Supreme Court New South Wales

• Medium Neutral Citation: ATF Services Pty Ltd v Ronald Chapman & Anor [2011] NSWSC 1024
• Hearing dates: 25 and 31 August 2011
• Decision date: 01 September 2011
• Jurisdiction: Equity Division
• Before: Pembroke J

Decision

See paragraph [35]

• Catchwords: RESTRAINT OF TRADE - validity of restraint - legitimate interests - customer connection - confidentiality - whether restraint reasonable - relevance of legal advice to reasonableness of restraint - proportionality between protection of interests and duration/location of restraint.; CONTRACTS - construction - parties - whether party bound personally when signing as director of company - whether objective intention to be bound can be ascertained - relevance of surrounding circumstances and text of contract.; CONTRACT - meaning of termination - whether relevant distinction between effluxion of time and termination - contract to be read as whole - absurdity, commercial sense
• Cases Cited: BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347; Buckley v Tutty (1971) 125 CLR 353; Cole and Battery World Pty Limited v Heavenly Bound Pty Limited [2009] NSWSC 1309; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337; Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523; Franklins Pty Ltd v Metcash Trading Limited [2009] 76 NSWLR 603; Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386
• Category: Principal judgment
• Parties: ATF Services Pty Ltd - plaintiff; Ronald Chapman - first defendant; Vicron Constructions Pty Ltd - second defendant
• Representation: J C Giles - for the plaintiff; R I Bellamy with Ms L Doust - for the first and second defendants; Norton Rose Australia - for the plaintiff; Stacks Forsters - for the first and second defendants
• File Number(s): 2011/195780

ex tempore Judgment

Introduction

1 This is a an application to restrain Mr Chapman (the first defendant) and the company of which he is the sole shareholder and director, (the second defendant) from breaching the restraint of trade provisions contained in an agency agreement made on 1 April 2002. The agency agreement was for a term of one year but contained annual options to renew until 30 March 2011. Those options were exercised. Following 30 March 2011, the business continued to be operated by Mr Chapman through his company and the agreement remained on foot until 9 June 2011 when it was terminated by notice.

2 The business of the agency agreement was the marketing, sale or hire within the defined territory on the mid north coast of New South Wales of gantries and portable fencing panels manufactured by the plaintiff. It is very clear to me that Mr Chapman was highly efficient and well regarded in the supply of the goods and services that he provided to customers pursuant to the agency agreement.

Party to Agency Agreement

3 A threshold question arises as to whether Mr Chapman is a party to the agency agreement and thereby bound by the restraint of trade provisions contained in it. He signed the form of agreement only in his capacity as a director of his company. He did not sign it additionally or separately in his personal capacity. However, I am satisfied that he is bound. The question is of course to be determined objectively.

4 The proper construction of an agreement and the identity of the parties bound by it must be ascertained by reference to the language of the agreement and the mutually known surrounding circumstances including, importantly in this case, the evident purpose of the agreement and its provisions: Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 (CA); Franklins Pty Ltd v Metcash Trading Limited [2009] 76 NSWLR 603 (CA).

5 In my view it was intended objectively that Mr Chapman be bound. He is named on the front of the agency agreement and in the list of parties as a party. Clause 29, which is the restraint of trade provision, contains an express promise by him. As a matter of commercial sense clause 29 would be of little or no utility unless Mr Chapman were bound. The business was to be undertaken in substance and reality by Mr Chapman. He is the one who would develop the contacts, establish the relationships and attract any goodwill. His company was virtually worthless and a restraint of trade only against it would be virtually worthless. When the matter is looked at objectively there is no rational reason why it could have been intended Mr Chapman would not be bound.

6 I acknowledge that prior to execution of the agency agreement a draft was provided to Mr Chapman which contained a space for execution by him in his personal capacity, in addition to a space for execution by him as a director of his company. The document as executed did not contain such a space. Although the question is objective, I should observe that Mr Chapman did not notice the difference and did not recall that anything about the form of the agency agreement as executed caught his attention when compared to the earlier draft.

7 I do not think that, by itself, the form of the earlier draft is a material objective factor even if it could be taken as anything more than part of the prior negotiations. In any event, it is not, however, sufficient to dissuade me from the compelling inference, arising from the overall circumstances, that the parties intended at the time of entering into the agency agreement that Mr Chapman would be bound to it. T hose objective factors point clearly to an intention that Mr Chapman be bound by the restraint provision as a party to the agency agreement. As I have said, it must have been obvious to the parties at the time that a restraint limited to Mr Chapman's company alone would give little or no protection to the plaintiff. I do not think that it was objectively intended that Mr Chapman should avoid being personally bound.

The Guarantee

8 In addition, Mr Chapman is bound to adhere to the restraint provisions in the agency agreement by the terms of the guarantee. The guarantee operates in accordance with its terms. It specifically provides in language which is reasonably clear that it is incorporating the terms of the agency agreement, where those terms are applicable.

9 The defendants submitted that the only purpose of the incorporation of the terms of the agency agreement in the guarantee was to incorporate the definitional and interpretation provisions of the agency agreement and no more. But the language of the guarantee does not support any such limitation of the terms of the agency agreement which are incorporated.

10 The guarantee should be given effect in accordance with its terms. It is in fact more than a guarantee. It repeats the obligations in the agency agreement where applicable and Mr Chapman is bound by it. The incorporation of the terms of the agency agreement may well explain why Mr Chapman was not requested to sign the agency agreement in both of his capacities. It was not necessary for him to do so.

Termination or Expiry

11 There is another threshold question of construction. The restraint in clause 29 relevantly operates during the period of 1 year from "termination" of the agency agreement. The defendants contend that the restraint does not operate where the agreement expires by effluxion of time. This would be commercially absurd. It would mean that if the agreement were terminated on the penultimate date of its term the restraint would apply, but not if the agreement ran for a further day and expired by effluxion of time. Even ignoring the extension of the agreement until 9 June 2011 and its termination by notice on that date, there are several answers to the defendants' contentions.

12 First, every case will of course depend on the precise question of construction that arises in the unique circumstances and according to the particular language of the case in hand. Nonetheless, on its usual meaning, termination includes a contract coming to an end by the effluxion of time: Cole and Battery World Pty Limited v Heavenly Bound Pty Limited [2009] NSWSC 1309.

13 Second, as I have already stated, the defendants' construction is not a commercially sensible construction. There is no good commercial reason for parties to agree that there will be no restraint if the agreement ends by effluxion of time but that there will be a restraint if terminated, such as by giving a thirty day notice which expires one day before the end of the agreement. The commercial interests of the plaintiff are to protect its business, its goodwill and its confidential information regardless of the form and manner in which the agency agreement comes to an end. Those interests would have been obvious to the parties at the time the agreement was entered into. They inform its proper construction.

14 Third, the defendants' approach fails to read the agency agreement fairly and broadly as is required in the construction of any commercial contract: Franklins Pty Ltd v Metcash (supra) at [19]. It gives too much weight to the use of the word 'termination' in other parts of the agreement where it is used inconsistently, for different purposes and with varying meanings. The only question which arises is the meaning which should attach to the word 'termination' in clause 29. I do not get any assistance in this particular case from the use of that word in other provisions of the agency agreement.

Validity of Restraint

15 That leads me to the main issue, which is the validity of the restraint. The general principles applicable to the resolution of the issue as to whether a restraint of trade is valid are well known. But there are two significant preliminary matters that should be stated at the outset:

(a) The first is that contracts are meant to be observed. The general policy of the law is that people should honour their contracts. I referred to this consideration in Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386 at [3].

(b) The second is that in contracts such as these, and especially where, as here, the party sought to be restrained received legal advice at the time of entry into the contract, considerable weight should be given to an acknowledgment by that party of the reasonableness of the agreed restraint periods. I also referred to those considerations in Seven Network (Operations) v Warburton (No 2) (supra) at [70] to [72].

16 The general principle, subject to those two preliminary matters, is that no matter what the parties have agreed, negative covenants imposing a restraint on trade will not be enforced if the restraint is not necessary for the reasonable protection of the legitimate interests of the person for whose benefit it was agreed: Buckley v Tutty (1971) 125 CLR 353 at 376; Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 at 346-8; Seven Network (Operations) v Warburton (No 2) (supra) at [4].

17 The predominant issue in this case, and the basis for the legitimate protection which the plaintiff seeks, is the goodwill and customer connection of the plaintiff. Confidential information also plays a minor part. In particular that means that there is a question as to whether reasonable people in the position of the parties would have expected that the performance of the agency agreement and the conduct of the business pursuant to it, would be likely to generate significant new goodwill in relation to that business which the plaintiff could reasonably protect by the restraint of trade provision: BB Australia Pty Ltd v Karioi Pty Ltd [2010] NSWCA 347 at [67].

18 An employee or agent is entitled, and is to be encouraged, to build up his own qualities of skill and experience. Equally, it is his duty to develop and improve the principal's business for the benefit of the principal. These two obligations interlock during the period of the agreement. After its termination they diverge and mark the boundary between what the agent may take with him and what he may legitimately be restrained from doing: BB Australia Pty Ltd v Karioi (supra) at [70] - [80]. It is therefore necessary to identify some advantage or asset inherent in the business which it would be unjust to allow the agent to appropriate for his own purposes even though the agent may have contributed to its creation.

19 The focus in cases such as these is the extent to which the agent is likely during the course of his agency to develop business relations with customers. If it is anticipated that an agent will develop personal connections with customers while acting in the course of his agency so that those customers may follow the agent to a new business it will usually be reasonable for the principal to impose some contractual restraint upon the agent: BB Australia Pty Ltd v Karioi (supra) at [81].

20 The business conducted by Mr Chapman pursuant to the agency agreement was simple and straightforward. It involved the marketing and hire of temporary fencing for use by contractors on construction sites. But in the conduct of that business Mr Chapman would have been anticipated to develop personal connections with customers. He certainly did so. I infer that he was a skilful exponent of the tasks, including marketing, which he carried out pursuant to the agency agreement. He acknowledged as much himself:

Q. And in the period from 2022 on to 2010, 2011, you developed a series of customers who were repeat customers?

A. Yes.

Q. And with those people you endeavoured to service their needs quickly, didn't you?

A. Yes.

Q. When they rang up and asked for temporary fencing to be delivered within a short period of time you'd go out of your way to comply with that request, wouldn't you?

A. Yes.

21 The question of personal connections in the conduct of the business by an agent such as Mr Chapman or his company was put to Mr Littlewood, the plaintiff's General Manager, Fencing and Events. He gave the following evidence:

Q. Mr Littlewood, the ATF business which you have described and explained, does not seem to be the sort of business where the agent develops such personal connections with customers that you might expect customers to follow the agent from one business to another; do you agree?

A. No, I don't. Your Honour to explain, we all over the country will have local customers and if that agent or indeed our own principal branches staffed by ourselves are servicing that customer well, that customer becomes very loyal. The fencing business is - quite often it is a late call up for the project managers because it is a small part of their spend so they need it fairly quickly so they will normally fall [sic] upon mobile phone to the number they have of a local ATF person and contact that person to take that problem away from them.

Q. Yes?

A. Although we provide a product, it is the service that you provide is the important thing. So you will have customers throughout the country side in the ATF network that are very loyal locally and you will have other customers that decide: No, I don't want to deal with that agent in that space for whatever commercial reasons they make.

22 I accept Mr Littlewood's evidence. But I have no doubt that the witnesses called for the plaintiff overstated the degree of customer connection that Mr Chapman developed. The customers serviced by Mr Chapman fell into two categories. There were those who entered into hire contracts with the plaintiff through its head office and for whom Mr Chapman's only service was the supply of fencing in the territory. These were national and state-wide customers. They were usually the larger contractors. Those larger companies often had previous dealings with the plaintiff outside the territory and came to use Mr Chapman or his company through that prior connection. Mr Chapman explained that Masterton Homes was one example of such a company. Those clients were, however, less lucrative for Mr Chapman and his company because they tended to operate on single sites, in comparison with local contractors who tended to have a larger local presence and multiple sites where they operated.

23 Those local contractors represented the second category. Mr Chapman said this was the largest part of the business. He said that this part of the business was work performed for customers who he approached himself and whose custom he and his company had obtained. This included customers seeking repeat business. Mr Chapman explained that hire contracts in this category were generally for a period of five to six months. He did not agree they were for periods of between two to twelve months.

Mr Chapman ' s Evidence

24 I prefer Mr Chapman's evidence on this issue. I was impressed with the frankness and honesty of his evidence in general. He gave direct and straight answers without any apparent regard to whether the answer would assist his case or detract from it. He was credible and plausible. His evidence was helpful to me in many respects. I formed the view that his evidence was truthful and reliable and should be preferred where necessary.

25 That is not to say that Mr Chapman should not be bound by his contractual obligations. It is merely to say on this issue I am prepared to act on the basis of his evidence as to the length of hire contracts with a local contractors. This is an important question because it was with these customers in particular that Mr Chapman built up a customer connection. And it is these customers, rather than the national or state-wide customers, who may follow Mr Chapman if the restraint of trade is not enforced. Mr Chapman accepted the description of these customers as repeat customers:

Q. Do you say that the local builders were more lucrative because they had a multiple presence and multiple sites operating?

A. Yes.

Q. And those were the customers who were repeat customers, weren't they?

A. Yes.

Q. It's right that those customers usually kept the temporary fencing for somewhere between 2 and 12 months, isn't it?

A. No, up to 5 to 6 months.

Q. Sometimes up to 12 month

A. Everything on cottage work was only hired out for 6 months.

Q. While we're talking being the repeat customers, it was with those customers you endeavoured to keep a good name and a good reputation, wasn't it?

A. All customers.

Q. But including those customers for the reason you wanted them to comeback for the next job?

A. Yes.

Q. And you would try and be efficient to try and get the fencing out to them quickly?

A. Yes.

Q. And you believed you developed a good name with those people, don't you?

A. Yes.

Q. And you'd hoped if you ever went back to the temporary fencing business in the mid north coast, some of those people would ring you up because of your good name?

A. I did but I don't think they will now.

26 This evidence also leads me to conclude that, having regard to the dichotomy in the business between national and state-wide customers on the one hand and local contractors on the other, the legitimate protection to which the plaintiff is reasonably entitled should be limited. It should be limited to protection against the risk that the local contractors in the territory serviced by Mr Chapman might follow him rather than stay with the replacement agent that the plaintiff has appointed. I am satisfied that this is a real risk that would have been understood and anticipated at the time the agency agreement was entered into. It is and was a risk against which the plaintiff is reasonably entitled to protection. The appropriateness of such a restraint accords in my view with the reasonable expectations of the parties.

27 Such a restraint legitimately protects the plaintiff's goodwill. That is so for at least the following reasons. Price is only one of the three major points of competition. The others include accessibility of Mr Chapman, the ease of doing the business with him and his service to customers in full and on time. Additionally, customer loyalty to the plaintiff and its brand was developed in the territory through Mr Chapman providing a quality service while operating the plaintiff's business and being paid a significant fee by the plaintiff. Further, over the nine year term of the agency agreement the defendants built up a reputation for providing an efficient and quick service which was an important factor in the success of the business in the territory. That reputation was developed in the context of using the plaintiff's name, its existing goodwill, its advertising and its products.

28 Further still, the defendants were able to able to build up a reputation through providing service to national and state-wide customers referred to them by the plaintiff. The plaintiff significantly contributed to the defendants' agency business through its own reputation, its own brand and its own goodwill. It is entitled as part of the commercial arrangement between the parties to protect that goodwill.

Length of Restraint

29 However, the length and extent of the restraint give rise to particular considerations. The length of the restraints stipulated in the agency agreement and their reach across Australia go beyond what is necessary for the reasonable protection of the legitimate interests of the plaintiff. I have no hesitation in limiting the restraint to the defined territory. Additionally, I have concluded that a restraint until 31 December 2011 is all that is appropriate.

30 The defendant suggested in submissions that, if the restraint were otherwise valid, it should be limited to three months. The plaintiff contended for twelve months, on the assumption that a two year period was regarded as unreasonable. I have concluded that the appropriate period is approximately six months. That is not because of any arbitrary selection on my part. It is because I am satisfied that the length of hire contracts with local contractors is usually in the range of two to six months. I accept that the greatest risk of loss of custom to the plaintiff is on renewal or expiration of existing contracts with local contractors with whom Mr Chapman has developed goodwill and customer connection.

31 The plaintiff is entitled to the benefit of that customer connection and goodwill, not Mr Chapman. A restraint until 31 December 2011 will ensure that the plaintiff will have the benefit of any renewal of hire contracts entered into by Mr Chapman's company with local contractors. It will provide a reasonable opportunity for the replacement agent in the territory to retain and enhance the connection which Mr Chapman established with those contractors. A restraint for any longer period would go beyond the reasonable protection of the legitimate interests of the plaintiff and would be unfair to Mr Chapman.

32 I have not overlooked the fact that the plaintiff also relied on the contention that the defendants had access to names, contact details and prices charged for at least those customers with whom Mr Chapman dealt directly. They also had access to price information concerning national and state-wide customers. I am quite satisfied that by 2012 this information, even if retained by the defendants, will be of little utility. The plaintiff will in my view be adequately protected by a restraint until 31 December 2011.

Costs

33 The plaintiff has succeeded, but on a reduced and more limited basis than that which it sought. I have some sympathy for Mr Chapman. The restraint sought by the plaintiff was excessive having regard to the reality of the reasonable protection to which it was entitled. And the failure of the plaintiff to clearly provide for execution of the agency agreement by Mr Chapman in his personal capacity gave rise to disputation that could easily have been avoided with a little care and attention.

34 In the exercise of my discretion I have concluded that the defendants should therefore only pay 50 per cent of the plaintiff's costs. There should be an order in the terms of the restraint sought by the plaintiff, but limited to the defined territory and only until 31 December 2011. The plaintiff's solicitor should send to my associate an agreed form of order in those terms.

oOo

Decision last updated: 05 September 2011