BB Australia Pty Ltd v Karioi Pty Ltd - [2010] NSWCA 347

No judgment structure available for this case.

New South Wales

Court of Appeal

CITATION: BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347

HEARING DATE(S): 16 and 17 September 2010

JUDGMENT DATE:
13 December 2010

JUDGMENT OF: Giles JA at 1; Macfarlan JA at 2; Sackville AJA at 103

DECISION: The appeal is dismissed with costs.

CATCHWORDS: CONTRACT - franchise agreements - whether ending of franchise relationships constituted termination of agreements - whether franchisor had right to acquire franchisee's leasehold interests for no consideration - contractual interpretation - commercial, businesslike construction - CONTRACT - restraint of trade - franchise agreements - whether restraints on franchisee and its directors constituted reasonable protection of franchisor's legitimate interests - whether contractual regime sufficiently protected any interest in confidential information and industrial property - ESTOPPEL - estoppel by convention - whether conventional estoppel arose when franchise businesses continued after conclusion of specified contractual terms - parties did not make any consistent, clearly identifiable assumption about the nature of their relationship and how it was to end

LEGISLATION CITED: Restraints of Trade Act 1976

CATEGORY: Principal judgment

CASES CITED: Blockbuster Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089
Bridge v Deacons [1984] 1 AC 705
Chipsaway International Ltd v Kerr [2009] EWCA Civ 320
Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; (1998) 193 CLR 605
Dyno Rod Plc v Reeve [1999] FSR 148
EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389
Geraghty v Minter [1979] HCA 42; (1979) 142 CLR 177
Hanna v OAMPS Insurance Brokers Ltd (ACN 005 543 920) [2010] NSWCA 267
KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702
Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628
Miles v Genesys Wealth Advisers Limited [2009] NSWCA 25
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535
Ryeldar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603
Stenhouse Australia Ltd v Phillips [1974] AC 391

TEXTS CITED: J D Heydon, The Restraint of Trade Doctrine, 3rd ed (2008) LexisNexis Butterworths Australia

PARTIES: BB Australia Pty Ltd (Appellant)
Karioi Pty Ltd (First Respondent)
Peter Lindsay Fife (Second Respondent)
Ronald James Fortington (Third Respondent)

FILE NUMBER(S): CA 2009/298475

COUNSEL: F Kunc SC/J Emmett (Appellant)
I Pike/A Shearer (Respondents)

SOLICITORS: DLA Phillips Fox (Appellant)
Marque Lawyers (Respondents)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): SC 4338/2008

LOWER COURT JUDICIAL OFFICER: Price J

LOWER COURT DATE OF DECISION: 16 October 2009

LOWER COURT MEDIUM NEUTRAL CITATION: Blockbuster Australia Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089

CA 2009/298475

GILES JA
MACFARLAN JA
SACKVILLE AJA
13 DECEMBER 2010

BB AUSTRALIA PTY LTD v KARIOI PTY LTD

Judgment

1 GILES JA: I agree with Macfarlan JA.

:

Nature of case and conclusions

3 By two Franchise Agreements dated 2 April 1998 and in substantially identical terms the appellant (“Blockbuster”) granted to the first respondent (“Karioi”) the right to conduct Karioi’s existing video store businesses at Noosaville and Nambour in Queensland as Blockbuster Video Stores using methods of operating retail businesses for the rental and sale of video and related products developed by Blockbuster (“the Blockbuster Systems”). The Blockbuster Systems included the use of a distinctive retail store format and colour scheme. In 1998 Blockbuster itself operated about 140 stores throughout Australia. It commenced franchising stores in that year. The obligations of Karioi under the Agreements were guaranteed by the second and third respondents (Messrs Fife and Fortington) who were directors of Karioi.

4 When the 10 year terms of the Agreements expired in April 2008, Karioi, with the consent of Blockbuster, continued until 31 August 2008 to operate the stores as Blockbuster franchises. Presumably the stores were by then essentially DVD rather than video stores but the distinction has no relevance to this appeal as the definition in the Agreements of “Video Products” included DVDs. Karioi has continued to operate the stores, otherwise than as Blockbuster franchises, since 31 August 2008.

5 Subsequently Blockbuster commenced the present proceedings seeking orders, inter alia, to enforce restraint of trade provisions contained in the Agreements, orders concerning confidential information of Blockbuster that Blockbuster alleged was in the possession of Karioi and orders concerning alleged rights of Blockbuster to acquire assets of Karioi’s businesses, including leases of the premises upon which the businesses were conducted.

6 For reasons given in his judgment of 16 October 2009 (Blockbuster Australia Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089) Price J made orders in favour of Blockbuster in relation to the allegedly confidential information but otherwise rejected Blockbuster’s claims for relief.

7 For the reasons that I have given below I do not consider that Blockbuster is entitled to succeed upon any of the three issues that it raised on appeal, namely, the Asset Purchase Issue (see [8] – [30] below), the Lease Acquisition Issue (see [31] – [42] below) and the Restraint of Trade Issue (see [43] – [101] below).

The Asset Purchase Issue

8 Blockbuster unsuccessfully contended before the primary judge, and contends on appeal, that when the Agreements came to an end (to use a neutral expression) at the end of August 2008, it became entitled under Clause 18.6 of the Agreements to require Karioi to sell to Blockbuster (at prices to be determined, if necessary, by an independent valuer) such of Karioi’s fittings, equipment, stock and consumables used in the conduct of the Franchised Operations as Blockbuster wished to acquire. As this right was expressly conditioned on the Agreements having been “terminated”, it was necessary for Blockbuster to demonstrate that the Agreements were in fact “terminated” in the sense that that expression was used in the Agreements, as distinct from simply expiring or coming to an end by some other means.

9 If the Agreements were “terminated”, Blockbuster undoubtedly also acquired the right under Clause 18.9 to require Karioi to transfer to it Karioi’s leases of the premises upon which the businesses were conducted. Clause 18.9 did not provide for the giving of consideration for the transfer. Blockbuster had an alternative argument, which is the subject of the second issue on the appeal (see [31] – [42] below), that even if the Agreements were not “terminated”, Blockbuster was nevertheless entitled to obtain a transfer of the leases under Clause 18.9.

Relevant Provisions of the Franchise Agreements

10 Clause 18 of the Agreements relevantly provided as follows:

Upon this Agreement being terminated or expiring for whatever reasons,

18.5 Transfer telephone service

…

18.6 Sale of Selected Fittings and Equipment

18.6.1 IF the Agreement is terminated, and if COMPANY [that is, Blockbuster] requires, the FRANCHISEE must sell and deliver to COMPANY any of the FRANCHISEE’s fittings and equipment and any unsold stock of videos, accessories and consumables used in the conduct of the Franchised Operation that COMPANY selects.

18.6.2 The purchase price of the fittings, equipment, videos, accessories and consumables will be as agreed between the parties but if they cannot agree then as determined by an independent valuer nominated by the then President of the Queensland Law Society or his/her nominee. The valuer[’]s fees will be paid equally by the parties but if one party pays the whole fee they may recover the other party’s share as a debt due and owing or, at its option, COMPANY may set-off FRANCHISEE’s share against the purchase price.

…

18.6.6 If the Agreement expires, refer to Option to Purchase, paragraph 32.

If required by COMPANY the FRANCHISEE must assign, transfer or surrender (as the case may require) of [sic] all the FRANCHISEE’s right, title and interest in any lease, sub-lease or licence of the Premises or equipment held by the FRANCHISEE as part of or in the course of the Franchised Operation”.

11 Termination of the Agreements was dealt with in Clause 16 which had a heading “TERMINATION – DEFAULT” and commenced with the words:

“COMPANY at its option, and without prejudice to any other rights or remedies it may have, may immediately cancel this Agreement and the Franchise if any of the following things happen … ”.

12 There then followed in Clause 16 a list of matters constituting default. It is sufficient to say that these included a failure by Karioi to pay any money due by it to Blockbuster, any breach or non-observance or non-performance by Karioi of any covenant in the Agreements and the commission by Karioi or any of its directors or principal officers of any criminal offence. The only event giving rise to termination not of this character (that is, not being what might be regarded in common parlance as in a very broad sense a “default”) was Blockbuster and Karioi agreeing in writing “to cancel” the Agreements. This event was referred to in Clause 16.15 under the heading “Written Agreement to Terminate”.

13 The concept of expiration, as distinct from termination, of the Agreements was referred to in the first line of Clause 18 and also in Clause 18.6.6 which included a cross-reference to an option (of Blockbuster) to purchase contained in Clause 32 of the Agreements (see [10] above). This Clause is relevant to the resolution of the second issue on the appeal (see [31] – [42] below).

14 For the purposes of its argument on the first issue on appeal (as distinct from that on the second issue) Blockbuster implicitly accepted that because of its place in a clause dealing with termination (see the heading to Clause 18: “ACTION UPON TERMINATION”), Clause 18.9 was only applicable if the Agreements were “terminated” in the sense contemplated by Clause 16, as distinct from the Agreements coming to an end as a result of expiry of their terms.

15 The definition of “Franchise Term” contained in Clause 1 of the Agreements, was as follows:

“‘Franchise Term’ means the Original Term, the Renewal Term and any other period during which the FRANCHISEE operates the Franchised Operation with COMPANY’s consent”.

16 The “Original Term” was the period of 10 years from 2 April 1998 and the “Renewal Term” would have been a further 5 year period of the operation of the Agreements applicable in the event, which neither party contended on appeal did in fact occur, of the exercise of an option to extend the term.

Blockbuster’s argument

17 Blockbuster does not allege that Karioi defaulted in any of the ways itemised in Clause 16, either in the 10 year period to April 2008 or in the period from that date until the date of 31 August 2008 upon which both parties accept that the Agreements undoubtedly came to an end. Nevertheless it contends that the Agreements were “terminated” at the end of that latter period such as to enliven, in Blockbuster’s favour, the provisions of Clause 18.6.

18 Its argument is to the following effect:

(a) “[A]n estoppel by convention arose [applicable from 3 April 2008] to the effect that the Franchise Agreements would continue until either Karioi exercised its option to renew or until the Franchise Agreements were terminated” (Summary of Argument [10]);

(b) This estoppel arose because the parties acted upon a common assumption to this effect (Summary of Argument [11]);

(c) “[T]he Franchise Agreements give the word ‘ expiry ’ its primary meaning of a right coming to an end through effluxion of time (Clause 18.6), leaving to ‘ termination ’ the circumstances in which the rights are extinguished through the voluntary act of one or both parties” (Summary of Argument [19]); and

termination

19 Blockbuster accepted that there was between the parties “a mutual understanding that the Franchise Agreements would continue on foot between the parties during the [post 2 April 2008] ‘negotiation period’” (Outline of Factual Matters [49]) and that “it is obviously appropriate to infer that both parties had the right to bring the continuation of the Franchise Agreements to an end upon reasonable notice” (ibid [52(e)]). It contended however that because of the distinction in the Agreements between “termination” and “expiry”, the Agreements “would treat” any exercise of the right to bring the continuation of the Agreements to an end upon reasonable notice “as a ‘termination’ and not an ‘expiry’” (ibid [51]).

20 Blockbuster summarised the matters upon which it relied to establish the common assumption for which it contended as follows:

“(a) correspondence between Blockbuster and Karioi clearly demonstrating a mutual understanding that the Franchise Agreement would continue in force after 2 April 2008, at least for as long as the negotiations about whether Karioi would exercise its option to renew [continued] and, if so, on what terms;

(b) conduct on both sides in ongoing performance of the Franchise Agreements after 2 April 2008;

(c) oral evidence from Mr Fife, the effect of which was that he understood that the obligations in the Franchise Agreements would continue to have effect during the period of negotiation;

terminate its Franchise Agreements

terminate

The judgment at first instance

21 The primary judge concluded that there was nothing in the terms of letters written on behalf of Blockbuster in the relevant period “which suggest[ed] that Blockbuster was acting upon the assumption that, if the negotiations between the parties were unsuccessful, the bringing to an end of the negotiation period would be a termination under the franchise agreements” (Judgment [92]). His Honour considered that letters of 7 and 14 May 2008 written on behalf of Blockbuster in fact pointed against such a conclusion.

22 Likewise, his Honour found that Karioi did not act upon that assumption and a letter of 23 May 2008 written by Mr Fife indicated that that was the case (Judgment [93]).

23 The judge’s conclusion on this issue was expressed as follows:

“ … I am satisfied on the balance of probabilities that a reasonable person would consider the communications and conduct of the parties demonstrate a common understanding that Karioi with Blockbuster’s consent would continue to operate the stores as Blockbuster franchises until either the option to renew under cl 2.2 was exercised or the negotiations were concluded without agreement. There was a mutual assumption that if they were unable to reach agreement upon the terms of a renewal of the franchises Blockbuster’s consent to Karioi’s operation of the franchises would be withdrawn” (Judgment [96]).

…

“ … Whilst Blockbuster by Mr Howes’s letter of 6 August 2008 purported to terminate the franchise agreements, the true nature of its action was to withdraw its consent to Karioi operating the franchises from 31 August 2008 from which date the franchise terms expired” (Judgment [100]).

24 For those reasons the judge concluded that the Agreements had not been “terminated” and that Clause 18.6.1, because it was expressly predicated upon the Agreements having been “terminated”, was not applicable. The judge thus held that Blockbuster had no right of purchase under Clause 18.6. It followed that Blockbuster failed, so far as the arguments in relation to this issue were concerned, in establishing that Clause 18.9 became operative.

Consideration

25 In my view the primary judge’s decision on this issue was correct, essentially for the reasons that he gave. The correspondence between the parties in the relevant period did not reveal that either party made any consistent, clearly identifiable assumption as to what the precise nature of the legal relations between them was and how those relations were to end, beyond that referred to in [28] below. Certainly the evidence did not establish that the assumption of the type identified by Blockbuster in its argument “formed the conventional basis” of the parties’ relationship in the relevant period (see generally as to conventional estoppel, Ryeldar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [193] – [214] per Tobias JA with the agreement of Mason P and Campbell JA).

26 To emphasise the correctness of the views taken by the primary judge and to illustrate the difficulties faced by Blockbuster in its argument I would simply refer to the following correspondence.

27 Blockbuster’s letter of 14 May 2008 said that “[a]s advised in our letter to you of 7 May 2008 we will consider exercising our rights as above advised in the event that you terminate the Franchise Agreement on 31 May 2008 as indicated”. The reference to termination was a reference to a statement that Karioi made in a letter of 2 May 2008 that “[w]e would appreciate [it] if our ties can terminate on 31^st May … ”. Amongst the rights that Blockbuster said in its letter of 14 May 2008 that it would consider exercising was the option granted by Clause 32 to acquire the assets of Karioi’s franchised operations. This option was only available “upon the expiration of the Original Term … ”. What Blockbuster said was thus inconsistent with Blockbuster’s contention on appeal that the parties were proceeding upon the common assumption that any notice by one party to the other that their relationship was to end would constitute a “termination” as that expression was used in the Agreements, as distinct from the expiration of the term of those Agreements (and indeed as distinct from any other way of bringing their relationship to an end). Other possible ways of bringing the relationship to an end included the withdrawal by Blockbuster of its consent to Karioi continuing after the Original Term to conduct the Franchised Operations (see the definition of “Franchise Term” quoted in [15] above) and the giving of reasonable notice by one party to the other, if (as occurred) the Agreements were performed beyond their fixed terms without agreement as to fixed periods of extension (see in this respect the concession of Blockbuster referred to in [19] above).

28 The outcome at which the primary judge arrived can further be supported by reference to the terms in which Blockbuster stated its argument (see [19] above). The argument involved a recognition that there was an implicit arrangement between the parties that the Agreements would continue to govern their dealings until that situation was brought to an end by one party giving reasonable notice to the other. The conclusion that the giving of such reasonable notice would amount to a “termination” under the Agreements seems, in Blockbuster’s argument, simply to be based upon the proposition that that would be “the most natural position” (see [18(d)] above). I do not however agree that that is so.

29 The bases for “termination” under the Agreements were set out in Clause 16 (see [11] and [12] above). With the exception of the making of an agreement in writing “to cancel” the Agreements (Clause 16.15) the circumstances justifying termination all related to what may loosely be termed “default” on the part of Karioi. Indeed the word “default” forms part of the heading to the Clause. The right that Blockbuster accepts was implied by law into the arrangements between the parties after 2 April 2008 to bring those arrangements to an end “upon reasonable notice” (of either party) was of a quite different character. It was not one of the circumstances specified in Clause 16 and was not analogous to any of them. It cannot in my view be concluded, at least in the absence of express support for it in the communications between the parties (of which there is none), that the parties must have regarded their rights to bring their post 2 April 2008 arrangements to an end upon reasonable notice as equivalent to “termination” under the Agreements and as carrying with it the consequences that followed under the Agreement when default occurred.

30 In my view Blockbuster is not entitled to succeed on the first issue.

The Lease Acquisition Issue

31 Blockbuster’s next argument was that regardless of whether the Agreements “expired” or were “terminated” at the end of August 2008, Blockbuster had a right under Clause 18.9 (see [10] above) to require Karioi to assign to it the franchised stores’ leases.

32 If Clause 18.9 did in fact confer this entitlement, Blockbuster was, and is, entitled to such assignments without the need for Blockbuster to give any consideration to Karioi for them. It was common ground in the proceedings that relevant leases (or subleases) were held by Karioi and that nothing turns upon the detail of them. The effect of Blockbuster being entitled to require Karioi to assign the leases to it would be that Blockbuster could thereby prevent Karioi continuing to carry on video store businesses at the two sets of premises.

33 Resolution of this issue turns upon whether Clause 18.9 should be construed as having been operative only upon “termination” of the Agreements even though the Clause did not expressly state that that was so.

34 Prominent in the primary judge’s reasoning on this issue was Clause 32 of the Agreements. This was relevantly in the following terms:

…

32.4 (a) The purchase price for the Assets will be the fair market value as agreed between COMPANY and the FRANCHISEE but if they cannot agree then as determined by an independent valuer nominated for that purpose by the President of the Queensland Law Society or his/her nominee.

…

32.6 The FRANCHISEE must cooperate in the assignment to COMPANY of any interest which the FRANCHISEE has in any lease or tenancy with respect to the Premises and do all things reasonably necessary to obtain the landlord’s consent to the assignment. The option under this clause will lapse if the landlord’s consent to the assignment cannot be obtained”.

The judgment at first instance

35 First, the primary judge found that at the time the parties entered into the Agreements, they were aware of the following background facts. These findings were not challenged on appeal.

“(i) Karioi had been operating the Noosaville store for about 8 years and the Nambour store for about 4 years [prior to 2 April 1998]. They were established stores with existing databases of members and profitable trading histories.

(ii) The goodwill of each store had substantial value.

36 The judge then noted that whilst Clause 18 was headed “ACTION UPON TERMINATION” the clause commenced with the words “Upon this Agreement being terminated or expiring for whatever reasons”. He referred to the operation of Clause 18.6.1 being expressly conditioned upon termination of the Agreements and then said:

(a) require Karioi to transfer to it its leasehold interests in the Noosaville and Nambour stores pursuant to cl 18.9 for no payment. There is no time provided within which Blockbuster is required to exercise that right; or

Assets

128 As Karioi submits, a literal construction of cl 18.9 would permit Blockbuster to circumvent the operation of cl 32 by requiring Karioi, for no consideration, to transfer to it Karioi’s leasehold interests without purchasing the assets of the franchised operations. Not only would Karioi be prevented from continuing to operate the businesses from the Noosaville and Nambour stores Karioi would receive nothing for its valuable goodwill .

129 Clauses 18.9 and 32 literally construed are plainly inconsistent but that is not enough to engage the absurdity rule. Can they be read harmoniously so that effect can fairly be given to both clauses?

130 Blockbuster’s contention that these clauses can be harmonised is founded on the premise that cl 18.9 ensures that the part of the goodwill of the business which arises from its location enures to the benefit of Blockbuster. Karioi, it is suggested, would then be free to sell to a third party its stock, goodwill (such as staff who have a particularly good reputation or relationship with the customers of the area) and any non-confidential information. An acceptance of that submission would ignore the substantial value of the goodwill of each store that pre-existed the arrival of Blockbuster and the efforts of Karioi to successfully operate the business over the franchise terms. By themselves Karioi’s leasehold interests particularly in the Noosaville store are valuable assets. An acceptance of Blockbuster’s case would permit Blockbuster in substance to acquire the leasehold interests and the goodwill attaching to the store locations for nothing. The suggestion that Karioi could then sell goodwill such as staff is devoid of business commonsense and commercial reality. Blockbuster’s alternative construction which permits of a negligible value being assigned to the leasehold continues to ignore the valuable assets which Karioi held before it entered into the franchise agreements. Furthermore, there is nothing in the agreements which indicates that upon the option to purchase being exercised under cl 32.1 the fair market value of a leasehold interest should be written down because of Blockbuster’s rights under cl 18.9. Neither construction gives a fair effect to both clauses nor avoids inconsistency.

…

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd

37 Again, I agree with the primary judge’s conclusion and reasoning. Blockbuster’s construction does not make sense of the Agreements. On the one hand they provided, according to Blockbuster’s argument, that upon expiration of their terms Blockbuster was able to require Karioi to transfer the leases of the premises to it for no consideration (Clause 18.9) and at the same time provided that if Blockbuster upon the expiration of the terms sought to acquire the leases from Karioi it had to pay their “fair market value” to Karioi (Clause 32). The obvious way of construing Clauses 18.9 and 32 so as to arrive at an harmonious, businesslike interpretation of them is to have regard to Clause 18.9 as part of the Agreements as a whole and to conclude that it only applied in the event of termination, as distinct from expiration, of the Agreements.

38 That conclusion is supported by the findings of mutually known facts that the primary judge made (see [35] above): Karioi had been operating the stores for a number of years prior to them becoming Blockbuster franchises, with each store having attached to it substantial goodwill that was to a significant extent based upon the locations of the stores. These facts suggest that it was most unlikely that reasonable people in the position of these parties would have intended to agree that, in a circumstance where Karioi was not in default under the Agreements, Karioi would have to transfer its leases to Blockbuster, and thereby transfer to Blockbuster the associated, valuable goodwill, for no return to Karioi.

39 The opening words of Clause 18 (referring to both termination and expiration) are a contrary indication but this is in my view outweighed by the factors to which I have referred. The phrase is in any event capable of being read, and should in the circumstances be read, not as stipulating that each of the subclauses of Clause 18 (including Clause 18.9) would be equally operative whether the Agreements were terminated or simply expired, but as recognising that, despite the terms of the heading, some of the subclauses might be applicable even if there were no termination as such, thus leaving the condition upon which particular subclauses were enlivened to be determined by their character and a consideration of the terms of the Agreements as a whole. The obligation in Clause 18.3 to “Remove or Obliterate Signs and Features” might, for example, be sensibly construed as applying whether the Agreements were terminated or simply expired. In light particularly of Clause 32, Clause 18.9 could not.

40 Blockbuster submitted that the apparent inconsistency between Clauses 18.9 and 32 would be resolved if the reference to goodwill in Clause 32 were understood as a reference to “goodwill other than the location of the store” (Summary of Argument [31]). However the judge’s factual findings (see [35] above) demonstrated that the location of the stores was a very significant aspect of the goodwill of the franchised operations. The prominent references in Clauses 32.1 and 32.6 to the leases of the premises reflected this. In these circumstances there is not in my view any basis for the construction for which Blockbuster contended.

41 For similar reasons I do not accept Blockbuster’s submission that there is in reality no inconsistency between Clause 18.9 and 32 because a valuer acting under Clause 32 could, by reason of the existence of Blockbuster’s alleged rights under Clause 18.9, assign a negligible value to the leases of the premises (Summary of Argument [38]). If the parties had contemplated that this would occur, they would not in my view have expressly referred in Clause 32.1 to the “leasehold interest in the Premises”.

42 For these reasons Blockbuster has failed to establish that the primary judge has erred in resolving the lease acquisition issue against it. Clause 18.9 would only have applied if the Agreements had been terminated which, according to my findings on the first issue, they were not.

The Restraint of Trade Issue

43 By its Amended Statement of Claim Blockbuster sought against each of the respondents orders in the following terms relating to each store:

“An injunction restraining the [respondents] from operating a business offering recorded films and/or computer games for hire within 30 km of the [premises] for a period of two years from 1 September 2008”.

44 So far as Karioi was concerned, these claims were founded upon Clause 14 of the Agreements which was in the following terms:

For a period of:

(i) Three years;

(ii) Two years;

(iii) Twelve months;

(iv) Six months;

following the expiration[,] termination or Transfer of this Agreement FRANCHISEE will not directly or indirectly in any capacity whatsoever (including either individually or as a principal member, franchisor, franchisee, licensor, licensee, lender, joint venturer, agent, officer or employee of any business) engage in or have a Financial Interest in or render consulting or other services to any Competitive Business:

(i) within a radius of thirty kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

[ii] within a radius of ten kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

(iii) within a radius of five kilometres of any BLOCKBUSTER Video Superstore outlet located in Australia;

(iv) within a radius of one kilometre of any BLOCKBUSTER Video Superstore outlet located in Australia;

(v) within a radius of thirty kilometres of the Site;

(vi) within a radius of ten kilometres of the Site;

(vii) within a radius of five kilometres of the Site;

(viii) within a radius of one kilometre of the Site;

(ix) Anywhere within the Territory.

14.2 For a period of

(a) Three years;

(b) Two years;

(c) Twelve months;

(d) Six months,

following the expiration, termination or Transfer of this Agreement, FRANCHISEE will not by any direct or indirect inducement divert or attempt to divert to any Competitive Business any customer or business of the STORE or any customer or business of any other BLOCKBUSTER VIDEO Store”.

45 Under the Agreements the second and third respondents, the directors of Karioi, agreed to restraints of a similar nature.

46 The respondents contended that the restraints constituted unreasonable restraints of trade that were contrary to public policy and were therefore void.

The judgment at first instance

47 The primary judge noted first that as Clause 26 of the Agreements provided that they were to be governed by the laws of Queensland, the validity of the restraint of trade provisions was to be determined under the common law and not by reference to the Restraints of Trade Act 1976.

48 He then referred to the principle established by Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535 that whilst restraints of trade are prima facie void, the general rule is subject to the exception that restraints that are reasonable are valid – reasonable “in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour [they are] imposed, while at the same time [they are] in no way injurious to the public” (at 565 per Lord Macnaghten).

49 The primary judge also stated the following propositions, the correctness of which was not in issue in the appeal:

Herbert Morris Ltd v Saxelby

The Restraint of Trade Doctrine

^rd

Putsman v Taylor

The Restraint of Trade Doctrine

50 His Honour then said:

51 In the course of considering whether Blockbuster had a legitimate interest to protect, the judge referred as follows to affidavit evidence given by Mr Uniacke who was the managing director of Blockbuster:

in [his] experience in the industry, the primary factor in determining which video store a person will choose to belong to is the convenience of the location

customers tend to have strong brand loyalty and, as a general rule, in [his] experience, customers tend not to change video stores

52 The judge referred also to evidence to similar effect that Mr Uniacke gave in cross-examination.

53 His Honour went on to consider the growth in the stores’ membership numbers and concluded as follows:

“152 I conclude that the growth in the patronage of the Noosaville and Nambour stores in the decade of trading as Blockbuster franchises may be attributed in part to the attraction of the Blockbuster brand to some customers and to the benefits provided by being part of a large marketing group. To this extent Blockbuster has an interest in the stores’ customers which is a legitimate interest to protect.

54 Mr Fife had said in evidence that he “did not accept that brand recognition would make much difference in Nambour but it would have some significance in Noosaville” (Judgment [150]).

55 As to the first and second aspects of Blockbuster’s claimed goodwill (see [50] above), his Honour concluded:

“159 There is, in my opinion, an element of double counting in this submission [concerning the first aspect of the claimed goodwill] as the third aspect of Blockbuster’s claim to goodwill is the ‘ Confidential Information ’ preserved for its benefit. Blockbuster’s entitlement to confidential information which includes the customer database does not augment, in my view, Blockbuster’s legitimate interest in the stores’ customers which I have found at [152] above.

56 On the third aspect, his Honour concluded:

“166 Mr Uniacke, in my opinion, in the passages of his affidavit which have been quoted at [162-163] above, overstates the value of the information provided to Karioi and the competitive edge it would give to a Blockbuster competitor. Mr Fife is a very experienced video retail operator and I accept his evidence as to the limited value of the Blockbuster material”.

57 His Honour then concluded:

…

Confidential Information

Karioi employs seven staff at its Nambour store and twelve staff at its Noosaville store. If Blockbuster is able to rely on the restraints in the Franchise Agreements, both the Nambour and Noosaville stores will need to be shut down. This will mean that all staff will be dismissed…

173 I regard such a loss of employment as being detrimental to the public interest. I am unable to conclude on the evidence that Blockbuster intended to open its own video retail stores or to grant new franchises within the territory of the Noosaville and Nambour franchise agreements upon the expiration of the franchise terms. Any imposition of restraint in the circumstances is more than what is required to protect Blockbuster’s interests and, in my view, is unreasonable.

KA & C Smith Pty Ltd v Ward

175 Given the need to balance the interests of Blockbuster and the defendants, I consider that any period of restraint is unreasonable. Upon either approach, I decline to grant injunctive relief to Blockbuster”.

58 The judge concluded that the restraints on the directors were not necessary to protect Blockbuster’s interests because Blockbuster had the ability to protect its interests by exercising the rights conferred upon it by Clauses 10 (imposing restrictions on the use of confidential information), 18.2 (requiring the delivery up of confidential material) and 32 (giving Blockbuster an option to purchase assets used in the franchised operations) (Judgment [176]).

Legal principles

59 I should add the following to the references to legal principles and authorities given in [48] – [49] above.

60 As observed by Gibbs J in Geraghty v Minter [1979] HCA 42; (1979) 142 CLR 177, “[t]he courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants between vendor and purchaser” (at 185). There are a variety of reasons for this (J D Heydon, The Restraint of Trade Doctrine, 3^rd ed (2008) LexisNexis Butterworths Australia at 86 – 90). They include the fact that by agreeing to a restraint on further employment an employee may be wholly or partially giving up his or her ability to work after the present employment ceases. On the other hand, when a business is sold it may not have any value to the purchaser if the vendor is not restrained from competing for at least a limited period (ibid at 90). Thus the law permits a purchaser to impose restraints reasonably necessary to protect the goodwill it is purchasing. Relevant to the present case is therefore the question of whether at the date of the Agreements reasonable people in the position of the parties would have contemplated that by the Agreements, or by the operation of the franchised business under them, Blockbuster would acquire any goodwill which the restraint of trade covenants in Clause 14 of the Agreements were reasonably necessary to protect.

61 Franchise agreements commonly have characteristics relevant to both employment and vendor/purchaser categories (ibid at 93). As a result, to determine whether the stricter, less favourable view taken in the employment cases should be applied to the present case, it is necessary to look carefully at the features of the particular franchise relationship in question, without presuming in advance that the approach relevant to one rather than the other of the categories is necessarily applicable. This is what occurred in Bridge v Deacons [1984] 1 AC 705 which dealt with another arguably hybrid relationship, namely, that of partners in a firm of solicitors.

Whether the vendor/purchaser category of cases is analogous

62 In the present case Karioi had for some years prior to the date of the Agreements operated video stores at the two locations. Such goodwill as existed in relation to the businesses at the date of the Agreements was owned by Karioi. Blockbuster paid money to a previous franchisor of Karioi to have it encourage Karioi (and other franchisees) to enter into the Agreements with Blockbuster. However Blockbuster did not make any payment to Karioi and Blockbuster did not by its payment to the previous franchisor acquire any rights to Karioi’s goodwill beyond those that it may have acquired under the Agreements, a topic to which I shall now turn.

63 Clause 32 of the Agreements conferred upon Blockbuster an option to acquire Karioi’s goodwill relating to the businesses in certain circumstances. In so providing, the Agreements recognised and contemplated that Karioi’s goodwill as it stood at the date of the Agreements, and as it might be enhanced by the franchised operations, would remain the property of Karioi (subject to Blockbuster’s exercise of that option and such rights arising upon cessation of the Agreements to transfer of the goodwill as Blockbuster might have under Clause 18).

64 If Blockbuster had by exercise of its option to purchase arising upon expiration of the terms of the Agreements purchased Karioi’s goodwill, the parties would have been in the position of vendor and purchaser of the goodwill and the principles applicable to the category of cases concerned with the sale of goodwill would have been applicable. In these circumstances, the restraint of trade provision may, at least in part, have been justified on that basis. However the option to purchase was not exercised, nor, according to the views that I have formed upon the first two issues arising on the appeal, is this a case where Blockbuster was entitled to acquire any assets of Karioi under Clause 18.

65 Prima facie the principles in the vendor/purchaser cases are accordingly not here relevant. However before turning to the principles applied in the employment cases, it is necessary to consider whether, upon the assumption that Blockbuster did not and has not acquired any of Karioi’s goodwill, Blockbuster nevertheless otherwise acquired goodwill which the restraint of trade covenants in the Agreements may be regarded as reasonably protecting.

66 Prior to 2 April 1998 Blockbuster undoubtedly had goodwill associated with its brand. Because of the multiplicity of stores that operated under its banner, that goodwill existed independently of the businesses at the two subject premises (with which it was not then associated). Blockbuster was not entitled to protect such independently generated goodwill against competition by the respondents. To this extent Blockbuster had as at 2 April 1998 no legitimate interest requiring protection from competition.

67 The question then arises whether as at the date of the Agreements reasonable people in the position of the parties would have expected that performance of the Agreements and the conduct of the Franchised Operations during the terms of those Agreements would be likely to generate significant new goodwill in relation to those businesses which Blockbuster would own and which Blockbuster could reasonably protect by the restraint of trade provisions. If they did so expect, the present case would to that extent bear some analogy to the purchase of goodwill category of cases (the vendor/purchaser category) because, so the argument would go, Blockbuster would by its performance of its obligations under the Agreements have been expected to be in effect purchasing that goodwill by allowing, and indeed facilitating, Karioi’s use of Blockbuster’s brand.

68 This question must be considered in the context of the three aspects that Blockbuster submitted that its goodwill had (see [50] above). The third of those (see subparagraph (c)) was in effect the Blockbuster brand and all the industrial property, confidential information, operating systems and the like associated with it that Karioi was permitted to use during the currency of the Agreements (see the reference in [3] above to the “Blockbuster Systems”). The Agreements however clearly precluded the respondents using any facet of the Blockbuster Systems after the Agreements came to an end and required the return to Blockbuster of “all copies of the Industrial Property and Confidential Information” (Clause 8.6; and see Clauses 2.1, 10 and 18) that had been made available to Karioi.

69 In these circumstances, and for reasons given in my discussion below of the decision in EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389 (see [93] – [94] below), I consider that the third aspect of Blockbuster’s claimed goodwill was sufficiently protected by the terms of the Agreements, other than the restraint of trade provision in Clause 14, and that additional protection by means of Clause 14 was not reasonably required. In other words, to the extent that during the currency of the Agreements the parties expected Blockbuster to acquire goodwill in connection with the businesses as a result of the use of the Blockbuster Systems in the businesses, Blockbuster had no legitimate interest to protect by use of a restraint of trade clause because the parties would not reasonably have expected that after cessation of the Agreements Karioi could or would use any part of the Blockbuster Systems to compete with Blockbuster.

70 The second aspect of Blockbuster’s claimed goodwill related to the location of the stores (see [50] above). However, it was Karioi, not Blockbuster, that had the rights to occupy the premises prior to the making of the Agreements. Clause 14.1 does not identify the location of the stores as a basis for Blockbuster having any interest in protecting itself from competition. The Agreements were specific as to the circumstances in which Blockbuster might become entitled to those rights at the conclusion of the Agreements’ terms (see Clauses 18 and 32). Those circumstances did not occur. Whilst judging the position as at the date of the Agreements, the view might be available that the restraints of trade would be reasonable to the extent that they applied where Blockbuster acquired Karioi’s leases of the premises, they were not reasonable insofar as they applied to circumstances such did in fact occur. To the extent that Karioi retained entitlement to the locations, Blockbuster had no goodwill based upon those locations. Accordingly the restraints of trade could not be justified by reference to the second aspect of the claimed goodwill.

71 The remaining aspect of Blockbuster’s claimed goodwill was “the patronage of the store, as set out in the customer database” (see subparagraph (a) set out in [50] above).

72 The evidence of Mr Uniacke, who was Blockbuster’s Managing Director, (see [51] – [52] above), indicated that this was not in reality an independent aspect of any goodwill that Blockbuster owned. The effect of Mr Uniacke’s evidence was that the goodwill of the businesses (irrespective of who owned that goodwill) arose out of the location of the businesses and their branding. These are the two aspects of Blockbuster’s claimed goodwill with which I have already dealt. Mr Uniacke did not suggest that any other factors, for example, personal service provided to customers, was a significant factor in attracting or retaining customers.

73 The primary judge did refer to “customer service, operating efficiency and video retail experience of Mr Fife, Mr Fortington and Karioi’s staff” as enhancing the value of the stores (see [35] above). However he did not conclude that such factors would have been expected in the present case to cause customers to choose one video store over another, or did in fact do so. Nor was this Court referred on the appeal to any evidence indicating that this was or might have been the case.

74 The primary factor recognised in the evidence of Mr Uniacke and Mr Fife was the location of the premises. The other factor they recognised was the Blockbuster brand, although Mr Uniacke attributed more significance to this factor in relation to the subject stores than did Mr Fife. The primary judge preferred Mr Fife’s evidence in this respect (see [56] above).

75 I put the point another way as follows. The goodwill of a business of the type under consideration is the intangible asset which reflects the fact that there are features of the business that render it likely that customers will come to, or will continue to, do business with it (see Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; (1998) 193 CLR 605, as to the variety of ways in which “goodwill” can be defined, but see particularly [17] as relevant to the present case). In the case of businesses such as the subject ones, a feature of this type might be the location of the businesses. Another might be the brand under which they operate. For reasons I have given above, neither of these features is capable of underpinning the relevant restraint of trade clauses here. Other features of relevance might be reputation or customer connection arising out of the quality of products or services provided during the currency of the Agreements. However there was no evidence in the present case that reasonable people in the position of the parties would have contemplated that these features, as distinct from location and branding, might of themselves draw customers to businesses conducted by Karioi after cessation of the Agreements and away from competing Blockbuster businesses, or that that in fact occurred.

76 Blockbuster did not therefore have any legitimate interest in the “patronage” of the businesses (to use the word used in Blockbuster’s identification of the first aspect of its claimed goodwill – see [50] above).

77 The result of these considerations is that, subject to any operation of Clauses 18 or 32 at the conclusion of the Agreements, there is no basis for concluding that at the date of the Agreements reasonable people in the position of the parties would have considered that Blockbuster owned, or was likely to acquire during the currency of the Agreements, any goodwill in the businesses at the two locations which Clause 14 was reasonably required to protect. As my view is that Blockbuster did not acquire any such goodwill as a result of the operation of Clauses 18 or 32 of the Agreements, the relationship between the parties was not analogous to the purchase of goodwill (that is, to the vendor/purchaser) cases and the approach taken in these cases is not therefore applicable.

The principles applicable to the employment category of cases

78 It remains to consider whether the restraints of trade can be justified as reasonable by reference to the principles applied in the employment category of cases. Neither Karioi nor its directors were employed by Blockbuster but as in a loose sense they were acting on Blockbuster’s behalf (as well as on behalf of Karioi) to generate and develop businesses at the two locations carried on in Blockbuster’s name, some analogy to the employment category of cases exists.

79 The first point to be made is that which the Privy Council made in Stenhouse Australia Ltd v Phillips [1974] AC 391 as follows:

“The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information (which is separately dealt with by clause 3 of the agreement and which does not arise here), the employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For while it may be true that an employee is entitled – and is to be encouraged – to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer’s business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers” (at 400).

80 This statement of principle was approved by this Court in Miles v Genesys Wealth Advisers Limited [2009] NSWCA 25 at [37] and in Hanna v OAMPS Insurance Brokers Ltd (ACN 005 543 920) [2010] NSWCA 267 at [43].

81 The emphasis in the passage upon the need to identify “some advantage or asset inherent in the business … which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation” reflects the focus in the cases in the employment category, first, upon the extent to which the employee is likely during the course of his or her employment to develop business relations with customers and, secondly, upon the prospect of use by the employee of confidential information made available to the employee during the course of his or her employment (J D Heydon, The Restraint of Trade Doctrine, at 115 – 133). Thus if it is anticipated that an employee will develop personal connections with customers whilst acting in the course of his or her employment, such that the customers may follow the employee to a new business, it may be reasonable for the employer to impose some contractual restraint upon the employee operating or being involved in such a new business.

82 As pointed out in [75] above there was however no evidence in the present case of the expectation of reasonable people in the position of the parties of development of any such customer connections that might have this result. Indeed, Blockbuster’s own evidence, given by Mr Uniacke, in emphasising the importance of location and brand, suggested an absence of such connections.

83 So far as confidential information, the other focus of cases in the employment category, is concerned, Blockbuster had in the Agreements separate contractual protections that were the foundation for orders made by the primary judge which are not in issue on the appeal. For the reasons I have given above in relation to the third aspect claimed to have supported Blockbuster’s goodwill (see [68] above), the contractual protections relating to any misuse of confidential information were in my view adequate, with the result that the restraint of trade provisions in Clause 14 of the Agreements were not necessary to protect Blockbuster’s legitimate interest in protecting its confidential information.

Relevant employment and franchising cases

84 In Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628 a contractual provision purporting to restrain the activities of a motor mechanic after the cessation of his employment by garage proprietors was, by majority, held to be void as an unreasonable restraint of trade. All members of the Court considered that the garage proprietors were not entitled to protection from competition from their former employee unless it was demonstrated that the parties anticipated at the time of entry into the employment contract that the employee might establish connections with the firm’s customers such that there would be a significant risk that the customers would follow the employee when his employment ceased. For example, Kitto J, in the majority, observed that the employee “should not be in a position to use ‘the intimacies and the knowledge’ which he had acquired in the course of his employment in order to create or assist a competing business in the same area and by doing so undermine the business connection” of the garage proprietors (at 654). Likewise, Latham CJ, in the minority, considered that a restraining covenant is justified “[w]here an employee is in a position which brings him into close and personal contact with the customers of a business in such a way that he may establish personal relations with them of such a character that if he leaves his employment he may be able to take away from his former employer some of his customers and thereby substantially affect the proprietary interest of that employer in the goodwill of his business … ” (at 636). As I have pointed out, there is no basis in the present case for concluding that at the date of the Agreements reasonable people in the position of the parties contemplated that the respondents might develop such customer connections. Indeed there is no evidence that they did in fact do so whilst the Agreements were on foot.

85 KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 was concerned with a franchise agreement for a business of repairing and restoring vinyls, plastics and leathers. Austin J found in that case that a provision in the franchise agreement that restrained the trade activities of the franchisee after termination of the agreement was in part valid. His Honour found that the franchisor had legitimate interests that the restraint clause sought to protect. The first of these he described as “an interest in protecting the patronage built up through the operation of the franchise, which may be lost if the franchisee is permitted to compete without restriction” and the second as “an interest in preserving the confidentiality of confidential information provided to the franchisee, which could be used by the franchisee to compete with the franchisor if there were no restraint” (at 722). I have concluded earlier that in the circumstances of the present case Blockbuster did not have any legitimate interest of the first type to protect. Whilst it had a legitimate interest of the second type, that interest was sufficiently protected by the provisions of the Agreements dealing with confidential information and the cessation, on the ending of the Agreements, of Karioi’s right to continue to use the Blockbuster Systems (see [68] – [69] above).

86 Austin J’s conclusion as to the reasonableness of the duration of the restraint was relevantly expressed as follows:

“To preserve the franchisor's ‘goodwill’ (referred to above as an interest in the patronage of the franchised business and the confidentiality of products and processes), the franchisor needs time to obtain a substitute franchisee to work the franchise area, and the new franchisee needs time to become established. Direct competition by the former franchisee would be likely to damage the transition process. Given the nature of the business and the expertise which needs to be acquired by tuition or selfteaching or both, a two year restraint is appropriate” (at 723 – 724).

87 In the present case, allowance of time for a substitute franchise “to become established” was not warranted as the evidence did not suggest that there was any reason (apart from location) why customers would patronise a non-Blockbuster store conducted by Karioi after termination of the Agreements rather than a Blockbuster store operated by a substitute Blockbuster franchisee. Indeed, on the evidence, the Blockbuster brand might have been a significant feature attracting many customers to the latter rather than the former.

88 Furthermore the evidence in the present case did not suggest that the parties contemplated that by reason of its operations under the Agreements, Karioi would acquire expertise that would not be immediately available to a substitute Blockbuster franchisee. This contrasts with the position in KA & C Smith where Austin J regarded a two year restraint as justified, at least in part, by “the expertise which needs to be acquired [by the franchisee]” (see [86] above).

89 The decision of the High Court of England and Wales in Dyno Rod Plc v Reeve [1999] FSR 148 concerned a drainage services business that was conducted on a franchised basis. Neuberger J acknowledged that “a franchise arrangement does fall between the vendor/purchaser case and employer/employee case” (at 153) but considered that the particular agreement before him was closer to the former category than the latter. He noted in this respect that the agreement provided that “the goodwill is ultimately to be that of Dyno Rod”, that is the franchisor, although the franchisee was to have the benefit of it during the term of the agreement. As I have pointed out earlier (see [77] above) the present case is different in that it was only in the event that the franchisor Blockbuster exercised its option to purchase Karioi’s goodwill, or obtained a relevant right under Clause 18, that Blockbuster would become entitled to Karioi’s goodwill at the cessation of the Agreements. For reasons that I have given, Blockbuster did not itself have or acquire any significant goodwill in the businesses beyond that which was attached to the Blockbuster brand. That aspect did not justify a restraint of trade of Karioi in favour of Blockbuster.

90 In Dyno Rod Neuberger J found that the prospect of development of customer connection justified the restraint of trade covenant. In this regard he made the following observations:

“An ex-franchisee has the benefit of considerable investment by [the franchisor], which puts the ex-franchisee in a better position than others … The point is that mere solicitation of present or previous customers is not the [franchisor’s] primary concern. The [franchisees] are trained Dyno Rod cleaners and they can do whatever a new franchisee could do. They would be able to undercut any franchisee, apart from stealing a march on him in terms of knowing the area, the customers and knowing how the area, as it were, works. … The unfairness, it seems to me, of the [franchisees] using their knowledge and experience gained by the teaching manuals and experience, thanks to the [the franchisor], and use of [the franchisor’s] name, has to be balanced against the desirability or the undesirability of covenants of this sort” (at 156 – 157).

91 In the present case there is, in contrast, no evidence, and no basis for an inference, that reasonable people in the position of the parties would have contemplated that by reason of Karioi having acted as a Blockbuster franchisee (rather than by reason of its entitlement to continue to operate businesses in the existing locations), any of the respondents would have a competitive advantage over replacement franchisees appointed by Blockbuster.

92 Dyno Rod was applied by the Court of Appeal of England and Wales in Chipsaway International Ltd v Kerr [2009] EWCA Civ 320. This decision related to a franchised business of repairing minor damage to motor vehicles. The Court found that a restraint on the franchisee competing with incoming franchisees after termination of the franchise agreement was valid. Dyson LJ (with whom the other members of the court agreed) referred to the franchisor’s interest in the goodwill of the business being “vulnerable to competition from a former franchisee who has knowledge of the area and experience of dealing with particular groups of customers” (at [22]). He relied upon the judgment of Neuberger J in Dyno Rod, including the passage, which I have quoted above at [90] referring to the “considerable investment” of the franchisor having put the “ex-franchisee in a better position than others” ([23]).

93 The decision of the Queensland Court of Appeal in EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389 was concerned with a franchise agreement relating to a DVD store. Fraser JA referred to the issue for determination in the proceedings as being:

“Whether it was reasonable to impose the particular restraint on competitive trade in order to protect [the franchisor’s] rights in respect of such of its information as may have remained in the [franchisee’s directors’] heads notwithstanding the contractual regime in the franchise agreement which provided for the return or destruction of the relevant records” (at [31]).

94 For reasons including the following Fraser JA (with whom the other members of the Court agreed) found that the primary judge, de Jersey CJ, was correct in concluding that the contractual regime relating to confidential information and/or intellectual property sufficiently protected the franchisor’s interests and that the restraint of trade covenant accordingly did not have a reasonable basis:

“[40] This evidence supported the finding that with rapidly changing titles and prices the information in the database was generally of short term applicability. The titles and prices were also so numerous and varied as to render it very improbable that the franchisee would recall them. And the accepted evidence also cast doubt on the [franchisor’s] case that the information was of such a character as would materially advantage the [franchisee] in competing with the [franchisor] for any period approaching the period of the restraint. The second respondent’s evidence was to the effect that most of the customers of the franchisee’s store were ‘passing traffic’ and mostly ‘one-off’ (who, I would interpolate, were not shown to be likely also to buy significant numbers of videos from the appellant’s online store), his knowledge of prices and other details of arrangements between the franchisor and distributors would quickly become obsolescent, and the nature of the industry was such that an individual franchisee could not negotiate competitive prices with distributors but instead depended upon the buying power of organisations such as the appellant or buying groups such as Network Video. In the absence of more compelling evidence about the market at the time when the franchise agreement was made, the trial judge was right to infer that those conditions represented what might have been anticipated at that time.

[41] In my opinion the Chief Justice did not err in the findings to the effect that the information likely to be transmitted to the franchisee under the franchise agreement was of such a character as would not likely be retained in memory and would in any event quickly become obsolescent”.

95 There was no evidence establishing that the factual position in the present case was any better from Blockbuster’s point of view than the franchisor’s position in EzyDVD.

96 As a result, the decision supports the conclusion in the present case that the restraint of trade provision in Clause 14 was not justified by the risk of misuse of confidential information.

Conclusion on restraint of trade issue

97 In assessing in the present case the parties’ expectations as to the ability of Karioi to compete with Blockbuster (or incoming franchisees of it) after the conclusion of the Agreements, one has to assume that Karioi would not be utilising any aspect of the Blockbuster brand (because the Agreements prohibited it from so doing). One has also to disregard any competitive advantage Karioi would obtain from utilising the existing store locations as for reasons I have sought to explain above in the circumstances that occurred the effect of the Agreements was that that advantage, which Karioi had had prior to the inception of the Agreements, was to remain with Karioi. Likewise one has, for reasons I have given, to assume that Karioi cannot use confidential information obtained from Blockbuster to its competitive advantage.

98 Leaving these three considerations aside, the evidence does not indicate that at the date of the Agreements reasonable people in the position of the parties would have contemplated that for any other reason Karioi, by reason of its operations under the Agreements, would acquire a competitive advantage over any replacement franchisees that Blockbuster appointed. Nor does the evidence suggest that that in fact occurred.

99 An obvious question to be asked in this context is whether, by reason of its Blockbuster franchise operations, Karioi would have been expected to acquire significant customer connections which it could utilise after the Agreements concluded. For reasons I have given, that was not the case if the three matters that I mentioned are disregarded.

100 For these reasons, which differ to some extent to those that the primary judge gave, I consider that the primary judge was correct in finding in favour of the respondents on the restraint of trade issue.

101 I should add that I do not consider that it was appropriate for the primary judge to take into account, in assessing the reasonableness of the restraints, the views that his Honour formed that if injunctive relief were granted there would be a loss of employment (because the stores would close and staff would be dismissed) and that serious consequences would flow to the respondents (through inability to conduct the businesses) (see [57] above). Apart from any other reason, taking this matter into account was inappropriate because there was no evidence, nor any basis for an inference, that they would have been in the contemplation of reasonable people in the position of parties at 2 April 1998, that is, at the date of the Agreements. They thus do not form part of the circumstances by reference to which the reasonableness of the restraint must be judged, as that assessment must be undertaken as at the date of the Agreements.

Orders

102 As Blockbuster has in my view failed in each of its three challenges to the primary judge’s decision, its appeal should be dismissed with costs.

: I agree with Macfarlan JA.

**********

Citations

BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347

Most Recent Citation

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CITATION:	BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347
HEARING DATE(S):	16 and 17 September 2010
JUDGMENT DATE:	13 December 2010
JUDGMENT OF:	Giles JA at 1; Macfarlan JA at 2; Sackville AJA at 103
DECISION:	The appeal is dismissed with costs.
CATCHWORDS:	CONTRACT - franchise agreements - whether ending of franchise relationships constituted termination of agreements - whether franchisor had right to acquire franchisee's leasehold interests for no consideration - contractual interpretation - commercial, businesslike construction - CONTRACT - restraint of trade - franchise agreements - whether restraints on franchisee and its directors constituted reasonable protection of franchisor's legitimate interests - whether contractual regime sufficiently protected any interest in confidential information and industrial property - ESTOPPEL - estoppel by convention - whether conventional estoppel arose when franchise businesses continued after conclusion of specified contractual terms - parties did not make any consistent, clearly identifiable assumption about the nature of their relationship and how it was to end
LEGISLATION CITED:	Restraints of Trade Act 1976
CATEGORY:	Principal judgment
CASES CITED:	Blockbuster Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089 Bridge v Deacons [1984] 1 AC 705 Chipsaway International Ltd v Kerr [2009] EWCA Civ 320 Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; (1998) 193 CLR 605 Dyno Rod Plc v Reeve [1999] FSR 148 EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389 Geraghty v Minter [1979] HCA 42; (1979) 142 CLR 177 Hanna v OAMPS Insurance Brokers Ltd (ACN 005 543 920) [2010] NSWCA 267 KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628 Miles v Genesys Wealth Advisers Limited [2009] NSWCA 25 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535 Ryeldar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 Stenhouse Australia Ltd v Phillips [1974] AC 391
TEXTS CITED:	J D Heydon, The Restraint of Trade Doctrine, 3rd ed (2008) LexisNexis Butterworths Australia
PARTIES:	BB Australia Pty Ltd (Appellant) Karioi Pty Ltd (First Respondent) Peter Lindsay Fife (Second Respondent) Ronald James Fortington (Third Respondent)
FILE NUMBER(S):	CA 2009/298475
COUNSEL:	F Kunc SC/J Emmett (Appellant) I Pike/A Shearer (Respondents)
SOLICITORS:	DLA Phillips Fox (Appellant) Marque Lawyers (Respondents)
LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	SC 4338/2008
LOWER COURT JUDICIAL OFFICER:	Price J
LOWER COURT DATE OF DECISION:	16 October 2009
LOWER COURT MEDIUM NEUTRAL CITATION:	Blockbuster Australia Pty Ltd v Karioi Pty Ltd [2009] NSWSC 1089