Woer & Woer v Mattsson & Mattsson - [2005] SADC 55

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
WOER & WOER v MATTSSON & MATTSSON
Judgment of His Honour Judge Bishop
31 May 2005
CONTRACTS
Contract - sale and purchase of a drilling business on Eyre Peninsula for $80,000 - special condition of the agreement provided that the vendors "will not carry on or be interested directly or indirectly in any business of a like nature within the boundaries of Eyre Peninsula for a period of five years" - whether the vendors were in breach of that condition - meaning of "carry on" and "be interested in" any business - whether the restraint was reasonable as to adequacy of protection, area, nature of the business, duration and capacity of restraint - action dismissed.
Smith v Hancock [1894] 2 Ch 377; Gophir Diamond Co v Wood [1902] 1 Ch 950; Ronbar Enterprises Ltd v Green [1954] 2 All ER 266; Kirkwood v Gadd [1910] AC 422; Smith v Anderson (1880) 15 Ch D 247; Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 50 ALJR 309; Smith v Capewell (1979) 142 CLR 509; Hope v Bathurst City Council (1980) 144 CLR 1; Pioneer Concrete Services Ltd v Galli [1985] VR 675; Newling v Dobell (1869) 38 LJ Ch 111; William Cory and Son Ltd v Harrison [1906] AC 274; Ford v Andrews (1916) 21 CLR 317; Sloane v Sambell [1931] VLR 393; AG for Victoria v Keating (1970) 26 LGRA 87; Downward v Babington (1975) 31 LGRA 314; Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd [1894] AC 535, considered.

WOER & WOER v MATTSSON & MATTSSON
[2005] SADC 55
Judge Bishop
Civil

In this action, a married couple, Kenneth Woer and Fiona Ruth Woer (“the plaintiffs”) have claimed liquidated damages of $50,000, interest and costs from another married couple, Neil Clifford Mattsson and Maureen Joan Mattsson (“the defendants”) in respect of their alleged breach of special condition 3 of the sale and purchase agreement entered into between the parties on 2 February 2001, by which agreement the defendants sold their business, Lincoln Drillers, to the plaintiffs for $80,000. Special condition 3 of the agreement provided that:
“3.The vendor will not carry on or be interested directly or indirectly in any business of a like nature within the boundaries of Eyre Peninsula for a period of five years from the date of possession and upon breach of this clause the vendor shall pay to the purchaser the sum of $50,000.00 as and for liquidated damages and not by way of penalty.” (My emphasis.)
To appreciate the issues which here arise, it is necessary to relate the factual circumstances from which those issues are derived.
Background
In 1995, the defendants began operating the business named Lincoln Drillers, for which purpose Mr Mattsson had obtained a well driller’s licence under the now repealed Water Resources Act 1990. (He still holds that licence.) The registered office of the business was the defendants’ residential address in Port Lincoln. Although Mr Mattsson agreed that Lincoln Drillers was engaged in drilling work in and around Port Lincoln “on Lower Eyre Peninsula” (T205), he also agreed that the business operated over a large geographical area. That area extended as far north as the Streaky Bay area (T206) and as far west as Penong (T206), which is situated 73 kilometres west of Ceduna and beyond the western boundary of Eyre Peninsula at the western point of Denial Bay (see the map, Exhibit P5, and the South Australian Gazette of 31 October 1839, Exhibit P7, by which the Governor directed that, “The Peninsula included between Spencer’s Gulf in its whole length, and the Southern Ocean from Cape Catastrophe to the western point of Denial Bay [which is situated near Ceduna] [was] to be called – EYRIA”). Mr Mattsson also agreed (T235) that the operations of Lincoln Drillers extended “north west” of Nonning (which is situated just within the northern boundary of Eyre Peninsula) to Mount Vivienne Station, near Glendambo (which is situated about 100 kilometres due north of the northern boundary of Eyre Peninsula).
While Mr Mattsson performed manual work for Lincoln Drillers as a licensed driller (without such a licence, activities which include the drilling of wells constitute statutory offences), Mrs Mattsson primarily attended to book-keeping and secretarial functions for the business (T293). She did the banking and arranged for the payment of bills from the business’ cheque account, of which she was a signatory. As the licensed driller, Mr Mattsson completed and verified details of the actual drilling, on the requisite Drillers Well Construction Reports which Mrs Mattsson then forwarded to the Department of Mines and Energy (subsequently renamed the Department of Conservation).
Following numerous discussions in the latter part of the year 2000, by business sale agreement (Exhibit P1) dated 2 February 2001 and made between the parties to this action, the defendants agreed to sell to the plaintiffs and the plaintiffs agreed to purchase from the defendants the business and stock in trade of Lincoln Drillers for the amount of $80,000, upon the terms and conditions contained in the agreement. (The agreement was signed by the defendants on 30 November 2000 and by the plaintiffs on 8 December.) The business was described in the schedule to the agreement as “Drilling services”. Settlement was to be effected on 9 February 2001. In the evidence of Mr Mattsson, the reason for which he had contemplated sale of the business was his ill health, which included spinal, leg and knee problems, blood pressure, diabetes and left eye thrombosis (T161).
Having reached oral agreement upon the sale and purchase of Lincoln Drillers, Mr Mattsson approach Mr Neil Kopman, a conveyancer or landbroker in Port Lincoln, for preparation of the necessary documents on behalf of both parties (T162, 164). After reading special condition 3, Mr Mattsson directed that his wife ask Mr Kopman to remove that condition from the agreement. However, when he later signed the agreement, he was aware that special condition 3 had not been removed. He accepted the assurance of Mr Kopman that the condition meant nothing (T165).
On 8 February 2001 (the day before settlement was effected), the parties met in the defendants’ house and discussed equipment of the business. At that meeting, the defendants presented to the plaintiffs for their signatures a document which is here described as the addendum (Exhibit P2, the original of which later became Exhibit D1) to the business sale agreement (Exhibit P1). The addendum stated:
“Ken Woer and Fiona Woer
Neil Mattsson and Maureen Mattsson
All parties agree at change of ownership of “Lincoln Drillers” on 9/2/2001 that NC & MJ Mattsson are able to undertake “cleaning, developing and inspection of bores” in business name of either
(1)    Down Hole TV Inspections
(2)    Bore Hole TV Inspections or
(3)    TV Down Hole Inspections
(currently in process of being registered 30/1/01).”
All of the parties signed the addendum on 8 February 2001.
Mr Mattsson explained, in evidence (T166-167, with my emphasis), that he told the plaintiffs that he wanted to stay involved with the drilling industry,
“inasmuch as I had a down-hole camera, a four-wheel drive van and I wanted to clean bores, develop bores and stay - inspect bores. With the experience I had, you use that to assess faulty bores or problem bores … We were all happy and we presented it [the addendum] with them and they signed it.”
Upon that evidence, I asked Mr Mattsson what he meant by the word “develop”. He replied (T168):
“‘Develop’ has got a wide ranging – it can be develop, developing, rehabilitate, whatever. It’s got a – to clean – if a bore has a problem, you can clean it with air or with a drilling rig or whatever it might be. Those things are appropriate but, as I see it, the word ‘develop’ is develop, developing, and developed and rehabilitate are all much the same word.”
(My emphasis.)
Our dialogue continued (T168):
“Q The question is: what does that word mean.
AIt means to get water flowing to –
QIt is a word which you have used in the addendum and I’m trying to come to grips with what it means.
AWithin the drilling industry, to develop a bore is to make the water flow properly and clean out of the aquifer from the screen in the bottom of the casing.
QYou explained that to the Woers, did you, that that was what you wanted to stay involved in the industry for.
AYes.”
(My emphasis.)
(As shall later be recounted, when Mr Mattsson was recalled, about three months after giving that evidence, he gave significantly different evidence.)
Turning to the background position from the point of view of the plaintiffs, Mr Woer confirmed those circumstances in which the agreement (Exhibit P1) was entered into by the parties. Towards the purchase price, the plaintiffs borrowed some $60,000. Special condition 3 had been suggested to the plaintiffs by legal practitioners with whom they consulted before signing the agreement, which was prepared through Mr Kopman. Mr Woer first saw the addendum on the date that he signed that document in the defendants’ house. Previously, in discussions about purchasing the business, Mr Mattsson had told him that, “he was trying to get on to a doctor so that he could get on to a pension”; that he had been rejected; and that he “wanted to start up a different business to keep an income coming in” (T307).
Mr Woer’s evidence continued (T31, with my emphasis):
“On the night I think it was Mr Mattsson told me that one of his sons had designed a camera that you could put down inside bores of wells to see the condition of the bore or well to determine if any rework needed to be done on it if there was a problem with it.”
He also said that he asked Mr Mattsson what was meant by the expression “cleaning, developing and inspection of bores” in the addendum and was told:
“A lot of customers ring up when they’ve got existing bores and either they’re not producing water or they’ve got smelly water or something like that, and part of the business is going around and cleaning bores. Mr Mattsson informed me that there’s not much money in it so I wouldn’t want to be bothered doing it; he would like to do it” (T32; with my emphasis).
Mr Woer said (in evidence) that he could not see a problem with that at the time.
Mr Woer explained what was involved in the business of Lincoln Drillers that he and his wife purchased from the defendants, including: requests from prospective customers for information; applications for permits (made either by Lincoln Drillers or the customer); the drilling of holes (to a maximum depth of 50 metres, as stipulated in his licence) with either the cable tool vehicle or the vehicle with a rotating rig (depending on the nature of the soil), both of those vehicles having been purchased with the business; and the installation of casings into the bores. When the plaintiffs purchased the business, Mr Woer was not the holder of a well driller’s licence. (He obtained that licence in August 2001.) “For about four months”, he said, Lincoln Drillers operated with Mr Mattsson working (as a licensed driller) alongside Mr Woer (as a plant operator under supervision); that is, Mr Woer drilled the holes under the supervision of Mr Mattsson (T36). (In Mr Mattsson’s evidence (T171), that arrangement only lasted for about two months, until early April 2001.)
The business sale agreement (Exhibit P1) also contained two further relevant special conditions:
“1.It is hereby agreed between the vendor and the purchaser, that the vendor shall be retained in the business as a drilling operator on a wage as agreed upon by the vendor and the purchaser until such time as the purchaser shall obtain the necessary registration and/or licensing qualifications required to operate the business.
2.It is further agreed that the aforesaid wage shall be increased every six months until such qualifications are gained.”
(My emphasis.)
In the evidence of Mr Woer (T37), he and Mr Mattsson agreed that Mr Mattsson would be paid “along the lines of $20 for [each of] the first eight metres and possibly about [$] 18 for a metre thereafter.” However, he explained (T36):
“When we started working, Mr Mattsson told me he wasn’t in a hurry for the money, so we put money towards other things within the business and then Mr Mattsson wanted his money and consequently took us to court because we didn’t have it available at the time.”
After that litigation, the plaintiffs owed Mr Mattsson about $2,500.
According to Mr Woer, his working arrangement with Mr Mattsson ceased when Mr Mattsson became ill, demanded payment and would not continue to work until he was paid (T37). (In the evidence of Mr Mattsson, who is now 65 years old, he was in receipt of a disability pension from about March 2001 and the aged pension since 20 February 2004. Accounts were not sent out for the work that he had done until well after the plaintiffs last called him for a job (T173).) About two months after Mr Mattsson ceased to work for Lincoln Drillers, Mr Woer obtained his own well driller’s licence (T38). In cross-examination, he agreed that he obtained his (restricted) licence on 17 August 2001, and that it expired on 17 August 2004. He drilled holes for persons as far away as Penong. The average amount charged to customers by Lincoln Drillers was about $100 per metre, with the depths drilled varying between about six and 80 metres, depending on the area (T44). In early to mid 2001, besides Lincoln Drillers there was one driller in the Elliston area, one in Penong and two outsiders who visited the Peninsula (T45-46).
Subsequent events
Mr Woer first became aware of the business named EP Water Bores when he saw Mr Mattsson, with a drilling rig bearing that name, drilling a hole for a Mr Don Millard at Mount Hope (T46-47). (Although Mr Woer thought that he observed that work about November 2003, from copies of the Drillers Well Construction Reports (Exhibit P4) which he subsequently obtained from the Department of Conservation, it appeared that Mr Mattsson supervised his son, Warren Mattsson, in the drilling of a new well for Mr Millard at Mount Hope between 21 and 28 February 2003.) In December 2003, Mr Woer obtained from the Department the 20 Drillers Well Construction Reports which had been completed and signed by Mr Mattsson and are contained in the 32 pages of Exhibit P4. Until he obtained those reports, Mr Woer was not aware that any of the work therein described had been performed; in none of that work had Lincoln Drillers been involved.
Analysis of those 20 reports has indicated that Mr Mattsson completed and signed 18 Drillers Well Construction Reports relating to work that he had either done or supervised between 11 June 2002 and 7 July 2003 at various places on Eyre Peninsula. (The locations of that work, by reference to the numbered pages of Exhibit P4, are indicated on the map (Exhibit P5) as marked by Mr Woer.) Of those 18 reports:
·six reports related to work that he had done by himself in drilling five new wells and enlarging an existing well;
·seven reports related to work in which he had supervised another person (his son, Warren, on three occasions when new wells were drilled and on one occasion when the description of the work was not indicated; and his son, Jamie, on three occasions when new wells were drilled, four occasions when existing wells were rehabilitated and one occasion when an existing well was enlarged and rehabilitated);
·eleven reports related to work in which new wells were drilled;
·four reports related to work in which existing wells were rehabilitated;
·one report related to work in which an existing well was enlarged;
·one report related to work in which an existing well was enlarged and rehabilitated;
·one report related to work the nature of which was not indicated; and
·five reports related to work upon existing wells where Mr Mattsson had supervised his son, Jamie, and the work was stated to have been done “for EP Water Bores”.
(In relation to the other two of those 20 reports included in Exhibit P4, they have not here been analysed. I accept Mr Mattsson’s evidence that those two reports related to work that he had previously done for Lincoln Drillers in the year 2000 but had omitted to report upon until February 2001, after that business had been sold to the plaintiffs.)
EP Water Bores was registered under the Business Names Act 1996 as a business name on 10 October 2001 (Exhibit D4). The registered proprietor was Cathryn Diane Mattsson, who is married to Jamie Mattsson, a son of Mr Mattsson. The registered office was their residential address (T222). On 21 September 2001, Cambrai Drillers of Cambrai sold to “JM Engines” of Port Lincoln a drilling rig with accessaries for $3,300 cash (including GST) (Exhibit D9). “JM Tuning and Engine Reconditioning” was a business conducted by Jamie Mattsson. Mr Mattsson (senior) purchased that rig for Jamie at an auction, after discussions with his son (T184). On 5 October 2001, on behalf of JM Tuning and Engine Reconditioning, Jamie Mattsson invoiced EP Water Bores in the amount of $3,300 for that rig (Exhibit D10).
In the evidence of Mr Mattsson (T184-185):
“It was suggested that I might be employed by EP Water Bores… As a driller but only employed. As I said, I was on a pension, I didn’t want to own anything. It was theirs completely. Even if today I was given the rig, I don’t want it. I don’t want a business. I don’t want the responsibility of it.”
From time to time, he was employed in the business of EP Water Bores (T185). He completed and signed Drillers Well Construction Reports in relation to wells which were drilled by him or under his supervision for clients of that business (T185). He denied having any financial interest in that business (T185). For the work that he performs for the business, he is renumerated at a rate per metre, “which is transferred to the hourly rate to be able to satisfy the pension” (T185). In relation to the 18 Drillers Well Construction Reports here previously referred to (and also included below the red line in the ‘list of drilling jobs’ (Exhibit D2)), Mr Mattsson said that all of that work was done for EP Water Bores (T195) with the drilling rig belonging to that business. On some of those reports, he had referred to EP Water Bores, not because it was obligatory but to assist SA Water, for whom some of that work had been performed.
Cross-examined as to why, if (as he had said (T165)) he accepted that special condition 3 meant ‘nothing’, he had bothered to prepare the addendum to that agreement, Mr Mattsson replied (T215):
“I wanted to be sure that I retained my licence and I also wanted to be sure that Mr Woer understood what I was trying to do, or wanted to do. Condition 3 agitated me – aggravated me is, I suppose, the word, from the first time I saw it.”
He said that the business named Down Hole TV Inspections (which is referred to in the addendum) was registered and did some business (T216-217). From when EP Water Bores was registered, Mr Mattsson was the only licensed driller working for that business, until his son, Warren, became licensed early in 2005 (T217-218). Since he has been working for EP Water Bores, Mr Mattsson has been paid at the same rate per metre that he was paid by the plaintiffs: “I work for the same rate and I’m available to anybody. I’m a free spirit” (T219). If he earns enough money to be taxed, then taxation is taken from his remuneration (T244).

Mr Mattsson did not think that his wife does anything in the business of EP Water Bores: “She might help Cathryn with the books but she comes out with me” (T219-220). However, he then considerably qualified that response by saying that, “She does the majority of it, I suppose” (T221). He also said that the vehicles belonging to EP Water Bores are kept at the defendants’ 17 acre property, where there is a lot of room (T237). About 18 months ago, Jamie built a rotary drill into the cable tool drill vehicle (T238).
Mr Mattsson completed his evidence on 3 February 2005. When the case resumed on 11 May 2005, with leave of the court he was permitted to give further evidence about the work involved in the construction of a new well and “the tasks involved in cleaning, developing and inspection of bores” (that expression which appears in the addendum). In explaining the construction of a new well, he referred to a step (which I noted (at T273) to be the ninth step) as being “the start of the developing process” (T267), the purpose of which is to remove as much material as possible from the bottom of the bore by passing water through, until it is clean and clear (T268). Mr Mattsson then asserted that the word ‘develop’, in the addendum, permitted him to do that which is involved in the developing process of creating a new bore or well (T273) which, if correct, would considerably diminish any restrictive effect of special condition 3 in the business sale agreement (Exhibit P1). In his words (T274):
“The day before settlement, I still was not happy. The only way I could stay within the drilling industry was to get the addendum or manufacture something that they sign that would counteract that addendum.”
Mr Woer had not been cross-examined upon that belatedly suggested meaning of the addendum; nor had Mr Mattsson been asked to address it in examination-in-chief. Indeed, the only evidence which had previously been given by Mr Mattsson upon that topic was in response to my previously quoted questions about the meaning of the expression in the addendum and his evidence (at T166-167) about his desire to use his experience to assess ‘faulty or problem bores’. In further cross-examination, he denied that he was thereby referring to existing bores (T282). He said that to clean a bore is not an undertaking different from the activity of drilling a new bore (T284). I am unable to accept that evidence which, to my mind, is inconsistent with his previous evidence and displayed his desire to avoid any restrictive effect that special condition 3 might be held to contain.
Mrs Mattsson (the second defendant) was called to establish, inter alia, that, in breach of special condition 1, the plaintiffs had terminated employment of Mr Mattsson. In her cross-examination, it was elicited that, in relation to EP Water Bores:
·she could not recall having been involved in preparing any documentation for the registration of that business;
·occasionally she wrote a docket or did incidental paperwork, for which she was paid by cheque;
·she could not recall her hourly rate of reimbursement;
·occasionally she went to the bank and withdrew cash for her husband, when he was travelling and cash was needed;
·both she and her husband were signatories to the bank account (her husband because of the potential need for money when away from home);
·all of the books of the business were kept at the house of her daughter-in-law, Mrs Cathryn Mattsson, the proprietor of the business;
·on probably two occasions, she sent maps by their fax machine to the Department on behalf of her husband who, as a licensed driller, was required to complete, sign and send Drillers Well Construction Reports with maps to the Department; on his behalf, she remitted those reports and maps to the Department;
·very infrequently she prepared ‘tax statements’ for customers of the business;
·occasionally she (or her husband) signed cheques in payment of accounts rendered to the business;
·from (at least) October 2001, her daughter-in-law has worked “full-time” for a Port Lincoln motor vehicle dealership company;
·her sons, Warren and Jamie, have both drilled for the business, and she has occasionally assisted her husband out ‘on site’;
·her daughter-in-law is the owner of the business, does 90% of the paperwork, ‘fetching and carrying, banking, mail and organising’ and has been out ‘on site’;
·in 2002, her daughter-in-law owned and ran the business, “did the papers [and] everything that was involved in running a business, except the labouring” (T303), which was done by Jamie and Warren (as the drillers) and Mr Mattsson (as their supervisor); and
·her daughter-in-law is not only the owner ‘in name’ of the business, “She has the risk. It’s hers.”
Mrs Mattsson also said that to ‘rehabilitate’ a well is, “to bring it to be able to be used” (T306); and that ‘rehabilitation and enlargement’ of a well is something different from drilling a new well (T307).
Mr Jamie Mattsson gave evidence for the defendants. He has been married to Cathryn Mattsson for nine years. (His wife was not called as a witness.) In 1991, he commenced a business of engine reconditioning and mechanical repairs. When his parents owned Lincoln Drillers, he performed mechanical work for them. About February 2001, he began full-time mechanical work in Port Lincoln with the motor vehicle dealership where his wife also worked. Having injured his knees bending down as a mechanic, with his wife and parents alternative work was discussed. About six months after his parents sold Lincoln Drillers to the plaintiffs, he and his wife decided to purchase a drilling rig, he would obtain a driller’s licence and eventually cease mechanical work. Soon after purchasing the rig, he commenced a correspondence course to obtain a driller’s licence. (He is still completing that course.) In 2001, through his business (JM Engines) he had bought the drilling rig (Exhibit D9) which he then sold to EP Water Bores (Exhibit D10). Because he does not have a truck driver’s licence, his father picked up and paid for the rig with money from JM Engines.
Mr Jamie Mattsson confirmed that the registered office of EP Water Bores is their residential address. Although otherwise employed full-time, his wife is responsible for the management, accounting and advertising of and for the business, which only has the one drilling rig. His role in the business is to receive and answer recorded telephone messages, “do some quotations and organise a schedule of jobs to be done” (T320). His wife makes out most of the invoices for clients from the Driller’s Reports, although sometimes his father will do that ‘on the job’, if time permits. His mother is also involved with accounts and correspondence, if his wife is unable to be involved. He is not a signatory to the bank account of EP Water Bores. As a matter of convenience, his parents are signatories to that account.
Mr Jamie Mattsson said that he participates in the business of EP Water Bores on weekends or when he has days off work. Quite often he will go out to where the rig is located, drill the hole (under supervision) and return home. For about a year, now, his brother, Warren, has been a licensed driller (previously he was an assistant). Both his father and brother are paid by the metre for working in the business. He does not receive any remuneration. When the business commenced and the rig was purchased, he and his wife had no intention of his father working in the business. He thought that his father was being employed by Lincoln Drillers. Jamie was going to become a driller and, until then, his father was going to be allowed to use the rig for cleaning, developing and checking existing bores for damage, through his Down-Hole TV business (T337).

The alleged breach of contract

In paragraph 10 of their amended Statement of Claim, the plaintiffs pleaded that the defendants’ breach of contract comprised infringement of special condition 3 of the business sale agreement (Exhibit P1) of 2 February 2001, in that the defendants, “continued to carry on or be interested directly or indirectly in any business as Licensed Drillers of bores on Eyre Peninsula”. However, Mr Tredrea, counsel for the plaintiffs, acknowledged (T408) that the addendum (Exhibits P2 and D1) signed by the parties on 8 February 2001 also constituted “part of the contractual arrangements” entered into between them before settlement on 9 February 2001. In my view, in construing special condition 3 regard should also be had to those qualifying words of the addendum, namely, that the defendants were able to undertake “cleaning, developing and inspection of bores” in one or other of the business names there stated. That view is confirmed by paragraph 11 of the Statement of Claim which pleaded:
“The Drillers Well Construction Reports filed by the defendants or by permit holders owning land upon which the defendants carried out drilling work clearly indicate that new bores were constructed and not work of the kind permitted by the addendum to the Sale and Purchase Agreement.”
(My emphasis.)
In their Defence, the defendants pleaded that:
·“after about April 2001, in breach of special condition 1 of the agreement, the plaintiffs terminated the employment of the first defendant” (paragraph 7.5);
·“from about June 2002 the first defendant was employed pursuant to a contract of service as a drilling operator by Cathryn Mattsson trading as EP Water Bores” (paragraph 7.6, with my emphasis); and
·“pursuant to the said contract of employment, the first defendant as the holder of the registration and licence as aforesaid, is required to complete and sign driller well construction reports for wells drilled by his employer” (paragraph 7.7, with my emphasis).
The defendants denied the breaches of contract alleged in paragraphs 10 and 11 of the Statement of Claim. Further “or in the alternative”, the defendants’ pleaded that:
·“The special condition number 3 in the contract is void and unenforceable because it is in restraint of trade” and in particular:
(i) is a bare covenant;
(ii)the area of restraint is undefined and too large, having regard to the plaintiffs’ interests;
(iii)the nature of the business, participation against which the defendants are restrained, is unreasonable and extends beyond the business of drilling wells and bores;
(iv)the duration of the restraint is excessive, having regard to the plaintiffs’ interests;
(v)the restraint is unlimited as to the capacity, including the capacity as an employee, in which the defendants are restrained; and
(vi)is unreasonable;
·the stipulated sum of $50,000 in special condition number 3 is a penalty.
Upon the pleadings and the manner in which the case has been presented, consideration of the alternative defence, which is founded upon principles relating to restraint of trade, will become necessary only in the event that a breach or breaches of contract are established by the plaintiffs against the defendants. Unless a breach or breaches of contract are established, consideration of restraint of trade principles and their applicability to these contractual arrangements would, to my mind, be academic or irrelevant.
For the plaintiffs, Mr Tredrea contended that there are four elements to be established by the plaintiffs in relation to the defendants’ conduct concerning special condition 3, namely:
·that the defendants carried on or were interested in the business of EP Water Bores;
·that the business was of a like nature to that of Lincoln Drillers;
·that the business was within the boundaries of Eyre Peninsula; and
·that the defendants’ ‘involvement’ occurred within the period of five years from 9 February 2001.
In submitting that, upon the evidence, the defendants were ‘carrying on’ the business of EP Water Bores from October 2001 to about December 2003, Mr Tredrea relied upon seven “points”, namely:
·that Mr Mattsson purchased the drilling rig in September 2001 and paid cash for it;
·that all the business equipment was based at the defendants’ premises;
·that Mr Mattsson was the only licensed driller involved in the business, which could not be conducted without a licensed driller;
·that Mr Mattsson supervised all of the drilling and on-site work of the business and physically performed a substantial amount of that work;
·that the defendants completed and remitted to the Department all of the requisite Drillers Well Construction Reports;
·that the defendants were signatories to the bank account of the business; and
·that the defendants were renumerated from the business, but not as salaried employees.
In his submission, Mrs Cathryn Mattsson, although the registered owner, had “no substantial role” in the business (T389).
Upon the wording which appears in special condition 3, namely, “will not carry on or be interested directly or indirectly in any business of a like nature”, Mr Tredrea referred to and relied upon the following passages from the judgment of Lindley L.J. in the seminal case of Smith v Hancock [1894] 2 Ch 377, at 385 and 386:
“If the evidence admitted of the conclusion that what was being done was a mere cloak or sham, and that in truth the business was being carried on by the wife and Kerr for the Defendant, or by the Defendant through his wife for Kerr, I certainly should not hesitate to draw that conclusion … But I find it impossible to avoid the conclusion that the business is being carried on by the wife primarily for Kerr, and, perhaps, to some extent, for herself … The utmost that can be said is that [the Defendant] has assisted his wife and Kerr to do what he agreed not to do himself. No honourable man would have done that … But, as a matter of law, I cannot say that the Defendant is breaking his agreement.”
(My emphasis.)
“ It is urged that, even if the Defendant is not carrying on the business, he is in some way “interested” in it, that he is interesting himself in it, and that he can be restrained, and ought to be restrained, from so doing. As the Defendant and his wife are living together, I have no doubt that he is interested in her, and perhaps also in her nephew Kerr. Further, if the wife gets any profit out of the business she may very likely make use of it in adding to her husband’s comforts. But I cannot say that he is in any way “interested” in the business which she has started and is carrying on for Kerr. What interest has he in that business? Certainly no pecuniary interest. His only interest is that indirect interest which every man has in the happiness and welfare of his wife. But to have such an interest as this is no breach of the Defendant’s agreement. When a person sells a business and agrees not to carry on, or be in any way interested in, any similar business, the word “interested” is used to prevent him, not only from carrying it on, but also from having any proprietary or pecuniary interest in it.”
(My emphasis.)
In Smith v Hancock (supra), the agreement provided that the defendant would not “carry on or be in anywise interested in” any similar business within a specified area. A.L. Smith L.J. there held (at 390-391) that those words mean,
“that he will not carry on, by himself or his agent, such a business, nor will he in anywise have an interest, be it pecuniary or personal, in such a business. It is not a covenant that he will not take an interest, whether from feelings of affection or friendship or what not, in how another may carry on his or her business within the prescribed limits. The words are, “or be in anywise interested in” the businesses. To constitute a breach of the covenant it must be proved that the covenantor has some interest in the business itself which is being carried on, and not that he only takes, or has taken, an interest in the success of another carrying on his or her business.”
(My emphasis.)
His Lordship also referred (at 391) to, “evidence which might well lead to the inference that the business was in reality his, and not his wife’s, or partly his and partly hers, which would suffice to constitute a breach of covenant by the husband, for he would then have an interest in the business”, but held that such an inference had been disproved. His Lordship agreed with Lindley L.J. in dismissing the appeal of the covenantee plaintiff.
In his dissenting judgment in Smith v Hancock (supra), Kay L.J. said (at 387 to 388):
“It seems to me clear that it is not confined to a pecuniary interest. If he carried on, or was in anywise interested in, a like business which drew away the old customers from the purchaser or otherwise diminished his receipts, though he took no pecuniary benefit from that business, the injury to the purchaser would be the same. Then “carry on” does not mean “exclusively” carry on, or even “principally”. If he became partner with other persons, even a dormant partner, or if he contributed capital to aid a like business, or became manager, I should think he would have broken this agreement. So any active assistance in the business, particularly any such as was intended and calculated to attract his former customers and to take them away from the purchaser, would, in my opinion, be a “carrying on”, within the meaning of those words as used in this agreement. I am also of opinion that being “interested in” means something short of “carrying on” and, when coupled with the words “in anywise”, a very large meaning should be given to those words in furtherance of what seems to me the obvious intention.”
(My emphasis.)
(The words “in anywise” do not appear in special condition 3 of this agreement.)
Mr Tredrea submitted that both of the defendants did have a pecuniary interest in EP Water Bores because, not only did they assist in that business, they were also paid for the work that they did for the business (T393); and that Mr Mattsson did have an interest in the business because, were it not for his involvement as a licensed driller, there would not have been a business (T396).
For the defendants, Mr Di Fazio submitted that, upon proper construction of special condition 3, the defendants were not carrying on the business of EP Water Bores and were not interested directly or indirectly in that business or any business of a like nature to Lincoln Drillers. In his submissions:
·Mrs Cathryn Mattsson was the sole proprietor and manager of EP Water Bores, to whom the profits and losses accrued;
·the defendants had no financial interest in, or contractual or financial relationship with, that business;
·Mr Mattsson was “an employee or independent contractor” of or to that business and was renumerated by reference to the number of metres drilled;
·there was no contractual or financial relationship between the defendants and the customers of the business for whom wells were drilled, that relationship was between the land owners and EP Water Bores; and
·the words “be interested directly or indirectly in any business” denote a proprietary, financial or pecuniary interest in a business (see Smith v Hancock (supra); and Pioneer Concrete Services Ltd v Galli [1985] VR 675, at 707).
Mr Di Fazio referred to and relied upon the English Court of Appeal case of Ronbar Enterprises Ltd v Green [1954] 2 All ER 266, where parties to a partnership agreement agreed that a partner whose share was purchased shall not directly or indirectly “carry on or be engaged or interested in any business similar to or competing with the business of the partnership”. Counsel for the defendants there argued that there had been no breach of that restrictive provision because, on its true construction, it did not extend to the rendering of services for a salary or wages, as distinct from being engaged in business on one’s own account. That argument was rejected. In the judgment of Jenkins L.J. (at 268-269), those words were apt,
“particularly in view of the word “engaged”, to include a case where the party subject to the restriction takes employment in a business of either of the kinds mentioned at a salary or wages, as well as a case in which he embarks on such a business on his own account or on a partnership.”
(My emphasis.)

In Ronbar’s case (supra), Hodson L.J. agreed (at 270) that, on the true construction of that clause, the word “engaged” is apt to cover “employment as a servant as well as employment as a principal.” His Lordship found support for that view in the opinion expressed by Swinfen Eady J. in Gophir Diamond Co v Wood [1902] 1 Ch 950, at 952:
“[The covenant] does not provide that the covenantor shall not be ‘engaged or concerned or interested’ in a similar business, but merely that he shall not be ‘interested’ therein. Nor does it contain the usual provision against accepting employment as a servant in a similar business. If it was intended to prevent the defendant accepting employment of that nature it would have been quite easy to say so.”
(My emphasis.)
Hodson L.J. concluded (at 271) that the word ‘engaged’ does comprise being engaged as a servant and, therefore, on the face of the language, assuming that the clause was valid, the defendant was in breach. (The words “or be engaged” do not appear in special condition 3 of this agreement.)
Upon the authority of Ronbar’s case (supra), Mr Di Fazio submitted (T358) that, if it were intended that the restraint be extended to an employment relationship, it could very easily have been provided for in special condition 3. He also submitted that, on the evidence presented, the relationship between Mr Mattsson and EP Water Bores was not a sham, but a real relationship, and Mr Mattsson was not carrying on, in the sense of managing, that business (T361-362; 374).
I shall consider these respective submissions, for which purpose gratitude is expressed to both counsel for their thorough and helpful research into the legal considerations with which this case is concerned.
Carrying on business
Apart from the general observations that “to carry on” means to manage or conduct (The Macquarie Dictionary (1981), page 302) and, in relation to a business, implies a repetition or series of acts which constitute a business (see Brett L.J. in Smith v Anderson (1880) 15 Ch D 247, at 277 and 278), as Lord Atkinson observed in Kirkwood v Gadd [1910] AC 422, at 432,
“ It is impossible to define with fulness [sic] or accuracy what is the precise meaning to be given to the phrase “carrying on business”. It is to a large extent a question of fact, to be determined in each case by its own special circumstances. Little assistance can be gained from the authorities.”
To similar effect was the statement of Gibbs J. in Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 50 ALJR 309, at 314:
“ The expression “carrying on business” may have different meanings in different contexts. It would usually connote, at least, the doing of a succession of acts designed to advance some enterprise of the company pursued with a view to pecuniary gain. … the question whether a company is carrying on business within the State is simply one of fact and must be decided by having regard to all the circumstances of the case.”
Gibbs J. repeated much to the same effect in Smith v Capewell (1979) 142 CLR 509, at 517-519:
“The expression “carry on business”, in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction. … A single transaction may amount to the carrying on of a business, although no other transaction has so far been effected, if it is proved that there was an intention to carry on a business and that the transaction was undertaken in pursuance of that intention: Fairway Estates Pty Ltd v Federal Commissioner of Taxation (1970) 123 CLR 153, at 164-165.”
In Hope v Bathurst City Council (1980) 144 CLR 1, at 8-9, in a judgment which was concurred in by Gibbs, Stephen and Aickin JJ, Mason J considered that, “it is the words ‘carrying on’ which imply the repetition of acts (Smith v Anderson [supra]) and activities which possess something of a permanent character.” His Honour also said that the word “business” denoted,
“activites undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis.”
The Full Court of Victoria considered that definition as sufficient for the purposes in Pioneer Concrete Services Ltd v Galli [1985] VR 675, at 705.
Reference has previously been made to Smith v Hancock (supra), where Lindley and A.L. Smith L. JJ regarded the word “interested” as referring to proprietary or pecuniary interest and held that, notwithstanding the acts of the husband in assisting his wife to start a rival business, he had not committed a breach of his covenant not to “carry on or be in anywise interested” in any similar business; the mere performance of those acts of assistance was no breach of the covenant.
In application of those legal authorities to all of the established factual circumstances of this case, I am not persuaded that it has been proved that the defendants have carried on the business of EP Water Bores in breach of special condition 3. I accept the evidence that was given by and for the defendants as to their relationship with that business. Upon the evidence presented, I am satisfied that the business has been carried on by the registered proprietor, Mrs Cathryn Mattsson, with the assistance of her husband and his parents, the defendants. I am not persuaded that, in reality, the business has been carried on by the defendants and that what was done was a mere cloak or sham and, in truth, the business has been carried on by the defendants or one of them.
Being interested in any business
Upon the evidence presented, I am satisfied that the defendants were employees or independent contractors of or to EP Water Bores and that they were remunerated by reference to the amount of work that they did for that business. The question which then arises is whether an employee, or a person who is paid by a business, has an interest in that business by virtue of that payment. Upon that question, my mind has fluctuated. During submissions (at T373), I posed to Mr Di Fazio the question: in principle, why cannot it be said that a person who is working for a business is interested in the business in that, if the business ceases to exist, he is out of a job – to which Mr Di Fazio replied: he is, but not in the relevant sense. I also remarked to Mr Tredrea (T396): as a matter of common sense, one would think that the receipt of remuneration indicates an interest in the business, namely, continued financial advantage – to which Mr Tredrea replied: exactly; this is a case of a person who is at the very heart of the business operation.
In Newling v Dobell (1869) 38 L.J. Ch 111, at 112, Mallins VC held that a tailor who had sold the goodwill of his business, had covenanted with the purchaser not to “carry on or be concerned or interested in” the business of a tailor within a fixed distance from his former shop and then engaged himself as a journeyman tailor to his nephew (who carried on the same trade within the proscribed limits) had “upon principle” breached the covenant because, “every journeyman or workman is interested in the condition of his master’s business.” However, that decision is inconsistent with Gophir Diamond Company v Wood (supra) where, in 1902, a covenant against being “interested” in a similar business was construed so as to prohibit the defendant from being thus interested, “in the sense that he must not have a proprietary or pecuniary interest in the success or failure thereof”. Swinfen Eady J there remarked (at 953):
“If his remuneration in any way depended on the profits or gross returns, he would be “interested” in the business, but the mere fact that he is employed as a servant at a fixed salary gives him no such interest and constitutes no breach of his covenant.”
(My emphasis.)
Of such words as “interested or concerned in”, Lord Halsbury L.C. said for the House of Lords in William Cory and Son Ltd v Harrison [1906] AC 274, at 275, “You must look at the facts of the particular case and look at the business meaning of the words.” The mere fact of being a creditor of a firm was there held not to be “concerned or interested” in the firm. His Lordship observed (at 276) “Although , in a certain sense, every creditor is interested in the solvency of his debtor, and in that sense there is an interest, that is not the sort of interest that is contemplated by this covenant.”
In Ford v Andrews (1916) 21 CLR 317, Griffith C.J. pertinently remarked (at 321), in relation to a person who was a director of a company and also an alderman of a municipality,
“ In my opinion, a person who, with or without pecuniary remuneration, becomes charged with the duty of supervising or protecting the interests of another person in respect of a contract is himself interested in that contract within the meaning of the [Local Government] Act, whether he actually intervenes in its execution or not. No one disputes that a pecuniary obligation incurred by a man in respect of the performance of a contract made by another creates such an interest. An obligation arising from duty (by which I mean a duty cognizable by the Court, not necessarily contractual) is in my opinion equally efficacious to create an interest. It is to be noted that the words of the Act are “is interested in,” not “has an interest in,”which might, perhaps, be limited to pecuniary or proprietary interest. It would be lamentable if it were to be laid down by the Court that a person bound by the obligation of duty, however arising, is not interested in the matter with respect to which the duty is to be performed.”
(My emphasis.)
(That case was concerned with an interest in a contract, not an interest in a business, although the distinction between the two may be obscure.)
Helpfully (to me), in Sloane v Sambell [1931] VLR 393, at 397-398, Cussen ACJ referred to some cases (including Smith v Hancock (supra), Gophir Diamond Co. v Wood (supra), Ford v Andrews (supra) and William Cory Son Ltd v Harrison (supra)) in which the words “interested” and “concerned”, or one of them, have or has been considered. Of those cases, Sir Leo Cussen said, in this relevant passage,
“The cases … emphasize the necessity of cutting down the popular meaning of these wide words by reference to the subject-matter. They show that at law “interest” arising from curiosity, novelty, relationship, friendship, affection, ill-will, etc., are excluded, that which has to be found is something in the nature of a pecuniary or proprietary, or at least material, interest, something by which legal rights or liabilities are or may be affected, something to which the law can apply its objective standard of money or money’s worth. The cases further show that even the natural interest of a creditor in the business and solvency of his debtor do [sic] not give him in the legal sense an interest in that debtor’s business, much less in a contract made by the debtor. So too it appears that the natural interest of a managing director or other servant in the business of his company or employer do [sic] not give him a legal interest in the contracts made in connection with the business [or, I think that it may be added, the business itself].”
In Sloane v Sambell (supra) Mann J remarked (at 406) that,
“It is clear that to be concerned in the business of the contractor is by no means the same as being concerned in the particular contract. Thus a person employed in a business at a weekly salary has been held to be clearly “concerned” in the business – Hill v Hill [1886] 55 L.T. 769”.
Of the word “interested” (in a contract), his Honour also there remarked (at 407) that, hitherto, the meaning attached to that word implied directly or indirectly a personal advantage or prospect of advantage and that, even where some personal advantage can be discerned, the question of remoteness has to be considered – see, for instance, Norton v Taylor [1905] 2 CLR 291; [1906] AC 378.
To similar effect was the view expressed by Starke J in AG for Victoria v Keating (1970) 26 LGRA 87, at 92:
“For authority supporting the contention in similar legislation [to the Local Government Act] that to have a concern or interest in a matter a man must have either a pecuniary interest or a material advantage: see Hunnings v Williamson (1883) 11 QBD 533; Barnacle v Clark [1900] 1 QB 279; England v Inglis [1920] 2 KB 636; and Whiteley v Barley (1888) 21 QBD 154).”
His Honour also referred to the High Court case of Allen v Tobias (1958) 5 LGRA 28, at 36-37, where the Court observed that “it is enough that it [the benefit which might be expected to accrue from a contract] is material and appreciable.”
Finally, in Downward v Babington (1975) 31 LGRA 314, at 320, Gowans J remarked,
“ The word “interest” in itself is wide enough, and has been treated in this connexion as wide enough, to cover any material benefit or advantage of an appreciable character, whether pecuniary or otherwise, although exclusive of an interest based upon merely sentimental associations. (See AG for Victoria v Keating [supra] and the cases there cited.)”
His Honour there attributed to the words “any direct or indirect pecuniary interest in any contract or proposed contract with the municipality” in section 181(1) of the Local Government Act 1958 (Victoria),
“a meaning which would have the effect of saying that a councillor has a pecuniary interest in a contract or proposed contract or matter in which the municipality is concerned, if the contract or matter would, if dealt with in a particular way, result in the payment of money to him or by him or would give rise to an expectation (so long as it was not too remote) of the payment or receipt, or gain or saving or loss, of money by or to him.”
Such statutory provisions, in my view, are not of much assistance in construing the expression “interested directly or indirectly in any business” in special condition 3 of this agreement.
In the light of the legal authorities to which reference has here been made (at, perhaps, too great a length), in my view the expression “interested directly or indirectly in any business” in special condition 3 should be construed as relating to such an ‘interest’ in the legal sense of a pecuniary, proprietary or material interest in a business and not the natural interest which employees or independent contractors of a business have in being reimbursed for their services to that business.
Conclusion
For these reasons, in my judgment, the plaintiffs have not succeeded in establishing any breach of contract by the defendants and, therefore, consideration of whether the contract was void or unenforceable as being in restraint of trade is not relevant. However, in the event that I am incorrect in this conclusion, that position should be addressed.
Restraint of trade
The test to be applied in determining the validity of a restraint of trade is that stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. Ltd [1894] AC 535, in a passage that has been cited with approval in many cases, including Esso Petroleum Co. Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, Buckley v Tutty (1972) 125 CLR 353 and Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co. Pty Ltd (1973) 133 CLR 288. Lord Macnaghten said (at 565):
“ All interference with individual liberty of action in trading, and all restrains of trade themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.”
(My emphasis.)
The restraint “must afford no more than adequate protection to the party in whose favour it is imposed” (Herbert Morris Ltd v Saxelby [1916] 1 AC 688, at 707) or not exceed “what is reasonably necessary for the protection of the covenantee” (McEllistrim v Ballymacelligott Co-operative Agricultural and Dairy Society Ltd [1919] AC 548, at 563). Where the parties to a contract have been in a position to bargain on an equal footing they should be treated as the best judges of what is reasonable in their own interests (Esso Petroleum’s case (supra, at 323-324)). However, the fact that the parties have bargained from a position of equality is one of the circumstances to be considered in determining whether covenants were reasonable does not save from invalidity a covenant found to be unreasonable on contrary to the public interest (see Gibbs J in Amoco’s case (supra, at 317)).
The onus of establishing that an agreement is reasonable as between the parties is upon the person who puts forward the agreement, while the onus of establishing that it is contrary to the public interest, being reasonable between the parties, is on the person so alleging (Lord Hodson in Esso’s case (supra, at 319)). However, the question of reasonableness is a question of law for the decision of the judge (Mason v Provident Clothing and Supply Co. Ltd [1913] AC 724, at 732), “the reasons for which do not admit of great elaboration” (Walsh J in Amoco’s case (supra, at 308)).
The legal position in relation to covenants in restraint of trade entered into between vendor and purchaser was succinctly stated by Jenkins L.J. (as he then was) in Ronbar’s case (supra, at 270):
“In the case of a covenant between vendor and purchaser, the court recognises that it is perfectly proper for the parties, in order to give efficacy to the transaction, to enter into such restrictive provisions as regards competition as are reasonably necessary to enable the purchaser to reap the benefit of that which he has bought; and restrictions of that kind are regarded as necessary, not only in the interests of the purchaser, but in the interests of the vendor also, for they not only preserve the value to the purchaser of that which he buys, but also enable the vendor to realise a satisfactory price. It is obvious that in many types of business the goodwill would be well-nigh unsaleable if it was unlawful for the vendor to enter into an adequate covenant against competition.”
Having regard to all the factual circumstances here proved and previously referred to, I am satisfied that the plaintiffs have established that the restrictive covenant contained in special condition 3 (and as qualified by the addendum) was reasonable as between the parties and did not exceed what was reasonably necessary for the plaintiffs’ protection in purchasing Lincoln Drillers from the defendants in February 2001. I am not satisfied that the defendants have established that the restrictive covenant was contrary to the public interest.
In my judgment, the restrictive covenant was reasonable in relation to area (“the boundaries of Eyre Peninsula”, beyond which the business of Lincoln Drillers had ranged when owned by the defendants), in relation to the nature of the businesses in the participation of which the defendants were restrained (the drilling of new wells), in relation to duration (five years, there being very few other drillers in the area) and in relation to the scope (unlimited) of that restraint (in the event that my previously expressed conclusion is incorrect and, as persons remunerated by EP Water Bores, the defendants were restrained from working in the area). In my judgment, also, the stipulated sum ($50,000) should be regarded as liquidated damages and not a penalty, having regard to the purchase price ($80,000), the equipment ($8,000), the costs involved in drilling a well and the agreement of the parties as to that sum.

However, for the reasons previously expressed, in my judgment the plaintiffs’ claim against the defendants should be dismissed. Upon the question of costs, counsel shall be heard.