Industrial Relations Commission of New South Wales in Court Session CITATION: Sylvan Buildings Pty Ltd v AG&S Building Systems Pty Ltd and another [2005] NSWIRComm 368 Applicant Sylvan Buildings Pty Ltd First Respondent PARTIES: AG&S Building Systems Pty Ltd Second Respondent Dennis McFadden FILE NUMBER(S): 1089 of 2005 CORAM: Backman J CATCHWORDS: Unfair contract - s 108B(1) application by way of notice of motion - meaning of termination of contract - whether variation to original agreements or new and separate agreements created - onus on party seeking relief to satisfy the Court that the arrangements were terminated - summons for relief not filed out of time - notice of motion dismissed - costs reserved. Industrial Relations Act 1996 LEGISLATION CITED: Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Limited (2000) 201 CLR 520 Kennedy v Contract Transport Solutions Pty Ltd [2003] NSWIRComm 158 Michael Etherden & Anor v Morgo Street Reserve Trust [2005] NSWIRComm 269 CASES CITED: Sanpine v Koompahtoo Local Aboriginal Land Council [2005] NSWSC 365 Southern Foundries (1926) Limited v Shirlaw [1940] AC 701 HEARING DATES: 09/30/2005 DATE OF JUDGMENT: 10/18/2005 Applicant Mr J. Catlin, of counsel Solicitors Sofra Solicitors LEGAL REPRESENTATIVES: Respondents Mr G. Sirtes, of counsel Solicitors Jackson Smith Solicitors JUDGMENT: - 1 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION CORAM: Backman J Tuesday, 18 October 2005 Matter No IRC 1089 of 2005 Sylvan Buildings Pty Ltd v AG&S Building Systems Pty Ltd and another Application under s 106 of the Industrial Relations Act 1996 INTERLOCUTORY JUDGMENT [2005] NSWIRComm 368 1 AG&S Building Systems Pty Ltd and Dennis McFadden are the first and second respondents respectively in proceedings brought under s 106 of the Industrial Relations Act 1996 and the applicants in a notice of motion filed 5 May 2005 in which they seek a dismissal of the proceedings on the basis that the summons for relief ("the summons") has been filed out of time. For convenience AG&S Building Systems Pty Ltd and Dennis McFadden will be referred to as "the respondents", or the "first respondent" and "second respondent". The summons for relief 2 The summons was filed on 3 March 2005 by Sylvan Buildings Pty Ltd ("the applicant"). The summons admits to various matters of fact which may be briefly stated. 3 The applicant had a business constructing and selling construction kits, carports, domestic garages, industrial sheds and concrete slabs. The respondents owned the licence to a system, referred to as Multibuild which was a materials ordering and pricing system and an associated computer software programme. Multibuild selected and ordered products such as sheds, garages, carports and other similar products. The software allowed the distributor or retailer of the product to remotely design the products to customer specifications which were shown in "real time" to the customer at the distributor's or retailer's premises. Once a customer selected a design, a company order was generated and forwarded by the first respondent to the authorised supplier. The supplier then delivered the product to the customer. The products were all in kit form and could be assembled by the customer with or without the assistance of a tradesperson. 4 In 2001 the applicant acquired rights to the Multibuild concept and distribution rights from the first respondent. Five written agreements were entered into between the applicant and the first respondent. Each agreement granted distribution rights to the applicant in an "agreed territory". The term of each agreement was 99 years. The parties also entered into an arrangement whereby the applicant was required to source products from an authorised supplier, chosen and approved by the first respondent. The nominated supplier was Strammit Pty Ltd. 5 During 2003, a competitor, Ranbuild Pty Ltd entered the market. The applicant advised the first respondent that it would not breach its agreements with the respondent by entering into an agreement with Ranbuild. 6 Between October 2003 and February 2004 the three computers connected to the Multibuild system at the applicant's Shepparton site were randomly and without warning disconnected. Reconnection followed telephone discussions between the second respondent and the applicant. Then in early February to March 2004, the applicants became aware that the first respondent had sold part of the Shepparton territory to another entity "A. C. Sheds". Subsequently, correspondence was received by the applicants from the first respondent's solicitors advising that the agreements with the applicant had been terminated. Evidence on the notice of motion 7 Correspondence from the first respondent's solicitors to the applicant advising it of the termination of the agreements was by way of letter dated 27 February 2004 and was received by the applicant on 1 March 2004. [The letter is annexed to the affidavit of Brian Hoskin affirmed on 12 September 2005 ("Hoskin affidavit")]. In the letter the applicant was informed that it was in breach of the agreements, and, that as a consequence the first respondent was terminating the agreements. The letter particularised the alleged breach (or breaches) in the following way: Particulars of Breach 3. Sylvan has breached the provisions of clause 4(a) of the Agreements not to directly or indirectly engage in the operation of a Concept identical to or similar to the AG&S Concept anywhere in Australia during the term of the Agreement in its recent dealings with the AGS competitor Ranbuild. 4. In the alternative to 3 above, Sylvan is in substantial and longstanding arrears in relation to its obligations to an authorised supplier namely Strammit (clause 3(i)i Annexure 3 paragraph (h) of the Agreement). 8 The letter added: AG&S hereby terminates the Agreements. AG&S requires Sylvan to fully comply with its obligations under clause 8 of the Agreements and in particular: 7 [sic] (a)(i): The Distributor shall immediately deliver to AG&S any and all Intellectual Property and other documents relating to the Concept and to its operation and Product sales thereof. 7 [sic] (a)(ii): The Distributor shall immediately cease to exploit in any way whatsoever any Intellectual Property including any techniques and skills owned and/or developed by AG&S and used by the Distributor in respect of the same Distributorship. Please contact AG&S direct in relation to return of our client's Intellectual Property. 9 Notwithstanding the contents of the 27 February 2004 letter, the Multibuild computer system was on the evidence still operating until at least 3 March 2004. At the same time, that is, up to 3 March 2004 the first respondent continued to accept payments by electronic transfer from the applicant for orders placed. Annexed to the Hoskin affidavit is a National Australia Bank statement of the applicant's account wherein an entry dated 3 March 2004 records a withdrawal in the sum of $1,082.40 by electronic transfer and contains the notation "Your ref: 1830-5017. AGS". According to the Hoskin affidavit that entry verifies a payment made by the applicant to the first respondent for orders placed with it on 3 March 2004. 10 In addition, Strammit continued to accept orders from the applicant for the supply of shed kits until 5 April 2004. It also continued to make deliveries to the applicant in accordance with orders placed until 28 May 2004. This suggests, according to the Hoskin affidavit a continuation of normal commercial relations rather than a severing of those relations which may be consistent with a significant dispute. 11 The applicant asserted that prior to 27 February 2004 it had never sold Ranbuild products from its retail sites. According to the affidavit of Gregory James Brassil ("Brassil affidavit") affirmed on 12 September 2005, this means that the applicant did not breach Clause 4(a) of the agreement. A copy of the agreement in relation to the Shepparton Territory is annexed to the Hoskin affidavit. Clause 4(a) of that agreement provides: The Distributor hereby acknowledges that during the term of this Agreement and for a period of 5 years after the termination of this Agreement, the Distributor shall not without the prior written consent of AG&S directly or indirectly as an employee, proprietor, partner, director, shareholder, officer or otherwise engage in the operation of a concept identical to or similar to the AG&S Concept anywhere in Australia herein or such areas or locations as a court mediating and/or adjudicating over this Agreement deems fit in the circumstances of this matter. 12 The second respondent swore an affidavit on 29 September 2005 ("McFadden affidavit"). That affidavit provides some further background in relation to the Multibuild computer system. According to the affidavit the Multibuild system was set up so that immediate disconnection from a distributor on termination of a distributor agreement was not possible. This was because a distributor such as the applicant had to reboot the system every thirty days to gain access to upgrades to the Multibuild software package. When an entity ceased to be a distributor the information was entered on the Multibuild system and when after a thirty day period the system was rebooted then that distributor's connection to the Multibuild server was no longer permitted. By this method, the applicant's connection was able to continue for a period following the 27 February 2004 letter. In the interim period before disconnection the system could not prevent orders being received and recorded via email from a distributor. No such orders however would be processed if a distributor's agreement had been terminated unless Mr McFadden gave express instructions. 13 The McFadden affidavit also deposes to a conversation between the second respondent and Brian Norris which is said to have occurred shortly after the 27 February 2004 letter. Mr Norris at that time was a director and shareholder of the applicant. The McFadden affidavit sets out the following record of the conversation: Norris: Well Dennis its a shame things have turned out like this. DMcF: Yes, we've had a good time together but he [referring to Greg Brassil] wanted to run the two distributorships [meaning AG&S & Ranbuild Pty Limited as AGS competitor] together. If I had allowed you to run the Ranbuild distributorship alongside the AGS Directorship it would have created havoc amongst my other distributors. Norris: Yes, I know. But Dennis I've got a last lot of sheds that have been ordered on your plans and that have been put into council. If you don't let us put these orders through, we'll have to go back to the customer and put things through council again using the new Ranbuild plans. DMcF: How many are there? Norris: About half a dozen. DMcF: Ok. I will process the orders but you have to pay COD [meaning cash when the order is placed] to the various suppliers. Norris: OK. Thanks. 14 Following the conversation the second respondent directed staff of the first respondent to process six orders for which the first respondent then invoiced its commissions on 3 March 2004. The Multibuild system records that the six orders were received on 29 February 2004 and on 1, 2 and 4 March 2004. Two orders were received on 1 and 2 March 2004 respectively and one order on the other days. The first respondent received payment representing its commission on 3 March 2004. The orders were forwarded on to the various suppliers on 4 March 2004. Were the agreements terminated before 3 March 2004? 15 The issue between the parties concerns the date upon which termination of the agreements was said to have been effected. If, as contended by the respondents, the operative date was at the latest 1 March 2004, being the date of receipt of the 27 February 2004 letter by the applicant, then the summons filed on 3 March 2005 is caught by the time bar imposed by s108B(1) of the Act. That section provides: An application for an order under this Division in relation to a contract that has been terminated must be made not later than 12 months after the termination of the contract. 16 The applicant contends that the agreements were not terminated, but if terminated, that this did not occur until at least 3 March 2004. The basis for this contention was the evidence that disconnection of a distributor such as the applicant from the first respondent's system was not possible until the end of the thirty day cycle when the system was rebooted. Until that time, the applicant's connection to Multibuild continued. Although the evidence does not specify when the thirty day cycle came to an end, it appears to be common ground that the cycle was still operating during a period prior to 27 February and up to 4 March 2004. 17 What is clear from this evidence is that the respondent's inability to disconnect the system on the same day of the purported termination (27 February 2004) meant that the applicant continued to have access to the system for some undefined period at least up to 4 March 2004. This continued access enabled the applicant to place further orders on the system via emails. This access and any ensuing and connected activity on the part of the applicant however, of itself would not be conclusive of a finding that the agreements were not terminated on 27 February 2004. 18 The applicant, represented by Mr Catlin of counsel, drew my attention to a decision of Peterson J in Kennedy v Contract Transport Solutions Pty Ltd (2003) NSWIRComm 158 (19 May 2003). In that decision, the parties entered into a cartage agreement in September 2001 which provided that the applicant would provide cartage services on behalf of the respondent. On 15 February 2002, the parties signed another cartage agreement in which it was agreed in the recitals that the cartage contract entered into in September 2001 was terminated effective from 3 February 2002. The applicants filed a summons for relief under s 106 on 6 February 2003. Notwithstanding this attempt to terminate the agreement retrospectively, his Honour found that the agreement remained on foot at least as at 6 February 2002. In so finding, his Honour commented: On that aspect of the argument I am not persuaded that 3 February 2002 is the relevant date. Section 108B(1) requires that an application must be made "not later than 12 months after the termination of the contract". Where the contract is demonstrated, as it was here, to have been in operation at a time within 12 months of the date of filing of the summons for relief, I consider the application was filed within time. The view I would take of s108B(1) is that the section is not concerned with a legal fiction or, as it was termed by Mr Warren of counsel for Mr Kennedy, "a commercial effect". He submitted that the parties are perfectly free to change the commercial effect of their relationship but they cannot change the fact that the contract actually operated after that date. In my view, that proposition must be correct. Were it otherwise, parties could by an agreement in writing obviate completely the 12 month limitation period provided by s108B. On that basis the time bar argument advanced for the respondent must fail. 19 In my view, the facts in Kennedy's case do not assist the applicant. The circumstances disclosed by the present application are quite different. Here, there is a purported termination in the letter of 27 February 2004 which is intended to operate prospectively. The case does, however, contain a useful statement of principle in relation to the approach to be taken in construing whether, or when, a contract has been terminated. 20 The respondents, represented by Mr Sirtes of counsel, contended that the processing of the six orders following the discussion between the second respondent and Mr Norris constituted a new and "one-off" arrangement. This was because the parties had not until then conducted their contractual relationship on the basis of payment to the supplier by way of "cash on delivery" (COD). 21 The issue of whether a purported amendment to a contract constitutes a variation of the existing contract or a separate contract was considered by Boland J in Michael Etherden & Anor v Morgo Street Reserve Trust (2005) NSWIRComm 269. His Honour placed reliance on the decision of the Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Limited (2000) 201 CLR 520 in which it was said by the majority (Gleeson CJ, Gaudron, McHugh and Hayne JJ) at 533, 534: When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. ... In Tallerman & Co Pty Ltd v Nathan's Merchandise (Vict) Pty Ltd (1957) 98 CLR 93, Taylor J said: It is firmly established by a long line of cases ... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement. 22 By reference to these authorities, the present facts reveal, in my view, a variation of the earlier agreements as to the method of payment to an authorised supplier. Otherwise, the arrangements between the parties concerning the ordering, processing of orders and payment of commission, remained unchanged. 23 The first respondent purported to terminate the agreements on the basis that the applicant had breached clause 4(a). There was little evidence in the present application to suggest that the purported termination was valid except for the conversation deposed to by the second respondent during which the second respondent referred to the applicant's desire to run concurrently "two distributorships" involving the first respondent and Ranbuild. Clause 8 of the agreements provided in part for the surrendering of all intellectual property and other documents relating to the Multibuild concept by the applicant to the first respondent. In addition, clause 8 required the applicant, upon termination, to immediately cease to exploit any intellectual property owned or developed by the first respondent and used by the applicant: refer clauses 8(a)(i) and (ii). These requirements were repeated in the letter of 27 February 2004. There was, however, no evidence before me to show the applicant had complied or was capable of complying with these requirements, either wholly, or partially, or if partially, to what extent. Access to the Multibuild system continued because of the way it had been set up. 24 The second respondent, in his affidavit said that notwithstanding the system's inability to prevent orders being received electronically and recorded (during a 30-day cycle) that no orders would be processed by the first respondent if a distributor's agreement had been terminated without his express instructions. An examination of the agreements admitted into evidence, however, reveals no such requirement. 25 The onus is on the respondents as the parties seeking relief on the notice of motion to satisfy the Court that the agreements were terminated prior to 3 March 2004: Sanpine v Koompahtoo Local Aboriginal Land Council [2005] NSWSC 365 (22 April 2005) at [174] [175] [176]. In Southern Foundries (1926) Limited v Shirlaw [1940] AC 701 at 729 per Lord Wright the proposition is expressed as a requirement to justify the determination of the contract. 26 What the evidence suggests is the following: i) at all times between 27 February and 4 March 2004, the applicant had access to the Multibuild concept thereby giving it an open direct line of communication with the first respondent; ii) during that period, the agreements continued to be performed by the applicant with the express permission of the first respondent who was the other party to the agreements. Six orders were processed by the first respondent who received commission in relation to those orders from the applicant on 3 March 2004; iii) the procedure for processing those six orders was unchanged from the procedure in place prior to 27 February 2004 except for the variation in the method of payment to the authorised supplier. 27 What this evidence indicates in my view is that the agreements were on foot at least until 3 March 2004 and probably up to 4 March 2004. Either date would bring the summons within jurisdiction and therefore outside the time bar imposed by s 108B(1) of the Act. Based on these findings, I am not satisfied on the balance of probabilities that the summons was filed out of time under s 108B(1). The respondents' notice of motion is therefore dismissed. Orders 28 I make the following Orders: (1) The respondents' notice of motion is dismissed; (2) Costs are reserved; (3) The matter is set down for a directions hearing on Friday, 28 October 2005 at 9.30 am. ____________________________ DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.