Federal Court of Australia

Lian Fa International Dining Business Corporation v Mu [2021] FCA 1527

ORDERS

THE COURT ORDERS THAT:

1.    The parties confer with a view to agreeing orders to give effect to these reasons.

2.    The proceedings be listed at 9.00 am on 7 December 2021 to resolve any outstanding dispute as to the appropriate orders.

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

REASONS FOR JUDGMENT

THAWLEY J:

1    By an originating application dated 26 October 2021, the applicant (Lian Fa) commenced proceedings against Mr Teng (Anthony) Mu and Sharetea Australia Pty Ltd, the first and second respondents. The originating application was accompanied by a statement of claim.

2    The originating application claimed final and interlocutory relief:

    By way of final relief, Lian Fa seeks declarations in relation to trade mark infringement, misleading and deceptive conduct, passing off and misuse of confidential information and also consequential orders.

    By way of interlocutory relief, Lian Fa seeks orders until further order, that Sharetea Australia and Mr Mu cease using the Lian Fa trade marks and any sign that is substantially identical with or deceptively similar to any one or more of those marks.

3    These reasons for judgment address the claim for interlocutory relief.

4    Before setting out the background events I should observe that a number of documents were translated from Chinese to English. There were also a number of documents which were issued in both Chinese and English. There was no dispute on this application about the accuracy of any translation.

BACKGROUND

5    The brand ‘Sharetea’ was established in 1992 as a tea shop kiosk in Taiwan by the founder of Lian Fa. Since its incorporation in 2004, Lian Fa has been a retail supplier of ‘bubble teas’ and other beverages directly to consumers and to various other companies across the world that operate under the ‘Sharetea’ brand. There are over 350 franchised tea shops worldwide under the ‘Sharetea’ brand in over 15 countries and 50 cities. Lian Fa is the registered owner of various trade marks.

6    Mr Mu is the sole director of Sharetea Australia. Sharetea Australia has been an individual franchisee of Lian Fa since about 2012 and also the master franchisee in respect of somewhere between 67 and 90 Australian sub-franchises. Two written agreements are particularly relevant in this regard:

(1)    Australia Brand Licence Authorisation Agreement between Lian Fa and Aumay Group Pty Ltd dated 16 December 2011 (Master Franchise Agreement); and

(2)    Master Licence Renewal Agreement between Lian Fa and Sharetea Australia dated 30 January 2019 (Renewal Agreement).

7    By the Master Franchise Agreement, Aumay Group (referred to in the agreement as “Party B”) became the sole agent in Australia for the brand name ‘Sharetea’. Lian Fa (referred to as “Party A”) granted to Aumay Group the “rights and interests in relation to Australia brand licence” to open “chain beverage stores” in accordance with Lian Fa’s “authorised operation mode … management policies and standard”. At some point from 2012 to 2014, the parties operated as if Sharetea Australia rather than Aumay Group was “Party B” to the Master Franchise Agreement.

8    The exclusive licence fee payable was US$100,000. The licence was for a period of 5 years, after which it was contemplated that the agreement might be renewed for a renewal fee of US$50,000. It was stated that “Party B shall open at least 20 stores within 5 years”. Excluding the first store, Party B was to pay US$8,000 per store opened: cl 2.1.

9    Clause 6.4 of the Master Franchise Agreement was in the following terms:

4)     Use of Raw Materials and Identifiable Packaging

If Party B does not to purchase tea and/or Sharetea exclusive original fruit juice/or other raw materials, or purchase tea and/or products made from Sharetea exclusive original fruit juice and/or other raw materials, or does not use the printed cups, plastic bags and other packaging designated by Party A, Party A shall provide written notice in advance and request rectification within a time limit. If rectification has not been made within the time limit, Party A can unilaterally terminate this agreement. Party B shall also be liable for damages caused to Party A in this process. The packaging materials (such as paper cups and plastic bags) needed by Party B for business purposes shall be uniformly printed by Party A and ordered by Party B in the quantity it required. Party B shall not arbitrarily replace or add items, contents and raw materials sold in the stores approved by Party A. If due to Party B’s local market competition and consumer needs, to add or change any items, materials and tastes shall be approved by Party A first.

10    Clause 7 included:

7.    Agreement modification, cancellation, termination, and renewal

1)    Modification

After both parties negotiate and agree, both parties can modify the content of the agreement, and both parties should sign a written supplementary agreement as an attachment to this agreement, the effect of which is the same as this agreement.

2)    Cancellation or termination of the agreement

In one of the following situations, Party A has the right to terminate or rescind this agreement and claim all losses caused by Party B:

…

VI.    Party B has a major breach of agreement or has not corrected it within a time limit.

VII.    Party B is in arrears with any of the payables in this agreement, including: licence fees, shop establishment fees, material payables, brand licensing fees, etc., but no payment has been made after Party A has urged Party B to pay for one time.

In the following circumstances, Party B has the right to terminate this agreement and claim all losses caused by Party A:

I.    Party A fails to supply the goods in accordance with the provisions of this agreement due to Party A’s negligence, or Party A’s negligence results in any deterioration of the quality of its supply to Party B, and Party A has not corrected it within a time limit after Party B’s demand.

…

4)     After this agreement is cancelled or terminated:

I.     Party B loses the right of exclusive authorized general licensee.

…

11    From the time of entry into the Master Franchise Agreement, Sharetea Australia purchased raw materials and product from Lian Fa. In 2020, the total orders amounted to approximately US$1.3 million.

12    On or about 30 January 2019, Sharetea Australia executed the Renewal Agreement, operative from 1 March 2017. The Renewal Agreement incorporated the Master Franchise Agreement and extended it until 28 February 2022. The Renewal Agreement included cl 2, which stated:

Party B should open 30 more stores which means total 50 stores in whole Australia within next five (5) years. If Party B reach the goal, Party A will extend this agreement for another ten (10) years without renewal fee.

13    The construction of this clause is in dispute. Lian Fa submitted that it means that a renewal fee would not be charged if the conditions were met, but did not oblige Lian Fa to extend the agreement for ten years. The respondents contended that cl 2 obliged Lian Fa to extend the agreement for ten years without a renewal fee if the relevant conditions were met.

14    On 21 June 2019, Mr Mu advised Lian Fa’s “Overseas Department Project Deputy Manager”, Mr Chuck Liu, that Sharetea Australia had 50 stores. The respondents contend that cl 2 has operated with the result that the agreement has been extended or that Lian Fa is obliged to extend the agreement for ten years, without charging a fee. Lian Fa disputes this.

15    In his affidavit, Mr Mu stated that during the first wave of the COVID-19 pandemic, from about February or March 2020, many Sharetea stores either shut down or suffered a significant downturn in business. As a result, instead of on-selling and distributing product to the sub-franchisees, Sharetea Australia stored product that it had purchased from Lian Fa for four to five months.

16    Mr Mu also stated that, from about February 2020, Sharetea Australia was provided by Lian Fa with product which was soon to expire. The suggestion was that Sharetea stores in other parts of the world had ceased to require product, or had reduced requirements, with the result that Lian Fa had an excess of product, which it held on to for longer than usual, and supplied to Sharetea Australia.

17    By at least 12 May 2020, Lian Fa was preparing for an IPO in Taiwan. It started requesting that Sharetea Australia prove certain information to assist with the IPO. It is not clear on the material on this application precisely what was being requested at around this time. Whatever it was precisely that was being requested, it was not provided.

18    On 28 December 2020, Mr Liu wrote an email to Mr Mu in the following terms:

Before any compliance documents from an Australia lawyer are submitted as committed by your company, there will be legal concerns and questions in relation your company’s operation of Sharetea stores as our licensee in Australia,

As such, please forgive us not being able to continue accepting the attached orders by your company.

Please provide compliance documents from an Australian lawyer, so that the business between your and our companies will not be affected. Thank you for understanding.

19    Mr Mu understood this email as meaning that Lian Fa was not prepared to accept the orders because Sharetea Australia had not provided “compliance documents”, being the documents which Lian Fa wanted to obtain approval from the relevant Taiwanese Authorities for its planned IPO.

20    As at 6 January 2021, the arrangements between the parties appears to have been that Sharetea Australia had been allowed a credit of NTD15,000,000 (roughly A$680,000 at the time). This amount represents a little under half of the total orders for 2020. An email from Mr Liu to Mr Mu on 6 January 2021 stated that this was “the maximum amount to assist your company and the supervising authority OTC may require our company to control risk and reduce the amount at any time”.

21    On 20 January 2021, Lian Fa issued an “announcement” to Sharetea Australia, titled “Incentive program of submitting Franchisee store compliance documents”. The announcement included:

Thanks for all your continued support and cooperation with us during this hard year. In order to reach the Initial public offering successfully, Master franchisee compliance document is one of steps on the road of success. When we achieved, our valued master franchisees will benefit from comprehensive resources in the future. To ensure the process go smoothly, HQ [Lian Fa] had launched an incentive program to sincere contribution of submitting documents before deadline, the detail as below:

1.     Deadline: As from today to 31st, JAN, 2021

2.     Items: 100 CTNS of Tapioca Pearl

3.    Qualification: Submit 1) Australian Layer [Lawyer] Statement & 2) all the store compliance documents, which both of them are approved by Taiwan Layer [Lawyer] within deadline.

4.    Delivery: Combine with next shipment.

5.    Remarks: Do not accept any request to change equivalent goods and waive any payment.

22    An email from Mr Liu to Mr Mu on 8 January 2021 referred to a conversation between the two the night before and thanked Mr Mu for “understanding our company’s financial policies”. The email stated that the “accounts between our two companies have been fully settled”. The email then referred to a series of containers being sent to Melbourne and Sydney, some of which had been shipped. In relation to each of these, the email stated that “payment [was] expected to be settled on [the relevant date] upon arrival at port”.

23    On 26 February 2021, Mr Liu sent an email to Mr Mu providing “updated goods payment information” relating to a number of containers to Melbourne and Sydney. Included in these were:

•    3/2 [2 March 2021] Melbourne two containers (unshipped) USD$125,227.14 (payment expected to be settled on 3/19 upon arrival at port) [Melbourne Order]

•    3/2 [2 March 2021] Sydney two containers (unshipped) USD$124,829.76 (payment is expected to be settled on 3/19 upon arrival at port) [Sydney Order]

24    According to Mr Mu, the Melbourne Order and the Sydney Order had been made towards the end of January 2021.

25    Mr Mu stated in his affidavit that he had “received a couple of emails from Chuck, as was normally the case, regarding payment information and outstanding amounts” and that he “understood these outstanding amounts to be amounts that would be payable at a later date, on account of the payment terms that Sharetea Australia had with Lian Fa, as referred to previously”.

26    In his affidavit, Mr Mu deposed to a conversation with Mr Liu on 15 March 2021 which included:

Liu:     “I attended a meeting with the Chairman and his wife last week. They said that if you don’t provide the compliance documents, they will stop sending you product.”

Mu:    “This is illegal. If you don’t sell me any stock, I can’t continue operating my business.”

Liu:    “They will stop supplying you stock on any date. You are going to need to prepare in case this happens. If you want to put any order, place it now. If you put an order now, it might go through, and it will give you a longer time to prepare.”

27    Mr Mu stated he received a call from Mr Liu on 17 March 2021 which included:

Liu:    “The company want me to send you a letter which you will receive today.”

Mu:    “What is the letter for?”

Liu:    “The letter is in relation to you providing compliance documents for the IPO. After this letter, they will stop sending you stock. You can try but there are no guarantees that you will receive stock. You should have put an order on the 15th when I spoke with you when I gave you the warning.”

Mu:    “I can’t make an order that quickly as it’s done by my warehouse team. They normally take 5 days to produce the stock order.”

Liu:    “I understand but now it is probably too late for you to make an order. If you don’t have any more stock, what are you going to do?”

Mu:    “What can I do? I’m going to have to find another supplier.”

28    On 17 March 2021, Mr Mu received a second “announcement” from Lian Fa, signed by Lian Fa’s General Manager, Mr Angus Lai, dated 16 March 2021. This stated:

Firstly, much appreciation for the good cooperation between both of us in many of years. During the period of your Sharetea Australia Master Franchisee, both of us have a well mutual relationship in many of executing Sharetea HQ policies even though we are facing many of challenges caused by the different area and culture thinking. Thank you again!!!

However, Sharetea HQ as being an ESG (Environment Social and Governance) enterprise, in order to develop and strengthen company itself, we start the “GO PUBLIC” plan in 2019. On the basis of the examination standards of Taiwan governmental authority, starting from March, 2020, according to the rules in Australia Master License Agreement, we have to get the related documents which prove every Sharetea store in Australia set up by your company is truly legal in Australia from you.

However, we tried to ask you to provide the related documents in the past one year. We deeply regretted not to get any your effective result or scheduled progress and still don’t get any valid certificates in accordance with Australia law from you until now.

Now, this case is going to be over 1 year, now the Taiwan governmental “GO PUBLIC” examination authority ask Sharetea HQ that if we can not submit 1) “Australia Layer Statement” which clarifies the standards of legally opening a store in Australia and 2) “Official Store Compliance Document in Australia” before 31th March, 2021, we are forced to do the necessary actions for the case of Australia Master License Agreement.

As compelled by circumstances, Sharetea HQ hereby announce “please confront the stake of this case and provide “Australia Layer Statement” & “Official Store Compliance Document in Australia” before 31th March, 2021”. Otherwise, Sharetea HQ has to reasonably and conditionally raise the objection for your Australia Master License Agreement under the request of Taiwan governmental authority.

Looking forward to getting a positive result between both of us for keeping a smooth and good relationship in the future business.

29    On 17 March 2021, Mr Liu sent an email to Mr Mu which referred to the Melbourne Order and Sydney Order, stating that payment was expected on arrival at port. The email ended with the words:

Please confirm the actual arrival time at the port with Reza regarding 3/2 goods [being the Melbourne Order and Sydney Order], and make payment in advance so that arrangement to release goods can be processed at Taiwan’s end.

30    On 22 March 2021, Mr Mu placed a further order for product to be delivered to Melbourne and Sydney. This was done by email to Mr Liu. Mr Mu deposed to a telephone conversation with Mr Liu on 23 March 2021, which included:

Liu:    “I don’t think they’re going to send you the orders you made yesterday unless you give them the documents. You should have made the order a week ago when we spoke. I had a meeting with the Chairman and his wife yesterday when you were trying to call me.”

Mu:    “Just like I said, I needed 5 working days to make the order.”

31    Mr Mu deposed to a telephone conversation with Mr Liu between 23 and 31 March 2021 concerning the orders he made on 22 March 2021 during which Mr Liu is asserted to have said:

Liu:    “The Chairman said that unless you comply with the letter dated 16 March 2021 and provide the documents to help us with the IPO by 31 March, we aren’t going to accept any further orders.”

Mu:    “If we don’t get any orders in April, we will be out of stock and this will cause massive damage to our business”

Liu:    “I will speak with the General Manager to see if he can convince the Manager Director to proceed with your orders.”

32    Mr Liu sent an email on 31 March 2021, largely concerning the Sydney Order. This email requested that Sharetea Australia “make payment today” in respect of the Sydney Order because there was a holiday period in Taiwan from 2 to 5 April such that “after today, we will have to wait until [6 April] when we are back in the office to process this”. The email did not refer to the orders which had been made on 22 March 2021.

33    It was not contentious that Sharetea Australia collected the two containers comprising the Sydney Order without paying Lian Fa. It appears that the Melbourne Order had been paid for before collection.

34    Mr Mu stated that he spoke with Mr Liu on 6 April 2021 concerning whether stock would be released to Sharetea Australia and querying the result of any discussion which had occurred between Lian Fa’s General Manager and Chairman. There was apparently no result.

35    Mr Mu stated that he spoke with Mr Liu on 8 April 2021 and was told that “Lian Fa’s final decision is that they won’t release stock … until you give up those documents”.

36    Mr Mu stated that he spoke with Mr Liu on 12 April 2021 and sought to arrange a meeting with Lian Fa’s Chairman in order to fix things. This was later arranged.

37    A meeting was held on 21 April 2021 via Microsoft Teams between Mr Mu, Lain Fa’s general manager, Po-Yu-Lai and Mr Mu’s mother, Ms Bi. In his affidavit, Mr Mu gave the following account of the meeting:

At the meeting, most of the discussion was between Lian Fa's General Manager, PoYu-Lai, my mother, and me, and the discussion was in Mandarin. A conversation to the following effect took place (as I cannot recall exactly whether certain comments or questions were said by my mother or I, I will refer to us collectively as “Sharetea”):

Sharetea:    “Why is Lian Fa not sending us product? We need you to ship the product that we ordered in March.”

Po-Yu-Lai:    “We will ship the containers as long as you give us the documents for the IPO.”

Sharetea:     “That is fine, we are happy to do that. But how are the containers going to be shipped on time and by 27 April if you haven’t even given the orders to the factory?”

Po-Yu-Lai:    “We will make sure they arrive on time”

Sharetea:     “Over the last few years, we have had so many problems with Lian Fa. We have had issues with product quality, expiring product and now COVID has really affected our business. As I said, we are happy to help Lian Fa for the IPO but we need some assistance.”

Po-Yu-Lai:    “We are also happy to help. How can we help?”

Sharetea:     “In 2019, we paid Lian Fa USD70,000 when we renewed the agreement. It would be very helpful if this amount was given back to Sharetea Australia just to help us in this tough time, especially after all the issues we have had with the product recently which have caused us great expense. Lian Fa also have said to me before that they will compensate me further for the product issues.”

Po-Yu-Lai:    “I am happy to do that. We know you have had a lot of issues with product. You were one of the only licencees ordering stock from us due to COVID so we sent you some product that was in the factory and that we couldn’t send anywhere else. Unfortunately, some of that product was old stock that we needed to get rid of. As compensation for all the issues, we will refund the USD70,000 amount and waive the cost of the container that you ordered for Sydney in January”

Sharetea:     “That would be very helpful. We also need to know why the prices for product have gone up so much. We can’t afford to keep paying this price.”

Po-Yu-Lai:    “We are hoping to reduce the price of stock and will make sure the prices are reduced for you. We should now be able to do this as the IPO will help give us more financial flexibility, which could also help

Sharetea:     “Can you please also tell us how the IPO will help us as we have been asked to give these documents, but still do not know how they benefit us at all?”

Po-Yu-Lai:    “We are going to do a roadshow for international licencees to help explain the IPO and how they will benefit. We are also open to a profit-sharing model with the international stakeholders and this is something we are going to look into.”

Sharetea:     “We look forward to it. We will be more than happy to give Lian Fa the documents that they need and to help with the IPO now, as long as we receive what we have agreed to.”

38    On 22 April 2021, Mr Mu was copied into two emails from Lian Fa which requested that the freight forwarding company, GEODIS, cancel containers that were due to be sent on 27 April 2021. Mr Mu sent a message to Mr Liu about an hour after receiving this email stating:

Just saw your email to cancel the cargo space, which is not as what we have agreed, please clarify as soon as possible. If it can’t be shipped as scheduled, please let me know.

39    On 27 April 2021, Mr Lui sent an email to Mr Mu stating:

Considering our long-term cooperation and let’s get back to the essence of problem solving as well as our own demands and positions, we’d like to ask your company to cooperate:

1.     Please as set out in your company’s licence agreement, your company needs to provide documents demonstrating store opening is in compliance with Australia laws, in a way in either option A or B:

Option A: please attach the store opening compliance documents as shown in the example prepared by our company’s Australian lawyer and email to us;

Option B: Please have your own lawyer to provide a) A legal opinion issued by an Australian law firm to evidence the compliance of the store, b) evidences that all stores are in compliance with Australian government’s requirements

2.     Please pay USD$124,829. 76 for the two Sydney containers that have been taken by you company by 4/30 (please provide bank slip on 4/30).

3.     Please change to another freight forwarder to protect the rights and obligations of both you and our companies during transactions (your freight forwarder GEODIS released the cargo without B/L before our company agreed to telex release, and has lost the most basic integrity in business)

If your company completes the above three matters, our company will agree to provide the previous ‘pay at port’ preferential terms.

Before the three matters are completed, we can only act in accordance with the agreement. Please make payments to our company first and we will arrange production after your payment is received.

40    On 6 May 2021, Mr Liu sent an email to Mr Mu requesting payment in relation to the Sydney Order and requesting the “related documents” (being the documents which Lian Fa wanted for the IPO) by 15 May 2021.

41    On 10 May 2021, Mr Mu wrote an email to Mr Liu which included:

I refer to your most recent emails and telephone conversations.

We are very disappointed with how you have responded given what we agreed during the Microsoft Teams meeting on 21 April 2021. Clearly, Lian Fa has completely changed what we agreed and are now trying to bully us by: not providing us with stock, increasing the cost for the product, putting harsher payment terms and not giving us the credits for compensation as agreed. Let us not also forget that everything was operating normally until recently when Lian Fa stopped supplying us stock. It appears to me now that Lian Fa is doing this as we have not agreed to sign and not provide relevant documents that it has requested that we sign and provide for the IPO. Further, it appears that Lian Fa is doing this as a tactic to force us to comply with its demands.

Sharetea Australia is not required to sign or provide these documents. If you think that I am wrong, please advise why and show me which clause of our agreement gives Lian Fa the right to request that we sign this document. Simply because your IPO team is requesting we sign a document is not enough. You can’t force us to sign any document. On top of this, our lawyers will not simply agree to sign and provide these document as this is what they have said to us. In fact, our lawyer has advised that you need to provide these documents to us as part of the disclosure document as required by the Franchising Code of Conduct. I also called the lawyer that you asked me to call from Holding Redlich lawyers (his name was Dan Pearce). Dan didn’t know what I was talking about saying that he does not act for Lian Fa and does not know about the IPO.

We kindly request that Lian Fa change its position and agree to do what we agreed to during the call on 21 April 2021, which is:

1.     Lian Fa to send the 3 containers of stock on time by 27 April 2021 but you cancelled the order after the meeting even though you emailed Susan to book it on 29 March 2021.

2.     You agreed to not charge us for the 2 Sydney containers as compensation for the several stock issues that we have had with Lian Fa.

3.     [Y]ou advised that you would do a roadshow for all stakeholder worldwide so that we can understand the benefit that we can get from this. As part of this process, Lian Fa to build an association of all worldwide stakeholders for Sharetea.

4.     You agree to reduce the stock price and increase our credit for payment terms.

5.     You agree to refund the US$70,000 we paid in 2019 for the damages we have had with Covid19 for the last 15 months.

This is the right thing to do and we happy to work with you to see what we can do to assist with the IPO but you must note that we are not required to do anything.

If you don’t want to proceed with what we agreed, please advise us as soon as you can. I will then need to go see my lawyer as I have to take matters legal as I have a number of stores that will need the stock and will lose a lot of money. This also may lead to stores closing down.

We don’t want to be difficult and we are happy to work with you to resolve this matter.

We await to hear from you. We are also happy to have another Microsoft Teams meeting if Lian Fa wants to do so.

Please note that we reserve our rights. Further, nothing in this email is to be considered a waiver nor an admission of any kind.

42    On 18 May 2021, Lian Fa issued a “Final Notification Letter” setting out asserted breaches. The first asserted breach was that “Sharetea Australia fails to provide the compliance documents of Sharetea stores in Australia to Lian Fa for the past year”. This was asserted to be a breach of cl 3.1 of the Master Franchise Agreement. The last asserted breach was that “Sharetea Australia picked up the products [the Sydney Order] without paying and without Lian Fa’s consent”. It was noted that payment had still not been received.

43    Lian Fa subsequently issued two breach notices, the first on 9 July 2021, sent under cover of a letter from Lian Fa’s Australian lawyers, Maddocks. This asserted a number of breaches, which are summarised below.

44    The second breach notice was issued on 12 August 2021. This notice asserted breaches by reason of Sharetea Australia having purchased “unauthorised raw materials” from third parties and required Sharetea Australia to “re-commence purchasing all raw materials from Lian Fa”.

45    On 30 August 2021, Lian Fa issued a notice of non-renewal under cl 18 of the Franchising Code of Conduct. Paragraphs 2.1 and 2.2 of the notice stated:

2.1    Pursuant to clause 18 of the Code, Lian Fa notifies the Master Franchisee that, due to the Master Franchisee’s historical and current breaches of the Franchise Agreement, Lian Fa does not intend to extend either or both the Master Franchise Agreement or Renewal Agreement or enter into a new agreement with the Master Franchisee at the end of the Renewal Period.

2.2    For the avoidance of doubt, the Master Franchise Agreement and Renewal Agreement will come to an end on 28 February 2022.

46    On 27 September 2021, Lian Fa’s solicitor wrote to the respondents’ solicitor in response to that solicitor’s response to the breach notices. The letter from Lian Fa’s solicitor included:

Sharetea Australia – response to the Breach Notice

…

3.    Earlier this year, your client took delivery of products from our client without paying for them. When called on by our client to pay for the products, your client alleged that the products were defective and then falsely claimed that our client agreed to waive your client’s obligation to pay for the products. Despite being invited to do so on a number of occasions, your client has never provided any evidence to support its claims that the products were defective or to account for what happened to them. Your client continues to refuse to provide any such evidence or to pay for the products. Pursuant to clause 18 of the Code, Lian Fa notifies the Master Franchisee that, due to the Master Franchisee’s historical and current breaches of the Franchise Agreement, Lian Fa does not intend to extend either or both the Master Franchise Agreement or Renewal Agreement or enter into a new agreement with the Master Franchisee at the end of the Renewal Period.

4.    Our client recently discovered that your client has started supplying unauthorised products to its franchisees purchased from a company with an apparent relationship to your client. This new company was established in January 2021. As you are aware, our client is concerned that your client intends to cease to purchasing key products from our client with the deliberate intention of denying our client one of the primary sources of revenue under the Agreements. When this issue was raised by us with your firm, your client asserted that it only obtained the unauthorised products because our client refused to provide your client with new products. As set out below, that is not the case.

5.    At all times our client has been and remains ready, willing and able to provide your client with new products on two conditions - your client must pay for:

  5.1     the products referred to in paragraph 3 of this letter; and

5.2     any new shipments of products from our client before they are delivered, consistent with our client’s usual trading terms.

Despite this, your client refuses to bring its account with our client up to date or to pay for new deliveries of products. Of greater concern is that your client wishes to continue selling unauthorised products to franchisees. Our client has grave concerns as to the quality and safety of these products and the potential risk to Australian consumers, your franchisees and the Sharetea brand.

47    On the hearing of this application, Lian Fa emphasised that the letter stated that Lian Fa was ready, willing and able to provide products to Sharetea Australia. It might be observed, however, that its willingness was conditional on payment by Sharetea Australia in relation to the Sydney Order. Sharetea Australia contends that it reached an agreement with Lian Fa, during the meeting of 21 April 2021, that Lian Fa would waive payment of the relevant amount.

48    On 29 September 2021, Lian Fa issued a notice of termination. The grounds raised by the notice of termination (and the first and second breach notices) may be summarised in the following way:

(1)    failure to provide copies of licences or permits for each of the Master Franchisee stores required by local government authorities (cl 2.1);

(2)    failure to provide monthly sales reports for all of its “Sharetea Australia” stores for the period 30 June 2016 to 30 June 2021 (cl 2.2);

(3)    failure to pay the amount of US$124,829.76 for goods supplied (cl 2.3);

(4)    failure to cease selling unauthorised or unapproved products including certain yoghurt-based drinks (cl 2.4);

(5)    failure to provide copies of all franchise agreements and leases entered into with franchisees for the operation of “Sharetea” stores in Australia (cl 2.5.2);

(6)    failure to cease purchasing raw materials from third parties (cl 3.1.1);

(7)    failure to recommence purchasing all raw materials from Lian Fa (cl 3.1.2);

(8)    failure to account for all purchases of unauthorised raw materials (cl 3.1.3);

(9)    failure to compensate Lian Fa for the failure to purchase raw materials from Lian Fa (cl 3.1.4).

49    The respondents deny that the notice of termination was validly issued.

50    By its solicitors, Lian Fa has also since sent two “cease and desist” letters.

51    The evidence establishes that Sharetea Australia has continued to use marks which are substantially identical with or deceptively similar to one or more of the Lian Fa marks.

52    As mentioned earlier, these proceedings were commenced on 26 October 2021. The respondents have filed a cross-claim in which they seek, amongst other things, a declaration that the notice of termination is of no effect or that Lian Fa is estopped from relying upon it and a declaration that the Renewal Agreement has been extended for 10 years from 28 February 2022.

LEGAL PRINCIPLES

53    The legal principles applicable to the grant of interlocutory relief of the kind presently sought were not contentious. There are two main inquiries. As explained by Gummow and Hayne JJ in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 at [65] (and see also at [19] per Gleeson CJ and Crennan J), those main inquiries are:

(1)    whether the applicant has a prima facie case in the sense of a sufficient likelihood of success to justify the granting of the interlocutory relief which is sought; this does not mean that the applicant must establish that they are more probable than not to succeed at trial; and

(2)    whether the inconvenience or injury the applicant would be likely to suffer if an injunction were refused outweighs the injury the respondent would suffer if the injunction were granted.

54    The two main inquiries cannot be conducted independently of each other, because “an apparently strong claim may lead a court more readily to grant an injunction when the balance of convenience is fairly even” and “[a] more doubtful claim (which nevertheless raises ‘a serious question to be tried’) may still attract interlocutory relief if there is a marked balance of convenience in favour of it” – see: Bullock v The Federated Furnishing Trades Society of Australasia (No 1) (1985) 5 FCR 464 at 472 per Woodward J (Smithers and Sweeney JJ agreeing at 467 and 469 respectively); GlaxoSmithKline Australia Pty Ltd v Reckitt Benckiser Healthcare (UK) Ltd [2013] FCAFC 102 at [81(j)]; (2013) 305 ALR 363 (Bennett, Jagot and Griffiths JJ).

55    It is also relevant to inquire whether the applicant will suffer irreparable harm for which damages are not an adequate remedy. This is sometimes expressed as a third requirement, additional to the two main inquiries – see, for example: Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153 (Mason ACJ); O’Neill at [19] (Gleeson CJ and Crennan J). It is sometimes expressed as a component of the second inquiry, namely where the balance of convenience lies: Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156; (2011) 217 FCR 238; 286 ALR 257 at [61] (Dowsett, Foster and Yates JJ); GlaxoSmithKline at [81(h)].

56    The extent to which the Court will look into the strength of the prima facie case, and how strong the prima facie case must be, depends on the case, in particular the nature of the rights which the applicant asserts and the practical consequences which are likely to flow if the interlocutory order is made: Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618 at 622 (Kitto, Taylor, Menzies and Owen JJ); Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535-536 (McLelland J); Samsung at [71] to [74].

57    If the interlocutory relief sought by Lian Fa is granted, the practical commercial consequence is that Sharetree Australia would need to rebrand and, presumably, seek to require its franchisees to do likewise. The granting of interlocutory relief will have effectively the same consequences, in respect of use of the marks, as the granting of final relief. Lian Fa accepted that the circumstances were such that it needed to establish “a relatively strong case” for relief, referring to Samsung at [87].

58    It follows that an assessment of the evidence as a whole must be undertaken in order to determine the strength of the prima facie case. However, it is not the Court’s function to conduct a preliminary trial, nor (at least generally) to resolve conflicts between the parties’ evidence. The Court “does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case”: Beecham at 622.

59    In Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 at 734, Mahoney JA (with whom Glass and Samuels JJA agreed) observed:

But there are limitations upon the extent to which a judge is to take into account such evidence as the defendant may tender upon an interlocutory application. It is not his function to conduct a preliminary trial of the action, nor is it, in general, to resolve the conflict between the parties’ evidence, and grant or refuse the application upon the basis of such findings. Where there is conflict of evidence, the use which may be made of the defendant’s evidence in determining whether the plaintiff has made out a prima facie case is a limited one. For example, the plaintiff’s evidence, considered alone, may be such a prima facie case as would be acceptable if submitted to a jury in a trial. But, when considered in the light of the defendant’s evidence, it may be explained away so as no longer to be such. Or the defendant’s evidence, when juxtaposed to that of the plaintiff may show that there is in reality no such case, no real question between the parties, appropriate to warrant preserving the status quo until the hearing.

60    This passage was referred to by the Full Court in Warner-Lambert Company LLC v Apotex Pty Ltd [2014] FCAFC 59; (2014) 311 ALR 632 at [72] (Allsop CJ, Jagot and Nicholas JJ).

61    Whilst I have set out various aspects of the evidence in some detail above, I have done so in order to assess the evidence as a whole and because it was submitted for Lian Fa that Mr Mu’s account of the conversation on 21 April 2021 was inconsistent with the contemporaneous documents, the latter often or generally being a more reliable guide than evidence after the event based on recollections – see: Australian Securities and Investments Commission v GetSwift Limited (Liability Hearing) [2021] FCA 1384 at [103] and [104] (Lee J). It is not appropriate to resolve contested questions of fact on this application. The contemporaneous documents were not so inconsistent with Mr Mu’s account of the conversation on 21 April 2021 that, in assessing the evidence as a whole, his account of the conversation should be rejected as implausible or unreliable even if that were otherwise appropriate on an application of this kind. For example, his message on 22 April 2021 was consistent with his account of the conversation on 21 April 2021 as was, broadly, his email on 10 May 2021.

CONSIDERATION

Prima facie case

62    It was not in dispute that Lian Fa has made out a prima facie case. It was not contentious that, if the notice of termination is valid, then Sharetea Australia does not have a right to use Lian Fa’s marks. On the other hand, if the notice of termination is invalid (or Lian Fa is estopped from relying upon it) then Sharetea Australia has a right to use those marks, at least until 22 February 2022. Sharetea Australia might have a right to use those marks until 2032 if it is correct that there has been, or it is entitled to, a 10 year extension.

63    The strength of Lian Fa’s prima facie case was contentious. The respondents contended that Lian Fa’s case was not sufficiently strong as to warrant the grant of the interlocutory relief having regard to the balance of convenience.

64    One complicating matter in assessing the strength of Lian Fa’s prima facie case is that, according to the evidence of the respondents, the parties have conducted themselves on a basis which does not necessarily strictly reflect the two written agreements referred to earlier.

65    Whether the notice of termination is valid depends upon a careful analysis of all of the events which include conversations the content of which is not agreed between the parties. Lian Fa characterises the case as one in which the respondents are impermissibly using Lian Fa’s marks whilst completely ignoring its obligations to perform its agreement with Lian Fa.

66    The respondents, on the other hand, assert that Lian Fa’s actions, including its earlier refusal to supply product to Sharetea Australia, was undertaken in an attempt to force the respondents into providing documents or information which Sharetea Australia was not obliged to provide. The respondents’ case includes that Lian Fa was, in substance, tying its willingness to continue to supply product and otherwise deal with Sharetea Australia in the manner it previously had to the willingness of the respondents to provide documents to Lian Fa to which Lian Fa was not contractually entitled. The respondents contend that, because of Lian Fa’s refusal in around March and April 2021 to supply product, Sharetea Australia had no choice in the circumstances other than to obtain the products elsewhere. It was not in dispute that products were obtained from an entity related to Sharetea Australia. It was also not in issue that the related entity was incorporated in January 2021. The first suggestion in the material of the possibility of Lian Fa not providing product if Sharetea Australia did not provide the requested documents was Mr Liu’s email on 28 December 2020.

67    Lian Fa’s entitlement to the documents requested in relation to the IPO is not clear on the provisions of the agreements. It is not appropriate to resolve that question in a final way on this application. The relevant clauses are cl 3.1 and 4.1 of the Master Franchise Agreement which provide:

3.    Business Scope of the Cooperative License

1)    Party B shall obtain the formal authorisation of Party A’s brand of Sharetea Modern Beverage Chain Store under the terms of this agreement and incorporate a company (hereinafter referred to as the ‘Australian Company’) before opening Sharetea Modern Beverage Stores in Australia. The Australian Company shall operate chain stores in Australia and be compliant with relevant Australian laws.

4.    Review of the Brand’s Operation Materials

1)    Party B shall keep correct and complete business records which Party A is entitled to require Party B to provide, so that Party A can better assist Party B with operation.

68    It is also not clear that Lian Fa has a strong case for termination in relation to other documents which have allegedly not been provided. In relation to “licences or permits”, it was not established that the documents existed even if there was a contractual entitlement to them – see: cl 3.1.1(b) of the first breach notice. In relation to “monthly sales reports”, Lian Fa required Sharetea Australia to provide such reports for all of its Sharetea Australia stores from 1 January 2020 to 30 June 2021 – see: cl 3.1.1(g) of the first breach notice. Clause 4.2 of the Master Franchise Agreement provided:

Party B shall provide Party A with seasonal business reports of the chain stores for operation analysis purposes.

69    Evidence indicated that the word “seasonal” could also be translated as “quarterly”, consistently with the fact that there are four seasons in a year. Whichever word is used, it is not clear in the context of the agreement as a whole that “monthly sales reports” are “seasonal business reports” of the kind contemplated by cl 4.2. Not only are monthly reports not necessarily seasonal, but it is not clear that “sales reports” are “business reports”. Nor is it presently clear what significance might attach to the words in cl 4.2: “for operation analysis purposes”. Again, it is not appropriate to decide the issue. It is also relevant to note that, so far as the evidence presently discloses, seasonal or quarterly business reports had not been provided by Sharetea Australia before the more recent events described above, nor apparently requested by Lian Fa.

70    Another area of dispute concerns whether Lian Fa was entitled to insist on being paid for the Sydney Order. On the respondents’ case, by reason of what was said at the meeting on 21 April 2021 and having regard to the parties’ earlier dealings, Lian Fa was not entitled to insist on being paid for the “Sydney Order” and therefore not entitled to terminate on that basis.

71    As to the sale of yoghurt drinks, the respondents contend that this had been known to Lian Fa for a substantial period and Lian Fa had apparently elected not to rely on that as constituting a breach. In this regard, I note that, although one breach asserted by Lian Fa in its “Final Notification Letter” concerned a failure to obtain approval for new products, an email from Mr Lui to Mr Mu sent on 17 April 2020 stated:

Our staff has found this drink called Sharetea’s tiger mango on your social media. It looks good and we would like to try. Hope you don’t mind sharing with us the recipe of this drink.

72    As noted earlier, it is not appropriate to resolve which account of the facts is correct on an interlocutory application of this kind. It is sufficient to observe that the detailed material which has been filed (a substantial amount of which is on information and belief) shows an arguable case on both sides of the dispute. Whether Lian Fa’s notice of termination is valid will depend in part on disputed conversations. There is no direct evidence in respect of these conversations from individuals employed by Lian Fa. The only direct evidence of most, if not all, of these conversations at this point in time is the evidence of Mr Mu.

73    The validity of the notice of termination will also depend on a precise identification of the contractual relationship between the parties, that relationship perhaps being defined not only by the two written agreements but also the dealings between the parties.

74    The question whether Lian Fa is estopped from relying upon the notice of termination also involves disputed issues of fact.

Balance of convenience

Summary of submissions

75    Lian Fa submitted that the prejudice to Lian Fa of Sharetea Australia continuing to use the marks outweighs the prejudice to Sharetea Australia of ceasing to use the marks. In its written submissions, Lian Fa relied in particular on the following matters:

(1)    First, it was submitted that Lian Fa would suffer irreparable brand damage if Sharetea Australia continued to supply poor quality products (both consumables and packaging):

(a)    as to consumers, Lian Fa referred to having already received complaints about the quality of consumables and packaging;

(b)    as to potential business partners, Lian Fa submitted that the supply of poor quality products would affect its ability to recruit new franchisees.

(2)    Secondly, Lian Fa submitted that it was not able to verify whether products supplied to consumers were safe to consume or might represent a health and safety risk.

76    During oral argument at the hearing of the interlocutory application, Lian Fa added that consumers might be, or were being, effectively misled as to the source of products and that consumers expected the same product in Australia as overseas such that brand damage might also be expected more broadly than solely with Australian consumers.

77    Lian Fa submitted that it would be difficult to quantify brand damage such that damages would not be an adequate remedy.

78    The respondents relied upon the following matters:

(1)    First, they submitted that ceasing to use the marks on the signage of, and packaging used by, approximately 90 stores across Australia was no small matter.

(2)    Secondly, they submitted that there is a prospect that the legal and business relationships between the respondents and its franchisees would be substantially disrupted, perhaps permanently in some cases, by the making of such orders. It was submitted that these risks were disproportionate to the contingent harm sought to be avoided by Lian Fa over the few months that might be expected to be involved until determination of the dispute on a final basis. In this regard, the parties were basically in agreement that the matter could be ready for final hearing on liability issues by May next year.

(3)    Thirdly, it was submitted that, if Sharetea Australia was forced to rebrand because of the interlocutory orders, but it were to succeed at final hearing, it might be wondered whether Sharetea Australia would revert to using Lian Fa’s marks.

(4)    Finally, it was submitted that the impact on Sharetrea Australia’s franchisees (who have not been joined to the proceedings) should be given weight, albeit not decisive – as to which see: Samsung at [68] to [69].

79    The respondents also submitted that, if interlocutory orders were made, the Court should require Lian Fa to provide security in support of the undertaking as to damages should be required. It was submitted that it was not appropriate that the respondents should be forced to proceed to enforce a judgment in Taiwan to recover under the undertaking. This submission was met during the hearing of the interlocutory application by Lian Fa undertaking to provide security in the amount of $500,000, an amount which the respondents did not suggest was inappropriate at least as matters presently stand.

Discussion

80    The evidence is that there are approximately 90 Sharetea stores operating in Australia.

81    As to the quality of products, and the question of brand damage with consumers and potential business partners, Lian Fa relied on complaints from three franchisees. Those complaints related in some cases to the product and in some cases to the cups and sealing tape (packaging). These complaints apparently commenced in about July 2021. There was also evidence of complaints from the “Sharetea Franchisees Group” in July 2021. This group appears to be connected in some way to the three franchisees. There was also hearsay evidence concerning complaints from consumers but, in addition to being hearsay evidence, it was imprecise. Ultimately not much weight can be attached to it. There was no suggestion that there have not always been some consumer complaints, even before July 2021, as one might expect in the operation of any business of the relevant kind.

82    Mr Mu stated that Sharetea Australia had received complaints from about three franchisees in the relevant period. One of those franchisees had been involved in an ongoing dispute for a long time. His evidence is that when the products were being supplied by Lian Fa, there were also complaints, and product quality issues.

83    I am not satisfied on the material before the Court that the product is of such poor quality that it is having a material effect on the brand or that such is likely to occur in circumstances where it is in no-one’s interest for poor quality products to be supplied to consumers.

84    As to Lian Fa’s concern that Sharetea Australia would supply products which were damaging to the health of consumers, there is no basis in the evidence for such a conclusion and every reason as a matter of commercial common sense to think that such a conclusion is unlikely.

85    On the other hand, I do give significant weight to the fact that, as things presently stand, Lian Fa does not supply products to Sharetea Australia which is at the core of the agreement between the parties and that there may be consumers who might think that the product is sourced from, or approved by, or its quality is ‘guaranteed’ by, Lian Fa. This is a state of affairs which has existed for some months already as a result of the dispute between Lian Fa and the respondents. I infer that the products the subject of the Sydney Order and Melbourne Order were likely to have been distributed by July 2021. Lian Fa refused to supply products in March and April 2021 and it has not offered to recommence supplying products to Sharetea Australia except on conditions which include that Sharetea Australia make payment in respect of the Sydney Order. Lian Fa has known that Sharetea Australia has not been supplied with Lian Fa’s products since about April 2021. Lian Fa must have known that Sharetea Australia would have to use products supplied by others, even if it did not know that at least one of the suppliers was an entity related to the respondents.

86    I do not conclude that Lian Fa relevantly delayed in bringing these proceedings. Its actions were consistent with seeking to resolve its dispute expeditiously and in good faith with the respondents, consistently with the Franchising Code of Conduct. Further, it has conducted the proceedings in this Court in an appropriately expeditious way.

87    I accept that stopping to use the marks on the signage of, and packaging used in, 90 stores requires considerable time and expense for a number of persons or entities, including Sharetea Australia. Lian Fa submitted that this consideration should be put to one side because the orders sought do not, in terms, require such steps to be taken. However, as the respondents submitted, the practical effect of the orders is what matters. If the interlocutory orders are made, Sharetea Australia is left with no practical option other than to rebrand. The disruption to the various businesses involved is obvious.

88    I accept that there is a real prospect that the legal and commercial relationships between the respondents and its franchisees would be substantially disrupted by the making of such orders. I accept that it is reasonably likely that disputes will arise with some of the franchisees if Sharetea Australia rebranded and sought to require its franchisees to do likewise. Those franchisees presumably entered into the relationship with Sharetea Australia because of the ‘Sharetea’ brand. Being forced to rebrand is likely to result in dispute. I do not accept Lian Fa’s submission that the contracts between Sharetea Australia and its franchisees are so clear that no dispute could arise if Sharetea Australia required the franchisees to rebrand. In any event, disputes might turn on more than the terms of the relevant contracts.

89    I accept that, if made, the interlocutory orders are likely to force Sharetea Australia to rebrand and that it is unlikely that, if the respondents were to succeed at a final hearing, they would wish to return to using Lian Fa’s marks.

90    There is no reason to suppose that, should the applicant succeed at final hearing, the calculation of damages or account of profit would pose unusual difficulties. The respondents have, by their written submissions and during the hearing, given undertakings to keep proper detailed records and to provide certain financial records. These undertakings were appropriately given. The respondents noted that one interlocutory order sought was for the respondents to provide the name and address of any of its additional franchisees and the respondents consented to the making of such an order.

91    It is likely that the proceedings can be brought relatively expeditiously to a final hearing on liability in May or June 2022. Noting the undertakings which the respondents have agreed to give, and having regard to the matters referred to earlier in connection with the strength of Lian Fa’s prima facie case, and the various considerations just referred to on the issue of balance of convenience, it is preferable to leave matters as they are until final hearing, rather than make interlocutory orders preventing Sharetea from using Lian Fa’s marks.

CONCLUSION

92    Accordingly, I refuse the interlocutory relief which is claimed in the originating application.

Associate:

Dated:    6 December 2021