Pearson v Arcadia Stores Guyra Ltd (No 1) [1935] HCA 41; (1935) 53 CLR 571 (13 June 1935)

HIGH COURT OF AUSTRALIA

Pearson Defendant, Appellant; and The Arcadia Stores, Guyra, Limited Plaintiff, No. 1.Respondent.

H C of A

On appeal from the Supreme Court of New South Wales.

13 June 1935

Rich, Starke, Dixon, Evatt and McTiernan JJ.

Mason K.C. (with him Miller), for the appellant.

Maughan K.C. (with him Kitto), for the respondent.

Mason K.C., in reply.

The following written judgments were delivered:—

June 13

Rich, Dixon, Evatt and McTiernan JJ.

In 1927 the appellant entered into a covenant that he would not within a period of ten years carry on or be engaged or concerned or interested in the business of a produce merchant within a radius of fifty miles of the post office at Guyra, or suffer his name to be used in carrying on such a business. He is now carrying on at Guyra the business of a produce merchant and is using his name for the purpose.

The respondent is the assignee of the covenant. It has obtained an injunction from Nicholas J. restraining the appellant from continuing to act in contravention of the covenant, and from the decretal order granting the injunction he brings this appeal. His ground of appeal is that the respondent by reason of its conduct and that of its assignors is disentitled to an injunction compelling him to observe the covenant. The conduct upon which the appellant relies falls under two heads. The respondent and the persons through whom it claims acquiesced, as he alleges, in the appellant's establishing and continuing the business which the respondent now seeks to enjoin. The second matter relied upon is that the covenantee, before assigning the covenant to the respondent, failed to pay the appellant the full rate of wages to which he was entitled under a contract of employment which he claims was a collateral engagement upon which the covenant depended.

The transaction in which the appellant gave the covenant was the sale of a business carried on in Guyra under the style "Richard Pearson & Sons" by a partnership of which he was a member. The partnership consisted of his father, his three brothers and himself. The purchaser, John Pringle & Co. Ltd., under its own name carried on in Guyra a general business, one branch of which was that of a produce merchant. That company acquired the business of Richard Pearson & Sons with the object of continuing both businesses as separate enterprises. Accordingly, besides taking a transfer and assignment of all the assets of the business, the company made with the appellant a contract of employment by which he agreed to serve as manager of the business for five years from 1st March 1927. The remuneration provided by the agreement was £6 a week and ten per cent of the profits. Although the agreement fixed a term of five years, the employment might during that period be determined by the manager if he desired to do so, or by the company if for any reason it should deem it desirable to do so in the interests of the company. Neither of these powers was exercised, and for the full period of five years, which expired on 1st March 1932, the appellant served John Pringle & Co. Ltd. as manager of the produce business it had taken over. The business was carried on, notwithstanding that John Pringle & Co. Ltd. owned it, under the style "Pearson & Sons, O. R. Pearson Proprietor." A year or two before the end of the term the weekly payment of wages was reduced to £5 10s. The appellant protested, but he was told that the arrears would be made up when business improved. His weekly allowance of £1 for travelling expenses was also reduced by 10s.; but to this, unlike the weekly salary, he had no definite right under the terms of the agreement which, after the first year, left the amount to the agreement of the parties. When the term of five years ran out, John Pringle & Co. Ltd. continued to employ the appellant as manager of the produce business carried on in the name of Pearson. But John Pringle & Co. Ltd. did not prosper. Its directors were G. A. Butt, H. F. White and L. P. Dutton of whom the first was manager of the company's business. Between him and his co-directors there arose some personal enmity, but whether as a consequence or as a cause of the company's failure does not appear. The company had given a debenture to its bank, and, on 22nd May 1933, a receiver and manager was appointed under this debenture. On the same day a winding-up order was made. The order, which appointed an official liquidator, gave the bank leave to exercise its rights under the debenture. The receiver appointed one Moss to manage the business of the company, and Butt's connection with the company ended. The produce business carried on in the company's own name was put under the control of a manager named C. S. White. The appellant was left in charge of the other produce business until 19th August 1933. That business was carried on in a store or shed near the railway station where it had been conducted before John Pringle & Co. Ltd. bought it. On 19th August Moss terminated the appellant's appointment and requested him to vacate the produce shed. The appellant refused to hand over the keys, and Moss placed a new lock on the premises. But the appellant in his turn removed the new lock. The appellant consulted a solicitor who wrote to the receiver claiming that his client, as the ostensible principal in the business, was responsible to the farmers who had consigned their produce to him, and he must, therefore, have access to the premises to deal with the goods. This evoked a long letter from the solicitors for the bank and the receiver. They referred to the covenant and demanded that the appellant return the goods taken from the store, that he desist from breaking the covenant and that he restore everything that he had taken from the shed. The letter threatened proceedings in equity in default of immediate compliance. The appellant's solicitors replied to the effect that he was bound to look after the produce entrusted to him as if he were principal, but that he had not carried on business and denied that he had stated it was his intention to do so. The correspondence proceeded, and apparently the appellant was not finally ejected until about 12th January 1934. But in the season from August until January there is little done in the produce business.

In the meantime the appellant's brothers had interviewed H. F. White and L. P. Dutton. His brothers in September told these gentlemen that the appellant's position was worrying his father, and asked if anything could be done to allow him to go on trading as a produce merchant, seeing that he had children to support and no other livelihood. They answered, in effect, that they would not stand in his light and would let him go on trading as a produce merchant so long as he "kept away from." Butt, who had boasted that he would get into the shed controlled by the appellant. This statement was reported to the appellant by his brothers. At the time neither H. F. White nor Dutton had any authority in the matter whatsoever, and immediately after the conversation, namely, on 16th September 1933, the brothers were so informed quite definitely by the solicitor who had acted for the company. The parties met in his office and there raised the question again. But two of the appellant's brothers nevertheless guaranteed his bank account, on the strength, they suggest, of White's and Dutton's assurance. Although at that time they had no authority in the affairs of the company, yet in fact White and Dutton were discussing the formation of a company to acquire the business from the liquidator; indeed this proposal was discussed with the Pearsons at the interview in the solicitor's office. Ultimately it was carried into effect. On 20th November 1933 they entered into an agreement with the company and its liquidator for the acquisition of its assets. Under the agreement, which was made subject to the Court's approval, White and Dutton deposited £1,500 for the payment of a number of creditors whose debts, according to the recitals, they had verbally guaranteed. Claims made by the liquidator against them were to be released and they agreed to pay a sum of £2,500 to the liquidator upon the Court's sanctioning the agreement. The liquidator agreed to transfer certain of the company's assets to them and otherwise to vest the whole of the undertaking and assets (words wide enough to include the appellant's covenant) in a company to be formed under the name of Arcadia Stores, Guyra, Ltd., in other words in the respondent company. That company was incorporated on 22nd December 1933. White and Dutton were, by its articles, constituted its first directors. Moss became its secretary. On the day of its incorporation and, no doubt immediately prior to the actual registration of the company, the agreement of 20th November 1933 received the sanction of the Supreme Court. On 24th January 1934 an agreement was made between the old company and its liquidator, the new company and White and Dutton for the transfer of the assets to the new company in pursuance of the earlier agreement. The goodwill of the old company and the agreement containing the appellant's covenant were specifically transferred. The receiver, however, did not go out of possession and hand over the business until 13th March 1934, and until that date the capacity in which Moss conducted the undertaking was as manager for the receiver. Until January 1934 the appellant does not appear to have been very active in carrying on as a produce merchant. He says that after he was finally ejected from the produce shed, he conducted his business for about six weeks at his home and then took a small office in the town, which he occupied for another six weeks without putting up a sign. C. S. White saw him occasionally in the railway yards looking after produce. On 4th January 1934, however, he advertised in the Guyra Argus newspaper that he was carrying on business as a produce merchant. Moss wrote a letter to him on 12th January 1934 demanding the keys of the produce shed, warning him against trespassing there, offering to deliver the personal belongings he had left in the shed, and stating that Moss had had his attention directed to the fact that he was carrying on the business of a produce merchant, and notifying him that, unless he discontinued doing so, "suitable action will be taken immediately and without further notice." Notwithstanding this letter, in April he took new premises upon which he exhibited signs "O. R. Pearson Produce Merchant."

Butt had become a partner in a firm of produce merchants carrying on business on the Queensland border and the appellant undertook the agency of this firm. On 24th May 1934 he published in the Guyra Argus newspaper an advertisement of his business stating that he was local agent of the firm of which Butt was a member.

On 7th June 1934, without any further communication with the appellant, the respondent company commenced this suit.

Moss gave as a reason for not proceeding earlier that in March and April the appellant's father was known to be dying. He died on 26th May 1934. It may be inferred that the appellant's father was much concerned about his son's position and that it was for this reason that White and Dutton had said, in September 1933, they would not stand in his light and that during the father's last illness proceedings were withheld.

Upon these facts the respondent company has established a clear prima facie right to an injunction restraining the appellant from continuing to act in opposition to the terms of his covenant. The covenant is valid. It was annexed to the goodwill of the covenantee's business. That goodwill, together with the benefit of the covenant, has been duly acquired by the respondent company. The appellant is persisting in a course of conduct completely at variance with the terms of the covenant. The position is exactly that which obtained formerly when a covenant and a continuing breach had been established at law and the covenantee prayed an injunction. Unless the covenantor established affirmatively some definite ground upon which it would be inequitable to grant the relief, the covenantee was unconditionally entitled to an injunction. If the covenantor sets up grounds which do not give him an equity to restrain the covenantee from enforcing the covenant at law, in considering their sufficiency to induce the Court to withhold specific relief the fact cannot be left out of account that a continuance of the covenantor's conduct exposes him day by day to repeated actions for damages, and that a refusal of the injunction turns the covenantee to that remedy. When the covenantor relies upon the conduct of the party entitled to the benefit of the covenant as implying consent or acquiescence, an essential matter is the covenantor's own belief that the covenant was not insisted upon, or that his failure to observe it would be permitted, and his acting upon the faith of that belief.

In the present case the appellant was repeatedly warned both by Moss when manager for the receiver and by the receiver's solicitors that he was required to desist from breaking the covenant. He knew that the greatest objection to his carrying on existed on the part of those entitled to speak for the liquidating company. During the period when he commenced his business and when his brothers guaranteed his bank account, he knew that he was acting without the consent, indeed, in face of the objection of the covenantor, the liquidating company. In his evidence he did not say that he acted in the belief that the covenant would not be enforced against him. What he does say is that, without the assent of White and Dutton, he could not have continued to establish his business, because without their expressions of acquiescence his brothers would not have guaranteed his bank account. It can scarcely be doubted that he knew they then had no authority to waive the covenant. When, on 13th March 1934, the respondent company took over the business, did he believe that White's and Dutton's consent continued, and, because they were its directors, became, so to speak, the consent of the respondent company? Nowhere in his evidence does he say so. He had received a most emphatic protest from Moss on 12th January 1934, who, although he may have written as manager for the receiver, was the secretary of the new company. Moss continued to manage the business when the new company took it over. The appellant did not consult or communicate with either White or Dutton, nor did his brothers.

So far from acting in accordance with the views they had expressed to his brothers in September 1933 about Butt, he undertook the agency in Butt's new firm. Vaguely as the condition about "keeping away from Butt" was expressed, to become his firm's agent and to advertise the agency can scarcely be consistent with it.

The appellant's evidence reads as if he knew full well in March, April and May 1934 that his carrying on business was objected to by the respondent company.

Nicholas J. has found that the appellant did not carry on business in reliance on the assurance or assurances given. His evidence and his conduct convinced His Honor that for some reason he did not take the permission seriously into account when deciding his course of action.

The appellant has failed to establish that at any time he acted upon the faith of a belief that the covenant was not insisted upon induced by the respondent company or its predecessor in title. He cannot succeed upon the ground of laches or acquiescence.

The other ground relied upon by the appellant is that, during the latter part of the period of the appellant's service under the agreement made between him and John Pringle & Co. Ltd., the latter failed to pay him the full amount of weekly wage stipulated for. It is said that his agreement of service was intimately bound up with the giving of the covenant, and afforded to him a material inducement to enter into the covenant. To defer payment of a portion of his wages was to deprive him of some of the advantages he looked for in giving the covenant, and the covenantee having committed a breach of contract of this character could not obtain an injunction. The covenantee's assignee could be in no better position.

This argument cannot be sustained. It is not every failure by the covenantee to observe stipulations entered into as part of transactions in which the covenant was given that disentitles the covenantee to an injunction. If, by reason of the covenantee's own failure to perform interdependent covenants made by him, the covenant has ceased to bind the covenantor at law, there is no obligation to enforce by injunction. It is, of course, plain that in the present case the contract of service could not operate to create a collateral condition upon which the covenant depended. But there may be cases, both in covenant and in simple contract, where, although the obligation for the enforcement of which an injunction is sought continues to subsist at law, either because there has been an election to affirm, or because a right to treat the obligation as discharged did not arise, yet in equity an injunction would be refused because it would be inequitable to require the obligation to be carried out specifically by a person who has through the default of the other contracting party failed to obtain a material part of the consideration which induced him to enter into the obligation. But the present case is not of that description. The service agreement was terminable at the option of either party and gave the appellant no security of tenure. The only departure from its strict terms was to hold over payment of a small part of his salary thereunder. Had the appellant persisted in his objection to this course, it would have been open to John Pringle & Co. Ltd. to terminate the service agreement. He did not do so and went on under the agreement until it expired.

For these reasons the appeal should be dismissed with costs.

Starke J.

The case cannot be made any plainer than the judgment of Nicholas J. has made it. In my opinion, that judgment should be affirmed and this appeal dismissed.

Appeal dismissed with costs.

Solicitor for the appellant, E. W. Doust, Guyra, by C. A. Morgan & Stevens.

Solicitors for the respondent, Mackenzie & Biddulph, Guyra, by Biddulph & Salenger.