HRX Holdings Pty Ltd v Pearson [2012] FCA 161 | Case summary

REASONS FOR JUDGMENT 1 The plaintiff company ("HRX") was founded in January 2005 by Ms Katrina Leslie. The trustee of Ms Leslie's family trust ("the Leslie Family Trust") is Cazo Pty Limited ("Cazo"). Cazo holds the great majority of the shares in HRX. Since the establishment of HRX Ms Leslie has, through her family trust, contributed over $12m by way of capital and loan funds to HRX. Until October 2010 Ms Leslie was the Executive Chairman of HRX. She is now the non-Executive Chairman of HRX. 2 The defendant ("Mr Pearson") is often publicly, and by himself, referred to as the co-founder of HRX. He and Ms Leslie were both involved in the original decision to establish HRX, and instrumental in charting the path it would follow. Mr Pearson became engaged by HRX as an employee (originally as its managing director) in February 2005. He did not initially have a written contract although it was always contemplated between him and Ms Leslie that a written contract would be executed. In December 2005, when Mr Pearson was the Chief Operating Officer of HRX, he executed a written contract ("the Executive Service Agreement") which was expressed to operate on and from 14 February 2005. Mr Pearson was granted 8 percent of the shareholding in HRX, at no cost to him, as part of his employment arrangements. The shares were released to him from escrow progressively over a period of three years and were subject to a buy-back arrangement in the event that Mr Pearson left the service of HRX. I need not deal with that aspect of his employment in this judgment. 3 Mr Pearson was a director of HRX until he resigned his directorship in July 2011. During the period of his employment Mr Pearson held a small number of differently titled positions as the executive and ordinary workforce of HRX grew from the point at which he was its only employee to the point where, at present, HRX engages about 130 people either as direct employees or its contractors. The Executive Service Agreement applied to the whole period of Mr Pearson's employment. On 29 September 2011, Mr Pearson gave two months' written notice of his resignation from the employment of HRX, in accordance with the Executive Service Agreement. 4 The Executive Service Agreement contains provisions restraining Mr Pearson from accepting employment with or engaging in a business "similar to or competitive with" HRX for a period of two years from cessation of employment with HRX. This judgment concerns an application made by HRX to enforce that obligation against Mr Pearson, who proposes to take employment at a senior level with one of HRX's direct competitors. 5 HRX is a human resources outsourcing company that offers recruitment process outsourcing and consulting services, human resources outsourcing and recruitment technology to government and business. It sometimes provides its services as a consultant. It sometimes provides services by embedding its own staff in the operations of its clients. It operates with a view to encouraging and providing proactive strategies for human resources and recruiting issues rather than a passive approach of reacting to such issues as they develop in the workplace. To this end a variety of techniques and technological systems and facilities have been developed. Mr Pearson has been (and was envisaged from the outset to be) the leader of innovation in this area. Additionally he has been the primary presenter to prospective clients in HRX's endeavour to offer its services to and obtain contracts from such clients. Mr Pearson is regarded as having a very special ability to connect with prospective clients, gain their trust and convince them of the benefits of the techniques and strategies which he has (with HRX in more recent years) developed. Mr Pearson shares the view that he has a particular ability to engage with prospective (and current) clients and gain their trust. It has meant that he has been a key component of HRX's success to date in first entering, and then growing in, a small and competitive market in Australia. Various witnesses referred to Mr Pearson "sprinkling fairy dust" and Mr Pearson in his evidence did not seem uncomfortable with characterisations of this sort. 6 Although the operations of HRX have grown substantially since the time that Mr Pearson executed the Executive Service Agreement it was always contemplated that the business would initially be built around him and that he would continue to play a pivotal role in business development. So it has proven to be until the time Mr Pearson resigned his employment. He was almost invariably the lead presenter to major prospective clients. He was the person relied upon to provide an effective and persuasive incentive to current clients to renew existing contracts, or extend them, by engaging with their senior executives on a personal level. Mr Pearson had, until the resignation of his employment, access to all, or virtually all, of HRX's confidential material. He was intimately involved in the development and application of its pricing and other business models. He had an intimate knowledge of client relationships, of the techniques and resources used by HRX to sell its services to clients, of the methods by which HRX serviced the contracts which it obtained, and of the strategies with which HRX might attempt to retain a client whose contract was about to expire (generally two to three years after inception). All of these things appear, on the evidence, to have been envisaged and present to the minds of him and Ms Leslie when the Executive Service Agreement was executed. 7 When the negotiations about the precise terms of a written employment contract began in earnest later in 2005, there were some things which were not immediately agreed between Mr Pearson and Ms Leslie. The duration of any restraint was one such matter. On the other hand, there can be no serious question that Mr Pearson accepted that it was appropriate for some level of restraint to be imposed upon him, against the possibility that he might at some time in the future leave the service of HRX. There does not appear to have been any issue about the operative terms of that restraint although certain accompanying features were also the subject of negotiation, in light of Ms Leslie's insistence that the duration of the restraint be longer than proposed by Mr Pearson. 8 At common law, restraints of trade are prima facie invalid as infringing public policy. However, a restraint of trade will not be invalid as contrary to public policy if it was reasonable in all the circumstances at the time it was made. The Restraints of Trade Act 1976 (NSW) ("the Restraints Act") represents a statutory intervention intended to preserve the reasonable operation of restraints which might otherwise be struck down as unreasonably wide in their terms. Amongst other things, it avoids the perceived necessity for highly artificial drafting techniques where restraints are expressed, both in scope and duration, in a complicated series of cascading, severable provisions. Before any discussion proceeds about whether the restraints were reasonable in this case, and whether the Restraints Act has any operation, it is necessary to examine the circumstances in which the Executive Service Agreement was signed and the meaning to be assigned to its relevant terms. 9 The Executive Service Agreement, like any other contract, must be given a meaning in accordance with the language used within it, having regard to the mutual intent of the parties as disclosed by that language. For the purpose of divining that intent it is not permissible to pay regard to specific pre-contractual negotiations or their content. It is permissible to pay regard to surrounding circumstances which would be relevant for a reasonable person in the position of the parties to take into account and which would be likely to be known to such a person. It is possible that the question of whether any restraint in a contract was reasonable at the time it was agreed may permit some closer examination of the particular positions of the parties than the principles relating to the construction of formal contracts might allow, but it will not be necessary for me to enter that territory for the purpose of this judgment. The matters which bear upon the question of whether the restraint agreed by Mr Pearson was reasonable at the time it was agreed, do not extend in the present case beyond those which are relevant to a proper construction of the contract which he made. 10 From the time that Mr Pearson agreed with Ms Leslie in late 2004 that he would become engaged by HRX, and from the time that he actually commenced his employment with HRX, it was intended, and the intention was realised, that Mr Pearson would be the person responsible for getting the business off the ground. To that end he was required to engage staff. That required negotiation with them and in many cases involved proposals and counter-proposals about the salary and other employment conditions of those staff. From a very early time Ms Leslie and Mr Pearson took the view that it was necessary, in order to protect the interests of HRX, that staff engaged by it be subject to some level of post-employment restraint, as well as obligations of confidentiality, when they left the service of HRX. Staff being engaged were required to agree to levels of restraint commensurate with the sensitivity of their positions. Before Mr Pearson executed his own contract he had engaged staff with post-employment restraints of three months, six months and 12 months. In no case did any of those contracts oblige HRX to make any payment during the period of restraint. The contrary was to be so in Mr Pearson's case, as will be seen. 11 In one instance which received attention during the evidence Mr Pearson was, in April/May 2005, in negotiation with a particular prospective employee. He said the following in an email to that prospective employee: The restraint clause is imperative for our business, we can't consider bringing an executive on board without an appropriate restraint clause in place. We have tried to make it as narrow as we can in scope and have reduced the period of restraint as much as we can without losing reasonable protection for the business. 12 The restraint which Mr Pearson initially proposed to that prospective executive was relevantly identical in scope to that to which he himself subsequently agreed. A suggestion was made in those negotiations for one alteration to the scope of the restraint which I will mention again later. No final position was reached because the prospective employee did not ultimately accept the engagement. The term of the restraint in that case was initially proposed to be 12 months but was later negotiated down to six months. The prospective employee asked to be paid during the restraint period if the restraint was engaged. That proposal was referred to as "gardening leave", although that term is more often used to refer to an obligatory period of notice, which is spent away from the workplace (e.g. at home) upon resignation or termination of employment. Mr Pearson's response to the prospective employee was as follows: Regarding the gardening leave, we are not a large corporation with deep pockets. While we are well funded, ensuring that we spend our investment $ wisely is critical. We can not entertain the prospect have [sic] having to pay 6 months of gardening leave for an exiting executive. We feel that 3 months of unconditional gardening leave is reasonable and helps to offset the personal downside of a restraint period. 13 This was the only example which the evidence disclosed (apart from Mr Pearson's own case) of consideration being given to payment by HRX during a period of restraint. 14 Mr Pearson's evidence was that although he was the direct negotiator with prospective executives in situations such as this, during this period of time he was effectively a relay between the prospective employee and Ms Leslie, who retained overall control of operations. I infer that Mr Pearson and Ms Leslie (and HRX as a separate legal personality) shared a sufficiently common position about the need and appropriateness of restraints to protect HRX's legitimate interests, about the fact that those restraints would be reduced in scope and duration so far as was thought reasonably possible by them without compromising that protection, and that any question of payment during a period of a restraint would be an unusual matter to be approached conservatively, so far as HRX was concerned. 15 In late 2004, before Mr Pearson's employment with HRX began, Ms Leslie and Mr Pearson had come to broad agreement about the nature and level of his personal compensation. They had also agreed in principle that the terms of Mr Pearson's employment would be put in writing and formally executed, in keeping with Ms Leslie's belief that that was necessary as a matter of good business practice. Dealing with those important formalities may not have appeared immediately pressing for a number of reasons. Obviously enough, Mr Pearson (and no doubt Ms Leslie) was concentrating on getting the business established, engaging executives and other staff and attempting to obtain business from prospective clients. Mr Pearson had also agreed to defer taking his salary (the level of which had been agreed) for the first 12 months. This was to be treated as a loan by him and earned a healthy rate of interest of 12 percent. However, by early August 2005 it is clear that the question of a formal contract received more specific attention. There were then negotiations over a period of about three months which commenced with a document proposed by Mr Pearson as an appropriate contract. That document proposed a post-employment restraint upon carrying on (directly or indirectly, alone or with others) a "Restrained Business" or having any interest (including as an employee or consultant or adviser) in a "Restrained Business". "Restrained Business" was defined, in this proposal, in the same terms which were eventually agreed. I do not mention that in order to invoke any part of the negotiating process but rather to indicate that the defined term in the final agreement, whatever meaning might be ascribed to it, was not a matter about which the parties were disagreed. The period of restraint proposed by Mr Pearson was six months. 16 Negotiations proceeded, over a period of some months, to the point where Ms Leslie felt some sense of urgency in bringing matters to a conclusion. That point was reached by 20 October 2005, at which time Ms Leslie indicated that she hoped that the contract would be finalised within the "next eight days". Ms Leslie said that the question of a restraint upon Mr Pearson, post-employment, was "one of the biggest risks to the business that we need covered". That concern was based in part upon the fact that the business was being (and was to be) built around Mr Pearson, a circumstance which he accepted in his evidence was the common understanding. Nevertheless, the matter was not settled at that time. There were further negotiations. 17 Mr Pearson in due course, accepted a restraint period of two years. I shall return to discuss the reasonableness of that period after I deal in more detail with the terms of the restraint itself and the contract as a whole. By contrast with the original proposal, when the period of restraint was proposed to be six months, arrangements were included in the final contract for payment during all but three months of the restraint period of two years. Specific elements of the payment arrangements, and other particular aspects of the restraint, were still being addressed as late as 9 December 2005. During the period of the negotiations Mr Pearson took advice from his accountant and from solicitors. He took advice, in particular, about the restraint clause. 18 The Executive Service Agreement was signed by Mr Pearson on his own behalf and by Ms Leslie and another director on behalf of HRX on 14 December 2005. The contract was expressed to take effect from 14 February 2005. The contract recorded that on that date (14 February 2005) Mr Pearson was issued with his HRX shares. The contract recorded the escrow arrangements for progressive release of the shares over a period of three years. The shares were not expressed to be part of Mr Pearson's remuneration package. The remuneration package consisted of a salary (inclusive of superannuation) and a bonus paid according to satisfaction of targets to be established by HRX. The contract stated obligations concerning confidential information. The obligations were expressed to survive the termination of employment. Read with the definition of "Confidential Information" those obligations required Mr Pearson to keep confidential, and not disclose, information including policies, procedures, contracts, agreements, affairs, ideas, business plans and developments relating to existing or future business opportunities or business practices as well as all other matters relating to the internal or external operations or plans of companies in the HRX group. One argument which has been advanced by Mr Pearson in the present proceedings is that those obligations sufficed to provide adequate protection to HRX, rendering any further restraint unreasonable. I do not agree and it is evident from the further terms of the contract that that is not the position taken by the parties at the time the contract was signed either. 19 Clause 14 stated the restraints with which the present proceedings are concerned. I shall set them out in full: 14.1 Acknowledgment The Executive acknowledges to the Company that he: (a) has an intimate interest in the contacts, clients, knowledge and management of the Company's business: (b) has obtained specific employment legal advice in relation to this agreement, including without limitation the restraints contained in this clause 14; (c) has and will receive consideration for his obligations under this clause, including the HRX Shares which will be granted to the Executive without cost to him; (d) would detrimentally affect the Company's legitimate interests by breaching his obligations under this clause; and (e) pursuant to paragraph (a) believes the restraints contained in this clause 14 are reasonable, in context of the Employment, the industry and the period and geographic nature of the restraints, to protect the goodwill of the Company's business. 14.2 Certain conduct prohibited during the Employment The Executive must not during the Employment, do any of the following things without first getting the consent of the Board: (a) business activities: directly or indirectly carry on a Restrained Business, alone or in partnership or joint venture, with anyone else; (b) no interest: subject to clause 14.6, directly or indirectly be concerned with or interested in a Restrained Business in any capacity, including as principal, agent, partner, joint venturer, shareholder, unit holder, employee, director, trustee, beneficiary, manager, consultant, adviser or financier; or (c) payment: accept any payment or other benefit in money or in kind from any person as an inducement or reward for any act or forbearance or in connection with any matter or business transacted by or on behalf of the Company. 14.3 Non-solicitation The Executive must not and must not counsel, procure or otherwise assist any person or entity to do any of the following during the Restraint Period: (a) customers: solicit or persuade a Customer to stop or reduce its business with the Company or its Related Bodies Corporate; (b) employment: induce or attempt to induce an employee or contractor of the Company to terminate his or her employment or consulting relationship with the Company; (c) suppliers: solicit or persuade a supplier to stop or reduce its business with the Company or its Related Bodies Corporate. 14.4 Restraint Period obligations (a) The Executive must not and must not counsel, procure or otherwise assist any person or entity to do any of the following things during the Restraint Period: (i) no competition: directly or indirectly carry on a Restrained Business, alone or in partnership or joint venture with anyone else; (ii) no interest: subject to clause 14.6, directly or indirectly be concerned with or interested in a Restrained Business in any capacity including as principal, agent, partner, joint venturer, shareholder, unit holder, employee, director, trustee, beneficiary, manager, consultant, adviser or financier. (b) In further consideration of the Restraint Period under this sub-clause, the Company will pay the Executive the average monthly Remuneration Package which he received during the two years before the Termination Date or during the Employment if employed for less than 2 years, for each month of the Restraint Period, except the first 3 months of the Restraint which will be unpaid, provided that: (i) If Pearson leaves voluntarily within 2 years any amounts payable or paid by the Company in respect of the Restraint Period are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares; (ii) If Pearson does not voluntarily leave within 2 years then any amounts payable by the Company in respect of the Restraint Period are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares on the following schedule: • If proceeds from any sale of HRX shares is less than $500,000 then there is no reduction for the sale of HRX shares • If the sale of HRX shares is more than $500,000 but less than $1,000,000 then the amount owing under the Restraint will be reduced by 50% • If the sale of HRX shares is $1,000,000 or more, then clause (i) applies (i.e. amounts payable are reduced by any alternative remuneration or income received or receivable by the Executive, including proceeds from any sale of the HRX Shares. (iii) the Executive must immediately refund to the Company any payments made which exceed what the Executive is otherwise entitled to be paid under this sub-clause, whether or not a demand has been made by the Company to do so; (iv) the Executive must use his best endeavours to obtain alternative employment commensurate with his skills and experience; (v) the Executive must provide the Company with any information it requests or answer any questions arising from or in connection with his employment, remuneration and income following the Termination Date; (vi) the Executive must immediately inform the Company if he accepts an offer of employment and provide the Company with particulars of his remuneration in respect of that employment; and (vii) the Executive is not entitled to any payment in respect of the Restraint Period if the Company waives the Executive's obligations under this clause 14.4. within 14 days post termination. 14.5 Separate undertakings If any part of an undertaking in clause 14.2 is unenforceable, it may be severed without affecting the enforceability of the rest of that undertaking or the other undertakings. 14.6 Listed securities Nothing in this clause 14 prevents the Executive or the Executive's nominee holding 5% or less of the issued shares or units of a body corporate or a unit trust listed on a stock exchange. 14.7 Survival The Executive's obligations under this clause survive the termination of the Employment. 20 I draw attention to the following features: • the acknowledgement of Mr Pearson's intimate interest in the contacts, clients, knowledge and management of HRX's business, an acknowledgement which the evidence clearly confirmed, with respect to the period both before and after execution of the contract; • Mr Pearson obtained specific legal advice in relation to the Executive Service Agreement; • the HRX shares, issued to Mr Pearson, at no cost to him, were agreed to represent specific consideration for the restraints in clause 14; • the parties accepted the restraints as reasonable. 21 In addition it should be noted that there were further specific accompanying arrangements put in place as consideration for the particular constraints stated by clause 14.4, notably payment for most of the restraint period at a level which could not be less than prior average monthly remuneration. 22 The constraints in cl 14.4(a) were expressed by reference to the defined term "Restrained Business". That definition read as follows: Restrained Business means a business or operation similar to or competitive with the business of a Group Company, including without limitation a business involved in the outsourcing of recruitment services (often referred to as Onsite or Recruitment Process Outsourcing) or any other HR Outsourcing areas that HRX is operating in at the time of leaving the company. 23 The "Restraint Period" agreed to by Mr Pearson was two years from the date of termination of employment. 24 Clause 14.4(b) represented an arrangement whereby Mr Pearson would be paid his average monthly remuneration (calculated over the preceding two years) except for the first three months, provided certain conditions were met. The conditions of most relevance for present purposes are that there were reductions envisaged upon realisation of Mr Pearson's HRX shares, but in no case would such a reduction reduce Mr Pearson's total remuneration below its pre-existing level and in every case there would be potentially a substantial additional amount which remained payable. Mr Pearson was obliged to refund an amount equivalent to any other income earned. An argument was put on his behalf that his obligation to seek to obtain alternative employment which was commensurate with his skills and experience required him to confront the restraint itself and showed how unsatisfactory the overall arrangement was. I do not agree. Obviously the restraint was intended, in this contract, to take priority. The precise terms of this condition were the subject of specific negotiation. Similarly, the requirement that the company decide within 14 days whether to waive the restraint, thereby relieving itself of any obligation to pay, was the subject of specific negotiation by Mr Pearson. The relevance of the fact of those negotiations is to show that the mechanism which was placed into the contract was the subject of detailed attention by the parties up to a period shortly before the contract was executed. 25 When construing the Executive Service Agreement, and in particular the post-employment restraints, and when testing them for reasonableness it is in my view relevant and permissible to bear in mind the following circumstances:

HRX had a well developed policy, with which Mr Pearson was intimately familiar, of insisting upon post-employment restraints on its executives;
Before the Executive Service Agreement was executed, no executive had a contract of employment which provided for any payment during a period of post-employment restraint;
HRX and Mr Pearson agreed, without the necessity for negotiation, the terms of the definition of "Restrained Business";
The parties expressly agreed to bring the provision of shares representing 8% of the issued shares of HRX to account as consideration for the post-employment restraint.
The question of the duration of the post-employment restraint was the subject of close negotiation. In that connection, the accompanying arrangements for payment for all but three months of the period were unusual - indeed unique at HRX at that time;
The parties expressly agreed that payment during any period of post-employment restraint would be specific consideration for the duration of the restraint.
Mr Pearson had the opportunity to take accounting and legal advice and did so;
The final terms of the Executive Service Agreement, and the restraints in particular, had been negotiated in detail (where in issue) over some months.
The parties expressly acknowledged that the restraints, including the period of the restraints, were reasonable. 26 In Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 the High Court said (at [45]): 45 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. 27 The purpose of citing the observations of the High Court is to emphasise the deliberate character of the execution of the contract which, in my view, it is appropriate to impute to both the parties to it. In his evidence in the present proceedings Mr Pearson disclosed that he had received advice from his solicitors that a restraint period of two years would be "unenforceable". It is not clear when during the process of negotiations this advice was received. It is not clear, therefore, whether the advice was received before or after negotiations began for payment during the restraint period of two years. Whatever might be the position two things are clear. First, Mr Pearson continued to negotiate the fine detail of the arrangements connected with the restraint clause up until the time he executed the contract in mid December 2005. Secondly, he must be regarded as having taken his chances on the question of enforceability. I do not propose to discount Mr Pearson's execution of the contract by reference to the fact that he received advice before execution that, if tested, it may not be enforceable. That was the risk that he ran. The language of the contract may not be subordinated to any such consideration. 28 Nor may any question of whether the restraints were reasonable at the time they were agreed to be decided by reference to the advice which Mr Pearson received from his solicitors, or by reference to the quality or lack of quality of that advice, the full context of which is, in any event, not available. 29 The critical issue of construction which requires attention, before the question of reasonableness is considered, arises from the definition of "Restrained Business". 30 HRX argued that the words "similar to" did not add to the words "competitive with" and could, therefore, be ignored or "blue-pencilled". Mr Pearson mounted a very different argument. It was, first, that the two phrases conveyed different ideas and were, in that sense, alternatives. The words "similar to", it was argued, were not confined within the levels of present or potential competition and were not subject to any stated geographical limitation, and no such limits should be implied. Mr Pearson contended that the restraint therefore applied to engagement by or involvement with any business like that of HRX anywhere in the world, whether with a competitor (or potential competitor) or not. Nevertheless, the argument went, the words "similar to" were not capable of being "blue-pencilled" as they were an integral, operative part of the definition. On this argument the definition (and therefore the restraint) was impermissibly wide because it was not, as a matter of construction, limited to the legitimate and reasonable protection of HRX's business. 31 In my view the words "similar to" and "competitive with" are not entirely disjunctive but are intended to refer to aspects of the same concept, namely that a restrained business will be one which is active in the same market, or (in a practical sense) potential market, as HRX. That market may not, necessarily, at any point in time be confined to Australia (or New Zealand) but it is sufficiently narrow to exclude the notion of an unrestricted global restraint advanced by the defendant. 32 There are a number of reasons which contribute to that conclusion. First, the definition must be read in light of its intended purpose as an aid to construction of the restraint in cl 14 of the Executive Service Agreement. Clause 14 must be read in the overall context of the Executive Service Agreement and having regard to the evident purpose of cl 14 itself. The evident purpose of cl 14 is to provide reasonable and legitimate protection to HRX, rather than to unnecessarily restrain the legitimate future activities of Mr Pearson. Clause 14 should be construed, so far as reasonably possible, in a way consistent with that evident purpose. Construed that way, what is identified by the words "similar to or competitive with" is a business which might, in a real and not fanciful sense, pose a commercial threat to HRX if it had the benefit of Mr Pearson's intimate knowledge of HRX's business, method of operation, contracts, client details and contacts. Secondly, the definition of restrained business contains within its own terms strong indications that it was only intended to aid a restraint in areas in which HRX was actually operating in a commercial sense (i.e. by contractual success or endeavour) at the time the executive (in this case Mr Pearson) left employment. That also serves to indicate that no unlimited or unduly wide or unfocused restraint was intended. Thirdly, not long before the negotiations and execution of the Executive Service Agreement, in negotiations with the prospective executive mentioned earlier, HRX (and Mr Pearson as its agent) had agreed to excise the words "similar to" from an otherwise identical version of the same definition. That is a clear indication that those words were not seen (or intended) to add materially to the words "competitive with". That is one of the objective surrounding circumstances which may be taken into account in a search for the meaning to be attributed to the language used by the parties to express their bargain and state their respective rights and obligations. 33 As a matter of construction of the Executive Service Agreement, therefore, I take the view that the words "similar to" do not signify, as Mr Pearson argued, an unlimited global restraint. Rather, they do not add materially to the words "competitive with" when it is understood that the latter concept includes the realistic prospect of potential competition during the restraint period. 34 Construed in the way I have, it is clear that neither the definition of "Restrained Business", nor the restraint in cl 14 of the Executive Service Agreement is unreasonable. In my view, the terms of the restraint agreed by Mr Pearson are not void as against public policy. On those conclusions, the restraint is capable of enforcement, without the necessity to consider the operation of the Restraints Act, subject to consideration of its duration. 35 The two-year restraint period is not unreasonable either for a number of reasons. First, that aspect of the restraint was, it appears from the terms of the Executive Service Agreement itself, separately negotiated in the sense that it was accompanied by specific provisions for payment which were expressed to be addressed specifically to the period of restraint. Secondly, for that reason, and as expressed, there was separate consideration for the restraint period. It was clearly valuable consideration. Thirdly, a relevant surrounding circumstance is that this was the only example of such an arrangement at the time the Executive Service Agreement was executed. No other HRX executive had a provision in their employment contract providing for payment during the restraint period. Fourthly, the period of two years reasonably accommodated the contractual cycle on which HRX operates, as HRX typically enters into two to three year contracts with its clients. A restraint period of two years will prevent Mr Pearson from intruding on some (although perhaps not all) efforts by HRX to renew existing contracts, or extend them, without having to face competition from the very person who probably secured them initially and who knows, better than any other, what were the ingredients of a successful sale to that client. Accordingly, in my view the period of restraint of two years is not unreasonable. 36 If I am wrong in my conclusions to this point then the application of the Restraints Act will lead to the same result, having regard to what Mr Pearson may be taken to intend. 37 Sections 4(1) and (3) of the Restraints Act provide: (1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not. … (3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order. 38 The way in which these provisions apply should be noted. First, by s 4(1), it is declared (thereby ameliorating the common law position) that a restraint of trade is "valid to the extent to which it is not against public policy" (my emphasis). No further order is necessary. Under s 4(3), a person subject to a restraint may apply for an order where there appears a "manifest failure…to attempt to make the restraint reasonable" (my emphasis). In that circumstance a court may order that the restraint is altogether invalid, or it may order that it is partially valid. I am not dealing with such an application. 39 Cases in the Supreme Court of New South Wales have interpreted s 4(1) of the Act as requiring that specific attention be directed to an alleged breach (or threatened breach) rather than merely the terms of the restraint. In Orton v Melman [1981] 1 NSWLR 583 at 587, McLelland J said: In my opinion where the court is to determine, in relation to a restraint to which s 4(1) applies whether (having regard to public policy) the restraint is enforceable in respect of an alleged breach (or threatened breach), it is proper first to determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then by force of s 4(1) the restraint is to that extent valid, subject always of course to any order which may be made under s 4(3). 40 Similarly, in Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [10] Brereton J said: 10 … The effect of the Restraints of Trade Act is that, in New South Wales, one approaches this type of case by determining, first, whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed; secondly, whether the restraint in its application to that breach is against public policy; and thirdly, if it is not, then in its application to the alleged infringing conduct, the restraint is valid unless the court makes an order under the Restraints of Trade Act, s 4(3): Orton v Melman [1981] 1 NSWLR 583; Woolworths Ltd v Olson [2004] NSWCA 372 at [42]. That is because the effect of the Restraints of Trade Act, s 4(1), is to require that, for the purpose of determining the validity of a restraint, attention be focussed on the actual or apprehended breach, rather than on imaginary or potential breaches. 41 It is not necessary for me to consider any departure from the approach in these cases. 42 This approach requires attention to the threatened or anticipated breach of a restraint which may be vulnerable to the charge of unreasonable width. It requires and permits an examination of whether restraint of the anticipated breach could occur within a reasonable and more limited operation of the overall scope of the restraint. In contradistinction to the common law requirement to construe a restraint clause, and divine its intended operation, at the time the restraint is adopted by the parties, the provisions of the Restraints Act, as interpreted by the Supreme Court of New South Wales, permit the position to be examined by reference to the circumstances at the time the benefit of the restraint is sought (and the burden is to be imposed) thereby allowing a contemporaneous assessment of the question of reasonableness. Examined in this way, for the reasons I will explain shortly, the restraint proposed is reasonable. 43 Mr Pearson sought to avoid the prospect of the application of the Restraints Act by arguing that the Act was inoperative by reason of pro tanto invalidity arising from the operation of s 109 of the Australian Constitution. The submission was that the Fair Work Act 2009 (Cth) ("the Fair Work Act") left no room for the valid operation of the Restraints Act and manifested an intent to exclude its operation. The submission was developed by reliance on a series of elaborate and technical arguments which advanced a number of highly artificial propositions about the terms and operation of the Fair Work Act, suggesting in effect, that its tentacles intruded, octopus-like, into almost every corner of working relationships. By contrast, submissions made on behalf of the Attorney-General for New South Wales demonstrated crisply and clearly that, at every level, Mr Pearson's submissions failed and should be rejected. It will suffice to refer, in a moment, to the principal reason why that is so. 44 In its ordinary operation, the Restraints Act would apply, as between HRX and Mr Pearson, as an enactment of the New South Wales Parliament, unless it was rendered inoperative by the superior force of s 109 of the Constitution. However, as the present proceedings involve the use of the judicial power of the Commonwealth, different considerations apply although with no different result. In the present proceedings, the Restraints Act will apply if "picked up" by s 79 or by s 80 of the Judiciary Act 1903 (Cth). The Restraints Act will be "picked up" and applied (as to its own provisions, or so far as it modifies the common law) if it is not, or to the extent it is not, (relevantly here) inconsistent with an enactment of the Commonwealth Parliament. For practical purposes, the test for examination of that question is the same, in the present case, as the test arising under s 109 of the Constitution, and no attention need be given to the possibility of a technical difference between the two, or which part of the analysis should be undertaken first (cf. Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2006) 67 NSWLR 9 at [32]-[41]). 45 I may therefore turn directly to the argument that a relevant inconsistency exists. Section 26(1) of the Fair Work Act provides: (1) This Act is intended to apply to the exclusion of all State or Territory industrial laws so far as they would otherwise apply in relation to a national system employee or a national system employer. 46 It is not necessary to consider whether the Restraints Act is a State industrial law (although it is not) because s 27 of the Fair Work Act provides (by s 27(1)(c)) that s 26 does not apply to a State law so far as the State law deals with "non-excluded matters". Non-excluded matters include (s 27(2)(o)) "claims for enforcement of contracts of employment" (subject to an exception not here relevant). The present claim is one to enforce a contract of employment. The Restraints Act deals with the issues raised by the claim. It is not a State law to which s 26(1) applies. The argument advanced is without substance, on the face of the Fair Work Act. 47 It follows that the Restraints Act will apply, if necessary, to render valid so much of the post-employment restraints in the Executive Service Agreement as are not against public policy - i.e. not unreasonable in scope or duration. According to the line of authority I earlier mentioned, that examination focuses upon a threatened or anticipated breach, and the extent of the restraint sought to be imposed in response to it at that time. 48 In the present case HRX has sought the following orders: The Court: 1. Declares that clause 14.4(a) of the Executive Services Agreement dated 14 December 2005 is binding upon the defendant; 2. Orders that the defendant be restrained until 28 November 2013 from: i. directly or indirectly being concerned or interested in Talent2 in any capacity, including as a principal, agent, partner, joint venturer, shareholder, employee, director, consultant or adviser; ii. directly or indirectly being concerned or interested in any other provider of Human Resource Outsourcing (including Recruitment Process Outsourcing) business which operates in Australia (irrespective of where else it operates) in any capacity, including as a principal, agent, partner, joint venturer, shareholder, employee, director, consultant or adviser; iii. conducting or being directly or indirectly being concerned or interested in any Human Resource consulting business (including recruitment) in Australia or New Zealand in any capacity, including as a principal, agent, partner, joint venturer, shareholder, employee, director, consultant or adviser. 3. The Court notes that the defendant undertakes to the Court to comply with the provisions of clauses 14.3(a) and (b) of the Executive Services Agreement dated 14 December 2005. 49 It is Order 2 which requires attention in connection with the application of the Restraints Act. Some further factual detail is also relevant at this point. 50 Mr Pearson commenced his involvement with the human resources field in Australia in 1995, working for the business known as Morgan & Banks. Thereafter for a good deal of his employment and engagement in the human resources outsourcing industry, Mr Pearson worked for businesses associated with Mr Geoff Morgan and Mr Andrew Banks. He has, on a personal level, a friendly association with them. Those two gentlemen have been deeply involved in the industry for a considerable period of time. They have had controlling interests in businesses in Australia and the United States of America at least. Mr Banks is the present Chairman and Mr Morgan is a non-Executive director of a company known as Talent2. Part of Talent2's operations are known as Recruitment Management Services. That part of the business is headquartered in Hong Kong. It competes in Australia directly with HRX. It has been one of HRX's strongest competitors both generally and for particular clients and contracts. Talent2 was established in 2003. Its existence, likely competition with HRX when it began and the possibility that it might seek Mr Pearson's services were very much at the forefront of the discussions between Mr Pearson and Ms Leslie. 51 At the time that Mr Pearson resigned his employment, and actually left employment, HRX had clients only in Australia and New Zealand although from time to time it had sought work more broadly. Mr Pearson accepted that the overriding philosophy during the whole of his time at HRX was that HRX would be prepared to and wished to follow the work of any client into areas outside Australia and New Zealand. HRX has, in fact, tendered for work outside Australia and New Zealand and from time to time over the years had expressed plans or optimism about doing work at least in Singapore, Manila and the UK, as well as tendering for work in Hong Kong. 52 Mr Pearson decided to leave HRX on 12 August 2011. He apparently did so because of dissatisfaction with management practices, an issue which has not been fully explored in the present proceedings. He was, a short time later, in active discussions with Talent2. He went to Hong Kong to further those discussions. He received a firm indication of an offer of engagement to work in the Recruitment Management Services part of Talent2's business. He was, a week before resigning from HRX, offered the position of General Manager - Global Head of Business Development for the Talent2 Recruitment Management Services business which he has accepted, subject to the outcome of the present proceedings. Mr Pearson, therefore, proposes to work in the business of Talent2 which is in direct competition with HRX in Australia. He would be one of its most senior executives. In that business, which competes directly in Australia with HRX, Mr Pearson would report to and be responsible to the executive of Talent2 who directs competition against HRX in Australia. He would be required to supervise and lead employees who implement Talent2's competition with HRX in Australia. Mr Pearson offered to make the necessary distinctions and impose upon himself the necessary restraints to ensure that his new responsibilities would not have the effect of doing anything which the restraint clause would embargo or prevent. In my view, this merely gives emphasis to the fact that the restraint has real work to do. 53 As part of his suggestion Mr Pearson said that he would not be involved in "innovation". At first he seemed to say that he would have no involvement where innovation might impact directly upon HRX. Then, because he could not avoid the proposition that by his own example and development of ideas, he might instil or inspire techniques or approaches in others with whom he worked, he suggested that he would not be involved in innovation "at all" until the restraint period (which he is seeking to avoid) had expired. Again this emphasises that the restraints have real and legitimate work to do. I thought, with respect to Mr Pearson, and having heard evidence about his capacities (perhaps his quirky brilliance) that the suggestion lacked practicality. 54 I am satisfied that a direct and focused restraint against Mr Pearson working for Talent2 is appropriate. The evidence has shown clearly that Mr Pearson proposes to act inconsistently with the terms of cl 14 of the Executive Service Agreement by accepting employment and providing services to a direct competitor of HRX. He proposes to do the very thing which he agreed he would not do. He proposes to do it with the very company about which he knew Ms Leslie was apprehensive when they negotiated the Executive Service Agreement. 55 In addition, despite clear obligations in the Executive Service Agreement not to assist another business to poach employees of HRX, on 1 November 2011, before his employment with HRX had come to an end, Mr Pearson provided active encouragement to Talent2 to secure the services of two high performing executives of HRX. I am not satisfied that Mr Pearson is prepared to honour the restraints to which he agreed if an injunction is not granted. 56 I am also satisfied that the further terms of the proposed injunction are appropriate. On 12 December 2011 Mr Pearson said in an email to an existing client of HRX: I can not solicit your business …. but I believe you can solicit my services if you know what I mean. 57 Furthermore, after he decided to leave HRX, and while he was in the process of negotiating his employment with HRX's direct competitor, Talent2, Mr Pearson allowed himself to be widely presented to HRX's existing and potential customers to report on "great ideas" he picked up after attending an annual high level seminar in the United States. Mr Pearson conceded in his evidence, that presentations of the kind he undertook to HRX's existing and potential customers represented the major piece of promotion carried out by HRX each year. Without any disclosure to HRX, but intent on leaving and going to a direct competitor, Mr Pearson allowed his personal qualities and undoubted presentation skills to be drawn once again to the attention of those customers and potential customers. He allowed himself to be presented, as before, as the embodiment of HRX. 58 Mr Pearson argued that he could not be restrained simply from competing with HRX if the restraint was not necessary to actually protect a legitimate business interest of HRX, such as confidentiality. However, the position is not as simple and straightforward as that. Mr Pearson was in a unique position. He was in that position because he was, for most customers, the "human face" of HRX, who represented HRX to the customer, at least during the introduction and selling phase until a commitment was made, after which more mundane matters such as contract documentation could be attended to. An employer is "entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment" (see Cactus Imaging Pty Ltd v Peters (2006) 71 NSWLR 9 at [25] and the cases there cited). 59 I am satisfied that, apart from Talent2, Mr Pearson should also be restrained from working for other businesses which compete with HRX in Australia. It is not necessary to wait until Mr Pearson attempts to make some form of arrangement with such a business. Similar considerations apply to the possibility that Mr Pearson may, within the restraint period, offer his services as a consultant in competition with, or in the same area of operations as, HRX in Australia or New Zealand. During a round of communications with HRX customers in December 2011, after his employment was over, Mr Pearson let it be known that he proposed to engage in consulting. In my view, the evidence shows that what he proposed would be in breach of the restraints and HRX has a legitimate interest in preventing him from doing so. 60 From 29 February 2012, subject to his obligation to seek employment commensurate with his skills and experience so far as that may be done consistently with the restraints, Mr Pearson will be paid at least at the level he enjoyed while at HRX for the balance of the restraint period. That represents a significant amelioration of any financial disadvantage to him and bears directly on the question of reasonableness. I am satisfied that all the terms of the orders sought by the plaintiff are appropriate. 61 Apart from the Executive Service Agreement, Mr Pearson as a shareholder in HRX was bound by the Constitution of HRX. Clause 15 of the Constitution imposes restraints upon shareholders from carrying on, or having an interest in, a "Restrained Business" in Australia or other country in which HRX operates for up to two years after ceasing to be a shareholder. "Restrained Business" is defined to mean "a business or operation similar to or competitive with the Business [itself defined]". It is not necessary to give separate attention to the restrains in the Constitution. I was only invited to do so if I decided that the restraints in the Executive Service Agreement were invalid and were not rendered valid by the operation of the Restraints Act. I have not so decided. 62 There will, at present, be orders in the terms sought by the plaintiff. Unless a special order is sought the defendant must pay the plaintiff's costs as taxed if not agreed. I will hear the parties about that issue if necessary. The balance of the proceedings will be listed for directions on a date to be advised by my Associate. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan.

HRX Holdings Pty Ltd v Pearson

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Judgment (14 paragraphs)

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