CATCHWORDS
FRAUD - sale of business - feasibility studies - non-disclosure of accounts - alleged misrepresentation as to income, expenditure and profit.
TRADE PRACTICES - sale of business - representations as to projected gross profit margins - whether vendor had reasonable grounds for making representations
NEGLIGENCE - sale of business - disclaimer of liability for error or omissions in feasibility study - whether due skill and competence required in preparation
RESTRAINT OF TRADE - sale of supermarket - vendor entitled to issue notice that purchaser buy stock from a nominee - whether arrangement a reasonable restraint of trade - right had not been exercised
Trade Practices Act 1974 (Cth) ss51A, 52
Restraints of Trade Act 1976 (NSW) s4
Abalose v Australian Postal Commission (1990) 171 CLR 167
Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242
Amoco Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288
Attorney-General of the Commonwealth of Australia v The Adelaide Steamship Co Ltd [1913] AC 781
Atwood v Lamont [1920] 2 KB 146
A. Buckle & Son Pty Ltd v McAllister (1986) 4 NSWLR 426
Douglass Automated Laboratories & Allied Services Pty Ltd v Sonic Technology Australia Ltd [1994] ATPR (Digest) ¶46-129
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269
Gerathy v Minter (1979) 142 CLR 177
Hedley Byrne & Co Ltd v. Heller & Partners Ltd [1964] AC 465
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Howard F Hudson Pty Limited v Ronayne (1972) 126 CLR 449
Lezam Pty Limited v. Seabridge Australia Pty Ltd (1992) 35 FCR 535
Lindner v Murdock's Garage [1950] 83 CLR 628
Louth v Diprose (1992) 175 CLR 621
Nordenfelt v Maxim, Nordenfelt Guns & Ammunition Company Limited [1894] AC 534
Orton v Melman [1981] 1 NSWLR 583
Owners of SS Montestroom v Owners of SS Sagaporack [1927] AC 37
Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326
Watson v Prager [1991] 1 WLR 726
Wright v Gasweld [1991] 22 NSWLR 317
MICHAEL TREVOR GREENHALGH & ORS v COMPOSITE BUYERS LIMITED & ANOR
NG 852 of 1994
Davies, Einfeld & Sackville JJ
Sydney
31 May 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No G 852 of 1994
)
GENERAL DIVISION )
On appeal from a judgment of a single judge of the Federal Court of Australia
BETWEEN: MICHAEL TREVOR GREENHALGH
First Appellant
LEONIE ANNE GREENHALGH
Second Appellant
M & L GREENHALGH PTY LIMITED
Third Appellant
AND: COMPOSITE BUYERS LIMITED
First Respondent
PAYLESS SUPERBARN (N.S.W.) PTY LIMITED
Second Respondent
Coram: Davies, Einfeld & Sackville JJ.
Date: 31 May 1995
Place: Sydney
MINUTES OF ORDER
THE COURT ORDERS THAT:
1. The appeal be allowed in part.
2. The orders in the Court below be set aside and the following orders substituted therefor:
(i) Declaration that the restraint appearing in cl.3(1) of the second schedule of the deed of trust dated 30 November 1987 is invalid from the handing down of this judgment.
(ii) The application otherwise be dismissed.
(iii) The applicants pay 3/4 of the respondents' costs.
3. The appellants pay 3/4 of the respondents' costs of the appeal.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) No G 852 of 1994
)
GENERAL DIVISION )
On appeal from a judgment of a single judge of the Federal Court of Australia
BETWEEN: MICHAEL TREVOR GREENHALGH
First Appellant
LEONIE ANNE GREENHALGH
Second Appellant
M & L GREENHALGH PTY LIMITED
Third Appellant
AND: COMPOSITE BUYERS LIMITED
First Respondent
PAYLESS SUPERBARN (N.S.W.) PTY LIMITED
Second Respondent
Coram: Davies, Einfeld & Sackville JJ.
Date: 31 May 1995
Place: Sydney
REASONS FOR JUDGMENT
Davies & Einfeld JJ: This
is an appeal from a judgment of a judge of the Court, Whitlam J, in which his
Honour dismissed a claim for damages and other relief in respect of
representations said to be deceitful, to amount to conduct in breach of s.52 of
the Trade Practices Act 1974 (Cth) and to have been negligently
made. The claim
also sought relief with respect to an arrangement between the parties which was
said to constitute an unlawful restraint of trade.
As his Honour's reasons for judgment were brief, it would be inappropriate to describe the whole of the evidence, which occupied the best part of five appeal books and in which there are many conflicts between the witnesses. Nevertheless, we have read the whole of the evidence and are left with a comfortable satisfaction that his Honour's judgment was, save in two respects which we shall later mention, well based on the evidence before him. In these reasons, the evidence set out will be principally that which supports the conclusion at which his Honour arrived. But that is not to suggest that attention has not been given to the evidence to the contrary.
The
issues between the parties arose out of the sale by the first respondent,
Composite Buyers Limited ("Composite Buyers"), to the third
appellant, M & L Greenhalgh Pty Limited ("Greenhalgh Co"), which
was then called "Ligon 120 Pty Ltd", of the Payless Supermarket in
Goulburn, NSW. It is unnecessary to
describe all the arrangements entered into between the parties and which took
effect on 30 November 1987. Greenhalgh
Co was incorporated to serve as trustee of a unit trust and to acquire the
supermarket business. The ordinary units
in the trust were issued to the first and second appellants, Mr & Mrs
Greenhalgh, and entitled the holders to the profits of the trust. Composite Buyers took up a certain number of
redeemable preference units which entitled the holders to the payment of a rate
of interest, these units representing the finance which Composite Buyers made
available to the venture. Composite
Buyers also took up a small number of preference units which entitled the
holder to certain rights, the subject of the contention as to an unlawful
restraint of trade. The second
respondent, Payless Superbarn (NSW) Pty Limited ("Payless"), took the
head lease of the supermarket premises and sublet to Greenhalgh Co. The arrangements provided for Greenhalgh Co
to operate under the Payless banner.
Composite Buyers, which was a large wholesaler, had acquired a number of supermarkets in New South Wales and Victoria from Permewan Wright Pty Limited and desired to sell them. After disposing of some of the supermarkets in Victoria, Composite Buyers advertised several of the New South Wales stores, including the Goulburn supermarket. The first appellant, who had been an assistant bank manager, became interested in the acquisition of one of the stores and contacted Composite Buyers.
It
was an unusual aspect of the negotiations that Composite Buyers declined to
make available to potential purchasers the books relating to the business which
it was offering for sale. Instead it
proffered to interested persons a feasibility study of the future operations of
the business. The reason for the
non-disclosure may have been that Composite Buyers could not be sure that the
accounts which had been kept by Permewan Wright in respect of each of its
stores fairly reflected the expenses of those stores. Thus, it was conceded on behalf of the
appellants that, so far as personnel, occupancy, advertising, insurance,
stationery, security, head office and other expenses were concerned, there was
no way of knowing how the total costs of the Permewan Wright chain had been
distributed amongst its stores. In any
event, the books were not made available.
However, Composite Buyers did disclose the actual gross takings
of the Goulburn store for five years and also certain actual figures relating
to the business of the store. The
detailed information provided in the feasibility studies was in general based
upon estimations and expectations.
Necessarily, such a procedure is more susceptible to a claim of
misleading and deceptive conduct than a full disclosure of the actual books of
account.
MISLEADING AND DECEPTIVE CONDUCT
The appellants' case at the trial encountered the problem that the first year's results for 1987-88 fairly matched the challenged feasibility study, which was the third of three studies prepared, save in a respect which did not reflect upon its reliability. Turnover was up to prediction and the actual gross profit margin was close to the predicted margin. Mr Greenhalgh's main complaint with the first year appears to have been that, "That year was fairly horrific with warehouse problems." But that was not a matter dealt with by the feasibility study. From the end of the first year there were factors outside the ambit of the predicted feasibility which operated to affect the performance of the Goulburn store. First there was the management of the store by the appellants. Then, in 1989, Woolworths upgraded its competing supermarket and the image of its store. In subsequent years, there was a price war between the Woolworths and Coles supermarkets and, in 1992, Franklins also opened a store in Goulburn.
It
was, moreover, not until the second half of 1992 that these proceedings were
commenced. By this time, the three year
limitation period in s.82 of the Trade Practices Act 1974 (Cth)
applicable to the representations in the feasibility study may
have expired. The appellants' case
suffered from a lack of specific and early complaint about matters in the
feasibility study which were said to mislead.
Of the three feasibility studies, the first was prepared by Mr A. Fisher, who had died before the trial, for another potential purchaser of the Goulburn store and was not shown to Mr & Mrs Greenhalgh. However, it became relevant as a study prepared at about the relevant time and was significant because the studies in fact supplied to Mr & Mrs Greenhalgh were more conservative, predicting lower gross income and lower operating profit. The existence of Mr Fisher's feasibility study and the adoption of lower figures in the later studies supplied to Mr & Mrs Greenhalgh tend to support the case put for Composite Buyers that each of the studies provided to Mr & Mrs Greenhalgh was prepared by a person who set out to prepare a fair and genuine projection of likely results.
Two feasibility studies were supplied to Mr & Mrs Greenhalgh. It is not clear who prepared the first of these. It was signed by Mr P.J. Sugden but he denied both that he prepared it or that he took it into account when he prepared the second feasibility study. The first of the studies supplied to Mr & Mrs Greenhalgh assumed that the total price would be $920,000, of which Composite Buyers would contribute $95,000, the purchaser would contribute $200,000, a bank loan of $150,000 would be obtained, plant valued at $325,000 would be leased and creditors of $150,000 would be taken over.
Subsequently, Mr Greenhalgh advised that he wished to decrease the amount of the purchaser's cash contribution to $115,000. It is not necessary to deal with the conversation which occurred. The affidavits differ on its content, there was very little cross-examination on the point, and no finding was made by the trial Judge about it. But the result was that Mr Sugden was directed to prepare a feasibility study. He did so on the footing that Composite Buyers would contribute $60,000, the purchaser would contribute $115,000, there would be a bank loan of $200,000, the plant leased would be valued at $450,000 and there would be creditors of $100,000, giving a total purchase price of $925,000.
There are similarities between Mr Sugden's study and the earlier one also signed by him, but this may not be surprising as Composite Buyers used a computer program for the projections in which it was necessary only to insert the variables for the computer to produce the feasibility study. Thus, once Mr Sugden adopted the first year sales of $6,318,000, which accorded with the previous year's actual sales for the store, as the previous feasibility study had also done, many similarities between the two studies flowed as a matter of course.
An
attack was made at the trial upon both the projected net profits and the
trading details in Mr Sugden's feasibility study, but it is not clear that, in
fact, these latter details played much part in what occurred. In his affidavit, Mr Greenhalgh said: "I did not compare the figures stated in
the second feasibility study with the figures stated in the first feasibility
study until late 1991 or early 1992 as they had been passed on to my
accountant". The accountant, Mr
W.J. Bartlett, for his part, said in
evidence: "We took the trading figures in the first feasibility study and
we did not go through the trading figures in the second feasibility
study." Nevertheless, both studies
showed net profits and one of the attacks made below was that the appellants
were misled accordingly.
At the trial it was put to Mr Sugden in cross-examination that, if the earlier feasibility study had been used as the basis for the new feasibility study and if it had been adjusted merely to account for the difference in financing costs, then the computer would have produced a result which predicted losses in the first two years, in which case it would have been very difficult to sell the store. It was also put to Mr Sugden that he had altered some of the figures so as to throw up a profit, specifically that he "fiddled with" the figures so as to produce a positive cash flow. Mr Sugden denied those allegations and denied that he gave any attention to the earlier study, which he said was not on the file when he undertook his task. The effect of Mr Sugden's evidence was that his feasibility study was an independent effort which he undertook with a view to arriving at a fair result.
The
trial Judge accepted Mr Sugden's evidence.
His Honour said:- "I accept
Mr Sugden's denials, which strike me as entirely plausible. The applicants have failed to establish any
lack of genuineness or bona fides on the part of Mr Sugden in the exercise that
he undertook." The trial Judge had
the benefit of seeing Mr Sugden in the witness box. The conclusion was open to him and was not
improbable. Indeed, Mr Sugden's
affidavit and the transcript of his evidence convey an impression of
genuineness and honesty on his part.
Accordingly, the submission that Mr Sugden's feasibility study was
manipulated to achieve a misleading result must be rejected.
To obtain the comparison between the projection for the first year in Mr Sugden's feasibility study and the actual results of the Goulburn store in the preceding twelve months, it was necessary to annualise the figures for the first 11 months to 31 October 1988, for that was the period for which accounts were kept. When that was done, the annualised actual income amounted to $6,465,702, whereas the projected figure was $6,318,000. The principal difference was accounted for by wages. The annualised personnel costs of $492,645 were well above the predicted sum of $442,260. It appears that this difference was related to the fact that Greenhalgh Co not only employed a manager but paid also $20,000 per annum to each of Mr & Mrs Greenhalgh. Mr Sugden's estimate had been made by adopting a percentage of 7% of turnover. This figure was strongly supported by the evidence of Mr M J Mitchell, chartered accountant, who said that he would have expected personnel costs as a percentage of sales in an owner-operated store to be less than or equal to that of a chain store, due to the owner being able to directly monitor and adjust staffing levels as and when appropriate for an individual store. Mr Mitchell's report shows that the figures estimated by Mr Sugden were not much less than the actual figures for the Permewan Wright store when operated as a chain store. Although the actual personnel costs of Greenhalgh Co were much higher, the weight of the evidence would seem to show that Mr Sugden's estimate was reasonable at the time, on the information available to Mr Sugden.
Challenge was made to Mr Sugden's feasibility study over his adoption of a gross profit margin of 14% for dry groceries, which was higher than the figure adopted in the first feasibility study. This was said by the appellants to be one of the matters which Mr Sugden had "fiddled". The result of the adoption of the 14% rate was to increase the gross profit by $26,536 as between the two studies. Mr Sugden gave evidence that the percentage on dry groceries was so important that he checked with Mr Saunders, an officer of Composite Buyers, who knew the stores and had great experience in this area. He was informed by Mr Saunders that this was the product margin that the Goulburn store could expect to obtain. The trial Judge accepted this evidence and impliedly accepted that Mr Saunders was a person on whom reliance could reasonably be placed.
The result of the adoption of this figure for dry groceries was the adoption of a percentage of gross profit to sales of 16.4% or, if wrappings were added into account, of 16.02%. This was higher than the percentage adopted in the first of the studies supplied to Mr & Mrs Greenhalgh, which was 15.6%. It was an important figure as it was applied to gross income to obtain a figure for gross profit. The feasibility study prepared by Mr Fisher had adopted a percentage for dry groceries of 14.5% and a percentage of gross profit after taking wrappings into account of 16.44%, so it was considerably higher.
Mr Mitchell gave evidence that, in his opinion, the overall gross margin assumptions used in Mr Sugden's feasibility study were reasonable. He said, moreover, that in the years ended 30 June 1990, 1991 and 1992, the gross profit margin exceeded the predicted margin. Exhibit 3 shows that the gross profit for the 11 months to 31 October 1988, which was 15.78%, was quite close to the predicted 16.02%. Moreover, if $7,800 be added to the income for the groceries which Mr & Mrs Greenhalgh took out of stock, the actual percentage would rise to 15.9%. As Mr Greenhalgh conceded in his evidence, the difference between this percentage and 16.02% was insignificant.
The expert called on behalf of the appellants was Mr Norman Hilton, a chartered accountant. The trial Judge did not place weight on Mr Hilton, referring to his "artifice" and "contrived approach". This view has support in Mr Hilton's evidence. For example, in his first report dated 8 June 1993, Mr Hilton derived actual income for the first year by taking 5 months during 1987 and annualising the resultant figure. The result was to arrive at a figure which was much less than the actual income and not useful for the purposes of comparison. Similarly, when in a table subsequently prepared, Mr Hilton set out a figure for actual trading results, he used the figure for the 11 months up to 31 October 1988 without converting that figure to an annual figure. The result was to give an impression that the gross income for the first year of trading was less than had been predicted in the feasibility study. This was not so.
Mr Hilton criticised Mr Sugden's feasibility on the basis that he should not have expected Greenhalgh Co to receive the same level of cooperative rebates as had been received when the store was operating as a member of a chain. He therefore readjusted the historical figures to remove what he, Mr Hilton, alleged would be income which it was unreasonable to predict that the purchaser of the Goulburn store would receive. There were several problems with this approach which caused the trial Judge to conclude that it was without merit. One was that, in the first year of operation, the income of the supermarket including rebates did match the prediction in Mr Sugden's feasibility study. Therefore, the feasibility study was not misleading in that respect. Nor did any of Mr Hilton's other attacks on the study demonstrate any erroneous predictions or representations.
In our opinion, the challenge to his Honour's findings that Mr Sugden's feasibility study was not misleading and that Mr Sugden had reasonable grounds for his projections fails. The appeal against his Honour's conclusions on the issues of deceit and breach of s.52 of the Trade Practices Act must be dismissed.
NEGLIGENCE
Each of the feasibility studies supplied to Mr & Mrs Greenhalgh commenced with a disclaimer signed by Mr Sugden. The disclaimer read:-
DISCLAIMER
We have prepared the following feasibility study from data obtained from information provided by the staff of Composite Buyers Limited and Payless Superbarn (Nsw.) Pty Ltd. This study has been prepared for the exclusive use of Composite Buyers Limited.
We do not guarantee that sales estimates will be achieved and no warranty of accuracy or reliability is given. Neither Composite Buyers Limited nor any employee of Composite Buyers Limited undertakes responsibility in any way whatsoever to any person in respect of the feasibility study including any errors or omissions therein however caused.
For and on behalf of Composite Buyers Limited."
His Honour did not consider the question of common law negligence as, in his view, "[t]he question of negligence does not arise as the disclaimer on the front of the feasibility study (which Mr Greenhalgh said that he read and understood) expressly excludes the assumption of any responsibility for any material it contains."
However, the whole of the facts must be considered. This is not a case such as Hedley Byrne & Co Ltd v. Heller & Partners Ltd [1964] AC 465 in which it was held, in the circumstance where there was a disclaimer of responsibility, that no duty of care arose. In that case, Lord Morris said at 504:-
"They stated that they only responded to the inquiry on the basis that the reply was without responsibility. If the inquirers chose to receive an act upon the reply they cannot disregard the definite terms upon which it was given. They cannot accept a reply given with a stipulation and then reject the stipulation."
In the present case, Composite Buyers was not simply responding to an inquiry to which it was under no obligation to reply. Composite Buyers was selling a business. It provided the feasibility studies as information on which the purchaser should act. Indeed, because the actual books of account were not produced, all the parties knew that there could not be an agreement for the sale and purchase of the business unless the purchaser acted on the faith of the feasibility studies. Despite the statement in the disclaimer that the studies had been prepared for the exclusive use of Composite Buyers, they were specifically prepared for the use of Mr & Mrs Greenhalgh and Greenhalgh Co and with the intention that they be acted upon by them. Out of such a circumstance, a duty of care arises. The circumstances called for Composite Buyers to act in the preparation of the feasibility studies, not merely honestly, but with skill and competence.
In an analogous situation, in Lezam Pty Limited v. Seabridge Australia Pty Ltd (1992) 35 FCR 535, Burchett J said at 556-7:-
"In my opinion, the defence based on JLW's disclaimers in small print was rightly rejected by Beaumont J, for the reasons which he gave. Having described the disclaimers as `almost illegible', he stated the fundamental point:
`The present question is not whether the disclaimers were incorporated in a contract. The question here is whether the conduct of the respondents, taken as a whole (see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199), is misleading or likely to be so.'
When a court comes to apply that principle to a case of a plain misrepresentation, said later to have been disclaimed, it should not allow fine textual analysis, nor the differently orientated rules of contract law, to distract it from seeing the obvious. A disclaimer or qualification will frequently have little or no effect on the impact of a misrepresentation."
The present is such a case. The feasibility studies were provided in a context where a duty of care arose and in which the exercise of care and skill on the part of Composite Buyers was expected. In this circumstance, the disclaimers would have had little or no impact, save to emphasise that the feasibility studies were projections, not statements of existing fact, and that no warranty was given as to their validity.
The
trial Judge was satisfied that the feasibility studies were prepared with skill
and care and that Mr Sugden had reasonable grounds for his projections. His Honour found that the conduct of
Composite Buyers was not misleading or deceptive or likely to be so and he
found that Composite Buyers had satisfied the onus of proof which s.51A of the Trade
Practices Act imposed upon it. In these
circumstances, had the trial Judge considered the matter, his Honour would have
been bound to dismiss
the claim based upon common law negligence.
The appeal on this ground must be dismissed.
RESTRAINT OF TRADE
The last issue is the claim that a part of the arrangements into which Greenhalgh Co entered constituted an unlawful restraint of trade under common law principles.
The arrangements between the parties included a deed of trust dated 30 November 1987 which established a unit trust. Composite Buyers took up 17,500 preference units which give rise to the rights set out in the second schedule to the deed. The second schedule provided, inter alia:-
"3. The Preference Units shall entitle the holders thereof:-
(1) to require the Trustee, by notice in writing to the Trustee, to acquire from a person or company nominated by them (`the Nominated Supplier') not less than 90% of its Available Stock and not less than 60% of its Available Liquor measured by the cost of purchases during any calendar month. ...
(2) to nominate by similar notice, the `banner' under which the Trustee must carry on the business; `banner' means the trading name under which the Company, in carrying on the business sells, markets and publicises its goods and services"
The issue debated in the appeal related to the first of these entitlements. Amongst other things, it was unlimited in time save by the perpetuity period stated in clause 1.2 of the deed which was 80 years.
The trial Judge took the view that, as Composite Buyers had not given a notice in writing under clause 3(1) of the second schedule, no restraint of trade had come into existence. He therefore did not go on to consider whether the restraint of trade was reasonable, though he noted that the restraint could well be justifiable and that cogent evidence had been given as to the advantages to independent operators of the central purchasing and rebate facility provided by Composite Buyers and of like matters. His Honour also referred to the fact that s.118 of the Income Tax Assessment Act 1936 (Cth) conferred a taxation benefit on Composite Buyers as a cooperative provided that more than 90% of its business was undertaken with its members.
The general principle at common law was stated by Lord Macnaghten in Nordenfelt v Maxim, Nordenfelt Guns & Ammunition Company Limited [1894] AC 534 at 565 as follows:-
"The true view at the present time I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. That, I think, is the fair result of all the authorities."
The onus lies upon the person who has had the
benefit of a restraint to show that there are circumstances which make the
restraint reasonable in the interests of the parties: Mason v Provident Clothing &
Supply Co Ltd [1913] AC 724 at 733.
If the
restraint is not a reasonable one in the interests of the parties, it is bad: Herbert
Morris Ltd v Saxelby [1916] 1 AC 688 at 708. If the restraint is reasonable in the
interests of the parties then the burden lies upon the party who suffers from
the restraint to show that injury to the public will result therefrom: Attorney-General
of the Commonwealth of Australia v The Adelaide Steamship Co Ltd
[1913] AC 781 at 796-7. The date for
testing the validity of the restraint is the date of the agreement imposing it:
Lindner v Murdock's Garage (1950) 83 CLR 628 at 653; Amoco
Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Ltd
(1973) 133 CLR 288 at 318; Gerathy v Minter (1979) 142 CLR 177 at
179, 187-8, 193-4, 199-200; Adamson v New South Wales Rugby League
Ltd (1991) 31 FCR 242 at 285. The
reasonableness of a restraint of trade is tested by reference to the nature and
incidents of the restraint, not by reference to what the parties have actually
done or intended to do: Watson v Prager [1991] 1 WLR 726 at 749; Adamson
v New South Wales Rugby League Ltd at 285.
In our opinion, clause 3(1) of the second schedule of the deed of trust constituted a restraint of trade, notwithstanding that no notice had been given thereunder. It conferred upon Composite Buyers an entitlement to require the trustee, Greenhalgh Co, to acquire from a person or company nominated by Composite Buyers not less than 90% of its requirements of the stock in which that person or company dealt. That clause constituted an effective restraint upon Greenhalgh Co. Its manner of enforcement was the giving of a notice in writing under the clause which would then have activated the provisions of Article 78(c) of the Articles of Association of Greenhalgh Co whereby, on a failure to comply with such a direction given by the preference unit holder, the holder of the "B" class shares, Composite Buyers, could immediately by notice in writing to the company appoint three additional directors. The requirement of a notice in writing and the provisions of Article 78(c), which came into operation on the giving of such a notice, were machinery provisions.
The substance rather than the form of the restraint must be considered: Howard F Hudson Pty Limited v Ronayne (1972) 126 CLR 449, where at 453 Barwick CJ cited the words of Lord Wilberforce in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 at 331 that "The doctrine of restraint of trade is one to be applied to factual situations with a broad and flexible rule of reason." Barwick CJ went on to say: "It seems to me nothing to the point that the condition is in form or substance a condition precedent to the promise to pay. It is nonetheless effective to create the unreasonable restraint." See also 457 and 462. In the present case, the existence of clause 3(1) of the second schedule to the deed of trust and the holding by Composite Buyers of the 17,500 units issued under the terms of that schedule of itself ensured that Greenhalgh Co complied with the policy of acquiring from Composite Buyers 90% of its requirements of the available stock of that company.
Issues of unreasonableness and public policy in relation to restraints of trade are issues of law: Mason v Provident Clothing & Supply Co Ltd at 590; Attorney-General (Commonwealth) v Adelaide Steamship Co Ltd at 797; Herbert Morris Ltd v Saxelby at 707. Accordingly, this appellate Court may consider the issues for itself, notwithstanding that the trial judge did not make findings of fact. Gibbs J said in Amoco Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Limited at 318: "... a trial judge enjoys no special advantages in deciding such a question ..."
From the evidence in the case we can see the benefits which would flow from a limited restraint. Obviously, it was intended that, at least in the first instance, the Goulburn supermarket would trade under the Payless banner and would purchase the great proportion of the available stock which Composite Buyers sold. Evidence was given that Composite Buyers dealt in approximately 60% of the stock sold by a store such as the Goulburn supermarket. The commercial success of the arrangement necessarily depended upon bulk buying by Composite Buyers and the provision of goods to the Payless stores at a competitive price.
However, cl.3 was entirely unlimited in time. Composite Buyers had sold its store to an independent retailer. A tie for 80 years could not be justified as a reasonable restraint of trade to protect the interests of Composite Buyers, the vendor of the store. It was neither reasonable in the interests of the parties nor in the public interest that Greenhalgh Co should be restrained to operate as a tied company throughout the term of the trust.
The tie was, moreover, not limited to the business of the Goulburn store. The deed of trust defined "Business" as "any grocery business, whether licensed or unlicensed, carried on by the Trustee of the Trust for the time being". Nor was it limited to any period while Composite Buyers had any significant loan or equity investment in Greenhalgh Co. The restraint was not related to the period of the sub-lease or any period of holding over. Nor was it related to the period during which Greenhalgh Co operated under the Banner Agreement dated 30 November 1987. And although Composite Buyers provided a certain level of rebate to such of its Payless stores as were subject to a like restraint, the tie was not expressed to be conditional upon the provision of such rebates.
These facts do not ignore the evidence called on behalf of Composite Buyers as to the advantages to be gained from a reasonable tie. That evidence referred to matters such as leases, franchises, rebates and the commercial advantages of volume buying and selling, to some or all of which the subject restraint could have been related and limited but was not.
The restraint did not include elements which were severable under common law principles. It was "a single restriction expressed in indivisible terms": Atwood v Lamont [1920] 2 KB 146 at 155. It was not reasonable for the protection of the interests of the parties and, if not read down, was contrary to the public interest. Therefore, if the common law principles to which we have referred applied, the restraint would be struck down.
The common law principles have been materially affected by the Restraints of Trade Act 1976 (NSW). Section 4 of that Act provides, inter alia:-
"4. (1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable form or not.
(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.
(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
..."
In Orton v Melman [1981] 1 NSWLR 583 at 587-8, McLelland J said:-
"The mischief or defect [of the common law] was that in determining the validity of a restraint, the courts were bound to consider all possible breaches within its terms (after any permissible severance) and determine whether public policy was infringed by the restraint of all such breaches, rather than by the actual or threatened breaches proved in the particular case; or as stated succinctly in the report (par 12): `The Court does not consider the actual breach, it considers imaginary breaches.'
...
In applying s4(1) the court should consider the circumstances of the particular case before it and determine the validity of the restraint to the extent that it purports to operate in those circumstances, and it is unnecessary to consider its purported operation in other conceivable sets of circumstances. Other considerations may of course arise in an application under sub-s(3) of s4. In my opinion the enactment of s4(1) has succeeded in requiring attention to be concentrated on `the actual breach' rather than `imaginary breaches' for the purpose of determining validity of a restraint."
This approach has subsequently been followed in Wright v Gasweld [1991] 22 NSWLR 317; Douglass Automated Laboratories & Allied Services Pty Ltd v Sonic Technology Australia Ltd [1994] ATPR (Digest) ¶46-129.
In
the present case, there has been no breach of a restraint. Neither has there been a threatened breach
nor even a threat on the part of Composite Buyers to give notice under cl 3(1)
of the second schedule. The appellants
merely referred to their desire to be free of the restraint so as to improve
the sale price of the business, in the event of a sale. Thus, no occasion has arisen which would
enable the Court to
compare, in the context of the facts of particular circumstances, the restraint
and Composite Buyers' actions in relation thereto on the one hand with public
policy on the other.
In this light, we would have been reluctant to make any order in relation to the restraint had not counsel for Composite Buyers made before the trial judge an "open offer" to relinquish the right conferred upon Composite Buyers under cl.3(1) as from 30 June 1995. Counsel repeated the offer at the hearing of the appeal and, indeed, indicated that Composite Buyers was content to accept a declaration of the invalidity of the restraint as from the date of the Court's judgment.
We take this offer to be a concession that, whatever may have been the position in past years, by the date of the Court's judgment there will be no circumstance remaining in respect of which the restraint could validly apply. In this circumstance, it is proper to make a declaration of invalidity as from the date of judgment, as s.4(3) of the Restraints of Trade Act permits.
For these reasons, we would allow the appeal to the extent of including in the orders below a declaration that the restraint appearing in clause 3(1) of the second schedule to the deed of trust dated 30 November 1987 is invalid as from the date of the judgment on appeal. We would otherwise dismiss the appeal. The respondents should have 3/4 of the costs below and 3/4 of the costs of the appeal. The orders below should be varied accordingly.
I certify that this and the 21 preceding pages
are a true copy of the reasons for judgment herein
of the Honourable Justices Davies & Einfeld
Associate:
Date: 31 May 1995
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. G 852 of 1994
GENERAL DIVISION )
On appeal from a judgment of a single
judge of the Federal Court of Australia
BETWEEN:
MICHAEL TREVOR GREENHALGH
First Appellant
LEONIE ANNE GREENHALGH
Second Appellant
M & L GREENHALGH PTY LIMITED
Third Appellant
AND:
COMPOSITE BUYERS LIMITED
First Respondent
PAYLESS SUPERBARN (N.S.W.) PTY
LIMITED
Second Respondent
CORAM: DAVIES, EINFELD, SACKVILLE JJ.
DATE: 31 MAY 1995
PLACE: SYDNEY
REASONS FOR JUDGMENT
SACKVILLE J:
I have had the advantage of reading in draft the judgment of Davies and Einfeld JJ. Subject to the matters dealt with below, I agree with their Honours' conclusions and reasons. However, I wish to add some observations of my own on two issues.
Mr Sugden and the Feasibility Studies
As Davies and Einfeld JJ. point out, three feasibility studies are relevant to this case. The first was prepared by Mr Fisher and was not shown to Mr and Mrs Greenhalgh. The second and third feasibility studies were supplied to Mr and Mrs Greenhalgh. The author of the second feasibility study (the first of the two supplied to Mr and Mrs Greenhalgh) was not identified in the evidence, although at one point Mr Sugden, who denied preparing the second feasibility study, seemed to suggest that Mr Fisher had prepared the second study as well as the first. However, there was no dispute that Mr Sugden prepared the third feasibility study. I shall refer to these feasibility studies, respectively, as the first, second and third feasibility studies.
The Notice of Appeal included a ground that his Honour had erred in declining to find that Mr Sugden, in preparing the third feasibility study, which was supplied to the appellants in October 1987:
(a) had prepared the second feasibility study (that is, the first of the two studies supplied to the appellants);
(b) alternatively to (a), had used information contained in the second feasibility study to prepare the third; and
(c) had deliberately increased the gross profit margin on dry groceries and decreased rubbish removal costs, in order to produce a positive cash flow in the third feasibility study.
Mr
Walker SC, on behalf of the appellants, acknowledged the
difficulty facing this contention, having regard to his Honour's advantage in
seeing Mr Sugden in the witness box.
This was clearly a case, to use the language of Dawson, Gaudron and
McHugh JJ in Louth v Diprose (1992)
175 CLR 621, at 641, in which the findings
"were substantially dependent on the trial judge's assessment of character and credit and...were reached having regard to the demeanour of the parties in the witness box."
In such cases, unless it can be shown that the trial judge failed to use, or palpably misused, the advantage derived from seeing and hearing the witnesses, the appellate court should not interfere: Abalos v Australian Postal Commission (1990) 171 CLR 167, at 178-179. In the absence of such a conclusion, the appellate court should not overturn the findings made at first instance merely because of its own view of the probabilities of the case: Owners of SS Montestroom v Owners of SS Sagaporack [1927] AC 37 (HL), at 47; Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 (NSW CA), at 347-348, per Samuels JA.
Mr Walker pointed to a number of factors in support of his submission that it was "inescapable" that Mr Sugden had acted in the manner alleged by the appellants. Mr Sugden had signed the disclaimer at the front of the second feasibility study (the first given to the appellants). He acknowledged that he would not normally sign a document in the nature of a feasibility study unless he had provided the professional input personally. Furthermore, the only difference between the second and third feasibility studies, apart from financing costs, were changes in the assumed percentage gross profit margin for dry groceries (14% in the third, as opposed to 13.5% in the second) and reductions in rubbish removal costs ($9,000 in the first year of the second feasibility study compared with $3,000 in the first year of the third feasibility study). By contrast, the first feasibility study, prepared by Mr Fisher in respect of the Goulburn store for another set of prospective purchasers, was based on a number of assumptions quite different from those contained in either of the two feasibility studies provided to the appellants. The differences included assumed sales levels, the assumed growth rate for sales in the first year of operations, the gross profit margins for dry groceries, labour costs, rates and taxes and the amounts required for repairs and maintenance. Mr Sugden denied that he had ever been aware of the existence of the second feasibility study. This was despite the fact that Mr Sugden had prepared the third feasibility study after receiving a telex dated 19 October 1987 from Mr Watson, a member of the "on-sell team" of Composite Buyers Ltd ("CBL"), requesting Mr Sugden to prepare a "new feasibility study".
The feasibility studies were all prepared using a particular computer program. The program performed the calculations required to produce the tables included in all studies, but the resulting figures were of course dependent upon the assumptions fed into the program. Thus, while all of these feasibility studies were substantially similar in form, the individual figures in the very first study, prepared by Mr Fisher, were different in important respects from those used in each of the two feasibility studies provided to the appellants. (This is not to say that the third feasibility study, which Mr Sugden accepted that he had prepared, was more optimistic than the feasibility study prepared by Mr Fisher. On the contrary, the third feasibility study was more cautious on a number of key assumptions. In the first feasibility study, for example, Mr Fisher had assumed a gross profit margin of 14.5%, rather than 14%, for dry groceries.)
As Davies and Einfeld JJ. have pointed out, the trial judge accepted Mr Sugden's evidence. Mr Sugden said that he had prepared the third feasibility study by making his own assessment of the various assumptions required to produce the projections, although he took advice from others with expertise on specific issues. The trial judge accepted Mr Sugden's denial that he had been aware of the second feasibility study at the time he (Mr Sugden) prepared the third feasibility study. His Honour also accepted that the gross profit margin of 14% for dry groceries, adopted in the third feasibility study, had been checked by Mr Sugden with Mr Saunders, an officer of CBL, who had visited every store and had run his own supermarkets successfully.
I cannot say whether I would have reached the same result as the trial judge on the factual questions presented by Mr Sugden's evidence. Mr Sugden, however, offered a detailed explanation as to how he came to make each of the assumptions he did. The trial judge had the benefit of observing Mr Sugden under cross-examination. The matters relied on by Mr Walker were, in substance, put to Mr Sugden and answered by him. In my view, it was open to the trial judge to make the findings of fact which, in the result, depended upon his Honour's assessment of Mr Sugden's credit. Accordingly, notwithstanding the force of the criticisms made by Mr Walker, I do not think it is open to this Court to substitute different findings of fact.
Once it is accepted that his Honour did not err in accepting Mr Sugden's evidence, it seems to me inevitable that the contention that Mr Sugden had no reasonable basis for his projections must fail. I agree with the analysis of Davies and Einfeld JJ. on this issue. As their Honours have pointed out, the actual gross income from the business in the first year after November 1987, if anything, exceeded the projections of $6,318,000. The projections suggested an operating profit in the first year of $86,552, or 1.37% of the projected sales. The comparable figure for the second year was $123,123, or 1.8% of projected sales. The "bottom line" was plainly vulnerable to relatively minor changes in profit margins and sales revenue. Nothing in the projections suggested otherwise. The evidence suggested that a number of external factors affected the profitability of the Goulburn store, and were therefore instrumental in making trading unprofitable.
The Trade Practices Act 1974, s.52, does not impose a statutory warranty on a vendor of a business that it will be (or continue to be) profitable. The issue is always whether the vendor, or other representor, has engaged in conduct that is misleading or deceptive or is likely to mislead or deceive. The appellants, in my opinion, have not established that the respondents did engage in conduct of that character in their dealings prior to the sale of the business.
Restraint of Trade
Davies and Einfeld JJ. have referred to the relevant terms of the Payless Goulburn Unit Trust deed, of which the third appellant was the trustee. In their Notice of Appeal, the appellants sought a declaration in the following form:
"Declare that upon [the] true construction of:
(i) the Agreement entered into on or about 30 November 1987 between the Appellants, Michael Trevor Greenhalgh and Leonie Anne Greenhalgh of the first part and the Respondent Composite Buyers Limited of the second part;
(ii) the Declaration of Trust dated 30 November 1987 of the applicant, M & L Greenhalgh Pty Limited (formerly Ligon 120 Pty Limited) as Trustee of the Payless Goulburn Unit Trust in favour of the Appellants Michael Trevor Greenhalgh and Leonie Anne Greenhalgh and the Respondent Composite Buyers Limited Beneficiaries and Clause 3(1) of the Second Schedule in particular;
(iii) the Articles of Association of the Appellant M & L Greenhalgh Pty Limited adopted by special resolution of the members of the company on 30 November 1987 and Article 78(c)(i) in particular;
and in the events which have happened, the
said instruments operate as an unreasonable restraint upon the freedom of the
Appellant, M & L Greenhalgh Pty Limited to conduct the business of a
supermarket at premises situate at 238 Auburn Street, Goulburn and
upon the freedom of the Appellants, Michael Trevor Greenhalgh and Leonie Anne
Greenhalgh as beneficiaries in respect of the said trust estate to engage in
the said business insofar as the same in substance and effect oblige the
Appellants to acquire a substantial portion of the merchandise acquired for the
purpose of resale in the conduct of the business."
The appellants also sought an order restraining the respondents from exercising or purporting to exercise any right or entitlement conferred under the various documents
"so as directly or indirectly [to] deny to the appellants or any of them the freedom to acquire from persons other than the respondents merchandise for the purpose of resale in the conduct of the business of the supermarket."
I
agree with the conclusion of Davies and Einfeld JJ. that cl.3(1) of the second
schedule to the Unit Trust deed constituted a restraint of trade under common
law principles, notwithstanding that no notice had been given by CBL, as the
holder of the preference units. I also
agree, for the reasons given by their Honours, that if the matter were viewed
at the date of the agreement, CBL could not show that the restraint was
reasonable in the interests of the parties, having regard to its width and
duration. Nor was it in the public
interest that the trustee should be restrained so as to operate, in effect, as
a tied company throughout the term for which the arrangement was to apply. Accordingly, the restraints imposed by the
deed and associated documentation, were contrary to public policy and void at
common law. In the absence of
legislation, the appellants would be entitled to the declaratory and injunctive
relief sought
by them.
In New South Wales, it is necessary to take account of s.4 of the Restraints of Trade Act 1976, the terms of which are set out by Davies and Einfeld JJ.
In Orton v Melman [1981] 1 NSWLR 583 (NSW SCt), at 587, McLelland J. expressed the view that the
"mischief or defect [at which the legislation is aimed] was that in determining the validity of a restraint, the courts were bound to consider all possible breaches within its terms (after any permissible severance) and determine whether public policy was infringed by the restraint of all such breaches, rather than by the actual or threatened breaches proved in the particular case; or as stated succinctly in the report [of the Law Reform Commission on Covenants in Restraint of Trade (LRC 9), para 12]: "The Court does not consider the actual breach, it considers imaginary breaches"."
His Honour considered that s.4(1) is to be applied in the following way: (at 587-588):
"In my opinion where the court is to determine, in relation to a restraint to which s.4(1) applies whether (having regard to public policy) the restraint is enforceable in respect of an alleged breach (or threatened breach), it is proper first to determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then by force of s.4(1) the restraint is to that extent valid, subject always of course to any order which may be made under s.4(3).
Whether, and if so the extent to which, the
court will have to define the outer limits of validity of a restraint in a
particular case, will depend upon the
nature, and degree of generality, of the relief which in that case it is
necessary or proper for the Court to grant.
For example, where injunctive relief is granted, the duration of a valid
restraint of any breach enjoined will have to be determined. In applying s.4(1) the court should consider
the circumstances of the particular case before it and determine the validity
of the restraint to the extent that it purports to operate in those
circumstances, and it is unnecessary to consider its purported operation in
other conceivable sets of circumstances.
Other considerations may of course arise in an application under sub-s
(3) of s.4. In my opinion the enactment
of s.4(1) has succeeded in requiring attention to be concentrated on "the
actual breach" rather than "imaginary breaches" for the purpose
of determining validity of a restraint."
This approach has been followed in subsequent cases: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 (NSW CA), at 327-328, 337-338, 339; Douglass Automated Laboratories & Allied Services Pty ltd v Sonic Technology Australia Ltd [1994] ATPR (Digest) 46-129 (NSW SCt/Giles J.) at 53,623 and cases cited.
In determining whether it is appropriate to grant injunctive or declaratory relief to the appellants, it is necessary, in particular, to consider the operation of s.4(1) of the Restraints of Trade Act 1976. The fact that a restraint would have been void ab initio under the general law does not mean the restraint cannot validly be applied to particular breaches by the covenantor. The question posed by s.4(1) is whether the restraint, in its application to the particular breaches, is contrary to public policy. Thus in an individual case it may not be possible to determine conclusively whether a restraint can be applied validly to particular breaches that might occur in the future. In such a case declaratory or injunctive relief may not be appropriate.
In the present case Mr Weber, on behalf of the respondents, stated that they were content for orders to be made under the Restraints of Trade Act 1976, having the effect of relieving the appellants from the obligation to purchase 90 per cent of available stock and 60 per cent of available liquor from the nominated supplier. He indicated that such orders could take effect as from the date of the judgment. Before the trial judge it appears that the respondents made what was described as an "open offer" that, as from 30 June 1995, the first respondent would relinquish its right to issue a notice under the terms of the deed. This offer was not accepted by the appellants.
The difficulty with the course proposed by Mr Weber is that it is not authorised by the Restraints of Trade Act 1976. Before s.4(3) of the Act can be invoked, it must be shown that the restraints are invalid
"by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint."
This is a condition precedent to the power conferred by s.4(3): Orton v Melman, at 589; Douglass Automated v Sonic Technology, at 53,625. Mr Weber did not submit that the condition precedent was satisfied and, indeed, did not seek to file a cross-application for the purpose of seeking relief under the Act.
Nor does s.4(1) authorise the course of action suggested by Mr Weber. As Giles J. remarked in Douglass Automated v Sonic Technology, at 53,625, s.4(1), in a sense
"can found the fashioning of a reasonable restraint, in that it may be held that the restraints so far as they apply to the breach in question are not contrary to public policy - that involves finding that the restraint of the breach is a reasonable restraint. But s.4(1) does not call for a rewriting of the restraints in the abstract: it looks to the postulated breach."
Mr Weber did not argue that cl.3(1) of the second schedule to the deed was reasonable in the interests of the parties or in the public interest, having regard to the period of time that has elapsed since the restraints were imposed in November 1987. In particular, Mr Weber did not suggest that the restraints could be reasonable between the parties, or in the public interest, in their application to future events (bearing in mind that the hearing took place more than seven years from the date the restraints were originally imposed). Mr Walker accepted that the practical significance of the restraints was in relation to potential purchasers of the business. I appreciate that there is no evidence of a breach or a threatened breach by the appellants. Nonetheless, the appellants have made out a case for relief and a declaration having prospective effect will have practical utility.
Mr Walker did not consent to the restraints being treated as if they would have been valid until the date of the hearing or judgment in the present proceedings. On the contrary, he submitted that the restraints should be held invalid as from the date they were entered into by the parties. To this end he cited the observations of Needham J. in A. Buckle & Son Pty Ltd v McAllister (1986) 4 NSWLR 426, at 434:
"For these reasons, I think that cl.12 involves an unreasonable restraint of trade and is unenforceable. Whatever may be the proper interpretation of the Restraints of Trade Act 1976, s 4(1) I do not think it empowers the court to create a valid restraint out of an invalid one unless that can be done by a reading down process. In the present case, it seems to me that the plaintiff has sought to restrain conduct which, in the circumstances, cannot validly be restrained. Section 4(1), therefore, can have no operation."
But those observations were made in a case where an employer sought to restrain a former employee from engaging in certain conduct, pursuant to a deed entered into on the employee's retirement. The conduct sought to be restrained included purchasing goods from the employer's suppliers and canvassing the employee's 1,600 retail customers. Needham J. held that the deed was not reasonable in its application to the particular breaches of the restraints; it was for that reason that s.4(1) of the Act could not apply. His Honour did not have to consider the form of declaratory relief, if any, that it might be appropriate to grant in favour of a party bound by the restraints.
On the material before the Court, I do not think it can be said that the restraints were incapable of being validly applied to any breaches that might have been committed by the appellants after the documentation was executed in November 1987. It must be remembered that any such application, at the suit of the covenantee, could take advantage of what Samuels JA has described as the "beneficial surgery" afforded by s.4(1) of the Restraints of Trade Act 1976: Wright v Gasweld Pty Ltd, at 339. As that case shows, considerable refashioning of the terms of a restraint might take place in order to protect the legitimate interests of the covenantee, to the extent consistent with "the continuing public policy which upholds freedom of trade and legitimate competition": Wright v Gasweld Pty Ltd, at 337, per Kirby P. The result of any attempt to enforce the restraints in relation to particular breaches by the appellants would depend on the precise circumstances, including the character of the breaches, when the breaches occurred and the nature of the interest of the respondents requiring protection. These issues were not explored in argument and do not admit of definitive resolution in the abstract. Nor, in my opinion, is it necessary or appropriate to attempt to ascertain the precise circumstances in which, or the time at which, the restraints ceased to be reasonable in their application to hypothetical breaches by the appellants, having regard to the terms of s.4(1) of the Restraints of Trade Act 1976.
In the circumstances, I think it appropriate that the declaration sought by the appellants be made with prospective effect. Having regard to the approach taken by Mr Weber, the declaration should state the position as from the date of the judgment. I do not think that any order beyond a declaration is appropriate. I agree with the orders proposed by Davies and Einfeld JJ.
I certify that this and the preceding 14
pages are a true copy of the reasons for
judgment of the Honourable Justice Sackville.
Date: 31 May, 1995
Associate:
Counsel for the appellants: B.W. Walker SC
S.J. Gageler
Solicitors for the appellants: Verekers
Counsel for the respondents: R.J. Weber
Solicitors for the respondents: Holman Webb
Date of hearing: 28 February 1995
Date of judgment: 31 May 1995
