Popham Holdings Pty Ltd v Franklin
[2016] VSC 597
•6 OCTOBER 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2015 000472
| POPHAM HOLDINGS PTY LTD (ACN 166 571 286) AND ANOTHER | Plaintiffs |
| v | |
| XAVIER DANIEL FRANKLIN | Defendant |
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JUDGE: | ELLIOTT J |
WHERE HELD: | MELBOURNE |
DATES OF HEARING: | 12, 13 SEPTEMBER 2016 |
FURTHER WRITTEN SUBMISSIONS: | 15 SEPTEMBER 2016 |
DATE OF JUDGMENT: | 6 OCTOBER 2016 |
CASE MAY BE CITED AS: | POPHAM HOLDINGS PTY LTD v FRANKLIN |
MEDIUM NEUTRAL CITATION: | [2016] VSC 597 |
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CONTRACT – Restraint of trade – Share buy-back agreement – Former employee – Certainty – Reasonableness – Mistake – Rectification – Common intention.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Fetter | Gilbert + Tobin Lawyers |
| For the Defendant | Mr P Booth | Flower Lawyers |
HIS HONOUR:
A. Introduction
The horse transport industry on the east coast of Australia has only a small number of significant transporters.
The second plaintiff, JG Goldner Pty Ltd (“JG Goldner”), was established in Adelaide in 1945. Since then, JG Goldner has continuously been in the horse transport business. From 2005, JG Goldner has carried on business in Queensland, New South Wales, Victoria and South Australia. At all relevant times, JG Goldner was a substantial operator in the industry.
This case principally concerns the conduct of the defendant, Xavier Daniel Franklin (“Franklin”). From 4 April 2007 to 18 April 2014, Franklin was employed by JG Goldner, including, from 1 November 2013, as its chief executive officer. In April 2014, JG Goldner and Franklin parted ways amicably. Franklin is now the sole director and shareholder of Xavier Franklin Horse Transport Pty Ltd (“Franklin Transport”). Since December 2015, Franklin Transport has competed with JG Goldner. Things are no longer amicable.
The first plaintiff, Popham Holdings Pty Ltd (“Popham Holdings”) became the holding company of JG Goldner in late 2013. Popham Holdings’ interest in shares in JG Goldner exists via 2 interposed subsidiaries, Popham Finco Pty Ltd (“Popham Finco”) and Kiplincotes Pty Ltd (“Kiplincotes”). From 6 December 2013 to 17 April 2014, Franklin was a director of Popham Holdings. Further, from 16 December 2013 to 6 April 2015, Franklin held 50,000 fully paid “C class” shares in Popham Holdings (“the Shares”), which represented approximately 3.6 percent of Popham Holdings’ issued share capital.
At all material times, transporting horses was the only trading activity of JG Goldner. None of Popham Holdings, Popham Finco or Kiplincotes engaged in any activities beyond those related to JG Goldner as the respective holding company. According to the records of the Australian Securities and Investments Commission (“ASIC”), the ultimate holding company of Popham Holdings is Stonehouse Corporation Pty Ltd (“Stonehouse”).[1] Charles Jennings (“Jennings”) is the chairman and chief executive officer of Stonehouse.
[1]A current and historical extract from ASIC’s records as at 17 December 2015 was tendered by the plaintiffs without objection.
In contrast to the other companies, since its incorporation in 2012, Stonehouse has engaged in investment business, and attracted capital from others to be invested in both private and publicly listed companies or businesses.[2]
[2]Stonehouse holds an Australian financial services licence. Jennings is the responsible manager.
From November 2013, when JG Goldner was acquired, Popham Holdings, Popham Finco, Kiplincotes and JG Goldner were related bodies corporate.[3] There is an issue as to whether Stonehouse was also a related body corporate in March 2015.
[3]See Corporations Act 2001 (Cth), ss 9 and 50.
Having left JG Goldner in April 2014, approximately 4 months later Franklin sought to sell the Shares back to Popham Holdings. The negotiations took some time. Ultimately, in selling the Shares in March 2015, Franklin executed an agreement, which included a restraint of trade clause (“the Restraint”). The principal issue in this case is the enforceability of the Restraint.
For the reasons that follow, the plaintiffs’ claim seeking to enforce the Restraint shall be dismissed.
B. Background
Franklin became involved in the horse transport business when he was only 18 or 19 years old, driving a truck while completing his university studies. From around 1999, he drove the “track run” for Mornington and Cranbourne racetracks, 5 days a week.
After completing his tertiary studies and obtaining a business management degree in 2003,[4] Franklin worked full time transporting horses, initially as a driver and then working in operations management.
[4]Although the precise details were not available, in completing the business management degree it appears Franklin majored in human resources.
In 2006 or 2007, JG Goldner offered Franklin a position in operations, assisting the existing managing director. Franklin accepted. No contract was signed. Generally, there are not formal contracts in the industry. Some customers followed Franklin from his previous employer.
Initially, Franklin was involved with transport in Victoria and New South Wales, but then moved to Sydney to set up JG Goldner’s Sydney depot.
In 2009, a major competitor of JG Goldner went into liquidation. The following year the business of JG Goldner grew rapidly. As part of this expansion process, in 2010 JG Goldner spent approximately $2 million on a new fleet of trucks. In the same year, Franklin was promoted to general manager. JG Goldner’s business continued to steadily grow.
In the first half of 2013, JG Goldner was put up for sale. Jennings obtained an information memorandum providing details of JG Goldner’s business and history.
The information memorandum stated that JG Goldner was recognised as a premium horse transporter able to command a premium for its services. In the memorandum, Franklin was described as “General Manager/Interstate Manager”, with 4 managers working with him. The management structure was said to be “deep and established”. It was stated that the “Vendor” held the position of managing director, but was not involved in the day-to-day operations of the business. Apparently, the owner had not been in good health for some time.
On 21 June 2013, Jennings put forward a non-binding indicative offer. From July 2013 to October 2013, Jennings conducted an extensive due diligence.
During the course of that due diligence, on 5 July 2013, Franklin sent an email to Jennings in which Franklin stated he was happy to invest up to $500,000, subject to the availability of funding, “in partnership with yourself in” JG Goldner.
However, towards the end of the due diligence process, Franklin revised his position. On 19 September 2013, Franklin and Jennings met. Franklin told Jennings he had not been able to sell some property and was unable to provide $500,000 as previously indicated. Franklin said $50,000 was all that he had to invest, but that Jennings should move forward with the transaction in any event. Jennings continued with the due diligence on the basis Franklin would invest $50,000 and continue in his role with JG Goldner.
At around this time, Franklin and Jennings had a discussion about Franklin’s role with JG Goldner. According to Jennings, Franklin said that customers were surprised when they were told that Franklin ran the business “for a mate”. Jennings gave evidence that Franklin said all JG Goldner’s customers thought Franklin owned it. Franklin denied making such statements. Nothing really turns on whether anything to this effect was said. It was common ground that in 2013, Franklin was effectively “the face” of JG Goldner.
Like observations may be made in relation to the accounts given of other pre-contractual discussions, to the extent that they differed. It is unnecessary to discuss the details. By way of general observation, I found both Jennings and Franklin to be frank and honest witnesses. It appeared they were both doing their best to recollect the relevant events as they occurred. To the extent there was a discrepancy between them as to what was said, it is more likely each of them simply has different recollections rather than either of them giving any evidence that was deliberately misleading.
C. JG Goldner – a new regime
Before the sale of the shares in JG Goldner, no employee had a written employment contract. Franklin signed an “executive services agreement” with JG Goldner on around 1 November 2013 (“the Employment Contract”), as written employment contracts were required by Jennings before the sale could proceed.
The Employment Contract provided for the following:
(1) A base salary of $150,000 per annum.
(2) Superannuation of $22,500 per annum.
(3)Rental costs of Franklin’s apartment in Randwick, Sydney (which was in the amount of $36,450 per annum, plus $1,707 in related costs).
(4) A company vehicle (which cost $9,067).
(5) Fuel costs for the vehicle (which amounted to $6,800).
A restraint of trade clause was included in the Employment Contract, imposing a restraint for 9 months after Franklin’s employment came to an end. The consideration for which Franklin agreed to enter into the Employment Contract was stated as $10.
Jennings became a director and the company secretary of Popham Holdings upon its incorporation on 1 November 2013.
In mid November 2013, Jennings met with Franklin and provided Franklin with a memorandum he had prepared. In return for the $50,000 investment, Jennings proposed that Franklin invest either equally in “B class” and “C class” shares, or wholly in “C class” shares. Both types of shares were subordinated to proposed deferred payments to the Vendor, acquisition finance payments and repayment of “B class” subordinated notes, but “C class” shares were non-dilutable and were said to have a higher net present value than “B class” shares. On the projections provided by Jennings, it was anticipated C class shareholders would not receive any return on their investment for a number of years. Shortly after, Franklin indicated he would subscribe for 50,000 fully paid C class shares in Popham Holdings.
On 28 November 2013, an agreement was executed for a sale of all the shares in JG Goldner to Kiplincotes, with settlement to occur on 6 December 2013. The purchase price was $7.9 million, $1.5 million of which was deferred over 3 years and subject to performance benchmarks. The sale proceeded as agreed.
Jennings decided that decisions would be made with respect to JG Goldner’s business at the level of Popham Holdings’ board. In addition to Jennings and Franklin, the Vendor also agreed to be appointed to Popham Holdings’ board. In time, Jennings attracted other board members to Popham Holdings.
After the settlement, Franklin otherwise continued in the same role. To the exclusion of Jennings, Franklin spoke and met with all the major customers of JG Goldner on an ongoing basis. Franklin explained to Jennings that this was in the interests of JG Goldner because of the nature of the industry and the close relationships that Franklin enjoyed.
Jennings accepted Franklin’s advice. Jennings focussed upon improving the finance and management structures and procedures of JG Goldner, many of which were either non-existent or had not been formalised before that time.
In late February 2014, a close friend of Franklin, who worked in the horse transport industry, committed suicide. This had a significant effect on Franklin. Franklin decided to leave the industry.[5] On 21 March 2014, Franklin gave 4 weeks’ written notice, as required under the Employment Contract.
[5]Some emails may suggest that Franklin might have been considering leaving JG Goldner from December 2013. Nothing turns on this. Franklin was entitled to leave upon giving due notice.
On 25 March 2014, the board of Popham Holdings met and discussed Franklin’s position. The minutes of that meeting include the following:
(a)Over the past six weeks, personal matters have made [Franklin] decide that he cannot continue to lead [JG Goldner].
(b)[Franklin] is not certain what he will do going forward, but assured the Board that it will not be in horse transport, and that if he thought he could stay in the industry, he would be continuing to lead [JG Goldner].
After giving notice, but before Franklin left JG Goldner, he took Jennings to a horse sale (for the first time), so that Jennings could meet some of the customers of JG Goldner. Jennings found it difficult. The discussions with customers were stilted.
On leaving JG Goldner, Franklin took a break from any work for approximately 2 months. Upon his return to the workforce, Franklin set up a pizza restaurant in Patterson Lakes, a suburb of Melbourne.
After Franklin’s departure, Jennings formed the view that it would be better for JG Goldner if someone with contacts in the industry approached JG Goldner’s customers rather than him. Accordingly, a search commenced for Franklin’s replacement. This proved to be a difficult exercise. In the months that followed, JG Goldner’s business suffered a significant downturn in revenues.
In August 2014, Franklin approached Jennings and asked whether he could sell back the Shares. Having established the pizza restaurant, Franklin intended to expand, by opening a new “American-style diner” next door.
The reaction of the Popham Holdings’ board was mixed. Negotiations ensued sporadically. They did not include any discussion of a further restraint of trade being imposed upon Franklin until late in the negotiations, when Jennings emailed a draft agreement to Franklin on 11 March 2015.
By March 2015, JG Goldner had still not found a satisfactory replacement for Franklin. Although appointments had been made, they had not been successful. There were also other events with the business that had consumed the time of Jennings and others, which had diverted Jennings’ attention from finding a replacement.[6]
[6]JG Goldner were alleged to have infringed driving laws relating to employee drivers. The offences were alleged to have occurred in January 2013, but were apparently not disclosed by the Vendor. Ultimately, in 2015, JG Goldner pleaded guilty to a reduced set of charges and was fined $12,613 on 21 April 2015.
Further, Jennings gave uncontradicted evidence that there is a pecking order in the horse racing industry with respect to customer relationships. Horse transporters are down that pecking order regarding with whom customers want to talk. Furthermore, there is a divide between “horsey people” and “non-horsey people”, such that relationship and trust building in the industry takes years. Moreover, the way to cultivate a customer relationship is to attend horse sale or industry events, informally run into a customer and hope to have a friendly discussion with them. In summary, more formal types of marketing are unlikely to meet with success.
Because of the nature of the industry and some unforeseen events, despite his best efforts, and working 3 to 5 days a week for JG Goldner after Franklin’s departure, Jennings had not had the opportunity to meet all of the top 20 customers of JG Goldner. Accordingly, by March 2015, JG Goldner had not managed to secure a meaningful connection with all of its customers, despite the lapse of nearly a year since Franklin had left.
It was in this context that Jennings was determined to secure a further restraint of trade in any agreement concerning the buy-back of the Shares.
When Franklin received the email on 11 March 2015, he took exception to the proposed restraint of trade. He telephoned Jennings and asked why the restraint was there. Franklin stated, correctly, that the restraint of trade under the Employment Contract had already expired. Franklin also reminded Jennings that he had told him he was not getting back into the horse transport industry.
In response, Jennings stated that he believed Franklin, but he considered that he had a duty to his investors to protect JG Goldner’s business. Jennings said that Franklin could not be paid $35,000 so that he could set up his own business “to compete with us”.
After repeating that he had no intention of getting back into the horse transport industry, Franklin also stated that the proposed 2 year period from the date of execution was too long. Jennings stated the best he could do was to reduce the restraint to 1 year. Franklin said he would think about it. Later, Franklin telephoned Jennings and said he would accept the proposed restraint of 1 year.
On around 20 March 2015,[7] Franklin and Popham Holdings executed a share buy-back agreement (“the Buy-Back Agreement”). The only parties to the Buy-Back Agreement were Franklin, defined as “Shareholder”, and Popham Holdings, defined as “Company”.
[7]The document is dated 16 March 2015, but was not emailed to Franklin for signing until 20 March 2015.
The consideration was described as “among other things, the mutual promises contained in” the Buy-Back Agreement. Popham Holdings agreed to purchase the Shares for $35,000, though Franklin would only receive an amount after Popham Holdings had deducted the amount of the “Transaction Costs”, up to the sum of $12,000.[8] Other than payment for the Shares and the Transaction Costs, no other amounts were payable.
[8]In fact, the Transaction Costs were only $5,500. Jennings managed to reduce the legal fees by doing “a lot of the paperwork on [his] own”.
The terms of the Buy-Back Agreement included the Restraint, in the following terms:
4.1 Restraint[9]
[9]Headings were used for convenience only: Buy-Back Agreement, sch 1, item 2(a).
The Shareholder agrees that during the Restraint Period he shall not, whether:
(a) directly or indirectly;
(b) on his own account;
(c)jointly with or on behalf of any other person or corporation in any capacity, including as an officer, executive, independent contractor, partner, joint venturer or agent;
(d)as principal, executive, partner, agent, director, consultant, employee, advisor, shareholder (excluding the holding of less than 5% of the stock of a publicly listed company) or otherwise on any account or pretence:
(i)within the Restraint Area, carry on, assist or be employed, engaged or concerned in any business which is engaged, whether directly or indirectly in the business of horse transport or which otherwise competes with the business of the Company or its Related Bodies Corporate;
(ii)solicit, employ or engage any director, manager, employee, contractor or consultant of the Company or its Related Bodies Corporate;
(iii)entice away, provide services to, accept services from or in any other manner persuade any customer, contactor or supplier to the Company or its Related Bodies Corporate to discontinue his, her or its relationship with the Company or its Related Bodies Corporate or to otherwise reduce the amount of business they do with the Company or its Related Bodies Corporate; and/or
(iv) offer, attempt or prepare to do any of the above.
4.2 Employment agreement
The parties agree that this clause 4 applies without prejudice to any covenants given by the Shareholder under [the Employment Agreement] with the Company.
The dictionary in the Buy-Back Agreement included the following:
Related Bodies Corporate has the meaning given in sections 9 and 50 of the Corporations Act.
Restraint Area means:
(a) Queensland;
(b) New South Wales;
(c) Victoria;
(d) South Australia.
Restraint Period means:
(a) 24 months;
(b) 18 months;
(c) 12 months;
(d) 9 months,
from the date on which the Shareholder ceased to be employed by the Company.
In fact, Franklin had never been employed by “the Company”, ie Popham Holdings. On the assumption that the parties intended this phrase to be referring to JG Goldner,[10] in effect, this meant the maximum Restraint Period was approximately 13 months from the time of execution of the Buy-Back Agreement.
[10]As to which, see pars 61-66 below.
Upon receipt of $29,500 for the Shares, Franklin used those moneys to complete the fit-out of his proposed new restaurant. However, things did not go as planned. A new pizza restaurant had opened nearby in Patterson Lakes. Franklin’s pizza business started losing significant amounts of money. Before long, Franklin’s expenses exceeded his income.[11]
[11]Franklin also had a rental property from which he received a modest amount of income after payment of related expenses.
By September 2015, Franklin was desperate to leave the pizza business. A friend of his conducted a horse transport business in Melbourne and asked if Franklin would like to take it over. This business was in direct competition with JG Goldner. Although the business was in difficulty, Franklin’s friend thought Franklin could make a go of it due to his contacts in the industry.
Franklin agreed to purchase the trucks of the business. To do this he borrowed money from his parents and arranged arms-length finance.
On 12 October 2015, Franklin Transport was incorporated. On 9 November 2015, Franklin registered “Platinum Horse Transport” in the name of Franklin Transport.
In November 2015, Jennings telephoned Franklin. Jennings stated that he had heard that Franklin had bought some trucks and asked him what he was doing. Franklin stated that he had received legal advice and that Franklin could do whatever he wanted.
On 16 November 2015, Popham Holdings’ solicitors wrote to Franklin demanding a written undertaking from Franklin in favour of Popham Holdings. The letter sought to have undertakings that Franklin would fully comply with the terms of clause 4.1 of the Buy-Back Agreement, without severing any relevant aspect of the covenant (clause 4.1(a)-(d)(ii) was inapplicable).[12] In ultimately asserting that a court was “likely to give full force and effect to the Restraint”, the solicitors stated that Franklin had previously agreed to a restraint of trade as an employee, but incorrectly identified the former employer as Popham Holdings.
[12]There was no suggestion that, by November 2015, Franklin had sought to solicit, employ or engage any person related to Popham Holdings or its Related Bodies Corporate.
It was not until 7 December 2015 that Franklin Transport commenced trading activities.[13] Before this time, Franklin himself was not involved in any trading in the horse transport industry. Although the exact timing was not clear on the evidence, Franklin closed his restaurant businesses.
[13]The first customer Franklin Transport provided with horse transport was on 8 December 2015. Franklin said he contacted the customer the day before.
There can be no doubt that if the Restraint is legally enforceable by either of Popham Holdings or JG Goldner or both, then from at least 7 December 2015 to 17 April 2016, Franklin breached the Restraint. Further, during that time, JG Goldner lost work to Franklin Transport.
On 18 December 2015, Popham Holdings commenced this proceeding against Franklin seeking damages for breach of the Buy-Back Agreement.
On 21 April 2016, Popham Holdings and JG Goldner executed a deed of assignment (“the Deed of Assignment”), whereby Popham Holdings assigned to JG Goldner the benefit of clause 4 of the Buy-Back Agreement “insofar as it applies to [JG Goldner]”.
In May 2016, leave was granted for JG Goldner to be joined as the second plaintiff.
D. Rectification
The first issue for determination is whether the word “Company” in the definition of Restraint Period was a mistake such that it should be rectified and replaced with “JG Goldner”.[14]
[14]Consistent with this, “Company” in cl 4.2 would be rectified in the same manner, but no relief was sought with respect to cl 4.2 and therefore this rectification was unnecessary.
Before turning to this issue, I refer to the plaintiffs’ primary submission that there was no mistake. This was put on the basis that “Company” should be read as a reference to JG Goldner, rather than Popham Holdings. However, “Company” was clearly and unambiguously defined to mean Popham Holdings.[15] There is simply no scope for giving this specifically defined term a distinct and fundamentally different meaning in different parts of the Buy-Back Agreement.
[15]All defined terms are clearly identified as beginning with a capital letter.
As a fall-back position, the plaintiffs submitted there was a common mistake and that the Buy-Back Agreement should be rectified. Franklin contended there was no mistake, based on Jennings’ evidence to the effect that he treated Popham Holdings, Popham Finco, Kiplincotes and JG Goldner as 1 in his own mind.[16]
[16]These companies were treated as a consolidated group for tax purposes.
Notwithstanding the plain language used in defining “Company”, the parties must have intended the Restraint Period to be defined by reference to the time at which Franklin ceased to be employed by JG Goldner. In short, that was the only entity that had employed him at all relevant times. Jennings’ treatment of entities within the group does not alter this fact.
This intention is also reflected in the discussions shortly before the Buy-Back Agreement was executed.[17] In essence, Franklin and Jennings had agreed orally that the restraint would operate for 12 months from the time of execution. This time frame approximates[18] with 24 months from the time Franklin ceased to be employed by JG Goldner, which was the maximum period in the definition of Restraint Period.
[17]See pars 42-44 above.
[18]See par 49 above.
Accordingly, to conform with the true agreement between the parties, which remained their common intention at the time of execution, the Buy-Back Agreement must be rectified so that the word “Company” in the definition of Restraint Period is replaced with “JG Goldner Pty Ltd”.[19]
[19]Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336, 350.2 (Mason J, with whom Menzies J agreed).
E. Restraint of trade – relevant principles
In Wallis Nominees (Computing) Pty Ltd v Pickett,[20] Sifris J summarised the basic principles governing restraint of trade clauses as follows:[21]
[20](2012) 219 IR 244.
[21]At 252-253 [50]; referred to and quoted with approval on appeal in Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, 662 [14] (Warren CJ and Davies AJA, with whom Redlich JA generally agreed).
(a) A contractual provision in restraint of trade is, prima facie, void.
(b)The presumption can, however, be rebutted and the restraint justified by the special circumstances of a particular case, if the restriction is reasonable by reference to the interests of the parties.
(c)The validity of the covenant in a contract is to be judged as at the date of the [e]mployment [a]greement.
(d)A stricter view is taken of covenants in restraint of trade in employment contracts than those contained in contracts for the sale of a business.
(e)The onus of proving the special circumstances justifying the restraint is on the person seeking to enforce the covenant.
(f)So far as the parties’ interests are concerned, the restraint must impose no more than adequate protection to a party in whose favour it is imposed. If the court is satisfied that the restraint confers greater protection than can be justified, there is no further issue of reasonableness.
(g)The meaning of the restraint clause may be construed by reference to the factual matrix, documentary context and surrounding circumstances.
(Citations omitted.)
As to the last of these propositions, if the meaning of the restraint clause is uncertain, it will not be enforced by the courts.[22]
[22]See, for example, Hanna v OAMPS Insurance Brokers Ltd (2010) 202 IR 420, 427-429 [19]-[29] (Allsop P, with whom Hodgson JA and Handley AJA agreed) and the cases there cited, including Davies v Davies (1887) 36 Ch D 359, 388.2 (Cotton LJ), 394.3 (Bowen LJ), 399.7 (Fry LJ).
F. The Restraint is uncertain
There are a number of uncertainties with the Restraint. The most obvious uncertainties arise from the definitions of “Restraint Area” and “Restraint Period”.
As to the definition of Restraint Area,[23] the plaintiffs accepted the definition was ambiguous, insofar as the areas identified could be read cumulatively or in the alternative. However, it was contended that ambiguity did not give rise to uncertainty. Because of the factual matrix and the parties’ knowledge of the fact that JG Goldner’s business operated in all the areas referred to, it was contended that the reasonable reader would understand that the word “and” was effectively included so that the areas were to be read cumulatively. But the matter cannot rest there.
[23]Which only confines the operation of cl 4.1(a)-(d)(i), but not cl 4.1(a)-(d)(ii)-(iv).
The draftsperson has used an identical form of drafting in defining Restraint Period. Despite this, the plaintiffs contended that, in contrast to the definition of Restraint Area, the periods should not be read as if the word “and” formed part of the definition. It was accepted that, if such a construction were adopted, it would be uncertain as to whether each of the periods ought to be added together or alternatively read as cascading clauses.[24]
[24]Cf Northern Tablelands Insurance Brokers Pty Ltd v Howell (2009) 184 IR 307, 314-315 [38]-[46] (Barrett J).
Further, the plaintiffs accepted that if the 4 different periods identified were to be read in the alternative, as if the word “or” were included in the definition, that would give rise to uncertainty.[25]
[25]Cf Tyser Reinsurance Brokers Pty Ltd v Cooper (unreported, Supreme Court of New South Wales, Young J, 7 December 1998); Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505, 520.4 (Spender J).
Significantly, the Buy-Back Agreement did not contain a severability clause, which might have provided for each possible permutation of the Restraint to be treated as an individual and separate covenant.[26]
[26]Cf Hanna v OAMPS Insurance Brokers Ltd (2010) 202 IR 420, 424 [3] (clause 4), 425-426 [7]-[14] (Allsop P, with whom Hodgson JA and Handley AJA agreed).
The construction contended for by the plaintiffs was that, rather than reading the periods cumulatively or alternatively, they should be read on the basis that the greatest of the periods was intended to apply, with “an eye to potential severance” in the event that the longer periods were held to be unreasonable. In other words, it was submitted that the clause should be read as if the words “the greater of” were inserted before the listing of the different periods.
A fundamental difficulty with the plaintiffs’ submission is that it requires the reader to apply a different approach to construction to the 2 definitions despite the same form of drafting being adopted. Further, the approach requires the reader to exclude constructions that are sensibly open on the face of the document. It follows that a reasonable reader the subject of the Restraint could not be certain as to its operation.
These difficulties are compounded by the reference to 9 months in the definition of Restraint Period. At the time the Buy-Back Agreement was entered into, 9 months had already elapsed since Franklin’s departure. The parties having “an eye to potential severance” does not explain the existence of this provision, which could have no operation unless it were read in a cumulative manner with the longer periods. As the plaintiffs’ counsel correctly conceded, if there were to be cascading periods there was no point in including a 9 month period.
Another uncertainty with the Restraint arises from the inclusion of Popham Holdings’ “Related Bodies Corporate” in clause 4.1. With respect to subparagraph (i) of clause 4.1, the business Franklin was required not to be involved in, either directly or indirectly, was not clearly specified. Although “Related Bodies Corporate” was defined by reference to the Corporations Act, neither the entities which comprised the Related Bodies Corporate nor the businesses of the Related Bodies Corporate were identified. Franklin submitted, correctly in my view, that simply referring to ss 9 and 50 of the Corporations Act (which require reference to other provisions in the Corporations Act to be understood) in the circumstances of this case did not identify the subject matter of the Restraint with sufficient certainty.
In response to Franklin’s submission, the plaintiffs contended that Franklin knew that Popham Finco, Kiplincotes and JG Goldner were Related Bodies Corporate of Popham Holdings and that these companies were only concerned with the horse transport business; the first 2 of them being special purpose vehicles established for the acquisition of JG Goldner. Whether or not Franklin fully appreciated this,[27] that does not address the possible uncertainty concerning whether there were other entities that were also Related Bodies Corporate.
[27]Franklin gave evidence that, notwithstanding he was a director of Popham Holdings, he did not fully understand the corporate structure involved.
During the plaintiffs’ closing submissions, the court inquired as to whether or not Stonehouse was a Related Body Corporate for the purposes of the Buy-Back Agreement. The plaintiffs’ counsel responded that it probably was, but then immediately withdrew the concession saying it would be necessary to look at the Corporations Act as he could not be certain without the provisions in front of him.
Ultimately, the plaintiffs submitted they were not in a position to address the issue. They sought, and were granted, 2 days to file written submissions.
Before referring to these submissions, it is important to recognise that the pleadings did not squarely address which companies were encapsulated in the definition of Related Bodies Corporate. In pleading the terms of the Buy-Back Agreement, the statement of claim merely recited the definition of Related Bodies Corporate. There was no allegation as to which companies were the subject of the definition. The defence denied the relevant allegations and pleaded further averments, but made no attempt to plead which companies were or might have been included in the definition.
It was not until the oral opening of their case that the plaintiffs’ position was made clear.[28] After noting Related Bodies Corporate was defined by reference to the Corporations Act, the plaintiffs’ counsel stated:
So we say that it’s a restriction on competing with the business of any 1 of 4 companies, Popham Holdings, Popham Finco, Kiplincotes or [JG Goldner], since they are the 4 companies in the group.
[28]Written openings were filed by the parties. No reference was made by the plaintiffs or Franklin as to which companies were referred to the definition of Related Bodies Corporate.
Having filed a written opening, Franklin’s counsel chose not to open orally. This might explain why the issue was not clearly identified until closing submissions.
The plaintiffs submitted that Franklin ought to be precluded from raising any issue about the meaning of “Related Bodies Corporate” as it had not been raised on the pleadings.[29] Whilst that is a correct statement as to the contents of the pleadings, the onus is on the plaintiffs to establish that the Restraint is certain and reasonable.[30] If the statement of claim had addressed the entities for which the plaintiffs contended, presumably this would have been addressed in the defence.
[29]See, for example, Banque Commerciale SA, en Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279, 286.8-287.3 (Mason CJ and Gaudron J).
[30]See par 67 above.
Having said this, there is force in the plaintiffs’ submissions that if the issue had been squarely raised by Franklin after the entities had been identified in the oral opening, then Jennings may have led further evidence on the issue. Accordingly, I will proceed on the basis that Jennings may well have led evidence on why Stonehouse was not the ultimate holding company and thus was not a Related Body Corporate, notwithstanding it is recorded as such in the ASIC current and historical extract.
Returning to the submissions, I agree with the plaintiffs’ threshold submission that the identification of which companies come within the definition of Related Bodies Corporate is to be ascertained at the time the Buy-Back Agreement was entered into. I also accept that the question of whether or not Franklin actually knew in March 2015 precisely which corporations came within the definition cannot determine the certainty or otherwise of the provision. There were no submissions made to the contrary.
The plaintiffs’ supplementary submissions referred to the reference to “holding company” in s 50 of the Corporations Act. They then submitted that Stonehouse could only be a holding company for Popham Holdings under s 9 of the Corporations Act (which must be read in conjunction with ss 46 to 49) if, at the time of the Buy-Back Agreement being entered into, Stonehouse met any of the following:
(1) Controlled the composition of Popham Holdings’ board.
(2)Controlled more than half the votes at a general meeting of Popham Holdings.
(3)Held more than half of the voting shares in Popham Holdings.
Further, the plaintiffs relied upon s 48(2) of the Corporations Act insofar as it contained an exception so that “any shares held, or power exercisable … in a fiduciary capacity” were to be ignored in the identification of a holding company.
In concluding the supplementary submissions, the plaintiffs submitted that the evidence pointed to a positive conclusion that Stonehouse was acting in a fiduciary capacity with respect to Popham Holdings at all times so it could not be a Related Body Corporate.
A restraint of trade must be clear in its terms so that the person the subject of the restraint can properly and meaningfully understand the requirements that bind her or him.[31] It would have been very simple for Popham Holdings’ solicitors to simply list the companies that were intended to be encompassed within the Restraint. In the particular circumstances of this case, by choosing not to list the companies and simply referring to provisions of the Corporations Act when the beneficial ownership of many of the shares in, and the complete nature of the relationship with, Stonehouse was not apparent, the ambit of the Restraint was not sufficiently clear to give certainty to Franklin as to the requirements being imposed. In short, Franklin was in no position, himself, to ascertain exhaustively which companies fell within the definition “Related Bodies Corporate”. This is an additional and distinct reason as to why the Restraint is uncertain each time the term is used.
[31]See fn 22 above. See also Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505, 522.2 (Spender J).
This conclusion is reached as a matter of construction of the Buy-Back Agreement. The matter was raised at trial and the parties were given the opportunity to put submissions based on the construction issue. The conclusion I have reached does not depend on what further evidence Jennings may or may not have given on the subject or whether Stonehouse may have been acting in a fiduciary capacity. Accordingly, even proceeding on the basis that Jennings might have satisfied the court that Stonehouse was not a Related Body Corporate, as a matter of construction the relevant provisions are uncertain.
In addition, if Franklin had understood Related Bodies Corporate to include Stonehouse, there was no attempt in the Buy-Back Agreement to identify what the investment business of Stonehouse involved. In those circumstances, the reasonable reader in the position of Franklin could not be certain what activities “otherwise compete[d] with the business of” Stonehouse.[32]
[32]See cl 4.1(a)-(d), (i).
G. The Restraint is unreasonable
If, contrary to the findings above, the Restraint was not uncertain and the definition of Related Bodies Corporate included Stonehouse, the Restraint went far beyond what was adequate to protect Popham Holdings or JG Goldner. Quite properly, the plaintiffs did not contend that such a broad construction would be enforceable. Implicitly, in making the submissions they did, the plaintiffs accepted the Restraint would be too wide if the Restraint sought to protect Stonehouse’s business.
In any event, on the issue of reasonableness, I will proceed on the assumption the Restraint was sufficiently certain and that it did not extend to Stonehouse.
Before determining whether or not a Restraint Period of 24 months from the date on which Franklin ceased to be employed by JG Goldner[33] was reasonable, it is necessary to consider the relevant circumstances in March 2015.[34]
[33]This period of 24 months was the only construction for which the plaintiffs contended. The court was specifically directed not to consider the reasonableness of a period of 18 months or some lesser period in the event 24 months were held to be unreasonable.
[34]Then There Were Three Pty Ltd v Douglas [2014] NSWSC 1011, [107] (Lindsay J); Hanna v OAMPS Insurance Brokers Pty Ltd (2010) 202 IR 420, 430 [33] (Allsop P, with whom Hodgson JA and Handley AJA agreed).
In my view, it is of some significance that, at the time the Employment Contract was entered into, 9 months was the agreed restraint period. The obvious inference is that the parties agreed that this was a reasonable period.[35]
[35]This is the proper and objective inference to draw, and is not affected by Jennings’ evidence that he did not give the length of the restraint much consideration at the time.
Further, although JG Goldner had experienced considerable difficulties since Franklin’s departure and still found itself in a somewhat precarious positon 11 months later, such circumstances were not attributable to any conduct of Franklin.[36] Furthermore, by this time, Franklin had already faithfully complied with the previous restraint imposed under the Employment Contract. In short, Franklin was entirely free to compete with the plaintiffs in March 2015. The cumulative effect of the Restraint was to seek to shut Franklin out of the industry he had worked in nearly his entire working life for more than 2½ times longer than what had originally been agreed.[37]
[36]In saying this, I make no criticism of Jennings, who struck me as an earnest and diligent business person. The evidence suggests Jennings used his best endeavours to find a suitable replacement.
[37]See pars 24 and 44 above.
The plaintiffs submitted that Franklin received a significant sum of money and that he could have chosen to live off that money for some of the Restraint Period rather than invest the money in the new restaurant. Although Franklin may have made a different decision on how to spend the proceeds of the sale of the Shares, the amount paid bore no resemblance to the remuneration he had been entitled to under the Employment Contract.[38]
[38]See par 23 above.
Further, there was no expert evidence before the court as to the value of the Shares in March 2015. Franklin received $35,000 (less expenses) for the Shares, having paid $50,000 for them less than 1½ years before. In these circumstances, the court cannot be satisfied that any significant premium was paid to Franklin in order to secure the Restraint. In summary, the consideration paid for the Shares, after taking into account an amount for the value of the Shares, could in no way be seen as commensurate with the income Franklin would have been entitled to for the further 13 month period the subject of the Restraint.
It must follow that, while Popham Holdings wanted to protect its interests and those of JG Goldner, the Restraint went beyond what was reasonably necessary to protect those interests. It was unreasonable to seek to shut Franklin out for a substantially longer period than had already been agreed under the Employment Contract, and thereby potentially deprive him of his livelihood.
Also relevant to the reasonableness of the Restraint is the nature of the agreement entered into. The Buy-Back Agreement was not for the sale of a business, but for the sale of a small minority shareholding in the context where Franklin had received none of the proceeds of the original sale of business and was a former employee of a related company seeking to sever his last connection with his former employment. Although the Buy-Back Agreement cannot be properly characterised as containing a restraint in an employment contract, the circumstances of the case are such that the court should take a stricter view of the Restraint than a restraint contained in a sale of business. This must be so when, nearly a year after Franklin’s employment lawfully ceased, the Restraint in its terms would have had the effect of preventing Franklin from earning a living for more than a year in the only industry in which he had any meaningful experience.
On the question of policy, the plaintiffs submitted that it was in the public interest for the Restraint to be upheld. It was submitted that if restraints similar to the Restraint were not permitted, then minority shareholders might not be able to sell their shares and would therefore be deprived of investment moneys for other purposes. It was also submitted the stifling of such arrangements would result in companies being saddled with unwilling shareholders, potentially leading to difficulties in the running of the companies and to sub-optimal capital structures.
It may be that in other circumstances it would be appropriate to enforce a restraint agreed to as part of a share sale. The authorities do not suggest that restraints of trade may only be enforceable when they are in employment contracts or sale of business contracts. Suffice to say, the circumstances of this case mean that the Restraint is unreasonable. Further, the problem sought to be identified by the plaintiffs may not be as grave as suggested given other protections available,[39] but it is unnecessary to discuss such matters here.
[39]For example, Corporations Act, s 232; the Competition and Consumer Act 2010 (Cth), Schedule 2, the Australian Consumer Law, s 20.
H. Further matters
What is set out above clearly disposes of the question of the enforceability of the Restraint. In those circumstances, it is unnecessary to catalogue each of the other potential difficulties the plaintiffs face. For completeness, I refer to the following:
(1)The wording used in clause 4.1(a)-(d)(i) “which otherwise competes with the business of the Company or its Related Bodies Corporate” does not make it entirely clear as to what conduct would be the subject of the Restraint.
(2)When clause 4.1(a)-(d)(i) is read as a whole, it seeks to prevent Franklin from any activity whatsoever concerning the business of horse transport or which otherwise competes with the business of the Company or its Related Bodies Corporate. This means that Franklin could not even accept work as a truck driver in the event that he was otherwise unable to secure employment. Such a broad restraint goes beyond protection that could be justified by the plaintiffs and therefore is unreasonable.
(3)To the extent that clause 4.1(a)-(d)(i)-(iii) contains wording that is unclear or imposes obligations that are unreasonable, it must follow that clause 4.1(a)-(d)(iv) is also unclear or unreasonable.
Equally, as the Restraint is not enforceable, it is unnecessary to determine issues relating to the Deed of Assignment, the standing of either Popham Holdings or JG Goldner to make claims in this proceeding concerning the Restraint, or whether Popham Holdings could make a claim for damages.
Conclusion
For the reasons stated above, the Buy-Back Agreement will be rectified, but otherwise the plaintiffs’ claim will be dismissed.
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