Devil Dog Pty Ltd v Cook
[2017] WASC 27
•8 FEBRUARY 2017
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: DEVIL DOG PTY LTD -v- COOK [2017] WASC 27
CORAM: TOTTLE J
HEARD: 7 & 8 FEBRUARY 2017
DELIVERED : 8 FEBRUARY 2017
FILE NO/S: CIV 3022 of 2016
BETWEEN: DEVIL DOG PTY LTD
Plaintiff
AND
DAVID JOHN COOK
Defendant
Catchwords:
Civil procedure - Interlocutory injunctions - Application for an injunction to restrain the defendant from continuing to own or be employed by a competitor of the plaintiff - Whether the balance of convenience favours the grant of interlocutory relief - Interlocutory injunction granted
Contracts - Restraint of trade clause - Whether area of restraint of Western Australia unreasonable - Whether time period for restraint of 10 years unreasonable - Where covenantor commences work for competitor - Where activities of the business involve the manufacture, service and repair of hydraulic cylinders and associated components
Legislation:
Nil
Result:
Application granted
Category: B
Representation:
Counsel:
Plaintiff: Mr M G Pendlebury
Defendant: Mr I F Tait
Solicitors:
Plaintiff: Fletcher Law
Defendant: Tait & Co
Case(s) referred to in judgment(s):
Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57
Brown v Brown [1980] 1 NZLR 484
Cream v Bushcolt Pty Ltd [2004] WASCA 82
Emeco International Pty Ltd v O'Shea [2012] WASC 282
Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 72 ALR 643; (1987) 17 FCR 505
National Australia Bank Ltd v Joyce [2012] WASC 224
Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238
Warner‑Lambert Co LCC v Apotex Pty Ltd [2014] FCAFC 59
TOTTLE J: The plaintiff applies for an injunction restraining the defendant from breaching restraint of trade provisions contained in a Deed of Restraint made between the plaintiff and the defendant on 18 July 2014.
Overview
The Deed of Restraint was made pursuant to a term of an agreement, also made on 18 July 2014, between the plaintiff and D & S Cook Enterprises Pty Ltd to purchase a business carried on under the name 'Matchtec Hydraulics' (the Business).
The defendant had established and developed the Business and he was a director of the vendor, D & S Cook Enterprises Pty Ltd. The activities of the Business involved the service and repair of hydraulic cylinders and associated components and the manufacture of hydraulic cylinders when customers' cylinders were damaged or worn beyond serviceable condition.
It was a term of the agreement for the purchase of the Business that the defendant would continue to work for the Business for a period of one year following settlement. Settlement occurred on 15 August 2014. In fact the defendant continued to work in the Business until mid-June 2016 when he resigned. His resignation took effect on 30 June 2016.
In about July 2016 the defendant started to work in a business known as 'Allwest Hydraulic and Mechanical Services' (Allwest), a hydraulic engineering business established by another former employee of the plaintiff, Mr Ovidiu Circa. Mr Circa had resigned from the plaintiff's employment in July 2016. Allwest undertakes the same work as the Business.
The plaintiff seeks injunctions restraining the defendant:
(a)engaging in any business activity which is the same or similar to the Business or any material part of it;
(b)soliciting or accepting any approach from any person who was a customer of the Business in the 12 months immediately preceding the plaintiff's purchase of the Business; and
(c)interfering with the relationship between the plaintiff and customers of the Business.
The application first came before me on 29 November 2016. At that hearing the defendant was unrepresented and, with my leave, appeared by telephone. He explained that he was leaving to go overseas later that day and would not be returning until a date in January 2017. Directions for the filing and service of affidavits and submissions were made and the application was set down for hearing on 7 February 2016.
The evidence
The plaintiff read and relied upon:
(a)affidavits sworn by Mr Ross Stephen Palmer on 21 November 2016 and 1 February 2017;
(b)an affidavit sworn by Mr Erik Ross Palmer on 21 November 2016;
(c)an affidavit sworn by Mr Jamie Yotopoulos on 21 November 2016;
(d)an affidavit sworn by Ms Kate O'Brien on 1 February 2017.
Mr Ross Palmer and Mr Erik Palmer are directors of the plaintiff who work in the business and Mr Yotopoulos is employed by the plaintiff as a manager in the Business.
The defendant read and relied upon an affidavit sworn by him on 20 January 2017.
The principles applicable to the grant of interlocutory injunctions
The principles concerning interlocutory injunctions are well-established. First, an applicant must make out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at trial the plaintiff will be held entitled to relief. The requisite strength of the probability of ultimate success depends on the nature of the rights asserted and the practical consequences likely to flow from the relief sought. Secondly, an applicant must demonstrate that the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs the injury which the defendant would suffer if an injunction were granted - the balance of convenience: Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 [65] (Gummow & Hayne JJ). The question of whether damages would be an adequate remedy forms part of the balance of convenience inquiry: Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238 [61]; National Australia Bank Ltd v Joyce [2012] WASC 224 [40]. Whether an applicant for an interlocutory injunction has made out a sufficient prima facie case and whether the balance of convenience favours the grant of such relief are related, not independent, questions: Warner‑Lambert Co LCC v Apotex Pty Ltd [2014] FCAFC 59 [87].
The principles applicable to restraints of trade
There was no material dispute between the parties as to the principles which govern restraints of trade. A useful statement of the relevant principles is to be found in the judgment of Malcolm CJ (Miller & McKechnie JJ agreeing) in CreamvBushcoltPty Ltd [2004] WASCA 82 [18] - [31] and [53]. In summary, and omitting the citation of authorities, the principles stated by Malcolm CJ were as follows:
(i)There is a clear rule that restraints of trade will be held void unless they can be justified as reasonable.
(ii)A party who seeks to enforce a restraint of trade clause in a contract carries the burden of proving that the restraint is reasonable as between the parties. This reflects the principle that a restraint of trade is unreasonable if it provides greater protection than that which is reasonably required to give adequate protection to the person for whose benefit the restraint is imposed. In order to be reasonable, a restraint must afford no more than adequate protection for the party in whose favour it is imposed.
(iii)In considering whether a covenant in restraint of trade is reasonable as between the parties, the amount of the purchase price paid when a business is sold, particularly the amount paid for goodwill or distributed to it, is relevant to the question of reasonableness, but is not decisive. In the case of a sale of a business the most important consideration is the time required to sever the relationship between the vendor and customers who patronise the business after sale. The question in each case is whether the covenant goes no further than is necessary to afford the covenantee adequate protection of its interests.
(iv)A restraint may be imposed more readily and more widely upon the vendor of a business in the interests of the purchaser than upon a former employee in the interests of the employer.
(v)The question whether a particular provision in a contract operates unreasonably in restraint of trade is to be determined not by the form in which the relevant provision is framed but its effect and operation in practice.
(vi)The question whether a particular restraint is unreasonable is a question similar to whether the facts in a particular case establish negligence.
(vii)The onus of establishing that an agreement is reasonable as between the parties is upon the person who relies upon the agreement, while the onus of establishing that it is contrary to the public interest is on the person alleging that to be the case.
In Cream v Bushcolt Malcolm CJ stated that it had been held that provisions in agreements recording that the parties agree that the restraint imposed is reasonable are of little assistance. As noted by Edelman J in Emeco International Pty Ltd v O'Shea [2012] WASC 282 [49], there are authorities (referred to by Edelman J) in which such provisions have been held to be relevant.
By way of further exposition of the way in which the courts have considered restraints imposed on the vendor of a business, counsel for the plaintiff developed a number of other propositions. I will refer to two of these propositions: first, the test for the duration of a restraint ought to depend on however long it will take for the seller's connection to fade away: Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 72 ALR 643; (1987) 17 FCR 505, 662; and, second, the duration of the seller's promise should not extend beyond the point in time at which the seller's re-entry into the business would not affect the buyer any more than the entry of a stranger: Brown v Brown [1980] 1 NZLR 484, 497.
The plaintiff's case
First, the plaintiff relies upon the fact that the purchase price for the Business was $650,000 of which $588,700 was attributable to goodwill and $61,300 to plant and equipment.
Second, the plaintiff relies upon the term of the restraint itself. It reads as follows:
2.Restraint Provisions
2.1In this clause, 'engage in' means to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, director, consultant, advisor, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.
2.2The Restrained Persons will not, for the Restraint Period after the Settlement Date in any of the Restraint Area:
(a)engage in any business or activity, which is the same or similar to the Business or any material part of it;
(b)solicit any person who was an employee of the Business at any time during the twelve month period prior to and ending on the Settlement Date to leave the employment of the purchaser;
(c)solicit, canvass, approach or accept any approach from any person who was at any time during the twelve month period ending on the Settlement Date a customer of the Vendor with a view to obtaining the customer or any such person in a business, which is the same or similar to the Business; or
(d)interfere with the relationship between the Purchaser and its clients, employees or suppliers.
2.3 Each covenant and restraint set out in Clauses 2.2(a), (b), (c) and (d) has effect and is to be interpreted as a separate and independent covenant and restraint.
2.4The Restrained Persons agree that the prohibitions and restrictions set out in this Clause 2.2 are reasonable in the circumstances and necessary to protect the goodwill of the Business.
2.5If any of:
(a)the several and independent covenants and restraints in Clause 2.2 are or become invalid or unenforceable for any reason then that invalidity or unenforceability will not affect the validity or enforceability of any of the other separate and independent covenants and restraints in Clause 2.2; and
(b)the prohibitions or restrictions contained in this clause 2 is judged to go beyond what is reasonable in the circumstances and necessary to protect the Goodwill but would be judged reasonable and necessary if any activity were deleted or the period or area were reduced, then the prohibitions or restrictions apply with that activity deleted or that period or area reduced by the minimum amount necessary.
The defendant was a 'Restrained Person'. The 'Restraint Period' was 10 years and the 'Restraint Area' was Western Australia.
Third, the plaintiff relies upon Mr Ross Palmer's evidence about the Business's customers. That evidence is to the effect that customers are located in the major population centres in Western Australia, including not only the Perth metropolitan region but also regional centres such as Albany, Bunbury, Geraldton, Port Hedland, Karratha and Kalgoorlie and that many of its customers had been customers for a considerable period of time. Mr Palmer deposed that much of the work of the Business is repeat work. He also deposed that there were a limited number of hydraulic cylinder repairers in Western Australia, he estimated there were no more than 20, and an even more limited number of hydraulic cylinder manufacturers, he estimated less than six.
Fourth, after the defendant resigned from the Business, Mr Ross Palmer, Mr Eric Palmer and Mr Jamie Yotopoulos began to receive reports from customers of the Business that the defendant had approached them and made disparaging remarks to them about the nature and quality of the products and services offered by the Business and sought to persuade those customers to have their hydraulic cylinder service and repair needs met by Allwest. The customers who reported approaches from the defendant included customers who had been customers of the Business in the 12 months preceding settlement of the purchase. The evidence suggests that some customers of the Business have directed at least some of their work to Allwest.
Allwest Hydraulic and Mechanical Services is a business name registered in the name of Mr Circa. Mr Circa was employed in the business until mid‑July 2016. Allwest Hydraulic and Mechanical Services Pty Ltd was a company incorporated on 1 September 2016. Mr Circa was one of its directors. The company was deregistered on 14 December 2016. The business name Allwest Hydraulic and Mechanical Services remains registered in Mr Circa's name.
Fifth, in response to the defendant's argument that he is not qualified to do any work outside the hydraulic engineering industry to generate income, the plaintiff points to the defendant's training in welding fabrication and machine operation and to the fact that the defendant has experience in air hydraulic systems (pneumatics) and supplying and fitting hydraulic hoses, two areas of hydraulic engineering with which the Business is not concerned.
By way of summary the plaintiff submits it is entitled to the benefit of reasonable restraints of trade and there is evidence that those restraints are being breached and will continue to be breached unless the injunctive relief it seeks is granted.
The defendant's case
First, the defendant says that he has considerable experience in the hydraulic engineering business. He completed welder fabrication training, which included training in machine operation and welding techniques, in the United Kingdom and thereafter established such a hydraulic engineering business in the United Kingdom that specialised in both air and oil systems and which also had a large hose department specialising in supplying and fitting hoses. The defendant says that the industry of hydraulic servicing and repair work in Western Australia is very competitive and little loyalty is shown by customers to service providers. He maintains the customers assess each job on a case-by-case basis and award work according to price and the reputation of the service provider. Against that background defendant maintains all work done by the Business was performed on a one-off basis.
Second, by way of elaboration of his evidence about the competitive nature of the hydraulic servicing and repair work industry in Western Australia the defendant deposed that in August 2014 there were 127 hydraulic servicing and repair companies in Perth and that thirty of those were within a 50 km radius of the premises from which the Business operated.
Third, the defendant deposed that at the time he entered into the Deed of Restraint he did not pay much attention to its terms as he was planning to return to live in the United Kingdom with his family in the near future when his wife completed her university degree. The defendant says that he did not obtain legal advice about the Deed of Restraint.
Fourth, the defendant's counsel, Mr Tait, submitted that although the agreement for the purchase of the Business attributed $588,700 to goodwill, the court should not conclude that this figure reflected the value of the goodwill at the time of the purchase. Mr Tait submitted that there were many factors that affect how parties to sale and purchase agreements apportion the consideration and in the absence of evidence from the plaintiff's witnesses to the effect that $588,700 represented their assessment of the value of the goodwill, there was no evidence either way of the value of the goodwill.
Fifth, the defendant maintains that the Business was not managed effectively by the plaintiff and the quality of its work diminished leading to a lack of work.
Sixth, for various family reasons, the defendant and his family were not able to return to live in the United Kingdom as they had planned to do by the end of 2016. The defendant deposed that his family's plans to return to the United Kingdom have been 'placed on hold' until his wife completes her studies at the end of 2017. In the course of the hearing Mr Tait accepted that the court could infer that the defendant proposes to return to live in the United Kingdom at the end of 2017.
Seventh, when he resigned from his employment with the plaintiff, the defendant was aware that Mr Circa intended to set up a hydraulic engineering business, namely Allwest, but he had not been approached by Mr Circa at that stage. It was contended that the defendant resigned from the plaintiff out of frustration and that his decision to resign was made prior to the defendant having formulated plans as to how he might earn his living after he left the plaintiff's employment. It was only after the defendant had resigned that Mr Circa approached him to ask him for help in his new business. The defendant says that Mr Circa has had no involvement in Allwest since 31 October 2016 and that since 1 November 2016 he, the defendant, has operated the business of Allwest on his own, and as his own.
Eighth, the defendant denies approaching any former customers of the Business requesting work and says that any work he has done for former customers of the Business has been as a result of those customers approaching him and requesting that he undertake work for them. He says that almost all of the customers have advised him that since August 2014 the work undertaken on their behalf by the Business has been of poor quality and that is the reason why they no longer refer their work to the Business. The defendant also denies making disparaging remarks to customers about the Business, though some customers have approached him and made comments about the poor quality of work undertaken by the Business and have told him that they will not use the Business in the future for this reason and the defendant has responded that some of the staff members within the Business are 'out of their depth'.
Ninth, the defendant says that Allwest is his sole source of income and that he is not qualified to do any work outside of the hydraulic engineering industry to generate income.
Tenth, the defendant's counsel submitted that the evidence adduced by the plaintiff in support of its case that the restraints were reasonable in duration and area was very general in nature consisting of conclusionary assertions about the number of customers for whom the plaintiff did recurring or repeat work and the geographical location of customers. It was submitted that there was an absence of detailed documentary evidence about such matters and this reflected adversely on the strength of the plaintiff's case.
Has the plaintiff established a prima facie case?
There are a number of factual disputes between the parties that cannot be resolved on an interlocutory basis. Importantly, these include the critical issue of the nature and extent of the goodwill enjoyed by the Business, that is, whether its customers used the Business services for repeat work and the degree of 'customer loyalty'. The extent to which (if at all) the defendant under the name Allwest has solicited work from customers of the Business or undertaken work for such customers even if it has not been solicited are issues that can only be resolved at trial.
I am satisfied that the plaintiff has established a prima facie case that the Restraint Area, that is Western Australia, is reasonable. I have reached this conclusion on the basis of the plaintiff's evidence that it draws its customers from regional Western Australia as well as the Perth metropolitan area. Whilst it is correct that the plaintiff's documentary evidence in support of this aspect of its case is indeed limited, Mr Ross Palmer has deposed that to be the case and one would expect a director of the plaintiff to be able to say with some authority the areas from which the Business draws its customers.
I have a significant degree of reservation about the reasonableness of the 'Restraint Period', that is, 10 years. Having regard to the considerations identified in the authorities to which I referred earlier, a restraint for 10 years appears to me to be at the outer edge of what may be considered to be reasonable. I am also mindful of the criticisms made of the cogency of the plaintiff's evidence on the nature of the goodwill of the Business.
On balance, however, I am satisfied that the plaintiff has made out a prima facie case, albeit one not without some difficulty, that the 'Restraint Period' of 10 years is reasonable. This is necessarily a provisional assessment. There are three matters that lead me to the conclusion that the plaintiff has established a prima facie case that the 'Restraint Period' is reasonable.
The first matter is the fact that on the face of the purchase agreement over 90% of the purchase price paid by the plaintiff for the Business was attributed to goodwill. For the purpose of this interlocutory application I do not accept that the plaintiff is not entitled to rely on the apportionment of the purchase price in the agreement as reflecting the value of the goodwill. If the defendant had wished to contend that the apportionment did not reflect the actual value of the goodwill it was open for him to give evidence to that effect in his affidavit but he did not do so. That such a large proportion of the purchase price was attributed to goodwill suggests that the Business did have the benefit of repeat business from its customers and enjoyed some degree of customer loyalty.
The second matter is my impression drawn from the whole of the evidence presented on this application is that the defendant has a strong personal connection with customers of the Business and that it will take time for that connection to be severed. The defendant established the Business and ran it for about five years. The strength of his connection with the Business's customers is demonstrated by the approaches that he deposes he has received from customers to undertake work on their behalves.
The third matter is of much less significance and it is that the 10‑year period is what was negotiated and agreed between the parties. I accept that the significance of this matter might be diminished by the defendant's evidence that he was not concerned about the restraints of trade as he was proposing to return to live in the United Kingdom but, nevertheless, this is what the parties negotiating at arms-length agreed.
Where does the balance of convenience lie?
I consider that the balance of convenience favours the grant of injunctive relief for the following inter-related reasons.
First, the defendant received a substantial payment for the goodwill of the Business and to refuse the grant of injunctive relief would have the effect of depriving the plaintiff of a potentially valid contractual restraint, that formed part of the benefit of the bargain it struck by its agreement to acquire the Business and to confine it to a remedy in damages.
Second, I consider that damages are likely to be an inadequate remedy for the plaintiff primarily because of the difficulty in detecting breaches of the restraints, and the difficulty of establishing causation and thereafter quantifying the damage done to the goodwill of the Business: see Emeco International Pty Ltd v O'Sheaat [21]. The defendant's evidence that the plaintiff has lost business because of the poor quality of its work is a harbinger of the difficulties to which I have referred. I have a further concern that suggests that damages are likely to be an inadequate remedy. There appears to be every prospect that the defendant will return to live in the United Kingdom at the end of 2017. This raises the possibility that if it is successful in its action the plaintiff may be obliged to take steps to collect any damages awarded in its favour from a defendant who is out of the jurisdiction and, whilst that is not an impossible task, it is a factor that points up the difficulty with confining the plaintiff to the remedy of damages in this case.
Third, I am not persuaded that the defendant is unable to earn a living other than by being involved in the service, repair and manufacture of hydraulic cylinders. The defendant resigned from the Business before he was approached by Mr Circa to join Allwest. Thus, I infer that at the time he resigned he must have had a degree of confidence that he was able to earn his living by some means other than involvement in the service, repair and manufacture of hydraulic cylinders. This is so even if his resignation was an emotional response to the frustration he felt with the management by the plaintiff of the Business.
The interplay between the strength of the plaintiff's prima facie case and the balance of convenience
As noted earlier, the strength of the case and the balance of convenience are related, not independent, considerations. As stated, I consider that the plaintiff has established a prima facie case though my present assessment is that it is one with some difficulty. I emphasise, however, that this is a provisional assessment made on the basis of limited evidence. I consider that the balance of convenience favours the grant of interlocutory relief. I propose to enter this action into my Commercial & Managed Cases List and programme it to an expedited hearing of the issue as to whether the restraints are void on 3 and 4 April 2017. An early determination of this issue mitigates the potential injustice that might be suffered by the defendant. I note that the defendant has the protection of the plaintiff's undertaking as to damages.
On that basis, I consider that injunctive relief should be granted.
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