New South Wales Supreme Court CITATION : Hermescec v Carcagni [2008] NSWSC 183 HEARING DATE(S) : 26/02/08 JUDGMENT DATE : 6 March 2008 JURISDICTION : Equity Division JUDGMENT OF : Barrett J DECISION : Interlocutory injunction refused CATCHWORDS : TRADE AND COMMERCE - restraint of trade - restrictive covenant in contract for sale of restaurant business - application for interlocutory injunction - serious question to be tried amply shown - balance of convenience - where grant of interlocutory relief would be equivalent to grant of final relief - interlocutory relief not granted but directions to be made for early preparation for final hearing CATEGORY : Principal judgment Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA; (2001) 208 CLR 199 Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 CASES CITED : Cayne v Global Natural Resources plc [1984] 1 All ER 225 Hunt v Pascoe (1990) 21 NSWLR 10 Orton v Melman [1981] 1 NSWLR 583 Trego v Hunt [1896] AC 7 PARTIES : Branko Hermescec - Plaintiff Roberto Carcagni - Defendant FILE NUMBER(S) : SC 1534/08 COUNSEL : Mr N R Murray - Plaintiff Mr R D Marshall - Defendant SOLICITORS : UTR Law - Plaintiff Patey & Murphy Solicitors - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BARRETT J THURSDAY, 6 MARCH 2008 1534/08 BRANKO HERMESCEC v ROBERTO CARCAGNI JUDGMENT 1 The plaintiff, by his summons, seeks final relief by way of injunction and damages for alleged breach by the defendant of an express provision of a written agreement for the sale of a business between the plaintiff as buyer and the defendant as seller. The provision is a restraint of trade provision of the kind often included in such agreements. The relief claimed in the summons includes an injunction restraining the defendant from engaging in certain activities until 29 March 2009. 2 I am dealing now with the plaintiff's notice of motion by which he seeks injunctive relief pending trial of the action. The interlocutory restraint the plaintiff seeks is in the same terms as the permanent injunction claimed in the summons, save that it is expressed to apply only until further order. 3 The business concerned is a restaurant named "Benevenuti Treats of Tuscany" conducted in premises at 88 Darby Street, Cooks Hill. I shall refer to it as "Benevenuti". The plaintiff purchased this restaurant business from the defendant by written contract dated 28 March 2007. The transaction was completed on 12 April 2007, at which point the plaintiff went into possession. The defendant, a chef by calling, continued to work at the restaurant on a part-time basis for some time after completion and left for good on 26 November 2007. He says he acted as "the manager" during that period but the plaintiff does not accept that description. 4 The Darby Street premises are held under lease. The subject matter of the sale and purchase was plant and the like, plus the goodwill of the business. The price of $101,000, paid as to $5,000 on exchange of contracts and as to the balance of $96,000 on completion, was apportioned so that $12,000 was for plant and $89,000 was for goodwill. 5 The agreement for the sale of the business contained a clause 19 as follows: " NON COMPETITION (a) In consideration for the mutual agreements given by the parties under this Agreement, the Vendor undertakes to the Purchaser that, it will not for a period of two (2) years from the date of this Agreement within five (5) kilometres of Premises: (i) engage in any business or activity which is the same or similar to the Business or any material part of it. For the purposes of this clause 19, 'engage in' means to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, consultant, adviser, contractor, principal, agent, manager, director, joint venturer, beneficiary, partner, associate, trustee or financier; (ii) solicit, canvass, approach or accept any approach from any person who was at any time during 12 month period ending on the Completion Date a customer of the Vendor with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or (iii) interfere with the relationship between the Business and its clients or suppliers; or (iv) entice, solicit or attempt to entice or solicit any employee, contractor or consultant of the Purchaser or any associated company away from employment or engagement with the Purchaser or associated company. (b) If any of these several separate and independent agreements and restraints are or become invalid or unenforceable for any reason then that invalidity or unenforceability will not affect the validity or enforceability of any of the other separate and independent agreements and restraints. (c) The Vendor acknowledges that all the prohibitions and restrictions contained in this clause 19 are reasonable in the circumstances and necessary to protect the Goodwill." 6 The date of the agreement is, as I have said, 28 March 2007. The "Premises" are the premises at 88 Darby Street, Cooks Hill. The "Business" is the restaurant business conducted at the premises. 7 On 16 January 2008, the plaintiff read a restaurant review in the Newcastle Herald newspaper. It concerned a newly opened restaurant "Ristorante il Grifone" occupying premises of the former "Brewery" restaurant at the Honeysuckle Boardwalk. The new restaurant was described as "[o]wned by Roberto Carcagni, formerly of Benevenuti in Cooks Hill". The defendant, in his own affidavit, admits that he is the sole director and shareholder of Grifone Pty Ltd which carries on a restaurant business under the name "Ristorante il Grifone" at The Boardwalk, 1 Honeysuckle Drive, Newcastle. The defendant further says that the company purchased the restaurant business for $195,000 in late 2007, with the purchase completed on 24 December 2007. He also says that he later spent about $30,000 on changing the décor. The evidence shows that the defendant, as well as being the chef at Grifone, is in charge of operations as a whole. There is ample ground for a finding that, as well as being the sole shareholder and director of the company conducting the Grifone restaurant business, he is the manager of that business. He says in his own affidavit that he is the manager. 8 It appears from a map introduced into evidence (on which a scale is marked) and from descriptions of locations given by both plaintiff and defendant in the witness box, that the distance between the two restaurants in a straight line is about 1.1 kilometres. The distance by road would appear to be of the order of 1.5 kilometres. The defendant's Grifone restaurant is on the boardwalk at the harbour front (or riverfront) adjacent to the Crowne Plaza Hotel. The plaintiff's Benevenuti restaurant is to the south of that point, beyond the railway line near Civic station and also beyond the main street (Hunter Street), along Darby Street from its T-intersection with Hunter Street, past Civic Park and Laman Street to a point about 100 metres south of the intersection of Darby Street and Queen Street. 9 In approaching the plaintiff's application for an interlocutory injunction, I must be guided by what was said by Mason A-CJ in Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153 in a passage adopted by Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA; (2001) 208 CLR 199 at CLR 218: "In order to secure such an injunction the plaintiff must show (1) that there is a serious question to be tried or that the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction." 10 On the matter of serious question to be tried, there is no apparent basis on which the defendant can resist the conclusion that he has, within the area and period referred to in clause 19, "engaged in" the business of the Grifone restaurant as a shareholder and as a director and probably also as manager. He does, however, appear to seek to put in issue two matters: first, whether the Grifone restaurant business is, in terms of clause 19, a "business activity which is the same or similar to the Business", that is, the Benevenuti restaurant business; and, second, whether the restraint involving a period of two years and a radius of five kilometres from the Darby Street premises is, as a matter of public policy, valid – that is, reasonably necessary, as to both period and area, for the protection of the plaintiff's goodwill. 11 As to the first of these matters, there is clearly a serious question to be tried. Evidence of the menus at the two restaurants shows that there is a substantial commonality of dishes offered. Both serve Italian food with a Tuscan emphasis. It appears that Grifone is in an area where many pedestrians pass along a waterfront boardwalk, while Benevenuti is in a conventional street setting; also that there are two sections of Grifone, one indoors and the other in the open on the other side of the boardwalk, while outdoor dining at Benevenuti is on a verandah. Each of the plaintiff and the defendant has a view about where his restaurant and its locality stand on the scale of "up-market" establishments, compared with the other's. Each considers his own superior in this respect. It is, I suppose, conceivable that some material difference between the two may be found at trial but, as the evidence stands now, the provisional conclusion must be that the Grifone business is at least "similar to" the Benevenuti business and may very well be the "same" as it. 12 As to the second matter (that is, validity of the restraint, as a matter of public policy), it might very well be found at trial that a restraint for two years within a five-kilometre radius entailed reasonable protection, in the Newcastle area, for a purchaser who had paid $89,000 for goodwill. And even if the radius of five kilometres were, in the Newcastle market for restaurant services, seen to be greater than required to protect the goodwill for which $89,000 had been paid, it is very likely that a radius of, say, two kilometres would be upheld by resort of s 4(3) of the Restraints of Trade Act 1976. As for the period, one would strongly doubt that, in the particular context, two years would be held excessive (see Orton v Melman [1981] 1 NSWLR 583) but, if it were, a slightly shorter period would virtually certainly would be upheld under s 4(3). 13 This is not a case of an employee whose right to earn a living is unreasonably curtailed. It is a case in which the owner of a business was paid $89,000 for the goodwill of the business by a purchaser who is entitled to expect that the benefit of the goodwill will be assured to him in accordance with the contract to which both parties consciously and deliberately committed themselves. 14 In summary, there is a serious question to be tried as to breach by the defendant of clause 19 of the agreement of 28 March 2007 by reason of his having been, and continuing as, the sole shareholder of the company which became on 24 December 2007, and has continued as, the owner and operator of the Grifone restaurant business (of which the defendant has been, and is, the manager). On the evidence as it stands, the prospects of the plaintiff's succeeding at trial in establishing breach of clause 19 (either in its original form or in some adjusted form produced by the Restraints of Trade Act) must be regarded as very strong. 15 That makes it necessary to consider the second matter to be taken into account, namely, whether, if interim relief is not awarded, the plaintiff will suffer injury for which damages will not be an adequate remedy. That matter requires no investigation or discussion in this case. The very nature of the circumstances is such that damages cannot be regarded as an adequate remedy and equity will intervene in the traditional way to protect goodwill by injunction: Trego v Hunt [1896] AC 7. 16 I turn, therefore, to the balance of convenience, that is, whether the defendant will suffer greater hardship through grant of the interlocutory injunction than the plaintiff will suffer if it is refused. The court must weigh up the comparative injury that will arise from granting or withholding an injunction pending trial of the action, seeking out the major risk of damage and, in particular, of any irreparable damage. This aspect was referred to in Cayne v Global Natural Resources plc [1984] 1 All ER 225 as "the balance of the risk of doing an injustice". 17 The first thing to be said here is that there are many more than two restaurants within a radius of five kilometres of the Darby Street address – and in Newcastle as a whole. The defendant estimates that there are more than 20 Italian restaurants within five kilometres of the Darby Street address. The plaintiff accepted that there are about 10 restaurants in the part of Darby Street between Hunter Street and Bull Street. Given the size of the population, leakage or shift of customers from Benevenuti to Grifone cannot be assumed. The plaintiff gave evidence that he has cultivated regular patrons of Benevenuti. The defendant, who knew regular diners at Benevenuti because of his active involvement there during his own ownership and thereafter until November 2007, says that he is aware of only one of them having later visited Grifone. 18 The defendant sought to argue that Grifone, because of its location on the boardwalk at the riverfront, tends to attract passing trade, including tourists, the implication being that those persons would not be expected to divert and travel inland to the conventional street setting at Cooks Hill. Against that stands evidence that the particular part of Cooks Hill is something of a restaurant belt, so that strolling tourists might divert there to see what they could find. These matters may well be the subject of further evidence. 19 The plaintiff gave evidence of financial matters. He accepted that the average weekly turnover of Benevenuti for part of 2007 was between $7,000 and $8,000 but that this was not the case in the last quarter of the year. In his affidavit he said that turnover in December 2007 was at the rate of $9,500 per week on average, while in January 2008, the weekly average was about $4,000. He also accepted, however, that trade was slower than usual in January when many people were away on holidays, while trade was most active in December when people went out for Christmas parties and celebrations. 20 The comparative risks, pending trial, seem to me to be fairly clear-cut. If no injunction is in place, the plaintiff may suffer some loss of custom in that, although the defendant says that he has seen only one Benevenuti regular patron at Grifone, the contacts the defendant made with customers at Benevenuti and the reputation he built up there may cause a leakage of business to Grifone. Against that, it can no doubt be said that the plaintiff has the opportunity, by providing good food and good service, to put his own stamp on Benevenuti and thereby not only to attract new customers but also to persuade to remain those who appreciated what the defendant did for them. The plaintiff testified that he has made efforts to get to know regular patrons and to greet them; also to make sure that the meals he serves are of a high standard. There are presumably some people who would readily go to Benevenuti whatever its ownership (provided the food and service were of reasonable standard), rather than walking or driving some two kilometres to the boardwalk on the riverfront. I am thinking of people who live or work nearby. 21 If an interlocutory injunction is granted, Grifone would have to close down pending the court's final decision on the entitlement of the plaintiff to relief by way of permanent injunction or damages or both. That would be a drastic result. If Grifone were able to stay open with an injunction in place, it could only be on the basis that the company of which the defendant is sole shareholder and director was no longer the operator and the defendant himself was no longer the manager. On the defendant's evidence, such a situation would be impossible to achieve in any real sense, given that Grifone is in substance a one-man business operated by the defendant, albeit with the assistance of employees. The practical result of an interlocutory injunction would be suspension of the defendant's Grifone business. 22 As in cases such as Hunt v Pascoe (1990) 21 NSWLR 10, this is a case in which any injunction pending trial would produce the very result to be put in issue at a final hearing. Such an interlocutory injunction would affect rights in a permanent fashion on evidence which may be supplemented and may be found to bear some different complexion at the trial. 23 At this stage, therefore, "the balance of the risk of doing injustice" favours the defendant, even though the prospects that he will in due course be subjected to a permanent injunction and also be ordered to pay damages and costs appear, at least at this stage, to be strong. 24 I shall accordingly dismiss the plaintiff's application for an interlocutory injunction. In addition, however, I shall arrange for the proceedings to be listed before me at an early date for directions with a view to preparation for an early trial and a listing before the Expedition List Judge to that end. 25 Although this is a case in which the plaintiff has not succeeded in obtaining the interlocutory injunction he sought, my inclination is to think that, in the circumstances as I have described them and having regard to the substantial likelihood that the plaintiff will succeed at trial, the costs of the application should be costs in the cause, as in Hunt v Pascoe (above). However, I shall hear submissions on costs when the matter comes back before me for directions. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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