Brookview Holdings Pty Ltd v Hankinson
[2003] WADC 239
•7 NOVEMBER 2003
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: BROOKVIEW HOLDINGS PTY LTD -v- HANKINSON [2003] WADC 239
CORAM: HH JACKSON DCJ
HEARD: 1 JUNE 2001 & 1 AUGUST 2003
DELIVERED : 7 NOVEMBER 2003
FILE NO/S: CIV 1339 of 1999
BETWEEN: BROOKVIEW HOLDINGS PTY LTD
Plaintiff
AND
LEAH JOYCE HANKINSON
Defendant
Catchwords:
Contract - Sale of video store - Covenant in restraint of trade - Construction - Reasonableness - Breach and damages alleged
Legislation:
Nil
Result:
Judgment for plaintiff in the sum of $41,700
Representation:
Counsel:
Plaintiff: Mr B P Wheatley
Defendant: Ms C H Thompson
Solicitors:
Plaintiff: Nicholson Clement
Defendant: Freehills
Case(s) referred to in judgment(s):
Peters (WA) Ltd v Petersville Ltd (2001) 181 ALR 337
Case(s) also cited:
Adler Mallach Holdings Pty Ltd v Robertson [2001] NSWSC 691
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Pty Ltd (1973) 133 CLR 288
Bridge v Deacons [1984] AC 705
Brooks v Burns Philp Trustee Co Ltd & Anor (1969) 121 CLR 432
Clegg v Henwood, unreported; SCt of NSW; BC9801319; 17 April 1998
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] 2 AC 269
Geraghty & Anor v Minter & Anor (1979) 142 CLR 177
Hawker De Havilland v Fernandes & Anor, unreported; SCt of WA; Library No 960055; 9 February 1996
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Nordenfelt v Maxim & Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
North & Ors v Marra Developments Ltd (1981) 148 CLR 42
Pawley & Ors v Kraus & Anor, unreported; SCt of WA; Library No 970629; 30 October 1997
Peters (WA) Ltd v Petersville Ltd [2001] HCA 45
Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370
Ryan v Rouen [2000] NSWSC 468
HH JACKSON DCJ: The plaintiff company purchased a business known as Falcon Video at Falcon for $240,000 from one Gary William Same and one Gabrielle Ellen Same on 29 April 1995. A material term of the written contract of sale was that the vendors "undertook not to engage either directly or indirectly in any capacity whatsoever whether as principal or employee in any business or activity of a similar nature to that of the Business for a period of 2 years within a radius of 10 kilometres of the Business." It is agreed the vendors' liability is joint and several. The plaintiff says that: "in breach of the Contract on or about 10 February 1997 Gary William Same commenced operating, in joint ownership with one Keith Read, a video rental business known as 'Video Connection' at premises situated within 10 kilometres of the Business."
As a result of these alleged breaches the plaintiff alleges that it has suffered loss and damage. It issued a writ of summons against Gary William Same in these proceedings in 1999.
By way of defence the defendant Same pleaded that the restraint clause was unlawful as it was unreasonable as to time, distance and activity. He admitted that 21 months after the sale of Falcon Video and following receipt of legal advice he entered into a partnership with Keith Read in the video rental business known as Video Connection but discontinued after 10 working days on receipt of a letter from the plaintiff's solicitor, and denied that the plaintiff "suffered any loss from the Defendant's 10 day involvement with the 'Video Connection'."
The matter came on for hearing before me on 1 June 2001, listed for one hearing day, but hearing could not be completed on that date. Mr J H Reyburn then appeared for the plaintiff. Evidence was given by a number of witnesses for the plaintiff but the plaintiff's case was not closed. The matter was adjourned sine die part‑heard. It would not have been completed in the day.
It was in any event also adjourned to enable the plaintiff's source documents of a financial nature to be found.
Before it was re‑listed Mr Same died. Leah Joyce Hankinson was subsequently appointed as executrix of his estate. The matter did not come back before me until 1 August 2003. Mr Wheatley then appeared for the plaintiff.
Essentially the business of Falcon Video was the rental of video cassette films to members of the public. The price of the business was for plant and equipment, valued at $50,000, stock valued $140,000 and goodwill valued at $50,000. The contract of sale is Exhibit 1.
Settlement took place on 19 June 1995 on which date the plaintiff took possession and commenced trading. The plaintiff managed the business through a director Mr P Burgess. He gave evidence that he had sought to prevent the vendors setting up in competition in the Falcon area until he had had a chance to build up and get to know his own clientele. Most of the customers had addresses in Falcon, Halls Head and Dawesville. The restraint did include the central area of Mandurah. The stock of the business included games, videos, confectionery and laser discs. Video hire was seven‑eighths of the business. His evidence is that over the following two years there was no significant change to the plant and equipment of the business but that the stock was slightly expanded. Trading hours, advertising, pricing and staffing remained the same, although he increased staff wages.
The plaintiff commenced trading on the day of settlement 20 June 1995 and Mr Burgess gave evidence that he had thought the two‑year restraint of trade on the vendors commenced then. Later he had seen a sign seeking lessees for new shops being erected nearby. The Video Connection business commenced trading therefrom in February 1997. He asked his solicitors to make enquiries. The solicitors wrote to Mr Same. In February 1997 his solicitors received advice from Mr Same's solicitors (Exhibit 2) that:
"We are instructed by Mr Same that he is not a proprietor of the business of Video Connection. The proprietor is a company, Coral Shore Holdings Pty Ltd in which Mr Same is neither a director nor a shareholder.
Mr Same is however working as a casual employee only for Coral Shore Holdings Pty Ltd for a maximum of two days per week which in the circumstances of the existence of the Video Connection shop can cause your client no financial loss."
He had seen Mr Same at the premises once when the business was being stocked. He said the business the plaintiff had purchased deteriorated after Video Connection opened and then stabilised over the period until the writ issued in April 1999.
Mr Burgess was recalled on 1 August 2003 by which time a bundle of original financial documents which he produced in court had been discovered and inspected. His oral evidence is that he had seen a computer printout showing approximately some 50,000 customers of the business at the time the plaintiff acquired it.
Mr Burgess estimated, from his memory of the business records, that between June 1995 and February 1997 average weekly turnover of the business as being $5,000. After Video Connection opened in February 1997 it dropped to about $2,900 ‑ $3,000.
Mr Burgess agreed that prior to purchasing the business he had perused the accounts of the business. No complaint is made as to that. He also agreed that he was provided with details of stock, plant and equipment, attached to the contract, Exhibit 1. Although Mr Burgess gave evidence that not all these items were handed over no complaint is before me as to that. He agreed he had had no prior experience in operating a video rental business. The store opened for some 11 hours per day, seven days per week. Of these Mr Burgess worked full time for 18 months then four hours per day three days per week. He agreed that prior to sale Mr Same had been employed full time in the store during the day and therefore employed staff less of the time than the plaintiff. He agreed also that he had discontinued the buying and selling of video machines during the first year after purchase. He had not known originally that it was part of the vendor's business but "it was just too hard." He was not aware of other local competitors opening up until about two years after the purchase. He agreed that some of the business' customers came from Mandurah. He agreed also that there were seasonal fluctuations with factors such as school holidays and summer.
The plaintiff sold the business in June 2000 to a third party for $60,000: Exhibit 3. Goodwill was agreed at $40,000, plant and equipment at $13,000 and stock at $7,000.
Mr K J Read
Mr Read was called by the plaintiff. He was a proprietor of the business known as Video Connection through a family company. He had become involved in setting up the business in August or September 1996 with Mr Same. They had each contributed $45,000 or $50,000 to its establishment.
"How did you come to know Mr Same?‑‑‑Through his previous ownership of Falcon Video; I was a customer there.
How was it that you came to be involved with him in setting up a new business?‑‑‑I recall that I had lunch with Gary sometime in 96, in July or thereabouts, August 96, and the subject was raised of a possibility of entering into a video business at Falcon.
Do you remember who it was that raised that subject?‑‑‑As I recall, it was Gary who mentioned that he was looking at – or he investigated a lease for the possibility of opening a video shop, and asked me whether I'd be interested in taking part.
When do you think this was?‑‑‑Around July or August in 96 as far as I can recall. I can't be precise with that but I think it was the middle of the year, anyway.
…
We know that the Video Connection business was opened at premises on Old Coast Road, Falcon?‑‑‑That's right."
Mr Same had obtained an understanding with the leasing agent to lease a store. Eventually a lease was signed but only by Mr Read's company, although Mr Same had contributed to establishment of the business and Mr Read regarded him as his partner, Mr Same had video rental experience; Mr Read did not.
"If he was involved in the business, put money into it, why wasn't he put down on the lease document as one of the tenants?‑‑‑Well, he didn't think it was a good idea and nor did I. He had concerns about previous agreements he may have entered into.
…
Can you recollect the terminology which he used in expressing his concern?‑‑‑I can recollect generally that ‑ and I understood that he'd entered and agreement which precluded him from opening another video store within a certain radius and a certain time frame to the Falcon Video, and that extended until around June or July of 97 and that he wasn't able to be seen to be formally part of the business by the lease document etcetera, but in terms of the exact words, no; that's just a gist of what was said.
Did you know at that time how that restriction on him arose?‑‑‑Yes. I understood that he had sold the business of Falcon Video and that was a condition of the sale, that there was a restrictive covenant placed on him conducting trade within that period of time."
They commenced trading in about mid‑February 1997. However, Mr Same was active in the business only for a matter of weeks. His share was purchased by Mr Read's father. Eventually Mr Same was repaid his capital contribution after a dispute about it. The business comprised 75 ‑ 85 per cent video rentals with customers coming from an area between Halls Head and Lake Clifton. It incurred significant losses at first.
Mr John Read
Mr Read confirmed that he acquired a 50 per cent interest in Video Connection from Mr Same with an initial arrangement being made in 1997. In the result the arrangements led to proceedings in this Court: CIV 4395/1997, which were ultimately resolved: see Exhibit 8.
Mr L A Tatam
Mr Tatam is the accountant for the plaintiff and for Mr Burgess. He gave evidence that he prepared various tax returns for Falcon Video. He tendered a group of three documents, Exhibits 4, 5 and 6, prepared on the basis of source documents provided by the plaintiff and produced by Mr Burgess. These set out statements of income and expenditure and details of turnover for Falcon Video as follows:
Turnover
"Period 10/02/96 – 09/08/06 $122,279.52
10/08/96 – 09/02/97 $131,619.54
10/02/97 – 09/08/97 $87,418.85
10/08/97 – 09/02/98 $79,565.80
From the above figures, it is my calculation that turnover from 10/02/96 to 09/02/97 compared with 10/02/97 to 09/02/97 has decreased by 34%."
FALCON VIDEO
STATEMENT OF INCOME AND EXPENDITURE
10/2/1996 to 9/2/1997 10/2/1997 to 9/8/1997 10/2/1997 to 9/2/1998 INCOME Rental 253,899 87,419 166,985 LESS EXPENSES Video/Game Purchases 78,031 40,911 68,402 Bank Charges 665 623 967 Electricity 2,020 1,117 2,225 Freight/Courier 100 350 350 Insurance 2,216 1,769 1,769 Loan Interest Charges 36,710 15,641 27,011 Overdraft Interest 351 489 489 Rental Tax 4,884 2,152 3,329 Payroll Tax 0 304 461 Wages 42,870 15,767 38,176 Printing & Stationery 791 244 636 Rates 1,610 0 1,649 Repairs & Maintenance 4,354 1,508 3,303 Variable Outgoings 10,928 3,825 7,651 Superannuation 2,916 1,198 2,418 Telephone 1,275 770 1,558 Total Expenses 189,721 86,668 160,394 Profit/Loss $64,178 $751 $6,591
He also produced an income tax return for the plaintiff for the year ended 30 June 1997 (Exhibit 7) but it emerged in evidence that the figures also include those relevant to other businesses then conducted by the plaintiff and I ignore it.
The defendant tendered a map of the relevant area prepared by Department of Lands Administration, Exhibit 9, showing the area affected by the restraint of trade clause. The only affected localities are Dawesville, Wannanup, Falcon, Erskine, Halls Head, Dudley Park, Coodanup, part of Greenfields but all of central Mandurah north to Gordon Road.
Findings
In my view the restriction on the vendor the subject of the agreement is one which is in restraint of trade and unenforceable in public policy at common law unless shown to be reasonable in the interests of the parties and the absence of injury to the public.
The common law operates independently of the provisions of the Trade Practices Act of the Commonwealth and the Fair Trading Act of this State: Peters (WA) Ltd v Petersville Ltd (2001) 181 ALR 337.
The relevant questions of law and onus of proof are set out in Halsburg's Laws of Australia, vol 6, 110 – 7185 and 110 – 7190 as follows:
"The onus of establishing that the restraint is reasonable rests upon the person alleging that it is of that character. If the restraint affords to the covenantee nothing more than reasonable protection against something which the covenantee is entitled to be protected, then as between the parties concerned the restraint is to be held to be reasonable in reference to their respective interests, but notwithstanding this the restraint may still be held to be injurious to the public and therefore unenforceable or void. This establishes a contrast, which affects the onus of proof, between reasonableness in the parties' interests and reasonableness in the public interest.
In most cases, it is the person who obtained the restraint (the covenantee) who seeks to have it enforced, and the onus is therefore on the covenantee to prove that the restraint is reasonable as between the parties. The onus of showing that, notwithstanding that it is reasonable between the parties, it is nevertheless injurious to the public and therefore unenforceable or void also rests on the party so alleging, but this will in most cases be the covenantor.
Whether a restraint has been justified is a question of law not fact.
There are two issues of reasonableness, not just one. However, the issues are not necessarily distinct, in practice they frequently overlap. This is because public policy is the dominant consideration and relevant to both issues of reasonableness. However, in practice the second issue of reasonableness tends to merge with the first. So far as the parties' interest is concerned, the restraint must afford no more than adequate protection to the 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 and it is unnecessary to consider further the public interest.
On the other hand, if no more than adequate protection is achieved by the clause the public interest must be further considered and the restraint not found to be injurious to the public. In recent years more prominence has been given to the public interest than was formerly overtly in evidence."
The time for consideration of these issues is the time at which the restraint was entered into. In my view the plaintiff has shown the restraint to be reasonable in the interests of the parties both in point of time and of geographical scope. No issue has been raised that it is injurious to the public interest, and I am not so satisfied.
I do not regard the fact that some part of central Mandurah is included in the geographical width of the restraint unreasonable. Mr Burgess' evidence is that some customers came from Mandurah. Ms Thompson argues that the restraint is geographically too wide and unreasonable given the relative value of goodwill. I do not agree. The area is relatively small and the time limit narrow, and the restraint operates only against one small business proprietor.
The defendant also argued that the restraint was ambiguous, in that it is not clear as to the date on which the restraint was to commence operation. In my view it is clear that it was intended to and could only come into operation after settlement and transfer of possession were complete.
I turn then to issues of breach. The evidence makes it plain that Mr Same was aware that his action in assisting in the establishment and operation of a video retain business in the area would breach the agreement he had reached and that the letter he instructed solicitors to write to the solicitors for the plaintiff was untrue.
The evidence establishes the following course of events. The agreement was made for the sale of Falcon Video on 29 April 1995 and settlement effected on 19 June 1995 at which date, in my view, the restraint condition commenced to have operation. It thus operated until 18 June 1997.
The preparations for the establishment and operation of the business of Video Connection commenced in about July 1996. However, the business was not trading until mid‑February 1997.
Mr Same was involved in the establishment of the business and in its operation as a partner until after the expiration of the restraint.
The plaintiff is entitled to damages in respect thereof against the executrix of his estate, the defendant, in that capacity.
The question then becomes one of assessment of damages.
The plaintiff claims to be entitled to damages in three distinct categories of loss: the first is said to be loss during the period from August 1996 to February 1997 in which the preparations were being made for Video Connection to commence trading. In my view however, that loss has not been and cannot be established, even if it is true that the vendor was technically then acting in breach of his agreement. There could be no loss without the business competition competing.
Video Connection commenced to trade on say 10 February 1997 and continued to do so until the expiry of the vendors' period of non‑competition on 19 June 1997, a period of four months during which time I am satisfied that Mr Same continued to be engaged in the business. The difficulty is in quantifying resultant losses to Falcon Video.
The plaintiff claims $5,000 per month for four months in reduction of profit. The only evidence on which the matter can be quantified is that in Exhibits 4 to 6. Those figures were not challenged. Of course there may have been other reasons, internal or external to the Falcon Video business, which caused those results but they were not proven. I allow $20,000.
Thirdly, the plaintiff claims a loss in value of the business of at least $40,000 being the cost of establishing a new business of $100,000 (as was the case in Video Connection) less the sale price of $60,000 (which included a figure for goodwill). Ms Thompson argues that the agreed difference in goodwill value as between the sale and resale is that between $50,000 and $40,000, that is $10,000.
I think that a reasonable basis for assessment.
No reason was given in evidence which really explains the difference in the sale and resale values attributed either to plant and equipment or to stock.
In my view arguments that Mr Same was not alone in establishing and managing Video Connection and quickly ceased day‑to‑day involvement are irrelevant. Nor do I accept that Exhibits 4 to 6 are simply expressions of opinion based on hearsay, in light of the way the evidence was adduced.
The plaintiff also seeks interest at the rate of 6 per cent per annum from August 1996 to judgment. I allow interest from February 1997, which I calculate as $11,700.
For these reasons I find the plaintiff entitled to judgment in the sum of $41,700.
1
2
1