Plaintiffs v Defendants

3 Prior to June 2016, Mr Palmer's company, Lendossa Pty Ltd, owned 40 per cent of the shares in Southern Cross Computers. He sold the shares to the second plaintiff, Ingenio Group Pty Ltd, in 2016. The agreement pursuant to which the shares were sold provided for payment of $3.5m to an entity associated with Mr Palmer.

4 The agreement also provided for Mr Palmer to continue as an employee of Southern Cross Computers and to be subject to a number of restraints operative for a period of up to four years from the completion date of the share sale agreement being 28 June 2016.

5 The central issue in the current interlocutory application turns on the construction of a restraint contained in clause 14.1(a) of the share sale agreement which relevantly provides:

During the Restraint Period, each Restricted Person must not, within the Restrained Area, directly or indirectly, either on their own account or as an employee, member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, beneficiary, partner, associate, trustee, nominee, custodian, financier, representative, salesperson or in any other capacity whatsoever for any other person, firm, association or corporation (except as is expressly permitted by this agreement):

(a) carry on, engage in or have any involvement in the Restricted Business.[2]

There is no issue that Mr Palmer is a Restricted Person within the relevant definition.

6 The restraint in clause 14.1 is to be read in conjunction with the definition of Restricted Business and Business. Restricted Business is defined as 'any business which is competitive with, or likely to be competitive with, the Business at the relevant time during the Restraint Period'.[3] Business is defined as 'the business of IT procurement and associated IT managed services carried on by the Company'.[4]

7 This is an interlocutory application and it is therefore neither appropriate nor necessary for the Court to express a concluded view as to the enforceability of clause 14.1(a). It is, however, necessary for the Court to form a view as to the strength of the plaintiffs' claim that clause 14.1(a) does impose a valid enforceable restraint.

8 In Freedom Finance Accounting Pty Ltd v Goldstein,[5] I cited with approval the statement of Younger LJ in British Reinforced Concrete Co v Schelff,[6] where his Honour stated:

It is the business sold which is the legitimate subject of protection, and it is for its protection in the hands of its purchaser, and for its protection only, that the vendor's restrictive covenant can be legitimately exacted.[7]

9 The question which arises in the present application is whether clause 14.1(a) read in conjunction with the definition of Restricted Business and Business imposes a restraint which operates beyond the scope of the business of Southern Cross Computers as at 28 June 2016. If so, it is strongly arguable that the clause is unenforceable as an unreasonable restraint of trade.

10 Heydon, in his seminal text, The Restraint of Trade Doctrine,[8] summarises the principle as follows:

Similarly, a covenant not to enter 'any business competing or liable to compete in any way with that for the time being carried on' by the buyer is void because it is framed with reference to the buyer's future activities, not the scope of the seller's business at the time of sale.[9]

11 Mr Collins QC, who appeared with Mr Kirby for the plaintiffs, submitted that clause 14.1(a) is confined to the scope of the business of Southern Cross Computers as at 28 June 2016.[10] He submits that the definition of Business focusses attention on the scope of Southern Cross' activities of IT procurement and associated IT managed services as at 28 June 2016.[11] He submits that this is the business which was sold and which can legitimately be protected from competition by clause 14.1(a).[12]

12 On the other hand, Mr Herskope who appeared with Mr Freire on behalf of the defendants, focused on that part of the definition of Restricted Business which relevantly states, 'the Business at the relevant time during the Restraint Period'. He submitted that these words extended the scope of the business protected from competition beyond that which existed as at 28 June 2016.[13] He submitted that the definition has ambulatory effect shielding the business of Southern Cross Computers from competitive activity for a period of up to four years, notwithstanding that the scope of its activities may have extended during that period beyond those which existed as at 28 June 2016.[14]

13 The arguments on behalf of both the plaintiffs and the defendants have some merit. However, I have determined that for the purposes of this interlocutory application the construction advanced on behalf of the plaintiffs is to be preferred.

14 The reference to Business in the definition of Restricted Business is a reference to the business activities of IT procurement and associated IT managed services carried on by Southern Cross Computers as at 28 June 2016. So construed, the protection conferred by clause 14.1(a) does not extend beyond the scope of the Business at the time of sale. The phrase in the definition of Restricted Business 'at the relevant time during the restraint period' is not otiose. It allows for consideration of whether a Restricted Person such as Mr Palmer is providing services to a business competing with Southern Cross Computers during the Restraint Period in the sense that the competing business is also engaged in the business of IT procurement and associated IT managed services.

15 I am therefore satisfied that the plaintiffs have established a serious question to be tried.[15] I am also satisfied that the balance of convenience favours the grant of relief.[16] First, Mr Palmer was paid $3.5m for his shares in Southern Cross Computers. In return, he promised not to work for a competitor business for a period of up to four years. Prima facie he has been engaging in conduct contrary to the terms of the share sale agreement.

16 Second, the period of the restraint which will flow from the orders I propose to make will be for a short time pending a final hearing, which will commence on 27 July 2017. Third, any loss of income flowing from the injunction will not be significant as Mr Palmer has only been working one day a week and earning approximately $5,000 per month. He will in any event be protected by the plaintiffs' undertaking as to damages. On the other hand, if Mr Palmer did continue to provide services to Blue Connections Pty Ltd, it will be difficult for the plaintiffs to prove that any damage to its business has been caused by Mr Palmer acting in breach of clause 14.1(a). It is well established that it is a rare case, involving the enforcement by injunction of a negative covenant, that relief will be denied on the basis that damages are an adequate remedy.[17]

17 Finally, I note that Mr Herskope pointed to the delay of some two months in the plaintiffs coming to court to seek injunctive relief from when they were first aware that Mr Palmer was working for Blue Connections.[18] I have taken this delay into account,[19] but I do not consider, in the weighing exercise which I have undertaken, that the extent of that delay is sufficient to deny the plaintiffs an injunction for a relatively short period of time. I propose to grant relief in the terms of paragraph 1(a) of the amended summons.

[1] Amended Summons dated 21 June 2017, [1](a).

[2] Exhibit DW-2 to the affidavit of Denise Wightman sworn 23 June 2017, Share Sale and Purchase Agreement, 27.

[5] [2017] VSC 179.

[6] [1921] 2 Ch 563.

[8] J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 3rd ed, 2008).

[10] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd & Anor v Palmer & Ors (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 June 2017) T20 L25 - T21 L1, T32 LL5-10, T42 L15 - T44 L30.

[15] See J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 3rd ed, 2008), 318, citing American Cyanamid Co v Ethicon Ltd [1975] UKHL 1; [1975] AC 396 and Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57, 81-84.

[17] See Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659; (2012) 222 IR 172, [129]-[132]. See also Cerilian Pty Ltd v Graham Fraser [2008] NSWSC 1016, [10]; Otis Elevator Company Pty Ltd v Nolan [2007] NSWSC 593, [17]-[30]; IceTV v Duncan Ross [2007] NSWSC 635; Huhtamaki Australia Ltd v Botha [2004] NSWSC 386, [17].

[18] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd & Anor v Palmer & Ors (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 June 2017) T56 LL2-5, T57 LL16-24; see also Defendant's Outline of Submissions dated 26 June 2017 [32].

[19] See, eg, Pearson v Arcadia Stores, Guyra, Ltd [1935] HCA 41; (1935) 53 CLR 571, 585; Turner v General Motors (Aust) Pty Ltd [1929] HCA 22; (1929) 42 CLR 352, 366 (Isaacs J); Victoria v Australian Education Union [2013] FCA 72, [23].