Stramit Corporation Pty Ltd v Stone Homes Pty Ltd
[2014] NSWSC 370
•01 April 2014
Supreme Court
New South Wales
Medium Neutral Citation: Stramit Corporation Pty Ltd v Stone Homes Pty Ltd [2014] NSWSC 370 Hearing dates: 17 - 21 February, 19 and 20 March 2014 Decision date: 01 April 2014 Jurisdiction: Equity Division - Expedition List Before: Stevenson J Decision: Amended Statement of Claim and Cross-Claims dismissed
Catchwords: RESTRAINT OF TRADE - restraint in distributor agreement - proper construction of restraint - whether restraint contravened - whether business of fourth defendant is "similar" to that of second plaintiff - validity and reasonableness of restraint; CONTRACTS - whether oral collateral contract established; TRADE PRACTICES - misleading or deceptive conduct - whether oral representation established - 52 Trade Practices Act 1974 (Cth); PRACTICE AND PROCEDURE - amendment to pleadings - application made late in proceedings - would necessitate further adjournment - leave to amend refused Legislation Cited: Civil Procedure Act 2005
Trade Practices Act 1974 (Cth)Cases Cited: Australian Broadcasting Commission v Australian Performing Rights Association (1973) 129 CLR 99
BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347
Camden v McKenzie [2007] QCA 136
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184
Dennis v Australia Broadcasting Corporation [2008] NSWCA 37
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7
Galcif Pty Limited v Dudley's Corner Pty Limited (1995) 6 BPR 14,134:
Herbert Morris Limited v Saxelby [1916] 1 AC 688
McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; 73 NSWLR 53
Reardon Smith Line Ltd v Yngvar Hansen -Tangen [1976] 1 WLR 989; [1976] 3 All ER 570
Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386
State of Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146
Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418
Synavant Australia Pty Ltd v Harris [2001] FCA 1517Texts Cited: Concise Oxford English Dictionary (11th ed)
Macquarie Dictionary (5th ed)Category: Principal judgment Parties: Stramit Corporation Pty Limited (First Plaintiff/First Cross Defendant)
FBHS (AUST) Pty Ltd (Second Plaintiff/Second Cross Defendant)
Stone Homes Pty Ltd (First Defendant/First Cross-Claimant)
Dennis Malcolm McFadden (Second Defendant/Second Cross-Claimant)
Gai Ann McFadden (Third Defendant/Third Cross-Claimant)
Best Sheds Pty Ltd (Fourth Defendant)Representation: Counsel:
A R Moses SC with J S McLeod (Plaintiffs/Cross Defendants)
G A Sirtes SC with S E Gray (Defendants/Cross-Claimants)
Solicitors:
HWL Ebsworth Lawyers (Plaintiffs/Cross Defendants)
GHS Legal Lawyers (Defendants/Cross-Claimants)
File Number(s): SC 2012/365061 Publication restriction: Nil
Judgment
Introduction
This case concerns the ambit and operation of a non-compete covenant ("the Restraint") in an agreement ("the Distributor Agreement") made between the second plaintiff ("FBHS") on the one hand and the first defendant ("Stone Homes") and the second and third defendants, Mr and Mrs McFadden, on the other.
FBHS claims that Stone Homes and Mr and Mrs McFadden are in breach of their obligations under the Restraint by reason their involvement in a business now being conducted by the fourth defendant ("Best Sheds") (a wholly owned subsidiary of Stone Homes).
FBHS seeks a declaration that Stone Homes and Mr and Mrs McFadden are in breach of certain aspects of the Restraint and an order restraining Stone Homes, Mr and Mrs McFadden and Best Sheds from engaging in certain conduct said to be proscribed by those aspects of the Restraint.
Questions arise as to the proper construction of the Restraint, whether the nature of the business now conducted by Best Sheds bespeaks a contravention of the Restraint by Stone Homes and Mr and Mrs McFadden and, if so, whether the Restraint is valid.
The Restraint, if engaged and valid, operates for three years from 2 August 2012; that is, to 12 August 2015. By the time argument before me concluded, some 19 of the 36 months of the Restraint had passed. FBHS has made no application for interlocutory relief.
On 15 April 2012, Pembroke J made orders, the effect of which is that the plaintiffs' entitlements to damages or equitable compensation are to be determined separately from, and after, determination of its entitlement to the declaratory and injunctive relief.
A further issue arises (on the First Cross-Claim) as to whether the first plaintiff ("Stramit"), by its then General Manager Mr Tim Richards, made a verbal representation to Mr McFadden and, if so, whether a "collateral contract" thereby arose. Stramit and FBHS have brought a Second Cross-Claim against Stone Homes and Mr and Mrs McFadden that is responsive to the First Cross-Claim.
Stramit is the parent of FBHS. It guaranteed certain obligations of FBHS under the 2 August 2007 transaction documents to which I refer below and was evidently joined as plaintiff for that reason. In the final iteration of the plaintiffs' pleadings, it claims no relief in the proceedings (otherwise than on the Second Cross-Claim).
Decision
In my opinion, Stone Homes and Mr and Mrs McFadden are not in contravention of those parts of the Restraint that are the subject of FBHS's claim, as those aspects of the Restraint should properly be construed.
Those aspects of the Restraint are, however, valid.
I am not satisfied that Mr Richards made the representation for which Mr McFadden contends.
The result is that the Amended Statement of Claim, and the First Cross-Claim, should be dismissed. The issues in the Second Cross-Claim do not arise, and it, too, should be dismissed.
Background - events leading to FBHS's 2 August 2007 acquisition of the "Fair Dinkum Sheds" network
In about 1990 Mr McFadden (together with his father and uncle) established a company called Auction Sheds Pty Ltd. That company manufactured steel sheds and garages that it sold directly to the public, initially at auction yards.
In 1993 Auction Sheds started operating through a network of distributors ("the Network"). It also changed its name to AG&S Distributors Pty Ltd. "AG&S" is short for "Auction Garage and Sheds". There were a number of AG&S entities. There is no relevant distinction between them for present purposes. For convenience, I shall refer simply to "AG&S". From 1993, AG&S's business operated, in broad terms, as follows:
(a) each distributor paid a "one off" fee to AG&S and, in return, received a licence for the term of the agreement to use a software package owned or licensed by AG&S;
(b) the distributor was permitted to set up a display centre within a certain geographical area and sell steel sheds to the public;
(c) the distributor, after receiving an order from a customer to purchase a shed, used the software package to order the building materials necessary to build the shed;
(d) AG&S purchased the materials identified by the distributor from suppliers;
(e) AG&S on-sold the materials to the distributor;
(f) the distributor paid a commission to AG&S for each shed ordered by the distributor; and
(g) the distributor, or a contractor on the distributor's behalf, built the shed for the customer using the materials.
In around 1998, AG&S engaged a consultant to devise what was evidently an enhanced version of the software program called "MultiBuild". MultiBuild was licensed to each of AG&S's distributors. Distributors used MultiBuild to take orders from customers, design sheds to the customers' bespoke requirements, source the components for the sheds (including, after 7 February 2001, from Stramit) and calculate the price of the shed (both for quotation and sale purposes).
In around 2001, AG&S started using the brand name "Fair Dinkum Sheds" to promote its products.
Between 2001 and 2 August 2007, the Network comprised approximately 140 distributors.
On 7 February 2001, AG&S entered into a "Supply Agreement" with Stramit. That agreement provided Stramit with the exclusive right to supply roll formed products and flashing requirements to AG&S and its distributors.
Hitherto AG&S had sourced such material from other suppliers.
In 2005, Stramit approached AG&S with a proposal that it acquire the Network. From late 2006 to mid 2007, representatives of Stramit and AG&S engaged in negotiations in respect of such an acquisition.
Those negotiations resulted in a suite of agreements dated 2 August 2007 between Stramit and FBHS on the one hand, and AG&S and Mr and Mrs McFadden on the other, pursuant to which FBHS purchased certain assets of AG&S for $29 million.
The purchase of the AG&S assets by FBHS had the effect that, from 2 August 2007, FBHS owned the Network and from that point operated the Network in place of AG&S.
The purchase was effected by two Business Purchase Agreements each of which contained restrictive covenants binding the various AG&S entities (including Mr and Mrs McFadden and Stone Homes) from competing with FBHS for five years from 2 August 2007. Those non-compete provisions are not the restraint provisions at the heart of FBHS's case.
Simultaneously with the completion of the FBHS purchase, FBHS, Stone Homes and Mr and Mrs McFadden entered into the Distributor Agreement. The Restraint is contained in the Distributor Agreement.
Stone Homes was already a distributor under the Network. That is because on 14 February 2007, some six months before the 2 August 2007 AG&S purchase, Stone Homes entered into a "Distributor Agreement" with AG&S.
FBHS insisted that Stone Homes enter into the Distributor Agreement (rather than simply continue as distributor under the 14 February 2007 agreement with AG&S) to demonstrate to other distributors Mr McFadden's commitment to the new commercial arrangements.
The wording in the distributor agreements used by FBHS from 2 August 2007 was substantially the same as in the agreements AG&S used with its distributors prior to 2 August 2007 (including with Stone Homes). FBHS simply adopted the wording of the AG&S distributor agreements.
The terms of the 2 August 2007 Distributor Agreement
By the Distributor Agreement, Stone Homes appointed FBHS as its "Buying House" to negotiate with suppliers competitive prices for shed components. In return, FBHS licensed to Stone Homes something described as "the Concept". A prominent feature of "the
Concept" was the "MultiBuild" software. As I have mentioned, MultiBuild facilitated the design of sheds to the precise requirements of Stone Homes' customers, the pricing of such sheds and the sourcing of the components needed for the construction of such sheds.
The Distributor Agreement recited:
"Pursuant to Business Purchase Agreements dated 2 August 2007 between, among others, FBHS, [Mr and Mrs McFadden] and [Stone Homes]...FBHS is the owner of a distinctive computer software program...plans, engineering drawings, designs and materials ordering system and pricing concept (collective referred to in this Agreement as "the Concept") for the design, costing and listing of components for Steel Sheds ("the Products").
Clause 2(a) of the Distributor Agreement conferred on Stone Homes the following "Distributor Rights":
"i. a non-exclusive right to use the Concept for sales of the Product to be in Australia erected [sic]; and
ii. an exclusive right to establish Sales Site at [xx] Street, Narellan, NSW, 2067 within 15km radius from the Centre of Narellan, NSW ("the Territory") for the sale of the Products for a term of 99 years or until earlier termination of this Agreement...".
There were terms in the Distributor Agreement that:
(a) all "FBHS Distributors" (including Stone Homes) could advertise the Products "Australia wide including within the Territory"; thus distributors could compete with other distributors (cl 2(f)(i));
(b) FBHS would "not advise [Stone Homes] how to operate the Distributorship" and Stone Homes "may operate the Distributorship in any manner without interference or restriction from FBHS subject to compliance with this Agreement" (cl 3(a)(ii));
(c) Stone Homes must not include in any stationery or promotional material "a reference to FBHS" nor contain the mark "Fair Dinkum Homes and Sheds" without the written approval of FBHS (cl 3(b));
(d) Stone Homes would pay FBHS commissions for use of "the Concept" plus a "MultiBuild fee" (cl 4(b) and Annexure 1); the "MultiBuild fee" was a nominal figure (typically $10) for each "Product"; the commission ranged from $73 for "garden sheds" and the like to $2420 for products "up to 40 metres"; and
(e) Stone Homes was entitled to "sell the Products to its customers for any price and FBHS shall not set prices (either maximum or minimum) for the Products sold" by Stone Homes (cl 4(q)).
The Agreement made extensive provision for the protection of FBHS's "secrecy and confidential information" (for example cl 4(f)) and obliged Stone Homes to "deliver up documents and cease to use intellectual property" on termination of the Agreement (cl 8(a)).
During final submissions Mr Moses SC, who appeared with Mr McLeod for Stramit and FBHS, indicated claims hitherto made by the plaintiffs for the alleged breach of the confidentiality provisions were not pressed. In the final iteration of its pleadings, FBHS abandoned claims of breach of obligations of confidence. It maintained a claim for orders restraining the defendants from using its confidential information and intellectual property. Mr Moses agreed that these prayers were "precautionary" in nature.
Annexure 2 of the Distributor Agreement provided for "Standards & Procedure for Conducting the Distributorship" and sets out the substance of the commercial relationship between the parties.
Annexure 2 provided:
"As detailed herein, FBHS is a "Buying House" that negotiates competitive market prices for its Distributors, with the Concept relying upon strict adherence to the procedure described herein...
(a) The compute software application known as "MULTIBUILD" is provided to the Distributor on a Per Use payment basis...
(b) The Distributor is responsible for quoting/costing each Product using FBHS' Concept as defined herein. When a sale is made, "MULTIBUILD" will generate a Bill of Materials...of the required components for the Products. FBHS is not responsible for generating the Distributor's orders and/or [Bill of Materials]. Unless advised otherwise all orders must be placed using "MULTIBUILD".
The Distributor acknowledges that he and/or his builder are ultimately responsible for ordering the components for the structure, and must ensure council approvals, check all designs and plans, especially alterations for the design and plans of the Concept...
(d) When the Distributor wishes to place an order with FBHS, he must...
i. Electronically transfer to FBHS the Commission...
(e) Upon the payment of the Commission, FBHS will transmit orders to suppliers. Provided that Distributors are not in excess of their authorised Credit limit, the order will be processed by the suppliers.
(f) Suppliers will generate orders and arrange for the components to be delivered to the Distributors [sic] nominated site...
(h) Following delivery a statement will be faxed to the Distributor on the first working day of each week. The Distributor must pay the account by approved method of payment by close of business on the last day of the week...
All orders must be placed through FBHS."
In a Deed of Guarantee made between FBHS, Stone Homes and Mr and Mrs McFadden on 2 August 2007, the Distributor Agreement is described as being an agreement "for the use of the FBHS Concept".
That, in substance, captures the nature of the Distributor Agreement. Stone Homes was licensed and obliged to use the "Concept" to design sheds for its customers and to source components for those customers. Otherwise, Stone Homes could conduct its business as it saw fit. It could set its own prices for sheds. It could conduct business under whatever name it chose. Indeed, as I have mentioned, the terms of the Distributor Agreement prevented Stone Homes from making any reference to FBHS or any use of the "Fair Dinkum Sheds" mark without written approval of FBHS.
Both before and after 2 August 2007 Stone Homes carried on business under the name "Best Sheds".
The Restraint is in the following terms:
"(a) The Distributor and Principal hereby covenant that during the term of this Agreement and for a period of 3 years after the termination of this Agreement, they (neither jointly nor separately) shall not without the prior written consent of FBHS directly or indirectly as an employee, proprietor, partner, director, shareholder, officer or otherwise engage in the operation of a concept identical to or similar to the Concept anywhere in Australia.
(b) For the avoidance of doubt, Clause 5 shall operate to prevent the Distributor and Principal on the termination of this Agreement and for a period of 3 years thereafter from:
i. Dealing with products similar to the Product by alternative methods, procedures, designs and plans;
ii. Using such methods, designs and plans used by the Distributor prior to this Agreement to manufacture or sell similar products; and, in consideration of any confidential information and know how imparted by FBHS to the Distributor in relation to the Concept and the shed industry generally (the use of which by the Distributor cannot be restrained by FBHS for whatever reason), for a period of 3 years after the Distributor ceases to be a distributor of the Product for whatever reason.
iii. Manufacturing similar products that the Distributor dealt with or manufactured prior to this Agreement; and
iv. Dealing in software and associated media either directly or via agents to produce products similar to FBHS's Products and the Concept.
(c) The Distributor and Principals acknowledge these restrictions as fair and reasonable for the protection of FBHS' goodwill, the Product and the Concept."
The restraint in the 2 August 2007 Business Purchase Agreements
The restraint in the Business Purchaser Agreements (which I shall call the "BPA Restraint" to distinguish it from the Restraint) applied to the "the Restrained Parties" which included the AG&S entities, Mr and Mrs McFadden and Stone Homes.
Relevantly, the BPA Restraint read:
"The Restrained Parties must not do any of the following things during the Restraint Period [defined to mean a cascading period of years from five to one] without first getting the written consent of [FBHS]:
(i) no competition: directly or indirectly carry on a Restrained Business [defined as set out below] in the Restraint Area [defined to mean a cascading series of areas from "Worldwide" to "Australia"], alone or in partnership, joint venture or other capacity with anyone else;
(ii) no interest: directly or indirectly be concerned with or interested in a Restrained Business in the Restraint Area in any capacity including as trustee, principal, agent, shareholder or unit holder;
(iii) customers: solicit or persuade a distributor, customer or client of [FBHS], or a person who was a customer, distributor or client of the Business [the definition of which is also set out below] in the 12 month period before the Completion Date [2 August 2007], to stop or reduce its business with the Business or [FBHS];
(iv) business: accept from a distributor, customer or client referred to in clause a(iii) any business of the kind ordinarily forming part of the Business...".
"Restrained Business" was defined as follows:
"● Any business, activity or undertaking which designs, distributes, manufactures, sells, offers to sell, provides advice or consultancy services in respect of, or is otherwise involved or concerned in, Portal Framed Buildings (either as a single product or in combination with any other product).
● Any business, activity, auction business or undertaking which designs, distributes, manufactures, sells, offers to sell, provides advice or consultancy services in respect of, or is otherwise involved or concerned in:
● garages, including where sold as a package or kit;
● sheds, including where sold as a package or kit; or
● any Garage Component.
● Any business, activity or undertaking which relates to an agency or distribution network or chain in relation to the sale, supply, distribution, manufacture or provision of other services in relation to:
● garages, including where sold as a package or kit;
● sheds, including where sold as a package or kit; or
● any Garage Component."
"Business" was defined to mean:
"[A]n agent network, that designs and distributes software and pre engineered portal frame shed, barns, carports and light industrial buildings conducted by [AG&S] in the period up to completion [2 August 2007] in each state and territory of Australia".
Events since 2 August 2007
Since 2 August 2007, FBHS has conducted the Network in substantially the same manner as did AG&S prior to 2 August 2007.
Indeed, as I have mentioned, FBHS had adopted, virtually word for word, the form of distributor agreements AG&S used prior to 2 August 2007; including with Stone Homes.
Stone Homes conducted an FBHS distributorship from 2 August 2007 to 2 August 2012 under the name "Best Sheds". During this period Stone Homes also used the "Fair Dinkum Sheds" as part of its signage and in advertisements (evidently with FBHS's permission).
On 4 May 2012, Stone Homes gave notice to FBHS of its intention to terminate the Distributor Agreement, effective on 2 August 2012.
The Restraint operates for three years from that date; that is to 2 August 2015.
Since 2 August 2012, Best Sheds has conducted a business in Narellan selling a range of approximately 25 "standard" or "non-bespoke" garages and steel sheds under the name "Best Sheds". It is competing directly with FBHS's "distributors", including Stone Homes' successor within FBHS's Narellan "Territory".
The fundamental question in this case is whether FBHS is entitled to restrain Best Sheds from acting in this way.
In my opinion, it is not, for the reasons that follow.
The alleged infringement of the Restraint - the pleaded case
FBHS seeks:
(a) a declaration that Stone Homes and Mr and Mrs McFadden have breached the Restraint; and
(b) an order restraining each of Stone Homes, Mr and Mrs McFadden and Best Sheds until 2 August 2015 from, without the prior written consent of FBHS, directly or indirectly as an employee, proprietor, partner, director, shareholder, officer or otherwise engaging in the operation of a concept identical to or similar to "the Concept" or from dealing with products the same or similar to the Products including by alternative methods, procedures, designs and plans (with the words "Concept" and "Product" having the meanings defined...in Recital A of the Distributor Agreement).
In its Statement of Claim of 23 November 2012, the only breach of the Restraint pleaded by FBHS was as follows:
"[O]n or around 2 August 2012, in breach of [the Restraint], [Stone Homes and Mr and Mrs McFadden] (including through [Best Sheds]) have sold or offered for sale (or been directly or indirectly involved in those activities) products the same or similar to products sold by FBHS trading as Fair Dinkum Sheds (including products similar to but which are not necessarily sourced from or supplied by Fair Dinkum Sheds)."
That pleading is directed to cl 5(b)(i) of the Restraint which proscribes "[d]ealing with products similar to the Product by alternative methods, procedures, designs and plans".
For that reason, during his opening submissions, I asked Mr Moses whether FBHS contended that any of the defendants were acting in breach of cl 5(a) of the Restraint which speaks of engaging "in the operation of a concept identical to or similar to the Concept". Mr Moses said that FBHS did not so contend.
However, on the fourth day of the hearing, Mr Moses and Mr McLeod circulated written submissions which appeared to be directed to establishing that Best Sheds and thus, indirectly Stone Homes and Mr and Mrs McFadden, were using a "concept" similar to or identical with the "Concept" and thus acting in breach of cl 5(a) of the Restraint.
That caused Mr Sirtes SC, who appeared with Mr Gray for the defendants, to object that FBHS was seeking to make out a case outside its pleadings.
That complaint prompted Mr Moses to seek to amend FBHS's claim (during final submissions, on the fifth day of the hearing) to plead that the defendants had, in addition to engaging the conduct referred to at [53] above, also:
"[E]ngaged in the operation of a concept identical to or similar to the Concept (within the meaning of the proper construction of the word "Concept" in the [Distributor] Agreement".
I allowed that amendment on the basis that Mr Sirtes be given a chance to adduce further evidence to meet it, necessitating the adjournment of the proceedings from 21 February 2014 to 19 March 2014.
Mr Moses did not then seek to amend FBHS's claim to allege any breach of cll 5(b)(ii), (iii) or (iv) of the Restraint.
The hearing of the matter resumed on 19 March 2014. In the meantime, the parties had exchanged further evidence going to the issue raised by the amendment, namely whether Best Sheds has been, since 2 August 2012, or is now engaged, "in the operation of a concept identical to or similar to the Concept" in breach of cl 5(a) of the Restraint.
Cross-examination of those witnesses took the best part of 19 March 2014 and the matter was adjourned to 20 March 2014 for final submissions.
On 20 March 2014, Mr Moses sought leave to further amend FBHS's claim to allege that Best Sheds, in addition to engaging in the conduct referred to at [53] (in breach of cl 5(b)(i) of the Restraint) and at [58] (in breach of cl 5(a) of the Restraint):
"Manufactured (in the sense of forming, fabricating or processing steel for the purpose of commercial use) and/or caused to be manufactured, including with the use of a steel roll former, steel components which are used in connection with the sale of kits made up of components which together form steel sheds".
Thus Mr Moses sought to expand FBHS's claim to allege a breach of cl 5(b)(iii) of the Restraint ("manufacturing similar products that the Distributor dealt with or manufactured prior to this Agreement"). Mr Moses submitted the amendment arose out of answers given in cross-examination on 19 March 2014 by Mr Graham McFadden (Mr Dennis McFadden's son).
Mr Sirtes informed me that, were the amendment to be allowed, he would seek a further adjournment in order to adduce evidence to meet it.
I refused to allow FBHS to so amend its claim and said I would give my reasons in this judgment.
Section 64(2) of the Civil Procedure Act 2005 provides that:
"Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings...".
Section 58 provides that, in deciding whether or not to allow an amendment, the Court "must" seek to act in accordance with the dictates of justice and, to that end, "must" have regard to the provisions of s 56 and s 57 which, as is well known, direct attention to the "overriding purpose" of the Act to facilitate the "just, quick and cheap resolution of the real issues in the proceedings".
In Dennis v Australia Broadcasting Corporation [2008] NSWCA 37, Spigelman CJ, with whom Basten and Campbell JJA agreed, observed that whilst State of Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146 at 154 remains binding authority in respect of applicable common law principles in this area, those principles have been modified by statute. Spigelman CJ said at [28]:
"In this state J L Holdings must now be understood as operating subject to the statutory duty imposed upon the courts by s 56(2) of the Civil Procedure Act 2005, which requires the Court in mandatory terms - 'must seek' - to give effect the overriding purpose - to 'facilitate the just, quick and cheap resolution of the real issues in the proceedings' - when exercising any power under the Act or Rules. That duty constitutes a significant qualification of the power to grant leave to amend a pleading under s 64 of the Civil Procedure Act."
The conclusion to which I came was that it would be inimical to my duty to facilitate the "just, quick and cheap" resolution of the real issues in these proceedings to permit the amendment sought by Mr Moses. The focus of this case has always been on the terms of the Restraint. When the hearing commenced, FBHS's only claim concerned cl 5(b)(i) of the Restraint. Only when prompted by my enquiry as to cl 5(a) (see [55] above) did FBHS seek to expand its claim beyond cl 5(b)(i); and then only to cl 5(a) and not to cl 5(b)(iii). That amendment caused the adjournment of the proceedings from 21 February 2014 to 19 March 2014.
The further amendment would have provoked yet another adjournment of the proceedings. The amendment would have opened up new issues in the case; namely whether Best Sheds was "manufacturing" products and, if so, whether those products were "similar" to those that Stone Homes had "dealt with or manufactured" prior to 2 August 2012. The dictates of justice would have required that the defendants have an opportunity to adduce evidence in relation to the new claim. The particular issue which prompted the 20 March 2014 amendment application (the evidence by Mr Graham McFadden concerning the use of Best Sheds of a steel roll former) did not, in my opinion, provide a sufficient justification for the belated amended application. The same evidence could have been adduced from cross-examination of earlier witnesses (not least, Mr Dennis McFadden). For these reasons, I refused to allow FBHS further to amend its claim.
The proper construction of the Restraint
There was no dispute before me as to the principles I should apply in relation to the proper construction of the Restraint. In Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) said (at [52]): -
"The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Limited v Alphafarm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Limited v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Limited [2011] HCA 45; (2011) 282 ALR 604."
In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7, French CJ and Hayne, Crennan and Kiefel JJ said (at [35]):
"[The parties] recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'." (citing Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350 citing Reardon Smith Line Ltd v Yngvar Hansen Tangen [1976] 1 WLR 989 at 995-996; [1976] 3 All ER 570 at 574; citations otherwise omitted)
The structure of the Restraint
Clause 5(a) defines the ambit of the Restraint both during the term of the Distributor Agreement, and for a period of three years following its termination. The ambit of the Restraint is expressed in terms of engaging in the operation of a "concept" similar to or identical to "the Concept". I discuss this further below.
Clause 5(b) states ("for the avoidance of doubt") how the Restraint is to operate in the three years following termination of the Distributor Agreement. It says nothing as to how the Restraint operates during the term of the Distributor Agreement. The ambit of the post-termination Restraint is expressed in cl 5(b)(i) in terms of "[d]ealing with Products" similar to "the Product" by "alternative, methods, procedures and plans". I also discuss this further below.
Curiously, there is nothing in the Distributor Agreement to prevent Stone Homes, during the term of the Distributor Agreement, from selling steel sheds in competition with FBHS (or otherwise "[d]ealing with products similar to the Product" to use the language in cl 5(b)(i)) provided it did not engage in the operation of a "concept" identical to or similar to the "Concept".
The terms the BPA Restraint (see [40] to [43]) may well have been wide enough to prevent Stone Homes from competing with FBHS in this way for five years (to 2 August 2012). In fact, perhaps not coincidentally, Stone Homes terminated the Distributor Agreement from 2 August 2012. But the Distributor Agreement could have endured for a further 94 years (see [30] above).
If FBHS could not have prevented Stone Homes competing with it in the steel sheds industry during the term of the Distributor Agreement (provided Stone Homes was not engaging in the operation of a "concept" identical to or similar to "the Concept") it would be curious if FBHS's position were stronger now that the Distributor Agreement has been terminated. In my opinion, for the reasons that follow, it is not.
Clause 5(a) - "directly or indirectly" engaging "in the operation of a concept"
Clause 5(a) forbids Stone Homes and Mr and Mrs McFadden from engaging in particular conduct (engaging "in the operation of a concept identical to or similar to the Concept") "directly or indirectly", including as a shareholder.
Stone Homes is the only shareholder in Best Sheds. Mr and Mrs McFadden have caused at least $2 million to be paid into Best Sheds as working capital.
It follows (and this was common ground) that if Best Sheds is engaging in conduct of the kind proscribed by cl 5(a) of the Restraint, each of Stone Homes and Mr and Mrs McFadden have been indirectly engaged in the same conduct.
Clause 5(a) - a "concept" identical to or similar to "the Concept"
It will be recalled that the "Concept" is defined (in the recital to the Distributor Agreement) as:
"...[A] distinctive computer software program...plans, engineering drawings, designs and materials ordering system and pricing concept...for the design, costing and listing of components for Steel Sheds."
Thus, when the parties used the word "Concept" they intended to encapsulate the aggregation of the various elements deployed by FBHS to provide to its distributors the "Buying House" services described in the Distributor Agreement; in particular the processes described in the annexure to that agreement being the "Standards and Procedure for Conducting the Distributorship" (see [35] above). Mr Moses described that aggregation as the "system" adopted by FBHS.
That "system" was a combination of the "distinctive computer software program" referred to in the agreement (i.e. MultiBuild) together with plans, engineering drawings, designs and materials ordering system.
In my opinion, the parties must have intended that "concept" have a corresponding meaning. Accordingly, cl 5(a) of the Restraint invites a comparison between FBHS's "Concept" or "system" and such "concept" or "system" as is being engaged in by Best Sheds.
What is proscribed by cl 5(a) of the Restraint is the engagement by Best Sheds in the operation of a "concept" which is "identical to or similar to" the "Concept".
There is no suggestion that Best Sheds' system is "identical" to that of FBHS. As will emerge below, it is obvious it is not. The question is whether the "systems" are "similar" for the purposes of the Restraint.
As the following dictionary definitions reveal, the word "similar" is one capable of having a range of meanings.
According to the Concise Oxford English Dictionary (11th ed) one thing is similar to another if it is:
"[O]f the same kind in appearance, character or quantity without being identical."
On the other hand, the Macquarie Dictionary (5th ed) defines "similar" as:
"Having likeness or resemblance, especially in a general way".
Resort to earlier cases dealing with the word "similar" is unlikely to be productive. As Kirby P said in Galcif Pty Limited v Dudley's Corner Pty Limited (1995) 6 BPR 14,134:
"The Court is not controlled by the meaning given to words, even the same word, in earlier cases. This is because no two cases are ever precisely the same. The examination of earlier cases, such as cases on the meaning of the word 'similar' are only of assistance to the court as the earlier judicial opinions prompt, by analogous reasoning, the approach which should be taken in the case at hand." (BC9504700 at 6)
The context in which the word is used here is within the phrase "identical to or similar to" as applied to the somewhat amorphous notion of a "Concept"; itself defined by reference to the particular, detailed, business system operated by FBHS.
The proscription against engaging in a "concept" similar to the "Concept" is given in a same breath, as it were, and as an alternative to, the proscription against engaging in a "concept" identical to the "Concept". That suggests to me that it was not the intention of the parties to prevent an entity associated with Stone Homes or Mr and Mrs McFadden from engaging in a business containing a "concept" or "system" which has no more than a passing resemblance to, or some features in common with, the "Concept" as operated by FBHS. The words the parties have used suggest to me that their intention was to confine the Restraint to circumstances where there was a substantial or significant similarity (albeit not a precise identity) between the "concept" engaged in by an entity associated with Stone Homes or Mr and Mrs McFadden and FBHS's "Concept".
The role of cl 5(b)
Clause 5(b) of the Restraint is prefaced with the words "for the avoidance of doubt" and deals only with the period of three years following termination of the Distributor Agreement. It has no work to do during the term of the Distributor Agreement.
The words "for the avoidance of doubt" suggest that it was the parties' intention that cl 5(b) be no more than explanatory of the operation of the cl 5(a) restraint during those following three years, and not to expand the cl 5(a) restraint or to be itself an independent source of restraint.
A further such indication is that cl 5(a) defines the territory of the restraint ("anywhere in Australia") whereas cl 5(b) makes no reference to such territory; suggesting cl 5(b) is merely explanatory of cl 5(a).
The ambit of cl 5(b)(i)
In that context, cl 5(b)(i) provides that during the three year period following termination of the Distributor Agreement, the restraint in clause 5(a) operates to prevent entities associated with Stone Homes and Mr and Mrs McFadden from "[d]ealing with products similar to the Product by alternative methods, procedures, designs and plans".
The term "Product" is not itself defined in the Distributor Agreement. However "the Products" are defined in the recital to the agreement as "components for Steel Sheds" designed costed and listed using the "Concept" (see [29] above). The parties have must intended "Product" in cl 5(b)(i) to have a corresponding meaning: namely, such steel shed components.
Clause 5(b)(i) does not purport to prohibit Stone Homes from dealing with "products similar to the Product" in any circumstances; the prohibition only extends to such dealing "by" (and this must mean "using") "alternative methods, procedures, designs and plans".
But "alternative" to what? The sub-clause does not identify, in terms, the other "methods, procedures, designs and plans" by reference to which the proscribed "alternative" is to be compared. In my opinion such "methods, procedures, designs and plans" can only be those referred to in cl 5(a), namely those comprised in the "Concept".
In those circumstances, and consistently with the prefatory words to cl 5(b) ("for the avoidance of doubt"), a "reasonable businessperson" would in my opinion understand that in cl 5(b)(i) the parties:
(1) are explaining how they intended cl 5(a) to operate during the three years following termination of the Distributor Agreement; and
(2) making clear that, during that three year period (when Stone Homes and its related entities would no longer have no access to "the Concept") they must not use "alternative methods, procedures, designs and plans" to the "Concept" to engage in a "concept" which is "similar to" the "Concept"; but
(3) were not seeking otherwise to prevent Stone Homes and its related entities from "dealing with products similar to the Product".
I thus do not accept the submission advanced on behalf of FBHS that the effect of cl 5(b)(i) is that the defendants cannot, in any circumstances, sell sheds in competition with FBHS for a three year period after the termination of the Distributor Agreement. However, the defendants cannot act in the manner described in the preceding paragraph: they cannot sell steel sheds in competition with FBHS if, in so doing, they are in substance using a business model or system that mimics that of FBHS (engaging in a "concept" similar to the "Concept").
No doubt the parties could have used words that expressed these matters more clearly. However, this construction of their words brings cl 5(a) into harmony with cl 5(b)(i): see Australian Broadcasting Commission v Australian Performing Rights Association (1973) 129 CLR 99 at 109 per Gibbs J.
Whether such harmony is achieved with the later sub-clauses of cl 5(b) (especially cl 5(b)(iii)) is a matter I need not consider, as they are not within the ambit of FBHS's pleaded case.
Are the defendants acting in breach of cl 5(a) or cl 5(b)(i) of the Restraint?
As I have mentioned, it is common ground that if Best Sheds (not a party to the Distributor Agreement) is engaging in conduct contrary to the terms of the Restraint, each of Stone Homes and Mr and Mrs McFadden is also in breach. Accordingly, my analysis will focus on the nature of the business now conducted by Best Sheds, compared to that of FBHS.
There are some similarities between the FBHS's "Concept" and the "concept" engaged in by Best Sheds. Both use computer software enabling storage of and access to data about plans, designs, prices, bills of materials and engineering aspects of steel sheds each offers for sale. Both supply plans, drawings and designs for steel sheds to third parties (customers in the case of Best Sheds, and distributors in the case of FBHS, who pass the plans, drawings and designs on to their customers).
However, there are significant differences between FBHS's "system" or "Concept" and Best Sheds' "concept".
FBHS conducts a distributorship on the basis of the "Concept", the substance of which I have described above (at [19], [28] and [37]). FBHS does not sell sheds or the materials used to construct sheds to the public, or to its distributors.
FBHS's distributors are able to use "the Concept" (in particular the software MultiBuild) to design and price, virtually at a keystroke, a shed to its customers' particular requirements, with almost no limitation on the configuration of the sheds able to be designed and supplied to the customer. For example, FBHS is able to design a shed to meet a variety of regional requirements (including as to capacity to withstand wind load).
Once a shed has been designed using MultiBuild, the distributor can then use other aspects of MultiBuild to cause orders to be placed on suppliers for all of the components needed for that particular shed. Those components are then delivered directly to the distributor or customer without further input from the distributor.
A striking feature of the FBHS "Concept" is that the distributor does not need to maintain any inventory or stock of shed components. An FBHS distributor need not itself make any judgment about what components are needed for the particular shed ordered by the customer. The distributor need not make any prediction as to likely customer demand or decide what components should be on hand to meet demand; let alone fund the cost of maintaining an inventory.
In addition to being able to offer bespoke "made to measure" sheds, FBHS now offers a range of standard "off the shelf" shed models; but only in response to Best Sheds' marketing campaign of its "standard range".
On the other hand, Best Sheds:
(a) sells a standard range of some 25 pre-made sheds and is unable to custom build sheds to meet individual customer requirements or the proposed location of the shed;
(b) is unable, for example, to design sheds suitable for particular wind forces prevalent in any given location;
(c) can only vary its "off the shelf" designs by moving the location of doors and windows around the plan using a licensed "Computer Aided Designed" package;
(d) does not operate a distributorship;
(e) does not operate within a distributorship;
(f) must purchase components from various suppliers;
(g) holds stock and inventory which it orders in anticipation of demand;
(h) is only able to provide sheds with corrugated wall sheeting;
(i) can only sell sheds with roller doors;
(j) can only offer five different roofing colour options, one wall colour on large sheds and two wall colours on smaller sheds;
(k) after receiving an order for a shed, must engage five to six people to take the order, retrieve the components from storage, pack them and deliver them to the customer; and
(l) does not erect or build sheds and does not arrange for this to happen.
Best Sheds does use a software program in which it stores details of the components referrable to each of its standard shed sizes and which reveals whether those components are in stock. But its software problem does not have a capacity resembling that of MultiBuild; it cannot design or price a shed; it cannot source components for a shed and arrange delivery of the shed in accordance with a customer's requirements.
The only resemblance between Best Sheds' "concept" as I have described it and FBHS's "Concept" is that:
(a) each uses computer software, albeit to achieve very different outcomes; and
(b) each has as its end point the assembly of components for tin sheds which are made available for sale to the public (albeit sheds different in nature and variety and derived by quite different processes).
In my opinion, Best Sheds' "concept" has no more than a passing resemblance to FBHS's "Concept" and is not a business system or process that can fairly be described as being "similar" to that of FBHS for the purpose of the Restraint.
In my opinion, Best Sheds is not engaging in conduct in breach of the Restraint; accordingly, Stone Homes and Mr and Mrs McFadden are not in breach of the Restraint.
Is the Restraint invalid?
As I have found that the defendants are not acting in breach of cl 5(a) or cl 5(b)(i) of the Restraint, it is not necessary that I express any opinion as to whether those clauses are valid.
However, in view of the detailed submissions addressed to me on this topic, I will express my opinion, albeit briefly.
I do not, however, propose to express any opinion as to the validity of other aspects of the Restraint, particularly that in cl 5(b)(iii). The potential ambit of that sub clause is very much wider than cl 5(a) and cl 5(b)(i) (as I have construed them). As I have refused FBHS leave to allege a breach of cl 5(b)(iii), I will make no further comment about it.
There was no dispute before me as to the legal principles relevant to the validity of restraint clauses. As Mr Moses pointed out, those principles were recently summarised in McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; 73 NSWLR 53 and Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418.
In McHugh Holdings, Brereton J observed at [40]:
"Clause 3.5, so read, is a restraint of trade. In New South Wales, a restraint of trade is valid to the extent to which it is not against public policy, even if not in severable terms [(NSW) Restraints of Trade Act 1976, s 4(1); Koops Martin Financial Services v Reeves [2006] NSWSC 449, [26]-[27]]. A restraint of trade is not contrary to public policy if it is reasonable having regard to the interests of the parties concerned and the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public [Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535, 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 706 and 707; Lindner v Murdock's Garage (1950) 83 CLR 628 at 653]. Whether a restraint is reasonable having regard to the interests of the parties depends upon two questions: first, whether the covenantee has a legitimate protectable interest, and secondly, whether the restraint is no more than reasonable for the legitimate protection of that interest. A covenantee is not entitled to be protected against mere competition; the legitimate interests which may be subject of protection by covenant are in the nature of proprietary subject matter [Vanderwell Products Ltd v McLeod [1957] RPC 185; Tank Lining Corporation v Dunlop Industrial Pty Ltd (1982) 140 DLR (3d) 659, 664], including trade secrets and confidential information, and goodwill including customer connection."
In Sidameneo, Young JA, with whom Beazley and Basten JJA agreed, set out principles that inform the proper consideration of restraint provisions in the context of a case where the legitimate commercial interest being protected by the relevant non-compete covenant was goodwill in a medical practice (at [70] to [75], [82] and [83]):
"The validity of a restrictive covenant is to be judged at the date of its creation: Geraghty v Minter [1979] HCA 42; 142 CLR 177,181. However, as Brereton J pointed out in Tullett Prebon at p 440, when exercising its discretion whether or not to grant relief, the Court considers matters as at the date of hearing.
Although one judges the covenant at the date of its creation, if the parties should realise that they are dealing with a business that might be expanding, the covenant can be that which is reasonable to protect the contemplated expansion: see Lamson Pneumatic Tube Co v Phillips (1904) 91 LT 363; Cactus Imaging at 21 [37] and Treitel at [11-062].
In BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347; 278 ALR 105, Macfarlan JA, with whom Giles JA and Sackville AJA agreed, said at [67] and [75] that the test was "whether as at the date of the Agreements reasonable people in the position of the parties would have expected that performance of the Agreements...would be likely to generate significant new goodwill... which B... could reasonably protect."
When looking at the word "reasonable" in the present context, it must be realized that one looks to see what is reasonable to protect the legitimate interest, not just what one might think would be reasonable in the abstract.
Again, it must be noted that the word "reasonable" in the present context has its peculiarities. In the present context, the question is one for the judge: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; 133 CLR 288, 305.
What needs to be considered is whether the restrictive covenant is so framed "as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public": Buckley v Tutty [1971] HCA 71; 125 CLR 353, 376.
...
One has also to bear in mind, as Palmer J said in Idameneo at [44] et seq, that when considering whether a restraint of trade is void, the Court must consider two questions: (1) is the restraint reasonable between the parties (onus on the appellant); and (2) is the restraint contrary to the public interest (onus on the respondents).
In one sense this is odd as there are authorities which assume that there is only one question and that is whether the restriction is reasonable in the public interest."
In its opening submissions, FBHS contended that the following facts comprised "insurmountable obstacles to any challenge to the validity of and/or reasonableness of the Restraint":
(a) that the parties to the transaction documents, including the Distributor Agreement, were sophisticated parties who had had legal advice about those documents;
(b) that the restraints that Mr and Mrs McFadden had insisted AG&S distributors agree to prior to 2 August 2007 were identical to those that the defendants now contend to be unenforceable; and that
(c) between 14 February 2007 and 2 August 2007, during which period Stone Homes acted as a distributor under the AG&S network, it had agreed to an identically worded restraint.
Mr Moses also placed great emphasis on the acknowledgment given by Stone Homes and Mr and Mrs McFadden in cl 5(c) of the Restraint that it was "fair and reasonable for the protection of FBHS's goodwill, the Product and the Concept".
I accept that each of these factors is important when determining whether the Restraint was reasonable at the time it was entered into.
In Synavant Australia Pty Ltd v Harris [2001] FCA 1517, Emmett J (as his Honour then was) said at [85]:
"The matter involves the exercise of business judgment. For that reason, considerable weight should attach to the period the parties themselves have selected."
As Pembroke J observed in Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386, the observation of Emmett J is consistent with a long run of cases, all of which speak with one voice (see the cases at [71]).
That aspect is of particular importance where, as here, the parties are commercially sophisticated, have had the benefit of legal advice, and have engaged in lengthy negotiations leading up to the agreement in which the Restraint appears. Further, Stone Homes and Mr and Mrs McFadden have acknowledged, in terms, the reasonableness of the Restraint, and have submitted to a restraint in identical terms to that which, in indistinguishable circumstances, they sought to impose on parties who were then in the position in which they are now.
However, the essential question is whether the Restraint does no more than is necessary for the reasonable protection of FBHS's legitimate protectable interests under the Distributor Agreement. The Restraint must "afford no more than adequate protection" (per Lord Parker of Waddington in Herbert Morris Limited v Saxelby [1916] 1 AC 688 at 707 (emphasis in original)) to FBHS's legitimate interests. The Restraint is not enforceable if it does no more than protect FBHS from competition.
In my opinion, FBHS's legitimate protectable interests included preserving the goodwill associated with its "Concept" and, in particular, the MultiBuild software. That Concept, and the MultiBuild software are at the heart of, and represent the defining characteristics of, the "Fair Dinkum Sheds" business and the Network that FBHS purchased from AG&S. The essence of the Distributor Agreement was the licensing by FBHS to Stone Homes of "the Concept" and the provision by FBHS to Stone Homes of its services as a "Buying House" using "the Concept" (and, particularly, MultiBuild) (see [28] to [39] above).
There was debate before me as to whether FBHS had any legitimate protectable interest associated with the businesses conducted by its distributors. In view of the manner in which I have construed cll 5(a) and 5(b)(i) of the Restraint, I do not consider it necessary to decide that question. I do not see those sub-clauses of the Restraint, as I have construed them, as seeking to protect any interest FBHS might have in its distributors' businesses. The sub-clauses are directed at protection of "the Concept", which is the essence of FBHS's own business model.
I see nothing unreasonable in FBHS seeking to protect its interest in "the Concept" by preventing a former distributor from copying or closely emulating "the Concept" for three years anywhere in the area in which "the Concept" operates. For the reasons I have outlined above, I do not see the relevant clauses of the Restraint as doing any more than this.
In all these circumstances, I do not consider the relevant clauses of the Restraint to be unreasonable having regard to the interests of the parties or to go any further than is necessary to protect FBHS's legitimate interest in "the Concept".
In my opinion, "reasonable people in the position of the parties" would have considered that FBHS would generate significant goodwill through operation of "the Concept" during the term of the Distributor Agreement which FBHS would own and could reasonably protect by the relevant provisions of the Restraint (per Macfarlan JA in BB Australia Pty LtdvKarioi Pty Ltd [2010] NSWCA 347 at [67], [77] and [98]).
Is the Restraint contrary to the public interest?
Again, in view of the conclusions to which I have come concerning the ambit of the relevant clauses of the Restraint, it is not necessary for me to deal with this question.
It was for the defendants to establish that the Restraint was contrary to the public interest. The defendants did not seek to do so in their written submissions, and barely addressed the question in oral submissions.
I see no basis to conclude that the relevant clauses of the Restraint are contrary to the public interest.
First Cross-Claim
Stone Homes and Mr and Mrs McFadden, as cross-claimants, allege that Stone Homes entered into a "collateral contract" to the Distributor Agreement with Stramit on 2 August 2007. Stone Homes contends that in consideration of Stone Homes and Mr and Mrs McFadden entering into the Distributor Agreement, Stramit agreed that it would supply all roll formed products and flashing requirements of Stone Homes in accordance with "the Supply Agreement".
The "Supply Agreement" was originally particularised as that in place between Stramit and AG&S in May 2007 for the period 7 February 2001 to 30 September 2015. In his second affidavit Mr McFadden said that the "Supply Agreement" was not that of May 2007 but was rather in a letter from Stramit to AG&S of 22 September 2005.
The collateral contract is said to have arisen from a conversation Mr McFadden alleges he had, alone, with Mr Tim Richards immediately prior to execution of the Distributor Agreement. As I have mentioned, Mr Richards was then General Manager of Stramit.
Arising out of the same conversation, Stone Homes and Mr and Mrs McFadden claim that Stramit engaged in misleading or deceptive conduct within the meaning of s 52 of the Trade Practices Act 1974 (Cth).
Mr McFadden's evidence concerning the making of the alleged collateral contract is that on 2 August 2007, whilst at the offices of Gilbert & Tobin (who were acting for FBHS in relation to the 2 August 2007 transaction documents), and shortly before the 2 August 2007 transaction documents were signed, he said to Mr Tim Richards:
"Tim, before we sign, can I talk to you about prices for kit homes?"
Mr McFadden alleges that he and Mr Richards then moved out of the large boardroom, where the others remained, and into a smaller, nearby conference room, where the following conversation took place:
Mr McFadden: "What is happening to pricing for the sheds?
Mr Richards: I'll cut you off there Dennis, we are not buying this business for this amount of money to change the pricing mechanism. The pricing mechanism will stay the same way. We are leaving things the way they are.
Mr McFadden: That's what I wanted to hear because I intend to build a very big display centre for the sheds. I want to be one of your biggest distributors. Now, can we do a deal today on pricing for the kit homes?"
Even on Mr McFadden's account of the conversation, no reference was made, in terms, to any "Supply Agreement" (whether one made in May 2007, or one arising from Stramit's letter of 22 September 2005). According to Mr McFadden, what Mr Richards said was that Stramit's "pricing mechanism" would not change.
The "pricing mechanism" specified in Stramit's letter of 22 September 2005 was:
"As per original Agreement dated 7/2/2001, Stramit will increase prices under this Supply Agreement by the same percentage increase as the percentage cost increase of coil from BlueScope Steel ...Should there be no BlueScope price increase for a period of 15 months, and when Stramit has a general price increase, Stramit and AG&S will negotiate a price increase sufficient to cover Stramit's non-steel overhead cost increases...".
It is common ground that, after 2 August 2007, Stramit departed from this "pricing mechanism" and increased prices otherwise, and beyond, the percentage cost increases it received from BlueScope.
Mr Richards denied the conversation alleged by Mr McFadden but agreed he said words to the effect:
"We are buying a good business and it is not our intention to change it. We are prepared to pay $29 million because we consider it to be a good business."
Mr Richards also agreed that, on a number of occasions prior to 2 August 2007, he had said to Mr McFadden words to the effect:
"Stramit do not intend to change the way in which the shed business was run."
and:
"We are buying a good business and I don't intend to change it."
It was not suggested to Mr Richards, and I see no basis to conclude, that it would have been misleading or deceptive of Mr Richards to say something to the effect set out in the preceding two paragraphs.
Mr McFadden said that immediately after his alleged conversation with Mr Richards, he returned to the boardroom of Gilbert & Tobin and told Mrs McFadden, and Stone Homes' then (and current) solicitor, Mr Greg Smith, without further elaboration, that "everything is good". There is no evidence of what response Mr McFadden received, if any, to this intimation. Mr Smith did not give evidence. Mrs McFadden's recollection of the events of 2 August 2007 was given in very general terms and made no reference to Mr McFadden's remark. Mrs McFadden was not cross-examined.
Mr McFadden agreed that he did not mention to either Mrs McFadden or Mr Smith that Mr Richards had made any representation to him about Stramit's "pricing mechanism" for steel products.
In cross-examination, Mr McFadden appeared confused as to some aspects of what had occurred during his conversation with Mr Richards.
Prior to Mr McFadden's cross-examination, Mr Sirtes had this exchange with Mr Richards:
Q. "And on the day that the documentation was being signed in the lawyers office at Gilbert & Tobin, [Mr McFadden] dragged you aside into a private meeting and sought your confirmation again that you were not planning on changing the running of the business, particularly in relation to the pricing mechanism?
A. No, it didn't happen."
During Mr Moses' cross-examination of Mr McFadden, the following occurred:
Q. "Did you drag Mr Richards out to speak to him on 2 August 2007, is that your evidence?
A. He really asked for us to come out. He wanted to have some talks.
Q. When you say 'us', who?
A. Me, just me.
Q. Just you. That is not what your barrister put to Mr Richards yesterday. You were present in Court when Mr Sirtes was asking Mr Richards a question, is that right?
A. Yes.
Q. You heard Mr Sirtes say, did you not, to Mr Richards, that you dragged Mr Richards out of the meeting because you wanted to talk to him. Did you hear Mr Sirtes put that proposition?
A. No, I didn't, I'm sorry.
Q. Is that true, did you drag Mr Richards out?
A. No, Mr Richards wanted me to - when we started talking on price."
A short time later I reminded Mr McFadden of his affidavit evidence (at [143] and [144] above) and Mr McFadden gave this evidence:
Q. "...you said in your affidavit that you said to Mr Richards, 'Tim, before we sign, can I talk to you about prices for kit homes?' and what I am pointing [out] to you is that that might suggest to the reader that it was you who suggested to Mr Richards that there be a discussion about prices for kit homes. Isn't that how I should read it?
A. Yes, your Honour.
Q. That means you, does it not mean that you are the one that raised...
A. Tim wanted to go out of the room, the private room of the solicitors'.
[MR MOSES]
Q. Sir, that is not true, is it?
A. It is true.
Q. Sir...
A. But I can get words mixed up, but I'm telling you the truth."
One aspect of Mr McFadden's account of what occurred on 2 August 2007 was plainly wrong. He said that, shortly before the critical conversation, Mr Richards handed him a bulky document relating to the supply of steel material for kit homes. Evidently, this provided the foundation for the original particularisation of the "collateral contract" by reference to a "Supply Agreement" (see [139] and [140] above). Mr McFadden's later concession, without explanation, that the only relevant "Supply Agreement" then in existence was Stramit's letter of 22 September 2005 (see [140] above) makes clear that Mr McFadden's evidence of being given a document by Mr Richards on 2 August 2007 could not be right.
In Stone Homes' letter of 4 May 2012 terminating the Distributor Agreement (see [47] above) Mr McFadden complained about the price at which Stramit was supplying steel to Stones Homes and concluded:
"[P]lease remember John [Bull, the National Marketing Manager of Stramit], Tim Richards said to me before I sold [the AG&S assets], 'Dennis, we're not buying this business for this amount of money and change the pricing mechanism, it's going to stay the same.' It definitely hasn't stayed the same; otherwise I wouldn't be in this situation."
Stramit, through its solicitors, responded to Stone Homes' letter of 4 May 2012. That letter made reference to Stramit's "pricing structure" and refuted various allegations Mr McFadden made in his 4 May 2012 letter about steel pricing, but did not refute Mr McFadden's assertion as to what Mr Richards had said to him.
Mr Richards said that he could not recall seeing the 4 May 2012 letter "in the operating sense" but that "that team at Stramit certainly let me know in due course" of Stone Homes' notice of termination. He said "in the normal course of operations, if a matter like this came up, it would be a monthly cycle upon which we were made aware of these issues".
I understood Mr Richards' evidence to be that, although he was aware that Stone Homes had terminated the Distributor Agreement, he was not aware of what Mr McFadden had said in that letter about the events of 2 August 2007 and Mr Richards' alleged representation.
According to Mr McFadden, whose evidence in this regard was corroborated by that of Best Sheds' and Stone Homes' General Manager, Mr Jonathan Wright, the subject matter of Stramit's "pricing mechanism" was also discussed at a meeting of 21 April 2011 at Stramit's offices at Chatswood. Present at the meeting were Mr McFadden, Mr Wright as well as Mr Richards and Mr Paul Jensen, the NSW and ACT Regional General Manager of Stramit.
Mr McFadden gave evidence that, during the meeting, he said to Mr Richards:
"Don't you remember, Tim? When I asked about what you were doing with the pricing, you cut me off and said 'Dennis, we are not buying this business for this amount of money to change the pricing mechanism. The pricing mechanism stays the same'."
And that Mr Richards replied:
"Oh yeah, that's right, but you need to stop making noises in the market."
Mr Wright gave evidence to similar effect. He said that Mr McFadden had said to Mr Richards:
"Don't you remember the conversation we had? You said to me that Stramit would not buy into this business and change the pricing structure. Don't you remember?"
Both Mr Richards and Mr Jensen denied any such words were said.
Each of Mr McFadden, Wright, Richards and Jensen were cross-examined about this conversation. Each stuck to their guns.
Conclusion as to the alleged 2 August 2007 conversation
Mr McFadden's recollection of some aspects of his encounter with Mr Richards on 2 August 2007 was unclear (see [153] to [156] above). However, when pressed he was adamant that his recollection of what Mr Richards said was correct. Mr Richards appeared to me to be equally confident as to the accuracy of his recollection of events.
The same can be said of the four witnesses who gave evidence as to what was said at the meeting on 21 April 2011 (see [162] to [166] above). Each of Mr McFadden, Wright, Richards and Jensen were challenged as to their recollection. Each appeared to me to be quite sure that their recollection was correct. I was not able to gain any insight into the truth of the matter by reference to the manner in which the witnesses gave their evidence.
There is not a great difference between that which Mr Richards recalls he said to Mr McFadden and that which Mr McFadden recalls Mr Richards said to him.
The difference between the parties is whether Mr Richards said something to the effect "[t]he pricing mechanism will stay the same way. We are leaving things the way they are" on the one hand or something to the effect "[I]t is not our intention to change [the business]" or "Stramit do not intend to change the way in which the shed business is run" on the other. The former, but not the latter, is said to be misleading or deceptive, and to have induced Mr McFadden to commit the defendants to the 2 August 2007 transactions.
Mr McFadden's statement to Mrs McFadden and Mr Smith, immediately after his 2 August 2007 conversation with Mr Richards, that "everything is good" certainly suggests that Mr McFadden took some comfort from whatever Mr Richards had said to him about pricing.
But that is consistent with the accounts of both Mr Richards and Mr McFadden. On either version, Mr Richards said something to the effect that Stramit did not intend to change the way things were done.
It is true that Mr McFadden's assertion in his letter of 4 May 2012 as to his conversation with Mr Richards (see [158] above] was not contradicted by or on behalf of Stramit. But I am not satisfied that Mr Richards knew of what McFadden had said in the letter.
There is no evidence that Mr Bull (to whom the letter was addressed), or anyone else from Stramit, asked Mr Richards about what Mr McFadden alleged Mr Richards had said. That aspect of the matter was not explored in cross-examination of Mr Richards.
Stramit's solicitor's reply to Mr McFadden's letter of 4 May 2012 referred to a meeting between Mr Bull and Mr McFadden on 11 May 2012. Mr Bull swore an affidavit in the proceedings in which he made no mention of either Mr McFadden's letter or that meeting. The questions of whether McFadden's allegations about his conversation with Mr Richards was mentioned at this meeting, or whether Mr Bull asked Mr Richards about the allegations, were not explored in cross-examination. Indeed, Mr Bull was not required for cross-examination at all.
In Camden v Mckenzie [2007] QCA 136; [2008] 1 Qd R 39, Keane JA said at [34]:
"Usually, the rational resolution of an issue involving the credibility of witnesses will require reference to, and analysis of, any evidence independent of the parties which is apt to cast light on the probabilities of the situation".
In this case, there are a number of factors pointing to the improbability of Mr McFadden's recollection being correct.
First, it is common ground that, in the period leading up to the execution of the documents of 2 August 2007 the parties had discussed the possibility of consolidating historical supply arrangements.
It is an agreed fact that:
"In the context of there being progress towards finalisation of the purchase [by FBHS of the AG&S assets] (which completed on 2 August 2007), the need for this consolidation dissipated, and the work in consolidating the supply arrangements was never finalised and a form of consolidated agreement was never signed".
It seems unlikely that, having failed to finalise arrangements for the consolidation of supply arrangements in the lead up to the execution of the 2 August 2007 transactions, Mr McFadden would, in the extremely informal circumstances to which he deposes, have sought and obtained from Mr Richards an assurance of the kind alleged.
Further, on his own account of it, Mr McFadden did not mention Mr Richard's alleged assurance to his wife or solicitor before execution of the 2 August 2007 documents.
Nor did Mr McFadden make any mention of the representation to FBHS for over four years, despite the fact that Stramit in the meantime increased steel prices otherwise than in accordance with the 2007 "pricing mechanism". If Mr McFadden had had the conversation with Mr Richards on 2 August 2007 for which he now contends, it seems probable he would have mentioned it much earlier than May 2012.
All these factors point to the improbability of Mr McFadden's account being correct.
In all these circumstances, I am not satisfied that on 2 August 2007, Mr Richards made the statement Mr McFadden attributes to him. The onus was on Mr McFadden to establish, on the probabilities, that the conversation occurred as he said. I find that he has failed to do this.
In any event, I am not satisfied that whatever was said by Mr Richards to Mr McFadden made any difference to Mr McFadden's decision (assuming it was his) to commit AG&S to the transactions of 2 August 2007.
Negotiations for the purchase by FBHS of the Network had taken place over a lengthy period. By 2 August 2007, the deal was exhaustively documented. The Business Purchase Agreements and the Distributor Agreement were in their final form. The parties were at Gilbert & Tobin's offices for final settlement. It is improbable in the extreme that, in those circumstances, and at a "minute to midnight", Mr McFadden would have sought, let alone obtained, a private, oral assurance from Mr Richards upon which his commitment to the transactions would depend.
For these reasons, the First Cross-Claim fails and is dismissed.
Second Cross-Claim
Stramit and FBHS filed a Second Cross-Claim that was responsive to the First Cross-Claim.
As I propose to dismiss the First Cross-Claim, I need not deal with the Second Cross-Claim.
Conclusion
The Amended Statement of Claim, and each of the First Cross-Claim and Second Cross-Claim should be dismissed.
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Decision last updated: 01 April 2014
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