Huhtamaki Australia Ltd v Botha

2379/04 HUHTAMAKI AUSTRALIA LIMITED & ANOR v CHRIS BOTHA JUDGMENT 1 HIS HONOUR: Another employee has left another selling organisation to take employment with a different selling organisation. This has led to these proceedings in which the plaintiffs seek to restrain what is said to be the misuse of confidential information and the breach of a covenant or contractual term in restraint of trade. The application is brought on an interlocutory basis. 2 The plaintiffs are part of a group called the Huhtamaki Group which sells packaging items to a large number of customers, including large retail chains such as Woolworths and Coles Myer. The defendant was originally employed by a company which was then in the Huhtamaki Group ("the Group"), but it is not now in the Group or a party to these proceedings. The employment took place in 1996. The defendant was at that time employed as Business Development Manager New South Wales and the prime focus of his job was said to be on the wine industry in New South Wales. The defendant was required to, and did enter into a secrecy deed with that company ("the secrecy deed"), then named Van Leer Australia Pty Limited. Clause 11 of the secrecy deed provided as follows: "The Employee shall not (without the previous consent in writing of the Board of Directors of the Company) for the period of two only years after the end of the Employee's employment with the Company, either on his own account or for any other person, firm or company, solicit or endeavour to entice away from the Company or any of its subsidiaries any person, firm or company who or which during the Employee's employment with the Company shall have been a customer of or in the habit of dealing with the Company or any such subsidiary."

Clause 1 of the secrecy deed contains a definition whereby the term "the Company" shall generally "mean and include any related body corporate of the Company as defined in the Corporations Law". There are also in the secrecy deed clauses concerning breach of confidentiality but, for reasons which will appear hereafter, I do not need to attend to the terms of those clauses. 3 There were subsequently complicated changes in the affairs of the Group and in the names of companies within the Group. Such was the complexity of these changes that the plaintiffs themselves were in these proceedings initially mistaken as to the identity of some of those companies and, in particular, the later employer in the Group of the defendant. However, it is now clear that the company named as the second plaintiff was the employer of the defendant at the time that he parted company with the Group. That fact is undisputed. There is correspondence indicating how this came about. On 10 October 2000 there was a letter written concerning the corporate reorganisation that was then taking place. In that letter it was stated that it was necessary to move a group of employees of the defendant's original employer into the company which is the second plaintiff. It was stated that the transfer to this company "will take place at 7 pm on Friday, 27 October [2000]". The letter added: "Naturally, this change does not impact your conditions of employment, service or entitlements."

It is clear from the evidence that the defendant entered into the employment of the second plaintiff ("the new employment") and that the function performed by the defendant in that employment was Business Development Manager - Fresh Food. It is stated in an affidavit by Ms Ganley, to whom the defendant reported, that: "His role included any new business development for the Fresh Food business. His role also included care of four named clients, namely, Woolworths, Bartters Steggal, Primo and Action Supermarkets." 4 The defendant departed from the Group on or about 5 April 2004. Subsequently, these proceedings were commenced and an application made to the Court for interlocutory restraints in two categories. The first was to restrain the use or misuse by the defendant of confidential information gained by him in the ex-employer's service. The other sought to enforce the restraint of trade in clause 11 of the secrecy deed set out above. The interlocutory application has been settled, or at least rendered unnecessary, in large part by the decision of the defendant to proffer undertakings to the Court. These undertakings are proffered on a permanent basis, although their duration is limited to a period ending on 5 October 2004. The plaintiffs complain that this is too short a restraint, but, as the situation is held by the undertakings for quite a lengthy period, during which these proceedings may well be able finally to be resolved by trial, even if they have not otherwise been resolved, I do not propose to deal with any question of whether the restraints offered by way of undertaking are inadequate in length. That situation can be agitated in a fresh interlocutory application after 5 October 2004, if that becomes necessary. It should be said that these undertakings appear to me to give the plaintiffs (other than the conflict as to their length) all that they are entitled to by way of restraint in respect of the use of confidential information. That is why I have said before that the terms of any contractual restraint as to the use of confidential information is not of any concern to the Court in this application. 5 The case was fought with some vigour, between Mr Burchett of counsel and then Mr Mendel of counsel on behalf of the plaintiffs and Mr Moses, of counsel on behalf of the defendants, on the second arm of the application. This related to whether there should be any restraint in or similar to the terms of clause 11 of the secrecy deed restraining the defendant from soliciting or enticing customers of the plaintiffs. As I understand it, this was asked for in terms of the clause generally, or, alternatively, specifically in relation to a list of named customers. The evidence did not extend, however, to demonstrating that all those persons were customers of the employer during the relevant time, although it did establish in a prima facie way that 11 of them were customers during that time. I should say that, as well as undertaking not to misuse confidential information, the undertakings proffered by the defendant included an enticement undertaking in respect of three of the four customers, care of which was said to be part of the defendant's primary role, namely, Bartter, Primo and Action Supermarkets. The undertaking also included Dairy Farmers, which apparently was a customer and with whom the defendant had substantial dealings. Of the four customers for whom the defendant was said to be primarily responsible, the only one omitted was Woolworths, which I shall, in due course, return to. 6 The issues which arose in the application, as it was contested, were usefully summarised by Mr Moses in his submissions as follows:

(1) Is there an arguable case that the secrecy deed which the defendant entered into on 20 June 1996 with Van Leer Australia Pty Ltd applies to his employment with the second plaintiff?

(2) Assuming that the secrecy deed applies to his employment with the second plaintiff (which is strenuously contested) is there evidence of a breach of clause 11 by the defendant?

(3) Is there an arguable case that the restraint covenant is valid? Can it be read down under s 4(1) of the Restraint of Trade Act 1976 ("the ROTA")?

(4) Does the balance of convenience lie in favour of the granting of the injunction sought?

(5) Are damages an adequate alternative remedy to the granting of an injunction?

I shall deal with these issues in turn. 7 Whilst issue (1) as set out above points to an important issue between the parties, in an important sense it misstates that issue. The case on which the plaintiffs have relied is that there is an arguable case, not that the secrecy deed per se applied to the new employment, but that the new employment was offered, in effect, on terms set out in the letter of 10 October 2000, which I have referred to above; that that letter is to be taken to state that the new employment would be upon the same terms, presumably incorporating terms of the same content, as the provisions of the secrecy deed; and that an offer to engage in employment on those terms was accepted by the defendant going to work for the stipulated new employer at the time mentioned in the letter, or at least some time shortly after that. 8 Mr Moses has said that there cannot be a transfer or novation of a contract of employment, and in that he is undoubtedly right: McKloskey v Karagiozis [2002] FCA 1137. However, it is not the plaintiffs' case that the contract was transferred or novated, but that a fresh contract of employment arose in the fashion and relevantly on the terms which I have outlined above. Another reason why the secrecy deed itself could not be relied on is that there is not a skerrick of evidence that the benefit of the secrecy deed was transferred or assigned to the new employer. The defendant has argued vigorously, that the legal characterisation contended for above cannot be put upon the letter of 10 October 2000, or anything done under or after it. It seems to me, however, that the case in this regard put forward by the plaintiffs is reasonably arguable. I certainly do not find that it is made out, nor do I intend to make any finding as to its relative strength or weakness, save to say, as I have said, that it appears to me reasonably arguable. In saying this, I also decline to accede to an argument, put on behalf of the defendants, that the language of clause 11 is so unclear that it is plainly to be regarded as void for uncertainty. Once again, in my view, it is reasonably arguable that it is not void for uncertainty and has operation. 9 I should also, at this stage, make some comment upon the submission put to me that the validity of the covenant is to be judged as at the date of the agreement imposing it. This appears to me to be correct. The defendant has argued that the relevant date is the date of entry into the secrecy deed, when involvement with the wine industry in New South Wales was apparently in the forefront of the defendant's duties. However, on the case that the plaintiffs, in fact, seek to make out, that is not correct. On their case the date of the agreement imposing the restraint is at or shortly after 10 October 2000, when the new agreement was arguably entered into. 10 The second issue is the question of whether there is evidence of a breach of the obligation imposed by reference to the terms of clause 11. It seems to me quite plain from the defendant's entire conduct of the matter, including the fact that he undertakes to refrain from seeking to entice four named customers, that he regards himself as at liberty to approach other customers of the plaintiffs if he so desires. In my view on all the material, there is a sufficient establishment of a fear of enticement of other customers to found relief if it is otherwise justified. 11 The third issue is whether there is an arguable case that the restraint is valid, which includes an issue as to whether it can be read down under s 4(1) of the ROTA. Once again, this is a matter that will no doubt be hotly contested at the trial, if it proceeds. However, it does seem to me that it is arguable that the restraint is valid. I have already observed that the time of entry into employment with the second plaintiff was in or about October 2000 and that it is arguable that that is the time at which validity of the restraint is to be judged. There does not seem to me to be any suggestion on the evidence, that by that time the defendant's duties were focussed on the New South Wales wine trade. Evidence has been given as to the functions of the defendant in relation to customers "that he looked after on behalf of Huhtamaki". There is evidence that the information that he had available in dealing with those customers was as follows: "He understood the products that were sold to those customers. He had access to the costs of all products that were sold to those customers. He had access to, and in some cases, set the prices that were sold to these customers. He understood all the terms of trade that we extended to those customers."

In my view there is a reasonable argument that the restraint was valid and a reasonable argument that it could be read down, if necessary, under the ROTA as applying to particular customers. It was certainly put to me that that was a possible result under the ROTA. 12 In relation to this issue, Mr Moses put to me, in particular, that, if I was of the view that there were some customers in respect of whom an enticement injunction was justified, but others in respect of whom it was not, then I could not grant an interlocutory injunction specifying less than all the customers, either by description or by name. Mr Moses formulated this as follows. The way in which the restraint is articulated in clause 11 is that it purports to restrain the defendant from dealing with all customers who were customers of the plaintiff, or its subsidiaries, during the period of his employment. The plaintiffs now request that that restraint be read down so that it would read, in effect, that the defendant be restrained from dealing with particular customers that he dealt with whilst employed by the plaintiff. The submission is that that restraint would not be in accordance with the width of the restraint in clause 11 and cannot be granted either as a permanent restraint, or as an interlocutory restraint. 13 Mr Mendel has submitted that it is not correct that an injunction to be granted must restrain the enticement of all customers and that if the evidence does not extend to support an injunction of that width, then no injunction can be granted. He has referred me, in this regard, to two decisions of the Court of Appeal. They are Kone Elevators Pty Limited v McNay (1997) ATPR 41-564 and Rouen v Ryan [2001] NSWCA 230. In the latter case Beazley JA said (at [2] and [3]): "2 Section 4(1) of the Restraints of Trade Act 1976 (NSW) provides: '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 It is correct to say, as Young J said and Davies AJA has endorsed, that s 4(1) of the Act does not allow the Court to remake the contract or a covenant in it: see Kone Elevators Pty Limited v McNay & Anor (1997) ATPR 41-564. However, as Sheller JA pointed out at 43,833: 'If the Court can read down a covenant in restraint of trade, otherwise void as against public policy, to an extent that makes its enforcement not against public policy, the Court may restrain a breach of the covenant so read down By this means a party may be able to restrain a particular breach of covenant even though the covenant is expressed in terms so wide as to be void as against public policy at common law. Section 4(1) of the Act has confirmed and enlarged the capacity of the Court to enforce just and reasonable covenants which may on their face be too widely expressed.'"

In my view, I am able, if on the evidence it seems to be the appropriate course, to grant an injunction restraining the enticing of particular employees on an interlocutory basis. 14 This is also important in relation to the next issue, which is issue (4), as to the balance of convenience. In my view, in relation to the 11 organisations established to be customers in a prima facie way, the plaintiff has shown a case for a restraint only in favour of one. The balance of convenience is against restraint in relation to the others, because there simply is not enough evidence of engagement of the defendant with the others, to justify a restraint which would inhibit his dealing with them. In saying this, I bear in mind the warnings that have often been given against too readily granting injunctions which would restrain, or impede, an ex employee earning a living. I should say in this regard, I have taken into account the fact that the defendant, on the evidence, was a man in the middle. He is not simply an on the road salesman. His engagement in the overall strategy of selling and in his dealings with his principal customers, is shown in the evidence set out above. On the other hand, it was conceded by Ms Verschuer, who gave evidence on behalf of the plaintiffs, that the defendant could not be regarded as a senior executive. 15 Young J (as his Honour then was) in First Australia Inc v Shade NSWSC 31 July 1998 unreported discussed the circumstances in which ex employees would, or would not, be restrained from solicitation of customers. It was submitted to me that non solicitation injunctions were available to be granted to employees who were, in effect, "at the coal face". What was meant by that was that they were intimately connected with the employer's dealings with particular customers. Young J referred to situations "where the employee is in frequent face to face contact with the customers, where the employee alone knows the customers and their requirements and where the contact takes place away from the employer's premises."

I do not take his Honour as having intended, in that formulation, to lay down particular criteria that had to be met in all cases, but to illustrate the closeness and centrality of contact between the employee and the customer, which made restraint against solicitation an appropriate remedy. Why, in my view, there cannot be restraint against solicitation in respect of 11 customers, is that in respect of ten, that sort of contact between the defendant and the customers, as opposed to them simply being customers during the time of his employment, is not established. 16 There is, however, one customer in relation to whom there is an arguable case, that the defendant was "at the coal face". That customer is Woolworths. An injunction in relation to Woolworths was strongly opposed by Mr Moses on the ground that, although Woolworths had undoubtedly been a customer and one for which the defendant had had some responsibility, the seller/customer relationship between the plaintiffs and Woolworths was over. The evidence however, does not go that far. There is some continuing supply to Woolworths and, no doubt, endeavours to recover Woolworths' custom. Some correspondence upon which Ms Verschuer was cross examined, to demonstrate the recent diminution of business with Woolworths, did that, but also had another effect. That correspondence tended to show the central part played by the defendant in the plaintiffs' dealings with Woolworths. It may well be at this time, when the commercial relationship between the plaintiffs and Woolworths is diminished and they are seeking to recover it, that a restraint against enticement is of particular importance. 17 The fifth issue that was raised was as to the adequacy of damages as a remedy. It was suggested that, the onus being on the plaintiff, there was nothing to establish the inadequacy of damages as a remedy. However, it seems to me clear, from all the circumstances of the case, that this is one of those cases where the difficulty of detection of breaches of the obligations; the difficulty of establishing causation between any loss of business with customers and any actions of the ex employee; and the difficulty of the calculation of the quantum of any damage arising from loss of business, indicate this as a case in which the remedy of damages should be regarded as inadequate and injunctive relief appropriate. As I say, those propositions appear to me, from the material before me, to be inherent in the business dealings with which this case is concerned. 18 The sixth issue is what has been called the unclean hands issue. That is an issue as to certain unfortunate events regarding the entry of orders for relief obtained ex parte in this matter and communications made on behalf of the plaintiffs to the defendant concerning them. I shall say more about those facts later. 19 The standard authorities concerning the granting of interlocutory injunctions have been put to me by Mr Moses. I shall not refer to them, except to say that I have attempted to carry out the exercise commended by McLelland J in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 at 535 - 6. In my view the following have been established. There is an arguable case that there was a non enticement provision in force between the defendant and his former employer. There is an arguable case that the restraint is valid and could be read down under s 4(1) of the ROTA. In my view damages are not, in the circumstances, an adequate remedy. On my view of the balance of convenience, I propose to grant injunctive relief, but injunctive relief limited to the case only of Woolworths. 20 On the balance of convenience, I bear in mind the damage the plaintiffs may suffer in relation to their dealings with a customer of the importance of Woolworths against the lack, it seems to me, of any great disadvantage to the defendant in undergoing this restraint, in addition to the restraints that he has voluntarily undergone. I am not ignoring for a moment the caution with which restraints of this sort should be approached, or the importance of his right to earn his living. He has a job with another employer. He is obviously able to carry out that job and continue in employment with that employer, in the face of the wide undertakings that he has proffered. It does not seem to me likely (and there is nothing in the evidence to indicate) that his new employment will be threatened by the imposition of an additional restraint relating to Woolworths. Whilst it may be that a restraint greater than a restraint of six months could arguably be justified in relation to Woolworths, so that a restraint in relation to Woolworths until further order would be appropriate, in my view the practical course, bearing in mind the limitation to six months of the voluntary restraints is that the restraint I should grant in relation to Woolworths, should also be limited to six months, so that there is only one period of restraint. Just as I have already indicated that this judgment is not intended to preclude a re approach by the plaintiffs for further interlocutory relief after the six months, if the circumstances warrant it, that situation should be regarded as equally applying to the restraint in relation to Woolworths. 21 I have not ignored the unclean hands issue in carrying out the balancing exercise relating to interlocutory relief. The unfortunate situation that arose and to which I have already referred was remedied when the matter first came before a Judge in open court in the Duty list ("the second Judge"), not being the Judge who granted the ex parte relief ("the first Judge"). Any disadvantage to the defendant was removed from that time. The second Judge granted further relief, which has again been extended up to the present time. I do not think that unfortunate matter should prevent the grant of such amount of further interlocutory relief as I have thought appropriate at this stage. 22 However, it has also been put that that matter should go to the question of costs. What occurred at the time of the ex parte application was not entirely the fault of the plaintiffs' solicitors, but they must be regarded as bearing some of the blame. It is quite clear on the evidence that the first Judge did not make an order that the defendant file an affidavit giving certain information. This was sought before the first Judge, but his Honour declined the relief. Unfortunately, in the form of order that went down to the Registry, that order was not crossed out of the document, and the Duty Registrar, not unnaturally, entered orders that included the order that avowedly had not been made at that time. The error constituted by the failure to strike the order not made out of the forms of orders sent down to the Registry was an error inside the Court. However, it seems to me, on the material that I have seen, that, as is quite common, the entry of judgment was preceded by the presentation by the plaintiffs' solicitor to the Duty Registrar of a minute of order for entry. As well as not being crossed out in the Court's copy of the form of orders, the order which was not made was included in the minute of order that was presented by the plaintiffs' solicitors to the Duty Registrar for entry. I accept their word that this was not noticed at the time and was not noticed for some days after that. However, the plaintiffs' solicitors cannot justly complain that they played no part in the unfortunate situation of procuring the entry of an order which had not been made and serving it upon the defendant. Their part in it was compounded by their notification to the defendant that he had been ordered to appear before the Court on the return day of the summons. This, of course, was simply not so. All that was occurring was that he was to be served with a summons, which gave him notice to attend on that day, if he desired, and warned of consequences which might occur to his detriment if he did not attend. The initial conduct was, to my mind, also compounded somewhat by an initial niggardliness on the part of the plaintiffs' solicitors in acknowledging the part that they, rather than the Court, had played in this unfortunate situation and in apologising, either to the defendant or to the Court, for the inappropriate manner in which ex parte orders were dealt with and communicated. I have since been presented with a fulsome and proper apology in writing from the solicitors involved, which mitigates this last aspect of the matter, and I am told that a fuller apology has also now been given to the defendant than had previously been given. 23 It is not, of course, the aim of costs orders to punish. The orders were served and the communication about an order to attend was made just before Easter. The defendant, who was to go away for a holiday, apparently spent long hours taking steps to comply with the aid of solicitors with an order which had not, in fact, been made at the time. In all the circumstances, I think it appropriate that the plaintiffs should be ordered to pay the defendant's costs of the proceedings up to and including 14 April 2004 and to pay those costs on the indemnity basis. The 15 April was the day when the matter came before the second Judge in open Court and the situation was set right. 24 It has been put to me that the true position was established and communicated by the plaintiffs' solicitors at 6.10 pm on 13 April, so that 14 April should not be included in my order. However, I adhere to the view that I have already expressed, that the appropriate cutoff time was the beginning of the day when the matter came before the second Judge for formal correction in Court. 25 As for the costs of the balance of the application, this may be a matter of some considerable debate. There has been some success each way, but no doubt the defendant will say that there has been very little success beyond what the defendant at some stage along the way offered. For various reasons, I think the more appropriate course is to reserve the costs of this application, so that it may be considered in the light of the final result of the proceedings. …oOo… 26 I am asked to order that the costs order that I have made up to and including 14 April 2004, be assessed and paid forthwith. I decline to make that order.

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