Positive Endeavour P/L v Madigan, Lehmann & First Pacific Mortgages P/L - [2008] SADC 117

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
POSITIVE ENDEAVOUR P/L v MADIGAN, LEHMANN & FIRST PACIFIC MORTGAGES P/L
[2008] SADC 117
Judgment of Her Honour Judge Shaw
11 September 2008
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - PARTIES
Parties entered into a contract for sale of partnership asset - plaintiff alleged defendants breached a restraint of trade clause - validity of restraint - construction of terms of contract - questions of severance and rectification. Held - restraint clause void. Plaintiff's claim dismissed.
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Herbert Morris Ltd v Saxelby [1916] 1 AC; Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Company Pty Ltd (1973) 133 CLR 288; NE Perry Pty Ltd v Judge (2002) 84 SASR 86; Hydron Pty Ltd v Harous [2005] SASC 176; McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542; Tricontinental Securities Limited v Barwa Holdings Limited (1991) 32 FCR 451; Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; Specialty Equipment Co Inc v RE Phillips Nominees Pty Ltd (2007) 99 SASR 535; Tyser Reinsurance Brokers Pty Ltd v Cooper [1998] NSWSC 689; Meehan v Jones (1982) 149 CLR 571; Trustees Executors and Agency Co Ltd v Peters (1960) 102 CLR 537; Whitlock v Brew (1968) 118 CLR 445; New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co (1986) 6 NSWLR 740; Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133; Butt v Long (1953) 88 CLR 476; Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; Mason v Provident Clothing & Supply Co. Ltd. [1913] AC 724; I.F. Asia Pacific Pty Ltd [2003] VSC 192, considered.

POSITIVE ENDEAVOUR P/L v MADIGAN, LEHMANN & FIRST PACIFIC MORTGAGES P/L
[2008] SADC 117
Introduction

This is a claim for damages for breach of an agreement entered into on 22 March 2004 between the plaintiff, Michael Smoker, the first and second defendants and the corporate entities of the first and second defendants, namely Kopala Pty Ltd and Erimus Pty Ltd (“the contract”). Pursuant to the contract, the plaintiff paid the sum of $120,000.00 to the first and second defendants and their related corporate entities, in respect of the purchase of a finance broking business. The sole asset of the business at that time was a trail book containing details of customer loans which loans generated commissions. The plaintiff is the corporate entity of Michael Smoker. Kopala Pty Ltd is the corporate entity of the first defendant. Erimus Pty Ltd is the corporate entity of the second defendant.
The third defendant is a company in respect of which the first and second defendants are shareholders and directors. The third defendant was not a party to the contract.
The contract provided that the first and second defendants would not solicit, canvass or secure the custom of a person who was, at the completion of the contract, a customer of the defendants, either directly or through an associated person, as defined in the contract (“the restraint”).[1]
[1] Clause 8 of the contract
The plaintiff claims that the defendants breached the restraint in that they re-wrote loans or arranged new loans for certain customers from the trail book. The plaintiff also claims that the first and second defendants breached the restraint through the agency of the third defendant. The plaintiff claims damages in relation to commissions which it alleges were lost as a result of a breach of the contract.
The defendants claim that the restraint was invalid. Alternatively, if it was valid and effective, the defendants did not breach the restraint.
The important issues for determination are the true construction of the contract, the validity of the restraint and the measure of any damages.
Background
Mr Smoker had been involved in the finance industry for more than 20 years. He operated as a finance broker through the plaintiff company. In 2001, the plaintiff entered into a partnership arrangement with Kopala Pty Ltd, which was the corporate entity of Mr Madigan (the first defendant). Mr Madigan, also a finance broker, had worked in the finance industry since 1973 and had worked in his own business since 1989. The plaintiff and Kopala Pty Ltd traded as finance brokers in the commercial and domestic market.
On 1 July 2001, Mr Madigan and Mr Smoker, on behalf of their corporate entities, appointed Fairways Securities Pty Ltd as their agent and nominee of and for their home loans business partnership.
Subsequently, Kopala Pty Ltd sold part of its finance broking business to Erimus Pty Ltd, the corporate entity of Ms Lehmann (the second defendant).
On 5 March 2002, First Pacific Mortgages Pty Ltd was incorporated Mr Madigan and Ms Lehmann were appointed as directors and shareholders. On 30 July 2002, the plaintiff, Kopala Pty Ltd and Erimus Pty Ltd, entered into a partnership named Fairway Securities (“the partnership”).
By deed dated 30 July 2002, Fairway Securities Pty Ltd was appointed as agent and nominee for the partnership. Mr Smoker, Mr Madigan and Ms Lehmann were directors of Fairway Securities Pty Ltd. Fairway Securities Pty Ltd held the finance broking accreditation. The Fairway Group undertook finance broking activities in Adelaide, Victor Harbor and in the Northern Territory.
The commissions were split between the partners depending upon the writer of the business. The balance of the partnership profits was shared proportionately according to their capital contributions, namely 50% to the plaintiff, 25% to Kopala Pty Ltd and 25% to Erimus Pty Ltd
As at 2002, Jackie Aylesbury was employed by the Fairway Group.
From 31 March 2003, the third defendant began operating as a finance broker under the control of the first and second defendants. The third defendant used the lender accreditation held by Fairway Securities to enable the third defendant to carry on its business.[2]
[2] Further amended defence paragraph 9
In April 2003, the partners decided to go their separate ways, although they continued to trade as Fairway Securities. It was agreed that each partner would seek its own accreditation. On 17 June 2003, Ms Eylesbury ceased as an operative of the plaintiff and registered the business name “South Coast Lending” as a sole trader.
In late June 2003, Ms Eylesbury became an operative of the third defendant and entered into an agreement with the third defendant to share commissions earned by her. She continued to operate her own business. On 1 July 2003, the plaintiff demanded that Ms Eylesbury return files belonging to the plaintiff. Eventually, the files were returned although there is a dispute as to whether they were complete. Litigation between the plaintiff and Ms Aylesbury in relation to this dispute resolved in late 2004.
During 2003, relations between the partners deteriorated. In July 2003, the partnership became deadlocked and creditors were not being paid.
On 5 December 2003, the plaintiff issued proceedings for pre-action discovery against the defendants. On 20 January 2004, the first and second defendants offered to sell to the plaintiff for the sum of $120,000.00, their interest in the home finance business of Fairway Securities.
On 10 February 2004, a sale price of $120,000 was agreed. On 23 February 2004, Mr Madigan wrote to Mr Smoker in the following terms:[3]
We will act in good faith in this matter. .... I will not be prevented from dealing with my commercial clients where trailing commission is unaffected, ie. plant & equipment and the like. These were my clients prior to the establishment of the Fairway partnership. I am prepared to avoid dealing with loans which entail a trail however with the exception of: ....
[3] Exhibit P7 p23
On 26 February 2004, the plaintiff’s solicitors prepared the first draft of the proposed contract between the parties.[4]
[4] Exhibit P7 p27
On 10 March 2004, the solicitor for the first and second defendants confirmed in writing that “the consideration was largely payable for the sale and purchase of the right to the future commissions generated by the loan book, rather than for the purchase of the shares in Fairway Securities which is not the beneficial owner of any of the assets”.[5] The solicitor requested certain alterations in respect of the draft contract.[6]
[5] Exhibit P7 p24
[6] Exhibit P7 p24
On 15 March 2004, the final draft contract was prepared. It contained amendments to the restraint, and a schedule which contained the exceptions to the restraint. The contract was signed on 22 March 2004.
On 4 August 2005, the plaintiff wrote to the defendants complaining about alleged breaches of the contract.
On 9 October 2006, Mr and Mrs Smoker entered into an agreement to sell their shares in the plaintiff company and Fairway Securities Pty Ltd to Melshar Pty Ltd but retained the right to pursue the present action on behalf of the plaintiff, for their benefit.[7]
[7] Exhibit P1, pp268 & 272
The Plaintiff’s Claim
The plaintiff contended that after the date of entry into the contract, it was entitled to all the commissions due to Fairway Securities Pty Ltd. It was alleged that Fairway Securities was acting as agent for the plaintiff.
The plaintiff contended that the defendants were in breach of the contract because they dealt with customers from the trail book. The plaintiff’s claim was limited to those customers and trails particularised in the statement of claim.
The plaintiff alleged that the first and second defendants had breached the contract by securing the custom of customers identified in the trail book and enticing them to enter into new financial contracts with the third defendant. This caused the plaintiff to lose up-front and trailing commissions which were due to it, and resulted in the third defendant receiving the benefit of those commissions.
The plaintiff also alleged that the defendants breached the contract directly, or through the agency and control of the third defendant, by using the trade secrets, the secret details and information relating to individuals who were the customers of the first and second defendants.
Further, the plaintiff alleged that the third defendant had breached the contract as agent of the first and second defendants, and as an “associated person” to the first and second defendants.
The plaintiff claimed that the total value of the loans in the trail book exceeded $8 million. It was alleged that the total loss of up front commission entitlements was $59,332.00 and that the total loss of trailing commission entitlements was $87,304.00. That is, the plaintiff claimed a loss in the total sum of $186,594.00. Alternatively, the plaintiff claimed damages for breach of contract.
Defendants’ Case
The defendants each denied that they breached the contract. Firstly, it was contended that there was no breach of the restraint. It was submitted that the plaintiff failed to prove that the defendants solicited, canvassed or secured the custom of the persons identified in the plaintiff’s claim.
The defendants claimed that neither Jackie Aylesbury nor the third defendant were parties to the contract and therefore were not bound by any of its terms.
Further, the definition of “associated person” in the contract, did not extend to the third defendant or to Jackie Aylesbury.
Therefore, any business transacted by the third defendant or by Jackie Aylesbury with customers in the trail book, was not in breach of the contract.
Next, it was contended that the restraint was void because it was unreasonable, unworkable, unlimited as to time, anticompetitive and against public policy.
Alternatively, the defendants alleged that even if the restraint was valid and if there was a breach by the defendants, the restraint applied only to those customers who settled loans in the 12 months prior to the date of the contract. It was submitted that the plaintiff’s particularised claim did not include any customers who had settled loans during that period.
Finally, the defendants claimed that the plaintiff had not suffered a loss or damage as a result of a breach of the contract on the part of the defendants. It alleged that a non-party, Fairway Securities, held the entitlement to the commissions. It was alleged that any loss incurred was caused by the acts of the plaintiff or of third parties.
Terms of the Contract
In order to determine the validity of the restraint and whether the defendants breached the restraint, it is necessary to construe the contract.
The interpretation clause of the contract provides the following definitions:
‘Associated person’ means:
(a)in relation to a corporation, any related corporation, director or substantial shareholder (as the term is defined in the Corporations Act 2001) of the corporation; and
(b)in relation to a natural person, any spouse, or blood or adoptive relative of that person or that person’s spouse;
....
‘Body corporate’ means each of Fairway Securities, Fairway North and Fairway Group, and ‘bodies corporate’ has a corresponding meaning;
‘Business’ means, in relation to a body corporate, the business conducted by that body corporate as at the date of this agreement.
The restraint clause provides:
Restraint
8. (1) Non-interference
On and from completion, each vendor must not, and must procure that each of its associated persons does not:
(a)solicit, canvass or secure the custom of a person who is at completion, or was within twelve months before completion, a customer of a body corporate or the vendors or purchasers in connection with a body corporate, except as set out in schedule 1;
(b)represent itself as being in any way connected with, interested in or associated with a body corporate (except as the prior owner of the shares) or any business conducted by the purchasers, or a body corporate;
(c)itself or by any of its agents or servants, disclose or use to advantage or to the disadvantage of the purchasers:
(i)the name of any person who is at completion, or was within twelve months before completion, a customer of a body corporate, or of the vendors in relation to a body corporate;
or
(ii)any of the trade secrets, or secret or confidential operations, processes or dealings of, or any confidential information relating to, a body corporate or its organisation, finances, transactions, customers or affairs; or
(d)solicit, employ or engage the services of any person (other than Ms. Jackie Aylesbury) who is at completion, or was within twelve months before completion, an employee of a body corporate.
(2)Permitted involvement
Clause 8(1) does not prevent a vendor, together with any of its associated persons, being the holders in aggregate of less than two per cent of the issued shares or units of a company or unit trust listed on the stock market conducted by the Australian Stock Exchange Limited.
(3)Independence of Restraint
Each of the restraint obligations imposed on the vendors by clause 8(1) is a separate and independent obligation from the other restraint obligations imposed (although they are cumulative in effect).
(4)Reasonableness of restraint
The vendors agree that each of the restraint obligations imposed by clause 8(1):
(a)is reasonable in its extent having regard to the interests of each party to this agreement;
(b)extends no further than is reasonably necessary;
(c)is solely to protect the purchasers as purchasers of the shares in respect of the goodwill of the bodies corporate and the businesses;
(d)has been taken into consideration by the vendors in fixing the purchase price; and
(e)that a breach of the same cannot be adequately compensated by payment of damages and warrants injunctive relief.
(5)Definition of customer
In this clause 8, ‘customer’ means a person who has entered into an agreement with any body corporate to arrange a loan on behalf of that person.
Schedule 1 and schedule 2 are also important.
SCHEDULE 1 (clause 8(1)(a))
Restraint
The vendors are permitted to undertake further business with the customers listed below, including re-financing loans already in existence at the time of this agreement, provided however that any lending services provided to these customers relate solely to commercial or business lending. Under no circumstances are the vendors or any of them to provide lending services to any customer included in the terms of clause 8(1)(a) in relation to personal lending or home loans (including loans for the purpose of purchasing investment property) and whether new loans or re-financing of existing loans,
O’Neill RJ, RJ & CA
Clift PJ (Epic Peat Pty Ltd)
Willson, A & G
Allen RH (ABTEC Services Pty Ltd)
Heusler J
Nolan J
Pipikos S
The relevant part of schedule 2 is as follows:
SCHEDULE 2 (clause 3(1))
.....
S3.(1) The vendors are to do the following things prior to completion and continue to do them following completion as circumstances require:
(a)pay in full all amounts charged to the credit or account of any body corporate with any creditor or supplier for the benefit of a vendor or any of its associated persons (including First Pacific Mortgages Pty Ltd);
.....
Evidence From the Parties
Mr Smoker gave evidence that the consideration of $120,000.00 was paid in order to obtain the benefit of the customer connection of the Fairway Group whereby the plaintiff would secure the business of the partnership in its entirety. According to Mr Smoker, the plaintiff remained liable for an outstanding tax liability, intercompany loans, staff entitlements and the sum of $20,000 in respect of outstanding creditors.
Mr Smoker said that the plaintiff would not have entered into the agreement unless the defendants had agreed that they would not deal with the customers in the trail book, other than those expressly excluded from the restraint. As a result of discussion between the parties, it was agreed that there would be no restraint period. Mr Smoker said that the intended effect of the restraint clause was that the defendants were not to deal with the customers in the trail book at any time in the future. This included the customers of the parties who were the subject of business during the preceding twelve months. He said that the restraint meant that the defendants were entitled to continue to deal with their commercial clients solely for commercial purposes.
Evidence of Mr Madigan
Mr Madigan gave evidence that he understood that the restraint meant that the defendant vendors could not market themselves directly to anyone with whom they had dealings during the twelve month period prior to the contract. He relied upon the words “or was within twelve months before completion” in clause 8(1)(a) of the contract.
In relation to customers whose business was transacted outside the twelve month period, he said, “I probably shouldn’t be dealing with them either”, unless they came to him. He said that the restraint was superfluous because it related to the sale of shares and therefore it was unenforceable.
He agreed that he transacted business with customers from the trail book. However, he said that he did not directly market or solicit those customers.

Mr Madigan gave evidence that he sent an e-mail to Mr Smoker where he stated that he would “avoid dealing” with loans which involved a trail.[8] He explained in his evidence that he meant that he would not market them. He said that he did not state that he would not deal with them at all. Rather, he undertook to ‘avoid’ dealing with them.
[8] Exhibit P7, p23
Evidence of Ms Lehmann
Ms Lehmann gave evidence that she understood that the restraint clause meant that the vendors could deal with all former customers identified in the trail book, except that they could not approach those customers with whom they had dealings, during the twelve months prior to the signing of the contract.
Ms Lehmann explained that the sale price for the finance broking business in the sum of $120,000.00 was based upon the gross trail income from the trail book with a number of deductions. A multiplier of 1.5% was utilised which was based on the average life remaining in relation to the loans in the trail book. The figure also took into account a discount because it was to be an up-front cash payment.
Ms Lehmann said that she prepared schedule A from exhibit D5 in order to identify the loans introduced to the third defendant by Ms Aylesbury. She identified the customers who were not customers at or within 12 months before 22 March 2004 by reference to the original settlement dates supplied by the plaintiff. She also identified the customers who were expressly excluded from the restraint by schedule 1 of the contract.
However, Ms Lehmann did not know how many loans were settled in the twelve month period covered by the restraint nor the value of the trails relating to that period.
Credibility Findings
I note the defendants’ criticisms of the plaintiff’s evidence, in particular, the allegation that the plaintiff misappropriated funds belonging to the partnership.
I found Mr Smoker to be an impressive witness. He had a clear memory of important events. His account was consistent with other objective evidence. On the other hand, I found the evidence of Mr Madigan and Ms Lehmann unreliable in a number of areas. Where there was a conflict between Mr Smoker and either or both of the first and second defendants, I preferred the evidence of Mr Smoker. However, it is the construction of the terms of the contract which is critical to the resolution of the issues between the parties.
Circumstances Surrounding the Contract
I make the following findings of fact:
The company Fairway Securities Pty Ltd held the finance broking accreditation as agent for the partnership and entered into agreements as agent for the partnership. It was not considered to be a trading entity in its own right.
Mr Smoker on behalf of the plaintiff, and Mr Madigan and Ms Lehmann on behalf of Kopala Pty Ltd and Erimus Pty Ltd, conducted the negotiations for the sale of the partnership. The third defendant was not specifically identified as a party to the contract.
Although the contract is expressed as an agreement to buy and sell shares, the common intention of the parties and the effect of the contract was a sale of the partnership assets and a transfer of control of the shares of the operating company.[9] At the time of completion of the contract, the sole partnership asset was the trail book. The plaintiff paid the sum of $120,000.00 in respect of the purchase of that asset.
[9] Transcript at p150
Pursuant to the contract, the first and second defendants and their corporate entities transferred to the plaintiff, the right to commissions generated by the trail book. The value of the trail book depended upon firstly, the income stream derived from continuing commissions and secondly, the customer contact. Customer contact added value to the trail book because of the potential to earn further up-front trailing commissions if customers in the trail book decided to refinance their existing loans.
The finance industry is extremely competitive. The personal relationship between the finance broker or his business and the client is extremely important. A customer wishing to re-finance would usually return to the person who arranged the loan.
It was common knowledge in this industry, and it was the understanding of the parties to the contract, that “the customer” became a customer at the settlement of the loan, and remained a customer until the loan was discharged.
The parties to the contract entered into the contract upon the basis that the value of the trail book would be diminished if a loan in the trail book was discharged and not re-financed by the purchaser of the trail book.
Therefore, it was necessary to protect the purchaser by restraining the vendors from diminishing the value of the trail book by dealing with the persons named in it.
It was known to the parties to the contract that the first and second defendants had been using the third defendant as a vehicle for certain business.[10]
The Construction of the Contract and Whether the Restraint is Enforceable
[10] Exhibit P18
The Issues
The first question is whether upon a proper construction of the contract, the restraint is enforceable against each of the defendants. If the restraint is enforceable, the second question is whether all or any of the defendants breached the restraint.
The plaintiff submitted that upon a proper construction of the contract, the restraint was enforceable.
The plaintiff contended that the restraint was necessary in order to protect the asset which it purchased pursuant to the contract.
The plaintiff submitted that the area of operation and scope of the restraint was limited to those customers identified in the trail book who had an existing loan for a definite period.
The plaintiff submitted that the amount of the consideration received by the defendants supported the reasonableness of the restraint.
It was contended that if the court was to find that the restraint was unreasonable, the defendants would be entitled to retain the purchase price without providing the asset purchased by the plaintiff pursuant to the contract.
It was argued that insofar as clause 8(5) of the contract provided a definition of “customer”, and was ambiguous and/or unworkable, it ought to be severed or rectified.
The defendants submitted that upon a proper construction of the contract, the restraint was void.
It was submitted firstly, that the plaintiff did not have a legal entitlement under the contract.
Secondly, the restraint was limited to customers secured within the 12 months prior to entry into the contract. However, the plaintiff’s particularised claim did not include any customers secured within that period.
Thirdly, the restraint clause applied only to those customers “solicited” by the defendant. The plaintiff had adduced no evidence that any of the customers which were the subject of the claim were solicited by the defendants.
Fourthly, the restraint did not apply to the third defendant.
Finally, the definition of “customer” was uncertain and wider than was reasonably necessary to protect the plaintiff’s legitimate interests.
The defendants submitted that the restraint was unreasonable, having regard to the interests of the parties and public policy considerations.
Principles of Construction
In order to determine whether the restraint is enforceable, and what is necessary for the protection of the plaintiff’s legitimate interests under the contract, it is necessary to construe the restraint.
In relation to the interpretation of a written contract, Lord Hoffman said in Investors Compensation Scheme Ltd v West Bromwich Building Society:[11]
(1)Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
[11] [1998] 1 WLR 896, at 912; see also Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181 at [11]
I also refer to the statements of principle by the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[12]:
This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties but their rights and liabilities that govern their contractual relations. What matters is what each party, by words and conduct would have led a reasonable person to the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of a transaction.”
[12] (2004) 219 CLR 165 at 179 [40]
A commercial contract should be construed having regard to its purpose. This requires an understanding of the genesis of the transaction, its background, its context, and the market in which the parties are operating.
In the present case, it is necessary to construe the meaning of the restraint and to have regard to the documentary context and surrounding circumstances in which the parties contracted. It is also necessary to have regard to the market in which the parties were operating.[13]
[13] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 applying Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995-996. See also Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Test in Relation to Validity of the Restraint Clause
The test to be applied in the determination of whether the restraint clause is valid, is that stated by Lord MacNaghten in Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at 565 as follows:
All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed while at the same time it is in no way injurious to the public”.
In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd,[14] Lord Hodson said:
It has been authoritatively said that the onus of establishing that an agreement is reasonable as between the parties is upon the person who puts forward the agreement, while the onus of establishing that it is contrary to the public interest, being reasonable between the parties, is on the person so alleging: see Herbert Morris Ltd v Saxelby [1916] 1 AC at 688, 700, 707-708, per Lord Atkinson and Lord Parker. The reason for the distinction may be obscure, but it will seldom arise since once the agreement is before the court it is open to the scrutiny of the court in all its surrounding circumstances as a question of law.
[14] [1968] AC 269 at 319
Further, in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Company Pty Ltd,[15] Walsh J stated:
I acknowledge that the consequence of what I have just stated is that there is to some extent a merging of the second branch of the Nordenfelt formulation of the applicable principle with its first branch. But this does no mean that the distinction between them is wholly obliterated. In order to justify a restraint of trade both tests must be satisfied. The restraint must be reasonable in the interests of the parties in that it affords no more than adequate protection to the covenantee “while at the same time it is in no way injurious to the public” (see the Nordenfelt case [1894] AC at 565).
[15] (1973) 133 CLR 288 at 307
The restraint is presumed to be void and unenforceable unless that presumption is rebutted. The restraint must be reasonable having regard to the interests of the parties and reasonable having regard to the public interest.[16]
[16] NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [24]
The onus is on the plaintiff to prove that the restraint clause is reasonable having regard to the interests of the parties to the contract.[17]
[17] NE Perry Pty Ltd v Judge (2002) 84 SASR 86, at [98]
The plaintiff is required to demonstrate that the restraint is “to protect a legitimate interest of itself, and that the extent of the restraint goes no further than is necessary to protect that interest”.[18]
[18] Hydron Pty Ltd v Harous [2005] SASC 176 at [84]
It is necessary to have regard to the subject matter of the contract, identify the interests to be protected and to consider how that is intended to be achieved under the contract.[19] The legitimate interests which may be protected by a restraint covenant include those interests which are in the nature of proprietary interests such as goodwill and the customer connection of a business.[20]
[19] HydronPty Ltd v Harous supra at [86]
[20] McHugh Holdings Pty Ltd v Newtown Colonial Hotel Pty Ltd [2008] NSWSC 542 at [40]
It is necessary to have regard to the time at which the parties entered the contract in order to determine the reasonableness of a restraint.
However, it is also necessary to consider the right of the party subject to the restraint to carry on business in his chosen field without unnecessary and unjust restriction.
Reasonableness is a question of construction in relation to the public interest as well as in relation to each party to the contract.
If the plaintiff establishes that the restraint clause is reasonable, the onus is on the defendants to show that the restraint clause was contrary to public policy.[21]
[21] HydronPty Ltd v Harous supra at [78]
The Restraint and a Legitimate Interest
The restraint which is the subject of the plaintiff’s claim, relates to the protection of customer connection upon the sale of a business.
In the finance broking business, the personal relationship between the broker and his customer is important. That is, the customers of the first and second defendants would likely follow them if not restrained. From the plaintiff’s perspective, the restraint was necessary in order to ensure a continuing relationship between the customers in the trail book and the purchaser. It provided protection to the plaintiff in order to secure the benefit of the trails which were the subject of the consideration provided in the contract. In my view, the protection of the customer connection identified in the trail book was a legitimate purpose for the restraint.
(1) Whether the Plaintiff had an Entitlement
Defendant’s Submission
The defendants submitted, that in order for the plaintiff to succeed in its claim for a loss of commission,[22] it must verify that Fairway Securities Pty Ltd held a legal entitlement to the benefits of the contract. Further, it must prove a relationship with Fairway Securities Pty Ltd that gave the plaintiff a beneficial entitlement. The defendants submitted that even if the plaintiff proved that Fairway Securities suffered a loss of commissions, that was not sufficient to prove that the plaintiff suffered a loss.
[22] Exhibits D24 - 27
Finding
In my view, at all relevant times, Fairway Securities acted as agent for the plaintiff. After the dissolution of the partnership, Mr Smoker and his wife were the sole “owners”[23] of the plaintiff and of Fairway Securities. The plaintiff was beneficially entitled to the assets held by Fairway Securities. The relationship between Fairway Securities and the plaintiff was comparable to that which existed between Fairway Securities and the partnership prior to dissolution. I find that pursuant to the terms of the contract, the plaintiff was beneficially entitled to the commissions related to the sale of the trail book.
(2) “Customer Within Twelve Months”
[23] Transcript at p268
Defendants’ Submissions
The defendants contended that the plaintiff had failed to prove a breach of the restraint because it applied only to those customers who settled loans in the 12 month period prior to the date of the contract.
The defendants contended that as a matter of construction and consistent with the evidence of the first and second defendants, clause 8(1)(a) of the contract meant that customers with original settlement dates prior to 22 March 2003 (that is, more than 12 months before the completion date), were excluded from the operation of the restraint. According to the evidence, there were no customers in the trail book who had settled loans in the 12 months before the date of the contract.
Finding
In my view, upon a proper construction of the contract, clause 8(1)(a) of the contract is not limited in its operation to those customers whose loans were settled during the 12 months prior to settlement of the contract.
Neither the contract nor the correspondence prior to the signing of the contract, included any attempt to identify the number of customers or the value of the trails gained during the twelve month period prior to the signing of the contract.
I note that this interpretation of the restraint is also consistent with the amount of the consideration of $120,000.00 paid by the plaintiff. This amount was arrived at having regard to the estimated value of the entire trail book, and not by reference only to those loans settled during the twelve month period prior to the date of the contract. In relation to this issue, insofar as there is a conflict, I prefer the evidence of Mr Smoker to that of Mr Madigan and Ms Lehmann.
Accordingly, I reject the defendants’ contentions in relation to the interpretation of clause 8(1)(a) of the contract in this respect.
(3) Meaning of “Solicit, Canvass or Secure” in clause 8(1)(a) of the Contract
Submissions of the Parties
Clause 8(1)(a) of the contract provided that the vendors were prohibited from soliciting, canvassing or securing the custom of those persons identified in the trail book.
The plaintiff submitted that the defendants were in breach of the restraint because they ‘secured’ customers who were the subject of existing trails in the trail book. The plaintiff submitted that if the word ‘secure’ is to have any work to do, it must mean that the defendants were required to avoid dealing with all of the customers identified in the trail book, not limited to those who were approached by the first and second defendants.
The defendants submitted that the clause was confined to prohibiting the defendants from taking active steps to attack the loan book. The defendants submitted that because there was no evidence that the defendants actively persuaded customers who were the subject of the plaintiff’s claim to return to them, the plaintiff had failed to establish a breach of the restraint. The defendants also submitted that the heading “non-interference” was relevant to the interpretation of the restraint because it showed context.
It was submitted that the word ‘secure’ is ambiguous. The defendants relied upon communications between the parties[24] and the “ejusdem generis” rule.
[24] Para 22 of Defendants written submission
Findings
In my view, the key word in clause 8(1)(a) of the contract is ‘secure’. I consider that the word ‘secure’ has a different significance to the words ‘solicit’ and ‘canvass’ which precede it.
Clause 8(1)(d) of the contract is of assistance in interpreting clause 8(1)(a) of the contract. In my view, the expression “engage” is different from and a step further than soliciting, in the same way that “secure’ is a step further than “soliciting” or “canvassing”.

I find that the word ‘secure’, in the context of the other words in clause 8(1)(a) of the contract, relates to the getting of custom with a view to retaining custom, as opposed to a prelude to gaining or obtaining custom.[25]This view is consistent with the approach of Hill J in Tricontinental Securities Ltd v Barwa Holdings Ltd (1991) 32 FCR 451, 454, where he stated:
In my view, the submissions of the applicant are to be preferred. The word “secure” is an ordinary English word. Among the meanings given in the Shorter Oxford Dictionary (2^nd ed) are “to make secure or certain”; “to make fast or firm”. The Macquarie Dictionary includes among the meanings of the word “sure; certain”; “that can be counted on”; “to make secure or certain”; “to make firm or fast”. Inherent in the word is more than the concept of “get”; rather, it is the concept of certainty, that what has been obtained is made certain, that is relevant in the present context.
Role of Ms Aylesbury
[25] Cf Hydron Pty Ltd v Harous [2005] SASC 176
Plaintiff’s Submissions
The plaintiff submitted that the words “each vendor” in clause 8(1) of the contract, refer to the personal defendants. It was submitted that on a proper construction of the contract as a whole, the clause prohibits the vendors either directly or indirectly, from securing the custom of persons identified in the trail book. It was submitted that Ms Aylesbury was acting as an agent of the first and second defendants. Ms Lehmann agreed that she obtained documents from Ms Aylesbury for the purpose of preparing the folder Exhibit D5.[26] Ms Aylesbury sent business to the defendants, whether in their personal capacity or as shareholders or directors of the third defendant, including customers in the trail book who had existing loans.[27]
[26] Relating to customers that returned to them from which she prepared schedule A to the amended defence.
[27] Also see unsigned commission agreement Exhibit P7 p48
It was submitted that the failure to call Ms Aylesbury is relevant to the inferences available from the evidence. Ms Aylesbury had access to the names in the trail book as part of the documentation in her possession.
Defendants’ submissions
The defendants submitted that the restraint did not extend to the activities of Ms Aylesbury because she was not a party to the contract. It was submitted that Clause 8(1)(d) of the contract provides that the defendants remained entitled to solicit, employ or engage the services of Ms Aylesbury. It was contended that the contract defined “associated person”. Ms Aylesbury did not fall within that definition. It was submitted that in any event, there was no evidence that Ms Aylesbury had solicited customers identified in the trail book, and introduced them to the defendants.
Finding
Upon a consideration of the evidence, I am not satisfied that Ms Aylesbury solicited the custom of those persons identified in the defendants’ schedule to the amended defence, as an agent for the defendants and introduced them to the defendants. For reasons which I will come to, I am not satisfied that the restraint is enforceable in any event.
(4) Whether the Restraint Applied to the Third Defendant
Submissions of the Plaintiff
The plaintiff submitted that clause 8(1) of the contract prohibited the first or second defendants, either directly or indirectly from securing the custom of those persons identified in the trail book.
The plaintiff submitted that the first and second defendants were directors, shareholders and controllers of that company. It was contended that the first and second defendants breached the contract through the agency and control of the third defendant, by securing customers from the trail book.
Alternatively, it was submitted that the restraint was framed and intended to apply to associated persons of the vendors. The first and second defendants were co-directors and joint shareholders of the third defendant at the time of completion of the contract. It was submitted that although the third defendant fell outside the general definition of “associated person”, it was specifically referred to in schedule 2 of the contract as an “associated person”. It was submitted that the contract expressly contemplated that the third defendant was an “associated person” under the contract. The plaintiff asked the court to imply that the definition of “associated person” specifically included the third defendant. The plaintiff submitted that the recognition elsewhere in the contract of the third defendant as an “associated person” of the vendor, constituted objective evidence[28] of a common intention that the third defendant was included in the contract as an “associated person” of the first and second defendants.
[28] Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65
The plaintiff submitted that it ought to be inferred that clause 8 applied to a corporate entity of the vendors.
Therefore, it was submitted, the court ought to find that the definition of “associated person”, by necessary implication, included the corporate entity of which the first two defendants were co-directors and joint shareholders and which entity was in operation at the time of the completion of the contract.
It was submitted that in all the circumstances and for business efficacy, it ought to be inferred that the securing of the custom of a customer in the trail book by a vendor which was prohibited under clause 8 of the contract, included securing the custom by the third defendant.
Finding
In my view, upon a proper construction of the contract, the definition of “associated person” does not include the third defendant. It is not reasonable to imply or infer such a term where the third defendant is a separate legal entity that was in existence at the time the parties entered into the contract. I find that the third defendant was not a party to the contract and that the third defendant is not bound by the restraint.
(5) Definition of Customer – Clause 8(5) of the Contract
Plaintiff’s Submissions
It was conceded that the definition of ‘customer’ meant that the operation of the restraint was too wide. However, the plaintiff submitted that clause 8(5) of the contract ought to be severed, rectified or read down, in order to make the restraint enforceable.
Discussion
A possible interpretation of clause 8(5) of the contract, is that it applied to any person who had entered into any agreement with any of the Fairway Group of companies at the date of completion of the contract. This interpretation would mean that the restraint would apply to customers whose loans had been discharged and those who had never proceeded to borrowing.
Alternatively, clause 8(5) of the contract could be interpreted to mean that it would operate in perpetuity. That is, if at the date of the contract, the customer had entered into an agreement with Fairway Securities to arrange a loan, the defendant vendors could never deal with those customers again.
The plaintiff submitted that the definition of ‘customer’ was drafted by the defendants’ solicitor.[29] If there was an ambiguity, it should be construed against the defendants.
[29] Exhibit P7 p30-31
The plaintiff submitted that it was open to interpret clause 8(5) of the contract to mean that the restraint was limited in its operation to those customers who had a loan recorded in the trail book as at the date of the contract, and it operated only for the duration of their loans.
Alternatively, if that was not a proper interpretation of clause 8(5) of the contract and clause 8(5) was to be given a wide meaning, it is able to be severed as an unreasonable restraint.[30] In the further alternative, clause 8(5) of the contract could be struck out as void for uncertainty.
[30] See also section 12(5) of the contract
In the further alternative, it was submitted that the contract could be rectified so that it reflected the common intention of the parties. Mr Madigan[31] made it clear that the intention of the parties to the contract was to sell all of the commissions payable in respect of the loans of the customers in the trail book. It was submitted that having regard to all of the relevant circumstances, when viewed objectively, this was the common intention of the parties.[32] The contract could be rectified by adding the words, “which loan is in the trail book” to clause 8(5) of the contract so that the contract would reflect the common intention of the parties.
[31] Transcript at p387
[32] Specialty Equipment Co Inc v RE Phillips Nominees Pty Ltd (2007) 99 SASR 535
Legal Principles in Relation to Ambiguity, Severance and Rectification
Where a contract has been performed or acted upon, the courts are inclined to uphold a contract which has been poorly drafted.[33]
[33] Meehan v Jones (1982) 149 CLR 571, 589
One way in which a contract is able to be saved is to sever the offending term or part of the contract.[34]
[34] Trustees Executors and Agency Co Ltd v Peters (1960) 102 CLR 537
Severance of an uncertain term depends upon the intention of the parties in relation to the significance of the clause to the agreement. Intention is determined by a consideration of the construction of the contract as a whole.[35]
[35] Whitlock v Brew (1968) 118 CLR 445, see also Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
In Mason v Provident Clothing & Supply Co. Ltd., Lord Moulton said:[36]
I do not doubt that the court may, and in some cases will, enforce a part of a covenant in restraint of trade, even though taken as a whole the covenant exceeds what is reasonable. But, in my opinion, that ought only to be done in cases where the part so enforceable is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause.
[36] [1913] AC 724, 745
Where a prior written contract has been entered into and the contract incorrectly records the common intention of the parties,[37] the document may be rectified for common mistake.[38]
[37] New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co (1986) 6 NSWLR 740, 747
[38] Hoyt's Pty Ltd v Spencer (1919) 27 CLR 133, 144
The plaintiff has the onus of proving the mistake and must demonstrate that it is an obvious one, and that it was manifested in the words and conduct of the parties to the contract.[39]
[39] Australasian Performing Right Association Ltd v Austarama Television Pty Ltd [1972] 2 NSWLR 467, 473-4; cf Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
In Tyser Reinsurance Brokers Pty Ltd v Cooper[40], Young J considered the validity of a broad restraint clause dealing with the provision of services in the insurance industry. His Honour refused to rectify the agreement. His Honour said:
Clause 11.1 is an extremely difficult clause to construe. Principally this is because the drafter has used wide words in the definition section. This, generally speaking, is a good habit, but when one gets to a restraint of trade clause, which is void unless it is a reasonable restraint, then the habit of defining things widely becomes embarrassing.[41]
[40] [1998] NSWSC 689
[41] ibid at [2]
In Butt v Long[42] a geographically unlimited restraint clause was read down by the primary judge to “at the place where, and of a kind previously carried on by the partnership”. On appeal to the High Court, Dixon CJ held that the reading down or limitation should not be implied as a matter of construction.
[42] (1953) 88 CLR 476
His Honour said:[43]
An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parities contract. But the agreement should be interpreted for the purposes of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text, it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving ambiguity but a restrictive interpretation of general words is not to be adopted simply to save a covenant or agreement from invalidity.
[43] ibid at p487
His Honour explained:[44]
Now the words are perfectly general. There is no reference at all to place and if the operation is to be confined to the junction at Wallangarra it must be by implication. An implication of such a kind ought not to be made unless from subject matter and the contents of the document an inference that the parties so intended arises with such force as to carry conviction to the mind.
[44] ibid at p487
His Honour declined to make an implication which would introduce words of limitation “so as to limit quite general words containing no suggestion of locality or of identification with a specific business or thing.”[45] He took the view that “there was no reason to import a limitation that the parties had not seen fit to express.”[46]
[45] ibid at p489
[46] ibid
In I.F. Asia Pacific Pty Ltd, Dodds-Streeton J noted:[47]
According to the accepted modern approach, the reading down of a restraint covenant in order to save it from invalidity due to unreasonable width is not justified. While “evident ambiguity appearing from the text” may justify a narrow construction of literal terms, mere generality does not constitute ambiguity.
[47] [2003] VSC 192 at [108]
Findings
In my view, the definition of customer in clause 8(5) of the contract means that the restraint applies indefinitely to any customer of the partnership prior to the date of the contract. The wide operation of the restraint is fatal to the enforceability of the restraint. I am not satisfied that clause 8(5) ought to be severed from the contract. Further, I am not satisfied that the contract ought to be rectified by the addition of the words suggested by the plaintiff in order to limit the operation of the restraint.
I am reinforced in this view by the fact that even if clause 8(5) of the contract is severed, I consider that the restraint is void in any event.
I am not satisfied that the identification of the particular customer in the trail book and the inbuilt period of the loan of the particular customer, is a sufficient limitation upon the operation of the restraint.
Although the parties gave evidence based upon their respective experience, as to the average length of loans in the industry, there is no specific evidence as to the length of each of the loans in the trail book.
I am not satisfied that the court ought to imply any terms in the contract in order to give effective operation to the restraint. I am not satisfied that the terms of the restraint ought to be “read down”, or that it is possible to otherwise interpret the restraint in order to achieve its enforceability.
SUMMARY OF FINDINGS
The plaintiff’s claim based upon the enforceability of the restraint, faces a number of difficulties.
The plaintiff was entitled to secure protection of a legitimate interest, namely, its customer connection.
However, the plaintiff’s claim depends entirely upon the identification of customers in the trail book and the particulars inbuilt into particular loans, to establish the period of operation of the restraint.
Neither in the contract itself nor in the evidence given about the circumstances surrounding the completion of the contract, is there a clear limit as to the duration of the restraint. There is no clear evidence as to the actual length of the loans of customers which are the subject of the trail book. In my view, the evidence about the average length of such loans according to industry standards, about which there was a dispute, does not provide the necessary limitation upon the operation of the restraint. Nor is there a limitation upon the geographical area to which it applies. In relation to the customers identified in the trail book, it is too wide and indeed, imprecise in its operation.
If the plaintiff’s construction of clause 8(1)(a) of the contract is accepted in relation to which customers are caught, it is too wide. If the defendant’s contention is correct, in relation to the meaning of clause 8(1)(a) of the contract, there are no customers who settled contracts within the relevant period and who are the subject of the plaintiff’s claim.
I am not satisfied that the court ought to sever clause 8(5) of the contract in order to support the enforceability of the restraint. In my view, even if the court was to sever this clause, the restraint is unreasonable and void. I am not satisfied that the court ought to resolve ambiguities, imply terms or rectify the restraint in the manner contended for by the plaintiff, for the purpose of enforcing the restraint.
Further, in my view, the plaintiff’s contention in relation to the meaning of ‘secure’, in clause 8 of the contract, upon which its claim depends, means that the restraint is unreasonable. That is, the protection afforded to the plaintiff is greater than is reasonably necessary to protect the interests of the plaintiff. In addition, in my view, it unduly and unreasonably restricts the liberty of the defendants in the carrying out of their business activities in the same field as the plaintiff.
I am not satisfied that the court ought to imply a term into the contract so that it applies to the third defendant, a corporate entity not otherwise caught by the contract.
I bear in mind that both parties had legal advice and were in similar bargaining positions,[48] consideration was provided and that the parties reached agreement after negotiation in relation to the restraint clause.
[48] Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181 at para 56
However, it is my view that the restraint exceeds what is necessary to protect the plaintiff’s legitimate interests.
As Bleby J said in N E Perry Pty Ltd v Judge[49]
...the freedom to contract cannot override what is the policy of the law in this area to protect contracting parties and the community from unreasonable restraint of trade.
[49] (2002) 84 SASR 86
In the present case, I am not persuaded that any of the matters relied upon by the plaintiff, override the presumption that the restraint is unenforceable.[50]
[50] Bleby J ibid at p101, [87]
CONCLUSION
I have considered the reasonableness of the restraint having regard to an overall assessment of the restraint clause, the contract within which it is found and all of the surrounding circumstances.[51] In my view, the customer connection detailed in the trail book is a legitimate interest which may be protected by a restraint clause. However, having regard to the interests of each of the parties to the contract, I am of the view that the restraint is uncertain. In any event, it operates wider than is necessary to protect the legitimate interests of the plaintiff. Having due regard to the legitimate interests of the parties to the contract as at the date of the contract, I find that the restraint is unenforceable. Therefore, the plaintiff’s claim is dismissed.
[51] Ryan v Rouen [2000] NSWSC 468 at [50]
I will hear the parties as to costs.