In a decision that strikes at the enforceability of Business Sale Contract terms in common usage in Queensland, the Supreme Court has ruled that a raft of non-compete clauses crafted to prevent a corporate seller’s director from opening up in competition against the buyer, were wholly ineffective.
B&C P/L sold its Brisbane based asbestos removal business in October 2013 to GBAR (Australia) P/L for nearly $2.5 mil. B&C was also granted 20% of GBAR’s shares over which the company took an option to buy from B&C for a further $600k.
As part of the deal, B&C’s founder and guiding mind, Greg Brown, was also contracted to become the buyer’s general manager while GBAR’s other shareholders – Barend Stoltz and Vincent Manning – planned the national expansion of its operations.
The business sale contract – on standard REIQ terms – restrained the seller company in the usual way from being engaged in Queensland in asbestos removal or any other similar business for 3 years.
It also contained a provision restricting Brown in a similar manner and another requiring the seller to procure for the buyer, a separate similar non-compete covenant from Brown. Brown was not however a party to the contract and the separate restraint was – for reasons not explained in the judgment – never provided.
The employment agreement prohibited Brown from soliciting or accepting any GBAR customers with whom he had dealings during the 12 months prior to employment termination.
It also specified that he would not for 3 years following termination in Queensland, “either alone or in partnership be interested directly or indirectly as a director, shareholder, employee or consultant” in a business similar to or in competition with that of GBAR.
Over the ensuing 15 months, Brown became estranged from the other shareholders and exhausted by the 15 hour work days required of him to keep the profitable Brisbane operation going while the expansion into Western Australia faltered.
His exit – negotiated in January 2015 – included the purchase by GBAR or its nominee of B&C’s shares at the agreed price and a cascading restraint on Brown – for a period of three years, two years or one year – from being interested or providing consultancy services directly or indirectly etc in Australia, to a competitor.
The exit agreement waived all claims for adverse conduct by each party against the other, contained no restraint against B&C itself and preserved the terms of the Business Sale Contract and the Employment Agreement “except to the extent that they have been changed or overruled by the terms and conditions of this agreement”.
The business fared poorly after Brown’s departure at the end of that month.
After fielding enquiries from numerous former customers about whether or not he would return to the industry, Brown received legal advice in June 2016 that his exit restraint went “well beyond what is necessary to protect GBAR’s legitimate business interests”.
B&C – with Brown at its head – returned to the asbestos removal industry at the end of July 2016.
It set up in Geebung less than 1 km from GBAR’s home base under the name “B and C Asbestos Removals” and later changed it to “Greg Brown Asbestos Removals”.
GBAR sought to swiftly enforce the non-compete restraints. Its application for interlocutory injunctions was however dismissed on the balance of convenience, in October 2016.
Central to GBAR’s contention when the dispute ultimately came before Justice Thomas Bradley 3 years later, was that B&C’s outstanding success during the intervening 3 years – corresponding as it did with a decline in GBAR’s revenue of a similar magnitude – was evidence of Brown’s “business diverting conduct”.
His honour was reluctant to draw any such inference and instead embarked upon an examination of each of the non-compete restraints and in particular whether or not they were “reasonably necessary for the protection of a legitimate interest” so as not to be contrary to public policy.
First up for consideration was that within the Business Sale Contract which had relevance only for the 3 month period from B&C’s re-start until that restraint expired at the end of October 2016.
Was the restriction on B&C having a “direct concern or interest” in a competitor reasonable to protect the goodwill GBAR had acquired?
“No”, answered the judge. The Business Sale Contract had clearly recognised that – to protect the goodwill acquired and grow the business – it was Brown’s personality and in particular his reputation that had to be harnessed and to the extent lawfully permitted, restrained. Any restraint on B&C was as a consequence, superfluous.
The judge was therefore “unable to conclude that the clause 12.1 restraint was “no wider than reasonable or necessary” to protect GBAR’s goodwill. He ruled the clause to be unenforceable.
It followed that any prohibition on B&C having an “indirect interest” in a competitor eg as shareholder, would be even less essential to protect the buyer’s goodwill, rendering such term likewise unenforceable.
Such was in fact the basis of Brown’s attack on the second restraint – that in the employment agreement – which stipulated among other things that he would not for 3 years after termination, hold an “indirect interest” in a competitor.
Bradley J agreed there was no basis for concluding that the restraint on Brown from having “an interest as a shareholder in a company that conducted a similar asbestos removal business anywhere in Queensland” ie an “indirect interest”, was necessary or reasonable. That clause too was therefore unenforceable.
The third provision – that in the exit agreement – purported to restrain Brown from working for any similar business or any competitor in Australia for a period of either two or three years from 30 January 2015.
This went way too far according to the judge and was inconsistent with “the elementary freedom of an employee to earn his living as best he can”. Brown was GBAR’s employee, “not their slave,” he remarked.
But even disregarding the overly wide geographic restraint, Justice Bradley explained that the restraint was likely to be unenforceable on the basis that it had been given for no consideration in the context of employment termination rather than that of gaining employment.
The wash up of the analysis of each of the restraints was that the buyer could rely on none because they had all overreached – in different ways – the bounds of reasonableness.
What though of the general rule that a vendor of a business “is not entitled to depreciate that which he has sold” and must abstain from any act intended to deprive the purchaser of that which has been sold to him ie the so-called rule in Trego v Hunt?
In respect of this argument, the court noted that the evidence showed Brown had not actively sought out GBAR’s defectors. Rather the customers themselves had looked for him once they became aware he was back in business.
Thus it could not be said that Brown had even engaged in any offending conduct.
Justice Bradley also observed that the doctrine could have no operation where the parties themselves “turned their respective minds to and agreed on the specific contractual rights and obligations in respect of competition”.
As a consequence of this judgement, restraint of trade clauses in common usage in Business Sale Contracts and in employment agreements will require close re-examination. Extreme care will be required going forward to ensure reasonableness and the absence of overreach in all commonly used non-compete provisions.