HABITAT 1 PTY LTD -v- FORMBY [No 2] [2017] WASC 331 (17 November 2017)

3 In February 2013, Geoffrey Pritchard through the second plaintiff (Maliza) acquired the balance 50% shareholding in Habitat from a third party. Mr Pritchard also became a director.

4 Mr Formby was employed as the managing director pursuant to the terms of an Executive Services Agreement (ESA) made between him and Habitat on 22 February 2013.[1] The terms of the ESA include a restraint of trade clause.

5 In February 2016, Mr Formby left Habitat. He says he resigned. Habitat says that it dismissed Mr Formby from his employment, either summarily or for gross misconduct. Habitat alleges that following his departure from Habitat, Mr Formby breached the contractual restraints, in particular by undertaking work that competes with Habitat.

6 The relationship between Mr Formby and Mr Pritchard has irreparably broken down.

7 In November 2016, I granted an injunction to enforce certain aspects of the restraints pending further order.[2] Following the trial, the first priority was to focus on the time period of any restraint. I determined that assuming the restraint provisions were enforceable, a time period of 12 months would provide sufficient protection of the interests of Habitat. Therefore, on 20 March 2017 I ordered that the injunction be discharged.

8 These proceedings between the parties are not limited to allegations as to the restraints. Habitat claims the second defendants are obliged to repay certain loans made to them as shareholders. The second defendants are Mr Formby and his former wife, Chantelle Formby, as trustees of the Formby Family Trust.

9 Mr Formby claims (by counterclaim) that he was underpaid employment entitlements by Habitat under the ESA and seeks payment. The level of any payment depends upon the circumstances of his resignation or dismissal.

10 The second defendants also bring a counterclaim alleging their shares in Habitat were wrongly 'converted' after Mr Formby's employment terminated.

11 Attempts to agree segregation of some of those other matters to facilitate a determination of the restraint issues were only successful in part. Parts deferred are:

(a) the quantification of any damage, assuming the restraints are found to be valid and Mr Formby breached those restraints;

(b) the counterclaim dealing with the transfer of shares.

12 Mr Pritchard gave evidence. Mr Pritchard is a chartered accountant. He practised in the areas of tax and insolvency before moving out of accounting some 25 years ago and into chief executive roles, corporate governance and private equity mergers and acquisitions.

13 The plaintiff also called Elizabeth Bradford and Glenn Bergsma.

14 Ms Bradford is a chartered accountant with over 15 years experience as a financial controller. She was employed by Habitat as its financial controller since 2011. After Mr Pritchard joined Habitat, she attended by invitation almost all board meetings, and prepared board papers and minutes. She kept Habitat's accounts.

15 Mr Bergsma provided consulting services to Habitat from about 2014. He provided management consultancy and organisational developments services. He attended most board meetings. Mr Bergsma did not have any decision making power within Habitat. Later in 2014, Mr Pritchard and Mr Bergsma became business partners in a separate venture.

16 Mr Formby gave evidence. His qualifications and experience are dealt with below. Ms Formby gave limited evidence. She is a retail assistant and gave evidence as to her role as joint trustee of the Formby Family trust.

17 The issues that fall to be determined can be grouped as follows:

(a) are the restraints enforceable and to what extent?

(b) if the restraints are enforceable, has Mr Formby breached them?

(c) were payments that were made by Habitat to the second defendants made by way of dividends or loans?

(d) if the payments were loans, what are the terms of the loans?

(e) to the extent Habitat made other miscellaneous payments on behalf of Mr Formby, are they repayable?

(f) is Mr Formby entitled to be paid any further entitlements by Habitat on the basis that he resigned, that he was dismissed summarily or that he was dismissed for gross misconduct?

These reasons deal with the issues in that order, divided into Part A (restraint issues), Part B (loan issues) and Part C (employee entitlement issues).

18 Habitat was incorporated in 2005. Mr Formby was a founding director, secretary and shareholder (as trustee) of Habitat. He remained a director, secretary and shareholder (as trustee) as at February 2013.

19 Mr Formby founded Habitat with Milos Stojsavljevic. Mr Stojsavljevic was the director of a company called Little Rhino (WA) Pty Ltd (Little Rhino) which was the trustee of the Stojsavljevic Family Trust.

20 Prior to February 2013, the two hundred issued shares in Habitat were held as to 50% by Mr Formby and Ms Formby as trustees of the Formby Family Trust[3] and as to 50% by Little Rhino. In around 2011, Mr Stojsavljevic became ill and wished to sell his interest in Habitat.[4] Habitat had previously undertaken a fitout for Mr Pritchard, and Mr Formby had also met Mr Pritchard from time to time as Mr Pritchard had offered to provide him with financial planning advice.[5]

21 In 2012, Mr Pritchard and Mr Formby had various communications as to Mr Pritchard acquiring Mr Stojsavljevic's interests. Those communications refer to the need for restraints (these are addressed in more detail below).

22 On or about 22 February 2013, Maliza as trustee of the Pritchard Family Trust, acquired the 50% shareholding from Little Rhino for a consideration of $1 million. The share sale was documented by way of a Share Sale Agreement executed on or about 22 February 2013 between Habitat, Maliza, Little Rhino and Mr Stojsavljevic.[6] Mr Formby executed the Share Sale Agreement as director of Habitat.

23 Importantly, there were conditions precedent to the Share Sale Agreement that:[7]

(a) Mr Formby and Habitat enter into an employment agreement on agreeable terms;

(b) Mr and Ms Formby (as continuing shareholders) and Maliza enter into a shareholders' agreement on mutually agreeable terms;

(c) Habitat declares a dividend and offsets the dividend payment against existing loan amounts owed by Little Rhino and Mr and Ms Formby to Habitat.

24 The Share Sale Agreement contained a restraint of trade clause, which restrained Little Rhino and Mr Stojsavljevic from competing by way of engaging in a business the same or substantially the same as the business in the Restraint Period or the Restraint Area or soliciting customers during the Restraint Period. The business of Habitat is defined as, 'the business carried out by [Habitat], being commercial and retail interior design and construction'.[8] The Restraint Period and the Restraint Area are defined by reference to cascading clauses which mirror those in the ESA (set out below).

25 The ESA was executed on or about the same date by Habitat and Mr Formby. The Recitals in the ESA record that it was a condition precedent of the Share Sale Agreement that the ESA be executed by Mr Formby.[9]

26 A Shareholders Deed was also executed on or about the same date by Maliza and Mr and Ms Formby.[10] It contained an obligation on the part of each of those shareholders to procure that the directors of Habitat comply with certain restraints.

27 It is not in issue that the Share Sale Agreement, the ESA and the Shareholders Deed were executed and the transactions were completed on or about 22 February 2013.

28 In December 2013, the second defendants sold 20 of the 100 shares in Habitat held by them to Maliza for consideration of $200,000.[11]

29 The restraint of trade clause is comprised in the 'non‑competition' section of the ESA and its relevant terms are as follows:

The Executive agrees with the Company that, during the Restraint Period and within the Restraint Area, the Executive will not, without the Company's prior written consent, directly or indirectly:

(a) engage in or be concerned or interested directly or indirectly in any business or person that:

(i) is the same or similar to the Business or any material part of the Business; or

(ii) in competition with the Business or any material part of the Business;

(b) solicit, canvass, induce or encourage any person who was at any time during the twelve month period ending on the date of termination of the Employment a director, employee or agent of the Company to leave the employment or agency of the Company;

(c) solicit, canvass, approach or accept any approach from any person who was at any time during the twelve month period ending on the date of termination of the Employment a customer of the Company with a view to obtaining the custom of any such person in a business which is the same or similar to the Business; or

(d) interfere with the relationship between the Company and its clients, employees or suppliers.

The agreement by the Executive in clause 13.2 applies to the Executive acting:

(a) either alone or in partnership or association with another person;

(b) as principal, agent representative, director, officer or employee;

(c) as member, shareholder, debenture holder, noteholder or holder of any other security; or

(d) as trustee of or as a consultant or adviser to any person.

(a) Restraint Area means:

(i) Perth and Melbourne;

(ii) Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;

(iii) New South Wales, South Australia, Victoria, Queensland and Western Australia;

(iv) Australia;

(b) Restraint Period means:

(i) the period of 2 years after termination of the Employment;

(ii) the period of 1 year after termination of the Employment; or

(iii) the period of 6 months after termination of the Employment.

Clauses 13.3 and 13.4 have effect as comprising each of the separate provisions which result from each combination of a capacity referred to in clause 13.4 and an area, period and a category of conduct referred to in clause 13.3. Each of these separate provisions operates concurrently and independently. If any separate provision is unenforceable, illegal or void, that provision is severed and the other separate provisions remain in force.

The Executive acknowledges and agrees that each of the restraints imposed upon the Executive under this clause are fair and reasonable and are no greater than is reasonably necessary to protect the Company.

30 It should be noted that cl 13.5 contains cross‑referencing errors. It is cl 13.2 that sets out categories of conduct. Clause 13.3 deals with capacity. Clause 13.4 deals with area and period. The incorrect references in cl 13.5 are clearly typographical errors. The plaintiffs agree that is the case. Mr Formby challenges the operation of cl 13.5 but on other grounds. In my view, the clause is intended to provide that cl 13.2 and cl 13.4 are to have effect as comprising each of the separate provisions which result from each combination of a capacity referred to in cl 13.3 and an area, period and a category of conduct referred to in cl 13.2 and cl 13.4.[12]

31 There are other clauses to which reference will be made and it is convenient to now set them out.

32 In addition to the reference to severance in cl 13.5 as set out above, there is a general severance provision (cl 21):

If any provision of this Agreement is invalid and not enforceable in accordance with its terms, all other provisions which are self‑sustaining and capable of separate enforcement without regard to the invalid provision, shall be and continue to be valid and forceful in accordance with their terms.

33 There is an acknowledgment clause dealing with confidentiality and providing that the restraint extends post termination of the ESA (cl 10).

(a) all trade and business secrets and other information and Documents which are not generally known or available or not already known or available to the Executive at the time of disclosure (other than through the Company's disclosure and without breach of this clause 10) but which relate to the affairs or business of the Company and its Related Bodies Corporate or any person with whom the Executive comes into contact as a result of this Agreement, or which come into the Executive's possession in the course and by reason of the Employment, whether or not the same were originally supplied by the Company or its Related Bodies Corporate, are confidential (Confidential Information);

(b) the Confidential Information has been and will be acquired by the Company or its Related Bodies Corporate at the Company's or its Related Bodies' Corporate initiative and expense; and

(c) the Company and its Related Bodies Corporate have spent and will spend effort and money in establishing and maintaining its customer base, employee skills and the Confidential Information. Accordingly, it is reasonable that the Executive should enter into the representations and warranties contained in this Agreement and, if the Employment is terminated, the Executive should continue to be subject to the restrictions set out in clauses 11, 12 and 13.

34 The term Documents for the purpose of cl 10(a) is defined in cl 1.1 as follows:

Documents includes software (including source code and object code versions), manuals, diagrams, graphs, charts, projections, specifications, estimates, records, concepts, documents, accounts, plans, formulae, designs, methods, techniques, processes, supplier lists, price lists, customer lists, market research information, correspondence, letters and papers of every description, including all copies of and extracts from any of the same.

35 The restraint clauses in the Shareholders Deed impose obligations on the new and continuing shareholders to ensure the directors comply with certain restraints. The relevant provisions provide:

The provisions of clause 17.2 have effect as if they were separate clauses, each being severable from the other, such separate clauses consisting of each of the undertakings in clauses 17.2(a), 17.2(b) and 17.2(c) and combined with each separate area set out in clauses 17.2(a) to 17.2(d) combined with each separate period set out in clauses 17.2(e) to 17.2(g). Each combination creates a separate and independent obligation although the obligations stated in clause 17.2 are cumulative in effect.

To protect the interests of all Shareholders in the goodwill of the Business and to protect the interests of the Company, each Shareholder covenants, and agrees to procure that each Director, and subject to 17.5 [not relevant], will not directly or indirectly:

(a) on its own account;

(b) jointly with or on behalf of any other person, firm or company; or

(c) as an employee, manager, director, shareholder, member, partner, joint venture participant, consultant, or in any other capacity,

without the previous consent in writing of the Company be concerned or interested or employed, manage or operate or participate in the management or operation or marketing of any products or services in competition with the Company's activities, products or services or likely to be competitive with that carried on by the Company, within of [sic] the following areas:

(a) Perth and Melbourne;

(b) Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;

(c) New South Wales, South Australia, Victoria, Queensland and Western Australia;

(d) Australia;

(e) from the Commencement Date until termination plus two years;

(f) from the Commencement Date until termination plus one year;

(g) from the Commencement Date until termination plus six months.

Each Shareholder acknowledges that each of the restraint obligations imposed by clauses 17.2 and 17.3 are reasonable in its extent (as to all of duration, geographical area and restrained conduct) having regard to all the interests of each Shareholder and extends no further (in any respect) than is reasonably necessary and is solely to protect the Shareholders in respect of the goodwill of the Company and the relevant Business.

Overarching principles relevant to restraints of trade

36 A restraint of trade clause is contrary to public policy and prima facie void, unless the restraints are reasonable to protect the legitimate interests of the party seeking to enforce the restraint. The validity of a restraint is to be considered as at the date of the contract.[13] So much was not in issue between the parties. The applicable principles are summarised elsewhere: see, for example, the decision of the Court of Appeal in Smith v Nomad Modular Building Pty Ltd.[14]

The nature of Habitat's business at the time of the ESA

37 Habitat was established in 2004 by Mr Formby and Mr Stojsavljevic. That year, it won its first job for Diamond Industries in Bentley. In 2005, Habitat was incorporated and opened an office in Mt Lawley. By the end of 2006, Habitat had undertaken approximately 36 projects.[15]

38 In 2008, Habitat won a large scale project for Horizon Power in Bentley for which it received an award from the Design Institute of Australia. In 2009, Habitat expanded to five employees and moved into a larger office in Wembley. By the end of 2011, Habitat's Perth office had expanded to 12 employees and was undertaking approximately 40 projects per year.[16]

39 During cross‑examination, Mr Formby was taken to two documents that referred to work either undertaken or being pitched for in Perth and Melbourne at around the time of entry into the ESA.

40 Mr Formby was taken to Habitat's sales register for December 2012 to February 2013. Mr Formby recalled that Habitat's jobs were located throughout the Perth metropolitan area including Bentley, Guildford, Henderson, Peppermint Grove, Perth CBD, Subiaco, Wembley, and West Perth. He accepted that the Habitat Perth office undertook an office, medical, and hospitality fitout.[17]

41 Mr Formby was taken to Habitat's pipeline document which details the work for which Habitat was competing in February 2013.[18] Mr Formby accepted that Habitat was pitching for studio, office, hospitality, retail, and medical fitouts. He recalled that Habitat was pitching for work in Cottesloe and Murdoch.[19]

42 Mr Formby said that nearly 50% of Habitat's work in Perth was obtained through enquiries sent to Habitat's website that he would follow up. He said that referrals from property managers, building owners and tenant advocates accounted for less than 5% of Habitat's work, although commercial leasing agents did account for 'some of the work' Habitat acquired in Perth CBD and West Perth.[20]

43 At the time of entering into the ESA, approximately 90% of Habitat's work was in Perth.[21]

44 The Habitat Melbourne office was established by Mr Formby and Mr Stojsavljevic in January, 2011. The office originally had three employees (sales manager, site supervisor and interior designer), growing to four by the end of 2011. Mr Formby said that Habitat Melbourne generated its leads from Habitat's website and a telemarketer. At the time of entering into the ESA, approximately 10% of Habitat's work was in Melbourne.[22]

45 Mr Formby was taken to two documents that referred to work either undertaken or being pitched for in Melbourne at around the time of the ESA. The Habitat sales register for December 2012 to February 2013 indicates that in addition to numerous jobs in Perth, Habitat Melbourne undertook office fitouts for Melbourne clients. [23] Mr Formby said that he had very little recollection of those jobs, especially those of low value. He accepted that Habitat would have undertaken work outside the CBD and in suburbs such as St Kilda. He said that Duncan Sibley, a sales manager and site supervisor employed by Habitat in Melbourne, would have made the call as to the distance travelled for jobs.[24]

46 The Habitat pipeline document details the work for which Habitat was competing in February 2013, including at least four jobs that Mr Formby recalled were in Melbourne.[25] It seems at least two of those jobs were outside the Melbourne CBD (Altona, Whittlesea).

47 According to Mr Formby, approximately 15 projects were undertaken by Habitat Melbourne in the time it was operating. The office ran for three years, and while it did not lose money it did not make enough money to make it worthwhile.[26] In early 2014, Habitat closed its Melbourne office due to poor performance. It re‑opened in October 2016.[27]

48 Mr Formby accepted that prior to the execution of the ESA, Mr Pritchard had access to financial information and the pipeline documents for Habitat.[28] Therefore the spread of geographic areas where Habitat undertook work was identified to Mr Pritchard prior to entry into the ESA.

49 I also note that the financial records indicate that for the year ending June 2012, Habitat had income of some $11 million and an operating profit before tax of some $1.5 million.[29]

The nature of Habitat's business more generally and after execution of the ESA

50 Mr Formby was also taken to a fee proposal and company profile prepared by Habitat and submitted to a prospective client, Resi Invest, in October 2014 (Resi proposal). The Resi proposal stated that Habitat worked in commercial, hotel, industrial, hospitality, health and retail. Mr Formby accepted that was accurate. He also accepted that Habitat was open to working in architectural services and project management if Habitat could win the work.[30]

51 The Resi proposal provided a list of Habitat's clients. Whilst the timing of the jobs is not entirely clear, Mr Formby said that 50% to 90% of Habitat's work for those clients was office fitouts. He confirmed that Habitat undertook fitouts in Applecross, Bentley, Cannington, Dalkeith, Fremantle, Leederville, Mount Lawley, Northbridge, Osborne Park, Subiaco, and Yokine.[31]

52 The Resi proposal also listed clients such as Community First in each of Bunbury, Cannington, Fremantle, Maddington and Victoria Park, although Mr Formby said some of those jobs involved only small changes or refurbishments. Mr Formby agreed that Habitat also undertook a fitout for Life Ready physiotherapy in Baldivis, did a fitout for Monson shipping agency in Fremantle, other jobs in Morley, South Perth and Cottesloe and pitched for a hearing clinic in Joondalup.[32]

53 Mr Formby accepted that Habitat did or would do fitouts of rooms within buildings such as offices within schools, retail shops within shopping centres and medical suites within hospitals, although it did not undertake fitouts of whole buildings of that nature.[33]

54 Mr Formby accepted that Habitat was prepared to do fitout work in the Perth metropolitan area subject to value and distance.[34] It had also done at least one design job in Singapore, pitched for jobs in Singapore and represented in the Resi proposal that it was based in Perth, Melbourne and Singapore.[35]

55 Mr Formby gave evidence as to the nature of his role. He was the managing director, the only architect on staff, and was the building supervisor for Perth and for Melbourne. As at February 2013, Habitat had approximately ten employees in addition to Mr Formby, including a project supervisor, three interior designers and a financial controller. Mr Formby was the only sales person for Habitat in Perth and he remained its only sales person until he left in February 2016. He was generally in charge of introducing Habitat to prospective clients and then once a project entered the concept plan stage, Mr Formby would largely hand over the running of the job to the general manager and designers.[36]

56 Mr Formby was solely responsible for the major sales of the company (being those over approximately $200,000) and for determining the margin on price.[37]

57 Mr Formby would prepare proposals and concept designs and rough budgets to submit to clients, quoted on major jobs and oversaw quotes on smaller jobs, and made decisions about which designer would be working on a job. He assisted others with respect to sales under $200,000. He oversaw all of the staff and all the staff reported to him. He was responsible for hiring, for the strategic direction of the company, for developing the website, for marketing decisions and for determining how internal processes of the company were developed in regards to quoting. Mr Formby had access to all information regarding the way in which Habitat won work, undertook the design process, quoted on work, its budgets, operating margins and business opportunities.[38] He had access to suppliers' prices and all job lists.[39] He had regular tradespeople.[40]

58 Mr Formby was also responsible for the Melbourne office. He extended his building licence to Victoria and set up Habitat's office in Abbotsford, a suburb of Melbourne, which ran for three years. He travelled to Melbourne to oversee its operations.[41] Mr Formby says that he trained staff to undertake projects but that Habitat received leads from the website and a telemarketer. Mr Formby was not the predominant sales person in the Melbourne office. That person was Mr Sibley.[42] It was Mr Sibley's task to 'win work' in Melbourne.[43]

59 Under cross‑examination, Mr Formby admitted he was the 'main person', the 'key person' and knew all of the business 'inside out'.[44]

60 Mr Formby's role in Habitat was anticipated to continue after entry into the ESA. His role is also described in the ESA. See, for example:

(a) managing the business of the Company and its Related Bodies Corporate including, without limitation, implementing strategic and tactical plans and managing operational functions to achieve the Company's goals and outcomes; review and initiate continuous improvement in support and administrative functions; implement employment policies and development of an effective and valued performance management framework;

(e) formulating strategies to promote and improve the financial performance of the Company;

(h) developing new opportunities and expanding the Company's current activities and market share;

(i) supervising and implementing appropriate financial controls and accounting procedures, and the preparation of financial statements.

61 On 30 December 2012, Mr Pritchard included the following in an email to Mr Formby:[45]

Without an employment contract or shareholder's agreement, Habitat1 arguably has no value whatsoever. Further, no buyer would agree to purchase an interest in a business where no employment contract or shareholder agreements exist; As an example, there is nothing that stops you from closing down Habitat1 today and starting Habitat2 tomorrow; This puts you in an extremely powerful position with respect to achieving the outcome that you need to achieve.

62 By email from Mr Pritchard to Mr Formby of 9 January 2013, Mr Pritchard said that he would like to confirm his offer to purchase 50% of Habitat subject to various conditions, including:[46]

Execution of satisfactory Employment Agreement for the Managing Director (Christian Formby) which includes appropriate restraints and non‑compete provisions. My understanding is that the present arrangements have no preventative terms on one or both of the directors leaving Habitat1 and commencing a competing entity.

63 Mr Formby sent a copy of Mr Pritchard's email to Mr Stojsavljevic and also copied it to Darren Shillington of PKF Mack (Habitat's accountants) on 10 January 2013, stating:[47]

Please see below offer to purchase your H1 shares from Geoff Pritchard. I approve of the shares going to Geoff as there is a lot of value to add to Habitat.

64 On 11 January 2013, Mr Pritchard wrote to Mr Formby noting that he had attained a valuation on the basis of an incoming party acquiring 50% of equity and stating that:[48]

The key advice that I have received is that without Shareholder's Agreement, Employment Contract or Director's Agreement, any value in either this transaction or a future transaction is largely dependent on you as a key person, your goodwill and your agreement to remain committed to a business where 50% of your earnings are 'leaking' to another party.

My advice is that this position is unlikely to be sustainable for you (or any party under a similar arrangement) without the above agreements in place which include the agreed participation for relative contributions to the business.

65 On 1 February 2013, Mr Formby signed a Binding Term Sheet which included a provision that settlement was subject to a condition precedent that Mr Formby execute a satisfactory employment agreement including appropriate restraints and non‑compete provisions.[49] On 2 February 2013, Mr Pritchard wrote to Mr Formby attaching (relevantly) a draft executive services agreement and a director's appointment letter noting:[50]

These agreements are designed to protect the value of the company and represent best practice and another level beyond where Habitat1 has gone before in the corporate governance process; So although many of these provisions look onerous, it is the shareholders (you and me) and more importantly if we decide to sell, list or realise value later on, future shareholders - that benefit from these agreements being in place.

66 On 4 February 2013, Mr Formby replied to Mr Pritchard saying that he would read through the drafts prior to a proposed meeting. He also returned the signed Binding Terms Sheet.[51]

67 On 5 February 2013, Mr Formby forwarded copies of the draft executive services agreement to Libby Bradford at Habitat and to Mr Shillington asking, 'we okay with this?'.[52]

68 Mr Shillington replied to Mr Formby by email dated 5 February 2013 but making no comment with respect to the restraint provisions.[53]

69 On 21 February 2013, Mr Formby wrote to Mr Pritchard making comments on both the draft executive services agreement and the draft shareholders' agreement.[54] He made no comment on the restraint provisions.

70 On 22 February 2013, Mr Pritchard sent draft copies of the various documents to Mr Formby which incorporated some of the amendments requested by Mr Formby.[55] The final form documents were all executed on or about 22 February 2013 without any changes to the restraint provisions.

71 Under cross‑examination, Mr Formby said that he understood what non‑compete clauses were and acknowledged that he had sought advice on the draft executive services agreement from an accountant. He said he had not read the documents but sent them to his accountant for comment, although he may have skimmed over them. However, he admitted he had read the Binding Terms Sheet. When asked if he knew that Mr Pritchard wanted appropriate restraints and non‑compete provisions, he replied, 'yes'. When asked if he knew why Mr Pritchard wanted restraints, he replied, 'yes'. He knew that a satisfactory employment agreement between him and Habitat, including restraints and non‑compete provisions, would have to be signed as a condition of Mr Pritchard buying in to Habitat.[56]

Preliminary - some matters to be taken into account in assessing reasonableness

72 When assessing the reasonableness of the terms of the restraints, it is important to bear in mind that in signing the ESA, Mr Formby made certain acknowledgements as to both the confidential nature of information and the reasonableness of the restraints.

73 The parties agreed the terms of the definition of Confidential Information and the terms of the restraints in the ESA and did so without negotiation on those terms. Mr Formby had the opportunity to obtain legal and accounting advice on the ESA and he sought advice from his accountant. He requested certain amendments. He did not request amendments to those relevant terms. The parties expressly acknowledged that the restraints were reasonable.[57]

74 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd the High Court said:[58]

It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document. The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be.

75 Further, the presence of a confidential information clause militates against acceptance of a proposition that no confidential information exists.[59]

76 Although the reasonableness of restraints is a matter of law for the court to decide, the court has held on numerous occasions that an acknowledgment that a restraint is reasonable is a matter to which weight should be given in deciding whether or not the restraint is reasonable.[60] This is because the parties are taken to have knowledge of the relevant industry and are in a better position than the court to assess what amounts to reasonable protection.[61]

77 The fact that Mr Formby also executed the Share Sale Agreement (on behalf of Habitat) and the Shareholders Deed, both of which contained clauses dealing with restraints, is also relevant.

Habitat has legitimate business interest to be protected

78 It is often noted that courts differ in their attitude to covenants on the sale of goodwill as against employee covenants. It has been said that employee covenants are regarded more strictly.[62] On that basis, parties sometimes go to considerable effort to classify the relationship between the parties as akin to either a vendor/purchaser of goodwill or an employee/employer.

79 The restraints contained in cl 13.2 of the ESA comprise what can generally be described as a non‑compete restraint, a restraint against soliciting customers and a non‑interference restraint (neither party suggested the restraint with respect to soliciting employees was relevant to these proceedings).

80 Habitat says the covenants are to be looked at in all the circumstances and are not to be considered by reference to employee restraints simply because they appear in an employment agreement.[63]

81 The submissions filed on behalf of Mr Formby proceed on the basis that the restraints are to be considered in the context of an employer/employee relationship only.[64] In particular, Mr Formby contends that he was not a vendor of the shares, he received no payment under the Share Sale Agreement and accordingly he is in no different position to an employee who, it was submitted, would not ordinarily be subjected to 'vendor/purchaser' restraints.[65]

82 A difficulty with Mr Formby's contention is that even in the case of employer/employee relationships, non‑compete restraints, restraints against soliciting customers and non‑interference restraints post termination of employment have been upheld by the courts.[66] Therefore, even if the appropriate classification of the relationship between Habitat as covenantee and Mr Formby as covenantor were limited to one of employer/employee, that fact alone would not render the clauses unreasonable.

83 It is not appropriate to proceed on the basis of an assumed dichotomy between goodwill/employee cases. Rather, attention should be directed to the nature of the legitimate interest that the covenantee seeks to protect.[67]

84 Further, the courts do not look at a covenant in an employment contract in isolation. For example, the court takes into account that the circumstances that lead to the employment are interrelated to a sale of business or sale of shares. As Le Miere J said in Sear v Invocare Australia Pty Ltd:[68]

Where the sale of a business carried on by a company is effected by means of a sale, not of the business itself, but of the issued capital of the company, it is commonplace for the parties to require that promises on the part of the former shareholders be given to the purchaser. Similarly, where the vendors of the shares are not the individuals who are responsible for the management of the company, it is commonplace for a purchaser to require that the individual or individuals who are responsible for management also enter into restraints in order to afford protection to the purchaser in respect of the goodwill for which it is giving consideration.

85 The court cannot ignore the commercial reality of the relationship established by the ESA, the Share Sale Agreement and the Shareholders Deed.[69]

86 Mr Stojsavljevic wanted to sell the shares held by Little Rhino. Mr Formby also wanted Mr Stojsavljevic to be in a position to sell the shares held by Little Rhino and realise proper value for them.[70] Mr Formby did not seek to buy the Little Rhino shares, but rather negotiated with Mr Pritchard and reached a position where it was Mr Pritchard (or his interests) who provided the $1,000,000 to Little Rhino. Mr Formby saw value in Mr Pritchard coming on board and the evidence suggests Mr Formby was optimistic about the benefits that Mr Pritchard's experience would bring to the table.[71]

87 Mr Pritchard (via Maliza) made a significant investment by purchasing the shares in Habitat. He was aware of the risk that Mr Formby's departure from Habitat would pose to his investment and the financial position of Habitat. He expressly raised the risk and the importance of restraints in his communications with Mr Formby prior to execution of the various deeds, and Mr Formby did not voice any disagreement.

88 Mr Formby was the key person in Habitat at the time, as is readily inferred from the evidence as to his role set out above. That was also the position espoused by his counsel at the injunction hearing: he 'made the company'.[72]

89 There was benefit to the respective family trusts of Mr Pritchard and Mr Formby in ensuring that their shareholdings remained of value. The restraints sought by Habitat and agreed to by Little Rhino and Mr Stojsavljevic in the Share Sale Agreement were important for this purpose. The covenants in the Shareholders Deed requiring the shareholders to procure that both Mr Pritchard and Mr Formby as directors comply with restraints were expressly said to be for the purpose of protecting the goodwill of the Business (of Habitat), and the interests of Habitat.[73] Protection of the goodwill of Habitat in turn benefits its shareholders.

90 Mr Formby was not an employee in a traditional master/servant relationship.[74] He was a director of the company and employed as its managing director. He was in a position of control within the company.

91 The execution of the ESA and the Shareholders Deed were conditions precedent to Maliza's acquisition of the shares.

92 The mutuality of the obligations with respect to restraints and the obligation of Mr Pritchard to purchase the shares in Habitat under the interrelated documents is clear.

93 The legitimate interest sought to be protected by the restraints is to be considered against the commercial reality of the relationship. In my view, the legitimate interest encompasses the goodwill of Habitat, confidential information and customer connections. It is not necessary to strictly categorise those circumstances where legitimate interests may be protected.[75]

94 Against that backdrop, the next step is to consider the application of the different restraints in the ESA.

95 In Emeco [No 2], Edelman J usefully collects authorities where the court has considered non‑compete restraints in the context of employees.[76]

(a) circumstances where non‑compete restraints can be supported are not limited to protecting confidential information.

(b) customer connections may also support a non‑compete clause;[77]

(c) there may be some industries where customer connections alone may justify a non-compete restraint;[78]

(d) a number of authorities support non-compete restraints on the basis of both of those interests;[79] and

(e) it may be that a non‑compete restraint is justified where there is a need to protect customer connections and confidential information even in circumstances in which neither interest alone may be sufficient.[80]

97 In AGA Assistance Australia Pty Ltd v Tokody, a senior manager involved in selling insurance was found to be in breach of a non‑compete clause. McMurdo J referred to both customer connections and information about the employer's dealings with clients, as advantages which the employee could bring to a new employer. His Honour concluded that the protection of these interests of the plaintiff warranted a restraint which prevented the defendant from working in a competing business in Australia for 12 months.[81]

98 In Pearson v HRX Holdings Pty Ltd,[82] Mr Pearson was the primary presenter to prospective clients with respect to recruitment process outsourcing and consulting. The Full Federal Court upheld a non‑compete restraint which restrained Mr Pearson for two years from directly or indirectly carrying on a Restrained Business, alone or in partnership or joint venture with anyone else. Mr Pearson was also restrained from being directly or indirectly 'concerned with or interested' in a Restrained Business, including as an employee. Restrained Business was defined (in summary) as a business or operation similar to or competitive with the business of a Group Company.[83]

99 The enforceability of the particular non-compete restraint in that case was supported by the Full Federal Court not on the basis of confidential information, but on the basis of 'HRX's interests, both in protecting its customer connections and in ensuring the diligent and faithful pursuit by Mr Pearson of business opportunities for HRX'.[84]

100 In Emeco [No 2], Edelman J found that Emeco had an interest in protecting confidential information and customer connections. A non‑compete restraint that applied to a business development manager throughout Western Australia for a period of six months was held to be enforceable.

101 Habitat relies in particular on protection of confidential information in support of the restraints. It says that Mr Formby has acquired confidential information and it is entitled to ensure such information is protected.

102 As appears from the description of Mr Formby's role discussed above, he has been the driver of the business since its establishment.

103 Mr Formby developed and therefore had access to all of Habitat's corporate information including the way in which it undertook the marketing of the business, how it went about its design function, its procedures for identifying work for which to bid, its procedures for quoting work, the margins to be made on each job.[85] He knew customer lists, had detailed customer knowledge through his role in securing those customers, and knew about Habitat's strategic plans. He knew terms of contracts and knew about the profitability of contracts.

104 Mr Formby was the managing director of a small entity. His knowledge of that company's operations was necessarily substantial. At least insofar as Perth is concerned, he was the main sales point and secured the deals. He had knowledge of the pipeline of work for the company.[86]

105 He had access to all information about the company. He attended board meetings and prepared papers for the board.

106 It does not matter that more specific confidential information cannot necessarily be identified.

107 In Nomad Modular Building Pty Ltd v Smith, Master Sanderson noted at first instance that:[87]

With respect, it is clear that the defendant does possess confidential information. The definition is very wide. The defendant was the head of the manufacturing section of the plaintiff. It is inevitable that he, during his 12 months of employment, picked up concepts and technical and operational information used by the company. He also undoubtedly had an insight into the financial affairs of the plaintiff. He received management reports, albeit in somewhat limited form. These reports disclosed in some detail the financial position of the plaintiff. They showed the work which had been obtained, work which had been tendered for and tenders on which the plaintiff had been unsuccessful. All of this information was confidential.

It is not possible to say with any precision precisely what the defendant knows which falls within the definition of confidential information. There is no suggestion that he has removed any sensitive documents from the plaintiff or that he has in some way expropriated trade secrets or lists of clients which will assist him in his new employment. Only he knows what he knows and any attempt to define the limit of his understanding is pointless.

108 On appeal, Pullin JA noted that the respondent employer was aware of work the employee was seeking to obtain, was aware of major tenders lost, and gained information about profits and margins.[88] Further:[89]

There was an argument advanced by the appellant that the information was not sufficiently confidential to support the reasonableness of the restraint clause, but that was a matter of assertion only. The appellant was a top level employee and his salary package reflected this. As the general manager of manufacturing he was privy to much strategic and operational information which a competitor would be interested to know and which the respondent was entitled to keep confidential by contractual means.

109 The information in that case was considered sufficiently confidential to justify a non‑compete restraint.

110 In Emeco [No 2], the employee was the business manager and so one of those persons who were the 'face of the company'.[90] He had full access to all of the employer's information including as to upcoming opportunities and the status of those opportunities. He was the particular point of contact for certain clients. He was involved in the preparation of strategic plans and had access to collated information referring to clients and jobs.[91] Such information was considered sufficiently confidential to justify a restraint.

111 Counsel for Mr Formby submits that information as to Habitat's business was not of a confidential nature or that Mr Pritchard did not point to any confidential information. Counsel referred to Ms Bradford's evidence to the effect that all staff had access to the computer system.[92] Counsel contended that the knowledge Mr Formby had was simply common industry knowledge.[93]

112 I do not accept that simply because others within a company have access to confidential information, the nature of that information as confidential is thereby compromised.

113 Further, there is a distinction between merely having access to information (some of which may be in the public domain) and having the tools, systems and expertise to collate and utilise such information for the strategic benefit of a business. Mr Pritchard explained that confidential information is utilised in pricing, margins, taking the business from concepts to working drawings and how work is undertaken in order to win work over competitors. [94] I accept that would be so.

114 In my view, discretion is exercised within a company as to the use made of information it holds. The particular collation of information and the way it is utilised may be the key to a profitable business, the key that enables a business to be competitive.[95] One particular example of Habitat's collated information which I consider would be confidential are the documents referred to as pipeline documents which indicate work tendered for and Habitat's assessment of the probability of that tender being successful, a probability assessed by Mr Formby.[96] One can see close parallels between such documents and the 'overview' documents considered in Emeco [No 2] and found to be confidential.[97]

115 That is but one example of use of information in a manner that produces, in my view, a product confidential to Habitat. Such documents existed at the time the ESA was entered into.

116 For various reasons, I consider there existed information confidential to Habitat, that Mr Formby had access to confidential knowledge and that a restraint is justified.

117 First, Mr Formby expressly acknowledged that all trade and business secrets and other information and Documents which are not generally known or available other than by disclosure from Habitat are confidential.[98] 'Documents' is defined broadly.[99]

118 Second, Mr Formby's role as managing director was a senior role which included developing strategies for securing and retaining clients and inevitably included the development of relationships of trust with those clients and ascertaining information from them.[100] I note that counsel asserted that there is no evidence that Mr Formby in fact had any particular knowledge of customer preferences or purchasing habits.[101] Absent any admission, it is not uncommon that knowledge must be inferred. In my view there is sufficient evidence of Mr Formby's role and involvement in the company from which I can infer such knowledge. In any event, it would have been expected that he would have such knowledge at the time of entry into the ESA.

119 Third, Mr Formby made a recommendation to the Habitat board, referred to in his managing director's report for a board meeting in April 2014, that employee contracts should include clauses dealing with 'non‑compete clause/approaching our clients'.[102] Although this did not occur until after the ESA was entered into, it suggests that despite his claims to the contrary, Mr Formby considered that there was confidential information that should be protected for the benefit of Habitat. There is nothing to suggest that Mr Formby was seeking to protect information of a type that did not exist at the time of entry into the ESA. Mr Formby's evidence as to his recommendation was that, as far as he knew, it was only included in contracts after he left.[103] That is not to the point. It is the fact that Mr Formby recognised a need for restraints that tells in favour of the existence of confidential information.

120 Fourth, although Mr Formby claimed he was not aware of any specific confidential information that he utilised,[104] I do not accept that was in fact the case. There was confidential information to which Mr Formby was privy. At a general level, there is the kind of information referred to in Smith v Nomad Modular Building Pty Ltd and in Emeco [No 2] and found to be confidential. Although such information has been found to be confidential in one case it does not follow that it will be confidential in another; but having considered the nature of the industry and the type of information, I find that Habitat acquired and maintained confidential information.

121 Fifth, the difficulty in distinguishing between confidential and non-confidential information is one of the factors that supports the grant of a restraint. Merely relying on confidentiality undertakings may well not offer sufficient protection.[105] For this reason, and contrary to Mr Formby's submission, I do not consider that sufficient protection can be provided by attempting to restrain disclosure of particular identified information.[106]

122 It is necessary to consider the customer connections that Mr Formby would have been expected to make at the time of entry into the ESA. In this context, Mr Formby's role description is important. It specifically notes that it includes, 'developing new opportunities and expanding the Company's current activities and market share'. The evidence as to his key role in sales is important. He was the only sales person for Habitat in Perth prior to entry into the ESA and he remained its only sales person until he left in February 2016.[107] He was generally in charge of introducing Habitat to prospective clients. He was also in charge of pricing jobs for those clients.

123 Mr Formby said that, 'Any suggestion that Habitat performed multiple work for repeat clients is not true. The vast majority of Habitat's work was one off fitouts for entities that Habitat had never previously worked for'.[108]

124 I accept that, based on the list of jobs as at 2013 prepared by Ms Bradford,[109] most jobs were 'one offs'. However, contrary to Mr Formby's statement, there was evidence of some repeat work for clients at the time of entry into the ESA. For example, Mr Formby accepted under cross‑examination that there had been repeat work for Horizon Power,[110] the Publican Group,[111] and Acton Real Estate.[112] There was evidence by the time of the Resi proposal of repeat work for Community First.[113]

125 Further, shortly prior to his departure, Mr Formby informed the board that Habitat was becoming a preferred supplier for medical suites within several hospitals.[114] He also gave evidence that during 2014 and 2015 he called agents who were leasing medical suites around Fiona Stanley Hospital and obtained at least 13 jobs for Habitat fitting out medical suites.[115] This evidence of agent contact and sales, although occurring after entry into the ESA, is relevant when considering the estimates that the parties were making as to future developments when entering into the ESA.[116]

126 In my view, it was reasonable to conclude at the time of entry into the ESA that Mr Formby would obtain personal knowledge and influence over customers and that he would have customer connections which were of the type that can be protected legitimately by a non‑compete restraint. That there were repeat customers reinforces this view. It is not necessary to show that a customer saw Mr Formby as the only attraction in retaining Habitat: I am satisfied that it was expected at the time of entry into the ESA that Mr Formby would have connections with customers such that a change in his employment would potentially lead to a customer deciding to follow Mr Formby elsewhere.[117]

127 Taken in combination with the expected knowledge of confidential information already referred to, I consider that the extent of customer connections is sufficient to justify a non‑compete restraint.

Is the extent of the non-compete restraint reasonable

128 Mr Formby contends that the restraints are in any event unenforceable as being unreasonable in that they operate as a universal restraint and are too wide and for too great a period.

129 In supplementary written closing submissions,[118] counsel for the defendants raised two further arguments:

(a) that there is uncertainty within the drafting; and

(b) that the cascading clause is unenforceable on the basis it creates uncertainty.

130 Mr Formby submits in effect that the market for fitout work in Perth and Melbourne is enormous and varied and the terms of the restraint prevent him working in the commercial fitout sphere at all. It was said to be a universal restraint.

131 This submission ignores the wording of the restraint. As set out above, cl 13.2(a) provides that Mr Formby must not directly or indirectly:

(a) engage in or be concerned or interested directly or indirectly in any business or person that:

(i) is the same or similar to the Business or any material part of the Business; or

(ii) in competition with the Business or any material part of the Business.

132 The clause considered in AGA Assistance Australia v Tokody was to similar effect,[119] as was the clause in BDO v Sully.[120] There is no suggestion that Habitat sought to compete for all fitout work in Perth or Melbourne. As the role of Mr Formby suggests and as the pipeline documents suggest, jobs were targeted for tender. By way of further example, the dashboard report included in the Board Report dated 10 February 2016 identified a target range of $250,000 to $600,000 for average value per project.[121] Mr Formby described a job with a value of $240,000 as an average job.[122] I have set out above the nature of Habitat's business. I infer from such evidence that Habitat identified jobs for which it had appropriate capabilities and which fell within its strategic plans. That also follows as a matter of common sense.

133 The businesses in which Mr Formby might be restrained from working are narrowed by the use of words such as 'similar to' and 'in competition with'. That is, whether or not the restraint operates depends on the business of Habitat and the business of the proposed new employer. It is only if the businesses compete or are sufficiently similar that the restraint will operate. A similar submission that such a restraint operates as a universal restraint on work was considered and rejected in Pearson v HRX Holdings Pty Ltd. The Court of Appeal said that the phrases are a composite expression encompassing business operations which were actually competitive with the employer's business or potentially so by reason of their similarity.[123]

134 At trial, Mr Formby sought to rely on data collected from a 'Council of Australian Governments report', an 'Office Market Report Statistical Summary July 2013' and URBIS shopping centre statistics as to the square meterage of office, hotel, shopping centre, supermarket, school and university, law court and correctional facility space available in each of Perth and Melbourne.[124] Mr Formby then sought to give evidence from his own experience as to the frequency of turnover of fitouts and the cost per metre for such fitouts in purporting to establish the size and value of the fitout market in each of Perth and Melbourne. I will not set out his purported conclusions as I accord them no weight, other than as to square meterage.

135 Habitat accepted for the purpose of the trial that the third party data as to square meterage was correct but objected to Mr Formby's purported market evidence that utilised the data by multiplying it by his estimates of costs and turnover across a sector of industries. The basis of the objections was that Mr Formby purported to give expert evidence without seeking to qualify himself and he did not adequately set out the facts upon which it was based.

136 Mr Formby's witness statement was tendered on the basis the objections to the market evidence would be dealt with in these reasons. I have admitted the evidence as to square meterage. That is to the effect that:

(a) in 2012, there was approximately 5,051,000 sqm of office space in Perth (comprising both stand alone and non‑stand alone);[125]

(b) in 2012, there was approximately 13,763,000 sqm of office space in Melbourne (comprising both stand alone and non‑stand alone;[126]

(c) in 2012, there was approximately 2,766,000 sqm of retail space in Perth and 7,491,000 sqm of retail space in Melbourne.[127]

137 At most, that evidence suggests that there is a large potential market for office and retail fitout work in Perth and Melbourne. In the context of the data relied upon by Mr Formby, the figures he provides for Perth and Melbourne are not limited to the Perth CBD or Melbourne CBD.[128]

138 However, as to the balance of Mr Formby's calculations, the alleged dollar values of the market asserted are too general to be accepted as accurate. Counsel for Mr Formby conceded there may be a plus or minus 30% variance.[129] Mr Formby does not confine his evidence to experience based on fitouts in which he has been involved but seeks to speak further of fitouts across a range of buildings (schools, prisons etc). The level of generalisation as to the fitout costs and turnover rates of 'office space' and 'retail space' denies it any material forensic value.

139 More significantly, such information says nothing as to the potential work for which Habitat or a competing business may have tendered or the work it may have secured within that market. The section of the market in which Habitat might compete is unidentified.

140 Accordingly, I uphold the objections to the identified paragraphs.[130]

141 Whether or not restraints are to be upheld as reasonable is determined by taking into account the particular business of the covenantee. It is that business the restraints seek to protect.

142 I add that nothing in the restraint prevents Mr Formby from working in the building industry more generally. He is a qualified architect and builder and has other professional experience and interests.[131] This is dealt with further below.

143 Having formed the view that the restraints are otherwise valid, it is necessary to turn to the operation of the cascading clause and Mr Formby's contention that is unenforceable. Mr Formby asserts the clause is uncertain because of numerous potential permutations and the omission of an 'or' at the end of cl 13.4(a).

144 The potential for a range of permutations does not render the clause uncertain. It is well established that where a covenant may have many combinations but it is clear that the combinations are to operate as separate restraints, then the clause may be valid. See, for example:

(a) JQAT Pty Ltd v Storm,[132] where combinations were to operate as separate restraints, albeit cumulative and overlapping, and it was clearly the parties' intention to impose 18 different restraints of which some might be valid and others (which could duly be severed) might not;

(b) Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd,[133] where a covenant with as many as 120 combinations was not void for uncertainty because of the clear provision in the contract specifying that each combination of variables was intended to operate as a separate restraint; and

(c) Sear v Invocare Australia Pty Ltd,[134] in which it was expressly provided that each covenant provided for by the relevant cascading clause constituted an independent and separate restraint and any such covenant that is unenforceable was deemed to be severed.

145 The provisions in this case are to similar effect. The potential for numerous combinations does not make the cascading clause uncertain. Clause 13.5 provides that the combinations specified in cl 13.2, cl 13.3 and cl 13.4 are to operate as separate restraints.

146 In my view, the absence of an 'or' does not undermine the argument. Its omission is likely a typographical error, but in any event its inclusion can be implied at the end of cl 13.4(a)(iii), in accordance with the principles in Fitzgerald v Masters.[135] The areas are clearly not to be read cumulatively. Clause 13.5 refers to 'each' area in cl 13.4. The clause must be read sensibly.

147 The number of permutations is not so great as to make the task of the court burdensome. The different capacities in cl 13.3 are distinct and whether Mr Formby falls within those capacities is a matter to be determined by the facts at any particular relevant time. The same applies as to the businesses referred to in cl 13.2(a) and the conduct referred to in cl 13.2. There are four restraint areas and three restraint periods, resulting in 12 permutations of area and time period. I consider a genuine attempt has been made to consider the different levels of protection that the Company might seek to invoke and that the number and scope of options is not so extensive as to render the clause unenforceable.[136]

148 It was also said that the geographic restraint was unreasonable.

(i) Perth and Melbourne;

(ii) Perth, Sydney, Melbourne, Brisbane, Adelaide; Hobart;

(iii) New South Wales, South Australia, Victoria, Queensland and Western Australia;

(iv) Australia.

150 Habitat relies on the lowest level in the cascade only: that is, Perth and Melbourne.

151 I note that Mr Formby did not plead or open his case on the basis that references to 'Perth' and 'Melbourne' rendered the geographic restraint uncertain and so voidable as a whole (although such submission had been made during the interlocutory proceedings).[137] Such contention was not included in particulars that were requested and supplied prior to trial as to how the restraint clause was said to be unenforceable.[138] It was not addressed during the trial. It was only addressed by Mr Formby in supplementary written closing submissions. This approach limited the attention given to the issue. Habitat did, however, provide responsive submissions.

152 I find that 'Perth' in the context of the ESA means the metropolitan area of Perth. Taking into account the objective circumstances at the time of entry into the ESA, Habitat was quite clearly operating within the metropolitan area of Perth, had very significant jobs in suburbs such as Bentley and, taking into account documentary evidence such as the pipeline document, the expectation at the time of entry into the ESA was that Habitat would continue to operate in (at least) the metropolitan area.

153 The jobs for which it tendered were not restricted to CBD offices. I reject Mr Formby's contention during the interlocutory hearing that 'Perth' must be taken to mean only the Perth 6000 postcode area (and, it follows, that 'Melbourne' means only the Melbourne 3000 postcode area) as artificially narrow, taking into account the context of Habitat's business at the time of the ESA.[139]

154 In the supplementary closing submissions, Mr Formby referred to a definition of 'Central Perth' used in the Ministry for Planning's Commercial Land Use Survey and also a definition of 'City of Perth' as contained in the City of Perth Act 2016 (WA). I do not consider reference to those sources assists.

155 Whilst it is true that Perth and Melbourne may be ascribed different meanings according to context, that of itself does not render the clauses void for uncertainty. To find that a contractual provision is void for uncertainty should be a last resort.[140]

156 Construing a contract requires attention to the language used by the parties, the circumstances which the document addresses, and the objects which it is objectively intended to secure. [141]

157 Where words used are susceptible to more than one meaning the court may have regard to the surrounding circumstances against which the contract was entered into and which were known to both parties at the time.[142]

158 The evidence that Mr Pritchard had access to all the financial documents of Habitat (including the pipeline documents that disclosed suburbs in metropolitan Perth and Melbourne in which jobs were undertaken) is highly relevant in this regard, as is his knowledge at the time of the nature of the business.

159 A construction which reflects what a reasonable person with knowledge of the nature of Habitat's business at the time would have considered it to mean is to be preferred. The court also leans against declaring invalid on the ground of uncertainty a commercial agreement that the parties have entered into, clearly intending that it have effect.

160 As stated by Murray J in Siver Pty Ltd v Bunce,[143] 'the metropolitan area of Perth is a familiar concept and it has been enshrined in statute as the Metropolitan Region by its definition in the Metropolitan Region Town Planning Scheme Act'.[144] I acknowledge that statement was made at interlocutory level. However, in Hanna v OAMPS Insurance Brokers Ltd,[145] the court considered that a covenant that included a restraint that was to operate 'in the metropolitan area of Sydney' was capable of being understood and capable of being complied with.[146]

161 I have taken into account that there are authorities to the effect that ambiguity in a stipulation between an employer and an employee in a traditional relationship of that nature should be resolved by providing for a narrower rather than wider construction in most cases.[147] I do not consider in the circumstances of this case that I am compelled to find that the meaning to be ascribed is as narrow as submitted by Mr Formby or that there is uncertainty such that the covenant must fail.

162 In my view, there is ample evidence to suggest that a restraint in the geographic area of metropolitan Perth is reasonable. That is where Habitat's business in fact operated and from where its customers were drawn. It is the legitimate interest of that business which the restraint seeks to protect.

163 I accept that Mr Formby's role in Melbourne was more confined and that the business in Melbourne was also more confined. Mr Formby was not in charge of sales, although he still had a sales role. The number of jobs undertaken in Melbourne was quite limited compared to that in Perth.

164 Taking into account that it was clear as at 2013 that Habitat was operating in Melbourne and anticipated continuing to operate in Melbourne, it was still a part of its business that Habitat was entitled to protect. I note that Habitat does not contend that Mr Formby breached the restraint by pursuing work in Melbourne.

165 Mr Formby was in possession of confidential information that affected the whole of Habitat's business, including the Melbourne operations. Although his customer connections in Melbourne may not have been as compelling, there is still a valid basis for a non‑compete clause to protect the legitimate interests of Habitat, taking into account its confidential information.

166 On that basis, I do not consider the restraint area referred to in cl 13.4(a) is void as being unreasonable.

167 However, if I am wrong as to the enforceability of the extension of the restraint area to Melbourne, then in any event, I would strike out the reference to Melbourne, leaving the restraint area of Perth in cl 13.4(a) of the ESA otherwise enforceable.

168 Mr Formby says that such severance is impermissible and if the inclusion of Melbourne is unreasonable then the restraint fails as a whole. This submission directs attention to the doctrine of severance.

169 Counsel for Mr Formby submitted that apart from finding that a particular step in a staged cascading clause might be severed, the court could not re‑write a clause. It was said, for example that the court, 'doesn't have the ability to sever Melbourne from Perth'.[148]

170 I do not accept that submission. Even where there is a cascading clause, there remains the capacity for the court to strike out parts of a clause in accordance with severance principles.

171 In Attwood v Lamont,[149] it was held that the doctrine of severance has not gone further in the context of employee restraint cases than to make it permissible to sever in a case where the covenant is not really a single covenant, but is in effect a combination of covenants. Where there is a combination of covenants and where the severance can be carried out without the addition or alteration of a word, severance is permissible.

172 The narrow application was a response to the traditional perception of the servant in a master/servant relationship being at a significant disadvantage:[150]

It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master.

173 As stated in Goldsoll v Goldman,[151] the courts were more prepared to sever covenants where it could be effected by striking out restrictions which are excessive with respect to area or subject matter or classes of customers.[152]

174 In IF Asia Pacific Pty Ltd v Galbally,[153] Dodds‑Streeton J accepted that there is 'a strictly circumscribed role for severance in the context of employee restraint covenants'.[154]

175 In SST Consulting Services Pty Ltd v Rieson,[155] the High Court held that:[156]

The modern law respecting severance in relation to covenants in unreasonable restraint of trade may be seen as turning on three questions. The first question is whether the covenantee can enforce the restraining covenant to the extent to which it would have been valid had it been narrowly drafted. The answer is that the covenantee can do so if the parts which are too wide can be removed without altering the nature of the contract and without having to add to, or modify, the wording in any way other than by excision.

176 The development of cascading clauses (sometimes referred to as ladder or waterfall clauses) can be seen as a response to the role of severance. Even in the context of a cascading clause, the court has acknowledged room for the application of severance. In Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd, the parties entered into non‑compete and non‑solicitation restraints on the sale of a shipbuilding business. The restraint clause included cascading provisions as to geographic area. Relevantly, the broadest area of restraint was, 'within the United States, Canada, Australia and/or New Zealand'.[157]

177 First, it was accepted that the words 'and/or' before New Zealand were a mistake and were taken to read 'and', in accordance with the principles in Fitzgerald v Masters.[158]

178 Second, whilst there was evidence that the business had some operations in the United States market, there was no evidence of a proposed move into the Canadian market. Spender J said:[159]

I prefer to regard Canada as part of the 'American market'. If I am wrong in this, then I would, relying on such cases as Goldsoll v Goldman [1915] 1 Ch 292, limit the area by severing the reference to Canada.

179 The relationship between Habitat and Mr Formby is not a typical employer/employee relationship of imbalance, for the reasons discussed above. I do not consider the principles must be applied in such a limited manner. But in any event, even applying the narrow approach, this is an example of a particular geographic area that can be excised by the removal of the two words 'and Melbourne,' in circumstances where the covenants as to Perth and Melbourne sensibly operate separately. The geographic areas are quite distinct. Whilst I acknowledge that Spender J's reference to severance was obiter, I concur with his Honour's approach.

180 I note that in Hydron Pty Ltd v Harous,[160] the court considered that a clause that permitted complete severance of an offending clause did not permit severance of particular words within the clause. However, in that case, the severance of the particular words would have created uncertainty. I do not consider that authority to stand for the proposition that there can never be internal severance as proposed in Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd. In Fitwear v Pietrolungo,[161] the court said:

There is, I think, no doubt, quite apart from the severability clause in the contract now under consideration, that the courts may either sever a term or read it down to the point where it may be accounted reasonable: see the discussion in Greig and Davis Law of Contract, at 1113-4; see also Lloyds Ships Holdings Pty Ltd v Davros Pty Ltd; and JQAT Pty Ltd v Storm.

181 Accordingly, if the inclusion of Melbourne is unreasonable then I consider severance principles operate to limit the reference in cl 13.4(a)(i) to Perth, and I would strike out the reference to Melbourne, leaving the restraint area and the clause otherwise enforceable in Perth.

182 Considerable weight should be given to the period the parties themselves have selected.[162] In this case, the maximum restraint period is two years.

183 In AGA Assistance Australia v Tokody a 12 month period for a non‑compete restraint was found not to be excessive. The court took into account the length of time during which the defendant had been employed by the company (six years), the length of contracts (sometimes exceeding 12 months) and the length of time over which advantages of personal connection and knowledge might diminish. The court considered essential information was likely to have a shelf life of more than 12 months and that the essential terms of contracts was likely to be recalled for a period exceeding 12 months.[163]

184 In Cactus Imaging Pty Ltd v Peters a 12 month restraint on solicitation was upheld in the case of a senior employee.[164]

In this case it is necessary to consider the duration of the restraint bearing in mind that it is supported by both protection of customer connection and

protection of confidential information. Generally, the test of reasonableness for the duration of a non-solicitation covenant, when it is supported by customer connection, is what is a reasonable time during which the employer is entitled to be protected against solicitation, which in turn depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers.

185 In determining the period of restraint, the Privy Council in Stenhouse Australia Ltd v Phillips said:[165]

It is for the judge, after informing himself as fully as he can of the facts and circumstances relating to the employer's business, the nature of the employer's interest to be protected, and the likely effect on this of solicitation, to decide whether the contractual period is reasonable or not. An opinion as to the reasonableness of elements of it, particularly of the time during which it is to run, can seldom be precise, and can only be formed on a broad and commonsense view.

186 In this case, the time for the tender process, meeting with clients, preparing concepts and securing a deal with clients may well range, but in any event may well exceed six months. I base this on the practicalities of the steps involved but also on the pipeline document.[166] The pipeline document provided indicates that the closing dates for jobs extended up to 52 weeks. Mr Bergsma's evidence was that the time for jobs and the time to see the benefit from jobs could take 'months and months'.[167]

187 Although it is fair to say that a new sales person could be employed to step into at least some of Mr Formby's business development and sales roles over time, a senior person must be identified, recruited, able to accept a position, receive the necessary training and become familiar with Habitat's processes.

188 Further, Mr Formby has been in a senior role since the company was founded. His knowledge is likely to have a reasonable shelf life, to utilise the expression used in AGA Assistance Australia v Tokody.

189 I do not consider there is evidence from which I can properly infer that a two year restraint is required to protect the legitimate interests of Habitat. However, nor do I consider the period of six months is sufficient, particularly when one takes into account the senior and all‑encompassing nature of Mr Formby's role. I consider a 12 months restraint is reasonable.

190 Taking into account Mr Formby's role and the fact of and potential for repeat work, I consider the non-solicitation clause is justified.

191 The clause is confined and applies only to those customers who were customers of Habitat during the 12 month period preceding termination of Mr Formby's employment. Those customers are identifiable. The clause is similar to that in Cactus Imaging Pty Ltd v Peters that was upheld,[168] and distinguishable from the broad and open‑ended clause in Emeco [No 2] that was found to be unenforceable.[169]

192 Mr Formby as the managing director, and being the person in the sales role in Perth and who maintained an overview of the Melbourne office would have knowledge of all customers or at least, with his access to all books and records of the Habitat, the ability to identify such clients during his employment. The fact that he was in such a senior role is relevant to the scope of the non-solicitation restraint.[170] Although at the time of entry into the ESA it may have been anticipated that he would have less contact with clients in Melbourne, he was still in the position of someone with knowledge of the requirements of those clients. He reviewed pipeline documents that included the Melbourne jobs. At least one customer (The Publican Group) was a client of both the Perth and Melbourne offices.[171]

193 In my view, the solicitation clause is supported by the protection in particular of Habitat's confidential information, but also customer connections.[172] I add that the non-solicitation clause alone would not sufficiently protect the legitimate interests of Habitat, taking into account the confidential information as already discussed. The non‑compete clause encompasses wider circumstances than the particular conduct of soliciting the known class of former clients.

194 As a practical matter, identifying clients of the Melbourne office in the relevant 12‑month period prior to termination is unnecessary, as the office was closed during that period.

195 Restraints on interference with the relationship between its clients or suppliers are not uncommon.

196 In BDO v Sully, the court upheld the validity of a restraint against interference in very similar terms for a period of 12 months, noting:[173]

The restraint however, whilst in general terms, is aimed at protecting not only the goodwill of the BDO Group but also customer and employee connections.

197 The respondent in that case claimed that use of the words 'interference' and 'relationship' rendered the clause uncertain, but those submissions were rejected by the court, as is to be inferred from the orders made.

198 The restraint itself does not displace the role of a non‑compete restraint[174] or a non‑solicitation restraint.[175]

199 I would uphold the restraint. It would have been expected at the time of entry into the ESA that Mr Formby could continue to have contact with suppliers, employees and clients and so be in a position to interfere with Habitat's business to its detriment. A restraint of that nature is not a significant imposition on Mr Formby.

200 After the hearing, Mr Formby's counsel invited me to take into account the interlocutory reasons in Pryse v Clark.[176] In that case, the court declined to enforce by interlocutory injunction a non‑compete restraint clause in a partnership agreement against a group of eight partners who had resigned from Herbert Smith Freehills (HSF) to join a different firm. The relevant restraint period was six months. The court considered that enforcement of the restraints would deny the relevant partners the opportunity to work and have adverse financial consequences upon then, and that such a determination would in effect comprise a practical determination of the issues without a final hearing.

201 There are (at least) three matters that distinguish the circumstances of that case. First, the partners were highly specialised finance lawyers and the prospect that they would find short term work in another field for a six month period was unrealistic.[177] In contrast, there is no suggestion that Mr Formby could not work at all during the period of a restraint. To the extent Mr Formby claimed a restraint would operate as a 'blanket ban' on him working, I consider he overstated the position.[178] Such a claim does not accord with the matters referred to during the injunction hearing.[179] He has other qualifications, work experience, and his evidence during the trial was that it was open to him to do other work because Habitat did not offer project management and he could work as a builder.[180] That he considered he could do work outside his usual Habitat role is also supported by his conduct in September 2015 in securing a contract for construction of a Mandurah apartment block which was 'not an interior project', initially in the name of Hawk Crest Pty Ltd (Hawk Crest) (discussed below) and later securing it in his own name. [181]

202 Second, the duties of the partners as lawyers in terms of client confidentiality subsisted, providing some protection to HSF and its clients. There are no similar duties imposed on Mr Formby.

203 Third, HSF was in a position to reduce the impact of the partners leaving and working elsewhere by immediately appointing others from within its pool of talent within the firm to look after clients who may otherwise be affected. Habitat was not in that position.

204 For reasons set out below as to the scope of the pleading and the alleged breaches relied upon, I do not consider Habitat's reliance on the restraint clause in the Shareholders Deed, assuming it to be enforceable, increases any liability on the part of the defendants. However, I will briefly consider its construction.

205 The parties agree that cl 17.2 creates an obligation on the part of the shareholders (relevantly Mr Formby and Ms Formby as trustees of the Formby Family trust) to procure that, relevantly, Mr Formby not act in breach of the non-compete clause.[182] The parties do not agree on the enforceability of the restraint clause.

206 Insofar as the defendants make analogous arguments as to the enforceability of cascading clauses, universal restraints, geographic areas and severance in the context of the ESA restraint clause with respect to cl 17.2, I do not accept them and for the same reasons as apply to the ESA.

207 The potential for numerous combinations does not make the cascading clause uncertain. Clause 17.1 provides that the combinations of capacity, area and time period specified in cl 17.2 are to operate as separate restraints. Clause 17.1 also provides for severance of each separate clause created. Clause 17.4 provides for severance generally. A non‑compete restraint is justified for the reasons already provided.

208 However, there is a difficulty with the drafting of the clause insofar as it refers to time periods. The time period of the restraint on the director is not linked to his or her time as a director, but to the term of the Shareholders Deed. The shortest time period provided under cl 17.2 is, 'from the Commencement Date until termination plus six months'. The date for termination of the Shareholders Deed is indefinite. Clause 20 provides that there is no definite term and termination occurs if one shareholder becomes the sole shareholder, there is an event of insolvency or the shareholders mutually agree. Arguably, the undertaking on the part of the shareholders is to procure compliance with the non‑compete clause by a person who has been a director for an indefinite period. 'Director' is defined in the Shareholders Deed as a director 'for the time being'. That does not mean that the effect of the non‑compete obligation only subsists as long as the person remains a director. Such an interpretation is inconsistent with the clear intent that the restraint operates into the future. I accept the defendants' submission that the clause is unenforceable due to the indefinite time frame for which the procurement obligation and restraint are said to endure.

209 There is also a difficulty with the notion of 'procurement'. Certainly insofar as Ms Formby is concerned, the steps it is alleged she ought to have taken to comply with the clause were not canvassed. Habitat did not address whether the term was said to operate in effect as a guarantee of performance by Mr Formby or whether it was to be implied that only reasonable endeavours were required. This issue does not now need to be resolved.

210 Having found that the relevant restraints are not void, it is necessary to determine whether certain conduct of Mr Formby in the period after his employment terminated comprised breaches of those restraints.

211 Habitat asserts breaches of cl 13.2(a) (non‑compete), cl 13.2(c) (non‑solicit) and cl 13.2(d) (non‑interference).

Breach by conduct relating to Hawk Crest (non-compete)

212 Hawk Crest was registered in August 2015 while Mr Formby was still involved in Habitat. Mr Formby was not at that time a director. Its directors were family members. He gave evidence in the interlocutory proceedings that:[183]

In respect of the creation of Hawk Crest, this was a company set up by my family. I did not become a director of Hawk Crest until some 8 months after I ceased my employment with the plaintiff company.

213 Despite that evidence, Mr Formby admitted under cross‑examination that he had always been the deciding mind of Hawk Crest.[184] It was to be his business from the beginning.[185] He said he did not become a director when it was established because he did not want to appear to be a director of Hawk Crest at the time.[186] He said that the sole reason for not being a director was that he had money coming from other sources and he was separated from his wife at the time, so he wanted that money to be paid to Hawk Crest without his wife knowing.[187]

214 Hawk Crest is described on the website as a design, project management and construction company.[188] Mr Formby said that the company was set up by his family and has no employees. He says he became a director eight months after he left Habitat, and that it operates as an architecture, project management and construction company. It was accepted that it undertakes fitout work.[189]

215 Mr Formby sought to rely on work undertaken by Habitat in promoting the experience and capacity of Hawk Crest. For example, the website advertised that Hawk Crest had done work for The Publican Group. A testimonial purportedly from The Publican Group appears on the website. Mr Formby accepted that work for the Publican Group had been undertaken by Habitat and none had been done by Hawk Crest.[190] The website refers to Hawk Crest having done over 400 jobs. Mr Formby accepted under cross‑examination that it was a new company, it had not done over 400 jobs, and that it was Habitat that had done over 400 jobs.[191] Figures as to 121,655 m2 of projects delivered by Hawk Crest and references to 94 repeat clients were also accepted by Mr Formby as being not correct and, in the case of the repeat clients, possibly 'made up'.[192]

216 It is clear that Mr Formby was engaged in and directly concerned with the business of Hawk Crest. Habitat relies on the following conduct as establishing that Hawk Crest was competing with the business of Habitat:

(a) Hawk Crest offered and in fact carried out fitout services for a range of clients; and

(b) Hawk Crest provided site supervisor services to Project One East Pty Ltd in circumstances where Habitat had previously provided that service.

217 Mr Formby admitted through counsel that he had, 'undoubtedly engaged in conduct which is in competition with [Habitat]'.[193] I infer that is a reference to work undertaken through Hawk Crest.

218 After Mr Formby's departure from Habitat, Hawk Crest undertook seven projects for which it was paid a total of $210,000.[194]

219 It undertook an office fitout for Tox Free Solutions, Osborne Park.[195] Mr Formby said, 'I performed the project through Hawk Crest on a 'open book' cost plus 10% basis. I am not aware of Habitat ever doing an open book cost plus contract'.[196]

220 Hawk Crest undertook an office fitout for Textile Traders, Belmont.[197] Mr Formby said, 'I accepted the project on a $4,000 per week retainer basis (with a maximum of $24,000) through Hawk Crest. I am not aware of Habitat ever undertaking a project on a retainer basis'.[198]

221 The evidence as to the manner of payment appears to be an attempt to distinguish the jobs from the type of job undertaken by Habitat. That distinction is not real.

222 Other jobs completed were for entities referred to as Badlands (Northbridge), Stand'in Room (Claremont), CPK (Hillarys), Automic and Mt Gibson Iron.

223 As to Badlands, Mr Formby said the job was, 'outdoor - like a courtyard and toilet block with a sea container' and so not a fitout.[199] Whilst a courtyard location rather than solely indoors, I consider it is the type of work that falls within the scope of fitout that would have been undertaken by Habitat.

224 As to Stand'in Room, the contract refers to construction of works and also project management and utilises almost the same contract terms as for Textile Traders and CPK, and on balance I am satisfied that it was for the type of works for which Habitat would compete.[200]

225 As to CPK, Mr Formby says he met the client in January 2016 when he was at Habitat but CPK engaged a different company to design and build their fitout.[201] He says CPK subsequently asked him to project manage the 'project' on a retainer basis. He says he does not recall Habitat previously project managing a project on a retainer basis. He also says he was asked to 'build' the restaurant in April 2016, and that he did not recall Habitat undertaking a build only project.[202]

226 The work for CPK falls within the scope of work undertaken by Habitat. It was a fitout project. The fact that Mr Formby seeks to separate components of 'build' or 'project management' is not to the point. That does not deny its characterisation as the type of work undertaken by Habitat and for which it competes.

227 On the basis of this evidence, there is sufficient evidence to establish that Hawk Crest was operating a business that was similar to and competed with Habitat within the meaning of cl 13.2(a) of the ESA.

228 For completion, I refer also to the Mt Gibson, Automic and Project One East Pty Ltd matters raised by Habitat.

229 As to Mt Gibson, while the job appears on the face of the part‑contract produced to be a fitout job, there is insufficient evidence as to the location of the job.[203] Mr Formby admitted the Automic job was a fitout job, but again, there is no legible evidence that discloses the location of the job.[204] Without more it is not possible to discern whether the Mt Gibson or Automic jobs were within the area where Habitat operated.

230 There is also evidence that both Habitat and Hawk Crest had arrangements with Project One East Pty Ltd for the provision of mutual supervision services.[205] That is consistent with there being similarities between the businesses but as to only a peripheral aspect. I do not consider it relevant in the context of cl 13.2(a) of the ESA.

Breach by establishing Habitat Interiors (non-compete)

231 At some point after he left Habitat, Mr Formby advertised a business on LinkedIn called Habitat Interiors, offering commercial, retail and hospitality and medical fitouts. He established a domain name for that business but says no business was transacted by it and through counsel he has undertaken that he will not in the future trade under that name. [206]

232 In the circumstances, there was clearly an intention on the part of Mr Formby to compete with Habitat by way of a business called Habitat Interiors. However, that attempt ceased at the time of the injunction proceedings.

233 Bearing in mind that the business, such as it was, was abandoned prior to trading, I do not consider there is sufficient evidence to establish that this step rises to the level of an actual breach of cl 13.2(a).

234 Clause 13.2(c) refers to soliciting of customers.

235 Habitat relies on Hawk Crest's work with CPK as a breach of the non‑solicitation clause.

236 Mr Pritchard's evidence is that Habitat was completing design work and planning construction work for CPK during February and March 2016. He does not say specifically when CPK became a client and there was no documentary evidence that established when that might have been. For example, no design documents or retainer agreements were tendered. Mr Pritchard found out in April 2016 that Habitat would not be continuing with work for CPK.[207]

237 Mr Formby submits that CPK was not a client of Habitat at the time of his departure and so there is no breach of the restraint.[208] He admits that he had met with them in January 2016 but says Habitat did 'no paid work'.[209] He referred to an invoice but said it was not issued until after he left.[210]

238 The gaps in the timeline mean that I cannot be satisfied that CPK was in fact a client at the time Mr Formby's employment was terminated. The parties made no submissions as to the date of termination in this context but in any event, the date on which CPK became a client remains unclear. Accordingly, I do not find that Mr Formby breached cl 13.2(c) of the ESA.

239 Habitat relies on four matters as establishing a breach of cl 13.2(d):

(a) interference with its relationship with Ramsay Health Care (Ramsay);

(b) interference with a potential employee, Mr Hodge;

(c) interference by attempting to transfer Habitat's domain name to an entity controlled by him; and

(d) interference by contacting a supplier, Total Cabinet Services (TCS).

240 The first allegation relies upon inference. There are emails that indicate that a 'contractor' who would not identify himself rang the chief financial officer of Ramsay, alleged that Habitat was insolvent and that Ramsay should not proceed with work with Habitat. Ramsay then requested that Habitat amend its terms and conditions of payment, which it did.[211] The conduct clearly amounts to interference. However, mere suspicion that it was Mr Formby is not enough. Mr Formby was not asked whether he was the contractor or arranged for the call to be made. I am not satisfied to the requisite standard that Mr Formby made or arranged the call to Ramsay. He denied in the interlocutory proceedings that he did so.[212]

241 Habitat alleges that on or about the day Mr Formby left Habitat, he spoke to Mr Hodge to attempt to dissuade him from accepting employment with Habitat. Mr Hodge was not then an employee. He was a potential new general manager. Mr Formby accepts he spoke to Mr Hodge both then and some weeks later when he passed him at a food hall and stopped to speak.[213] Mr Formby contends the first contact was prior to the termination of his contract so is not covered by the restraint. He does not make that submission as to the food hall conversation. He denies he said anything during the food hall conversation other than to say, 'what [had] happened to me'.[214] There is no admissible evidence that details any more fully the content of the alleged conversation with Mr Hodge.[215] I am not satisfied to the requisite standard that the communication comprised interference with an employee.

242 There is no doubt Mr Formby attempted to interfere with Habitat's business by seeking to transfer Habitat's domain name to an entity controlled by him. Confronted by irrefutable evidence, Mr Formby admitted he attempted to obtain the domain name and that, 'it wasn't [his] finest moment'.[216] His attempt failed, as the service provider brought the transfer application to the attention of Habitat and the transfer did not proceed. In my view, there was therefore no actual interference with a relationship with a client, employee or supplier within the meaning of cl 13.2(d).

243 In November 2016, Mr Formby emailed a Habitat supplier, TCS, asking who was doing work for Habitat. TCS forwarded the email to Habitat, noting that, 'getting emails like this doesn't help'.[217] It seems to me that there was interference with the relationship between Habitat and TCS by that email and Mr Formby ought not to have put Habitat and TCS in that position. Whilst not significant interference, it was interference with a relationship none the less.

Breach of restraint covenants - Shareholders Deed

244 It is not necessary to deal with the alleged breaches of cl 17.2 of the Shareholders Deed. For completion, however, I note that Habitat relies on the same breaches upon which it relies for the purpose of cl 13 of the ESA, but also relies on breaches it alleges occurred during the course of Mr Formby's employment.

245 A difficulty with this approach is that Habitat did not plead a restraint case that relied on breaches during Mr Formby's employment. It referred to the cl 17.2 restraints operating from within the period of two years, one year or six months respectively 'after the termination of the Shareholders [Deed]', and pleaded the date on which that termination occurred (being June 2016 on its case).[218]

246 Mr Formby's conduct during his employment remains relevant, however, in the context of the termination of his employment, as dealt with below.

PART B Whether payments to second defendants loans or dividends

247 Habitat pleads that during the period 31 December 2013 to 1 June 2016 it made payments in the total sum of $399,397.03 to the benefit of the second defendants.[219] The particular sums are itemised in sch 1 to the amended statement of claim.

(a) lump sum payments of $20,000 or $10,000 which I will refer to as distributions ($385,000);

(b) payment to MLC for life insurance premiums ($7,639.87); and

(c) payment of various personal expenses of Mr Formby ($6,757.16).

249 As to the first category, Habitat's case is that the payments were shareholder loans as permitted under the Constitution and which could be re‑paid by set off against dividend entitlements if dividends were declared. The loans were paid to the second defendants as trustee. If dividends were not or could not be declared, the loans remained a liability to be repaid by the shareholders. The terms of the loan were set out in the Company Loans Schedule to the Constitution, but if those terms do not apply, then the loan was repayable at any time in accordance with the principles in Young v Queensland Trustee.[220]

The distributions - summary of Mr and Ms Formby's position

250 The second defendants deny they are obliged to repay the distributions. Their case is that the distributions were received but with no obligation to repay them. That the moneys were received into the Formby Family Trust bank account was accepted by Mr Formby.[221]

(a) the payments were not into a loan account;[222]

(b) although the payments were pleaded as a 'dividend distribution', the second defendants intended to plead that the distributions 'were not a loan.' An amendment to the pleading was permitted during the trial to reflect that position;[223]

(c) despite that, in the written closing submissions the defendants continue to refer to the payments as 'dividends' and other paragraphs of their pleading also use that word;[224]

(d) the payments were 'authorised interim dividend payments...calculated in accordance with the directors' belief as to anticipated profits';[225]

(e) the payments were 'in effect a dividend or an advance on a dividend but with no obligation to repay';[226] and

(f) Mr Formby did not expect to have to repay the distributions.[227]

252 I note that Mr Formby says he did not know about the terms of Habitat's Constitution and he did not take steps to inform himself of its terms.[228] However, the defendants' contention above as to the payments being an authorised interim dividend payment is based on cl 26.4 of the Constitution. It provides as follows:

The Directors may authorise the payment by the Company to the members of such interim dividends as appear to the Directors to be justified by the profits of the Company.

253 The requirement that any interim dividend be justified by the profits of the company is important.

254 Ms Bradford gave evidence that prior to Mr Pritchard's involvement, she maintained a shareholder loan account (sometimes called a director loan account) for Habitat for each of Mr Stojsavljevic and Mr Formby.

255 Ms Bradford continued to maintain the accounts after Mr Pritchard joined Habitat. She kept the accounts using Xero software. One of the ledgers she kept within the accounts was for the shareholder loan for the Formby Family Trust. Ms Bradford said that she and the parties sometimes referred to 'the director loan accounts', but there was no separate ledger for Mr Formby or Mr Pritchard in their capacity as directors. Relevant drawings and expenses were recorded in the one ledger account for Mr Formby.[229]

256 In 2009 and 2010 the shareholders of Habitat were Velvet Rhino Pty Ltd and FBY Global Pty Ltd (FBY Global), as trustee of the Formby Family Trust.[230]

257 During the 2009 and 2010 tax years Habitat had made payments by way of salary to each of Mr Stojsavljevic and Mr Formby and to Velvet Rhino Pty Ltd and FBY Global by way consultancy fees.[231]

Change to salary plus payments debited to loan accounts

258 In the 2010 to 2011 tax year, there was a change so that payments were made by way of salary with payments additional to salary made by distributions to the shareholder loan accounts. This was done after a change in accountants. The new accountant was Mr Shillington.[232] A dividend was declared and $200,000 paid to each shareholder in July 2011. The dividend was not paid to the shareholders but was credited to the shareholder loan accounts. [233]

259 Mr Formby was content to follow the advice given to him by the accountants as to how to characterise the payments. He said tax was out of his area of expertise and he was happy for Ms Bradford, Mr Pritchard (later) and Mr Shillington to make recommendations to which he would agree.[234] On 15 October 2012 Mr Formby received copy correspondence from Mr Shillington that referred to the repayment of Div 7A loans, the offsetting by payment of dividend and the proposed treatment of interest on the loans as Habitat income.[235]

260 For both 2011 and 2012, Habitat made payments of salary and payments to the shareholder loan accounts. For example, a profit and loss balance sheet to 31 December 2012 prepared by Ms Bradford and copied to Mr Formby on 21 January 2013 shows Mr Formby's salary for a six month period of $125,000 and also shows entries under the heading 'receivables' as follows:[236]

Div 7a Loan 2011 - FBY Global - $444,217.93

Div 7a Loan 2011 - Velvt Rhno - $423,735.93

Div 7a Loan 2012 - FBY Global - $537,046.02

Div 7a Loan 2012 - Velvt Rhno - $536,999.88

261 Mr Formby said that he understood that the way Ms Bradford treated drawings was that she put it into a loan account. He knew that the payments were recorded in Habitat's accounts on the basis that they were loans to, firstly, FBY Global and, later, to the second defendants as the new trustees.[237]

262 Mr Formby did not ever complain that the payments should not have been recorded as a loan.[238]

Declaration of dividend ahead of sale of shares to Maliza

263 Dividends were declared and used to repay the loan account as at February 2013 in the 2013 taxation year.[239] The moneys were credited against the loan accounts and not otherwise paid to the shareholders.[240]

264 It was a condition of the Share Sale Agreement that such a dividend would be declared.[241] By email dated 27 January 2013 to Mr Shillington copied to Mr Formby, Mr Pritchard said, 'we'll also need to remove the Div 7A loans prior to settlement'.[242]

265 The second defendants accounted for the dividend in the tax return for the Formby Family Trust. Mr Formby had the conduct of approving the tax returns.[243] The tax return for the 2013 year also records payment of a dividend by Habitat to the trust in the sum of $1.2m. Mr Formby claimed he does not know if that was used to clear the loan account but admitted he does not recall receiving any cash or a cheque in payment of the dividend.[244]

After the ESA - the interim dividend on the share transfer

266 After entry into the ESA, Mr Formby and Mr Pritchard continued to receive payments of salary and distributions. Their salaries were different but the distribution payments were equal, consistent with the fact the trustees of their family trusts were equal shareholders.[245]

267 Between March 2013 and December 2013, 10 monthly distributions of $20,000 were distributed to each shareholder and recorded in the loan account, a total of $400,000.[246]

268 The loan account was cleared in the 2014 tax year because it was a condition of the sale of the additional 10% of the shares by the Formby Family Trust to Mr Pritchard's company. [247] Minutes of a meeting of 19 December 2013 record that the directors agreed to the 10% share sale and agreed to declare an interim fully franked dividend of $400,000 by loan account credit.[248] In other words, the declaration of the interim dividend was fully documented. Mr Formby agreed that he knew that the dividend was to clear the loan account.[249] Correspondence at that time indicates Habitat was considering all sources of profit to ensure the dividend could be declared.[250]

269 The second defendants accounted for that dividend from Habitat in the tax return for the Formby Family Trust for the 2014 taxation year.[251]

270 After December 2013, the shareholders continued to receive distributions.

271 Minutes of meetings for each of 8 May 2014, 5 June 2014, 19 June 2014 and 2 October 2014 refer to the distribution position. The 8 May 2014 minutes state:[252]

Discussed equity position. Given current forecast, it is unlikely that there will be sufficient equity to allow a dividend for Directors' loans on 1 July 2014.

Discussed sustainability of current policy for Directors' drawings. Agreed that a reduction may be beneficial to build business reserves.

272 A similar statement as to the dividend for directors' loans was repeated in the 5 June 2014 minutes. The 19 June 2014 minutes record that current profit expectations might result in a negative equity and that at current profit levels current drawings were not sustainable. The 2 October 2014 minutes record that there were poor profit results and directors' drawings were to be put on hold until the cash position improves.[253] The 5 March 2015 minutes refer to there being 'insufficient retained profits to repay Directors loan.'[254]

273 The 19 March 2015 minutes refer to the balance sheet being distorted 'by the directors loans which will need to be cleared via declaration of a dividend out of retained profits', but noting that the retained profits were less than the current level of loans. The minutes also refer to advice from PKF as to the directors' loans.[255]

274 The 10 February 2016 minutes also state that the directors' loan/distribution issues need to be resolved.[256]

275 The minutes report that Mr Formby was present at the above meetings.

276 Habitat's financial accounts prepared by PKF are also important. The Balance Sheet as at 30 June 2013 includes by way of current assets loans for 2013 to Maliza of $80,000 and loans to FBY Global of $118,503. The 2011 and 2012 loans to FBY Global are noted as nil (consistent with the reduction to nil by the dividend distributions referred to above).[257]

277 The Balance Sheet as at 30 June 2014 includes by way of current assets the 2013 loans to Maliza and FBY Global and also includes the 2014 loans to each. The only dividend payments are those already referred to.[258]

278 The Balance Sheet as at 30 June 2015 similarly includes by way of current assets the 2014 and 2015 loans to Maliza and FBY Global and notes there have been no further dividend payments.[259]

279 The Balance Sheet as at 31 January 2016 provided to Mr Formby as part of the monthly Board Papers dated 10 February 2016 also included the loans as current assets.[260]

280 Mr Formby accepted that Ms Bradford would provide copies of the company accounts to him and he would look at them.[261]

Other references in documents to loans/distributions/dividends

281 There is some correspondence where the parties used terms such as 'shareholder loans' and 'director loans' and 'dividends' without regard to the precise nature of the payments. For example, in one exchange Mr Formby asks Ms Bradford for a way to show proof of wages or 'dividends' for a two month period, and she replies by way of a document headed 'Div 7A Loan' and listing a distribution and a drawing for July and August 2015 of $10,000 each.[262]

282 However, having reviewed the numerous documents to which I was referred by the defendants, I do not consider they establish agreement as to paying interim dividends or any agreement that loans or distributions did not have to be repaid. To the contrary, the documents support a finding that the distributions to the shareholders were loans.

283 I will not refer to all of the documents relied upon but there are themes.

284 There are statements consistent with a distinction between dividends and distributions by shareholder loans.[263]

285 There are communications that state the level of shareholding distributions are to vary taking into account business profitability levels and where the potential for distributions is linked to budgeted earnings (and the distributions are not referred to as a dividend).[264]

286 The loan account was regularly referred to as a loan account or as the Div 7A loan account in meetings and in documents, including emails and minutes of meetings which the first defendant received.[265]

287 There are examples where Mr Formby refers to distributions and other examples where he refers to dividends.[266]

288 There are references by Mr Pritchard to paying dividends if Habitat hits its budget but in the same correspondence he refers to director loan account distributions. There is also a reference (in the context of negotiating new employment terms) to potentially paying a monthly dividend, but in that same communication Mr Pritchard refers to shareholder distributions and links them to the ability to pay from profits. Mr Pritchard refers at length in one email to shareholder distributions and equitable distributions to shareholders but still refers to the need for franked dividends. He then uses the word 'dividend' in follow up communication. In short, there is no doubt that there are occasions where Mr Pritchard uses the word 'dividend' when in context what is clearly anticipated is a distribution to shareholders and at a time when the directors are not in a position to know whether any dividend can be justified and declared.[267]

289 There are also other documents that refer to the need to declare a dividend with respect to loans already incurred and stating that payments cannot be dividends as they are not coming out of profits.[268]

290 There are two documents that indicate that Mr Formby understood that liability for the loans subsisted and that payments received did not comprise dividend payments. In May 2015, Mr Formby asked Ms Bradford for details of his 'director's loan'. Ms Bradford replied by setting out:

291 At that time, due to the breakdown of their marriage, Mr Formby was trying to reach agreement with Ms Formby about the distribution of their assets. In October 2015, Mr Formby wrote to her setting out a schedule of their assets and liabilities position. He included an entry for a liability by way of, 'directors loans to Habitat' in the sum of $200,000'.[269]

292 Each of Mr Pritchard, Ms Bradford, Mr Bergsma and Mr Formby were cross‑examined as to what was said in meetings and communications about the loan position.

293 Mr Pritchard said that there were ongoing discussions at meetings about the amount of shareholder loans and that was reflected in the minutes of meetings. There were discussions about whether there were sufficient profits and sufficient equity to clear those loans. He said that whilst there were not overt discussions about repayment, it was clear that loans were outstanding. He admitted that sometimes terminology was used interchangeably but there was no dividend policy because profitability was so variable. He said that matters reached a head in May 2016 when it was clear that Habitat did not have the money to pay any dividends.[270]

294 Ms Bradford explained the manner in which she maintained the loan account by ledger and I accept her explanation. Under cross‑examination, she explained that personal expenses incurred on the credit card were annotated as personal on credit card statements or discussed at meetings with the directors and were applied against the loan account. She denied that although she recorded distributions as loans they were in fact dividends.[271] Further, the following exchange occurred under cross‑examination:

Mr Gough: ... But the effect, in reality, was this. The entry for accounting purposes and to the accounts is a 'loan'. The intention is that no one ever has any obligation to repay that and when an official dividend is declared, it wipes the loan accounts that's recorded in the books that you keep---

Ms Bradford: In an ideal world, but I mean that's not going to be the case if there's not the profit there ...

295 Ms Bradford freely admitted that she was not aware of any written loan document (the plaintiffs did not contend that there were any signed loan agreements). She also said that she was not aware of any discussion prior to Mr Formby leaving about an obligation or potential obligation to repay a loan.[272]

296 Mr Bergsma recalled that the issue of shareholders loans was discussed at board meetings in March 2015 and August 2015 although he could not recall the detail of what was discussed.[273]

297 Mr Formby stated that at no time prior to his resignation was he informed that 'drawings and distributions paid to me as part of my remuneration formed a loan to be paid back under any Company Loans Schedule'.[274] Mr Formby admitted that he read the email from Mr Shillington of 15 October 2012 which referred to the loans to the respective trustee shareholders and the need to offset the loans by a dividend. He said he was not concerned by that. [275] He said that prior to the time of the ESA, he understood that Ms Bradford would treat drawings by putting them into a loan account. It was up to Ms Bradford and Mr Shillington to 'declare a dividend'. He left matters up to them.[276] He said he has no idea whether tax was paid on distributions as he would give the information to the accountants and he was happy for them to determine how payments were treated.[277] He said he took drawings and never expected to give them back, and that the accountants would deal with how to do that.[278] He admitted he did not go back to Ms Bradford when he received financial statements that referred to 'loans' and tell her they should not refer to loans.[279] He admitted that when Maliza acquired the additional shares in December 2013 he knew that the loan account was to be repaid so he would 'start again from zero'.[280] He knew that the declaration of a dividend in December 2013 was to clear the loan account.[281] He accepted that there were discussions about the loan accounts regularly at board meetings. He accepted that drawings would go on to a loan account.[282]

298 Ms Formby said she had no knowledge of these matters but left all decisions regarding all matters concerning the trust to Mr Formby and was content with what he decided.[283]

299 I do not consider the communications or other evidence establishes that when distributions were made, the directors were exercising authority to issue interim dividends or that they considered there were profits to justify the issue of interim dividends. The terminology of interim dividends is not used. Any such decision is not minuted. On the one occasion after Mr Pritchard joined the company when there was a declaration of an interim dividend, it was fully and formally documented (December 2013).

300 In my view the distributions were clearly shareholder loans. They were made to the shareholders and entered in the ledger against the trust entities. Any reference to such distributions as 'directors loans' is in error, although an understandable error in the context of a company with two directors where the sole shareholders are their respective family trusts. The preponderance of the evidence supports the fact the distributions were shareholder loans.

301 The conduct of Habitat and the reporting of the loans in its financial accounts is consistent with the distributions as loans to shareholders. The indebtedness could be satisfied (in part or in full, presumably) if profits permitted dividend distributions in the future. The directors were no doubt hopeful that the profit position would be sufficient to permit such dividends. They considered anticipated profits before continuing with distributions. But the evidence does not establish authority to pay interim dividends. There is no evidence to suggest the loans were otherwise non-recourse. They remained in the balance sheets as current assets.

302 The contemporary minutes of board meetings refer to loans. The financial statements refer to loans. Mr Formby accepted that the interim dividend in December 2013 was to satisfy a loan. His email to Ms Bradford sought information about his loan and his letter to Ms Formby refers to a loan.

303 To my mind the evidence clearly establishes that the distributions to the shareholders were by way of loan. I have relied in particular on the documentary evidence.

304 As to the second category, although Mr Formby denied any recollection as to the insurance payments having been discussed,[284] there was evidence that supported Habitat's contention that in accordance with accounting advice received, the payments were to be applied to the loan accounts. In particular, emails from Habitat's accountant to Mr Pritchard and others and copied to Mr Formby disclose that the company sought advice about the deductibility of life insurance premiums and the minutes of meeting dated 19 December 2013 state that the advice received was that the life insurance would be paid through the 'director loan accounts'.[285]

305 Mr Formby under cross‑examination said that those documents do not record his agreement to that course. However, he then accepted that although he did not recall agreeing to it, the minutes record such advice. He accepted that he followed advice when he received it. He also said that he 'switched off' when it came to matters such as insurance.[286]

306 The documents support a finding that Habitat obtained advice that the insurance payments should be added to the loan accounts and the board accepted and acted upon that advice. Accordingly, the liability was properly recorded by Ms Bradford against the loan accounts.

307 As to the third category, at trial Mr Formby conceded that some payments were personal or to be reimbursed by him. He accepted he used a car after he resigned. Habitat made payments with respect to that car. This included payments for insurance for the car. I find that those amounts were incurred on Mr Formby's behalf, but the extent of his liability to repay the car payments may be affected by the date of termination of his employment, a matter dealt with further below.[287] Mr Formby did not concede he was liable for an entertainment expense in the sum of $995.28. Ms Bradford gave evidence that following a fringe benefits tax review, she considered those entertainment expenses and determined that they were personal.[288] Whilst I do not doubt Ms Bradford's expertise, it has not been possible to assess her decision absent identification of the expenses. The prima facie standing of the record of the debt having been challenged, I consider that expense has not been established as personal.

308 I find that benefits were received by Mr Formby and debited to the loan account in accordance with a practice that had been implemented over a period of years by Ms Bradford and Mr Formby.

309 The evidence of Mr Pritchard and Ms Bradford was consistent in that Ms Bradford and Mr Formby would discuss between themselves the payment of personal expenses.[289] Apart from where the directors signed off on each other's credit cards, Mr Pritchard was not involved in the mechanics of payment.[290] There was an informal arrangement that such payments were addressed and dealt with at meetings. Mr Formby did not disagree.[291] Mr Formby accepted that personal expenses were sometimes met by reductions from his salary.[292]

310 The Constitution of Habitat permits it to make advances.

311 The relevant provisions of the Constitution are as follows:

18.6 For the purposes of Division 974 of the Tax Act, upon a person becoming a Shareholder, that person and the Company shall be deemed to have executed a document substantially in the form of the document set out in the Company Loans Schedule together with such necessary alternations as may be required to correctly reflect each person's relevant circumstances, such document confirming:

(a) that at all times since that person became a Shareholder, it has been bound by; and

(b) that person's undertaking to comply with;

the Company Loans Schedule. An original of the document shall be signed by the relevant parties as soon as practicable. Such document shall be irrevocable until such time as the person ceases to be a Shareholder.

312 Relevant extracts of the Company Loans Schedule are as follows:

COMPANY LOANS SCHEDULE

Contingent Loan Agreement between the Company and every shareholder, director, company secretary and public officer.

This Schedule sets out the terms and conditions which apply to an Advance made by either a Shareholder to the Company, or by the Company to a Shareholder or Associate of a Shareholder.

'Advance' means any amount to be provided or paid by the Company to the Recipient or at the direction of the Recipient or paid to a third party on behalf of the Recipient in accordance with Clause 2;

'Associate' has the same meaning as in section 318 of the Tax Act 1936;

'Principal Sum' means the amount specified in Item 2 or such other amount as the parties may agree to in writing from time to time;

The Company has agreed to advance funds to the Recipient and pay monies to third parties on behalf of the Recipient, after the Commencement Date, subject always to the aggregate Advances not exceeding the Principal Sum. For the purposes of Clause 3.1, upon each Advance being made, the Company will record in its books, the date of the Advance, the amount of the Advance and the Repayment Date.

The Recipient may at any time and from time to time on or before the Final Drawdown Date request that an Advance be provided to, or at the direction of, the Recipient.

Subject to the provisions of Clause 2.3, each Advance will be provided by the Company to the Recipient in cash, by cheque or other negotiable instrument or otherwise as the Recipient may direct.

All Advances are to bear interest at the Applicable Rate, calculated daily on the basis of the actual number of days in that Financial Year and the actual number of days elapsed from and including the date on which the Advance was made and the day on which the Advance was repaid. Interest due by a Recipient to the Company is to be paid on or before 30 June of each year of the Term.

Subject to the provisions of this Deed requiring earlier payment, the Recipient hereby covenants with the Company to repay to the Company each Advance made to the Recipient (and interest calculated at the Applicable Rate) and all monies comprising the Recipient's Debt on or before the Repayment Date.

Information and Payment

3.1 Written Notice

As from 30 June 1998, for each succeeding twelve month period of the Term, on the date three business days from the 30 June, the Company will provide the Recipient with a notice setting out the amount of each Advance made between 1 July to the date of the notice ('the Period'), the date of the Advance, the rate of interest payable in respect to each Advance and the amount outstanding from time to time of any earlier Advances in terms similar to the notice set out in Schedule 2.

(c) the Recipient has obtained all necessary consents and complied with all internal procedures in relation to the execution and performance of this Deed.

7.1 Company's right to demand payment of Recipient's Debt upon Event of Default

Following the happening of any Event of Default the Recipient must if the Company (in its absolute discretion and at any time irrespective of delay) so demands immediately pay the Company the whole of the Recipient's Debt.

The Recipient is not entitled to any notice of any such demand or any period within which to pay under any such demand.

(a) the Recipient fails to repay when payable any Recipient's Debt or Advance or any other money which the Recipient is at any time liable to pay the Company, including without limitation monies due pursuant to Clause 4.1;

11.3 Company's statement of Recipient's Debt prima facie evidence

A statement in writing by the Company setting out the Recipient's Debt or any component parts shall be prima facie evidence of those amounts.

Unless expressly waived in writing by the Company any omission, delay or waiver by the Company does not affect the obligations of the Recipient or the rights of the Company under this Deed.

313 Schedule 1 to the Company Loans Schedule provides:

(a) any Advance which is repaid by the Recipient to the Company prior to 30 June of the Financial Year in which the Advance was made will not bear interest;

(b) if an Advance is not repaid prior to 30 June of the Financial Year in which the Advance was made, the amount of the Advance not repaid shall bear interest at the minimum rate specified in the Section 109N of Division 7A.

Item 2 Principal Sum (Clause 1.1)

$

Item 3 Repayment Date (Clause 1.1)

The date seven years from the date that the relevant Advance was made by the company to the Recipient, such date to be the date recorded by the Company in its books in accordance with Clause 2.1.

314 The Constitution has effect as a contract between the company and each member and also between the company and each director.[293]

315 It is not in issue that the parties did not execute a document substantially in the form of the document set out in the Company Loans Schedule. They did not execute a formal loan agreement at all. Habitat contends that it makes no difference: the shareholders are bound by the terms of the Company Loans Schedule in accordance with cl 18.6 of the Company Loans Schedule.

(a) there is no loan agreement between the parties;

(b) the fact that no Principal Sum is identified in Schedule 1 to the Company Loans Schedule makes its terms unenforceable. The Principal Sum is the 'price' and as the price is unstated, an essential term is omitted; and

(c) Ms Formby did not participate in any way and did not agree to any loan.

317 I have already determined that the shareholder distributions were loans. The terms of the Constitution are consistent with that finding. The loans were recorded by way of the internal loan accounts maintained by Ms Bradford.

318 I find that the terms of the loans are set out in the Company Loans Schedule. It is clear from cl 18.6 of the Company Loans Schedule that each of Maliza and Mr and Ms Formby, as shareholders of Habitat, are deemed to have executed a loan agreement in those terms. It is not to the point that they have not executed one. The terms are clearly intended to apply even in the absence of an executed agreement. So much is apparent from the deeming provision. Whilst one is to be executed 'as soon as practicable', a delay in execution does not deny the interim and continuing enforceability of the agreement deemed to have been executed.[294]

319 The absence of an identified Principal Sum does not render the Company Loans Schedule agreement void. It is not a 'price'. The agreement is not a one‑off lump sum advance with interest. Rather, it permits Advances from time to time to the shareholders or 'Recipient'.

320 'Recipient' is not a defined term but I accept Habitat's submission that taking into account the heading to the Company Loans Schedule and when read with cl 2.1, 'Recipient' extends to every shareholder, director, company secretary and public officer. Taking into account the first paragraph of the Company Loans Schedule, I consider it also extends to an Associate of a shareholder (as defined).[295]

321 Advances are made to the Recipient or at its direction (cl 2.2). The Recipient accordingly has knowledge of the Advances. If a Principal Sum has been agreed, the sum of the Advances cannot exceed that Principal Sum (cl 2.1). However, the absence of a Principal Sum does not render the Company Loans Schedule agreement unenforceable. If one is agreed, then it operates as a cap on Advances. It is open to the parties to agree a Principal Sum from time to time as they may require (definition of Principal Sum). The terms of the Company Loans Schedule agreement operate effectively without it. Mr and Ms Formby's counsel submitted that there could be an exposure on the part of a party who has received advances to pay 'many, many millions of dollars' if a Principal Sum is not defined.[296] This ignores the process by which Advances are made. The Recipient is not compelled to request an Advance. It may do so under cl 2.2. The Recipient can demand the manner of payment (cl 2.4).

322 The second defendants also refer to the fact that Habitat did not comply with the notice provision in cl 3.1. They do not say what flows from such failure. They do not allege repudiation. In my view, such non‑compliance does not affect the enforceability of the loan agreement. Further, cl 11.4 of the Company Loans Schedule agreement provides that any omission by the Company does not affect the obligations of the Recipient.

323 Ms Formby's evidence was that she left all matters to do with the Formby Family Trust to Mr Formby, including matters relating to how much would be paid to Mr Formby or the trust.[297] She recalled she sometimes signed documents to do with the business. She said she never requested any payments on behalf of the trust. [298] She was in my view a truthful witness, but she took no active role in Mr Formby's business, and appears to have undertaken no inquiries in her capacity as trustee. Regardless, as a shareholder she is also bound by the terms of the Constitution and, relevantly, the deemed execution provision. Therefore, she is bound by the terms of the Company Loans Schedule agreement. The distributions were paid to the Formby Family Trust bank account.[299] Habitat was entitled by cl 6.1(c) to assume that the shareholders acted with appropriate authority in requesting Advances. Both Mr and Ms Formby warranted by cl 6.1(c) of the Company Loans Schedule agreement that they had received all necessary consents and complied with all internal procedures in relation to, relevantly, the performance of the agreement. That would include internal procedures relevant to requesting Advances. Even accepting that Ms Formby took no active role as a shareholder as trustee of the Formby Family Trust, she is bound by the terms of the Company Loans Schedule agreement.

324 In March 2016, Habitat sought advice from tax specialist accounting firm Cooper Partners as to the shareholder distributions and loans and also as to steps to be taken with respect to minimum payment obligations to protect the position under div 7A of the Income Tax Assessment Act 1936 (Cth).[300] The advice extended to the position of both Maliza and the second defendants as shareholders. The advice proceeded on the basis that the terms of the Company Loans Schedule applied.

325 In summary, that advice insofar as it concerns recovery of the shareholder loans was that:

(a) the interest payment on the 2014 shareholder loans was due to be paid by 30 June 2015;

(b) the loans were therefore in default;

(c) the shareholders should be given an opportunity to rectify that default;

(d) further payments of interest would be required by 30 June 2016.

326 That advice reflects the provisions of cl 2.5 and item 1 of sch 1 to the Company Loans Schedule. Habitat acted in accordance with that advice and on 24 March 2016 issued a letter to Mr Formby, referring to the Constitution providing information as to (amongst other things) the balances of the shareholder loans for the financial years ending 2014 and 2015, and noting that interest on the 2014 loan in the sum of $7,171 was payable by 30 June 2015, with interest on the 2015 loans in the sum of $6,960 payable by 30 June 2016. The letter required payment of the sum of $7,171 within seven days.[301]

327 Mr Formby did not respond to the letter. There was no challenge to the calculation of that interest.[302] (Nor was there any challenge to the calculations of interest accrued from 1 July 2015 to 30 June 2016 on advances made in the financial years ended 30 June 2014 and 30 June 2015 and I accept those calculations as accurate).[303]

328 By letter dated 14 April 2016, Habitat demanded repayment of the whole of the loan balances.[304]

329 The second defendants contend that it was open to Habitat to apply Mr Formby's salary entitlements against the interest obligation rather than against personal expenses of Mr Formby, and had it done so there would be no default.[305] They contend that even assuming they were bound by the Company Loans Schedule agreement, they remained liable to repay the Advances but only by the Repayment Date, being seven years after the date of the respective Advances.

330 There is no evidence Mr Formby asked Ms Bradford to apply his salary against interest.

331 To the extent salary was applied against liabilities of Mr Formby, it was applied against personal expenses. Some $16,095 was deducted from Mr Formby's salary between November 2015 and January 2016 and applied to offset personal expenses. Mr Formby was informed of the costs of $16,095 to be reimbursed by email with an attached spreadsheet from Ms Bradford on 1 December 2015.[306] Mr Formby's evidence was that expenses were personal and had been paid back (by deductions from salary in November and December 2015 and January 2016) and that he had agreed to that course.[307]

332 An additional $19,163 was applied against personal expenses when Mr Formby left Habitat. Mr Formby was informed by a letter from Habitat's lawyers of 18 February 2016 that it was proposed to meet that indebtedness by offset against his payout.[308] That course was consistent with the prior treatment of personal expenses. Whilst there was some dispute about the level of the payout, Mr Formby did not inform Habitat of any objection to the offset.

333 Again, Mr Formby did not suggest that the moneys should be applied against the interest on the shareholder loan (or any other indebtedness).

334 In my view, it was open to Habitat to appropriate the payments from Mr Formby's salary against his personal liabilities rather than the Company Loans Schedule agreement interest liability. Habitat's election to do so was communicated to Mr Formby. That course was also consistent with the manner in which Habitat had previously dealt with personal expenses and with Mr Formby's knowledge.[309]

335 Accordingly, there was an event of default on the part of the second defendants when they failed to make the interest payment. By cl 7.1 Habitat was then entitled to call up the whole of the debt.

336 The fact that some of the debits to the shareholder loan account related to expenses incurred by Mr Formby does not affect their treatment. Such loans, even to Mr Formby, were still subject to the Company Loans Schedule terms. As a director, he is bound by the Constitution as a statutory contract. He is also liable on the basis that he is a director Recipient. Arguably, he is also an Associate of a trustee as that term is defined in s 318(3) of the Income Tax Assessment Act 1936.[310]

337 If I am wrong as to the application of the Company Loans Schedule, then in any event, the loans are repayable by the second defendants. The loans are repayable at any time in accordance with the principles in Young v Queensland Trustee and as summarised in Central City Pty Ltd v Montevento Holdings Pty Ltd.[311]

338 If I am wrong as to the liability of the second defendants to pay all or any of the sums claimed, then Habitat says that to the extent the second defendants are not liable for any part of the amount claimed by Habitat, then Mr Formby remains liable for it on the basis that the 'distributions' paid to him and moneys paid to third parties to his benefit and at his request were by way of loan.[312] I would accept that argument. The loans would be repayable again in accordance with the principles in Young v Queensland Trustee.

339 In the further alternative, if I am wrong as to the liability of the second defendants, Habitat says that as to payments made to meet Habitat's liability on a Westpac credit card for items for Mr Formby's personal use and benefit, liabilities to suppliers for goods or services to his own use and benefit and in respect of the car lease payments, then Habitat paid for them on Mr Formby's behalf and at his request and they are liable to be repaid.[313] Again, I would accept that argument. They were paid on Mr Formby's behalf in accordance with a practice which he had endorsed with Ms Bradford.[314]

**PART C

Mr Formby's counterclaim for payment of salary and superannuation**

340 By his counterclaim, Mr Formby asserts that he has been underpaid by Habitat and claims the balance salary and benefits he says are due to him.

342 First, there is a generalised claim that he was underpaid for the period up to and including 15 April 2015. Habitat denies this.

343 Second, he says that he was paid a reduced salary from April 2015 and he did not agree to that salary reduction. He says he should have been paid at his previous rate. Habitat says his salary was varied by agreement.

344 Third, he says he resigned and is entitled to payment for the three month term of his notice period. Habitat says he was dismissed and is entitled to no further termination payments than those already paid to him.

345 Mr Formby relies on calculating the amount he was to be paid pursuant to the ESA and deducting from it certain sums Habitat pleads that it paid to him. He relies on the ESA which provides for the payment of a salary of $200,000 pa plus superannuation at the Superannuation Guarantee Charge (SGC) rate, with salary to be paid monthly in arrears.[315]

346 Habitat accepts that the applicable SGC rate was 9.25% for the period 22 February 2013 to 30 June 2014 and 9.5% for the period 1 July 2014 to 16 May 2016.

347 Mr Formby uses a simple arithmetic calculation (daily rate of salary and superannuation multiplied by days employed) to claim that Habitat had underpaid him at unspecified times throughout that period. Mr Formby's counsel submitted that there was a 'timing issue' that justified not being able to properly specify any particular period of underpayment or the amount of underpayment in that period or periods.[316]

348 However, between February 2013 and April 2015, Mr Formby was the managing director of Habitat and was overseeing Ms Bradford in her duties, which included paying and recording employees' salaries. There was no evidence that he pointed out to Ms Bradford at any time during that period that he was underpaid. Further, there is documentary evidence that indicates Mr Formby was paid his agreed salary entitlements.

349 According to Habitat, the evidence that militates against there having been any underpayment during that period is as follows:

(a) Mr Formby was paid a salary of $200,000 pa plus superannuation from February 2012,[317] and the salary in the ESA was a continuation of the existing arrangement;[318]

(b) Mr Formby's tax return for the period between 1 July 2012 and 30 June 2013 shows that his income from Habitat was $233,333 (exclusive of superannuation);[319]

(c) Mr Formby's tax return for the period between 1 July 2013 and 30 June 2014 shows that his income from Habitat was $183,333 (exclusive of superannuation).[320] That sum is about 11 months of a salary of $200,000 pa;

(d) Ms Bradford produced a payroll employee summary spreadsheet. It indicates that Mr Formby was properly paid for each of those periods (after taking into account the timing of the payments of salary);[321] and

(e) Mr Formby's tax return for the period between 1 July 2014 and 30 June 2015 shows that his income from Habitat was $166,666 (exclusive of superannuation).[322] He was paid for the period of 9 months in that financial year, because payment for the last three months was made in the next financial year. [323] The sum of $166,666 represents a full 10 months salary at $200,000 pa.

350 Taking into account the contemporary records as to the payments to Mr Formby, his tax returns and that Ms Bradford was challenged on neither the manner in which she paid Mr Formby during this period nor on the spreadsheet, I accept Habitat's position and Ms Bradford's evidence to the effect that Mr Formby was paid his salary entitlements during the period February 2013 to April 2015. Mr Formby has not met his onus of establishing otherwise.

351 I prefer that document‑based evidence to the calculation conducted on Mr Formby's behalf.

352 Mr Formby relies on cl 22 of the ESA in contending that there was no modification to Mr Formby's salary. He says under the ESA a variation needed to be in writing and there is no written variation.

353 Clause 22 of the ESA is a boiler plate variation clause:

No modification or alteration of the terms of this Agreement shall be binding unless made in writing dated subsequent to the date of this Agreement and duly executed by the parties.

The Executive's Salary will be reviewed annually by the Company in accordance with the Company's policy for the annual review of salaries.

355 There is no evidence of any formal review policy.

356 Habitat's position is that in April 2015 Mr Pritchard sat down with Mr Formby as the company was not at that point travelling well financially. Mr Formby said to him that they needed to make changes: to reduce costs, to reduce Mr Pritchard's remuneration, to stop paying Mr Pritchard's expenses. Mr Pritchard said under cross examination:[324]

I said, well, hang on a second. We need to sit down and work through these situations. So one of the alternatives that was discussed was dismissed. And this was the second of two alternatives that were discussed where it was a fair and equitable way of honouring the original agreement that there was a $150,000 differential between what I got paid and what he got paid, recognising that he was an executive in the business and I wasn't. So he went from 200 and me at 50 to him being at 150. And he got 150,000 in his last 12 months. I got zero. And that's the arrangement we came to ...It wasn't something that we liked. Neither of us liked it. But it was a necessary outcome of the circumstances that were prevailing over the business at that point in time.

357 At that point, neither of the Formby or Pritchard interests were receiving shareholder distributions but Mr Formby was receiving his salary.[325]

358 Following the meeting, Mr Pritchard sent an email dated 7 April 2015 to Ms Bradford (copied to Mr Formby) asking her to draft a letter for each director to sign confirming the arrangements.[326]

(a) existing remuneration for both Mr Pritchard and Mr Formby was to be adjusted to nil;

(b) shareholder distributions of $25,000 would be paid each month;

(c) Mr Formby would receive a salary by way of a bonus based on a percentage of distributions made and to be paid quarterly to a maximum of $150,000 (net of SGC) and if the quarterly amount could not be paid in a particular quarter, it would be topped up in a subsequent quarter.

360 Mr Formby did not reply. Ms Bradford prepared letters to each of Mr Pritchard and Mr Formby said to reflect the agreement. The letter to Mr Formby provided, relevantly that the bonus would be to a maximum value of $150,000 inclusive of superannuation.[327] Mr Pritchard's salary was accordingly reduced to nil.

361 Mr Formby told Ms Bradford he would not sign his letter. He did not say that to Mr Pritchard at that time.[328] Ms Bradford said she probably told Mr Pritchard that Mr Formby said he would not sign the letter.[329]

362 Ms Bradford implemented payments in accordance with the letters.

363 On 14 June 2015, Mr Formby emailed Ms Bradford, (replying to the 7 April 2015 email) and asking what payments Habitat required for his bonus to be paid at the end of June. Ms Bradford replied, noting relevantly that the payment then would be $18,750 less superannuation and tax. [330]

364 On 29 July 2015, Mr Formby emailed Mr Pritchard noting, amongst other things, that he was receiving a current wage of $18,750 minus superannuation and tax.[331]

365 On 20 October 2015, Mr Formby emailed Mr Pritchard:[332]

I have been on a wage of approx. 68k since April. Happy to have done this to help us through the tough times.

We will be over budget for profits in the next 3 months with what we currently have on so I feel it's time to correct the situation.

Proposal is to back pay to July with wage of 180k. New wage moving forward, 180k. This is under what I used to be on.

Please let me know if in agreeance.

366 Mr Pritchard replied on 22 October 2015, referring to a meeting with Mr Formby that day and saying, in effect, that shareholder distributions would be increasing to $50,000 per month,[333] the December quarterly bonus payment to Mr Formby would be paid in full and a previous shortfall in quarterly bonus payments would be topped up subject to cash‑flow levels.

Thanks Geoff,

If it's ok, I would just like my wage monthly. This will assist me with my cash flow as I have just moved house and have more expenses now.

368 Mr Pritchard replied to the effect that there was no problem with that, but referred to the $150,000 'agreed in March' and said that any increase above that had to be considered in the context of the size and scale of Habitat, and an increase in salary would impact profit.[335]

369 Mr Pritchard and Ms Bradford then ascertained what sales figures would be required for Mr Formby to be paid monthly.

370 Mr Formby was not paid the anticipated $37,500 bonus in each relevant quarter.

371 On 2 December 2015, Ms Bradford answered a query from Mr Formby and noted that his salary would be $37,500 for the quarter inclusive of superannuation.[336] Mr Pritchard (by email copied to Mr Formby) asked Ms Bradford to make a top up payment to Mr Formby of $18,750 for one quarter.[337]

372 Mr Formby replied the same day, saying:[338]

This is not in accordance with what I have asked for. I was being underpaid for working here for 2 quarters. I am now on 150k wage plus super as agreed, and I have been asked to be back paid the 2 quarters I was on 75k.

373 On 2 December 2015, Mr Pritchard replied, saying he was happy to make the commitment to pay the shortfall for the two quarters as soon as it could reasonably be paid in conjunction with payment of distributions. He also said:[339]

I'm also ok with continuing your remuneration at $12,500 per month ($150,000 per annum) while shareholder distributions remain at $50K per month...

374 Mr Formby replied on 3 December 2015 and suggested that they split the payment over four payments monthly so that Habitat was not under financial pressure.[340]

375 Mr Pritchard replied, confirming 'so there is no misunderstanding here' that, insofar as the salary aspect was concerned, the shortfall for two quarters ($37,500) would be paid to Mr Formby by four monthly remuneration payments of $9,375. He asked Mr Formby when he wanted payments implemented and Mr Formby replied to the effect that it should be immediate and then aligned with monthly payments.[341]

376 Mr Formby received a bundle of payslips during the period April 2015 to January 2016 which all indicate that superannuation was deducted from the salary equivalent of $150,000.[342]

377 Habitat submits that the chain of correspondence reveals an acceptance by Mr Formby of the arrangement whereby he would receive a salary of $150,000 (inclusive of superannuation and in addition to shareholder distributions) from 1 April 2015 onwards.

378 Mr Formby contended that Mr Pritchard came to him insisting on the change. There is a conflict in evidence as to who precipitated the conversation but I do not consider it affects the outcome. Mr Formby denied under cross-examination that he accepted a reduction in salary to $150,000. He said that at the time he considered it a cost cutting measure but not a variation. His position on the various communications with Mr Pritchard was that they did not amount to an acceptance of a variation.[343]

379 To the extent of any conflict between Mr Formby's evidence and the documentary evidence, I prefer to rely on the contemporaneous communications in determining their legal consequence. To the extent Mr Formby denies there was any variation, I do not accept that was the legal position.

380 Whilst he did not sign the letter prepared by Ms Bradford, and may well have been disappointed by the need to reduce his salary, at least by October 2015 and confirmed in December 2015, any doubt as to the terms of his salary was addressed with Mr Formby and it was clear that the parties were proceeding on an agreed basis. The 22 October 2015 email and the 2 December 2015 evidence such agreement. There is only the one occasion where Mr Formby refers to the $150,000 salary 'plus super'. That is inconsistent with the other documentary evidence referred to and inconsistent with the pay slips which were received by Mr Formby.

381 To the extent there was a requirement that a variation be in writing, then I am satisfied that there are sufficient written communications to effect the variation.[344] More to the point, it was always anticipated by the ESA that the salary could be reviewed and the parties by their process of communications in fact reviewed the salaries of both Mr Pritchard and Mr Formby.

382 Accordingly, the issue of termination payments is to be addressed on the basis that from 1 April 2015 Mr Formby's salary was $150,000 including the SGC.

383 I note that Mr Formby claimed during his evidence that the ESA should have referred to 30 days annual leave, rather than 20. There was no claim for rectification of the ESA and the entitlement is therefore in accordance with the written terms of the ESA.

384 On 16 February 2016, Mr Formby tendered his resignation.[345] Under cl 14.4(b) of the ESA, he was entitled to terminate his employment on three months written notice.

385 On 18 February 2016, Habitat, by its then solicitors wrote to Mr Formby terminating his employment.[346] That letter provided that:

We ... refer to your letter addressed to Mr Geoff Pritchard, Mr Glenn Bergsma and Mr Derek Gerrard dated 17 February 2016 whereby you notified them of your 'resignation from [Habitat]'. You also advised that you will work until 15 May 2016, as per the ESA.

However, notwithstanding your resignation, we are instructed that the Company has decided not to continue with your employment and in accordance with clause 14.1 (b) of the ESA, we hereby give notice, for and on behalf for the Company, of the termination of your employment, effective immediately. Accordingly, you will not be required to attend the Company's office, do any work for or otherwise represent the Company on and from receipt of this letter.

Your ESA has been terminated as a result of various instances of serious misconduct and inadequate performance concerns that have had significant repercussions on the financial performance of the Company. Of particular concern to the Company is that pursuant to clause 5.1 of your ESA, you are required to faithfully serve the Company and use your best endeavours to promote the interest and welfare of the Company. In this regard, your recent actions represent a serious breach of trust and faith where you have deliberately acted against the interests and welfare of both the Company and the major shareholder of the Company, Maliza Nominees Pty Ltd (Maliza). Examples of such behaviour include, but are not limited to:

(a) competing with the Company and accepting engagements and payments outside of those authorised and agreed by the Company;

(b) threatening to establish a competing business to the Company, should Maliza not transfer its shareholding to you for nil consideration; and

(c) making false and damaging representations about the Chairman of the Company to staff and customers of the Company.

We are also instructed that a specific recent example of such behaviour is the phone call made by you to Mr Brendan Hodge, who you were aware was being considered for the General Manager role at the Company, and your attempt to sabotage his decision to move forward with the appointment process, cast aspersions on the board and specifically the Chairman, Mr Geoff Pritchard and Financial Controller, Mrs Libby Bradford and your damaging comments about the Company generally.

Pursuant to clause 14.1(b) of the ESA, the Company is required to give you one (1) month's written notice of your termination. However, pursuant to clause 14.2, the Company may dispose with the written notice period and immediately terminate your employment by making a payment to you equal to your 'Salary' payable for the relevant period of notice.

...

Accordingly, the Company intends to rely on clause 14.2 and dispose with the written notice period and pay you the required salary for the notice period.

386 Ms Bradford then took steps to ascertain all amounts owing to and from Mr Formby, taking into account an entitlement to one month's notice as set out in the letter.

387 After Mr Formby left Habitat, Mr Pritchard became aware that Mr Formby had deleted all of his emails before departing Habitat's office.[347] Mr Formby admitted under cross‑examination that he had deleted the emails.[348] Habitat utilised a specialist to recover those emails.[349] After their recovery, Mr Pritchard found information which he did not previously have and which Habitat now relies upon in support of a right to terminate Mr Formby's employment summarily without notice.

388 Habitat distinguishes the conduct relied upon solely with respect to summary dismissal and that also relied upon as gross misconduct. [350]

389 It is first necessary to consider the relevant terms of the ESA as to termination.

The Company may at its sole discretion terminate the Employment in the following manner and in accordance with the NES under the Fair Work Act:

(b) by giving one (1) month's written notice if at any time the Executive:

(i) commits any serious or persistent breach of any of the provisions contained in this Agreement and the breach is not remedied within 14 days of the receipt of written notice from the Company to the Executive to do so;

(ii) in the reasonable opinion of the Board, is absent in, or demonstrates incompetence with regard to the performance of the Executive's duties under this Agreement, or is neglectful of any duties under this Agreement or otherwise does not perform all duties under this Agreement in a satisfactory manner, provided that the Executive:

(A) has been counselled on at least three separate occasions of the specific matters complained of by the Board; and

(B) after each such occasion has been provided with a reasonable opportunity of at least a month to remedy the specific matters complained of by the Board;

(iii) the Executive commits or becomes guilty of any Gross Misconduct; or

(iv) refuses or neglects to comply with any lawful reasonable direction or order given to the Executive by the Company which the Executive, after receipt of prior notice, has failed to rectify to the reasonable satisfaction of the Company within 21 business days of receipt of that notice; or

(c) summarily without notice:

(i) if at any time the Executive is convicted of any major criminal offence...; or

(ii) in accordance with clauses 18.3 or 19.2.

The Company may at its sole discretion dispose with the written notice period that must be given to the Executive under clauses 14.1(a) and 14.1(b) and immediately terminate the Employment by making a payment to the Executive equal to the Salary payable for the relevant period of notice.

(a) The Company may at its sole discretion terminate the Employment by giving three (3) months' written notice to the Executive and, at the end of that notice period, making payment to the Executive equal to the Salary payable over a three (3) month period.

18 INTERNET

...

18.3 Termination if breach

If the Company considers that a material breach of its policy concerning the use and access to the internet has occurred, the Company has the right to terminate this Agreement without notice.

...

...

19.2 Breaches of email policy

If the Executive places information on the Company's electronic mail which:

(a) is discriminatory in nature;

(b) if communicated to another person, could constitute sexual harassment;

(c) is defamatory or libellous;

(d) contains disparaging remarks about the Company, its consultants, competitors, clients or any other person with whom the Company has any dealings;

(e) without having obtained the prior written consent of the Company, contains Confidential Information or intellectual property of the Company: or

(f) is in breach of any provisions of this Agreement or the Executive's duties as an employee of the Company,

the Company has the right to terminate this Agreement without notice. For the avoidance of doubt where a third party sends any offending electronic mail to the Executive, the Executive is not considered to have placed that electronic mail on the Internet unless that party sends such electronic mail onto another party.

391 Clause 14.1(b) refers to Gross Misconduct. That term is defined in cl 1.1:

Gross Misconduct means any act, neglect or default or conduct committed, including without limitation, neglecting to properly discharge the Executive's duties under this Agreement with the direct or indirect effect of causing any damage or discredit to the Company's business which the Executive, after receipt of proper notice, has failed to rectify to the reasonable satisfaction of the Company within 7 days.

392 Habitat does not seek to rely on termination in accordance with common law rights, although it points to examples of conduct that comprise breaches of contractual obligations to act in due faith and in the faithful discharge of duties to an employer. Habitat pleads and relies in its submissions on cl 14 of the ESA.[351] In any event, the detailed grounds and steps set out by cl 14 are such that properly construed, common law rights with respect to dismissal are intended to be displaced.[352]

393 By cl 14.1(c), the circumstances where the right to terminate summarily without notice may be exercised are strictly limited: where there has been a criminal offence, a breach of the internet policy or a breach of the email policy.

394 On the facts, Habitat could only terminate Mr Formby's employment summarily in accordance with cl 19.2 (breach of email policy).

395 Insofar as Habitat was not aware of such breaches at the time, it relies upon Shepherd v Felt and Textiles of Australia Ltd.[353] It says the breaches were uncovered when Mr Pritchard obtained access to emails after Mr Formby left.

396 Dismissal without notice is a significant step and care must be taken to ensure that the appropriate evidentiary burden is met.

397 Habitat relies on cl 19.2(e) and (f). First, it relies on emails passing between Mr Formby and three entities, being Westpac, GMO Valuations and NXT Enterprises, and says they contain Confidential Information, within the meaning of cl 19.2(e).[354]

398 Second, Habitat relies on the same emails passing between Mr Formby and Matt Turnbull of Westpac, and also on emails that passed between Mr Formby and Daniel Bird, and says they comprised information in breach of Mr Formby's duties as an employee of Habitat, within the meaning of cl 19.2(f).

399 I infer from Mr Pritchard's discovery of the emails after termination that at no point did Mr Formby obtain Habitat's consent to the alleged emailing of the information.

400 In August 2015, Mr Formby contacted Mr Turnbull of Westpac to set up an overdraft account for Hawk Crest.

401 Habitat relies on an email sent by Mr Formby to Troy Wood (apparently a family member) dated 24 November 2015 as indicating Habitat confidential information had been provided to Westpac.[355] Mr Formby writes:

Troy Westpac has asked for a copy of previous tax return ... to set up the temporary overdraw against Hawk Crest. I have provided mine and Habitat's also.

402 Habitat also relies on an email sent by Mr Turnbull to Mr Formby dated 15 December 2015.[356] Mr Turnbull writes:

Just following up on the info sent through already. All good with the financials and tax returns for Habitat.

403 Habitat's financials and tax returns are not attached to either email.

404 Mr Formby denied that he sent Mr Turnbull Habitat's financial information. Mr Formby said that Mr Turnbull would have already had Habitat's financial information because the bank had been Habitat's bank for probably seven years. Mr Formby accepted that, according to the email dated 15 December 2015, he had provided Westpac with Habitat's up‑to‑date financials and that it was for the purpose of a Hawk Crest overdraft, but he did not recall sending them.[357]

405 Even assuming they were provided, there is no evidence that Mr Formby sent Habitat's financials and tax returns to Mr Turnbull using Habitat's electronic mail facilities.

406 Mr Formby retained a firm referred to as GMO Valuations (GMO) to provide a valuation of the Habitat business for the purpose of his family court proceedings.

407 Habitat relies on GMO's valuation for Habitat dated 8 February 2016. The valuation states that it was prepared from records and information supplied by Habitat.[358] It lists various financial information about Habitat and it can be assumed that some is Confidential Information. Mr Formby accepts that he provided GMO with financial information to obtain a valuation of Habitat for his divorce proceedings.[359] However, there is no evidence it was provided to GMO using Habitat's email.

408 In December 2015, Mr Formby corresponded with an entity called NXT Enterprises about precedent contracts. Habitat relies on an email sent by Mr Formby to NXT Enterprises dated 9 December 2015. Mr Formby says 'The AS4906 contract between WesTrac and [Habitat] is a full version of the contract'.[360] Mr Formby accepts that he sent this email.[361] The contract does not appear to have been attached to the email. The email also refers to another contract which has modifications from Freehills (lawyers). Mr Formby states in his email that he cannot send it due to its size. I accept that a Habitat contract may well contain confidential information. Mr Formby also accepted that he showed the contracts to NXT.[362] However, it is not established that the Habitat email server was used to email such contracts.

Communications Formby to Westpac and Formby to Bird

409 The relevant emails between Mr Formby and Westpac (Mr Turnbull) are referred to above. As to Mr Bird, in September 2015 Mr Formby proposed to undertake a project with Mr Bird outside Habitat. Mr Bird was employed elsewhere. Mr Formby sent three emails to Mr Bird using the Habitat email address.[363]

410 Those emails do not contain relevant information about Habitat. Rather, they comprise communications between Mr Formby and Mr Bird about the corporate entities they would use for the proposed project, how profit share would work, how expenses and insurance would be dealt with and what agreements they needed to put in place.

(a) in October 2014, Habitat had provided a proposal for architectural and construction services for the Mandurah apartments (the Resi proposal referred to above);

(b) Habitat provided architectural design and documentation services and issued an invoice to the owner;[364]

(c) in December 2014, Mr Formby's company, FBY Global, issued an invoice to Habitat for architectural services for the project ($16,500);[365]

(d) Habitat did not pursue the construction of the apartments. Construction was not part of the core focus of Habitat at that time and Mr Pritchard was not sure Habitat would be able to do it;[366] and

(e) in his emails with Mr Turnbull of Westpac, Mr Formby said he had a signed construction contract for that job in the name of Hawk Crest.[367] Mr Formby accepted Hawk Crest had entered into a contract at that time. However, Hawk Crest was not a registered builder.[368] It appears a contract was entered into for the job between Mr Formby as contractor and the owner in December 2015.[369]

412 The communications with Mr Bird appear to relate to them undertaking the construction and project management for the Mandurah apartments.

413 The complaint then is that by those emails Mr Formby placed information on Habitat's email which is in breach of his duties to serve Habitat and use his best endeavours to promote its interests and welfare and his duty to not compete with Habitat.

414 The argument relies on cl 19.2(f). It gives rise to a construction question.

415 The question is whether cl 19.2(f) is to be read narrowly such that it is the information that must be in breach of duty or whether it is to be read more broadly such that it is the conduct in placing information on the company email that comprises the breach.

416 If the narrower approach is correct, then I do not consider the relevant emails comprise 'information which is in breach of duty'. It is the information itself that must be 'in breach'. The conduct in placing the emails may well evidence a breach of duty by, for example, utilising time which should have been devoted to Habitat or by competing with Habitat, but reliance on such conduct to terminate without notice requires a broader reading of cl 19.2.

417 Habitat was not interested in undertaking the construction for the Mandurah job. None of Mr Formby, Hawk Crest or Mr Bird were competing with Habitat for that job. Habitat's real complaint is that Mr Formby was using time that should have been devoted to Habitat to correspond about that matter and not focussing on Habitat.

418 In my view, such conduct would be caught potentially by cl 19.2(f) only if it is construed to mean that it is the conduct in the placing of the information that is a breach of duty.

419 On a proper reading of the chapeau and each of cl 19.2(a), (b), (c), (d) and (e), the subject matter that the subparagraph refers to is the 'information'. For example, cl 19.2(a) operates as follows:

If the Executive places information on the Company's electronic mail which is discriminatory in nature, the Company has the right to terminate...

420 It is clear that it is the information that must be discriminatory. It does not make sense to suggest it is the conduct in placing the information that must be discriminatory. For each of cl 19.2(b), (c), (d) and (e) the position is the same. The content qualifies the information.

421 The question is whether the clause should be read inconsistently insofar as cl 19.2(f) is concerned. Clause 19.2(f) may not be easy to apply when construed in the same manner as for each of cl 19.2(a) to (e). One could argue that in order to give cl 19.2(f) meaningful operation, it should be read so that the wording of cl 19.2(f) qualifies the placing of the information rather than the information alone.

422 I prefer the view that the narrow approach is correct. The contractual scheme of the ESA informs its construction. Summary termination is a serious step and as noted above, is only open under the ESA in limited circumstances. The other provisions of cl 14 provide a range of steps that can be taken to terminate employment based on the type of conduct and on notice. If cl 19.2(f) were construed in the broader manner there would be serious consequences in that the scope of conduct potentially caught by its operation would be greatly expanded. Any breach of the ESA or breach of duty would potentially be caught as long as the sending of an email was involved. That construction does not sit with the other provisions of cl 14. For example, cl 14.1(b)(i) provides that even for a serious and persistent breach of the ESA there must be notice and an opportunity to remedy before termination. Clause 14.1(b)(iii) provides that even for termination for Gross Misconduct, there must be prior notice or payment in lieu.

423 The narrower view also reflects a consistent operation of cl 19.2. As in the case for each of cl 19.2(a) to (e), cl 19.2(f) qualifies the information itself.

424 Accordingly, for those reasons cl 19.2(f) is to be construed by requiring that the information itself be in breach of duty. I do not consider the emails relied upon sit within the terms of cl 19.2(f). Habitat was not entitled to terminate Mr Formby's employment summarily under cl 19.2(f).

425 Habitat also relies on cl 14.1(b)(iii): that is, that Mr Formby has committed Gross Misconduct as defined. Habitat asserts the following matters comprise Gross Misconduct:

(a) issuing the invoice for architectural work for the Mandurah apartments in the sum of $16,500 through his company FBY Global and causing that invoice to be paid by Habitat;

(b) establishing Hawk Crest in August 2015, arranging for it to enter into the building contract for the Mandurah apartments, using Habitat's resources and working in business hours to seek an overdraft for Habitat, meeting with Westpac, retaining Mr Bird and negotiating with him as proposed site manager, liaising with consultant building surveyors and preparing architectural drawings, seeking financial information and providing it to Westpac to assist in obtaining finance for Hawk Crest;

(c) failing to devote his whole time and attention to the business during normal business hours and taking numerous holidays without authorisation;

(d) making damaging comments to Mr Hodge in an effort to dissuade him from joining Habitat; and

(e) deleting 'his' emails from Habitat records and copying those of Ms Bradford immediately prior to his departure.

426 By its definition, an element of Gross Misconduct is that Habitat was required to provide notice to Mr Formby to rectify the particular default, and there must have been non‑compliance with that notice.

427 Habitat did not issue such notice. As a result, there has been no conduct falling within the definition of Gross Misconduct.

428 Habitat says that most of the facts that found the claim of Gross Misconduct were not known by it at the time of the termination, and so it could not have issued a seven day notice, and that even if it had done so, the result would have been no different.

429 With the exception of the invoice dispute and the allegation about excessive annual leave, I accept that Habitat had no knowledge of the conduct complained of prior to Mr Formby's departure (through Mr Pritchard or Ms Bradford or anyone else identified).

430 In Heugh v Central Petroleum Ltd [No 5], Le Miere J considered a similar notice requirement. The employee's conduct in instigating a private investigation of another employee comprised a serious breach that entitled his employer to terminate the contract if the breach was not remedied within 14 days notice specifying the breach. The employer had not issued a notice prior to termination. The employer contended that it had not known about the misconduct so that it could not have issued the notice, that the employee had failed to disclose his misconduct and should not have the benefit of his breach and that accordingly the notice provision should have no application.

431 That contention was rejected. A duty to cooperate so that parties have the benefit of their contract cannot be imposed in a manner which obliges a party to do something they are not obliged to do. An employee is not obliged to disclose their own breach of contract to the employer. Further, the principle of construction that a contract will be construed so far as possible so as not to permit one party to take advantage of their own wrong yields to the express terms of the contract. His Honour held that the contract expressly provides that the employer could only terminate if there is a failure to remedy after receiving notice. It could not be construed so as to provide that the employer could terminate the employee's employment without giving such notice.[370]

432 His Honour also held that in any event the employer had prior notice of the serious misconduct, and so was treated as having waived any right to terminate for that breach.[371]

433 I respectfully follow Le Miere J's reasoning and in light of the absence of any seven day notice providing the opportunity to rectify the breach, find that there has been no Gross Misconduct and so no valid termination of Mr Formby's employment for Gross Misconduct.

434 However, in case I am wrong in my approach to notice, I will deal with the conduct relied upon by Habitat for the purpose of establishing Gross Misconduct.

435 The background to the issue of the invoice is set out above under the heading 'Communications Formby to Westpac and Formby to Bird'. The fact that Mr Formby (by FBY Global) issued and was paid on an invoice to Habitat for work undertaken by him for the design for the Mandurah apartments was uncovered by Habitat and raised directly between Mr Formby and Mr Pritchard and between Mr Formby and Ms Bradford in July 2015.[372] I accept that Mr Pritchard did not know about the payment to Mr Formby until that time.[373] Ms Bradford assumed Mr Pritchard had agreed to the payment when she arranged it.[374] In effect, Mr Formby approved the payment to himself by asking Ms Bradford to pay it. Email exchanges between Mr Formby, Ms Bradford and Mr Pritchard in July 2015 are consistent with an acknowledgment by Mr Formby that the moneys would be repaid to Habitat. He makes suggestions as to how that might be done (including by invoicing a third party architect who would then pay Mr Formby, and he would then reimburse). He writes that he won't repay it 'as he can't.'[375]

436 Under cross‑examination, Mr Formby said the fact he wrote that he could not pay it was only one reason for not paying it.[376] He said he was entitled to undertake the architectural work independently and was entitled to bill for it. He said he was not at Habitat to do architectural work.[377] He said he was 'pretty sure' he had raised the issue that he would be providing an invoice with Mr Pritchard. He accepted that if billed for architectural work and the third party billed for its architectural work, then Habitat's fees for stage one for the job would have in effect been exhausted.[378]

437 Taking into account all the evidence, I do not accept Mr Formby's explanation. It is not consistent with the email exchanges of July 2015. I prefer to rely on those emails, which are also consistent with the evidence of Mr Pritchard and Ms Bradford. Mr Formby was a qualified architect and Habitat had provided architectural services for that job. Taking into account, those circumstances, I do not consider Mr Formby (or FBY Global) was entitled to retain the $16,500 payment. There was no agreement to retain FBY Global or Mr Formby personally to perform those architectural services.

438 However, Mr Formby's conduct in this regard cannot be relied upon for the purpose of termination for Gross Misconduct. The issue of the invoice was live between the parties well before the purported termination. I consider that Habitat waived its right to terminate for that conduct.

439 There was a range of conduct during the period August 2015 until (at least) December 2015 involving the establishment of Hawk Crest and exploitation of opportunities for Hawk Crest or Mr Formby personally at a time when he was a full time employee of Habitat.

440 Sometime during or prior to July 2015, Habitat held a strategy day. It was agreed that Habitat needed to focus on its strengths, being interior design and fitout. It was apparent at that time that Mr Formby had been interested in Habitat pursuing architectural and external construction work.

441 During July 2015, there were email exchanges between Mr Pritchard and Mr Formby about Mr Formby's desire to work on other projects. Mr Formby said he wanted an opportunity to give architecture and build jobs that came through to his mates and use his personal build ticket to take a cut of those projects. He said that 'eventually' he would like to step back from interiors and run an architecture/build business but, 'this won't be until a time that we have a comfortable sum of money in the account and the sales pipeline and sales process is feeding the system'.[379]

442 Mr Pritchard responded, expressing the view that, for example, architecture fees were part of Habitat's revenue stream. He said that Mr Formby's request to focus on building and architectural projects was 'not in line with [Habitat's] core strategy'. He noted that he was supportive of Mr Formby moving onto such other things once Habitat's budget and cash flow were on track and it had recruited and developed sales and marketing resources that would allow Mr Formby to resign from a full time position. He said, 'Then if you want to invest your own time and resources into projects that make sense, you are absolutely free to do that'.[380]

443 Mr Formby replied, saying, relevantly:[381]

(a) he agreed to focus 100% of his attention on interiors;

(b) he agreed to get the sales function to a point where he could comfortably exit the business development role;

(c) things he does in his spare time are his choice as long as they are not in conflict with Habitat interiors; and

(e) any future works once he exited the Habitat business development role using his architecture and construction experience and building ticket would be up to him.

444 As those exchanges evidence, the expectation was that Mr Formby would focus on his sales and business development role and focus on interiors until the position of the company improved. Once he left that role, he might pursue other jobs.

445 Hawk Crest was established some two weeks later, in mid‑August 2015 and Mr Formby was its controlling mind. By mid‑September he was liaising with Mr Bird about arrangements between themselves for performing the contract. He apparently met Mr Turnbull for afternoon drinks during work hours to discuss banking arrangements for Hawk Crest.[382] He did not tell Mr Pritchard that he went ahead and secured the Mandurah apartments contract in the name of Hawk Crest. Architectural drawings dated December 2015 in the name of Hawk Crest were on the Habitat computer system.[383]

446 Viewed collectively, I consider the conduct comprised a breach of Mr Formby's duties to the company. He utilised Habitat time to promote the interests of Hawk Crest and his own personal interests. He failed to focus properly on his duties to Habitat or its interests. However, in order to bring such breach within the definition of Gross Misconduct, the conduct must have the direct or indirect effect of causing damage or discredit to Habitat's business. Such damage or discredit has not been proven. Whilst the evidence shows that Mr Formby used some of his time to promote external interests when he should have been focusing on Habitat, Habitat has not established the requisite damage or discredit for the purpose of Gross Misconduct. The difficulty in establishing and proving any such damage is heightened by the fact that Mr Formby was absent from Habitat for many weeks (see below). It is not possible to infer that any damage in terms of lack of attention to Habitat was caused through the activities relating to Hawk Crest, as against by way of the other extended absences from the office.

447 Mr Pritchard expressed concern about Mr Formby's absences from the business because the sales function was not performed when he was away. He raised the issue of holidays and time away. Whilst he acknowledged Mr Formby had a difficult year for personal reasons, he calculated that he had taken holidays for a period of 13 to 15 weeks in a nine month period. The issue about excessive leave was raised in writing in July 2015.[384] Mr Formby did not accept he had taken leave in the amounts claimed. He made some admissions to the effect he had taken some leave without notice.[385] Habitat knew about the leave issue for some time and did not act upon it. I consider that Habitat has waived its right to terminate for that conduct.[386]

448 As discussed above, I am not persuaded that Habitat has proved the allegation and this issue falls away. Mr Hodge did not give evidence.

449 Mr Formby admitted that shortly before he left Habitat he deleted all of 'his' emails. He admitted they included emails he had sent as managing director of Habitat. He said he 'thought that it was okay to do [so]'. He accepted that Ms Bradford's emails were Habitat's emails.[387] The email was a company email account. It is a given that many business communications are done by email. Emails form an important part of the business records of a company. The conduct was a breach of Mr Formby's duties to Habitat.

450 To the extent Mr Formby suggested he had implicit consent to delete or copy emails, I do not accept that evidence. First, to suggest a company would permit a director to delete the contents of his company email account is not credible. Second, there was conduct on the part of Mr Formby both before and after he left Habitat which indicates that he harboured a certain resentment towards Habitat or Mr Pritchard and was prepared to put his own interests above those of Habitat: for example, attempting to acquire Habitat's domain name; advertising in the name of Habitat Interiors on LinkedIn; setting up and promoting Hawk Crest by a website that utilised information from and about Habitat's clients, and was intended to undertake work including fitout work. Although some of those steps were thwarted, they indicate Mr Formby was quite willing to conduct himself without regard to Habitat's consent or the effect his conduct may have on Habitat.

451 The emails were restored. Although the restoration of emails was done by a consultant, there is no evidence as to any cost. Habitat has not proved damage or discredit as required for the purpose of Gross Misconduct.

452 In the circumstances, Habitat has not established conduct on the part of Mr Formby that comprised Gross Misconduct within the meaning of cl 14.2(iii).

453 The parties objected on the basis of relevance to many paragraphs in witness statements. To the extent I have referred in these reasons to paragraphs the subject of such objection, the evidence is relevant for the reasons apparent from my reference to it.[388] As to the balance paragraphs to which objection was taken and to which I have not referred, then the evidence is either irrelevant or did not play any significant part in my reasons.

454 I have found that Mr Formby was bound by the restraint covenants in the areas of Perth and Melbourne for a period of 12 months from termination of the ESA. The reference to Perth and Melbourne is to their metropolitan areas. If I am wrong as to the restraint operating in Melbourne, that location can in any event be severed from the relevant clause, leaving the restraint enforceable in Perth.

455 I have found that some of Mr Formby's alleged breaches of the restraint covenants are established.

456 The distributions made to the shareholders of Habitat were loans, repayable in accordance with the terms of the Constitution. The second defendants' non‑payment of interest comprised a default and Habitat was entitled to call up the loan. Mr Formby is also liable to repay certain, but not all, of the personal expenses as claimed by Habitat.

457 Habitat was not entitled to terminate Mr Formby's employment under the ESA for Gross Misconduct or summarily under its terms. Outstanding entitlements to employee benefits are to be calculated taking into account that Mr Formby's salary was varied with effect from April 2015. Habitat's method of calculation of Mr Formby's outstanding salary is accepted but there will need to be some adjustments to take into account these reasons. The calculation of wages as prepared on behalf of Mr Formby is not accepted.

458 The resolution of any assessment of damages for breach of the restraint covenants will need to be programmed, together with the pleaded claims that have been deferred.

459 The parties should confer as to orders that reflect these reasons and costs.

[2] Habitat 1 Pty Ltd v Formby [2016] WASC 376.

[3] Before Mr and Ms Formby became trustees of the family trust, the trustee was a company controlled by Mr Formby called FBY Global Pty Ltd which is named in certain documents. No issue was identified as arising out of the change in identity of the trustee(s).

[5] Exhibit 10 [39], [49]. In 2010, Mr Pritchard, in his capacity as CEO of an entity known as Finovia, had retained Habitat to design a fitout: Exhibit 10 [35].

[12] In accordance with the principles in Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420, 426 ‑ 427.

[13] Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288, 318; Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169 [7].

[14] Smith v Nomad Modular Building Pty Ltd [6] - [8].

[15] Exhibit 10 [20], [22], [25] - [26], [29].

[16] Exhibit 10 [30] - [31], [44].

[22] ts 345, 98; Exhibit 2 [46]; Exhibit 10 [36], [37], [44].

[25] TB 34; ts 354 - 357: Altona RSL - members room refurbishment; Visual Q - retail and accommodation refurbishment; Darcy Group - commercial fitout; Whittlesea - fitout for a respite care home.

[36] ts 345 ‑ 350; Exhibit 2 [20], [23], [44] - [45].

[43] ts 350 ‑ 351, 355 ‑ 356; Exhibit 11 [57].

[58] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [45].

[59] Emeco International Pty Ltd v O'Shea [No 2] [2012] WASC 348 [111], [114] (Emeco [No 2]).

[60] Smith v Nomad Modular Building Pty Ltd [17]; BDO Group Holdings (Qld) Ltd v Sully [2015] QSC 166 [53], [57] (BDO v Sully); HRX Holdings Pty Ltd v Pearson [2012] FCA 161 [25]; Seven Network (Operations) Ltd v Warburton (No 2) [2011] NSWSC 386 [71] ‑ [72].

[61] Vision Eye Institute Ltd v Kitchen [2014] QSC 260 [266] (appeal on other grounds dismissed: Kitchen v Vision Eye Institute Ltd & Anor [2016] QCA 226).

[62] Heydon JD, The Restraint of Trade Doctrine (3rd ed, 2008) 86 ‑ 91.

[63] Plaintiffs' closing submissions filed 13 February 2017 [24].

[64] Defendants' closing submissions filed 9 February 2017 [6].

[65] Defendants' closing submissions filed 9 February 2017 [5] ‑ [6].

[66] Eg Nomad Modular Building Pty Ltd v Smith [2007] WASC 117 (non‑compete restraint against employee upheld on appeal, non‑solicitation clause upheld at first instance and not challenged on appeal); Emeco [No 2] (non‑compete restraint upheld, non‑solicit clause not upheld in light of particular drafting); AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176 (non‑compete restraint against employee enforced); Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9 [25]; BDO Group Investments (NSW‑Vic) Pty Ltd v Ngo [2010] VSC 206 [62] (non‑interference restraint protects goodwill and customer/employee connections).

[67] Bridge v Deacons (a firm) [1984] 1 AC 705, 714; BDO v Sully [41] ‑ [43]; Sear v Invocare Australia Pty Ltd [2007] WASC 30 [52] ‑ [54].

[68] Sear v Invocare Australia Pty Ltd [51], also citing Synavant Australia Pty Ltd v Harris [2001] FCA 1517 [69].

[72] Habitat 1 Pty Ltd v Formby [17].

[73] See cl 17.2 of the Shareholders Deed set out above.

[74] A distinction noted in M & S Drapers v Reynolds [1956] 3 All ER 814, 821: 'A managing director can look after himself'.

[75] Sear v Invocare Australia Pty Ltd [53] ‑ [55].

[76] There are various ways to describe such restraints. I have used the expression 'non-compete' restraint as that was the expression used by the parties.

[77] Lindner v Murdock's Garage [1950] HCA 48; (1950) 83 CLR 628, 636; Emeco [No 2] [89].

[79] Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 709; Emeco [No 2] [88].

[81] AGA Assistance Australia v Tokody [32].

[82] Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111.

[83] HRX Holdings Pty Ltd v Pearson [19], [22].

[84] Pearson v HRX Holdings Pty Ltd [51], [62].

[87] Nomad Modular Building Pty Ltd v Smith [13] ‑ [14].

[88] Smith v Nomad Modular Building Pty Ltd [31].

[89] Smith v Nomad Modular Building Pty Ltd [39].

[91] Emeco [No 2] [135], [138], [145].

[93] ts 144 - 145; Defendants' closing submissions filed 9 February 2017 [10(c)].

[95] Landmark Underwriting Agency Pty Ltd v Kilborn [2006] NSWSC 1108 [60].

[101] Defendants' closing submissions filed 9 February 2017 [10(j)].

[105] Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 [22].

[106] Defendants' closing submissions filed 9 February 2017 [10(k)].

[112] ts 361; TB 94 (Applecross, Dalkeith, Fremantle, Mt Lawley and Subiaco).

[113] ts 362; TB 94 (Bunbury, Cannington, Fremantle, Maddington and Victoria Park).

[114] ts 364; TB 209. See also TB 282 and the reference to Life Ready in each of Warwick, Cockburn and Baldivis (page 1884, January 2016).

[116] Smith v Nomad Modular Building Pty Ltd [7]; Emeco [No 2] [68], [122] ‑ [123].

[117] See AGA Assistance Australia v Tokody [18].

[118] Defendants' further submissions filed 3 March 2017; Defendants' further submissions filed 9 March 2017.

[119] AGA Assistance Australia v Tokody [19].

[123] Pearson v HRX Holdings Pty Ltd [43].

[128] This is apparent from, for example, TB 293. The approximate office space for Perth CBD and Melbourne CBD is set out at [14] and [15]. The CBD estimates are considerably lower than the approximate office space for Perth and Melbourne set out at [5] and [6] and used by Mr Formby in his calculations.

[130] For the above reasons and as per the schedule of objections filed 27 January 2017: as to Exhibit 11, objections upheld as to [7] - [26], save for the sentences identified for [14] and [20].

[131] Habitat 1 Pty Ltd v Formby [38] ‑ [46].

[132] JQAT Pty Ltd v Storm [1987] 2 Qd R 162.

[133] Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd [1987] FCA 70; (1987) 17 FCR 505.

[134] Sear v Invocare Australia Pty Ltd [35] ‑ [39].

[135] Fitzgerald v Masters (426 ‑ 427).

[136] Sear v Invocare Australia Pty Ltd [40] ‑ [46] and cases cited therein.

[137] Habitat 1 Pty Ltd v Formby [65] ‑ [66].

[138] Amended further and better particulars of defence and counterclaim filed 24 January 2017.

[139] Habitat 1 Pty Ltd v Formby [65] ‑ [66].

[140] Seven Network (Operations) Ltd v Warburton (No 2) [39].

[141] Smith v Nomad Modular Building Pty Ltd [10], citing Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd.

[142] Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations [2014] WASCA 164; (2014) 48 WAR 261 [35] ‑ [45], [152] ‑ [157].

[143] Siver Pty Ltd v Bunce (Unreported, WASC, Library No 8086, 23 February 1990).

[144] Now the Metropolitan Region Scheme in force as a region planning scheme under the Planning and Development Act 2005 (WA).

[145] Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267.

[146] Hanna v OAMPS Insurance Brokers Ltd [11]. See also Lyreco Pty Ltd v Schoolworks Australia Pty Ltd [2006] NSWSC 1184, in which in contrast to many aspects of the restraint, the geographic area was not apparently contested but the court had no difficulty granting an injunction restraining the defendants from operating 'within the Melbourne metropolitan area'.

[147] Mills v Dunham [1891] UKLawRpCh 16; [1891] 1 Ch 576, 589.

[149] Attwood v Lamont [1920] 3 KB 571.

[150] Mason v Provident Clothing & Supply Company Ltd [1913] UKLawRpAC 37; [1913] AC 724, 745.

[151] Goldsoll v Goldman [1915] 1 Ch 292.

[152] Goldsoll v Goldman (299); British Reinforced Concrete Engineering Company Ltd v Schelff [1921] 2 Ch 563, 572.

[153] IF Asia Pacific Pty Ltd v Galbally [2003] VSC 192.

[154] IF Asia Pacific Pty Ltd v Galbally [174].

[155] SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516.

[156] SST Consulting Services Pty Ltd v Rieson [46]. The other two reasons are not relevant.

[157] Lloyd's Ships Holdings v Davros (513).

[158] Lloyd's Ships Holdings v Davros (518); Fitzgerald v Masters (426 ‑ 427).

[159] Lloyd's Ships Holdings v Davros (524).

[160] Hydron Pty Ltd v Harous [2005] SASC 176 [96].

[161] Fitwear v Pietrolungo [1991] VicSC 476 (12 September 1991) (Ashley J) (18).

[162] Synavant Australia Pty Ltd v Harris [85]; Seven Network (Operations) Ltd v Warburton (No 2) [70].

[163] AGA Assistance Australia v Tokody [36] ‑ [38].

[164] Cactus Imaging Pty Ltd v Peters [36].

[165] Stenhouse Australia Ltd v Phillips [1973] UKPC 1; [1974] AC 391; [1973] 2 NSWLR 691, 699.

[168] Cactus Imaging Pty Ltd v Peters [8].

[169] Emeco [No 2] [200]: note that it was 'properly conceded' that there were sufficient interests to justify a non‑solicitation clause in addition to the non-compete clause, but the non-solicitation clause was not enforceable because of the wide definition of 'client' [183].

[170] Emeco [No 2] [188] ‑ [193]; Cactus Imaging Pty Ltd v Peters [33].

[172] As in Cactus Imaging Pty Ltd v Peters [34].

[174] DP World Sydney Ltd v Guy [2016] NSWSC 1072 [61] ‑ [62].

[176] Pryse v Clark [2017] NSWSC 185.

[178] Defendants' closing submissions filed 9 February 2017 [24(6)], [29].

[179] Habitat 1 Pty Ltd v Formby [39] - [42], [46].

[182] There is also a non‑solicit clause but nothing turns on that: cl 17.3 Shareholders Deed.

[193] Defendants' further closing submissions filed 9 March 2017 [40].

[194] Exhibit 10 [185] (payments to 3 February 2017).

[206] Habitat 1 Pty Ltd v Formby [38], [43] ‑ [44], [53]; TB 281; ts 99.

[207] Exhibit 2 [190] ‑ [191]; TB 260.

[208] Defendants' further closing submissions filed 9 March 2017 [48].

[218] Amended statement of claim [6B.2], [7A].

[219] An additional amount of $17.30 was not pressed: Plaintiffs' closing submissions filed 13 February 2017 [69].

[220] Young v Queensland Trustee [1956] HCA 51; (1956) 99 CLR 560, 566. See also Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 [36] ‑ [38].

[222] Defendants' opening submissions filed 30 January 2017 [67].

[224] Defendants' closing submissions filed 9 February 2017 [66] - [68].

[225] Defendants' closing submissions filed 9 February 2017 [67].

[226] ts 116. The word 'ineffective' in the transcript rather than 'in effect a' is clearly a transcribing error.

[229] Exhibit 7, [9], [110] - [111]; ts 146.

[235] TB 7. The reference is to Division 7A of Part III of the Income Tax Assessment Act 1936 (Cth).

[239] ts 388 - 389; TB 18, 26 - 28, 296.

[257] TB 83, page 705; TB 294, page 1997.

[261] ts 367 - 368. Other examples of financial information provided for the purpose of meetings include those at TB 68, 79, 85 and 160, each of which include references to the loans.

[262] TB 141. I note that I have disregarded a 'dividend policy letter' signed by Mr Formby (TB 62). Its provenance is unclear. Ms Bradford denied it was prepared by her. Mr Formby also denied preparing it. The second defendants do not appear to rely on it. I am not satisfied it is a genuine Habitat document.

[265] ts 436; eg TB 4, 7, 28, 31, 40, 53, 56, 79, 82, 100, 294.

[283] ts 451 ‑ 452; Exhibit 13 [23] - [24].

[287] ts 437; Harvey Norman x 2 payments conceded exhibit 11 [38(a)], [38(b)].

[293] Corporations Act 2001 (Cth), s 140.

[295] Section 318(3) of the Income Tax Assessment Act 1936: 'Tax Act' in the Company Loans Schedule is defined as the Income Tax Assessment Act 1936.

[296] Defendants' further closing submissions filed 3 March 2017 [18].

[298] Exhibit 13 [13], [17], [24].

[300] ts 209; Exhibit 2 [165] - [169]; TB 251.

[302] Exhibit 9 comprises the Taxation Determinations setting out applicable interest rates.

[303] Amended statement of claim, schedule 2.

[305] Defendants' closing submissions 9 February 2017 [83].

[309] For an example involving a loan agreement under a Constitution and appropriation of payments to personal expenses, see Icognition Pty Ltd v Peter James Callaughan [2012] ACTSC 19 [47] (upheld on appeal: Callaughan v Icognition Pty Ltd [2013] ACTCA 2).

[310] The 'Tax Act 1936' in the Constitution is defined as the Income Tax Assessment Act 1936.

[311] Young v Queensland Trustee (566); Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 [36] ‑ [38].

[312] Amended statement of claim [18].

[313] Amended statement of claim [19].

[314] As to suppliers, see plaintiffs' closing submissions filed 13 February 2017 [72].

[315] Defendants' 'Calculations of wages payment due' filed 3 February 2017.

[321] Exhibit 7 [64]; TB 246, page 1436.

[323] Exhibit 7 [64]; TB 246, page 1436.

[328] ts 402. He confirmed he had not signed it in a later email to Mr Pritchard: TB 137.

[333] TB 144 (40% of that shareholder distribution to Formby interests, 60% to Pritchard interests, in line with shareholdings).

[342] TB 141, 143, 148, 152, 162, 185.

[344] Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 (750 - 751).

[350] Plaintiffs' opening submissions [27], Plaintiffs' closing submissions [112] ‑ [127].

[351] Reply and defence to counterclaim [6]; Amended further and better particulars of reply and defence filed 31 January 2017; Plaintiffs' closing submissions filed 13 February 2017 [112].

[352] Concut Pty Ltd v Worrell [2000] HCA 64; Heugh v Central Petroleum Ltd [No 5] [2014] WASC 311 [87].

[353] Shepherd v Felt and Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359.

[354] Definition of Confidential Information in the ESA is set out above.

[365] TB 98A. FBY Global was paid by Habitat. The invoice was for $15,000 + GST of $1500.

[370] Heugh v Central Petroleum Ltd [95] - [103].

[371] Heugh v Central Petroleum Ltd [94], [105] - [107].

[383] TB 156; ts 419 - 420; Exhibit 5[13].

[386] Heugh v Central Petroleum Ltd [105], [107].

[388] Exhibit 2 [203]; Exhibit 10 [49], [73], [174]; Exhibit 13 [23].