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[2012] FCA 161
Federal Court of Australia
2012-03-01
Mr P, Buchanan J
Original judgment source is linked above.
Number of paragraphs: 62
Counsel for the Plaintiff: Mr P Braham SC with Mr Y Shariff
Solicitor for the Plaintiff: Clayton Utz
Counsel for the Defendant: Mr D Studdy SC with Mr N Furlan
Solicitor for the Defendant: Harmers' Workplace Lawyers
Counsel for the Intervener - Attorney-General of New South Wales Mr S Robertson
Solicitor for the Intervener - Attorney-General of New South Wales I V Knight, Crown Solicitor
HRX Holdings Pty Ltd v Pearson [2012] FCA 161 CORRIGENDUM 1 The cover sheet of the judgment has been amended to include Mr S Robertson as 'Counsel for the Intervener - Attorney-General of New South Wales'. 2 The cover sheet of the judgment has been amended to include I V Knight, Crown Solicitor, as 'Solicitor for the Intervener - Attorney-General of New South Wales'. I certify that the preceding two (2) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Buchanan.
Associate: Dated: 13 April 2012 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2312 of 2011
JUDGE: BUCHANAN J DATE OF ORDER: 1 MARCH 2012 WHERE MADE: SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2312 of 2011
JUDGE: BUCHANAN J DATE: 1 MARCH 2012 PLACE: SYDNEY
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 Holdings Pty Ltd
Pearson