Queensland Co-operative Milling Association v Pamag Pty Ltd [1973] HCA 24; (1973) 133 CLR 260 (7 August 1973)

HIGH COURT OF AUSTRALIA

QUEENSLAND CO-OPERATIVE MILLING ASSOCIATION v. PAMAG PTY. LTD. [1973] HCA 24; (1973) 133 CLR 260

Restraint of Trade

High Court of Australia
Menzies(1), Walsh(2) and Stephen(3) JJ.

CATCHWORDS

Restraint of Trade - Restraint by agreement - Restrictive covenant - Application of doctrine of restraint of trade to covenants - Validity and reasonableness - Exclusive supply arrangement - As between wholesaler and retailer.

HEARING

Brisbane, 1973, June 6;
Sydney, 1973, August 7. 7:8:1973
APPEAL from the Supreme Court of Queensland.

DECISION

August 7.
The following written judgments were delivered:-
MENZIES J. The full facts of this case have been stated in the judgment

2. The question is whether a particular trade tie entered into between a flour miller ("the Association") and a baker ("Pamag") is void as an unlawful restraint upon the trade of the baker. The restriction upon the baker's trade was effected by a covenant by it to purchase all of its requirements of flour for a particular bakery from the manufacturer. This unquestionably restricted the buying freedom of a trader. To such a covenant I have no doubt that the doctrine of restraint of trade applies. It must, therefore, answer to the test of reasonableness having regard to the interests of both the parties and the public. In this case I do not consider that any more elaborate statement of the law to be applied is necessary. (at p264)

3. The covenant was given as part of an arrangement highly advantageous to the baker. The baker wanted to establish a business at a newly established town in Queensland - Moranbah. It lacked the financial resources to do so and it could not borrow sufficient money either from its bank or from another flour miller ("Defiance"), with which those concerned with Pamag had as partners in Sarina Bakery ("Sarina partnership") been doing business in connexion with their bakery at Sarina. The Association offered to lend the baker and the Sarina partnership up to $108,000 with interest at 6 1/2 per cent. - 1 3/4 per cent. less than the ruling bank rate on long terms to provide finance for the Sarina partnership - including money to pay off existing loans made by Defiance - and to enable Pamag to set itself up in business at Moranbah. The convenant entered into and broken by Pamag was to last so long as any part of the loan was outstanding. The Association had the right to call up the outstanding balance of the loan at any time and Pamag had the right to pay it off by 30th April, 1978. Accordingly the tie would last seven years unless the loan was called up in the meantime by the Association. In fact only some $9,000 was advanced to Pamag and $13,000 to the Sarina partnership because the Sarina partnership sold the bakery at Sarina to Defiance at a handsome price within a few months of the making of the arrangement between Pamag and the Association. As part of the deal with Defiance, Pamag covenanted with Defiance to take three-quarters of its requirements of flour at Moranbah from Defiance. The baker, therefore, for its own advantage entered into two inconsistent trade ties. It now seeks to escape from the first in order to observe the second. The reality of the matter may therefore simply be whether the Association or Defiance gets the business of Pamag. The facts here - including the way in which business was done with Defiance - point unmistakably to the giving and taking of trade ties as part of the ordinary conduct of the business of selling and buying flour. Accordingly I do not share some of the reservations expressed by the learned trial judge about lack of information about the way in which business is done in the flour trade. The deal which Pamag made with the Association was the result of hard bargaining in which Pamag was at no disadvantage. It was of a kind in keeping with the practice of the trade. It did not prevent the baker from making or selling bread. Its only operation was to require Pamag to buy its requirements of flour from the Association at reasonable prices for so long as the loan made by the Association remained unpaid. (at p265)

4. Prima facie such an arrangement as I have outlined is not unreasonable either as between the parties themselves or as between the parties and the public. By the arrangement the baker obtained, upon advantageous terms, the finance that it needed to start a bakery for the manufacture and sale of bread to the public. The public could, so far as appears, have no interest in the invalidation of the covenant. There is nothing whatever to suggest that it was in the public interest that the baker should buy its flour from Defiance rather than from the Association. The source of the baker's supply of flour was of no practical interest to the public. In a general way, however, it is to the public interest that traders who make contracts in the course of their business should keep them. Here, so far as I can see, Pamag suffered no disadvantage from its covenant which could induce a belief that its double dealing was excusable. In short, the public has an interest in the commercial morality of traders which would seem to outweigh any interest in the outcome of the competition of rival manufacturers to supply good quality products at reasonable prices for the making of bread for sale by Pamag. (at p265)

5. In view of observations in some of the decided cases, the tie in question was, naturally enough, attacked as one which aimed to protect the Association from competition. No doubt to some degree it was. However, the principles which have been developed in relation to restraint of trade do not condemn a restriction because part of its operation is to protect the covenantee from some competition. It is the attempt to gain protection against "competition per se", particularly from former employees, that has been regarded as inadmissible. Here the Association, one trader, did no more than buy at an acceptable price from Pamag, another trader, a favourable trading position vis-a-vis other manufacturers who did not pay a like price. The real question in such a case seems to me to be whether the advantage which the Association bought was out of proportion to the price which it paid for that advantage. For the reasons given in detail by Stephen J., I do not think that it was. (at p265)

6. In these circumstances I consider that the covenant which the baker gave to the Association was reasonable having regard to the interests both of the parties and the public. (at p265)

7. I would therefore allow the appeal. (at p265)

WALSH J. The recital of the facts in the judgment prepared by Stephen J. makes it unnecessary for me to set them out but I wish to refer to some particular matters of fact to which attention was directed in the arguments addressed to this Court. (at p266)

2. In the discussions which preceded the execution of the bill of sale containing the covenant which the appellant seeks to enforce, reference was made to a contemplated total advance of $108,000. But the amount contemplated as that which the appellant might lend to the respondent for the purposes of the Moranbah bakery was much less than that. A memorandum prepared in March 1971 by the sales manager of the appellant mentioned $45,400 as the total amount of finance sought for the Moranbah venture. Another memorandum prepared in April 1971 stated that the bank had agreed to advance $60,000 and indicated that the amount to be provided by the appellant for the Moranbah undertaking might be about $17,000. (at p266)

3. The evidence to which I have just referred appears to reduce the importance of another question to which some argument was addressed. This was the question whether or not the benefit which the respondent should be regarded as having obtained in return for entering into the trade tie was limited to the advance of $4,500 mentioned in the bill of sale, together with a further $4,500 which had been advanced by the time that the bill of sale was executed. On behalf of the appellant it was suggested that it was in the contemplation of the parties that the needs of the respondent and of the partnership, which carried on the Sarina business, for finance up to the amount of $108,000 would be met and that the appellant had made an agreement, of which the March memorandum provided evidence, that it would provide the difference between $108,000 and whatever could be borrowed from the bank. I am of opinion that after the bill of sale had been executed there was no binding obligation on the appellant to make any further loan to the respondent, for by the terms of the bill of sale the making of any further advances was to be in the discretion of the appellant. However, I think it is legitimate, in considering the reasonableness of the trade tie, to take into account the facts that the security given by the respondent was to extend to any further advances and that it was in the contemplation of the parties that in fact there would probably be some further advances at least to the extent indicated by the April memorandum. (at p266)

4. The learned trial judge considered that it ought to have been obvious to the appellant that if the partnership sold the Sarina business then Mr. Goulevitch and his wife would have ample funds to finance the establishment of the respondent company and its operations at Moranbah. His Honour found that the appellant would have known, therefore, that the trade tie included in the bill of sale might be obtained by it in exchange for temporary loans of the two sums of $4,500. These findings have been criticized as being unwarranted having regard to his Honour's refusal to accept the evidence of Goulevitch that he had told the appellant's officers that if the Sarina business were sold he would not need financial aid from the appellant. But if the inference drawn by his Honour be accepted, this has not very much bearing on the question of the reasonableness of the trade tie. If it be supposed that the appellant must have realized that it might turn out that within a fairly short time the respondent would not only be able to repay the loan but would also wish to do so, notwithstanding the relatively low rate of interest payable on it, it must also be borne in mind that when the loan was negotiated the respondent's need of money was urgent and it could not be assured of obtaining its requirements from any other source on such favourable terms as to the time for repayment and as to interest or, indeed, of obtaining all it might need on any terms. It was also uncertain whether a sale of the Sarina business would go through quickly. In the circumstances, I am of opinion that it would not be right to treat the respondent as having obtained in reality nothing more than a temporary loan for a short period. (at p267)

5. I do not think that it is necessary for me to discuss at length the law relating to covenants in restraint of trade or to examine in detail the authorities on that subject. But I propose to state my opinion on some matters of law, which appear to be relevant to the facts of this case. (at p267)

6. I am of opinion that the covenant with which the Court is now concerned is one to which the doctrine relating to restraint of trade applies. I do not think that it matters that the covenant relates to the purchase of the flour and other products with which the respondent makes the goods that it sells and not to the sale by it of goods supplied to it by the appellant. The purchase of the goods needed in its business forms part of the trade of the respondent and the trade tie interferes with its freedom in carrying on that trade. I am of opinion, also, that the dicta in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1967] UKHL 1; (1968) AC 269 , to the effect that the doctrine applies only where a man contracts to give up some existing right or freedom, have no application to the facts of the present case. (at p267)

7. The question to be considered is whether or not the restraint was reasonable with reference to the interests of the parties. An affirmative answer to that question should not be given unless it is found that the restraint gives no more than adequate protection to the party in whose favour it was imposed. If this is found in favour of the appellant, then in the circumstances of this case I am of opinion that the requirement to which the authorities refer that the restraint must be reasonable having regard to the interests of the covenantor as well as to those of the covenantee should also be found to be satisfied: see Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. (1894) AC 535, at p 565 and Herbert Morris Ltd. v. Saxelby (1916) 1 AC 688, at pp 700, 707 . (at p268)

8. Where, as in the present case, the parties have not been on unequal bargaining terms and there has not been any deception or overbearing of one of them by the other, the Court will give considerable weight, in deciding whether or not the restraint is reasonable between the parties, to the fact that they have been willing to agree upon the restrictions imposed by it. But the Court cannot regard that fact as conclusive. There are many cases in which covenants, upon which the parties bargaining upon equal terms have agreed, have been held to be unreasonable having regard to the interests of the parties in that they have imposed a greater degree of restraint than was reasonably necessary to protect the relevant interests of the covenantee. (at p268)

9. It has been stated often that a trader is not entitled to be protected against mere competition. But this does not mean that a covenant which ensures the protection of the covenantee against competition in respect of the supply of its goods to the covenantor cannot be binding. Covenants of that character have often been upheld, e.g. in Peters American Delicacy Co. Ltd. v. Patricia's Chocolates and Candies Pty. Ltd. [1947] HCA 62; (1947) 77 CLR 574 . One such covenant was held to be valid in the Esso Case [1967] UKHL 1; (1968) AC 269 : see the observations in that case of Lord Reid (1968) AC, at p 301 and of Lord Pearce (1968) AC, at p 329 . (at p268)

10. In my opinion the commercial interest of the appellant in selling as large a quantity of its goods as possible was a legitimate interest for the protection of which an enforceable trade tie might be imposed. This view is amply supported by the authorities cited in the judgment of Stephen J. (at p268)

11. The fact that the trade tie is contained in a document by which security is given for a loan does not render inapplicable the doctrine relating to restraint of trade: see the Esso Case (1968) AC, at pp 299, 321, 326 . But it is of importance to consider whether the trade tie is taken in order to enhance the effectiveness of the security or is one which is intended to be "bolstered" by means of a security agreement which provides for the continuance of the tie so long as any debt is outstanding and provides that payment in full of the debt is not to be made before the expiration of a specified period. There is no reason to doubt in the present case that the taking of the bill of sale was genuinely intended to provide security for the advances. But the provision under which the payment of the final instalment of $37.50 could not be made earlier than 30th April 1978 was plainly designed for the purpose of enabling the trade tie to be maintained, at least until that date, if the appellant so desired. It was a case in which to that extent the mortgage "was intended to bolster up the solus agreement": see Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd., per Harman L.J. (1966) 2 QB 514, at p 569 . The consequence is, in my opinion, that the appellant's position is no stronger than it would have been if repayment of the advances at an earlier date had been permitted. The question to be considered is whether in the circumstances the taking of a trade tie for a period of nearly seven years was reasonable: see the Esso Case, per Lord Reid (1968) AC, at p 299 and per Lord Pearce (1968) AC, at p 327 . (at p269)

12. The learned trial judge considered that the evidence of conditions in the flour-selling and baking trade was slight and inadequate and he thought that evidence should have been provided as to the relevant commercial practice in the milling and sale of flour. I am of opinion that his Honour was fully justified in asserting that evidence of this character was desirable and might even be essential at least in some cases of this kind. But after much consideration and with some doubt, I have reached the conclusion that on the material which was before his Honour it should have been found that the restraint imposed by the covenant was reasonable with reference to the interests of the parties. The restraint against buying the specified commodities from other suppliers was not accompanied by additional onerous conditions, such as a requirement for the purchase by the respondent of specified minimum quantities. The circumstances in which the agreement was negotiated, which are set out in the judgment of Stephen J., are of great importance in considering the question of reasonableness and, in my opinion, they point to the conclusion that the tie was not unreasonable. (at p269)

13. I do not think that there is any precise method or test by which the propriety of the duration of the tie is to be judged in a case such as this. What the Court should do, I think, is to consider all the terms of the agreement and all the circumstances in which it was made and form a judgment as to the reasonableness of the restraint imposed. (at p270)

14. There was evidence that in transactions of this kind the taking of trade ties was usual. But the evidence did not disclose whether or not a practice had been established as to the duration of such ties or what was the duration of any particular ties, apart from evidence that the partnership had given a bill of sale to the Defiance company in relation to the Sarina business, with a trade tie for the duration of the loan, which could be paid off at any time, and apart from evidence that, notwithstanding its execution of the agreement now under consideration, the respondent gave a trade tie later in the same year in relation to the Moranbah bakery in favour of a subsidiary of the Defiance company, for a term of five years. But I am of opinion that in spite of the absence of evidence as to the usual duration of such trade ties (if they had any usual duration), it should be found that the duration of the trade tie in favour of the appellant was not greater than was reasonable for the protection of the appellant's interests. Being of the opinion that on this question the appellant was entitled to succeed, I think that there are no circumstances in this case which could require a finding that the restraint was not reasonable so far as the interests of the public were concerned. (at p270)

15. In my opinion the appeal should be allowed. (at p270)

STEPHEN J. The appellant is a Queensland flour miller. In the proceedings the subject of this appeal it has been sought to enforce against the respondent, which carries on a bakery business at Moranbah in that State, a covenant contained in a bill of sale granted by the respondent in favour of the appellant in June 1971 to secure advances made and to be made to it. (at p270)

2. The relevant covenant, in cl. 6 (viii) of the bill of sale, is as follows:

"The Grantor will during the continuance of this security
purchase exclusively from the Grantee its successors in business
or its nominee or nominees for the time being and from
no other person or persons firm company or corporation all
flour wheatmeal or other commodities which it may require
in the conduct of its business of Master Baker at Moranbah
aforesaid as long as the Grantee its successors in business or
its nominee or nominees shall be ready to supply the same at
fair and reasonable prices AND IT IS DECLARED AND EXPRESSLY
AGREED that any neglect or refusal by the Grantee or its successors
in business to supply the same shall not release the
Grantor from future liability to observe and perform this
present covenant the Grantor being nevertheless entitled
during the continuance only of such neglect or refusal (unless
caused by the default of the Grantor to pay for goods already
supplied to it) to supply itself from other sources with all
such wheaten flour and wheatmeal as aforesaid as may be
necessary for carrying on its said business."

Its duration is expressed to be "during the continuance of this security". An examination of the bill of sale discloses that the security is to endure so long as any part of the defined "principal sum" of $4,500 is outstanding. The principal sum is made payable on demand but if not demanded is repayable by monthly instalments, repayment of the first instalment being deferred for almost five years and the last being payable in 1986; the respondent is given a limited right to accelerate repayment, limited because the last $37.50 of the principal sum may not be paid earlier than 30th April 1978. (at p271)

3. The duration of the restraint imposed by the covenant is therefore for a minimum term of somewhat less than seven years unless in the meantime the appellant should call up the principal moneys; in any event the restraint is co-terminous with the duration of the secured loan, it will endure so long as any principal moneys or further advances are outstanding but no longer. (at p271)

4. Although the bill of sale recites an advance to the respondent of only $4,500 and speaks of "further advances which the grantee might at its option at any time during the continuance of this security make", for all of which it is to be security, the appellant in fact made a further advance of $4,500 before the execution of the bill of sale by the respondent, so that at all material times a total of $9,000 was secured by the bill of sale. Further advances were also to be payable on demand. (at p271)

5. Despite some ambiguities of drafting I construe the appellant's power to call for repayment on demand, both as to the principal moneys and the further advances, as confined to a demand for repayment in full; it cannot thus call up all but a small part of the loan, while retaining the benefit of the restraints because the security still continues. Again, as I interpret the document, there is no limitation placed upon the respondent's power to repay at any time any additional advances, the limitation applies only to the principal sum of $4,500. It is therefore to that sum and its repayment that the minimum duration of the restraint of trade clause is tied. (at p271)

6. The learned trial judge refused the injunction sought by the appellant. Breach of the covenant by the respondent was not in issue; it was rather upon the ground that the covenant sued on was in undue restraint to trade that the relief sought by the appellant was refused. The learned trial judge upheld the respondent's contention that the restraint was unreasonable in the interests of the parties and was therefore unenforceable. (at p272)

7. The ground upon which his Honour rested his decision was that the appellant, bearing the onus of proof in this respect, had failed to satisfy him that by the restraints imposed by the covenant, lasting for a minimum of almost seven years, the appellant had not procured restraints which went further than was reasonable for the adequate protection of the appellant's legitimate interests. He was led to that conclusion, he said, because the evidence given concerning conditions in the flour milling and baking industries was very meagre, leaving him in doubt as to what legitimate interests of the appellant existed which required protection and to what extent; the appellant had an interest in trading profitably but this was not in itself sufficient to justify the restraints imposed and the value of the consideration received by the respondent was not so great as to minimize the need for evidence on market conditions, including the extent of use of trade-ties, the state of competition in the industry and details of retail trade outlets. (at p272)

8. I have come to the conclusion that, notwithstanding the paucity of evidence tendered at the trial, the restraint imposed in this case and which the appellant sought to enforce was validly imposed and should be enforced; I would allow this appeal accordingly. (at p272)

9. Before stating my reasons for doing so there are additional relevant facts to which I should refer. (at p272)

10. The incorporation of the respondent was procured in 1970 or early 1971 by Mr. and Mrs. Goulevitch, experienced bakers and pastrycooks who had for many years carried on their business in partnership with Mr. Goulevitch senior at Sarina in Queensland. It was incorporated following a successful tender by Mr. and Mrs. Goulevitch for the right to set up a bakery business at another Queensland town, Moranbah, which is apparently a new town which was then in the course of being established to provide accommodation for workers at nearby mines. This tender was accepted in about December 1970 despite considerable competition and the respondent, which was to be the medium whereby that new business was to be conducted, was thus obliged to undertake the erection and equipment of a bakery there at very considerable expense. (at p272)

11. It was the need for finance for the Moranbah bakery that provided the origin of this litigation. The Goulevitchs apparently had two possible sources of finance available to them, two rival flour millers, the appellant and Defiance Milling Co. Pty. Ltd. Their partnership business at Sarina had been obtaining all its supplies of flour from the Defiance company which had also advanced some $6,000 to the partnership secured by bill of sale. This bill of sale contained a covenant by the partners which obliged them during the duration of the loan to purchase all their requirements of flour from the Defiance company. At the same time Mr. Goulevitch was known to the sales manager of the appellant and in December 1970, as soon as it was known that the Goulevitchs' tender for the new Moranbah bakery had been successful, the appellant wrote to Mr. Goulevitch offering assistance with what it called "your Moranbah project". (at p273)

12. Apart from their involvement in the establishment of the new bakery, the consequent need for finance and the existence of these two possible trade sources of it the Goulevitchs also had to determine the fate of the old partnership bakery business at Sarina, which they could either sell or retain. (at p273)

13. The Goulevitchs had for some years been trying to dispose of the Sarina business and the Defiance company had been aiding them in finding a purchaser but without success. In about January 1971 Mr. Goulevitch told the Defiance company that the partnership would sell the business to it for about $100,000 and as part of that sale would agree that in any other bakery business in which the partnership members might thereafter engage they would purchase from it seventy-five per cent of their flour requirements. Mr. Goulevitch described this as a verbal option exercisable by the Defiance company at any time during 1971, although it seems clear that it did not involve any enforceable obligations on the part of the partnership. When this offer was made to the Defiance company it displayed, initially, no interest in purchasing the Sarina business. (at p273)

14. In their search for finance for the new Moranbah bakery project the Goulevitchs' first move was to turn to their existing flour supplier, the Defiance company, but it declared itself unable to lend more than a quite small part only of the sum which was required to establish the new bakery. Mr. Goulevitch then approached the appellant, having ascertained that his bankers would lend only some $30,000 of the total sum required, and the appellant proved to be more co-operative than the Defiance company, stating that, together with some increase in bank finance which it could procure for the respondent, a total of some $108,000, part of which was required by the Sarina partnership business, could be made available. Not only was the appellant able to offer and to procure these funds; its own portion of the total loan funds, amounting to about one half, would bear interest at only 6 1/2 per cent, 1 3/4 per cent less than ruling bank rates of interest, and it would accept very favourable repayment terms, involving no repayment for the first five years and thereafter instalment repayments spread over the ensuing ten years. (at p274)

15. All discussions between the appellant and Mr. Goulevitch concerning the provision of finance for the Moranbah bakery were on the footing that the respondent, of which Mr. Goulevitch was managing director, would covenant to purchase the whole of its flour requirements from the appellant. It is of significance that in all their dealings with the two flour milling concerns, whether as suppliers of finance or as buyers of the Sarina business, a trade-tie was a feature; this was not treated by the parties as at all unusual. (at p274)

16. The evidence provides only scant information concerning the working of the industry. It seems that in the relevant part of Queensland a number of bakeries were owned by flour millers; that price cutting was prevalent and was engaged in by mill-owned bakeries; that this did at one time force the price of bread down to low levels in some localities; that the Sarina business had, ever since about 1962, been subject to a trade-tie relating to exclusive buying of its flour supplies; that millers were seeking outlets for their flour and sought to secure and retain those outlets by lending money to bakers in return for trade-ties in their favour; that both of the rival millers in the present case were engaged in this practice of imposing trade-ties. To these facts may be added the fact that Mr. Goulevitch knew that from flour millers and from them only would he be able, with the security he had to offer, to obtain the finance which was required for the Moranbah project and for certain modernization of plant at Sarina, if it were to be retained. (at p274)

17. So much for the evidence, meagre though it is, concerning the flour milling and bakery industry. One matter that may shortly be disposed of is any suggestion that in its negotiations with the appellant the respondent was in any sense the victim of oppression or lacking in bargaining power. On the contrary the respondent, through Mr. Goulevitch, was able to take full advantage of the competition of millers for its custom and appears successfully to have played off one against the other. Indeed it was not too scrupulous in attaining its ends, no nice sense of commercial morality appears to have affected it and the learned trial judge was certainly not unduly critical, rather the reverse, when he described the course of Mr. Goulevitch's negotiations with the two millers as involving him in "walking a tightrope". (at p275)

18. Mr. Goulevitch did not tell the appellant that were the Sarina business to be sold to the Defiance company this would or might involve the tying of the Moranbah bakery's flour purchases to the Defiance company. This was, of course, a vital factor so far as the appellant was concerned; it was being asked to lend moneys at less than ordinary commercial rates of interest and was agreeable to do so only because of the prospect of flour sales to the Moranbah bakery. (at p275)

19. Instead Mr. Goulevitch allowed the appellant to believe, to the end, that it alone would be supplier of flour at Moranbah; indeed he went further. His company, the respondent executed the bill of sale now sued on, with its covenant to purchase in the future all supplies of flour for the Moranbah bakery from the appellant, having in return to that stage received advances of $9,000 and the Goulevitch partnership also having received advances of over $13,000 for new plant; yet only some few months later he and his partners sold the Sarina business to the Defiance company on terms which involved an inconsistent trade-tie in its favour in respect of flour supplies to the Moranbah bakery. Thus the Goulevitchs, rejected by the Defiance company in their request for adequate finance at a time when it was not itself interested in purchasing the Sarina business and had failed to find another buyer for that business, turned to the only other available source of finance for the Moranbah project, knowing that part of the price of that finance would be a trade-tie over flour supplies to the Moranbah bakery. They paid that price by entering into the bill of sale with its restrictive covenant but when they later found that the Sarina business could be sold to the Defiance company for an "extraordinarily good" price of over $100,000, they chose to ignore the fact that the flour supply rights at Moranbah had already been bargained away and, in effect, sold them a second time, on this occasion to the Defiance company, a sum of $9,000 of the agreed price of the Sarina sale being allocated to those rights. In effect the much sought after exclusive right to supply flour to Moranbah bakery was knowingly sold twice over. (at p275)

20. I shall, for the present, assume that the covenant here in question is one to which the doctrine against restraints of trade applies. Its enforceability therefore depends upon it appearing that the restraints which it imposes may be justified as reasonable in reference to the interests of the parties and to the interests of the public. (at p275)

21. The test of reasonableness is a reflection of the problem of reconciling two often conflicting concepts of public policy, on the one hand the freedom of the individual to employ his skill and abilities in whatever occupation is open to him without restraints, whether self-imposed or involuntary; on the other, his freedom to contract in the knowledge that contracts entered into will be enforced by the Courts. In undertaking this task of reconciliation courts are frequently confronted with contracts freely entered into between parties of no unequal bargaining power. The fact that such parties have arrived at a concluded agreement must be of great weight in determining whether that agreement, including the restraints which form part of it, is reasonable in reference to the interests of the parties; hence the frequently expressed view that a court should be reluctant to substitute its view of what is reasonable in the interests of the parties for their own view testified by their entry into the contract in question. (at p276)

22. However, that reluctance disappears whenever a consideration of public policy can be seen to emerge; were it to be otherwise the process of reconciliation to which I have referred would be abandoned and freedom of contract would prevail unquestioned. The difficulty is to discern when the process of reconciliation calls for a disregard of this view of the parties (I refer, of course, to their views as inferred from their entry into the contract and not to their subsequent views when enforcement of a restraint is sought by one of them). (at p276)

23. It is clear from the authorities that if the first limb of the doctrine, which concerns itself with the interests of the parties, is to be regarded as quite distinct from its second limb, reasonableness in reference to the interests of the public, courts have not regarded the former as immune from the introduction of considerations of public policy; the many instances in which restraints have been held bad without the second limb of the doctrine being invoked attests this. (at p276)

24. This is not, I think, because of any disregard of the views of the parties but rather because either the first limb itself involves a consideration of matters of public policy or else because it is erroneous to regard the two limbs as distinct from one another. Because of the different rules relating to onus of proof applicable to each limb I would prefer the former of these views while acknowledging that, as Lord Wilberforce said in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. [1967] UKHL 1; (1968) AC 269, at p 341 , both limbs of the doctrine should be regarded as a single public policy rule, having only as its wider aspects the interests of the public. Lord Pearce (1968) AC, at p 324 expressed himself to the same effect. (at p277)

25. In Texaco Ltd. v. Mulberry Filling Station Ltd. (1972) 1 WLR 814; (1972) 1 All ER 513 , Ungoed-Thomas J., as I read his Lordship's reasons for judgment, took the view that in the case of a commercial contract where no bargaining inequality exists the whole question of reasonableness in the interests of the parties should be left to the business decision of the parties, the court concerning itself primarily with the second limb, under which heading subjects such as the duration of a tie clause properly fall. I would myself prefer to treat the question of duration of the tie as one fact relevant to the first limb of the doctrine, although it may sometimes also prove to be very material in those cases where the second limb is in question. (at p277)

26. The public policy aspects of the first limb have traditionally been reflected in the insistence of courts upon a second aspect of reasonableness in reference to the interests of the parties, and in determining upon this second aspect the views of the parties are not only not decisive but play relatively little part. (at p277)

27. This second aspect relevant to reasonableness as between the parties depends upon whether the restriction is reasonably necessary for the covenantee's protection or whether, on the contrary, it imposes upon the covenantor a greater degree of restraint than the legitimate interests of the covenantee require for their protection; this in turn necessarily calls for the identification of "what it is for which and what it is against which protection is required" - Herbert Morris Ltd. v. Saxelby, per Lord Parker (1916) 1 AC 688, at p 708 . (at p277)

28. In the past the seeking of protection against "mere competition" or "competition per se" has often been stated not to be a legitimate interest; however in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. (1968) AC, at p 301 , Lord Reid did not find this to be a useful criterion in the facts of that case - see too per Lord Morris (1968) AC, at p 304 . In a case such as the present, where the only restraint imposed is one in no way designed to restrict the trade of either party with its respective customers, but rather the contrary, where the restraint is not directed at competition between the parties at all, the illegitimacy of protection against mere competition seems of little relevance. (at p277)

29. In the Esso Case [1967] UKHL 1; (1968) AC 269 the maintenance of a stable system of distribution, the preservation of secure outlets, Esso's interest in selling petrol at the covenantor's site, these were regarded as interests justifying lawful protection by a restraining covenant. In Peters American Delicacy Co. Ltd. v. Patricia's Chocolates and Candies Pty. Ltd. [1947] HCA 62; (1947) 77 CLR 574 , the interests which might be protected were variously described. Latham C.J. referred (1947) 77 CLR, at p 581 to "the protection of the plaintiff's trade"; Rich J. (1947) 77 CLR, at p 582 cited a passage from a judgment of Wrottesley L.J. referring to the protection of the covenantee's business, Dixon J. (1947) 77 CLR, at p 592 treated price maintenance of the supplier's goods as not illegitimate, and Williams J. (1947) 77 CLR, at p 599 referred both to the protection of the covenantee's business and to it being "the goodwill of that business which they are entitled to take reasonable measures to protect". In Buckley v. Tutty [1971] HCA 71; [1971] HCA 71; (1971) 125 CLR 353 this Court treated a football league and its member clubs as having as a legitimate object the ensuring that competing teams were strong and well matched and, as ancillary to that, that there existed a degree of stability in membership of teams, to be preserved by restraints upon transfers of players from one club to another. (at p278)

30. In the present case it is not, in my view, possible to select any particular factor other than the appellant's desire to increase its sales, and hence, no doubt, the profitability of its operations, as the interest which it seeks to advance by the present covenant. In a sense, of course, this may be said to amount to the obtaining of protection against competition but then in that sense so will most trade-ties and they are not, for that reason alone, unenforceable. There is here no evidence to suggest that the effect of the covenant will operate in any way contrary to the public interest, that it will create a monopoly, will increase prices or will otherwise operate in a manner which, at least to those not expert in matters economic, may suggest injury to the public as a whole. In Petrofina (Gt. Britain) Ltd. v. Martin (1966) 1 Ch 146, at p 188 , Diplock LJ. said that,

"The interests of the appellants in selling as large a quantity
of their petroleum products as they can is one which they
have a right to have protected...The appellants have an interest
in inducing owners and occupiers of filling stations to
stock and sell their petroleum products to the public in as
large quantities as possible."

In the later case of Regent Oil Co. Ltd. v. Leavesley (Lichfield) Ltd., Stamp J. said (1966) 1 WLR 1210, at p 1214; (1966) 2 All ER 454, at p 456 :

"It is also established that though a trader in the position
of the plaintiff in this case is not entitled to protection against
competition per se, it has an interest in selling as large a
quantity of its goods (in this case motor fuel) as it can, and
as profitably as it can. These are interests which it is legitimate
to protect."

I would regard the interest of the appellant in securing customers for its flour and in ensuring that their custom, once secured, is thereafter retained, as constituting a legitimate interest in furtherance of which an enforceable restraint may be imposed by covenant. (at p279)

31. Whether the present restraint is excessive, being more than adequate to safeguard that legitimate interest is not, I think, easy to determine, and this not principally because the facts lie close to some borderline between what is and is not excessive but rather because the question posed does not appear fully appropriate to the facts of the case. The test is readily applicable to the historic spheres within which the doctrine against restraints of trade has long operated, those of master and servant, of vendor and purchaser of goodwill; its formulation suggests that it is to be applied by reference to the two classic criteria, duration and area of restraint. When applied to cases such as the present, where the restraint is not upon competition between the parties, the area criterion is largely meaningless and it is not wholly clear how reasonableness of duration is to be judged. In the modern petrol re-seller cases recourse has been had, in judging reasonableness of duration, to the need to provide stability of outlets for marketers, whose very large capital investment in refining and distribution requires a relatively stable pattern of widespread distribution outlets; the "solus" system of trading, once established, also requires that if new entrants into the field of marketing are to be permitted, they must be free to obtain trade-ties like those existing in favour of established marketers. (at p279)

32. The appellant is, however, not seeking multiple retail outlets through which its product, identified as such, will be distributed to the public; it is no more than the manufacturer of a raw material endeavouring to secure a long term supply arrangement with a consumer-customer; considerations hinging upon the maintenance of a relatively stable pattern of distribution outlets play no part. (at p279)

33. The possibly excessive nature of the covenant lies, no doubt, principally in its duration yet if it be legitimate to secure customers and, once secured, then to seek to retain them by appropriate covenants why is it to be said that their retention for a short term is reasonable but it is unreasonable to retain them for a long term and what provides the measure of reasonable duration? (at p279)

34. The answer must, I think, be found in a scrutiny of the whole transaction including what is its effect upon the public at large, thus giving proper weight to matters of public policy. As Lord Reid said in the Esso Case (1968) AC, at p 301 , while dealing with the first limb of the doctrine,

"Again, whether or not a restraint is in the personal
interests of the parties, it is I think well established that the
court will not enforce a restraint which goes further than
affording adequate protection to the legitimate interests of the
party in whose favour it is granted. This must I think be because
too wide a restraint is against the public interest." (at p280)

35. Approaching the matter in this way there are two features of the present covenant which invite comment, its duration and its extension to successors in business and to nominees of the covenantee. Dealing first with the latter, their being here no restriction upon sales by the covenantor of its products but only a restriction upon the procurement of raw materials, the covenantor is only likely to be prejudiced if the price or quality of raw materials supplied to it is not competitive with raw materials obtainable from other suppliers; as to price the reference to a fair and reasonable price offers a satisfactory safeguard and it also bears, indirectly, upon the question of quality since if inferior grades of flour or other materials are supplied a lower price would be called for so as to answer the description of "fair and reasonable". In any event, there need, I think, be no undue concern with the question of quality; as was pointed out in the Esso Case [1967] UKHL 1; (1968) AC 269 , a covenantor in a situation such as the present "chooses to rely on the commercial probity and good sense" of the covenantee (1968) AC, at p 303 ; the supplier's interest will lie in so acting as to promote the covenantor's sales of bakery products (1968) AC, at p 313 . The reference to successors in business and to nominees might, in circumstances that the mind may conjure up, produce unfair or harsh consequences but, if commercial realities are kept fairly in view, it does not appear to bulk large as a relevant consideration. (at p280)

36. It may be noted that whereas the restraint applies to flour, wheatmeal and other commodities the right to obtain supplies from other sources should the supplier fail to supply is limited to "wheaten flour and wheatmeal as aforesaid". Whether or not this is due to some defect in drafting no point was made of it by the respondent nor did the extension of the restraint to "other commodities" play any significant part in its submissions. (at p280)

37. What then of the duration of the restraint? In the absence of any onerous requirements as to the mode of conduct of the respondent's business and having regard to all other circumstances I see no reason for treating almost seven years as an unduly lengthy period during which the appellant may properly seek to retain the respondent as a customer. It is not, even in these days of technological innovation, such a term as "stretches far beyond any period for which developments are reasonably foreseeable" - per Lord Reid in the Esso Case (1968) AC, at p 303 ; it was less than half the period which the respondent was prepared to tie itself for, it being willing to grant a tie for fifteen years. Its reasonableness is to be judged not by the events which in fact occurred but rather in the light of the circumstances as they existed in June 1971. At that time, adopting the findings of fact of the learned trial judge, the appellant was prepared to advance very large sums to the respondent, repayment of which the respondent would find it necessary to spread over many years with an initial period of five years during which no repayment would be required. A new bakery was to be set up in a new town and, unless the respondents could sell their Sarina business, the whole of the finance for that business, other than that obtained from a bank, the amount of which was greatly increased by the appellant's support of the respondent's application for bank finance, was to come from the appellant at low rates of interest. (at p281)

38. The Sarina business had then been on the market for some years and, as Mr. Goulevitch said in cross-examination, he had been obliged, by March 1971, to come to the decision not to sell the Sarina business because he had had no buyers; in particular the Defiance company showed no interest in purchasing it until some time after June 1971. That being so, and accepting the learned trial judge's finding that the appellant knew of the so-called option arrangement between the respondent and the Defiance company, I cannot share in his view that the appellant should have appreciated the likelihood of an early sale of the Sarina business. Even if such a sale had been anticipated it would not then have been thought likely to bring so large a price as substantially to relieve the respondent from the need for future financial aid from the appellant. Not only did the Defiance company's sudden interest in buying the Sarina business come as a surprise to the Goulevitchs but the sale price was quite clearly very much more than they anticipated. Thus when, earlier, the bill of sale was executed the situation was one in which very long term reliance upon the appellant's financial support appeared to the parties to be the likely future. This of itself provides considerable support for the reasonableness of the seven year trade-tie. The absence of any contractual obligation on the part of the appellant to supply the bakery with its requirements of flour no doubt tells against reasonableness; however in the case of a fungible commodity like flour, in a country which is a major grain producer, the likelihood of shortages of flour appears slight indeed. I doubt whether the offer of an assured supply would have added much to the value of the consideration flowing from appellant to respondent; its absence accordingly seems to me to be of little weight. (at p282)

39. So far as concerns matters of general public policy the evidence discloses nothing injurious to the interests of the public beyond the bare fact that the covenantor's freedom to supply itself from whom he wills is restrained. Indeed it was not contended at the hearing that on the ground of the interests of the public the covenant should be held to be bad. Accordingly I conclude that the duration of the restraint is not unreasonable in the sense that it is excessive. No doubt, as the learned trial judge points out, the leading of adequate evidence of the conditions in the Queensland flour milling and bakery industry would have allowed the question of the reasonableness of the covenant to have been determined in a more satisfactory way, but even on the material that does appear I do not regard the matter as really in doubt and I am unable to take the view that the covenantor fails upon any ground depending upon onus of proof. (at p282)

40. As already mentioned, the enforceability of the covenant was not separately attacked on the second limb of the doctrine, reasonableness in regard to the interests of the public; what I have already said will suffice to show that I do not regard that limb as having any application in this case. I would therefore allow this appeal. (at p282)

41. Before concluding I would refer again to the question whether this is indeed a case which raises for decision the application of the doctrine against restraint of trade. There are, to my mind, two quite distinct considerations which arise on the facts of this case and which call for some comment. The first turns upon the fact that in this case the restraint is confined to the covenantor's source of raw materials and says nothing as to the sale of its products. (at p282)

42. If it be correct to define a contract in restraint of trade as "one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses" (per Diplock L.J. in the Petrofina Case (1966) 1 Ch, at p 180 , approved of by Lord Hodson in the Esso Case (1968) AC, at p 317 ) this in itself may raise some doubts whether the present covenant is one in restraint of trade. It does not affect in any way the respondent's trade with its customers; for this purpose I assume that a baker's customers are substantially unaffected by the brand of the flour from which bread is made, they presumably neither know nor care which miller's flour is used. Only to the extent that the respondent's trade can be taken to include its purchases of raw materials can there be said to be a restraint of trade imposed and then only to the same extent as would the terms of a supply contract expressed to cover all flour requirements of the Moranbah bakery. It is true that such a contract would include an obligation on the miller's part to supply the baker's requirements, although perhaps not at a predetermined price but rather at prices ruling from time to time, but this may go rather to an aspect of reasonableness than to whether or not any restraint exists to which the doctrine is applicable. (at p283)

43. The present case is therefore unlike past cases dealing with the assumption of restraints by resellers of products under brand names; no direct restraint at all is placed upon what the covenantor sells. In a number of reported cases the validity of contracts for the exclusive supply, during a fixed term, of raw materials and the like were in issue; these contracts did not restrict the purchaser in its sales of its products. However in none of these cases does the court appear to have been called on to rule upon the application, if any, of the doctrine against restraint of trade although in some the matter is touched on. In Donnell v. Bennett (1883) 22 Ch D 835 , the brewery tie-clause case of Catt v. Tourle (1869) LR 4 Ch App 654 was cited; in Metropolitan Electric Supply Co. Ltd. v. Ginder (1901) 2 Ch 799 , the covenantor's counsel relied upon public policy as favouring competition, however the terms of a relevant statute may there have been thought to overcome any question of undue restraint; in British Oxygen Co. Ltd. v. Liquid Air Ltd. (1925) Ch 383 , Romer J. held that to offer to supply on favourable terms in return for a trade-tie was neither unlawful nor contrary to public policy; Tolhurst v. Associated Portland Cement Manufacturers (1900) Ltd. (1903) AC 414 and Kemp v. Baerselman (1906) 2 KB 604 may also be referred to. In the Esso Case [1967] UKHL 1; (1968) AC 269 the relationship to such supply contracts of the doctrine against restraints of trade was referred to. Lord Wilberforce said (1968) AC, at p 337 , that had Esso's agreement been "a mere agreement for exclusive purchase of a commodity...nothing more, there would be a strong case for treating it as a normal commercial agreement of an accepted type" to which the doctrine would be inapplicable. (at p284)

44. It may in truth be illusory to speak of any provision which imposes a real restraint upon the individual's freedom to trade as not falling within the doctrine; the true analysis may simply be that the doctrine is of the greatest breadth but that in many cases restraints will readily pass through its processes of scrutiny unscathed and that in those instances it is of little practical importance to determine whether or not the doctrine is applicable. There is much modern authority for the wide application of the doctrine; in Buckley v. Tutty [1971] HCA 71; (1971) 125 CLR 353, at p 375 this Court said that "the rules as to restraint of trade apply to all restraints, howsoever imposed, and whether voluntary or involuntary" and in Pharmaceutical Society of Great Britain v. Dickson (1970) AC 403, at p 431 Lord Hodson denied the possibility of segregating "any particular class of case so as to exclude it from the ambit of the doctrine although there are of course many cases where it is futile to raise it. I have in mind the field of contractual and other manifold activities which, in the absence of special features, have been treated as immune." Other of their Lordships gave the doctrine an equally wide application. (at p284)

45. A rather different aspect of the question whether the doctrine applies to the present covenant is concerned not so much with the nature of the covenant as with the circumstances under which the covenantor entered into it. However wide the application of the doctrine it may yet not apply in circumstances such as the present. (at p284)

46. There is now much authority for the view that the doctrine is, as their Lordships said in the Esso Case [1967] UKHL 1; (1968) AC 269 , concerned with those instances in which "a man contracts to give up some freedom which otherwise he would have had" (Lord Reid (1968) AC, at p 298 ); in which "someone fetters his future by parting with a freedom which he possesses" (Lord Morris (1968) AC, at p 309 ); thus a purchaser of land who promises not to deal with it in a particular way is not derogating from any pre-existing right which he has, as Lord Hodson said (1968) AC, at p 316 . Lord Pearce (1968) AC, at p 325 instances as intolerable any application of the doctrine which would enable a man, who buys or leases on terms made more favourable to him because he submits to a trade-tie of some sort, subsequently to repudiate that tie. In Cleveland Petroleum Co. Ltd. v. Dartstone Ltd. (1969) 1 WLR 116; (1969) 1 All ER 201 , the Court of Appeal applied this principle of the giving up of an existing freedom as did the New Zealand Court of Appeal in Robinson v. Golden Chips (Wholesale) Ltd. (1971) NZLR 257, esp at p 265 . Although enunciated in the Esso Case [1967] UKHL 1; [1967] UKHL 1; (1968) AC 269 in the context of real estate, that being the aspect which presented itself on the facts of that case, it may be that the principle confining the doctrine of restraint of trade to cases where a pre-existing freedom is given up should apply equally to the acquisition of other pre-requisites to the engagement in trade; whether land, machinery or working capital is in issue the price to be paid for their original acquisition, necessary so that trade may be entered upon, may include the entry into some restraint affecting subsequent use of those assets in the trade, the entry into which is made possible only by their acquisition. (at p285)

47. In Bacchus Marsh Concentrated Milk Co. Ltd. (In liq.) v. Joseph Nathan & Co. Ltd. [1919] HCA 18; (1919) 26 CLR 410, at p 441 Isaacs J. described what he called the "larger principle" underlying the doctrine of restraint of trade. In the Peters American Delicacy Case [1947] HCA 62; (1947) 77 CLR 574, at p 591 , Dixon J. cited this passage as explanatory of that "larger principle". The words of Isaacs J. were these [1919] HCA 18; (1919) 26 CLR 410, at p 441 :

"That principle is that true freedom of trade is not to be
restricted, but that a provision which, taken by itself, would
amount to such restriction may, when considered in conjunction
with and as qualified by the surrounding circumstances,
prove to be not really a restriction but merely part of a larger
transaction which, regarded as a whole, does not restrict, but
may even assist, freedom of trade. To employ a simile, expenditure
is per se a loss, but expenditure which secures a
greater benefit is not." (at p285)

48. Until the decision in the Esso Case [1967] UKHL 1; (1968) AC 269 it had not been necessary to distinguish between the case of existing traders subjecting themselves to restraints and the rather different case of the assumption of a restraint as part of the price to be paid so as to enter into trade for the first time. Even in the Esso Case the matter was discussed only in the limited context of the use of land for the purpose of carrying on a business. (at p285)

49. When, in equipping oneself for a trade, it happens that the only source of finance is a trade supplier and part of the price of that finance is a trade-tie, it then positively encourages trade that that tie should be valid and enforceable, else entry into the trade by those without independent sources of finance will be prevented; those engaging in the trade will be the fewer and competition the less. In the present case the appellant was a tenderer, in competition with the Goulevitchs, for the opportunity of establishing the Moranbah bakery; had the Goulevitchs not been able to anticipate that they would obtain finance from a flour-miller in return for a trade-tie they could not have tendered and the appellant might have been the successful tenderer, adding to the already large number of mill-owned bakeries in the area. If such ties are to be subject to the doctrine, its effect may then be to encourage vertical integration in the industry, a strange result of this public policy in favour of the individual's freedom to trade and one which, in the context of the United States petrol reselling industry and the impact of the Clayton Act upon exclusive dealing contracts in that industry, was forecast by Douglas J. in his dissent in Standard Oil Co. of California v. United States [1949] USSC 76; (1949) 337 US 293, at pp 319-321 [1949] USSC 76; (93 Law Ed 1371, at p 1389) . (at p286)

50. This suggests that an arrangement such as was the present one, when it enables the covenantor to enter into trade, answers Lord Pearce's description, in the Esso Case (1968) AC, at p 328 , of a contract for the promotion of trade, and thus immune from the doctrine, any incidental restraints imposed being directed towards the absorption, not the sterilisation, of the parties' services and being limited to the term of the contract. The passage I have already quoted from the judgment of Isaacs J. in the Bacchus Marsh Case (1919) 26 CLR, at p 441 might be applicable; a provision which taken by itself amounts to a restraint upon trade, namely the trade-tie which is part of the price of entry into the trade, may prove, when considered in conjunction with the surrounding circumstances, namely that only by its acceptance can entry into the trade be accomplished, to be not really a restriction but part of a larger transaction, first entry into the trade, which does not restrict but assists freedom of trade. (at p286)

51. I have thought it proper to refer to these considerations as to whether the present covenant is one to which the doctrine against restraints of trade has any application. However I am content to determine the matter upon the footing that it does but that the covenant imposes no more than a reasonable restraint and is, accordingly, nevertheless enforceable. (at p286)

ORDER

Appeal allowed with costs. Order of the Supreme Court of Queensland set aside and in lieu thereof order that (1) the defendant be and it is hereby restrained from purchasing any flour or wheatmeal which it may require in the conduct of its business at Moranbah from any person or persons in breach of the covenant in favour of the plaintiff contained in the bill of sale dated 7th June, 1971; (2) the defendant pay to the plaintiff the costs of the proceedings in the Supreme Court of Queensland.