Butt v Long [1953] HCA 76; (1953) 88 CLR 476 (20 November 1953)

HIGH COURT OF AUSTRALIA

BUTT v. LONG [1953] HCA 76; (1953) 88 CLR 476

Trade and Commerce

High Court of Australia
Dixon C.J.(1), Webb(2) and Fullagar(3) JJ.

CATCHWORDS

Trade and Commerce - Agreements in restraint of trade - Construction - Reference to nature and place of business - Partnership - Dissolution - Transhipping branch of former partnership - Transfer to one partner - Covenant by other partners not to "carry on the business of a transhipping-agent for a period of five years" - Transhipping goods and stock from one railway system to another - Business - Localization - Express provision - Absence - Enforceability of covenant - Transferred branch of former partnership business - Protection - Injunctions.

HEARING

Sydney, 1953, August 20, 21; November 20. 20:11:1953
APPEAL from the Supreme Court of New South Wales.

DECISION

November 20.
The following written judgments were delivered:-
DIXON C.J. The question for decision upon this appeal is the validity of a five years. To decide whether the covenant is invalid as involving an unreasonable restraint of trade it is necessary to ascertain what is its meaning and intended scope. (at p484)

2. The covenant forms part of an agreement for the dissolution of a firm called J.E. Long & Co. The firm carried on business at the border town called on its New South Wales side Jennings and on its Queensland side Wallangarra. The business was that of stock and station and commission agents produce merchants and forwarding and transhipment agents. There is a break of railway gauge at Wallangarra which involves the transhipment of goods and livestock from the trucks of one railway system to those of the other. A business exists of performing and superintending in the interests of consignors and consignees the work of and incidental to the transhipment. It includes the movement of the goods and livestock from truck to truck, the storage of goods where necessary, the resting watering and feeding of livestock, and for that purpose the providing of paddocks, and the reporting to owners if desired upon the condition of their goods or beasts. Such a business was associated with the produce business and stock station and commission agency of the firm. The partners at the material time were J.E. Long, who is one of the plaintiffs respondents in the appeal and G.A. Butt and H.G. Butt who are two of the defendants appellants. By an agreement in writing dated 23rd March 1950 these three parties dissolved the partnership between them. The relevant terms took an unusual form. Long sold all his share and interest in the whole business to the Butts in the first instance but it was stipulated that within two years from 1st July 1950, the Butts should sell to Long and he should purchase the transhipping branch (both goods and stock) of the business and all assets relating thereto. Long was required to give three months' notice of the date of taking over the transhipping branch. The consideration for each sale was based on book values and payment of the consideration for the transhipping branch was to be by set-off. By a subsequent agreement the date for taking over the transhipping branch was extended to 31st August 1952, and it was agreed that the plant of the branch should be vested in Long and his two sons who join with him in the suit as co-plaintiffs. The Butts formed a company which they called J.E. Long & Co. Pty. Ltd. They are the directors and chief shareholders. The company is the third defendant appellant. The business of the firm was taken over by the company, which in spite of the sale to Long and his sons of the transhipment branch proceeded to do transhipment business. It appears that the company had purchased a rival transhipment business and that having done so it carried it on under the name of J.E. Long & Co. Pty. Ltd. (at p485)

3. The agreement of dissolution of 23rd March 1950, made between Long and the Butts contained the following clause:- "5. The said James Edward Long shall not carry on the business of a Produce Merchant for a period of five years from the 1st July 1950 and the said George Albert Butt and Harold George Butt shall not carry on the business of a Trans-shipping Agent for a period of five years from the date of the taking over of such branch of the said business". (at p485)

4. Long and his two sons instituted the suit out of which this appeal arises against the two Butts and the company seeking relief not only for breach of this clause but also on the basis of passing off. (at p485)

5. The suit was heard by Roper C.J. in Eq., who made a decree restraining the Butts for a period of five years from 1st September 1952 from carrying on a business of a transhipping agent at Wallangarra and Jennings and the company from aiding abetting or facilitating their doing so. So much of the decree was based upon the foregoing clause of the agreement. The decree also enjoined the company from carrying on in Wallangarra or Jennings the business of a transhipping agent under its present name or under any name so nearly resembling that of the plaintiffs as to be calculated to cause confusion with the plaintiffs' transhipping business and restrained the Butts from representing that any such business carried on by them is the same as or a continuation of that of the firm and the company from aiding abetting or facilitating their doing so. (at p485)

6. From so much of the decree as granted the relief based upon the express clause the defendants appeal; but not from so much of the decree as is based on passing off. Roper C.J. in Eq. decided that the clause was not invalid as in unreasonable restraint of trade but his Honour arrived at that conclusion by placing upon the clause a restrictive interpretation. His Honour was of opinion that, taking into consideration the surrounding circumstances, it was not only possible but proper to confine the operation of so much of the clause as relates to the business of a transhipping agent to such a business in Wallangarra and Jennings. But the learned Judge was of opinion that if the operation of the covenant was not as a matter of meaning restricted in point of locality it would be void as in unreasonable restraint of trade. (at p486)

7. I agree in thinking that the validity of the covenant can only be supported by placing a restriction upon it which will confine its operation to Wallangarra and Jennings. The clause does, of course, impose a restraint of trade and a restraint of trade is unreasonable if it is greater than is needed to give adequate protection to the person for whose benefit the restraint is imposed. It may be too great in the area which it covers or in the time through which it endures or in other respects. A bare covenant restrictive of competition even if it is limited in point of time and place cannot be sustained. "The covenants restrictive of competition which have been sustained have all been ancillary to some main transaction, contract, or arrangement, and have been justified because they were reasonably necessary to render that transaction, contract or arrangement effective" - per Lord Macmillan for the Privy Council (Vancouver Malt & Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. (1934) AC 181, at p 190 ). For a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed - per Lord Parker of Waddington (Herbert Morris Ltd. v. Saxelby (1916) 1 AC 688, at p 707 ). (at p486)

8. A distinction is drawn between the position of the purchaser of the goodwill of a business taking a covenant in restraint of trade from his vendor and the case of the owner of a business taking such a covenant from his servant or apprentice. The goodwill of a business is immune from the danger of the owner exercising his personal knowledge and skill to its detriment and if the purchaser is to take over such goodwill with all its advantages it must in his hands remain similarly immune. Without, therefore, a covenant on the part of the vendor against competition, a purchaser would not get what he is contracting to buy, nor could the vendor give what he is intending to sell. The covenant against competition is therefore reasonable if confined to the area within which it would in all probability enure to the injury of the purchaser - per Lord Parker of Waddington (Herbert Morris Ltd. v. Saxelby (1916) 1 AC, at pp 708, 709 ). (at p486)

9. If the clause in question operates generally throughout Australia, it is impossible to regard it as going no further than was reasonable as a protection of Long against injury in respect of the business of transhipment at Wallangarra. But there are two questions of interpretation of the clause in the agreement of dissolution. One relates to the meaning of the words "business of a transhipping agent" as a description of a commercial activity. The other is what is the area over which the covenant is to operate. Literally the words "business of a transhipping agent" would describe the business affecting transhipment between sea-going vessels or between motor lorries engaged in road transport as well as the transfer of goods and livestock from the railway trucks of one system to those of another. The first question is whether the clause extends over all these forms of transhipment. An agreement in restraint of trade, like every other agreement, is to be construed with reference to its subject matter and descriptive words may be restricted in their operation by reference to the circumstances in which the parties contract. But the agreement should be interpreted for the purpose of ascertaining its real meaning independently of the rules prescribing the tests of reasonableness for the purpose of ascertaining its validity. If an evident ambiguity appears from its text it may be proper to take into account the law relating to the validity of covenants in restraint of trade in resolving the ambiguity but a restrictive interpretation of general words is not to be adopted simply to save a covenant or agreement from invalidity. Here I think the circumstances in which the parties contracted show what they meant by the expression "business of a transhipping agent". They did not have in mind transhipment for the purpose of sea carriage. Plainly they were concerned only with carriage by land. Nor did they, I think, have in mind the possibility of transhipment at some road transport terminal or depot from one motor lorry to another. The question upon which the appeal depends is therefore whether by interpretation the covenant may be confined in point of locality. (at p487)

10. Wallangarra is not the only place in Australia where the necessity exists of transhipping goods from trucks of one gauge to trucks of another. Such a necessity exists at Albury, at Clapham Junction in Brisbane and Port Pirie and also at Kalgoorlie. The agreement was made at a border town and it is not possible by some presumption to confine it to a given State. The alternative, therefore, seems to be to give it no less than an Australia-wide operation or else to confine it by implication to Wallangarra and Jennings. (at p487)

11. Now the words are perfectly general. There is no reference at all to place and if the operation is to be confined to the junction at Wallangarra it must be by implication. An implication of such a kind ought not to be made unless from the subject matter and the contents of the document an inference that the parties so intended arises with such force as to carry conviction to the mind. The words "business of a transhipping agent" are descriptive of a character of business and in them nothing can be found limiting them to a place. The reputation of the firm was such that if a successor in title had set up such a business at Clapham Junction or at Albury he would have found in that reputation some advantage. It is, of course, the fact that the actual place where the parties had been conducting business was that chiefly in mind but that is no sufficient reason for construing the words they used as applying exclusively to that place. Cases were cited for the plaintiff respondent as justifying a construction restricting the covenant in restraint of trade to a business at a place. First it was said that Dubowski & Sons v. Goldstein (1896) 1 QB 478 , was an example of such a thing being done. But all that was done in that case by Lord Esher M.R. and Lopes and Rigby L.JJ. was to construe the words "in his business of a dairyman" as applying to the employer's existing business which was carried on in shops in Whitechapel and St. Georges in the East and not as extending to any possible future business elsewhere. It perhaps should be remarked that the decision has not been followed on one of the grounds given by Lords Esher M.R. and Rigby L.J. for holding the covenant reasonable; see East Essex Farmers Ltd. v. Holder (1926) 70 SJ 1001 . E. Underwood & Son Ltd. v. Barker (1899) 1 Ch 300 , which is also cited, appears still less to govern the point. The covenant there in question was ambiguously worded. The covenantor was not to carry on the business of a hay and straw merchant or enter into the service or act as agent of any person or persons carrying on the business of hay and straw merchants in the United Kingdom of Great Britain and Ireland or in France or in the kingdom of Belgium or Holland or in the Dominion of Canada. For the covenantor it was said that if in any part of the world he acted for any hay merchant carrying on business in any of the specified countries he would be guilty of a breach. This construction was rejected in favour of a construction which made it necessary that he should be in one of the specified countries when carrying on the business or entering into the service or acting as agent for the person carrying on the business. Vaughan Williams L.J dissented, holding that the covenant was unreasonable and invalid, and it seems likely that at this date his dissent would be upheld. In Barr v. Craven (1903) 89 LT 574; 20 TLR 51 upon which the respondents also relied, the words to be interpreted were contained in an agreement by an insurance agent with his society. The clause made him agree "to introduce all the members in my agency to my successor, or to any officer of the society. And not to interfere directly or indirectly with any of the business after having resigned this agency or being dismissed therefrom". These words were construed as referring to the business of the society in the district where the agent had been the agent of the society and the agreement was upheld as not unreasonable. It will be seen that the words "the business" specified a particular business, and the question was one only of identification. (at p489)

12. In the present case, if the operation of the clause is to be confined to Wallangarra, words of limitation must be introduced so as to limit quite general words containing no suggestion of locality or of identification with a specific business or thing. The necessity of doing so to effect a restriction is shown by the form of the decree which adds the words "at Wallangarra or Jennings" to the words of the clause. There appears to be no sufficient ground justifying the making of such an implication. The case is in truth of the description expressed by Lord Macmillan in Vancouver Malt & Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. (1934) AC, at p 191 , where it was maintained that the restrictions limited themselves by practical considerations to a particular area and that the limitation should be held to be implied as a matter of construction. The contention was answered by Lord Macmillan that it was not so nominated in the bond and that there was no reason to import a limitation that the parties had not seen fit to express. In my opinion the appeal should be allowed. (at p489)

WEBB J. I would allow this appeal for the reasons given by the Chief Justice. (at p489)

2. It is true, as Roper C.J. in Eq. points out, that "the business of a trans-shipping agent" is necessarily localized, that is to say, is confined to a border town or towns where there is a break of railway gauge. But that is not the end of the matter; that merely points to a locality of a particular kind as distinct from a particular locality. I can see nothing in the agreement which goes further and indicates, or in the nature of the subject matter of the agreement which requires, that the operation of the restrictive covenant in cl. 5 should be held to be confined to the business of a transhipping agent at the border towns of Wallangarra and Jennings where it so happens that the parties carried on business, and not to extend to a business of transhipping agent at other border towns, in New South Wales at all events, where there is a break of railway gauge, e.g., at Albury on the border of New South Wales and Victoria. But so construed the restrictive covenant purports to have a wider operation than is required for the reasonable protection of the respondents and so is invalid. (at p490)

3. As the Chief Justice points out, if a restrictive covenant is on its face ambiguous advantage might be taken of that to limit its otherwise general operation. But this is not such a covenant and, as I have already stated, I can see nothing in the nature of the subject matter of the covenant to require the covenant to be given an operation confined to a particular locality as distinct from a locality of a particular kind. In my opinion the use of the definite article "the" before "business of a trans-shipping agent" in cl. 5 has not that limiting effect. If the subject matter in this case requires that an operation to a particular locality be given to the covenant I am unable to see why that result did not follow in cases of unquestioned authority where the covenant was held invalid as being too wide. However the nature of the subject matter may well be such as to prevent the covenant being held to extend to any business of transferring goods from one kind of conveyance to another kind, not being from and to railway vehicles, without also preventing the covenant from extending to all border towns, in New South Wales at all events, where there is a break of railway gauge. (at p490)

FULLAGAR J. I agree with the judgment of the Chief Justice in this case. The question of the kind of business, the carrying on of which is prohibited by the contract, is a separate and distinct question from the question of the area within which the prohibition is to operate. So far as the former question is concerned, it is, I think, legitimate, in order to determine the scope of the expression "the business of a trans-shipping agent", to have regard to the nature of the business in fact being carried on at the time of the making of the contract. To do so is merely to refer to surrounding circumstances in order to ascertain the meaning of an expression which the parties have actually used, and this is always permissible and often necessary. But, when we come to the second question, the fact that the business was being carried on in a particular locality cannot be used to justify reading into the contract a limitation as to the local operation of the prohibition, when no such limitation is expressed. The locality of the business in fact carried on can warrant no further inference than that, if the parties had thought of the matter, they would or might have imposed some local limitation on the prohibition. What they would or might have thought a sufficient local limitation can be matter only for speculation; cf. generally Ward v. Byrne (1939) [1839] EngR 342; 5 M & W 548 (151 ER 232) ; Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co. Ltd. (1894) AC 535 ; and Vancouver Malt & Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. (1934) AC 181 . It was rightly conceded that, unless some local limitation could be placed on the promise not to carry on the business, the promise could not be enforced. (at p491)

ORDER

Appeal allowed with costs. Discharge so much of the decree of 2nd December 1952 as decrees that the defendants George Albert Butt and Harold George Butt and each of them be restrained for a period of five years from 1st September 1952 from carrying on a business of a trans-shipping agent at Wallangarra or Jennings and as decrees that the defendant J. E. Long & Co. Pty. Ltd. be restrained from aiding or abetting or facilitating the defendants George Albert Butt or Harold George Butt in carrying on for a period of five years from 1st September 1952 a transhipping agency business at Wallangarra or Jennings.