Cl 4.4 and cll 7.2 and 7.3 as restraints of trade
65 For the reasons given above it is not strictly necessary that we consider the application of the restraint of trade doctrine to cll 7.2 and 7.3 of the Candle-Woolworths contract. Our primary conclusion, as noted, is that cll 7.2 and 7.3 must be taken at face value as facts existing at the time the Candle contract was made. For the sake of completeness, and in the event that our primary conclusion in this regard is incorrect, we consider the application of the doctrine to both the Candle contract and the Candle-Woolworths contract.
66 As conveniently explained by Brereton J in Cactus Imaging at [10]:
Although at common law a restraint of trade is contrary to public policy and void unless it is justified by the special circumstances of the particular case (for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public) [Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535 at 565; Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 706 and 707; Lindner v Murdock's Garage (1950) 83 CLR 628 at 653], in New South Wales a restraint is valid to the extent to which it is not against public policy, even if not in severable terms [Restraints of Trade Act, 1976 (NSW) s 4(1); Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449, [26]-[27]]. 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 Restraints of Trade Act, s 4(3) [Orton v Melman [1981] 1 NSWLR 583; Woolworths Ltd v Olson [2004] NSWCA 372, [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.
67 These considerations suggest that if a party benefiting from a restraint can establish that the restraint protects a legitimate interest and is reasonable as between the parties and it is not otherwise unreasonable as a matter of public policy it may be difficult for the party subject to the restraint to succeed in a claim that the restraint was nevertheless unfair or harsh, at least insofar as the claim of unfairness or harshness relates to the substance of the restraint rather than some other circumstance (such as, in the present case, the fact that Candle knew about cll 7.2 and 7.3 of the Candle-Woolworths contract when the Candle contract was executed but Informax and Mrs Menano-Pires did not).
68 The submissions of Mrs Menano-Pires and Informax of present relevance concern the substance of the restraint of trade provisions. Each is said to be a matter in existence at the time the Candle contract was made and which is relevant to the question whether that contract is unfair or harsh in whole or part. In summary they said:
(1) The second extension of the Candle contract was for a term of six months. Measured against that term the six month restraint in cl 4.4 was unreasonably long and thus unfair.
(2) The third extension of the Candle contract was for a term of four weeks. Measured against that term the six month restraint in cl 4.4 was unreasonably long and thus unfair.
(3) The short term of the extensions shows that cl 4.4 had enormous potential to sterilise Mrs Menano-Pires and Informax form working for numerous companies even if the work for those companies was on a short-term basis only.
(4) The unreasonableness of cl 4.4 is supported also by the fact that Candle was entitled to terminate the Candle contract immediately if Woolworths was dissatisfied with the services provided and otherwise on the same terms as Candle received from Woolworths (cl 7.1(a) of the Candle contract). Under the Candle-Woolworths contract cl 9.1 provided for termination with 10 days' notice for any reason. Accordingly, Mrs Menano-Pires and Informax could be terminated on 10 days' notice whereas the restraint in cl 4.4 operated for six months irrespective of the circumstances in which the contract concluded.
(5) Clause 4.4 applied to Woolworths and its related entities with no geographical limit and no limit in respect of the capacities in which Mrs Menano-Pires would be prevented from employment by Woolworths. The restraint thus has no sensible or legitimate limit referable to the interests sought to be protected, particularly given that Mrs Menano-Pires was to carry out work for Woolworths in one location only and Woolworths is a multinational business.
(6) Informax is not a labour hire company and was not in a position to take the Woolworths labour hire business away from Candle.
(7) By reason of her role Mrs Menano-Pires and Informax did not have access to any of Candle's confidential information.
(8) Candle had not had to train or otherwise make Mrs Menano-Pires marketable and had not expended any resources in so doing.
(9) Mrs Menano-Pires was not an employee of Candle. Nor was she Candle's agent. Given her limited role she was not and could not be Candle's "human face" to Woolworths.
(10) Clause 4.4 is disproportionate in that its effect was to protect an income stream for Candle of $4,959 per quarter whilst depriving Informax and Mrs Menano-Pires of an income of $900 per day for six months.
(11) Any protectable interest of Candle was limited to that relating to its introduction of Mrs Menano-Pires to Woolworths. That interest could have been protected by a fee payable by Woolworths to Candle on Woolworths directly employing Informax and Mrs Menano-Pires.
(12) Insofar as the interest against opportunistic disintermediation is concerned there is no such protectable interest by reason of the fundamental proposition that people are not property. There can be no proprietary interest of Candle in the skills and capacities of Mrs Menano-Pires.
69 Submissions to the same effect were made in respect of cll 7.2 and 7.3 of the Candle-Woolworths contract.
70 It will be apparent that these propositions are fundamentally directed at the reasonableness of the restraints as between Mrs Menano-Pires and Candle. In this sense the submissions relate alleged unreasonableness to unfairness. Given this, it is not apparent that, in the present case at least, there is capacity to find the restraints both reasonable and yet unfair on the basis alleged.
71 We are not concerned by the fact that the primary judge treated Candle as supporting the reasonableness of the restraints by reference to "two quite distinct legitimate interests" (at [24] of the first judgment). Although we agree in principle with Candle's submission that it would be "incorrect to allow convenient labels such as customer connection and opportunistic disintermediation to mask the substance of the underlying interest contended for by Candle" we do not consider that the primary judge did so. We accept also that Candle asserted the existence of a commercial interest capable of protection being its interest in not only protecting its connection with (and thus income stream from) Woolworths but also its connection with Informax which was one of Candle's pool of contractors. Insofar as the primary judge dealt with the interests of Candle as distinct we agree with Candle's submission that its case was not limited to an assertion of customer connection based only on the recognition of that interest in Dalysmith and nothing more (see the first judgment at [33] to [42]). Candle relied on the undisputed facts of the case that it had introduced Mrs Menano-Pires and Informax to Woolworths and arranged her initial placement at Woolworths enabling her to develop contacts with relevant Woolworths employees to obtain further work and, when she no longer wished to deal through Candle, to deal directly with Woolworths for the provision of the same services to the same part of Woolworths into which Candle had initially placed her. To the extent that Candle's case was rejected because it did nothing more than rely on Dalysmith we accept Candle's submissions to the contrary.
72 Many of the submissions of Mrs Menano-Pires and Informax did not directly grapple with the true nature of Candle's asserted interest. As Candle submitted, the uncontested evidence before the primary judge established (consistent with the primary judge's findings) that:
(1) Candle assiduously pursued the acquisition of clients who were large corporations with significant IT needs under long-term labour supply agreements. These were known as "Preferred Supplier Agreements" (or PSAs). Under these long-term arrangements Candle was able to secure large volumes of work through the continuous and on-going engagement of contractors (at [5] of the first judgment).
(2) About 65% of Candle's business came through PSAs. Considerable efforts went into procuring clients under PSA arrangements. Usually these resulted from a tender process which involved a careful assessment of matters such as likely future volume, margin and profitability. Sometimes in excess of 100 hours of staff time might be required to prepare such a tender. If a PSA was secured there were then substantial costs in its administration. The largest of these were staff costs. Two types of employees were involved: these were, at one end, account managers who liaised with the relevant client and arranged the placement of appropriate contractors; and, at the other end, consultants who were assigned to look after the interests of the contractors. The rationale behind that approach was the need to maintain a pool of contractors who were readily available to meet the demands of the clients (at [60] of the first judgment).
(3) At the same time, the maintenance of the pool of contractors was an important aspect of Candle's business which necessarily depended on an ability rapidly to be able to service the needs of its clients. Thus significant expenditure was incurred in finding appropriate contractors to be placed in the pool, satisfying the needs of those contractors (to encourage them to stay in the pool) and keeping track, in an orderly way, of the skill set that the pool contained. Ms Quick gave evidence that Candle's single largest cost was the on-going maintenance of its contractor database which required a substantial workforce of recruiters and contractor care consultants together with attendant infrastructure and advertising costs (at [62] of the first judgment).
(4) Candle thus put considerable economic effort into arranging the placement of contractors with its clients (at [63] of the first judgment).
73 Insofar as the interest was labelled as opportunistic disintermediation it may be accepted that no such interest had been recognised in Australia. Nevertheless as the primary judge said at [28] of the first judgment the categories of legitimate interest are not closed (citing Heydon (2008) at 133). Moreover, the primary judge's analysis at [45] to [52] of the first judgment is compelling. We agree with the primary judge that "there may be a real conceptual distinction between the notion that an employer might have interests in the arrangement of its staff as a whole and the notion that it has an interest in any particular employee" (at [50] of the first judgment). We agree too with the primary judge's analysis of the decisions in Aussie Home Loans and Cactus Imaging.
74 In Aussie Home Loans the issue was the interest an employer might have in preventing a former employee from enticing current employees away from the employer (at [20]). At [24], White J observed that previous decisions indicated "that a covenant against poaching employees of a former employer is not necessarily invalid. The employer may be able to demonstrate a legitimate interest against this particular form of competition, but the restraint will be invalid if it goes wider than is necessary to protect such an interest". In Cactus Imaging the issue was also (amongst others) soliciting of current employees by a former employee. At [25] Brereton J also conveniently summarised the principles underlying the proposition that an employer may have a legitimate interest in protecting its customer connection as follows:
It is plain that an employer's customer connection is an interest which can support a reasonable restraint of trade [Hitchcock v Coker (1837) 6 Ad & El 438 at 454 ; [1835-42] All ER Rep 452, 456-7 (Tindal CJ); Herbert Morris Ltd v SaxelbyDewes v Fitch [1920] 2 Ch 159 at 181; Coote v Sproule (1929) 29 SR (NSW) 578 at 580 (Harvey CJ in Eq); Lindner v Murdock's Garage, 633-634 (Latham CJ, Webb J agreeing), 650 (Fullagar J), 654 (Kitto J); Koops Martin v Reeves [Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449], [29]-[33]]. Such a restraint is legitimate if the employee has become, vis-à-vis the client, the "human face" of the business, namely the person who represents the business to the customer - or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter 105 NE (2d) 685, 706 (Ohio, 1951): "The personal relation between the employee and the customer [is] such as to enable the employee to control the customer's business" [Twenty-First Australia Inc v Shade (NSWSC, Young J, 31 July 1998, unreported), BC9803667, 12; Koops Martin v Reeves, [34]]. While the employer is not entitled to be protected against mere competition by a former employee, the 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 - which, because the employee has in effect represented the employer from the customer's perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer [Koops Martin v Reeves, [30]].
75 At [32] to [33] in Cactus Imaging Brereton J also noted that:
[32] Were the restraint in cl 9.1.2 supported solely by customer connection, it would be prima facie excessive insofar as it prohibited solicitation of customers other than those with whom Mr Peters dealt, and in particular those who had become customers only since he had left Cactus [Coote v SprouleHarlow Property Consultants Pty Ltd v Byford [2005] NSWSC 658, [30]; Konski v Peet [1915] 1 Ch 530 at 539; Smith v Ryngiel [1988] 1 Qd R 179 at 186].
[33] However, such a restraint may be reasonable, notwithstanding that it extends beyond customers with whom the employee has personal contact, in particular where, despite the absence of personal contact, the employee may have acquired influence over or special knowledge of the clientele as a result of the seniority of his or her position, or where the employee's role includes obtaining and extending custom for the employer's business [Stenhouse Australia Ltd v Phillips [1974] AC 391; Guildford Motor Company v Horne [1933] 1 Ch 935; G W Plowman & Sons Ltd v Ash [1964] 1 WLR 568 ; [1964] 2 All ER 10; Business Seating (Renovations) Ltd v Broad [1989] ICR 729 at 733; Normalec Ltd v Britton [1983] 9 FSR 318 at 324; Dean, The Law of Trade Secrets, 2nd edn, [11.150]; Koops Martin v Reeves [Koops Martin Financial Services Pty Ltd v Reeves [2006] NSWSC 449], [44]]. Mr Peters' position as State Sales Manager places him in that category in respect of the New South Wales clientele, even those with whom he did not personally deal.
76 At [36] in Cactus Imaging Brereton J also recorded the following principles:
Generally, the test of reasonableness for the duration of a non-solicitation covenant, when it is supported by customer connection, is what is a reasonable time during which the employer is entitled to be protected against solicitation, which in turn depends on how long it would take a reasonably competent replacement employee to show his or her effectiveness and establish a rapport with customers [Stenhouse v Phillips; Daly Smith Corporation (Australia) Pty Ltd v Cray Personnel Pty Ltd (NSWSC, Young J, 14 April 1997, unreported)]. A related, albeit subsidiary, consideration is how long might the hold of the former employee over the clientele be expected to last before weakening [Koops Martin v Reeves, [88]].
77 At [41] his Honour said:
As White J has said in Aussie Home Loans v X Inc Services [2005] NSWSC 285, [36], the reasonableness of the duration of an otherwise justifiable restraint is often difficult to gauge, and where the parties have equal bargaining power it will often be appropriate to regard them as the best judges of what length of period is reasonable - although, as the result of that case itself shows, such considerations are far from conclusive.
78 Brereton J also gave detailed consideration to the restraint concerning the non-solicitation of current employees at [43] to [56]. At [55] and [56] his Honour concluded in these terms:
[55] But apart from protection against misuse of confidential information, does an employer have a protectable interest in staff connection - that is, in maintaining a stable trained workforce? The cases denying that there is any such legitimate interest emphasise that an employer does not own the workforce, as if employees were akin to stock-in-trade. That is self-evident, but nor does an employer own the customers, who are also not akin to stock-in-trade; yet a connection with customers is unquestionably amenable to protection by covenant. The employees, along with the suppliers and the customers, make up the three relations upon which the profitability of a business depends. The customers are not property, but their connection with the business adds value to the business and is recognised as deserving of protection in the proprietor's legitimate interest. Similarly, employees are not property, but, all else being equal, a business with a stable trained workforce will be more attractive to a purchaser and command a higher price than one with a workforce which is unstable, disruptive or poorly trained, just as a loyal and satisfied clientele makes a business more attractive and valuable. In my opinion, staff connection constitutes part of the intangible benefits, which may give a business value over and above the value of the assets employed in it, and thus comprises part of its goodwill. It is amenable to protection by a covenant in a manner similar to customer connection, even in the absence of protectable confidences.
[56] In the absence of confidential information, similar considerations inform the reasonableness of such a covenant in respect of its duration as are relevant to the reasonableness of a covenant protecting customer connection: essentially, how long might the hold of the former employee over the other employees be expected to last before weakening. That will be influenced, inter alia, by the seniority of the former employee. There is unlikely to be any influence over employees with whom the former employee did not have contact, except perhaps in the case of senior staff. Another consideration is that it is within the capacity of an employer to ensure the stability of its workforce by offering key staff long term contracts of employment, so that solicitation of staff with such contracts would constitute the tort of inducing breach of contract [cf Lumley v Gye (1853) E&B 216 at 118 ER 749]. It is difficult to see why, as a matter of policy, an employer who wishes to maintain flexibility in its labour force by engaging staff on contracts terminable on relatively short notice on either side, should at the same time be entitled to insist on maintaining stability by a covenant of the type in question here.
79 The term "opportunistic disintermediation" is more apt to describe the mischief which is to be avoided rather than the interest to be protected. We doubt its utility as a descriptor of a protectable interest and also the validity of the suggestion that all "middle men" have a protectable interest and that such an interest is always the same. Protectable interests will vary from case to case and may not exist at all. In this case, the commercial interest warranting protection was Candle's connection with its clients and with the contractors within its pool as a whole. Candle was entitled to seek to protect that interest from harm by guarding against the risk of being cut out by direct contracting between a contractor from its pool and its client. Whether it validly did so is a different question. We do not share the primary judge's characterisation of the interest as limited to "recouping expenditure together perhaps with a profit component" (at [58] of the first judgment). We think that characterisation of the nature of the interest is both too narrow and operates at too great a degree of specificity.
80 The proper characterisation of the nature of the interest explains another issue. Having accepted Candle's evidence about the efforts it made to secure PSAs by a process of tender and to maintain its pool of contractors, the primary judge nevertheless rejected Candle's case on the basis that Candle had not adduced evidence explaining the value of the effort in placing contractors with clients, its profits or how much it had recouped from Mrs Menano-Pires' placement at Woolworths (at [63] of the first judgment) and had not demonstrated the extent of its disintermediation interest because it had not adduced evidence of its daily margins, overhead costs or amounts recouped (at [65] of the first judgment). Because of the nature of the interest we have identified, we take a different view.
81 Informax and Mrs Menano-Pires were a part of a pool of contractors that Candle had accumulated in order to, amongst other things, meet the service needs of the clients with whom Candle had established PSAs. Candle had proved that it assiduously pursued the acquisition of clients who were large corporations with significant IT needs under PSAs. It had proved that considerable effort went into procuring clients under PSA arrangements and that if a PSA was secured there were then substantial costs in its administration. It had proved that the maintenance of the pool of contractors was an important aspect of the business which necessarily depended on an ability to be able to service rapidly the needs of its clients and that significant expenditure was incurred in finding appropriate contractors to be placed in the pool, satisfying the needs of those contractors (to encourage them to stay in the pool) and keeping track, in an orderly way, of the skill set that the pool contained. In the face of this evidence we do not agree that Candle's interest was dependent on proving how much it had recouped from Mrs Menano-Pires' placement at Woolworths.
82 Contrary to the submissions of Informax and Mrs Menano-Pires, Candle undoubtedly had a commercial interest in maintaining its connections with both the client under the PSA, being Woolworths, and its pool of contractors. It is not to the point that Candle has no proprietary interest in the skills and capacities of Mrs Menano-Pires. Candle did not assert any proprietary interest in Mrs Menano-Pires' skills and capacities which it accepted were her own and in no way belonged to Candle. The evidence which Candle adduced and which the primary judge accepted established the existence of its interest as described, in its connections with Woolworths as the client under the PSA and with Informax and Mrs Menano-Pires as part of the pool of available contractors. This interest (which is better described as "commercial" than "proprietary") had been created by Candle's efforts. Recognition of this interest is thus consistent with the observation of Lord Wilberforce in Stenhouse Ltd v Phillips [1974] AC 391 (at 400) that:
The employers' claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.
83 We also do not accept the submission for Informax and Mrs Menano-Pires that the primary judge's acceptance of the proposition that Candle's interest could be protected by the payment of a fee by Woolworths to Candle (at [64]) necessarily should have led to the view that the restraints were unreasonable. First, because of the different characterisation of the interest discussed above, we are not persuaded that Candle's interest necessarily could have been protected by the mere payment of a fee. Second, even if the interest could have been protected in that way, we do not consider the decision in Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 (Office Angels) supports the submission. It is true that in Office Angels at [49]-[50] the UK Court of Appeal rejected the proposition that in reviewing a restraint of trade a court is not entitled to consider whether or not a provision of a narrower nature would have sufficed, but this is not the same as the submission in the present case. It may also be accepted that in Stacks Taree Pty Ltd v Marshall (No 2) [2010] NSWSC 77 (Stacks Taree) McDougall J considered that where a restraint contained both a non-solicitation covenant and a covenant not to compete "the reasonableness of the latter must be assessed by reference to the adequacy of the protection, for the legitimate interests of the covenantee, offered by the former" so that it "will only be if the former does not provide adequate protection for the legitimate interests of the covenantee that the latter may be upheld" (at [63]). Again, this is a different proposition from that made for Informax and Mrs Menano-Pires.
84 We also accept Candle's submission that cl 7.2 of the Candle-Woolworths contract cannot be characterised as a covenant by Woolworths "not to be poached" (at [31] of the first judgment). Clause 7.2 of the Candle-Woolworths contract is a mutual covenant by Woolworths and Candle not to poach each other's employees and contractors. Accordingly, cl 7.2 is not a fetter on Woolworths' right to contract with a labour hire company other than Candle and does not, as the primary judge put it, bind Woolworths "not to leave Candle's stable" (at [31] of the first judgment). So understood cl 7.2 of the Candle-Woolworths contract is a natural corollary of cl 4.4 of the Candle contract. Candle has an interest in protecting its pool of contractors from direct engagement by Woolworths and Woolworths presumably has an interest in protecting its employees from becoming part of Candle's pool of contractors. On this basis and from Candle's perspective, cl 7.2 of the Candle-Woolworths contract is referable to the same interest as that underpinning cl 4.4 of the Candle contract.
85 None of these considerations, however, determine the question of the reasonableness of the restraints as between the parties or the extent to which they are supportable on public interest grounds. Although there is force in Candle's submissions about Mrs Menano-Pires having been able to exploit the connections she developed in Woolworths by reason of her placement there by Candle under the PSA, none of the submissions contend with the essential question whether the restraints "afford no more than adequate protection to the party in whose favour it is imposed" (Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707), or whether the public interest limb of the test for validity is infringed.
86 The issue in relation to cll 7.2 and 7.3 is one of the reasonableness of the restraint having regard to the interests of Candle and Woolworths and the public interest. The observations by Jenkins LJ in Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1959] Ch 108 at 125-126 (Kores Manufacturing) remain relevant:
…an employer has no legitimate interest in preventing an employee, after leaving his service, from entering the service of a competitor merely on the ground that the new employer is a competitor. The danger of the adequacy and stability of his complement of employees being impaired through employees leaving his service and entering that of a rival is not a danger against which he is entitled to protect himself by exacting from his employees covenants that they will not, after leaving his service, enter the service of any competing concern. If in the present case the plaintiffs had taken a covenant from each of their employees that he would not enter the service of the defendants at any time during the five years next following the termination of his service with the plaintiffs, and the defendants had taken from their employees covenants restraining them in similar terms from entering the employment of the plaintiffs, we should have thought that (save possibly in very exceptional cases involving trade secrets, confidential information and the like) all such covenants would on the face of them be bad as involving a restraint of trade which was unreasonable as between the parties. Here the plaintiffs and the defendants have, as it seems to us, sought to do indirectly that which they could not do directly by reciprocal undertakings between themselves not to employ each other's former employees, entered into over the heads of their respective employees, and without their knowledge. It seems to us to be open to question whether an agreement such as that, directed to preventing employees of the parties from doing that which they could not by individual covenants with their respective employers validly bind themselves not to do, should be accorded any greater validity than individual covenants by the employees themselves would possess.
87 Although, at least insofar as Candle is concerned, we do not consider cl 7.2 as merely a covenant against competition, the clause is a reciprocal undertaking between Candle and Woolworths which has the effect of imposing a restraint on a third party. That consideration alone dictates that the provision warrants close scrutiny. As Dillon LJ observed in Hanover Insurance Brokers Ltd v Schapiro [1994] IRLR 82 (at [15]), there are difficulties in law with non-poaching agreements between employers. Those difficulties, as Dillon LJ noted, arise because of the right of an employee to work for his or her employer of choice. In a similar context, Wilcox J in Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 (Adamson) (at 267 and 280-81) said:
[T]he right to choose between prospective employers is a fundamental element of a free society. It is the existence of that right which separates the free person from the serf.
88 Such a right of course may be compromised by a covenant freely given by the employee. However, that an employee's ability to earn a living may be sterilised or diminished by contractual or other arrangements made or imposed by others raises issues as to the validity of such a restraint on public interest grounds.
89 The non-poaching covenant the subject of the litigation in Kores Manufacturing was struck down on the public interest ground by Lloyd-Jacob J at first instance ([1957] 1 WLR 1012). The Court of Appeal expressed some doubt that the covenant was defensible on that basis (see at 126-128) but preferred to strike down the restraint on the ground that it was unreasonable in the interests of the parties. Lord Reid in Esso Petroleum Co. Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269 (at 300) thought that it would have been more correct to hold that the restraint was against the public interest. Lord Hodson suggested the same (at 319). That approach was followed by the Hong Kong Court of Appeal in Kao, Lee & Yip (a firm) v Koo Hoi-Yan [1995] 1 HKLR 248 (at 252-253). In that case a covenant restrained a former partner from employing any employee of the partnership whether or not that employment had been solicited by the former partner. The Court considered such a clause to unjustifiably restrain competition in the labour market and that agreements of that nature were contrary to the public interest. Restraints affecting third parties have also been struck down on the public interest ground in a range of cases involving sporting professionals and the imposition of bans or other restrictions by clubs and sporting associations: see the discussion in Heydon (2008) at 262; and the cases discussed by Hungerford J in Daley v New South Wales Rugby League Ltd (1995) 78 IR 247 at 280-287.
90 Clauses 7.2 and 7.3 of the Candle-Woolworths contract prohibit the employment or engagement of third parties irrespective of whether the employment was solicited by a party to that contract. When read with cl 7.4 that prohibition does not apply to positions which have been publicly advertised and where no solicitation occurred. In other circumstances, the prohibition on employment irrespective of any solicitation remains. On that basis alone, having regard to the authorities to which we have just referred, cl 7.2 does not withstand scrutiny on the public interest ground. However, that was not the basis upon which cl 7.2 (or cl 4.4) was challenged either before the primary judge or in this appeal. The challenge made was fundamentally based on the restraint being unreasonable as between Woolworths and Candle. For reasons we will explain, the provision also does not withstand scrutiny on that basis. This is so because, amongst other things, it is relevant to take into account the interests of third parties when assessing whether the restraint goes no further than is reasonably necessary to protect the legitimate interests of the persons imposing the restraint: Adamson (at 246-8 (Sheppard J), at 266-267 (Wilcox J) and at 289-290 (Gummow J)).
91 The validity of a restraint is assessed at the time of entry into the contract and by reference to what the restraint entitled or required the parties to do rather than what they intend to do or have actually done: Woolworths Ltd v Olson [2004] NSWCA 372 at [40]. On this basis the restraint in cl 7.2 goes far beyond what might be thought reasonable to protect the interest of Candle which has been identified. Insofar as it must have been in the contemplation of the parties that cl 7.2 would apply to a person such as Mrs Menano-Pires it is apparent that the restraint: - (i) operates for the period of 12 months irrespective of the length of time for which the person might have been involved as a Representative in the provision of the Services, (ii) applies to Woolworths as a whole and its related entities in all locations irrespective of the location within which the Representative provided the Services, and (iii) applies to all Representatives directly involved in the provision of the Services irrespective of their level of involvement or the nature of their role. It seems to us that cl 7.2 is patently excessive having regard to the nature of the interest of Woolworths and Candle in preventing poaching of each other's employees and contractors.
92 Section 4 of the Restraints of Trade Act was explained in Woolworths Ltd v Olson at [42] to [47]:
[42] This provision was authoritatively expounded by McClelland J in Orton v Melman [1981] 1 NSWLR 583. First, the court determines whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed. Next, the court determines whether the restraint, so far as it applies to that breach, is against public policy. If it is not, the restraint is valid, subject to any order which may be made under s 4(3).
[43] McClelland J continued (at 587-8):
Whether, and if so the extent to which, the court will have to define the outer limits of validity of a restraint in a particular case, will depend upon the nature, and degree of generality, of the relief which in that case it is necessary or proper for the Court to grant. For example, where injunctive relief is granted, the duration of a valid restraint of any breach enjoined will have to be determined. In applying s 4(1) the court should consider the circumstances of the particular case before it and determine the validity of the restraint to the extent that it purports to operate in those circumstances, and it is unnecessary to consider its purported operation in other conceivable sets of circumstances. Other considerations may of course arise in an application under subs (3) of s 4. In my opinion the enactment of s 4(1) has succeeded in requiring attention to be concentrated on "the actual breach" rather than "imaginary breaches" for the purpose of determining validity of a restraint.
[44] These principles have been endorsed in later decisions, including cases in this Court …In Industrial Rollformers [Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001] NSWCA 111] Giles JA (with whom Priestley and Meagher JJA agreed) said (at [165]):
The operation of s 4(1) of the Act is now relatively well settled. It does not permit the Court to remake the contract or a covenant in it, and although sometimes it is said that it allows the covenant to be read down or redrafted that is really an inaccurate description. The provision looks to the postulated breach, and permits the Court to enforce a covenant otherwise invalid as against public policy if the restraint in the covenant so far as it applies to the postulated breach is not contrary to public policy. The Court is given the capacity to enforce a reasonable restraint of trade falling within the expressed restraint although the expressed restraint is too widely stated. It is sufficient to refer to Kone Elevators Pty Ltd v McNay (1997) ATPR 41-564 at 43,833 and the cases there cited, which include Orton v Melman.
[45] Section 4(1) allows the court to ignore the fact that the restraint goes beyond what is reasonable, provided the restraint can be enforced to an extent that is reasonable. The subsection permits the court to enforce a covenant whose provision is overextensive as regards area, time or extent….
[46] The court may not rewrite the covenant while exercising the power under s 4(1). In the language of this Court in ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 at 674:
… a restraint validated by the section must fall wholly within the scope of the contractual provision. Amputation is directed but reconstruction is not.
[47] "Amputation" is not confined to blue-pencilling. As Sheller JA pointed out in Kone Elevators [Kone Elevators Pty Ltd v McNay & Anor (1997) ATPR 41-564] (at p 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 a 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.
93 In terms of s 4(1) of the Restraints of Trade Act the restraint in cl 7.2 of the Candle-Woolworths contract applied to Informax and Mrs Menano-Pires for periods of 12 months commencing on 1 June 2007 for the Candle contract, 3 December 2007 for the first extension, 31 May 2008 for the second extension and 30 June 2008 for the third extension. The actions in breach of the restraints occurred between 1 July and 30 September 2008 when Informax and Mrs Menano-Pires were directly engaged by Woolworths at the same location where Mrs Menano-Pires had been placed by Candle. During this period cl 7.2 in each of the three contracts as extended applied. As noted, the extensions were for periods of 26 weeks, 26 weeks and four weeks respectively.
94 The issue is the length of the restraint. Brereton J in Cactus Imaging in the passage already quoted at [75] above posed the test for reasonableness in relation to the duration of a non-solicitation covenant given by an employee as dependent upon how long it would take a reasonably component replacement employee to show his or her effectiveness and establish a rapport with customers. His Honour relied upon the observations of Young J in Dalysmith who in turn relied upon the American cases considered by Professor Harlan M Blake in his article "Employee Agreements not to Compete" (1960) 73 Harv L Rev 625, 677. Other judges have preferred a different approach which focuses upon the time that it would take to sever the relationship built up between the former employee and the clients for whom work was performed: Stacks Taree (at [66]-[72]). Considering the two approaches, Allsop P (with whom Hodgson JA and Handley AJA agreed) in Hanna v OAMPS Insurance Brokers Ltd (2010) 202 IR 420; [2010] NSWCA 267 (at [43]-[44]) thought that there is no legally required test and that the use of one test or another depended upon what was required, in the circumstances, to protect the connection of the former employer. Allsop P noted that there is a balance to be struck between reasonable protection to which the former employer was entitled and the right to practice a trade or profession of the former employee. We agree with this approach.
95 In this case, the risk to which Candle was exposed was less than that ordinarily faced by an employer from a former employee soliciting a customer or customers. There was no risk of Informax taking the whole of Woolworths' custom from Candle. The risk was far more limited. It was confined to that custom which Candle could expect to provide to Woolworths through Mrs Menano-Pires and Informax. Mrs Menano-Pires provided IT services to Woolworths. She was not involved in any aspect of the management of Candle's business in respect of Woolworths. She was not involved in any aspect of the management of Woolworths' business in respect of Candle. While her placement by Candle enabled her to develop contacts at Woolworths, Mrs Menano-Pires was but one of Candle's pool of contractors and did not in any way control the flow of work from Woolworths to other Candle contractors, except to the extent that she herself performed part of the IT services Woolworths required.
96 In common with the primary judge at [66] of the first judgment, insofar as cl 7.2 applies to Informax and Mrs Menano-Pires, we can see no basis for a restraint of 12 months irrespective of the length of time of the contracts in question.
97 If reasonable protection for Candle is to be assessed by reference to the time it would take Candle to introduce to Woolworths a replacement Representative and for that Representative to show her or his effectiveness and establish a rapport with Woolworths, our impression is that a restraint of four weeks would suffice in this case. We take that view because, amongst other things, Candle's business model involved retaining a pool of contractors who, like Mrs Menano-Pires, could rapidly understand a client's needs and perform the required services with no delay.
98 If on the other hand, reasonable protection for Candle is to be assessed by reference to the time it would take to sever the relationship likely to be built up between a Representative like Mrs Menano-Pires and Woolworths, our impression is a restraint of three months would likely be required. That conclusion is not affected by the diminishing lengths of term for each of the extensions. The interest remains the same and the extensions were contracted back-to-back.
99 The disparity in result between the two approaches is troubling. It probably reflects the fact that those approaches were formulated in a different context from that in which a labour hire firm operates. The short-term nature of the engagements organised by labour hire firms and the diminished nature of the exposure to risk compared to that generally faced by an employer from the solicitation of customers by a former long term employee, suggests that, ordinarily, adequate protection would be afforded to a labour hire firm by a shorter period of restraint than that which would be required by a former employer. Accordingly, the preferable course is to focus on the time it would take for the labour hire firm to organise the introduction of a replacement worker including the time that it can be expected that a competent replacement will be able to show his or her effectiveness and develop a rapport with the customer. This approach enables the capacity for the exploitation by the worker of the labour hire firm's introduction of the worker to be negated by the opportunity given to the labour hirer to introduce and secure a replacement worker. On this view, we consider that a restraint of four weeks was reasonable to adequately protect Candle's interest. We reach the same conclusion in relation to cl 4.4 of the Candle contract. This result achieves a proper balance between the reasonable protection to which Candle was entitled and the right of Mrs Menano-Pires to practise her trade or profession.
100 Accordingly, we consider that insofar as the restraint encompassed a period of four weeks it would be reasonable and thus valid by operation of s 4 of the Restraints of Trade Act. This does not alter our opinion that the potential operation of cl 7.2 of the Candle-Woolworths contract is a factor which made the Candle contract unfair as, at the time Informax and Mrs Menano-Pires entered the Candle contract, they had no knowledge of any restraint beyond that in cl 4.4 of the Candle contract. Insofar as cl 4.4 encompassed a restraint of four weeks from 30 June 2008, it would be reasonable and thus valid by operation of s 4 of the Restraints of Trade Act. However, and as discussed, Candle does not press its cross-claim and thus damages for breach of cl 4.4 is not in issue.
101 Our conclusion that cl 4.4 of the Candle contract is reasonable and thus valid insofar as it restrained Informax and Mrs Menano-Pires from direct engagement by Woolworths for a period of four weeks means that the Candle contract is unfair given that cl 7.2 of the Woolworths-Candle contract, being a fact existing at the time the Candle contract was made, purports to impose a restraint of 12 months on the same conduct. We would not accept, however, that the provisions of the Candle contract to the extent to which they are valid under that Act are otherwise unfair or harsh under Pt 3 of the IC Act.
102 For these reasons ground 11 of the notice of appeal should be dismissed. Ground 12 should also be dismissed because, as explained above, the primary judge did not in fact decline to decide whether the Candle contract was unfair because it contained cl 4.4. Also, although we have sustained some of Candle's grounds of cross-appeal (specifically, grounds 1, 2, 3, 4 and 6) those grounds do not lead to any relief in the circumstances. We otherwise would dismiss grounds 5, 7 (as the primary judge did not fail to consider Candle's interest against opportunistic disintermediation), and 8 and 9 of the notice of cross-appeal for the reasons given above.