That restraint had an effect similar to that of the restraint which I have just discussed.
13 Lord Fraser, Lord Wilberforce, Lord Scarman, Lord Roskill and Lord Templeman held that that restraint was valid. Lord Fraser, who delivered their Lordships' judgment, referred to the principles stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd [1894] AC 535 at 565, where his Lordship said:-
"The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public."
14 Lord Fraser also referred to the following comment of Lord Parker in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707:-
"… for a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed."
15 Lord Fraser went on to say, at p 713:-
"While Lord Macnaghten in Nordenfelt's case … referred to restraints which might be justified by 'the special circumstances of a particular case,' it has come to be accepted that certain types of contract which impose a measure of interference with the freedom of trade are treated as not being within the field of restraint of trade, provided that the degree of interference does not exceed the accepted standard."
16 It follows that, if cl 14(a) were to be read in the manner I have set out, it would be a valid restraint. Moreover, the steps which the respondent took to facilitate and arrange the engagement by his former clients of the firm Barker Gosling as their new solicitors constituted the acting by the respondent, directly or indirectly, for persons who had been clients within the three years preceding his departure.
17 On this reading of cl 14(a), it is not necessary to discuss the words of the clause which I have omitted. However, I should mention that I agree with Young J that those words were too wide in their scope to constitute a valid restraint of trade and that they could not be read down pursuant to the Restraints of Trade Act, 1976. As his Honour said, "the Court cannot redraft the covenant".
18 The interpretation which I have so far placed upon cl 14(a) reads the whole of the clause as follows:-
"No Partner shall during the period of one year after the date of his retirement act as a solicitor
1) either directly or indirectly for, or
2) as a partner or an employee of any other legal practice carrying on business within 25km of the GPO Sydney which within that period acquires as a client
any person who was a client of the firm or the partnership at any time during the 3 years prior to the Partner's retirement from the Partnership."
19 At the trial before Young J, both counsel read cl 14(a) as follows:-
"No Partner shall during the period of one year after the date of his retirement act
1) as a solicitor either directly or indirectly for or
2) as a partner or an employee of
any other legal practice carrying on business within 25km of the GPO Sydney which within that period acquires as a client any person who was a client of the firm or the partnership at any time during the 3 years prior to the Partner's retirement from the Partnership."
20 That is the reading of the clause with which his Honour dealt. Understandably, his Honour held that the clause, read in that sense, was wider than was necessary to protect the goodwill of Laurence & Laurence and that it could not be read down so as to create a valid restraint.
21 It is submitted on behalf of the respondent that it is not open to the appellants to rely upon an interpretation of the clause other than that which was put to the trial Judge. However, the interpretation of the clause did not turn on matters of evidence but rather on the true meaning of the words used. The meaning of a statute and the meaning of a contract are matters which an appellate court must necessarily determine for itself. An appellate court ought not to allow such a matter to proceed on an incorrect basis simply because counsel, in the proceedings below, misunderstood the position. When matters concern the validity of a contract, the interpretation of the contract is at the heart of the function which an appellate court must undertake.
22 In my opinion, the interpretation of cl 14(a), which was adopted at the trial, was incorrect. First, it excluded the operation of the provision first set out above, which is the primary and usual type of restraint found in such contracts. It was wrong to exclude the provision when, reading the whole of the clause grammatically, the provision was clearly expressed.
23 Secondly, the interpretation adopted below was ungrammatical, perhaps nonsensical. It would require the clause to read, inter alia, "No Partner shall … act as a solicitor either directly or indirectly for … any other legal practice". That would be a curious reading of the clause. If it was said that the clause should read, inter alia, "No Partner shall … act as a solicitor either directly or indirectly … as a partner or an employee of any other legal practice", that interpretation would omit the word "for" altogether and would appear not to encompass the situation where a solicitor set up practice on his own account.
24 Thirdly, s 4(1) of the Restraints of Trade Act requires that a contract be read as valid, where it is feasible to do so. As the contract can be read so as to contain the valid restraint which I have set out above, it should be so read.
25 For these reasons, as cl 14(a) expressed a valid restraint and, as the respondent breached that restraint, the basis for the orders made by Young J did not exist.
26 It has been further submitted on behalf of the respondent that the forfeiture of the respondent's entitlements, pursuant to cl 14(b) of the partnership agreement, was a penalty in respect of which the respondent was entitled to be relieved entirely.
27 However, cl 14(b) was not, on its face, a penalty. Rather, it allowed the continuing partners to act so as to retain such part of the moneys otherwise payable by the continuing partners as they considered to reflect the loss caused by the breach. The words "reasonably suspect", "may" and "such part only" show that the clause has in mind that the continuing partners should act bona fide and on reasonable grounds to reduce the outgoing partner's benefits on retirement by so much as they consider to represent the loss which will flow from the breach of the restraint of trade clause.
28 I would not agree with the view expressed by Young J that cl 14(b) is a penalty because it does not provide for liquidated damages in that the extent of the loss suffered by the continuing partners bears no relation at all to the amount that is forfeited. As Lord Dunedin said in Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 at 87-88, when speaking of penalty clauses:-
"(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in Clydebank Case [1905] AC 6).
…
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties ( Clydebank Case , Lord Halsbury [1905] AC at p 11; Webster v Bosanquet , Lord Mersey [1912] AC at p 398)."
29 In my opinion, cl 14(b) intends that the resolution of the continuing partners will be made bona fide and will be based upon the damage likely to be suffered by the continuing partners as a result of the breach of the retiring partner. It does not impose a penalty.
30 In the present case, no attempt was made to show that the resolution of the continuing partners was not bona fide or that the resolution was not based on a sound estimate of the loss which the continuing partnership would be likely to suffer, nor was general relief against forfeiture sought.
31 For these reasons, I would allow the appeal. I would set aside the orders below. I would substitute an order that the summons be dismissed with costs. The respondent should pay the costs of the appeal.
32 ROLFE AJA: I agree with Davies AJA and with the further comments of Beazley JA.