Practice and procedure - Application for an order for trial of preliminary issue - Turns on its own facts

First Plaintiff : Mr R L Le Miere QC & Mr G S French

Second Plaintiff : Mr R L Le Miere QC & Mr G S French

Second Defendant : Mr C L Zelestis QC & Mr D B Shaw

Adamson v NSW Rugby League Ltd [1991] FCA 425; (1991) 103 ALR 319

Addwood Products Pty Ltd v Frost, unreported; SCt of NSW; 11 July 1986

Allen v Gulf Oil Refining Ltd [1980] UKHL 9; [1981] AC 1001

Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40; (1973) 133 CLR 288

Ashmore v Corporation of Lloyd's [1992] 1 WLR 446

Barlow v Neville Jeffress Advertising Pty Ltd [1994] TASSC 181; (1995) ATPR 41-376

Brechin v Shire of Brookton [1999] WASC 3

Brendon Pty Ltd v Russell (1994) 11 WAR 280

Bridge v Deacons [1984] AC 705

Butt v Long [1953] HCA 76; (1953) 88 CLR 476

CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601

Clarkel Holdings Pty Ltd (In Liq) v Kelly, unreported; FCA; 9 September 1999

Cooks Australian Directories Pty Ltd v Stratton (1946) 47 SR (NSW) 189

Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337

Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1967] UKHL 1; [1968] AC 269

Gerahty v Minter (1979) 142 CLR 177

GMB Research & Development Pty Ltd v The Commonwealth, unreported; FCA; 28 August 1997

Hayden Theatres Pty Ltd v Jebb Holland Dimasi Pty Ltd,, unreported; SCt of NSW; 13 March 1998

Herbert Morris Ltd v Saxelby [1916] 1 AC 688

Jacobson v Ross [1995] VicRp 24; [1995] 1 VR 337

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

Laporte Group Australia Ltd v Vatselias, unreported; SCt of NSW; 14 May 1992

Lloyd's Ships Holdings Pty Ltd v Davros Pty Ltd [1987] FCA 70; (1987) 72 ALR 643

Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535

Peters American Delicacy Co Ltd v Patricia's Chocolates and Candies Pty Ltd [1947] HCA 62; (1947) 77 CLR 574

Queensland Co-operative Milling Association v Pamag Pty Ltd [1973] HCA 24; (1973) 133 CLR 260

Reading Australia Pty Ltd v AMP, unreported; FCA; 3 May 1999

Reed v Metropolitan Health Service Board [2000] WASC 70

Rentokil Pty Ltd v Lee [1995] SASC 5318; (1995) 66 SASR 301

Schindler Lifts Australia Pty Ltd v Debelak [1989] FCA 311; (1989) 89 ALR 275

SSA Pacific Pty Ltd v Pragnell, unreported; SCt of NSW; 2 September 1996

Stirling Marine Services Pty Ltd v Austral Piling Constructions Pty Ltd, unreported; SCt of WA (Master Sanderson); Library No 970620; 21 November 1997

Tilling v Whiteman [1980] AC 1

University of Newcastle v GIO General Ltd, unreported; SCt of NSW; 28 September 1995

1 MASTER SANDERSON: This is the defendants' application for trial of a preliminary issue. The application is brought under O 32 r 4. That rule is in the following terms:

"The Court may order that any question or issue arising in a cause or matter whether of law or fact or partly of law and partly of fact, and whether raised by the pleadings or by agreement of the parties or otherwise be tried separately from any other question or issue whether before or after the trial or further trial of the proceedings, and may direct that a case and the question or issue for discussion be stated."

2 The statement of claim pleads that the first plaintiff is a company registered in the United States of America and is the holding company of the second plaintiff. The second plaintiff is resident in Western Australia. The first defendant is a former executive director, employee and shareholder of the second plaintiff, a former employee of the first plaintiff and a former consultant to the first and second plaintiffs. The third defendant is a former employee of the second plaintiff. The second defendant is the alter ego of the first defendant and the fourth defendant is the alter ego of the third defendant. It is pleaded that at all material times the principal business activities of the first plaintiff was providing drilling services and location of underground water resources for the mining industry. (These activities are pleaded in detail in par 12 of the statement of claim.) By par 13 through to par 17 the plaintiffs plead that the first plaintiff carried on business in certain specified countries, including a number of countries in Africa. Paragraph 18 through to par 22 plead the first defendant's involvement with the second plaintiff. Essentially, the first defendant was an executive director and employee of the second plaintiff from the date of incorporation of the second plaintiff on 19 December 1984 through to September 1997. In effect, it is pleaded the second plaintiff was the alter ego of the first defendant. In mid 1997 the first plaintiff took over the second plaintiff and in doing so it paid to the first and second defendants just under $18 million. At the date of the takeover the first defendant was an employee of the second plaintiff. Subsequent to the takeover the employment ceased and the first and second plaintiffs entered into what is in the pleadings referred to as "the Consulting Agreement". A copy of the Consulting Agreement appears as Annexure "DBS1" to the affidavit of David Brian Shaw sworn 19 April 2000 and filed in support of this application. The Consultancy Agreement was not a de facto employment agreement. Pursuant to cl 6.1(e) the first defendant was required to perform services pursuant to the agreement for up to 24 days per annum. Clause 6.1 generally sets out the responsibilities of the first defendant during the term of the Consultancy Agreement and requires the consultant, pursuant to cl 6.1(d) to:

"honestly and diligently perform such services to the Company and at all times use his best endeavors to promote the interests of the Company for the time being;"

3 By cl 9 of the Consulting Agreement the consultant was required to maintain confidentiality. Clause 10 of the Consulting Agreement is a non-competition clause. Because of the importance of this clause to the application I will quote it in full:

"10.1 In consideration of the retention of the Consultant and other valuable consideration, whether directly or indirectly received by the Consultant from the Company or Layne, and in order to reasonably protect the goodwill and the business of the Company, during the Term and for the period set out in clause 10.2 following the expiration or termination for any cause of the Undertaking, within the area set out in clause 10.3, the Consultant must not without the prior written consent of the Company:

(a) either as principal, agent, employee, associate, representative, partner, consultant or assistant of another approach or accept any approach from a Customer, with the view to soliciting for himself or any other person the business of or an order for services from that Customer where that would be in competition with the Company or any related or affiliated corporation;

(b) either as principal, agent, employee, associate, representative, partner, consultant or assistant of another seek to obtain orders in respect of any services provided by the Company or any related or affiliated corporation of the Company to a Customer;

(c) either as principal, agent, employee, associate, representative, partner, consultant or assistant of another seek to encourage an employee of the Company to leave the Company;

(d) plan, organize, participate in, or have any interest in as owner (except listed securities equaling [sic] no more than 10% of the issued capital), director, officer, partner, employee, consultant, agent, lender representative, adviser (paid or otherwise) of any business which is a competitor of the Company, or any affiliated or related corporation; or

(e) accept any employment or position or render any services which would require him to reveal, base judgments upon, or otherwise use any Confidential Information (as defined above).

For the purposes of this clause 'Customer' means any person who at the date of termination of the Consultant's employment by the Company is or was within the 12 months proceeding the termination a client or customer of the Company or a related or affiliated corporation of the Company.

(a) three years, or if that period is determined to be unenforceable then;

(b) two years, or if that period is determined to be unenforceable then;

10.3 The geographical area referred to in clause 10.1 is:

(a) Australia, South America, Africa and Asia, or if that area is determined to be unenforceable then;

(b) Australia, Africa and Asia or if that area is determined to be unenforceable then;

(c) Australia and Africa, or if that area is determined to be unenforceable then;

10.4 Clause 10.1 has effect as separate and independent covenants and restraints consisting of each separate covenant and restraint set out in clause 10.1 combined with each separate period set out in clause 10.2 and each separate geographical area set out in clause 10.3.

10.5 Notwithstanding the provisions of clause 10.1, Consultant will be permitted to make investments in various mining concessions throughout the world, including specifically Equigold NL, provided that such investments do not include, as part of its object or purposes, providing services competitive to those currently offered by the Company.

10.6 If any part of clause 10 is or becomes invalid or unenforceable, that part will be deemed to be eliminated or modified to the extent necessary to make the rest of the clause enforceable.

10.7 The parties agree that any of the acts referred to in clause 10.1 by the Consultant would be unfair, would damage the business of the Company and would lead to substantial loss to the Company.

10.8 The provisions of this clause 10 do not in any way operate to limit the generality of any other clause of this agreement, each of which have at all times independent operation unrestricted by the provisions of this clause 10.

10.9 The Consultant must not represent himself as being in any way connected with or interested in the business of the Company or any related corporation of the Company. For the purposes of this clause it is agreed that the use by the Consultant of the name 'Stanley' as part of a company, business or trading name, which business is competitive with that of the Company, would constitute a representation of connection with the Company."

4 Returning to the statement of claim, by par 35 the plaintiffs claim that the first defendant breached the Consulting Agreement. That paragraph reads as follows:

"From about September 1997 to about May 1998, the First Defendant planned and organised a business (being that of the Fourth Defendant) which is a competitor of the Second Plaintiff or its related corporation in Africa."

5 It is further alleged in par 37 that the first defendant enticed the third defendant to leave the employ of the second plaintiff. The pleading then details what it is alleged the first defendant has done and how the Consulting Agreement has been breached. By par 70 it is pleaded that on 7 September 1999 the first and second plaintiffs accepted what they say was the first defendant's repudiation of the Consulting Agreement. All parties agree that the Consulting Agreement is at an end. However, the first defendant denies that he breached the Consulting Agreement and all defendants deny that they are in any way liable to the plaintiffs. By way of relief, the plaintiffs' claim against each of the defendants' declarations and injunctions. One aspect of the relief claimed by the plaintiffs is enforcement of the non-competition covenant found in cl 10 of the Consulting Agreement.

6 The chamber summons, the subject of this application, was issued by the first and second defendants. It was supported by the third and fourth defendants, but they did not independently seek trial of a preliminary issue. The question the first and second defendants seek to have tried is put (in par 1 of the chamber summons) in the following terms:

"Is Clause 10 of the Consulting Agreement, or any part of that clause (and, if so, which part or parts) invalid and unenforceable."

7 As I have indicated above, the first and second defendants challenged the validity of cl 10 of the Consulting Agreement. They say it is void and unenforceable. First, they say it is uncertain in that it contains a number of inconsistent covenants and should therefore be struck down. Secondly, they say that it is unreasonable because the geographical area in which the restraint is to operate is in excess of what is reasonable in the interests of the parties and in the public interest. In particular, it is said that the clause is to apply to the whole of Africa when at the time the first plaintiff took over the second plaintiff the second plaintiff's business was confined to a limited number of African countries as specified in the statement of claim. It is said, therefore, that to extend the operation of the non-competition covenant to all of Africa is to cast the net too wide, rendering the clause void and unenforceable. The defendants say that the validity of cl 10 is a discrete issue which can be determined independently of a full trial of the action. Although they accept that determination of the validity or otherwise of the non-competition clause will not necessarily bring the action to an end once this issue is determined, they say there is either a prospect that the whole of the action will settle or the scope of the evidence required at trial will be much reduced. It is said that there would be a saving in time and expense if the validity of cl 10 is dealt with in advance.

8 The argument put by the plaintiffs is that it is inappropriate to consider cl 10 in isolation. They say that there are disputes of fact which will require the calling of evidence before the validity of cl 10 can be considered. By way of example it is said that, although the statement of claim pleads that the second plaintiff's business was conducted in a number of specified African countries, the plaintiffs would want to lead evidence that the fact that the second plaintiff was working in these countries for particular customers was likely to lead to work being obtained in other African countries. This in turn, so it was said, could lead to a finding of fact that the restraint covering the whole of Africa was reasonable. Ancillary to this line of argument, it was said that evidence would need to be given as to the precise nature of the work undertaken by the second plaintiff, who potential customers might be and various other matters. Moreover, the plaintiffs submitted that there would be no saving in time and expense no matter what the outcome of the trial of the preliminary issue. It was submitted that the causes of action brought against the defendants related not only to cl 10. It was alleged that the first defendant had breached cl 9 in relation to the use of confidential information and had failed to use his best endeavours in the plaintiffs' favour contrary to cl 6. These causes of action would survive if cl 10 was struck down and would be pursued. The evidence that would have to be called in relation to these matters would precisely mirror the evidence to be called in relation to cl 10. Moreover, the plaintiffs made the point that no settlement negotiations had taken place and there was nothing to suggest that whatever the outcome of proceedings in relation to cl 10 the action might be settled.

9 The summaries I have provided of the arguments of the parties is somewhat truncated. The respective positions were put by senior counsel for the first and second defendants and the plaintiffs and were supported by detailed written submissions. Without going to those submissions in detail, I can say that I have carefully considered all matters raised by each of the parties.

10 As a statement of general principle there is much to be said for trial of a preliminary issue. There are occasions when teasing out one particularly significant aspect of a claim, although it may not finally dispose of an action, will nonetheless determine the rights of the parties to the extent there is a real prospect that a resolution of the whole action will follow. It is now clear that the court takes a rather more liberal approach to determining when there should be trial of a preliminary issue: see Wilsmore v Court [1983] WAR 190 per Burt CJ at 194, as compared with Smith v Maloney (1998) 19 WAR 209 per Malcolm CJ at 222 - 223. However, it is clear that caution needs to be exercised to ensure that trial of a preliminary issue is actually of benefit to the parties. Furthermore, care must be exercised to ensure that the preliminary question can actually be properly answered: see Rocklea Spinning Mills Pty Ltd v Anti Dumping Authority [1995] FCA 1188; (1995) 129 ALR 401; Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 161 ALR 399. Statements of principle in this area are a useful guide but in the end the decision whether or not to order trial of a preliminary issue is a matter of discretion. Each case must be decided on its merits.

11 In this case I have reached the conclusion that it would not be appropriate to order trial of a preliminary issue. I have come to that conclusion essentially for three reasons. First, I am not satisfied that the question the first and second defendants seek to pose, as expressed in the chamber summons, can be determined in isolation. If the question was to be put, there would need to be a statement of agreed facts. For instance, in their defence the first and second defendants do not admit par 12 through to par 17 of the statement of claim (par 7). In other words, they do not admit what the plaintiffs plead about their business activities and where these business activities were carried on. It is difficult to see how there could then be a statement of agreed facts. Counsel for the first and second defendants suggested that these facts be admitted for the purposes of the trial of the preliminary issue. The difficulty with that course of action is that it introduces a theoretical or hypothetical aspect to the whole proceedings. But perhaps more importantly it is very difficult to see that the parties would be able to agree a statement of facts even if the first and second defendants only admitted those facts for the purpose of the trial of the preliminary issue. For instance, the plaintiffs say that it is important that they lead evidence as to the nature of their business and the effect that trading in particular African countries might have on their ability to attract business in other parts of Africa. I doubt it would be possible under any circumstances to reach a statement of agreed facts in relation to this matter. That would inevitably lead to arguments as to what evidence should be led at the trial of a preliminary issue. The whole process is likely to become confused.

12 Secondly, I am not satisfied that trial of a preliminary issue will result in significant savings in time and expense. If the plaintiffs were successful and the court was to find that the restraint was valid, then the trial would proceed and presumably the defendants would still put the plaintiff to proof of matters found in par 12 and par 17 and would raise all the other defences pleaded in the defence. It is difficult to see that the case would be reduced at all, either in terms of time or cost. If the first and second defendants were successful and the restraint was not valid, there would still be the questions of the use of confidential information and the alleged failure by the first defendant to use his best endeavours as required by cl 6. These issues would require extensive evidence, no less than if the validity of the restraint clause remained in issue between the parties. Following on from that, I am not satisfied that even if the issue of the restraint clause was disposed of in separate proceedings the action is likely to settle. Clearly there is a lot at stake in these proceedings. While that assessment is difficult to make, based upon the material presently available, this case does not strike me as one where resolution of one particular issue will lead to the rest of the case falling away.

13 Finally, I am not satisfied that case management principles favour trial of a preliminary issue. Given the stakes in this action and given the difficulties in deciding upon precisely how trial of the preliminary issue would be conducted, it seems to me likely there would be significant delay in listing the preliminary issue for hearing. Once judgment was handed down an appeal is almost inevitable. Experience shows as much. Moreover, this is not an area where the law is well settled. The upshot of all of that is it may be two years before the preliminary issue is finally determined. Meanwhile, other aspects of the case are left to languish. In my view it would be preferable to take all matters together and resolve all issues at the one trial. I appreciate that this will involve discovery and in a case of this nature discovery may be a lengthy process. Even taking that into account, it seems to me there is a real prospect of all issues between the parties being resolved in roughly the same time it would take to deal with the preliminary issue.

14 For these reasons I am of the view that I ought not order trial of a preliminary issue. The chamber summons will be dismissed. The defendants should pay the plaintiffs' costs on the chamber summons in any event.