Rickard & Wilson & Active Safety Services Pty Ltd v Testel Australia Pty Ltd
[2019] SASCFC 16
•21 February 2019
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
RICKARD & WILSON & ACTIVE SAFETY SERVICES PTY LTD v TESTEL AUSTRALIA PTY LTD
[2019] SASCFC 16
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Kelly and The Honourable Justice Bampton)
21 February 2019
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - EXCESSIVE OR INADEQUATE DAMAGES
DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT - REMOTENESS AND CAUSATION - LOSS OF PROFITS
DAMAGES - GENERAL PRINCIPLES - EXEMPLARY, PUNITIVE AND AGGRAVATED DAMAGES
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS - INDEMNITY COSTS - PARTICULAR CASES - UNREASONABLE CONDUCT OR DELINQUENCY RELATING TO PROCEEDINGS
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS - APPEALS AS TO COSTS
EQUITY - EQUITABLE REMEDIES - ACCOUNTS AND INQUIRIES
Appeal against an order for damages in favour of the respondent for breach of contract.
The respondent is the franchisor of an electrical testing business. T&T Rickard Pty Ltd (‘T&T’) was a franchisee of the respondent. The first appellant was the former director of T&T and was also the guarantor of T&T’s contractual obligations to the respondent contained in a franchise deed. The second appellant had been an employee of T&T. The second appellant was later the sole registered director of the third appellant. The third appellant is an electrical testing business.
A District Court Judge found the first appellant liable for breach of the franchise deed and restraint covenant. He found the second and third appellants had interfered with the contractual relations between the respondent and the first appellant. Damages were awarded against all the appellants.
The appeal is in respect of assessment of damages only. The appellants contend that the trial judge erred:
1. in calculating the damages in relation to the loss of opportunity of the respondent to provide electrical testing services to Flinders Medical Centre by reference to one hundred percent of the revenue derived by the third appellant over the whole of the period between the date of the breach of covenant and the 30 September 2014, the last date of the restraint period contained within the covenant;
2. in failing to properly assess and quantify damages in relation to the breach by the first appellant of the restraint covenant contained in the franchise deed and in relation to the tort of interference with contractual relations as found against the second and third appellants;
3. in assessing damages in relation to the respondent’s loss of opportunity to earn revenue from a client, ‘Newmont’, by reference to 80% of the revenue derived by the third appellant during 2012;
4. in ordering that the first appellant pay the respondent’s costs of the cross-action on an indemnity basis;
and on numerous other grounds.
The respondent cross-appealed on the basis that the trial judge erred:
1. in declining to award exemplary damages against the second and third respondents;
2. in declining to order an account of profits as a restitutionary equitable remedy against the second and third respondents.
Held, per Kelly J (Kourakis CJ and Bampton J agreeing), partially allowing the appeal and dismissing the cross-appeal:
1. Appeal allowed in respect of damages assessed for loss of the opportunity to provide electrical testing services to Flinders Medical Centre;
2. Those damages discounted by 15% on account of contingencies;
3. All other appeal grounds dismissed;
4. Cross-appeal dismissed.
Shaw v Yarranova Pty Ltd (2017) 252 FCR 267; Gray v The Motor Accident Commission (1998) 196 CLR 1; House v King (1936) 55 CLR 499; Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157; Robinson v Harman [1848] 1 EX 850; 154 ER 363, applied.
Testel Aust P/L v Rickard & Ors [2017] SADC 31; Testel Aust P/L v Rickard & Ors (No 2) [2017] SADC 69; Farah Constructions Pty Ltd and Others v Say-Dee Pty Ltd (2006) 130 CLR 89, discussed.
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Testel Australia Pty Ltd v KRG Electrics Pty Ltd and Anor (2013) SASC 91, considered.
RICKARD & WILSON & ACTIVE SAFETY SERVICES PTY LTD v TESTEL AUSTRALIA PTY LTD
[2019] SASCFC 16Full Court: Kourakis CJ, Kelly and Bampton JJ
KOURAKIS CJ: I would allow the appeal in part and dismiss the cross appeal for the reasons given by Kelly J.
KELLY J: This is an appeal against an order for damages made by a District Court Judge following trial.
The respondent, Testel Australia Pty Ltd (‘Testel’), is the franchisor of an electrical testing business.
The first appellant, Mr Rickard, was the former director of T&T Rickard Pty Ltd (‘T&T’). T&T was a franchisee of Testel. Mr Rickard was also the guarantor of T&T’s contractual obligations to Testel contained in a franchise deed.
The second appellant, Mr Wilson, had been an employee of T&T. Mr Wilson was later the sole registered director of the third appellant, Active Safety Services Pty Ltd (‘Active’). Active is an electrical testing business in many ways similar to T&T.
Testel brought proceedings in the District Court against each of the appellants. Testel alleged that Mr Rickard and Mr Wilson had embarked upon a scheme to set up and operate Active together for the specific purpose of providing electrical testing services to one of Testel’s clients, the Flinders Medical Centre (‘FMC’). Testel brought proceedings against Mr Rickard for various alleged breaches of contract contained in the relevant franchise deed. These included the breach of a restraint covenant and obligations to conduct the franchise on a full-time basis and continue servicing clients. Testel brought proceedings against Mr Wilson and Active for the tort of inducing the breaches of contract.
Testel claimed various remedies, including damages, against the appellants. In the alternative, Testel claimed an account of profits against Mr Wilson and Active. Testel further claimed exemplary damages against Mr Wilson and Active. Testel also claimed injunctions in respect of confidential information.
The appellants each defended the claims made by Testel. The appellants’ defence case was effectively that Active had been set up solely by Mr Wilson. Mr Rickard had only provided general business advice when the company started up, before becoming an employee.
Mr Rickard maintained a cross-action, which was incorporated into his defence, claiming that a collateral agreement was entered into at the time the original franchise deed was executed. He claimed that Testel had breached this collateral agreement, as well as various provisions of the former Trade Practices Act 1974 (Cth). Mr Rickard claimed declarations that the guarantee and the restraint covenant contained in the franchise deed were void, as well as other remedies. Testel denied the existence of the alleged collateral agreement.
The Judge found for Testel on liability. His Honour awarded damages against the appellants in the sum of $144,812.63 plus interest. Damages were awarded for the loss of opportunity to obtain a benefit from the customers lost by Testel because of the appellants’ wrongful conduct.
His Honour made injunctive orders against Mr Rickard in respect of the confidential information and dismissed the cross-action. His Honour did not award exemplary damages, nor an account of profits, against Mr Wilson or Active. His Honour ordered that the appellants pay costs on an indemnity basis, both as to the action and the cross-action.
The appeal
The appellants do not appeal against the findings of liability made by his Honour. The appellants confine their appeal to the assessment of damages.
The appellants’ primary contention is that the Judge erred in assessing damages in relation to the loss of opportunity of Testel to provide electrical testing services to the FMC by reference to 100% of the revenue derived by Active over the period of April 2011 to 30 September 2014. This alleged error can be further summarised into the following grounds of appeal:
The Judge erred in failing to make a distinction between the breach of the restraint covenant and the positive obligation to continue operating the franchise on a full-time basis (NOA 3.1-3.3).
The Judge erred in finding that had it not been for Active’s incumbency, then Testel would have been the only contender for the FMC work after June 2013 when Spotless acquired the contract (NOA 3.4).
The Judge erred in assessing damages for Testel’s loss of opportunity to earn revenue from FMC over the period of April 2011 to 30 September 2014 by including the revenue earned by Active from thermal imaging services provided by it to FMC from May 2013 to 30 September 2014 (NOA 3.5-3.6).
The Judge erred in effectively treating all of Testel’s overheads as being fixed in awarding damages comprised of the revenue lost without deduction by Active (NOA 3.7).
The appellants further appeal the award of damages in relation to matters that do not specifically concern the FMC. They are as follows:
The Judge erred in making the finding regarding the likelihood of Testel reclaiming the work from the Newmont mine at a probability estimate of 80% (NOA 3.8).
The Judge erred in ordering that Mr Rickard pay Testel’s costs of the cross-action on an indemnity basis rather than a party/party basis (NOA 3.10).
By cross-appeal, Testel claims the Judge erred in declining to award exemplary damages against Mr Wilson and Active. Testel claims an amount of $50,000 in such damages. Testel also claims the Judge erred in declining to order an account of profits against Mr Wilson and Active.
Prior to the hearing before this Court, the appellants indicated they no longer pressed grounds 3.9A and 3.9B contained in the Second Notice of Appeal. The Court was also advised that Testel no longer pressed paragraphs 4, 5 and 6 of the Second Notice of Alternative Contentions, nor the interlocutory application to adduce fresh evidence filed 22 December 2017.
Background
Before considering the grounds of appeal, it is necessary to briefly outline the background and facts of the matter.
Testel
Testel is a franchise business which provides electrical testing services. It is operated by its sole director Mr John Oszczypok. Testel provides electrical testing services to its clients so that they comply with occupational health and safety requirements. It generally charges its clients an agreed amount per appliance tested.
Testel provides its electrical testing services to clients via franchisees. The dealings with clients to arrange testing, billing and payment are all undertaken by Testel, rather than the franchisees. Testel collects the fees from clients and, after deducting its franchise fee of 22% plus marketing and other charges, pays the balance to the franchisee. Testel also allocates clients to its franchisees.
T&T
T&T was incorporated in 2004 for the purpose of entering into a franchise agreement, by deed, with Testel. Its directors were Mr Rickard and Mrs Tracey Rickard (Mr Rickard’s wife). Mr Rickard also executed a document which guaranteed the performance by T&T of its obligations under the deed. The 2004 deed and guarantee were executed on 14 September 2004. The deed was renewed on similar terms in 2007 and 2010.
There was a dispute at trial regarding the validity of the 2010 deed. The trial Judge found that the 2010 deed was validly executed. There is no appeal on this finding.
The Flinders Medical Centre
In around April 2005, Mr Bob Crossman, who was at the time the maintenance manager of FMC, contacted Mr Oszczypok in relation to the prospect of Testel carrying out electrical testing work for FMC. Testel subsequently won the contract. Mr Oszczypok approached Mr Rickard and asked that T&T do the FMC work. Mr Rickard agreed. From 2005 to 2011, T&T serviced the FMC as a Testel franchise.
From May 2009 until shortly before 11 April 2011, Mr Wilson was an employee of T&T. During this time Mr Wilson conducted testing at the FMC as an employee of T&T.
Active
By April 2011 the business relationship between Mr Rickard and Mr Oszczypok had broken down. The trial Judge found that there were several factors which contributed to this breakdown. For the purposes of this appeal it is not necessary to set out those factors.
Active was incorporated on 11 April 2011. Whilst its sole registered director was Mr Wilson, the trial Judge found that Mr Rickard and Mr Wilson set up Active together. His Honour found that the company was set up with the intention of both Mr Wilson and Mr Rickard owning and operating it together and primarily for the purpose of taking over the provision of testing services to Testel’s client, FMC.
Following discussions between Mr Wilson and Mr Crossman in April 2011, Active submitted a quote to Mr Crossman for testing of the FMC. This was accepted. Active thereafter began testing appliances at the FMC.
The Judge found that Mr Rickard did not operate the franchise of T&T since about April or May 2011. Mr Rickard purported to terminate the contractual relationship between Testel and T&T by email dated 19 August 2011. This purported termination was not accepted by Testel. T&T was subsequently deregistered as a company in 2012.
Restraint Covenant
The relevant conduct pertinent to the breach of the restraint covenant was committed after the execution of the 2010 deed. The 2010 deed contained a restraint covenant in the following terms:
12.29Restraint of Competition
12.29.1 Covenant by Franchise Holder and Guarantor(s)
Except as allowed by this Deed the Franchise holder, each Guarantor jointly and severally agree with the Master Franchisee that they and each of them must not be directly or indirectly engaged concerned or interested in (either alone or in association with or as an employee, servant, agent, representative, director, shareholder, trustee, consultant, financier, adviser, unit holder or beneficiary of any trust, person, firm, business, organisation, association, trust or corporation which is engaged), concerned or interested in any business that is substantially the same as or in competition with the Franchised Business and/or the Master Franchisee for any of the periods specified in clause 12.29.2 and within any of the areas specified in clause 12.29.3.
12.29.2 Periods of Restraint
(a)A period commencing on the date of this Deed and finishing 3 years after the termination or expiration of this Deed or transfer or assignment of whatever nature by the Franchise Holder of the Franchised Business.
(b)A period commencing on the date of this Deed and finishing 2 years after the termination or expiration of this Deed or transfer or assignment of whatever nature by the Franchise Holder of the Franchised Business.
(c)A period commencing on the date of this Deed and finishing 1 year after the termination or expiration of this Deed or transfer or assignment of whatever nature by the Franchise Holder of the Franchised Business.
12.29.3 …
12.29.4 Acknowledgment of Reasonableness of Restraint
The Franchise Holder and each Guarantor acknowledge that:
the maximum restraints imposed under this clause are reasonable and are no more than reasonably and necessarily required by the Master Franchisee for the maintenance and protection of the goodwill and assets of the Franchised Business, the Master Franchisee and other franchises; and
the Master Franchisee would not have entered into this Deed but for the maximum restraints so imposed.
…
12.29.6During the term and for the period of one (1) year following the termination or expiration of this Deed or the transfer or assignment of whatever nature of the Franchised Business by the Franchise Holder, the Franchise Holder, each Guarantor jointly and severally undertake not to employ, seek to employ or engage in any capacity any employee or agent of the Master Franchisee or any Franchise Holder without (first) obtaining the written consent of the Master Franchisee or such other Franchise Holder.
Contractual obligations to service
Testel claimed in the alternative to the breach of the restraint covenant claim that T&T and Mr Rickard as guarantor were under a contractual obligation pursuant to the 2010 deed to conduct the franchise on an exclusive and full-time basis and to provide electrical testing to FMC for such time as FMC remained a client of Testel assigned to T&T. I will refer to these obligations collectively as the “obligations to service.”
The following are the relevant clauses of the 2010 deed:
1.3.2The Franchise Holder acknowledges:
…
that any Testel Contract is between the Master Franchisee and the Client. The Franchise Holder will comply with all conditions and obligations of any such contract;
…
2.1.2.Franchise
The conduct of the Franchised Business shall include the following principal roles:
Operate from a Motor Vehicle;
Undertake the Site Services at Clients premises;
Generate Referrals;
Manage Clients of the Master Franchisee;
Comply with the provisions of this Deed and any directive of the Master Franchisee;
Comply with the directives of the Region Master Franchisee.
…
12.5Franchise to be conducted on an Exclusive Basis
The Franchise Holder, and its Directors and Shareholders (in the event the Franchise Holder is incorporated) and in the event that the Franchise is conducted through its nominated Manager referred to in Item 7 of the Schedule, its Manager, undertakes and agrees:
12.5.1to conduct the Franchise on an exclusive and full time basis except as otherwise agreed by the Master Franchisee, which agreement shall be a written Special Condition or a variation to this Deed as the case may be;
…
12.24Servicing Testel Contract Licences
Any Testel Contract Licence allocated by the Master Franchisee to any Franchise Holder shall be serviced by that Franchise Holder and the relevant Region Master Franchisee will comply with the obligations contained within this Deed concerning the supervision and management of Contract Licences.
Damages
The Judge found that through his involvement and conduct in relation to Active, Mr Rickard breached the restraint covenant contained in the franchise deed. His Honour also found that Mr Rickard breached the obligations to service.
As previously stated, his Honour awarded damages against the appellants for Testel’s loss of opportunity in the sum of $144,812.63 plus interest. The amount was calculated with reference to the franchise fees that his Honour found Testel would have likely earned from clients but for Active’s incumbency. Those franchise fees were found to equal 22% of Active’s revenues derived from particular clients from its beginnings in April 2011 through to the expiration of the restraint period on 30 September 2014. His Honour applied a percentage to reflect the probability of those fees actually being earnt by Testel, in accordance with the principles outlined in Commonwealth v Amann Aviation Pty Ltd[1] and Sellars v Adelaide Petroleum NL.[2]
[1] (1991) 174 CLR 64.
[2] (1994) 179 CLR 332.
His Honour assessed the damages for the tort of interference with contractual relations against Active and Mr Wilson on the same basis as the damages assessed against Mr Rickard for the breach of the restraint covenant. No dispute arises in this regard on appeal.
His Honour did not specifically assess damages for the breach of the obligations to service. His Honour found that the damages for the breach of the restraint covenant were higher than the damages sought in respect of the other contractual breaches and that it was therefore unnecessary to assess them.
Grounds of appeal
The breach of the restraint covenant and the breach of the obligations to service.
The appellants submit that the Judge erred in his reasoning on the assessment of damages for loss of opportunity in relation to the FMC work by failing to distinguish adequately or at all between the effect of the breach of the restraint covenant and the breach of clause 12.5.1 of the franchise deed, being the positive obligation to conduct the franchise on an exclusive and full-time basis.
The appellants submit that the error in failing to distinguish between the breaches can be found at paragraphs 589-591 of the judgment:[3]
Mr Rickard was obliged by paragraph 12.5.1 to conduct the franchise on an exclusive and full-time basis except as otherwise agreed by Testel. In breach of that obligation, T&T ceased conducting the franchise in April 2011. Mr Rickard told Mr Crossman of his decision to do so. It was only then that FMC needed another testing contractor. If T&T had continued conducting the franchise, there is no evidence that FMC would have sought another testing contractor. There is no evidence that Mr Crossman was dissatisfied with Testel’s services provided by T&T. The defendants’ argument that FMC would have abandoned Testel, or would have gone to tender, is therefore irrelevant.
I also reject the defendants’ argument that FMC would have inevitably gone to Active whether or not T&T and Mr Rickard breached the restraint covenant. I agree with the plaintiff’s submission that it is unlikely that Active would have been set up at all if Mr Rickard had not breached the restraint covenant. I reject Mr Wilson’s evidence that he was thinking of setting up Active anyway. The evidence is clear that he decided to set it up because he perceived an opportunity to do so when Mr Rickard announced he was getting out. Further, I think it is at least probable that Mr Wilson would have been unable to set up Active without Mr Rickard’s help, and by helping him as he did, Mr Rickard breached the restraint covenant.
I therefore find that the breaches of the restraint covenant by Mr Rickard, and hence by T&T since Mr Rickard was its manager, caused Testel to lose the FMC work.
[3] Testel Aust P/L v Rickard & Ors [2017] SADC 31 at [589] – [591].
Whilst the Judge specifically referenced paragraph 12.5.1 of the deed in the passage quoted above, the appellants’ submission is that the Judge ought to have distinguished between the effect of the breach of the restraint covenant and the breach of the obligations to service.
The appellants submit that the Judge erred in his approach to the assessment of damages by failing to adopt a two-stage process; first, to determine whether there was any damage suffered at all (the causation argument); second, to assess the probabilities that would have occurred had Mr Rickard not breached the franchise agreement.
They submit that in awarding damages for loss of opportunity, the Judge erroneously relied upon the scenario of T&T continuing to conduct the Testel franchise. In this respect, they point to the finding made by his Honour that Mr Rickard had ceased to conduct the Testel franchise or provide any testing services to FMC from about April or May 2011. They submit that the restraint covenant did not impose a positive obligation on Mr Rickard to continue to conduct the franchise. Thus, they submit that a distinction between the breach of the restraint covenant and the breach of the obligations to service was necessary. They submit the existence of this error is manifested by the Judge including in the assessment of damages the revenue of Active for the one year restraint period after the term of the deed had expired, from 1 October 2013 to 30 September 2014.
The appellants also complain that the Judge wrongly disregarded the evidence of Mr Crossman that he saw no advantage to using another Testel franchisee. They point to the evidence of Mr Crossman that had Active not been the incumbent the likelihood is that FMC would have put the work out to tender. The appellants complain that the Judge gave no or inadequate reasons as to why Mr Crossman’s evidence about that topic was disregarded.
This argument ignores the finding of the Judge that the FMC contract was lost by Testel due to the breach of the franchise agreement and restraint covenant within that agreement by T&T. His Honour found that the events which led to Active’s incumbency commenced at the time when Mr Rickard abandoned the franchise agreement in April 2011. His Honour found that Mr Rickard’s abandonment was part of a plan to substitute Active as the provider to FMC in place of T&T.
Furthermore, the argument does not take into account the Judge’s scepticism about Mr Crossman’s evidence. Having read the whole of the evidence of Mr Crossman I consider the Judge was entitled to be sceptical. The evidence of Mr Crossman, in particular, why he requested the testing history of FMC from an account manager at Testel, Ms Caroline Pell, on 24 March 2011 and on receiving it immediately forwarded it to Mr Rickard, was very telling.
I consider that the Judge was entitled to act on the basis that Mr Crossman was not an independent witness. The appellants’ submission to the contrary flies in the face of the evidence.
Testel had been supplying services to FMC since 2005. There was no evidence before the Court to contradict the submission that during that time Testel had been a reliable service provider to FMC through T&T.
Mr Crossman’s evidence was that he contacted Ms Pell by email on 24 March 2011 to ask for the FMC testing records because Mr Rickard had said to him that he was not continuing with the FMC work. Mr Crossman did not mention to Ms Pell that Mr Rickard had said he was not continuing with the FMC work. The failure of Mr Crossman to mention this to Ms Pell in circumstances where he might be expected to have raised such a concern is also particularly telling.
In addition, approximately one month later in May 2011, Mr Crossman was not candid with Ms Pell when he told her that FMC had gone to a cheaper supplier. That was not in fact true.
The conclusion that Mr Crossman was aware of the plan is the only plausible explanation for his failure to mention to Ms Pell in his conversation with her in May 2011 the identity of the new supplier.
Later, in November 2011, Mr Crossman also failed to tell Mr Oszczypok the identity of the new testing provider in circumstances where it might naturally be expected he would have.
Although the Judge did not make a direct finding as to Mr Crossman’s credibility, the overall tenor of the Judge’s remarks make it clear his Honour was not only sceptical about some of the evidence of Mr Crossman, but in respect of some aspects was not prepared to accept his evidence. The very fact that the last occasion of testing for FMC by T&T as a franchisee of Testel was almost on exactly the same date as the first service rendered by Active to FMC, was also particularly telling. The Judge’s conclusion that this could not have happened without the knowledge and cooperation of Mr Crossman was plainly correct.
For these reasons, the Judge was entitled to be sceptical about Crossman’s evidence and not to act upon his evidence which his Honour found to be inherently implausible.
Based on the findings which he made, the Judge’s conclusion – that FMC would have continued to use the services of Mr Rickard and T&T as a franchisee of Testel had Mr Rickard not breached the agreement by ceasing to work in May 2011 – was open.
Thus, the answer to the appellants’ complaint that the Judge failed to approach the assessment of damages in two stages is, on the evidence which the Judge accepted, the Court was entitled to conclude that Mr Rickard abandoned the franchise agreement as part and parcel of a plan to ensure that Active would take over the FMC work.
In fact, that is what happened as the transfer of work from Testel to Active occurred seamlessly at the same time as the abandonment of the franchise by T&T.
For these reasons, I consider that the Judge was entitled to conclude that had it not been for the breach of the franchise agreement and the restraint covenant, Mr Rickard and T&T would have continued to service FMC as a Testel franchisee.
The Judge was entitled to assess the damages on that basis. That is why the Judge assessed the damages for breach of the restraint covenant on the same basis as the breach of the obligations to service. Effectively, his Honour found that the causation of the loss was established by the finding that Mr Rickard abandoned the franchise agreement as part of a plan to substitute Active in its place.
Furthermore, the award of damages is a discretionary exercise. The assessment of damages for the lost opportunity in this case plainly involved questions of fact, degree, opinion and judgment.[4] The Judge was entitled to take a robust approach in making that assessment. For these reasons I do not accept that there was any error in the approach the Judge took by assessing the damages on a global basis.
[4] Shaw v Yarranova Pty Ltd (2017) 252 FCR 267 at [12].
I would dismiss these grounds of appeal.
Spotless
In June 2013, Spotless acquired the contract to service FMC. From this point in time, Active’s client was Spotless, rather than FMC. The Judge found that had in not been for Active’s incumbency, then Testel would have been the only other contender for the FMC work.
The appellants submit that there was an insufficient evidentiary foundation for the Judge to make this finding. Furthermore, they submit that a number of documents before the Judge point to the conclusion that a company called eSafe was at least in the running for the Spotless contract.
I do not accept these arguments. The evidence before the Court was that Testel had in fact already been awarded work by Spotless in respect of a number of hospitals in South Australia and more generally around Australia. There was no evidence led, including the evidence regarding eSafe, to support the conclusion that there was a realistic prospect of the work going to any provider other than Testel if Active had not been the incumbent by virtue of Mr Rickard’s actions at the time Spotless came into the picture.
Furthermore, it was clear from Mr Crossman’s evidence that he had a strong preference for keeping change to a minimum. Had Testel been servicing the FMC in June 2013, there is a strong basis for the inference that he would have supported its retention as the service provider.
I would dismiss this ground of appeal.
Thermal Imaging
The appellants submit that the Judge erred in assessing damages for Testel’s loss of opportunity to earn revenue from FMC by including the revenue earned by Active from thermal imaging services provided by it to FMC from May 2013 to 30 September 2014.
The appellants’ contention is that the franchise deed did not contemplate the provision of thermal imaging services by T&T because the terminology used throughout the deed does not incorporate such services. They specifically submit that thermal imaging is not a form of “Electrical Testing” as contemplated by the franchise deed.
The reasons for including thermal imaging revenue in the calculation of the award of damages are not specifically addressed in the Judge’s remarks.
There was little evidence regarding how Active came to provide thermal imaging services to FMC. T&T did not carry out any thermal imaging as a Testel franchisee. Mr Rickard received no training in thermal imaging in his capacity as a Testel franchisee. Mr Rickard only undertook training in thermography in June 2012 which was then utilised in relation to the thermal imaging work subsequently undertaken by Active for FMC.
The other evidence, such as it was, about thermal imaging came from Mr Oszczypok. He described it as a form of electrical testing provided by Testel. He described it as a process where a camera is used to identify areas where an electrical circuit is likely to break down or has already broken down. He gave evidence that any franchisee who is franchised to undertake electrical testing could carry out thermal imaging work so long as that franchisee had the appropriate people to do the work. Later, Mr Oszczypok went on to explain that all franchisees were encouraged to upsell services whereby the franchisee would negotiate with the client to provide additional types of testing work.
In relation to FMC, there had been a history of FMC adding to the range of services it received from Testel. In this way, the work to be performed extended to the testing of residual current devices and later the testing of emergency and exit lights.
Mr Oszczypok’s evidence was that once a contractor was on site at FMC and had demonstrated their capability of doing the required work, FMC would open more work to them. In that sense, the technicians were on trial. As the client gained confidence in the company and the technicians on site they released more work. This is what occurred from 2005 to 2011.
For these reasons, I consider that thermal imaging was a form of electrical testing as contemplated by the franchise deed. I consider that it was open to conclude, based on the evidence that thermal imaging work as required by FMC would have been extended to T&T as a franchisee of Testel had the franchise agreement not been breached, and to any other Testel franchisee who would have performed the FMC work had Mr Rickard and Active not wrongfully procured that work.
In relation to the period up to the end of the franchise agreement on 30 September 2013, I consider that the implicit finding of the Judge that the franchising fees relating to thermal imaging revenue from FMC would have been earned by Testel in that period should not be disturbed. The damages assessed however, are to be based on wrongfully competing not on failing to provide services as franchisee.
This does not necessarily mean that there should not be some discount for the contingency that the alternative Testel franchisee may not have introduced the thermal imaging work as quickly as Active did. For that reason, I consider that some discount should have been allowed for the lost thermal imaging revenue for the whole period from 1 May 2013 to 30 September 2014 on the contingency that, although Testel may not have been in a position to pick up that work straight away in the first year, it could have obtained that work.
For this reason, I consider that the assessment of damages should be discounted by 15% to allow for the contingency that Testel may not have been in a position to have performed the thermal imaging work as quickly as Active did after Mr Rickard’s wrongful conduct.
The parties agree that the revenues earned from thermal imaging during the period from May 2013 to 30 September 2014 were $69,286.00 excluding GST. 15% of this amount is $10,392.90. Testel would have earned franchise fees of 22% of this amount, being $2,286.44. I would therefore subtract that amount from the damages awarded by the Judge. Otherwise, I do not consider the findings of his Honour should be disturbed.
Overheads
The Judge made a finding of fact that there was no cost saving by Testel in respect of overheads by reason of the conduct of the appellants. The appellants submit that the Judge erred in effectively treating all of Testel’s overheads as being fixed in awarding damages comprising of the revenue earnt by Active.
The appellants submit that there ought to have been a recognition of some additional costs, and therefore a reduction of damages awarded, if Testel had continued to service the FMC as a client. The appellants point to several costs that they say would have been incurred by Testel including travel for site visits as well as telephone, paper, printing and depreciation expenses.
The evidence however points to the contrary.
There was evidence before the Court that Testel’s systems are highly automated. The loss of a franchisee would not reduce the burden on the office account managers and there would be no real change in disclosure compliance costs. That evidence came from Mr Oszczypok who confirmed that the way Testel has been managed and run since 2010 had been substantially unaltered. The number of franchisees then and at the time of giving evidence remained about the same, being 60.
For these reasons, I do not accept that there was any error demonstrated in the approach of the Judge to his assessment of damages on a global basis without making a reduction for potential overhead costs.
I would dismiss this ground of appeal.
Newmont
The appellants submit that the Judge erred in making the finding that the likelihood of Testel reclaiming the work from Newmont Asia Pacific (‘Newmont’) was 80%. They submit that the likelihood ought to have been determined somewhere in the vicinity of 50%.
The appellants submit the Judge erred in finding that there was “no other evidence as to what happened in 2011” in relation to Newmont. The complained of passage is found at paragraph 594 of the judgment:[5]
Testel argued that the probability that Newmont would have come back to Testel in 2012 is about 80%. Mr Rickard had asked Caroline Pell at Testel to reallocate the 2011 Newmont work in an email dated 20 April 2011. This work was allocated to another ‘Test Engineer’, Steve Bolter, on 27 April 2011. Mr Rickard assisted Mr Bolter by answering a number of his questions by email. The defendants said Testel’s chances of getting the 2012 work were more like 50% if Active is taken out of the scenario. I do not see why. There is no other evidence as to what happened in 2011. I accept Testel’s assertion that the likelihood of its reclaiming the Newmont work was 80%.
[Emphasis added]
[5] Testel Aust P/L v Rickard & Ors [2017] SADC 31 at [594].
The appellants submit that the Judge did not take into account that despite Mr Rickard asking Ms Pell to offer the Newmont work to another Testel franchisee and assisting with the proposed transfer, Newmont did not in fact use Testel for the remaining 2011 cycle.
The appellants further submit that the Judge did not take into account a number of factors in assessing the likelihood of Testel reclaiming the Newmont work at 80%. Those factors include that there was no contract between Testel and Newmont to the effect that the provision of services was to continue for any particular period of time and the evidence that Newmont had used three different electrical testing contractors over the period of 2000-2013.
Newmont Mine is in the Tanami Desert, NT. Newmont had been a client of Testel and was serviced by T&T until April 2011. In April 2011 Mr Rickard asked Ms Pell for Newmont to be assigned to another Testel franchisee and assisted with the proposed transfer. However, Newmont elected not to engage the other Testel franchisee for the remaining 2011 cycle. The only evidence in this regard came from Mr Oszczypok. His evidence was that Newmont used another electrical testing contractor based in the Northern Territory by the name of AE solutions (NT) Pty Ltd. There was no evidence regarding Newmont’s decision to use the alternative service provider.
In early 2012, Mr Rickard was contacted by a representative of Newmont. Active prepared a quote to undertake testing work for Newmont on 3 February 2012. Active subsequently won the Newmont Mine contract to undertake the testing work. Mr Wilson and Mr Rickard travelled to the Newmont Mine and tested and tagged for the first three weeks of June 2012.
The total revenue derived from this activity was $33,182.00. The Judge found that the likelihood of Testel reclaiming the Newmont work was 80% if Active had not been operating. Damages were calculated at $5,840.03.
Even if it is accepted that the Judge did not consider the fact that Newmont decided not to use the other Testel franchise for the remaining 2011 cycle, I am not convinced that this would justify an intrusion into his Honour’s assessment of the probability of Testel reclaiming the Newmont work. As I have said, there was no evidence led regarding Newmont’s decision not to use the Testel franchisee. The possible reasons are endless.
What is clear, however, is that had Mr Rickard in 2012 not been conducting the Active business, and had he not offered electrical testing when approached by Newmont, there was a strong likelihood that Newmont would have approached Testel. Testel had already demonstrated it was able to service the remote location through its franchisees. Furthermore, Newmont had sought out its former service provider by contacting Mr Rickard.
For these reasons, I am satisfied that the Judge’s assessment of this lost chance at 80% was within the permissible range of such a finding. There is no error demonstrated.
I would dismiss this ground of appeal.
Indemnity Costs order on the Cross-Action
The appellants submit that the Judge erred in ordering that Mr Rickard pay Testel’s costs of the cross-action on an indemnity basis rather than a party/party basis. They further submit that the Judge erred in finding that the conduct of Mr Rickard in relation to the cross-action was unmeritorious and unreasonable.
The appellants submit that the Judge did not distinguish adequately or at all between the cross-action and the primary action. The appellants submit that whilst the Judge found that their defence of the action was improper and unreasonable, the cross-action was separate to and involved factual and legal allegations that were separate to the primary action. In support, they point to the concession by Testel, and referred to in his Honour’s remarks, that the cross-action was “arguable”.[6]
[6] Testel Aust P/L v Rickard & Ors (No 2) [2017] SADC 69 at [23].
The Judge properly made adverse findings against Mr Rickard in defending Testel’s claim. It was within the bounds of the proper exercise of his Honour’s discretion to order indemnity costs in respect of the whole of that defence. The cross-action was expressly incorporated into Mr Rickard’s defence. It was therefore within the bounds of his Honour’s discretion to make the order for indemnity costs of the whole of the cross-action. His Honour was not obliged in exercising the discretion to embark upon separating each part of the action for treatment on one basis and other parts on a different basis. His Honour was entitled to take a robust approach in the circumstances.
I would dismiss this ground of appeal.
Conclusion
For the reasons outlined above I would dismiss the appeal save as to reduce the amount awarded by the trial Judge by $2,286.44 to allow for the contingencies regarding the thermal imaging issue outlined above. Damages were awarded against Mr Rickard, Mr Wilson and Active in the sum of $144,812.63. I would therefore substitute an order for damages of $142,526.19.
In light of the conclusions I have reached, I do not find it necessary to deal with Testel’s notice of alternative contentions or the appellants’ remaining grounds of appeal referrable to that notice.
Cross-appeal
I turn now to the cross-appeal by Testel.
Firstly, Testel appeals the decision of the Judge not to award exemplary damages against Mr Wilson and Active. Secondly, Testel appeals the decision not to order an account of profits against Mr Wilson and Active by reason of their interference in the contractual relations between Mr Rickard and Testel.
Grounds 1 & 2 – Exemplary damages
Testel submits that the Judge erred in characterising the culpability of Mr Wilson and Active for the tort of interference in contractual relations as something less than that which would support an award of exemplary damages. Furthermore, Testel contends that the Judge erred in failing to attribute to Active the participation of Mr Rickard in suppressing the “Active folder” in circumstances where his Honour found that Mr Rickard was, from the start, a principal of Active.
The Active folder was located on Mr Rickard’s computer pursuant to a search order during the course of the litigation. It contained electronic evidence connecting Mr Rickard to Active. The Active folder had been moved to the recycle bin on Mr Rickard’s computer the day after disclosure orders were made.
His Honour concluded that Mr Rickard deleted the folder from his computer because he knew of its forensic significance. His Honour also concluded that Mr Rickard was in truth a principal of Active from the start. Testel’s submission is that Mr Rickard’s conduct in deleting the Active folder ought to therefore be attributed to Active. They submit that the Judge erred in failing to do so.
Furthermore, Testel submits that the Judge found that Mr Rickard and Mr Wilson had acted together to conceal Mr Rickard’s role in Active, each knowing that it was a breach of the restraint covenant. The evidence of Mr Rickard and Mr Wilson was largely disbelieved by the Judge. His Honour found that Mr Rickard, Mr Wilson and Active had maintained a defence which was unreasonable, unmeritorious and known to be false. The whole of the circumstances found by the Judge disclose that the object of establishing the new business was specifically to take over Testel’s client FMC with the consequence that Testel lost that client.
Testel submits that the Judge implicitly found that the conduct of Mr Wilson and Active was contumelious and outrageous. Paragraph 625 of the judgment provides:[7]
In those circumstances, while I regard Mr Wilson’s and Active’s roles as wrongful and worthy of criticism, they were not so contumelious or outrageous as to justify an award of exemplary damages.
[7] Testel Aust P/L v Rickard & Ors [2017] SADC 31 at [625].
Testel submits an award of $50,000 by way of exemplary damages should have been awarded.
The award of exemplary damages involves the exercise of a discretion.[8] The principles in House v King[9] also apply to this issue. I do not accept that the Judge’s characterisation of the culpability of Mr Wilson or Active constitutes an error in the exercise of the discretion.
[8] Gray v The Motor Accident Commission (1998) 196 CLR 1 at [25].
[9] (1936) 55 CLR 499.
Furthermore, I cannot accept the argument that the Judge erred in failing to attribute to Active participation of the conduct of Mr Rickard. It was never pleaded that the knowledge of Mr Rickard was the knowledge of Active. The Judge found that Mr Wilson did not actively instigate the breach of the restraint covenant by Mr Rickard. The Judge found Mr Wilson only had a general knowledge of the contents of the restraint covenant at the relevant times and it was only after Mr Rickard made clear his intention to abandon the contract that Mr Wilson came on board. Those findings were plainly open on the evidence.
In these circumstances, I do not consider Testel has established any basis on which this Court should interfere with the exercise of the discretion by the trial Judge not to award exemplary damages. No error, let alone any clear error, has been identified.
I would dismiss these grounds of the cross-appeal.
Grounds 3-5 - Account of Profits
The Judge found Mr Rickard was in breach of the restraint covenant and that Active and Mr Wilson interfered with the contractual relationship of Mr Rickard and Testel. Testel now complains that the Judge should have ordered an account of profits against Mr Wilson and Active. Testel contends that the remedy is available to redress the appellants’ interference with its goodwill, a proprietary interest.
The Judge stated at paragraph 627[10] that he was bound by the decision of Blue J in Testel Australia Pty Ltd v KRG Electrics Pty Ltd and Anor.[11]Blue J had followed the decision of the Full Court of the Federal Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd.[12]In doing so, Blue J noted the observations of the High Court in Farah Constructions Pty Ltd and Others v Say‑Dee Pty Ltd[13] as follows:
Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law. …
(References omitted)
[10] Testel Aust P/L v Rickard & Ors [2017] SADC 31 at [627].
[11] (2013) SASC 91 at [109].
[12] (2001) 110 FCR 157.
[13] (2006) 130 CLR 89 at [135].
Testel has urged that this Court should follow the dissenting judgment of Emmett J in Hospitality Group and find that an account of profits is available in Australia as a restitutionary remedy in respect of the tort of interference of contractual relations.
In Hospitality Group the majority (Hill and Finkelstein JJ) held[14] that the law in Australia in relation to damages arising out of breach of contract is as laid down in Robinson v Harman[15] that:
….under presently accepted principles, an injured plaintiff cannot claim a windfall to prevent a wrongdoer profiting from his wrong, except in those cases where exemplary damages are available and it is proper that illicit profits are taken into account in assessing the quantum of the award….
[14] (2001) 110 FCR 157 at 196, [157].
[15] [1848] 1 EX 850; 154 ER 363.
The Judge declined at first instance to award exemplary damages. For this Court to order an account of profits, it would require this Court to form the view that the decision of the majority in Hospitality Group is plainly wrong.
There has been some academic writing critical of the majority decision in Hospitality Group.[16]Nevertheless, I am not convinced that the decision of the majority of the Full Federal Court in Hospitality Group is plainly wrong. Whilst there are clearly diverging opinions as to what the law should be, this Court should follow that decision unless and until the High Court determines otherwise. Moreover, this case is yet a further step removed from the circumstances in Hospitality Group. The appellants derived their profit by subverting Testel’s goodwill, and not by exploiting it.
[16] See for example K Mason, J W Carter & G J Tolhurst, Mason & Carter’s Restitution Law in Australia (Lexis Nexis Butterworths, 3rd ed) at [1509] and [1639].
Accordingly, it follows that the claim by Testel for an account of profits must fail. I would dismiss these grounds of appeal.
Conclusion
For the reasons I have given I would make the following Orders:
1The appellants’ appeal is partially allowed to the extent of reducing the damages awarded to Testel by the sum of $2,286.44.
2Testel is entitled to an award of costs for damages in the sum of $142,526.19.
3The cross-appeal by Testel is dismissed.
BAMPTON J: I agree with the reasons of Kelly J. I would reduce the sum awarded by the trial Judge by $2,286.44, but otherwise dismiss the appeal. I would dismiss the cross-appeal.
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