Geraghty v Minter

High Court of Australia|1979-07-01|Before: Aickin JJ

High Court of Australia Barwick C.J. Gibbs, Stephen, Mason and Aickin JJ. Geraghty v Minter [1979] HCA 42

My brother Mason, in the reasons for judgment which he has prepared in this appeal, sets out the terms of cl. 21 of the partnership arrangements between the parties, which clause has been held to be valid by the Supreme Court of Queensland, both at first instance and on appeal. My brother also recites all the circumstances of the case relevant to the resolution of this appeal. I have no need to set out the terms of the restrictive clause or to supplement what my brother has written as to those facts and circumstances.

Whether or not the clause is no more than a reasonable restraint of trade raises a familiar question. The principles by the employment of which the validity or otherwise of the clause is to be determined are well known. So far as the present case is concerned, the question is: did the clause provide at the time it was given no more than reasonable protection of the interest of those in whose favour it was entered into, bearing in mind its possible operation according to its terms properly construed?

Treating each husband and wife as together one party, the parties were unequal partners sharing assets and profits in the ratio of sixty to forty. The partnership was terminable by either party at short notice and, in any case, instanter on a notice given in due time pursuant to cl. 3 which my brother Mason has set out in full in his reasons. The partnership arrangements provided that, on the termination of the partnership, the assets of the partnership should be realized and appropriate distribution made of the proceeds. But the partnership arrangements provided that, on termination of the partnership for any reason, the firm name should remain the sole property of the major partner. Thus, on the termination of the partnership, the assets of the partnership, including the goodwill (which could not include the use of the name of the business) would be realized and the net proceeds distributed ratably to the partners, according to their respective interests.

The benefit of the restrictive clause in thie case clearly enough was not personal to the majority partner. The benefit of the clause was therefore assignable along with the goodwill: Jacoby v. Whitmore [1] , per Brett M.R. Indeed, it formed part of the goodwill and might be expected to increase its worth. Though given to the major partner, it enured for the benefit of the partnership and not for that of the covenantee: see Halsbury's Laws of England, 3rd ed., vol. 38, p. 37, and the cases cited in footnote (t).

The promisor therefore would, on the realization of the assets, including the goodwill, be entitled to receive his share of the added value which the covenant might give to the goodwill. Of course, in this case, the exclusion of the use of the firm name from the goodwill might materially affect that value.

I ought to say at the outset that, with due respect, I am unable to agree with any of the reasons given by the members of the Full Court of the Supreme Court of Queensland for upholding the validity of the clause. Undoubtedly, the notice for which cl. 3 provides could be given if the respondent had breached the terms of the partnership or been guilty of a criminal offence. But the occurrence of any of the various matters listed in cl. 17 does not affect an automatic termination of the partnership: the termination depends upon the will of the party who has not committed or suffered one of the acts or events listed in the clause. The termination of the partnership is then a matter of that partner's choice. The partnership, in any case, was terminable at will on short notice. It seems to me that, in the circumstances, the reason for the termination of the partnership could not be a determining factor in deciding the validity of the clause.

If the clause were unreasonable in any of the circumstances in which according to its terms properly construed it could operate, it could not be supported in my opinion, by ignoring or treating as outside the contemplation of the parties an occasion or event which fairly fell within the terms of the clause because it was an unlikely possibility. I can see no reason why other than full effect should be given to all the possibilities which fall within the terms in which the parties have expressed their agreement. But, of course, when construing such a clause, it may be possible to hold that some unlikely event, not thought to be in contemplation by the use of the language to be construed, was not meant to be included therein.

Nor could the clause, if invalid, in my opinion, in this case be saved by any manner of severance. It operated, in my opinion, upon a termination or dissolution of the partnership however brought about.

I have noted above that the validity of the clause must be determined as at the time of its making, bearing in mind all the possibilities which its terms embraced. I lay emphasis on this aspect of the matter because of what occurred after the termination of the partnership.

The parties subsequently entered into a contract under which the majority partner acquired all the assets of the partnership with the exception of a motor car. The partners purported to exclude from the sale of these assets the goodwill of the business. Clause 5 of that contract is set out in my brother's reasons.

I find it extremely difficult to understand what the parties thought they were achieving by excluding the goodwill from this transaction. The right to use the firm name clearly vested in the majority partner. It was agreed that the exclusion of the goodwill from the transaction did not impair the restrictive clause. The exclusion of goodwill from the sale of the assets of the partnership could not result in the former minority partner being able to use the firm name or to carry on the partnership business.

In any case, goodwill is not something which can be conveyed or held in gross: it is something which attaches to a business. It cannot be dealt with separately from the business with which it is associated: see, e.g. Inland Revenue Commissioners v. Muller & Co.'s Margarine Ltd. [2] , per Lord Macnaghten:

For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Goodwill in itself is indivisible, though its value, when realized, may be shared in proportions. 1. [1901] A.C. 217, at p. 224.

Thus, whatever the parties thought they were achieving by cl. 5 of the subsequent contract of sale of the assets of the partnership, the terms of the sale did not give to the appellants the right either to use the firm name or to carry on the firm's business: nor, for that matter, to carry on any business.

Further, apart from these considerations, the deed and its terms can, in my opinion, have no relevance to the question of the validity of the restrictive clause. When it was given, it enured for the benefit of the partnership and, as I have said, might have been realized as an entirety along with the business upon a termination or dissolution of the partnership.

It seems to me therefore that the validity of the restrictive covenant cannot be approached by treating one of the partners as having only a limited interest in the goodwill to protect. The majority partner in this case had the right to protect the whole of the goodwill. Of course, on its realization he could obtain only his share of its value: but it would be the value of the whole goodwill which would be divisible on realization.

On the footing that the majority partner as the covenantee was entitled to protect the whole goodwill, cl. 21 is not, in my opinion, an unreasonable protection of that goodwill. It is limited in time and space. Indeed, no suggestion was made during argument, having regard to the nature of the business of the partnership, that it was to operate for an unreasonable length of time or over too great an area.

The question for decision on this appeal is whether a covenant in restraint of trade contained in a deed of partnership entered into between the appellants and the respondents is reasonable with reference to the interest of the parties. If so, it will be valid, since it is not suggested that the covenant is in any way injurious to the public.

The respondents had since 1969 carried on business as insurance loss adjusters from an office in Brisbane under the name of "J. B. Minter & Co." (J. B. Minter being one of the respondents) and some of their business activities took place in and around the Gold Coast. In 1973 the male appellant suggested to the respondents that they should open a branch office at the Gold Coast and appoint him to conduct its business. As a result of this suggestion, the respondents took the male appellant into their employment in November 1973 with the intention of giving him some instruction in the work he would be required to perform, and in January 1974 the appellants and the respondents commenced business in partnership in premises at Mermaid Beach on the Gold Coast pursuant to an oral agreement whose terms were later incorporated in the deed.

On about 10th March 1974 the parties entered into the deed of partnership. The deed stated that the partnership business "shall be that of insurance loss adjusting investigations and allied business activities" (cl. 1), and provided that the parties should carry on business as aforesaid as partners on and after 1st January 1974 (cl. 2). Any party was entitled to determine the partnership by giving not less than fourteen days' notice in writing and "at the expiration of such period of notice the partnership shall be determined" (cl. 3). The partnership was to be carried on under the name of "J. B. Minter & Co. Gold Coast", and in the event of a determination of the partnership the firm name was to remain the sole property of and be available for the sole use of the respondents (cl. 4). The profits and losses were to be shared as to thirty per cent to each of the two respondents and as to twenty per cent to each of the two appellants (cl. 12). Should any party commit a breach of a provision of the partnership agreement, or commit any act of bankruptcy, or be convicted of any criminal offence, or become unable for any cause to attend to the partnership business for a period of not less than three months, or do or suffer any act which would be a ground for the dissolution of the partnership by the court, the other parties might, within fourteen days after becoming aware thereof, by notice in writing, determine the partnership (cl. 17). On the determination of the partnership the assets were to be sold and the balance, if any, of the proceeds was to be divided between the partners in the manner in which they shared profits (cl. 19). The restraint now in question was imposed by cl. 21, which was in the following terms:

Should the third party or the fourth party retire from this partnership or should their his or her share of the partnership be acquired by any other person or should their interest in the partnership be determined or should the partnership business be ceased or terminated for any reason whatsoever then and in every such case the third party and the fourth party and each of them shall not exercise carry on or be in any manner whatsoever either directly or indirectly concerned or interested by himself or herself or in partnership with or as manager servant or agent for any other person, persons, company, corporation engaging in the trade or business of a similar nature within a radius of twenty (20) miles by the nearest practicable route by road from the corner of Sunbrite Avenue and Gold Coast Highway, Mermaid Beach aforesaid for a period of three (3) years from the date of retirement acquisition termination ceasation [sic] or as the case may be. The third and fourth parties were the appellants.

On 10th October 1977 the respondents gave notice, under cl. 3, dissolving the partnership as from 24th October 1977. On the latter date, the parties entered into an agreement whereby, for a consideration, the appellants assigned all their interest in the property of the partnership (except a motor vehicle) to the respondents. The agreement contained the following provision:

The parties hereto expressly agree that the goodwill of the said partnership is hereby reserved and excluded from this sale and purchase. The said parties hereto further expressly agree that they each retain as and for their own property their respective interests in the goodwill of the said dissolved partnership. Without the assignors admitting the validity or enforceability of Clause 21 of the Deed of Partnership nothing contained in this agreement shall derogate from the provisions of that clause.

In November 1977 the appellants commenced to carry on business as insurance loss adjusters at Burleigh Heads on the Gold Coast about four miles from Mermaid Beach. The respondents thereupon sought and obtained an injunction to restrain the appellants from committing any breach of the covenant contained in cl. 21.

It is well settled that "a restraint will not be enforceable, unless it affords no more than adequate protection to the interests of the covenantee in respect of which he is entitled to be protected" (Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty. Ltd. [3] ; and see pp. 315-316). The questions that arise in the present case are whether the respondents had an interest that they were entitled to protect and, if so, whether the restriction imposed by cl. 21 exceeded what was reasonably necessary to protect that interest. At the time when the deed was executed, the parties had been carrying on in partnership the business of insurance loss adjusters which the respondents had commenced and established. The evidence discloses that an insurance loss adjuster obtains most of his work from insurance companies; he thus has a comparatively small number of clients, each one of whom is therefore likely to be valuable. It is apparent that such a business will depend to a considerable extent - possibly to a large extent - on the personal relationship that exists between those conducting the business on the one hand and those managing the affairs of the insurance companies on the other. When the appellants were taken into the respondents' business, and given the conduct of the office on the Gold Coast, they were placed in a position that enabled them to form their own associations with the members of the staffs of the insurance companies who were responsible for giving the instructions that led to business for the loss adjusters. It was likely that any associations formed in these circumstances would be of great value to the appellants if they chose to set up a competing business as insurance loss adjusters on the Gold Coast. If the appellants derived an advantage in that way, it would be to the disadvantage of the respondents' business. In these circumstances, if the appellants had been employed by the respondents as servants, and not taken as partners, there can be no doubt that the respondents would have had an interest which they were entitled to protect by an appropriate covenant preventing the appellants from competing with them. The respondents would have been entitled to protect their business and the goodwill attached to it, and for that purpose to prevent the appellants from misusing their acquaintance with the respondents' clients and taking advantage of the respondents' trade connexions. A covenant such as cl. 21 would in those circumstances have been upheld on the authority of a line of cases which includes Fitch v. Dewes [5] and Scorer v. Seymour Jones [6] .

(1973) 133 C.L.R. 288, at p. 306. 2. [1921] 2 A.C. 158. 3. [1966] 1 W.L.R. 1419; [1966] 3 All E.R. 347.

The fact that the appellants were admitted as partners, rather than merely employed, cannot in itself mean that the respondents have any less right to protect their interest in the business. The courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between employer and employee than of similar covenants between vendor and purchaser: see Halsbury's Laws of England, 3rd ed., vol. 38, par. 26, and Lindley on Partnership, 13th ed. (1971), p. 458. Jenkins v. Reid [7] and Craig v. Cole [8] may possibly be regarded as providing some support for the view that the considerations which apply in determining the validity of covenants in restraint of trade between master and servant are also applicable in some cases of partnership, whereas Whitehill v. Bradford [9] appears to be authority for a rather more liberal approach in partnership cases. It is probably right to regard partnership covenants as sui generis (see Lindley , op. cit., p. 459) and to treat some cases where there is in fact a sale of goodwill as different from those in which an employee is taken into partnership. However, in no circumstances can there be any reason for regarding covenants made between partners more strictly than those made between employers and employees.

[1948] 1 All E.R. 471, at pp. 477-479. 2. [1964] W.A.R. 257, at p. 261. 3. [1952] Ch. 236, at pp. 245-246.

In my opinion, when the appellants became partners, with a forty per cent share in the business, the respondents did not cease to have an interest in the business which they were entitled to protect by a covenant framed in appropriate terms. The respondents retained a substantial interest in the goodwill, and they were entitled to protect that interest. Viewing the matter more broadly, the respondents retained an interest in the business which they had built up, and when they took in partners they were entitled to protect themselves against the possibility that the newcomers might use to their own advantage the trade connexions which were vital to the success of that business.

The question that then arises is whether the covenant imposed by cl. 21 provided more than adequate protection for the interest of the respondents. It was not submitted by the appellants in argument before us that either the area within which the restraint was to operate or the time for which it was to endure was unreasonably wide. It was, however submitted that the business in relation to which the restraint operates was so widely described as to make the restraint unreasonable. Clause 21 prevents the respondents from carrying on or being concerned or interested in "the trade or business of a similar nature". These words can only mean "a trade or business of a nature similar to that carried on by the partnership". The business of the partnership is described in the deed as "that of insurance loss adjusting investigations and allied business activities". The submission on behalf of the appellants was that the mention of "allied business activities" gave the clause an unreasonable width. The evidence shows that the business in fact carried on by the partnership was that of insurance loss adjusters, and there is nothing to suggest that any "allied business activities" were carried on. Having regard to the nature of the business of insurance loss adjusting, it is difficult to suggest any other kind of business which might fairly be described as an allied business, within the meaning of the deed. In my opinion, the deed, on its proper construction, did no more than prevent the appellants from carrying on a business of the same character as that carried on by the partnership. In this regard, therefore, it is impossible to hold that the provisions of cl. 21 are too wide.

Of course, the clause forbade the appellants to carry on the business within the area and for the period specified, notwithstanding that they had a forty per cent interest in the goodwill of the business of the partnership. However, once it is decided that the respondents were entitled to protect their interest in the business, a covenant forbidding the appellants from engaging in a business of the same character within a reasonable area and for a reasonable time cannot be said to afford more than adequate protection to that interest, because it is not possible to devise any covenant which would be less onerous and at the same time would protect the respondent's trade connexion. Obviously it was not practicable to put a proportionate limit on the extent to which the appellants could engage in a like business. Nor did cl. 21 operate unfairly against the appellants. The business had been that of the respondents, and the deed of partnership recognized the intention of the parties that the name of the business should be available for the exclusive benefit of the respondents. If the appellants' share of the goodwill had any value, they were entitled to receive the benefit of it when the proceeds of realization were divided under cl. 19. A covenant such as cl. 21 provided the only practicable means of preventing the appellants from appropriating to themselves the business connexion that the respondents were entitled to protect, and such a covenant was not unjust or unreasonable so far as the appellants were concerned.

Considerable reliance was placed by the appellants on the provisions of cl. 17. It was pointed out that, under that clause, the partnership might be determined because of some improper, indeed criminal, act of the respondents, and it was said that it was unreasonable that, in those circumstances, the appellants, being the innocent party, and exercising the right to determine the partnership because of the respondents' default, should be prevented from carrying on a similar business of their own. It should, however, be observed that cl. 17 does not materially alter the situation already brought about by cl. 3. Under that clause, the partnership may be determined by a party who has defaulted in his obligations as well as by a party whose conduct has been entirely above reproach. The only change effected by the inclusion of cl. 17 is that when one party is in default the others may determine the partnership immediately upon notice, rather than on fourteen days' notice. The answer to the appellants' arguments that the respondents may be in default under the deed and yet enforce the restraint lies in the principles of equity. He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade "cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future": Measures Brothers Ltd. v. Measures [10] , cited in Kaufman v. McGillicuddy [11] . The same principle was recently applied by the Court of Appeal in Shell U.K. Ltd. v. Lostock Garage Ltd. [12] .

[1910] 2 Ch. 248, at p. 254. 2. (1914) 19 C.L.R. 1, at pp. 10-11. 3. [1976] 1 W.L.R. 1187, at pp. 1199, 1202, 1206; [1979] 1 All E.R., at pp. 490, 492, 496.

In my opinion, the provisions of the agreement made on the determiantion of the partnership on 24th October 1977 are irrelevant to the question whether the restraint imposed by cl. 21 was reasonable. The validity of the covenant is to be decided at the time the agreement was made: see Lindner v. Murdock's Garage [13] and Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty. Ltd. [14] . In Shell U.K. Ltd. v. Lostock Garage Ltd., Lord Denning M.R. [15] recognized that this is the general rule, but suggested an exception; he said that the court should not enforce a contract in restraint of trade if circumstances afterwards arise in which it would be unreasonable or unfair to enforce it. The other members of the Court disagreed [16] . Even if the principle suggested by Lord Denning M.R. were accepted, cl. 5 of the agreement of 24th October 1977 would not assist the appellants. It was doubtful whether the appellants' share of the goodwill was of much value, having regard to the fact that the respondents had the exclusive right to use the firm name, and the reservation of the goodwill from the sale of the assets did not make it unreasonable or unfair to enforce the restraint. So far as is now relevant, the sole purpose of cl. 5 was to ensure that the agreement made on 24th October 1977 would not prejudice the rights of the parties in relation to cl. 21. The clause did no more than preserve the status quo. It did not strengthen the position of the appellants.

(1950) 83 C.L.R. 628, at p. 653. 2. (1973) 133 C.L.R., at p. 318. 3. [1976] 1 W.L.R., at pp. 1197-1198. 4. [1976] 1 W.L.R., at pp. 1201-1202, 1203; [1977] 1 All E.R., at pp. 492-493, 494.

The restraint imposed by cl. 21 was, in my opinion, reasonable and valid. I would accordingly dismiss the appeal.

The Minters, husband and wife, carried on business as insurance loss assessors in Queensland under the name of "J. B. Minter & Co." from 1969 to 1974. Towards the end of 1973 they employed Mr. B. F. Geraghty in their business and opened a branch office on the Gold Coast. Mr. Geraghty was put in charge of business conducted from that office. Then, in 1974, the Minters entered into partnership with the Geraghtys, husband and wife, as insurance loss assessors under the old name of J. B. Minter & Co. In 1977 the Minters validly determined that partnership by notice to the Geraghtys. No sooner had the partnership been determined than the Geraghtys began to carry on business as insurance loss assessors a few miles away from the old partnership premises. In doing so they were in breach of a restraint of trade clause contained in the partnership deed.

The Minters promptly sought and obtained injunctive relief in the Supreme Court of Queensland; the Geraghtys appealed without success to the Full Court and they now appeal to this Court.

The Geraghtys tendered no evidence at first instance. Instead, they were sought to rely, as they have on appeal, upon the invalidity of the restraint clause as being in unreasonable restraint of trade. That clause is not now suggested to be unreasonable either in its duration or in the geographical area of restraint which it imposes. It is, rather, its unilateral operation, the burden of the clause being imposed only upon the Geraghtys, and the circumstances in which it may come into operation, that are said to produce, in combination, vitiating unreasonableness.

The point is made in this way. The partnership was for no fixed term. By cl. 3 of the deed any partner might determine it by fourteen days' written notice to the others. Clause 17 also provided for termination by notice in writing to a "party in default" given by the others within fourteen days after becoming aware of the happening of any one of various specified events involving the conduct of solvency of the "party in default". The restraint clause is not only unilateral in the sense which I have indicated above: it also is so worded as to apply upon termination of the partnership for any reason, including termination (whether by the Minters or by the Geraghtys) under cl. 17.

So say, the Geraghtys, the restraint clause might come into operation even although the partnership came to an end not merely through no fault of theirs but due to some positive fault of the Minters, perhaps even involving fraud. A restraint clause which, in conjunction with the rest of the deed, is capable of such an operation cannot be supported as a no more than reasonable restraint of trade. On the contrary it is unconscionable and opposed to public policy.

That this submission is made to turn upon the power of termination conferred by cl. 17 is revealing. In a partnership which is in any event determinable at any time under cl. 3 without cause on fourteen days' notice, the additional qualified power of instant termination which cl. 17 confers is of negligible significance in defining the rights of partners. Were there no cl. 17 any partner, however base his motives and blameworthy his conduct, could still determine the partnership on fourteen days' notice under cl. 3 and thereby bring the restraint clause into operation. The appellants' submission cannot, then, rest upon the presence of cl. 17: it must be equally applicable wherever such a "unilateral" restraint clause appears in any partnership either at will or which is terminable by notice.

The reason why all such restraint clauses, otherwise perfectly valid as reasonable restraints, are not rendered invalid, as the appellants' submission would have it, is because the submission mistakes the criteria of invalidity of covenants in restraint of trade: it concentrates upon the circumstances in which the restraint may come into operation rather than upon the reasonableness of the restraint itself. It seeks alleged unreasonableness not so much in the terms of the restraint clause but rather in what is seen as lack of favours in other provisions of the partnership deed. If there existed some general equity to reform unreasonable contracts according to abstract standards of fairness, courts might busy themselves in substituting their own concept of a fair contract for the contractual arrangement at which the parties have in fact arrived. However, whether, in cases of contracts entered into in the absence of oppression or disparity of bargaining power, the exercise of such a jurisdiction would be other than mischievous may be doubtful. In fact no such jurisdiction exists.

The existence of the unreasonableness which the appellants assert is equally illusory. There is nothing unreasonable about a "unilateral" restraint clause where a new partner is admitted into an existing business venture; nor in such a case is it necessarily remarkable that the partnership should be terminable at short notice without cause. All must depend upon the particular circumstances of the parties who have chosen these terms as appropriate to govern their partnership relationship. A "unilateral" restraint clause is not merely reasonable, it is commercially essential where the intention of the parties is that on a dissolution a particular partner is to retain for himself the benefit of the goodwill of the business. That intention is, of course, made manifest when such a restraint clause is coupled with an express provision entitling that partner, upon dissolution, to retain sole property in and the exclusive use of the existing partnership name. Such is the present case: upon dissolution cl. 4 entitles the Minters to the partnership name and cl. 21 imposes a unilateral restraint upon the Geraghtys.

The goodwill of a loss assessor's business will reflect the peculiar character of that business. Its only customers are insurance companies and it is the prospect of their continued custom that generates its goodwill. Much of the custom must tend to be personal to the person or persons actually doing the work of loss assessing, just as it would be were barristers organized into firms. However, whatever transmissible goodwill, not associated with individuals and thus adhering to them and ceasing on their death or departure from the business, may exist must very largely reside in the firm name and to that the Minters were to be entitled after dissolution.

It is against that background that the present partnership deed is to be viewed. The Geraghtys came into an already well-established business possessing substantial connexions with Queensland insurers. They were to establish and run a new Gold Coast office, but in a capacity distinctly subservient to the Minters: this is perhaps most clearly demonstrated by cl. 10 of the partnership deed, which reserves exclusively to the Minters all decisions upon policy in the management of the partnership business. But it is also reflected in several other clauses of the partnership deed.

Nevertheless the Geraghtys were to be the only active partners resident on the Gold Coast and it would be they alone who would perform the actual work of loss assessing there and by doing so no doubt establish personal contacts with insurance company customers.

It is clear from the evidence and from the recitals to the partnership deed that it was after a period of negotiation, conducted at a time when Mr. Geraghty was already managing the Gold Coast office, that the arrangements for a partnership were agreed upon. These apparently included the concept of a partnership which might be dissolved by any partner at any time and also contemplated that upon dissolution the Geraghtys were not to compete for Gold Coast business and the Minters were to retain exclusive use of the partnership name. In these circumstances the partnership deed could scarcely be expected to have assumed a form other than it did. Far from being unreasonable in its terms, it would seem accurately enough to have reflected the realities of the situation as it must have appeared to the parties.

That the Minters, having the important right to exclusive use of the firm name after dissolution (important because, personal connexions apart, it was the only tangible manifestation of transmissible goodwill), should seek to protect the value of that right by obtaining a unilateral restraint clause was a matter of course. The duration and geographic area of restraint being reasonable and the existence of an interest requiring protection not being in doubt, there can be no question of the protection afforded to the Minters by the clause being in excess of that reasonably required in the circumstances. There is no suggestion in the evidence that the obvious advantages which accrued to the Geraghtys from entry into the partnership, which represented Mr. Geraghty's first venture into business after having been an employee of an insurance company, were outweighed by the potential burden of the restraint clause. There is thus no ground for concluding that on balance that clause was unreasonable in the interests of the Geraghtys. No suggestion is made that any interest of the public at large is in question on this appeal. Accordingly I see no reason for doubting the validity of the restraint clause.

Following the giving by the Minters of notice of intention to determine the partnership under cl. 3, an agreement, dated on the date when that dissolution took effect, 24th October 1977, was executed by the parties. That agreement can be of no relevance in determining the validity of the restraint clause in the partnership deed. It could only be otherwise relevant to the Minters' application for an injunction were it in some way to operate so as to vary, or to deny to the Minters the right to enforce, the restraint clause. It contains a curious provision, cl. 5, which is in the following terms:

The parties hereto expressly agree that the goodwill of the said partnership is hereby reserved and excluded from this sale and purchase. The said parties hereto further expressly agree that they each retain as and for their own property their respective interests in the goodwill of the said dissolved partnership. Without the assignors admitting the validity or enforceability of Clause 21 of the Deed of Partnership nothing contained in this agreement shall derogate from the provisions of that clause. The purpose of this agreement as a whole is clear enough, its recitals show that that purpose was to obviate the need, occasioned by the dissolution, for a sale of partnership property, consisting of certain chattels and choses in action. Instead of a sale the interest of the Geraghtys in all those assets, with one immaterial exception, was assigned to the Minters at a price. The Geraghtys acknowledge the dissolution of the partnership and agreed that they were entitled "to no further payment in respect of the winding up". The Minters indemnified the Geraghtys in respect of partnership debts.

Counsel for the Geraghtys apparently contended at first instance that the first sentence of cl. 5 in some way resulted in their retaining on dissolution a share of the goodwill of the partnership business and that this permitted them to continue in business as insurance loss assessors in disregard of the restraint clause.

Whatever may have been the intended operation of this cl. 5, its concluding sentence demonstrates that it was not intended to in any way affect the operation of cl. 21 of the partnership deed, that is, the restraint clause. The true explanation of the presence of cl. 5 is, I think, that suggested by the learned trial judge: it "simply reserved freedom to (the Geraghtys) to argue the validity or the binding effect of cl. 21 of the partnership agreement".

Be that as it may, it not only cannot affect the validity of the restraint clause but any suggestion that it could effect some distribution of fractional entitlements to goodwill as between the former partners, enabling each of them to in some way put those fractions to use, is, I think, to confer upon goodwill qualities which it is incapable of possessing. Goodwill of a partnership business is an inseverable whole unless, of course, it consists in fact of a series of separate goodwills, each applicable to distinct areas in which the one business operates or to distinct business activities which the one business entity carries on. When sold, proceeds of goodwill may be divided up readily enough, but, because goodwill is "the benefit and advantage of the good name, reputation and connection of a business" (Inland Revenue Commissioners v. Muller & Co.'s Margarine Ltd. [17] ), per Lord Macnaghten, it is inherently inseverable from the business to which it relates. It may cease to exist or may be purloined by one who falsely represents his own business as the original business, but it cannot be disposed of separately from the business which created it nor can it survive the cessation of that business. The reason is simple: since it reflects and is dependent upon the reputation of that business, to sever it from the business destroys it.

Thus where, after dissolution, the business previously conducted by a partnership continues to be carried on under the same name by one of the former parties or by a purchaser, the old goodwill will tend, at least initially, to adhere to that business. As time passes the business, under its new management, will acquire for itself its own distinctive goodwill which will gradually take the place of the old goodwill. The function of restraint clauses is the better to ensure that this initial adherence of goodwill is not interfered with by the activities of the former owners of the business.

Where one partner has agreed that on dissolution his former partner shall retain the exclusive use of the firm name he has thereby agreed to the other having, on dissolution, so much of the goodwill of the partnership business as passes with the name. As previously mentioned, the nature of this partnership business was such that transmissble goodwill must largely have depended upon use of the name. When he has further agreed that on dissolution he shall be subject to a restraint clause such as cl. 21 he has also excluded himself from thereafter engaging in competition with his former partner, who is continuing to use the old firm name. He has thus surrendered the prospect of taking advantage of so much of the goodwill of the partnership as tended to be personal to himself and hence not transmissible. He is, in truth, left with no part of the goodwill of the old firm which he can put to any use, whereas his former partner has acquired all its transmissible goodwill.

Clause 5 of the agreement of 24th October 1977 in no way affects what I regard as the result flowing from the terms of the partnership deed. The Minters were left in possession of such of the goodwill of the old firm as did not come to an end when, because the Geraghtys ceased to be connected with it, such custom as depended upon their continued membership of the firm ceased to come its way. The Geraghtys were, at the same time, unable, because of the restraint clause, to take advantage of that personal element of goodwill from which, but for the restraint clause, they might to some extent have profited. That element, having departed from the firm, has simply expired.

There was, in my view, nothing to suggest that the restraint clause to which the Geraghtys agreed when entering into partnership with the Minters was other than in reasonable restraint of trade and the learned primary judge was correct in enforcing it.

The issue in this appeal is whether a covenant against competition expressed to come into operation on the termination of a partnership business is invalid on the ground that it is in restraint of trade. Andrews J. at first instance in the Supreme Court of Queensland held it to be valid. On appeal the Full Court was unanimously of the same opinion, though there was some divergence in the reasons offered by the members of the Full Court to support the conclusion, and the form of injunction granted by the primary judge was varied.

The respondents who, like the appellants, are husband and wife, have carried on business as insurance loss adjusters at Brisbane, on the Gold Coast and elsewhere since February 1969. On 1st January 1974 the appellants and the respondents commenced to carry on business as insurance loss adjusters in partnership at Mermaid Beach on the Gold Coast under the name or style of "J. B. Minter & Co. Gold Coast".

The initial partnership was oral. It was superseded by an undated deed of partnership which was expressed to relate back to the commencement of the partnership business on 1st January 1974. In the deed the respondent husband and wife are described as the parties of the first and second part, and the appellant husband and wife are described as the parties of the third and fourth part. The deed recited that the respondents had carried on business since February 1969 under the firm name or style of "J. B. Minter & Co.", and that they had acquired a goodwill in the business and an interest in the firm name or style which was of substantial value to them. The deed further recited that the appellants had acknowledged that the respondents were to remain entitled to the exclusive use of the firm name or style and that the appellant husband had been employed by the respondents in their former business as a clerk, loss adjuster and investigator.

Clause 1 described the partnership business and nominated the premises at which it would be carried on. Clause 3 conferred upon each partner the right to terminate the partnership by giving not less than fourteen days' notice. It was in these terms:

Any party may at any time determine the partnership by giving not less than fourteen (14) days' notice in writing of his or her intention so to do to the other parties and at the expiration of such period of notice the partnership shall be determined. Clause 4 provided that the business should be carried on under the firm name or style which had been adopted, and that in the event of a determination of the partnership "in any manner whatsoever" the firm name should remain the sole property of, and should be available for the exclusive use of, the respondents.

It was provided that the net profits of the partnership were divisible between the parties as follows: thirty per cent to each of the respondents; twenty per cent to each of the appellants.

The parties were to bear the losses in the same proportions (cl. 12) and they were to contribute to the capital in the same proportions (cl. 9).

Clause 17 made provision for determination of the partnership in the event of breach or default. It provided:

Should any party (hereinafter called "the party in default")

(a) Commit any breach of the provision of this agreement; or

(d) Become unable for any cause to attend to the partnership business for a period of time not less than three (3) months; or

(e) Do or suffer any act which would be a ground for the dissolution of the partnership by the Court

then in any such case the other parties may, within fourteen (14) days after becoming aware thereof, by notice in writing determine the partnership.

Clause 19 provided for the winding up of the partnership "upon the determination of the partnership by agreement between the parties or by notice in accordance with Clause 3 hereof or by the death of a party or any other event not expressly otherwise herein provided for".

The crucial provision is cl. 21. It is in these terms:

On 10th October 1977 the respondents, pursuant to cl. 3, gave the appellants fourteen days' notice of their intention to determine the partnership. The effect of the notice was to determine the partnership on 24th October 1977. By an agreement in the form of a deed made on 24th October 1977 the appellants assigned to the respondents their interest in the partnership business, excluding their interest in a motor vehicle, for $4,300. Clause 5 of this agreement provided:

During the month of November 1977 the appellants commenced to carry on business as insurance loss adjusters at Burleigh Heads, some six kilometres distant from the partnership premises at Mermaid Beach. The respondents instituted proceedings for an injunction to restrain a breach of cl. 21 of the deed. The primary judge ordered that the appellants and each of them be restrained "from exercising or carrying on directly or indirectly in the trade or business of insurance loss adjusting investigations within a radius of twenty (20) miles from the corner of Sunbrite Avenue and Gold Coast Highway, Mermaid Beach, City of Gold Coast".

The appellants' defence to the action was based on the wide-ranging statement of events in cl. 21 which served to bring into operation the covenant against competition therein set forth. It was conceded that determination of the partnership by the respondents under cl. 3 satisfied the words "should the partnership business be ceased or terminated for any reason whatsoever" in cl. 21. But it was argued that cl. 21 went beyond what was necessary for the legitimate protection of the respondents' interest in the goodwill because it protected the respondents from competition even in the event that the appellants determined the partnership under cl. 17 for breach by the respondents of their obligations under the partnership deed. Certainly, the words in cl. 21 which I have already quoted are as apt to embrace a determination under cl. 17 as a determination under cl. 3, and there is nothing in cl. 21 which restricts the operation of the covenant to a determination under cl. 17 by the respondents for the breach or default of the appellants or either of them. The appellants' contention is that cl. 21 is unreasonable to the extent that it subjects them to a covenant against competition in the event that the partnership is determined for the breach or default of the respondents. The exaction of the covenant in that event, so the argument runs, is more than a legitimate protection of the respondents' interest.

A covenant in a partnership agreement by which a partner undertakes on the determination of the partnership not to carry on within a defined area and for a stipulated time a business of the kind carried on by the partnership is a covenant to which the common law doctrine of restraint of trade applies. Consequently, in order to sustain the validity of the covenant it must be shown that it is reasonable in the interests of the parties and reasonable in the interests of the public.

Whether the restraint which is accepted is reasonable depends initially on the nature and the extent of the interest which is sought to be protected, for the restraint must not exceed that which is necessary for the legitimate protection of the interest. Here the interest which was sought to be protected by cl. 21 is the respondents' interest in the goodwill of the business, because the respondents had no other interest which would justify the appellants' covenant against competition. Just as in the case of the sale of a business it is protection of the purchaser's newly acquired interest in the goodwill that justifies the covenant by the vendor against competition, so in the case of a partnership it is the continuing partner's interest in the goodwill that justifies the giving of the covenant by the retiring or outgoing partner.

In a partnership agreement the covenant is usually expressed to be given by the outgoing partner, whosoever he may be. In general his identity will not be known until the partnership is determined because the identity of the outgoing partner will depend on the manner and circumstances of the determination of the partnership. The fact that the covenant is entered into by each of the partners and may become binding on any of them, depending upon the events which happen, is a factor which is to be taken into account in assessing whether it is reasonable between the parties.

None the less cl. 21 would have been explicable had the deed of partnership provided that the respondents were, and would continue to be, the sole owners of the goodwill, no matter how the partnership might be terminated. Clause 4 contained a provision of this kind, but it was confined to ownership of the firm name. The name under which a business is carried on is but one of the elements which constitute goodwill. As Dixon C.J., Williams, Fullagar and Kitto JJ. said in Box v. Federal Commissioner of Taxation [18] :

Goodwill includes whatever adds value to a business, and different businesses derive their value from different considerations. The goodwill of some businesses is derived almost entirely from the place where they are carried on, some goodwills are purely personal, and some goodwills derive their value partly from the locality where the business is carried on and partly from the reputation built up around the name of the individual or firm or company under which it has previously been carried on. 1. (1952) 86 C.L.R. 387, at p. 397.

In the present case, goodwill, apart from that part of it which was associated with the firm name, was owned in the same proportions in which the capital was held, that is, as to thirty per cent by each of the respondents and as to twenty per cent by each of the appellants. So much flows from cl. 12 of the deed of partnership and it is confirmed by cl. 5 of the agreement made on 24th October 1977. It is perhaps somewhat surprising in the light of cl. 21 that the parties should have agreed that the ownership of goodwill should be divided and that this division of ownership should prevail on termination of the partnership. Still, that is what they agreed upon and that is what they accepted later by their subsequent agreement. A provision for the division of the ownership of goodwill serves a useful purpose if the partnership is wound up and sold and the proceeds of sale are distributed. But it serves little, if any, purpose when the partnership is not sold, and two of the partners acquire by agreement the assets, or most of the assets, of the partnership excluding goodwill.

The issue then is whether the exaction of the covenant in question is necessary for the protection of the respondents' limited interest in goodwill. The covenant is certainly not necessary for the protection of the respondents' exclusive interest in the firm name which is sufficiently protected by the availability of injunction to restrain any use of the firm name by the appellants. The difficulty then from the respondents' viewpoint is to conceive of a form of covenant which would protect their sixty per cent interest in goodwill without at the same time prejudicing the appellants' forty per cent interest in goodwill. A covenant in the form of cl. 21 certainly protects the respondents' interest, but it does so at the price of effectively extinguishing the appellants' interest in goodwill, unless perhaps it could be shown in some way that the area of operation of the covenant preserved to the respondents no more than sixty per cent of the business. No attempt has been made to make out such a justification for the covenant. Consequently, in my opinion it exceeds what constitutes a legitimate protection of the respondents' interest and this is because it unduly interferes with the liberty of the appellants, having regard to the existence of their interest in the goodwill of the partnership business.

I need not discuss the question whether it is permissible to look beyond events existing at the date of the deed of partnership in order to decide whether a covenant exceeds what is reasonable. The extent of the parties' interest in goodwill was fixed by the deed itself. However, had it become critical to do so, I should have been willing to look to the subsequent agreement dividing goodwill to decide whether the protection sought to be obtained was reasonable and consequently valid. Even if it be assumed that it is a settled principle that the validity of the restraint must be decided at the date when the restraint was entered into (Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty. Ltd. [19] ; Lindner v. Murdock's Garage [20] ), and I do not concede that it is so settled, it should not apply so as to exclude from consideration a subsequent agreement by which the parties divide the ownership of that goodwill which the restraint was designed to protect. Shell U.K. Ltd. v. Lostock Garage Ltd. [21] was not a case of this kind.

(1973) 133 C.L.R. 288, at p. 318. 2. (1950) 83 C.L.R. 628, at p. 653. 3. [1976] 1 W.L.R. 1187; [1977] 1 All E.R. 481.

It will be seen that in my view there is a more fundamental flaw in cl. 21 than that perceived by the members of the Full Court of the Supreme Court. All the members of the Full Court seem to have thought that cl. 21 would have been unreasonable to the extent to which it would have subjected the appellants to a covenant against competition in the event that the partner-ship is determined for the breach or default of the respondents. Wanstall C.J. overcame this problem by construing cl. 21 in accordance with the principle enunciated by Lindley L.J. in Haynes v. Doman [27] , so that the clause has no application to a determination of that kind. Stable and Hoare JJ. considered that the events which bring cl. 21 into operation are capable of severance and upheld the validity of the covenant as severed.

However, the ground on which I have found the covenant to be invalid is incapable of cure by severance for it involves the conclusion that the covenant as a whole went beyond what was necessary for the respondents' protection. It is not a conclusion hinged upon the happening of one of the events expressed to bring the covenant into operation, which might be severed from the others, thereby leaving them to bring the covenant into operation.

In this matter I have had the advantage of reading the reasons for judgment prepared by my brother Gibbs. I agree with those reasons and the conclusion that this appeal should be dismissed.

At a glance

Court

Decision date

Before

Source

Judgment (92 paragraphs)

Parties

Cited By (24)