SUPREME COURT OF QUEENSLAND

Transcription

1 SUPREME COURT OF QUEENSLAND CITATION: GBAR (Australia) Pty Ltd & Ors v Brown & Ors [2017] QSC 234 PARTIES: GBAR (AUSTRALIA) PTY LTD ACN (first applicant) AND BAREND JACOBUS STOLTZ (second applicant) AND DANIEL PETRUS UYS (third applicant) AND VINCENT CHARLES MANNING (fourth applicant) AND STOLTZ SUPERANNUATION PTY LTD ACN (fifth applicant) AND D.P. UYS SUPERANNUATION PTY LTD ACN (sixth applicant) AND MACROCOMM (AUSTRALIA) PTY LTD ACN (seventh applicant) v GREGORY JOHN BROWN (first respondent) AND BROWN & CREMIN PTY LTD ACN (second respondent) AND TANYA RENEE CREMIN (third respondent)

2 2 FILE NO/S: No 9209 of 2016 DIVISION: PROCEEDING: ORIGINATING COURT: Trial Division Application Supreme Court at Brisbane DELIVERED ON: 14 October 2016 DELIVERED AT: Brisbane HEARING DATE: 14 September 2016 JUDGE: ORDER: CATCHWORDS: Peter Lyons J The application is dismissed. TRADE AND COMMERCE OTHER REGULATION OF TRADE OR COMMERCE RESTRAINTS OF TRADE VALIDITY AND REASONABLENESS GENERALLY where second respondent sold asbestos removal business to first applicant where second respondent was allotted 20% of the shares in the first applicant where first applicant employed first respondent as General Manager under an Employment Agreement where applicants and respondents entered into a Settlement Agreement for the sale of the 20% of shares in the first applicant to the applicants where Settlement Agreement contained a restraint of trade clause purporting to restrain the first respondent whether the restraint of trade clause in the Settlement Agreement sought to protect employer s interests or goodwill of business sold TRADE AND COMMERCE OTHER REGULATION OF TRADE OR COMMERCE RESTRAINTS OF TRADE VALIDITY AND REASONABLENESS PARTICULAR CASES EMPLOYMENT where second respondent sold asbestos removal business to first applicant where second respondent was allotted 20% of the shares in the first applicant where first applicant employed first respondent as General Manager under an Employment Agreement where applicants and respondents entered into a Settlement Agreement for the sale of the 20% of shares in the first applicant to the applicants where Settlement Agreement contained a restraint of trade clause purporting to restrain the first respondent whether, assuming the restraint of trade clause in the Settlement Agreement sought to protect employer s interests, the clause goes beyond what is reasonable to protect that interest TRADE AND COMMERCE OTHER REGULATION OF TRADE OR COMMERCE RESTRAINTS OF TRADE VALIDITY AND REASONABLENESS PARTICULAR CASES VENDOR OF BUSINESS where second

3 3 respondent sold asbestos removal business to first applicant where second respondent was allotted 20% of the shares in the first applicant where first applicant employed first respondent as General Manager under an Employment Agreement where applicants and respondents entered into a Settlement Agreement for the sale of the 20% of shares in the first applicant to the applicants where Settlement Agreement contained a restraint of trade clause purporting to restrain the first respondent whether, assuming the restraint of trade clause in the Settlement Agreement sought to protect goodwill of business sold, the clause goes beyond what is reasonable to protect that interest whether that interest extended to potential future expansion of business TRADE AND COMMERCE OTHER REGULATION OF TRADE OR COMMERCE RESTRAINTS OF TRADE VALIDITY AND REASONABLENESS PARTICULAR CASES EMPLOYMENT where first applicant employed first respondent as General Manager under an Employment Agreement where Employment Agreement contained a restraint of trade clause purporting to restrain the first respondent whether clause goes beyond what is reasonable to protect employer s interests TRADE AND COMMERCE OTHER REGULATION OF TRADE OR COMMERCE RESTRAINTS OF TRADE ENFORCEMENT OF AGREEMENT REMEDIES FOR BREACH OF AGREEMENT INJUNCTION EXERCISE OF DISCRETION where applicants alleged their business would suffer reputational harm if relief not granted where six of seven applicants offered undertaking as to damages where applicants offered employment to employees of respondents business where respondents business is in its infancy where first respondent offered undertaking to keep an account of profits generated by respondents business where applicants delayed in commencing proceedings whether the balance of convenience favours the granting of interlocutory relief Alliance Paper Group plc v Prestwich [1996] IRLR 25 Allied Dunbar (Frank Weisinger) Ltd v Weisinger [1988] IRLR 60 Australian Broadcasting Corporation v O Neill (2006) 227 CLR 57 British Reinforced Concrete Engineering Co Ltd v Schelff [1921] 2 Ch 563 Buckley v Tutty (1971) 125 CLR 353 Connors Bros Ltd v Connors [1940] 4 All ER 179 Cook v Shaw (1894) 25 OR 124 Davis & Anor v Woods & Anor (1979) ATPR Federal Commissioner of Taxation v Murry (1998) 193 CLR

4 4 COUNSEL: SOLICITORS: 605 Hall Manufacturing Co v Western Steel & Iron Works 227 F 588 (CCA 7th Circ, 1915) Inland Revenue Commissioners v Muller & Co s Margarine Ltd [1901] AC 217 Koops Martin v Reeves [2006] NSWSC 449 Lamson Pneumatic Tube Company v Phillips (1904) 91 LT 363 Linder v Murdock s Garage (1950) 83 CLR 628 Lloyd s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505 McAllister et al v Cardinal (1964) 47 DLR (2d) 313 NE Perry Pty Ltd v Judge (2002) 84 SASR 86 Pearson v HRX Holdings Pty Ltd (2012) 293 ALR 554 Pioneer Concrete Services Ltd v Galli [1985] VR 675 Smith v Ryngell [1988] 1 Qd R 179 Systems Reliability Holdings plc v Smith [1990] IRLR 377 Tank Lining Corp v Dunlop Industrial Ltd (1982) 40 OR (2d) 219 Taylor v Rotowax Trading Ltd [1988] 1 NZLR 674 Trego v Hunt [1896] AC 7 Vision Eye Institute Ltd & Anor v Kitchen & Anor [2014] QSC 260 Weinberg v Mervis 1953 (3) SA 863 White v Fletcher (Mayo) Associates Inc 303 SE 2d 746 (Sc Ga, 1983) Williams v Hurford [1918] St R Qd 164 A Morris QC for the applicants P O Shea QC for the respondents Londy Lawyers for the applicants TressCox Lawyers for the respondents [1] This is an application for an interlocutory injunction to enforce covenants in restraint of trade given by Mr Brown. [2] Prior to 31 October 2013, Brown & Cremin Pty Ltd (B&C) owned an asbestos removal business, including what appears to be appropriate plant and equipment 1. It operated as GBAR Asbestos Removal. It would appear that at this time, Mr Brown was the sole director and shareholder of B&C 2. On Mr Brown s evidence it would appear that its business was conducted in south-east Queensland, though it had also on one occasion had a job in Charters Towers, on one occasion in Townsville, and on one occasion in Moree, New South Wales. [3] The company GBAR (Australia) Pty Ltd (GBAR) was incorporated on about 23 October It was incorporated for the purpose of purchasing the business of B&C, which 1 See CFI 14 para 6(e). 2 See CFI 2 Exhibit BJS-1 p 57.

5 5 company was allotted 20 per cent of the shares in GBAR. negotiations which led to the formation of a number of contracts. This was a result of [4] One such contract was a Business Sale Contract, said to be made on 31 October By it, B&C agreed to sell its business (including its business assets) to GBAR for $2,454,000. Of this price the sum of $2,122,000 was apportioned to goodwill. This contract contained a clause restricting B&C from competing with GBAR in Queensland for a period of three years. [5] By an Employment Agreement of the same date, GBAR employed Mr Brown as General Manager. The agreement was terminable in certain circumstances, including on 60 days notice by either party. The Employment Agreement also contained a restraint of trade clause, in the following terms: 13. Restraint of Trade 13.1 The Manager agrees with the Company that after the date of termination of employment, the Manager will not:- (a) either directly or indirectly: (i) (ii) (iii) solicit, canvass, induce or encourage any person or entity who is an employee or agent of the Company with whom the Manager had dealings with in the last 12 months of their employment, to leave the employment of the Company; solicit, canvass, approach or accept any approach from any person or entity who was during the last 12 months of the Manager s employment with the Company a client or supplier of the Company with whom the Manager had dealings with in relation to the Company s Business. interfere or see to interfere with a relationship between the Company and its clients, employees, contractors or suppliers in the conduct of the Company s Business Subject to clause 13.8, the Manager agrees with the Company that after that date of termination of employment, the Manager will not: (a) (b) either alone or in partnership be interested directly or indirectly as a Director, shareholder, employee or consultant in a firm or corporation in Queensland the business of which is similar to or in competition with the Business of the Company: for a period of: (i) (ii) 3 years; 1 year after the date of termination.

6 Clause 13.2 is to be construed and take effect as if it consists of a number of separate provisions which are the result of combining each type of conduct referred to in clause 13.2(a) and with each of the time periods referred to in clauses 13.2(b). If any of those separate provisions is unenforceable, illegal or void for any reason, that provision shall be severed. Severance will not affect the validity or enforceability of any of the other separate provisions The Manager acknowledges that each of the separate prohibitions and restrictions contained in this clause is reasonable and necessary to protect the goodwill and interests of the Company. [6] Also on 31 October 2013, B&C entered into an option deed with GBAR under which B&C granted to GBAR or its nominee an option to purchase B&C s shares in GBAR for the sum of $600,000 if Mr Brown s employment was terminated within three years (Option Agreement). [7] In the course of the negotiations which led to these agreements, there were discussions between Mr Brown, and Mr Stoltz and Mr Manning, representing parties who also became initial shareholders in GBAR, in which it was made apparent that GBAR would seek to expand the business so that it would become a national business. There is dispute between the parties about the extent of these discussions. [8] By early 2014, steps had been taken to expand the business into Western Australia. A Mr Hempel was appointed as State Manager for Queensland and Western Australia and, it would appear, the business is currently operating there. [9] By June 2014, GBAR had obtained licences which enabled it to carry out asbestos removal in Queensland and Western Australia. It was said to have a harmonised Queensland licence for asbestos removal, which also enabled it to carry out asbestos removal in New South Wales and the Northern Territory. According to Mr Stoltz s evidence, it was then carrying out work in Queensland, Western Australia, New South Wales and the Northern Territory. However, later in his affidavit, he said that in July 2016 there were three branches operational, in Queensland, New South Wales, and Western Australia. [10] By January 2015, Mr Brown had decided not to continue in his employment with GBAR. On Mr Brown s evidence, at this time GBAR conducted business only in south-east Queensland; while an office had been established in Perth, it had shut down by this time. After some negotiations, an agreement was entered into between GBAR, B&C, other shareholders in GBAR, Mr Brown, Mr Manning, Mr Stoltz and Mr Uys (associated with another shareholder in GBAR). It contained a covenant in restraint of trade on the part of Mr Brown. [11] That agreement was replaced by an agreement between the same parties dated 24 January 2015 (Second Settlement Agreement). It contained a restraint in the following terms: 4. GREG BROWN hereby agrees with GBAR that he will not:

7 7 a) Either alone or in partnership be interested directly or indirectly as a director, shareholder or employee in a firm or corporation in Australia, the business of which is similar to or in competition with the business of GBAR, and that he will not provide consultancy services directly or indirectly to a firm or corporation that provides asbestos removal services in Australia: b) For a period of: I. 3 years; II. III. 2 years; 1 year After 30 January Clause 4 is to be construed and take effect as it if consists of a number of separate provisions which are the result of combining each type of conduct referred to in clause 4. If any of those separate provision is unenforceable, illegal or void for any reason, that provision shall be severed. Severance will not affect the validity or enforceability of any of the other separate provisions. 4.2 GREG BROWN acknowledges that each of the separate prohibitions and restrictions contained in this clause are reasonable and necessary to protect the goodwill and interests of GBAR. [12] The Second Settlement Agreement also included the following: 10. The terms and conditions of the Business Sale Contract and the General Manager Employment Agreement remain in force except to the extent that they have been changed or over ruled by the terms and conditions of this agreement. [13] On 3 June 2016, the solicitors acting for the respondents (including Mr Brown) wrote to the solicitors for the applicants contending that a restraint of trade which operated throughout Australia went well beyond what was necessary to protect the legitimate interests of GBAR and was unenforceable. That view was repeated in a letter dated 20 June 2016, which gave notice that Mr Brown and B&C intended to commence business providing asbestos removal services and related consultancy services. The letter invited the solicitors for the applicants to substantiate any contrary view about the effect of the restraint. Those solicitors sent a lengthy reply and sought undertakings. By letter dated 14 July 2016, the solicitors for the respondents repeated the view previously expressed, and invited the applicants to have the dispute determined on a priority summary basis. Early in August 2016, B&C began to conduct an asbestos removal business. These proceedings were commenced on 9 September The contentions of the parties [14] Although the originating application sought relief against B&C, since the covenants by it would expire on 31 October 2016 this relief was not pursued at the hearing. The interlocutory injunctions sought against Mr Brown reflected the language of clause 4(a)

8 8 of the Second Settlement Agreement. The submissions for the applicants also relied upon clause 13.2 of the Employment Agreement, although the restraint in that clause related only to activities in Queensland. [15] For the applicants, it was contended that the termination date relevant to clause 13 of the Employment Agreement was 30 January It remained in force, notwithstanding clause 10 of the Settlement Agreement, because the restraint in the Second Settlement Agreement was broader in operation than that in the Employment Agreement. It was submitted that Mr Brown was paid $600,000 under the Second Settlement Agreement, as consideration for the extended geographical restraint. Mr Brown breached each of the restraint clauses by conducting the business, B&C Asbestos Removals, and by recruiting staff from GBAR. His breaches were aggravated by the advertising on the website for B&C Asbestos Removals. [16] It was submitted that the relevant time for examining the reasonableness of each restraint clause was the time when the relevant contract was entered into. The sale of the goodwill of a business provides justification for the enforcement of a restraint, and the quantum of the consideration paid is relevant to the question whether the restraint is reasonable. In assessing the reasonableness of the geographical area in which the restraint was to operate, regard is to be had to such future extension of business as might reasonably be contemplated. A restraint is reasonable if it operates for a sufficient time to permit the former owner s connection with customers to fade. [17] It was submitted for the applicants that the balance of convenience favoured granting the restraining order. The case for the applicants was strong. Damages were not an adequate remedy, as they would not be capable of meaningful calculation. [18] For the applicants it was orally submitted that the Second Settlement Agreement included the purchase of 20 per cent of the shares in GBAR, and thus the reasonableness of the restraint should be tested in the same way as a covenant given by a vendor of a business, rather than as a covenant given by an employee. The submission was supported by reference to Heydon, The Restraint of Trade Doctrine 3, and Pioneer Concrete Services Ltd v Galli 4. The question was one of substance rather than form 5. The grant of relief was supported by the fact that the Courts will restrain a vendor of goodwill, even one who has not given a covenant of this kind, from engaging in conduct which would amount to taking back what was sold: see Trego v Hunt 6. Given the steps taken to expand the business, it was reasonable for the restraint to operate throughout Australia. It appears to have been submitted that the grant of relief was supported by clause 13.1 of the Employment Agreement, described as a nonsolicitation clause. The period for which the restraint would operate was reasonable, by reference to the time it would take for the connection of the seller with customers to fade away rd ed, LexisNexis Butterworths, 2008, p 91 (Heydon). 4 [1985] VR See Heydon at p [1896] AC 7, See Heydon at p 210.

9 9 [19] It was orally submitted for the applicants that the balance of convenience favoured the grant of relief. B&C s current business had only been in operation for six weeks, and at present was generating only about $2,500 income. Six of the seven applicants proffered an undertaking as to damages. The undertaking proffered by Mr Brown, to keep an account of profits generated by B&C in the new business, was inadequate, the concern being harm done to the standing of GBAR in the industry, and the potential loss of staff. This appeared to relate particularly to a project being carried out in Canberra. [20] For the respondents it was submitted that the Business Sale Contract recognised that the goodwill of the business was limited in its geographic scope to Queensland. The national expansion plans were independent plans, not reliant on local reputation. No goodwill attached to the shares in GBAR which were disposed of by B&C in January The Second Settlement Agreement was not directed to protecting a legitimate goodwill interest acquired under the Business Sale Contract; rather it was an attempt, without justification, to restrain Mr Brown in his capacity as employee from competing with GBAR at all. It was unreasonable by reference to the range of activities referred to; and by reason of its geographic scope. The temporal scope, at least beyond one year, could not be justified. [21] The respondents also submitted that the balance of convenience favoured refusal of relief. GBAR had been given express notice that B&C did not consider there was an enforceable restraint, as early as 20 June 2016; but did not commence these proceedings until 9 September In the meantime, B&C had spent approximately $300,000 on equipment to commence work, opened an office at Geebung, and employed one fulltime and two part-time employees. Moreover, it operated only on a small scale in southeast Queensland, and had offered an undertaking to maintain full accounts of all work performed until the determination of these proceedings. The applicants had not shown that damages would not be an adequate remedy. To grant interlocutory relief would in effect be to grant final relief in this case. [22] For the respondents it was orally submitted that at the time of the Business Sale Contract, the business operated only in southeast Queensland. There was no evidence of an intention to expand the business to regional areas of Queensland, though there was an intention to expand interstate. Relief should be refused because of the delay by the applicants, after they were given notice of the intention of the respondents to commence a business, in which period that business was commenced. Because the respondents do not have an established business, it would be difficult to determine the damage they have suffered; whereas the records of the business which show the loss which the applicants might suffer if the injunction were wrongly refused. Clause 13.2 of the Employment Agreement no longer had any effect, as a consequence of the provisions of clause 10 of the Second Settlement Agreement. The provisions of clause 13.2 had been changed by the provision of clause 4 of the Second Settlement Agreement. The Second Settlement Agreement did not involve a sale of goodwill. In any event, the goodwill was relevantly limited to Queensland, not having materially changed from the time when the parties entered into the Business Sale Contract. The applicants had submitted that the reasonableness of the covenant might be judged by reference to the sum of $600,000 paid for B&C s shares in GBAR. That was the sum in the Option Agreement, reflecting the value of the interest in the company (including goodwill), as things stood in October Nothing extra was paid for any additional goodwill developed by the company since that time; nor for the restraint in the Second Settlement Agreement, so

10 10 far as it purported to bind Mr Brown. The restraint in the Second Settlement Agreement was not enforceable, because it was not directed to the protection of goodwill interest and was accordingly unreasonable. It was a naked restraint. The geographical area in which it was to operate was too wide. The restraint was also too wide because of the activities to which it was directed, going well beyond the protection of GBAR s interest in Mr Brown s connection with GBAR s customers. It was acknowledged that the period of three years from the restraint in clause 4 of the Second Settlement Agreement was, for the purposes of an interlocutory hearing, to be regarded as reasonable. [23] In oral submissions in reply, it was submitted that any concern about the position of employees was overcome because GBAR offered employment to the present employees of the business of B&C, other than Mr Brown. The evidence showed that the expansion contemplated at the time of the Business Sale Contract was Australia-wide. Damage to the applicants extended beyond the loss of a particular contract, and extended to damage to reputation. If the restraint in the Second Settlement Agreement were struck out as being too wide, that would have the effect that the restraint in the Employment Agreement remained in force. The Second Settlement Agreement, and the associated sale of B&C s shares, included a sale of goodwill. The price of $600,000 for B&C shares, while it may have been taken from the Option Agreement, reflected the amount that it was agreed would be paid in an arrangement which included the restraint found in the Second Settlement Agreement. It thus reflected the value of B&C s interest in the goodwill of the business, resulting from arms length negotiations. [24] For the respondents it was submitted that clause 4 was not void, but unenforceable, as determined in Buckley v Tutty 8. The difficulties with clause 4 cannot be resolved by resort to the blue pencil rule. Mr Brown and B&C were prepared to give a nonsolicitation undertaking, consistent with clause 13.1(a)(i) of the Employment Agreement. [25] It was common ground that the principles to be applied on an application for an interlocutory injunction are those set out in Australian Broadcasting Corporation v O Neill 9. That requires some assessment of the prospects of success for the applicants at a final hearing. Since the applicants case appeared to rest primarily on clause 4 of the Second Settlement Agreement, it is convenient to commence with a matter relevant to that clause. The interest to be protected in January 2015 [26] In Vision Eye Institute Ltd & Anor v Kitchen & Anor 10 Applegarth J said In what may be described as employee cases, different interests are at stake to those that arise in the sale of a business. Subject to reasonable restraints to protect an employer s legitimate interests, an employee should be free to pursue a living in his or her chosen field. The principal interest which can be protected by a restraint against a former employee is the benefit of the former employer of the relationships with its customers. 11 In 8 (1971) 125 CLR 353, (2006) 227 CLR 57 at [2014] QSC 260 at [262]. 11 Pearson v HRX Holdings Pty Ltd (2012) 293 ALR 554 at [46]; Linder v Murdock s Garage (1950) 83 CLR 628 at 636.

11 11 general, restrictive covenants restraining an employee will be scrutinised more strictly than covenants in relation to the sale of a business. 12 A restraint upon a former employee may be reasonable if it allows a replacement employee to establish a connection with customers and thereby protect the employer s goodwill. 13 One test is to ask how long it will take the connection between the ex-employee and the customer to die away. 14 [27] Applegarth J also noted that not every case fell comfortably into one or other of these categories. [28] There can be little doubt that, on the sale of the business to GBAR in 2013, control of the business passed from Mr Brown. It seems to have passed primarily to Mr Stoltz. He is the Chief Executive Officer, and also a director, of GBAR. On its incorporation, his superannuation fund held just short of 50 per cent of the shares in GBAR. Those and other shares were transferred to him in November 2014, with the result that he now holds 51,920 shares, by my calculation in excess of 60 percent of the issued shares. In his affidavit, Mr Stoltz regarded himself as buying the business, no doubt along with other persons apart from Mr Brown. [29] The other director of GBAR is Mr Manning. The company associated with him was allotted 8,000 of the shares in GBAR which issued on its incorporation, which shareholding has increased to 12,000. [30] In his affidavit, Mr Stoltz described the proposed role of Mr Brown after the purchase of the business in 2013 as a 20% shareholder and as an employee. While the material indicates that Mr Brown participated in strategic planning for the expansion of the business, that appears to reflect the implementation of the intentions which Mr Stoltz had at the time of the purchase. Steps taken to implement this strategy were the result of the instructions of Mr Stoltz. Under the Employment Agreement, Mr Brown, though employed as General Manager of the business at GBAR s premises at Geebung, was required to report and be accountable to Mr Stoltz, then described as the Managing Director of the company. [31] For the proposition that the transactions which occurred in January 2015 should be regarded as a sale of goodwill, the applicants relied upon Pioneer Concrete Services, previously referred to. There, Brooking J said 15, Where the sale of a business carried on by a company is effected by means of a sale, not of the business itself, but of the issued capital of the company, it is commonplace for businessmen and their advisers to require that promises on the part of the vendors be given, not only to the purchaser, but also to the company whose shares are the subject of the sale. [32] In that case, Apex Quarries Limited carried on a quarrying business. It was substantially controlled by the defendants, Lorenzo Galli and Michael Galli. Michael Galli was the chairman of Apex, and Lorenzo Galli was its managing director. Their 12 Heydon at Smith v Ryngell [1988] 1 Qd R 179 at 185; Koops Martin v Reeves [2006] NSWSC 449 at [88] ( Koops ) 14 NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at 91 [28]-[30], 92 [35], 96 [60] and [63], 98 [72], [101] and [103] ( NE Perry ) 15 At 693.

12 12 company owned 40.4 per cent of the issued capital of Apex. That shareholding was purchased by Pioneer. At the time of the purchase, each defendant entered into a retirement agreement with Apex; and each entered into an agreement with Apex referred to as a restraint agreement, which contained a covenant restraining them from engaging in quarrying activities. Of these agreements, Brooking J said 16 In my opinion the restraints in the two agreements entered into with Apex are ancillary to the restraints in the sale of shares agreement and form part of a scheme for the protection of the business being acquired by Pioneer. If it is legitimate to infer that the covenants with Apex were exacted by Pioneer from the defendants for the protection of the business that was being acquired, I can see no reason why the vendor and purchaser principles should not be applied to those covenants. [33] It is clear that Brooking J proceeded on the basis that Pioneer was purchasing a controlling interest in Apex 17. I would add that, under the Share Sale Agreement, the defendants were to assist Pioneer in relation to a takeover offer for the remaining shares in Apex 18. [34] In my view, critical to the reasoning of Brooking J was the fact that, in substance, Pioneer was acquiring the business conducted by Apex by the acquisition of the controlling shareholding in that company; and the restraint covenants given by the defendants were ancillary to the sale of that business, through the sale of their controlling interest in Apex. It was as a consequence of that reasoning that his Honour concluded that the vendor and purchaser principles should apply to the restraints. [35] Brooking J relied on Connors Bros Ltd v Connors 19. In that case, an agreement was reached that Neil McLean and Allan McLean would purchase a controlling interest in a company which carried on the business of packing and canning fish, including sardines. There was a separate sale agreement, which included a restraint on the vendors from engaging in any other sardine business in Canada. The parties also entered into a Put Option Agreement for the remaining issued shares in the company. Their Lordships considered that the three agreements should be read together, when considering whether the restraint was enforceable 20. They also said 21, if the managing director of a private company, owning all or the great majority of its shares, desires to effect a sale by the company of the whole undertaking and is willing, in order that a better price may be obtained, to enter into a reasonable covenant restrictive of his activities as regards carrying on such a business in the future, it is difficult to see why public policy should intervene [36] Their Lordships considered the same principle applicable where, instead of a sale of the undertaking, the shares of the company or a large interest therein were sold. They tested the reasonableness of the restraint by considering whether it was reasonably necessary for the protection of the goodwill of the business of (the company), for, if the 16 Pioneer Concrete Services at Pioneer Concrete Services at p 677, Pioneer Concrete Services at p [1940] 4 All ER Connors Bros at p Connors Bros at

13 13 restraint was larger than was necessary for that protection, it could be of no benefit to either party, and would be regarded in the eyes of the law as oppressive, and, therefore, unenforceable 22. [37] The passage from Heydon relied on by the applicants was based on the decision in Systems Reliability Holdings plc v Smith 23. In that case, the defendant had a 1.6 per cent shareholding in a company called Enterprise Computer Systems. He had been an employee of the company, acquiring a high level of skill in relation to a particular form of IBM computers. The plaintiff acquired all of the shares in the company under a share sale agreement, containing a restrictive covenant affecting some of the vendors including the defendant. The defendant had ceased to be an employee of the business shortly before the share sale agreement. Harman J considered that the reasonableness of the restraint given by the defendant should be tested by the principles relevant to a restraint given by a vendor to a purchaser. His Lordship said 24, It seems to me that in those circumstances it is right, and that the courts should allow, covenants in restraint of trade as between vendor and purchaser to be reasonable when a vendor sells and the purchasers buys the whole of a business from a number of vendors, some of whom have only small participations in the goodwill and business which is being sold. In my belief the courts would be stultifying themselves to hold that only what were called controlling shareholders or persons having major interests can be bound. [38] In my view, his Lordship s conclusion depended on the fact that the defendant was one of a number of persons who, together, entered into a transaction which in effect involved the sale of the goodwill of a business. [39] A case with marked similarities but a different result is White v Fletcher (Mayo) Associates Inc 25. In the course of his employment, the plaintiff acquired 4.62 per cent of the shares of his employer. The employer carried on business as an advertising company. Another company acquired all its shares, and obtained a restraint covenant from several employees including the plaintiff, who had managed the employer s Atlanta office, which serviced the employer s largest client. Shortly after the takeover, the plaintiff s employment was terminated. It was common ground that, if treated as an employee s covenant, the restraint was too wide. The plaintiff was successful on appeal, on that basis. The Court referred to the fact that the profit which the plaintiff made on the sale of his shares was strictly proportional to that which was received by all other shareholders, most of whom were not required to provide a covenant; and he had no control of overall management of his employer. His bargaining power was regarded as no greater than that of an employee. [40] Treitel states that a person who buys a business which is about to expand may be able to take a covenant against competition covering the area of the proposed expansion 26. The first authority relied upon for this proposition is Lamson Pneumatic Tube Company v 22 Connors Bros at p [1990] IRLR 377, At [54] SE 2d 746 (Sc Ga, 1983). 26 Edwin Peel, Treitel on the Law of Contract, 14 th ed, Sweet & Maxwell, 2015 at para (Treitel).

14 14 Phillips 27. The case was rather unusual. The plaintiff was incorporated for the business of the manufacture and sale of pneumatic tube systems for use in large buildings, for the conveyance of documents and small parcels from one part of the building to another. The plaintiff purchased another company, Bostedo Pneumatic Tube Company, which carried on a similar business in the Eastern Hemisphere. Bostedo had employed the defendant as its agent to extend the business into the United Kingdom and Europe. After the purchase, the defendant was employed as the plaintiff s general agent, for a term of two years certain, though an extension of the term was contemplated in the contract. The contract also included a restraint on the defendant for a period of five years from the time when his employment ceased, operative in the Eastern Hemisphere. At the time of the contract, the business which had been done was extremely small 28. Nevertheless, the area the subject of the restraint was held to be reasonable. Romer LJ said 29, It was, as I have said, peculiarly a business that required a large area, and having regard to its novelty, I have no doubt in my own mind that both the plaintiff company and the defendant expected and believed at the time that the contract was made between them that the business would under the defendant s management become a great success, and could and would be extended, as it succeeded, to all the principal places of business in the Eastern Hemisphere. I myself think that it cannot be said that at the date of the contract between the parties that expectation and belief was unfounded or unreasonable. [41] The nature of the contract was such that the restraint would take effect at some indefinite time in the future. It seems to me that, for that reason, a restraint referrable to the anticipated expansion of the business, could be regarded as reasonable. [42] On the other hand, the primary principle identified in Treitel 30 is that a purchaser is entitled to protection only in respect of the business which he has bought, and not in respect of some other business which he already carries on or may carry on in the future. [43] As has been said, that which a purchaser is entitled to protect by a restraint is the goodwill of the business purchased. Notwithstanding the notorious difficulties in defining it, it is of assistance to give some consideration to this concept. A number of definitions were collected in the majority judgment in Federal Commissioner of Taxation v Murry 31. Of those, the following from the judgment of Lord Macnaghten in Inland Revenue Commissioners v Muller & Co s Margarine Ltd 32 seems to me to be of most assistance: It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing that distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a 27 (1904) 91 LT Lamson at p At p At para (1998) 193 CLR 605 [12]-[20]. 32 [1901] AC 217, , cited in Murry at [17].

15 15 particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. [44] It seems to me to follow that a purchaser is entitled to protect by restraint, not only the business purchased, but also the potential expansion of the business based on its goodwill at the time of the sale. However a proposed expansion which is not in reality based on the goodwill of the business at that time will not justify a restraint extending beyond the area in which the business is conducted. [45] In Alliance Paper Group plc v Prestwich 33 the vendor of a 75 per cent interest in a company, who had also been its managing director, was held bound by a restraint. Judge Levy said 34, It seems appropriate to me to consider the covenants here on the basis that the defendant was the managing director and negotiator of the sale and it was his business which was being sold, and the covenants into which he entered should be viewed not only as those of an employee entering into a service contract, but also as those of the person who negotiated the sale of the shares sold on his own behalf and on behalf of other interested parties, including the trustees of his family trusts, from some of which he himself benefited. [46] In Taylor v Rotowax Trading Ltd 35 the sale of the business of a company was effected by a transaction which included a sale of all of the shares in the company, to a company associated with the person ultimately interested in the purchase of the business. The defendant was one of the eight shareholders in the company which had carried on the business. He gave a covenant which was expressed to be in favour of the company which purchased the business, and others. It was held to be enforceable by that company, to protect the business purchased 36. [47] In my view, it is apparent from these decisions that it is necessary to identify the substance of the transaction which gave rise to the covenant; and to determine whether in substance it involved a sale of an asset, such as the goodwill of a business, which might legitimately be protected by a covenant in restraint of trade. The fact that the means by which the asset is sold is through the sale of shares in a company is not decisive. But it would also follow, it seems to me, that not every sale of shares is to be regarded as the sale of a business, or its goodwill. None of the cases to which I have been referred would go so far. [48] On the material before me, I would conclude that the sale of its shares in GBAR by B&C in January 2015 was ancillary to the termination of the employment of Mr Brown, in contrast to the position in Pioneer Concrete Services. The sale was the product of negotiations relating to the termination of his employment. The latter was the primary transaction. In truth, the goodwill of the business was no longer the property of Mr Brown, or interests associated with him. Nor was it under his substantial control. 33 [1996] IRLR At [15]. 35 [1988] 1 NZLR Taylor at 678, 683.

16 16 Rather the goodwill was, as a matter of law, the property of GBAR; and would appear to have been substantially under the control of Mr Stoltz, and interests aligned with him. Nor does this appear to be a case of an incorporated partnership, where one partner sells its shareholding to the other or others 37. [49] On that basis, it seems to me that it is likely that the validity of the restraint imposed on Mr Brown by the Second Settlement Agreement should be assessed by the principles relating to an employer and an employee, and not those relating to the vendor and purchaser of a business. Clause 4 considered as an employee s covenant [50] I did not understand the applicants to make express submissions as to the reasonableness of this clause, viewed as a covenant by an employee. Nevertheless, it seems to me I should give some consideration to this question. [51] The only interest which, it would appear from the evidence, GBAR as Mr Brown s employer might seek to protect is his connection with customers. In my view, clause 4 extends well beyond what is reasonable to protect that interest. It is sufficient to note that it extends to an indirect interest in a competitor. The prohibition will extend, therefore, to a shareholding in a competitor, where Mr Brown had no active involvement with the business. This could not be regarded as reasonably required to protect GBAR s relationship with its customers. The same might well be said of the prohibition on being a director, if the director has no contact with customers. It is also difficult to see how provision of consultancy services might adversely affect the relationship of GBAR with its customers. [52] On this basis, it seems to me that the applicants have weak prospects of establishing that the restraint in clause 4 is enforceable. Clause 4 regarded as a vendor s covenant [53] My earlier conclusion does not mean that I consider that the applicants have no prospect of establishing that clause 4 should be assessed by reference to the principles applicable to the sale of a business. I therefore propose to consider their prospects of successfully enforcing the covenant on that basis. [54] As Applegarth J pointed out, 38 the reasonableness of a restraint is determined by reference to the circumstances at the date when the parties entered into the relevant agreement. The Second Settlement Agreement was entered into towards the end of January [55] By this time, the business was being operated by GBAR. Some steps had been taken to extend its area of operation, to Western Australia in particular. [56] Heydon states the rule to be that the area or scope of the covenant must not be more extensive than that of the business sold 39. The authority relied on is British Reinforced 37 Compare Davis & Anor v Woods & Anor (1979) ATPR , esp at [18287]. 38 See Vision Eye Institute at [260]. 39 Heydon at 206.

17 17 Concrete Engineering Co Ltd v Schelff 40 where Younger LJ determined that this covenant must be judged only with reference to the goodwill of the business sold 41, having earlier said 42, I should have thought that the law on this subject was clear. It is the business sold which is the legitimate subject of protection, and it is for its protection in the hands of its purchaser, and for its protection only, that the vendor s restrictive covenant can be legitimately exacted. [57] Nevertheless, it is not necessary for the purchaser to demonstrate that the business was conducted in every part of the area identified in the covenant, particularly in the case of a large business 43. [58] Heydon continues 44, Some allowance may be made for reasonable possibilities of expansion in the business sold; ideally this should be proportioned to the quantum of expansion to be expected in the time for which the restraint is imposed. It is not always easy to reconcile this theory with the theory that only the business sold can be protected. (references omitted) [59] The first authority cited by the author is Cook v Shaw 45. This case involved the sale of a business of manufacturing and selling by wholesale bamboo ware and fancy furniture. The vendors covenanted not to be involved in the manufacture or sale by wholesale or as a jobbing business of such items at any place in the Dominion of Canada for a term of 10 years. At the time of the sale, the business was making sales to retail dealers in provinces across Canada, but not in all provinces 46. The learned judge appears to have approached the question on the basis that the parties having agreed as to the area, it should be taken to be reasonable unless it was shown otherwise 47. It was against that background that he made reference to his assumption that the parties contemplated the possibilities of the business being extended to all parts of the Dominion. He also noted that there were other manufacturers in Canada from which similar articles might be obtained, apparently thereby suggesting that competition for the existing business might come from parts of Canada where the business did not sell its products. [60] A somewhat similar approach appears in Williams v Hurford 48. That case involved the sale of a bakery at Crow s Nest, the business of which was confined to areas within six miles of the bakery. The vendor gave a restraint, operative within an area within 15 miles of the bakery. Shand J upheld the area saying 49, I do not think that the plaintiff was bound to confine the agreement to the working area of his own business, as it existed at the date of the agreement, without regard to such future extension of business as might reasonably be 40 [1921] 2 Ch At p At pp See Connors Bros at p At pp (1894) 25 OR See Cook at p Cook at p [1918] St R Qd Williams at 167.

18 18 contemplated, and without regard to the possibility that the Crow s Nest business could be captured by bakers who carried on businesses at places beyond the original working area of the plaintiff s own business. [61] Another case relied upon by the author was Hall Manufacturing Co v Western Steel & Iron Works 50, where the Court upheld a vendor s covenant unlimited as to area. The covenant was collateral to the sale of a business of manufacturing posthole augers and diggers, which had been marketed in 34 of the United States and in two Canadian provinces. The business had attempted to sell its products elsewhere in the United States, through advertisements, commission men, and the outstretched hands of jobbers 51 ; so that its trade could be regarded as extending through all parts of the United States and Canada where these items could be used. The primary principle applied by the Court was that enforceability of a restrictive covenant should be tested 52 by determining whether on the facts of a particular case the restraint is greater than is reasonably necessary for the protection of the purchaser of the business and goodwill. In concluding that the covenant should be enforced, the Court said 53, In as much as the collateral covenants are no broader than the conveyed goodwill, full-grown and embryonic, they should be enforced. [62] On the other hand, in McAllister et al v Cardinal 54 Stewart J refused to declare enforceable a restrictive covenant by a vendor, stating 55, in determining the question of the reasonableness of the area the restraint must be for the protection of the business sold and in which the covenantee has an interest. His Honour also said 56 I have found no case where the future potentiality for development over a much greater area than that of the activity of the company at the date of the sale was regarded as an important element to be considered in determining the reasonableness of a restrictive covenant although no doubt to some degree prospects of expansion at the time of sale should be considered. [63] Davis v Woods 57 arose out of the sale to the continuing shareholders of one-half of the shares in a company which sold toys to specialty shops throughout New South Wales. The agreement recorded the purchase price as being applicable both to the net tangible assets of the company, and its goodwill. The company was treated as an incorporated partnership. The agreement contained a restraint on the vendors being involved in the sale of toys, gifts and novelty items to certain forms of retail business in New South Wales. The area specified in the restraint was held to be reasonable. At the time of the sale, the business extended to every major country town in New South Wales 58. It is in that context that Powell J said 59, The principal element of goodwill is, of course, the existing trade connection of the business to which it relates. But whereas, in the case of F 588 (CCA 7 th Circ, 1915). 51 Hall at p Hall at p Hall at p (1964) 47 DLR (2d) McAllister at p McAllister at p (1979) ATPR Davis at [18283]. 59 At [18287]-[18288].