Mecca Brands Pty Ltd v Kingdom Animalia LLC

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2020 04587

MECCA BRANDS PTY LTD (ACN 077 859 931)	Plaintiff/ Defendant by Counterclaim
v
KINGDOM ANIMALIA LLC	Defendant/ Plaintiff by Counterclaim

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JUDGE:	M Osborne J
WHERE HELD:	Melbourne
DATE OF HEARING:	10, 11, 12 and 17 August 2021
DATE OF JUDGMENT:	19 November 2021
CASE MAY BE CITED AS:	Mecca Brands Pty Ltd v Kingdom Animalia LLC
MEDIUM NEUTRAL CITATION:	[2021] VSC 761

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RESTRAINT OF TRADE – Exclusive distribution agreement – Restriction on sale of goods –Agreement between supplier of cosmetics products and cosmetics distributor/retailer – Term of the agreement – Rolling term – Whether doctrine of restraint of trade applies – Whether restraint reasonable – Test to be used in determining whether restraint is reasonable – Status of trading society test in Australia – Status of sterilisation of capacity test in Australia – Status of pre-existing freedom test in Australia – Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] AC 269 – Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75 – Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 – Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 – Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390 – Australian Capital Territory v Munday (2000) 99 FCR 72 – Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 – ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 – Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 – Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 – Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR 1 – Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candles Pty Ltd (1947) 77 CLR 574 – Kosciuszko Thredbo Pty Ltd & Anor v ThredboNet Marketing Pty Ltd & Anor (2014) 311 ALR 656 – Panayiotou and others v Sony Music Entertainment (UK) Limited [1994] EMLR 229 – Hummingbird Music Limited v Dino Acconci [2009] HKCA 587 – One Money Mail Ltd v RIA Financial Services [2015] EWCA Civ 1084 –Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36 – Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227.

CONTRACT – Construction – Incomplete clause in contract – Whether contract void for uncertainty – Whether term can be implied – Reasonable notice – Whether parties intended to be bound by contract despite incomplete clause – Whether incomplete clause is material – Crawford Fitting Co & Ors v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 – Moonlighting International Pty Ltd v International Lighting Pty Ltd [2000] FCA 41 – Fitzgerald v Masters (1956) 95 CLR 420.

COSTS – Costs thrown away – Whether Court should exercise its discretion in awarding indemnity costs – Late pleadings amendment – Whether Party has a proper basis for claim – Overarching obligations – Civil Procedure Act 2010 (Vic) – Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 63.17 – Supreme Court Act 1986 (Vic) s 24(1).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr N De Young QC with Mr J Claridge	Arnold Bloch Leibler
For the Defendant	Mr J Peters AM QC with Mr A Di Pasquale	Baker & McKenzie

HIS HONOUR:

Introduction*

*This judgment contains a number of redactions for reasons of confidentiality.

The plaintiff, Mecca Brands Pty Ltd (‘Mecca’), is an Australian retailer of beauty and skincare products. The defendant, Kingdom Animalia LLC, trades under the name Hourglass Cosmetics (‘Hourglass’) as a manufacturer of high end cosmetics products such as complexion products, eye makeup, and lip products (‘cosmetics products’). Hourglass is based in Los Angeles, California.

Mecca and Hourglass entered into an exclusive distribution agreement on 6 February 2010 (‘the EDA’) pursuant to which Hourglass granted Mecca the sole and exclusive right, for an initial fixed term,[1] to purchase cosmetics products from Hourglass and then sell those products to retail customers in Australia and New Zealand.
[1]The initial term was [REDACTED]. The initial term of [REDACTED] continued for further [REDACTED] terms, unless either party gave notice of termination to the other, not less than [REDACTED] prior to the expiry of the current term.

On or about 6 August 2015, the parties varied the terms of the EDA,[2] providing for a different notice period if either wished to terminate. Aside from the new notice period, and one new clause which is immaterial to the dispute, the terms of the agreement were unaltered from those that had been in place since the inception of the EDA on 6 February 2010.
[2]The term of the agreement as varied provided for [REDACTED] to commence on each anniversary of the commencement date of the agreement as varied (that is, 6 August 2015), save that either party could end the agreement on [REDACTED] written notice. For convenience, the agreement is referred to both prior to and after its variation as the ‘EDA’. The only relevant change for present purposes is the change after 2015 to the term and termination arrangements.

The EDA no longer suits Hourglass’s commercial interests. By letter dated 7 May 2020, Hourglass purported to terminate the agreement on the basis that Mecca had breached cl 12.5 of the EDA by being ‘unable, for a continuous period of 28 days, to distribute the product because of the … the COVID-19 pandemic and associated governmental orders.’[3]
[3]See cl 12.5 below at [51].

Mecca commenced this proceeding on 14 December 2020 seeking declaratory relief to the effect that the purported termination was invalid and of no effect. This contention was abandoned by Hourglass on 28 July 2021.[4] Hourglass accepts that it should pay Mecca’s standard costs thrown away by reason of its abandonment of that aspect of its defence. Mecca seeks those costs on an indemnity basis. The concluding parts of these reasons deal with this question.
[4]The dispute turned in part on the proper interpretation of a clause in the EDA. Notwithstanding the closure of some stores for some time, Hourglass products were sold by Mecca throughout this closure online and from some outlets after 24 April 2020, which Mecca argued meant that the retail outlets were not closed for the requisite period.

Hourglass also alleged in its defence that the EDA is void and of no effect because it is an unlawful restraint of Hourglass’s trade. Mecca denies that the restraint of trade doctrine applies but says that if it does, the restraint is reasonable as between the parties. No issue as to the restraint being contrary to the interests of the public arises as Hourglass, which bears the legal burden on establishing that matter, advanced no such argument.

Thus, the Hourglass contention brings into focus the tension between two freedoms: on the one hand, freedom of contract and the associated public interest in holding parties to bargains freely and fairly negotiated; on the other, freedom of trade and the associated public interest in allowing traders the right to ply their trade as and when they see fit.

Shortly prior to trial Hourglass obtained leave to further amend its defence so as to allege that the EDA is void for uncertainty.[5] This argument has its genesis in the fact that cl 16 of the EDA[6] contemplated a right to terminate the agreement where a force majeure event occurred under certain circumstances, provided that the force majeure event and its effect on the ability to comply lasted for a specified period of days. The parties never completed that section of the EDA which specified the requisite number of days. Hourglass submits that as a consequence, the EDA is void for uncertainty.
[5]Leave was granted on 27 July 2021.
[6]The same clause including in its uncompleted form appeared in the EDA from 6 February 2010; see cl 16 below at [52].

In my opinion the restraint of trade doctrine does have application to the EDA but Mecca has discharged its onus of establishing that the restraint is reasonable as between the parties. There being no submission of unreasonableness in the interests of the public, the EDA is enforceable.

In respect of the argument that the EDA is void for uncertainty, in my opinion cl 16.4 is severable. Accordingly, the agreement as a whole is not void for uncertainty.

Evidence in the proceeding

The principal witnesses in the proceeding were Ms Jo Horgan (‘Ms Horgan’), Mecca’s Chief Executive Officer and founder; Ms Marita Burke, Mecca’s Creative Director of Brands; and Hourglass’s Chief Executive Officer,[7] Carisa Janes (‘Ms Janes’).[8] Evidence in chief was given by way of the tender of a witness statement (or statements) and each witness was cross examined, albeit that the cross examination was appropriately confined to those elements of the witness statements in dispute. The factual dispute between the parties was minimal. Each of the principal witnesses gave evidence thoughtfully, responsively, and honestly.
[7]In about July 2017 Unilever acquired Hourglass but Ms Janes remains as CEO.
[8]In addition, witness statements by Mr Christopher Moore, Vice President for Finance & Strategy at Hourglass and Ms Deanne Parks, Senior Vice President of Sales at Hourglass were tendered at trial.

Ms Horgan holds a Master of Science and Mass Communication from the University of Boston. In the course of her studies she developed an interest in marketing and communications directed to women. After graduating from the University of Boston, she started work in the consumer division of the cosmetics company L’Oréal in London. Whilst employed at L’Oréal, Ms Horgan conceived of the idea behind Mecca, namely the establishing of a standalone multi-brand cosmetic store in which customers could receive brand-agnostic advice. She conceived of the Mecca business model in part as a response to what she perceived to be shortcomings in the traditional department store model. Those shortcomings related to the fact that in traditional department stores, beauty brands occupied their own space and used their own sales staff. In Ms Horgan’s view, this meant that customers who wanted to buy products from a number of different brands had to walk from counter to counter, receiving product advice from sales staff who had an incentive to promote only their own brand.

Before Mecca opened its first store, Ms Horgan identified a list of around 20 small overseas beauty brands that she considered to be pioneering and occupying niche spaces. In 1996 she met with each of the brands on her list. In most cases, the representatives of those brands told her that they had never considered entering the Australian market.

As a result of her discussions, Ms Horgan formed the view that two considerations were critical if she was to establish Mecca in Australia:

(a) Mecca would need to provide an ‘end-to-end service’ effectively acting as the importer, distributor, brand manager and retailer of the product; and

(b) Mecca would need to promote and protect each individual brand and thereby create ‘brand equity’ in each individual brand by appropriate marketing and other measures such as product positioning in stores.

Ms Horgan considered that a business model where Mecca effectively did all the work in managing and promoting the brand in Australia and arranging for product acquisition and sale would be attractive for international brands that had not previously entered or considered entering the Australian market, because it would allow the brand to achieve sales in Australia without having to incur any capital investment or devote human resources to the Australian market.

As a result of those discussions and considerations, Ms Horgan conceived of what she describes as Mecca’s ‘exclusive distribution model’.[9] The exclusive distribution model involves Mecca importing the product, distributing it throughout the relevant market, managing the brand, and selling the product as retailer from brick and mortar stores designed and occupied by Mecca in prestige retail locations as well as through various online channels.
[9]Interchangeably referred to as Mecca’s ‘end-to-end model’.

Mecca opened its first store in 1997 on Toorak Road, South Yarra in Melbourne and upon opening stocked products from seven international beauty brands, none of which had previously been sold in Australia. Each of the initial seven brands were distributed by Mecca on an exclusive or end-to-end service basis;[10] that is, each of the brands provided Mecca with exclusive distribution rights in return for which Mecca imported the product and arranged for its distribution and sale at Mecca branded stores. As part of its service, Mecca undertook various marketing activities and other promotional and educational campaigns under the Mecca brand for the particular cosmetics brands sold at the Mecca stores.
[10]Having regard to the passage of time Mecca was not able to locate any written contract in relation to those seven brands.

Since 1997 Mecca has grown substantially. From the time of its first store opening in 1997, it now has 107 bricks and mortar stores in Australia and New Zealand and employs approximately 3800 staff. Ms Horgan’s evidence is that the exclusive distribution model has always been at the core of Mecca’s business model. She explained that the grant of exclusive distribution rights provides Mecca with the commercial certainty and incentive to offer the end-to-end service model, including by regularly opening new stores; investing in the establishment of a digital presence; and undertaking marketing, promotional and education campaigns as the effective steward of the branded products in Australia and New Zealand. Ms Horgan gave evidence that the end-to-end service model requires substantial ongoing and long-term investment by Mecca and each brand.

Mecca made discovery on a confidential basis of distribution agreements that it had entered into with brands both as at February 2010 and as at 2020, and by consent evidence was tendered in the proceeding in a tabular form, which established that the overwhelming majority of distribution arrangements that Mecca had in place as at 2010 involved distribution arrangements on a wholly exclusive basis.[11] In 2010, the overwhelming percentage of Mecca’s sales was of brands with which it had wholly exclusive distribution agreements.[12]
[11]Of the [REDACTED] agreements in place as at 2010, [REDACTED]of those agreements (which equates to [REDACTED] of the total number of agreements) were wholly exclusive in nature.
[12][REDACTED] of Mecca’s sales; [REDACTED].

Ms Horgan gave evidence that in a small number of cases the exclusivity conferred by agreements entered into by Mecca was subject to minor carve-outs, which:

(a) retained the right to sell via non-retail distribution channels (eg, spas or salons or via existing small fashion retailers); and

(b) retained the right to sell to customers via their own pre-existing stores and websites.[13]

[13][REDACTED] of the agreements in place as at 2010 were exclusive but subject to a condition that the brand could sell their product via non-retail distribution channels such as spas or via existing small retailers. The [REDACTED] agreements represent [REDACTED] of the total number of the agreements and [REDACTED] of Mecca’s total sales as at 2010; or [REDACTED]. [REDACTED] agreements ([REDACTED] of the total number of agreements) were exclusive but subject to the condition that the brand could sell directly to customers via their own stores or websites. The percentage of Mecca’s total sales which these agreements represented constituted [REDACTED]; or [REDACTED].

There were also a small number of distribution arrangements in place in 2010 where Mecca was not able to locate a written agreement.[14]
[14]These [REDACTED] agreements represented [REDACTED] of the total number of agreements and [REDACTED] of Mecca’s total sales; or [REDACTED].

Ms Horgan gave evidence that as at 2020, the exclusive distribution model remains an integral feature of Mecca’s business and that a majority of Mecca’s sales were made from brands that are completely exclusive to Mecca.[15] There remain in place agreements with a number of brands for whom Mecca distributes on what Ms Horgan describes as ‘a predominantly exclusive basis’, but with the limited carve-outs to the effect set out in paragraph 20 above.[16] There are a small number of brands for whom Mecca distributes which are not the subject of a written agreement.[17]
[15]Mecca has [REDACTED] agreements entered into with brands on a wholly exclusive basis. The percentage of Mecca’s total sales represented by these wholly exclusive brands constitutes [REDACTED]; or [REDACTED]. The brands included in the wholly exclusive category include [REDACTED] brands which are Mecca owned.
[16]There are [REDACTED] agreements which are exclusive but subject to the carve-out that the brand can sell their product via non-retail distribution channels or via existing small retailers or where the exclusivity component is subject to a time limitation. This component represents [REDACTED] of Mecca’s total sales; or [REDACTED]. In addition, there are [REDACTED] agreements which are subject to the condition that the brand can sell directly to customers via their own stores and/or websites. Sales pursuant to these agreements constitute [REDACTED] of Mecca’s total sales; or [REDACTED].
[17]The [REDACTED] brands in this category are not distributed exclusively by Mecca and are therefore included in the non-exclusive category.

Unlike the case in 2010, there are now a number of brands for whom Mecca distributes on a nonexclusive basis.[18] However, Ms Horgan gave evidence that most of the nonexclusive brands or the partially exclusive brands have been sold through Mecca Maxima stores, which was a new retail concept launched by Mecca in late 2010. According to Ms Horgan, the Mecca Maxima business is pitched at a broader audience and the stores are situated predominantly in shopping centres, not in premium retail strips. Ms Horgan says that the non-exclusive brands do not receive the same end-to-end service as received by the exclusive brands, such as marketing, education, and brand management. Effectively, Mecca’s role in respect of the non-exclusive brands is limited to that of a conventional retailer.
[18]There are [REDACTED] brands for whom Mecca distributes that are not subject to exclusive arrangements in any respect. In 2020, they made up [REDACTED] of Mecca’s total sales; or [REDACTED].

Ms Burke is Mecca’s Creative Director for Brands and joined Mecca in 2007. Ms Burke gave evidence as to the nature of the Mecca exclusive distribution model to substantially similar effect to that of Ms Horgan. Ms Burke described the model as one which allows brands to enter the Australian and New Zealand markets without any ‘on the ground’ resources or responsibilities. She gave evidence that Mecca asks for brand exclusivity in return for the end-to-end service responsibilities that it agrees to carry out on the brand’s behalf. Ms Burke describes this as a ‘win-win’: a win for Mecca, in that Mecca takes sole stewardship of the brand in the Australian and New Zealand markets; and a win for the brands as it provides a risk-free ‘set and forget’ model that allows them to enter the market with a partner such as Mecca that has substantial market experience and presence.

Ms Burke described Mecca’s role in its end-to-end service as collecting the goods from the brand’s warehouse (overseas); shipping; freight management; warehouse and logistics; training; visual merchandising management and updates; PR; social and influencer relations; events; monthly sales and business reporting; annual reviews and distribution across all Mecca stores.

Ms Horgan deposed that she initially met with Ms Janes in Santa Monica, California in March 2009 where she explained the Mecca exclusive distribution model, to the effect that Mecca places the orders; picks the products up ex-works; ships them to Australia; warehouses them and distributes them to Mecca’s stores; undertakes the education program to its team members; creates a launch plan; and provides ongoing marketing and promotion. In addition, she told Ms Janes that Mecca collated the sales results and visited the brands every six months to consult and devise future plans. Ms Horgan said that she explained to Ms Janes that the advantage of this end-to-end service meant that the Hourglass brand could come into the market with minimum risk and that Hourglass wouldn’t need any capital or a local infrastructure team; all it was required to do was supply the product and the presentation units, as well as provide product education to Mecca’s staff.

Although there were some slight differences around the exact nature of the 2009 discussions, there were no significant differences in the evidence between Ms Horgan, Ms Burke, and Ms Janes in relation to either the discussions which preceded the entering into of the EDA or the subsequent conduct of the relationship.

Ms Janes explained that Hourglass launched its products to the public through the Barneys Department Stores in Los Angeles and Manhattan in or around 2004 and that Barneys sold Hourglass cosmetics around from 2004 to 2005. Although she cannot now locate the agreement pursuant to which Hourglass sold through Barneys, her recollection is that Hourglass gave Barneys exclusivity for its products within the territories in which Barneys sold (Los Angeles and Manhattan) for a one year period.

In 2007, Hourglass entered into an agreement to sell products (initially just for its ‘extreme sheen’ lip gloss range) through Sephora stores in the United States. At the start of 2010 all of Hourglass’s retailers were located in the United States. Hourglass had a total of nine employees at the start of 2010, all of whom were based in Los Angeles.

Ms Janes accepted that Hourglass was looking for opportunities to expand its business but did not have the resources or team to enter into the Australian market of its own accord. The advantage to Hourglass in entering into the proposed arrangements with Mecca as she saw it was that Hourglass was able to enter the Australia and New Zealand markets without having to appoint a distributor, brand manager, public relations firm, or sales staff in the local market. Ms Janes described the benefit to Hourglass of entering into the agreement with Mecca was that it enabled Hourglass to access Mecca’s physical retail presence.

Ms Janes also said that Hourglass had no internal legal counsel and only engaged external lawyers for limited purposes. It did not seek legal advice in connection with any of the distribution agreements entered into by Hourglass including that negotiated with Mecca. Ms Janes said that as at 2010, she had no experience in the negotiation of contractual terms dealing with exclusivity of brand sales, fixed terms of contracts, or associated matters.

Ms Burke led the negotiations on the terms of the arrangement with Hourglass on Mecca’s behalf. On 9 September 2009, Mecca forwarded a draft EDA to Hourglass. Neither side used lawyers in the negotiations. The agreement is relatively straightforward, some eight pages in length (including appendices) and was for the most part in the terms ultimately executed.[19]
[19]The terms of the EDA are set out in more detail at [46]–[55] below.

The next day Hourglass returned the agreement with three mark-ups indicating the sections of the agreement that Hourglass wished to change. Specifically, Hourglass wanted the termination provision (which permitted termination by notice in writing)[20] to be mutual; similarly, Hourglass requested that the agreement which provided for termination for an adverse event be made mutual.
[20]The initial draft specified three calendar months, but only at the end of the first year.

Additionally, Hourglass requested an amendment to appendix 2 of the agreement. Appendix 2 is headed ‘Price and Payment’ and specifies the price payable by Mecca for the products by reference to a specified percentage of the home country retail price (in this case the retail price in the United States for the particular Hourglass product). In other words, the higher the percentage discount, the cheaper the product for Mecca. Hourglass requested a decrease in the percentage discount, which equated to an increase in the price that it would sell to Mecca.[21]
[21]From [REDACTED] to [REDACTED].

The price was then the subject of negotiations with Hourglass over the ensuing months, presumably in response to entreaties from Mecca proposing a slight increase in the percentage discount, as referred to in an email of 7 November 2009.[22] On 30 December 2009, Mecca made what Ms Burke described as a final attempt to negotiate a better margin for Mecca by trying to convince Hourglass to accept a higher discount on the price payable by Mecca for Hourglass products.[23] On 9 January 2010, Hourglass responded to the request, maintaining that the present discount offered was appropriate. Ultimately, on 16 January 2010 Mecca agreed to accept the proposed discount offered by Hourglass, and the parties signed the document titled ‘Exclusive Distribution Agreement’ ( that is, the EDA) on 3 and 6 February 2010 respectively. The initial term of the EDA was fixed, to be renewed automatically at the expiration of the initial term. Each party had a right to terminate on notice to the other given within an agreed period prior to expiry.[24] The key terms of the EDA are set out in paragraphs [49]–[55] below.
[22]In an email of 13 November 2009 Hourglass agreed to increase the discount to [REDACTED].
[23]Mecca’s email of 30 December 2009 suggested a [REDACTED] discount and described this as ‘the ideal pricing structure for the brand in this market to achieve targets and ensure a strong base business for the brand. After running these numbers I’m not sure we can do this at [REDACTED]’.
[24]The initial term was [REDACTED] and notice had to be given not less than [REDACTED] prior to the end of the term.

In the period from 2010 to 2015, the arrangements proceeded, apparently to the mutual satisfaction of Mecca and Hourglass. Mecca’s sales of Hourglass products has grown substantially since 2010. Hourglass is now amongst Mecca’s highest selling brands.[25] The growth in Mecca’s business throughout that period has also been substantial. Ms Horgan gave evidence that Mecca invests heavily in its network of bricks and mortar stores which, aside from the Mecca Maxima stores which are located in shopping centres, are chosen for and located in prime prestige locations. Commensurate with its location in prime retail strips, Mecca also invests substantially in store fit-outs.
[25]It is Mecca’s [REDACTED] highest selling brand. Mecca’s sales of Hourglass cosmetic brand products by year from the commencement of the EDA from 2010 to 2020 are as follows: [REDACTED].

Mecca’s marketing activities generally and its promotion of Hourglass products appear to have been conducted in a mutually satisfactory fashion. Certainly, there is no evidence of any complaint by Hourglass as to Mecca’s marketing or its distribution of the Hourglass products. An example of the Mecca marketing for Hourglass products appears below:

In 2015, Mecca wished to grow its retail footprint so as to be the largest retailer in the market by store number. Ms Horgan believed that this would allow Mecca to drive customer acquisition and further growth in its brands.

By 6 August 2015, the number of Mecca stores had grown to 62. Mecca’s desire for expansion required it to enter into a number of new retail leases, the minimum term of which was five years, as well as to make associated investments in marketing, promotion, and costs associated with the opening of new stores.[26]
[26]Such as fitout costs and rental.

In view of its desire to expand and increase its retail footprint, Mecca proposed a variation to the term of the EDA to give it greater security of tenure in relation to its distribution arrangements.[27] Ms Horgan gave evidence that the new arrangements as to the term of the various exclusive distribution agreements entered into by Mecca provided Mecca with the certainty to be able to invest heavily in building its brands for the long term. She describes this change as the key to facilitating Mecca’s substantial growth over the last eight years.
[27]The proposed variation sought by Mecca introduced a [REDACTED] with a [REDACTED] notice period which Mecca refers to as a ‘[REDACTED]’. Under these varied arrangements, [REDACTED] term [REDACTED] of the agreement and either party must provide [REDACTED]’ notice of their intention to terminate the agreement. Like variations were also sought in relation to a number of other distribution agreements to which Mecca was then party.

Ms Burke gave evidence that in 2015 she informed Ms Janes that the business with Hourglass had grown substantially and that Mecca felt that this growth would continue alongside Mecca’s own expansion. She said to Ms Janes that she wanted Hourglass to be part of Mecca’s expansion strategy, and that Mecca wanted to know that they could invest in the Hourglass brand with the certainty of continued exclusivity. Ms Janes did not in terms take issue with her conversations with Ms Burke in respect to the proposed new term and termination arrangements,[28] save that she also recalled Ms Burke saying that all the brands had agreed to new terms and that Mecca was worried that about losing brands to Sephora, another major international beauty retailer, who at that time was yet to enter the Australian market.
[28][REDACTED].

Ms Janes said that at the time of these conversations in 2015, she was considering the possibility that, if there was a change of control in Hourglass, its new controller may wish to take a different approach to the distribution of its products. Accordingly, she asked Mecca whether any variation to the EDA could also include a provision that if there was a change in control in Hourglass, Hourglass would be able to terminate the distribution agreement. Ms Burke recalls the conversation in slightly different terms; namely that Ms Janes said words to the effect that she would agree to the new arrangements as to the term and termination arrangements, but wanted an assurance that in the event that Mecca sold the business to a third party Hourglass would have the option to terminate, to the effect that Hourglass would not be left with a new partner not of Ms Janes’ choosing for an extended period of time. Nothing turns on the difference in recollection.

In the result, on 7 June 2015 Ms Burke forwarded an attached letter of variation to Ms Janes giving effect to the new arrangements to term and termination and including a change of control provision.

Some six weeks later, Ms Burke sent an email to Ms Janes chasing up a response to the email, to which Ms Janes replied on 28 July 2015 that she had been travelling and had a few questions about the agreement. Ms Janes proposed that they set up a time at the end of the week or earlier the next week to discuss.

The emails confirm a proposed discussion on 6 August 2015, although there is no evidence as to whether that discussion took place. In any event, on 6 August 2015 Ms Janes signed the letter from Mecca addressed to Hourglass.

The letter reads:

As a valued supplier of products to Mecca we continue to take steps in an attempt to further deepen our relationship. In this regard and as further consideration for the entitlements and benefits you will derive as a result of distributing your products in Australia and New Zealand, please see the following new clauses which we propose:
•replaces the existing clause 2 in the Agreement in relation to the Term; and
•includes a new clause 11A in the Agreement in relation to a right to terminate in the event of a change of control.

The parties acknowledge and agree that this letter will constitute a binding deed and that as at the date of this letter the following amendments to the Agreement automatically and without further requirements or notices become effective.
2. Term
2.1The Agreement commences on the date of this Agreement (“Commencement Date”), and continues subject to the duration(s) and processes as set out as follows (“Term”):
(a)[REDACTED]: On the Commencement Date, there will be [REDACTED] remaining for the Term, provided [REDACTED] will be, [REDACTED] remaining for the Term.
(b) Termination Trigger: Following the date that is not earlier than [REDACTED] following the Commencement Date, a party may terminate this Agreement by providing the other party with [REDACTED] written notice of termination, and in those circumstances the Agreement will come to an end at the expiry of such [REDACTED] period.

11AIn the event that a party (“changing party”) [REDACTED] (which consent will not be unreasonably withheld) the other [REDACTED] its sole [REDACTED] with [REDACTED] the Agreement, provided that such right is only exercisable by the other party within the period of [REDACTED] following the date of notification by the changing party of such change. For these purposes the following definitions will apply:
(a)“Change of control” means that a third party (not being a related body corporate of the changing party) gains the power to hold 51% of the issued capital in the changing party.
(b)“Related body corporate” has the meaning given to such phrase in the Corporations Act 2001 (Cth).

Please carefully consider these proposed changes and, if all is in order, we kindly ask that you confirm your acceptance of these agreements by signing in the bottom of this letter (where indicated) and returning to me by email. Once you have done so, both you and Mecca acknowledge that these terms are binding and form part of an Agreement (by way of this letter of variation).

In effect, the new cl 2.1 modified the term of the agreement to a ‘rolling term’, such that on each anniversary of the commencement date (6 August 2015), the term would automatically renew and involved a longer termination notice period.[29]
[29]The new cl 2.1 amended the term from [REDACTED] that on the anniversary of the commencement date (6 August 2015) and on each anniversary thereafter (each ‘renewal trigger date’), the term of the agreement would automatically renew so that on every renewal trigger there was automatically [REDACTED] for the term, with the notice period now extended from [REDACTED] written notice.

The repealed cl 2 (which was replaced by the above cl 2.1 in 2015) outlined the term of the agreement as ‘an initial term of [REDACTED] from the date of receipt of the first order (or term), unless terminated earlier in accordance with [the agreement]’. The repealed term outlined that the agreement is to continue ‘after the initial term for successive periods of [REDACTED] each’, unless a party provides the other with written notice of discontinuance ‘not less than [REDACTED] prior to the end of the then current term’:

This Agreement comes into force on the date upon which the Agreement is executed by the parties. The Agreement remains in force for an initial term of [REDACTED] from the date of receipt of the first order (the term), unless terminated earlier in accordance with this Agreement. This Agreement continues after the initial term for successive periods [REDACTED], unless a party provides the other party with written notice that it elects to discontinue the Agreement at the end of the current term, provided that such notice is delivered to the other party not less than [REDACTED] prior to the end of the then current term.

Relevant clauses in the EDA

By cl 1:

The Manufacturer [Hourglass] grants to the Distributor [Mecca] the sole and exclusive right to purchase the Manufacturer’s products as per appendix 1, at the price and on the terms specified in Appendix 2 for the distribution and resale in Australia and New Zealand whilst the Agreement remains in force. The Manufacturer must not give any other person any rights that are inconsistent with the rights granted to the Distributor under this Agreement. The Manufacturer must refer to the Distributor any orders for the product which it receives from a customer in Australia and New Zealand. The Manufacturer must not allow or permit any person other than the Distributor to distribute and/or resell the products listed in appendix 1 in Australia and New Zealand…

Appendix 1 states:

All Hourglass Cosmetics Branded Products.

Appendix 2, entitled ‘Price and Payment’, states:

[REDACTED] discount off Home Country Retail Price.
Payment [REDACTED] days from receipt of invoice (subject to clause 8.5).
Wholesale price will not increase for [REDACTED] months from placement of first order.

Clause 12.5 provides that:

12Either party may end this agreement immediately if any of the following occurs:
12.5 In accordance with Clause 16, if the other party is unable, for a continuous period of 28 days, to distribute the product because of a Cause Beyond the Reasonable Control of the party.

For the purpose of this clause:
Cause Beyond the Reasonable Control includes an act of God, strike, lockout, other industrial disturbance or difficulty, war, act of public enemy, blockade, revolution, riot, insurrection, civil commotion, lightning, storm, flood, fire, earthquake, explosion, embargo, unavailability of any essential equipment of materials, unavoidable accident, lack of transportation, or anything done or not done by or to a Person, government or other competent authority, except the party relying on force majeure.

Clause 16 provides:

16A party is not liable for failure to perform, or delay in performing, an obligation (except an obligation to pay money), if each of the following conditions is satisfied:
16.1The failure or delay arose from a Cause Beyond the Reasonable Control of that party, as defined in Clause 12.5.
16.2 The party took all reasonable precautions against that cause and did its best to mitigate its consequences. This does not require the party to settle a labour dispute if, in the party’s opinion, that is not in its best interests.
16.3 The party gave each other party notice of the cause as soon as practicable after becoming aware of it.
16.4 If the cause and resulting failure or delay lasts more than [insert period], the party is entitled to end this document immediately by giving each other party written notice.

(emphasis added).

The number of days section was never completed.

Clause 3 of the EDA sets out contains Mecca’s obligations:

(a) Clause 3.1, which requires that Mecca:

Sell or distribute the Manufacturer’s products (or any of them) from the Distributor’s retail outlet(s), internet sites, and/or mail order catalogue selected from time to time by the Distributor…

(‘the Distribution Clause’);

(b) Clause 3.2, which requires that Mecca:

Manage and pay for the launch and ongoing marketing of the Manufacturer’s brand in the Australian and New Zealand marketplace to the best of its abilities consistent with the Distributor’s commercial and business objectives. This includes managing the initial and ongoing PR, training of staff, merchandising the brand in line with its international standards, and marketing the brand in line with its international standards as it sees fit.

(‘the Marketing Clause’); and

(c) Clause 3.3 which requires that Mecca pay for shipping of the product ex-works.

Hourglass’s obligations under the EDA are contained in a number of clauses, relevantly:

(a) Clause 4.2 requires that Hourglass:

Fulfil an order placed by the Distributor if the ordered products are in stock or reasonably available to the Manufacturer.

(b) Clause 4.3 requires that Hourglass:

[P]rovide the Distributor free of charge with a reasonable quantity of all standard point of sale materials (such as tester displays and tester products), press product, colour copies of international PR magazine tear sheets, brochures, price lists, and other sales material which it uses from time to time.

(‘the Materials Clause’);and

(c) Clause 4.4 requires that Hourglass:

[Reimburse the Distributor for any customer returns, damaged goods, faulty goods, live products converted to tester, and press products sent out.

(‘the Free Product Clause’).

Clause 7 allows Mecca to return ‘slow moving products’ to Hourglass and be refunded for the purchase of those products (‘the Refund Clause’).

Key issues in the proceeding

As noted above, the evidentiary disputes in the proceeding were relatively minor and assumed little or no significance in the case.

There are two critical matters between the parties:

(a) is the restraint on Hourglass by requiring it to sell in Australia and New Zealand exclusively through Mecca imposed in cl 1 of the EDA (‘the Restraint’) enforceable as against Hourglass (‘the restraint of trade issue’)?

(b) is the EDA a valid contract or alternatively void for uncertainty by reason of the fact that the parties never completed the number of days in cl 16.4 (‘the uncertainty issue’)?

There was no issue between the parties that cl 1 did impose a restraint in the sense recognised in the authorities and succinctly set out by Diplock LJ in Petrofina (Great Britain) Ltd v Martin:[30]

A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses.

[30][1966] Ch 146, 180.

In respect of the restraint of trade issue, the critical questions are as follows:

(a) Does the restraint of trade doctrine apply to the Restraint?

(b) If it does, has Mecca discharged its onus of establishing that the Restraint is reasonable in the sense that the Restraint goes no further than is necessary to protect Mecca’s legitimate interests?[31]

[31]Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75 (‘Fonterra’), [225].

It is common ground that the time for assessing reasonableness is the time of entry into the contract.[32] It is also common ground that the onus of establishing that the Restraint goes no further than is necessary to protect Mecca’s legitimate interests lies on Mecca.[33]
[32]Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 (‘Amoco’), 318.
[33]Fonterra (n 31), [225].

Hourglass’s submissions as to invalidity proceed from the starting point that if the doctrine does apply, the Restraint is prima facie void. Hourglass submits that Mecca has not discharged the onus of establishing that the Restraint is reasonable in the sense that it goes no further than is necessary to protect Mecca’s legitimate interests. Relatedly, Hourglass submits that the assessment as to reasonableness and whether Mecca has discharged the necessary onus calls to be considered in the context of an analysis of the terms of the EDA as a whole.

Relevantly, Hourglass claims in respect of the EDA that:

(a) the Distribution Clause (cl 3.1) restricts, on the one hand, Hourglass from selling even unwanted products or unused products in Australia or New Zealand, yet places no concurrent obligation on Mecca to sell Hourglass’s products through its online channels, nor does it require Mecca to stock the entire range of Hourglass products. Hourglass argues that in effect it entitles Mecca to sell whichever Hourglass products howsoever it chooses it;

(b) Mecca’s obligations in relation to marketing as set out in the Marketing Clause (cl 3.2) only require Mecca to market Hourglass’s products to the best of Mecca’s abilities consistent with the distributor’s (ie, Mecca) commercial and business activities; Mecca’s obligations in relation to PR, training, merchandising, and marketing are subject to being ‘in line with its international standards as it sees fit’;

(c) Hourglass is restrained throughout the term of the agreement from allowing any person other than Mecca to distribute or resell Hourglass products in Australia or New Zealand, and is obliged it to refer to Mecca any orders for the product which it receives from a customer in Australia and New Zealand, and Hourglass is prevented from giving any other person any rights that are inconsistent with the rights granted to Mecca; and

(d) the terms of the EDA oblige Hourglass:

(i) to fulfil orders placed by Mecca (cl 4.2);

(ii) to provide Mecca free of charge with a reasonable quantity of all standard point of sale materials, tester and tester products (cl 4.3); and

(iii) to allow Mecca to return at its expense ‘slow moving stock and if any product is returned Mecca can get either a full refund or choose another product as its replacement’ (cl 7).[34]

[34]Hourglass is however unable to sell these unwanted products in the territory.

Further, Hourglass point to the possibility of a divergence of commercial interest between Mecca and Hourglass in circumstances where Hourglass decides to end the agreement by giving the requisite termination notice.[35] Hourglass submits that in that event, Mecca’s commercial interests would lie in Mecca promoting the remaining brands to the exclusion of Hourglass, which would remain restrained throughout the balance of the notice period. Hourglass submitted that there is nothing in either the Distribution Clause (cl 3.1) or the Marketing Clause (cl 3.2) that protects it from such conduct during the notice period.
[35][REDACTED].

Mecca submits that:

(a) the restraint of trade doctrine does not apply to the Restraint because exclusive distribution arrangements are an established and accepted part of a trading society, consequently, Mecca is not obliged to justify its reasonableness;

(b) in any event, the Restraint is reasonable because:

(iv) Mecca has a legitimate interest in maintaining its end-to-end service to Hourglass and its investment in launching, marketing and distributing products in accordance with the end-to-end model under the EDA;

(v) the Restraint goes no further than is reasonably necessary to protect Mecca’s legitimate interest in that:

A. the covenant is limited to the continuance of the EDA;

B. Mecca agrees to provide the end-to-end service on an ongoing basis during the continuance of the EDA; and

C. the covenant is limited to the territories in respect of which Mecca provides the end-to-end service to Hourglass (Australia and New Zealand);

and

(c) in any event, the fact that Hourglass agreed to the Restraint including in the 2015 variation is a circumstance of considerable weight as the parties should be treated as the best judges of what is reasonable in their own interests.[36]

[36]Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260, 276 (‘Pamag’).

In order to address the parties submissions, it is convenient to consider some of the critical authorities.

Historical English authorities

In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd[37](‘Nordenfelt’), the defendant sold his worldwide armaments business and agreed not to compete anywhere in the world for 25 years. The primary judge held this to be unreasonable but the Court of Appeal disagreed. The House of Lords supported the majority of the Court of Appeal and established a doctrine which quickly became widely accepted, that a contract in restraint of trade was reasonable if it did no more than protect the legitimate interests of the covenantee. Some judges thought that the contract had to be reasonable with respect to the covenantor’s interests as well.[38]
[37][1894] AC 535.
[38]See, eg, Mitchel v Reynolds (1711) 24 ER 347; 1 P Wms 181, 182; Leather Cloth Co v Lorsont [1869] LR 9 Eq 345, 354; Nordenfelt (n 37) 565.

However, a narrower test was soon adopted by the House of Lords in Mason v Provident Clothing and Supply Co Ltd[39] and in Herbert Morris Ltd v Saxelby.[40] Accordingly, the position was explained as follows:[41]

For a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the parties in whose favour it is imposed … [though] in one sense no doubt it is contrary to the interests of the covenantor to subject himself to any restraint, still it may be for his advantage to be able to subject himself in cases where, if he could not do so, he would lose other advantages, such as … the possibility of obtaining employment or training under competent employers.

[39][1913] AC 724.

[40][1916] 1 AC 688.

[41]Ibid, 707(Lord Walker of Waddington); see also Lord Atkinson at 700.

The test has been reiterated in substantially the same terms in numerous Australian authorities.[42]
[42]See, eg, Aerial Taxi Cabs Cooperative Society Ltd v Lee (2000) 102 FCR 125. The relevant question is whether the restraint affords no more than adequate protection to the covenantee’s interests, not whether it affords less than adequate protection to the covenantor’s interest. See also Amoco (n 32), Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR (‘Specialist Diagnostic’).

In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[43] (‘Esso’) the respondent owned two service stations. It entered into solus agreements with Esso under which it covenanted to take all its petrol supplies from Esso for a specified period of five years in the case of one service station, and 21 years in the case of the other. When cheaper petrol became available, the respondent commenced to buy from that source and ceased selling Esso petrol. Esso sought injunctive relief, whilst the respondent counterclaimed for a declaration that the covenants were invalid.
[43][1966] AC 269 (‘Esso’).

The House of Lords recognised that Esso had a legitimate interest in maintaining a suitable fuel distribution system, and that a 5 year restraint was not longer than necessary to protect that interest, but that the 21 year restraint was too long and hence unenforceable. Esso argued that the doctrine of restraint of trade did not apply because the restraint affected land and thus imposed a burden on the land rather than the person. All members of the House rejected this argument. Their Lordships propounded various tests for determining whether the doctrine of restraint of trade applied. The first test was adopted by Lord Reid, Lord Morris of Borth-Y-Gest, Lord Hodson and Lord Pearce and came to be known as the ‘pre-existing freedom’ test. In effect, those members of the House of Lords considered that the restraint of trade doctrine applied where a person contracted to give up some freedom which they might otherwise have.

The fact that the respondent was already trading at the two sites when it entered into the restraint meant that the doctrine applied. Had the operator purchased or leased the stations from Esso at the same time the operator entered the covenants, the doctrine would not have applied.

In addition to adopting the pre-existing freedom test, Lord Pearce also endorsed another test which looked at the nature of the performance required during the period of the contract. In a passage of interest in the context of the present dispute, his Lordship said:[44]

The doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract viewed as a whole is directed towards the absorption of the parties’ services and not their sterilisation. Sole agencies are a normal and necessary incident of commerce and those who desire the benefits of a sole agency must deny themselves the opportunities of other agencies. So, too, in the case of a film-star who may tie herself to a company in order to obtain from them the benefits of stardom … And partners habitually fetter themselves to one another.
When a contract only ties the parties during the continuance of the contract, and the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises. If, however, the contract ties the trading activities of either party after its determination, it is a restraint of trade, and the question of reasonableness arises. So, too, if during the contract one of the parties is too unilaterally fettered so that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade.

[44]Ibid, 328.

This test came to be referred to as the ‘sterilisation of capacity test’.

A third test is found in the speech of Lord Wilberforce and came to be referred to as the ‘trading society test’. His Honour noted:[45]

The common law has often (if sometimes unconsciously) thrived on ambiguity and it would be mistaken, even if it were possible, to try to crystallise the rules of this, or any, aspect of public policy into neat propositions. The doctrine of restraint of trade is one to be applied into factual situations with a broad and flexible rule of reason … There will also be certain general categories of contracts as to which it can be said, with some degree of certainty, that the “doctrine” does or does not apply to them. Positively, there are likely to be certain sensitive areas as to which the law will require in every case the test of reasonableness to be passed: such an area has long been and still is that of contracts between employer and employee as regards the period after the employment has ceased. Negatively, and it is this that concerns us here, there will be types of contract as to which the law should be prepared to say with some confidence that they do not enter into the field of restraint of trade at all.
How, then, can such contracts be defined or at least identified? No exhaustive test can be stated – probably no precise and non-exhaustive test. But the development of the law does seem to show that judges have been able to dispense from the necessity of justification under a public policy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions, may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations. That such contracts have done so may be taken to show with at least strong prima force that, moulded under the pressure of negotiation, competition and public opinion, they have assumed a form which satisfies the test of public policy as understood by the courts at the time, or, regarding the matter from the point of view of the trade, that the trade in question has assumed such a form that for its health or expansion it requires a degree of regulation. Absolute exemption for restriction or regulation is never obtained: circumstances, social or economic, may have altered, since they obtained acceptance, in such a way as to call for a fresh examination: there may be some exorbitance or special feature in the individual contract which takes it out of the accepted category: but the court must be persuaded of this before it calls upon the relevant party to justify a contract of this kind.

[45]Ibid, 331–3.

His Honour then noted that cases concerning clauses in hotel leases tying the lessee to acquire the lessor’s beer, and covenants in leases not to carry on a particular trade, had become part of relevant accepted doctrine such as to fall outside the field of restraint of trade. His Lordship’s conclusion and the source of the trading society test appears (at 335):

One may express the exemption of these transactions from the doctrine of restraint of trade in terms of saying that they merely take land out of commerce and do not fetter the liberty to trade of individuals; but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society.

Principal Australian authorities

Pamag

Queensland Co-operative Milling Association v Pamag Pty Ltd[46] (‘Pamag’) was decided in 1973, some five years after the decision of the House of Lords in Esso. The case concerned an exclusive purchase covenant given by a bakery (Pamag) to acquire all of its flour from the supplier (QCMA). The covenant was given as security for a loan provided by QCMA to Pamag to enable it to establish the bakery. The period of the covenant was a minimum term of approximately seven years (unless the supplier chose to call up the loan earlier). Pamag sold the business to a competitor of the supplier and attempted repayment of the loan. QCMA refused to accept repayment of the loan and sought to enforce the exclusive covenant.
[46]Pamag (n 36).

All members of the Court (Menzies, Walsh and Stephen JJ) accepted that the doctrine applied, but held that the restraint was reasonable. Walsh J referred to the pre-existing freedom test in Esso as dicta and remarked that it had no application to the facts of the present case.[47] Stephen J considered that there was ‘much authority’ for the pre-existing freedom test and observed that:[48]

When, in equipping oneself for a trade, it happens that the only source of finance is a trade supplier and part of the price of that finance is a trade-tie, it then positively encourages trade that that tie should be valid and enforceable, else entry into the trade by those without independent sources of finance will be prevented; those engaging in the trade will be the fewer and competition the less.

[47]Ibid, 267.

[48]Ibid, 285.

Aside from these references by Stephen and Walsh JJ, the Court did not in terms adopt the pre-existing freedom test or indeed any other test.

The pre-existing freedom test had, in the period after Esso and before Pamag, been the subject of some criticism. In an article entitled ‘The Frontiers of the Restraint of Trade Doctrine’,[49] J D Heydon argued that the pre-existing freedom test reflected a distinction based purely on form and not on substance at all. He was similarly critical of the sterilisation test favoured by Lord Pearce, which he described as ‘mystical’. In respect of the test favoured by Lord Wilberforce the article described the test as reflecting ‘a relatively inert acceptance by the courts of the status quo’, before concluding with the suggestion that it would be preferable for the doctrine to have universal application to all restraints of trade in order to assess a wide range of evils.

Amoco

[49](1969) 85 LWR 229.

The case of Amoco Australia Pty Ltd v Rocca Bros Mother Engineering Co Pty Ltd (‘Amoco’)[50] concerned an agreement between Rocca and Amoco pursuant to which Rocca agreed to build a service station. On completion, Rocca would lease the land to Amoco for 15 years at a nominal rent and Amoco would grant Rocca a sublease for 15 years less one day at nominal rent. By a term of the lease, Rocca covenanted to acquire all its petroleum supplies from Amoco. The High Court held by majority[51] that the agreement entered into by the owner in favour of Amoco engaged the doctrine of restraint of trade, was unreasonable, and hence unenforceable.
[50]Amoco (n 32).
[51]McTiernan ACJ, Menzies, Walsh and Gibbs JJ (Stephen J dissenting).

The majority rejected Amoco’s contention that the owner had enjoyed no pre-existing freedom to trade. Walsh J stated that it was not necessary to examine closely the correctness of the principle in Esso on which Amoco relied, but expressed reluctance to accept the pre-existing freedom test as a criterion for determining that the restraint of trade doctrine did not apply.[52]
[52]Amoco (n 32), 304.

Menzies J accepted that the restraint of trade could have application where the covenantor was starting a new business and the restraint was given in relation to future trading.[53] Gibbs J held that it was unnecessary to decide whether the application of the doctrine was limited by the pre-existing freedom test,[54] while Stephen J in dissent held that the restraint of trade doctrine was not applicable, applying both the sterilisation of capacity test and the pre-existing freedom test.[55]

Quadramain

[53]Ibid, 293.

[54]Ibid, 313.

[55]Ibid, 328.

In Quadramain Pty Ltd v Sevastapol Investments Pty Ltd[56](‘Quadramain’), the owner of two adjacent parcels of land, retained one lot on which it operated a hotel. It sold the adjacent land to another party for use as part of a shopping centre, and the transferee covenanted on behalf of itself and its successors not to apply for a liquor licence there. The original covenantor transferred the burdened land to one of the defendants who leased it to another defendant. The benefited land had also been transferred. The dispute as to enforcement was not between the original covenantor and covenantee. By majority, the High Court held that the restraint doctrine did not apply to restrictive covenants given by a person purchasing or leasing land. Barwick CJ stated that no restraint of trade was involved because the plaintiff and defendant in the proceeding were not the parties to the restrictive covenant noted on the certificate of title. His Honour considered that Esso supported the conclusion that an existing covenant to which the purchaser of the land subject to the covenant is not a party is not a contract in restraint of trade.[57] McTiernan J gave judgment broadly to the same effect, but emphasised the fact that the doctrine had no application to restrictive covenants burdening land. Gibbs J, with whom Stephen and Mason JJ agreed, observed that the trading society test was more flexible than the pre-existing freedom test and might in time come to be preferred.[58]

Munday

[56]8 ALR 555; 133 CLR 390.

[57]Ibid, 557.

[58]Ibid, 563.

In Australian Capital Territory v Munday[59](‘Munday’), the plaintiff was a scavenger by trade. The public authority operated a tip and licensed entry to the tip for dumping. Mr Munday paid fees to the authority to enter the tip where he scavenged for abandoned goods which he sold elsewhere and traded with other licensees before they abandoned goods at the tip. The public authority granted another party a non-exclusive right to enter and to use the tip, but an exclusive right to salvage goods abandoned at the tip. Effectively, from that point on Mr Munday, by virtue of the other party’s exclusive licence, was prohibited from scavenging for abandoned goods and from trading with other licensees before they abandoned the goods.
[59](2000) 99 FCR 72.

The Full Court of the Federal Court held that the restraint of trade doctrine did not apply, and after a careful review of the authorities concluded that the trading society test should be adopted.

Adamson

In Adamson v New South Wales Rugby League Ltd[60] (‘Adamson’), The New South Wales Rugby League Ltd (‘the NRL’) had adopted a set of internal draft rules (‘the rules’) which laid down a mandatory procedure to be followed by the clubs and players whose contracts with particular clubs had expired. The rules required players to nominate terms and conditions upon which they were prepared to play football for any club. A player wishing to change clubs was required to submit himself to all clubs on those terms and conditions starting with the club which finished last in the competition. If that club did not wish to engage the player the player was required to offer himself to the next club in order of reverse ranking and so on. The player was obliged to accept employment from the first club that required his services.
[60](1991) 31 FCR 242.

The players challenged the rules on a number of grounds, including that they were an unreasonable restraint of trade and hence void at common law. The Full Court of the Federal Court held unanimously that the rules were an unreasonable restraint of trade. Having regard to the nature of the restraint, which was one which affected employees post-employment, and which had historically been recognised as a category to which the doctrine applied, there was no need to consider the various tests promulgated in Esso.

ICT

In ICT Pty Ltd v Sea Containers Ltd[61] (‘ICT’) a ship builder was contracted to build a number of ferries for a ferry operator. In addition to their various building contracts, the parties executed a ‘commercial protection agreement’ which prevented the designer and the builder from selling a similar ferry to any competitor of the buyer operating a service from ports within 100 nautical miles of the ports served by the buyer for as long as the ferry continued to operate on the routes. The New South Wales Court of Appeal held that the restraint was unreasonable and hence unenforceable. The Court held that the doctrine of restraint of trade applied; however, it would appear that there was no argument to the contrary, and hence the Court did not need to consider the tests propounded in Esso. The Court noted various cases in which manufacturers and suppliers had been permitted to protect their sources of supply.[62] Likewise, the Court noted cases where suppliers had been permitted to protect their distribution outlets and customer base.[63]

Peters (WA)

[61](1995) 39 NSWLR 640.

[62]Ibid, 671; citing McEllistrim v Ballymacelligot Co-operative [1919] AC 548 and Heron v Port Huon Fruitgrowers’ Co-operative Association Ltd (1922) 30 CLR 315.

[63]Ibid; citing Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574 (‘Peters American Delicacy’), Esso (n 43) and Pamag (n 36).

In Peters (WA) Ltd v Petersville Ltd[64] (‘Peters (WA)’), the respondents manufactured ice cream across Australia and had sold their Western Australian business to the appellant. The respondents covenanted not to sell any ice cream which they had manufactured in Western Australia. The High Court upheld a ruling that the covenant was in restraint of trade and that the doctrine applied. The Full Court of the Federal Court had upheld the trial judge’s decision that the covenant was unreasonable and hence unenforceable. On appeal to the High Court, the only issue was whether the doctrine applied; there was no issue before the High Court as to reasonableness. The appellant argued that the covenant absorbed rather than sterilised the respondent’s capacity to service the market for ice cream, and that by application of Lord Pearce’s test in Esso, it failed to engage the doctrine. In a joint judgment, Gleeson CJ, Gummow, Kirby and Hayne JJ said that the sterilisation of capacity test should not be accepted in Australian common law. The Court also noted criticisms of the pre-existing freedom test.

Maggbury

[64](2001) 205 CLR 126.

The position of the pre-existing freedom test in Australia was further clarified by the High Court in Maggbury Pty Ltd v Hafele Australia Pty Ltd[65] (‘Maggbury’), decided four months after the decision in Peters (WA). Here, again examining the doctrine of restraint of trade in the context of a confidentiality agreement, three of the four judges who had formed part of the majority in Peters (WA) stated that the pre-existing freedom test was rejected in that case.

Specialist Diagnostic

[65](2001) 210 CLR 181.

In Specialist Diagnostic Services Pty Ltd v Healthscope Ltd[66] (‘Specialist Diagnostic’) the Court of Appeal of this Court upheld the validity of a covenant by a lessor of hospital premises in relation to its ability to utilise other parts of the hospital. The appellant conducted a pathology business and took a lease of premises from the predecessors of the respondent. In granting the lease the owners of the hospitals covenanted not to be concerned in a business similar to that which the appellant was conducting in hospitals (that is, pathology services) and not to grant any right to occupy any other part of the hospitals to any third party for the conduct of such business. The primary judge had held that the doctrine applied and that the covenantee had not established that the covenant went no further than was necessary to adequately protect its legitimate interest; accordingly, the Court at first instance found that the covenant was not reasonable and therefore unenforceable.
[66]Specialist Diagnostic (n 42).

The successors to the original covenantor argued both before the primary judge and before the Court of Appeal that the restraint of trade doctrine was not engaged on the basis that exclusivity provisions of the type in question were part of accepted practice and fell within the ‘trading society test’ formulated by Lord Wilberforce in Esso. The Court of Appeal noted that in Maggbury and Peters (WA) the High Court had rejected both the pre-existing freedom and the sterilisation of capacity tests, but that the High Court had declined to express a concluded view upon the trading society test.[67]
[67]Ibid, [55].

Their Honours continued:[68]

For present purposes, it is sufficient to deal with Symbion’s arguments on the assumption that the trading society test applies.

[68]Ibid, [56].

They then noted with approval that the trial judge had found no evidence before him of accepted practice relating to restraint of trade provisions in tenancy agreements concerning pathology facilities within hospitals; the trial judge had noted that no simple analogy could be drawn between exclusivity provisions in shopping centre leases and the case with which the trial judge was concerned.[69] Moreover, the Court of Appeal held that there was no authority which justified the postulation of a general exception for restraints of trade contained in a landlord’s covenant under a lease.[70]
[69]Ibid, [71]–[2].
[70]Ibid, [73].

It therefore considered that the doctrine of restraint of trade applied, but nevertheless held that the restraint was reasonable and hence enforceable. The Court of Appeal noted with evident approval that the desire of the flour miller in Pamag to increase its sales and the profitability of its operation was a ‘sufficient interest capable of being protected by a restraint of trade’,[71] as was the protection of the plaintiff’s business in the manufacture and sale of ice cream in Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candles Pty Ltd (‘Peters American Delicacy’).[72] The Court of Appeal concluded that the obligations undertaken by the pathology provider under its agreements which gave it a guarantee of pathology services at the hospital ‘provided ample consideration for the restraint.’[73]

Kosciuszko Thredbo

[71]Ibid, [47].

[72]Peters American Delicacy (n 63).

[73]Specialist Diagnostic (n 42) [50].

In Kosciuszko Thredbo Pty Ltd & Anor v ThredboNet Marketing Pty Ltd & Anor[74] (‘Kosciuszko Thredbo’) a tenant entered into two subleases with the owner of a resort in Thredbo. The subleases contained provisions that the sublessee must not use or permit the use of the word ‘Thredbo’ in connection with any business carried on at the premises without the owner’s consent.
[74](2014) 311 ALR 656.

The Full Court of the Federal Court said in obiter that the question of whether the restraint of trade doctrine applied depended upon whether the particular covenant had been accepted as part of a trading society, applying Lord Wilberforce’s test in Esso.[75] However, the Court considered that there was an absence of evidence of such acceptance and accordingly considered that the doctrine applied, holding that the covenantee had not discharged its obligation to establish that it was reasonable.[76] Accordingly, the covenant was unenforceable.
[75]Ibid, [68].
[76]Ibid, [68], [78], [79], [81], [83].

Contemporary English Authorities

Panayiotou

In Panayiotou and others v Sony Music Entertainment (UK) Limited[77] (‘Panayiotou’), Jonathan Parker J, sitting in the High Court, Chancery Division, upheld an exclusive recording contract between a popular singer and a recording company. The contract had been renegotiated or renewed or both on a number of occasions. The contract required the singer to deliver a certain number of albums to Sony and limited the singer to only distribute through Sony. His Honour held that the doctrine applied but that the restraint was reasonable, holding inter alia that Sony’s desire to sell as many records as follows was a legitimate interest.[78]
[77][1994] EMLR 229.
[78]Ibid, 361.

Amongst the singer’s arguments rejected by his Honour was one to the effect that whilst the singer was bound to distribute via Sony, the terms of the agreement did not in terms impose obligations on Sony to properly exploit the singer’s recordings; the Court regarded the contention that Sony might ‘put the recordings in a drawer’ as far-fetched, noting that Sony’s commercial interests lay in exploiting them to the full.[79]

Hummingbird

[79]Ibid, 236.

Similar in result, but via a slightly different process of reasoning, the High Court of Hong Kong, Court of Appeal, in Hummingbird Music Limited v Dino Acconci[80] (‘Hummingbird’) upheld the validity of an exclusive recording contract between a singer and a recording company. The Court of Appeal adopted the trial judge’s description of the arrangement as one akin to ‘a joint venture’,[81] with the record company providing the funding and organisation to promote the singer and the singer providing the ‘considerable musical talents’.[82] Unlike the decision in Panayiotou which grounded the validity of the agreement on the basis that the restraint was reasonable, in Hummingbird, it seems that the Court considered the doctrine did not apply, albeit that the Court’s reasoning was plainly influenced by both a finding that the contract in question was based on the Sony records standard form recording contract and the Court’s favourable consideration of Lord Pearce’s sterilisation of capacity test.

One Money Mail

[80][2009] HKCA 587.

[81]Ibid, [27].

[82]Ibid, [14].

In One Money Mail Ltd v RIA Financial Services,[83] (‘One Money Mail’) the Court of Appeal, Civil Division in the United Kingdom upheld the validity of a covenant in restraint of trade which applied to restrict an agent from working for a competitor during the currency of the contract and for the six months after its termination.
[83][2015] EWCA Civ 1084.

The Court considered that the covenant was reasonable and hence enforceable, but in the course of reaching its decision referred to Lord Pearce’s speech in Esso, and in particular his reference to the fact that:[84]

Sole agencies are a normal and necessary incident of commerce and those who accept the benefits of a sole agency must deny themselves the opportunities of other agencies. So, too, in the case of a film-star who may tie herself to a company in order to obtain from them the benefits of stardom.

[84]Ibid, [6].

The Court of Appeal upheld the validity of the covenant, not on the basis that the doctrine did not apply, but rather that it did apply and was reasonable in its application.

Peninsula Securities

In Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd[85] (‘Peninsula Securities’), the Supreme Court of the United Kingdom considered a covenant provided by the owner of a shopping centre in a lease with a retailer, in which the owner agreed not to allow any substantial shop to be built on the rest of the centre in competition with the retailer. The Court of Appeal in Northern Ireland had held that the covenant engaged the doctrine of restraint of trade. The retailer appealed to the Supreme Court against that ruling.[86]
[85][2020] UKSC 36.
[86]The question of reasonableness had not been determined and was to be the subject of a remitter from the Court of Appeal to the High Court to consider whether the covenant was reasonable.

In Peninsula Securities, the Court concluded that the pre-existing freedom test should no longer apply and that Lord Wilberforce’s ‘trading society’ test was the appropriate test to apply. Lord Carnwath agreed that the pre-existing freedom test should be discarded and that the so called ‘trading society approach’ was to be preferred; nevertheless his Lordship observed that the trading society approach ‘is no more than an imprecise guide’.[87]

Quantum

[87]Peninsula Securities (n 85), [60].

In Quantum Actuarial LLP v Quantum Advisory Ltd[88] (Quantum), decided after Peninsula Securities, the Court of Appeal in the United Kingdom considered the application of the doctrine to a bespoke services agreement entered into by commercial parties in the context of a corporate restructure. The relevant covenant arose following a restructure, the effect of which was to provide for the continuation of the business of ‘the legacy companies’ which would be continued by a new entity that sought to develop and expand it.
[88][2021] EWCA Civ 227.

However, the goodwill of the existing legacy business was to be ‘ring fenced’, with the clients of the legacy companies (‘the legacy clients’) remaining the clients of the legacy companies (or their assigns). The legacy clients would be serviced on behalf of the legacy companies by a new entity which would then receive a fee representing the cost to it of providing the services to the legacy clients. Thus, the new entity would not receive any profit element from servicing the legacy clients.

The new entity was prevented by a covenant from soliciting or enticing away any of the legacy clients in connection with certain defined services and from obtaining instructions from, or undertaking those services for, any of those clients, as well as from undertaking any services in relation to what was described as ‘pipeline business’ or in relation to new business introduced before 31 March 2008. The covenants were to apply throughout the 99-year duration of the services agreement (and a further 12 months beyond).

The High Court held that the doctrine did not apply to the covenants, but that if it did the covenants were reasonable. The Court of Appeal agreed. After noting the Supreme Court’s adoption of the trading society test in Peninsula Securities, and before proceeding to apply it to the covenant in question, the Court of Appeal acknowledged that ‘the approach of the [majority in the] Supreme Court raises, amongst other things, the question as to how private parties are to prove whether a contractual restriction is or is not “acceptable and necessary” as part of the structure of a trading society’.[89] It further noted that the Court itself in Peninsula Securities recognised that the test was an inherently difficult standard to define or apply.
[89]Ibid, [48].

The Court of Appeal accepted that it was clear that the Supreme Court in Peninsula Securities rejected the ‘pre-existing freedom test’ but did not accept that at the same time it had laid down the trading society test as the ‘single test of universal application’.[90] The Court of Appeal noted that the trading society test fitted neatly with the facts in Peninsula Securities, which was a case involving the grant of a long-term lease of part of a supermarket. In rejecting the notion that the trading society test applied in each and every case as the single relevant test, the Court of Appeal noted that ‘any other approach would lead to the result that every contract that did not satisfy the trading society test, for example because it was entirely novel, would automatically fall within the doctrine’ and expressed the view that that would be a ‘most surprising result’.[91]
[90]Ibid, [71].
[91]Ibid, [73].

The High Court held that whether the contract as a whole remained effective depended upon whether it could be inferred that the parties did not intend to contract at all unless effect could be given to cl 8. The Court described it as absurd to say that the parties, having agreed on everything essential, intended that the agreement should be nullified if effect could not be given to cl 8. As the Court noted, another way of examining the question was to ask whether cl 8 was severable from the rest of the agreement.[136]
[136]Ibid, 427.

The High Court considered that there was no basis for an inference that the parties did not intend to contract unless effect could be given to cl 8.

By way of a similar process of reasoning, though leading to a different result, in Brew v Whitlock (No 2),[137] a decision of the Court of Appeal of this Court, it was held that a contract for the sale of land was uncertain. The contract included a condition by which the purchaser was required to grant a lease to a third party, but which specified neither the date of commencement of the term agreed to be granted, nor the period of such lease, nor the rental.
[137][1967] VR 803.

The Court held that the condition obliging the purchaser to grant a lease to the third party was too uncertain to take effect. In so holding, the Court said that the test as to whether an uncertain provision in a contract can be severed so as to save the whole contract from invalidity is whether it was the intention of the parties that the balance of the contract, apart from the impugned provision, was or was not to be conditional on that provision taking effect.[138] Having regard to the terms of the contract considered as a whole and the admissible extrinsic evidence, the Court held that both parties should be taken to have regarded the relevant condition as a material provision in their bargain and not to have intended to make a contract which would operate without it. Accordingly, the condition was not severable and the whole contract was void.
[138]Ibid, 807.

In the present case, the analysis must proceed upon the basis that cl 16.4 has not been agreed. The relevant question is whether it can be inferred that the parties did not intend the balance of the EDA to take effect unless and until the parties had agreed on the time period in cl 16.4.

In my opinion, it is clear that the parties did not intend that the EDA was not to take effect unless the time period was agreed and then specified in cl 16.4. First, the parties had agreed upon the essential terms of the EDA both in 2010 and 2015; the term had been agreed; the nature of the products the subject of the agreement had been agreed; the Restraint had been agreed; and critically the price payable by Mecca to Hourglass had been agreed. The clause not agreed was collateral to and independent of these essential elements.

Further, cl 16.4 operates only in limited and somewhat unusual circumstances. Under cl 12, either party can bring the agreement to an end if the other party is unable for a continuous period of 28 days to distribute the product because of a cause beyond the reasonable control of that party. In other words, if Mecca is unable for a continuous period of 28 days to distribute the Hourglass product because of a cause beyond the reasonable control of Mecca, Hourglass is entitled to bring the agreement to an end. So too if the roles are reversed: if Hourglass is unable to supply the product to Mecca because of a cause beyond Hourglass’s reasonable control, Mecca is entitled to bring the agreement to an end. Such an arrangement makes obvious commercial sense; if one party is unable to perform, the other party loses the benefit that it has gained under the contract as a consequence of the other party’s inability to perform. Those rights remain.

Further cls16.1, 16.2 and 16.3 also contain a measure of protection for the party who is unable to perform; provided the matters the subject of cls 16.1-16.3 arise, the party who is unable to perform is not liable to the other party as a consequence. This too makes sense and is in accordance with the obvious commercial sense having regard to the nature of the parties respective obligations under the agreement.

What has not been agreed, and hence that which is unenforceable is cl 16.4, which entitles the non-performing party to terminate.

In other words, in its operative effect, the clause would allow for a termination by Mecca where Mecca is unable to perform because of a cause beyond its reasonable control, notwithstanding that Mecca’s inability to perform does not in any way render it liable to Hourglass. To reverse the role, if Hourglass is unable to perform due to a cause beyond its reasonable control, it cannot be liable to Mecca for its failure to perform; Mecca, as the party who is not receiving the benefit of Hourglass’s performance under the agreement, can terminate the agreement as per cl 12.5, but Hourglass, the non-performing party, could not as the time period in cl 16.4 has not been agreed. The circumstance in which cl 16.4 could apply therefore is if a party, due to the highly unusual events of a cause beyond its reasonable control, cannot perform and yet wishes to take advantage of this highly unusual event, notwithstanding it not being liable to the other party, to bring the agreement to an end.

In my view, it defies credulity to suggest that the fact that the parties did not agree on the relevant time period in respect of the operation of a clause, which operates in such unusual circumstances, meant that they did not otherwise intend to be bound. Further, it is significant in my view, and speaks loudly as to the absence of the importance of the relevant clause, that both parties overlooked the need to insert the relevant number of days in cl 16.4. Not only did they fail to do so in 2010, but they again failed to pick it up in August 2015. Moreover, the fact that the clause had not been completed apparently never came to the attention of either party until shortly prior to the trial commencing. Those matters of objective fact in my view point squarely to the insignificance of the nature of the matter not agreed.

It follows therefore, in my view, that the fact that the time period in cl 16.4 has not agreed does not have the effect that the agreement is unenforceable and void as a consequence for uncertainty.

Costs thrown away

As noted above, this proceeding was commenced by Mecca on 14 December 2020. Mecca sought declaratory relief with respect to the service by Hourglass of a letter of termination sent on or around 7 May 2020 (‘the purported termination’). The purported termination was on the basis that Mecca had been unable for a continuous period of 28 days to distribute the product because of a ‘Cause Beyond the Reasonable Control of Mecca’. Hourglass in its original defence and counterclaim dated 15 December 2020 sought to justify the purported termination on the basis that upon its proper construction, the Distribution Clause (cl 3.1) obliged Mecca to sell or distribute Hourglass’s products (or any of them) from its retail outlets in addition to sales via internet sites and/or mail order catalogues selected from time to time by Mecca.

Thus, the validity of the Hourglass purported termination turned upon first, whether as a matter of construction, the Distribution Clause obligated Mecca to sell or distribute Hourglass’s products from its retail outlets as well as from its internet sites and/or mail order catalogues; and secondly, if that was so whether Mecca’s stores had been closed on and from 30 March 2020 and remained closed for a period of 28 days (‘the Store Closure Allegation’).

On 28 July 2021, less than two weeks prior to the trial date, Hourglass obtained leave to file and serve an amended defence and counterclaim (‘amended defence and counterclaim’). Relevantly for present purposes, in the amended defence and counterclaim Hourglass abandoned its allegation of the Store Closure Allegation and the purported termination and obtained leave to amend its defence accordingly.

Previously, the Rules provided that an amendment would only be allowed on the terms that the cost of the application for leave to amend occasioned by and thrown away in consequence of the amendment were paid by the party amending in any event. However, the Supreme Court (General Civil Procedure) Rules 2015 (Vic) now provide that where a pleading is amended such costs are to be part of the parties’ costs in the proceeding unless the Court otherwise orders.[139]
[139]Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 63.17.

Hourglass concedes that it is appropriate that the Court otherwise order in this instance and does not oppose an order that it pay such costs on the standard basis.

Mecca seeks an order that such costs be paid on an indemnity basis.

The parties are in agreement as to the relevant principles; that is to say, that the Court’s power to make orders with respect to costs is discretionary,[140] but that the usual position is that the successful party is entitled to costs on the standard basis. Nevertheless, the Court may order indemnity costs where the circumstances warrant departure from the usual rule, including whether conduct of a party bears a ‘special or unusual feature’, or some relevant delinquency.[141]
[140]Supreme Court Act 1986 (Vic), s 24(1).
[141]Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, 233.

The categories of cases in which the Court may exercise its discretion to award indemnity costs are not closed.[142] However, the authorities establish that the Court may exercise its discretion to order indemnity costs in circumstances where:
[142]DS Clarke Nominees Pty Ltd v Adder Holdings Pty Ltd [2015] FCA 277, [13].

(a) a party’s conduct causes loss of time to the Court and to other parties;

(b) proceedings have been commenced or continued in wilful disregard of known facts or clearly established law;[143]

(c) an unsuccessful defendant causes other parties to the litigation to incur costs far beyond what they could reasonably have been expected to incur in litigation on the genuine issues;[144] and

(d) where a party has made allegations in a proceeding never to have been made, or has unduly prolonged a case by making groundless contentions.[145]

[143]J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Works (WA Branch) (No 2) (1993) 46 IR 301, 303.

[144]Degmam Pty Ltd (in liq) v Wright (No 2) [1983] 2 NSWLR 354, 358.

[145]Ragata Developments Ltd v Westpac Banking Corporation (1993) 217 ALR 175, 177.

The Court’s discretion with respect to costs must also be considered having regard to the Civil Procedure Act 2010 (Vic) (the ‘Civil Procedure Act’). Non-compliance with the overarching obligations imposed by the Civil Procedure Act may support the exercise of the Court’s discretion to order costs on an indemnity basis.[146]
[146]Wilson v Waigani Pty Ltd (No 2) [2018] VSC 569 [8]-[10], [19].

The overarching obligations in the Civil Procedure Act relevantly include the following:

(a) a paramount duty to the Court to further the administration of justice in relation to any civil proceeding in which the person is involved, including any interlocutory application or proceeding;[147]
[147]Civil Procedure Act 2010 (Vic), s 16.

(b) an obligation not to make any claim that is frivolous, vexatious, an abuse of process or does not, on the factual and legal material available at the time of the making claim, have a proper basis;[148]

(c) an obligation to use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to the complexity or importance of the issues in dispute and the amount in dispute;[149] and

(d) an obligation to use reasonable endeavours in connection with the civil proceeding to act promptly and minimise delay for the purposes of ensuring the prompt conduct of the civil proceedings.[150]

[148]Ibid, s 18.

[149]Ibid, s 24.

[150]Ibid, s 25.

Mecca submits that the Court should order that Hourglass pay Mecca’s costs thrown away by reason of the amendments on an indemnity basis for three reasons:

(a) first, it submits that Hourglass did not have a proper factual basis to make the Store Closure Allegation;

(b) secondly, on a number of occasions and in correspondence, both prior to and after the commencement of the proceeding, Mecca advised Hourglass that it would seek indemnity costs in respect of the Store Closure Allegation and the related purported termination; and

(c) thirdly, Mecca submitted that the Hourglass purported termination was based on the untenable construction that the Distribution Clause (cl 3.1) obligated Mecca to sell or distribute Hourglass products from its retail stores.

I do not accept that the purported termination was based on an untenable construction of the Distribution Clause (cl 3.1). The construction of the Distribution Clause is a matter of law. Hourglass’s construction of the clause was not untenable; the relevant clause required Mecca to ‘sell or distribute [Hourglass’s] products from [Mecca’s] retail outlet(s), internet sites and/or mail order catalogues selected from time to time by [Mecca] (emphasis added). It was not untenable to contend that the ‘and/or’ alternative applies to internet sites and mail order catalogue only. The competing argument that it is permissible to treat all three of internet sites, mail order and retail outlets as being subject to the and/or conditionality as advocated by Mecca is not the only tenable construction available.

Further, whilst it is clear that Mecca repeatedly and clearly put Hourglass on notice that unless it withdrew the purported termination notice, Mecca would apply for indemnity costs, the mere foreshadowing of the intention to seek indemnity costs of itself does not constitute a sufficient or unusual feature such as to warrant the making of an indemnity costs order.

More pertinent is to the extent to which the foreshadowing of an intention to seek indemnity costs was accompanied by material from Mecca which should have put Hourglass on notice that the Store Closure Allegation was unsustainable.

In order to consider this aspect of Mecca’s costs submission, it is necessary to have brief regard to the relevant sequence of events.

It is common ground that all Mecca stores in Australia and New Zealand closed on 30 March 2020. It is also common ground that Mecca made a presentation to Hourglass on 5 May 2020 concerning closure of its stores.

The executive summary contained in this presentation stated:

•COVID-19/March 30^th – all Mecca stores close and Mecca pivots to 100% ecommerce business …
•whilst the outlook for store opening is unclear, we will continue to innovate,
•        Mecca pick up
•        Virtual Meccaland
•        Mecca influencer army

The Mecca presentation continued to describe the COVID-19 impact to Mecca:

• Closed 14 NZ doors on 26 March 2020
• Closed 94 AU doors on 30 March 2020.

There was no suggestion in the presentation that as at 5 May 2020 any Mecca stores had reopened or that any reopening was planned.

Further, Mecca made statements on social media:

(a) on 23 and 25 April 2020 which referred to its stores remaining temporarily closed and that Mecca could not confirm whether Mecca stores would reopen but would let its customers know right away;

(b) that while Mecca stores were not yet open (at 25 April 2020) there were eight stores operating nationwide on a pilot call and collect basis.

On 14 May 2020, Arnold Bloch Leibler (‘ABL’) acting for Mecca disputed the validity of the purported termination and its reliance on cl 12.5 of the EDA and characterised it as misconceived for a number of reasons including that:

[Mecca] has continued to distribute the products through its highly successful online channel and has supported this with increased marketing and advertising spend.

The burden of the letter was that the purported termination was ineffective because the distribution of products had continued online. The letter requested that Hourglass withdraw the purported termination notice and advised that if that request was not complied with proceedings would be commenced without further notice, and that it would seek the costs of such proceedings on an indemnity basis.

On 24 September 2020, ABL wrote to Hourglass again setting out the reasons why the purported termination was unlawful and referenced the earlier letter of 14 May 2020. Again, ABL relied on the sale or distribution of Hourglass products through Mecca’s highly successful online channel and supported by increased marketing and advertising spend.

On 20 October 2020, ABL again wrote to Hourglass seeking withdrawal of the notice of termination and asserting:

Our client has continued to sell or distribute Hourglass products at all material times. Whilst our client’s retail outlets were closed for a period of time due to COVID-19 pandemic restrictions, our client continued to sell the product online during this period.
(emphasis added)

The letter again requested that the purported notice of termination be withdrawn, failing which proceedings would be commenced.

On 5 November 2020 ABL wrote to Hourglass’s solicitors, Baker and Mackenzie advising, among other things, that:

Our client has continued to sell or distribute your client’s products including through its online store and its click and collect store operations at all times.
(emphasis added)

The letter set out a graph showing the quantum of sales of Hourglass products achieved by Mecca in each month from January 2020 to September 2020. The letter also stated that:

Our client’s entire network of retail outlets was closed due to the COVID-19 pandemic for less than 28 days.

That assertion was repeated in a further letter from ABL dated 12 November 2020 in which ABL additionally asserted, among other things, that:

On any objective view of the undisputed facts – including the sales data in our letter dated 5 November 2020 – our client has continuously distributed your client’s products. The fact that the majority of our client’s sales were, during a very short period of the COVID-19 pandemic, achieved through online means does not mean that “distribution” within the meaning of clause 12.5 has not occurred.

By letter dated 19 November 2020, Baker and Mackenzie responded to the letter from ABL of 12 November 2020. The letter stated inter alia, that:

5You did not suggest that Mecca’s retail outlets had not been unable, for a continuous period of 28 days, to distribute Hourglass products.
6Hourglass’s understanding based on communications from Mecca and from your firm has been that Mecca’s retail outlets were closed for a continuous period of 28 days or more commencing on 30 March 2020.
7In recent correspondence (you letters dated 5 and 12 November 2020) you say that Hourglass cannot establish that Mecca’s entire network of retail stores was closed due to the COVID-19 pandemic and associated government orders for a continuous period of 28 days.
8Your letters of 5 November and 12 November 2020 do not set out what Mecca contends to be the true position, only that Mecca contends that Hourglass cannot establish the position as set out in paragraph 6 above.
9This should not be a matter which is contest between us, or on which Mecca will rely solely because Mecca takes the position that the onus will be on Hourglass to establish a continuous period in which the retail outlets were unable to distribute Hourglass cosmetics of at least 28 days.

10 Would you please:
(a)let us know, in clear terms whether Mecca contends that any of its retail outlets distributed Hourglass products during a period of 28 days commencing 30 March 2020; and if so

(b)provide details of the locations of the retail outlets which did distribute Hourglass in that period and the dates upon which they did so.

On 23 November 2020, ABL wrote to Baker and Mackenzie, inter alia, that:

1Our client’s retail stores did sell or distribute your client’s products in the 28 day period commencing on 30 March 2020; and, more specifically,
2 Our client’s Australian retail stores sold and distributed your client’s product to passer-by traffic as well as call and collect and virtual host services on and from 24 April 2020.

On 23 November 2020, Baker & McKenzie requested clarification as to whether the reference to Mecca’s Australian retail stores having sold and distributed Hourglass’s product to passer-by traffic meant that Mecca’s retail outlets were open and distributing products to customers in store on and from 24 April 2020, and additionally requested details of the location of the retail outlets which allegedly distributed Hourglass products in the 28 day period commencing 30 March 2020, and the dates upon which they did so.

On 25 November 2020, ABL advised that Mecca’s Australian stores opened on 24 April 2020 and identified the eight stores which so opened. The letter further advised that the reference to distribution to passer-by traffic referred to sales to retail customers entering the store in the ordinary course. The letter further noted that this should put an end to the matter and requested the withdrawal of the purported notice of termination and advised that if proceedings needed to be commenced, the letter would be relied upon in support of an indemnity costs order.

By letter dated 26 November 2020, Baker & McKenzie sought further clarification and confirmation that all eight stores were open on 24 April 2020 during their ordinary pre-COVID business hours; that the eight stores were also open on 25 April 2020 and that Hourglass cosmetics were available for sale from, and in fact sold from, each of the eight named Mecca stores on 24 April 2020. The letter requested the provision of documentation which evidenced the position in answer to those questions.

On 27 November 2020, ABL responded to that request by confirming that the eight stores were open on 24 April 2020 operating very close to ordinary trading hours; that the all eight stores did not open on 25 April 2020 but reopened on 26 April 2020; that all eight stores contained stock on and from 24 April 2020; and that all eight stores sold Hourglass’s products on and from 24 April 2020. The ABL letter then enclosed ‘a spreadsheet extracted from our client’s accounting systems showing the value of sales of your client’s products from each of the eight stores’.

The spreadsheet listed the total Hourglass sales at the eight identified Mecca stores on a daily basis from 24 April 2020 under the heading ‘Total B and M Stores’ (brick and mortar stores).

On 1 December 2020, Baker & McKenzie sought further clarification as to the matters the subject of the spreadsheet, and in particular asked whether the sales on 24 April 2020 and 26 April 2020 were all to passer-by traffic, were not to passer-by traffic, or were in part to passer-by traffic and in part to click and collect or other means of sales, and if so whether Mecca had information as to the division between those sale methods.

On 2 December 2020, ABL responded and advised that on 24 April 2020 in respect of six of the eight stores all sales were to passer-by traffic and in respect of two of the eight stores, sales were to passer-by traffic and via call and collect; advised that on 26 April 2020 all sales were to passer-by traffic and stated that ‘to be absolutely clear, the reference to “passer-by traffic” means sale to ordinary retail customers’.

In circumstances where the purported termination had not been withdrawn, on 14 December 2020, Mecca commenced this proceeding.

When the matter came on for directions on 29 January 2021, Hourglass’s senior counsel made statements at the directions hearing to the effect that the position regarding the opening dates of Mecca’s stores was unclear.

After the directions hearing, ABL wrote to Baker & McKenzie and referring to the statements made during the directions hearing enclosed further copies of their previous letters of 25 November 2020, 27 November 2020, and 2 December 2020, and advised that the documents and information demonstrated unequivocally that eight of the retail stores opened to the public on 24 April 2020 and that those stores sold Hourglass products on and from 24 April 2020.

On 15 February 2021, Hourglass filed its defence and counterclaim which included an allegation that Mecca had ‘closed all of its retail outlets in Australia on and from 30 March 2020 (which) remained closed for a period of 28 days’.

The defence and counterclaim was accompanied by a proper basis certificate signed by Hourglass’s solicitor. The material relied upon in support of that allegation comprised a purported admission contained in ABL’s letter of 14 May 2020, a presentation given by Mecca to Hourglass on 5 May 2020, and social media captions and comments made in March 2020 and April 2020.

The ABL letter sent after the directions hearing stated that the defence and cross-claim had been filed in apparent disregard of the correspondence which had taken place between November 2020 to December 2020, and again on 1 February 2021. The letter of 17 February 2021 concluded by requesting that Baker & McKenzie indicate the proper basis on which it maintains the allegation that the stores had been closed on and from 30 March 2020 for a period of 28 days and in particular:

We expect your response to explain the basis on which your client disputes our client’s accounting records that we have provided to you, which show that sales of your client’s products were achieved from eight stores to ordinary passer-by traffic on 24 April 2020 and onwards.

On 19 February 2021, Baker & McKenzie advised that there was an inconsistency between the social media posts and the matters contained in ABL’s letters and that ‘this inconsistency is the matter of factual controversy’ which Hourglass is entitled to have determined by the Court.

On 11 June 2021, I ordered that the parties confer and agree categories of documents for discovery and that failing agreement, any application for discovery be made by 18 June 2021. By that stage Mecca had filed its witness statements in chief. Ms Horgan’s statement confirmed that the 8 stores had re-opened on 24 April 2020 and annexed the extract from Mecca’s accounting system sent by ABL to Baker & McKenzie on 27 November 2020.

By 23 June 2021, the parties had not agreed on the all categories of discovery. In particular, Hourglass sought general discovery of matters relevant to the Store closure allegation. Mecca had opposed the request for general discovery of this category on the basis that the witness statement which had been provided by Ms Horgan annexed business records which show sales from the number of Mecca stores on 24 April 2020. The letter outlined the types of documents that would be expected to be discovered, which included all internal documents of Mecca from the period 1 March 2020 to 1 June 2020 relating to the closure and reopening of stores; public statements during that period relating to the availability to the public of Mecca’s retail outlets; and records pertaining to the details of sales of Hourglass products other than by click and collect or call and collect made by Mecca retail stores in the period from 29 March 2020 to 26 April 2020, including the amount for purchase, the products purchased, and the identity of the customer.

At the directions hearing on 25 June 2021, Mecca’s counsel submitted that the discovery sought was disproportionate and that Mecca had sought to address the issue in its evidence and discovery to date on a proportionate and sensible basis. On 25 June 2021, I declined to make orders for general discovery relating to the Store Closure Allegation but made orders for discovery of certain categories relevant to that allegation in the terms adverted to as indicative components of that category as set out in the Baker & McKenzie letter of 23 June 2021. In making that order, I accepted that the categories were relevant to a pleaded issue but noted that if Mecca’s position was vindicated by the fuller discovery then there may well be costs consequences for Hourglass.

Subsequently, Mecca provided two further witness statements, a witness statement of David Cumberland, Mecca’s head of finance and company secretary, and a further witness statement of Marita Burke. I do not know if the service of these statements was in lieu of or additional to the further discovery.

Mr Cumberland’s witness statement explained Mecca’s internal database system from which the data in the exhibits to Ms Horgan’s statement (that is, the spreadsheets) were directly derived. Mr Cumberland also in his statement specifically explained the method by which Mecca’s electronic database is able to distinguish between the sales of Hourglass products made during the relevant period to passer-by traffic and via call and collect. Mr Cumberland’s witness statement also exhibited in respect of the eight stores copies of digital sales receipts recording the sale of Hourglass products to consumers from those stores on 24 April 2020 and 26 April 2020, and an extract of the timesheet data showing the staff who were employed at those stores on the relevant dates. Ms Burke’s supplementary statement exhibited an email sent to senior executives of Mecca on 20 April 2020 which referred to the reopening of the eight Mecca stores on and from 24 April 2020.

Accordingly, on 9 July 2021, ABL wrote to Baker & McKenzie requesting the withdrawal of the notice of termination and foreshadowed a request to seek costs orders against Baker & McKenzie as well as indemnity costs against Hourglass.

Shortly prior to 28 July 2021, Hourglass gave notice that it was abandoning the store closure allegations.

Hourglass submits that at the time that Mecca commenced this proceeding on 14 December 2020, Hourglass had a proper, even ‘compelling’, basis to contest Mecca’s assertions. Hourglass pointed to the alleged inconsistencies in the explanation offered by Mecca and further noted that the spreadsheets that had been provided on 22 November 2020 were not business records pursuant to s 69 of the Evidence Act 2008 (Vic) (‘Evidence Act’) as they had been produced for the purposes of the dispute between Mecca and Hourglass and not in the ordinary course of Mecca’s business. Hourglass submits that prior to the filing of the witness statement of David Cumberland dated 9 July 2021, which explained how the spreadsheets had been compiled, they were inadmissible and also liable to be excluded or limited in accordance with ss 135 and 136 of the Evidence Act.

To establish Hourglass had no proper basis to make such an allegation from 14 December 2020 onwards is a high hurdle for Mecca to jump. It is a serious thing to suggest that Hourglass’s solicitor did not have a proper basis when verifying the making of the Store Closure Allegation.

Hourglass did have in its possession some material from Mecca which was supportive of Hourglass’s contentions, namely the executive summary of material provided in the 5 May 2020 presentation and some social media posts. In my view there was a proper basis to commence and maintain the proceeding.

The case was, however, far from compelling. Whilst there was material in its possession which supported the Store Closure Allegation, there was a series of communications from ABL on Mecca’s behalf to the contrary and which included the spreadsheets. True it is that the extracted spreadsheets had not been proved as business records such as to be admissible as evidence, they nevertheless represented credible extracts of same, and were provided as part of a cost effective attempt to verify something which was far easier for Mecca to prove than Hourglass, namely whether the eight stores had opened and sold product to passer-by traffic.

Whilst therefore Hourglass had a proper basis to make and maintain the Store Closure Allegation, the evidence available to support it was far from robust. When Hourglass insisted upon Mecca providing further and more detailed verification when it sought the further discovery orders which it did from 25 June 2021, it did so eschewing Mecca’s good faith and proportionate attempts to establish this in a cost effective manner. In my view, by pressing for the more detailed and costly verification, Hourglass did so at its own peril as to costs. The failure to resolve this fact finding exercise in a cost effective and proportionate manner in my view is sufficient to entitle Mecca to costs on an indemnity basis from the date of the directions hearing on 25 June 2021 to the abandonment of the Store Closure Allegation defence on 28 July 2021. Otherwise, the costs thrown away will be payable by Hourglass on the standard basis. The costs of this costs dispute shall be payable on a standard basis.

Conclusion

In the circumstances, Mecca will be entitled to the declaratory and ancillary relief that it seeks in its writ. The Hourglass counterclaim will be dismissed. I will hear the parties as to the appropriate form of orders and as to costs.

[2021] VSC 761

19 November 2021