Supalux Paint Co Pty Ltd v Vyse
[1999] WASC 78
SUPALUX PAINT CO PTY LTD & ANOR -v- VYSE & ORS [1999] WASC 78
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [1999] WASC 78 | |
| Case No: | CIV:1658/1997 | 26, 27, 31 MAY 1999 & 4, 7-10 JUNE 1999 | |
| Coram: | TEMPLEMAN J | 24/06/99 | |
| 37 | Judgment Part: | 1 of 1 | |
| Result: | Plaintiffs' Application dismissed Judgment for defendant on counterclaim | ||
| PDF Version |
| Parties: | SUPALUX PAINT CO PTY LTD JOHN CHELMSFORD VYSE DAVID ALBERT VYSE FANCREST PTY LTD SLADE CORPORATION PTY LTD |
Catchwords: | Contracts Construction and interpretation Whether void for uncertainty Breach of agreement Variation of agreement Whether unreasonable restraint of trade Whether breach of obligation of confidentiality Section 10 Fair Trading Act 1987 Whether misleading or deceptive conduct "in trade and commerce" Whether implied term of non-solicitation Estoppel |
Legislation: | Fair Trading Act 1987, s 10 Property Law Act 1969, s 80 |
Case References: | Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 94 ALR 719 Castlemaine Tooheys Ltd v Carlton United Breweries Ltd (1987) 10 NSWLR 468 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 Franich v Swannell (1993) 10 WAR 459 Herbert Morris Ltd v Saxelby [1916] AC 688 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 Trego v Hunt [1896] AC 7 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1967) 118 CLR 429 Akron Securities v Iliffe (1997) 41 NSWLR 353 Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 ANZ Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695 Astra Tanks Pty Ltd v Running 91982] 2 NSWLR 840 Brown v Gould [1972] Ch 53 Connors Bros Ltd v Connors [1940] 4 All ER 179 Curl Brothers Ltd v Webster [1904] 1 Ch 685 Davies v Davies (1887) 36 Ch 359 Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 Drake Personnel Ltd v Beddison [1979] VR 13 Esso Petroleum Co Limited v Harper's Garage (Stourport) Limited [1968] AC 269 G D Searle & Co Limited v Celltech Limited (1982) FSR 92 Godecke v Kirwan (1973) 129 CLR 629 Hawker de Haveland Ltd v Fernandes & Anor, unreported; SCt of WA (Commissioner Gilmour); Library No 960055; 9 February 1996 Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 Lidner v Murdock's Garage (1950) 83 CLR 628 Lloyd'sShips Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505 Marks v GIO Australia Holdings Ltd (1998) 73 ALJR 12 Meredith v Anthony [1980] 2 NSWLR 784 O'Loughlin v O'Loughlin [1958] VR 649 Peters Ice Cream (Vic) Ltd v Todd [1961] VR 485 Petrofina (Gt Britain) Limited v Martin [1966] 1 Ch 146 Pioneer Concrete Services Ltd v Galli [1985] VR 675 Thomas Marshall Ltd v Guinle [1979] Ch 227 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Wardley Australia Limited v Western Australia (1992) 175 CLR 515 Whitlock v Brew (1968) 118 CLR 445 Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA CITATION : SUPALUX PAINT CO PTY LTD & ANOR -v- VYSE & ORS [1999] WASC 78 CORAM : TEMPLEMAN J HEARD : 26, 27, 31 MAY 1999 & 4, 7-10 JUNE 1999 DELIVERED : 24 JUNE 1999 FILE NO/S : CIV 1658 of 1997
District Court No 2111 of 1997 BETWEEN : SUPALUX PAINT CO PTY LTD
- First Plaintiff
JOHN CHELMSFORD VYSE
Second Plaintiff
AND
DAVID ALBERT VYSE
First Defendant
FANCREST PTY LTD
Second Defendant
SLADE CORPORATION PTY LTD
Third Defendant
(BY ORIGINAL ACTION)
DAVID ALBERT VYSE
Plaintiff
AND
(Page 2)
- JOHN CHELMSFORD VYSE
Defendant
(BY COUNTERCLAIM)
Catchwords:
Contracts - Construction and interpretation - Whether void for uncertainty - Breach of agreement - Variation of agreement - Whether unreasonable restraint of trade - Whether breach of obligation of confidentiality - Section 10 Fair Trading Act 1987 - Whether misleading or deceptive conduct - "in trade and commerce" - Whether implied term of non-solicitation - Estoppel
Legislation:
Fair Trading Act 1987, s 10
Property Law Act 1969, s 80
Result:
Plaintiffs' Application dismissed
- Judgment for defendant on counterclaim
Representation:
Counsel:
First Plaintiff : Mr R H B Pringle QC & Mr P T Arns
Second Plaintiff : Mr R H B Pringle QC & Mr P T Arns
First Defendant : Mr R E Birmingham QC & Mr J C Hammond
Second Defendant : Mr R E Birmingham QC & Mr J C Hammond
Third Defendant : Mr R E Birmingham QC & Mr J C Hammond
Solicitors:
First Plaintiff : Arns & Associates
Second Plaintiff : Arns & Associates
First Defendant : Hammond Worthington Prevost
Second Defendant : Hammond Worthington Prevost
Third Defendant : Hammond Worthington Prevost
(Page 3)
Counterclaim
Counsel:
Plaintiff : Mr R E Birmingham QC & Mr J C Hammond
Defendant : Mr R H B Pringle QC & Mr P T Arns
Solicitors:
Plaintiff : Hammond Worthington Prevost
Defendant : Arns & Associates
Case(s) referred to in judgment(s):
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 94 ALR 719
Castlemaine Tooheys Ltd v Carlton United Breweries Ltd (1987) 10 NSWLR 468
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337
Commonwealth of Australia v Verwayen (1990) 170 CLR 394
Franich v Swannell (1993) 10 WAR 459
Herbert Morris Ltd v Saxelby [1916] AC 688
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989
Trego v Hunt [1896] AC 7
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1967) 118 CLR 429
Case(s) also cited:
Akron Securities v Iliffe (1997) 41 NSWLR 353
Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288
ANZ Banking Group Ltd v Frost Holdings Pty Ltd [1989] VR 695
Astra Tanks Pty Ltd v Running 91982] 2 NSWLR 840
Brown v Gould [1972] Ch 53
Connors Bros Ltd v Connors [1940] 4 All ER 179
Curl Brothers Ltd v Webster [1904] 1 Ch 685
Davies v Davies (1887) 36 Ch 359
Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167
Drake Personnel Ltd v Beddison [1979] VR 13
(Page 4)
Esso Petroleum Co Limited v Harper's Garage (Stourport) Limited [1968] AC 269
G D Searle & Co Limited v Celltech Limited (1982) FSR 92
Godecke v Kirwan (1973) 129 CLR 629
Hawker de Haveland Ltd v Fernandes & Anor, unreported; SCt of WA (Commissioner Gilmour); Library No 960055; 9 February 1996
Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281
Lidner v Murdock's Garage (1950) 83 CLR 628
Lloyd'sShips Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505
Marks v GIO Australia Holdings Ltd (1998) 73 ALJR 12
Meredith v Anthony [1980] 2 NSWLR 784
O'Loughlin v O'Loughlin [1958] VR 649
Peters Ice Cream (Vic) Ltd v Todd [1961] VR 485
Petrofina (Gt Britain) Limited v Martin [1966] 1 Ch 146
Pioneer Concrete Services Ltd v Galli [1985] VR 675
Thomas Marshall Ltd v Guinle [1979] Ch 227
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Wardley Australia Limited v Western Australia (1992) 175 CLR 515
Whitlock v Brew (1968) 118 CLR 445
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317
(Page 5)
1 TEMPLEMAN J: The principal protagonists in this action are the second plaintiff, Mr John Chelmsford Vyse and his first cousin, Mr David Albert Vyse, who is the first defendant. John and David (as I shall call them) worked successfully together as the shareholders and directors of the first plaintiff, Supalux Paint Co Pty Ltd, a paint manufacturing company which they acquired in 1989.
2 The dispute has arisen out of the terms on which John purchased David's shares in Supalux in 1994, as those terms were varied in 1996.
3 The other parties to the action are Fancrest Pty Ltd, which is David's company and Slade Corporation Pty Ltd, a company acquired by Mr Michael George Morley. Fancrest and Slade are carrying on in partnership the business of sealing grain silos under the name Sealing Technology Australia ("STA"). I shall make further reference to the silo sealing business in general and to Mr Morley in particular, later in these reasons.
4 There is then a counterclaim by David against John for the unpaid balance of the purchase price of the shares in Supalux.
5 Central to the dispute is the plaintiffs' allegation that David is in breach of the agreements made between him and John in relation to the sale of the shares in Supalux and in breach of obligations of confidentiality imposed on him by a service agreement made between him and Supalux, pursuant to the share sale agreement.
6 The share sale agreement was varied by what is known to the parties as a letter agreement made between John and David on 14 August 1996. That agreement purported to release David from certain covenants contained in the share sale agreement. However, it is asserted by John that the letter agreement is a void for uncertainty. That is the first issue I must resolve.
7 It is trite law that in order to carry out the task of construing the letter agreement, I am not to have regard to the evidence given by the parties as to their actual intention at the material time. John and David gave evidence about those matters because it is relevant to an allegation by John that he was induced to enter into the letter agreement in reliance on misrepresentations by David as to his intention in relation to competing with Supalux.
8 In construing the letter agreement, I must discover the parties' intention from the document itself and the factual matrix in which it was
(Page 6)
- made. There is no dispute about most of these matters which I summarise as follows.
9 John and David (who is the older by some six years) have each spent the majority of their working lives in the paint industry. They commenced in India and continued in Australia where John arrived in 1972 and David in about 1973.
10 John and David have each worked for a number of major paint manufacturers. John has been concerned mainly with sales and marketing, whereas David has been more concerned with manufacturing. However, each has acquired broad experience in the industry.
11 In 1989, John and David each purchased 2500 shares in Supalux and became its working directors. Supalux's business was principally the manufacture of paint.
12 In the second half of 1989, with a view to increasing its paint sales, John and David decided that Supalux should attempt to enter the silo sealing market. This is a relatively small and specialised market involving the application of paint and similar substances to grain silos so as to make them inaccessible to insects. Once sealed, the silos may be filled with grain and fumigated so as to destroy insects which are introduced with the fresh grain.
13 The market is small, in the sense that there is only one customer in each State. These include Co-operative Bulk Handling (CBH) in Western Australia, its South Australian equivalent and Grain Corp in New South Wales. Further, there are few companies in Western Australia able to provide a silo sealing service. These companies tend to employ labour only sub-contractors to carry out the work, which is a specialised aspect of the spray-painting trade.
14 The evidence suggests that the person in Australia with the greatest practical experience of silo sealing is Mr Morley. He has been sealing silos since 1982, when he was among the pioneers in the field. He then saw the potential for this kind of work and made it his business to gain as much experience as he could in various aspects of the trade. From 1982 until he and David Vyse established STA in early 1997, Mr Morley worked for various competitors of Supalux in the silo sealing business. These included Wood-Kon International Pty Ltd from 1982 to 1990 and Uniseal Pty Ltd from 1990 to 1993. Mr Morley then joined Bains Harding Pty Ltd, by which he was employed until his resignation in January 1997, when he was the surface coatings manager.
(Page 7)
15 From its small beginnings, Supalux's silo sealing activities proved to be lucrative. This was because Supalux was able to earn profits not only from the application of paint, but also from the sales of the considerable quantities of paint which were required. Supalux's practice was for its manufacturing division notionally to sell paint to its application division, at a profit. The application division would mark up its costs, including the notional cost of paint, when tendering for a job. Supalux was therefore able to achieve a double mark-up on the cost of paint.
16 In 1994, for reasons which are irrelevant for present purposes, John agreed to buy David's shares in Supalux on terms which involved the payment of $340,000 by John and payment of dividends and superannuation contributions by Supalux. These terms are not in dispute. The gross value to David was about $450,000. The net value, after the payment of capital gains tax, was about $300,000. Further, it is common ground between the parties that an amount of $176,570 remains unpaid.
17 The share sale agreement came into existence on 21 July 1994 as the result of the exercise of an option granted by David to John on 29 June 1994. On that day, David entered into a service contract with Supalux whereby he became an employed consultant for a period of 30 months, expiring on 28 December 1996. The fact that Supalux was to make superannuation payments to David, made it necessary for him to remain as an employee for the relevant period.
18 Clause 8.1 of the share sale agreement was in the following terms:
"Covenants
In consideration of the Purchaser purchasing the Shares, the Vendor covenants with the Purchaser as follows:
(a) that for a period of five (5) years commencing on the First Completion Date the Vendor shall not directly or indirectly persuade, attempt to persuade or counsel:
(i) any employee of the Company to terminate his employment or to become by any other person or entity;
(ii) any customer of the Company to cease doing business or reduce the amount of business it does with the Company; or
(Page 8)
- (iii) any customer of the Company to award any new account to any other person, firm or company that carries on the same or a similar business to that carried on by the Company;
- (b) that the Vendor shall not, either on the Vendor's account or on behalf of any other person, have an interest in the carrying on of any business of or similar to that of the business of the Company or use any company, business or trade names owned or used by the Company for any one or more of the periods specified in paragraphs (I) to (iii) of sub-clause (A) below in any one or more of the areas specified in paragraphs (I) to (iii) of sub-clause (B) below:
(A) (i) for a period of two (2) years from the First Completion Dave;
(ii) for a period of three (3) years from the First Completion Date;
(iii) for a period of five (5) years from the First Completion Date;
(B) (i) within a radius of 150 kms from the Perth Central Business District;
(ii) within Western Australia;
(iii) within Australia.
For the purposes of this clause to 'have an interest' in any business includes to own, maintain, develop, operate, advise, help or lend money to that business, whether directly or indirectly."
19 There was then a provision in cl 8.2 for severance of the paragraphs contained in par (A) and par (B) above. Clause 8.3 contained an acknowledgement that the restraints contained in cl 8 were reasonable and necessary for the protection of John's interests as the purchaser of David's shares.
20 The service contract contained a confidentiality clause which is in the following terms:
(Page 9)
- "CONFIDENTIALITY
Except as authorised or required by his duties, the Employee shall not reveal to any person any of the trade secrets, secret or confidential operations, processes or dealings or any information concerning the organisation, business, finances, transactions or affairs of the Company or of any client of the Company which has prior to the date of this Agreement or may hereafter come to the Employee's knowledge and shall keep with complete secrecy all confidential information entrusted to the Employee and shall not use or attempt to use any such information in any manner which may injure or cause loss either directly or indirectly to the Company or its business or clients or may be likely to do so. This restriction shall continue to apply after the termination of this Agreement without limit in point of time but shall cease to apply to information as and when that information comes into the public domain."
21 After payments of about $300,000 had been made to David pursuant to the share sale agreement, it was discovered that an accountant who had been employed by Supalux had been defrauding the company and had stolen some $400,000. Supalux recovered some $200,000 by way of compensation from a bank. However, in order to augment its capital, Supalux issued further shares. This it did in February 1996, when 5000 ordinary shares were allotted to Pacific Paint Investments Ltd, a Singaporean company.
22 David resigned as a director of Supalux when he became a consultant. He was replaced by Mr Morris Mathias whose experience was in international finance and business management rather than in paint making.
23 In July 1996, not having made the payment due on 30 June, John told David that he was unable to pay. It was in those circumstance that the letter agreement came into existence. It is set out under the letterhead of Pullinger Sanderson and Workman, who were John's solicitors. It is in the following terms and is based on the draft prepared by Mr Eric Ross-Adjie, a consultant to that firm:
(Page 10)
- "Mr D Vyse
3 Cluelow Rise
LEEMING WA 6155
12 August, 1996
Mr John Vyse
We act for Mr John Vyse in relation to a Share Purchase Option Deed dated 29 June 1994 and stamped 24 November 1994 made between you as the vendor and our client as the purchaser ('the Deed').
We understand that our client is indebted to you in the sum of $176,570 being the balance of the purchase price for your shares in Supalux Paint Company Pty Ltd which was payable pursuant to Clause 4.1 of the Deed by no later than 30 June 1996 ('the Moneys').
Our client is currently unable to pay the Moneys to you. However our client is prepared to pay the Moneys to you on the following basis:
(a) The Moneys be paid over a period of twelve (12) months from 1 July 1996 by lump sum or interim payments the first being no less than 25% of the Moneys before 31 December 1996;
(b) interest will be paid from 1 July 1996 on the unpaid balance of the Moneys at the rate of 10% per annum, being the current Supreme Court rate of interest of 8.5% plus a loading of 1.5% contemporaneously with payment of the final instalment of the Moneys; and
(c) our client releases you from the restrictive covenant contained in Clause 8.1 of the Deed in consideration of your agreement:
(i) to comply with the confidentiality obligations contained in your employment agreement with Supalux;
(Page 11)
- (ii) not to set up a paint manufacturing business which our client reasonably considers would be a market competitor to Supalux.
- Would you please signify your acceptance of these terms and conditions by signing the duplicate letter attached and returning the same to us.
Yours faithfully
PULLINGER SANDERSON & WORKMAN
(Signed)
Eric Ross-Adjie - Consultant
Encl
I agree to the terms and conditions specified above and agree that it is intended that this letter is to take effect as a Deed."
- The letter was then countersigned by David and John.
24 It is said by the plaintiffs that the letter agreement is void for uncertainty. That is the first issue which I have to decide. I approach it bearing in mind what was said by Barwick CJ in Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1967) 118 CLR 429 at 437, that particularly in the case of "commercial arrangements" the court should not adopt a narrow or pedantic approach in searching for the intention of the parties. So long as the words of the letter agreement are not so obscure and so incapable of any definite or precise meaning, it cannot be held to be void for uncertainty. Although the letter agreement is not a commercial arrangement of the kind with which Barwick CJ was concerned, it is nevertheless a document which the parties intended to have legal effect. It was drawn by a solicitor and executed as a deed. I therefore accept that the proposition stated by Barwick CJ is applicable in this case.
25 Before embarking on the task of construction, it is necessary to consider one further factual matter which the plaintiffs say should be taken into account as part of the factual matrix in which the letter agreement came into existence.
26 That matter arises from evidence given by John which is disputed, but which I will assume for present purposes to be the fact. In his
(Page 12)
- statement which stood as evidence-in-chief, John said that in the course of negotiations with David which preceded the first draft of the letter agreement, David said to him:
"You know I have worked in the paint industry all my life and might want to work with someone in the industry later when I have finished with Supalux. I have no definite intention to do so but in case I get a job with a paint manufacturer, I would like to have a relaxation of the covenant in that regard."
- John then said that after discussing the matter with Mr Mathias, he spoke again to David and said words to the following effect:
"As long as you adhere to the terms of the confidentiality agreement and second, do not set up a business in competition with Supalux, I will agree to a variation of the restraint covenant regarding you working for a paint company."
"Setting up a paint manufacturing business in competition with Supalux was what I did not want David Vyse to do in the light of what he said to me as set out (above)."
28 It is submitted on behalf of the plaintiffs that this evidence is admissible as part of the factual matrix because it proves that the parties' objective in entering into the letter agreement was to release David only from the covenant contained in cl 8.1(b) of the share sale agreement so as to permit him to work in the paint industry.
29 The plaintiffs submit that the evidence is admissible on the basis of Lord Wilberforce's judgment in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995 - 996:
"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."
- That passage was cited with approval by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1981) 149 CLR 337 at 350. Later, at 352, Mason J went on to say:
(Page 13)
- "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and the expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification." (My emphasis)
- In my view the evidence which the plaintiff seeks to admit falls within the prohibited category identified by Mason J: it reflects John's "actual intentions and expectations". But those are matters which merged in the letter agreement and must be gleaned from that document. Only if there is a claim for rectification is it justifiable to consider evidence of the parties' pre-contractual intentions, so as to determine whether they were recorded correctly in the written instrument. There is no such claim in the present case.
30 To return to Lord Wilberforce's statement referred to above: it is sufficient to say that the commercial purpose of the letter agreement was to relax the restrictions by which David was bound: and that the genesis of it was John's inability to make payments due under the sale agreement. These matters together are the background to the letter agreement. The extent to which the restrictions were to be relaxed is to be ascertained not from evidence of pre-contractual intention but from the letter agreement. As Lord Wilberforce went on to say in Reardon Smith (supra) at 996:
(Page 14)
- "When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties."
31 With these considerations in mind, I turn to the construction of the letter agreement.
The construction of the letter agreement
32 The letter opens by referring to the share sale agreement. It then refers to the outstanding balance of $176,570 which was payable by 30 June 1996. There is then a statement that John is currently unable to pay the moneys due, followed by what is, in effect, an offer to make payment over a 12 month period by lump sum or interim payments. The first of the payments is to be made before 31 December 1996 and is to be no less than 25 per cent of the moneys due. There is then the provision for the payment of interest at 10 per cent per annum on any unpaid balance.
33 Then follows the contentious part of the letter agreement. I will set it out again for convenience:
"(c) our client releases you from the restrictive covenant contained in Clause 8.1 of the [share sale agreement] in consideration of your agreement:
(i) to comply with the confidentiality obligations contained in your [service contract] with Supalux;
(ii) not to set up a paint manufacturing business which our client reasonably considers would be a market competitor to Supalux."
35 In my view, the answer to this question lies in the fact that the only prohibition on David is that he must not set up a paint manufacturing
(Page 15)
- business which John reasonably considers would be a market competitor to Supalux. It follows, I think, that David would be free to set up any other business than that of a paint manufacturer which might be a market competitor to Supalux. And if David is to be free to set up a business which competes with Supalux, it seems to me that he should be free to deal with any customer of Supalux.
36 It would be inconsistent with that intention if David was not then free to solicit any customer of Supalux with whom, or with which he wished to do business, other than as a paint manufacturer. It follows that the intention of the parties must have been to release David from the whole of cl 8.1 of the share sale agreement.
37 It is true that the letter agreement refers to the release from the restrictive covenant (singular) whereas cl 8.1 has the heading covenants (plural). However, in a grammatical sense, cl 8.1 contains only one covenant: the operative part of the clause is a single sentence. Thus, sub-cls 8.1(a) and (b) are not separate covenants.
38 Further, the letter agreement refers to "the restrictive covenant". This expression, I think, would be a somewhat inappropriate description of that limb of the covenant contained in cl 8.1(b). Had the intention been to limit the release to that limb, I should have expected it to be referred to as a covenant in restraint of trade. The expression "restrictive covenant" seems to be a more appropriate way of referring to the whole of cl 8.1.
39 The second issue between the parties is whether, as the plaintiffs contend, the prohibition against David setting up a paint manufacturing business which John "reasonably considers would be a market competitor to Supalux" is void for uncertainty.
40 The plaintiffs submit that it is impossible for David to know with reasonable certainty and precision what he is, or was, precluded from doing. I do not accept that submission. The clause seems to me to be no different in substance from clauses of the kind which have appeared in leases for well over 100 years, prohibiting assignment or sub-letting without the consent of the lessor, subject to a proviso to the effect that such licence or consent is not to be withheld unreasonably.
41 In such cases, a lessee who wishes to assign or sub-let must first seek the approval of the lessor. The lessor is entitled to be told what is in substance the true nature of the transaction to which he is asked to consent.
(Page 16)
42 The law in relation to these matters is well settled. There are innumerable cases in which courts have resolved the question whether a lessor acted unreasonably in withholding the relevant consent: see Hill & Redman's "Law of Landlord and Tenant", 15th ed, p 624-5. Because a lessor is obliged to act reasonably, an objective element is imported into the consent clause. The court is therefore able to determine whether or not the landlord has acted reasonably. So far as I am aware, it has never been suggested that such clauses are void for uncertainty. And they now have statutory force: Property Law Act 1969, s 80.
43 In substance, that is, I think, the position in the present case. If David wished to set up a paint manufacturing business he would be obliged to disclose the details to John, who would then be obliged to consider whether the proposed business would be a market competitor to Supalux. If John expressed the view that such a business would be a market competitor, it would be open to the court to determine whether that was a view which he could reasonably hold.
44 I am not therefore persuaded that the letter agreement is void for uncertainty on any of the bases asserted by the plaintiffs.
45 As an alternative to their primary contention that the letter agreement is void, the plaintiffs seek a declaration that if it is valid, the prohibition against David setting up a paint manufacturing business imposes a permanent restraint. That appears to me to be the intent of the clause, although the matter has not been argued. That is because David has no intention of setting up such a business.
46 During the course of closing addresses I expressed some reservations about making a declaration that the restraint was permanent. It seems to me to be at least arguable that because the restraint is both temporally and geographically unlimited, it is unreasonable and therefore void. However, I am persuaded that I should make an appropriately worded declaration which leaves this point open. I shall invite assistance from counsel in achieving that objective.
47 My conclusions thus far may be summarised as follows: I find that the letter agreement is binding and enforceable. It releases David from every restraint imposed by cl 8.1 of the share sale agreement. It imposes permanent obligations to comply with the confidentiality provisions contained in cl 4 of the service contract and it purports to impose a permanent global restraint on David which prevents him from setting up a
(Page 17)
- paint manufacturing business which John reasonably considers to be a market competitor to Supalux.
Allegations of misrepresentation
48 It is contended by the plaintiffs that John was induced to enter into the letter agreement by misrepresentations made by David which constitute misleading or deceptive conduct in trade or commerce in contravention of s 10 of the Fair Trading Act 1987. It is said that as a consequence, John has suffered, and will suffer loss and damage which is recoverable under s 77 or s 79 of the Act.
49 The allegations are put in the following way in the statement of claim:
"30C Further or alternatively in August 1996 and with the intention of inducing the Second Plaintiff to enter into the Letter Agreement, the First Defendant :
(a) orally represented to the Second Plaintiff that his age precluded him from starting a business, that he would be unable to find employment outside the paint manufacturing business and that if the Second Plaintiff released him from the covenants referred to in paragraph 29 above, he would not set up business in competition with Supalux but would merely seek employment within the paint industry for the remainder of his working life;
(b) failed to warn the First Plaintiff that he intended to (or alternatively that he might) establish, or concur in establishment of a silo sealing business in competition with Supalux.
Particulars of intention
Such intention to be inferred -
(i) from the circumstance that the First Defendant or his solicitor on his behalf altered the first draft of the letter agreement prepared by the Plaintiff's solicitors by changing the reference therein to 'a painting business' to 'a paint manufacturing business';
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- (ii) from the circumstances that in 1996 the First Defendant commenced preparations to complete [sic] with Supalux and that from January 1997 the Second and Third Defendants have competed with Supalux, for contracts for the sealing of silos;
(iii) in the first and second halves of 1996 the First Defendant was visited in his office several times by Michael Morley;
(iv) in the first half of 1996 the First Defendant suggested that the Second Plaintiff should meet Michael Morley and Ian Alexander both silo sealing supervisors about a joint working relationship between them and Supalux."
50 These matters are relied on also as grounds for an estoppel, although this was not raised until the commencement of the trial. The estoppel is pleaded in the reply, in response to a late amendment to the defence which alleged that John is estopped from contending that David is not released from cl 8.1 of the share sale agreement.
51 It will be convenient to deal first with the allegation of a failure to warn set out in par 30C(b) above. That is because I have come to the conclusion that in August 1996, it had not occurred to David that he might engage in the silo sealing business. And that is a matter which I think it necessary to take into account in considering the allegation contained in para 30C(a).
52 I therefore set out my findings in relation to the matters referred to in the particulars of intention as follows:
(i) The alteration of the first draft of the letter agreement
53 The first draft of the letter agreement was prepared by Mr Eric Ross-Adjie on 6 August 1996. Mr Ross-Adjie sent a copy by facsimile to John at 5.10 pm on that day. Clause (c)(ii) of the draft provided that David would be released from the restrictive covenant contained in cl 8.1 of the share sale agreement subject to his agreeing
"not to set up a painting business which our client reasonably considers would be a market competitor to Supalux".
54 On the following day John sent an amended copy of that draft back to Mr Ross-Adjie by facsimile. The copy which was produced from
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- Mr Ross-Adjie's file contains amendments to cl (c)(ii) which are as follows:
"not to set up a paint
- The word "manufacturing" which appears in brackets has been written in pencil. It must therefore have been written by Mr Ross-Adjie or someone in his office after the copy emerged from his facsimile machine. The abbreviation "mfg" is an alteration which was made on the copy received by John from Mr Ross-Adjie on 6 August. It is not clear in whose hand that alteration was made. However, I find that it was made in John's office, by him or at his direction. The copy which emerged from John's facsimile machine on 6 August has not been produced.
56 There is therefore no substance to the allegation that it was David or his solicitor who made the change from "a painting business" to "a paint manufacturing business".
(ii) David commenced preparations to compete with Supalux in 1996 and that from January 1997 STA has competed with Supalux for silo sealing contracts
57 I make the following findings of fact, starting from October 1996. I am satisfied that no material event occurred before then.
58 In October 1996, Mr Morley, who was then employed by Bains Harding heard that David was leaving Supalux. At about that time, Mr Morley was becoming restless. Bains Harding wanted him to become involved in areas other than silo sealing and he was reluctant to do so. He had vague and unformed ideas about setting up his own business in a small way. He was conscious that his lack of education and financial resources and his inexperience of business matters would limit the scope of his activities. He thought he might do better if he found someone who possessed the resources he lacked and with whom he might form some kind of business relationship.
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59 Mr Morley telephoned David to find out whom he should contact in future when dealing with Supalux. The conversation proceeded with some small talk during which Mr Morley asked David, only half seriously, whether David would be interested in going into business with him.
60 David said he was soon to go on a long holiday to England and that he intended to retire. In fact, David, who had then just turned 54 years of age, did not intend to retire and do nothing. He had said within Supalux that he was too young to retire and that he proposed to enter into some business activity. That was true, but I find that he had not then formed any specific intention.
61 Mr Morley contacted David again on his return from holiday in December 1996. At Mr Morley's request, he and David met at David's house in Leeming before Christmas 1996. Mr Morley suggested to David that they should go into the silo sealing business on the basis of a 60-40 split, in favour of David.
62 David told Mr Morley that he might be interested in such an arrangement but that, as was the fact, he had not yet decided what he would do. However, he showed Mr Morley the letter agreement to demonstrate that there was no bar to him going into business with Mr Morley should that be his decision.
63 On 20 December 1996 David went to see Mr Desmond Frank Crawley, his accountant. Mr Crawley gave David some general advice about business structures, but nothing directed specifically to the business proposed by Mr Morley.
64 On 24 December, just before Supalux closed for Christmas, John sent David a Supalux cheque in the sum of $25,000 purportedly in payment for the instalment of the outstanding balance of the purchase price of the shares which, pursuant to the letter agreement, was due by 31 December 1996. In fact, the amount due was not $25,000, but 25 per cent of the balance, an amount of some $44,140.
65 After Christmas, John went to India on holiday. He left Perth on 27 December and returned on 8 January 1997. On 9 January David spoke to John by telephone. He pointed out that he had not been paid the amount due and that it was inappropriate in any event for the payment to be made by Supalux. John acknowledged his mistake and said that he would provide a personal cheque in the correct amount within the next few days. David returned the Supalux cheque which was banked in its
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- account on that day. John did not then, or at any time thereafter, make the correct payment to David.
66 On about Friday 17 January (but no later than that day) David and Mr Morley went to see Mr Crawley about setting up in the silo sealing business together.
67 On the same day, Mr Crawley gave instructions on the telephone to Mr Kenneth Green of Huston Partners, David's solicitors, in relation to these matters. As a result, arrangements were made to acquire the shelf companies Fancrest and Slade, to prepare a partnership agreement and to register the business name of STA.
68 Mr Morley tendered his resignation to Bains Harding on 20 January 1997.
69 In the light of these findings, I am satisfied and find as a fact, that David did not form the intention of going into business with Mr Morley until mid-January 1997 at the earliest. The allegation that David commenced preparations in 1996 to compete with Supalux is without foundation.
70 It is not in dispute that STA has competed with Supalux for silo sealing contracts from January 1997. However, that is as a result of the implementation of the decision then taken by David and Mr Morley. I find that they moved quickly to put the business arrangements in place because they were anxious to tender for a paint contract to be let by CBH for the painting of a silo at Tammin.
(iii) In the first and second halves of 1996, David was visited in his office several times by Mr Morley
71 I find that in about October 1996 Mr Morley called at Supalux's premises to purchase some domestic paint for use at his house. On that occasion he saw David, who referred him to Mr Gedeon, Supalux's Contracts Manager.
72 Not only is the allegation about several visits without foundation, but I am satisfied that the single visit had nothing to do with the establishment of a silo sealing business by David and Mr Morley.
(iv) In the first half of 1996 David suggested that John should meet Mr Morley and Mr Ian Alexander about a joint working relationship between them and Supalux.
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73 This allegation has not been pursued. John's evidence in relation to it is denied by David in his responsive statement. Mr Morley gave no evidence on the subject and Mr Alexander was not called. I note that in an affidavit sworn by John on 8 July 1997, he said that the approach by Mr Morley and Mr Alexander had been made to Mr Mathias who was the source of John's knowledge on the subject. That was not made clear in John's evidence-in-chief.
74 In these circumstances, I am not persuaded that there is any truth in the allegation. Even if true, it does not detract from my finding that David did not consider the possibility that he might go into the silo sealing business until it was suggested by Mr Morley in October 1996.
75 There is therefore no substance to the allegation that during the negotiations which preceded the letter agreement, David failed to warn John that he intended to (or might) establish a silo sealing business in competition to Supalux.
76 I turn to the allegation in par 30C(a). I have already set out John's evidence-in-chief which it was said that I should have taken into account as part of the factual matrix in which the letter agreement is to be construed. It will be noted that the evidence contains no allegation of an express representation by David that he would not set up business in competition with Supalux. Rather, it was John's evidence that he said to David:
"As long as you adhere to the terms of the confidentiality agreement and second, do not set up a business in competition with Supalux, I will agree to a variation of the restraint covenant regarding your working for a paint company."
77 Having observed David and John giving evidence under cross-examination, I am not satisfied that either of them has a clear recollection of the discussions which preceded the letter agreement, although much of what they have said is common ground. Having regard to all the evidence, including that of Mr Mathias, I now set out my findings of fact.
78 At about the end of June or early July 1996 (the date is not critical) John told David that he was unable to pay the instalment of the purchase price due under the share sale agreement. John said that, as was the case, he had no assets other than his shares in Supalux. He offered these to David in settlement of the debt, subject to David assuming Supalux's
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- liabilities. David said that was not acceptable to him and that he wanted to be paid the moneys due.
79 John told David that in those circumstances, there were only two choices open to him: he could sue John or grant him additional time in which to pay. David said he did not want to be involved in legal proceedings. He said he would grant an extension, provided his financial interests were secure. He asked John to put forward a proposal for payment of the debt and interest.
80 There was a further discussion in which John suggested to David that he should pay 25 per cent of the money due before the end of 1996 and the balance by 30 June 1997. David said in that case, he wanted interest to be paid at the rate of 12 per cent per annum on the outstanding balance.
81 John then made enquiries of a barrister who told him that the current interest rate pursuant to the Supreme Court Act was 8.5 per cent. John told David this at a subsequent meeting. They then agreed that the appropriate interest rate should be 10 per cent per annum. At the same meeting, David said to John words to the effect that he had worked in the paint industry all his life; it was all he knew and he wanted to be free to operate within the industry. He asked to be released from the restrictive covenants. At that time, David had no particular intention. He did not give John any indication of what he might do.
82 John did not give David an immediate answer. He discussed David's request with Mr Mathias. In the course of the discussion John and Mr Mathias agreed that they did not want David competing with Supalux. They thought there would only be a risk of competition if David established a paint manufacturing business. However, they believed that the possibility of David working for a major paint company would pose no threat to Supalux because he would not be able to provide such a company with any information to which it did not already have access.
83 John then told David that he would agree to the release of the restrictive covenants provided David agreed to abide by his existing confidentiality obligations and did not set up a paint manufacturing business in competition with Supalux. David agreed.
84 John then instructed Mr Eric Ross-Adjie to prepare a draft of a letter recording the proposed agreement.
85 On 6 August 1996, Mr Ross-Adjie produced the draft , to which I have referred above, containing the prohibition against setting up "a
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- painting business". It was that document which was amended by John or at his direction so as to prohibit David from setting up a paint manufacturing business.
86 I do not accept John's evidence that he told David at any time that he was not to set up a business in competition with Supalux. David denied that allegation in his responsive statement and it was not pursued in cross-examination. Although there were some inconsistencies in David's evidence, he impressed me as being essentially a truthful witness. I believe his denial to be the truth. Nor am I persuaded that David represented to John, either expressly or impliedly, in the negotiations which preceded the letter agreement, that he would not "…set up business in competition with Supalux, but would merely seek employment within the paint industry for the remainder of his working life", as alleged in par 30C(a) of the statement of claim.
87 I have found that David said expressly that he wanted to be released from the restrictive covenants. Since the covenants prevented him from competing with Supalux, that request alone carried the implication that he might want to compete. John must be taken to have appreciated that possibility, because he and Mr Mathias decided that the risk of competition would arise only if David established a paint manufacturing business.
88 In his closing address, leading counsel for the plaintiffs sought to draw a distinction between the paint industry and the contracting industry. Counsel submitted that because David told John that he might want to operate in the paint industry, he misled him into believing that he (David) would not engage in the silo sealing business, because that was a part of the contracting industry.
89 I do not accept that submission. It was not suggested by either John or Mr Mathias in their evidence that they drew the distinction which counsel identified. They were well aware of the nature of Supalux's business and had the opportunity of stipulating the limitations they wished to impose. David had said he wanted to be released from the restrictive covenants. John was sympathetic to that, as well he might be, bearing in mind that he was unable to make a substantial payment which was already overdue. He appreciated that if David was not paid for his shares, he would need to find some other source of income.
90 If David's intentions were unclear, or equivocal, John could have asked for clarification.
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91 I am not persuaded, therefore, that David misled John into releasing him from the covenants. John and Mr Mathias considered the request. They identified a particular risk that they wished to guard against and acted accordingly. It did not occur to them that David might become involved in silo sealing: but that was not because they were misled by David. They exercised their own judgment. The claim based on allegations of misleading and deceptive conduct is therefore without foundation.
92 These findings dispose also of the plaintiffs' estoppel claim in which it is alleged that by making the representations pleaded in par 30C of the statement of claim, David induced John to assume that he would not become involved in the silo sealing business.
93 If I am wrong in reaching that conclusion and David did expressly or impliedly represent that he would not set up business in competition with Supalux, it would be necessary to consider whether that conduct amounted to a contravention of s 10 of the Fair Trading Act.
94 The plaintiffs submit, and I accept, that the representation would have been made with respect to "a future matter". That being so, there would be imposed on David, by s 9 of the Fair Trading Act, the onus of proving that he had reasonable grounds for making the representation. David has not attempted to prove that was the case. Indeed, his evidence was that he wanted to be free to solicit customers within the paint industry. That being so, any representations by David that he would not compete with Supalux must be taken to have been misleading.
95 However, a misleading representation is not actionable unless made "in trade or commerce": s 10.
96 It was submitted by leading counsel for the defendants, relying on Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 94 ALR 719, 734 that the relationship between John and David and the circumstances in which the letter agreement came into existence, did not fall within the expression "trade or commerce". That expression is defined in the Fair Trading Act to include any business or professional activity: and "business" is itself defined to include a business not carried on for profit, or a trade or profession.
97 It was held by Hill J in the Federal Court in Argy (supra) that the sale of a house, whether by private treaty or auction, is not an act done in a business context. That statement was approved by the Full Court in Franich v Swannell (1993) 10 WAR 459.
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98 Although the present case is concerned with a private sale of shares, the agreement was made "in a business context". However, it was not, I think, an agreement which it is apt to describe as being within even the extended definition of "trade or commerce". If it were necessary for me to decide the point I would be inclined to accept the defendants' submission. Even if a positive representation was made by David as to his intentions that representation would not be actionable under the Fair Trading Act.
The implied term argument
99 As a further or alternative claim, it is contended by the plaintiffs that a term should be implied into the letter agreement that David would not by himself, or with others, actively solicit business from Supalux's customers. The term is said to be implied by the general law and to arise from the fact that there was in Supalux's business (and thereby reflected in the value of its shares) substantial goodwill which would be unjustly depreciated by the solicitation of its customers.
100 The principle which it is sought to invoke is that set out in the judgment of Lord Herschell in Trego v Hunt [1896] AC 7, 21:
"It is not material to consider whether, on the sale of a goodwill, the obligation on the part of the vendor to refrain from canvassing the customers is to be regarded as based on the principle that he is not entitled to appreciate that which he has sold, or as arising from an implied contract to abstain from any act intended to deprive the purchaser of that which has been sold to him and to restore it to the vendor. I am satisfied that the obligation exists, and ought to be enforced by a Court of Equity".
101 In the same case, Lord MacNaghten said (at 25):
"It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of sale, to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own."
102 I am not persuaded that the principle enunciated in Trego v Hunt (supra) has any application in the present case.
103 I accept that the price which John agreed to pay may reflect, to a certain extent, the value of Supalux's goodwill. Indeed, the principle has
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- been held to apply to the sale of shares in a corporation which carries on business: Castlemaine Tooheys Ltd v Carlton United Breweries Ltd (1987) 10 NSWLR 468. However, it is by no means clear that Supalux enjoyed any goodwill in the conventional sense in relation to its silo sealing activities.
104 Goodwill arises from the fact that the customers of a business return to it because of its name or reputation. However, neither of those factors appears to be of any great consequence in the silo sealing business. There is only one customer in each State. That customer has a limited choice of organisations able to do the work and always requires tenders to be submitted before letting contracts. The customers are not concerned so much with the name or reputation of the business as with the price and the identity of the persons who will actually be carrying out the work. But those persons are not employees of Supalux. They are generally drawn from the limited pool of spray painters having the necessary silo sealing experience. These tradesmen provide their services as labour-only subcontractors to the successful tenderer.
105 Even if it be accepted that the sale of the shares involves or incorporates the sale of David's interest in Supalux's goodwill, it cannot be said that David, having sold his shares, pocketed the price and then recaptured the subject of sale. David sold the shares in 1994 on terms which required John to complete the payment by 1996. From 1994 David was an employee of Supalux who had no say in its management. John therefore had the benefit of the restrictive covenants for over two years. The letter agreement came into existence because John was unable to keep his part of the bargain: he was unable to pay a very substantial proportion of the price which he had agreed to pay. It may well be that his inability to pay resulted from the defalcations of the employed accountant, which occurred in part while David was a shareholder. However, that was a risk against which John did not protect himself when he entered into the share sale agreement. Further, in 1994 the silo sealing business amounted to only about 25 per cent of Supalux's turnover.
106 Furthermore, I am not persuaded that a non-solicitation term should be implied when the parties have regulated their relationship by an express agreement. It seems to me that since John mapped out that part of Supalux's territory which he wished to preserve as his own, he cannot be heard to complain if David wishes to operate in another part of the territory.
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107 In his closing address, leading counsel for the plaintiffs submitted that because David had said only that he might wish to operate in the paint industry, a non-solicitation term should be implied in respect of customers outside the paint industry. I have referred above to the argument that in its silo sealing activities, Supalux is operating in the contracting industry. Counsel submitted further that if there had been any suggestion by David that he was proposing to compete with Supalux in the silo sealing business, John's reaction to his request for a relaxation of the restrictions would have been quite different.
108 That may well have been true. However, it does not alter the fact that neither John nor David had any such consideration in mind at the material time. And it was John who formulated the terms of the letter agreement in the circumstances which I have outlined above. Indeed, it was his decision to delete the prohibition in the first draft of the letter agreement against setting up a painting business. Had that remained, it would have afforded John the protection which he now seeks. But the court cannot remake the bargain.
109 For all these reasons, I am not persuaded that equity requires the imposition of the non-solicitation term for which the plaintiffs contend.
Issues relating to confidential information
110 The plaintiffs plead that from February 1989 to 31 December 1996, David had access to all of Supalux's confidential information of varying descriptions. This is set out in some detail in par 13 of the statement of claim.
111 Despite the breadth of the allegations, by the end of the trial only four matters were said to constitute confidential information. These were:
1. the paint formulae;
2. the cost to Supalux of manufacturing paint;
3. the price charged notionally by Supalux's manufacturing division to its application division;
4. the number of hours taken to perform various tasks in silo sealing operations.
112 In his closing address, leading counsel for the plaintiff put his case on the basis that knowledge of the paint formulae enabled the defendants to work out the cost of manufacture of paint by Supalux. It is not clear to
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- me what this adds to the allegation that the defendants knew that cost in any event.
113 The first question I have to answer in this context is whether the information in the four categories referred to above may properly be described as confidential.
114 It is trite law that describing information as confidential does not make it so if the information does not have that quality. Despite that, I asked David in the course of his evidence, whether he regarded Supalux's formulae as confidential. He said it was confidential but not secret. He explained that answer in re-examination when he said that the actual piece of paper containing the Supalux formula is "certainly confidential" in that it was not freely available within the Supalux organisation. However, he said that the formula was not secret in the sense that it was common to other paint companies who make similar products.
115 As to the first part of that answer: the evidence satisfies me that the formulae were not, in fact, treated as confidential within Supalux in the sense that they were not kept under lock and key. However, Supalux is a relatively small organisation employing only some 30 or so people. I therefore infer that a large proportion of the workforce would need to know the formula. I have in mind those persons engaged in making the paint, purchasing the raw materials and costing the product.
116 As to the second part of the answer, I accept that there are paint formulae which are common to a number of paint manufacturing companies. Indeed, evidence was given by Mr Peter James Hallett, who had been Supalux's chief chemist from 1988 to 1991, that the formula for silo sealing paints which he used at Supalux, was virtually identical with one which he had developed while working at Raffles Paints, a previous employer. However, as Mr Hallett accepted, formulae are not static: new developments take place constantly.
117 The evidence establishes that in Western Australia, paints used for silo sealing must meet a specification published by CBH. If a manufacturer wishes to satisfy CBH that his paint complies with a specification, it must be tested by Curtin Consultancy, a company run under the auspices of Curtin University.
118 Evidence was given by Mr Geoffrey Donald Fisher, who for many years had been a proprietor of Permalux Paints, a relatively small scale paint manufacturer. Permalux has retained David as a consultant since January 1997. Mr Fisher said he had made several attempts to have silo
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- sealing paints approved by Curtin Consultancy. Three such attempts were unsuccessful, despite the fact that in developing the formula, Permalux had the assistance of Mr Ted Kilminster, the recently retired chief chemist of Dulux Paints in Western Australia. He said that David had not been involved in this exercise.
119 Although I accept that what are known as "start point formulae" are widely available from paint manufacturers, I am not persuaded that the formulae for paints which will satisfy the CBH specification are common knowledge.
120 Further, I am satisfied that although similar formulae are used by different paint manufacturers, there may well be important differences of detail such as the substitution of a cheaper ingredient which results in more economical production without loss of quality.
121 Although it may well be that the formulae employed by Supalux were not regarded as confidential within its organisation, I am satisfied that those formulae were nevertheless confidential to Supalux itself. I am therefore satisfied that Supalux's paint formulae are properly regarded as confidential information.
122 I consider also that the cost to Supalux of manufacturing its paint and the cost at which Supalux makes notional sales from its manufacturing to its application divisions are confidential.
123 It was the unchallenged evidence of Mr Morley that on one occasion John told him the costs at which Supalux was producing and selling its silo sealing paints. While I accept that evidence, it does not detract from the inherently confidential nature of the information.
124 I do not accept, however, that there is anything confidential about the number of hours taken to perform various tasks in silo sealing operations. This information is in the public domain in the sense that it is possessed by independent tradesmen who carry out the work of silo sealing. The knowledge of the time taken to perform the tasks is acquired from experience. Insofar as that information is possessed by Supalux, it is not properly described as confidential.
125 The question then arises whether there has been any breach by David of his confidentiality obligations. These, it will be recalled, are contained in cl 4 of his service contract with Supalux which imposes a permanent prohibition against revealing confidential information to any person, or
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- using such information in any manner which might cause, or be likely to cause, loss to Supalux.
126 The allegations about misuse of confidential information are again far more extensive than those relied on ultimately by the plaintiffs. In relation to misuse, it is said by the plaintiffs that David's knowledge of Supalux's formulae and paint prices (which it is said he has disclosed to Mr Morley) has enabled him, or them, to calculate the cost at which Supalux would be likely to tender for a particular job and thus to submit a lower price so as to secure the relevant contract.
127 David and Mr Morley denied that they made use of the information in that way. They both said that the cost of which Supalux manufactured paints was irrelevant so far as they were concerned because they were obliged to purchase paint and that it was their practice to bring it into account in the tenders at cost price. They said that their objective was to calculate their costs as accurately as they could and then to apply a profit margin which would be fixed having regard to the size and nature of the job and the risks involved in carrying it out.
128 Much was made by leading counsel for the plaintiffs of answers given by Mr Morley in cross-examination when he was asked whether, if Supalux had given him copies of their tenders, he would have found it helpful in preparing his own. He answered that it would not: because he had to work out his own pricing irrespective of what others were quoting. He was then asked to consider a hypothetical example in which he knew that Supalux had tendered at $100,000 and his figures came out at $105,000. It was put to Mr Morley that if his profit margin on the $105,000 price was 20 per cent, the knowledge that Supalux was quoting $100,000 would enable him to reduce his price to $99,000 and still earn a healthy profit. He was asked whether it would have been helpful in that situation to know that Supalux had put in a tender of $100,000. He said:
"I suppose in hindsight, yes, that would have been".
129 I do not think that evidence advances the plaintiffs' case. That is because, of course, the example was purely hypothetical. Mr Morley and David never did know what Supalux was quoting. Further, from my observations of them I have no doubt that they were telling the truth when they said that they did not attempt to calculate the price at which Supalux was tendering because they regarded it as irrelevant to their operations.
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130 I am not therefore persuaded that there is any substance to the allegation that David misused any information which was confidential to Supalux.
131 The second limb of these allegations is that David disclosed to Permalux Paints the confidential formulae and manufacturing processes which enabled Permalux Paints to manufacture samples of paints suitable for use in silo sealing. Both David and Mr Fisher denied that any such information had been given to Permalux. Again, from my observation of the witnesses, I have no doubt that they were telling the truth. Furthermore, I have no doubt that Mr Fisher was telling the truth when he said that his attempts to have Permalux Paints approved by Curtin Consultancy met with repeated failure, despite the assistance of the former chief chemist of Dulux Paints in Western Australia. This is a matter to which I have referred above. Although Permalux Paints ultimately succeeded in having its samples approved, I am satisfied and find as a fact that this was not as a result of any confidential information provided by David Vyse.
132 There is one other issue relating to Permalux Paints to which I should refer. It was put to Mr Fisher in cross-examination that in late January or early February 1997 he had spoken on the telephone to a Mr Fali Framjee and told him that he had been approached by David Vyse to make specialised paints.
133 Mr Fisher accepted that he had spoken to Mr Framjee "along those lines". However, he said he did not make the statement that "David Vyse has approached me to make specialised paints".
134 Over objection by leading counsel for the defendants, I permitted counsel for the plaintiffs to call Mr Framjee to give evidence about his conversation with Mr Fisher. I did so on the basis that although the issue was collateral, I had a discretion to permit the evidence to be given.
135 In Mr Framjee's evidence-in-chief he said Mr Fisher had told him of an approach by David "to make specialised coatings". In cross-examination Mr Framjee was referred to an affidavit he had made on 6 June 1997 in opposition to an application for summary judgment which David had brought against John. In his affidavit, Mr Framjee said Mr Fisher had told him about talking to David "…and David has approached us to start manufacturing specialised paints". He went on:
"I cannot recall exactly whether Mr Fisher told me that David wanted Permalux to make him silo sealing and road marking
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- paint but I recall my mind was immediately alerted to the fact that Permalux would be making some kind of special coating paint."
- Mr Framjee accepted in cross-examination that when Mr Fisher told him about the possibility of Permalux manufacturing some kind of special coating paint, he assumed it would be either road marking paint or silo sealing paint, or both. Indeed, Mr Framjee had gone on to say in his affidavit:
"Although I cannot remember expressly, it's quite possible that Mr Fisher did tell me that David said that he wanted Permalux to make silo sealing paints and products."
137 David denied this. He said Permalux approached him: he did not approach Permalux. I accept that evidence. It is consistent with Mr Fisher's evidence that he asked David to act as a consultant to Permalux early in 1997, in relation to management matters and quality assurance. I accept Mr Fisher's evidence.
138 The inference I draw from these facts is that Mr Fisher of Permalux, having become aware that David was engaged in the silo sealing business, saw this as a potential market for Permalux's paints. For that reason, he sought to have paints approved by Curtin Consultancy, with the assistance of Mr Kilminister. I am not persuaded that there was any disclosure of confidential information by David to Mr Fisher or Permalux Paints as alleged in the statement of claim.
139 In my view, the plaintiff's case in relation to misuse of confidential information is based only on suspicion. In his closing address, leading counsel for the plaintiffs referred to the fact that there was no "price war" in the silo sealing market until Mr Morley and David combined together to form STA. Counsel pointed out that Mr Morley on his own did not create a price war. There had been no such competition while he was at Uniseal or at Bains Harding:
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- "Everything was on an even keel within the market until 1997; and what was new in 1997 was Mr David Vyse as a competitor to Supalux, having just left it."
140 All this is true. However, the inference that the success of STA was due to David imparting confidential information to Mr Morley does not stand scrutiny. Not only do I believe David and Mr Morley in their denial of impropriety: the reason for their success is not difficult to discern. It lies in the fact that Mr Morley is extremely experienced in the sealing of silos. As a result of his experience, he has a detailed knowledge of the time it takes to carry out the various operations necessary to seal silos of different types in different geographical locations and weather conditions. As a result of this expertise, STA is able to make very accurate assessments of labour costs. It is Mr Morley, not David, who estimates the costs for the purposes of tendering for silo sealing contracts. Further, because Mr Morley is an approved applicator, he is able to carry out the duties of a project manager or supervisor while working on the job himself. The combination of these factors, together with a decision to keep STA's overhead costs to a minimum, has resulted in it becoming very competitive.
141 Two examples illustrate that this is the case. STA won a contract for sealing silos at Geraldton at a price of $479,000. Supalux tendered at $513,000. Its quote included an amount of $65,000 for labour. That was the price quoted to STA by a subcontractor who was nervous about carrying out the work because of the associated problems. Mr Morley's assessment was that the labour cost could be reduced to $27,000. That was the figure included in STA's tender. The saving of $38,000 in labour is remarkably close to the $34,000 difference between the STA and Supalux tenders.
142 Then in relation to a job at Albany, Supalux included a labour cost of $45,000. STA's labour cost was $25,744. However, Supalux's overall cost was lower than STA's and it was awarded the contract.
143 For all these reasons, I am not persuaded that the plaintiffs have proved any of the allegations on which they rely. The plaintiffs' claim should therefore be dismissed. That being so, I consider that there is no defence to David's counterclaim against John for the outstanding balance of the purchase price due under the share sale agreement. It is common ground that the principal sum is $176,570.00. Interest down to 24 June 1999 is $52,582, interest having accrued at a daily rate of $48.37.
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- Accordingly, David Vyse is entitled to judgment in the sum of $229,152 as at the date of judgment.
144 In reaching these conclusions, it has been unnecessary for me to consider a number of issues raised by the parties. In case the matter should go further, I will briefly set out my views in relation to these matters.
The defendants' estoppel argument
145 The defendants submit that if the letter agreement is void, John is estopped from contending that the letter agreement did not effect a variation of the share sale agreement so as to release David from the restrictive covenant contained in cl 8.1 of that agreement.
146 The estoppel is based on the assertion that in making the letter agreement, John induced David to assume that he was released from all obligations contained in cl 8.1; that John would not thereafter seek to enforce the terms of cl 8.1 and that David was free to establish any business other than a paint manufacturing business. The defendants rely on Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 434.
147 On the facts as I have found them, there is, I think, merit in that submission. It will be recalled that the crucial part of cl (c) of the letter agreement was drafted by or on behalf of John. The draft was given to David and proceeded through various amendments to a final form without any discussion about those words. I am satisfied that the possibility of the letter agreement being void for uncertainty was a subtlety which did not occur to David. He relied on the letter agreement as enabling him to engage in any business activity other than that of a paint manufacturer. Mr Morley relied on the letter also when David showed it to him before Christmas 1996.
148 David and Mr Morley then acted on the assumption by establishing STA and incurring financial obligations in relation to the leasing of premises, plant and equipment for that purpose.
149 Although they did not tell John about their intentions, he became aware of these matters quite fortuitously. On about 28 January 1997, a facsimile from Huston Partners to Mr Crawley was sent inadvertently to Supalux's offices. The facsimile contained details of the arrangements which David and Mr Morley were about to put in place in order to commence STA. Although John then consulted his solicitors, no formal
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- steps were taken until 26 February when a letter before action was written to David. However, this was sent to the wrong address and was not received by David's solicitors until early March, after his solicitors had served a notice of default on John in respect of his failure to pay the amount of $44,140 due under the letter agreement.
150 John had telephoned David on 27 February to complain of his conduct and warn him that he would be receiving a letter agreement. However, David and Mr Morley had by then entered into a lease of premises and incurred other obligations in relation to STA's business.
151 In these circumstances, I consider that an equity has arisen against the plaintiffs which prevents them from contending that the letter agreement is void.
The argument concerning the reasonableness of clause 8.1 of the share sale agreement
152 The plaintiffs contend that if the letter agreement is void for uncertainty, and they are not estopped from taking that point, the agreement is of no effect whatsoever. That being so, it is submitted, David has not been released from cl 8.1 of the share sale agreement and remains bound by it.
153 The defendants contend that if that is the case, cl 8.1 is unenforceable in any event because it imposes an unreasonable restraint of trade. The defendants rely on the well established propositions that:
1. for a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed; and
2. the party who seeks to rely upon the restraint carries the burden of proving its reasonableness in the interests of the parties.
See Herbert Morris Ltd v Saxelby [1916] AC 688 at 707 and 715.
154 The defendants plead in par 18.3 of the defence, that the restraint is unreasonable and void as contrary to public policy, having regard to the following matters:
"the nature of [Supalux's] business and its influence in the market in Western Australia and Australia;
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- the obligation of [David Vyse] to continue to work and support [Supalux] for a term of 2½ years after the sale;
the restriction on [David Vyse's] capacity to earn an income during the term of the restraint; and
the duration and scope of the restraint…."
155 In their reply, the plaintiffs do not plead expressly to these allegations: they merely deny them and join issue.
156 The first of the matters referred to above has not been addressed. Supalux is primarily a paint manufacturer: and there has been no evidence about its influence in the relevant markets, other than silo sealing.
157 However, the lack of evidence does not, I think, relieve the plaintiffs from the obligation of proving that the restraint was reasonable. As they have not attempted to do so, I would hold cl 8.1 to be void in any event.
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