Leisure Co Pty Ltd v City of Bunbury - [2006] WASC 209

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: LEISURE CO PTY LTD -v- CITY OF BUNBURY & ANOR [2006] WASC 209

CORAM: LE MIERE J

HEARD: 30 & 31 AUGUST 2006

DELIVERED : 31 AUGUST 2006

FILE NO/S: CIV 1897 of 2006

BETWEEN: LEISURE CO PTY LTD (ACN 082 959 251)
Plaintiff
AND
CITY OF BUNBURY
First Defendant
BUNBURY COMMUNITY RECREATION ASSOCIATION INC
Second Defendant

Catchwords:

Contract - Application for interlocutory injunction - Whether serious question to be tried that agreement between parties was validly extended - Whether damages an adequate remedy - Balance of convenience

Legislation:

Nil

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr P C Doherty & Mr V Liu
First Defendant             :     Mr D R Williams QC & Mr M J Feutrill
Second Defendant         :     No appearance
Attendee:     Mr D Smith (Chairman of Second Defendant)

Solicitors:

Plaintiff:     Minter Ellison
First Defendant             :     Slee Anderson & Pidgeon
Second Defendant         :     No appearance

Case(s) referred to in judgment(s):

Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1
Patrick Stevedores v Maritime Union of Australia (1998) 195 CLR 1

Case(s) also cited:

American Cyanamid Co v Ethicon Ltd [1975] AC 396
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
Braham v Walker (1961) 104 CLR 366
Cash Converters Pty Ltd v Hila Pty Ltd (1993) 9 WAR 471
Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
GPI Leisure Corporation Ltd v Herdsman Investments Pty Ltd (No 1) [1990] ANZ Conv R 367
Hawthorn Football Club Ltd v Harding [1988] VR 49
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41
JC Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282
L Schuler A G v Wickman Machine Tools Sales Ltd [1974] AC 235
Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57
Masters v Cameron (1954) 91 CLR 353
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Pakenham Upper Fruit Co Ltd v Crosby (1924) 35 CLR 386
State Transport Authority v Apex Quarries Ltd [1988] VR 187
Thorby v Goldberg (1964) 112 CLR 597
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors (2004) 219 CLR 165
Warmington v Miller [1973] QB 877
Wolverhampton & Walsall Railway Co v London & North-Western Railway Co [1873] LR 16 Eq 433
Zhu v Treasurer of New South Wales (2004) 218 CLR 530

LE MIERE J: The plaintiff is presently the manager of the South West Sports Centre ("the Centre") which is situated in Bunbury. The first defendant owns the Centre. During 2000 the first defendant called for tenders to manage the Centre. The plaintiff submitted a tender in which it suggested that a body such as the second defendant be established to permit the first defendant to have an influence in the management of the Centre without exposing it to, "liability, political interference or costly and time-consuming day‑to‑day management".
The second defendant was then established to undertake the care, custody and control of the Centre. It then appointed the plaintiff to manage the Centre. The contractual arrangements between the plaintiff and the defendants are complex and confusing. Their relationship is primarily governed by an agreement dated 16 November 2000 and described as "the Contract" and an agreement dated 31 October 2001 and described as "the Management Agreement".
The Contract incorporates, by reference, other documents including the plaintiff's tender and correspondence. The Management Agreement contains a whole of agreement clause but specifically provides that the words "agreed terms" used in the agreement means the terms contained in specified documents including the Contract and the tender. The Management Agreement also provides that notwithstanding any other provision of the agreement, the manager acknowledges that if there is any inconsistency between the Management Agreement and the Contract, the Contract shall take precedence.

The Management Agreement

The plaintiff primarily relies on the terms of the Management Agreement. The Management Agreement says that it is an agreement between the plaintiff and the second defendant but the terms of the agreement refer to the City, described in the agreement as "the Council". The agreement places some obligations on the Council; for example, repair obligations under cl 6.3 and payment of agreed deficit funding under cl 13.1.
The Management Agreement contains covenants in favour of the Council; for example, cl 9.1 and cl 9.2 in relation to furniture, fittings and chattels. The agreement is executed by the City. It appears that the City is a party to some of the provisions of the Management Agreement but not all of its provisions apply to the City. I will refer to some of the terms of the Management Agreement.
Clause 2.2 provides that the manager shall ensure that the Centre is operated and maintained in accordance with the agreed terms. Clause 2.4 provides that the manager shall recruit and supervise staff but they are to be employed by the second defendant. Clause 3 provides that each year the manager is to draft a business plan and budget for approval by the second defendant and the City.
Clause 13.1, paragraphs (b) (c) and (f), deal with deficit funding; that is, payment of the loss resulting from outgoings exceeding revenue from the Centre. The City is to pay a specified and diminishing amount in each of the five years of the agreement. The plaintiff then guarantees the remaining deficit up to an amount limited by its bank guarantee of $100,000 for the initial period of two years and then a further $50,000 for each of the remaining three years of the five‑year term. I observe that there is no provision for dealing with the deficit beyond the five‑year term.
Clause 14 provides, amongst other things, that the second defendant will pay to the manager a management fee as detailed in item 5 of Sch 1. Schedule 1 item 5, specifies a fee of $30,000 for the first two years and $36,000 for the remaining three years of the five‑year term. The fee for any extension period is "subject to negotiation".
Clause 14 further provides that the manager shall provide direct support services to the management of the Centre, the cost of which shall be calculated annually and presented to the second defendant and the City in the annual business plan and budget.
Clause 15.1 provides that the agreement will operate for the term detailed in item 6 of Sch 1. Schedule 1 item 6 provides that the term of the agreement will commence on 1 September 2001 and expire on 31 August 2006, subject to cl 13.1 (c), with extensions in accordance with item 7. Item 7 provides that the first extension is from 1 September 2006 to 31 August 2011 and the second extension from 1 September 2011 to 31 August 2016.
Clause 15.2 is important, and I will read it in full:
"If three (3) months prior to the expiry of the term described in Item 6 of Schedule 1, the Manager has given written notice to [the second defendant] - of its desire to extend the term of this Agreement and there being no existing breach of the Manager's covenants contained in this Agreement at the time of such extension, [the second defendant] in consultation with Council shall extend this Agreement in accordance with item 7 of Schedule 1 and shall provide a further extension on the same basis for the remainder of the extension periods detailed in Item 7 of Schedule 1, other than the right being exercised."
I pause to observe that the words "on the same basis" in that clause refer to the manner in which the further extension is to be exercised, not the terms of the agreement between the parties upon the exercise of the right to extend the agreement.
Finally, I refer to cl 23. That is a dispute resolution clause. It provides for a negotiation process leading to arbitration under the Commercial Arbitration Act 1985 (WA), if not otherwise resolved. I observe that the clause appears to apply to differences between the plaintiff and the second defendant but not to the City.

The Plaintiff's Claims

The plaintiff alleges that by a letter of 4 May 2006 it effectively exercised its right under cl 15.2 of the Management Agreement to extend the Management Agreement for the further five years until 31 August 2011.
On 24 August the plaintiff commenced this action. It seeks a declaration that the Management Agreement has been extended until 31 August 2011 and orders and injunctions that would permit the plaintiff to carry out its management functions under the extended Management Agreement.
The plaintiff now seeks interlocutory injunctions that would have the effect of restraining the defendants from excluding the plaintiff from the Centre and requiring the defendants to permit the plaintiff to carry out its management functions under the extended Management Agreement.

The Interlocutory Injunctions

The principles relevant to the grant of interlocutory injunctions are set out in the defendants' written outline of submissions at [5] – [7]:
"5.In order to secure an injunction the plaintiff must show:
(a)that there is a serious question to be tried, or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to permanent injunctive relief;
(b)that it will suffer irreparable injury for which damages will not be adequate compensation unless an injunction is granted; and
(c)that the balance of convenience favours the granting of an injunction."
6.If the plaintiff is able to satisfy the Court that there is a serious issue to be tried, the relative weakness of the plaintiff's case is a factor which may be taken into consideration when assessing where the balance of convenience lies."
I pause to observe that, similarly, the relative strength of the plaintiff's case is a relevant factor.
"7.In weighing the balance of convenience, the features of a mandatory injunction usually have the consequence of creating a greater risk of injustice if it is granted rather than withheld at the interlocutory stage unless the Court feels a high degree of assurance that the plaintiff will be able to establish its right at trial."
I accept that the injunctions sought by the plaintiff, whilst negative in form, are positive in substance. They require the defendants to carry out their functions under the contracts with the plaintiff to keep the Centre open and to co‑operate with the plaintiff in operation of the Centre. By way of example, the staff who operate the Centre to be managed by the plaintiff are employed by the second defendant.

Is There a Serious Question to be Tried?

The plaintiff submits that on the proper construction of cl 15.2 of the Management Agreement, the clause entitles the plaintiff to extend the Management Agreement for a further term of five years and that the plaintiff has exercised that right.
The City's contentions concerning the plaintiff's extension of the Management Agreement are set out in par 8 of its written outline of submissions:
"(a)On a proper construction of the Management Agreement:
(i)it does not confer an option on the plaintiff which the plaintiff is able unilaterally to exercise and thereby bring into existence an unconditional contract between the plaintiff, the first defendant and the second defendant, but rather, any extension is subject to mutual agreement between the parties.
By clause 1.2 of the Management Agreement the terms of a contract entered into between the plaintiff and the first defendant on 16 November 2000 prevail in the event of any inconsistency between the terms of that contract and the Management Agreement. The 16 November, 2000 contract incorporates by reference letters dated 8 November, 2000 and 13 November, 2000 which stipulate that any extension is to be 'with right of renewal by both parties'.
(ii)in any event, if the Management agreement does confer an option on the plaintiff which the plaintiff is able unilaterally to exercise, any contract thereby brought into existence is subject to the first defendant's consent to the extension of the Management Agreement.
(b)as there is no mutual agreement to extend the Management Agreement or, in any event, the first defendant has not consented to an extension of the Management Agreement, the plaintiff's purported exercise of its alleged option is ineffective and the Management Agreement will expire, in accordance with its terms, on 31 August, 2006."
Notwithstanding that contention, the City accepts for the purposes of this application that the construction advanced by the plaintiff is at least arguable; that is, it is arguable that cl 15.2 of the Management Agreement grants an option to the plaintiff to renew the Management Agreement for a further term of five years.
However, the City, contends that for there to be a legally binding and enforceable contract upon the exercise by the plaintiff of its purported right to extend the Management Agreement, the purported extended agreement must be complete and certain as to its terms. The City submits that there is no serious question to be tried for the reasons set out in par 13 of its written outline of submissions, as follows:
"The Alleged Management Agreement is incomplete and is void for uncertainty as there is no formula or mechanism for resolving the incomplete terms in that:
(a)there is no agreement as to the annual management fee for any extended term and it is expressly stated to be subject to negotiation: Schedule 1: Item 5.
(b)there is no agreement as to:
(i)the deficit funding to be provided by the first defendant or
(ii)the limit of the plaintiff's guarantee; for the purposes of clause 13.1(b) and clause 13.1(f) and, in particular, for the purpose of calculating the plaintiff's share of any excess revenue for the purposes of clause 13.1(b).
(c)the arbitration clause (clause 23) does not supply the necessary mechanism because the arbitrator is not appointed for the purpose of resolving the incomplete terms.
That is to say, there is uncertainty and incompleteness as the amount and method of calculation of the plaintiff's remuneration and the level of the first defendant's Deficit Funding, if any, under the Alleged Management Agreement. Accordingly, the Alleged Management Agreement is patently void for uncertainty as it neither requires incompleteness to be resolved idiosyncratically by a third party nor by application of an objective standard, such as what is fair and reasonable."
The plaintiff says that the management fee is to be determined by negotiation, and if not agreed, it is to be a fair and reasonable amount. If necessary, that amount is to be determined by arbitration. I find it is arguable that there is an enforceable contract. It is not unusual for commercial people to make contracts in which agreement on some matters is postponed or left undecided.
It is arguable that in the absence of agreement on the management fee, the fee is to be a fair and reasonable fee, having regard to the fee agreed for previous years, and there is a mechanism for determining what is a fair and reasonable fee; that is, the dispute resolution process in cl 23. The City says that the arbitration provisions refer to the plaintiff and the second defendant, not the City. However, the fee is payable by the second defendant. So that is not necessarily fatal.
So far as the deficit funding to be provided by the City and the limit of the plaintiff's guarantee are concerned, it is arguable that those matters are to be determined by the construction of the contractual documents, and if neither is obliged to make any payment towards the deficit, then the loss will stand where it falls; that is, on the second defendant. It might be that the parties made no provision for deficit funding in the extended term because it was anticipated there would be no deficit. That appears to be the assumption in the tender documents.
There are other possible areas of uncertainty in the extended Management Agreement. The agreement provides that each year the manager is to furnish a business plan and budget for the approval of the second defendant and the City. There is no express mechanism for resolving an impasse resulting from the City not approving the plan or a plan not being agreed between the plaintiff and the City. The arbitration clause does not expressly include the City.
The plaintiff says that the parties, by their conduct since the Management Agreement was executed, have developed a process for dealing with the budget and business plan, and if the City does not agree to any item in the budget, then the plaintiff will be obliged to carry out those parts of the plan and budget approved by the City and not the other items.
I do not find those answers by the plaintiff to be compelling. Nevertheless, courts will try to uphold contracts despite lack of clarity, and I find there is a serious question to be tried, that there is an enforceable contract between the plaintiff and the defendants pursuant to which the plaintiff is entitled to manage the Centre for the extended period of five years.
The strength of the plaintiff's case for final relief is relevant to whether an interlocutory injunction should be granted. I find that on the materials before the court the plaintiff has a weak case for relief in the form of specific performance or permanent injunctions requiring the defendants to permit the plaintiff to carry on as manager until 31 August 2011 and perform their obligations under the Contract and under the Management Agreement on that basis.
There are three reasons for that conclusion. First, the plaintiff's arguments concerning the construction and certainty of the Management Agreement are not strong. Secondly, the fact that the terms of a contractual obligation are sufficiently definite to escape being void for uncertainty or to found a claim for damages does not necessarily mean that they will be sufficiently precise to be capable of being specifically enforced (see Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, per Lord Hoffmann at 14). Thirdly, in general the courts will not grant mandatory injunctions requiring persons to carry on a business (see Cooperative Insurance Society Ltd v Argyll Stores, (supra) per Lord Hoffmann at 11 – 16).
In PatrickStevedores v Maritime Union of Australia (1998) 195 CLR 1, at 46 – 47 Brennan CJ and McHugh, Gummow, Kirby and Hayne JJ said that the concept of "constant supervision by the court" by itself is no longer an effective or useful criterion for refusing a decree of specific performance or other mandatory orders. However, their Honours did not disapprove of the principle stated by Lord Hoffmann and distinguished the case before them on the ground that the injunctions granted against the administrators did not in form or substance require the administrators to carry on business activities in the sense with which the Argyll case was concerned.
The final relief sought by the plaintiff in this case would effectively require the second defendant to carry on the activity of operating the Centre under the management of the plaintiff for at least a further five years, that is either running a business or carrying on an activity sufficiently similar to attract the same principles.

Are Damages an Adequate Remedy?

The plaintiff says that it would not be just that the plaintiff be confined to a remedy in damages. Any losses to the plaintiff from not acting as manager for the next five years or any further period of extension could be compensated in damages. However, the plaintiff says that its reputation and professional standing will be adversely affected if it becomes public knowledge that the City has not renewed the plaintiff's Management Agreement.

There is no evidence to support that contention. The issue between the parties is not whether the defendants are entitled to terminate the Management Agreement for breach or poor performance by the plaintiff but whether as a matter of construction of the contractual documents the plaintiff is entitled to unilaterally extend the Management Agreement and whether as a matter of law the agreement as extended is sufficiently certain to be legally enforceable. Those matters do not go to the plaintiff's competence or performance and the resolution of them is not a matter that will affect its reputation.
The plaintiff relies upon matters deposed to by David Matthew Pollock in an affidavit sworn on 28 August 2006. I refer to par 4 and the following paragraphs in that affidavit where Mr Pollock deposes as follows:

"4.The plaintiff tenders on a regular basis for the management of centres that are similar to the Centre and which are owned by local government bodies. The management of such centres is the primary source of management work and revenue for the plaintiff.
5.Based upon my experience in this industry and discussions with representatives of local authorities over a number of years, I believe that representatives of local authorities regularly share their experiences about particular contractors amongst themselves.
6.As is apparent from the recent correspondence exchanged between the plaintiff and the first defendant and their solicitors, as exhibited to my earlier affidavit, it is clear that the first defendant is not satisfied with the plaintiff's performance of the management and operation of the Centre under the Management Agreement.
7.Annexed hereto and marked with the letters DMP1 is a true copy of an article that appeared in the local newspaper of the Bunbury region on 25 August 2006. The clear implication from the article is that the management and operation of the Centre for the period of the plaintiff's management has not been satisfactory.
8.I believe that this negative perception in relation to the plaintiff's performance under the Management Agreement:
(a)will be discussed amongst local government representatives, and will become common knowledge amongst them;
(b)will be taken into consideration by local government authorities when they are called to consider a tender submitted by the plaintiff;
(c)will be given further credence if the plaintiff is required to vacate the Centre on 31 August 2006 at the end of the initial period of the Management Agreement.

9.I also believe that if the plaintiff's Management Contract for the Centre is not renewed, this is likely to be used by the plaintiff's competitors when tendering for jobs against the plaintiff."

The potential damage to the plaintiff's commercial reputation arises from what representatives of the City might say about the plaintiff's performance to other local authorities and what has already been said in the press. The injunctions sought would not stop that. An injunction would do no more than inform those informed of the situation that the plaintiff had succeeded in obtaining a temporary court order requiring the defendants to permit the plaintiff to continue as Centre manager despite their adverse view of the plaintiff's performance and pending resolution by the court of the legal issues going to whether the plaintiff was entitled to remain as manager on grounds unrelated to the difference between the parties concerning the plaintiff's performance.
I am not satisfied that damages would not be an adequate remedy or that it would not be just that the plaintiff be confined to a remedy in damages.

The Balance of Convenience

The plaintiff says that the balance of convenience favours the grant of an injunction for the reasons set out in par 67 of its outline of submissions. I quote that submission:
"The plaintiff submits that the balance of convenience favours the grant of the injunction sought because if the interlocutory injunction is not granted:
(a)it will be removed as manager of the Centre that it has managed for the last five years;
(b)it will have lost the benefit associated with the $310,000 Investment and
(c)it is likely to suffer damage to its Australian-wide business reputation."
As to (a); that is, that the plaintiff will be removed as manager of the Centre that it has managed for the last five years, the removal of the plaintiff as manager may cause it loss but that can be compensated in damages. Furthermore, the amount of the loss does not appear to be very great, having regard to the current annual management fee of $35,000.
As to (b); that is, that the plaintiff will have lost the benefit associated with the $310,000 investment, the City says that the investment is no more than the payment of amounts due under the Management Agreement or an arrangement made on the basis of amounts due from the plaintiff under the Management Agreement. The City says that appears from a letter of 14 November, 2002 written by Graham Alder, the managing director of the plaintiff, to the chief executive officer of the City which is found commencing at p 236 of the affidavit of David Matthew Pollock sworn 24 August 2006. In particular the City says that those matters appear from the numbered paragraphs 1 and 3 of the letter and from the penultimate paragraph of the letter. I find that there is no evidence to establish that if the injunction is not granted, the plaintiff will have lost the benefit associated with an investment of $310,000 as distinct from an amount paid in the circumstances claimed by the City. In any event that is a matter that could be compensated for in damages.
As to (c); that is, that the plaintiff is likely to suffer damage to its business reputation, I have already found there is no evidence to support that contention.
I find that the interlocutory injunction should not be granted for a number of reasons that go to the balance of convenience or as a matter of discretion.
First, the injunction would require the defendants to continue to operate the Centre under the management of the plaintiff and in circumstances where the operations and expenses of operating the Centre would be controlled by the plaintiff and will result in a loss that will be paid by the second defendant.
The plaintiff, as manager, effectively controls expenditure in running the Centre. If there is no agreement as to how any deficit resulting from the excess of expenditure over income is to be paid and no mechanism for resolving a difference between the plaintiff, the second defendant and the City, then the second defendant is exposed to that ongoing loss. The losses, or funding deficit as it is described by the parties in the Contract and Management Agreement, are substantial. Parties should in general not be required by an interlocutory injunction to carry on activities at a loss.
Secondly, the injunction would require the second defendant to operate the Centre under the management of the plaintiff in circumstances where it does not have the means available to it to pay the operating losses for which it will be liable. During the initial five-year term the City and the plaintiff were each required to contribute to the funding deficit but there is no provision of the agreement requiring them to meet the funding deficit during an extended term.
Thirdly, the injunction would require the parties to engage in a close but hostile relationship. Parties should in general not be required by an interlocutory injunction to continue in a complex relationship involving frequent, if not continuous, interaction and cooperation in circumstances where, as here, there is a hostile relationship between them.
In Cooperative Insurance Society Ltd v Argyle Stores (supra) at 11 ‑ 16, Lord Hoffmann discussed the reasons for what his Lordship described as the settled practice of the court not to grant a mandatory injunction requiring the carrying on of a business. Many of the reasons given by his Lordship are applicable to the reasons I have so far given why an injunction should not be granted in this case. At 15 and 16 Lord Hoffmann said:
"From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation. It is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. If the defendant is ordered to run a business, its conduct becomes the subject of a flow of complaints, solicitors' letters and affidavits. This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed and they go their separate ways and the wounds of conflict can heal."
Fourthly, the injunction would require the defendants to perform a contract, some terms of which are uncertain or not sufficiently certain. The interlocutory injunctions would require the defendants to perform the whole of the agreement, not just some obligations under it.
Some of the obligations are sufficiently imprecise to confront the parties, particularly the second defendant, with difficulty in carrying them out. For example, the Management Agreement provides for the parties to agree a business plan and budget but is unclear on what is to happen if the City will not approve the plan and budget put forward by the plaintiff.
Parties should in general not be required by an interlocutory injunction to perform an agreement where, as here, the obligations of the parties under the agreement are uncertain and subject of dispute by the parties.
Fifthly, the plaintiff's delay in bringing this application has denied the second defendant a real opportunity to put a case in response. The plaintiff has known that the defendants maintain that its Management Agreement expires on 31 August for some time and on 2 August the City's solicitors wrote to the plaintiff, requiring the plaintiff to cease its management functions on 31 August. Despite that, the plaintiff did not commence this action until 24 August and then served the second defendant in circumstances where, as a practical matter, the second defendant has only been given short notice of the application.
The nature and composition of the association is such that it has not been able to engage legal representation or put its position to the court. I permitted its chairman to address me but I do not take into account any personal views which the chairman expressed. The second defendant is directly and seriously affected by the proposed injunction but has not had an adequate opportunity to put a case in answer.
For all of those reasons, the injunction is refused.