The Facts
Two flower wholesalers merge their operations
Flower wholesaler B traded at the Sydney Flower Market in Flemington for many years up to 2002. In January 2003, wholesaler V acquired 50% of wholesaler B.
In 2013 a new company, jointly owned by B and V, commenced business and took over the market stalls previously operated by B. By 2018, the new company was operating ten market stalls.
Division of business and agreement on restraint of trade
Between 2017 and 2018, a dispute arose between the owners of wholesalers B and V. They decided to go their separate ways and divide the market stalls between their two companies.
As part of this arrangement, the owners of B and V made an agreement. V would not import or display flowers from South America at its market stalls. If wholesaler V wanted to buy or display South American flowers, it had to buy them from B.
In addition, V was restricted from displaying South American flowers unless it was for the purpose of fulfilling orders, and the profit had to be shared with B.
Wholesaler B had the same restrictions in regard to flowers from Kenya. The intention of the agreement was to ensure that B and V did not operate identical flower stalls in close proximity to one another.
B sues V for breaching terms of agreement
In July 2019, V began displaying South American flowers at its stalls, which had not been supplied by B.
In response, B began proceedings against V in the Supreme Court Equity Division, claiming that according to their agreement, V could not display or sell flowers imported from South America unless it bought them from B.
B argued that this restriction should continue indefinitely while B and V operated adjacent market stalls.
V denies existence of trade restraint agreement
V denied that such an agreement existed, claiming that it was merely a proposal on the part of B and had never become an agreement.
V claimed that even if there was a contract involving this agreement, it had been repudiated and that repudiation was accepted by V, or that otherwise it had been abandoned.
V also argued that the terms of the agreement breached public policy by restricting the freedom to trade.
The trial judge found that the parties did intend to enter legally binding arrangements. The court was not satisfied there was any repudiation or abandonment.
However, the court agreed with V that the restraint was unreasonable, unenforceable and contrary to public policy because it was anti-competitive.
B appeals on basis of Restraints of Trade Act
B appealed the court’s decision.
B claimed that the trial judge was wrong in not applying section 4(1) of the NSW Restraints of Trade Act 1976 when deciding whether the restraint of trade was enforceable.
The question for the Court of Appeal was whether the restraint on V was void as an unreasonable restraint of trade.
Expert commentary on the court's decision
In the case of Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178, the court found in favour of Vinflora Pty Ltd (wholesaler V) and dismissed the appeal brought by Belflora Pty Ltd (wholesaler B).
The restraint was found to be unreasonable and in breach of legislation.
Grounds for Belflora’s appeal
In the appeal, Belflora argued that the trial judge had erred by failing to apply section 41(1) of the Restraints of Trade Act. Section 4(1) outlines that restraints which are not wholly unreasonable are valid, as long as they do not contradict public policy.
Belflora claimed that if section 4(1) of the Restraints of Trade Act had been applied, the court would have found the restraint from Belflora to be valid and not against public policy.
However, the Court of Appeal found that the judge in the original proceedings had not erred in not considering section 4(1). Furthermore, it found that if he had considered it, the restraint still would have been found to be unreasonable, as it was against the public interest.
Restraint found to be both vertical and horizontal
The court found that the agreement between Belflora and Vinflora was plainly a restraint of trade. It operated vertically, limiting the exporters and wholesalers from which Vinflora could purchase flowers.
The restraint also operated horizontally, by restricting the trading activities between the two businesses which would otherwise be in competition with each other. This restricted the liberty of the parties to conduct their dealings with third parties as they saw fit.
Did the restraint breach public policy?
At common law, a restraint of trade is contrary to public policy and void, unless it is reasonably necessary to protect the interests of the parties and is in the interests of the public. A mere restraint against competition per se, is unenforceable.
An agreement that had the effect not only of prohibiting Vinflora from completing against Belfora, but also from competing in the market for the supply and sale of South American flowers generally, could not be said to be in the public interest.
Ultimately the court found that the restraint was wholly unreasonable and therefore it was void.
The appeal was dismissed and Belfora was ordered to pay Vinflora’s costs of the appeal.
Tread carefully when creating a restraint of trade
It is so important to discuss with your lawyer any agreement which may be considered a restraint of trade, whether it be in an employment contract, or within a business dissolution or sale as in this case.
The court is very strict on ensuring that people have the liberty to trade freely and that agreements between people or businesses do not hinder the availability of products or services on the market.