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High Court of Australia Transcripts |
Perth No P64 of 2000
B e t w e e n -
PETERS (WA) LTD
Appellant
and
PETERSVILLE LTD AND PETERS FOODS AUSTRALIA PTY LTD
Respondents
GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON WEDNESDAY, 14 FEBRUARY 2001, AT 10.15 AM
Copyright in the High Court of Australia
MR W.S. MARTIN, QC: If it please the Court, with my learned friend, MR S.M. STANDING, I appear on behalf of the appellant. (instructed by Freehills)
MR T.F. BATHURST, QC: If the Court please, I appear with my learned friend, MR A.I. TONKING, for the respondents. (instructed by Minter Ellison)
GLEESON CJ: Yes, Mr Martin.
MR MARTIN: Your Honours, there are essentially two issues in this appeal. The first concerns the ambit of the common law doctrine of restraint of trade and, in particular, whether this agreement properly characterised in its commercial context falls within the scope of that doctrine or outside it. The second concerns the proper interpretation and application of section 51(2)(e) of the Trade Practices Act.
The scheme of my address, if it please the Court, was to first address your Honours on our submissions with respect to the proper characterisation of the agreement in its commercial context, then to take your Honours to what we contend are the errors in the analysis of the courts below and then to take your Honours to the cases and the competing principles which emerge from them, then to put our submissions to your Honours with respect to which of those principles ought be adopted and then to apply that principle to what we will have already put is the proper characterisation of the agreement and then, finally, to make some brief submissions with respect to section 51(2)(e).
So if it please the Court, the starting point then is our submissions with respect to the proper characterisation of the agreement and I tell your Honours that the primary facts - - -
GUMMOW J: How about the proper construction of it?
MR MARTIN: No, your Honour, construction is a step on the way to characterisation but it is a broader issue than construction. It is a characterisation in order to ascertain the purpose and effect of the agreement in its commercial context. I will take your Honours in due course to a number of authorities in this Court that establish the proposition that the inquiry is as broad as that.
GUMMOW J: But hopefully you will take us to the text.
MR MARTIN: I am sorry, your Honour?
GUMMOW J: We have to work out what is the interrelation between Article V and Article VII, do we not?
MR MARTIN: Yes, your Honour. I will certainly take your Honours to the text but it is appropriate, in my submission, to do that in the context of the antecedent arrangements between the parties and the commercial context. I will take your Honours to authorities in this Court that suggest that is the proper course. If of course we were embarked only upon the question of construction, then the wide inquiry to which I propose to direct your Honours would not be appropriate, but we are embarked upon a wider inquiry than that.
Your Honours, the most convenient course perhaps to truncate our submissions on this topic is to follow paragraph 9 of our written submissions, to which our opponents make no expressed demur. Again, if I could put to your Honours - - -
KIRBY J: They do not dispute what you put there but they say that it really is not necessary, that we should just confine ourselves to what the primary judge found.
MR MARTIN: Paragraph 10 of our submissions identifies the authorities that we rely on for the contrary proposition that one has to go to purpose and effect.
GLEESON CJ: On any view of the matter, we need to understand the agreement. We are not going to get far until we do that.
MR MARTIN: Indeed, your Honour. The agreement, in our submission, needs to be put in its context, and I will do that very briefly. The background is that prior to 1980 there were, amongst other brands, two substantive brands of ice-cream being marketed in the country, one under the name Peters, the other under the name Pauls.
KIRBY J: Was there a quality differential? Was Pauls not a more high class sort of ice-cream than Peters?
MR MARTIN: Different views were held by different consumers on that subject, I think, your Honour, and there is no evidence bearing directly on that.
KIRBY J: You do not have any samples for us?
MR MARTIN: No, I am afraid not, your Honour.
In relation to the Peters brand, the situation prior to 1980 was that in all States other than Western Australia, that brand was being marketed by the first-named respondent, Petersville, as a result of its acquisition of all the prior companies that had marketed that brand in other States. In relation to the Pauls brand, it was being marketed throughout Australia by a company called QUF Industries, which was one of the parties to the agreement in question. Its interest in the agreement has since been taken out, but nothing turns on that.
In 1980, as we point out in paragraph (a), those two entities, QUF, responsible for the Pauls brand, and Petersville, responsible for the Peters brand in every State and Territory except Western Australia, formed a partnership, and that partnership was called AUF. Now, prior to that time, as you would expect, those two brands had been fiercely competitive and there is a reference to the fierceness of that competition at page 136 of volume 1 of the appeal books, but I need not take your Honours to it. Now, the formation of that partnership assumes significance for our submissions in this case because the mere fact of the formation of the partnership meant that from then on neither of the two partners was at liberty to compete against the partnership in any State or Territory in which the partnership operated. Now, that was a consequence brought about by the implication of terms by law and, indeed, by the statutory provisions of the Partnership Act. Nobody suggested at that time that there was anything about that arrangement that infringed the common law doctrine with respect to restraint of trade, nor could such a proposition have been seriously put forward.
No doubt, issues under Part IV of the Trades Practices Act were raised and, no doubt, considered by the relevant authorities, but it was never suggested that the mere fact that the partnership created an infringement of the common law doctrine. The significance of that to this case is that what happened in 1983 was nothing more than an extension of that arrangement into Western Australia. So that in Western Australia after 1983 the two brands were then being marketed by the one operator; namely, the appellant, thus, achieving in Western Australia what had already been achieved through the partnership mechanism some three years earlier. So unkind critics of Western Australia might suggest that that is the usual time lag for things to flow over to that State.
Your Honours, the significance of that is there is nothing that occurred in 1983 from a consumer perspective that altered the position in Western Australia as compared to the other States, a position which had been achieved without any possible suggestion of contravention of the common law doctrine.
GLEESON CJ: I just want to understand that a little better. In all States except Western Australia between 1980 and 1983 and after 1983 competition between Peters and Pauls was effectively eliminated by the partnership?
MR MARTIN: In one sense, yes, your Honour. The two brands were still maintained as competitive to each other, but with a common proprietorship.
KIRBY J: There would not have been a need for price competition where once previously there presumably was.
MR MARTIN: One imagines there would have been all kinds of implications in terms of common marketing strategies, all manner of that sort.
KIRBY J: Well, let me put it slightly differently. Following 1980, in all States except Western Australia, the Peters and Pauls brand were commonly owned, brands were commonly owned.
MR MARTIN: Yes.
KIRBY J: What happened in 1983 in Western Australia was that the companies that were marketing one of those brands sold their business to the company that was marketing the other brand.
MR MARTIN: Inter alia, your Honour, and entered into a long-term relationship with the company that was marketing that other brand in Western Australia, which had the effect of producing the same result in Western Australia as had been achieved in the other States; that is to say, a situation in which, throughout Australia, there were common marketing programs and product development programs for the two brands. The two brands were obviously maintained because, in a retail context, the number of brands that one has is significant to the achievement of volume of sales.
Take for example the supermarket context, in which shelf space is limited. If one has two brands, then one is to get more space from the retailer than if one has only one brand. Similarly, in what is called the "impulse product" market in such places as petrol stations and the like, if one has more than one brand, one has more exposure to the potential impulse consumer, and so on. But what was achieved in 1983 was a commonality of product development and marketing for those two brands throughout Australia; a situation which was achieved in all States other than Western Australia in 1980, but between 1980 and 1983 had not been achieved in Western Australia.
The second point we make, flowing from that, is the point that is in paragraph (b) of our submissions, and that is the consequence of the formation of the partnership in 1980 was to disrupt an arrangement that had existed with respect to the Peters brand between the first respondent and the appellant, prior to 1980. Because the Peters brand was being marketed by my client in Western Australia and because the first respondent was not trading in Western Australia, they co-operated and exchanged information, made product for each other, shared product development and marketing.
Of course, when they became competitive in 1980, as a consequence of Petersville becoming a part proprietor of the Pauls brand, those arrangements ceased. The significance of that is that, for this case, in 1983 the agreement involved the restoration of that degree of co-operation, commonality of product development and marketing. Your Honours, lest it be thought that this equating of the position in Western Australia to the other States is a lawyer's ex post facto rationalisation, can I just take your Honours to two references in the papers, which show the parties themselves had that same view.
The first, your Honour, is in volume 2 at page 301. Now, this is a memorandum from the chief executive of the appellant to the staff of AUF or Pauls in Western Australia at the time of consummation of the relevant agreement. In the last paragraph he advises those staff that:
We extend a warm welcome to all staff in this historic merging -
and that, your Honours, is a familiar phrase that we will see a number of times -
of our respective Ice Cream and Frozen Foods operations. The partnership of Peters and Pauls brands now extends across Australia and we look forward with your help to a successful future.
Lest it be thought that that was a unilateral view, can I take your Honours to page 450, which is the general manager's report of AUF for June of 1983, and it is the second page of that report, page 451, which is relevant.
GUMMOW J: The general manager of what business?
MR MARTIN: Of AUF, the partnership, where he is reporting upon the fact of the sale in 1983 and on the second page, 451, under the heading "Western Australia" in the last paragraph, he observes:
As a result of this decision, Peters and Pauls brands will be marketed on a uniform basis throughout Australia as if there were only one company.
CALLINAN J: Mr Martin, what evidentiary value do these materials have? I mean, you are not suggesting they are an aid to the construction of the document.
MR MARTIN: Not to the construction of the agreement but to the characterisation of the agreement, its purpose and effect.
CALLINAN J: How are they admissible for that purpose?
MR MARTIN: Because they show the views of the parties with respect to what they were achieving. Their purpose is relevant and I will take your Honours to authorities in the High Court, in this Court, that show that purpose is a relevant consideration and so the ambitions of the parties are relevant and, of course - - -
KIRBY J: You could not confine yourself solely to their agreement because their agreement will often, as in this case, be the subject of legal advice and careful drafting.
MR MARTIN: Indeed.
KIRBY J: Not necessarily designed to reveal the true purpose.
MR MARTIN: But perhaps I can put it this way, your Honours - - -
CALLINAN J: I am sorry, how can we go outside the agreement?
MR MARTIN: Because we are concerned with notions of public policy and the public policy is directed to the effect of the agreement and in assessing its effect, the purpose of the parties is a relevant consideration because they were best placed to ascertain its likely effect. Now, we do not put - - -
CALLINAN J: But the purpose might not be effectuated.
MR MARTIN: It might not, your Honour, but it is, nevertheless, a relevant consideration. I will take your Honour to - in due course, perhaps hand up a copy of the judgment of Justice Brandeis in the United States where he observes that the intent of the parties is relevant but, of course, not decisive. We put it no higher than that. Your Honours, the portion I was taking you to - just before we leave this page, so I do not have to come back to it, can I invite your Honour's attention to the last sentence of the first paragraph under the heading "Western Australia", which observes that "From an income point of view" - - -
GLEESON CJ: I am sorry, what page are you on now?
MR MARTIN: Page 451, your Honour, under the heading "Western Australia", last sentence, the first paragraph:
From an income point of view, we are protected by a minimum quantities clause.
That is the clause relating to the minimum royalty to which I will take your Honours in due course. Now, the proposition that there should be this rationalisation of the market in Western Australia emerged very early in the life of the partnership. We refer to it in paragraph 9(c) of our submissions. Can I take your Honours to one only of the references that we there give, and that is at page 89 of volume 1 of the appeal books, and this is a report - - -
GLEESON CJ: Just before you go to that, am I right in thinking that the need for the licensing arrangements that you are coming to, as part of this rationalisation that you have just been talking about, is that Pauls brand in other States was still owned by AUF? If the entirety of the Australian Pauls business had been sold to your client, there would have been no need for any licensing arrangement at all.
MR MARTIN: Indeed.
GLEESON CJ: But, because this agreement was only going to affect what was happening in Western Australia, there was a need for a licensing arrangement to support the sale of the business, is that right?
MR MARTIN: Indeed, your Honour, and added to that is the consideration that the licensing arrangement was only for a limited time - an initial term of 15 years with three five-year options. So that at some point in time the right to market the Pauls brand in Western Australia will revert to the partnership upon the expiry of the term, whereas - I will show your Honours in due course - upon default under the agreement the rights revert and the covenant with which we are here concerned ceases to have effect. So that there was a temporary, albeit for a relatively long term, transfer of the right to market the Pauls brand in Western Australia.
GLEESON CJ: So that they sold to your client the plant at which the product was being manufactured and other assets that had a location in Western Australia but at the end of whatever licensing arrangements were made in relation to the Pauls brand, there was nothing to stop the partnership commencing in business in Western Australia marketing under the Pauls brand?
MR MARTIN: With the distinct advantage, your Honour, that that brand would have been maintained in the consumer presence, the consumer mind, by my client throughout that period without need for any capital expenditure or exposure by the partnership and during which time they receive a significant revenue stream through the royalty provision. As we will see, the partnership regarded it as a means of maintaining the brand presence in Western Australia, protecting the income stream that they were deriving from Western Australia and enabling them to go back into that market without having to, as it were, restart product development or brand name development.
HAYNE J: That is a submission that takes as its premise that the agreement obliged continued use of the name.
MR MARTIN: Yes, that is one aspect of it, your Honour, but also the commercial reality that the obligation to pay a minimum royalty provided a commercial incentive to continue to use the name in any event because, if you are paying a minimum royalty whether you sell product or not, there is a significant incentive to sell product.
Your Honours, the other aspect that I should mention in this context was that, although there was a sale of plant, it was common ground, as we will see, that the plant of both parties, both Peters and the partnership in Western Australia, was outdated and needed to be rebuilt. So that the sale of the plant was not a significant aspect of the transaction. What both parties realised, as we will see from just a couple of the documents I will take your Honours to, is that the market in Western Australia was so small that it could really only provide justification for one modern economic plant. Both of them needed to do it. They could not do it in competition with each other, especially as a major competitor in the form of Streets was expected to enter that market in 1983 and did, in fact, do so.
So the commercial reality of the situation, in our submission, was that the effect of the agreement was to produce an outcome where, from the prospective of the partnership, they maintained a presence in Western Australia, which was important from a national marketing point of view, and in particular national contracts, such as those with national retailers like Coles and Woolworths, but alleviated any need to inject capital, at the same time maintained a revenue stream that on their analysis was, in fact, greater than had they remained in the Western Australia market.
Now, your Honours, in order to make good those factual propositions, can I take you to two documents: the first is at page 89 and this is a document that emerged shortly after the formation of the partnership in 1980 and which preceded the negotiations between the parties and there is a document produced by and, indeed, presented to the board of the partnership by the chief executive. It refers on page 89 to the concerns with respect to the:
Western Australia operation
1. Likely future profitability.
2. Low factory outputs.
3. Long distance from the main part of our operation.
And the recommendation was that an approach be made to two of the existing Western Australia operators:
to investigate forming a joint venture.
GUMMOW J: Just a minute. Is page 89 that which is referred to at the bottom of page 88?
MR MARTIN: Yes, it is, your Honour, and it is a part of that document. It is the general manager's report presented to the board. In fact, although, at page 85, it bears the date October 1980, it is a report presented to the board in December 1980 in respect of October's performance. Now, on page 90 - - -
GUMMOW J: This is presented to the board where?
MR MARTIN: In December 1980.
GUMMOW J: Yes.
MR MARTIN: To the board of AUF, which I think sat in and alternated between Queensland and Melbourne.
GUMMOW J: Right.
MR MARTIN: At page 90 there is a reference to:
Average contribution -
that, of course, is another word for profit -
is estimated at $300,000.
Major increases in - - -
GLEESON CJ: That, I presume in the scale of this business, is practically nothing.
MR MARTIN: Yes, not a significant contributor.
Major increases in earnings are unlikely. Therefore we should be looking at restructuring the operation.
Then:
Total market size -
in the next paragraph -
of 20/25 million litres -
that is, litres of ice-cream in Western Australia -
justifies one factory only.
Closing -
the Western Australia factory -
and shipping all product from Melbourne is not viable due to the freight costs -
and then on page 91, if one turns sideways again, there are figures, profit estimates and the figure for 1980/81 at the very bottom is estimated at $300,000, as we have already seen.
Now, your Honours, then negotiations continued. We have set out all the references to those negotiations in paragraphs (d) and (e). I will not take your Honours to them. We jump to paragraph (f). This brings us forward in time to the period just prior to the consummation of the agreement. If I could take your Honours to page 146 of volume 1. This is a recommendation again to the board of AUF by Mr Hutchinson, the chief executive, in October 1992. So we have jumped forward two years, and at page 147 he observes that:
It is clear that significant benefits are available if the operations of Peters Ice Cream (WA) Limited and Australian United Foods are merged.
So that that notion of merger continues.
CALLINAN J: I suppose with a refrigerated product, costs of exporting from the east to the west are very high, indeed.
MR MARTIN: Indeed.
CALLINAN J: So you really need a local manufacturer.
MR MARTIN: Indeed, and that was the point made in the first document we saw. It is just not viable to talk about - - -
GLEESON CJ: It is a refrigerated product with a low unit cost.
MR MARTIN: Indeed, and so the cost of transport would exceed the cost of manufacture and make it simply non-viable. So, once you sell your plant, once you are in a position - the partnership recognised its plant was outdated - there are many references in there and we have a paragraph that says that plant was outdated, it needed a radical restructure, you are staring down the barrel of very significant capital expenditure, or maintaining your presence in the market some other way. That what was here under consideration by Mr Hutchinson in his report to the board.
GLEESON CJ: Now, I suppose if and when the time came when the licence was not renewed, the partnership would then have a decision to make as to whether it would bother to go back into business in Western Australia?
MR MARTIN: Yes, or attempt to enter into some other arrangement with some other manufacturer, perhaps us, perhaps not us, for a continuation of the arrangement whereby their interest in Western Australia is maintained as licensor, rather than as manufacturer.
GLEESON CJ: If the argument against you is correct, and the relevant part of this agreement bears the character of a sterilisation of a business, it was a sterilisation of a business that was looking distinctly unattractive.
MR MARTIN: Indeed, indeed, and the highest it could be put against us is that it was a sterilisation of a particular type of business, namely, manufacturing and selling. Our proposition is that that is an unduly narrow approach to the commercial reality of this situation. One can achieve the profits, the benefits, more correctly, of a business a number of ways. One is by manufacturing and selling. The other is by licensing somebody to sell on your behalf so that you achieve the benefit of national recognition of your product and a revenue stream. So, in that sense, in a real sense, you are maintaining your business interest. You are not sterilising your capacity. You are expanding it. In economists' terms, you are shifting to a different functional level.
GLEESON CJ: You made an assertion of fact that sounds plausible and potentially important, but you have not shown any evidentiary support of it yet.
MR MARTIN: I am coming - yes.
GLEESON CJ: You suggested that there might have been arrangements with national retailers such as Woolworths or Coles?
MR MARTIN: Yes, I can take your Honours to that. We will see that at page 147, which your Honours are at.
CALLINAN J: It is a "tyranny of distance" case.
MR MARTIN: It is, your Honour.
KIRBY J: The shifting to a different functional level, is that discussed in any material that - - -
MR MARTIN: No, no, it is economists' speak, I am afraid, your Honour. Can I take your Honours back to page 147. Again, the first paragraph talks of merger. The second paragraph:
It is therefore recommended that a sale of the Australian United Foods operations is the simplest way to achieve integration -
a very important observation -
provided there are safeguards relating to the volume in regard to Pauls brand and other National contracts.
There is one of the references, your Honour. So, what was important was we have to maintain the Pauls brand because, in order to market effectively with Coles, we need a presence for Pauls in Western Australia. Now, under the notes further down that page:
The General Manager of Peters Ice Cream (W.A.) Limited is starting to acknowledge that a sale may be the most desirable course of action. He has no objection to a side agreement relating to the supply of marketing and technical information.
Now, in fact that became part of the agreement, but it is an important aspect of the ongoing arrangements between the parties. On page 148, the first paragraph refers to the structure of the market, referring to a fifth being expected to enter within six months, and we can see from the rest of that paragraph that that entrant is Streets, which, of course, in fact some of the material show as the major Australian supplier.
Paragraph 2 repeats the assertion made earlier in 1980:
There are 4 factories where one would be sufficient. The two leading brands have totally unsatisfactory facilities.
Now, the two leading brands were my client, Peters, and AUF, the partnerships.
Peters will be making a decision within 6 - 8 weeks to spend $8 million on a new factory at Balcatta, while A.U.F. has deferred any expenditure pending the outcome of discussions with Peters (W.A.).
And by paragraph 3:
The A.U.F. operation has little or no fat, which leaves market gains as being the only avenue for earnings growth.
Now, the next paragraph your Honours are concerned with the possibility of entering into a joint venture with Peters and reached the conclusion because of the way the Peters business is structured, that is not a feasible outcome.
Paragraph 5 observes:
The simplest method of achieving rationalisation is for A.U.F. to sell its operation, provided there is an agreement relating to the supply and implementation of marketing and technical knowledge.
Then there is a reference to the problems of a joint venture, and then paragraph 6 refers again to the notion of integration:
There is no doubt that significant savings could be achieved if both operations were integrated.
And then on the next page there is a reference to charges to the operations. They are costs that are being borne by the Western Australia operation in an accounting sense of some $200,000, but then the qualification is:
However, we would require, and there is not objection by P.W.A. in principle, a royalty arrangement for technical and marketing knowhow.
GLEESON CJ: May I ask you a question? Does AUF partnership market under any brands other than Peters and Pauls?
MR MARTIN: Not in 1983, your Honour.
GLEESON CJ: Is this case about the fact that they now want to market in Western Australia under other brands?
MR MARTIN: Yes.
KIRBY J: Looked at in economic terms most of these competitors were selling a product in respect to which they would be presumably price competition, but each of them was only marginally economically viable, profits were low, important capital investments were shortly to be made. In the point of view of the consumers, the competition was in the consumer's interest, but the risk was one or both would go out of business.
MR MARTIN: Indeed, your Honour, and, most importantly, in a
context in which Streets was about to enter the market, and some of the materials I will take you to make the point that in order for any remaining competitor in Western Australia to be competitive to this new and large entrant, it was important that they have the economic strength to meet the challenge.
GLEESON CJ: Why did a licence of the Pauls brand need to be sustained by an agreement not to sell under any other brands?
MR MARTIN: Because, your Honour, the licence was part of an overall relationship which involved the exchange of confidential information, the obligation to pay minimum royalties, a combining of interests in which competition by one against the other would be antithetical to the general nature of that ongoing relationship, whether it be in the Pauls brand or the Peters brand.
GLEESON CJ: That is what the case is about, is it not?
MR MARTIN: That is really what it is about, your Honour.
GUMMOW J: That is right, and the question, really, in a way, is because of that, does not Article VII do more than buttress Article V?
MR MARTIN: That is the question. In our submission, Article VII, when read together and, in particular, the important paragraphs about exchange of information and extension of the licensing arrangements, do more than buttress Article V but Article V is itself, that is the licensing arrangement, only a part of an overall commercial relationship which, as I earlier suggested, effectively achieved in Western Australia what had been achieved in the other States, namely, a commonality of enterprise, and it is in that context of a commonality of enterprise that competition is antithetical. That is why, of course, the law itself prevented any of the partners from competing with the partnership.
GLEESON CJ: You mean it would have been inconsistent with the partnership arrangement in Victoria, for example, if Petersville had developed a new brand of ice-cream and marketed it in competition with the partnership.
MR MARTIN: Your Honour, the law itself would have precluded Petersville from doing that. The law would have implied a term.
GUMMOW J: Can you just explain that again?
MR MARTIN: It is a common feature of partnership that the partners, by entering into the arrangement, undertake not to compete with the firm. That was a common law - it is also embodied in the Partnership Acts.
GUMMOW J: It depends on what you mean by "compete".
MR MARTIN: Well, yes, indeed, but in the example posited by the Chief Justice, there would, in our submission, be no doubt that the law would restrain Petersville from undertaking that activity.
GLEESON CJ: I have no idea who manufactures Devondale ice-cream, but just suppose that in 1985 Petersville developed a new product with a new name called "Devondale". Would it have been inconsistent with the partnership obligations of Petersville to start marketing Devondale on its own account in Victoria?
MR MARTIN: Absolutely, your Honour.
GLEESON CJ: What about frozen yoghurt?
MR MARTIN: That would become more difficult. One would then need to ascertain whether or not that was reducing the market of the partnership. If frozen yoghurt was substitutable for ice-cream, then the same answer would prevail.
CALLINAN J: It is a frozen - the question would be whether it is a frozen confection.
MR MARTIN: Yes. Well, in terms of the obligations flowing from partnership, the answer would probably be dependent upon the outcome of the issue of whether the activity was capable of causing detriment to partnership. If it did, then it would be contrary to the fiduciary obligations which the partnership entails. Now, can I just mention, your Honours, that paragraph 530 of the latest edition of Meagher, Gummow and Lehane sets out the principles and the authorities for these propositions, including the references to the Partnership Acts.
Now, your Honours, our proposition is that just as the law itself requires, prevents partners from competing with each other in that circumstances, what these parties were doing was effectively achieving for themselves the same outcome because of the nature of their relationship by and including the covenant which is in Article VII of the agreement, because of the commercial reality of the situation. Your Honours, could I go back to the documents at paragraph - can I just mention, your Honour the Chief Justice, other references to the importance of national contracts are at page 48B, 107D and 147A. I need not take your Honours to them. At 149, in paragraph 8, Mr Hutchinson is submitting to the board that:
A combining of P.W.A. and A.U.F. ice cream and frozen foods makes a lot of sense. A sale by A.U.F. is the simplest method, with the only problem being to get agreement on the value of the business. Reaching agreement on a joint venture has the difficulties -
set out below. The next pages, your Honours, are concerned with an economic analysis of Peters existing operation and, in particular, the prospect of a joint venture. Could I just mention the passage at the top of page 153 where it is observed that, "No allowance has been made" in these figures "for the probable entry of Streets". The exact effect being unknown but the inevitable effect observed just under line A:
Both A.U.F. and P.W.A. will lose volume, whether they are separate or combined.
Now, could I jump then to the conclusion of this report to the board, which is at page 158, where the author observes, between C and D under the heading, "Benefits to A.U.F. in Selling Pauls", first item:
Avoidance of capital expenditure at -
the existing plant. Secondly:
Possible links with Peters brand and broader amortisation of marketing costs. This is subject to P.W.A. views on a side agreement.
Now, that found its way into the agreement; it is significant. And, thirdly, the:
Share in merger benefits to increase earnings.
Then, under the heading "Summary" - and there seems to be a word missing here. Perhaps it should read "There is no benefit to A.U.F. unless we achieve the following" or perhaps "There is benefit to A.U.F. if we achieve the following". The sense is clear enough. The objectives were to achieve:
1. Higher earnings.
2. Protection for Pauls brand.
3. Protection for national contracts.
We then, in paragraph (g), attempt to summarise the advantages - and this is on page 4 of our submissions - which AUF perceived. They were, firstly, the continuing royalty stream; secondly, the return of its capital in WA, which when invested would produce revenue which would exceed the profits of the business. If I could just take your Honours briefly to some references on that subject. The first is at page 239 of volume 1, under the heading "Western Australia - Sale of Operation" - it is a reference to the agreement - second paragraph under that heading:
Streets will be entering the market mid-April, with media to commence 14th April.
There are considerable benefits to both P.W.A. and A.U.F. as the result of the agreement, with the main ones for A.U.F. being as follows: -
(a) Higher earnings compared to current earnings, which would be under considerable pressure due to there being a major new entrant.
(b) A reduction in funds invested; with no reduction in earnings, the R.O.I -
that is, return on investment -
for A.U.F. as a whole will improve.
(c) Avoidance of considerable non-earning capital expenditure.
If I could then take your Honours to the second volume, in particular, page 367. This is back in time, but in the middle of that page, between C and D, the same notion, that is, that the
agreement covering marketing, manufacturing and distribution activity and development, in return for a royalty on sales. This royalty would be a vehicle of achieving greater returns than is presently the case.
And at 420 in that same volume is the calculation, in November 1982, which justified that conclusion. If I could just take your Honours through it. At the top of the page, it sets out the consideration to be received under the agreement - the lump sum consideration, I should say - 3.5 million. The effect of that, under item 2, was to give to the partnership a capital sum of just over $2 million. When one compares that to present earnings, the budget for 1982-83 was $300,000, add back head office charges as costs being borne by the Western Australian operation, 420,000, but then it is said:
It is expected that Marketing Charges will be more than recovered as the result of services supplied by A.U.F. for both Peters and Pauls brands.
And that is under clause 7.2 of the agreement. So the 120 is going to be picked up by the marketing charges.
GLEESON CJ: Mr Martin, I asked you earlier whether the partnership was selling ice-cream under any brands other than Peters and Pauls, and you said "no".
MR MARTIN: Yes.
GLEESON CJ: I think my question was a little too narrow. Does the evidence show whether, at the time of this agreement, the partnership was marketing other frozen confections?
MR MARTIN: I do not think it does establish any other frozen confections.
GLEESON CJ: Bearing in mind the reach of Article VII, it would, I would have thought - correct me if you have a different view - extend to things like frozen yoghurt, paddle-pops, any form of frozen confection, of which there are many in addition to ice-cream.
MR MARTIN: Yes, it would.
GLEESON CJ: Is there no evidence as to what the frozen confection market was or what frozen confection products the partnership was selling at the time of the agreement?
MR MARTIN: There is, your Honour, and I can find it in due course.
GLEESON CJ: Your junior can turn it up and you can give us a reference in due course.
MR MARTIN: The way the parties seem to have approached it is that the market was taken as the combination of both ice-cream and frozen confection products and includes such things as frozen confections that contain no dairy product, such as frozen iceblocks and things of that sort. That was treated by the parties, I think, as one comprehensive market because the products were substitutable for each other. Certainly we would not disagree with the proposition that Article VII extended to all that which could be described as that market.
Your Honours, back to 420, the analysis shows at the bottom of the page that by investing the $2 million return of capital at some 15 or 161/2 per cent - and it has to be remembered this is the early 80s - revenue of $340,000 was to be achieved, and then the minimum royalty estimated at 162,000 produced a total revenue stream of over 500,000, to which would have to be added the marketing charges as a result of services. So the estimation was that by undertaking this transaction the revenue stream from the continued participation in the Western Australian market as licensor would, in fact, be greater than from continuing to participate as manufacturer and seller.
HAYNE J: Is that right? Does that take account of the cash inflow of the investment of the 2.0?
MR MARTIN: It does, your Honour.
HAYNE J: But that investment was in what?
MR MARTIN: In land and plant. So that the options confronting AUF were to stay in Western Australia with that equity locked up in land and plant - - -
HAYNE J: Which it sold.
MR MARTIN: Which it sold.
HAYNE J: It received money.
MR MARTIN: It received money which it - - -
HAYNE J: It invested.
MR MARTIN: To produce a revenue stream.
HAYNE J: So the revenue stream was from the investment of proceeds and royalty?
MR MARTIN: Yes. The combination of those two income streams was significantly greater than the profit to be derived from maintaining their existing operation, which was not, in fact, a viable option anyway, because of the need to upgrade plant and the threat to be derived from the Streets entry.
HAYNE J: But one way of looking at those figures, perhaps quite the wrong way, is to say that the income stream from, speaking generally, ice-cream businesses dropped to 162.
MR MARTIN: In fact, your Honour, it proved to be more than that, because this is the minimum royalty. The royalty was 21/2 per cent on sales actually achieved, and there are figures in the book that showed that in later years that was more like $250,000-odd a year, but certainly the income purely from royalty was not expected to match profit on sales, but the achievement of profit on sales was problematical, because of the need to inject further capital, which would, of course, have had a cost, and the likely reduction in volume occasioned by the Streets entry.
So the advantage of this was that it achieved a risk-free return from the perspective of AUF, return of all its capital, no risk, no obligation to conduct a business a long way from its home operation, but, at the same time, the maintenance of its market presence in Western Australia, which was important to its national market presence, so that it could market nationally through the national retailers and so that, when the period of the licensing expired, it could either re-enter the market as it saw fit, or enter into another licensing arrangement with some other manufacturer.
GLEESON CJ: In Western Australia, at the time of this agreement or immediately before this agreement, was the partnership manufacturing any frozen confections other than ice-cream?
MR MARTIN: I am sure it would have, your Honour; it would have been manufacturing things on sticks that would have had water, not dairy products, in it, but, as I say again, the parties seem to have - my learned junior points out at page 42 in volume 1, as part of the agreed facts, there is a statement of the products sold by AUF under the Pauls brands. They included such things as popsicles and - - -
GLEESON CJ: Did it market any products under any other brand apart from Pauls?
MR MARTIN: No, I do not think so, your Honour.
GLEESON CJ: So all ice-cream and frozen confections marketed in Western Australia by the partnership were marketed under the Pauls brand?
MR MARTIN: I think that is right, your Honour. I have seen reference somewhere to a brand called Diamond, but it was not of - I think the answer to the question is that it was only Pauls; I cannot be 100 per cent certain of it.
HAYNE J: But some of its products sold in Western Australia came from the east, it seems.
MR MARTIN: About 15 per cent.
HAYNE J: See pages 44 and 45.
MR MARTIN: Yes, about 15 per cent was, in fact, freighted over from Melbourne. One of the advantages of the 1983 agreement was that those costs would no longer be incurred, because those products would now be manufactured by the appellant.
Your Honours, in paragraph (g) of our submissions on page 4, we again refer to the other advantages from AUF: the higher earnings, item (3); protection for the Pauls brand and protection for national contracts I have already referred to. Significantly in item 4, and I will come to this in the terms of the agreement, the benefit of continuing commercial co-operation. Item 5, the maintenance of its participation in the Western Australia market and significantly, in item 6, the preservation of the Pauls name and brand. Could I just take your Honours to two evidentiary references for the significance of that aspect. Could I go first to page 246 in volume 1, where, at a meeting of the directors of the AUF partnership, just after the transaction, at line D on page 246, the minutes record:
Congratulations were again expressed to the General Manager by the board in the achievement of success in this matter and in preserving the name "Pauls" in Western Australia.
And then at page 355 in volume 2, going from the minutes of the board of the directors of AUF at a time when they were considering the transaction back in 1981, between D and E the minutes record:
The view was expressed that the firm should be careful in coming to any decision which might result in withdrawing the Pauls brand from Western Australia.
The Chairman expressed some concern against the firm withdrawing from any marketing areas; it has been proven in the past that the cost of possible re-entry could be excessively expensive, or prohibitive.
And the significance - - -
GLEESON CJ: It would not just be a question of re-entry that we are concerned with. The consequence of this agreement is, is it not, that if a partnership bought the business of Streets, they could not market Streets ice-cream in Western Australia?
MR MARTIN: Yes. Now, the point, though, that I am seeking to make here is that the commercial incentive for an arrangement of this kind from AUF was that in the event of re-entry into the Western Australian market as a manufacturer, it would not have to bear all the expenses of re-creating the market for the Pauls brand because that brand would have been kept alive by the arrangement which was being entered into.
Now, in answer to your Honour the Chief Justice's question, what our proposition, of course, is, is that the nature of the arrangement entered into in 1983 and the degree of co-operation between the parties, which was at its core would make it destructive of that arrangement for one party to be actively undermining the other party's market in Western Australia by marketing another brand such as Streets.
Now, your Honours, this may be an appropriate time to move to the agreement itself.
GUMMOW J: Just before you do that, Mr Martin, is there anything in the papers which gives any specificity as to the nature of this threat which provoked all this litigation?
MR MARTIN: No.
GUMMOW J: What it is now proposed to do?
MR MARTIN: No, there is nothing in the papers to that effect, your Honour.
The agreement commences at page 169 of volume 1. Could I go to recital A on that page, where the business, to pick up your Honour the Chief Justice's point, is described to include "ice cream and frozen confections". Now, of some significance is the fact that the defined term, "the ice cream business", is not defined by reference to brands. That is of significance when we come to Article VII. So that, it is not defined by reference to Peters and Pauls brands, but it is the ice-cream business of the partnership.
Can I move then to recital F on page 170 which refers to AUF wishing:
to retire from direct engagement in the ice cream business in Western Australia -
Now, of course, we say that that reflects the parties' acknowledgment that AUF was continuing an indirect engagement in the ice-cream business. Our opponents in their submissions put against us the proposition that this may be explicable by the fact that part of the consideration for the transaction took the form of the issue of shares in the appellant to the respondent. But the fact of it is that at the time the agreement was signed, the very same time the agreement was signed, the respondent entered into an option to sell those shares - and reference to that is at page 236, line B, and 455, line D - and, in fact, the shares were sold within three months of the transaction going ahead, and that is an agreed fact at page 62, B. So there was no obligation to maintain the shareholding. It was simply a convenient way of financing the transaction. So, in our submission, there is nothing in the proposition that this is a reference to shareholding.
Article I deals with the sale of realty. Article II on page 171 deals with the sale of other assets, and significant amongst them, your Honours, is paragraph (c) on page 172, which is:
The right to use in Western Australia . . . the brand name "Pauls" and all trade marks, names -
et cetera -
and upon terms to be mutually agreed the right to use in Western Australia any other trade mark which shall be incorporated in or associated with the name "Pauls" -
So it was the existing marks plus any new marks developed by the partnership in respect to new product. And then, significantly, at paragraph (e) is reference to:
The goodwill of the ice cream business of AUF in Western Australia.
Your Honours, the significance of that is that when we come to the expression "the consideration" in paragraph 2.2, at the very bottom of that page we see that the right to use the name "Pauls" and the goodwill have been bracketed together for the purposes of the allocation of consideration. That, with respect, reflects the commercial reality because without the right to use the name "Pauls", in essence, there would have been no goodwill in this business because the goodwill all reposed with consumers identifying with Pauls product. So that the commercial reality of the relationship between the right to use the name and the goodwill of the business was, in fact, recognised by the parties in the terms of their agreement.
I need move now, your Honours, to Article V, which commences on page 180. By 5.1 it is provided that the obligations imposed by the clause extend to the successes in business of the AUF partnership, and that has, in fact, come to pass. In 5.2 - - -
GUMMOW J: I do not understand that.
MR MARTIN: There is a purported binding of future proprietors of the Pauls brand.
GUMMOW J: All right. That cannot be effective, can it?
MR MARTIN: Probably not, your Honour, but the fact of it is that the subsequent proprietors have acknowledged themselves bound by this agreement and treat themselves as bound. No issue has been taken in the case arising from the change in proprietorship.
GUMMOW J: Subsequent proprietors being who?
MR MARTIN: QUF has sold its interest to the second respondent.
GUMMOW J: Yes.
MR MARTIN: So there has been one change in proprietorship at that level. There have also been changes in the ownership of those two companies so that the ownership of the shares of the two partners became common.
GLEESON CJ: We are not interested in that, but I think we are being asked how the agreement comes to be binding upon the second respondent.
MR MARTIN: By the second respondent's adoption of the obligations.
GLEESON CJ: What is that? In what, for consideration?
MR MARTIN: Consideration being receipt of the royalty payments, for example. So that it has taken the benefit of the agreement.
GLEESON CJ: So there has been a novation of the agreement, has there?
MR MARTIN: Probably, your Honour. As I say, that has not been an issue in the case.
CALLINAN J: What has happened to QUF?
MR MARTIN: I am not sure, your Honour, but it sold its interest to the second respondent.
CALLINAN J: I see. It has been taken over, I think, QUF?
MR MARTIN: Yes, indeed. Both of the second respondents have been taken over originally by H.C. Sleigh and now by Nestlé. Your Honours, 5.2 - - -
GUMMOW J: These new proprietors want to get back in?
MR MARTIN: They want to, we say, derogate from their grant.
GUMMOW J: Yes, quite, but they want to get back in. You keep talking about commerciality. They want to get back in? Nestlé Ice-cream or whoever it might be, I suppose.
MR MARTIN: Yes, or whatever.
GUMMOW J: Not Pauls.
MR MARTIN: They accept that the exclusive arrangement whereby we have Pauls would preclude them from marketing under the Pauls brand in Western Australia. But they want to, at the same time, take the benefit of our minimum royalty obligation and undercut our market.
CALLINAN J: Mr Martin, does Article 3.10 on page 178 add anything?
MR MARTIN: All it did, your Honour, was achieve that part of the transaction which involved the transfer of the assets.
CALLINAN J: Which included the right to use the name.
MR MARTIN: The right to use the name, in our submission, is governed by Article V and the licence - - -
CALLINAN J: But you say that the use of the name is the only aspect of the goodwill.
MR MARTIN: The most material aspect of the goodwill. I could not say the only aspect, but certainly the most material aspect in the sense that there is no evidence to the effect that relationships with retailers, for example, was a significant aspect of the goodwill. In our submission, it is really brand recognition in the retail marketplace that was the real goodwill for Pauls brand.
Your Honours, in relation to the entry of - take Nestlé, for example - the point we make, of course, is that if Nestlé were to come in in its own right without using the AUF partnership there would be nothing to prevent it from doing so under the covenant. The only thing that bites is its use of the AUF partners to compete against us. I have developed that in the context of Article VII.
Your Honours, at 5.2 the licence is in respect of the existing marks set out at the date hereof. They are set out in the fifth schedule. I need not take your Honours to it. It was to be granted by reference to a "pro-forma User Agreement" that I will take your Honours to in due course.
GUMMOW J: Now, that phrase "sole and exclusive" would exclude the licensor, would it not?
MR MARTIN: Yes. That is common ground, your Honour. At 5.3 the period of the initial licence is expressed to be until "31st December, 1997" which, because this transaction was consummated in March of 1983 is a period of just under 15 years.
GLEESON CJ: Just before you depart from that page, the point that you made a moment ago about Nestlé in the context of 5.1 goes further, does it not? There would be nothing, would there, to stop the incorporation of a new company which was not a member of the partnership and that new company going into business in Western Australia marketing frozen confections under a brand other than Pauls?
MR MARTIN: Nothing at all, your Honour. This turns on paragraph 7.1(d). There is a covenant that limits the parties to this agreement - - -
GUMMOW J: Permitting "any subsidiary or related".
MR MARTIN: Permitting "any subsidiary or related company". Now, of course, if one goes upstream from those entities, they have no capacity to control what their parent does. They would have no capacity to control what another subsidiary of their parent would do and they would not be in contravention of the prohibition upon permitting. What I am saying, ineloquently, is there is no positive obligation to restrain any related company.
GLEESON CJ: Petersville used to be called Petersville Sleigh, did it not?
MR MARTIN: Yes, that was after the takeover by H.C. Sleigh.
GLEESON CJ: They used to manufacture frozen peas and things like that, did they not?
MR MARTIN: Yes, and, indeed, so did Peters and Pauls, but this agreement was essentially limited to the ice-cream business by which I mean ice-cream and ice confection.
GLEESON CJ: The first case that was ever conducted in the Trade Practices Tribunal was a case between the Trade Practices Commission and the manufacturers of frozen vegetables, and I am sure a Petersville company was one of the parties to that litigation.
MR MARTIN: Yes. Your Honour, one of the commercial advantages of course is that because you have freezer trucks running round distributing product, it makes sense to accommodate the delivery of frozen foods with the delivery of frozen ice-cream and other confections from an economic sense. So the businesses are related but distinct.
GLEESON CJ: But it is certainly not fanciful to think that there could be a parent company of the ice-cream manufacturing company that was engaged, for example, in the manufacture of Copper Kettle frozen peas. If that company had decided to go into business in Western Australia marketing not only frozen peas but also paddle-pops, there would not have been anything to stop it in this agreement.
MR MARTIN: Quite, your Honour, that is our submission. That is a point not appreciated by the courts below, with respect. I will take your Honours to that in due course.
I was working through Article V. If we could go then to Article 5.4, which is the royalty provision. The provision is in respect of 2.5 per cent of the value of net sales by Peters of licensed products. Interestingly, at the bottom of that page that includes:
any ice cream products . . . sold by PWA to G.J. Coles . . . under any house brand -
that is, whether it was derived from the Pauls brand or not. So the royalty attaches to things other than the Pauls product. In paragraph 5.5 provision is made for transfer pricing to a related company to prevent that. The significance of it is simply that we say that there are other provisions of Article VII that simply mirror that in terms of the covenant.
Then 5.6 is significant because it imposes a minimum royalty requirement of $150,000, but through the rest of that clause that was effectively indexed by reference to paragraph (b) which provides that the royalty is whichever is the greater of $150,000 or 21/2 per cent of the value of certain quantities of product. So that as the value of price of those quantities of product increased, then the minimum royalty obligation similarly increased. The rest of that clause makes provision for the circumstance in which that product is not sold. If the total quantities of that product are not sold by Peters, you then apply a notional price. So the royalty obligation was indexed and kept up to date through that means.
Could I next take your Honours to clause 5.9 which provides that:
During the period of the grant PWA shall use its best endeavours to maintain and expand markets for products under some one or more of the Pauls marks.
That is a rather curiously expressed obligation, but one can see why it would be expressed in those terms because of course these parties would have contemplated that over the course of 15 years decisions by the AUF partnership would be made to delete a product line, and so it would be inconsistent with the objective of achieving a national marketing strategy to lock PWA into an obligation to promote all of the products that were being promoted in 1983. Now, "one or more" is a curious phrase. The trial judge took a view of the effect of that which, in our submission, is not commercially real. Our submission is that in the context of this agreement as a whole, clause 5.9 does create a more general obligation with respect to the promotion of the Pauls product. Of course, the minimum royalty obligation creates a strong commercial incentive for that course to be followed.
Significantly, your Honours, is clause 5.10, which provides that, in the event of unremedied default for a period of 30 days or more, the licensing arrangement terminates. The significance of that is that that bites on Article VII as well. So that once the licensing arrangement terminates, all the provisions of Article VII fall with it, including the covenant, the sharing of marketing information and the right to extended licences under the Peters names, to which I will take your Honours shortly. Could I just draw attention to the last words of clause 5.10 on page 184:
In the event of the conflict between any of the provisions of this Article V and the terms and conditions of the User Agreement, the provisions of this Article V shall prevail.
That again emphasises the significance of these ongoing licensing arrangements.
Clause 5.11 contains the options to extend for each of the three five-year periods. The first option was exercised and that period therefore expires in December 2002, but could I draw your Honours' attention to paragraph (d) on page 184A which provides that, upon renewal, clause 5.6 is to be reviewed and the minimum quantities are to be as agreed or as set by arbitration. Now, the "minimum quantities" are the quantities of product to which the minimum royalty obligation of 2.5 per cent attaches, so that in addition to the automatic indexation provided by using a basket of product, upon renewal of the term there was a review of the adequacy of that consideration for the ongoing arrangements.
Could I take your Honours then to Article VII. It is of some significance that it is headed "Future Arrangements" because it covers things other than what our opponents characterise as the restraint. Clause 7.1 contains a recital - - -
GUMMOW J: What about 5.12?
MR MARTIN: I should have drawn your Honour's attention to that. That is to cover a circumstance in which the Pauls brand - the Pauls proprietors - are themselves licensees and so they then covenant to obtain the proprietor of any of those marks to - - -
GUMMOW J: Who in fact owned these marks?
MR MARTIN: In almost all instances, it was the partnership. There may have been other exceptions, but this was to cover the contingency, I guess, of, for example, the partnership developing a product that was initiated in another country under licence into Australia. Then their obligation was to effect a sub-licence to Peters.
GUMMOW J: Were they registered marks?
MR MARTIN: Some of them were and some of them were not.
GUMMOW J: Is there any prohibition on assignment?
MR MARTIN: Yes.
GUMMOW J: Where is that?
MR MARTIN: That is in the user agreement. I will take your Honour to that in due course, if I might. If we go to Article VII, your Honours, the recital of course picks up the wording of section 51(2)(e) of the Act, and there is an inference that we would not challenge, that that is why it is there, in order to try and invoke the protection of that section. It is not, however, in our submission - - -
GLEESON CJ: What would be wrong with that?
MR MARTIN: Nothing, your Honour, except that we would accept the proposition that when one comes to the application of section 51(2)(e), one looks to substance rather than form and that by merely reciting - putting these words in an agreement you do not necessarily achieve the benefit of protection of the section. But we say there is nothing wrong with this recital in this context because the goodwill embraces, in this instance, the sources of goodwill which, in this instance, is the licensing arrangement. So we do not put the proposition that this mere recital achieves our objective under 51(2)(e).
Next, your Honours, it is of significance that the covenant is expressly made subject to the due performance by PWA of its obligations. Now, that is one of many factors that take this case outside the outright sale scenario for which our learned friends contend. In an outright sale scenario, the purchaser pays the money to the vendor and has no further or continuing obligations and gets immediately the benefit of the restraint. This covenant is expressly conditioned upon our continuing performance of all the obligations contained under this agreement and because it is co-extensive with the licensing arrangement, that includes the fact that upon 30 days unresolved breach, we lose the licences and the benefit of this covenant.
GUMMOW J: Why does that follow? Where does the termination clause say that?
MR MARTIN: It derives from the last words of 7.1, your Honour, at the top of page 189.
GUMMOW J: I see.
MR MARTIN: Because the covenant itself is expressed to only endure "during the period of the licensing arrangements".
GUMMOW J: Yes, thank you.
MR MARTIN: It is also expressly subjected to due performance of our obligations under the agreement. The first limb of the covenant is a prohibition upon sale of ice-cream or frozen confections manufactured or distributed by the partners. Your Honours, there is a word missing from the second paragraph at line 4. The word is "where" - the third word in that paragraph should be "where". Again, courts below have made something of this clause. We make a number of points about it.
First, it is geographically restricted to Western Australia, so that it is only if the product ends up in Western Australia that the clause operates, and secondly, without a clause such as this, the covenant contained in paragraph (a) would be utterly ineffective because one could simply transfer product to an intermediary and thus evade the primary obligation.
GUMMOW J: What is the relationship between 7.1(a) and 5.2? In other words, is not 5.2 pregnant with the negative which is then expressed in 7.1(a)?
MR MARTIN: Yes, your Honour, we would accept that. Paragraph (c) - - -
GUMMOW J: Well, wait a minute, 5.2 is talking about Pauls mark - - -
MR MARTIN: Yes, that is the Pauls marks. And 7.1(a) - - -
GUMMOW J: Is wider.
MR MARTIN: Is wider. Now, so is 7.2 and 7.3, to which I will take your Honours shortly. Clause (c) prohibits the carrying on in Western Australia of business as manufacturer and distributor of ice-cream, et cetera, and in (d), we have already mentioned - - -
GLEESON CJ: I have a problem with (b). I understand how the concept of permission can operate in relation to the conduct of a subsidiary. Just at the moment I do not understand how the concept of permission can operate in relation to a related company.
MR MARTIN: It would operate in a circumstance in which there was a power to control.
GLEESON CJ: That is my point. There is a pretty obvious loophole that could be exploited fairly readily here. I do not know what the legal significance of that is, but you cannot stop a parent company or a subsidiary of a parent company doing something, as you have pointed out earlier. So, if the parent company, if there was one, of Petersville Ltd decided it was in its interests to start marketing Streets ice-cream in Western Australia, there being on the face of it no capacity in Petersville Ltd to stop its parent company doing that, how would there be a contravention of 7.1(d)?
MR MARTIN: There would, however, be a contravention of other clauses if the product was manufactured in the plants owned by the partners, so that the price of exercising the loophole, to which your Honour refers, would be the need to either set up new plant or to transfer that plant from one of the existing partners to the new entity because, as soon as product is manufactured by one of the partners, then either clause (a) or (b) would operate to prohibit it. So the price of the loophole would be the - - -
GLEESON CJ: But just a minute. I thought you told us that because of the distances involved, it was not a realistic possibility to manufacture these products outside Western Australia and the plant was sold.
MR MARTIN: It was not in 1983.
GLEESON CJ: But the plant in Western Australia was sold in 1983. Therefore, on the face of it there would have to be new plant.
MR MARTIN: Yes.
GLEESON CJ: Or, suppose, for example, that in 1986 the business of Streets was taken over. This would cause a problem if the business of Streets was taken over by Petersville Ltd, but it would not cause a problem if the business was taken over by a related company provided it was not a related company that Petersville Ltd could control.
MR MARTIN: Yes, that is, in our submission, the effect of the clause. Now, it may be that it falls short of exactly the protection one might have expected, but that is, in our submission, the clear effect of the language. To take another example, if Streets was taken over by the parent company of each of these two entities, then the clause just would not bite.
CALLINAN J: Well, 7.1(c) would not have any operation. I am not too sure what it means, but - - -
MR MARTIN: It only prohibits these two parties, that is the two respondents, from carrying on business in Western Australia. If another subsidiary of their parent were to carry on business, it would not infringe that clause.
GLEESON CJ: Well, I do not imagine the law about restraint of trade requires that you seek perfection in mechanisms that you set up to protect the goodwill, if that is a fair characterisation of what this is.
MR MARTIN: Your Honour, what we submit is that because the other obligations imposed by this clause, to which I will shortly come, 7.2 and 7.3, are imposed on these respondents and would not extend to a parent, for example, who is engaged in another business, it is no coincidence that 7.1(d) itself bites upon these respondents. In other words, there is identity of operation of both the covenant relating to activities in the Western Australian market and the obligations with respect to the provision of marketing information and the extension of licensing. That occurs both in the identity of the parties, subject to the obligations, and in the time for which they are subjected to the obligations, and in the geographical area in respect of which the obligations bite, namely, product in the West Australian market.
Now, could I come to paragraph 7.2, after observing that, again, it is very important that the covenant in 7.1 only exists for the length of the licensing arrangements. We do not say it is decisive, but it is very significant. In 7.2, there is an obligation upon each of the respondents to:
during a like period -
that is, the period of the licensing arrangements -
provide access to manufacturing know-how, product development and technical and marketing information in relation to products of the ice cream business then being marketed by AUF -
so that this is an obligation that bites upon changes in the business and, in our submission, it is an obligation of profound significance. It is difficult to contemplate anything more vital to a commercial entity engaged in this business than:
manufacturing know-how, product development and technical and marketing information in relation to products - - -
GLEESON CJ: So this means that if Petersville Ltd, in 1986 commenced to manufacture frozen yoghurt for the first time, Peters (Western Australia) can say, "How do you make that?".
MR MARTIN: Yes, and, "How are you proposing to market it, and how are you proposing to distribute it?". And at our expense, they have to provide us with that information. One would imagine that the next step would be, if we liked the product, we would then negotiate with them in respect of a licensing arrangement. Of course, in respect of Peters brands, by clause 7.3, that next step is provided by the agreement itself because by clause 7.3, we are entitled as a right to treat any extension of Peters products as licensed product under this agreement.
GUMMOW J: But not existing ones.
MR MARTIN: Not existing ones, because they were already covered.
GUMMOW J: Why is that? Why were they already covered?
GLEESON CJ: You made the existing ones, did you not, in Western Australia?
MR MARTIN: We made the existing ones. We had licences with the proprietors originally, Peters America, things of that sort.
CALLINAN J: They are subject to the indexed 21/2 per cent, are they not?
MR MARTIN: Yes, and so they would - - -
CALLINAN J: Whereas this could be at a different rate?
MR MARTIN: Well, I do not think so, your Honour. It is treated as licensed product for the purpose of Article V and, therefore, we would have to pay 21/2 per cent on it.
CALLINAN J: What about under 7.2?
MR MARTIN: Under 7.2 it would be up to negotiation. In relation to Peters brand, we have a right to extension. In relation to Pauls brand, the effect of Article V is that we get the right again to licence new Pauls products from time to time and 7.2 means that we get access to the vital information in relation to any product outside those two brands.
GUMMOW J: But am I right in thinking that the ultimate ownership of Peters was outside all these parties, above all these parties?
MR MARTIN: Of Peters (WA)?
GUMMOW J: Yes. Peters marks.
MR MARTIN: Peters marks, yes. Peters marks was offshore.
GUMMOW J: All of you had licences?
MR MARTIN: Yes.
GUMMOW J: So 7.3 really would not work unless you were able to draw in the head licensor in some way? It could be a breach, because the licence has presumably divided the spectrum up geographically, put walls between them.
MR MARTIN: Unless there were new products being developed by the Australian licensees, the AUF partnership, outside the terms of the head licence from America and which they could then sub-licence to us without the consent of the head licensor. But in any event we would submit in that circumstance 7.3 would carry with it an implicit obligation to obtain the right to sub-licence - - -
GUMMOW J: Or to seek it.
MR MARTIN: Or to seek it at least. So, your Honours, what we say is that when regard is had to 7.2 and 7.3, there was a very profound degree of integration between these two entities and these were the mechanisms by which the parties achieved what I took your Honours to in opening, namely, the commonality of operation throughout Australia of the two brands and product development.
HAYNE J: I am sorry, can I just take you back a moment, Mr Martin. I am lagging a furlong behind the pace. 7.3 - what is the significance of the words "develop or acquire advertising or promotions relating to products"?
MR MARTIN: The significance of that, your Honour, is to achieve what we saw earlier in the documents, namely, the amortisation of new product development and marketing costs across Australia.
HAYNE J: Yes, I understand that, but what is not at the moment self-evident to me from 7.3 is that if a wholly new product is developed, even developed within Australia by AUF, that 7.3 bites.
MR MARTIN: In our respectful submission, it would if it is under the name Peters and we had no prior right to it.
HAYNE J: Can you point me to the words that would have that effect?
MR MARTIN: The last three lines, your Honour:
if any such products were not previously marketed by PWA then such products upon being marketed by PWA shall be considered "licensed products" - - -
HAYNE J: Yes, "such products" takes you back into the early part of 7.3, "such products", at least on one view might be products in respect of which there has been development or acquisition of advertising or promotions.
MR MARTIN: Yes.
HAYNE J: Now, it may be that nothing turns on this - I do not know - but it is not self-evident to me, at the moment at least, that 7.3 bites on the development of a product as distinct from the development of advertising or promotions, whatever that may mean.
MR MARTIN: Yes. In our submission, the wording is inelegant, but when it refers, in the last sentence, to "products" not "being" previously "marketed by PWA", and then in the first portion refers to the future development of, admittedly, advertising or promotions, then the requirement that it not - be products previously marketed by PWA, PWA carries with it the necessary conclusion that it is a new product, at least in PWA terms.
GLEESON CJ: But the opening words are very awkward, are they not? I am just not sure how they should be punctuated.
MR MARTIN: Yes.
GLEESON CJ: Could you read that out as you would have us understand it?
MR MARTIN: It is certainly conditioned upon the development or acquisition of "advertising or promotions" - that is the first limb. The second limb would be a product "sold under the said trade names" - that is Pauls:
or like product under the brand name "Peters", then at the request of PWA and upon such reasonable terms and conditions . . . PWA may market such products -
Now, the clause is triggered - - -
HAYNE J: Who "may use such advertising or promotion therewith".
MR MARTIN: Yes, "and may use such advertising or promotion". Now, it is the consent to the marketing of the product that is significant. Then in the event that it was not a product previously marketed by Peters, royalty is payable. Let us take, for example, an existing Peters brand, the Drumstick, that Peters WA had the right to manufacture and sell prior to this. If AUF develops a new promotion, a new advertising strategy for that product, we are entitled to use it on terms to be agreed - - -
GLEESON CJ: This may reflect the commercial circumstance that the real value of these products lies in the marketing expenditure and not what is sometimes called the active ingredients.
MR MARTIN: I think that is a very fair observation, your Honour, but I probably should not say too much on behalf of my client on the subject.
HAYNE J: Chocolate-type substances and dairy-type substances.
CALLINAN J: Mr Martin, could you put a comma after "develop", "If AUF shall develop, or acquire advertising or promotions relating to products" - - -
MR MARTIN: Yes, your Honour, that would be an alternative way of making - that would achieve the result that I would think would derive - that the parties intended.
CALLINAN J: So it could be either, it could be the development of a new product or a new form of promotion.
MR MARTIN: Promotion, yes, your Honour, I would respectfully embrace that proposition. Your Honours, this is a very profound degree of commercial co-operation. It is not peripheral, as the courts below thought, it is profound, and that is of great significance to our argument.
CALLINAN J: It might depend on how you dissect the agreement. I mean, you do not know how the consideration for the realty is fixed; you do not know how the various components of value were fixed; and it is very difficult to say that - and, perhaps, they might have received a great deal more in value for some aspects in consideration of foregoing something in respect of others. Whatever happens, the respondents are going to be left with the price that was paid to them for the land, for example.
MR MARTIN: Your Honours, there was material before the trial judge - and I do not know if it has found its way into the appeal books - relating to the valuation of those assets and the like.
CALLINAN J: Because I see anything that was depreciable went in at depreciated values for taxation purposes, which may or may not have been the market value.
MR MARTIN: Yes. There is reference in the materials to the booking of a profit of some $1.4 million on the transaction, but that would obviously be derived to book values.
CALLINAN J: You do not know. You just cannot say. That is the point, is it not?
MR MARTIN: Yes.
GLEESON CJ: I am sure in due course you will come to this, but I had in the back of my mind a principle in this area that when you are dealing with parties who are big enough and ugly enough to look after themselves, by and large you let them decide what is reasonable in their own interests.
MR MARTIN: Yes, certainly that is a proposition that the cases embrace. Our proposition, of course, is that you do not get to the reasonableness inquiry with a covenant of this kind, because it is not of a kind that invokes the operation of the doctrine.
HAYNE J: Just as to the question of division of the consideration, is it appropriate to notice that the document was stamped and is it wrong to assume that the Commissioner of State Taxation Western Australia might have had a slight interest in the way in which the realty was valued for that purpose? But that is an unduly cynical approach.
MR MARTIN: Yes. Well, your Honour, the parties expressly allocated the consideration and, as you observe, the Commissioner of Stamp Duties would undoubtedly have had an interest in that subject matter and he appears to have accepted their figures.
GLEESON CJ: This case was decided against you, not on the basis that this was against the public interest, but that this agreement went beyond what was reasonably necessary in the interests of the parties.
MR MARTIN: Two things, your Honour: our submission that it was not, in fact, within the scope of the doctrine was rejected; and then it was found that it went beyond what was reasonable as between the parties.
GLEESON CJ: But not on a public interest basis?
MR MARTIN: And on public interest as well.
GLEESON CJ: And as well.
MR MARTIN: On public interest as well.
KIRBY J: The Full Court said that they did not have to come to the public interest, did they not?
MR MARTIN: Yes, but his Honour the trial judge, having expressed the same observation, found against us on that subject as well.
HAYNE J: Just while we are at that level, there is a series of issues under the Trade Practices Act which would await trial, is there not?
MR MARTIN: Yes, that is correct, your Honour. That is the significance of the section 51(2)(e) point. If we are successful on that point, the Part IV issues go away. If we are unsuccessful, they remain to be adjudicated.
KIRBY J: Does the jurisprudence in this area uphold the big and ugly criteria?
MR MARTIN: It does.
KIRBY J: That is to say that you look at the size of the parties and if they are big and well advised and so on, that courts do not substitute their opinion for what is reasonable.
MR MARTIN: My recollection of them is that they talk more in terms of inequality of bargaining power, so if there is no apparent inequality of bargaining power, then, what the parties themselves agree is a prima facie reliable guide for the court, but not determinative.
KIRBY J: There are concurrent findings, both of the trial judge and the Full Court here, that it was unreasonable as between the parties. You have to show an error in that.
MR MARTIN: That is not part of our notice of appeal, but your Honours will see that those conclusions are based upon the same flawed reasoning as led those courts to conclude that we were within the scope of the doctrine.
KIRBY J: But in the Full Court's reasoning they take it in steps: the first is, was it in the doctrine; second, is it unreasonable; third, is it against the public interest.
MR MARTIN: As did his Honour the trial judge.
KIRBY J: And therefore they take step one and step two. We are concerned with the suggestion we should correct the Full Court - at least, the appeal is from the Full Court's judgment.
MR MARTIN: The appeal only concerns step one, your Honour: whether the doctrine applies at all.
KIRBY J: What happens if you succeed, then, in relation to step three, which, at least in my mind, is a viable step; that is to say, the public interest?
MR MARTIN: That is not presently raised by the notice of appeal, your Honour.
KIRBY J: So what would happen to that issue, then? Assume you will succeed on point 1.
MR MARTIN: That issue would not arise for consideration because if we succeed on point 1 that issue falls away, because the doctrine has no application.
GUMMOW J: That is ground (a) on the - - -
MR MARTIN: Yes, there is no presumed illegality, so the question of reasonableness inter partes, reasonableness in the public interest, simply does not arise.
KIRBY J: But is that relevant, then, to giving content to step one?
MR MARTIN: It may be, your Honour, but it is - in our submission, the fact that those decisions have made below ought not be a consideration that motivates this Court in determining whether or not step one applies, because, of course, if our argument that step one is to be resolved in our favour is upheld, then all of those determinations become utterly irrelevant and will also have been infected by the same flawed reasoning - - -
KIRBY J: But was not the theory behind step one in the first place, the theory of the common law, a theory concerned with protecting the public interest and the conviction that competition was in the public interest and that therefore the common law would have a public policy inclination towards it?
MR MARTIN: It is, your Honour. And that is why there is, undoubtedly, some commonality - not coincidence, but commonality - of issues between what we have been calling step one and step three, and probably step two as well.
GUMMOW J: You are pressing step two, are you not? I am looking for ground (b) on page 529.
MR MARTIN: Your Honour, not in the sense that we suggest there needs be a detailed consideration of the relative benefits as between the various parties. Ground (b) is really a different semantic means of expressing ground (a), and it caters for the observation in some of the cases that you can achieve the outcome for which we contend one of two different doctrinal ways. One is by saying that this agreement is of a kind to which the doctrine does not apply - - -
GLEESON CJ: I do not know what you mean by that expression. The doctrine is there and the agreement is there.
MR MARTIN: Yes.
GLEESON CJ: You measure them up against one another.
MR MARTIN: Yes. The doctrine simply does not apply to the agreement.
GLEESON CJ: What do you mean, "does not apply"? Then does not have a result?
MR MARTIN: It does not produce the consequence that the agreement is presumed to be invalid unless we can satisfy the Court that it is reasonable inter partes and in the public interest, because it is not - - -
HAYNE J: It seems to me to be an artificial segmentation of the issues. What you say as, does the agreement "bite", depends, as I would understand you, on consideration of such questions as whether there was a sufficient mutuality of obligation and benefit.
MR MARTIN: It really turns more, your Honour, upon whether or not the covenant in question is nothing more than an incident of a broader ongoing commercial relationship. It does not, for example, turn upon the sorts of considerations that would be ventilated if reasonableness inter partes were to be determinative, because reasonableness inter partes, for example, involves a weighing of the competing considerations; whether the price was high enough to sustain the ambit of the covenant. That is not a consideration that is germane to the issues that we raise. We put the proposition - - -
HAYNE J: It seems to put the courts in a very difficult position of making judgments of a kind for which courts are not self-evidently well suited.
MR MARTIN: Your Honour, we put the proposition that there has to be a boundary drawn around what I might call presumptive illegality, presumed illegality absent justification, because it simply cannot apply to every covenant that has the effect of restraining trade, because, as the cases observe, every agreement has that effect in some way or another. So that the courts have to set a boundary to identify those cases in respect of which the party who seeks the benefit of the covenant must discharge the burden of satisfying the court that it is reasonable inter partes and in the public interest.
So that, in our submission, is what this case is about, that is, defining the boundary to that presumption of illegality and, therefore, the invocation of the burden of justification. We put that this is a case in which it should have been concluded that there was no burden of justification because this covenant is nothing more than an incident of a much broader commercial relationship and should have been seen as such.
GLEESON CJ: But do I understand you additionally to say that if you get into the area of seeking to demonstrate that this agreement was reasonably necessary in the interests of the parties, you at least take an important step in that direction by identifying the parties and pointing out that they have agreed to this in circumstances where there is no inequality of bargaining power?
MR MARTIN: Yes, certainly, your Honour. Could I go to the last part of the agreement to which I would wish to take the Court, and that is at page 208. That is the pro forma user agreement and it contains what I might call the usual clauses relating to use of the mark, and so forth, the protection of the integrity of the mark. Could I just draw your Honours' attention to paragraph 12 on page 211.
HAYNE J: Just before you do, at 208 there is a reference to recital B, "desires to manufacture, process and sell Confectionery and Ices", which seems to inject a further concept.
MR MARTIN: Yes, although that would still be within the scope of what we would apprehend to be "the ice-cream business" as defined in the agreement.
GLEESON CJ: It may not be relevant, but is there any evidence as to who proffered this agreement?
MR MARTIN: The moving party was AUF, and that is paragraphs 9(d) and (e) of our submissions, the evidentiary references are there.
KIRBY J: I am still not completely clear in my mind about what was called the third step, the public interest step, and how that comes into the first step. I will have to get clear what the jurisprudence requires, but at least, arguably, one could say that there was a public interest in this agreement in that it rescued a market in a remote part of Australia from inefficiencies, jobs, and the supply of a product which could not readily be secured there otherwise. What I am saying is, I am not at all clear in my own mind that evidentially there was not support for a public interest notion.
MR MARTIN: Yes, can I just say in response to that, your Honours, that it seems to us that the reason we lost at both step two and step three was the proposition that the covenant went beyond what was necessary to protect the marks. Because it extended into marks other than Peters and Pauls, it was not reasonable as between the parties and it was not in the public interest. Now, the proposition we are putting fundamentally is that the covenant, properly characterised, was nothing more than a normal incident of this profound ongoing commercial relationship between these two parties, one consequence of which, and the consequence raised by the notice of appeal, is that the court below should have held that the second and third questions simply did not arise. But another consequence of acceptance of that proposition, it would seem to us, is that the second and third tests would necessarily have been determined in our favour if the doctrine does, in fact, apply, so the presumed illegality does apply.
KIRBY J: Does the case law, to use Justice Hayne's description, require the segmented steps, given that there seems to be an overlap at least in the concepts, as I understand them, between one and three?
MR MARTIN: In our submission, it does, your Honour, because of the widespread acknowledgment that there is a whole raft of agreements which have the practical effect of restraining trade. Take, for example, the partnership agreement - and this was said by Chief Justice Begbie in British Columbia late last century - every partnership agreement restrains trade because whilst you are a partner in that agreement, you cannot do certain things.
HAYNE J: But this grew out of, or at least was reflected in the solace agreement cases, was it not, and whether the oil company could put its tie into the transaction documents relating to land?
MR MARTIN: Yes. If I could try and trace the development historically: there were a number of categories in which the doctrine was traditionally applied, including the outright sale of the business and the employer/employee situation. As is observed in Esso, those two categories of case account for almost all the reported decisions prior to Esso. There were only some 30 or 40 cases that fell outside those categories. But, of course, the courts acknowledged - and we do not quarrel with this - it was not legitimate to argue that the doctrine was constrained to those two categories. So the question, which occupied minds in Esso which we say necessarily arose also, is once you go outside those recognised categories, what are the boundaries of presumed illegality. What are the circumstances in which the parties have to justify their agreement because it cannot be every agreement, otherwise every partnership would be presumed illegal, absent justification?
So then the task that we pose is the definition of just what it is that invokes that notion of presumed illegality. What we put is that what it is not, at least, is a case such as this, where the covenant is nothing more than a normal incident of an ongoing relationship and is coincident with that relationship because it terminates upon the termination of the relationship.
GLEESON CJ: You cannot understand the meaning of the expression "restraint of trade" by going to a dictionary and looking up the word "restrain" and looking up the word "trade"?
MR MARTIN: Certainly not. So what this case is about - and the problem was posed by Esso. Three competing tests were advanced in Esso. All have been considered in this Court, but none definitively adopted.
KIRBY J: But the whole concept of the approach to restraint of trade developed out of, I suppose, a philosophy of the common law that competition is a good thing - - -
MR MARTIN: Yes.
KIRBY J: - - - and has to operate in wildly different marketing conditions today than existed at the time that doctrine was enunciated.
MR MARTIN: Indeed, and that is why, your Honours, we put - - -
KIRBY J: Not the least of which is the global feature of markets today.
MR MARTIN: Indeed, and, your Honours, one of the tests enunciated in Esso, the Lord Wilberforce test, is paraphrased "the trading society" est. It focuses upon emergence of new forms of business arrangement and would suggest that if those forms of business arrangement are accepted as part of an integral trading society, then the doctrine has no application. There is no presumed illegality. Our submission is there are some problems with that and I will come to that in due course. We say the same result can be achieved a better way.
GLEESON CJ: How are you going in terms of time, Mr Martin?
MR MARTIN: Rather slower than I expected, your Honour.
GLEESON CJ: We have allowed a day for this case.
MR MARTIN: I would be relatively optimistic we can finish within the day. I may go a little past lunchtime but not much.
GLEESON CJ: All right.
KIRBY J: Why does one not start these cases with the Trade Practices Act, that normally where you have the statute that is spoken you start with the Act and then you go into the common law if you need to or if it is still relevant?
MR MARTIN: For a very pragmatic reason in this case, your Honour. If our learned friend's contention with respect to the common law is correct, then a very large piece of litigation about market structure and the like under Part IV is obviated.
KIRBY J: But I am talking about the theory of the law, that if the Parliament of the Commonwealth of Australia has spoken on a subject, normally you go to what the people's representative of Parliament has said rather than what a judge has said.
MR MARTIN: One of the problems with that approach in this case is that by section 4M of the Trade Practices Act the Parliament has expressly preserved the common law doctrine and we will come to the question of whether section 51(2)(e) itself mirrors the common law doctrine and the courts below said that it did.
GUMMOW J: It says:
This Act does not affect the operation of:
(a) the law relating to restraint of trade in so far as that law is capable of operating concurrently with this Act - - -
MR MARTIN: Yes, I am sorry, your Honour. That is a more correct way of putting it, but it does expressly acknowledge the co-existence of both the statutory regime - - -
KIRBY J: Well, my question still hangs over me. Excuse me for not knowing all this because in the Court of Appeal one did not tend to get these cases, but in terms of principle, I would have thought you go straight to the statute first and if there is anything left over then you fuss around in the common law. However, that is not the way this has developed.
MR MARTIN: It is not the way this case has developed. Our submission on that subject, your Honour, is that this Court, when defining the scope of the common law of Australia, can have regard to the fact that the statute exists and has a different ambit of operation and perhaps be - - -
KIRBY J: That is a large question raised by Cotogno whether the common law moulds itself to the statute, but anyway.
GLEESON CJ: It may be a lingering problem. It will only arise when you come to the end of your submissions, but it is not self-evident, as far as I am concerned, that you could make a decision about section 51(2)(e) isolated from other provisions of the Act. However, you might be able to persuade me if that is possible.
MR MARTIN: Yes, thank you, your Honour, for flagging that. Can I just complete reference to the agreement by going to the user agreement at page 211, drawing the Court's attention to paragraph 12, which is the exclusive user provision. Paragraph 13 is the provision I mentioned to your Honour Justice Hayne earlier, the prohibition against assignment, and significantly, paragraph 18 provides a mirror prohibition to that contained in Article VII because it provides that:
DURING the period of this Agreement the User -
that is, my client, is not to -
sell supply or distribute the Products outside the State of Western Australia or sell supply or distribute to any person anywhere the Products where -
they are to be sold outside Western Australia. So that mirrors the arrangement. We were to be the Western Australian manufacturing arm. We were not to manufacture product on their patch, nor were they to manufacture on our patch, and, in addition, there were these continuing arrangements.
GUMMOW J: Now, the Pauls marks appear in the fifth schedule.
MR MARTIN: That is correct, your Honour.
GUMMOW J: They are not just Pauls. Popsicle, I see, is one of them.
MR MARTIN: Whether that is Pauls - yes, that is right. The marks held by QUF seem to extend beyond Pauls. I stand corrected.
GUMMOW J: That is right. In a way, 5.2 is slightly misleading.
MR MARTIN: Yes.
GUMMOW J: It is not when you read it with the fifth schedule.
MR MARTIN: Yes. They were, I think, though I think it is non-controversial that these were products that were marketed as part of the Pauls business. They just did not have a Pauls name on the record.
GUMMOW J: Yes, the product would have both "Pauls" on it and "Popsicle" on it, probably.
MR MARTIN: Quite possibly.
GUMMOW J: Yes.
MR MARTIN: Your Honours, we have, I think, covered all the propositions we wish to advance from (g) through to (n) of paragraph 9, but I just wish to take your Honours to one or two other documents before I leave this topic and one of them is the document that commences at page 217, which is the submission to the Foreign Investment Review Board. Because of the ultimate ownership of my client, consent was required. It does record - - -
HAYNE J: This is put forward as a document, the truth of which is self-evident. It goes forward as evidence of the truth of its contents, does it not?
MR MARTIN: It goes forward as evidence of the intention of the parties at the time, there being no suggestion that, for example, the document was produced with litigation of this kind in mind.
HAYNE J: No, of course not.
MR MARTIN: Your Honours, can I just draw attention to the bottom of page 222, where there is again repetition of the structure of the market, the inadequacy of the existing factories; at the top of page 223 where the move of Peters to the new factory cannot be justified on current ice-cream turnover, and - - -
KIRBY J: What point does this go to? It sounds like public interest.
MR MARTIN: It goes to, again, the commercial reality of the agreement; the intent of the parties and the commercial reality of what your Honours see in the written word in the agreement. Again, I will take your Honours to the support for the breadth of that inquiry in due course. At page 223B, the transaction is spoken of as a "rationalisation" and, significantly, it refers to AUF having:
a continuing interest in the merged operation by way of the technical and marketing support provided for under the royalty arrangement.
At the bottom of that page there is reference to Streets entering the market. If I jump then to page 224 where the first proposition on that page is:
The proposal is a logical and sensible rationalisation of an industry . . . and is consistent with similar moves in the Eastern States -
and the first one mentioned is the "QUF - Petersville merger". Now, that is, of course, the formation of AUF. So, again, the parties were equating their transaction to what had occurred three years earlier. Then there is reference to the range of products and, for example, in the third paragraph:
some "Peters" products marketed by AUF in the Eastern States are not marketed in W.A.
The merger will make the upgrading of plant justifiable -
and then there is savings, item 6.4, through the merger will reduce unit prices. Could I jump to 225 where, again, at the bottom at 6.6 - - -
GLEESON CJ: Just a moment. Before you go past 6.2 on 224:
The full range of AUF products will be capable of being marketed in W.A. -
Does that mean will be capable of being marketed in WA by PWA?
MR MARTIN: Yes. So that, for example, some of the Peters products marketed by AUF were not then being marketed in WA. Clause 7.3 would enable that to occur and, for example, that 15 per cent of product that was being freighted from Preston to Perth would no longer have to take place.
Could I go please to the bottom of page 225 where again the transaction is described as "a merger" and the third-last sentence:
Currently some products sold by AUF under the "Peters" brand in all other states must be sold under the "Pauls" brand in Western Australia. This leads to significant additional marketing costs for some products. A merger with PWA would mean AUF could prepare co-ordinated Peters, Pauls national marketing campaigns which would reduce their marketing costs.
KIRBY J: Merging and merger are not strictly accurate words, are they?
MR MARTIN: Well, in a commercial sense, our submission is that they were; they were a fair description.
KIRBY J: But "merger" leaves the concept that you only have one, not two, whereas here you have at least the possibility of a subsequent divorce.
MR MARTIN: Yes, more correctly it was a temporary merger, temporary not in the short sense, but a 15-year merger.
KIRBY J: I imagine in these proposals the companies involved put the best foot forward.
MR MARTIN: Again, best foot forward, but the proposition for which we rely upon in this document is not the propositions that would have been motivating the parties to put before the Foreign Investment Review Board. Take, for example, the proposition in the first sentence at the top of page 226:
The proposal is viewed by both parties as being a merger of interests and it relies on the goodwill of both parties.
Now that is not something that would have impacted upon deliberations of the Foreign Investment Review Board, but it is, nevertheless, in our submission, an accurate description of what the parties contemplated they were doing in 1983.
CALLINAN J: In any event, these documents were put in by consent, were they not?
MR MARTIN: They were.
CALLINAN J: It may be accepted that all of the facts, perhaps as opposed to opinions, but perhaps even opinions - but that none of the facts stated in them are in issue, but we can accept them as facts.
MR MARTIN: Yes.
CALLINAN J: I did not appreciate it before that your client is an offshore company, is it not? Is that why it had to make application - - -
MR MARTIN: Yes, because of the ownership of its shares, it had a mixed ownership, but there was sufficient offshore holding to require approval.
CALLINAN J: But there is no reason why we should not accept any of the facts stated as true, in any document.
MR MARTIN: Well, that is our submission, your Honour. No witness was required to be called. All these documents were tendered by consent.
KIRBY J: That is as between the parties, but there is a third party here and that is the public interest.
MR MARTIN: Yes, your Honour, but we would say that even though - - -
KIRBY J: Not always protected by competitors.
MR MARTIN: Quite, your Honour, but whilst one might infer that this was putting the rosiest complexion on the transaction from a foreign investment point of view, as I was trying to point out earlier, that is not what we rely upon in this document, for we rely upon it as an accurate description of what was in the parties minds as to what they were doing, and they were entering into a relationship that relied on mutual goodwill.
GLEESON CJ: I take it that there was no attempt by the ACCC to intervene in this litigation?
MR MARTIN: No.
GLEESON CJ: How would a decision about the operation of section 51(2)(e), as between these parties, bind the ACCC in relation to proceedings under Part IV?
MR MARTIN: I do not believe it would, your Honour.
GLEESON CJ: Well then, what would be the utility of it?
MR MARTIN: The utility of it would be to prevent these two parties spending several months in court arguing about the application of Part IV inter se.
KIRBY J: Because they have to operate within the budget of the ACCC and I think, at least in academic literature, comment has been made by a former chairman, Professor Baxt, that it is the limits that are placed on them by that budget what they can do.
MR MARTIN: Yes, certainly. Now, again, before I leave 226 there is another echo of the 1980 arrangement. It said:
The proposal is in line with the merging of the interests of the "Peters" and "Pauls" brands in all other states.
So these parties plainly thought that is what they were doing.
Your Honours, we have set out the other matters in paragraph 9. I will not take your Honours to it in detail, but there is just one last document I would take your Honours to and it is at page 244. This is a letter from the chairman of Peters to the shareholders following announcement of the transaction. In the third paragraph, again the transaction is described as "the merging of the two operations". Then paragraph 4 is significant:
The acquisition will allow us to lock into AUF's national marketing framework and to share in their development of new products.
Then the second-last paragraph, Streets are coming in:
this acquisition will assist us to counter any impact on our ice cream business -
by remaining a strong competitor.
KIRBY J: These are to Australian shareholders as distinct from the overseas shareholders who were holding - - -
MR MARTIN: I do not know whether it was geographically restricted, your Honour.
CALLINAN J: Mr Martin, do we have the independent study in the documents that is referred to in the third paragraph?
MR MARTIN: No, I do not think that is in the materials, your Honour.
GUMMOW J: There is some reference in the papers, is there not, to some struggle for control of your company?
MR MARTIN: Yes, there was. This transaction was the subject of a rift at board level, which is documented in the papers. Two directors opposed it and indeed sought injunctions restraining my client from proceeding with the transaction. It was only after that was overcome that the transaction proceeded.
GUMMOW J: Is the identity of the ultimate overseas parent disclosed?
MR MARTIN: It was not a single overseas parent. There are diverse offshore interests. The combination of them added up to sufficient to invoke - - -
GUMMOW J: It was not an overseas multinational?
MR MARTIN: No, your Honour. Before going to the errors below, could I take the Court to a case which has actually been suggested to us by the Court. That is the case of Murray (Inspector of Taxes) v ICI [1967] 1 Ch. It does assist, in our respectful submission, in the characterisation of the events I have just been taking your Honours to. It was a tax case, but nevertheless the observations are of some pertinence. The relevant facts perhaps can be found at page 1042 where there is grant of licences including patent licences, and then at 1043 is the covenant not to trade within the relevant jurisdiction. There were licences being granted in a variety of European and other jurisdictions and they were coupled with a covenant. So it is a scenario very similar to the present. At page 1044 are the findings of the trial judge which were accepted for the purposes of the appeal where at line C his Honour Justice Cross observes:
Two points about the agreements merited special attention. First, the covenant in Article X, which could be called the "keep-out" covenants -
which is the equivalent of our Article VII -
were not confined to manufacturing or selling under the patents but extended to manufacturing or selling products of a terylene character whether made under the patents or not.
So we have exactly the same scenario as here, that is, the keep-out covenant is broader than the licensed product. His Honour goes on:
It was plainly essential for the licensees to have the protection of such a covenant.
GUMMOW J: That is the question, is it not?
MR MARTIN: Yes. That was the conclusion of his Honour on appeal. Lord Denning at page 1051 dealt with this issue and in the first paragraph on that page referred to different types of licences and identifying the nature of an exclusive licence. Then at line D he observes:
A "keep-out" covenant is a covenant which bolsters up an exclusive licence. It makes express that which would otherwise be implied. The licensor covenants expressly with the licensee that he will not enter on the domain which he has granted to the licensee. In the present case . . . somewhat wider . . . in area, time and products. But this makes no difference to the tax position.
GUMMOW J: Now, when he says "which would otherwise be implied", that is the Butt v McDonald idea, is it not, it is the Samuel Griffiths idea?
MR MARTIN: Yes. I think that is. I say that in a scenario in which you give a domain, extract a price which includes with it a minimum royalty, you would be, in Butt v McDonald terms, taking away the benefit that you had given by then going in and undercutting the market, derogating from your own grant.
CALLINAN J: It is in Martins Investment Trust too, and Secured Income is the other - - -
MR MARTIN: Yes, yes. Secured Income, yes, is the same point. Now, the only other member of the court that, it seems to us, expressed a view on this subject, is Lord Justice Russell, at the very conclusion of the report, at page 1056, where, in the very last paragraph, he refers to Justice Cross:
this aspect of the case -
that is, the keep-out covenant -
was ancillary to the whole disposition of the patent rights, and indeed a sine qua non of such disposition . . .
That succinctly puts the proposition that we put for this case.
Your Honours, could I go now to the judgments below to identify what we say were the errors in analysis, starting with his Honour the trial judge, at volume 2. His Honour's judgment starts at page 456. We can, however, move direct to 463, at line D, where his Honour deals with the competing contentions as to whether or not this agreement was of a kind presumed illegal unless justified. Line D, he refers to the proposition that the covenant was an incident of the ongoing licensing arrangements, and appears to accept that, where he says, in the second-last sentence:
I accept that the Restraint can thus be seen as being incidental to the positive commercial arrangements reflected in the licensing arrangements. However, that does not, in my view, exclude the Restraint from the operation of the common law doctrine against unreasonable restraints of trade.
That is an interesting conclusion, given that later on he appears to adopt Lord Pearce's formulation from Esso, which is in exactly those terms. So there does seem to be something of a tension there. He then analyses the various views expressed in Esso, and then his reasoning substantively commences at the bottom of page 466. The first point is at line E, where his Honour observes:
the Restraint is not so confined. It extends to any ice-cream or frozen confections sold under any brand or name -
That is the point that the - 7.1 is not limited to Peters and Pauls. Our complaint about that, of course, is that it overlooks the breadth of the ongoing relationship and, in particular, the significance of clauses 7.2 and 7.3. That is the first point his Honour deals with.
The second point commences about mid-way between A and B on the next page, where his Honour observes:
the Restraint is not confined to sales within Western Australia but, potentially, to sales made anywhere in the world to persons who -
would "distribute" in Western Australia. We say, with respect, that is not material, because, firstly, but for such a covenant, the substantive covenant would be meaningless. But, secondly, the important point is that the covenant still focuses upon ultimate sale in Western Australia, which is the heart of the agreement between the parties, and so it has the - - -
KIRBY J: What was that first point; that you have to imply it in, do you say?
MR MARTIN: I am sorry, no, your Honour, you have to have it, otherwise there would be a very easy loophole because you could simply sell to a company set up expressly for the purpose of being a transferee. So without it, it would be meaningless and, of course, precisely the same form of covenant is to be found in the user agreement where we are precluded from selling product that ultimately would end up in other States. His Honour seeks to demonstrate that point by referring to an example. Let us say, as his Honour posits at line B, if Unilever, which is Streets of course, approached the partnership to manufacture ice-cream in another State and supply it into Western Australia, they would be prohibited by the restraint from doing so. That is certainly right. We would say, "Well, what is wrong with that?".
GLEESON CJ: You are not suggesting, are you, to use this expression, "keep-out covenants", that a keep-out covenant is not one of a kind to which the principles relating to restraint of trade potentially apply?
MR MARTIN: No, your Honour, we do not put it as broad as that. What we do say is where the keep-out covenant is no more than a normal and unexceptional incident of an ongoing commercial relationship and is no more than coincident with that relationship, then - - -
GLEESON CJ: That is the ultimate question.
MR MARTIN: Yes.
GLEESON CJ: When you say it is unexceptional, you mean it does not offend the law relating to restraint of trade?
MR MARTIN: No, with respect, it does not invoke presumed illegality.
HAYNE J: But the whole bite of that proposition lies in the value laden terms you use.
MR MARTIN: Indeed, but if one starts with the proposition that you have to draw a boundary somewhere for presumed illegality, then our submission is that it is as desirable a test as any because it has the advantage that it focuses upon precisely that which underpins the doctrine.
HAYNE J: But at one level that proposition is no more than a proposition about burden of proof in litigation and that may be an important proposition but it does not seem to be the central issue, at least at this level of the dispute, where we have all the facts.
MR MARTIN: It goes beyond burden of proof, in our respectful submission. It goes to presumed illegality and the nature of the inquiry, so that once one is in the area of presumed illegality then, of course, men of commerce would regard their agreements as much more fragile and would not attach the same value to them but also the nature of the inquiry that would then be undertaken is different to the inquiry for which we contend because it would involve such things as assessing the reasonableness of the consideration, whether the value was proper for the ambit of the covenant. What we are submitting is a test that would not involve that inquiry at all - - -
GLEESON CJ: If you substituted for the expression "restraint of trade" or "presumed illegality" the expression "anti-competitive," you would not get any different result, would you? If you had to decide whether this agreement was or was not anti-competitive, you would be using the same value-laden terms, would you not?
MR MARTIN: Yes, you would, your Honour. But, again, you come back to the problem that almost all agreements have some form of inhibition of competition - take the partnership.
HAYNE J: In the case of some agreements, the answer to the ultimate question may be readily apparent. In the case of other agreements, the answer to the ultimate question may require a closer degree of inquiry. That is self-evidently true, but I do not think it is captured, is it, by saying, "Well, the doctrine applies here but does not apply there"?
MR MARTIN: The problem, your Honour, with respect, is that our doctrine has what the Americans call "per se illegality," and so that one starts then from the proposition. It is not really a question of - - -
GLEESON CJ: No, it does not. It is subject to a rule of reason. That is the point. Per se illegality applies in cases where there is no rule of reason.
MR MARTIN: Yes, and what we are positing is how is the Australian common law to deal with that approach?
GLEESON CJ: Nobody is suggesting this is price fixing.
MR MARTIN: No.
KIRBY J: Though it would have consequences or could have consequences for prices to consumers.
MR MARTIN: It could, both favourable and unfavourable. I took your Honours earlier to the proposition that by the merger we were able to reduce unit costs and through that means - - -
KIRBY J: But you then had, until Streets came, a virtual dominance of the market.
MR MARTIN: That was over a period of about a month, I think. It was not much of a honeymoon.
CALLINAN J: Mr Martin, I was concerned at your answer to the Chief Justice's question to the effect he had asked you - this is the same question as the question: is it anti-competitive? Do you look at the position inter partes in the same way as you would look at questions of competition generally?
MR MARTIN: I may have not adequately expressed myself, your Honour. What I was meaning to say was that the answer to the question will not be any different depending on which jargon you use, because the proposition I meant to convey by that was that the fundamental question which the Americans answer by the rule of reason is: to what extent will, under our system, presumed illegality, per se illegality apply?
KIRBY J: Is this per se and rule of reason - is this elaboration of an Act of Congress or is this common law.
MR MARTIN: The Sherman Act. It is developed in that context.
KIRBY J: Yes, in America they presumably start with the statute.
MR MARTIN: Yes, although a number of the cases there say that - - -
KIRBY J: It is a rather old-fashioned view, I know, that you pay some higher level of deference to the people's representative in Parliament.
MR MARTIN: But they have put a common law gloss on it. The way the Americans have approached I think it is section - - -
GUMMOW J: Well, they used to say in the 1890s that it re-enacted the common law with these fancy remedies of triple damages and imprisonment.
MR MARTIN: Yes, and what they said was because section 1 of the Sherman Act says that any contract in restraint of trade is illegal, it cannot be what the legislature intended because every contract restrains trade to some extent. So there is - - -
KIRBY J: You have to characterise it.
MR MARTIN: Yes. So, there is a class of contract that is per se illegal, such as price fixing, but in respect of all other categories, they apply the rule of reason to work out whether or not section 1 applies. Now, the traditional common law of Australia is that per se illegality applies to a much broader range of agreements. The question that we pose in this case is to what categories does per se illegality apply?
CALLINAN J: In litigation inter partes, what significance do we attach to the fact that this is the deal the parties did and presumably thought reasonable between themselves?
MR MARTIN: Great significance, your Honour, both at question 1 and question 2.
GLEESON CJ: Absent inequality of bargaining power.
MR MARTIN: Absent inequality of bargaining power and in - - -
KIRBY J: Yes, but that is as between the parties. I have to keep reminding you there is another party that is hovering in the background that the common law protects.
MR MARTIN: But also a party that is, as has been pointed out, given very thorough protection by statute at the moment. So what this area of the law is about is balancing two competing principles. The first, of course, is the freedom of contract principle, that men of commerce should be allowed to enter into bargains in the expectation they will be enforced. The other is this freedom of trade principle. Now, the way the balance works at the moment, in our submission, is uncertain. On the view for which the courts below would contend, it works very much against freedom of contract by presuming to be illegal and thus casting upon the parties to the transaction the onus of justifying to the court their transaction.
Our submission is that the boundary ought be struck with greater regard to freedom of contract, and that is an approach that can be safely taken in a context in which the legislature has spoken as to how it sees the public interest properly protected.
GLEESON CJ: But you have attached to your written submissions a most exhaustive and thorough analysis of the process of reasoning that led a court to decide that Boy George should be held to his bargainers. Do we need to do any more than read that process of reasoning to - - -
KIRBY J: It was not Boy George, was it?
HAYNE J: It was George Michael, I think.
GLEESON CJ: George Michael.
KIRBY J: For goodness sake, there is an enormous difference between them. Even I know that.
CALLINAN J: It was Culture Club.
MR MARTIN: Yes. Your Honours, that is really the nub of the issue, where is the boundary to be drawn and how is the balance to be struck between freedom of contract, on the one hand - - -
GUMMOW J: George Michael's Case arose out of a compromise.
MR MARTIN: Yes.
GUMMOW J: The agreement in question was reached as a compromise of an earlier dispute about an earlier restraint.
GLEESON CJ: And there was a public interest consideration and they were encouraging settlement of litigation.
MR MARTIN: That is what the case turned on in the end. That is what his Honour held.
KIRBY J: His Lordship was not considering something that was relevant here which was not a compromise in the public interest in settling litigation, but two large dinosaurs of the business community reaching an agreement between themselves.
MR MARTIN: We put it in in an attempt to be geographically thorough, no other reason, your Honour.
Your Honours, can I get back to what I hope will be a brief analysis of the errors in the analysis of his Honour the trial judge, and it requires us to go to page 467, where I think we were. He posits the example of Unilever requesting the partnership to manufacture for them. We would say there is nothing unusual about that because in that circumstance these partners would be assisting Unilever to undermine our market in a context in which we are paying minimum royalty, so it would be derogating from the grant.
The next point his Honour makes is just below line B where he refers to the related company proposition. I have already put our argument in relation to that and that is that his Honour has, with respect, misconstrued the breadth of the covenant and not given sufficient weight to the obligation, which is simply not to permit.
The next point raised by his Honour is Article 5.9, which I have also referred to. His Honour puts the proposition that it would be enough to satisfy the promotion obligation if it promoted only one mark out of some 34. We submit that that is an unduly restrictive construction of Article 5.9 and in any event overlooks the commercial incentive created by the minimum royalty.
The next point made by his Honour, just above line D, is:
If the Restraint were intended to protect the respondent's rights as licensee, one would have expected some express reference to that in the Restraint itself.
Firstly, we would say, well, why would you expect to see that but, in any event, as I pointed out to your Honours, it starts by reciting that the restraint is for the purpose of protecting the goodwill and if, as we submit, goodwill includes sources of goodwill, that includes the licence. So that is our answer to that.
Then, at the bottom of the page, apparently the last point made by his Honour is sub-article 7.2 and 7.3:
provide the respondent with a fairly limited degree of co-operation.
We just submit that that is not a fair characterisation of the effect of those articles. He makes the point at the very bottom of the page:
there is no obligation on the respondent to use this information -
Again, that, with respect, is a commercially unreal way of approaching a clause that gives us the right to the innermost secrets of the development of new product by a major operator in the market.
His Honour then, on the next page, purports to embrace Lord Pearce's reasoning, which is, as we would submit, somewhat inconsistent with his earlier observation, but then further down that page refers to:
two bases i.e. the fact that the Restraint falls within one of the two well-known categories of restraint -
and presumably what he is there referring to is restraints on sale. Our submission, of course, is that this is a very different agreement to an outright sale and the additional factors to which you have just referred, the doctrine applied.
GLEESON CJ: And before you pass over that page, what do you say about the observations of Justice Jacobs?
GUMMOW J: His Honour, more than any of these English judges you are referring to, he was for many years in the Equity Division and dealt with these restraint of trade covenant cases....mind, I would think.
MR MARTIN: The observation needs to be put in its context by which I do not mean that he was in dissent, but the case concerned a Tulk v Moxhay covenant, as your Honours might recall, involving a hotelier who sold land next door, subject to a covenant that the incoming proprietor would not apply for a liquor licence. So, the first question was whether or not the doctrine applied at all to a covenant of that kind, and the majority held that it did not. The first portion of his Honour's quotation concerns some observations that he made with respect to the inapplicability of the doctrine to Tulk v Moxhay covenants that were aimed at protecting amenity. So that, what his Honour was saying, well, there might be cases in which, the covenant not to apply for a liquor licence might be intended to protect the amenity of those in the surrounding houses, who did not want to be troubled by intoxicated patrons and his Honour's view was that, in such a case, the doctrine would have no application.
Now, that then provides the context for the second paragraph that Justice Carr has relied upon. What his Honour is saying is, by contradistinction to the scenario in which a covenant did not apply for a liquor licence is for amenity purposes, this covenant is of a different kind: it was imposed by a hotelier for the protection of his existing business and therefore the doctrine applies.
GLEESON CJ: Well, let us get back to the relationship between expressions like "restraint of trade" and "anti-competitive". If a person subdivides a large parcel of land and sells one allotment to me, for the purpose of building a dwelling house on it, and I take from the vendor a covenant that precludes the vendor from erecting a tannery on the remaining block of land, that is not usually regarded as anti-competitive; it has got nothing to do with any state of competition between me and my next-door neighbour and I can understand the proposition that the doctrine of restraint of trade "does not apply" to such a case. But if, instead of buying the allotment for the purpose of building a dwelling house on it, I was buying the allotment for the purpose of carrying on a manufacturing operation of my own, and the promise that the vendor made was not to carry on a similar manufacturing operation on the adjoining block of land, then I would have thought you are right into the area of restraint of trade or anti-competitive agreements. So you cannot say a covenant given by a vendor to a purchaser not to carry on a business on the vendor's land is automatically a kind of covenant to which restraint of trade principles "do not apply".
MR MARTIN: Except that was the result achieved by the majority of this Court in Quadramain, in our submission.
GLEESON CJ: But regardless of the circumstances, it is impossible to have a situation.
MR MARTIN: Because the proprietor goes back, it seems, to the notion of what is a Tulk v Moxhay covenant. It carves out of the title a lesser form of rights.
GLEESON CJ: It has nothing to do with amenity.
MR MARTIN: No, but I will need to re-read - - -
HAYNE J: Does the development in Quadramain do more than reflect changing practices in the drafting of commercial agreements, that that which was found once in one place by the time Quadramain came around was to be found in another place?
MR MARTIN: I will need to re-read Quadramain over lunch, but my impression was that the majority placed considerable significance upon the fact that it was a negative covenant attached to the acquisition of land.
GLEESON CJ: I am not saying that such a circumstance is insignificant, I am just cavilling at your proposition that you can categorise an agreement and say, "No covenant given by a vendor of land to the purchaser of a neighbouring parcel of land can ever be one to which the principles of restraint of trade will apply".
MR MARTIN: Yes. I would not put that proposition but I think it is an arguable construction of the decision of the majority in Quadramain.
GUMMOW J: It was very controversial at the time, Quadramain, was it not?
MR MARTIN: Yes.
GUMMOW J: Very.
MR MARTIN: Your Honours, can I just say before we leave Justice Jacobs, our submission is that his Honour the trial judge has taken out of context and misapplied this quotation because that was a case in which there was, what might be called, a bare covenant, a covenant in gross, where as part of the purchase there was a covenant not to apply for the liquor licence. There was no ongoing relationship other than that of neighbour. Now, this is a very different case.
Our submission is that the proper characterisation of the agreement in this case is not that its purpose and effect was clear, namely, the protection of the business from competition, but rather that its purpose, in effect, was clear. It was a normal, unexceptional incident of an ongoing commercial relationship of mutual trust and confidence to which competition within Western Australia would have been antithetical.
GLEESON CJ: Mr Martin, we have got full confidence in that prediction you made but, nevertheless, we will resume at 2 pm.
MR MARTIN: Yes, thank you, your Honour.
AT 12.44 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.02 PM:
GLEESON CJ: Yes, Mr Martin.
MR MARTIN: If it please, your Honour, before I return to the judgments below there are a couple of matters where I need to qualify or correct what I said before lunch. The first concerns a discussion I had with your Honour the Chief Justice about the significance of transport. I may have been overly dogmatic in relation to that matter, your Honour, because it is an agreed fact at page 57 of the appeal book that, in fact, when Streets started into Western Australia it did so with a product that was manufactured in the eastern States. There is no explanation as to how that can be reconciled with the other statements but that is the fact.
KIRBY J: Maybe they are more efficient.
MR MARTIN: That may be, or it may shed some light on the importance of a national market but one just does not know.
CALLINAN J: Or it might be something that you are prepared to do to try to penetrate the market at a loss even for a period.
MR MARTIN: Yes.
KIRBY J: Or they could have a different technique of preparing a product and adding water or something.
MR MARTIN: All of this is regrettably speculation on the material before the Court. The second matter, your Honour Justice Callinan raised with me the question of whether we had the report that was referred to in the letter from the chairman of Peters to the shareholders at page 244. We do not have the report but we do have a letter from its authors at page 440 of volume 2, which contains a fairly succinct summary of what that report was.
Finally, your Honour Justice Kirby raised with me the question of the perception of the marks and I think I said that there was no evidence. That was wrong. In fact, as an agreed fact on page 49 the parties agreed that:
Peters was positioned as a dependable, trustworthy but contemporary brand.
whereas -
Pauls was positioned as an exuberant and different brand, expert in providing novel treats.
KIRBY J: Yes, that is my impression too.
HAYNE J: So glad you told us all that.
MR MARTIN: That was the parties' agreement on their relative positioning.
KIRBY J: I knew I was not wrong in that subject.
MR MARTIN: Your Honours, before lunch I was just addressing the judgment of the trial judge. There is just two more passages to which I would take the Court in that judgment. At page 475 of volume 2, between B and C, his Honour accepted:
that the effect of the licensing arrangements was to confer on the respondent -
that is us -
a source of goodwill in the form of trade marks and brand names which consumers would recognise.
That is of some significance when we come both to the covenant and 52(1)(e).
Finally, on his Honour's judgment, if we go to page 485, paragraph 44 contains his Honour's very short reasons with respect to 51(2)(e). Essentially, he said, "The Restraint was not solely for the protection of the respondent" because of all that he had said with respect to reasonableness, it went "wider than that".
If I could move then to the judgment in the Full Court and proceed directly to page 518, paragraph 15 commences with the assertion that:
The question, whether a covenant amounts to a restraint, is one of fact.
As a subsequent Full Court of the Federal Court has pointed out, that is wrong. That misreads the passage in Esso to that effect at page 332. It is a question of law. Then at the top of page - - -
KIRBY J: It is mixed law and fact, is it not, really - - -
MR MARTIN: One has to make the findings of primary fact.
KIRBY J: - - - because you have to get the legal concept in your mind and then you have to apply for the facts as found.
MR MARTIN: Yes, certainly, but once the facts are found, it is a question of whether or not its restraint is one of law, in our submission. Paragraph 16 at the top of the next page would relegate the history of the negotiations to only being relevant to the question of reasonableness. Paragraph 10 of our submission sets out the authorities that are contrary to that proposition.
On the next page, 520, paragraph 22 commences the reasoning of the court. We would quarrel with the last sentence of paragraph 22 which said:
As to the question of future co-operation, what was required appeared to be fairly limited in his Honour's view. It has not been shown that such a finding was incorrect.
We would challenge that proposition. Then paragraph 23 contains what might be said to be the reasoning which is, essentially, the adoption of the analysis of his Honour the trial judge.
Finally, your Honours, paragraph 33 on page 523, sets out the reasoning with respect to the 51(2)(e) point. The first question posed was what we seek to derive? Well, the answer to that is not having to do a Part IV case. But then their Honours go on, essentially, to adopt the same approach as his Honour the trial judge and that is to say that it follows from the findings of unreasonableness that the covenant went beyond the scope of 51(2)(e). Our submission, in due course, will be that to bring in notions of reasonableness into interpretation of statute is erroneous.
Your Honours, could I go very briefly now to the cases; starting, if I could, with the decision of Justice Isaacs in Bacchus Marsh, 26 CLR which is on our list of authorities.
GUMMOW J: But what will all these cases show us, other than that this case has not been determined by them?
MR MARTIN: It identifies the competing principles. The purpose of taking your Honours to Bacchus Marsh is to sustain a couple of the submissions I have already put with respect to the ambit of the inquiry.
GLEESON CJ: I notice that the English judge - I think it was the English judge - said that, for some judges, who, every time they decide a case on this subject, feel obliged to summarise all the previous cases on the subject-so you get this sort of unlimited accretion, which means, amongst other things, however, that if you go to the most recent case you will usually find a reference to all the earlier cases. I am just a little troubled at starting at 1919.
MR MARTIN: Certainly, that is right, your Honour. And I will take your Honours very quickly to the Australian cases, but the reason I start at 1919 is to emphasise that our proposition is not novel. It has been accepted in this Court since as long ago as 1919. It is in the passage at page 441, in the passage in the middle of that page, the one that starts "The rules as I have stated them". In addition to the general proposition in that passage, we of course draw support from the reference to the consideration "in conjunction with and as qualified by the surrounding circumstances". And that is one of the sources of our proposition that the ambit of inquiry is broader than merely the terms of the agreement.
Could I go next to Adamson v New South Wales Rugby League Ltd [1991] FCA 425; (1991) 31 FCR 242, to which your Honour Justice Gummow made reference to these issues. If I could take the Court to page 292, where your Honour, under the heading "The rule of reason", refers to Esso and, in particular, Lord Wilberforce's adoption of a passage from the judgment of Chief Justice White in Standard Oil, then goes on to refer to the passage from Bacchus Marsh, making the point, of course, that Sir Owen Dixon had also cited with approval the passage from Sir Isaac Isaacs, to which I have already taken the Court.
KIRBY J: He was counsel in the case.
MR MARTIN: He was. Although, I think for the - - -
KIRBY J: And he was complimented with a very rare compliment; I do not think I have ever seen it in a judgment of this Court before.
MR MARTIN: Then, your Honour Justice Gummow cited from the decision of Justice Brandeis in Chicago Board of Trade which, with respect, is very pertinent to the proposition that we put before this Court. Could I hand up to your Honours a copy of that decision, because the passage cited by your Honour goes on with some observations that are pertinent to this question of the ambit of inquiry. Your Honours will find the passage at paragraphs [237] to [239], which is I think the fifth page in. Your Honours will find in the right-hand column the passage cited in Adamson and then after "The true test of legality", his Honour then goes on:
To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed -
et cetera, and then in the middle of the page is really the point we rely upon:
This is not because a good intention will save an otherwise objectionable regulation, or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences.
We would put it no higher than that, your Honours, and Adamson, of course, makes the point that the law in the United States has developed quite differently to the law in Australia.
GLEESON CJ: But an example of the danger of categorising contracts by saying the doctrine of restraint of trade does not apply to them is provided by the original case in this line of country in relation to football, that is, Buckley v Tutty or Tutty v Buckley. People used to always say before Buckley v Tutty, Cameron v Hogan is authority for the proposition that the courts will not treat as justiciable a dispute about the rules of a club.
MR MARTIN: Well, your Honour, one suspects that Buckley v Tutty became a recognition of the fact that the area of activity of clubs had extended well beyond the area they occupied at the time of Cameron v Hogan and so it is perhaps a reflection of the law accommodating changes in modern circumstances where now unincorporated clubs conduct very substantial commercial activities.
GLEESON CJ: Exactly.
MR MARTIN: But, your Honour, we are not putting that there ought be a rigid classification. The test for which we contend is a purposive and contextual approach to the agreement in question and therefore has the flexibility to accommodate changes in circumstances.
Your Honour, Esso [1968] AC was the start of much contemporary debate. It has been reviewed many times, so I will skim quickly through it. All members of the House accepted that a determination needed to be made as to whether or not the doctrine in fact applied, that is to say, which cases were within the scope of presumptive illegality and which were not, but all answered it different ways. Lord Reid posed the question at page 294 between A and C where, after referring to Lord Parker in Adelaide Steamship, he said that cannot have been a definition, making more eloquently than I the point I tried to make earlier and that is that:
all contracts in restraint of trade involve such a derogation -
from freedom to trade -
but not all contracts involving such a derogation are contracts in restraint of trade.
Now, His Lordship answered that question, the question of the determination of the boundary, at 298, with what has come to be characterised as the pre-existing "freedom" test, between B and C, where His Lordship posed the test in terms of giving up "some freedom which otherwise he would have had".
Lords Morris and Hodson appear to have adopted a similar approach, although Lord Morris expressed it somewhat differently and, we would say, perhaps more effectively at page 309, between E and F, where his Lordship expressed it in terms of "claiming a greater freedom than that which he possesses", and that may of some significance to this case because, of course, if this were a proper approach, we would put the proposition that the effect of this transaction was to confer upon AUF a greater freedom, namely the freedom to move to a different functional level, to continue to derive revenue without capital risk and continue to maintain the brand.
Lord Pearce took a different approach. At page 383 commencing at line B, and I will not read this out, His Lordship referred to the difficulties of undue expansion of the presumption of illegality, and then at 327 between E and F observed, after referring to a number of cases:
Somewhere there must be a line between those contracts which are in restraint of trade and whose reasonableness can, therefore, be considered by the courts and those contracts which merely regulate the normal relations -
and his line is enunciated on the following page 328 to 329, and that test has subsequently been characterised as the "sterilisation of capacity" test; namely, is the agreement sterilising the capacity of the covenantor, or is merely absorbing that capacity as an incident of an ongoing relationship.
Lord Wilberforce took a different approach again, although, again, acknowledging - and I will not take your Honours to it, it is at 332 - the need to identify the line. His view is really at 332 over to 333 and then again at 335C to D, in what has come to be characterised as the "trading society" test, that is to say, is the agreement of a kind which has become part of the recognised fabric of commercial activity endorsed by the courts?
GLEESON CJ: Am I right in thinking that what this case actually decided was that it is erroneous to say that a covenant in a lease is therefore outside the doctrine of restraint of trade?
MR MARTIN: Yes.
GUMMOW J: That is really what Sir Robert Megarry was saying in his unsuccessful argument.
MR MARTIN: Yes.
GLEESON CJ: And presumably by parity of reasoning he also decided that a covenant in a mortgage is not, on that account alone, outside the doctrine of restraint of trade.
MR MARTIN: Yes, there were two garages in question - one, the restraint for a period of 21 years tied to a mortgage. Their Lordships struck that down as being unreasonable. The other, four years and five months, was held to be reasonable.
GLEESON CJ: So, whatever the precise reasoning, they accepted the substance of the submissions that Mr Templeman was putting at pages 283 to 285?
MR MARTIN: In a number of instances they rejected propositions that he put as being too broad but the outcome was to apply the doctrine to the leases and arrangements in question. But he, for example, put the proposition that all contracts of employment were, in a sense, in restraint and their Lordships rejected that.
GLEESON CJ: But some covenants in leases are in restraint of trade and some covenants in leases are not, so that if I lease my dwelling house to an entrepreneur and include a covenant in the lease that he will not conduct any business in the dwelling house, that is not a covenant in restraint of trade although it restrains his capacity to trade.
MR MARTIN: Yes, quite.
GLEESON CJ: Now, how do you say you decide which covenants in leases might be in restraint of trade and which might not?
MR MARTIN: By reference to, essentially, the Lord Pearce approach which is, is that covenant no more than an integral part of an ongoing relationship, that of lessor and lessee, which is designed not to sterilise the business of the entrepreneur but rather to protect the lessor's interest in his premises not being used for purposes other than domestic purposes, whereas, in a supermarket situation, where the covenant was not to use the premises for a particular kind of trade, so that the lessor could gain a benefit from leasing other premises in the supermarket to persons who wish to carry out that trade, then questions of restraint might arise.
GLEESON CJ: Applying that test to the present case, there is not much doubt, is there, that one effect of this restraint was sterilisation of part of the business of Petersville?
MR MARTIN: No, your Honour. We say on the contrary, this was an absorption of capacity case. We put it this way. In 1983 AUF had essentially three capacities. One was the capacity to manufacture ice-cream in Western Australia and sell it. The second was the capacity to derive revenue from its existing reputation in the marks in Western Australia, which was the Pauls marks. The third was the capacity in the future to derive revenue from the innovation of new products and the development of new marks.
We absorbed all three capacities for the term of our arrangement. We purchased the plant, we licensed the existing marks and derived revenue from their use, for which in a sense we accounted to the licensor by the royalty provision, and we had arrangements in place whereby we had the capacity to exploit the development of new product within Western Australia. So that in that sense, in our submission, this is pre-eminently a case in which we were absorbing the capacities of a trader who wanted to get out physical involvement in the Western Australian market and move to another functional level rather than sterilising those capacities. Our arrangement gave it the opportunity to, in a very real sense, continue to participate in the Western Australian market but in a different form.
GLEESON CJ: You cannot solve these problems by putting a benign or, alternatively, a logistic label on it, can you, otherwise the question will be whether it is kosher?
MR MARTIN: Your Honour, I was not endeavouring to approach an answer by labelling but rather by reference to the commercial reality of the situation. Can I reverse the proposition and say it is wrong to say that merely because a covenant looks in isolation like a restraint, therefore it is a restraint. That is what Sir Isaac Isaacs was saying. You have to go to context and surrounding circumstances. If this covenant, as we submit, is in truth part of a much broader commercial relationship which is of an ongoing kind and which effectively enables the covenantor to participate in trade, albeit in a different form, then in truth it is not a restraint, albeit that on the face of it it might look like one. So we are putting, as I say, at the risk of using a buzzword, a purpose contextual analysis on the entire agreement and it is not intended to be a labelistic analysis but a substantive analysis.
GLEESON CJ: While I know that we are dealing with highly nutritious products that were the health food of a nation, there is a large element of marketing in this commercial activity, and what Petersville were agreeing not to do for a very long period of time was to market frozen confectionery.
MR MARTIN: In Western Australia?
GLEESON CJ: In Western Australia.
MR MARTIN: In respect of which it was taking a revenue stream, a risk-free revenue stream, and agreeing to co-operate with the trader that it had licensed in Western Australia.
GLEESON CJ: That might mean it is reasonable and it might mean it is not contrary to the public interest, but just at the moment I am having difficulty with the proposition that it means you do not even get to those questions.
MR MARTIN: Well, your Honour, we do put that proposition and we put it on the basis of the analysis of Lord Pearce, and it is because that covenant is nothing more than an ongoing part of a broader relationship, in the same way that one answers the lease question that your Honour posited to me earlier, by the same analysis. It produces the same conclusion when applied to the facts of this case. That is the issue though, I think, your Honour.
Can I go then to the three cases in this Court in which Esso has been considered, in chronological order. The first was Queensland Co-operative Milling v Pamag, 133 CLR. Two members of the Court, Justices Menzies and Walsh, rest their decision on the reasonableness of the covenant. Justice Stephen agreed with them and went further at page 284 where, at the top of that page, his Honour drew out the point your Honour Justice Hayne was making earlier, that, "It may in truth be illusory to speak of" the application of the doctrine as opposed to the proposition that there are agreements of a kind for which no detailed analysis is required. That is the explanation for the second ground in our notice of appeal.
At the bottom of page 284, his Honour refers, with apparent approval, to the pre-existing "freedom" test enunciated by Lord Reid, but then at page 285 his Honour moves in a somewhat different direction by referring again to Sir Isaac Isaacs, and then over the page at 286, to Lord Pearce. The paragraph in the middle of page 286 suggests quite strongly an acceptance of Lord Pearce's analysis and also reinforces our argument about the need to consider the "surrounding circumstances", and your Honours will see that in the fourth-last line of that paragraph in the middle of 286. So his Honour's judgment, in that case, lends support to our argument, with respect.
Next in chronological sequence was a decision in Amoco where, as your Honours may recall, there was a fairly blatant attempt to overcome the decision in Esso by a device, and the device was that the proprietor of the petrol station leased the station to the petroleum distributor who, in turn, subleased it back. The argument was, on the application of the pre-existing "freedom" test, when the sublease back was taken, because the proprietor had parted with possession, he was obtaining something, that is, the right to sell petrol, and was not giving anything up. Now, predictably enough, perhaps, the majority of the Court said that the issue was one of substance and not form and that a device of that kind would not prevail.
Justice Stephen, however, was in dissent, but his observations are of interest. He took the view that the doctrine was inapplicable, and his reason for that commences at page 322.
GLEESON CJ: Well, this case decides that he was wrong.
MR MARTIN: Yes.
GLEESON CJ: Well, then why would you take us to a decision that was wrong?
MR MARTIN: Because the reasoning is apt. The proposition we put is not inconsistent with the views of the majority. He was wrong on the facts of that case but our proposition is, again, it is not inconsistent with the view that one goes to substance not form, which was the ratio of the case.
At the middle of 323, his Honour, again, emphasises the need to view the agreement in "context and circumstance" and then could I just mention at 328 to 329 his Honour, again, expresses a preference for Lord Pearce's view, although combined, apparently, with notions of pre-existing freedom and not sterilisation of a pre-existing capacity to trade.
Now, the final case in the three cases is that of Quadramain. In relation to the interchange before lunch, I noticed over lunch that his Honour Justice Gibbs qualified the view - the proposition to the effect that the doctrine did not apply to Tulk v Moxhay covenants by saying "at least as general rule". His Honour imposed that qualification at page 402. But that was essentially, that notion of the impact of the doctrine of Tulk v Moxhay covenants was what preoccupied the majority. Justice Jacobs was in dissent, and I have already put our submissions with respect to the proper construction of the views which his Honour the trial judge put.
GLEESON CJ: The validity of Tulk v Moxhay covenants is to be determined under a different set of rules.
MR MARTIN: Yes.
GLEESON CJ: But they still are scrutinised according to - - -
MR MARTIN: Indeed, but not by reference to such consideration as competition in public interest.
Could I just draw attention to Justice Jacobs' observations at the bottom of page 415 where, again, his Honour expresses the doctrine as coming "into operation when restraint is imposed in a context and for a purpose", and that is why we have been using, perhaps, unduly often, the words "a purpose of contextual analysis."
GLEESON CJ: Yes, but you should not confuse purpose and motive.
MR MARTIN: No, your Honour.
GLEESON CJ: And you get the purpose usually from the effect.
MR MARTIN: Indeed, but as Justice Brandeis says one can take some evidentiary guide from what the parties themselves thought to be the likely effect.
Now, your Honours, those are the decisions in this Court. We have referred in our submissions to a number of decisions at lower levels in Australia, to which I will not take the Court but I can just mention them. Aloha Shangri-La is a decision in the Full Court of the Supreme Court of Queensland in 1970 in which the court appeared to adopt Lord Pearce's approach. ICT v Sea Containers is a decision of the Court of Appeal of New South Wales in which, again, that court in 1995 appeared to adopt Lord Pearce's approach but expressed it again, perhaps consistent with Justice Stephen in Pamag, as either producing the result that the doctrine did not apply or, alternatively, identifying a category of agreement in respect of which no specific consideration of reasonableness was necessary. Again, that is why we have cast our notice in the alternative.
More recently, in Australian Rugby Union, Justice Sackville expressed a preference for the "sterilisation of capacity" approach. More recently still, in ACT v Munday, the Full Court of the Federal Court analysed the different approaches and Justice Heerey, with whom the other members of the court agreed, came down in favour of the "trading society" approach and in the result found, in that case, the doctrine did not apply so that the decision of the court below was reversed. So the position is that the intermediate courts are, to some extent, grappling with this problem in different ways.
Now, your Honours, our submission is that the preferable course is that which I have already indicated. The problem with the pre-existing freedom test has been identified by Justice Heydon in his work and it is very susceptible to matters of form. To take the examples given by his Honour, if at the commencement of a lease in a shopping centre the trader agrees not to sell meat, under the pre-existing "freedom" test there would be no question of the restraint applying because prior to taking the lease he had no capacity to trade at all.
If, on the other hand, during the course of the lease he agrees to a variation of the lease to not sell meat then the doctrine would apply because he is giving up something that he had but alternatively, if during the course of the lease an assignment took place, as a condition of the assignment the landlord required the assignee to agree to a covenant not to sell meat, then the doctrine would not apply because the assignee had no prior freedom to trade. Or to take another example in the sale of land situation, Quadramain v Sevastapol - let us leave aside the Tulk v Moxhay problems for the moment - if a vendor has two lots and sells one to the incoming purchaser with a covenant that he not trade in a certain way on the land, the doctrine would not apply because the purchaser has no pre-existing freedom he has given up.
On the other hand, if, in order to increase the price the vendor says, "And in return I will give you a covenant in respect of my land, which I am retaining, not to do something on that land", then the doctrine would apply to that covenant.
The other criticism that has been directed at that test is that it is quite inadequate to deal with situations in which the effect of restraint is created by the imposition of a positive obligation, not a negative obligation, that is, a positive obligation to do something which effectively precludes any other course of conduct. The criticisms of the "trading society" test advocated by Lord Wilberforce that we would advance, are, firstly, it places, in our submission, undue weight upon what men of commerce have evolved as a way of structuring their business affairs without any particular regard to the public interest or their effect; and, secondly, it is very poorly equipped to handle one-off cases or cases of developing or novel business structures, because it rather relies upon an existing and entrenched business approach.
Our proposition is that, of all the tests that have thus far been enunciated, the test which focuses most squarely upon the public policy issue that underlies the whole doctrine is that developed by Lord Pearce and it has the flexibility to accommodate any raft of circumstances and does not suffer the defects of form or the defects of undue dependence upon commercial structures that the other tests suffer. Of course, we draw in aid the fact that it is consistent with the observations of Sir Isaac Isaacs back in 1919 and Justice Brandeis in the American courts at about that time.
KIRBY J: Has there been any course of authority in New Zealand or in Canada?
MR MARTIN: We refer to Robinson v Golden Chips, which seems to have been in favour of the pre-existing freedom test. In Canada we refer to Stevens v Gulf Oil, in our outline of submissions, which is, I think, to the same effect. Yes, it is paragraphs 34 and 35 of our written submissions, your Honour. Now, what we then say is that is the proper test. Because of what I said earlier about absorption of capacity, as what I have said endlessly about placing this covenant in the context of the overall commercial relationship, if it is applied to this case, we are outside the scope of the doctrine. Alternatively - and this is paragraph 44 of our submissions - one could say to achieve the same result, yes, the doctrine applies, but this is an agreement of a kind which does not need to be subjected to any detailed inquiry as to reasonableness or public interest.
Our alternative submission is that if the pre-existing "freedom" test is preferred, it is better enunciated by Lord Morris, where one looks at comparative freedoms and, in this case, AUF acquired a significant freedom by entering into this transaction, that is, the freedom to maintain its business interest in Western Australia without capital exposure and deriving a revenue stream from the maintenance of that interest and the maintenance of the brand. So, again, one looks at it in terms of the acquisition of a freedom.
Your Honours, all that remains, I think, is the issue concerning section 51(2)(e). We say that the proper starting point for that analysis is the words of the statute itself and one should not pollute the consideration of those words by notions of reasonableness under the common law doctrine and that that is an error that has affected the decisions below. The question that arises for determination under the statute is whether the relevant provision "is solely for the protection of the purchaser in respect of the goodwill of the business".
GLEESON CJ: Now, let it be supposed you are right in your primary submission and we should not ask ourselves whether this is reasonable or in the public interest, you win on your first point, what is the material by reference to which we answer this question?
MR MARTIN: It is the purpose and effect of the covenant.
GLEESON CJ: That is the same material.
MR MARTIN: But one does not answer it by questions of reasonableness and public interest. One simply says, "Is it solely for the protection of the goodwill?". If it is, then the answer to the question is the section applies and you do not go into the reasonableness of the consideration or the public interest.
GLEESON CJ: Now, does that mean solely for the purpose of the protection, or the sole effect is the protection?
MR MARTIN: Probably both, your Honour, but that may be an unhappy answer, it may lead to uncertainty. But probably the inquiry would direct attention to both aspects, purpose and effect, in the sense that Justice Brandeis was attempting to explain. One looks initially to purpose as a guide to effect. If the effect, however, was obviously contrary to the purpose of the parties, then the court may not be constrained by their subjective purpose. That is how I would try and harmonise those two notions.
What we say, of course, that in this case goodwill includes sources of goodwill, that is, the capacity to derive benefit from the consumer recognition of the marks. That in turn depends upon the licensing arrangements and the exchange of information and the other extensions of the licensing arrangements. If this covenant, as we put in our primary submission, is truly characterised as being for the protection of those interests, then it comes within the scope of section 51(2)(e).
Finally, could I just go to the question your Honour the Chief Justice raised before lunch, and that is whether one can answer this question without, in a sense, undertaking a Part IV inquiry. In our submission - - -
GLEESON CJ: What I have on my mind is this, Mr Martin: that expression, "solely for the protection of the purchaser in respect of the goodwill", means something slightly different, whatever it means, from "solely for the protection of the purchaser of the goodwill".
MR MARTIN: Yes.
GLEESON CJ: The question that comes to my mind when I read that expression, "solely for the protection of the purchaser in respect of the goodwill of the business" is as compared to what?
MR MARTIN: As compared to something other than the goodwill such as perhaps the goodwill of another business.
GLEESON CJ: I wondered whether you have to compare that concept of "solely for the protection of the purchaser in respect of the goodwill" with some other prohibited form of conduct under Part IV.
MR MARTIN: We would not submit so, your Honour. We would simply say that the effect of the provision is to focus attention and to limit attention to the goodwill of the business. So that if the covenant is being imposed for some other reason, then it falls outside the scope of the section. Take, for example, a bare covenant that was unrelated to the goodwill of a business purchased or a covenant not to trade in a business unrelated to the business purchased.
GLEESON CJ: But your submission - and you may well be right - is that the scheme of section 51(2) is that if you can identify something that falls within paragraphs (a) to (g) inclusive, you put down your glasses?
MR MARTIN: Indeed, and if one needed to undertake the Part IV inquiry before defining the scope, then the purpose of it would be thwarted, in our submission.
GUMMOW J: Is there any order segregating these three preliminary issues?
MR MARTIN: There is, your Honour. It is in volume 2, I think.
HAYNE J: Pages 32 to 33, I think.
MR MARTIN: Yes, your Honour Justice Hayne is quite correct. It is at pages 32 and 33 of volume 1.
GUMMOW J: I see, the issues raised. Where do we find a statement of them?
MR MARTIN: There was no statement of issues but it is defined by reference to the pleadings - and your Honours have the pleadings - commencing from page 5 onwards.
GUMMOW J: Is it reflected in any order that was made? What was the outcome of all this activity?
MR MARTIN: The issues raised by identified paragraphs of the pleading was as far as it went. The parties did state a series of issues before his Honour the trial judge and that is referred to, I think, in his judgment at page 460. I am indebted to my friend.
GUMMOW J: But it produced what look like declarations on page 498.
MR MARTIN: Yes.
GLEESON CJ: Just coming back to section 51(2)(e), it begins by categorising a contract, relevantly for the present case "a contract for the sale of a business". Then it says if you have "a contract for the sale of a business", in determining whether there has been a contravention of a provision of this Part, you shall not have regard:
to any provision of the contract that is solely for the protection of the purchaser -
right?
MR MARTIN: Yes.
GLEESON CJ: Does it mean: and that is also in respect of the goodwill of the business?
MR MARTIN: Yes, that is our submission, your Honour.
HAYNE J: You do not apply "solely" to the second element?
MR MARTIN: I think you would, your Honour.
HAYNE J: I think you would have to, would you not?
MR MARTIN: I think you would.
GLEESON CJ: You say Article VII is solely for the protection of the purchaser?
MR MARTIN: Yes.
GLEESON CJ: That is something different, I suppose, from "solely for the benefit of the purchaser"?
MR MARTIN: It seems to connote that it has to be the protection of the purchaser's interest in the goodwill. It seems to link into the second limb.
GLEESON CJ: Yes. And it is solely in respect of the goodwill of the business. And you say it is the link with the licences that produces that consequence.
MR MARTIN: Yes, because, without the licences, there was no goodwill. I do not need to go that far. The licences were a critical part of the source of the goodwill and the capacity to utilise those licences also drew heavily on clauses 7.2 and 7.3, the ongoing entitlement to information and the capacity to expand the licences.
GLEESON CJ: I wondered whether you were going to make an argument that, if you were right about that, it was no concern of the judges in the courts below to ask whether it gave the purchaser more protection than was necessary.
MR MARTIN: That would turn upon this question of "solely". But certainly, if it was for the goodwill, then the fact that it gave more protection than was necessary would not alter its character. Because that is not to be found in section 51(2)(e), and we do - your Honour, I have not enunciated that explicitly, but the problem below was that they focused on reasonableness. That, in turn, was the proposition that it gave greater protection than was needed. So the decision below was: you got greater protection than you needed. It does not follow from that, as your Honour is pointing out, that it is not solely for the goodwill of the business.
GLEESON CJ: In fairness to the judges below, however, I think that there was also an element in their reasoning to the following effect: because it went so much further than was necessary to protect the purchaser in respect of the goodwill of the business it was acquiring, there can be identified an element of sterilisation.
MR MARTIN: Or perhaps that it was protecting the business which my client already had, for example, rather than the business it was acquiring.
GLEESON CJ: Yes.
MR MARTIN: If that were the conclusion, if that were the proper characterisation, then we would have to concede that that would fall outside section 51(2)(e). May it please the Court, those are the submissions of the appellant.
GLEESON CJ: Thank you, Mr Martin. Yes, Mr Bathurst.
MR BATHURST: If the Court pleases. Consistently with Esso, since at least the decisions of this Court in Amoco and Pamag, the courts, in dealing with questions of common law restraint who embarked on what we submit could be described as a two or, perhaps, a three-stage process. The first step in the process is to see whether the contract in question truly restrains the covenantor in the carrying out of his trade or business. The second is whether that restraint is reasonable inter partes, the onus of establishing that being on the covenantee, which is why my learned friend has talked, presumably, about per se legality.
The third issue is the issue of whether the covenant, irrespective of the position of the parties, is reasonable in the public interest. On that issue, of course, the onus rests on the covenantor. I raise that for this reason: this case has been conducted in the courts below and, indeed, in this Court, on the basis that those elements are three separate elements. Each of the courts below found for the respondents on all three issues. The only challenge is on the first issue. In our submission, it follows from that that the issue of reasonableness of the restraint inter partes or of reasonableness in the public interest, is not before the Court, and the Court must proceed on the assumption, in our respectful submission, to the extent that reasonableness is a relevant criteria on the first issue, and we say it is not, that issue has, in fact, been decided. Could I just deal with two other preliminary issues?
GLEESON CJ: Before you go past that one, why do you say - I thought I heard Mr Martin make a challenge to the findings on reasonableness.
MR BATHURST: He made a challenge to those findings of Justice Carr which led his Honour to conclude that this agreement was one which fell within the doctrine of restraint of trade. There was undoubtedly an overlapping between those findings and the findings which led his Honour, and for that matter, the Full Court, to conclude that the restraints were unreasonable. What he has not done is challenge the ultimate determination of the trial judge or the Full Court that if the doctrine applies, then the restraints were, as a matter of fact, unreasonable.
HAYNE J: What then are we to make of ground (b)?
MR BATHURST: Ground (b) is, as Mr Martin put it, an alternative way of saying that there are particular classes of contract which are inherently unreasonable. That appears, from what he says, in paragraph 45 of his written submissions where he puts, as an alternative:
Alternatively, if one concludes that the restraint of trade doctrine is of universal application -
this contract -
should be considered to be of a class inherently reasonable and immune from the need for further enquiry.
Might I also respectfully remind the Court that special leave was only granted on the first issue.
GUMMOW J: Yes, the order does not seem to reflect that; the order in the appearance does not seem to reflect the grant.
GLEESON CJ: I did not realise that. There was a limited grant of special leave.
MR BATHURST: No, I cannot put that, your Honour. In the application, or the argument in support of the application, the appellants identified one issue on which leave was sought.
GLEESON CJ: I think there is a risk of confusion here, Mr Bathurst. It is one thing to say the part of the argument in support of the special leave application that attracted the interest of the Court was that first point but it does not follow from that that there is a limited grant of special leave.
MR BATHURST: I do not submit there was a limited grant of leave. What I do submit is that the notice of appeal, in fact, only reflects that first point. The notice of appeal appears at page 508. Your Honour Justice Hayne was just asking about ground 2, which, we submit, is explained in that way.
GUMMOW J: I think it said that A and B are the same side of a coin, two sides of the one coin.
MR BATHURST: Now the way we put the argument it probably will not matter very much but we do submit, with respect, in light of the way it is put that it is not appropriate for this Court to consider the ultimate findings of the two courts below on that question. Now, may I just deal with two other preliminary issues?
KIRBY J: Does the fact that those findings stand have any consequence for the first issue?
MR BATHURST: Probably not.
GLEESON CJ: It has a fairly large consequence for the second issue, though, does it not?
MR BATHURST: Yes, the section 51 issue?
GLEESON CJ: Yes.
MR BATHURST: Yes, definitely.
HAYNE J: Mr Bathurst, I must confess that I am off the pace. Either the point you have made is a debating point or it is a point, the substance of which I have not grasped.
MR BATHURST: It is not, I hope, a debating point. The point is this: during the course of argument, your Honour the Chief Justice and other members of the Bench referred to matters which are traditionally considered under the question of reasonableness, for example, the question of whether or not the parties are the best judge of their own commercial interests in entering into the agreement, for example, the motivation of the parties or, in particular, of the respondents in entering into the agreement.
We say that, ultimately, none of those issues are relevant in determination of what I might call the threshold question and, secondly, that it is not now open to the appellant to introduce as a determinative factor in the threshold question the ultimate question of the reasonableness of the covenant and we do say that it is of considerable importance when one comes to consider the second issue, so they are more than mere debating points.
GLEESON CJ: Do you mean that it is not open to us to say that where there is no inequality of bargaining power between large commercial entities, each acting with legal advice, a conclusion that the restraint your client proffered for the purpose of the deal it was promoting was unreasonably adverse to your clients' interests?
MR BATHURST: We say it is simply relevant to the first question. The first question is, "Is there a restraint to which the doctrine applies?". One then goes to the second question, "Is that restraint reasonable?". On the second issue the courts have consistently held that the commercial approach or commercial interests of the parties is a relevant and important, although not necessarily determinative factor.
GLEESON CJ: That was what I always used to think was point one in a case like this.
MR BATHURST: The difference is that most of the cases - - -
GLEESON CJ: But, of course, once you start arguing along those lines you find yourself entangled in the merits.
MR BATHURST: The difference is that in most of the cases there is an assumption that the doctrine applies. It is an unusual case where what I have described as a threshold issue has received the attention that it has received in this case. In a normal course, and what I might call, with respect, the common garden type of cases, one looks at a contract, measures it up against the restraint, compares the position of the covenantor before and after the restraint and sees whether the covenantor is restrained.
Once one does that, which is usually, and, indeed, we say in this case, a relatively simple process, then one moves to the question of reasonableness, where the debate, both factual and legal, usually takes place. But in this case what is being challenged is the first aspect, whether this is a contract in restraint at all.
GLEESON CJ: I must say I just had not read the notice of appeal with sufficient care to pick that up.
MR BATHURST: And that, with respect, is also the thrust of Mr Martin's submission. The only reference to reasonableness in his written submissions is in paragraph 45, where it is the concept of inherent reasonableness, as Justice Gummow said, not quite as inelegantly as this, the flip-side of the coin.
HAYNE J: I must tell you, Mr Bathurst, I had taken these questions to be bound up with, perhaps submerged by, the means chosen to, for example, express the second of the issues said to arise on the appeal, namely, did it have any application to a covenant which is incidental and ancillary to a positive and continuing commercial relationship, a value word upon value word, all of which seem to me to invite close attention to issues of the kind which I understand you to be saying are not raised in the appeal.
MR BATHURST: That is correct. We accept that my learned friend has put that because this covenant is, to use the expression, ancillary to the sale of the business and, more importantly, the grant of the licence, then the doctrine has no application, but he has not said that that is because it is reasonable. Merely, he has put the proposition that this is a type of contract which is excluded altogether from the scope of the doctrine.
Could I also deal with two other preliminary matters. The first is that it is incorrect to say that at the time it was economically impossible either generally or for these parties to conduct a business in Western Australia by transporting ice-cream to Western Australia. If the Court would go to the statement of facts, paragraph 2.15 on page 44 of the appeal book, paragraph 9:
However, a small but significant portion of AUF's products sold in Western Australia were sourced from the eastern states. In late 1980, for example, 15 percent of AUF's requirements were Pauls products in Western Australia were manufactured by AUF's Preston (Victoria) or West End (Brisbane) factories.
GUMMOW J: We were taken to that, were we not?
MR BATHURST: No, your Honours were taken to the fact that Streets, I think were going to import. This case can not be determined, we submit, against the factual background that importation from the east was impossible.
The second matter is this. It was suggested, as we understood my learned friend's submissions, that clause 18 of the user agreement imposed similar restrictions on the appellant as was imposed on the respondent in the sale agreement. That, with respect, is not correct. If your Honours go to the user agreement at page 212, clause 18, the restriction on the appellant is that:
During the period of this Agreement the User shall not sell, supply, or distribute the Products -
defined -
outside the State of Western Australia.
Products defined in recital B on page 208 as, your Honours will see:
The user desires to manufacture, process and sell Confectionery and Ices details of which are set out in the Second Schedule hereto (hereinafter called "the Products").
So one goes to the second schedule and one sees the only restriction on the appellants is, in effect, Pauls marks and the small number of ancillary marks which were held by QUF. It was not, contrary to the restraint imposed on the appellant - - -
HAYNE J: Is not the relevant second schedule at 214 or am I wrong? I may be quite wrong.
GUMMOW J: This bears all the marks of the standard form agreement.
HAYNE J: Somebody pressed the wrong button on the word processing machine and it all just spat forth.
GUMMOW J: It did not need a second schedule, actually. It is repetitious.
MR BATHURST: I see, with respect, what your Honour said. There does not seem to be a second schedule. Those products were the products that, I think it is common ground, were the subject of the mark. The agreement throughout the rest of it makes no reference to the fifth schedule. I am sorry, your Honour, I should have picked that up. We make the same submission notwithstanding.
GLEESON CJ: Mr Bathurst, just reverting for a moment to your first submission, is it your submission - we will see in due course what Mr Martin has to say to this in reply - that unless we take the view that it was no business of the judges below to consider the reasonableness of the restraint proffered and undertaken by your client, that is the end of the matter?
MR BATHURST: That is correct.
GLEESON CJ: We do not get into questions such as your client ought to be paid the compliment of an assumption that it was in a position to decide whether it was reasonable that this restraint should last for 30 years, possibly, or that it should apply to products other than Pauls products.
MR BATHURST: Correct. We say that is relevant to the second issue and may we also say in relation to that, that even if one comes to the second issue, it is irrelevant, but it is not a determinant of consideration and I will give your Honours references to the various statements of Justices of the High Court and the trilogy of cases in 133 CLR which establish that proposition.
GUMMOW J: May it all not all turn around this: Mr Martin kept using the expression, "of a kind", "they are outside", and "I am of that kind" and what you are saying is you cannot really give any content to the kind without going into these other matters? It is one thing to talk about leases, it is another to talk about mortgages and land. I do not know - - -
MR BATHURST: Mr Martin was talking about joint ventures. We say, for example, this is not a joint venture and joint ventures are not, in any event, one of that kind. That has been held by this Court on two occasions or by two Justices, I should say, or stated, more accurately, by two Justices on two occasions.
GLEESON CJ: But if you are going to pin a label on an agreement, I would have thought the kind of label that would instantly attract scrutiny under the restraint of trade document is the label "rationalisation of marketing".
MR BATHURST: That is correct. Market sharing, it is traditionally since the Privy Council.....What we say is this, that whatever test or criteria - - -
GUMMOW J: Just looking there for a minute. What do you say Lord Pearce was then talking about in Esso, and what, if any, is its relevance or irrelevance to what is now put against you?
MR BATHURST: What we say Lord Pearce was looking at was whether the agreement considered as a whole in fact promoted trade including the covenantor's trade. His statement about matters being incidental, in our respectful submission, was said in the context of what I might call, with respect, his "sterilisation absorption" test. What we say about it is that at most it may be a helpful criterion along with the other criteria laid down by their Lordships in Esso and referred to from time to time in this Court for determining whether or not there is in truth a restraint.
But at the end of the day the ultimate question is, as, for example, Lord Justice Diplock put it in Petrofina, whether a person's liberty to trade is fettered. If it is shown that on the true construction of the agreement, taking into account the surrounding circumstances, but excluding for this purpose a person's motivation that the trade is fettered, one moves to the question of reasonableness. If that is not shown, on Lord Pearce's approach one does not get there at all.
GUMMOW J: Then how does Quadramain fit in with that?
MR BATHURST: Quadramain fits in on this basis, that Sir Harry Gibbs, with whom Sir Anthony Mason agreed, put Quadramain on the basis that, because the respondent would not have been able to purchase the land in question without the tie, there was no restraint on its freedom of trade. He could not have had the land otherwise. Sir Harry Gibbs refers with approval to what Lord Pearce said in Esso, that he agreed that it would be intolerable if a person could buy a property subject to a tie, pay for it by reference to that tie and then seek to resile from it.
Whether or not that basis commends itself to this Court - it did not commend itself, of course, to Justice Jacobs who was in dissent - that is the basis of Quadramain, not purely Tulk v Moxhay covenants. It is also consistent with Lord Reid's approach in Esso, for example, where one is not giving up any freedom. Before you owned the land, you could not build a hotel on the land; you could not after you acquired the land.
We submit that the approach courts should adopt in considering the initial, or what I have described as the threshold, issue is first to compare the position of the covenantor before and after the agreement to see whether the covenantor is restrained from carrying out any trading activity and then, assuming there is such restraint, to have regard to the agreement as a whole, to examine its nature and character for the purpose of ascertaining whether, notwithstanding the existence of the restraint, the contract is one to which the doctrine does not apply because it promotes trade, including the trade of the covenantor. It cannot be just a trade of the covenantee rather than restrain it.
In the present case, prior to the entry into the contract, the respondents had the following rights. They could manufacture and sell ice-cream whether by wholesale or retail, in Western Australia, except under the trademark Peters. Secondly, they had the exclusive right to the use of the Pauls mark throughout Australia. As a result of the agreement, the respondents firstly gave up their rights to market ice-cream in Western Australia under the name Pauls. We accept that that was a consequence of the exclusive licence, and no complaint is made about that.
Secondly, they gave up their rights to manufacture ice-cream in Western Australia and to sell ice-cream under any brand name in Western Australia, whether by wholesale or retail. There is some evidence which shows that the respondents did not only market ice-cream under the name Pauls. If the Court could go to paragraph 37 of volume 1 of the book, paragraph 1.14: "Prior to the establishment of AUF" - - -
KIRBY J: Page?
MR BATHURST: I am so sorry, page 37.
Prior to the establishment of AUF, Peters WA manufactured certain products under licence from, or as agent of, Petersville Australia Limited, including Weight Watchers ice confection and Farmland's (Coles house brand) Icy Poles and Milky Poles. On the establishment of AUF in 1980, production of these products was transferred to QUF's Pauls factory in Perth.
So from 1980 certainly to the time of this agreement, those products were marketed by the respondent. I should add, as far as that is concerned, there was another mark, and that is the Diamond mark. It is referred to in paragraph 1.11 of the agreed statement of facts. It is not a matter that we place any reliance on; the Diamond mark products seem to have been transferred as part of the arrangement, and I have already shown your Honours the so-called second schedule of the User Agreement.
The third matter which the respondents gave up was their right to sell any ice-cream to anyone anywhere in the world which, to their knowledge, was likely to end up being sold in Western Australia. That is in clause 7.1, and that would, of course, include sales to related parties of the respondents.
Ice-cream is a product which to some extent depends on the marketing as well as the inherent stimulus you get from eating different brands. Large chains promote ice-cream under brands such as - I think one of them is No Frills, for example. This type of covenant would restrict a sale in New South Wales where the respondent became aware that their ice-cream might be used, wholly or in part, for import to Western Australia unless one could obtain from the retailer some form of segregation.
Fourthly, the respondents were required to prevent any subsidiary or related company from carrying on the business of manufacture or distribution of ice-cream in Western Australia. We accept that that clause would only, in the normal course, operate in relation to subsidiaries. There might perhaps be some room for debate as to whether the requirement was to take reasonable steps, but even then we accept that that restriction is somewhat illusory in the case of a parent company who was determined to do what it liked.
GLEESON CJ: That is an interesting question, Mr Bathurst. What, if any, significance attaches in a case like this to the fact that where you are dealing with companies that may be part of complex corporate structures, it may be relatively easy to circumvent on a group basis a restriction of this kind? Is that just irrelevant?
MR BATHURST: May I answer it in two ways. In the context of the question of the restraint or the reasonableness of the restraint, certainly not. In, for example, Peters v Patricia's Chocolates, the case at Wynyard shop, the majority judgment turned upon a different construction of the agreement to the construction of Sir Owen Dixon. It was a much limited interpretation of the clause. One has to look, we would accept, in determining reasonableness at the extent of the protection given.
GLEESON CJ: Sometimes these restraints may be more apparent than real. One of the vices in this was said to be that because it was lasting so long and because it covered frozen confectionery products as well as ice-cream, the potential for introduction of new products over the years, as has occurred in relation to frozen yoghurt, for example, produced the consequence that this was a highly unreasonable restriction. But is it relevant to say, "But they could have walked around that restriction simply by forming another company, not a subsidiary, of the covenantor to manufacture frozen yoghurt"?
MR BATHURST: It is relevant to say at least this, we would accept, that there is a possibility that without the assistance of the covenantors themselves a parent company could simply do that ignoring the covenant. I put it that way because we would submit that there would be, at least, implied in that provision a "best efforts" clause, which could be infringed by either of the respondents giving their assistance to that course of conduct.
GLEESON CJ: A lawyer advising Petersville about this draft agreement might have said to the client, "Look, do you realise that if a brand new kind of frozen confectionery, which is highly popular, comes onto the market in six years time, you will be prohibited from marketing that in Western Australia?", and the client might have said, "Give us credit for a little ingenuity".
MR BATHURST: Again, one is dealing with a hypothetical set of facts. It may well be there would be an argument against that. If the directors of Petersville set up a separate related company purely for the purpose of doing that, one could say that Petersville had an obligation to use its best endeavours. The directors in doing that are permitting it to occur.
GLEESON CJ: Was Petersville itself a subsidiary?
MR BATHURST: The answer to that question, I think, is no.
HAYNE J: See paragraph 1.15 page 38. The answer seems to be yes, does it not? "In 1981, HC Sleigh Limited acquired" - - -
MR BATHURST: I am sorry, your Honour is quite right. Yes, it was 1981 when H.C. Sleigh took it over. It certainly became a subsidiary thereafter.
HAYNE J: When Sleighs took over.
MR BATHURST: Yes.
HAYNE J: Yes.
GLEESON CJ: What was the date of the agreement?
MR BATHURST: The date of the agreement was 1983.
GLEESON CJ: So H.C. Sleigh Limited could have simply set up another subsidiary to manufacture or market frozen yoghurt in Western Australia.
MR BATHURST: Probably.
GLEESON CJ: Is that a relevant fact?
MR BATHURST: It is not relevant on this issue. It must be relevant on the question of reasonableness.
GLEESON CJ: Was it taken into account in the courts below?
MR BATHURST: No, although we do not say any of the judges below proceeded on the assumption that this clause would bind parent companies. What Justice Carr said appears at page 467, line B, midway down the page:
If the applicants were the subject of a takeover, the acquirer might also have other subsidiaries. All those subsidiaries would be related corporations of the applicants in relation to which the applicants assume [by Article 7.1(d)] an obligation in terms of not permitting them to do the things referred to in that sub-article.
His Honour does not go any further than that. The Full Court does not go any further. There was, as I recall it, no point taken that the covenant in 7.1(d) was, in effect, illusory for the reasons your Honour has just put. Of course, it has a practical effect as well.
GLEESON CJ: I would not suggest that it is illusory, but I can see ways of getting around it.
MR BATHURST: There is a practical aspect to it as well. It would involve, of course, because of the non-manufacture for distribution in Western Australia covenant, building another plant or, I suppose perhaps, selling the plant to an associated company, but if one did the latter, for the purpose to which your Honour has indicated, there could arguably be a breach of 7.1(d) in any event.
We submit that the first three matters to which I referred plainly restrain the respondents' trading activity. The last matter seeks, at least indirectly, to impose a restraint on third parties. Therefore, we would submit one approaches the question, at least at the first level, on the basis that as a matter of fact the respondents could not trade after the agreement as they could before. In that sense their liberty was restrained.
Can I then turn to the question of characterisation of the contract in which the restraint appears for the purpose of seeking to demonstrate to the Court that the contract does not show, properly characterised, that there is in truth no restraint on the respondent. We would accept in considering that issue the surrounding circumstances can be taken into account. One is entitled to look at the contract as a whole and the surrounding circumstances when it was made, but on at least the threshold question of whether the contract is one to which the doctrine applies, the parties' motivation or the benefits which they perceived to be obtained in entering into the agreement are, in our respectful submission, irrelevant. Now, we do not deny for a moment that the respondent at the time of the agreement regarded it as desirable and in its commercial best interest. They would not have entered into the agreement if they had not - there was no question of any suborning of them.
We accept, as I have indicated to the Court, that that is of course relevant to the question of reason. It is not, and we say the cases demonstrate that none of the cases have held that it is relevant on the threshold question. Can I test it this way. Let it be assumed, as my learned friend always went so far to suggest in his submissions, that what the parties were doing was, as it were, carving up Australia. Each party may have considered they would be much better off operating in a limited part of Australia, free from competition from the other party to the agreement and, in those circumstances, may well have regarded it in their interest to give a restraint.
That type of restraint, we would submit, a bare covenant against competition, is one of the very classes of restraints to which this doctrine has attached. I will give your Honours a complete reference in a moment, but the Privy Council held that in Vancouver Malt [1934] AC. The fact that the parties think it is a good idea to restrain competition does not necessarily mean the doctrine cannot apply.
The agreement, in our submission, is, firstly, an agreement for the sale of a business and the land on which the business was conducted. I am not going back to these clauses, except to the extent absolutely necessary. My learned friend has taken your Honours through most of them. That appears in clause 1 and clause 2.1(a), (b) and (e) of the agreement at page 170 of the book.
Secondly, the agreement is one by which the Pauls mark is licensed, that is clause 2.1(c) on page 172. Now, the consideration for the sale is split up over the various items of property transferred, but treated compendiously for goodwill and the licence. Mr Martin took your Honours to that. It is at clause 2.2(d), pages 173 to 174 of the appeal book. There is, as Mr Martin showed your Honours, a "best endeavours" clause and a "minimum royalty" provision.
If for the moment I could leave aside clauses 7.2 and 7.3 of the agreement, all the agreement is, to this stage, as a matter of characterisation, is the sale of a business, coupled with an ancillary licence of a trademark. There is no reason, we submit, why an agreement of that nature should not be subject to the doctrine, particularly when it is remembered that the agreement itself says that the covenant is solely for the protection of goodwill.
GLEESON CJ: I would thought that a contract for the sale of business, accompanied by a covenant on the part of the vendor not to engage in future competition with the purchaser in a certain area and for a certain time, is a classic case to which the doctrine of restraint of trade applies, and you deal with that by asking whether the time is too long and the area is too large.
MR BATHURST: That is our submission.
GUMMOW J: What do you say to the idea that 7.1(a) is merely an express statement of what already would flow from the exclusive grant in 5.2?
MR BATHURST: We submit, with respect, that it would not. We accept - - -
GUMMOW J: You say it is more?
MR BATHURST: Yes. Courts are reluctant, in our respectful submission, to impose as a matter of implication covenants against competition. This Court on two occasions, in different contexts admittedly, where one was looking from the point of view of a distributor competing with the products the subject of a distribution agreement, have rejected the implication of terms. That was in Transfield v Arlo, which I think is in 144 CLR, and some of the Justices in the High Court in Hospital Products took the same approach. This, of course, is a different type of covenant to that because it is not a restriction on a distributor, but the same principles would apply.
My learned friend indicated that the term was in the nature of a Butt v McDonald or McKay v Dick type of implied term. One may imply, to give effect to the agreement, or to give the party the benefit of what he had purchased, non-competition in respect of the mark to the extent it was necessary. But any implication beyond that, would have to be by reference to the Codelfa test, in our submission, it would be an implication in fact, and there is just no basis for it in this case.
Now, what was said by the Court of Appeal in England, in our respectful submission, in Murray v ICI, does not affect that position. Murray v ICI was a case where the issue was whether or not the payment in respect of the "keep-out" covenants was an affair of capital. It is.....but that is effectively the situation. The Court held that it was "ancillary to the grant of the licence" for the patent for which the consideration was paid, and it was therefore capital. Could I just take the Court for a moment to Murray [1967] Ch 1038. We do submit that, with respect, that Lord Denning, with whom Lord Justice Davies agreed, was not suggesting that in all cases of a grant of patent there be implied a covenant not to trade in any other similar products. What his Lordship said appears at page 1051D:
A "keep-out" covenant is a covenant which bolsters up an exclusive licence.
If I can pause there, any covenant by which a person says he will not compete in a contract for sale bolsters up the value of what is sold. Then he goes on:
It makes express that which would otherwise be implied. The licensor covenants expressly with the licensee that he will not enter on the domain which he has granted to the licensee. In the present case the "keep-out" covenants are somewhat wider than the exclusive licence in area, time and products.
GUMMOW J: That negates what he said in the second sentence.
MR BATHURST: That is right, exactly.
GLEESON CJ: In the next sentence he says:
But this makes no difference to the tax position.
MR BATHURST: The tax position, that is right, yes. Could I hand to the Court an extract from Volume 23 of the Fourth Edition of Halsbury, where this case is dealt with. In paragraph 571, the learned authors say:
The provisions of the Tax Acts as to the deduction of income tax from annual payments etc also apply in terms to any royalty or other sum paid in respect of the user of a patent.
The sum in respect of the user must be of an income nature. Whether it is a capital or revenue receipt may be a difficult matter to determine, depending upon the particular facts and including the terms of the agreement and any extrinsic evidence. If the lump sum is arrived at by reference to some anticipated quantum of user, it will normally be income in the recipient's hands. If it is not and there is nothing else which points to an income character, it will be capital.
Then if I could invite the Court - I am sorry it is difficult to read, it is the best we could do - to go to footnote 6 on the next page, your Honours will see about halfway down the footnote a reference to Murray and the judgment of Lord Denning:
(a lump sum payable in instalments for an exclusive licence to make `Terylene' was held to be a capital receipt because (1) the exclusive licence was a capital asset; (2) the instalments were payable in any event irrespective of user under the licence; and (3) the agreement provided for it to be a capital sum payable by instalments, and not as an annuity or a series of annual payments.
That was the issue that was involved in that case. That, with respect, his Lordship was not considering and we say did not purport to consider in any detail the extent of an implication. To the extent he did, and we would be seeking to put a proposition that in all cases where a grant of, in this case, a licence for trademark was issued, there is implied, as a matter of law, a covenant not to compete in respect of goods the subject of the trademark, that, with respect, is incorrect on the state of the law in this country.
GUMMOW J: Wait a minute, it is an exclusive licence. That means the licensor is excluded.
MR BATHURST: That is right.
GUMMOW J: For whatever the trademark covers. You accept that?
MR BATHURST: That is right.
GUMMOW J: What if Murray was a bit greedier?
GLEESON CJ: What do you say about the argument that in order to complement the minimum royalty obligation, the restriction on selling products that might compete with Pauls products was - I am trying to avoid categorising it as reasonable - - -
MR BATHURST: Your Honour disliked my answer.
GLEESON CJ: Yes.
MR BATHURST: It goes to the question of reasonableness because it may well be that some restriction is required to permit the covenantee to get the benefit of the covenant and to be able to meet that obligation.
GLEESON CJ: Your primary submission, as I understand it, is that this agreement ought to be properly characterised as an agreement for the sale of a business with a covenant by the vendor not to compete, and in that respect is a classic form of agreement subject to the doctrine.
MR BATHURST: That is right.
GLEESON CJ: In so far as Mr Martin seeks to persuade us that its true character is that of an agreement for the integration and rationalisation of the marketing operations of the parties, he is out of the frying pan and into the fire.
MR BATHURST: That is right.....If he describes it, and for reasons I will show your Honour in a minute, as a joint venture, he is wrong, with respect, as a matter of construction of the agreement and it would not matter anyway on the authorities. That takes me directly to clauses 7.2 and 7.3.
There may be some debate about the ambit of clause 7.2. Clause 7.2 appears at page 189 of the appeal book. Our primary submission in relation to clause 7.2 is that the obligation which it imposes on the respondents is to supply "information in relation to products of the ice-cream business" being marketed by AUF at the time of the agreement. That is the effect, we say - - -
HAYNE J: "Then" means "now".
MR BATHURST: "Then" means "now", yes. If that is right, what the clause requires is for the respondent to update the appellant in respect of technical and marketing information relating to those products of the business sold and which AUF has continued to market.
More relevantly for the purpose of this debate, we submit, is, firstly, there is no obligation on the appellant to use such material. The clause, as we have put it, is ancillary to the sale of the business and the licensing of the mark. It enables the purchaser to get the benefit of that - of any updates on what it has bought. It does not, however, we submit, alter the characterisation. The optional nature cannot lead to the agreement being characterised as a joint venture, or one which gave rise to obligations of mutual trust and confidence.
Even if it is read more widely as my learned friends would have it, to extend to any products of the ice-cream business marketed by AUF at the time the request was made - in other words, reading "then" as referring to the time of the request - we would submit that the grant of a right of access to product development and technical and marketing information, without any obligation to use that information for joint purposes, cannot constitute the relationship as one of joint venture or, what seems to be the fall-back position, a relationship where obligations of mutual trust and confidence arise.
GLEESON CJ: Could you just repeat the process by which you would conclude that the word "then" is a reference to some time other than the time when the request is made?
MR BATHURST: We say - - -
GUMMOW J: I thought you put "now" in after "sold". I know you said "then", but it really just goes in after "sold", does it not?
MR BATHURST: Yes, I accept that.
GUMMOW J: So if sometime in the future these things happen, but they are happening in relation to products we are now selling.
MR BATHURST: As I indicated, our primary submission is products of the ice-cream business is products of the business the subject of the sale, then, in those circumstances, deals with the question of whether the same products are still being marketed by AUF. It does not deal with other and different products. The alternative submission is the one I put then. We say for present purposes it does not matter, because the propositions we put apply whichever construction is correct.
I indicated that Justices of this Court have expressly rejected the proposition that the doctrine cannot apply to joint ventures. That appears from Amoco[1973] HCA 40; , 133 CLR 288. At page 304 at the foot of the page, Sir Cyril Walsh notices the submission in the second-last line:
Likewise, if it appears that the parties have agreed to embark upon a joint venture in setting up a business the doctrine will not be applied. In my opinion, there is no warrant for laying down any such rules of exclusion of the doctrine as those proposed by these submissions. The particular circumstances to which the argument refers may need to be taken into account when the court considers whether or not the restrictions go beyond those that are permissible. But they should not be held to prevent the court from considering that question at all.
It was also dealt with by Sir Harry Gibbs at page 314 to 315. At page 315 in the fifth line, his Honour said this:
In further support of this branch of Amoco's argument it was contended that Amoco, which had only recently commenced to trade in Australia, and Rocca, which was commencing business as a service station proprietor, stood in a relationship of mutual need and ought to be regarded as being engaged in a joint venture rather than as supplier and retailer -
which is, with respect, very close to Mr Martin's submission here -
With all respect, I can see no reason why, if this were correct, the doctrine relating to restraint of trade should be inapplicable, but in any case the parties were in truth not joint venturers; Amoco was a supplier endeavouring to bind Rocco, when it commenced business as a retailer, to obtain its supplies exclusively from the one source.
GLEESON CJ: Well, in the days when there were two major breweries, I do not suppose they could have avoided the consequence of the doctrine by going into a joint venture.
MR BATHURST: That is right.
GLEESON CJ: It is the first thing they would think of doing if they had wanted to eliminate competition.
MR BATHURST: That is right. Well, the effect of the clause 7.3, in our submission, is that the appellant had the right to the - I am sorry. Can I start that again? I put that badly.
On completion of the agreement the appellant had the right to the Peters and Pauls marks in Western Australia and the respondent had the right to each mark elsewhere in Australia. Clause 7.3 gives the appellant an option, in effect, to market new products developed by AUF and market them under those names on terms to be agreed. If your Honours could go to the clause for a moment. It is at page 189. We say the words "develop or acquire advertising or promotions" probably give rise to a difficulty - I am more forthcoming than my learned friend, notwithstanding the identity of my client - for the reason that the skill in this area is the marketing, not the development.
We say it should be read that if AUF shall either develop or acquire advertising or promotions relating to products, then it means in fact that if AUF develops and advertises and promotes particular products of the Peters name, then at the request of PWA, on such reasonable terms as may be agreed, PWA may market such products.
GLEESON CJ: May I take you back for a moment to 7.2 and your construction of 7.2. Is the argument in support of your construction one that turns mainly on the meaning of the words "the ice cream business"?
MR BATHURST: Yes.
GLEESON CJ: And if you relate those words back to the definition in recital (A), it is the business in which the partnership are engaged at the time of the contract?
MR BATHURST: Yes. I have to accept the words, firstly, are not the defined term and secondly, they are used indiscriminately throughout the agreement, which is - - -
HAYNE J: But they are. They are a defined term.
GLEESON CJ: In recital (A).
MR BATHURST: Yes, your Honour, I withdraw that. So far as clause 7.3 is concerned, we say that the fact that the parties may in the future reach agreement on additional products which, irrespective of the restraint, could not be sold by the respondents in Western Australia because they have had no right to the Peters mark in that State, cannot alter the characterisation of the agreement nor lead to the result that some form of joint venture existed. The mere fact that PWA from time to time could say "We'd like that product. We'd like to buy it from you or license it from you. Let's sit down and negotiate reasonable terms" does not, in our respectful submission, lead there to be either a joint venture or a relationship of mutual trust and confidence.
Now, if those propositions be correct, it follows, we submit, that the agreement is, in truth, properly characterised as one of sale with an ancillary grant of a licence, and whatever test is adopted for the threshold limb, the contract falls within the class of cases to which the doctrine applies.
Now, we would submit, with respect, that this case demonstrates the undesirability of laying down any inflexible rule as to how the threshold question is to be determined. In truth, the question of whether or not there is a restraint of trade is likely, in most circumstances, to be very easily seen, even if there is some difficulty in defining it, and experiences would suggest shows that apart from the solus agreements, normally it is not a question that raises much difficulty. That is not to say the threshold should be abandoned. Your Honour Justice Gummow, for example, in Adamson emphasised the importance in distinguishing between the two limbs and we do not say any thing in opposition to that. But what we say is that ultimately the question is whether or not the liberty of the covenantor is restricted and rigid rules should not be laid down to determine that.
GUMMOW J: They ended up being struck down in Adamson, did they not?
MR BATHURST: Yes. That is right.
GUMMOW J: The draft.
MR BATHURST: Yes, it was a draft. The Full Court overturned Justice Hill. That is not to say, in our submission, that what was said by Lord Reid and Lord Pearce and Lord Wilberforce offer no assistance to dealing with the question. They are, with respect, useful criteria, but ultimately what the Court has to conclude is whether the contract in truth restricts the liberty of the covenantor to trade with third parties in the future or whether as a whole it promotes trade. And that is what was said, for example, by Justice Issacs in Bacchus Marsh and that has been approved by Sir Owen Dixon in Peters v Patricia and cited with approval by Justice Stephen admittedly in dissent in Pamag at page 205. I will not take your Honours to it.
Even if one applies the criteria or tests suggested by each of their Lordships in Esso, the contract is one to which the doctrine applies. If one adopts the majority criteria, it is self-evident. The respondents have given up the freedom to trade in Western Australia which they previously had.
If one adopts the criteria adopted by Lord Pearce, there is no absorption of the respondents' trade. The fact that its know how may be used in certain circumstances and the fact that some products may be licensed in the future - they may not - does not lead to that conclusion. That is shown, we would submit, by a comparison simply between those possibilities and what was, in fact, given up. It is not a contract, we would submit, of which one could say, consistently with the approach of Lord Wilberforce, that the contract, coupled with the restraint, had passed into the accepted and normal currency of commercial, or contractual, or conveyancing relationship, so that the restraint would pass without scrutiny. That is the approach his Lordship adopted in Esso at pages 332 and 333 of his Lordship's speech.
Now, my learned friends have indicated that the appropriate test for the threshold question should be the test laid down by Lord Pearce. There are a number of difficulties applying it as a universal test. Firstly, the expression "absorption of a parties trade" is, in our respectful submission, a somewhat elusive concept to it. It presumably means the absorption of a party's capacity to trade in the particular area the subject of the covenant. That involves, perhaps, a factual inquiry even at the threshold level. It also leaves open the question of what happens where the contract does not totally absorb the covenantor's trade but only partially absorbs it.
Lord Pearce would probably answer that question by saying the partial absorption is enough because he relies in part in reaching his views in what was said in the Bette Davis Case. The reasoning in that case has been criticised by Justice Heydon, in the second edition of his work on The Restraint of Trade, at page 55. I will not read it to the Court. But even if partial absorption is enough, again it must amount to a question of degree. An inquiry which overlaps the reasonableness inquiry - we submit that that is an inappropriate means of considering the threshold issue.
That is all I would seek to say on the first issue, except subject to saying this: so far as the Trade Practices Act is concerned, section 4M of the Act preserves the doctrine to the extent it is capable of concurrently operating with the Act. We submit, and it has not been suggested to the contrary, it is capable of operating in conjunction with the Act in the present case. The other thing we would say about the - - -
GUMMOW J: Does not section 4M mean that there may be some restraints which survive at common law but which will be struck down by the Act?
MR BATHURST: There may be some restraints which survive the common law, and will be struck down by the Act, yes. We were unable to find any examples where it went the other way.
GUMMOW J: That is what I was wondering.
MR BATHURST: We tried. The best we could do - but it does not really get there - is section 88 on authorisations. One could have a contract authorised under section 88, so there is a protection of section 45, but struck down by the common law. It would seem to us primarily they could still operate concurrently, but it may be - and I do not want to put it especially any higher than that, because it is not necessary for this Court to consider at this stage.
GUMMOW J: It may be that if you got the authorisation you got your federal right and that is all you need and you are not liable to attack under the common law.
MR BATHURST: But that is a question, at least in this case, that need not detain this Court.
KIRBY J: But on general principles, would you not, first of all, to answer the problem that is presented by 4M, ask, "What are the requirements of this Act, what does the Act mandate?", and, only if you need to, ask, "What is the law that is capable of operating concurrently with the Act?"?
MR BATHURST: Not necessarily, with respect.
KIRBY J: I know that is not what is done, but I am asking whether it is not the principled way to approach the matter.
MR BATHURST: For there to be an effective covenant, looking from the point of view of validity at the time of the agreement, it would be necessary if the relevant provision was not void in restraint of trade at common law or was not and did not contravene section 45. We certainly submit, with respect, that section 45 does not oust the operation of the common law doctrine. That would be contrary, we submit, to the legislative mandate in section 4M because, if section 45 had that operation, there would be a considerable limitation on the room for the operation of the common law doctrine.
KIRBY J: I did not hear your last words.
MR BATHURST: There would be a considerable limitation on the operation of the common law doctrine, which whilst it is underpinned by public policy - we accept that - operates not only in relation to restraints held to be against the public interest but also restraints unreasonable inter partes, which is a different area of discourse from the issues raised by Part IV of the Trade Practices Act. Can I then turn to section 51(2)(e).
GLEESON CJ: Now, is your submission to us that we should approach this question on the basis of an acceptance of the views about reasonableness in the court below?
MR BATHURST: Yes.
CALLINAN J: The court had no advantage over us because it was all on agreed facts and on the documents, was it not?
MR BATHURST: Had there been an application to amend the notice of appeal, whether before or during the course of this hearing, there may be a different issue. I accept, with respect, if the Court was to embark on that, there is no material or nothing available to the courts below which would not be available to this Court. It does not depend at all on the credit of witnesses or any issue of that nature.
CALLINAN J: I am sorry, would you just explain to me why we do not get to that question again?
MR BATHURST: Your Honours do not get to that question - before I answer that - I am not trying to avoid it - I think I should put this issue in context. It was not put down below by the respondents to this appeal that because of the findings of fact it would follow that - I am sorry, I withdraw that. We put down below that if the covenant was wider than necessary to protect goodwill, it would not fall within section 51(2)(e). We also told the court that if we succeeded on the common law issue, there was really no need to consider it any further.
GLEESON CJ: Consider what any further?
MR BATHURST: Consider the Part IV issue any further, because what was sought in the litigation, at least by the respondents, would have been achieved.
GLEESON CJ: Just coming back to the first part of that proposition, as a matter of construction of 51(2)(e), why does it follow, from the fact that the covenant is wider than is necessary for the protection of the goodwill, that it does not fall within (e)?
MR BATHURST: We say the word "solely for the protection" is making it clear that the covenant which gives - I am sorry. I will put that again. We say a covenant which gives more than what is adequate for the protection of the goodwill cannot be solely for such protection.
GLEESON CJ: A covenant that gives more protection than is necessary might still be a covenant solely for protection, might it not?
MR BATHURST: It might be. We would submit, with respect, the word "solely" introduces the concept of adequacy. It would be very unusual if one could, as it were, circumvent the provisions of section 45, by putting in a covenant far beyond what was necessary for that, that being - - -
GUMMOW J: Has that always been there, 51(2)(e)?
MR BATHURST: Yes.
GUMMOW J: It has not been changed.
MR BATHURST: No.
GUMMOW J: Has it been discussed since by the Swanston Committee or anything like that?
MR BATHURST: Not as far as I am aware.
GLEESON CJ: Take the classic simple case: a person is carrying on a dry cleaning business in a suburb; he sells the business and the purchaser of the business says, "I want you to promise that you are not going to open up a dry cleaning business within an area of five square kilometres for a period of 10 years", and the court looks at that and says, "Well, five should be three and 10 should be eight", and therefore, because they have not put a series of clauses you can run a blue pencil through, the covenant fails. Does that mean it does not fall within 51(2)(e)?
MR BATHURST: We would submit so.
GUMMOW J: Is there any other authority on 51(2)(e)?
MR BATHURST: There is none.
GUMMOW J: It is a provision that has been vexing conveyancers drawing agreements like the Chief Justice mentioned for years.
MR BATHURST: That is right.
CALLINAN J: There is a big difference between the word, say, "sufficient", and "solely", is there not?
MR BATHURST: We would accept that the alternative construction is the sole witness who would accept that there is an alternative construction, that solely looks to the purpose of the covenant, the sole purpose. We, however, in our submission, the correct construction is, in effect, that "solely" - is looking, as it were to effect, and if it is more than adequate, for the reasons we have said, it have an effect greater than is necessary.
There is another problem with the application of section 51(2)(e) which does not depend directly on the construction but may highlight, we accept perhaps, the difficulty of this Court determining this issue at this stage.
My learned friend's primary submission is that this covenant formed an integral part of an ongoing relationship between these parties, whether it is called in the nature of a joint venture or not. It is implicit in that proposition that whatever be the position about this covenant at common law, it could not be said on those submissions to be solely for the purpose of protection of goodwill. It had another purpose - maybe a perfectly reasonable purpose at common law but it does not fall within section 51(2)(e).
GLEESON CJ: I am just not sure where you say Mr Martin is left in relation to 51(2)(e), having regard to the form of the notice of appeal. Do you say that he is committed to seeking to bring the case within 51(2)(e) notwithstanding his acceptance for the purposes of the appeal of findings of unreasonableness and adverse effect on the public interest?
MR BATHURST: It would be open to Mr Martin, we would accept, to say irrespective of those findings, the covenant was solely for the purpose of the protection of goodwill and, on the alternative construction of the section, unreasonableness does not matter.
The difficulty with that is that neither of the courts below made any express finding on the issue, whether that covenant as a matter of fact was solely for that purpose as distinct from finding it is too wide.
GLEESON CJ: Mr Bathurst, how does the 51(2)(e) issue arise if you are successful on the first point?
MR BATHURST: It does not, is the short answer to that.
GLEESON CJ: It only arises if you fail on your first point and Mr Martin still wants to fend off a Part IV case?
MR BATHURST: That is right.
GUMMOW J: Can we be confident then that if you win on your first point, that that brings with it an end to the litigation?
MR BATHURST: The answer is, I am confident, but I can probably go further than that. We would not be seeking to proceed with any Part IV case if we are successful on the first point.
GUMMOW J: For us to embark on it would be truly - - -
MR BATHURST: There are really three alternatives and probably, to some extent, highlights the difficulties of this Court embarking on it now in any event. Your Honours could find that the construction for which we urge is correct and that as a result of the findings below this covenant was not solely for the purpose of the protection of goodwill. Your Honours could find, because I have to accept that this point was not squarely addressed below, that whether or not the findings as to reasonableness in the common law sense were not challenged, at no stage below did a court make an express finding on this issue.
The third problem could be, if your Honour finds for Mr Martin, on the basis that this covenant was as part of a wider arrangement, as he now contends, which of its very nature would take it out of section 51(2)(e) and may well make it inappropriate for the Court to deal with it at this particular point of time. We take the view we should raise those issues with the Court, because it does present problems in determining it now. They are our submissions, if your Honour pleases.
MR BATHURST: Your Honours, I am reminded that - if I can give your Honours just one reference to the proposition that the position of the parties or the views of the parties of the commercial benefit of the agreement is inconclusive, even on the question of reasonableness. That appears from what Sir Harry Gibbs said in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Pty Ltd [1973] HCA 40; (1974) 133 CLR 288, pages 316 to 317.
GLEESON CJ: Yes, Mr Martin.
MR MARTIN: Your Honours, we have put written submissions in reply, and obviously I will not repeat anything that is in those, but can I just deal firstly with the question of the ambit of the appeal, in the hope that what I say will elucidate rather than further confuse. We put two submissions in the alternative. The first is that, because of all the reasons we have developed, this is not an agreement that falls within the scope of the doctrine in restraint of trade; or, alternatively, if that is not accepted, we put the submission that it is an agreement of a class or kind which is inherently reasonable within the scope of that doctrine, so that no further inquiry or consideration of its reasonableness by reference to its particular facts and circumstances arises.
GLEESON CJ: So you do not invite us to reconsider the factual assessment of "reasonableness" made in the courts below?
MR MARTIN: No, your Honour, we do not. But what we do say is that we are entitled to put, in support of that submission, any proposition that is relevant or germane to the propositions that we have put, and the mere fact that those propositions overlap with some of the considerations that were taken into account below does not preclude us from putting them.
We have put another proposition, your Honours, and that is if either of our primary contentions is upheld, then it follows that there was no occasion for the courts below, on a proper view of the law, to go on and consider what we earlier characterised as the second and third questions, that is, reasonableness inter se, and reasonableness in the public interest.
GLEESON CJ: But you do not invite us to reconsider whether 15 or 30 years was too long, or whether frozen yoghurt was too wide?
MR MARTIN: No, we do not, and, your Honour, the other point we make, of course, is that, in the end, those conclusions to which the court came were conclusions of law based upon non-contentious facts and they are particular conclusions about the application of common law tests. So that it is not as if there is a finding of fact of the court below which our proposition is somehow inferentially challenging. Rather, they are conclusions of law on questions that would be otiose and, of course, the other thing that would follow is that if our primary argument succeeds, it would seem quite likely that some of the process of the reasoning of the court in arriving at those conclusions would be found to be flawed in any event.
But, your Honours, our primary proposition is that the fact that there is overlap cannot prevent us pointing the Court to material matters. Can I give an example. Your Honours might think that if our proposition with respect to the proper principle to be applied in determining the scope of the doctrine is accepted, then it would be a very rare case indeed that an agreement that falls outside the scope of the doctrine would contravene the public interest. Now, that is a proposition though and, indeed, we rely in support of our principle that it is an apt means of giving effect to the public interest. In our respectful submission, we can put that, notwithstanding that there has been a determination below on particular circumstances of the third question.
Then finally on this topic, can I say in relation to 51(2)(e), our submission is that those conclusions of law with respect to inter se and reasonableness in the public interest are simply irrelevant to the considerations under 51(2)(e). It may be that some of the matters adverted to by the courts below in arriving at those conclusions of law have a bearing upon the 51(2)(e) question.
GLEESON CJ: If it arises, what do you say about the example of the sale of the dry cleaning business? You have a covenant, the court looks at the covenant and says, "The area is too wide, the period is too long". What do you say about whether that produces the consequence that it cannot fall within paragraph (e)?
MR MARTIN: That "solely" does not mean reasonably. "Solely", in my learned friend's proposition, would have to re-construe the statutory provision so that "solely for the protection of goodwill" means "and only reasonably in relation to the protection of that goodwill".
GLEESON CJ: So that produces the consequence that if BHP sells its steel-manufacturing business and covenants with the purchaser of the business that it will never manufacture steel in Australia ever again, paragraph (e) produces the consequence that that cannot be examined under Part IV?
MR MARTIN: If the conclusion is that the purpose and effect of that covenant is solely for the protection of the goodwill, then the answer is yes but if one goes out at extremist examples of this kind, one is getting into the area in which it may be open to conclude the purpose and effect of the provision was not, in fact, solely for the protection of the goodwill of the business being purchased. But, in the dry cleaning example that your Honour postulated, differences of degree of the kind in your Honour's example, would not take it outside the scope of protection.
GLEESON CJ: Let me suppose that BHP sells its steel-manufacturing business to Smorgons and it covenants with Smorgons that so long as Smorgons remain in the business of selling steel in Australia and continue to carry on the business that BHP have sold to them, BHP will never compete with them. Is not that, on your approach, solely for the protection of the goodwill?
MR MARTIN: If that is right, then that is the ordinary natural meaning of the statutory provision to be construed, of course, in conjunction with section 4M.
HAYNE J: And is the question of whether common law rules about restraint of trade in the example just postulated of the BHP/Smorgon sale affected by whether, at the same time as BHP sells, BHP agrees that it will continue to make certain kinds of know how coming into its possession available to Smorgon during the period of the agreement?
MR MARTIN: That would, perhaps, complicate the question, again, of whether it was solely for the protection of goodwill.
HAYNE J: No, turning away from 51(2)(e) purely to the common law principles, why does the addition of a covenant by the vendor that it will hereafter do certain things for the purchaser affect whether this is an agreement that comes within the purview of the common law rules.
MR MARTIN: Your Honour, we do not put that such a covenant would of, itself, take it outside the common law rules. It would be a matter relevant to consider in conjunction with other circumstances here present, such as, the licensing arrangement, the geographical boundaries, the entire circumstances that surrounded this transaction. We do not put that exchange of information per se in isolation. If that is the only thing coupled to a bare covenant, it probably would not bring such an agreement within the scope of our argument. We rely on more than that.
Your Honours, could I next move to the question of my learned friend's submission based on Amoco. Amoco was a solus case. That is to say it was concerned with sources of product, not with two parties who are potentially competitive with each other, but rather with the question of whether a petrol station owner could buy fuel from another source. That is why, with respect, it is easy to see that a conclusion there was a joint venture would be of limited assistance.
I respectfully, your Honours, take up the Chief Justice's example of the two brewers, and put, contrary to what was suggested, that, in fact, in that circumstance, if there was a joint venture, whereby those two brewers agreed as part of their joint venture to simultaneously promote the sales of their product and share the revenue derived from the sales of their product undertaken pursuant to a common enterprise, then a covenant that neither of them would compete with that common enterprise would be entirely unexceptional, and, indeed, a covenant of the kind that the law would imply in the event of partnership which a joint venture of that kind would almost certainly constitute.
So, in our submission, there is a danger in just taking labels like "joint venture" from a solus case, and then applying principles enunciated in that context into a circumstance of two competitors for the ultimate consumer.
Finally, your Honours, could I go to my learned friend's ingenious attempt to make clause 7.2 mean something that it does not say. The fundamental problem with the attempt, with respect, is that "ice-cream business" is a defined term, and if we go back to the definition, it is not limited to the business conducted in Western Australia because clause (a) refers to the business conducted in Western Australia and elsewhere. So that it is clear that it is the business conducted elsewhere to which reference is being made by the defined term, so that to read it as my learned friend construes would be doing enormous violence to the language and you cannot read "then" as "now". If it please the Court, those are our submissions.
GLEESON CJ: Thank you, Mr Martin. We will reserve our decision in this matter.
AT 4.26 PM THE MATTER WAS ADJOURNED
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