BETWEEN : AUSDALE ENTERPRISES PTY LTD As Trustee for THE LOVETT FAMILY TRUST (ACN 060 607 650)

Jurisdiction : DISTRICT COURT OF WESTERN AUSTRALIA

Citation : SANDFORD -v- AUSDALE ENTERPRISES PTY LTD as Trustee for THE LOVETT FAMILY TRUST & ANOR [2005] WADC 165

Restraint of trade - Contract to provide services on an exclusive basis for a maximum term of 10 years - Whether restraint reasonable - Turns on own facts

Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 289

Australian Capital Territory v Munday [2000] FCA 653; (2000) 99 FCR 72

Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353

Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628

Mills v Gill (1952) 3 DLR 27

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535

Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126

Peters American Delicacy Co Ltd v Patricia's Chocolates & Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574

Putsman v Taylor [1927] 1 KB 637

Cream v Bushcolt Pty Ltd [2004] WASCA 82; (2004) ATPR 42-004

Peters (WA) Ltd v Petersville Ltd [1999] FCA 1245; (1999) ATPR 41-714

2 McLURE JA: The appellants (defendants) appeal from the decision of Deane DCJ awarding to the respondent (plaintiff) damages for breach of a contractual covenant in restraint of trade and an injunction restraining the appellants from breaching the covenant.

3 The respondent, Geoffrey Sandford, is an optometrist. The first appellant is a company carrying on the business of providing optometrical goods and services in Bunbury. By an agreement in writing made on 3 August 2001 the respondent agreed to provide optometrical services to the first appellant for a term of five years with the respondent having an option to renew the term for a further five years ("the Services Agreement"). The second appellant, Mr Lovett who was the sole director of the first appellant, guaranteed its obligations under the Services Agreement.

4 The Services Agreement expressly provides that the respondent would, save during periods of annual and sick leave, be the sole provider of optometrical services to the first appellant's business ("the exclusive service provisions") which traded under the name Vision Plus Bunbury ("the business").

5 The first appellant breached the Services Agreement by engaging a second optometrist to provide optometrical services to the business. The appellants claimed that the exclusive service provisions of the Services Agreement gave rise to an unreasonable restraint of trade. The learned trial Judge found that the exclusive service provisions were reasonable and enforced the Services Agreement. The appellants rely on one ground of appeal in the following terms:

"1. The trial judge erred in law in holding that the restraint of trade imposed by the [Services Agreement] on the First Appellant ... was reasonable.

Particulars

(a) The trial judge erred in law in finding that a restraint of trade for a period of 10 years was reasonable.

(b) The trial judge erred in law in finding [that]:

(i) the [respondent's] interests, beyond establishing his practice, were entitled to protection by the restraint.

(ii) the contract did not adequately protect [the respondent's] interests without the need for a restraint.

(c) The trial judge erred in law in failing to consider [the first appellant's] position in determining the reasonableness of the restraint."

6 The parties accepted that the restraint of trade doctrine applied in this case. On that question, see Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126; Australian Capital Territory v Munday [2000] FCA 653; (2000) 99 FCR 72 at [27] - [44] per Heerey J.

7 The test to be applied in determining the validity of a restraint of trade was stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 in a passage that has been cited with approval in many cases. Lord Macnaghten said:

"All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."

8 Thus, in order to be enforceable, a restraint must be reasonable. Reasonable means reasonable both in relation to the parties to the contract and in relation to the public interest: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288 at 306 - 307. The appellants did not contend in this case that the restraint injured the public interest. The only issue was whether the restraint was reasonable as between the parties. Accordingly, the onus was on the respondent to prove that the restraint was reasonable: Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628 at 633; Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 377.

9 The doctrine of restraint of trade applies to covenants that operate during the existence of the contract: Amoco. The validity of the restraint must be decided as at the date of the contract. However, the Court may take into account future probabilities which could have been foreseen: Lindner v Murdock at 653. Subsequent developments may be looked at, not to determine whether the agreement was reasonable as between the parties but to determine whether it was a reasonable one to make at the relevant time, having in mind the best estimate they could make for the future: Putsman v Taylor [1927] 1 KB 637 at 643; Mills v Gill (1952) 3 DLR 27 at 31.

10 A restraint is reasonable in relation to the restraining party if it is necessary for the adequate protection of that party and reasonable in relation to the party restrained if it preserves the fullest liberty of action consistent with that protection: Brightman v Lamson Paragon Ltd (1914) 18 CLR 331 at 337 per Isaacs J. Thus, the restriction must not exceed what is reasonably necessary for the protection of the restraining party: Buckley v Tutty at 376. In order to apply the test it is necessary to identify the interest of the party seeking to enforce the restraint. The restrictions must be no more than what was reasonably required to protect the respondent's legitimate interests.

11 Public policy lies at the root of the restraint of trade doctrine. It reflects a balance between the competing public interests in freedom of contract on the one hand and preserving freedom of trade on the other: Peters American Delicacy Co Ltd v Patricia's Chocolates & Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574 at 590 per Dixon J.

12 It is for the Judge to decide as a matter of law whether a restraint is reasonable (Amoco at 305). A decision upon the question of reasonableness depends upon a judgement the reasons for which do not admit of great elaboration (Amoco at 308). It is not uncommon for decision-makers to form different judgements on what is reasonable in the circumstances of a case.

13 The fact that a restraint has been negotiated and agreed to by the contractual parties is not determinative of what is reasonable. However, the background to, and circumstances of, the negotiations leading to a contract are relevant considerations in making a judgement. In particular, that competent parties contract at arms length by reference to their commercial assessments and interests is relevant when forming a judgement about what is reasonable: Amoco at 294 per McTiernan J, at 307 per Walsh J, at 317 per Gibbs J.

14 The Services Agreement provides in its entirety as follows:

"CONTRACT FOR OPTOMETRICAL SERVICES

This contract is made this 3rd day of August 2001

Between GEOFFREY MICHAEL SANDFORD of 8 Cowrie Crescent, Mount Pleasant in the State of Western Australia, optometrist, of the one part ('Geoff');

And

AUSDALE ENTERPRISES PTY LTD ACN 060607650 as Trustee for THE LOVETT FAMILY TRUST Trading as VISION PLUS BUNBURY ('the Company') trading from premises at Princep Street, Bunbury in the said State ('the Practice');

And

DALE LOVETT of Australind in the said State, as GUARANTOR of the obligations of the Company hereunder ('Dale').

The Parties hereto agree to enter into a contract to secure the services of Geoff as sole optometrist for the Practice on the following terms and conditions:

1. Geoff to work 4 days per week from 9/01/2002 except where allocated day falls on a public holiday.

2. No other optometrist to work at the Practice except when Geoff is sick or on holiday.

3. Geoff to have 4 weeks per annum holiday (unpaid and inclusive of sick leave). Geoff shall give Dale at least four weeks' prior notice of intended holiday dates.

4. Geoff to ensure that he is covered by professional indemnity insurance, and to always have a tidy, professional appearance.

5. Geoff to collect all medicare fees, contact lens fees, and half the profit on soft lens sales, where the prescription is provided by him. This is also to apply to repeat purchases. This to apply from the date of signing of this contract.

6. Dale to provide suitable accommodation or to pay for the expenses thereof from the date hereof until 30/6/2003. After this date, all accommodation expenses are Geoff's responsibility.

7. The term of this contract is from the date hereof until the 31/12/2006, with Geoff to have a five (5yr) year option, exercisable no later than three months from the date of expiration of the initial 5 year term of this contract.

8. This Contract shall be binding upon the heirs, executors, administrators, successors in title and assigns to the Practice, Dale and the Company. It shall be a condition of any sale or assignment of the Practice and the Company's business that the services of Geoff shall be retained in accordance with this contract for the duration of the term hereof and any option period."

15 The first appellant admitted it breached the exclusive service provisions of the Services Agreement as a result of engaging a second optometrist, Mr Buckeridge, to provide services to the business in the period 10 March 2003 to 30 November 2003. Mr Buckeridge worked on average three days over a two-week period when the respondent was not at work.

16 The respondent's remuneration under the Services Agreement was solely derived from the optometrical services he provided to, and the sale of soft contact lens he prescribed for, the clients who attended the appellants' business. In particular, the respondent was entitled to Medicare fees payable for carrying out eye tests on clients and half the profit from the sale of soft contact lens he prescribed for clients of the business. The appellants received the profits from the sale of glasses and other goods sold by the business.

17 The evidence established that the respondent worked from the appellants' business premises in Bunbury and that the appellants provided administrative and secretarial services and larger items of optometrical equipment.

18 The first appellant had been in the business of providing optometrical goods and services in Bunbury since around 1993. It had encountered difficulty in obtaining consistent optometrical services for the business. At various times prior to entering into the Services Agreement the respondent had provided locum services to the first appellant.

19 The respondent was convicted of Medicare fraud in February 1995. The trial Judge accepted the respondent's evidence that as a consequence it was more difficult for him to obtain work as an optometrist. The respondent had secure employment in Perth four days per week at the time he was approached by the appellants to provide optometrical services. The trial Judge accepted the respondent's evidence that he would have been loathe to change his existing employment arrangements, particularly as he wanted financial security, without the assurance that his interests would be protected. The trial Judge also found that the respondent would not have left his existing employment in Perth to provide services to the appellants in Bunbury for a term of less than 10 years' duration. Further, the Services Agreement was entered into after Mr Lovett and the respondent were unable to reach a satisfactory agreement regarding a guaranteed minimum number of clients to be serviced by the respondent per day in the business.

20 The evidence established that the respondent lived in Perth with his family and commuted to Bunbury, a driving distance of around two hours, staying overnight in Bunbury one night per week. I infer from cl 6 of the Services Agreement that the respondent's intention to continue living in Perth was known to the appellants.

21 The business moved to new premises in Bunbury in December 2002. The new premises were better positioned for street trade and as a result the business grew quite substantially. Mr Lovett's evidence was that by early 2003 appointments were sometimes booked three weeks ahead. The business traded six days per week (Monday to Saturday). The respondent's evidence, accepted by the trial Judge, was that on the four days he worked, including when he was the sole optometrist, he had surplus capacity in the sense that if clients were available he could carry out more eye-testing on the days he worked in the business. The trial Judge also found that the respondent suffered a loss of income during the period when Mr Buckeridge provided optometrical services to the business. It appears he did so on more favourable terms to the appellants. In particular, Mr Buckeridge was not entitled to any profit from the sale of soft contact lens.

22 The trial Judge relied on a number of factors in concluding that the exclusive service provisions were reasonable. She said that as the Services Agreement did not guarantee a minimum revenue or a minimum number of clients to be seen by the respondent each day or over his four day working week the respondent had "a legitimate interest in ensuring that any contract he entered into would protect his opportunity to maximise his revenue earning capacity during those days on which he did work". She continued:

"This was particularly so as his personal circumstances meant he would be required to incur both travel and accommodation expenses and supply some specialist equipment by reason of travelling to Bunbury in order to provide services to the [appellants'] business."

23 Allied to this were further findings that it was reasonable for the respondent to protect his opportunity to be as fully booked as possible whilst working at the business and that exclusivity was a reasonable means of ensuring that occurred. The trial Judge relied on figures demonstrating a drop in the respondent's income during the breach period as supporting the conclusion that exclusivity was needed to maximise the respondent's opportunity to earn revenue during the four days he worked.

24 The trial Judge also examined the appellants' position. She said (at [35]):

"There is evidence, which I accept, indicating that the [appellants'] business and the demand for optometrical services has grown considerably since Vision Plus Bunbury relocated to new and more visible premises. It would seem to me that this is in large part why the [appellants] claim that the effect of the contract is now preventing expansion of the business which it is said is not reasonable ... This ... is not a case where events which occurred after the relevant date [the date of the contract], for example the growth of the business and demand for services, might assist throwing light on the circumstances existing at the date of the contract."

25 The trial Judge then summarised the grounds for her conclusion that the exclusive service provisions were reasonable. She said (at [37]):

"On the evidence in this case I am satisfied that the [respondent] has established that the restraint is reasonable, in that his professional and financial future in moving to employment with the [appellants] in Bunbury were such that he had a legitimate interest in ensuring that they were protected in the best way possible. Both the exclusivity and the duration of the contract are no more than what was adequate and required to protect those interests."

26 Nothing turns on whether the Services Agreement is a contract for services or a contract of service or whether the respondent technically supplied optometrical services to the first appellant or directly to clients.

27 Under the Services Agreement the appellants secured continuity in the availability and provision of optometrical services to actual and potential clients of the business for five or (if the respondent exercised the option) 10 years. The respondent obtained security of tenure for the equivalent period.

28 The Services Agreement places no obligation on the appellants (or either of them) to pay wages or a fixed fee to the respondent for providing optometrical services to their clients. The respondent only receives remuneration for services actually provided. There is no guarantee of a minimum income to the respondent, whether by way of a guaranteed minimum figure or minimum number of clients. The exclusive service provisions are the means by which the parties protected the respondent's source of income from internal competition.

29 The question is whether the exclusive service provisions go beyond what is reasonably necessary to protect the legitimate interests of the respondent. It is necessary to first identify those interests.

30 The respondent had and continues to have a legitimate interest in generating income for the entire time he is contractually obliged to make himself available to provide optometrical services to the appellants' clients in Bunbury. Moreover, he had and continues to have a legitimate interest in maximising the income he can earn in the period he is obliged to make himself available. These legitimate interests are coextensive with the contractual term, whether it be five or 10 years.

31 The appellants contend that the respondent's only legitimate interest was in "establishing a practice" and there was no evidence of the time it would take to do so. As I understand it, the submission is to the effect that exclusivity is only permissible for the purpose of enabling the respondent to build a personal client base which would then protect the respondent from internal competition provided by other optometrists engaged by the appellants. I do not accept the unstated underlying premise of the submission which is that the identity of an optometrist, like that of a medical or dental service provider, is a determinative or weighty factor in the generation of future business. That premise is contradicted by the evidence. The increase in the volume of the appellants' business resulted from increased exposure to street trade. Further, Mr Buckeridge's engagement had the effect of reducing the respondent's income notwithstanding the respondent was never at any stage working at full capacity. Moreover, the clear suggestion in the conduct of the appellants' case was that they would be able to expand the business if optometrical services could be provided as and when demand arose or reasonably shortly thereafter.

32 I am satisfied that the respondent's legitimate interests are coextensive with the contractual term and any extension thereof and that the reasonableness of the exclusive service provisions is not time dependent. That is, the interests do not vary (reduce) with time. They are constant. The question is whether the exclusive service provisions go beyond what is reasonably necessary to protect those interests for the potential maximum contractual term of 10 years. The background is relevant. First, in light of the trial Judge's findings, a maximum term of 10 years is objectively reasonable. Indeed, there can be no independent challenge to the maximum term of the Services Agreement that is unconnected with the validity of the exclusive service provisions. Secondly, the appellants had been unable to obtain a consistent supply of optometrical services prior to entering into the Services Agreement. Thirdly, the appellants declined to provide to the respondent an income safety net.

33 Against that background the Services Agreement allocated the financial risks to be borne by each of the parties. If demand for services was low, the respondent would suffer financially. If the demand for services came in due course to exceed the respondent's capacity to satisfy it during his four-day working week, the appellants would suffer financially. Of course, the latter eventuality has not come to pass. What happened was that the appellants say they could expand the volume of trade and be financially advantaged if, in addition to the continuity of services which the respondent was obliged to provide under the Services Agreement, they could also offer the services of another optometrist on the days the respondent was not at work. That would enable the appellants to respond to service (and related sales) opportunities that arose in the days when the respondent was absent. This is really an issue of six-day coverage rather than the capacity of a single optometrist to meet the total demand in four days.

34 It is apparent that the choice of the period of coverage (four days per week) was closely related to an assessment of the likely demand for optometrical services in the business which demand directly determines the amount the respondent can earn under the Services Agreement. The exclusive service provisions protect that demand. The evidence establishes that one optometrist providing services four days per week in the business was more than what was required to satisfy the demand at the time the Services Agreement was entered into. It allowed for increased demand. Moreover, the substantial increase in demand for optometrical services resulting from the relocation of the business premises did not exceed the respondent's capacity to meet the demand within the contractual coverage period. In any event, the trial Judge found in effect that the relocation and its effect on trade volume was unforeseeable, a finding that is not challenged. In circumstances where the parties had agreed that the respondent's remuneration for his services be solely and directly determined by demand in the appellants' business and had built in room for significant future growth in demand, the exclusive service provisions constitute, in my assessment, a reasonable restraint of trade.

35 The fact that there would be some difficulties in making a reliable estimation of demand for the maximum term of the Services Agreement does not render the exclusive service provisions unreasonable in circumstances where the first appellant's financial obligations to the respondent are directly related to demand. Moreover, the parties and more particularly the appellants, were in the best position to make a judgement about future demand by reference to the circumstances that prevailed at the relevant time in the light of the trading history of the business as to what was reasonable to protect the interests of both parties.

36 The appellants also contended the trial Judge erred in failing to consider the first appellant's position in determining the reasonableness of the restraint. As the authorities demonstrate, the restraint must be reasonable in relation to the party restrained in the sense that it preserves that party's fullest liberty of action consistent with what is necessary for the adequate protection of the restraining party. It is not an error to focus

on what was reasonably necessary for the protection of the respondent. However, that assessment ordinarily includes consideration of the nature and extent of the impact of the restraint on the party who is restrained. The only relevant matter the appellants contend the trial Judge failed to take into account was the wholly unsustainable claim that the first appellant did not receive any consideration for the restraint. The consideration for the restraint was the respondent's obligation to provide at his financial risk optometrical services at the appellants' business premises four days per week.

37 For these reasons, the exclusive service provisions of the Services Agreement are reasonable restraints of trade. I would dismiss the appeal.

• Legal Principles
• Background facts and findings
• Analysis