Lindner v Murdoch's Garage

[1950] HCA 48

High Court of Australia|1950-07-01|Before: Kitto JJ

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Court

High Court of Australia

Decision date

1950-07-01

Before

Kitto JJ

Source

Original judgment source is linked above.

Judgment (92 paragraphs)

[1]

High Court of Australia Latham C.J. McTiernan, Webb, Fullagar and Kitto JJ. Lindner v Murdoch's Garage [1950] HCA 48

[2]

ORDER Appeal allowed with costs. Judgment of Supreme Court discharged. Action dismissed with costs.

[3]

In an action by a firm called Murdock's Garage against F. R. W. Lindner an injunction was granted restraining the defendant for a period of one year from 4th February 1950 from being employed by any person or company in any business similar to that of the plaintiffs' within five miles from the plaintiffs' premises in Crystal Brook. The judgment was founded upon an agreement in writing made between the plaintiff firm and the defendant on 10th August 1946 when the defendant became an employee of the plaintiff firm at its motor garage in the township of Crystal Brook, South Australia. The agreement provided for a rate of pay and for determination on either side by twenty-one days' notice, and contained the following clause: - "3. The workman will not during his employment or within one year from the termination thereof in any way carry on or be engaged concerned or interested either personally or as a partner or as a servant or employee of any other person or company in the business of garage proprietors, motor and general engineers, agents for the distribution of or dealers in motor accessories or in any other similar business now and hereafter carried on by the employers within the same area either personally or by his agent or by letters, circulars or advertisement in any way compete with the employers in any of the employer's business nor in any way interfere with the employer's customers nor solicit their custom nor use any information concerning the employers, their business or customers which may have been acquired by him through his employment for his own benefit or any person other than the employers or to the detriment or the intended detriment of the employers".

[8]

It is well established that prima facie all restraints upon trade are invalid, but that they may be upheld if the party seeking to enforce them shows that circumstances exist which make the restraint reasonably necessary for protection of a covenantee's business and that it is not contrary to public interests. A distinction is drawn between a restraint upon trade included in an agreement for the sale of a business and a restraint included in an agreement with an employee. The restraint is more easily upheld in the former than in the latter case. In the former case the purchaser is entitled to protect himself against competition on the part of the vendor, but in the latter case he cannot acquire such a right by agreement with the employee: Herbert Morris Ltd. v. Saxelby [1] ; Attwood v. Lamont [2] . It is sometimes said as, for example, in Attwood v. Lamont [2] that a restraint of trade, in order to be valid, must be in the interests of both parties, the covenantor and the covenantee. The restraint in itself may obviously be advantageous to the covenantee. It is difficult to see how any restraint in itself can ever be advantageous to the covenantor, though it may be that he would not, in the case of employer and employee, have been able to obtain employment from the employer, or in the case of the sale of a business, have been accepted as a purchaser of the business, unless he had entered into the covenant. The true meaning of the proposition that the restraint must be in the interests of both parties is explained by Isaacs J. in Brightman v. Lamson Paragon Ltd. [3] , and see Herbert Morris Ltd. v. Saxelby [4] . Where an employee has access to trade secrets or other confidential information he may be restrained by agreement from communicating those secrets or such information to other persons, and particularly to competitors in trade with his employer. Again, an employee who is brought into personal contact with the customers of his employer may by agreement effectively bind himself to abstain after his term of service has been completed from soliciting the customers of his former employer. In these cases the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interest of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer.

[12]

In Herbert Morris Ltd. v. Saxelby [3] , the same principles were recognised and applied. In that case a covenant by a draughtsman not to enter into any form of employment with any person carrying on the manufacture and sale of particular machinery was held to be invalid because it was in the circumstances a covenant against what was described as "competition per se". Lord Atkinson said [4] that the employer "is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use. He is also entitled not to have his old customers by solicitation or such other means enticed away from him. But freedom from all competition per se apart from both these things, however lucrative it might be to him, he is not entitled to be protected against. He must be prepared to encounter that even at the hands of a former employee". Lord Parker of Waddington referring to covenants against competition by a servant, said [5] : - "Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilize information confidentially obtained". Thus the acquisition of personal knowledge of, and of an influence over customers, is an element to be considered in relation to the possibility, "if competition were allowed", of "taking advantage of an employer's trade connection". It was said in Mason's Case [1] per Lord Moulton, that the first task of the court in dealing with a covenant in restraint of trade is to ascertain with due particularity the nature of the master's business and of the servant's employment therein.

[14]

In the present case there is no evidence that the defendant obtained or was expected to obtain any knowledge of trade secrets of his employers. He was, however, brought into close and daily touch with customers who brought in their cars for servicing and repairs, and in a small country town (the population of the district of Crystal Brook is some one thousand five hundred persons) he would develop relations of intimacy with the persons with whom he dealt on behalf of the plaintiffs. Napier C.J. heard evidence on behalf of the plaintiffs, the defendant calling no evidence. His Honour's finding on the nature of the work which the defendant did and the significance thereof in relation to the matter in issue between the parties was: - "If he should stay as he did - for a period of years, he might expect to qualify himself to set up in business on his own account, or to obtain other employment, in some similar capacity, but, from the plaintiff's point of view, the employment must necessarily bring the defendant into constant and intimate contact with the customers of the garage. He was a stranger in the district, but he would not only get to know the customers, but they would get to know him, and - if he stayed on - it would be on the footing that he had their trust and confidence. If he should then leave the plaintiffs' service, and set up in business on his own account or take other employment in the same neighbourhood, he would be in a position to take with him some part of the goodwill of the garage business, and it might well be a very substantial part. It seems to me that there is a difference, in this respect, between a garage in the city and a garage in a country township like Crystal Brook. Even in the city I think that the risk would be appreciable, but in a township like Crystal Brook I think that it would be manifest". In my opinion these conclusions are supported by the evidence, which shows that all the customers of the plaintiff who required their cars to be serviced or repaired would normally deal with the defendant. I base my judgment upon these findings.

[17]

In Bowler v. Lovegrove [1] , upon which the defendant relied, it was held that a covenant restraining an employee who was an outside canvasser for a firm of estate agents was invalid because it was wider than was reasonably necessary for the protection of the plaintiff's business and was accordingly contrary to public policy. It was pointed out, however, that although the defendant came into personal contact with the plaintiff's customers that fact "lost its significance" when the duties of the defendant in connection with the business were considered [2] . It was pointed out that in that case the plaintiff's customers with whom the defendant came into personal contact were not "the ordinary recurring customers such as exist in most other businesses". This was the point of distinction which prevented the covenant from being held to be valid. In the present case the plaintiffs' customers with whom the defendant came into personal contact were the ordinary recurring customers of the plaintiffs. In Putsman v. Taylor [1] the court considered a covenant by an employee of a tailor that he would not for five years be employed in any capacity with any tailor carrying on business in three areas - A or B or C. It was held that the restriction was valid as to A and should be enforced. The decision was founded upon the distinction between employees in general and an employee who is concerned with the management of a business in such a way as to bring him into direct relations with the customers of the business. Salter J. said [2] : - "The relation between a master and the servant who manages his business for him is highly confidential. During the service he is in constant contact with the master's customers, and cannot fail to learn their names and addresses, their likes and dislikes, and something of their financial credit. Such knowledge can be used with effect, after the determination of the service, to induce such customers to transfer their custom to a new employer. Certain conduct of this kind will be restrained, as being in breach of implied terms in the contract of service: Robb v. Green [3] , and Louis v. Smellie [4] . Other conduct of this kind, though injurious to the late employer, will not be restrained in the absence of express agreement. Such agreement need not take the form of a covenant against solicitation. Such a covenant is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition, provided that it is not wider than is reasonably necessary to safeguard his proprietary interest against unfair use by the former servant of information gained during the service: see the judgment of Lord Sterndale M.R. in Attwood v. Lamont [5] ". In my opinion these principles apply to the present case. The defendant managed the repair shop, which was a most important section of the plaintiffs' garage, and was brought into close and intimate relations with the customers in such a way that when he left the employment he would be in a position to take away some, and perhaps a great deal, of the plaintiffs' business. I am therefore of opinion that the covenant, in its relevant terms, did not exceed what was reasonably necessary for the protection of the plaintiffs' interest in its business and is valid.

[19]

It was argued that the area within which the covenant applied, namely Wirrabara as well as Crystal Brook, was too wide because the defendant in fact was employed only at the garage at Crystal Brook and not at the garage at Wirrabara. But this fact in my opinion cannot affect the validity of the covenant. The validity of the covenant must be determinable at the time when the contract is made. The defendant might consistently with the terms of the contract have been employed in work either at Crystal Brook or Wirrabara. I can see no reason for holding that the area of the restraint is too wide. A covenant in restraint of trade is not invalid by reason of the area to which it applies unless the area exceeds that "fairly covered by the business of the covenantee at the date of the agreement or which might at that date reasonably be expected to be covered by such business on the expiration of the agreement" (Brightman v. Lamson Paragon Ltd. [1] ). The two areas are about ten miles apart. In relation to a motor garage business in the country and in view of the great mobility of modern motor cars, the areas should in my opinion be regarded as being contiguous for all practical purposes. No attempt was made to show that at the time when the contract was made (which, as I have said, is the relevant time) no persons in the Wirrabara area went or were likely to go to Crystal Brook for service or vice versa. If such evidence had been tendered it would in my opinion have been irrelevant because the business of the plaintiff in which the defendant accepted employment was a business which extended to both Crystal Brook and Wirrabara and he might have worked at either place. The validity of the covenant cannot be affected by the fact that it happened that his services were used at Crystal Brook only. But, if for some reason the covenant is held to be invalid in respect of Wirrabara, that fact does not afford a reason for holding it to be invalid in respect of Crystal Brook. The covenant relates to two separate areas and may quite well be valid as to one and invalid as to the other: see Putsman v. Taylor [2] ; Marquett v. Walsh [3] ; S. V. Nevanas & Co. v. Walker & Foreman [4] .

[43]

The agreement imposing the restraint, which is in question in the present case, was made about four days after the defendant entered into the plaintiff's employment. The plaintiff thereby agreed to employ him and he agreed to serve the plaintiff at a rate of remuneration "to be fixed between them from time to time but commencing at £7 per week of 48 hours". It is important to notice that the agreement does not mention the specific capacity in which the plaintiff agreed to employ the defendant. The agreement refers to him as "the workman". Another important fact is that the agreement does not fix any period of employment. It was a term of the agreement that either party could terminate the employment on giving twenty-one days' notice or paying or forfeiting twenty-one days' wages in lieu of notice. The restraint upon employment would operate even though the defendant served only for the minimum period for which the plaintiff was bound by the contract to employ him. If the plaintiff exercised his right to dismiss the defendant, with three weeks' wages, within a week from his entering the service or the defendant exercised his right to leave after three weeks, then, according to the terms of the restrictive provision which is in question, he was prevented for a period of twelve months from working whether as a mechanic, a labourer or at any other job in any motor garage in Crystal Brook and the district around it or in Wirrabara, which is thirty miles away, and the district around that town. The plaintiff exacted a covenant imposing a restraint which would operate for twelve months in that area even if the plaintiff exercised its right of dismissal or the defendant his right to retire before he was long enough in the employment to be acquainted with any of the plaintiff's customers or trade secrets. The plaintiff was not bound by the agreement to keep the defendant in any particular position in its workshop or to employ him in Crystal Brook rather than Wirrabara. If the defendant were disposed, in order to protect his own interests, to give notice of the termination of the employment, the restraint was likely to deter him from exercising his contractual right to give such notice. It could operate in terrorem. Fry J. said in De Francesco v. Barnum [1] , "I should be very unwilling to extend decisions the effect of which is to compel persons who are not desirous of maintaining continuous personal relations with one another to continue those personal relations I think the Courts are bound to be jealous, lest they should turn contracts of service into contracts of slavery".

[68]

With regard to the circumstances of this particular case, the effect of the evidence and the validity of the term of the contract which is in question I agree with Napier C.J. The only point which has caused me any difficulty is the fact that the contract of employment is made terminable on twenty-one days' notice on either side. That the period of the employment may be a relevant matter in such cases as the present can hardly, I think, be doubted, but there is authority for saying that what must be taken to have been actually contemplated by the parties may be taken into consideration along with the actual terms of the contract itself. Moreover, it must always be borne in mind that an injunction is a discretionary remedy. In Haynes v. Doman [1] , where the agreement was terminable by a fortnight's notice on either side, Lindley M.R. said: "Possible cases in which the the restriction would not be reasonable are suggested. One would have arisen if the defendant had left the plaintiff's employ within a very short time after entering it, and before the defendant could have acquired or carried away with him any knowledge of the plaintiff's mode of conducting his business. Such an event has not happened, and clearly was not contemplated. This objection, if sound, would invalidate all agreements of the sort determinable on short notice, unless some words were introduced excluding their application to cases never contemplated. Another case to which the restriction could not be reasonably applied would have arisen if the defendant had left business altogether, or had had no dealings with the plaintiff's rivals for twenty or thirty years, and had then resumed business and assisted them". Romer L.J. [2] agreed with the above observations of the Master of the Rolls. The case of Haynes v. Doman [3] was decided before Mason v. Provident Clothing & Supply Co. Ltd. [4] and Herbert Morris Ltd. v. Saxelby [5] but, when all the circumstances are regarded, I think that the decision is quite in line with Dewes v. Fitch [6] , which was decided after the two leading cases in the House of Lords and in which a very similar covenant was held valid. In McPherson v. Moiler [7] where the agreement was terminable by a month's notice on either side, Harvey J. said: "I cannot altogether put out of consideration the fact that on the face of the agreement there was no security of employment for more than from month to month, though exactly what weight has to be given to that it is not easy in the present state of judicial authority to pronounce with any definiteness. The judgment of Lindley L.J. in Haynes v. Doman [8] and the judgment of Eve J. in Dewes v. Fitch [6] both show that the Court may to a certain extent take into consideration what was probable as to the intention of the parties as to the length of the engagement Although the master has the power almost immediately to dismiss the employee, one has to look at the surrounding circumstances to see whether that was seriously in the contemplation of the parties as being likely to happen". It would not be right, I think, in this connection to overlook the notorious fact that the industrial situation in this country at this time is exactly the converse of that which is described by Younger L.J. in Dewes v. Fitch [1] where he refers to the respective bargaining positions of employer and employee. I do not think that the fact that the agreement in this case was terminable by twenty-one days' notice on either side affords any sufficient ground for differing from the view taken by Napier C.J.

[78]

In these circumstances it is necessary to consider what it was for which, and what it was against which, the respondents needed protection: Herbert Morris v. Saxelby [1] . The answer is that they needed protection for their business connection against the possibility of its being affected by the personal knowledge of and influence over the customers which the appellant might acquire in their employment [2] . (I put on one side the preservation of trade secrets because on the evidence I do not think that there were any trade secrets that required protection). To adapt the words of Lord Birkenhead in Fitch v. Dewes [3] , the respondents might claim for their protection that that business which was theirs, and to which they were admitting the appellant in the manner defined in the agreement, should continue to be theirs, and that if at any time the contract of employment between themselves and the appellant should come to an end, on such determination the latter should not be in a position to use "the intimacies and the knowledge" which he had acquired in the course of his employment in order to create or assist a competing business in the same area and by doing so undermine the business connection of the respondents. The knowledge referred to does not include the technical knowledge and skill which the appellant might acquire in the employment: Sir W. C. Leng & Co. Ltd. v. Andrews [4] ; Mason v. Provident Clothing & Supply Co. [5] ; Herbert Morris Ltd. v. Saxelby [6] ; for an employer cannot validly preclude his employee from competition per se, that is competition apart from the divulging or use of trade secrets and enticing away of old customers by solicitation or such other means: Herbert Morris Ltd. v. Saxelby [7] , per Lord Atkinson. The knowledge which, because its use may deprive the employer of the business connection which he is entitled to preserve as his own, he may require his employee to abstain from using, is objective knowledge of customers, their peculiarities, their credit and so forth: [8] ; cf. Routh v. Jones [9] . Against the prejudice likely to result from such "intimacies and knowledge" the respondents were entitled to protect their business by means of a contractual restraint of a width reasonable in reference to the interests of both parties: Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Co. Ltd. [10] ; Herbert Morris Ltd. v. Saxelby [11] . But to be valid, such a restraint "must afford no more than adequate protection to the party in whose favour it is imposed": Herbert Morris Ltd. v. Saxelby [12] ; Mason v. Provident Clothing and Supply Co. [13] .

[81]

But in order that a restraint may be made reasonable in reference to the interests of the parties by means of a geographical limitation, the limitation must, I think, be such as will fairly approximate to a limitation expressed by reference to the employer's customers of whom the employee is likely to acquire special knowledge or with whom the employee is likely to be brought into a personal relation while in the employment: cf. Coote v. Sproule [2] ; Empire Meat Co. Ltd. v. Patrick [3] . In Brightman v. Lamson Paragon Ltd. [4] , Rich J. said: "No restraint is excessive unless the area exceeds that fairly covered by the business of the covenantee at the date of the agreement or which might at that date reasonably be expected to be covered by such business on the expiration of the agreement". No doubt this proposition is accurate as applied to cases such as that with which his Honour was dealing, where the employment is to be co-extensive with the area of the employer's business, and the employee may be expected to form personal relationships with customers in all parts of that area; but it should not, I think, be accepted as accurate in relation to cases where the employer carries on business in several areas, and the employment may be confined to one or some only of the areas and is of such a character that the employee while working in one area is unlikely to be brought into any significant degree of contact with customers in the others. In such a case a restraint upon the employee's becoming connected with a rival business after he leaves the employment will give the employer's business reasonable protection against the effects of the intimacies and knowledge to which Lord Birkenhead referred, if it is limited to the area or areas in which the employee in fact works within a reasonable time before the termination of his employment; and a restraint which applies indiscriminately to all the areas in which the employer carries on business will exceed what is reasonably necessary to prevent the injury to his business against which he is justified in guarding.