Hydron Pty Ltd v Harous - [2005] SASC 176

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
HYDRON PTY LTD v HAROUS
Judgment of The Honourable Justice Bleby
17 May 2005
TRADE AND COMMERCE - TRADE AND COMMERCE GENERALLY - RESTRAINT OF TRADE - RESTRAINT BY AGREEMENT - VALIDITY AND REASONABLENESS
Related company of plaintiff engaged in the manufacture, distribution and sale of contact lens and contact lens care products in UK – Defendant majority shareholder and managing director of contact lens company in Australia – Joint venture agreement for sale of UK company’s products in Australia – Later acquisition by related company of all shares in joint venture company – simultaneous acquisition by plaintiff of business of defendant’s company and employment of defendant by plaintiff – defendant subject to restraint of trade clauses in business sale agreement, Deed of Non-Competition with plaintiff and contract of employment with plaintiff - Termination of defendant's contract of employment and engagement by rival company – “ladder clause” restraints – Whether restraint clauses void for uncertainty – Whether restraint clauses unreasonable and therefore void on grounds of public policy – Distinction between purpose of post employment restraints and sale of business restraints – Restraint clauses not void for uncertainty – Sale of business restraints unreasonable and therefore void – Relevant employment restraints unreasonable and therefore void – Plaintiff’s action dismissed.
Fair Trading Act 1987 (SA) s 56; Trade Practices Act 1974 (Cth) s 45, s 52, s 53, s 80 and s 87; Competition Reform (South Australia) Act 1995 (SA) Part IV; "Employee Agreements Not to Compete", HM Blake, (1960) 73 Harvard Law Review 625; "The Restraint of Trade Doctrine", JD Heydon, (2nd ed, 1999), Chapter 4, referred to.
Herbert Morris Ltd v Saxelby [1916] 1 AC 688; Lindner v Murdock's Garage (1950) 83 CLR 628; Butt v Long (1953) 88 CLR 476; Buckley v Tutty (1971) 125 CLR 353; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; Geraghty v Minter (1979) 142 CLR 177; Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505, applied.
Peters Ice Cream (Vic) Ltd v Todd [1961] VR 485; Austra Tanks Pty Ltd v Running [1982] 2 NSWLR 840, distinguished.
JQAT Pty Ltd v Storm [1987] 2 Qd R 162; SA Petroleum Co Pty Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269, discussed.
Cruttwell v Lye (1810) 17 Ves. 335; 34 ER 129; Davies v Davies (1887) 36 Ch D 359; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 211 ALR 342; (2004) 79 ALJR 129; L'Estrange v Graucob [1934] 2 KB 394, considered.

HYDRON PTY LTD v HAROUS
[2005] SASC 176
BLEBY J:
Introduction

The plaintiff, Hydron Pty Ltd (‘Hydron’), is a wholly owned subsidiary, by way of several holding companies, of Aspect Vision Holdings Ltd, having become a wholly owned subsidiary in early 2002. In turn, Aspect Vision Holdings Ltd is ultimately owned by a United States based company with subsidiary companies throughout the world, known together as the Coopervision Group. Hydron is engaged in the business of the manufacture, distribution and sale of contact lenses and contact lens care products in Australia.
Aspect Vision Care Limited (‘AVCL’), is also a wholly owned subsidiary of Aspect Vision Holdings Ltd, and hence part of the Coopervision Group. It is also engaged in the business of the manufacture, distribution and sale of contact lenses and contact lens care products in the United Kingdom.
In 1988 the defendant, Christopher Harous, together with Kendrew Smith and Kostas Harous, co-founded and continued thereafter to be co-directors of Nu Contacts Pty Ltd (“Nu Contacts”). Nu Contacts was also engaged in the manufacture, distribution and sale of contact lenses and contact lens care products in Australia from June 1988 until 1 November 2002. Its headquarters and laboratory were located in Adelaide. Prior to the formation of Nu Contacts, Mr Harous had been employed by the OPSM Group Limited for approximately eight years as a contact lens technician.
From the time of Nu Contacts’ incorporation until 1 November 2002, Mr Harous held a majority shareholding (52.5%) in the company and was the acknowledged “voice” and “controller” of the Nu Contacts business. Not only was Mr Harous the public voice of the business, but he was also involved in all areas of the business: manufacturing, tinting, packing and cleaning, and, together with Mr Kendrew Smith, liased with Nu Contacts’ customers. In late October 2002 and just prior to the sale of the business of Nu Contacts, the company name was changed to Smihar Pty Ltd. For ease of reference, I will refer to it as Nu Contacts, notwithstanding this change of name. Mr Harous currently is the sole director and shareholder of Smihar Pty Ltd.
The joint venture and associated transactions
In 1999, AVCL sought to re-establish a distributorship operation in Australia to facilitate the sale of its products in this country. Until 1999, AVCL had had an Australian distribution agreement with a Melbourne based company. In June 1999 that company discontinued the distributorship arrangement it had had with AVCL because it was acquired by a competitor of AVCL in the contact lens market.
AVCL entered into negotiations with Nu Contacts in 1999 to establish a joint venture for the purpose of selling and distributing AVCL’s products in Australia and New Zealand.
By written agreement dated 19 August 1999, AVCL and Nu Contacts entered into what was termed the Shareholders Agreement, whereby the entities agreed to establish and operate a joint venture company which was subsequently incorporated and became known as Coopervision Australia Pty Ltd (“CVA”).
CVA was established as a contact lens sales and distribution company in Australia and New Zealand for the sale and distribution of AVCL’s products. A term of the joint venture provided that AVCL and Nu Contacts would each respectively hold 51% and 49% of the issued shares in CVA. Mr Harous was appointed managing director of CVA. He entered into a Service Agreement that outlined his responsibilities as managing director of the joint venture company. The agreement recognised that he would also continue as managing director of Nu Contacts. That was not seen to provide any irreconcilable conflict, as CVA was not a manufacturer, and was to handle a much wider range of product lines than Nu Contacts produced. CVA operated from July 1999 until 31 October 2002, when, as will be explained below, AVCL purchased Nu Contacts’ shares in CVA and Hydron purchased the business of Nu Contacts.
Included in the Service Agreement between Mr Harous and CVA was a restraint of trade provision restraining Mr Harous for a period of twelve months from the date of his termination as Managing Director of CVA from undertaking certain activities in competition with CVA. The relevant terms of that clause are set out and discussed in more detail later in this judgment.
As part of the joint venture, AVCL and Nu Contacts signed two option agreements on 19 August 1999. Both option agreements provided for the granting of put and call options by the parties.
The first of the option agreements, known as the Coopervision Option Agreement, was in relation to the shares owned by AVCL and Nu Contacts in CVA. The put option in this agreement granted Nu Contacts the right to require AVCL to purchase Nu Contacts’ 49% shareholding in CVA. The call option granted AVCL the right to require Nu Contacts to sell to AVCL its 49% shareholding[1]. In each case the price payable on exercise of the option was six times the profit of CVA before tax at CVA’s balance sheet date multiplied by the percentage of Nu Contacts’ then shareholding in CVA[2].
[1] Clause 2.1, Coopervision Option Agreement
[2] Schedule 2, Clause 1, Coopervision Option Agreement
The second of the option agreements, known as the Nu Contacts Option Agreement, concerned the business of Nu Contacts itself. Like the Coopervision Option Agreement, Nu Contacts and AVCL were respectively granted a put and call option concerning the purchase of the Nu Contacts business[3]. The option price payable on the exercise of the option was six times the profit before tax at Nu Contacts’ balance sheet date in 2002[4].
[3] Clause 2.1, Nu Contacts Option Agreement
[4] Schedule 2, Clause 1, Nu Contacts Option Agreement
The Nu Contacts option (sale of Nu Contacts business) could not be exercised unless the CVA option (for AVCL to purchase Nu Contacts’ shareholding in CVA) was exercised simultaneously[5].
[5] Clause 2.2, Nu Contacts Option Agreement
It was also a term of the Nu Contacts Option Agreement[6] that the terms of the sale and purchase of the Nu Contacts business would be substantially those terms contained in Schedule 3 to the Agreement, defined in that Agreement as “the Business Sale Agreement”. This was in the form of a draft, with some schedules incomplete. Clause 2.7 of the Nu Contacts Option Agreement provided, in part:
To the extent that the Business Sale Agreement or any or any [sic] of its schedules are incomplete or uncertain [CVA] will provide all relevant factual information to achieve completeness and the Parties will negotiate in good faith or reach agreement on all matters which are uncertain. If the Parties fail to reach such agreement then the terms of any matters that are uncertain will be determined by the nominee of the then President of the Law Society of SA Inc being a commercial lawyer of not less than 10 years standing acting as an expert and not as an arbitrator.
[6] Clause 2.7, Nu Contacts Option Agreement
Clause 24 of the draft Business Sale Agreement provided:
The Vendor and the Directors jointly and severally agree with the Purchaser that in order to protect the goodwill of the Business that the Vendor and each Director shall execute the Deed of Non-Competition specified in Schedule 14 on or before the Completion Date.
The “Business” referred to in that clause was defined as meaning the business of Nu Contacts. Schedule 14 in the draft Business Sale Agreement was left blank. Therefore, in the absence of agreement, it could have been dealt with under clause 2.7 of the Nu Contacts Option Agreement.
Operation of CVA and Nu Contacts
From July 1999 to 1 November 2002, CVA engaged in the distribution and sale of AVCL’s contact lenses and contact lens care products throughout Australia. Under the terms of the joint venture, Nu Contacts continued to operate and distribute and sell its own products. The two businesses were managed by Mr Harous from the Nu Contacts premises in Adelaide. Employees were employed either by one company or the other. Mr Harous had two roles: his involvement in the day-to-day running of Nu Contacts as well as working in the position of managing director of CVA, a position he occupied from September 1999 to 1 November 2002.
Exercise of Options
On 1 October 2002, AVCL assigned its rights under the Nu Contacts Option Agreement to Hydron, which was, by then, also a member of the Coopervision Group.
Also on 1 October 2002, Hydron exercised the call option under the Nu Contacts Option Agreement. The purchase price calculated in accordance with the agreement was $3,115,369 plus 85% of the trade debtors as at 11 November 2002. AVCL also exercised the call option under the Coopervision Option Agreement. The purchase price payable under that agreement was $2,234.079.
Although the call options were formally exercised on 1 October 2002, Mr Harous was aware for some months before that the options would be exercised at that time.
Throughout October 2002, Hydron and Mr Harous conducted negotiations to finalise the terms of the Sale and Purchase Agreement for the Nu Contacts business. In the Sale and Purchase Agreement as executed, to which the directors of Nu Contacts were also parties, clause 3.1 provided that the Agreement was subject to some conditions precedent, one of which was that Nu Contacts and its directors would execute Deeds of Non-Competition in substantially the same form as set out in Schedule 14. Clause 23 also contained a restrictive covenant binding Nu Contacts and the directors. The terms of that covenant are set out in full later in these reasons. There was also negotiated and executed an Employment Agreement between Mr Harous and Hydron whereby Mr Harous was to be employed by Hydron from 1 November 2002 as Sales Director, OPSM Group. The Employment Agreement also contained a restraint provision in clause 10. The nature and effect of that clause is discussed below.
The negotiations for these agreements were conducted primarily between Mr Harous and representatives from both Hydron and Hydron’s solicitors. Much of the evidence was directed to the conduct of those negotiations, whether there was a failure on the part of Hydron to negotiate in good faith, and whether Mr Harous, when he signed the agreement, was aware of the content and effect of clause 23 of the Sale and Purchase Agreement, the Deed of Non-Competition and clause 10 of the Employment Agreement. In the view that I take of the validity of those provisions it is not necessary to discuss that evidence.
It is sufficient to note that Mr Harous received a draft of the Sale and Purchase Agreement on 11 October 2002 which contained the present clause, that he considered that any restraint should be commensurate with the period represented by a redundancy payment if his services with Hydron were terminated, that he was aware from a conversation that he had with Mr Dasan, from Hydron’s solicitors, on 25 October that Hydron was insisting on a three year restraint, that he received the documents for signature late on 31 October, that he looked at them and nevertheless signed them on 1 November 2002, During all this time he chose not to obtain legal advice.
The fact of the matter was that he knew that provisions concerning a restraint on termination of his employment were contained in the agreements, and that these had been a matter of some contention. Notwithstanding that, he signed the documents.
In those circumstances, the High Court has recently affirmed that when there is no vitiating element and no claim for equitable or statutory relief, a person who signs a document known to contain contractual terms and to affect legal relations is bound by those terms. It is immaterial that the person has not read the document or has some subjective view as to what it means[7].
[7] See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 79 ALJR 129; (2004) 211 ALR 342, affirming the dictum of Scrutton LJ in L’Estrange v Graucob [1934] 2 KB 394 at 402-403
As will be seen, in this case Mr Harous, by way of alternative counterclaim, alleges a breach of s 56 of the Fair Trading Act 1987 (SA) or of s 52 and s 53 of the Trade Practices Act 1974 (Cth) by Hydron. However, there is no evidence of misleading representations giving rise to the signing of the agreements. As will be seen, there is nothing misleading or deceptive by way of uncertainty in the clauses themselves. Therefore, for present purposes, the question of the claim for statutory relief can be put aside. There is no other vitiating element or claim for equitable relief.
The Nu Contacts business is taken over
A consequence of the series of Agreements signed on 1 November 2002 was that Hydron absorbed the Nu Contacts brand name and business. Ms Delaney, Hydron’s then Finance Director and Company Secretary gave evidence that it was Hydron’s intention to absorb Nu Contacts’ business into its own, rather than continue to operate it as a separate entity. She acknowledged that Hydron intended to move the Nu Contacts’ business from its then premises to Hydron’s manufacturing laboratory within six months of having acquired the Nu Contacts business. She acknowledged that it was Hydron’s intention, in November 2002, that the Nu Contacts brand would be dispensed with during this six-month transition period. That intention appears to have been well-known before 1 November 2002. It was well understood by Mr Harous. In the weeks preceding 1 November 2002 he was becoming increasingly concerned that a significant number of the staff of Nu Contacts would be made redundant.
In fact, Nu Contacts’ laboratory, where its lenses were manufactured, was closed soon after the Nu Contacts business was acquired by Hydron. The manufacture of some of the same or similar products continued thereafter at Hydron’s laboratory. Some Nu Contacts products were discontinued. A number of Nu Contacts employees were transferred to Hydron once the Nu Contacts business had been purchased. By June 2004 the Nu Contacts brand name had been replaced entirely by the Coopervision Hydron brand, even for Nu Contacts products that were continued by Hydron.
Mr Harous’ employment by Hydron
As noted above, Mr Harous entered into an Employment Agreement with Hydron on 1 November 2002. His employment was not for a fixed period, and was terminable by either party on six months’ notice.
He was employed as Sales Director responsible for the OPSM Group. OPSM has always been Hydron’s biggest client. Sales of contact lenses and contact lens care products to OPSM account for over 40% of Hydron’s unit sales and over 33% of sales in dollar terms. The OPSM Group has over 490 stores in Australia and New Zealand. It represents about 20-25% of all active optometrists.
Both Nu Contacts and CVA had vendor agreements in place with OPSM. As part of the settlement their rights and benefits under the agreements had been assigned to Hydron as from 1 November 2002.
As Sales Director, OPSM Group, Mr Harous had primary responsibility for maintaining and enhancing a favourable business relationship with the OPSM Group. He was to maintain regular contact with OPSM decision makers at head office level and to make sales calls on OPSM branches “to build business”. He was to maintain communications and consultation with interested Coopervision colleagues in relation to activities and agreements with OPSM. He was also to provide support and expertise in selling the Nu Contacts products taken over and “to provide support to the Australian team as necessary, liaising with the Regional Sales Director to agreed requirements”[8]. He was expected to be a “team player with clear and innovative thinking who will take an active part in the management of the Australian business”[9].
[8] Employment Agreement, Schedule 2
[9] Employment Agreement, Schedule 2
Mr Harous was part of the Australian management team. He attended team meetings at which a range of policy and other matters was discussed relating to the performance of Hydron and activities of competitors. He was involved in discussions concerning pricing, product specification and marketing and pricing strategies. He was aware from time to time of Hydron’s and Coopervision’s market performance, budget performance and operating profit analysis. He was concerned with tactical marketing decisions and was alive to new product launches and policies and to strategies to attack competitors’ products. He attended at least one national sales meeting where various sales strategies were discussed. In short, Mr Harous had access to significant information concerning Hydron’s business, its plans and its marketing and pricing strategies.
Whilst employed by Hydron, Mr Harous was directly answerable to the managing director of Hydron (Pacific Rim), Mr Michael Kotow. His salary package was equal to that paid to Mr Kotow. From 25 November 2002 until 31 January 2003, Mr Harous took unpaid leave from Hydron, resuming work with Hydron on 3 February 2003.
Initially, when not calling on customers, he worked from Hydron’s premises. At a later date, in or about March or April 2003, Mr Harous, by arrangement, worked mainly from home. This was associated, in part, with complaints he was receiving from optometrists in relation to products and service concerning Nu Contacts lenses then being manufactured by Hydron.

Mr Harous continued to work in his capacity as Hydron’s Sales Director responsible for OPSM until 6 August 2003. A dispute arose between Mr Harous and Hydron over a number of matters relating to the exercise of the options. As a result, Mr Harous was stood down with pay for a period of two weeks and told to have no contact with OPSM.
At a meeting on 18 August 2003 Mr Harous was handed a letter giving him six months’ notice of the termination of his employment with Hydron and advising him that he was not to perform any duties in the meantime for Hydron. The termination was therefore effective from 18 February 2004.
Following further discussions and correspondence between solicitors, Hydron advised Mr Harous by letter dated 22 October 2003 that it was terminating his employment as from 24 October and would pay out all accrued entitlements and the balance of period of notice. That duly occurred and the employment was terminated as from 24 October 2003.
Replacement of Mr Harous
Mr Covey, another member of the Hydron management team, assumed the responsibilities of Sales Director, OPSM as soon as Mr Harous was stood down. There continued to be complaints regarding product quality, although the nature and volume of those complaints lessened over the months that followed as the initial problems associated with the incorporation of the Nu Contacts business were gradually resolved. By June 2004 Mr Covey had gained a familiarity with the OPSM business and had successfully cemented a good working relationship with OPSM’s then chief contact person, Daniel Tracton.
Harous and Menicon Australia
From 1 November 2004, Mr Harous commenced employment with Menitic Pty Ltd trading as Menicon Australia. The Menicon Group of Companies is an international competitor of Hydron and the Coopervision Group in the contact lens industry. Menicon Australia is the exclusive distributor of Menicon Group’s contact lenses and contact lens care products for Australia and New Zealand.
Mr Harous is employed by Menicon Australia as its Sales and Marketing Director. A Memorandum of Understanding contemplates that he will become a shareholder of Menicon Australia. In short, Mr Harous’s main duties, as Sales and Marketing Director, are to increase awareness and promotion of Menicon products in the territory and significantly increase sales of all Menicon products.
Through his experience and contacts he has been able to introduce an overseas company, Visaq Ltd, to Menicon Australia, with a view to the companies forming a partnership or joint venture for the purpose of distributing Visaq lenses in Australia and New Zealand.
Relief claimed and counterclaimed
In these circumstances Hydron seeks a declaration that Mr Harous has contravened clause 23 of the Sale and Purchase Agreement for the Nu Contacts business, clauses 2-4 of the Deed of Non-Competition entered into at the same time and clause 10 of the Employment Agreement between Mr Harous and Hydron. It seeks injunctive relief or damages for breach of contract or, in the alternative, damages for breach of warranty and representations, including damages pursuant to the Fair Trading Act 1987 (SA).
By way of counterclaim Mr Harous, while denying the validity of the several restraints at common law, claims that they are also in breach of s 45 of the Trade Practices Act 1974 (Cth). He seeks orders pursuant to s 87 and s 80 of the Trade Practices Act and the Schedule Version of part IV of the Competition Policy Reform (South Australia) Act 1995 rescinding the purported restraints and enjoining the plaintiff from relying upon them or purporting to enforce them. Alternatively, Mr Harous alleges breaches of s 56 of the Fair Trading Act 1987 (SA) or s 52 and s 53 of the Trade Practices Act, claiming similar orders.
The three restraint clauses
It is necessary first to consider the nature and effect of the three restraint provisions.
Clause 23 of the Sale and Purchase Agreement provides as follows:
23.1The Vendor and the Directors jointly and severally agree with the Purchaser that in order to protect the goodwill of the Business that the Vendor and each Director shall execute the Deed of Non-Competition specified in Schedule 14 on or before the Completion Date.
23.2In this clause 23 ‘engage in’ means to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier.
23.3The Vendor and the Directors each undertake to the Purchaser that they will not, and will procure that each of their Related Entities will not for the Restraint Period defined in clause 23.4 and in the Restraint Area described in clause 23.5:
(a)     engage in any business or activity which is the same or similar to the Business or any material part of it, except, with respect to the Directors, to the extent required for the proper performance of their duties under any Employment Agreement with the Purchaser;
(b)     solicitor, canvass, induce or encourage any person who was at any time during the six month period ending on the Completion Date a director, employee or agent of the Vendor to leave the employment or agency of the Purchaser;
(c)     solicitor, canvass, approach or accept any approach from any person who was at any time during the six month period ending on the Completion Date a customer of the Vendor with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or
(d)     interfere with the relationship between the Purchaser and its clients, employees or suppliers.
23.4Restraint Period means
(a)     with respect to the Vendor, the period of:
(i)3 years from the Completion Date;
(ii)2 years from the Completion Date;
(iii)6 months from the Completion Date; and
(b)     with respect to each of the Directors, the period of:
(i)3 years from the termination or expiration of their respective employment with the Purchaser;
(ii)2 years from the termination or expiration of their respective employment with the Purchaser;
(iii)6 months from the termination or expiration of their respective employment with the Purchaser.
23.5Restraint Area means, with respect to the Vendor and each of the Directors, the geographical area of:
(a)     Worldwide;
(b)     Australia.
23.6Each covenant and restraint set out in this clause 23 has effect and is to be interpreted as a separate and independent covenant and restraint.
23.7The Vendor and each Director agrees that the prohibitions and restrictions set out in this clause 23 are fair and reasonable in the circumstances and necessary to protect the goodwill of the Business.
23.8If any of:
(a)     the several separate and independent covenants and restraints in this clause, are or become invalid or unenforceable for any reason then that invalidity or unenforceability will not affect the validity or enforceability of any of the other separate and independent covenants and restraints in this clause 23; and
(b)     the prohibitions or restrictions contained in this clause 23 is judged to go beyond what is reasonable in the circumstances and necessary to protect the goodwill of the Business but would be judged reasonable and necessary if any activity were deleted or the period or area were reduced, then the prohibitions or restrictions apply with that activity deleted or that period or area reduced by the minimum amount necessary.
23.9The prohibitions and restrictions contained in this clause 23 do not apply to the Vendor or any Director holding up to a maximum of 5% of the shares of any public company listed on Australian Stock Exchange Limited.
For the purpose of that clause the Vendor is defined as Nu Contacts. The Business is defined as the business, carried on by the Vendor, of the sale and distribution of contact lenses and contact lens care products from the premises at 763 South Road, Black Forest, SA, 5035. The directors, who are parties to the contract, include Mr Harous, Mr Smith and Mr Kostas Harous, being the directors of the Vendor.
It is to be noted that the purpose of the covenant is to protect the goodwill of the business of Nu Contacts acquired, under this agreement, by Hydron. Nu Contacts was to continue in existence under the new name of Smihar Pty Ltd.
It will also be noted that the period of restraint specified is different with respect to Nu Contacts as vendor on the one hand and the directors, including Mr Harous, on the other hand. In the case of the directors it is dependent upon the period of their employment by Hydron, which was to begin on the Completion Date (1 November 2002).
Clause 23.1 of the Sale and Purchase Agreement requires the Vendor and the directors to execute a Deed of Non-Competition. The deed between Hydron and Mr Harous was executed on the same day, namely 1 November 2002. The material clauses of that deed were clauses 2-7. They provide as follows:
2.     Undertaking
The Director agrees that he will not for the Restraint Period defined in clause 3 and in the Restraint Area described in clause 4:
(a)     Engage In any business or activity which is the same or similar to the Business or any material part of it, except to the extent required for the proper performance of his duties under the Employment Agreement;
(b)     solicitor, canvass, induce or encourage any person who is a director, employee or agent of Hydron or who was at any time during the six month period ending on the date of this Agreement a director, employee or agent of the Company, to leave the employment or agency of Hydron;
(c)     solicitor, canvass, approach or accept any approach from any person who is a customer of Hydron or who was at any time during the six month period ending on the date of this Agreement a customer of the Company, with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or
(d)     interfere with the relationship between Hydron and its clients, employees or suppliers.
3.Restraint Period
Restraint Period means the period of:
(a)     3 years from the termination or expiration of the Employment Agreement:
(b)     2 years from the termination or expiration of the Employment Agreement;
(c)     6 months from the termination or expiration of the Employment Agreement.
4.Restraint Area
Restraint Area means the geographical area of:
(a)World-wide;
(b)Australia.
5.Separate Covenants
5.1Separate Covenants
Each covenant and restraint set out in this Deed has effect and is to be interpreted as a separate and independent covenant and restraint.
5.2Severability
If any of:
(a)     the several separate and independent covenants and restraints in this Deed, are or become invalid or unenforceable for any reason, then that invalidity or unenforceability will not affect the validity or enforceability of any of the other separate and independent covenants and restraints in this Deed; and
(b)     the prohibitions or restrictions contained in this Deed is judged to go beyond what is reasonable in the circumstances and necessary to protect the goodwill of the Business but would be judged reasonable and necessary if any activity were deleted or the period or area were reduced, then the prohibitions or restrictions apply with that activity deleted or that period or area reduced by the minimum amount necessary.
6.Exclusion
The prohibitions and restrictions contained in this Deed do not apply to the Director holding up to a maximum of 5% of the shares of any public company listed on the Australian Stock Exchange Limited.
7.Acknowledgement and Indemnity
7.1Acknowledgement
The Director acknowledges and agrees that:
(a)     the prohibitions and restrictions set out in this Deed are fair and reasonable in the circumstances and are necessary to protect the goodwill of the Business;
(b)     he has or will receive a material and substantial financial benefit from the sale of the Business to Hydron in accordance with the Purchase Agreement.
(c)     he is aware that any breach of this Deed will result in Hydron suffering damage.
7.2Indemnity
The Director indemnifies Hydron against all losses, damages, expenses and legal costs (on a solicitor and own client basis and whether incurred by or awarded against Hydron) that Hydron may reasonably sustain or incur as a result, whether directly or indirectly, of any breach by the Director of this Deed.
The Employment Agreement referred to in the Deed is the Employment Agreement referred to below. “Engage in” is defined to mean “to participate, assist or otherwise be directly or indirectly involved as a member, shareholder, unitholder, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier”.
For the purpose of this agreement “the Business” is defined as meaning “the business of the sale and distribution of contact lenses and contact lens care products” formerly carried on by Nu Contacts. “The Company” is defined as meaning Nu Contacts. The purpose of this Deed is also to protect the goodwill of the business of Nu Contacts acquired by Hydron.
One is tempted to wonder what was the purpose of the Deed of Non-Competition with Mr Harous. In its material terms it did not differ in any material way from clause 23 of the Sale and Purchase Agreement. In clause 2(c) of the Deed of Non-Competition the words “who is a customer of Hydron or” do not appear in the Sale and Purchase Agreement . Counsel for Hydron indicated that he did not press for the inclusion of those words and that they should be excised from the Deed of Non-Competition. Apart from those words, which appear to be superfluous, clause 2(c) of the Deed of Non-Competition and clause 23.3(c) of the Sale and Purchase Agreement both appear to have been drawn in haste without proper contemplation of their effect. Mr Harous was to be employed by Hydron in a business which was now to include the business of Nu Contacts. He was being employed as Sales Director OPSM Group, to develop the whole of Hydron’s business with OPSM. Yet, if taken literally, the two clauses to which I have referred would prevent him from soliciting business from OPSM (a former customer of Nu Contacts) with a view to selling products developed by Hydron, being a business similar to the business of Nu Contacts, the subject of protection in both restraint clauses.
As I have said, the purpose of both clause 23 of the Sale and Purchase Agreement and the Deed of Non-Competition is to protect the goodwill of the Nu Contacts business for the benefit of Hydron, the new owner of that business. Although recital D to the Deed of Non-Competition recites that Mr Harous “has agreed … not to compete with Hydron or engage in certain activities following the sale of the Business to Hydron … ”, this can only mean not to compete with Hydron in its capacity as proprietor of the Nu Contacts business.
The protection of the goodwill of Hydron’s wider business was to come in the Employment Agreement mentioned below.
On 1 November 2002 Mr Harous also signed the Employment Agreement with Hydron. Clause 11 provides for termination of the contract. Clause 11.1 provides for summary termination in circumstances not presently relevant. Clause 11.2 provides for termination on notice as follows:
11.2   Termination on Notice
(a)     Either party may terminate this Agreement by giving six months notice.
(b)     The company may choose to pay the Employee an amount equal to six months salary in lieu of notice.
(c)     At the company’s discretion
(i)the Employee may be required to work through all (or part only) of the notice period; or
(ii)the company may make payment instead of the Employee working through the whole notice period (or the unworked balance of the notice period).
Besides a number of other typical clauses to be found in a contract of employment, clause 10 of the Agreement is as follows:
10.Restraint
(a)     In order to reasonably protect the goodwill of the company’s business and to reflect that the Employee has been the beneficiary of a which has provide substantial financial benefit to him, the Employee agreed that he will not without the prior consent of the Employer, directly or indirectly participate, assist or be interested in (whether as a sole operator, partner, associate, consultant, employee, independent contractor, agent, director or in any other capacity) the commission of each restricted activity during each restricted period in each restricted area.
(b)     The Employee acknowledges that the restraints imposed by this clause is fair and reasonable. Clause 10(a) is intended to take effect as if the obligation which would result from combining each restricted activity for each restricted period in each restricted area was set out separately and in full in that clause. Furthermore, each of those obligations arising in respect of restricted activities described in paragraphs (i) and (ii) of clause 10(e) is to be treated as a separate obligation.
(c)     If any of the obligations referred to in Clause 10(a) cannot be enforced, the enforceability of the other obligations will not be affected.
(d)     Each separate obligation referred to in Clause 10(a) is severable from the other obligations but all the separate obligations are cumulative in their effect, despite any overlap between them.
(e)     For the purposes of Clause 10(a) each of the following activities described in each paragraph (i) to (iii) inclusive is a restricted activity:
(i)soliciting the business of any client of the Employer, person or entity for similar services to those supplied by the company or by the Employer;
(ii)soliciting at any time any business whether sale or purchase of any interest in any lens manufacturing concern from any existing employee or agent of the Employer to leave the employment or agency of the Employer or any associated independent contractor who is in a contractual arrangement with the company to cease that contractual arrangement;
(iii)using or disclosing confidential information to the detriment or possible detriment of the company;
(f)     For the purposes of Clause 10(a) each of the following is a restricted period:
(i)three (3) years after the Employee’s employment with the Employer ends;
(ii)two (2) years after the Employee’s employment with the Employer ends;
(iii)six (6) months after the Employee’s employment with the Employer ends.
(g)     For the purpose of Clause 10(a) each of the following is a restricted area:
(i)the world;
(ii)Australia.
(h)     Nothing in this clause will limit the Employee’s obligations of confidentiality at common law nor prejudice the Employee’s obligations under Clause 5.
(i)    The Employer and Employee may mutually agree to reduce the period of restraint and such agreement must be made in writing.
The effect of clause 11 of the Agreement is to provide that the employment ends, for the purpose of subclause (f) of clause 10, at the time of expiry of the period of notice, notwithstanding that the employee may not be required to work during that period. If no work is required by the employer, the effective periods of restraint after ceasing work could therefore be increased by up to 6 months.
The purpose of this clause in the Employment Agreement is to protect the goodwill of Hydron’s business upon termination of Mr Harous’ employment, although the expression “the company” is not defined in the agreement. The defined short form name of Hydron is the “Employer”. This and the provisions of clause 10(e)(i) and (ii) indicate that this agreement was also prepared in haste without adequate attention to the meaning and effect of the words used. In clause 10(e)(i) the phrase “person or entity” appears to be superfluous, and again counsel for Hydron did not seek to rely on it. Clause 10(e)(ii) is incapable of any sensible meaning without substantial surgery to the subparagraph. It is not my function to re-write the clause, and at least that part of it must be void for uncertainty. It is not as though it has some obvious meaning which can be attended to by ignoring the obviously accidental insertion of a word or by inserting some appropriate punctuation.

If any of the three clauses is valid, it is not suggested that Mr Harous’ activities associated with Menicon Australia are not activities covered by each of the restraint clauses.
Validity of the clauses – uncertainty
Before considering the validity of the three clauses in question as being contracts in restraint of trade, it is necessary to address an argument of Mr Harous that the three clauses are void for uncertainty. The argument was not that just a particular subclause, such as clause 10(e)(ii) of the Employment Agreement, is void for uncertainty.
This type of clause is sometimes known as a “ladder” clause. It is said that the whole clause, in each of these cases, is void because the contract seeks to define the obligation through a series of inquiries as to what is enforceable, without adequately specifying the intention of the parties. In the Sale and Purchase Agreement, for example, leaving aside for the moment the different capacities in which certain activities may be engaged in, the agreement provides for three different periods of restraint in two different areas, thereby creating six combinations. The number of combinations is increased substantially if one takes into account the different capacities in which one might engage in a business or activity. By providing for that number of various combinations, it was said that there is no genuine attempt to define Hydron’s real need for protection, and Hydron may not leave the covenant indefinite so that the court has to set the limits[10].
[10] Cf Davies v Davies (1887) 36 Ch D 359
Mr Harous relies on the observations of Little J of the Supreme Court of Victoria in Peters Ice Cream (Vic) Ltd v Todd[11]:
In this case, however, the parties have not, in my opinion, by the use of the imprecise language employed, defined the promisor’s obligation, or defined it in such a way that the court can determine whether it exceeds or does not exceed the protection to which it may find the promisee was in fact entitled. They have, I think, left to the court the task of making their contract for them, and of carving out from time to time a distance which, within the restraint of trade doctrine, is reasonable. It is not for the court, however, to determine what protection could have been validly agreed upon between the parties. The function of the court is to determine whether a protection agreed upon between the parties is in law valid. The clause is, therefore, in my opinion, void.
[11] [1961] VR 485 at 490
In that case, however, the covenant was not to sell certain products “within a reasonable distance” from the defendant’s present place of business for a period of five years. That was not a ladder clause, but was nevertheless a clause which gave rise to uncertainty.
In Austra Tanks Pty Ltd v Running[12] the contract provided that the defendant should “not for the stipulated period engage in the business of the Partnership or any aspect thereof in the stipulated area”. The terms “the business of the Partnership”, “the stipulated area” and “the stipulated time” were each then defined through a series of variables which involved inquiries as to what was enforceable. The number of possible combinations was 82,152.
[12] [1982] 2 NSWLR 840
There was no provision in the contract that each combination constituted the separate covenant. As mentioned above, some covenants, for example as to area and time, demanded an inquiry as to whether that particular covenant was enforceable. The contract contained a further covenant:
6.Should any provision hereof be unenforceable by reason of its being void at Common Law on the grounds of public policy as a restraint of trade that provision shall be severed from each and every other provision of this agreement which is not so void.
However, the difficulty for the plaintiff in that case was that that severance provision could not be considered in isolation without regard to the conduct to be restrained or, in the case of area, the period of the restraint. As Wootten J observed[13]:
But it is not simply a restraint in respect of an area which is unenforceable, but a total covenant. One cannot make a decision about an area unless one knows the other terms of the covenant in which the area is embodied. What is it that the covenantor is forbidden to do in the area, and for how long? This covenant supplies no certain foothold to answer that question as the other ingredients move beneath one’s feet in the same way as the area, and the contract does not stipulate that the application of any one of the variables is to have priority over the application of the others.
[13] At 844
Even if the clause could be read as providing for separate covenants, there was no statement in the contract as to the priority of the variables. The contract, by its wording, contemplated only one covenant. The problem could not be solved by trying to decide which was the widest enforceable covenant intended. As Wootten J asked rhetorically[14]:
Does a 100 kilometre radius for one year give a wider covenant than a 10 kilometre radius for five years? How are ten years of tanks in situ (one of the products constructed and sold by the Partnership) to be weighed against four years of all the listed products?
[14] At 845
In each of the agreements in this case there is specific provision that each of the restrictions is to operate as a separate covenant[15]. In each of the agreements there is a provision that if one covenant is unenforceable, that will not affect the validity or enforceability of the others[16]. The Sale and Purchase Agreement[17] and the Employment Agreement[18] both contain specific severance provisions. While there is no specific covenant to that effect in the Deed of Non-Competition, clause 5.2(b) probably has a similar effect, especially when considered in the light of the heading to clause 5.2. These features distinguish these agreements from the type of agreement considered in Austra Tanks Pty Ltd v Running. That decision does not render these agreements void for uncertainty.
[15]Sale and Purchase Agreement clause 23.6; Deed of Non-Competition clause 5.1; Employment Agreement clause 10(b)
[16]Sale and Purchase Agreement clause 23.8; Deed of Non-Competition clause 5.2; Employment Agreement clause 10(c)
[17] Clause 28
[18] Clause 10(b)
In JQAT Pty Ltd v Storm[19] the restraint clause was contained in a contract of employment. It contained 18 possible combinations of service, period and area which were the subject of restraint. Clause 6.3 of the agreement provided:
6.3 The preceding sub-clause 6.2 of this Clause 6 shall be construed and have effect as if it were the number of separate sub-clauses which results from combining the commencement of sub-clause 6.2 with each sub-paragraph of paragraph (a) and combining each such combination with each sub-paragraph of paragraph (b) and combining each such combination with each sub-paragraph of paragraph (c), each such resulting sub-clause being severable from each other such resulting sub-clause, and it is agreed that if any of such separate resulting sub-clauses shall be invalid or unenforceable for any reason, such invalidity or unenforceability shall not prejudice or in any way affect the validity or enforceability of any other such resulting sub-clause.
[19] [1987] 2 Qd R 162
The Full Court of the Supreme Court of Queensland was not persuaded that the agreement manifested an intention that only one of the 18 possible subclauses should operate. On that basis the court distinguished Austra Tanks v Running (supra).
In the later case of Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd[20] Spender J referred to the decision in JQAT Pty Ltd v Storm (supra) and said[21], with which I respectfully agree:
The judgments of the Full Court in JQAT v Storm (supra) suggest that a threshold question in determining the certainty of a restraint of trade clause of the kind now before me, is whether the clause contemplates a single covenant to operate from the numerous combinations of conduct, time and area which are generated. If the clause contemplates a single covenant, then the covenant must provide a means by which to choose which of the combinations is to apply; otherwise the clause is void for uncertainty. A clause which contemplates a single covenant, being the widest restraint that is enforceable, will be uncertain “because in the absence of any statement as to the priority of application of the variables, it is not possible to say which covenant is widest”: Austra Tanks (supra) at 845. Such a clause may be open to separate public policy objection that the parties have left the court to fix the measure of the restraint.
If, however, the clause contemplates all of the combinations applying with severance of those found to be an unreasonable restraint of trade, then no uncertainty exists. The clauses operate cumulatively, with any overlap between the obligations thereby imposed not being regarded as an inconsistency of the kind discussed by Bowen LJ in Davies v Davies (supra) at 393.
[20] (1987) 17 FCR 505
[21] (1987) 17 FCR 505 at 520
As was the case in Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd, the agreements in this case expressly state that the respective clauses are to have effect as if they were separate covenants consisting of the several combinations. The agreements indicate an intention for all combinations to apply, subject to severance of any of them which become invalid or unenforceable for any reason. The covenants imposed are not inconsistent and are cumulative. On the authority of the above cases, they cannot be said to be uncertain.
As to the argument that such a structure nevertheless requires the court to determine what is reasonable or enforceable, and hence the extent of the operation of the clause, Spender J addressed that problem in Lloyd’s Ships Holdings as follows[22]:
The judgment of Connolly J [in JQAT v Storm] suggests that, provided the parties have agreed to sever those covenants that constitute an unreasonable restraint of trade, then the paring down of the covenantor’s obligation to what the court determines to be not unreasonable, does not amount to having the court fix the limits of the restraint. That conclusion may have the merit of not permitting a covenantor to escape its obligations in a case such as JQAT v Storm, where the total restraint imposed by the eighteen combinations involved a three month restraint in Queensland and New South Wales on the specified conduct. It seems to me to be very much a question of degree and dependent on the parameters of each such attempt, whether in truth the court is being asked to choose the extent of the restraint.
In my opinion, the question whether a technique of defining covenants in restraint of trade by combining different variables of conduct, time and space, and providing that each of the covenants so “generated” is subject to severance, is successful in defining enforceable restraints or is unsuccessful in so doing, comes down to whether the exercise amounts to a genuine attempt to define the covenantee’s need for protection, with the agreement as to severance as a precaution against the “all or nothing” nature of the court’s tests for reasonableness, or whether the exercise is simply one where the parties have left to the court the task of making their contract for them.
One might think the more numerous the variables, and the more mechanical and indiscriminate the combinations of variables, the more likely would be a conclusion that the exercise is of the latter kind.
[22] (1987) 17 FCR 505 at 522-523
I do not think that any of these clauses are of the type of which it can be said that the parties have left to the court the task of making their contract for them. The number of combinations is relatively few. On their face, the clauses appear to be a genuine attempt to define Hydron’s need for protection in respect of the various situations covered by the agreements. The severance provisions can be seen as a precaution against the “all or nothing” nature of the reasonableness test.
Accordingly, I do not consider that any of the restrictive covenants are void for uncertainty.
Validity of the restraint – public policy – general principles
The relevant principles to be applied in determining whether the contracts are void on the ground of public policy, as being contracts in restraint of trade, were not in dispute. In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd[23] Gibbs J, as he then was, said[24]:
The test to be applied in determining the validity of a restraint of trade was stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565 in a passage that has been cited with approval in many cases including, to name only recent decisions, Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 299, 307 and 318 and Buckley v Tutty (1972) 125 CLR 353 at 396. Lord Macnaghten said:
“All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed while at the same time it is in no way injurious to the public”.
[23] (1973) 133 CLR 288
[24] Ibid at 315
Gibbs J went on to say that it was not just the interests of the covenantee that were protected but those of the covenantor as well. He considered that it was permissible to consider, as part of the circumstances of the case, the quantum of consideration received by the covenantor and the effect of the agreement on the position of the covenantor, citing[25] a number of cases in support of that proposition.
[25] Ibid at 316
In this case, Hydron bears the onus of establishing that each restraint is reasonable as between the parties both as to the conduct sought to be restrained and the area in which and the period for which the restraint is to operate: Herbert Morris Ltd v Saxelby[26]; Buckley v Tutty[27].
[26] [1916] 1 AC 688 at 700, 707-708
[27] (1971) 125 CLR 353 at 377
As to whether there remains an onus on Mr Harous to show that the restraint is reasonable in the public interest, Lord Hodson said in SA Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd[28]:
It has been authoritatively said that the onus of establishing that an agreement is reasonable as between the parties is upon the person who puts forward the agreement, while the onus of establishing that it is contrary to the public interest, being reasonable between the parties, is on the person so alleging: see Herbert Morris Ltd v Saxelby [1916] 1 AC at 688, 700, 707-708, per Lord Atkinson and Lord Parker. The reason for the distinction may be obscure, but it will seldom arise since once the agreement is before the court it is open to the scrutiny of the court in all its surrounding circumstances as a question of law.
[28] [1968] AC 269 at 319
In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd Walsh J referred to the Nordenfelt formulation of the principle and said[29]:
[I]f 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 interest.
[29] (1973) 133 CLR 288 at 307
This passage was quoted with approval by Gleeson CJ, Gummow, Kirby and Hayne JJ in Peters (WA) Ltd v Petersville Ltd[30].
[30] (2001) 205 CLR 126 at 139
Walsh J in Amoco went on to say[31]:
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 [1894] AC at 565).
[31] (1973) 133 CLR 288 at 307
In any event, Hydron bears the onus of demonstrating that the restraint is to protect a legitimate interest of itself, and that the extent of the restraint goes no further than is necessary to protect that interest.
The courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between an employer and an employee than of such covenants entered into between a vendor and a purchaser[32]. This is probably because there are different interests to protect. In the case of sale of a business, the purchaser is entitled to protect himself against competition on the part of the vendor, in order to preserve, for a reasonable time, what it is that he has bought. With an employee, the emphasis is not so much on restriction of the activities for which the employee is trained and which might be competitive with those of the employer, but on the use of information obtained about the employer’s business which would be of subsequent use to the employee or to the employee’s new employer[33].
[32] Geraghty v Minter (1979) 142 CLR 177, Gibbs J at 185
[33] See Lindner v Murdock’s Garage (1950) 83 CLR 628, Latham CJ at 633; Butt v Long (1953) 88 CLR 476, Dixon CJ at 486
The validity of the restraint must be decided as at the date of the agreement imposing it[34]. However, as Gibbs J observed in Amoco[35] facts that occur after the agreement are not necessarily irrelevant, as they may throw light on the circumstances existing at the relevant date.
[34] Lindner v Murdock’s Garage (supra) at 653; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (supra) at 318; Geraghty v Minter (supra) at 179, 181
[35] (1973) 133 CLR 288 at 318
The Sale and Purchase Agreement and Deed of Non-Competition
I turn first to consider the restraints in the Sale and Purchase Agreement and the Deed of Non-Competition. Their stated purpose is the protection of the goodwill of the Nu Contacts business acquired by Hydron. The period of restraint commences, in each case, not from the date of transfer of the business, but from the termination of employment of Mr Harous by Hydron at some unspecified time in the future. It is the goodwill of Nu Contacts, not the goodwill of Hydron which is to be protected. The restraint can only be considered reasonable to the extent that it is necessary to protect that goodwill from the danger of the former owner or principal shareholder “exercising his personal knowledge and skill to its detriment”[36]. It is therefore necessary to consider the nature of the Nu Contacts business and what was intended as at 1 November 2002.
[36] Butt v Long (1953) 88 CLR 476, Dixon CJ at 486
What was transferred by the Sale and Purchase Agreement, besides some physical assets, was the goodwill of the Nu Contacts business. Goodwill is not susceptible of simple definition. Lord Eldon said in Cruttwell v Lye[37].
The good-will, which has been the subject of sale, is nothing more than the probability, that the old customers will resort to the old place.
[37] (1810) 17 Ves. 335 at 346; 34 ER 129 at 134
The name, the intellectual property, the location of the business, the nature of its product and the service which accompanies or follows the sale will all influence what comprises goodwill in a business, depending upon the nature of the business. In some cases, customer lists will be important, although in this case both Nu Contacts and Hydron were selling to the same market. What they had were different products or sometimes similar products under different names.

There are different ways in which a business may be acquired and used. In one case a business may be acquired and the owner or manager of that business may be employed by the new owner in running the same business with the intention of maintaining the business as a separate entity so that it continues to bear a close identity with the previous proprietor or its manager. Where the business is maintained as a separate and going concern in those circumstances, and particularly where product identification remains the same, especially if associated with the previous owner, there may be justification for relating the commencement of a restraint period to the termination of the manager’s employment by the new owner.
On the other hand, a business may be acquired with a view to integrating the business with the purchaser’s existing business because the purchaser may wish to extend its product lines, but all in the name of the purchaser’s existing business. In that case, the former business does not maintain its continued identity but becomes integrated with the business of the purchaser.
The proprietor or manager of the business acquired may well be employed by the purchaser in the expanded business of the purchaser. In that case, the continuation of the business acquired depends much more on the ability of the purchaser to integrate the former business with what becomes and what is perceived to be the purchaser’s own expanded business. Where the former manager or proprietor is employed by the purchaser in that situation and a restraint clause is inserted in the sale and purchase contract, it is still only the goodwill of the vendor’s business which needs protecting in the event of the termination of the contract of employment, and that may well have disappeared after a relatively short time, having become integrated with the business of the purchaser. In that situation there is little justification for a restraint clause being related to the length of employment by the purchaser of the previous owner or manager. All that could be justified is a restraint reasonably required to prevent the former owner or manager from leaving his new employment within a reasonably short time and setting up a new business identical to the one that has just been sold. The length of time for that protection cannot be dependent upon the length of employment of the former owner or manager by the purchaser.
The nature of the restraint clauses in the Sale and Purchase Agreement and the Deed of Non-Competition are of the type of clauses that one might expect to find in the first type of transaction which I have described. However, the nature of the acquisition of the business in this case was similar to the second type of transaction which I have described. I have already described the process of absorption which was to and which did in fact take place. It was never intended that the Nu Contacts business would continue to be identified as such. It was to become part of the Hydron business. Its life as a continuing and identifiable business which needed protecting as such was to be relatively short. It was to become absorbed into the goodwill of the Hydron business. What was intended by Hydron at the time was carried out in practice.
In all those circumstances there was no justification for a restraint of the nature contained in the Sale and Purchase Agreement and the Deed of Non-Competition, being a restraint that was quite open ended and could operate, depending on the length of employment of Mr Harous, for up to 20 years. Given the integration of the Nu Contacts business with that of Hydron, the employment of Mr Harous in the expanded Hydron business covering the whole range of Nu Contacts’ former products, the only substantial protection that Hydron could justify for the protection of the goodwill of the former Nu Contacts business would be for a relatively short fixed term, sufficient for the purchasing public who used to purchase Nu Contacts lenses and products to become accustomed to purchasing the same or similar products from Hydron. Thereafter, Hydron’s only legitimate concern would be the protection of its own goodwill for a period after the termination of the employment of Mr Harous.
Mr Slattery QC, for Hydron, effectively conceded that the “World-wide” restraint was invalid in these two agreements. That was, in my opinion, a proper concession. But even severing those sub-clauses so that the restraints only apply to Australia, the parties have adopted a form of restraint, dependent on the length of Mr Harous’ employment by Hydron, which is inappropriate for the circumstances surrounding the sale of this business. The period specified shows no real connection with the protection of the acquired goodwill of the Nu Contacts business. In all these circumstances, it is not a reasonable protection of the interests of the parties and it is not in the public interest. Each of the restraint clauses goes wider than is necessary to protect the goodwill of the Nu Contacts business. In effect, they attempt to protect the goodwill of the CVA and Hydron businesses and constitute a general restraint on competition with Hydron, although purporting only to protect the goodwill of the Nu Contacts business.
All three relevant restraint periods contained in each Agreement are quite open-ended. Each of the three periods specified are individual parts of separate covenants. The separate covenants are recognised as such in clauses 23.6 of the Sale and Purchase Agreement and clauses 5.1 of the Deed and Non-Competition. Clause 23.8 of the Sale and Purchase Agreement and Clause 5 of the Deed of Non-Competition contemplate that it is only a complete covenant in restraint that may be invalid and can therefore be severed. I do not, for example, consider that it is possible to sever internal parts of the covenants by deleting the words “from the termination or expiration of the Employment Agreement” in clause 3 of the Deed of Non-Competition. Even if this were possible, without rewriting the covenants there would be no certainty when any of the periods commenced.
In my opinion the whole of the restraint covenants in the Sale and Purchase Agreement and the Deed of Non-Competition are invalid.
The Employment Agreement
As in the case of the Sale and Purchase Agreement and the Deed of Non-Competition, counsel for Hydron did not seek to justify a world-wide restraint. That part of the restraint contained in the Employment Agreement is invalid and can be severed as provided in the Agreement.
The reference in clause 10(e)(i) to “person or entity” was not relied on. The words appear to be superfluous, but if they have the effect of broadening the category of persons or bodies from whom business cannot be solicited beyond clients of the employer, they constitute an unreasonable restriction. It would form a discrete “restricted activity” which can properly be severed under clause 20(e).
Clause 10(e)(ii) I have already held to be meaningless and uncertain. That too can be severed.
The restraint clause is therefore to be considered as if those parts identified in the preceding three paragraphs were not included.
Before returning to consider the terms of the restraint contained in the Employment Agreement between Hydron and Mr Harous, it is necessary to review the nature and circumstances of the restraint clause contained in the Service Agreement between CVA and Mr Harous dated 19 August 1999. That was an agreement entered into between Mr Harous and CVA, the shares in which were owned as to 51 per cent by AVCL and 49 per cent by Nu Contacts.
Under Clause 4.1 of the Constitution of CVA, AVCL was able to appoint two directors; Nu Contacts could appoint one. The Chairman was elected by the Directors[38] but he had no casting vote[39].
[38] Clause 8
[39] Clause 8.3
Mr Harous was to be and was appointed managing director. He was the director appointed by Nu Contacts. He would have been disqualified by interest from voting on entering into his service agreement with CVA. It was in fact negotiated by representatives of AVCL.
The Service Agreement was terminable on three months’ notice[40]. It expressly acknowledged that CVA consented to Mr Harous’ interest and involvement in the operation and day-to-day management of Nu Contacts[41].
[40] Clause 2.2
[41] Clause 4.2
Clause 12 bound Mr Harous to the provisions of Schedule 3 of the agreement, in which the relevant restraint appeared. The material parts of that schedule provided as follows:
1.The Executive shall not without the prior written consent of the Board directly or indirectly at any time during the Relevant Period:
(a)     solicit away from the Company or any Group Company; or
(b)     endeavour to solicit away from the Company or any Group Company; or
(c)     employ or engage; or
(d)     endeavour to employ or engage,
any Key Personnel.
2.The Executive shall not without the prior written consent of the Board directly or indirectly at any time within the Relevant Period:
2.1    (a)     solicit the custom of; or
(b)     deal with,
any Relevant Customer or Prospective Customer in respect of any Relevant Goods or Services; or
2.2    (a)     interfere; or
(b)     endeavour to interfere,
with the continuance of supplies to the Company and/or any Group Company (or the terms relating to those supplies) by any Relevant Supplier.
3.The Executive shall not without the prior written consent of the Board directly or indirectly at any time within the Relevant Period engage or be concerned or interested in any business within the Relevant Area which competes with the Business Provided that the Executive may hold (directly or through nominees) by way of bona fide personal investment in any security issued for public subscription by an authorised trustee corporation and up to three per cent. of the issued shares, debentures or securities of any class of any company whose shares are listed on a recognised Stock Exchange. For the avoidance of doubt the existing business of Nu Contacts Australia Pty Ltd at the time of execution does not complete with the business of the Company.
4.4.1     The Executive acknowledges (having taken appropriate legal advice) that the provisions of this Schedule are fair and reasonable and necessary to protect the goodwill and interests of the Company and the Group Companies and shall constitute separate and severable undertakings given for the benefit of the Company and each Group Company and may be enforced by the Company on behalf of any of them.
4.2     If any of the restrictions or obligations contained in this Schedule is held not be valid on the basis that it exceeds what is reasonable for the protection of the goodwill and interests of the Company and the Group Companies but would be valid if part of the wording were deleted then such restriction or obligation shall apply with such deletions as may be necessary to make it enforceable.
4.3     The Executive acknowledges and agrees that he shall be obliged to draw the provisions of this Schedule to the attention of any third party who may at any time before or after the termination of the Executive’s employment hereunder offer to engage the Executive and for whom or with whom the Executive intends to work.
It is not necessary to record the definition of all terms used and defined in Schedule 3. However, “Relevant Area” was defined as meaning:
(a) Australia; and
(b)any other country in respect which the Executive has carried on his duties hereunder for a period of three months (in aggregate) at any time during the period of 12 months prior to the Termination Date.
“Relevant Period” was defined as meaning:
The period of 12 months from the Termination Date less any period during which the Executive has not been provided with work pursuant to clause 3.4 of this Agreement.
The purpose of that Schedule was to protect the business interests and goodwill of CVA. As mentioned earlier, at the time that the Agreement was entered into, AVCL was a wholly owned subsidiary of Aspect Vision Holdings Ltd, which in turn, by a series of holding companies, was owned by the Cooper Companies Inc, a United States based company with subsidiary companies throughout the world. The evidence was, however, that AVCL management operated independently until some time in 2001.
In early 2002 Hydron also became a wholly owned subsidiary, by way of several holding companies, of Aspect Vision Holdings Ltd, and hence part of the Coopervision Group.
It will be remembered that the Share Option Agreement, entered into at the same time as the Service Agreement, also contemplated the possible acquisition by ACVL of the whole of Nu Contacts’ shares in CVA between 1 November 2002 and 1 May 2003. In fact, the date on which the option could be exercised was advanced by one month. Its rights under the Agreement were assigned to Hydron which then in fact exercised the option.
There were some similarities between the circumstances surrounding the CVA Service Agreement and the Employment Agreement. CVA and Hydron were both engaged in the same business. Ultimate control of both businesses was vested in the same company. Mr Harous was engaged as Managing Director of CVA and as Sales Director OPSM Group by Hydron, although he enjoyed the same salary and conditions in Hydron as Mr Kotow, the Managing Director of Hydron for the Pacific Rim Region.
There were also differences. Mr Harous had day to day control of the operations of CVA but was responsible only for one client, although the largest client, of Hydron. However, he was dealing, in respect of that client, with the whole product range of Hydron. He had benefited substantially as the major shareholder in Nu Contacts upon sale of the business of Nu Contacts to Hydron. The Nu Contacts business acquired by Hydron presumably had substantial value to Hydron by way of increasing its own volume of sales of similar or identical products previously manufactured and sold by Nu Contacts. I have already indicated what was intended and what in fact happened to the absorption of the Nu Contacts business into that of Hydron.
As the major shareholder in Nu Contacts Mr Harous had also benefited from the sale of Nu Contacts’ shares in CVA. It appears that CVA had been a successful operation. The arrangement entered into when the joint venture was created provided a substantial incentive to Mr Harous to manage the company well and to re-establish AVCL’s presence in the contact lens market in Australia. It appears that he succeeded in that. Payment of a substantial sum for the shares in CVA was the reward for that effort.
What now required protection was Hydron’s business from unreasonable competition by Mr Harous or by any subsequent employer of Mr Harous upon termination of Mr Harous’ employment with Hydron. That was the type of protection that CVA also needed and which was imposed by means of Schedule 3 of the CVA Service Agreement.
However, there were substantial differences between the two restraints. The period of restraint in the CVA Service Agreement was twelve months, compared with six months, two years and three years in the Employment Agreement. The period of restraint in the CVA Service Agreement included any period during which Mr Harous was not provided with work following the giving of notice of termination of the Agreement. The Employment Agreement did not. The area of restriction, at least outside Australia, was much more restricted in the CVA Service Agreement than in the Hydron Employment Agreement.
The question that must be asked is whether there was any justification for the more onerous conditions contained in the Employment Agreement. In my opinion, there was none. If anything, the differences mentioned above required a less onerous restraint in the case of Hydron than in the case of CVA. Mr Harous was the Managing Director of CVA, being responsible for the sale of Coopervision Group products throughout Australia to all customers. Whilst employed by Hydron, he was responsible for similar range of products but for sales to one company only. Whilst substantial prices were paid by Hydron for the business of Nu Contacts and by AVCL for the shares in CVA, the justification for that appears not to have been the obtaining of Mr Harous’ services but the perceived commercial advantage in increasing the volume of sales of the types of products sold by Nu Contacts, and as a reward for success in increasing the business of CVA, now also to be integrated with the business of Hydron. The agreement between the parties that the first restraint was reasonable, without more, presents some difficulty in attempting to justify the reasonableness of the second restraints, insofar as they were to operate for periods of two and three years. However, whilst that is a relevant consideration, I do not regard it as conclusive.
I return to a consideration to the factors relevant to the validity of a restraint on an employee. I have already referred to the recognition of the different interests to be protected by a restraint contained in an employment contract and by one contained in a contract for the sale of the business. As a number of commentators have observed, the essential purpose of a post-employment restraint is quite different from that associated with the sale of a business. H M Blake, “Employee Agreements Not to Compete”[42] summarises the objective of a post-employment restraint in this way:
Its objective is not to prevent the competitive use of the unique personal qualities of the employee – either during or after the employment – but to prevent competitive use, for a time, of information or relationships which pertain peculiarly to the employer and which the employee acquired in the course of the employment. Unlike a restraint accompanying a sale of goodwill, an employee restraint is not necessary for the employer to get the full value of the thing being acquired – in this case, the employee’s current services. The promise not to act in certain ways after terminating employment is something additional which the employer may or may not feel to be important and worth bargaining and paying for, depending on the circumstances. A sale of goodwill implies some obligation to deliver the thing sold by refraining from competition, just as an employment contract implies some obligation not to impair the value of the services rendered by competitive activity during the period of employment. But no such commitment not to compete after employment can be implied from an ordinary employment contract.
[42] (1960) 73 Harv LR 625 at 647; See also JD Heydon, “The Restraint of Trade Doctrine” (2^nd Edition) Chapter 4
As Heydon[43] observes, “covenants which restrain an ex-employee from competition with his employer are invalid unless they are necessary to prevent disclosure of trade secrets or use of a connexion built up by the employee with customers”. Not only will they be necessary to prevent disclosure of trade secrets, but they may also be necessary to prevent the use by the employee of such trade secrets in any business or employment subsequently engaged in by the employee.
[43] Ibid at 66
I turn to the restraints contained in the Employment Agreement. The first observation is that its essential features are designed to mirror the provisions in the Sale and Purchase Agreement and the Deed of Non-Competition. As I have pointed out, those provisions may be adequate for the sale of goodwill in some circumstances, but not in the circumstances surrounding those agreements. One must question whether any thought was given to the essential difference between and the purposes behind restraints accompanying the sale of goodwill, on the one hand, and the restraints on termination of employment, on the other.
Mr Harous had spent most of his working life involved in the manufacture and sale of contact lenses and contact lens products. He knew the industry well. That was not something which he had learned through his employment with Hydron. There could be no justification for a restraint which merely restricted Mr Harous’ ability to exercise the skills that he had gained in competition with Hydron or which restricted him from utilising his knowledge of the industry gained by his general experience in it. What Hydron was entitled to protect, and to do so by imposing a reasonable restriction on his employment in the field, was Mr Harous’ knowledge of the Hydron products and in particular his knowledge of commercially sensitive information such as pricing structures, marketing strategies, sales promotions, intended product development and other factors peculiar to Hydron, which I will collectively call Hydron’s trade secrets. It was also entitled to a reasonable period of restraint for a replacement employee of Mr Harous’ stature to build the necessary relationship of confidence with key personnel in OPSM. The application of the knowledge of Hydron’s trade secrets in a competitor’s business and his immediate access to OPSM could adversely affect the business of Hydron. I have already referred to the general nature of the trade secrets of which Mr Harous was aware. No evidence was led as to their detail, nor any evidence from which one could infer the period of time over which the trade secrets might become stale and useless in the hands of a former employee.

In this industry I would not regard client lists as falling into the category of trade secrets. The “clients” were all optometrists whose names are readily available to any member of the public. Mr Harous could not be prevented from using his knowledge as to who were optometrists. However, what would comprise part of the employer’s trade secrets is the volume of sales from time to time of the employer’s products to a particular optometrist and to OPSM.
So far as Hydron’s relationship with OPSM is concerned, there was evidence that Mr Covey, who took over Mr Harous’ role, had cemented relationships with relevant key people in OPSM by June 2004. That aspect of Mr Harous’ employment would not justify a restraint of 2 years from either 18 February 2004, being the date of expiry of the original notice, or 24 October 2003 when Mr Harous was paid out his entitlements.
It is clear, from his position in Hydron as one of the Hydron management team, that Mr Harous became aware of Hydron’s trade secrets and that that information could be applied to the commercial advantage of a competitor. However, as Hydron bears the onus of proof as to the reasonableness of the restraint in the interest of the parties, it bears the onus in this case of showing, on the balance of probabilities, that such information in the hands of Mr Harous would justify a restraint covering the whole of Australia for periods of three and two years, or possibly more, depending on the circumstances of the termination of employment. The six months period of restraint passed with Mr Harous not having been in breach of it.
In the absence of evidence of that type I cannot find that either restraint is reasonable. Indeed, the only guide I have as to the reasonableness of a restraint in this industry and in similar circumstances where a person is entrusted with similar knowledge is the nature of the restraint agreed between the parties in the CVA Service Agreement, one of whom is the same party to this agreement, and the other of whom at the relevant time was effectively controlled by the same ultimate parent company as Hydron.
In the circumstances I cannot be satisfied that the restraints contained in the Employment Agreement, other than the six months’ restraint, are reasonable. It follows that the plaintiff is not entitled to the declaratory or other relief that it seeks. There will therefore be judgment for the defendant on the claim.
I do not consider that it is necessary to deal with the defendant’s counterclaim for relief under the Trade Practices Act. If it were necessary, a declaration could be made to the effect that certain parts of the Agreements are invalid. However, I consider that that is going further than is necessary in the circumstances. It may be that the several restraints restricted to a period of six months would be valid, although I would not wish to preclude any argument which is not yet been put to me that there is some further invalidity in the breadth of the conduct sought to be restrained. In the circumstances, it is not necessary to rule on the validity of any restraint based on a six months’ prohibition. It would therefore not be appropriate to make any declaration as to the validity of the restraints. The defendant’s interests in the present proceedings are adequately served by merely dismissing the plaintiff’s claim.