Restraint of Trade & Injunctions

When parties are in a dispute, before their matter is heard by the court at trial, it is possible for an application to be made to the court to prevent one or more parties from doing or continuing to do something that may be worsening the damages being suffered by another party to the dispute.

The court is then placed in a position where it must determine whether an injunction should be granted to prevent the alleged harmful activities, without having examined all of the facts of the case.

The court must decide on the balance of convenience whether the application should or should not succeed.

The Federal Court heard such an application in AAV Australia Pty Ltd v ISIS Broadcast Media Pty Ltd.

Four companies were involved together in the development and commercialisation of technology that allows the distribution of television commercials and programs by means of digital satellite transmission (“the Dubsat Business”).

The companies had entered into an agreement under the terms of which each participant was, amongst other things, prevented from directly or indirectly carrying on any business which was the same as the Dubsat Business or which involves the exploitation of technology which is similar to or which achieves similar effects as the technology being developed or commercialised by the Dubsat Business, if they had not obtained the written consent of the other participants.

The court has to consider the burden that the granting or refusal to grant such an injunction will place on the parties involved. The court will consider issues such as:

• whether the applicant(s) will suffer irreparable harm if the injunction is not granted;
• whether damages will be an adequate remedy for the breach of the agreement;
• whether the applicant is willing to give undertakings that it will pay the respondent's damages suffered as a result of the injunction having been granted in circumstances where the respondent is successful at trial; and
• whether there is an arguable serious question of fact or law that ought to be heard at trial.

ISIS argued that due to the fact that the agreement contained severe penalties for breach of the agreement, the agreement should be read with narrow interpretation and that its activities did not compete with the Dubsat Business. ISIS also claimed that the restraint of trade contained in the agreement was contrary to the Trade Practices Act 1974 (Cth) (“the TPA”) in that it contained an exclusionary provision and / or contained a provision that has the purpose, or would have or be likely to have the effect, of substantially lessening competition.

ISIS also argued that the restraint of trade is unreasonable because it served no public interest.

However, the court considered that AAV and Omnilab had a reasonable and legitimate commercial interest to protect and that there was an arguable case that no public interest is to be served in the preservation of the inefficient delivery methods being offered by ISIS, which were technologically inferior, time consuming and duplicative.

Although the court agreed that some of the issues raised by ISIS warranted further examination, it decided to grant the injunction to prevent ISIS's ongoing competition with the Dubsat Business.

Where an agreement contains a negative covenant, the court is inclined to grant an injunctive relief without extensive proof of damages by the applicant.

Restraint of trade clauses should be carefully considered when drafting an agreement as to which activities will be restricted.

If a restraint of trade clause is too wide, the court may decide to sever that clause from the agreement leaving no restriction in place.

As a result, you will often see restraint of trade clauses that contain a variety of restraint levels, with the aim that the court may only strike out part of the clause.

However, each party should assume the worst case situation will prevail and carefully tailor their activities so as not to infringe their obligations under the agreement.

AAV Australia Pty Ltd ( “AAV” ) and Omnilab Pty Ltd ( “Omnilab” ) claimed that ISIS Broadcast Media Pty Ltd ( “ISIS” ) continued to distribute dubs of television commercials in breach of the agreement.

AAV and Omnilab requested that the court grant an injunction to prevent the ongoing activities of ISIS. The purpose of such an injunction is to preserve the status quo between the parties until the dispute has gone to trial.