The NSW Court of Appeal considered in Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178, whether a restraint of trade would be upheld in the event partners mutually agree to be restrained in operating in each other’s market.


Background

Between January 2003 and June 2018, Mr Belcastro and Mr Uppalapti operated Belflora Australia Pty Ltd (Belflora) (as equal partners and shareholders) at the Flemington markers selling flowers imported from South America and Kenya.

Around 2018, the directors decided to split the business, including the 10 stands at the Flemington markets, and entered into a written agreement. The agreement stated that [at 8]:

“VAMSI WHOLESALE       

Kenyan flowers to be exclusive to Vinflora. Only Vamsi to speak to them.                

JOHN WHOLESALE

South American flowers to be exclusive to Belflora. Only John to speak to them.

The farms listed above are to be shared. They are to be sold at the same price on both stands. Vamsi can wholesale what Vinflora imports and John can wholesale what Belflora imports.

Vamsi pays for shipment clearance of flowers from Vinflora growers. John pays for shipment clearance of flowers from Belflora growers.

Other things to share:

Truck
Warehouse
Anil
Belflora Natives

The reason for these agreements is so that we do not have two identical stands.”

Put simply, the restraint meant that it:

  1. prohibited Vinflora from importing flowers from South American and displaying the flowers in his stands. Vinflora was only able to purchase the South American flowers from Belflora to fulfil its orders, with all profits to be shared between the two companies; and
  2. prohibited Belflora from importing flowers from Kenyan and displaying the flowers in his stands. Belflora was only able to purchase the South American flowers from Vinflora to fulfil its orders, with all profits to be shared between the two companies.

The reasoning behind the restriction provision was so that they did not have “two identical stands”.

Around July 2019, Vinflora (Mr Uppalapti) started displaying South American flowers that were not supplied to it by Belflora.

The main issue that arose between the companies was whether the restraint provisions that were in the agreement were void, for being unreasonable.


Conclusion

The Court noted that the that the agreement was void as it was unreasonable restraint of trade and was contrary to the public policy. The three judges held that the restrain provision did not protect any legitimate interest of Belflora.

Bathurst CJ summarised the matter as follows:

 “[30] … No justification for a blanket protection from importation from a subcontinent was offered, except that it would protect Belflora from competition. The position is exacerbated by the fact that Vinflora was not only prohibited from importing flowers from South America but was prohibited from purchasing South American flowers from anyone other than Belfora and then selling them only on a profit share basis. This goes well beyond any legitimate interest Belflora would be entitled to protect.

[31] Three things should be added. First, the fact that there were mutual restraints does not affect the position. Whilst it may have been seen by the parties as beneficial to have mutual restraints against competition, that does not mean the restraints were valid. Second, the fact that the mutual restraints were freely bargained for provides no sufficient reason for concluding that the doctrine should not apply. … Third, there was some debate in the Court below as to whether Vinflora benefited from the restraint to a greater degree than Belflora. That, in my opinion, is immaterial to the resolution of the question.”

The effect of the above was that the primary judge was correct in dismissing Belflora’s claim for an injunction to restrain Vinflora from displaying and selling South American flowers in its stores.


Implications

An agreement to provide exclusive rights or agree to restrain will more than likely to be deemed an unreasonable restraint of trade unless there is a legitimate protection of an interest. However, overcoming the public interest test will be a high bar especially when there are no trade secrets and/or confidential information and/or goodwill that is to be protected.