FEDERAL COURT OF AUSTRALIA

Cafe2U Pty Limited v Bishambu Pty Ltd [2013] FCA 191

THE COURT ORDERS THAT:

1.    Judgment be entered in favour of the applicant pursuant to r 5.23(2) of the Federal Court Rules 2011 (Cth) in the sum of $43,983.94 including interest.

2.    The first and third respondents, whether by themselves, their servants or agents, be restrained from taking any steps whatsoever in relation to the conduct of the business known as “Café Metro” in Glen Waverley, Victoria, up to and including 6 September 2013.

3.    The first and third respondents, whether by themselves, their servants or agents, be restrained from being involved in or carrying on any mobile food or mobile beverage business or other business similar to “Cafe2U” in Glen Waverley, Victoria, up to and including 6 September 2013.

4.    The first and third respondents, whether by themselves, their servants or agents, be restrained from infringing the applicant’s copyright in the web site known as www.Cafe2U.com.au, its menus and advertisements by reproducing or authorizing the reproduction of the applicant’s web site known as www.Cafe2U.com.au, its menus or advertisements or a substantial part thereof without the written licence of the applicant.

5.    The first and third respondents, whether by themselves, their servants or agents, be restrained from continuing to operate the business of a Cafe2U Franchised Operation.

6.    Within 7 days the first respondent deliver to the applicant the following items of property provided to it by the applicant:

7.    The first and third respondents pay the applicant’s costs as agreed or assessed.

THE COURT NOTES THAT:

To the extent that the depreciated value of items provided to the applicant listed in order 6 above exceeds the amount of damages awarded together with interest and legal costs, the applicant undertakes to the Court to pay such amount to the first respondent or, if that is not possible, into Court.

Note:    Entry of orders is dealt with in Rules 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    Cafe2U Pty Ltd is a franchisor of mobile coffee vans in Australia. On 4 September 2012 it filed an originating application supported by a statement of claim alleging that a franchisee, Bishambu Pty Ltd (“BPL”), breached its franchise agreement to operate a Cafe2U service in Glen Waverly, Victoria by failing to pay fees due under the agreement and running a mobile coffee van and cart in competition with Cafe2U. Cafe2U also pleaded that BPL, Paras Bishambu, a director and secretary of the company, and his older brother, Prince, its sole shareholder, engaged in misleading and deceptive as well as unconscionable conduct in violation of the Australian Consumer Law, and have infringed its copyright in Cafe2U websites, menus and advertising material. The originating application sought declaratory relief, damages, an account of profits and various other orders including injunctive relief.

2    By an interlocutory application filed on 14 December 2012 Cafe2U applied for default judgment against all respondents pursuant to r 5.23(2) of the Federal Court Rules 2011 (“FCR”). Cafe2U now only seeks orders only against BPL and Prince. The orders have been modified slightly from those appearing in the interlocutory application. The form of the proposed orders is annexed these reasons. For present purposes Cafe2U relies only on the cause of action for breach of the franchise agreement. For the reasons given below, I have decided, for the most part, to grant the relief sought.

Rule 5.23(2)

3    Rule 5.23(2) relevantly provides:

If a respondent is in default, an applicant may apply to the Court for:

…

If the proceeding was started by an originating application supported by a statement of claim, of if the Court has ordered that the proceeding continue on pleadings – an order giving judgment against the respondent for the relief claimed in the statement of claim to which the Court is satisfied that the applicant is entitled; or

An order giving judgment against the respondent for damages to be assessed; or any other order;

…

4    Kiefel J traced the history and operation of the former rule (Federal Court Rules 1979 O 35A r 3(2)(c)) in Australian Competition and Consumer Commission v Dataline.net.au Pty Ltd (2006) 236 ALR 665; [2006] FCA 1427 (“Dataline”).

5    It may be accepted that the power conferred on the Court by the rule is just that. Whether it should be exercised in a particular case is a matter for the Court’s discretion and the discretion should generally be exercised with caution. See Engineered Thermal Systems Pty Limited v Salmon, In the Matter of Salmon & Speck Pty Ltd (In Liq) [2012] FCA 1159 (“Engineered Thermal Systems”) (Foster J) at [36]. But on the face of it there are significant differences between the present and the former rule. The former rule permitted the Court to give judgment against the respondent for the relief that:

the applicant appears entitled to on the statement of claim; and

the Court is satisfied it has power to grant.

[Emphasis added.]

6    The current rule is in more emphatic terms. The word “appears” has gone and the Court must not simply be satisfied that it has the power to grant the relief; it must be satisfied that the applicant is entitled to the relief.

7    It is not obvious why the terminology was changed. No reference is made to the rule in the Explanatory Statement. The description of Part 5, in which the rule appears, provides only limited assistance. It reads:

Part 5 deals with the Court’s supervision of proceedings. It provides machinery for case management, for the operation of the Court’s individual docket system and to assist the Court in achieving the objectives of the overarching purpose under Part VB of the Federal Court of Australia Act 1976. While it largely adopts, simplifies and streamlines processes and procedures which operated under the former Rules and does not substantially alter existing practice, it does expand it and sets out some aspects in more detail. It also contains some new provisions.

[Emphasis in original.]

8    Uninstructed by authority I might have concluded that the change was substantive. But the weight of numbers is against me.

9    In Yeo v Damos Earthmoving Pty Ltd, in the matter of Beachwood Developments Pty Ltd (in liq) [2011] FCA 1129 Gordon J considered that the earlier authorities under the former rule applied with equal force to the current rule.

10    In CNIP Pty Ltd v Chan & Naylor Norwest Pty Ltd (No 2) [2011] FCA 1170 (“CNIP”) at [19] Perram J held that the requirements of the current rule, like its predecessor, will be met if, upon inspection of the applicants’ pleading, the Court is satisfied that the applicant would be entitled to the relief sought (in that case permanent injunctions).

11    In Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 (“Speedo”) Flick J provided a useful list of the old authorities. His Honour also cited Perram J in CNIP and held, in substance, that the differences between the former and the current rule were of no consequence. His Honour said at [23]:

Notwithstanding that difference in language, the requirement imposed is not that an applicant prove by way of evidence the claim sought to be advanced; the requirement is that the Court needs to be “satisfied” on the face of the statement of claim that the applicant is entitled to the “relief” claimed. (Citation omitted).

[Emphasis in original.]

12    In Engineered Thermal Systems Foster J (at [38]) agreed with Flick J.

13    Despite some misgivings, I am not convinced that these decisions are clearly wrong. I am therefore constrained to follow them.

14    Having said that, in the present case, without referring to any of the authorities, Cafe2U adduced evidence.

15    In Speedo Flick J explained (at [24]–[25]) that in order to be satisfied that an applicant is entitled to the relief claimed the Court only needs to be satisfied that each element of the relevant civil wrong involved is properly and discretely pleaded in the statement of claim. His Honour accepted, however, that the Court may permit recourse to further evidence provided it would not alter the case as pleaded. In this respect his Honour followed Kiefel J in Dataline. In that case, after reviewing the authorities concerning the former rule, her Honour said at 677 [45] that no evidence needs to be adduced, at [48] that the terms of the rule do not suggest recourse to affidavit evidence, and that the case law provides that judgment must be entered according to the pleading alone. Yet her Honour ultimately held at [50] that some affidavit material could be admitted in relation to the relief sought. In the appeal from her Honour’s orders (Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) (2007) 161 FCR 513 (“ACCC v Dataline”)) the Full Court said at 536 [90] that it was not necessary for it to consider whether additional evidence could be led going beyond the facts pleaded in the statement of claim. This begs the question, of course, about whether evidence can be called to support those facts.

16    In Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] 195 FCR 1 at 21 [63], however, Gordon J went a little further. Her Honour held that where the relief is discretionary (including declarations, injunctions, pecuniary penalties), the Court is “entitled, if not obliged”, to receive evidence relevant to the exercise of that discretion so long as that evidence does not include additional facts which should have been pleaded. I take the rider to refer to material facts.

17    Each of these cases was only brought under r 5.23(2)(c) or its predecessor, and none of them involved a claim for unliquidated damages. In CNIP Perram J made an order that damages be assessed but was apparently not asked to assess them. In the present case, not only am I asked to assess damages but I am also asked to grant several injunctions. A good deal of the evidence called by Cafe2U is relevant not only to the allegations of breach of the franchise agreement but also to the question of relief.

18    While it may not be necessary to do so, in Macquarie Bank Ltd v Seagle (2008) 79 IPR 72; [2008] FCA 1417 Jagot J received evidence to support the allegations in the statement of claim and made findings of fact based on that evidence. I have done the same. This course is largely unavoidable, not merely because of the way Cafe2U conducted its case, but because the particulars of allegations made in the statement of claim often incorporate the evidence by reference. It is also appropriate to consider the evidence because of the nature of the orders that are sought.

19    In addition to the evidence relating to service, in support of its application for default judgment Cafe2U relied on affidavits of:

    Derek Black, Managing Director and Chief Executive Officer of Cafe2U, who is responsible for all records and documentation relating to the operation of the business, sworn on behalf of the company on 3 September 2012;

    George Angelis, National Operations Manager of Cafe2U, who is responsible for the day to day operations of the company’s Australian business and the manager of its information technology systems (sworn on 3 September 2012); and

    Barry Lazarus, solicitor for Cafe2U, affirmed on 14 December 2012 and 20 February 2013.

20    Cafe2U also tendered the transcript of the hearing of a claim for interim relief before Cowdroy J on 7 September 2012 in which Prince appeared by telephone conference.

21    The discussion of the facts that appears below is derived from this evidence. I am satisfied that, with the exception of inadmissible opinion evidence to which I have not had regard, the evidence does not go beyond the scope of what was pleaded. Before I go any further, however, I must deal with the question of service.

The question of service

22    The history of the attempts to serve the respondents is a sorry saga.

23    There is no evidence about service of the originating application, save that the transcript of the hearing on 7 September 2012 discloses that Prince had been served with it as well as the affidavits of Mr Angelis and Mr Black that were filed at the same time. Cafe2U appeared to submit that the transcript proved that BPL had also been served but it does nothing of the kind.

24    Cafe2U engaged a process server, Garry Scates, to serve the amended originating process and statement of claim together with a copy of the orders made on 23 October 2012. On 24 October 2012 Mr Scates handed to Prince the documents addressed to all respondents, including Paras and BPL. He did so at an address in Hornsby Street Dandenong which he stated was Prince’s “most usual place of residence” and the place he believed to be the registered office of BPL. It is little wonder that he held this belief because the letter from Mr Lazarus addressed to BPL described the address in this way. But the company search annexed to the affidavit of Mr Black (witnessed and presumably prepared by Mr Lazarus) shows that this was not the registered office of the company and that Prince was not a director. Counsel’s written submissions refer to a recent search conducted on 11 February 2003 that confirms these details, but the search was not tendered. Either way, service on BPL was not effective. FCR r 10.02 provides that a document that is to be served personally on a corporation must be served in accordance with s 109X(1) of the Corporations Act 2001 (Cth). Section 109X(1) requires that documents must be served on a company by leaving it at, or posting it to, the company’s registered office (para (a)) or by delivering a copy personally to a director (para (b)).

25    Mr Scates asked Prince whether this was Paras’s usual place of residence and whether he would pass the “document” on to him. Prince agreed. But Paras should have been served personally, so service on Paras was also defective: FCR r 10.01.

26    Mr Scates said he established that the man he spoke to was Prince by asking him whether he was Prince Bishambu, the person named as third respondent in “this document” (whatever that means) and receiving an affirmative answer. In view of the allegations of identity fraud made in the statement of claim, supported by the evidence, this is scarcely reliable. Neither is Prince’s affirmative answer to the question whether the place at which service was attempted was the registered office of BPL.

27    On 7 January 2013 the interlocutory application, together with Cafe2U’s written submissions in support of the orders it sought and covering letters addressed to all three respondents were again given to Prince. The process server, Martin Telley, never asked Prince whether he was authorised to accept service on Paras’s behalf and Prince never told him he was. He simply told him he had documents for Paras. At the time he handed Prince the documents addressed to BPL the following rather extraordinary exchange took place:

Process server:    I have a document for Bishambu Pty Ltd at Unit 8, 1 Close Avenue, Dandenong.

I interpolate that the Close Avenue address, according to the evidence, was the registered office of the company but the place where this conversation occurred was not. The conversation took place at the Hornsby Street address.

Prince:    That address is no longer connected to the business and I do not want the people there knowing our business, I am a director and I will accept that document.

28    If the address is no longer connected to the business, the evidence does not show that. If the man claiming to be Prince was indeed Prince, the statement that he was a director, on the evidence before me, was false.

29    For the reasons given earlier, service on BPL remained defective. On the date allocated for the hearing of the interlocutory application Cafe2U was forced to seek an adjournment to enable it to effect service.

30    Cafe2U then took the following further steps to serve BPL:

(a)    on 14 February 2013 the interlocutory application filed on 14 December 2012, supporting affidavits and outline of submissions also filed on 14 December 2012 together with proposed orders, were left at the company’s registered office in Close Avenue in accordance with s 109X(1)(a);

(b)    on 15 February 2013 the amended originating application, statement of claim and orders dated 23 October 2012 were posted to BPL’s registered office in Close Avenue in accordance with s 109X(1)(a); and

(c)    on 20 February 2013 the affidavit of Barry Lazarus sworn on 20 February 2013, Cafe2U’s supplementary submissions filed on 15 February 2012 and Cafe2U’s revised proposed orders were posted to BPL’s registered office in Close Avenue.

31    The affidavit of Barry Lazarus sworn on 20 February 2013, Cafe2U’s supplementary submissions filed on 14 February 2013 and Cafe2U’s revised proposed orders were also posted to Prince’s address on 20 February 2013.

32    I am therefore satisfied that BPL and Prince have been properly served and are aware of this proceeding. When the matter was called on for hearing there was no appearance for either of them.

33    As far as I am aware no further attempts were made to serve Paras. There is no evidence that he has ever been served with the originating application or the amended originating application and statement of claim. Consequently, although Paras is the guarantor under the agreement, he has not been served. No application was made for substituted service (r 10.24) or for the Court to dispense with service (r 1.34). This is the reason that Cafe2U only seeks orders against BPL and Prince.

The facts

34    Cafe2U has been in business for in excess of six years as a franchisor of mobile coffee vans throughout Australia. According to Mr Black, over that time it developed a reputation as a quality operator of mobile coffee vans. Currently it has over 130 franchisees in five States and in the Australian Capital Territory. The franchise operation involves the retail sale and delivery of hot and cold beverages and various food items to take away. It supplies individuals and businesses.

35    Since about 2005 Cafe2U has maintained a website under the domain name www.cafe2u.com.au.

36    In about July or August 2011 Cafe2U received an online application for a franchise opportunity from Paras. Negotiations followed, culminating in the execution of the agreement on 14 September 2011. The document was apparently signed by Paras on behalf of BPL and by Mr Black on behalf of Cafe2U. Paras’s signature, or at least a signature purporting to be his, also appears as the guarantor of BPL’s obligations under the agreement. The agreement provided for a five-year term, starting on 19 September 2011. Paras and Prince were both appointed managers of the franchise operation.

37    Before the agreement was signed Paras and Prince undertook initial training. Mr Black met both men on their first day training. So did Mr Angelis. In conformity with the allegations in the statement of claim, the substance of their evidence is that when they were introduced to the brothers Paras pretended to be Prince and vice versa. Prince was questioned about this before Cowdroy J but denied it. In the statement of claim Cafe2U alleged that up until 3 September 2012 the brothers continued to conduct themselves in this way, falsely using each other’s names. The evidence bears this out.

38    The brothers Bishambu finished their initial training on 9 September 2011 and Mr Black presented them with certificates of completion. They then posed for a photograph holding up their certificates. Paras held up Prince’s certificate and Prince Paras’s.

39    On or about 15 September 2011 – the day after the agreement was signed – Cafe2U (pursuant to the terms of the franchise agreement) supplied BPL and Paras with a new Mercedes Benz Vito for the operation of the business together with 37 items for use in the business. These items are listed in para 18 of the statement of claim and in para 24 of Mr Black’s affidavit. They included an email address, web page and other items the intellectual property in which Cafe2U pleaded, and Mr Black stated, is owned by Cafe2U. The other items included the Cafe2U Business Development Manual, training and operations manuals, point of sale material, menus, and business and loyalty cards.

40    The vehicle was involved in an accident just under two months later. The vehicle was written off and a new one was supplied.

41    The records produced by Mr Black and certified as true and accurate by Paras and Prince showed that in its first 10 days the franchised business operated by the respondents received a total of $3,123 in revenue. The records also show that the business fell short of its daily target of $500 on all but two of those days.

42    The evidence is that the last payment BPL made in respect of franchise fees was made on 22 June 2012. Although two cheques were subsequently sent for fees due to be paid on 29 June 2012, they both bounced. Emails were sent to Paras informing him however by 10 July 2012 $563.30 remained outstanding. On 13 July 2012 yet another cheque bounced. By then the balance of outstanding fees had risen to $771.30 (including dishonour fees). The same day Paras told Stefano Paino, the Victorian Franchise Development Manager for Cafe2U, that he was not making enough money to pay franchise fees anymore.

43    Mr Black arranged for Mr Angelis to speak with Paras but, despite several attempts to contact him (by phone, text message and email), Paras did not respond.

44    On 26 July 2012 Mr Angelis flew to Melbourne and met with the man he then believed to be Paras, but whom he later realised was Prince. They discussed the plight of the business. “Paras” told him he was not making enough money and the business was doing very poorly. He said he was unable to make $500 a day. Mr Angelis offered assistance to help him “grow” the business but he told Mr Angelis that there was nothing Cafe2U could do to help. Mr Angelis also said that they had a conversation to the following effect:

Mr Angelis:    Paras, do you remember that whilst you were training in Sydney, you told me that your goal was to run multiple vans and to have others operating the vans whilst you ran the business?

[Prince posing as Paras]:    I can't even get one van to work. My brother earns more money than I do running his coffee cart.

Mr Angelis:    What cart?

[Prince]:    He is running a small coffee cart in the CBD. He can make $2,000 in one day.

Mr Angelis:    You know you are not allowed to run another business.

[Prince]:    Oh no, it's not me.

45    On 31 July 2012 Cafe2U’s accounts department sent an email to Paras advising him that the cheque for his franchise and marketing fees had bounced again and that the outstanding amount at that date was $1,334.60. The accounts department asked Paras to contact it urgently to settle the matter. Each week thereafter up to and including 28 August 2012 the accounts department sent Paras emails to the same effect. By then the amount owing had risen to $2,177.31. In the meantime, on 1 August 2012, Mr Angelis sent Paras a lengthy email referring to the problem and offering assistance to help him get back on his feet. He also reminded him of the non-compete clause (cl 6.1) in the franchise agreement.

46    On 15 August 2012 Mr Angelis conducted some internet searches that revealed links (“Likes”) on Prince’s Facebook page to “Coffee Van Melbourne” and “Coffee Mobile Van”. The Facebook entry for “Coffee Van Melbourne” contained a photograph of a coffee cart branded “Café Metro”. The telephone number displayed on the cart was the same telephone number listed by BPL on the franchise agreement with Cafe2U. The Café Metro website – www.coffeemobilevan.com – showed the primary contact person as “Prince” and listed the same mobile number.

47    The domain name www.coffeemobilevan.com was registered on 15 January 2012, just four months after the franchise agreement was signed. It was updated on 22 July 2012, not long before Mr Angelis had his meeting with Prince.

48    The menu link on the web page brought up a menu very similar to the Cafe2U menu. Since it might be expected that mobile coffee vans would sell the same or similar items, this may not be surprising. What is significant, however, is that the descriptions for almost all items were identical. For example, the espresso was described in both menus as “the undisputed king of coffees, rich and complex for the true coffee connoisseur”, the cappuccino as “perhaps the world’s favourite style of espresso coffee, an Italian icon”, the flat white as “a cousin of the cappuccino without the creamy head”.

49    Mr Black identified (from a photograph of a coffee cart displayed on the Café Metro website) sugar sachets in a plastic container apparently belonging to Cafe2U.

50    By letter under the hand of Mr Lazarus, dated 4 September 2012 but apparently not served until 6 September 2012, Cafe2U terminated the agreement and all rights granted under it “with immediate effect”.

51    Nevertheless, Cafe2U alleged in the statement of claim (para 32) that on 8 September 2012 Prince was seen serving customers from a Cafe2U van in North Clyde and that Paras and/or Prince have continued to use the email address paras@cafe2u.net and the domain name www.cafe2u.net without Cafe2U’s authority.

52    On 14 September 2012 Mr Lazarus wrote again to BPL, this time giving notice of Cafe2U’s decision to exercise its option pursuant to cl 11.8 of the agreement to purchase various fittings and items of equipment used in the operation of the franchise business for an amount equal to the written down value of each of the items (assuming a straight line depreciation) and the vehicle at the fair market value. The nominated amount for the fittings and equipment was $34,144 and for the vehicle $28,600 (a total of $62,744). BPL was given 14 days to complete the transaction. Cafe2U foreshadowed that if BPL did not deliver up the items in that time, it might seek a court order. None of these items has been returned.

The franchise agreement

53    The agreement is 47 pages long. It is unnecessary to refer to most of it. The relevant clauses are as follows.

54    By cl 2.1 Cafe2U, the franchisor granted to BPL, amongst other things “the exclusive right, franchise and licence to conduct the Franchised Operation” for the term of the agreement within “the Territory” (defined in cl 1.1 and item 5 of the Schedule to mean a 26.5 km2 area in Glen Waverley, Victoria delineated by a map attached to the agreement).

55    BPL was required to pay initial franchise and training fees and an initial marketing contribution and business development fee (see cl 8.1). It was also required to pay weekly franchise service fees (cl 8.4) and a weekly marketing fund contribution (cl 7.2).

56    Clause 6.1 contained a restraint of trade or “non-compete” covenant. It provides that the Franchisee (BPL) and Guarantors (there is only one, Paras) “covenant and agree” that:

(a)    they or any of them shall not, nor shall any of their directors, secretary, shareholders or employees directly or indirectly, whether solely or jointly with or as director, manager, agent, partner or employee of any person or corporation, during the Term of this Agreement or any extension or renewal of it, be involved in or carry on any mobile food or mobile beverage business or other similar business to the Franchised Operation:

(i)    anywhere in Australia:

(ii)    anywhere within the state or territory in which the Territory is situated;

(ii)    within any CAFE2U Territory of any CAFE2U Operation;

without the prior consent in writing of the Franchisor first being obtained which consent may be given or withheld, or given with conditions, in the absolute discretion of the Franchisor;

(b)    they shall not, within the Non Compete Area and during the Non Compete Period either personally or otherwise, by letter, circulars or advertisements or otherwise whether on their own account or on behalf of any other person, firm, company, canvass or solicit business from, or in any other way communicate with, any person or company who shall at any time during the Term or any extension thereof have been associated with the Franchised Operation, the Franchisor or the System;

(c)    they shall not, within the Non Compete Area and during the Non Compete Period, be in any way concerned in or with a Competing Business, either directly or indirectly, either as principal, director, employee, agent, servant, shareholder, beneficiary or otherwise.

(d)    The Non Compete Area and the Non Compete Period are as set out in Item 21 of the Schedule.

57    The Non Compete Area is defined in the Schedule to refer to the Territory. The Non Compete Period is specified in the Schedule in three different ways:

(a)    A period of 12 months from the date of completion of the sale of the Franchised Operation or 12 months from the date of expiration or termination of this Agreement.

(b)    A period of 6 months from the date of completion of the sale of the Franchised Operation or 6 months from the date of expiration or termination of this Agreement.

(c)    A period of 3 months from the date of completion of the sale of the Franchised operation or 3 months from the date of expiration or termination of this Agreement.

58    Upon expiration or termination of the agreement BPL was obliged to immediately cease using Cafe2U’s trading name and intellectual property (cl 10.3).

59    BPL was bound to pay all reasonable costs and expenses incurred by Cafe2U in relation to any breach of the agreement or in connection with the franchised operation (cl 6.14).

60    Clause 11 deals with termination of the agreement. It provides for damages if the franchisor (Cafe2U) terminates the agreement in “an event of default” (as defined in cl 11.1 or as provided under cl 23 of the “Franchising Code of Conduct under the Trade Practices Act 1974” (cl 11.3)). Clause 11 also provides an option for Cafe2U to buy back all or some of the equipment and fittings, and the vehicle (cl 11.8). It is not necessary to refer to the “events of default” because they only apply where the Code does not, and counsel for Cafe2U contended that the Code applied.

61    The Franchising Code of Conduct (“the Code”) was made under the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2011 (Cth)) and appears in the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth). It applies (with certain exceptions) to all franchise agreements entered into on or after 1 October 1998 (cl 5). The agreement meets the definition of a franchise agreement in cl 4(1).

62    Clauses 21–23 of the Code deal with termination of agreements. Clause 21 provides that in the event of termination by a franchisor where a franchisee has breached the agreement, reasonable notice must be given and the franchisee must be told what needs to be done to remedy the breach and given a reasonable time in which to do so. Clause 22 applies to termination by the franchisor without the consent of the franchisee where there has been no breach by the franchisee. Neither clause applies where clause 23 does. Cafe2U relied on paragraphs (c) and (f) of cl 23:

Termination – special circumstances

A franchisor does not have to comply with clause 21 or 22 if the franchisee:

…

(c)    voluntarily abandons the franchised business or the franchise relationship;

…

(f)    is fraudulent in connection with operation of the franchised business.

63    The effect of these provisions is that a franchisor may terminate a franchise agreement without notice if the franchisee engaged in conduct answering this description: Farahbakht v Midas Australia Pty Ltd (No 2) [2006] NSWSC 1323 (“Farahbakht”) (Brereton J) at [4].

64    Upon its expiration or termination the agreement gave Cafe2U the option to purchase some or all of the equipment and fittings (cl 11.8(a)) at an amount equal to the then written down value of each of the items assuming a straight-line depreciation from the date the item was first acquired to the end of the five year period. The agreement also gave Cafe2U the option to purchase the vehicle at the then fair market value as if it were to be debranded and without the equipment and fittings (cl 11.8(b)). A 21 day period is fixed in which the option can be exercised, running from the date of expiration or termination of the agreement (cl 11.8(c)). In the event that Cafe2U exercised its option, then (unless there was a dispute about the purchase price) the parties were obliged to complete the transaction within 14 days of service of the “Option Exercise Notice” (cl 11(e)(i)).

The alleged breaches of the franchise agreement

65    For the purposes of this interlocutory application, Cafe2U alleges that the agreement was breached by BPL and/or Prince engaging in two species of conduct without its knowledge and consent.

66    The first is said to be a breach of cl 6.1(a) and (c) of the agreement (the restraint of trade/non-compete provisions), the second a breach of cl 8.4 (the requirement to pay a franchise service fee).

67    The alleged breach of cl 6.1(a) and (c) consists of the following:

    causing the domain name www.coffeemobilevan.com (“the coffeemobilevan domain name”) to be registered;

    causing to be created a web site for the business known as “Café Metro” (using the coffeemobilevan domain name);

    causing the Café Metro business name and the coffeemobilevan domain name to be advertised on Facebook;

    undertaking the business known as Café Metro and also “Café Metro – Mobile Espresso Café”;

    duplicating content from Cafe2U’s website and using it on the www.coffeemobilevan.com website and in the conduct of the Café Metro business;

    using in the conduct of that business, material and products supplied by or on behalf of Cafe2U for use in the Cafe2U franchise operation; and

    continuing to use in the conduct of the Café Metro business a website called www.mobilecoffeemelbourne.com.

68    The alleged breach of cl 8.4 entails BPL failing to pay monthly fees due under the agreement.

Are the respondents in default?

69    FCR r 5.22 provides that a party is in default if it fails to:

(a)    do an act required to be done, or to do an act in the time required by the Rules;

(b)    comply with an order of the Court;

(c)    attend a hearing in the proceeding; or

(d)    fails to prosecute or defend the proceeding with due diligence.

It will be seen that the respondents are in default in all these respects.

70    The originating application was filed on 4 September 2012. It included an application for interim relief.

71    The originating application was supported by the affidavits of Mr Angelis and Mr Black. It came on for hearing before Cowdroy J as duty judge on 7 September 2012. Prince appeared on that occasion by telephone. His Honour made the following orders:

1.    Pursuant to s 232 of the Australian Consumer Law or s 23 of the Federal Court Act 1976 (Cth), the respondents and their servants and agents be restrained from taking any steps whatsoever to operate or sell the business known as “Café Metro” until further order;

2.    The respondents take all necessary steps by noon on Wednesday 12 September 2012 to:

(a)    Remove all content from the web page www.coffeemobilevan.com; and

(b)    Remove all content on the Facebook page entry relating to the Second Respondent as shown on page 19 of the affidavit of George Angelis sworn 3 September 2012.

72    I should point out that the printout of the Facebook page extracted at p 19 of Mr Angelis’s affidavit is titled “Coffee van Melbourne”. It shows pictures of a Café Metro van, equipment and logo. While it contains three references to Prince “liking” certain posts, there is no evidence of Paras having engaged in any activity on the page. I can only assume that the reference to the Second Respondent in Cafe2U’s proposed order 2 is an error.

73    Cowdroy J then stood the proceedings over for directions before the duty judge on 21 September 2012. On that occasion Buchanan J granted leave to Cafe2U to amend its originating application. His Honour ordered, in effect, that the proceeding continue on pleadings and that the parties file a statement of claim and a defence. None of the parties complied with those directions. On 23 October 2012 I granted Cafe2U leave to file and serve the amended originating application and statement of claim signed by Mr Lazarus and dated 12 October 2012.

74    Since then the matter has been before the Court on five occasions.

75    The rules relevantly require that:

•    a corporation must not proceed in the Court other than by a lawyer (r 4.01(2));

•    on the return date fixed in the originating application a party must attend the Court, either in person or by a lawyer (r 5.01);

•    a respondent who has been served with an originating application must file a notice of address for service in accordance with Form 10 before the return date fixed in the originating application (r 5.02);

•    a notice of address for service for a corporation must be filed by a lawyer (r 11.02); and

•    a party or its lawyer must attend any hearing for the proceeding (r 5.04(2)).

76    None of the respondents has ever filed a notice of address for service. After his initial appearance by telephone before Cowdroy J, Prince appeared (seemingly via video link from Melbourne) before Buchanan J on 21 September 2012. He did not appear after that. Paras has never appeared.

Did BPL breach the franchise agreement?

77    Each of the matters alleged, if proved, would breach the franchise agreement and the evidence makes out the allegations.

78    First, from late June 2009 BPL failed to pay the monthly fees due under the agreement.

79    Secondly, BPL and Prince have been involved in the Café Metro business, a mobile food and beverage business in competition with Cafe2U in breach of the non-compete clause in the agreement. There is no evidence about how the domain name www.coffeemobilevan.com came to be registered or about who created the website or the Facebook page for Café Metro. Given the nature of this proceeding, that does not matter. I would, however, observe that the evidence in the affidavits filed with the originating process does show that it is more likely than not that BPL and also Prince, whether alone or with his brother, undertook the Café Metro business.

80    Café Metro’s ABN number incorporates BPL’s nine digit ACN number. It may therefore be taken that Café Metro is a business operated by BPL.

81    The mobile numbers Paras and Prince gave to Cafe2U for the BPL franchise operation appear on the Café Metro website and the email address for the site begins with the name “prince”. Indeed, Mr Black said that when one clicks on the contact link on the Café Metro website the primary contact is revealed as “Prince” and the mobile telephone number is that supplied to Café 2U for Paras.

82    Mr Angelis conducted searches in early October 2012 that show that the above mentioned mobile number, which was the number used by the respondents in the conduct of the Cafe2U franchise, is also used for a business called “Mobile Coffee Melbourne” which has a website under the domain name www.mobilecoffeevansmelbourne.com. According to the WHOIS internet database, the domain name was created on 30 December 2010. The contact phone number that appears on WHOIS is the mobile phone number provided to Cafe2U for Prince. The address is the same one Prince gave on his insurance claim after his accident in the first vehicle Cafe2U supplied to BPL. It is also the same address for the contact prince@coffeemobilevan.com on the Café Metro site.

83    Moreover, the WHOIS database separately lists the registrant contact, administrative contact and technical contact as:

Café Metro

Prince Bishambu

…

84    For these reasons I think that it is likely that the www.mobilecoffeevansmelbourne.com website is used in connection with the Café Metro business and that both BPL and Prince are involved in the Café Metro business.

85    This conduct was in breach of cl 6(1)(a) of the agreement. The clause provides that without the prior written consent of Café 2U, BPL(as franchisee), Paras (as guarantor and franchisee) and Prince (as shareholder) are prohibited from being involved in or carrying on during the term of the agreement, any mobile food or beverage business within the Territory or, indeed, anywhere in Australia. Mr Black stated that Cafe2U did not authorise BPL or either Bishambu brother to operate any similar business within the Territory. Glen Waverley is part of the Dandenong area in which the Café Metro business was conducted.

86    The conduct was also a breach of cl 6(1)(c) of the agreement which provides that the franchisee and guarantors shall not be in any way concerned with a competing business. The Café Metro business was undoubtedly in competition with Café 2U.

87    Further, I am satisfied that material and products supplied by or on behalf of Cafe2U for use in the Cafe2U business have been used in the Café Metro business.

88    A comparison of the services pages from the Cafe2U and Café Metro websites provides numerous examples of text that appears to have been copied from the Cafe2U site to the Café Metro site. One (under the heading “Supreme Quality”) differs only in the inclusion of a grammatical error in the Café Metro entry. Another (under the heading “Easy Fund Raising”) is the same except that the Café Metro entry contains two spelling errors. The Cafe2U page includes a heading “We cater 2U”. The Café Metro page includes a heading “We Cater You” (sic). The list of events appearing under those headings on the two pages is not only identical, the events appear in an identical order. The only difference is the replacement of the ampersand in the Cafe2U entry with the word “and” on the Café Metro page.

89    It is highly unlikely that the identical descriptions of numerous items on the menu pages for the two businesses are coincidental.

90    Mr Black’s evidence supports the conclusion that Cafe2U’s sugar was used in the conduct of the Café Metro business. There is also good evidence that other products supplied by Cafe2U to BPL for use in the franchised business were used in the conduct of the rival business.

91    Gross sales during the period BPL operated the Cafe2U franchise, appearing in Mr Angelis’s affidavit, show that the quantity of products BPL purchased from Cafe2U should have generated gross sales of beverages of over $97,000. Given the poor return to the franchised operation, it appears likely that some of this product was siphoned off for use in the Café Metro business.

92    I am also satisfied that content from the Cafe2U website was copied and used on the www.coffeemobilevan.com website as well as in the conduct of the Café Metro business. Given Prince’s involvement in the Café Metro business, it is more probable than not that he copied the content, whether alone or in concert with Paras.

Is Cafe2U entitled to the relief claimed?

93    The facts pleaded in the statement of claim and supported by the evidence make out the elements of a breach of the franchise agreement. I am satisfied that Cafe2U is entitled to the relief claimed and that the Court has the power to grant relief to remedy and restrain the breaches of the agreement. I am also satisfied that relief should be granted.

94    I will deal first with the injunctions in proposed orders 2 and 3. An injunction must enforce a legal duty to act or refrain from acting or protect a right, although an injunction will not normally be granted unless there is a real risk of further misconduct: ACCC v Dataline 161 FCR 513 at [112], [114]. There is no doubt that s 23 of the Federal Court of Australia Act 1976 (Cth) (“FCA Act”) gives the Court the power to make such orders: Ho v Grigor (2006) 151 FCR 236 at [52]–[56]. The evident purpose of an injunction in the present case is to prevent further breaches of the restraint of trade covenant in cl 6.1 of the agreement. The proposal is not unreasonable. The period over which it is sought is only six months and the area is limited to Glen Waverley.

95    Secondly, I accept Cafe2U’s submission that the injunctions contemplated by proposed orders 4 and 5 should also be made in the proposed terms. Proposed order 4 seeks to protect Cafe2U’s copyright by restraining BPL and Prince from reproducing material from its website without its written licence. There is a clear basis for this order in the evidence relating to the menus and the promotional material. Proposed order 5 seeks to restrain BPL and Prince from continuing to operate a Cafe2U franchised operation. The allegations made in the statement of claim that Prince was seen serving customers from the Cafe2U van and about the unauthorised use of the Cafe2U email address and domain name after the agreement had been terminated are not the subject of evidence. Still, as I have found that the agreement was validly terminated and the evidence is that the van and all other items supplied by Cafe2U to BPL have not been returned, it is reasonable to infer continuing use. There is therefore utility in imposing these injunctions.

96    Thirdly, I will make the order for the delivery up within seven days of the items of property given by Cafe2U to BPL for use in the franchised business. Cafe2U exercised its option as franchisor of purchasing the equipment and the vehicle by letter dated 14 September 2012. The price nominated for the equipment was $34,144 and for the vehicle $28,600. The transaction was not completed within 14 days as required by cl 11.8(e) of the agreement despite the fact that no objection was taken to the nominated prices. Cafe2U undertakes to pay to BPL (or, if that is not possible into Court) the difference between the depreciated value of the items and the amount of damages and costs.

97    Cafe2U also asks for an order that the first and third respondents take all necessary steps to remove all content from the website domain names www.mobilecoffeevansmelbourne.com.au and www.mobilecoffeemelbourne.com and to deregister those domain names. I am not satisfied that this order should be made.

98    If the domain names are used in the conduct of the Café Metro business and the restraints imposed by proposed orders 2 and 3 only operate for six months, I fail to see why I should order that the content of the website be removed or that the respondents deregister the domain names. The WHOIS database indicates that the expiration date for registration of the first domain name – www.mobilecoffeevansmelbourne.com.au – (30 December 2012) has passed. There is no evidence that registration has been renewed or that either site is still active. The content on both sites appears innocuous. For the most part the websites offer information of a general nature about coffee. There is no reference on either website to Café Metro, Cafe2U or the Bishambus. The only connection to the Bishambus is the inclusion of the mobile number. On the assumption that these websites are still in existence, the other injunctions are sufficient to protect Cafe2U’s interests.

The question of damages

99    Under cl 11.3 of the agreement Cafe2U’s entitlement to damages relevantly depends on whether the agreement was terminated in accordance with cl 23 of the Code. This in turn depends on whether Cafe2U can show that BPL voluntarily abandoned the franchised business or the franchised relationship, or was fraudulent in connection with the operation of the franchised business.

100    BPL stopped paying the fees due under the agreement. It used the products of the franchised business to advance the interests of a competing business in flagrant disregard of the terms of the agreement. These allegations made in the statement of claim and borne out by the evidence are sufficient to demonstrate a voluntary abandonment of the franchised relationship.

101    I am also comfortably satisfied that BPL was fraudulent in connection with the operation of the franchised business. I am mindful of the seriousness of the allegation but the evidence is strong enough to support such a finding. BPL’s sole director, Paras, in concert with its sole shareholder, Prince, each pretended to be the other and thereby duped Mr Black and other senior employees of Cafe2U. Paras was the director of the company but Prince owned all the shares and had control over its operations. Given their level of responsibility for the affairs of BPL, both Paras and Prince may be taken to be the “directing mind and will” of the company (Tesco Supermarkets Ltd v Nattrass [1972] AC 153). Even if I am wrong in this respect, however, Paras’s state of mind can certainly be imputed to BPL and he was as complicit as Prince in the false pretence.

102    Why the brothers engaged in this pretence is not clear. It may have started out as a game. But it was not accidental. These representations were fraudulent within the meaning of cl 23(f) of the Code because they were made in connection with the operation of the franchise business and they were knowingly false: D’Arling One Pty Ltd v Eagle Boys Dial-A-Pizza Australia Pty Ltd [2011] NSWSC 296 (Tamberlin AJ) at [42], adopting Viscount Haldane’s description of fraud given in Nocton v Lord Ashburton (followed by Gleeson CJ in Magill v Magill (2006) 226 CLR 551 at [17]):

[A] false representation [is] fraudulently made […] if the defendant made it knowing it to be false, or recklessly, neither knowing nor caring whether it was false or true. That is fraud in the strict sense.

103    Cafe2U has therefore established an entitlement to damages.

In what amount should damages be awarded?

104    Clause 11.3 of the agreement relevantly provides:

The Franchisee and Guarantors acknowledge that should this Agreement be terminated in accordance with … section 23 of the Code, the Franchisor shall, without prejudice to any of its other rights at law or otherwise, be entitled to recover from the Franchisee and or Guarantors damages on account of Franchise Service Fees and other monies which would have been payable by the Franchisee to the Franchisor, had this Agreement expired within its natural term, in an amount equal to the minimum amount payable by the Franchisee on account of the Franchise Service Fee and other monies payable under this Agreement multiplied by the number of weeks in the unexpired portion of the Term as at the date of termination of this Agreement (if this Agreement was not so terminated).

105    Cafe2U seeks damages against BPL as franchisor, not against Paras as guarantor.

106    The particulars of loss and damage given in the statement of claim are in the following terms:

(a)    Unpaid monthly fees in the sum of $3,306.14 up to and including 19 September 2012 and monthly fees thereafter which continue to accrue pursuant to cl 11.3 of the agreement;

(b)    Damages in the sum of $43,807.40 pursuant to cl 11.3 of the agreement;

(c)    Further particulars of loss and damage will be provided after discovery.

107    In the interlocutory application Cafe2U sought an order that damages be assessed in the sum of $49,381.34.

108    The franchise service fee fixed under the agreement at “the base date” (curiously 30 June 2010 – before the agreement was entered into) was $164.96 plus GST per week per vehicle increased by the CPI in accordance with cl 8.6 of the agreement. It seems that the figure including GST at all relevant times was $188. Cafe2U alleges that to date it is owed $8,306.59 in weekly franchise fees and cheque dishonour fees and monthly marketing fees, being other fees that would have been payable by BPL to Cafe2U. But that figure includes $188 for the week ending 22 June 2012, which Mr Black stated had been paid. Accordingly, the current amount owing at the date of hearing was $8,306.59 minus $188 or $8,118.59.

109    Cafe2U asked for interest (and the originating application includes a claim for interest) but made no submissions about how much should be paid, at what rate or how the sum should be calculated. Nonetheless, interest should be awarded in accordance with s 51A(1)(a) of the FCA Act at 7% pa (the rate referred to in Practice Note CM 16). For some unexplained reason Cafe2U only asked for interest from 19 September 2012. I would not in any event have awarded interest on the entire outstanding amount. Allowance has to be made for the fact that the whole amount was not due at the time interest begins to run but has been accruing weekly since then. Interest on $8,118.59 since 19 September 2012 at 7% pa is $252. I am content to allow interest in that amount. Cafe2U did not press its claim for post-judgment interest.

110    As for the future losses relating to the fees that would have been payable during the unexpired portion of the term of the agreement (42.9 months), Cafe2U accepts that the amount must be discounted to reflect its present value. David Fisher, a chartered accountant, calculated the net present value of future fees, based on a weekly franchise fee of $190.21 and a weekly marketing fee of $29.94, and using an investment rate of 4.1% p.a., at $35,613.35 including GST.

111    I award damages, then, of $43,983.94 including interest.

112    Cafe2U should also have its reasonable costs.

113    There will be orders accordingly.

114    Cafe2U’s proposed order 10 contemplates payment of damages within 28 days. No submissions were advanced in support of this order. I see no reason why I should make it. If the damages are not paid from the date judgment is entered, interest will run: FCA Act, s 52.

Associate:

Dated:    8 March 2013

ANNEXURE

No: (P)NSD 1312/2012

Federal Court of Australia

District Registry: New South Wales

Division: General

CAFE2U PTY LIMITED

Applicant

BISHAMBU PTY LTD

First Respondent

PARAS BISHAMBU

Second Respondent

PRINCE BISHAMBU

Third Respondent

APPLICANT’S REVISED PROPOSED ORDERS

JUDGE:        Justice Katzmann

DATE OF ORDER:    February 2013

WHERE MADE:    Sydney

THE COURT ORDERS THAT:

1    Judgment be entered in favour of the Applicant pursuant to Rule 5.23(2)(c) of the Federal Court Rules 2011 as against the first and third respondents.

2    The first and third respondents, whether by themselves, their servants or agents, be restrained from taking any steps whatsoever in relation to the conduct of the business known as “Café Metro” in Glen Waverley, Victoria, up to and including 6 September 2013.

3    The first and third respondents, whether by themselves, their servants or agents, be restrained from being involved in or carrying on any mobile food or mobile beverage business or other similar business of “Cafe2U” in Glen Waverley, Victoria, up to and including 6 September 2013.

4    The first and third respondents, whether by themselves, their servants or agents, be restrained from infringing the Applicant’s copyright in the web site known as www.cafe2u.com.au, its menus and advertisements by reproducing or authorizing the reproduction of the Applicant’s web site known as www.cafe2u.com.au, its menus or advertisements or a substantial part thereof without the written licence of the Applicant.

5    The first and third respondents, whether by themselves, their servants or agents, be restrained from continuing to operate the business of a Cafe2u Franchised Operation.

6    The first and third respondents take all necessary steps to remove all of the content from the web site domain names www.mobilecoffeemelbourne.com.au and www.mobilecoffeemelbourne.com and to deregister the said domain names.

7    The first and third respondents deliver up the following items of property to the Applicant within 7 days:

8    Damages as against the first and third respondents be assessed in the sum of $43,919.94.

9    Interest be paid upon the amount of assessed damages from 19 September 2012 up to judgment and continuing thereafter.

10    The First and Third Respondents pay the assessed damages together with interest to the Applicant within 28 days.

11    The first and third respondents pay the Applicant’s costs as agreed or assessed.

The Court NOTES that to the extent that the depreciated value of items provided to the Applicant listed in order 7, above, exceeds the amount of damages awarded together with interest and legal costs of the proceedings, the Applicant undertakes to the Court to pay such amount to the First Respondent or, if that is not possible, into Court.

DATED: ………………………