OAMPS Gault Armstrong Pty Ltd & Anor v Andrew Glover & Anor

Supreme Court of NSW|2012-10-02|Before: Nicholas J

Judgment 1His Honour: By summons filed 19 September 2012, the plaintiffs seek interlocutory injunctions to restrain the defendants, who were former employees, from undertaking employment with a competitor in contravention of restraint provisions in their contracts of employment. The proceedings were heard by me whilst sitting as the duty judge on 21 September 2012, and required prompt determination. 2The plaintiffs are in the business of providing insurance broking and risk management services to clients. The second plaintiff provides insurance services to several industries, including the marine industry. That part of its business specialises in boat, pleasure craft, and marine insurance services in Australia, New Zealand, Noumea, Micronesia, Singapore and other territories throughout Asia. The second plaintiff provides its insurance services to the marine industry through the first plaintiff. 3The first plaintiff was formerly known as ZIB Gault Armstrong Ltd (ZIB). In 2005, the second plaintiff became the ultimate owner of the first plaintiff, and the marine insurance business it was operating. It was a specialist business with an extensive list of clients and associated goodwill. 4The first and second defendants were the principles of ZIB's business at the time of the transaction. As a consequence of the purchase the first and second defendants each entered into contracts of employment (the contracts) on 28 February 2005. Thereby the second plaintiff obtained the expertise of the first and second defendants, including the contacts and relationships which they had developed with the clients of the business, and the knowledge of those clients obtained from those dealings, who practised almost exclusively in the marine insurance industry. 5On 9 March 2012 the defendants were given notice of redundancy, and six months' notice of the termination of their employment. Their employment ceased on 9 September 2012 at the conclusion of the notice period. On about 12 September 2012 the defendants commenced employment with FP Marine Risks Australia Ltd (FP Marine). 6The plaintiffs contend that the restraint provisions which bind the plaintiffs are included in their contracts made on 28 February 2005. The defendants flagged that at any final hearing the operation and validity of these provisions will be in issue. However, in the present application the defendants accepted that there were serious questions to be tried on issues as to the currency of the restraints, and breach. In these circumstances, the issue for determination before me was whether the balance of convenience favoured the grant or refusal of the relief sought by the plaintiffs which, in short, is to enforce the post employment non-competition and non-solicitation restraints. 7The restraint provisions are included in clause 14 of the contracts which, relevantly, are as follows: "14 1 Clause 14 Definitions In this clause 14 unless the context otherwise requires: 'Completion Date' means the date of cessation of the employment of the Executive as an employee of the OAMPS Group or the Company. 'Restraint Area' means (a) Australia (b) New South Wales (c) Victoria (d) Queensland (e) South Australia (f) Western Australia (g) Tasmania (h) Northern Territory (i) Australian Capital Territory (j) Noumea. 'Restrained Business' means the business of insurance broking and related risk management services and the provision of expert advice in relation to insurance broking services. 'Restraint Period' means for a period of - (a) three (3) years or if the same is deemed by a Court of competent jurisdiction to be unenforceable, then (b) two (2) years or if the same is deemed by a Court of competent jurisdiction to be unenforceable, then (c) one (1) year or if the same is deemed by a Court of competent jurisdiction to be unenforceable, then (d) six (6) months, after the Completion Date 14 2 Restraint Obligations Except as permitted by clause 14.4 and as an employee of the OAMPS Group or the Company the Executive agrees that in order to protect the goodwill of the business of the Company and the OAMPS Group and the Company he must not directly or indirectly during the Restraint Period in the Restraint Area be concerned in, interested in, promote, participate in, finance, be employed in, operate or engage in (directly or indirectly, or through any interposed body corporate, joint venture, partnership, trust or as a director, partner, proprietor, employer, employee, principal, agent shareholder beneficiary, or as an independent contractor, consultant adviser or in any other capacity) any business: (a) the same as or similar to the Restrained Business, or (b) the same as or similar to a material part of the Restrained Business or (c) that competes with the Restrained Business 14 3 Non-interference The Executive must not directly or indirectly during the Restraint Period (except as an employee of the OAMPS Group or the Company) in respect of the Restrained Business - (a) solicit, canvas or secure the custom of or otherwise deal with any existing client, contractor, supplier or other customer of the OAMPS Group or the Company who is or has been within the last twelve months prior to the Completion Date a client, contractor, supplier or other customer of the OAMPS Group or the Company or (b) represent themselves as being in any way connected with, interested in or associated with OAMPS Group or the Company (except as one of the directors of the Company); or (c) solicit, employ or engage the services of any person who is an employee of the OAMPS Group or the Company at the Completion Date. ... 14 6 Reasonableness Of Restraint The Executive agrees that each of the restraint obligations imposed by clause 14 is reasonable in its extent (as to all of duration, geographical area and restrained conduct) having regard to the interests of each party to this Agreement and extends no further (in any respect) than is reasonably necessary and is solely to protect the Company and the OAMPS Group as purchaser of the Sale Shares and Assets as defined in the Share Sale Agreement. ... 14 8 Injunction Each party to this Agreement acknowledges that monetary damages alone would not be adequate compensation to the OAMPS Group and the Company for a breach of clause 14 and that the Purchaser is entitled to seek an injunction from a court of competent jurisdiction if: (a) the Executive fails to comply or threatens to fail to comply with clause 14; or (b) the OAMPS Group or the Company has good reason to believe the Executive will not comply with clause 14." 8In the present proceedings the following background was uncontroversial. 9The plaintiffs have over 500 marine clients who have approximately 1,300 policies combined. The clients are located throughout Australia, Noumea, New Zealand, Singapore and other territories in the Asia Pacific region, many of whom are long standing, and were clients of the business when it was purchased in 2005. 10FP Marine is a marine insurance and reinsurance broker with an office in Sydney which operates as the centre of its Australasian business. It provides marine insurance broking services to clients in the maritime and trading communities, and has portfolios in marine hull, liability and cargo exposures worldwide. It is a direct competitor of the plaintiffs' marine insurance business in Australia. 11In the conduct of their business, branches of the second plaintiff are operated by the first plaintiff in North Sydney and in Perth. The defendants became joint managers of the North Sydney branch in 2005, after the purchase. They were directors of the first plaintiff until late December 2011. Their duties included:

The principles 26In deciding where lies the balance of convenience, sometimes referred to as the balance of the risk of doing an injustice, the court is required to balance the hardship that would be suffered by the respective parties if the injunction were or were not to be granted. In a case such as the present the court must weigh the consequences to the defendants of the grant of an injunction in support of the relief to which the plaintiffs may ultimately be held not to be entitled, as against the consequences to the plaintiffs of the refusal of an injunction in support of the relief to which they may ultimately be held to be entitled (Kolback Securities v Epoch Mining NL (1987) 8 NSWLR 533, p 535; Willis Australia Group Services Pty Ltd v Griggs [2012] NSWSC 659, par 133). In cases where a negative covenant is sought to be enforced, damages will rarely be considered an alternative remedy, and the correct approach is to grant the injunction unless there are good reasons to the contrary (Cerilian Pty Ltd v Graham Fraser [2008] NSWSC 1016, par 10; Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, par 102). 27In Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9 Brereton J held that an employer had a protectable interest in staff connection. He said: "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." 28In Commissioner of Taxation v Murry [1998] HCA 42; (1998) 193 CLR 605 the High Court of Australia analysed the concept of goodwill of which, relevantly, the attraction of custom is a source or element which a court will protect. It is apt to refer to the following passages from the judgment of the plurality: 17 Lord Mcnaghten [in Inland Revenue Commissions v Muller & Co's Margarine Ltd [1901] AC 217 at 223-224] gave another much cited definition of goodwill in the same case. His Lordship said: 'What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade.' ... 20 ... But the attraction of custom still remains central to the legal concept of goodwill. Courts will protect this source or element of goodwill irrespective of the profitability or value of the business. Thus, a person who has sold the goodwill of a business will be restrained by injunction from soliciting business from a customer of the old firm even though the value of that firm is no greater than the value of its identifiable assets. ... 23 From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes 'the attractive force which brings in custom'. Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business. 24 The goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it ... ... 68 For legal purposes, goodwill is the attractive force that brings in custom and adds to the value of the business. It may be site, personality, service, price or habit that obtains custom ..." 29In Sidameneo (No. 456) Pty Ltd v Alexander [2011] NSWCA 418 the attraction of custom to a medical centre generated by the practice conducted by the doctors at the premises was held to be a protectable component of goodwill. 30That a non-solicitation provision may be insufficient to protect an employer's interests where there had been a strong connection between its clients and a former employee was recognised in Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 as follows: "51 In our respectful opinion, HRX' interest in protecting its customer connections was sufficient to justify HRX' bargaining for protection against the risk that the personal contacts made by Mr Pearson in the course of HRX' business would follow him unbidden to a new employer. That interest went beyond HRX' interest in confidential information and would not sufficiently be protected by the confidentiality provision of the service agreement. And the non-solicitation provision would not have protected HRX from the risk that its customers, knowing of Mr Pearson's move to Talent2, would choose to move their business to Talent2 unbidden by Mr Pearson and without even discussing the move with him. Further, the non-solicitation clause would be engaged only if there were a reduction in HRX' business: if an existing customer took new business to Talent2 upon an invitation from Mr Pearson, that conduct would not be caught by the non-solicitation clause. Finally, the non-solicitation clause might not provide practical protection to HRX if HRX did not become aware of a breach. ... 53 As Dickson J noted in Elsley, the protection afforded by the non-solicitation and confidentiality provisions is unlikely to be perfect given the difficulties of proof of breach. In Lindner v Murdock's Garage (1950) 83 CLR 628, Latham CJ also observed at 636-7 that an employer's interest in customer connections may not be sufficiently protected by a covenant against solicitation and that a covenant against competition may be a more reasonable form of protection as ... a covenant against solicitation ... is difficult to enforce; it is difficult to show breach and difficult to frame an injunction. The master is entitled to protect himself by a covenant against competition [637]. ... 58 There are two aspects of HRX' interest in securing the benefit of its bargain which are relevant here. The first is the preservation of the value of the goodwill generated for HRX by Mr Pearson during the term of his employment which we have already discussed. As we have said, that interest would not be adequately protected by the non-solicitation provision if Mr Pearson were subsequently to take up employment with a firm to which HRX' customers might be disposed to bring new business without even discussing the move with him." 31In Red Bull Australia Pty Ltd v Stacey [2011] NSWSC 1212; (2011) 214 IR 299 Rein J noted: "35 ... one of the points of restraint clauses is to prevent any potential conflict between the demands of the new employer or its business and the previous employer: see cases discussed at [13] of Cactus and see pages 111-112 of J D Heydon, The Restraint of Trade Doctrine, 3rd ed (2008). The cases point to the fact that the plaintiff is advantaged by a restraint clause in being able to stop somebody working for a competitor without having to prove exactly what the employee, or the former employee has done, or is doing for the competitor." 32Relevant also is the caution expressed in Stacks Taree v Marshall [No 2] [2010] NSWSC 77 by McDougall J: "62 However, it is not in every case that the court will uphold both a covenant against solicitation and a covenant against competition. That situation was considered by the Privy Council in Stenhouse Australia Ltd v Phillips [1974] AC 391. Their Lordships' opinion was stated by Lord Wilberforce. His Lordship said at 403 that, in assessing the validity of a covenant against competition, it was relevant 'that some protection has already been provided for the employer by the non-solicitation clause... . The presence of one restraint diminishes the need for others, or at least increases the burden of those who must justify those others'."

Determination 33For the defendants it was submitted that the proffered undertakings were sufficient to protect the plaintiffs' legitimate interests and, in the circumstances, there was no justification for interlocutory non-competition orders which would prevent their employment with FP Marine. It was also put that the consequential hardship to the defendants if prevented from employment with FP Marine would be such that, on the balance of convenience, the orders should be refused. 34The position of the first defendant was explained in his affidavit of 21 September 2012. He is 51 years of age, with 33 years' experience as an insurance broker, specialising in marine insurance. He says: "38 The marine insurance industry is an extremely small market in Australia. I estimate that there are probably no other positions throughout Australia that are similar to the position I held at OAMPS and the position I now hold at FP Marine Risks. 39 I believe that if my employment with FP Marine Risks was to cease, it may be impossible for me to find a comparable job in Australia for a very long time. This belief is based on my recent experiences of looking for a new job after I knew that my employment with OAMPS was going to come to an end." 35He said that if restrained from working in the insurance industry, including marine insurance, he would have no viable means of earning an income. He pays substantial amounts in university and school fees for his sons, and his wife has not worked for many years. His mortgage payments amount to $6,400 per month. 36The second defendant's position was explained in his affidavit of 21 September 2012. He is 61 years of age, with 44 years' experience as an insurance broker, specialising in marine insurance. In terms similar to the fear expressed by the first defendant, he referred to limited prospects of employment if prevented from continuing with FP Marine. He supports his children at private schools, and is liable to monthly mortgage payments in the amount of $5,600. 37It is also relevant that the defendants were remunerated under their contracts until termination of employment on 9 September 2012, in the amounts earlier referred to. 38On 9 March and 10 September 2012 the defendants were reminded of the restraint provisions, and warned against breach. Had they checked, they would have seen that the express purpose of the non-competition restraint in clause 14.2 was to protect the goodwill of the plaintiffs' business. On 12 September 2012 FP Marine published the press release announcing the appointment of the defendants. There was no evidence that the defendants were ignorant of, or distanced themselves from, its message. Its terms are set out in par 18 above. Self-evidently, it is a public appeal and promotion calculated to attract clients, including existing clients of the plaintiffs, to FP Marine's specialist marine insurance broking business to be led by the defendants, who are described as "two of the most experienced and respected marine insurance brokers in Australia". The press release demonstrates the readiness of a competitor of the plaintiffs to exploit the attraction power of the defendants in order to canvass and solicit customers to "... further extend [its] capabilities and competitive firepower across the entire region". 39As the cases show, the means or power of attraction is a protectable component of goodwill. The cases recognise that, although protection afforded by non-solicitation provisions is unlikely to be perfect given difficulties of proof of breach, courts will stop somebody working for a competitor without having to prove exactly what the employee, or the former employee has done, or is doing for the competitor, or where customers might be disposed to bring new business to a competitor without even discussing the move with the former employee (Red Bull par 35; Pearson pars 53, 58). 40It is significant that on the day of the press release, and upon commencement of the defendants' new employment, the plaintiffs' clients PDL International Pte Ltd and Sofrana Unilines (NZ) Ltd appointed FP Marine to act as their marine insurance brokers. 41On the present evidence, I find that, absent interim protection, the plaintiffs will be exposed to the probability of loss of custom and goodwill attributable to the defendants' force of attraction in the marine insurance industry whilst they are working for a competitor. Unless an appropriate order is made, the plaintiffs' goodwill is likely to be endangered, and the resultant harm may not be compensable in damages. 42There was no evidence that if restrained from employment as marine insurance brokers, the defendants could no longer work for FP Marine. Furthermore, there was no evidence as to income, assets, and liabilities of the defendants for a realistic assessment of hardship if interlocutory injunctions to enforce the restraints were made.

Conclusion 43It being accepted that there are serious questions to be tried on issues as to the operation, validity, and breach of the restraint provisions, I find the plaintiffs have demonstrated reasonable prospects of success at a final hearing. If the injunctions sought are refused it is likely the plaintiffs would suffer some irreparable harm to an extent which may be difficult to determine. On the other hand, if restraints are ordered and the defendants succeed at a final hearing, I am satisfied that any consequential hardship or loss suffered in the interim would probably be protected by the plaintiffs' undertakings as to damages. 44Although the non-competition restraint in clause 14.2 relates to the insurance industry generally, in my opinion the plaintiffs will have sufficient interim protection if the restraint is limited to employment as marine insurance brokers. 45Upon consideration of the matter overall, I find that the balance of convenience favours the plaintiffs, and the interests of justice require that appropriate restraining orders be made. In so deciding I gave weight to the scope of the undertakings proffered by the defendants. They corresponded with much, but not all, of the relief to which the plaintiffs are entitled. 46Accordingly, upon the plaintiffs giving to the court the usual undertakings as to damages, I propose to make orders in accordance with paragraphs 7(b), (c), (d), (e) and 8 of the summons filed 19 September 2012. I propose to order that the plaintiffs' costs of this application be the plaintiffs' costs in these proceedings. 47As it appears these proceedings are suitable for inclusion in the next expedition list, if requested to do so, I would make the appropriate direction. 48I direct the plaintiffs to bring in short minutes in accordance with these conclusions.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 October 2012

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