Baramon Sales Pty Ltd v Goodman Fielder Mills Limited

REASONS FOR JUDGMENT 1 This is an action to determine the validity of two restrictive covenants. One relates to the use to which the property at 74-76 Sydney Street, Sunshine (described in Certificate of Title Volume 4445 Folio 933) may be put. The other restricts the use of certain equipment that is located on the property. The facts of the case are briefly as follows. In 1921 a flour mill was constructed on the Sunshine land. The land was purchased in 1955 by a company related to the first respondent, Goodman Fielder Mills Limited. The related company operated the mill until 1990. In 1991 the Sunshine land was transferred to Goodman Fielder. That company also owns land at the corner of Arden and Elizabeth Streets, Kensington (described in Certificate of Title Volume 4022 Folio 255 and volume 4015 Folio 948), which is approximately 11 kilometres (or 12.5 kilometres by road) from the Sunshine land. Goodman Fielder decided to restructure its milling operations. The restructure involved the construction of a new mill on the Kensington land, the destruction of the Sunshine mill, and the sale of the Sunshine land. The plan was interrupted when the Sunshine mill was placed on the historic building register. This required Goodman Fielder to preserve the mill in accordance with the Historic Buildings Act 1981 (Vic). Efforts to remove the mill from the register, which included submissions to the Premier of Victoria and the State Minister for Planning, were to no avail. However, on 24 March 1997 Goodman Fielder was able to sell the Sunshine land to the applicant, Baramon Sales Pty Ltd, for $285,000. By special condition 5 of the contract of sale it is provided: "The Vendor and Purchaser agree that the transfer of land to give effect to this contract of sale will contain a restrictive covenant providing that the land cannot, in the future, be used for purposes associated with the milling of flour. The transfer of land referred to above will include a restrictive covenant in the following terms:- 'The transferor hereby covenants with the transferee its heirs, executors, assigns, administrators and transferees, the registered proprietor for the time being of the land that the land will not be used in any way for the operation of a business which involves the milling of flour and that this covenant shall appear on the certificate of title to issue for the land and shall run with the land' " Settlement of the sale was due on 12 June 1997. In the meantime Baramon was given permission to restore the Sunshine mill, apparently for use as a museum. On settlement Goodman Fielder delivered a duly completed transfer of the Sunshine land. The transfer contained the covenant required by special condition 5. For many years it had been the practice of the Office of Titles (now the Land Titles Office) to notify a restrictive convenant as an encumbrance on title, provided the Registrar of Titles was satisfied the covenant was valid. For a history of the practice see the judgment of Sholl J in Re Arcade Hotel Pty Ltd [1962] VR 274. The practice was given legislative recognition with the adoption of s 88 of the Transfer of Land Act in 1954. To be notified on title, a restrictive covenant must identify both the land that takes the benefit and the burden of the restriction: Re Dennerstein [1963] VR 688. The restrictive covenant in the transfer did not satisfy this requirement because it did not identify any dominant land. The Registrar requisitioned Baramon (the power to requisition is found in the Transfer of Land Act 1958 (Vic), s 104) requiring the dominant land to be identified. To satisfy the requisition Goodman Fielder and Baramon agreed to amend the transfer by deleting the existing covenant and substituting the following covenant: "… the transferee with the intent that the benefit of this Covenant shall be attached to and run at law and in equity with the land in Certificates of Title Volume 4022 Folio 255 and Volume 4015 Folio 948 and that the burden of this Covenant shall be annexed to and run at law and in equity with the said land hereby transferred doth hereby for itself and its transferees the registered proprietor or proprietors for the time being covenant with the said Goodman Fielder Mills Ltd formerly Allied Mills Industries Pty Ltd its transferees the registered proprietor or proprietors for the time being will not use the land for the operation of a business which involves the milling of flour and that the same shall be noted and appear on every future Certificate of Title for the said land hereby transferred and every part thereof as an encumbrance affecting the same and shall run with the land." That amendment satisfied the requisition, but by oversight the covenant was not noted on title. This will be remedied if the covenant is valid. 2 Whether the covenant is valid is the issue which brings the parties to court. Baramon proposes to reopen the Sunshine mill. Goodman Fielder informed Baramon that reopening the mill would be in breach of the covenant and threatened action. Baramon responded by commencing this action seeking a declaration that the covenant is invalid for a variety of reasons. To resolve that issue the parties have agreed to the following questions being stated under O 29 of the Federal Court Rules: Q 1: Is special condition 5 of the Contract of Sale dated 24 March 1997 (being the contract referred to in para 21 of the second further amended statement of claim) unenforceable at common law?; Q2: Is the covenant contained in the instrument of transfer delivered pursuant to the said contract unenforceable at common law?; Q3: Is special condition 6.2 of the said contract unenforceable at common law?; Q4: Is the substitute covenant in the said transfer unenforceable at common law?; Q5: Does the substitute covenant, when registered, constitute an enforceable restrictive covenant on the land contained in Certificate of Title Volume 4445 Folio 933 for the benefit of the land contained in Certificate of Title Volume 4022 Folio 255 and Volume 4015 Folio 948? 3 Although the arguments were directed principally towards the validity of the substitute covenant, it is necessary first to consider the effect of special condition 5 because that will have some bearing on the question of validity. The first thing to note about special condition 5 is that it has two aspects. First, the vendor and the purchaser agreed that the transfer would contain "a restrictive convenant providing that the [Sunshine] land cannot, in the future, be used for purposes associated with the milling of flour". Second, there was agreement as to the form of the covenant that would appear in the transfer. But the form of the proposed covenant raises an immediate difficulty. By the proposed covenant it is the transferor who would promise that the Sunshine land "will not be used in any way for the operation of a business which involves the milling of flour". Clearly this must be an error. It is evident that the parties contemplated that it would be the transferee and its heirs etc., that would make the promise. It is permissible to read the clause as it was intended to be written. In both Wilson v Wilson (1854) 5 HL Cas 40; 10 ER 811 and Nittan (UK) Limited v Solent Steel Fabrication Limited [1981] 1 Lloyd's Rep 633 the court corrected a mistaken reference to a party. 4 This brings me to the next point. It is whether there was any obligation upon Baramon to agree to the amendment of the transfer to overcome the deficiency in the drafting of the restrictive covenant. Here I must go back to the contract. We have seen that by special condition 5 the parties agreed to the terms of the restrictive covenant. They also agreed that the covenant would appear on the certificate of title to the Sunshine land. This was not something that was in the control of the parties. Only the Registrar of Titles can enter a memorandum of a covenant on a certificate of title. The capacity of the parties to bring about the intended result was limited to producing a document (in this case an instrument of transfer) in a form which would permit the Registrar to make the appropriate entry. Of course, as in this case, any document produced to the Registrar may not be sufficient for that purpose, though defiencies may be capable of being rectified. That is inherent in the system of registration established by the Transfer of Land Act. 5 Once the problem surfaced, how could it be rectified? The court will sometimes imply a term requiring the contracting parties to facilitate the bringing about of the state of things which the parties contemplated would come into existence. One way of stating the rule is that in a contract each party by implication agrees to do all that is necessary on his part to enable the other party to have the benefit of the contract: Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd (1979) 144 CLR 597, 607. Another way of putting it is that if action is required to bring about that which the parties intended, each party has the duty of complying with the reasonable requests made by the other to see that the intended result does come about: Electronic Industries Limited v David Jones Limited (1954) 91 CLR 288, 297. The application of either of those implied terms would require Baramon to come to some arrangement to overcome the difficulty raised by the Registrar. 6 In this case, however, there is no need to rely upon an implication of the above kind. Special condition 9.8 provides that: "[e]ach party must do, sign, execute and deliver … all deeds, documents, instruments and acts reasonably required of it …. to effectively carry out and give full effect to this Contract and the rights and obligations of the parties under it, both before and after settlement." Thus, although the parties agreed to the form of the covenant to be included in the transfer, it seems to me that the obligation imposed by special condition 5 is subject to the operation of special condition 9.8. Accordingly, if for some reason, as occurred here, the stated objective of having the covenant "appear on the Certificate of Title to issue for the [Sunshine] land" could not be fulfilled, for example, because the parties had not chosen the correct language to bring about that result, they were required to do all that was reasonably required of them to ensure that the covenant did appear on the title. It was reasonable, in the circumstances, for the parties to agree to the amended form the restrictive covenant. Accordingly, the agreement to amend the transfer by substituting covenants was a matter of contractual obligation, and was not nudem pactum as Baramon asserted. The effect of the amendment was to discharge the promise in the original covenant and substitute for that promise, the promise contained in the second covenant. 7 Strictly this makes it unnecessary for me to consider Baramon's attack on the validity of the original covenant. Baramon mounted that attack to meet the possibility that I would find that it was under no obligation to agree to the substitute covenant, that the substitute covenant would then fall away for want of consideration, and that the first covenant would thereby be revived. However, it is convenient to deal with its arguments in case I am wrong in my conclusion that the first covenant has been discharged. 8 Baramon's attack on the first covenant has two limbs. The principle line of attack is to show that the covenant is rendered void by the so-called doctrine of restraint of trade. As part of this attack, Baramon sought to show that the covenant was not a Tulk v Moxhay covenant. In Tulk v Moxhay (1848) 2 Ph 774; 41 ER 1143 it was decided that if certain conditions were satisfied, equity would permit the enforcement of a covenant affecting land against a successor in title to the covenantor. This case is not concerned with the enforcement of a covenant against a successor in title. Here we have the original contracting parties before the court, and if the covenant is valid it could be enforced as a covenant in gross. However, Baramon pressed the Tulk v Moxhay argument because it assumed that if it were not such a covenant it would be more vulnerable to the restraint of trade rules. 9 To establish the existence of a Tulk v Moxhay covenant, three conditions must be satisfied: (a) The covenant must be negative in nature; (b) It must be made for the protection of land retained by the covenantee; and (c) The burden of the covenant must have been intended to run with the covenantor's land. 10 Baramon says that the first covenant is not a Tulk v Moxhay covenant for two reasons, the first being that the covenant was not intended to run with the Sunshine land. This reason can be dismissed without much ado. Once the covenant is read in the manner in which it was intended to be written, it provides that it will bind Baramon's successors, that it will appear as an encumbrance on the certificate of title for the Sunshine land (presumably to notify any prospective purchaser of the existence of the covenant) and finally that "it should run with the [Sunshine] land". I cannot imagine what more is necessary to satisfy the third condition. 11 The second basis for denying to the covenant the character of a Tulk v Moxhay covenant is its failure to identify the land for the benefit of which the covenant was given. It is clear that the basis of a Tulk v Moxhay convenant is that the covenantee has land which will benefit by the covenant, except in the case of a building or development scheme where different considerations apply: Elliston v Reacher [1908] 2 Ch 665. It was once thought that the benefited land must be clearly defined in the covenant, or in the deed in which the convenant is found, or must be capable of ascertainment from the terms of the deed, which may be explained when necessary by extrinsic evidence. This seems to be the position that is still taken in the most recent edition of Preston & Newsom, "Restrictive Covenants Affecting Freehold Land" 1998 9th ed at p. 22-23. On the other hand, there are cases which I should follow where it has been held that extrinsic evidence is admissible to establish both that there is an intention to benefit land kept by the covenantee, and also to identify that land. The cases include Newton Abott Co-Operative Society Limited v Williamson & Treadgold Limited [1952] Ch 286 and Marten v Flight Refuelling Limited [1962] Ch 115. In Australia see Clem Smith Nominees Pty Ltd v Farrelly (1978) 20 SASR 227. 12 There is evidence to show that the parties intended the covenant to benefit the Kensington land. The Kensington land was referred to as the land to be benefited in correspondence between the solicitors, written after the Registrar had delivered her requisition to Baramon. The benefited land is expressly identified in the substitute covenant a covenant which was drafted by Baramon's solicitors. In these circumstances I infer that the parties intended to annex the covenant to the Kensington land at the time of their contract. 13 I now turn to the challenge brought against the substitute covenant. Again there is an issue whether this covenant is a Tulk v Moxhay covenant. Baramon says that the covenant cannot be a Tulk v Moxhay covenant because, although the Kensington land has been identified as the benefited land, it cannot truly be benefited by the covenant because it "is too far away from the burdened land to actually benefit from the covenant". 14 The benefit of a covenant will run with the benefited land if the covenant affects the nature, quality, mode of use or value of that land: P & A Swift Investments v Combined English Stores Group Plc [1989] AC 632, 642. Thus the protected land itself must be affected by the observance or non-observance of the convenant. It is not sufficient if some personal advantage is gained by the owner of the benefited land. 15 Often the benefited land will be close to the burdened land, for otherwise it would not be possible to hold that any benefit can reasonably be regarded as attaching to the benefited land. As Tomlin J said in Kelly v Barrett [1924] 2 Ch 379 at 395: "[I]t is an essential of effectual annexation of the benefit that they should touch or concern the land. It is plain, for example, that the benefit of a right of way over or of a covenant restrictive of the user of land in Clapham cannot be annexed to land, say, at Hampstead, and there may be cases where, either by reason of the situation of the land intended to be burdened, or otherwise, there is a difficulty in determining whether the restriction or easement sought to be imposed touches or concerns the land intended to be benefited." But there can be no hard and fast rule concerning the maximum distance between the benefited and burdened land. The only relevant rule is that the benefited land must be benefited by the covenant. In some cases it will be benefited only if it is adjacent, or reasonably proximate, to the burdened land. In other cases there may be a good deal of travelling time between the two, and nevertheless the benefit can be found to exist. 16 In this case the restrictive covenant is taken to protect trade carried on at the Kensington land. There is no reason why a restrictive convenant should not be taken for the protection of trade carried on upon the benefited land. This issue arose in Newton Abott. The vendor carried on an ironmonger's business on land that she owned. She conveyed a nearby property to a purchaser with a convenant not to carry on the business of an ironmonger on those premises. The validity of the covenant was called into question. One ground relied upon was that there was no dominant tenement. It was argued that the covenant was taken not for the benefit of any land, but for the benefit of the vendor's business. Upjohn J rejected this attack. He said (at 293-294) "In 1923 Mrs. Mardon was carrying on the business of an ironmonger at Devonia. No doubt the covenant was taken for the benefit of that business and to prevent competition therewith, but I see no reason to think, and there is nothing in the conveyance of 1923 which leads me to believe, that that was the sole object of taking the convenant. Mrs. Mardon may well have had it in mind that she might want ultimately to sell her land and the business and the benefit of the covenant in such manner as to annex the benefit of the covenant to Devonia for, by so doing, she would get an enhanced price for the totality of the assets which she was selling; a purchaser would surely pay more for a preperty which would enable him to sue in equity assigns of the defendants' premises taking with notice and to pass on that right, if he so desired, to his successors, than for a property which would only enable him to sue the original covenantor, …. Further, Mrs. Mardon may well have thought that her own business might ultimately be closed down, or the goodwill thereof sold to someone who was going to carry it on on some other premises. She would then be left with Devonia, and Devonia could be sold at an enhanced price to someone intending to carry on the business of an ironmonger, because, if, as part of the sale transaction, he obtained the benefit of the covenant, he could prevent competition from the defendants' premises opposite in that trade." Moreover, if an owner imposes a restriction on use and the restriction is imposed for the purposes of benefiting retained land, the court will usually assume that it is capable of doing so. Of course, the court may take a different view if it is apparent that the covenant was not taken in good faith, or it is clear that the covenant could not be of benefit to the retained land: Marten [1962] Ch 115 at 136. 17 Here evidence was called on the question of benefit. Mr Dudacov, a well known valuer, said that so long as production of flour at the Sunshine land is prevented, the value of the Kensington mill would be increased. He made the point that what is important is the ability of other mills to compete with the Kensington mill, not their proximity to each other. In light of this evidence, which confirms my own view of the matter, it is clear that the retained land is benefited by the covenant. The precise extent of its increased value might not be capable of close analysis, but that is not to the point. On the facts of this case, the distance between the burdened land and the benefited land is irrelevant to the question of benefit. 18 This brings me to the final submission, which deals with both the first covenant and the substitute covenant. The contention is that each restrictive covenant is an unlawful restraint of trade and therefore void. From the earliest of times the common law has regarded covenants in restraint of trade to be contrary to public policy. The rule can be traced back to the Magna Carta of 1225, Cap. 29 of which provides: "No freeman shall be taken, or imprisoned, or be disseised of his freehold, or his liberties, or free customs, or be outlawed, or exiled, or in any otherwise destroyed", and to Dier's Case (1414) 2 Hen V 5 pl 26 where Hull J said in relation to an action for a debt on a bond which had a condition that the defendant refrain from carrying on his trade of a dyer for half a year: "In my opinion, you may demur at law, as the obligation is void, inasmuch as the condition is against the common law, and 'per Dieu' if the plaintiff were here he would go to prison until he should pay a fine to the king." 19 The common law position had been modified by the end of the 19th century. Beginning with the views of Lord Macclesfield in Mitchel v Reynolds (1711) 1 P.Wms 181; 24 ER 347 and ending with the celebrated Nordenfelt's case (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Limited [1894] AC 535) and Herbert Morris Limited v Saxelby [1916] 1 AC 688, two rules relating to restrictive covenants were laid down. To establish those rules the common law had to reconcile two inconsistent public policy demands, which were the product of the laissez faire view that prevailed at the time. One demand was freedom to trade and the other was freedom to contract. The general rule was that all interferences with trade were prima facie contrary to public policy and therefore void. But a restraint could be valid in a particular case if two conditions were satisfied: first that the restraint was reasonable as between the contracting parties; second, that the restraint was not contrary to public policy. The existence of each condition is a question of law for the judge to decide, although the court may be assisted by evidence of ordinary usages of a trade, but not of what in the opinion of the witness is a reasonable covenant: Haynes v Doman [1899] 2 Ch 13. For a time there was some uncertainty as to the burden of proof. The law was settled in Attwood v Lamont [1920] 3 KB 571 where it was stated by Younger LJ (at 587) that it was for the covenantee to show that the restraint goes no further than is reasonably necessary (the first condition), and in North Western Salt Company Ltd v Electrolytic Alkali Company Ltd [1914] AC 461 where Lord Sumner held (at 480) that the burden of proof to show the covenant was contrary to the public interest lay upon the party alleging it (the second condition). 20 The rules that I have just been discussing do not apply to all restraints. Speaking generally, the rules do not apply to a covenant given by a purchaser restraining the use to which the land purchased may be put: Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390; Peters (WA) Ltd v Petersville Ltd (2001) 181 ALR 337, 343. There are at least three possible bases for limiting the application of the restraint of trade rules in such a case. They were discussed by the Full Court in Australian Capital Territory v Munday (2000) 173 ALR 1 in some detail, and I will mention them only briefly. One basis is what has been referred to as the "fettering an existing freedom" test. This view holds that restraint rules only apply to a covenant that restricts an existing freedom, and not when the covenant does not affect an existing right. Although the subject of some criticism, this view appears to have commended itself to the majority in Quadramain. The second rationale is the so called "trading entity" test. According to this view, there are accepted arrangements which fall outside the rules. The sale and lease of land are examples of such arrangements. This was the preferred view of the court in Munday. Finally there is the "sterilisation of capacity" test, which is that if the restriction is directed towards the absorption of the parties' services and not their sterilisation, the rules will not apply. This test was rejected by the High Court in Peters (WA). 21 Whatever be the reason why certain covenants fall outside the scope of the restraint of trade rules, this case is within the area of exclusion. For many years now the authorities have accepted the validity of a covenant which forbids a covenantor from competing with a business conducted on the covenantee's land. In Victoria the cases go back to at least Allen v Lawson [1926] VLR 1, a decision of the Full Court of the Supreme Court. This is hardly the occasion to depart from such a long line of authority. 22 Baramon submitted that this case is distinguishable because, at least in relation to the substitute covenant, the restriction was imposed after it had completed the purchase of the Sunshine land. I have already explained why Baramon was obligated to agree to the substituted covenant. This removes any point of distinction between this and the earlier cases. In any event, the agreement to substitute covenants was so intimately connected with the conveyance that for all practical purposes it could be justified by either the "fettering an existing freedom" test or the "trading entity" test, whichever was the proper test to apply. 23 Baramon argued its case on the assumption that if the first covenant or the second covenant is not a Tulk v Moxhay covenant, its validity would be governed by the ordinary common law rules. There is authority that supports such an approach. The case is McGuigan Investments Pty Ltd v Dalwood Vineyards Pty Ltd [1970] 1 NSWR 686, 692, where Hope J said that "covenants affecting the use of land are subjected to the relevant rules [relating to restraint of trade] where they are covenants in gross." However the distinction between covenants entered into at the time of purchase and other covenants has been criticised in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 by two justices, Walsh J (at 304) with whom McTiernan ACJ agreed. Menzies J (at 293) and Gibbs J (at 313) refused to rule on the point. If the rationale for the inapplicability of the restraint of trade rules to Tulk v Moxhay restrictive covenants is to be found in acceptance of either the "restriction of existing freedom" test or the "trading entity" test, then the distinction must be rejected. However, this is not a matter that must be resolved today. 24 I can now consider the validity of what has been called the equipment clause. The only challenge to this clause is that it is rendered unlawful by the restraint of trade rules. In order to consider whether those rules apply it is necessary to mention the operation of special condition 6.2. This cannot be done in isolation. The clause must be read in conjunction with special condition 6.1. By special condition 6.1 Goodman Fielder was entitled before settlement to remove from the Sunshine mill "any article or item whether a fixture or not which has been used by [Goodman Fielder] in connection with its flour milling activities". Then special condition 6.2 imposed a restriction on the use of the flour milling equipment that Goodman Fielder did not remove pursuant to special condition 6.1. Special condition 6.2 provided that "[Baramon] shall not use the remaining items of flour milling equipment for the purposes of milling flour." The clause went on to provide that if Baramon decided to remove the remaining items of flour milling equipment or to sell the Sunshine land to a third party, Baramon was required to give notice to Goodman Fielder, which would then have the right to take the remaining items of flour milling equipment. 25 In the context in which the restriction is found, it is clear that it only applies to flour milling equipment that has not been removed from the Sunshine mill. This is because the items that are the subject of the restriction are "the remaining items of flour milling equipment" and special condition 6.1 makes clear this is a reference to items that have not already been removed from the Sunshine mill. 26 For the purposes of the argument on validity I will accept that a covenant restraining the use of chattels may be a covenant that is capable of being in restraint of trade if that is the ultimate effect of the covenant: British Motor Trade Association v Gilbert [1951] 2 All ER 641; British Motor Trade Association v Gray [1951] SC 586. Nonetheless, the submission that in this case the equipment covenant is in restraint of trade is not well founded for the simple reason that it does not in the circumstances restrict or hamper Baramon's milling activities. To the extent that it is unable to carry on those activities on the Sunshine land, this is not the result of the equipment clause, but rather the effect of the covenant restricting the use to which the land can be put. The only material restriction that is imposed upon Baramon is that it cannot remove the remaining items of flour milling equipment without first giving Goodman Fielder the opportunity to do so. The imposition of such a condition does not result in a restraint of any trade. 27 I would answer the questions stated as follows: Q1: Is special condition 5 of the Contract of Sale dated 24 March 1997 (being the contract referred to in para 21 of the second further amended statement of claim) unenforceable at common law?; A1: Unnecessary to answer. Q2: Is the covenant contained in the instrument of transfer delivered pursuant to the said contract unenforceable at common law?; A2: Unnecessary to answer. Q3: Is special condition 6.2 of the said contract unenforceable at common law?; A3: No. Q4: Is the substitute covenant in the said transfer unenforceable at common law?; A4: No. Q5: Does the substitute covenant, when registered, constitute an enforceable restrictive covenant on the land contained in Certificate of Title Volume 4445 Folio 933 for the benefit of the land contained in Certificate of Title Volume 4022 Folio 255 and Volume 4015 Folio 948? A5: Yes. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate: Dated: 4 December 2001 Counsel for the Applicant: Mr S. Palmer

Solicitor for the Applicant: The Law Offices of Barry Fried

Solicitor for the Respondent: Blake Dawson Waldron