Liability of Mr Andrews in respect of breaches of contract and contraventions of the Corporations Act
143The findings that I have made above (see at [122] to [124]) lead to the further conclusions that Mr Andrews, in effecting the diversion of work away from the Company to AMC and then participating in the carrying out of such work during the period of his employment, was in breach of his Executive Services Agreement, in particular clauses 3.1(c) - (d) and 3.2(a) - (d). He was also in contravention of section 182 (and possibly s183) of the Corporations Act.
144The Company did not abandon the claims in respect of such breaches and contraventions. However, the Company submitted that, applying the Company's profit margin (which was said to be 13.4%), the damages flowing from such conduct would be considerably less than the amount of the profit for which an account was sought.
145In these circumstances, it is not necessary to say anything further about these claims, save to note that I would have had no difficulty in concluding that had such breaches and contraventions not occurred, all of that diverted work would likely have been performed by the Company. There is no reason to think that it lacked either the willingness or the ability to perform such work.
146I turn now to the claims for damages which are based on the alleged loss to the Company of work for Sleep City in the period after the cessation of Mr Andrews' employment. In brief, the Company contends that had Mr Andrews not breached the restraints contained in clause 11.1 of his employment contract, and improperly made use of information acquired by him due to his employment with the Company (in contravention of s183 of the Corporations Act), the work performed for Sleep City by AMC and Smart Retail in the six month period from 19 July 2010 to 19 January 2011 would have been performed instead by the Company.
147The evidence showed that in the period 30 September 2010 to 31 January 2011, invoices were issued by Sleep City to Smart Retail for a total sum of $3,065,202.16 (excluding GST), and in the period 17 September 2010 to 28 February 2011, invoices were issued by Sleep City to AMC for a total sum of $508,233.39 (excluding GST). The total value of work was thus $3,573,435.55.
148The Company claims that had it done that work, it would, applying a profit margin of 13.4%, have made a profit of in excess of $478,000.
149In circumstances where the Heads of Agreement between the Company and Sleep City was due to expire on 30 June 2010, it seems to me that the loss claimed is in the nature of a loss of commercial opportunity, to be assessed in accordance with the principles discussed in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 and Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4. Mr Jackman accepted that that was probably the correct analysis, and submitted that there was a very high probability (in the order of 80%) that the Company would have retained Sleep City as a client throughout the period if Mr Andrews had not engaged in wrongful conduct.
150The restraints contained in clause 11.1 of Mr Andrews' Executive Services Agreement were referred to earlier in these reasons (see at [30]). Enforced to their full extent, the restraints would prevent Mr Andrews from having any involvement within Australia with the business of an advertising agency until six months after the cessation of his employment.
151As the employment contract is governed by the law of NSW (see clause 14.6), the provisions of the Restraints of Trade Act 1976 (NSW) are applicable. By section 4(1) of that Act, a restraint of trade is valid to the extent that it is not against public policy, whether it is in severable terms or not.
152The proper approach to the application of the section is to first determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then (subject to any order made under s4(3) of the Act), the restraint is to that extent valid (see Orton v Melman [1981] 1 NSWLR 583 at 587).
153The Company alleges that after the cessation of his employment, Mr Andrews continued to provide advertising services to Sleep City through his involvement with AMC and later through Smart Retail. I have already found that by about the second week of August 2010, Mr Andrews was actively involved in providing advertising services to Sleep City and at least to some extent that was through AMC. It is likely, bearing in mind Mr Andrews' role in the negotiations between AMC and Sleep City in January and February 2011, that after he ceased to be employed by the Company he continued that involvement with AMC (which had commenced no later than September 2009) until the end of the Restraint Period.
154Further, at various times (for example in August and September 2010) Mr Andrews was performing advertising work for Sleep City which was billed to Smart Retail. He was also chasing payment of Smart Retail invoices in February 2011. I infer that he had at least some involvement in that company's business from about August 2010 until the end of the Restraint Period.
155This conduct would in my view infringe the terms of the restraint found in clause 11.1 of Mr Andrews' employment contract. Until the end of the Restraint Period, Mr Andrews was, within the Restraint Area, participating in, and concerned in, the advertising businesses of AMC and/ or Smart Retail, which were providing services to Sleep City.
156The question then arises as to whether the restraint, insofar as it applies to those breaches, is contrary to public policy.
157The defendants' submissions did not accommodate the approach required by the Restraints of Trade Act. They made the general submission that the restraint found in clause 11.1 was unenforceable and void because it effectively imposed a complete prohibition against Mr Andrews using his professional skills in advertising to earn a livelihood in Australia for six months. The defendants submitted, in the alternative, that if the restraint was upheld, it should only be for a three-month period and in respect of the Sydney and Melbourne metropolitan areas.
158It was submitted for the Company that in circumstances where Mr Andrews had been employed by the Company for many years, and had built up a very strong personal relationship with Sleep City, a six month restraint was the minimum period required in order for Mr Andrews' connection with Sleep City to be severed and for a new employee to establish a connection, and also for any confidential information possessed by Mr Andrews to begin to go stale. It was further submitted that in circumstances where Sleep City conducted business in both Melbourne and Sydney, a restraint extending to at least those areas was reasonable.
159In Stenhouse Australia Ltd v Phillips [1974] AC 391, the Privy Council stated at 400:
"The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man's improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information ... the employer's claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee may have contributed to its creation. For while it may be true that an employee is entitled - and is to be encouraged - to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer's business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers."
160That passage was cited with approval by Hodgson JA in Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 at [37], and also by Allsop P in Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267 at [43]. In Hanna (supra), Allsop P further stated (at [45]) that regard should also be had to what the Privy Council said in the following passage in Stenhouse (supra) at 402:
"The question is not how long the employee could be expected to enjoy, by virtue of his employment, a competitive edge over others seeking the clients' business. It is, rather, what is a reasonable time during which the employer is entitled to protection against solicitation of clients with whom the employee had contact and influence during employment and who were not bound to the employer by contract or by stability of association. This question ... their Lordships do not consider can advantageously form the subject of direct evidence. It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employers' business, the nature of the employer's interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to the reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and commonsense view."
161Reference should also be made to the following statement made by Allsop P in Hanna (supra) at [43]:
"There is no legally required test in these circumstances. The use of one test or another depends on the facts and the evaluation of the approach that is reasonable. The judge is required to evaluate the evidence about connection and adopt an appropriate approach to assessing what is required to protect reasonably the connection of the former employer."
162It is well established that although it is not open to an employer to seek protection against competition per se, an employer may have a legitimate interest in protecting the connections it has with existing customers (see, for example, Lindner v Murdock's Garage (1950) 83 CLR 628 at 633 - 4, 645, 647, 650 and 654); [1950] HCA 48. As stated by Brereton J in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9; [2006] NSWSC 717 at [25]:
"... While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment - which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer: Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 at [30]."
163Further, it may be reasonable for the employer to not merely restrain a former employee from soliciting clients, but also restrain a former employee from being involved in a rival business where such involvement would present a danger to the employer's customer connections (see Woolworths Ltd v Olson [2004] NSWCA 372 at [67] per Mason P; Metcash Ltd v Jardim (No. 3) [2010] NSWSC 1096 at [50] per Ball J).
164A restraint of trade will not be considered to be contrary to public policy if it is reasonable as between the parties, and not unreasonable in the public interest (see Tullett Prebon (Australia) Pty Ltd v Purcell [2008] NSWSC 852 at [47] per Brereton J).
165The evidence establishes that when the Executive Services Agreement was entered into between the Company and Mr Andrews in July 2006, Sleep City was an important client of longstanding. Along with Lowes-Manhattan, it could properly be described as one of the main clients of the business. From about 1998, when he was appointed as the Senior Account Director in respect of Sleep City, Mr Andrews' employment with the Company had required him to develop and maintain the relationship between the Company and Sleep City. Mr Andrews accordingly built up a strong relationship with Sleep City, which Mr Andrews described as "personal". He plainly knew a great deal about Sleep City and, in particular, its advertising requirements. In 2006, there was no formal written agreement between the Company and Sleep City. Instead, the provision of services was, as described by Mr Andrews, based on a "handshake deal". The Company provided services to Sleep City which included the production of advertising material as well as media negotiations and placements. The Company, through Mr Andrews, satisfied almost all of Sleep City's advertising needs.
166The evidence concerning the work performed for Sleep City after July 2006 establishes that for at least some of Sleep City's advertising campaigns, the required work may need to be conducted over a period of several months. For example, there was evidence from Mr Andrews that work done in February 2011 might be in respect of work in progress from November or December 2010. He gave other evidence to the effect that bookings may commence in about September for projects which are still being worked on the following February. That evidence is consistent with documentary evidence which indicates that in August 2010, work was being done in preparation for advertising campaigns (television, radio and catalogue) to be conducted from October 2010 to February 2011 and, further, that confirmation of starting dates for campaigns in respect of the period March to June 2011 was also being sought.
167In my view, given the importance of Sleep City as a client, the central role played by Mr Andrews as an employee of the Company in maintaining the relationship with Sleep City, the ability of Sleep City to take its custom elsewhere, and the nature of the services which were provided to Sleep City, it was reasonable in July 2006 for the Company to seek to protect its connection with Sleep City by restraining Mr Andrews, for a period of six months after the cessation of his employment, from promoting, participating in, engaging in, or being concerned or interested in, another advertising agency.
168A restraint of that character and duration would, so it seems to me, provide protection for the Company's connection with Sleep City which is reasonable in all the circumstances. It would enable the Company, through a new employee, a fair opportunity without interference from Mr Andrews to carry out whatever work was in progress, and to seek the continued custom of Sleep City.
169It is, of course, true that the effect of the restraint would be to keep Mr Andrews out of his chosen occupation for a period, but nothing less than that would adequately protect the Company's legitimate interest in protecting its connection with a major client. For these reasons, I have concluded that the restraints contained in clause 11.1 of the Executive Services Agreement are reasonable as between the parties, and not unreasonable in the public interest more generally. By reason of the operation of s4(1) of the Restraints of Trade Act, those restraints, insofar as they apply to the breaches I have found, are valid.
170I have not overlooked the suggestion made by Mr Andrews that when the agreement was entered into, he was not given time to seek independent advice. I do not accept that that was the case. Mr Andrews' evidence suggests that he was favourably disposed to the transaction of which his Executive Services Agreement was to form part, and there is no evidence of a request to obtain advice, let alone any refusal by the Company to give him time to obtain any advice. For what it is worth, the Executive Services Agreement itself contains a warranty by Mr Andrews to the effect that he had a reasonable opportunity to obtain legal advice (see clause 13).
171There was no suggestion that the restraints were invalid due to uncertainty, or any other ground apart from public policy. Accordingly, the restraints in clause 11.1 may be enforced against Mr Andrews.
172It is next necessary to determine what loss has been suffered by the Company as a result of Mr Andrews' breaches of clauses 11.1. In my view, had Mr Andrews simply resigned in July 2010 and obeyed the restraints which bound him, it is more likely than not that the Company would have retained Sleep City as a client until Mr Andrews was again free to be involved in an advertising agency.
173Sleep City was plainly enamoured of Mr Andrews, and if he was unavailable for a time, there would be no reason for Sleep City to leave its existing agency pending Mr Andrews' return to the industry. Even in the situation which in fact unfolded in July 2010, Sleep City was prepared to at least allow the Company to continue to provide some services until 1 September 2010, despite the complaints which were set out by Mr Klein on 22 July 2010.
174Mr Jackman submitted that Mr Klein's letter was disingenuous and thus cannot be relied upon as any reliable statement of Sleep City's reasons for terminating the relationship. He points, in particular, to the statements about bringing the advertising "internally into our business", which were contrary to Sleep City's later actions in entering into a Heads of Agreement with AMC, and making use of Smart Retail. That submission has some force and, in the light of Ms Hennessy's unchallenged evidence that she had not received any complaints from Mr Klein, I would not conclude that any complaints which Sleep City held were of such magnitude that they would have caused it to go to a new agency in the period July 2010 to January 2011. In the absence of Mr Andrews, it is more likely that they would have stayed with the Company rather than go to another agency in the interim.
175The Company has therefore lost a valuable commercial opportunity as a result of Mr Andrews' breaches. However, I do not think that this loss of commercial opportunity should be assessed as having a value based upon an 80% chance of the Company obtaining the work which was in fact undertaken by Smart Retail and AMC for Sleep City within the six months restraint period. Sleep City had shown in 2008 that it was quite capable of taking its business elsewhere (even with Mr Andrews in his position at the Company). The prospect of that happening again in July 2010, if Mr Andrews was no longer available, seems to me to be a significant one. I accept that the amounts invoiced by Smart Retail and AMC from September 2010 to January 2011 ($3,573,435.55) is a reasonable reflection of the value of the work which might have remained with the Company. However, taking the above matters into account, I would assess the chance of the Company obtaining all of that work to be about 65%. Applying a profit margin of 13.4% would give a value of about $311,246.
176I think there is some "downside risk" that the Company would not have achieved a profit margin of 13.4%. That figure is an estimate based on nine months of actual figures and three months of projected figures for the 2009 - 2010 financial year. Taking that further matter into account, I would slightly reduce the value the opportunity which was lost due to Mr Andrews' breaches of clause 11.1. Ultimately, I assess the value of the lost opportunity at $300,000. Mr Andrews is liable to the Company in this amount as damages for breach of contract.
177It was suggested in submissions that Mrs Andrews, who it seems was aware of the restraints contained in her husband's employment contract, had wrongfully interfered in the contractual relations between Mr Andrews and the Company. However, there was no such claim pleaded against Mrs Andrews and I will not therefore consider it further.
178I turn now to consider the alleged contraventions of s 183 of the Corporations Act. Section 183(1) provides:
"A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
179The provision is a civil penalty provision within the meaning of section 1317E(1) of the Corporations Act. By section 1317H(1) of the Corporations Act, the Court may order a person to compensate a corporation for damage suffered by the corporation if the person has contravened a civil penalty provision in relation to the corporation, and the damage resulted from the contravention.
180For there to be a contravention of s183(1), there must be an improper use of information of the type which falls within the subsection; that is, information obtained by a person only because they are or have been a director, officer or employee of a corporation. There will be an improper use of such information where its use would be a breach of an equitable obligation of confidence, or breach of a contractual obligation (see Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172 at [59] - [60] per Hodgson JA; Manildra Laboratories Pty Ltd v Campbell [2009] NSWSC 987 at [131] - [133] per McDougall J).
181In the present case, aside from any equitable obligation which would preclude the use of any confidential information, the provisions of clause 8 of Mr Andrews' Executive Services Agreement prohibit disclosure of Confidential Information (as defined).
182However, the Company has not demonstrated, in my view, that Mr Andrews, in the course of carrying out work for Sleep City in the period from July 2010 to January 2011, used any specific item of information (or even any particular class of information) in breach of either an equitable obligation of confidence or clause 8 of the Executive Services Agreement. It was not put to Mr Andrews in cross-examination that in carrying out such work, he made wrongful use of any confidential information. Neither was it established that any wrongful use of information caused such work to be lost to the Company. There was a suggestion that the knowledge of the terms of the Heads of Agreement between the Company and Sleep City was wrongfully used in the negotiations which took place in July 2010 between AMC and Sleep City for their own Heads of Agreement. However, that information was already known to Sleep City. It could not have been disclosed to Sleep City, and it is difficult to see how that information was itself used improperly. I am not satisfied that any such use was causative of Sleep City work being performed by AMC and Smart Retail instead of the Company.
183In these circumstances, it is not possible to conclude that Mr Andrews contravened s183(1) of the Corporations Act or that any such contravention caused the Company to lose Sleep City work to AMC or Smart Retail. It follows that neither Mrs Andrews nor Smart Retail have any liability as persons involved in the contravention of s183(1) alleged against Mr Andrews.