Capital Aircraft Service Pty Ltd v Brolin [2007] ACTCA 8

Court of Appeal (ACT)|2007-04-26|Before: Higgins CJ, Crispin P, Madgwick J, Connolly J

IN THE SUPREME COURT OF THE ) No. ACTCA 36 - 2006

ON APPEAL FROM A SINGLE JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

1. This is an appeal against a decision of Connolly J. His Honour held that a contractual clause, purportedly restricting the respondent's right to provide services as an aircraft maintenance engineer, was void on the grounds of public policy.

2. The appellant company provided technical support services to aircraft owners and operators, principally from Canberra Airport, but also at other regional airports. The respondent, who was qualified to service and maintain aircraft avionics was initially employed by another company, National Jet Systems Pty Ltd, in Canberra. Whilst he was employed by that company on a full-time basis, his services were not in constant demand and, so long as he was available on call, he was free to accept other part- time paid work in the field of avionics.

Whilst you are working on Canberra Airport, Albury Airport or any Airfield within 75 nautical miles radius of Canberra Airport, you agree that besides National Jet, you will solely work under Capital Aircraft Services Pty Ltd Certificate of Approval.

4. The respondent has pleaded that he was unaware that this clause had been included in the final draft of the agreement but no finding has been made concerning the defence of mistake and it is not relevant to the appeal.

5. The issue was determined pursuant to r 1521 of the Court Procedures Rules 2006 ("the Rules") which provides that:

The court may make an order for the decision by the court of a question separately from another question, whether before, at, or after the trial or continuation of the trial of the proceeding.

6. An application for a ruling as to the validity of cl 4 was made at the conclusion of the plaintiff's evidence. His Honour accepted that this was an appropriate course and proceeded to hear submissions from the parties concerning that issue.

7. For the purposes of the application, his Honour accepted that the respondent had carried out some work for one of the appellant's competitors, contrary to the terms of cl 4. The decisive question on appeal was whether that clause gave rise to an unlawful restraint of trade.

8. It is well established that otherwise valid contractual provisions will be void if contrary to public policy by reason of imposing unlawful restraint of trade. In Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 699 Lord Atkinson cited the even earlier case of Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 in which Lord Macnaghten said, at 565:

The true view at the present time, I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interest of the parties concerned and reasonable in reference to the interest of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.

9. Lord Atkinson, in approving this passage, explained, at 700, that:

If it be assumed, as I think it must be, that no person has an abstract right to be protected against competition per se in his trade or business, then the meaning of the entire passage would appear to me to be this. If the restraint affords to the person in whose favour it is imposed nothing more than reasonable protection against something which he is entitled to be protected against, then as between the parties concerned the restraint is held to be reasonable in reference to their respective interests, but notwithstanding this the restraint may still be held to be injurious to the public and therefore void; the onus of establishing to the satisfaction of the judge who tries the case facts and circumstances which show that the restraint is of the reasonable character abovementioned resting on the person alleging that it is of that character, and the onus of showing that, notwithstanding that it is of that character, it is nevertheless injurious to the public and therefore void, resting, in like manner, on the party alleging the latter.

10. These propositions must now be regarded as well accepted. In Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126 Gleeson CJ, Gummow, Kirby and Hayne JJ added a note of caution, observing, at 134-5, that:

A great number of the reported decisions respecting that doctrine turn upon the reasonableness of the restraint, particularly in relation to the legitimate interests of the parties. However, in particular cases, before the question of reasonableness is reached, there may be one or more threshold or preliminary questions requiring resolution. Three may be mentioned. First, it may be asked whether there is a "restraint" within the meaning of the doctrine. That is to be answered by having regard to the practical working of the alleged restraint rather than merely to its legal form. Secondly, it may be suggested that the restraint is not upon or in respect of "trade". Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353 at 371-2 established that, for the purposes of the common law doctrine, the notion of "trade" is not to be read narrowly, so that, for example, it is not limited to any category of skilled occupation and applies to employment generally. The third question is that with which this case is concerned, namely whether the restraint in question is one to which the doctrine applies so that, if the question is in the negative, there is no occasion to go on to consider the question of reasonableness. (references omitted)

11. In the present case there had been no evidence of industry practices or standards directed to establishing the reasonableness of the clause and the only purpose identified had been the protection of the appellant's current business.

12. His Honour noted, at [15] of his judgment, that prohibitions on employees "moonlighting" are relatively common in a range of industries (see Macken, O'Grady, Sappideen & Warburton and McGarry, The Law of Employment (5th ed, 2002) Lawbook Co, 152-153) and that they have been upheld in some cases (such as Hivac Ltd v Park Royal Scientific Instruments [1946] Ch 169) although not in others (such as Weldon & Co Services Pty Ltd v Harbison [2000] NSWSC 272). In this case, however, the respondent had been employed on a full time basis by a third party who permitted him to undertake part-time work. The clause reflected an attempt to prevent the respondent from doing further part-time work for anyone other than the appellant. His Honour held that this amounted to a restraint within the meaning of the restraint of trade doctrine and that it was one in respect of "trade".

13. His Honour proceeded to find that the appellant had failed to discharge the burden of proving that the restraint was reasonable. The only evidence as to the purpose of the clause was to the effect that it had been intended to protect its business from competition, and his Honour held that this was insufficient.

14. In addressing this issue, his Honour adverted to the discussion by JD Heydon in The Restraint of Trade Doctrine (2nd ed 1999) of two approaches that emerged from the reasons for judgment in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269.

15. The first approach suggested by Lord Pearce at 328, was that the doctrine "does not apply to ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract, viewed as a whole, is directed towards the absorption of the parties' services and not their sterilization". Connolly J noted that the majority in Peters v Petersville had not adopted this approach and said that it would, in any event, have been difficult to see how the clause in question could have been directed to the "absorption" rather than the "sterilisation" of services. The agreement did not require the appellant to offer any minimum amount of work to the respondent, but purported to preclude him from undertaking other work in the avionics industry even if offered little or none under the contract.

16. The second approach, as Lord Wilberforce explained in the same case at 335, concerned clauses that "have become part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society". In Australian Capital Territory v Munday [2000] FCA 653; (2000) 99 FCR 72, Heerey J, with whom Miles and O'Connor JJ agreed, said, at 92, that this test seemed to have attracted the approval of the High Court_._ This case was mentioned in Peters v Petersville, at 143, and the High Court did not demur from this observation. Connolly J accepted the principle described by Lord Wilberforce but concluded that the "trading society" test could not assist the appellant as there was no evidence to show that the clause was "part of the accepted machinery of a type of transaction which is generally found acceptable and necessary" and hence acceptable as "part of the structure of a trading society". His Honour added, at [22]:

On the contrary, the only evidence is that this clause was inserted to protect the plaintiff's business, and so it would. On the agreement, even if the plaintiff company was not in a position to offer work to the defendant, it could prevent the defendant from undertaking contractual work or part-time employment from others in the avionics industry in and around Canberra. Where a public policy approach is to be taken into account, as it seems to me it must under this test, a court should be particularly careful about extending the exemptions from the restraint of trade doctrine accepted as applying within employment contracts to agreements for independent contractors. It seems to me that all of the arguments in favour of exclusive dealing clauses within employment contracts (see Macken, above, and also A Brooks, The Limits of Competition: Restraint of Trade in the Context of Employment Contracts [2001] UNSWLJ 346) are based on the employee's duty of fidelity during the life of the employment. But this is of course a two way street, and the employee, in return for this fidelity, enjoys all the consequences of the employment relationship. The present agreement is expressly a contract for services, and excludes the defendant from workers compensation and insurance. There is no obligation to supply any work or any defined quantum of work. All that is provided for is that, should the plaintiff allocate work, it will be done at an agreed rate per hour. As independent contractor arrangements spread increasingly throughout the workplace, it seems to me that courts ought to be cautious about extending to such an arrangement considerations that are more appropriate for employment contracts. A duty of fidelity, and the corresponding tendency of common law courts to permit a degree of exclusive dealing within the life of the employment, should not, it seems to me, be extended to an arrangement where the contractor has no defined or specified amount of work to be provided by the principal.

17. His Honour also concluded, at [23], that the clause could not be severed or read down. It purported to restrain the respondent from doing further casual work in the avionics industry in circumstances effectively sterilising his services to that extent and, given its unilateral nature, it could not be seen as acceptable on the "trading society" test. The operation of the clause was contrary to public policy and hence void.

18. The appellant formally challenged his Honour's decision to resolve the issue separately pursuant to r 1521 of the Rules but this ground was not pressed with any real vigour. Mr Meagher SC, who appeared for the appellant, acknowledged that it was in the interests of both parties to have the issue determined on appeal prior to any rehearing of the other issues and I am unable to see that his Honour fell into error in adopting a similar approach at trial.

19. It was common ground that his Honour had correctly answered the three questions identified in Peters v Petersville and that the real issue was whether the restraint of trade was justified. Hence, insofar as the more substantive aspects of the appeal are concerned, it was incumbent upon the appellant to demonstrate that his Honour had fallen into error by failing to be satisfied that the restraint had been of the reasonable character described by Lord Atkinson in Herbert Morris Ltd v Saxelby or in accepting that it had nonetheless been injurious to the public.

20. Mr Meagher submitted that a number of factors were relevant.

21. First, he pointed out that the clause applied only during the currency of the contract. That is true, but the clause is expressed to impose the obligation not to accept work from any other employer than National Jet System for a period of two years unless his employment with National Jet Systems ended earlier. That obligation would continue even if the contract with the appellant terminated before either of those events had occurred. Thus, assuming no breach by the appellant of the contract, the clause, if valid, would effectively sterilise the respondent's services to the extent of preventing him from engaging in any other casual work even after his involvement with the respondent had ceased.

22. Second, he stressed that courts will give weight to the fact that the parties have freely reached an agreement and the absence of any inequality of bargaining power. See, for example, Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288. These are valid considerations but they are not necessarily decisive.

23. Third, Mr Meagher submitted that his Honour had erred in failing to find that there was an implied term in the contract requiring the appellant to offer the respondent a reasonable amount of work. This was said to arise from a duty of good faith, a duty to act in accordance with the objective of the contract and the need to give business efficacy to the contract. We are unable to accept this submission. Clause 4 of the Contract provided that the parties were committed to an "ongoing process of consultation, co-operation and agreement to achieve the bipartisan objectives". However, the "primary goal" of the contract, and the only objective mentioned, was for the respondent to provide the appellant with avionic support "on a casual basis". We see no reason to construe the contract as extending beyond an arrangement for the respondent to carry out work for the appellant as and when it was offered to him.

24. In our opinion, neither the duty of good faith nor the duty to act in accordance with the objective of the contract required the appellant to offer the respondent any amount of work. Nor can we see why such a term needs to be implied to give business efficacy to the contract. As Mason J said in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 347, the conditions necessary to ground the implication of a term were summarized by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283:

... (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;(3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

25. In the present case, we are unable to see how conditions (2), (3) and (4) could be held to have been satisfied. The contract was essentially an agreement for casual employment. It contained no warranty to the effect that work would be available or that, if available, it would be offered to the respondent in preference to any other suitably qualified person. There was no evidence as to whether the appellant had entered into similar contracts with other such people, employed any on a full time or part time basis or otherwise drew on their services. There was evidence that some work had, in fact, been offered to the respondent, and that more would have been available to him but that does not provide any adequate basis for the retrospective implication of a term of the kind suggested. Had the work subsided to a trickle or even ceased, it is difficult to see how the respondent could have mounted any credible action against the appellant for breach of such a term.

26. The appellant argued that, in reality, the position of the parties was very close to that of employer and employee, and that both had the expectation that there would be a considerable amount of work available to the respondent from the appellant. In these circumstances, some restraint was reasonably necessary. Assuming that the factual assumptions underpinning this submission are correct enough, it remains the position that the respondent was only a casual quasi-employee for the appellant and that the restraint was not confined to the respondent's dealing with customers of the appellant. As between the parties, it seems unreasonable to have sought to prevent the respondent finding other work on his own account when he had no promise, as distinct from an expectation, of plenty of work from the appellant. In relation to the public interest, there appears to be no benefit to the public from such a restraint.

27. It was conceded by counsel for the appellant that if his Honour had correctly found that the contract had not required the appellant to offer a reasonable amount of work to the respondent then the restraint might be held to be unreasonable. That concession was properly made. Even Lord Reid, whose judgment in Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269 was relied upon heavily by the appellant, made it clear, at 294, that this would be the fate of contracts such as those in Young v Timmins (1831) 1 Cr & J.331 where a servant had agreed not to work for anyone else but might have been given no work. See also A Schroeder Music Publishing Co Ltd v Macaulay (formerly Instone) [1974] 1 WLR 1308.

28. In our opinion, this factor alone demonstrates that the clause purports to impose an unreasonable restraint of trade. However, there is, in our opinion, another fundamental impediment to the appellant's case. At least since Herbert Morris Ltd v Saxelby was decided in 1916, it has been clear that the onus of establishing that a restraint of trade is reasonable rests upon the proponent. Mr Allen claimed that he had inserted the disputed clause in the contract "to protect our current business" but did not give evidence of any real need for such protection. Nor did Mr Allen explain how the clause would provide such protection, other than by restricting his competitors' access to casual staff such as the respondent. As counsel for the respondent pointed out, the appellant adduced no evidence of factors such as the size of the business, the nature and extent of its connections with customers or any investment in training or otherwise equipping the respondent as a consequence of his engagement. Nor did the appellant adduce any evidence to support a finding of substantial risk to its business that would have flowed from additional opportunities for the respondent to solicit work from its existing customers or the acquisition of confidential information. Nor, for that matter, did it adduce evidence of any relevant trade usage. His Honour found that the only evidence as to the purpose of the clause was that it was to protect the appellant's business against competition. That finding was not directly challenged by any of the grounds of appeal and was clearly open to his Honour.

29. As Lord Atkinson said in Herbert Morris v Saxelby at 700, "no person has an abstract right to be protected against competition per se in his trade or business". See also Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co at 565 and Peters v Petersville at 145.

30. In short, his Honour was not satisfied that the appellant had discharged the onus of establishing that the clause was reasonable. We are unable to see anything in the evidence that would have required a contrary finding.

31. His Honour did not find it necessary to consider whether it might in any event have been inimical to the public interest for the respondent to have been restrained from providing technical support services to aircraft owners or operators in and around Canberra save on behalf of National Jet Systems or the appellant. When this proposition was put to Mr Meagher, he protested that there had been no evidence of any shortage of technicians and that any such owner or operator could simply engage his client. Neither of these objections seems compelling and, even if some appealable error had been identified, I would have been inclined to remit the matter to his Honour for further consideration of this point.

32. Mr Meagher was very critical of the respondent. He submitted that the respondent had been offered work by the appellant but had nonetheless ignored the obligation that he had voluntarily assumed by entering into the agreement. Mr Neil SC, who appeared for the respondent, rejoined that the pleaded defences had not yet been addressed and that the respondent would maintain that he had not known that the agreement contained the disputed clause when he signed it. He submitted that the appellant's claim to the high moral ground was at least premature. In any event, the relevant issue is whether the clause imposed an unreasonable restraint of trade; not whether the respondent had been morally justified in failing to comply with it.

33. We would dismiss the appeal.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Solicitor for the Respondent: Williams Love & Nicol

Procedures Rules 2006

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