Ronald Ian Charles Bartsch; David John Lee and Aviation Dynamics Pty Ltd v Avtex Airservices Pty Ltd; International Pilot Training Course Pty Ltd; Dieter Siewert and Paul Lange [1993] FCA 409 (27 August 1993)

FEDERAL COURT OF AUSTRALIA

RONALD IAN CHARLES BARTSCH; DAVID JOHN LEE and AVIATION DYNAMICS PTY LTD v.
AVTEX AIRSERVICES PTY LTD; INTERNATIONAL PILOT TRAINING COURSE PTY LTD; DIETER
SIEWERT and PAUL LANGE
No. NG321 of 1992
FED No. 589
Number of pages - 17
Contract - Restraint of Trade

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow(1), French(1) and Heerey(1) JJ

CATCHWORDS

Contract - implied terms - criteria - obviousness - necessity - specific formulation - alternative possibilities - whether term reasonable and equitable - inconsistency with expressed term.

Restraint of Trade - limitation on use of aviation theory teaching system - reasonableness - financial contribution of covenantee - distinction between limitation of existing freedom and acquisition of limited freedom - validity of distinction - restriction not unreasonable.

BP Refinery (Westernport) Pty Ltd v. Shire of Hastings (1977) 52 ALJR 20

Codelfa Construction Pty Limited v. State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337

Esso Petroleum Co. v. Harper's Garage (Stourport) Ltd [1967] UKHL 1; (1968) AC 269

Amoco Australia Pty Ltd v. Rocca Bros. Motor Engineering Co. Pty Ltd [1973] HCA 40; (1973) 133 CLR 288

Quadramain Pty Ltd v. Sevastapol Investments Pty Ltd [1976] HCA 10; (1976) 133 CLR 390

Tulk v. Moxhay (1848) 2 PH. 774; 41 ER 1143

Elkhoury v. Farrow Mortgage Services Pty Ltd (In Liquidation) [1993] FCA 264; (1993) 114 ALR 541

HEARING

SYDNEY, 17, 18 May 1993
27:8:1993

Counsel for the Appellants: Mr J M Ireland QC and Mr J B Maston.

Solicitors for the Appellants: Emil Ford and Co.

Counsel for the Respondents: Mr T Simos QC and Mr E Strasser.

Solicitors for the Respondents: Schweizer and Co.

ORDER

THE COURT ORDERS THAT:
1. The appeal is dismissed.

2. The appellants to pay the respondents' costs of the appeal.

Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

Factual History
GUMMOW, FRENCH AND HEEREY JJ Dieter Siewert and Paul Lange, the third and fourth respondents, are directors and shareholders of the first respondent, Avtex Airservices Pty Ltd (Avtex) which conducts an air charter business at Bankstown in the State of New South Wales. On 3 August 1988, Siewert and Lange, with Robert Nash, the company's operations manager, and David Chapman, the general manager, met with the first and second appellants, Ronald Bartsch and David Lee, to discuss the establishment by Avtex of an academy for teaching flying theory. Bartsch, at that time, was lecturing in an aviation course at the Sydney TAFE college. Lee, his friend and business associate, had experience with the use of computers. There had already been some preliminary discussion between these parties.

2. At the meeting Bartsch went through a document which he had drawn up entitled "Proposal for Airtex Aviation Academy". The document was prepared in the name of Aviation Consultancy Services (ACS), a business conducted by Caldtear Pty Ltd (Caldtear) of which Bartsch and his father were directors. Under the proposal Avtex was to provide the necessary facilities and funding for the academy and access to aircraft for key staff. ACS would provide management through Bartsch who, as general manager, would be responsible for the overall running of the Academy through an administration and sales manager. ACS would also provide high quality lecturers, and would be responsible for their training and performance. It would furnish the training material for the lecturers and training material and lecture notes for students. By way of consideration for its involvement, ACS sought:

1. A service/consultancy fee of $2,500 per month
2. A fee per student of 10% of the course price.
3. A one-off payment of $6,000 to enable work to start.
4. $2,500 per month to cover expenses between the acceptance
of the arrangement and the proposed commencement of the
Academy's operations on 30 January 1989.

A classroom layout was proposed, including separate rooms for Private Pilot Licence (PPL), Commercial Pilot Licence (CPL) and Senior Commercial Pilot Licence (SCPL) students respectively. The installation of an Interactive Classroom Learning System (ICLS) in each of the classrooms was strongly recommended. The physical elements of that system comprised a computer terminal for each student and a control terminal for the lecturer. Its purpose was to allow the lecturer to pose multiple choice questions to the entire class as part of the teaching process. Students would enter answers and get an immediate response from their own terminals. The lecturer would get an overall map of the responses displayed on the control terminal which could be used to gauge levels of class knowledge on a particular topic and to identify students in difficulty. According to the ACS proposal, a similar system was in use by Ansett and Qantas in their pilot training, and its application to the Academy would be of great assistance in winning training contracts from major airlines. Cost estimates were given for setting up the various elements of the Academy. Proposed "training aids" included "3 Interactive Class Learning Systems" for a total of $32,100 and "Training videos" for $550. Bartsch offered to arrange all training material, including lecture notes and slides. Under the proposal Avtex would provide the necessary funding and would expand its premises to accommodate the Academy. The ICLS came later to be known as the ACE system. The primary Judge found that this name was not used at the time of the initial meeting and that it was first used in January 1989.

3. At the initial meeting, Bartsch said he wanted the right to market the ICLS in other parts of Australia. Lange observed that it was being suggested that Avtex pay for the development of the system. He asked what benefit would accrue to Avtex if Bartsch were to franchise the system outside Sydney. Bartsch said he was considering a franchise fee of ten to fifteen per cent of turnover. Siewert said he had nothing against that proposition. Lange said that Avtex would not want a franchise granted in the Sydney area. Bartsch replied "No, definitely not". The Sydney area was defined in the discussion that followed as extending from Newcastle in the north to Wollongong in the south. Although the discussion was comprehensive the meeting reached no firm agreement.

4. A further meeting was held on 5 August. There the following points were agreed:

1. Bartsch would stay with the Academy for four years.
2. Avtex would have the opportunity of withdrawing from the
agreement after three months from commencement of courses
if the Academy had not broken even within that time.
3. Bartsch would not receive any percentage of course fees
unless the Academy broke even.
4. A payment would be made to Avtex in the event of a sale
or franchise of the ICLS outside the Sydney area.

There was no discussion of the period for which the ICLS would be used by Avtex. A letter was apparently sent setting out the matters discussed on 5 August, but the letter itself has been lost. Nevertheless the conversations which took place in August reflected the terms of an agreement between Avtex and Bartsch and Lee for the establishment of an aviation academy. Although Bartsch and Lee seemed to have been negotiating for ACS in these conversations, the question of the precise identity of the corporate vehicle representing their interests was never in issue. The business name to be used by Avtex for the proposed academy was Airtex Aviation Academy.

5. Bartsch advertised under the Airtex name in the Australian newspaper of 31 August 1988, calling for lecturers to teach ground theory. On 6 November 1988 he met with a number of persons who were subsequently engaged as lecturers at the Academy and discussed with them syllabus and teaching format. He indicated that books would need to be written for the course and assigned topics to particular individuals.

6. In mid-December 1988, a further major meeting took place between Bartsch, Siewert, Lange and probably Lee. Bartsch proposed a development of the Academy concept which involved setting up an Airline Pilot Training Course (APTC) providing theoretical instruction and practical training to the level necessary for Qantas minimum entry requirements. He said some five or six flying schools in the Bankstown area would be interested in running such a school in conjunction with Avtex. The proposal as developed involved no more than the provision of ground theory instruction by Avtex and practical flying training by the flying schools under an arrangement by which Bartsch would collect money for the flying schools from the Airtex students. The designation Air Pilot Training Course did not reflect the existence of a new organisation. It was a way of advertising the Airtex ground training course. Avtex was to pay the advertising. Charges for the APTC course would have two parts. The first, called a deposit, would be the normal charge for the ground theory course less a 10% discount. The second, to meet the flying school fee, was to be kept separate from money paid to the Academy. The proposal was accepted.

7. A number of flying schools were contacted by Bartsch and told that Airtex Aviation Academy would be responsible for their fees. The name Airline Pilot Training Course was registered as a business name. The registration was made in the name of a company called Dyljot Pty Ltd (Dyljot), which was controlled by Bartsch, Lee and their wives. It later became Aviation Dynamics Pty Ltd (Aviation Dynamics), the third appellant. In 1990, the shares of Mr and Mrs Lee in this company were sold to Mr Webster and Mr Punch. They were the third and fourth respondents at the trial. They are not parties to the appeal.

8. Some 16 student workbooks for use in the Airtex course were prepared in January and February 1989 by Wayne Waddington, Gordon Smith, Gavin Secombe and Bartsch. Bartsch prepared three of them. Copyright in all but those three, and one which had been prepared by Gavin Secombe, was assigned to Avtex. Photographic slides for the course were prepared by a Mr Nicholas King under an arrangement with Aviation Dynamics. King was paid by that company out of funds which derived from Avtex. No arrangements were made for assignment of the copyright in the photographs.

9. The Airtex Aviation Academy was officially opened on 30 January 1989 with an initial enrolment of eight students. The workbooks were ready at that time but the ICLS computer system did not arrive until February. Lee supervised its installation. He had devised the circuit board and had a program written by a relative at a cost of $3,000.

10. In March 1989, Siewert became aware that money collected from students for the airline pilot training component of the course had been banked in an account with a bank in Paddington. He told Bartsch that all Avtex's accounts were with the Commonwealth Bank at Moorebank and he expected the moneys to be transferred to the company's account there. Bartsch agreed to comply with this request. The Commonwealth Bank was involved with financing students who attended the Airtex course. Bartsch and Lee discussed the matter with their wives and decided it would be inconvenient to bank with the Commonwealth. They opened an account at Moorebank and placed a token amount of money in it. Apart from that sum all funds received in excess of the ground school component of the course were credited to an existing account of Aviation Dynamics and used to pay flying fees and for other purposes of Messrs. Bartsch and Lee. A month or so after the initial discussion about these funds, Siewert followed up with Bartsch but Bartsch's answers to him were "vague".

11. Accounts for the Airtex Aviation Academy were prepared shortly after 30 June 1989, based upon information derived from its operations manager, Mr Stephen Donoghue. They showed a turnover for the first five months of operation of $177,638. This should have resulted in profits of $63,000 to Airtex and $17,760 to ACS on the basis of the projections which formed part of Bartsch's original proposal. The overall profit was in fact $14,090. At a meeting with Bartsch in July 1989, Siewert proposed, and it was agreed, that the Academy should share the net profits with the Bartsch and Lee interests in the ratio of thirty to seventy.

12. The next major meeting between the parties took place in October 1989. Bartsch put to Siewert and Lange a proposal for a separate course for training overseas pilots. After some further exchanges an agreement was signed on 31 October 1989. Under the agreement Messrs. Siewert, Lange, Bartsch and Lee were to become equal shareholders in a company to be established to operate a business called International Pilots Training Course (IPTC). They acquired a shelf company called Dawnvisa Pty Ltd (Dawnvisa), later renamed as International Pilot Training Course Pty Ltd (IPTC Pty Ltd). New premises were to be built for the proposed IPTC at Bankstown Airport. Bartsch and Lee were to co-ordinate theory and flying training. Siewert and Lange were to arrange for construction and supervision of the offices, accommodation and catering at the Bankstown section of the course. The proposal never came to fruition although Bartsch and Lee made arrangements for the preparation of a promotional video for the proposed course in October 1989.

13. At about this time, it emerged that one of the flying schools which had been involved in the APTC claimed to be owed money by Avtex. Siewert rang Lee about this and Lee agreed to send a cheque. The matter was raised at the time of execution of the IPTC agreement on 31 October 1989. Siewert expressed surprise that the APTC money was still held in the Paddington account of Aviation Dynamics. Bartsch claimed that Nash had agreed in January that he and Lee could run the APTC as a separate enterprise for their own account. Siewert later asked Lee about this and he denied any such conversation.

14. Towards the end of December 1989 it was apparent that the Academy was not making very much money. Siewert spoke to Donoghue who then told him that the APTC flying component involved a big mark up on the fees paid to the flying schools. These were of the order of $3,500 per student. Siewert raised this matter also with Bartsch and Lee. At the time some forty five students had enrolled in the APTC. The profit based on the mark up of the flying component should have been $135,000 to $145,000. At the conclusion of this meeting, Siewert proposed that the IPTC, the APTC, the Academy and the sale and franchising of the ACE system be operated by one company in which he, Lange, Bartsch and Lee would have equal shareholdings. At this time Siewert believed that the amount necessary to pay for the flying component of the APTC was still in the Paddington bank account which was effectively operated by Bartsch and Lee. Bartsch and Lee wanted to discuss the proposal with their wives. At a subsequent meeting in January 1990, Bartsch agreed to merge the various businesses in one company but asked to exclude the computer system. That exclusion was accepted.

15. At a further meeting on 7 March 1990, Siewert became aware that the funds held in the APTC bank account at Paddington were insufficient to pay the flying schools for the flying component of the course. There was only $68,000 in the account. About $95,000 was missing. At that meeting Lee produced a draft agreement which was executed later that day. The terms of the agreement are of importance. It was agreed that Dawnvisa (later to become IPTC Pty Ltd) would take over the operation of Airtex Aviation Academy and the Airline Pilot Training Course. It would own and operate both those activities. It would take transfers of the relevant trading names from Dyljot (later to become Aviation Dynamics) and Avtex. The agreement was expressed to be subject to various conditions. Summarising those of lesser importance:

1. Dawnvisa would purchase and own the fittings of the
Academy.(cl.1)
2. The existing Academy premises would be leased from the
present owners for four years with two options for three
year extensions. (cl.2)
3. The board of Dawnvisa to comprise Siewert, Lange, Bartsch
and Lee, could agree to the leasing of an extension to
the Academy from the owners for four years with two
further options of three years. (cl.3)
4. Dawnvisa would finance and own the equipment and fittings
of the new Academy. (cl.4)
5. The employment structure of the Academy and the APTC was
set out and it was provided that the consultancy fee paid
to ACS of $2,500 per month would cease on the employment
of a full-time General Manager. (cls.5 and 6)
6. Bartsch could transfer his shareholding in Dawnvisa to
Caldtear. Lee had the option of transferring his
shareholding in Dawnvisa to Toveax Pty Ltd. (cls. 7 and 8)
7. Dawnvisa was to pay $1,000 per month to ACE system for
the provision of office premises until the premises were
sold or for a maximum of three months. (cl.9)
8. An anticipated cost structure for Dawnvisa was set out
for a period of three months. (cl. 10)

Clauses 11, 12, 13 and 14 were in the following terms:

"11) On signing of this agreement, Dyljot Pty Ltd will
transfer the current balance of the APTC account held by
Dyljot Pty Ltd to the APTC account held by Dawnvisa Pty
Ltd. The current balance is $68,362.06.
12) Dawnvisa Pty Ltd agrees to accept responsibility for the
payment of all unpaid and yet to be incurred flying
training fees in relation to students who commenced with
Airline Pilot Training Course while it was owned by
Dyljot Pty Ltd. This debt is approximately $147,784 (net
of credits held by Navair Flying School and installments
(sic) owed by APTC 1989 students) and the difference
between this amount and the amount transferred in
accordance with clause 11 shall be deemed to be an
advance against the profit share of Ron Bartsch and David
Lee (or Caldtear Pty Ltd and Toveax Pty Ltd).
This debt will be interest free to Dyljot Pty Ltd,
Caldtear Pty Ltd, Toveax Pty Ltd and all officers and
shareholders of those companies and will be repayable
only out of the distribution of profit from Dawnvisa Pty Ltd.
Ron Bartsch and David Lee (or Caldtear Pty Ltd and Toveax
Pty Ltd) will not be eligible for any further
distribution of profit from Dawnvisa Pty Ltd until Dieter
Siewert and Paul Lange have received between them a
distribution of profit equal to the above shortfall of
approximately $79,422, and such further distributions of
profit will be made simultaneously and equally to the
four directors.
13) ACE System ( a division of Dyljot Pty Ltd) agrees that it
will pay 10% of turnover from sales made after 1 January
1990 to its franchises excluding Airtex Aviation Academy.
This payment will be made to Silan Trading every 1 month,
together with a record of trading.
14) All banking will be done though the Commonwealth Bank,
Moorebank."

The sums of $147,784 and $79,422 referred to in the above clauses were worked out in the meeting and inserted on the draft prepared by Lee.

16. Relationships between the parties and particularly between Siewert and Bartsch deteriorated later in 1990. The final rift occurred after an open night held by a company called Axis Aviation Pty Ltd (Axis) in January 1991. Siewert had heard a rumour that Bartsch had arranged to franchise the ACE system to Axis. Siewert arranged for some persons to attend the opening night at which there was an ACE system. On 31 January 1991, Aviation Dynamics (at that stage still Dyljot) had entered into an agreement with Axis Aviation of Bankstown Airport under which it agreed to grant to Axis a non-transferable licence to use the ACE system and for that purpose to utilise the equipment, software, trademarks and documentation. The licence was said to be an exclusive licence within "the Region". The region was defined in Item 6 of the Schedule to the agreement as:

"The region within a radius of 50 nautical miles of
Bankstown Airport."

The ACE system was defined in cl.1 in the agreement as:

"... the system developed by Aviation Dynamics
utilising the Software, Equipment, lecturer guides,
student workbooks and Slides provided to the Licensee
in accordance with this Agreement."

In February 1991, Bartsch and Lee resigned as directors of IPTC Pty Ltd and the present proceedings were instituted on 27 February 1991. The case, as pleaded, focussed very much on claims that Bartsch and Lee and associated parties had infringed Avtex copyright in various components of the ACE system. The copyright claims failed. They are therefore mentioned only incidentally in the summary of the pleadings that follows.

The Pleaded Case
17. By their amended statement of claim, Avtex, IPTC Pty Ltd, Siewert and Lange allege that by the agreement made in August 1988 between Avtex and Bartsch, Bartsch was appointed general manager of the Airtex Aviation Academy and given a licence to reproduce, publish, adapt and/or market the ACE system to operators outside a 50 kilometre radius of Bankstown Airport. Pursuant to the agreement, Bartsch recruited lecturers for the Academy and arranged for them to commence preparation of student workbooks and visual teaching aids prior to their commencing full-time employment with Avtex (para.8). By the agreement of 7 March 1990, it is alleged that Avtex, IPTC Pty Ltd and Aviation Dynamics agreed to transfer the whole of the business of the Academy to IPTC Pty Ltd, which has carried on the business since then. Avtex said it granted IPTC Pty Ltd an implied licence to exploit, reproduce, publish, adapt, and/or use the ACE system and/or works prepared in connection with the system in which Avtex claimed copyright.

18. On 23 January and 20 February 1991, it is alleged that Bartsch, acting for himself or as agent for Aviation Dynamics and/or Caldtear, represented to the public in the course of trade or commerce that Axis held an exclusive licence to exploit the ACE system at Bankstown Airport and that IPTC Pty Ltd was not authorised or entitled to utilise or exploit the system at Bankstown Airport or at all. Each of these representations was said to have been false. Further, Bartsch and/or Lee and/or Webster and/or Punch for themselves or on behalf of Aviation Dynamics had purported to grant and continue to licence Axis to use the ACE system and/or adaptations of the system and had for that purpose compiled, published and offered for sale, hire, lease or licence reproductions of the system to Axis and through it to such members of the public as were to become students of a school for ground theory conducted by Axis at Bankstown Airport (para.12A). By reason of these matters the applicants said they had suffered loss and damage (para.12B). Allegations of infringement of copyright by Axis were made which are not material for present purposes (paras.12B to 13B).

19. It was then alleged that on or about 23 November 1988, Bartsch and/or Aviation Dynamics caused the name Airline Pilot Training Course to be registered as a business name in New South Wales, using the address of the Academy as the principal address of the business (para.13C). Bartsch and Lee were said to have opened an account to be conducted by Aviation Dynamics at the Paddington Branch of the State Bank of New South Wales (para.13D). Bartsch and/or Aviation Dynamics were said to have falsely pretended to the public and the Academy that the account was an account constituted by the authority of or in the name of the Academy (para.13E). Bartsch under colour and pretence of acting as general manager of the Academy caused $900,000, the property of the Academy, to be paid into the account (para.13F). As particularised, this sum comprised payments made by students in respect of their enrolments in the APTC. (para.13F(a)) which was a course conducted by Avtex (para.13F(b)).

20. Between January 1989 and March 1990, it is alleged that Bartsch and Lee and/or Aviation Dynamics wrongfully converted $266,290.18, the moneys of the Academy which had been paid into that account, to their own use (para.13G).

21. Further, and in the alternative, it is alleged that during the operation of the APTC before 7 March 1990, Bartsch and/or Caldtear owed fiduciary duties or a duty of fidelity to Avtex by reason of Bartsch's employment as general manager and alternatively Caldtear's agreement to provide its services in that capacity. (para.14A). In the circumstances, Bartsch and/or Caldtear were precluded from receiving any secret remuneration or secret financial benefit in connection with the APTC (para.14B). Bartsch and/or Caldtear are said to have breached these duties in that they received secret remuneration or secret financial benefit and alternatively caused Bartsch and Lee jointly to receive such a benefit (para.14C). The particulars of this allegation were that payments made by students enrolling in the APTC were intended by Avtex to cover the cost of the ground theory training and the charges made by the flying schools for flying lessons given to the students. Unknown to Avtex, Bartsch or Caldtear calculated a fee for the APTC which exceeded the amount necessary to cover those costs. That excess amount was paid without the knowledge of Avtex into an account operated by Bartsch and Lee at the Paddington branch of the State Bank, and who thereafter applied the amount to their own purposes without accounting for it to Avtex. Bartsch and Lee who were directors of Aviation Dynamics were said to have paid money from the account to that company, including sums representing a secret remuneration. (para.14C). Apart from various declarations and other orders relating to claimed infringements of copyright, an order was sought for damages for breach of contract and interest.

22. By their amended defence, the respondents allege that the agreement concluded on 23 August 1988.

The Trial Judge's Reasons for Judgment
23. His Honour's judgment is reported at (1992) 107 ALR 539. The factual background set out above reflects the findings of fact of the trial judge which, for the most part, are not challenged. He made strongly adverse findings about the credit of Messrs. Bartsch and Lee. So far as the evidence of various conversations given by the principals was concerned, he said that unless otherwise indicated, he accepted the versions of conversations adduced in evidence by Siewert, Lange and Nash where those versions differed from evidence given by Bartsch and Lee. After reviewing the evidence and giving his assessment of the credit of those two witnesses, his Honour turned to the claim based upon the alleged exclusivity of the licence of the ACE system. His Honour noted that it was not in dispute that as at 5 August 1988 Avtex had become entitled to an exclusive licence to use the ACE system to be developed by ACS. There was contention as to whether it was for a term of four years as alleged by the Bartsch and Lee interests or of indefinite duration as alleged by Avtex and its principals. It was submitted, however, for the Bartsch and Lee interests that whatever the effect of the August 1988 agreement, that was superceded by the agreement of 7 March 1990. His Honour did not accept that submission. He held that the parties to the 1990 agreement did not contemplate that Dawnvisa would not have the right to use the ACE system. His Honour said at 557:

"To give business efficacy to that agreement it is
necessary to apply a term that Dawnvisa, which was to
be the successor of Avtex in relation to the use of
the system, enjoy the same rights as Avtex had done.
Should I be wrong, then I would be of the opinion that
there never was any termination of the original
agreement with Avtex, so that the latter company
continued to have the right, for at least four years,
or indefinitely, to the exclusive use of the system
with the right to license Dawnvisa to use the system
for the same period. On either view of the facts,
either Avtex or Dawnvisa had the right to restrain a
grant of a right by the fifth respondent to Axis to
use the system in Bankstown and a declaration to this
effect should be made."

His Honour held that the reference to "four years" in the August 1988 discussions was not a reference to the term of an exclusive licence but a reference to the time in which Bartsch would be required to participate. It was his involvement which Siewert and Lange had regarded as significant. They understood they were financing the development of the system totalling and expected that they would have an indefinite right to it. They were relying on Bartsch to develop and operate the ground theory school. His Honour went on at 558:

"It is true that there were discussions about the
appointment of a full-time employee to take over the
position of general manager of the academy, a role
which Mr Bartsch was to undertake part-time, and that
the parties understood that at that time Mr Bartsch
would step down from that position, but that does not
alter the intention of the parties that the right to
use the system, which was essential to the whole
arrangement, was not to terminate at the expiration of
four years."

His Honour discussed the common law doctrine of restraint of trade and noted that there was little dispute that the development of the system in the present case was wholly financed by Avtex. It was in the legitimate interests of Avtex and the associated parties that it retain the right to use in Sydney and for its own business purposes the industrial property rights embodied in the system, the development of which it had wholly paid for. It was, in his Honour's view, entitled to protect the goodwill of the business which it was developing against the competition of others in the Sydney area and that the restraint implicit in that protection was no more than was adequate for that purpose. In a sense, Aviation Dynamics had not given up any right or freedom which it might formerly have had. But whether or not that sort of analysis were accepted, there was a relevant restraint of trade and the protection under that restraint was no more than reasonably necessary to protect the legitimate interests of Avtex and its successors and did not infringe any relevant public interest. It was thus not unreasonable.

24. On the question of breach of fiduciary duty, his Honour held it was Bartsch's responsibility while he was general manager of the Academy to run it. For this continuing service, payment was to be made to a company controlled by him. He put himself in a position, however, where his interest and duty had conflicted in organising, apparently for his employer, a venture for an integrated system of flying training. He had not revealed that, through the medium of a company in which he, Lee and their wives participated, he had priced the course so that there was a substantial profit to accrue to that company. Not only did he not reveal this, but he told Siewert and Lange that there was no mark up on the flying component. His Honour held that Bartsch had fraudulently concealed the profit, choosing to open a bank account at a bank unconnected with Avtex, and failed to comply with a request that an account be opened with Avtex's bank and the flying money banked in that account. In addition, he and Aviation Dynamics had taken advantage of Bartsch's position with Avtex to suggest a relationship between the APTC business and Avtex. His Honour held that Bartsch was, as a result of his continuing responsibility as general manager of the Airtex Academy, obliged to act in relation to the affairs of the Academy in the interests of his employer and that that obligation required him not to act in his own interests. Avtex was in the result in a position of vulnerability. Bartsch, it was said, chose to appropriate for himself and Lee and their respective spouses an opportunity for profit that had come to him as a result of his position with Avtex and concealed that from Avtex. It was immaterial that the relationship between Avtex and Bartsch was strictly employer/employee. The relationship was fiduciary. Bartsch was obliged to account to Avtex for profit gained from the breach of the duty. Prima facie the measure of profits for which an accounting had to be given was the gross profit made on the APTC courses in the period between 31 January 1989 and 7 March 1990, less proper and reasonable expenses in making that profit.

25. Bartsch and Lee and their associated companies had, as his Honour noted, relied upon doctrines of estoppel, waiver and equitable release. And in their oral submissions they claimed that Siewert and Lange had acquiesced in the breach of fiduciary duty. If there were such acquiescence, his Honour held that it was not explicit. Avtex and the others were unaware that the business was being conducted for the benefit of Bartsch and Lee until, at the earliest, October 1989 and were unaware in any event that there was a profit mark up until the end of December 1989. Nothing that happened between December 1989 and March 1990 could be construed as acquiescence.

26. His Honour went on, after discussing the doctrine of estoppel and waiver, to hold that the facts did not admit of the application of any doctrine of waiver. The necessary intention on the part of the Avtex interests to give up their pre-existing rights against the Bartsch and Lee interests was absent. At best, all that the evidence established was that, subjectively, Siewert and Lange saw the 7 March 1990 agreement as "calling it quits" in relation to past claims. The evidence did not admit of a finding that Siewert and Lange, with full knowledge of their claim against Bartsch and the other parties associated with him, consciously waived their rights in entering into an agreement which simply did not deal with the matter.

27. Nor could his Honour find any representation on the part of Avtex, upon which Bartsch and the others relied, that no action would be taken by the Avtex interests against the Bartsch and Lee interests. It was noteworthy, his Honour said, that neither Bartsch nor Lee said in evidence that he understood that the March agreement would operate to release or override any liability to account for the profits of the APTC business. There was not present in the facts any suggestion that Avtex or those associated with it had created or encouraged the assumption by Bartsch or Lee that they would not be called on to account for the APTC profits or that they were to be or had been released. A statement by Bartsch in evidence that had he been told he was not to be released, he would not have executed the agreement did not, according to his Honour, enhance the case, even if he were to accept such self-serving evidence which he did not. He also rejected similar evidence given by Lee.

28. Before dealing with the claim of equitable release, the primary Judge analysed the authorities (at 567-8) in a passage which was not challenged on appeal. His Honour concluded from the authorities that whilst lapse of time may, in some cases, be construed as signifying a release, this must at least be in circumstances "where the equitable beneficiary fully and clearly appreciates the nature and the circumstances of the transaction out of which the equitable right alleged to have been released arises". The primary Judge held that no act of Avtex or its associates could be seen, within the meaning of the authorities, as a "fixed, deliberate and unbiased determination" that they would not bring proceedings in equity against the Bartsch interests for breach of fiduciary duty. Nor, in anything that was said or done by them in conjunction with the March 1990 agreement, could there be found a present fixed intention to release the Bartsch interests. While lapse of time might in some cases be construed as signifying a release, on the facts of the present case, the Avtex interests first learned that the Bartsch interests were treating the APTC course as their own business on or about 31 October 1989. At that time, however, his Honour held, they believed that the APTC business was run without a profit. They did not become aware of the profit mark up until the end of December 1989. The proceedings were not threatened until after the open-nights in January 1991, and were instituted in February 1991. This represented a delay of approximately 14 months during which time the parties sought to work together but, as it turned out, unsatisfactorily. On a consideration of the whole of the circumstances of the case, his Honour did not think it could be said that the lapse of time was such as to require him to conclude that the Avtex interests had abandoned their rights against the Bartsch interests. It was a lapse of time in which the parties were seeking a modus vivendi for future business relationships between them. And if he were wrong on that, there remained the question whether the Avtex interests had the relevant knowledge which would convert mere delay to waiver or acquiescence. His Honour took the view that there needed to be knowledge not only of the relevant facts but of the rights that emerge from those facts. The onus of showing that would lie upon the person alleging the waiver or acquiescence, although knowledge of the relevant facts might give rise to a presumption of knowledge of those rights. He considered the reality of the matter to be that the Avtex interests did not direct their minds to such matters. Their concern was the commercial reality of a business which was losing money. He saw no reason to infer that they had turned their minds to the question of whether the facts gave rise to legal rights. On this basis his Honour was of the view that the submissions put by the Bartsch interests, whether on the basis of estoppel, waiver or acquiescence, should fail.

29. The primary Judge delivered judgment on 4 May 1992 and stood the matter over for the bringing in of short minutes of orders. This was done on 12 May 1992. His Honour then made various orders and granted declarations. By Order 2, he ordered that Aviation Dynamics be permanently restrained from licensing the interactive learning system known as the ACE system to Axis or to any other person or company in the area defined by the Sydney metropolitan area but extending in a northerly direction as far as Newcastle and in a southerly direction as far as Wollongong in the State of New South Wales. A declaration also was made that the action of Aviation Dynamics in 1991 in licensing Axis to use the ACE system for flying theory instruction at Bankstown was a breach of the contractual obligation owed by Aviation Dynamics to Avtex or alternatively to IPTC Pty Ltd for exclusive use in perpetuity of the ACE system in the said area.

30. Further declarations were made that Mr Bartsch was liable to account to Avtex for the benefits gained or received by him in breach of fiduciary duty (subject to an allowance for proper and reasonable expenses) from the operation from January 1989 by him and the other respondents of the business known as Airline Pilot Training Course, and that Mr Lee and Aviation Dynamics were liable to account to Avtex for all benefits received or gained by them by participation in the said breach of fiduciary duty by Mr Bartsch.

31. Finally, a declaration was made that Avtex was entitled to damages for breach of contract against Aviation Dynamics in relation to the licensing of Axis.

32. Following the orders of 12 May his Honour heard further evidence for the purpose of assessing damages and delivered judgment on 30 November. Orders reflecting the terms of that judgment were made on 14 December. In essence those orders were that Bartsch, Lee and Aviation Dynamics pay Avtex $248,232.95 in respect of the breach of fiduciary duty claim and that Aviation Dynamics pay Avtex $136,587.48 in respect of the breach of the restraint clause. The quantum of those amounts was not the subject of appeal.

The Issues on the Appeal
33. As we have indicated, the appeal is brought by Messrs Bartsch and Lee and Aviation Dynamics, against Avtex, IPTC Pty Ltd and Messrs Siewert and Lange. The respondents comprise the applicants below. The appellants are some only of the respondents below. Caldtear, and Messrs Webster and Punch, are not appellants.

34. The first submission of the appellants is that the award of contractual damages against Aviation Dynamics depended upon what the appellants characterise as the finding by the primary Judge "of the implied term of exclusivity in perpetuity". This finding is said to have been wrongly made.

35. Next, it is submitted that the recovery of compensation in equity against the three appellants depended upon the rejection by the primary Judge of the true effect of the agreement of 7 March 1990 and of the conversations and circumstances surrounding the execution of that document. In particular, it is said that his Honour was in error in not treating what happened as extinguishing any previous equitable claims; rather, it should have been held that known claims resulting from the conduct of the business were extinguished, with a fresh business framework being made between the parties for future operation of that business and the Airtex Academy. We turn first to consider the contractual issues.

Contractual Term as to Exclusivity
36. The appellants attacked his Honour's finding that the 1988 agreement included a term conferring on Avtex an exclusive right to use the ACE system within the Sydney area as defined (i.e. including Newcastle and Wollongong) in perpetuity. It was said that while the appellants accepted, and had accepted at trial, that Avtex had an "enduring and indeterminate" right to use the ACE system, there was no similar perpetual right to prevent the sale of the ACE system in the Sydney area to other parties. The appellants' contention was that Avtex had, in addition to its permanent right to use, a right to exclude others from use of the system in the Sydney area for the period "during which a business association continued between Avtex and Aviation Dynamics".

37. Such a provision was said by the appellants to give "business efficacy" to the relationship between the parties. The appellants' submissions proceeded on the footing that the term which was found by the primary Judge was not an express term but one implied to give business efficacy to the arrangements between the parties. In essence, the submission is that the term so implied should have been formulated differently.

38. However, we accept the submission for the respondents that an analysis of his Honour's judgment (esp. 107 ALR at 543-5, 557-8) shows him to have "gleaned", as he put it, the terms of the contract from what had been said by the parties. This was but an illustration of the not unusual situation where what in law are express terms of an unwritten contract are distilled from the available evidence.

39. The primary Judge did find an implied term on another branch of the case, that concerned with the 1990 agreement. In the first of the passages we have set out earlier in these reasons, his Honour said that to give business efficacy to that agreement, it was necessary to imply a term that Dawnvisa was to enjoy the same rights as Avtex in relation to use of the ACE system. His Honour went on to say that, alternatively, the earlier agreement remained on foot and that Dawnvisa took its rights as sub-licensee of Avtex.

40. Whilst both sides accept the right of Avtex to exclusivity, under the 1988 agreement, there is disagreement as to the nature of the term giving that right and a further disagreement as to the period for which that exclusivity would endure.

41. The term found by the primary Judge was an express term; we accept the respondents' submission that, on the evidence, it was well open to his Honour to find a term as he did. That being so, the task of the appellants is to attach to the express term an implied term.

42. Before considering whether their submissions in favour of that course should succeed, it is as well to bear in mind the propositions from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 at 26, which were approved by Mason J in Codelfa Construction Pty Limited v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 347. The 5 conditions necessary to ground the implication of a term were stated as follows:

"1. it must be reasonable and equitable;
2. it must be necessary to give business efficacy to
the contract, so that no term will be implied if
the contract is effective without it;
3. it must be so obvious that 'it goes without
saying';
4. it must be capable of clear expression.
5. it must not contradict any express term of the
contract."

In this context the evidence of Siewert and Lange as to the August 1988 discussions becomes important. As has already been noted, his Honour found that Lange said that Avtex would not want a franchise granted in the Sydney area and Bartsch replied "No, definitely not". Thus as a matter of contractual analysis, it is the appellants who seek to imply a time limitation to the admitted term as to exclusivity. The appellants' proposed limitation - to "the period during which a business association continued between Avtex and Aviation Dynamics" - has in our view obvious defects. It does not satisfy a number of the criteria as to implied terms laid down in BP Refinery (Westernport). It is not something that "goes without saying", if only for the reason that there are a number of alternative possibilities which spring to mind, for example (i) perpetuity (as the respondents contended) or (ii) a reasonable time or (iii) an indefinite time terminable by reasonable notice. For the same reason, it cannot be said that the particular limitation suggested by the appellants is necessary to give business efficacy to the transaction.

43. There is the further problem about the appellants' formulation that it would have the admitted right of exclusivity terminate whenever the "business association" ceased, no matter how soon that cessation might occur and whether it occurred as a result of some act on the part of Aviation Dynamics or at any rate some event which was beyond the control of Avtex.

44. It is significant also that it is Avtex which was paying for the development of the ACE system so that, in a commercial sense, it might reasonably have been regarded as the "owner" thereof, and as such in a position to give the Bartsch interests no more than a licence in exchange for a royalty. What, as his Honour found, was agreed was that the Bartsch interests were to be treated as "owner" of the ACE system but this was to be on terms that Avtex would have an exclusive right to use the ACE system in the Sydney area which was unqualified and indefinite in time. If the submissions for the appellants were to be accepted, there would be much to be said for the view that the implication which thus would be read into the express term would be neither reasonable nor equitable and that it would contradict the express term.

45. In the light of all these considerations, we conclude that the appellants' submission as to the period for which the exclusivity would endure should not be accepted.

46. But even if the admitted term as to exclusivity in the Sydney area extended, as the appellants argue, for the term of the business association between Avtex and Aviation Dynamics, his Honour thought that the business association came to an end when Bartsch franchised the Avtex competitor Axis (thereby precipitating the litigation). This view of the facts was not challenged by the appellants. Accordingly, a further, and short, answer to the appellants' case on this issue would therefore seem to be that the breach of the term as to exclusivity on the appellants' construction occurred when that right was still in existence - albeit that shortly thereafter, and as a consequence of the breach itself, the association came to an end.

Restraint of Trade
47. The appellants did not contend that their version of the exclusivity term was an unreasonable restraint of trade. Since there was, for the reasons just mentioned, in any case a breach of such a term committed by the appellants it might be thought unnecessary to consider the appellants' further argument that the respondents' version of the term would be an unreasonable restraint. However, the damage suffered by the respondents would vary markedly depending on which version was accepted. So the issue needs to be considered.

48. In our view, the respondents were correct in their contention that as at the date of the contract (August 1988) the appellants did not have any existing right to trade in relation to the ACE system. That system was to be developed in the future with finance provided by Avtex.

49. In Esso Petroleum Co. v Harper's Garage (Stourport) Ltd [1967] UKHL 1; (1968) AC 269 at 298, 309, 316-7, three members of the House of Lords expressed views reflecting the proposition that a restraint of trade necessarily involves the yielding up by the party restrained of some pre-existing freedom. Thus the acquisition of land or leasehold interests subject to a negative restrictive covenant would fall outside the doctrine. The distinction between the cutting down of an existing freedom and the acquisition of a restricted freedom, has been criticised as based on form rather than substance: see Heydon, The Restraint of Trade Doctrine, pp 55-59, Heydon, Restraint of Trade in the High Court (1976) 50 ALJ 290 at 292-295, where the point of the criticism is illustrated by various examples.

50. However, the respondents submitted both that the distinction was observed in the common law in Australia, and that it applied in the present case because the appellants were not giving up any interest which otherwise they would have had when they entered into the 1988 contract.

51. In Amoco Australia Pty Ltd v Rocca Bros. Motor Engineering Co. Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, Menzies J (at 292-3) and Walsh J (at 303-4), with whom McTiernan ACJ agreed (at 290), and Gibbs J (at 314-5) were not prepared to disregard practical or commercial realities in favour of the formal distinction made in Esso. Thus a tie clause in an underlease back to a service station proprietor who leased land it owned to an oil company was held to be within the scope of the restraint of trade doctrine. In Quadramain Pty Ltd v Sevastapol Investments Pty Ltd [1976] HCA 10; (1976) 133 CLR 390, a decision construing s.45 of the Trade Practices Act 1974 as it then stood, there was further discussion of the Esso case. The comments of Barwick CJ (at 394), McTiernan J (at 397), Gibbs J (at 401), with whom Mason J agreed (at 406) and Stephen J (at 405), suggest that any endorsement of what had been said by the majority in Esso did not go beyond its application to negative covenants, given by purchasers or lessees of land, of the kind dealt with in Tulk v Moxhay (1848) 2 PH. 774; 41 ER 1143. In particular, at 402, Gibbs J, after referring to what had been said in Esso, said that it was unnecessary for present purposes to consider whether the statements of principle contained there correctly defined the limits of the doctrine. His Honour continued:

"The conclusion that the rules relating to restraint of
trade do not apply to restrictive covenants given by a
person purchasing or leasing land should be accepted
as correct, at least as a general rule."

Hence, in the present case, the primary Judge (107 ALR at 559) preferred not to consider whether what had been said in Esso was confined to the special case of leases. In the absence of full argument upon the point, we should take the same course.

52. However, the primary Judge went on to find that the relevant restraint was no more than was reasonably necessary to protect the legitimate interests of Avtex and its successor, and did not infringe any relevant public interest. It followed that the restraint was not unreasonable in terms of the restraint of trade doctrine.

53. As we have earlier observed, it is Avtex which was financing the development of the ACE system. As such, it might be thought that Avtex was to be treated as the "owner" of that system. In the event, the contract, which was negotiated between the parties with a view to the protection of their individual positions, put Avtex in the position of a licensee. The restraint was reasonable for the purpose of protection of the goodwill of the business which was being developed with the finance from Avtex. We agree with his Honour's conclusion upon this issue (107 ALR at 559).

54. In reaching that conclusion, we have taken into account the appellants' submission that the emphasis upon the financing of the development of the ACE system by Avtex should be diminished by the consideration that the contractual arrangements did not involve the vesting in Avtex of the copyrights in various materials used for the ACE system. The absence of such arrangements does not, in our view, militate against the conclusion in favour of the reasonableness of the restraint which was obtained by Avtex as part of the contractual arrangements.

55. This conclusion makes it unnecessary to consider any question of severance under s.4 of the Restraints of Trade Act 1976 (NSW) - a matter which, in any event, was not raised at the trial.

Breach of Fiduciary Duty
56. The appellants' case as respondents at the trial had been that the agreement of 7 March 1990 was an agreement to "call it quits" in respect of all past disputes, including claims for accountability in respect of the proceeds of the APTC business. The legal infrastructure of this argument was based on estoppel, waiver, equitable release and acquiescence.

57. As to the concept of "waiver", the present position appears to be that, putting to one side waiver of statutory rights and steps taken whilst litigation is on foot, "waiver" is not a doctrine of independent operation beyond the principles concerned with contractual variation, election and estoppel: see Elkhoury v Farrow Mortgage Services Pty Ltd (In Liquidation) [1993] FCA 264; (1993) 114 ALR 541 at 547-8. Further, whilst, in general, estoppel is concerned with detrimental reliance upon an assumption induced by the defendant, as to a present, past or future state of affairs, and may be permanent or limited in operation, equitable release of purely equitable rights is concerned with a present fixed intention immediately to effect a release. The primary Judge pointed this out (107 ALR at 567). Upon the appeal, the appellants' oral submissions focussed upon the finding of the primary Judge that the facts did not amount to a case of equitable release.

58. The appellants argued that the events leading up to the 7 March 1990 agreement featured complaints by Siewert and Lange that Bartsch and Lee had been running the APTC business as their own. The agreement reached between the parties was that the joint venture company Dawnvisa be employed to take over both the APTC business, formerly conducted by Aviation Dynamics, and the Academy business, formerly conducted by Avtex, with the two camps becoming equal shareholders and directors in the new company. It was argued that it is inconceivable in the circumstances that Bartsch and Lee would have entered into this new arrangement upon the footing that personal claims against them would be preserved. It was said that his Honour should have accepted the evidence of Bartsch that had he been told that he was not to be released, he would not have executed the agreement. The appellants also say that before the agreement of 7 March 1990, Siewert and Lange had become aware of the profit component of $3,000 per student on the flying component of the APTC, that there was only about $60,000 in the APTC bank account and that it was claimed by Bartsch and Lee that they had expended the shortfall on other things relating to the business.

59. In our opinion his Honour was entitled to conclude that the evidence does not admit of a finding that Siewert and Lange, with full knowledge of their claim against Bartsch and others of the respondents, "consciously waved their rights in entering into an agreement which dealt not at all with the matter".

60. The agreement itself was drawn up by Lee on behalf of the Bartsch interests. In all the circumstances it was for them to make explicit the substantial concession the respondents are now said to have made, that is to say the abandonment of any claims which might then have existed against Bartsch and Lee, to whatever amount, and whether or not the full circumstances had been disclosed. We think his Honour was correct in concluding that such an intention should not be imputed to the respondents. Further, there was evidence of serious non-disclosure by Bartsch and Lee which persisted right up until the time of the trial. The circumstances appear from his Honour's judgment as follows (107 ALR at 555):

"An affidavit of Mr Lee had been prepared in the
proceedings detailing the expenses and income of the
APTC course. That affidavit referred to amounts
expended in payments to the Civil Aviation Authority
for student examination fees. On the first day of
hearing before me, reference was made to a subpoena
issued by the applicants to that authority. The
significance of that was obvious both to Mr Bartsch
and to Mr Lee.
It emerged that when students had paid examination
fees directly to the Authority, cheques were drawn on
the account of APTC conducted by the fifth respondent
to cash. In those written by Mr Lee, the cheque butts
were originally left blank. Some cheque butts had
been completed showing a payment to the Authority. A
number of these cheques were written by Mr Bartsch,
who initially denied this. The proceedings, some
$29,292 were distributed to Mr Bartsch and Mr Lee. Mr
Lee agreed that in swearing a second affidavit in
which the Aviation Authority moneys were treated as
management fees to Mr Bartsch and himself, he had been
influenced by the knowledge of the subpoena and had
thereafter discussed the matter with his counsel. He
was aware that the affidavit was untrue and, in my
view, was prepared to lie because he did not believe
that he would be caught out. He did say that he
believed that he would in any event have changed that
evidence, but I find this difficult to accept.
Mr Lee, after learning of the subpoena and after
discussions with his counsel, had a conversation with
Mr Bartsch in which he told Mr Bartsch that he
proposed to allocate these cash funds to management
fees. According to his evidence, Mr Bartsch agreed.
Mr Bartsch claimed not to have seen Mr Lee's affidavit
and to have been unaware that he had filed a second
correcting affidavit. Indeed, he claimed not to have
been aware of the first affidavit at the time.
This whole episode reflected badly upon the credit
both of Mr Bartsch and Mr Lee."

Where a party asserts an equitable release by way of avoidance of the consequences of his own admitted inequity, the starting point must surely be the most full and frank disclosure to the injured party who is said to have released the right to equitable relief. The injured party must fully appreciate the circumstances in which the equitable injury was inflicted. Plainly, that was not the position in the present case, as his Honour found.

61. In our opinion the appeal should be dismissed with costs.