Validity of Restraining Clause in Partnership Dissolution

The court examined the validity of a restraint clause in a Deed following the dissolution of a partnership. The clause restricted the former partner from competing with the business for five years. The court found the restraint reasonable for protecting the business interests of the claimant.

Supreme Court New South Wales

Medium Neutral Citation: [NAME] v [NAME] [2011] NSWSC 887 Hearing dates: 7 April 2011 Decision date: 30 August 2011 Jurisdiction: Equity Division Before: Davies J Decision: The parties should bring in Short Minutes to reflect these reasons Catchwords: TRADE AND COMMERCE - restraints of trade - buy out of one partner in business - restraint on departing partner - whether restraint reasonable in time - appropriate test to be applied - restraint not more than was reasonable for protection of the business. Legislation Cited: Restraints of Trade Act 1976 Cases Cited: [NAME] v [NAME] [2010] NSWCA 267 Herbert Morris Ltd v Saxelby [1916] AC 688 IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 [NAME] v [NAME] [2006] NSWSC 449 [NAME] v Murdoch's Garage [1950] 83 CLR 628 NE Perry Pty Ltd v Judge (2002) 84 SASR 86 [NAME] v [NAME] & Ammunition Co Ltd [1894] AC 535 [NAME] v [NAME] [2010] NSWSC 781 Orton v Melman [1981] 1 NSWLR 583 [NAME] v [NAME] (No. 2) [2010] NSWSC 77 Synavant Australia Pty Ltd v Harris [2001] FCA 1517 Woolworths Ltd v Olson [2004] NSWCA 372 Category: Principal judgment Parties: [NAME] (First Plaintiff) [COMPANY] (Second Plaintiff) [NAME] (First Defendant) [COMPANY] (Second Defendant) [COMPANY] (Third Defendant) Representation: A Rogers ([NAME]) [NAME] (Defendants) [NAME] ([NAME]) [NAME] (Defendants) File Number(s): 2010/401791

Judgment 1The First Plaintiff ([NAME]) and the First Defendant ([NAME]) were in partnership sometime in 1999, which from 26 November 1999 was operated through a company called [COMPANY] (the Second Plaintiff). The business was a window film and glass tinting business. 2The parties eventually parted ways in 2008 and at the time a Deed dated 21 July 2008 was executed. The effect of the deed was that [NAME] effectively bought [NAME] out of the business. Pursuant to the [NAME] was restrained from competing with the [NAME]' business for a period of 5 years. Within that 5 year period [NAME] has allegedly competed with the [NAME] and the present proceedings, in which the [NAME] seek an injunction against [NAME] and two companies associated with him, involve the validity of the restraint clause in the Deed. 3On the face of it the restraint clause operates throughout Australia and beyond. The [NAME] accept that it cannot operate outside Australia, and the main issue between the parties is the validity of the 5 year period in the restraint clause.

The business 4Mr [NAME] has worked in the window film and glass tinting business since about 1985. From 1998 he has traded under the name [NAME]. The company by that name was incorporated in 1999. 5The business was to purchase and sell solar film. [NAME] purchased it mainly from the United States and sold it to the domestic Australian market. His main customer base in Australia was a number of solar film installers. [NAME] also undertook solar film installation. 6Mr [NAME] had been one of his customers between 1993 and 1999 who purchased and installed solar film. 7In January 1999 [NAME] and [NAME] executed a Deed of Partnership to carry on the business of solar film sales and distribution. On 26 November 1999 they incorporated the partnership under the name [COMPANY] ("[NAME]"). 8At least since the partnership commenced the unincorporated business, and later [NAME], traded as an exclusive importer and distributor within Australia of certain window film products including solar control, safety, security and speciality window films for the automotive, residential and commercial markets. The manufacturer of the products imported is [COMPANY] in the USA. The products were supplied pursuant to a Distributor Agreement between the US Company and [NAME]. 9The Distributor Agreement relevantly provided: DISTRIBUTOR AGREEMENT This Agreement ("Agreement") made and effective on the first day of June 2001, by and between [COMPANY]. ("[NAME]") and [NAME] [COMPANY]. ("Distributor"). WITNESSETH Whereas, [NAME] manufactures and sells solar control and security window film affixed with certain of [NAME]'s trademarks as shown on Exhibit A to this Agreement (the "Trademarks") for use on windows by the automotive, residential and commercial building industries (collectively referred to herein as "Industries"); and Whereas, Distributor, in conjunction with its existing business of providing certain materials and services to the Industries, has a demonstrated marketing capability and desires to buy the solar control and security film products bearing any of the Trademarks (the "Product") for sale to others; NOW, THEREFORE, in consideration of the premises, covenants and conditions set forth herein, the parties hereto mutually agree as follows.

1. Appointment 1.1. Exclusive Sales and Service Area . In connection with the sale of Product to others and the Service connected therewith, [NAME] hereby appoints Distributor as its exclusive authored distributor in the exclusive service area described on Exhibit B, attached hereto ("Exclusive Service Area"), and agrees to appoint no other distributor for the purpose of providing Product and service in the Exclusive Service Area or which is located in the Exclusive Service Area, so long as this Agreement is in effect. 10In addition, Clause 13.3 set out various events of default which would enable the innocent party to terminate the agreement. One of those events: 13.3.8 A change in control of Distributor without specific prior written approval from [NAME]. 11The business appears to have been a successful one with the turnover increasing from $600,000 in 1999 to $4,500,000 in 2005/2006. [NAME]'s wife also worked in the business. The partners drew substantial salaries which in 2007 were $391,000 to [NAME] and $361,000 for [NAME]. 12As an adjunct to the core business of the importation and distribution of various window films, the business began sourcing and supplying decorative glass films and vinyls from other manufacturers. This part of the business came to be called "The Sign Division". 13It appears that from the latter part of 2004 differences of opinion arose between [NAME] and [NAME] as to the future of The Sign Division within [NAME]. That resulted in an agreement between them whereby [NAME] would purchase all of the stock and equipment relating to The Sign Division and relocate it as a separate entity. [NAME] took over The Sign Division from 1st July 2006 when he rented premises at Narellan. He initially traded as a sole trader but later incorporated the business as [COMPANY] in which he was the sole director and secretary and his wife [NAME] and himself were the two share holders. 14Also from the 1st July 2006 [NAME] took full control of the day to day operations of [NAME]. Despite that arrangement [NAME] and [NAME] continued to meet regularly on a Monday for lunch where business matters were discussed.

The separation and the Deed 15The new arrangement did not, however, resolve the ongoing problems between them. There were ongoing disputes about the salaries being paid to each of them and disputes arising out of the level of capital contributions and asset contributions of each of the parties. 16Negotiations continued and letters were exchanged over the early months of 2007. On 18th April 2007 [NAME] sent an email to [NAME] saying this: [NAME] I have had enough of the games. Here's an alternative solution, think it over. You win, I'm done! [NAME] 17There was attached to the email the following document: Without Prejudice Offer to sell [NAME] share to [NAME] of Range Rover in full and $ 145,000 transfer ownership to [NAME] ownership of Grange to [NAME] $ 45,000 [NAME] to purchase [NAME] 50% share of [NAME] $396k - $346k = [NAME] equity ($50,000) $ 50,000 Payment to purchase [NAME] shares in [NAME] $ 150,000 Total Sale Price $390,000 Conditions Range Rover to be paid out in full. [NAME] to pay all applicable stamp duties & legal costs. [NAME] to resign as director of the [COMPANY] [NAME] to be dissolved. [NAME] to be indemnified against any action on Co. There will be no anti competition clause in sale agreement . Offer expires Tuesday, 1st May, 2007 and no part is negotiable. If agreeable, solicitors can be instructed to commence preparation of "contract of sale" documents with a view to settling on the 30th June, 2007. (emphasis added) 18The following day [NAME] sent an email to [NAME], the President of the USA company, telling him of the difficulties that had emerged between him and [NAME]. 19On 21 April 2007 Mr [NAME] sent an email to both [NAME] and [NAME] which relevantly said this: [NAME] and [NAME] sent me an email yesterday saying that you just don't seem to be able to work it out together. I can not tell you how much it pains me to hear. You asked if I would approve a buy out or sale of the company . This obviously has huge bearing on your lives but also affects us greatly. We have allowed you carry our name and reputation which is now tied to you. You have made large incomes and built a position in the market based on the "[NAME]" name. There is a reason that we have an "approval" clause in our distribution agreement which is primarily to protect our image, reputation and market. You two not being able to work this out presents a huge problem to [NAME]. The 3 most obvious problems are:

1. Whoever leaves the company can not go out and start selling another window film in competition to our brand. Your positions in the market were built on our name and I can not allow anyone to use that against us so one condition for me to agree to any sale would be a solid 5 year non-compete agreement between you . If it is [NAME] leaving the window film business, this should not be difficult as you have already begun your new business in the graphics arena. [NAME] would also have to agree to stay out of the graphics business. 2. [NAME], you have taken the [NAME] name and put it into your graphics business. That name will have to change to reflect the fact that there is no tie between the businesses . It was not an issue when you were partners in the [NAME] business but if there is this unfortunate separation, the names must be separated as well. It seems that this is a relatively minor issue that can be carried out at minimal cost both financially and from a reputation perspective.

3. Divorce often winds up in name calling and reputation bashing. You will have to have a legal agreement for both of you to not disparage the name/reputation of each other or each others businesses. This must have some kind of serious financial consequence or it will have no teeth but if you don't, you will wind up bitching about each other and hurting both of your businesses. I feel very strongly about all three of these issues but items 1 and 2 are not negotiable . Protecting our name, market, reputation and the jobs of your employees are paramount to us and we feel that we have the right to demand this as your entire reputation in the market has been built on our name. (emphasis added) 20The reference in paragraph 2 of the above email that I have highlighted was in relation to the fact that when [NAME] commenced to run the Sign Division he registered the trading name of [NAME]. 21On 24 April 2007 [NAME] sent an email to [NAME] saying: I accept your proposal. Do you want me to have [NAME] get in touch with your solicitor and is it the same one that has been in contact with [NAME]? 22Mr [NAME] said that after he received that email he rang [NAME], probably the following day, and said: I got your email and I see you want to proceed but what about what [NAME] has said in his email? [NAME] replied: Don't worry about that. I will talk him around. [NAME] gave evidence that [NAME] subsequently advised him that [NAME] had been in contact with [NAME] "but [NAME] had been insistent that there had to be a restraint as set out in his email of 21 April 2007". 23Thereafter it appears that the parties continued negotiating with solicitors being brought in on either side at some stage but certainly by early 2008. 24On 12 May 2008 the [NAME]' solicitors submitted 2 documents to [NAME]'s solicitors in an endeavour to resolve the matter. The first was a Consultancy Agreement whereby [COMPANY] (scil. [COMPANY]) would provide various services to [NAME]. The payment provided under the arrangement was $1,279,200 in equal weekly payments of $8,200 for a period of 156 consecutive weeks being the term of the Agreement. 25The other document was a deed for the resignation of [NAME] from the business and the transfer of his shares to [NAME]. One of the recitals to that document noted that [NAME] had agreed to enter into a consultancy agreement with a company associated with [NAME] for a term of 3 years. Clause 4 of the Agreement provided for the simultaneous execution of both Agreements. 26Clause 7 of the draft deed provided: Part 7 Confidentiality and Non-Compete and Non Disparagement A. Protection of the Business (a) Non-compete During the Restricted Period, [NAME] must not engage or be involved or interested in, either directly or indirectly and whether as a partner, joint venturer, financier, director, secretary, shareholder in or, employee of or consultant to any entity or otherwise, a Protected Business. (b) No solicitation of customers During the Restricted Period, [NAME] must not approach (either solely or jointly with any other person and in any capacity whatsoever) any person whom [NAME] is aware or ought to be aware is a customer of or client of the Business at Completion, for the purpose of persuading that person to cease doing business with the Company or [NAME] or reduce the amount of business which the customer or client would normally do with the Company or [NAME]. (c) No solicitation of Employees During the period of 5 years from Completion, [NAME] must not approach or solicit, and must not in any way assist any other person to approach or solicit, any employee of the Company for the purpose of recruiting that person. ... (e) Definitions In this Part: [NAME] means [NAME] and any heir, successor in title, assign, trustee or any person or entity acting in any capacity for or on behalf [NAME] (sic) or any corporation or other entity in which [NAME] has an interest whether disclosed or otherwise. Business means any business actual and incidental conducted by [NAME] Pry Limited ACN [PHONE]. Protected Business means any business which is the same or substantially the same actual or incidental as the Business or a part of the Business or provides a service the same as or similar to any of the services provided by the Business; or competes in the Restricted Area with the Business or a part of the Business. Restricted Period means the period from Completion up to the expiration of 5 years from the Completion Date. Restricted Area means Australia. (f) [NAME] acknowledges that all the prohibitions and restrictions contained in this clause are reasonable in the circumstances and necessary to protect the goodwill of the Business as at the Completion Date. [NAME] acknowledges and agrees that a breach of this Part will entitle at their absolute and unfettered discretion [NAME] and the Company to terminate the Consultancy Agreement. ... 27The evidence did not disclose what the response to those documents was. 28Ultimately on 21 July 2008 a Deed was executed which relevantly provided: THIS DEED is made on the 21 day of July 2008 [NAME] of [ADDRESS], [ADDRESS] in the state of New South Wales, 2570 ([NAME]) of the first part and [NAME] of 55-[ADDRESS], [ADDRESS] in the state of New South Wales, 2745 ([NAME]) of the second part and [COMPANY] 60 [PHONE] of [ADDRESS], Girraween in the said state ([NAME]) of the third part

BACKGROUND A. [NAME] and [NAME] (collectively called "the parties") are the registered legal owners of one share each in the shares of [NAME]. B. [NAME] is registered under the Corporations Law and carries on the business of importing and distributing window film products within Australia. C. [COMPANY]. ([NAME]) manufactures the window film products sold by [NAME] in Australia and supplies such products to [NAME] pursuant to Distribution Agreements entered into between [NAME] and [NAME] from time to time. D. [NAME] has agreed with [NAME] for the transfer to [NAME] of [NAME]'s shares in [NAME] with the intent that all of [NAME]'s right title and interest in [NAME] be transferred and assigned to [NAME]. E. In the conduct of its business [NAME] has various loan arrangements with its bankers and financiers' (sic) for the provision of funds for the acquisition of stock etc and to meet the financiers' requirements in relation to the provision of such funds [NAME] has provided his own assets as security for these financial arrangements. F. The parties have each provided personal guarantees to [NAME]'s bankers and financiers to support the security given for the financial accommodation from such bankers and financiers. G. Part of the business conducted by [NAME] was the importation and sale of sign making vinyls and decorative glass films which business was known as "The Sign Division" (The Sign Division). H. During the first half of 2006 [NAME] and the parties determined that The Sign Division was losing money and consideration was given to the closing down of The Sign Division. [NAME] negotiated with [NAME] and [NAME] for the acquisition of The Sign Division from [NAME].

I. The Sign Division business was acquired by [NAME] from [NAME] in June 2006. Such acquisition included the plant and equipment used by [NAME] in the conduct of The Sign Division business. J. The Sign Division business is now carried on by [COMPANY] (ABN 128 304 549) ([NAME]) which is a company controlled by [NAME]. K. [NAME] and [NAME] are co-owners (as tenants in common in equal shares) of the property [ADDRESS], Girraween being the land comprised in Certificate of Title Folio Identifier 8/SP36247 (the Premises) from which the [NAME] business is conducted. THIS DEED WITNESSES 1. Sale and Transfer of Shares 1.1 [NAME] agrees to sell and [NAME] agrees to purchase [NAME]' 1 (one) ordinary share in [NAME] for the price of $500,000.00 (the purchase price). 1.2 The purchase price is to be paid as follows:- Deposit (on signing this agreement) $ 50,000.00 Balance (on completion) $450,000.00 TOTAL $500,000.00 1.3 The completion date shall be:- 1.3.1 31 July 2008 or 1.3.2 Seven (7) days after [NAME] has given its consent to the transfer of shares whichever shall be the later. ...

6. Range Rover Registration number NXK 41B 6.1 On or before completion [NAME] will transfer registration of the Range Rover registration NXK 41 B( the Range Rover) to [NAME]. 6.2 Notwithstanding the transfer of the registration referred to in sub paragraph 1 of this clause [NAME] will continue to meet all payments due to Alphera Financial Services (a division of [COMPANY]) on the Range Rover until the completion of the asset purchase agreement for the acquisition of the Range Rover as and when they fall due. 6.3 [NAME] hereby guarantees the performance of [NAME]'s obligation pursuant to this clause. 6.4 In the event that [NAME] fails to meet the payments to Alphera Financial Services as and when they fall due and [NAME] is required to make the payments himself then [NAME] and or [NAME] shall immediately become liable to pay [NAME] a further $100,000.00 (less the lease payments made to Alphera Financial Services since 1 July 2008) together with interest calculated at the rate of 12% per annum on the balance payable as from the date of demand in writing being made by [NAME] to [NAME] and [NAME] until such payment is made. 6.5 Upon completion of all of the payments to [NAME] and [NAME] shall do all things necessary to transfer the ownership of the Range Rover to [NAME].

7. Real Estate 7.1 Completion of this Agreement is conditional upon a simultaneous completion of a sale of [NAME]' interest in the Premises to [NAME]. 7.2 The Second Schedule sets out the terms and conditions of the sale by [NAME] to [NAME] of his interest in the Premises. 7.3 Prior to completion of the sale of the Premises [NAME] must do all things necessary to enable the [COMPANY] ([NAME]) to discharge the existing mortgage over the Premises to enable [NAME] to be released from all liability under the mortgage to [NAME]. 7.4 [NAME] is to be responsible for payment of all stamp duty, bank fees and charges and registration fees in relation to the transfer to him of [NAME]' interest in the Premises. 7.5 Any breach of [NAME]'s obligation under this Agreement shall be deemed to be a default by [NAME] under the contract for sale of the Premises.

8. Charges and or Security Interests 8.1 [NAME] has granted charges over company assets details of which are listed in the Third Schedule. 8.2 The parties will do all things necessary to enable any personal guarantees given by [NAME] in support of such charges or in support of any indebtedness by the company to any other third party to be released and discharged on or prior to completion.

9. Loan Accounts 9.1 The parties must procure that on or before completion [NAME] will execute appropriate discharges or releases in respect of any indebtedness due from either of the parties to [NAME]. 9.2 The parties must procure that on or before completion all indebtedness due from [NAME] to [NAME] is satisfied in full without payment of interest. 10. [NAME] 10.1 For a period of five (5) years from 1 July 2008 [NAME] must not:- 10.1.1 Engage or be involved or interested in, either directly or indirectly and whether as a partner, joint venturer, financier, director, secretary, shareholder in or, employee of, or consultant to any entity or otherwise of any business which is the same or substantially the same as the business carried on by [NAME]. 10.1.2 Accept business or work from a client or customer of [NAME] except as hereinafter provided. 10.1.3 Canvass or solicit orders for goods of a similar type to those being sold or provided by [NAME] at completion from any person who at completion has been at any time within the year prior to completion a customer of [NAME]. 10.1.4 Induce or attempt to induce any [NAME] to [NAME] to cease to supply or to restrict or vary the terms of supply to [NAME]. 10.1.5 Induce or attempt to induce any employee to leave the employment of [NAME]. 10.2 [NAME] acknowledges that the prohibitions and restrictions contained in this clause are reasonable and necessary to protect the business of [NAME]. 10.3 Notwithstanding the provisions of this clause it is agreed and acknowledged by [NAME] that [NAME] now carries on The Sign Division business which includes the importation and sale of sign making vinyl, decorative glass vinyls, and digital printing services associated with such vinyls and that there are many customers of [NAME] who are also customers of [NAME] in its new business. 10.4 It will not be a breach of the restrictions in this clause for [NAME] and [NAME] to deal with customers of [NAME] provided that it is not for the purpose of carrying on any activities restricted by this clause. 10.5 [NAME] and [NAME], in undertaking its new business, both sell tools related to the application of the materials sold (which sale of tools represents a minor part of each of those businesses) and it is agreed and acknowledged that the sale of tools by [NAME] shall not amount to a breach of the restraint in this covenant.

11. Indemnity to [NAME] 11.1 [NAME] and [NAME] indemnify [NAME] in respect of any actions, claims, demands, costs or expenses arising out of any claim against [NAME] as a consequence of any matter or thing arising and giving rise to a claim against [NAME] whether such matter arose before or after completion. 11.2 As from 1 July 2008 [NAME] is not to be responsible or liable for any payments due by [NAME] to any of its debtors including the chargees referred to in the Third Schedule to this Agreement and [NAME] and [NAME] indemnify [NAME] in respect of any such liability. ...

13. Consent by [NAME] 13.1 Completion of this Agreement is conditional on the consent of [NAME] to the transfer of shares by [NAME] to [NAME] pursuant to this agreement. 13.2 The completion is also conditional upon [NAME] granting to [NAME] a new distribution agreement on terms substantially in accordance with the terms of the last current distribution agreement between [NAME] and [NAME]. 13.3 Within seven (7) days of an (sic) this Agreement being entered into [NAME] shall cause a copy of this Agreement to be forwarded to [NAME] for its c onsideration and approval. 13.4 [NAME] shall forthwith do all things necessary to arrange for a new distribution agreement to be entered into between [NAME] and [NAME]. 13.5 In the event that [NAME] has not:- consented to the sale shares as contemplated by this agreement; OR agreed to grant a new distribution agreement to [NAME] by 31 August 2008 either of the parties to this Agreement (excluding [NAME]) can by notice in writing to the other rescind the Agreement. ... SCHEDULE ONE Assets to b e transferred to [NAME] (clause 4) Subaru Station Wagon registration AL 95 FP Range Rover registration NXK 41B 13 x Roland digital printers model numbers SJ 740 and SP 300 Saeco Coffee Machine Dell lap top computer and all its accessories Film cutter/dispenser and attached bench table (currently stored at [NAME]). SCHEDULE TWO Real Estate See contract for sale annexed SCHEDULE THREE Charges or Security Interests 1. Charge in favour of [COMPANY] created 30 December 1999 registered at Australian Securities and Investment Commission (document no. [PHONE]).

2. Charge in favour of [COMPANY] created 1 July 2004 registered no. [PHONE].

3. Charge in favour of [COMPANY] created 1 September 2005 registered document no. [PHONE]. (emphasis added) 29It was accepted by the [NAME], and not disputed by the Defendants, that the total value of the share purchase in clause 1, the land sale in clause 7 and Schedule 2, together with the arrangements in relation to the assets listed in Schedule 1, had a total monetary value of $675,000. It was not possible to value the release of the charges and guarantees.

Breaches of restraint clause 30Mr [NAME] gave evidence that he formed the view in early March 2010 that he wanted to get back into the business of retailing or wholesaling solar film. He knew at that time that he was under the restraint provided by s 10 of the Deed. 31In about November 2010 [NAME] received by way of facsimile from a business called [NAME] what appeared to be an order for certain products from [NAME]. [NAME] said that it was clear to him that [NAME] was not the intended recipient of the order. He could tell this from inspecting the document and the codes and notation regarding pick-up at the foot of the document. [NAME] had been a customer of [NAME] for the previous 5 years. Shortly after the facsimile arrived David Pratt from [NAME] called and asked [NAME] to disregard the document as it had not been intended to send it to them. 32There is also evidence of other material sent to customers of [NAME] with those customers forwarding the material onto to [NAME]. The material contained a trade price list which utilised product references similar to those used by [NAME]. The material contained an order form containing the business name [NAME] and [NAME]. It contained a number of references to web addresses being www.[NAME].com.au and www.grangegraphics.com.au. The material showed the address of [NAME] as 9/24 Anzac Ave, Smeaton Grange. That was the address of premises where [NAME] was the sub-lessee from a company called [COMPANY]. 33The material that had been forwarded to [NAME] by customers was contained in exhibit JHH-1. It was [NAME]'s evidence that the material in that exhibit was in direct competition to the material sold and distributed by [NAME]. The material contained statements that the [NAME] product was distributed by [NAME]. There was a business card for [NAME] with [NAME]'s name and telephone numbers on it. 34The evidence showed that [NAME] was owned by [COMPANY]. Similarly, a domain name search of the website www.[NAME].com.au disclosed that that website was owned by [COMPANY]. 35A current search of [COMPANY] (as at 4 May 2010) discloses that [NAME], the wife of [NAME], is the sole shareholder, director and secretary of the company. 36Other evidence disclosed that [NAME] was selling solar film in March 2011. 37Given the frequent references to the [NAME] website when coupled with [NAME], it seems to me reasonable to me to draw the inference, and I draw it, that despite the present ownership of [NAME] by [NAME] is acting in breach of his restraint through both of those entities. It was not seriously contested that there had been a breach of the restraint clause at least by the [NAME] and I find that there was. As [NAME] of counsel for the Defendants said at the outset, the main issue was whether or not the restraint was reasonable in time. 38The [NAME] made an urgent application to Bergin CJ in Eq on 8 December 2010 seeking an interlocutory injunction restraining the Defendants from continuing to engage in any business the same, or substantially the same, as the business carried on by [NAME]. Those interlocutory proceedings were settled with an arrangement for the Defendants to keep separate and identifiable records of all relevant business undertaken and income received from such business on or after 13 December 2010. 39The proceedings were then listed for hearing before me for injunctive relief on a final basis.

Submissions 40The Defendants submitted that, it if being accepted that the restraint should be limited to Australia, the period of time in restraint was too long. They submitted that the restraint was imposed not by negotiation between the parties but as a result of a non-negotiable term imposed by the US company who were required to consent to the sale of the part of the business. Further, they submitted that the 5 year period bore no relationship to the benefits that [NAME] received under the Deed, particularly because his income whilst working at [NAME] was such that the payment of $600,000 (in fact it was $675,000) was equivalent to income for 1.53 years. They also pointed to the disparity between that figure and what was in effect offered in the draft agreements forwarded by the [NAME]' solicitors on 12 May 2008. 41The Defendants particularly pointed to what was said by Rath J in IRAF Pty Ltd v Graham [1982] 1 NSWLR 419 at 429: To my mind the most important consideration on the question of the period of the restraint is the time required for severing the relationship between the defendant and those clients who would patronize the business after its sale. There is necessarily a large element of conjecture involved here. Additional evidence might reduce that element, but in the main the matter involved is the exercise of business judgment. For this reason considerable weight should attach to the period the parties themselves have selected. Notwithstanding this, I am satisfied that the period of three years is unreasonably long. 42In that regard the Defendants submitted that [NAME] had really been working separately from the main business since 2006, and that that was ample time to sever the relationship with regard to existing customers. The Defendants submitted, therefore, that a reasonable time for the restraint would have been up to the time proceedings commenced but certainly not beyond the period of 5 years from June 2006.

Legal principles 43Section 4 Restraints of Trade Act 1976 relevantly provides: 4 Extent to which restraint of trade valid (1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms 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. ... 44The present application is not an application by a person subject to the restraint - it is an application by the person having the benefit of the restraint to restrain a breach of it. The onus at common law was on the person seeking to enforce the restraint: Herbert Morris Ltd v Saxelby [1916] AC 688 at 715; IRAF Pty Ltd at 424. The reason for this appears to have been that the presumption was that restraints of trade were contrary to public policy and therefore void: [NAME] v [NAME] & Ammunition Co Ltd [1894] AC 535 at 565; Herbert Morris at 715. 45The position does not appear to be quite so clear by reason of the Restraints of Trade Act because s 4(1) says that a restraint of trade is valid to the extent which it is not against public policy. That might suggest that the onus was on the person asserting that a restraint was against public policy. Moreover, sub-s (3), in the circumstances of an application by a person subject to restraint, also appears to suggest that the onus is on that person: Orton v Melman [1981] I NSWLR 583 at 589. I note, however, that Hammerschlag J in [NAME] v [NAME] [2010] NSWSC 781 at [69] and [70] took the view that under the Act the person seeking to enforce the restraint has the onus to prove the circumstances from which reasonableness can, as a matter of law, be inferred. The issue of onus does not appear to have been argued nor considered on the appeal: [NAME] v [NAME] [2010] NSWCA 267. 46In the present case, on the basis of all of the evidence adduced before me, it is not necessary to consider the question of onus of proof to determine the matter. 47Other principles that I bear in mind in reaching my decision are these: (a) The reasonableness and validity of a restraint clause should be assessed at the time of entry into the contract: [NAME] v [NAME] at [33]; [NAME] v [NAME] [2006] NSWSC 449 at [53] and the cases cited therein; (b) A distinction should be observed between a case of a sale of a business and its goodwill on the one hand, and the case of a restraint by an employer of an employee. A restraint would be more favourably regarded in the former case because of the necessary depreciation in the value of the goodwill sold if there was no such restraint: Herbert Morris at 701; [NAME] v Murdoch's Garage (1950) 83 CLR 628 at 633; (c) Particularly in the case of a restraint on an employee there is no one correct test for reasonableness; [NAME] v [NAME] at [41] - [45]. Depending on the circumstances, the test may be how long it would take a reasonably competent replacement employee to establish a rapport with the customers ( [NAME] at [88]), or it may be how long it would take for the employee to sever his connection with the customers or clients of the person having the benefit of the restraint: [NAME] v [NAME] (No. 2) [2010] NSWSC 77 at [82] - [83]. The issue to be resolved is whether the restraint offers no more than is reasonably necessary to protect the legitimate business interests of [NAME]: [NAME] v [NAME] at [84]; NE Perry Pty Ltd v Judge (2002) 84 SASR 86 at [31]. (d) [ADDRESS] gives considerable weight to what parties have negotiated and embodied in their contracts, but a contractual consensus cannot be regarded as conclusive even where there is a contractual admission as to reasonableness: Woolworths Ltd v Olson [2004] NSWCA 372 at 39; IRAF Pty Ltd at 429; Synavant Australia Pty Ltd v Harris [2001] FCA 1517 at [85]; (e) Under s 4 of the Act the Court must first determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the Court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3): [NAME] v [NAME] at 587; [COMPANY] v [NAME] at [42]. If it is against public policy s 4(1) enables the restriction to be narrowed [NAME] v [NAME] at 587-588.

Was the restraint reasonable? 48There are a number of matters which, in my opinion, make the 5 year period of restraint a reasonable one. 49First, the nature of the business with its exclusive distributorship arrangement with the US company, together with the high salaries being paid points to a valuable business with substantial goodwill to protect. The evidence disclosed that there were only about 10 wholesalers and 1200 retail window tinters in the Australian market. The product itself was a large factor in the growth and prosperity of the business. It was a valuable business which was entitled to protection for a reasonable period of time after the departure of [NAME] from the business. 50Secondly, [NAME] was aware of the extent of the control that the US company had both with regard to changes in the control of [NAME] (clause 13.3.8 of the Distributor Agreement), the exclusive arrangement between the US company and [NAME], and (at least from the time that negotiations started to sever the relationship between [NAME] and [NAME]) the fact that the US company would insist upon a 5 year period of restraint of trade in the event that the 2 partners split. Although in the first instance [NAME]'s offer had stipulated that there would be no anti-competition clause in the sale agreement, he knew within a matter of days that that would be unacceptable to the US company and he knew instead what the US company would require. 51Thirdly, [NAME] agreed to the 5 year period and agreed it was reasonable. That is a very important consideration, although not a determinative one, because it involves the exercise of a business judgment: Synavant at [85]. The business judgment is no doubt closely associated with the benefits received by [NAME] and the alternatives available to him, which I will discuss presently. 52The Defendants pointed to the acceptance by [NAME] of the first proposal to settle put forward by [NAME] in his email of 18 April 2007. [NAME]'s explanation of why he accepted that proposal without any qualification was somewhat unsatisfactory. However, the evidence suggests that by the time [NAME] sent his acceptance he had already seen the long email of 21 April 2007 from [NAME] at [NAME]. [NAME] said that he knew the US company would insist on a restraint, but that does not properly explain why he accepted [NAME]'s proposal without qualification. In that regard I found his evidence somewhat unsatisfactory. Nevertheless, that seems to me to be a side issue in a case concerning the reasonableness of the restraint that was ultimately agreed between the parties after further negotiation. Ultimately, [NAME] was free not to accept the 5 year restraint. He had available other options including a winding up of the business, which he chose not to exercise. The starting point in relation to this matter, it seems to me, is that the parties agreed to a 5 year restraint and agreed that it was reasonable. 53Fourthly, [NAME] received in total some $675,000 together with a release of his contingent obligations under guarantees that he had given to [NAME]. The Defendants point to 2 matters suggesting that the benefits [NAME] received are not the equivalent of a restraint for 5 years. They point, first, to the salary that [NAME] was receiving in the years before the Deed was entered into and suggest that what he received was worth something a little less than 2 years salary. However, the authorities do not appear to suggest an enquiry into the relationship between the period of restraint and any payout figure received by the person subject to the restraint. Rather, the applicable tests are those discussed in [NAME] and [NAME] v [NAME] in the Court of Appeal and those tests can be appropriately adapted to a situation like the present. [NAME]'s departure is closely analogous to the departure of an employee. Indeed, it may be thought to provide a stronger case for a restraint bearing in mind his prior position and work within [NAME]. 54The Defendants also point to the figures in the draft document sent under cover of the 12 May 2008 communication from the Plaintiff's solicitors. The Consultancy Agreement provided for an arrangement of an overall payment of $1,279,200. The Defendants' submission seems to suggest that, whereas there had been an offer of $1.29 million, the final figure was considerably less at $600,000 (in fact $675,000), although the Defendants' submission did not take account of the release from the guarantees. 55The evidence did not disclose why the arrangement with the Consultancy Agreement and the Deed did not go ahead. What is significant, however, is that in the light of the obligations proposed in the Consultancy Agreement on [NAME], the $1.29 million cannot be seen to relate simply to a payout figure of [NAME] that subsequently was reduced to $675,000 together with the release of the guarantees. Although the two agreements were intended to be put into effect together, the basis in the documents for the payment of the figure was the consultancy obligations. 56Fifthly, I place some importance on the fact that both [NAME] and [NAME] engaged solicitors to act for them in negotiating the Deed that was finally executed. It can reasonably be inferred that appropriate advice was given in relation to the amounts being received by [NAME], his other options and the restraint clause together with its validity. 57Sixthly, in the light of [NAME]'s role with [NAME] both before and after he established The Sign Division, I reject the submission of the Defendants that the appropriate starting point for the time of any restraint should be 1 July 2006 when [NAME] commenced working separately in The Sign Division. The submission assumes, wrongly on the basis of the evidence, that [NAME] did not continue to be actively involved with clients of [NAME], during the time that he ran The Sign Division. That appears to be a relevant matter when considering the application of the appropriate test for reasonableness. 58In circumstances where this is not a restraint on a former employee who has left the business and a new employee would be coming in to take over the role of the departing employee, the appropriate test is the one adopted by McDougall J in [NAME] which concerned "the time required for severing the relationship between [[NAME]] and those clients who would patronize the business after its sale": IRAF at [429]. I accept that the position is not on all fours with that decision because the present arrangement was the buy-out of one partner in a business. Nevertheless, the concern of the [NAME] was not for some replacement of [NAME] to "show his or her effectiveness and establish a rapport with customers" ( [NAME] at [88]) but rather the concern for the severing of the relationship between [NAME] and customers of [NAME]. 59Interestingly, and despite the test employed by Brereton J in [NAME] , the issue as he described it there was one of "customer connection" (at [28]). That is precisely the position here that forms the basis for the [NAME]' submission in justification of the restraint. As Brereton J said at [44]: A more robust view is taken where the employee's role includes obtaining and extending custom for the employer's business. When an employee's duty includes to build up the employer's clientele as well as to deal with existing clients, a wide restraint is more likely to be upheld, because in such circumstances the employer is entitled to protection against the employee taking advantage of the period of service to prepare for later competition [ G W Plowman & Sons Limited v Ash [1964] 1 WLR 568; [1964] 2 All ER 10; Normalec Limited v Britton [1983] 9 FSR 318, 324; [NAME], The Law of Trade Secrets , 2nd edn, [11.150]. In such a case, the establishment of a customer connection is not merely incidental to the employment, but its purpose. In that context, a covenant is considered reasonable, first, to remove the temptation that by cultivation of the target market during employment, the employee may prepare the ground for its exploitation by himself after the employment ends, rather than for his employer during the employment; and, secondly, to prevent exploitation after termination of the employment by the employee of a connection with the customer which the employer has paid the employee to establish for the employer's benefit. In this context in particular, the fact that in pursuance of his or her obligations under the employment contract an employee has for reward introduced customers who include relatives, friends and acquaintances does not [absent specific agreement to the contrary: see Sharah v Healey [1982] 2 NSWLR 223] remove or cut away the basis which would otherwise exist for a restraint. 60The evidence was that from 1999 to 2006 [NAME] was the managing director of [NAME]. In that position he built a rapport with the clients. At the same time, [NAME] was primarily attending to two other businesses of his. It was only from 2006 that [NAME] allocated more of his time to the operation of [NAME]. As part of his regular meetings with [NAME] had active knowledge of how [NAME] was trading and what it was doing. 61After [NAME] established The Sign Division he had contact with a number of clients who were clients of [NAME]. [NAME] continued to take orders from clients and place them with [NAME] or one of his sons. He continued to deal with enquiries from clients about window tinting and solar films. [NAME] was still receiving enquiries and placing orders for solar film with [NAME] when he ran The Sign Division which was, in any event, a part of [NAME] and carried on under the name of [NAME], it would be inappropriate to take the view that time should begin to run for the restraint only when [NAME] commenced to run The Sign Division.

Conclusion 62In my opinion, the restraint agreed between [NAME] and [NAME] in the Deed of 21 July 2008 was no more than was reasonably necessary for the protection of the [NAME]. The First Defendant, for himself and through the Second and Third Defendants, has acted in breach of that restraint. They should themselves be restrained from doing so for the period stipulated, that is, until 20 July 2013. 63The parties should bring in Short Minutes to reflect these reasons.

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