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[2011] NSWSC 887
Supreme Court of NSW
2011-04-07
Davies J
Original judgment source is linked above.
Judgment 1The First Plaintiff (Mr Hunter) and the First Defendant (Mr Koulouris) were in partnership sometime in 1999, which from 26 November 1999 was operated through a company called Johnson Professional Window Films Pty Ltd (the Second Plaintiff). The business was a window film and glass tinting business. 2The parties eventually parted ways in 2008 and at the time a Deed dated 21 July 2008 was executed. The effect of the deed was that Mr Hunter effectively bought Mr Koulouris out of the business. Pursuant to the Deed Mr Koulouris was restrained from competing with the Plaintiffs' business for a period of 5 years. Within that 5 year period Mr Koulouris has allegedly competed with the Plaintiffs and the present proceedings, in which the Plaintiffs seek an injunction against Mr Koulouris and two companies associated with him, involve the validity of the restraint clause in the Deed. 3On the face of it the restraint clause operates throughout Australia and beyond. The Plaintiffs accept that it cannot operate outside Australia, and the main issue between the parties is the validity of the 5 year period in the restraint clause.
The business 4Mr Hunter has worked in the window film and glass tinting business since about 1985. From 1998 he has traded under the name Johnson Professional Window Films. The company by that name was incorporated in 1999. 5The business was to purchase and sell solar film. Mr Hunter purchased it mainly from the United States and sold it to the domestic Australian market. His main customer base in Australia was a number of solar film installers. Mr Hunter also undertook solar film installation. 6Mr Koulouris had been one of his customers between 1993 and 1999 who purchased and installed solar film. 7In January 1999 Mr Hunter and Mr Koulouris executed a Deed of Partnership to carry on the business of solar film sales and distribution. On 26 November 1999 they incorporated the partnership under the name Johnson Professional Window Films Pty Limited ("Johnsons"). 8At least since the partnership commenced the unincorporated business, and later Johnsons, traded as an exclusive importer and distributor within Australia of certain window film products including solar control, safety, security and speciality window films for the automotive, residential and commercial markets. The manufacturer of the products imported is Johnson Laminating & Coating Inc in the USA. The products were supplied pursuant to a Distributor Agreement between the US Company and Johnsons. 9The Distributor Agreement relevantly provided: DISTRIBUTOR AGREEMENT This Agreement ("Agreement") made and effective on the first day of June 2001, by and between JOHNSON LAMINATING AND COATING, INC. ("Supplier") and Johnson Professional Window Films Pty. Ltd. ("Distributor"). WITNESSETH Whereas, Supplier manufactures and sells solar control and security window film affixed with certain of Supplier's trademarks as shown on Exhibit A to this Agreement (the "Trademarks") for use on windows by the automotive, residential and commercial building industries (collectively referred to herein as "Industries"); and Whereas, Distributor, in conjunction with its existing business of providing certain materials and services to the Industries, has a demonstrated marketing capability and desires to buy the solar control and security film products bearing any of the Trademarks (the "Product") for sale to others; NOW, THEREFORE, in consideration of the premises, covenants and conditions set forth herein, the parties hereto mutually agree as follows.
The separation and the Deed 15The new arrangement did not, however, resolve the ongoing problems between them. There were ongoing disputes about the salaries being paid to each of them and disputes arising out of the level of capital contributions and asset contributions of each of the parties. 16Negotiations continued and letters were exchanged over the early months of 2007. On 18th April 2007 Mr Koulouris sent an email to Mr Hunter saying this: Jim I have had enough of the games. Here's an alternative solution, think it over. You win, I'm done! Alex 17There was attached to the email the following document: Without Prejudice Offer to sell AK share to JH Payout of Range Rover in full and $ 145,000 transfer ownership to AK Transfer ownership of Grange to AK $ 45,000 JH to purchase AK 50% share of JPWF Warehouse $396k - $346k = AK equity ($50,000) $ 50,000 Payment to purchase AK shares in JPWF $ 150,000 Total Sale Price $390,000 Conditions Range Rover to be paid out in full. JH to pay all applicable stamp duties & legal costs. AK to resign as director of the JPWF Pty Ltd AK & JH Partnership to be dissolved. AK to be indemnified against any action on Co. There will be no anti competition clause in sale agreement . Offer expires Tuesday, 1st May, 2007 and no part is negotiable. If agreeable, solicitors can be instructed to commence preparation of "contract of sale" documents with a view to settling on the 30th June, 2007. (emphasis added) 18The following day Mr Koulouris sent an email to Scott Davidson, the President of the USA company, telling him of the difficulties that had emerged between him and Mr Hunter. 19On 21 April 2007 Mr Davidson sent an email to both Mr Hunter and Mr Koulouris which relevantly said this: Alex and Jim, Alex sent me an email yesterday saying that you just don't seem to be able to work it out together. I can not tell you how much it pains me to hear. You asked if I would approve a buy out or sale of the company . This obviously has huge bearing on your lives but also affects us greatly. We have allowed you carry our name and reputation which is now tied to you. You have made large incomes and built a position in the market based on the "Johnson" name. There is a reason that we have an "approval" clause in our distribution agreement which is primarily to protect our image, reputation and market. You two not being able to work this out presents a huge problem to Johnson Laminating. The 3 most obvious problems are:
Breaches of restraint clause 30Mr Koulouris gave evidence that he formed the view in early March 2010 that he wanted to get back into the business of retailing or wholesaling solar film. He knew at that time that he was under the restraint provided by s 10 of the Deed. 31In about November 2010 Johnsons received by way of facsimile from a business called South Coast Window Tinting what appeared to be an order for certain products from Johnsons. Mr Hunter said that it was clear to him that Johnsons was not the intended recipient of the order. He could tell this from inspecting the document and the codes and notation regarding pick-up at the foot of the document. South Coast Window Tinting had been a customer of Johnsons for the previous 5 years. Shortly after the facsimile arrived David Pratt from South Coast Window Tinting called and asked Johnsons to disregard the document as it had not been intended to send it to them. 32There is also evidence of other material sent to customers of Johnsons with those customers forwarding the material onto to Johnsons. The material contained a trade price list which utilised product references similar to those used by Johnsons. The material contained an order form containing the business name SunX Window Films and Grange Graphics. It contained a number of references to web addresses being www.sunx.com.au and www.grangegraphics.com.au. The material showed the address of Grange Graphics as 9/24 Anzac Ave, Smeaton Grange. That was the address of premises where Mr Koulouris was the sub-lessee from a company called Ibex Interiors Pty Ltd. 33The material that had been forwarded to Johnsons by customers was contained in exhibit JHH-1. It was Mr Hunter's evidence that the material in that exhibit was in direct competition to the material sold and distributed by Johnsons. The material contained statements that the SunX product was distributed by Grange Graphics. There was a business card for Grange Graphics with Mr Koulouris's name and telephone numbers on it. 34The evidence showed that Grange Graphics was owned by GTS Films Pty Ltd. Similarly, a domain name search of the website www.sunx.com.au disclosed that that website was owned by GTS Films Pty Ltd. 35A current search of GTS Films Pty Ltd (as at 4 May 2010) discloses that Michelle Irene Koulouris, the wife of Mr Koulouris, is the sole shareholder, director and secretary of the company. 36Other evidence disclosed that Mr Koulouris was selling solar film in March 2011. 37Given the frequent references to the SunX website when coupled with Grange Graphics, it seems to me reasonable to me to draw the inference, and I draw it, that despite the present ownership of GTS Films by Mrs Koulouris, Mr Koulouris is acting in breach of his restraint through both of those entities. It was not seriously contested that there had been a breach of the restraint clause at least by the First and Second Defendants and I find that there was. As Mr Raoul Wilson of counsel for the Defendants said at the outset, the main issue was whether or not the restraint was reasonable in time. 38The Plaintiffs made an urgent application to Bergin CJ in Eq on 8 December 2010 seeking an interlocutory injunction restraining the Defendants from continuing to engage in any business the same, or substantially the same, as the business carried on by Johnsons. Those interlocutory proceedings were settled with an arrangement for the Defendants to keep separate and identifiable records of all relevant business undertaken and income received from such business on or after 13 December 2010. 39The proceedings were then listed for hearing before me for injunctive relief on a final basis.
Submissions 40The Defendants submitted that, it if being accepted that the restraint should be limited to Australia, the period of time in restraint was too long. They submitted that the restraint was imposed not by negotiation between the parties but as a result of a non-negotiable term imposed by the US company who were required to consent to the sale of the part of the business. Further, they submitted that the 5 year period bore no relationship to the benefits that Mr Koulouris received under the Deed, particularly because his income whilst working at Johnsons was such that the payment of $600,000 (in fact it was $675,000) was equivalent to income for 1.53 years. They also pointed to the disparity between that figure and what was in effect offered in the draft agreements forwarded by the Plaintiffs' solicitors on 12 May 2008. 41The Defendants particularly pointed to what was said by Rath J in IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 at 429: To my mind the most important consideration on the question of the period of the restraint is the time required for severing the relationship between the defendant and those clients who would patronize the business after its sale. There is necessarily a large element of conjecture involved here. Additional evidence might reduce that element, but in the main the matter involved is the exercise of business judgment. For this reason considerable weight should attach to the period the parties themselves have selected. Notwithstanding this, I am satisfied that the period of three years is unreasonably long. 42In that regard the Defendants submitted that Mr Koulouris had really been working separately from the main business since 2006, and that that was ample time to sever the relationship with regard to existing customers. The Defendants submitted, therefore, that a reasonable time for the restraint would have been up to the time proceedings commenced but certainly not beyond the period of 5 years from June 2006.
Legal principles 43Section 4 Restraints of Trade Act 1976 relevantly provides: 4 Extent to which restraint of trade valid (1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. (2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy. (3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order. ... 44The present application is not an application by a person subject to the restraint - it is an application by the person having the benefit of the restraint to restrain a breach of it. The onus at common law was on the person seeking to enforce the restraint: Herbert Morris Ltd v Saxelby [1916] AC 688 at 715; IRAF Pty Ltd at 424. The reason for this appears to have been that the presumption was that restraints of trade were contrary to public policy and therefore void: Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at 565; Herbert Morris at 715. 45The position does not appear to be quite so clear by reason of the Restraints of Trade Act because s 4(1) says that a restraint of trade is valid to the extent which it is not against public policy. That might suggest that the onus was on the person asserting that a restraint was against public policy. Moreover, sub-s (3), in the circumstances of an application by a person subject to restraint, also appears to suggest that the onus is on that person: Orton v Melman [1981] I NSWLR 583 at 589. I note, however, that Hammerschlag J in OAMPS Insurance Brokers v Peter Hanna [2010] NSWSC 781 at [69] and [70] took the view that under the Act the person seeking to enforce the restraint has the onus to prove the circumstances from which reasonableness can, as a matter of law, be inferred. The issue of onus does not appear to have been argued nor considered on the appeal: Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267. 46In the present case, on the basis of all of the evidence adduced before me, it is not necessary to consider the question of onus of proof to determine the matter. 47Other principles that I bear in mind in reaching my decision are these: (a) The reasonableness and validity of a restraint clause should be assessed at the time of entry into the contract: Hanna v OAMPS at [33]; Koops Martin v Dean Reeves [2006] NSWSC 449 at [53] and the cases cited therein; (b) A distinction should be observed between a case of a sale of a business and its goodwill on the one hand, and the case of a restraint by an employer of an employee. A restraint would be more favourably regarded in the former case because of the necessary depreciation in the value of the goodwill sold if there was no such restraint: Herbert Morris at 701; Lindner v Murdoch's Garage (1950) 83 CLR 628 at 633; (c) Particularly in the case of a restraint on an employee there is no one correct test for reasonableness; Hanna v OAMPS at [41] - [45]. Depending on the circumstances, the test may be how long it would take a reasonably competent replacement employee to establish a rapport with the customers ( Koops at [88]), or it may be how long it would take for the employee to sever his connection with the customers or clients of the person having the benefit of the restraint: Stacks Taree v Marshall (No. 2) [2010] NSWSC 77 at [82] - [83]. The issue to be resolved is whether the restraint offers no more than is reasonably necessary to protect the legitimate business interests of Johnsons: OAMPS v Hanna at [84]; NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [31]. (d) The Court gives considerable weight to what parties have negotiated and embodied in their contracts, but a contractual consensus cannot be regarded as conclusive even where there is a contractual admission as to reasonableness: Woolworths Ltd v Olson [2004] NSWCA 372 at 39; IRAF Pty Ltd at 429; Synavant Australia Pty Ltd v Harris [2001] FCA 1517 at [85]; (e) Under s 4 of the Act the Court must first determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the Court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3): Orton v Melman at 587; Woolworths Ltd v Olson at [42]. If it is against public policy s 4(1) enables the restriction to be narrowed Orton v Melman at 587-588.
Was the restraint reasonable? 48There are a number of matters which, in my opinion, make the 5 year period of restraint a reasonable one. 49First, the nature of the business with its exclusive distributorship arrangement with the US company, together with the high salaries being paid points to a valuable business with substantial goodwill to protect. The evidence disclosed that there were only about 10 wholesalers and 1200 retail window tinters in the Australian market. The product itself was a large factor in the growth and prosperity of the business. It was a valuable business which was entitled to protection for a reasonable period of time after the departure of Mr Koulouris from the business. 50Secondly, Mr Koulouris was aware of the extent of the control that the US company had both with regard to changes in the control of Johnsons (clause 13.3.8 of the Distributor Agreement), the exclusive arrangement between the US company and Johnsons, and (at least from the time that negotiations started to sever the relationship between Mr Koulouris and Mr Hunter) the fact that the US company would insist upon a 5 year period of restraint of trade in the event that the 2 partners split. Although in the first instance Mr Koulouris's offer had stipulated that there would be no anti-competition clause in the sale agreement, he knew within a matter of days that that would be unacceptable to the US company and he knew instead what the US company would require. 51Thirdly, Mr Koulouris agreed to the 5 year period and agreed it was reasonable. That is a very important consideration, although not a determinative one, because it involves the exercise of a business judgment: Synavant at [85]. The business judgment is no doubt closely associated with the benefits received by Mr Koulouris and the alternatives available to him, which I will discuss presently. 52The Defendants pointed to the acceptance by Mr Hunter of the first proposal to settle put forward by Mr Koulouris in his email of 18 April 2007. Mr Hunter's explanation of why he accepted that proposal without any qualification was somewhat unsatisfactory. However, the evidence suggests that by the time Mr Hunter sent his acceptance he had already seen the long email of 21 April 2007 from Scott Davidson at Johnsons US. Mr Hunter said that he knew the US company would insist on a restraint, but that does not properly explain why he accepted Mr Koulouris's proposal without qualification. In that regard I found his evidence somewhat unsatisfactory. Nevertheless, that seems to me to be a side issue in a case concerning the reasonableness of the restraint that was ultimately agreed between the parties after further negotiation. Ultimately, Mr Koulouris was free not to accept the 5 year restraint. He had available other options including a winding up of the business, which he chose not to exercise. The starting point in relation to this matter, it seems to me, is that the parties agreed to a 5 year restraint and agreed that it was reasonable. 53Fourthly, Mr Koulouris received in total some $675,000 together with a release of his contingent obligations under guarantees that he had given to Johnsons. The Defendants point to 2 matters suggesting that the benefits Mr Koulouris received are not the equivalent of a restraint for 5 years. They point, first, to the salary that Mr Koulouris was receiving in the years before the Deed was entered into and suggest that what he received was worth something a little less than 2 years salary. However, the authorities do not appear to suggest an enquiry into the relationship between the period of restraint and any payout figure received by the person subject to the restraint. Rather, the applicable tests are those discussed in Koops, Stacks Taree and Hanna v OAMPS in the Court of Appeal and those tests can be appropriately adapted to a situation like the present. Mr Koulouris's departure is closely analogous to the departure of an employee. Indeed, it may be thought to provide a stronger case for a restraint bearing in mind his prior position and work within Johnsons. 54The Defendants also point to the figures in the draft document sent under cover of the 12 May 2008 communication from the Plaintiff's solicitors. The Consultancy Agreement provided for an arrangement of an overall payment of $1,279,200. The Defendants' submission seems to suggest that, whereas there had been an offer of $1.29 million, the final figure was considerably less at $600,000 (in fact $675,000), although the Defendants' submission did not take account of the release from the guarantees. 55The evidence did not disclose why the arrangement with the Consultancy Agreement and the Deed did not go ahead. What is significant, however, is that in the light of the obligations proposed in the Consultancy Agreement on GTS Films, the $1.29 million cannot be seen to relate simply to a payout figure of Mr Koulouris that subsequently was reduced to $675,000 together with the release of the guarantees. Although the two agreements were intended to be put into effect together, the basis in the documents for the payment of the figure was the consultancy obligations. 56Fifthly, I place some importance on the fact that both Mr Koulouris and Mr Hunter engaged solicitors to act for them in negotiating the Deed that was finally executed. It can reasonably be inferred that appropriate advice was given in relation to the amounts being received by Mr Koulouris, his other options and the restraint clause together with its validity. 57Sixthly, in the light of Mr Koulouris's role with Johnsons both before and after he established The Sign Division, I reject the submission of the Defendants that the appropriate starting point for the time of any restraint should be 1 July 2006 when Mr Koulouris commenced working separately in The Sign Division. The submission assumes, wrongly on the basis of the evidence, that Mr Koulouris did not continue to be actively involved with clients of Johnsons, during the time that he ran The Sign Division. That appears to be a relevant matter when considering the application of the appropriate test for reasonableness. 58In circumstances where this is not a restraint on a former employee who has left the business and a new employee would be coming in to take over the role of the departing employee, the appropriate test is the one adopted by McDougall J in Stacks Taree which concerned "the time required for severing the relationship between [Mr Koulouris] and those clients who would patronize the business after its sale": IRAF at [429]. I accept that the position is not on all fours with that decision because the present arrangement was the buy-out of one partner in a business. Nevertheless, the concern of the Plaintiffs was not for some replacement of Mr Koulouris to "show his or her effectiveness and establish a rapport with customers" ( Koops at [88]) but rather the concern for the severing of the relationship between Mr Koulouris and customers of Johnsons. 59Interestingly, and despite the test employed by Brereton J in Koops , the issue as he described it there was one of "customer connection" (at [28]). That is precisely the position here that forms the basis for the Plaintiffs' submission in justification of the restraint. As Brereton J said at [44]: A more robust view is taken where the employee's role includes obtaining and extending custom for the employer's business. When an employee's duty includes to build up the employer's clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [ G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; Dean, The Law of Trade Secrets , 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer's benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint. 60The evidence was that from 1999 to 2006 Mr Koulouris was the managing director of Johnsons. In that position he built a rapport with the clients. At the same time, Mr Hunter was primarily attending to two other businesses of his. It was only from 2006 that Mr Hunter allocated more of his time to the operation of Johnsons. As part of his regular meetings with Mr Hunter, Mr Koulouris had active knowledge of how Johnsons was trading and what it was doing. 61After Mr Koulouris established The Sign Division he had contact with a number of clients who were clients of Johnsons. Mr Koulouris continued to take orders from clients and place them with Mr Hunter or one of his sons. He continued to deal with enquiries from clients about window tinting and solar films. Whilstever Mr Koulouris was still receiving enquiries and placing orders for solar film with Johnsons when he ran The Sign Division which was, in any event, a part of Johnsons and carried on under the name of Johnson Professional Graphics, it would be inappropriate to take the view that time should begin to run for the restraint only when Mr Koulouris commenced to run The Sign Division.
Conclusion 62In my opinion, the restraint agreed between Mr Hunter and Mr Koulouris in the Deed of 21 July 2008 was no more than was reasonably necessary for the protection of the Plaintiffs. The First Defendant, for himself and through the Second and Third Defendants, has acted in breach of that restraint. They should themselves be restrained from doing so for the period stipulated, that is, until 20 July 2013. 63The parties should bring in Short Minutes to reflect these reasons.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 August 2011
Hunter
Koulouris
(2002) 84 SASR 86
(1950) 83 CLR 628