Whitford Nominees P/L v Caldecott Irrigation P/L and Others No. DCCIV-03-1204

MR & BH WHITFORD NOMINEES PTY LTD
V
CALDECOTT IRRIGATION PTY LTD
PHILLIP CALDECOTT
IRRIGATION SYSTEMS AND COMPONENTS PTY LTD
[2003] SADC 99
Chief Judge Worthington
Civil

This is an application by the plaintiff for an interlocutory injunction restraining the defendants from competing with it in the sale and servicing of irrigation equipment. For present purposes the position can be summarised as follows.
Michael Robert Whitford is the sole director of the plaintiff, MR & BH Whitford Nominees Pty Ltd. Between April 1998 and June 2002 he was employed as a sales assistant, and then as a manager, by Caldecott Irrigation Pty Ltd (the first defendant) which was involved in the sale and servicing of irrigation equipment. It operated from premises in Keith under the business name: Caldecott Irrigation Services. In his affidavit of 6 August 2003 in support of this application, Mr Whitford states that the customer base of that business was mainly farmers from Keith and surrounding areas.
The two directors of Caldecott Irrigation Pty Ltd as at June 2002 were Phillip Caldecott (the second defendant) and Gregory Caldecott. They were also directors and shareholders of Irrigation Systems and Components Pty Ltd (the third defendant) which since 1999 has manufactured irrigation equipment and distributed it through resellers.
During 2001 and early 2002 there were discussions between Mr Whitford and the second defendant which eventually led to Mr Whitford deciding to buy the business of the first defendant. In May 2002 Mr Whitford submitted a proposal which he says was based on the understanding that the first defendant would no longer be involved in the retail sale and servicing of irrigation parts and equipment. The proposal contains a clause as follows:
“The vendor, either personally or by agent, shall not promote or sell products or services in competition with the purchaser within a 50 kilometre radius for a period of 5 years. The vendor, either personally or by agent, shall not actively promote products or services in competition with the purchaser to the client base as purchased, as shown in Appendix C, for a period of 5 years.”
The plaintiff was incorporated in June 2002, and on 8 October 2002 a formal agreement, as contemplated by the proposal, was executed by the plaintiff and the first defendant. Pursuant to that agreement the plaintiff is to pay the first defendant $210,000 for the business, $110,000 of it being for plant and equipment and $100,000 for goodwill which is identified as its “customer base”. The method of payment is specified as an initial instalment of $110,000 at settlement (16 July 2002) and the balance by way of 60 monthly payments of $1,666.67.
Clause 9.1 of the agreement provides:
“9.1THE VENDOR shall not for three (3) years from the date hereof directly or indirectly carry on or be concerned or interested in the business of irrigation systems manufacture and sales within a 50 kilometre radius from the town of Keith (whether solely or jointly with or as a partner, joint venturer, associate, advisor, consultant, manager, employee, independent contractor, agent, principal, director or officer of a body corporate, shareholder, unitholder, trustee, beneficiary or in any other capacity) NOR solicit canvass approach or serve any customer now or within five (5) years before the date hereof regularly served from the Business.”
Mr Whitford says that six incidents between December 2002 and April 2003 indicated to him that the first defendant seemed to be selling to, or servicing the equipment of, customers in contravention of clause 9.1. In May 2003 he instructed solicitors, Thomson Playford, to write to the second defendant about this and there was then a series of letters between Thomson Playford, and Donaldson Walsh, solicitors for the defendants. In the course of that correspondence, it was alleged that the plaintiff had defaulted in payment of an instalment for May 2003. It is unnecessary to digress into the details, but in a letter of 12 June Donaldson Walsh informed Thomson Playford that the plaintiff was in breach of the agreement because of failure to pay the instalment, that the breach had not been remedied within the requisite time and that, pursuant to its rights under the agreement, the first defendant no longer regarded itself as bound by the terms of clause 9.1. There was further correspondence about the instalment and in a letter dated 20 June 2003, Donaldson Walsh reiterated the first defendant’s right to suspend its obligations under clause 9.1 but added that, in any event, there had been no breach of that clause. In late June 2003 Mr Whitford became aware of an advertisement being broadcast over 5MU, which covers much of the Upper South East of the State, in which the third defendant was offering to design and sell irrigation equipment. Some of the localities targeted in the advertisement are within the area to which the restraint in clause 9.1 applies, and the advertisement seems to promote sales generally, including retail.
In its summons the plaintiff seeks permanent injunctions in relation to sales and service of equipment against all three defendants, an inquiry and account, damages and consequential orders. The plaintiff has not yet filed a statement of claim but by its counsel, Mr Slattery, it has advised the court that, inter alia, it proposes to pursue remedies under the Trade Practices Act 1974 (Cwlth) against all three defendants. Similar remedies are available under the Fair Trading Act 1987 but for simplicity, references are to the Trade Practices Act. The plaintiff will seek damages pursuant to s82 for various breaches of the Act and for an order pursuant to s87(2)(b) varying the contract to give effect to what the plaintiff says was Mr Whitford’s overt intention at the time the agreement was entered into, the practical effect of which was that the second defendant, Mr Phillip Caldecott, and his business associates were not to compete with the plaintiff in retail sales and service, be that personally or via either the first defendant or the third defendant.
The plaintiff has given the usual undertaking as to damages and seeks orders that would impose the sales and service restrictions of clause 9.1 on all three defendants until the trial is completed. In short, they would be restrained from carrying on the business of selling or servicing irrigation equipment, directly or indirectly, within a 50 kilometre radius of Keith and from dealing in any way with customers who had been regularly served by the business of Caldecott Irrigation Systems during the period of five years prior to 8 October 2002, the date the agreement was signed. Clause 9.1 also purports to restrict the manufacture of irrigation equipment but the plaintiff does not seek to enforce that.
In an affidavit dated 12 August 2003 the second defendant says that the first defendant has not acted, and does not intend to act, in contravention of clause 9.1, stating that since the agreement was signed its only activity has been sorting out the accounts. He denies that the first defendant was involved in any of the six incidents complained of and says that it was the third defendant. However, he points out that there is nothing in the agreement that applies to him personally or to the third defendant. He also says that both before and after the agreement the “main business” of the third defendant has been the manufacture and distribution of irrigation equipment through dealers and resellers. He goes on to say that any “further business” relating to the manufacture, sale and service of irrigation equipment and systems “has been and will be undertaken by or on behalf of the third defendant.” In that context “further business” can be taken to mean business other than the “main business” and clearly that could include retail sales and service.
The plaintiff’s case against the first defendant is that it is directly in breach of clause 9.1. In short, its case against the second and third defendants is that the second defendant induced the plaintiff to buy the first defendant’s business (including goodwill) knowing, but not disclosing to Mr Whitford, that the third defendant would continue in the same business as the plaintiff. Further, it says, the third defendant is deemed to have been aware of the second defendant’s knowledge and intention because he was a director of both the first defendant and third defendant. The plaintiff points to various sections of the Trade Practices Act to say that there was complicity and that all three defendants were involved in that deception, giving rise not only to a claim for damages but to a right to have the contract varied ab initio under s87(2)(b) to prevent the defendants from defeating the avowed arrangement. For present purposes there is no need to go to the various sections of the Trade Practices Act relied on by the plaintiff. It is enough to say that if the relevant facts are established, the statutory framework is available to mount the argument.
The principles governing the grant or refusal of an interlocutory injunction in a matter such as this are well settled. The applicant must demonstrate (1) that there is a serious question to be tried, (2) that if the injunction is not granted there will be irreparable loss for which damages will not be an adequate remedy and (3) that the balance of convenience favours granting the injunction (Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153).
For present purposes I am not concerned with whether the restraint imposed by clause 9.1 is reasonable. It is sufficient that it is arguable. The statements by Mr Whitford about discussions leading up to the agreement can be taken at face value at this stage. These discussions and the relevance, if any, of the restriction contained in the proposal, which is different to clause 9.1, are matters that will be ventilated at trial, but it is not part of the court’s function on this application to delve into them.
In my opinion, the plaintiff has established that there is a serious question to be tried. To some extent that question is whether there has been a breach of clause 9.1 by the first defendant but seemingly of more consequence whether, in all the circumstances, the second and third defendants are also affected by clause 9.1.
Mr Coppola, for the defendant, submits that the plaintiff has been guilty of delay in that Mr Whitford knew about the apparent breaches of the agreement between December and April, yet no action was taken until 8 August when the present application was filed. In those circumstances, he says, the plaintiff is not entitled to seek urgent interlocutory relief. I do not accept that submission. Looked at realistically, Mr Whitford became aware of a number of isolated incidents between December and April, and by late May he had instructed Thomson Playford to write to the second defendant seeking an undertaking that he would not act in breach of clause 9.1. Things then developed in the way I have already described, ultimately leading to this application. It is fair to say that what had come to his attention as some isolated incidents that caused him some concern, escalated in June to a much more serious level, with Donaldson Walsh asserting that the first defendant was no longer bound by clause 9.1. Shortly after that, Mr Whitford became aware of the radio advertisement, and on 29 July he was told about another questionable incident involving the second defendant which I need not describe. In my opinion, the plaintiff has not been guilty of delay in seeking a remedy. It would be unfair to criticise Mr Whitford for not getting his solicitors to do something before May, and thereafter there were consistent efforts to remedy the problem.
In this matter it is appropriate to consider jointly the issues of whether, if the plaintiff were to succeed, damages without interlocutory relief would be an adequate remedy and the balance of convenience, as there are factors common to both.
It is put by Mr Slattery that damages would not be an adequate remedy for the plaintiff because, although the defendants may be called upon to account for monies wrongfully obtained, that would not include any goodwill lost between now and trial since there is no way of knowing what potential business might have come to the plaintiffs but for the wrongful conduct of one or more of the defendants. In his submission, it would be impossible for the plaintiff to establish its loss of goodwill if the defendants are allowed to continue conducting their business, and the only way to address that is to restrain the defendants. By contrast, he submits, the defendants would be able to account for business claimed to have been lost while they were subject to an interlocutory injunction.
Mr Coppola submits that the first defendant does not need to be restrained. Although the affidavit of Mr Whitford leaves open the possibility that the first defendant may have been involved in the transactions complained of, it raises a more likely scenario that it was the third defendant that was involved; certainly it was the third defendant that advertised on the radio. In his answering affidavit, the second defendant confirms that it was the third defendant that was involved. He says that since the date of the agreement the first defendant’s only activity has been to deal with outstanding accounts and that it has not done anything in breach of the agreement. Despite earlier assertions by his solicitors that clause 9.1 was inoperative, the second defendant says on oath that the first defendant will abide by it and there is no reason why that should not be accepted.
Both before and after the agreement, the third defendant has been involved in the manufacture and distribution of irrigation equipment through dealers and resellers, which included the first defendant prior to the agreement. Mr Whitford confirms that in conversations prior to the agreement, it was said that the defendants, speaking generally, wanted to get away from retail sales and direct customer contact and to focus on manufacturing and distributing irrigation equipment via resellers, such as Elders and Caldecott Irrigation Services itself. Some of the six transactions complained of appear to have involved an intermediary, eg Elders, but some seem to have been direct retail sales. Having regard to the contents of the two affidavits, it cannot be said that there is always a clear demarcation between retail sales and those involving a reseller. Because of the way the industry operates, the line can be blurred.
There is no dispute that the first and third defendants are related to each other and to the second defendant, for the purposes of the Corporations Act 2001. The connection between the defendants on which the plaintiff relies has been outlined and I need not repeat the details. I accept the submission that it would not be practical to have an injunction other than one directed to all three defendants.
The approach to be adopted in considering where the balance lies is set out by Lord Diplock in American Cyanamid v Ethicon Ltd [1975] AC 396 at 408-409:
“Save in the simplest cases, the decision to grant or to refuse an interlocutory injunction will cause to whichever party is unsuccessful on the application some disadvantages which his ultimate success at the trial may show he ought to have been spared and the disadvantages may be such that the recovery of damages to which he would then be entitled either in the action or under the plaintiff’s undertaking would not be sufficient to compensate him fully for all of them. The extent to which the disadvantages to each party would be incapable of being compensated in damages in the event of his succeeding at the trial is always a significant factor in assessing where the balance of convenience lies; and if the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party’s case as revealed by the affidavit evidence adduced on the hearing of the application. This, however, should be done only where it is apparent upon the facts disclosed by evidence as to which there is no credible dispute that the strength of one party’s case is disproportionate to that of the other party. The court is not justified in embarking upon anything resembling a trial of the action upon conflicting affidavits in order to evaluate the strength of either party’s case.”
If the second and third defendants are restrained the probabilities are that the third defendant would be at risk of losing most, if not all, of the business it has conducted for some years, and given that this is the sole source of income for the second defendant, it can be inferred that he would lose his livelihood. If the plaintiff were then to fail against the second or the third defendants, it is unlikely that either of them could pick up from where they are now; they would probably have to start again.
It would not be practical to frame an injunction in more limited terms - eg restraining the defendants from engaging only in retail sales and servicing. As has been seen already, the nature of the third defendant’s business, especially with the involvement of dealers and resellers, is such that it is not necessarily a straightforward exercise to tell whether a particular transaction is retail. Therefore such an order has the potential to require supervision by the court and that would be unworkable. It is not suggested by anyone that some other type of injunction should be considered.
I have outlined Mr Slattery’s submission that damages would not be an adequate remedy because of the difficulty associated with goodwill lost between now and trial. While I accept that this aspect of damages would be more difficult to assess, it would not be impossible. In the final analysis it is likely that the question will be whether an existing or potential customer has gone to the third defendant instead of to the plaintiff, rather than whether such a customer has gone to some other competitor. The gist of the plaintiff’s complaint is in relation to retail customers, and if clause 9.1 is held to apply to the third defendant, it should be possible to identify the retail customers coming within its terms whose business the third defendant has taken. While I appreciate that this does not completely cover the more nebulous aspect of the value of the lost goodwill, the material on which the court can base an assessment of that loss is reasonably discoverable.
In my opinion the balance does not favour the grant of an injunction against the defendants. If there is no interlocutory injunction and the plaintiff were to succeed in the substantive action, the uncompensatable disadvantage to the plaintiff is the possibility that some of the lost goodwill may not be accounted for. But as I have just said, that possibility is not great and in the meantime the plaintiff can continue to trade as it does now. However, if an interlocutory injunction were to be granted and the plaintiff were to fail in the substantive action, it is likely that the second and third defendants will have either no business, or only a seriously damaged business, on which to rebuild after the litigation. Without in any way reflecting on the merits of the plaintiff’s arguments in the substantive action, these factors have to be weighed against the background that only the first defendant is a party to the agreement and the nexus with the other defendants has yet to be made out.
For these reasons the application is refused.

[2003] SADC 99

27 August 2003