HEADNOTE
[This headnote is not to be read as part of the judgment]
The Appellant, DXC Eclipse Pty Ltd (DXC Eclipse), is a Microsoft business software solutions company. It acquired another software solutions business called Sable37 by way of a Securities Purchase Agreement (SPA) entered into on 4 April 2018 (the Completion Date) with a number of "sellers". Those "sellers" included the First Respondent, Mr Wildsmith, and the Second Respondent, On-Key Consulting Pty Ltd (OKC).
At the time the SPA was entered into, Mr Wildsmith was the "Global Managing Director" of Sable37 and the owner and controller of OKC. The terms of the SPA required that Mr Wildsmith serve as DXC Eclipse's "ANZ Director - Microsoft" for at least one year after the acquisition. Mr Wildsmith in fact stayed longer but resigned from this position in July 2021. Mr Wildsmith was also subject to additional restraints and obligations contained in his Employment Contract.
Prior to its acquisition of Sable37, DXC Eclipse specialised in the supply of a product called "NAV" or "Dynamics NAV". Meanwhile Sable37 specialised in the supply of a more advanced Microsoft product called "AX" or "Dynamics AX", alongside another software called "CRM" or "Dynamics Customer Relations Management".
As part of its "cloud-based strategy", Microsoft later rebranded AX as "Dynamics Finance and Operations" (F&O), CRM as "Dynamics 365 Customer Engagement" (CE) and NAV as "Microsoft Dynamics 365 Business Central" (BC). At the time of the acquisition, Sable37 specialised in the supply of F&O alongside its previous offering. After the acquisition, DXC Eclipse continued to supply solutions based on F&O. Neither Sable37 nor DXC Eclipse ever supplied solutions based on BC.
On 21 December 2021, Mr Wildsmith incorporated a new software solutions venture called Will Thirty Three Pty Ltd (Will Thirty Three). The majority of the shares in Will Thirty Three are held by OKC. Will Thirty Three's business model involved the supply of BC, not F&O, AX or CRM. On 23 February 2022, Mr Wildsmith was appointed to the board of Sentient Dynamics Pty Ltd (Sentient). Mr Wildsmith envisaged that Will Thirty Three would team with Sentient who could customise and supplement the solutions based on BC being offered by Will Thirty Three using another Microsoft product called "Power Platform".
The Appellant alleged that the Respondents' new venture was in breach of non-competition and non-solicitation restraints contained in the SPA. The non-competition restraint in cl 16.1(c) of the SPA provided that sellers could not in any capacity operate a "Competing Business" during the "Restraint Period" in the "Restraint Area". The term "Competing Business" was defined in cl 16.1(a)(b) as "any business or operation competitive with the Business". "Business" was defined in cl 1.1 as:
"the business of the Sable37 Group as a whole as at the Completion Date, including but not limited to:
(a) consulting, development, software, licensing, management, support and training, based around information products and services based upon Microsoft Dynamics 365 technologies (and future, successor or derivative Microsoft Dynamics 365 products, services and technologies); and
(b) consulting, development, software, licensing, management, support and training, based around information products and services based upon the "Homebuilder" solution (and future, successor or derivative products, services and technologies focussed on the home building market)."
The injunctive relief sought by the Appellants in respect of the non-competition restraint was for the maximum possible "Restraint Period" of seven years from the Completion Date and an extremely broad "Restraint Area".
On appeal, the Appellant argued that:
1. the primary judge erred in construing the non-competition restraint such that the Respondents' conduct was not in breach of the SPA either:
(a) directly, because a business based on BC was a "Business" for the purposes of cl 1.1 of the SPA (the direct application issue); or
(b) indirectly, because a business based on BC was competitive with a business based on F&O (the indirect application issue);
1. the primary judge erred in holding that the non-competition restraint (insofar as it restrained the Respondents conduct in relation to Microsoft's supply to Will Thirty Three) was not reasonable (the reasonableness issue); and
2. as a consequence of the other grounds of appeal, the primary judge erred in not granting the injunctive relief sought (the relief issue).
In their Notice of Contention, the Respondents submitted that the primary judge ought to have found that the non-competition restraint was also unreasonable in duration, not only in scope (the duration issue).
The Court held (Bell CJ, Brereton JA and Simpson AJA agreeing), dismissing the appeal, that:
1. The appeal should be determined on the basis that it was fought at first instance, namely that DXC Eclipse bore the onus, pursuant to s 4(1) of the Restraints of Trade Act 1976 (NSW), of establishing the reasonableness of the restraints which it sought to enforce: [60]-[62] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Idameneo (No 123) Pty Ltd v Angel-Honnibal [2002] NSWSC 1214; Sidameneo (No 456) Pty Ltd v Alexander [2011] NSWCA 418; Water Board v Moustakas (1988) 180 CLR 491; Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; and Belflora Pty Ltd v Vinflora Pty Ltd (2021) 106 NSWLR 67, considered.
As to the direct application issue
1. The primary judge was correct to find that the Respondents were not in breach of the non-competition restraint on the basis that BC was not a "future, successor or derivative" product of the Microsoft Dynamics 365 products used in the business of Sable37 as at the Completion Date within the meaning of "Business" in cl 1.1 of the SPA: [111] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
2. While, unlike the words "successor" or "derivative", the word "future" did not relate back to a product used by Sable37 as at the Completion Date, it could be construed as referring to "successor" or "derivative" products which may emerge in the future: [108] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
3. This construction, although containing some element of redundancy, gave meaning to all the parenthetical words in the definition of "Business" in cl 1.1 of the SPA without requiring the reading out of the word "future". It also recognised that a business may include an element of potentiality, gave effect to the commercial need to be able to identify what comprised the business as at the Completion Date and did not create ambiguity elsewhere in the SPA: [109] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Fitzgerald v Masters (1956) 95 CLR 420, referred to.
1. In construing cl 1.1 of the SPA, the primary judge was correct not to have reference to evidence of the parties' drafting negotiations. The negotiations did not disclose the reasons for the drafting changes being made such that there was "mutual concurrence": [110] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Codelfa Constructions Pty Ltd v State Rail Authority (1982) 149 CLR 337 and Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd (2017) 94 NSWLR 108, applied.
As to the indirect application issue
1. Although his Honour used the word "will" rather than "might" in outlining the test for competition, the primary judge was correct not to be satisfied that Will Thirty Three "might pose a real commercial threat" to or "compete seriously" with DXC Eclipse such that it was competitive with the "Business", thereby bringing the Respondents in breach of the non-competition restraint: [144] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Veda Advantage (Australia) Pty Ltd v De Beer [2016] NSWSC 37; News Life Media v Janeke [2016] NSWSC 1835; and Employsure Ltd v McMurchy [2021] NSWSC 1179, applied.
1. Any competition between BC and F&O in the "grey area" identified did not meet the threshold for the existence of competition. There was insufficient evidence that solutions based on BC were substitutable for those based on either F&O or AX which were supplied by Sable37 as at the Completion Date. To the extent that there was evidence of substitutability between F&O and BC, it was only when BC was the subject of add-ons supplied by Sentient using Power Platform: [137]-[142] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
As to the reasonableness issue
1. Where the level of competition between a vendor and a purchaser of a business is slight, the greater the nature or extent of a non-competition restraint, the less it is likely to be reasonable. On this basis, the primary judge was correct to hold that the non-competition restraint was unreasonable in scope: [136] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
2. The primary judge correctly found that there was no suggestion that Microsoft's dealings with Will Thirty Three would have any effect on Microsoft's relationship with DXC Eclipse such that the injunctive relief sought in relation to the supplier non-solicitation restraint was not reasonably necessary to protect the goodwill purchased when DXC Eclipse acquired Sable37: [146]-[150] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
As to the duration issue
1. The primary judge ought to have found that the non-competition restraint was also unreasonable in duration. Although courts have recognised the importance of holding parties to their bargains, the Acknowledgement in cl 16.4 of the SPA as to the reasonableness of the restraints could not support a determination that the non-competition restraint was reasonable in duration: [154]-[156] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260, North Western Salt Co Ltd v Electrolytic Co Ltd (1914) AC 461; Belflora Pty Ltd v Vinflora Pty Ltd (2021) 106 NSWLR 67, Woolworths v Olson [2004] NSWCA 372, referred to.
1. The Appellant failed to demonstrate that a restraint period of seven years was necessary to prevent the goodwill the Appellant acquired from being subtracted from in circumstances where, by the time of judgment, the Appellant had the benefit of four and a half years without competition from Mr Wildsmith or any company associated with him. Evidence as to the time period the Appellant required to recoup its full investment was not to the point: [157]-[158] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Sear v Invocare Australia Pty Ltd [2007] WASC 30, referred to.
As to the relief issue
1. Even if the primary judge had erred with respect to either the breach or the reasonableness issue, the Court's discretion on a rehearing pursuant to s 75A of the Supreme Court Act 1970 (NSW) would not have been exercised favourably to the Appellant to grant the injunctive relief sought: [150], [164] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
2. While the reasonableness of the restraints was to be assessed at the time the SPA was entered into, the discretion whether to enforce the restraints could be informed by considerations at the time enforcement was sought. The fact that Mr Wildsmith, pursuant to his Employment Contract, was only obliged to remain with DXC Eclipse for 12 months provided some indication as to how long the Appellant considered was necessary to realise the goodwill it had acquired. The Appellant's goodwill was thus enhanced by the fact that Mr Wildsmith remained with DXC Eclipse for more than three times as long as he was contractually obliged to: [162]-[163] (Bell CJ), [166] (Brereton JA), [167] (Simpson AJA).
Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852; Isaac v Dargan Financial Pty Ltd (2018) 98 NSWLR 343; and Veda Advantage (Australia) Pty Ltd v De Beer [2016] NSWSC 37, referred to.