This case provides a useful summary and analysis of the factors that a court will consider when deciding whether a restraint in a sale of business context (as opposed to an employment context), where the parties will generally be in a similar bargaining position, will be reasonable. Restraint clauses in business sale contracts should go no further than is required to protect the relevant party’s legitimate business interests, which will obviously depend on the facts of each particular case.
RPR Maintenance Pty Ltd (RPR) was a franchisee of Spanline Weatherstrong Building Systems Pty Ltd (Spanline) for the South Coast territory and entered into a sub-franchise agreement (Sub Franchise Agreement) with Marmax Investments Pty Ltd (Marmax) for the Illawarra territory (an excised portion of the South Coast territory) for a 5 year term.
RPR and Marmax subsequently entered into a Transfer of Business and Loan Agreement (TBLA) under which RPR sold the ‘Spanline Illawarra’ business to Marmax. The TBLA included mutual restraint obligations on RPR (as vendor) and Marmax (as purchaser) to ensure that RPR in respect of the Illawarra territory and Marmax in respect of the remaining South Coast territory do not ”during each restraint period…promote, participate in, finance, operate or engage in…or be concerned or interested…in, any of the Restrained Businesses.’ Restrained Business was defined to mean a business or operation ‘similar to’ or ‘competitive with’ or ‘supplying similar products and services to’ the Spanline franchise businesses. The restraint period was expressed as a series of cascading dates within the range of 10 years down to one year.
Griffiths J in the Federal Court of Australia made the following general findings:
- there was no general principle that a restraint of trade clause in a sale of business agreement will only be valid where it restrains the vendor and not the purchaser – the intention of RPR here was to protect its franchise business in its reduced South Coast area and not another unrelated business; and
- although consideration is required for a restrictive promise, it need not involve a monetary payment - in this case, consideration comprised the transfer of the business and the promises made by RPR to Marmax under the TBLA (including the identical restraints in respect of the Illawarra territory).
In determining that RPR had discharged its onus of establishing the reasonableness of the restraint, Griffiths J found that:
- restraint provisions relating to the sale of a business are to be distinguished from those in contracts of employment. As there is an equality of bargaining power, the court can take a more restrained approach in assessing reasonableness in the context of a business sale. While attention is still given to the interests of the public, the Court generally regards the parties as the best judges of what is reasonable; and
- the restraint clauses in the TBLA did no more than protect the legitimate business interests (ie exclusive franchising rights in the Illawarra territory for Marmax and exclusive franchising rights in the reduced South Coast territory for RPR).
Griffiths J also found that the restraint was reasonable in terms of:
- the scope of the restraint - it reasonably referred to RPR’s legitimate business interest in the preservation of its Spanline franchise by preventing Marmax from engaging in similar activities or selling Spanline products in RPR’s exclusive territory; and
- the geographical territory covered – it was not unreasonable that customers in RPR’s territory but who are in fact closer to Marmax’s premises at Albion Park are not able to use Marmax and must travel to Nowra. Only 10% of jobs result from a customer physically visiting a showroom and this is in any case an inevitable consequence of an exclusive franchise arrangement that impacts on customer choice.
However, while rejecting Marmax’s argument that the series of cascading restraints indicates that the parties considered that 10 years was too long (and noting that such drafting plainly just anticipates that a Court may reject a longer period as unreasonable), Griffiths J found that an extension beyond 5 years did not protect legitimate business interests as there was no certainty that Spanline would renew its franchise agreement with RPR or enter into a new one with Marmax after that period.
See the case.