Peters (WA) Ltd v Petersville Ltd
[1999] FCA 1245
•10 SEPTEMBER 1999
FEDERAL COURT OF AUSTRALIA
Peters (W.A.) Ltd v Petersville Ltd [1999] FCA 1245
RESTRAINT OF TRADE - sale of business - whether a restraint given ongoing business relationships through licensing arrangements - reasonableness of restraint - whether more than adequate protection - whether reasonable in the public interest
TRADE PRACTICES - relevance of s 51(2)(c) Trade Practices Act 1974 to application of doctrine of restraint of trade
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 Appr, Discussed
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 Cited, Refd to
Peters American Delicacy Co Ltd v Patricia’s Chocolates & Candies Pty Ltd (1947) 77 CLR 574 Cited
Adamson v NSW Rugby League Ltd (1991) 103 ALR 319 Cited
Howard F Hudson Pty Ltd v Ronayne (1972) 126 CLR 449 Cited, Discussed
Herbert Morris Ltd v Saxelby [1916] 1 AC 688 Refd to
Trego & Smith v Hunt [1896] AC 7 CitedPETERS (W.A.) LTD v PETERSVILLE LTD and PETERS FOODS AUSTRALIA PTY LTD
W 8 of 1999
FRENCH, KIEFEL, NICHOLSON JJ
PERTH
14 SEPTEMBER 1999
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W 8 OF 1999
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
PETERS (W.A.) LTD
(ACN 008 668 602)
AppellantAND:
PETERSVILLE LTD
(ACN 004 936 154)PETERS FOODS AUSTRALIA PTY LTD
(ACN 000 249 132)
RespondentsJUDGES:
FRENCH, KIEFEL, NICHOLSON JJ
DATE OF ORDER:
10 SEPTEMBER 1999
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1. The appeal should be dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W 8 OF 1999
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN:
PETERS (W.A.) LTD
(ACN 008 668 602)
AppellantAND:
PETERSVILLE LTD
(ACN 004 936 154)PETERS FOODS AUSTRALIA PTY LTD
(ACN 000 249 132)
Respondents
JUDGES:
FRENCH, KIEFEL, NICHOLSON JJ
DATE:
14 SEPTEMBER 1999
PLACE:
BRISBANE
REASONS FOR JUDGMENT
THE COURT
Prior to 15 February 1983, ice-cream and ice-cream product manufacturing and distribution in Western Australia was conducted by both Australia United Foods (“AUF”), and the appellant Peters (W.A.) Ltd (“PWA”). Petersville Ltd and Queensland United Foods (“QUF”) were partners in AUF. On that date, AUF sold its business and QUF sold the land upon which the business was conducted to PWA. The contract contained a clause entitled “Future Arrangements” which operated as a restraint upon each of QUF and Petersville selling, supplying or distributing such products or carrying on such a business for the period of “the licensing arrangements” referred in the contract. I shall refer to QUF and Petersville collectively as “AUF”. At issue before his Honour, the primary Judge, and on the appeal, is the validity of the future arrangements clause.
The background facts were not in contention on the hearing. This Court has the benefit of his Honour’s summary of them, which is here set out:
“In the early 1900s an American, Mr F A B Peters, established various Peters ice-cream manufacturing businesses around Australia. The technology at the time required that ice-cream be manufactured near where it was sold. Accordingly, separate businesses were established under separate ownership in New South Wales, Queensland, Victoria and Western Australia. In the late 1920s the operators of those separate businesses entered into agreements under which they did not enter into each other’s markets and co-operated in relation to the sharing of marketing and technical information. Although by the 1960s disputes had occurred between the operators (principally in Queensland and New South Wales) in relation to border incursions, substantial co-operation continued. The respondent became the operator of the Western Australian business in 1929 under the name Peters American Delicacy Co (WA) Ltd. It has had three changes of name since then. In the 1930s, a group of families with an interest in the dairy industry in Queensland founded Pauls Ltd to compete in the ice-cream market with the Peters company in Queensland (Peters Arctic Delicacy Co Ltd). In 1960 Pauls Ltd and two Peters companies in Queensland amalgamated to form a company which I will call “QUF”. By 1980 QUF manufactured ice-cream (by which term I include ice-cream products) in Queensland, Victoria and Western Australia which it sold in Queensland under both the Peters and Pauls brands, but elsewhere solely under the Pauls brand. By that time (1980) all of the other Peters ice-cream businesses (ie other than the Western Australian and Queensland businesses) had been consolidated into a company called Petersville Ltd (the first-named applicant). I shall refer to that company as “Petersville”. Again in 1980, Petersville and QUF established a partnership under the name “Australian United Foods” (“AUF”). AUF manufactured and sold ice-cream under the Pauls brand nationally and under the Peters brand in every State except Western Australia. At that time the respondent manufactured and sold ice-cream under the Peters brand in Western Australia. It still does. On 15 February 1983 QUF and Petersville (the partners in AUF) sold their Western Australian ice-cream business to the respondent under an agreement entered into on that date.”
The land was sold by QUF for $1,164,500; the plant equipment, motor vehicles and chattels used in AUF’s manufacturing business for $519,000; AUF’s stock in trade for $752,000; the right to use the Pauls and other associated trademarks in Western Australia together with the goodwill of AUF’s business for $1,054,500.
The clause in question was in these terms:
“FUTURE ARRANGEMENTS
7.1 Each of QUF and [Petersville] covenants and agrees with and for the benefit of Peters (WA) Ltd solely for the protection of Peters (WA) Ltd in respect of the goodwill of the ice-cream business but subject to the due performance by Peters (WA) Ltd of its obligations hereunder and except as herein permitted that they and each of them will not:-
(a)sell, supply or distribute to any person in Western Australia ice-cream or frozen confections manufactured or distributed by them or either of them;
(b)sell, supply or distribute to any person anywhere ice-cream or frozen confections manufactured or distributed by them or either of them where such ice-cream or frozen confections are to the knowledge of QUF and [Petersville] or either of them ultimately intended for sale, supply or distribution in Western Australia whether by the first-mentioned person or any other person;
(c)carry on in Western Australia directly or indirectly and whether as principal or agent the business of manufacturer, distributor (or either of them) of ice-cream or frozen confections; or
(d)permit any subsidiary or related company (within the meaning of those expressions under the Companies (Western Australia) Code) of them or either of them directly or indirectly and whether as principal or agent to carry on the business of manufacturer, distributor (or either of them) of ice-cream or frozen confections in Western Australia;
during the period of the licensing arrangements referred to in Article V hereof.
7.2At the request of [Peters (WA) Ltd], AUF shall during a like period provide access to manufacturing know-how, product development and technical and marketing information in relation to products of the ice-cream business then being marketed by AUF and if such information is requested and provided AUF shall be entitled to be reimbursed for costs incurred in respect of marketing or advertising.
7.3If AUF shall develop or acquire advertising or promotions relating to products sold under the said trade names or like product under the brand name “Peters”, then at the request of [Peters (WA) Ltd] and upon such reasonable terms and conditions as may then be agreed between [Peters (WA) Ltd] and AUF, [Peters (WA) Ltd] may market such products and may use such advertising or promotion therewith, and if any such products were not previously marketed by [Peters (WA) Ltd] then such products upon being marketed by Peters (WA) Ltd shall be considered “licensed products” for the purposes of Article V.”
The first term of the licensing arrangement ended in December 1997. PWA had exercised the first of three options, each for a five year extension, when the matter was heard. If all were exercised the restraint would operate until 31 December 2013.
The Judgment Appealed from
The principal contention of PWA was, and is, that the restraint was connected with an ongoing contractual relationship between the parties and in particular that it was connected with, and incidental to, licensing arrangements for the use of AUF’s brand or mark “Pauls” in Western Australia. His Honour accepted that there was a connexion but that the restraint was not confined to the protection of the licensor’s rights in relation to the Pauls’ marks and all product names. It extended to any ice-cream or frozen confections sold under any brand or name whatsoever and was not confined within Western Australia. It could apply to sales anywhere in the world. To these observations, his Honour added that the restraint was for an initial term of fifteen years and could extend to thirty. His Honour concluded that the restraints imposed such a fetter that the licensing and other arrangements, when read with the restraint, could not be characterised as agreements for the regulation and promotion of trade, but had the predominant character of being in restraint of trade within the common law doctrine (applying Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, 328).
The question which his Honour then addressed was whether the restraint could be said to be reasonable, having regard to the interests of the parties at the time it was entered into.
It was common ground, in argument before his Honour, that to be valid the restraint had to be reasonable in the interests of both parties: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, 305-6, Peters American Delicacy Co Ltd v Patricia’s Chocolates & Candies Pty Ltd (1947) 77 CLR 574, 590; Adamson v NSW Rugby League Ltd (1991) 103 ALR 319, 341. His Honour accepted that both parties to the transaction had been pleased with the bargain arrived at and that there was no inequality of bargaining power. The issue however, in his Honour’s view, was not whether the Court would hold them to their bargain (Amoco, 316) but whether the restraint exceeded what was reasonably necessary for the protection of PWA. His Honour held that it did. In so concluding, his Honour assessed the position as at February 1983. An alternative argument then advanced, by PWA, that regard could be had to facts emerging after the date the contract was entered into, is not an issue on this appeal. His Honour considered that he was entitled to have regard not only to goodwill as an interest in respect of which PWA was entitled to protection, but also the sources of that goodwill, in this case the licensing arrangements.
In holding that the protection given by the covenant went beyond what was reasonably required, his Honour took into account the fact that a substantial sum was paid for the goodwill of the business. On the other side of the scale he had regard to provisions of the Principal Agreement whereby AUF’s employees remained with the business as employees of PWA and that this would have substantially assisted in maintaining the business. PWA was entitled to a reasonable period of time in which to integrate the business into its own operations free from competition from its former operator. It was significant however that PWA was already well established in the market. It was, his Honour said, “not a case of a buyer starting from scratch”. The initial term of fifteen years could not be justified, in his Honour’s view. It was designed to protect the purchaser from competition well into the foreseeable future, rather than merely protecting goodwill, for which three to five years would have sufficed. So far as concerned the licensing arrangements, the restraint was not confined to the product names, symbols and logotypes, but extended to prevent AUF from manufacturing and selling ice-cream under any brand name, anywhere in Australia or the world. His Honour rejected the argument that AUF continued to participate in the Western Australian market through the licensing arrangements in the agreement.
His Honour also rejected the argument for PWA that the restraint was reasonable given that it was obliged to pay royalties on products when AUF could affect the market price. His Honour held that the restraint was void, for the reasons already given, and there was no legislation in Western Australia which enabled the Court to alleviate that consequence were it minded to do so.
It was not necessary for his Honour to deal with the question of whether the restraint was reasonable having regard to the public interest. His Honour, however, expressed the opinion that it was not. In his view, a covenant by a partnership of two traders, having a significant share of the market, which had the effect of preventing consumers in Western Australia from obtaining their products, even for an initial period of fifteen years, was against the public interest.
His Honour made a declaration that the restraint was void.
Whether a Restraint
It was submitted for PWA that it is part of normal commercial relations that restraints are placed upon one party’s freedom to trade in competition. In this case, the covenant simply regulated ongoing commercial dealings “to the mutual benefit of both parties and in which each has a stake in the success of the other, for the duration of their continuing commercial relationship only. The restraint is incidental to those normal positive commercial arrangements.” The contract was also to be seen as advancing and promoting AUF’s trade following a rationalisation of its participation in the ice-cream industry in Western Australia and was keenly pursued by AUF. It followed, in PWA’s submission, not just that the covenant was reasonable, but that it did not amount to a restraint within the meaning of the common law doctrine. It was incidental to normal positive commercial arrangements.
The submission derives from statements made by Lord Pearce in Esso (328) that the doctrine does not apply to ordinary commercial contracts for the regulation and promotion of trade provided that prevention of work outside the contract is directed towards the absorption of the parties’ services and not their sterilisation. In the previous passage, his Lordship had spoken of the example of contracts for exclusive service. His Lordship went on (328-9):
“When a contract only ties the parties during the continuance of the contract, and the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the naming of the doctrine and no question of reasonableness arises. If, however, the contract ties the trading activities of either party after its determination, it is a restraint of trade, and the question of reasonableness arises. So, too, if during the contract one of the parties is too unilaterally fettered so that the contract loses its character of a contract for the regulation and promotion of trade and acquires the predominant character of a contract in restraint of trade. In that case the rationale of Young v Timmins [1 Cr & J 331] comes into play and the question whether it is reasonable arises.”
The question, whether a covenant amounts to a restraint, is one of fact (Esso, 332). PWA pointed to the following as indicative of a mutually beneficial commercial relationship:
·The ongoing relationship of licensor and licensee;
·Its obligation to pay a minimum royalty regardless of whether sales were good;
·The incentive for each party to co-operate and the maximisation of the sale of licensed product;
·Its specific obligation to promote sales;
·The provision by AUF of manufacturing know-how, product development and marketing information;
·Its right to market new products developed by AUF;
·The period of the restraint being co-extensive with the parties’ ongoing commercial arrangements.
Some time was spent in argument on the history of the negotiations, although its relevance, if any, relates to the question of the reasonableness of the restraint inter partes, which might take account of the benefit AUF saw in the agreement.
There were a number of matters which AUF addressed over the course of what were fairly lengthy negotiations. These included the difficulty of justifying the capital outlaid for its manufacturing business in Western Australia; the ability to maintain its brand name nationally, through a licensing arrangement with PWA, thus reducing the effect of its withdrawal from the market and the receipt of royalties. At various points a “continuing interest” was spoken of; and that there would be a “merger of interests”; but at other points it appears that a sale was contemplated, as distinct from some form of joint venture.
The recital to the contract explains that AUF is seeking to “retire from direct engagement” in the ice-cream business in Western Australia. Its continued participation is thereafter limited to licensing the brand name, providing know-how and receiving royalties.
Pursuant to the agreement, AUF sold its entire assets and undertaking in Western Australia. By clause 5.2 AUF was to grant, or procure the grant, to PWA of the sole and exclusive licence to use the Pauls marks, and all product names, symbols and logos associated with such marks in connexion with the production, sale or distribution of ice-cream and other products associated with the ice-cream business. The licence period was initially for almost fifteen years, with the option of the extensions earlier referred to, three of five years. By way of consideration for the exclusive licence of the brand name, PWA was to make payments in relation to Pauls brand products; the royalties extended to include all ice-cream products sold to one major retailer “as though they were licensed products”. A minimum royalty of $150,000, or 2.5 per cent of net sales on certain quantities of product was provided for. During the period of the licence, PWA was to use its best endeavours to maintain and expand markets for products under one or more of the Pauls marks. The “Future Arrangements” set out above, which contained the limitation upon AUF, also provided that AUF would give access to manufacturing know-how, product development and technical and marketing information, upon request. It was also to make available, on reasonable terms, any advertising or promotions it acquired with respect to products sold under the brand name “Peters”.
In summary, it may be observed that the agreement incorporated the sale of AUF’s entire undertaking in Western Australia, the transfer of its staff, and the exclusive use of the Pauls brand name in that State. A continuing fee was paid for that licence. The price of $1,054,500 was ascribed to goodwill and the brand name. The continuing relationship between AUF and PWA, to which the latter’s submissions were directed, involved primarily the licensing arrangements and payments for it. The provision of ongoing markets information was incidental to those arrangements.
A covenant by which a party promises not to engage in a business formerly conducted by it is in restraint of trade: See Howard F Hudson Pty Ltd v Ronayne (1972) 126 CLR 449, 467-8. Such cases are concerned with the practical effect of the covenant, because there what was required of the party whose ability to trade was to be restricted was not explicitly stated. This is not such a case. The effect of the covenant, a prohibition upon AUF’s trading activities in Western Australia and elsewhere, is plain. PWA, however, seeks to place it in that category of restraint which the Courts have held to be justified and therefore exempt from the common law doctrine.
The circumstances of which Lord Pearce spoke in Esso (328) require consideration of the “positive commercial arrangements at which the contract aims” and then the “negative ties” which are normal and incidental to those arrangements. . Here PWA’s argument necessarily relies upon the licensing arrangements, since that was the only aspect of what otherwise amounted to a sale of a business, which had the parties in continuing commercial relations. It was argued before his Honour the primary Judge that the fact that the restraint applied during the continuance of the agreement and that the agreement required the parties’ ongoing co-operation in a number of areas, were important factors. The firstmentioned factor provides a connexion between the restraint and the term of the licence, as his Honour the primary Judge noted. It did not however answer the question whether the restraint was necessary and incidental to the licence. As to the question of future co-operation, what was required appeared to be fairly limited in his Honour’s view. It has not been shown that such a finding was incorrect.
One may accept that the restraint could be connected to the licensing arrangements. Whilst it was said to be referrable to the “goodwill of the ice-cream business,” that clearly included the use of the brand names, as the identification of the components for the price of $1,054,500 confirms. Importantly, however, the restraint could not be said to be only referrable to the ongoing licensing arrangements. As his Honour held, correctly in my respectful view, it could not then be considered incidental to them. The arrangements envisaged restrictions not just upon the use of the brand name, but extended to the manufacture, distribution, sale or supply of ice-cream products not only to AUF’s former customers in Western Australia but to anyone and contained a prohibition on sale, supply and distribution to “any person anywhere” if it was known that the product was ultimately intended for the Western Australian market. The restrictions amounted to a restraint.
Whether Restraint Reasonable
It was accepted in argument that for the restraint to be held valid, the Court must be able to conclude that it was both reasonable in the interests of both parties (Amoco; 306; Peters American Delicacy Co Ltd v Patricia’s Chocolates (1947) 77 CLR 574, 590) and reasonable having regard to the public interest. They are separate questions.
Save in a case where there is no question of there having been some unfair advantage taken of a party, it should be difficult for a contracting party to assert that the bargain it negotiated was not seen by it as beneficial: Esso 300, 305, 324; Amoco 294, 308, 316. In some cases where such advantage is taken, the Courts might grant relief to the party the subject of the restraint. Given that, and that the basis for the doctrine of restraint of trade is public policy [Amoco, 307], it may be open to question whether the Courts need be concerned with the parties’ positions (see Esso, Lord Hodgson, 321). In any event, the cases show that the Courts do not assess its value or benefit.
The reasonableness of a restraint inter partes is not adjudged and concluded from the viewpoint of the value a party derives from it. Menzies J in Amoco (294-5) expressed the view that the important question was what the person who accepts the tie expects to gain from it, but his Honour was in the minority. Nevertheless, the cases show that the Courts will look at aspects of the bargain in order to determine whether it is reasonable, but that the parties’ views of it could not decide the question (Amoco, 306-8; 317-7; 318). An example given by Walsh J in that case (306) was the consideration paid for the restraint, as relevant to the length of its term. So far as it may be relevant here, I think it may be accepted that AUF was paid a substantial sum for the restraint and there were other advantages to it.
The critical question, in my view, is not whether AUF has received sufficient consideration nor whether it had good reason for entering into the whole agreement, but a matter which PWA’s submissions addressed extensively, whether the restraint affords any more than adequate protection to PWA. The issue of reasonableness as between the parties is concerned with the protection of the interests of the party receiving the benefit of the restraint: Amoco, 315-6; applying Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 707.
So far as concerned protection of the licensed brand name and marks, AUF submitted that PWA did not need a restraint and that the exclusivity of the licence given was sufficient. That submission appears to me to be correct. AUF would not be entitled to derogate from such a grant: Trego & Smith v Hunt [1896[ AC 7.
That leaves the goodwill of the business. His Honour found that, whilst some restraint could be justified, one of such a duration as this could not be justified. As his Honour pointed out, PWA was not commencing business afresh. It was integrating two businesses and reaping the benefit of the goodwill of that acquired. I respectfully agree. To these observations may be added reference to the provision restricting AUF from selling or distributing any product under any brand anywhere, if it were destined for the full Western Australian market. In my view, his Honour was correct in holding the restraint to be unreasonable as between the parties.
Whether Reasonable in the Public Interest
Given my view as to the reasonableness of the restraint as it operated inter partes, it is not necessary for me to address this question, although it would appear to be the more important of the questions concerning a restraint.
AUF, the party alleging that the restraint was not in the public interest, carried the onus on that issue: Amoco 308, 317. PWA contends that AUF had not discharged its onus given that it did not adduce evidence. The only available evidence, it submitted, suggested that the Western Australian market had more suppliers than it could sustain. The evidence would not seem to go so far. It suggested that there were other significant participants in the Western Australian market and that at the time of the agreement another major supplier was intending to enter the market. The picture is of a competitive market where PWA, by reason of the agreement, is positioned to acquire market share. His Honour’s view was that for two traders having a significant share of the market to covenant for even the initial term could not be said to be in the public interest, since consumers would be unable to obtain products from AUF for a long time. Even if the effect of the evidence was as PWA contended, that some traders experienced difficulty with the level of competition, it would not necessarily follow that the public interest was met by the restraint or that it was not injured. The public has an interest in suppliers or potential suppliers being able to trade freely. The findings on reasonableness inter partes showed that that was not possible and there was no countervailing benefit to the public to which PWA could point.
Section 51(2)(e) Trade Practices Act
Section 51(2)(e) Trade Practices Act 1974 provides that, in determining whether a contravention of some of the provisions of Part IV has been committed, regard is not to be had:
“(e)in the case of a contract for the sale of a business…to any provision of the contract that is solely for the protection of the purchaser in respect of the goodwill of the business.”
It is not immediately apparent what PWA seeks to derive by its submission that the restraint was within the scope of that provision. The section has regard to what is not to be taken into account in determining whether another provision has been contravened. The common law doctrine is preserved: see s 4M. The issue noted by his Honour was raised by AUF, and was whether there was a residual question as to whether giving effect to a provision such as that in question contravened the Act. It is not necessary to consider that further. It follows from his Honour’s findings of unreasonableness that the restraint was not of the type to which the provision referred.
Orders
The appeal should be dismissed with costs.
I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices French, Kiefel and Nicholson. Associate:
Dated: 10 September 1999
Counsel for the Appellant: Mr WS Martin QC with Mr S Penglis Solicitor for the Appellant: Freehill Hollingdale & Page Counsel for the Respondents: Mr TF Bathurst QC and Mr AI Tonking Solicitor for the Respondents: Tottle Christensen Date of Hearing: 27 May 1999 Date of Judgment: 14 September 1999
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