GKR Karate Australia P/L v P & M Thomas P/L & Ors No. Scgrg-00-321

GKR KARATE AUSTRALIA PTY LTD v P & M THOMAS PTY LTD & ORS
[2000] SASC 160

MARTIN J. (Ex tempore) The plaintiff (‘GKR’) operates businesses conducting karate classes throughout Australia and in a number of overseas countries. Within Australia the business is conducted in two zones which are divided into a number of regions. Pursuant to a region management agreement (‘the agreement’) dated 20 January 2000, one of the two regions in South Australia, the south region, was managed by the first defendant (‘the company’) through its manager, the second defendant (‘Mr Thomas’). In conjunction with the agreement, Mr Thomas and the third defendant (‘Mrs Thomas’) signed a guarantee and indemnity in relation to the due performance of the agreement by the company. Further details of the general background for this dispute are set out in my ex tempore reasons delivered on 28 April 2000 in action No.210/2000, and judgment No.[2000] SASC 122 in this action.
There is evidence in these proceedings that during March and April 2000 Mr Thomas, with the knowledge of the fourth defendant, Mr Sclanders, and his part of an enterprise commenced with Mr Sclanders, attempted to take over classes of GKR at venues used in the south region, and to commence a business in competition with GKR at those venues teaching what was called ‘Kenshukai Karate’. The evidence is capable of supporting the view that Mr Thomas planned the takeover while working with GKR, and provided misleading information to instructors and clients of GKR. He misused his position and acted in contravention of the express terms of the agreement. As a consequence, upon the application of GKR, on 5 April 2000 I made certain orders which had the effect of restraining Mr and Mrs Thomas, the company and Mr Sclanders from attempting to set up a business in competition with GKR. The orders were varied in a minor way with respect to the company and Mr and Mrs Thomas on 12 April 2000. On 11 May 2000, I discharged the orders against Mr Sclanders and made orders which had the effect of enabling Mr Sclanders to set up a business in competition with GKR, but subject to a number of constraints.
Mr and Mrs Thomas and the company have complied with the restraining orders and have applied to vary the orders. In essence, they challenge the validity of a restraint of trade clause in the agreement and contend that Mr and Mrs Thomas are not parties to the agreement.
As to the contractual issue, the wording of the relevant clauses of the agreement is unusual and far from satisfactory. There may well be some force in the defendants’ submission that Mr and Mrs Thomas were not parties to the agreement between the company and GKR. However, counsel for GKR submitted that there was evidence from which the court could conclude that, in entering into the agreement, the company acted as agent of Mr and Mrs Thomas with the knowledge and acquiescence of Mr and Mrs Thomas, thereby making them parties to the agreement. GKR has filed a statement of claim against the defendants asserting both the existence of the agreement and breaches of the agreement by the defendants. Other causes of action against the defendants are also asserted. Defences have been filed. In my view, there is a serious issue to be tried with respect to the contractual arrangements, if any, between the parties.
Regardless of whether Mr and Mrs Thomas were parties to the agreement, counsel for the defendants accepted that he may have difficulty resisting orders of restraint based in equity. However, he submitted that such orders should not prevent Mr Thomas from earning a living within the business of teaching karate.
The restraint of trade clause within the agreement is in the following terms:
“14.
14.1 The Contractor [the company] (and through it the Manager) [Mr Thomas] agrees, as evidenced by its execution of this Agreement, that it will not without the written consent of GKR (which consent may be withheld by GKR without giving any reason) be directly or indirectly engaged, concerned or interested as a member, director, employee, consultant, agent, partner or otherwise in any corporation, firm, business or other organisation which is engaged in either the teaching of or the recruitment of members and/or students for any other martial art school, academy or similar, or which engages in any like business to that of GKR, within a radius of twenty (20) kilometres of any training or administrative centre run by GKR or any other contractor of GKR for a term of three years (3) years from the date of the termination for whatever reason of this Agreement and the Contractor (and through it the Manager) further agrees, as is also evidenced by its execution of this Agreement, that these terms of restraint are reasonable in terms of activity, time and area.
14.2 In the event of any part of sub-clause 14.1 hereof being either held or found to be unreasonable in terms of activity, time or area and consequently unenforceable as against the Contractor, the Contractor (and through it the Manager) alternatively agrees, as evidenced by its execution of this Agreement, that it will not within the written consent of GKR (which consent may be withheld by GKR without giving any reason) be directly or indirectly engaged, concerned or interested as a member, director, employee, consultant, agent, partner or otherwise in any corporation, firm, business or other organisation which is engaged in either the teaching of or the recruitment of members and/or students for any other martial art school, academy or similar, or which engages in any like business to that of GKR, within the area specified in sub-clause 14.2.1 hereof for the term specified in sub-clause 14.2.2 hereof:
14.2.1 at any place within a radius of:
14.2.1.1     twenty (20) kilometres;
14.2.1.2     fifteen (15) kilometres;
14.2.1.3     ten (10) kilometres; or
14.2.1.4     five (5) kilometres;
......... of any training or administrative centre run by GKR or any other contractor of GKR;
14.2.2 for a term of:
......... 14.2.2.1     three (3) years;
14.2.2.2two (2) years; or
......... 14.2.2.3     one (1) year;
from the date of the termination for whatever reason of this Agreement,
whichever of these is the maximum term of restraint legally enforceable in accordance with sub-clause 14.3 hereof, and the Contractor (and through it the Manager) further alternatively agrees, as is also evidenced by its execution of this Agreement, that the maximum term of restraint which is enforceable in accordance with sub-clause 14.3 hereof is reasonable in terms of activity, time and area.
14.3 In the event of any of the provisions contained in sub-clauses 14.2.1 or 14.2.2 hereof being held to be unenforceable, the unenforceable portions are severable and the remaining provisions of sub-clauses 14.2.1 and 14.2.2 shall be enforceable between the parties to this Agreement.”
Read literally, cl 14 restrains only the company. It is highly unlikely, however, that the parties intended such a consequence. On the assumption that Mr and Mrs Thomas were parties to the agreement and that cl 14 was intended to apply to them, that clause purports to restrain them and the company from being involved or interested in any manner in any business or organisation concerned with martial art or engaged ‘in any like business to that of GKR’. The restraint is for a period of three years from the termination of the agreement. The restraint applies over a geographical area within a radius of 20 kilometres of any site from which GKR or any contractor of GKR operates the business of GKR. Geographically, that restraint is not limited to South Australia. It extends in the manner described to any area within Australia where GKR operates its karate business.
GKR operates in the metropolitan areas of each capital city and in a number of major centres in Queensland, New South Wales and Victoria. If clause 14 is upheld, it prevents the defendants from being involved in martial arts throughout the entire metropolitan areas of each capital city (with the exception of Melbourne where not all of the metropolitan area is covered).
Mr Thomas is 27 years of age. He commenced with the plaintiff as a trainee manager in 1994 and recruited students for lessons throughout the Adelaide metropolitan area. For a period of three years from October 1994 he worked in the business of GKR in Brisbane. From January 1998 until December 1999 he worked in the business of GKR in the United Kingdom and the United States of America. Upon his return to Australia in about December 1999, Mr Thomas took up the position as region manager for the south region. Mr Thomas has, therefore, been earning a living from the business of martial arts on a full-time basis since 1994.
Mrs Thomas is 28 years of age. She and their children aged 4 and 2 years are dependent upon Mr Thomas for their financial support. The family lives at Old Reynella in a house on which they owe $124 000. The mortgage repayments are $800 per month. Since the restraining orders were put in place, Mr Thomas has been unsuccessful in locating any work of substance. The family has been receiving benefits of $800 per fortnight from Centrelink and financial support from Mr Thomas’ parents.
Against this background, the effect of clause 14 and of the orders which I have made and which GKR seeks to maintain, is to restrain Mr Thomas from pursuing in any way paid involvement in the industry which provides him with his primary means of earning an income. That restraint applies in specified areas across Australia.
During submissions some debate occurred about which party bore the onus in respect of the current application to vary the terms of the injunction. Counsel for GKR submitted that as the injunction was in place and the restraint of trade clause existed in the agreement, the burden rested upon the defendants to make out their case for a variation. In my view, however, such an approach overlooks the realities of the total circumstances. The restraining orders were originally made on an ex parte application. When Mr Thomas appeared in April 2000 after he was served with the orders, he was unrepresented and effectively acquiesced in the continuation of the orders. On 12 and 17 April 2000, Mr Thomas again appeared unrepresented. He questioned the enforceability of cl 14 and I suggested that if he wanted to challenge the order and, in particular, the validity of the restraint of trade embodied in the agreement, he should seek legal advice and make the appropriate application.
Against this background, and bearing in mind the nature of the restraining orders and that their basis is found in a restraint of trade clause, in my opinion it is GKR who should bear the onus of justifying the continuation of the order. However, for the reasons that follow, regardless of who bears the onus I am satisfied that the defendants have made out a strong case for a variation in the terms which are identified later in these reasons.
It is unnecessary to canvass the relevant principles in any detail. The protectable interests of GKR must be identified. This will include consideration of the geographical area in which GKR operates its business. The position of the defendants within GKR’s organisation must also be carefully considered. In the light of all relevant information, the court must then assess whether the restraints exceed that which was necessary to guard GKR’s protectable interests.
From January 2000, Mr Thomas managed the south region within South Australia. As mentioned, the management arrangement was through a company of which Mrs Thomas is a director. She assisted her husband in preparing weekly reports on many occasions, but has not been involved in the karate classes or other aspects of running the business. As far as she is aware, she does not know anyone who may now be working as an instructor or distributor for GKR on the northern side of Adelaide.
In his capacity, Mr Thomas was familiar with the intimate dealings of the operation of GKR in the south region. He had access to lists of clients, instructors, distributors and venues. The regional manager of GKR’s north region is Mr Craig Pearce who swore an affidavit stating that Mr Thomas has had access to the ‘northern regions instructors contact list’. He also suggested that Mr Thomas has had ample opportunity to get to know instructors and distributors from the north region. He said that Mr Thomas has acquired knowledge of times and venues at which classes are conducted in the north region. In an affidavit dated 31 May 2000, Mr Thomas said that he only knows a few people in the region referred to by Mr Pearce. He denied that he now has information as to the details of independent distributors in the north region. As to venues and timetables, according to Mr Thomas, every person who joins GKR as a client receives a timetable listing all classes located in a particular region.
Mr Thomas was cross-examined. He was an impressive witness. I accept his evidence. Mr Pearce was also cross-examined. Careful scrutiny of his claim that Mr Thomas had access to extensive information concerning clients, venues and instructors in the north region demonstrates that Mr Thomas is highly unlikely to have gleaned or retained any significant information of that nature that is not publicly available.
On the evidence before me, I am satisfied that if Mr Thomas was permitted to commence or be involved in a business in competition with GKR in the north region, he would not be placed in a position of unfair advantage by reason of knowledge of clients, instructors or distributors in that region. He would, of course, be in a position to use his general expertise or ‘know-how’ in the business that he has gained during the period of his association with GKR. His standing in the industry may also assist him.
In my opinion, clause 14 encompasses an area that is far wider than the area necessary for the protection of GKR’s protectable interests. A period of three years restraint across that area is excessive. If the restraint had been limited to the south region, the validity of the clause, both in respect of the area and period, would have been a serious issue to be tried. However, in my opinion, the existing terms of clause 14 do not give rise to a serious issue to be tried. If there is any prospect of clause 14 being upheld, it is so remote that a continuation of the existing restraints placed upon it is not justified.
I have considered the possibility of clause 14 being read down. The terms of clause 14 purport to allow for such a process, both in respect of the area of operation and the period. However, the alternatives are presented in a form which, in essence, requires the court to re-write the contract. The court is required to examine a number of variations of geographical area and time and a combination of those variations. In my opinion, the variations and combinations result in the clause being void for uncertainty and demonstrate that the alternatives were not a genuine attempt to define GKR’s need for protection (see Austra Tanks Pty Ltd v Running [1982], 2 NSWLR 840 and Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 72 ALR 643).
In all the circumstances, I am satisfied that the defendants have made out their case for a variation of the terms of the orders restraining their activities. I am also satisfied that, in view of both the relationship created by the agreement and the inappropriate conduct of Mr Thomas previously discussed, a degree of restraint is appropriate. Although the issues primarily concern the restraint upon Mr Thomas, in my opinion the activities of the company and Mrs Thomas should be restrained in the same manner as Mr Thomas. The evidence satisfies me, however, that the restraint should be restricted to the south region. The restraints are based in Equity. In my opinion, the principles do not extend to restraining Mr Thomas from being engaged in lawful competition with GKR because he would be using his expertise or know-how gained during his time with GKR. Similarly, I reject GKR’s contention that restraining Mr Thomas from working in the north region is appropriate because, if he is permitted to do so, he would be taking unfair advantage of his good standing in the industry earned while with GKR.
In arriving at my views, I have taken into account the difficulty that GKR will have, if eventually successful, in establishing the quantum of damage sustained by GKR as a consequence of Mr Thomas being permitted to operate in the north region. However, although difficult, an assessment will be possible if appropriate records are kept. Notwithstanding that difficulty, I have reached the firm conclusion that it would be wholly unreasonable to prevent Mr Thomas from working in the north region or in other areas of Australia.
The orders made on 5 April 2000 as varied on 12 April 2000 with respect to the first, second and third defendants are discharged. In the orders that follow, the south region is that portion of the Adelaide metropolitan area that is south of a West-East line commencing with Burbridge Road and extending East through the City and along Kensington Road. The north region is that portion of the Adelaide metropolitan area north of that line.
I order that the company, Mr Thomas and Mrs Thomas, shall not:
(i).... conspire to injure GKR or plan the destruction of GKR’s business (excluding by way of lawful competition);
(ii)publish or cause to be published any information to the effect that GKR is or may be unable to continue to provide karate classes in an appropriate way or in any way similarly disparage GKR or its businesses;
(iii).. for a period of nine months directly or indirectly divulge any information to any person or entity as to the identity and addresses of persons or entities who were between 20 January 2000 and 5 April 2000 clients of GKR in the south region or engaged by GKR as distributors or karate instructors within the south region;
(iv)for a period of nine months directly or indirectly divulge any information to any person or entity as to the venues used by GKR within the south region for the conducting of karate classes between 20 January 2000 and 5 April 2000;
(v).... for a period of nine months be directly or indirectly involved in any manner whatsoever in the operation within the south region of a business in competition with GKR;
(vi)for a period of nine months solicit or procure other than by way of public advertising the services in connection with any business in competition with GKR of any person or entity engaged by GKR between 20 January and 5 April 2000 as a distributor or instructor in the south region; provided that this order shall not restrain the soliciting or procuring of the services of such a GKR distributor or instructor who responds to a public advertisement;
(vii). for a period of nine months solicit or procure any person or entity who was between 20 January and 5 April 2000 a client of GKR in the south region to become a client of a business in competition with GKR; provided that this order shall not restrain the soliciting or procuring of such a person or entity to become a client where such person or entity responds to a public advertisement or is contacted in the course of general doorknocking in the north region.
Order (v) refers to ‘the operation within the south region of a business’. The order is not intended to prevent Mr Thomas from being involved in a business merely because the business operates in areas that include the south region. In such circumstances, while he could work within the business, Mr Thomas could not be involved in that part of the business that operates in the south region.
I further order that during any engagement over the next nine months in a business in competition with GKR, Mr Thomas keep detailed records of his hours of work and duties, including details of clients, instructors and distributors recruited and instructed.

Mr Thomas has said that he wishes to work with Mr Sclanders. Provided the defendants do not breach the orders I have made, I am not prepared to restrain them from being involved with Mr Sclanders. To the extent there is the possibility that some of the orders made in action 321/2000 on 11 May 2000, and set out in judgment No.[2000] SASC 122 might prevent Mr Sclanders from entering into a contractual relationship or arrangement with the defendants or some of them, if necessary I will relist that action for reconsideration of the terms of the orders made on 11 May 2000 with a view to enabling Mr Sclanders and the defendants to enter into appropriate business arrangements.
I will hear the parties further as to the terminology of the orders.

[2000] SASC 160

8 June 2000