Dooley v Scotney[2010] QSC 179

SUPREME COURT OF QUEENSLAND

HER HONOUR:  This is an application by the plaintiffs against the defendants for an interlocutory injunction to restrain breaches of covenants in restraint of trade.

In September 2001 the first and second plaintiffs, Dooley and McKenna, and the first defendant, Scotney, set up an industrial cleaning business based in Townsville called "Clean It Group".  The business was operated by three corporate entities as trustees for unit trusts.  The beneficiaries of the trusts were companies which in turn were trustees for the Dooley, McKenna and Scotney Family Trusts.

The second defendant Papillon Enterprises Pty Ltd was trustee of the Scotney Family Trust.  McKenna and Dooley managed the practical aspects of the business, such as sourcing and developing appropriate equipment, sourcing clients and jobs, managing client relationships and managing the operational aspects of the business.  Scotney managed the finance and accounting aspects.

With effect from 31 August 2006, Scotney and Papillon sold their interests in the business to Dooley, McKenna and their related companies.  The sale was effected by two agreements -  one, a share sale contract by which Scotney was paid $938.62 for his shares and, two, a unit sale contract by which Papillon was paid $958,656 for its units in the unit trust.

The contracts contained identical covenants in restraint of trade and confidentiality obligations.

"7.1  The Vendor and all Associated Persons and entities from the Payment Date, must not within a 500km radius of the city of Townsville for a period of 5 years or the maximum time permitted by law:-

(a)engage in any business or activities the same as or similar to otherwise competitive with the Business or any material part of it;

(b)solicit, canvass or induce or encourage any person who has at any time been a director, employee or agent of the Vendor to leave the employment or agency of the Purchaser;

(c)solicit, canvass, approach or accept any approach from any person who was a customer of the Vendor with a view to obtaining the custom of any such person in a business which is the same as or similar to the Business;

(d)interfere with the relationship between the Companies, its clients, employees, suppliers or customers;

(e)engage in, participate, assist or otherwise be directly or indirectly involved as a member, shareholder or unit holder, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier any of the actions referred to in subclause 7.1(a) to 7.1(d) inclusive."

"Associated Person" means:

(a)In relation to a corporation, any related corporation, director or substantial shareholder (as that term is defined in Section 708(4) of the Corporations Act 2001 assuming that the corporation is a company within Section 708(1) of the corporation; and

(b)In relation to a natural person, any spouse, or blood or adopted relative of that person or that person's spouse.

There was also a clause dealing with severance, clause 19:

"19SEVERANCE

19.1If any provision(s) of this Agreement shall be determined to be invalid and not enforceable in accordance with its terms the provisions which are self-sustaining and capable of separate enforcement without regard to the invalid provision(s) shall be and continue to be valid and enforceable in accordance with their terms."

In this application the plaintiffs seek to restrain conduct allegedly in breach of clause 7.1 of each contract.  The application is for an interlocutory injunction.  The applicants must establish that there is a serious question to be tried, that damages would not be an adequate remedy and that the balance of convenience favours granting the injunction.

The validity of a covenant in restraint of trade turns on reasonableness - reasonableness inter partes and reasonableness in the public interest - see Nordenfelt [1894] AC 535.  The question of reasonabless is to be determined as at the date the contract came into effect (31 August 2006).  The applicants bear the onus of establishing reasonableness inter partes, and the respondents bear the onus of establishing unreasonableness in the public interest.

The validity of the restraint is not for final determination on this application.  The applicants have merely to establish that there is a sufficiently strong argument in favour of validity for there to be a serious question (as to validity) to be tried - see Rich v BDO Kendalls [2007] QCA 147.

The restraint is "within a 500 kilometre radius of the City of Townsville for a period of five years or the maximum permitted by law."  The plaintiffs contend - and I did not understand the defendants to dispute - that on its proper construction the clause provides for a maximum of five years from 31 August 2006.

The plaintiffs contend that it contains two concepts: five years and such lesser period as the Court would allow.  They contend that if the latter is invalid, at trial it would be severed or it would be treated as adding nothing to the five year maximum - see Maggbury Pty Ltd v Hafele Australia Pty Ltd [2000] QCA 172 at paragraphs 19 to 20.

The defendants concede, for the purposes of this application, that were the restraint simply for five years over a 500 kilometre radius of Townsville, there would be a sufficiently strong argument as to its validity for there to be a serious question to be tried.  But they contend it is invalid on two grounds:  (a) uncertainty - the obligation is not clearly enough defined; and (b) public policy - it leaves it to the Court to fix the measure of the restraint - see Davies v Davies (1887) 36 Ch D 359 and JQAT Pty Ltd v Storm (1987) 2 Qd R 162.  They submit that severance is not open because the clause contains only one concept - five years or such lesser period as the Court allows.  They refer to Brew v Whitlock (No 2) [1967] VR 803 at 808.  The plaintiffs seek to counter this by reliance on clause 19.

The plaintiff submitted further that whether the restraint is void is a "facts sensitive issue" which should be determined at trial.  While the factual matrix in which an agreement was reached is relevant to its interpretation, counsel for the respondent/defendants' observation that the plaintiffs have not pointed to any background facts which might bear on the interpretation of the restraint is apposite.  In my view, it was for the applicants to raise such facts if they contended they were relevant to the interpretation of the restraint.

The critical question on this application is whether there is a sufficiently strong argument that the offending words could be severed so as to give rise to a triable issue as to the validity of the restraint.  Severance can apply only when the only changes are those made by running a blue pencil through the offending parts:  that is, only in cases where the two parts of a covenant are expressed in such a way as to amount to a clear severance by the parties themselves and as to be substantially equivalent to two separate covenants.  Severance must not alter the nature of the original contract.  See Heyden:  The Restraint of Trade Doctrine 3rd edition pages 285 to 286.

Here the duration of the restraint has not been left completely to the Court's determination.  If it were, it would be invalid as against public policy - see Davies v Davies.  Nor is this a series of cascading alternatives which, provided they were sufficiently certain, might be capable of severance - see JQAT Pty Ltd v Storm and Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 72 ALR 643.

Rather the covenant is expressed as five years or the maximum permitted by law.  In my view this sets clear alternatives and it is possible to apply the blue pencil to the latter.  Thus I think severance is sufficiently open for there to be a serious question to be tried.  Moreover, where it is conceded, for the purposes of the application, that there is a sufficiently strong argument that a restraint for five years over a 500 kilometre radius from Townsville would not be unreasonable and that on its proper construction the clause means five years or such lesser period as the Court would allow, I think the clause could be read down by ignoring the offending words on the basis they add nothing.

So, despite the reservations I expressed in the course of argument, I have come to the view that the case on validity is a fairly strong one. 

I come then to the question of breach.  In my view, if the clause is valid, there is a serious question to be tried as to its breach.  In about March 2009 a new competitor entered the market - Complete Environmental Solutions Pty Ltd ("CES").  The sole shareholder of CES is D. Roy Pty Ltd.  D. Roy Pty Ltd is a company related to Damien Roy, a former employee of the Clean It Group.  CES operates out of property owned by Wildam Pty Ltd.  Scotney is the sole director and secretary of Wildam Pty Ltd.  Its shareholders are Papillon Enterprises Pty Ltd (the second defendant) and D. Roy Pty Ltd.  CES operates equipment leased from Mammoth Townsville Pty Ltd ("Mammoth").  Scotney is the sole director of Mammoth and Papillon Enterprises Pty Ltd is its sole shareholder.  Mammoth leases all the equipment it owns to CES.

An Environmental Protection Authority licence is required to operate the equipment.  To date Mammoth has held such a licence, but CES has not. 

When challenged about his involvement with CES in May 2009, Scotney made a deliberately false denial.  He has now admitted involvement. 

The plaintiffs engaged a private investigator, who reported in January 2010.  In March 2010 they found out that the EPA licence was held by Mammoth.  On 6 April 2010 they commenced this proceeding and filed the application for an interlocutory injunction.

I have to consider whether damages would be an adequate remedy and where the balance of convenience lies.  I do not accept that it would not now be possible to quantify the value of the impact of the breach on Clean It Group's business.  As at October 2006, the goodwill of that business was valued at $2.5 million.  It seems to me that an assessment of the value of the work undertaken by CES and of the probability that the Clean It Group and not some other competitor would have won that work could be the basis for an assessment of damages.

It is true that Scotney's false denial is a cause for doubt about the efficacy of the disclosure process.  It is certainly a reason for particular scrutiny of disclosure.  But I am not satisfied it would put the value of that process at nought, and I did not understand senior counsel for the applicants to submit that it would. 

On the material there is reason to doubt whether Scotney and Papillon Enterprises Pty Ltd could satisfy a damages award. 

These factors lead me to conclude that there is substantial doubt whether damages would be an adequate remedy. 

The new business was commenced about halfway through the period of the restraint.  It has been trading a little over a year.  All but one of the vehicles used in that business has been leased since May 2009:  that is, since Scotney's false denial.

On the one hand the applicant's delay in making inquiries and commencing this proceeding has been unexplained and to grant an interlocutory injunction would upset the status quo pending trial.  But on the other hand, as counsel for the applicants submitted, Scotney's false denial has at least contributed to the establishment of that status quo.

Those involved in the CES operation have obligations with respect to the leases, ultimately being obligations to a financier.  The plaintiffs are willing to assume those obligations to avoid default by Mammoth, although of course there is no guarantee that the financier would agree to such an arrangement.

There is no evidence of the effect on third party rights of an injunction, including no evidence of the rights of the various companies inter se should CES fail. 

The strength of the case on validity feeds into the balance of convenience and, as I have said, I think it is a fairly strong case.

Weighing all of these factors, I have concluded that the balance of convenience favours the grant of an interlocutory injunction.  So the matters upon which I need to hear from counsel are these:  a confirmation that the applicants proffer the usual undertaking as to damages, the form of the undertaking to meet the lease payments, the form of the interlocutory injunction generally and costs.

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HER HONOUR:  In those circumstances I will reserve costs.

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