Charltons CJC Pty Ltd v Fitzgerald

Charltons CJC Pty Ltd v Fitzgerald - [2013] NSWSC 350 - NSWSC 2013 case summary — Zoe

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The Plan 6The contemporaneous documents reveal that from at least May 2012, as part of their plan to set up a new business, Fitzgerald, Kishore and Prasad were engaged in a strategy of deception. I will not set out all the evidence, but it included the following stark and uncomplicated admissions, among many others: (a)On 25 and 27 May 2012 Fitzgerald sent a message to William Lawton stating 'I am also entering a new venture and may well need your input on various issues', and an email to Rodney Fitzgerald (his brother) and Tamara Fitzgerald (his daughter) attaching the previous email and stating: 'Will tell you about this sometime'. (b)On 30 May 2012 Fitzgerald received an email from Christopher Bellgard in which he was asked: 'How is the secret plan progressing?', to which he replies: 'on target ... but a lot of things still to accomplish'. (c)On 7 July 2012, using his private Yahoo email account, Fitzgerald emailed Silvana Younis (a former Charltons employee) copied to Prasad, stating: 'Kirat and Kamal would like to meet you re our 'situation' ... they will be in touch soon. I have a feeling we are going to have a great 'business' association soon ... like the old times but with greater rewards ... IMPORTANT ... only use THIS EMAIL for communication from now on'. (d)On 11 July 2012 Fitzgerald emailed Nolan Phillips stating: 'new company kicks off in mid August ... 3 fully qualified a/ctants, 2 consultants and two contract bookkeepers'. (e)On 14 July 2012 Fitzgerald emailed Carol Faulkner (a part-time bookkeeper who had worked irregularly for Charltons over many years) stating: 'Kamal/Kirat to do the 'deed' next week'. (f)On 21 August 2012 Judy Passlow emailed Kishore, copied to Fitzgerald and Prasad, stating 'I am so glad you are back on deck. I can't wait for Alden to arrive back too so we can 'do the deed' and get on with a new phase!'. (emphasis added) 7At times, Fitzgerald's enthusiasm and sense of intrigue must have got the better of him. On 15 August 2012 he sent an email to Carol Faulkner stating that he would be writing to Prasad 'for his insider's double agent view'. Prasad was the last to leave Charltons' employment - on 23 August. He had previously laid out the plans of the three defendants in an email to Silvana Younis: I know that [Fitzgerald] has briefed you on what the overall plan is and will be nice to work with you again. We have pretty much got the ball rolling and the new business venture is not far away. Kamal and I need to catch up with you in order to get all IT software, Els lodgement, access to portal and to get remote access on separate computers plus if need be to get all insurance ready. We have at least 4 weeks timeframe to get started. (emphasis added)

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Circumstantial Evidence 11The plaintiff's submissions recognised that this was a circumstantial case. What that means is well understood. It was summarised in United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408 at [71] - [72] by Kerracher J, to whom what follows is substantially indebted: (a)Proof of any fact on the balance of probabilities may be established by circumstantial evidence: Seltsam Pty Ltd v McGuiness [2000] NSWCA 29; (2000) 49 NSWLR 262 at [90]. That includes proof of primary or intermediate facts from which the court may infer a further fact: Shepherd v The Queen [1990] HCA 56; (1990) 170 CLR 573 at 579. The primary facts can themselves be the product of inference from other facts. (b)A fact may be proved by inference if according to common experience the fact is the more probable inference from the unexplained primary facts. Certainty is never possible, and is not required: Transport Industries Insurance Company Ltd v Longmuir [1997] 1 VR 125 at 141. All that is necessary is that 'circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought': Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 at 5. (c)For the purpose of considering whether the probabilities are satisfied in a case based on circumstantial evidence, the Court must consider 'the accumulation of the evidence': Chamberlain v The Queen (No 2) [1984] HCA 7; (1984) 153 CLR 521 at 535. It is appropriate 'not only to evaluate each of the factual contentions separately but also to form an appreciation of the overall effect of the whole of the evidence' by considering 'the weight which is to be given to the united force of all the circumstances put together': Belhaven and Stenton Peerage (1875) 1 App Cas 278 at 279. (d)In a circumstantial case, the Court is often able to draw an inference from the combination of primary facts, although none of those facts in isolation would have supported the inference: Chamberlain at 536. The true picture will be derived from the accumulation of detail; often best appreciated by standing back and viewing it from a distance - making an informed, considered, qualitative appreciation of the whole; recognising that the overall effect is not necessarily the same as the sum total of the individual details. The analogy is of 'strands in a cable' rather than of 'links in a chain'. Proof does not depend on the integrity of each link: Seltsam at [90] but on the combined strength of the multifarious strands.

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Incorporation by Reference 17In any event, the letter of offer to Fitzgerald, as well as those to each other relevant employee, clearly incorporated by reference the document containing the Terms of Employment. The incorporation occurred whether or not that document was physically attached to the letter and regardless of whether it was seen by Fitzgerald. Whether a document is incorporated by reference is a question of construction. In effect, the court asks 'What did the parties agree to?' The approach to the resolution of that question requires the application of conventional principles. If the incorporated document is clearly identified, if the language of incorporation is clear, and if the objective intention of the parties is readily discernible, the court will usually be satisfied that the extraneous document has been incorporated: see generally: Smith v South Wales Switchgear Ltd [1978] 1 All ER 18 at 29-30 (HL); Treacey and Others v Edwards [2000] NSWSC 846 at [33]. 18In this case, the second sentence of the letter stated that if Fitzgerald accepted the offer contained in it, his employment contract would include the Charltons 'Terms of Employment'. The third sentence stated that the Terms of Employment contained various undertakings with respect to non-competition and that the addressee of the letter should 'take the time required to read carefully all the documents'. On the last page of the letter, Fitzgerald signed and dated the letter below the following statement: I hereby accept the above terms and conditions of employment with Charltons. 19The phrase 'the above terms and conditions of employment' clearly refers to and includes the Charltons 'Terms of Employment' to which the letter gave explicit attention. I do not read it as limited only to the particular matters set out in the letter. It is true that the letter set out some of the most important elements of the contract of employment, but it also emphasised that the 'Terms of Employment' contained significant undertakings that the employee should take the time to consider. I am satisfied on the proper construction of the letter of offer that the objective intention of the parties was that the Terms of Employment be incorporated into the new contract that came into existence when Fitzgerald signed and returned the letter of offer.

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Failure to Initial Terms 20The second issue concerned the method of acceptance. Each letter of offer stated that if the employee wished to accept the offer of employment, he 'must initial each page of the Terms' and 'deliver the initialled Terms, and the counterpart signed copy of the letter, to Charltons within seven days of the date of this letter'. The evidence is that Fitzgerald signed the counterpart letter of offer but did not deliver it to Charltons 'within seven days of the date of this letter'. Nor did he initial each page of the Terms of Employment. And Mr Charlton did not insist on him doing so. Nor did he take any point based on the late delivery. After receipt of the letter of offer, Fitzgerald did not raise with Mr Charlton any aspect of the letter or the Terms of Employment. And his employment with the firm continued for the next five years until 2012. 21In the circumstances, the plaintiff clearly waived the requirement that Fitzgerald initial each page of the Terms of Employment and return the signed and initialled documents within seven days. The initialling requirement was for the plaintiff's benefit, not for Fitzgerald's benefit. The fact of initialling each page minimised the likelihood that the employee might later dispute the terms of his contractual obligations. This was potentially important, especially in circumstances where those obligations included restrictive covenants on the employee's future work. 22Even if, on its proper construction, the method of acceptance prescribed in the letter of offer was exclusive - so that no other method was intended to be sufficient - it was always open to Charltons, as offeror, to refrain from insisting on strict compliance. That it might choose to do so in the case of a senior and trusted employee is perfectly understandable. There was no indication of unhappiness between Fitzgerald and Mr Charlton in 2007 and no reason to think that they were not in complete agreement. If Mr Charlton did not wish to require Fitzgerald to comply with every detail of his own somewhat didactic method of acceptance, it was his prerogative to do so. The defendants' submission that Mr Charlton's failure to insist on strict compliance with his own stipulated acceptance procedure had the legal effect of ensuring that no new contract came into existence, introduces an unfortunate level of artificiality to what is in reality a common practical situation. 23Whether one characterises the events that occurred as giving rise to a waiver, election or estoppel, it is clear that, if the boot were on the other foot, the plaintiff could not now contend that there was no contract because Fitzgerald had not initialled each page of the Terms of Employment. Similarly, there is no basis for Fitzgerald contending that no contract was brought into existence. As Lord Hailsham LC said in Banning v Wright [1972] 1 WLR 972 at 978-9: The primary meaning of the word 'waiver' in legal parlance is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted.

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Consideration 24A third issue arises because Fitzgerald contends that the Terms of Employment, or at least the restraints imposed on him by Clause 7.1, are not binding by reason of the absence of valuable consideration. This is an exercise in false reasoning. As at September 2007, Fitzgerald was bound by an existing contract of employment with Charltons. Mr Charlton effectively proposed, and Fitzgerald agreed, that the existing contract be discharged and replaced by a further more extensive contract. The replacement contract addressed a number of topics that constituted a new and different subject matter. They were set out in Clauses 10, 11, 12 and 13 of the Terms of Employment. 25Although Fitzgerald's remuneration and responsibilities may have remained unchanged, the substitute contract dealt with new aspects of the employment relationship in ways that secured a 'practical benefit' or avoided some practical detriment or disadvantage to either or both parties, cf. the ungainly expression 'practical disbenefit' in Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 at 746-747. 26In any event, as a matter of legal analysis, whenever parties agree to discharge an existing contract and replace it, their mutual promises to discharge the original agreement and abide by the new agreement will constitute sufficient consideration - unless their conduct is simply an artifice. The point was stated succinctly in Figjam Pty Ltd v Pedrini [2005] NSWSC 221 at [15]: [I]f the existing duty is discharged by a contract which includes a promise with the same content as the original promise, the promise will be regarded as binding because consideration is present in the parties' agreement that the original duty is to be discharged ... Unless the circumstances are such that it is impossible to interpret the second contract as a termination of the first, a court will discern an implied agreement to terminate the original contract and consideration will be present. 27That passage had its origin in Carter and Harland, Contract Law in Australia, 4 ed (2002) at 347: Termination of the Contract. The principle that a promise to perform a contractual obligation already owed to the other party is no consideration for a return promise by the latter has no application where the earlier obligation is, as part of the agreement, terminated or discharged. In other words, if the existing duty is discharged by a contract which includes a promise with the same content as the original promise, the promise will be regarded as binding because consideration is present in the parties' agreement that the original duty is to be discharged ... Unless the circumstances are such that it is impossible to interpret the second contract as a termination of the first, a court will discern an implied agreement to terminate the original contract and consideration will be present. (emphasis added) 28I adopt that analysis. The 2007 letter of offer and the Terms of Employment were explicitly intended to constitute a new contract. The general statement by Mason J in Wigan v Edwards (1973) 1 ALR 497 at 512 is not to the point. His Honour's observations relate to promises made under an existing contract. They are not concerned with the legal effect of the discharge of a contract and its replacement by a new contract. In my view, there is no sound basis for the contention that Fitzgerald's 2007 contract was not supported by consideration.

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Width of Restraint 29The next issue is whether the restraints imposed by Clause 7.1 of the Terms of Employment are 'no more than reasonable to protect the legitimate interests of the plaintiff'. The defendants contend that the restraints are excessive and therefore contrary to public policy and void. Alternatively, they contend that they should be read down pursuant to Section 4 of the Restraints of Trade Act. 30Clause 7.1(3)(a) of the Terms of Employment restrains Fitzgerald, Kishore and Prasad from, among other things, soliciting persons or entities 'who at any time during the continuance of your employment have [sic] been a client of' the firm. The employment of each of them with Charltons commenced in 1999. The number of persons or entities, including former clients of the firm, who may therefore be caught by Clause 7.1 is considerable. It may include persons or entities who ceased to be clients of the firm more than a decade ago. The evidence does not disclose, in all cases, who has been a client of the plaintiff since 1999; whether they continue to be a client; when or if they ceased to be a client; and whether any such client has ever had dealings with Fitzgerald, Kishore or Prasad. The practical commercial necessity for the wide protection provided by Clause 7.1 is opaque; its justification imperspicuous. 31The defendants understandably contend that the definition of 'client' under the restraints should be limited. They submit that reasonableness requires that 'client' be confined to persons or entities with whom each of the defendants, as the case may be, 'had direct dealings during the last twelve months of his employment with the plaintiff'. 32The defendants are justified in their challenge to the width of the contractual restraint. In my view, the restraints are wider than is necessary for the reasonable protection of the legitimate interests of the plaintiff. An accounting firm such as Charltons undoubtedly has a valid interest in the protection of its customer connection: Stenhouse Australia Ltd v Phillips [1973] 2 NSWLR 691 at 699; [1974] AC 391 at 402; Miles v Genesys Ltd [2009] NSWCA 25; (2009) 201 IR 1 at [41]; Jardin v Metcash Ltd [2011] NSWCA 409 at [95]; Elsley v J G Collins Insurance Agencies Limited [1978] 2 SCR 916 at 925-938; Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 at [47]. But I have concluded in this case that the plaintiff's legitimate interest will be served if the restraints are limited to persons or entities with whom any of Fitzgerald, Kishore and Prasad had dealings in the last twelve months of their employment. 33I do not accept that the qualification 'direct dealings' is necessary. That will only lead to argument, disputation and uncertainty about what was, in a particular case, a 'direct dealing'. The nature of the connection between Fitzgerald, Kishore and Prasad and the clients of the firm to whose accounts they were assigned, does not justify the width of the restriction stipulated by Clause 7.1. Unless read down, it could operate unfairly, randomly and have consequences that do not serve the legitimate interests of the plaintiff. 34Fitzgerald, Kishore and Prasad should be restrained from, among other things, soliciting any person or entity with whom they had dealings on behalf of the firm in their last twelve months of employment. I am confident that such a restriction will provide adequate protection to the plaintiff. Anything more would go beyond what is reasonable.

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Duty of Fidelity 35During their employment with Charltons, Fitzgerald, Kishore and Prasad were subject to an express contractual duty of fidelity. Clause 3.1 of the Terms of Employment required them to 'well and faithfully serve [the plaintiff] and use your best endeavours to promote the interest and welfare of [the plaintiff]. 36A term to similar effect is implied by operation of law in every contract of employment unless it is directly or indirectly excluded. It obliges the employee to render faithful and loyal service to the employer and to avoid conduct incompatible with the continuing relationship of trust and confidence between them: Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 370, 372, 391, cited in Blyth Chemicals Ltd v Bushnell [1933] HCA 8; (1933) 49 CLR 66 at 81-82 (Dixon and McTiernan JJ); see also Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 103 IR 160 at [57] (Kirby J). 37The breadth and generality of the duty of fidelity was encapsulated in the statement of principle in Blyth Chemicals Ltd v Bushnell at 81-82 where, in addressing the circumstances in which summary dismissal is justified, Dixon and McTiernan JJ said: Conduct which in respect of important matters is incompatible with the fulfilment of an employee's duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground of dismissal ... But the conduct of the employee must itself involve the incompatibility, conflict, or impediment, or be destructive of confidence. An actual repugnance between his acts and his relationship must be found. It is not enough that ground for uneasiness as to future conduct arises. 38The contractual duty of fidelity, whether express as in Clause 3.1, or implied, prevents an employee from undermining the employer's business, such as by soliciting or procuring the employer's customers and employees, diverting the employer's business opportunities to their own business, or setting up, operating or assisting a business which competes with their employer: Blyth Chemicals v Bushnell at 81-82; Wessex Dairies Ltd v Smith [1935] 2 KB 80 at 87-89; Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 at 300; Goodchild Fuel Distributors Pty Ltd v Holman (1992) 59 SASR 454 at 477-481 and 484-485; Digital Pulse Pty Ltd v Harris [2002] NSWSC 33; (2002) 166 FLR 421 at [20] - [23] (not relevantly reversed on appeal in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10; (2003) 56 NSWLR 298); Dinte v Hales [2009] QSC 63 at [22] - [26]. 39In this case, there is no need to resort to the implied duty of fidelity. The express contractual obligation in Clause 3.1 of the Terms of Employment, achieves the protection which the plaintiff seeks, and the implied duty adds nothing. An implied term should only be found if, among other things, it is 'necessary'. See Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 124 (CA).

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Fiduciary Obligation of Loyalty 40During their employment with the firm, Fitzgerald, Kishore and Prasad also owed to the plaintiff a fiduciary obligation of loyalty. The fiduciary character of the employment relationship is well recognised. See for example, Digital Pulse Pty Ltd v Harris at [20], and on appeal in Harris v Digital Pulse Pty Ltd at [121]. 41Fitzgerald, Kishore and Prasad were relevantly obliged to subordinate their interests to Charltons: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 96-97; Concut Pty Ltd v Worrell at [17]. This is manifested in two proscriptive obligations: (1) not to be in a position of conflict between their duty and their personal interest, and (2) not to obtain any unauthorised benefit from their fiduciary position: Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at 113; and Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198. 42Fiduciary and contractual obligations do not always make easy bedfellows however. The express contractual duty of fidelity in Clause 3.1 of the Terms of Employment provides all the protection that the plaintiff could hope to achieve. The concurrent fiduciary duty adds nothing. That is because it is the contractual relationship which is all important. The fiduciary relationship 'must accommodate itself to the terms of the contract so that it is consistent with, and conforms to them': Hospital Products Ltd v United States Surgical Corporation at 97 (Mason J). To similar effect was Lord Browne-Wilkinson in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 at 206 who observed: ... the extent and nature of any fiduciary duty owed in a particular case falls to be determined by reference to any underlying contractual relationship between the parties. 43For those reasons, the fiduciary obligation of loyalty owed by Fitzgerald, Kishore and Prasad during their employment, rose no higher than their contractual duty. It was equivalent to and existed concurrently with the duty set out in clause 3.1 of the Terms of Employment.

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Breaches & Damages 47As well as seeking to restrain Fitzgerald, Kishore and Prasad from acting in contravention of Clause 7.1 of the Terms of Employment for the full twelve month period after the termination of their employment, the plaintiff has a practical commercial interest in securing monetary compensation from them, and from the company which they established together. 48However, before the amount of monetary compensation can be determined, senior counsel informed me that it will be necessary, in relation to part of the claim, for the plaintiff to elect between damages and an account of profits. No election can yet be made and any choice between an account of profits and damages may raise a number of issues. 49The calculation of damages for breach of the restraints stipulated in Clause 7.1 of the Terms of Employment is governed by the formula set out in Clause 7.2. It requires identification of 'the client', which in turn necessitates the identification of individual breaches. That process of identification will be affected by my conclusion that Clause 7.1 should be read down so as to limit its application only to 'clients' with whom Fitzgerald, Kishore and Prasad had dealings in the twelve month period prior to the termination of their employment. The defendants' written submissions acknowledged the need for the court to make findings about the existence and scope of the restraints imposed by Clause 7.1, before they would be in a position to make admissions as to breach. They also reserved their right to make submissions as to the validity of Clause 7.2. 50Despite those qualifications, the defendants cooperated in the production of schedules in which, among other things, they admitted a large number of post-employment breaches of Clause 7.1. However the admissions assume the application of Clause 7.1 in the form appearing in the Terms of Employment - not as read down by me. The outcome may well be different given that I have found that the Clause 7.1 restraints should apply only to persons or entities with whom Fitzgerald, Kishore and Prasad had dealings in the twelve month period before the termination of their employment. 51The same complication does not arise in relation to the contractual and fiduciary breaches by Fitzgerald and Kishore during their employment. In that respect, the schedules of breaches produced by the parties are divided between those that relate to actual clients of Charltons - for which Fitzgerald alone is said to be liable, and those that relate to 'shadow clients' of Charltons - for which Fitzgerald and Kishore are both said to be liable. Fortunately, the admissions are numerous and the denials relatively few - although their resolution is not without complication.

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