Metcash Limited & Anor v Jardim [2010] NSWSC 936 | Case summary

1 This is an application for interlocutory injunctions which would restrain the second defendant (Jardim Investments) from acquiring a 51 per cent interest in SPAR Australia Limited (SPAR). 2 The plaintiffs (Metcash and Metcash Trading, respectively) carry on the business of the marketing and distribution of food and other fast moving consumer goods. SPAR is a competitor. 3 The first defendant (Mr Jardim) commenced employment in the plaintiffs' business on 22 September 1997. On 1 October 2004, Metcash Trading and Mr Jardim entered into an employment deed under which Mr Jardim continued to be employed in the position of CEO IGA Distribution. 4 Clause 3.2 of the employment deed provides: "Without limiting the Employee's duties to the Company the Employee must not: (a) act in conflict with the Company's best interests; (b) accept or commence any other employment or engagement without the prior written consent of the Company; (c) compete with the business of the Company or any Related Body Corporate; (d) hold or be interested in any investments which amount to more than 5% of the issued investments of any class of any one company except where agreed to by the Company or to the extent that any excess over 5% is attributable to his position as a representative of the Company." 5 Clause 12.1 of the employment deed provides as follows: "Subject to clause 12.2, the Employee's employment may be terminated at any time by: (a) the Employee providing the Company with 3 months' written notice; or (b) the Company providing the Employee with 9 months' written notice." 6 On 17 February 2010, Metcash and Mr Jardim entered into a deed of release. Clause 1 of that deed of release relevantly provides: "(a) The Company will on 1 June 2010 provide the Executive with 9 months' written notice of termination of his employment in accordance with clause 12.1(b) of the Employment Agreement. (b) The Executive's Employment will terminate on the Termination Date.

That meeting is to be held this afternoon. 8 A number of other things happened on 16 July 2010. First, Mr Jardim purported to give 90 days' notice terminating the employment deed. Second, Jardim Investments was incorporated. All of the shares in that company are held by Mr Jardim's son, who appears to be a 26 year old medical student. Mr Jardim and his son were named as directors of Jardim Investments, although Mr Jardim's son resigned as a director on that day. Third, Jardim Investments and SPAR signed binding heads of agreement establishing a regime for the acquisition of 51 per cent of the shares in SPAR by Jardim Investments. The heads of agreement were subject to various conditions precedent, including approval by SPAR's shareholders. 9 On 21 July 2010, the plaintiffs commenced proceedings against Mr Jardim seeking various interlocutory orders. At that time, Mr Jardim gave the following undertakings to the court: "1. Without admissions, and until 3 August 2010 or until further order, whichever is the earlier, the defendant by his counsel undertakes to the plaintiffs and to the Court to: (a) refrain from: (i) entering into any transaction by which he holds or becomes interested in investments of any class of any one company, including but not limited to SPAR Australia Ltd or any of its related bodies corporate ( SPAR ); (ii) competing with the business of the plaintiffs or any of its related bodies corporate, including but not limited to contacting, conversing or dealing with any employee, customer, joint venture partner or supplier of or to the plaintiffs, or entering into any agreement to work for SPAR in any capacity including as a director, contractor or employee; and (iii) soliciting the customers or employees of the plaintiffs or its related bodies corporate for the benefit of SPAR or any other competitor of the plaintiffs; (b) comply with the terms of the Employment Deed in relation to disclosing any confidential information to anyone, including but not limited to SPAR, except as required by law, to his legal advisers or representatives, or otherwise in connection with these proceedings; and (c) to give seven clear business days' written notice to the plaintiffs' solicitors before: (i) Jardim Investments enters into any Subscription or Call Option Agreement within the meaning of Recital C to the Binding Heads of Agreement referred to in paragraph 5 of the defendant's affidavit of 26 July 2010, or (ii) any transaction being entered into by which the defendant will come to hold or become interested in SPAR or any other competitor of the plaintiffs." 10 On 3 August 2010, the matter was set down for a final hearing for three days commencing on 13 September 2010 and the undertakings were continued until 15 September 2010. 11 On 12 August 2010, Mr Jardim resigned as a director of Jardim Investments and was replaced by his wife. 12 On 22 August 2010, Mr Jardim's solicitors notified the plaintiffs' solicitors that Mr Jardim had been replaced as a director of Jardim Investments and gave notice that Jardim Investments may enter into a subscription or call option agreement with SPAR on or after seven business days in accordance with the heads of agreement. Shortly before that time, SPAR had called an extraordinary general meeting to be held today to obtain shareholder approval to the proposed agreement between SPAR and Jardim Investments. 13 As a result of these events, the plaintiffs now seek injunctions against Jardim Investments restraining it from entering into the agreement with SPAR. 14 Whether the plaintiffs are entitled to an interlocutory injunction depends on whether there is a serious issue to be tried in relation to the question whether the plaintiffs are entitled to relief against Jardim Investments and, if so, whether the balance of convenience is in favour of granting relief. 15 There are three questions in relation to whether there is a serious issue to be tried. The first is whether the employment deed was validly terminated by Mr Jardim. The second is whether clause 3.2(d) is enforceable or whether it is an unreasonable restraint of trade. The third is whether the court can give an injunction against Jardim Investments in circumstances where it is not a party to the employment deed. 16 The defendants concede that there is a serious question to be tried in relation to the first issue. The resolution of that issue will ultimately turn on whether the deed of release varies the termination right set out in the employment deed. 17 The defendants submit that there is not a serious question to be tried in relation to the second issue. They point out that the restraint contained in clause 3.2(d) is not enforceable except to the extent that it provides reasonable protection to Metcash Trading's legitimate business interests. They say that it is a naked restraint clause which cannot be justified by reference to Metcash Trading's interests. I do not accept the defendants' submission. On its face, the clause may be too broad because it prevents Mr Jardim from acquiring more than a 5 per cent interest in any company without Metcash Trading's consent. However, in my opinion there is a serious issue whether it can be given some operation under the Restraints of Trade Act 1976. In particular, it seems to me that there is a serious question whether the clause is valid insofar as it restrains Mr Jardim from acquiring more than 5 per cent of a competitor of Metcash, on the basis that that is a legitimate means of ensuring that Mr Jardim does not put himself in a position where his interests conflict with those of Metcash Trading. In this respect, it might be said that the clause is like a clause which prevents an employee from working for a competitor following termination of the employee's employment contract. Restraints of that type have been held to be reasonable as a legitimate means of avoiding the difficulties associated with proving breaches of behavioural restraints - such as the misuse of confidential information or a breach of an obligation not to solicit customers: see Stacks Taree v Marshall (No 2) [2010] NSWSC 77 at [41] per McDougall J; Portal Software v Bodsworth [2005] NSWSC 1179 at [83] per Brereton J. 18 As to the third question - whether clause 3.2(d) is enforceable against Jardim Investments - the plaintiffs rely on Gilford Motor Company, Limited v Horne [1933] 1 Ch 935. In that case, the English Court of Appeal granted relief against a company in circumstances where it held that the company had been established as a sham to avoid the operation of a restraint imposed on an individual who stood behind the company. In ICT Pty Ltd v Sea Containers Ltd (1995) 39 NSWLR 640 the Court of Appeal held that that decision could not be justified on that basis. In order for something to be a sham it must be done for the purpose of creating the appearance of something which is different from the reality. Here, there can be no question of who the director and shareholder of Jardim Investments are or which entity has entered into the agreement with SPAR. Even so, the Court of Appeal in ICT thought that the decision in Gilford Motor Company could be explained on the basis that the company was acting as an agent for the individual: 39 NSWLR at 657. 19 In my opinion, there is a serious question to be tried whether Jardim Investments is acting as agent for Mr Jardim. It is clear from SPAR's press release and other documents that SPAR believes - or at least believed at the time the press release was issued - that it was entering into an agreement with Mr Jardim. The defendants submit that those events occurred a number of weeks ago and that circumstances have changed. In particular, Mr Jardim is no longer a director of Jardim Investments and there is no evidence that he has had anything to do with SPAR since 3 August 2010, when he gave the undertakings he did. However, in the absence of further evidence, I think that there is a reasonable argument that it can be inferred from (a) the importance that SPAR attached to Mr Jardim's involvement, (b) Mr Jardim's previous involvement with SPAR and Jardim Investments, (c) the fact that Jardim Investments is owned and controlled by close family members and (d) the fact that Mr Jardim's son's address to SPAR shareholders seeks to explain "my family's vision for SPAR", that Jardim Investments is acting as Mr Jardim's agent. 20 The second defendant indicated that it wished to lead evidence on the balance of convenience but, because of the short notice on which this application was brought, had not had time to do so. Given that SPAR's meeting is today, and given that SPAR's shareholders should know the position before being required to vote on the proposal, I do not think that I can delay my decision to give the defendants time to put on evidence in relation to the balance of convenience. 21 Mr Clarke, who appeared for Jardim Investments, pointed to three matters relevant to the balance of convenience. First, he said that SPAR was in financial difficulties and required an injection of capital urgently. Secondly, he said that Jardim Investments ran the risk of losing the opportunity of investing in SPAR if there was a delay in entering into formal agreements with it. Thirdly, he said that competition may be affected unless Jardim Investments invested in SPAR because Metcash had 98 per cent of the market and SPAR had 2 per cent and was dependent on a cash injection in order to compete. Even accepting these matters, they must be weighed against the fact that, unless an injunction is granted, the transaction may proceed in circumstances where it is unlikely to be possible to unwind it if the plaintiffs are ultimately successful. It is also relevant that the case is listed for a final hearing commencing on 13 September 2010. In the absence of evidence, I am not prepared to conclude that SPAR cannot or is unwilling to wait for the outcome of these proceedings before deciding finally whether to proceed with a transaction with Jardim Investments. In those circumstances, I think that the balance of convenience is in favour of granting an injunction. 22 In my opinion, the injunctions proposed by the plaintiffs are too wide. The only transaction Jardim Investments is currently considering entering into is one with SPAR. Mr Jardim is already required by the undertakings he has given to give the plaintiff 7 days' notice of any transaction being entered into by which he will come to hold or become interested in SPAR or any other competitor of the plaintiffs. In circumstances where there is a serious question whether Jardim Investments is acting as Mr Jardim's agent, it seems to me that that undertaking gives the plaintiffs adequate protection in the event that Jardim Investments considers entering other transactions with other competitors of the plaintiff. In those circumstances, I make the following orders:

Metcash Limited & Anor v Jardim

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Judgment (17 paragraphs)

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