Champion Charcoal Chicken Pty Ltd v Lemne Pty Ltd
[2009] VSC 513
•12 November 2009
IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST C
No. 9634 of 2009
| CHAMPION CHARCOAL CHICKEN PTY LTD (ACN 107 677 967) | Plaintiff |
| and | |
| LEMNE PTY LTD (ACN 094 671 744) (as trustee for the MAAZE FAMILY TRUST) & ORS (according to the schedule attached) | Defendants |
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JUDGE: | DAVIES J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 4 November 2009 | |
DATE OF JUDGMENT: | 12 November 2009 | |
CASE MAY BE CITED AS: | Champion Charcoal Chicken Pty Ltd v Lemne Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 513 | |
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PRACTICE & PROCEDURE – Interlocutory injunction – Sale of business agreement – Restraints against vendor operating same or similar business in competition and employing former employees in such a business – Apprehended breach of restraint covenants – Application for interlocutory relief – Whether serious issue to be tried – Balance of convenience – Adequacy of damages – Relevance of clause acknowledging that damages not an adequate remedy.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N Pane | R B Legal Pty Ltd |
| For the Defendants | Mr R Moore | HWL Ebsworth |
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TABLE OF CONTENTS
Restraint Covenants........................................................................................................................... 1
Legal Principles.................................................................................................................................. 3
Serious question to be tried............................................................................................................. 4
Balance of convenience..................................................................................................................... 7
HER HONOUR:
The plaintiff seeks an interlocutory injunction to restrain threatened or apprehended breaches of restraint covenants that the defendants gave to the plaintiff in an agreement made 12 July 2007 (“the Asset Sale Agreement”) under which the plaintiff purchased the first defendant’s chicken bar and takeaway business in Hoppers Crossing. The restraint covenants include:
(a) a restraint on the defendants engaging in any business or activity that is the same or similar to the business sold, and which is in competition with that business, within a geographical area of five kilometres of the Hoppers Crossing shop for a period of five years; and
(b) a restraint on the solicitation of employees.
The apprehended or threatened breaches of the restraint covenants are:
(a) the first defendant proposes to start up a takeaway rotisserie chicken shop in Point Cook located 4,971.2 metres (on the defendants’ evidence) or 4,962.7 metres (on the plaintiff’s evidence) from the Hoppers Crossing shop, in either case within the five kilometre geographical boundary. The first defendant has entered into a lease for the Point Cook shop and in accordance with the terms of the lease, the Point Cook shop is to commence operation by 1 December 2009;
(b) the first defendant has offered employment to a person who was employed at the Hoppers Crossing shop before the business was sold and who also worked for the plaintiff for a short time after ownership changed.
The plaintiff claims that the defendants will be in breach of the restraint covenants in cl 15 of the Asset Sale Agreement, if this happens.
Restraint Covenants
Clause 15 of the Asset Sale Agreement provides:
15.1 Definitions
In clause 15:
engage in means to carry on, participate in, provide finance or services, or otherwise be directly or indirectly involved as a shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.
Prohibited Person means:
(a) The Vendor;
(b) Steve Makarios;
(c) Jim Makarios;
(d) Con Makarios; and
(e) Evdokia Makarios.
In clause 15, a reference to the Business is to the Business at the Completion Date.
15.2 Covenants
The Vendor undertakes to the Purchaser that the Prohibited Persons will not, and each of the other Prohibited Persons severally undertakes to the Vendor that he will not:
(a) engage in any business or activity which:
(i)is the same or similar to the whole or any part or parts of the Business; and
(ii)is in competition with the Business or any material part of it;
(b)solicit, canvass, approach or accept any approach from any person that the Prohibited Person knows to have been at any time during six month period ending on the Completion Date a customer or employee of the Business with a view to obtaining the custom or services of that person in a business that is the same or similar to the Business and is in competition with the Business; or
(c)interfere with the relationship between the Business and its customers, employees or suppliers.
15.3 Duration of covenants
The undertakings in clause 15.2 begin on the Completion Date and end on the fifth anniversary of the Completion Date.
15.4Geographic application of covenants
The undertakings in clause 15.2 apply only if the activity prohibited by clause 15.2 occurs within five kilometres of the Property.
15.5Exceptions
Clause 15 does not restrict a Prohibited Person from holding 5% or less of the shares of a listed company.
15.6Acknowledgements
The Prohibited Persons acknowledge that:
(a)all the prohibitions and restrictions contained in clause 15 are reasonable in the circumstances and necessary to protect the goodwill of the Business;
(b)damages are not an adequate remedy if a Prohibited Person breaches clause 15; and
(c)the Purchaser may apply for injunctive relief if:
(i)a Prohibited Person breaches or threatens to breach clause 15; or
(ii)it believes of [sic] Prohibited Person is likely to breach clause 15.
The Asset Sale Agreement contains a definition of the “Business”. The definition describes the business in terms of:
the chicken bar and take away business conducted by the Vendor from the Property.[1]
[1]Cl 1.1 Asset Sale Agreement.
The definition is important to the scope of the restraint covenants. The plaintiff contends that it purchased a takeaway chicken business and that the restraint that the parties agreed on is a restraint on the operation of any chicken bar. The defendants contend that the business it sold the plaintiff was a particular type of chicken bar, as the business specialised in charcoal cooked chicken which, the defendants argue, is quite a different product to rotisserie cooked chicken. It was submitted that the restraint clause should be construed as comprehending a restraint on the operation of a charcoal chicken bar and that a takeaway rotisserie chicken bar does not come within the ambit of the restraint.
Legal Principles
The parties were not in dispute about the legal principles for the grant of an interlocutory injunction. The plaintiff is required to demonstrate that it has made out a prima facie case, in the sense that the plaintiff must show a sufficient likelihood of success at trial. In other words, the plaintiff must show that there is a serious question for determination by the Court.[2] The plaintiff must also satisfy the Court that the balance of convenience favours granting the injunction pending trial. This requires consideration of the consequences to the defendants of the grant of an injunction where the plaintiff may not ultimately be successful in obtaining the final relief that it seeks, as well as the consequences to the plaintiff of the refusal of an injunction, where the plaintiff may ultimately be entitled to final relief.[3] The adequacy of damages as a remedy is a relevant factor in weighing up the competing disadvantages and consequences.
[2]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; Bradto Pty Ltd v State of Victoria (2006) 15 VR 65.
[3]Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57; Bradto Pty Ltd v State of Victoria (2006) 15 VR 65.
Serious question to be tried
I am satisfied on the available material that there is a serious question to be tried as to whether the takeaway rotisserie chicken shop that the first defendant intends to operate in Point Cook would be in breach of the restraint covenants in cl 15.2 of the Asset Sale Agreement. I am satisfied that the plaintiff’s construction of the term “Business” and the scope of cl 15.2 is reasonably open for argument on the language and text of the agreement and, if accepted, that it would be a breach of cl 15.2 for the defendants, within a five kilometre range of the Hoppers Crossing shop, to operate a chicken bar and takeaway business, albeit that the chicken was cooked in a different way.
Counsel for the defendants did not cavil that the plaintiff’s construction of the term “Business” and the scope of cl 15.2 is open for argument, but he contended that the plaintiff has a weak case and that the Court should consider this in determining whether to grant the injunction.
It was contended that the rotisserie chicken shop would not be “the same as” or “similar to” the “Business”, which is the first limb defining the scope of the prohibition in cl 15.2(a). Counsel relied on factual material supporting the proposition that charcoal cooked chicken is a different product to rotisserie cooked chicken. However, the determination of this issue depends in the first instance on the proper construction of the restraint clause, which is an objective inquiry, in the sense of what a reasonable person would understand the terms of the agreement to mean.[4] The issue requires a consideration of the proper meaning of the definition of “Business” in cl 1.1, which sets out the scope of the restraint covenants in cl 15.2, in order to determine whether the proposed new business is “the same as” or “similar to” the business sold. Accordingly, I would not conclude at this stage of the proceeding, on the basis of the evidence before me, that the plaintiff’s case is a weak one on whether the apprehended breach falls within the operation of cl 15.2(a)(i).
[4]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, 463 [25] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).
It was contended that the business sold and the new business would not be “in competition” with each other, which is the second limb defining the scope on prohibition. The defendants relied on expert evidence that the shops are not sufficiently proximate for the Point Cook shop to be a rival for the Hoppers Crossing shop. For the plaintiff it was contended that proximity is only one of the factors relevant to whether the new business was “in competition”. Counsel for the plaintiff referred to evidence of customer loyalty to the defendants over ten years when they ran the Hoppers Crossing business, supporting the plaintiff’s concern that customers would follow the defendants if they set up a new operation within the geographical limitation of the restraint. It is not for me to resolve that issue in this application. The question of competition is a factual enquiry. For the purposes of this application, there is sufficient evidence before me to satisfy me that the plaintiff has made out a case that the businesses would be “in competition”.
Next it was submitted by counsel for the defendants that cl 15.2(a) is so vague and extensive that the clause should not be enforced as a reasonable restraint of trade. This submission was put in two ways: first, that the restraint clause, on its terms, would prohibit the defendants from conducting a business selling fried potato chips or salads and that such a restraint was unreasonable and unnecessary to afford adequate protection to the plaintiff; secondly, that if the restraint was intended to restrain the defendants from selling any type of cooked chicken, it ought to have been expressed in clear and explicit language. It is arguable that the clause on its terms is too wide but the apprehended conduct sought to be restrained relates to the operation of a takeaway chicken business, not to the selling of chips or salads. It is arguable that a restraint on the conduct of a chicken bar for a limited time and within a geographical area is no more than is reasonably necessary to give protection to the plaintiff on the purchase of the Hoppers Crossing business.[5] The second part of the submission depends on the proper construction of the agreement which, as I have found already, is reasonably arguable on the plaintiff’s case.
[5]Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535; Lindner v Murdock’s Garage (1950) 83 CLR 628; Buckley v Tutty (1971) 125 CLR 353; Amoco Australia Pty Ltd v RoccaBrosMotor Engineering Co Pty Ltd (1972) 133 CLR 288.
Next it was submitted that the plaintiff’s case is a weak one because the geographical boundary of the restraint is unreasonable and adequate protection is provided by a geographical restraint of a three kilometre radius. That submission was based on the evidence of the expert report filed on behalf of the defendants in which the expert had noted that locals, the majority of whom KFC research suggests come from a three kilometre radius, are one of the two main markets for a takeaway chicken shop. In my view, that evidence is not a sufficient basis for me to conclude at this stage of the proceeding, in the circumstances of this case, that a restraint in terms of geographic area is too wide.
For the above reasons I do not accept that the plaintiff’s case is relatively weaker than the defendants’ case.
The restraining orders sought by the plaintiff extend to enforcing cl 15.2(b) to prevent the defendants from employing a person who had been employed by the first defendant in the Hoppers Crossing business during the six month period prior to the completion of the asset sale agreement. The clause, on its terms, would prohibit the first defendant from employing that person in the new business. Counsel for the defendants submitted that the prohibition was void as being an unreasonable restraint. I do not consider it appropriate to decide that question in this interlocutory application on the state of the evidence before me. It is sufficient, for the purposes of this application, to note cl 15.6(a) containing the acknowledgement of the defendants that all the prohibitions and restrictions contained in cl 15 are reasonable in the circumstances and necessary to protect the good will of the business sold to the plaintiff. In light of that clause, there is, in my view, sufficient foundation to be satisfied that it is reasonably arguable that the clause is valid and that there is a serious question about whether the clause would be breached on its terms.
Balance of convenience
Counsel for the plaintiff relied on cl 15.6(b) in which the defendants have acknowledged that damages will not be an adequate remedy for breach of the restraint covenants. The fact of that acknowledgement and also the acknowledgement in cl 15.6(c) that the plaintiff may apply for injunctive relief, if there is a threatened breach of cl 15, does not remove the Court’s jurisdiction in its discretionary power to refuse to grant the injunction sought, although as Tamberlin J observed in AAV Australia Pty Ltd v Isis Broadcast Media Pty Ltd,[6] that “is a powerful discretionary consideration because the provision was inserted by informed and legally advised commercial parties”.[7] However, despite that clause I have concluded that the balance of convenience does not lie in the plaintiff’s favour.
[6][2002] FCA 691 (Unreported, Tamberlin J, 6 June 2002).
[7]Ibid [38].
The evidence of the plaintiff is that since it has taken over the business, trade has been as expected and the takings are consistent with the takings that were represented to it by the defendants as being achievable by the business. Moreover, the plaintiff has been able to maintain the turnover at reasonable levels despite the change of ownership and the opening of a number of new takeaway outlets in the area, including chicken businesses such as Nandos and KFC and that these businesses have not had a long term effect on the business.
However, the plaintiff is concerned that the defendants’ proposed business will significantly impact on its business because of its proximity to its customers and the long established reputation of the defendants. The plaintiff is gravely concerned that customers of the defendants that stayed with it on the sale of the business will follow the defendants when they start their new business. The plaintiff has expressed its concern that if its takings were to fall by 20% the profitability of its business would fall by up to 40% in which event it is feared that the plaintiff would be unable to service the substantial borrowings it took out to acquire and operate the business.
I do not doubt that the plaintiff is genuinely worried about the impact that the new business at Point Cook may have on its business. However, I must also take into consideration the hardship to the defendants if the injunction was granted. The evidence on behalf of the defendants is that the first defendant has entered into a lease for the Point Cook shop for ten years with a ten-year option and if prevented from opening, would be in default of the terms of the lease thereby exposing it to significant damages. There is also evidence that, in preparing for the opening, costs of $266,708.20 have been incurred, the significant majority of which, it is claimed, would be lost entirely in the event that the shop was not opened for business. There is also evidence that the first defendant has a commercial line of credit facility used to pay for those costs and that the first defendant is relying on the Point Cook shop to generate income to meet its borrowing commitments.
The competing disadvantages of the plaintiff and the defendants are difficult to weigh. However, I have concluded that the balance of convenience is against the granting of an injunction. I cannot be satisfied at this juncture that the plaintiff’s concern that the opening of the defendants’ proposed new business will impact adversely on its business is a real, as distinct from theoretical, risk. I take into account the following matters – there is evidence before me that cooked charcoal chickens are distinct and have a very different flavour to rotisserie cooked chicken; the opening up of Nandos and KFC nearby to the plaintiff’s Hoppers Crossing business did not have adverse long term impact on the plaintiff’s business; there are at least 18 other chicken outlets within a six kilometre radius of the Point Cook shop; and the new shop will be situated just within the five kilometre radius of the Hoppers Crossing shop, and thus very close to the boundary considered adequate by the plaintiff to protect its interests. These matters weigh against the likelihood of adverse consequences to the plaintiff, if the new business starts up.
I have also taken into account the plaintiff’s concern about the proposed employment of a former employee and customers’ identity of that person with the defendants, bearing in mind customer loyalty to the defendants. Again, I am not persuaded that the concern that this may lead to or cause any serious loss of customers to the plaintiff is a real, as distinct from theoretical, risk.
In the circumstances, I find that the balance of convenience favours the defendants in refusing to grant the injunctive relief, but indicate that the refusal of relief in this application would not necessarily preclude the plaintiff from making a fresh application if changed circumstances made it appropriate.
The order that I will make is that the application is refused. I will hear the parties on the question of costs.
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SCHEDULE OF PARTIES
| No. 9634 of 2009 | |
| BETWEEN: | |
| CHAMPION CHARCOAL CHICKEN PTY LTD (ACN 107 677 967) | Plaintiff |
| - and - | |
| LEMNE PTY LTD (ACN 094 671 744) (as trustee for Maaze Family Trust) | Firstnamed Defendant |
| CON MAKARIOS | Secondnamed Defendant |
| EVDOKIA MAKARIOS | Thirdnamed Defendant |
| STEVE MAKARIOS | Fourthnamed Defendant |
| JIM MAKARIOS | Fifthnamed Defendant |
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