Fadu Pty Ltd (ACN 007 815 090) v ACN 008 112 196 Pty Ltd as Trustee of the "International Linen Service Unit Trust"

[2007] FCA 1965

FEDERAL COURT OF AUSTRALIA

Fadu Pty Ltd (ACN 007 815 090) v ACN 008 112 196 Pty Ltd as Trustee of the “International Linen Service Unit Trust” [2007] FCA 1965

RESTRAINT OF TRADE – disposal of interest in a linen hire service business – restraint of trade clauses – whether activity restrained too extensive in applying to ordinary laundry contracting services – whether state wide restriction too large – evidence of separate regional markets and of respondents not servicing those markets as of course – whether time restraint too long – 5 years – relevance of industry practice of 3 year term contracts

PLEADING – Applicants amended statement of claim to remove all references to Trade Practices Act 1974 (Cth) claim – Respondents seek leave to amend defence to raise s 45 and s 87(3) of the TP Act as alternative basis of relief – whether leave ought be granted

TRADE PRACTICES – Exclusionary provision contravention – s 87(3) – variation of contract containing an exclusionary provision in such manner as the Court considers just and equitable – relationship to powers under s 87(1), (1A) and (2) and s 4L – whether variation should be ordered – exclusionary provision also invalid at common law

TRADE PRACTICES – s 87(3) – application to be made by party to a “contract” – whether includes named party in a deed poll

Trade Practices Act 1974 (Cth) ss 4D, 4L, 4M, 45, 45B, 45(2), 45(2)(a), 45(2)(b)(i), 47, 51(2)(e), 53(g), 87(1), 87(1A), 87(1B), 87(2), 87(2)(b), 87(3)
Acts Interpretation Act 1901 (Cth) s 15AB
Corporations Act 2001 s 50
Trade Practices Amendment Bill 1977 cl 9

SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 cited
IRAF Pty Ltd v Graham (1982) 41 ALR 209 cited
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 cited
Re A & K Holdings Pty Ltd [1964] VR 257 cited
Sunderland Marine Insurance Co v Kearney (1851) 16 QB 925 cited
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 cited
O’Neil v Mann (2000) 175 ALR 742 cited
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 cited
Amoco Australia Pty Ltd v Rocca Brothers Motor Engineering Co Pty Ltd (1973) 133 CLR 288 cited
Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 cited
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 cited
Buckley v Tutty (1971) 125 CLR 353 cited
Brown v Brown [1980] 1 NZLR 484 cited
Geraghty v Minter (1979) 142 CLR 177 cited
Butt v Long (1953) 88 CLR 476 cited
Inland Revenue Commissioners v Meuller & Co’s Margarine Ltd [1901] AC 217 cited
Whitehall v Bradford [1952] 1 Ch 236 cited
Kennett v Crawford [1940] SASR 199 cited
C & S Constructions Pty Ltd v Dawson (1991) 13 ATPR 41-148 cited
Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505 cited
Connors Brothers Ltd v Connors [1940] 4 All ER 179 cited
Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581 cited
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 cited
News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 cited

Heydon, Trade Practices Law
Heydon, The Restraint of Trade Doctrine (2^nd ed, 1999)
Chitty on Contracts (29^th ed, 2004)
Furmston (ed), The Law of Contract (2^nd ed, 2003)
Norton on Deeds (2^nd ed, 1928)

FADU PTY LTD (ACN 007 815 090), ANTOINE GEORGE NEMER, LINDA NEMEBER, GEORGE ANTHONY NEMER AND TIP TOP DRY CLEANERS PTY LTD (ACN 007 758 661) v ACN 008 112 196 PTY LTD (FORMERLY KNOWN AS INTERNATIONAL LINEN SERVICE PTY LTD) (ACN 008 112 196) AS TRUSTEE OF THE "INTERNATIONAL LINEN SERVICE UNIT TRUST", MINORIS PTY LTD (ACN 008 296 375) AS TRUSTEE OF CERTAIN TRUSTS, TIGER (SA) PTY LTD (ACN 065 465 956) AS TRUSTEE OF "THE E & V NEMER INHERITANCE TRUST NO 2", PETER JAMES MANAGEMENT SERVICES PTY LTD (ACN 061 086 299), E G NEMER NOMINEES PTY LTD (ACN 007 803 849), ELIAS GEORGE NEMER, PETER WILLIAM JAMES AND INTERNATIONAL LINEN SERVICE PTY LTD (ACN 117 168 233)

No SAD 13 of 2007

FINN J
11 DECEMBER 2007
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 13 OF 2007

BETWEEN:

FADU PTY LTD (ACN 007 815 090)
ANTOINE GEORGE NEMER
LINDA NEMEBER
GEORGE ANTHONY NEMEBER
AND
TIP TOP DRY CLEANERS PTY LTD
(ACN 007 758 661)
Applicants

AND:

ACN 008 112 196 PTY LTD (FORMERLY KNOWN AS INTERNATIONAL LINEN SERVICE PTY LTD) (ACN 008 112 196) AS TRUSTEE OF THE "INTERNATIONAL LINEN SERVICE UNIT TRUST"
First Respondent

MINORIS PTY LTD (ACN 008 296 375) AS TRUSTEE OF CERTAIN TRUSTS
Second Respondent

TIGER (SA) PTY LTD (ACN 065 465 956) AS TRUSTEE OF "THE E & V NEMER INHERITANCE TRUST NO 2"
Third Respondent

PETER JAMES MANAGEMENT SERVICES PTY LTD
(ACN 061 086 299)
Fourth Respondent

E G NEMER NOMINEES PTY LTD (ACN 007 803 849)
Fifth Respondent

ELIAS GEORGE NEMER
Sixth Respondent

PETER WILLIAM JAMES
Seventh Respondent

INTERNATIONAL LINEN SERVICE PTY LTD
(ACN 117 168 233)
Eighth Respondent

JUDGE:

FINN J

DATE OF ORDER:

11 December 2007

WHERE MADE:

ADELAIDE

THE COURT ORDERS THAT:

1.The parties provide to the Court short minutes of order to give effect to the court’s findings and conclusions within seven days of the handing down of these reasons.

2.The parties file and serve submissions as to costs within seven days of the handing down of these reasons.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 13 OF 2007

BETWEEN:

FADU PTY LTD (ACN 007 815 090)
ANTOINE GEORGE NEMER
LINDA NEMEBER
GEORGE ANTHONY NEMEBER
AND
TIP TOP DRY CLEANERS PTY LTD
(ACN 007 758 661)
Applicants

AND:

ACN 008 112 196 PTY LTD (FORMERLY KNOWN AS INTERNATIONAL LINEN SERVICE PTY LTD) (ACN 008 112 196) AS TRUSTEE OF THE "INTERNATIONAL LINEN SERVICE UNIT TRUST"
First Respondent

MINORIS PTY LTD (ACN 008 296 375) AS TRUSTEE OF CERTAIN TRUSTS
Second Respondent

TIGER (SA) PTY LTD (ACN 065 465 956) AS TRUSTEE OF "THE E & V NEMER INHERITANCE TRUST NO 2"
Third Respondent

PETER JAMES MANAGEMENT SERVICES PTY LTD
(ACN 061 086 299)
Fourth Respondent

E G NEMER NOMINEES PTY LTD (ACN 007 803 849)
Fifth Respondent

ELIAS GEORGE NEMER
Sixth Respondent

PETER WILLIAM JAMES
Seventh Respondent

INTERNATIONAL LINEN SERVICE PTY LTD
(ACN 117 168 233)
Eighth Respondent

JUDGE:

FINN J

DATE:

11 DECEMBER 2007

PLACE:

ADELAIDE

REASONS FOR JUDGMENT

1. This litigation concerns the extent to which, if at all, clauses imposing restraints of trade are enforceable, these clauses having been entered into in association with what I will inexactly describe as a joint venturer’s withdrawal from the joint venture business.  Though the subject matter is prosaic, the litigation raises several novel issues.  The first concerns a matter of pleading. 

   A PRELIMINARY PLEADING ISSUE

2. This proceeding commenced in an application which unequivocally invoked the jurisdiction of this Court. It alleged that a Deed Poll of Restraint entered into by the first to fourth applicants in favour of the first to seventh respondents contained clauses (i) that were exclusionary provisions for the purposes of s 4D of the Trade Practices Act 1974 (Cth); (ii) which, if given effect to, would contravene s 45(2)(b)(i) of the TP Act and would in the circumstances not be saved by s 51(2)(e) of that Act; (iii) that were void and unenforceable as a matter of public policy at general law; and (iv) which were the subject of a false representation as to rights and remedies in contravention of s 53(g) of the TP Act. Declaratory and injunctive relief was sought.

3. In a Statement of Facts, Issues and Contentions filed prior to the hearing, the first, fourth, seventh and eighth respondents indicated they did not contest that the relevant restraints constituted exclusionary provisions for the purpose of s 4D of the TP Act. They nonetheless indicated they relied by way of defence on s 51(2)(e) of the Act (this had been pleaded) and, in the alternative should a contravention of s 45(2) be found, they would seek orders pursuant to any or all of s 87(2)(b), s 87(3) and s 4L varying the terms of the objectionable clauses so as to prevent any further contravention (this had not been pleaded).

4. At the commencement of the hearing counsel for the applicant sought and was granted leave to discontinue against the second, third, fifth and sixth respondents.  Leave was then sought to amend the application to delete all of the TP Act claims, leaving the applicants’ case simply as one founded on the common law.  The first, fourth, seventh and eighth respondents (to whom I will refer hereafter as “the respondents”) neither consented to, nor opposed the amendment sought.  Leave was granted.

5. The respondents in turn sought leave to amend their defence to raise the TP Act issues to which it had pleaded in its defence (i.e. s 51(2)(e)) or which it had foreshadowed (i.e. s 87(2)(b), s 87(3) and s 4L). This was opposed by the applicants on the basis that, with their TP Act claims now excised, there was no controversy between the parties concerning any contravention to s 45. The respondents, it is contended, were seeking to self-generate a controversy to enliven the provisions of the Act upon which they wish to rely. In consequence, it is said, a hypothetical question was being raised and advisory opinions were being sought.

6. While I do not in any way impugn the propriety of the forensic decisions taken by the applicants in amending their application and then in opposing the respondents’ amendment, their tactical character is transparent. They wish both to avail of the inflexibility of the consequences at common law of the deed being found to contain clauses contrary to public policy and to avoid those that may ensue under the TP Act (if a s 45 contravention is found), by virtue of the obligation imposed on the Court by s 4L and the discretions given by s 87(2)(b) and s 87(3).

7. Put shortly, the amended defence and cross-claim for which leave is sought raise the TP Act issues in the following way:

   (i)        it is denied that the actual restrains imposed are offensive at common law; 

   (ii)if the restraints are so offensive, they also are exclusionary provisions contravening s 45(2), not being ones to which s 51(2)(e) applies;

   (iii)accordingly, the restraints can and should be varied pursuant to s 4L, s 87(2)(b) and s 87(3); and

   (iv)as the restraints are incapable of being varied at common law, the TP Act and the common law are incapable of operating concurrently and, for that reason, the TP Act prevails: s 4M.

   The cross-claim seeks alternative relief reflecting the above contingencies.

8. For reasons I later give, I do not consider that s 87(2)(b) affords an appropriate avenue of relief to the respondents in this matter.

9. The hearing was conducted on the basis that the parties would address both the common law claim and the respondents’ TP Act defences and cross-claim, with my ruling on the application to amend being given with my judgment in the matter. 

10. I am satisfied now, as I was at the time of the hearing, that leave to amend ought be granted and that the proposed defence and cross-claim do not raise hypothetical questions or solicit advisory opinions.

11. I would preface my reasons by noting, first the provisions of s 4L, s 4M, s 51(2)(e) and s 87(3) of the TP Act. Section 4L provides:

    “If the making of a contract after the commencement of this section contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 87 or 87A, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable.”

    Because of what I say below, I would emphasise that this provision on its proper construction requires severance of offending provisions:  see SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at [51]; but that it operates subject to any order made under s 87 and it is upon s 87(3) that the respondents rely in particular.

12. Section 4M, a companion provision, provides, insofar as presently relevant, that:

    “This Act does not affect the operation of:

    (a)the law relating to restraint of trade in so far as that law is capable of operating concurrently with this Act; 

    …

    but nothing in the law referred to in paragraph (a) … affects the interpretation of this Act.” 

13. Section 51(2) provides for present purposes:

    “(2)In determining whether a contravention of [s 45] … has been committed, regard shall not be had: 

    …

    (e)in the case of a contract for the sale of a business or of shares in the capital of a body corporate carrying on a business – to any provision of the contract that is solely for the protection of the purchaser in respect of the goodwill of the business”. 

    I simply note in passing that there is a live issue between the parties as to whether the transaction of which the impugned deed poll was part, was itself a sale contract of a type envisaged by subpara (3). The subpara also gives rise to the question whether, if the deed contained restraints that did not offend the common law of restraint of trade, it would for that reason fall within s 51(2)(e) (assuming the transaction was of the relevant type and the restraints related to the protection of goodwill): cf IRAF Pty Ltd v Graham (1982) 41 ALR 209 at 216.

14. Section 87(3) relevantly provides that:

    “(3)     Where:

    (a)a provision of a contract made, or a covenant given, whether before or after the commencement of the Trade Practices Amendment Act 1977: 

    (i)in the case of a provision of a contract, is unenforceable by reason of section 45 in so far as it confers rights or benefits or imposes duties or obligations on a corporation;

    …

    the Court may, on the application of a party to the contract … make an order: 

    (c)varying the contract … or a collateral arrangement relating to the contract … in such manner as the Court considers just and equitable.”

    I would again note in passing that the subsection unqualifiedly permits any party to the contract to apply for an order under it whether or not in a separate application. It is not limited to a party burdened by a provision that contravenes s 45, let alone a party who has suffered, or is likely to suffer, loss or damage by the contravening conduct. In this last respect the subsection appears to be quite unlike s 87(1), (1A), (1B) and (2), each of which conditions the making of their respective orders “upon the court finding that a party to the proceeding has suffered, or is likely to suffer, loss or damage” (emphasis in original):  I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [46]. The manifest object of s 87(3) is to permit the “restructuring on a just and equitable basis the rights and obligations of parties to contracts which have contravened certain sections [i.e. s 45, s 45B and s 47] of the Act”: Heydon, Trade Practices Law, [18.1830]. The utility of a power so to do is obvious enough. Section 87(3)’s object contrasts with the object of s 87(1), (1A), (1B) and (2) which confer powers to make orders compensating, preventing or reducing loss or damage arising from breaches of the Act: ibid. I would note in passing that s 87(2)(b) would thus envisage that that object may in fact be furthered by an order varying a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the contravening conduct.

15. I should also note that the Deed Poll of Restraint is, as its name signifies, a deed poll.  The covenant of restraint is made in favour of, and for the benefit of, the first seven respondents who are named in the deed.  As such, the covenant is enforceable by those respondents:  see Re A & K Holdings Pty Ltd [1964] VR 257 at 261-262; Sunderland Marine Insurance Co v Kearney (1851) 16 QB 925 at 938. It is unnecessary for present purposes to enter upon the questions (a) whether a deed poll is properly to be called a “contract” at law at all: cf Chitty on Contracts, Vol 1 at 2-003 (29^th ed, 2004);  Furmston (ed), The Law of Contract, 2.135 (2^nd ed, 2003);  or (b) whether this deed poll in fact embodies a contract supported by consideration:  cf cl 3 of the Deed (not reproduced here);  or else is properly to be regarded as a part of the performance of the Heads of Agreement or as part of an entire transaction:  cf Norton on Deeds 86-88 (2^nd ed, 1928). Given that the restraints are contained in an enforceable instrument that reflect what has been agreed by all relevant parties, if they are found to be unenforceable because they are exclusionary provisions that contravene s 45(2)(a), I can see no reason consistent with the purpose and policy of s 87(3) for not treating them as provisions in a “contract” to which the covenantees are parties. To interpret s 87(3) in this way is to do no more than to give it a purposive and contextual interpretation: see CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408; Acts Interpretation Act 1901 (Cth), s 15AB.

16. In the above legislative context, s 4M, in my view, is of pivotal importance in determining when leave to amend should be granted. While the section saves the common law relating to restraint of trade, it does so qualifiedly. The operation of the common law is not affected insofar as that law is “capable of operating concurrently with [the] Act”. That qualification is presently important. In cl 9 of the Explanatory Memorandum to the Trade Practices Amendment Bill 1977 (which contained s 4L and s 4M) it was stated:

    “9.Common law and severance – To the extent that the common law doctrine of restraint of trade and the principles relating to the severance of restrictive provisions from such contracts are not displaced by the prohibitions and remedies in the Trade Practices Act, it is intended that they should continue in operation … New Sections 4L and 4M (clause 6) deal with these matters.”

    (Emphasis added)

    I have emphasised the reference to “remedies” in the above. As I earlier noted, the severance provisions of s 4L are subject to any order made under s 87 and, in particular for present purposes, s 87(3).

17. It may be accepted that where a common law claim alone is made (usually, but not necessarily, not in federal jurisdiction:  cf O’Neil v Mann (2000) 175 ALR 742 at [29]), a respondent would not characteristically put in issue the possible incapability of the common law operating concurrently with the Act. Often the Act would be of no conceivable relevance in a simple common law claim. But when incapability is properly put in issue, the common law (including its remedies) will be displaced by the operation of the Act (including its remedies and relief) to the extent of that incapability.

18. In this matter the respondents seek to do no more than to put that matter in issue, albeit contingently because their primary position is that the restraints are inoffensive at common law in any event. But if they are incorrect in that, and if the restraints are exclusionary provisions – the applicants frankly concede they are – and contravene s 45(2)(a), the respondents, as of course, are entitled to apply for an order under s 87(3) to have the restraints varied. They equally are entitled, subject to any order made under s 87, to have the issue of severance under s 4L determined: see SST Consulting Services Pty Ltd v Rieson.

19. By relying simply upon a common law claim in the present factual setting, the applicants have perforce exposed themselves to the defensive use the respondents seek to make of the TP Act.

20. I grant the leave to amend that has been sought. 

    FACTUAL SETTING

21. Though the issues raised in this proceeding fall within a fairly narrow compass, the factual setting is complex, and made the more so by the business structures employed by some of the principal actors and by the ease with which parties with similar names can be confused.  To avoid as best I can at least the last of these complications, I will refer to the principal members of the Nemer family by the first names they appear to have used.  I mean no disrespect in so doing.

1. In the 1950’s the Nemer brothers, Les (the sixth respondent) and Antoine (the second applicant) started a dry cleaning business.  Since the 1970’s they conducted as well a linen hire and laundry business.  These businesses were, until 2005, owned by the first respondent, International Linen Service Pty Ltd, as trustee of the International Linen Service Unit Trust (“the ILS unit trust”).  In these proceedings the trustee company has been referred to as “Old Co”.  On about 8 December 2005, Old Co ceased to own and operate the business.  From that date, the business the eighth respondent, a new entity given the name International Linen Service Pty Ltd, has been the operator of the business.  It has been referred to as “New Co” in these proceedings. 

2. The units in the ILS unit trust were held (i) as to 45 per cent (9 units) by Fadu Pty Ltd, the first applicant, which was in turn the trustee of the George Nemer Family Settlement of which Antoine, his wife Linda and his son, George Anthony, are beneficiaries;  (ii) as to a further 45 per cent (9 units), by Tiger (SA) Pty Ltd as trustee of the E & V Nemer Inheritance Trust No 2 of which Les Nemer is a beneficiary;  and (iii) as to 10 per cent (2 units) by Peter James, the seventh respondent, who from 1 March 1996 has been a director of Old Co, and from 22 November 2005 has been a director of New Co.  James is also a shareholder and director of the fourth respondent, Peter James Management Services Pty Ltd which since November 2005 has been the holder of the majority of ordinary shares in New Co.

3. Antoine Nemer and his family, and Les Nemer and his family each held 9 shares (or 45 per cent) of the shares in Old Co prior to the events to be narrated and Peter James held the remaining two shares. 

4. In early 2005, Old Co engaged Equity and Advisory Ltd to value the trust’s business and to advise on its potential sale.  The impetus for a sale was a falling out between Les and Antoine Nemer.  According to Mr James this was a “time of great dispute” between the two brothers.  Antoine indicated to Les that he understood that Spotless Services Australia Ltd, Old Co’s principal competitor, had made an unsolicited expression of interest possibly to acquire the business and the lands it occupied (all held by the second respondent Minoris Pty Ltd as a trustee on trust for the unit holders of the ILS unit trust).  The price, he understood, was $22 million.

5. On 29 June 2005, Antoine met with Les and following a discussion about the future of the business, he both offered to sell to Les all of his interests in Old Co, Minoris and the lands held by Minoris and to accept a watering down to a nominal value of Fadu’s rights in the ILS unit trust for a total of $8 million.  Antoine did not wish to wait for the uncertain outcome of a business sale process.  That offer was later confirmed by George Anthony, Antoine’s son.

6. Les advised Antoine that he wished to accept the offer on the understanding that “it was his intention either to sell some of the interest acquired to senior management of [Old Co] or alternatively to sell the entire business at a premium to the value implied by Antoine’s offer of $8M”:  recital 13 to the Heads of Agreement of 5 August 2005.

   The Heads of Agreement

7. This document was executed by all of the original parties to this proceeding save for New Co.  Its recitals contain much of the above factual information. 

8. The recitals also noted that (a) Peter James and PJMS Co were entitled to acquire a further 8.2 per cent interest in Old Co, the ILS unit trust, Minoris and the land, under pre-emptive rights they held;  and (b) Equity & Advisory had advised Mr James and his company that, after taking into account minority and marketability discounts, the consideration sought by Fadu was fair.

9. The manner in which the watering down of Fadu’s interest in the ILS unit trust to a nominal value was to be, and was achieved, first, through an amendment to the ILS unit trust deed to enable the issue of “Uplift Units” which would then be issued with differential entitlements (see below) and, secondly, through the issue of those units to Fadu, Tiger and Peter James.  The diluting effect of the issue of the Uplift Units with differential entitlements is thus exemplified in paras 25.13 and 25.14 of the respondents’ Further Amended Defence and Cross-Claim:

   “25.13.the following Uplift Units were issued, carrying the following Uplift Unit Entitlements:

   EntityUplift Units               Uplift Unit Entitlement attached to each unit

   Fadu900,000  .00001

   Tiger900,000  1

   James200,000  1

   25.14.following the issue of the Uplift Units the sum of Ordinary Unit Entitlements of each of Fadu, Tiger and James was as follows: 

   EntityEntitlement attached        Ordinary           Combined Ordinary

   to each Ordinary Unit      Units Held         Unit Entitlement

   Fadu2  9  18

   Tiger100,001  9  900,009

   James100,001  2  200,002”

10. The relationship of the consideration to be paid to the dilution so effected is revealed in the provision of the agreement dealing with “Watering down of Units and Sale of Shares and Equitable Interest in Land”.  It provided, in part, as follows: 

    “Watering Down of Units and Sale of Shares and Equitable Interest in Land

    ·In the event that ILS issues the Uplift Units referred to in the conditions precedent Tiger and PJMS (in such proportions as they determine) shall pay to Fadu the sum that is calculated as:

    $8M – SP – LP – ID (inclusive of any GST) where:

    ™SP means the total of the amounts to be paid in respect of the shares provided for below; 

    ™LP means the amount to be paid in respect of the Land provided for below;  and

    ™ID means the amount of the interim distribution of income by ILS to Fadu contemplated in the conditions precedent below, 

    by way of compensation to Fadu for the disproportionate increase in value of the units held by Tiger and PJMS in ILSUT, compared with the value of units of Fadu.”

11. Documentary evidence prepared by the lawyer instructed by Les and Peter James in relation to the Fadu transaction indicated that the amounts to be paid to Fadu under the Agreement (amounting in total to the $8 million) were:

    (i)        $18 in respect of shares;

    (ii)       $1,415,949 in respect of land;

    (iii)      $318,066 in respect of interim profit distribution;

    (iv)      $263,544 in respect of beneficiary account novations;  and

    (v)       $6,002,423 in respect of compensation for the watering down. 

12. The only additional provision in the Heads of Agreement to which it is necessary to refer relates to the “Restraint of Trade”.  It provided:

    “Restraint of Trade

    ·In consideration of Tiger, EGNNPL, [Les], PJ and PJMS entering into this agreement, Fadu, [Antoine, George Anthony and Linda] (‘Restraint Givers’) agree that they will not (and will procure that their related entities do not):

    ™operate, or be involved in any way, directly or indirectly, with the operation of, any linen supply or laundry hire services business of any kind;  or

    ™provide or offer to provide, or be involved in any way, directly or indirectly, with the provision or offer of provision of, dry cleaning services in competition with ILS (except to the extent of dry cleaning services which, at the date of this agreement, are both carried out by Fadu, [Antoine, George Anthony, Linda] or their related entities and not carried out by ILS, Tiger, EGNNPL, [Les], PJ, PJMS or their related entities),

    in South Australia for a period of 5 years after the Completion Date.”

    The agreement provided a formula for ascertaining the Completion Date.  I should add that a suite of “Completion Documents” associated with the effectuation of the 5 August agreement has been tendered.

    The Deed Poll of Restraint

13. This instrument was executed on 30 September by Fadu, Antoine, George Anthony and Linda, in favour of the other parties to the Heads of Agreement.  It recited first, the entry into the 5 August 2005 agreement and, secondly, that –

    “B.in consideration of the Restraint Recipients entering into the Heads of Agreement, the Restraint Givers agreed to give certain restraints.”

    The term of the restraints agreed reflect those in the Heads of Agreement, save for certain presently unimportant verbal differences.

14. The Deed expressly preserved the continuing operations of the Heads of Agreement.  It also contained a “reading down” and “severance provision” in the following terms:

    “… if a provision of this deed poll would, but for this clause, be unenforceable, the provision must be read down to the extent necessary to avoid that result and, if the provision cannot be read down to that extent, it must be severed without affecting the validity and enforceability of the remainder of this document …”

15. I would note in passing that while the 5 August Agreement envisaged (pp 7-8) that Fadu, Antoine, George Anthony and Linda could be requested by Tiger and Peter James to execute further instruments, it did not as such require execution of the Deed Poll of Restraint. 

    The 29 November 2005 On Sale

16. As foreshadowed, the Heads of Agreement (recital 13) indicated that Les had informed Antoine that it was his intention (inter alia) to endeavour to sell the entire business “at a premium to the value implied by [Antoine’s] offer of $8M”.  On 29 November 2005 Old Co sold the business (excluding the land held by Minoris) for $22.3 million, a deed to that effect being executed by both parties on that day.  Both Les and his son, Anthony, were required to, and did, execute a Deed Poll of Restraint.  These deeds embodied “ladder” (or “cascading”) clauses under which (a) the area of the restraint was first “South Australia” and then “the Adelaide metropolitan area, as that term is currently understood” and (b) the duration of the restraints descended annually from 5 to 2 years. 

17. Mr James was prepared to accept in cross-examination that there was an increase in the imputed value of the business between the two sale transactions;  it was in the order of millions;  but he would not put a figure on the difference as “these were not simple transactions … Probably … you’d need an expert far greater than me to - to be able to impute this sort of value.” 

    The Linen Supply or Laundry Hire Business in South Australia

18. The restraint deals with two different forms of business, “linen supply or laundry hire” (these are synonymous terms) and dry cleaning.  The latter will be referred to separately below.

19. It is common ground that a business supplying laundry hire services, would purchase linen to suit the requirements of its customers (e.g. hotels, restaurants, hospitals, nursing homes, entertainment centres etc) and then hire that linen to a customer under a contract with that customer which, as a matter of industry practice was for a fixed term of 3 to 5 years.  The service provided would involve the cyclical delivery, collection and laundering by the service provider of each linen item for which a “one off” hiring fee was paid for each such cycle.  When the linen of one customer was returned for washing it was “pooled” with other linen.  As Mr James indicated, a particular tablecloth may be delivered to a hotel one week, then returned into the pooled stock and delivered to the Casino the next week.  In his view, “[t]he pooling system makes hiring the linen cost effective”.  As customers are charged each time they hire an item of laundry, the faster the turnaround, the greater the profits generated.  As Mr James put it, “our profit is derived by turning our linen over quickly”.  When this consideration is tied as well to transport costs, the evidence indicates that the further from a laundry hire business a customer is located both the greater the transport costs in delivering and collecting linen, and the slower the turn around of such linen.  Again as Mr James said:

    “When it goes to a further destination it turns slowly, so I might send a sheet up to Roxby Downs where it might take a week or so to come back and in the city I could rent it out two or three times in that week and under our pricing regime it’s the number of turns that determines the profit.

    Does it take a week to come back from Roxby Downs because of the tyranny of distance?---Yes, we deliver every Thursday and it comes back the next week.

    Yes, so your business depends upon your customers being quite close to the source of your laundering?---Yes, the volume customers, yes.”

20. The evidence clearly establishes that distance and population density contrive the location, equipment needs and viable markets of laundry hire businesses.  Paul Hill, the owner of such a business in Berri who has had over thirty years experience in the industry gave affidavit evidence on these matters particularly in relation to the rural South Australian market.  He produced a map (which is Appendix A to these reasons) which indicated the parts of the State that are currently being serviced by commercial launderers.  He also indicated who were the operators in those areas who processed 10 tonnes or more per week.  It is unnecessary to recount the detail of this evidence other than to note that his own business processed an average of 16 tonnes of laundry per week and that its geographical radius is approximately 200 kilometres.  Only one rural business (in Mount Gambier) had a greater weekly tonnage and only two others reached approximately 10 tonnes.

21. Mr Hill’s evidence supported his conclusion that:

    “25.There are very few commercial laundry operations that operate outside the greater metropolitan area.  It is not commercially viable to operate a commercial laundry outside the areas identified on [the map] as A to G because of the transport costs associated with covering the vast distances between the few small customers. 

    26.The vast majority of the State is not serviced at all by commercial laundry businesses.  Within the area serviced by Werners [his business] in some instances there are over 150 kilometres between our customers (without any customer in between).  At one stage we serviced customers located in the mid north of South Australia.  We stopped servicing those customers because the transport associated with servicing those areas was too costly.  It is not financially viable for Werners to operate beyond the area which it now services.”

    Mr Hill also indicated that there are two metropolitan based businesses that service areas beyond the greater metropolitan area.  One is Alsco which specialises in laundering for hospitality and industrial clients.  Mr Hill had been employed by Alsco and it was his opinion that it processed less than 20 tonnes per week of linen sourced from beyond the greater metropolitan area.  The other is Spotless, which had a significant business servicing public hospitals and it processed about 25 tonnes per week from beyond Adelaide.  I would add Mr James’ evidence is that Spotless has almost exclusively health care clientele which provides very little by way of requirements on a relative tonnage basis outside of the metropolitan area.  He also indicated that Alsco have national and State wide obligations to customers and that they sub-contract work to smaller operators in regions more remote from Adelaide because it is not commercially worthwhile there going there. 

22. The significance of the tonnage processed related to the type of laundry equipment a business would use.  As Mr James accepted, there was a relation between the size, nature and numbers of the washing equipment and the tonnage processed per week.  Mr Hill made the same point that many businesses operating on a larger scale than his have a “Continuous Batch Washer” (CBW) which is a commercial scale “tunnel” washing machine which washes washable items in 90 second cycles.  To justify the purchase of such a machine (costing new in the order of $1 million), a business would need to wash upwards of about 28 tonnes per week. 

23. It was accepted by Mr James that the laundry hire market servicing volume customers had considerable barriers to entry.  One was the cost of equipment for high volume output such as a CBW.  Another was the capital outlay necessary to purchase stock.  These expenditures in turn informed the industry practice of fixed 3 or 5 year contracts.  In explaining what in his view were the barriers to entry, Mr James said:

    “In my opinion, the value of International Linen – and this proved to be – at the subsequent sale and when it became a buyer, the value is in the contracts.  Those long-term contracts are derived and obtained by the investment of working capital and stock and I will give you an example.  In 1995 when we started in Wakefield Hospital, we had to invest a half million dollars in stock which we borrowed from Fadu for the purposes of starting that business.  In return we had a five-year contract.  Now, say, a new supplier to take on the Wakefield Hospital – we took that from the government laundry at the time – would have to not only invest in equipment to be able to wash that fast enough to be able to get it back to them, that sort of volume, which is in the order of 10 tonnes a week, 8 at the time, 8 tonne, but also had to find a half a million dollars to bankroll the stock, and you have to – you get that money back over some years, so in answer to your question, the working capital is a large barrier to entry for large customers.

    And could I take it that a very significant part of the work in the industry is derived from government and private hospitals and from hotels?---On a tonnage basis, yes.

    Yes?---Certainly.

    And do I understand you to say if an operator wants to win that work, first they have to make the investment in the circulating stock, that is, in the items?---Yes. 

    And that can be quite expensive. That’s the first point you made, I think? --- Yes.

    And secondly, if you expect to win it, you have to be able to turn the stock over quickly and that requires a large investment in plant and equipment?---Washing capacity, washing and drying, yes.  They are the two major barriers to entry.

    And in addition, you say that - - - ?---And the fact that the contracts don’t come up straightaway, so you could go and build yourself a beautiful plant, buy a lot of stock, but unless a contract becomes available, at that time you still have to wait on that capital until it becomes available.

    And when you are speaking of contract periods, I take it you are speaking of the experience across the industry?---Yes.

    Yes, and?---Because we have invested stock, we induce and expect a minimum three-year, maximum five-year contract in order for us to – they can’t change their mind the minute after we have bought half a million dollars worth of stock and say, ‘We are going to go somewhere else.’

    So your contracts are generally between three to five years?---Yes.

    And that’s the industry standard practice?---For large customers, certainly, yes.”

    The Industry Practice of 3 to 5 Year Renewable Contracts

24. Mr James adverted to this practice in his evidence on a number of occasions.  He indicated that contracts for three years were the industry standard for medium to large customers.  Old Co had two contracts for five years.  It was equally the common practice in the industry for contracts to have, in effect, self-executing rollover provisions unless notice to the contrary was given by the customer within a specified time of the expiry of the existing term.  Old Co’s standard form of contract at the relevant time had such a provision and Mr James’ evidence is that 90 per cent of its customers rolled over their contract without renegotiation and that some had been with the company for over 20 years.  Mr James accepted that a consequence of these practices was that significant contracts did not come into play very often.  His description of Old Co’s business reflected a likely bye product of these practices:  “[it] depended upon loyal customers who were prepared to enter into long term contracts and to renew them”.  His affidavit in turn (at para 11 referring to a 2005 memorandum) was to like effect in emphasising customer loyalty which, in turn, he attributed to Old Co’s ability to deliver quality and value to the client.

    The Old Co Laundry Hire Business in 2005

1. Approximately 95 per cent of Old Co’s operating revenue was derived from laundry hire services.  As at May 2005, the company generated approximately 150 tonnes of laundry per week which, in Mr James’ opinion, represented about 33 per cent of the South Australian laundering market.  At the time of the Heads of Agreement, it had four CBWs and employed about 180 employees.

2. In terms of market share in 2005, Old Co was the second biggest supplier of laundry services in South Australia behind Spotless which along with Alsco were Old Co’s principal competitors.  In his affidavit Mr James described the area serviced by Old Co in the following terms:

   “22.[Old Co] serviced the greater metropolitan area of South Australia and into country areas of the State.  [Old Co] serviced the area extending north to the Barossa Valley, south to Victor Harbor, and in the Adelaide Hills.  It had customers in each of Whyalla and Roxby Downs. 

   23.Most of [Old Co’s] customers were within the metropolitan area of Adelaide.  In order for a linen hire business to be profitable the necessary ingredients are multiple customers and regular turnover of hire.  For that reason, the nature of a linen supply and laundry hire service business is such that it is more profitable when conducted in the metropolitan areas rather than rural areas or smaller towns.  The two significant competitors of [Old Co], Spotless and Alsco Linen, were also based in metropolitan Adelaide and sourced most, although not all, of their clients from the metropolitan area.”

3. In light both of the map Mr James prepared which delineates the extent of “own truck” delivery runs for Old Co’s business in South Australia and of his oral evidence the above description is more favourable to Old Co in relation to areas outside of the metropolitan area than was actually the case.  I have appended a copy of the map (slightly cropped) to these reasons as Appendix B.

4. In relation to the area included in the lined service area on the map – it encompasses an area that stretches from Aldinga in the south, through Macclesfield to Mount Barker in the Adelaide Hills, to Gumeracha and then to Tanunda in the Barossa Valley, west to Gawler and south-west to Barker Inlet on Gulf St Vincent – I accept, subject to one qualification, that this is the area normally serviced by Old Co in the ordinary course of its business.  The qualification relates to the inclusion within it of the Barossa Valley for reasons which emerged in Mr James’ cross-examination.  I would also note that unlike what is suggested by his affidavit, this area does not extend south to Victor Harbour. 

5. In relation to the services Old Co actually provided in what I will call rural South Australia – Whyalla, Roxby Downs, Victor Harbour and the Barossa Valley – there were idiosyncratic reasons which explained these.  In relation to Whyalla, there was one customer (a hotel) which was a subsidiary of a group of hotels in Adelaide with which Old Co had a contract.  Those hotels expected that the linen hire service would be supplied as well to the Whyalla hotel.

6. As to Roxby Downs, Mr James was apparently importuned to provide the service by way of a favour to “an old employee of mine” who was prepared to pay “way over the odds to deliver there”.  The service to Roxby Downs, as also to Whyalla, was provided using the delivery and pick up services of a contract freight yard.  Old Co’s own trucks “didn’t go there”. 

7. As to Victor Harbour, the service was to an aged person home and it was provided because Old Co had a contract with a customer to do all of its aged care services in the Adelaide metropolitan area.  It was a requirement of the customer that Victor Harbour be serviced.  Mr James conceded that providing that service was a loss making part of the contract.

8. While there was “plenty” of work in Gawler, Mr James accepted that the additional distance into the Barossa Valley made business quite marginal.  Old Co’s service to the Barossa resulted from a request from a resort that hitherto had run an in-house laundry and wished to outsource.  As Mr James put it:

   “In a variation of the Roxby Downs story, we were invited up there, we explained it was on the outer limits of our expected delivery regime but they were a large customer and they paid extra and so we went there.”

9. Confidential evidence was given by Mr James of total customer numbers in 2005 and their individual contributions to sales value, and of the total sales value for that period.  I have emphasised those parts of the evidence that having focussed on medium to large customers.  Their significance becomes the more apparent in the above evidence which indicates that 10 per cent of the customers in that year generated approximately 75 per cent of sales value, 33 per cent was responsible for about 93 per cent of total sales value and 90 per cent of customers produced over 99.7 per cent of sales value. 

   Old Co’s Dry Cleaning Business

10. This business provided only 5 per cent of the company’s operating revenue.  This service was carried out in a separate part of Old Co’s Torrensville factory.  It is Mr James’ evidence that the term “dry cleaning services” was a term used by the company’s management and staff to refer to dry cleaning (in the sense of the process which involves the use of solvents rather than water) and to laundering of customer owned goods (“COGs”).  It was said that the dry cleaning section of the business did more laundering than dry cleaning, which was common with dry cleaning businesses generally. 

11. Mr James indicted that a dry cleaning service was only provided to customers of Old Co’s laundry hire service.  As such, it was incidental to the laundry hire service (summary financial information supported this characterisation of the relationship of the two services).  Dry cleaning services were only provided to the company’s large customers and, in particular, large hotels, hospitals and two other significant clients.  There were less than 20 such customers.  The reason Old Co offered this service was to provide hospitals and large hotels with a “one-stop” service.  In respect of large hotels the items dry cleaned were hotel uniforms, hotel guests’ clothing, curtains, special bed covers and miscellaneous items.  In respect of hospitals, Old Co offered dry cleaning services for curtains, customer owned bedcovers, some individual uniforms and other miscellaneous items. 

    Fadu, Tip Top Dry Cleaners Pty Ltd and Tip Top’s Business

12. From the time Old Co was incorporated and became trustee of the laundry hire business, it would appear (from what is sparse evidence) that, while Antoine and his family retained interests in that business through the vehicles I have described, Antoine and his family and Les and his family de facto conducted two separate businesses.  Les and his family conducted Old Co’s laundry hire business with its dry cleaning appendage and, through Snowtex, had a small retail dry cleaning company.  Antoine and his family conducted a dry cleaning business and engaged in contract laundering.

13. Fadu was incorporated in 1976.  For present purposes it is sufficient to note it is an Antoine family company, it indirectly owns almost the entirety of the shares in Tip Top (with whom it shares common directors), and is majority owner of a factory and office premises in Richmond from which most of Tip Top’s business is conducted.  Tip Top provides both laundry and dry cleaning services from four types of premises.  These are (i) the Richmond premises which has laundry and dry cleaning plant but no customer service to members of the public;  (ii) premises (some owned by Fadu) at which Tip Top has dry cleaning and laundry plant and which operate a retail outlet;  (iii) premises without plant but which operate as retail outlet;  and (iv) other business, such as newsagencies, which receive retail dry cleaning on an agency basis for Tip Top.  Virtually all of its laundry and about 60% of its dry cleaning are done at the Richmond premises.

14. At the time of Heads of Agreement and the Deed Poll of Restraint, Tip Top provided dry cleaning to retail customers and laundry services, both retail and wholesale.  As a result of the execution of these instruments, Tip Top’s contract laundry work was reduced significantly with consequence that its large tunnel washer and most of its other washers and its driers are unused.

15. It is the evidence on Paul Richard Nemer, a director of both Fadu and Tip Top that at the time of the two deeds none of the applicants competed directly with Old Co in the business of laundry hire, and that save for one exception none of Tip Top’s contract laundering related to the business of laundry hire.  The exception related to contract laundry it did for Spotless which it believed it did since the Deed Poll with the consent of Old Co.  Additionally, Tip Top (and related entities) carry on as part of its business, hotel guest laundry and dry cleaning services.  This represents less than 1 per cent of its business and it had such a business at the time of the Deed Poll. 

16. In his affidavits Paul Nemer outlined opportunities it was pursuing or which it was unable to pursue because of the restraints.  Examples given included not pursuing sub-contracting proposal from companies that themselves provided laundry hire services. 

17. The evidence indicates that Tip Top positively solicits work for its business and that this has led to an alleged breach of the restraints by it.  The following letter, written to a private hospital, was one of a number written to hospitals and aged care facilities in July 2000 advising, as Paul Nemer put it in his affidavit, that it could carry out dry cleaning of their “curtains”. 

    “We would like to take this opportunity to offer our services to you.

    Founded more than 50 years ago Tip Top Dry Cleaners are Adelaide’s largest privately owned dry cleaners.

    We can offer a comprehensive pick up and delivery service encompassing all facts of dry cleaning, repairs and alterations for blankets, quilts, curtains and uniforms at very competitive prices.

    A representative of our company would be happy to meet with you at your convenience to discuss cost effective proposal for your dry cleaning requirements.”

18. Such a letter evoked a letter to Tip Top from Mr James of 22 August 2006 in the following terms:

    “You recall that you asked me a few months ago about Tip Top taking on Dry Cleaning work for our Hotel and other customers, I declined and recommended against you trying.

    This week, one of our Hospital customers showed us a letter from Tip Top approaching them.  I remind you that you were paid to forgo such work when Fadu sold out of International Linen Service last year.  I do not wish to confuse our customers now and ask that you stop approaching our existing customers for any work, dry-cleaning or not.  If you are ‘blanket’ canvassing for such business let me know so I can advise who our existing customers are.” (Emphasis in original.)

    The Nemer Name

19. It is necessary to mention this subject as the respondents have sought to utilise the “Nemer’s reputation” in support of Old Co’s goodwill and in partial justification of the restraint.  The evidence clearly establishes a twenty-five year involvement of Les and Antoine in the linen hire and laundry business in South Australia.  Les Nemer, whose affidavit was relied upon by the respondents, expressed the view that, because of their long involvement in the industry, the Nemer family became well established and well known throughout both the public arena and the industry itself as being involved in linen supply and laundry hire services.

20. Mr James’ evidence was that in his time as an owner of Old Co (since 1995), the company never advertised the Nemer name as a brand.  He went on to suggest, though, that the Nemer name was promoted in word of mouth dealings.  In his first affidavit he expressed the opinion that the Nemer name is synonymous with laundry and laundering in South Australia.  He indicated he had been familiar with Old Co’s business since the early 1980’s. 

21. Finally, I would note that none of the restraints agreed to in the Heads of Agreement or in the Deed Poll related to the use of the Nemer name in association with laundry hire or dry cleaning businesses.

    Antoine’s Family Member Involvement in Old Co

22. Both Antoine and George Anthony were directors of Old Co at the time of the Heads of Agreement, they having been appointed to the board in 1986 and 1992 respectively.  Mr James’ evidence is that while these two were frequent visitors to the business premises they had limited involvement in the day-to-day running of the business.  Paul Nemer was an even more regular visitor but for essentially social purposes and he had no direct dealings with Old Co’s customers.

    Goodwill

23. The evidence on the subject was given by Mr James.  Put shortly, his starting point was the $22 million the figure Antoine understood to be the amount of the possible Spotless offer.  It was taken to be the value of the business on the asset side at the time of Antoine’s offer to Les.  From this was deducted a debt of $4 million owed to a bank to produce a total net assets figure of $18 million.  This was the only debt deducted, Mr James being of the view that other creditors were cancelled out by other debtors.  There was $9.31 million of inventory and $3.5 million of plant and equipment at that time giving tangible net assets of $12.664 million (Mr James did not explain how this precise figure was reached).  This sum in turn was deducted from the total net assets figure of $18 million to leave a figure for the goodwill component of approximately $5.336 million or 29 per cent of the Old Co business.

24. I earlier referred to the Heads of Agreement, to the provisions relating to the “Watering Down of Units and Sale of Shares and Equitable Interest in Land”, and to the manner in which the $8 million was apportioned between shares, land, etc in the sales.  Those figures are important in that some significant part of almost $2 million was allocated to matters of which account was not taken (e.g. land held by Minoris) in the figure imputed to be the gross asset value of the business.  Mr James acknowledged he had not taken account of these figures.

25. In his oral evidence Mr James described the $8 million paid for Antoine’s family interest, in short, as a “package exit fee” and, in the greater elaboration, as follows:

    “In the deal that was struck between the two brothers of which you’ve spoken in your evidence, what part, if any, was played by that fact that you’ve just told his Honour about?---The $8 million was intended to be a complete severance from – I guess all the moneys – I use this word – the word advisedly, washing through for joint expenses through ILS.  It was not meant to cover all the assets that were jointly owned otherwise, but as an example, ILS had on its payroll the farm manager, and the farm was jointly owned by Les and Antoine, under other entities.  So that was just an example of the sorts of things that money was going in both directions, but mostly from ILS to the other farms.  This $8 million was meant to be a walk in walk out on the basis of a quick clear severance so they didn’t have to look at each other much longer.”

26. I have already referred to the on-sale of the business excluding the land, in late November 2005 for $22.3 million and that Mr James accepted that there was an effective increase in the imputed market value of the business between the two transactions “in the order of millions of dollars”.  He would not accept that increase was about $8 million and it was in this context he observed that “you’d need to be an expert far greater than me to – to be able to impute this sort of value”.  Mr James, I would note in passing, was a Certified Practising Accountant by training.  I should add that Mr James expressed the view that the on-sale was “a complicated transaction” that brought in adjustments “that aren’t simple to put into a piece of paper”.

27. In their final written submissions, the respondents appear to have taken a new tack in relation to goodwill.  Relying upon Old Co’s 30 June 2005 balance sheet – it was annexed to a 29 November 2005 side agreement between Tiger, Mr James and PJMJ – they now advance the following figures for (a) current assets of $12.47 million;  (b) fixed assets of $6.53 million including $1.73 million for goodwill;  and net equity of $3.74 million.  It has not been explained what I am to make of these figures or what the $1.73 million figure should be taken actually to signify by reference to then contemporary accounting standards:  cf Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at [13]-[14].

    THE COMMON LAW CLAIM

28. Though I am of the view that, given the provisions of s 4M of the TP Act, it would ordinarily be appropriate first to deal with the TP Act claim before a common law claim, because of the way in which this matter was prosecuted by the applicants and because of the dispute over the respondents’ amendments to its defence, I am content to deal with the common law claim first and without regard to any possible impact of the TP Act upon it in the circumstances.

    The Applicable Principles

29. Save in one respect to which I will refer below, there is no obvious disagreement between the parties as to the general principles to be applied in testing the validity of covenants in restraint of trade.  There are, predictably, differences in matters of emphases and in the alleged utility of analogies selected from the rich bazaar of decided case law.

30. For present purposes I need only refer to the following matters.

31. (i)        Public policy lies at the root of the rule that contracts in restraint of trade are, prima facie, unenforceable:  see Amoco Australia Pty Ltd v Rocca Brothers Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 307; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 at [27]. The only justification for a restraint is if it is reasonable in reference to the interests of the parties and reasonable in the interests of the public: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565; Buckley v Tutty (1971) 125 CLR 353 at 376. The two requirements merge to some extent. As Walsh J observed in Amoco (at 307):

    “… if a restraint is imposed which is more than that which is required (in the judgment of the court) to protect the interests of the parties, that is a matter which is relevant to the considerations of public policy which underlie the whole doctrine, since to that extent the deprivation of a person of his liberty of action is regarded as detrimental to the public interests … I acknowledge that the consequence of what I have just stated is that there is to some extent a merging of the second branch of the Nordenfelt formulation of the applicable principle with its first branch.  But this does not mean that the distinction between them is wholly obliterated.  In order to justify a restraint of trade both tests must be satisfied.  The restraint must be reasonable in the interests of the parties in that it affords no more than adequate protection to the covenantee ‘while at the same time it is in no way injurious to the public’ (see the Nordenfelt Case).  It may be that although a restraint satisfies the first requirement it is injurious to the public for some reason other than being in excess of what is reasonable in the interests of the parties.”

32. (ii)       The onus of establishing that a restraint is reasonable as between the parties rests with the party who puts forward the restraint, while the onus of establishing that it is contrary to the public interest is on the party alleging this:  Amoco, at 317.

    (iii)“The fact that the parties have bargained from a position of equality is … one of the circumstances to be considered in determining whether the covenants were reasonable, but it does not save from invalidity a covenant found to be unreasonable or contrary to the public interest (see also Creamoata Ltd v Rice Equalization Association Ltd [(1953) 89 CLR 286 at 318].”

    Per Gibbs J in Amoco, at 317.

    This is a proposition upon which the parties divide, the respondents emphasising that significant weight should be given in this regard to a commercial agreement reached “after hard bargaining” by parties, which each finds in its interests to accept:  Amoco, per Menzies J (in dissent). Whether or not the observations of Menzies J accurately reflects Australian law is not a matter that I need consider as I do not consider that the Heads of Agreement represented “an ordinary transaction between a willing vendor and a willing purchaser”: Brown v Brown [1980] 1 NZLR 484 at 489 per Cooke J. I will later return to this matter.

1. (iv)      The question of reasonableness is a question of law for the Court which ultimately depends upon “a judgment the reasons for which do not admit of great elaboration”:  Amoco, at 308. The validity of the restraint is to be determined as at the date of the agreement, though facts occurring after that date may be relevant if they throw light on the circumstances existing at the date of the restraint: Amoco, at 318.

2. (v)       The seller of the goodwill of a business or a person who relinquishes his or her interest in the goodwill of a business by retirement or sale to the continuing owners:  cf Geraghty v Minter (1979) 142 CLR 177 at 193-194; is nonetheless entitled to set up a competing business: see generally Heydon, The Restraint of Trade Doctrine, Ch 8 (2^nd ed, 1999);  unless a valid restraint protecting the goodwill of the business has been agreed.  As Dixon CJ commented in Butt v Long (1953) 88 CLR 476 at 486:

   “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.”

3. (vi)      The most recent elaboration of the legal nature of goodwill by the High Court was in Federal Commissioner of Taxation v Murry at [12] ff. It is unnecessary for present purposes to enlarge upon what was there said other than to note that one of the definitions endorsed by the joint judgment was that of Lord Macnaghten in Inland Revenue Commissioners v Meuller & Co’s Margarine Ltd [1901] AC 217 at 223-224 where it was said:

   “What is goodwill?  It is a thing very easy to describe, very difficult to define.  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 which distinguishes an old-established business from a new business at its first start.  The goodwill of a business must emanate from a 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.  Goodwill is composed of a variety of elements.  It differs in its composition in different trades and in different businesses in the same trade.”

4. (vii)     In the context of a restraint imposed in connection with the sale of a business or of an interest in a business, the question whether the protection afforded the covenantee is excessive can give rise to three quite distinct issues:  “Is the trade restrained unduly wide?  Is the area or scope of the restraint unduly wide?  Is the duration of the restraint unduly long?:  see Heydon, The Restraint of Trade Doctrine at 157 ff.  The applicants raise all three of these in their attack on the Deed Poll of Restraint. 

5. (viii)     The principal interest protected by restraints on competition on the sale of goodwill is customer connection, the customers being existing or potential customers.  The protection of that interest in a given case can contrive what is the acceptable area or scope of a restraint:  cf Whitehall v Bradford [1952] 1 Ch 236 esp at 249-250 where a ten mile radius restraint on a retiring partner of a medical practice was unsuccessfully challenged, the evidence establishing that, though the patients on the periphery of that area were small in number they contributed about one-third of the total partnership income; see also Kennett v Crawford [1940] SASR 199; C & S Constructions Pty Ltd v Dawson (1991) 13 ATPR 41-148 and Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505 at 524. Important in this regard for present purposes are observations of Viscount Maugham in the Privy Council in Connors Brothers Ltd v Connors [1940] 4 All ER 179 at 194 in the context of a covenant taken on the sale of a sardine business not to engage in any such business in Canada:

   “… 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.  In the cases in which the area has been the whole of England, or a substantial part of it, such as 100 miles or 150 miles from a named town, it has never been held that the covenantee was under an obligation to prove that the business has been carried on in all the towns and villages within the area.  In the Nordenfelt case, no attempt was made to prove that all the governments of the world, or even of the civilised world, had ordered goods from the company, though the greater number no doubt had done so.  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.  If, for example, a restrictive covenant were limited to the province of Quebec, it would seldom be possible to prove that the goods were used in every part of that province.  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.”
   (Emphasis added. Footnotes omitted.)

6. (ix)      Protection of customer connection equally can contrive what is the acceptable duration of a restraint, hence the emphasis in the cases on the period reasonably to be allowed (a) to give the covenantee the opportunity “of cementing an old connection and of profiting from an established reputation”:  Brown v Brown, 490; and to establish a relationship with the customers of the business Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581 at 614; and (b) for severing the relationship between the covenantor and those who would patronize the business of the sale: IRAF Pty Ltd v Graham, at 218.

   CONSIDERATION - THE RESTRAINTS

7. It will be necessary to deal separately with the laundry hire services and the dry cleaning services.  Before doing so I should deal with the issue of “goodwill”.

   Goodwill

8. The respondents’ case is that the goodwill of Old Co, including its name, was built up by the owners of the business (Les and Antoine) over the years since its establishment.  Given they were pioneers in linen hire and laundering generally since 1953, it is said they brought to Old Co from its establishment their own reputation in the industry;  that reputation assisted Old Co in developing and securing the fixed term customer contracts necessary to the capital investment required.  The Nemer name was associated with Old Co, and Les’ family and Antoine’s family shared in the benefit and advantage of the good name, reputation and connection of the business.  It is then said that the goodwill of Old Co is derived from its reputation built up around its name and the Nemer family name.  Equally, it is said, it is Old Co’s and the Nemer’s reputation within the industry which attracts repeat custom;  the assurance of quality and speedy service was provided by that reputation.  Reliance is placed on the evidence both of Mr James and of Les Nemer as to the standing and repute of the Nemer name in the fabric cleaning industry.  I would note in passing that the respondents have also attempted to derive support from evidence given by Paul Nemer in cross-examination which is said to link his father’s involvement with Old Co to the reputation it developed as an industry leader.  I simply note that read in context, Paul Nemer’s evidence cannot properly be taken to do more than confirm the historical association of his father and Les in the industry dated back to 1953.

9. I am satisfied that at the time of Antoine’s offer in 2005, Old Co’s business did have significant goodwill evidenced, most notably, in its level of customer loyalty.  I also am satisfied that that goodwill at that time was to some extent at least referable to Nemer family involvement in the business.  Though disinterested evidence on this is slight, and notwithstanding that since at least 1995 the Nemer name was not advertised with the business, it is reasonable to infer that some such nexus was there.  Les and his family managed the business;  both he and Antoine had a long presence in the fabric cleaning industry, the board of the company was constituted from 1986 by Les and his wife, Antoine and his wife and to this was added a member of each family in 1992 and Mr James in 1996.  Far more significant to Old Co’s goodwill in my view was the participation of Les and his family and, from 1995, Mr James in the day-to-day management of the company and to the levels of customer service they apparently supplied.  I simply note of this that Mr James in his evidence embraced the observation that “[Old Co] attributes [its level of] customer loyalty to their ability to deliver quality and value to the clients”.

10. In reaching these conclusions, I have considered, but do not accept, the centrality of the Nemer name as such to Old Co’s reputation that has been propounded by the respondents. 

11. Fadu’s sale of its various interests under the Heads of Agreement was, and was intended to be, a relinquishment of such interest as it had indirectly in the assets of the business including its goodwill.  Though the consideration indirectly referable to the business as such was in the order of about $6 million (see [32] above), I am satisfied that it encompassed some amount that acknowledged the goodwill of the business.  I would have to say that I do not find the evidence on what proportion of that consideration might be referable to goodwill to be particularly enlightening, although I do consider that in the distinctive circumstances of the sales and the watering down, it was probably a relatively modest amount.

12. The 5 August 2005 agreement cannot on the evidence meaningfully be characterised as embodying an ordinary transaction between a willing vendor and a willing purchaser.  The character Mr James gave the dealing which I accept – “a walk in walk out on the basis of a quick clear severance so they didn’t have to look at each other much longer” – comes closer to the transaction described in Brown v Brown, between two brothers who carried on a business together through a corporate vehicle but who could no longer continue in business together (at 489):

    “… it was a transaction forced on the parties, in effect a case of one partner buying out the other because unhappy differences had made co-operation impossible.”

    I mention this, not for the purpose of inquiring into the adequacy of the consideration for the restraint:  cf Amoco, at 316; but rather to indicate that the circumstances surrounding the transaction do not warrant its being characterised as having been “bargained from a position of equality”: cf Amoco, 317; and hence to be so considered in determining whether the restraints were reasonable.

13. I equally should add that the character I have ascribed the transaction is probably reflected as well in the difference between the consideration for it and that given in the November 2005 on-sale, the latter reflecting a bargain struck from positions of equality. 

    The Parties to the Restraints and “Related Entities”

14. The restraints bind only the four named covenantors and these do not include Tip Top. Nonetheless, it obliges the parties to “procure that their related entities do not” act inconsistently with the restraints. The applicants have, in a fashion, called into question the meaning of “related entities” suggesting – surprisingly given this formula applies to the related entities of natural persons as well as of Fadu – that the terms have the same meaning as related bodies corporate in s 50 of the Corporations Act 2001.  This clearly is not the case.  In its context, as the respondents submit, related entities seem clearly to have been intended to signify corporate bodies over which the covenantors jointly or severally have control such that they have the capacity to procure the required result.  Tip Top, manifestly, is a related entity subject to the control of at least Fadu, Antoine and George Anthony as is evidenced in the ASIC extracts for Tip Top, RMN Corp Pty Ltd and Fadu. 

    The Laundry Hire Services Restraint

    (a)       Activity restrained

15. The covenantors covenanted that they would not:

    “2.1operate, or be involved in any way, directly or indirectly, with the operation of any linen supply or laundry hire services business of any kind”.

    The applicants have contended that the activity restrained is unreasonable in two related respects.  I need only consider the first of these.  It is said, that the restraint means that the covenantors (or their related entities) can neither sub-contract to provide laundry services to a laundry hire service business or hire their facilities to such a business.  This, it is said, has precluded Tip Top from subcontracting laundry work from Spotless in the conduct of its laundry hire business because by so doing Tip Top would be “involved directly or indirectly with the operation of” Spotless’ business.  The respondents contend that the restraint does extend to the Spotless example.

16. If the covenant had a meaning which produced the above consequences, it would be unreasonable.  However, as I am satisfied that when the words “operate” and “operation” are properly construed, the activity restrained does not have the reach the applicants allege.  The usual dictionary meaning of “operate” (and relatedly with the “operation” of) when used in relation to a “business” means to direct, manage, conduct or carry on a business:  see e.g. Vol 10 Oxford English Dictionary (2^nd ed), “operate” 7.  In the context of the Heads of Agreement and of the Deed Poll, this plainly is its meaning.  For Tip Top to do sub-contracted laundry as such for Spotless, for example, does not involve it in the management, direction, the carrying on or the conduct of Spotless’ business.  It is Spotless that manages, directs, etc that business.  Tip Top is not involved in that process.  It is a stranger to it, though as a sub-contractor it may be availed of for the purposes of Spotless’ business.  However, if Spotless’ and Tip Top’s relationship was such as to constitute a joint business enterprise in the management of which they cooperated, the restraint would be engaged.  If I am incorrect in this, then as I foreshadowed, I would conclude that the indirect application of the restraint to catch contract laundering with a laundry hire business without more, was unreasonable.  It would be an undue curtailment of business that was not itself offering laundry hire services. 

    The Scope of the Laundry Hire Services Restraint

17. This extends to all of South Australia, notwithstanding that, apart from discrete customers in Whyalla, Roxby Downs, the Barossa Valley and Victor Harbour, Old Co had confined the area in which it conducted its business roughly to that marked on the map which is Appendix B and which, for convenience, I will call the “greater Adelaide metropolitan area”.  I earlier indicated that that boundary was set for reasons relating to cost of transport, the need to have customers close to laundry and to the relationship of profit to quick turn over of linen.

18. I am satisfied that the State-wide restraint is unreasonable given the nature and the manner of conduct of laundry hire businesses.  While it is not necessary to show that a covenantee actually has carried on, or proposes to carry on, the business in every part of the area specified in the covenant, it nonetheless must be shown that the covenant against competition is confined to the area within which it would in all probability enure to the injury of the purchaser:  Butt v Long at 486; Kennett v Crawford, at 203. In ascertaining that area regard may be had to such expansion of the business as might reasonably be contemplated: Lloyd’s Ships, at 524.

19. It is misleading to suggest that the evidence establishes that Old Co “serviced” Whyalla, Roxby Downs, the Barossa Valley and Victor Harbour.  It did nothing of the sort.  It did not make its services available in those towns to businesses that wished to avail of them.  Rather, for distinctive reasons, Old Co was obliged to or else was willing to make distinct arrangements for a single business in each of those places except the Barossa Valley where it dealt with two businesses.  There was no evidence led to suggest that Old Co at the relevant time was proposing or reasonably contemplating an expansion of their ordinary business activities into any of those areas:  cf Lloyd’s Ships, at 524. Neither was it suggested that, though remotely located, these customers contributed a significant proportion of Old Co’s sales revenue: cf Whitehall v Bradford, at 249-250.

20. I accept the burden of Mr Hill’s evidence that outside of the greater metropolitan area, there is a number of discrete areas in South Australia in which it is commercially viable to operate a commercial laundry business, so constituting several regional markets in the State.  It is quite inappropriate, in my view, for Old Co to sterilize these areas which do not fall within its ordinary sphere of operations, from the possible market entry of the applicants.  The restraint to that extent was not designed to protect Old Co’s goodwill or the business’ customer connection (actual and prospective). 

21. I am in consequence satisfied that the scope of the laundry hire restraint is unreasonable.

    The Duration of the Laundry Hire Restraint

22. The reasonableness of the five year restraint is one which has to be considered in a quite distinctive context.  First, Fadu’s disposal of its interests in Old Co’s business, did not result in an immediate change in the day-to-day management of the business although Les foreshadowed a possible sale of his interest in the business at the time of Antoine’s offer.  Moreover, after the on-sale there was continuity in the management of the business to the extent that Mr James continued to be engaged on a full-time basis in its day-to-day activities – a role he commenced in 1995.  Secondly, the industry practice of three, occasionally to five, year contracts with “roll-over” renewal provisions combined with the nature of the laundry hire business itself (with quick turn around between customers), provides protracted opportunities for customers to develop an appreciation of, and a business relationship with, a service supplier.  In Old Co’s case this probably was reflected in the 90 per cent rollover of customer contracts.  Thirdly, given the usual three year contractual term, the period of the restraint in practice could vary in relation to Old Co’s customers from 5 years to 8 years.

23. The respondents submit that 5 years is a reasonable period in which to enable New Co to derive full value from the adherence of retained goodwill without interference from the applicants.  They rely upon (i) Antoine’s family’s capital, know-how and consequent ability to compete;  (ii) their ability to attract customers from the business;  (iii) George Anthony’s alleged breach of the covenant by sending the letter to which I earlier referred to a private hospital [see [62]-[63]];  and (iv) notwithstanding the apparent affect of the three year term on Old Co customers becoming available each year, across the industry this would also be the case, but there would nonetheless be an adequate pool for which to compete on a yearly basis.

1. Put shortly, the respondents’ contention is that in an industry where the goodwill is identified and preserved by the fixed term contract, it seems quite reasonable to require the vendor to vacate the field until most of the existing Old Co contracts are rolled over at a time when the customers are responding to the efforts of the new regime, and not to the adhered goodwill left over from the old regime.  While I agree with this submission, I do not accept the time the respondents assert is reasonable within which this transition ought be permitted to transpire.

2. In my view, whatever expectation an existing or new customer may have of the business if it renews or contracts for the first time shortly after the Fadu sale, that customer will thereafter have three years of regular dealing with New Co’s management (especially if the customer is a medium to large one).  In that time it would be reasonable to expect that both supplier and customer alike would as of course develop an informed understanding of the other and of the prospects for, and value of, continuing their relationship.  I do not consider that when, towards the end of that three years, the question of contract renewal arises, that customer’s decision to renew would be likely to be affected by the prospect of Tip Top, or an Antoine family entity, entering the laundry hire service market.  This suggests that a restraint of three years is reasonable in the interests of the parties. 

3. In respect of a customer who enters into, or renews at any time in the three years before the date of the Heads of Agreement or Deed poll, somewhat different considerations obtain.  If a reasonable period of restraint is 3 years, then, in the case of this class of customer, the de facto period in which they will be contracted to New Co and immune from competition from the covenantors (assuming a further renewal in the restraint period) will be between 3 and 6 years.  I consider this to be reasonable given that the restraint, which could not reasonably be expected to operate on a customer by customer basis, necessarily will operate differently from customer to customer.

4. Little attention has been given in the evidence to the contractual arrangements with small customers – a very considerable number made very minor contributions to Old Co’s sales returns (see [54] above) – although it would seem these, in the main, have fixed term contracts with roll-over clauses.  The evidence of Mr James is that 90 per cent of Old Co’s customers rolled over their contracts.  Insofar as this class of customer would be added to by those who would deal with New Co for the first time after the date of the restraint, New Co was entitled to the reasonable opportunity to profit from Old Co’s established reputation and to attract these prospective customers without fear of competition from the applicants.  Three years is, in my view, an appropriate period to allow for this.  For those who contracted before the date of the restraint, assuming their contracts to be three year renewable, they were de facto in the same position as their medium and large customer counterparts as to their prospective future tie to New Co to which I referred above. 

5. For the reasons I gave earlier in relation to the scope of the restraint, I do not regard the fact that the 5 year period of restraint was agreed by Les and Antoine provides compelling reason for characterising it as reasonable. 

6. The question of reasonableness has to be determined, as I earlier indicated, in the context of this particular industry and its contracting practices.  The latter, as I earlier indicated, were utilised (in the contract system) by Old Co to generate goodwill.  They and their effects are equally of considerable significance in determining what is a reasonable period of restraint.  I am not satisfied on the material before me that it has been established that a 5 year restraint is reasonable in the circumstances. 

   Conclusion on the Laundry Hire Restraint

7. I find that this restraint is not reasonable in the interests of the party in that it affords more than adequate protection to the respondents.  It is for that reason injurious to the public.

   THE DRY CLEANING RESTRAINT

8. This also is State-wide and for five years.  To reiterate, it provided that the covenantees would not (and that they would procure their “related entities” to not):

   “2.2provide or offer to provide, or be involved in any way, directly or indirectly, with the provision or offer of provision of, dry cleaning services in competition with [Old Co] (except to the extent of dry cleaning services which, at the date of the Heads of Agreement, were both carried out by Fadu, [Antoine, George Anthony, Linda] or their related entities and not carried out by [Old Co], Tiger, EGNNPL, [Les], PJ, PJMS or their related entities).”

9. This provision does not readily yield up a meaning.  The respondents sought to tender a letter from George Anthony’s solicitor which commented (inter alia) upon an earlier draft of the dry cleaning restraint.  This letter, it is contended, disclosed the common understanding which informed the intended meaning of cl 2.2.  I am asked to infer that it so did because of the amendment made to the earlier draft.  To that end the respondents rely upon observations of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352-353 where his Honour accepted the possibility of receiving evidence of mutual intention amounting to concurrence as to the meaning to be given to a contractual provision. Here there is no such evidence of concurrence. I am asked to infer that such was the case. At the time, I indicated the difficulty involved in this and the respondents indicated they would supplement the record. This did not happen. Accordingly, I am not prepared to rely on the letter when construing the clause.

10. The clause on its face prohibits the provision of dry cleaning services “in competition with [Old Co]” subject to one limitation which requires the satisfaction of both of two conditions.  The prohibition does not apply to dry cleaning services which, at the date of the agreement:

    (a)       were carried out by the applicants or their related entities;  and

    (b)       were not carried out by the respondents or their related entities.

11. An evaluation of the reasonableness of the restraint requires first and foremost an answer to the question:  What dry cleaning services were provided by Old Co at the date of the Heads of Agreement?  It was in relation to the provision of those services that the general prohibition on competition (subject to the limitation) was, seemingly, intended to operate. 

12. I would emphasise at the outset, first, that the prohibition was in respect of Old Co’s services alone and, secondly, while it related to “dry cleaning services”, this was not a defined formula in the Deed Poll.  The evidence of Mr James is that that formula had a dictionary meaning within Old Co and it encompassed both dry cleaning and laundry of customer own goods (COGs).  It is, in my view, unnecessary to determine whether that was a meaning known to, and accepted by, the applicants.  What is clear on the evidence is that Old Co’s dry cleaning services were only provided to its existing large laundry hire customers in relation to their COGs and that supply was incidental to Old Co’s laundry hire service.  In other words this was the extent to which Old Co provided dry cleaning services and in turn contrived what would be the limits of any lawful restraint on competition with Old Co, there being no evidence of any contemplated enlargement of the dry cleaning services to be provided. 

13. Given both the inter-family composition of the board of Old Co and the evidence of Paul Nemer as to Old Co’s dry cleaning services at the time of the Heads of Agreement, I am prepared to infer that the applicants knew that Old Co’s services were as I have described them above and were the only type of services provided by Old Co.

14. If such was the factual setting of the prohibition, the problematic question is, nonetheless, how the restraint purported to deal with competition.  In my view cl 2.2 borders on the unintelligible.  If it be said that the general prohibition related only to competition with Old Co in respect of Old Co’s provision of dry cleaning services for the COGs of large customers – and this seems to be the respondents’ ultimate position – this permits an intelligible contextual reading of the clause but without regard to the limitation in parenthesis.  That limitation thus would have to be regarded as otiose at best, and utterly abstruse at worst.  It is difficult, for example, to see what relevance dry cleaning services provided by a respondent other than Old Co could have to a prohibition on the applicants’ competition with Old Co.

15. Nonetheless the limitation, seemingly, was intended to have meaning in the context of the clause as a whole.  This rather suggests, as the applicants appear to contend, that the proper construction of the clause is that it imposes a blanket prohibition on the applicants providing dry cleaning services at all, or else to any of Old Co’s customers, unless their provision falls within the limitation which qualifies the extent of the prohibition.  The first such possibility seems highly unlikely because, to take an example, with both George Anthony and Les Nemer each carrying on – and being known to carry on – retail dry cleaning businesses at the time of the Heads of Agreement, George Anthony’s continuing to so do would be precluded by the restraint as the dual requirements of the limitation could not be satisfied (because Les was, rather than “was not”, carrying out dry cleaning services).  Such a consequence, moreover, would serve no intelligible purpose at all in protecting Old Co’s legitimate interests and would spell invalidity for the restraint if this was its proper construction.  As to the second possibility (i.e. all of Old Co’s customers), the restraint is demonstrably too wide because Old Co’s services were only being rendered to 20 or so of its large customers and there seems to be no obvious work for the limitation to do by way of amelioration of that width. 

16. While I consider each possible construction to be problematic, I do not in any event consider that a five year restraint on competition in relation to dry cleaning services on any possible construction to be at all reasonable in the circumstances. 

17. The service provided by Old Co to a very limited range of customers may have added to the attraction it could offer to such customers but that service, as the respondents acknowledge,  was simply incidental to their laundry hire service.  Even if I were to accept that it was a service which added to the goodwill of the business, I do not accept that the restraint itself is reasonable given its duration, for like reasons to those I have given in relation to the laundry hire service.  Moreover, I consider this particular restraint to amount to no more than an attempt to contrive a continuing, incidental advantage in the provision of laundry hire services by excluding others already operating in the dry cleaning services market.  It is not protecting goodwill.  It is stifling competition.

    Conclusion

18. I am satisfied that the dry cleaning restraint is not reasonable in the interests of the parties or of the public and is unenforceable.

    CONCLUSION:  THE COMMON LAW CLAIM

19. Considered in isolation from the TP Act claims, the applicants case has been made out.

20. The respondents have not made submissions to the effect that the offensive parts of the restraints could be severed:  cf SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516 at [46]; or that the “reading down” provision of the deed poll would permit the court to make an inoffensive agreement for the parties which they did not make themselves. The obvious reason for their not taking either of these course lies in their TP Act claims to which I now turn.

    THE TP ACT CLAIM

21. There are four tiers of questions which possibly arise in relation to the respondents’ claim.  The first is whether as exclusionary provisions, the Deed Poll restraints contravene s 45(2)(a) of the TP Act. The second is whether, on the application of the respondents, the Court should grant relief under s 87(3) of the Act so as to vary the contract in a manner it considers just and equitable. The third is whether, again on the respondents’ application, the Court should grant relief under s 87(1) favourable to the applicants by way of varying the Deed Poll’s restraints so as to prevent or reduce loss or damage to the applicants. The fourth is whether the offending restraints ought be severed under s 4L of the TP Act.

22. For reasons I later give it is only necessary to deal with the second of these in any detail. 

    A Contravention of s 45(2)(a)?

23. Both parties have conceded that, for the purpose of the TP Act, the restraints imposed by the Heads of Agreement and the Deed Poll are exclusionary provisions. The respondents in their cross-claim contend that because of s 51(2)(e) of the Act, the restraints, nonetheless, do not contravene s 45(2)(a). However, in their defence to the common law claim, it is conceded that if the restraints “offend against public policy” (as I have found), they also contravene s 45(2)(a). It is, in consequence, unnecessary for me to consider s 51(2)(e) and the questions to which it may have given rise in the circumstances of this matter. I have earlier referred to these: see [13].

    A s 87(3) Order?

24. The restraints in the Deed Poll have been rendered unenforceable by s 45 of the TP Act. As I have earlier indicated, the respondents, as parties to the “contract” imposing them: see [14]; were entitled to apply to the Court to have it varied in such manner “as the court considers just and equitable”. I am satisfied that this is an appropriate matter in which to make an order under the subsection.

25. It may not be particularly helpful to indicate that, while the discretion given is not one constrained by enumerated considerations to which regard must be had, it must be exercised judicially. What is clear in my view is that it should be exercised consistently with policies and purposes manifest in the TP Act in relation to exclusionary provisions: see s 4D, s 45 and s 51(2); and, in a case such as the present, to the Act’s treatment of provisions in contracts that are for the protection of a purchaser of a business in respect of the goodwill of the business: cf s 51(2)(e). Equally, regard can properly be had to those considerations of public interest and public policy informing the law relating to restraint of trade, the Act itself acknowledging the continuing significance of that law, albeit to the extent that it is capable of operating concurrently with the Act: cf s 4M.

26. I would note that an exclusionary provision of a contract, for present purposes, is one having the purpose of preventing, restricting or limiting supply or acquisition of services to or from particular persons or classes of person and the contract itself is between bodies corporate which, but for that provision, would be or be likely to be in competition in relation to the supply or acquisition of the services or goods to which the provision relates: s 4D and see News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563. Unless other, not presently relevant, requirements are not complied with, or unless another provision of the Act (including a subsection of s 45 itself) makes s 45 inapplicable in the circumstances: see e.g. s 51(2) and s 88(1); s 45 declares such a provision to contravene the Act regardless of its actual effect on competition. That it so operates, notwithstanding the object of the TP Act is to enhance the welfare of Australians through (inter alia) the promotion of competition and fair trading: s 2; gives little guidance as to how, consistently with the Act’s object, the s 87(3) discretion ought be informed.

27. In the present case, though, guidance is to be found in s 51(2)(e) in that, as I noted at the beginning of these reasons, it exempts from s 45’s purview, any provision of a contract for the sale of a business or of shares in the capital of a body corporate carrying on a business, “that is solely for the protection of the purchaser in respect of the goodwill of the business”. It is unsurprising that the view has been expressed that:

    “[t]he test provided by s 51(2)(e) seems … to encapsulate the conditions which by the common law are required to bring a restraint relating to a business within the policy of the law”: see IRAF Pty Ltd v Graham, at 216.”

28. It is not necessary for present purposes that I express a concluded view on the correctness of this observation. The burden of the subsection in the end is simply one of statutory interpretation. But what the s 51(2)(e) exception suggests for the purposes of the s 87(3) discretion is that there well could be circumstances in which it would be both appropriate and just and equitable to vary a restraint in a contract associated with the sale of an interest in a business so that it does no more than provide a level of protection that would be acceptable at common law for the policy reasons of the common law. Such an exercise of discretion would be permissible under s 87(3) in an appropriate case even if a provision valid at common law was not saved from contravening s 45 because of s 51(2)(e), i.e. because that provision did not operate in tandem with the common law: cf Peters (WA) Ltd v Petersville Ltd, at [46]-[50].

29. I am satisfied that the present is a case in which a variation order should be made.  I indicated in relation to the laundry hire restraint that I considered a three year period of restraint would appear to be reasonable as between the parties.  I equally indicated that, save in relation to its extension into the Barossa Valley, the map tendered by the respondents (Appendix B to these reasons) delineates an area within which it would be reasonable to proscribe competition between the parties in relation to the applicants operating etc a laundry hire business.  I also indicated what I consider to be the proper construction to be given the words “operate” and “operation” in the restraint but that, in any event, that meaning indicated what was a reasonable limit to the scope of the activities that could be the subject of an acceptable restraint. 

30. Accordingly, I would vary the Restraint clause as it relates to the laundry hire business so as –

    (i)to limit the restraint to conducting, or being involved directly or indirectly, in the conduct of, a laundry hire business; 

    (ii)to limit the area of the restraint to that marked with a line in Appendix B to these reasons commencing at Aldinga and terminating at Barker Inlet but so as to exclude the area to the north between Williamstown, Tanunda and Gawler (i.e. the Barossa Valley);  and

    (iii)to limit the duration of the restraint to three years from the “Completion Date” – a date defined in the Heads of Agreement. 

31. Turning to the restraint as it applies to the dry cleaning services, I do not consider it appropriate either to attempt to recast it or for that matter to retain it as part of the Restraint clause.  I will order its deletion.  The respondents have had the advantage of it for over two years.  I do not consider it to be just or equitable that such a contrived restraint on competition in so minor an aspect of the laundry hire business should be continued.

    A s 87(1) and (2)(b) Order?

32. The parties are sharply divided on the question whether the power to vary the Deed Poll can be enlivened in circumstances in which the parties, whose actual or likely loss or damage is to be compensated in whole or in part (or else protected from it) by the order to be made, do not themselves seek that order.  This is not a question which I need determine, though I would note the apparent curiosity in a party whose conduct occasions loss applying for an order to remedy that loss. 

1. In circumstances in which s 87(3) makes express provision for variation of a contract containing an exclusionary provision at the suit of a party to it (irrespective of whether that party has suffered or is likely to suffer loss), it would be quite inappropriate to resort to a power of more general application to furnish the very remedy for which s 87(3) was designed.

   Section 4 L

2. I need not repeat here the terms of s 4L save to note that the severance requirement imposed by the section: see SST Consulting Services Pty Ltd v Rieson, at [52]; is expressly made “subject to any order under section 87”. I propose to make such an order and that order will render severance under s 4L unnecessary.

   CONCLUSION

3. I will direct the parties to bring in short minutes of order to give effect to my findings and conclusions.  Additionally, I would note that while it is provided expressly in the Deed Poll of Restraint that it does not supersede the Heads of Agreement (see cl 7), no relief has been sought in this proceeding in relation to that agreement. 

4. I will also direct the parties to file and serve written submissions on costs within seven days of the handing down of these reasons. 

I certify that the preceding one hundred and thirty-six (136) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.

Associate:

Dated:       11 December 2007

Counsel for the Applicants:	Mr R Whitington QC with Mr N Rochow
Solicitor for the Applicants:	Cowell Clarke
Counsel for the 1st, 4th, 7th & 8th Respondents:	Mr W Wells QC with Mr T Duggan
Solicitor for the 1st, 4th, 7th & 8th Respondents:	Kelly & Co
Counsel for the 2nd, 3rd, 5th & 6th Respondents:	Mr M Evans
Solicitor for the 2nd, 3rd, 5th & 6th Respondents:	Iles Selley
Date of Hearing:	22, 23, 24 and 30 October 2007
Date of Judgment:	11 December 2007

Appendix A

 

Appendix B