Extraman (NT) Pty Ltd v Blenkinship

Extraman (NT) Pty Ltd & Ors v Blenkinship & Anor [2008] NTSC 31
PARTIES:EXTRAMAN (NT) PTY LTD
ACN 097 833 531
SKILLED GROUP LIMITED
ACN 005 585 811
EXTRA GROUP PTY LTD
ACN 069 181 059
EXTRAMAN (HR) PTY LTD
ACN 088 411 812
v
BLENKINSHIP, ROBIN TERENCE
CORESTAFF PTY LTD
ACN 129 495 263

TITLE OF COURT:  SUPREME COURT OF THE NORTHERN TERRITORY
JURISDICTION:  SUPREME COURT OF THE TERRITORY EXERCISING GENERAL JURISDICTION
FILE NOS:60/08 (20814255)
DELIVERED:  15 August 2008
HEARING DATES:  28, 29 & 30 July 2008
JUDGMENT OF:  ANGEL J
CATCHWORDS:

RESTRAINT OF TRADE – Restraint in agreement for sale of shares in companies operating business – Goodwill – Possible combinations of restraint of trade – whether restraint void for uncertainty – whether restraint contrary to public policy – whether limitations as to area and time reasonable – whether restraint enforceable.
Cases Cited:
Amoco v Rocca Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840
Bonitto v Fuerst Bros Co Ltd [1944] AC 75
Brendon Pty Ltd v Russell (1994) 11 WAR 280
Bridge v Deacons [1984] AC 705
Brown v Brown [1980] 1 NZLR 484
Butt v Long (1953) 88 CLR 476
Connors Bros Ltd and Others v Connors [1940] 4 All ER 179
Cream v Bushcolt Pty Ltd (2004) ATPR 42–004; [2004] WASCA 82
Davies v Davies (1887) 36 Ch D 359
Fadu Pty Ltd v ACN 008 112 196 Pty Ltd (2007) ATPR 43–206
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605
Fitch v Dewes [1921] 2 AC 158
Geraghty v Minter (1979) 142 CLR 177
Griffiths and Beerens Pty Ltd v Duggan (2008) 66 ACSR 472
Herbert Morris v Saxelby [1916] 1 AC 688
Hydron Pty Ltd v Harous [2005] SASC 176; (2005) 240 LSJS 33
IRAF Pty Ltd v Graham [1982] 1 NSWLR 419
JQAT Pty Ltd v Storm [1987] 2 Qd R 162
Lloyds Ships Holdings Pty Ltd & Anor v Davros Pty Ltd& Ors (1987) 17 FCR 505
Mason v Provident Clothing & Supply Co Ltd [1913] AC 724
Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
Pearson v Arcadia Stores, Guyra Ltd(No 1) (1935) 53 CLR 571
Run Corp Ltd v McGrath Ltd (2007) ATPR 42–198; [2007] FCA 1669
Schenker and Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834
Sear v Invocare Australia Pty Ltd (2007) ATPR 42–149; [2007] WASC 30
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors (2004) 219 CLR 165
Heydon, The Restraint of Trade Doctrine 2^nd edn (1999)
Trebilcock: The Common Law of Restraint of Trade, Carswell (1986)

REPRESENTATION:
Counsel:
Plaintiffs:JWS Peters SC and A Young
Defendants:A Wyvill
Solicitors:
Plaintiffs:Ward Keller
Defendants:Clayton Utz
Judgment category classification:    A
Judgment ID Number:  Ang200808
Number of pages:  44

IN THE SUPREME COURT
OF THE NORTHERN TERRITORY
OF AUSTRALIA
AT DARWIN
Extraman (NT) Pty Ltd & Ors v Blenkinship & Anor [2008] NTSC 31

No. 60 of 2008

BETWEEN:
EXTRAMAN (NT) PTY LTD
ACN 097 833 531

First Plaintiff
SKILLED GROUP LIMITED
ACN 005 585 811

Second Plaintiff
EXTRA GROUP PTY LTD
ACN 069 181 059

Third Plaintiff
EXTRAMAN (HR) PTY LTD
ACN 088 411 812

Fourth Plaintiff
AND:
BLENKINSHIP, Robin Terence

First Defendant
CORESTAFF PTY LTD
ACN 129 495 263

Second Defendant

CORAM: ANGEL J
REASONS FOR JUDGMENT
(Delivered 15 August 2008)

The second plaintiff Skilled Group Ltd and its subsidiaries carry on business on a national basis. They have about 30,000 employees Australia wide. The businesses carried on by Skilled and its subsidiaries comprise diverse activities including permanent placement, labour hire and contract staff services to a wide range of clients in both Government and the private sector. The provision of these services in the mining sector (including clients who provide services to the mining sector) is a substantial part of the business carried on by Skilled and its subsidiaries. Skilled Group Ltd carries on business in its own right and is also the holding company for its various subsidiaries. It was listed on the Australian Stock Exchange in 1994 and in the financial year ended 30 June 2007 had an annual turnover of approximately $1.4 billion dollars, its earnings before interest and tax were approximately $55 million dollars and its net profit after tax about $29 million dollars.
The Skilled business was established in 1964 and for many years has experienced considerable growth both organically and through the acquisition of several businesses or companies that carry on such businesses throughout Australia that operate in the “workforce solutions” industry.
The third plaintiff Extra Group Pty Ltd and its subsidiaries including the first plaintiff Extraman (NT) Pty Ltd and the fourth plaintiff Extraman (HR) Pty Ltd have at all material times conducted the business of labour hire and contract staff services for the mining, resources and engineering and offshore marine industries in Western Australia, the Northern Territory and Queensland, particularly to remote locations.
The first defendant is 38 years of age. He is an extremely capable and successful businessman. He, like the appellant in Fitch v Dewes [1921] 2 AC 158, is “alert and very competent both to understand and to safeguard his own interests”. In cross examination he agreed that he was “a driving force of the Extraman business over the years”.
In 1990 the first defendant completed an apprenticeship as a fitter machinist and obtained a certificate in management through a TAFE program in Western Australia. In 1990 he worked with various employers in the trade of fitter machinist, at times utilising the recruitment services of Skilled Engineering in the Skilled Group Ltd group of companies to obtain placements in the trade. In October 1991 he obtained employment with Skilled Engineering as a recruitment consultant based in its office in Perth, a job he retained until October 1992.
In October 1992 the first defendant was employed as a recruitment consultant with a business then known as “Extraman” in Perth. A principal of that firm was one Cummins. Extraman was a small labour hire recruitment business based solely in Perth. It had no regional or interstate offices at that time. Cummins was the general manager of the business which had a total of four staff.
In December 1992 the first defendant was offered and acquired a 25 percent interest in the business of Extraman. Between about December 1992 and September 1995, the turnover of Extraman business in Perth increased from approximately $15,000 per week to about $250,000 per week. Extraman (WA) Pty Ltd was incorporated on 18 May 1995 to conduct the business.
In September or October 1995, the first defendant resigned from his employment with Extraman (WA) Pty Ltd. He remained a shareholder and director thereof. The first defendant resigned from his employment because of a deteriorating relationship he had with Cummins. In November 1995, Cummins contacted the first defendant and requested him to return to the business to be branch manager of an Extraman office in Kalgoorlie, Western Australia. The first defendant accepted that position in November 1995.
In early 1996, one Ottogolli, commenced employment with Extra Group Pty Ltd and acquired a share holding. Between 1996 and 1997 the first defendant reduced his shareholding from 25 percent to 19.5 percent. Ottogolli purchased the first defendant’s shares.
In August 2000 the first defendant resigned from his employment as branch manager in the Kalgoorlie office. He also retired as a director of each of the companies Extra Group Pty Ltd, Extraman (WA) Pty Ltd, Extraman (QLD) Pty Ltd and Extraman (HR) Pty Ltd. He reduced his shareholding in the Extraman Group Pty Ltd from 19.5 percent to 10 percent by selling shares to the spouses of Cummins and Ottogolli. He retained a 10 percent shareholding in Extra Group Pty Ltd and Extraman (HR) Pty Ltd.
From August 2000 to September 2001 the first defendant lived in Perth without any involvement in the business of any member of the Extraman group of companies.
As at August 2000, Extra Group Pty Ltd’s head office was based in Perth. Its business was managed by Cummins and Ottogolli with a management team. Extraman (WA) Pty Ltd conducted its business from Western Australia through offices in Perth and Kalgoorlie, the nature of the business being predominately the provision of labour hire services to clients in the mining engineering and construction industries who had business operations or projects within the radius of about 100 kilometres from the Perth business district and the area known as “The Goldfields” which comprised a significant part of Southern and mid–Western Australia from Southern Cross to Meekathara. At that time Extraman (QLD) Pty Ltd conducted its then recently established business in Queensland through offices initially in Townsville but soon after in Mackay and Brisbane. Each office was linked to a database which contained details of all information relevant to clients, employee candidates and employees placed with clients.
In about July 2001, Cummins asked the first defendant whether he would be interested in establishing a business for Extra Group Pty Ltd in either the Northern Territory or South Australia. The first defendant decided to pursue the opportunity in the Northern Territory. Extraman (NT) Pty Ltd was incorporated on 14 August 2001 with Cummins, the first defendant and Ottogolli as directors. In September 2001 the first defendant was engaged as branch manager with a 20 percent shareholding in Extraman (NT) Pty Ltd. The first defendant was responsible for overall management of the Northern Territory business reporting to Cummins, who continued to be based in the Extra Group Pty Ltd head office in Perth.
In about 2003, an Extraman office was opened in Broome to service a Northern Territory client who also operated in Broome. The first defendant says that from the time he was employed by Extraman (NT) Pty Ltd until the Sale of Shares Agreement of 4 July 2005, he did not participate in the management, operation or client development of any of the other regional offices of the Extraman Group of companies then located in Western Australia and Queensland, other than the Broome office.
In early 2005 the second plaintiff Skilled Group Ltd was employing 175 staff in its “workforce solutions” business in the Northern Territory. It competed with Extraman (NT) Pty Ltd for the provision of labour hire services to clients in the mining, engineering, construction and offshore marine industries in the Northern Territory. In early 2005, Extraman (NT) Pty Ltd was the largest labour hire business in the Northern Territory, regularly competing with Skilled Group Ltd to provided services to, amongst others, the same customers. Extraman (NT) Pty Ltd employed some 111 staff at this time.
I have already adverted to the fact that the first defendant is a competent and highly successful businessman alert and capable of looking after his own interests. His cross examination included the following:
“Mr Blenkinship, can I ask how old you are? ––– 38.”
After eliciting that the first defendant commenced working in the labour hire market in 1991 in Perth and acquired a 25 percent interest in the Extraman Group in 1992, the cross examination continued:
“Now, in about 1992, the Extraman business was taking about $15,000 a week in revenue? ––– That’s correct.
That equates to about a little less than $800,000 per annum in total revenue? ––– Mmmm.
You became a director eventually of the Extraman Group, correct? ––– Yes.
And by 1995, partly as a result of your efforts in the business, revenues had grown to $13m per annum? ––– Yes, we went from four staff to obviously having several more staff, business development managers, more recruitment consultants, so certainly a key part of the business at that point and we certainly went through a growth phase with additional internal staff to achieve that result.
It’s more than a growth phase isn’t it? It’s a remarkable success in a short period of time from $800,000 to $13m of turnover over three years? ––– It’s a very good result – yes.
….
You were involved in the strategic direction and business management of that business at the time? ––– Yes, I was.
And you put your position forcefully to the other shareholders and directors of the business? ––– I was a minor shareholder. There was the managing director and another senior shareholder. I was a new young man coming into a work environment that had a major shareholder who was 50 something years old and a senior executive and another shareholder who was the founder of the company, so I was certainly part of the directorship and ownership of the business, but yeah. When you say forcefully, sorry, I don’t understand the question much?”
Having said that he did take part in the “strategic direction and management of the business”, he was asked –
“Alright, now in 1995, you were sent off to establish the Kalgoorlie office of Extraman? ––– Yes.
And that business flourished under your stewardship? ––– Yes, it did.
And in fact you remained a director of the Extraman business until August 2000? ––– Yes, that’s correct.
And if I take Extra Group and its subsidiaries and various businesses it had, what was the total revenue by 2000, roughly speaking, I won’t hold you to it? ––– I would say at that point $35m.
So it had almost tripled in five years again? ––– Yes, it had.
And you must have been proud of your achievements as a director and steward of the business? ––– Certainly, as well as the staff that had achieved it, very proud.
And in fact in 1999 you believed you should have become the managing director of that $35m business? ––– That’s correct.
You were sufficiently confident of your skills and knowledge of the business that a stewardship should have been trusted to you? ––– That’s correct.
And when you didn’t obtain the managing director’s position you left the Extraman Group for a short time? ––– For 12 months.
….
Now in August 2001 you went in to develop – in your third attempt to develop a new market which was the Northern Territory market? ––– Yes.
And in August 2001 you became a director of Extraman (NT) Pty Ltd? ––– Yes.
And you arrived in Darwin with nothing more really than a laptop? ––– That’s correct.
And as I understand it – what was the revenue in say the year ending 30 June 2002 the first nine or 10 months of operation, roughly speaking? ––– I would say $5m.
$5m. You just developed that from scratch? ––– Yes.
Is it an achievement of which you’re were proud? ––– It’s an achievement which I am very proud of, yes.
And by 2005 the annual revenue had grown to about 12 or $13m, is that right? ––– That’s correct.
And you were justifiably proud of the efforts in starting up a business from scratch with such success? ––– Yes.
And you built that business up in the Northern Territory with your hard work, skill and ability? ––– Yes, along with the resources boom which was thankfully it was reasonably good timing. …”
As at 4 July 2005 the first defendant was a director and shareholder of Extragroup Pty Ltd and Extraman (NT) Pty Ltd. He held a 20 percent interest in Extraman (NT) Pty Ltd and a 10 percent interest in Extragroup Pty Ltd.
On 4 July 2005, pursuant to a Sale of Shares Agreement between the second plaintiff Skilled Group Ltd and the first defendant and others, Skilled Group Ltd acquired all the issued share capital of Extragroup Pty Ltd and its subsidiary companies, Extraman (NT) Pty Ltd, Extraman (HR) Pty Ltd and other related companies for $21,982,766, of which $19,650,000 was allocated to goodwill in the books of the second plaintiff.
The first defendant’s share of the sale price was $2,955,835, and on a pro rata basis, $2,643,066 of that sum represented payment to the first defendant for his share of the goodwill of the Extraman business. I infer the sum of $19,650,000 represents the difference between the purchase price of the Extraman business and the assessed net value of assets deployed in the business. In respect of a profitable company, that usually represents what the law regards as goodwill: Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 624 [49]. The allocation of $19,650,000 as goodwill was unilateral. It was not agreed between the parties. There is no evidence of the value of net assets deployed in the Extraman business. Nevertheless, the existence of substantial goodwill is in any event to be inferred from the nature of the Extraman business and the substantial consideration paid for its acquisition.
The Sale of Shares Agreement effected the sale and transfer of the Extraman business from the first defendant and his associates to Skilled Group Ltd. The Sale of Shares Agreement provides, inter alia, that the first defendant would not compete with or carry on the same or a substantially similar business as that of Extragroup Pty Ltd and its subsidiaries in specified areas including the Northern Territory for up to five years from 4 July 2005, (Clause 11). The covenant extends to procuring that the second defendant would not do so.
On 4 July 2005, in addition to the Sale of Shares Agreement, pursuant to another agreement between Extraman (NT) Pty Ltd and the first defendant, the first defendant was employed as branch manager in Darwin on the same salary as he had been previously. That employment agreement provides that in consideration of the Sale of Shares Agreement and the employment agreement itself, inter alia, the first defendant would not compete with Skilled Group Ltd and its subsidiaries in specified areas including the Northern Territory for up to two years from the termination of his employment.
Following the Sale of Shares Agreement on 4 July 2005, the first defendant was paid his share of the sale price. In September 2005 he was paid $825,000. In September 2006 he was paid $991,093. In February 2007 he was paid $631,408. In September 2007 he received a final payment of $508,333. In all, the first defendant was paid $2.95 million dollars for his share in the Extraman business.
After 4 July 2005 Extraman (NT) Pty Ltd continued to conduct business in the Extraman name extensively competing with Skilled Group Ltd and other providers of “workforce solutions”. The present case is in contrast to cases where the purchased business as a continuing and identifiable business becomes absorbed into the goodwill of the purchaser relatively shortly after being acquired, as in Hydron Pty Ltd v Harous [2005] SASC 176; (2005) 240 LSJS 33; see at [90]–[94].
In July 2007 the first defendant’s position as branch manager in Darwin with Extraman (NT) Pty Ltd changed. He thereafter was employed as regional manager for the Northern Territory with Skilled Group Ltd. The first defendant was offered a new written employment agreement which he did not sign, but it is common ground that he accepted the new position in accordance with that written document, Clause 9.3 whereof provided that the earlier employment contract with Extraman (NT) Pty Ltd was terminated by mutual agreement without affecting ongoing obligations under that earlier employment agreement including the restraint clause.
The first defendant, having received his last instalment of the purchase price in September 2007 resigned his employment with Skilled Group Ltd on 24 November 2007.
On 18 May 2008 the first defendant announced his intention to re–enter the Northern Territory labour hire market and compete with the plaintiffs. He is a director and shareholder of the second defendant. He first made the decision to compete with the plaintiffs’ business in late January 2008.
In late February 2008 another employee of the plaintiff Extraman (NT) Pty Ltd, one Pedersen, resigned as Extraman Darwin Branch Manager. He left in early March 2008 intending to work with the first defendant. Pedersen now works as NT Regional Manager with the first defendant for the second defendant. He was solicited by the first defendant in breach of Clause 11.1(b) of the Share Sales Agreement and Clause 15.3(a) of the Extraman (NT) Pty Ltd employment contract. Both Pedersen and the first defendant have pursued clients and former clients of the plaintiffs competing for business.

The first defendant intends to compete with the plaintiffs via the second defendant. The second defendant placed advertisements in the NT News on 31 May 2008 and on 4 June, 7 June, 12 June and 14 June 2008, seeking business. In one such advertisement the first defendant was described as general manager and Pedersen was described as the NT regional manager of the second defendant.
The plaintiffs found their claim for relief upon the admitted breaches of the terms of the restraint clauses in the Sale of Shares Agreement and the Extraman (NT) Pty Ltd employment contract. The defendants contest the enforceability of those restraints on two grounds, first, that the restraints are void for uncertainty, and secondly, that they are unenforceable as being an unreasonable restraint of the first defendant’s trade. Should the Court find that the restraints are binding upon the first defendant there is no issue that in principle an injunction would issue against him. The first defendant, through his counsel, informed the Court that he has no intention of acting contrary to his valid contractual obligations and offers an undertaking in lieu of an injunction in the event his defences fail. Insofar as the second defendant is concerned the plaintiffs’ cause of action against it is inducing breach of contract. Any question of damages for breach of contract has been deferred pending the court’s decision as to the enforceability of the covenants.
The Sale of Shares Agreement contains the following restraint clause:
“11.   Restraint
11.1Vendors’ and Covenantors’ restraint
In consideration of the terms of this Agreement and the payment by the Purchaser of $1.00 to each of the Vendors and the Covenantors (receipt of which is acknowledged upon execution of this Agreement), the Vendors and the Covenantors will not and will procure that their Related Bodies Corporate (to the extent that each of the Vendors and Covenantors is able lawfully to control them) will not (subject always to clause 11.3) during the Restraint Period and in the Restraint Area:
(a)provide any services in competition with the Business;
(b)solicit, employ or engage to provide any services (or directly or indirectly aid or assist any other person to do so) any person who is at Completion, or after the Completion Date becomes, an employee or contractor of any of the Companies without the prior written consent of the Purchaser (which may be given or withheld, or given on such conditions as are determined by the Purchaser, in the Purchaser’s sole discretion);
(c)carry on or be engaged in any capacity in a business the same as or substantially similar to the Business (or any material part of it); or
(d)be involved, directly or indirectly (and whether on his or its own account or as an agent, officer, employee, consultant, contractor, partner, member, shareholder, trustee, unitholder or other beneficiary) in any business the same as or substantially similar to the Business (or any material part of it).
11.2Definitions
In this Clause 11:
Restraint Area means each of the following periods (sic) separately;
(a)Western Australia;
(b)Northern Territory;
(c)Queensland;
(d)New South Wales;
(e)Victoria;
(f)South Australia;
(g)Tasmania;
(h)New Zealand;
(i)Australia.
Restraint Period means each of the following periods separately:
(j)the period of 5 years commencing on Completion;
(k)the period of 4 years commencing on Completion;
(l)the period of 3 years commencing on Completion;
(m)the period of 2 years commencing on Completion;
(n)the period of 1 year commencing on Completion.
11.3   Read down if invalid
(a)each of the parties acknowledge that each of the prohibitions and restrictions contained in this Clause 11:
(1)will be read and construed and will have effect as separate, severable and independent prohibitions or restrictions (namely the prohibitions and restrictions set out in Clauses 11.1 and 11.2 arising from the different combinations of each activity restrained or prohibited under clause 11.1 with each Restraint Period and each Restraint Area set out in clause 11.2) and will be enforceable accordingly even though they are cumulative in effect; and
(2)are reasonable as to period, territorial limitations and subject matter and are required in order to protect the Business and the interests of the Purchaser;
(b)however, for the avoidance of doubt, if any of the separate and independent covenants or restrictions set out in this Clause 11 is or becomes invalid or unenforceable for any reason:
(1)if the covenant or restriction in question would be valid or enforceable if any activity was deleted or the area or time was reduced, then the clause must be read down by deleting that activity, or reducing that period or area, to the minimum extent necessary to achieve that result; and
(2)subject thereto Clause 16.7 of this Agreement applies.
(c)Nothing in this Clause 11 restricts the Vendors or the Covenantors from holding any shares in any listed public company provided that such holdings do not exceed (collectively between the Vendors and the Covenantors) 10% of the issued share capital of any such listed public company.
11.4   Specific acknowledgment by the Parties
The Vendors and the Covenantors also acknowledge and agree that any breach of any of the prohibitions and restrictions on their part in this Clause 11 may not adequately be compensated by an award of damages and any breach by the Vendors or the Covenantors of any of those prohibitions and restrictions will entitle the Purchaser, in addition to any other remedies available at law or in equity to seek an injunction to restrain the committing of any breach (or continuing breach) of any of those prohibitions or restrictions.”
The 2005 Extraman (NT) Pty Ltd employment contract contains the following restraint clause:
“15. RESTRICTION ON POST EMPLOYMENT ACTIVITIES
15.1In consideration of the Employer agreeing to employ the Employee and in order to protect the business of the Employer and the Company Group (and additionally in consideration of the amounts paid to the Employee and/or entities related to him in connection with the Sale of Shares Agreement), it is a condition of the Employee’s employment with the Employer that the Employee may not within the Restraint Period or within the Restraint Area without the prior written consent of the Employer be directly or indirectly engaged, concerned or interested:
(a)as an employee;
(b)as an advisor, consultant or contractor;
(c)as an employer;
(d)as an officer or member of a company or a trustee, unitholder or other beneficiary of any trust;
(e)as a principal in his own right;
(f)as an agent; or
(g)in any other capacity.
in any business, undertaking or activity which in the reasonable opinion of the Employer is in competition with the Employer or the Company Group in the business of the provision of permanent placement labour hire or contract staff services.
15.2Clause 15.1 shall be construed and have effect as if it were the number of separate sub clauses which results from combining each of the activities restricted under clause 15.1 with each Restraint Area (under clause 15.5(a)) and then combining each of these combinations with each Restraint Area (under clause 15.5(b)). Each of the separate sub clauses operates concurrently and independently. Each such resulting sub clause is severable from each other such relating sub clause, and it is agreed that if any such separate resulting sub clause shall be invalid or unenforceable for any reason, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other such resulting sub clause.
15.3The Employee may not without the prior written consent of the Employer within each Restraint Period and in each Restraint Area:
(a)solicit, canvass, induce or encourage (or attempt to do any of these things) any employee, contractor or agent of the Employer or of the Company Group to terminate their employment contracts or agency with the Employer or with any Company Group; or
(b)solicit, canvass, approach or accept any approach (or attempt to do any of these things) from any Client of the Employer or of any member of the Company Group or any person who during the twelve months immediately preceding the Termination Date was a Client of the Employer or of any member of the Company group with a view to soliciting the business or custom of that Client in the business of the permanent placement, contract labour or contract staff services; or
(c)solicit, canvass, approach or accept any approach (or attempt to do any of these things) from any person whose business or custom the Employer or any member of the Company Group was cultivating at the time of the Termination Date with a view to soliciting the business or custom of that person; or
(d)interfere or seek to interfere with the relationship of the Employer or any member of the Company Group with the Clients, suppliers and employees of the Employer or any member of the Company Group;
(e)this sub–clause 15.3 shall be construed and have effect as if each reference in it to a period of time or a geographic area were the number of separate clauses which results from combining each reference to a period of time with each reference to a geographic area and combining each such combination with each sub paragraph of this sub clause 15.3. Each of the separate sub clauses so formed operates concurrently and independently. Each such resulting sub clause is severable from each other such resulting sub clause, and it is agreed that if any such separate resulting sub clause shall be invalid or unenforceable for any reason, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other such resulting sub clause.
15.4It is specifically acknowledged by the Employee that:
(a)the Employer’s rights under this clause 15 are in addition to, and do not derogate from or affect the Employer’s common law rights and the Employer’s rights under the Share Sale Agreement.
(b)The restrictions in clause 15.1 and 15.3 are reasonable and that injunctive relief may be sought by the Employer to enforce these restrictions; and
(c)The rights and obligations of the parties in this clause 15 survive termination of this Agreement.
15.5In this agreement:
(a)Restraint Period means each of the following periods commencing on the Termination Date;
(i)6 months;
(ii)12 months;
(iii)18 months;
(iv)2 years;
(b)Restraint Area means each of the following areas:
(i)Western Australia;
(ii)Northern Territory;
(iii)Queensland;
(iv)any other State in which any member of Extraman Group has carried on business for any material period during the term of the Employee’s employment with the Employer;
(v)Australia.”
The Skilled Group Ltd employment contract also contained a restraint. It has now expired.
Skilled Group Ltd did not agree to purchase the Extraman business for a fixed sum but rather for a sum calculated upon a formula as to earnings post contract averaged over the years 2005, 2006 and 2007 during which the first defendant, and his former co–shareholders in the Extraman companies, Cummins and Ottogolli, would remain in the business on a day to day basis under the supervision of Skilled Group Ltd for at least two years after completion: Clauses 6.3(a) (2), 7.2.
The first defendant gave the following evidence about this in cross examination:
“… You understood what you signed on 4 July 2005, did you not? –––Yes.
Thank you. Now it was important to you as a person who had received 13% of the purchase price that the profits of the business were not eroded after 4 July 2005? ––Yes.
And it was important to you to have some involvement in how those profits were earned for the 13% on which you were to be paid? ––– Yes, in Darwin.
And the profits were to be calculated – well you weren’t being paid 13% purely of the Darwin revenue, were you? ––– No. I didn’t have control over any other revenue.
You were being paid a consideration, you agreed with me before, of 13% of the total sale price, were you not? ––– Yes.
And that total sale price was calculated by a factor of earnings before interest and tax for the entire operations of the Extraman Group? ––– Yes.
And those operations were in the Northern Territory, Western Australia and Queensland? ––– That’s correct.
And you understand that EBIT E–B–I–T means earnings before interest and tax? ––– Yes, I do.
And you understand the company tax rate is about 30%? ––– Yes, I do.
Now you received other benefits under this agreement, did you not? The share sale agreement? You got your loan accounts repaid? ––– They were our retained earnings from previous year. Yes.
Yes, but you had an agreement from Skilled to fund the payment out of that capital you had tied up in the business by way of loan account or retained earnings? ––– The retained earnings were paid out and the cash flow needed to be replaced by Skilled to continue business.
So Skilled, one of the benefits you got was that Skilled funded the release of that capital you had tied up in the business by way of loan accounts and retained earnings? ––– No. We took out money out that was in the business and they needed to replace cash in order to have cash flow to run the business. They did not pay the shareholders their dividends. The dividends and the retained earnings were already there.
Technically, you’re quite correct? ––– Thank you.”
I turn to the question of whether Clause 11 of the Sale of Shares Agreement is unenforceable as being too uncertain.
In Butt v Long (1953) 88 CLR 476 at 487 Dixon CJ said:
“… An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. But the agreement should be interpreted for the purpose of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving the ambiguity but a restrictive interpretation of general words is not to be adopted simply to save a covenant or agreement from invalidity. …”
The defendants submitted that Clause 11’s failure to distinguish between vendors and the covenantors was “the first indication” of what was said to be “the indiscriminate and capricious operation” of the clause. It was emphasised that the covenantors included trustees of family trusts, wives and other persons not directly involved in the Extraman business, other than as shareholders. It was said Clause 11 is capable of operating in different ways in relation to different vendors and different covenantors and there was nothing in the agreement that required the clause to be individually varied according to the individual interest of each vendor and each covenantor. It was complained that the clause in its terms either operated as separate free standing clause in relation to each individual covenantor or vendor or alternatively the clause is to be construed in its terms as equally applicable to all vendors and covenantors. Just as the restraint areas and the restraint periods are expressed as a range and each area and period is to be looked at separately, the clause is indiscriminate when it comes to covenantors and vendors.
So far as the restraint on business activities are concerned, the clause is not confined to Western Australia, Northern Territory and Queensland, that is, “business” as defined includes the business of Extraman companies not trading in the Northern Territory.
The next complaint was of the multiple restraint areas and restraint periods. With the exception of Australia, the other areas are alternative areas. This means, the defendants submitted, that the combinations go up in multiples. Were this the case, counsel were agreed upon the formula applicable. The number of possible combinations is calculated by taking the number of variables, multiplying two to the power of that number of variables and subtracting one. As an illustration of this, where there are two variables, say, Western Australia and Northern Territory, the possible combinations are three, namely, Western Australia, Northern Territory and Western Australia and Northern Territory combined. If one adds Queensland the number of variables becomes three. Two to the power of three is eight, which deducting one, gives seven combinations. In that case the seven combinations would be Western Australian, Northern Territory and Queensland individually, Western Australia and Queensland combined, Western Australia and Northern Territory combined, Northern Territory and Queensland combined and Western Australia, Northern Territory and Queensland combined. So it increases with the increasing number of variables, multiples getting larger and larger. The defendants submitted the total number of combinations for the restraint area were 257.
It is to be noticed that the inclusion of New Zealand, Tasmania, Victoria and New South Wales are all areas where Extraman never had any business, although Skilled Group Ltd did. However, in sale of goodwill cases, as was properly conceded by counsel for the plaintiffs, a restraint clause can only be used to protect the business sold not other businesses of the purchaser.
Clause 11 also contains four different categories of activity in five different combinations of time. Thus, so submitted the defendants, 257 different combinations of areas applied across five different restraint periods over four different activities when applied to ten vendors and covenantors results in 51,400 separate covenants.
Counsel for the defendants submitted that number of combinations was based on the four broad categories of activity contained in Clause 11.1(a), (b), (c), (d). It did not take additional account of sub–activities contained in Clause 11.1(b) and (d). Counsel then turned to Clause 11.3(b)(1). This clause required the Court, it was submitted, having individually looked at each of 51,400 combinations, and having concluded a particular combination to be unreasonably broad, to decide how the clause might be reduced to make it reasonable. The number of combinations, it was said, were therefore infinite. Rather than the severance provision saving Clause 11, it was submitted it rendered it useless for uncertainty.
I am unable to accept the defendants’ submissions in this regard. I agree with the plaintiffs’ submission that there is an assumption that the areas are to be calculated on an “and/or” basis. Clauses 11.2 and 11.3(a)(1) separate the covenants. They do not say or incorporate “and/or”. There is no warrant for the introduction of that “bastard conjunction”, as Viscount Simon called it in Bonitto v Fuerst Bros & Co Ltd [1944] AC 75 at 82. I also agree with the plaintiffs’ submission that the words “each of the Vendors and the Covenantors” do not require a number of combinations for which the first defendant is responsible.
Clause 11.2 of the Sale of Shares Agreement defines “Restraint Area” as “each of the following periods (‘periods’ is a typographical error for ‘areas’ and I so read it) separately”. I agree that a combination of the areas was neither intended nor contemplated and that there is no warrant for reading the words “and/or” into areas. The defendants conceded in their supplemental written submissions that only five periods are contemplated. The drafting of the clause in relation to “restraint period” is the same as the drafting of the clause “restraint area”, see Clause 11.2. I also agree with the plaintiffs’ submission that Clause 11.3(a)(1) does not provide for the combination of the “restraint areas” in each individual covenant. The word “combinations” only appears in the phrase “combinations of each activity”. I agree that on its proper construction the words “restraint area” should be construed separately allowing for nine areas only and not 257 as was submitted by the defendant. I also agree with the plaintiffs’ submission that the defendants’ submission that the number of “combinations” should be increased by a factor of 10 for “vendors and covenantors” offends the reasonable and commonsense approach taken by the courts towards covenants of this type: Griffiths & Beerens Pty Ltd v Duggan [2008] 66 ACSR 472 at 492 [65], and the honest and reasonable businessman test: Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 848–849. As was submitted by the plaintiffs, in respect of the first defendant there is only one restraint. He was both a vendor and a covenantor. As a matter of commonsense and proper construction his covenant as vendor (on behalf of the Blenkinship Family Trust) also binds him personally – Clause 20.1. He would not be liable for a breach by other vendors or covenantors.

Clause 11.2 is similar to the clause considered by the Queensland Court of Appeal in JQAT Pty Ltd v Storm [1987] 2 Qd R 162. The court there was dealing with a clause in which there were three separate activities, three separate time periods, and two different areas. The court held that produced 18 notional separate subclauses.
If one applies the same construction and calculations used in that case to Clause 11.2 to the first defendant alone and not to other covenantors, there are nine separate areas, five separate time periods and four separate activities, that is, 180 separate covenants.
Clause 11 is drafted in a form that has become variously known as a “step”, “ladder” or “cascade” clause. These clauses have received quite some judicial attention in recent times and stem, it seems, from the decision in Davies v Davies (1887) 36 Ch D 359. That case concerned a covenant on the dissolution of a partnership restraining a retiring partner “so far as the law allows”. The clause was held to be too vague for the court to enforce. At 393 Bowen LJ said:
“The law may allow 20 different restrictions all of which might serve the purpose of the parties all of which might be inconsistent with each other all of which the law would nevertheless allow. That would leave it absolutely uncertain as to what the parties agreed to because they had not made up their own minds about it.”
Fry LJ at 395 said that the object of the contract was to leave the law to make the contract between the parties and that was impermissible.
In Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840 Wootten J held the covenant there void for uncertainty. In that case it was possible to spell out of a covenant in restraint of trade 82,152 notional covenants, many of which in his Honour’s view might be held to be enforceable and others unenforceable. The clause failed, not because of the number of covenants, but because the agreement contained alternatives whilst contemplating only one covenant. At 845 Wootten J said:
“… Which one is intended? The problem is not to be solved by saying that the widest enforceable covenant is intended because in the absence of any statement as to the priority of application of the variables it is not possible to say which covenant is widest. Does a 100 kilometre radius for one year give a wider covenant than a 10 kilometre radius for five years? …”
Restraints similar to the present Clause 11 have been held not to lack certainty in a number of cases to which the Court was referred: JQAT Pty Ltd v Storm [1987] 2 Qd R 162, Lloyds Ships Holdings Pty Ltd & Anor v Davros Pty Ltd & Ors (1987) 17 FCR 505, Brendon Pty Ltd v Russell (1994) 11 WAR 280, Hydron Pty Ltd v Harous [2005] SASC 176 (2005); 240 LSJS 33, Sear v Invocare Australia Pty Ltd (2007) ATPR 42–149; [2007] WASC 30, Run Corp Ltd v McGrath Ltd (2007) ATPR 42–198; [2007] FCA 1669.
In, Lloyds Ships Holdings Pty Ltd & Anor v Davros Pty Ltd & Ors (1987) 17 FCR 505 at 520 Spender J, in a passage approved by Bleby J in Hydron Pty Ltd v Harous, said:
“The judgments of the Full Court in JQAT v Storm (supra) suggest that a threshold question in determining the certainty of a restraint of trade clause of the kind now before me, is whether the clause contemplates a single covenant to operate from the numerous combinations of conduct, time and area which are generated. If the clause contemplates a single covenant, then the covenant must provide a means by which to choose which of the combinations is to apply; otherwise the clause is void for uncertainty. A clause which contemplates a single covenant, being the widest restraint that is enforceable, will be uncertain ‘because in the absence of any statement as to the priority of application of the variables, it is not possible to say which covenant is widest’: Austra Tanks (supra) at 845. Such a clause may be open to a separate public policy objection that the parties have left the court to fix the measure of the restraint.
If, however, the clause contemplates all of the combinations applying with severance of those found to be an unreasonable restraint of trade, then no uncertainty exists. The clauses operate cumulatively, with any overlap between the obligations thereby imposed not being regarded as an inconsistency of the kind discussed by Bowen LJ in Davies v Davies (supra) at 393.”

(emphasis added).
As was the case in Lloyds Ships Holdings Pty Ltd & Anor v Davros Pty Ltd & Ors and Hydron Pty Ltd v Harous, Clause 11 expressly states the respective obligations are to have effect as if they are separate covenants consisting of the several combinations. Clause 11 indicates an intention for all combinations to apply subject to severance of any of them which are invalid or unenforceable for any reason. On the authority of the cases to which I have referred Clause 11 as a matter of construction, and questions of public policy aside, is not uncertain.
There is then the question whether the clause is open to a separate public policy objection that the parties have left the court to fix the measure of the restraint. Of this, Spender J in Lloyds Ships Holdings said at 522–523:
“… The judgment of Connolly J (in JQAT v Storm) suggests that, provided the parties have agreed to sever those covenants that constitute an unreasonable restraint of trade, then the paring down of the covenantor’s obligation to what the court determines to be not unreasonable, does not amount to having the court fix the limits of the restraint. That conclusion may have the merit of not permitting a covenantor to escape its obligations in a case such as JQAT v Storm, where the total restraint imposed by the eighteen combinations involved a three month restraint in Queensland and New South Wales on the specified conduct. It seems to me to be very much a question of degree and dependent on the parameters (sic) of each such attempt, whether in truth the court is being asked to choose the extent of the restraint.
In my opinion, the question whether a technique of defining covenants in restraint of trade by combining different variables of conduct, time and space, and providing that each of the covenants so ‘generated’ is subject to severance, is successful in defining enforceable restraints or is unsuccessful in so doing, comes down to whether the exercise amounts to a genuine attempt to define the covenantee’s need for protection, with the agreement as to severance as a precaution against the ‘all or nothing’ nature of the court’s tests for reasonableness, or whether the exercise is simply one where the parties have left to the court the task of making their contract for them.
One might think the more numerous the variables, and the more mechanical and indiscriminate the combinations of variables, the more likely would be a conclusion that the exercise is of the latter kind.”
As Pagone J said in Griffiths & Beerens Pty Ltd and Others v Duggan and Ors (2008) 66 ACSR 472 at 492 [65]:
“A restraint clause is, in my view, to be interpreted like any commercial agreement giving the words and their operation a reasonable and common sense interpretation. Fundamentally the task of construction is one of ascertaining the intention of the parties and of applying that intention (Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437 (Barwick CJ)). Reading a restraint ‘in a sensible fashion’ (Rentokil v Lee (1995) 66 SASR 301 at 305 (Doyle CJ)), will involve avoiding unreasonable constructions and unreasonable applications of them. Similarly, if the language of a provision is open to two constructions, a court should prefer the one which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust (Australian Broadcasting Commission v Australasian Performing Right Assn Ltd (1973) 129 CLR 99 at 109 (Gibbs J)). But, in the end, my task is to determine the true intention of the parties and to give effect to that intention to the extent to which the law allows.”
One may readily infer that no party under the Sale of Shares Agreement contemplated, notionally or otherwise, in excess of 51,400 individual restraint covenants, let alone the formula 2O–1 where x equals the number of variables. The first defendant having secured his benefit – payment – given the severance provision, there seems no reason why the plaintiffs can not waive what of Clause 11 they wish. None was advanced, save that such clauses could be employed in terrorem which would be contrary to public policy: Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at 725–6, per Lord Moulton. But I do not so read Clause 11. Nor do I read it as leaving to the Court the task of making a contract for the parties. Clause 11 is intended to protect the goodwill of all the Extraman group of companies operating in Western Australia, Northern Territory and Queensland. In one sense, Extraman (NT) Pty Ltd has goodwill discrete from that of the Extraman companies conducting business in Western Australia and Queensland. But that is not, I think, an appropriate way of looking at the matter. The subject matter of sale is the reason the restraint area extends beyond the Northern Territory and the activities restrained beyond that of Extraman (NT) Pty Ltd alone. It is, as a matter of commonsense and substance, I remind myself, a goodwill restraint not an employee restraint and that the more paid for goodwill the slower the Court will be to set a restraint aside: Brown v Brown [1980] 1 NZLR 484 at 490. The defendants’ appeal to arithmetic avails them nothing.
Clause 11 of the Sale of Shares Agreement is not void for uncertainty. Nor is it contrary to public policy in making no genuine attempt to confine the restraint to that necessary for the covenantees’ real need for protection.
I turn to whether Clause 11 is unenforceable for being an unreasonable restraint of the first defendant’s trade.
I am anxious not to overburden these reasons with citations from what Finn J in Fadu Pty Ltd v ACN 008 112 196 Pty Ltd (2007) ATPR 43–206 at [74] described as “the rich bazaar of decided case law”. However, given the submissions of the defendants, I do need to refer to a number of cases.
The following statement of Lord Maugham delivering the advice of the Privy Council in Connors Bros Ltd and Others v Connors [1940] 4 All ER 179 at 189–191 is particularly pertinent to the present case:
“… There have been many statements of the general rule during the last 30 years, and their Lordships do not propose to add to their number, for every alteration of language is apt to be treated as if some slight difference in the rule or in its application were intended.
The principles now well–established cannot be better stated than in the often–quoted passage from the judgment of the Board delivered by Lord Parker in A–G of Commonwealth of Australia v Adelaide S.S. Co. Ltd., at p. 795:
‘Though, speaking generally, it is the interest of every individual member of the community that he should be free to earn his livelihood in any lawful manner, and the interest of the community that every individual should have this freedom, yet under certain circumstances it may be in the interest of the individual to contract in restraint of this freedom, and the community if interested to maintain freedom of trade is equally interested in maintaining freedom of contract within reasonable limits. The existing law on the point is laid down in the case of Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. For a contract in restraint of trade to be enforceable in a court of law or equity, the restraint, whether it be a partial or general restraint, must (to use the language of Lord Macnaghten, evidently from that of Tindal CJ in Horner v Graves) be reasonable both in reference to the interests of the contracting parties and in reference to the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while a the same time it is in no way injurious to the public. Their Lordships are not aware of any case in which a restraint though reasonable in the interests of the parties has been held unenforceable because it involved some injury to the public.’
It should be observed that in this statement there is no attempt to limit or define the cases in which the community is ‘equally interested in maintaining freedom of contract within reasonable limits’. The same remark is true as regards the proposition stated by Lord MacMillan in delivering the judgment of the Board in Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd at p 189:
‘The law does not condemn every covenant which is in restraint of trade, for it recognises that in certain cases it may be legitimate, and indeed beneficial, that a person should limit his future commercial activities, as, for example, where he would be unable to obtain a good price on the sale of his business unless he came under an obligation not to compete with the purchaser.’
The cases which have most often come before the courts have been those connected with the sale of a goodwill and those of master and servant, and the wide differences between these two categories from the point of view of restraint of trade have repeatedly been pointed out: Mason v Provident Clothing and Supply Co. Ltd. at pp. 731, 738, Herbert Morris Ltd v Saxelby, at pp 701, 708, 709, and Anson’s Law of Contract, 18^th Edn., pp 236, 237. Their Lordships are not here concerned to deal with cases in the second category. With regard to those in the first, it is plain that considerations which apply in such cases will often be applicable with necessary modification to the case in which the goodwill sold is the property of limited company. A covenant by such a company not to compete with a purchaser would in general be useless as a protection, for the company would in due course be wound up and the most serious competition might be expected to come from those who had been actively engaged in managing and carrying on its affairs. The necessary capital might be supplied out of the price paid by the purchaser.
To take a simple case, if the managing director of a private company, owing 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, for, though public policy requires that trading should be encouraged, and that trade should, as far as possible, be free, on the other hand, there would be a restriction on this freedom if the person in control of the company owning a business was not able to enter into such a contract as would enable him to obtain the full benefit of the proposed sale. As Lord Watson observed in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co. at p. 552:
‘… it is now generally conceded that it is to the advantage of the public to allow a trader who has established a lucrative business to dispose of it to a successor by whom it may be efficiently carried on …. Accordingly it has been determined judicially, that in cases where the purchaser, for his own protection, obtains an obligation restraining the seller from competing with him, within bounds which having regard to the nature of the business are reasonable and are limited in respect of space, the obligation is not obnoxious to public policy, and is therefore capable of being enforced.’
That this principle is applicable even in the case of an important public company where the covenant is entered into by a managing director holding shares in the company is evident from the facts of the case from which that passage is taken, for Lord Herschell (at p 541), Lord Watson (at p 551), Lord Ashbourne (at p 555) and Lord Macnaghten (at p 560) found no difficulty in holding that the case must be treated on precisely the same footing as if the covenant had been entered into by Nordenfelt in connection with the direct sale of the goodwill of his business.
This being accepted in the case of the sale of the business of a company and of a covenant entered into upon a such a sale by a person who does not own the goodwill or any other assets of the company (which was the case of Nordenfelt), the same result may well follow in a case where, instead of selling the undertaking, the shares or stock of the company or a large interest therein has been sold, and one or more of the directors or managers of the company, being interested in the sale, are willing, in order to enable the transaction to go through, or to obtain a better price, to enter into a restrictive covenants with the purchaser. Every such case must depend on the surrounding facts and circumstances, and their Lordships do not propose to lay down a general rule, but there are many cases of that character in which, as it seems to them, the principles above will apply, and where, in other words, the community is as interested in maintaining freedom of contract within reasonable limits as it is in maintaining freedom of trade: AG of Commonwealth of Australia v The Adelaide SS Co Ltd, at p 795.” (Citations omitted).
The Sale of Shares Agreement is properly to be characterised as an agreement for the sale and purchase of the Extraman business conducted by the third plaintiff and its subsidiaries including the first and fourth plaintiffs. Counsel for the defendants did not submit otherwise. The first defendant was a significant, if not controlling, shareholder and director of the first and third plaintiffs, the manager of the Darwin business and “a driving force of the Extraman business” who, if free to compete with Extraman, would do so inevitably to the injury of Extraman.
In Butt v Long (1953) 88 CLR 476 at 486 Dixon CJ, Webb and Fullager JJ agreeing, said:
“A bare covenant restrictive of competition even if it is limited in point of time and place cannot be sustained. ‘The covenants restrictive of competition which have been sustained have all been ancillary to some main transaction, contract, or arrangement, and have been justified because they were reasonably necessary to render that transaction, contract or arrangement effective’ — per Lord Macmillan for the Privy Council (Vancouver Malt & Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] AC 181, at p 190). 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 — per Lord Parker of Waddington (Herbert Morris Ltd v Saxelby [1916] 1 AC 688, at p 707).
A distinction is drawn between the position of the purchaser of the goodwill of a business taking a covenant in restraint of trade from his vendor and the case of the owner of a business taking such a covenant from his servant or apprentice. The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment and if the purchaser is to take over such goodwill with all its advantages it must in his hands remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is therefore reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser — per Lord Parker of Waddington (Herbert Morris Ltd v Saxelby [1916] 1 AC, at pp 708, 709).”
In relation to the question of reasonableness of Clause 11 of the Sale of Shares Agreement a number of matters were canvassed in argument: what was said to be inequality of bargaining power between the first defendant on the one hand and Skilled Group Ltd on the other, the first defendant’s covenant and warranty that the restraints were reasonable, the breadth of activity restrained, the area of the restraint, the duration of the restraint, the interplay between the Sale of Shares Agreement and the employment contracts.

The defendants submitted that the customer base of the business had changed significantly between 2005 and 2007, that key contacts at customers had come and gone and that there was a considerable turnover of staff amongst customers. It was submitted that the goodwill of the Extraman business in the Northern Territory today bears no reasonable resemblance to the goodwill of the business as at 4 July 2005. It followed, it was submitted, that the plaintiffs could not protect, by covenants attached to the sale of the first defendant’s shares, a new goodwill generated by the first defendant’s post Sale of Shares Agreement employment. It was submitted the proper place to seek to protect those interests was in the post acquisition employment arrangements. It was further submitted that the post employment restraint in the 2007 Skilled Group Ltd employment contract having expired, that Skilled Group Ltd’s right to protect itself from competition from the first defendant, expired with it. Moreover, the employment restraints were less onerous than the share sale restraints. All of this, it was submitted, demonstrated that the five year duration of the restraint in the Sale of Shares Agreement was unreasonable and unenforceable, or at least that the plaintiffs had failed to establish, the onus being on them, that it was reasonable and enforceable.
The defendants also submitted that aside from questions of taxation and interest, the earnings before tax averaged over the 2005/06/07 financial years demonstrated that the business would pay for itself over three and a half years and that on that basis “alone” it would “appear to be impossible” to justify a restraint period on any vendor of greater than three and a half years.
These submissions should be rejected.
As to the reasonableness of the area of the restraint in Clause 11 of the Sale of Shares Agreement it is relevant to note what the Privy Council said in Connors Bros Ltd v Connors (supra) at 194, 195:
“It should also be observed that, the question of reasonableness being a matter of law for the court, it has never yet been supposed that it is necessary in relation to the trade of a large manufacturer or merchant to prove to the satisfaction of the court that the business which the covenant is designed to protect has been carried on in every part of the area mentioned in the covenant. … A great deal no doubt depends on the nature of the business and the area in question. In a country of vast spaces, like the Dominion of Canada, it will always be possible, until the population of the country reaches a point now scarcely contemplated, to point to areas where there are only few settlers or inhabitants, and where, accordingly, few, if any, of the goods sold by the manufacturer have penetrated. … However, the goodwill of a business such as is now under consideration could not adequately be protected if the restrictive covenant had to be limited to the towns and villages where actual sales could be proved, whilst leaving the vendor free to establish a business, which would almost certainly be competitive, in all the adjoining places.”
Counsel for the plaintiffs indicated that the plaintiffs did not seek in these proceedings to restrain the first defendant outside the Northern Territory. The defendants did not submit that in the circumstances the area of the Northern Territory of itself was unreasonable. Plainly it was an area within which, were the defendants to compete with the plaintiffs, it would enure to the injury of the plaintiffs.
After quoting Lord Parker in Herbert Morris Ltd v Saxelby, and in particular the sentence “The covenant against competition is, therefore, reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser …”, the Privy Council in Connors Bros Ltd v Connors said:
“If the restriction as to space is considered to be reasonable, it is seldom in the case where the sale of the goodwill is concerned that the restriction can be held to be unreasonable because there is no limit as to time.
In Bridge v Deacons [1984] AC 705 at 717E, Lord Diplock in delivering the advice of the Privy Council said:
“The five years’ limitation also impresses their Lordships as being in no way unreasonable. They have in mind that there appears to be no reported case where a restriction which was otherwise reasonable has been held to be unreasonable solely because of its duration.”
There are a number of cases to the effect that the reasonableness of duration depends upon how long it will take for the covenantor’s customer connection to fade away or for the covenantee to secure a firm connection with customers: See the cases discussed in Heydon: The Restraint of Trade Doctrine 2^nd edn (1999) at 164–166. IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 at 429 and Brown v Brown [1980] 1 NZLR 484 have proved influential in this regard; and see Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd & Ors (1987) 17 FCR 505 at 524; Cream v Bushcolt Pty Ltd [2004] ATPR 42–004; [2004] WASCA 82; Fadu Pty Ltd v ACN 008 112 196 Pty Ltd (supra) at [83]. A purchaser, however, is entitled to protect not only the connection with existing customers of the business but also to profit from its established reputation: Brown v Brown [1980] 1 NZLR 484 at 490. See also Trebilcock: The Common Law of Restraint of Trade, Carswell (1986) at 241–242.
It seems to me, with respect, that in cases involving the sale of goodwill of a business, the duration of a restraint is not to be measured according to the time required for severing the relationship between the vendor and the clients of the business.
Nor do I think reasonableness in goodwill cases is to be measured according to the purchasers’ “recoupment of their investment”. Trading agreement restraints are quite different to goodwill restraints. It is, with respect, erroneous, to take account of the reasoning in Amoco v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 306, 308–310, per Walsh J, 316, 318–319, 321, per Gibbs J, to assess the reasonableness of the duration of a restraint in a goodwill case. Compare Brown v Brown [1980] 1 NZLR 484 at 490, 501.
Counsel for the defendants also argued that the first defendant’s customer connections being confined to the Northern Territory, his being continuously employed in the Darwin business for some two years after the Sale of Shares Agreement, there having been what was said to be a significant change in goodwill since 2005, that these matters when combined with profit figures which showed a “return of outlay” within three and a half years demonstrated that the five year duration of the tie was unreasonable.
I reject these submissions. First, they overlook the fact that the first defendant had shares in not only Extraman (NT) Pty Ltd but also Extra Group Pty Ltd. It was the first defendant’s share holding in the Extraman group that was the subject of sale. It was his interest in the goodwill of the Extraman group which was entitled to be protected from competition, not just that of the Northern Territory company. Secondly, a purchaser of goodwill is entitled to protection from competition from the vendor because the purchaser has paid for goodwill (an item of property), not because the vendor personally poses as a threat to that goodwill. It is therefore irrelevant to enquire whether the first defendant has any advantage over anybody else in being able to attract customers away from the purchaser.
When goodwill is sold the whole of the connection of the business can be protected by a covenant against competition, in the words of Lord Parker which I repeat, “confined to the area within which it would in all probability enure to the injury of the purchaser”. It is especially significant, I think, that Lord Parker refers to “area”, not the duration of the restraint. So, too, Lord Watson in Nordenfelt (at 552), in the passage I have quoted from Connors Bros Ltd & Ors v Connors above, refers to a limitation “in respect of space”, not in respect of the duration of the restraint. This goes some way to explain why in both Connors Bros Ltd & Ors v Connors and Bridge v Deacons the Privy Council treated the scope of a restraint as opposed to its duration as determinative of its validity. It also goes some way to explain and justify Heydon’s comment in The Restraint of Trade Doctrine, 2^nd edn, at 165, that there is relatively little discussion in the cases of “problems” of time, and little coherence in the decisions. Lord Parker’s speech in Herbert Morris Ltd v Saxelby was approved and followed by the High Court in Butt v Long and it is, of course, binding on me.
It is well established that the time to determine whether or not a restraint against competition is enforceable is the time the covenant was entered into, that is, on 4 July 2005: Amoco v Rocca Bros (1973) 133 CLR 288 at 318.
The defendants’ submissions do not sufficiently take account of the clear demarcation the law draws between restraints in respect of the sale of a business and restraints in employment contracts. The former concern the protection of a legitimate interest defined by reference to the business in which the goodwill is being transferred and the whole of the reputation and connection of that business. Employment cases concern protection limited to trade connection and trade secrets: Herbert Morris v Saxelby [1916] 1 AC 688, at 701–2, per Lord Atkinson, 708–9, per Lord Parker of Waddington.
As Lord Parker said:
“… The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment, and if the purchaser is to take over such goodwill with all its advantages it must, in his hands, remain similarly immune. The covenant against competition is, therefore, reasonable if confined to the one within which it would in all probability enure to the injury of this purchaser.
It is quite different in the case of an employer taking such a covenant from his employee or apprentice. The goodwill of his business is, under the conditions in which we live, necessarily subject to the competition of all persons (including the servant or apprentice) who choose to engage in a similar trade. The employer in such a case is not endeavouring to protect what he has, but to gain a special advantage which he would not otherwise secure. …
If a covenant restraining competition by an employee were in itself reasonable, it is difficult to see why the Court has considered in almost every case whether such covenant could be justified as no more than sufficient to protect trade connection and trade secrets.”
It seems to me, with respect, that sale of goodwill cases which treat customer connection as determinative of the reasonableness of the duration of a restraint, do not take sufficient account of a number of matters: that reasonableness is to be judged as at the date the covenant was entered into; that goodwill is not confined to customer connection: Federal Commissioner of Taxation v Murry (1998) 193 CLR 605; that goodwill is property; that subject to the contrary intention of the parties, a covenant protecting goodwill is for the benefit of the business – rather than the purchaser personally – which can be resold, the new purchaser gaining the benefit of the restraint: Pearson v Arcadia Stores, Guyra Ltd (No 1) (1935) 53 CLR 571; that the transfer of businesses from one hand to another would be discouraged if a narrow view of duration was taken. As Professor Trebilcock (supra, at 232) has observed, there is a public interest in promoting the sale of businesses and restraint clauses on the sale of businesses, while commonplace, are much less frequently litigated than post–employment contracts and much less frequently overturned. Furthermore, as Lord Macnaghten said in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at 567:
“When all trades and businesses are open to everybody alike, it is not very easy to appreciate the injury to the public resulting from the withdrawal of one individual.”
I do not regard inequality of bargaining power between the first defendant and Skilled Group Ltd as of significance in the present case. The first defendant was an experienced businessman who signed the Sale of Shares Agreement having read and understood it, and subject to the restraint of trade argument and the uncertainty argument, he was bound by what he signed: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd & Ors (2004) 219 CLR 165. This is not a case where any advantage was taken by Skilled Group Ltd of the first defendant as a party in a vulnerable economic position. The first defendant was represented by a solicitor and participated in negotiations over the sale and disposal of the Extraman business.
In my opinion Clause 11 in the Sale of Shares Agreement in so far as it restrains the first defendant for a period of five years from 4 July 2005 within the Northern Territory from being involved in a business the same or similar to that sold was reasonable in the interests of the parties.
As Walsh J said in Amoco v Rocca Bros (1972–73) 133 CLR 233 at 308, a decision upon the question of reasonableness depends upon a judgment the reasons for which do not admit of great elaboration. In my opinion the plaintiffs have shown that the restraint which they seek to impose upon the first defendant in these proceedings, does not go beyond what is adequate or necessary for the protection of the plaintiffs’ interests.
The business sold included substantial goodwill. Skilled Group Ltd purchased the goodwill and the Extraman name and business connection. The restraints were in the interests of both covenantors and covenantees. The restraints enabled the substantial purchase price to be agreed and realised. The first defendant was a “driving force” behind the Extraman business, not only in the Northern Territory. The first defendant expressly warranted that the restraint was reasonable; this matter, although not conclusive, is nevertheless relevant. It not only acquits the first defendant from being thought akin to the cynical covenantor discussed by Bray CJ in Amoco v Rocca Bros (1972) 7 SASR 268 at 340.
In the event the restraint was found to be reasonable as between the parties it was not argued that it was otherwise unreasonable or against the public interest.
Having reached this conclusion it is unnecessary to consider the enforceability of the Extraman (NT) Pty Ltd employment restraint.
I shall hear the parties as to relief, costs, and such further orders or directions as may be required for the future conduct of the proceedings.

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[2008] NTSC 31

15 August 2008

Key Legal Topics

Areas of Law

Contract Law

Legal Concepts

Restraint of Trade

Unconscionable Conduct

Breach of Contract

Compensatory Damages