FEDERAL COURT OF AUSTRALIA

EQUITY - maxiMS - HE WHO SEEKS EQUITY MUST DO EQUITY - application to restrain telecommunications provider from terminating agreement to provide service to others - substantial amounts claimed to be owing by applicant under agreement - no evidence of solvency of applicant - whether mandatory injunction should be conditional upon applicant paying amounts in dispute or paying into court or securing the payment of the whole or part of such amount - injunction dissolved.

Trade Practices Act 1974 (Cth)

Maguire v Makaronis (1997) 144 ALR 729, referred to

Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161, applied

Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499, applied

Coco v AN Clark (Engineers) Ltd  [1969] RPC 41, applied

Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414, applied

TELSTRA CORPORATION LTD v FIRST NETCOM PTY LIMITED

NG 483 of 1997

Lockhart, Beaumont & Hill JJ

Sydney

2 September 1997

                                                                                                general distribution

ON APPEAL FROM A SINGLE JUDGE OF THE

FEDERAL COURT OF AUSTRALIA

JUDGES:       LOCKHART, BEAUMONT & HILL JJ

DATE:            2 SEPTEMBER 1997

PLACE:          SYDNEY

THE COURT ORDERS THAT:

1.    Leave to appeal be granted.

2.    The appeal be allowed in part.

3.    Order 1(a) of the orders made on 16 August 1997 be set aside.

4.    Appeal otherwise dismissed.

5.    The order that First Netcom Pty Limited provide security in respect of the undertaking given by it as to damages be set aside.

6.    The Respondent First Netcom Pty Limited pay Telstra Corporation Ltd’s costs of the application for leave to appeal and the appeal and 75% of the costs of Telstra Corporation Ltd in seeking interlocutory relief.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

THE COURT:

Telstra Corporation Limited (“Telstra”) seeks leave to appeal, and if leave is granted appeals against the judgment of a judge of this Court restraining it until further order from discontinuing the supply of tariffed services to First Netcom Pty Limited (“First Netcom”) and from communicating the fact of that discontinuance to customers of First Netcom in the terms of a draft letter which Telstra had indicated it proposed to send.

BACKGROUND

The background to the dispute between the parties, a dispute which is both acrimonious and multi-faceted, is to be found in the partial deregulation of telecommunications within Australia which commenced in around the end of 1994.

In July 1995 First Netcom became an intermediate purveyor of telecommunication services, buying local call services from Telstra (presently the only viable direct source of such services), obtaining trunk and international services from Optus Communications Ltd (“Optus”) and reselling those services to customers, being individuals, corporations, governments, public agencies etc.  Because it purchases services in bulk First Netcom pays a

somewhat lower (wholesale) rate to Telstra, than would be payable by the ordinary member of the public pursuant to Telstra’s standard tariff and sells, presumably at a profit to itself, to those who engage its services.

First Netcom’s operation involves it in contracting with its customers.  It provides to Telstra details of these customers which Telstra records in an “Agreed Accounts List” (“AAL”).  This information is necessary to enable Telstra to identify First Netcom customers within Telstra’s billing system so that bills can be sent to First Netcom for the services which are then reinvoiced by First Netcom to its customers.  The customers have thus no direct contact with Telstra but are billed by First Netcom and pay that company for all telecommunication services used.  The profitability of First Netcom obviously depends upon the difference between the amount it is charged by its suppliers and the amounts it bills to its customers.

The relationship between Telstra and First Netcom is governed, at least in part, by Telstra’s General Conditions Applicable to Telecommunications Services (“the General Conditions”). Clause 7.3 of these conditions permits Telstra to terminate the arrangement in certain circumstances and to seek security for amounts payable to it.  It provides:

“(a)     Telstra may discontinue provision of a Tariffed Service:

(iii)       if the customer becomes bankrupt or insolvent ...

(v)        if, whether or not the Tariffed Service has already been       suspended or restricted under clause 7.2, payment of an         account or provision of security, for the service or for any      other telecommunications service provided to the Customer, is        overdue.

(x)        if the Customer breaches any term or condition of the          Tariff.”

Since 1995, when the parties first reached agreement Telstra has provided telecommunication services to First Netcom customers, limited, in the past twelve months or so to line rental, maintenance and local calls.  However for a considerable time there has been a dispute between Telstra and First Netcom concerning the accounts which Telstra has rendered First Netcom.  Since at least October 1996 First Netcom has paid Telstra only about $25,000 per month, or less than 4% of total billings.  Notwithstanding this, it has collected from its own customers something in the order of 40% to 50% of these billings.

Telstra claims that as at 31 March 1997 First Netcom owed it $13,863,962 for services provided but not paid.  First Netcom disputes the amount owing.  It claims that Telstra’s billing system is deficient and that a significant proportion of the bills rendered by Telstra are wrong.  It is claimed that the bills are prepared in such a way as not to identify the amounts owing with any precision to enable them to be checked and verified with customers.  A number of accounts have been the subject of analysis, and, it is said, shown to be incorrect.

First Netcom has adopted the procedure of examining accounts forwarded and if any item shown in the account appears to be wrong the whole of the account is treated as being in dispute and is not paid notwithstanding that there may be amounts included in the account which are, in fact, owing.  It is claimed by First Netcom, but denied by Telstra, that this is in accordance with an agreed disputes resolution procedure.

There is a second reason which First Netcom gives for not paying the amounts which Telstra claims are due to it.  First Netcom claims to have a cross-claim in an amount which far exceeds any amount which Telstra says is due to it.  This cross-claim is for an amount in excess of $30,000,000.  It  is for damages, inter alia, alleging that Telstra has failed to transfer or delayed in transferring customers to First Netcom’s AAL, that Telstra has failed to provide accurate and timely billings, has used confidential information to approach First Netcom’s customers to entice them back to Telstra (this claim involves the activities of a group within Telstra called the “Win-back” team), has communicated misleading and deceptive information about First Netcom to customers and has abused its market power.

The dispute between the parties came to a head on 6 June 1997 when Telstra gave formal notice to First Netcom of its intention to discontinue all tariffed services to First Netcom on 8 July 1997.  It claimed to be entitled to do so because First Netcom had failed to pay an amount of $3,639,327, which Telstra had demanded by letter of 19 February 1997; because First Netcom had failed to pay an amount of $1,718,633, which Telstra had demanded by letter of 2 April 1997; because First Netcom had failed to pay an amount of $3,168,633, in respect of accounts for services provided by Telstra from 1 October 1996 to 28 February 1997, which accounts had not been paid and because Telstra had demanded security for unpaid accounts as it claimed to be entitled to do, but that security had not been provided and, finally, because First Netcom had not paid an amount of $325,000 which Telstra had demanded by letter of 20 May 1997.

Telstra also advised First Netcom that it proposed to send to First Netcom’s customers a letter “to minimise any disruption in relation to the provision of services to First Netcom’s customers”.   The letter advises the addressees that Telstra intends to cease to supply First Netcom with telecommunications services for resale and advises that customers have the need to choose a new service carrier.  There is a form which is enclosed which the addressee  is invited to complete in order to have Telstra provide all telecommunication services in the future.

Telstra commenced proceedings in the Supreme Court of New South Wales to recover the amounts which it claims were owing to it.  First Netcom filed a defence and cross-claim.  The proceedings were cross-vested to this Court and an application for interlocutory relief was made. 

THE JUDGMENT APPEALED FROM

The learned primary judge accepted that prima facie Telstra was entitled, pursuant to clause 7.3 of the General Conditions, to discontinue providing services for non-payment of accounts.  However, his Honour said that there was a major question whether:

“discontinuance would be a bona fide and proper use of the contractual right, whether it would in the circumstances represent a prejudgment of the issues to be raised in the litigation which Telstra itself commenced, and whether it would be an action in breach of other legal obligations and statutory enactments.  In other words, First Netcom’s application for interlocutory relief raises the question whether Telstra’s use of the discontinuance weapon is a legitimate exercise of its rights and powers in the light of its summary effect on First Netcom’s business and profitability.”

His Honour pointed out that it was far too early to assess the likely results of the dispute between the parties, particularly as to the amount owing to Telstra for unpaid billings.  His Honour thought that enough, had, however, been shown to make it clear that Telstra would not recover the entirety of its claim.  It might be added by way of parenthesis, that the fact that First Netcom had reinvoiced to its customers (the reinvoiced figure including, it may be assumed, a profit margin) between 40% to 50% of the amounts which Telecom had billed to it would suggest that, subject to the cross-claim First Netcom clearly owes to Telstra an amount considerably in excess of the amount it has so far paid. 

So far as the balance of convenience was concerned his Honour pointed out that discontinuance would lead to First Netcom going out of business.  If discontinuance were restrained Telstra stood to lose further funds if First Netcom did not pay.  This, his Honour thought led to the conclusion that there was only one possible result: injunctive relief restraining Telstra from discontinuing the provision of services to customers of First Netcom.

His Honour noted an assertion by Telstra that First Netcom’s creditworthiness was not all it should be.  There was, indeed, an assertion of insolvency.  This was, his Honour said, an issue which required “full litigation, not summary conclusions on an interlocutory basis.”

An undertaking as to damages was, of course, proffered.  Telstra sought security for that undertaking.  There was not sufficient evidence before his Honour to deal with that application and it was stood over to a later date to be dealt with.  Subsequently, we understand, his Honour ordered that security in the amount of $2,000,000 be provided by September 8.  His Honour ordered that the whole matter come before him again in October.

In the result, his Honour granted an injunction restraining Telstra from discontinuing the provision of services and restraining it also from sending to First Netcom’s customers a letter in the form of the letter proposed to be sent, or to the same effect.  It is from these orders that Telstra seeks leave to appeal.

WHETHER LEAVE SHOULD BE GRANTED AND, IF SO, WHETHER THE APPEAL SHOULD BE ALLOWED

There are a number of grounds advanced by senior counsel for Telstra that leave be granted to appeal.  Many of the matters advanced raise no matter of principle.  For example, it is said that there was no, or insufficient, evidence adduced on the question of the amounts which First Netcom say were wrongly billed to them.  So, too, it is said that there was no rational triable issue raised by such evidence as had been adduced.  Discretionary matters are likewise advanced as to why the relief should not have been granted.  We do not propose to discuss these matters here.  It suffices to say that on their own they would not have provided grounds for leave to be granted.

However, there is one significant matter which leads us to conclude that leave should be granted and that the appeal in part should succeed.

It is a fundamental maxim of equity that he who seeks equity must do equity.  The learned authors of “Equity Doctrines and Remedies”, 3d ed para 311, describe this as among the most important of the maxims, for it is at the heart of the remedies which a court administering an equitable jurisdiction will grant.  A recent example and at the highest court level is the decision of Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (1997) 144 ALR 729, see at 745-6. 

Thus, a court of equity will not make an order for specific performance of an agreement (and there is an analogy between an order for specific performance and the mandatory injunction sought in the present case) unless the party seeking that order is ready, willing and able to perform his or her side of the bargain. 

The doctrine manifests itself in many contexts.  One, close to the present, is where an applicant seeks the aid of the court to enjoin a mortgagee’s sale.  A mortgagor in default may be ordered to either repay the amount owing, if admitted, or pay the amount and interest into court, where there is a dispute: Inglis v Commonwealth Trading Bank of Australia (1972)  126 CLR 161 before injunctive relief will be granted.  While it is true to say that exceptions have been grafted on to the rule in Inglis, especially where the mortgagor claims the mortgage was induced by misleading or deceptive conduct so that the powers of the Court under s80 of the Trade Practices Act 1974 are brought into play (cf Town and Country Sports Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540), the approach of the Court even in such cases is to endeavour to mould its order so as to do justice as between the parties.

Thus it may be said that where a person seeks an injunction to restrain the termination of an ongoing agreement with the consequence that the party so enjoined is forced to continue to deal against his or her will, the party seeking the injunction will, prima facie, be required to pay to the party enjoined any moneys owing between them or, if there is dispute as to whether monies are owing, to pay the amount in dispute into Court, in addition to the normal undertaking as to damages.  Such an order was, for example, made by Gummow J in Businessworld Computers Pty Limited v Australian Telecommunications Commission (1988) 82 ALR 499, a case not unlike the present case, save that the amounts in dispute between the telecommunication supplier and the party seeking to restrain it from terminating the provision of services was substantially less than in the present case.

In making its order the Court will, naturally, have regard to the circumstances of the particular case.  So, if there is a dispute between the parties as to the amount owing, the court might determine that the appropriate order was, as in Businessworld, not that the totality of the amount owing should be paid into court, but rather that some lesser sum (in addition to an undertaking to pay further accounts) be paid into Court so that the Court’s order not work injustice.  In determining the extent of the amount which should be paid into Court (if any), the Court must, of necessity, have regard to the financial circumstances of the applicant for injunctive relief.  Where the applicant is comfortably solvent, so that there would be no concern that the respondent be forced to continue to do business, and incur perhaps ever greater indebtedness, and ultimately be left lamenting for amounts unpaid, the Court, as a matter of discretion, might refrain from ordering payment into court.  But it will almost invariably be relevant to the way the Court exercises its discretion to have evidence as to the financial situation of the Applicant, unless all amounts owing are paid to the respondent, paid into Court, or security for the amount provided.

Thus the failure to direct attention to the need for First Netcom to do equity as a condition of the grant of the mandatory injunctive relief and the related failure to treat the question of the solvency of First Netcom as a matter requiring immediate examination rather than full litigation in the future, both involved, in our view, errors of principle.  Before granting interlocutory relief in the form of a mandatory injunction it was incumbent upon the learned primary judge to determine what provision should be made to secure the position of Telstra, should trading continue between the parties and, to the extent that the whole amount owing was not paid or secured, the financial situation of First Netcom was a matter of the greatest significance.  This was particularly so in the present case when such evidence as there was before his Honour as to the capacity of First Netcom to pay indicated that that company had a share capital of only four dollars and that in respect of the 1995 fiscal year it had a net deficiency of assets of $615,471, after excluding intangible assets of $617,886.

We gave counsel for First Netcom the opportunity to seek the leave of the Court to file, even at this late stage, evidence of its financial situation.  The opportunity was declined.  In these circumstances in our view it would be quite wrong in principle to require Telstra to continue to perform its side of the agreement with First Netcom, when that company has neither offered to pay, paid into court or offered to secure payment, of the amounts in dispute.

In these circumstances leave to appeal should be granted, and to this extent the appeal allowed, with the consequence that the interlocutory injunction granted by his Honour restraining Telstra from discontinuing to provide services under the agreement between the parties should be dissolved; consequentially the order for security for the damages undertaking in that behalf should also be discharged.

There remains then the question whether the injunction restraining Telstra from forwarding to customers of First Netcom a letter in or to the effect of the letter which Telstra has threatened to write should consequentially be dissolved.

At the heart of the dispute between the parties on this question is that Telstra, in sending the letter to customers of First Netcom, will be making use of the list of customers, the so-called “AAL”, and perhaps securing for itself a collateral marketing advantage in the result. 

It is said on behalf of First Netcom that the customer list is either confidential information in the strict sense, or alternatively, information provided by First Netcom to Telstra for the purposes of the agreement between them so that the list could not, without the consent of First Netcom, be used for any other purpose.  There is another argument, which it is not necessary to resolve here, that the draft letter is misleading and deceptive.

The question whether a duty of confidence exists in information will largely depend upon the circumstances in which that information is communicated.  If the circumstances are such that a reasonable person would have realised that the information was communicated in confidence then that would generally suffice to impose the equitable obligation: Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 48 and see Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 at 438. 

In the present circumstances there is no doubt that customer details were supplied by First Netcom to Telstra solely for use by Telstra for the purposes of the telecommunication service agreement between them.  It could scarcely be suggested that Telstra could use the information to promote its own and competing services without restraint.  Indeed, a customer list is the most obvious example of information the confidentiality of which the courts will secure by injunctive relief.  On the other hand, that does not necessarily mean that Telstra might not be able to utilize the information to communicate to customers of First Netcom, if so to do was within the scope of the purposes for which the information was communicated to Telstra, that is to say, for the purposes of giving effect to the agreement between First Netcom and Telstra for the provision of telecommunication services to persons who are customers of First Netcom and a fortiori of Telstra.

If the situation were that, once Telstra terminated the agreement with First Netcom, customers of First Netcom would be left without a telecommunications service, then it may well be implicit in the relationship with First Netcom that Telstra should, or at least could, communicate with customers to advise them that the agreement with First Netcom had come to an end, and that they had choices which included contracting with Telstra.  However, we have been told from the bar table, and it appears to be common ground, that it may be possible for First Netcom to come to an agreement with another third party supplier for the provision of telecommunication services for First Netcom customers, so that the fact that the Telstra/First Netcom agreement had been terminated would not in any way affect customers, who would continue to be billed by First Netcom and have their local calls supplied by Telstra, albeit through a third party supplier.

In these circumstances, in our view, it cannot be necessary for the purposes of the agreement between Telstra and First Netcom that customers of First Netcom be notified of the termination.  Thus, for Telstra to use the customer list for the purpose of communicating to customers of First Netcom the fact of termination of the First Netcom/Telstra agreement (and in the result to obtain a commercial advantage) would be to use the list for a purpose for which it was not supplied to Telstra.  In these circumstances, we think that the injunction restraining communication with customers of First Netcom should stand.

Associate:

Dated:              2 September 1997