ISS Facility Services Australia Limited v Grounds and Gardens Pty Limited - [2008] NSWSC 1406

No judgment structure available for this case.

CITATION: ISS Facility Services Australia Limited v Grounds and Gardens Pty Limited [2008] NSWSC 1406

HEARING DATE(S): 2/12/08, 3/12/08

JUDGMENT OF: McDougall J at 1

EX TEMPORE JUDGMENT DATE: 3 December 2008

DECISION: See paras [82] to [88].

CATCHWORDS: CONTRACTS - Licence agreement - restraint of trade clause - appeal from arbitration - construction of agreement - whether arbitrator applied incorrect construction of clause - breach - whether two businesses operating in the same market offering similar service to potential customers constitutes 'competition' in breach of clause - whether restraint of trade clause unreasonable.

LEGISLATION CITED: Corporations Act 2001

PARTIES: ISS Facility Services Australia Limited (Plaintiff)
Grounds and Gardens Pty Limited (Defendant)

FILE NUMBER(S): SC 50224/07

COUNSEL: J T Gleeson SC / D F Villa (Plaintiff)
A S Bell SC / R C A Higgins (Defendant)

SOLICITORS:
Minter Ellison (Plaintiff)
Clayton Utz (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

3 December 2008 ex tempore (revised 3 December 2008)

50224/07 ISS FACILITY SERVICES AUSTRALIA LTD v GROUNDS AND GARDENS PTY LIMITED

JUDGMENT

1 HIS HONOUR: The question for decision is whether an arbitrator erred in law in concluding that the plaintiff (Tempo) breached what is in terms a restraint of trade clause in a licence agreement made between Tempo and the defendant (Grounds).

Background

2 Tempo carries on, and for some years has carried on, the business of provision of cleaning services. Ancillary to that business, Tempo provides grounds maintenance services to some of its customers for whom it provides cleaning services. Tempo does not provide, and has not provided, grounds maintenance services on a "stand-alone" basis. As at October 2003, the revenue from grounds maintenance services was substantially less than one per cent of Tempo's total revenues.

3 Most of the grounds maintenance services that Tempo provided to its cleaning customers were performed by subcontractors. Grounds was one of those subcontractors prior to October 2003.

4 On 30 June 2003, after what appeared to have been extensive negotiations, Tempo and Grounds reached an agreement that:

(1) Tempo would sell to Grounds a grounds maintenance business acquired by Tempo when it bought out the business of Prestige Property Services; and

5 That agreement was recorded in a document styled "Heads of Agreement" dated 30 June 2006. The heads of agreement were expressed to be immediately binding, but Tempo and Grounds agreed to enter into more formal agreements that would form a complete record of their bargain. That was done (at least, so far as the grant of a licence was concerned) on 27 October 2003.

6 On 13 April 2005, a company known as Pacific Solutions Pty Limited (Pacific Solutions) took over Tempo through a scheme of arrangement. At that time, Pacific Solutions was owned as to 49 per cent by a company known as Pacific Investment December 2004 Pty Limited (Pacific Investment). On 28 February 2006, Pacific Investment acquired the remaining 51 per cent of the issued shares in Pacific Solutions. At the same time, Tempo changed its name to ISS Facility Services Australia Limited.

7 As at 28 October 2006, and since, Pacific Investment was, and remains, a wholly-owned subsidiary of a company known as ISS Global A/S (ISS Global). ISS Global was then, and remains, the holding company (or ultimate holding company) of yet another company known as ISS Facility Services Pty Limited (ISS Facility Services).

8 Thus, on 28 February 2006, Tempo and ISS Facility Services became related bodies corporate within s 50 of the Corporations Act 2001.

9 Before then, in May 2005, ISS Facility Services had acquired the grounds maintenance business of Kirwan Grounds Maintenance (Kirwan). Kirwan was, and remains, a competitor of Grounds, in relation to what might be called the core or original business of Grounds - i.e., Grounds’ business apart from the business that it conducts pursuant to the licence agreement.

10 Grounds claims that the "Kirwan" business of ISS Facility Services also competes, and since 28 February 2006 has competed, with the licensed business. Thus, Grounds says, Tempo is, and since 28 February 2006 has been, in breach of cl 16 of the licence agreement. In very broad outline, cl 16.1 provides that Tempo and its directors will not be engaged in a business that competes with the licensed business, and that Tempo will ensure that its related bodies corporate are not engaged in a competing business.

11 That claim was referred to arbitration. By a preliminary award dated 19 November 2007 (the Award), the arbitrator decided that claim in favour of Grounds. Tempo appeals from the arbitrator's decision. Clause 20.8(d) of the licence agreement permits an appeal to this Court "on any question of law arising in the course of the arbitration or out of an arbitration award".

The issues in this court

12 Mr J S Gleeson of Senior Counsel, who appeared with Mr D F Villa of counsel for Tempo, said the question involved some seven questions of law.

1. (Summons Issue 4):

Business”

Plaintiff: No

Defendant: No

(b) if no to (a), did the arbitrator err by applying an incorrect construction of the clause?

Plaintiff: Yes

Defendant: No

(c) alternatively to (b), did the arbitrator apply the correct construction of a clause but to evidence which was incapable in law of satisfying it?

Plaintiff: (alternatively) Yes

Defendant: No

2. (Summons Issue 5): if Question 1(a) is answered no but a clear answer cannot be drawn from the face of the award as to 1(b) or 1(c), has the arbitrator failed sufficiently to state reasons indicating that he has applied the correct construction of the clause for identified reasons to evidence capable in law of satisfying the clause?

Plaintiff: (alternatively) Yes

Defendant: No

must ensure”

Plaintiff: No

Defendant: Yes

“must ensure”

Plaintiff: No

Defendant:

5. (Summons: Issue 2): if yes to 4, is Clause 16.1 to that extent void and unenforceable as an unlawful restraint of trade?

Plaintiff: Yes

Defendant: No

13 In his address in reply, Mr Gleeson raised what he said was a further question of law, arising from the submissions put for Grounds:

1. Whether, on the proper construction of Clause 16.1 of the Licence Agreement, a business is to be regarded as competing in any way with the Business of the Plaintiff licenced to the Defendant for the Term if, absent proof of actual competition in the sense of the 2 businesses tendering for the same clients the 2 businesses are in the same market, providing the same kind of services and at least one is an active and expansionist participant in the market?

14 Dr A S Bell of Senior Counsel, who appeared with Ms R C A Higgins of counsel for Grounds, submitted that the first question (No 1(a)) raised a false issue, or non-issue. Dr Bell submitted that no one had suggested that cl 16.1 should be construed in the manner suggested by that question. There being unanimity on the question of construction posed by paragraph 1(a), it follows that the question should be answered "no".

15 Further, as to the third question (No 1(c)), Dr Bell submitted that it was an attempt to dress up as a question of law something that was no more than a question of fact. Dr Bell and Mr Gleeson agree that a question of law could only arise if there were no evidence before the arbitrator that was capable of showing a breach of cl 16.1 on its proper construction.

Relevant terms of the licence agreement

16 The parties referred to many provisions of the licence agreement. Dr Bell referred also to cls 12 and 19 of the heads of agreement. I do not propose to set out cls 12 and 19. Nor do I propose to set out all the terms of the licence agreement to which reference was made in submissions. I do, however, summarise, or set out, those that seem to me to be more relevant:

A. Tempo is the owner of the Business.

B. On 21 June 2003 Tempo and Grounds agreed that Tempo would grant to Grounds the sole and exclusive licence right to carry on the Business during the Term and within the Territory and the parties have signed a Heads of Agreement to that effect.

…

1.5 “Business” means the business of the Licensor comprising:

(a) all landscaping maintenance, design, construction, management and consultancy services provided by Tempo in the Territory,

(b) all horticultural business carried on by Tempo in the Territory, including the Prestige and Group 4 businesses but excluding the Prestige business carried on by Tempo in New South Wales; and

(c) all plant and equipment and consumables used or held ready for use by Tempo in the conduct of the Business;

1.9 “Client” means every person for, or on whose behalf, Tempo provides or has provided any service in the ordinary course of the Business within the Territory;

1.10 “Client Contracts” means all contracts and arrangements entered into by Tempo and its Clients for the provision of services by Tempo in the Business within the Territory;

1.12 “Initial Term” means the period of five (5) years commencing on the Start Date;

1.19 “related body corporate” has the meaning contained in the Corporations Act 2001;

1.23 “Term” means:

(a) the Initial Term; and

(b) if this Agreement is renewed by Grounds under clause 4 – the Renewed Term;

1.24 “Territory” means:

(a) Australia;

(b) New Zealand; and

(c) Asia-Pacific;

2. GRANT OF LICENCE

2.1 Tempo grants to Grounds the sole and exclusive right licence and privilege to carry on the Business in the Territory during the Term and on the terms and conditions of this Agreement.

2.2 Tempo shall not carry on, or grant to any other person any licence or other right to carry on, the Business within the Territory during the Term.

2.3 Grounds shall carry on the Business during the Term as the independent licensee of Tempo and not as a partner, joint venturer, franchisee or agent of Tempo.

5. CONDUCT OF BUSINESS

5.1 During the Term Grounds is responsible for the supervision, management and control of the Business within the Territory.

5.2 Grounds must conduct the Business diligently and in a professional manner and in accordance with normal and prudent practice.

5.3 Tempo shall allow Grounds to use the Business Name throughout the Territory for the purpose of carrying on the Business under the licence, and shall not cancel or transfer the Business Name without the prior written consent of Grounds.

5.4 Grounds must clearly show its independent conduct of the Business on its letterhead, invoices public documents and other identifying materials.

5.5 Grounds shall keep its principle place of business open to the public at all times during usual business hours.

5.6 Grounds shall comply with all applicable laws including OH&S and workers’ compensation in the conduct of the Business.

5.7 Grounds must immediately notify Tempo of the happening of any event which has or may have a material effect on the profitability or value of the Business.

6. DEALINGS WITH CLIENTS

6.1 Subject to clauses 6.2 and 6.3, Tempo shall conduct all dealings with Clients in relation to Client Contracts.

6.2 Throughout the Term Grounds will not, except with the prior written consent of Tempo:

(a) deal directly with Clients in relation to Client Contracts; or

(b) approach or procure any Client to deal directly with Grounds after termination or expiry of its Client Contract in respect of services of the kind already provided by Tempo to that Client.

6.3 Tempo shall allow Grounds to have direct contact with the Client in respect of the Transfield Contract, and in respect of other Client Contracts as agreed in writing by Tempo.

6.4 Grounds shall render Invoices to Tempo for all services provided by Grounds in the Business during the Term. Tempo shall pay to Grounds the Invoice within 21 days of the date of that Invoice. Grounds shall not render Invoices or make any charges to Clients directly unless otherwise agreed by Tempo.

6.5 Grounds shall render Invoices to Tempo based on the information provided by Tempo to Grounds in relation to Tempo’s billings to its Clients.

6.6 Grounds may deal with Clients in relation to other matters not referable to Client Contracts.

6.7 Tempo will make full disclosure to Grounds of all Client Contracts and invoice amounts for Clients of the Business for the period of 12 months ended 30 June 2003, and other relevant information as reasonably requested by Grounds to enable Grounds to conduct the Business under the licence. Grounds acknowledges that such information is private and confidential to Tempo and will be provided to Grounds for the sole purpose of this clause and must not be used by Grounds otherwise than for carrying on the Business under the licence.

6.8 Grounds is responsible for estimating and submitting future fees and costings for all Client Contracts to Tempo for submission to the Client during the Term. Grounds will provide Tempo with all appropriate documentation and information in relating to such fees and costings. Tempo is responsible for submission of all tenders, quotations and estimate to its Clients during the Term. Tempo reserves the right to:

(a) require Grounds to amend any quotation or tender submission; and/or

(b) obtain a market test on the Client opportunity and obtain quotations and tender submissions from other suppliers, but Tempo will not engage or allow any person other than Grounds to provide services under a Client Contract unless Grounds cannot satisfy the requirements of that Contract.

6.9 If Grounds determines that any Client Contract(s) in the Business is unprofitable or unviable and that in Grounds’ opinion after all reasonable efforts that Client Contract cannot be made profitable or viable, the Grounds will inform Tempo of its determination. Tempo shall, at its own discretion do any one or more of the following:

(a) renegotiate the Client Contract with the Client;

(b) adjust the Commission Fee to a lesser amount or nil in respect of that Contract;

(c) terminate the Contract if Tempo and Grounds determine that no other solution is viable;

(d) engage another subcontractor to perform the services.

6.10 Grounds and Tempo agree that each will make every effort to be competitive with the market place and to provide competitive pricing so as not to disqualify collective opportunities. The process for determining if tender bids are competitive will be the tender de-briefings on unsuccessful bids.

6.11 If a Client does not wish for Grounds to carry out the services required for any reason under that Client’s Contract, then Tempo may engage another person to carry out those services if Tempo proves, to Grounds’ reasonable satisfaction, that the Client does not, of its own volition and for its own reasons, wish for Grounds to carry out those specific services, and not by reason of any influence, benefit or opportunity from Tempo or any other person.

6.12 Tempo will give Grounds the opportunity to be involved and participate in the landscaping, maintenance, design, construction, management, consultancy and other horticultural business components of new ventures and opportunities that Tempo may participate in during the Term. Tempo will also endeavour to source new business of that kind from its existing clients of other services provided by Tempo.

9. NO TRANSFER OF BUSINESS

9.1 Each party acknowledges that nothing in this Agreement constitutes a sale or transfer by Tempo to Grounds of any ownership or title in:

(a) the Business (including goodwill of Tempo);

(b) the Business Name; and

(c) the Business Records.

9.2 Grounds acknowledges that nothing in this Agreement constitutes a transfer or novation of Contracts from Tempo to Grounds, and Grounds does not, by this Agreement, become a party any Contracts.

16. PROTECTION OF LICENCE RIGHTS

16.1 In order to ensure that Grounds enjoys the full benefit and advantage of the licence under this Agreement, Tempo and the Directors will not, and Tempo shall ensure that its related bodies corporate do not, without the prior written consent of Grounds either directly or indirectly, be engaged, concerned or interested in a prescribed way in a business which competes in any way with the Business within each prescribed area for the Terms.

16.2 For the purposes of this clause, the prescribed ways are:

(a) as sole proprietors;

(b) as member of a partnership;

(c) as majority shareholder;

(d) officer or director of a corporation;

(e) employee; and

(f) agent.

16.3 For the purposes of this clause, each of the following is a prescribed area:

(a) the area encompassed within the Territory;

(b) Australia.

16.4 Sub-clause 16.1 is to be construed as if Tempo and each Director had entered into a series of separate covenants not to be engaged, concerned or interested in each prescribed way in a business which competes in any way with the Business within each prescribed area during the Term.

16.5 Each of the series of separate covenants referred to in sub-clause 16.4 is severable and has an independent operation from the other covenants.

16.6 The parties acknowledge that the provisions of this clause are fair and reasonable and are formulated taking into account the Licence Fees and other consideration payable by Grounds to Tempo under the licence. Grounds would not have entered into the licence and agreed to pay the Licence Fees and other consideration under this Agreement but for the full force and effect of the covenants by Tempo and the Directors under this clause.

16.7 Grounds will offer Tempo first right of refusal should the directors of Grounds decide to sell either Grounds or the Business.

17. PROTECTION OF TEMPO RIGHTS

17.1 In order to protect Tempo’s interests, Grounds will not, and Grounds shall ensure that its related bodies corporate do not, without the prior written consent of Tempo either directly or indirectly, be engaged, concerned or interested in a prescribed way in a business of the kind carried on by Tempo within each prescribed area for the Term.

17.2 For the purposes of this clause, the prescribed ways are:

(a) as sole proprietors;

(b) as member of a partnership;

(c) as majority shareholder;

(d) officer or director of a corporation;

(e) employee; and

(f) agent.

The issues before the arbitrator

17 The issues raise by Grounds' points of claim are not limited to a breach of cl 16.1. However, in relation to clause 16.1, the points of claim assert in pars 21 to 23 that in the circumstances that I have summarised Tempo breached cl 16.1. Those paragraphs read as follows:

21. By reason of the matters pleaded in paragraphs 5 to 10 of these Points of Claim, since at least 28 February 2006, ISS Tempo and ISS Facility Services were related bodies corporate for the purposes of the Licence Agreement.

22. It was an express term of the Licence Agreement that ISS Tempo would not be, and would ensure that its related bodies corporate were not, without the prior written consent of Grounds & Gardens, either directly or indirectly, engaged, concerned or interested in a prescribed way (as defined) in a business which competed in any way with the Business (as defined) within the Territory for at least 5 years from 1 September 2003.

Particulars

Clause 16.1 of the Licence Agreement

23. In breach of this obligation, ISS Tempo has not ensured that its related bodies corporate have not competed with the Business and Grounds & Gardens has not enjoyed the full benefit and advantage of the Licence.

Particulars

Grounds & Gardens will provide these particulars following discovery.

18 Tempo's points of defence raised three suggested answers to the cl 16.1 claim:

19 The answers to paragraphs 21 to 23 of the points of claim are set out in paragraphs 6 to 8 of the points of defence. I set out those paragraphs:

6. In response to paragraph 21, the Respondent admits that since 28 February 2006, ISS Tempo and ISS Facility Services were related bodies corporate and does not otherwise admit the allegations in that paragraph.

7. In response to paragraph 22 the Applicant’s Points of Claim, the Respondent says that:

(a) on the proper construction of the Licence Agreement

(i) clause 16.1 only applies in respect of ISS Tempo’s related bodies corporate as at the date of the Licence Agreement; and/or

(ii) clause 16.1 applies in respect of ISS Tempo’s related bodies corporate over which ISS Tempo had control.

(b) if clause 16.1 applies in respect of ISS Tempo’s related bodies corporate or to related bodies corporate over which ISS Tempo does not have control, it is to that extent void and unenforceable because it is unreasonable restraint of trade.

8. In response to paragraph 23 the Applicant’s Points of Claim the Respondent says that by reason of the matters pleaded above in paragraph 7 above, ISS Tempo is not in breach of the obligation under clause 16.1 of the Licence Agreement.

20 It will be noted that the denial of breach in paragraph 8 was based only on the three "matters pleaded... in paragraph 7...".

21 The parties' outline written submissions to the arbitrator were put in evidence on this appeal. Tempo's outline addressed at length the three issues raised by para 7 of its points of defence. They did not suggest that, if those were decided adversely to Tempo, there was nonetheless a defence on the facts.

22 Grounds' outline likewise addressed at length the three issues raised by para 7 of the points of defence. It did however refer in addition, although briefly, to the facts that, Grounds submitted, showed breach.

[see Statement of Scott Howells, paragraphs 18-21 and 31-32;. Email dated 26 April 2007 from Mal Day to Dean Campbell et al re Grounds and Gardens; file note dated 2 June 2006 from Mal Day re Grounds and Gardens Agreements; Presentation on ISS Australia dated 21 March 2007 by Charles Blinkworth].

27. ISS Tempo is thus in breach of its obligation under Clause 16.1 to ensure that its related bodies corporate did not engage in any way in grounds maintenance business in competition with Grounds and Gardens.

23 Tempo took no issue in writing with those paragraphs, although:

24 There was no evidence, by way of transcript or otherwise, as to what took place during the hearing before the arbitrator.

The award

25 The arbitrator set out the fundamental issue with which his interim award was concerned at para 1: whether Tempo had breached the licence agreement because, contrary to cl 16.1, it had failed to ensure that one of its related bodies corporate would not be interested in a business that competed with the business the subject of the licence agreement.

26 The arbitrator then summarised or set out, at paras 3 to 9, the key provisions of the licence agreement.

27 In paragraphs 10 to 33, the arbitrator made findings of fact.

28 Against that background, the arbitrator restated the issue at para 35:

35. The preliminary question in this arbitration is whether ISS Tempo has breached cl. 16.1 of the Licence Agreement because ISS Facility Services Pty Limited is a related body corporate and, without the prior written consent of Grounds & Gardens Pty Limited, has been, directly or indirectly, engaged concerned or interested in a prescribed way in a business which competes with the business that Grounds & Gardens has licensed from ISS Tempo. Grounds and Gardens contends that, because ISS Facility Services Pty Limited operates the Kirwin and SISTEMS businesses, ISS Tempo has breached cl 16 by failing to ensure that ISS Facility Services Pty Limited – a related body corporate – does not operate those businesses, businesses which compete with the business that is the subject of the Licence.

29 The arbitrator summarised Tempo's submissions at para 36. They were said in essence to comprise the three issues raised by its points of defence, as I have stated above. The arbitrator did not suggest that Tempo had submitted that, even if those issues were decided adversely to it, nonetheless there was a defence on the facts. Mr Gleeson levelled no criticism at para 36.

30 The arbitrator then dealt at length with the questions of construction raised by paragraph 7(a) of Tempo's points of defence. He concluded in substance that the definition of "related bodies corporate" in cl 1.19 should be applied literally. As has been seen, that definition referred to s 50 of the Corporations Act. For convenience, I set out that section:

50 Related bodies corporate

31 Having reasoned thus, the arbitrator concluded at para 65 that "[t]he ordinary meaning of clause 16.1, read with the definition of 'related body corporate' must be given effect according to the language of those provisions.”

32 Having reached that conclusion, the arbitrator turned to the question of fact raised in para 26 of Grounds' outline. He dealt with it in para 66, in terms that reflected closely what Grounds had put:

66. The evidence establishes that ISS Facility Services Pty Ltd did compete with the business of Grounds and Gardens by performing grounds maintenance work of the relevant kind in Australia after 28 February 2006. (Howells, paras 18-21 and 31-32; file note date 2nd June 2006 made by Mr Day; e-mail dated 26 April 2007 from Mr Day to Dean Campbell; Presentation by Charles Blinkworth dated 21 March 2007.) It follows that, by failing to ensure that ISS Facility Services Pty Ltd did not compete with the relevant business of Grounds and Gardens, ISS Tempo breached cl. 16 of the Licence Agreement.

33 At para 67, the arbitrator turned to the issue of restraint of trade. He dealt with that on two alternative bases:

(1) he concluded at para 81 that there was no restraint of trade, in substance because in his view cl 16 did not involve Grounds in applying any legal or commercial pressure to the related bodies corporate of Tempo. Those related bodies corporate, the arbitrator said, remained free to decide whether or not they wanted to compete with Grounds "with respect to the grounds maintenance business".

First question: the proper construction of clause 16.1

34 As I have said, it was common ground that this question should be answered "no". Thus, it was common ground that on the proper construction of clause 16.1, the restraint for which it provides would be breached only if the competing business competed with the "Business" as defined: that is, with the "Business" that was the subject of the licence.

Second question: did the arbitrator apply the correct construction?

35 Mr Gleeson submitted that the arbitrator had applied an incorrect construction. He referred to what he said were "oscillations" in the award (which oscillations, Mr Gleeson submitted, may have been triggered by what he said was equivalent imprecision in Grounds' written outline).

36 Mr Gleeson referred to the following paragraphs (or part), among others, of the award as showing oscillation:

55. …Nothing in cl.16 or Licence Agreement as a whole prevented or prevents ISS Tempo, its Directors or related bodies corporate from having a minority shareholding in a company that was or is engaged in the grounds maintenance business. The object of cl.16 is to prevent ISS Tempo, its Directors or related bodies corporate from being in a position where they could exercise control or direction over a business that competes with the business the subject of the Licence Agreement.

56. Moreover, ISS Tempo had its own interest in having the term “related body corporate” construed literally in accordance with the definition in cl.1.19. Such a construction ensured that the reciprocal obligation imposed on Grounds and Garden by cl.17 would assist in protecting ISS Tempo’s core businesses. It had the effect, for example, that, if the shareholding in grounds and Gardens was acquired by a conglomerate who provided cleaning, security, courier, delivery or fire control services, Grounds and Gardens would have to pay damages to ISS Tempo if the conglomerate carried out those services.

62. Nor can I see any compelling ground for holding that paragraph (b) of s.50 does not apply to a “holding company” of ISS Tempo or, for that matter, Grounds and Gardens when cl.17 is applicable. There is no readily apparent commercial reason for excluding a holding company form the operation of cll. 16 and 17. ISS Tempo’s inability to control its holding company is not a sufficient ground for holding that clause 16.1 does not apply to its holding company. It is true of course that ISS Tempo cannot “ensure” that its holding company. It is true of course that ISS Tempo cannot “ensure” that its holding company will have acquired the control and benefit of ISS Tempo’s businesses, and it makes commercial sense for those, like Grounds and Gardens, who have contracted with ISS Tempo to ensure that the new controllers of that company should not profit by disregarding the obligations of ISS Tempo, obligations that may well have been factored into the consideration which the holding company has paid to acquire control of ISS Tempo. It makes commercial sense that Grounds and Gardens should have the benefit of a stipulation that requires ISS Tempo to pay damages if the holding company, by reason of its control of ISS Tempo, is able to exploit the latter’s contacts, experience and skill in the grounds maintenance business to the detriment of Grounds and Gardens. As I later indicate when dealing with the doctrine of restraint of trade, cl. 16.1 cannot prevent the holding company from engaging in a grounds maintenance business. But if it does, its related body corporate – ISS Tempo – must pay damages for the breach of what is effectively a warranty.

63. The reasons that indicate that paragraph (b) of section 50 applies to clause 16.1 also indicate that paragraph (c) of that section applies to that clause. Unless clause 16.1 applied paragraph (c) to a subsidiary of ISS Tempo’s holding company, the latter by reasons of its control of both companies could utilise the contacts, experience and skill of ISS Tempo to the detriment of Grounds and Gardens to want a right to damages if a subsidiary of ISS Tempo’s holding company should compete with Grounds and Gardens business. It is true that such a subsidiary might have competed with Grounds and Gardens before becoming a subsidiary of that holding company. It is also true that it may compete with Grounds and Gardens without utilising the contacts, experience and skill of ISS Tempo in the grounds maintenance business. But the risk that such a subsidiary might utilise those contacts, experience and skill provides a commercial reason why, objectively, Grounds and Gardens would have wanted paragraph (c) of the definition of s.50 to apply to cl.16.1. Put another way, that risk indicates a rational commercial basis for the literal application of paragraph (c) of s.50 to clause 16.1.

66. The evidence established that ISS Facility Services Pty Ltd did compete with the business of Grounds and Gardens by performing grounds maintenance work of the relevant kind in Australia after 28 February 2006. (Howells, paras 18021 and 31-32); file note date 2nd June 2006 made by Mr Day; e-mail dated 26 April 2007 from Mr Day to Dean Campbell; Presentation by Charles Blinkworth dated 21 March 2007.) It follows that, by failing to ensure that ISS Facility Services Pty Ltd did not compete with the relevant business of Grounds and Gardens, ISS Tempo breached cl.16 of the Licence Agreement.

79. …Given the reciprocal nature of cl.16 and the lock-step relation between the business of ISS Tempo and Grounds and Gardens, cl.16 in applying to New Zealand and Asia-Pacific as well as Australia did not go beyond what was required to protect the business of Grounds and Gardens from the activities of ISS Tempo and its subsidiaries.

81. In my opinion, clause 16 does not have that effect because it does not involve Grounds and Garden applying any legal or commercial pressure on those bodies corporate. They are free to determine whether or not they wish to compete with Grounds and Gardens with respect to the grounds maintenance business.

37 I do not accept that those paras, considered individually, or together, and in context, show that the arbitrator applied an incorrect test. Nor do I accept that this follows from the other paras of the award to which Mr Gleeson referred. I have not set out all those paras. In many cases, Mr Gleeson did not submit that they displayed error. In others, they do not disclose the approach taken by the arbitrator to the question of construction. It is sufficient to say that, considering them all in conjunction with the ones that I have set out, there is, as I have said, no demonstrable error.

38 As to paras 55: the arbitrator posed the correct question. Clause 16.1 prohibits involvement in a "business that competes with the business the subject of the Licence Agreement as the arbitrator said. That is clearly the test that clause 16.1, on its proper construction, does pose.

39 As to para 56: Mr Gleeson criticised it because, he submitted, cls 16.1 and 17.1 were not truly "reciprocal". That was so, he submitted, because competition is a necessary ingredient of clause 16.1, but not of clause 17.1. That linguistic distinction may be accepted. It does not follow that the arbitrator erred in his use of the adjective “reciprocal,” let alone that there is demonstrated thereby some error of law in the arbitrator's approach to cl 16.1.

40 As to para 62: Mr Gleeson criticised in particular the antepenultimate and penultimate sentences. There, he submitted, the arbitrator had oscillated away from the kind of competition on which cl 16.1 was focused to competition at large. I do not agree. Earlier in the para, the arbitrator had referred - twice - to cl 16.1. Indeed, he had set out the correct test in the third sentence of that para. I do not think that, thereafter, he was referring to some different test. What he said in the criticised sentences should not be taken out of context. Far less should it be regarded as signalling some unheralded shift in construction.

41 In this context, I note that no one contended for the construction of cl 16.1 that, according to Tempo, the arbitrator had adopted. One might well wonder why, in those circumstances, an arbitrator of the highest legal and professional standing would have gone on a frolic of his own, without - so far as the evidence reveals - giving the parties any prior hint as to his thought processes.

42 As to para 63: the answer to Mr Gleeson's submission is in substance that which I have given as to paragraph 62. In para 63 also, the arbitrator referred explicitly to cl 16.1. His reference later on to a company competing "with Grounds and Gardens’ business" must be read in that context: as referring to competition within the scope of cl 16.1.

43 As to para 66: the arbitrator twice introduced the qualification of relevance. When he referred to the "grounds maintenance work of the relevant kind" in the first sentence, he was in my view picking up the requirements of cl 16.1. The work was "relevant" because it was undertaken by a business that competed with the licensed Business. In the last sentence, the "relevant business of Grounds and Gardens" is clearly a reference to the licensed Business.

44 Paragraphs 79, 81 and 89 fall into a somewhat different category to those paras that I have dealt with. The arbitrator was dealing in pars 79 and others with the restraint of trade issue. He had concluded that cl 16.1 had been infringed. Paragraphs 67 and following form no part of his reasoning on that question. Thus, to the extent that in paragraphs after paragraph 67 the arbitrator’s references to the business of Grounds are less precise, this should not be taken to reflect back on, or undermine, his reasoning on the question of breach.

45 In any event, the arbitrator did not lose sight of the relevant test. For example, the use of the definite article in the second sentence of para 81 - "the grounds maintenance business" - shows clearly enough that the arbitrator continued to be focused on the licensed Business and not on Grounds’ business generally.

46 Again, in para 89, the arbitrator referred expressly to cl 16.1. It is unlikely that, in the same para, he would have been thinking of some business of Grounds’ other than that which was the subject of protection given by cl 16.1.

47 As to the answer returned in the interim award: The use of the capitalised initial letter in "Business" indicates that the arbitrator had in mind that the relevant question was one of competition with the "Business" licensed to Grounds. His use of the preposition "of" does not detract from this reading. Indeed, having regard to cl 5 of the licence agreement (in particular, subcls 5.1, 5.3, and 5.4) the preposition "of" is not entirely inapposite to describe the relationship between Grounds and the "Business" during the term of the licence agreement.

48 I do not regard the form of the award as demonstrating that the arbitrator had posed, and by the award answered, the wrong question.

49 The second question should be answered "no".

Third question: no evidence?

50 This question involves two issues:

51 The first of those issues reflects the additional question of law to which I referred above when setting out the issues for my decision.

52 As to that further question: Mr Gleeson submitted that what was required was real or direct or actual competition. It was not sufficient, he submitted, that the two businesses provided similar services to similar users within any prescribed area.

53 Dr Bell relied on the dictionary definition of "compete" in the Shorter Oxford English Dictionary:

strive for (something) together with another; be a rival, bear comparison...; strive, contend, take part in a competition...; be commercially competitive.

54 Dr Bell submitted that, particularly having regard to the language of cl 16.1, it was sufficient if the two businesses were rivals in the sense that both were active in the same market, seeking to provide their services to the same class of users within any prescribed area.

55 As Dr Bell submitted, the language of cl 16.1 is wide. Not only does it qualify - or, more accurately, amplify - the verb "competes" by the phrase "in any way"; it contains other indications that what was sought to be conferred was ample rather than meagre protection. That is apparent from:

56 These considerations suggest that the meaning to be ascribed to "competes in any way" should not be unduly restricted.

57 On the other hand, there is force in Mr Gleeson's contrast between the drafting of cl 16.1 and the drafting of the "reciprocal" obligation in cl 17.1. The former is premised on competition, the latter is not. Two things follow from this difference of expression:

(1) the parties appear to have drawn a distinction between competing (cl 16.1) and being engaged in a similar business (cl 17.1); and
(2) for there to be competition of the kind relevant to cl 16.1, there must be more than engagement in a similar business.

58 It follows in turn that the construction advocated by Dr Bell should be rejected. For there to be competition of a relevant kind, there must be more than that the two businesses are participants in the same market, offering the same (or similar) services to a common pool of potential customers.

59 It does not follow from this that the construction advocated by Mr Gleeson should be accepted: at least, in what appears to be its most extreme form. Mr Gleeson submitted that cl 16.1 required active competition for the business of the same potential customers. Such competition could be shown, Mr Gleeson submitted, if:

60 It is not necessary to go so far. It is sufficient for the purposes of cl 16.1 that:

61 Clause 16.1 does not require more. For example, it does not require that the two businesses should be shown to go head to head, or hand to hand, over every existing and potential customer. Indeed, I think, the form of the additional question, as it was postulated by Mr Gleeson, recognises this.

62 The second issue is whether there was any evidence of competition in the sense that I have outlined. Mr Gleeson accepted that if there were but a scintilla of material before the arbitrator, that was capable of showing competition in the relevant sense, there could be no error of law.

63 In my view, there is such evidence, and it is found in some of the material to which the arbitrator referred at paragraph 66. The evidence comes from a file note prepared by Mr Day, the company secretary of Tempo, in which Mr Day set out certain things about the relationship between Tempo and Grounds.

64 The file note is headed: File note, Ground and Gardens agreements as at 31 May 2006.

65 It summarises the relevant background, including the agreements for sale and licence. It then states:

State of Licence

Tempo is providing G&G with in excess of $1,500,000 per annum.

In NSW, some grounds work is done by Tempo or subcontracted to other parties, on the basis that it was originally offered to G&G who then rejected it as being unprofitable or geographically not feasible.

Certain work at hospital clients in Victoria and South Australia is currently being retendered and consideration has been given (at a local level) to using the ISS group company ISS Facility Services Pty Limited (based in Victoria, and a part of the ISS) as the grounds maintenance provider. In Victoria, using ISS has only been a consideration, whereas in South Australia, a tender was recently submitted using ISS instead of G&G.

66 The last of the paras that I have set out shows that work that had been (or was being) performed by Grounds, in connection with some of Tempo's contracts for the provision of cleaning services, was being put out to tender. In at least one such case, Tempo submitted a tender in which ISS Facility Services, not Grounds, was the entity proposed to supply grounds maintenance services should the tender be accepted.

67 Mr Gleeson submitted that this showed, at most, a breach of the exclusivity promised by cl 2 of the licence agreement. I do not agree. The licensed Business includes not only elements existing as at 27 October 2003, but also relevant elements of new business won thereafter during the term. See, for example, cls 6.8, 6.10 and 6.12 of the Licence Agreement. If Tempo were tendering for new business that included a grounds maintenance service component - and it is clear that this had happened in at least one case referred to in Mr Day's file note - and if ISS Facility Services and not Grounds were the "sub-tenderer" for the Grounds maintenance services component, ISS Facility Services was thereby competing with Grounds for that business.

68 Thus, there was evidence before the arbitrator (to which he referred) that showed, or at the least was capable of showing, that ISS Facility Services competed with the licensed Business in the relevant sense.

69 It follows that the third question should be answered "no". So, too, although for reasons I have given earlier, should the additional question be answered.

Fourth question: insufficiency of reasons

70 The answers that I have given for the first three questions mean that this question, according to its terms, does not arise.

71 Were it otherwise, I would conclude that the arbitrator's reasons on the factual question of competition were sufficient. The factual issue was not raised in Tempo's points of defence, and was touched on but lightly in its outline submissions. The arbitrator gave the point at least as much prominence as did the parties; and in doing so he referred to the relevant evidence.

72 That having been said, the fourth question should be answered "Does not arise".

Fifth and sixth questions: “must ensure”; “related bodies corporate”

73 In view of the answer to which I have come on the seventh and last question (to which I shall turn in a moment) I do not propose to deal with these questions. It is sufficient to say that the arbitrator considered the issues underlying them carefully and at length, and that had I been called upon to decide the questions, I would conclude that his reasons betray no error of law.

74 These questions should be answered "Not necessary to decide".

Seventh question: unlawful restraint of trade

75 Ultimately, Mr Gleeson accepted, this question only arose if the additional question of law - the question of construction underlying the third question, as set out above - were answered as Dr Bell submitted it should be. If I am right in thinking that Mr Gleeson accepted that, for the purposes of cl 16.1, competition requires "actual competition in the sense of the two businesses tendering for the same clients" (and his formulation of the additional question of law makes it clear that this is so) then the seventh question involves no element of controversy.

76 Mr Gleeson conceded that on his construction of this aspect of cl 16.1, the restraint of trade that it imposed would be no more than was reasonably necessary to protect the legitimate interests of Grounds under the licence agreement.

77 In substance, I have accepted Mr Gleeson's construction of the cl 16.1 requirement for competition. On that basis, I do not think that there is a real contest as to the seventh question.

78 The arbitrator dealt with the question of reasonableness in para 89 of the award. I have set that out in part above, but for convenience I set it out in full now:

In any event, even if the second limb of cl. 16 – “ensure that its related bodies do not” was a restraint of the trading rights of all related bodies corporate of ISS Tempo, the clause would be reasonable. By reason of its control of all companies in the group, the holding company of ISS Tempo could utilise the contacts, experience and skill of ISS Tempo, either directly or through subsidiaries, to the detriment of Grounds and Gardens. It was therefore perfectly reasonable for Grounds and Gardens to want a right to damages if a subsidiary of ISS Tempo’s holding company or the holding company itself should compete with Grounds and Gardens grounds maintenance business. It is true that such a related body corporate might have competed with Grounds and Gardens before becoming a related body corporate of ISS Tempo. But once control of the group had passed out of ISS Tempo’s hands to the holding company, the contacts, experience and skill of ISS Tempo could be directed to any entity in the group. It was therefore reasonable for Grounds and Gardens to insist that no related body corporate of ISS Tempo should compete with Grounds and Gardens whether or not it had been a competitor of that company before becoming a related body corporate. Furthermore, it should not be forgotten that the second limb of cl. 16.1 was the product of a voluntary agreement on the part of ISS Tempo, a public company with over 100 subsidiaries and 23,000 employees who lacked nothing in bargaining power and who had expressly acknowledged the fairness and reasonableness of the restraint.

79 The express acknowledgment to which the arbitrator referred is found in cl 16.6 of the Licence Agreement. The other matters to which he referred in the last sentence of paragraph 89 were supported by his reasons and findings at paragraphs 75 and 76.

80 I see no error in paragraph 89, and no error in the arbitrator's conclusion in para 90 that "even if the second limb of clause 16 was characterised as a restraint of the trade of all related bodies corporate of... Tempo, it was a reasonable restraint".

81 It follows that the 7th and final question should be answered "no".

Conclusions and orders

82 All challenges to the award fail.

83 I order that:

84 I will hear the parties on costs.

85 VILLA: Your Honour, the usual order.

86 HIS HONOUR: Is anything other than the usual order sought Ms Higgins?

87 HIGGINS: Your Honour, my instructions are that nothing other than the ordinary order is sought, but the client has asked me to communicate to the Bench its gratitude for the quick resolution of the matter.

88 HIS HONOUR: I order the plaintiff to pay the defendant's costs of the proceedings.

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ISS Facility Services Australia Limited v Grounds and Gardens Pty Limited [2008] NSWSC 1406

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CITATION:	ISS Facility Services Australia Limited v Grounds and Gardens Pty Limited [2008] NSWSC 1406
HEARING DATE(S):	2/12/08, 3/12/08
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	3 December 2008
DECISION:	See paras [82] to [88].
CATCHWORDS:	CONTRACTS - Licence agreement - restraint of trade clause - appeal from arbitration - construction of agreement - whether arbitrator applied incorrect construction of clause - breach - whether two businesses operating in the same market offering similar service to potential customers constitutes 'competition' in breach of clause - whether restraint of trade clause unreasonable.
LEGISLATION CITED:	Corporations Act 2001
PARTIES:	ISS Facility Services Australia Limited (Plaintiff) Grounds and Gardens Pty Limited (Defendant)
FILE NUMBER(S):	SC 50224/07
COUNSEL:	J T Gleeson SC / D F Villa (Plaintiff) A S Bell SC / R C A Higgins (Defendant)
SOLICITORS:	Minter Ellison (Plaintiff) Clayton Utz (Defendant)