Louvain Nominees Pty Ltd v Cesure Pty Ltd - [2003] WASC 203

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: LOUVAIN NOMINEES PTY LTD -v- CESURE PTY LTD & ANOR [2003] WASC 203

CORAM: JOHNSON J

HEARD: 23 OCTOBER 2003

DELIVERED : 29 OCTOBER 2003

FILE NO/S: CIV 2536 of 2002

BETWEEN: LOUVAIN NOMINEES PTY LTD
Plaintiff
AND
CESURE PTY LTD
First Defendant
CHRISTOPHER FABIANO CANDELORO
Second Defendant

Catchwords:

Procedure - Variation of interlocutory injunction - Turns on own facts

Legislation:

Nil

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr P P McCann
First Defendant             :     Mr M L Bennett
Second Defendant         :     Mr M L Bennett

Solicitors:

Plaintiff:     Hotchkin Hanly
First Defendant             :     Bennett & Co
Second Defendant         :     Bennett & Co

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

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170
Automasters Australia Pty Ltd v Bruness Pty Ltd [1999] WASC 105
Christmas Island Resort Pty Ltd v Casinos Austria International (Christmas Island) Pty Ltd, unreported; FCt SCt of WA; Library No 960641; 8 October 1996
Louvain Nominees Pty Ltd v Cesure Pty Ltd & Anor [2002] WASC 277
Louvain Nominees Pty Ltd v Cesure Pty Ltd & Anor [2002] WASC 277 (S)
Temwood Holdings Pty Ltd v Oliver & Ors [2001] WASC 131
United Telecasters Sydney v Hardy (1991) 23 NSWLR 323

Case(s) also cited:

Nil

JOHNSON J: The defendants seek to vary the orders made by Heenan J on 20 November 2002 ("the Orders") restraining the defendants in the course of operating the business known as Albany LifeStyle Centre ("the Centre") from selling, advertising for sale, marketing or promoting within a 20‑kilometre radius of the plaintiff's premises any items of surf clothing, or other clothing and leisure wear, and accessories under various labels and brand names identified in an annexure attached to the order ("Annexure A"). The injunction was granted, pending trial or further order, to enforce a restraint of trade condition in an agreement for the sale and purchase of Mad Martey's, a surf and leisurewear business in Albany.
The defendants seek a variation of the Orders permitting
(i)sale of NRG, NGS and Milly stock on hand;
(ii)sale of clothing and accessories listed in Annexure A which were not stocked at Mad Martey’s at the time of sale of the business;
(iii)sale of clothing and accessories listed in Annexure A which were stocked at the time of sale but are no longer stocked;
(iv)NRS, NGS and Milly items to be given away as part of a sales promotion.
This application is brought pursuant to par 2 of the orders which granted either party liberty to apply on 72 hours' notice. The defendant asserts that there are changed circumstances justifying a variation to the order. The relevant circumstances can be summarised as follows:
(1)The plaintiff has failed to demonstrate that it has the capacity to satisfy its undertaking as to damages.
(2)The defendants have suffered significant financial disadvantage arising from not being able to operate their business over the full range of its intended sales.
The legal framework within which this application falls to be determined is not in dispute. The test applicable to the variation of an injunction is the same test for the discharge of an injunction, that is, whether there are new facts or "changed circumstances of a sufficient gravity to affect the continuation of the injunction": Christmas Island Resort Pty Ltd v Casinos Austria International (Christmas Island) Pty Ltd, unreported; FCt SCt of WA; Library No 960641; 8 October 1996 at 4 and Temwood Holdings Pty Ltd v Oliver & Ors [2001] WASC 131 at [9] and [10]. The changed circumstances or new facts go to the question of whether the balance of convenience continues to favour the grant of interlocutory relief and must be sufficient to show that the situation in respect of the grant of interlocutory relief is materially different from that which applied when the order was originally made: Christmas Island Resort Pty Ltd v Casinos Austria International (Christmas Island) Pty Ltd at page 5. The essential question, therefore, is whether it remains just for the injunction to continue in the light of the new facts and circumstances: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 178; Automasters Australia Pty Ltd v Bruness Pty Ltd [1999] WASC 105 at [8 ‑ 9]. It is important to note, however, that the new facts and changed circumstances must be established by evidence: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc, above, at 178 per Gibbs CJ, Aitken and Brennan JJ.
Before turning to consider the effect of the matters raised by the defendant, it is appropriate to consider the basis of the Orders. EM Heenan J considered it to be sufficiently clear that there was likely to be a substantial overlap between the nature of the business conducted at Mad Martey's and the nature of the clothing sales to be conducted at the Centre sufficient to raise an arguable case that there has been a breach of the restraint of trade clause: Louvain Nominees Pty Ltd v Cesure Pty Ltd & Anor [2002] WASC 277 at [18]. In addressing the balance of convenience, EM Heenan J concluded (at [18] ‑ [19]):
"It does seem to me that, if this restraint is valid, to allow the establishment of another business which would infringe the restraint and establish an erosion of the plaintiff's business in this protected area is likely to produce damage and prejudice of a kind which cannot easily be compensated for by any process of assessment. This is especially so in a situation where the proposed business of Cesure Pty Ltd at its new premises has not commenced.
It seems to me that the balance of convenience favours prohibiting activity which would encroach upon the restraint rather than the alternative of leaving the plaintiff to an action for damages with all the complications which would follow in trying to assess the degree to which reductions in profitability of the plaintiff's business, if they were to occur, had been caused by the competition undertaken by Cesure Pty Ltd in breach of the restraint. It seems to me that it would be simpler, clearer and more reliable to grant interlocutory relief prohibiting encroachment on the restraint until the trial of this action or final order. In that case, the situation would be that the plaintiff's business would continue unhindered by the alleged illegal competition whereas the defendants' new business would suffer the disadvantage of not being able to operate over its full intended range of sales."
It is clear from these reasons that EM Heenan J always had in mind the potential for the defendants' new business to suffer disadvantage as a result of not being able to operate over its full intended range of sales. Despite that knowledge, his Honour considered that it would be easier to compensate the defendants, in the event of failure by the plaintiff in the action, than it would be to compensate the plaintiff for losses caused should it emerge that the defendants' actions are, in fact, in breach of a valid restraint of trade: Louvain, above, at [18].
EM Heenan J also considered the adequacy of the undertaking as to damages. The evidence which was available to him at that time was more limited than the financial material which is now available. However, it was known to his Honour that Mad Martey’s was the only relevant asset and that the business had traded at a loss. His Honour was also aware that the business had a significant overdraft of approximately $94,000 which was secured against the private home of the plaintiff's directors. It is clear that he had some reservations in regard to the adequacy of the undertaking as he reserved liberty to apply for a supplementary undertaking or alternative security in the event that the defendants wished to challenge the adequacy of the undertaking offered.
I am advised by counsel for the plaintiff that, although there is no reference to it in the reasons for decision, at the time the orders were made the Court was aware that the defendants had already ordered NRG clothing. It is also apparent from further reasons given for the terms of the injunction that EM Heenan J considered that the injunction should be framed in such a way as to preserve the monopoly of the plaintiff to the exclusion of the defendants. His Honour expressly stated that the injunction was to include "all the lines which were stocked at the date of the sale of the business, whether or not that business continues to retail them, and all new lines of a similar character regardless of the fact that they may not have been stocked at the time of the sale": Louvain Nominees Pty Ltd v Cesure Pty Ltd & Anor [2002] WASC 277 (S) at [9].
The affidavit material now put before the Court indicates that the Centre has been marketed and promoted as a department store and not as a surf shop. It is located approximately 100 metres from Mad Martey's. The Centre has a total floor area of 2100 square metres, of which approximately 800 square metres is allocated to a music section which the second defendant describes as his core business. Approximately 200 square metres is allocated to a DVD section. An area of 400 square metres was originally allocated to this section. However, it has been scaled down, allegedly as a direct consequence of the Centre's financial problems. The balance of the floor area is allocated to a clothing section known as Wicked Clothing. Despite the fact that the Centre is not marketed as a surf shop, Wicked Clothing trades in the retail sale of sports and leisurewear and ladies and menswear and, therefore, operates in competition with other department‑style stores such as K-Mart, as well as boutique clothing stores. The Centre has now been operating for nearly 11 months without the benefit of selling all the brands listed in Annexure A. It is alleged that due to the restraint generally and, in particular, the inability to sell the NRG stock, the following situations have arisen:
(1)The business is three months in arrears in its $16,041.67 per month rent payments.
(2)The second defendant has been forced to sell personal properties to cover the business' losses.
(3)There has been a reduction of the total floor area of the business.
(4)Staff have resigned and others have been dismissed from the business.
(5)The second defendant has been drawing on funds from personal credit cards to pay for staff wages.
(6)The second defendant has been diagnosed with a depressive illness.
(7)The business has experienced a $300,000 cash short fall from November 2002 to February 2003.
(8)The business has suffered a trading loss of nearly $400,000 to May 2003, nearly $500,000 to June 2003 and continues to compound.
(9)There is a high likelihood of the business and the first defendant being forced into insolvency.
The second defendant, who is the director of the first defendant, deposes to the fact that he currently has at the Centre a substantial quantity of NRG stock of approximately $107,000 in value and a small quantity of BGS stock and Milly stock. He states that since the purchase of Mad Martey's the plaintiff has not stocked any NRG products. He also states that NGS and Milly brands were never stocked at Mad Martey's prior to the plaintiff's purchase of the store and are not currently stocked by the store. It was also submitted on behalf of the defendants that many of the other lines which the defendants now seek to sell are not stocked by the plaintiff in any event. I note that the plaintiff disputes that it does not or does not intend to stock all of the product lines included in the variation.
In contempt of the order for interlocutory injunction, in the period January 2003 to 16 July 2003, the defendants sold NRG clothing from the Centre. The breach came to the attention of the plaintiff whose solicitors wrote to the defendants' solicitors on 16 July 2003 alleging that the defendants were in contempt of the order. Through their solicitors, the defendants, by letter dated 1 August 2003, responded by acknowledging that it had in fact been selling NRG clothing. In summary form, the explanation provided was that:
(1)The clothing had been placed out for sale during a time of staff changes and without the knowledge of the second defendant.
(2)The defendants had been facing demands from the supplier of NRG for payment for the NRG stock on hand.
(3)Having exhausted other avenues of resolving the financial problem, the defendants "had no choice but to fund the purchase of the NRG stock on hand by selling some of the NRG stock".
The letter also indicated that all NRG stock had been immediately removed from the floor on receipt of the letter of 16 July 2003. At the time the second defendant became aware that there was also a small quantity of NGS and Milly stock on the shop floor which had been there since March 2003. The items were not immediately removed from sale, allegedly due to a misreading of Annexure A. The second defendant alleges that he has not benefited from the sale of the NRG clothing because he sold the items at a 50 per cent discount which was less than the cost of the clothing.
The second defendant asserts that the value of the losses to the business would be well in excess of the value of the plaintiff's current undertaking as to damages. The bases of this assertion are the statements in the affidavit of the second defendant of his financial difficulties and the affidavit information filed on behalf of the plaintiff which indicates that the business of Mad Martey's is the only relevant asset of the trust for which the plaintiff is the trustee. The financial statements of the trust indicate that there are insufficient funds to fulfil the undertaking as to damages.
The second defendant explains the delay in bringing the application to vary the injunction by his absence from work due to ill health between March to July 2003 and the fact that the parties were engaged in without prejudice settlement discussions from February to May 2003. The second defendant further states that, when it appeared unlikely that the proceedings could be resolved, the defendants' solicitors were instructed to apply to vary the order.
It is also the case that the plaintiff's financial statements were only made available on the day before the hearing of the variation application. The plaintiff disputes that the delay in bringing proceedings can be attributed to any settlement negotiations occurring in 2003. The plaintiff's director, Mr Sims, states that on 3 March 2003 the second defendant expressed to him an interest in buying Mad Martey's. However, after obtaining a valuation of the business, Mr Sims advised the second defendant that he was not interested in selling. Mr Sims states that after March 2003 there were no further discussions with the second defendant about a sale of the business. It is neither possible nor appropriate to attempt to resolve this factual dispute. For reasons to which I will later refer, I consider it unnecessary to do so.
On behalf of the defendant it is said that the losses the defendants have suffered since the grant of the injunction, and continue to suffer, are not losses that can be easily compensated for or assessed. Consequently, the balance of convenience has shifted in favour of the defendants who ought now be permitted to sell lines which were not stocked at the time of the sale of the business and lines which are no longer stocked. It is further said that the proposed variation of the orders still affords the plaintiff with some protection for the brands and labels it stocks, including protection of principal surf brands.
In relation to the adequacy of the undertaking, the defendants submit that the plaintiff has failed to demonstrate that it has the capacity to satisfy its undertaking as to damages. Insofar as the directors' home might be relied upon, the evidence adduced by the defendants is that the home is worth approximately $342,000 on a kerb‑side valuation.
The plaintiff objects to the variation of the injunction on the following grounds:
(1)A contemnor is not entitled to be heard or take proceedings in the same cause until his contempt is purged by making an apology to the Court and reparation: see United Telecasters Sydney v Hardy (1991) 23 NSWLR 323 at 340. The plaintiff alleges that the defendants have not made a full disclosure of the extent of their conduct and have, therefore, not made reparation.
(2)The defendants' assertions as to the deterioration in the financial position of the Centre are not supported by evidence which does not establish any correlation between the operation of the injunction and its financial position.
(3)Apart from the evidence concerning the Centre's financial position since it opened, all other material on which the defendants rely was in evidence or available to put into evidence when the application for interlocutory injunction was initially heard.
(4)The defendants unduly delayed bringing their application to vary the order for interlocutory injunction.
As to item (2), the plaintiff submits that none of the "bare assertions" of trading losses and arrears of rent is supported by any evidence or particularity such as financial statements or reports for the business disclosing assets, liabilities, overall stock levels in all departments, turnover, expenses or profit margins. In particular, it is said, the evidence does not establish any correlation between the first defendant's inability to sell NRG and its financial position. The defendant submits that, on the second defendant's own admission, the core business of the Centre is the music store, the Centre was subject to significant competition and, of approximately $500,000 worth of clothing stock on hand in November 2002, only 25.4 per cent represented stock which was affected by the injunction. Further, it is said that, since the injunction was ignored for several months without apparent positive impact on the financial situation, the restraints could not be considered to be the cause of the first defendant's losses during that period. Indeed, the surf and leisure side of the Centre's business is a small fraction of the clothing which in turn appears to be a small component of the overall stock of the Centre.
It was also submitted on behalf of the plaintiff that, despite any direct evidence of the relevant profit margin, the second defendant's evidence that he sold the NRG stock at less than cost when discounted by 50 per cent indicates that the historic gross profit of 37.5 per cent identified in the trading statements given to the plaintiff at sale constitute a reasonable estimation. Calculations based on this figure indicate that the inability to sell the NRG stock on hand could not have caused a cash flow shortfall of $300,000. Whilst this analysis is somewhat oversimplified, there is sufficient substance to it to raise doubt, in the absence of actual documentation, whether the allegations made by the second defendant should properly be relied upon.
In opposition to the variation of the injunction, the plaintiff also emphasises that, on his own account, the second defendant would be a formidable competitor if allowed to compete in the surf and leisure wear business. Reference is made to the marketing material annexed to the second defendant's affidavit in which he asserts that his marketing strategy includes tactics of bulk merchandising and the use of draw card loss leaders. The marketing material also refers to the second defendant's "innate ability to identify and capture chosen markets and their trends" and to the fact that the second defendant's edge over competitors "is unrivalled and unsurpassed and includes consistent ongoing aggressive advertising". The material also states that the second defendant has market leader status in the eyes of customers. This material, it is said, shows the dire consequences of varying the injunction to allow the defendants to compete with the plaintiff.

In relation to the adequacy of the undertaking as to damages, the plaintiff has now put before the Court its financial statements for the years ending June 2001 and 2002. Mr Sims deposes to the fact that he does not anticipate much variation in the financial statements for the year ending June 2003 which are not currently available. It is apparent from the financial statements which have been provided that there is a substantial deficiency in trust funds and any undertaking provided by the plaintiff alone would provide no comfort to the defendants. The overdraft which is secured against the Sims' home is approximately $114,000. Mr Sims asserts that the home was purchased in December 2002 for $342,000 and, on a desk‑top valuation from a local real estate agent, is worth approximately $375,000.
Counsel for the plaintiff advises that Mr and Mrs Sims are willing to give personal undertakings for damages and that any diminution in the equity due to a rising overdraft could be monitored by an undertaking that the defendants' solicitors are to be kept informed of the balance of the overdraft. Reserving to the parties liberty to apply on 72 hours' notice would enable to the defendants to make the appropriate application should the level of overdraft become problematic.
Counsel for the defendants submit that the plaintiff's assertion that the defendants' losses are not caused by the interlocutory restraint fatally undermines EM Heenan J's finding that the defendants' losses could be easily assessed and compensated because it indicates that this issue will be disputed. In my view, EM Heenan J's decision did not turn on such a finding and the plaintiff is doing no more than maintaining that the defendants have failed to adduce evidence of changed circumstances.
Having considered this material, I have formed the view that the defendants have failed to establish that there are changed circumstances of a sufficient gravity to affect the continuation of the injunction.
While the second defendant's affidavit may well provide evidence of compounding, increasing and continuing losses being suffered by the defendants, it does not follow, as submitted, that this situation is in conflict with EM Heenan J's conclusion that it would be easier to compensate the plaintiff than the defendants. Such a submission underestimates the difficulties in attempting to quantify the extent of the loss to the plaintiff which arises when a person buys from the Centre and not from the plaintiff's business. Neither do I think the balance is affected by the intention to stock lines not currently stocked by the plaintiff. The two businesses would still be competing in the same market with a consequential adverse impact on the plaintiff's market share. The marketing material underscores the real risk to the plaintiff of allowing the defendants to compete in the confined market of surf and leisure wear.
In any event, it is clear from his reasons that EM Heenan J always had in mind the potential for the defendants' new business to suffer disadvantage as a result of not being able to operate over its fully intended range of sales. In my view, the second defendant's evidence is inadequate to do other than confirm his Honour's view and, hence, does not constitute a change in circumstances sufficient to vary the injunction. I accept the submissions of the plaintiff that, in the absence of supporting documentation, the bare assertions of the second defendant as to the loss suffered and the first defendant's financial position are an inadequate basis upon which to vary the undertaking.
EM Heenan J was well aware that the defendants would suffer financial disadvantage by reason of the grant of injunctive relief. I am unpersuaded that the additional financial material reflects an adverse financial position which is directly or sufficiently attributable to the restraint on selling the goods identified in Annexure A to constitute changed circumstances justifying a variation in the original order.
As to the adequacy of the undertaking, it is now clear that the plaintiff's undertaking does not properly protect the defendants' interests. The plaintiff's directors are prepared to give personal undertakings relying on the equity in their home. The second defendant asserts that the value of the potential loss to the business would be well in excess of such equity. However, that submission is based on the evidence of the defendants' financial position which, for the reasons I have already outlined, is not, in my view, sufficiently persuasive. I remain unconvinced that the loss arising from the operation of the injunction could not be met by an equity of approximately $200,000. I would, however, require Mr and Mrs Sims to undertake to keep the defendants' solicitors advised of the extent of the overdraft secured against the home.
I have reservations as to whether the defendants have made reparation so as to entitle them to be heard. However, as I have concluded that the evidence adduced does not justify variation of the injunction, it is unnecessary for me to decide that issue.
For the reasons to which I have referred, the application will be dismissed.