Federal Court of Australia

Kilimanjaro Consulting Pty Ltd v MYOB Australia Pty Ltd [2023] FCA 922

ORDERS

THE COURT ORDERS THAT:

1.    Until further order, the respondent be restrained from taking any action for breach of contract under the Business Partner Agreement with the applicant dated 15 November 2018 by reason only of the applicant paying the respondent 65% of the Annual Licence Fee paid to the applicant by an End User of MYOB’s Exo software.

2.    Until further order, the respondent be restrained from withholding licence codes for the use of MYOB Exo by any End User which is a customer of the applicant by reason only of the applicant retaining 35% of the Annual Licence Fee paid by the End User to the applicant and paying the respondent 65% of the Annual Licence Fee.

3.    The costs of the interlocutory application dated 12 July 2023 be costs in the cause.

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

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

JACKMAN J

Introduction

1    This is an application by the applicant (KC) for interlocutory injunctions against the respondent (MYOB), seeking to retain a 35% margin on annual licence fees, pending the hearing of these proceedings, rather than the 20% margin which would be applicable on the face of the variations to the 2018 Business Partner Agreement (BPA) which have been notified by MYOB.

Salient Facts

2    KC and MYOB have been in a commercial relationship since at least 2007. There are two software products of MYOB relevant to the proceedings. The first is MYOB Exo (Exo), which KC has sold since 2006. This is an on-premises product. The second product is MYOB Advanced, which was developed from 2013 and launched in 2014 as a cloud-based product. By 2018, KC had built up a business as a large reseller of Exo and provider of “Business Partner Services” in respect of that software, and goodwill attached to KC’s business. KC and MYOB entered into the BPA in 2018, accompanied by a separate set of terms called the Business Partner Program (BPP).

3    In May 2021, MYOB notified a variation to cl 12(a) of the BPA to implement a direct or “dual channel” distribution model. In May 2022, MYOB advised a reduction in the annual licence fee (ALF) margin for the Exo product (Exo ALF margin) under the BPP from 35% to 20%.

4    KC expresses in broad terms the legal issue between the parties as being whether MYOB’s prima facie contractual power to unilaterally alter cl 12(a) of the BPA or to alter the Exo ALF margin is relevantly constrained or not. KC contends that constraints arise in the context of its pre-existing relationship with MYOB by reason of implied contractual duties (particularly duties of good faith), the statutory duty of good faith under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (the Franchise Code) and the protection against unconscionable conduct under s 21 of the Australian Consumer Law, being Sch 2 of the Competition and Consumer Act 2010 (Cth). In addition to reliance on its express contractual rights, MYOB raises a positive case of the type envisaged by s 22(1)(b) of the Australian Consumer Law as to whether its conduct can be justified as being reasonably necessary to protect its legitimate interests.

5    KC takes issue with MYOB’s explanation for its conduct and pleads that, in light of the longstanding relationship between KC and MYOB, the reduction in the Exo ALF margin is arbitrary or capricious. KC also points to what it claims to be the relevant chronology of events, which include the following:

(a)    in May 2021, MYOB announced the implementation of its direct model and amendment to cl 12(a) of the BPA;

(b)    from July to November 2021, MYOB acquired three “Business Partners”;

(c)    on 6 May 2022, KC provided due diligence materials to MYOB and KKR (which appears to be the ultimate shareholder of the parent of KC) in respect of a potential purchase of KC on and from 6 May 2022; and

(d)    on 27 May 2022, MYOB advised KC and the other Business Partners that from 1 July 2022, the Exo ALF margin would be reduced from 35% to 20%.

6    The evidence for KC establishes that in relation to KC’s Exo business:

(a)    KC has 1,275 Exo customers, about 80% of its total customer base, who generate NZ$6.3 million in ALF;

(b)    KC has 61 of its 114 staff engaged in relation to the Exo software and customers;

(c)    KC has progressively built up its customer base since 2006, Exo customers have an average lifespan of 14 years, with a life expectancy of the Exo product of another 10 years, and MYOB continues to set sales targets for KC in relation to Exo;

(d)    KC is understood to have the largest proportion of Exo customers among MYOB’s Business Partners, with KC’s customers representing between 25% and 30% of all Exo customers; and

(e)    the Exo product has a distinct and ongoing appeal to a particular segment of the enterprise resource planning (ERP) market.

Serious Question to be Tried

7    As to whether there is a serious question to be tried, KC submits that the substance of the relationship between the parties is that KC has built up a solid base of Exo customers, from which both parties have benefited by a substantial ALF revenue stream over more than 15 years. KC says that it took investment risks in building up and operating its business on the basis of the financial incentives offered by MYOB to earn profits over the lifetime of the customers acquired, including the 35% Exo ALF margin. KC says that MYOB also benefited by growing its enterprise division without taking those risks or making any direct financial contribution to KC for the acquisition of those products.

8    KC emphasises that MYOB’s decisions as to the variations I have referred to above cannot be excused by taking the contract in isolation from the context of the relationship, and that MYOB ought not to be able to change the “ground rules” for existing customers, as they existed at May 2022. KC submits that KC’s lack of choice in responding to MYOB’s margin reduction is a clear indicium of unconscionable conduct. KC submits that it had no ability to reject the 20% margin and refers to MYOB’s threats to cause harm by refusing to issue license codes to KC’s customers and threatening to terminate the BPA, thereby jeopardising KC’s business entirely.

9    KC submits that there is a serious question to be tried as to the application of the Franchising Code and its attendant statutory duty of good faith. KC, in this regard, emphasises the slogan “partners are partners”, although at the final hearing KC will need to grapple with cl 27.5 of the BPA which rules out any relationship of partnership.

10    MYOB submits, in relation to whether there is a serious question to be tried, that while the law implies terms obliging parties to do what is necessary to enable the other party to have the benefit of the contract and a negative covenant not to hinder or prevent the fulfilment of the purposes of the express promises made in the contract, there is no general obligation to enhance the value of an agreement for a counterparty. MYOB relies upon the express terms of the BPA permitting MYOB to change the commission payable to KC, and also to permit either party to bring the BPA to an end without cause. MYOB submits that KC cannot sensibly assert that the benefit or value of the contract involves an ongoing entitlement to be insulated from any variation in the commission payable to it. Accordingly, MYOB submits that there is no scope for implied obligations of the kind alleged, to operate in such a way as to preclude it from exercising its contractual right to vary the commission.

11    MYOB accepts that the question of whether broader duties of cooperation and good faith are an incident of all commercial contracts has not been determined definitively by the High Court, although the weight of intermediate appellate authority is against the implication of such terms. MYOB also submits that KC is plainly not a franchisee within the meaning of the Franchise Code and the BPA is not a franchise agreement, and points to the fact that KC’s parent company (Enprise) has characterised KC as a “reseller”. MYOB also submits that the content of any obligation of good faith does not prevent MYOB acting in its own commercial interests, which MYOB have identified as being aligned with an increased demand for cloud-based products, and also points to recognition by Enprise of that trend. In relation to the question of statutory unconscionability, MYOB submits that on no view could MYOB’s conduct be said to involve any departure from ordinary community standards of honest and fair conduct.

12    In my view, there is a serious question to be tried. While I would not describe KCs case on the present evidence as compelling, it is a case which is sufficient, in my view, to meet the relatively low threshold for interlocutory injunctions of demonstrating a serious question to be tried. In particular, many of the legal concepts which will be in issue at the final hearing, such as good faith and unconscionability, are relatively elastic concepts on which divergent views have been expressed, as illustrated by the divergent approaches taken by the High Court in ASIC v Kobelt [2019] HCA 18; (2019) 267 CLR 1. Concepts of good faith and unconscionability must be applied taking into account all the circumstances of the case, which may, in turn, involve subtle nuances in the facts and considerable differences may arise based upon those subtle nuances. I do not regard KC’s case as being unarguable or one as to which there is no serious question to be tried.

Balance of Convenience

13    Turning then to the balance of convenience. On the one hand, Mr Free SC, who appeared for MYOB, candidly accepted that there would be no prejudice to MYOB if orders 2 and 3 in the interlocutory application were granted. I am grateful for Mr Free’s candour in that regard. As to the prejudice to KC, the evidence indicates that if the injunctions are not granted, then there will be a very substantial reduction in the amount of Exo ALF margin which KC will receive, which, in turn, directly impacts its current business model. The evidence indicates that that will generate a need to retrench a number of employees who are an important part of servicing Exo customers and maintaining Exo customer relationships. KC submits, and I accept, that recruiting and training staff is not easily done, and the consequential effect on the business as a whole, as well as its customers, would make that a last resort for any business. KC submits, and I accept, that once existing staff members have been terminated, and their business capabilities have been lost, then it is very difficult to return to the status quo ante, if, in due course, the court were to uphold KC’s claims for relief in respect of the 35% margin.

14    KC submits that, if left unaddressed, MYOB’s actions would preclude KC getting full relief in respect of its margin reduction, because the business and the customer experience will have changed between now and the hearing, which is anticipated to be in late March or April 2024, with an unknown impact on KC’s goodwill. KC points out that it has sought to maintain the status quo at its own cost over the last 12 months in the hope of a resolution to this dispute, but it has now reached a point where KC cannot maintain its current business model and staffing on the basis of the 20% margin.

15    MYOB makes a number of criticisms of the quality of the evidence deployed by KC as to the financial impact on it of the margin reduction and the apparent need to retrench staff members. While those criticisms are well made, I take into account that this is an interlocutory hearing for which the evidence has been prepared expeditiously and deficiencies in the evidence are an inevitable by-product of that forensic endeavour.

16    I accept that there is a real and tangible prospect of KC having to retrench a number of its staff members if it does not obtain injunctive relief, and I accept that that would cause a disruption to its business which, as a matter of justice, should be avoided, pending determination of the claims which it makes. I do not regard damages as being an adequate remedy. While I note that the accounts of Enprise do quantify a loss of goodwill, the evidence of Mr Cooper, for KC, explains that that was calculated as a multiple of the ALF revenue reduction alone using standard business valuation methodology, and did not include valuing the loss of goodwill resulting from a change in business model resulting from the loss of staff and capabilities. Accordingly, I accept that damages are not an adequate remedy, and that there would be difficulty, if not impossibility, in proving, in monetary terms, the consequences to the business of KC if it were not to obtain injunctive relief.

17    Accordingly, in my view, particularly having regard to Mr Free’s candid concession as to the lack of prejudice to MYOB, the balance of convenience favours the grant of some injunctive relief.

The Form of Relief

18    Turning then to the form of the injunctions, the first injunction which is sought is an order “restraining the respondent from issuing invoices to the applicant, in respect of its End Users who have purchased a MYOB Exo software product, on any basis other than a 35% Annual Licence Fee margin”. The effect of such an injunction would be to require MYOB to issue invoices on a basis which it bona fide believes to be erroneous, in that MYOB has a bona fide belief as to the legitimacy of the change in ALF margin from 35% to 20%. In my view, that would be an undesirable outcome and MYOB should be at liberty to issue invoices on the basis which it bona fide believes to be correct. Further, I regard such an order as unnecessary, as the second and third orders, to which I will turn in a moment, provide KC with sufficient protection from the consequences of any breach of contract which it may commit by remitting funds to MYOB on the basis of a 35%, rather than a 20%, Exo ALF margin. Accordingly, I decline to grant the first order sought by KC.

19    The second order sought is an order that, until further order, the respondent be “restrained from taking any action for breach of contract under the [BPA] if the applicant pays the respondent 65% of the Annual Licence Fee paid to the applicant by an End User of MYOB’s Exo software”. That injunction is too widely drafted because it would give protection to KC in the event that it committed a breach of the BPA other than the payment of a 35% margin, provided only that KC pays the 35% margin. Accordingly, I would reword the injunction so that the words “if the applicant pays” are deleted, and the words, “by reason only of the applicant paying,” were inserted in its place.

20    The third order sought is an order “restraining the respondent from withholding licence codes for the use of MYOB Exo by any End User which is a customer of the applicant, where the applicant retains 35% of the Annual Licence Fee paid by the End User to the applicant and pays the respondent 65% of the Annual Licence Fee”. Again, that injunction is too widely drawn for the reasons that I have dealt with in relation to order 2. However, I would be prepared to make the injunction on the basis that the words “where the applicant retains” are deleted and replaced by “by reason only of the applicant retaining,” and the word “pays” towards the end of the order should be replaced with “paying”.

21    As to costs, while I have not yet heard the parties on costs, I regard the appropriate costs order on a preliminary basis to be costs in the cause. The applicant has enjoyed substantial success; however, not success in the terms which it sought. In addition, the respondent has acted reasonably, in my view, in opposing the application and my ultimate decision on the grant of the injunctions is a relatively finely balanced one.

22    As neither party wishes to take up the opportunity to address me on costs, the orders which I make then are, upon the applicant, by its counsel, giving the usual undertaking as to damages:

(1)    Until further order, the respondent be restrained from taking any action for breach of contract under the Business Partner Agreement with the applicant dated 15 November 2018 by reason only of the applicant paying the respondent 65% of the Annual Licence Fee paid to the applicant by an End User of MYOB’s Exo software.

(2)    Until further order, the respondent be restrained from withholding licence codes for the use of MYOB Exo by any End User which is a customer of the applicant by reason only of the applicant retaining 35% of the Annual Licence Fee paid by the End User to the applicant and paying the respondent 65% of the Annual Licence Fee.

(3)    The costs of the interlocutory application dated 12 July 2023 be costs in the cause.

Associate:

Dated:    7 August 2023