//
[2017] VSC 460
General information, not legal advice.
Supreme Court of Victoria
2017-08-14
McDonald J
Original judgment source is linked above.
CONTRACT - Sale of business agreement - Restraint of trade - Enforceability of covenant in restraint of trade - Whether restraint reasonable - Application for injunction granted.
1 On 27 June 2017 the Court heard an interlocutory application brought by the plaintiffs seeking orders restraining Mr Palmer from being employed by a competitor, Blue Connections Pty Ltd. The Court granted the plaintiffs' application.[1] On 27 July 2017 the Court heard an application for final orders which would have the effect of extending the interlocutory relief granted on 27 June 2017 until 28 June 2020. I have concluded that the restraint imposed upon Mr Palmer by cl 14.1 of the Share Sale and Purchase Agreement ('Agreement') is enforceable. The plaintiffs are entitled to an injunction operative until 28 June 2020 restraining Mr Palmer from having any involvement in the business of Blue Connections Pty Ltd.
2 The central issue in the present proceedings is summarised in the Court's interlocutory judgment as follows:
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.
There is no issue that Mr Palmer is a Restricted Person within the relevant definition.
3 During the hearing on 27 July 2017 both Mr Collins QC, who appeared with Mr Kirby for the plaintiffs, and Mr Herskope, who appeared with Mr Freire on behalf of Mr Palmer, made submissions consistent with those they had presented at the interlocutory hearing. Their respective submissions are conveniently summarised in the interlocutory judgment as follows:
Principles governing the enforceability of restraints
4 The principles governing the enforceability of restraint of trade clauses are well settled:
(a) A contractual provision in restraint of trade is, prima facie void.
(b) The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.
(c) The validity of the covenant in a contract is to be judged as at the date of the Employment Agreement.
(d) A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.
(e) The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.
(f) So far as the parties' interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.
(g) The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.[4]
5 In Just Group Ltd v Peck,[5] the Court of Appeal stated:
A term in a contract, which is a restraint of trade ('a restraint clause'), is presumed to be void as contrary to public policy.
The presumption may be rebutted if there are special circumstances that demonstrate the covenant to be:
(a) reasonable as between the parties; and
(b) not unreasonable in the public interest.
The test of reasonableness varies depending on 'the situation the parties occupy and so recognising different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business'. A court takes a 'stricter view' of restraint clauses in employment contracts; and will more readily uphold a restraint clause in favour of a purchaser of the goodwill of a business than a restraint clause in favour of an employer. In particular, a purchaser of a business is entitled to protect itself from competition by the vendor; but an employer is not entitled to protect itself from competition per se by an employee.[6]
6 In Butt v Long,[7] Dixon CJ identified the characteristics distinguishing the purchaser of the goodwill of a business from that of an employer seeking to restrain competitive activity by an employee. His Honour stated:
A distinction is drawn between the position of the purchaser of the goodwill of a business taking a covenant in restraint of trade from his vendor and the case of the owner of a business taking such a covenant from his servant or apprentice. The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment and if the purchaser is to take over such goodwill with all its advantages it must in his hands remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is therefore reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser.[8]
7 Ingenio Group Pty Ltd, as the purchaser of Lendossa Pty Ltd's shareholding in Southern Cross, was entitled to reasonable protection of the goodwill in the business attributable to that shareholding. As Judd J observed in Allison v BDO (NSW - Vic) Pty Ltd:[9]
There can be no doubt that the purchaser of goodwill is entitled to reasonable protection of the goodwill. That is a matter which will be prominent in the mind of a court in deciding whether or not a restraint is enforceable.[10]
8 The test of the reasonableness of a goodwill covenant therefore focuses upon what is necessary to protect the goodwill in the business which has been sold. In British Reinforced Concrete Co v Schelff,[11] Younger LJ 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.[12]
9 Heydon summarises the relevant 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. A covenant not to deal in 'real or imitation jewellery' was held too wide where the seller's business was only that of a dealer in imitation jewellery. An agreement not to enter businesses 'similar' to that sold was bad because the only business capable of protection was the one sold. An agreement by the seller of a fat and bone business to stay out of the soap business was held bad, as was a covenant restraining the seller of a retail food business from competing with that or any other business. Agreements not to enter 'business' are bad unless limited to the business formerly carried on by the covenantor.[13]
Does cl 14.1(a) when read in conjunction with the definition of Restricted Business impose a restraint which extends beyond the scope of Southern Cross' business as at 28 June 2016?
10 The starting point for addressing this question is consideration of the defined terms Restricted Business, Business and Company:
11 When the definitions of Restricted Business and Business are read together the effect of cl 14.1(a) is to restrain Mr Palmer from carrying on, engaging in, or having any involvement in:
12 If the defined term 'Business' where it appears in the definition of 'Restricted Business' is confined to 'the business of IT procurement and associated IT managed services carried on by the Company' as at 28 June 2016 (being the completion date under the Agreement), the words 'at the relevant time during the Restraint Period' do not add anything to the scope of the business activities which are subject to the restraint in cl 14.1(a). If so, the restraint imposed by cl 14.1(a) is prima facie valid and enforceable. Mr Collins submits that the defined term Business must be read in the context of the Agreement as a whole.[17] He submits that, so construed, 'the Business' in the definition of 'Restricted Business' means the business of IT procurement and associated IT managed services.[18] He submits that these are the business activities which were undertaken by Southern Cross as at 28 June 2016.[19] The net effect is that 'the Business' is confined to the activities which were undertaken by Southern Cross as at 28 June 2016.[20]
13 Mr Collins' submission that the meaning of a defined term in a contract is to be construed by reference to context, including the terms of the agreement as a whole, is plainly correct.[21] The restraints imposed upon Mr Palmer by cl 14.1 form part of a share sale and purchase agreement pursuant to which each of Lendossa Pty Ltd and Mandossa Pty Ltd (the seller) agreed to sell all of their shareholding in Southern Cross to Ingenio Group Pty Ltd. Under the terms of the Agreement, Mr Palmer was entitled to consideration in the sum of $3.5 million for his shareholding in Southern Cross.[22] Following adjustments made in accordance with the terms of the Agreement, the ultimate price paid by Ingenio for the shares acquired from Lendossa was $2,662,500.[23] Plainly, even after taking into account this adjustment, Southern Cross paid a substantial amount of money to acquire Lendossa's shareholding. It is not in dispute that whilst the money was not paid directly to Mr Palmer, it was paid into a trust which he controls.[24]
14 The plain meaning of Restricted Business, read in conjunction with Business, strongly supports the plaintiffs' contention that the scope of the business activities the subject of the restraint in cl 14.1(a) is confined to IT procurement and associated IT managed services. These were the activities undertaken by Southern Cross as at 28 June 2016.
15 Mr Collins submitted that the phrase in the definition of Restricted Business 'at the relevant time during the Restraint Period' is directed to the activities undertaken by the competing entity during the restraint period.[25] Mr Herskope, on the other hand, submitted that the phrase is directed to the activities undertaken by Southern Cross during the Restraint Period and, so construed, the definition has an ambulatory effect which extends the scope of the activities the subject of the restraint beyond those which were undertaken by Southern Cross as at 28 June 2016.[26]
16 Even if 'at the relevant time during the Restraint Period' refers to the activities of Southern Cross (rather than the activities of the competing entity), a competing business will only be a Restricted Business if it is engaged in activities which are the same as those undertaken by Southern Cross as at 28 June 2016. For example if, during the four year restraint period, Southern Cross branched out into a new area of business which it had not undertaken as at 28 June 2016, such as manufacturing computers, this activity would not be caught by the definition of Restricted Business. Such manufacturing activities would constitute the 'business' of Southern Cross, but would extend beyond the 'Business' as defined. Accordingly, if Mr Palmer commenced employment with a company manufacturing computers, that company would not be a Restricted Business and the restraint in cl 14.1(a) would not operate.
17 The definition of 'Business' identifies the business activities which were being undertaken by the company as at 28 June 2016. This is consistent with the fact that the definition appears in a share sale agreement, governing the sale of shares in the business as it operated at a specified date. The defined term 'Business' is confined to those activities. The phrase 'at the relevant time during the Restraint Period' does not extend the operation of the restraint in cl 14.1(a) beyond the scope of the business activities undertaken by Southern Cross as at 28 June 2016. Subject to consideration of the matters below, the restraint in cl 14.1(a) read in conjunction with the definition of Restricted Business is prima facie valid and enforceable.
18 On 27 July 2017 both Mr Collins and Mr Herskope made submissions regarding the extent to which the Court could have regard to an amendment to the definition of Restricted Business in a draft of the Agreement dated 2 April 2016.[27] In the draft, Restricted Business is defined as 'means any business which is competitive with, or likely to be competitive with, the Business at the relevant time during the Restraint Period as carried on at the Completion Date'.[28]
19 The amendment was prepared by Southern Cross' solicitors.[29] It inserted the phrase 'at the relevant time during the Restraint Period' in lieu of the phrase 'as carried on at the Completion Date'. Mr Herskope submitted that the terms of the amendment constituted evidence of the mutual intention of the parties to the Agreement that the restraint imposed by cl 14.1(a) was not confined to the business activities of Southern Cross as at 28 June 2016.[30]
20 Both Mr Herskope and Mr Collins made extensive submissions regarding the extent to which the Court could legitimately have regard to an amendment to a draft agreement as an aid to the construction of the agreement in its final form. It is unnecessary to revisit these submissions. Assuming in Mr Palmer's favour, that the terms of the amendment evidence an intention of the contracting parties that the scope of the restraint in cl 14.1(a) operates by reference to the Business of Southern Cross at the relevant time during the Restraint Period (rather than the Business carried on as at 28 June 2016), the key question remains: What is meant by the defined term 'Business' within the definition of 'Restricted Business'?
21 I have concluded that 'Business' is confined to the business of IT procurement and associated IT managed services. These were the activities of the business of Southern Cross which were carried on by it as at 28 June 2016. Whatever the intention of the parties in removing the phrase 'at the Completion Date', the defined term Business confines the restraint in cl 14.1(a) to the scope of the business activities undertaken by Southern Cross as at 28 June 2016. The deletion of the phrase 'at the Completion Date' from the draft of the Agreement did not alter the meaning of 'Restricted Business'. Indeed, the competing submissions of the parties regarding the utility of the amendment as an aid to the construction of the Agreement, brings into sharp relief the observations of Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW):[31]
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.[32]
22 I do not accept that the amendment constitutes objective evidence as to the mutual intention of the contracting parties. It is quite possible that in agreeing to the amendment the contracting parties had differing views as to what the effect of the amendment would be. I have concluded that the deletion of the phrase 'at the Completion Date' did not expand the scope of the activities undertaken by Southern Cross the subject of the restraint in cl 14.1(a), beyond those undertaken as at 28 June 2016. It is possible, that in drafting the proposed amendment, Southern Cross took the view that the words 'at the Completion Date' were otiose because they added nothing to the scope of the protection arising under the definition of Restricted Business by reason of the defined term Business. Ultimately, it is unproductive to speculate as to what the intention of the contracting parties were in proposing and agreeing to the terms of the amendment. The objective intention of the parties is clearly discerned from the terms of the Agreement as executed.
23 The matters set out above address the question of the reasonableness of the restraint imposed by cl 14.1 by reference to the legitimate interest of Southern Cross in protecting the goodwill in the business which it acquired pursuant to the Agreement. There are two other matters which bear upon the reasonableness of the restraint. First, the geographic reach of the restraint. Second, the period during which the restraint is operative.
24 As to the first matter, cl 14.3 of the Agreement defines the Restraint Area as:
(a) Australia;
(b) Victoria, New South Wales, the Australian Capital Territory, Queensland and Western Australia; or
(c) Victoria.[33]
25 There was some dispute between the parties as to whether or not Southern Cross had commercial operations Australia wide which would justify the breadth of the restraint area as set out above.[34] However, Mr Herskope quite properly accepted that irrespective of whether Southern Cross was undertaking business activities throughout Australia in June 2016, when cl 14.3 is read in conjunction with cl 14.1(a) the scope of the geographic restraint is confined to locations where a business is competing with the IT procurement and associated IT managed services carried out by Southern Cross.[35] He accepted that when the geographic restraint is read with the definition of Business, the effect is to read down what otherwise might be an objectionable aspect of the geographic restraint.[36]
27 I consider that the four year restraint period is reasonable. First, Mr Palmer had worked at Southern Cross since May 2001. He was designated in cl 1.1 of the Agreement as a 'Key Employee'.[39] Second, the four year restraint period is a term in an agreement which was freely entered into by Mr Palmer's company, Lendossa Pty Ltd. Third, Southern Cross paid a substantial amount of consideration in return for the terms of the Agreement, including the restraints imposed upon Mr Palmer. Fourth, although the Restraint Period operates for up to four years, the Agreement provides for Mr Palmer to continue as an employee of Southern Cross.[40] Prior to the Completion Date of 28 June 2016, Mr Palmer had entered into a fixed term contract of one year expiring June 2017.[41] Therefore, when the parties executed the Agreement, their expectation would have been that the restraint imposed by cl 14.1(a) would not operate prior to June 2017.
28 In Birdanco Nominees Pty Ltd v Money,[42] the Court of Appeal upheld the validity of a three year restraint in an employment contract. Robson AJA stated:
Justice Heydon suggests a test that has particular relevance in this case: 'how soon the hold of the old employee over customers will weaken: that is, what is the time that would have to elapse before a branch manager who has quit the territory would no longer be able to return and acquire his business?'
In my view, it is probable that Mr Money would still retain some material level of attachment necessarily formed with a client by providing 'the Services' after an almost six year break in providing those services. Mr Money would have a degree of knowledge of the client's affairs that would avoid the client having to explain and disclose its financial structure and history, something that it would have to disclose if it retained somebody unaware of its circumstances. Part of the attraction to the client of retaining Mr Money would be the attachment that was formed when he was employed by Bird Cameron in providing 'the Services' to the client.
In my opinion, three years is a reasonable time during which Bird Cameron was entitled to protection against Mr Money exploiting the goodwill he created for the benefit of Bird Cameron when providing 'the Services' to clients of Bird Cameron.[43]
29 The three year restraint which was upheld in Birdanco was a covenant in an employment contract. It is well established that the courts take a stricter view of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.[44]
30 Finally, I accept the plaintiffs' submission that whilst the consideration of the reasonableness of a restraint turns upon the facts of a particular case, there is nothing exceptional in a four year restraint in the context of a goodwill case where the vendor receives a substantial amount of consideration.[45] In Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd,[46] a ten year restraint was upheld. In C & S Constructions Pty Ltd v Dawson,[47] a five year restraint was upheld. In Pioneer Concrete Services Ltd v Galli,[48] a five year restraint was upheld. In Bridge v Deacons,[49] a five year restraint was upheld.
31 The plaintiffs are entitled to an order restraining Mr Palmer from having any involvement in Blue Connections Pty Ltd until 28 June 2020. The plaintiffs also seek orders which will have the effect of restraining Mr Palmer from soliciting persons who were employed by Southern Cross as at 28 June 2016 from leaving their employment with Southern Cross. They also seek an order the effect of which will be to restrain Mr Palmer from soliciting any person who was at 28 June 2016, or at any time during the 12 month period prior to 28 June 2016, a customer of Southern Cross with a view to obtaining the custom of any such person in the business of Blue Connections Pty Ltd. Mr Herskope did not advance any submissions opposing these orders.[50] However, I pointed out to Mr Collins on 27 July 2017 that I would not be prepared to make an order restraining Mr Palmer from soliciting customers of Southern Cross without a list of the relevant customers being prepared and being annexed to an order of the Court.[51]
32 I shall provide the parties with an opportunity to make final submissions on the form of an order to give effect to these reasons for judgment and also to make submissions on the question costs.
[1] Southern Cross Computer Systems Pty Ltd v Palmer [2017] VSC 412.
[2] Ibid [2]-[6], [9] (citations omitted).
[3] Ibid [11]-[12] (citations omitted).
[4] Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24; (2013) 45 VR 657, [14].
[6] Ibid [30]-[32] (citations omitted).
[13] J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 3rd ed, 2008) 203-4 (citations omitted).
[14] Affidavit of Denise Wightman sworn 23 June 2017, "DW-2", 8.
[17] 'Plaintiffs' Outline of Submissions for the Trial on 27 July 2017' dated 25 July 2017, [9]; Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T46 L27 - T47 L9; Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 June 2017) T35 LL15-18.
[18] 'Plaintiffs' Outline of Submissions for the Trial on 27 July 2017' dated 25 July 2017, [14].
[20] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 June 2017) T36 LL6 -24.
[21] See Apple & Pear Australia Ltd v Pink Lady America LLC (2016) 343 ALR 112, [229]-[230].
[22] Amended Statement of Claim dated 21 June 2017, [7].
[23] Affidavit of Christopher Palmer sworn 19 July 2017, [5].
[24] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 June 2017) LL22-24.
[25] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T10 LL3-20, T87 L24 - T88 L13.
[26] 'First Defendant's Outline of Submissions' dated 25 July 2017, [13].
[27] See Affidavit of Denise Wightman sworn 23 June 2017, "DW-1".
[29] Affidavit of Denise Wightman sworn 23 June 2017, [4].
[30] 'First Defendant's Outline of Submissions' dated 25 July 2017, [16]; Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T56 LL7-15.
[33] Affidavit of Denise Wightman sworn 23 June 2017, "DW-2", 28.
[34] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T77 LL2-13.
[36] Ibid. See also Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR 1, [38].
[37] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T90 LL18-20.
[38] Affidavit of Denise Wightman sworn 23 June 2017, "DW-2", 28.
[42] [2012] VSCA 64; (2012) 36 VR 341 ('Birdanco').
[43] Ibid [82]-[84] (citations omitted).
[44] Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24; (2013) 45 VR 657, [14].
[45] 'Plaintiffs' Outline of Submissions for the Trial on 27 July 2017' dated 25 July 2017, [23].
[46] [1987] FCA 70; (1987) 17 FCR 505, 524.
[47] (1991) ATPR 41-148, 53,107-53,108.
[48] [1985] VicRp 68; [1985] VR 675, 694.
[49] [1984] AC 705, 717.
[50] Transcript of Proceedings, Southern Cross Computer Systems Pty Ltd v Palmer (Supreme Court of Victoria, S CI 2017 01876, McDonald J, 27 July 2017) T90 LL7-10.
Southern Cross Computer Systems Pty Ltd
Palmer
(2013) 45 VR 657
(2016) 264 IR 425
(1953) 88 CLR 476
(2016) 343 ALR 112
(1982) 149 CLR 337
(2012) 41 VR 1
(2012) 36 VR 341
(1987) 17 FCR 505