Whotif Pty Ltd v Zervas - [2010] SADC 117

District Court of South Australia
(Civil)
WHOTIF PTY LTD & ORS v ZERVAS
[2010] SADC 117
Reasons for Ruling of His Honour Judge Tilmouth (ex tempore)
2 September 2010
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - SERIOUS QUESTION TO BE TRIED - PROBABILITY OF SUCCESS
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - BALANCE OF CONVENIENCE
The applicant as purchaser of land and business sought to restrain the defendant from establishing or conducting a nearby business. Contract contained a restraint of trade condition preventing defendant from carrying on any business, "the same or substantially similar to or in competition with" the subject business - whether serious issue to be tried - where the balance of convenient lies - whether damages an adequate remedy - multiple serious trial issues identified - balance of convenience against complete injunction - limited injunction granted.
Positive Endeavour Pty Ltd v Madigan (2009) 105 SASR 109, referred to.
Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, applied.

WHOTIF PTY LTD & ORS v ZERVAS
[2010] SADC 117
The Proceedings

What follows is a brief ruling, in view of the relative urgency of the matter, and of course, in the desire to indicate to the parties the conclusions the court has reached, so they can make their consequential commercial and legal decisions accordingly.
The plaintiff brings proceedings against the defendants based on misrepresentation and breach of contract, arising out of an agreement for the sale by the defendant to the plaintiff of the business known as “Chocolate @ No 5”, situated at 5 Main Road Hahndorf, located at the southern tip of Main Street. The contract for the sale and purchase of the real estate and business dated 20 January 2010, described the business as a “café specialising in coffee and chocolate”. The total outlay with on-costs was in the order of $835,000, a not insubstantial investment. The prices of $650,000 and $140,000 were allocated to the real estate and the business, respectively.
Brief background
It is claimed in the Statement of Claim filed on 27 August 2010, that the defendant represented she grew tired of running the business and wanted to pursue other interests. A defence is yet to be filed. As it transpires, before the contract settled on 2 March 2010, the defendant lodged an application dated 16 February 2010 for Development Approval with the local Council. This application related to a change of use from a residential dwelling, to a lounge bar and dwelling situated in the centre of Hahndorf, some 750 metres to the north of “Chocolate @ No 5”, on Mount Barker Road. She proposed to run from this dwelling a food and beverage business seven days a week, retailing food in the nature of platters, scones and the like, beverages including cocktails, smoothies and gourmet and exotic teas and coffee. At no time during the course of their negotiations did she inform the plaintiff of this proposal.
The subject contract contained a special condition headed “Deed of Restraint” which provided (so far as relevant):
1that as from the date of this Deed … the vendor agrees that the vendor … will not do any of the following things … for a period of 3 years and a radius of 35 kilometres from the business premises:
1.1 carry on or be directly or indirectly engaged or interested in any business … which is directly or indirectly engaged or interested in:
1.1.1promoting, operating, engaging in or carrying on any business the same as or substantially similar to, or in competition with the Business as conducted by the Vendor immediately before the date of possession …
The injunction proceedings
The plaintiff now brings an application for interim injunctions, in the first instance restraining the defendant from conducting the new business, “White House Adelaide Hills Pty Ltd” at 90 Main North Road Hahndorf altogether. Alternatively it seeks an injunction preventing the new business “The White House” from offering for sale, goods the same or substantially the same as the menu items of “Chocolate @ No 5” and in the further alternative conducting a business the same, or substantially similar to or in competition with “Chocolate @ No 5”.
A number of arguments were advanced by the defendants contending that an injunction should not be granted at all, quite apart from questions of discretion. It was accepted by the parties that the questions to be considered were whether there are serious trial issues to be heard in the sense of a sufficient likelihood of success appearing to justify the preservation of the status quo, then questions of balance of convenience and whether damages is an adequate remedy: Australian Broadcasting Corporation v O’Neill.[1]
[1] (2006) 227 CLR 57 at 82
Multiple serious questions to be tried
I entertain no doubt that the first of these preconditions is satisfied. Insofar as it is contended the restraint of trade clause was not executed by or on behalf of the plaintiff, there is a substantial argument that the true capacity of the signatory must be gathered from the whole agreement, in the context of the particular transaction, not in isolation or as a stand alone clause. Next the argument that the restraint of restraint of trade condition is bound to fail as being too wide or unreasonable (or both) must also fail. No doubt there will be substantial arguments at trial as to whether or not the geographic or time period involved were apt to the protection of the goodwill of this business in the context of the negotiations and in the unique Hahndorf locale. It may well be that if the court accepts representations were made as pleaded, the terms as negotiated were entirely appropriate in the special circumstances, and therefore in the interests of both parties concerned. On one view of the matter the sheer breadth of the covenant may tend to support the conclusion that the pleaded representations were made. In any case it is not established that the trial court could not read down or sever offending positions. On the contrary that option may well be open to the trial court: Positive Endeavour Pty Ltd v Madigan.[2] The question of whether the new business operates in competition with the subject business, or ultimately proves to be a distinctly similar business, are obviously live issues.
[2] (2009) 105 SASR 109 at [43-45] and [153]
The failure to mention the proposal to commence a new business just down the road in the negotiation process before settlement, and its consequence, is likely to prove critical. In the first place, it is not difficult to accept that the plaintiff would have re-evaluated its options or even reconsidered the deal altogether: see generally Kenny & Good Pty Ltd v MGICA.[3] Still further, it is more difficult to imagine that it would do other than have sought renegotiation of the restraint of trade clause, specifically tailored to address the precise operations proposed by the defendant.
[3] (1992) Ltd (1999) 199 CLR 413
Whether the fact of non-disclosure standing alone, or perhaps more likely in the context of the pleaded representations, if proven, amount to representations by silence is also an open question on the basis of the material presently before the court: see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No.1),[4] Demagogue Pty Ltd v Ramensky,[5] Fraser v NRMA Holdings Ltd,[6] Software Integrators Pty Ltd v Roadrunner Couriers Pty Ltd,[7] for instance. Furthermore it is as presently advised, perhaps an open question as to whether an obligation of disclosure arose pursuant to s s15 of Land and Business (Sale and Conveyancing) Act 1994 (SA): refer Catalano v Zollo[8] and the cases discussed therein.
[4] (1988) 39 FCR 546
[5] (1992) 39 FCR 31
[6] (1995) 55 FCR 452
[7] (1997) 69 SASR 288
[8] [2006] SADC 111 at [22-38]
The balance of convenience
The much more difficult issue is the balance of convenience. This entails an inquiry into the contrasting injury the parties are likely to suffer if an injunction is or is not granted, in the particular circumstances of the case: Beecham Group Ltd v Bristol Laboratories Pty Ltd.[9] The defendant proposes to open the business tomorrow, that is Friday 3 September. She has hired at least 4 employees, expended upwards of $100,000 to renovate the premises, outlaid $620,000 for the real estate, so that to injunct the business from trading, or to severely restrict the food and beverages it can serve, would have very serious consequences and may well effectively close the business down. Nor is it evident that placing a time limit on operations, say only after 5.00 pm in the evening after the plaintiff’s business closes, would not have the same effect. It can not be assumed that this kind of restriction would not compromise the overall viability of the business.
[9] (1968) 118 CLR 618
Unfortunately the plaintiff delayed in bringing this application, probably for the reason that it was hoping the matter might resolve. The court is faced with the inexorable fact that the application was brought on the cusp of the opening of a new start-up business. Another consideration is that it would be difficult to fashion an injunction that is not too wide, as it would be if couched in the terms of the restraint clause, or practically unenforceable if it attempts to be too prescriptive. On the other hand the plaintiff has expended a large amount of money, and committed itself to an investment on which the wider family depends for their livelihood. However the prospect of loss is at this stage, necessarily speculative. There is no evidence of any downturn to the present time. The combined considerations incline the balance of convenience against granting an injunction, the lower risk of injury or injustice as things presently stand, falling on the plaintiff.
Damages an adequate remedy
Turning then to consider whether damages is likely to be an adequate remedy, there are certainly potential problems of proof, as suggested by Mr Riggall. It may be that the respective books of account, even if well kept, might not be detailed enough to reveal losses in relation to particular lines of food or beverages, and it may well prove difficult to demonstrate a causal link between apparent losses and the defendant’s line of business. These are however conventional problems of proof inherent in any damages assessment: see Kizbeau Pty Ltd v WG & B Pty Ltd,[10] for instance. Consequently they are not necessarily complications created by this particular transaction. If the issue of paying a “premium” for the real estate is agitated, that should be capable of resolution by obtaining historical or purely real property valuations.
[10] (1995) 184 CLR 281
Another problem here lies in the fact that there is no track record for the new business. Even though that might be said to be the product of this particular transaction, it is not a situation unknown in damages inquiries.
In the result the conclusion must be that damages is an adequate remedy in the circumstances, despite a number of potential evidentiary hurdles. The same conclusion can be reached in another way. The plaintiff disavowals rescission as an option. A complete or substantial injunction is inappropriate at this advanced point of time, for the reasons mentioned above, so that damages must be the remedy, by default. It should not be forgotten that there are different measures of damage in the pleaded causes of action (contract and tort), which serve to make available wider remedies to the plaintiff.
Conclusion and Orders
On the other hand as defence counsel accepted, the court is prepared to impose an injunction preventing the defendants in the new business, from offering for sale the specific items listed in the menu of “Chocolate @ No 5”, being those contained in Exhibit JWP14 to the affidavit of Joseph Percy Wolfsen. These must be extended to include food containing chocolate (excepting only on cappuccinos) chocolate fondue or chocolate mousse, ice-cream, milkshakes, bottled water and fruit beverages, cakes, desserts or biscuits, as undertaken by the defendant’s counsel and from holding out, promoting, advertising or representing that the business sells coffee or is a coffee shop, as undertaken in Exhibit “JPW-21”.
The parties are entitled to be heard as to the precise terms of the injunction, the nature of appropriate undertakings (if any) and as to costs.