Then There Were Three Pty Limited v Douglas - [2014] NSWSC 1011

This decision has been amended. Please see the end of the decision for a list of the amendments.

Supreme Court

New South Wales

Case Title: Then There Were Three Pty Limited v Douglas

Medium Neutral Citation: [2014] NSWSC 1011

Hearing Date(s): 28, 29, 30 and 31 October and 1, 4, 5, 6, 8, 12 and 13 November 2013

Decision Date: 25 July 2014

Jurisdiction: Equity Division

Before: Lindsay J

Decision:
(1) In the main proceedings (numbered 2011/0092402): Orders to be made for dismissal of proceedings for enforcement, by purchaser of a business, of contractual restraints of trade.
(2) In the ancillary proceedings (2011/00413221): Judgment to be granted in favour of vendor (of shares/business sold subject to restraints) for unpaid purchase moneys

Catchwords: Restraints of trade - Validity and reasonableness - Vendor of business - Purchase price payable by instalments and adjustable depending on trade experience - Restraints held invalid

Legislation Cited: Restraints of Trade Act 1976 NSW
Uniform Civil Procedure Rules 2005 NSW, r 28.2

Cases Cited: Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570 at 582 [35]
Attorney General of Australia v Adelaide Steamship Co Limited [1913] AC 781 at 796-797
Aussie Home Loans v X Inc Services [2005] NSWSC 285 at [11]
Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109
Barlow v Neville Jeffress Advertising Pty Limited (1994) 4 Tas R 391 at 399-400
BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347 at [61]; [47]
Butt v Long (1953) 88 CLR 476 at 486
Equuscorp Pty Limited v Glengallan Investments Pty Limited (2004) 218 CLR 471 at 483 [34]
Esso Australia Resources Pty Limited v Southern Pacific Petroleum NL [2005] VSCA 228 at [25]
Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 611 [12]
Hanna v OAMPS Insurance Brokers [2010] NSWCA 267 at [33]; [7]-[14]
JQAT Pty Limited v Storm [1987] 2 QD 162
Kearney v Crepaldi [2006] NSWSC 23 AT [47]
Lloyd's Ships Holdings Pty Limited v Davros Pty Limited (1987) 17 FCR 505 at 520
Metropolitan Gas Co v Federated Gas Employees' Industrial Union (1925) 35 CLR 449 at 455
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535
Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462 [22]
Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 134-135 [14]
Positive Endeavour Pty Limited v Madigan [2009] SASC 281 at [30]
Queensland Cooperative Milling Association v Pamag Pty Limited (1973) 133 CLR 260 at 268
Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 256 and 263-268
Ronbar Enterprises Limited v Green [1954] 1 WLR 815; [1954] 2 All ER 266
SST Consulting Services Pty Limited v Rieson (2006) 225 CLR 516 at 530 [42] - 531 [46]
Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40]
Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529 [16]
Woolworths Limited v Olson [2004] NSWCA 372 at [39]; [40]-[41]

Texts Cited: JD Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), pp 33, 35, 41-44, 45, 50, 86
K Lewison and D Hughes, The Interpretation of Contracts in Australia (Law Book Co, Sydney, 2012), para [7.02]

Category: Principal judgment

Parties: In the main proceedings (2011/0092402):
Then There Were Three Pty Limited ACN 126 893 169, Plaintiff
Stephen Paul Douglas, First Defendant
DF Hold Pty Limited ACN 114 916 586, ATF the Douglas Family Holdings Trust, Second Defendant
Jennifer Ann Douglas, Third Defendant
Ian Douglas, Fourth Defendant
Cameron Ian Douglas, Fifth Defendant
Suzanne Spalding, Sixth Defendant

In the ancillary proceedings (2011/00413221)
DF Hold Pty Limited ACN 114 916 586, Plaintiff
Then There Were Three Pty Limited ACN 126 893 169, Defendant

Representation

- Counsel: Counsel:
In the main proceedings (2011/0092402)
N Cotman SC and K Odgers, Plaintiff
RM Goot SC and SEJ Prince, Defendants

In the ancillary proceedings (2011/00413221)
RM Goot SC and SEJ Prince, Plaintiff
M Cotman SC and K Odgers, Defendant

- Solicitors: Solicitors:
In the main proceedings (2011/0092402)
Redchip Lawyers, Plaintiffs
Reid Commercial Law, Defendants

In the ancillary proceedings (2011/00413221)
K & L Gates, Plaintiff
Redchip Lawyers, Defendants

File Number(s): 2011/0092402
2011/00413221

JUDGMENT

INTRODUCTION

There are two sets of proceedings before the Court, one of which occupies most attention and the other of which is ancillary to it.

The main set of proceedings

The main proceedings (numbered 2011/0092402) were commenced by summons on 22 March 2011. Pursuant to orders made on 18 April 2011, the issues in the proceedings have been defined by quasi-pleadings: points of claim and points of defence.
In these proceedings Then There Were Three Pty Limited (the plaintiff) seeks to enforce restraint of trade provisions arising from its purchase of all the shares issued in Altoria Insurance Solutions Pty Limited ("AIS").
AIS is and was at all material times engaged in the business of providing general insurance underwriting services.
The vendor of the AIS shares was DF Hold Pty Limited, as trustee for The Douglas Family Holdings Trust. It is the second defendant.
The first and third to sixth defendants (all associated with the Douglas Family) supported the second defendant, as vendor, by providing contractual assurances ("covenants") to the purchaser. Collectively, they have been described by the parties as "Covenantors".
The first defendant, Mr SP (Paul) Douglas, was a key personality in the conduct of the business of AIS before the company was acquired by the plaintiff.
At about the time the plaintiff acquired AIS (in July/August 2007) it also procured his personal services, as a professional underwriter, by three means:
(a)First, he was named in the "Share Purchase Agreement" as the "Key Employee", to the intent that the purchase price payable by the plaintiff for the AIS shares might be diminished if he left the employ of the "Austcover Group" of companies (defined in terms to include the plaintiff and, upon completion of the Share Purchase Agreement, AIS) during the "Earn Out Period", a period throughout which the Share Purchase Agreement anticipated that instalments of purchase price would be paid;
(b)Secondly, he entered into an "Employment Agreement" with AIS, with the intention that it would operate following the plaintiff's acquisition of AIS; and
(c)Thirdly, he and his corporate vehicle (Mereman Pty Limited) entered a "Consultancy Agreement" with Austcover Pty Limited a company (with the plaintiff) in the Austcover Group.
The purchase price was payable by the plaintiff for the AIS shares under the Share Purchase Agreement was payable by five instalments, the first of which (subject to adjustments) was payable on completion of the purchase. The "Completion Date" specified in the Agreement, and the date upon which the Agreement was in fact "completed", was 31 August 2007.
In the fullness of time, the plaintiff and the first defendant parted company on 7 September 2009 (when AIS terminated its employment of the first defendant) and, on notice to the plaintiff, the first defendant, within a short period, commenced employment with Australis Group (Underwriting) Pty Limited ("Australis") which is continuing.
Within five months of the first defendant taking up that employment, the parties to the Share Purchase Agreement and the first defendant's corporate vehicle Mereman entered into a "Deed of Release" (dated 30 March 2010) which adjusted their respective rights, crystallising the outstanding purchase price payable by the plaintiff for the AIS shares, exchanging mutual releases, and confirming the operation of restraint of trade provisions in favour of the plaintiff.
At the outset of the proceedings, the plaintiff claimed both injunctive relief and damages.
On 18 April 2011 Ball J dismissed an application by the plaintiff for an interlocutory injunction. It was at that time that orders were made for issues in the proceedings to be defined by pleadings.
The plaintiff maintained its claim to injunctive relief until the final hearing, at which time it confined its case to a claim for compensation.
Although each of the Share Purchase Agreement, the Employment Agreement and the Consultancy Agreement contained restraint of trade provisions of one type or another, the only provisions sought to be enforced by the plaintiff are those found in clauses 23.2(a) and (b) of the Share Purchase Agreement. A claim referable to clause 23.2(e) was abandoned during the course of the final hearing.
One reason for the plaintiff's abandonment of its claim to injunctive relief may be that, in or about July 2013, it sold the AIS shares, and any interest held by it in the business of AIS, to another, unrelated party.

The ancillary set of proceedings

The ancillary proceedings (numbered 2011/00413221) were commenced by a statement of claim filed by DF Hold Pty Limited (the vendor of the AIS shares), against Then There Were Three Pty Limited (the purchaser of those shares) in the District Court of NSW.
The purchaser filed a Defence, and a cross claim, in the District Court on 7 February 2012.
By an order made by this Court on 26 March 2012, the proceedings were transferred to this Court. On 13 April 2012, by consent, the cross claim was discontinued.
By its statement of claim, the vendor alleges that the purchaser has failed to pay the full amount of the purchase price for the AIS shares payable under the Share Purchase Agreement as subsequently varied by the Deed of Release.
By its Defence the Purchaser accepts that it has not paid the full amount, but alleges that it has been justified in withholding money because it is entitled to a set off against the purchase price referable to damages claimed by it in the main proceedings.
On 28 May 2013 the Court formally noted an agreement between the parties that "the sole issue remaining for determination in this proceeding is confined to whether [the purchaser] is entitled to set off its claim for liquidated damages [in the main proceedings] against [the vendor's] agreed entitlement to $215,000 plus interest in this proceeding."

Joint hearing of proceedings

With the consent of the parties, the two sets of proceedings were heard together.
Given the confined scope of the ancillary proceedings, references to the parties in these Reasons for Judgment will hereafter generally be by reference to their respective designations as parties in the main proceedings.

THE MAIN PROCEEDINGS

The current pleadings in the main proceedings (both filed on 29 October 2013) comprise:
(a)the plaintiff's "Third Further Amended Points of Claim"; and
(b)the defendants' Third Further Amended Points of Defence".
As has been noted, during the course of the final hearing the plaintiff abandoned its pleaded claims to injunctive relief and any form of relief referable to clause 23.2(e) of the Share Purchase Agreement.
The contractual documentation at the core of the proceedings comprises:
(c)the "Share Purchase Agreement" dated 27 July 2007.
(d)the "Employment Agreement" dated 26 July 2007.
(e)the "Consultancy Agreement" dated 1 August 2007.
(f)the "Deed of Release" dated 30 March 2010.
There were two agreements for the purchase of shares by the plaintiff made on (and dated) 27 July 2007. One related to the plaintiff's purchase of all the issued capital of AIS. The other related to the plaintiff's purchase of all the issued capital in Altiora Retail Pty Limited. The present proceedings are concerned only with the former.

The Share Purchase Agreement

That agreement (the "Share Purchase Agreement" or "SPA") is styled "Altiora Insurance Solutions, Share Purchase Agreement".
The parties to it are:
(a)the second defendant, as "Vendor".
(b)the plaintiff, as "Purchaser".
(c)the first and third to sixth defendants, as "Covenantors".
(d)Austcover Holdings Pty Limited and David Ingram, as "Guarantors".
AIS is defined in the Share Purchase Agreement as "the Company": clause 1.1 and Schedule 1, Item 4.
The Share Purchase Agreement contains the following recitals:
"A. The Company is a proprietary company limited by shares which conducts the Business.
B. The Vendor is the legal owner of the Shares in the Company.
C. The Covenantors are related to the Vendor and assume certain liabilities under this Agreement.
D. The Guarantors have agreed to guarantee the obligations of the Purchaser subject to the terms and conditions of this Agreement.
E. The Vendor has agreed to sell the Shares and the Purchaser has agreed to purchase the Shares for the Purchase Price subject to the terms and conditions of this Agreement."
By clause 30 (read with the definition of "Jurisdiction" in clause 1.1), the parties chose the law of the State of Queensland as the law governing the Share Purchase Agreement.
Clause 1.1 of the Share Purchase Agreement includes the following material definitions:
"'Broker List' means the list of the Company's clients in respect of the Business which is attached to this agreement as Annexure 'E';
'Business' means the business currently conducted by the Company as General Insurance Underwriting services and arranging administering and otherwise dealing with forms of General Insurance of any and every description;
'Client' means a person listed in the Broker List and any Associate, Relative or Related Body Corporate of any such person, and other persons who during the Earn Out Period become clients of the Purchaser or the Company, howsoever introduced and 'Clients' has a corresponding meaning;
'Confidential Information' means all technical and other information and know-how, including all information and know-how in any eye or machine-readable form or other format which belongs to the Company or is disclosed or given to another party from any source in respect of or incidental to:
(a) accounting records, financial statements, flowcharts and other financial records relating to the specific character of the Business;
(b) the corporate structure of the Company, its business plans, projections, financials, estimates, market plans and
assessments;
(c) the customer lists and personal information of the Clients of the Business, and any other information belonging to the Company which is not in the public forum; and
(d) and [sic] includes any other information given to a party by another which is declared to be confidential information;
'Disassociation Date' means the end of the Earn Out Period;
'Earn Out Period' means the period commencing on the Completion Date [31 August 2007] and expiring on the Fifth Instalment Date [defined, indirectly, as 1 October 2011, being three calendar months after the fourth anniversary of the Effective Date, 1 July 2007].
'General Insurance' means insurance policies customarily written by general underwriters, including without limit annual personal accident and personal accident and illness policies, but excluding Life Insurance;
'Goodwill' means the goodwill of the Business including (but not limited to):
(a) the Business Name(s)
(b) the benefit of the Company's relationship with its Clients;
(c) the Advertising Material (including the Company's copyright in it or licence to use it, if any);
(d) the benefit of all contracts and orders referred to in clause 25 (including the Key Agreements), all transferable licences, permits, quotas, consents or authorities and/or trademarks held by the Company in connection with the Business;
(e) the Company's copyright (if any) in labelling, stationary or printing used by the Company in connection with the Business;
(f) the right for the Purchaser to represent itself as the successor to the Vendor in the ownership and operation of the Company; and
(g) the website for the Business;
'Purchase Price' means, in aggregate, the First Instalment, the Second Instalment, the Third Instalment, the Fourth Instalment and the Fifth Instalment;
'Retention Sum' means any and all portions of the Purchase Price to be paid to the Vendor after Completion that are, at the relevant time unpaid... "
The substantive provisions of the Share Purchase Agreement include the following clauses (with material dates inserted and emphasis added to clause 23):
"3.1 Sale and Purchase
The Vendor agrees to sell the Shares and the Purchaser agrees to purchase the Shares on the Completion Date [31 August 2007] for the Purchase Price in accordance with the terms of this Agreement....
6. PAYMENT
6.1 Acknowledgement
The Parties acknowledge and agree that the Purchase Price is calculated over the duration of the Earn Out Period [31 August 2007 - 1 October 2011] and is subject to adjustment during that period in accordance with [terms and conditions set out]....
6.11 Retention
(a) The Vendor agrees that the Retention Sum may be utilised as a setoff against the Purchase Price for any Claim made by or against the Purchaser or the Company, arising out of:
(i) a breach of the Warranties; and
(ii) the circumstances described in clause 22 [relating to a right of indemnity].
(b) The Purchaser may only exercise a right of set off where the amount claimed exceeds, in aggregate, $5,000.00.
(c) The Purchaser must serve notice of its intention to claim a set off against an Instalment on the Vendor on prior to the date that the Instalment is due. For the avoidance of doubt, the Purchaser's failure to claim a set off for an event occurring prior to an Instalment Date does not prevent the Purchaser from claiming a set off against later Instalments....
12. KEY EMPLOYEE
12.1 Terms used in this Clause
For the purposes of this clause 12 only, the following interpretations shall apply:
(a) a reference to 'Key Employee' means Stephen Paul Douglas:
(b) a 'Good Leaver' is someone:
(i) whose resignation from employment is as a consequence of sickness, injury or disability;
(ii) whose resignation from employment is for legitimate personal reasons i.e. death, injury or sickness of a loved one; or
(iii) the Purchaser determines, notwithstanding resignation before the expiration of the Earn Out Period [ie, 1 October 2011], that the reasons for resignation (e.g. personal circumstances that do not amount to sickness, injury or disability) are such that they should be considered a Good Leaver.
(c) a 'Bad Leaver' is someone who:
(i) as a consequence of their conduct is legitimately dismissed without notice;
(ii) has failed to perform in their role after appropriate warnings and having been given an opportunity to improve their personal performance;
(iii) is guilty of an act of dishonesty;
(iv) has committed a criminal offence; or
(v) resigns their employment during the Earn Out Period [ie, between 31 August 2007 - 1 October 2011].
12.2 Retention of Key Employees
(a) During the Earn Out Period [31 August 2007 - 1 October 2011], if any Key Employee leaves the employ of the Purchaser or the Austcover Group (whether they are engaged in their personal capacity or as a contractor via an interposed entity) as a Bad Leaver, on each subsequent Instalment Date the relevant Instalment will be calculated by reference to the lesser of:
(i) the AWII (as that term is defined in Schedule 5) for the Financial Year ending immediately prior to the occurrence of the Bad Leaver Event; or
(ii) the AWII (as that term is defined in Schedule 5) for any Financial Year during the Earn Out Period ending after the occurrence Bad Leaver event.
(b) For the avoidance of doubt, an example of the calculation of the amended payment is attached to this Agreement as Annexure "C".
12.3 Good Leaver
No reduction to the Purchase Price shall apply if a Key Employee ceases their engagement as a Good Leaver....
16. POST COMPLETION
(a) The Purchaser must refer any change to the business practices of the Business to the Vendor for approval where such a change would negatively affect the calculation of Purchase Price.
(b) Such approval must not be unreasonably or capriciously withheld and in any event, must not be withheld when the Purchaser can demonstrate that the change to the business practices will not negatively impact on the Purchase Price.
(c) In the event of a dispute in relation to the matters set out in this clause, the parties agree to submit to the dispute resolution procedures set out in clause 31.2....
23. RESTRAINT
23.1 Restraint Agreement
For the purpose of retaining the value of the goodwill of the Business and in consideration of the material benefits to be derived by the Vendor:
(a) the Vendor and Covenantors shall comply with all of the restraint provisions contained in subclause 23.2; and
(b) a Covenantor who, as at the Completion Date [31 August 2007], has signed a new employment agreement with the Business on terms agreed by the Purchaser [ie, the first defendant] shall:
(i) immediately upon Completion [31 August 2007], comply with the restraint provisions contained in subclause 23.2(a) and 23.2(e);
(ii) immediately upon Completion [31 August 2007], comply with the restraint provisions contained in subclause 23.3; and
(iii) in addition to the Obligations contained in paragraphs (i) and (ii) of this subclause, upon termination of their employment agreement with the Business referred to in this subclause [in the case of the first defendant, 7 September 2009], comply with all of the provisions contained in subclause 23.2. For the purpose of this subclause; all references to "Restraint Period" in clause 23.2 shall be deemed to commence on the date of termination of the relevant Covenantor's employment agreement with the Business [in the case of the first defendant, 7 September 2009].
23.2 Restraint Terms
Subject to subclause 23.1, the Vendor and Covenantors undertake and covenant with the Purchaser to procure that none of them nor any of their Associates, Related Bodies Corporate or Relatives will during the Restraint Period and within the Restricted Area do any one or more of the following (unless otherwise expressly agreed to by the Purchaser in writing):
(a) be directly or indirectly engaged, concerned or interested whether on their own account or as a member, partner, director, shareholder, consultant, adviser, agent, employee, beneficiary, trustee or otherwise in any enterprise, partnership, corporation, firm, trust, joint venture or syndicate which is engaged, concerned or interested in or carrying on any business the same as or substantially similar to or in competition with the Business as conducted before the Completion Date [31 August 2007].
(b) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate entice away from the Purchaser, accept instructions from or approach any Client or customer of the Business;
(c) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate entice away from the Purchaser any supplier to the Business;
(d) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate entice away from or approach with a view to enticing away from the Purchaser any employee of the Business; or
(e) personally or by its employees or agents or by circulars, letter or advertisements whether on their own account or for or by means of any other person, enterprise, partnership, corporation, firm trust, joint venture or syndicate Interfere with the Business or use the trading name or names commonly associated with, similar to, or used in connection with the Business or divulge to any person any information concerning the Business or the Purchaser or any of their respective dealings, transactions or affairs, including but not limited to details of the customer list of the Business and any other information which is not common knowledge amongst the Business competitors.
23.3 Restraint Terms for Employee Vendor
Subject to subclause 23.1, the Vendors and Covenantors undertake and covenant with the Purchaser to procure that none of them nor any of their Associates, Related Bodies Corporate or Relatives will during the Restraint Period and within the Restricted Area do any one or more of the following (unless otherwise expressly agreed to by the Purchaser in writing):
(a) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate approach any customer of the Business with a view to enticing away that customer from the Business;
(b) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate approach any supplier of the Business with a view to enticing away that supplier from the Business; or
(c) on their own account or for or by means of any person, enterprise, partnership, corporation, firm, trust, joint venture or syndicate entice away from or approach any employee of the Business with a view to enticing away that employee from the Business;
23.4 Construction
The Vendor and Covenantors acknowledge that each of the prohibitions and restrictions contained in this clause:
(a) shall be read and construed and shall have effect as a separate severable and independent prohibition or restriction and shall be enforceable accordingly;
(b) is reasonable as to period, territorial limitation and subject matter;
(c) confers a benefit on the Purchaser which is no more than that which is reasonably and necessarily required by the Purchaser for the maintenance and protection of the goodwill of the Business;
(d) is capable of being assigned by the Purchaser for the benefit of any subsequent purchaser of the goodwill of the Business; and
(e) operate during the Earn Out Period [31 August 2007 - 1 October 2011].
23.5 Definitions
(a) For the purpose of this clause 23:
(i) 'Restraint Period' means in respect of the Restricted Area the Earn Out Period [31 August 2007 - 1 October 2011] and a period of:
4 years [1 October 2015];
3 years [1 October 2014];
2 years [1 October 2013];
1 year [1 October 2012];
from the Disassociation Date [1 October 2011]; and
(ii) 'Restricted Area' means:
Australia;
New South Wales;
Queensland;
Western Australia;
Victoria;
Northern Territory; and/or
South Australia.
(b) If any such period or area shall be held to be invalid for any reason by any court of competent jurisdiction such invalidity shall not prejudice or in any way affect the validity of any lesser period or area specified and all such periods or areas shall bind the Vendor to the extent that no such decision is made.
24. CONFIDENTIALITY
24.1 Strict Confidence
On and from the date of this Agreement [27 July 2007] until the expiration of the Earn Out Period [1 October 2011] the Vendor and the Covenantors shall procure that the officers, employees, agents and representatives of the Vendor shall:
(a) maintain in strict confidence the Confidential Information;
(b) take all steps reasonably necessary to ensure that all persons involved in the conduct of the Business of the Vendor or Employees of the Vendor keep the Confidential Information in the strictest confidence;
(c) not memorise, copy, use or modify any Confidential Information for their own benefit or any other person; and
(d) not disclose, divulge, communicate to or otherwise place at the disposal of any person, the Confidential Information in any form or by any means.
24.2 Exceptions
The obligations under clause 24.1 shall not apply to any Confidential Information which the party relying on this clause can demonstrate:
(a) is currently in or enters into the public domain other than through the neglect or default of that party or its servants, agents, officers or licensees; or
(b) is disclosed by order of any court, tribunal or other government body acting on the scope of its powers.
24.3 Assignment
This Agreement ensures to the benefit of and is binding upon each of the parties and their respective and permitted assigns, but neither the rights nor the obligations of the parties under this Agreement may be voluntarily novated or assigned, in whole or in part, by any party to any person without the prior written consent of the others....
28. ASSIGNMENT
28.1 Assignment and consent
(a) The Vendor or the Covenantor is not entitled to assign any of their respective Rights or Obligations under this Agreement without the prior written consent of the Purchaser, which consent may be given or withheld, or given on conditions, in the absolute discretion of the Purchaser.
(b) The Purchaser may assign transfer or novate any or all of its obligations under this Agreement without consent of the Vendor or the Covenantor.
28.2 Continuation of liabilities
After an assignment:
(a) the assignor remains principally liable jointly and severally with the assignee for the performance and observance of all Obligations assigned to the assignee; and
(b) the assignor shall procure the assignee to enter into a deed in which the assignee covenants to be bound by this Agreement, including (without limitation) this clause.
29. NON-MERGER
Any Rights, liabilities or Obligations of a party to this Agreement to which effect is not given upon Completion and which is capable of continuing after the Completion Date shall not merge or be extinguished upon or by virtue of Completion and shall remain in full force and effect.
33. ILLEGALITY AND SEVERABILITY
This Agreement shall, so far as possible, be interpreted or construed so as not to be invalid, illegal or unenforceable in any respect but if any provision on its true interpretation of construction is held to be illegal, invalid or unenforceable;
(a) that provision shall, so far as possible, be read down to the extent that it may be necessary to ensure that it is not illegal, invalid or unenforceable and as may be reasonable in all the circumstances so as to give it a valid operation of a partial character; or
(b) if the provision or part of it cannot effectively be read down, that provision or part of it shall be deemed to be void and severable and the remaining provisions of this Agreement shall not in any way be affected or impaired and shall continue notwithstanding that illegality, invalidity or unenforceability."

The Employment Agreement

The Employment Agreement took the form of a letter dated 26 July 2007 addressed by AIS (under the control of Austcover) to the first defendant, with his counter signature (accepting AIS's terms) dated 29 July 2007.
The Employment Agreement was expressed to have been effective from 1 July 2007.
The Employment Agreement was expressed to set out the entire agreement between AIS (as employer) and the first defendant (as employee) in connection with the first defendant's engagement with AIS.
It incorporated a Schedule of printed "Terms and Conditions" signed and dated 27 July 2007 by each of the first defendant and a representative of AIS.
The Schedule provided for the employer (AIS) to be able to terminate the Employment Agreement, inter alia, on a period of notice calculated by reference to the employee's (ie, the first defendant's) length of service: clause 12.1(b).
It is common ground that AIS terminated the employment of the first defendant on 7 September 2009.
The Employment Agreement included a restraint of trade provision (by reference to Item 13 of the Schedule) operative against the employee (the first defendant) for one calendar year commencing on the day following the termination of the employment of the employee or the employee's resignation.
That period of one year would, on the facts, have commenced on 7 September 2009 and ended on 6 September 2010.
Relevantly, the restraint contemplated (by clause 13.1 of the Schedule) during the restraint period took the form of a promise by the employee (the first defendant) not to "canvass, solicit, interfere with or entice away any person who at any time during the Employee's employment with the Employer [AIS] was: (a) an employee, servant or agent of the Employer; or (b) a Client of the Employer".
Clause 13.1 of the Schedule (entitled "Clients of the Business") provided an acknowledgement by the Employee "that any person, corporation or other entity introduced to the Employee during their employment in the Business are the clients of the Employer".
The term "Business" was defined by clause 23.1 to mean "the business conducted by the Company [sic] including but not limited to General Insurance, Life Insurance, Financial Planning and Finance Brokerage".
The document contained no express definition of the word "Company".

The Consultancy Agreement

The Consultancy Agreement was styled "Austcover Consultancy Agreement".
The parties to it were:
(a)Austcover Pty Limited, as "the Company".
(b)Mereman Pty Limited, as "the Consultant".
(c)the first defendant, as the Nominated Executive.
As has been noted, Mereman Pty Limited is a corporate vehicle of the first defendant.
The Consultancy Agreement was, effectively, expressed to commence on 1 August 2007 and to be determinable, by either the Company or the Consultant, at will and without cause: clauses 2, 14.1 and 24.1.
The Consultancy Agreement contained the following recitals:
"A. The Company wishes to engage the Consultant to deliver the Services in accordance with the provisions of this Agreement.
B. This Agreement is designed to implement practices and provide flexible working arrangements to improve efficiency and productivity of the Company's business and its service to clients.
C. This Agreement is effective from the Commencement Date."
By clause 22.1, the parties chose the laws of New South Wales to govern the Consultancy Agreement.
The substantive provisions of the Consultancy Agreement included the following clauses:
"3. CONSULTANT'S DUTIES
3.1 Specific duties
During the Engagement the Consultant will provide the Services and assist and advise the Company in relation to the following aspects of the Business as the Company may require from time to time:
(a) at all reasonable time introduce representatives of the Company to insurers, customers, clients, sub-agents and/or suppliers to the Business so as to assist the Company to maintain and develop the goodwill in respect of the Business;
(b) endeavour to develop and fully support so far as is reasonably possible on behalf of the Company the Business of the Company in accordance with the aims and plans of the Company. For the purposes of assisting the Consultant and the Nominated Executive to develop the Business of the Company, the Company will provide to the Consultant and the Nominated Executive such access to the Client List as the Company shall in its sole discretion determine. Such access shall not be exclusive to the Consultant or the Nominated Executive;
(c) endeavour to introduce new clients to the Company, provided that such clients and business generated by the Consultant shall always be by and in the name of t he Company; and
(d) such other services to the Company as the Company may reasonably determine from time to time.
3.2 General duties
In the discharge of the Services and duties the Consultant shall:
(a) act with professional skill as consultant to the Company with a view to promoting, advancing, developing and improving the Business;
(b) comply with all policies, directions and resolutions of the Board and any nominee of the Board;
(c) subject only to the policies, directions and resolutions of the Board, act on its own responsibility and initiative and exercise all powers as may be granted to it by the Board or any nominee of the Board from time to time;
(d) make regular reports at any intervals or on any occasions as the Board or any nominee of the Board stipulates, and on any matters as the Board or any nominee of the Board requires;
(e) procure the Nominated Executive to devote sufficient of it's [sic] time and attention to the Business to ensure its promotion to the best of it [sic] and the Consultant's ability;
(f) cause the Nominated Executive to comply with clauses 3.2(a) - (d) in it's [sic] performance of the Consultant's Services and duties and cause the Consultant to perform all Services and duties and exercise any powers as the Board may from time to time assign to it;
(g) not change, replace or substitute the Nominated Executive without the prior consent in writing of the Company;
(h) perform any Services for any Related Body Corporate of the Company as the Board may from time to time reasonably require;
(i) itself refer to the Company, and will ensure that the Nominated Executive will refer to the Company, for first refusal by the Company any business opportunities which come from or to the attention of the Consultant or the Nominated Executive which are similar to business opportunities handled by the Company in the ordinary course of its Business;
(j) not during the Term deliver the Services to any other party involved in any capacity with a business or product which is or would be similar to or competitive with the Business of the Company;
(k) not pledge the credit of the Company or hold itself out as having any capacity other than as expressly provided in this Agreement or as authorised in writing by the Company.
3.2 Ownership of Goodwill
The parties acknowledge and agree that the goodwill attaching to any business whatsoever introduced by the Consultant or the Nominated Executive during the Engagement belongs to the Company....
9.3 After Termination
The Consultant covenants and undertakes, for the benefit of the Company, that it will not at any time after termination or expiration of this Agreement with the Company, except in the proper course of performing its Services under this Agreement or as required by law or by the Company disclose or use any information which is:
(a) Confidential Information or of a confidential nature;
(b) peculiar to the Business itself; and
(c) information that has been tabulated, collated, organised, written, recorded or otherwise preserved in a tangible form by the Consultant and/or the Company having been developed by either party through considerable time, effort and expense....
12. NON-COMPETITION
12.1 Non-Solicitation of Employees
The Consultant and the Nominated Executive each covenants and agrees with the Company that none of them shall from the expiration or termination of the Agreement until the expiration of the Restraint Period in a Restrained Capacity directly or indirectly employ or be involved in employing any of the employees of the Company or any Related Body Corporate of the Company except with the written consent of the Board of Directors of the Company.
12.2 No Instructions
The Consultant and the Nominated Executive each covenants and agrees with the Company that none of them shall from the termination or expiration of the Agreement until the expiration of the Restraint Period in a Restrained Capacity directly or indirectly:
(a) accept instructions from, deal with or in any way trade with any of the Restrained Clients in respect of any requirement or business opportunity the Company could reasonably provide; or
(b) solicit or entice away from the Company or from any Related Body Corporate of the Company any restrained Clients;
(c) solicit or entice away from the Company any employee, servant or agent of the Company;
(d) counsel, procure or otherwise assist any person to do any of the acts referred to in this clause 12.2 or clause 12.1.
12.3 Restrained Capacity
For the purpose of this clause, "Restrained Capacity" shall mean as an adviser, consultant, partner, shareholder, associate, principal, agent, director, manager, servant, employee, sole trader or beneficiary or in any other capacity whatsoever of any company, body corporate, trust, partnership, business or other organisation whatsoever.
12.4 Consultant and Nominated Executives Acknowledgement
The Consultant and the Nominated Executive each acknowledge and agree that:
(a) the Consultant shall have a substantial amount of contact with and/or involvement in the administration of the affairs of the Client List and Prospective Clients of the Company;
(b) given the involvement of the Consultant (and in particular that a client of the Company may have diverse interests, may only have contact with the Consultant and that only the Consultant may have the knowledge of the specific requirements or likely requirements of any client or Prospective Client for the products or services provided by or through t he Company), the relationship of the Company with any client may be prejudicially affected if the Consultant was able to solicit the custom of the client before the expiration of the Restraint Period.
(c) the restraints contained in this clause 12 are no greater than is reasonably required to protect the Business and the goodwill of the Company;
(d) the Obligations contained in this Agreement shall continue for the duration of the Restraint Period;
(e) the only effective, fair and reasonable manner in which the interests of the Company can be protected is by the restraints imposed on the Consultant on the terms set out in this Agreement;
(f) the Consultant and the Nominated Executive will each have received adequate consideration for the restraint Obligation undertaking in terms of this clause 12; and
(g) each of the covenants contained in clause 12 are reasonable in scope and duration having regard to the interest of the party who is giving the covenants and that the covenants go no further than is reasonably necessary to protect the interest of the party having the benefit of each of the covenants);
(h) the Consultant warrants that the Consultant has had the opportunity of receiving independent legal advice with respect to this Agreement and considers that this Agreement goes no further than is reasonably necessary to protect the interests of the Company.
12.5 Damages and Injunction
The Consultant and the Nominated Executive acknowledge and agree that a breach by any of them in the covenants contained in this clause shall entitle the Company not only to damages but also to injunct summarily the continued breach of this clause and the Consultant shall not in any such proceedings argue that the breach complained of is not one which should properly by [sic] the subject of summary injunctive relief.
12.6 Restraint Necessary
The Company acknowledges and agrees that clauses 12.1 and 12.2:
(a) do not apply to the extent reasonably necessary for the Consultant and the Nominated Executive to provide the Services to the Company as part of the Engagement and in accordance with this Agreement; and
(b) do not prohibit the holding (whether directly or through nominees) of shares listed on a recognised stock exchange provided that the Consultant and its Nominated Executive do not collectively own more than 15% of the issued capital of any such company;
12.7 Restraint Period
The rights and obligations of each of the parties pursuant to clause 12 shall continue to have full force and effect throughout the duration of the Restraint Period....
23.7 Severability
This Agreement shall, so far as possible, be interpreted and construed so as not to be invalid, illegal or unenforceable in any respect, but if a provision, on its true interpretation or construction is held to be illegal, invalid or unenforceable:
(a) that provision shall, so far as possible, be read down to the extent that it may be necessary to ensure that it is not illegal, invalid or unenforceable and as may be reasonable in all the circumstances so as to give it a valid operation; or
(b) if the provision or part of it cannot effectively be read down, that provision or part of it shall be deemed to be void and severable and the remaining provisions of this Agreement shall not in any way be affected or impaired and shall continue notwithstanding that illegality, invalidity or unenforceability.
24.1 Definitions
In this Agreement:
'Agreement' means this deed; (including the recitals, schedules, appendices and exhibits to it), as it may later be amended or supplemented by the parties in writing;...
'Business' means the business conducted by the Company including but not limited to General Insurance, Life Insurance, Superannuation, Financial Planning and Finance Brokerage;...
'Client List' means the past, present and Prospective Clients of the Company or a Related Body Corporate, whichever is relevant in the context, at the relevant time;...
'Finance Brokerage' includes but is not limited to general finance brokerage, private mortgage lending and premium funding;
'Financial Planning' includes but is not limited to general investment brokerage and financial advice;
'General Insurance' means policies customarily written by general underwriters, including without limit annual personal accident and personal accident and illness policies, but excluding Life Insurance business;...
'Life Insurance' means policies customarily written by life underwriters, including without limit salary continuance and disability policies and non-cancellable personal accident policies;...
'Prospective Client' means any person or entity who is not either a past or present client of the Company but whom the Company or Consultant has submitted, tendered, supplied or written to with a view to obtaining that person or entities General Insurance, Life Insurance or Finance Brokerage business or any other product included in the Business of the Company;
'Related Body Corporate' has the meaning given in section 9 of the Corporations Law;
'Restrained Clients' shall mean all of the following:
(a) any person or entity forming part of the Client List;
(b) any Prospective Client of the Company, which includes any person with whom the Consultant has had contact of dealing in respect of that person's insurance or finance needs;
(c) any person or entity who to the knowledge of the Consultant at any time proceeds with any insurance through the Company, the risk in respect of which is incepted during the Term;
(d) any person or entity that is or becomes, to the knowledge of the Consultant, a Related Body Corporate of any person or entity referred to in (a), (b) or (c) above.
'Restraint Period' means the periods of one (1) year or two (2) years commencing immediately on the expiration of the Term or upon the termination of the Engagement and expiring after the expiration of the period for the particular party bound by the relevant obligations of restraint in this Agreement, to the intent that:
(a) if any such period shall be held to be Invalid for any reason by any Court of competent jurisdiction, such invalidity shall not prejudice or in any way affect the validity of any lesser period specified; and
(b) all such period shall bind the parties to this Agreement to the extent that no such finding is made."

THE DEED OF RELEASE

The parties to the Deed of Release are:
(a)the second defendant, as "Vendor";
(b)the plaintiff, as "Purchaser";
(c)the first and third to sixth defendants, as "Covenantors";
(d)Austcover Holdings Pty Limited and David Ingram, as "Guarantors";
(e)Mereman Pty Limited, as "Mereman".
That is, all the parties to the Share Purchase Agreement, together with Mereman (the first defendant's corporate vehicle), the Consultant named in the Consultancy Agreement.
The preamble to the Deed of Release recites the following (referring to both share purchase agreements dated 27 July 2007):
"RECITALS
A. Each of the parties to this Deed are party to the Share Purchase Agreements.
B. Pursuant to the Terms of the Share Purchase Agreements:
(a) the Purchaser remains liable to pay to the Vendor amounts owing on account of the Purchase Price; and
(b) the Purchaser has claimed a set-off against amounts alleged to be owing to the Vendor on account of the Purchase Price by reason of the alleged breach(es) by the Vendor and/or the Covenantors of certain warranties and conditions contained in the Share Purchase Agreements.
C. The parties have agreed to:
(a) amend the definition and manner of payment of the Purchase Price under the Share Purchase Agreements;
(b) mutually release each other in respect of certain alleged Claims; and
(c) otherwise confirm and ratify the terms of the Share Purchase Agreement,
subject to the terms and conditions contained in this Deed."
The Deed contains no definition of the "alleged breach(es)" referred to in paragraph B(b) of the preamble.
By clause 5.5(a), the parties chose the law of Queensland as the law governing the Deed.
The substantive clauses of the Deed included the following:
"2. SHARE PURCHASE AGREEMENTS
2.1 Payment - Full and Final Satisfaction
(a) The Purchaser agrees to pay, and the Vendor agrees to accept, the following amounts in full and final satisfaction of all amounts owing by the Purchaser on account of the Purchase Price under the Share Purchase Agreements:
(i) the amount of $500,000.00 on or before 31 March 2010; and
(ii) an amount equivalent to 2.16 x Willis Income, capped at $500,000.00 on 31 July 2011, subject to paragraph (b).
(b) The parties agree that in the event that the income received by the Austcover Group from the Cameron Douglas Portfolio for the period commencing on 1 A[p]ril 2010 and expiring 31 March 2011 is less than $165,000.00 (excluding GST) (a "Shortfall"), the amount of the Shortfall will be multiplied by 2.25 and deducted from the amount payable in paragraph (a)(ii).
(c) For the avoidance of doubt the adjustment in paragraph (b) will not operate to entitle the Purchaser to a payment from the Vendor in the event that the amount of the adjustment is more than the amount that would otherwise be payable in accordance with paragraph (a)(ii).
(d) The Purchaser will use all reasonable commercial endeavours and do all such things as are reasonable[sic] necessary to maintain the Willis Income.
2.2 Release
(a) The Vendors and Covenantors, jointly and severally, from the Deed Date, release and discharge the Purchaser and the Guarantors from all Claims arising:
(i) which the Vendors and Covenantors, jointly and severally, now have, or had the right to bring against the Purchaser and the Guarantors; or
(ii) which the Vendors and Covenantors, jointly and severally, would have had, or had the right to bring against the Purchaser and the Guarantors but for the execution of this Deed, including Claims that may arise in the future due to any past dealings or events,
in relation to the Share Purchase Agreements, including but not limited to any Claim in relation to the Purchase Price, but excluding claims related [to] the further payments referred to in clause 2.1.
(b) The Vendor, Covenantors and Mereman (themselves and on behalf of their Related Entities) hereby further release each member of the Austcover Group from any claims for commissions, payments, salaries, wages, directors fees, redundancy payments, unfair dismissal, loss of office, holiday, long service or sick pay, compensation or any other amounts that may be owed by a member of the Austcover Group to the Vendor, the Covenantors, Mereman and/or their Related Entities at the Deed Date.
(c) For the avoidance of doubt the release in this subclause 2.2 is not to apply to any moneys owing or due to be paid to Cameron Douglas or C and M Douglas Holdings Pty Limited under the Authorised Representative Agreement....
3. PURCHASER RELEASE
3.1 Release
Subject to clause 4(b), the Purchaser, from the Deed Date, releases and discharges the Vendors and Covenantors from all Claims arising:
(a) which the Purchaser now has, or had the right to bring against the Vendors and/or the Covenantors; or
(b) which the Purchaser would have had, or had the right to bring against the Vendors and/or Covenantors but for the execution of this Deed, including Claims that may arise in the future due to any past dealings or events,
in relation to the Share Purchase Agreements...
4. CONFIRMATION AND RATIFICATION
(a) Except to the extent that the Share Purchase Agreements have been amended or Claims have been released in accordance with this Deed, the parties to this Deed hereby ratify the terms of the Share Purchase Agreements and confirm that the terms of the Share Purchase Agreements remain in full force and effect.
(b) The Vendor and Covenantors specifically:
(i) acknowledge, and confirm the rights of the Purchaser and the obligations of the Vendor and Covenantors contained in:
A. clauses 23 and 24 of [the AIS SPA]; and
B. clauses 22 and 23 of [the Altiora Retail Share Purchase Agreement];
(ii) confirm and warrant as at the Deed Date that there is no other breach, Claim, issue, failure to perform or other matter that should be brought to the attention of the Purchaser which would give rise to a further Claim or Right of set-off against the Vendor and/or the Covenantors pursuant to the terms of the Share Purchase Agreements but for the releases contained in this Agreement; and
(iii) acknowledge that the Purchaser may make further Claims against the Vendor and/or the Covenantors in relation to the Share Purchase Agreements should the warranty in paragraph (ii) above be breached....
5.5 Illegality and Severability
This Deed shall, so far as possible, be interpreted or construed so as not to be invalid, illegal or unenforceable in any respect but if any provision on its true interpretation or construction is held to be illegal, invalid or unenforceable:
(a) that provision shall, so far as possible, be read down to the extent that it may be necessary to ensure that it is not illegal, invalid or unenforceable and as may be reasonable in all the circumstances so as to give it a valid operation of a partial character; or
(b) if the provision or part of it cannot effectively be read down, that provision or part of it shall be deemed to be void and severable and the remaining provisions of this Deed shall not in any way be affected or impaired and shall continue notwithstanding that illegality, invalidity or unenforceability....
5.7 Confidentiality
Each party must treat the existence and terms of this Deed confidentially and no announcement or communication relating to the negotiations of the parties or the existence, subject matter or terms of this Deed may be made or authorised by a party unless the other parties have first given their written approval provided that a party may, without the consent of the other parties, disclose the terms of this Deed to their professional advisors for the purpose of seeking advice.

The Deed provided that it could be pleaded as a full and complete defence to any claim of a type released and discharged under the Deed: clauses 2.3 and 3.2.
Each release was also supported by a parallel covenant not to sue: clauses 2.4 and 3.3.

THE QUESTIONS IN DISPUTE

The principal questions in dispute between the parties comprise the following:
(a)Whether clause 23.2(a) of the Share Purchase Agreement is valid, or invalid, having regard to the common law doctrine against restraint of trade.
(b)Whether SPA clause 23.2(b) is valid, or invalid, having regard to the common law doctrine against restraint of trade.
(c)Upon the proper construction of the Share Purchase Agreement, the nature and scope of the restraints contained in SPA clauses 23.2(a) and 23.2(b).
(d)Whether the restraints contained in SPA clauses 23.2(a) or 23.2(b) are void for uncertainty.
(e)If the restraints contained in SPA clauses 23.2(a) or 23.2(b) would otherwise be invalid in any respect, can the Court sever part of them so that what remains is valid and enforceable?
(f)Has the first defendant breached the restraint in SPA clause 23.2(a) by:
(i)being employed by Australis from 1 November 2009?
(ii)continuing to be employed by Australis from 31 March 2010 to the present?
(g)Has the first defendant breached the restraint in SPA clause 23.2(b) by accepting instructions from clients of AIS?
(h)Have the second to sixth defendants thereby breached their obligations under the SPA?
(i)What, if anything, is the effect of the Deed of Release on the causes of action alleged by the plaintiff? In particular:
(i)did the plaintiff waive any breach of SPA clauses 23.2(a) and 23.2(b) by entry into the Deed?
(ii)is the plaintiff estopped from alleging that employment of the first defendant by Australis constitutes a breach of those sub clauses?
(j)If the defendants have breached their obligations under SPA clause 23.2(a) or clause 23.2(b), has the plaintiff suffered any (and, if so, what) loss by reason thereof, sounding in an entitlement to an award of damages?
These principal questions involve a number of ancillary, subsidiary questions that include the following:
(a)Upon the proper construction of the Share Purchase Agreement, have the restraints contained in SPA clauses 23.2(a) and 23.2(b) restrained the first defendant (as an employee of Australis) from accepting instructions:
(i)from clients of AIS with whom he did not personally deal while an employee of AIS?
(ii)in respect of business areas in which he did not personally transact business while employed by AIS?
(b)Upon an application of the common law doctrine against restraint of trade, what, if anything, is the significance of the fact that the purchase price payable under the Share Purchase Agreement was a sum payable on completion and then, under "Earn Out" provisions, subject to adjustment and additional payments, depending on actual income earned by AIS after completion?
In light of the determinations made on the questions identified in paragraphs 63(a)-(c), 63(e) and 64, it is not necessary in this judgment to address the question identified in paragraph 63(d), and the questions identified in paragraphs 63(f)-(j) do not arise for determination.
The claims for relief made by the plaintiff are circumscribed by the following factors:
(a)The plaintiff's claim is for damages for breach of contractual obligations contained in SPA clauses 23.2(a) and 23.2(b)?
(b)The plaintiff does not rely upon any allegation of breach of obligations of confidentiality, whether defined by contact or equity.
(c)The plaintiff makes no allegation, or claim for relief, referable to the law governing fiduciary obligations.
(d)There is no suggestion that there was any form of inequality of bargaining power as between the parties to the Share Purchase Agreement.
(e)There is no suggestion that the plaintiff, having sold AIS or its business, cannot be taken to have suffered damage consequential upon any breach of SPA clauses 23.2(a) or 23.2(b) found against the defendants.
(f)The law governing the Share Purchase Agreement is the law of Queensland and, accordingly, upon an application of the restraint of trade doctrine, the parties agree that the Restraints of Trade Act 1976 NSW has no application: cf, Aussie Home Loans v X Inc Services [2005] NSWSC 285 at [11]; BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347 at [47].
Three distinctive features of the Share Purchase Agreement distinguish it from other cases involving contractual restraints of trade consequent upon sale of a business.
First, the Purchase Price payable by the plaintiff was payable by instalments adjustable by reference to trading experience following completion of the contract. That carried the consequences that: (a) the Purchase Price was not principally determined by reference to past transactions enjoyed by AIS; and (b) the variability of the Purchase Price, based on trade experience through the Earn Out Period, gave the second defendant, as vendor, an opportunity for participation in the success, or otherwise, of the business of AIS after completion of the contract.
Secondly, the terms of restraint clauses relied upon by the plaintiff (especially SPA clauses 23.2(a) and 23.2(b)), read in the context of the Share Purchase Agreement as a whole and the surrounding circumstances, contemplated an expansion of the business of the plaintiff, and of AIS under the control of the plaintiff, not limited to the clientele of AIS at the time the SPA was made.
Thirdly, as part of the matrix of contracts entered by the parties at or about the time the SPA was made, the plaintiff had the benefit of continuing employment in the business of AIS of the first defendant (a key employee) and contractual restraints given by him as an employee of AIS and by his company as a consultant.
Although these points do not bear upon the proper construction of the SPA, or an assessment of the reasonableness of restraints contained in SPA clause 23, forensic points made by the defendants in the course of the hearing of the proceedings include the following facts:
(a)The plaintiff has not relied upon the separate restraints it had against the first defendant (under the Employment Agreement) or his company (under the Consultancy Agreement).
(b)The first defendant's employment with AIS was terminated by AIS, under the control of the plaintiff, rather than by the first defendant.
(c)A senior officer of the plaintiff (David Ingram, a director of the plaintiff and of the holding company in the Austcover Group) agreed, in cross examination, that he regarded it as reasonable for the first defendant to be employed at Australis, even though he had serious concerns at the time that the first defendant might be stepping across the line into AIS products, specifically hotel business: Transcript, pp 166-167.

CONSTRUCTION OF SPA CLAUSES 23.2(a) AND 23.2(b)

The outcome of these proceedings turns on the proper construction of clauses 23.2(a) and 23.2(b) of the Share Purchase Agreement.
Each subclause must be read in the context of the Share Purchase Agreement as a whole: K Lewison and D Hughes, The Interpretation of Contracts in Australia (Law Book Co, Sydney, 2012), para [7.02] citing, inter alia,Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109, Metropolitan Gas Co v Federated Gas Employees' Industrial Union (1925) 35 CLR 449 at 455 and Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529 [16].
The Share Purchase Agreement is to be construed objectively, in the sense that the meaning of its terms is to be determined by what a reasonable person would have understood them to mean, having regard, not only to the text, but also to the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462 [22]; Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40]; Equuscorp Pty Limited v Glengallan Investments Pty Limited (2004) 218 CLR 471 at 483 [34].
The meaning of a contract must generally be determined as at the time it was made, unaided by the parties' subsequent conduct: Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570 at 582 [35].
An application of that general principle invites two particular observations in these proceedings.
First, were subsequent conduct of the parties to be used as an aid to construction of the Share Purchase Agreement it would be at best an uncertain guide. The subsequent conduct to which an appeal might be made in the proceedings might, at least to some extent, have been governed by subjective consideration of current, commercial expediency rather than an objective construction of the parties' contract. An example of this, which possibly cuts both ways, is the plaintiff's acquiescence in the first defendant's employment by Australis on and from 1 November 2009 (following AIS's termination of its employment of him on 7 September 2009) and his perception that he could, as an employee of Australis, work within the constraints of SPA clause 23.2 by simply distancing himself from clients of AIS with whom he had personally dealt.
Secondly, as the general principle is to be applied to the Share Purchase Agreement so too is it applicable to the Deed of Release with its "confirmation and ratification" of the Share Purchase Agreement.
The contextual material to which regard may be had in construing SPA clauses 23.2(a) and 23.2(b) includes the first defendant's Employment Agreement with AIS, if only because it was made (on 26 July 2007) the day before the Share Purchase Agreement was made (on 27 July 2007) and SPA clause 23.1(b) expressly alludes to it. However no party contends that the proper construction of SPA clause 23 is affected by the content of the Employment Contract. The existence of the Employment Contract activates SPA clause 23.1(b) but does not govern the proper construction of SPA clause 23.
The purpose and object of the transaction documented in the Share Purchase Agreement require particular notice. At a formal level, both may be discerned in the preamble to the Share Purchase Agreement, particularly Recital E: "The Vendor [the second defendant] has agreed to sell the [AIS] Shares and the Purchaser [the plaintiff] has agreed to purchase the Shares for the Purchase Price subject to the terms and conditions of this Agreement".
This formal statement focuses attention on:
(a)the subject matter of the Share Purchase Agreement: the second defendant's ownership of the shares in AIS and AIS's "Business", as defined in SPA clause 1.1.
(b)the essential character of the transaction governed by the Share Purchase Agreement: a sale of the second defendant's shares to the plaintiff (SPA clauses 3.1, 13.2 and 20) with a view to allowing the plaintiff, through its ownership and consequent control of AIS, to benefit from conduct of the business (including the goodwill) of AIS.
(c)the "Purchase Price" as defined by SPA clause 1.1 (with the ancillary definitions that feed into that definition), read with SPA clause 6.1 and ancillary provisions embodying an agreement for the payment of adjustable instalments of purchase moneys over time (formally defined as "the Earn Out Period").
Those provisions, in their turn, focus attention on:
(a)the definition, and content of the concept, of "Business" (in SPA clause 1.1) and the associated definition of "General Insurance".
(b)the definition of "Goodwill" in SPA clause 1.1 and, through that definition, the definitions of "Client" and "Broker List" also found in clause 1.1, noting however that the introductory words of SPA clause 23.1 refer to "goodwill" rather than "Goodwill".
The "Broker List" (Annexure "E" to the Share Purchase Agreement) comprises 41 pages of names and addresses of entities ostensibly (as suggested by the names of many of them) engaged in the provision of insurance broking services.
The addresses of "clients" named in SPA Annexure "E" include addresses throughout Australia - including each State, the Australian Capital Territory and the Northern Territory.
Evidence extrinsic to the Share Purchase Agreement, to which reference might be made as part of the surrounding circumstances known to the contracting parties at the time the Share Purchase Agreement was made, establishes the following facts:
(a)The Austcover Group of Companies (of which the plaintiff was part) conducted the business of an insurance broker.
(b)Austcover wanted to buy an insurance underwriting agency.
(c)AIS was an underwriting agency with a history (via the first defendant's work with Triton Underwriting Insurance Agency Pty Limited ("Triton") and as Renaissance Underwriting Agency Pty Limited ("Renaissance")) as an underwriting agency for brokers with hotels and hospitality insurance.
(d)The Douglas Family, the ultimate owners and operators of AIS, had a long history in the insurance industry, including the conduct of both brokerage and underwriting agency businesses.
(e)The Share Purchase Agreement was predicated upon a common understanding that, following completion of the agreement, AIS (as a member of the Austcover Group) would seek to recapture the business of brokers whose business it had done but lost when Triton was restrained from acting as an underwriter because it did not hold a financial services licence.
(f)Endeavours to recapture that lost business would include the connection of AIS with London insurers with whom the first defendant, as an officer of AIS, had established connections.
(g)The Broker List (SPA Annexure "E") was substantially prepared by the defendants, with the common intention that it would capture in the "Purchase Price" the business secured by AIS after completion of the Share Purchase Agreement, during the Earn Out Period.
The introductory words of SPA clause 23.1 define "the purpose" of clauses 23.2(a) and 23.2(b): retention of "... the value of the goodwill [sic] of the Business ..." and as part of the "consideration of the material benefits to be derived by the Vendor [the second defendant]".
The "material benefits to be derived by the Vendor" are not separately specifically defined. However they may reasonably be taken to focus squarely, if not entirely, on the payment of the "Purchase Price" over the "Earn Out Period".
There is tension between the introductory words of SPA clause 23.2 (which defines the operation of restraints as "during the Restraint Period"), clause 23.4(e) (which provides for the operation of the restraints "during the Earn Out Period") and clause 23.5(a)(i) (which defines the "Restraint Period" as being, in effect, the Earn Out Period together with an additional one-four years depending on the operation of the common law restraint of trade doctrine).
Linguistically there is no necessary inconsistency between the reference to the "Restraint Period" in the introductory words of SPA clause 23.2 and the acknowledgment by the defendants, in SPA clause 23.4(e), that the "prohibitions and restrictions" contained in SPA clause 23.2 "operate during the Earn Out Period". The "prohibitions and restrictions" would operate during the Earn Out Period (as contemplated by SPA clause 23.4(e)) even if (as contemplated by the reference to "Restraint Period" in clauses 23.2 and 23.5(a)(i)) they were to have an operation extending beyond the expiry of the Earn Out Period. Nevertheless, there is a degree of tension between the two provisions to the extent that the Restraint Period was expressed to include a period extending beyond the Earn Out Period.
The draftsman of SPA clause 23 appears to have contemplated that the operation of the restraints for which clause 23 provided beyond the Earn Out Period was, in formal terms at least, conceptually related to "retaining the value of the goodwill of the business" sold to the plaintiff and part of the consideration for "the material benefits to be derived" by the second defendant from the sale.
The restraints for which SPA clause 23 provided are found in the several paragraphs of subclauses 23.2 and 23.3, both of which subclauses are expressed:
(a)to be subject to SPA clause 23.1;
(b)to operate during the Restraint Period and within the Restricted Area;
(c)to apply to each of the defendants and, vicariously, to "Associates, Related Bodies Corporate, or Relatives.
(d)to impose obligations (in the form of an undertaking and covenant) qualified by the words "unless otherwise expressly agreed to by the Purchaser [the plaintiff] in writing."
Within their respective fields of operation, both SPA clause 23.1(a) and 23.1(b)(iii) contemplate that "all" of the Restraint Provisions contained in SPA clause 23.2 were to be complied with. This is consistent with the obligation found in each of SPA clauses 23.2 and 23.3 not to do "any one or more" of enumerated acts.
Although the plaintiff's claims for relief are ultimately confined to allegations of breach referable only to SPA clauses 23.2(a) and 23.2(b), each subclause must be construed as an integral part of SPA clause 23 and in the context of the Share Purchase Agreement as a whole (with particular reference to the several subclauses of SPA clauses 23.1, 23.2 and 23.3), subject to questions about severance.
Viewed in that light, it is difficult to escape the conclusion that, read objectively, the intendment of SPA clause 23 (including specifically SPA clauses 23.1, 23.2(a) and 23.2(b)) was that, during the Restraint Period and within the Restricted Area, the Vendor and Covenantors would entirely desist from participation in the conduct of any General Insurance business substantially similar to or in competition with business that AIS was conducting under the control of the defendants (or could possibly, in the future, conduct under the control of the plaintiff) unless:
(a)they were working as an employee of AIS (or, at least, with the Business) on terms agreed by the plaintiff; or
(b)the plaintiff otherwise expressly agreed in writing.
This conclusion follows, in my opinion, from the following features of SPA clause 23:
(a)The breadth of the "parties" affected by the "undertakings and covenants" respectively contained in SPA clause 23.2 and clause 23.3, including "Associates" (defined in SPA clause 1.1 by reference to s 11 of the Corporations Act 2001 Cth), "Related Bodies Corporate" (defined by clause 1.1 by reference to s 9 of the Corporations Act) and "Relatives" (defined by clause 1.1 by reference to s 9 of the Act).
(b)The breadth of each of the definitions of "Business" and "Client", the former of which was nominally defined (in SPA clause 1.1) by reference to "the business currently conducted" by AIS but which, by reason of the extended definition of "Client" in SPA clause 1.1 (not limited to the inclusion in the Broker List of former clients targeted for fresh business), extended to "similar" or "competitive" business that AIS (under the control of the plaintiff) might do during the Earn Out Period.
(c)The purported protection conferred by SPA clause 23, not only of "the Business", but also of "the Purchaser" as such (SPA clauses 23.2(b), (c), (d) and (e) and the definition in clause 1.1 of "Client").
(d)The breadth of the topics covered by each of the subclauses in SPA clauses 23.2 and 23.3: involvement in any business "substantially similar to or in competition with" the Business (SPA clause 23.2(a)); any form of solicitation of "any Client or customer of the Business" (SPA clauses 23.2(b) and 23.3(a)); enticement of any "supplier" to the Business (SPA clauses 23.2(c) and 23.3(b)); enticement away of any "employee" of the Business (SPA clauses 23.2(d) and 23.3(c)); "interference" with the Business (SPA clauses 23.2(e)); or disclosure of any information concerning the Business not common knowledge amongst competitors of the Business (SPA clause 23.2(e)).
(e)The use of all-embracing, emphatic language (including "all", "any", "directly or indirectly", etc.) throughout SPA clauses 23.1, 23.2 and 23.3.
(f)The inclusion in SPA clause 23.1(b)(iii) of what, on one view, was a superfluous restraint of a "Covenantor cum Employee" following termination of employment.
(g)The inclusion in each of SPA clauses 23.2 and 23.3 of a power of dispensation in the Plaintiff (embodied in the expression "unless otherwise expressly agreed to by the Purchaser in writing").
(h)The nature of any "substantially similar" or "competitive business" for which SPA clause 23.2(a) provided: comprehensive, defined by reference to a full range of legal structures and terms (such as "engaged", "concerned" or "interested") of indeterminate content.
(i)The scope of SPA clause 23.2(b), by reason of the words "from the Purchaser" and the SPA clause 1.1 definition of "client", operating beyond established business of AIS and extending to future business of the Plaintiff.
(j)The structure of the "Purchase Price" as defined by SPA clause 1.1 read with SPA clause 6.1, and ancillary provisions embodying an agreement for the payment of adjustable instalments of purchase moneys over the Earn Out Period.

Although the introductory words to SPA clause 23.1 (read with the introductory words of SPA clauses 23.2 and 23.3) defined "the purpose" of SPA clause 23 by reference to retention of the value of "the goodwill of the Business", the object of the clause (with its operation beyond "existing business", with an aspiration for expansion of the Business, and its protection of "the Purchaser" as a party distinct from "the Business") points to an intendment to travel beyond protection of the business the subject of the sale effected by the Share Purchase Agreement.
The same observation can be made about the reference, in the introductory words of SPA clause 23.1, to the expression "in consideration of the benefits to be derived by the Vendor". Those "benefits", as contemplated by the Share Purchase Agreement, were adjustable instalments of "Purchase Price" anticipated to materialise over the Earn Out Period.
In making this observation I notice, but do not place significance on distinctions in SPA clause 23 between "the Vendor" and "Covenantors". The Convenantors were associated with the Vendor and, it may be inferred, derived advantage acceptable to them from benefits enjoyed by the Vendor.
The existence, form and ambit of the power of dispensation is significant:
(a)It was predicated upon, and it reinforced, the existence of a comprehensive set of particular restraints that covered the field of commerce: competition; dealings with clients, customers, suppliers and employees; interference with the Business; and disclosure of information "not common knowledge".
(b)The power of dispensation took the form of a power that was "absolute" in the sense that it was not qualified by a provision requiring the plaintiff's consent not to be unreasonably withheld.
(c)The absolute form of the dispensing power offered no concession to the possibility (which I reject) that it could be effectively qualified by an implied obligation of good faith. It was a power exercisable by the plaintiff in its own interests alone. Cf, Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 256 and 263-268; Esso Australia Resources Pty Limited v Southern Pacific Petroleum NL [2005] VSCA 228 at [25].
(d)The dispensing power applied to each and every category of restraint, across the spectrum of restraints, without any distinction between them so that (for example) it purported to protect business of "the Purchaser", not merely "the Business".
(e)Because the obligations for which SPA clause 23.1(b) provided were defined by reference to SPA clauses 23.2 and 23.3, the dispensing power of the plaintiff attached (according to SPA 23.1(b)(iii)) to a comprehensive set of post-employment obligations of a Convenantor (such as the first defendant) to whom clause 23.1(b) purported to apply.
Contrary to what appears to have been a practical, working assumption made by the first defendant after his employment with AIS was terminated in 2009, the restraints for which SPA clauses 23.1(b)(iii), 23.2(a) and 23.2(b) provided cannot, on their proper construction, be limited to a prohibition on him dealing with the particular clients he personally dealt with at AIS, in relation to particular lines of insurance business that he personally wrote at AIS.

VALIDITY OF THE RESTRAINTS

General Principles

There is no dispute in these proceedings that:
(a)the common law doctrine against restraint of trade applies to SPA clause 23: Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 134-135 [14].
(b)that doctrine derives, in modern form, from Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535.
An application of the doctrine depends on the proper construction of the contract in which a restraint is found, and upon an assessment of the legitimate interests sought to be protected by the restraint.
A restraint of trade is prima facie void. A party seeking to enforce a restraint must show that the restraint is no wider than is reasonably necessary to protect its legitimate interests: Kearney v Crepaldi [2006] NSWSC 23 at [47]; JD Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), pp 33, 35 and 41.
A restraint may be justified by demonstration that it is reasonable by reference to both the interests of the parties concerned and the interests of the public: Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535 at 565.
The onus of demonstrating that a restraint is reasonable as between the interested parties is on the party alleging it to be so: North Western Salt Company Limited v Electrolytic Alkali Company Limited [1914] AC 461 at 470-471. The onus of showing that a restraint is injurious to the public interest lies on the party alleging that to be so: Attorney General of Australia v Adelaide Steamship Co Limited [1913] AC 781 at 796-797.
The focus for attention in these proceedings is on whether the restraints contained in SPA clause 23, particularly clauses 23.1(b)(iii), 23.2(a) and 23.2(b), are reasonable as between the parties. On that issue, the onus lies on the plaintiff.
The reasonableness and validity of a restraint clause must be assessed at the time of entry into the contract in which it is found: Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), p 45, relied upon in Hanna v OAMPS Insurance Brokers [2010] NSWCA 267 at [33].
A contractual admission of "reasonableness" (such as appears in SPA clause 23.4(b)) is not conclusive (Woolworths Limited v Olson [2004] NSWCA 372 at [39]) although considerable weight may be given to the freely negotiated terms of the parties' contract: Queensland Cooperative Milling Association v Pamag Pty Limited (1973) 133 CLR 260 at 268.
If a restraint is otherwise unreasonable, it is not made reasonable by the existence of a contractual power in the covenantee to permit departures from it: Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), p 50.
The parties agree that the courts, in general, take a stricter and less favourable view of covenants in restraint of trade given by an employee in favour of an employer than similar covenants given by a vendor, to a purchaser, of the goodwill of a business (Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), p 86; Butt v Long (1953) 88 CLR 476 at 486); but they differ as to the significance, if any, of that differential attitude in these proceedings.
The plaintiff, here, draws comfort from the distinction and emphasises the character of the SPA as a sale of business. The defendants draw attention, as was done in BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347 at [61], to the need for a careful examination of the features of the particular contract (which, like a franchise agreement, might be a hybrid form of contract, not readily classified as one relating to a sale or an employment relationship).
Whatever benefit may be derived from analogies drawn from other cases, at the beginning and end of the day attention must be focussed on the particular contract and the circumstances in which it was made.
Adopting that perspective, one may have regard to the nature of "goodwill" (BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347 at [75]; Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 611 [12] et seq) and its focus upon the possibility of a connection between past and prospective business. It is that concept of "goodwill" rather than "Goodwill" as defined by SPA clause 1.1 that is referred to in the opening words of SPA clause 23.1.
The possibility that customers will remain with, or return to, a business the subject of a sale, notwithstanding the sale, may have sufficient value to bear the character of property. The subject matter of a sale of business may include an element of goodwill which, having paid for it, the purchaser has an interest in enjoying via enforcement of a promise by the vendor, in effect, not to derogate from the sale of it. That is the nature of the interest asserted by the plaintiff in these proceedings.

The structure of the Share Purchase Agreement

Upon a consideration of the reasonableness of the restraints relied upon by the plaintiff in these proceedings, particular importance attaches to the structure of the Share Purchase Agreement insofar as it provided for the payment of a purchase price by instalments, subject to adjustment, depending upon actual income earned by AIS, after completion of the Agreement, in circumstances in which one of the mechanisms available for the plaintiff's protection of goodwill was the ongoing employment of the first defendant in the business.
The means available to the plaintiff for the protection of any goodwill attaching to "the Business" it purchased were not limited to SPA clauses 23.1(b), 23.2(a) and 23.2(b). One sees that in extensive provisions for adjustment of the Purchase Price in light of experience (SPA clauses 6, 12 and 16); the protection of Confidential Information (SPA clause 24); and the plaintiff's powers to utilise the services of the first defendant (SPA clause 12, Employment Agreement, Consultancy Agreement).

The Restricted Area : Territorial Limitation of the Restraints

Given the geographical dispersion of "Clients" named in the "Broker List" all over Australia, and the territorial connection of AIS's insurance business with the nation, it was, in my opinion, reasonable for the territorial ambit of the restraints for which SPA clause 23 provided to be (as SPA clause 23.5(a)(ii) provides) defined by reference to Australia.
The defendants have not contended otherwise.
Debates about the reasonableness or otherwise of the subject restraints have focused upon the subject matter of the restraints and the Restraint Period.

The subject matter of the Restraints

In my assessment, the plaintiff has not demonstrated that the restraints for which SPA clause 23 provided (or, more particularly, the restraints for which clauses 23.1(b), 23.2(a) and 23.2(b) jointly and severally provided) were no wider than was reasonably necessary to protect its legitimate interests, either as the purchaser of "the goodwill of the Business" or as an employer of the first defendant.
Each subclause upon which the plaintiff sues went beyond what was necessary to protect the legitimate interests of the plaintiff.
Both SPA clause 23.2(a) and SPA clause 23.2(b) operated (by reference to Covenantors and their Associates, Related Bodies Corporate and Relatives) whether or not there was any connection between any of them and the business or customers of AIS.
The comprehensive ambit of SPA clause 23.2(a), and the abstract character of the definition of "Business" lying at its heart, meant that there was no necessary connection between any person the subject of restraint, their activities and custom of AIS. The breadth of the expression "engaged, concerned or interested" (together with the expansive qualifying words before and after that expression) ostensibly operated to prevent any connection with an insurance operator, whether or not such a connection could reasonably be thought to have an impact on the interests of the plaintiff as the purchaser of AIS.
SPA clause 23.2(b) suffered from a similar form of overly comprehensive ambit, but also (given its focus on enticement of Clients or customers, rather than competition in the abstract) a more particular vice in its extension to: (a) protection of "the Purchaser" as such; and (b) the character of a "Client or customer of the Business" as somebody with whom AIS may have had no goodwill connection whatsoever.
In my assessment, each of SPA clause 23.2(a) and 23.2(b) cannot be justified as reasonable within the limits of its own terms, still less in the broader context of other provisions in clause 23.
SPA clause 23.1(b)(iii) cannot rise any higher than SPA clause 23.2, but suffers from additional vices. In particular, it acknowledges no connection between the terminated employee and the work he or she may have done during the course of their employment agreement: and no connection between particular clients he or she may have dealt with at AIS, and no connection with particular lines of business that he or she may have written as an employee of AIS.
Given that SPA clause 23.1(b) was activated by entry into the first defendant's Employment Agreement with AIS, a factor that might be taken against the reasonableness of the restraint in clause 23.1(b)(iii) is that it was open to the plaintiff, through AIS, to protect its legitimate interests vis â vis the first defendant, as an employee, via that Agreement.

The Restraint Period

In my assessment, each of SPA clauses 23.1(b)(iii), 23.2 and 23.3 was unreasonable because of the length of time under which those under restraint were purportedly the subject of restraint.
This is so, particularly, because a primary method adopted by the plaintiff for the protection of its interests was a structured, adjustable payment of a purchase price by instalments, coupled with employment of a Covenantor (the first defendant) considered significant to the operation of the business.
Given the provision for the payment of instalments of purchase price over the Earn Out Period, an extension of the "Restraint Period" (as defined by SPA clause 23.5(a)(i) for a further period of up to four years) cannot be justified as being no wider than was reasonably necessary to protect the plaintiff's legitimate interests.
I am conscious of evidence that demonstrates that, within the insurance industry, personal, professional relationships over an extended period of time have always been of critical importance in the development of business.
On the other hand, I am conscious also of evidence that policies and binder agreements have customarily operated over annual cycles. That evidence is consistent with the "Restraint Period" of one calendar year imposed on the first defendant under his Employment Agreement.
In light of this evidence, and the terms of the Share Purchase Agreement (including provision for the payment of purchase price by structured, adjustable instalments), I am not satisfied that any period of restraint after the end of the Earn Out Period (let alone more than one year) was reasonably necessary to protect the plaintiff's legitimate interests.

Overview

Although I have separately addressed questions relating to the Restraint Area, the subject matter of the restraints and the Restraint Period, I pause to record that I have reviewed those questions globally as well as severally.
Viewed in the broader perspective, I am satisfied that the restraints for which SPA clauses 23.1(b)(iii), 23.2(a) and 23.2(b) provided were, jointly and severally, wider than was reasonably necessary for the plaintiff to protect its legitimate interests.
They travelled beyond what was necessary to protect the goodwill of the business purchased and sought, by broad prohibitions (subject to a discretionary dispensation power in the plaintiff) and extended definitions, to provide a foundation for expansion of the business of the plaintiff, and of AIS under the control of the plaintiff, at the same time reserving a right to adjust the Purchase Price payable to the second defendant in light of actual experience.

Severance

Upon my construction of SPA clause 23, and making full allowance for provisions in the SPA designed to facilitate the preservation of some operation of the restraints relied upon by the plaintiff (SPA clauses 23.4(a), 23.5(b) and 33), none of the restraint provisions can, in substance, be read down so as to be regarded as reasonable and capable of independent operation without altering the nature of the contract: SST Consulting Services Pty Limited v Rieson (2006) 225 CLR 516 at 530 [42] - 531 [46].
I accept, as the plaintiff contends, that the concept of severance can operate in the context of restraints concerning sale of a business. Barlow v Neville Jeffress Advertising Pty Limited (1994) 4 Tas R 391 at 399-400 and Positive Endeavour Pty Limited v Madigan [2009] SASC 281 at [30] et seq provide local examples. Ronbar Enterprises Limited v Green [1954] 1 WLR 815; [1954] 2 All ER 266, indeed, bears some similarity to the present case.
However, each case depends on its own facts and, more particularly, the intention of the parties gleaned from the terms of their contract.
It might be possible, as a matter of form, to apply a "blue pencil" to SPA clause 23.2(a) or SPA clause 23.2(b) and, to the extent necessary, definitions that feed into them. However, to do so would be, in substance, to alter the nature of SPA clause 23 and its constituent parts, including each of clauses 23.1, 23.2(a) and 23.2(b), and to reason backwards from allegation of "breach" to construction and evaluation of the contract, rather than by an assessment of validity of the restraints at the time the contract was made.
The plaintiff has presented its case in an attractive light by a selective approach to the restraints sought to be enforced (progressively contained during the course of the proceedings) and a focus upon its allegations of breach. However, the severance of an excessive, and therefore unreasonable, restraint is not countenanced by the common law doctrine; the validity of a restraint is not to be judged by reference to what parties have actually done in purported performance of their contract; and the parties agree that, in these proceedings, the plaintiff can take no comfort from the Restraints of Trade Act 1976 NSW: Woolworths Limited v Olson [2004] NSWCA 372 at [40]-[41].

The Restraints are void

The consequence of this analysis is that SPA clauses 23.1(b)(iii), 23.2(a) and 23.2(b) are held to have imposed no valid restraint on the defendants. They were, by another name, void.
Accordingly, it is not necessary to give consideration to the defendants' separate contention (by reference to Hanna v OAMPSInsurance Brokers Limited [2010] NSWCA 267 at [7]-[14]) that the SPA restraints were void for uncertainty. For the record, I note that, for its part, the plaintiff relies on similarities between the SPA restraints and the restraints considered in JQAT Pty Limited v Storm [1987] 2 Qd 162 and Lloyd's Ships Holdings Pty Limited v Davros Pty Limited (1987) 17 FCR 505 at 520.

THE DEED OF RELEASE

Nothing in the Deed of Release affects my conclusion that the SPA clause 23 restraints relied upon by the plaintiff should be held invalid.
True it is that clause 4 of the Deed provided for the terms of the restraints to be ratified, acknowledged and confirmed.
However, the plaintiff does not contend that such rights as it may have under, or by reference to, clause 4 rise higher than the terms of SPA clause 23 themselves.
That contention, if advanced, could not be accepted, and would run into additional difficulties associated with the parties' compromises associated with the quantification of the Purchase Price (Deed, clause 2.1) and mutual releases.

DISPOSITION OF THE PROCEEDINGS

It follows from what I have written that the main set of proceedings (numbered 2011/0092402) must be dismissed.
In the particular circumstances of this case, I see no utility in proceeding, against the possibility of an appeal, to make detailed findings referenced to allegations of "breach" of the restraints sued upon, questions of causation or quantification of damages said to have flowed from alleged breaches.
The parties did not allow SPA clause 23 to govern their conduct entirely. The plaintiff, at least for a time, acquiesced in the first defendant's employment with, and activities at, Australis. The first defendant, for his part, endeavoured to pay homage to what he perceived to be the practical intendment, rather than the precise terms, of the SPA clause 23 restraints.
On the findings that I have made, those restraints had no effective operation.
If I am wrong about that, there is substance in the defendants' contention that any rational, reliable analysis of questions of breach, causation and quantification depends upon what construction is attributed to the restraints.

At a time when the proceedings were before me for pre-trial directions, I declined the defendants' application for the validity of the restraints to be determined as a preliminary question (under the Uniform Civil Procedure Rules 2005 NSW, r 28.2) because the parties had already substantially prepared their evidence and there was utility in allowing it to be adduced. As events unfolded, that course at least permitted the Court to receive evidence of circumstances surrounding the Share Purchase Agreement bearing upon an objective construction of the Agreement and (as Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), at pp 41-44, countenances) the question of reasonableness. It did, however, extend the length of the final hearing.
If my findings about the proper construction of SPA clause 23 and the validity of the restraints relied upon were to be overturned on appeal, the evidence about breach, causation and quantification would be better assessed in light of the appellate court's determination of the proper construction of the parties' contract.
With that in mind, I formally record that I make no findings adverse to the credit of any witness who gave evidence before me. Any determination of the questions of breach, causation and quantification would turn on an objective review of the whole of the evidence, unaffected by findings about the credibility or otherwise of particular witnesses.
Subject to allowing the parties an opportunity to make submissions about the form of orders to be made, I anticipate that disposition of the two sets or proceedings before the Court will involve orders to the following effect:
(a)In the main proceedings (numbered 2011/0092402):
(i)Order that the proceedings be dismissed.
(ii)Order that the plaintiff pay the costs of the defendants.
(iii)Reserve liberty to apply for orders relating to security for costs provided by the plaintiff.
(iv)Order for return of exhibits.
(b)In the ancillary proceedings (numbered 2011/00413221):
(i)Judgment for the plaintiff in the sum of $215,000, plus pre-judgment interest to be calculated or assessed.
(ii)Reserve liberty to apply in relation to the calculation, or assessment, of pre-judgment interest.
(iii)Order that the defendant pay the costs of the plaintiff.
(iv)Order for return of exhibits.
**********

Amendments

30 Jul 2014 Revision before final orders made. Paragraphs: Coversheet; Paras 9, 42, 85(e), 95(i), 111

Case Title:	Then There Were Three Pty Limited v Douglas
Medium Neutral Citation:	[2014] NSWSC 1011
Hearing Date(s):	28, 29, 30 and 31 October and 1, 4, 5, 6, 8, 12 and 13 November 2013
Decision Date:	25 July 2014
Jurisdiction:	Equity Division
Before:	Lindsay J
Decision:	(1) In the main proceedings (numbered 2011/0092402): Orders to be made for dismissal of proceedings for enforcement, by purchaser of a business, of contractual restraints of trade. (2) In the ancillary proceedings (2011/00413221): Judgment to be granted in favour of vendor (of shares/business sold subject to restraints) for unpaid purchase moneys
Catchwords:	Restraints of trade - Validity and reasonableness - Vendor of business - Purchase price payable by instalments and adjustable depending on trade experience - Restraints held invalid
Legislation Cited:	Restraints of Trade Act 1976 NSW Uniform Civil Procedure Rules 2005 NSW, r 28.2
Cases Cited:	Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570 at 582 [35] Attorney General of Australia v Adelaide Steamship Co Limited [1913] AC 781 at 796-797 Aussie Home Loans v X Inc Services [2005] NSWSC 285 at [11] Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109 Barlow v Neville Jeffress Advertising Pty Limited (1994) 4 Tas R 391 at 399-400 BB Australia Pty Limited v Karioi Pty Limited [2010] NSWCA 347 at [61]; [47] Butt v Long (1953) 88 CLR 476 at 486 Equuscorp Pty Limited v Glengallan Investments Pty Limited (2004) 218 CLR 471 at 483 [34] Esso Australia Resources Pty Limited v Southern Pacific Petroleum NL [2005] VSCA 228 at [25] Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at 611 [12] Hanna v OAMPS Insurance Brokers [2010] NSWCA 267 at [33]; [7]-[14] JQAT Pty Limited v Storm [1987] 2 QD 162 Kearney v Crepaldi [2006] NSWSC 23 AT [47] Lloyd's Ships Holdings Pty Limited v Davros Pty Limited (1987) 17 FCR 505 at 520 Metropolitan Gas Co v Federated Gas Employees' Industrial Union (1925) 35 CLR 449 at 455 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535 Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462 [22] Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 134-135 [14] Positive Endeavour Pty Limited v Madigan [2009] SASC 281 at [30] Queensland Cooperative Milling Association v Pamag Pty Limited (1973) 133 CLR 260 at 268 Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 256 and 263-268 Ronbar Enterprises Limited v Green [1954] 1 WLR 815; [1954] 2 All ER 266 SST Consulting Services Pty Limited v Rieson (2006) 225 CLR 516 at 530 [42] - 531 [46] Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40] Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529 [16] Woolworths Limited v Olson [2004] NSWCA 372 at [39]; [40]-[41]
Texts Cited:	JD Heydon, The Restraint of Trade Doctrine (3rd ed, 2008), pp 33, 35, 41-44, 45, 50, 86 K Lewison and D Hughes, The Interpretation of Contracts in Australia (Law Book Co, Sydney, 2012), para [7.02]
Category:	Principal judgment
Parties:	In the main proceedings (2011/0092402): Then There Were Three Pty Limited ACN 126 893 169, Plaintiff Stephen Paul Douglas, First Defendant DF Hold Pty Limited ACN 114 916 586, ATF the Douglas Family Holdings Trust, Second Defendant Jennifer Ann Douglas, Third Defendant Ian Douglas, Fourth Defendant Cameron Ian Douglas, Fifth Defendant Suzanne Spalding, Sixth Defendant In the ancillary proceedings (2011/00413221) DF Hold Pty Limited ACN 114 916 586, Plaintiff Then There Were Three Pty Limited ACN 126 893 169, Defendant
Representation
- Counsel:	Counsel: In the main proceedings (2011/0092402) N Cotman SC and K Odgers, Plaintiff RM Goot SC and SEJ Prince, Defendants In the ancillary proceedings (2011/00413221) RM Goot SC and SEJ Prince, Plaintiff M Cotman SC and K Odgers, Defendant
- Solicitors:	Solicitors: In the main proceedings (2011/0092402) Redchip Lawyers, Plaintiffs Reid Commercial Law, Defendants In the ancillary proceedings (2011/00413221) K & L Gates, Plaintiff Redchip Lawyers, Defendants
File Number(s):	2011/0092402 2011/00413221