FEDERAL COURT OF AUSTRALIA

Findex Group Limited v McKay [2020] FCAFC 182

Appeal from:

Findex Group Limited v McKay [2019] FCA 2129

File number(s):

NSD 72 of 2020

Judgment of:

MARKOVIC, BANKS-SMITH AND ANDERSON JJ

Date of judgment:

29 October 2020

Catchwords:

PRACTICE AND PROCEDURE – whether the appellants sought to advance submissions not advanced below and which depart from the manner in which the case was run before the primary judge – arguments now put by the appellants on appeal raise matters not developed to same extent below – no objection to appeal in respondent’s written submissions – no prejudice to first respondent if appellants permitted to advance arguments on appeal – appeal arguments concern questions of law and raise no new facts – expedient and in the interests of justice to entertain arguments put on appeal

CONTRACTS restraint of trade provision in a shareholders agreement – whether the primary judge erred by failing to give restraint of trade clause a “commercial construction” – principles relating to the interpretive task – on a proper interpretation, the primary judge’s interpretation was not erroneous – Court must give effect to the unambiguous terms used by the parties – there is no power to remake or amend the contract to avoid a result which is considered to be inconvenient or unjust – commercial common sense not to be invoked retrospectively – mere fact of an undesirable result is no reason to depart from the natural language of the agreement

CONTRACTS – whether the primary judge’s interpretation was erroneous in that it failed to appreciate that the restraint of trade provision contained separate groups of restraints by “Covenantors” and “Affiliates” – the primary judge’s construction contains no such error – the appellants’ interpretation approaches the question of construction with the benefit of hindsight, and not as at the date of the restraint’s creation – text and structure of restraint’s chapeau does not indicate independent and separate restraints as contended by the appellants – appellants proposed interpretation inconsistent with another clause in shareholders agreement, cl 20.5

CONTRACTS – severance – principles relating to severance – whether a part of the chapeau to the restraint of trade provision can be severed in manner contended by the appellants – severance not possible in manner advanced by the appellants – part of the chapeau to the restraint of trade provision cannot be severed consistently with principles relating to severance

CONTRACTSenforceability – whether the restraint of trade provision is valid and enforceable – the primary judge did not fail to properly construe the restraints – primary judge was correct to conclude that the restraints are not enforceable because they are unreasonable

Legislation:

Corporations Act 2001 (Cth), s 9

Federal Court Rules 2011 (Cth), r 16.08(b)

Cases cited:

Adamson v NSW Rugby League Ltd (1991) 31 FCR 242

Attwood v Lamont [1920] 3 KB 571

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99

Branir Pty Ltd v Owston Nominees (No 2) [2001] FCA 1833

Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432

Butt v Long (1953) 88 CLR 476

Charben Haulage Pty Ltd v Environmental & Earth Sciences Pty Ltd [2004] FCA 403

Clarke v Newland [1991] 1 All ER 397

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337

Coopers Brewery Ltd v Lion Nathan Australia Pty Ltd (2005) 93 SASR 179

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

Findex Australia Pty Ltd v McKay [2019] FCA 335

Findex Group Limited v McKay [2019] FCA 2129

Fitzgerald v Masters (1956) 95 CLR 420

Geraghty v Minter (1979) 142 CLR 177

Haynes v Doman [1899] 2 Ch 13

Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310

Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526

Hume Steel Limited v Attorney-General for Victoria (1927) 39 CLR 455

IF Asia Pacific Pty Ltd v Galbally [2003] VSC 192

Just Group Limited v Peck [2016] VSCA 334

Koops Martin v Dean Reeves [2006] NSWSC 449

Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate [2015] FCAFC 99

Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026

Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505

Marion White Ltd v Frances [1972] 1 WLR 1423

Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104

New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski [2011] FCAFC 106

Oceanview Developments Pty Ltd trading as Darwin River Tavern & Darwin River Supermarket v Allianz Australia Insurance Ltd trading as Territory Insurance Office [2020] FCA 852

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451

Pan Foods Company Importers and Distributors Pty Ltd v Australia and New Zealand Banking (2000) 170 ALR 579

Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111

Qube Ports Pty Ltd v Maritime Union of Australia [2018] FCAFC 72

Rentokil Pty Ltd v Lee (1995) 66 SASR 301

Sandoz Pty Ltd v H. Lundbeck A/S [2020] FCAFC 133

Software AG (Australia) Pty Ltd v Racing & Wagering Western Australia [2009] FCAFC 36

SST Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

Trust Co (Nominees) Ltd v Banksia Securities Ltd [2016] VSCA 324

Water Board v Moustakas (1988) 180 CLR 491

Zhu v Treasurer (NSW) (2004) 218 CLR 530

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Commercial Contracts, Banking, Finance and Insurance

Number of paragraphs:

168

Date of hearing:

12 August 2020

Counsel for the Appellants:

I Neil SC and N Furlan

Solicitor for the Appellants:

Harmers Workplace Lawyers

Counsel for the First Respondent:

E A Cheeseman SC and M A Karam

Solicitor for the First Respondent:

Just Dispute Resolution

Counsel for the Second Respondent:

The Second Respondent filed a Submitting Notice

ORDERS

NSD 72 of 2020

BETWEEN:

FINDEX GROUP LIMITED (ACN 128 588 714)

First Appellant

CIVIC FINANCIAL PLANNING LIMITED (ACN 143 253 767)

Second Appellant

FINDEX SERVICES PTY LTD (ACN 128 588 705) (and another named in the Schedule)

Third Appellant

AND:

DAVID KEITH MCKAY

First Respondent

VANDAMAN PTY LIMITED (IN LIQUIDATION) (ACN 103 917 773)

Second Respondent

order made by:

MARKOVIC, BANKS-SMITH AND ANDERSON JJ

DATE OF ORDER:

29 October 2020

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The appellants will pay the first respondent’s costs of and incidental to the appeal, to be taxed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1    The appellants commenced proceedings against the first respondent, Mr McKay (McKay), and a company of which he was the sole director and shareholder, the second respondent, Vandaman Pty Ltd (Vandaman), for damages for breach of contract, declarations and injunctions. Shortly prior to the hearing, Vandaman went into liquidation and the Court granted leave to the appellants to proceed against Vandaman in liquidation: Findex Australia Pty Ltd v McKay [2019] FCA 335. The primary judge dismissed the proceeding with costs on 18 December 2019: Findex Group Limited v McKay [2019] FCA 2129 (Primary judgment). This appeal is from that decision.

2    The appellants’ Notice of Appeal dated 23 January 2020 sought relief from the “respondents”. However, the appellants’ Amended Notice of Appeal dated 14 August 2020 now only seeks relief against McKay. While Vandaman is a party to this appeal, it filed a Submitting Notice dated 31 January 2020 by which it submitted to any order the Court may make.

3    Before the primary judge, the appellants’ breach of contract claim concerned covenants in restraint of trade in cl 20.2 of a shareholders agreement dated 1 June 2010 between the first appellant (Findex), the second appellant (New Civic), McKay, Vandaman and other shareholders (Shareholders Agreement). The purpose of the covenants was to protect goodwill acquired by Findex in the context of its acquisition of a financial planning business from Vandaman and others for a total consideration of $15 million: Primary judgment, [35].

4    The primary judge determined each issue in the breach of contract claim in favour of the appellants save for the issue concerning the construction and interpretation of the covenants in cl 20.2 of the Shareholders Agreement and the application to it of the principles of severance. The primary judge held at [187] of the Primary judgment that the restraints properly construed are unenforceable because they are unreasonable and to the extent that they are unreasonable they are not severable.

5    This appeal is limited to the critical issue on which the appellants lost, namely the enforceability of the restraints.

6    For the reasons that follow, we will dismiss the appeal.

BACKGROUND FACTS

7    The parties to the appeal accept that the primary judge accurately summarised the circumstances giving rise to the proceeding in Primary judgment, [11]-[46]. There is no notice of contention.

8    From February 2003, McKay was one of five principals of Civil Financial Planning Pty Ltd (Old Civic). Old Civic operated a financial planning and advisory business from premises located in Canberra servicing private clients, largely comprising members of Commonwealth government superannuation schemes who were in or close to retirement. McKay held his stake in Old Civic through Vandaman: Primary judgment, [12]-[14].

9    On or around 14 July 2009, the principals of Old Civic (on behalf of their stakeholder companies) and Findex signed a document entitled “Non-Binding Heads of Agreement Joint Venture Transaction” (HOA): Primary judgment, [16]. Under the HOA, a new company was to be established to acquire the business of Old Civic, Findex would acquire 55% of the shares of that new company and the parties would enter into a shareholders agreement to govern their relationship into the future. Clause 13 of the HOA provided that the anticipated transaction documents would include “appropriate non-compete and non-solicitation obligations in favour of Findex, in a form which is appropriate for a transaction of this nature”.

10    In April 2010, New Civic was incorporated in Victoria: Primary judgment, [20]. On 21 May 2010, Findex, each of the shareholding entities of the relevant five principals including Vandaman (as vendors) and the principals themselves concluded a Share Sale Agreement dated 21 May 2010 (SSA): Primary judgment, [21]. Under the SSA, New Civic would acquire the business of Old Civic, the vendors (including Vandaman) would sell 60% of New Civic’s shares to Findex on completion for $11 million (less certain amounts), and the parties would execute “the Shareholders Agreement”: Primary judgment, [22]-[25].

11    On 31 May 2010, under a Business Sale Agreement, New Civic acquired the business of Old Civic for $18 million: Primary judgment, [27]. Vandaman became the owner of 200 shares in New Civic at a value of $18,000 for each share, and a total value of $3,600,000: Primary judgment, [27]-[28]. On 1 June 2010, Findex acquired 60% of New Civic’s shares, including 120 of the shares owned by Vandaman. Findex paid Vandaman approximately $2,152,647.40 for its New Civic Shares: Primary judgment, [27]-[29].

12    On 1 June 2010, New Civic and the shareholders of New Civic (ie Findex as to 60% and each of the shareholding entities in Old Civic as to the remainder) executed the Shareholders Agreement: Primary judgment, [30]. It included two put/call options which provided for the transfer of the remaining 40% of New Civic shares to Findex, in two tranches of 20% each: Primary judgment, [31].

13    By 29 August 2013, both options were exercised and Findex owned 100% of New Civic’s shares: Primary judgment, [33]. Findex paid a total of $15 million for those shares, of which approximately 85% was attributed to the client list of Old Civic and 15% to goodwill: Primary judgment, [35]. Vandaman was paid a total of $2,991,586.80 for all its New Civic shares: Primary judgment, [33]-[35].

14    McKay was an employee of the third appellant (Findex Services) from 1 June 2010 until 7 September 2012, when his employment was terminated on the grounds of redundancy: Primary judgment, [38] and [40]. McKay began offering financial planning services from an office at Chatswood in Sydney through StrategyOne Advice Network Pty Ltd from at least January 2014, as an authorised representative of “Fitzpatrick’s Dealer Group”: Primary judgment, [38]-[42].

15    At about this time, McKay began communicating with a number of his former Old Civic clients to encourage them away from New Civic by criticising Findex and offering cheaper financial planning services: Primary judgment, [47]. The primary judge found that this conduct was in breach of cl 20.2 of the Shareholders Agreement: Primary judgment, [189].

16    The primary judge concluded that McKay was a party to the Shareholders Agreement, that McKay and Vandaman had breached cl 20.2 of that agreement, and that the appellants had suffered a loss of $742,866 as a consequence of McKay’s breaches of the Shareholders Agreement: Primary judgment, [231]. The issue on which the appellants failed at trial was the enforceability of the restraint of trade provisions in cl 20.2 of the Shareholders Agreement.

GROUNDS OF APPEAL

17    The appellants on the hearing of the appeal were granted leave to amend the Notice of Appeal.

18    The issues for determination on this appeal can be conveniently summarised as follows:

Grounds 1 and 2 – Construction of cl 20.2 Shareholders Agreement

(1)    The appellants contend that the primary judge erred by failing to give cl 20.2 of the Shareholders Agreement a commercial construction, by making the following three alleged errors:

(a)    adopting an excessively literal and expansive interpretation of its language that resulted in improbable and extravagant contingencies falling within the clause that could not have been intended by the parties;

(b)    failing to interpret the clause in a way that was consistent with and gave effect to its stated sole purposewhich was to protect the appellants’ goodwill; and

(c)    not adopting a construction which properly preserved the validity of the clause instead of one that made it void, either as required by the general law or by cl 2.1 in Schedule 2 of the Shareholders Agreement.

(2)    The errors identified in ground 1 resulted in, or contributed to, the following further and specific alleged errors of construction:

(a)    the primary judge ought to have held that cl 20.2 of the Shareholders Agreement contained multiple independent restraints including restraints in the form of undertakings by each covenantor not to itself do any of the things in each of sub-paragraphs (a)-(g) of cl 20.2 (Covenantor Restraints), and separate restraints in the form of undertakings by each covenantor that its Affiliates would not do any of the things in each of sub-paragraphs (a)-(g) of the clause (Affiliate Restraints or Affiliate Restraint); and

(b)    the primary judge ought to have held that the enforceability of each restraint in cl 20.2 did not depend on, and was not affected by, the ambit and the reasonableness of any other restraint that was independent from it, and that the enforceability of each of the Covenantor Restraints could not depend on, and was not affected by, the ambit and the reasonableness of any Affiliate Restraints.

Ground 3 – Severance

(3)    The primary judge was said to have erred in failing to sever the following parts of cl 20.2 of the Shareholders Agreement (either in accordance with the general law or as required by cl 2.2 in Schedule 2 to the Shareholders Agreement):

(a)    in the chapeau, the words “nor will any Affiliate of the Non-Findex Shareholders / Shareholders / Covenantors (as applicable)”;

(b)    in the chapeau, the words “directly or indirectly”;

(c)    in sub-paragraph (b), the words “any of its Controlled Entities or any authorised representative or corporate authorised representative of any of them” (appearing twice); and

(d)    any one or more of sub-paragraphs (a)-(g) in their entirety.

Ground 4 – Enforceability

(4)    The primary judge erred in:

(a)    failing to find that, properly construed (including, if necessary, after severance of the words referred to in ground 3), each restraint in cl 20.2 of the Shareholders Agreement was in the form of an undertaking by McKay (as a covenantor) that he would not himself do the things in sub-paragraphs (b), (c) and (f) of cl 20.2, which afforded no more than adequate protection for the appellants’ interest in the protection of goodwill; and

(b)    holding that these restraints were invalid and unenforceable.

A PROCEDURAL ISSUE

19    Before setting out the parties’ arguments concerning the proper construction of cl 20.2 of the Shareholders Agreement, it is necessary to deal with a procedural issue.

20    McKay submits that the appellants on this appeal seek to advance submissions on the proper construction of cl 20.2 which were not advanced below and depart from the manner in which the case was run before the primary judge. In short, McKay submits that severance of the Affiliate Restraint from the chapeau of cl 20.2 was an argument not run below. McKay submits that the appellants failed to plead or argue that the chapeau of cl 20.2 was to be construed as containing independent and separate covenants. McKay submits that the appellants are seeking to run a new case on appeal which was not put below and that this offends against the principles stated in Branir Pty Ltd v Owston Nominees (No 2) [2001] FCA 1833; 2001 FCR 424 (Branir) and Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate [2015] FCAFC 99; 240 FCR 578 (Linkhill).

21    It is necessary to set out the parties’ contentions on this aspect in further detail.

McKay’s submissions

22    McKay pointed to the following matters as demonstrating that the appellants’ arguments in this appeal constitute essentially a new case.

23    McKay referred to the various pleadings and submits that at no point in these pleadings is it contended that the restraint was comprised of separate and independent obligations, which were severable by putting a “blue pen” through the words in the chapeau of cl 20.2 dealing with the Affiliate Restraint. McKay submits that, on the pleadings, there was no contention that part of the chapeau to cl 20.2 was capable of being read down or severed.

24    McKay then referred to the written opening submissions below. McKay submits that these too contain no reference to the Affiliate Restraint, nor any mention of severance. McKay referred to [15] of the appellants “pre-trial submissions”, which recorded as follows:

The principal issues in dispute appear to be:

(a)     whether [McKay] was contractually bound to abide by the Restraint Provisions in clause 20.2 of the Shareholders Agreement (or, in the alternative, whether [McKay] is estopped from denying that he was);

(b)     whether the Restraint Provisions are valid and enforceable;

(c)     whether [McKay] breached clause 20.2 of the Shareholders Agreement and, whether as a result of conduct by Mr McKay, Vandaman breached clause 20.2 of the Shareholders Agreement because [McKay]'s conduct was attributable to Vandaman or because clause 20.2 contained a covenant and undertaking by Vandaman that its “Affiliates” (including [McKay]) would not do any of the things proscribed by that clause;

(d)     whether one or more of the Applicants has suffered a financial loss in consequence of the breaches of clause 20.2 of the Shareholders Agreement by [McKay] and/or Vandaman and the quantum of that loss; and

(e)     whether [McKay] should be restrained by injunction from any further breach of s. 183(1) of the Corporations Act 2001 (Cth)[.]

25    McKay submits that these issues are similar to the issues set out in [9] of the Primary judgment, as follows:

There are eight issues requiring resolution:

Issue 1: was [McKay] personally bound by the restraint provisions? That issue raises further issues. Did [McKay] in signing the relevant agreement sign only for Vandaman or did he also sign it for himself personally? Alternatively, did [McKay] by the conduct of the parties become bound to the terms of the [Shareholders Agreement]? Or, as a further alternative, is [McKay] estopped from denying that he was bound by the [Shareholders Agreement]?

Issue 2: are the restraint provisions enforceable?

Issue 3: did [McKay] breach the restraint provisions? This also raises an issue whether New Civic conducted the relevant business.

Issue 4: did the applicants suffer any loss? This is related to the issue that arises under issue 3, namely whether New Civic conducted the relevant business.

Issue 5: was all or part of the loss avoidable?

Issue 6: what loss, if any, did the applicants suffer?

Issue 7: did [McKay] breach s 183(1) of the Corporations Act and should an injunction be ordered to prevent further breaches?

Issue 8: is there any liability of Vandaman?

26    McKay submits there was no issue raised as to reading down, or severance, or as to construing the chapeau as imposing separate and independent obligations. McKay submits that, instead, the appellants expressly relied on the Affiliate Restraint to say that Vandaman was liable because of its exposure under that limb by reason of McKay’s conduct – ie the appellants below sought to make Vandaman liable for a breach by McKay on the basis of a part of cl 20.2 which the appellants now say can be easily severed. McKay submits that the frame of the case as pleaded, as opened and as run before the primary judge was whether cl 20.2 was reasonable, valid and enforceable, and that issue did not include consideration of the Affiliate Restraint in particular or whether it was severable.

27    McKay submits there was no mention of reading down or severing part of cl 20.2’s chapeau in the oral closing in chief. McKay submits that the only question of severance arose in relation to cl 20.2(g), but not cl 20.2’s chapeau. McKay submits that it was not put to the primary judge, in the way that it is now framed in appeal ground 2, that there is embedded in the chapeau in a subordinate clause a separate and independent obligation which the appellants refer to as the Affiliate Restraint.

28    McKay submits that the arguments put below were recorded in [127]-[133] of the Primary judgment. McKay submits that those paragraphs show that the primary judge dealt with the appellants’ argument expressly on the basis of an assumption that the individual sub-paragraphs in cl 20.2 (and not part of the chapeau) could be severed. McKay submits that the primary judge dealt with that argument at Primary judgment [159], where the primary judge stated that the “principal difficulty with regard to severance is the extraordinary complexity of the restraints with their interlinking and overlapping definitions; it is simply not possible to identify an independent covenant capable of being removed without affecting the remaining part as required by the second part of the test …”. McKay submits that the primary judge then went on in [160] of the Primary judgment to introduce a mere example and asked rhetorically whether a part of the chapeau in cl 20.2 could be excised.

Appellants’ submissions

29    In response to these submissions, the appellants made the following submissions.

30    The appellants concede that the “Affiliate Restraint issue” came forward at trial in a “messy way”. The appellants submit that the only allegation in the Further Amended Defence was a general pleading to the effect that cl 20.2 was unduly restrictive and onerous. The appellants submit that there were no particulars of that allegation and it was never said specifically in any pleading delivered on the part of McKay that the covenant in cl 20.2 was restrictive and onerous on account of its application to Affiliates of Covenantors. In this respect, the appellants referred to r 16.08(b) of the Federal Court Rules 2011 (Cth), which states that, “[i]n a pleading subsequent to a statement of claim, a party must expressly plead a matter of fact or point of law that[,]if not expressly pleaded, might take another party by surprise if later pleaded”.

31    The appellants submit that McKay’s written opening submissions at trial carefully identified the five respects in which he asserted that the restraint in cl 20.2 was unreasonable, but the appellants submit that they did not include any aspect concerning the Affiliate Restraint.

32    The appellants submit that position continued until the morning of the last day of trial. The appellants submit that, in McKay’s written closing submissions, delivered on the last day of trial, one finds the first mention in McKay’s case of the Affiliate Restraint being unreasonable.

33    The appellants submit that it was in that context that the appellants made submissions below as follows:

… We then move to the next topic about which we wish to say something in reply, severability. In that regard, may we remind your Honour of two provisions in the shareholders’ agreement.

HIS HONOUR: Yes.

MR NEIL: The first is clause 20.4 and the second is clause 20.5 …

HIS HONOUR: Yes. I have it.

MR NEIL: So far as Just Group [[2016] VSCA 334] is concerned, the first respondent put considerable weight on subparagraph (c) in paragraph 39. We would respectfully remind your Honour of the more general principles put earlier in paragraph 39. The ultimate question is whether , as Attwood v Lamont [[1920] 3 KB 571] puts it, the covenant in question is a combination of several distinct covenants. This one is, plainly.

HIS HONOUR: So Mr Karam says there are 111.

MR NEIL: Yes …

HIS HONOUR: You don't need to respond. I was just …

MR NEIL: No. Thank you.

34    The appellants submit that, in light of that context, there is no reason why this Court should consider that the appellants addressed the topic of severance below in a limited way without regard to the separate and distinct covenants which the appellants submit arise in cl 20.2. The appellants submit that the first sensible opportunity that the appellants had to address reliance on the Affiliate Restraint was in their oral submissions late on the last day of the trial, and they did so. The appellants submit that it should not now be put against the appellants that they failed to anticipate every possible ground on which cl 20.2 might eventually thought to be unreasonable and to seek severance measures prophylactically.

35    In any event, the appellants submit that the issues raised on this appeal are pure issues of law, there is no question of evidence bearing upon them and McKay has not suffered any relevant prejudice.

36    In response to those contentions, McKay submits that, regardless of the “messiness” in which the Affiliate Restraint issue arose at trial, the position remains that the appellants had the onus of establishing that the restraints in cl 20.2 were reasonable. McKay submits that, if the contention was to be that it was reasonable because there were separate and independent and, therefore, severable obligations in the chapeau, then that was something on which the applicants below (ie the appellants in this appeal) bore the onus and which they either had to plead in their statement of claim or put in reply when the defence put reasonableness in issue.

The appeal should be decided on the substantive bases argued in full by the parties

37    Relevant principles as to whether appellants should be permitted to advance matters not put below were set out in Linkhill, by North and Bromberg JJ at [30] to [38]:

In Suttor v Gundowda (1950) 81 CLR 418 the High Court (Latham CJ, Williams and Fullagar JJ) said at 438:

The circumstances in which an appellate court will entertain a point not raised in the court below are well established. Where a point is not taken in the court below and evidence could have been given there which by any possibility could have prevented the point from succeeding, it cannot be taken afterwards. In Connecticut Fire Insurance Co. v. Kavanagh (1892) AC 473, Lord Watson, delivering the judgment of the Privy Council, said, "When a question of law is raised for the first time in a court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient in the interests of justice, to entertain the plea. The expediency of adopting that course may be doubted, when the plea cannot be disposed of without deciding nice questions of fact, in considering which the court of ultimate review is placed in a much less advantageous position than the courts below.”

[Emphasis added.]

That approach was adopted by Mason J, with whom the other members of the Court agreed, in O’Brien v Komesaroff (1982) 150 CLR 310 at 319.

Then, in University of Wollongong v Metwally & Ors (No 2) (1985) 60 ALR 68 the Court (Gibbs CJ, Mason, Wilson, Brennan, Deane and Dawson JJ) said at [7]:

It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.

In Coulton v Holcombe (1986) 162 CLR 1 the majority (Gibbs CJ, Wilson, Brennan and Dawson JJ) said at [9]:

It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.

Their Honours said that there was no distinction to be drawn in the application of these principles between an intermediate court of appeal and ultimate court of appeal (at [9]).

The majority further also endorsed the rationale of these principles which had been stated by the Court of Appeal from which the appeal had been brought as follows at [10]:

[T]he finality of litigation; the difficulty of inducing an appeal court to consider new facts; the undesirability of encouraging tactical decisions not to present an issue at first instance: keeping it in reserve for appeal; and the need for vigilance to avoid injustice to a party having to meet new facts and new issues of law for the first time at the appeal court.

Citing and applying these authorities, the joint judgment (Mason CJ, Wilson, Brennan and Dawson JJ) in Water Board v Moustakas (1988) 180 CLR 491 summarised the position at [13] thus:

More than once it has been held by this Court that a point cannot be raised for the first time upon appeal when it could possibly have been met by calling evidence below. Where all the facts have been established beyond controversy or where the point is one of construction or of law, then a court of appeal may find it expedient and in the interests of justice to entertain the point, but otherwise the rule is strictly applied.

[Emphasis added.]

In Branir Pty Ltd v Owston Nominees (No 2) [2001] FCA 1833 (Branir) Allsop J (as his Honour was then) (with whom Drummond and Mansfield JJ agreed) referred to some further considerations which might be taken into account by an appeal court when faced with a party seeking to raise a new point. He said at [38]:

First, the finality of litigation and the importance of parties being bound to the cases they make at trial should never be overlooked: Gleeson CJ and Hayne J in Crampton, supra at [15] and [157], respectively and University of Wollongong v Metwally, supra; see too JB Chandler Investment Company Limited (in voluntary liquidation) v Commissioner of Taxation [1993] FCA 641; (1993) 47 FCR 588 per Gummow J at 593G. Secondly, the difficulty of the party against whom the new point is raised reaching back in time to assess, necessarily hypothetically, how the conduct of the trial would, or may, have been different should not be underestimated. Such judgments or assessments can require re-agitation or reconsideration of decisions taken before and at trial (which may be privileged) and which can be very difficult to assess and articulate after the event. The entitlement of a party to the benefit of the opportunity of informed and reasonably contemporaneous assessment of relevant evidence, or inquiry, should be respected. Thirdly, the potential unfairness on counsel conducting an appeal who will be expected to assist the court in respect of the prejudice, or lack of it, to his or her client in the face of such matters being raised should not lightly be brushed aside. Even when counsel cannot positively say that something in particular would have been done differently, that does not mean that the court will be satisfied of a lack of prejudice. The possibility of evidence or the possibility that the hearing would have taken a different course, if not fanciful, may well suffice to deny raising of the new point. These considerations should not be seen as not requiring counsel frankly and candidly to say that the trial would not have been conducted differently if he or she is of that view. Fourthly, and in conclusion, before any new point be allowed, the court should be able to be satisfied that the raising of it could work no injustice on the other party and is otherwise in the interests of justice.

[Emphasis added.]

Applying these authorities, the Full Court in VUAX v Minister for Immigration & Multicultural & Indigenous Affairs [2004] FCAFC 158 restated, at [46], that:

… Leave to argue a ground of appeal not raised before the primary judge should only be granted if it is expedient in the interests of justice to do so

(Emphasis in the original.)

38    With those principles in mind, there is substance to McKay’s complaint regarding whether the appellants’ grounds were properly run below. Grounds 1, 2 and 3 as now put by the appellants on appeal raise matters which were either not put or were not developed to the same extent as they have been put on this appeal. The issue that arises is whether the appellants should be permitted to raise these grounds which relate to grounds 1, 2 and 3 on this appeal.

39    For the following reasons, the Court will permit the appellants to raise the arguments which are the subject of grounds 1, 2 and 3.

40    First, no objection to the written submissions of the appellants in respect of grounds 1, 2 and 3 has been raised by McKay in the filed written submissions. McKay’s complaint appears to have been raised for the first time at the hearing of the appeal.

41    Second, senior counsel for McKay did not submit that McKay would suffer any prejudice on appeal if the appellants were permitted to advance these new arguments on appeal. It is not apparent that McKay has had the difficulty of “reaching back in time to assess how the conduct of the trial would, or may, have been different”: Branir, [38]. It is not apparent that McKay has had any difficulty responding to the submissions put, which, as mentioned below, concern questions of law.

42    Third, the new arguments concern submissions on questions of law and raise no new facts. It is not apparent that McKay could have dealt with grounds 1, 2 and 3 by calling further or different evidence below.

43    In these circumstances, we are of the opinion that no injustice will be suffered by McKay on this appeal if the appellants are permitted to advance their submissions in respect of grounds 1, 2 and 3. The points raised are of construction or of law, and it is expedient and in the interests of justice to entertain” them: Water Board v Moustakas (1988) 180 CLR 491, [13] per Mason CJ, Wilson, Brennan and Dawson JJ; see also Branir, [38].

GROUNDS 1 AND 2: CONSTRUCTION OF CLAUSE 20.2

Relevant provisions of the Shareholders Agreement

44    Before addressing each of the parties’ arguments on the construction of cl 20.2 in detail, it is desirable to set out relevant provisions of the Shareholders Agreement.

45    The “Background” of the Shareholders Agreement provided as follows:

A.     [New Civic] carries on the Business.

B.     Findex has acquired 60% of the issued share capital in [New Civic] pursuant to the Share Sale Agreement.

C.     Immediately following Completion, the Initial Shareholders between them own one hundred percent (100%) of the issued share capital of [New Civic] in their respective Equity Shares.

D.     The parties wish to record the terms for the relationship between them in this agreement.

E.     The Covenantors are associated with the Non-Findex Shareholders and have agreed to enter into certain obligations in favour of other parties to this agreement.

46    The Shareholders Agreement contained the following definitions:

(1)    Affiliate means, in relation to a person (Principal), any person who: (a) is Controlled by the Principal; (b) Controls the Principal; (c) is Controlled by a person who Controls the Principal; (d) is a related entity (as that term is defined in Section 9 of the Corporations Act substituting the word Principal for the words body corporate); or (e) is a partner or joint venturer of the Principal.” The definition of “related entity” in s 9 of the Corporations Act 2001 (Cth) (Corporations Act) provided at the date of execution of the Shareholders Agreement, 1 June 2010, and still provides as follows:

related entity, in relation to a body corporate, means any of the following:

(a)     a promoter of the body;

(b)     a relative of such a promoter;

(c)     a relative of a spouse of such a promoter;

(d)     a director or member of the body or of a related body corporate;

(e)     a relative of such a director or member;

(f)     a relative of a spouse of such a director or member;

(g)     a body corporate that is related to the first‑mentioned body;

(h)     a beneficiary under a trust of which the first‑mentioned body is or has at any time been a trustee;

(i)     a relative of such a beneficiary;

(j)     a relative of a spouse of such a beneficiary;

(k)     a body corporate one of whose directors is also a director of the first‑mentioned body;

(l)     a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first‑mentioned body because of any other application or applications of this definition.

(2)    Business means in respect of [New Civic] (including its Controlled Entitles) the business of [New Civic] from time to time (as conducted in accordance with the Business Plan (if applicable) including providing Financial Services and the sale of Financial Products (including without limitation the sale of insurance products), and promoting the ‘Pinnacle’ superannuation managed fund product to retail investors”.

(3)    Client means all of the financial planning clients of the Business from time to time.

(4)    Control means”:

(a)    “in relation to any body corporate (including without limitation, a body corporate in the capacity as trustee of any trust property), the ability of any person to exercise control over the body corporate by virtue of the holding of voting shares in that body corporate or by any other means including, without limitation, the ability to directly or indirectly remove or appoint all or a majority of the directors of the body corporate”; and

(b)    “in relation to an individual, the ability of any person to direct that person to act in accordance with their instructions whether by operation of any law, agreement, arrangement or understanding, custom or any other means”.

(5)    Controlled Entity means in relation to a party any entity Controlled by that party.

(6)    Non-Findex Shareholders means each of the Second Shareholder, Third Shareholder, Fourth Shareholder, Fifth Shareholder and Sixth Shareholder”. These were DBDash Pty Limited (ACN 103 917755) as trustee for the Dash Investment Trust, Blarch Nominees Pty Ltd (ACN 071 650050) as trustee for the Kemp Family Settlement, LivGenal Pty Limited (ACN 103 942 132) as trustee for the Dawes Family Trust, and Vandaman as trustee for the McKay Family Trust.

(Bold, italicised text in the above definitions in the original.)

47    The “Covenantors” were defined in the “Parties” section of the Shareholders Agreement as including (among others) McKay.

48    Clause 20.1 provides definitions which apply “[f]or the purpose of this clause 20”, as follows:

(a)     the expression competitive with the Business includes, but is not limited to, competition in a small part of the Business or mere competition in peripheral products or lines of business;

(b)    the expression engage in means to participate, assist or otherwise be concerned (including by providing finance or services), directly or indirectly, and in any capacity (including, without limitation, as a shareholder or unitholder owning or holding more than 5% of the issued capital or units of a company or a trust listed on any stock exchange, director, consultant, adviser, contractor, principal, agent, manager, employee, beneficiary, partner, associate, trustee or financier);

(c)    customer or client means any person who was, in the twelve (12) month period before the date of retirement, a customer or client of [New Civic], any of its Controlled Entities or of any authorised representative or corporate authorised representative of [New Civic] or its Controlled Entities;

(d)     date of retirement means the date upon which a Shareholder sold, transferred or otherwise Dealt with the last of its shares in [New Civic] (or, in the case of the Covenantors, the date upon which a Shareholder associated with a particular Covenantor sold, transferred or otherwise Dealt with the last of its shares in [New Civic]);

(e)    Restraint Area means each of the following:

(i)     the Australian Capital Territory;

(ii)     within a 200km radius of the Premises; and

(iii)     Canberra (Metropolitan).

(f)    Restraint Period means:

(i)     five (5) years from the date of retirement;

(ii)     four (4) years from the date of retirement;

(iii)     three (3) years from the date of retirement;

(iv)    two (2) years from the date of retirement; and

(v)    one (1) year from the date of retirement;

(g)    solicit means to entice, canvass, induce, encourage, persuade or otherwise solicit or to attempt to entice, canvass, induce, encourage, persuade or otherwise solicit; and

(h)    supplier means any person who was, in the twelve (12) month period before the date of retirement, a supplier or service provider to [New Civic] its Controlled Entities or any authorised representative or corporate authorised representative of [New Civic] or its Controlled Entities.

(Bold, italicised text in the original.)

49    Pausing there, it will be apparent that the definitions of “Restraint Area” and “Restraint Period” set out above are species of what is commonly referred to as “cascading provisions”. Lawyers “commonly seek to overcome” the difficulty of drafting restraint of trade provisions “by itemising numerous ‘cascading’ possibilities – ever widening or narrowing periods of time, area and trade – in the hope that the court will sever the excessively wide ones … and leave the balance”: J D Heydon, The Restraint of Trade Doctrine (LexisNexis Butterworths, 4th ed, 2018), 309.

50    The main clause in issue, cl 20.2, provides as follows:

20.2     Restraint Obligations

For the sole purpose of protecting the interest of [New Civic] and the other Shareholders (Other Parties) in respect of the goodwill of [New Civic] and the Business, subject to the express exclusions set out below, each of the applicable Shareholders and the Covenantors covenants with, and undertakes to, the Other Parties that they will not, nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable), do any of the following for so long as the Shareholder remains a Shareholder, and during any of the Restraint Periods, within any of the Restraint Areas, directly or indirectly:

(a)     (in relation to each of the Non-Findex Shareholders and Covenantors only, and not Findex) directly or indirectly carry on or otherwise be engaged in, concerned with or interested in any business competitive with the Business conducted by [New Civic] or similar or competitive to any business conducted by any of its Controlled Entities as at the date of retirement of the Non-Findex Shareholder (or, in the case of the Covenantors, the date of retirement of the Non-Findex Shareholder associated with the Covenantor);

(b)    solicit any person who is or was or would otherwise have been a supplier or customer or client to not do business or cease doing business with [New Civic], any of its Controlled Entities or any authorised representative or corporate authorised representative of any of them, or to reduce the amount of business which the supplier or customer or client would have done or would normally do with [New Civic], any of its Controlled Entities or any authorised representative or corporate authorised representative of any of them;

(c)    (in relation to each of the Non-Findex Shareholders and Covenantors only, (but without prejudice to clause 20.2(b)), accept from a customer or client any business of the kind ordinarily forming part of the Business;

(d)    solicit any person who was at the date of retirement of the Shareholder or who later becomes an employee of the Business to terminate his or her employment with [New Civic] or any of its Controlled Entitles;

(e)    solicit any person who was, at the date of retirement, or who later becomes, an authorised representative of [New Civic] or any of its Controlled Entities, to terminate his, her or its authorisation from [New Civic] or its relevant Controlled Entity, or otherwise to become, concurrently, an authorised representative of any other person;

(f)    interfere with the Business or disclose to any person any Confidential Information concerning the Business or concerning the Other Parties or any of their respective dealings, transactions or affairs (except in the circumstances allowed in clause 21.2(b)); or

(g)    after the date of retirement, represent itself as being in any way connected with or interested in or associated with [New Civic], or the Business (except as a prior shareholder of [New Civic]).

51    Clause 20.3 provides as follows:

20.3 Carve-outs from restraints

Nothing in clause 20.2 is intended to prevent:

(a)     any of the Non-Findex Shareholders, the Covenantors or their Affiliates from entering into and performing their employment agreements with [New Civic] or any of its Controlled Entitles;

(b)     any of the Shareholders or Covenantors from holding the Shares or being a Director or other officeholder of [New Civic];

(c)     Findex or any of its Affiliates from employing or engaging any person who is or was an employee of the Business if that person is employed or engaged in accordance with ‘business as usual’ recruitment activities of Findex or its Affiliate which were not directed specifically at the relevant employee;

(d)    Findex or any of its Controlled Entitles, authorised representatives or employees from providing financial services to any client or former client of the Business where such client solicits Findex or its Controlled Entities, authorised representatives or employees for such services or Findex or its Controlled Entities, authorised representatives or employees does not otherwise initiate contact with such client or former client other than by way of advertising or other promotional material in the ordinary course of business;

(e)     any authorised representative of Findex or its Controlled Entities from independently soliciting the business of a client, former client or supplier of the Business without direction from Findex or its Affiliate; and

(f)     any Shareholder or Covenantor from acting in a manner as agreed by all the Other Parties in writing.

52    Clause 20.4 provides as follows:

20.4 Restraints are Independent and Reasonable

The Shareholders and Covenantors acknowledge that each of the restraints in clause 20.2 (which apply to the applicable Shareholders) are reasonable in their extent (as to duration, geographical area and restrained conduct) having regard to the interests of each party to this agreement and goes no further than is reasonably necessary to protect [New Civic].

53    Clause 20.5 provides as follows:

20.5 Restraints cumulative

Each of the restraints in clause 20.2 resulting from the various combinations of the Restraint Periods and the Restraint Areas is a separate, severable and independent restraint and the invalidity or unenforceabllity of any of the restraints in clause 20.2 does not affect the validity or enforceability of any of the other restraints in that clause.

54    Relevant rules for interpreting the Shareholders Agreement in Schedule 2 include the following:

1.     Construction

1.1.     In this agreement unless specified to the contrary:

(b)    a reference to the singular includes the plural and vice versa;    

(e)    words or phrases defined in the Corporations Act as at the date of this agreement have the corresponding meaning;

(g)    a reference to a person includes a natural person, a company or other entities recognised by law …

2.    Compliance with Law

2.1    This agreement is to be interpreted so that it complies with all applicable Territory laws and if any provision does not comply then it must be read down so as to give it as much effect as possible.

2.2    If it is not possible to give that provision any effect at all, however, then it is to be severed from this agreement in which case the remainder of this agreement will continue to have full force and effect.

The primary judge’s reasoning

55    It is also useful to set out some key parts of the primary judge’s reasons. The primary judge stated the following in the Primary judgment:

110.     The consequence of [certain] definitions [in clause 20.2] is that the restraint provisions are remarkably complex to follow, and even more remarkably broad in application. Notably, it is not just the non-Findex shareholders and their principals who made the covenants in question in respect of their own conduct, but they did so also in relation to the conduct of any “Affiliate” of theirs. Whether or not another party is an affiliate largely turns on notions of “control” as defined, which in relation to a natural person includes the ability to give instructions including by “arrangement or understanding, custom or any other means”. But it also includes “related entities”, which includes, for example, the relative of a spouse of a director or member of the relevant covenantor including the spouse’s siblings and children and grandchildren, and so on, and parents and grandparents and so on.

111.     Turning to the prohibited conduct, as opposed to whose conduct it is, the first point to note is that it is not only direct conduct that is proscribed, but also indirect conduct which leaves some doubt as to just what is covered.

112.    Focussing on subclauses (b) and (c) [of cl 20.2], one notices that both proscribe conduct relating to a “customer or client” – subclause (b) proscribes soliciting a customer or client and subclause (c) proscribes accepting “Business” of a customer or client. In cl. 20.1(c), “customer or client” is defined to mean “any person who was, in the twelve (12) month period before the date of retirement, a customer or client of [New Civic], any of its Controlled Entities, or of any authorised representative or corporate authorised representative of [New Civic] or its Controlled Entities.”

113.    Confusingly, “client” is also defined in the [Shareholders Agreement]. That is in Schedule 1 where “Client means all of the financial planning clients of the Business from time to time”. Trying to make sense of these definitions together, it may be that clients are restricted to being financial planning clients whereas customers may not be restricted in that way, although there is no evidence as to the common understanding of the parties at the time that they concluded the [Shareholders Agreement] as to what business New Civic or any of its “Controlled Entities” might have in the future other than financial planning business/es.

114.    Controlled Entity in relation to a party is defined in Schedule 1 as meaning any entity “Controlled” by that party. That refers back to the definition of “Control” dealt with above.

117.    Even leaving aside the definition of the business, the result is that, for example, Mr McKay by the covenant undertook not to accept – or, indeed, that no grandchild of his would accept – business of the kind ordinarily forming part of the business (as defined) from someone who had, in the 12 months before he sold his remaining shares in New Civic, been a client of an authorised representative of a company in respect of which New Civic or Findex had the ability to indirectly remove or appoint a majority of the directors.

118.    The restraint in cl. 20.2(b) is also said to operate in respect of customers or clients not only of New Civic, but also any of its “Controlled Entities” or any authorised representative or corporate authorised representative of any of them. In fact, that provision is in any event merely repetitious of the definition of “customer or client” so serves no purpose.

153.    As I have indicated, the applicants only rely on three of the seven subclauses of cl. 20.2. It is those three subclauses on which I will focus.

154.    From what I have said above (paras [103]-[119]) with regard to the construction, meaning and reach of subclauses (b) and (c) of cl. 20.2, it is apparent that they have extraordinary reach and complexity. They extend well beyond any justifiably protected interest of the applicants in the goodwill of the business – they do not afford no more protection than is reasonably necessary to protect the interests of the party in whose favour they are imposed.

155.    The same is true of subclause (f). Although the wording of the subclause taken on its own is simpler and uncomplicated by incorporated defined terms when compared to subclauses (b) and (c), all the breadth and complexity of the chapeau nevertheless applies to it. Thus, the Covenantors covenant not only that they will not “interfere” with the business, but also that no “Affiliate” of theirs will do so which in turn brings any “related entity” within the restraint.

156.    For example, through paragraphs (h) and (j) of the definition of “related entity” in s 9 of the Corporations Act and the definition of “Affiliate” in the [Shareholders Agreement], … McKay and Vandaman covenanted that the relative (which can be, for example, a great-grandchild) of a spouse of a beneficiary of a trust of which Vandaman is or has been at any time a trustee would not solicit any person who is a client or potential client of a controlled entity of New Civic from doing business with that controlled entity. It was also covenanted that such a remotely related or interested person would not “interfere” with the business. The applicants did not come anywhere even close to justifying the breadth of the restraints. Indeed, the applicants did not attempt to justify such breadth, but rather sought to avoid it by focusing on the wording on which they sought to rely.

157.    The restraint provisions were clearly the work of lawyers, each with one eye on drafting the greatest possible protection for the applicants and with the other eye firmly shut to the limits that the law places on such restraints by requiring them to be the least necessary to protect the applicants’ interests in the business of New Civic. The result is restraint provisions that are impossibly convoluted and complex and unjustifiably broad.

158.    I therefore conclude that the restraints are too broad with respect to the conduct that is restrained with reference to the people and entities whose conduct is caught by the restraints. They are in this respect unreasonable and therefore unenforceable, unless they can be saved by severance.

159.    The principal difficulty with regard to severance is the extraordinary complexity of the restraints with their interlinking and overlapping definitions; it is simply not possible to identify an independent covenant capable of being removed without affecting the remaining part as required by the second part of the [relevant] test …

160.    For example, should a blue pencil be put through the words “nor will any Affiliate of the Non-Findex Shareholders/ Shareholders/ Covenantors (as applicable)” in the chapeau? Or, perhaps through paragraph (d) of the definition of “Affiliate” so that all the complexities and breadth of the incorporation of the definition of “related entity” are removed? But why one rather than the other?

161.    The point is that the Court will not embark on the task of redrafting the restraint provisions for the parties. That is made clear by the authorities: Lloyd’s Ships Holdings Pty Ltd v Davos Pty Ltd [1987] FCA 70; 17 FCR 505 at 523-524; [Just Group Limited v Peck [2016] VSCA 334; 344 ALR 162 (Just Group)] at [39]. Severance must be the act of the parties, not the Court: Just Group at [57(d)]. To attempt to sever parts of the applicable definitions in this fashion would be “to reason backwards from allegation of breach to construction and evaluation of the contract, rather than by an assessment of validity of the restraints at the time the contract was made”: Just Group at [57(d)].

162.    In that regard, it is not without significance that cl. 20.5 … identifies “separate, severable and independent” restraints with reference to the cascading provisions with regard to area and time, and not with reference to the intersecting, overlapping and cumulative definitions provisions. That counts against it being concluded, objectively speaking, that the parties intended the different permutations of the definitions provisions to be severable.

187.    In the result, the restraints are not enforceable because they are unreasonable as to the parties whose conduct they seek to restrain, and to the extent that they are unreasonable on that basis they are not severable. However, if I am wrong on that, in my view the restraints would be reasonable and enforceable in so far as area and time are concerned.

Appellants’ submissions on Ground 1 and 2

56    The appellants submit that the primary judge made six errors that led to the misconstruction of cl 20.2.

57    First, the appellants submit that the primary judge construed the definition of “Affiliate” too broadly. The appellants in this respect pointed to Primary judgment, [106]. The appellants submit that an “Affiliate” is a more limited concept in its application to “Covenantors” as compared with “Shareholders” and “Non-Findex Shareholders”. The appellants submit that this is due to the way in which “related entity” is defined (which is part of the definition of “Affiliate”). The appellants submit that many sub-paragraphs of the definition of “related entity” do not make sense when applied to a Covenantor because all the Covenantors are natural persons. As examples, the appellants submit that natural people are not “promoted”, natural people do not have directors and natural people do not have members. The appellants submit that the primary judge failed to appreciate this which resulted in the primary judge erroneously concluding that cl 20.2 captured conduct that fell outside its scope, which in turn contributed to the ultimate holding by the primary judge that the scope of cl 20.2 was excessive. The appellants submit that this approach led the primary judge to erroneously state the following at [110] of the Primary judgment:

Notably, it is not just the non-Findex shareholders and their principals who made the covenants in question in respect of their own conduct, but they did so also in relation to the conduct of any “Affiliate” of theirs. Whether or not another party is an affiliate largely turns on notions of “control” as defined, which in relation to a natural person includes the ability to give instructions including by “arrangement or understanding, custom or any other means”. But it also includes “related entities”, which includes, for example, the relative of a spouse of a director or member of the relevant covenantor including the spouse’s siblings and children and grandchildren, and so on, and parents and grandparents and so on.

58    The appellants made reference to the words “nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable)” in cl 20.2. The appellants referred to this as the “Affiliate restraint” and submit that the “scheme of the chapeau” of cl 20.2 is “to identify the people whose conduct are subjected to the obligations that follow, the restraint periods for which those obligations will apply, and the restraint areas within which they will apply”. The appellants submit that there must be some reason why the words “as applicable” were included, and the only work that those words can do logically is to indicate that something that might otherwise be within the compass of the words that precede them is not applicable. The appellants took the Court to other provisions in the Shareholders Agreements which make use of the concept of an “Affiliate” and the appellants noted that none of those provisions use “Affiliate” in connection with a Covenantor.

59    Second, the appellants submit that the reasoning of the primary judge at Primary Judgment [110], [117], [156] and [158] indicates that too much weight was given by the primary judge to improbable contingencies that were unlikely to have been within the contemplation of the parties in construing the restraints. The appellants submit that the parties intended Findex to have the benefit of “appropriate” restraints (in this regard, the appellants pointed to cl 13 of the HOA). The appellants submit that the primary judge’s construction was excessively literal, and did not give due weight to the parties’ sole objective being the protection of goodwill or the principle that a construction which preserves validity is to be preferred over one that does not. The appellants submit that such “improbable contingencies” or “fantastical hypothetical possibilities” should have been ignored for the purposes of evaluating the relevant restraint and engaging in the task of a “sensible or realistic construction”. The appellants submit that the primary judge’s considerations were “so far removed from the reality of the protection needed in this case to preserve Findex’s goodwill in the business that it bought, that it is clearly a result that the parties did not intend and thus, it could be eliminated by a process of construction”.

60    The appellants sought assistance from the following passage in Haynes v Doman [1899] 2 Ch 13, 25-26 (quoted in Rentokil Pty Ltd v Lee (1995) 66 SASR 301 (Rentokil), 338-339):

Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them … [T]he object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot reasonably be supposed ever to have been contemplated by the parties, and which on a rational view of the agreement are excluded from its operation by falling, in truth, outside and not within its real scope.

… [T]he Court ought not to hold a just and honest agreement void, even when to enforce it would be just, simply because the agreement is so unskilfully worded as apparently, or even really, to cover some conceivable case not within the mischief sought to be guarded against. Public policy does not require so serious a consequence to be attached to a mere want of accuracy in expression. To hold such an agreement wholly illegal and void is to lose all sense of proportion, and is not necessary for the protection either of the defendant or of the public.

61    The appellants referred to the following statement of Debelle J in Rentokil at 339: “ … the preferred approach is to have regard to the object and intent of the parties and read down a covenant to give effect to that object and intent. Such a rule is fairer given the difficulties in drafting an appropriate clause”. The appellants submit that this common law approach was also mandated by cl 2.1 of Schedule 2 of the Shareholders Agreement which provides as follows: “[t]his [Shareholders Agreement] is to be interpreted so that it complies with all applicable Territory laws and if any provision does not comply then it must be read down so as to give it as much effect as possible”.

62    Third, the appellants submit that the primary judge appears to have treated the word “client” in cl 20.2 as having the meaning of that term given where it is defined in Schedule 1. The appellants pointed to Primary judgment, [113], in this regard. The appellants submit that the use of the term in lower case in cl 20.2 is a clear indication that it does not have the meaning in Schedule 1. The appellants submit that this error seemingly contributed to the primary judge’s perception of the restraint provisions as confusing and overly complex.

63    Fourth, the appellants submit that, at [111] of the Primary judgment, the primary judge treated the prohibition on “indirect” conduct as leaving some doubt as to what is covered by cl 20.2. This, the appellants submit, is indicative of an approach by the primary judge to the construction of cl 20.2 that was excessively narrow and literal. The appellants submit that this error influenced the primary judge’s perception of the restraints as excessively broad.

64    Fifth, the appellants submit that the primary judge failed to appreciate that the sole object of the restraints in cl 20.2 was the protection of the interest of New Civic and the other Shareholders (including Findex) in the valuable goodwill of the business that once belonged to Old Civic.

65    Sixth, the appellants submit that the primary judge ought to have read down the provisions of cl 20.2 so as to exclude from its operation the improbable and extravagant contingencies which ultimately led the primary judge to conclude that the restraints were invalid. The appellants point to what they submit is the obvious inapplicability of much of the definition of “related entities” to Covenantors as being a strong indication that the parties did not intend improbable and extravagant results that may arise on a very strict and literal reading of the definitions of “Affiliate” and “related entity”.

66    In respect of ground 2, the appellants submit that the chapeau to cl 20.2 clearly includes two separate groups of restraints. First, the Covenantor Restraints, which proscribe conduct by the Covenantors themselves and, second, the Affiliate Restraints by which each Covenantor undertakes that its “Affiliates” will not engage in the conduct either. The appellants submit that the two groups of restraints are independent because they are concerned with conduct by different groups of people. The appellants submit that the primary judge should have, but did not, find that the Covenantor Restraints were independent of the Affiliate Restraints. The appellants submit that the primary judge should have further found that, as the two sets of restraints concern conduct by different groups of people, the breadth and reasonableness of the Affiliate Restraints was not relevant to the assessment of the validity of the Covenantor Restraints.

McKay’s submissions on Grounds 1 and 2

67    McKay submits that the appellants are impermissibly asking this Court to redraft the restraints in cl 20.2. McKay submits that the primary judge correctly recognised that what the appellants were contending at trial was not a reading down of extraneous words but creating new restraints.

68    McKay submits that the primary judge did not misconstrue cl 20.2 and nor did the primary judge fail to give the clause “a proper commercial construction”. McKay submits that the appellants’ submissions suffer from at least two fatal defects: first, those submissions ignore the plain meaning of the text of cl 20.2 and, secondly, they oversimplify and thereby mischaracterise the context and purpose of cl 20.2.

69    As to the text of cl 20.2, McKay submits that the primary judge was correct to identify that the most distinctive feature of the text is that it is “lengthy”, “intricate”, “impossibly convoluted and complex and unjustifiably broad” and of “extraordinary reach and complexity”: Primary judgment, [101], [154] and [157]. McKay submits that the embedding of multiple layers of defined terms and the effect that the incorporation of those definitions has on the breadth of the restraints is to give them a remarkably broad application. McKay refers to the Primary judgment at [110] and [127] in this regard.

70    McKay submits that the definitions are detailed and largely unambiguous. McKay submits that they have been drafted to avoid ambiguity, the result of which is that this is not a case where the text admits of much, if any, constructional choice.

71    McKay submits that the “fundamental principle” for construing defined terms is that “the incorporated terms must be construed as if they had been written out in full in the contract, and accordingly must be construed in the context of the contract into which they have been incorporated”, citing Coopers Brewery Ltd v Lion Nathan Australia Pty Ltd (2005) 93 SASR 179; [2005] SASC 400 (FC), [26]. McKay submits that the starting point must be that the parties agreed to incorporate these terms, knowing they had a defined meaning, and that they would be construed in accordance with that meaning.

72    McKay submits that the broad operation of the clause was a necessary result of the expansively defined terms selected by the parties. McKay submits that no basis exists for ignoring the terms selected by the parties in cl 20.2. McKay contends that the terms used in cl 20.2 cannot be read down by any permissible method of interpretation so that they have a reasonable operation. McKay submits that the Court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust, citing Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 (Australasian Performing Right Association), 109 (per Gibbs J), most recently cited with approval in Oceanview Developments Pty Ltd trading as Darwin River Tavern & Darwin River Supermarket v Allianz Australia Insurance Ltd trading as Territory Insurance Office [2020] FCA 852, [98] (per Allsop CJ).

73    McKay submits that the unreasonableness of the restraint is not, as the appellants contend, the result of the primary judge engaging in an excessively literal and expansive, uncommercial construction of the clause tainted by improbable and extravagant contingencies. On the contrary, McKay submits that the unreasonableness of the restraint is manifest on its plain meaning, giving effect to the defined terms selected by the parties, and consistently with its intended reach. McKay submits that it is impermissible for the appellants to now ask the Court to redraw the restraint in a way that would be reasonable and enforceable.

74    As to ground 2, McKay submits that the appellants’ contention that cl 20.2 should be construed as being constituted by “multiple independent restraints” must be rejected. McKay submits that this is so for three reasons. First, the clause is to be construed as at the date of its creation: citing Just Group Limited v Peck [2016] VSCA 334; 344 ALR 162, [57(d)]. McKay submits that the appellants seek to approach the clause with the benefit of hindsight, now knowing the precise matters which are of concern to them, and seeking to dispense with the rest in order to preserve the clause’s validity. Second, McKay submits that the appellants’ construction ignores the commercial context of the transaction. McKay submits that the way in which the clause has been drafted points firmly to the parties’ intention being to prohibit conduct not only by the Covenantors but also by their Affiliates. Third, McKay submits that the appellants’ construction is contradicted by cl 20.5 which, as the primary judge observed, “does not identify that there are ‘separate, several and independent’ restraints other than with reference to the restraint periods of time and the restraint areas”: Primary judgment [126]. That, McKay submits, is significant because, presumably, the express statement in cl 20.5 was intended to prescribe all of the ways in which the various aspects of cl 20.2 were intended to be “separate, several and independent”. McKay submits that cl 20.5 only refers to the cascading provisions dealing with area and time, not to any other matters in cl 20.2.

Consideration of Grounds 1 and 2

Principles

75    The relevant legal principles that the Court should apply to the task of construction were not in dispute between the parties in this appeal. The appellants’ submissions conveniently summarised the relevant general principles as follows.

76    The exercise of construction is undertaken for the purpose of ascertaining the real meaning of the restraint, independently of the rules proscribing tests of reasonableness for the purpose of ascertaining its validity: Butt v Long (1953) 88 CLR 476, 487 per Dixon CJ.

77    The Court should approach the task of construction on the basis that the parties intended to produce a commercial result, and one which makes commercial sense: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640 (Woodside Energy), [35]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12; 261 CLR 544 (Ecosse Property), [17].

78    A commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience: Woodside Energy, [35]; Zhu v Treasurer (NSW) [2004] HCA 56; 218 CLR 530, [83]; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310, 313-314.

79    Commercial contracts must be interpreted fairly and broadly, without being too astute or subtle in finding defects: Pan Foods Company Importers and Distributors Pty Ltd v Australia and New Zealand Banking [2000] HCA 20; 170 ALR 579, [14]; Australasian Performing Right Association, 109-110.

80    A construction that avoids unreasonable results is to be preferred to one that does not, even though it may not be the most obvious, or the most grammatically accurate: Australasian Performing Right Association, 109-110.

81    Determining the meaning of a contractual term normally requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165, [40] (Toll); Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 (Pacific Carriers), [22]; Woodside Energy[35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 (Mount Bruce Mining), [47] and [49]-[50]; Ecosse Property, [17].

82    Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency: Fitzgerald v Masters (1956) 95 CLR 420, 426-427.

83    In deciding whether there are special circumstances justifying a restraint of trade, the Court should be wary of placing weight upon “improbable and extravagant contingencies as indicating the restraint to be unreasonable”: Adamson v NSW Rugby League Ltd (1991) 31 FCR 242, 286 per Gummow J citing Haynes v Doman [1899] 2 Ch 13, 26.

84    Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them. The object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly held to apply to cases which, although covered by the words of the agreement, cannot reasonably be supposed ever to have been contemplated by the parties, and which, on a rational view of the agreement, are excluded from its operation by falling, in truth, outside and not within its real scope: Haynes v Doman [1899] 2 Ch 13, 26.

85    If a clause is valid in all ordinary circumstances which have been contemplated by the parties, it is equally valid notwithstanding that it might cover circumstances which are so ‘extravagant’, ‘fantastic’, ‘unlikely or improbable’ that they must have been entirely outside the contemplation of the parties: Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526, 536 endorsed in Rentokil, 304 (Doyle CJ), 320-321 (Matheson J) and 339 (Debelle J). See also Marion White Ltd v Frances [1972] 1 WLR 1423; Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026; Clarke v Newland [1991] 1 All ER 397.

86    The preferred approach is to have regard to the object and intent of the parties and read down a restraint of trade to give effect to that object and intent: Rentokil, 339; Koops Martin v Dean Reeves [2006] NSWSC 449, [40]; cf. Geraghty v Minter (1979) 142 CLR 177, 180.

87    A construction which will preserve the validity of the contract is to be preferred to one which will make it void: Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111; 205 FCR 187, [45].

Consideration of Ground 1

88    The parts of the Shareholders Agreement which are relevant to grounds 1 and 2 have been set out above.

89    Those clauses and definitions are relevant to ascertaining the intention of the parties to the Shareholders Agreement with respect to the restraints contained in cl 20.2. The task of the Court in determining the proper construction of cl 20.2 is to give effect to the text on the basis that the parties intended to produce a commercial result which makes commercial sense: Woodside Energy, [35]; Ecosse, [17]. In determining the meaning of a contractual term regard must be had to not only the text but also the surrounding circumstances known to the parties at the time, and the purpose and object of the transaction: Toll, [40]; Pacific Carriers, [22]; Woodside Energy, [35]; Mount Bruce Mining, [47] and [49]-[50]; and Ecosse, [17].

90    McKay, in his personal capacity, was one of the “Covenantors” to the Shareholders Agreement. Vandaman as trustee for the McKay Family Trust was the “Fifth Shareholder” to the Shareholders Agreement and one of the “Non-Findex Shareholders”. The five Covenantors were all natural persons and an “Associated Covenantor”, being, “in relation to a Non-Findex Shareholder, the Covenantor that is associated with that [Non-Findex] Shareholder”. By way of example, McKay was the “Associated Covenantor” in relation to Vandaman. The Covenantors “agreed to enter into certain obligations in favour of other parties to [the Shareholders Agreement]”: see Recital E, Shareholders Agreement. The Covenantors were individuals who, through the Non-Findex Shareholders, hold shares in Findex and have worked in the financial advice business that was acquired by Findex.

91    The nature of the financial services business acquired by Findex was such that it depended upon the provision of personal services to clients of the business. The goodwill of the business was based on the reputation, trust and confidence in the financial services provided by the business. That is the goodwill which Findex paid $2.25 million to obtain: Primary judgment, [35].

92    It is the protection of the goodwill to which the restraints in cl 20.2 are directed. When goodwill is based on personal relationships built on reputation, trust and confidence, there is an inherent risk that the goodwill will be eroded if persons leave the business. It is to this end that the restraints in cl 20.2 are directed – they are directed to (among others) the Covenantors who as individuals were at the time of sale providing these personal financial services which were the basis for the goodwill in the business.

93    It is apparent from the structure of the transaction that Findex sought to ensure that it had the widest possible protection from the risk that its goodwill would be eroded by Covenantors leaving the business to start a new business with former clients of the business that had been sold to Findex. The restraints were drafted by lawyers seeking to prevent any erosion of the goodwill of the business.

94    This is the commercial setting and context against which the proper construction of cl 20.2 is to be assessed.

95    We do not accept the appellants’ submission that the primary judge at [106] construed the definition of “Affiliate” too broadly. The word “Affiliate”, which appears in the chapeau to cl 20.2, is defined by reference to the other defined terms in Schedule 1 to the Shareholders Agreement and picks up terms defined in the Corporations Act. In this respect, two definitions are of significance. The definition of “Control” in Schedule 1 to the Shareholders Agreement (set out above) and the definition of “related entity” which, by item 1.1(e) of Schedule 2 of the Shareholders Agreement, incorporates the definition of “related entity” in s 9 of the Corporations Act (set out above).

96    The incorporation of the defined terms “Control” and “related entity” (the singular including the plural: see Shareholders Agreement, Schedule 2, cl 1.1(b)) are terms which are precisely defined and do not admit any ambiguity. Those definitions were chosen by the parties and incorporated in the Shareholders Agreement, in the definition of “Affiliate”.

97    In these circumstances, no basis exists for ignoring the terms selected by the parties and incorporated into the restraint in cl 20.2. They cannot, as the appellants contend, be read down by any permissible method of interpretation so that they have a reasonable operation.

98    So much is clear from the observations of Gibbs J, as the former Chief Justice then was, in Australasian Performing Right Association at 109 where his Honour (although dissenting) stated:

If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.

99    That passage has been cited with approval by the Federal Court and Full Federal Court: see eg Oceanview Developments Pty Ltd trading as Darwin River Tavern & Darling River Supermarket v Allianz Australia Insurance Ltd trading as Territory Insurance Office [2020] FCA 852, [98] (per Allsop CJ); New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski [2011] FCAFC 106; 195 FCR 234, [54] (per Siopis, Cowdroy and Tracey JJ); Software AG (Australia) Pty Ltd v Racing & Wagering Western Australia [2009] FCAFC 36; 175 FCR 121, [33] (per Spender, Sundberg and Siopis JJ).

100    In Australasian Performing Right Association, Barwick CJ stated at 105 that “it is no part of the function of a court by some process of divination as distinct from construction of the language employed to attribute to parties an intention to do something for which their express words do not provide”. Stephen J stated (at 114-115) that, in Australasian Performing Right Association, the relevant agreement was one in which the parties had “determined, in unambiguous terms and in a formal document obviously prepared with legal assistance, their quite complex contractual relationship”. His Honour stated that the “approach of courts to the construction of such documents, when they contain no ambiguity nor any other patent error or omission, cannot be other than that of an uncritical rendering of the meaning of the text”.

101    The consequence of the cumulative effect of the incorporation of the defined terms of “Control” and “related entity”, in the definition of “Affiliate” in the chapeau to cl 20.2, is that the restraints are not only intricate and complex, they have a compounding effect on the breadth and reach of those persons and entities which fall subject to the restraints.

102    By way of example, the restraint provisions in cl 20.2 operate to affect not only the Non-Findex Shareholders and Covenantors who gave the covenants in respect of their own conduct but also extend to the conduct of any “Affiliate” (cl 20.2 contains the words “each of the applicable Shareholders and the Covenantors covenants with, and undertakes to, the Other Parties that they will not, nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable), do any of the following …”). That in turn extends the operation of the restraint provisions to “any person who … is”:

(1)    “Controlled by” the Non-Findex Shareholders and Covenantors;

(2)    “Controls” the Non-Findex Shareholders and Covenantors;

(3)    “is Controlled by a person who Controls” Non-Findex Shareholders and Covenantors; and

(4)    “is a partner or joint venturer of the” Non-Findex Shareholders and Covenantors.

103    The breadth of the definition of Control is considerable. It means, “in relation to any body corporate …, the ability of any person to exercise control over the body corporate by … anymeans including, without limitation, the ability to directly or indirectly remove or appoint all or a majority of directors of the body corporate” (emphasis added). In respect to an individual, Control is “the ability … to direct that a person act in accordance with … instructions whether by operation of any law, agreement, arrangement or understanding, custom or any other means” (emphasis added). It is apparent from the text of the definition of “Control” that it is expressed in the widest of terms.

104    A further example as to the extensive breadth and operation of the restraint provisions in cl 20.2 may be seen by considering the incorporation of the defined term related entity in the definition of the word Affiliate, which word appears in the text of the chapeau to cl 20.2. By item 1.1(e) of Schedule 2 to the Shareholders Agreement, the definition of related entity in s 9 of the Corporations Act is taken to be the definition in the Shareholders Agreement at the time it was concluded. Incorporated in the definition of related entity is the definition of relative under the Corporations Act which at that time meant “spouse, parent or remoter lineal ancestor, child or remoter issue, or brother or sister of the person”.

105    The definition of Affiliate” includes “in relation to a person (Principal), any person who … is a related entity (as that term is defined in Section 9 of the Corporations Act substituting the word Principal for the words body corporate) …” (bold, italicised text in the original). Taking that plain direction, an “Affiliate”, in relation to a Covenantor or Non-Findex Shareholder, includes a “related entity” which is defined as follows:

related entity, in relation to a [Covenantor or Non-Findex Shareholder], means any of the following:

(a)     a promoter of the [Covenantor or Non-Findex Shareholder];

(b)     a relative of such a promoter;

(c)     a relative of a spouse of such a promoter;

(d)     a director or member of the [Covenantor or Non-Findex Shareholder] or of a related body corporate;

(e)     a relative of such a director or member;

(f)     a relative of a spouse of such a director or member;

(g)     a body corporate that is related to the first‑mentioned [Covenantor or Non-Findex Shareholder];

(h)     a beneficiary under a trust of which the [Covenantor or Non-Findex Shareholder] is or has at any time been a trustee;

(i)     a relative of such a beneficiary;

(j)     a relative of a spouse of such a beneficiary;

(k)     a body corporate one of whose directors is also a director of the [Covenantor or Non-Findex Shareholder];

(l)     a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the [Covenantor or Non-Findex Shareholder] because of any other application or applications of this definition.

106    The appellants submit that definitions (a) to (c) have no operation in relation to Covenantors because the Covenantors are natural persons and natural persons cannot have promoters.

107    Considering the breadth and operation of the term related entity in the definition of Affiliate, it can be seen, as the primary judge observed at [110], that the restraint provisions, are remarkably complex and they are even more remarkably broad in their application.

108    The restraint provisions operate to include related entities which are defined to include, for example:

(1)    a “promoter of” a Covenantor or Non-Findex Shareholder. In a particular factual situation, there could be arguments about who precisely falls within the compass of the word “promoter” of a Covenantor;

(2)    “a relative of such a promoter”. Such persons are prima facie quite removed from the Shareholders Agreement;

(3)    “a relative of a spouse of such a promoter”. Why the restraint might need to capture these persons is not evident, but the restraint does in terms apply to those persons;

(4)    a body corporate that is related to a Covenantor;

(5)    a beneficiary of a trust of which a Covenantor is “or has at any time been” a trustee. If Messrs Dawes, McKay, Kemp, Waller or Ms Dash (being the Covenantors) were “at any time” a trustee of a trust, the beneficiaries of those trusts are “Affiliates”. It is not apparent why the net needed to be cast so wide, but the terms of the Shareholders Agreement capture such persons; and

(6)    a relative of such a beneficiary, or the relative of a spouse of such a beneficiary.

109    The scope of the restraint provisions is also further extended as a consequence of it applying to both direct and indirect conduct. The permutations and potential breadth and operation of the restraint provisions in cl 20.2 are, by reason of the text used and the defined terms used in the text in cl 20.2, as the primary judge observed, remarkably broad in their application.

110    We reject the appellants’ submissions that the primary judge’s reasons at [110], [117], [156] and [158] indicate that the primary judge placed too much weight on improbable contingencies that were unlikely to have been within the contemplation of the parties in construing the restraints. This submission ignores the cautionary warning of Gibbs J subsequently Gibbs CJ in Australasian Performing at 109 (referred to above) that no basis exists for ignoring unambiguous terms used by the parties. The Court must give effect to them notwithstanding that the result might be unlikely, capricious or unreasonable. The Court has no power to remake or amend the contract to avoid the result which is considered to be inconvenient or unjust.

111    The appellants submit that the primary judge failed to give cl 20.2 “a proper commercial construction” by adopting “an excessively literal and expansive interpretation of its language”. The appellants submit that the primary judge failed to give effect to the clause’s purpose, being to protect the appellants’ goodwill, and failed to preserve the clause’s validity.

112    Those submissions must be rejected. The parties chose to use the terms that they did. The Court cannot start rewriting the various interlocking definitions by “some process of divination”: Australasian Performing Right Association, 105. As Nicholas, Yates and Beach JJ recently stated in Sandoz Pty Ltd v H. Lundbeck A/S [2020] FCAFC 133 at [66]:

In Arnold v Britton [2015] AC 1619 Lord Neuberger referred to a number of factors relevant to the construction of written contracts. His Lordship said at [17]-[19]:

[17]    First, the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.

[18]    Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning

[19]    [C]ommercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. Judicial observations such as those of Lord Reid in Wickman Machine Tools Sales Ltd v L Schuler AG [1974] AC 235, 251 and Lord Diplock in Antaios Cia Naviera SA v Salen Rederierna AB (The Antaios) [1985] AC 191, 201 … have to be read and applied bearing that important point in mind.

(Emphasis added.)

113    The choice of words used in the text of cl 20.2 cannot be rewritten by the Court to accord with a so-called “more commercial construction”. This is particularly the case in an agreement which is the product of intricate and complex drafting on the part of lawyers.

114    The appellants’ submissions suggest that the primary judge was diverted from the importance of the commercial object to be secured by the transaction that gave rise to the restraint clauses in the Shareholders Agreement when contemplating the proper construction of cl 20.2. The appellants point to the sole object of the restraints as stated in cl 20.2 being for the protection of the interest of New Civic and the other Shareholders, including Findex, in the valuable goodwill of the business that once belonged to Old Civic. These submissions must be rejected for the following reasons.

115    The primary judge recognised at [157] that “[t]he restraint provisions were clearly the work of lawyers, each with one eye on drafting the greatest possible protection for the applicants and with the other eye firmly shut to the limits that the law places on such restraints by requiring them to be the least necessary to protect the applicants’ interests in the business of New Civic”. With this in mind, the appellants’ submissions that the parties only intended for there to be “appropriate” restraints limited to the “sole object” of the protection of goodwill ring hollow and adopt an impermissible, overly simplistic approach to interpretation which is plainly contrary to the intention of the parties as manifested by the unambiguous express terms used in cl 20. It is no answer to the impossibly complex and broad restraints to say (10 years after the contract was executed) that the parties only intended to impose “appropriate” restraints and accordingly read down or (somehow) more accurately redraft cl 20.2 on that basis.

116    The appellants’ submission that the primary judge ought to have read down the provisions of cl 20.2 so as to exclude from its operation improbable and extravagant contingencies must be rejected. That is because the consequence of any improbable and extravagant contingencies arises from the plain meaning of the text used by the parties in cl 20.2 and not from the primary judge engaging in an excessively literal and expansive, uncommercial construction of cl 20.2.

Consideration of Ground 2

117    By ground 2, the appellants contend that the chapeau to cl 20.2 includes two separate groups of restraints. First, the Covenantor Restraints, which proscribe conduct of the Covenantors themselves, and second, the Affiliate Restraints, by which each Covenantor undertakes that its “Affiliates” will not engage in the conduct either. The appellants contend that these two groups of restraints are separate and independent of each other as they are concerned with the conduct of different people. The appellants further submit that the primary judge should have also found that, as the two sets of restraints concern conduct by different groups of people, the breadth of the reasonableness of the Affiliate Restraints was not relevant to the assessment of the validity of the Covenantor Restraints.

118    This contention of the appellants which is the foundation for ground 2 must be rejected as it suffers from the following defects.

119    First, as McKay submits, it seeks to approach the construction of the restraint clause with the benefit of hindsight, now knowing (after the benefit of a trial and judgment) the precise matters which are of concern to the appellants, while dispensing with the surplus in order to argue that the breadth of the clause is reasonable so as to preserve its validity. Such an approach is misconceived as the restraint clause must be construed as at the date of its creation: Just Group Limited v Peck [2016] VSCA 334; 344 ALR 162 (Just Group), [57] (per Beach and Ferguson JJA, and Riordan AJA). As Beach and Ferguson JJA, and Riordan AJA stated in Just Group (at [57]):

… [F]or the Court to sever all but four of the 50 entities listed in [an Annexure to the relevant contract in that case] (with the knowledge of what has occurred since the parties entered into the agreement) is to ‘reason backwards from allegation of “breach” to construction and evaluation of the contract, rather than by an assessment of validity of the restraints at the time the contract was made’ … It is not for the Court to make a new agreement for the parties. As was stated by Heydon J writing extra-judicially:

The courts are referees, not players; they are not supposed to waste their time adapting illegal covenants at the instance of those who seek to benefit from the illegality.

(Citations omitted.)

120    Second, there is nothing in the text and the structure of the chapeau to cl 20.2 suggesting that it should be divided into, on the one hand, Covenantor Restraints, and on the other hand, Affiliate Restraints such that each has a separate and independent operation. It is to be observed that the Covenantor Restraints and the Affiliate Restraints contended by the appellants both appear in the chapeau for cl 20.2. They are not divided into separate sub-paragraphs. They identify the persons who will not “do any of the” proscribed conduct identified in the sub-paragraphs. The appellants now seek to separate out the persons identified in the following phrase:

each of the applicable Shareholders and the Covenantors covenants with, and undertakes to, the Other Parties that they will not, nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable), do any of the [restrained conduct.]

121    However, those words are cumulative in their operation and effect and are not to be treated as independent covenants.

122    In this respect, the appellants argue that the use of the word “nor” in this sentence ensured that the alleged separate covenants in the chapeau were manifest. The appellants argued that this followed from “nor” being used in the chapeau as a negative conjunction which introduced “two or more alternatives”. True it is that “nor” can be used as a negative conjunction – the Oxford English Dictionary provides that when used in that way “nor” means “[u]sed before the second or further of two or more alternatives, normally to negate each: OED Online (Oxford University Press, September 2020) (Oxford English Dictionary). The Oxford English Dictionary gives as an example the phrase “I am neither a bleeding heart liberal nor a heartless conservative”. However, that is not how “nor” is used in the chapeau. The use of the word “nor” in the chapeau does not negate alternatives. It is used in a different sense, which the Oxford English Dictionary describes as “[i]n [the sense] of neither” or “[f]ollowing an affirmative clause, or in continuing narration”. That is, “nor”, as used in the chapeau, is used in the sense of “neither”: it expresses that each of the applicable Shareholders and the Covenantors will not, and neither will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable), do any of the restrained conduct. In that way, and as the Oxford English Dictionary points out, the use of “nor” is a “continuing narration”.

123    Moreover, if the parties had intended that the “Covenantor Restraints” and the “Affiliate Restraints” were to be, as the appellants contend, two separate and independent restraints, then one would have expected that they would be in separate clauses or at least, in the specific restraints identified in the sub-clauses to the restraint provisions in cl 20.2 and not in the chapeau to that clause.

124    Third, the appellants’ submission that the restraints can be divided into two separate groups of restraints (being the Covenantor Restraints and the Affiliate Restraints) ignores the commercial context and the purpose of the restraint provisions. That sole purpose was to protect the goodwill of the business. The parties drafted the restraint provisions with the intention of prohibiting conduct not only of the Covenantors, who were natural persons, but also their Affiliates which included individuals and corporates who were under their “control” or a related entity.

125    Fourth, the appellants’ submission that the chapeau to cl 20.2 includes two separate groups of restraints (namely, the Covenantor Restraints and the Affiliate Restraints) which are independent, is contradicted by cl 20.5 which provides:

Each of the restraints in clause 20.2 resulting from the various combinations of the Restraint Periods and the Restraint Areas is a separate, severable and independent restraint and the invalidity or unenforceability of any of the restraints in clause 20.2 does not affect the validity or enforceability of any of the other restraints in that clause. (Emphasis added.)

126    Clause 20.5 is instructive. Its heading is “Restraints cumulative”. The restraints that are identified as cumulative are the “restraints in clause 20.2 resulting from the various combinations of the Restraint Periods and the Restraint Areas” (emphasis added). The “Restraint Area” is defined by reference to cascading geographical limits. The “Restraint Period” is defined by reference to cascading temporal periods. Other than the “restraints … resulting from the various combinations of” those cascading geographical areas and temporal periods, no other restraints in cl 20.2 are identified as being “separate, severable and independent”. The parties are to be presumed to have identified in cl 20.5 all of the ways in which the various restraints in cl 20.2 were intended to be “separate, severable and independent” and only two have been identified, the various combinations of the restraints listed in the Restraint Periods and the Restraint Areas. Tellingly, there is no reference to what the appellants have identified as the Covenantor Restraints and the Affiliate Restraints, or a reference to any part of the chapeau to cl 20.2.

Disposition of Grounds 1 and 2

127    For these reasons, the appellants’ grounds 1 and 2, which contend that the primary judge misconstrued cl 20.2, must be rejected.

GROUND 3 – SEVERANCE

128    By ground 3, the appellants seek to sever a particular part of cl 20.2.

Appellants’ submissions on Ground 3

129    The appellants submit that the primary judge erred in failing to sever, from cl 20.2, the “Affiliate Restraints” (being the relevant undertakings by Covenantors and others that their “Affiliates” would not engage in certain conduct). The appellants submit that the correct test for severance is stated in SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; 225 CLR 516 (SST Consulting). The appellants in particular relied on SST Consulting at [43]-[46]. In SST Consulting, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ stated at [46]:

The modern law respecting severance in relation to covenants in unreasonable restraint of trade may be seen as turning on three questions. The first question is whether the covenantee can enforce the restraining covenant to the extent to which it would have been valid had it been narrowly drafted. The answer is that the covenantee can do so if the parts which are too wide can be removed without altering the nature of the contract and without having to add to, or modify, the wording in any way other than by excision. The second question is whether the covenantor can enforce the promise in consideration of which the restraining covenant was given. The answer is that the covenantor can enforce the promise if the main consideration provided for it is not illegal. The third question is whether, if a contract is unenforceable because it contains a covenant in restraint of trade, transactions connected or associated with it are also unenforceable. The answer is that the unenforceability of the contract may affect the enforceability of other transactions with which it is closely connected.

130    The appellants submit the first condition in SST Consulting is clearly met in this case as all one needs to do in order to sever the Affiliate Restraints is to strike through the words “nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable)” in the chapeau. That is, the appellants submit that the chapeau of cl 20.2 could be essentially amended as follows (with the strikethrough text below showing the proposed amendment):

For the sole purpose of protecting the interest of the Company and the other Shareholders (Other Parties) in respect of the goodwill of the Company and the Business, subject to the express exclusions set out below, each of the applicable Shareholders and the Covenantors covenants with, and undertakes to, the Other Parties that they will not, nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable), do any of the following for so long as the Shareholder remains a Shareholder, and during any of the 'Restraint Periods, within any of the Restraint Areas, directly or indirectly: …

131    The appellants submit that the nature of the Shareholders Agreement is not affected by striking through those words, and no words need to be modified or added. The appellants submit that, if the Affiliate Restraints are removed, the contract would still be the kind of contract that is described in the recitals, although its extent might have been reduced. The appellants submit that, if cl 20.2 was amended as set out above, there would be no need to add to or modify any other wording of the contract, other than by that simple excision, because, in the appellants’ submission, the Affiliate Restraint is a separate, distinct and independent covenant. The appellants submit this is apparent for three main reasons:

(1)    the appellants submit that cl 20.2 “carefully deal[s] separately with shareholders and covenantors on the one hand, and various affiliates on the other hand”;

(2)    the appellants submit that, “syntactically, the part of the chapeau to clause 20.2 that refers to Affiliates, the Affiliate Restraint, is distinctly separated from other parts of that provision”. The appellants submit that the Affiliate Restraint is a separate clause which was not “subordinate or dependent” on any other part of cl 20.2’s chapeau; and

(3)    the appellants submit that the use of the word “nor” (in the phrase “nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors …”) is a negative conjunction that by its ordinary and natural meaning is used before the second or further of two or more alternatives. The appellants submit that the words that follow the word “nor” are separate from the words that precede it and those two sets of words “deal with two separate and distinct concepts, and therefore two separate and distinct obligations”.

132    The appellants submit that the second condition in SST Consulting is also met. The appellants submit that the promise in consideration of which the Affiliate Restraints were given can be enforced despite their excision because the main consideration for that promise was clearly the Covenantor Restraints and/or the promise to acquire the shares of the Non-Findex Shareholders in New Civic for very valuable consideration.

133    The appellants submit that the third condition in SST Consulting is not relevant.

134    As a consequence, the appellants submit that the first and second conditions of SST Consulting are satisfied and the third condition is not relevant and, in these circumstances, there is no residual discretion to refuse severance. Accordingly, the appellants submit the primary judge should have found that, consistently with the test for severance as stated in SST Consulting, the Affiliate Restraints were capable of being severed and the Covenantor Restraints upheld.

135    The appellants referred to [157] to [161] of the Primary judgment (which are set out above). The appellants submit that, in applying the principles discussed in those paragraphs taken from Just Group, the authorities make clear that those principles are always subject to the intentions of the parties as expressed in their contract. The appellants in this regard referred to the following statement in Just Group (at [38]): “the application of [the considerations referred to, for example, in SST Consulting] is subject to the court giving ‘appropriate attention to the intentions of the parties’ objectively assessed at the time of the contract” (citations omitted). The appellants also referred to the following passage from Rentokil (at 306 per Doyle CJ):

It is well established by the cases that if part of an agreement is invalid or unenforceable, that part may, under certain circumstances, be severed from the balance of the agreement or disregarded. In considering this issue the court is not concerned with the construction of the particular provision … The court in considering severance is concerned with the question of whether, properly construed, the relevant agreement should be permitted to operate as between the parties with some part of its apparent or intended operation not being given effect. But while the courts have said on many occasions that they will not rewrite the contract for the parties, in order to create a valid restraint from an invalid restraint, the question is again ultimately one of intention. The question is whether, construing the contract as a whole, it may be concluded on an objective basis that the parties intended the relevant provision to have the reduced operation if it could not have its full operation.

136    The appellants submit that the syntactic and textual features of cl 20.2 (referred to earlier) ensured that it was the intention of the parties that the Affiliate Restraint is separate and distinct from the other parts of cl 20.2. The appellants submit this position was reinforced by the terms of cl 20.5 and cll 2.1 and 2.2 of Schedule 2 (extracted above). As support for this position, the appellants referred to the following passage of Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 442 (per Taylor J):

It was suggested in argument that the effect which a void promise expressed in a contractual instrument will have on the rest of the contract will vary according to whether it is contained in a deed or in a simple contract. But the problem of severability is the same in either case; fundamentally the question is one of intention to be gathered from the instrument itself … There can, of course, be no doubt that if the parties to either a deed or simple contract were expressly to declare their intentions as to what consequences should follow upon the invalidation of a particular term[,] effect would be given to the intention expressed provided, of course, the invalidation of the term meant merely that it was void.

(Citations omitted.)

137    The appellants submit that cl 20.5 and cll 2.1 and 2.2 in Schedule 2 (extracted above) were all express declarations of a relevant intention of the kind referred to in the above passage. It will be recalled that cl 20.5 provides as follows:

Each of the restraints in clause 20.2 resulting from the various combinations of the Restraint Periods and the Restraint Areas is a separate, severable and independent restraint and the invalidity or unenforceabllity of any of the restraints in clause 20.2 does not affect the validity or enforceability of any of the other restraints in that clause.

138    The appellants submit that cl 20.5 is a direction to “look at clause 20.2, read it … as a whole[,] with all of the combinations that clause 20.1 authorises, and each or any of those [resulting] restraints become the subject matter of clause 20.5.

139    The appellants also referred to cll 2.1 and 2.2 of Schedule 2 of the Shareholders Agreement. Schedule 2 is titled “Rules for interpretation”. Clauses 2.1 and 2.2 provide as follows:

2.     Compliance with Law

2.1     This agreement is to be interpreted so that it complies with all applicable Territory laws and if any provision does not comply then it must be read down so as to give it as much effect as possible.

2.2     If it is not possible to give that provision any effect at all, however, then it is to be severed from this agreement in which case the remainder of this agreement will continue to have full force and effect.

140    The appellants submit that the reference in cl 2.1 to all applicable Territory laws is wide enough to include the common law doctrine of restraint of trade. The appellants submit that the word “provision” that is used in the second line of cl 2.1 and then the first line of cl 2.2 is apt to capture the Affiliate Restraint. In this respect, the appellants sought to draw support from Rentokil. The appellants submit that in Rentokil the relevant contract contained a clause which stated that “Any provision of this Deed which is, or becomes, illegal, void or unenforceable, shall be ineffective to the extent only of such illegality, voidness or unenforceability and shall not invalidate any other or the remaining provisions of this Deed”. The appellant noted that, in Rentokil, Doyle CJ (at 307) stated that clause “indicates that it is the parties’ intention that the various restraints imposed upon the employee … should be read as separate restraints, and that severance may take place, provided that to do so does not alter the scope and intention of the agreement”. The appellants observed that in Rentokil Matheson J made a similar finding: Rentokil, 327.

McKay’s submissions on Ground 3

141    McKay submits that the primary judge’s reasoning at Primary judgment [159]-[162], as to why the restraint in cl 20.2 could not be rendered valid through severance, should be upheld. McKay submits that severance has a “strictly circumscribed role”: IF Asia Pacific Pty Ltd v Galbally [2003] VSC 192; 59 IPR 43, [174]. Severance can only occur where a restraint clause is “not really a single covenant but is in effect a combination of several distinct covenants”: Just Group, [39], quoting Attwood v Lamont [1920] 3 KB 571, 593.

142    McKay submits that the primary judge was clearly correct at Primary judgment [162] by reasoning that cl 20.5 expressly provided that certain aspects of cl 20.2 would be severable – namely, the cascading provisions as to the “Restraint Area” (which refers to geographical areas) and “Restraint Period” (which refers to various temporal periods) – and the parties thereby did not intend that other parts of cl 20.2 would also be severable. McKay submits that the parties were legally advised, expressly turned their minds to the severability of the restraint clause and limited such severability to certain aspects of it. McKay submits that the primary judge’s finding – that the parties did not also intend for other parts of cl 20.2 (which they did not stipulate to be severable) to be read as standalone covenants capable of being severed – is clearly correct.

143    McKay submits that, even putting cl 20.5 to one side, the principal difficulty with any attempt to sever parts of cl 20.2 is, as the primary judge described, the “extraordinary complexity of the restraints with their interlinking and overlapping definitions”: Primary judgment, [159].

Consideration of Ground 3

Principles

144    The legal principles which determine whether covenants can be severed from a restraint clause may be broadly summarised as follows.

145    In SST Consulting, one of the issues was whether s 4L of the Trade Practices Act 1974 (Cth) (Trade Practices Act) required severance of provisions of a loan agreement so that a principal debtor’s obligations to repay a loan and to pay interest remained enforceable: SST Consulting, [3]. Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ stated the following at [21]:

The central focus of the reasons of the Full Court was upon the application of what were understood to be the common law rules governing the consequences of illegality. There was, therefore, a deal of reference to the decisions of this Court in Brooks v Burns Philp Trustee Co Ltd, Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd and Humphries v Proprietors Surfers Palms North Group Titles Plan 1955 as well as to McFarlane v Daniell and Brew v Whitlock [No 2]. But as these reasons will later demonstrate, whether the principles stated in those cases find application in the present matter depends upon first construing the relevant provisions of the [Trade Practices Act].

(Citations omitted.)

146    After considering the construction of s 4L of the Trade Practice Act, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ stated the following at [41]: “Are some common law “rules” relating to severance nonetheless engaged by the reference made in s 4L [of the Trade Practices Act] to the extent of severance of the offending provision?”. It was in that context that Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ stated the following (at [42]-[46]):

… as Kitto J said in [Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432]:

“Questions of severability are often difficult, and tests that have been formulated as useful in particular classes of cases are not always satisfactory for cases of other kinds.”

In Carney v Herbert, Lord Brightman, speaking for the Privy Council and with reference to the statement by Kitto J, added:

“There are not set rules which will decide all cases.”

Not least is that so because questions of “severance” arise in different circumstances. In public law, what have been called common law rules of severance were devised to preserve valid portions of subordinate legislation after textual surgery to remove the invalid portions. The term “severance” is also used to describe what is done when a contractual term is ignored as being too uncertain to admit of enforcement but other promises in the contract are enforced. Further, “severance” is a term employed in considering the enforceability of provisions of contracts other than provisions whose making or enforcement is illegal or contrary to one of the heads of public policy. Different considerations arise in these various cases.

The origin of what came to be known as the “blue pencil” test lay in the treatment by the common law of illegal conditions in bonds and other instruments under seal. This was a field where matters of form were paramount and the concern was with whether what remained was a valid instrument rather than with the implication of a promise to take effect if part of the bargain was illegal.

The “blue pencil” test was imported into the treatment of covenants in restraint of trade even though in that field, at least following the general adoption of the approach of courts of equity to such restraints, the emphasis has been upon questions of substance and of public policy.

The modern law respecting severance in relation to covenants in unreasonable restraint of trade may be seen as turning on three questions. The first question is whether the covenantee can enforce the restraining covenant to the extent to which it would have been valid had it been narrowly drafted. The answer is that the covenantee can do so if the parts which are too wide can be removed without altering the nature of the contract and without having to add to, or modify, the wording in any way other than by excision. The second question is whether the covenantor can enforce the promise in consideration of which the restraining covenant was given. The answer is that the covenantor can enforce the promise if the main consideration provided for it is not illegal. The third question is whether, if a contract is unenforceable because it contains a covenant in restraint of trade, transactions connected or associated with it are also unenforceable. The answer is that the unenforceability of the contract may affect the enforceability of other transactions with which it is closely connected.

147    In Just Group, the Victorian Court of Appeal stated at [39]:

If a restraint clause is ‘not really a single covenant but is in effect a combination of several distinct covenants’, some of which are too wide, the invalid covenants may be severed subject to the following conditions:

(a)     The impugned covenants must be capable of simply being removed – as if crossed out with a blue pen. A court can only remove words from a restraint clause; it cannot rewrite the restraint clause.

(b)     The restraint clause contains several distinct covenants, one of which is valid. The covenant to be severed must be an independent covenant capable of being removed without affecting the remaining part. ‘The only change should be to the sphere of operations of the clause’.

(c)     Whether it is based on the principle of uncertainty, or the public policy to protect employees, or that ‘it is for the parties to make contracts, not the courts’, courts have demonstrated reluctance to engage in ‘curial disentanglement’ and sever the unenforceable parts of unreasonably wide restraint clauses if the clause is not a genuine attempt to establish reasonable protection for the legitimate interests of the employer. The following factors indicate that the restraint clauses of the latter kind are unreasonable:

(i)     If the restraint clauses include patently unjustifiable restraints such as might intimidate the employee.

(ii)     If the restraint clauses are in a standard form.

(ii)     If the variables are numerous and the combination of variables appear mechanical and indiscriminate.

However, the application of these considerations is subject to the court giving ‘appropriate attention to the intentions of the parties’ objectively assessed at the time of the contract.

(Internal quotations in the original; citations omitted.)

The “Affiliate Restraint” cannot be severed

148    We are not satisfied that the “Affiliate Restraint” can be severed consistently with the principles stated above.

149    For the reasons also stated above in relation to grounds 1 and 2, we are not satisfied that the part of cl 20.2 that the appellants submit can be severed, being the “Affiliate Restraint” in the chapeau to cl 20.2, can be properly characterised as constituting a single, distinct covenant. In rejecting the appellants’ ground 2, we have concluded that the only restraints in cl 20.2 which are “separate, severable and independent” are the cascading provisions in the Restraint Periods and the Restraint Areas. We are not satisfied that the Affiliate Restraints are “separate, severable and independent” and can be severed from cl 20.2. We do not accept that it is permissible to take a blue pen and simply strike through the words “nor will any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors (as applicable)” in the chapeau. That provision of the chapeau cannot be removed without altering the nature of the contract and without having to add to, or modify, the wording in any other way other than by way of excision: SST Consulting, [46]. To do so would amount to an impermissible redrafting of the restraint provisions and reasoning backwards from allegations of breach to construction and evaluation of contract: Just Group, [57(d)].

150    Severing the part of cl 20.2 identified by the appellants would alter the nature of the Shareholders Agreement. The nature of the agreement was to regulate the relationship between shareholders in a company. The text of that agreement makes it clear that an inherent feature the parties sought to deal with was other entities or persons being affiliated with the Covenantors or the relevant Shareholders. The parties sought to capture all of those “Affiliates” in the widest possible terms and to deal with them in the Shareholders Agreement. It was part of the agreement that the relevant Covenantors and Shareholders were obliged to ensure that neither they nor their Affiliates engaged in the restrained conduct.

151    By way of example, there is a separate clause in the Shareholders Agreement, cl 16, which required that a Shareholder could not deal with any of its shares except with the prior written consent of all Shareholders or in accordance with the further provisions of cl 16. Absent the consent of the other Shareholders, a Shareholder could sell shares to certain other persons, including an “Affiliate”, on the precondition that the transferee agreed to be bound by that Shareholder’s obligations (see cl 16.4(a)) and on the basis that (among other things) the selling/transferring Shareholder “remain[ed] principally liable for the performance of the … obligations assumed” by the transferee (see cl 16.7(a)). In these circumstances, an important feature of the Shareholders Agreement was tethering the primary obligors, the Covenantors and the Shareholders, to “Affiliates”, even in the context of a shareholder exiting its relationship with the company. In the context of an agreement between corporate trustees with associated covenantors, the parties were attuned to the reality that the parties likely had, or may during the currency of the Shareholders Agreement have, relationships relevant to the goodwill restraint and that the agreement should specifically attempt to capture those relationships. The vice, of course, was the breadth of restraint, which is referred to above.

152    This Court must also give “appropriate attention to the intentions of the parties objectively assessed at the time of the contract”: Just Group, [39]. As evidenced by the text of the Shareholders Agreement, it was the intention of the parties that Affiliates of Covenantors were to be subject to the restraint. Severing the “Affiliate Restraint” would ignore that obvious intention. To accept the appellants’ submissions on ground 3 and sever the Affiliate Restraints from cl 20.2 would be to impermissibly redraft the restraint provisions for the parties. The primary judge correctly recognised at [161] that to sever the Affiliate Restraints would be to redraft the restraint clause to make it valid.

153    The Court severing the “Affiliate Restraint” would also represent the parties leaving “to the court the task of making their contract for them”: Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505, 522-523. In this case, that has occurred after the appellants have had the benefit of a trial. After that trial, the appellants are in a position to identify which part of the restraint they now say can be abandoned. In addition, the “more numerous the variables, and the more mechanical and indiscriminate the combinations of variables”, the “more likely” it is that the parties have left it to the Court to find a restraint for them: ibid. Here, the number of variables and their various permutations is considerable. By way of brief illustration, cl 20.2 contains a chapeau with embedded definitions and then seven sub-paragraphs. The chapeau’s embedded definitions include “Affiliate” which itself has five elements, and each of those five elements refers to the concepts of “partner[s]” or “joint venturers” and contains further embedded definitions of “Control” and “related entity”. Those latter definitions contain at least 2 and 12 elements respectively.

154    The purpose of the clause and the drafting by the parties of the chapeau – such that it refers to the covenants applying to each of the Shareholders and the Covenantors as well as any Affiliate of the Non-Findex Shareholders/Shareholders/Covenantors – provides the strongest indication that the restraints were not intended by the parties as separate and independent restraints. The Court rejects the appellants’ invitation to redraft the restraint so as to restrain only the Covenantors and not their Affiliates which includes related entities through which they may operate. To do so would not be consistent with the parties’ intentions, objectively ascertained, at the time the contract was made: Just Group, [39(c)].

155    As stated above, cl 20.5 was a specific clause which dealt with severance as to the particular restraints in cl 20.2. The parties are to be presumed to have identified in cl 20.5 all of the ways in which the various restraints in cl 20.2 were intended to be “separate, severable and independent” and only two have been identified, the various combinations of the restraints listed in the Restraint Periods and the Restraint Areas. The “Affiliate Restraint” was not referred to.

156    In addition, the principle by which specific provisions will be given effect in preference to general provisions, or specific provisions are given greater weight than general provisions applying to the same subject matter, has been described as reflecting “sound common sense”: Hume Steel Limited v Attorney-General for Victoria (1927) 39 CLR 455, 466 (Higgins J); Charben Haulage Pty Ltd v Environmental & Earth Sciences Pty Ltd [2004] FCA 403, [171] (Wilcox J); Trust Co (Nominees) Ltd v Banksia Securities Ltd [2016] VSCA 324, [46] (Ashley, Beach and McLeish JJA); see also Qube Ports Pty Ltd v Maritime Union of Australia [2018] FCAFC 72, [130]-[141], where White J considered this maxim in the particular circumstances of that case.

157    The more specific treatment in cl 20.5 should prevail over the general statement in Schedule 2, cl 2.2 (which provided that “[i]f it is not possible to give [a] provision any effect at all, … then it is to be severed from this agreement in which case the remainder of this agreement will continue to have full force and effect”). We do not read the generality in cl 2.2 of Schedule 2 as overriding the specific provision set out in cl 20.5. That accords with a reading of the contract as a whole, the plain meaning of cl 20.5, and ascribing an objective or purposive analysis to that provision.

Disposition of Ground 3

158    It follows, for the reasons given, that ground 3 must be rejected.

GROUND 4 – ENFORCEABILITY

Appellants’ submissions on Ground 4

159    The appellants submit that, for the reasons advanced in respect to ground 3, the Affiliate Restraints should be severed from cl 20.2 which would have resulted in the restraint clause providing no more than adequate protection of the appellants’ interests in the protection of goodwill.

160    The appellants also submit that the primary judge appeared to have correctly accepted that the separate sub-paragraphs of cl 20.2 were severable. The appellants submit that the primary judge ought to have gone on to make a finding that sub-clauses (a), (d), (e) and (g) of cl 20.2 could be severed and it followed that any one or more of the sub-clauses on which the appellants did rely (sub-clauses (b), (c) or (f) of cl 20.2) could also be severed if necessary. The appellants succeeded in establishing that all three sub-clauses were breached. Accordingly, the appellants submit, it was not necessary to rely on sub-clauses (b) or (c), and to determine the correctness of the assessments made by the primary judge at Primary judgment [112] as to the effect on their scope of the definition of “customer or client” that they each contain. The appellants submit that the primary judge’s reasons appeared to accept that cll 20.2(b) and (c) are severable and, as a result, the appellants submit that they should have succeeded at trial by relying only on cl 20.2(f).

McKay’s submissions on Ground 4

161    McKay submits that ground 4 is only relevant if one or more of the first three grounds is upheld but for the reasons given by McKay those grounds should be rejected. In any event, McKay submits that, even if the first three grounds are upheld, they would not be sufficient to render the restraint valid and enforceable. That is because, in McKay’s submission, the permutations and complexities of cl 20.2 result in the clause having an impermissible breadth such that the restraint is unenforceable because it is unreasonable.

Consideration of Ground 4

162    A premise of the appellants’ argument on ground 4 was that the primary judge “accepted that the separate sub-paragraphs of cl 20.2 were severable”. However, that is not a fair reading of the primary judge’s reasons. At [103], [127]-[133] of the Primary judgment, the primary judge stated the following:

Although cl. 20.2 has another four sub-clauses covering such conduct as being engaged or concerned in a competing business (subclause (a)), soliciting any employee (subclause (d)), soliciting any authorised representative (subclause (e)) and representing any connection with or interest in the business (subclause (g)), senior counsel for the applicants put their case as relying on subclauses (b), (c) and (f) only.

The principal difficulty in the restraints arises from the many defined terms and the effect that the incorporation of the definitions has on the breadth of the restraints.

The applicants’ approach of focusing on and seeking to defend only those parts of the restraint provisions on which they rely could obviate the need to consider the many parts of the many permutations of the restraint provisions on which they do not rely, but only if the test for severance is met …

In that regard, the subclauses of cl. 20.2 which are not relied on may be able to be severed from the rest of the clause.

First, there is no difficulty in applying the apocryphal blue pencil to each subclause without changing the meaning of what remains and without needing to add anything.

Secondly, each subclause proscribes different conduct and could thus be understood as a separate restraint.

Thirdly, in so far as the question arises as to whether the restraint provisions as a whole can be seen as a genuine attempt to establish reasonable protection for the legitimate interests of the covenantee, in my view it is significant that by cl. 20.4 Mr McKay acknowledged that each of the restraints is reasonable in its extent having regard to the interests of each party to the [Shareholders Agreement], and that it goes no further than is reasonably necessary to protect New Civic. Whilst that acknowledgement will have limited relevance to the question of whether the restraints are, objectively, reasonable, which is the test in respect of their enforceability, it is relevant to the subjective question of whether the restraints constitute a genuine attempt to establish reasonable protection. Also relevant in that regard is that the parties to the restraint were legally represented and there was no apparent inequality of bargaining power; this was an arms-length commercial transaction.

The point is that I do not intend at this stage exploring the meaning of each of the four subclauses of cl. 20.2 that the applicants do not rely on. Each has its own permutations and complexity. I am prepared to assume for present purposes that they can be severed. That assumption obviates the need for me to consider them further.

(Emphasis added.)

163    As the italicised words in this passage make clear, the primary judge was “prepared to assume” that cl 20.2’s sub-paragraphs could be severed. It was an assumption which obviated the need to fully consider the issue. It was not a positive finding that those sub-paragraphs were severable. As a result, a premise of the appellants’ ground 4 was without an adequate foundation.

164    Moreover, as to whether the appellants can succeed by relying solely on sub-clause (f), the primary judge stated the following at [154]-[155] of the Primary judgment:

From what I have said above … with regard to the construction, meaning and reach of subclauses (b) and (c) of cl. 20.2, it is apparent that they have extraordinary reach and complexity. They extend well beyond any justifiably protected interest of the applicants in the goodwill of the business – they do not afford no more protection than is reasonably necessary to protect the interests of the party in whose favour they are imposed.

The same is true of subclause (f). Although the wording of the subclause taken on its own is simpler and uncomplicated by incorporated defined terms when compared to subclauses (b) and (c), all the breadth and complexity of the chapeau nevertheless applies to it.

(Emphasis added.)

165    We agree with the primary judge’s assessment in this respect. The issues addressed above and which affect cl 20.2’s chapeau also affect cl 20.2’s sub-paragraphs. For the reasons given above, one cannot simply close one’s eyes to the chapeau, read only those parts of the chapeau which are convenient to the appellants, and then seek to enforce only one or more of sub-paragraphs (b), (c) or (f) of cl 20.2.

166    We have rejected the appellants’ grounds 1, 2 and 3 for the reasons given. It follows that we reject ground 4 as the primary judge did not fail to properly construe the restraints in cl 20.2. The primary judge was correct to conclude at [187] that the restraints are not enforceable because they are unreasonable as to the parties whose conduct they seek to restrain, and to the extent that they are unreasonable on that basis they are not severable.

Disposition of Ground 4

167    For the reasons given, ground 4 must be rejected.

DISPOSITION OF THE APPEAL

168    The appeal will be dismissed with costs.

I certify that the preceding one hundred and sixty-eight (168) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Markovic, Banks-Smith and Anderson.

Associate:

Dated:     29 October 2020

SCHEDULE OF PARTIES

NSD 72 of 2020

Appellants

Fourth Appellant:

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