Sladen Snippet - Enforceability of vendor restraint clauses – How wide is too wide?

The enforceability of vendor restraint clauses contained in sale of business agreements is currently under review in the Supreme Court of Victoria in the case of Southern Cross Computer Systems P/L (ACN 005 770 598) and Ingenio Group P/L (ACN 610 396 748) v Palmer, Christopher Anthony; Faithfull, Jamie and Jakimoski, Zoran [2017] VSC 412.

In this case, the Court granted interlocutory relief in this matter, acknowledging that there is at least an argument in respect of the enforcement of the vendor restraint based on a measurable definition of ‘Restrained Business’.

The concept of restrained business in question was defined as:

any business which is competitive with or likely to be competitive with, the Business at the relevant time during the Restrained Period’.

It is the reference to ‘at the relevant time’ in the context of determining whether the activity is competitive that was examined.  This drafting raises the question – does the vendor restraint extend to the buyer’s future activities in conducting the business, as opposed to the scope of the sellers’ business at the time of the sale.

The plaintiff argued that the business in question should be limited to the business activities that were conducted as at the completion date as they were contemplated by the parties and could therefore be legitimately protected.

The defendant argued that the words ‘the Business at the relevant time during the Restrained Period’ extended beyond the business activities that existed as at the date of completion. It was submitted that the wording of the vendor restraint contemplated a movable restraint which encompassed any business activity that the business may undertake during the period in which the restraint was to operate. Such an interpretation potentially leads to a wide scope of business activities, so much so the vendor restraint may be rendered unenforceable.  

For the purposes of an interlocutory application the Court found that both arguments had merit and therefore construction advanced by the plaintiff was preferred.

The trial is currently underway with the Court’s determination as to the success of the plaintiff’s argument and therefore whether the restraint clause will be enforceable, due shortly.

To discuss the enforceability of vendor restraint clauses further or for more information please contact:

Dean Beaumont
Sladen Legal
T +61 3 9611 0131
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Meagan O’Connor
Sladen Legal
T +61 3 9611 0106| M +61 438 531 978
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia