Supreme Court of SA|1995-11-02|Before: Matheson J, Debelle J, Doyle CJ

RENTOKIL PTY LTD v ANITA KATE LEE No. SCGRG 95/400 Judgment No. 5318 Number of pages - 47 Contracts (1995) 66 SASR 301 [1995] SASC 5318 (2 November 1995)

COURT IN THE IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA DOYLE CJ(1), MATHESON(2) AND DEBELLE(3) JJ

CWDS Contracts - general contractual principles - illegal and void contracts - contracts contrary to public policy - Deed restraining employee's involvement in certain businesses - restraint reasonable as to duration and area - restraint on involvement in 'any capacity'

particular capacities also stated
wide definition including particular capacities cannot be read down by reference to events not within contemplation of parties - definition unreasonably wide - severance - severance a question of parties' intention - particular capacities severed from definition of capacity. Brooks v Burns Philp Trustee Co Ltd ; ; Attwood v Lamont , applied. Home Counties Dairies Ltd v Skilton , distinguished.

HRNG ADELAIDE, 18 August 1995 #DATE 2:11:1995 #ADD 12:12:1995

JUDGE1 DOYLE CJ This is an appeal from a decision of a District Court Judge holding that a provision contained in a "Non-Competition Deed" made between the appellant as employer and the respondent as employee was not enforceable as against the employee. The relevant provision restrained the employee, after termination of the employment, from involvement in certain types of business. The Judge found that the restraint was not enforceable because although it was reasonable as to area and duration, it was unreasonable in relation to the range of activities restricted by the provision. Accordingly, the restraint afforded more than reasonable or adequate protection to the party in whose favour it was imposed, and so applying common law principles relating to restraint of trade clauses it was unenforceable.

I have read in draft the judgments of Matheson J and Debelle J. I agree with them that the employer's appeal should be allowed, the Notice of Contention filed by the employee that the restraint was unreasonable both as to area and duration notwithstanding. The matter should be remitted to the District Court for assessment of damages.

However, because I have reached that conclusion by an approach which differs in some respects from the approach taken in those judgments, it is necessary for me to set out my reasons for agreeing with them in the ultimate conclusion. I will do so briefly.

I do not propose to repeat the facts. They are to be found in the judgments of Matheson J and Debelle J.

I agree with most of what is to be found in those judgments. In particular, I agree with their conclusion that the District Court Judge erred in his approach to the interpretation of the restraint, and that the restraint in cl 2.2(a)(ii) is intended to limit the employee only from involvement in a business which is competitive with the business divisions of the employer in which the employee was employed. I agree that in principle such a restraint is reasonable and therefore enforceable. I also agree with the reasons of Matheson J and Debelle J for concluding that the restraint is reasonable as to area and duration.

That leaves the issue of whether the restraint is shown to be no more than is reasonable in the interests of the parties and in the interests of the public notwithstanding the operation given to it by the definition of "capacity" in cl 1.1 of the Deed.

As to that also I am in agreement with the broad approach taken by Debelle J. In particular I agree that the Courts should not take an approach to such provisions that would make it almost impossible to draft a clause which, from the employer's point of view, provided appropriate protection in a range of circumstances which could not be foreseen with any precision by the employer when the contract is entered into.

In particular, an employer who has a relevant protectable interest should be able to obtain effective protection against an employee engaging in a competitive business when the employee's engagement in that business would enable the employee to make use of the knowledge of and influence over customers of the employer which the employee might have acquired and to make use of protectable information in the possession of the employer: cf Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628 at 653-654 Kitto J and at 636 Latham CJ (diss).

It is well established by the cases that an employer who has a protectable interest is not limited to a restraint which prevents the specific conduct which would infringe that protectable interest. In other words, the employer is not restricted to a restraint which prohibits solicitation of former customers or making use of confidential information. It is well established that an employer may restrain a former employee from engaging in a business when to do so is likely to present an opportunity to behave in a manner which would infringe upon or damage the employer's protectable interest. That is what the employer has done here, and in principle that is permissible.

I also accept that in construing such restraints a Court will not treat them as providing a protection which is more than reasonable, and so hold them void, because there are circumstances, falling within the restraint but either unlikely to occur or not within the contemplation of the parties, in which the protection provided by the restraint would be more than reasonable. The judgment of Lindley MR in Haynes v Doman (1890) 2 Ch 13 at 24-26 which is set out in the judgments of Matheson J and Debelle J adequately expresses this principle. To my mind the principle is concisely summarised in Home Counties Dairies Ltd v Skilton (1970) 1 All ER 1227 by Salmon LJ at 1233: "If a clause is valid in all ordinary circumstances which can have been contemplated by the parties, it is equally valid notwithstanding that it might cover circumstances which are so 'extravagant', 'fantastic', 'unlikely or improbable' that they must have been entirely outside the contemplation of the parties."

But in my opinion there is not much scope for that approach in the present case. The Deed spells out in quite precise terms what the parties meant by the expression "in any capacity". The meaning given to the term "capacity" is an inclusive meaning, not a definition, but the Deed makes it clear that it is the intention of the parties that any of the identified forms of involvement in a business are to be caught. I do not consider that any of them can be disregarded.

I find some support for this approach in the case of Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co Pty Ltd [1973] HCA 40; (1972) 133 CLR 288. The majority judgments in the High Court were those of Walsh J (with whom McTiernan ACJ agreed) and Gibbs J.

The submission was advanced that, despite the wide terms of the restraint in question, that restraint should not be considered unreasonable, because it was unlikely that the stipulation would be enforced. This submission relied upon a statement of Lord Reid in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; (1968) AC 269, in which His Lordship had said that (at 303): "(if) a garage owner chooses to rely on the commercial probity and good sense of the producer, I do not think that a court should hold his agreement unreasonable because it is legally capable of some misuse."

This submission was rejected by Walsh J, who stated (at 300-1): "There may be cases in which it is very clear that a provision would never be enforced according to its strict terms and I do not question the propriety of disregarding in such cases some theoretical possibility. But I am of opinion that, except within very narrow limits, the Court must have regard to the rights and obligations created by the agreement rather than to the manner in which it thinks it is likely that the agreement will operate in fact."

In my opinion, the approach taken in this passage indicates that the Court is not free to disregard the wide definition of "capacity" in the Deed.

This is not a case in which an attack on the validity of a restraint is mounted on the basis that a general expression which in most applications would give no more than reasonable protection is capable, if taken to the limit, of applying and so giving protection which is more than reasonable. The difficulty, as I see it, is that the meaning given to "capacity" gives protection in circumstances which would mean that the protection is more than reasonable. In the present case we are not concerned with circumstances which are "extravagant" or which must have been outside the contemplation of the parties - we are concerned with circumstances specifically identified by the Deed.

It seems to me that the meaning given to "capacity" by the Deed would give protection which is more than reasonable, having regard to the protectable interest, insofar as it applies to a shareholder or unit holder, to a financier and to a guarantor. I also have some difficulty about its application to a member, in part because of my uncertainty as to the meaning of that expression.

It seems to me that the other capacities which are identified, such as employee and principal and director, identify an involvement in a competitive business which, as a matter of common sense, gives rise to a real risk of the employee's involvement infringing or damaging the employer's protectable interest. Applying the principles established by the cases it is, therefore, permissible for the employer to restrain the employee from involvement in a competitive business in those capacities. To the extent that it might be said that that restraint provides more than reasonable protection, the principle identified by Salmon LJ in the passage cited above is relevant.

But in respect of the other capacities identified, the position is, as a matter of common sense, that there is no basis for saying that involvement in a competitive business in those capacities would ordinarily give rise to any real risk of an infringement of or damage to the employer's protectable interest. That is not to say that an involvement, such as a shareholder or unit holder or financier or guarantor, could not lead to the employee becoming involved in a manner which infringes or damages the employer's protectable interest. But in my opinion the mere possibility of that occurring is not sufficient to justify the restraint. One must bear in mind that the general words of cl 2.2(a)(ii) provide protection against involvement in a business in a manner likely to damage the employer's protectable interest.

In my opinion the principle underlying the cases is that an employer with a relevant protectable interest can restrain an employee from accepting a position the nature of which is such that the employee would be likely to utilise confidential information or trade connections which have been acquired in the course of the employment. A restraint against accepting such a position will be read in a sensible fashion and, ordinarily, as not intended to apply to such a position in name but in which there is no risk of anything happening against which the employer could reasonably require protection. But if the employer identifies positions as subject to the restraint, being positions which do not give rise to the relevant risk, then it seems to me that on its face the restraint has gone too far.

To take this approach is not to put the employer in a difficult, let alone an impossible position. The employer can use fairly general expressions, such as were used here - "carry on, be associated with or engaged or interested in" - knowing that the Courts will not read such general expressions as extending to an involvement unlikely to give rise to any risk of injury to the employer's protectable interest. Or, if the employer so wishes, the employer can identify positions in a competitive business which would ordinarily give rise to the relevant risk - "principal, agent, director, employee" - once again knowing that the Courts will read such provisions in a practical way. But in my opinion the employer cannot then identify other means of involvement which, as a matter of common sense, do not give rise to the relevant risk and expect the restraint to survive.

For these reasons it is my opinion that the Deed goes too far, or provides protection which is more than reasonable, to the extent that it restrains the employee from being involved in a competitive business merely by virtue of being a shareholder or unit holder or by being a financier or guarantor. In other respects I consider that the restraint does not provide protection which is more than reasonable.

But in my opinion the fact that in this respect the Deed provides more than reasonable protection to the employer does not lead to the invalidity of the Deed as a whole. Clause 4 of the Deed, which is set out in the judgment of Matheson J, manifests an intention on the part of the parties that a provision which becomes unenforceable is to be ineffective only to the extent of the unenforceability. In my opinion that provision can be read as applicable to a provision as a whole or to parts of a provision.

It is well established by the cases that if part of an agreement is invalid or unenforceable, that part may, under certain circumstances, be severed from the balance of the agreement or disregarded. In considering this issue the Court is not concerned with the construction of the particular provision. I have already expressed my views on the proper construction of the relevant provisions. The Court in considering severance is concerned with the question of whether, properly construed, the relevant agreement should be permitted to operate as between the parties with some part of its apparent or intended operation not being given effect. But while the Courts have said on many occasions that they will not rewrite the contract for the parties, in order to create a valid restraint from an invalid restraint, the question is again ultimately one of intention. The question is whether, construing the contract as a whole, it may be concluded on an objective basis that the parties intended the relevant provision to have the reduced operation if it could not have its full operation.

Accordingly, the exercise is not one in which the Court endeavours to create a valid restraint. It is one in which the Court should be mindful of the interests of employers and of employees, and it is clear that the Courts have shown some restraint in applying the principle of severance to save the validity of a restraint imposed on an employee which restraint would be unenforceable if it were given its apparent effect. But in dealing with these considerations the Court must give appropriate attention to the intentions of the parties.

In the present case I consider that cl 4 of the Deed makes it clear that the parties intended severance to take place. I do not understand cl 4 as authorising severance of a type which would, in the words of Lord Sterndale MR in Attwood v Lamont (1920) 3 KB 571 (at 580): "... alter entirely the scope and intention of the agreement."

Clause 4 indicates an intention on the part of the parties that subject to that overriding restraint it is their intention that provisions may be disregarded if they are particular provisions or words which to the extent of their operation render the Deed unenforceable. The decision of the Court of Appeal in Attwood v Lamont is often cited in this context. In that case the Court took the view that severance could not take place on the simple basis that severance was mechanically possible by applying the blue pencil test and striking out particular words which rendered a provision unreasonable and unenforceable. The reason for this was that, in the opinion of their Lordships, the relevant contract could not be construed as containing a number of separate covenants each expressed by the particular occupation identified. Reading the contract as a whole there was a single all embracing restraint and to break it up into a number of separate restraints was to change the nature of the intended contract. This was how Younger LJ expressed it (at 593): "The doctrine of severance has not, I think, gone further than to make it permissible in a case where the covenant is not really a single covenant but is in effect a combination of several distinct covenants. In that case and where the severance can be carried out without the addition or alteration of a word, it is permissible. But in that case only.

Now, here, I think, there is in truth but one covenant for the protection of the respondent's entire business, and not several covenants for the protection of his several businesses. The respondent is, on the evidence, not carrying on several businesses but one business, and, in my opinion, this covenant must stand or fall in its unaltered form."

In the present case it is my opinion that cl 4 indicates that it is the parties' intention that the various restraints imposed upon the employee by the meaning given to "capacity" should be read as separate restraints, and that severance may take place, provided that to do so does not alter the scope and intention of the agreement. As Taylor J said (in a slightly different context) in Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432 at 442: "But the problem of severability is the same in either case; fundamentally the question is one of intention to be gathered from the instrument itself: Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 and Whitlock v Brew [1968] HCA 71; (1968) 118 CLR 445."

In my opinion the expressions which I have identified as providing protection to the employer which is more than reasonable can be severed from the meaning given to "capacity" without altering the underlying scope or intention of the Deed. In my opinion to do so does not involve the Court rewriting the promise which the parties have expressed. What remains is a workable agreement, an agreement consistent with the underlying intention to protect the employer against activities of the employee which would infringe or damage the employer's protectable interest, and an agreement which is consistent with the intention indicated by the parties: cf Cheshire and Fifoot's Law of Contract (6th Australian edition) para (1310).

I do not find it necessary to decide whether, as Matheson J has held, the whole of the meaning given to "capacity" can be severed from the Deed.

It is on that basis that I would allow the appeal, make the declaration that the appellant employer claims by way of amendment allowed at the hearing of the appeal, and remit the action to the District Court for assessment of damages.

JUDGE2 MATHESON J This appeal by a plaintiff employer concerns the construction of what is commonly called a covenant in restraint of trade. The learned trial Judge stated his findings of fact with some care. The employee, who is the defendant/respondent, does not challenge his findings, which I now set out:

"The plaintiff is a corporation with international business interests in the area of environmental services. It is engaged in the business of sanitary hygiene including the provision to non-residential premises of wash room services, soap dispensers, hand dryers and the sanitary disposal of used tampons, nappies and similar products.

Although the parent company of the plaintiff is based in England, the plaintiff is nevertheless established in Australia and has a presence in each of the Australian States carrying on business as aforesaid.

The plaintiff is separated into, and operates under, four separate divisions. Two of them have no relevance to the proceedings before me. They are "the Pest Control Division" and "the Tropical Plants Division". One of the other two divisions of the plaintiff's business which is of relevance for present purposes is the Calmic Hygiene Services Division ("Calmic").

Calmic is engaged in the business of hiring and servicing a variety of hygiene products including soap dispensers, wash room services and hygiene treatment apparatuses for non-residential premises.

The other division of relevance to the proceedings before me is the Healthcare Services Division ("Healthcare"). This division is engaged in business which involves the provision of feminine hygiene services including the sanitary disposal of used napkins and tampons. It is also involved in the provision of, and with dispensing equipment for, those items, as well as the hiring of hand dryers.

Although each division operates separately from the others and from different premises, there is nevertheless some intermingling of their respective activities. At one stage, for example, all divisions combined to participate in "swap sales meetings". At those meetings information gained by the various consultants employed by the various divisions in the field was passed on to all others. Another example of that intermingling was that sales leads which had been received in the course of any of the consultants' work of any division in the field would be recorded and eventually would be passed on to members of the appropriate division for their attention.

The company's head office is located in New South Wales. There are branches in each of the other States. Healthcare has a general manager. There are also area managers for each of the branches. There is only one branch in South Australia. That branch is divided into five geographical areas. Each area is serviced by a sales consultant. The sales consultant is appointed by the company, inter alia, to secure contracts with potential customers and to renew contracts with existing customers, in each instance for periods of about two years. The period of the contract is negotiable and may be longer or shorter than that stated. The plaintiff uses a standard form of contract. By one of its terms it reserves the right to vary the contracted price during the currency of the contractual period. All consultants, including the defendant, are aware of that fact but make it their business not to draw it to the attention of potential customers and not to discuss it with them unless specifically requested to do so. The geographical areas as well as the number of sales consultants and the territory which is allocated to each of them are all subject to change by the company from time to time, depending on the circumstances as seen by management in the best interests of all concerned.

The defendant was initially employed by the plaintiff as a sales consultant or representative in Calmic. She was involved in the marketing of the product and services of that division. Her employment began in March of 1992 and continued until the end of November 1992.

In January 1993 the defendant was employed by the plaintiff as a sales consultant or representative in Healthcare. The terms of that employment are recorded in a written agreement which is dated 7th January 1993. That document is in evidence as P5. Whilst at Healthcare the defendant was involved in the marketing of the plaintiff's health care products and was responsible for the canvassing of new customers and for attending on existing customers. Her task was to secure new contracts, renew existing ones and generally to attend to the ongoing requirements of existing and/or of new clients. She was remunerated by means of a basic salary and was paid commissions with respect to sales which she might be able to secure above a prescribed minimum.

The defendant could only operate within certain designated areas. I do not find it necessary to make (a) precise finding as to what were her designated areas of operation whilst she was engaged either in the Calmic division and/or in the Healthcare division. It is sufficient for me to say that her territory was extensive and covered a large proportion of the State including the North Eastern suburbs (bounded by Main North Road to the East and by the beach to the west) and country areas including the Eyre Peninsular(sic), the Yorke Peninsula and the Iron Triangle."

(I interrupt the quotation to say that I think his Honour would have been more accurate if he had not included his words in brackets, and had added "the Eastern, North Western, Northern and Western suburbs". )

"The defendant did not operate beyond her designated areas of operation except for limited periods and as required by the plaintiff's authorised officers from time to time in the event of some other consultant being absent for extended periods on sick leave or for some other reason. On one occasion the defendant spent some three months in the South Eastern region of the State for that purpose.

Some of the plaintiff's customers were multi-sited in the sense that they operated in more than one place, and in some

cases in more than one geographical area as delineated by the plaintiff for its purposes. Some of those customers operated centrally from head office. Others had autonomous branches. The defendant dealt only with the head office purchasing officer and with those autonomous branches within but not outside her designated geographical area.

For the purpose of its operation the plaintiff maintains a file on each customer. The file contains various information including the contract, the installation notice, the quotation and the survey report relating to particular customers.

There are literally thousands of files with respect to both past and present clients of the plaintiff. All files on former clients are archived. Those on existing clients are kept in filing cabinets within the branch office itself. Sales consultants have free access to those files. It is company policy however, that the information contained in those files is to be kept confidential and is not to be diss(e)minated. The files may not be photocopied and cannot be taken out of the office. All files, but in particular those on existing clients, are regarded by the plaintiff as being of a confidential nature. They are commercially sensitive. That fact had been made known to the various consultants including the defendant who understood and was aware of the fact that all files and their contents were, and were to remain, confidential to the plaintiff and to the plaintiff's employees for the purposes of their employment with it.

The plaintiff operates a computer. It keeps a list of all its customers on it. The customer list contains sensitive information relating to each customer including:- (a) the name and address of the customer; (b) the location where the services are provided, especially in the case of multi-sited customers; (c) the services provided by the plaintiff; (d) the price charged for the services; (e) the frequency of the services; (f) the date of the first contract; (g) the variations in price since the first contract; and other information.

All information kept by the plaintiff in its files on customers and on its computer is acquired through the efforts of the sales consultants. That information is updated on a regular basis as and when fresh material comes into existence. Access to information kept on computer is limited to the branch administrator and to the branch manager only. Pass words are in existence in order to access that information by those officers. Sales consultants are not provided with any pass word. They do not have direct access to the computer, but each of them can

be made aware of the computer data upon request to, and through, one of the two authorised officers of the plaintiff. The hard copy of the information so provided is regarded as being commercially sensitive and of a highly confidential nature. It can only be inspected within the office itself. It may not be photocopied or removed and must be returned to one of the two authorised officers for destruction upon completion of the inspection by the sales consultant concerned. The defendant was made aware of that fact and understood that that was so.

In the course of her employment with the plaintiff the

defendant was provided, on a regular monthly basis, with a list of the plaintiff's customers whose contracts with it were about to expire. It was her task to re-negotiate those contracts. Having attended upon each customer named on the list which had been provided to her, it was her duty to return the list to the branch manager for destruction. Once again the information contained on the computer list was considered to be highly confidential and commercially sensitive. The defendant knew and understood that to be the case.

Except for the names of customers appearing on those lists, and the customers whom she had herself secured, the defendant did not know the identity of the plaintiff's customers in her designated area of operation or in any other area. It was possible however, for her to gain that information upon request and on making appropriate arrangements in the event that she had wanted to acquire it for the purposes of her employment duties. For the purpose of its operation the plaintiff, of course, prepared, distributed and updated price lists for its products and services. Although the actual method of pricing was not communicated to its employees the price lists in questions were handed to sales consultants. The defendant received those lists from time to time. It was company policy that the contents of those lists was not to be diss(e)minated. Consultants were not permitted to quote prices over the phone. It was company policy that that had to be done face to face only. The plaintiff regarded its price lists as confidential material, particularly because in many cases its prices were substantially higher, and in some cases lower than those charged by its competitors.

During the time of the defendant's employment with the plaintiff the defendant visited, contacted and/or had dealings with thousands of the plaintiff's existing and potential customers. She spent a substantial proportion of her time "cold calling", a term used in the industry to

describe the activity of systematic door knocking in a particular street or area in an endeavour to secure new contracts.

Upon being employed and/or re-employed by the plaintiff the defendant underwent an extensive training program in relation to sales techniques (including selling and planning) and product knowledge both in Adelaide on an information basis, and later in Melbourne on a more formal and concentrated basis when she attended a three day conference held in Victoria for that purpose. At that time she was provided with various information including information in the nature of "Material Safety Data Sheets".

Shortly after the defendant's engagement in the plaintiff's Healthcare division in January of 1993 the defendant entered into a written agreement. That document is dated 7 January 1993 and is in evidence as Exhibit P5. In that document the defendant agreed that upon the cessation of her employment with the plaintiff she would not disclose or make use of any confidential information of the plaintiff, and that during a period of six months following the termination of that employment she would neither solicit nor compete for the custom or business of any person who was a customer of the plaintiff and to whom she had provided services or with whom she otherwise had had contact during the six months preceding the termination of that employment.

In January 1994 the defendant agreed to accept changed terms and conditions of her employment. Those changes are contained in a letter dated 13 January 1994 addressed to the defendant and subsequently signed by her. That document is in evidence as P7. The changed terms and conditions of the defendant's employment with the plaintiff included a non disclosure clause which provided that after termination of her employment with the plaintiff the defendant would

neither disclose to any unauthorised person any "confidential" information which she may have received in the course of her employment with the plaintiff, nor would she use or attempt to use any such information in any manner which may cause or which may be calculated to cause injury or loss to the plaintiff. Confidential information was defined in that document as including but not being limited to inter alia manufacturing processes, business or trade secrets, customer lists, customer pricing and servicing information.

In accordance with the terms of the acknowledged letter of 13 January 1994 (Exhibit P7) the parties subsequently entered into the Deed which is the subject of these proceedings. That document is in evidence as P8. "

I set out the Deed in full, excluding the execution clause: "NON-COMPETITION DEED

BETWEEN ANITA KATE LEE (the "Employee") AND RENTOKIL PTY. LIMITED A.C.N. 000 034 597 of 150 Mowbray Road, Willoughby, New South Wales, 2068 (the "Company")

A. The Employee wishes to enter, or continue in, Employment.

B. It is a condition of the Employee entering, or continuing in Employment, that the Employee execute this Non-Competition Deed.

Definitions and Interpretation 1.1 Definitions

In this Deed (including the Recitals) unless the context indicates a contrary intention:

'Capacity' means any capacity including, without limitation, as principal, agent, director, employee, shareholder or unitholder (other than as the holder of no more than 5% of the issued capital of any company or trust whose shares or units are listed on a recognised stock exchange), partner, joint-venturer, member, trustee, beneficiary, financier, guarantor, advisor or consultant.

'Employment' means the employment (including any prior period or periods of employment) of the Employee by the Company.

'Related Body Corporate' has the meaning given in section 9 of the Corporation Law.

1.2 Interpretation In this Deed (including the Recitals) unless the context indicates a contrary intention: (a) words denoting the singular number shall include the plural and vice versa; (b) words denoting gender shall include all genders; (c) words denoting individuals shall include bodies corporate, unincorporated associations and authorities; (d) headings are for convenience only and shall not affect interpretation; (e) references to this Deed and any deed, agreement or instrument shall include references to this Deed or such other deed, agreement or instrument as amended, novated, supplemented, varied or replaced from time to time;

(f) references to any party to this Deed shall include its successors or permitted assigns; and (g) references to any statute, ordinance or other law shall include all regulations and other enactments thereunder and all consolidations, amendments, re-enactments or replacements thereof.

Non-Competition 2.1 During Employment The Employee will not, during the Employment, either directly or indirectly in any Capacity: (a) carry on, be associated with, or be engaged or interested in, any business or activity which is competitive with any business carried on by the Company during the Employment; or

(b) be associated with, or be engaged or interested in, any public or private work or duties which, in the reasonable

opinion of the Company, may interfere with or detract from the performance of the Employee in the Employment.

2.2 After Termination of Employment The employee will not, after the termination of the Employment, either directly or indirectly in any Capacity: (a) carry on, be associated with or engaged or interested in: (i) if the Employee is a General Manager, an Area Manager, a Branch Manager or is employed in another position the title of which includes the word 'Manager'

(other than a Service Manager or a Sales Manager) at the date of termination of the Employment - the business, for

the period and within the area specified in the First Schedule; and (ii) if the Employee is on the Sales, Service or Administrative Staff at the date of termination of the Employment and is not an Employee to whom clause 2.2(a)(i) applies, - the stream of business, for the period and within the area specified in the Second Schedule. (b) canvass, solicit, procure or otherwise induce or attempt to induce away from the Company all or part of the custom of any person who or which during the Employment or

at the date of termination of the Employment was or is a client or customer of or supplier to the Company or who was or is in the habit of dealing with the Company; (c) solicit, counsel, procure or otherwise induce or attempt to induce any employee or agent of the Company to terminate their employment or relationship with the Company; or (d) counsel, procure or otherwise assist any person to do any of the acts referred to in clauses 2.2(b) and 2.2(c).

2.3 The provisions of clauses 2.1 and 2.2 shall apply to each period of the Employment.

Breach May Result in Summary Dismissal A breach of clause 2.1 of this Deed shall render the Employee liable to summary dismissal.

Severability Any provision of this Deed which is, or becomes, illegal, void or unenforceable, shall be ineffective to the extent only of such illegality, voidness or unenforceability and shall not invalidate any other or the remaining provisions of this Deed.

No Waiver No relaxation, forbearance, indulgence, delay, failure or omission by the Company at any time to enforce or require strict compliance with any provision of this Deed shall affect or impair that provision in any way or the right of the Company to avail itself of the remedies it may have in respect of any breach of any such provision.

Variation This Deed may not be changed or modified in any way except by a deed signed by or on behalf of each of the Employee and the Company.

Acknowledgment The Employee acknowledges that the provisions of this Deed shall not be affected and shall continue to apply notwithstanding a change in the Employee's job classification or description during the course of the employment.

Governing Law This Deed shall be construed according to the laws of that State or Territory within the Commonwealth of Australia in

which the Employee is employed by the Company at the date on which a provision of this Deed is required to be construed

or action is instituted to determine or enforce the rights of a party to this Deed, and the parties submit unconditionally to the non-exclusive jurisdiction of the courts of that State or Territory and courts with jurisdiction to hear appeals therefrom.

Business: Any business carried on by the Company at the date of termination of the Employment.

Period: Two (2) years after the date of termination of the Employment.

(It was agreed by both parties that the clause in brackets was incorrectly typed or drafted and should have read "Clause 2.2(a)(ii))

Business: Any business stream of any business carried

on by the Company at the date of termination of the Employment in which the Employee is employed at that date or in which the Employee has been employed within 2 years prior to that date. For this purpose, the Calmic Hygiene Services Division and the Healthcare Services Division shall be deemed to be a business stream.

Period: One (l) year after the date of termination of the Employment.

Area: The State or Territory of the Commonwealth of Australia in which the Employee was employed at the date of termination of the Employment."

The respondent resigned from her employment with the appellant with effect from 14 April, 1994, and commenced employment with one of the appellant's principal competitors in South Australia, Pink Environmental Services, on 18 April, 1994 as a sales consultant in the area of sanitary hygiene. To employ the language of Buckley LJ in Marion White Ltd v Frances (1972) 3 All ER 857 at p861, I think the respondent's conduct was "really quite inexcusable". She admitted in her defence that "in the course of (the) employment (she) has canvassed, solicited, procured or otherwise induced or attempted to induce the (appellant's) customers away from the (appellant)". The appellant alleged that the respondent's actions were in breach of clause 2.2(a)(ii) and 2.2(b) of the Deed, and claimed various remedies for that breach. At the hearing which took place between 24 January, 1995 and 1 February, 1995, the appellant's claim was limited to a claim for injunctions. The period of restraint specified in the Second Schedule is one year from the termination of the respondent's employment with the plaintiff, and that period has already expired. The learned trial Judge found that clause 2.2(b) was expressed too widely in that it was unlimited in time, and was therefore unreasonable. The appellant does not challenge that finding. Accordingly, in lieu of injunctions, the appellant now seeks declarations that clause 2.2(a)(ii) is valid and enforceable against the respondent and that the respondent is in breach thereof, and an order that its claim for damages be remitted to the District Court for assessment.

The learned trial Judge correctly identified the legal principles relating to agreements in restraint of trade, and the protection of confidential information in particular, and reached the following conclusion: "I am satisfied to the appropriate degree as I now find that the plaintiff's customer lists, price lists and sales leads are so commercially sensitive as to make each of them highly confidential so as to entitle the plaintiff to have each of them protected, not necessarily as the plaintiff has attempted to do, but by an appropriate restrictive covenant at any rate ... The question now is: Is the restriction contained in clause 2 of the Deed reasonable in all the circumstances of the case, or has the plaintiff gone too far so as to make the covenant void and unenforceable?

The question of reasonableness is a question of law to be determined by the court on the special circumstances of each case, Herbert Morris Ltd v Saxelby (1916) 1 AC 688 to 707. The onus of proving the special circumstances justifying the restriction as reasonable between the parties lies on the person alleging it to be so. Similarly the onus of proving injury to the public is on the person asserting it to be so Salt Company's case 1914 AC at page 470; Saxelby's case (1916) 1 AC at page 700.

For it to be upheld by the court then a covenant must be adjudged to be reasonable (as it was said in Nordenfelt v Maximum Nordenfelt Guns and Ammunition Co 1894 AC 535, at page 565:- 'In reference to the interests of the public, so framed and so guided as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is no way injurious to the public.'

This statement of principle is generally understood as meaning that for it to be upheld, the restrictive covenant must be reasonable in all the circumstances of the case both as to the period of time in respect of which the restraint has been imposed, as well as to the area restrained, and as to the employee's capacity or the employee's trade which has been restricted or restrained."

The learned trial Judge found in the appellant's favour that the relevant "restrictive covenant" was reasonable as to the period of time in respect of which the restraint was imposed as well as to the area restrained. The respondent has filed a Notice of Contention, and contends that the judgment of the learned trial Judge should be upheld for the reasons given by him and, alternatively or additionally also, on the following ground: "That clause 2.2(a)(ll) of the Non-Competition Deed is void and unenforceable in that the restriction contained therein as to geographic extent and duration are unreasonable in all the circumstances."

His Honour found in the respondent's favour that the "restrictive covenant" was not reasonable as to the employee's capacity which has been restricted or restrained. To understand the argument on this aspect of the case, it is convenient to repeat again the relevant parts of clause 2.2 of the Deed: 2.2 After Termination of Employment The employee will not, after the termination of the Employment, either directly or indirectly in any Capacity: (a) carry on, be associated with or engaged or interested in: (i) if the Employee is a General Manager, an Area Manager, a Branch Manager or is employed in another position the title of which includes the word 'Manager' (other than a Service Manager or a Sales Manager) at the date of termination of the Employment - the business, for the period and within the area specified in the First Schedule; and (ii) if the Employee is on the Sales, Service or Administrative Staff at the date of termination of the Employment and is not an Employee to whom clause 2.2(a)(i) applies, - the stream of business, for the period and within the area specified in the Second Schedule. (b) - (d) inclusive ...

Business: Any business carried on by the Company at the date of termination of the Employment.

Period: Two (2) years after the date of termination of the Employment.

(Clause 2.2(a)(ii)) (I have corrected the Clause reference as agreed)

Business: Any business stream of any business carried on by the Company at the date of termination of the Employment in which the Employee is employed at that date or in which the Employee has been employed within 2 years prior to that date. For this purpose, the Calmic Hygiene Services Division and the Healthcare Services Division shall be deemed to be a business stream.

Period: One (l) year after the date of termination of the Employment.

Area: The State or Territory of the Commonwealth of Australia in which the Employee was employed at the date of termination of the Employment."

The first thing to note is that sub-clause 2.2(a)(i) uses the words "the business" towards the end thereof, whereas sub-clause 2.2(a)(ii) uses the words "the stream of business" towards the end thereof. In two places in his judgment, the learned Judge misquoted the words in 2.2(a)(ii), proceeding erroneously on the basis that the words were "any stream of business".

Next, in interpreting the words "the stream of business" in 2.2(a)(ii), I consider one must have regard to the fact that the drafter of the Deed was dealing with one sort of Employee in (i) and another sort of Employee in (ii). Further, in considering the wording of the Schedules as one must, it is obvious that the Second Schedule is concerned with a "business stream" of a business, as one would expect, bearing in mind the Second Schedule has as a corrected sub-heading, Clause 2.2(a)(ii). It would seem to me to be absurd to say that one cannot read "business" in the marginal note thereof as meaning "stream of business". "Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency" (see Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at pp426-427 per Dixon CJ and Fullagar J). I have no hesitation in supplying the words "stream of" before the word "business". Further, I would correct the sub-heading to the First Schedule to read "Clause 2.2(a)(i)", another obvious typing or drafting error.

The learned Judge concluded: "The effect of the clause, on a literal construction of it, as it seems to me, is to prevent the defendant from being employed not simply in the competitive business of sanitary hygiene (that being the stream of business carried on by Calmic and Healthcare at the relevant time) but also in any of the other streams of business of each of the other two divisions (i.e. Tropical Plants and Pest control) under which the plaintiff operated at that time."

In my opinion, this conclusion was erroneous. His Honour continued: "Furthermore, the covenant does not purport to restrict the

defendant from being employed by a competitor in her former capacity of sales consultant or sales representative but, as

the covenant expressly states, it purports to restrain her from working 'in any capacity'."

The Deed defines the term "capacity" as meaning ("unless the context indicates a contrary intention"): "'Capacity' means any capacity including, without limitation, as principal, agent, director, employee, shareholder or unitholder (other than as the holder of no more than 5% of the issued capital of any company or trust whose shares or units are listed on a recognised stock exchange), partner, joint-venturer, member, trustee, beneficiary, financier, guarantor, advisor or consultant."

The learned Judge considered that this definition strongly reinforced his view, and added: "... on a literal interpretation of the expressions in question, the restraint sought to be imposed by the covenant is in excess of what is reasonably required for the protection of the plaintiff's interest, and for that reason therefore it should be adjudged to be void at common law and unenforceable against the defendant."

The width of the definition of "capacity", combined with the use of the words "either directly or indirectly" and the words "carry on, be associated with or engaged or interested in", prompted me to consult drafting precedents. None that I could find actually had a definition of capacity, but the relevant precedents in both the Encyclopaedia of Forms and Precedents published in London by Butterworths, and the Australian Encyclopaedia of Forms and Precedents, also published by Butterworths, contain comparably wide wording, although that is not conclusive by any means. For example, that contained in Volume 6 of the Fourth edition of the former work contains the following clause in the precedent entitled "Agreement on Appointment of a Sales Director": "9. The director shall not at any time within ...years from the determination of this agreement either directly or indirectly either on his own behalf or as agent for any person firm or company carry on or be engaged or interested in the trade or business of ... or any similar trade or business carried on within ... miles of ... (except with the consent in writing of the board of directors of the company for the time being)."

I also refer to the following clause in the precedent entitled "Agreement between employer and assistant" in Volume 6 of the Australian Encyclopaedia. It reads: "9. The Assistant expressly agrees as follows: (1) not at any time during a period of (two) years after the determination of his employment hereunder (whether the

same shall be determined by notice or otherwise) to undertake or carry on or be employed or directly or indirectly concerned or interested either as master journeyman, manager, clerk, canvasser or otherwise howsoever (except only as a servant of the employer or as a shareholder or debenture-holder in a limited company) in any business of (specify nature of business) at any place within a radius of (number of kilometres) from the said business premises at (address) aforesaid, or within the like radius from the premises of the particular business of the employer in which he shall be employed at the time of such determination or within the like radius from any other premises upon which the employer may be carrying on business at the time of such determination."

One of the seminal judgments on the law relating to restraint of trade in master and servant contracts is that of Lindley MR in Haynes v Doman (1899) 2 Ch 13. At pp24-26, his Lordship said in a passage that has been frequently quoted: "Another matter which requires attention is whether a restriction on trade must be treated as wholly void because it is so worded as to cover cases which may possibly arise, and to which it cannot be reasonably applied. The appellant's counsel strenuously contended that, even if the restriction could be regarded as reasonable in the events which have happened, and in the great majority of cases likely to happen, yet, if others could be suggested to which it would be unreasonable to apply the restriction, it must be held void in toto. This contention has been considered and repudiated when the restriction is so worded as to be divisible into distinct portions, not depending on each other. In all such cases the restriction is not held void in toto, but is held to be good so far as it is free from objection, and bad only as to those parts which are objectionable. Mallen v. May ll M. and W. 653 is the leading case on this point. This principle gets over any difficulty arising from the introduction of the words 'or any part thereof'; and the same principle is, in my opinion, also applicable to cases not contemplated, and to which it would be unreasonable to apply the restriction ...

Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them. In cases such as the one before us, the object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot be reasonably supposed ever to have been contemplated by the parties, and which on a rational view of the agreement are excluded from its operation by falling, in truth, outside, and not within, its real scope. But, even if some extreme case of a technical breach producing no injury to the party to be protected could be

proved, sound principle requires, not that the agreement should be held void in toto, but only so far as it is really unreasonable. Even if the restriction could not be so construed as to exclude such a case, no jury would give the plaintiff any damages, and no judge would grant him an injunction. In such an extreme case the defendant is sufficiently protected against oppression without holding the agreement void in toto, and I am unable to see that public policy requires more. The last words used by Lord Macclesfield, in giving judgment in Mitchel v. Reynolds (1711) l PWms 181, 197 were: 'In all restraints of trade, where nothing more appears, the law presumes them bad; but if the circumstances are set forth, that presumption is excluded, and the Court is to judge of those circumstances, and determine accordingly; and if upon them it appears to be a just and honest contract, it ought to be maintained.' This is good law and good sense, and, adopting it as a guide, it leads to the conclusion that the Court ought not to hold a just and honest agreement void, even when to enforce it would be just, simply because the agreement is so unskilfully worded as apparently, or even really, to cover some conceivable case not within the mischief sought to be guarded against. Public policy does not require so serious a consequence to be attached to a mere want of accuracy in expression. To hold such an agreement wholly illegal and void is to lose all sense of proportion, and is not necessary for the protection either of the defendant or of the public. This conclusion is warranted by the judgments of the Court in Rannie v. Irvine (1844) 7 Man. and G. 969. Tindal CJ there said 7 Man. and G. 976: 'If, however, the

contract is a reasonable one at the time it is entered into, we are not bound to look out for improbable and extravagant contingencies in order to make it void.' The other judges expressed their opinions to the same effect; and this view was approved by Lord Macnaghten in Nordenfelt's Case (1894) AC 574."

I also refer to a passage in the judgment of Warrington LJ in Dewes v Fitch (1920) 2 Ch 159, a case concerning a contract of service between a solicitor and a managing clerk. At p184, his Lordship said: "It has been urged before us that the agreement may be so construed as to make the doing of certain isolated and more or less trivial acts which are done by a solicitor a breach of it. I desire to express no opinion upon the construction of the agreement in that respect. Whether or not what the defendant does is a breach of the agreement is a matter that will have to be decided when he does it, and on the finding of a particular act on which the question arises. That he has broken the agreement for the purpose of the present action, and broken it purposely and deliberately, and with the object of raising the question of its validity, there can be no doubt. That is quite enough for the present purpose. I shall be quite ready to construe the agreement as to its extent if and when the question arises whether what has been done is a breach of it."

A more recent case containing similar reasoning is Home Counties Dairies Ltd and Anor v Skilton and Anor (1971) All ER 1227. At p1233 Salmon LJ said: "If a clause is valid in all ordinary circumstances which can have been contemplated by the parties, it is equally valid notwithstanding that it might cover circumstances which are so 'extravagant', 'fantastical', 'unlikely or improbable' that they must have been entirely outside the contemplation of the parties.

There has been some argument at the Bar whether the circumstances have to be 'extravagant' or 'fantastical' or only 'unlikely or improbable' to fall within the principle which I have enunciated. All these words have been used in the different authorities to which we have been referred. I do not think it matters which word is chosen. We are not dealing with semantics or metaphysics, but with reality. The words 'likely' or 'probable' have a wide range of meanings which vary according to the context in which they are used and which have been subject to considerable differences of judicial opinion: see, for example, Lord Reid's speech in The Heron II (1967) 3 All ER 686 at 693-696, (1969) l AC 350 at 387-393. In my judgment, the far-fetched possibility about the customer and the employee moving, say to Leeds is so completely outside the contemplation of the parties and so remote that it cannot affect the validity of cl 15."

At p1234, Cross LJ (as he then was) said: "... even in a master and servant case the court will not pay regard to improbable contingencies which were not within the contemplation of the parties and in respect of which, if they occurred, no court would grant an injunction or award damages: see the judgment of Sir Nathaniel Lindley MR in Haymes v Doman (1899) 2 Ch 13 at 25, and the judgment of Warrington LJ in Dewes v Fitch (1920) 2 Ch 159 at 184."

I also refer again to Marion White Ltd v Frances (supra). The plaintiff company there carried on business as hairdressers at a number of salons in Hertfordshire and Buckinghamshire and employed the defendant as an assistant ladies hairdresser at one of their salons. The defendant was dismissed and eight days later entered the employment of a rival firm of hairdressers 150 yards away. A county court judge dismissed the plaintiff company's claim for an injunction holding that the relevant covenant was invalid on a ground that it was too wide as the words "in any way" and "in any other capacity" prevented the defendant from acting not only as a hairdresser but as, for example, a receptionist or bookkeeper. The Court of Appeal allowed an appeal.

Buckley LJ set out the relevant (and admittedly very wide) covenant at p859: "'(The defendant) shall not during the continuance of (her)

employment hereunder or within Twelve months after she shall have ceased to be in the service of (the plaintiff company)

(both of which periods are hereinafter included in the expression "the prohibited period") either solely or jointly with any other person or persons or Company and either on her own behalf or on behalf of any other person or persons or Company directly or indirectly carry on or assist in carrying on either as principal or as manager agent or servant or assistant or in any other capacity whatsoever or be in any way engaged or concerned or interested in the business of a Ladies' Hairdresser within one half mile of any premises of the (plaintiff company) where the (defendant) shall have served during the three months last preceding the cessation or determination of (her) employment hereunder (hereinafter referred to as "the prohibited area")' ...

'AND the (defendant) shall not during the prohibited period permit or suffer her name to be used or employed in carrying on or in connection with such business as aforesaid within the prohibited area.

'AND the (defendant) shall not during the prohibited period promote or assist in promoting any Company formed or to be formed for the purpose of carrying on such business as aforesaid within the prohibited area or be or become a member or director manager secretary or other officer of any Company for the time being carrying on such business as aforesaid within the prohibited area.

'AND the (defendant) shall not during the prohibited period endeavour or attempt directly or indirectly to induce any person or persons or Company who shall be known as the (defendant) to have been at any time during her employment hereunder a customer or customers of the (plaintiff company) in their said business to cease from employing or dealing with the (plaintiff company) in the way of their said business or so as to employ or deal with any person persons or Company other than the (plaintiff company)' ...

'AND during the aforesaid period after she shall have ceased to be in the service of the (plaintiff company) the

(defendant) shall not on her own account or on account of any other person or persons or Company attend in connection with such business as aforesaid at the residence of any person residing within the prohibited area.'"

At p863 in a judgment with which Stevenson LJ and Davies LJ agreed, his Lordship said: "Counsel has contended on behalf of the defendant that the

learned judge was justified in taking the view that he did, in the passage that I have read from his judgment, that this

covenant is too wide in its operation and that it would extend to activities in which the defendant would not be brought into connection with customers at all. He suggested that she might be employed as a bookkeeper in a back room and never see a customer; or she might be merely a shareholder or a director in a company concerned with a hairdressing establishment within the prohibited area. The example taken by the learned judge was that she might become or be employed as a receptionist. It is not absolutely clear, on the language he used in the judgment, whether he was there thinking of a receptionist in a hairdresser's salon or a receptionist in some other kind of establishment, perhaps a dentist's place of business or an hotel or something of that sort. I think that on a fair reading of what the learned judge said he was thinking of employment as a receptionist in a hairdressing establishment. If that was what the learned judge had in his mind, I would myself think that that would be likely to be just as damaging or almost as damaging to the goodwill of the plaintiff company as employment in the actual processes of attending to people's hair; for if a customer of the plaintiff company became aware that the defendant, who had been used to serve her at the plaintiff's shop and with whom she had become friendly, had moved to a nearby competitor hairdresser as receptionist or as manageress of the business in that shop, I think that there would be almost as great a risk of custom being lost by the plaintiff company as if the defendant had merely entered the employment of the competitor as an assistant carrying out the operation of dressing hair.

I have stressed already that I think this covenant is aimed at active participation by the defendant in a hairdressing business within the prohibited area, and I think it is aimed at active participation in a way that is directly connected with the hairdressing aspects of the business. I do not think it was within the contemplation of the parties to this agreement that the defendant would either be likely to be employed as a bookkeeper in another hairdressing establishment or as a cleaner or in any other capacity that one can think of that has nothing to do with dressing hair although it may have to do with the administrative or domestic arrangements of the business. As was pointed out by the court in Home Counties Dairies Ltd v Skilton (1971) 1 All ER 1227, (1970) 1 WLR 526, to which (I) have already referred, an agreement of this kind and a clause of this kind must be read in the context of the business in relation to which the covenant is entered into and of the relation between the parties, and I think for myself that it is giving too wide an interpretation to this covenant to say that it would extend to any such activities as being employed as a bookkeeper or as a cleaner or anything of that sort.

In my judgment this covenant, which cannot be criticised on the basis of either area or period, is a good and valid and effective covenant, and I think that the learned deputy

county court judge was in error in arriving at the contrary conclusion. For these reasons, I would allow this appeal and would make a declaratory order accordingly, since no injunction will now be of any value to the plaintiff company."

Strangely enough there have been very few relevant decisions of the High Court. The case of Geraghty and Anor v Minter and Anor (1979) 142 CLR l77 concerned a deed of partnership, clause 21 of which was in the following terms: "Should the third party or the fourth party retire from this partnership or should their his or her share of the partnership be acquired by any other person or should their interest in the partnership be determined or should the partnership business be ceased or terminated for any reason whatsoever then and in every such case the third party and the fourth party and each of them shall not exercise carry on or be in any manner whatsoever either directly or indirectly concerned or interested by himself or herself or

in partnership with or as manager servant or agent for any other person, persons, company, corporation engaging in the

trade or business of a similar nature within a radius of twenty (20) miles by the nearest practicable route by road from the corner of Sunbrite Avenue and Gold Coast Highway, Mermaid Beach aforesaid for a period of three (3) years from the date of retirement acquisition termination ceasation(sic) or as the case may be."

At pp184-185, Gibbs J (as he then was), in a judgment with which Aickin J agreed, said: "It is well settled that 'a restraint will not be enforceable, unless it affords no more than adequate protection to the interests of the covenantee in respect of which he is entitled to be protected' (Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty. Ltd. [1973] HCA 40; (1973) 133 CLR 288, at p 306; and see pp 315-316). The questions that arise in the present case are whether the respondents had an interest that they were entitled to protect and, if so, whether the restriction imposed by cl.21 exceeded what was reasonably necessary to protect that interest. At the time when the deed was executed, the parties had been carrying on in partnership the business of insurance loss adjusters which the respondents had commenced and established. The evidence discloses that an insurance loss adjuster obtains most of his work from insurance companies; he thus has a comparatively small number of clients, each one of whom is therefore likely to be valuable. It is apparent that such a business will depend to a considerable extent

possibly to a large extent - on the personal relationship that exists between those conducting the business on the one hand and those managing the affairs of the insurance companies on the other. When the appellants were taken into the respondents' business, and given the conduct of the office on the Gold Coast, they were placed in a positon that enabled them to form their own associations with the members of the staffs of the insurance companies who were responsible for giving the instructions that led to business for the loss adjusters. It was likely that any associations formed in these circumstances would be of great value to the appellants if they chose to set up a competing business as insurance loss adjusters on the Gold Coast. If the appellants derived an advantage in that way, it would be to the disadvantage of the respondents' business. In these circumstances, if the appellants had been employed by the respondents as servants, and not taken as partners, there can be no doubt that the respondents would have had an interest which they were entitled to protect by an appropriate covenant preventing the appellants from competing with them. The respondents would have been entitled to protect their business and the goodwill attached to it, and for that purpose to prevent the appellants from misusing their acquaintance with the respondents' clients and taking advantage of the respondents' trade connexions. A covenant such as cl.21 would in those circumstances have been upheld on the authority of a line of cases which includes Fitch v. Dewes (1921) 2 AC 158 and Scorer v. Seymour Jones (1966) 1 WLR 1419; (1966) 3 All ER 347."

A very wide restraint clause was considered in the case of Davis and Anor v Wood and Anor (1979) ATPR 40-117 in the NSW Supreme Court. The background to the decision of Powell J is set out in the headnote: "The parties were shareholders for a little over a year in a company N which developed a successful business selling toys to speciality shops throughout New South Wales. The first defendant was responsible for sale to retailers before he and his wife agreed to sell their shares to the plaintiffs. The defendants covenanted not to be involved in trading in toys in the State for one year thereafter. The first defendant then acquired a toy-shop at Cronulla which he operated for a short time before taking a position as sales supervisor with a company selling, inter alia, toys competing with those sold by Nick Nack.

The plaintiff sought a declaration that the covenant was binding and an interlocutory injunction to enforce it. At the time of the application the covenant had four months to run, and there was no prospect of a final hearing in that time.

The plaintiff argued that the covenant was no more than was reasonable to protect his legitimate trading interests or, if it was too wide, sec.4(1) of the Restraints of Trade Act 1976 (N.S.W.) ought to be applied.

Powell J. held that the restraint was not excessive in terms of area or duration but that, unless it could be read down or severed, the range of activities covered was excessive. He considered the application of the section: '4(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not'; and held that what it contemplated was 'the notional striking out of so much of the restraint as makes the restraint excessive ... so as to produce a restraint which is valid, rather than the remoulding of the restraint, if need be by the introduction ... of appropriate words'.

This 'notional striking out' was appropriate in the instant

case but Powell J. held that in the circumstances, on the balance of convenience, the granting of an injunction would not assist the plaintiff and would be oppressive."

The relevant covenant is set out at p18,284, and reads as follows: "4. The Vendors jointly and severally covenant with the Purchaser for a period of one (l) year from the date hereof that they will not nor either of them will without the consent in writing of the Purchaser (which consent may be withheld without assigning any reason therefor) be directly or indirectly engaged concerned or interested whether as a member shareholder debenture holder director employee consultant agent or otherwise in any corporation firm or business which is engaged in the trade of a toy wholesaler importer or distributor of toy gifts novelty items to any pharmacy, gift shop or novelty shop within the State of New South Wales or to carry on such business as aforesaid jointly severally or individually."

In the course of his judgment Powell J said at pp18,288-18,289: "The question then is, is the restraint contained in cl. 4 more than is reasonably necessary to protect what was the then existing and potential trade connection of Nick Nack? It seems to me that, in terms of duration it was not; for it is to be remembered that Mr. Wood had been the director principally responsible for setting up and developing Nick Nack's selling activities and was thus in a very special position in relation to Nick Nack's customers (see e.g. Stenhouse Australia Limited v. Phillips [1973] UKPC 1; (1974) AC 391). Nor do I think that it was excessive in terms of area; for the business, although comparatively new, extended to many

places throughout the State and was growing (Connors Bros. Limited v. Connors (1940) 4 All ER 179). However, it does seem to me that, unless as was submitted by Mr. Douglas when I raised the matter with him in argument, the restraint is capable of being read-down or severed the nature of the activity or activities restrained is excessive. Although perhaps, the examples are extreme, it is, nonetheless, true to say that, as a matter of language cl.4 is wide enough to prevent Mr. Wood working as a cleaner, and to prevent Mrs. Wood working as a 'tea lady', for a company such as Racking Services.

Mr. Douglas has, as I have indicated, submitted that, having regard to the nature of Mr. Wood's activities when with Nick Nack I should 'read cl.4 down' so as to limit the restraint to similar activities (see, e.g. Heydon: The Restraint of Trade Doctrine 124-5). But even if, in the absence of ambiguity, such an exercise be permitted, all that would be

achieved, so it seems to me is that one would read the words 'employee consultant agent or otherwise' as '(sales) employee (sales) consultant (selling) agent or otherwise (in a selling capacity)' or in a similar way. There would still be left untouched a wide range of activities as, for example, acquiring shares in any importer of toys (one would think that a major retailer such as David Jones' Limited would fall within that description), the prohibition of which hardly seems necessary for the protection of the goodwill of Nick Nack.

Mr. Douglas further submitted that, if that be the case, the restraint should be severed so as to remove the excess. That such an exercise is, in an appropriate case, permissible is undoubted. The conditions for it being undertaken are two; firstly, that the removal can be achieved without altering the real nature of the restraint; and, secondly, that the removal of the excess may be achieved without having to add to or modify the wording in any way other than by way of excision. It seems to me that, even if it were permissible to combine the activities of 'reading down' and 'severing' the excessive part of the restraint the result would be so different that the ultimate

nature of the restraint would be substantially different from its original nature (see Attwood v. Lamont (1920) 3 KB 571, 593; British Reinforced Concrete Engineering Co. Limited v. Schelff (1921) 2 Ch 563).

I turn, then, to the question of the applicability of sec.4(1) of the Restraints of Trade Act 1976. That subsection, which applies in the present case since the Deed was executed after the date of assent to the Act (sec. 3(1)), is in the following terms:

'4(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms of not.'

So far as I am aware, the sub section has not, hitherto, been the subject of judicial interpretation, so that I must approach it as a matter which is res integra.

It seems to me that, having regard to the use in the subsection of the words 'whether it is in severable terms of not', the subsection is directed towards overcoming some, at least, of the problems which had, prior to its enactment, arisen in cases where some form of restraint would have been legitimate, but the form of restraint was excessive and, having regard to the form in which it was taken, it was

incapable of being severed. But to which of those problems is the subsection directed? Is it to those arising out of the limitation to the excision of words; or is it to those arising out of limitation that one cannot, by severing, change the substance of the restraint? Although the matter is not clear, I am disposed to think that, since the subsection uses the words 'is valid to the extent to which it is not against public policy' what is contemplated is the notional striking out of so much of the restraint as makes the restraint excessive (whether or not that changes the substance of the restraint) so as to produce a restraint which is valid, rather than the remoulding of the restraint, if need be by the introduction (other than by way of implication or construction) of appropriate words, so as to produce a valid restraint.

The question which thus arises is, whether, by approaching the subject restraint in such a way, it is possible to produce a restraint which would not be excessive. I am disposed to think that one can do so. Such a result could, I think, be achieved by reducing the restraint to one restraining Mr. and Mrs. Wood from being 'engaged ... as a director, employee, consultant, agent or otherwise in any corporation firm or business which is engaged in the trade of a ... distributor of toys, gifts, novelty items to any pharmacy, gift shop or novelty shop within the State ...' and by construing the words 'employee, consultant, agent or otherwise' in the way which I suggested above when discussing Mr. Douglas' submission that the restraint should be 'read down'."

The judgment of Powell J does not refer to the line of cases that I have quoted from, starting with Haynes v Duncan. In any event, I do not agree with all that his Honour said, and his views are not binding on the Full Court.

I have reached the conclusion that the relevant covenant was aimed at active participation by the respondent in a business of sanitary hygiene in South Australia in a way that is directly connected with sanitary hygiene. I do not think it was aimed at employment of, for example, a cleaner in such a business, or at a small shareholder, for example, of a company whose business included sanitary hygiene.

If this view is erroneous, I would uphold the covenant on an alternative ground. Even if the appellant can derive no assistance from common law principles of severability, (I express no opinion as to that), I consider effect can be given to Clause 4 of the Deed headed "Severability". I refer to the remarks of Taylor J in Brooks v Burns Philp Trustee Co Ltd [1969] HCA 4; (1969) 121 CLR 432 at p442. His Honour said: "There can, of course, be no doubt that if the parties to either a deed or simple contract were expressly to declare their intentions as to what consequences should follow upon the invalidation of a particular term effect would be given to the intention expressed provided, of course, the invalidation of the term meant merely that it was void."

Clause 4 uses the word "provision", not "clause" or "term", and in my opinion it is wide enough to authorize, if necessary, the severance of the definition of "capacity". Without that definition, in my opinion, the appellant's argument is even stronger, and should be upheld.

I revert to the respondent's Notice of Contention that the clause contained an unreasonable restriction as to geographic extent and duration. These questions are frequently related: the more limited the geographic area, the longer the period which will be justifiable, and vice versa (see for example Fitch v Dewes (1921) 2 AC 158 at 162-163.

The learned trial Judge here said: "... the working area of the plaintiff's business, as it existed at the date of the agreement, covered the whole of the State of South Australia. The defendant's allocated space covered a large proportion of that area and from time to time she attended on some of the plaintiff's customers outside her allocated space. She says, and I accept, that on one occasion she spent extended periods in another area which had been allocated to another consultant.

Whilst in another case, a covenant restricting activities within the whole of South Australia may be thought to be unreasonable, I have reached the conclusion on the facts as found and on the law as stated in Brightman (v Lawson

Paragon Ltd (1914) 18 CLR 331) ... that for the reasons given by Rich J in that case the area which has been restrained in the case before me is not unreasonable because it does not exceed the area fairly covered by the plaintiff's business as at February 1994 when the agreement was entered into. I find and hold accordingly."

The respondent, before this Court, sought to rely on a passage in the judgment of Lord Moulton in Mason v Provident Clothing and Supply Co Limited (1913) AC 724 at p 743: "Such being the nature of the employment, it would be reasonable for the employer to protect himself against the danger of his former servant canvassing or collecting for a rival firm in the district in which he had been employed.

If he were permitted to do so before the expiry of a reasonably long interval he would be in a position to give to his new employer all the advantages of that personal knowledge of the inhabitants of the locality, and more especially of his former customers, which he had acquired in the service of the respondents and at their expense. Against such a contingency the master might reasonably protect himself, but I can see no further or other protection which he could reasonably demand. If the servant is employed by a rival firm in some district which neither includes that in which he formerly worked for the respondents, nor is immediately adjoining thereto, there is no personal knowledge which he has acquired in his former master's service which can be used to that master's prejudice."

In that a case an agent employed to canvass for orders in Islington was restricted from trading within twenty-five miles of London and that restriction was held void.

A number of cases where a restraint was invalidated by the excessive geographic area of its sphere of intending operation are set out in Cheshire and Fifoot's Law of Contract Sixth Australian Edition at p518. After referring to them, the learned authors continued: "Nevertheless, everything depends upon the circumstances and these may well justify a far wider restraint than those repudiated in the above examples. A restriction extending throughout the United Kingdom has been allowed (E Underwood and Son Ltd v Barker) (1899) l Ch 300 and in one case the eastern hemisphere was regarded as a reasonable area (Lamson Pneumatic Tube Co v Phillips) (1904) 91 TLR 363. It is not necessary for the covenantee to prove that the business, for the protection of which the restraint was imposed, has in fact been carried on in every part of the area specified in the contract: Connors Bros Ltd v Connors (1940) 4 All ER 179."

As I have indicated earlier in these reasons, I consider that, if anything, his Honour underestimated the area of the respondent's operation. It really did cover a large area of the State. I am not persuaded that his Honour's conclusion was wrong.

The respondent's counsel strenuously disputed the finding of the learned trial Judge that a duration of one year was reasonable. He appeared to contend that a reasonable period would be no longer than about three months, that being the period (upon the findings of the learned trial Judge) that the confidential information would be retained in the memory of the respondent, and provide her with an unfair advantage. Relevant to this contention is a passage in the opinion of the Privy Council in Stenhouse Ltd v Phillips [1973] UKPC 1; (1974) AC 391 at p402, namely: "The judge, holding that the period was excessive, took into account some evidence, elicited by the court itself, from Mr. Hargreaves, the general manager of a company in the Boral Group which handled much of the group's insurance. This was directed towards the question how long after termination of his employment a person in the position and with the experience of the respondent might be expected to enjoy an advantage over others in the obtaining of the Boral Group's insurance business. Mr. Hargreaves' opinion was that, in relation to a diversified group such as Boral, a period of 2.5 years was the maximum: in relation to an ordinary manufacturing company possibly three to four years. His Honour appears to have placed some reliance on this evidence in deciding that five years was too long. On this approach their Lordships would make two observations. First, the evidence was, in their opinion, directed to the wrong point. The question is not how long the employee could be expected to enjoy, by virtue of his employment, a competitive edge over others seeking the clients' business. It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by

contract or by stability of association. This question, secondly, their Lordships do not consider can advantageously

form the subject of direct evidence. It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer's business, the nature of the employer's interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not."

With respect, this reasoning is very persuasive, and, in my opinion, applies equally to a non-competition clause. I reject the respondent's contention that this Court should not follow it.

Counsel then criticised the trial Judge's reliance on Brightman's case (supra) where the restraint was for a period of ten years, and one of the facts found was that the most lucrative contracts extended over periods from five to ten years. At p335, Rich J said: "The time limit is not excessive, especially having regard to the fact that the more valuable contracts of the plaintiff company are those which extend over five to ten years."

Rich J's decision was upheld on appeal, and his reasoning was not criticised. Counsel for the respondent submitted that we should not follow Brightman's case, but this Court is bound by it.

The learned trial Judge continued: "In the case at bar, the plaintiff had a standard form of contract. That contract provided for a standard service period of two years. Some 80% of the plaintiff's customers bound themselves contractually to that period. Approximately 20% of them took on a shorter period which was agreed at 12 months. I bear in mind that on the defendant's own evidence which I accept, it took her the best part of 12 months to revisit any particular area in her allocated territory, and I have not forgotten either that the proportion of the plaintiff's customers in respect of whom the defendant had acquired some knowledge was but a very small percentage of the plaintiff's customers in any area of the State, or that, as the defendant says and I accept, that it would have been possible for her to have retained only a minute portion of the information to which she had become privy, and to have done so for only some three months or so and no longer.

I have already referred to the fact that the Deed contains a non solicitation clause. That, on the authorities, is a further relevant matter to which I must have regard. When dealing with that topic in Stenhouse Ltd -v- Phillips [1973] UKPC 1; 1974 AC 391 Lord Wilberforce said at page 403:- '... It is relevant that some protection has already been provided for the employer by the non solicitation clause ... The presence of one restraint diminishes the need for others, or at least increases the burden of those who must justify those others. It cannot be said that provisions such as those in (the subject clauses) are no more than is necessary for the employer's protection where he is already protected against solicitation.'

Although I have not found the question posed easy to answer, and whilst I have vacillated from one point to another, at the end of the day, after carefully weighing all relevant factors, I have come to a firm view, on the authority of what was said and done by the High Court in Brightman's case (supra), that on the question of time, the restriction imposed by the covenant goes no further than it is reasonably necessary to protect the interests of the employer in all the circumstances of the case and I so find."

Counsel for the respondent pointed out that the duration of the restraint in the previous agreements between the parties was only six months. He argued that this was a relevant factor, and that his Honour overlooked it. The fact that he did not refer to it does not, of course, mean that he did not consider it. It was a relevant factor, but there was evidence that competition facing the appellant in the area of sanitary hygiene had increased, and it understandably led the appellant to increase the duration of the restraint.

I have anxiously considered all the respondents' arguments in support of her notice of contention, but I am not persuaded that they should succeed.

I would allow the appeal, make the declarations sought, and remit the assessment of damages to the learned trial Judge.

JUDGE3 DEBELLE J This is an appeal from a decision of a District Court judge refusing to order that the respondent was bound by a restraint of trade clause.

The Appellant's Business: The appellant is a corporation with international interests in providing what are euphemistically called "environmental services". It is engaged in the business of sanitary hygiene which includes providing non-residential premises with washroom services, soap dispensers, hand dryers and the sanitary disposal of used tampons, nappies and similar articles.

The appellant conducted its business in South Australia in four separate divisions. They are the Pest Control Division, the Tropical Plants Division, Calmic Hygiene Services Division ("Calmic") and Healthcare Services Division ("Healthcare"). The two divisions which are most relevant in this action are Calmic and Healthcare. Calmic hires to non-residential premises a variety of products for personal hygiene including soap dispensers, washroom services and other apparatus. Calmic also services those products. The business of Healthcare is to provide hygiene services for women including sanitary disposal of used napkins and tampons. It provides equipment for those items as well as hiring items such as hand dryers.

Although Calmic and Healthcare operate separately from different premises, their activities nevertheless do mingle to a degree. From time to time all four divisions combine to participate in "sales swap meetings" at which information gained by sales consultants employed in these divisions is made available to employees in other divisions. In addition, sales leads which have been received in the course of the work of any consultant in any division are recorded and eventually are passed on to members of another division for their attention.

The head office of the appellant is in New South Wales. It has branches in other States. The branch in South Australia is divided into five geographic areas. Each area is serviced by a sales consultant. The appellant may from time to time alter the geographic areas and the number of consultants. The duties of a sales consultant include canvassing for contracts with new customers and attending to the needs of and renewing contracts with existing customers, in each instance for periods of about two years. The period of a contract may be longer or shorter than two years.

RENTOKIL PTY LTD v ANITA KATE LEE No. SCGRG 95/400 Judgment No. 5318 Number of pages - 47 Contracts

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RENTOKIL PTY LTD v ANITA KATE LEE No. SCGRG 95/400 Judgment No. 5318 Number of pages - 47 Contracts (1995) 66 SASR 301 [1995] SASC 5318 (2 November 1995)

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Cases Cited (12)