=~ wm Ly Li JUDGMENT No. 29248! CATCHWORDS Iniunctions - interlocutory relief - balance of convenience and discretion - agreement for management of hotel - whether Court should grant interlocutory injunctive relief restraining breach of management agreement - question of need for continuing co-operation and confidence onthe part of parties - whether grant of iniunction would involve specific performance of agreement - assessment of strenath of respondents' case that manager in breach of fundamental provisions of management agreement with consequence that agreement no longer on foot - restraint of breach of provision of agreement conferring right of first refusal on manager in the event of owner wishing to sell. HOLIDAY INNS (PACIFIC) INC. and ANOR. v. LETSURE DEVELOPMENTS (QLD) PTY LIMITED and ORS. No. G469 of 1987 Coram: Sheppard J. Place: Sydney Date : 7 October 1987 IN_THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. 6469 of 19987 wewre wn GENERAL DIVISION BETWEEN: HOLIDAY INNS (PACIFIC) INC. and ANOR. Applicants AND: LEISURE DEVELOPMENTS (OLD) PTY LIMITED and ORS. Respondents CORAM: SHEPPARD J. PLACE: SYDNEY DATE : 7 OCTOBER 1987 MINUTES OF ORDER For Orders see p. 26 and annexure hereto NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALTA NEW SOUTH WALES DISTRICT REGISTRY No. G469 of 1987 eww wer GENERAL DIVISION BETWEEN: HOLIDAY INNS (PACIFIC) INC. and _ANOR. Applicants AND: LEISURE DEVELOPMENTS (QLD) PLY LIMITED and ORS. Respondents CORAM: SHEPPARD J. DATE : 7 OCTOBER 1987 REASONS FOR JUDGMENT HIS HONOUR: This is an application for interlocutory relief. The application was made partly to restrain the use of the Holiday Inns name and the infringement of certain Holiday Inns trade marks bv the respondents who, it was said, were threatening to use the Holiday Inns name or a name said to be substantially similar thereto, Holiday Plaza. But this was not the essential matter at the heart of the applicants' case. That case was that the respondents had wrongfully purported to terminate a management agreement made on 16 May 1984 between B.G.H. (Qld) Pty Limited and Holidav Inns (Australia) Inc. Both companies have since changed their names. 8.G.H. (Qld) Ptv Limited is the first respondent, Leisure Developments (Qid) Pty Limited and Holidav 2. Inns (Australia) Inc. is now Holiday Inns (Pacific) Inc. Both applicants are companies incorporated in the United States of America. Holiday Inns (Pacific) Inc. ("Holiday Inns") is registered as a foreian company in each State and Territory of the Commonwealth. It carries on business in both New South Wales and Queensland and perhaps in other places in Australia as well. Pursuant to the management aqreement, Holiday Inns agreed to manage a hotel at Surfers Paradise for the first respondent which was the owner of it. Earlier this vear the first respondent had sought the applicants' consent to the novation of the aqreement by the second respondent. Gourdon Ptv Limited. The matter has been in abeyance since June. Nevertheless. on 23 September 1987, Gourdon Pty Limited purported to qive Holiday Inns notice of the termination of the management agreement for alleged breach thereof by it. It 13 for that reason that Gourdon Pty Limited has been joined as a respondent. The respondents, Messrs. Graham and Holt, have been joined because they guaranteed the first respondent's obligations under the management agreement. The management agreement 1s for a period of 20 vears from the date of the opening of the hotel which was in June 1987. Holiday Inns has options to renew the agreement twice. each time for a further period of five years. Critical clauses in the aqreement are articles 4.01, 16 and 25.02. So far as relevant, articles 4.01 and 25.02 are as follows:- "4.01 -.. Owner (the First Respondent) agrees not to interfere in the day to day operation of the Hotel and acknowledges Manager's (Holiday Inns') total control of operational activities. 25.02 Owner covenants Manager shall and mav peaceablv and quietly manage the Hotel in accordance with this Contract. Owner aqrees to take all appropriate actions, judicial or otherwise, required to assure such quiet and peaceable management by Manager". Article 16 deals with a different matter, namely, the sale of the hotel. Relevantly it provides as follows:- "Tf at any time or times after the Effective Date of this Contract Owner shall intend to make an offer to sell the Hotel, Owner shall deliver to Manager an executed original copy of such offer together with all financial information (including, but not limited to. certified balance sheets and operating statements) involved and such other information as may be reasonably requested by Manager. Manager may, within sixtv (60) davs of its receipt of such offer and said financial data, at its option, exercise its right hereunder to purchase the Hotel on the terms of said offer. Tf Manager fails to exercise said right of first refusal within said sixty (60) dav period, Owner shall be free to sell the Hotel pursuant to such offer within six (6) months provided that such transaction proceeds to closing on essentially the same terms contained in the offer". The effective date referred to is the date of the agreement, namely, 16 May 1984. It is the applicants' case that the provisions of articles 4.01 and 25.02 entitle Holidav Inns to manage the hotel free from interference from the respondents, that the action of Gourdon Pty Limited in purporting to terminate the contract was wronaful. and would have been wrongful, if done by the first respondent. and that the respondents have wrongfully attempted to dispossess Holiday Inns from the hotel, thus attempting to prevent it from 4. managing it. Furthermore, the applicants say that the first respondent is threatening to sell the hotel without observing the provisions of article 16 of the aqreement. The matter first came before Gummow J. on 28 September 1987, consequent upon leave to serve short notice granted on Sundav evenina, 27 September 1987. After a short hearing, his Honour made certain orders and stood the matter over to 30 September 1987 when it came before me. The orders made bv Gummow J. were 1n substance as follows:- "Order that until 4.30 p.m. on Wednesday 30 September 1987 the Respondents by themselves their servants and agents and the servants and agents of each of them be restrained from. in trade or commerce:- (a) using in relation to the hotel and hotel business at Surfers' Paradise in the State of Queensland which is the subject of the management contract annexed as annexure A to the affidavit of Mark Evan Thomas sworn 28 September 1987 and filed herein the name 'Holidav Plaza' or any other names (other than 'Holiday City' and Holiday Inn) which are substantially identical with or deceptively Similar to the name Holiday Plaza. (b) representing that the first applicant is no lonager manager of the said hotel, and (ce) representing that the respondent or any of them has the right to manaqe the said hotel" The orders have been continued up to and including today. Additionally, the respondents have undertaken until today not to enter into any contract for the sale of the hotel. The application for interlocutory relief was heard on 30 September, part of 1 October, 2 October and yesterday when I 5. stood the matter over for judament this afternoon. Except for a cross-claim filed on behalf of the respondents there have as yet been no pleadings. But the essential interlocutory relief which the applicants claim is. as indicated, an injunction restraining the respondents from committing breaches of articles 4.01, 16 and 25.02 of the management agreement. In other words. they seek to be left in control of the premises under the terms of the agreement until the final hearing can take place. They also seek to restrain the first respondent from selling the hotel unless 1t follows the procedures provided for in article 16. The cross- claim is brought by the first respondent against Holiday Inns. It contains alleqations which the respondents intend to rely upon defensively as well as by way of cross-claim. The essential alleagations made in the cross claim are as follows. It is said that the hotel consists of approximately 408 quest rooms, two restaurants, two lounges and two shops. It was designed to be a hotel of international five star standard. Paragraph 4 of the cross-claim alleges that 1t was an implied term and condition of the management agreement that Holiday Inns. in the performance of its undertaking as manager of the hotel should exercise skill, care and diligence in and about such management as is usual in and for the conduct of the business of managing a hotel of international five star standard. The critical allegations are contained in paragraph 5 which alleaes breach of the obligations pleaded in paragraph 4. It is said that Holiday Inns failed to exercise any skill, care or diliaence in and about the performance of its undertaking as manager of the hotel. A number of particulars follow. I do not refer to all of 6. them but, amongst other things. it is alleged that:- (a) (b) (c) (da) (e) (f) Between May 1986 and June 1987 Holiday Inns over-staffed the hotel: Holiday Inns so managed the hotel that hotel fixtures and fittings were poorly maintained; Holiday Inns so managed the hotel that there was no adequate program for cleanliness and the presentation of the hotel asa high quality hotel; Holiday Inns suffered the performance of the Banqueting Department to be incompetently operated: Holidav Inns suffered the Cafe Carinva, which was operated within the hotel, to be managed by inexperienced personnel so that the standard of service and the quality of food supplied were inferior: Holiday Inns failed to make adequate provision for room service given the size of the hotel; Holiday Inns failed adequately to manage or 7. control the staff of the kitchen at the hotel; (h) Holiday Inns failed to anstitute any effective cost control procedures with respect to the sale of food in the hotel; (1) Holidav Inns suffered. from May 1986 to 1 June 1987. the employment on behalf of the first respondent of an incompetent hotel engineer 30 that prior to the replacement of the incompetent engineer the serious deficiency deposed to in paragraph 34 of the affidavit of Jurg Metzger filed in the proceedings, existed; (4) Holiday Inns caused to be installed plant and equipment at substantial expense to the first respondent which was not reasonably necessary for the proper conduct of the hotel. Paragraph 34 of Mr. Metzger's affidavit referred to in para. (1) will be referred to later. The notice referred to is the notice given by Gourdon Pty Limited on 23 September 1987 which I have earlier mentioned. It is as follows:- 8. "Gourdon Pty Uimited herebv determines the agreement between it and Holiday Inn Australia Inc. (the Manager) bearing the date 16 May 1984 due to breach by the Manager of fundamental terms of the agreement. It was expressly agreed that the Manager would operate the Hotel to a standard which would produce occupancy levels and profit at or about the forecast and approved budget level. The Manager has not complied with this fundamental term. We regret having to take this action but the Manager's failure to meet its obligations has left the company no choice but to determine the agreement". It is difficult to see how the notice can have any effect directly or indirectly on the outcome of the proceedings. Not oniy is it qiven by a company not a party to the agreement; it alleqes that the agreement contained an express term to the effect that Holiday Inns would operate the hotel toa standard which would produce occupancy levels and profit at or about the forecast and approved budget level. The aqareement contained no such term. Article 6 provides for an operating budget but part of that article is as follows:- "Manager shall not be deemed to have made any guarantee, warranty or representation whatsoever in connection with the Operating Budget. Owner acknowledges that the Operating Budget is intended only to be a reasonable estimate of the Hotel's income and expenses for the ensuing year". It was submitted by counsel for the respondents that the notice evinced an intention on the part of the first respondent not to be further bound by the agreement because of breaches of the aqreement by Holiday Inns going to the root of it. I think 9. this is difficult in the light of the notice having been given by the wrong company. The matter is of little moment because the first respondent, through Mr. Holt. one of its directors, has by a number of its actions, indicated quite clearly that it no longer considers itself bound by the management agreement. The only trouble about this is that Holiday Inns by its actions. has Plainly evinced an intention to keep the contract on foot. It wants the first respondent held to the terms of its bargain. Whether 1t is correct in this reqard will not be a matter capable of being determined prior to the final hearing. The starting point for the consideration of the matter is to make some assessment of the strength of the allegations made by the first respondent in its cross-clain. Such an assessment 13 difficult to make because of the limited time the parties have had to put on evidence, the fact that Mr. Metzger's affidavit mentioned in the particulars to the cross-claim. although not objected to, 1s in a vague and general form and has not been tested by cross examination, the inabilitv of the applicants in the time available to respond to the affidavit and the overall haste with which the matter has been attended. Nevertheless. I am satisfied that I should make some attempt to assess the strenath of the allegations made in the cross-claim because such assessment as I can make will have a bearing on the general exercise of my discretion. When the hotel opened it was managed by a Mr. Bischof. He continued as manager until May 1987 when he was succeeded by Mr. Metzger. Mr. Metzger has had a substantial experience in the 10. management of hotels in Australia. He became manager of the hotel after complaints made by the respondents to Holiday Inns about Mr. Bischof's capacity to manage the hotel. Holiday Inns professed not to agree with these complaints but agreed to Mr. Metzger's appointment, so it would seen, to appease the respondents. Mr. Metzger's evidence, although vague and general and in many respects, in an inadmissible form, even in an interlocutory application, is extremely critical of the previous management of the hotel. In para. 34 of his affidavit which is referred to in the cross claim he said. amongst other things, that he discovered that:- (a) The workshop and store room were ina state of chaos; (b) The plant rooms had been used as storage areas with various plant and equipment being totally inaccessible for maintenance and emergency break downs; (c) Various fire doors and fire fighting equipment where inaccessible; (d) Little planned preventive maintenance had been carried out; (e) The emergency diesel hydrant pump for the fire hose reel system had been dismantled during construction and was placed across ll. the entry door; (f) The qeneral standard of fire safety equipment was in need of immediate action: a) The level 23 hnotwells, which supplied the hot water to the quest rooms, were found to be in disrepair in as much as 60 per cent of the heating elements were found to be defective: (k) Various items of kitchen equipment were found to be out of order or partially defective including deep fryers, salamanders, oven ranges and bainmaries; 1) Ice machines were found to be leaking across the floors causing a safety hazard; (m) The refrigeration equipment was operating inefficiently and at a much greater cost than it should have been. These are most serious allegations and, in the light of the lack of adequate opportunity Holiday Inns has had to answer then, ought not at this stage be accepted at their face value. That is not to say that they may not eventually be proved correct. For 12. the moment it is enough to conclude that they tend to show that there is substance in the respondents' allegations so that the cross-claim raises serious matters to be tried. Furthermore, there are signs in the objective material which lend support to the respondents' case. I mention three of these:- (a) In the course of his cross-examination Mr. Bischof qave the following evidence:- ",e. did not the buddaet provide for the operational costs including payroll? ---It did indeed. It must have been out. was it? ---It was a bit under-estimated, yes, this can be said. How did that come about? ---In all the stages we discussed the operation, we intended to create a deluxe environment and a deluxe operation which eventually needed more employees than we anticipated and this then was curtailed but the loss or the expense in the payroll had already occurred then. We did, as of end of January, decrease the manning by 42 people all over in the hotel and, in particular, in the food department. What was wrong? Did you not allow for penalty rates or overtime. or what? ---It was allowed for but the operation requirements of a deluxe operation was more than we anticipated, yes, your Honour. Did you have to put extra staff on? ---Extra staff on as well as casuals. But you operate luxury establishments in other parts of the world, do you not? ---Yes. Well. how did you get this wrong? ---This was, most probably our biggest mistake. The expenses of an employee, We had, in the food department, around about 80 per cent of the total sales went in salary and wages while in other parts of the world, averages around about 30, 32, 35 per (db) 13. cent. Well, that means that Australian labour costs are higher? ---Very much so. But was not that foreseen at the time of establishment? ---Not to the fullest, not to the fullest. Well, maybe some people would say they are far too high 1n the tourist industry but the fact is that they are there and I would have thought that people like yourselves would have foreseen this when you were making your estimates. Why was it not foreseen? ---I nyself was by establishing the budget of the first eight months not fully involved in the budget preparation itself and this could have been one of the slight oversights". The emphasis is mine. The questions were asked by me. An annexure to an affidavit of Mr. Holt. Annexure "C", is a tabulation indicating the operating results of the hotel for the period from its opening at the beginning of June 1986 until the end of Auqust 1987. For the seven months of 1986 the hotel was consistentlv in a loss situation. The maximum loss was $413,684 for the month of July. The monthly loss was never less than $128,000, which was the figure for November, and other figures were of the order of $200,000 and $300,000. The total loss for the seven months was $1.9 million. The budget had provided during the same period fora profit of $1.7 million. The position was retrieved not insubstantially in the first eight months of 1987. There was a substantial profit in January, $292,000, which conformed almost precisely with the budget of $291,000. There were losses, although much smaller than in 1986. in February, May, June and July and there were small profits in the months of March and {c) 14. August. The tabulation discloses that the hotel was very substantially below budget throughout the whole of the period to which it refers. In evidence is a memorandum dated 3 December 1986, written by Mr. Koppens, who is Senior Vice-President and Managing Director of Holiday Inns Inc. to a Mr. Windfuhr. Amongst other things, Mr. Koppens said:- "As you probably know, Surfers Paradise business is still appalling and we are way behind budaet year-to-date. Further it does mot look very encouraging for the months to come, primarily because we never had a proper marketing and sales department in the hotel and secondly, anew hotel managed by Travelodge has just opened next to ours. I had to make some decisions on this trip and told Mike Bischof to replace Toni Gregory and find a top-notch on hands sales director for Surfers. In the meantime I have agreed with Brian Wythe that David Barbuto, our National Sales Director. takes full charge of the Surfers Sales Department and reports to Mike Bischof. We are now looking for someone to replace Toni. For your information Toni has already left. Christian, when you are in Surfers with Francis I want you to have a_ really hard look at our marketing and sales department as I have been aiven to understand that Mike Bischof never attended anv sales meetings. I have given Mike six months to turn the hotel around or he will be replaced or transferred to another of our properties. I also told Mike Bischof to release the Executive Housekeeper and the Chief Engineer - this has been done. The Assistant Chief Engineer is now Acting Chief Engineer and the Assistant Housekeeper is Acting Executive Housekeeper until such time as Stella Cheng from HIGM arrives to take over the position later this month. Both of these departments were very expensive and non-productive and did not work inthe true spirit of Holiday Another thing pointed out to me in Particular was the fact that management is not visible Personally I am determined to turn this hotel around and make it a success. If we are to lose this hotel it will curb our development efforts 1n Australia and the South Pacific area. Frankly speaking I have never had such a disastrous operation on my hands ...". In passing I should mention a complaint made by counsel for the applicants of the use made of internal memoranda said to have been wronqfully obtained from Holidav Inns' records. In the time available I was unable to give this matter sufficient consideration and counsel did not press it. But I thouqht that the documents should be admitted 1f for no other reason than that they were relevant and plainly discoverable documents. All this evidence, in my opinion, establishes that the allegations made by the respondents raise substantial questions. Since they are to be relied upon defensively as well as in the cross-claim, that conclusion must have a bearing on the overall outcome of the application. Counsel for the applicants sought to overcome the effect of the evidence by reference to a letter dated 9 June 1987 by Mr. Holt and Mr. Graham to Mr. Koppen. Amongst other things they said:- "We have just completed a detailed survey of the operations of Holiday Inn Surfers Paradise, covering the pre-opening period and operations to date. This was made necessary by the continuing requirement to supply funds to cover operational 16. losses. It will be readilv agreed that the Hotel has not performed at all, indeed it has quite a sorry history, of which the details are well known to you. Whilst we are sure 1t will improve, and that we have sound management techniques in operation following the appointment of Mr. Jurg Metzger, we are nevertheless required to take every possible step to minimise the heavv continuing drain on our financial resources. It would be a pointless exercise to go through all the events leading to the present position, since you are well aware of the problems here, Holiday Inns Inc. position in Australia, and what 1s required to repair the situation. We do however need some pointed and defined assistance within the spirit if not the letter of our agreement". The letter went on to ask for certain concessions includinag the deferral of management fees for two years. Messrs. Holt and Graham then said that they had produced money "as required ina continuous stream". The figures were said to be $2.99 million to opening and $1.8 million thereafter, a total of $4.79 million "with further funding now required". The letter concluded as follows:- "We have continually expressed to your good self and senior staff our firm opinion that Holiday Inn in Australia would be a vigorous competitor and even a pacemaker in the industry. That is still our view, but it will take a little longer than the original planning indicated. The course set was wrong and must be resailed. Your assistance as requested will help us to our mutual benefit". It was said that this indicated a willingness to waive or 17. overlook any breaches of the agreement. The difficulty I have with this submission 1s that it omits from account the date of the letter which was written some four months ago. Furthermore, it 1s by no means clear to me that the respondents were fully aware of the serious criticisms made by Mr. Metzger 1n his evidence. I have thus not given the statements in the letter substantial weight in my overall consideration of the matter. A matter which to my mind is of more substance, which was relied upon by counsel for the applicants. 1s a submission that the real reason for the respondents' present attitude to the problem 1s their desire to sell the hotel free of the fetter imposed by article 16 of the agreement. The evidence at the moment is inconclusive and I would not make a finding to that effect, but I think, in the light of some of the documents in the case and also some of the oral evidence given by Mr. Holt. that there is substance in this submission and that, unless there were this desire to sell, matters might have been allowed to go on as indeed was contemplated in the letter of 9 June 1987 to which I have referred. It seems clear that what really has precipitated the crisis is the on-going liability of the first respondent to service the large borrowings which have been made in order to finance the acquisition of the hotel and its operation. According to Mr. Holt the present interest commitment of the first respondent ranges between $1.2 and $1.4 million per month depending on variations in bill rates. Whilst, therefore, there is a serious matter to be tried arising out of the respondents' various allegations, it is not clear to me that they may not have to face up to the fact that such breaches of the agreement as may 18. have been committed by Holiday Inns in the past have no significance other than as matters in respect of which they may eventually be entitled to damages. Having expressed my view about the respondents' positive case, I now turn to the applicants' case. It 18 essentially one in which it seeks to restrain breaches of negative covenants in an agreement. It is to be observed that only one of the three s provisions relied upon, article 4.01, is expressly negative in form. The others provide for positive obligations. But each of the others imports a negative obligation as a complement to its positive requirements. That is how the matter was approached in argument. Reliance was placed on a number of cases including Lumley v. Wagner (1852) 1 De G.M. & G. 604; 42 E.R. 687, Winter Garden Theatre (London) Limited v. Millenium Productions Limited Ci9487 A.C. 173 and Ampol Petroleum Limited v. Mutton (1953) 53 S.R. (N.S.W.) 1. In the submission of counsel for the respondents the matter was not so simply approached. Although the covenants were negative in effect, a restraint against breach of them would in substance require the respondents specifically to perform the agreement. It was submitted that the Court would not grant the relief sought in the context of an agreement which required the continuance, for a period of 20 years, of a relationship which involved a substantial degree of mutual trust, confidence and co-operation. Reference was made to Davis v. Foreman £1894] 3 Ch. 654, J.C. Williamson Limited v. Lukey (1931) 45 C.L.R. 282, especially per Dixon J. (as he was) at pp. 297 - 300, and Atlas Steels (Australia) Pty Limited v. Atias Steels Limited (1948) 49 S.R. (N.S.W.) 157. 19. It should be observed at the outset that the submission made by the respondents does not touch the provisions of article 16 dealing with the first respondent's obligations in the event that it decides to sell the hotel. That matter may be put on one side for the moment. In support of his submission, counsel for the respondents entered upon an analysis of the adareement. He referred particularly to the following matters:- 1. Holiday Inns had no proprietary rights in the hotel. Article 1 made this clear. No other provision of the agreement conferred any right or interest in the hotel. The licence granted was thus a contractual licence only. 2. The agreement contemplated continued contact and co-operation. It could only work 1f this was present. Reference was made to articles 4.02 and 5. The former provides for monthly meetings and is as follows:- "4.02 Manager agrees to hold a monthly meeting with Owner beginning with the commencement of the Pre-Opening Program, at which time Manager and Qwner shall review and discuss the previous and future months operating statement, the marketing plan, cash flow, budget reviews, capital expenditures, key personnel moves and the general concerns of Owner and Manager relating to the Hotel". Article 5 provides amongst other things that the first respondent agrees to establish and deposit into the bank account, provided for in the article, on the day the hotel 20. opens at least the equivalent of $US300.000, usina the official rate of exchange. The amount is to be the minimum balance maintained by the first respondent during the first year of the hotel's operation. The minimum balance thereafter is to be no less than the hotel's operating costs as defined in the agreement for the preceding calendar month. Further provisions are made about operating costs and the first respondent agrees immediately on request to furnish the manager with sufficient funds to make up any deficiency in the minimum balance. There is then provision for the disbursement of funds. The agreement conferred full power and little responsibility on the manaqer and full responsibility and little power on the owner. Reference was made to article 6 dealing with the operating budget and to article 14 dealing with employees. Article 6 provides that, not less than 45 days prior to the scheduled opening day of the hotel, and not less than 45 days prior to the commencement of each full fiscal year thereafter, Holiday Inns is to submit to the first respondent for the first respondent's approval a proposed operating budget for the ensuing fiscal or partial fiscal year. The first respondent's approval of the budget is not to be unreasonably withheld and is to be deemed to be given unless a specific written objection thereto is delivered by the first respondent to Holiday Inns within 20 days after submission. Holiday Inns is to revise the operating budget from time to time to reflect any unpredicted significant changes, variables or events or to include significant 21. additional umanticipated items of income or expense. Any such revision is to be submitted to the first responent for approval, which approval is not to be unreasonably withheld and is to be deemed aiven unless a specific written obtection is delivered within 20 days after the submission. The article contains provisions providing for what 15 to happen in the event of disagreement over specific written objections. Article 14, as I indicated in the course of the argument, is to me a curious provision. It opens with the words, "All Hotel employees including the Hotel general manager shall be employees of Owner". Holiday Inns, however, as agent for the first respondent, is to be the sole judge of the fitness and qualifications of all hotel personnel and has the sole and absolute right to hire, supervise, order, instruct, discharge and determine the compensation, bonuses, benefits, including housing and complimentary food and beverages, allowances andall other terms of employment of all personnel working in the hotel. So. Holiday [Inns has complete control over the staff but nevertheless' the intention apparently is that they remain employees of the first respondent. The question that was raised during argument was how was the first respondent to see to it that its obligations to its employees, some of which would involve it in criminal liability 1f they were not observed, were discharged. In essence counsel submitted that, if the injunctions sought were granted, the parties would be bound to co-operate at 22. meetings and to endeavour to agree on budgets. This would occur in an atmosphere where each party had lost faith in the other and where there were signs of positive mistrust on each side. Furthermore, the provisions of articles 5 and 14 gave Holiday Inns very substantial power over the management of the hotel. It was true that it was obliged to manage it in accordance with the manual provided for in clause 4.01 and that there was probably an implied term requiring Holiday Inns to manage the hotel in accordance with proper practice either because such a term was an incident of the relationship of owner and manager, or because the term should be implied in accordance with ordinary principles: cf. Codelfa Constructions Pty Limited v. State Rail Authority of N.S.W. (1982) 149 C.L.R. 337. But in the context of all that had happened this was cold comfort to the respondents who could be forced to continue to contribute to substantial losses as had been the case in 1986 and was still the case to some extent even up to the end of August 1987 as the analysis earlier referred to shows. The broad answer made to these submissions by counsel for the applicants was that the Court would restrain the breach of negative stipulations in a licence agreement and that the parties had contracted upon the basis that Holiday Inns would have the extensive powers which the agreement confers. No more was required than that the respondents be restrained until the final hearing from interfering with the management of the hotel by Holiday Inns which it would be obliged to do in accordance with the contract. Difficulties might occur at management meetings and budget discussions but commercial common sense dictated that 23. these would perforce have to be held in a co-operative atmosphere in the joint interests of the parties. Otherwise the hotel might fail to the detriment of both. I confess that I have not found the solution of the problem easy. I am attracted by submissions made on behalf of the applicants because they have the effect of preserving the status quo and the respondents can be protected by an undertaking as to damages which, if required, must be supported by substantial security because each applicant is in reality outside the jurisdiction. Furthermore, provisions can be imposed obliging the manager of the hotel to report regularly to the respondents who could be given liberty to apply on short notice for a dissolution of any injunction. On the other hand the considerations put to me by counsel for the respondents are weighty indeed. They suggest that this is a case where the Court might ultimately refuse to grant final injunctive relief. In the time available I have considered a number of the cases relied upon but I do not find any precisely in point. All one can do is to take the principles from then. But when one does one must read what is said in the light of the particular facts in issue. Having reflected on the matter I think there is much to be said for the proposition stated in Equity - Doctrines and Remedies (2nd ed.), Meagher, Gummow and Lehane, para. 2142, p. 544 where, in the context of this whole topic, the authors say that the individual judge's own intuitive sense of what is the most appropriate course to take in the particular circumstances is probably the deciding factor. This 24. may be a truism, but the implications underlying it are clear. Notwithstanding the very substantial matters put against my taking such a course, I have reached the conclusion that, on conditions to be worked out after discussion with counsel, I should grant interlocutory relief in terms of that sought by the applicants. One matter which has weighed heavily with me in persuading me to take that course 1s that I think, in matters of this kind, there is always a great deal to be said for the preservation of the status quo. If the management agreement comes to an end because of failure on the part of the Court to grant interlocutory relief, it will not come to an end temporarily. It would seem to me from a practical point of view that that will be the end of the agreement. The hotel wil change its name and 1t will be managed by the first respondent. That may or may not be a good thing, but it is very hard to say that damages will provide Holiday Inns with an adequate remedy if, after all, it should be substantially right about the various issues which will be litigated. Furthermore, it seems to me that the best chance of preserving the very valuable asset which these parties in effect share is to preserve the hotel as an ongoing entity, thus presenting to those who deal with it at least the appearance of continuity and stability. To that end, I endeavoured to induce the parties in the course of the hearing to agree to a middle course which would have involved Mr. Metzger remaining as manager and there being a committee consisting of a representative each of the applicants and the respondents to whom he could refer in cases of doubt or 25. difficulty. One difficulty with this is that it seems impractical for Mr. Metzger to remain as Manager. The applicants, through Mr. Koppen,. have stated that they have lost confidence in him because of his allegiance to the respondents and Mr. Metzger has said in his evidence that he does not wish to be the manager of a hotel of which the managing director of the managing company has no confidence in him. He is prepared to stay on for a short period and the applicants are prepared to have him for that period until a suitable replacement can be found, but it seems, although it may have been desirable in the interests of the parties jointly to retain a continuity of a managership which seems at least prima facie to have been somewhat successful, that that is not to be. IT have thought of imposing upon the applicants the sort of suggestion that I made from the bench during the course of the argument but I have decided against that course. I think it 1s better to provide very substantial security for the undertaking as to damages which must be given, to give the respondents leave to move on short notice for the dissolution of the injunction if they be so advised and to see to it that they are informed as best they can be of the detail of the management of the hotel either through the ordinary operation of the relevant clauses of the agreement or though specific conditions which will be imposed to compel that course. That leaves the question of article 16. I am of opinion that breach of this article should also be restrained until further order but again, subject to the right of the respondents to apply 26. forthwith for the dissolution of the injunction if they be so advised. It remains to mention the undertaking as to damages. There was some discussion during the arqument about the amount of security which should be required for 1t. As I indicated. I am satisfied that the amount at the moment should be $5 million with the right reserved to either party to apply to vary it as they may be advised. I shall now hear counsel on the precise form of relief. { certify that this and the 25° preceding pages are a true copy of the reasons for Judgment herein «+ The Honourable Mr Justice Sheppard. / 4. KK. : Asecciata Baad 7 OCTOBER /987 (After discussion, the matter was stood over to 8 October 1987 to enable counsel to bring in short minutes to give effect to the decision. On 8 October 1987 counsel brought in short minutes which were in an agreed form together with a bond by one of the Banks securing to the respondents the payment of up to $5,000,000 in respect of damages which might be suffered by them as a result of a grant of the injunction. The orders agreed upon were in accordance with the short minutes annexed to these reasons for judgment). Dates of Hearing: 30 September, 1, 2 and 6 October 1987 Counsel for the Applicants: R.V. Gyles, Q.C., T.F. Bathurst, M. Ellicott Solicitors for the Applicants: Allen, Allen and Hemsley Counsel for the Respondents: A. B. Shand, Q.C. and WN. 27. Hutley up to 1 OctoberR.P. Meagher, Q.C. and N. Hutley on 2 and 6 October Solicitors for the Respondents: Gadens ' YN THE FEDERAL COURT OF AUSTRALIA o> NEW. SOUTH WALES DISTRICT REGISTRY o. "4 GENERAL DIVISION - No. 469 of 1987 T! BETWEEN: HOLIDAY INNS (PACIFIC), INC First Applicant HOLIDAY INNS, INC. Second Applicant , AND: LEISURE DEVELOPMENTS (QLD.) PTY. LIMITED First Respondent GOURDON PTY. LIMITED Second Respondent RICHARD JOHN GRAHAM Third Respondent RICHARD TWEEDY HOLT Fourth Respondent SHORT MINUTES OF ORDER Upon the Applicants by their Counsel: (i) Giving the usual undertaking as to damages; (1i) Undertaking that they wiil at all reasonable times and upon reasonable notice - mht (iii) (iv) {a) Make available to the Respondents for inspection and copying the records of the Hotel; (b) Permit the Respondents or persons nominated by them to inspect any part of the Hotel. Agreeing to supply to the Respondents on a monthly basis a return setting out the income and expenditure of the Hotel for the preceding month. Agreeing to comply with all reasonable requests for information made by the Respondents in respect of the running of the Hotel. Agreeing to make available to the Respondents the daily naght at auditor's report andAban transaction statement. ke the following orders: Counsel for the Applicants Dated: That the Respondents forthwith return to the Applicants the "Holiday Inn" signs removed from the Hotel. Orders in terms of paragraphs 1 to 6 and 8 to il of the Applicant's claim for interlocutory relief contained in the Application up—to and i : E a PROVIDED HOWEVER that the above orders are conditional upon the Applicants epEeD security in the sum of $5 million for its undertaking as to damages. Grant liberty to any party to apply on 24 hours notice. That costs be reserved. 8 October, 1987