WPS Enterprises Pty Ltd v Radford
[2009] VSCA 22
•27 February 2009
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 3744 of 2007
| WPS ENTERPRISES PTY LTD (ACN 100 839 325) |
| v |
| PETER FREDERICK RADFORD |
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JUDGES: | BUCHANAN and NEAVE JJA and ROBSON AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 25 November 2008 | |
DATE OF JUDGMENT: | 27 February 2009 | |
MEDIUM NEUTRAL CITATION: | [2009] VSCA 22 | |
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Contract – Restraint of trade – Covenant in restraint of trade – Construction – Whether covenant breached – Lease of premises – Loan of monies by wife of covenantor – Delivery and collection of articles of trade by covenantor – Meaning of ‘interested in’ and ‘financially or otherwise engaged in’ a business – Cumulative effect of severed actions – Covenant not breached.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr P G Cawthorn SC with Mr H P Bokelund | Creelman Lawyers |
| For the Respondent | Mr M Stirling | Richmond and Bennison |
BUCHANAN JA:
This appeal is concerned with the question whether a restraint of trade clause in a sale of business agreement was breached by the promisor.
The business was that of a wheel repairer conducted by Advanced Alloy Wheel Repairs Pty Ltd (‘Advanced’) in leased premises at Moorabbin. The respondent and another were the directors of Advanced. By an agreement dated 28 June 2002, Advanced sold the goodwill and assets of the business to Weajay Pty Ltd and the appellant at a price of $1,080,000. The directors of Advanced were parties to the agreement. The price reflected the profitability of the business, which had a gross income of $1,800,000 in the year it was sold. The trial judge found that the business required some skill and experience, but was neither sophisticated nor unique.
On 1 July 2002 Weajay Pty Ltd paid the purchase price and entered into possession of the business. The purchasers became lessees of the Moorabbin premises. On 11 October 2003 the appellant acquired Weajay’s share of the business.
The restraint was contained in clause 14 of the agreement, which provided, so far as is relevant:
14.1In consideration of the Purchasers entering into this Agreement at the request of the Directors and to reasonably protect the goodwill of the business, Advanced and the Directors jointly and severally agree with (sic) that without the prior written consent of the Purchasers, they shall not whether directly or indirectly, for a period of five years following the Settlement day (‘the restraint period’) within the State of Victoria (‘the restraint area’):-
· be employed, carry on or be financially or otherwise engaged in any undertaking which in any capacity whatsoever carries on a business which is competitive with the business;
· canvass, induce, encourage or solicit any employee or agent of the Purchasers to leave the employment of the Purchasers;
· solicit, canvass or approach any customer (whether past or current) of the Purchasers with a view to soliciting for itself or themselves or some other person the business of that customer in competition with the Purchasers; or
· on their own account or for any other business or undertaking compete or seek to compete with the business of the Purchasers or interfere with the relationship between the Purchasers and its clients or employees.
14.2The parties agree that the words ‘carry on or be financially or otherwise interested, engaged in or concerned with’ shall include (without derogation from their generality):-
· management without salary, advising or influencing a competitive business whether from time to time or on a continuing basis, whether for direct remuneration or benefit or otherwise; or
· establishing or being interested in or influencing a competitive business through any association or arrangement with any person, relative, nominee or trust in or over which any interest of influence (absolute or partial) is held (but shall exclude a shareholding interest in a publicly listed company of not more than 10% of the issued share capital of such company).
The words ‘interested’ and ‘or concerned with’, which appear in quotation marks at the beginning of clause 14.2, did not appear in clause 14.1. Accordingly, counsel for the appellant conceded that those words were not to have the effect of extending the scope of clause 14.1.
On 2 September 2005 the respondent’s son, Jason Radford, his mother and Shane Hathaway, who had been employees of Advanced, registered the business name ACE Alloy Wheel Repairs. In about April 2000 Jason Radford and Hathaway commenced trading as wheel repairers. I shall refer to the business as ACE. Both Jason Radford and Hathaway had considerable experience. The former had been in the wheel repairing industry since 1989 and the latter since 1985. At the time of the sale, Hathaway was Advanced’s workshop manager.
The trial judge’s decision
The appellant brought proceedings against the respondent, alleging that he had breached the restraint of trade clause by providing premises and a loan of money to ACE on non-commercial terms, assisting ACE in acquiring plant and equipment, soliciting customers of Advanced for the benefit of ACE, servicing the customers of ACE and advising and influencing ACE. The trial judge considered each of the allegations in turn and held that none was established. Her Honour held that the appellant had not established a breach of the clause ‘whether the [respondent’s] acts are considered individually or cumulatively’.
The premises said to have been provided to ACE on uncommercial terms consisted of a small factory at Mentone owned by the respondent and his wife, which had earlier been leased by Advanced and the appellant and used to store materials. The factory was a great deal smaller than the Moorabbin premises. The premises had been vacant for some time before they were leased to ACE. The last tenant had paid rent at a rate of $650 per month. The premises were leased in April 2006 to ACE at a rate of $600 per month. It was agreed that ACE would not have to pay rent until the business became profitable.
In fact ACE duly paid rent from the outset of the lease. In January 2007 the rental was increased to $800 per month. The trial judge held that the respondent had not ‘financially or otherwise engaged’ in the business of ACE by leasing the factory.
In February 2006 the respondent’s wife made an arrangement with her son and Hathaway to advance $35,000 to ACE. The sum advanced came in part from money held jointly by the respondent and his wife. The loan was free of interest. At the suggestion of an accountant, the respondent’s wife entered into an agreement with her son and Hathaway granting the respondent’s wife a 20 per cent share in the business of ACE. That interest was to be surrendered on repayment of the loan. Repayments were made by ACE irregularly. At trial, $10,000 had been repaid by cheques made payable to the respondent’s wife. The trial judge held that the respondent was not a party to the loan and obtained no share in the business of ACE. Accordingly, the loan did not mean that the respondent was financially engaged in an undertaking carrying on a competitive business.
The respondent gave evidence that he had conducted some research and obtained pamphlets in respect of equipment for use in a wheel repairing business. The respondent’s son and Hathaway denied that they relied upon any advice or assistance provided by the respondent. The trial judge accepted their evidence. She said:
Mr Radford senior generally attempted to answer questions thoughtfully and conscientiously. Having observed his demeanour and considered his evidence, in my opinion, despite some inconsistencies and hesitation on individual matters … Mr Radford senior was essentially a straightforward and honest witness whose evidence I generally accept.
Mr Radford senior’s evidence was generally corroborated by that of Mr Shane Hathaway and his son Jason Radford, whose evidence I also generally accept.
Mr Hathaway, who had many years experience in the wheel repair business, was an impressive witness.
Her Honour found that the research undertaken by the respondent was unsolicited, voluntary and not acted upon by ACE. The respondent’s son and Hathaway found the equipment which ACE required. They both had years of experience in the industry and, in the words of the trial judge, ‘were capable of sourcing equipment and running a successful wheel repair business’.
The respondent signed a guarantee in support of an application for finance for the purchase of tyre equipment by ACE. The proposal for finance did not proceed. ACE purchased the equipment with its own funds.
At trial, the appellant alleged that the respondent solicited customers of Advanced on behalf of ACE. The appellant relied upon telephone records showing that the respondent made calls to nine businesses which had been customers of Advanced and became customers of ACE. The respondent gave evidence that none of the calls was made for the purpose or had the effect of soliciting business for ACE. None of the customers said to have been solicited was called to give evidence by the appellant. The trial judge accepted the evidence of the respondent, his son and Hathaway. Her Honour also accepted the evidence of representatives of two businesses who were called as witnesses for the respondent and who said that they transferred their custom from Advanced to ACE because of poor service by Advanced. Her Honour found that the respondent’s son and Hathaway solicited the customers which ACE obtained.
In support of the allegation that the respondent serviced the customers of ACE, the appellant relied upon evidence given by a private investigator engaged by the appellant. The agent telephoned the respondent on his mobile telephone and was told that if he wanted to have a wheel repaired he should drop it off at his son’s factory. The next day the agent went to ACE’s premises and spoke to the respondent. The respondent took a damaged wheel from the agent and quoted a price of $75 to repair it. The trial judge found that the respondent did not repair the wheel. The evidence established no more than that the respondent took delivery of a wheel and quoted a sum for its repair ‘on one occasion when specifically requested to do to.’
In addition, the respondent from time to time picked up or delivered wheels in the early stages of ACE’s business. Over a period of 14 months, the respondent collected or delivered some 20 wheels, thereby saving ACE about $300 in courier fees. Even in the early stages of its business, ACE was repairing 20 wheels a day. The respondent was not paid for this work. Her Honour held that the ‘peripheral voluntary assistance’ of the respondent did not constitute a breach of the agreement.
The allegation that the respondent assisted and advised his son and Hathaway was based upon an invitation to the trial judge to disbelieve the respondent’s denial of assistance and advice and a statement by the respondent that, ‘No court will convict me for helping my son.’ The trial judge did believe the respondent and found that the help he admitted was picking up and delivering some wheels.
The appeal
At the hearing of the appeal, the appellant attacked the trial judge’s conclusion that none of the respondent’s acts complained of by the appellant, considered individually, constituted breaches of the restraint of trade clause. The appellant also attacked the conclusion that the respondent’s acts, considered collectively, did not amount to a breach of the clause.
The appellant contended that the lease of the factory was made on uncommercial terms in that ACE was not tied to a lease for an extended term, the rent was $50 per month less than the rent paid by the previous tenant of the premises, ACE was not obliged to pay rent until its business was established and ACE was not required to post a bond. The respondent admitted in cross-examination that ACE did have a benevolent landlord. He said that ACE ‘had some flexibility, more than you would have under a normal commercial lease.’ It was also submitted that the respondent as landlord would benefit if ACE prospered, for that would enhance its ability to pay rent. Accordingly, so it was said, the respondent was ‘financially or otherwise engaged in’ the business of ACE and was ‘interested in’ the business of ACE.
I doubt the significance of the beneficial terms on which the lease was granted. The premises had been vacant for some time, which would suggest that there was a lack of demand for them and that may well have justified the reduction in the rent. Monthly tenancies are not uncommon. The previous tenant had been granted a monthly tenancy and had not been required to provide a bond. Hathaway gave evidence of the availability of other suitable premises. ACE was required to share the premises with the respondent. The respondent had constructed a gymnasium in the premises. He continued to use the gymnasium he had fitted out in the premises and to use the premises to repair cars and wheels for himself and his friends.
While the circumstances surrounding a lease may enable it to be said that a lessor is engaged or interested in the undertaking conducted in the leased premises by the tenant[1], neither the lease in this case nor the relationship between the respondent and ACE in respect of the leased premises admit such a conclusion. In my view, the respondent was no more engaged or interested in the undertaking of ACE than he was in the undertaking of the previous tenant. In my opinion, the connection between a landlord’s entitlement to rent and the tenant’s ability to pay rent being affected by the success of the tenant’s business is too remote to result in the landlord being ‘interested in’ the business. I think the phrase ‘interested in’ in clause 14.2 is coloured by the later words, ‘shareholding interest’, and contemplates a direct interest. The interest might not be limited to a proprietary interest in the entity that carries on the competitive business, but, in my view, the words require at least a sharing in the fruits of the success of the business.
[1]See Hunt v Pascoe (1990) 21 NSWLR 10, 15 (Young J).
Save for a sum of $2,300, which the respondent’s wife said was cash she provided, the source of the $35,000 lent to ACE appears to have been accounts held jointly by the respondent and his wife. In an agreed summary of facts which the parties supplied to the Court, it was stated that $25,000 of the amount of the loan was withdrawn from the respondent’s wife’s personal entitlement to a pension fund of which she and the respondent were trustees. The respondent’s wife sought and obtained the respondent’s approval of the loan. The loan was interest free.
Hathaway gave evidence that he and Jason Radford each contributed $12,000 from their own funds and each borrowed a sum of $10,000 from a bank. Hathaway said that his banker was prepared to lend him more than the amount of the loan advanced by Mrs Radford.
The appellant contended that as a result of the security taken by the respondent’s wife in the form of a share of the partnership which conducted the ACE business, the respondent had ‘an indirect or beneficial interest in the ACE business.’ I do not agree. The evidence established that the loan was made by the respondent’s wife. She did employ in part money to which the respondent was entitled and did so with his consent, but that circumstance did not render her an agent of the respondent in making the loan. The appellant also contended that because it was in the respondent’s interest that ACE’s business should be profitable and thereby assist the respondent’s son and Hathaway to repay the loan, the respondent was ‘interested in’ ACE’s business. For the reasons I have expressed in concluding that the lease did not result in the respondent being ‘interested in’ ACE’s business, I am of the view that the loan did not constitute a breach of the restraint clause.[2]
[2]See also Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275, 308 (Pincus J).
It was submitted on behalf of the appellant that the part played by the respondent in assisting in the acquisition of equipment for ACE’s business meant that the respondent breached the covenant which forbade ‘establishing … a competitive business’.
At the outset it was contended on behalf of the appellant that the trial judge should have found that the respondent was instrumental in the design and construction of a jig used to repair wheels and that he identified suppliers of equipment important to the business and arranged for the acquisition and installation of the equipment. The appellant also relied upon the fact that the respondent completed an application to a finance company for a loan to purchase wheel balancers and tyre changers. The application nominated the respondent as a potential guarantor. The application did not proceed. ACE paid for the equipment from its own funds.
There was no direct evidence that the respondent performed the acts complained of by the appellant. Counsel for the appellant invited the Court to infer that the respondent played a role in the design and installation of the jig and the identification and acquisition of other equipment because it was ‘very likely’. In the same way the appellant contended that because the respondent was present when a pre-fabricated spray booth was delivered to ACE’s factory, the respondent ‘most likely oversaw this task’.[3] Accordingly, so it was said, the Court should reject the denials of the respondent, his son and Hathaway, which had been accepted by the trial judge. Jason Radford and Hathaway gave detailed evidence of the steps they took to locate and purchase all the equipment required by ACE.
[3]Again, the respondent gave evidence directly denying that he supervised the installation of the spray booth.
This Court is not at liberty to set aside the findings of the trial judge based upon the credibility of the witnesses because we might think the probabilities of the case are against the findings. It has not been shown that her Honour failed to use or misused her advantage in seeing and hearing the witnesses give their evidence or that she has acted upon evidence which was inconsistent with facts incontrovertibly established by the evidence or which was glaringly improbable.[4] In any event, I do not regard it as probable that the respondent performed the acts alleged by the appellant. There was no evidence that he did and, in my view, the so-called inferences which the appellant invited us to draw amounted to no more than speculation.
[4]See Abalos v Australian Postal Commission (1990) 171 CLR 167; Devries v Australian National Railways Commission (1983) 177 CLR 472; Cox v Percy (2003) 214 CLR 118.
Accordingly, the position is that the respondent carried out unsolicited research into equipment that might be bought by ACE, for example, by obtaining pamphlets, which was characterised by the trial judge as the acts of an ‘overenthusiastic retired father’. The evidence of Hathaway and the respondent’s son, which the trial judge accepted, was that they had either built or bought all the critical items of equipment purchased by ACE. There was no evidence that any of the respondent’s research had been acted upon by Jason Radford or Hathaway. Those limited acts fell far short of establishing the buiness of ACE or being employed or engaged in it. The application for finance played no part in the establishment of the business. The fact that it was made demonstrated the respondent’s readiness to assist his son and Hathaway, but it had no practical effect.
The appellant sought to meet the absence of any evidence that the respondent solicited customers of the appellant by submitting that this Court should overturn the finding of the trial judge and infer from the evidence that the respondent spoke by telephone to nine former customers of ACE and visited two former customers that the respondent solicited those customers. The trial judge accepted the respondent’s evidence that his communications with his old customers were social calls or connected with his own affairs or with the delivery or collection of wheels for ACE. He also accepted the evidence of the principals of two customers of Advanced called as witnesses who said that the respondent had not solicited their custom. The customers were the only customers identified in the appellant’s pleadings as having been solicited by the respondent. Their evidence was led on behalf of the respondent. At the time of the sale of the business to the appellant Advanced had some 659 customers. None of the customers was called to give evidence by the appellant.
It is hardly surprising that the respondent should have formed friendships with some of the customers he had served for years. The business of Advanced did not depend upon personal relationships. The attractiveness of one wheel repairer compared to another was principally due to price, service and workmanship. Accordingly, the evidence accepted by the trial judge was not improbable. In my view, there is no reason to think that her Honour erred in this regard.
The appellant contended that in picking up and delivering perhaps 20 wheels, the respondent was ‘employed … or otherwise engaged in’ ACE’s business. I accept that the fact that the respondent’s acts were not conducted for monetary reward does not preclude the conclusion that the respondent breached the restraint of trade clause.[5] Nevertheless, in my view, the clause was designed to catch something more than casual assistance with respect to an insignificant portion of a competing business.[6] As Brooking J said in Pioneer Concrete Services Ltd v Galli:
In determining whether, as a matter of construction, the covenant extends to these acts, it is relevant to consider what harm is likely to be done to Apex by their commission. If the acts are not likely to injure the business which was in effect the subject of the sale, and certainly if they were not likely to injure Apex or Pioneer in any way, then it is less likely that the parties intended to prohibit them. [7]
[5]Parnelll v Dean (1990) 31 OR 517.
[6]C & S Constructions Pty Ltd v Dawson (1991) ATPR 4-148, 53111 (Waddell CJ in Eq).
[7][1985] VR 675, 691.
Counsel for the appellant submitted that the evidence of the private investigator that the respondent accepted delivery of a wheel and quoted a price for its repair founded the inference that the respondent regularly serviced customers of ACE and thus was ‘employed … or otherwise engaged in’ ACE’s business. I am not prepared to draw the inference, particularly as counsel cross-examining the respondent chose not to ask him whether he had serviced any other customer.
The final allegation of the appellant that a particular act constituted a breach of the restraint of trade clause was that the respondent advised or influenced ACE. The allegation was based upon the respondent’s visits to ACE’s premises three to four times a week and the fact that he picked up and delivered wheels for ACE. It was submitted that it was ‘inconceivable’ that the respondent did not give his son and Hathaway advice and counsel. In effect, the appellant sought to build upon the limited evidence of the respondent’s acts relating to ACE’s business by inviting this Court to draw the conclusion that the respondent played a significant role in the business and find that the respondent’s evidence that he did not advise or influence his son or Hathaway was false. Once again, the appellant sought to supply a want of evidence with inference based upon what it contended was likely, contrary to the sworn evidence of the respondent, his son and Hathaway. In my opinion the inference is not open in the face of the findings of the trial judge.
Cumulative effect of the respondent’s acts
The foregoing recitation of the allegations of particular acts constituting breaches of the restraint clause leads me to the contention, which was at the forefront of the argument advanced by the appellant in its written outline of submissions, that ‘the trial judge failed to adequately consider the factual findings she made (and the evidence overall) cumulatively’.
The appellant’s submissions ran together two concepts. The first was the weight which a combination of proven facts may have in supporting an inference to be drawn from the facts. In a case depending upon circumstantial evidence, it is an error to consider each item of circumstantial evidence in isolation from the others and seek to determine whether the ultimate fact can be inferred from each such item of evidence. The evidence is to be considered as a whole in order to determine whether the ultimate fact has been established.
Thus in Transport Industries Insurance Co Ltd v Longmuir[8] the Court of Appeal held that a trial judge erred in considering separately each item of evidence led by an insurer seeking to prove that the insured had deliberately set fire to his house. The evidence was that the insured was on the property immediately before the fire started, that he had stored there a large amount of petrol, which had been used to start the fire, and that he was in the midst of a bitter matrimonial dispute which involved the property. As Tadgell JA said:
A true picture is to be derived from an accumulation of detail. The overall effect of the detailed picture can sometimes be best appreciated by standing back and viewing it from a distance, making an informed, considered qualitative appreciation of the whole. The overall effect of the detail is not necessarily the same as the sum total of the individual details.[9]
[8][1997] 1 VR 125.
[9]Above, 141.
In the present case the appellant sought not to accumulate a number of items of evidence to prove an ultimate fact, but rather to conclude that because on one occasion the respondent performed an act, for example, accepting delivery and quoting for the repair of a wheel, that it was to be inferred that he did so more often than the evidence disclosed or that because the respondent engaged in particular conduct, for example that he visited ACE’s premises and occasionally picked up and delivered wheels for ACE, that it was to be inferred that he engaged in other but related conduct, namely, that he advised and influenced his son and Hathaway in the conduct of ACE’s business. In my opinion, the trial judge did not err in considering separately the evidence with respect to each allegation for the purpose of determining the ultimate fact constituted by the allegation.
The second concept was the aggregation of a number of discrete acts for the purpose of concluding that those acts constituted an activity. The activities in the present case were those proscribed by the restraint of trade clause, namely,
· being employed in;
· carrying on;
· being financially or otherwise engaged in;
· advising;
· influencing;
· establishing or;
· being interested in
a competing business, and
· soliciting;
· canvassing;
· approaching
any customer of the appellant.
In determining whether the restraint clause was breached, I do not think it is permissible to lump together all the acts of the respondent established by the evidence and invite the Court to conclude that they all contribute to the conclusion that the respondent breached the agreement. Different parts of the evidence related to particular parts of the restraint of trade clause. For example, an issue in the proceeding was whether the respondent was employed in a competing business. That question required an evaluation of the evidence of acts of the respondent which were capable of constituting that activity. The evidence that the respondent owned premises leased to ACE was not relevant to that issue. On the other hand, the evidence that the respondent collected and delivered wheels, took delivery of a wheel and quoted for its repair and frequently attended at ACE’s premises was relevant to the issue. Another issue was whether the respondent canvassed the
appellant’s customers. It was not material to that issue that the respondent’s money was lent to ACE or that his premises were leased to ACE or that he conducted research into equipment that ACE might purchase. What was material was that the respondent telephoned and visited customers of the appellant.
The issue to which the most evidence was relevant was whether the respondent established ACE’s business. The respondent played a part in the provision of premises and some seed capital, which assisted ACE to establish its business. The occasional collection and delivery of wheels in the early stages of ACE’s business also related to the issue. In my opinion the cumulative effect of the acts did not amount to establishing the business. Other premises and loans were available. The premises apparently offered no particular advantages to a wheel repairing business, for the appellant gave up the premises after using them only for storage. The terms of the loan and the lease were favourable to ACE, but overall I think the benefit was marginal, as was the limited assistance constituted by collecting and delivering some wheels. I think that the restraint clause was not intended to catch acts which were helpful but far from essential in the establishment of a competing business. Clause 14 forbade establishing a competitive business. It did not in terms proscribe assisting in establishing a competitive business.[10]
[10]Compare Batts Combe Quarry Ltd v Ford [1943] 1 Ch 51, where the vendors of a business covenanted not to ‘carry on or assist in carrying on’ a competing business.
In my opinion, the limited aggregation which the issues and the evidence permitted did not disclose a breach of the restraint of trade clause.
For the foregoing reasons, I would dismiss the appeal.
NEAVE JA:
I have had the advantage of reading the draft reasons of Buchanan JA and Robson AJA.
I agree with their Honours that the respondent’s collection and delivery of wheels on 20 occasions over a period of 14 months did not, standing alone, amount to a breach of the covenant not to ‘otherwise engage’ in a business competitive with the appellant’s business. A more systematic and sustained involvement in this activity would have amounted to such a breach.
In my view, the combined effect of the respondent agreeing that his wife would lend seed capital to the business from their joint pension fund, the grant of a lease to the business on favourable terms and the respondent’s involvement in collecting and delivering wheels to customers, came very close to establishing a breach of the covenant not to ‘otherwise engage’ in any undertaking which carries on a business competitive with that of the appellant. The fact that the business could have obtained a lease from another landlord, or borrowed money from a different lender, does not necessarily detract from that conclusion.
However, having regard to the helpful summary of the case law set out in the reasons of Robson AJA,[11] I am persuaded that this appeal should be dismissed.
[11]At [74].
ROBSON AJA:
Introduction
I have had the advantage of reading in draft the reasons of Buchanan JA. I agree with him that the appeal should be dismissed for the reasons he gives.
As Buchanan JA discloses, Mr Radford did provide some assistance to his son and Mr Hathaway to establish and operate a competing business. I wish to add some observations on why, in my view, that assistance did not infringe the restraint of trade covenant. In particular, I will examine the meaning of ‘being interested in’, and ‘being employed in’ a competitive business as those terms are used in the
restraint covenant. In my view, consideration of the meaning of these terms also throws light on the approach to the interpretation of ‘carrying on’, ‘being financially or otherwise engaged in’, ‘establishing’ and ‘influencing’ as these terms are used in the restraint covenant.
Interested in
The leading authority on the meaning of the term ‘interested in’ in a restraint of trade clause is a decision of the English Court of Appeal, Smith v Hancock.[12] This case has been cited with approval in numerous cases, including Pioneer Concrete Services Ltd v Galli[13] and Hunt v Pascoe[14] in Australia.
[12][1894] 2 Ch 377.
[13][1985] VR 675, 707.
[14](1990) NSWLR 10, 21.
In Smith v Hancock[15] the defendant, who had been carrying on the business of a grocer under the name and style of ‘TP Hancock’, sold the business to the plaintiff, and entered into an agreement not to ‘carry on or be in anywise interested in’ any similar business within a specified area. About seven years later, the wife of the defendant, desiring (against his wishes) to start her nephew in business, opened a grocer’s shop within the specified area, and carried on business there under the name and style of ‘Mrs TP Hancock’. The business was managed by the nephew, and the defendant’s wife took some part in carrying it on; but the defendant took no part. The money necessary for starting the business was found by the wife out of her separate estate, and no money whatever was contributed by the defendant, either towards starting the business or carrying it on, nor did he share in the profits in any way. He, however, introduced his wife to his bankers, where she opened an account in her own name, assisted her in obtaining the lease of the shop in her own name, introduced the nephew to the wholesale merchants who had supplied the old business, and, as his wife was disabled by rheumatism from writing, wrote for her a circular inviting ‘old friends’ to come to the shop. He also handed copies of the circular to some few persons, including a tenant of his own.
[15][1894] 2 Ch 377.
The Court of Appeal, Lindley and A L Smith LJJ (Kay LJ dissenting), held that there had been no breach of the agreement by the defendant. On the issue of interpretation of the covenant, Lindley LJ identified the importance of the object of the clause and said it was not possible to extend the clause to make the defendant responsible for the conduct of others. He said:
The agreement, like every other agreement, must be construed with reference to the subject-matter to which it relates, and so as to give effect to, and not to defeat, the object to attain which the agreement was entered into. The object is plain enough: it was to secure the plaintiff from the competition of the defendant. But, although this is the object, it is not in accordance with sound legal principle to give the language of the agreement a wider interpretation than that language properly bears. The duty of the court is confined to enforcing the agreement entered into, and it is not permissible to extend it so as to make the defendant responsible either for the conduct of other people besides himself or for conduct which does not amount to carrying on or being in any way interested in one of the prohibited businesses. These principles are elementary, and their application to such cases as the present is well exemplified by the case of Bird v Lake[16].[17]
[16](1863) 1 H & M 111, 338; 71 ER 147.
[17][1894] 2 Ch 377, 383– 384.
Lindley LJ construed the restraint ‘being in anywise interested in’ as preventing the defendant from having any proprietary or pecuniary interest in the competing business. Lindley LJ said:
The utmost that can be said is that he has assisted his wife and [the nephew] to do what he agreed not to do himself. No honourable man would have done that …[18]
But he said that as a matter of law he could not say the defendant was breaking his agreement.
[18]Ibid 385.
A L Smith LJ said the covenant was not that the defendant would ‘not take an interest, whether from feelings of affection or friendship or whatnot, in how another may carry on his or her business within the prescribed limits.’[19] He said that to constitute a breach of the covenant ‘it must be proved that the covenanter 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.’[20]
[19]Ibid 391.
[20]Ibid.
At first instance, Kekewich J said that the interest must be an interest which touches a man directly giving him some right to interfere in the business or some means of gaining an advantage from it. He said:
It was argued on the part of the plaintiff that any interest, in the widest sense of the word, would be sufficient. I am glad to be interested in the professional success of my friends at the Bar. Surely that is not being interested in their business. I put it to Mr Tyssen the case, which I daresay is familiar to some of us, of a man advancing money to start his son in a trade or profession. Is he interested in his son’s business by reason of that advance? Yes, but I cannot concede that that is being ‘interested’ within the meaning of the word as used in this agreement. It is something more than that. No doubt, when a business is carried on by a wife, it is impossible that her husband should not be interested in the business, and in one sense he may even have a pecuniary interest in it, because, if the business fails, and the wife’s money is lost, he will have to make different provisions for his wife from those which he has made hitherto. But there, again, it would be stretching language far too much to say that he is in anywise interested in the business of his wife, within the meaning of an agreement such as this. It must be an interest, not necessarily in profits, but an interest which touches a man directly, giving him some right to interfere in the business, or some means of gaining an advantage from it, and not an interest of a domestic or sentimental character, such as in the illustration which I have given, and which are only intended to be illustrations, and not to be exhaustive. Beyond that I do not intend to define the meaning of the word.[21]
[21]Smith v Hancock [1893] 1 Ch 209, 216 – 217.
Bird v Lake (No 2)[22] was cited with approval by Lindley LJ in Smith v Hancock. In that case, in 1856 George Lake dissolved his partnership with George Hill under which they had carried on business as eating-house keepers in London. Under the dissolution, George Lake sold to George Hill all his interests in the partnership premises for £15,000 and agreed not to ‘carry on or be engaged in the trade or business of an eating-house keeper or any matter or thing whatsoever in anywise relating thereto’ within a certain distance.
[22](1863) 1 H & M 111; 71 ER 147, with material facts to be found at 71 ER 111.
Subsequently, Hill sold his interest to the plaintiff but agreed, if requested, to enforce the covenant given by George Lake. George Lake bought an eating-house with the intention of operating the business in the belief that he was entitled to do so if he paid £1,500 compensation to Hill. Hill would not accept the sum and Lake was subsequently advised that he could not conduct the eating-house. He thereupon sold it to his nephew, James Lake, for £8,000, of which £500 was paid down and George Lake undertook to advance a further £1,500 in fitting out the premises. George Lake obtained a mortgage of the premises to secure the whole of the purchase money and interest payable by instalments. George Lake knew that he had only the profits of the business to look to for payment.
The Vice-Chancellor, Sir W Page-Wood, held that there was nothing in the covenant to prevent George Lake from lending his money to any person on whose bond he might be content to rely, even though he might know that such borrower was about to open an eating-house within the prohibited district and there was really no security for the payment of his debt except the profits of the business. The Vice-Chancellor said that the covenant would extend to prevent Lake from acting as a director, manager, assistant and perhaps even as waiter, in such an establishment; but, he said, it was impossible to contend that he may not advance money to enable others to do so.[23]
[23]Ibid 149.
In Southland Frozen Meat & Produce Export Company Ltd v Nelson Brothers Ltd,[24] a decision of the Privy Council, the appellant alleged that the respondent was in breach of a restraint clause by which the respondent agreed not to ‘erect or assist, or be in any way concerned or interested in the erection of or use of freezing works at Bluff.’ The respondents nevertheless contracted to purchase all frozen meat produced at the freezing works at Bluff. The appellant argued that, by doing so, the respondent was in breach of the covenant.
[24][1898] AC 442.
Their Lordships said that the words of the covenant should be given their business meaning and not their wider possible dictionary meaning. They said having regard to the agreement, that it must be construed in a business fashion and;
that the words must not be applied to everything that might be said to come within a possible dictionary use of them, but must be interpreted in the way in which businessmen would interpret them, when used in relation to a business matter of this description.[25]
Their Lordships held that ‘the use’ means the manufacturing use and that a contract to buy all the produce of the works was not in any reasonable sense either an assisting in the use of the works, or being interested or concerned in the use of the works.[26]
[25]Ibid 444.
[26]Ibid 444-445.
In William Cory & Son, Limited v Harrison,[27] the respondent Harrison had sold a coal merchant business conducted in England (the home business) to the appellants and covenanted that he would not ‘solely or jointly with any other person either directly or indirectly carry on or be engaged or concerned or interested in the coal trade’ in the prescribed area. Subsequently, the respondent Harrison sold his export business, which he had retained, to J & C Harrison, Limited, receiving the purchase money in shares. That company then subsequently began to carry on a home business as well as an export business in the coal trade. It was argued that the respondent Harrison was ‘concerned and interested in’ the coal trade within the meaning of the covenant as he was a large shareholder in J & C Harrison, Limited and was therefore indirectly if not directly interested in the home and foreign profits of the company for payment of the price of the export business sold by him to J & C Harrison, Limited.
[27][1906] AC 274.
The action was dismissed at first instance on the authority of Smith v Hancock[28] and the decision at first instance was confirmed by the Court of Appeal. On appeal to the House of Lords, the Earl of Halsbury LC took a similar approach to the Privy Council in Southland Frozen Meat & Export Company v Nelson Brothers[29] and interpreted the clause having regard to the business meaning of the words. He said as follows:
My Lords, we are all of opinion that what is complained of here is not within the covenant. It would be absolutely impossible, I think, to lay down with precision what is or is not comprehended in such words as “interested or concerned in”. You must look at the facts of the particular case and look at the business meaning of the words. That is the question to be determined. What was the business meaning of these words, dealing with such a subject-matter as is dealt with by these agreements? To my mind it is impossible to say that the words of the covenant make this gentleman “concerned or interested in” this particular business.
The ambiguity arises when words so very wide in their extension are applied to a business of this character. The words “concerned or interested in” would, in popular signification, undoubtedly include a great deal more than could have been intended by the business meaning of this covenant. When it is put that you are interested if you lend money to a person, if you supply him with capital, if you do this, that and the other which enables a business to be carried on, in a certain wide sense it cannot be denied that you are “interested”; and “being interested” might include the fact that you are on affectionate terms with the person carrying on the business. But when you are dealing with the carrying on of a business and endeavouring to prevent the carrying on of that business directly or indirectly, or the having any part or concern in that business, I think every business man would quite comprehend that the mere fact of being a creditor of the firm is not being “concerned or interested in” it. 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. It appears to me that that is really the short point we have to decide, and, as far as I am concerned, I think there is no doubt that it is not within the covenant.[30]
[28][1894] 2 Ch 377.
[29][1898] AC 442.
[30][1906] AC 274, 275-276.
The decision of the English Court of Appeal in Batts Combe Quarry Ltd v Ford,[31] does not sit comfortably with the earlier decisions discussed above, which were not referred to by the Court of Appeal. In that case, two vendors had sold to the plaintiff a quarry and had agreed not to directly or indirectly ‘carry on or assist in carrying on or be engaged, concerned, interested or employed in the business of a quarry’ within a prescribed distance from the existing quarry. One of the vendors, within the limited time, provided a sum of money to enable this three sons to purchase a competing quarry and for working capital. He also took part on his sons’ behalf in preliminary negotiations for the purchase of machinery and equipment for the competing quarry. He was not a partner in the son’s business, nor in any way financially interested in it, and took no part in its management. It was held by Lord Greene, the Master of the Rolls (with whom Lord Clauson and Du Parcq LJ agreed), that by providing his sons with the capital to establish the business he had breached the covenant not to ‘assist in carrying on’. Lord Greene MR said:
I should have thought that those words [“assist in carrying on”] were wide enough to cover a person who provides the necessary capital to enable a business to be carried on. It is not merely the equipment of a business which is brought about by the provision of capital, but its whole life. In other words, the provision of the capital which is necessary to set up a business gives the business life, and its effects continue after the installation is complete for the simple reason that the business as carried on owes its origin entirely to the provision of the capital. I can think of no more effective way of assisting a person in carrying on his business than to provide for him free of charge the necessary equipment to enable him to begin the business.[32]
[31][1942] 1 Ch 51.
[32]Ibid 53.
He also said that apart from the words ‘assist in carrying on’, that the father was also ‘concerned in’ the sons’ business. He said the word ‘concerned’ is of a quite general import and clearly could not be limited to concerned in the sense of financial interest or being an employee of the business.[33]
[33]Ibid.
He also said that the word ‘concerned’ covers the assistance given by the father in the course of the negotiations. Finally, he held that the words ‘employed in the business’ covered the acts of the father in connection with those negotiations. He said that the part that the father took in those negotiations, representing his sons during their necessary absence in other work, was that of an agent or employee.[34]
[34]Ibid 53-54
Admittedly, Batts Combe does not deal with the term ‘interested in’. In this case, the word ‘concerned’ is not provided for in the covenant. There is also no prohibition against someone ‘assisting’ in carrying on a competitive business.
In Pioneer Concrete Services Ltd v Galli,[35] the Full Court of the Supreme Court of Victoria considered a restraint clause where the covenanter had agreed not to ‘carry on or conduct or be engaged in or be concerned or interested in’ any competitive business. The covenanter had undertaken preparatory works to starting a business but had not commenced to conduct the business. The Court held there was no business yet in existence and that, accordingly, the covenanter’s actions could not constitute a breach of the covenant not to do the prohibited acts in relation to any competitive business as no such business existed.
[35](1985) VR 675.
The Court (Crockett, Murphy and Ormiston JJ) said as follows:
To be “engaged in”, “concerned in” or “interested in” a business each involves a concept wider than carrying on or conducting the business but in our opinion they do not expand the meaning of “business” when used in conjunction with that word, at least not so as to lead to the conclusion that, if one is shown to have engaged in or been concerned or interested in a business, the covenant is broken at an earlier point of time than if it was confined to carrying on or conducting a business. To be “engaged in” is obviously wider than the earlier expression, covering mere employment: Ronbar Enterprises v Green.[36] The concept of being “concerned in” a business is even wider, perhaps the most vague of all the expressions, once being described as equivalent to “having something to do with” a business: George Hill & Co v Hill.[37] On the other hand, being “interested in” a business is a little more precise, connoting a proprietary or pecuniary interest in a business: Smith v Hancock[38].[39]
[36][1954] 2 All ER 266 at 268 – 69 ( Jenkins LJ).
[37](1886) 55 LT 769 at 771 (Kekewich J); cf William Cory & Son Ltd v Harrison [1906] AC 274, 275 – 276; and Allen v Tobias (1958) 98 CLR 367, 378 – 379.
[38][1894] 2 Ch 377, 386 (Lindley LJ).
[39]Pioneer Concrete Services Ltd v Galli (1985) VR 675, 707.
Both the Full Court and Brooking J, at first instance, considered the Batts Combe case at length. The Full Court observed that the covenant in the Batts Combe case extended to ‘assisting in’ carrying on a quarry business and that the judgments were unreserved.[40]
[40][1985] VR 675, 708.
In Schindler Lifts v Bebelak,[41] Pincus J of the Federal Court of Australia distinguished the Batts Combe case. The case concerned an employee restraint. Nevertheless, Pincus J considered whether providing a guarantee to secure a competitor’s borrowings and causing a sum to be lent infringed a restraint not to be ‘engaged in’ in competitive business. Pincus J observed that Lord Greene MR thought that the words ‘assist in carrying on’ covered provision of capital and that the father was ‘concerned in’ the business for the same reason. Pincus J said:
Although authorities of this kind can help, there are dangers in approaching the problem by considering whether there is a justification for distinguishing an earlier decision; the important thing is to concentrate on the words these parties have actually used. But if it is necessary to overcome the obstacle of the Batts Combe case, it has to be pointed out that the words relied on by the court there did not include “engaged in”. Reading the words used here, in their context, I hold that the mere provision of finance did not constitute being engaged in the business of Liftronic. A person who lends money for the establishment or carrying on of a business does not thereby engage in that business, nor does one who procures a loan for a business necessarily engage in it by so doing.[42]
[41](1989) 89 ALR 275.
[42]Ibid 308.
In Hunt v Pascoe,[43] the plaintiff held an indirect interest in a motel, which had been sold to him by the defendants. The defendants had agreed that they were not to ‘carry on or be engaged in or interested in the operation’ of a competitive motel. Young J said it was common ground that the word ‘interested’ in such a covenant means a person who has a proprietary interest. Young J said that it was fairly common ground that it is not enough that the covenanter takes an interest in the success of another carrying on a business, for instance, by being the husband of the person carrying on the business. He referred, amongst other cases, to Smith v Hancock,[44] William Cory & Son Ltd v Harrison[45] and Batts Combe Quarry Ltd v Ford.[46]
[43](1990) 21 NSWLR 10.
[44][1894] 2 Ch 377.
[45][1906] AC 274.
[46][1943] Ch 51.
Counsel for the defendant submitted that a creditor who is aware that the debtor has no means of paying his debts except out of the profits of a business is not interested in the business unless there is a charge.[47] In support of that proposition, Bird v Lake[48] was cited. Young J did not accept the proposition in an unqualified form. He said he considered that the decision in Bird v Lake was correct in principle at least in its widest form.[49] He referred, however, to criminal cases concerning persons living off the earnings of prostitutes which could arise where the accused provided a room for the use of a prostitute at a very high rent and uncommercial rent, earning income from her activities, and thus had an interest in her activities. Young J concluded:
n my view, the true rule is that just because a person is a landlord does not mean that the person is interested in the business being carried on by his tenant in the premises. However, it is going too far to say that the relationship between landlord and tenant precludes the Court holding that the landlord is interested in the tenant’s business. It may be, from a consideration of all the aspects of the relationship between the parties, that the court may conclude that the person who is the landlord does have such an interest.[50]
Young J went on to find that in the case before him, which was an application for an interlocutory injunction, there was not sufficient evidence to suggest that the landlord did in fact have an interest in the leased competing premises, but on the balance of convenience he refused the injunction.
[47]Hunt v Pascoe (1990) 21 NSWLR 10, 14.
[48](1863) 1 H & M 338; 71 ER 147.
[49](1990) 21 NSWLR 14, 14.
[50]Ibid 15.
Finally, I return to Smith v Hancock.[51] In that case A L Smith LJ assessed the defendant’s conduct by posing it as being done with a stranger rather than a relative. He said:
If the husband had performed similar acts in like circumstances for a stranger who was setting up business on his own account, in my judgment, it could not be said that he was in anywise interested in the business, though he had interested himself on behalf of the stranger.[52]
[51][1894] 2 Ch 377.
[52][1894] 2 Ch 377, 391-392; see also Gophir Diamond Company v Wood [1902] 1 Ch 950 at 952 – 953 where Swifen Eady J applied the same approach.
In my view, the imposition of a stranger is a helpful tool to keep in mind when assessing the covenanter’s conduct and is of use in this case.
Relevant Principles
From an examination of these cases, several principles on construction of a restraint clause emerge:
(1) Each restraint clause must be interpreted having regard to its particular terms, but in a business contract usually one should look at the business meaning of the words.
(2) The words ‘interested in’ as they appear in restraint clauses are normally interpreted not to include interest arising through personal affection or family relationships, but are limited to having a financial interest or perhaps an interest which gives a person some right to interfere in the business or the means of gaining some advantage from it.
(3) The mere loaning of money or leasing of premises will usually not by itself constitute being interested in a business, but the relationship of landlord and tenant and lender and borrower does not necessarily preclude the landlord or lender having an interest. The terms of a lease or the terms of a loan may be such as to constitute the landlord or lender having an interest in a business.
(4) Unless the restraint otherwise expressly provides, the family relationship between the covenanter and the person he or she assists usually should not lead to the characterisation of the conduct alleged to be in breach if it would not be so with a stranger.
Application of relevant principles
Mr Radford agreed to lease premises that he knew were to be used to establish and operate a competitive business. The tenants agreed to pay a commercial rent and did once the business began. Mrs Radford had indicated to the tenants that they need not pay any rent until the business became profitable. Assuming Mr Radford was a party to this concession, did his actions in leasing the premises on those terms constitute a breach of the restraint?
Consistently with the authorities and having regard to the purpose of the restraint, the term ‘interested in’ must relate to some business or commercial interest as opposed to a personal interest. In my opinion, the arrangement entered into by Mr and Mrs Radford did not give Mr Radford an interest in the business in the sense used in the restraint. At its very highest, Mr Radford may be said to have a pecuniary interest, just as a creditor may have a pecuniary interest in his or her debtor being able to pay the debt. On the other hand, he did not have any right to interfere in the business or to gain some advantage from it. He was not to share in the fruits of the business.[53]
[53]Smith v Hancock [1893] 1 Ch 209, 217 (Kekewich J).
The appellant contends that the role that Mr Radford played in the loan of moneys to Jason Hathaway constituted a breach of the restraint. As indicated above, Mrs Radford lent moneys which included moneys jointly owned by Mr Radford. I assume that Mr Radford’s consent was required for her to use these moneys. Nevertheless, the loan was by Mrs Radford and not Mr Radford. It was Mrs Radford who took a share in the partnership which was to be converted to a debt, not Mr Radford. Mr Radford’s giving consent does not constitute him ‘being interested’ in the competitive business or ‘establishing’ a competitive business.
Employed in
I am also of the opinion that Mr Radford’s assistance in the operating of the business by opening the premises in the morning, by doing occasional pick-ups and deliveries did not constitute him being directly or indirectly employed in a competitive business. His actions were isolated and not systematic. When one has regard to the terms in the restraint in a business sense, these isolated acts cannot be characterised, in my opinion, as Mr Radford being employed in a competitive business. I accept that the word ‘employed’ goes beyond merely an employee or an agent and may even include a person who was otherwise engaged or occupied in the business. A courier who makes isolated deliveries on behalf of the business cannot be properly described as being employed in the business. In my opinion, to be employed at a business requires more than an ad hoc isolated assistance, but some conduct which can be described in a business sense as being employed in the business. The fact that Mr Radford was related to one of the business owners does not convert what would otherwise not offend the clause to a breach of the clause.
Costs
In Smith v Hancock,[54] Lindley LJ, although finding for the defendant Mr Hancock, described his actions as dishonourable in assisting others to do what he had agreed not to do himself. Although the plaintiff lost the appeal, Lindley LJ said no order as to costs should be made. Concepts of honour might be thought to play little part in a contractual dispute. Nevertheless, on the question of costs, the Court has a discretion and may not award a successful defendant his costs where his conduct has induced the plaintiff to bring the action and without which it would probably not have been brought.[55] It is unnecessary for me to restate all the evidence that connected Mr Radford with his son’s business. It might be submitted that Mr Radford was paid a very large sum not to compete and he has only himself to blame for this action. Accordingly, I would hear the parties on the question of costs.
[54][1894] 2 Ch 377, 387.
[55]Verna Trading v New India Assurance [1991] 1 VR 129, 151 – 156.
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