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Full Federal Court considers interpretation of restraint of trade clauses

Elizabeth Cheeseman SC and Matt Karam represented the successful respondent before the Full Court of the Federal Court in Findex Group Limited v McKay [2020] FCAFC 182 (Markovic, Banks-Smith and Anderson JJ), an important case regarding the proper approach to the construction and interpretation of restraint of trade provisions designed to protect goodwill upon the sale of a business. The primary judge, Stewart J, had determined that the restraints were unenforceable because they were unreasonable and further that the clause was not severable: Findex Group Ltd v McKay [2019] FCA 2129; (2019) 148 IPR 284.

 

The appellants contended on appeal that the primary judge erred (i) in not giving the restraint provision a “commercial construction”; (ii) in not holding that the relevant provision contained multiple independent restraints including separate restraints by each covenantor on the one hand and their “affiliates” on the other, (iii) in failing to sever certain parts of the provision so that remaining restraints would be enforceable and (iv) in holding that the restraints were not valid and therefore not enforceable.

 

The Full Court rejected these arguments and dismissed the appeal. In doing so, the Full Court emphasised that when construing a restraint of trade clause which employs precise definitions and which is unambiguous, it is necessary to give paramountcy to the wording selected by the parties. In this case, the express wording of the provision resulted in restraints that were “remarkably complex” and “even more remarkably broad in their application” but were nevertheless clear on their terms. In those circumstances the Full Court held that it would not be appropriate to read down or redraft the provision to give it a meaning that differed from the plain meaning of the text chosen by the parties.

 

The Full Court further emphasised that it was impermissible to approach the construction of a restraint of trade clause with the benefit of hindsight and reason backwards from the allegations of breach. Such a clause must be construed as at the date of the contract. The Full Court also reiterated that severance of content from a provision may only be permitted if it will not otherwise alter the nature of the contract or amount to an impermissible redrafting of the agreement in a way which would be inconsistent with the objective intentions of the parties at the time the contract was made. Consequently, the Full Court agreed with the primary judge that the restraints in question were not enforceable and dismissed the appeal with costs.

 

A link to the judgment can be found here: Findex v McKay [2020] FCAFC 182.

 

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