the court may, on such terms if any as it thinks fit -
(e) refuse to grant that relief; or
(f) grant that relief as if this subsection had not been enacted, but with such limitations and restrictions if any as the court thinks fit."
172 Section 89A(1) was said in the Report to embody "the principle of the recommendation" (para 22). Section 89A(3) was intended to empower the Court to refuse or restrict relief in exceptional cases because the draftsman of the covenant (presumably the promisee) had not applied his mind to what would be a "restraint within the bounds of reason": this was described as a "sanction applicable only where there is a manifest failure to attempt to make a promise which is reasonable between the parties" (para 44).
173 The manifest failure appeared in s 4(3) of the Act, but that sub-section did not provide for refusal of relief, or grant of only limited relief, to a promisee bringing proceedings. It provided for an order of invalidity, or only limited validity, where there was application by a promisor. Notwithstanding this rather radical change, in the second reading speech in the Legislative Assembly the Attorney-General said (New South Wales Parliamentary Debates, Vol CXXXV p 1181, 29 September 1976) -
"Clause 4(3) envisages the circumstances that a person receiving the benefit of a restraint may be disadvantaged by the prospective loss of benefits that might flow from an otherwise valid aspect of the restraint, if the court in determining the relevant part of the restraint was invalid. The prospect of losing these benefits will, it is anticipated, discourage the making of recklessly wide restraints in the first instance. As a result the incidence of cases where the court is required to intervene to read down unduly wide restraints will be reduced.
The vesting of power in the court to make an order declaring a restraint invalid wholly or in part from a specified date will also bring certainty to the future relationship and conduct of the parties. It is important to note that the court's power to order a restraint wholly or partially invalid depends upon its being satisfied that there was a manifest failure to make the restraint reasonable."
174 In the Legislative Council the Minister for Planning and Environment said (New South Wales Parliamentary Debates, Vol CXXVI p 2298, 3 November 1976) -
"Clause 4(3) provides that the Supreme court, on an application made by a person subject to a restraint of trade, may order the restraint to be wholly or partially invalid from a specified date. The court in making such an order must be satisfied such an order must be satisfied [sic] that the restraint is against public policy because of a manifest failure to make it reasonable.
The application is available only to the person who is subject to restraint - in simple terms, the person who makes the promise. It has always been open to the person to whom the promise is made to see relief by way of damages or injunction against the promisor for breaches of the promise. Clause 4(3) does not disturb that entitlement but gives the person subject to the restraint the right to apply to the court for an order that the restraint is wholly or partly invalid. The court in having the power to make the order effective from a specified date is able to make a determination of the future conduct of the parties under the restraint.
The availability of such an application will have the result that at the initial contractual stage persons will be deterred from seeking unduly wide promises or restraints in the expectation of the court being asked to order that the restraint is wholly invalid or read down to be only partially invalid, with the consequent possibility of loss of prospective benefits. A further effect of the subclause is that the court in considering an application will have the power to make an order that determines the future conduct of the parties and thus give certainty to their relationship under the restraint."
175 It seems that the rationale in the Report of the Law Reform Commission continued, but in modified form. The draftsman of the covenant (still presumably the promisee) was to be encouraged to apply his mind to what would be a restraint within the bounds of reason by the prospect that the promisor would apply to have the covenant found invalid or of only limited validity, but this would still depend upon a finding of manifest failure. Application by the promisee was envisaged, and a finding of manifest failure was regarded as and has been said to be a condition precedent to the grant of relief under s 4(3) (see Orton v Melman at 589; Douglass Automated Laboratories & Allied Services Pty Ltd v Sonic Technology Australia Ltd at 53,625; Greenhalgh v Composite Buyers Ltd at 53,162).
176 Section 4(3) of the Act is in a sense complementary to s 4(1). Section 4(1) enables limited enforcement of the restraint to the extent to which it applies to the particular breach, on the application of the promisee and looking to the past and present. (Framing injunctive relief for the future may require regard to the outer limits of validity, but will turn on the validity of the restraint as it operates in the circumstances of the proved breach and not on other conceivable circumstances: see Orton v Melman at 587-8.) Section 4(3) enables a reading down of the restraint in the abstract, on the application of the promisor and looking to the future. The express provision that any order is to have only future effect should be noted.
177 The complementary operations of s 4(1) and s 4(3) are, however, not complete. Because the promisee's application focuses on the particular breach, invocation of s 4(1) does not define the extent of validity and enforceability of the restraint - it may have validity wider than that necessary for enforcement in the face of the particular breach. Because the promisor's application requires a finding of manifest failure, a promisor may be able to resist the promisee's proceedings to enforce the restraint in the face of his breach on the ground that the restraint would to that extent be against public policy, even though the promisor could not successfully invoke s 4(3) to have the restraint found invalid or read down. There are other problems. It may be some time before the operation of s 4(3) of the Act is settled.
178 In the present case the first appellant did not expressly claim an order that the restraint in cl 15 of the 1984 agreement be read down (in the words of s 4(3) of the Act, that it be valid only to such extent as the Court thinks fit). It contended in its defence that cl 15 was void, including (rather obscurely) "as a restraint of trade pursuant to s 4 of the Act 1976 (NSW)", and it cross-claimed for an order pursuant to s 4(3) of the Restraints of Trade Act that the restraint was wholly invalid. The defence may not have amounted to an application by the first appellant, but the cross-claim was an application by it.
179 In my opinion, although the first appellant's claim was not expressly for an order that the restraint in cl 15 of the 1984 agreement be read down, there was an application by the first appellant which enlivened the Court's powers under s 4(3) of the Act. The introductory words of s 4(3) called for an application by the promisor, on which application it appears (in short form) that the restraint is against public policy because of manifest failure. That was what the first appellant alleged in para 3 of the cross-claim. The application to which s 4(3) referred was for a finding of the Court to that effect, not a finding of complete offence to public policy but of offence to public policy "to any extent". The Court was then empowered to order that the restraint be altogether invalid or valid only to such extent as the Court thinks fit, not to such extent as the promisor claimed.
180 Bergin J found the restraint in cl 15 of the 1984 agreement against public policy: this, of course, was as the first appellant had contended. Her Honour found that "Although there was ample opportunity for the plaintiff to create or join in creating a reasonable restraint it did not do so". In the following sentences she appears to have had in mind the early 1990's. The manifest failure to which s 4(3) of the Act refers seems to me to be manifest failure at the time the restraint was created, not some later time, in this case in 1984 not in the early 1990's. However, her Honour's initial statement was not limited in time, and from the first appellant's submissions as reflected in the reasons the first appellant was contending for stark unreasonableness of the restraint in 1984. The first appellant did not submit on appeal that a finding of manifest failure was erroneous. I consider that what her Honour said amounted to a finding of manifest failure in 1984.
181 As to the reading down itself, by the terms of s 4(3) of the Act the restraint must be read down so that it is valid to no greater extent than "the extent to which the restraint is not against public policy". At the time she referred to exercise of her discretion Bergin J did not spell out her reasoning to cl 15 of the 1984 agreement as read down, save for saying that the fact that the Split Set was a safety product with a need for competent and safe manufacturers in the market "also featured prominently in my mind in reaching this conclusion". It is evident from her Honour's earlier reasons, however, that she considered that it was necessary that there be an adequate time for "tooling up" any manufacturer of friction bolts in order to ensure that the product was a safe one; that it would take the respondent about nine months after the termination of the 1984 agreement to "tool up" a manufacturer in substitution for the first appellant; and that the respondent should be protected for that period against the springboard advantage which the first appellant would otherwise enjoy.
182 Protection against a headstart or springboard advantage is a recognised ground for a restraint. In Terrapin Ltd v Builders' Supply Co (Hayes) Ltd , a confidential information case, it was said (at 391-2) -
"As I understand it, the essence of this branch of the law, whatever the origin of it may be, is that a person who has obtained information in confidence is not allowed to use it as a spring-board for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public. The brochures are certainly not equivalent to the publication of the plans, specifications, other technical information and know-how. The dismantling of a unit might enable a person to proceed without plans or specifications, or other technical information, but not, I think, without some of the know-how, and certainly not without taking the trouble to dismantle. I think it is broadly true to say that a member of the public to whom the confidential information had not been imparted would still have to prepare plans and specifications. He would probably have to construct a prototype, and he would certainly have to conduct tests. Therefore, the possessor of the confidential information still has a long start over any member of the public. The design may be as important as the features. It is, in my view, inherent in the principle upon which the Saltman case rests that the possessor of such information must be placed under a special disability in the field of competition in order to ensure that he does not get an unfair start; or, in other words, to preclude the tactics which the first defendants and the third defendants and the managing director of both of those companies employed in this case."
183 Many headstart or springboard cases are considered in United States Surgical Corporation v Hospital Products International Pty Ltd (1983) 2 NSWLR 157 at 228-33. It was there accepted that, if the person misusing confidential information gained from the headstart, injunctive relief or damages would be moulded or assessed accordingly, although it was considered that in that case the gain was not a headstart. More recent cases recognising a headstart or springboard advantage are Wright v Gasweld Pty Ltd at 338 and Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 at 615.
184 In the present case the restraint in cl 15 of the 1984 agreement was not against the use of confidential information. It was against manufacture of friction bolts similar in design to the Split Set. Further, and as a result, the springboard advantage recognised by her Honour was not measured by the time it would have taken the defendant legitimately to place itself on equal terms with the plaintiff, but by the time it would take the plaintiff to place itself on equal terms with the defendant.
185 It was not clear that the first appellant submitted on appeal that this made her Honour's approach erroneous. One of the grounds of appeal was that "the 'spring board' principle first propounded in Terrapin Ltd v Builders' Supply Company (Hayes) Ltd 84 RPC is of limited application and in the circumstances of the instant proceedings of none to them". But the argument in the appellants' written submissions under that ground of appeal came down to the argument that the confidential information was not confidential and that, because ANI, AGS and Jennmar manufactured competing friction bolts, the appellants enjoyed no advantage from "their supposed possession of the 'confidential information'." In the light of what I have earlier said, the argument loses its foundation.
186 In any event, I consider that analogous recognition of a springboard advantage entitled her Honour to reason as she did. It is true, as the appellants at one point said, that the 1984 agreement was non-exclusive, so that the respondent could have "tooled up" another manufacturer of Split Sets at any time; it could also have terminated the 1984 agreement on 180 days notice. But it did not have to do so, and there was no reason for it to do so while the 1984 agreement was current and it was receiving a satisfactory supply of Splits Sets from the first appellant. If the first appellant chose to terminate the 1984 agreement, in the absence of cl 15 (and subject to cl 12) the first appellant would be able to make friction bolts similar in design to the Split Set. It would only make them to sell, in competition with the respondent. It would gain from being placed, through being the respondent's manufacturer under the 1984 agreement, in a position in which it was "tooled up" and with knowledge and experience equipping it immediately to make and sell competing products. That gain was a headstart or a springboard advantage.
187 So far as the first appellant's submissions otherwise addressed the reading down of cl 15 of the 1984 agreement, it was said that cl 15 as read down was still against public policy because it would reduce competition by requiring the first appellant to supply friction bolts exclusively to the respondent and preventing it from supplying friction bolts directly to end users.
188 Any restraint of trade is apt to reduce competition. A restraint is not against public policy if it is reasonable in the interests of the parties and reasonable in the interests of the public (the classic statement in Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Co Ltd (1894) AC 535 at 565). As between the parties protection to the party contracting for the restraint is valid if it affords no more than adequate protection ( Herbert Morris Ltd v Saxelby (1916) 1 AC 688 at 707; Buckley v Tutty (1971) 125 CLR 353 at 376). A restraint is not unreasonable in the interests of the public simply because part of its operation protects the promisee against competition, although a restraint which does no more than protect against competition will not be upheld ( Queensland Co-operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 265, 268, 277-9; ICI Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 671), and one aspect of public policy is promotion of commercial agreements by allowing appropriate protection to their parties.
189 A variety of interests have been held to warrant protection, extending to interests such as the maintenance of a stable system of distribution and preservation of secure outlets ( Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd (1968) AC 269), and preservation of a source of supply ( McEllistrim v Ballymacelligot Co-operative (1919) AC 548) and of a customer base and pricing structure ( Peters American Delicacy Co Ltd v Patricia's Chocolates and Candies Pty Ltd (1947) 77 CLR 574). Capital expenditure unrelated to the transaction between the parties does not warrant protection ( ICI Pty Ltd v Sea Containers Ltd at 671-2), but capital expenditure as part of the transaction may warrant protection, as in the expenditure on service station equipment which became the property of the other party in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 290, 308, 318-9. In modern times a narrow view of interests warranting protection should not be taken.
190 The respondent had a monopoly right in 1984, which it shared with the first appellant and from which the first appellant initially greatly benefited. In the performance of the 1984 agreement, and repeating what I have earlier said, the first appellant was placed in a position in which, after the monopoly right ended and the 1984 agreement came to an end, in the absence of cl 15 (and subject to cl 12) it would be able to make friction bolts similar in design to the Split Set. The first appellant was "tooled up" and with knowledge and experience - in part the confidential information but going beyond that information - equipping it immediately to make and sell those products. The respondents had "invested" in the first appellant, and was entitled to be protected from the disadvantage to which it subjected itself by entering into the 1984 agreement, namely that on termination of the agreement the first appellant would immediately be able to make and sell the similar products.
191 The respondent bargained for protection which included cl 15 of the 1984 agreement. That was too wide, but the more limited protection at which Bergain J arrived, sufficient to neutralise the first appellant's springboard advantage, is in my view reasonable between the parties and has not been shown to be unreasonable in the public interest. In my opinion it was open to Bergin J to read down cl 15 of the 1984 agreement in the manner she did, and there was no error in this respect.