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Restraint of trade clause smashed by the Court of Appeal

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By Jack Newton, Law Clerk, MST Lawyers

Bodycorp Repairers, a smash repairer franchise system, has lost an appeal in the Victorian Court of Appeal, after almost thirteen years in court.

This case involved a large number of causes of action alleged against eight defendants. This article is limited to the restraint of trade issue and the termination by Bodycorp of one of its franchise agreements. If you would like more information about this case, please contact us using the information contained at the end of the article.

The facts

In the mid-1990s, Bodycorp Repairers (“Bodycorp”) formed a franchise system of smash repairers in Victoria. In late 1997, Bodycorp entered into an agreement with AAMI, the insurance company, whereby much of Bodycorp’s network of franchisees would be placed on AAMI’s “Recommended Repairer” list and each franchisee would enter into a Recommended Repairer Agreement with AAMI.

There was significant value to being placed on the Recommended Repairer list of a major motor vehicle insurer such as AAMI. It was a sign that the repairers were very competent and undertook high quality work. Importantly, for the Bodycorp franchisees, work from AAMI represented the majority of their business. Similarly, most of AAMI’s work was given to those repairers on the Recommended Repairers list.

The agreement between AAMI and Bodycorp provided for a restraint of trade against the franchises. If the franchisee left the Bodycorp network, AAMI would immediately remove the franchisee from the Recommended Repairer list and would not request the former franchisee to do any work for AAMI for a period of 6 months.

There was a separate franchisee agreement entered into between Bodycorp and each franchisee. Of particular importance to this case, was that the franchise agreement did not provide for any restraint of trade. In other words, each franchisee entered into the franchise agreement on the basis that there would be no restraint of trade when the franchise agreement came to an end.

The Recommended Repairer Agreement between AAMI and each franchisee also contained no restraint of trade. Therefore, each franchisee had not signed any agreement that contained any restraint of trade. The only restraint of trade that existed was in the agreement between AAMI and Bodycorp.

The agreement between AAMI and Bodycorp only operated for a few years. This was because, in summary:

  1. some franchisees left the Bodycorp franchise network;
  2. AAMI did not enforce the restraint of trade against those franchisees and continued to give them work and continued to keep them on the Recommended Repairer list;
  3. Bodycorp was not at all happy about this and sued AAMI (and various other parties) in an attempt to force AAMI to enforce the restraints of trade against the franchisees who had left the Bodycorp network.

Bodycorp also maintained a cause of action against one of its franchisee (“Maisano“). Bodycorp claimed that Maisano had breached the franchise agreement by leaving the franchise network. Maisano, however, claimed that it had terminated the franchise agreement because Bodycorp breached the franchise agreement by granting another franchise within Maisano’s territory. Maisano, therefore, admitted to leaving the franchisee network but argued it was lawful to do so because of Bodycorp’s breach.

The Supreme Court decision

While Bodycorp’s action pleaded numerous causes of action against numerous defendants, as has already been made clear this article will only analyse the restraint of trade issue and franchise agreement breach issue.

Before analysing the judgment, many readers may not be aware of the law’s unusual position in relation to restraints of trade. Clauses that seek to impose a restraint of trade are presumed to be unenforceable, unless the party seeking to enforce the restraint of trade can establish it is reasonable. What is and isn’t reasonable is determined by asking whether the restraint affords nothing more than adequate protection of the interests of the party seeking to enforce the restraint but also must not be injurious to the public.

Turning then to Bodycorp’s claim against AAMI, AAMI admitted it had breached the restraint of trade provisions but AAMI successfully argued that the restraints of trade were unreasonable, and therefore unenforceable. The following factors were taken into account by the Supreme Court:

  • The starting point is that the restraint is not enforceable.
  • Each Bodycorp franchisee had not signed any agreement that included any restraint of trade. The fact that a restraint of trade was then included in Bodycorp’s agreement with AAMI was seen by the court as an attempt by Bodycorp to rectify its earlier failure to include any restraint of trade in the franchise agreements.
  • The restraint would cause significant harm to each franchisee, as AAMI’s work compromised the majority of each franchisee’s business.
  • If the franchise agreement ended because the term ended, the restraint of trade (according to Bodycorp) could still be enforced, even though each franchisee would receive nothing in exchange for it. The court saw this as manifestly unreasonable.
  • At the time the restraint of trade was created in the agreement between Bodycorp and AAMI, many franchisees were already leaving the franchise network, which meant that franchisees were seeking to exercise their freedom to conduct their businesses at the same time as Bodycorp was seeking to interfere with that very freedom.
  • The restraint would prevent franchisees from obtaining Recommended Repairer status, even though they would ordinarily be capable of achieving that status independently of Bodycorp. Furthermore, some franchisees had independently obtained this status before entering into the franchise network.

The court held that, both individually and collectively, these factors illustrated that the restraint of trade was unreasonable. Bodycorp could not and did not discharge its burden to establish the restraints were reasonable. It followed that Bodycorp’s claims against AAMI failed.

Turning then to Bodycorp’s claims against Maisano, and Bodycorp suffered another failure. The court found that, on the evidence, it was quite clear that for some time Bodycorp was seeking to appoint another franchisee and did eventually appoint a new franchisee within Maisano’s territory. There was some dispute as to the boundaries of the territory, largely due to poor drafting of the franchise agreement. However, the boundaries were settled by the court after hearing the evidence, and it was clear that Bodycorp’s newly appointed franchisee fell within the territory.

The court found that it was unequivocal that, in appointing a new franchisee in Maisano’s territory, Bodycorp had conveyed its intention not to abide by the terms of the franchise agreement. The exclusivity of a franchise territory is a fundamental term in any franchise agreement. What made the breach even more serious, was that Maisano had confronted Bodycorp about it, and Bodycorp continued its process of appointing a new franchisee. The court found Maisano was entitled to terminate the contract, and Bodycorp’s claims against it failed.

Bodycorp was ordered to pay the costs of AAMI, Maisano and several other defendants.

The Court of Appeal decision

In a comparatively short judgment, the Court of Appeal upheld the Supreme Court’s judgment and rejected all of Bodycorp’s arguments on appeal.

In respect of the restraint of trade, the Court of Appeal found that the Supreme Court’s analysis of the law and of the facts was without any error. The Court of Appeal also held that because the Supreme Court had held that the factors listed above meant were sufficient individually and collectively to conclude the restraints were unreasonable, Bodycorp could not simply make a couple of arguments about a couple of the factors. To succeed on appeal, Bodycorp would have had to have argued all the factors were wrong.

The Court of Appeal also noted that the arguments made on appeal were very different to the arguments made at trial. Bodycorp was, in effect, criticising the trial judge for failing to assess arguments that were never put to him. Unsurprisingly, the Court of Appeal didn’t pay much attention to this.

Consequences

As has been observed in earlier articles, litigation can be extremely expensive and can take an extensive amount of time. This case could not demonstrate this more clearly.

This case was initiated in the Federal Court of Australia in December 2002 and was transferred to the Supreme Court of Victoria in October 2005. As one Judge observed, in one of many interlocutory judgments, the case had “proceeded at a leisurely place”, which is perhaps being slightly generous.

A different interlocutory judgment also reveals that between 2002 and 8 May 2013, Bodycorp had spent in excess of $2,000,000 in legal costs. Whilst that figure may seem difficult to believe, it becomes even more incredulous when taking into account the fact that these costs only covered the preparation stage and the first two days of what became a 16 day hearing and does not include a later hearing regarding costs of the trial, and does not include any component of the appeal.

Yet again, this case illustrates the importance of taking genuine steps to resolve disputes as early as possible, and highlights the importance of carefully drafting restraint clauses.

 For more information please contact our Franchise Law team or Dispute Resolution & Litigation team by email at franchise@mst.com.au or litigation@mst.com.au or by telephone +61 8540 0200.