Testel Australia Pty Ltd v KRG Electrics Pty Ltd - [2013] SASC 91

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 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.
Australia Consumer Law ss 18, 232; Competition and Consumer Act 2010 (Cth) ss 75B, 80; Sch 2; Copyright Act 1968 (Cth) s 115; Designs Act 2003 (Cth) s 75; Federal Court Rules 1979 (Cth) O 35A r 3; Patents Act 1990 (Cth) s 122; Rules of the Supreme Court 1965 (England and Wales) O 19 r 7; Supreme Court Act 1935 (SA) s 30C; Supreme Court Civil Rules 2006 (SA) rr 4, 12, 27, 99, 136, 137, 145, 223, 228, 229 ; Trade Practices Act 1974 (Cth) s 52; Trade Practices Act 1974 (Cth), referred to.
Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89; Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157, applied.
Attorney-General v Blake [1998] 2 WLR 805; Attorney-General v Blake [2000] UKHL 45; [2001] 1 AC 268, not followed.
AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176; Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 290 ALR 595; Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd [2006] FCA 1427; (2006) 236 ALR 665; Australian Competition and Consumer Commission v Yellow Page Marketing BV [2011] FCA 352; (2011) 195 FCR 1; Australian Rugby Union Ltd v Hospitality Ground Pty Ltd [2000] FCA 823; (2000) 173 ALR 702; BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347; (2010) 278 ALR 105; Charles v Shepherd [1892] 2 QB 622; Dalecoast Pty Ltd v Guardian International Ltd [2003] WASCA 142; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389; [2010] 2 Qd R 517; Herbert Morris Ltd v Saxelby [1916] 1 AC 688; Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157; NE Perry Pty Ltd v Judge [2002] SASC 312; (2002) 84 SASR 86; Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126; Phonographic Performance Ltd v Maitra [1998] 2 All ER 638; Robinson v Harman 154 ER 363; (1848) 1 Exch 850; Tito v Waddell (No 2) [1977] Ch 106; Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454, discussed.
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288; Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349; Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220; (2009) 261 ALR 501; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50; (2003) 128 FCR 1; Geraghty v Minter [1979] HCA 42; (1979) 142 CLR 177; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91; Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125; Lindner v Murdock’s Garage [1950] HCA 48; (1950) 83 CLR 628; Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535; Optus Networks Pty Ltd v Telstra Corporation Ltd [2010] FCAFC 21; (2010) 265 ALR 281; Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574; Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574; Phonographic Performance Ltd v Maitra [1997] 3 All ER 673; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; SP Hywood Pty Ltd v Standard Chartered Bank Ltd (Unreported, Supreme Court of South Australia, Perry J, 21 December 1992); Woolworths v Olson [2004] NSWCA 372, considered.

TESTEL AUSTRALIA PTY LTD v KRG ELECTRICS PTY LTD & ANOR
[2013] SASC 91
Civil
BLUE J:

In August 2008, the plaintiff Testel Australia Pty Ltd (“Testel”) and the first defendant KRG Electrics Pty Ltd (“KRG”) executed a Franchise Deed under which Testel granted to KRG a franchise in respect of its electrical testing business. The second defendant, Kawana George, executed the Franchise Deed as a guarantor of the obligations of KRG and also undertook some primary obligations. The franchise expired by the effluxion of time in August 2011.
Testel claims that, in breach of various provisions of the Franchise Deed, both before and after the term of the franchise, KRG unilaterally solicited, obtained and performed electrical testing work from Testel clients and others.
Testel also claims that KRG, aided and abetted by Mr George, engaged in misleading conduct[1] by applying tags bearing Testel’s mark “Testel” to appliances unilaterally tested by KRG.
[1] Australian Consumer Law s 18 under Competition and Consumer Act 2010 (Cth) s 140B (formerly Trade Practices Act 1974 (Cth) s 52).
Testel seeks:
1.   a declaration that clause 2.29 of the Franchise Deed imposed a lawful restraint upon the defendants;
2.   an injunction restraining the defendant from conducting or being concerned in an electrical testing business;
3.   damages or an account of profits in respect of the defendants’ conduct of an electrical testing business in contravention of clause 2.29 and other provisions of the Franchise Deed;
4.   an injunction restraining the defendants from using or applying the mark “Testel” in connection with electrical testing; and
5.   costs of the action on a contractual basis under clause 12.36 of the Franchise Deed.
On 28 August 2012, Testel applied under rule 228 of the Supreme Court Civil Rules 2006 (“the Rules”) for permission to enter default judgment.[2] The application was made on the ground that the defendants had failed to comply with their disclosure obligations and was subsequently expanded to include failure to comply with orders made by me on 26 September 2012.
[2] Interlocutory application dated 28 August 2012 (FDN 37).
On 4 October 2012, as a result of my finding that the defendants had failed to comply with their obligations as alleged by Testel, I made an order under rule 12(2)(b) striking out their defence. I listed Testel’s application for permission to enter default judgment for hearing on 29 November (subsequently relisted for 30 November) 2012. The defendants were given notice of those orders. They did not appear at the hearing on 30 November 2012 and it proceeded on an ex parte basis.
Approach to determination of issues
Part 3 of the Rules deals with default judgments. Division 2 (rule 229) deals with entry of default judgment administratively where the Court’s permission is not required. Testel has not sought to enter judgment in default administratively pursuant to rule 229. Division 1 (rule 228) deals with entry of default judgment by permission of the Court.
Rule 228 relevantly provides:
(1)If a party fails to file a pleading, or particulars of its case, as required under these rules, or commits some other procedural irregularity that seriously prejudices the proper and expeditious conduct of the action, another party may, with the Court's permission, enter a default judgment.
(2) If the defendant is in default, judgment may be entered for the relief claimed or some other relief the Court considers appropriate.
Under rule 228(1), it is a precondition to the exercise of the Court’s power to grant permission to enter a default judgment that the other party:
1.   has failed to file a pleading, or particulars of their case, as required under the Rules; or
2.   has committed some other procedural irregularity;
that seriously prejudices the proper and expeditious conduct of the action.[3]
[3]    It may be that, where the party fails to file a pleading or particular as required under the Rules, it is not a precondition to the exercise of the power to grant permission that the failure seriously prejudices the proper and expeditious conduct of the action. If so, the degree of prejudice would in any event be relevant to the exercise of the discretion. I do not need to resolve that issue because Testel does not rely on failure by the defendants to file a pleading or particulars.
For the reasons set out at [17]-[29] below, I am satisfied that the defendants have committed procedural irregularities that seriously prejudice the proper and expeditious conduct of the action and accordingly that the precondition to the exercise of the power under rule 228(1) has been satisfied.
Rule 228(1) requires grant of the Court’s permission to enter a default judgment if the precondition is satisfied. The fact that a discretion is conferred upon the Court is reinforced by use of the word “may” in rule 228(1) and rule 228(2) and the reference in rule 228(2) to relief “the Court considers appropriate”.
Considerable caution needs to be exercised in applying decisions of other courts in relation to differently worded rules in the context of different procedural regimes. Subject to that caution, decisions of other courts may provide guidance concerning the construction of the Rules.
Order 19 rule 7(1) of the former Rules of the Supreme Court 1965 (England and Wales) relevantly provided that, in certain circumstances, if a defendant failed to serve a defence:
… the plaintiff may … apply to the Court for judgment, and on the hearing of the application the Court shall give such judgment as the plaintiff appears entitled to on his statement of claim.
In Phonographic Performance Ltd v Maitra,[4] the English Court of Appeal held that, at least in cases in which relief is discretionary (such as injunctive relief), the Court had a discretion in hearing an application for default judgment under Order 19 rule 7 whether or not to grant the relief and as to the terms and conditions upon which any such relief should be granted.[5] In Charles v Shepherd,[6] the Court of Appeal had held, in relation to a predecessor of order 19 rule 7(1), that the Court had a general discretion on an application for default judgment to determine whether or not grant the relief.[7]
[4] [1998] 2 All ER 638.
[5] Ibid at 644 per Lord Woolf MR, Aldous and Mummery LJJ. See also the first instance judgment of Chadwick J in Phonographic Performance Ltd v Maitra [1997] 3 All ER 673 at 679-680.
[6] [1892] 2 QB 622.
[7] Ibid at 623-624 per Lord Esher MR (Bowen and Kaye LJJ agreeing).
Order 35A rule 3(2)(c) of the former Federal Court Rules 1979 (Cth) relevantly provided that, if a respondent was in default (as defined):
… the Court may … give judgment against the respondent for the relief that:
(i)the applicant appears entitled to on the statement of claim; and
(ii)the Court is satisfied it has power to grant …
In Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd,[8] Kiefel J held that the Court had a discretion under Order 35A rule 3(2)(c) whether or not to grant discretionary relief (such as declarations and injunctions).[9] In Australian Competition and Consumer Commission v Yellow Page Marketing BV,[10] Gordon J adopted the same approach.[11]
[8] [2006] FCA 1427; (2006) 236 ALR 665.
[9] Ibid at [43]-[59] per Kiefel J.
[10] [2011] FCA 352; (2011) 195 FCR 1.
[11] Ibid at [14] and [62]-[63] per Gordon J.
Testel accepts that the principal provision of the Franchise Deed upon which it relies is prima facie in restraint of trade and hence unlawful and unenforceable as being against public policy at common law, although it will be enforceable to the extent that it imposed a restraint which was reasonable in reference to the interests of the parties and the public interest. Testel accepts that, at least to the extent that it seeks declaratory or injunctive relief, it is appropriate that the Court determine on the merits whether the clause is unlawful and unenforceable and that such relief should be refused if the Court concludes that the clause is unlawful and unenforceable. My understanding is that Testel accepts that the same applies to the extent to which Testel seeks damages for breach of that clause, but in any event I hold that the same approach should apply pursuant to rule 228. It would be incongruous if the Court were to hold that, for the purpose of declaratory and injunctive relief, the clause is unlawful and unenforceable but then to proceed to assess damages for breach of that unlawful clause.
In relation to issues such as the existence and terms of the Franchise Deed, because rule 228 refers to a “default judgment”, it is likely that the Court is entitled to proceed on the face of facts pleaded in Testel’s statement of claim and evidence is not required. Testel has in fact adduced evidence in respect of the various elements of its claim. I consider that such evidence is admissible on an application for default judgment under rule 228.[12] I have regard to the facts pleaded in Testel’s statement of claim and the facts proved by the evidence adduced by Testel given that they cover similar ground and there is no conflict between them.
[12] In some other jurisdictions, it has been held not only that the court is entitled to act on the face of the facts pleaded in the statement of claim but also that ordinarily evidence is not admissible. However, the rules in those jurisdictions are differently worded, and provide explicitly for the court to act on the basis of the pleadings. See, for example, the former English and Welsh Rules and the former Federal Court Rules and the cases considered at [13] and [14] above.
Precondition to exercise of power under rule 228
The precondition to the exercise of the Court’s power to grant permission to enter a default judgment under rule 228 on the ground of procedural irregularity is relevantly that:
1. the defendants committed procedural irregularities; and
2. those irregularities seriously prejudice the proper and expeditious conduct of the action.
The term “procedural irregularity” is defined by rule 4 to include:
… failure to comply with a procedural obligation (whether arising under these rules, a practice direction or an order of the Court) …
On 27 April 2012, an order was made that the parties make disclosure within 28 days. The defendants failed to comply with that order.
On 2 July 2012, an order was made extending the time for disclosure by the defendants to 16 July 2012. The defendants did not make disclosure in accordance with their obligations following that order.
On 18 July 2012, Testel applied under rule 228 for default judgment due to the failure of the defendants to make disclosure. On 8 August 2012, I ordered that the defendants make disclosure by 16 August 2012. In the meantime, Testel’s solicitors wrote to the defendants on 10 August 2012 setting out, for their assistance, categories of documents which Testel expected to have been in the possession of the defendants and to be relevant to the matters in issue in the action. The defendants did not comply with the order made on 8 August 2012.
On 7 September 2012, I extended the time for the defendants to file and serve their list of documents to 14 September 2012. On 14 September 2012, Mr George filed and served a list of documents (FDN 46). No list of documents was filed or served by KRG notwithstanding that on 13 September I had made an order under rule 27 authorising Mr George to represent KRG in the action.
The list of documents filed by Mr George did not comply with rules 136 and 137 of the Rules. Rule 136(2) requires disclosure to be made by filing a list of documents in the approved form. The approved form is form 20, which requires a listing of documents relevant to the issues arising on the pleadings which are presently in the possession of the party and a separate listing of such documents which have been, but are no longer, in the possession of that party.
The non-compliance with the Rules and the approved form by Mr George was so extensive that I concluded that he had not made a proper diligent effort in good faith to make disclosure in accordance with his obligations. Aspects of the non-compliance included the following.
1.   Mr George identified some categories of documents, but did not attempt to itemise or identify the documents. For example, in respect of the category suggested by Testel’s solicitors of communications with another specified franchisee, he made reference to some client referrals but did not identify any documents. In relation to the category of documents suggested by Testel’s solicitors of communications with clients other than Testel clients, Mr George simply listed the names of such clients without attempting to identify the nature or details of relevant documents.
2.   Mr George did not disclose specifically (by date, invoice or otherwise) invoices issued to clients. Invoices obtained by Testel from Testel clients and obtained by Testel at the outset of the action from Mr George and KRG were tendered by Testel. Those invoices proved that KRG and Mr George issued such invoices. Other evidence adduced by Testel proved that KRG and Mr George issued other invoices of which Testel does not have copies.
3.   Mr George did not include any documents which were formerly in his possession in paragraph 2 of form 20 (in an attachment he did refer incidentally to some documents which had formerly been in his possession, but did not attempt to provide a comprehensive list of relevant documents formerly in his possession).
4.   Mr George did not complete at all paragraph 3 of form 20 so as to state that he had now discharged his obligations regarding disclosure of documents in the action.

I was satisfied that, by its failure to file and serve any list of documents in contravention of its obligations under the Rules and various orders made by the Court, KRG committed a series of procedural irregularities. I was also satisfied that, by failing to comply with his obligations under the Rules and various orders and ultimately by filing and serving a list of documents which did not comprise an attempt in good faith to comply with his disclosure obligations, Mr George committed a series of procedural irregularities.
On 26 September 2012, I made an order under rule 145 that Mr George attend on 4 October 2012 at 2.45 pm for cross-examination as to compliance by the defendants with their obligations to disclose documents. Mr George failed to comply with that order and thereby committed a procedural irregularity.
On 26 September 2012, I made an order that the defendants deliver to the Registrar by 4.00 pm on 28 September 2012 defined computers and, if unable to do so because they were no longer in their possession, power or control, that they file and serve by 4.30 pm on 2 October 2012 an affidavit setting out certain information in relation to those computers. The defendants failed to comply with that order and thereby committed a procedural irregularity.
I was satisfied that each of the procedural irregularities in relation to the filing and service of complying lists of documents and failure to comply with the orders made on 26 September 2012 seriously prejudiced the proper and expeditious conduct of this action. That prejudice was particularly serious because, ex hypothesis, Testel does not have in its own possession documents relating to unilateral testing undertaken by the defendants and Testel was largely reliant upon the defendants complying with their disclosure obligations and with the orders made for the production of computers or information relating to those computers.
For the above reasons, on 4 October 2012 I was satisfied that the defendants had committed procedural irregularities within the meaning of rule 12 and that an order should be made striking out their defence pursuant to rule 12(2)(b).
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 facts
Testel’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.
Testel does not perform major repairs or replacements. It does not generally undertake repair or replacement work other than incidentally to electrical testing.
KRG and Mr George
Mr George is and was the sole director and shareholder of KRG. He has undertaken most, if not all, of the electrical testing or other work undertaken on behalf of KRG.
Franchise Deed
On 4 August 2008, Testel, KRG and Mr George executed the Franchise Deed. Under the Franchise Deed, Testel granted to KRG the right to establish and operate a franchised business undertaking electrical testing in accordance with AS3760 using the methods and techniques provided by Testel and its trademarks and designs. The franchise granted to KRG was non-exclusive and in particular KRG was not given a specific geographical area in which to operate exclusively.
The term of the franchise was three years commencing on 7 August 2008,[13] with four consecutive rights of renewal for three years each upon satisfaction of defined conditions.[14]
[13] Franchise Deed clause 4.1 and Schedule item 2.
[14] Franchise Deed clause 4.2.
Under the Franchise Deed, Testel agreed to pay to KRG monthly the total of Gross Monthly Receipts received by Testel from clients in respect of work performed by KRG plus defined credits and less defined fees payable by KRG to Testel.[15] The total fees comprised 23.5 percent of Gross Monthly Receipts.[16] Accordingly, KRG was entitled to receive 76.5 percent of Gross Monthly Receipts.
[15] Franchise Deed clause 9.2.
[16] Franchise Deed clauses 9.1, 9.2 and 10.3 and Schedule item 15; clauses 9.2, 9.9 and Schedule item 15; clause 15.1.2 and Schedule item 22.
Under the Franchise Deed, Testel agreed to provide sufficient work to KRG to generate a Gross Annual Income of $100,000. KRG agreed to pay a fee of $20,000 in return for this guarantee. Gross Annual Income was defined by reference to gross turnover (receipts from clients for work performed) and in particular was calculated before deduction of the percentage based fees totalling 23.5 percent payable by KRG to Testel. The net result was that Testel agreed to pay to KRG a net annual amount of at least $76,500.[17]
[17] Less the one off $20,000 fee.
AS3760:2003 was the Australian Standard in force in 2008 when the parties entered into that Franchise Deed. The Standard was expressed to have the following scope:
This Standard specifies procedures for the safety inspection and testing of low voltage single phase and poly-phase (e.g nominal 240V and 415V) electrical equipment, connected to the electrical supply by a flexible cord and/or connecting device, which is already in-service, has been serviced or repaired, is returning to service from a second-hand sale, or is available for hire.
…
This Standard only applies to equipment in-service at a place of work or public place, or offered for hire.
…
This Standard does not apply to fixed or stationary equipment connected to wiring that forms part of the electrical installation and falls within the scope of [AS3000].
Under the Franchise Deed, KRG agreed, inter alia:
1.   not to be engaged, concerned or interested in any business substantially the same as or in competition with the Franchised Business and/or Testel for defined periods within defined areas;[18]
2.   to maintain strict confidentiality of, and not to disclose, during or after termination of the Deed, confidential information, methods, techniques and processes not generally known to the public pertaining to the promotion, marketing, operation and management of Testel;[19]
3.   not after termination of the Deed to use confidential information without the prior written consent of Testel.[20]
[18] Franchise Deed clause 12.29.
[19] Franchise Deed clauses 12.28.1 and 1.1 (defining "Proprietary Information"); clause 24.2.
[20] Franchise Deed clauses 12.28.3 and 24.3.
Under the Franchise Deed, Mr George undertook some direct obligations, including the same obligation as was imposed on KRG in restraint of competition under clause 12.29 referred to above. He also guaranteed the obligations of KRG.
The franchise granted to Testel expired by the effluxion of time on 7 August 2011. KRG did not seek to exercise any right of renewal.
Breach of Contract: Clause 12.29
The primary claim advanced by Testel is that the defendants have breached, and unless restrained are likely to continue to breach, clause 12.29 of the Franchise Deed.
Clause 12.29.1 relevantly provides that, subject to exceptions allowed by the Deed, the Franchise Holder (KRG) and each Guarantor (Mr George) jointly and severally agree that, for defined periods and within defined areas, they:
must not be directly or indirectly 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 …
The “Master Frachisee” is defined to be Testel. The “Franchised Business” is defined to mean “the business operated by the Franchise Holder under the Franchise granted to the Franchise Holder in this Deed”.
Clauses 12.29.2, 12.29.3 and 12.29.5 in combination create a series of separate covenants in respect of different periods and areas. The periods all commence on the date of the Deed (4 August 2008) and finish three, two and one year(s) after the determination or expiration of the Deed. The areas range from Australia as a whole through South Australia down to a radius of 2 kilometres from any Testel client’s premises. Clause 12.29.5 effectively provides that, if a covenant in respect of a greater period or greater area is invalid or unenforceable, that will not affect the validity or enforceability of a covenant in respect of a lesser period or lesser area.
On the face of the pleadings, there was no dispute concerning the execution or wording of the terms of the Franchise Deed. In any event, they are proved by the evidence adduced by Testel. However, the defendants had pleaded that clause 12.29 is unlawful and unenforceable as being in restraint of trade. For the reasons given at [11]-[16] above, it is necessary to determine whether clause 12.29 is valid as a step in determining whether permission should be granted to Testel to enter default judgment against the defendants.
General principles applying to covenants in restraint of trade
The following general principles apply to covenants in restraint of trade.
1.   A covenant in restraint of trade is prima facie unlawful and void at common law as being contrary to public policy.[21]
[21] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 per Lord Macnaghten; Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd; (1947) 77 CLR 574 at 589-592 per Dixon J (see also at 580-581 per Latham CJ, 582 per Rich J, 583 per Starke J, 595 per McTiernan J and 598-599 per Williams J); Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 at [14] per Gleeson CJ, Gummow, Kirby and Hayne JJ.
2.   There are “some species of restraint of trade which do not attract the operation of the common law doctrine”,[22] but Testel does not suggest that clause 12.29 of the Franchise Deed falls within any such species.
3.   The general rule is subject to the exception that restraints which are reasonable in reference to the interests of the parties and in reference to the interests of the public are valid.[23]
4.   The onus of proof on the issue whether the covenant is reasonable in reference to the interests of the parties[24] lies on the covenantee.[25]
5.   For a covenant to be reasonable in reference to the interests of the parties, the covenantee must have a legitimate interest in restraining the convenantor from trading.[26]
6.   The protection of the goodwill of the covenantee is frequently regarded as a legitimate interest for this purpose.[27]
7.   Assessing whether a covenant in restraint of trade is reasonable in reference to the interests of the parties involves weighing the legitimate interests of the covenantee against the legitimate interests of the convenantor in being free to trade and to earn revenue.[28]
8.   To be reasonable in reference to the interests of the parties, the covenant “must afford no more than adequate protection to the party in whose favour it is imposed”, ie it must not exceed “what is reasonably necessary for the protection of the covenantee”.[29]
9.   A covenantee may have a legitimate interest in the protection of its goodwill in the context of various relationships, including that of employer and employee,[30] contractor and subcontractor,[31] franchisor and franchisee,[32] partnership and vendor and purchaser.[33]
10. While the ultimate test and required approach is the same, different considerations apply to assessing reasonableness in a context such as a relationship of employer and employee compared to a transaction such as the sale of a business as between vendor and purchaser.[34]
11. The reasonableness of the restraint is determined as at the date of the contract in light of the provisions of the contract, the objective circumstances at the time of the contract and the objectively foreseeable circumstances.[35]
[22] Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 at [15] per Gleeson CJ, Gummow, Kirby and Hayne JJ and [51] per Callinan J.
[23] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 per Lord Macnaghten; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd; (1973) 133 CLR 288 at 315-316 per Gibbs J; BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347; (2010) 278 ALR 105 at [48]-[49] and [59]-[61] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
[24] There is some uncertainty on the authorities as to whether the onus of proof on the issue whether the convenant is reasonable in reference to the interests of the public lies upon the covenantor or the position is the same as the onus of proof on the issue whether the covenant is reasonable in reference to the interests of the parties (and hence lies upon the covenantee): see, for example, the approach of Lord Atkinson in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 700 compared to the approach of Lord Parker at 707.
[25] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565-566 per Lord Macnaghten; Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 700 per Lord Atkinson and 707 per Lord Parker (Lord Sumner agreeing); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 317 per Gibbs J.
[26] Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269 at 301 per Lord Reid; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2009] QCA 389; [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing).
[27] Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 713-714 per Lord Shaw.
[28] Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111; (2012) 205 FCR 187 at [36] and [62]-[64] per Keane CJ, Foster and Griffiths JJ.
[29] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 315-316 per Gibbs J; NE Perry Pty Ltd v Judge [2002] SASC 312; (2002) 84 SASR 86 at [24] per Doyle CJ.
[30] Lindner v Murdock’s Garage (1950) 83 CLR 628.
[31] NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [24] per Doyle CJ.
[32] BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [60]-[61] per Macfarlan JA (Giles JA and Sackville AJA agreeing); EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing).
[33] Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 713-714 per Lord Shaw.
[34] Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574 at 590-591 per Dixon J; Geraghty v Minter (1979) 142 CLR 177 at 185 per Gibbs J; NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [24] per Doyle CJ; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing); BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [60] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
[35] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 574 per Lord Macnaghten; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing); BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [48]-[49] per Macfarlan JA (Giles JA and Sackville AJA agreeing)
In the context of a covenant in restraint of trade in a franchise agreement, every case needs to be considered by reference to its own facts and circumstances and it is dangerous to generalise. Nevertheless, typically the following factors are relevant in assessing the reasonableness of the covenant in reference to the interests of the parties.
1.   It is generally necessary that the franchisor possesses goodwill of a substantial value in respect of its business and that such goodwill would be likely to be adversely affected by the franchisee being unrestrained by the restraint of trade provision.[36]
2.   A relevant factor will typically be whether the franchisor possesses confidential information and/or intellectual property of a substantial value which would be adversely affected by the franchisee being unrestrained by the restraint of trade provisions.[37]
3.   Reasonableness will be assessed by reference to the nature of the restraint, the depth and scope of the activities restrained, the period of the restraint and the geographical area the subject of the restraint.[38]
4.   A relevant factor will often be the nature and depth of the relationship between the franchisee and the franchisor’s clients, such that the stronger the relationship, typically the more likely the covenant will be found to be reasonable.[39]
5.   A relevant factor will be the frequency with which contracts between the franchisor and its clients are negotiated.[40]
6.   If the contract, and in particular the restraint of trade provision, was freely negotiated between parties at arm’s length, that is a factor to be taken into account in assessing the reasonableness of the restraint as between the parties.[41]
7.   Generally, the more akin the relationship between franchisor and franchisee is to a relationship between employer and employee, the less likely it is that the covenant will be assessed as reasonable.[42]
8.   To the extent that the franchisor relies upon protection of intellectual property or confidential information (or intangible property more generally) as justification for the restraint, it is relevant to consider the extent to which the franchisor is adequately protected by other contractual provisions or duties owed to the franchisor by the franchisee.[43]
[36] BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [67]-[83] per Macfarlan JA (Giles JA and Sackville AJA agreeing); Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 at [58] per Keane CJ, Foster and Griffiths JJ.
[37] EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [16]-[20] and [26]-[31] per Fraser JA (Fryberg and McMeekin JJ agreeing); BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [79]-[83] and [85] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
[38] Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 at [62]-[65] per Keane CJ, Foster and Griffiths JJ.
[39] BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [81]-[82] per Macfarlan JA (Giles JA and Sackville AJA agreeing); Ibid at [46]-[51] per Keane CJ, Foster and Griffiths JJ
[40] Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 at [65] per Keane CJ, Foster and Griffiths JJ.
[41] EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing); Ibid at [30]-[35] per Keane CJ, Foster and Griffiths JJ.
[42] BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [61]-[83] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
[43] Lindner v Murdock’s Garage (1950) 83 CLR 628 at 636-637 per Latham CJ; Woolworths Ltd v Olson [2004] NSWCA 372 at [67] per Mason P (McColl and Bryson JJA agreeing); EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [35] and [45] per Fraser JA (Fryberg and McMeekin JJ agreeing); Pearson v HRX Holdings Pty Ltd (2012) 205 FCR 187 at [51]-[56] per Keane CJ, Foster and Griffiths JJ.
Proper construction of clause 12.29

In order to consider whether clause 12.29 (in its various permutations) is unlawful and unenforceable as being in restraint of trade, it is first necessary to construe the clause for its proper effect. As a matter of construction, the clause should be read distributively such that it prohibits the Franchise Holder and Guarantor from being engaged, concerned or interested in any business that is either:
(a)substantially the same as the Franchised Business; or
(b)in competition with the Master Franchisee.
It would be incongruous and indeed meaningless to describe a business as being “the same as” an entity (the Master Franchisee – Testel) or to describe a business as being “in competition with” the Franchised Business after the termination of the franchise under the Franchise Deed (because the term “the Franchised Business” is defined to mean the business operated by the Franchise Holder under the franchise granted by the Deed).
Context of clause 12.29
In assessing the reasonableness of the clause, it is appropriate to have regard to the context of the clause in the Franchise Deed and other facts in existence or in the objective contemplation of the parties at the time of execution of the Franchise Deed.[44]
[44] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 574 per Lord Macnaghten; EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd [2010] 2 Qd R 517 at [10] per Fraser JA (Fryberg and McMeekin JJ agreeing; BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR 105 at [48]-[49] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
Those facts include those set out at [30]-[47] above.
While it is clear that the relationship between Testel on the one hand and KRG and Mr George on the other hand was not one of employer and employee, there were similarities with a relationship of employer and employee. Effectively, KRG was entitled to a base income of $76,500 per annum, together with 76.5 percent of the revenue in respect of work performed by KRG over and above $100,000 per annum. All contracts with clients were between Testel and the client. All bills were rendered by Testel to the clients. KRG’s principal responsibility was to perform the physical testing and tagging work. Pursuant to clause 12.5 of the Franchise Deed, Mr George was required to devote his full time attention and attendance to supervising duties and day to day operation of the franchised business.
Assessment of reasonableness
Testel concedes that clause 12.29 is a covenant in restraint of trade and is prima facie unlawful. There is therefore no need to assess whether the covenant imposes a “restraint”,[45] or is upon or in respect of “trade”[46] or falls within species of covenant in restraint of trade not subject to the common law doctrine.[47]
[45] Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at [14] per Gleeson CJ, Gummow, Kirby and Hayne JJ.
[46] Ibid.
[47] Ibid.
In NE Perry Pty Ltd v Judge,[48] the plaintiff company (“Perry”) was owned by a chiropractor (Dr Perry) and carried on a chiropractic business in Whyalla. Perry engaged the second defendant (“Judge”), a company of which the first defendant (Dr Judge) was a shareholder and director, to procure Dr Judge to provide chiropractic services at Perry’s Whyalla practice. The contract included a covenant in restraint of trade, precluding Judge from practicing in Whyalla for two years following termination of the agreement. The trial Judge concluded that a restraint of trade clause in those terms for one year following termination of the agreement would have afforded reasonable protection to Perry, but that Perry had not demonstrated that two years was necessary for the reasonable protection of Perry’s legitimate interests. This conclusion was upheld on appeal by the Full Court of this Court.[49] The Full Court held that the principal factor to be considered was the time required to break the connection between Dr Judge and the patients whom he treated.[50]
[48] (2002) 84 SASR 86.
[49] Ibid at [38]-[39] per Doyle CJ, [76] and [87] per Bleby J and [115]-[117] per Besanko J
[50] Ibid at [28]-[30] per Doyle CJ, [72]-[73] per Bleby J and [101] per Besanko J.
In EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd,[51] the plaintiff franchisor granted to a franchisee company the right to operate an EzyDVD store at a Brisbane suburb. The franchise agreement included a covenant restraining the franchisee company and its two directors from engaging in or having a financial interest in a competitive business within 5 kilometres of the store or within one kilometre of any other EzyDVD store in Australia for six months following the expiration of the franchise. The trial Judge concluded that the restraint was unreasonable. This was upheld by the Court of Appeal of the Queensland Supreme Court. The principal reason for that conclusion was that there was limited personal goodwill and the plaintiff was largely protected in respect of its confidential information by its intellectual property rights and confidential information contractual rights.[52]
[51] [2010] 2 Qd R 517.
[52] Ibid at [4], [15]-[16], [24]-[25] and [31] per Fraser JA (Fryberg and McMeekin JJ agreeing).
In BB Australia Pty Ltd v Karioi Pty Ltd,[53] the plaintiff franchisor granted to a franchisee company the right to conduct a Blockbuster video store at two Sunshine Coast towns. The franchise agreement included a provision restraining the franchisee from engaging in or having a financial interest in a competitive business within cascading radii ranging from 30 kilometres down to 1 kilometre of the site or any other Blockbuster video outlet in Australia for cascading periods ranging from 3 years down to 6 months following termination of the franchise. The trial Judge held that the restraint of trade clause was unreasonable. This conclusion was upheld by the Court of Appeal of the New South Wales Supreme Court. The principal reason for the Court of Appeal’s conclusion was that a franchisee did not itself enjoy substantial personal goodwill in its relationship with customers of the Blockbuster stores.[54]
[53] (2010) 278 ALR 105.
[54] Ibid at [82] and [87] per Macfarlan JA (Giles JA and Sackville AJA agreeing).
In Pearson v HRX Holdings Pty Ltd,[55] the plaintiff carried on a human resources business. The plaintiff employed the defendant as chief operating officer. One of the defendant’s principal roles was to be the primary presenter on behalf of the plaintiff to prospective clients in an endeavour to secure their business. He was intended to have a close relationship with clients and prospective clients of the plaintiff’s business. The service agreement included a clause restraining him from being concerned in a business similar to or competitive with the plaintiff’s recruitment business for two years following termination of the employment relationship. The trial Judge held that the restraint was reasonable. This conclusion was upheld by a Full Court of the Federal Court. The principal reason for the conclusion was the extent and importance of the defendant’s connections with the plaintiff’s customers.[56]
[55] (2012) 205 FCR 187.
[56] Ibid at [51] and [62]-[65] per Keane CJ, Foster and Griffiths JJ.
In AGA Assistance Australia Pty Ltd v Tokody,[57] the plaintiff carried on business as a travel insurer. The plaintiff employed the defendant in a position under various titles, the last of which was chief sales officer. The defendant was responsible for procuring insurance business and as a result had extensive and intensive relationships with clients and prospective clients of the plaintiff’s travel insurance business. The employment contract included a clause restraining him from being interested or concerned in a business substantially similar to or in competition with the plaintiff’s business within cascading areas ranging from Australia to Brisbane for cascading periods ranging from one year down to three months. McMurdo J held that the restraint of trade clause was reasonable. An important factor was the extent of the personal relationship between the defendant and the plaintiff’s clients and prospective clients.[58]
[57] [2012] QSC 176.
[58] Ibid at [38] per McMurdo J.
In the present case, I accept that Testel had goodwill of a substantial value in respect of its business and that it had a legitimate interest in protecting that goodwill vis a vis KRG and Mr George.
In respect of the period prior to the expiration of the franchise on 7 August 2011, the nature of the relationship between the parties pursuant to the Franchise Deed and the objective circumstances are such that it was reasonable in reference to the interests of the parties that KRG and Mr George be restrained from being engaged, concerned or interested in a business substantially the same as the Franchised Business or in competition with Testel within Australia. In particular, clause 12.5 obliged KRG through Mr George to devote his full time attention and attendance to the operation of the franchised business.
In respect of the period following the expiration of the franchise on 7 August 2011, different considerations apply. In relation to the geographical area the subject of the restraint, on the evidence adduced by Testel, it was in the contemplation of the parties that during the franchise period KRG (Mr George as its manager) would undertake electrical testing work in South Australia, being principally the metropolitan area of Adelaide as well as country towns and areas. It was not anticipated that KRG or Mr George would undertake substantial work in other States. Although in fact KRG undertook some work in country towns in Queensland and Western Australia, this was quite limited (and in accordance with the anticipation of the parties at the time of the contract). In those circumstances, it was not reasonable that KRG or Mr George be restrained from undertaking activities outside South Australia following the expiration of the franchise period.
In relation to the period of the restraint, a restraint imposed by clause 12.29 on the defined activities within South Australia for one year after expiration of the franchise period was reasonable in the interests of the parties. Taking into account the contractual benefits conferred upon KRG (and indirectly upon Mr George), including the guaranteed minimum income provision and the right to extend the franchise (subject to compliance with conditions) for a total period up to 15 years, as well as the nature and extent of Testel’s goodwill and confidential information, it was reasonable that a restraint be imposed upon KRG and Mr George for a period following expiration of the franchise period. The nature of the restraint (engaging in or being concerned or interested in a business substantially the same as the Franchised Business or in competition with Testel) was reasonable. As electrical testing was most commonly provided annually, if any restraint was reasonable, it was necessary that it extend for a period of one year to cover most existing clients of Testel whose equipment had been tested by KRG (given that contract start and renewal dates would vary over the year depending on the client). The interests of KRG and Mr George do not sufficiently counter-balance Testel’s interests in this regard.
On the other hand, a restraint for two years following expiration of the franchise period was not reasonable in the interests of the parties. A restraint for the first year following expiration of the franchise would enable Testel to provide the next annual, next two biannual or next four quarterly electrical testing services to each client (depending on the contractual frequency of testing) without competition with or interference by KRG or Mr George. The mere fact that a small minority of Testel’s contracts with clients provided for a testing frequency greater than 12 months does not dictate that a restraint beyond the first 12 months was reasonable. The nature of the relationship between Mr George and Testel’s clients was relatively limited compared, for example, to the relationship between a chiropractor and patient as considered in NE Perry Pty Ltd v Judge or a human resources business’s chief operating officer as considered in Pearson v HRX Holdings Pty Ltd. The relationship with Testel clients was not likely to be as intensive or extensive as the relationship would be with a chiropractic patient. It is also necessary to balance against Testel’s legitimate interests the interest of Mr George in earning a livelihood and of KRG in earning revenue.
Turning to the public interest, in all of the circumstances, it was not contrary to the public interest that KRG and Mr George be restrained by clause 12.29 in respect of activities within South Australia up to 12 months following expiration of the Franchise Deed. It was contrary to the public interest that they be restrained thereafter.
Accordingly, clause 12.29 is valid to the extent that it operates within South Australia for up to one year after the expiration of the franchise period, in other words up to 7 August 2012.
Breach of clause 12.29
The affidavits of Mr Oszczypok and Mr Townsend, together with the exhibits thereto, prove that KRG has engaged in an electrical testing business during the restraint period. That business is substantially the same as the Franchised Business and is in competition with Testel. Mr George, in his capacity as director and shareholder of KRG and as the person performing work on behalf of KRG, has been concerned and interested in that business.
These matters are proved in particular by invoices rendered by KRG to, and KRG banking deposits from, entities which were or had previously been Testel clients as well as invoices rendered by KRG to entities which have never been Testel clients. The invoices are principally for electrical testing. It is also proved in several instances by affidavits and/or documents provided by Testel clients. KRG rendered electrical testing services to 30 Testel clients and 7 non-Testel clients
Remedies
Declaration
Testel seeks a declaration that the restraint of trade provision contained in clause 12.29 of the Franchise Deed is lawful and enforceable.
In Part 2 of its statement of claim, Testel pleads, amongst other things, a claim to a remedy by way of an injunction restraining the defendants from acting in breach of clause 12.29, but does not mention a declaration. However, rule 223 of the Rules provides:
The Court may, in an appropriate case, give judgment for a form of relief that differs from the kind of relief sought by the plaintiff.[59]
[59] See SP Hywood Pty Ltd v Standard Chartered Bank Ltd (Unreported, Supreme Court of South Australia, Perry J, 21 December 1992).
In the circumstances, it is appropriate to grant a declaration declaring the rights of Testel in respect of clause 12.29.
Injunction
Testel seeks an injunction restraining KRG and Mr George from carrying on an electrical testing business substantially the same as the Franchised Business or in competition with Testel in contravention of clause 12.29 of the Franchise Deed. Testel seeks the injunction in respect of the remaining operative period of the restraint imposed by clause 12.29. As I have concluded that a period in excess of one year after the expiration of the franchise is unenforceable, it follows that clause 12.29 is not enforceable in respect of the period after 7 August 2012. It follows that no injunction should now be granted.
However, I have concluded that, at the time Testel instituted the action in December 2011, the restraint imposed by clause 12.29 was enforceable. If the matter had been heard before 7 August 2012, it would have been appropriate to exercise the discretion to grant an injunction restraining KRG and Mr George from acting in contravention of clause 12.29 in respect of the period up to 7 August 2012. This is relevant because an interlocutory injunction was in force during the period 8 December 2011 to 27 April 2012.
Assessment of damages
In respect of 23 Testel clients who were clients of Testel during all or part of the franchise period (4 August 2008 to 7 August 2011), Testel tendered invoices rendered by KRG to those clients (or in two cases internal records of the clients showing details of KRG invoices) during the franchise period and up to 7 August 2012. Those invoices were obtained by Testel either directly from the clients or, in one manner or another, from KRG and Mr George. The total of the invoices was $85,105.[60] The amounts charged in the invoices can be broken down as follows:
1.   $70,550 of the total amount of those invoices was described as testing and tagging work and showed the number of items tested at a unit rate shown in the invoice.
2.   Charges for thermal imaging by KRG to a single client totalling $6,468.
3.   Repair or replacement work which appears to be incidental to electrical testing work totalling $3,277.
4.   Repair or replacement work not demonstrated to be incidental to electrical testing work totalling $4,392.
5.   Charges for roofing work by KRG for a single client totalling $418.
[60] All dollar figures quoted in this section are inclusive of GST.
KRG and Mr George breached clause 12.29 to the extent that they conducted or were concerned in a business either substantially the same as the Franchised Business or in competition with Testel. Their business was in competition with Testel to the extent that they undertook electrical testing work, repair or replacement work incidental to electrical testing work or thermal imaging work. Accordingly, I assess the revenue generated by KRG in breach of clause 12.29 in respect of Testel clients for which invoices (or secondary evidence thereof) are available at $80,295 as follows:
Electrical testing  $70,550
Thermal imaging  $ 6,468
Incidental repairs/replacement  $ 3,277.
In respect of 7 of the 23 Testel clients referred to above, Testel tendered banking records of KRG which showed deposits into its bank account identified as being made by those 7 clients. In addition to deposits correlating to invoices which were tendered, there are other deposits for which no corresponding invoice was tendered. I infer from the date and amount of the deposit compared to the pattern of invoices which were tendered that it is likely that some of these deposits represented payment for electrical testing work or incidental repair or replacement work. The total of the deposits in respect of which I make this inference is $9,733. I deduct five per cent on account of the proportion likely to represent independent repair or replacement work (the same proportion as in respect of work charged on Testel invoices tendered in evidence) to give an adjusted revenue figure of $9,246.
There were also seven Testel clients for which no KRG invoices were tendered. In respect of those clients, Testel tendered banking records of KRG which showed deposits into its bank account identified as being made by these Testel clients. Testel also tendered evidence of details of payments made by these 7 Testel clients to Testel itself for electrical testing services undertaken by Testel via its franchisees (including KRG). I infer from the dates and amount of payments by the client to Testel itself compared to the date and amount of a KRG deposit in some cases that the banking of a particular amount on a particular date is likely to have been in respect of electrical testing or incidental repair or replacement services performed by KRG. This is because testing services are usually provided with a regular and recurring frequency and for a regular and recurring charge. The total of these deposits is $14,958. I deduct five per cent representing the proportion likely to be for independent repairs and replacements. This gives a figure of $14,209 revenue for electrical testing and incidental repair and replacements.

The total revenue generated by KRG from the 30 Testel clients for electrical testing, incidental repairs and replacements and thermal imaging is $103,750.
In respect of 7 non-Testel clients, Testel tendered KRG invoices showing total amounts invoiced of $42,231 during the restraint period. Of the total amount invoiced:
1.   $30,277 was for electrical testing work;
2.   $594 was for thermal imaging work;
3.   $2,994 was for repair and replacement work apparently incidental to testing and tagging work;
4.   $7,761 was for repair and replacement work not demonstrated to be incidental to testing and tagging work;
5.   $605 was for plumbing work.
In respect of non-Testel clients, Testel’s claim is for the loss of the opportunity for Testel to have gained their work if there had been no breach by KRG and Mr George of clause 12.29 of the Franchise Deed. As Testel had approximately 10 per cent of the market in South Australia, I value the loss of that opportunity at 10 per cent of the revenue generated by KRG in respect of testing work, incidental repairs/replacements and thermal imaging. Total revenue generated by KRG from non-Testel clients for that type of work over the four year period was $33,865. Ten per cent of that revenue amounts to $3,386.
Testel tendered evidence of deposits into KRG’s bank account for 16 persons or entities who were not clients of Testel and in respect of which no invoices were available. In respect of those persons and entities, I have no basis to infer that KRG undertook electrical testing work. I have not included revenue from those persons in the assessment of damages.
Appendix A sets out the amounts which I have concluded were invoiced or banked by KRG in respect of electrical testing services performed for Testel clients. Appendix B sets out the amounts which I have concluded were invoiced by KRG in respect of electrical testing services performed for non-Testel clients.
In respect of the franchise period up to 7 August 2011 and the subsequent 12 months, Testel was entitled to receive total fees of 23.5 per cent of turnover generated as a result of work by KRG.
I assess the amount of the total damages at $25,176, being 23.5 per cent of $107,136.
Alternative claim for account of profits
Testel claims that, in the circumstances, it is entitled to a remedy (in the alternative to damages – at Testel’s election) of an account of profits for the breach of contract by KRG and Mr George.
Testel contends that, as a matter of principle, the remedy of an account of profits is available, albeit in limited circumstances, as an alternative remedy to damages for breach of contract. Testel does not contend that there was a fiduciary duty owed by KRG to Testel. Nor does Testel rely at this point on an equitable cause of action against KRG and Mr George for breach of confidence.[61] Nor does Testel contend that, as an evidentiary matter (as opposed to a matter of principle), it is appropriate in the circumstances to use the quantum of Testel’s profit as the best and most accurate measure available to assess the loss suffered by Testel.
[61] Testel does contend that it has an equitable cause of action for “breach of confidence”, but that involves different considerations which are addressed below.
Traditionally, the common law remedy for breach of contract and tort has been regarded as damages. Indeed, it was the inadequacy of the common law remedy of damages in certain circumstances which led the Court of Chancery to develop remedies such as specific performance and injunction in the exercise of its auxiliary jurisdiction and to include as a criterion for the grant of those discretionary remedies the inadequacy of the common law remedy of damages.
By contrast, the Court of Chancery developed the remedy of an account of profits in its exclusive jurisdiction in respect of equitable causes of action such as breach of fiduciary duty, breach of confidence and infringement of intellectual property rights. Statute has applied the remedy to breach of statutory intellectual property rights.[62]
[62] See, for example: Copyright Act 1968 (Cth) s 115(2); Patents Act 1990 (Cth) s 122(1); Designs Act 2003 (Cth) s 75(1)(b).
The common law courts did not give a remedy of an account of profits[63] in respect of common law causes of action and they did not recognise equitable causes of action. Conversely, the Court of Chancery did not grant the remedy of an account of profits (as opposed to specific performance or injunction) in its auxiliary jurisdiction.
[63] The common law courts did recognise an action of account where there was a pre-existing relationship between the parties which required the defendant to account to the plaintiff (eg a pre-existing obligation to account by a bailiff, receiver, rent collector, agent or trustee). If the obligation was to account for profits (as opposed to gross receipts), the appropriate remedy was to order that the defendant account for those profits. However, that is quite different to a remedy being granted for a simple breach of contract measured by reference to the profit made by the defendant where there was no pre-existing relationship between the parties involving an obligation by the defendant to account to the plaintiff for such profits.
In Robinson v Harman,[64] Parke B said:
… where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.[65]
[64] (1848) 1 Exch 850; 154 ER 363.
[65] (1848) 1 Exch 850 at 855 per Parke B.
In Wenham v Ella,[66] Gibbs J cited this passage with approval.[67] In Commonwealth v Amann Aviation Pty Ltd,[68] Mason CJ and Dawson J cited this passage and the judgment of Gibbs J in Wenham v Ella and went on to say:
The corollary of the principle in Robinson v. Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed.[69]
[66] (1972) 127 CLR 454.
[67] Ibid at 471 per Gibbs J.
[68] (1991) 174 CLR 64.
[69] Ibid at 82 per Mason CJ and Dawson J. See also Brennan J at 98, Toohey J at 134-135, Gaudron J at 148-149 and McHugh J at 161, each of whom cited the passage by Parke B in Robinson v Harman quoted above.
In Tito v Waddell (No 2),[70] Megarry VC said:
… it is fundamental to all questions of damages that they are to compensate the plaintiff for his loss or injury by putting him as nearly as possible in the same position as he would have been in had he not suffered the wrong. The question is not one of making the defendant disgorge what he has saved by committing the wrong, but one of compensating the plaintiff.[71]
[70] [1977] Ch 106.
[71] Ibid at 332 per Megarry VC.
It might be argued that, if equity intervenes to grant discretionary remedies of specific performance or injunction where the common law remedy of damages is inadequate, there is no reason not to extend equity’s intervention to grant the remedy of account of profits. However, the purpose and effect of granting specific performance is compensatory by reference to the detriment suffered by the plaintiff rather than the benefit obtained by the defendant.
In Attorney-General v Blake,[72] the House of Lords (Lord Hobhouse dissenting) revised the common law as it applies in England and Wales and held that an account of profits is available as a remedy for breach of contract, albeit in exceptional circumstances. The remedy is discretionary. It is only to be granted where it is just and equitable that the defendant should retain no benefit from the breach of contract.[73] The following matters are relevant to the existence of exceptional circumstances justifying grant of the discretionary remedy.
1.   Standard remedies for the breach of contract (damages, specific performance, injunction) must provide an inadequate response to the breach of contract.[74]
2.   Relevant circumstances include “the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and the circumstances in which relief is being sought”.[75]
3.   A useful general guide, although not exhaustive, is “whether the plaintiff had a legitimate interest in preventing the defendant’s profit-making activity and, hence, in depriving him of his profit”.[76]
[72] [2000] UKHL 45; [2001] 1 AC 268.
[73] [2001] 1 AC 268 at 284-285 per Lord Nicholls (Lord Goff and Lord Browne-Wilkinson agreeing) and 291 per Lord Steyn (also agreeing with Lord Nicholls).
[74] Ibid at 285 per Lord Nicholls (Lord Goff and Lord Browne-Wilkinson agreeing).
[75] Ibid.
[76] Ibid.
Matters which are not in themselves sufficient ground to grant the exceptional remedy are “the fact that the breach was cynical and deliberate; the fact that the breach enabled the defendant to enter into a more profitable contract elsewhere; and the fact that by entering into a new and more profitable contract the defendant put it out of his power to perform his contract with the plaintiff”.[77]
[77] Ibid at 286 per Lord Nicholls (Lord Goff and Lord Browne-Wilkinson agreeing).
The revision of the common law in England and Wales by the House of Lords in Attorney-General v Blake was presaged by the judgment of Deane J, in dissent, in Hospital Products Ltd v United States Surgical Corporation.[78] Hospital Products International Pty Ltd (“HPI”) was the exclusive distributor in Australia of surgical products manufactured by United States Surgical Corporation (“USSC”). While it was exclusive distributor, HPI and its controller, Mr Blackman, established a competing business, which it continued after terminating the distributorship with USSC. USSC sued HPI’s successor in business (“HPL”), claiming that HPI had acted in breach of fiduciary duty and that USSC was entitled to the remedy of a constructive trust over HPL’s business. At first instance and in the Court of Appeal, USSC succeeded and was held entitled to a constructive trust due to the breach of fiduciary duty. In the High Court, Deane J held that there was no relevant breach of fiduciary duty, but that USSC was entitled to a constructive trust by way of a remedy making HPL liable to account for profits made from distributing competing products in Australia for a limited period.[79] However, Gibbs CJ, Wilson J and Dawson J held that, because there was no relevant fiduciary duty, there was no entitlement of USSC to a remedy by way of constructive trust so as to make HPL liable to account for profits. Mason J (dissenting) held that there was a breach of fiduciary duty, and proceeded on the basis that this conclusion was essential to USSC’s entitlement to a constructive trust so as to make HPL liable to account.[80] Accordingly, despite the dissenting judgment of Deane J, the High Court’s decision does not support Testel’s contention that the remedy of an account of profits or a constructive trust is available in certain circumstances in respect of a breach of contract.
[78] (1984) 156 CLR 41.
[79] Ibid at 123-125 per Deane J.
[80] Ibid at 96-116 per Mason J.
In Hospitality Group Pty Ltd v Australian Rugby Union Ltd,[81] a Full Court of the Federal Court held that Attorney-General v Blake should not be followed in Australia and that the common law in Australia is that an account of profits is not available as a remedy for breach of contract or tort. Australian Rugby Union Ltd (“ARU”) entered into contracts with Australian Tours for Sport Pty Ltd (“ATFS”) and various members of the public relating to the issue of tickets for rugby union test matches. ICM (Marketing) Pty Ltd (“ICM”) acquired tickets and embodied them in a hospitality package which it onsold to corporate customers. ARU claimed that this was contrary to the conditions printed on the tickets. It sued ICM for breach of contract on the basis that ICM had become bound by the terms of the original contracts with ATFS and/or members of the public who had originally acquired tickets. It sued ICM and a related company, Hospitality Group Pty Ltd (“THG”), for the tort of inducing breach of contract by ATFS and/or members of the public who had originally purchased the tickets.
[81] [2001] FCA 1040; (2001) 110 FCR 157.
At first instance, ARU succeeded in both contract and tort. It sought an account of profits as a discretionary remedy on the basis of the then recent decision of the English Court of Appeal in Attorney-General v Blake.[82] Gyles J declined to follow that decision and held that it did not represent the common law of Australia.[83] However, Gyles J made an award of $100,000 exemplary damages against ICM and THG in respect of the tort of inducing breach of contract.
[82] [1998] 2 WLR 805.
[83] Australian Rugby Union Ltd v Hospitality Group Pty Ltd [2000] FCA 823; (2000) 173 ALR 702 at [128] per Gyles J.
By the time the appeals by ICM and THG and a cross-appeal by ARU were heard, the House of Lords had handed down its decision in Attorney-General v Blake. The Full Court allowed ICM’s appeal against the trial Judge’s finding that it breached the contract, but dismissed the appeals by ICM and THG against the trial Judge’s conclusion that they induced breaches of contract by ATFS and the original ticket purchasers. Hill and Finkelstein JJ declined to follow the House of Lords decision in Attorney-General v Blake and held that an account of profits is not available as a remedy in Australia for breach of contract or tort. Hill and Finkelstein JJ said:
Whether or not the law of contract is “seriously defective” (Attorney-General v Blake [1998] Ch 439 at 457 per Lord Woolf MR), if the court is unable to award disgorgement damages …, the position in Australia is that the loss recoverable for breach of contract is limited to that laid down in Robinson v Harman. That is, the aggrieved party is entitled only to compensation. If he has suffered no loss, he is not entitled to be compensated. In an appropriate case, the aggrieved party may be able to recover (by a claim in restitution) benefits that he has made available to the wrongdoer; for example, he may be able to recover the price paid under an incomplete contract or recover possession of goods sold but not paid for. Presently, however, it would be inconsistent with the current principles laid down by the High Court to confer a windfall on a plaintiff under the guise of damages for breach of contract.
Turning to the remedies available to the victim of a tort …
Speaking generally, an award of damages is made in order to compensate the plaintiff for his injury …
However described, it is not possible to slot an account of profits into the general framework of remedies that are available in tort, when the account is not awarded to compensate the plaintiff for his actual or presumed loss. That is to say, 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 …[84]
[84] (2001) 110 FCR 157 at [159]-[160], [161] and [162] per Hill and Finkelstein JJ.
Hill and Finkelstein JJ went on to allow ICM’s appeal against the award of exemplary damages, holding that exemplary damages were not warranted on the facts for the torts committed by ICM and THG. They held that exemplary damages are not available for breach of contract.
Emmett J agreed with everything said by Hill and Finkelstein JJ except their conclusion in relation to exemplary damages.[85] He would have set aside the award of exemplary damages in the sum of $100,000 (because the trial Judge wrongly included breaches of contract in reaching his conclusion), but would have remitted the matter to the trial Judge to determine the quantum of exemplary damages in tort. Emmett J referred to an award being made by reference to the profits made by ICM and THG as a result of inducing the breach of contract. It appears that he was referring to an award of exemplary damages by reference to the profits made rather than an account of profits as a primary remedy in itself.
[85] Ibid at [164] per Emmett J.
In Dalecoast Pty Ltd v Guardian International Ltd,[86] the plaintiff sought an account of profits as an alternative remedy to damages for breach of contract. The trial Judge had held that, if the approach of the House of Lords in Attorney-General v Blake were applied, there were no exceptional circumstances justifying the grant of the discretionary remedy. The Court of Appeal did not decide one way or the other whether Attorney-General v Blake is good law in Australia. Murray J (Wallwork J agreeing) upheld the trial Judge’s conclusion that, if Attorney-General v Blake is good law in Australia, there were no exceptional circumstances justifying the grant of the discretionary remedy.[87]
[86] [2003] WASCA 142.
[87] Ibid at [102]-[107] per Murray J (Wallwork J agreeing).
In Andrews v Australia and New Zealand Banking Group Ltd,[88] the High Court addressed the approach at common law and equity to penalties in relation to bonds. No question of a remedy by way of an account of profits for breach of contract or otherwise arose in that case. However, French CJ, Gummow, Crennan, Kiefel and Bell JJ said:[89]
[88] [2012] HCA 30; (2012) 290 ALR 595.
[89] Ibid at [41] and [43]-[44] per French CJ, Gummow, Crennan, Kiefel and Bell JJ.
Williston describes the position as follows:
The court of equity early assumed jurisdiction to limit the recovery in an action on a bond to the damages actually suffered by the obligee, regarding the literal enforcement of the obligation as unconscientious. …
The law respecting bonds, like that respecting deposits, was received from Roman law and developed before the rise of what might be called the modern law of contract. The courts of equity did not treat their jurisdiction to relieve against penalties and forfeitures as extending to forfeiture of a deposit, being an amount paid as an earnest of performance. Those courts did, however, relieve against stipulations which were penal conditions in bonds.
The courts of equity went on to extend their jurisdiction to deal with stipulations which were penal provisions in simple contracts. But it does not follow that that extension was a change to the nature of the jurisdiction. In particular, the requirement that equity intervene to ensure the recovery of no more than compensation, accommodated the “fundamental principle” of modern contract law to redress breach by adequate compensation.⁵⁵
⁵⁵E A Farnsworth, Contracts, Aspen, 4th ed, 2004, § 12.18; compare Attorney-General v Blake [2001] 1 AC 268 at 284–5 …
[Footnotes other than footnote 55 omitted]
The proposition put by the High Court in the last sentence of the passage quoted above and the reference in footnote 55 to “compare Attorney-General v Blake” is suggestive that the High Court was not endorsing the approach of the House of Lords in that case. However, the reference remains elliptical.
As a judge at first instance, I should follow a decision of an intermediate court of appeal concerning the common law of Australia unless I am persuaded that it is plainly wrong.[90] Applying that approach, I should follow the decision of the Full Court of the Federal Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd.[91]Testel concedes that the decision of the Full Court that an account of profits is not a remedy available at common law in tort was part of the ratio decidendi of that case, but contends that the decision that the remedy is not available for breach of contract was obiter dicta because the Full Court rejected ARU’s breach of contract case. This is an artificial distinction, given the approach of Hill and Finkelstein JJ in that case. The tort in question was the tort of inducing breach of contract, and the Full Court addressed the availability of the remedy in contract first before addressing its availability in tort. Their conclusion on contract was fully reasoned as if it were the ratio decidendi of the case. I am not persuaded that the decision of the Full Court was plainly wrong. If the common law is to be revised so as to include a discretionary remedy of an account of profits as a remedy for breach of contract, given the traditional state of the law, such revision should only be made at appellate court level. The revision would need to decide the nature and extent of the availability of the remedy for breach of contract as well as whether the law as to exemplary damages should be revised instead.
[90] Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ.
[91] (2001) 110 FCR 157.

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 terms
Clauses 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.
The total revenue generated by KRG from providing testing and tagging services to Testel’s clients over the period from 7 August 2008 to 7 August 2012 was $103,750 (see [83] above). I assess the quantum of the damages caused by breach of the confidentiality provisions of the Franchise Deed at $24,381 for the reason given at [88] above. However, those damages are encompassed in the damages already assessed for breach of clause 12.29 of the Franchise Deed.
For the reasons given at [92]-[110] above, the remedy of an account of profits is not available for breach of contract.
Implied obligation to act in good faith
Testel pleads that it was an implied term of the Franchise Deed that KRG would perform its obligations under the Franchise Deed in good faith. A mutual term that each party will act in good faith is generally implied in commercial contracts.[93]
[93] See, for example: Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 257-263 per Priestley JA (Handley JA agreeing); Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91 at 92-93 per Kirby P and 98-102 per Priestley JA; Alcatel Australia Limited v Scarcella (1998) 44 NSWLR 349 at 368-369 per Sheller JA (Powell and Beazley JJA agreeing); GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50; (2003) 128 FCR 1 at [915]-[922] per Finn J.
Testel pleads that KRG’s conduct during the franchise period (up to 7 August 2011) in respect of Testel clients was in breach of the implied obligation of good faith. That conduct involved KRG leading some clients to believe that they were still dealing with Testel and KRG notifying Testel that some clients no longer required its services in circumstances in which KRG was taking over those clients. I am satisfied on the evidence adduced by Testel that KRG acted in breach of the implied duty of good faith in this way in respect of Testel clients during the franchise period.
The damages suffered by Testel caused by these pleaded breaches of the implied term are encompassed within the damages already assessed at [119] above.
Testel claims that KRG’s conduct during the franchise period (up to 7 August 2011) in respect of non-Testel clients was in breach of the implied obligation of good faith because clause 12.5 required Mr George to devote his full time attention and attendance to the performance of work for Testel clients on behalf of Testel. It may be that KRG was in breach of the implied obligation of good faith by reason of Mr George devoting time and attention to recruiting and undertaking work for KRG clients who were not Testel clients. However, there is no plea in the statement of claim of a breach of clause 12.5 and there is no plea that KRG breached the implied obligation of good faith in respect of non-Testel clients. Accordingly, Testel is not entitled to relief in respect of non-clients for any breach of the implied obligation of good faith.
For the reasons given at [92]-[110] above, the remedy of an account of profits is not available for breach of contract.
Breach of equitable duty of confidence
Testel maintains that it has pleaded a cause of action of breach of the equitable duty of confidence and is entitled to relief under that cause of action, namely (at its election) damages or an account of profits. Alternatively, Testel claims that it has pleaded the cause of action of breach of a contractual duty of confidence which involves the same facts and that under rule 223 of the Rules it is entitled to relief even if the cause of action has not been pleaded.
I address first the merits of a claim by Testel for breach of an equitable duty of confidence and then whether such claim is available to Testel in light of its pleadings.
Merits of the claim
Equity recognises a cause of action for breach of confidence in circumstances in which:
1.   information which is confidential in character has been imparted (typically by the plaintiff to the defendant);
2.   the information was imparted in circumstances importing an obligation of confidence; and
3.   there has been an actual or threatened unauthorised use or disclosure of that information.[94]
[94] Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220; (2009) 261 ALR 501 at [632]-[637] per Finn J.
For the reasons given at [118] above, I am satisfied that information which was confidential in character was imparted by Testel to KRG in circumstances importing an obligation of confidence and that KRG has used that information for its own purposes without the authority of Testel. I am satisfied that Testel has made out a cause of action for breach of confidence in equity.
It is well established that, the cause of action being equitable, an account of profits is available as an alternative remedy to damages.[95]
[95] See, for example: Optus Networks Pty Ltd v Telstra Corporation Ltd [2010] FCAFC 21; (2010) 265 ALR 281 at [28], [30], [34] and [35] per Finn, Sundberg and Jacobson JJ.
Pleading of cause of action
The question arises whether Testel is entitled to pursue a cause of action for breach of confidence in equity by reference to its pleading in its statement of claim.
Rule 99(1) of the Rules relevantly provides:
A statement of claim –
(a)    must state each cause of action; and
(b)   must state the basis of each cause of action (including reference to any statutory provision on which the plaintiff relies); and
(c)    must contain a short statement of the material facts on which each cause of action is based; and
(d)   must state any remedy for which the plaintiff asks …
The fact that rule 99(1)(a) requires the statement of claim to state the cause of action in contradistinction to rule 99(1)(c) requiring the statement of claim to state the material facts on which the cause of action is based suggests that rule 99 requires identification of the cause of action and not merely a pleading of the material facts which give rise to the cause of action. However, it does not follow that the cause of action needs to be identified explicitly in order to give the defendant fair notice of the identity of the cause of action relied upon. For example, a pleading that the defendant owed to the plaintiff a duty to take reasonable care not to endanger the health of the plaintiff, that the defendant was negligent and that the negligence caused the plaintiff to be injured and suffer loss would generally be easily recognisable as pleading the tort of breach of duty of care (or negligence) without using those words.
In the present case, paragraphs 25 and 26 of the statement of claim plead the contractual obligations contained in clauses 12.28.1 and 12.28.3 of the Franchise Deed in respect of confidential information and paragraph 28 pleads a use of confidential information in contravention of clause 12.28.3 of the Franchise Deed. These paragraphs plead a cause of action for breach of contract, but are not apposite to plead a cause of action for breach of a duty of confidence in equity. Nor does the statement of claim expressly plead the three elements of the equitable cause of action identified at [128] above.
Rule 99(2) provides:
If the plaintiff relies on separate causes of action, the statement of material facts must differentiate between –
(a) facts that are common to both or all causes of action; and
(b) facts that are relevant only to a particular cause of action.
The statement of claim does not make any differentiation between a cause of action for breach of contractual confidentiality obligations and breach of an equitable duty of confidence.
Part 2 of the statement of claim includes the following claims for relief:
3. Damages for breach of contract.
4. Further, or in the alternative to damages, an account of profits.
In context, while it is unusual for a plaintiff to seek an account of profits for breach of contract, paragraphs 3 and 4 suggest a claim in contract (which Testel is in fact making). There is no reference to equitable compensation (for breach of an equitable duty of confidence) and no reference to an account of profits in the context of such an equitable duty.
The statement of claim did not give fair notice to the defendants that Testel was relying upon a cause of action of breach of an equitable duty of confidence.
Rule 223 of the Rules provides:
The Court may, in an appropriate case, give judgment for a form of relief that differs from the kind of relief sought by the plaintiff.
If Testel had stated in its statement of claim that it was pleading a cause of action of breach of confidence in equity, had pleaded the three elements of that cause of action as identified at [128] above and had sought equitable compensation, rule 223 would have empowered the Court in an appropriate case to grant an account of profits as an alternative remedy. However, rule 223 does not allow the Court to give relief in respect of a cause of action which has not been pleaded.
If the matter had proceeded to trial on the ordinary inter partes basis, it is likely that Testel would have opened and conducted its case identifying that it was relying upon the equitable cause of action of breach of duty of confidence, that the defendants would have made no objection and that the case would have been conducted on the basis that Testel was relying on that cause of action. In those circumstances, in light of the manner in which the case would have been conducted, the defendants could not have contended during closing address that the cause of action was not open to Testel because it was not pleaded. However, that is not the position in the present case. The defendants have taken no part in the trial and Testel is seeking default judgment under rule 228.
The equitable cause of action of breach of duty of confidence is not available to Testel.
Misleading conduct
Testel pleads that KRG engaged in conduct in trade or commerce which was misleading in contravention of section 52 of the Trade Practices Act 1974 (Cth) in respect of conduct up to 31 December 2010 and section 18 of the Australian Consumer Law[96] in respect of conduct on and after 1 January 2011.[97] Testel pleads that KRG used and applied Testel’s mark “Testel” in connection with electrical testing undertaken unilaterally by KRG and thereby represented to customers that Testel had undertaken or was responsible for the work and that KRG was authorised by Testel to carry out the work.[98]
[96] Contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth).
[97] Second statement of claim [31].
[98] Second statement of claim [31].
Testel pleads that the representations were false because the testing was undertaken unilaterally.[99] Testel pleads that Mr George is liable under section 75B of the Competition and Consumer Act 2010 (Cth) because he aided, abetted, counselled or procured or was knowingly concerned in the contraventions.[100] Testel seeks an injunction pursuant to section 80 of the Competition and Consumer Act 2010 (Cth) and section 232 of the Australian Consumer Law. Section 232(1) of the Australian Consumer Law provides:
A court may grant an injunction, in such terms as the court considers appropriate, if the court is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute:
(a)a contravention of a provision of Chapter 2, 3 or 4; or
…
(c)aiding, abetting, counselling or procuring a person to contravene such a provision; or
…
(e)being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; …
[99] Second statement of claim [32].
[100] Second statement of claim [34].
Testel tendered various photographs of tags attached to appliances at premises of customers of KRG. Each tag bears the “Testel” mark and a barcode created by Testel. Some of the photographs show that the testing was undertaken by Mr George. The tags show various testing dates ranging from August 2010 to August 2012.
I am satisfied that KRG engaged in misleading conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) prior to 1 January 2011 and thereafter in contravention of section 18 of the Australian Consumer Law. I am satisfied that its conduct was in trade or commerce. I am satisfied that Mr George was knowingly concerned in the contraventions.
In the circumstances, it is appropriate to grant an injunction restraining the defendants from using the “Testel” mark in future.
Costs
Clause 12.36 of the Franchise Deed relevantly provides:
The Franchise Holder shall pay the reasonable costs and expenses of whatever nature (including legal costs on a solicitor/client basis) which the Master Franchisee may in any way incur as a direct or indirect consequence of any breach or default of the provisions of this Deed by the Franchise Holder or in remedying such breach or default by the Franchise Holder.
Testel claims that it is entitled to payment of its costs of the action calculated on an indemnity basis under clause 12.36 of the Franchise Deed.
In Abigroup Ltd v Sandtara Pty Ltd,[101] clause 18.02 of the lease in question relevantly provided that:
The Guarantor … hereby unconditionally indemnifies the Landlord … from and against all actions claims demands losses summonses writs proceedings judgments orders decrees damages costs and expenses which the Landlord may suffer or incur consequent upon or arising directly or indirectly out of any breach or non-observance by the Tenant of any of the covenants … in this lease …
[Emphasis added]
The Court of Appeal of the New South Wales Supreme Court held that the clause should be construed so as to provide for the payment of solicitor/client costs rather than party/party costs.[102]
[101] [2002] NSWCA 45.
[102] Ibid at [15]-[17] per Stein JA (Giles JA agreeing) and [38]-[42] per Young CJ in Eq.
Clause 12.36 of the Franchise Deed is in stronger terms than clause 18.02 in the Abigroup case. I construe clause 12.36 as providing for payment of indemnity costs of this action being a consequence of breach of the Deed by KRG. Mr George is liable for that debt as guarantor under clause 26.
The question arises whether Testel is entitled to make such a claim by reference to its pleading in its statement of claim. Because Testel seeks its costs of action by way of contractual debt, such a claim must be pleaded. The situation is analogous to the need to plead a claim for interest by way of damages[103] as compared to claiming interest under section 30C of the Supreme Court Act 1935 (SA).
[103] Pursuant to the principle recognised in Hungerfords v Walker (1989) 171 CLR 125.
By paragraph 8 of Part 2 of its statement of claim, Testel seeks:
Costs on a solicitor-client basis pursuant to clause 12.36 of the Franchise Deed & Guarantee.
I consider that this is a sufficient pleading by Testel of a contractual debt to entitle Testel to pursue its claim for indemnity costs under clause 12.36.
Conclusion
Testel is entitled to a declaration that clause 12.29 is lawful and enforceable in respect of conduct within South Australia up to 7 August 2012.
Testel is entitled to an injunction restraining the defendants from using the “Testel” mark.
Testel is entitled to damages assessed at $25,176.
Testel is entitled to the reasonable costs and expenses incurred in this action by way of contractual debt.
I will hear submissions in relation to the wording of the declaration and injunction and any consequential orders.
Appendix 1
Testel Clients

Client Invoices Banking Total

Testing Incidental Thermal Total 95%

AB 1,331 1,331

AG 205 542 515 720

AL 1,399 22 1,421

AN 7,503 7,503

BE 28,714 2,144 6,468 37,326

BI 3,507 1,274 1,210 4,717

BM 814 1,226 1,165 1,979

BR 5,398 5,128 5,128

CI 2,230 2,118 2,118

EB 558 28 993 943 1,529

EI 177 168 168

FI 782 782

GR 375 375

IN 1305 1,305

LA 156 156

LI 775 736 736

ME 3,538 330 2,626 2,495 6,363

NE 1,423 1,352 1,352

ORZ 3,438 3,266 3,266

PAP 1,517 1,441 1,441

PE 367 367

RA 1,415 286 1,701

RAP 970 44 1,014

RO 2,676 1,919 1,823 4,499

SA 2,676 1,153 1,095 3,771

SE 3,158 203 3,361

ST 2,300 2,300

STP 2,926 2,926

TR 1,935 220 2,155

YA 1,940 1,940

TOTAL 70,550 3,277 6,468 24,691 23,455
103,750

Appendix 2
Non-Testel Clients

Client Invoices
Total

Testing Incidental Thermal

CO 399 154 553

FU 128 128

HI 88 88

KE 5,254 55 594 5,903

PA 17,131 2,519 19,650

RR 3,622 266 3,888

RY 3,655 3,655

TOTAL 30,277 2,994 594
33,865

Client	Invoices			Banking		Total
Testing	Incidental	Thermal	Total	95%
AB	1,331	1,331
AG	205	542	515	720
AL	1,399	22	1,421
AN	7,503	7,503
BE	28,714	2,144	6,468	37,326
BI	3,507	1,274	1,210	4,717
BM	814	1,226	1,165	1,979
BR	5,398	5,128	5,128
CI	2,230	2,118	2,118
EB	558	28	993	943	1,529
EI	177	168	168
FI	782	782
GR	375	375
IN	1305	1,305
LA	156	156
LI	775	736	736
ME	3,538	330	2,626	2,495	6,363
NE	1,423	1,352	1,352
ORZ	3,438	3,266	3,266
PAP	1,517	1,441	1,441
PE	367	367
RA	1,415	286	1,701
RAP	970	44	1,014
RO	2,676	1,919	1,823	4,499
SA	2,676	1,153	1,095	3,771
SE	3,158	203	3,361
ST	2,300	2,300
STP	2,926	2,926
TR	1,935	220	2,155
YA	1,940	1,940
TOTAL	70,550	3,277	6,468	24,691	23,455	103,750