Restraint of trade
66 The meaning of the terms of a commercial contract is ascertained by what a reasonable business person in the position of the parties would have understood those terms to mean. This requires the Court to consider the language used by the parties, the surrounding circumstances known to them and the purpose or object secured by the contract: Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd (2014) 306 ALR 25 at 33-34 [35] per French CJ, Hayne, Crennan and Kiefel JJ. Their Honours continued, saying (at 33-34 [35]):
"Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd (in rec), unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." (footnotes omitted)
67 It is significant that cl 4.3 does not apply to restrict the use of the demised premises. Rather, on its face the clause restricts the sublessee in the manner it carries on any business from any place in the world by prohibiting the sublessee from using the word "Thredbo" in connection with that business. Thus, cl 4.3 is not a restrictive covenant of the kind in Tulk v Moxhay [1848] 2 Ph 774; 41 ER 1143 restricting the sublessee (Mr Smith) in the way in which he may use the land. It is not a covenant about the use of land, far less the demised premises, at all. Rather, it is a restriction on the way in which the sublessee can carry on any business at all merely because the sublessee is in the relationship of tenant and landlord.
68 Whether a restraint is one within the legal doctrine of restraint of trade is determined by having regard to its practical working rather than merely its legal form: Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 134 [14] per Gleeson CJ, Gummow, Kirby and Hayne JJ. Some restraints are understood to have no practical operation that bring them within the doctrine. The test for ascertaining whether the restraint falls within that class, and so is outside the operation of the doctrine, was settled in this Court by Heerey J, with whom Miles J and O'Connor J agreed in Australian Capital Territory v Munday (2000) 99 FCR 72 at 93 [105] as being whether it is accepted as part of a trading society in the sense explained by Lord Wilberforce in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 335B-D: see Peters 205 CLR at 138 [23]. The Court of Appeal of the Supreme Court of Victoria assumed that the trading society test should be applied in Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 305 ALR 569 at 581 [57] per Buchanan, Mandie and Osborn JJA. Lord Wilberforce examined a number of accepted instances where the doctrine did not apply and said ([1968] AC at 335B-D):
"One may express the exemption of these transactions from the doctrine of restraint of trade in terms of saying that they merely take land out of commerce and do not fetter the liberty to trade of individuals; but I think one can only truly explain them by saying that they have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society. If in any individual case one finds a deviation from accepted standards, some greater restriction of an individual's right to "trade," or some artificial use of an accepted legal technique, it is right that this should be examined in the light of public policy."
(Emphasis added.)
69 KT did not challenge or seek leave to challenge the correctness of Munday 99 FCR 72. KT merely asserted that there was now a class of contract in which a restraint of the kind imposed by cl 4.3 was an accepted restriction on the way a contracting party could carry on a business. KT's submission that cl 4.3 should be construed as restricting the use of the word "Thredbo" in a business name of a business the sublessee carried on in the demised premises flies in the face of the ordinary and natural meaning of cl 4.3. That clause does not, in terms, limit its prohibition of the use of "Thredbo" to use merely as a part of a business name. Rather, it prohibits use of that name "in connection with any business carried on by the Sublessee". The words "in connection with" create a very wide ambit in which the prohibition will operate.
70 However, the parties cannot have intended that the clause would be read as prohibiting the sublessee giving "Thredbo" as part of its address. That is because, in cl 20, the sublease contemplated that Mr Smith, as part of a business conducted from the demised premises, could, indeed had to, offer the demised premises to the public as holiday accommodation. A necessary part of such an offer would be the provision of the address of the accommodation in Thredbo. The parties, reasonably, would have understood that the sublessor authorised that use when the sublease was made. That is, by reading the sublease as a whole, including cl 20, there was no need for Mr Smith to seek KT's consent to using or giving out the address of the demised premises as part of the business of offering them as holiday accommodation.
71 This construction does not reflect either side's reading of cl 4.3. Yet it flows necessarily from the terms of cl 20 when read as part of the sublease as a whole. Once the parties expressly provided for Mr Smith not only to be able, but to be required, to conduct a business of offering the demised premises as holiday accommodation, it is difficult to understand why cl 4.3 applied to that business at all, as opposed to all other businesses the conduct of which on those premises was prohibited by cl 20(a). After all, the nature of the business that cl 20(a) authorised Mr Smith to carry on was the offer to the public of accommodation in the demised premises at Thredbo.
72 We reject the respondents' argument that, because cl 20(d) did not require the sublessee to advertise the availability of the accommodation, there was no inconsistency between that provision and cl 4.3 and that cl 4.3 should not be read down by reason of the operation of cl 20. The sublease was a commercial agreement. It required the sublessee to conduct a substantive accommodation business using the demised premises for at least 26 weeks in each year of its 50 year term. It would create a commercially nonsensical result to read the sublease as prohibiting the use of the word "Thredbo" in any advertising of the demised premises as accommodation by the sublessee. And, it would work commercial inconvenience so to read cll 4.3 and 20: Verve Energy 306 ALR at 33-34 [35].
73 Moreover, for the purposes of consideration of cl 4.3 as a restraint of trade, the Court looks to the practical working of the clause: Peters (WA) 205 CLR at 134 [14]. If the practical working of cll 4.3 and 20 were as the respondents argued, the sublessee could only advertise the availability of the accommodation it was leasing in ways that did not use the word "Thredbo". While the respondents suggested possible scenarios in which that could occur (such as in a real estate agent's window in Thredbo), the limiting of the sublessee's promotion of its demised premises to those scenarios demonstrated the commercial inconvenience of that construction.
74 The parties could not reasonably have contemplated that the sublessee, Mr Smith, could conduct such a business without using the word "Thredbo" in connection with it. The location at which the holiday accommodation was to be offered obviously had to be named as "Thredbo". Moreover, a reasonable person in the position of the parties would have expected that the sublessee was free to advertise the availability of the demised premises in the ordinary way holiday resort accommodation is advertised, including on the internet. That being so, there is no reason to read a limitation into cl 4.3 such as that suggested by KT, that confined its restraint to using the word "Thredbo" in the business name or in order to identify any business carried on by Mr Smith that conformed to the use authorised in cl 20. A reasonable business person in the position of the parties, in light of the sublease's commercial purpose, the context, and the market in which they were operating, would have understood cl 4.3 to restrain the sublessee's use of the word "Thredbo" in respect of activities other than those that reflected the, or a, central purpose of the sublease.
75 Accordingly, cl 4.3 did not affect Mr Smith or ThredboNet in the ways KT complained of as a breach. Although the respondents did not challenge the primary judge's view that Mr Smith was prima facie in breach of cl 4.3 if it were valid, his Honour did not have his attention directed to the effect of cl 20 on the proper construction of cl 4.3 in the context of the subleases as a whole. And, as we have observed above, in this appeal, neither side propounded the construction of cl 4.3 which we consider correct. Because of that construction we are of opinion that Mr Smith did not breach cl 4.3. The clause did not apply to the present dispute. In the circumstances, cl 4.3 must have been intended to prohibit the sublessee from using the word "Thredbo" in a way that created a connection between any other business than providing accommodation that the sublessee might establish or conduct and the business or goodwill of the appellants' resort known as "Thredbo".
76 The effect of this construction is partly complementary to KT's common law right to seek relief in respect of acts or conduct that a sublessee might engage in amounting to passing off, or misleading or deceptive conduct representing the sublessee's business as that of KT to the extent that it could assert such rights in respect of the word "Thredbo" and the activity or conduct complained of. However, if the sublessee carried on another business, then cl 4.3 prohibits him using "Thredbo" in connection with it, regardless of any relationship that business might have to the demised premises.
77 There was no evidence before the primary judge of how lessees operating businesses in locales such as shopping centres or holiday resorts are permitted to use the developer's or operator's name for the centre or resort as part of the lessee's trading name. A franchisee of, say, a hamburger business in such a location, may wish to distinguish itself by adopting the franchisor's name with the suffix "at X Centre". There was no material before his Honour or us to suggest that it is an accepted or necessary part of tenancy leases in shopping centres or resorts that there is a restraint on using the centre's or resort's name without the lessor's permission in or to the effect of cl 4.3.
78 We reject KT's argument that the primary judge erred by not, in effect, taking judicial notice of some unspecific practice to include restraints like cl 4.3 in commercial leasing arrangements. This is because, first, KT had great difficulty in explaining a rational operation of the limitation in the use of the word "Thredbo" created by cl 4.3. The parties could not have intended that the ordinary and natural (i.e. literal) construction of cl 4.3 would apply even in leases without a clause like cl 20 in the respondent's lease. That is evident because every business subjected to the restraint was in fact connected to, and likely to operate in, Thredbo. The clause must be read to accommodate that reality, including the ability of the business to use its own address in dealing with the public and suppliers and in advertising its location. It would be extraordinary to find, without cogent evidence of commercial usage, that it was a generally necessary and accepted incident of commercial leases in shopping centres and resort complexes that a lessee trader could not use the name of the centre or resort in any connection with its business without the lessor's consent which the lessor was at liberty to withhold in its absolute discretion. We are not prepared to infer that such a commercially absurd restriction is reflective of a reasonable and business-like construction of cl 4.3: Verve Energy 306 ALR at 33-34 [35]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. Far less do we accept that construction in respect of the argument as to the doctrine of restraint of trade, that a clause having that effect is an accepted part of the Australian trading society.
79 Secondly, as Buchanan, Mandie and Osborn JJA observed in Specialist Diagnostic 305 ALR at 584-585 [75]-[76], it would be anomalous if the geographic extent of an obligation in a clause that extended a restraint beyond the land retained by the lessor could not be examined by the Courts in order to ascertain whether it was reasonable either as between the parties or in the public interest. Thirdly, their Honours adverted to the difficulties in inferring that a restraint, in certain contexts, was an accepted part of this trading society without evidence (see 305 ALR at 585 [77]-[78]).
80 There will be some contexts where a court can draw such an inference without evidence, as Heerey J explained in Munday 99 FCR at 93 [107]-[108] where he said:
"A common, and important, way of deriving economic benefit from land is the grant of exclusive licences for the conduct of business thereon. Such licences are only of value because of the expectation that other persons will enter upon the land and be customers, but not competitors. So persons gaining admission to the Melbourne Cricket Ground who happen to be caterers would not expect to be able to set up a pie stall in competition with those who have been granted exclusive catering rights by the MCG. Nor would a television station expect to be able to send camera operators into the ground to transmit broadcasts in competition with the channel which has exclusive contractual rights.
It is true that Revolve's contractual rights only extended to material left or abandoned at the Tip. His Honour reasoned that Revolve's rights were therefore not infringed when the appellant persuaded entrants to hand over items to him rather than deposit them - as exemplified by the incident involving the plastic bottles. However, I think looking at the matter from a business viewpoint the ordinary and reasonable expectation of Revolve must have been that people taking rubbish to the Tip (and paying a fee for the opportunity to do so) would leave the material there. This would be, objectively speaking, the commercial genesis and purpose of the contract between Revolve and the appellant."
(Emphasis added.)
81 Here, the commercial genesis and object of the sublease was to allow the sublessee to conduct the business of offering the demised premises to the public as holiday accommodation at Thredbo as part of a business that included those premises. That context does not suggest, one way or another, how the parties must reasonably have intended that each could use the word "Thredbo" in connection with their respective, and not necessarily wholly complementary, commercial interests in exploiting their business opportunities. Hence, the plenary reach of cl 4.3, and the need to construe it to arrive at a commercially practicable operation for it, demonstrate that a restraint in its literal terms cannot be considered as a commonplace in Australia. The very need to construe the objectively-intended operation of cl 4.3 in the context of the sublease as a whole suffices to explain why the wording of the restraint in cl 4.3 cannot be inferred or treated as being an accepted part of a trading society.
82 It may well be that some other shopping centres and resort complexes have some form of restraint clauses in leases, but those clauses would have to be construed as part of those leases as a whole, in accordance with the ordinary principles of contractual construction. The way in which any such restraint may operate and its validity in its own factual context are not matters that can be assumed without evidence.
83 KT bore the onus of proving that cl 4.3 was an accepted part of the machinery of a trading society. It did not discharge that onus. Accordingly, the doctrine of restraint of trade operates on cl 4.3 and its validity falls to be determined under that doctrine.
84 The practical working of cl 4.3 imposed a restraint of trade on the sublessee. However, given the construction of cl 4.3 at which we have arrived, it does not prevent Mr Smith carrying on a business as he and ThredboNet have or in the ways complained of by KT.
85 Because of the conclusion we have reached on the construction of cl 4.3 when read with the sublease as a whole in the manner a reasonable business person would read it, as explained in Verve Energy 306 ALR at 33-34 [35] and the authorities to which French CJ, Hayne, Crennan and Kiefel JJ referred, the questions of whether cl 4.3 is an unreasonable restraint or can and should be read down under the Restraints of Trade Act do not arise. However, we are not persuaded that cl 4.3 imposes a reasonable restraint of trade. It lacks any connection to the demised premises or any other reasonable basis connected to the sublessor's legitimate interests, such as the protection of its goodwill and trading reputation. The plenary restraint in cl 4.3, outside the activities contemplated by cl 20, preventing a sublessee conducting any business giving even its address as Thredbo is unreasonable. In our opinion, cl 4.3 is void at common law, as his Honour correctly held.