EMECO INTERNATIONAL PTY LTD -v- O'SHEA [2012] WASC 282 (8 August 2012)

Mr O'Shea's employment with Emeco International and the restraint clause

4 The plaintiff, Emeco International, is in the business of 'dry hire' of mobile mining equipment in Australia and internationally. Mr O'Shea was employed by Emeco International for 21 months, between 21 October 2010 and 3 August 2012. He was the company's business development manager in Western Australia.

5 Mr O'Shea was engaged under two contracts of employment. The first was dated 21 October 2010. The second was dated 3 October 2011. Both contracts contained identical restraint of trade clauses. The relevant clause is the one contained in the second employment contract.

6 There were four restraints on Mr O'Shea's postemployment activities. Emeco International relied upon one of these. The restraint relied upon by Emeco International was that Mr O'Shea agreed not to engage in the activity below (either directly or indirectly) without the prior written consent of Emeco International:

[P]rovide or take part in the provision of consultancy services or otherwise perform work for or provide products or services to a business competitive with the business of Emeco.

7 The period of the restraint is six months although the clause further provides that 'unless that period is held invalid ... in which case, 3 months'.

8 Mr Stubbs, the State Manager for Emeco International in Western Australia and South Australia, provided an affidavit in which he described the nature and conditions of the dry hire industry. He differentiated the dry hire industry from two other sectors, namely (i) mine operators who purchase and operate equipment themselves; and (ii) mine owners who retain the services of mining contractors to operate the whole or parts of the operation of the mine.

9 Dry hire, in contrast, responds to temporary needs of mine owners and operators. It involves companies such as Emeco International delivering mobile mining equipment to a mine site for use by a customer, as well as maintaining the equipment during the hire and removing the equipment from the mine site at the conclusion of the hire period. Ninetythree per cent of all of Emeco International's contracts are over six months long, and currently the average contract length is almost 15 months.

10 Mr Stubbs says that the dry hire industry is extremely competitive due to a large number of dry hire businesses vying for the business of a small number of customers. Emeco International has the largest share of the market. Mr Stubbs says that National Plant & Equipment Pty Ltd is one of Emeco International's five major competitors, although this is disputed by Mr O'Shea.

Mr O'Shea's resignation and proposed new employment

11 Although some of the facts surrounding Mr O'Shea's resignation are disputed, it is common ground that on 16 July 2012 Mr O'Shea met with Mr Stubbs. Mr O'Shea said that he was resigning from Emeco International. Mr O'Shea said that he intended to go to work for National Plant & Equipment Pty Ltd. Mr O'Shea gave Mr Stubbs a resignation letter.

12 Mr Stubbs says that he said words to Mr O'Shea which included words to the following effect: 'I understand you have to do what's right for you and your family. Because you are going to a competitor we will need to finish you up today. I will need to speak to HR about how this works'.

13 The conditions of termination reached were that Mr O'Shea was to be paid for his employment up until, and including, 3 August 2012.

The injunction sought and Mr O'Shea's most recent undertaking

14 The terms of the injunction, as narrowed at the hearing, were that:

Until 2 February 2013 or further order an injunction be granted against the defendant, restraining him from (either directly or indirectly) accepting employment with or providing or taking part in the provision of consultancy services in Western Australia or otherwise performing work for or providing any products or services to National Plant & Equipment Pty Ltd or any dry hire company which competes with the business of the plaintiff.

15 Mr O'Shea gave an undertaking which, in broad terms, included a promise that he would not accept employment with National Plant & Equipment Pty Ltd or any dry hire company which competes with the business of Emeco International until 8 August 2012. This matter was heard on 7 August 2012 and decided on an urgent basis.

The principles relevant to the assessment of the interlocutory injunction

16 Mr Ritter, senior counsel acting for Mr O'Shea, referred to the commonly quoted exposition by Beech J of the principles concerning the availability of interlocutory injunctive relief in Twinside Pty Ltd v Venetian Nominees Pty Ltd [2008] WASC 110 [7] [11]. The submissions of both parties proceeded on the basis of those accepted principles concerning the interrelated issues of (i) whether there is a serious question to be tried, and (ii) whether the balance of convenience favours the grant of the interlocutory injunction.

17 However, two aspects of the submissions of Mr Ritter must be addressed before these principles can be considered. These are:

(i) whether an award of damages would be adequate for Emeco International; and

(ii) whether it is possible for the court in this case to engage in a comprehensive examination of the factual circumstances to determine the strength of Emeco International's case that the restraint clause was reasonable.

18 Mr Ritter submitted that an award of damages to Emeco International would be adequate and that the interlocutory injunction should be refused for that reason. One difficulty with this submission, which he acknowledged, is the line of authority which I discussed in National Australia Bank Ltd v Joyce [2012] WASC 224 [38] [41]. That line of authority treats adequacy of damages not as an independent requirement but simply a matter which is relevant to the broader question of the balance of convenience: see Marley New Zealand Ltd v Icon Plastics Pty Ltd [2007] FCA 851 [3] (Gordon J); Medrad Inc v Alpine Medical Pty Ltd [2009] FCA 949; (2009) 82 IPR 101, 109 [38] (Kenny J); Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (No 2) [2010] FCA 38 [55] [64] (Yates J); Samsung Electronics Co Ltd v Apple Inc [2011] FCAFC 156 [61] (the Court); Boyd v Wild Hibiscus Flower Company Pty Ltd (No 2) [2012] FCA 74 [61] [66] (Foster J).

19 In any event, on the evidence before me, I do not consider in this case that damages would be an adequate remedy for Emeco International if the restraint clause were found at trial to be valid.

20 It has often been said, in the context of injunctive relief for apprehended breach of a restrictive covenant that 'where what is involved is the enforcement by injunction of a contractual negative stipulation, it is a rare case in which relief will be declined on the basis that damages are a sufficient remedy': Cerilian Pty Ltd v Graham Fraser [2008] NSWSC 1016 [10] (Brereton J); John Fairfax Publications Pty Ltd v Birt [2006] NSWSC 995 [45] (Brereton J); Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659 [129] [130] (Ward J).

21 The reasons why damages are often inadequate in these cases includes (i) the difficulty of detection of breaches of the obligations; (ii) the difficulty of establishing causation between any loss of business with customers and any actions of the ex-employee; and (iii) the difficulty of the calculation of the quantum of any damage arising from loss of business: Huhtamaki Australia Ltd v Botha [2004] NSWSC 386 [17] (Hamilton J).

22 These concerns will not always apply. There are many cases where detection and proof of breach can be difficult, and cases involving claims for loss of a chance of obtaining, or retaining, a contract often involve assessments (ii) and (iii). But, in the circumstances of this case, I am satisfied at this preliminary stage that damages would be an inadequate remedy for Emeco International due to these three reasons in combination.

The extent to which the strength of Emeco International's case can be considered

23 Mr Ritter submitted that it was desirable for the court to evaluate the strength of Emeco International's case for final relief. His submissions, and Mr O'Shea's affidavit, involved a comprehensive examination of the restraint clause and the factual circumstances from which it was said that Emeco International could not show that there was a serious question to be tried that the restraint clause was reasonable.

24 The extent to which a court can embark in a detailed consideration of the strength of a plaintiff's case depends on each particular case. The principles concerning the assessment of the strength of a case for an interlocutory injunction were set out by McLelland J in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533, 535 536. These passages from the decision have been relied upon and quoted numerous times including in the High Court in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57, 84 [72] (Gummow & Hayne JJ). A summary, extracting those principles relevant to the issue of the extent to which the strength of Emeco International's case can be assessed, is as follows.

(1) Normally the court does not undertake a preliminary trial, and give or withhold interlocutory relief upon a forecast as to the ultimate result of the case. But, there are some kinds of case in which for the purpose of seeing where lies the balance of convenience it is desirable for the court to evaluate the strength of the plaintiff's case for final relief. One class of case to which this applies is where the decision to grant or refuse an interlocutory injunction will in a practical sense determine the substance of the matter in issue.

(2) Where a plaintiff's entitlement to ultimate relief is uncertain, the court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of the uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled.

(3) Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the court to decide that question on the interlocutory application.

(4) Where the uncertainty depends in whole or in part on a contested question of law, it may or may not be appropriate for the court to decide that question on the interlocutory application, depending on circumstances, eg, whether the question is novel or difficult, or is susceptible of resolution on the present state of the evidence, or whether the urgency of the matter renders it impracticable to give proper consideration to the question.

25 If an interlocutory injunction is awarded in this case it will not have the effect, in a practical sense, of determining the substance of the matter in issue. It is true that the injunction will have a harsh effect on Mr O'Shea because he will be unable to commence work for National Plant & Equipment Pty Ltd for several weeks pending the trial of this action. But this falls considerably short of the six month restraint sought by Emeco International. The effect on Mr O'Shea does not justify undertaking a 'preliminary trial' or a close examination of the strength of the plaintiff's case.

26 There were also numerous disputed facts in the affidavit material before me. At least six areas of disputed facts can be given.

27 One example of an area of disputed fact is that Mr Stubbs says that Mr O'Shea has been in a position, by virtue of his employment with Emeco International, to form relationships including those with eight particular clients and six contractors. Mr O'Shea denies this and points to preexisting relationships or a lack of contact with these persons.

28 Another example is that Mr Stubbs says that Mr O'Shea has been named as the Business Development Representative or has signed contracts with customers. In each case, Mr Stubbs says that Mr O'Shea would have been privy to significant confidential information. This is denied by Mr O'Shea.

29 A third example is that Mr Stubbs describes Mr O'Shea as being privy to a 'detailed and confidential pricing model that has been developed by [Emeco International] over many years'. Mr O'Shea denies that there are confidential commercial terms upon which Emeco International does business with its clients or that there was significant confidential information in relation to each client.

30 A fourth example of disputed facts is that Mr Stubbs says that Mr O'Shea has been exposed to significant confidential information. Mr O'Shea denies that he has any confidential information of Emeco International. Mr Stubbs says that the planned mining operations of customers of Emeco International in Western Australia are confidential. Mr O'Shea denies this. He has produced a large map from the Western Australian Department of Mines and Petroleum of those operations.

31 A fifth area of disputed facts is that Mr Stubbs says that National Plant & Equipment Pty Ltd is one of Emeco International's major competitors. Mr Ritter submits that the content of Mr O'Shea's affidavit shows that this is not so.

32 Finally, and more broadly, there is a sixth area of disputed facts. Although this was not a matter raised in any detail at this hearing there may be facts in dispute relevant to the meaning of the words 'a business competitive with the business of Emeco' in the restraint clause. The wider the meaning of this clause the more likely it will be that the clause will not be reasonable. But the narrower the meaning of this clause the less likely it will be that National Plant & Equipment Pty Ltd is in competition with Emeco International. It may be that this meaning is the subject of agreement between the parties but it is otherwise a matter of construction that may need to be resolved at trial.

33 None of these disputed facts or areas of disputed fact can be decided on this application. This significantly reduces the extent to which the strength of the plaintiff's case can be assessed. However, for the reasons set out below, I am satisfied that the plaintiff has established that there is a sufficiently serious question to be tried.

34 There was no dispute concerning the legal principles governing the validity of restraint of trade clauses.

35 A leading statement in this jurisdiction of the principles applicable to the reasonableness of restraint of trade clauses is the decision of the Court of Appeal in Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169. An application was special leave to appeal from that decision was refused: Smith v Nomad Modular Building Pty Ltd [2008] HCATrans 113.

36 In Smith v Nomad Modular Building Pty Ltd [6], McLure JA (with whom Buss JA agreed) quoted from the well known decision of Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, 565 that for a restraint of trade to be justified:

[I]t is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests 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.

37 McLure JA explained (at [8]) that a restraint is reasonable in relation to the restraining party if it is necessary for the adequate protection of that party and reasonable in relation to the party restrained if it preserves the fullest liberty of action consistent with that protection: Brightman v Lamson Paragon Ltd [1914] HCA 90; (1914) 18 CLR 331, 337 (Isaacs J); Buckley v Tutty [1971] HCA 71; (1971) 125 CLR 353, 376 (the Court).

38 As to the interests about which it is legitimate for an employer to protect, it is well established that these include its customer connections and its confidential information: Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628, 633 634 (Latham CJ), 650 (Fullagar J), 654 (Kitto J).

39 It is also established that a restraint may be justified as protecting more than one legitimate interest. An example given by Meagher JA (Campbell & Young JJA agreeing) in Jardin v Metcash Ltd [2011] NSWCA 409 [91] is 'where an employee having a close relationship with and influence over particular customers also holds confidential information as to their terms of trade or as to the future plans of the business which may adversely affect the interests of those customers'.

40 The onus of proof is therefore on Emeco International to show circumstances from which it can be inferred that the restraint of trade clause was reasonable to protect these legitimate interests. Otherwise the clause will be struck down as void.

41 Mr de Kerloy submitted that there was a serious question to be tried concerning the validity of the restraint of trade clause based upon the legitimate interests of Emeco International in preserving and protecting its (i) client connections; and (ii) confidential information. Mr Ritter, referring to evidence from Mr O'Shea's affidavit, asked rhetorically 'what is the extent of the client connection?' and 'what is the confidential information?'.

42 It is not merely the issue of the extent of client connection which is relevant to the question of reasonableness of the restraint. The nature of the connection is also relevant. Examples which are often given of client connections which, of their nature, are not legitimate to protect are relationships formed by lift attendants, receptionists, and apartment caretakers during their employment. Further, regard must be had to contextual matters such as 'institutional hold'. Hoover J gave a famous example of institutional hold in Arthur Murray Dance Studios Inc v Witter 105 NE 2d 685 (1951, Ohio), 706 saying that if the deans of Harvard and Yale law schools exchanged chairs then it might be 'very unflattering' to consider how many students would try to follow them.[1]

43 Emeco International did not seek to establish with any great precision the extent of its client connection or the nature of the confidential information possessed by Mr O'Shea. But, as I have explained, the resolution of these issues involves inferences to be drawn from facts which are contested. It is not appropriate to adjudicate those contested questions of fact on this application. It is enough to say that there is a serious question to be tried concerning the extent of customer connection and confidential information, albeit involving disputed matters of fact.

44 There is a further point to be made about these factual issues. The determination of facts concerning the extent of customer connection and confidential information at times after Mr O'Shea's 3 October 2011 contract are relevant only to the extent that they can illuminate whether the clause was reasonable at 3 October 2011 having in mind the best estimate that the parties could then have made about the future: Smith v Nomad Modular Building Pty Ltd [7] (McLure JA); Putsman v Taylor [1927] 1 KB 637, 643 (Salter J). Some of the subsequent facts might be expected since on 3 October 2011 Mr O'Shea had been employed by Emeco International for almost a year under a different contract.

45 Mr Ritter submitted that an assessment simply of terms of the restraint clause showed that the clause was unreasonable. He pointed to the breadth of the restriction against 'consultancy services or otherwise perform work' and the breadth of 'a business competitive with the business of Emeco'. There is some difficulty in drawing conclusions about the breadth of these words against a background of contested facts. But the breadth of these words is not, by itself, sufficient to dispel all the other matters which establish a serious question to be tried.

46 It is also relevant that the prohibition is not absolute. It is a prohibition against the relevant activity 'without the prior written consent of Emeco'. It may be that a term is to be implied that such consent could not be unreasonably withheld. But it is not necessary to consider this matter.

47 In relation to the terms of this particular clause, another relevant matter is the definition of Mr O'Shea's 'core responsibilities' in his June 2011 'position description' prior to his entry into his 3 October 2011 employment contract. That position description involved matters closely related to the two interests upon which Emeco International relies to justify its restraint as reasonable: (i) customer connection and (ii) confidential information. Three of the 'core responsibilities' of Mr O'Shea were:

(1) 'Relationship management and business development to maintain existing customers and develop new customers and supply equipment in accordance with Emeco financial returns, commercial terms and equipment selection policy'.

(2) 'Work closely with the Rental State Manager to gain a complete understanding of the State P&L, forecasting and budgeting requirements'.

(3) 'Contribute to strategic plans, budgets and reports to the Rental State Manager'.

48 Further, the restraint clause contained an acknowledgement in the following terms:

1. you occupy a responsible position with Emeco;
2. Emeco's relationships with its Clients are critical to the business;

1. it is in Emeco's legitimate business interests to promote the preservation of its relationships with its Clients;

1. it is in Emeco's legitimate business interests to protect the use by you or others of Confidential Information to its detriment;
2. the restraints in this clause are reasonable and necessary to protect the legitimate business interests of Emeco in the preservation of its client relationships, the goodwill of its business and its Confidential Information.

49 Although a contract cannot, by reciting apparent agreement, convert the unreasonable into the reasonable, it has been said that '[t]he assessment of the contractual parties on that subject is not determinative but neither is it irrelevant, particularly where, as here, competent parties contract at arms length by reference to their commercial assessments and interests': Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, 294 (Menzies J), 307 (Walsh J), 317 (Gibbs J); Smith v Nomad Modular Building Pty Ltd [17] (McLure JA, Buss JA agreeing). It may be that less weight might attach to this factor in light of Mr O'Shea's evidence that the contract was in standard form and was not negotiated.

50 Mr Ritter also submitted that the broad definition of 'client' in this recitation of the interests of Emeco International goes beyond the legitimate interests of Emeco International because it includes persons who at any time in the 12 months prior to the date of termination of the employment contract with Emeco International had entered discussions or negotiations with Emeco International for provision of products and services (and who had not told Emeco International that they did not want those products and services). One difficulty with the breadth of this clause is that it captures persons who, perhaps due to a period of 'gardening leave' before termination of employment, the employee could not have any knowledge.

51 Mr Ritter also pointed to matters which suggest that the restraint clause goes beyond Emeco International's legitimate interests.

52 First, the fact that to the extent that the clause is aimed to protect the legitimate interest of the employer in preventing solicitation of those customers, it is not confined to those customers with whom the employee has dealt. Indeed, there is a separate restraint upon solicitation of any client (as broadly defined). It may be that this restraint is impermissible: Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449 [72] (Brereton J). But Emeco International relies only upon the restraint, which I have quoted, against performing work for a business competitive with the business of Emeco International.

53 Secondly, the provision of an alternative restraint period of three months (albeit similar to the alternatives provided in AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 which were upheld as reasonable) was said to point to a failure by Emeco International genuinely to attempt to protect its interests.

54 Thirdly, there is the length of the contracts which Emeco International had with its customers as well as the factual evidence that Mr O'Shea gave (about which it was unclear whether it was in contest) that matters such as Emeco International's equipment availability was in continual flux and was reconciled on a weekly basis. On Mr Stubbs' evidence, 93% of these contracts were for periods of longer than six months. If this was a matter which was reasonably expected at the date of the 3 October 2011 contract then it is a matter which will be relevant to the reasonableness of a six month restraint on employment of Mr O'Shea with a company said to be a competitor.

55 For the reasons explained above, there are facts, inferences and legal arguments supporting the case for both Mr O'Shea and for Emeco International. Many of these matters will need to be considered at trial but I am satisfied that there is a serious question to be tried that the clause is reasonable.

56 As a postscript to this point, and although cases in this area will usually turn on their own facts, I mention also the submission of Mr de Kerloy that clauses which are not in dissimilar terms to the clause in this case were upheld as reasonable in AGA Assistance Australia Pty Ltd v Tokody [19] (McMurdo J) and Nomad Modular Building Pty Ltd v Smith [2007] WASC 117 [1] (Sanderson M), decision upheld by the Court of Appeal in Smith v Nomad Modular Building Pty Ltd.

57 There are some factors which favour the refusal of an interlocutory injunction. When Mr O'Shea presented his resignation and explained that he was going to work for National Plant & Equipment Pty Ltd, there was no suggestion by Mr Stubbs that Emeco International might restrain Mr O'Shea from working for their competitor.

58 An affidavit was also provided from Mr Matijevic, a former Business Development Manager for Emeco International from April 2011 until May 2012, who resigned to work for a dry and wet hire company and against whom no restraint was enforced. Mr O'Shea has also proffered an undertaking not to canvass or solicit or engage in work for six months for the four main clients which he said that he oversaw and with which he developed a business relationship.

59 On the other hand, as Brereton J said in John Fairfax Publications Pty Ltd v Birt [51], the enforcement of contractual restraints frequently occasion hardship to employees who, in defiance of them, accept employment with competitors. An employee who pursues such employment despite the terms of a known restraint runs a risk of enforcement of the restraint. In any event, Mr Matijevic's evidence concerning the circumstances of his resignation and in particular the dissimilarities between the company to which he was going to be employed and National Plant & Equipment Pty Ltd are relevant differences from this case.

60 A further factor militating in favour of an interlocutory injunction is that the terms of the undertaking proffered by Mr O'Shea do not extend to all the customers with which Mr O'Shea was involved. One of those is Barrick Ltd. Mr Stubbs' evidence was that Mr O'Shea signed or was named as Business Development Representative for around 100 contracts with Barrick Ltd. Mr O'Shea accepts that he had contact with Barrick Ltd but says that he had a previous relationship with one of its managers. His undertaking did not extend to include Barrick Ltd.

61 However, perhaps the most powerful factor relevant to the balance of convenience is that if no injunction is granted, Emeco International will be deprived, probably permanently, of the protection afforded by a potentially valid contractual restraint and left to a claim for damages which, at this stage, I consider to be inadequate. On the other hand, if an interlocutory injunction is granted, any loss to Mr O'Shea will be recoverable on the undertaking as to damages which is given by Emeco International. This was also an important factor which favoured the grant of an interlocutory injunction in John Fairfax Publications Pty Ltd v Birt [51].

62 I conclude that there is a serious question to be tried and that the balance of convenience or, more properly, the balance of the risk of doing an injustice, favours the grant of an interlocutory injunction.

63 An interlocutory injunction should be granted in the terms set out above at [14]. I will hear from the parties, if any submissions are necessary, concerning orders that (i) the time for service of appearances and notice of the hearing of the application be abridged; and that (ii) costs of this application be in the cause.

64 I will also hear from the parties concerning the entry of this matter into my Commercial and Managed Cases list and programming and mediation directions prior to trial. Emeco International has said that it can be ready for trial in a very short period of time. I have also reserved the dates of 3 5 September 2012 for a hearing if Mr O'Shea is able to prepare in that time.

[1] This decision of Hoover J, a graduate of Harvard Law School, is said to have shot to prominence after it was cited forty three times by Professor Williston, a former acting dean of Harvard Law School, in his famous treatise on the Law of Contracts (sic). At the time of the decision the Dean of Harvard Law School was Erwin Griswold, also from Ohio.