial, I will permit the evidence given by Ms Cheng in these paragraphs. There has been no suggestion that her translation is wrong by any of the defendants. No doubt, if the matter proceeds, then certified translations of the various Chinese documents relied upon will be obtained. This objection is disallowed.
Defendants’ strike out application
38The defendants seek an order pursuant to r 23.02 of the Rules that the plaintiffs’ statement of claim be struck out. Rule 23.02 of the Rules permits the Court to strike out a pleading where it does not disclose any cause of action, may prejudice embarrass or delay the fair trial of the proceeding, or is otherwise an abuse of process.
39During the initial hearing on 31 May 2022, counsel for the defendants clarified that the defendants no longer pursued the strike out application. The reason being that the amended statement of claim filed on 30 May 2022 had answered the matters originally raised in their summons dated 27 May 2022. However, the defendants seek their costs of that summons.
40The plaintiffs contend that the strike out application ought to be dismissed with costs in their favour.
41The plaintiffs provided a useful chronology in their submissions in relation to the circumstances leading up to the amendment of the statement of claim and the defendants’ subsequent strike out application, which is reproduced in part below.
(a) On 6 May 2022, the Court’s registry emailed the parties noting that the plaintiffs’ statement of claim appeared to raise allegations of breaches of duties under ss 180-182 of the Corporations Act 2001 (Cth), and confirming that the Court does not have jurisdiction under the Corporations Act to exercise various powers, including the power to order that a party pay compensation or damages s 1317H of that Act. Registry instructed the parties to inform the Court by the first administrative mention of the matter, listed for 15 June 2022, whether the statement of claim would be amended; an application would be made to transfer the proceeding to the Supreme Court; or if it was submitted that the Court has jurisdiction to hear and determine all of the claims made in the proceeding.
(b) On 17 May 2022, the plaintiffs responded to the Court, noting that while the duties pursuant to ss 180 and 182 of the Corporations Act were pleaded, no relief was sought pursuant to the Corporations Act. The plaintiffs suggested that in the circumstances, the Court has jurisdiction to hear and determine all claims in this proceeding and to grant the remedies sought.
(c) On 18 May 2022, Judicial Registrar Bennett made orders on the papers listing the matter for hearing to determine if the Court ought to strike out paragraphs [9] and [15] of the statement of claim on the basis that they did not form part of a cause of action. Submissions were required by 25 May 2022.
(d) In submissions filed and served on 23 May 2022, the plaintiffs stated “In respect to the matters raised by the Court in the Orders made 18 May 2022, the plaintiffs consent to an order striking out paragraphs [9] and [15] of the statement of claim.”
(e) On 27 May 2022, the defendants issued their summons seeking to strike out the statement of claim. In submissions filed that day, the defendants made submissions as to the unavailability of ss 180 and 182 of the Corporations Act and the fact that this Court does not have jurisdiction to adjudicate those claims.
(f) On 30 May 2022, the plaintiffs filed the amended statement of claim as of right, which deleted paragraphs [9] and [15].
(g) At the hearing on 31 May 2022, the defendants by their counsel, accepted that the amended statement of claim had dealt with the issues in the summons other than as to costs. At that time it was not clear whether the summons had actually been filed, but it was accepted by Counsel that it had not been served on the plaintiffs and that the substance of its application had, in any case, effectively been dismissed during the hearing.
(h) On 3 June 2022, the defendants served a sealed copy of the strike out summons on the plaintiffs for the first time.
42As can be seen from this chronology, the defendants filed the strike out summons in circumstances where the plaintiffs had already agreed on 23 May 2022 to delete the offending paragraphs referring to the Corporations Act. These paragraphs were removed in the amended statement of claim filed on 30 May 2022.
43It follows then that the strike out application should be dismissed as the amended statement of claim cured the jurisdictional issue that had been raised by the Court.
Defendants’ application for stay of proceedings
44In their stay application, the defendants seek orders pursuant to rr 23.01(1)(a) or (b) of the Rules that the proceeding be stayed on that grounds that it is scandalous, frivolous or vexatious, or an abuse of process of this Court.
45The defendants describe the stay application as an alternative to their strike out application. The defendants contend the proceeding has been impermissibly brought without the authority of the first plaintiff and ought be stayed on that basis. They submit that if the English shareholders agreement is binding then there is no authority pursuant to that agreement to bring these proceedings. Further, the English shareholders agreement contains a dispute resolution clause, which obliges the parties to continue to perform the English shareholders agreement despite the existence of a dispute.
46Further, clause 12.1(xii) of the English shareholders agreement states that unanimous consent of all shareholders is required in order for any litigation to be commenced. The defendants hold 79% of the issued shares and comprise four out of five shareholders. Therefore, the defendants submit that if the second plaintiff wished to bring a proceeding in the name of the first plaintiff, it ought to have brought a statutory derivative action pursuant to Part 2F.1A of the Corporations Act, instead of the proceedings issued in this Court which were issued without authority of the majority of the first plaintiff’s shareholders.
47The defendants further submit that if the Chinese shareholders agreement is the source of the authority for the plaintiffs’ claim, then the orders sought in the plaintiffs’ summons are defective and do not properly reflect the wording of the Chinese shareholders agreement, which simply contains a provision for liquidated damages. Pausing here, it should be noted that the plaintiffs do not rely upon or refer to the Chinese shareholders agreement in their amended statement of claim.
48On these bases, the defendants submit that this proceeding is most properly described as “vexatious” and an “abuse of process”. The defendants note the historical common law position in England & Wales was that proceedings brought on behalf of a company without authority were labelled “irregular” and liable to be struck out under the Court’s inherent jurisdiction. The defendants submit that the common law in Australia recognises that proceedings issued without authority are liable to be stayed or struck out and can result in practitioner costs orders against solicitors who have acted without proper instructions.
49The plaintiffs submit that the defendants’ submission the proceeding is advanced without authority is misconceived for three principal reasons:
(a) The first plaintiff issued this proceeding by its sole director, Ms Yan Wang. She has the authority to cause the company to issue this proceeding pursuant to s198A of the Corporations Act, which provides that directors may exercise all the powers of the company except any powers that are required to be exercised in a general meeting. This is not a derivative proceeding pursuant to s 236 of the Corporations Act for which leave is required to issue.
(b) The second plaintiff is a party to the English shareholders’ agreement. Clause 15.5(b) expressly authorises shareholders in the first plaintiff to enforce the restraint of trade provision in that agreement. The second plaintiff is not bringing proceedings in the name of the first plaintiff, nor does it seek to do so.
(c) Insofar as the defendants seek to raise the dispute resolution clause and a restriction on issuing proceedings in the English shareholders agreement, they can hardly do so in circumstances where they deny that it binds them at all. They cannot seek to simultaneously deny the effect of this agreement and also seek to rely upon it. They must elect.
50The defendants, in response, submit that as sole director of the first plaintiff, Ms Wang is contractually bound by the English shareholders agreement as the named chairperson. They submit that the agreement requires unanimous resolution for proceedings to be issued, and that such a step does not fall under the kind of “everyday business” a director is entitled to undertake under the agreement and the Corporations Act. The defendants note that though Ms Wang is the sole director of the first plaintiff, she is also a minority shareholder. They submit that, by commencing a proceeding in the name of the company against the majority, Ms Wang is undermining the clear intention of the parties to the agreement that a unanimous resolution of shareholders would be required in order to commence legal proceedings other than a statutory derivative proceeding.
51The Court will not make an order under this rule unless it is clear on the pleadings or from extrinsic evidence that the proceeding is unsustainable in fact or in law. The burden on this question lies on the party impeaching the claim.[2]
[2]Annesley v Westpac [2016] VSC 323, [69] (Derham AsJ), citing Onus v Alcoa of Aust Ltd (1981) 149 CLR 27 at [57]; Wickstead v Browne (1992) 30 NSWLR 1 at [11]; Williams, Civil Procedure Victoria at [23.01.15].
52The claim made on behalf of the first plaintiff is a claim for equitable compensation against the first defendant for breaching fiduciary duties owed to the first plaintiff whilst he was a director. That is the only claim advanced in the amended statement of claim by the first plaintiff. I am satisfied that the first plaintiff has standing to bring such a cause of action and that Ms Wang is empowered to cause the first plaintiff to bring this proceeding against the first defendant under s198A of the Corporations Act.
53The claim made by the second plaintiff relates to the alleged breaches under the English shareholders agreement. As a shareholder, it has standing to bring this proceeding in its name against other defaulting shareholders under clause 15.5(b) of that agreement. The second plaintiff is not bringing proceedings on behalf of the first plaintiff but in its own right. In those circumstances, I accept the submissions put forward by the plaintiffs and find that neither plaintiff lacks authority to commence the claims made by them as pleaded in the amended statement of claim.
54The other aspect relied upon by the defendants was the existence of the dispute resolution clause in the English shareholders agreement as a basis for a stay. Whilst the defendants have accepted that they signed this agreement, they will seek to argue for a variety of legal reasons that they are not bound. If that is so, then its terms are of no effect, including the dispute resolution clause. If they wish to argue that the agreement has no effect, then it is inconsistent to argue that this term of the agreement is nevertheless binding on the parties. But more fundamentally, whilst clause 19 sets out a process for dispute resolution, it does not expressly contain a prohibition on proceedings being commenced before the dispute resolution process is followed. Further, clause 15.5(b) specifically authorises a shareholder to take proceedings against a defaulting shareholder in a court of competent jurisdiction. No mention is made in that clause that a shareholder must first engage in a dispute resolution process before taking proceedings. I am not satisfied that clause 19 provides a proper basis upon which the plaintiffs’ claim should now be stayed.
55Given these matters, I am not persuaded that the proceeding is scandalous, frivolous, vexatious, or an abuse of process of this Court within the meaning of rules 23.01(1)(a) or (b) such that the proceeding ought now be stayed. Accordingly, the defendants’ stay application is dismissed.
Plaintiffs’ injunction application
Legal Principles
56The defendants’ outline of submissions dated 30 May 2022 refer to the well-known principles in respect of the grant of an interlocutory injunction. They are:
(a) whether there is a serious question to be tried; and
(b) whether the balance of convenience favours the granting of the interlocutory relief.
57The other aspect the Court needs to determine is whether the applicant would suffer irreparable harm for which damages would not be an adequate remedy.
Serious question to be tried
58In order for the plaintiffs to establish there is a serious question to be tried, they must show prima facie a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial.
Enforceability of restraint of trade clause
59The Court of Appeal approved a statement of applicable principles in respect to a restraint of trade clause,[3] as set out by Sifris J in Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett,[4] as follows:
“The principles applicable to the enforceability of contracts in restraint of trade are not for the most part in dispute. They are well settled:
(a) a contractual provision in restraint of trade is, prima facie void.
(b)The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.
(c)The validity of the covenant in a contract is to be judged as at the date of the Employment Agreement.
(d)A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.
(e)The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.
(f)So far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.
(g)The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.”
[3] Wallis Nominees (Computing) Pty Ltd v Matthew William Pickett [2013] VSCA 24 [14]
[4] [2012] VSC 82 [50] (citations omitted)
60The plaintiffs will have the burden of persuading the Court at trial that the restraint relied upon is not unreasonable nor contrary to public policy.[5]
[5] Employsure v McMurchy; Employsure Ltd v Kumaran [2021] NSWSC 1179 [90]
61The plaintiffs say the restraint of trade is enforceable as clause 15.3(a) of the English shareholders agreement expressly provides that the parties acknowledge that restraint of trade is “reasonable in extent having regard to the interests of each party to this Agreement, extends no further than is reasonably necessary and is solely to protect the remaining Shareholders”.
62The plaintiffs submit that the Court can read down the cascading restraint to whatever it finds reasonable, should the Court find it too wide in area or time.
63Not unsurprisingly, the defendants argue the restraint of trade clause is unenforceable. They submit that the clause restricts “mere competition” only, rather than protecting a “legitimate interest” such as trade secrets, confidential information, and goodwill.
Scope and breach of restraint of trade clause
64The plaintiffs submit that the defendants are breaching and are likely to continue to breach the restraint of trade clause. They rely on the following alleged breaches:
(a) The establishment of the fourth defendant in April 2020;
(b) The resignation of the third defendant as director of ADSM Logistics in February 2022;
(c) An alleged unauthorised change of consignee from ADSM Logistics to the fourth defendant of shipments from Shenzhen Headway (a customer of ADSM Logistics) in February 2022;
(d) An alleged unauthorised change of consignee from ADSM Logistics to the fourth defendant of shipments from Maxfill Australia (a customer of ADSM Logistics) in February 2022;
(e) Further speculated diversions of shipments;
(f) Decreased containers arriving at the Sydney warehouse between November 2021 and April 2022;
(g) Removal of a commercial label printer from the Sydney warehouse;
(h) Deletion of ADSM’s computer records on 23 February 2022 (the day the first defendant attended the Sydney warehouse);
(i) The first and third defendants’ refusal to attend the Sydney warehouse since February and March 2022 respectively, and failure to provide Wang with ADSM Logistics’ books and records despite demands; and
(j) The first, second and third defendants’ alleged purchase of a competitor of ADSM Logistics, in circumstances where their involvement was intended to be concealed.
65The plaintiffs submit that ADSM Logistics’ line of business (and consequently the business that the defendants ought be restricted from trading in) is “importing, exporting, logistics and warehousing”. While it will be determined at trial if the defendants have in fact been engaging in trade that competes with ADSM Logistics, the plaintiffs submit that the defendants’ own evidence demonstrates that they are trading in competition with ADSM Logistics in that:
(a) The first and third defendants are assisting as logistics contractors with another company; and
(b) The fourth defendant has traded in competition with ADSM Logistics by receiving shipments from Zhongshan Post in February 2022.
66The plaintiffs submit that the defendants have failed to adduce evidence that they do not engage in or seek to engage in direct competition with ADSM Logistics, or solicit or service ADSM Logistics’ clients.
67The defendants submit the scope of the restraint of trade should be limited to the definition contained in the English and Chinese shareholders agreement (namely a logistics company), and not as set out in the affidavit materials filed. Alternatively, they submit the scope of the restraint should be limited to that deposed to in paragraph 15 of the fourth Chen affidavit, namely, freight forwarding, warehousing, distribution, customs brokerage and clearance. They submit that ADSM Logistics has no legitimate interest which the restraint of trade covers. They rely on the Chinese shareholder agreement’s employment of “warehousing business and the marine and export business” and “sea freight logistics services” terminology. They submit that regulatory requirements under the Customs Act 1901 (Cth) and business and industry practices differentiate the work of ADSM Logistics from the broader definition of business as “importing and exporting”.
68The defendants contend the enforceability of the English shareholders agreement is seriously disputed for the following reasons:
(a) Ms Wang either misrepresented the content of the English shareholders agreement or took unconscionable advantage of the defendants’ special disability (namely their lack of written and oral English language skills), because the defendants understood they were signing documents to facilitate the first defendant’s appointment as director. The introduction of a cascading restraint of trade in the English shareholders agreement and acknowledgment as to reasonableness are highlighted as differences from the Chinese shareholder agreement; and
(b) Clause 7.1 of the Chinese shareholder agreement provides that subsequent agreements may be entered into only for matters “not covered by this Agreement”. As the plaintiffs have not led evidence that fresh consideration was provided for entry into the English shareholders agreement, and it was not executed as a deed, the plaintiffs cannot enforce the English shareholders agreement.
69Additionally, the defendants say the plaintiffs bring this application without clean hands. They allege the second plaintiff breached clause 4.3 of the Chinese shareholders agreement, by failing to report the day-to-day execution of business and preventing the first, second and third defendants entry to check the execution of that day-to-day business. It is submitted the orthodox position is that restraint of trade obligations will not survive where there has been a repudiation of contract.[6] The plaintiffs’ enforcement of the restraint of trade is said to be a “surreptitious use” at an interlocutory stage and ought be rejected by the Court.
[6] See Bond v Rees Corporate Advisory Pty Ltd [2013] VSCA 13, [47] (Tate JA, in obiter)
70It is not the function of the Court in this type of interlocutory application to determine finally whether the restraint clause is enforceable and whether a breach has occurred. While the defendants’ submissions raise a number of evidentiary and legal issues going to the enforceability and scope of the restraint clause, these are matters which will ultimately be determined at trial. Both the English and Chinese shareholders agreements are signed by the defendants, so prima facie they are bound by the terms of those agreement, both of which contain restraint clauses. I am also persuaded by the contents of the first Cheng affidavit, in particular, that the plaintiffs have led sufficient evidence to support a prima facie case of breach on the part of the defendants. In all the circumstances, I am well satisfied that the plaintiffs have established a serious question to be tried.
Balance of convenience
71In the Court of Appeal in Bradto Pty. Ltd. v State of Victoria [2006] VSCA 89 at [35], the Court observed that in determining whether to grant an interlocutory injunction:
“… the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial.”
72The plaintiffs argue that if the defendants are not seeking to compete improperly or solicit the first plaintiff’s clients, then granting the injunctions sought will have no impact upon them at all, and will merely require them to comply with obligations as set out in the Chinese and English shareholders agreements.
73The plaintiffs submit that if the injunction is not granted, should the defendants seek to divert the first plaintiff’s business, it would be impossible to restore the plaintiffs to their current position. The first plaintiff’s business would no longer remain viable if the defendants divert the first plaintiff’s business for a protracted period.
74The plaintiffs submit the strength of the plaintiffs’ submission on the question to be tried is relevant to the balance of convenience.
75The defendants contend that if the injunction is not granted, the first plaintiff:
(a) has pre-existing competition in the warehousing, logistics and transportation industry;
(b) can quantify its damages to date at $50,000;
(c) aside from two shipments, has been unable to clearly identify any other alleged “loss of business”; and
(d) cannot show how the fourth defendant would present a serious threat of competition.
76Conversely, the defendants submit that if an injunction is granted, the first, second and third defendants would suffer significant financial hardship for the reasons set out in paragraph 12(b) of their written submissions dated 27 May 2022.
77The defendants rely on a number of practical consequences likely to flow from the interlocutory orders sought in the plaintiffs’ summons, namely:
(a) The defendants would be unable to work in any way in a competitor business, which is broader than the English shareholders agreement, and that which could be achieved at trial. Similarly, the defendants would be unable to obtain gainful employment in the industry within which they have knowledge, skills and experience.
(b) The fourth defendant would not be able to operate, in circumstances where it does not import, export or warehouse products of a similar nature to the first plaintiff.
78The plaintiffs submit the defendants’ submissions as to the balance of convenience pertain to the restraint of trade aspect, but not the solicitation of clients. Even if the Court was persuaded that the defendants’ personal reasons meant the balance of convenience was against the plaintiffs for the first order sought by their summons, the defendants have failed to show any reasons why the defendants should not be restrained from servicing the plaintiffs’ clients. Solicitation conduct is prohibited under the relevant restraint clause and means soliciting or servicing any clients of the business as well as soliciting any employees of the business.
79On balance, I am persuaded by the defendants’ submission that the balance of convenience favours not granting an injunction restricting the defendants from working in the industry of their experience. The potential harm to the goodwill of the plaintiffs’ business and loss of income is outweighed, in my view, by the potentially detrimental impact to the first, second and third defendants’ ability to earn income and the consequential flow on effect to their families. I am also not persuaded that the restraint clause should be split up in the manner suggested by the plaintiffs, namely, that the prohibition in the restraint clause not to engage in solicitation of clients can be carved out from the restriction to work in a business competitive with the first plaintiff.
Damages inadequate remedy
80The defendants submit (should it be held to be enforceable) that clause 15.3(b) of the English shareholders agreement provides that a party who breaches clause 15.2 pay the sum of $50,000 to each of the other shareholders. This mirrors clause 6.6 of the Chinese shareholder agreement. Therefore, an award of damages to the second plaintiff would be an adequate remedy for any breach of the restraint clause.
81The plaintiffs submit there is no evidence before this Court that the defendants would be in a position to pay any damages if ordered. The defendants have not offered to pay the sum of $50,000 to the plaintiffs or into Court for contravention, nor have they deposed to their ability to pay such a sum. Accordingly, it is submitted an award of damages would not be an adequate remedy.
82The amount of equitable compensation sought by the first plaintiff against the first defendant is not quantified in the prayer for relief. The second plaintiff seeks the sum of $50,000 from each of the first, second and third defendants. This reflects the amount stated to be payable under clause 15 if a shareholder acted in breach of the restraint clause. No doubt, if the matter proceeds, as the defendants have foreshadowed, there will be arguments as to whether this sum is genuine pre-estimate of the damage to be sustained and constitutes a penalty. I consider the bargain struck by the parties (accepting the defendants will say they are not bound) should be given some weight. The parties did agree on a fixed sum in the event of a breach. Therefore, they had turned their mind to the remedy available in the event of a breach and agreed that damages were appropriate and also agreed on the quantum payable.
83The plaintiffs’ claimed losses are said to be $18,000 and $600 respectively for the alleged diversion of shipments by the defendants at the plaintiffs’ expense. It can also be accepted that the plaintiffs may have difficulty in establishing their losses in circumstances where it is claimed the defendants have destroyed relevant computer records. It is self-evident there is always the risk that if a plaintiff succeeds, it may not be able to recover against an impecunious defendant. But overall, I am not satisfied that the plaintiffs would suffer irreparable harm for which damages would not be an adequate remedy.
84Whilst I was satisfied there was a serious question to be tried, I consider that the balance of convenience weighed more in the defendants’ favour and that damages would be an adequate remedy. Therefore the plaintiffs’ application for injunctive relief will be dismissed.
85Given these findings, it is unnecessary to determine whether the plaintiffs’ application should also be refused on the grounds of a lack of clean hands concerning the defendants’ allegation that the second plaintiff was in breach of the Chinese shareholders agreement.
Conclusion
86I will order as follows:
(1) The plaintiff’s summons dated 14 April 2022 is dismissed.
(2) The defendants’ summons dated 26 May 2022 is dismissed.
(3) The defendants’ summons dated 3 June 2022 is dismissed.
87Subject to hearing from the parties, I propose ordering that the defendants pay the plaintiffs’ costs of the defendants’ summonses dated 26 May 2022 and 3 June 2022 on a standard basis to be taxed in default of agreement. I consider there was no need to bring the strike out application given the plaintiffs had already agreed to make the necessary amendments to the statement of claim such that this application was unnecessary. The stay application has failed so costs should follow the event.
88I propose ordering that the costs of the plaintiffs’ summons dated 14 April 2022 seeking injunctive relief be costs in the cause.
89The parties are directed to confer and file a minute of agreed orders to reflect these reasons, including costs. If agreement cannot be reached, any submissions must be filed and served by 4pm on 24 June 2022, limited to five pages. Any submissions in reply, limited to three pages, must be filed and served by 4pm on 29 June 2022. Final orders will then be made on the papers.
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Certificate
I certify that these 24 pages are a true copy of the Reasons for Ruling of Her Honour Judge A Ryan delivered on 21 June 2022.
Dated: 21 June 2022
Associate to Her Honour Judge A Ryan
SCHEDULE OF PARTIES
BETWEEN
ADSM LOGISTICS GROUP AUSTRALIA PTY. LTD. (ACN 634 585 050)
First plaintiff
and
THE LEGAND FAMILY PTY. LTD. (ACN 166 722 694) ATF THE LEGAND
FAMILY TRUST
Second plaintiff
and
YUCHENG ZHANG
First defendant
and
HUAIGEN WEI
Second defendant
and
JIAMING CHEN
Third defendant
and
JINXIN GLOBAL PTY. LTD. (ACN 640 074 102)
Fourth defendant
0
10
0