Testel Australia Pty Ltd v KRG Electrics Pty Ltd

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SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Civil)

TESTEL AUSTRALIA PTY LTD v KRG ELECTRICS PTY LTD & ANOR

[2013] SASC 91

Judgment of The Honourable Justice Blue

17 June 2013

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - OTHER MATTERS ARISING BEFORE TRIAL

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH

TRADE AND COMMERCE - OTHER REGULATION OF TRADE OR COMMERCE - RESTRAINTS OF TRADE

TRADE AND COMMERCE - OTHER REGULATION OF TRADE OR COMMERCE - RESTRAINTS OF TRADE - ENFORCEMENT OF AGREEMENT - REMEDIES FOR BREACH OF AGREEMENT

In August 2008, Testel Australia Pty Ltd, KRG Electrics Pty Ltd and Mr George, as guarantor, executed a Franchise Deed under which Testel granted to KRG a non-exclusive franchise in respect of its electrical testing business. The franchise expired by the effluxion of time in August 2011.

Testel sues KRG and Mr George alleging breach of clause 12.29 and other provisions of the Franchise Deed by the defendants unilaterally soliciting from and performing for Testel clients and others electrical testing work before and after the term of the franchise.

Testel also alleges that KRG engaged in misleading conduct by applying tags bearing Testel’s mark “Testel” to appliances unilaterally tested by KRG.

Testel seeks permission under rule 228 of the Supreme Court Civil Rules 2006 (SA) to enter default judgment because the defendants failed to comply with their disclosure obligations and Court orders.

Held:

1.      (a) The defendants committed procedural irregularities seriously prejudicing the proper and expeditious conduct of the action (at [18]-[28]).

(b) The Court has a general discretion whether to grant the relief claimed (at [11]-[16]).

(c) It is appropriate to exercise the discretion to proceed to consider the relief to which Testel is entitled (at [29]).

2.      The contractual restraint of KRG and Mr George from being engaged, concerned or interested in a business substantially the same as the Franchised Business or in competition with Testel was valid to the extent that it operated within South Australia for up to one year after the expiration of the franchise period (at [59]-[71]).

3.      (a) KRG and Mr George, in breach of clause 12.29, engaged in and were concerned and interested in an electrical testing business substantially the same as the Franchised Business and in competition with Testel (at [72]-[73]).

(b) Testel is entitled to damages assessed at $25,176 (at [79]-[89]).

(c) The remedy of account of profits is not available as a matter of law in respect of breaches of contract (at [99]-[110]).

4.      (a) KRG breached clauses 12.28.3 and 24.3 relating to the use of confidential information and the implied duty of good faith in respect of Testel clients during the franchise period (at [118] and [122]).

(b) The damages caused by those breaches are encompassed in the damages assessed for breach of clause 12.29 (at [119] and [123]).

5.      The equitable cause of action of breach of duty of confidence is not available to Testel…

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Details
Case
[2013] SASC 91
Decision Date

CaseChat Overview and Summary

The matter before the court involved Testel Australia Pty Ltd, an electrical testing services provider, and KRG Electrics Pty Ltd, a former franchisee of Testel. The dispute centred around breaches of the franchise agreement by KRG and its director, Mr George, including competition with Testel and the use of confidential information. The court was tasked with determining the validity of certain contractual restraints, assessing damages for breaches of the franchise agreement, and considering other remedies available to Testel.

The court first considered the validity of the contractual restraint prohibiting KRG and Mr George from engaging in a similar business or competing with Testel within South Australia for a year after the franchise ended. The court found the restraint to be valid within South Australia for the specified period. The court then addressed the breaches of the non-compete clause by KRG and Mr George, concluding that they engaged in an electrical testing business similar to Testel's and in competition with Testel. Testel was awarded damages of $25,176, but an account of profits was not available as a remedy. Regarding the use of confidential information, the court found KRG and Mr George in breach of the confidentiality clauses of the franchise agreement and the implied duty of good faith concerning Testel's clients. The court determined that the damages for these breaches were included in the overall damages awarded. The court also noted that an equitable cause of action for breach of confidence was not available due to the lack of pleading. Additionally, KRG and Mr George were found to have engaged in misleading conduct in contravention of consumer protection laws, with Mr George knowingly involved. Finally, the court awarded Testel reasonable costs and expenses incurred in the action.

The court ordered the following relief: a declaration that the non-compete clause was lawful and enforceable within South Australia up to 7 August 2012; damages of $25,176; an injunction preventing KRG and Mr George from using the "Testel" mark in the future; and invited Testel to provide input on the wording of the declaration and injunction, as well as on any ancillary relief.

Orders

Orders of the court

Held:

1. (a) The defendants committed procedural irregularities seriously prejudicing the proper and expeditious conduct of the action (at [18]-[28]).

(b) The Court has a general discretion whether to grant the relief claimed (at [11]-[16]).

(c) It is appropriate to exercise the discretion to proceed to consider the relief to which Testel is entitled (at [29]).

2. The contractual restraint of KRG and Mr George from being engaged, concerned or interested in a business substantially the same as the Franchised Business or in competition with Testel was valid to the extent that it operated within South Australia for up to one year after the expiration of the franchise period (at [59]-[71]).

3. (a) KRG and Mr George, in breach of clause 12.29, engaged in and were concerned and interested in an electrical testing business substantially the same as the Franchised Business and in competition with Testel (at [72]-[73]).

(b) Testel is entitled to damages assessed at $25,176 (at [79]-[89]).

(c) The remedy of account of profits is not available as a matter of law in respect of breaches of contract (at [99]-[110]).

4. (a) KRG breached clauses 12.28.3 and 24.3 relating to the use of confidential information and the implied duty of good faith in respect of Testel clients during the franchise period (at [118] and [122]).

(b) The damages caused by those breaches are encompassed in the damages assessed for breach of clause 12.29 (at [119] and [123]).

5. The equitable cause of action of breach of duty of confidence is not available to Testel because it was not pleaded (at [133]-[140]).

6. KRG engaged in misleading conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) and section 18 of the Australian Consumer Law. Mr George was knowingly concerned in the contraventions (at [143]-[144]).

7. Testel is entitled to reasonable costs and expenses incurred in the action by way of contractual debt under clause 12.36 (at [149]).

8. Relief granted (at [152]-[156]):

(a) Declaration that clause 12.29 is lawful and enforceable in respect of conduct within South Australia up to 7 August 2012.

(b) Damages assessed at $25,176.

(c) Injunction restraining KRG and Mr George from using the “Testel” mark in the future.

(d) Testel to be heard on the wording of the declaration and injunction and on ancillary relief.

Background

Background to the litigation

While the power conferred by rule 228 should only be exercised as a last resort, given the extent and importance of the failures by the defendants to comply with their obligations over a prolonged period coupled with their failure to take any active part in the action after 17 September 2012, it is appropriate that I exercise my discretion under rule 228 and proceed to consider the relief to which Testel is entitled in accordance with the approach identified at [11]-[16] above.Background factsTestel’s business Testel carries on, and has for several years carried on, an electrical testing business based in South Australia but operating Australia wide. Businesses and institutions who use electrical appliances are often required by law to test them periodically, and to record details of the testing (which is typically done by affixing a tag). The testing is usually undertaken in South Australia on a three monthly, six monthly, annual, two yearly or five yearly basis, depending on the nature of the equipment and of the operation in which it is used. Testing every two years is comparatively rare, applying in only 5 per cent of cases in Testel’s business. Annual testing by Testel is most common. Electrical testing and tagging is covered by Australian Standard 3760 entitled “In-Service safety inspection and testing of electrical equipment”. Testel has, and at relevant times had, clients with whom it entered into contracts to provide electrical testing services for a defined period. It charged an agreed amount per appliance tested. Testel services approximately 10 per cent of the South Australian market and 5 per cent of the Australian market for electrical testing services and has done so since at least 2008. As at 2008, the four largest electrical testing service providers in Australia (which included Testel) serviced approximately 20 percent of the Australian market. The balance of the Australian market was serviced by small operators. At all material times, Testel has provided its electrical testing services to clients via franchisees. The franchisees perform the work for Testel (akin to subcontractors). The dealings with the clients to arrange testing and billing and payment are all undertaken by Testel rather than the franchisees. As at 2008, Testel had 21 franchisees in South Australia and 48 franchisees Australia wide. The performance of ordinary electrical testing work does not require a person to be a qualified or licensed electrician. Some of Testel’s franchisees are not and do not employ licensed electricians. In addition to electrical testing work, Testel provides two additional services to its clients. First, some of Testel’s clients require thermal imaging testing. It must be performed by a licensed electrician. Testel arranges for a franchisee who is or employs a licensed electrician to undertake thermal imaging testing for its clients. The second additional service is the repair or replacement of appliances tested and found to be faulty. Sometimes the repair or replacement is a simple matter such as replacing a globe, which can be undertaken by the Testel franchisee undertaking the electrical testing whether or not they are or employ qualified electricians. On other occasions, the repair or replacement involves exposure to mains electricity and can only be undertaken by a qualified electrician. In that case, Testel generally arranges for one of its franchisees who is or employs a qualified electrician to undertake the repair or replacement.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The remedy of an account of profits is not available to Testel in respect of the breaches of clause 12.29 by KRG and Mr George.Conclusion KRG breached clause 12.29 of the Franchise Deed and Testel is entitled to damages of $25,176 as against KRG. Mr George breached clause 12.29 of the Franchise Deed and Testel is entitled to damages of $25,176 as against him. He is also liable to Testel for the same amount as guarantor of the obligations of KRG under clause 26.Breach of contract: other termsClauses 12.28 and 24.3 The Franchise Deed contains several clauses which preclude KRG and its employees and agents from using confidential information without the consent of Testel. Clause 12.28.1 relevantly provides:The Franchise Holder shall maintain strict confidentiality of the Proprietary Information and shall not disclose any of the Proprietary Information to any person …, both during and after termination of this Deed. …Proprietary Information is defined by clause 1.1 of the Deed to mean:… confidential information, software Licences, programmes, devices, methods, techniques and processes that are not generally known to the public pertaining to the promotion, marketing, operation and management of the Master Franchisee, the Franchised Business and the Testel system … Clause 12.28.3 provides:The Franchise Holder and the Franchise Holder’s employees shall not after the expiration or earlier termination of this Deed use the Proprietary Information without the prior written consent of the Master Franchisee. Clause 24.2[92] relevantly provides:The Franchise Holder will not, and will use its best endeavours to ensure that its nominees, employees and agents will not during the currency of this agreement or after its termination except in the proper course of their duties, disclose any secret or confidential information received by any of them from the Master Franchisee in the course of this agreement to any person, corporation or other entity whatsoever …[92] It is not alleged that clause 24.2 was breached but its wording is relevant to the construction of clause 24.3. Clause 24.3 provides:The Franchise Holder and its nominees, employees or agents will not after the expiration or earlier termination of this agreement use the said secrets or confidential information without the written consent of the Master Franchisee first being had and obtained. I am satisfied that KRG breached clauses 12.28.3 and 24.3 relating to the use of confidential information. The evidence establishes that the names and details of Testel’s clients together with the pricing and other arrangements negotiated by Testel with its clients comprised confidential information which was disclosed by Testel to KRG for the purposes of the franchise. KRG has performed electrical testing services for 30 clients of Testel. In some cases, KRG applied “Testel” tags to the electrical appliances of clients and in some cases the clients believed that Testel was continuing to supply the services when in fact they were being supplied by KRG in its own right. I infer that KRG must have made use of the confidential information in order to procure this work.

Ratio Decidendi

Legal Principle Established

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