Judgment - EX TEMPORE
Revised from transcript; issued 27 November 2020
Before the Court is an application for interlocutory injunctions in proceedings arising out of an employment dispute. A former employer seeks orders preventing its former employee from working for his new employer or limiting work he can perform at his new employment.
BGC Partners (Australia) Pty Ltd, the plaintiff, is one of a group of companies, headquartered in the United States, which operates as a wholesale broker of various financial products in various countries around the world. Those countries include Australia. In this judgment I will refer to the plaintiff and other companies in the group collectively as BGC.
The defendant, Kyle Mathew Lambert, worked for BGC (employed by the plaintiff company) from September 2018 to June this year. He was employed in a part of BGC's Australian business which is known as "Fixed Income Solutions". This is a brokerage business with bonds and other fixed interest income securities. It is operated by another BGC company, BGC Securities (Australia) Pty Ltd. I will refer to this business as BGC's "FIS" business.
On 9 June this year Mr Lambert purported to terminate his employment contract with the plaintiff company. He claimed that the plaintiff was in breach of its obligations towards him and had repudiated the contract and he purported to accept that repudiation. He has not worked for BGC since then.
BGC did not accept the validity of Mr Lambert's purported termination. It asserted that his employment contract remained on foot and continued to pay him.
On 3 July, however, BGC issued a notice of termination. The parties agree that the contract came to an end, at the latest, at that point.
At around the beginning of October, Mr Lambert started work with a company called Cashwerkz Limited ("Cashwerkz"). It is a recently established competitor of BGC's FIS business.
The proceedings have only recently begun and there has not yet been any direction for the filing of pleadings. The following summary of issues is based on the plaintiff's summons and the contentions foreshadowed in the parties' affidavits.
BGC Partners (Australia) Pty Ltd v Lambert [2020] NSWSC 1688 | Case summary | Zoe
BGC seeks final injunctions imposing restraints on Mr Lambert. In summary, the restraints are against:
1. employment in Cashwerkz' competing business;
2. soliciting BGC's FIS customers; and
3. dealing with BGC's FIS customers.
These restraints reflect provisions of the written employment contract between BGC and Mr Lambert.
The contractual restraints last for six months after the termination of the employment contract. BGC contends that the contract did not come to an end until 3 July, and, therefore, seeks restraints which would last until 3 January next year.
Mr Lambert has foreshadowed two lines of defence. First, he relies upon his purported termination of the employment contract on 9 June. Mr Lambert contends that the termination was valid and that the restraints do not operate at all. Alternatively, he argues, they only have contractual effect until 9 December. Mr Lambert's second contention is that the restraints are in any event invalid as unreasonable restraints of trade.
The proceedings were commenced on 10 November, shortly after BGC became aware that Mr Lambert was working for Cashwerkz. It did not prove possible to organise an early final hearing, and I have therefore dealt with BGC's interlocutory application in the Duty List.
BGC's evidence on the application comes from Timothy Charles Mallott. He is BGC's chief operating officer for the Asia Pacific region, based in Hong Kong.
In response to the application, Jonathan Nguyen, Mr Lambert's solicitor, filed an affidavit foreshadowing his defences. A short affidavit was later filed by Mr Lambert himself, dealing with some specific points raised in BGC's evidence. There was no cross-examination and it was not suggested that I could make any final findings of fact on potentially disputed issues.
As mentioned, BGC's FIS business is a brokerage. BGC's clients are investors who wish to invest in fixed income securities. BGC introduces its clients to issuers and other suppliers of such securities. They are referred to by BGC as "counterparties". The fees earned by BGC come from both clients and counterparties.
Mr Lambert has extensive experience in financial services, going back to 2005. According to Mr Mallott, in his work for BGC he performed three main functions. The first is described as facilitation. This involves collating market pricing information and distributing it to BGC's brokers who dealt with clients. Mr Lambert's previous two employments prior to his BGC employment were also as a facilitator.
The second and third tasks performed by Mr Lambert for BGC were to source bids for and offers of new securities, and to review and assess new issuances. Mr Lambert did not, in his work with BGC, deal directly with BGC's clients, but he would have learned about their needs and wishes from BGC's brokers. He did deal directly with BGC's counterparties.
It appears that the Cashwerkz business was launched in August this year. It is called "Bond Income". News reports of its launch are in evidence. They state that the structure for the new business was established in April of this year. There was an equity raising to pay for it in May. The announcement in August stated that all necessary hires for the business had already been made.
Since April 2020 the chief executive officer of Cashwerkz has been John Lechte. He and Mr Lambert worked together between 2010 and 2014 when they were both employed by another broker, FIIG.
The evidence does not indicate precisely what Mr Lambert's role is at Cashwerkz, but he is paid a substantial salary and it is reasonable to suppose that he was hired because of his long experience in financial services and, in particular, in fixed interest brokerage operations.
Mr Lambert's employment contract is dated 1 October. The contract was sent to Mr Lambert for signature by a Cashwerkz employee to Mr Lambert's Cashwerkz work email. He must at that point already have started working for Cashwerkz. There is no evidence before me as to when the negotiations which led to his employment actually began.
Counsel for BGC submitted that the circumstances of Mr Lambert's departure from BGC's employment and taking up employment with Cashwerkz raised some suspicion. The suggestion was that Mr Lambert's purported termination may have been some form of set-up and that he was already negotiating with Mr Lechte to work for Cashwerkz. Counsel also suggested that Mr Lambert had sought to conceal from BGC after starting work with Cashwerkz that he was working with a competitor. Counsel referred to the evidence which I have summarised concerning the Cashwerkz employment contract as supporting BGC's submissions.
All of these things are possible, but the evidence before me does not provide any confirmation for the suspicions to which counsel referred. All that can be said at present is that the evidence is incomplete and those suspicions may or may not ultimately be justified at the hearing.
Also in evidence on the application were communications between Mr Lambert, on behalf of Cashwerkz, and Mr Paul McCombe of Australian Pacific Mortgage Fund Ltd ("APMF"). Mr Lambert dealt with Mr McCombe in the course of his employment with BGC. APMF was and is one of BGC's counterparties in its FIS business. The emails show that Mr Lambert has been working with Mr McCombe on a fixed interest security deal of some type between APMF and Cashwerkz. I will say more about the content of the emails at a later point in this judgment.
Mr Lambert's contention that BGC had repudiated its employment contract with him, thereby justifying his purported termination on 9 June, rests on three main grounds.
The first concerns the compensation provisions of Mr Lambert's employment contract with BGC. Under the contract, Mr Lambert was entitled to a bonus, or at least entitled to participate in a bonus pool, which was linked to BGC's profitability. Mr Lambert's concern was that the custodial (clearing) costs being incurred by BGC were too high. As a result, according to his letter, he was not receiving any bonuses at all. The suggestion is that BGC's conduct in this regard was in some way uncommercial and a breach of its obligations as Mr Lambert's employer. Presumably the argument relies on some sort of duty to co-operate, or duty to act in good faith, on BGC's part.
The second ground raised by Mr Lambert in his letter was that, so he alleged, he was led to understand, when he started work for BGC, that BGC would establish a Gold Coast office and that he would be able to work from that office. According to the letter, this was something that was attractive to Mr Lambert because that is where he or his wife have friends or family. The contract itself provided that Mr Lambert was to work at the Sydney office or such other office as BGC might nominate, but as I understood it, Mr Lambert relied upon oral representations originally made at the time of entering into the contract.
The third matter raised by Mr Lambert arose out of an Australian Securities and Investments Commission investigation into conduct of another BGC employee. Mr Lambert's complaint appears to be that BGC either failed to take appropriate steps to ensure that the conduct did not take place or mishandled the investigation. The result is said to have included reputational damage to Mr Lambert personally.
It is not necessary to go into these contentions and BGC's responses in any more detail for the purpose of this application. To establish valid termination, Mr Lambert will not just need to establish breach by BGC of the employment contract, he will need to establish sufficiently serious breaches to amount to repudiation. Both of these elements are in dispute. Mr Lambert's case is not strong enough to conclude that BGC has no arguable claim to hold him to his employment contract. In fact, on the material before me I would not describe Mr Lambert's claim of repudiation as a strong one.
I will proceed on the basis that BGC has established a prima facie case that the contractual restraints which are the subject of its claim continue until 3 January next year.
I turn to the restraint which BGC seeks against Mr Lambert's employment in Cashwerkz' competing business. Mr Lambert's employment agreement relevantly provided that he would not:
engage the services of, render services to or become interested in (as owner, stockholder, partner, lender or other investor, director, officer, employee, consultant or otherwise) any business activity that is in competition with the Restricted Business.
This drafting is clumsy. Usually one speaks of providing services to a person rather than to an activity. Arguably the clause must be given some meaning and should be read so as to restrict the provision of services (whether as employee, consultant or otherwise) "to" a competing business activity, in the sense that the provision of the services enables that activity to take place.
In the course of the hearing BGC revised the form of the restraint which it was seeking. The employment restraint which BGC now seeks, both on a final and interlocutory basis, is:
… the Defendant be restrained from directly or indirectly engaging the services of, rendering services to or becoming interest in (as owner, stockholder, partner, lender or other investor, director, officer, employee, consultant or otherwise) Cashwerkz Limited Group (save that the Defendant may acquire or own, by way of investment only, less than 1% of the outstanding securities of any class of any corporation that is listed on a recognised stock exchange or trades in the over-the-counter market).
As I understood counsel for Mr Lambert, he argued that the restraint was unreasonably broad. As a result, counsel submitted, BGC had insufficient prospects of sustaining the clause in the face of a restraint of trade challenge based on reasonableness. Counsel also submitted that the width of the restraint was relevant to the balance of convenience, noting that it would prevent him being employed by Cashwerkz in his chosen field.
Counsel for BGC in response submitted that the restraint was justified on a number of grounds. One of those was to protect BGC's confidential information. This was explained by Lord Denning MR in The Littlewoods Organisations Ltd v Harris [1978] 1 All ER 1026 at 1033 as follows:
It is … established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has shown that it is not satisfactory to have simply a covenant against disclosing confidential information. The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable if limited to a short period.
I dealt with a similar issue in my recent judgment in JMB (NSW) Pty Ltd v West [2020] NSWSC 1280 at [67]-[73]. For reasons I gave in that judgment, I think that application of Lord Denning's principle depends both on the nature of the information and the seniority of the employee concerned. The more senior the employee, and the easier it is for the employee to retain the confidential information in his or her head, the stronger the case for upholding the restraint will be.
In the present case there is no suggestion that Mr Lambert has retained any confidential information in documentary form, but it is reasonable to suppose that as a senior employee he could have had a good understanding of FIS's business strategy and operations which could be useful to a competitor.
Furthermore, the personal connections which Mr Lambert will have developed at BGC (which for present purposes I think would extend to any understanding Mr Lambert has picked up of BGC's clients through indirectly satisfying their wishes) can themselves be an interest which can justifiably be protected by a restraint of the present sort. This was explained by Brereton J, as his Honour then was, in Cactus Imaging Pty Limited v Peters (2006) 71 NSWLR 9 at [25] (citations omitted):
It is plain that an employer's customer connection is an interest which can support a reasonable restraint of trade. Such a restraint is legitimate if the employee has become, vis-à-vis the client, the "human face" of the business, namely the person who represents the business to the customer - or, as it was put by Hoover J: "The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business." 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.
Counsel for Mr Lambert emphasised that the restraint on competition in Mr Lambert's contract was on employment which was competitive with BGC's business. Counsel pointed out that the deal with AMPF in which Mr Lambert has been involved appears to have originated as a result of AMPF approaching Cashwerkz rather than the other way around. Indeed, it seems AMPF approached Cashwerkz after BGC said it was unable to participate in the deal.
But this is not a full answer. Mr Lambert's correspondence with Mr McCombe refers (at least on the face of it) to Cashwerkz becoming involved in other future deals. It also seems from the correspondence that Mr Lambert has been introducing other Cashwerkz employees to AMPF against the possibility that he himself will not be able to speak to Cashwerkz' customers over the next few months.
BGC is not seeking to prevent Cashwerkz from dealing with AMPF or other counterparties. It is seeking to prevent Mr Lambert from acting as Cashwerkz' point of contact for that purpose. In my view the correspondence suggests that Mr Lambert, if not restrained, may engage in exactly the sort of conduct which amounts to unfair competition of the type described by Brereton J.
Counsel for Mr Lambert referred to an earlier demand for payment of a sum of approximately US$300,000 by BGC against Mr Lambert. The suggestion, as I understood it, was that this demand made the imposition of restraints on Mr Lambert in some way unnecessary.
The demand was based on another clause of Mr Lambert's employment contract. As I have mentioned, that contract was entered into in September 2018. It provided for the contract to last for a fixed term of four years. The demand alleged breach of Mr Lambert's obligation to serve out the full term. The sum demanded was based on a liquidated damages provision in the contract which provided for an assessment of the damages which would be suffered by BGC in the event of breach of the clause. In my view the demand relates to a separate contractual issue and is not an obstacle to BGC's claim for the imposition of the restraints sought in these proceedings.
Counsel for Mr Lambert also submitted that damages would be an adequate remedy. I am not sure that the inadequacy of damages is a critical element in obtaining the enforcement of a negative stipulation by way of prohibitory injunction: Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 852 at [97] (refusal of relief on this ground only in an "exceptional case"); see also at [102] ("Equity holds parties to their agreements, rather than allowing them to escape from them at the price of damages").
But in any event I am not convinced that damages would be an adequate remedy. I have already quoted Lord Denning's observation from the Littlewoods case which referred to the difficulty in assessing damages where a senior employee goes to work for a rival organisation. Similar observations apply, in my view, to the former employer's interest in protecting itself from unfair competition of the type referred to by Brereton J in Cactus Imaging: see Tullett Prebon at [101]-[102].
This leaves me with the balance of convenience to consider. The restraint period is relatively short. It is true that the restraint sought by BGC will stop Mr Lambert working in Cashwerkz' business but it has not been suggested that Mr Lambert will not be paid his salary during the period of any restraint.
If Mr Lambert had proposed an arrangement which would have allowed him to work in areas which clearly did not compete with BGC's business or otherwise did not pose a risk of his deploying his experience and skills in a way which infringed BGC's reasonable interests, I would have tried to accommodate him, but no such arrangement has been proposed. In my view, therefore, the balance of convenience favours the grant of an injunction.
I turn now to the restraints on soliciting or dealing with FIS customers. Mr Lambert's employment contract relevantly provided that he would not:
15.2.1 solicit or entice away any client or counterparty or any prospective client or counterparty of the [FIS] Desk (or any desk to which you are moved in accordance with your employment contract or these terms and conditions) of the Employer or any Associated Company (whether a company or an individual) with which or whom you have had material and/or regular dealings in the course of your duties or, where this provision would apply after your employment ends, any time during the twelve (12) months prior to its termination;
15.2.2 in competition with the Restricted Business, seek to procure orders from, deal or carry on business with, or transact business with, any client or counterparty or any prospective client or counterparty of the Desk (or any desk to which you are moved in accordance with your employment contract or these terms and conditions) of the Employer or any Associated Company (whether a company or an individual) with which or whom you have had material and/or regular dealings in the course of your duties or, where this provision would apply after your employment ends, any time during the twelve (12) months prior to its termination;
I do not think that any extended discussion of these restraints is necessary. Essentially, for reasons I have already given, they are arguably enforceable against Mr Lambert until 3 January next year. As I have decided to grant an injunction against Mr Lambert providing services to Cashwerkz' business, the field of operation for these restraints will for practical purposes be confined to contacts Mr Lambert might make on his own account. Such restraints would impose no obvious hardship on him. In my view the balance of convenience favours the grant of injunctions under this heading also.
I conclude that the Court should grant an interlocutory injunction substantially in the terms sought by BGC.
(Counsel addressed on the form of orders and costs)
The orders of the Court are:
Upon the Plaintiff giving the usual undertaking as to damages, order that until further order, the defendant be restrained until 3 January 2021:
(a) from directly or indirectly soliciting or enticing away from BGC:
i. Australian Pacific Mortgage Fund Limited (APMF); and
ii. any client or counterparty of BGC with which or whom the defendant had material and/or regular dealings at any time during the period 3 July 2019 to 3 July 2020;
(b) from directly or indirectly in competition with the Restricted Business (as that term was defined in clause 15.3 of the terms and conditions annexed to the employment contract between the plaintiff and the defendant dated 21 February 2018) seeking to procure orders from, deal or carry on business with, or transact business with:
i. APMF; and
ii. any client or counterparty or any prospective client or counterparty of BGC with which or whom the defendant had material and/or regular dealings any time during the period 3 July 2019 to 3 July 2020; and
c) from directly or indirectly rendering services to the fixed income business of Cashwerkz Limited Group.
Order that the Confidential affidavit of Timothy Charles Mallott dated 10 November 2020 and the Confidential Exhibit TCM-1 be treated as confidential and access be limited to the parties to these proceedings and their legal advisors for the purpose of giving effect to this order.
Order that the plaintiff's costs of this application will be the plaintiff's costs in the cause.
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Decision last updated: 27 November 2020