Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd
[2017] ACTSC 116
•19 May 2017
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd |
Citation: | [2017] ACTSC 116 |
Hearing Dates: | 10, 17, 19 May 2017 |
DecisionDate: | 19 May 2017 |
Before: | Murrell CJ |
Decision: | See [43] – [46] |
Catchwords: | CIVIL LAW – JURISDICTION, PRACTICE AND PROCEDURE – Application for interlocutory injunction – termination of franchise contract by franchisor – whether serious question to be tried – whether balance of convenience favours injunctive relief |
Legislation Cited: | Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) sch 1 cls 6, 27 Court Procedures Rules 2006 (ACT) r 700 |
Cases Cited: | Australian Broadcasting Corporation v O'Neill [2006] HCA 46; 227 CLR 57 Beecham Group Ltd v Bristol Laboratories Pty Ltd [1968] HCA 1; 118 CLR 618 Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659; 222 IR 172 |
Parties: | Atarashii Stone Pty Ltd (Plaintiff) Granite Transformations Pty Ltd (Defendant) |
Representation: | Counsel Mr P Walker SC and Mr B Buckland (Plaintiff) Mr D Mahendra (Defendant) |
| Solicitors Trinity Law (Plaintiff) Gilberts Legal (Defendant) | |
File Number: | SC 138 of 2017 |
MURRELL CJ:
Background
This is an application by a franchisee for interlocutory injunctive relief against a franchisor who has purported to terminate the franchise agreement.
The defendant has the exclusive Australian distribution rights to a granite benchtop product used in kitchen renovations. It operates a franchise system. In late 2016, the defendant sold to the plaintiff a successful Canberra franchise that operated from premises in Gladstone Street, Fyshwick. The licence agreement (the contract) is contained in the affidavit of Ms Malone, who is the sole director of the plaintiff. The contract contained a force majeure provision (cl 27). The transaction was completed on 12 December 2016.
Subsequently, in mid to late December 2016, there was a fire at the premises adjoining those occupied by the plaintiff’s business. The fire caused damage to the plaintiff’s premises. At about the same time, tools and equipment were stolen from the plaintiff’s premises.
Since the outset, the plaintiff’s franchise business has been relatively unproductive. The plaintiff says that this is largely because of the fire, the break-in, and the associated insurance claims.
Between January and March 2017, the defendant received a number of customer complaints. In early 2017, the plaintiff dismissed experienced staff who had transferred from the former business to the plaintiff’s business. On 10 February 2017, Mr D’Addio was dismissed. He had acted as project coordinator for the plaintiff’s business and its predecessors. The shedding of experienced staff, particularly Mr D’Addio, and the receipt of customer complaints caused the defendant to become concerned. The defendant had difficulty contacting the plaintiff. The defendant sought information and documents from the plaintiff, but these were not provided.
On 28 March 2017, the defendant issued a breach notice requiring the plaintiff to take specified action within 30 days.
On 1 May 2017, the defendant purported to terminate the franchise agreement on grounds set out in the March breach notice and subsequent correspondence dated 19 and 27 April 2017. On the same day, the defendant commenced selling the franchised product in Canberra.
Proceedings
By an originating application filed on 3 May 2017, the plaintiff sought final orders, being a declaration that the termination was void and of no effect, and an order restraining the defendant from relying on or implementing termination of the contract. The plaintiff sought interlocutory relief by way of an injunctive order restraining the defendant from relying on or implementing its termination of the franchise contract until further order.
The grounds set out in the application were that the termination was invalid and ineffective because:
(a)The plaintiff was not in breach of the contract, or any breach was not sufficient to justify the termination of the contract;
(b)The breach notice dated 28 March 2017 and subsequent correspondence failed to comply with cl 16 of the contract by adequately setting out the nature of the breach and the manner in which it could be remedied.
Issues
On the interlocutory application, the issues are:
(a)Whether the plaintiff has shown that there is “a serious question to be tried”, i.e. a sufficient likelihood of success at trial to justify an interlocutory injunction (the merits issue); and
(b)Whether the balance of convenience favours injunctive relief (the balance of convenience issue). This requires a consideration of the hardship that would be suffered by the parties if the injunction was or was not granted.
The defendant submitted that a third and independent requirement must be satisfied before an interlocutory injunction would be granted; that is, that damages were not an adequate remedy. The defendant said that the adequacy of a remedy by way of damages was not merely an important factor to be weighed when considering the balance of convenience. In support of this submission, the defendant relied on the decision of Gleeson CJ and Crennan J in Australian Broadcasting Corporation v O’Neill [2006] HCA 46; 227 CLR 57 at [19], where their Honours referred to the “organising principles” applicable to a decision about whether to grant an injunction.
The reference to “organising principles” was a reference to the principles in Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 (Beecham). In Beecham, the High Court identified that the consideration of an application for interlocutory injunctive relief involved two main inquiries, i.e. whether there was a “prima facie case” and the balance of convenience. Consequently, I do not accept the defendant’s submission. However, I do accept that the adequacy of a remedy by way of damages is an important factor to be weighed when considering the balance of convenience. Other considerations include the right to a livelihood, delay, the impact on third parties, the strength of the plaintiff’s case and any undertakings that have been given: Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659; 222 IR 172 at [133].
The merits issue
Clause 16.1 of the contract provides that the contract may be terminated if either party is in breach of any of the terms and conditions and fails to remedy the breach in accordance with a written notice “which sets out the nature of the breach, how the breach can be remedied, and a reasonable time for remedy (which need not be more than 30 days).”
On 28 March 2017, the defendant served a breach notice pursuant to cl 16 identifying the following breaches:
(a)Clause 7.3(j): Ms Malone, as the nominated manager under the contract who was required to directly supervise the operation of the business, had delegated her responsibility without the written consent of the defendant;
(b)Clause 7.3(l): Ms Malone was not devoting herself full-time to the business during trading hours;
(c)Clause 7.4(a): The plaintiff was required to employ trained and experienced personnel, but there were insufficient trained and experienced staff employed;
(d)Clause 7.5: The plaintiff had not provided the defendant with written notice of each complaint that it had received and the action taken;
(e)Clause 7.7: The plaintiff had failed to attend a meeting scheduled by the defendant for 21 March 2017;
(f)Clause 7.9(j): The plaintiff had failed to provide the defendant with information requested by email on 14 March 2017; and
(g)Clause 7.11(a): The plaintiff was operating the business at 20 Collie Street, Fyshwick, which had not been approved by the defendant.
The notice required the plaintiff to remedy the breaches by 28 April 2017 by taking specified action. There is no suggestion that the required action was unreasonable.
On 19 April 2017, the defendant’s solicitors wrote to the plaintiff complaining about further matters. The letter included an assertion that the plaintiff was promoting a competing product, Ceasarstone, and that sample books for that product were at 20 Collie Street. Further, the letter asserted that the plaintiff had not installed any of the defendant’s products for at least one month, that sales had been virtually non-existent, and that Ms Malone had no role in the operation of the business and had left it in the hands of Ms Strickland, who had no relevant experience.
On 27 April 2017, the defendant’s solicitors wrote to the plaintiff’s solicitors complaining that telephone calls to the plaintiff’s business number on 21 and 24 April 2017 had gone unanswered and that, on 26 April 2017, a member of the plaintiff’s staff had said that the business was too busy to provide a quotation for a kitchen renovation before the end of May.
On 28 April 2017 (the last day of the breach notice), the plaintiff served a notification of dispute under cl 40 of the Competition and Consumer (Industry Codes—Franchising) Regulation 2014 (Cth) (Code of Conduct) alleging that the defendant had not acted in good faith in its dealings with the plaintiff.
By cl 19 of the contract, the plaintiff and the defendant agreed to comply with the Code of Conduct. Clause 6(1) of the Code of Conduct imposes an obligation to act in good faith in relation to any matter arising under or in relation to the relevant franchise agreement. Clause 6(3) provides that, in determining whether there is a contravention of cl 6(1), a court may have regard to whether a party has acted honestly and not arbitrarily and whether the party has cooperated to achieve the purposes of the franchise agreement. Clause 27 of the Code of Conduct applies if a franchisee breaches a franchise agreement and the franchisor proposes to terminate the agreement. Inter alia, it provides that Part 4 (resolving disputes) of the Code of Conduct applies in relation to a dispute arising from termination under cl 27.
The termination notice of 1 May 2017 alleged that the plaintiff had not remedied the breaches in the breach notice of 28 March 2017 “and our subsequent correspondence.”
Ultimately, for the purposes of the argument about whether an interlocutory injunction should be granted, the defendant accepted that there was a serious question to be tried.
I am satisfied that the following are serious questions to be tried:
(a)The plaintiff relies heavily on the obligation to act in good faith in the Code of Conduct. The plaintiff contends that the defendant took no steps to investigate whether the plaintiff had remedied the breaches and did not seriously consider whether the breaches had been remedied. Inferentially, in breach of the obligation to act in good faith, the defendant issued the notice for an illegitimate purpose: to enable it to commence business in Canberra as soon as the notice expired. On the other hand, the defendant says that its conduct was consistent with a desire to ensure maintenance of its brand and reputation in Canberra.
(b)The plaintiff says that the force majeure (the fire) had a continuing effect on the plaintiff’s business. The defendant accepts that the fire did impact on the plaintiff’s business for a short period, but disputes that there was a significant continuing impact.
(c)The plaintiff says that, as a matter of fact, there was no significant breach of contract; inter alia, the business was always conducted from the approved premises, experienced staff are, and have been, employed, and there is no reliable evidence that the plaintiff has promoted Caesarstone. As to Ms Malone’s involvement in the business, the plaintiff says that the defendant was aware that Ms Strickland was playing an important role and only made an issue of Ms Malone’s limited involvement when it wished to terminate the contract.
(d)There is an issue about the meaning of cl 7.5 of the contract and whether the plaintiff was contractually bound to remedy defects associated with work done before it purchased the franchise.
(e)The plaintiff disputes that, in the termination notice of 1 May 2017, the defendant was entitled to rely upon the alleged breaches in the April correspondence. On the other hand, the defendant says that at least some of the matters raised in the April correspondence constituted a fundamental breach entitling it to terminate the contract immediately.
(f)There is a dispute about the effect of cl 27 and Part 4 of the Code of Conduct and its impact on the defendant’s right to terminate.
Balance of convenience
The plaintiff argues that by granting an interlocutory injunction, the Court would maintain the status quo by maintaining the pre-termination contractual position.
However, this begs the question of whether, in a practical sense, there is a status quo worth maintaining and the related question of the extent to which the plaintiff would be disadvantaged if the Court declined to grant an interlocutory injunction.
The parties agree that the strength of the plaintiff’s case is relevant to a determination of the balance of convenience.
The defendant argues that the plaintiff’s case is weak.
I accept that, in relation to some of the facts, there is no real dispute that the facts favour the defendant. For example, there is no dispute that the plaintiff failed to take some of the actions required by the breach notice. Ms Malone was based in Sydney and was not directly supervising the business on a full-time basis. Further, the plaintiff failed to provide the defendant with the information and documents requested by the defendant and did not advise the defendant about complaints received and action taken to remedy the complaints.
On an interlocutory basis, it is more difficult to assess the strength of the plaintiff’s legal arguments.
If, as the defendant asserts, the plaintiff is unable to provide qualified tradespeople to install the defendant’s product, there is a significant risk to the defendant’s brand and reputation and an associated likelihood that defective work will require rectification.
The defendant submitted that it would be prejudiced if it was required to cease the business operation that it commenced on 1 May 2017.
However, as the plaintiff commenced proceedings two days later (on 3 May 2017) and the defendant’s business has been operating for less than three weeks, I am not satisfied that there could be any significant prejudice in this regard.
The defendant submitted that a court will not require specific performance of a contract for personal services and that the contract was akin to a contract for personal services because it required ongoing cooperation and trust between the parties.
I accept that the contract does require a degree of trust and cooperation, but in this respect, it does not differ greatly from many contracts involving the ongoing supply of goods.
The defendant submitted that, in the event that the plaintiff succeeded on its claim, damages were an adequate remedy.
There is no evidence that, to date, the plaintiff’s business has been productive to any significant extent. In the circumstance that the plaintiff has not developed any significant goodwill, damages may well be an adequate remedy. It would not be particularly difficult to assess damages. Evidence would be available regarding the profitability of the business if it was successfully run because it was being run successfully when the plaintiff purchased it.
The defendant submitted that the plaintiff was guilty of delay after 28 March 2017, when it first became aware of the defendant’s intention to terminate the contract.
I am not impressed by the fact that the plaintiff waited until the eleventh hour to issue a notice of dispute and, in other respects, has been less than proactive. However, these proceedings were commenced two days after the contract was terminated and the asserted cause of action arose; in that respect, there has been no delay.
Ms Malone says that the plaintiff has experienced staff and “about 70 quotations which look like they will proceed” equating to “a turnover of about $500,000.00”. The main matters that are preventing the quotations from proceeding are the fire damage to the building and the replacement of tools and equipment. On 3 May 2017, Ms Malone stated that she expected each of these problems to be resolved within “a few weeks”. On 17 May 2017, the plaintiff indicated to the Court that its business would be operational within a week.
If an interlocutory injunction was refused, Ms Malone would suffer detriment because she has personally guaranteed the lease of the business premises for two years at an annual rent of $61,615.62 plus GST.
The plaintiff says that it has six staff members who will lose their employment if the injunction is not granted.
I am sceptical about the plaintiff’s capacity to make the business operational in the near future. On the other hand, the failure to grant an injunction for a short period will, in a practical sense, seal the fate of the plaintiff’s business.
With some hesitation, I have decided that, in the short term, the balance of convenience favours the plaintiff. However, it is inappropriate for the Court to supervise the plaintiff’s business operations. If, on 5 June 2017, the Court is not satisfied that the plaintiff is operating the business in a satisfactory manner, or that continuation of the interlocutory injunction would require a degree of supervision by the Court, the injunction will not be continued.
Orders
Upon the plaintiff giving the usual undertaking as to damages (as explained in r 700 of the Court Procedures Rules 2006 (ACT)) the defendant is restrained from relying on or implementing its termination of the contract until 4pm on 5 June 2017.
The matter is relisted on 5 June 2017.
By 4 pm on 1 June 2017, the plaintiff is to file and serve affidavits concerning relevant business operations, including details of: quotations issued, customer orders taken, orders for the provision of stone by the defendant, complaints received and action taken in response between 12 December 2016 and 1 June 2017, providing supporting documentation, and the identity and qualifications of persons currently employed by the plaintiff.
By 4 pm on 2 June 2017, the defendant is to file and serve any affidavits upon which it relies in relation to the plaintiff’s business operations.
| I certify that the preceding forty-six [46] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Chief Justice Murrell. Associate: Date: 5 June 2017 |
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