Queensland Judgments
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GBAR (Australia) Pty Ltd & Ors v Brown & Ors

Unreported Citation:

[2016] QSC 234

EDITOR'S NOTE

The extent to which a restraint of trade clause will be enforced is an area of law under constant development.  In this recent decision of his Honour, Justice Lyons, on an application for an interlocutory injunction to enforce covenants in restraint of trade given by an individual the court had reason to consider the circumstances and extent to which these clauses are enforceable.  A brief summary of the facts giving rise to this matter follows. 

The respondent, an individual, was the sole director and shareholder of an asbestos removal business.  In 2013 the applicant was incorporated for the purpose of purchasing the respondent's business, this transaction being effected by the allocation of 20 per cent of the shares in the respondent.  As part of this transaction, three agreements were entered into:

1.a contract for the sale of the respondent's company, including its goodwill was executed.  This contract included a clause restricting the respondent's company from competing with the applicant for a period of three years;

2.an employment agreement whereby the applicant employed the respondent; and

3.an option deed whereby the respondent's company granted an option to purchase its shares in the applicant for a sum if the respondent's employment was terminated within three years.

Approximately 18 months later in January 2015 the respondent decided to terminate his employment with the applicant.  After negotiations, a settlement agreement was reached between the parties (Settlement Agreement).  This agreement included a restraint clause which, in summary, restrained the respondent from being interested directly or indirectly in a business similar to or in competition with the applicant.  The respondent has since commenced business providing asbestos removal services, and the applicant, by this action and in reliance upon the relevant restraint clause in the Settlement Agreement, sought to restrain this conduct.   [2]–[13]. 

In reaching a decision on this application, the court considered a number of issues, including:

1.the “nature” of the interest to be protected by the relevant restraint clause;

2.the enforceability of the restraint if it was to be regarded as an employee’s covenant; and

3.the enforceability of the restraint if it was to be regarded as a vendor's covenant.

Nature of the Interest

Given the well-established differences between the enforcement of restraint of trade clauses for the benefit of employers, as opposed to the purchaser of a business, in considering the enforceability of the restraint imposed by the Settlement Agreement, the court first considered whether, in the circumstances, the clause sought to protect the employer's interests or the goodwill of the business sold, see Vision Eye Institute Ltd v Kitchen.  [26]. 

In arguing that the transactions which occurred in January 2015 ought to be regarded as a sale of goodwill, the applicants relied upon the court's decision in Pioneer Concrete Services, where it was held that where a sale of a business carried on by a company is effected by means of a sale of the issued capital of the company, “it is commonplace … to require that promises on the part of the vendors be given [both] to the purchaser … [and] the company whose shares are the subject of the sale”.  [31].  In reflecting upon this submission, his Honour noted, however, that critical to this reasoning was the extent of the interest acquired, and that for this reasoning to hold the purchase would need to be of a controlling shareholding in that company. [34].  Further, though a sale of an asset effected through the sale of shares in a company tends to suggest that it is a sale of a business and / or its goodwill, that a transaction is effected in this manner, as it was in the matter presently before the court, is not decisive. [47]. 

Turning to the facts before the court, his Honour concluded that the sale of shares in January 2015 was ancillary (secondary) to the termination of the employment of the respondent.  [48].    On the facts it appeared that the goodwill was no longer the property of the respondent, and further that the goodwill was substantially under the control of the applicant.  Id.   Given that the primary transaction related to the employment of the respondent, his Honour considered that the validity of the restraint imposed ought to be assessed by the principles relating to an employer and an employee, and not those relating to the vendor and purchaser of a business.  [49]. 

Enforceability if regarded as an “employee's covenant”

Analysed in this light, the court considered that the restraint extended well beyond what was reasonable to protect the interest in question, namely the applicant's interest as an employer of the respondent.  [51].  In particular the court noted that, on the evidence before him, the only interest the applicant might seek to protect was the respondent's connection with customers.  In this regard the court considered that the restraint, extending as it did to restraining the respondent from having even an indirect interest in a competitor even where he had no active involvement with the business could not be regarded as reasonably required to protect the applicant's relationship with its customers.  Id.  For this reason the court concluded that the applicants had weak prospects of establishing that the restraint was enforceable.  [52].

Enforceability if regarded as a “vendor's covenant”

Given the interlocutory nature of the application, and that the court did not consider the applicants had no prospect of establishing that the restraint clause should be assessed by reference to the principles applicable to the sale of a business, his Honour then considered whether, if it was held that the restraint clause in the Settlement Agreement sought to protect the goodwill of the business sold, whether it went to beyond what was reasonable to protect that interest, and in particular whether that interest extended to the potential future expansion of the business. 

The reasonableness of a restraint is determined by reference to the circumstances at the date when the parties entered into the relevant agreement,   [54], see further Vision Eye Institute.  Further, the “scope” of any covenant cannot be more extensive than that of the business sold, [56], though it is not necessary for the purchaser to demonstrate, particularly in the case of a large business, that the business was conducted in every part of the area identified in the covenant. [57].  A person who buys a business may be able to take up a covenant against competition covering the area of the potential expansion of the business based on its having goodwill at the time of the sale which extends beyond its current operating area, or the area of potential expansion by way of further penetration into an area in which the business already operates. [41]–[44], [68].  Such covenants, however, must not extend beyond the “conveyed goodwill full-grown”.  [61], see also Hall Manufacturing Co v Western Steel & Iron Works; McAllister et al v Cardinal

Applying these principles to the facts, his Honour concluded that the area of the restraint sought, being a restraint across the entire country, was unreasonable.  At the time of the entering into of the Settlement Agreement, the business was only conducted in Queensland and Western Australia.  In addition to this, the applicant was unable to establish that its “goodwill” extended beyond a relatively confined area in South-East Queensland and, to a lesser extent, Perth.  [70]–[73].  On this basis, the court considered that even a vendor's covenant extending over such an area was unreasonable, and was unlikely to be enforceable. 

For these reasons, the court dismissed the applicant's interlocutory application. [92]. 

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