Kingdom Animalia LLC v Mecca Brands Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2022 0001

KINGDOM ANIMALIA LLC	Applicant
v
MECCA BRANDS PTY LTD (ACN 077 859 931)	Respondent

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JUDGES:	NIALL, SIFRIS and MACAULAY JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	17 November 2022
DATE OF JUDGMENT:	17 March 2023
MEDIUM NEUTRAL CITATION:	[2023] VSCA 55
JUDGMENT APPEALED FROM:	[2022] VSC 761 (M Osborne J)

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CONTRACT – Restraint of trade – Exclusive distribution agreement – Respondent exclusive distributor and retailer of applicant’s cosmetic products – Rolling [redacted]-year term for exclusive distribution agreement with [redacted]-year notice of termination period – Whether exclusive distribution arrangement an unlawful restraint of trade – Whether judge erred in identifying respondent’s legitimate interest requiring protection by the restraint – Whether the judge erred in finding the restraint reasonable as affording no more than adequate protection for respondent’s legitimate interest – No error by judge in finding the restraint reasonable – Leave to appeal granted but appeal dismissed.

CONTRACT – Construction – Severance – Incomplete clause concerning force majeure – Trial judge held incomplete clause was severable from agreement – No arguable error – Leave to appeal refused.

Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288; Queensland Cooperative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260; Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd (2012) 41 VR 1, discussed.

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Counsel
Applicant:		Mr JWS Peters KC with Mr A Di Pasquale
Respondent:		Mr N De Young KC with Mr J Claridge
Solicitors
Applicant:	Baker McKenzie
Respondent:	Arnold Bloch Leibler

TABLE OF CONTENTS

Introduction and summary

Relevant clauses in the agreement

Was the restraint imposed on Hourglass under cl 1 of the Agreement an unlawful restraint of trade?

Did the judge err in identifying the legitimate interest?

Did the judge err in assessing the operation of the restraint or its reasonableness?

Did the judge err in severing cl 16.4 and failing to find that the entirety of the agreement was void for uncertainty?

Findings at trial

Parties’ submissions

Applicable legal principles

Analysis

Conclusion

NIALL JA
SIFRIS JA
MACAULAY JA:

Introduction and summary*

A judge of the Trial Division of this Court held that a covenant within an exclusive distribution agreement made between the applicant (‘Hourglass’),[1] an American manufacturer of cosmetics, and the respondent (‘Mecca’), an Australian importer and retailer of cosmetic products, was not void as an unlawful restraint of trade.
*This judgment contains a number of redactions for reasons of confidentiality.
[1]Hourglass Cosmetics is the trading name of the applicant, Kingdom Animalia LLC.
In 2015 Hourglass and Mecca effectively renewed an earlier agreement made between them in 2010 (with some variations) for a further term of [redacted] years. Under the 2015 exclusive distribution agreement (‘the EDA’), Hourglass agreed to fulfil any orders made by Mecca for the supply of Hourglass’ cosmetics, and Mecca agreed to sell and distribute Hourglass’ cosmetics in Australia and New Zealand (‘the territory’). By cl 1 of the EDA, for the duration of the agreement Hourglass agreed not to give any other person the right to purchase Hourglass’ products for distribution and resale in the territory and further agreed to refer to Mecca orders received for its cosmetics from any customer in that territory (‘the covenant’).
In addition to contending that the covenant was an unlawful restraint of trade, Hourglass also argued that a clause in the agreement concerning termination, cl 16.4, was void for uncertainty, rendering the entire agreement void. While accepting that cl 16.4 was uncertain, the judge nevertheless considered that it could be severed from the agreement without rendering the whole agreement unworkable.
In substance, Hourglass seeks leave to appeal the decision on the bases that the judge erred in finding that the covenant was not an unlawful restraint of trade and in determining that cl 16.4 was severable.[2]
[2]The full terms of the applicant’s five proposed grounds of appeal are set out below at [27] and [69].
For its part, Mecca filed a notice of contention by which it contended that the trial judge erred in finding that the doctrine of restraint of trade applied to the agreement at all.
For the reasons that follow, we would grant leave to appeal in respect of the restraint of trade issue but dismiss the appeal. We would not grant leave to appeal in respect of the proposed grounds relating to the severance issue. It is unnecessary to decide the issue raised by the notice of contention.

Relevant clauses in the agreement

On 3 February 2010 the parties made their first agreement whereby Hourglass appointed Mecca as its exclusive distributor and reseller of Hourglass cosmetic products in the territory. It was a 17-paragraph agreement to remain in force for a term of [redacted] years from the date of receipt of the first order with a provision for renewal.
Following negotiations in 2015, Mecca sent Hourglass a letter dated 7 June 2015 proposing variations to the existing agreement. Hourglass signed that letter on 6 August 2015 signifying its agreement to those variations. The variations replaced the existing cl 2 concerning the duration of the agreement and included a new cl 11A in relation to a mutual right to terminate in the event of a change of control of the contracting entities. Otherwise, the EDA was in the same terms as the 2010 agreement.
Accordingly, from 6 August 2015 the EDA came into effect for a rolling [redacted] year term as prescribed by the new cl 2 (see below).
The full terms of the covenant were contained in cl 1:
The Manufacturer [Hourglass] grants to the Distributor [Mecca] the sole and exclusive right to purchase the Manufacturer’s products as per appendix 1, at the price and on the terms specified in Appendix 2 for the distribution and resale in Australia and New Zealand whilst the Agreement remains in force. The Manufacturer must not give any other person any rights that are inconsistent with the rights granted to the Distributor under this Agreement. The Manufacturer must refer to the Distributor any orders for the product which it receives from a customer in Australia and New Zealand. The Manufacturer must not allow or permit any person other than the Distributor to distribute and/or resell the products listed in appendix 1 in Australia and New Zealand...
Appendix 1 stated:
All Hourglass Cosmetics Branded Products.
Appendix 2, entitled ‘Price and Payment’, stated:
[redacted]
Payment 60 days from receipt of invoice (subject to clause 8.5).
Wholesale price will not increase for 12 months from placement of first order.
As mentioned, the provision relating to the duration of the agreement was one of the two provisions that were varied between the 2010 agreement and the 2015 version. Clause 2 of the EDA provided for a [redacted] year term that reset every anniversary of the agreement with either party having to provide [redacted] years’ notice of their intention to terminate the agreement. Its full terms were:
2. Term
2.1The Agreement commences on the date of this Agreement (‘Commencement Date’), and continues subject to the duration(s) and processes as set out as follows (‘Term’):
(a)[redacted] Year Rolling Term: On the Commencement Date, there will be [redacted] years remaining for the Term, provided that on the anniversary of the Commencement Date and on each and every anniversary thereafter (each a ‘renewal trigger date’), the Term shall automatically renew so that, on each and every of such renewal trigger date(s), there automatically is, and will be, [redacted] years remaining for the Term.
(b) Termination Trigger: Following the date that is not earlier than [redacted] year following the Commencement Date, a party may terminate this Agreement by providing the other party with [redacted] years [sic] written notice of termination, and in those circumstances the Agreement will come to an end at the expiry of such [redacted] year period.
Clause 3 contained Mecca’s obligations:
3The Distributor agrees that it will at all times during the continuance in force of this agreement:
3.1Sell or distribute the Manufacturer’s products (or any of them) from the Distributor’s retail outlet(s), internet sites, and/or mail order catalogue selected from time to time by the Distributor...
3.2Manage and pay for the launch and ongoing marketing of the Manufacturer’s brand in the Australian and New Zealand marketplace to the best of its abilities consistent with the Distributor’s commercial and business objectives. This includes managing the initial and ongoing PR, training of staff, merchandising the brand in line with its international standards, and marketing the brand in line with its international standards as it sees fit.
3.3Pay for the shipping of the product ex works.
Hourglass’ obligations under the EDA were set out in cl 4, relevantly:
4.Manufacturer undertakes and agrees that it will:
…
4.2Fulfil an order placed by the Distributor if the ordered products are in stock or reasonably available to the Manufacturer.
4.3[P]rovide the Distributor free of charge with a reasonable quantity of all standard point of sale materials (such as tester displays and tester products), press product, colour copies of international PR magazine tear sheets, brochures, price lists, and other sales material which it uses from time to time.
4.4[R]eimburse the Distributor for any customer returns, damaged goods, faulty goods, live products converted to tester, and press products sent out.
Clause 7 allowed Mecca to return ‘slow moving products’ to Hourglass and be refunded for the purchase of those products.
Clause 12.5 provided each party the right to end the agreement due to an adverse event including a force majeure, as follows:
12Either party may end this agreement immediately if any of the following occurs:
…
12.5 In accordance with Clause 16, if the other party is unable, for a continuous period of 28 days, to distribute the product because of a Cause Beyond the Reasonable Control of the party.
A Cause Beyond the Reasonable Control of a party included:
… an act of God, strike, lockout, other industrial disturbance or difficulty, war, act of public enemy, blockade, revolution, riot, insurrection, civil commotion, lightning, storm, flood, fire, earthquake, explosion, embargo, unavailability of any essential equipment of materials, unavoidable accident, lack of transportation, or anything done or not done by or to a Person, government or other competent authority, except the party relying on force majeure.
Clause 16 made provision for the liability of the non-performing party in respect of a force majeure event as follows:
16 A party is not liable for failure to perform, or delay in performing, an obligation (except an obligation to pay money), if each of the following conditions is satisfied:
16.1The failure or delay arose from a Cause Beyond the Reasonable Control of that party, as defined in Clause 12.5.
16.2 The party took all reasonable precautions against that cause and did its best to mitigate its consequences. This does not require the party to settle a labour dispute if, in the party’s opinion, that is not in its best interests.
16.3 The party gave each other party notice of the cause as soon as practicable after becoming aware of it.
16.4 If the cause and resulting failure or delay lasts more than [insert period], the party is entitled to end this document immediately by giving each other party written notice.
(emphasis added).
The period of time for cl 16.4 was never completed.

Was the restraint imposed on Hourglass under cl 1 of the Agreement an unlawful restraint of trade?

The applicable principles are well established[3] and were not in dispute. Stated shortly:
(a)where an agreement contains a covenant which restrains one party from freely engaging in trade in respect of its products or services, the party receiving the benefit of the covenant carries an onus to justify the restraint;
(b)to do so, the covenantee must demonstrate that the restraint is reasonable in reference to the interests of both the parties and the public,[4] in the sense that it affords no more than adequate protection for its legitimate interests; and
(c)the time for assessing reasonableness is the date of entry into the restraint.
[3]Herbert Morris Limited v Saxelby (1916) 1 AC 688, 707; Esso Petroleum Co Limited v Harpers Garage (Stourport) Ltd [1968] AC 269, 301 (‘Esso’); Butt v Long (1953) 88 CLR 476, 486; [1953] HCA 76; Buckley v Tutty (1971) 125 CLR 353, 376–7; [1971] HCA 71; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, 295 (‘Amoco’); [1973] HCA 40; Queensland Cooperative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 (‘Pamag’); [1973] HCA 24; Specialist Diagnostic Services Pty Ltd v Healthscope Pty Ltd (2012) 41 VR 1, [46]; [2012] VSCA 175.
[4]Hourglass relied only on the first limb of the test relating to the interests of the parties and raised no grounds based on the public interest under the second limb: Reasons [6].
At least since the United Kingdom’s House of Lords decision in Esso there has been an ongoing debate about the existence and content of a threshold test — that is, whether the restraint of trade doctrine applies at all to the contract in question so as to require the covenantee to justify the reasonableness of the restraint. That matter is the subject of the notice of contention, the judge having held that the restraint of trade doctrine did apply to the EDA.[5]
[5]Reasons, [129].
Before analysing the reasonableness of the restraint, the judge engaged in a careful and extensive review of cases in the United Kingdom, Hong Kong and Australia concerning the existence of, and test for, the threshold question.[6] The judge noted a number of difficulties associated with the application of the threshold question and with each of the posited tests for determining whether the threshold had been passed. Ultimately, the judge held that, assuming the threshold test was part of Australian law — applying what has been styled ‘the trading society test’ — Mecca had not established that the EDA belonged to a class of contract to which the restraint of trade doctrine did not apply.[7] Thus, the restraint of trade doctrine did apply.
[6]Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1966] AC 269 (‘Esso’); Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 (‘Amoco’); [173] HCA 40; Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012) 41 VR 1 (‘Specialist Diagnostic’); [2012] VSCA 175; Queensland Cooperative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 (‘Pamag’); [1973] HCA 24; Quadramain Pty Ltd v Sevastapol Investments Pty Ltd (1976) 133 CLR 390; [1976] HCA 10; Australian Capital Territory v Munday (2000) 99 FCR 72; [2000] FCA 653; Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 (‘Adamson’); ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640; Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126 (‘Peters WA’); [2001] HCA 45; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574 (‘Peters American Delicacy’); [1947] HCA 62; Kosciuszko Thredbo Pty Ltd & Anor v ThredboNet Marketing Pty Ltd & Anor (2014) 311 ALR 656; [2014] FCAFC 87; Panayiotou and others v Sony Music Entertainment (UK) Limited [1994] EMLR 229; Hummingbird Music Limited v Dino Acconci [2009] HKCA 587; One Money Mail Ltd v RIA Financial Services [2015] EWCA Civ 1084; Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36 (‘Peninsula Securities’); Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227 (‘Quantum’); Earth Force Personnel Pty Ltd v E A Negri Pty Ltd [2010] VSC 426.
[7]Reasons, [124].
We do not think it is necessary to consider whether there is a separate threshold question to be determined before considering the reasonableness of a covenant that restrains trade, still less whether the restraint of trade doctrine applies to this particular agreement. There is much to be said for the observations made by the judge about the overlap between the threshold question and the reasonableness question, and the possible inutility of applying both iteratively.[8] In this, the judge is not alone.[9]
[8]Reasons, [117]–[122].
[9]See, JD Heydon, ‘The Frontiers of the Restraint of Trade Doctrine’, (1969) 85 Law Review Quarterly 229 and TF Bathurst AC KC ‘Problems with Restraint of Trade’, (2022) Commercial Law Quarterly 4, 7.
We find it convenient to proceed directly to the question of the reasonableness of the restraint assuming, if assumption is necessary, that the restraint of trade doctrine applies to the EDA. Because, as we will explain, the judge was correct to find that the restraint is reasonable, it is unnecessary to add to the debate about the existence and content of a threshold test.
With reference to the test of reasonableness (as summarised above in [21]), Hourglass challenged the judge’s:
•identification of Mecca’s ‘legitimate interest’ (ground 1);
•analysis of the operation of the restraint (ground 2); and
•assessment of the reasonableness of the restraint in light of its true operation and what was in fact claimed to be adequate for the protection of Mecca’s legitimate interest (ground 3).
Thus, Hourglass’ three grounds devoted to the restraint of trade issue, were:
Ground 1: Error in identification of legitimate interest
1.1.In determining that Mecca has a legitimate interest capable of protection by a restraint of trade, the learned primary judge erred in having regard to the activities of Mecca, being the marketing and stocking of Hourglass products, which Mecca was not obligated to perform under the EDA.
1.2.The learned primary judge should instead have found that Mecca’s legitimate interest capable of protection by a restraint of trade was limited to those connected to Mecca’s obligations in accordance with the EDA.
Ground 2: Error in assessing the operation of the Restraint
2.1.In the alternative to Ground 1, if Mecca has a legitimate interest capable of protection by a restraint of trade, in determining that the Restraint was reasonable in the interests of the parties and hence enforceable, the learned primary judge erred in not analysing the operation of the Restraint in the contingency where Mecca determines in its discretion to not order or stock Hourglass products either in part of entirely and/or to not market Hourglass products.
2.2.The learned primary judge should instead have found that as the Restraint operated in contingencies where Mecca had no legitimate interest requiring the protection of the Restraint, that the Restraint was not reasonable in the interests of the parties.
Ground 3: Error in assessing reasonableness of the Restraint
3.1.In the further alternative to Ground 1, in determining that the Restraint was reasonable in the interests of the parties and hence enforceable, the learned trial judge erred in finding that Mecca had discharged its onus in circumstances where:
3.1.1.Mecca provided no evidence as to the necessity of the Restraint in the contingency referred to in Ground 2; and/or
3.1.2.Mecca did not quantify its purported investment in the Hourglass brand; and/or
3.1.3.The learned trial judge gave inordinate weight to the voluntary nature of the Restraint; and/or
3.1.4.The learned trial judge gave weight to the irrelevant evidence that the Restraint operated during the term of the EDA and in the markets which Mecca operates, in circumstances where Mecca was not obligated to purchase Hourglass products for the duration of the EDA, and not obligated to make Hourglass products available in those markets.
3.2.The learned primary judge should instead have found that Mecca had not discharged its burden so as to establish that the Restraint was reasonable in the interests of the parties.

The same or similar contentions were advanced at trial. As recorded by the judge, at trial Hourglass argued that:
…
(a)The Distribution Clause (cl 3.1) restricts, on the one hand, Hourglass from selling even unwanted products or unused products in Australia or New Zealand, yet places no concurrent obligation on Mecca to sell Hourglass’ products through its online channels, nor does it require Mecca to stock the entire range of Hourglass products. Hourglass argues that in effect it entitles Mecca to sell whichever Hourglass products howsoever it chooses it:
(b)Mecca’s obligations in relation to marketing as set out in the Marketing Clause (cl 3.2) only require Mecca to market Hourglass’ products to the best of Mecca’s abilities consistent with the distributor’s (ie, Mecca) commercial and business activities; Mecca’s obligations in relation to PR, training, merchandising, and marketing are subject to being ‘in line with its international standards as it sees fit’;
(c)Hourglass is restrained throughout the term of the agreement from allowing any person other than Mecca to distribute or resell Hourglass products in Australia or New Zealand, and is obliged it to refer to Mecca any orders for the product which it receives from a customer in Australia and New Zealand, and Hourglass is prevented from giving any other person any rights that are inconsistent with the rights granted to Mecca; and
(d)the terms of the EDA obliged Hourglass:
(i)to fulfil orders placed by Mecca (cl 4.2);
(ii)to provide Mecca free of charge with a reasonable quantity of all standard point of sale materials, tester and tester products (cl 4.3); and
(iii)to allow Mecca to return at its expense ‘slow moving stock and if any product is returned Mecca can get either a full refund or choose another product as its replacement’ (cl 7).
Further, Hourglass point to the possibility of a divergence of commercial interest between Mecca and Hourglass in circumstances where Hourglass decides to end the agreement by giving the requisite termination notice. Hourglass submits that in that event, Mecca’s commercial interests would lie in Mecca promoting the remaining brands to the exclusion of Hourglass, which would remain restrained throughout the balance of the notice period. Hourglass submitted that there is nothing in either the Distribution Clause (cl 3.1) or the Marketing Clause (cl 3.2) that protects it from such conduct during the notice period.[10]
[10]Reasons, [62]–[63].
Before the trial judge, Mecca submitted that:
…
(b) in any event, the Restraint is reasonable because:
(i)Mecca has a legitimate interest in maintaining its end-to-end service to Hourglass and its investment in launching, marketing and distributing products in accordance with the end-to-end model under the EDA;
(ii)the Restraint goes no further than is reasonably necessary to protect Mecca’s legitimate interest in that:
A. the covenant is limited to the continuance of the EDA;
B. Mecca agrees to provide the end-to-end service on an ongoing basis during the continuance of the EDA; and
C. the covenant is limited to the territories in respect of which Mecca provides the end-to-end service to Hourglass (Australia and New Zealand); and
(c)in any event, the fact that Hourglass agreed to the Restraint including in the 2015 variation is a circumstance of considerable weight as the parties should be treated as the best judges of what is reasonable in their own interests.[11]
[11]Reasons, [64].
In substance, the judge accepted the arguments advanced by Mecca and concluded that the restraint was reasonable in the interests of the parties and therefore held it was enforceable.

Did the judge err in identifying the legitimate interest?

Before coming to the judge’s identification of Mecca’s legitimate interest, it is first necessary to say something about the nature of Mecca’s business as found by the judge.
Mecca operates according to a somewhat unique business model conceived by its founder, Ms Jo Horgan. Unlike traditional department stores which feature a number of beauty brands, each occupying a particular space and serviced by their own dedicated sales staff, Ms Horgan sought to establish a ‘standalone, multi-brand cosmetic store in which customers could receive brand agnostic advice’.[12] Ms Horgan chose small overseas beauty brands which she considered to be pioneering and occupying niche spaces. Mecca was to provide an end-to-end service, effectively acting as importer, distributor, brand manager and retailer of the product. Mecca aimed to create ‘brand equity’ by the way it promoted and marketed each individual brand. Product was to be sold through brick and mortar stores in prestige retail locations as well as through online channels.
[12]Reasons, [12].
The judge summarised how Mecca’s business commenced and operated:
Mecca opened its first store in 1997 on Toorak Road, South Yarra in Melbourne and upon opening stocked products from seven international beauty brands, none of which had previously been sold in Australia. Each of the initial seven brands were distributed by Mecca on an exclusive or end-to-end service basis; that is, each of the brands provided Mecca with exclusive distribution rights in return for which Mecca imported the product and arranged for its distribution and sale at Mecca branded stores. As part of its service, Mecca undertook various marketing activities and other promotional and educational campaigns under the Mecca brand for the particular cosmetics brands sold at the Mecca stores.
Since 1997 Mecca has grown substantially. From the time of its first store opening in 1997, it now has 107 bricks and mortar stores in Australia and New Zealand and employs approximately 3800 staff. Ms Horgan’s evidence is that the exclusive distribution model has always been at the core of Mecca’s business model. She explained that the grant of exclusive distribution rights provides Mecca with the commercial certainty and incentive to offer the end-to-end service model, including by regularly opening new stores; investing in the establishment of a digital presence; and undertaking marketing, promotional and education campaigns as the effective steward of the branded products in Australia and New Zealand. Ms Horgan gave evidence that the end-to-end service model requires substantial ongoing and long-term investment by Mecca and each brand.[13]
[13]Reasons, [17], [18].
Hourglass launched its cosmetic products to the public through department stores in Los Angeles and Manhattan around 2004–2005. By 2010 it had a total of nine employees, all located in Los Angeles. All of its retailers were located within the United States of America — it had no existing presence in the territory.[14] Hourglass’ CEO, Ms Clarissa Janes, gave evidence about its decision to enter an exclusive distribution agreement with Mecca, which the judge summarised this way:
Ms Janes accepted that Hourglass was looking for opportunities to expand its business but did not have the resources or team to enter into the Australian market of its own accord. The advantage to Hourglass in entering into the proposed arrangements with Mecca as she saw it was that Hourglass was able to enter the Australia and New Zealand markets without having to appoint a distributor, brand manager, public relations firm, or sales staff in the local market. Ms Janes described the benefit to Hourglass of entering into the agreement with Mecca was that it enabled Hourglass to access Mecca’s physical retail presence.[15]
[14]Reasons, [28], [29].
[15]Reasons, [30].
The judge outlined the growth in both Mecca’s business and Mecca’s sales of Hourglass products, between 2010 and 2015. Hourglass became one of Mecca’s highest selling brands and the growth in Mecca’s business throughout the period was substantial. Mecca invested heavily in a network of brick and mortar stores located in prime prestige locations, investing heavily in store fitout.[16] By August 2015, Mecca’s stores had grown to 62. The background to the entry into the EDA in 2015 included Mecca’s desire to further expand into a number of new retail leases, the minimum term of which was for [redacted] years, and to make investments in marketing, promotion and costs associated with the opening of new stores.[17]
[16]Reasons, [36].
[17]Reasons, [39].
Thus, we come to the way in which the judge characterised Mecca’s legitimate interest to be protected by the restraint. In summary, his Honour described and identified that interest in this way:
(a)Mecca’s business included importing products, distributing those products in retail stores which it leased, and promoting and marketing the products, all of which activities were funded by Mecca;[18]
(b)in addition to the acquisition of products on a per order basis, Mecca’s business involved the provision of ongoing service to brands through digital and conventional marketing and access to Mecca’s retail presence in prestige stores, and through its online distribution channels;[19]
(c)the arrangement was akin to a species of joint venture in which the brand, such as Hourglass, provided the premium product and Mecca marketed and distributed it to their mutual benefit;[20]
(d)the commercial viability of funding this service and these activities on behalf of brands depended on the commercial certainty and incentive of exclusivity;[21] and
(e)Mecca’s legitimate interest lay in protecting this end-to-end service model, recovering its outlay of money for the benefit of its brands, such as Hourglass, and ensuring that the benefit of the goodwill so created remained harnessed to Mecca for as long as it provided its service.[22]
[18]Reasons, [131].
[19]Reasons, [132].
[20]Reasons, [136].
[21]Reasons, [131].
[22]Reasons, [131], [133], [136].
On appeal, Hourglass’ argument can be summarised in the following way:
(a)the judge found that Mecca’s legitimate (protectable) interest lay in ensuring that the benefit of goodwill remained harnessed to Mecca for as long as it provided services to Hourglass under the EDA;
(b)but the authorities only recognise an interest as being protectable by a restraint if that interest stems from or is the subject of an obligation imposed on the covenantee by the agreement as discerned from its terms (and not from gratuitous acts which parties intended might be performed);
(c)in this case, the marketing and distribution of products and the investment in retail infrastructure relied upon by Mecca as giving rise to the goodwill it seeks to protect are not activities which Mecca was obliged to carry out — they are gratuitous acts which the parties merely hoped or intended might be performed;
(d)those authorities relied on by the judge in support of his reasoning[23] are cases in which the covenantors’ protectable interests (in goodwill) were harnessed to actual obligations found in the agreement;
(e)thus, Mecca had no protectable interest because the terms of the EDA imposed no obligation, or only de minimis obligations, to carry out sales, marketing, investment and the like.
[23]Reasons, [134]–[135].
The second proposition in Hourglass’ argument, namely that the legitimate interest must be identified by reference to specific obligations imposed on the covenantee — here, Mecca — is not supported by the authorities. Any confinement of the analysis to the actual obligations fixed by the contract rather than to what the parties intended or how they thought the contract may be performed is more relevant to the assessment of the operation of the restraint and its reasonableness.[24]
[24]See the principles referred to below at [50], and the cases cited in n [45].
Typically, the legitimate interest of the party receiving the benefit of a restraint of trade is expressed broadly, and reflects the broad commercial objectives of that party discernible from the nature of its business and the character of the transaction under which the restraint arises. So, for example, in:
(a)Peters American Delicacy, in which a milk bar and confectionary business agreed to take all of its supplies of ice cream from a particular manufacturer in consideration of an agreement as to the price of the products, various members of the High Court described the legitimate interest of the manufacturer as ‘the protection of the [manufacturer’s] trade’,[25] ‘the protection of [the manufacturer’s] business’,[26] and ‘the goodwill of that business’.[27] Although in dissent, Dixon J referred to the legitimacy of protecting or even strengthening ‘the interest of the [beneficiary of the restraint] against some hazard or prejudice to which the transaction might otherwise expose them’;[28]
(b)Amoco v Rocca, the relevant legitimate interest was variously described as the recoupment of Amoco’s investment, and its trading interests arising out of its agreement to supply products to Rocca,[29] or Amoco’s interest in having petrol stations exclusively buy its fuel, to maintain the volume of its sales, and to ensure its investment was secure and profitable;[30]
(c)Queensland Cooperative v Pamag, the legitimate interest of a flour supplier was described as ‘a commercial interest in selling as large a quantity of products as possible’[31] and, following an extensive analysis of the way in which legitimate interest had been described in previous cases, as ‘a desire to increase sales and profitability’ and in securing and retaining customers;[32]
(d)Fonterra,[33] the legitimate interest was described as ‘a legitimate interest of whatever kind’ including a purchaser’s interest in protecting goodwill;[34]
(e)Geraghty v Minter,[35] the legitimate interest was described as an interest in protecting goodwill[36] and in preventing the other party misusing a familiarity with customers and taking advantage of the covenantee’s trade connections;[37] and
(f)Specialist Diagnostic,[38] the legitimate interest was simply the covenantee’s interest ‘in the leases and service agreement’ and the ‘support [of] its hospital business’.[39]
[25]Peter’s American Delicacy (1947) 77 CLR 574, 581 (Latham CJ).
[26]Ibid 582 (Rich J).
[27]Ibid 599 (Williams J).
[28]Ibid 591 (Dixon J).
[29]Amoco (1973) 133 CLR 288, 308 (Walsh J).
[30]Ibid 318–19 (Gibbs J).
[31]Pamag (1973) 133 CLR 260, 268 (Walsh J).
[32]Ibid 278–9 (Stephen J).
[33]Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75 (McDonald J) (‘Fonterra’).
[34]Ibid [227]–[228].
[35](1979) 142 CLR 177 (‘Geraghty’); [1979] HCA 42.
[36]Ibid 182 (Barwick CJ).
[37]Ibid 185 (Gibbs J).
[38]Specialist Diagnostic (2012) 41 VR 1.
[39]Ibid [48], [50] (Buchanan, Mandie, Osborn JJA).
It is, therefore, an overstatement to say that no legitimate interest can be identified beyond one that is demonstrably harnessed to some specific contractual obligation.[40] None of the authorities say so in terms. Moreover, in some instances, a broad protectable commercial interest has been identified without there being any positive obligation on the part of the covenantee to supply (or buy) particular products or services, or where such an obligation was significantly qualified.[41]
[40]Ultimately, it is not clear to what extent Hourglass pressed its submission about legitimate interest in its oral argument. During oral argument, it conceded that Mecca had a legitimate interest in protecting its goodwill.
[41]See, generally, Peters American Delicacy (1947) 77 CLR 574, Amoco (1973) 133 CLR 288 and Pamag (1973) 133 CLR 260.
In this case it can be seen that the judge adopted an entirely orthodox description of the legitimate interest which Mecca had to protect. In substance, he described it as Mecca’s interest in protecting its business goodwill and recouping its investment.
Furthermore, it is inaccurate to characterise Mecca’s role in the arrangement under the EDA as merely performing ‘gratuitous acts’. So much was conceded in oral argument before us. As the judge acknowledged,[42] Mecca’s obligations to buy, sell and market Hourglass’ products were qualified by discretions allowed to Mecca as to the amount and range of Hourglass products it ordered and sold. It also allowed to Mecca a discretion as to the method by which it sold products. But these discretions were integral to the very business model the parties sought to implement. Construed in the context of the mutually understood business model which the parties were intending to adopt (and which, as at 2015, they had already experienced under the 2010 agreement), it would be quite unrealistic to characterise cl 3 of the EDA as imposing no actual obligation (or only de minimis obligations) on Mecca. As the judge rightly said, to do so
… ignores the fact that Mecca’s business model has as a core component the making of sales by bringing customers to its doors (physically and virtually) who wish to acquire high quality cosmetic products, of which Hourglass products stand at or near the apex.[43]
[42]Reasons, [140], [141].
[43]Reasons, [142].
Relevantly to the identification of Mecca’s legitimate interest, under the EDA Mecca committed (at its own cost) to import, market and distribute Hourglass’ product in a territory in which Hourglass had no pre-existing market. Mecca was to be responsible for the physical and online infrastructure to promote and sell Hourglass’ products. The business model envisaged that Hourglass’ brand would be promoted in prestige locations alongside other niche and prestige brands. In short, at its own expense, Mecca was to establish and build Hourglass’ brand presence in the territory.
Posing the question in terms as framed by Dixon J in Peters American Delicacy: what was the hazard to which Mecca was exposed under this arrangement against which it needed protection? Plainly, the hazard was that either Hourglass, or some third party with whom Hourglass dealt, could leverage off Mecca’s investment in building and maintaining the Hourglass brand reputation in the territory by selling the same Hourglass products acquired by Mecca, or even those products which Mecca chose not to buy.
Therefore, even if it were necessary to identify particular obligations under the arrangement from which the legitimate interest emerged, the judge’s formulation of the legitimate interest as being to ensure ‘that the benefit of the goodwill so created remained harnessed to Mecca for as long as it provided its services’ can be seen to stem from obligations cast upon Mecca under the EDA.
In our view, ground 1 is not reasonably arguable.
It is clear that the judge found that, in this particular case, paying careful attention to identifying the interest which Mecca could legitimately protect by the exclusive distribution covenant established a critical platform from which to proceed to determine its reasonableness.[44] We agree. We now turn to the remaining two complaints — the operation of the restraint and its reasonableness — which we will deal with together.

Did the judge err in assessing the operation of the restraint or its reasonableness?

[44]Reasons, [131].

There was no dispute that the restraint set out in cl 1 operated only for the term of the EDA, only within the territory, and in respect of all Hourglass products.
The complaint by Hourglass was that the judge did not analyse the restraint as it could operate in the circumstances which the EDA permitted, placed too much focus on the practical way in which the business was intended to operate or had operated, and gave too much weight to the inferred judgment of the parties that the restraint was reasonable.

Hourglass submitted on appeal that it was necessary to analyse the operation of the restraint in conjunction with other provisions of the EDA. The Court was taken to statements made in a number of cases.[45] For example, in Amoco, Gibbs J said that in deciding upon the reasonableness of the restraint it is not possible to regard the length of the tie apart from the provisions of all the covenants in the agreement — ‘all must be considered together’.[46] Additionally, the reasonableness of a restraint must be tested, not by reference to what the parties have actually done or intend to do, but what the restraint entitles or requires the parties to do. The fundamental question involves an assessment of what was permitted by the terms of the arrangement between the parties.[47]
[45]Adamson (1991) 31 FCR 242, 285 (Gummow J); Fonterra [2021] VSC 75, [225] (McDonald J); Peters American Delicacy (1947) 77 CLR 574, 587 (Dixon J); Amoco (1973) 133 CLR 288, 320 (Gibbs J); Potato Producers Co-operative Limited v Pavone [1962] VR 231, 237 (Herring CJ and Dean J); Geraghty (1979) 142 CLR 177, 180 (Barwick CJ).
[46]Amoco (1973) 133 CLR 288, 301 (Walsh J), 320 (Gibbs J).
[47]Adamson (1991) 31 FCR 242, 285 (Gummow J).
Proceeding from these principles, Hourglass drew attention to other provisions in the EDA which bore upon the permitted contingencies in which the restraint operated.
First there were those provisions that defined the services that Mecca must provide over the whole of the period that the restraint operates. Hourglass submitted that the wholesale restraint on Hourglass’ ability to trade in the territory for the rolling term of [redacted] years is to be assessed having regard to the fact that the EDA did not oblige Mecca to purchase, sell, market or distribute any particular quantity of products in the territory over that period; permitted Mecca to select those products it chose to sell and distribute; and limited Mecca’s obligation to market Hourglass’ brand to that which is consistent with Mecca’s ‘commercial and business objectives’ and ‘as it sees fit’.
Secondly, there were those provisions that governed the duration of the EDA and the means of terminating it, particularly those found in the new cl 2 introduced by the variation contained in the Mecca’s letter of 7 June 2015, countersigned by Hourglass on 6 August 2015. In the contingency, permitted by the EDA, in which a party triggered the termination of the term by [redacted] years’ written notice, Hourglass argued that Mecca’s interest in building Hourglass’ brand and selling its products for the remaining [redacted] years of the term, would be in tension with its interest in promoting those other brands staying within its stable.
In short, the permitted operation of the restraint included that it could restrain Hourglass from selling its products in the territory:
(a)while Mecca chose not to sell any Hourglass products at all, or only to sell limited products in a limited manner; and
(b)over the course of a [redacted]-year notice period when Mecca’s interests diverged from those of Hourglass and would better be served by migrating Mecca’s customers to other brands.
Hourglass submitted that, in those permitted contexts, the restraint would operate only to prevent Hourglass’ products competing with Mecca’s business. It would therefore go beyond what was necessary to protect any legitimate interest of Mecca because it would operate to serve an illegitimate interest.
In answer to the first argument, that Mecca could effectively lock Hourglass out of the market while making minimal purchases and undertaking little or no marketing, the judge said (as already mentioned) that such a submission ignored the essential features of the business model of which Hourglass was well aware when it renewed the agreement in 2015.[48] That is, it ignored the business judgment afforded to Mecca as to which products to buy and how they should be marketed, a mechanism which was integral to the end-to-end, brand agnostic service.
[48]Reasons, [142].
In answer to the second argument, that Mecca could act adversely to Hourglass’ interest over the period of any notice of termination while Hourglass was restrained from selling its product in the territory, the judge said that Hourglass’ argument smacked of a complaint about the adequacy of the consideration given for the restraint.[49] Whilst accepting there was a risk that the interests of Mecca and Hourglass could diverge in such a period, particularly in the period close to the expiry of the term, the judge made three points. First, whilst at a general level such a risk exists, that type of risk exists in any contractual arrangement of that nature which had an expiry date. Secondly, it always remained in Mecca’s interest to bring customers to its store regardless of the particular brand which is attractive to the buyer. Thirdly, Hourglass was well aware of that risk when it renewed in 2015 on the varied terms.
[49]Reasons, [144].
To both arguments, the judge emphasised a theme which has been repeated in many cases, a good example of which is the statement by Menzies J in Amoco, namely
… [w]hen parties negotiate a commercial arrangement from positions where one does not have the other at an unfair advantage and do, after hard bargaining, reach an agreement which each finds in its interests to accept, the Court will not readily find that their bargain is unreasonable as between themselves, notwithstanding the well-established policy of the law against restraints of trade.[50]
[50]Amoco (1973) 133 CLR 288, 294 (Menzies J), 306 (Walsh J), 320 (Gibbs J). See further, Adamson (1991) 31 FCR 242, 388 (Gummow J); Pamag (1973) 133 CLR 260, 268 (Walsh J), 276 (Stephen J); Specialist Diagnostic (2012) 41 VR 1, 13 [49] (Buchanan, Mandie, Osborn JJA).
It is correct to point to the emphasis in the cases that a restraint is to be assessed in the context of all of the provisions of the agreement, and against the way it could operate in the various contingencies which the terms of the agreement permitted, judged at the date of the making of the agreement. However, there are several important qualifications to that general statement of principle. One is that the operation of the restraint is to be viewed excluding ‘imaginary hypotheses which though logically conceivable would be regarded as completely unreal in the world of practical affairs’ and by preferring a construction of the operation of the restriction which may arise ‘out of any natural or probable exercise by the covenantee or promisee of the powers the contract may confer upon him.’[51]
[51]Peters American Delicacy (1947) 77 CLR 574, 587 (Dixon J). See also, Adamson (1991) 31 FCR 242, 286 (Gummow J).
Another qualification is to be found in the statement of Lord Reid in Esso, cited by Walsh J in Amoco, noting that a court should not hold that an agreement is unreasonable because it is capable of misuse in circumstances in which one party has chosen to ‘rely on the commercial probity and good sense’ of the other.[52]
[52]Amoco (1973) 133 CLR 288, 300 (Walsh J). See generally, Seddon and Bigwood, Cheshire & Fifoot Law of Contract (LexisNexis, 12^th ed, 2023) [18.35] 1069–1073.
Both qualifications may be understood as different expressions of the need to apply some commercial and pragmatic good sense, to take account of what Williams J referred to as ‘the whole substance and reality of the matter’.[53]
[53]Peters American Delicacy (1947) 77 CLR 574, 599 (Williams J).
In our view, applying these principles, the judge made no error in his analysis of the operation of the restraint nor of its reasonableness. Even if, in the setting of the other provisions of the EDA, the restraint could be used for the purpose of avoiding competition, we do not think that such an outcome arises from the natural and probable exercise by Mecca of the powers the contract confers upon it. For the reasons given by the judge, the proposition that Mecca might exercise its prerogatives under the EDA, afforded to it by Hourglass for sound business reasons, in order to sterilise competition from Hourglass products either generally or during a period of notice of termination, attracts the description of being ‘completely unreal in the world of practical affairs’.[54]
[54]Analogously, in Panayiotou [1994] EMLR 229, Parker J at 369 rejected as ‘farfetched’ the notion that Sony would put singer George Michael’s recordings ‘in a drawer’.
Hourglass supplemented its challenge as to whether, having regard to the duration of the termination notice period under the EDA, this particular restraint was necessary to protect Mecca’s legitimate interests. Because, as its evidence showed, there were agreements between Mecca and some other cosmetics manufacturers which contained shorter termination notice periods (although others had the same or comparable notice periods), it followed, so the submission went, that Mecca had not established that the restraint, construed against the full terms of the EDA, was necessary to protect its legitimate interests. A shorter period of notice, during which the restraint would continue to operate, would have sufficed. Hourglass’ argument was built upon the premise (already discussed) that during a period of notice Mecca’s and Hourglass’ interests would diverge, and Mecca would derive illegitimate competition protection in that period by reason of the restraint, while not fully exploiting Hourglass’ product in the marketplace.
The judge was not swayed by this argument. Nor are we. At a level of detail, the strength of the argument about the reasonableness of the restraint having regard to the period of notice for any manufacturer may be influenced by an individual analysis of the precise terms of the restraint, territory size, agreement duration, pre-existing brand presence and reputation in the territory, likely volumes of product to be sold, the scope of the product range the subject of the agreement, obligations imposed on each party, the commercial discount involved, and so on. As a more general response, the judge accepted Mecca’s evidence as to its investment in the establishment of the retail and marketing infrastructure for the benefit of Hourglass (and others), its legitimate interest in recouping that investment over time and its natural incentive, because of its business model, to keep on selling Hourglass’ product while the EDA remained on foot. Simply pointing out the existence of other agreements with shorter termination notice periods does not gainsay the reasonableness of this restraint for these parties.
Even less persuasively, in our view, Hourglass argued that Mecca failed to discharge its burden to establish that the restraint was reasonable because it did not quantify its investment in the Hourglass brand and demonstrate that a period of [redacted] years was necessary to recoup that investment. In rejecting this argument at trial,[55] the judge found that Mecca’s legitimate interest included its ongoing provision of service to Hourglass over the duration of the EDA, with associated cost, in addition to the recovery of any initial outlay of money in leases and other infrastructure. Although a ledger-like analysis of quantified investment and quantified recoupment may be one way of justifying a restraint, the judge held that the authorities do not erect any principle that such a method is the only way. And, said the judge, it was not necessary in this case. We agree.
[55]Reasons [133].
In our view, it was correct to conclude that the restraint only serves the legitimate interests of Mecca when viewed in the following context:
(a)It is directly responsive to the hazard to Mecca’s legitimate interests arising from the nature of the arrangement.
(b)It is limited to the term of the contract during which both parties enjoy the benefit of their bargain.
(c)Although the adequacy of the consideration which Hourglass received in exchange for giving the restraint is not the test of reasonableness, nonetheless the nature and quantum of the benefit it received in consideration is a relevant consideration.[56] In exchange for giving the restraint, Hourglass receives access to a new market which it had neither the means nor resources to access itself.
(d)The Mecca model is built on the mutuality of interest in Mecca promoting the Hourglass brand. Integral to that model was that Hourglass should rely on the commercial probity and good sense of Mecca in the selection of products to sell and the method of marketing.
(e)The [redacted]-year termination term has a completely rational basis in the context of the Mecca-model featuring, as it did, large scale and long-term investments by Mecca in leases and distribution infrastructure, and in that period Mecca retains a commercial interest to sell each brand’s products so as to maximise its goodwill and pay for its sunk investments. That there may be agreements with other manufacturers with shorter termination periods does not gainsay this proposition.
(f)The restraint was entered into at a time when the parties had the experience of the operation of the agreement between 2010 and 2015, apparently to their mutual benefit.
(g)The past, known experience as at 2015 was relevant to the probable and realistic operation of the restraint in all the circumstances of the contract, and that circumstance justifies considerable (albeit, not conclusive) weight being placed upon the business judgment of two equally-matched parties as to what was reasonable in their own interests.
[56]Amoco (1973) 133 CLR 288, 306–7 (Walsh J), 316 (Gibbs J).
In short, seen as part of the whole transaction, the exclusive distribution provision in this instance was more likely to assist freedom of trade rather than restrict it.[57] Adapting Lord Macmillan’s observation in Vancouver Malt & Sake Brewing Co v Vancouver Breweries about restraints that are justifiable, cited by Dixon J in Peters American Delicacy,[58] cl 1 is ancillary to the main transaction under the EDA (one of supply, sale and distribution) and is justified in this case because is it reasonably necessary to render that transaction effective.
[57]Cf Bacchus Marsh Concentrated Milk Co Ltd (In Liq) v Joseph Nathan & Co Ltd (1919) 26 CLR 410, 441 (Isaacs J), cited in Peters American Delicacy (1947) 77 CLR 574, 591 (Dixon J). See also Pamag (1973) 133 CLR 260, 285 (Stephen J).
[58]Peters American Delicacy (1947) 77 CLR 574 592, citing Vancouver Malt & Sake Brewing Co v Vancouver Breweries (1934) AC 181, 190 (Lord Macmillan).
Although reasonably arguable, we are not persuaded that either ground 2 or 3 is made good.

Did the judge err in severing cl 16.4 and failing to find that the entirety of the agreement was void for uncertainty?

Clauses 12.5 and 16 of the EDA, relevant to grounds 4 and 5, are set out at [17] to [19] above. The clauses are in precisely the same terms in the EDA as they were in the 2010 agreement. Hourglass devoted two proposed grounds to the severance issue, namely:
Ground 4
4.1.In determining that cl 16.4 was severable, the learned primary judge erred in finding that cl 16.4 could be severed without also severing
cl 12.5 and cl 16.1–16.3.
4.2.The learned primary judge should instead have found that the severance of cl 16.4 would also require the severance of [cl 16.1–cl 16.3][59] and cl 12.5 due to the interrelation between those clauses, and that as a consequence, cl 16.4 could not be severed as the parties did not intend the balance of the EDA to operate in the absence of cl 12.5 and cl 16. The learned primary judge should further have found the entirety of EDA was void for uncertainty.
[59]The applicant mistakenly repeated ‘cl 16.4’ at this point in its grounds of appeal but plainly meant cll 16.1–16.3.
Ground 5
5.1.In the alternative to Ground 4, in determining that cl 16.4 was severable, the learned primary judge erred in finding that it could be inferred that the parties intended the balance of the EDA to take effect absent cl 16.4.
5.2.The learned primary judge should instead have found that severance of cl 16.4 could not be severed as the parties did not intend the balance of the EDA to operate in the absence of cl 16.4. the learned primary judge should further have found that the entirety of the EDA was void for uncertainty.
At trial, Hourglass alleged that the EDA was void for uncertainty on the basis that cl 16 was incomplete.[60]
[60]Reasons [8], [156].
In the context of cl 16 as a whole, cl 16.4 contemplated the non-performing party’s entitlement to terminate where a force majeure event occurs, provided that the effects of that event last for at least a certain number of days. The number of days was not specified in the clause and instead was left as ‘[insert period]’. On that basis, Hourglass submitted the parties therefore failed to agree upon all terms required for the formation of a legally binding contract.[61]
[61]Reasons, [156].
Mecca advanced three submissions regarding the incomplete clause. Firstly, it submitted the Court could give meaning to the incomplete time period by implying a term that the relevant period was ‘a reasonable period’.[62] Alternatively, it contended cll 12.5 and 16.4 should be read together, with the parties inferring that the time periods of both clauses were to be the same, namely 28 days.[63] Lastly, Mecca argued that cl 16.4 was severable and that the EDA could operate without it.[64]

Findings at trial

[62]Reasons, [157].

[63]Reasons, [158].

[64]Reasons, [158].

Ultimately, the judge held that cl 16.4 was severable and the agreement as a whole was not void for uncertainty.[65]
[65]Reasons, [10].
The judge rejected Mecca’s invitation to imply that the time period specified by the incomplete cl 16.4 should be a ‘reasonable period’. His Honour noted that the implication of a term that the contract could be terminated on reasonable notice should only occur when it will give effect to the reasonable expectations of the parties at the time the contract was formed.[66] Instead, he found that the parties’ actual intention was for the clause to operate for a specified number of days, not a reasonable period.[67]
[66]Reasons, [161], citing Crawford Fitting Co & Ors v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438, 445 (McHugh JA).
[67]Reasons, [162].
The judge also rejected Mecca’s second submission that cll 12.5 and 16.4 should be read together, with cl 16.4 adopting the same 28-day timeframe imposed by cl 12.5. His Honour noted that the fact that a time period was specified in the former clause but omitted in the latter pointed away from an intention that the time periods were necessarily to be the same.[68]
[68]Reasons, [164].
In accepting Mecca’s final submission — that cl 16.4 was by itself severable — the judge asked whether it could be inferred that the parties intended that the EDA only be binding upon them if cl 16.4 took effect. His Honour discussed Fitzgerald v Masters[69] and Brew v Whitlock (No 2),[70] stating:
… the test as to whether an uncertain provision in a contract can be severed so as to save the whole contract from invalidity is whether it was the intention of the parties that the balance of the contract, apart from the impugned provision, was or was not to be conditional on that provision taking effect.[71]
[69](1956) 95 CLR 420; [1956] HCA 53.
[70][1967] VR 803.
[71]Reasons, [171], citing Brew v Whitlock (No 2) [1967] VR 803, 807.
In ruling that the parties did not intend for the balance of the EDA to be unenforceable if cl 16.4 was ineffective, the judge took into account the following matters:
(a)Firstly, the parties had agreed on all essential terms of the EDA in both 2010 and 2015. This included the nature of the products subject to the agreement, the restraint upon Hourglass, and the price payable by Mecca to Hourglass.[72]
(b)Secondly, cl 16.4 would only operate in limited and unusual circumstances, explained as follows:[73]
•Clause 12 entitles a party (ie, the performing party) to terminate the agreement if the other party (ie, the non-performing party) is unable to distribute (applicable to Mecca) or supply (applicable to Hourglass) the product because of a Cause Beyond the Reasonable Control of that non-performing party;
•Clauses 16.1–16.3 provide an additional measure of protection for the non-performing party, unable to perform due to a force majeure event, by removing the liability of that non-performing party, provided that the conditions of those clauses are satisfied; and
•In the context of those provisions, the intended effect of cl 16.4 is to allow the non-performing party a right to terminate where it is unable to perform due to a Cause Beyond [its] Reasonable Control, despite its non-performance not rendering it in any way liable to the performing party. Therefore, all cl 16.4 would allow is for a party, where it cannot perform due to ‘highly unusual’ events beyond its control, and despite not being liable to the other party, to ‘take advantage’ of that event and bring the agreement to an end.
(c)Thirdly and finally, it was significant ‘and speaks loudly as to the absence of the importance of the relevant clause’ that the parties did not agree upon the specified number of days in the clause in both 2010 and 2015 nor did it come to the attention of either party until shortly before the trial, with Hourglass seeking leave to file an amended defence relying upon the uncertainty of the clause as grounds to avoid the agreement.[74]
[72]Reasons, [173].
[73]Reasons, [174]–[177].
[74]Reasons, [178].

In the result, the judge found in favour of Mecca and determined the EDA was not void for uncertainty and that cl 16.4 could be severed.

Parties’ submissions

Hourglass advanced two alternative grounds before this Court alleging error on behalf of the judge at trial. One (ground 4) focuses specifically on the interconnection of cll 12.5, 16.1–16.3 and 16.4 and contends that the severance of cl 16.4 could not sensibly occur without the severance of all. The other (ground 5) takes issue with the judge’s inference that the parties would not have intended to be bound by the balance of the EDA in the absence of cl 16.4. As will be seen, these arguments are related.
On ground 4, Hourglass contends the severance of cl 16.4 ‘fundamentally alters the character of the clause’. In oral argument, it pointed to the chapeau to cl 16 and sought to characterise cl 16.4 as a condition to the clause being enlivened. In practical terms, it submitted that for the defaulting party to avoid liability under the clause, that party first had to suffer from a delay of the period that was intended to be specified in cl 16.4. The benefit of the clause cannot be relied upon by the defaulting party without that time period first elapsing. If cl 16.4 goes, the whole of cl 16 goes with it.
Clause 16.4 therefore, it was argued, has an indivisible connection to the entirety of cl 16 and, because cl 16 is a vital component of the whole of the parties’ entitlements in a force majeure event, also to cl 12.5. The applicant relied on McFarlane v Daniell[75] to assert that severance cannot occur where uncertain provisions are so connected in substance with others ‘as to form an indivisible whole which cannot be taken to piece without altering their nature’.
[75](1938) 38 SR (NSW) 337, 345.
Hourglass submitted that, by proceeding with his analysis whether the parties intended to be bound by the EDA without cl 16.4 on the assumption that the clause could be independently severed, the judge was in error. Instead, he should have asked himself whether it could be inferred that the parties intended the EDA to take effect without the protections of cll 12 and 16.
Operating on the assertion that cl 16.4 was not severable by itself, and instead had to be accompanied by the severance of cl 16 in its entirety together with cl 12.5, Hourglass maintained it could not be inferred that the parties would not have entered the EDA in circumstances where their respective contractual positions were not protected by any force majeure provision.
The substance of Hourglass’ alternative ground, ground 5, is that the judge erred in finding the parties were sufficiently protected by cll 12.5 and 16.1–16.3, and instead should have found that the parties did not intend to be bound by the EDA in the absence of cl 16.4. Hourglass submitted that cl 16.4 is of ‘crucial significance’ to it. It says that whilst the remainder of cl 16 excuses non-performance of an obligation in the event of a Cause Beyond [its] Reasonable Control, it is only cl 16.4 that would allow Hourglass (if it was the non-performing party) to remove itself from the restraint of the EDA in those circumstances. Hourglass submitted that if cl 16.4 could be independently severed, it could leave Hourglass stuck in the agreement ‘forever’ because it may not have the ability to terminate the agreement whilst subject to a force majeure event.
At the hearing, Mecca made two submissions on grounds four and five. The first was that cl 16.4 was not a condition within the meaning of the chapeau. In the respondent’s view, the clause is not a condition but instead an additional right on the part of the defaulting party to terminate if a force majeure event lasts more than a certain number of days. The second submission was that the deletion of cl 16.4 would not do any violence to cll 16.1–16.3, and that no reasonable commercial businessperson would look at cl 16 with the deletion of cl 16.4 and think the whole clause is rendered otiose. These two submissions lead to the same result — being that cl 16.4 is independently severable.

Applicable legal principles

Neither party drew upon additional authority not already referred to by the trial judge (identified in [76] above), nor was it suggested that his Honour’s treatment of the relevant principles was in any was deficient. The argument before us proceeded upon those principles but the parties differed on the conclusion to be drawn from their application in the circumstances of this case.

Analysis

In our view the judge’s analysis was plainly correct. More particularly, his analysis of the operation of cl 16.4 summarised at [77(b)] above is correct. The contention that the expiry of the time period intended to appear in cl 16.4 operates as a condition upon the liability relief provided in cll 16.1–16.3 gains no support from the text of the provisions. The insertion of a period of time in cl 16.4 would have no bearing at all on the operation of the relief from liability to the non-performing party provided in cll 16.1–16.3.
Clause 16.4, properly construed, stands somewhat apart from the balance of cl 16. It provides an additional and separate benefit to relief from liability upon the conditions stipulated in cll 16.1–16.3. That is, it provides the non-performing party with an entitlement to terminate in a force majeure event which is not otherwise available to it under cl 12.5.
But the judge was correct to identify the fact that, first, any force majeure provision operates in highly unusual circumstances and, secondly, it would be even more unusual for the non-performing party alone to want to terminate because of the force majeure event, especially when that party’s liability for its non-performance was relieved if the cl 16.1–16.3 conditions were met. The standalone nature of the entitlement, the highly unusual circumstances in which it would operate, and the principal benefits secured by the parties by the remaining provisions of the EDA, strongly favour the judge’s conclusion (objectively determined) that the parties intended the operation of the EDA not to be conditional upon cl 16.4 taking effect.
Further, we reject the contention that Hourglass would not have entered the EDA without cl 16.4 because otherwise it could be ‘stuck forever’ with the restraint, and thus cl 16.4 should be construed as an essential condition. That argument should be rejected for a number of reasons. First, it implicitly assumes, contrary to the position we have already reached, that the restraint is necessarily unfair and that it should be expected that, at the date of entry into the EDA, Hourglass, as covenantor, would have intended to keep some means of extricating itself from it. Secondly, it incorrectly posits cl 16.4 as the intended mechanism by which Hourglass, as covenantor, could extricate itself from the restraint should it have wished to do so. Thirdly, and related to the last point, it ignores the fact that cl 2 provided each party with the right to terminate the agreement (for whatever reason) upon [redacted] years’ notice such that no party would be stuck ‘forever’ with the EDA. Fourthly, cl 16.4 was in the uncompleted form when, on 16 August 2015, the contract was amended with the insertion of the new cl 11A. It is inconceivable that the parties, objectively, did not intend for the contract to have commenced until the time period contemplated by cl 16.4 was agreed.
In our view neither grounds 4 or 5 have any merit.

Conclusion

As foreshadowed earlier in these reasons, although grounds 2 and 3 were reasonably arguable, upon full analysis we are not persuaded that the judge erred in the way contended. We do not think that any of the remaining grounds were reasonably arguable. Leave to appeal should be granted on grounds 2 and 3, otherwise refused, and the appeal dismissed. It is unnecessary to determine the issue raised by the notice of contention.
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[2023] VSCA 55

17 March 2023