Sear v Invocare Australia Pty Ltd
[2007] WASC 30
•14 FEBRUARY 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: SEAR -v- INVOCARE AUSTRALIA PTY LTD [2007] WASC 30
CORAM: LE MIERE J
HEARD: 20-23, 27 JUNE 2006
DELIVERED : 14 FEBRUARY 2007
FILE NO/S: CIV 1287 of 2005
BETWEEN: MAREENA SEAR
Plaintiff
AND
INVOCARE AUSTRALIA PTY LTD (ACN 060 060 031)
Defendant
Catchwords:
Restraint of trade - Restraint upon sale of a business - Restraint contained in Employment Agreement - Whether restraint uncertain - Whether restraint contrary to public policy - Whether restraint characterised as employment restraint or sale of goodwill restraint - Whether limitations reasonable as to area and time
Contract law - Implied term - Turns on own facts
Contract law - Failure of consideration - Turns on own facts
Contract law - Mistake - Turns on own facts
Equity - Equitable estoppel - Turns on own facts
Legislation:
Nil
Result:
Claim allowed
Declaration made
Counterclaim dismissed
Category: A
Representation:
Counsel:
Plaintiff: Dr P R MacMillan
Defendant: Mr N W McKerracher QC & Mr B D Luscombe
Solicitors:
Plaintiff: Stephen Kemp
Defendant: Mallesons Stephen Jaques
Case(s) referred to in judgment(s):
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Austra Tanks Pty Ltd v Running (1982) 2 NSWLR 840
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Brendon Pty Ltd v Russell (1994) 11 WAR 280
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
Davies v Davies (1887) 36 Ch D 359
Dawnay, Day & Co Ltd v D'Alphen [1998] ICR 1068
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Hydron Pty Ltd v Harous [2005] SASC 176
JQAT v Storm [1987] 2 Qd R 162
Lindner v Murdock's Garage (1950) 83 CLR 628
Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505
Marshall v Marshall [1999] 1 Qd R 173
Synavant Australia Pty Ltd v Harris [2001] FCA 1517
Tropeano v Riboni [2005] VSC 229
LE MIERE J: In 1994 members of the Purslowe family, including the plaintiff, carried on business as funeral directors through a number of companies and a unit trust. The plaintiff, whose maiden name was Mareena Purslowe, held shares in some of the companies and was employed as a manager within the business.
In December 1994 the plaintiff acquired the business by purchasing the shares in the companies and the units in the unit trust. The plaintiff commenced employment as a manager with the plaintiff pursuant to an employment agreement dated 29 December 1994 ("the Employment Agreement"). The Employment Agreement was for a term of 10 years and contained a restraint clause that restrained the plaintiff from being involved in the business of funeral and related services within areas and for the terms provided in the restraint clause. In addition to other salary and benefits payable to the plaintiff, the defendant paid to the plaintiff as part of her salary a total of $500,000 in equal annual instalments of $50,000 in consideration of the covenants in the restraint clause.
In 2004 the Employment Agreement expired and the defendant did not offer the plaintiff further employment. Since her employment with the defendant expired in December 2004 the plaintiff has been unemployed and wishes to establish a business in the funeral services industry. The plaintiff seeks a declaration that the restraints in the restraint clause are unenforceable or alternatively a declaration that the restraints are enforceable in terms to be declared by the court.
The defendant counterclaims to recover the $500,000 it paid to the plaintiff in consideration of the restraints in the restraint clause, if the covenants in the restraint clause are unenforceable.
The Business
James William Purslowe, the plaintiff's great‑grandfather began a funeral business around 1906 in Northam under the name "J W Purslowe". In 1925 two of James' sons, Arthur and Ernest Purslowe, purchased the funeral business, Douglas Jones & Co in Guildford and carried on the business under the name "Arthur J Purslowe & Co". This business grew over the years to become a major participant in the funeral industry in the Perth metropolitan area. By 1956 the partnership was incorporated as Arthur J Purslowe & Co Pty Ltd ("the Company"). In 1985 the Company purchased the original family business in Northam. By 1994 the Company operated funeral homes from locations in North Perth, Victoria Park, Midland, Wangara, Northam and Subiaco.
The Company Structure
Upon the death of Arthur Purslowe in 1964, Brian James Purslowe, the plaintiff's father, and Neil Sydney Purslowe, his brother, became equal share holders in the Company. In 1972 Brian and Neil Purslowe transferred their shares in the Company to Brian J Purslowe Holdings Pty Ltd and Neil S Purslowe Holdings Pty Ltd respectively. At the time the defendant acquired the business in 1994 Brian J Purslowe Holdings Pty Ltd held 1,998 ordinary shares and Brian Purslowe held two ordinary shares respectively in the Company. Neil S Purslowe Holdings Pty Ltd held 1,998 ordinary shares and Neil Purslowe two shares respectively in the Company. Brian Purslowe held the majority of the shares in Brian J Purslowe Holdings Pty Ltd. The plaintiff had 20,000 fully paid C class shares and one fully paid H class share in Brian J Purslowe Holdings Pty Ltd. Other members of Brian Purslowe's family held the remaining shares in Brian J Purslowe Holdings Pty Ltd. There were 996,100 issued shares in Brian J Purslowe Holdings Pty Ltd.
The Company offered the facility to clients of pre‑paying their funerals. The pre‑paid funeral funds were administered by Purslowe Custodians Pty Ltd. The plaintiff held one fully paid share in that company.
Brian and Neil Purslowe established the Mead & Purslowe Trading Trust in 1977. The trustee of the trust was Mead & Purslowe Pty Ltd. The Mead & Purslowe Trust provided administration services to the business carried on by Arthur J Purslowe of funeral directors. The plaintiff held one unit in the trust.
The plaintiff did not exercise voting rights with respect to the shares or the unit she held. She did not receive any financial benefit from those shares or unit during the time she was a shareholder or unit holder. The plaintiff's father, Brian Purslowe, treated the plaintiff's shareholding and unit holding as though it were his own. He did not consult the plaintiff as to any matters relating to the shareholding or unit holding.
Plaintiff's Employment
The plaintiff began work in the business in 1979 when she was 20 years old. Initially her role was mainly secretarial but before long she was working as a funeral director.
In 1984 the plaintiff established the Grief Recovery and Funeral Education Centre, a division of the Company aimed at providing an educational and counselling service to the clients of the business and the general community. Following the birth of her first child in August 1984, the plaintiff worked part‑time for approximately six months and then returned to full time work at the North Perth branch of the Company.
In December 1986 the plaintiff left the Company and moved to the Seychelles where her husband was working. She returned to Perth in March 1987 and worked part‑time for the Company. She returned to the Seychelles in August 1987.
In about September 1987 the plaintiff returned to Australia and became manager of the Midland branch of the Company. The plaintiff was appointed a director of the Company in 1988. She ceased to be a director on 29 December 1994 following the acquisition of the business by the defendant.
In March 1989, at the initiative of the plaintiff, the Company decided to establish a funeral home operated wholly by women. The plaintiff managed the new business, or branch of the business, that traded under the name "Mareena Purslowe & Associates". The other locations or branches of the business traded as "Purslowe Funeral Homes". Each branch had a manager who reported to the managing director. The plaintiff was the manager of Mareena Purslowe & Associates and had responsibilities for that "brand". She reported to the managing director who had overall responsibility for the Company. The Mareena Purslowe & Associates brand traded principally from Rokeby Road, Subiaco, and from 2001 also from premises in Willetton.
The funeral process and contact with clients is carried out by a funeral director. In addition to her management role, the plaintiff carried out this function at the Subiaco premises together with two other funeral directors. There were also two funeral assistants based at the North Perth mortuary. The plaintiff had contact with the majority of clients. She operated the night phones, carried out night transfers and dealt with suppliers.
By the end of 1993 Mareena Purslowe & Associates conducted over 560 funerals per annum, which equated to about 6 per cent of the Perth funeral market and roughly 35 per cent of the Company's total business.
By the end of 1993 or early 1994 the staff at Mareena Purslowe & Associates had grown to approximately 13, of whom five were funeral directors. The plaintiff's role had changed from working as a funeral director and the plaintiff was mainly occupied with administration and management.
By December 1994 Mareena Purslowe & Associates was conducting over 600 funerals per annum. In 1994 the plaintiff had little contact with customers or suppliers of the Mareena Purslowe & Associates brand and no contact as a funeral director with customers or suppliers of "Purslowe Funeral Homes". She appeared in television advertisements for Mareena Purslowe & Associates. She was identified in a Mareena Purslowe & Associates brochure that was released in early 1994.
In 1994 the plaintiff had no involvement in the conduct of the business under the name Purslowe Funeral Homes that was conducted from the premises in North Perth, Victoria Park, Midland, Wangara, Fremantle and Northam. Apart from attending management meetings of the Company, the plaintiff played no part in the conduct of the Company's business, except for the Mareena Purslowe & Associates brand and co‑ordinating and developing training. The plaintiff's main contact with the public, aside from occasionally directing a funeral for Mareena Purslowe & Associates, was in conducting seminars and attending public engagements on behalf of Mareena Purslowe & Associates. The plaintiff had overall responsibility for the Subiaco branch. She worked mostly, aside from public engagements, behind the scenes. Except for a few funerals, the plaintiff did not arrange funeral services, which was the main source of contact between Mareena Purslowe & Associates' staff and clients.
The plaintiff had overall responsibility for the Mareena Purslowe & Associates brand, including financial performance, submitting marketing results, service excellence and professional leading of the brand.
Plaintiff's Role in Defendant's Business
In July 1995, six months after the defendant purchased the business, it appointed a location manager of the Subiaco branch. The location or branch manager was the hands on manager for that branch. The plaintiff became a cluster manager, a term which was later changed to regional manager. After the appointment of a location or branch manager of the Subiaco premises of Mareena Purslowe & Associates the plaintiff had very little contact with clients. She managed the Mareena Purslowe brand and was increasingly involved in a training role. The plaintiff had for some time been training Mareena Purslowe & Associates' staff. From early 1995 she became increasingly involved in the defendant's national training department. She spent approximately 30 per cent of her time on training.
As cluster or regional manager the plaintiff had overall responsibility for the two branches. The plaintiff had overall responsibility for the Mareena Purslowe & Associates brand, including the performance, asset management, marketing results, service excellence, and professional leadership of the brand. The plaintiff assisted the national training manager with the production and delivery of a national training programme and the development of recruitment and personnel documents. The plaintiff conducted occasional training sessions with staff at the defendant's state training centre at Scarborough Beach Road. The plaintiff became the WA State training manager in 2003.
Other members of the Purslowe family worked for the Company. The plaintiff's brother, Colin, was employed throughout the period the plaintiff worked for the Company, as were her cousins, Mark and Craig Purslowe and her aunt, Gay Purslowe. In later years Colin's daughter, Brooke Purslowe, Mark's son Daniel Purslowe and the plaintiff's daughter, Stephanie Sear worked for the Company.
The Sale of the Business
The purchase of the business by the defendant was effected by a number of agreements. Brian Purslowe, the plaintiff, Colin James Purslowe and Norma Betty Purslowe entered into a share purchase agreement with the defendant by which the Purslowe family members sold to the defendant their shares in the Company, Brian J Purslowe Holdings Pty Ltd, Mead & Purslowe Pty Ltd and Purslowe Custodians Pty Ltd ("the Share Purchase Agreement"). At the same time Neil Purslowe and members of the family associated with him entered into an agreement with the defendant for the purchase by the defendant of the remaining shares in the Company, Mead & Purslowe Pty Ltd and Purslowe Custodians Pty Ltd and the shares in Neil S Purslowe Holdings Pty Ltd. The defendant entered into an agreement with members of the Purslowe family, including the plaintiff, for the purchase of the units in the Mead & Purslowe Trading Trust. The apportionment of the sale price between the members of the Purslowe family was dealt with by an agreement called the Apportionment Agreement made by the defendant and members of the Purslowe family. That agreement provided that prior to the completion date of the sale of the various shares and units the purchase price would be apportioned as agreed by the defendant and the sellers of the shares and units.
The Apportionment Agreement provides that the purchase price for the shares and the units is $10,700,000. The defendant submitted that approximately $7.4 million, or in any event at least $7 million, of the purchase price represented goodwill, being the total price less the value of the tangible assets. That was not contested by the plaintiff.
An agreement made on 29 December 1994 between the defendant and members of the Purslowe family agreed how the purchase price for the shares and units should be apportioned. The arrangement provided that, but for $21.00, 50 per cent of the purchase price should be apportioned to the issued shares in Brian J Purslowe Holdings Pty Ltd and 50 per cent to the shares in Neil S Purslowe Holdings Pty Ltd. There was no separate agreement providing for the apportionment of the entitlement of the shareholders in Brian J Purslowe Holdings Pty Ltd amongst themselves.
The defendant submits that the plaintiff was entitled to and should have received about $98,000 for her shares and units. That sum was calculated by apportioning Brian J Purslowe Holdings Pty Ltd's half‑share of the purchase price equally amongst the 995,000 ordinary shares issued in that company.
It may not be correct to assume that the purchase price would or should be apportioned amongst the shareholders in proportion to the number of shares they held because the shareholding was divided into different classes with different rights attaching to each class of shares. The plaintiff testified that she did not receive any part of the purchase price.
The Employment Agreement
This action is concerned with the enforceability of the Restraint Clause, that is cl 3.1 in the Employment Agreement. It is as follows:
"3.1Restraint
3.1.1Sear covenants that she will not and that she will procure that any company in which she is or may be a shareholder (except SCIA or an Affiliate of SCIA) or of which she is or may be a director will not, in her own right or solely or jointly with any other person or entity, be engaged, involved, concerned or interested (including, without limitation, by providing any financial assistance, guidance or instruction), directly or indirectly, in the capacity specified in paragraph (a) in the business specified in paragraph (b) within the area specified in paragraph (c) for the period specified in paragraph (d):
(a)As a:
(i)sole trader,
(ii)director,
(iii)manager,
(iv)member,
(v)shareholder,
(vi)debenture holder;
(vii)employee,
(viii)consultant,
(ix)partner,
(x)agent, or
(xi)otherwise.
(b)Provider of funeral services and related services, or any business similar to or competitive with any part of the Business.
(c)Within:
(i)the area falling within the City of Perth;
(ii)a 80 kilometre radius of any of the Premises;
(iii)a 60 kilometre radius of any of the Premises;
(iv)a 40 kilometre radius of any of the Premises;
(v)a 20 kilometre radius of any of the Premises;
(vi)a 10 kilometre radius of any of the Premises;
(vii)a 5 kilometre radius of any of the Premises,
(d)For the term of this Agreement and for a period of:
(i)five years,
(ii)four years,
(iii)three years,
(iv)two years,
(v)one year,
from the date of termination of this Agreement.
3.1.2Sear enters into each of the covenants resulting from combining separately each of the capacities in clause 3.1.1(a) with each business or activity in clause 3.1.1(b) with each geographical area in clause 3.1.1(c), with each period in clause 3.1.1(d), with SCIA.
3.1.3Each of the covenants in this clause 3 constitutes an independent and separate restraint imposed upon Sear.
3.1.4If any of the covenants in this clause 3 is or becomes unenforceable, it will be deemed to be severed to the extent of the unenforceability, but that will not affect the validity and enforceability of the other covenants in this clause 3 which will remain binding on Sear.
3.1.5Notwithstanding the provisions of clause 3.1.1, if this Agreement terminates before the end of the 10 year term referred to in clause 1, then the periods referred to in clause 3.1.1(d) will be extended to include so many separate years as are necessary to constitute a restraint for a minimum period of 15 years from the date of this Agreement. The provisions of clause 3.1.2 will apply to the additional years.
3.1.6For the purposes of this clause 3, 'funeral services' includes, without limitation, mortuary, monumental masonry, crematory and cemetery services and the marketing of pre‑arranged funerals and any business related to mortuary, monumental masonry, crematory and cemetery services and the marketing of pre‑arranged funerals."
In addition to the Restraint Clause the Employment Agreement contains further covenants restraining the plaintiff from disclosing or using confidential information, soliciting clients, recruiting employees or damaging the goodwill of the business. These covenants are as follows:
"3.4Further covenants
3.4.1Sear agrees, without limiting any other provision of this Agreement, that during the term of this Agreement and for a period of 5 years from the expiration or earlier termination if this Agreement:
(a)to keep secret and confidential and not to publish, disclose or divulge (except with SCIA's prior written authority), nor to sue or attempt to use, any confidential information regarding the Business or SCIA's businesses or SCIA, including, without limitation:
(i)confidential financial information regarding the Business or SCIA or SCIA's businesses; and
(ii)confidential marketing information, including details of customers and past or current negotiations or transactions relating to customers or the Business or SCIA or SCIA's businesses;
(b)she will not (with reference to goods or services of the general nature or type sold or provided by the Business) solicit, canvass or endeavour to obtain the custom of customers or clients of the Business or of SCIA's businesses who have been customers or clients at any time during the period of 2 years immediately preceding the termination of her employment, on behalf of Sear or any other person or company conducting a business and dealing in products, goods or services which are competitive with those comprising the whole or part of the Business.
(c)she will not entice or attempt to entice any employee of the SCIA or an Affiliate of SCIA from continuing to be employed with SCIA, or that Affiliate, on behalf of Sear or any other person, firm or company; and
(d)she will not:
(i)knowingly or intentionally damage or destroy the goodwill and esteem of the Business, or SCIA's businesses with its suppliers, employees, patrons, customers and others who may at any time have or have had relations with the Business or SCIA's businesses;
(ii)reveal to any third person any difference of opinion, if there be such at any time, between SCIA and the management of the Business; or
(iii)knowingly or intentionally do any act or thing detrimental to the Business or SCIA's businesses.
For the purposes of this clause 3, without limiting the meaning of the expression 'SCIA's businesses', that expression includes any business of provinding [sic] 'funeral services' (as defined in clause 10.3.6) carried on by an Affiliate of SCIA."
The remuneration due to the plaintiff was set out in cl 4.1 which is as follows:
"4.1Remuneration
4.1.1As payment for the Employment Duties to be rendered pursuant to this Agreement, SCIA agrees, subject to clause 4.1.2, for the period of 10 years from the date of this Agreement to pay Sear the sum of $148,000 per annum less federal, state and other applicable deductions.
4.1.2The parties agree that:
(a)if the covenants in clause 3.1 become unenforceable or if Sear breaches any of the covenants in clause 3.1, then the remuneration referred to in clause 4.1.1 will be reduced to $98,000 per annum, the parties acknowledging that the amount of $50,000 per annum forming part of Sear's remuneration is in consideration of the covenants in clause 3.1;
(b)for the purposes of clause 8.1.3 and 8.1.4, that part of the remuneration referred to in clause 4.1.1 in the amount of $50,000 will be paid to Sear in accordance with clause 4.1.2(a).
4.1.3 (a)The remuneration referred to in clause 4.1.1 will be reviewed annually by SCIA.
(b)The first review will be made on the anniversary of the date of commencement of this Agreement and further reviews will be made on the subsequent anniversaries of the date of commencement of this Agreement.
(c)SCIA may not reduce the remuneration referred to in clause 4.1.1 unless in the 12 months (the 'first 12 months') immediately prior to the date of the review, the number of adult funerals performed by SCIA and it [sic] Affiliates in Western Australia is less than 75% of the number of adult funerals performed by the same businesses in the 12 months immediately preceding the first 12 months with due consideration being given to the sale or closure by SCIA of any of its businesses in the year prior to the review."
The Common Law of Restraint of Trade
At common law an agreement in restraint of trade is one in which a party agrees to restrict their liberty in the future to carry on trade with other parties in accordance with their agreement. Every restraint of trade is presumed to be void, in the sense of being unenforceable, but this presumption can be rebutted. The applicable test is that the presumption will be rebutted if the restraint is judged to be reasonable by reference to the interests of the parties concerned (the first limb of the test), and reasonable by reference to the interests of the public (the second limb of the test).
The plaintiff says that the restraints in the Restraint Clause are unenforceable for two reasons. First, the restraints are void for uncertainty. Secondly, the restraints are greater than is reasonably necessary to protect the defendant against the plaintiff's connection with the customers of the business. That is, the restraint is not reasonable by reference to the interests of the parties concerned.
At the outset the plaintiff formally maintained that the restraint was not reasonable in relation to the public interest. However, the onus of proving that the restraint injures the public interest is on the party restrained, that is the plaintiff. The plaintiff did not pursue that issue and I will not consider it further.
Is the Restraint Uncertain?
The restraint clause is in the form of a "step clause" that is a provision which sets out a series of overlapping or cumulative restraints, comprising multiple stipulations of different size or scope as to the location, period and activities affected: see A Stewart "Drafting and Enforcing Post‑Employment Restraints" [1997] 10 AJLL 181.
Austra Tanks Pty Ltd v Running (1982) 2 NSWLR 840 dealt with a contract for the sale of a business. The vendor covenanted that he would not for the stipulated period engage in the business of the partnership or any aspect thereof in the stipulated area. The definitions of stipulated period and stipulated area contained a large number of variables. Each variable was linked by the words "or if this provision be unenforceable then …". In total there were 82,152 possible combinations of the different variables. Wootten J noted that the contract was seeking "to define the obligation through a series of enquiries as to what is enforceable" and referred to Davies v Davies (1887) 36 Ch D 359, in relation to the impropriety of leaving it to the court to fix a valid restraint. Wootten J went on (at 845 – 846) to hold the restraint void for uncertainty:
"[T]he agreement only contemplates one covenant. Which one is intended? The problem is not to be solved by saying that the widest enforceable covenant is intended because in the absence of any statement as to the priority of application of the variables it is not possible to say which covenant is widest. Does a 100 kilometre radius for one year give a wider covenant than a 10 kilometre radius for five years? …
I referred earlier to this covenant as malevolent, because it makes no genuine attempt to define the covenantee's real need for protection, gives the covenantor no clear guide as to what he can or cannot do, and refers the definition of the obligation to litigation, 'the terror and expense' of which is, as Lord Moulton said in [Mason], often the real sanction at the back of covenants, especially those of employees."
In JQAT v Storm [1987] 2 Qd R 162 by contrast, the Full Court of the Queensland Supreme Court upheld a "step" restraint clause, distinguishing both Austra Tanks (supra) and Davies v Davies (supra). The key was not so much that the covenant contained only 18 combinations as opposed to 82,152, but rather the effect of a clause that made it clear that the combinations were to operate as separate restraints, albeit cumulative and overlapping. The combinations were not inconsistent with one another, in that they could be simultaneously obeyed. So rather than there being uncertainty as to what obligation was being imposed, the parties' intention was clear: to impose 18 different restraints, of which some might be valid and others (which could duly be severed) might not.
This reasoning was adopted by Spender J in Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505, where his Honour held that a covenant with as many as 120 combinations was not void for uncertainty, once again because of the clear provision in the contract specifying that each combination of variables was intended to operate as a separate restraint.
The restraint clause in this case is not uncertain. Subclauses 3.1.2, 3.1.3 and 3.1.4 make it clear that the combinations specified in subclause 3.1.1 are to operate as separate restraints, albeit cumulative and in some instances geographically and temporally overlapping.
Is the Restraint Clause contrary to Public Policy?
In Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (supra) Spender J recognised the existence of a separate objection, grounded in public policy and based on the reasoning in Davies v Davies against a covenant which effectively left it to the courts to frame a restraint. Spender J said at 660 – 661 that the clause before him, unlike the clauses in Davies v Davies and Austra Tanks:
" … does not expressly define the covenantors' obligations according to what is enforceable or reasonable. One might ask, however, whether a clause which envisages the severance of those out of very many separate covenants which are held to be unenforceable as an unreasonable restraint of trade, is any less objectionable than a clause which defines an obligation in terms of reasonableness or enforceability.
In JQAT v Storm (supra) Connolly J rejected a submission by the respondent in that case that cll 6.2 and 6.3 in effect asked the court to choose which combination was permissible and then to apply it. His Honour reiterated his view that the clauses operated cumulatively, subject to questions of unlawful restraint of trade. He observed (unreported, page 6 of transcript): 'However, should the court be of the view that in any respect there is an unlawful restraint of trade, the parties have agreed that severance of the illegal features will not make a new contract for them and that they will be bound by so much of the covenants as remains'. The judgment of Connolly J suggests that, provided the parties have agreed to sever those covenants that constitute an unreasonable restraint of trade, then the paring down of the covenantor's obligation to what the court determines to be not unreasonable, does not amount to having the court fix the limits of the restraint. That conclusion may have the merit of not permitting a covenantor to escape its obligations in a case such as JQAT v Storm, where the total restraint imposed by the 18 combinations involved a three month restraint in Queensland and New South Wales on the specified conduct. It seems to me to be very much a question of degree and dependant on the parameters of each such attempt, whether in truth the court is being asked to choose the extent of the restraint.
In my opinion, the question whether a technique of defining covenants in restraint of trade by combining different variables of conduct, time and space, and providing that each of the covenants so 'generated' is subject to severance, is successful in defining enforceable restraints or is unsuccessful in so doing, comes down to whether the exercise amounts to a genuine attempt to define the covenantee's need for protection, with the agreement as to severance as a precaution against the 'all or nothing' nature of the court's tests for reasonableness, or whether the exercise is simply one where the parties have left to the court the task of making their contract for them.
One might think the more numerous the variables, and the more mechanical and indiscriminate the combination of variables, the more likely would be a conclusion that the exercise is of the latter kind."
Spender J referred to two justifications for the objection to the enforceability of the covenant which he had discussed. The first is the basic view that it is for the parties to make their contracts not the courts. The second is the terror and expense of litigation which confronts a person who enters into a restraint clause with multiple cumulative and overlapping combinations of restraints. A third consideration is that the number of permutations that the Court is required to consider should not be so great as to place an oppressive burden on the Court.
In Brendon Pty Ltd v Russell (1994) 11 WAR 280 at 289 Ipp J approved those remarks by Spender J.
In this case the Restraint Clause provides, in effect, that the plaintiff will not be involved in the capacity specified in par (a) in the business specified in par (b) within the area specified in par (c) for the period specified in par (d).
In submitting that the variables in the Restraint Clause were excessive, counsel for the plaintiff contended that there were an excessive number of variables taking into account the capacities referred to in par (a), the businesses specified in par (b), the geographical area specified in par (c) and the periods specified in par (d). However, there is no overlapping between any of the capacities or businesses defined. The businesses and capacities are distinct and cumulative and whether the plaintiff falls within any of the capacities or businesses is a matter to be determined by the facts ascertained at a given time.
The alternative variables are those contained in par (c) and par (d) and it is to these paragraphs that consideration has to be given when determining this issue. There are seven areas and five periods and hence 35 permutations of area and period. The geographical areas, except for the area specified as the City of Perth, are determined by distances from each of the premises from which the business was carried on.
The Court leans against declaring invalid on the ground of uncertainty a commercial agreement that the parties have entered into intending that it should have effect. Having regard to the Restraint Clause as a whole I conclude that the parties to the Employment Agreement have made a genuine attempt to define the defendant's need for protection and the parties have not left to the court the task of making a contract for them. The number of permutations is not so burdensome on the Court as to require the clause to be held to be unenforceable. The Restraint Clause is not void on that ground.
Nature of the Restraint Clause
The plaintiff submits that the restraint is an employee restraint and not a sale of goodwill restraint.
The defendant contends that the reasonableness of the restraints contained in the Employment Agreement should be assessed on the basis that they form part of the consideration for the sale of the shares and units in the companies and the trust. Senior counsel for the defendant submitted that it can be important to ascertain what sort of restraint is imposed because the approach to sale of business restraints is more liberal than to employee restraints. Senior counsel referred to the observation by Bleby J in Hydron Pty Ltd v Harous [2005] SASC 176 at [85] that the courts in general take a stricter and less favourable view of covenants in restraint of trade entered into between an employer and an employee than of such covenants entered into between a vendor and a purchaser. Bleby J said that this is probably because there are different interests to protect:
"In the case of sale of a business, the purchaser is entitled to protect himself against competition on the part of the vendor, in order to preserve, for a reasonable time, what it is that he has bought. With an employee, the emphasis is not so much on restriction of the activities for which the employee is trained and which might be competitive with those of the employer, but on the use of information obtained about the employer's business which would be of subsequent use to the employee or to the employee's new employer."
In addition to the protection of information about the employer's business, the business interests that may be legitimately protected by a post‑employment restraint include the protection of established customer connections: see Lindner v Murdock's Garage (1950) 83 CLR 628.
Emmett J in Synavant Australia Pty Ltd v Harris [2001] FCA 1517, held at [69]:
"In some circumstances, a restraint of trade imposed upon an individual who is about to commence employment may be treated as a part of the consideration for the sale of goodwill, as where the individual enters into the employment of the purchaser of the goodwill of a business previously carried on by that individual."
Where the sale of a business carried on by a company is effected by means of a sale, not of the business itself, but of the issued capital of the company, it is commonplace for the parties to require that promises on the part of the former shareholders be given to the purchaser. Similarly, where the vendors of the shares are not the individuals who are responsible for the management of the company, it is commonplace for a purchaser to require that the individual or individuals who are responsible for management also enter into restraints in order to afford protection to the purchaser in respect of the goodwill for which it is giving consideration: Synavant (supra) at [69].
Senior counsel for the defendant referred to Kamerling, A & Osman, C "Restrictive Covenants under Common and Competition Law" where the authors say at p 175:
"In many cases covenants are entered into in transactions that combine both the sale of a business with an employment contract, whereby the purchaser of a business retains the services of the vendor as an employee after the sale."
The authors referred to Dawnay, Day & Co Ltd v D'Alphen [1998] ICR 1068 and continued:
"The courts will not look at any covenant in an employment contract in isolation, if the circumstances that lead to the employment are interrelated to a business sale."
That observation is consistent with the authorities.
Senior counsel for the defendant described the restraint clause in this case as a hybrid clause containing elements of both a covenant on the sale of goodwill and a post‑employment restraint.
It is not always necessary or appropriate to confine the restraint clause to one or other of the categories of employee covenant or goodwill covenant. In Dawnay, Day & Co (supra), Evans LJ said at 1107:
"In my judgment, far from confining the circumstances in which covenants in restraint of trade may be enforced to certain categories of case, and defining those categories strictly, the courts have moved in the opposite direction. The established categories are not rigid, and they are not exclusive. Rather, the covenant may be enforced when the covenantee has a legitimate interest, of whatever kind, to protect, and when the covenant is no wider than is necessary to protect that interest."
The Court should consider the interest to be protected by the covenant and whether or not the covenant is no greater than is necessary for the protection of that interest. Moreover, the general rule is that a restrictive covenant is prima facie void and can achieve validity only if it is reasonable in the interests of the parties and in the public interest. It will be reasonable only if:
1.The party in whose favour the covenant is given has a genuine interest requiring protection;
2.The restriction is limited to the covenantee's interest;
3.The restriction is for a period no longer than necessary for the protection of that interest; and
4.The restriction relates to a geographical area no larger than necessary for the protection of that interest.
See Brooks, A "The Limits of Competition: Restraint of Trade in the context of Employment Contracts" (2001) 24(2) UNSWLJ 346 at 347.
Interests to be protected
The Employment Agreement was entered into at the time that the defendant acquired the business by purchasing the shares and units. A recital to the Employment Agreement states that on the date of the agreement the defendant acquired the shares in the Company. The execution of the Employment Agreement was a condition of the acquisition of the shares and units. A draft of the Employment Agreement is annexed to the share purchase agreement and cl 2.1(f) of the share purchase agreement provides that, amongst other things, an employment agreement in the form of the annexed document was a condition precedent to completion of the share purchase agreement.
In substance, the restraint clause in the Employment Agreement was entered into as part of the transaction by which the defendant purchased the shares and units and acquired the business. The defendant has a genuine interest requiring protection, that is the goodwill of the business it acquired. It paid about $7.5 million for that goodwill.
On the sale of the business the defendant is entitled to protect itself against competition from the vendors, including the plaintiff, in order to preserve for a reasonable time what it has bought, relevantly the goodwill of the business. The goodwill purchased by the defendant was the intangible asset which provided a competitive advantage and derived from the strong Purslowe Funeral Homes and Mareena Purslowe & Associates' brands, the business' reputation, as well as existing customer connections and the management and high employee morale.
The defendant's interests that may be legitimately protected include confidential or other business information and established customer connections. Senior counsel for the defendant emphasised the role of the plaintiff in the establishment and conducting of the business carried on by the Company under the business name Mareena Purslowe & Associates. Senior counsel for the defendant submitted that the plaintiff was central to the Mareena Purslowe & Associates business because she introduced into the market a unique business and concept. Senior counsel for the defendant equated the concept with the Mareena Purslowe & Associates brand.
The evidence establishes that the Mareena Purslowe & Associates brand was distinctive. The defining features of the brand are that the services provided by Mareena Purslowe & Associates are:
•run entirely by women;
•less traditional;
•delivered with a creative and personalised approach to funeral services;
•reflected in the presentation of the staff and the funeral vehicles and the creative marketing focus of the brand;
•of a higher level of service than the more traditional funeral homes;
•focussed on being unique and delivering individual personalised service.
Senior counsel submitted that the plaintiff demonstrated a large amount of personal energy and enthusiasm in establishing the brand, in recruiting and training staff and promoting the business. As a result, it was submitted, the plaintiff made the Mareena Purslowe & Associates' business a successful venture. The defendant submitted that the Mareena Purslowe & Associates' success was all about the plaintiff's qualities and achievements as a manager and leader.
The concept of a funeral service run entirely by women with a more personalised and less traditional approach to funeral services was not unique in 1994. The plaintiff gave evidence that by the end of 1994, Bowra & O'Dea had adopted the concept behind Mareena Purslowe & Associates under the trading name "Leanne O'Dea". That business was operated from premises in West Perth.
In my view, the defendant's ownership of the Mareena Purslowe & Associates' brand is an interest that may be legitimately protected by restraint of trade clauses. The brand is the product of the plaintiff's qualities and efforts in establishing the brand.
Nature of the Business and Industry
The defendant says that the funeral business is different from many others in that clients generally only come back to the industry a few times during their lifetimes, and repeat business has to be planned over generations.
Documents are available that set out the number of funerals performed in 1994 and 1995 by Mareena Purslowe & Associates' Subiaco branch broken down by the suburb of residence of the deceased and the suburb of residence of the person authorising the funeral. This data was not analysed by either party. However, the reports show that over that period the business of Mareena Purslowe & Associates, Subiaco branch was drawn from a broad catchment area.
Mr Hogan, the defendant's general manager in Western Australia, gave evidence concerning a document described as a postcode report. The report details the post codes of the commissioner or originator of funerals conducted by the different branches of the business. It was used by the defendant, amongst other purposes, to track where its business was coming from. The report set out the number of funerals performed by the Subiaco branch in the years 1995 to 2004 and the number of funerals performed by the Willetton branch in the years 2001 to 2004 broken down by the post code in which people authorising and commissioning the funerals were located. The postcode reports show that the broad catchment area trend before December 1994 for Mareena Purslowe & Associates was maintained after 1994.
Mr Hogan said that locality of the funeral home is an important factor for Purslowe Funeral Homes, other than Mareena Purslowe & Associates. Source of business reports produced for Mareena Purslowe & Associates Subiaco and Willetton branches were compiled by the defendant after 1994 based on data provided by customers on the funeral arranging forms. The reports set out the reasons provided by customers for engaging Mareena Purslowe & Associates to perform the funeral they were authorised to arrange. This information shows that the two most common reasons for using Mareena Purslowe & Associates are "previous business" and "concept". Source of business reports produced for Purslowe Funeral Homes other than Mareena Purslowe & Associates show that locality and repeat business are the most important reasons for business.
The Reasonableness of the Limitations
Where, as here, protection of goodwill is sought by means of a broad restriction on involvement in the same field, the court must scrutinise very carefully the description of the field, the capacity and the geographical and temporal extent of the restriction, to ensure that it does not go further than necessary to protect the covenantee's legitimate interests.
The field set out in par (b) of the restraint clause is: "[p]rovider of funeral services and related services, or any business similar to or competitive with any part of the Business". That is no wider than is reasonably necessary to protect the goodwill purchased by the defendant.
The range of activities restrained effectively restrains the plaintiff from being engaged, involved, concerned or interested in a funeral services business in any capacity. The defendant concedes that subparagraph (xi) of par (a), that is "otherwise", is uncertain and unenforceable. The remaining capacities specified in par (a) of cl 3.1.1 are reasonably necessary to protect the goodwill purchased by the defendant provided that the area and duration elements of the restraint are no greater than is necessary to protect the defendant's legitimate interests.
The Area Restraint
The test of reasonableness will normally be applied as at the time that the agreement was entered into by the parties: Lindner v Murdock's Garage (1950) 83 CLR 628 per Kitto J at 653. Events after the date of the agreement may be relevant. In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 at 318, Gibbs J said that such facts might throw light on the circumstances existing at the relevant date.
The geographical area is the City of Perth and areas ranging from the area falling within a five kilometre radius of any of the Premises to the area falling within an 80 kilometre radius of any of the Premises. The defendant concedes that subparagraph (i) that refers to the area falling with the City of Perth is uncertain and unenforceable. The Premises are defined as being specified locations at Victoria Park, Wangara, North Perth, Midland, Northam and Subiaco. Those were the premises from which the business was being carried on by the Company at the time the business was acquired by the defendant in December 1994.
At the time the plaintiff entered into the Employment Agreement she was the manager of the Mareena Purslowe & Associates brand and of the Subiaco branch from which it principally operated. The brand also operated from premises in Willetton. The plaintiff's role was primarily a management one. She had some, but limited, contact with clients. She appeared in television advertisements for Mareena Purslowe & Associates and her photograph appeared in brochures promoting the brand.
The plaintiff had no involvement in the conduct of the business under the name Purslowe Funeral Homes, other than attending management meetings of the Company. The plaintiff was not directly involved in the operation of, or carrying out business from, the company's premises other than the Subiaco premises.
There is no evidence that at the time the plaintiff entered into the Employment Agreement it was intended that she would be involved in conducting business at any of the premises other than under the Mareena Purslowe & Associates brand.
There is evidence that the clients of the Mareena Purslowe & Associates were not confined to the area adjacent to the Subiaco or Willetton premises. Many were attracted to the all women theme of the operation and came from a wider area.
The record of funerals performed by Mareena Purslowe & Associates in 1994 by residence of deceased discloses that the vast majority of funerals originated from within a radius of 20 kilometres of the Subiaco premises. There were funerals performed for deceased with residences as far afield as Bolgart, Bunbury, Cadoux, Harvey, Kalgoorlie, Mandurah, Margaret River and Pingelly. But that does not represent a significant part of the business of Mareena Purslowe & Associates. The list of funerals performed by residences of authorising persons shows a similar pattern but there was no authorising person resident in Bolgart or Kalgoorlie. The list of funerals performed by Mareena Purslowe and Associates in 1995 by residences of authorised person and the list of funerals performed in 1995 by residences of deceased shows a similar pattern. The vast majority of funerals related to residences within 20 kilometres of Subiaco. The figures for 1994 and 1995 do not disclose any, or any significant, business originating from Northam or an area within a five kilometre radius of Northam.
Mr Hogan's evidence is that the locality of the funeral home is an important factor for Purslowe Funeral Homes, other than Mareena Purslowe & Associates. There is no evidence of the residence of the person authorising the funerals conducted at branches other than Subiaco or Willetton in the years prior to the defendant acquiring the business. There is evidence of the residence of those persons in respect of funerals performed at each of the premises in the years 1995 to 2005. Those figures have not been analysed by the parties. However, my observation of those figures supports the evidence of Mr Hogan that locality is an important factor in the funerals performed by those premises or branches. My observation of those figures discloses that the majority of funerals performed at each of the branches between 1995 and 2005 were authorised by a person with a residence within 20 kilometres of the branch. Nevertheless, some business originated from further afield.
The Temporal Restriction
The periods of the restraint under the restraint clause vary from five years to one year from the date of termination of the agreement. The term of the agreement is 10 years beginning on the date of the agreement. However, cl 3.1.5 provides that if the agreement terminates before the end of the 10 year term then the periods referred to in the restraint clause will be extended to include so many separate years as are necessary to constitute a restraint for a minimum period of 15 years from the date of the agreement.
Clauses 8.1.1 and 8.1.2 of the Employment Agreement provide that the agreement may be terminated before the expiry of its term if the plaintiff dies or is prevented from performing her duties by reason of disability. Clause 8.1.4 provides that the defendant may discharge the plaintiff for cause and terminate her employment without any further liability except for any accrued but unpaid salary due to her. A discharge for cause is defined to mean a discharge resulting from a determination by the defendant that the plaintiff has been convicted of a serious crime, regularly failed or refused to follow policies or directives established by the defendant, wilfully and persistently failed to attend to her employment duties, and committed acts amounting to gross negligence with lawful misconduct to the detriment of the defendant, or breached any of the terms or provisions of the Employment Agreement.
The Other Covenants
The reasonableness of the restraints must be considered in the context of the Employment Agreement as a whole.
Clause 3.4.1 of the agreement, which I have set out earlier in these reasons, restrains the plaintiff for the term of the Agreement and for a period of five years upon its expiration from publishing, disclosing or using any confidential information regarding the business and from soliciting, canvassing or attempting to obtain the custom of clients of the business who have been clients at any time during the period of two years immediately preceding the termination of her employment. The plaintiff is further restrained from enticing any employee of the defendant from continuing to be employed by the defendant and there is a requirement that she will not knowingly or intentionally damage or destroy the goodwill and esteem of the business.
Overview of the Restraints
The defendant submits that the nature of the funeral industry is such that five years is a reasonable duration to sever the relationship between the plaintiff and those clients who would patronise the business after the sale. However, the duration of the restraints is not for a period of five years after the sale or acquisition of the business by the defendant. The maximum period is effectively a period of 15 years, being the term of the employment agreement and five years after its termination. Of course, for the first 10 years, or so long as the Employment Agreement remained on foot, the plaintiff would remain working in the business.
The restraint period was to operate from a time 10 years after the sale of the business. At that time the defendant says that it needs protection from competition from the plaintiff because the plaintiff was the driving force in establishing Mareena Purslowe & Associates and she managed and operated the brand before and after the acquisition by the defendant and maintained direct contact with clients and suppliers. She was active in marketing the business, appeared in advertisements and media articles and spoke at industry and business functions. The nature of the funeral industry is such that five years is a reasonable duration to sever the relationship with the plaintiff and those clients who would patronise the business after sale. That is because repeat business from clients tends to be "intergenerational" in that clients or relatives come back after a long period of time.
As I have said, the term of the restraint to operate after the termination or expiry of the Employment Agreement must be considered in light of the terms of the Employment Agreement as a whole.
The defendant paid a substantial amount, at least $7 million for goodwill. In addition, the defendant agreed to pay the plaintiff a salary that included $50,000 per annum for 10 years in consideration of the restraint covenants in cl 3.1. The defendant gave substantial consideration to obtain covenants by the plaintiff and other members of the Purslowe family not to compete with the defendant.
The issue before the Court is whether the plaintiff's contractual undertaking not to engage or be involved in funeral services or similar business within the specified areas for a period of up to five years after the termination of her employment with the defendant and 10 years after the defendant acquired the business is no more than adequate protection to the defendant.
In determining the interests of the parties, the nature and object of the protection must be considered. As Lord Parker said in Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 708 – 709:
"The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment, and if the purchaser is to take over such goodwill with all its advantages it must, in his hands, remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is, therefore, reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser."
In Tropeano v Riboni [2005] VSC 229 Gillard J said at [90]:
"Liberty to contract on such terms as the parties agree underlies the law of contract. That is not to say that contracting parties have an absolute right to make any agreement. They do not. There are well recognised categories of contracts which are forbidden and also contracts which are unenforceable. But within limits each party negotiates to achieve the best bargain for himself. The negotiation process leads to an agreement in law. A vendor of a business sets out to achieve the best price he can. He wants the best return for his industry in establishing and building up his business. He wants a proper return on the sale of his goodwill which recompenses him for his efforts. On the other hand the purchaser wants to pay as small a sum as possible. But it is vital to his interests that in paying for goodwill he protects himself from the risk of clients going elsewhere and in particular back to the vendor. In purchasing the goodwill of the business the purchaser wants protection against the fruits of the sale being whisked away by the former owner. Mr Robini purchased the business as a going concern, and by doing that he sought to obtain an advantage in respect of the location, the premises, the goodwill and the customers. He desired to take over the business and provide accounting services to the same clients. He paid to get the goodwill and expected that the clients would remain with the business. …"
As I have said, the defendant paid substantial consideration for the restraint covenant. It was the agreed price for, amongst other things, the plaintiff and other members of the Purslowe family not competing with the business acquired by the defendant.
The contractual undertaking by the plaintiff not to compete is reasonable if confined to "the area in which it would in all probability enure to the injury of the purchaser". In considering the area restraint weight must be given to the agreement of the parties and the court should be slow to upset their bargain. However, in the end it is for the court to determine whether the area of restraint goes beyond the area in which in all probability the defendant would suffer injury if the defendant was to engage in the business of funeral services.
Although most of the funerals performed at each of the business' premises were authorised by persons living within 20 kilometres of the premises, each of the premises performed funerals authorised by persons living further from the premises. On the sale of the business the defendant was entitled to protection from competition. An area of restraint of at least 20 kilometres from each of the premises and probably more was necessary to protect the defendant from competition. It is not necessary for me to determine what was a reasonable area of restraint for the period of 10 years after the sale of the business. The issue to be determined is the reasonableness of the restraints for periods commencing on the expiration or termination of the agreement, that is, in general 10 years after the sale of the business. It is that matter which is determinative of these proceedings.
Restraints Commencing 10 Years after Sale of Business
The defendant agreed to pay a purchase price of $10.7 million. Senior counsel for the defendants submitted that a key issue in the calculations was that if the purchase price was an estimate of how long it would take for the defendant to recover its expenditure, before interest, the defendant calculated that before interest it would take 7.9 years to recover its purchase price. The law is not that a restraint of trade clause is reasonable for the period it takes the purchaser to recover its purchase price and it is not the law that a restraint is unreasonable if it is for a period longer than it takes the purchaser to recover its purchase price. However, the period of 7.9 years referred to by senior counsel indicates that the defendant paid a substantial amount for the business and a restraint for a period in that order would be reasonable to protect the goodwill purchased by the defendant.
A restraint for the term of the Employment Agreement would be a reasonable period. A restraint against competition for that period would enable the defendant to realise the goodwill it has purchased by operating free of competition from the vendors for 10 years. After 10 years the business' customer relations would be relations between customers and employees of the defendant, including employees who had formerly been employees of the Company before the defendant acquired the Company. Furthermore, the consideration for the restraint of trade covenant consisted of an addition to the plaintiff's salary of $50,000 each year for the duration of the Employment Agreement.
What is necessary to protect the defendant's legitimate interests for the term of the Employment Agreement, that is the period of 10 years after the purchase of the business, may not be necessary to protect the defendant's legitimate interests for periods commencing after the expiry of that 10 year period. On the expiry of the Employment Agreement, the defendant will have been operating the business free from competition from the plaintiff for 10 years and will have recovered the purchase price of the business. By that time the business interests of the defendant that may be legitimately protected are, or are equivalent to, those protected by a post‑employment restraint, that is confidential or business information and established customer connections. By that time, the defendant is no longer entitled to protection from competition from members of the Purslowe family in and of itself. The business interests that may be legitimately protected by a post‑employment restraint, that is a restraint on the termination of the agreement 10 years after the sale of the business, are the protection of confidential business information and established customer connections.
In considering whether the restraint clause in the Employment Agreement is not more than is necessary to protect those interests the court must have regard to the restraints imposed on the plaintiff by the clauses in the Employment Agreement other than the restraint cl 3.1.
As I have said the Employment Agreement restrains the plaintiff for a period of five years from the expiration of the agreement from disclosing or using any confidential information relating to the business and from soliciting or attempting to obtain the custom of clients of the business who have been customers or clients at any time during the period of two years immediately preceding the termination of her employment. The Employment Agreement also restrains the plaintiff from enticing or attempting to entice any employee of the defendant or affiliate of the defendant from continuing to be employed with the defendant or affiliate. The Employment Agreement also restrains the plaintiff from knowingly or intentionally damaging the goodwill and esteem of the business with its suppliers, employees, patrons and customers. Those restraints effectively protect the defendant's confidential or business information and established customer connections.
The defendant purchased the Mareena Purslowe & Associates brand. The development of the brand took time and money and was a valuable asset acquired by the defendant on the purchase of the Company's business. The defendant acquired the business by purchasing the shares in the Company. The defendant thereby acquired the business names belonging to the Company, including that of Mareena Purslowe & Associates. The Mareena Purslowe & Associates trading name and brand is secure to the defendant. The plaintiff does not intend to trade under the name Mareena Purslowe or any variant, nor could she in a way that would detract from the purchase by the defendant of the goodwill of the Company including the goodwill attached to the Mareena Purslowe & Associates name and brand. The defendant's entitlement to the name and brand is further protected by the promise by the plaintiff in cl 3.4.1(d)(i) and (iii) of the Employment Agreement, not to knowingly or intentionally damage or destroy the goodwill and esteem of the business with its suppliers, employees, patrons, customers and others who may have had relations with the business or to knowingly or intentionally do any act or thing detrimental to the business.
The narrowest area restraint under cl 3.1.1 of the Employment Agreement is an area within a five kilometre radius of any of the Premises. That includes the area within a five kilometre radius of Northam. At the time of the defendant purchasing the business the plaintiff had no involvement in the carrying on of the business from the Northam premises, other than as a director of the Company. In that capacity she had no involvement with the clients of the Northam branch nor with the operations of the Northam branch. Having regard to cl 3.4 of the Employment Agreement the restriction in cl 3.1 of the Employment Agreement relates to a geographical area larger than necessary for the protection of the defendant's interests on the expiry of the Employment Agreement. That is because even the narrowest geographical area, that is within a five kilometre radius of any of the Premises, includes an area within a five kilometre radius of the Northam premises which is larger than necessary for the protection of the defendant's legitimate interests.
It is not possible to sever par (c) of the restraint clause by excluding the Northam, or any other, premises from the specification of the area. That results in all of the provisions of par (c) being unenforceable, at least after the expiration of the Employment Agreement, that is 10 years after the date of the agreement which is also the time at which the defendant acquired the business.
Restraint Clause – Conclusion
For the reasons stated, I conclude that the restraint of trade clause in cl 3.1 of the Employment Agreement is wider than is necessary to protect the interests of the defendant and is unenforceable.
There is a real controversy as to that matter and it has practical consequences. Accordingly, it is appropriate to make a declaration to that effect.
Counterclaim
By its counterclaim the defendant seeks repayment of the $500,000 it has paid to the plaintiff if, as I have found, the restraint imposed by cl 3.1 of the Employment Agreement is unenforceable. Several different bases of the counterclaim are set up on the pleading.
Implied Term
The defendant pleads that it was an implied term that the sum be repaid if the restraint clause were void.
Clause 4.1.1 of the Employment Agreement provides that as payment for the employment duties to be rendered by the plaintiff the defendant agrees, subject to cl 4.1.2, for the period of 10 years to pay the plaintiff the sum of $148,000 per annum. Clause 4.1.2 provides that if the covenants in cl 3.1 become unenforceable or if the plaintiff breaches any of the covenants then the remuneration referred to in cl 4.1.1 will be reduced to $98,000 per annum, the parties acknowledging that the amount of $50,000 per annum forming part of the plaintiff's remuneration is in consideration of the covenants in cl 3.1.
On its proper construction cl 4.1 of the Employment Agreement provides, in effect, that the plaintiff is to receive remuneration of $148,000 per annum unless and until the covenants in cl 3.1 become unenforceable or the plaintiff breaches any of the covenants and in that event the plaintiff's remuneration will thereafter be reduced to $98,000 per annum. The clause does not provide for the plaintiff to repay $50,000 per annum out of the remuneration she received prior to the covenants in cl 3.1 becoming unenforceable or the plaintiff breaching any of those covenants. By the covenants becoming unenforceable the parties should be taken to have meant that they become unenforceable by reason of the agreement of the parties or judicial or other determination binding upon the parties.
The proposed term cannot be implied into the Employment Agreement because it contradicts the express terms of the agreement: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. Furthermore, the proposed term is not necessary to give business efficacy to the contract. The contract is commercially practicable if the plaintiff is entitled to receive an annual remuneration including $50,000 in consideration of the restraint clauses so long as they have not been determined to be unenforceable and have not been breached.
Total Failure of Consideration
Upon the proper construction of cl 4.1 of the Employment Agreement the plaintiff was paid $148,000 per annum as payment for carrying out the employment duties. If the covenants in cl 3.1 become unenforceable or the plaintiff breaches any of the covenants then her annual remuneration is reduced to $98,000, the parties acknowledging that the amount of $50,000 per annum, forming part of her remuneration, is in consideration of the covenants.
The plaintiff carried out the employment duties for the term of the agreement. Furthermore, the defendant observed the restraint covenants for the term of the agreement and indeed from the termination of the agreement until now. There has been no total failure of consideration.
Mistake
In David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, the High Court held that a payer is prima facie entitled to recover monies paid under a mistake if it appears that the monies were paid in the mistaken belief by the payer that he or she was under a legal obligation to pay them or that the payee was legally entitled to payment. The mistake must be one without which the payment would not have been made: Marshall v Marshall [1999] 1 Qd R 173, at 178 per McPherson JA.
The defendant has not established that the sum of $500,000, or any part of it, was paid to the plaintiff as a result of a mistake by the defendant without which the defendant would not have made the payment.
In his witness statement Mr McMillen says that he considered it was important to protect the defendant by ensuring that deeds of restraint and appropriate covenants were given by the relevant members of the Purslowe Family that they would not compete with the defendant after its acquisition of the Purslowe businesses. Mr McMillen says he would not have permitted the defendant to agree to purchase the Purslowe businesses for $10,700,000 without these restraints. However, Mr McMillen does not say that he determined the duration of the restraints. To the contrary, he says that he instructed the defendant's lawyers to advise and prepare the relevant documents.
Mr Davis said in his witness statement that if he had been of the view that the plaintiff would not honour the non‑compete clause for 15 years, he would have recommended that the defendant renegotiate the transaction. However, cl 3.1.2 of the Employment Agreement provides that the plaintiff enters into each of the covenants resulting from combining separately each of the elements in pars (a), (b) and (c) with each period in par (d). Paragraph (d) specifies five periods ranging from the term of the agreement plus one year to the term of the agreement plus five years, that is effectively from 11 years to 15 years after the sale. The Employment Agreement provides that if any of the covenants is or becomes unenforceable it will be severed to the extent of the unenforceability but that will not affect the validity and enforceability of the other covenants. That is, the intention of the parties was that a restraint for a period of less than 15 years would be valid and enforceable. That is inconsistent with the defendant having an intention not to make or proceed with the agreement if the plaintiff did not honour the non‑compete clause for the full 15 year period.
The evidence of Mr Davis is that it would take the defendant 7.9 years to recover the purchase price of the business, without taking into account interest. I do not accept that the defendant would not have paid the annual salary it paid to the plaintiff each year if the anti‑competition restraint would not be honoured by the plaintiff beyond the term of her employment.
Furthermore, the plaintiff has altered her position in reliance on her entitlement to receive the annual payments of salary, including the $50,000 per annum in consideration of the restraint covenant. The plaintiff carried out her employment duties for 10 years in reliance upon receipt of that salary. It would be inequitable to require her to repay the $500,000.
Estoppel
The defendant says that it entered into the Employment Agreement and paid the plaintiff the sum of $500,000 over a 10 year period as a result of the assumption that the plaintiff would comply with the terms of cl 3.1 of the Employment Agreement. The defendant says that the plaintiff induced it to adopt that assumption by executing the sale documents authorising her agents to sign related documents, by executing the Employment Agreement, by agreeing to accept $500,000 in consideration for the covenants in cl 3.1 of the Employment Agreement and by accepting the $500,000 from the defendant over a 10 year period.
The representation, if any, made by the plaintiff in executing the Employment Agreement and doing the other things referred to by the defendant was that she would comply with her obligations under the Employment Agreement. She made no representation that she would comply with the covenants in cl 3.1 of the Employment Agreement if they were or were found to be unenforceable. To the contrary, cl 3.1.4 of the Employment Agreement provides, in effect, that if any of the covenants are unenforceable then they will be severed and the remaining covenants will be valid. That is inconsistent with a representation that the plaintiff would comply with the covenants whether they were legally enforceable or not.
The plaintiff did not induce the defendant to believe that the covenants were legally enforceable. The defendant relied upon its own legal advisers to draft the relevant documents.
The claim of estoppel is not made out.
Conclusion – Counterclaim
The counterclaim is dismissed.
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